House of Cards: On Sean H. Vanatta’s “Plastic Capitalism”

Carey Mott reviews Sean H. Vanatta’s “Plastic Capitalism: Banks, Credit Cards, and the End of Financial Control.”

House of Cards: On Sean H. Vanatta’s “Plastic Capitalism”

Plastic Capitalism: Banks, Credit Cards, and the End of Financial Control by Sean H. Vanatta. Yale University Press. 416 pages.

THE AMERICAN WAY of life has long meant living beyond one’s means. Take the experience of the average millennial, who attended college by accruing a median amount of $20,000–$25,000 in student loans. While on campus, she opened her first credit card and began using it to buy clothes, plane tickets, and groceries. When she graduated, she earned a salary of about $60,000, which she used to pay down her debt, while at the same time incurring new debts to pay for vacations, computers, phones, and cars. She’ll rent until she eventually secures a mortgage for a house, and if she experiences a health emergency, the state won’t cover much, so she will pay for care using credit. Twenty years after graduating college, she will still be in debt.


If this sounds like a peculiar system, it is. European governments, by contrast, spend a great deal to allow households to pay less for school, to start saving early, and to avoid small debts for everyday purchases. Europeans pay more in taxes, but this relieves them of the need to secure as much credit for housing, since more affordable options exist, as well as for medical care. Europeans grew accustomed to carrying multiple currencies across borders, and they maintained this preference for cash without ever adopting the United States’ culture of credit.


The difference is rooted in an economic philosophy. Just as credit is necessary to afford the American standard of living, so is a high-spending consumer the key to sustaining the country’s growth. “As the U.S. consumer goes, so goes the U.S. economy,” is how the White House recently put it, attributing two-thirds of our economy to what consumers spend, as opposed to what they might have saved or invested. Credit is encouraged because—so the thinking goes—more spending stimulates the economy, which purportedly raises wages, helping consumers repay old debts and take on new ones. By normalizing household borrowing, the United States helped create the conditions—and the expectation—for low-cost, widely available loans, leading Americans to rack up $12 trillion in mortgages, $1.6 trillion in car loans, and $1.6 trillion in student loans.


Out of this economic philosophy emerged a seemingly natural by-product: the credit card. Between 1968 and 2000, use of this type of credit increased from $2 billion to a remarkable $626 billion, a period in which the US economy grew over 10 times. Credit cards fed this growth by enabling the consumer to finance everyday expenses beyond their earning power, which in turn fattened their wallets with so much plastic that they developed back injuries. Today, 191 million Americans have at least one credit card, and they swipe them a lot: last year, the country accumulated over $1 trillion in credit card debt.


Sean H. Vanatta, a historian at the University of Glasgow, shows, in his new book Plastic Capitalism: Banks, Credit Cards, and the End of Financial Control, that this system is a different type of credit altogether, with serious consequences. Vanatta argues that credit cards, which began as convenient plastic doodads with “gee-whiz novelty,” helped bankers shift the center of consumer finance from their neighborhood bank to an unsolicited credit offer arriving in the mail. In the process, bankers seized political power from the consumer, redesigning credit cards in a way that ultimately conflicted with the country’s idea of what credit should be—no longer freeing consumers to spend more but instead trapping them in debt they couldn’t afford.


It’s a predictable outcome given credit cards’ pernicious features: they are very expensive, short-term, and surprisingly addictive. Whether they’re taking out a loan for a house, a car, or a degree, the average American can expect to pay a lender a seven percent interest rate, at best. On their credit card, however, it’s more like 25 percent, charged every 30 days. It is, unsurprisingly, the form of household borrowing with the highest delinquency rate. This year, that rate reached its highest level since 2011. But that hasn’t suppressed our appetite for more expensive goods. Vanatta explains how bankers made these cards, with all their trappings, into the passports necessary for full financial citizenship, so that we never leave the house without one.


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The idea that access to credit is a basic and necessary part of the American way of life wasn’t always taken for granted. It only became a priority with the New Deal. In the government’s sweeping response to the Great Depression—from Social Security to public insurance of bank deposits and guarantees of installment loans—the common goal was to make it easier and safer to lend to individuals. The government targeted specific populations: first farmers and would-be homeowners, and much later, students and small businesses. But it avoided lending directly to them, instead guaranteeing or purchasing the loans made by private-sector banks, which freed up lenders to write more loans and preserved the appearance of free enterprise.


