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A Forerunner of Credit Card Debt Helped Spawn the Revolutionary War

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Washington was caught in the trap that was snaring so many other Virginia planters and that Thomas Jefferson, another victim, described as the chronic condition of indebtedness, which then became "hereditary from father to son for many generations, so that planters were a species of property annexed to certain mercantile houses in London... If a debt is once contracted by a farmer, it is never paid but by a sale," meaning bankruptcy proceedings.
-- His Excellency George Washington, Joseph Ellis

Most of us know the Revolutionary War was about more than just life, liberty, and the pursuit of happiness. Like most uprisings in fact, it was the expression of a people who felt their economic lifeline was being pinched by the British and their tax schemes. If you'll recall your high-school American history, the Sugar Act enforced a tariff on molasses and taxed the importation of items such as silk and wine, the Stamp Act -- every document or newspaper printed in the colonies -- and the Townshend Act: lead, paint, paper, glass, and tea imported by colonists.

Even a personage as august as George Washington had reasons other than unadulterated fealty to Lady Liberty for rejecting foreign rule. In fact, beyond just onerous English taxation, what galvanized him was the eighteenth century version of credit card debt.

When Washington married Martha Custis, he became the beneficiary of an outsize dowry, which allowed him to expand not only Mount Vernon but its tobacco crop. Joseph Ellis explains what happened next in His Excellency George Washington (Knopf, 2004), which shows that the human monument was, in fact, a force of nature:

Washington's man in London was Robert Cary, head of Cary & Company, one of the city's largest and most successful mercantile houses. ... Smaller growers. . . sold their crops to domestic buyers and purchased most of their consumer goods locally. But the planters with the largest estates [like Washington]. . . preferred the consignment system, whereby they consigned. . . sale of their crop to mercantile houses in England. ... But the greatest advantage of the consignment system was the access it offered to London's shops and stores.

In an average year Washington ordered more than £300 of goods from Cary & Company. [A] rough estimate would place his spending during five years in the early 1760s in the range of two to three million dollars.

Gradually, it began to dawn on Washington that he was running through his entire Custis inheritance. ... But he was truly stunned the following year when Cary apprised him that his account was more than £1,800 in arrears, a debt that was only going to increase once Cary began charging 5 percent interest annually on the principal. [Emphasis added.]

[Thereafter, when] Washington thought of that abstract thing called the "British Empire" he did not think politically, envisioning the Hanoverian kings and the members of Parliament. He thought economically. The face he saw was Robert Cary's. ...

By sheer coincidence. . . just as Washington was grappling with the bad news from Cary. . . the much-despised Stamp Act was scheduled to go into effect in Virginia. ... Washington's thinking. . . moved instinctively to the much more palpable issue of economic independence.

To free himself from debt, Washington summoned up the discipline for which he was famous. He diversified into other crops, which he sold stateside, and cut back substantially on the goods he and his wife ordered from London. Still, his experiences with Cary & Company left him with enough residual resentment to fire his revolutionary fervor.

"I owe my soul to the company store"

In recent years, paying tribute to Washington isn't considered politically correct. Besides bringing the rapaciousness of the parvenu that he was to land acquisition, he kept slaves, however reluctantly ("a certain species of property which I possess, very repugnantly to my own feelings"). But both he and Alexander Hamilton -- the prototypical Tim Geithner, but to the nth power -- launched the ship of state on a course toward prosperity. Little could they have known how ravaged our craft would be by the stormy seas we'd navigate 200 years hence.

Come to think of it, today's blighted economic landscape might look depressingly familiar to them. Aside from the debt, many of us are in effect indentured slaves like those who worked the Virginia tobacco farms alongside the slaves. Paying off credit card debt in just ten years is often a best-case scenario.

The ways that credit cards shackle us are legion. High interest rates were originally intended to compensate for the collateral we don't put up. But the practice has taken on a life of its own, along with fees for charging over the limit and for late payments. You're no doubt aware that they've devised other subterfuges to extract money from us. But, as with the arcane financial instruments that investment firms devised to inflate value, you may not know how they work.

