A forerunner of credit-card debt helped spawn the Revolutionary War

Washington was caught in the trap that was snaring so many other Virginia planters and that Thomas Jefferson, another victim, described as the chronic condition of indebtedness, which then became “hereditary from father to son for many generations, so that planters were a species of property annexed to certain mercantile houses in London. … If a debt is once contracted by a farmer, it is never paid but by a sale,” meaning bankruptcy proceedings.
His Excellency George Washington, Joseph Ellis

Most of us know the Revolutionary War was about more than just life, liberty, and the pursuit of happiness. Like most uprisings in fact, it was the expression of a people who felt their economic lifeline was being pinched by the British and their tax schemes. If you’ll recall your high-school American history, the Sugar Act enforced a tariff on molasses and taxed the importation of items such as silk and wine, the Stamp Act — every document or newspaper printed in the colonies — and the Townshend Act: lead, paint, paper, glass, and tea imported by colonists.

Even a personage as august as George Washington had reasons other than unadulterated fealty to Lady Liberty for rejecting foreign rule. In fact, beyond just onerous English taxation, what galvanized him was the eighteenth century version of credit card debt.

When Washington married Martha Custis, he became the beneficiary of an outsize dowry, which allowed him to expand not only Mount Vernon but its tobacco crop. Joseph Ellis explains what happened next in His Excellency George Washington (Knopf, 2004), which shows that the human monument was, in fact, a force of nature:

Washington’s man in London was Robert Cary, head of Cary & Company, one of the city’s largest and most successful mercantile houses. … Smaller growers. . . sold their crops to domestic buyers and purchased most of their consumer goods locally. But the planters with the largest estates [like Washington]. . . preferred the consignment system, whereby they consigned. . . sale of their crop to mercantile houses in England. … But the greatest advantage of the consignment system was the access it offered to London’s shops and stores.

In an average year Washington ordered more than £300 of goods from Cary & Company. [A] rough estimate would place his spending during five years in the early 1760s in the range of two to three million dollars.

Gradually, it began to dawn on Washington that he was running through his entire Custis inheritance. … But he was truly stunned the following year when Cary apprised him that his account was more than £1,800 in arrears, a debt that was only going to increase once Cary began charging 5 percent interest annually on the principal. [Emphasis added.]

[Thereafter, when] Washington thought of that abstract thing called the “British Empire” he did not think politically, envisioning the Hanoverian kings and the members of Parliament. He thought economically. The face he saw was Robert Cary’s. …

By sheer coincidence. . . just as Washington was grappling with the bad news from Cary. . . the much-despised Stamp Act was scheduled to go into effect in Virginia. … Washington’s thinking. . . moved instinctively to the much more palpable issue of economic independence.

To free himself from debt, Washington summoned up the discipline for which he was famous. He diversified into other crops, which he sold stateside, and cut back substantially on the goods he and his wife ordered from London. Still, his experiences with Cary & Company left him with enough residual resentment to fire his revolutionary fervor.

“I owe my soul to the company store”

In recent years, paying tribute to Washington isn’t considered politically correct. Besides bringing the rapaciousness of the parvenu that he was to land acquisition, he kept slaves, however reluctantly (“a certain species of property which I possess, very repugnantly to my own feelings”). But both he and Alexander Hamilton — the prototypical Tim Geithner, but to the nth power — launched the ship of state on a course toward prosperity. Little could they have known how ravaged our craft would be by the stormy seas we’d navigate 200 years hence.

Come to think of it, today’s blighted economic landscape might look depressingly familiar to them. Aside from the debt, many of us are in effect indentured slaves like those who worked the Virginia tobacco farms alongside the slaves. Paying off credit card debt in just ten years is often a best-case scenario.

The ways that credit cards shackle us are legion. High interest rates were originally intended to compensate for the collateral we don’t put up. But the practice has taken on a life of its own, along with fees for charging over the limit and for late payments. You’re no doubt aware that they’ve devised other subterfuges to extract money from us. But, as with the arcane financial instruments that investment firms devised to inflate value, you may not know how they work.

Take bait-and-switch credit card offers. The credit card company advertises its premium card at a low interest rate. But if you fail to qualify, the company simply issues you a non-premium card with a higher annual percentage. Next, take the period after a purchase before your card begins accrue interest — a month, right?

Wrong. The “grace period,” as it’s now called, averages 23 days. Another candidate for the charge most likely to have escaped your attention is the inactivity fee levied for failure to use your card regularly.

