(Originally published here.)
Printing money is easy — getting people to accept it for transactions is the tricky part. (Try it sometime if you don’t believe me. Being a government-backed bank helps a lot.) Although governments have a big advantage because they decide how people pay their taxes and how to pay welfare and retirement benefits, this hasn’t stopped private individuals and firms from trying to issue alternative currencies.
The most successful of these are credit-card reward points and frequent-flier miles. Despite their ubiquity, these private currencies have lots of problems that prevent them from being used more widely. Anyone hoping to replace government-backed money with private alternatives (I’m looking at you, Bitcoin and free-banking enthusiasts) should think carefully about a recent move by Southwest Airlines.
The Chicago Tribune reports that the discount carrier has just engineered a snap devaluation of its Rapid Rewards frequent-flier points. Starting next spring, the least-expensive Southwest flights will cost 70 points, up from 60 points. (The more costly flights will remain the same price for now.) Unless the dollar price of the cheapest flights also jumps, Rapid Rewards points are therefore about to lose more than 14 percent of their value against the dollar. That probably won’t dissuade people who already own a lot of points from using them, but it’s still a big deal.
Southwest’s decision also puts the alleged capriciousness and villainy of the Federal Reserve and other central banks into perspective. The dollar has lost a lot value over the years no matter how you count it, but the declines have generally been predictable and gradual. People can plan for these price changes and prevent them from disrupting their routine decisions. By contrast, sudden devaluations are impossible to anticipate by their nature.
As Lenin once said, “the best way to destroy the capitalist system [is] to debauch the currency.” Wild swings in the costs of goods, services, and capital make it very hard for people to decide what is best for them. This doesn’t mean that people who own depreciating airline points are going to start marching in the streets. It does explain, however, why airline miles and other rewards programs that randomly lose value have never threatened the monopoly of currencies backed by sovereign governments.
People who want to introduce private competition into the currency markets face a lot of obstacles. As Southwest Airlines makes clear, none is bigger than stable purchasing power.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)