When I was growing up, my parents purchased clothes and holiday gifts and periodically visited restaurants and fast-food outlets. They paid for their purchases only with cash or instruments easily converted into cash (typically checks). They relied on their favorite platform for purchases, the Sears catalogue, consummating purchases through what was known as cash on delivery (COD). They did not rely on any non-mortgage consumer credit. Many other Americans were the same way.

A lot has changed since then.

Most consumers today regularly employ “plastic,” meaning credit cards. A new book delves into the history of consumer credit: Plastic Capitalism. The author, Sean Vanatta, introduces readers to the emerging use of consumer credit dating back to the 1940s and traces the ups and downs of federal and state control of the credit card market through the 1980s. Vanatta is a lecturer in economic and social history at the University of Glasgow and a senior fellow at the Wharton Initiative on Financial Policy and Regulation at the University of Pennsylvania. This is his first book.

Capitalism and controls / Vanatta sets a neutral tone in the book’s preface: “This is a book of history, and I will not venture either policies or predictions.” However, the author advances an underlying narrative of “blame the capitalist bankers,” which is hinted at in a summary of his history on Plastic Capitalism’s book jacket: “How bankers created the modern consumer credit economy and destroyed financial stability in the process.” Vanatta emphasizes and regularly returns to two major historical themes, both of which are raised in the book’s title and subtitle: capitalism and the need for financial control to counteract what he favorably quotes from economist Herman Minsky as “the basic instability in a capitalist economy.”

In early chapters, Vanatta writes of Franklin D. Roosevelt and his Fed chairman, Marriner Eccles, who the author claims are responsible for

saving capitalism.… In Eccles’s view, the root of the nation’s prolonged depression was the collapse of consumer spending.… Eccles and his colleagues believed permanent federal controls could ensure stable growth within the context of Keynesian demand management.… Eccles told the Senate Banking Committee in June 1947 that installment credit accentuates the boom and it accentuates the downswing. It tends to make for instability.… [T]he credit system required federal management.

Strangely enough, Vanatta does not mention the massive monetary policy failings of the Federal Reserve during the 1930s.

He continues on the lessons of the Depression:

The New Deal … rescued [capitalism and democracy], in part by making capitalism subject to a greater measure of democratic participation and oversight.… The New Deal emerged from the failure of capitalism to reconcile itself to democracy, and the failure of financial capitalism in particular to provide the stability required by democratic society. The New Deal restrained private finance and bent its powers toward public purposes.… The Great Depression of the 1930s destroyed much of capitalism and threatened to destroy all of it. In its wake a new social compromise emerged, which in the United States included … the rigorous control of finance.

The New Deal set the trajectory for the next half century of regulation of consumer loans and credit cards. The primary controls Vanatta surveys in Plastic Capitalism include interest rate ceilings (usury laws), credit controls, and a mailing ban for unsolicited credit cards, but he also discusses annual and service fees.

Charge it! / The original charge accounts were not the multipurpose tool available today, but instead they had their genesis in consumer need for credit with a specific retailer or group of retailers. Vanatta describes them as “a forerunner of the bank credit card. The charge program allowed consumers to shop at a variety of local stores using a single, bank-sponsored credit plan, which they repaid at the end of each month.”

Early efforts at retailer self-financing of consumer credit held a great deal of risk: “The number of merchants who have been knocked out of business by supplying their own credit is enormous,” he writes. In the mid-1940s that risk was the trigger for Brooklyn banker John C. Biggins to develop Charg-It, “a revolving credit account [consumers] could use to shop at a variety of local retailers. The bank would pay merchants for the goods consumers purchased and assume the bookkeeping costs and credit risk.”

Vanatta sets the scene of the decidedly contemporary description of the perceived role for married, female consumers:

Once she passed the credit check, Mrs. Housewife was issued a charge card by Franklin National Bank, imprinted with her husband’s name and their account number.… Bankers designed their charge account plans to facilitate female-led, family consumption. Charge account bankers imagined their market as white, female, married and affluent.

Vanatta also recounts an early history of an “elite and masculine” market focus, commonly called “travel cards” reserved for “jet-set executives.” The first such travel and entertainment card, initiated in 1950, was Diners Club.

A deluge of credit / Bank of America (BofA), a megabank during the late 1950s as the credit card market was under development, styled itself as a “consumer bank,” keeping in mind its longstanding commitment to “the little fellow.” The approaches varied for how major banks built their market share in the nascent credit card market. BofA’s model was controversial because it “revolutionized consumer and merchant recruitment. Instead of relying on merchants to recommend creditworthy cardholders, [BofA] launched its program by mailing out millions of unsolicited cards directly to bank customers.” BofA executive Joseph P. Williams “believed the bank could build adequate volume and sustain the new credit program only by putting cards into consumer hands.” The first pilot test was undertaken in the Fresno market and “the cards were made of plastic. Before then, payment cards were either metal … or paper.”

The only apparent limitation was that the recipients had to be “established customers.… If they were already [BofA] customers, they would use their cards properly.” The projected delinquencies were understated: “Williams expected an initial delinquency rate of 4 percent; the actual rate was close to 20 percent.” Self-appointed consumer advocates criticized what they called “sales-persuasion chants in praise of debt.”

A further backlash was triggered as a more broad-based industry solicitation effort was set into motion: “Following the strategy pioneered by [BofA], from 1966 to 1970 bankers flooded American mailboxes with tens of millions of unsolicited credit cards.” Anecdotal evidence from Chicago area banks revealed extreme cases of an overly enthusiastic marketing effort:

People with strong credit histories or relationships with multiple banks received as many as a dozen cards.… One woman received cards from two separate banks, which was unfortunate, since she had been dead five months. Small children received credit [cards] in the mail.

