One of my brothers recently joked that he wanted to meet the first person to pitch him a gift card. Who would have thought that consumers would agree to their money becoming useless?
This is an important question for economists as well. Carl Menger’s famous book The Origin of Money argues that money could have emerged without government because people naturally exchanged goods that were more “sellable.”
Menger’s term “sellability” is very similar to our term “liquidity.” Products with higher salability can always be easily sold without lowering the price. For example, houses don’t sell well because it takes months to find a good buyer. Girl Scout cookies, in contrast, have a broader appeal and can be sold to even children.
Menger argued that because it’s hard to find someone to trade directly for what you want, people will trade it for a more salable item and use that as a barter. Over time, the best-selling products became money that naturally appeared.
Why buy gift cards if people are more likely to exchange them for something that sells better? This is the basic intuition behind the big brother joke. If a gift card can only be used for a certain product, doesn’t that mean the product is less salable?
Of course, people don’t always trade to increase their salability. You might be willing to hand over cash to buy a chocolate bar even if you know there’s no chance of it selling. There are other reasons why you might want to buy chocolate. However, with gift cards, buyers are still purchasing something that is intended to be used as currency. Most people buy gift cards with the expectation that they will use them. So why is there demand for hard-to-sell currencies? Does this contradict Menger’s insight?
One possible response is that the buyer may have their own judgment about what the recipient should buy. Reduced sales potential may itself be valued as a commodity. For example, one man I know always kept $100 McDonald’s gift cards in his wallet to give to homeless people he met. He kept the gift cards instead of Benjamin because he hoped it would be more difficult to exchange gift cards for drugs. He couldn’t always carry food with him, so gift cards met the financial characteristics of being portable without sacrificing the ability to choose what to consume in a container.
But if your grandma bought you a $50 Amazon gift card, it’s highly unlikely that she’s trying to wean you off drugs. People often purchase gift cards because they want to contribute to the benefit of the recipient. So how did gift cards become so popular?
Norms may be a factor that could make this better. Across cultures, it is common for people to give cash as gifts to their children. However, once you reach adulthood, cash gifts are no longer acceptable. If adults have the means to buy things themselves, thoughtfulness is at the heart of the gift. Besides, adults will only be exchanging cash.
These norms act as constraints on the range of gifts that one adult can give to another. If you want to give your friend $20, you should take the time to think about what they want and buy it for them. Even if I knew her well, I could misunderstand or not spend exactly the $20 she would have spent.
This is where gift cards get interesting. Purchasing a gift card when the code prohibits handing over cash actually increases my $20 sales potential.
Think of it this way. If you’re going to give $20 worth of stuff to a friend, you could buy two Yankee candles, a new book, or a bouquet of flowers from the grocery store. But whatever I give, she receives. My $20 is locked into a physical gift with very limited resale value. If you instead buy a $20 gift card to Target, you lose the $20 in sales potential, but you make it more salable for the gift recipient. My friend finds it much easier to exchange a $20 gift card for an economical price than it is to barter for Yankee Candle.
But what are the norms surrounding cash gifts to adults? Gift cards conveniently avoid some objections. If two adults happen to give each other gift cards instead of exchanging cash, each will end up getting something different than before. Gift cards are a bit more specific, which means they’re less salable than cash, but they also meet the minimum requirements for consideration. Perhaps that’s a little thoughtless, but gift containers seem to greatly appreciate the increased salability.
So the next time you buy a gift card for a friend, don’t be surprised if Carl Menger is rolling over in his grave. The $1.24 trillion gift card market is exactly the kind of emergence he was talking about.
