Do Credit Cards Really Reduce Aggregate Money Holdings?

Akhand and Milbourne (1986) have investigated how growth in the use of credit cards affects aggregate household money holdings. With credit cards as a means of deferring payment, indeed, households may make payments to credit card banks periodically and hence hold less money on a regular basis.  On the other hand, however, credit card banks must make payments to merchants constantly on behalf of cardholders.  Hence, credit card banks need to maintain a certain level of money for this purpose.

This paper discusses whether the use of credit cards reduces aggregate money holdings in an economy. Applying and modifying the Baumol-Tobin model (Baumol, 1952, and Tobin, 1956), it studies how much money a credit card bank would normally maintain to support retail trade, and shows that whether or not the use of credit cards actually reduces the aggregate demand for money depends on how often consumers “visit the bank” and how long it takes to clear a check. With innovations in the banking industry such as ATMs, online banking, and other automatic funds transfer services, the cost of “visiting banks” (ie., switching funds between a checkable account and an interest-earning account) is now very low.  For the whole economy, as a result, the use of credit cards may not necessarily reduce aggregate money holdings.