Until about 1930, outstanding consumer credit was dominated by no installment credit, largely charge accounts. The growth in the size of retail establishments, as well as in the number of customers and the volume of business, meant that not every charge account customer could be recognized by clerks in the store. Some form of identification became necessary—hence, the credit card.
Prior to World War I, credit cards were issued by a small number of hotels, oil companies, and department stores. They served the dual purpose of identifying a customer with a charge account and providing a mechanism for keeping records of customer purchases. The use of such cards continued to grow after World War I, until the growth was halted by the depression of the 1930s.
Unlike many other types of credit card issuers, the retailers drifted into the credit card industry simply by conducting business as usual. In the United States, a large proportion of retail sales, particularly of discretionary items, had always been made on credit. Thus, the conversion of the retail charge account into a credit card was no more than a change in terminology. Large retailers extended credit to their customers for two reasons. First, credit was necessary to generate many sales, particularly sales of higher priced items such as clothing or consumer durables. Second, a credit account helped bind a customer to a retailer. It is the latter reason that has accounted for the long-lived resistance of many retailers to universal credit cards, which can be used with virtually every retailer.
The use of credit cards by retailers began in 1914 when some large stores gave cards to their wealthier clients. The cards were helpful to store employees in recognizing charge account customers, and regular charge accounts were desirable to the wealthy customers because they could pay for an entire month’s purchases at one time, cutting down on their bookkeeping. Used in this fashion, credit cards lent prestige to their owners. However, the credit card’s prestige diminished somewhat with the wider distribution of credit cards. By the mid-1930s, two- thirds of Americans using credit cards did so because they did not have cash to pay for their purchases, a vast change from the earlier days.
In 1928, department store credit cards took on a new feature with the introduction of “charga-plates,” Produced by the Farrington Manufacturing Company of Boston, these metal plates resembled the Army- issue dog tags and were, in fact, nothing more than reconfigured embossed-address plates. A charge account customer at any of a wide number of department stores Would be given such a plate, which, when inserted by the salesperson in a machine known as a recorder, or imprinter, would automatically stamp onto the sales slip the customer’s name and address and some coded credit information.
Although retailers regarded the charge account as a means of retaining customer loyalty, they also recognized that shoppers who were not regular customers might be persuaded to buy if they had the necessary credit. Consequently, a number of charge account systems that covered many stores were formed—some covering stores with charge systems of their own. By 1936, the Retail Service Bureau of Seattle had signed up more than 1,000 retail establishments that agreed to honor charges by their joint customers, who received one monthly itemized bill covering all charge purchases. Payments were due on the tenth of the following month. Although the plan included only retailers, it was similar in concept to the Diners Club plan that came along some fifteen years later. By the end of World War II, cooperative credit plans existed in several cities.
While for the retail industry the credit card was simply a natural extension of its existing credit operations, the credit card was a much needed innovation for the oil companies. In marketing their gasoline, the oil companies were faced with a logistical problem not faced by many other retailers of the early twentieth century. Since the automobile was created for traveling, the owner could not be expected to maintain loyalty to one particular service station. Consequently, to keep customers loyal to a particular brand of gasoline, it was necessary to devise a system that would allow a customer to charge fuel purchases at all outlets of a particular company and that, through a consolidation of records, would charge the customer on a monthly basis.
Beginning in the early 1920s, oil companies issued what they called “courtesy” cards, which had all the features of today’s gasoline credit cards with two exceptions: they lacked the revolving credit feature, and they were made of paper rather than plastic and were reissued every three to six months. The oil company courtesy cards were issued without charge and did not even need to be applied for since they were given by service station managers to their most frequent customers.
The success of the early courtesy cards prompted other oil companies to issue their own cards. Customers could buy gasoline, oil, and small parts at the service station and were obligated to repay the entire outstanding charge by the end of the month. The plan proved so successful with the favored customers that the oil companies began giving out cards free to virtually every driver they could find. As historian Gerd Weisensee states, “The fact that the card holder owned an automobile was guarantee enough for the oil companies issuing the cards.”