Finally, as if you’re not already reeling, we give you. . . universal default penalties. Here’s how they’re incurred: A credit card company monitors its customers’ credit reports for late payments on any of its bills. No, not bills that the credit card company sends you — any of your bills: insurance, medical, discretionary purchases.

A late payment on any of those bills can be used by the credit card company as an excuse to raise the interest rate on your card — even if you have never made a late payment to the credit card company itself. Presumably the card issuer is operating on the theory that it had better extract every last cent from you before you go belly-up. It conveniently forgets that the rate hike, along with its other added fees, facilitates such an outcome.

Yet not only don’t we raise a hue and cry like the patriots of the American Revolution did, few of us even call our Congress persons to appeal to them for relief. The patriots were facing the greatest army and navy in the world. Meanwhile, the companies that we’re up against, like Citibank, are already diminished by the financial crisis. What better time to impose reform on them?

Credit Cards: Thy Name Is Usury

Kicking the credit card companies while they’re down is no doubt the furthest thing from the mind of Senator Chris Dodd (D-CT). As chairman of the Senate Committee on Banking, Housing and Urban Affairs, he’s noted for his cozy relations with the accounting industry.

It might seem surprising then that, in the second week of February, Dodd re-introduced the Credit Card Accountability, Responsibility and Disclosure Act (“the Credit CARD Act”) to the Senate. But he must instinctively know that legislation outlawing abusive credit-card company practices may help heal the consumer base, which, in the long run, is the only sure path to health for banks. Besides, last fall, H.R. 5244, a similar measure, sailed to victory in the House of Representatives with bipartisan support.

Although a rule was issued by the Federal Reserve in December 2008 that would prohibit many of the same unfair practices as these bills, it doesn’t kick in until July of next year. That’s ample time for the credit card industry to inflict yet more gaping wounds in the economy.

Dodd’s bill seek to limit fees and penalties, ensure that cardholders are briefed about the terms of their account, and protects young people from credit card solicitations. And yes, it also address those vertigo-inducing universal default penalties.

A complementary bill, left over, like Dodd’s, from last year’s Congressional session, was re-introduced by Sen. Dick Durbin (D-IL) on February 26 of this year. The Protecting Consumers from Unreasonable Credit Rates Act of 2009 seeks to create a national maximum interest rate for credit cards, as well as payday and tax-refund-anticipation loans. It also seeks to encourage alternatives to predatory lending such as small loans with minimal or no fees, and reasonable repayment schedules.

But it’s idea of the rate above which usury occurs is a whopping 36 percent!

Despite the high limit, Durbin’s bill draws the wrath of conservatives. In the National Law Journal last September, Brian Brooks and Elizabeth Lemond McKeen deplored the “strangulation of the economy by usury laws.”

“Why. . . would anyone want to reintroduce usury limits, especially at a time when consumer credit is already scarce? The reasons are rooted in an understandable desire to protect consumers [but] usury laws reduce the credit supply to people who need credit the most.”

Conservatives can’t have it both ways. If you’d like a nation less reliant on entitlement programs, allow us to channel the money we pay to credit card companies into a savings account, whether national or personal. As for credit flow, if old-fashioned bank loans at honorable rates aren’t good enough to keep an economy rumbling along, we might as well give up on capitalism.

As of this writing, the national average credit-card interest rate is 12.93%. Meanwhile, the figure of 36% is treated as if it were a sane ceiling. Now might be a good time to remind ourselves that all it took was a 5% interest rate to help drive George Washington to open revolt.

17 replies »

  1. I have to wonder if the call to plant hemp from both Washington and Jefferson were partially motivated by British taxes and Washington’s attempt to diversify his crop rotation. As a domestic crop able to replace a good many of the taxed materials, it would would have made both economic and political sense.

    I’d take Washington and his slave ownership over any of our current “leaders”, who behave more like King George than any of the founding brothers.

    If i understand the landscape correctly, credit cards are a huge profit engine for the big banks (how could they not be at 30% interest rates). But defaults are on the rise and the largest balances tend to be held by those least able to finance them. The contraction of the economy is going to change spending habits…except among those who have no other recourse, who will run the cards up to the limit and then have to walk away.

    One of the reasons i’m opposed to cutting stimulus checks to everyone is that the smart ones will use it to pay down credit card bills, which means that the checks are effectively another bank bailout. That legislation on credit cards should have been implemented years ago, before there was a huge mess that the legislation is not going to fix.

    A ship too late to save a drowning witch, and the beaten down American will still have to choose between paying a bloated credit card debt and doing something that would actually help the economy.

