Give Me Liberty or Give Me Debt - A History of Credit Cards

Dan Bryan, April 30 2012

American Mall, 1990 (Galinsky)Scene from a suburban shopping mall, 1990 (click for source)

The ubiquitous presence of credit cards is relatively new to American life. The first modern credit card was only established in 1958, and it is only since 1980 that the usage of them has taken off. The result was a social revolution away from saving, and in favor of spending. Long stigmatized as a sign of impulsiveness and weak character, consumer debt became an accepted part of financial management.

This has been a huge source of profits for the financial industry, and a source of increased purchasing power for the consumer. However, most consumers have been remarkably unwary about the downsides of credit card debt.

Credit before credit cards

The idea of using credit to purchase goods is nothing new by any means. However, there was no widespread system in place to regulate this credit in the early United States. Throughout the 18th and 19th century, credit was almost always granted on a store-by-store basis. One's personal reputation and relationship with a proprietor was the primary basis for any credit granted.

At its best, this system allowed farmers and businessmen to purchase essentials while they waited for the harvest or accounts receivable. The threat of receiving no credit in a subsequent year was more than enough to ensure payment when an influx of cash was received.

In its more insidious form, store credit was given out as a means of entrapment. Company stores in mining towns made sure that a gap naturally existed between the cost of their products, and the wages that they paid out. The same practice proliferated throughout the South, at those stores where sharecroppers were required to shop. The objective was to depress wages and decrease turnover. If an indebted worker tried to flee, they could be subject to arrest.

The rocky beginnings of the credit card industry

In modern times, the credit card has been created to fill the need of deferred payment for consumer goods.

As with many things, the locale of innovation was California. It was in this state that the BankAmericard was introduced in 1958. 60,000 cards were mailed to "customers" (the offer was unsolicited) in Fresno, California. The cards could be used at a variety of stores throughout the state.

The unsolicited sending of fully active credit cards became a common marketing tactic. Unfortunately for the card companies, it greatly backfired in what was labeled "The Chicago Debacle".

In advance of the 1966 Christmas holiday, a number of companies attempted to make their move into the Chicago market, using the standard practice of mailing pre-approved, functioning cards as their solicitation. Unfortunately, members of organized crime caught wind of these campaigns, and they used corrupt employees in the Postal Service to intercept thousands of cards. Outraged people throughout the Chicago area began receiving bills for accounts that they had never heard of. It was one of the first cases of large-scale identity theft in the United States.

The resulting Congressional Hearings placed a lot of negative press on the fledgling industry, and the practice of mailing pre-approved cards through the mail was ended.

National standards for consumer credit

By the 1970s, the credit card infrastructure had been moved online, and the system had been largely nationalized. The familiar providers -- Visa, Mastercard, and American Express -- had also established themselves as national brands. However, there was still a huge regulatory impediment to the industry. Credit card companies were hamstrung by state usury laws. Inflation was high in the 1970s, and it was impossible to service customers in many states when the APR on a card was fixed at 10-12%.

The Supreme Court changed this situation with their decision in Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. This 1978 ruling allowed credit card companies to charge the interest rate of the state they were located in, rather than the state that their customers were located in. Effectively, the least regulated state in the nation became the benchmark for everyone.

Citibank was the first to take advantage. In 1980, they moved their credit card operations from New York to South Dakota, where there was no limit on interest rates at all. They were then able to charge the 20% rates that were above the prevailing inflation levels. Other banks quickly followed suit, and a truly national credit card industry was born.

An explosion in consumer debt: 1982-2008

The 1980s ushered in the golden age of credit cards. After the 1982 recession ended, the inflation rate plummeted. Card companies discovered that they could keep their rates at the same levels, however, without a decrease in business. As usage expanded and balances increased, what had previously been a loss leader turned into the most profitable part of many banks' portfolios.

Total Revolving Credit, USTotal outstanding U.S. credit card balances, in $ billions. (click for source)

There were a number of corresponding developments in American financial life that began in this era.

  • Decline in personal savings rate
  • Increase in advertising, start of cable, etc.
  • Increase in stock values at rates well above historical levels
  • Increase in real estate prices, college education prices, government deficits, and other credit-dependent variables
  • Increasing cultural acceptance of consumer debt as a normal part of life
  • Stagnant wages
  • Decline in financial literacy
  • Increase in bankruptcies
U.S. Personal Saving RateAverage savings rate for American workers, as a % of income. (click for source)

It is difficult to say which of these developments led to others. For instance, did wages stay stagnant because workers in debt were less able to bargain for increases? Or did stagnant wages lead to an increase in credit card usage?

Credit card debt and its effects on society

Regardless of the causes, a widespread cultural consensus broke down. Since the Great Depression, the wisdom of saving 10% out of a paycheck had been as deeply ingrained into the American mentality as free speech, apple pie, and baseball. By the mid 2000s, the personal savings rate was effectively zero and many millions of people were deeply in debt -- not from productive investment but from living beyond their means.

Companies across the spectrum of industries benefited from the new paradigm on consumer debt. Here are just some of the ways:

For their part, people who used credit cards to make purchases were able to live beyond the means that their incomes provided. In the short term, this improved their level of prosperity. The future costs were:

  • Lower retirement savings
  • Greater percentage of future paychecks dedicated to debt service
  • Less ability to attempt self-employment
  • Increased risk of bankruptcy
  • Vulnerability to large and unexpected expenses (health care, housing, college)
  • Huge increases to borrowing costs on mortgages, cards, etc. in the case of missed payments
  • The reduced level of freedom that accompanies any type of consumer debt

These downsides did not slow the growth of the credit card industry. For the most part, American consumers decided that greater debt was compensated for by the increased use of luxury consumer goods. They were spurred on by highly sophisticated advertising campaigns -- a cultural revolution actually -- that encouraged this new mentality towards consumer debt.

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About the Author

Dan Bryan

Dan Bryan is the founder and editor of American History USA. He holds a B.A. in American History from the University of Chicago. He has created this site to empower Americans of all backgrounds to increase their historical literacy.

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