An Interview with Charles Geisst: How Americans Got Into a Credit Card Mess
[Charles Geisst is a professor of finance at Manhattan College]
You write that one of the major myths about American society is that we used to be prudent with our money and only recently did we go astray. What's the real history?
Americans are speculative people. During and after the Civil War, for instance, there was a lot of stock market and commodities speculation—people trying to make a quick buck. But it was only when financial institutions picked up on that and provided the methods whereby you could buy now and pay later—that very simple concept—that things started to change structurally. Now Americans are more highly leveraged than they were in the past.
Which makes our most recent downturn worse?
Yes, absolutely. We're out of proportion with our amount of personal debt. A good number of people are in debt to the point where they may not ever be able to pay their way out.
Why didn't lenders better capitalize on our speculative bent sooner?
Our banking system was never national. In fact it wasn't even retail in the 19th or early 20th century. The banks that were capable of doing the most lending to individuals didn't actually do it. We had to wait until Bank of America, for instance, got into business, and a lot of the companies like Household Finance that started making consumer loans, for this thing to actually warm up...
...You actually assign a lot of blame for our recent troubles on a lack of interest rate caps—that is, on the absence of strict usury laws. Why?
Almost every state had usury laws in the 1920s, and they were circumvented one by one. Prohibitions against excessive interest started to disappear [South Dakota, for instance, loosened its laws in 1980,] and once they did, the credit-card companies recognized a wonderful opportunity. They could charge as much as the market would bear, claiming that they had to charge more for bad credit risks. You can argue that's the democratization of credit, but it's in the interest of credit-card companies to keep people under the yoke. We've just swapped loan sharks for legitimate loan sharks...
...A lot of your book is about the history of borrowing money. Any favorite episodes?
Well, it's been a long road. During the Roman Empire, the first anti-usury law—and I think this says it all—was found in the Council of Nicea in the 4th century. It states that no clergyman could practice usury, so you can get a pretty good idea of what was going on then—lending to the flock. The odd part is, the Council of Nicea was also the council that confirmed the concept of the Trinity. Those are probably two of the most unlikely pieces of legislation you could find in the same piece of canon law.
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You write that one of the major myths about American society is that we used to be prudent with our money and only recently did we go astray. What's the real history?
Americans are speculative people. During and after the Civil War, for instance, there was a lot of stock market and commodities speculation—people trying to make a quick buck. But it was only when financial institutions picked up on that and provided the methods whereby you could buy now and pay later—that very simple concept—that things started to change structurally. Now Americans are more highly leveraged than they were in the past.
Which makes our most recent downturn worse?
Yes, absolutely. We're out of proportion with our amount of personal debt. A good number of people are in debt to the point where they may not ever be able to pay their way out.
Why didn't lenders better capitalize on our speculative bent sooner?
Our banking system was never national. In fact it wasn't even retail in the 19th or early 20th century. The banks that were capable of doing the most lending to individuals didn't actually do it. We had to wait until Bank of America, for instance, got into business, and a lot of the companies like Household Finance that started making consumer loans, for this thing to actually warm up...
...You actually assign a lot of blame for our recent troubles on a lack of interest rate caps—that is, on the absence of strict usury laws. Why?
Almost every state had usury laws in the 1920s, and they were circumvented one by one. Prohibitions against excessive interest started to disappear [South Dakota, for instance, loosened its laws in 1980,] and once they did, the credit-card companies recognized a wonderful opportunity. They could charge as much as the market would bear, claiming that they had to charge more for bad credit risks. You can argue that's the democratization of credit, but it's in the interest of credit-card companies to keep people under the yoke. We've just swapped loan sharks for legitimate loan sharks...
...A lot of your book is about the history of borrowing money. Any favorite episodes?
Well, it's been a long road. During the Roman Empire, the first anti-usury law—and I think this says it all—was found in the Council of Nicea in the 4th century. It states that no clergyman could practice usury, so you can get a pretty good idea of what was going on then—lending to the flock. The odd part is, the Council of Nicea was also the council that confirmed the concept of the Trinity. Those are probably two of the most unlikely pieces of legislation you could find in the same piece of canon law.