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2011 | OriginalPaper | Buchkapitel

1. Setting the Stage: Money, Credit, and Payments in America

verfasst von : Dr. David L. Stearns

Erschienen in: Electronic Value Exchange

Verlag: Springer London

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Abstract

This chapter establishes a context for the history presented throughout the rest of the book. It describes the formation of the Federal Reserve’s check clearing system in the United States; the early charge card programs operated by Western Union, the oil industry, the airlines and the department stores; the various travel and entertainment cards of the 1950s; and the early bank-issued credit cards, especially the BankAmericard from Bank of America. It ends with the creation of the first national interchange networks: the Interbank system; and the BankAmericard licensing system.

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Nächstes Kapitel Associating: Dee Hock and the Creation of the Organization

Chutkow (2001), pp. 64–66.

Evans and Schmalensee (2005), p. 38.

This was by no means a new idea. The Bankers’ Clearing House in London began in the 1770s. See Campbell-Kelly and Aspray (1996), pp. 15–18.

Humphrey (1995), p. 4.

Evans and Schmalensee (2005), pp. 40–41.

Klebaner (1974). See also Fernelius and Fettig (2006).

State-chartered banks were also encouraged to join, but most did not as the reserve requirements for Federal Reserve members were often higher than their state-mandated counterparts.

Evans and Schmalensee (2005), pp. 38–40. See also, Humphrey (1995), p. 8.

A number of authors on the history of money remark that this move toward abstraction has been a general trend. See especially Richardson (1970).

Quote from Fernelius and Fettig (2006). For historical points, see Evans and Schmalensee (2005), pp. 41–42.

For another example based on the choice between water and hand milling, see Bloch (1999).

Evans and Schmalensee (2005), pp. 41–42, Fernelius and Fettig (2006).

Mandell (1990), p. 18. Note that the loyalty reason actually seems a bit tenuous. If a cardholder could obtain a card from one merchant, that same cardholder could likely obtain cards from competing merchants as well, as there was no centralized credit reporting agency that would stop a consumer from obtaining multiple cards. If cardholders tended to be more loyal to a given merchant, it may be for more complex reasons.

Mandell (1990), p. 17.

Calder (1999).

Jutilla (1973), pp. 8–10.

It is perhaps not accidental that Western Union was at the forefront of payment systems innovation, as they also introduced the first electronic money transfer service in 1871.

Western Union Telegraph Company tariff manual, provided through personal correspondence with Harold Smith, former operations employee and webmaster of Western Union Retirees web site, and Carlos van Orden, another former Western Union employee. Some early authors mistakenly claimed that these cards were made from embossed metal, like a military dog tag, and journalists have tended to propagate this error in their articles. These authors likely confused this card with the “charga-plates” discussed later in this section.

One early department store “card” was actually a small elliptical metal fob meant to be put on one’s key chain.

Mandell (1990), p. 18.

Again, the loyalty argument may have had more to do with how merchants perceived the potential loss of loyalty rather than any real consumer affinity.

Mandell (1990), p. 18.

Mandell notes that when Standard Oil of California switched to metal embossed plates in 1952, errors in identification were cut by 94 percent and drafts returned to the stations due to the inability to establish identity were cut by 80 percent (Mandell 1990, p. 23).

Mandell (1990), p. 18. Unfortunately, Mandell provides little detail about these cooperatives, and no other author mentions them. If they are the first instances of a set of competitors cooperating to provide a common payment system, they are of great historical importance.

Facts about BankAmericard (October 1975). See also Mandell (1990), p. 18.

Mandell (1990), pp. 18–20.

Mandell (1990), p. 19. Considering the price of gasoline at the time, the amount of credit exercised by any one customer would have been quite limited, so this rationale might not have been as unreasonable as it sounds.

Evans and Schmalensee (2005).

Mandell (1990), pp. 19–20.

Mandell (1990), pp. 20–21. 1968 statistics are from Jutilla (1973), pp. 53–55.

Although the oil cards allowed customers to charge purchases as multiple stations, those stations belonged to the same franchise and thus did not compete with one another to any great extent.

Jutilla (1973), pp. 53–55.

Struble (1969), Facts about BankAmericard (October 1975).

Mandell (1990), p. 26.

Some sources put the formation at 1950. It is likely that the company was formed late in 1949 and did not actually start operations until 1950.

‘For everything’, Time (23 March 1959).

Simmons (1995), p. 106.

Simmons (1995).

For a recent example, see Evans and Schmalensee (2007).

Evans and Schmalensee repeat this story, but note that the original Newsweek article describes MacNamara as being at a coffee shop and forgetting his wallet altogether. Later reports tell the story as presented here.

Simmons (1995), p. 26.

Simmons (1995), pp. 21–22.

This significance of this point is often missed from our current vantage point. Restaurants at this time did not provide receipts unless asked for, which was required in order to be reimbursed or to deduct business entertainment expenses on tax returns. The T&E cards provided that proof automatically.

