Matthew C. Klein is a columnist for Bloomberg. He used to write on The Economist’s economic blog, Free Exchange. Despite not agreeing with him most of the times, I found that he had some of the most provocative and interesting pieces among the usually quite dull Economist posts. And I used to comment on those pieces. A lot.

He today published a new piece on the Bloomberg website, arguing that the ‘devaluation’ of US-based Southwest Airlines’ frequent flier reward points explains why private currencies (including free banking, Bitcoin and equivalents) have never taken off: they have unstable and unpredictable purchasing power.

His argument is really misguided. Let me explain why.

1. First, I would not really call reward points currency. They are media of exchange of very limited use. They are definitely not generally accepted media of exchange (to be honest, Bitcoins aren’t either, as George Selgin explains).
2. Bitcoins cannot even lose purchasing power unpredictably: its algorithm has been defined so that new Bitcoins are created following a very steady pattern. So I don’t see why Klein even mentions them…
3. Matthew Klein seems to have limited knowledge of banking history: free banking systems have been very stable where and when they existed (White, Selgin, Dowd, Horwitz, and others have published enough on the topic). It is the state that monopolised currency issuance for its own benefits which very often led to financial crises. Currency depreciation has also been much more acute under government’s fiat currency systems.
4. Finally – and this is where Klein’s argument really breaks down, the Southwest frequent-flier points devaluation is linked to the devaluation of the dollar! How? Like free banks’ private currency issuance is based on outside money reserve (usually gold or some other commodities), frequent-flier points are also based on another type of outside money (here, the US Dollar) although the analogy is not exact. Basically, every time a customer pays X USD to Southwest, Southwest generates Y reward points. As a result, there is an ex-ante Y/X exchange rate, which is supposed to remain constant over time. Issuing those points is a cost for the company, but which is offset by the potential profit of keeping loyal customers, at this specific exchange rate. When enough reward points have been accumulated, they can then be exchanged for a flight (which are priced in terms of both USD and reward points separately). While Southwest does control the reward points supply, it does not control the outside money supply. And unfortunately, the USD is slowly depreciating thanks to the Fed, thereby increasing the ex-post Y/X exchange rate and the relative purchasing power of the reward points… Like any price, reward points-based prices are sticky, and have to be revaluated over time to reflect the change in the medium of account (which is also USD) that Southwest uses to report its profits. It looks like in this case that reward points-based prices are stickier than USD-based prices, making devaluations both less frequent and sharper in order to catch up with the depreciation of their underlying outside money.

This phenomenon isn’t isolated. My internet monthly bill was recently increased by….25%! I was shocked for a few minutes when I found out. But it is easily explained: internet bills aren’t revaluated every month or even every year, despite the fact that inflation depreciates the currency’s purchasing power every month. At some point, internet firms have to readjust the prices that they charge in order to respond to the increase in their own supply costs and maintain their margins. And when it happens, increases are usually big. This is also valid for many other goods.

So Matt, you’re going to have to find another argument to justify government-controlled currencies!