How we have become a nation of plastic users

Ten years ago, the canary in the financial crisis coal mine died.

In March 2008, investment bank Bear Stearns ceased to exist as an independent company. With the help of the Federal Reserve, JPMorgan Chase agreed to buy Bear for $2 a share, down from $159 a year earlier.

It was the beginning of the end of a massive credit bubble that started in the housing market and was amplified with financial products that used even more borrowed money.

In light of the 10-year anniversary, I’m ditching the traditional tin or aluminum gift and will mark the solemn occasion by exploring some of the foundations that led to the financial crisis of 2008. Today, it’s credit cards.

Americans were able to purchase “on credit” as early as the 19th century. Those arrangements were usually extended to good customers, who could be trusted to pay in a timely fashion. The earliest cards were available through individual stores, oil companies and hotels in the 1920s.

In 1950, Diners Club rolled out the first universal version, which could be used in a variety of places, and American Express followed suit. Both cards required that users pay their bills in full at the end of each month, so they tended to be used by wealthier people or businessmen.

Bank of America brought the idea of credit access to the masses by mailing 60,000 unsolicited BankAmericard credit cards to select California markets in 1958. Within a year and a half, the company had lost about $20 million. It had assumed that delinquencies would run at 4 percent, but it actually was 22 percent, and because there were no applications required for borrowers, there was rampant fraud.

The government clamped down on the industry in the mid-1960s, and then in the ’70s, the country was in a recession, inflation spiked and interest rates soared to as high as 20 percent. That was a problem for credit card issuers, because state usury laws capped interest rates at 10 to 12 percent.

The industry was rescued by a 1978 landmark Supreme Court decision that changed the credit card industry forever. Marquette National Bank of Minneapolis v. First of Omaha Service Corp. allowed nationally chartered banks to issue cards to customers anywhere in the country, as long as they charged interest rates determined by the laws in the bank’s home state. Previously, state usury laws where a bank’s customer lived provided the cap to interest rates.

The ruling cleared the way for states to change their top statutory rate levels allowable in order to induce businesses to move their credit card operations. South Dakota was among the trailblazers that hoped the elimination of usury laws would bring jobs to its recession-ravaged local economy.

It worked. In 1981, Citibank moved its card operations to Sioux Falls, S.D., with a promise to create 500 jobs, and other banks followed suit.

The credit card industry soon became profitable, and plastic was on its way to being ubiquitous.

According to the Federal Reserve, in 1970, 16 percent of U.S. families reported having a credit card. By 1983, that percentage soared to 43 percent and by 1989, it was at 56 percent. Today, it’s about 80 percent.