Money is a concept notoriously resistant to definition. This is perhaps unsurprising, considering that, in various contexts, the label has been applied to items as diverse as gold coins, cartons of cigarettes, and tins of mackerel. Economists generally resort to defining money by the function it is meant to achieve, rather than based on an a priori analytical description. As one economist famously quipped, “Money is as money does.”
If money is defined by its function, then it should be unsurprising that money can mean different things to different people, based on what they want money to achieve. Yet it is an overlooked fact that, in America, the rich use a different type of money than the poor. For poor Americans, money is cash. For the middle-class, money is bank deposits. For the rich, money is United States government debt, also known as Treasuries. To understand why, one needs to consider two commonly overlooked aspects of money: access and security.
According to the most recent federal surveys, about 1 in 20 American households do not have access to a bank account. While this figure has been steadily declining over the years, it still leaves over 15 million Americans without basic financial services. Unbanked households are mostly poor. The unbanked rate is nearly 10 times greater for households with less than $30,000 in annual income than for households with more than that. Unsurprisingly, the primary reasons cited for not having a bank account are high fees or not being able to meet minimum account requirements.
Many poor Americans use cash because they do not have access to the forms of money available to middle-class or rich Americans. For people unable to meet account minimums or who cannot afford the fees associated with low account balances, access to bank deposits as a form of money remains restricted. While it would seem absurd for a country to mandate that poor people use an inferior version of a currency, this is de facto the situation in America today. Cash affords some benefits by way of privacy, but it is less convenient and less secure than using a bank account, which offers fraud protection and physical security. Moreover, having access to the system of electronic transfers is necessary to invest savings and build credit. Lack of access to financial services may not be the root cause of poverty, but it surely helps perpetuate it.
For middle-class Americans, bank deposits serve as the primary form of money. Employees typically receive their salary in the form of direct deposit, and bills can be paid by check or electronic transfer. Money spent in stores is done via cards, either withdrawn directly from a bank account or added to a credit card balance. While money-transfer apps might be used to pay friends or family, these are effectively layered solutions on top of traditional banking infrastructure. The tranquil normality of the entire system is secured by government insurance, which turns an IOU from a highly leveraged corporation into an indisputably secure claim on a real cash dollar.
Bank deposits can be money because of the security provided by government insurance. Since the United States government is viewed as having no risk of default, a dollar in a bank effectively is a dollar. Contrast this with the early days of wildcat banking in America, where no deposit insurance existed. Deposits from certain banks were accepted for pennies on the dollar due to the perceived default risk, and bank runs proliferated as depositors tried to withdraw their money before the vault ran out of cash. In the modern world, it is this same desire for security that causes rich Americans to use Treasuries as money, rather than bank deposits.
Government insurance only secures bank accounts up to $250,000, creating a problem for people who want to hold more than this amount as money. A depositor with a million dollars in a bank account runs the risk of waking up to find that three-quarters of their money has disappeared due to an insolvent bank. Considering that 29 banks have failed in the United States since 2015, this is not a trivial issue. To recover the security of a government guarantee, the rich turn to Treasuries as their form of money.
While most day-to-day purchases will still be done with a bank account, the rich largely use Treasuries as money to purchase financial assets. This is typically done by pledging the Treasuries as collateral for a line of credit, which is then used to purchase stocks or bonds. Like bank deposits, Treasuries can be sent electronically throughout the world, and the market for turning Treasuries into more familiar forms of money operates 24/7 in the world’s financial centers. When the Treasuries mature, the proceeds go toward paying off the line of credit. Since the interest on the line of credit and the interest on the Treasuries tend to be comparable, the effect is as if a bank account with millions of dollars was used to purchase the financial assets. By using Treasuries as money, though, government security is guaranteed for amounts far greater than $250,000.
In a cruel irony, bank deposits are not suitable for the poor because they do not have enough money, and bank deposits are not suitable for the rich because they have too much money. Lack of access on one end keeps the poor using cash, and lack of security on the other keeps the rich using Treasuries. Money is contextual, and what is money to one person may not be to another. If money is as money does, then money is not as money does not.
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