According to a 2014 Gallup poll, approximately 71% of Americans own a credit card. This number has lowered from 78% in 2008, but it nonetheless reveals an important truth about the average American: credit is important. As Art Swift of Gallup tells us, “Overall, Americans have an average of 2.6 [credit] cards, including those who say they have no credit cards. For credit card owners, the average is 3.7 cards” (Swift). Given that credit is so widespread and used by such a large amount of the population makes an understating of what credit is, how it is regulated, and the economic crises that have resulted from lenders granting risky credit to borrowers a necessity for any wise and prudent consumer. The granting of risky credit by lenders to borrowers was the cause of the Credit Crisis of 1772, the Great Panic of 1837, and the Great Recession of 2008 as well as numerous other financial disasters. In order to prevent these crises from occurring again, it is time that the history of credit was understood so that the mistakes of the past no longer have to continue onward into the future.
Before a through discussion of the history of credit, credit regulating agencies, credit bureaus, and credit-caused economic crises can begin, however, capital and credit must first be defined. Capital has been defined in a myriad number of ways. Most simply, it is one of the four factors of production essential to capitalist political economy. J. Singh writes in his “Meaning of Capital: Fixed Capital, Working Capital, and Human Capital” that capital is the “produced means of production.” This means that unlike land and labor which are original factors of production, capital is not original but produced from the labor of human beings who transform natural resources into useful commodities and goods. Singh then illustrates that this process of production leads to a differentiation of capital into three primary categories. The first is fixed capital or “durable-use producer goods which are used again and again till they wear out.” This includes machinery, tools, forms of transportation, store fronts, farms, factories, and the like. Working capital, in contrast, cannot be reused again and again. Instead, this form of capital includes “single-use producers’ goods.” This can include food, fuel, or good produced to be sold in the market that will bring revenue to the firm when sold but that cannot produce recurring value of fixed capital (Singh). For example, an automobile is fixed capital that can be used to transport goods until the vehicle breaks down while the fuel that is used to power the automobile is a single-use commodity that will be consumed in the engine and need to be replaced.
The third form of capital that Singh discusses is human capital. Where fixed and working capital are two forms of physical capital, human capital is not a physically produced good but the equipped skills, education, health, strength, and talents that are either in-born or learned within a single human being, which becomes in the capitalist marketplace a commodity to be bought and sold based upon the value of that capital. As Singh writes, “An educated, trained and skilled is much more productive than an uneducated, untrained and unskilled [man].” For this, both might do the same labor but the former is worth more because of increased human capital. He might be paid $25 an hour while the other might be able to charge only $10. While human capital and labor are closely intertwined, human capital is not labor.
Labor is the actual toil the human places into producing capital; human capital is a byproduct of labor. Like physical capital, it is the production of labor except not as immediately tangible. For example, a plumber labors and as a byproduct produces new talents, skills, and expertise. After a while, he will come to know his craft better than a novice and eventually become an expert plumber. He will continue to labor as a plumber, but his value will have increased. Because there is produced human capital as a result of his labor, the increased amount of capital is determined by the monetization (or particular form of quantification) of qualitative factors such as experience, education, skill set, referrals and recommendations, etc. An expert plumber is still selling his labor in the same way as the novice, but because he has increased his value as a commodity within the market by increasing his human capital, he can sell his labor at a higher rate and produce a larger wage than the novice.
Now money is not a form of capital; it is the intermediary that allows goods and services to be exchanged on the open market. As the supply and demand of different forms of capital (bread, cars, books, phones, etc.) fluctuates, the amount of money they are worth changes. The capital remains capital but the amount of money an average buyer is willing to pay, that is the value of the capital, is in a constant state of flux. Gasoline that sold for $2.47 yesterday may sell at $2.69 tomorrow. It is the same gas but external economic factors have caused a fluctuation in the price.
Often times, when gasoline is purchased, the consumer uses a credit card to pay-at-the-pump. This means that the gasoline is credited to the consumer on the stipulation that that money will be paid to the gasoline provider at a later. Often times, credit card companies collect for the businesses to which the credit card user owes money at the end of the month. In short, as the Oxford English Dictionary defines it, credit is the “Trust or confidence in a customer’s ability and intention to pay at some future time, shown by allowing money or goods to be taken or services to be used without immediate payment.” Because money acts as the intermediary for capital-exchange, it is typically money that is credited to a person or group. Thus, capital, money, and credit become intricately intertwined by their very nature. When one individual has surplus capital, he can credit that to another individual who will pay him back at a later date, typically at some rate of interest, using money. Take for an example a man who wishes to have new the pipes replaced in his house. The man hires a plumber to do the work and credits to him $1,000. The professional plumber is given the money before he completes the work based on the trust that the “creditor” has in the professional’s ability to complete the work for which he is hired. Once the work is completed, the capital that the worker was credited is now “paid for” with his labor. The pipes and labor are sold for money that is credited. Money, thus, represents that capital (pipes) and the labor but is not the capital itself.
