What do you do when you're stuck in an airport with 15 pounds or 20 euros of local currency?
It's not worth paying foreign exchange fees on such a small sum. It's not enough money to buy whisky at Heathrow. So I generally take it home and put it aside for the next journey – and there it will rest, alongside my collection of worthless marks, francs, and other currency.
But now there's a solution to such problems: Starbucks bucks. Just find an airport Starbucks, and load up a Starbucks card. Starbucks will instantly convert the funds into your local currency. The card can then be used in Starbucks around the world.
I don't know how the Starbucks exchange rate compares to those offered by credit cards and financial institutions, the Starbucks website only says "Currency conversions are based on currency exchange rates applicable on the date of the transaction".
What's the point here? Matthew Yglesias suggests that new technology reduces the gains from large currency areas.
I'm wondering if money on Starbucks cards acts like currency, if it should be thought of as part of the money supply. Are there any non-trivial implications of using, say, British pounds to create Canadian purchasing power?
But mostly I just think it's kind of cool.
Worthwhile Canadian Initiative 
Strictly, it’s not really part of the money supply, because it’s not generally acceptable in exchange for goods and services. It’s the same as Canadian Tire money. (Actually, Canadian Tire money is more like money, because there are no technical barriers to spending it elsewhere). It’s more like trade credit, only with a positive rather than negative balance in your account at the merchant. And trade credit is a substitute for money, and so reduces the demand for money rather than increasing the supply. (Steve Ferris did a paper on this ages ago.)
But the fact that you can convert it with low transactions cost (zero transactions costs in terms of hassle, which matters as much as fees) is interesting. In that regard, for someone who goes to Starbucks a lot, and who travels a lot, you might even argue that it is more generally accepted than dollar bills, and therefore more like money than dollar bills. Which is really neat.
Mike Sproul (I think?) made an argument here some months back, saying that monetary economists are always way behind the curve in terms as what we include as “money”. Thinking of credit cards and Starbucks cards being much easier to use across “currency areas” reinforces his point.
But forget Starbucks. Does it work for Tim Horton’s? That’s the important question.
One non-trivial implication: the seigniorage goes to Starbucks, rather than to the UK or Canadian governments.
Starbucks cards have been stable at 1 USD:1 CND for the last 4 years. I have yet to figure out how to exploit this for massive profit.
Nick: “And trade credit is a substitute for money, and so reduces the demand for money”
Interesting point. I could send my little ones off to school with $20 for emergencies and spending money. Or, I could send them off with bus tickets, a $10 Tim Horton’s card, a pre-paid cell phone for emergencies, and $5 in cash.
Perhaps there’s a post to be written on near money and social control?
JP: 😉
JP: That’s easy! Just stand in line at Starbucks and by people’s coffee for the, on your card, in exchange for cash, which you then take to the forex market, swap into the cheaper currency, then put on your card. You could easily make millions that way. Duh!
Just not right now (the Starbucks forex effect has kicked in, all those jars of US and CDN coins have been converted to coffee credits, and we are at parity), D’oh!
Try again the next time we (or the USD) are at 63 cents.