The Early Development of Credit

In tracing the development of the credit card industry, one must begin with a history of credit itself. According to economic anthropologists, the use of credit predates even the use of money. Historian Paul Einzig wrote in Primitive Money that “credit existed on a fairly extensive scale long before the state of money economy was reached”. A person might borrow seed to be repaid from the next harvested crop, or to pay for such things as ransom fines and bribe money and to carry on trade.

Even the earliest recorded documents carry references to credit. The Code of Hammurabi, written in Babylonia about 1750 B.C., mentions one of the earliest restrictions on credit: “If a man be in debt and sell his wife, son, or daughter or bind them over to service for three years, they shall work in the house of their purchaser or master; in the fourth year they shall be given their freedom.” There are also many references to credit in the Old Testament, usually in connection with the sin of usury. For example, Leviticus 25:37 states, “Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.”

It is clear, from these and other examples, that ever since the introduction of the concept of credit, strong moral forces were set against the consumer loan. In times of subsistence, when most persons borrowed only to stay alive, it is not difficult to understand why profiting at the expense of someone else’s misery was thought to be morally reprehensible. But the moral force of early prohibitions against usury has remained with us even in the age of affluence, when consumer borrowing has motivations other than subsistence. According to Charles Hardy, author of Consumer Credit and Its Uses,” The significant thing to observe is that there was in these early days no clear idea of that which, today, we call capital. For the most part, loans were not made to persons, who because they borrowed, were able to increase their own earning power and through this increase repay their debts.”

The Greeks and Romans were especially prejudiced against the taking of interest. The Greek philosophers, Plato and Aristotle, both condemned interest; Aristotle’s arguments, in particular, influenced the thinking of the Roman Catholic Church for well over a thousand years. The Romans, however, distinguished between productive credit, which was used for business and investment, and consumptive credit, which involved personal loans for purposes of consumption, often for borrowers on the verge of starvation. As industry and commerce played a larger and larger role in Roman society, many of the restrictions broke down; Justinian’s Code in the sixth century recognized interest and set maximum legal rates for various types of loans. (The notion of maximum legal rates continues to plague the credit card industry some fifteen hundred years after Justinian.)

In the early middle Ages, the halting of commerce combined with the increasing influence of the Roman Catholic Church ended most types of lending. During this period, money lending was left to the Jews, who were outside the Church’s jurisdiction. Toward the end of this period, however, trade resumed and credit became relatively wide-spread. Historian Herbert Heaton could be describing the late twentieth century when he says of this period, in his book Economic History of Europe, that cash on delivery was relatively rare, lending and borrowing were pervasive, and the debtor-creditor relationship was found in all classes from peasant to pope. Loans of all kinds—short-, medium-, and long-term—were common. Consumption loans were used to purchase food, clothing, or luxuries, while capital loans were used to finance production or trade.

The Protestant Reformation hastened the decline of usury prohibition by breaking Europe into independent religious units. The usury question could then be settled on a country-by-country basis, as well as brought from the religious into the secular arena. In 1545, England replaced the prohibition on interest with a maximum interest rate. By the eighteenth century, maximum rate laws had replaced the prohibition against interest in all of the western European countries.

The pendulum was to swing still further toward the liberalization of the use of credit in nineteenth-century England, where the great liberal economists, Adam Smith, David Ricardo, and John Stuart Mill, argued against restrictions on the rate of interest, predating the conservative economists who make the same arguments in our own day. In 1854, England removed all restrictions on the rate of interest, and within a few years, Germany, Holland, and Belgium all followed its example. As so often happens, however, the pendulum began to swing back over the next fifty years toward a more restrictive view of the use of credit, and by the year 1900, all of the western European nations again had legal limitations on interest charges. Even with this retrenchment, however, the use of credit at the beginning of the twentieth century was more widespread than it had been one hundred years earlier.

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