The story of how one forgotten wallet in 1949 led to the invention of the credit card – and the global debt crisis that followed.

When’s the last time you carried cash anywhere? Unless you’re regularly using public transport, it’s probably been a while, right?

If you want a good insight into humanity’s spending habits right now, all you have to do is go shopping for a new wallet. Now, notice how many of those new wallets on the shelf have simply done away with the little pocket that we used to keep coins in. If you’re lucky, you may still find a wallet that has a compartment for you to keep notes. Far more often, you’ll open a wallet and find only rows and rows of card slots inside.

I think that says a lot about our relationship with money. Like so many things in our lives, our currency has become digital – the texture of a coin or a crumpled paper note replaced by digital placeholders on our banking apps.

The best thing about digital money is that it never really runs out. When the cash in your wallet is used up, there’s literally nothing left in there for you to spend. On a banking app, however, you’re always two clicks away from accessing more – whether in the form of an overdraft, credit card or a microloan. In some instances, your bank may even use your spending data to pre-approve you for loans you never applied for (and then they’ll pepper you with messages and notifications telling you that this money is available to you).

In addition to our need for instant gratification, we’ve become accustomed to the idea of buying now and paying later. Could it be that the best thing about digital currency is also the worst thing about it?

The dawn of debt

Once upon a time back in 1949, a man named Frank McNamara received the bill after eating at a New York restaurant, and was horrified to realise that he had forgotten his wallet at home. Fortunately, his wife was able to come to his rescue, but this was a humiliating experience that Frank would struggle to forget. That seed of discomfort wedged itself into his brain until it grew into an idea.

“Why carry cash around at all?” Frank questioned. Why couldn’t every restaurant that he ate at send him the bill at the end of the month, and then he would pay them all together? Wouldn’t it be a much more pleasant experience for diners to sit down, enjoy themselves and then leave at the end of their meal without having to make a fuss about payment then and there?

Frank McNamara didn’t invent the idea of credit – that existed long before – but until the 1960s, it was never implemented on a significant scale.

The notion of credit traces its roots to ancient Mesopotamia, with evidence dating back at least 5,000 years. Inscriptions found on clay tablets from that era depict transactions between Mesopotamian traders and merchants from Harappa. They serve as some of the earliest documented instances of agreements to purchase goods immediately with a commitment to pay at a later time.

My guess is that for as long as we’ve been able to buy things, we’ve wanted to negotiate to buy things we couldn’t afford. What Frank and his partner Ralph Schneider did was to make it easy for everyday people to get used to the idea of paying for things without using cash. They invented the Diners Club.

In the beginning, Diners Club members would carry little cardboard cards around in their wallets as a show of faith – an IOU, if you will. In its first year of business, Diners Club had partnered with 28 restaurants and two hotels, all of which were prepared to accept monthly billing in respect of this select clientele. By 1960, the cardboard card was replaced by a more familiar-looking plastic version.

Before long, the Diners Club phenomenon shifted beyond the New York elite set, and everyone was showing their cards and getting their bills at home. This, of course, raised the attention of competitors in the field.

Swipe it like it’s hot

One of the first to jump on the credit track was American Express. To some degree, personal credit was a natural shift up the vertical: they already had a lucrative money order and travellers check business, which provided a safe replacement for travellers carrying large sums of cash. All they had to do now was to convince people to use a card for their everyday purchases instead of using money.

In October of 1958, American Express issued 250 000 cards and had 17 500 establishments signed on to accept them. Today, they have approximately 133 million cards in circulation.

Here’s something from my research that truly astonished me. In 1958 – the same year that American Express launched their cards – California-based Bank of America dropped 60 000 paper BankAmericards with a pre-approved limit of $300 into mailboxes around the city of Fresno, California. Imagine 60 000 Americans waking up one morning to a letter in their mailboxes saying “Here’s $300. Go spend it and pay us back later.”

For context, in today’s money, that $300 equals more or less $3 000, or around R55 000.

As you can probably guess, giving unsolicited credit to random people without checking them for creditworthiness beforehand ended very badly, with that first attempt ending in delinquency rates of 20% and multiple instances of fraud. This didn’t stop more of these “drops” from happening though.

Suddenly, without any forewarning, credit appeared as if delivered from the heavens. As an American at that time, you could go to sleep with no cash in your wallet and wake up with $300 that you didn’t ask for in your mailbox. In the subsequent 12 years that it took to prohibit these kinds of mass card mailings, banks across America would inundate the country with 100 million unsolicited credit cards of various kinds.

Built on a bad foundation

In case you’re wondering whatever happened to the good old Diners Club, the simple answer is that they’re still around. In a classic case of second mover advantage, DCs innovative idea of allowing customers to pay with a card instead of cash was quickly snapped up, improved and rolled out by other businesses, making Diners Club a mostly irrelevant afterthought in the process. After all, who would choose a card that you could only use at restaurants when you could have a card that could swipe, well, everywhere?

To their credit (and probably to their own detriment), Diners Club stuck to their guns and held relatively fast to their original concept for as long as they could. In 2016, they finally caved and released a credit card. By that time, they had well and truly been overtaken by all those that came after them, to a degree that they will probably never catch up on. Had you heard of the Diners Club credit card before now? My point exactly.

The Diners Club business (in my opinion at least) may be fading into irrelevance. But the legacy of their idea has left an indelible mark on human history and behaviour.

You’ll see that mark in statistics like these:

• 82% of adults in the United States have at least one credit card.
• At the end of the third quarter of 2022, the average American adult held $5,910 (that’s about R108 000) in credit card debt.
• 28% of cardholders who have card debt say it would take them 5 years or more to pay it off.
• 59% of Millennial Americans use their credit cards to cover essential living expenses like utilities and groceries.
• 43% of Americans have missed at least one credit card payment in the last year.

I’m drawing on statistics from the United States on purpose here, because I think it’s worthwhile surveying the effect of the credit card in its country of origin. That doesn’t mean that we should assume that South Africans are in a much better position when it comes to credit card debt. We all know that we aren’t.

With statistics like these painting a dire picture, and warnings of a credit crunch sounded since April of this year, I can’t help but to think back to that morning in 1958, when residents of Fresno woke up to find those magical cards in their mailboxes. Did they have any way of knowing what a sticky trap waited on the other end of the swipe? Could they possibly have imagined the kind of world where we own nothing because we choose to owe everything?

I don’t know about you, but I think I need a new wallet. This time, I’m looking for one that has space for cash.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.