Simmons (1995), p. 27.

Simmons (1995), p. 29.

Simmons (1995), p. 41.

Simmons describes such an episode when trying to break into the airline industry. After signing the newly-created Northeast Airlines, he called the president of Eastern Airlines. ```I just signed Northeast Airlines to a Diners Club contract,’ I told him. ‘Do you want all of our one million businessmen and travelers to use only Northeast on your common routes?’ A week later, I signed Eastern. The rest of the airline industry fell into place soon after.” (pp. 48–49).

Simmons (1995), p. 41.

Mandell (1990), p. 27. Like the other industry-specific cards, The Universal Travel Card was not profitable and was eventually taken over by American Express when it issued its card in 1958.

Mandell (1990), p. 27.

Mandell (1990), p. 28.

Mandell (1990), p. 7.

There is some debate over which was the first franchise. Mandell (relying on Bloomingdale) claimed it was the UK (p. 7), while Simmons recalls that it was France in 1955 (p. 37).

Simmons (1995), p. 53.

Simmons (1995), pp. 61–66.

Simmons (1995), p. 82.

Simmons (1995), p. 70.

Simmons (1995), p. 75.

Simmons (1995), p. 103.

Simmons (1995), p. 106.

Mandell credits Carte Blanche with inventing the gold card, but he may be incorrect on this point. He claims that American Express first offered their gold card in 1975 (p. 111), but other sources such as the AmEx web site say they issued their gold card starting in 1966. There is also no mention of a Carte Blanche gold card in the 1972 index of the American Banker. Therefore, it may have actually been American Express that issued the first gold card and not Carte Blanche.

According to Mandell, The L. Bamberger and Company department store was the first to develop a system with revolving credit in 1947 and it was quickly adopted by the major New York stores such as Gimbels and Bloomingdales. In 1956, J. L. Hudson’s of Detroit added the idea of an interest-free period. See Mandell (1990), pp. 24–25.

Struble (1969), p. 5.

Mandell (1990), p. 26, Struble (1969), p. 4. Note that many sources claim that Franklin National Bank was the first “credit card,” but a close reading of Struble reveals that although he used the that term, the Franklin plan did not offer revolving credit and was thus similar to the T&E cards. Struble wrote in 1969, and the terms defined above were not yet used consistently. Other sources have suggested that Franklin first offered a non-revolving card, and then later added the revolving credit feature, thereby becoming the first bank credit card.

Struble (1969), p. 5.

Evans and Schmalensee also remind us that this tipping point does not necessarily mean that once the point is crossed, participation is entirely self-sustaining. A small change in pricing can easily cause consumers to leave a system, resulting in a quick collapse (e.g., Yahoo bids). See Evans and Schmalensee (2005), pp. 134–139.

Mandell (1990), p. 26.

Nineteen states and the District of Columbia allowed statewide branching, 16 allowed limited branching, and 15 enforced unit banking. See Goldberg (1975).

Nocera (1994), pp. 18–20.

Mandell (1990), p. 29.

Quoted in Nocera (1994), p. 24.

Nocera (1994), p. 17.

The history and culture of BofA is chronicled in a number of sources. See especially Chutkow (2001) and Nocera (1994).

Chutkow (2001), p. 61.

Nocera (1994), p. 24.

Merchants were also supposed to fill in details about the goods purchased, but most found this too time consuming and neglected to do so.

The term floor limit comes from the department stores, where it literally meant the amount under which the “floor” could authorize. Any amount above require a telephone call to the finance department (Powar interview).

The system was called Electronic Recording Machine-Accounting (ERMA). That system automated the processing of checks through the use of magnetic ink printed on the back of the checks, a technique that would eventually be used in the Magnetic Ink Character Recognition (MICR) standard in 1957. According to O’Brien, the first ERMA installation was demonstrated in San Jose in early 1956, though the BofA did not fully convert all their accounts to ERMA until 1962. See O’Brien (1968), pp. 2–5, and Campbell-Kelly (2003), p. 49.

Jutilla, Derman, and Russell interviews.

Nocera (1994), p. 25.

Chutkow (2001), pp. 64–66.

Quoted in Nocera (1994), p. 27.

Stallwitz (1968), p. 44.

Nocera (1994), p. 28.

According to Business Week, this was the First Western Bank and Trust Company of Los Angeles. See ‘The charge-it plan that really took off’, Business Week (27 February 1965), p. 58.

‘The charge-it plan that really took off’, Business Week (27 February 1965), p. 58.

Nocera (1994), p. 30.

Nocera (1994), p. 31.

‘The charge-it plan that really took off’, Business Week (27 February 1965), p. 58. For the accusation that it was purposely kept quiet, see Galanoy (1980). Mandell actually questions this profitability, claiming that BofA did not include the cost of funds or advertising in the accounting of the card system, thus making it look profitable when it actually was not (Mandell 1990, p. 58).

Mandell (1990), p. 30, Jutilla (1973), p. 44.