Some have termed money “financial capital,” but this is misleading. While money can come to abstractly represent capital, it does not become capital. $100 is an abstract place-holder for a certain amount of capital. Capital, however, remains abstract. We trade capital in the form of commodities. Where capital is abstract and can represent anything that is produced by human labor from the land, the commodity refers to a specific quantity and quality of capital. For this reason, $100 can represent some amount of capital, but it tells us nothing of what that capital is or how money comes to represent it. External economic indicators which cause the price of commodities to change is what determines how much that $100 is worth. It could be worth 100 double cheeseburgers, a set of cheap tires, or a few shirts and a pair of jeans. These are each different commodities but are, at the same time, all a form of capital, that is a produced good that is manufactured using land and labor. The paper of money may be worth something but that will be quantified using these external economic indicators not the arbitrary amount printed on its surface. A $100 bill represents $100 worth of capital but the bill’s capital is not worth $100. The paper, cotton, and ink constitute the actual commodity form of that bill’s capital. And this commodified capital is not likely to be worth $100 based on economic indicators like supply and demand. When we discuss credit, we are discussing the lending of capital whose abstract qualities are quantified concretely as money.
The history of credit, thus, becomes the history of the economic evolution of the lending practices of those who possess commodified or monetized capital, land, or labor and how this lending effects the lender, borrower, and the greater community in which the economic activity takes place. This means including entrepreneurship which can include capital investment or credit lending as the fourth factor of production. Together these four factors underlie the basis for credit and as their function changes throughout history, so too has the face and shape of credit. Beginning in the feudal era, we will see that credit was based on religious decree of credited land by a lord to a serf but that this has evolved to the point that credit cards are frequently used to credit money to a business in order to procure commodities quickly and easily. The movement from the communitarian form of credit to the individualistic form used today is the result of larger cultural shifts that occurred over the last 500 years. Investigating these in the course of the analysis of credit throughout American history becomes exceedingly important and relevant.
Throughout Western history, the nature of credit was intricately linked to the dominant sources of capital and the cultural edifices that determined their purpose. Until the rise of the modern era, one’s labor or the needs, the land upon which they lived, and resources such as water, food, and wood for burning were primary sources of credit, not money. Leah S. Glaser of the Virginia Center for Digital History hosted by the Miller Center of Public Affairs of the University of Virginia, documents the economic structure of Europe during the Middle Ages in her essay “European Economic Life and Slavery in the Colonies.” She tells us that prior to the fifteenth century, Western Europe’s economy was agrarian with a system of feudalism instituted for pragmatic and political purposes (Glaser).
In this economic and political system, wealthy “lords” ruled over certain territories which needed to be farmed and cared for. Peasant farmers called serfs and their families were credited land upon which to live prior to the birth that existed on the lord’s territory. This was part of the legal system of the Middle Ages which was governed under a Catholic ideology which shaped all facets of culture including those political. One was born into a specific family based upon God’s will. The monarchs were born because into the family of political leaders because God had ordained for them to rule, lords gave birth to children that would inherit lordship as part of Divine decree, and serfs belonged to the land in which they were born and the lord to which they served as a result of God’s will.
Because credit is so intricately linked to the productive agency of the serfs who toiled on the land in order to produce their own sustenance and that of the lord, a further examination of the evolution of the economic agency of the working class is useful. In Chapter 5 of his A Worker Looks at History, Mark Starr identifies three types of workers that have emerged throughout history. The first is the slave whose autonomy and freedom is absolutely abolished; he is forced to labor without consent under the hand of a master who owns him as if he were property. As mentioned above, another type of worker is the serf which exists in feudal systems such as that which dominated Western Europe during the Middle Ages. The slave belongs to the master; the serf belongs to the land which is owned by the master. Of particular utility, is Starr definition of the four main characteristics of the serf:
“(1) Unlike the slave [the serf] could not be sold. He was fixed, not to an individual, but to the soil, and he could not leave his birthplace, give his daughter in marriage, or apprentice his son, without his lord’s consent. Like the slave, he had no fear of competition or unemployment, and his livelihood was secure. (2) His political status was low, like the slave, and his feudal lord’s word was his law. […] (3) The serf did not sell his labour—power or receive any wages. He owned, subject to certain restrictions, the means of production, which consisted at that time of the land; and the labour he had to put in upon his lord’s estate stood out clearly and distinctly as unpaid labour. (4) Like the slave, the serf had a chance of obtaining individual freedom. For he could escape into the town and become a wage—worker in the guilds […] or he could get his services changed into payment in kind or in money, and become a tenant—farmer” (Starr).
