99% Invisible - 196- The Fresno Drop

Episode Date: January 20, 2016

In September 1958, Bank of America began an experiment – one that would have far reaching effects on our lives and on the economy. They decided after careful consideration to conduct this experiment in Fresno, California. The presumption was that … Continue reading →

This is 99% Invisible. I'm Roman Mars. In September 1958, Bank of America decided to try an experiment, one that would have far reaching effects on our lives and on the economy. They decided after careful consideration to conduct this experiment in Fresno, California. The thinking was, no one was paying much attention to Fresno, so if the plan failed, it wouldn't get a lot of media attention. Things were slow back then here. Fresno was not the big metropolitan area it is today. That's Joseph Rusek. My name is Joseph Rusek. I've worked with Bank of America since 1956 and retired in 1985. Started off as a teller. I worked our way up, and most of us young fellows did.

Joseph was there when all this went down. And so in September of 1958, Bank of America sent out 60,000 pieces of mail to people in Fresno. Inside, with a little plastic object, that has become an equal parts, emblematic of opportunity, convenience, and debt. He's talking about the credit card. That's reporter Nate Berg here to tell you what I'm talking about.

Bank of America had recruited about 300 merchants in Fresno to accept this new payment system, and they'd asked employees like Joseph to hand credit cards out to people they knew. We did, we passed around our friends, you know, the neighbors, that's about it. out to people they knew. But as for Joseph, he was skeptical about using a credit card himself. I can credit myself. Why not? Well, you have to pay back interest, and I don't like giving money away. Joseph wasn't alone. The whole town of Fresno was a bit nervous about this new credit card system.

The concept of credit wasn't new, but it had never been done quite like this. Going back into, say, the 1800s, early 1900s, few had credit with a store or some kind of a business It was just kind of a ledger book type of thing This is Ken Howenbeck. He's a new Mismatist a new Mismatist That is someone who studies or collects currency not just coins, but it's paper money metals tokens Anything that's some money or money substitute Ken is retired now, but its paper money, metals, tokens, anything that's some money

or money substitute. Ken is retired now, but he used to work at the American New Mismatic Association. New Mismatic. So back in the late 1800s, every place from the corner bar to the local pharmacy allowed patrons to keep open tabs. They'd record everything in a ledger book and allow their customers to charge up a bill that they'd typically pay back at the end of the month. For businesses, this was an accounting nightmare. Stores could have hundreds of accounts, billing tabs for a dollar here and a dollar there,

and with each chart, a shopkeeper would have to haul out a ledger book and look up a customer's records just to complete a transaction. Eventually, store owners cut down on some of the paperwork by assigning customers account numbers, which they would inscribe on little tokens. Most of them were round, or oval, and I'm going to have a number on them, and that was your account number. Ken has a collection of a few dozen of these old credit tokens, many dating back to the early 20th century. I have one here, it says Pocahontas, Pioneer, Garage, but it has a head of an

Indian on it, and on the back it has a number 839. After credit tokens came something called Charger Plates, they look like little dog tags for the army. They were metal and had your name and information imprinted on them. Shopkeepers could make an impression of your personal information directly onto the bill, instead of having to write it all down. But the more accounts you had, the more charge-a-plates and tokens you had to carry around with you. It still wasn't a great system for the retailer or the customer. So in 1949, a New York businessman named Frank X McNamara came up with an idea for a single charge card that could be accepted at multiple establishments. He called it the Diner's Club Card,

and with it you could make charges at a number of New York restaurants and hotels. But unlike the credit card of today, you could only use your diner's club card in certain places. The idea caught on somewhat. About 20,000 people signed up, mostly businessmen. It wasn't a smash success, but still the banks started to see an opportunity. So you have this giant change taking place right around World War II and especially in the aftermath of World War II when the American economy was basically the only economy in the world that was still standing. That's Joe Noceira, colonist for the New York Times and author of a piece of the action,

how the middle class joined the money class. People having gotten through the war, settling down, getting married, raising kids, wanting to live in the suburbs, there were suddenly things they wanted to buy, a refrigerator, for example, or as it came into volga television. So maybe you'd have a Sears account. You could buy things there and pay your bill at the end of the month. But if you didn't have an account with a store, you'd have to go to a bank and get a traditional loan for any relatively large purchase. Whether it was a car, whether it was a sofa, whether it was a refrigerator, you'd go to the bank every single time, every single time.

