The Paradox of Plastic Currency: Credit Card Nears to the End of its Reign21 minute read
The moment when shark teeth were replaced by silver coins at around 500 BC marks a huge innovation in finance. An equally important revolution took place in the 20th century, when plastic currency triumphed. Paradoxically, however, each technical improvement that makes credit cards safer and more comfortable to use has brought the day when these plastic cards become the fascination of a select group of weirdoes ever closer. That day won’t come in 2019 and not even in 2020, but it’s closer than we think.
Credit cards have always offered something that cash doesn’t – the card is light, thin and small. And it only takes some crude oil and a tiny bit of gold to manufacture, making it a relatively cheap item to produce. Plus for just a small fee, the cardholder can delay the payment date.
The Predecessors of the Credit Card Are Ancient
The credit card, which was a symbol of the good life in the 1950s, did not appear in a vacuum. Shops had begun issuing charge plates and celluloid coins in the United States already in the 19th century; gas stations soon followed suit. This allowed local farmers to buy goods from the shop “on a loan”. The farmers would repay the loan once they sold their crop or cattle in autumn. But it wasn’t only the farmers who used the charge plates and celluloid coins – city folk did so too. It does feel great to buy something now and pay later, doesn’t it?
Department stores adopted similar cards at the start of the 20th century. Granted, the cards’ drawback was that they could only be used in the gas station or store chain that had issued them.
The credit card had two other important predecessors that greatly expanded people’s understanding of money. The U.S. Postal Service adopted the money order system in 1863. The courier company American Express began competing with the national mail service’s money orders in 1882. The service primarily gained popularity among immigrants who would wire money back to their former homeland. The service was also popular for paying gas and electricity bills.
Seeing how popular the money order system was, American Express developed a product that would allow converting US dollars to the local currency in another country with ease. The new product was called a traveller’s cheque and made travelling much more comfortable and safer than with cash. The cheques also had security features – a signature and a watermark.
The banks, too, saw financing credit purchases as a lucrative endeavour. The first bank issued credit card was the Charg-It card adopted by Brooklyn banker John Biggins in New York in 1946. Biggins’ bank served as the middleman between the buyer and seller, compensating the purchase to the seller and getting the money back from the buyer with an interest at a later date. The system was local and only available to the bank’s customers.
The first credit card to spread widely was the Diners Club Card that was first issued in 1950. The story began a year earlier when Frank McNamara went dining at Major’s Cabin Grill in New York but forgot his wallet. He couldn’t leave the restaurant before his wife drove all the way from their home in a suburb to Manhattan to save him. To avoid such embarrassing situations in the future, McNamara decided to establish the Diners Club Card system. He explained his plans to his lawyer Ralph Schneider, who eagerly joined forces with McNamara and made the plans a reality. The Diners card allowed its holder to peacefully dine at restaurants and travel for a month and then just pay the bill at the end of the month.
Some historians claim that McNamara’s story is made up. But so what if it is? It’s quite adorable to imagine McNamara’s wife rushing through New York at night to save her husband. The fact is that the Diners Club Card came, saw and conquered! At the beginning, there were twenty-seven restaurants in the system and two hundred friends and family who had paid a three-dollar annual fee. By 1951, the Diners Club Card had 40,000 users. When the Diners Club Card entered the travel business, the number of members reached a million in 1959 and Diners was listed on the stock market.
Here it is important to differentiate between a charge card, i.e. a card that requires the holder to pay the sum spent during a month back by a specific due date the following month, and a credit card, i.e. a card that allows the holder to pay back the spent sum whenever they choose, but the holder is required to pay interest on the sum that they’ve yet to pay back.