As prosperity returned to the United States shortly before the Second World War, oil companies began a major push to expand their cardholder base. In 1939, Standard Oil of Indiana startled the industry with a major campaign to distribute 250,000 new cards in a short period of time. While other companies had more than that number of cards outstanding, they had built their accounts carefully through distribution by local service station managers to trusted customers. Standard Oil of Indiana’s mass distribution of cards threatened to establish a new industry norm. According to a 1939 BusinessWeek article, “Credit men are nervous lest this new distribution precipitate unforeseen credit woes.”
The credit card was a useful marketing tool for the major oil companies, which were trying to sign up individual service station owners. A company boasting several hundred thousand cardholders around the country could hold out the promise of greatly enhanced “drive-in” business from travelers. In addition, by replacing a good customer’s existing charge account with a credit card, the dealer could effectively transfer the financing of accounts receivable to the oil company, since the charge ticket was accepted by the oil company as cash in paying for gasoline delivery.
However, as the credit card industry would learn again and again until the practice was outlawed by Congress in 1970, the mass distribution of unsolicited credit cards was detrimental as well as beneficial. The benefit was the quick establishment of a large cardholder base that held merchants in place and gained market share. The cost, however, came quickly in the form of large initial losses due to fraud. A 25 November 1939 BusinessWeek article, “Oil Men Jumpy over Credit Cards,” reported that
a credit card gone wrong is the next thing to a book of signed blank checks or an unlimited letter of credit. One cardholder went haywire and began earning his living by carrying passengers between New York and California for less than bus fare. The gas and oil bill for his transcontinental taxicab passed $500 before he committed an unrelated federal offense and landed in jail. (38-39)
In those days, as now, credit cards were substantial money-losers for the oil companies. According to a 1939 survey carried out by the oilmen’s section of the National Association of Credit Men and reported in the 1 November 1939 edition of National Petroleum News, the total cost of the credit card business over cash business averaged 0.850 per gallon, or 4.85 percent of the sale. And then, as now, problems of credit card fraud abounded. Dealers often sold unauthorized merchandise or services to cardholders, or even advanced money to cardholders while making out a slip only for gasoline. The practice of overcharging the customer became so widespread that, as the survey reported, companies were forced to “scrutinize all large tickets microscopically, threaten to revoke a dealer’s charge privilege when they catch him charging 17 gallons into a 14 gallon tank or selling 40 gallons in one day to the owner of one Chevrolet.”
One of the last major industries to introduce credit cards was the airline industry. Airline travel cards dated back to 1931 when Century Airlines began offering coupon books for airplane trips at a discount of 15 percent off list price. The use of these prepaid coupons enabled travelers to fly without having to carry large amounts of cash. After it acquired Century Airlines, American Airlines also adopted this service.
Charles R. Speers, a Detroit traffic manager for American, helped make coupon books more appealing to corporate customers by having the coupons on file with the airline, thereby enabling any of each customer’s employees to fly on those coupons. Speer proposed a modified system to the General Motors Pontiac Division, his largest commercial account, whereby American would hold two of Pontiac’s $250 coupon books on file in its Detroit office. When an employee flew American, Pontiac would supply an authorization letter permitting the airline to remove the necessary coupons. When the value of the coupons dropped to $250, another book would be purchased. In 1936, the coupon books were replaced by a deposit of $425, which was the equivalent of two $250 coupon books minus a discount. (American Airlines later renamed its program the Universal Air Travel Plan [UATP] and allowed other airlines to join.)
As the country moved into the 1940s, it finally seemed ready to push out of the economic doldrums of the 1930s. The credit card industry in particular—as indicated by Standard Oil of Indiana’s ambitious if unsuccessful mass mailing effort and the variety of new credit plans being implemented in various other industries—seemed poised to take advantage of the economic recovery. Those plans were put on the back burner, however, with the onset of the Second World War. Wartime credit restrictions and the slowdown in consumer spending forced most firms to put their credit card operations on hold. Gas was rationed, temporarily closing down the oil companies’ credit card operations, and the use of installment credit to finance purchases was greatly diminished by regulations placed on it by the Federal Reserve, which set minimum down payments and maximum repayment periods for the purchase of large consumer durables.
As World War II ended, however, the United States stood poised for a major economic expansion. Prosperity, always just around the corner during the 1930s, had finally arrived, with much fanfare. After four years of churning out fighter planes, warships, tanks, and rifles, the country was ready to turn its newly developed economic muscle to the more peaceful and more profitable production of automobiles, homes, dishwashers, and clothing.