The only way for this to work was to eliminate the incentives that had, leading up to 1933, encouraged banks to mushroom into so many different business lines. That year, 4,000 of them failed. So regulators cleaved off investment banking activity from commercial banking, to ensure that bankers wouldn’t speculate with customer deposits. Realizing that banks might try to steal customers from their competitors by paying depositors a rate they couldn’t afford, regulators capped the rate they were allowed to pay on deposits. Where banks used to branch across state lines, they were now stuck in one state. Everyone would know their banker, and the states would manage this relationship.


This era of boring banking spawned the “3-6-3” banker, who could count on paying depositors three percent, lending that money out at six percent, and being on the golf course by three p.m. But the New Deal’s regulatory system, designed as it was to limit banks’ size, scope, and political influence, also limited bank profits. This was a state of affairs that bankers could stomach for only so long, and they sought new avenues for profit. Once all their neighbors had mortgaged their houses, bankers turned to the postwar boom in consumer credit.


After World War II, millions of Americans were moving into new homes, and these new homeowners needed stuff to put inside them. American manufacturers were the first to realize that if they allowed customers to pay for their radios and refrigerators in installments, they could run their factories consistently, and even charge more for their products. Later, the merchants who sold appliances and televisions in their variety stores offered installment plans directly, in the form of charge accounts. Before long, large department stores offered store-branded credit cards. A family might travel with one card, buy gas with another, and dine out with a third.


Bankers, catching the scent of profit on the fairway, decided they should issue one card for everything. Initially, they pitched it as a way to band small retailers into a single network that could help them compete with the giant department stores. But it also became a convenient way for the bankers to break their regulatory restraints: they couldn’t build a branch in a neighboring state, but they could send a credit card through the mail. And while the price of a mortgage or loan was limited by laws on usury—a Sunday school word for extortionate moneylending—credit cards were, until 1968, exempt from such limits. Users weren’t borrowing money; they were paying for goods over time in installments. Where the ceiling on interest rates might earlier have been six percent, it could now go much, much higher.


But starting a credit card network poses a chicken-and-egg problem: do you market to consumers, who aren’t going to use a card that’s not accepted by merchants, or to merchants, who will only bother accepting them if consumers use them? In the late 1950s, Bank of America—which, half a century earlier, became the first national bank to prioritize lending to middle-income Americans—targeted the consumer, mailing unsolicited offers for its BankAmericard throughout California.


When, in 1966, a banking panic dampened the market for mortgages and loans, dozens of banks carpet-bombed the suburbs with unsolicited card offers. Vanatta, a passionate historian clearly at home in the archives, delights in the clammy-handed, midcentury sloganeering used to market these cards (“Indispensable New CONVENIENCE for the Executive—the Salesman—the man who gets around!”). But he is more serious when he explains that the unsolicited offers are more than a nuisance, familiar to anyone with a mailing address. Credit card marketing would soon deconstruct the New Deal’s concept of safe, brick-and-mortar banking, ultimately “creating new sites for financial extraction and […] shielding banks from democratic oversight.”


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As ample credit helped increase consumer spending power, the consumer also gained more power over what they purchased. The 1960s saw a wave of advocacy for transparency around nutritional facts, marketing claims, and the safety and performance of everyday appliances. President John F. Kennedy told Congress in 1962, “Consumers, by definition, include us all.” In spite of this fact, or because of it, consumers had never effectively organized. But politicians, recognizing the consumer’s increasing importance to the American economy, began courting their votes by advancing consumer priorities and changing state rules as needed, including for credit card prices.


Congresspeople likened credit card solicitations to “financial pornography” that turned consumers into “hopeless addicts.” By allying with consumer and labor groups, they helped shape a market that enacted, in Vanatta’s words, “their vision of economic fairness and the appropriate role of credit in consumer society.” In many states, this alliance successfully lobbied for ceilings on interest rates and bans on unsolicited mail. But as the government’s role in directing and guaranteeing credit receded over time, bankers stepped in to manage the consumer economy, deciding who got credit and on what terms.