    And this, Russ, was a particularly fine piece.

  2. One of the reasons i’m opposed to cutting stimulus checks to everyone is that the smart ones will use it to pay down credit card bills, which means that the checks are effectively another bank bailout.

    Good point, Lex. Thanks for compliments, Lex and Elaine.

  3. Just a few factual matters on credit cards to consider. First, banks are not usually the primary issuers of credit cards (that would be Mastercard, Visa, Diners Club, etc. companies largely uninvolved in the subprime mess). Second, not everyone runs a credit balance.

    There are numerous types of credit cards, so my summary is going to be a simplification but, on average, you get 30-days credit on any of your credit-card purchases before the total becomes due and you become liable for interest.

    Around the world, more than half of credit-card holders pay off their full credit balance on due date. In other words, they benefit from 30 days of free credit and pay no charges. Banks, on the other hand, do borrow the cash that their credit card holders spend. So the interest on the account holders who don’t pay off immediately is used to cover the total debt that the bank incurs.

    Now I’m not saying that banks don’t make quite a bit of money out of credit cards, but it isn’t as much as you think.

    Credit cards are a little like the opposite of health insurance. Insurance companies like young, healthy people to become members because they can use their premiums to cover the illnesses of their less-healthy members. Conversely, insurance companies don’t really like members who will be net recipients.

    In the same way, banks don’t really like people who use their credit cards as a cheap form of 30-day credit because they derive no benefit from them, but plenty of costs.

    Unfortunately, just as insurance companies don’t get enough people who are young and healthy to become members, banks don’t have enough people who spend wildly on credit.

    In both cases the premiums go up accordingly.

    If you don’t like high credit costs, don’t spend on credit, no matter what they promise you. If you, like me, enjoy the convenience of a credit card (less so now with the proliferation of debit cards), then simply arrange a standing debit order that deducts the full due amount on the due date. End of charges. And you get the satisfaction of costing your bank money.

  4. Gavin: Visa, etc. are transaction processors, not issuers. For 2008 (in the US), Chase topped the list with $183.32 B outstanding on its credit card issues. BoA was $166.32; Citi $106.74; etc. Those are all banks, right?

    60% of Americans carry a balance, and it is not uncommon to hear stories about maxed out credit cards from those least able to finance that debt. The banks are fine with it so long as they keep seeing $43B in late fees, etc. every year, as they did in 2006. I can think of several people that i know who’s minimum monthly payment on credit cards equals a small mortgage payment.

    It is not uncommon to receive multiple solicitations per day, and the first few weeks of a university semester have the campus a veritable swarm of salesmen hawking cards to people with little (or no) income. When i got my first card, i could not get my limit to rise by being responsible with the card and paying it off (as i had been taught to do), it wasn’t until i purposefully carried a balance for a couple of months that the issuer raised the limit.

    Sure, people should be careful with their money, but advice like that goes against the grain of modern American culture where the point is to consume, consume and consume some more. And so it is that the least able to handle the situation are in the worst situation, of course, the Citi’s and Chases and BoA’s were only too happy to issue those cards and raise the limit when the last one had been reached.

    Perhaps it is only an American phenomenon to have the person in front of you in a checkout line produce 5 or more cards before he finds one that will be accepted. So while the majority of American households have no credit card debt (according to one survey), we are likely facing a situation similar to the sub-prime issue where the minority (with the help of lenders) blow up the creaking, frothy situation for everyone else.

  5. Although it’s one’s fundamental right to carry a negative balance and pay interest, common sense dictates that one should adjust their lifestyle, adopt thrift, and live within their means. Money management skills just don’t apply to the rich, they apply to everyone and our public schools have been remiss in teaching these skills.

    There are two types of people in this world, those who pay interest, and those who collect interest and it’s up to the individual to decide in which group they belong.


    • It’s ironic you mention public schools here, Jeff, especially in the context of one of your favorite memes – that people should live within their means. There’s no arguing that average Americans are packing a lot more debt than is healthy – that’s fact, not theory, as far as I’m concerned, and on that point I think we agree.

      The problem is that your meme – a popular one in some conservative circles, it seems – suggests that the reason for all that debt is people just going hog wild and maxing out credit cards on video game systems and other unnecessary frivolities. In reality, the burgeoning debt load traces mostly to families spending beyond their means so that they can – wait for it – live in neighborhoods with better schools for their children.

      And the failure to get those kids into better schools has predictable results for the next generation in that poverty/credit/death spiral….

