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Of Credit Cards and the Velocity of Money

|Includes: American Express Company (AXP)

Now that credit card reform is an "item" in the U.S. Congress, it might be worth exploring how we got into this bind to begin with.

Until fifty or sixty years ago, there were basically no such thing as credit cards. People paid cash when they wanted to buy things. Occasionally, if the seller knew them well, they could use checks. The closest thing to "credit" was traveller's checks, which were really a form of "debit" checks; consumers put cash down up front, to purchase convenient pre-paid checks from established issuers like American Express (a 100-year old company at the time). No one doubted THEIR credit.

With the rise of installment purchasing after World War II, credit issuers sought to give their best customers the chance to "buy now, pay later." Amex, Mastercard, and later a consortium of banks using the so-called "Visa" card issued pieces of plastic that could be used as money, with the user reimbursing the issuer once a month.

Credit cards were initially available only to the economically top 20%-30% of the population. More recently, they were available to about 90% of the population. Only the certifiably insolvent couldn't get credit. And such loans could be rolled over, or "revolved" each month, subject to a minimum payment, rather paid in full.

Not long ago, it seemed like "everyone was doing it." Which was just the point. Issuers vied with each other to sign up the same customer, who then had "multiple" relationships. But there is a limit to how many financial relationships the average customer can maintain. (Some would say this is true of social relationships as well.)

An abundance of financial alterna... generated a lot more purchases than would otherwise have taken place, (just like a large number of social partners increase the number and variety of experiences). This contributed mightily to the economic boom of the past twenty years or so. But this leads to the danger of the financial equivalents of "social diseases" such as overstretched consumers, and ultimately defaulted loans. Then the merry-go-round has to stop. 

Nowadays, people are cutting down on the number of credit cards they use. That certainly means fewer partners, but it also means less financial "dating" (in total) with the partners that remain.

And like the social equivalent, that means less financial "procreation," which is expressed (in economic terms) in a lower velocity of money.