The New Deal architects locked banks within their states and subjected them to those states’ specific rules, a reflection of the fact that in the context of small, community finance, the fair price of a loan was for the states to decide—these were private decisions, between bankers and their neighbors. But this “financial federalism” also opened the door to regulatory arbitrage. In 1978, the Supreme Court ruled in Marquette National Bank of Minneapolis v. First of Omaha Service Corporation that national banks could apply the interest rate charged on credit card balances in their home state to any state where that card was mailed, even those states with the strictest regulations, marking, in Vanatta’s perspective, “a turning point away from the New Deal regulatory order and toward the deterritorialization of U.S. consumer finance.”


Soon, politicians were courting bank business rather than consumer votes. In return for Citibank agreeing to locate its credit card operations, with its many thousands of employees, in South Dakota, the state agreed, in 1981, to waive its usury laws and allow account fees. This was the largest, but not the last, shake-up in the state-based regulatory order. By 2003, nearly 75 percent of credit card loans were originated in states containing just four percent of the population.


The biggest banks, like Citi, moved fastest, so that today more than half of all credit card loans are made by four banks, topped by JPMorgan Chase. Most of the remaining loans are made by another two dozen large banks. Their vast marketing budgets help conceal, behind a veil of convenience, the fact that larger banks tends to charge higher rates on their cards compared to smaller banks. This led to an estimated $92 billion in earnings from credit cards last year, according to the Financial Times, over double what they earned a decade ago—and, according to a 2021 report by the Federal Reserve, consistently higher than earnings from their other banking activity.


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What began as a convenience became a necessity, so that bankers used credit cards to wrest political power away from consumers and regain the influence they had lost under New Deal regulations. As the banking system consolidated, from over 10,000 neighborly lenders after World War II to a few dozen faceless international banks today, responsibility for consumer credit floated like a piece of gristle in an alphabet soup of regulatory agencies. The Federal Reserve, FDIC, FTC, NCUA, OCC, OTS, and the Department of Housing and Urban Development all nominally had responsibility for the consumer—meaning that, in effect, none of them did.


It would take another financial crisis, with all the toxic products sold in the years leading up to 2008, for that system to break and convince Congress to consolidate the consumer mandate within one agency. The Consumer Financial Protection Bureau was tasked with promoting “fairness and transparency for mortgages, credit cards, and other consumer financial products and services.” If consumers had been only loosely organized since Kennedy’s era, they now had representation in the form of the CFPB.


The fact that this representation was technocratic and not political exposed the agency to criticism that its leadership and funding were unconstitutional. (The Supreme Court agreed with the first claim in 2020 and rejected the second claim this May.) Vanatta writes that banks used credit cards to exploit a place-based social contract, transferring political power from consumers to themselves. There remain over 4,700 banks scattered across the country; every congressional district has one, an omnipresence that helps make the banking lobby one of the most effective in the country. It also explains why the agency tasked with protecting the consumer from banks needed political independence for its mission.


The proposal for the CFPB asked whether consumers were at a greater risk from toasters or credit cards, since we seemed to regulate the former more vigorously than the latter. But the idea behind the agency—extending the protections on consumer products to banking services—resulted in a mission that is both narrower and larger than this suggests: narrower because it sought to design the market in a way that guides consumers away from truly extortionate credit, such as payday lenders, to traditional credit products; larger because the agency was, in a sense, trying to correct a century’s worth of unequal credit distribution.


The homeownership sponsored by the New Deal was racially segregated. Homeowners, predominantly middle-income and high-income white families moving to the suburbs, were the first to receive consumer credit. This demographic successfully lobbied state politicians to impose lower interest rates on their credit cards. Doing so curtailed access to credit for other would-be borrowers, meaning that as some consumers gained power, others lost it. Now these physical cards, having proliferated into an absurd variety of colors and materials, have come to represent another form of identification in our wallets: one symbolizing class and access.


