A brief look at the history of credit

While what we know today as the credit card is a recent modern invention, the idea behind it of extending a line of credit for a purchase to be paid later is nothing new. Like us today, our ancestors were consumers and many ingenious minds were behind the crafting of the financial system that we know today.

Sometime around 3000 BC in the Middle East the first lines of credit were established. It should be no surprise that the Egyptians, the Assyrians and the Babylonians were pioneers of commerce and banking. These are the peoples after all that gave us modern writing, a legal system and grand architectural and scientific advancements. The oldest profession in the world may be that of money lender and one of the oldest laws on the books was an attempt to regulate interest rates in Babylon and offer debtor protection. The Code of Hammurabi were so fair and complete that they remained relatively unchanged for over a millennia. Also in Babylon banks were established to lend money to those who needed it while earning interest for those lenders. It is also highly probable that the first default of a loan also occurred during this time. The penalty for that could have been three years of slavery.

In the Middle Ages bills of exchange were conceived. These were to be used to help pay debts and are considered to be the forerunner of modern paper currency. Modern international banking also had its birth with the Knights Templar, who would be paid in Europe before a traveler would head to the Middle East and upon arriving would present their note to the local Templar bank. They would receive the sum of money that they invested and could withdraw it at any time and from any Templar bank. This allowed the traveler to not have to worry about carrying large sums of cash and potential robbers relieving them of that cash. As the knights were a powerful order they could also dictate interest rates when they lent money thereby increasing the order’s wealth and political power. The concept of modern banking and credit was born.

Johannes Gutenberg’s printing press did more than just bring the Bible to the masses, it allowed for the printing of paper money which became widespread in the 1600s and thus made lending money easier. In 1730 Christopher Thornton’s furniture store in Southwark, England became the first to advertise that he would extend his buyers a line of credit to be paid back in weekly installments. This practice proved wildly successful and became increasingly more popular throughout Europe. New professions like the tallyman came into being, that is the person who kept track of each person’s debt. The repo man probably came into being shortly thereafter as well.

With the practice becoming ever more profitable the credit card came into being. No it was not what we recognize today as a credit card but its function was basically the same thing. The Industrial Revolution fueled a growth in personal wealth and with that came the desire to buy now and pay later. Western Union issued an embossed metal plate in 1914 laying claim as the first charge card issued in the US. Charge plates or charge coins would be distributed with the customer’s address and the issuing institution on it and the customer would simply show that at the issuing store and they could pay later. These were typically issued by department stores and could either be carried by the customer or left at the store for a clerk to retrieve.

The decision on whether to issue credit to a customer depended mostly on the appearance of the customer as there was no true way to find out their worthiness. That changed in 1913 with Henry Ford’s Model T automobile. While reasonably priced it was only able to be purchased for most with a line of credit. As lending a significant amount of money required a lot of risk (especially since you could now drive off into the sunset and never return) credit reporting services were born.

Lending money and issuing lines of credit has survived for millennia because the borrowers for the most part have paid their debts and merchants have been able to sell their goods. While the tools of the trade have changed the practice itself remains much the same as it was when a Babylonian merchant would need money to buy more goods. Think about that the next time you go to the bank for a loan.