Canadians will all know what Canadian Tire Money is, but American and overseas readers might not. Canadian Tire, one of Canada's largest retailers, defies easy categorization, selling everything from tents to lawn furniture to hockey sticks to car tires. Since 1958, it has been issuing something called Canadian Tire Money (see picture above). These paper notes are printed in denominations of up to $2 and are redeemable at face value in kind at any Canadian Tire store.
Because there's a store in almost every sizable Canadian town, and the average Canadian make a couple visits each year, Canadian Tire money has become ubiquitous—everyone has some stashed in their cupboard somewhere. Many Canadians are quite fond of the stuff—there's even a collectors club devoted to it. I confess I'm not a big fan: Canadian Tire money is form of monetary pollution, say like bitcoin dust or the one-cent coin. I just throw it away.
It's the monetary oddities that teach us the most about monetary phenomena, which is why I find Canadian Tire money interesting. Here's an observation: despite the fact that it is ubiquitous, looks like money, trades at par, and is backed by a reputable issuer, Canadian Tire money doesn't circulate much. Stephen Williamson, a Canadian econ blogger, had an entertaining blog post a few years back recounting unsuccessful efforts to offload the coupons on Canadians. Sure, from time to time we might encounter the odd bar or charity that accepts it, or maybe a corner-store in Wawa. But apart from Canadian Tire stores, acceptability of Canadian Tire money is the exception, not the rule.
Why hasn't Canadian Tire money become a generally-accepted medium of exchange? One explanation is that Canadian law prevents it. Were the government to remove the strict rules that limit the ability of the private sector to issue paper money, bits of Canadian Tire paper would soon be circulating all across the nation, maybe even displacing the Bank of Canada's paper money.
A second hypothesis is that even if the law were to be loosened, Canadian Tire would remain an unpopular exchange medium. Some deficiency with Canadian Tire money, and not strict laws, drives their lack of liquidity. Nick Rowe, another Canadian econ blogger (notice a theme here?), once speculated that this had to do with network effects. Canadians have long since adopted the convention of using regular Bank of Canada-issued notes, and overturning that convention by accepting Canadian Tire money would be too costly. David Andolfatto (not another Canadian econ blogger!), would probably point to limited commitment as the deficiency. IOUs issued by Canadian Tire simply can't be trusted as much as government money, and so they inevitably fail as a medium of exchange.
In support of the first view, which is known in the economics literature as the legal restrictions hypothesis, Neil Wallace and Martin Eichenbaum (yep, another Canadian) recount an interesting anecdote. Back in 1983, competitor Ro-Na (since renamed RONA), a major hardware chain, started to accept Canadian Tire coupons at face value. I've found an old advertisement of the offer below:
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| RONA advertisement in La Presse, 1983 (source) |
Eichenbaum and Wallace say that this is evidence that Canadian Tire money isn't just a mere coupon but readily serves as a competitive medium of exchange among Canadians. After all, if a major store like RONA accepted the coupons, then their acceptance wasn't just particular—it was general.
The story doesn't end there. Here is an interesting 1983 article from the Montreal Gazette:
The article mentions how in retaliation Canadian Tire sought an injunction against RONA to prevent it from accepting Canadian Tire money. We know this tactic must have been somewhat successful since RONA does not currently accept said coupons. Eichenbaum & Wallace slot this into their legal restrictions theory, noting that the injunction was probably motivated by Canadian Tire's desire to comply with legal prohibitions on the private issuance of currency, a damaging law suit helping to inhibit general use of their coupons. Remove these legal restrictions, however, and Canadian Tire would probably not have sued RONA, and usage of Canadian Tire coupons as a medium of exchange would have expanded. Presumably if Tim Horton's took up the baton from RONA and accepted Canadian Tire money, and then Couche-Tard joined in, you'd end up with a new national currency.
So we have two competing theories to explain Canadian Tire money's lack of acceptability. Which one is right? Let's introduce one more story arc. Zoom forward to 2009 when Canadian Tire lawyers sent a notice to a NAPA car parts dealer asking him to stop accepting Canadian Tire money. The reason cited by Canadian Tire: trademark infringement. As the article points out, Canadian Tire Money constitutes intellectual property, and if companies do not sufficiently police their trademarks against general usage, they may lose control of them. For instance, over the years Johnson & Johnson has had to vigorously defend its exclusive rights to the name "Band-Aid." If it hadn't, it might have lost claim to the name in the same way that Otis Elevator lost its trademark on the word "escalator" because the word fell into general use. That the 1983 RONA challenge probably had less to do with currency laws than trademark infringement damages Eichenbaum &Wallace's argument.