What made this inequality an intractable issue—first for a range of regulatory agencies, and now for the CFPB—is the fundamental dilemma of consumer credit, and a more essential reason why consumers have failed to effectively organize. We are all consumers, but we consume quite differently. Without the government guaranteeing loans and buying mortgages as they did during the New Deal, banks had to carefully manage their own risk. They did so by charging higher interest rates for risky borrowers—who received the credit but also a higher likelihood of defaulting.


Some politicians desire systemic stability (banks that don’t fail) while others prioritize economic empowerment (checks that won’t bounce). Large banks might be safer, ensuring continued access to the greatest number of borrowers, but they also charge higher rates on their credit cards—an average of 30 percent—than smaller banks do. For a society that runs on credit, it has proven surprisingly hard to make that credit both accessible and affordable to everyone.


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The New Deal solved this conundrum, simultaneously stabilizing banks and ensuring a low cost of credit, but it did so unequally, and only with a degree of government intervention that’s less palatable today. That hasn’t prevented some from calling for the public sector to take a greater role again. In its absence, a range of private-sector solutions have emerged to expand access to credit and to price it appropriately, if not affordably.


In the 1990s, Capital One became the first bank to effectively tailor the credit card to consumers by carefully analyzing their spending and saving habits. Today, it is the country’s ninth-largest bank by assets and fourth-largest issuer of credit cards. Discover, which launched in the 1980s as a department store card (for Sears), became the credit card for the masses and the fourth-largest card network behind Visa (formerly BankAmericard), MasterCard, and American Express. Discover eventually took on the flavor of a bank as it extended student loans and mortgages. Where credit cards used to be just one of a bank’s products, these banks formed around the credit card itself.


This February, Capital One proposed to acquire Discover, a consummation that would, if blessed by financial regulators, replace JPMorgan Chase as the country’s largest credit card issuer. The debate revolves around market competition and consumer welfare. Some argue that the role of the CFPB, which will have some say in the merger, should not be guiding consumer choice; rather, it ought to operate more like the current antitrust framework: deferring to consumers’ choices, while ensuring that those choices are plentiful.


As much as it enriches our scholarship, Vanatta’s history should also inspire our policymaking. He observes that framing the credit card debate around consumerism led most of last century’s lawmakers to miss how card technology and newly expansive credit networks were reshaping the banking industry, creating the conditions for today’s concentrated system. The big mergers within this system, then, are not as consequential as they seem, since they will not really change the menu of options available to consumers. The policymaking that followed the global financial crisis was, Vanatta suggests, a missed opportunity to fundamentally restructure the banking relationship—and rethink our culture of credit.


One such change, and a possible solution to the consumer credit trade-off, would be a perfectly regulated bank that doesn’t charge fees—in other words, a public banking option. Appetite for government-sponsored accounts has grown as their proposed venue has shifted from the US Post Office to the Federal Reserve. Such proposals have a few technical issues, but the stickier issues are political.


There is considerably more bipartisan support for shaking up the credit card networks, especially the 70 percent market share commanded by Visa and MasterCard—a duopoly that, despite those companies being embroiled in near-constant antitrust litigation, continues to earn a profit margin of 40–50 percent by skimming the transactions of retailers who earn an average profit margin of 2.5 percent. Most retailers make back transaction fees by hiking prices, for users of cash and cards alike. The result is, according to one estimate by the Federal Reserve Bank of Kansas City, a 1.4 percent premium charged on the overall price of consumer goods. That’s tens of billions of dollars every year in what has been called a tax on the global economy. Wealthy consumers earn this back in the form of points, rewards, and miles, making it one of society’s most regressive taxes.


Some progress comes from the Federal Reserve’s FedNow, a low-cost service that offers banks the option to process their payments outside the traditional card networks. Someday, this network could offer consumers a way to transact quickly and without short-term credit, as Europeans prefer to do. But as banks once struggled to cold-start the network effects of credit cards, the Fed has struggled to sign banks onto its payments network. Maybe it should try soliciting them through the mail.

LARB Contributor

Carey K. Mott, a researcher at the Yale Program on Financial Stability, studies business and finance at Columbia University. Previously, he worked at the Federal Reserve Banks of New York and Boston. He has contributed to Foreign PolicyThe National Interest, and other publications.

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