Word of these marketing strategies circulated widely. Longstanding House Banking Committee Chair Wright Patman was not pleased, complaining:

If there was ever an unsound banking practice, it has to be the sending out … of millions of unsolicited cards to an unsuspecting public. Indiscriminate card mailing jeopardized bank stability. It diverted credit flows from national social priorities.

Patman called for a “statutory moratorium on credit cards … [and] introduced legislation prohibiting FDIC-insured banks from issuing unsolicited cards.” Vanatta notes that even the Wall Street Journal referred to the credit card banks’ “scattergun mailings.” After congressional hearings Vanatta references as “a show trial for unsolicited mailings,” legislation was approved and signed by President Richard Nixon that included an unsolicited mailing ban. Nixon signed separate legislation, the Credit Control Act (CCA), that granted the Federal Reserve broad-based powers to limit credit. A Federal Reserve Bank of Richmond report from 1990 described the CCA as exhibiting almost dictatorial power over credit use.

A capitalist approach? / After the federal legislative response, much of the responsibility for credit control shifted to the state level. This was driven by the Supreme Court’s 1978 Marquette National Bank decision, under which Vanatta explains, “Card transactions … would be regulated by the state where the bank was located, not where consumers lived or used their cards.” He calls this “a turning point away from the New Deal regulatory order and toward the deterritorialization of U.S. consumer finance.”

An exemplary case is Citi’s credit card operations. Frustrated with “New York’s strict interest rate regime” and “conflict with federal regulators” over interstate banking restrictions, Citi CEO John Reed saw an opportunity to avoid restrictions on expansion at both levels by locating credit card operations in South Dakota. Reed emphasized Citi’s lending through credit cards:

Almost everything we have traditionally distributed through branch system can be delivered on the card. And cards could go anywhere, enabling Citi to traverse federal and state branching boundaries and build a truly nationwide card-based consumer bank.

Meanwhile, 1980 legislation approved by a wide margin in South Dakota and relying on court precedent “exempt[ed] all regulated lenders from the state’s usury limit…, allow[ing] South Dakota banks to charge any interest rate the market would bear.”

Last gasp / This all happened against the backdrop of the Federal Reserve’s bungling of monetary policy in the 1970s, followed by a burst of inflation. Fed Chair Paul Volcker’s policies left the credit markets in turmoil in the late 1970s and early 1980s. According to Vanatta:

consumers grasped cards as a lifeline to purchasing power and the previous generation’s prosperity.… In March 1980, [President Jimmy] Carter exercised powers granted by the [CCA] (1969) and authorized the Federal Reserve to institute controls on credit card lending.

Apparently, desperate consumers faced with out-of-control inflation needed to be reined in by the government. Vanatta’s take on the inflationary response is more charitable, defending the interventionist response:

Carter’s credit policy mirrored the 1960s political response to mass unsolicited card mailing. In both cases, politicians reacted to breakneck credit marketing by enveloping card plans in the New Deal’s restraining web of financial rules.… By 1980, however, the balance of forces had shifted. An unrelenting campaign to discredit New Deal economic controls had borne fruit. Proponents of unrestrained markets, like Paul Volcker, commanded the policy high ground.… The stagflation of the 1970s, coupled with the increasing prominence of free-market ideology among academic economists, undermined the Keynesian ideas that had guided policy in the postwar era.

In practice, the imposition of controls exuded an arrogance of government knowing the precise level of and terms that consumer lending should be under. Under the CCA, “Carter could authorize the Federal Reserve to regulate ‘the extension of credit in an excessive volume.’” Treasury secretary W. Michael Blumenthal’s advice to Carter was consistent with this confidence:

Some consumers may be extending their debt positions to an extent that is not desirable. Your advisers also agree unanimously that action should be taken to limit the most liberal terms of consumer credit.

Volcker “opposed controls, which would interfere with the Fed’s monetary policies and the natural workings of the market.” Volcker added, “I’m no enthusiast of using direct controls since they can be counterproductive.” Treasury also “suggested imposing higher monthly payments to stymie demand.”

Carter gave the final go-ahead for a system of controls, scolding Americans like children, blaming “our failure in government and as individuals, as an entire American society, to live within our means.… Consumers have gone in debt too heavily.” Vanatta described Carter’s approach: “Like a disappointed father or remonstrating pastor, Carter implored Americans to shift from spending to saving.”

The Fed’s follow-through on the policy “placed restrictions on credit cards as well as check credit overdraft plans, unsecured personal loans,” and other related products. Not surprisingly, consumers pulled back and that may have contributed to the double-dip recessions of the early 1980s and Ronald Reagan’s 1980 landslide. Vanatta admits the controls “may have gone too far.”

Conclusion / Plastic Capitalism provides a thorough history of the development of credit cards and consumer finance, and for that alone it is worth a read. Vanatta provides over 60 pages of endnotes as a byproduct of his painstaking research, with nearly every paragraph in the book (after the preface) end-noted with citations. It will be too detailed for most readers, including what is at times an exhaustive discussion of the legislative process.

The book places the case for direct control of the credit card market in a positive light compared with less restrictive “capitalism.” For me, Vanatta does not make a convincing case that our system of consumer credit has “destroyed financial stability” and sometimes needs to be tamed by the blunt instrument of government credit allocation.