Take bait-and-switch credit card offers. The credit card company advertises its premium card at a low interest rate. But if you fail to qualify, the company simply issues you a non-premium card with a higher annual percentage. Next, take the period after a purchase before your card begins accrue interest -- a month, right?

Wrong. The "grace period," as it's now called, averages 23 days. Another candidate for the charge most likely to have escaped your attention is the inactivity fee levied for failure to use your card regularly.

Finally, as if you're not already reeling, we give you. . . universal default penalties. Here's how they're incurred: A credit card company monitors its customers' credit reports for late payments on any of its bills. No, not bills that the credit card company sends you -- any of your bills: insurance, medical, discretionary purchases.

A late payment on any of those bills can be used by the credit card company as an excuse to raise the interest rate on your card -- even if you have never made a late payment to the credit card company itself. Presumably the card issuer is operating on the theory that it had better extract every last cent from you before you go belly-up. It conveniently forgets that the rate hike, along with its other added fees, facilitates such an outcome.

Yet not only don't we raise a hue and cry like the patriots of the American Revolution did, few of us even call our Congress persons to appeal to them for relief. The patriots were facing the greatest army and navy in the world. Meanwhile, the companies that we're up against, like Citibank, are already diminished by the financial crisis. What better time to impose reform on them?

Credit Cards: Thy Name Is Usury

Kicking the credit card companies while they're down is no doubt the furthest thing from the mind of Senator Chris Dodd (D-CT). As chairman of the Senate Committee on Banking, Housing and Urban Affairs, he's noted for his cozy relations with the accounting industry.

It might seem surprising then that, in the second week of February, Dodd re-introduced the Credit Card Accountability, Responsibility and Disclosure Act ("the Credit CARD Act") to the Senate. But he must instinctively know that legislation outlawing abusive credit-card company practices may help heal the consumer base, which, in the long run, is the only sure path to health for banks. Besides, last fall, H.R. 5244, a similar measure, sailed to victory in the House of Representatives with bipartisan support.

Although a rule was issued by the Federal Reserve in December 2008 that would prohibit many of the same unfair practices as these bills, it doesn't kick in until July of next year. That's ample time for the credit card industry to inflict yet more gaping wounds in the economy.

Dodd's bill seek to limit fees and penalties, ensure that cardholders are briefed about the terms of their account, and protects young people from credit card solicitations. And yes, it also address those vertigo-inducing universal default penalties.

A complementary bill, left over, like Dodd's, from last year's Congressional session, was re-introduced by Sen. Dick Durbin (D-IL) on February 26 of this year. The Protecting Consumers from Unreasonable Credit Rates Act of 2009 seeks to create a national maximum interest rate for credit cards, as well as payday and tax-refund-anticipation loans. It also seeks to encourage alternatives to predatory lending such as small loans with minimal or no fees, and reasonable repayment schedules.

But it's idea of the rate above which usury occurs is a whopping 36 percent!

Despite the high limit, Durbin's bill draws the wrath of conservatives. In the National Law Journal last September, Brian Brooks and Elizabeth Lemond McKeen deplored the "strangulation of the economy by usury laws."

"Why. . . would anyone want to reintroduce usury limits, especially at a time when consumer credit is already scarce? The reasons are rooted in an understandable desire to protect consumers [but] usury laws reduce the credit supply to people who need credit the most."

Conservatives can't have it both ways. If you'd like a nation less reliant on entitlement programs, allow us to channel the money we pay to credit card companies into a savings account, whether national or personal. As for credit flow, if old-fashioned bank loans at honorable rates aren't good enough to keep an economy rumbling along, we might as well give up on capitalism.

As of this writing, the national average credit-card interest rate is 12.93%. Meanwhile, the figure of 36% is treated as if it were a sane ceiling. Now might be a good time to remind ourselves that all it took was a 5% interest rate to help drive George Washington to open revolt.