Credit cards are obsolete. Is consumer debt heading the same way?

The technological history of credit.

Slate's Matt Yglesias, in a post about the effect higher bank capital requirements could have on the real economy, gives a brief overview of the changing nature of credit in America:

Once upon a time credit overwhelmingly meant business credit, which then expanded into the personal sphere primarily in the special case of houses and what you might call household investment goods (cars, large appliances). That then metastasised into the all-in culture of consumer debt and credit that we know from the past 25 years.

Yglesias' point is that high capital ratios will reverse that trend, boosting the price of consumer debt while making corporate debt cheaper. This, he adds, might not be a bad thing, "disproportionately encouraging business borrowing to finance investment while discouraging consumer borrowing to enhance consumption".

But what I find interesting is how that "metastasisation" of a relatively small field of debt into the widespread credit economy we now have was born. It was, broadly, a technological imperative, as the Financial Times' Isabella Kaminska points out:

The credit component in credit cards came into play because in the “old days” extending credit was the easiest way to transact remotely without the use of physical cash.

Any alternative back then would have involved waiting hours (if not days) for the merchant to call your bank, who would then verify who you were, who would then make a deduction from your account, who would then send an instruction to the merchant’s bank, whose bank would make a corresponding credit, who would both use different parties to clear and confirm the transaction. Sometimes by post.

It was basically much easier (from a velocity point of view) for a bank to guarantee to the merchant that you were good for the money by means of a piece of plastic. The transaction would take place and you would then owe the bank, whilst all the settlement processes continued on in the background. If you didn’t pay, it was between you and the underwriter bank. The merchant was covered. You were probably black-listed.

Initially, then, the fact that credit cards enabled people to freely and easily spend beyond their means wasn't deliberate — it was a by-product of the real aim, which was just to let people pay for things. It wasn't quite a bug in the system, because card issuers were always more than happy to let people pay off their credit card bills in instalments, racking up healthy interest payments in the process. But it was hugely important in getting the concept of borrowing to pay normal daily bills into people's heads.

Nowadays, of course, that technological imperative is nonexistent. Although they will take every possible opportunity to delay payments, squeezing marginal gains from the extra interest, banks are capable of transferring money instantly. At the very least, the fact that debit cards are now possible renders the initial rationale for credit cards obsolete.

Of course, if this apotheosis of the credit economy is something which is worth pushing back against, as Yglesias suggests, then doing so by just raising interest rates is about the most damaging possible way. People have got used to boosting their standard of living with easy credit, and until they can achieve the same standard without resorting to credit, making it more expensive to borrow could backfire heavily.

Credit cards. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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What the debate over troops on the streets is missing

Security decisions are taken by professionals not politicians. But that doesn't mean there isn't a political context. 

First things first: the recommendation to raise Britain’s threat level was taken by the Joint Terrorism Analysis Centre (JTAC), an organisation comprised of representatives from 16 government departments and agencies. It was not a decision driven through by Theresa May or by anyone whose job is at stake in the election on 8 June.

The resulting deployment of troops on British streets – Operation Temperer – is, likewise, an operational decision. They will do the work usually done by armed specialists in the police force protecting major cultural institutions and attractions, and government buildings including the Palace of Westminster. That will free up specialists in the police to work on counter-terror operations while the threat level remains at critical. It, again, is not a decision taken in order to bolster the Conservatives’ chances on 8 June. (Though intuitively, it seems likely to boost the electoral performance of the party that is most trusted on security issues, currently the Conservatives if the polls are to be believed.)

There’s a planet-sized “but” coming, though, and it’s this one: just because a decision was taken in an operational, not a political manner, doesn’t remove it from a wider political context. And in this case, there’s a big one: the reduction in the number of armed police specialists from 6979 when Labour left office to 5,639 today. That’s a cut of more than ten per cent in the number of armed specialists in the regular police – which is why Operation Temperer was drawn up under David Cameron in the first place.  There are 1340 fewer armed specialists in the police than there were seven years ago – a number that is more significant in the light of another: 900, the number of soldiers that will be deployed on British streets under Op Temperer. (I should add: the initial raft of police cuts were signed off by Labour in their last days in office.)

So while it’s disingenuous to claim that national security decisions are being taken to bolster May, we also shouldn’t claim that operational decisions aren’t coloured by spending decisions made by the government.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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