The formal definition of money is that it is (1) a medium of exchange, (2) a store of value, and (3) a unit of measure. The $20 bill clearly meets all three. The frequent flier miles are a tougher question.
These days, you can use frequent flier miles for a lot more than just booking plane tickets. Airlines have cross-promotions with magazines and home entertainment stores that enable you to cash in your miles for all kinds of goodies. At the same time, it's getting tougher to actually fly with frequent flier miles, as airlines reduce the number of seats eligible for frequent flier redemptions. Even if airlines stopped issuing miles, it would take people years to draw down their current stash of frequent flier miles. Hence, the pressure to create uses for miles that don't involve air travel, making miles a true medium of exchange.
In many ways, then, frequent flier miles act as a sort of mirror currency. Are they a good store of value, though? With airline bankruptcies mounting, David A. Kelly of the New York Times offers some free "Advice to Mileage Misers: Use the Hoard Now." He argues that evaporating opportunities to use miles amount to inflation of the frequent flier currency. That is, as the airlines reduce the number of redeemable seats, the purchasing power of frequent flier miles falls. Kelly quotes Tim Jarrell, publisher of Fodor's Travel Publications: "They're not bank accounts that earn interest." Another interesting quote from the article:
"Frequent-flier programs have turned into trading stamp programs without the stamps," said Terry Trippler, spokesman for CheapSeats.com. "Instead of opening up more seats for travelers, most programs are now offering magazine subscriptions, gift certificates or merchandise such as TVs instead. I sometimes wonder if the TV sets they're offering will last longer than the airlines themselves."
1. There are lots of other things that act like currency in our society, from Starbucks stored value cards to credits on iTunes. Some are even purely virtual, like currency in online fantasy games like Ultima. (See this BBC News article. Interestingly, the Gaming Open Market that it refers to is now closed, with a rather humorous sign-off.) Can you name a few more? What do they have in common with cash? What differentiates them from traditional currency? Do any of the stored value cards or credit systems gain value over time; are any of them worth hoarding?
2. A $20 Starbucks stored value card is clearly worth less than a $20 bill. Why do people buy stored value cards at face value?
3. Kelly has many useful nuggets of advice for using up your frequent flier miles. In many cases, he says, a trip from point A to point B may be possible, but it's made difficult because there are many possible routes that need to be checked. For example, he cites a case in which agents tell customers it's impossible to fly to Asia on frequent flier miles, while it is in fact possible, but only if you go through Amsterdam, which takes a bit longer. Why is it profitable for airlines to make it difficult to redeem miles? Is there an optimal level of difficulty? If you were in charge of an airline frequent-flier program, how would you find that optimal level?