Historically Speaking: Paying With Plastic Is New, but Credit Isn’t

From the Knights Templar to the Diners Club, people have long traded in promises instead of cash

The Wall Street Journal

March 17, 2022

On March 6, Amex, Mastercard and Visa announced that they were suspending their operations in Russia. The move will deal a blow to Russian commerce, as a life tied to cash and checks can be cumbersome in the extreme.

The Mesopotamians were among the first known to grasp the usefulness of the charge account. The extensive trade between Mesopotamia and the Indus Valley made regular shipments of gold highly impracticable. Instead, traders used seals and clay tablets to keep running tallies for settlement at a future date.

Greek and Roman travelers relied on letters of creditworthiness from their personal banks. But this practice died out during the Dark Ages. The Knights Templar revived it during the 12th century as one of their services to Christians traveling to Jerusalem. Pilgrims could deposit their money at any Templar house, receive a “letter of credit” and use it to withdraw funds from the Temple stronghold in Jerusalem.

Illustration: Thomas Fuchs

The letter of credit eventually evolved into the bill of exchange, or promissory note, between banks, used for business transactions. In 1772, the London Exchange Banking Company in England offered its clients a version for everyday use: Called “circular notes,” they were issued in set denominations, could be cashed in many major cities and were guaranteed against loss and theft.

The idea was slow to catch on in the United States until a freight transport business called the American Express Company decided its real profits lay in facilitating the movement of money. Having already enjoyed considerable success with money orders, in 1891 it rolled out the American Express traveler’s check, which merely required the owner’s counter signature to be valid.

The traveler’s check was by no means the only alternative to cash. By the late 19th century, most department stores had tokens, often personalized metal key fobs, that loyal customers could present in lieu of immediate payment. After World War I, oil companies went a step further, offering “courtesy cards” that could be used at their gas stations. Airline companies and hotels did the same.

The profusion of charge cards soon became onerous. In 1946, a Brooklyn bank experimented with the Charg-It Card, which could be used at local businesses. Three years later, so the story goes, New York businessman Frank X. McNamara was dining at a restaurant with clients when he realized he was out of cash. The ensuing embarrassment inspired him to propose a new kind of charge card: one that was members-based, would work anywhere and earned its profit by charging each customer an annual fee.

The Diners Club card had more than 10,000 members by the end of its first year. The first bank to copy the idea was Bank of America in 1958. Its BankAmericard—which became Visa in 1976—allowed card owners to pay interest rather than settling their monthly bill. By the mid-’60s, other banks were scrambling to imitate what had effectively become a cash-cow. The most successful competitor was a consortium of banks behind the Interbank Card, today known as Mastercard.

The first bank outside the U.S. to offer a credit card was Britain’s Barclays Bank in 1966. But by then Visa and Mastercard were already expanding to other countries, setting the stage for the global duopoly they are today.

Vladimir Putin may have difficulty charging his next holiday to his Visa. But he can still use his China-backed UnionPay card—for now.

Appeared in the March 19, 2022, print edition as ‘Paying With Plastic Is New, But Credit Isn’t’.

Historically Speaking: The High Cost of Financial Panics

Roman emperors and American presidents alike have struggled to deal with sudden economic crashes

The Wall Street Journal, January 17, 2019

ILLUSTRATION: THOMAS FUCHS

On January 12, 1819 Thomas Jefferson wrote to his friend Nathaniel Macon, “I have…entire confidence in the late and present Presidents…I slumber without fear.” He did concede, though, that market fluctuations can trip up even the best governments. Jefferson was prescient: A few days later, the country plunged into a full-blown financial panic. The trigger was a collapse in the overseas cotton market, but the crisis had been building for months. The factors that led to the crash included the actions of the Second Bank of the United States, which had helped to fuel a real estate boom in the West only to reverse course suddenly and call in its loans.

The recession that followed the panic of 1819 was prolonged and severe: Banks closed, lending all but ceased and businesses failed by the thousands. By the time it was over in 1823, almost a third of the population—including Jefferson himself—had suffered irreversible losses.

As we mark the 200th anniversary of the 1819 panic, it is worth pondering the role of governments in a financial crisis. During a panic in Rome in the year 33, the emperor Tiberius’s prompt action prevented a total collapse of the city’s finances. Rome was caught among falling property prices, a real estate bubble and a sudden credit crunch. Instead of waiting it out, Tiberius ordered interest rates to be lowered and released 100 million sestertii (large brass coins) into the banking system to avoid a mass default.

But not all government interventions have been as successful or timely. In 1124, King Henry I of England attempted to restore confidence in the country’s money by having the mint-makers publicly castrated and their right hands amputated for producing substandard coins. A temporary fix at best, his bloody act neither deterred people from debasing the coinage nor allayed fears over England’s creditworthiness.

On the other side of the globe, China began using paper money in 1023. Successive emperors of the Ming Dynasty (1368-1644) failed, however, to limit the number of notes in circulation or to back the money with gold or silver specie. By the mid-15th century the economy was in the grip of hyperinflationary cycles. The emperor Yingzong simply gave up on the problem: China returned to coinage just as Europe was discovering the uses of paper.

The rise of commercial paper along with paper currencies allowed European countries to develop more sophisticated banking systems. But they also led to panics, inflation and dangerous speculation—sometimes all at once, as in France in 1720, when John Law’s disastrous Mississippi Company share scheme ended in mass bankruptcies for its investors and the collapse of the French livre.

As it turns out, it is easier to predict the consequences of a crisis than it is to prevent one from happening. In 2015, the U.K.’s Centre for Economic Policy Research published a paper on the effects of 100 financial crises in 20 Western countries over the past 150 years, down to the recession of 2007-09. They found two consistent outcomes. The first is that politics becomes more extreme and polarized following a crisis; the second is that countries become more ungovernable as violence, protests and populist revolts overshadow the rule of law.

With the U.S. stock market having suffered its worst December since the Great Depression of the 1930s, it is worth remembering that the only thing more frightening than a financial crisis can be its aftermath.