‘The charge-it plan that really took off’, Business Week (27 February 1965), p. 58.

Mandell (1990), p. 40. Mandell actually claims that Visa “acquired Uni-Card,” implying that Visa purchased the portfolio, but this would be out of character for that organization, which was an association of card issuers and acquirers. Visa’s chief of operations at the time confirmed that NBI did not purchase anything from Chase, and that Chase merely joined Visa and offered a Visa product (Russell interview).

Struble (1969), p. 5.

O’Brien remarks that the 360s were so much more powerful that they easily justified the cost of porting applications. In 1966 BofA replaced their 32 GE mainframes used for the ERMA system with just two IBM 360/65s (O’Brien 1968, p. 14).

Nocera (1994), p. 56.

100

This was mentioned in interviews with Don Jutilla, director of one of the first BankAmericard licensee programs. Jutilla created flowcharts from his observations that were then used to train his staff.

101

Initially banks were not allowed to add their brands to the card. See the next chapter for more details.

102

Some sources mistakenly report that the name was created by WSBA. WSBA merely licensed the name from First National of Louisville, but WSBA did develop the mark, and made both widely recognized in the West (Honey interview).

103

Strangely, there seems to be even less written specifically about Interbank and MasterCard than there is about Visa. Some history appears in Kutler (1994); as well as Evans and Schmalensee (2005) and Mandell (1990).

Bloch, M.: The watermill and feudal authority. In: MacKenzie, D., Wajcman, J. (eds.) The Social Shaping of Technology, 2nd edn., pp. 152–155. Open University Press, Maidenhead (1999)

Calder, L.: Financing the American Dream: a Cultural History of Consumer Credit. Princeton University Press, Princeton (1999)

Campbell-Kelly, M.: From Airline Reservations to Sonic the Hedgehog: a History of the Software Industry. MIT Press, Cambridge (2003)

Campbell-Kelly, M., Aspray, W.: Computer: a History of the Information Machine. Basic Books, New York (1996)

The charge-it plan that really took off. Business Week, pp. 58–63 (27 February 1965)

Chutkow, P.: Visa: the Power of an Idea. Harcourt, Chicago (2001)

Evans, D., Schmalensee, R.: Paying with Plastic: the Digital Revolution in Buying and Borrowing, 2nd edn. MIT Press, Cambridge (2005)

Evans, D., Schmalensee, R.: Catalyst Code: the Strategies Behind the World’s Most Dynamic Companies. Harvard Business School Press, Boston (2007)

Facts about BankAmericard. National BankAmericard Incorporated Booklet (October 1975)

Fernelius, L.W., Fettig, D.: The Dichotomy Becomes Reality: Ten Years of the Federal Reserve as Regulator and Competitor. http://minneapolisfed.org/pubs/ar/ar1991.cfm—visited on 26 August 2006

For Everything. Time (23 March 1959)

Galanoy, T.: Charge It: Inside the Credit Card Conspiracy. GP Putnam’s Sons, New York (1980)

Goldberg, L.G.: The effect of state banking regulations on bank credit card use. Journal of Money, Credit and Banking 7(1), 105–112 (1975) CrossRef

Humphrey, D.B.: Payment Systems: Principles, Practice and Improvements. The World Bank, Washington (1995)

Jutilla, D.: Fundamentals of Bank Credit Cards. American Institute of Banking, Tacoma Chapter, Tacoma (1973)

Klebaner, B.J.: Commercial Banking in the United States: a History. Dryden Press, Hinsdale (1974)

Kutler, J.: Metal plates to duality: the shaping of an industry. American Banker, pp. 30–36 (September 1994). Special insert

Mandell, L.: The Credit Card Industry: a History. Twayne, Boston (1990)

Nocera, J.: A Piece of the Action: How the Middle Class Joined the Money Class. Simon and Schuster, New York (1994)

O’Brien, J.A.: The Impact of Computers on Banking. Bankers, Boston (1968)

Richardson, D.W.: Electric Money: Evolution of an Electronic Funds-transfer System. MIT Press, Cambridge (1970)

Simmons, M.: The Credit Card Catastrophe: the 20th Century Phenomenon That Changed the World. Barricade Books, New York (1995)

Stallwitz, J.F.: A market research study of the attitudes and reactions of member and non-member merchants to bank credit card plans. Masters thesis, University of California Berkeley (December 1968)

Struble, F.M.: Bank credit cards and check credit plans in the nation and the district. Monthly Review of the Tenth Federal Reserve District, pp. 3–9 (July–August 1969)

Titel: Setting the Stage: Money, Credit, and Payments in America
verfasst von: Dr. David L. Stearns
Verlag: Springer London
Buch: Electronic Value Exchange
Print ISBN: 978-1-84996-138-7

Electronic ISBN: 978-1-84996-139-4

Copyright-Jahr: 2011
DOI: https://doi.org/10.1007/978-1-84996-139-4_1

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