You know, you had to have collateral to pay for it. Every single time the banker would have to figure out whether you were a good credit risk. It was a pretty cumbersome process, both for the consumer and for the bank. Bank of America wanted to find an easier way to make these small loans. Bank of America was, in the 1950s,

the premier consumer-oriented bank in the United States. Bank of America really believed in the idea that it would grow by helping consumers. So it was Bank of America that decided that they would basically give clients a card that they could put in their pockets, that would give them roughly a $500 line of credit. Unlike the diner's club, Bank of America wanted their customers to be able to use their card anywhere, not just at restaurants. And where the diners club had to be paid off within 60 days, Bank of America would allow its customers to pay them back whenever they wanted. They'd call their new credit card, the Bank of America. You could spend it all down, you could pay part of it back,

you could pay it all back. You didn't have to get a banker to approve your purchase, and you didn't have to pay the bank back by any specific time. They called this revolving credit. The card was essentially an instant loan. Of course, it was a loan with an interest rate attached. This was one of the profound shifts in the way people handle money instead of it, the banker being in control of your money, of setting the terms for how you dealt with your money. With a credit card, you are the one setting the terms and you are the one making the decisions about what

to do with your money. Now all Bank of America had to do was convince retailers to accept credit cards as payment and convince people to use them. Now because they were a new invention and because people didn't really know what they were and because they were no laws surrounding credit cards, the way they tested the card was they simply sent a mailing to basically every Bank of America customer in Fresno, California, which brings us back to Fresno. They called it the Fresno Drop. Bank of America mailed out 60,000 credit cards all over the

city. Fresno had become a laboratory for the future of personal finance. The Fresno Drop was supposed to be a controlled experiment where the bank could test the concept and work out any kinks. But within just a few months of the Fresno credit card drop, Bank of America got word that one of its competitors in California was planning a similar program. So Bank of America quickly expanded. Mass millions went out in the central valley cities of Modesto

and Bakersfield, and then eventually to the state's bigger cities of Sacramento, San Francisco, and Los Angeles. Within 10 months of the Fresno drop, more than a million bank americarts have been mailed out across California. Once the cards had begun saturating the bigger cities, fraud and theft were rampant. People would go around to mailboxes and suburbs and steal cards on days when they knew the cards were being dropped. The system was being abused,

but the system was also randomly mailing out pre-approved credit cards that allowed anyone to buy up to $500 of whatever they wanted. You know, dead people were getting cards, dogs were getting cards. It was just very, very willing, nearly. Despite these mass mailings, the cards didn't catch on right away. It was hard to convince stores to accept them. They had to pay a percentage of the sale to the bank,

and it was hard to get customers to use them. And when people did start using the cards, they didn't always pay the money back, which was a bit of a surprise to Bank of America. People had mostly been pretty good about paying back traditional loans. And what they forgot was, in those days when you made a loan, the customer looked the banker in the eye and the banker looked the customer in the eye and they both had this kind of relationship and the customer would not want to let the banker down.

Whereas with a credit card, it was an anonymous thing. And this anonymity meant one in four people weren't paying their credit card debts. In 1959, about a year after Bank of America did their first mass million in Fresno, they had mailed out more than two million bank of Americans, but they hadn't made a single set from their experiment.

In fact, they lost about $20 million. And so the bank started making a few changes. They really started to think about it differently. Bank of America set up a collections department and an anti-fraud unit. People who weren't paying their bills had their cards revoked. And the government also started to regulate

the credit card industry. In 1968, the Truth and Lending Act made it illegal to mail out credit cards to people who never asked for one. From that point onward, instead of getting a card in the mail, you got instead a solicitation to apply for a card, which in one form or another exists to this day. It wasn't until 1961, three years after the Fresno drop, that Bank of America actually turned a profit on their crazy credit card experiment. By 1968, they were making about $13 million a year. The Bank of America system, which became a nationwide system, eventually became known as Visa.

And the other cards that had competed with Bank of America, they also consolidated and they became MasterCard. The major credit card companies now make lots and lots and lots of money every year, which is great for them. Maybe not so great for the rest of us. Today, over 70% of American adults have at least one credit card,

and the US as a whole has about $900 billion in credit card debt. In 2009, more credit card reform was passed. It prevents arbitrary interest hikes, stops credit card companies from specifically marketing to college kids, prohibits certain types of abusive fees, but a lot of people think more reform is needed. The experiment in Fresno created a tool that made buying things much, much easier. You no longer had to put on a suit and a tie and go to the bank for a loan every time you

wanted to get yourself something nice. The credit card facilitated an unprecedented amount of economic freedom for the middle class, and that aspect was intentional and maybe even noble. But it's important to keep in mind that first and foremost, the credit card was designed to make money for banks and everything about their design betrays that primary objective. Credit cards don't have to be complicated. They don't have to trick you, but they do, because they were designed that way. My bills are all due and the babies need shoes, but I'm busted. Cotton is down to a quarter of pound and I'm busted.

I got a cow that went to try and I can't that won't lay. A big stack of bills that get bigger each day. The county will hold my belong in so way. I'm busted. 99% Invisible was produced this week by Nate Berg with Katie Mingle, Avery Trophman, St. Greenspan, Kurt Colstead, and me Roman Mars. The new kids at 99PI starting today are Delaney Hall and Sherry Fusef. We are a project of 91.7 KALW San Francisco and produced out of

the offices of Arxon, an architecture and interiors firm in beautiful downtown Oakland, California. You can find this show and like the show on Facebook. We're all on Twitter, Tumblr, Instagram and Spotify and we are fascinating on every platform. But the easiest way to get more information on every single episode of 99% Invisible is at 99pion.org. Radio Tapio. From P-R-X. Tokyo. From PRX.