The last interesting Canadian factoid is the observation that a number of community currencies circulate in Canada. Salt Spring dollars, a currency issued by the Salt Spring Island Monetary Foundation, located off the coast of British Columbia, is one of these. Other examples include Calgary Dollars and Toronto Dollars. According to Johanna McBurnie, Salt Spring dollars are legal because they are classified as gift certificates. If so, I don't see why the use of Canadian Tire money as a medium of exchange wouldn't fall under the same rubric. This puts the final nail in Wallace & Eichenbaum's argument that restrictions on circulation of competing paper money have prevented broad usage of Canadian Tire paper. Rather, if laws are to blame for the minimal role of Canadian Tire Money's as currency, then it is the company's desire to protect its trademark that is at fault.
That local IOUs like Salt Spring dollars can legally circulate but lack wide acceptance (even in the locality in which they are issued) means we need something like the Nick Rowe's network effects or David Andolfatto's limited commitment to explain why incumbent paper money tends to exclude competing paper money from circulation. Which isn't to say that Canadian Tire money would never circulate. As Larry White and George Selgin have pointed out, private paper money has circulated along with government paper money in places like Canada. But the bar for Canadian Tire money is probably a high one.
Try paying your tax bill with them
ReplyDeleteEasy, just use it to pay the GST on your next visit to Canadian Tire.
DeleteIf CT circulated widely, then one could sell CT for CDN and use CDN to discharge tax obligation. So Andrew's point just assures that CDN remains in circulation. It does not explain why CT does not circulate.
DeleteYes in fact I have a savings account that does not allow me to write cheques, and therefore I can't pay income tax from this account, but the money in there is as good as any other Canadian dollars.
DeleteHere are a couple of possibilities:
ReplyDelete1. Canadian Tire did not take much care in thwarting counterfeiters, in designing its notes. With limited acceptability, it isn't worthwhile to counterfeit, but if the notes were widely acceptable, it would be, thus destroying wide acceptance as an equilibrium.
2. There are multiple equilibria. Another equilibrium has wide acceptance of Canadian Tire money. But Canadian Tire money is not acceptable - basically because it's not acceptable.
Here's a question: For some reason Canadian Tire thought it was advantageous to try to prevent Canadian Tire money from being redeemed by another retailer. But pre-1935 in Canada, the chartered banks agreed to accept each other's notes, and that system appears to have worked quite well. So what's different about Canadian Tire?
Accepting another bank's redeemable notes at par increases your own bank's circulation. Likewise, it is in the interest of others to accept CTMs.
DeleteIn the case of banks, the problem is symmetrical. We might choose to (1) accept each others notes or (2) not accept each others notes, reaching the same market share in both cases. But (2) is unstable since one bank can increase its market share by defecting and accepting the other's notes.
In the case of CTM, it is not symmetrical. Others can increase their market share by accepting CTM, but Canadian Tire cannot increase its market share by accepting the notes of others because they do not issue notes. So, naturally, they try to prevent others from accepting their notes.
"Here's a question.... So what's different about Canadian Tire?"
DeleteOne thing I'd like to know is what RONA did with the coupons back in 1983. Canadian Tire money is only redeemable in kind, say for things like hockey sticks, not in base money. Was RONA taking the coupons back to Canadian Tire in order to buy stuff to stock on its own shelves? Pre-1935 bank accepted each others notes because they knew they could always bring those notes back to the issuer for redemption in gold coin or government paper money. That seems more advantageous then redemption in kind and might explain the difference between pre-1935 Canada and Canadian Tire money.
JP I think your observations about monetary infrastructure really help address Dr. Williamson's questions. Usually we do use the monetary system established by the government, because the provided infrastructure is so good. But there are indeed multiple equilibria, and sometimes we switch away from the official currency to something that works better. Some countries switch to USD for transactions and abandon their own currency to a large extent. That's probably more likely than a switch to Canadian Tire money, because there is infrastructure to support USD, even if foreigners / Eurodollar holders are not able to access it directly.
DeleteIn the case of Canadian Tire money, it is denominated in Canadian dollars and the difference is that the notes are issued by them and not by the central bank. The missing bits of infrastructure relate to the handling of these notes. If you try to deposit them at the bank, they don't have a system of dealing with them, because they simply use the uniform currency issued by the central bank. Dr. Williamson notes above that a banking system can (and did) work without a uniform currency. But now that we have one, there is no point in trying to accommodate Canadian Tire money alongside the notes issued by BoC, when that would simply add costs and legal risk.
DeleteThe supply of CT money is a function of CT revenue, which is minuscule relative to Canadian GDP. In fact, the supply is constrained by CT revenue, since it affects margins. So there's not enough of the stuff to service GDP, unless velocity takes a meaningful jump toward the speed of light.
ReplyDeleteA more seriously pressing question:
What is the equilibrium relationship between the number of well known Canadian econ bloggers and the number of well known Canadian comedians?
