Credit Cards: From Clay to Plastic

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[ R ] Marinus van Reynerswaele - Moneylender and his Wife (1539)

The following post is the first of a two part series on Credit Cards and Entrepreneurship.

“Go with me to a notary, seal me there Your single bond; and, in a merry sport, If you repay me not on such a day, In such a place, such sum or sums as are Express’d in the condition, let the forfeit Be nominated for an equal pound Of your fair flesh, to be cut off and taken In what part of your body pleaseth me.” – The Merchant of Venice

In Shakespeare’s The Merchant of Venice, a Jewish moneylender named Shylock famously demands a pound of flesh from Antonio, a Venetian merchant who is unable to pay his friend’s loan. Credit during the Renaissance could be a nasty business.

Origins of Credit

The word credit comes from the Latin word credere, which means “to believe” or “to entrust.” The invention of credit is usually attributed to the Babylonians, where early bankers would charge interest in kind and record transactions on clay tablets. During the ancient era, interest was viewed as a result of the reproduction of living organisms. A loan of seeds was paid back with interest with produce or seeds. A loan of an animal was paid with the offspring of the animal. The Sumerian word for interest, máš, is the same word for calf.

The introduction of metal as a form of exchange challenged the reproduction-based system, as metal cannot reproduce itself. Aristotle wrote about the dilemma in his book Politics:

“The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest (tokos), which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural.”

Regulating Interest Rates

Around 1772 BC, King Hammurabi of Babylon established the first formal interest regulation in his Code of Hammurabi. Loans of grain were limited to an interest rate of no more than 33 1/3 % whereas loans of silver were limited to 20%. In classical Greece, typical interest rates were around 10%. Up until 594 BC when the Athenian Laws of Solon outlawed personal security, many lenders required debtors to place their own freedom as a guarantee on loans. Around 449 BC, during the birth of the Roman Republic, the Law of Twelve Tables established the maximum allowable interest rate at 8 1/3%. During Justinian’s reign, the interest rate dropped to 5%, while it returned to 8 1/3% under Constantine.

Usury

In 325 AD, during the First Council of Nicaea, the practice of usury among clergy was banned. The regulation was later applied to laity (common people) as well. While in these instances usury referred to the practice of charging any interest, the modern definition tends to qualify usury as the practice of charging exceptionally high interest rates, especially in cases that take advantage of the poor. Up until the Protestant Reformation in the sixteenth century, usury was classified as a sin in the Catholic Church. Islam also condemned the practice of usury.

Into this interest vacuum jumped moneylenders like Shakespeare’s Shylock. While the Jewish Torah forbade charging interest to fellow Jews, it did allow Jews to charge interest to foreigners (i.e. non-Jews). In Venice, Jewish moneylenders would sit on benches (banca) outside of ancient pawnshops, such as the famous Banco Rosso, and issue red receipts for loans.

Modern Day Banking

In 1397, Giovanni di Bicci de’ Medici figured out how to circumvent Church laws against usury through creative accounting in his newly founded Banco Medici in Florence, Italy. The bank focused exclusively in foreign exchange and instead of charging interest, his bankers would charge a commission. The Medici Bank had nine branches as far away as London and issued in the modern banking era. In 1668, the Sveriges Riksbank was founded as the first central bank, followed closely behind by the foundation of the Bank of England in 1694, which is the model for most central banks today.

Early Credit Cards

Around 1865, department stores in the United States began issuing charge coins, which identified customers who had charge accounts with the store. The coins were first made of celluloid (an early plastic) and were then manufactured in copper, aluminum, or steel. The coins carried the account number, name and logo of the store. In 1928, Charga-Plates were introduced. They included the customer’s name, city and state on the front and a small paper card on the back for a signature. Unlike modern credit cards, these early inventions were limited to a particular merchant, usually a department store, and were not portable. In 1934, American Airlines awarded customers a 15% discount for using the newly introduced Air Travel Card, designed to entice customers to “buy now, and pay later.”

Diners Club CardIn 1950, Frank McNamara and his attorney, Ralph Sneider, introduced the Diners Club Card with 200 customers and 14 restaurants in New York. Unlike previous charge accounts, which almost always were associated with a particular merchant, the Diners Club allowed customers to frequent participating restaurants and pay their full bill at the end of the month. Originally, Diners Club did not charge any interest to customers but charged a 7% transaction fee to participating restaurants. By the end of 1950, over 10,000 people were using the Diners Club Card. Starting in 1951, Diners Club charged a $3 annual membership fee ($27.50 in 2014 dollars) and made a profit of $60,000 ($550,000 in 2014 dollars).

In 1958, the Diners Club monopoly on charge cards ended with the entrance of major competitors: Carte Blanche, American Express and BankAmericard (VISA). In 1966, Master Charge (MasterCard) entered the fray. Early credit cards were mass mailed unsolicited to bank customers who were deemed credit-worthy, until the practice was outlawed in 1970.

In 1978, the Supreme Court opened the floodgates for credit card companies to circumvent state usury laws that were designed to protect consumers against exorbitant interest rates. In Marquette National Bank v. First of Omaha Corp., the court upheld First of Omaha Corporation’s right to charge 18% interest (maximum allowed in Nebraska) to customers in Minnesota, where the state usury laws capped interest at 12%.

Modern Credit Cards

As of 2012, there are 334 million credit cards in the U.S. The average variable rate cards charge 15.66% interest whereas the average fixed rate cards charge 13.02%. While modern credit cards have allowed easy access of credit to millions, unfettered credit has increased mass consumerism and personal bankruptcy. For hundreds of years during the Greek and Roman empires, interest was capped at below 10% to protect the populous, but our modern equivalent, state usury laws, are easily circumvented by credit card companies.

In the next post, we will take a look at the use of credit cards by entrepreneurs in launching businesses.

Photo Credits: Playing Futures: Applied Nomadology & How I See Life

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