The third type of worker is the wage-worker which is a byproduct of capitalist production. Unlike the slave or the serf, the wage-worker is viewed by the law as equal to his employer and chooses if, when, where, to whom, and in what way he will sell his labor for a wage. Throughout history, slave-based societies in which the slave was credited essentially nothing, had his basic dignity stolen, and was forced to labor with the threat of murder if he did not evolved into feudal societies in which the lord-and-serf relationship replaced the bond between master and slave and finally into industrialized, capitalist societies in which workers are free to labor if they choose and in what way. Thus, as we move from feudalism into capitalism, the nature of credit follows historically from a feudal variety in which serfs are credited the land in which they inhabit by virtue of their birth and in-so-far that they become servants of the lord lacking the autonomy of a free person toward one in which individuals are free to credit their own monetized capital to others using plastic cards. The nature of these distinct forms of credit was determined by external that limited the freedom of the serf before he was even born and give the American consumer the freedom to consume as readily as he wishes, even into debt if he so chooses. The movement toward freedom of labor that follow the movement from feudalism to capitalism also includes the establishment of the right to use credit by all members of society. While beneficial in many regards, capitalist credit, nonetheless, when granted in risky situations can bring about economic crises and the collapse of financial institutions.
The feudal mode of economic production is rooted in the larger cultural schema defined by the Middle Ages. Here, monarchs were considered divinely ordained rulers while the Catholic Church and its religious dogmas dotted every inch of the European territory. The political kingdoms were superseded by spiritual ones; economic production was based on the elevation of Catholic institutions through the collection of large amount of wealth; religious practice was limited to Catholicism with the threat of torture or execution for non-Catholics. In short, the Middle Ages was structured by the Catholic Church. The serfs were indentured to the land because God choose for them to be while the lords were free because of Divine decree. As science evolved and radical Protestant faiths challenged Catholic dominance, however, the culture of the Middle Ages which centered on religious observance, traditionalism, agrarianism and communalism would be replaced by a modern culture in which rationality and science would be deified, the traditions of old would be replaced by a focus on the present and an ideal of progress, industrial development would overthrow feudal and agrarian practices, and nationalism and globalization would come to challenge communal doctrines.
Jared Rubin of Chapman University tells us in his “The Printing Press, Reformation, and Legitimization” that the roots of the Industrial Revolution and the economic and political dominance of the West originated between 1450 and 1550. During the printing press was invented, the Protestant Revolution began, the Renaissance reached its height, and the Americas were discovered. Each of these facilitated the movement from feudalism toward the modern age. As Rubin points out, the use of the printing press facilitated the Protestant Reformation undermining Catholic authority and influence. From these events would come the 17th century rationalist philosophies of Descartes, Berkeley, Leibniz, and Malebranche in which the use of reason would be employed to try to prove the existence of God. Empiricist David Hume and other Enlightenment philosophers would illustrate the folly of this endeavor and espouse a radical atheism and secularism that would inspire the rise of a new modern culture to replace the old and antiquated culture of the Middle Ages. As Friedrich Nietzsche would write in his The Gay Science in 1882, “God is dead and we have killed him.”
Philip Irving Mitchell, Director of the University Honors Program and Associate Professor of English at Dallas Baptist University defines some of the most important characteristics of this new culture. Several of these are pertinent to the development of a mode of production that would transform the four factors of production and demand new uses and implementations of credit. These include new sciences and technologies that facilitated the rise of the nation state, the replacing of agrarian, feudal political economy with a the more industrialized mercantilist capitalism, and globalization following the discovery of the Americas and a resulting colonialism (Mitchell). As Jürgen Habermas points out, the modern age was also marked by a new time consciousness. He tells us that throughout history, the term “modern” has been used to defame the past and distance the present from it. It is a signifier that the age in which one lives is better than the past. There has been progress. Habermas defines this new time consciousness as “the exaltation of the present.” Coupled with an ideal of progress that, as Matt Herring of The Economist states, is doomed from the start, the modern era is marked by the transformation of the agrarian based feudal societies in which tradition and religious superstition and dogma were esteemed. What emerges are new sciences and technologies that facilitate industrialization to the point that feudalism lacks its former utility while a deeper understanding of the world beyond religious belief grows amongst the general public and a globalizing tendency that demands new forms of capital and credit.