  6. Whythawk wrote:

    In the same way, banks don’t really like people who use their credit cards as a cheap form of 30-day credit because they derive no benefit from them, but plenty of costs.

    Yeah, I’ve read that credit card issuers call people who don’t incur a lingering balance “deadbeats.” Intended irony, I’m sure.

  7. Sam mentions people living above their means in better school districts. But little drives up a credit card balance like health care costs.

    For those who are insured, so often there’s some stupid thing that isn’t covered. Typical example: Not long ago my wife was forced to call an ambulance. We were billed for it ’cause they didn’t take our insurance (how does an ambulance company not take Blue Cross?).

    No sooner do we finish paying off one medical expense — on a $20-per-month payment plan, usually — than another one pops up. That’s the kind of stuff other people put on their credit cards. Damn the consequences, they think. The emergency must be dealt with at the time.

  8. “Yeah, I’ve read that credit card issuers call people who don’t incur a lingering balance “deadbeats.” Intended irony, I’m sure.”

    I heard recently that some credit card companies will actually lower the credit limit for people who do not keep a balance. They’re in a sense punishing people for being financially responsible.

  9. Sam said,

    “In reality, the burgeoning debt load traces mostly to families spending beyond their means so that they can – wait for it – live in neighborhoods with better schools for their children.”

    I’m having trouble finding a source for that. Please help me out..

    I’m all for better schools in the public sector. That’s why I like vouchers so much. Bring some free market competition to the school districts and you’ll see improvement. Free markets tend to be an uplifting, rising tide that can be quantified.


  10. Has anyone actually studied that and reported it? What is the actual distribution of debt across various spending categories? Seems like it wouldn’t be all that difficult to get that sort of info. Credit card companies certainly have it. X% is spent in department stores, Y% is spent on medical, Z% is spent on education…

  11. Someone help me understand why my concept doesn’t work. Here it is. Instead of giving the banks all this cash in lump sum, why didn’t the government give it to all of those who owed the credit card companies, with the stipulation that they had to use it to pay off their debt. The banks get the money owed to them, the electorate gets out of debt and can begin spending again, which will boost the economy. Why doesn’t this plan work?

    BTW…I am a person who got completely steamrolled with credit card debt. It took months just to get it sorted out with the use of a 3rd party debt management company. Its gonna take me 4 rough years to pay my way out of this, thanks to absurd credit card regulations.

  12. I should add…that of course I realise that after the government gave all of the individuals cash to pay off their debt, they would be expected to pay it back. I am assuming the government would offer reasonable payment plans. 4-6% over 5-10 years rather than 15-36% right freaking now.

  13. I can only speak for my self of course, but it seems every time I get my credit card balance paid off, something breaks or I have some other unplanned expense that I can’t cover from my salary alone. Savings? Who has anything left after paying for the necessities in life today?

    So my car breaks down and I get a $300 bill – it goes on the card. I need new tires – $400 on the card. My dental plan requires me to pay up front and I get reimbursed for a part of the amount a few months later. That goes on the card, and I’ll apply the smaller check I’ll get later to towards paying my credit card bill. Prescription copays, even with good health insurance, can run to $40 for a single item. If I’m tight that week it goes on a card. A home appliance breaks down and needs to be replaced. It goes on the credit card. These things come up faster then my pay is able to over come them and the balance keeps creeping up. Soon it’s thousands of dollars. I pay as much as I can each month – never the minimum – but the balance keeps going up.

    I’m not using my card for frivolous stuff. No vacations. No new iPods. I have no cell phone. I don’t use a credit card when eating out.

    The simple fact is the cost of living even a fairly basic life has risen faster then salaries for many people and in order to maintain their existence, they turn to the credit card. It’s a dangerous slow motion plunge into financial difficulty, but we keep hoping the future will be better somehow.

  14. I don’t know the government’s reasoning, but I do know my own – chasing down millions of individual debts is a huge, costly pain in the ass, while a bureaucracy is already in place to monitor banks; it just needs claws and and a brain.

    Because what does “steamrolled” really mean? How did you get into debt in the first place, Scoop? Did you fail to read the contract you were signing with those credit card lenders? Did you not see their right to increase your interest at will in that tiny print? Did you do the math regarding compound interest, or grasp that you were spending money you didn’t actually have? And do you then expect me to believe that if you’re handed sufficient cash to pay off your debt over time you will, in fact, set aside that money for your debt and not spend it elsewhere?

    Pull the other one, Scoop – it’s got bells on.

  15. How about some editing next time? This article is barely legible.