Payment Cards and the Supply/Demand of Money

t occurred to me that the prevalence of payment cards (debit more so than credit) have a potential unbalancing effect on the market, as they have the net effect of decreasing the need for individuals to hold physical currency by virtue of creating a method of tendering payment in exchange for goods that does not involve actual currency.

It's immediately evident in the tendency of individuals to carry less cash than they once did. As a general observation, I've noticed this change over time: at one point, people would withdraw from their bank enough cash to cover their short-term expenses, though the amount would differ among individuals: some people would carry a few hundred dollars around, others would carry less than twenty.

In effect, the need of individuals for hard currency has a major impact on the demand for currency as a whole. If you estimate a commercially active population (that is, people who are engaged in economic activity) of 200 million, and they carry with them an average of $200, then the total amount of currency in circulation is $40 billion; but if they decrease the amount they carry to only $50, the total amount in circulation is only $10 billion (a 75% reduction in the amount of currency).

Given that prices in the marketplace reflect not only the supply and demand for goods, but also the supply and demand for money, then it can be reasoned that the less money in circulation, the greater its scarcity, and the greater its purchasing power in exchange for consumer goods.

From the perspective of the individual, this may be negligible, if not entirely meaningless: an individual may well be indifferent to physical currency so long as they have money in the bank that can be withdrawn to pay for goods on an as-needed basis. In effect, whether you have $500 in pocket or $500 in the bank makes no difference if a payment card can be used to issue payment (having less physical currency does not mean having less purchasing power).

The difference, however, occurs at the bank itself, where hard currency is used as a reserve for loans, which have the effect of increasing the supply of money substitutes in the marketplace (in the "money" on loan is not money at all, merely a credit extended to the borrower that is exchanged for goods, but is redeemed for currency in future). The less currency demanded by individuals means a greater amount of currency on hand at the bank, and the greater the amount of loans they can write.

The net effect of consumer and banking behavior, then, is to create a marketplace in which the total "money" traded in the marketplace is significantly increased by an increase in the supply of money substitutes, but a decrease in the supply of hard currency.

I'm not sure where I'm headed with this - I'm merely observing a phenomenon and speculating on its outcome - but my sense is that the change in consumer culture to prefer payment cards over hard currency may have to do with the diminishing value of goods in the marketplace (by virtue of a shortage of hard currency in circulation) and, at the same time, the diminishing return on interest-bearing accounts (by virtue of the abundance of money substitutes).

In the end, I'm left with the distinct sense that there is a significant connection between the three phenomena, but don't feel entirely confident in my reasoning of what that connection might be. Which means it's probably time to pick up an economics textbook to sort things out for myself.