During the feudal era, means of communication and transportation as well as the lack of industrialized, urban centers contributed to a heavily agrarian Europe in which national borders were not inexistent but less dominant. As industrialization increased throughout the modern age culminating in the Industrial Revolution of the 18th and 19th centuries, urban centers began to grow as factories were built, former serfs became wage workers moving to the city to find work, and lords and merchants became part of the growing bourgeoisie which owned the factories. The growth of large urban centers and the development of new technologies that made international and trans-continental communications and transportation easier, the nation state began to solidify almost naturally. It was believed in the early years of capitalism that a nation state must become more wealthy and powerful than its neighbors. Thus, these nations embraced mercantilism which refers to a political and economic doctrine that holds that the purpose of the nation state is to amass wealth and power by increasing exports and limiting imports in order to amass a large amount of gold, silver, and other bullion. This political economy, thereby, demands a strong central government that can support economic commerce with other nations (LaHaye). Unrestrained, this economic commerce became colonialism.
The Stanford Encyclopedia of Philosophy defines colonialism as “a practice of domination, which involves the subjugation of one people to another.” For example, when European powers entered into Africa and claimed it as their own, they became colonizers. At that point, they took control of all of the resources of the land including the people. These “colonized” became slaves that were taken across the Atlantic Ocean to the Americas and Europe. This policy of colonial subjugation and enslavement was motivated part by the usage of mercantile credit. Because the purpose of mercantilism is to create a wealthy and powerful state, there is no objection within the doctrine to amassing that wealth and power through genocide, war, slavery, imperialism, or other colonial activity. Of course, if there is not sufficient capital to finance these colonial endeavors, then there is a limit to how much power and wealth can be amassed. In other words, as the cliché goes, “you must spent money to make money.” But that money spent doesn’t have to technically exist; in fact, it could be predicated upon the existence of future monetized capital and the interest generated from it.
The earliest form of mercantile credit was very rudimentary. Before the rise of banking institutions in the 18th century, British merchants who bought the produce produced by slave labor were the creditors of the slave trade. In a cyclical manner, the British merchants credited the slave traders for the products of the slave’s labor by buying produce that would be produced by the slaves after their enslavement. This decentralized structure of mercantile credit became more defined with the rise of the British banks which began financing the slave trade using credit. They didn’t buy produce that didn’t exist; they invested money into a business venture with the promise that there would be a return-on-investment. In this way, colonial activity financed by credit became a lucrative means of raising bullion within Britain and colonialism financed by credit became one of the earliest uses of capitalist credit in world history (Walvin).
In this way, mercantilist philosophy permits and encourages colonial activity such as the Trans-Atlantic slave trade, the displacement and genocide of indigenous peoples within the Americas, and other such atrocities which were made possible with mercantile credit. Of course, the modern age was also defined by rise of representative democracy and an increasing focus on the dignity of the human person. Liberty, autonomy, equality, and fraternity were key virtues of the Enlightenment (Mitchell). That mercantilism failed in upholding these values meant that a new evolution would be needed. Of course, most products are eventually sold with a “new and improved” label sooner or later. Remove colonial activity and absurd notions that hoarding bullion (rather than spending it on the infrastructure of the State) and you began to move away from mercantilism and toward a more just capitalist system.
Despite the faults of colonialism, it was an important illustration of another similar modernity development: globalization. Noam Chomsky defines globalization very simply in its technical capacity as “international integration, economic and otherwise” (Chomsky). Such integration can be unequal wherein one group of people colonizes another to steal their resources and exploit their labor, as during the mercantilist era, or it can be an equal and just endeavor in which people from all portions of the globe work together as autonomous moral agents deserving respect and dignity. Depending upon the direction globalization takes, whether toward a just or unjust world, determines the legally permissible manner in which credit can be granted.
 For more on the factors of production, the Federal Reserve Bank of St. Louis had a podcast entitled “Factors of Production” released as part of their “The Economic Lowdown Podcast Series” which can be found here: https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-2-factors-of-production