This is a great explanation of why CT money will never be a reserve currency for international trade. The company is too small to even qualify for SIFI status or even lender-of-last-resort access. But what about Amazon? Should we expect them to eventually fund themselves almost entirely with loyalty credit?
DeleteJKH, good point. If they sold CT money as gift certificates (like Anwer's Amazon loyalty cards) rather than giving it out as a percent of each purchase, that might remove the constraints the supply.
DeleteYep, there really are a lot of Canadian econ bloggers out there. Maybe something to do with the cold?
Additional thoughts:
DeleteThe lower the velocity of redemption of CT money (i.e. use in purchases), the greater the outstanding float of CT money – i.e. the greater the CT money supply. To the degree that there is growth in the net annual production of CT money (issuance minus redemption), the float will increase each year as CT revenue grows. And to the degree that CT revenue growth is greater than GDP growth (which is normal), the CT money supply should be increasing as a ratio of GDP. All of that affects the proposition as to how useful CT money might become as a broader medium of exchange.
I checked the annual report to see what I could find on the accounting for CT money, but didn't see anything, which is weird. Thinking about it, I would guess that CT money is entirely off balance sheet and expensed on redemption rather than on issuance.
It's pegged to the CAD, by a worse counterparty than the Treasury, and in trivial low denominations? Exactly the outcome you'd expect.
ReplyDeleteTry pegging the CTD to a price of a quart of motor oil or laundry detergent or something. That would make it a useful trading note.
Or even better, if CT would issue CAD 1,000 notes, you'd see some real action!
I was going to write something completely different but then it occurred to me. CT issues CT money when you buy CT products, i.e. tyres, right? So basically you are overpaying for the product you're purchasing in exchange for a promise of a future product by CT (or possibly someone else, if you're lucky).
ReplyDeleteThe counterfactual to CT money is keeping your own money, i.e. not overpaying and instead using the money you didn't give CT on something you fancy.
In that sense CT does not actually issue new money. It exchanges existing money for its own, lesser money. Lesser, because the options of the holder are more limited.
To speak of an actual act of money creation, CT would have to issue tokens that act as means of payment for its own goods in exchange for something non monetary, say your labour.
Banks exchange existing base money for their own in the form of deposits, which trade at par. People deposit for various reasons, including the desire to access electronic payments infrastructure. This is where Canadian Tire money fails: you cannot deposit it at the bank, and draw on it electronically from anywhere in the world. The same is true for gift cards from other stores like Amazon. People do trade these sometimes, on sites like eBay, but not at par due to the large transactions costs. In principle, banks could accept gift cards from all kinds of stores, but this would require infrastructure that doesn't exist, nor is there sufficient demand for it. In earlier times it did exist, at least insofar as they would accept notes issued by other banks.
DeleteIf you're trying to sell me the money multiplier then I'll have to disagree. If you mean that banks will take base money in exchange for a deposit, then of course that is true. But if that's all they did we wouldn't need banks and my claim is that when they do that they are not creating new money. But that is of course a matter of definition.
ReplyDeleteMy point is that banks will take Bank of Canada notes for deposit, but not Canadian Tire money, and this answers a question posed in the blog: why it isn't used as a general medium of exchange. JP does note that it would be costly to switch from Bank of Canada notes to CT money, and I'm trying to highlight some reasons for this: missing architecture.
DeleteBut there is another aspect that should be discussed: in the hierarchy of money, the notes issued by Canadian Tire are a derivative, in the sense that they are denominated in terms of Bank of Canada money. What would it mean for the derivative money to replace the base money?
Right, and my guess my reply would be that that is because it is not actually money. Although I'm sure there are things that I do define as money, such as the WIR here in Switzerland, that are also not accepted as deposits in regular Banks. The WIR System does, however have its own bank. It is a real parallel or complementary currency. https://en.wikipedia.org/wiki/WIR_Bank
Delete... and so are the Salt Spring, Calgary and Toronto dollars that JP metions in the post, probably.
DeleteAnd as to why these monies / banks do not become part of the national currency / banking system, I think my answer would be to look at how they conduct their lending business. Whom do they lend to? Are borrowers restricted geopgraphically or by the types of business they run, the types of loans they can make or collateral they can post and whether they pay interest or not? I suspect that all these somplemantary currencies have business models that somehow make them distinct from standard banking practices such that they cannot be integrated into the national currency system. They provide a niche product to a niche market.
The system Williamson describes had a uniform outside money (gold and silver). The notes in circulation were redeemable claims to gold or silver--that is, inside money--much like checkable deposits were then and now. It is confusing because notes today (e.g., federal reserve notes) are outside money. So the case illustrates uniformity in outside money (just like today) but not inside money (again, just like today).
ReplyDelete