A Piece of the Action

How the Middle Class Joined the Money Class

Joe Nocera

• Publisher: Simon & Schuster
• Year: 2013
• ISBN:
  9781476734798
• Topic: Business
• Subtopic: Business General
• Index: Business

Winner of the Helen Bernstein Award for Excellence in Journalism
One of Business Week 's "Ten Best Business Books of the Year" When it was published in 1994, A Piece of the Action was wildly acclaimed by Fortune, The Wall Street Journal, authors Michael Lewis and Brian Burroughs; it won the Helen Bernstein Prize and was a national bestseller. Joseph Nocera describes the historical process by which millions of middle class Americans went from being savers—people who kept their money in the bank, and spent it frugally—to being unrepentant borrowers and investors. A Piece of the Action is an important piece of financial and social history, and with a new introduction, Nocera's 2013 critique of the uses of the revolution is a powerful warning and admonition to understand what is at stake before we act, to look before we jump.

Part I

THE SHAPE OF THE WAVE

CHAPTER 1

The Drop

September 1958

AMERICA BEGAN TO CHANGE on a mid-September day in 1958, when the Bank of America dropped its first 60,000 credit cards on the unassuming city of Fresno, California. That’s a word they liked to use in the credit card business to characterize a mass mailing of cards: a “drop,” and it is an unwittingly apt description. There had been no outward yearning among the residents of Fresno for such a device, nor even the dimmest awareness that such a thing was in the works. It simply arrived one day, with no advance warning, as if it had dropped from the sky. Over the course of the next twelve years, before the practice of mass card mailings was outlawed, banks would blanket the country with 100 million credit cards of one sort or another, and it would always have that same feeling. It would always seem as though those first hundred million credit cards had simply fallen from the sky.

Not that anybody made much of the drop back in 1958. Because this was the first test of its BankAmericard program (as it was called), the Bank of America purposely kept things low-key. The Fresno Bee managed to sandwich six paragraphs on the bank’s new credit card program on an inside page between the business briefs and the livestock report. The headlines that day centered on the outbreak of fighting between Communist and Nationalist Chinese forces near the island of Quemoy; in Fresno, the lead local story was about a proposed reorganization of the police and fire departments. The Dow Jones Industrial Average began the day at 524, in the midst of a decade-long bull market. But since we were still a good twenty-five years away from the time when the stock market would be among the daily concerns of the middle class, nobody paid much attention to it.

Like so many subsequent moments in the evolution of personal finance in America, it was years before the significance of that date became clear—years before the Bank of America would celebrate its original BankAmericard as the first all-purpose credit card to take root; when it would note with pride its history as the precursor to Visa, one of the two giant credit card systems; when it would draw attention to its role in helping to make credit cards the most ubiquitous financial instrument since the check, an unambiguous commercial success story. Thirty years later, when most of us had developed feelings about credit cards that were nothing if not ambiguous, the bank even used the anniversary as the centerpiece of a marketing campaign.

As it turns out, the Fresno drop also marked the beginning of something larger: the first stirring of what would become a full-scale financial revolution in America. A money revolution, you might call it. Here began the trickle of what we now call financial products, aimed largely at the middle class, that would become, by the 1980s, an avalanche. Here marked the first inkling of the gradual but enormous changes in the financial habits and assumptions of the middle class. Here is when a simple, ordered, highly regulated world began to evolve, for better or worse, into an immensely complicated universe. Though this transformation wouldn’t become apparent for several decades, and though it continues to this day, this is when the American middle class began to change the way it thought about, and dealt with, its money.

* * *

It’s oddly appropriate that the Bank of America wound up being the instigator of the credit card—and, by implication, everything that followed—for the bank was a unique institution in the 1950s, in many ways a harbinger of what was to come. Until it was finally overtaken in 1982 by Citibank, it was the largest bank in America, and indeed, for much of its existence, it was the largest bank in the world. What made it unusual was the route it had chosen to get there. Although every bank took in deposits from consumers and offered checking accounts, most of them were not especially interested in serving their middle-class depositors. There was no particular need to be interested. By law, all banks paid the same interest on passbook accounts, the primary vehicle for middle-class savings. In the 1950s, that rate never climbed above 3 percent. Checking accounts offered no interest at all, again by law. Other alternatives for middle-class savings were largely nonexistent. Since there was nothing to differentiate one bank from another, most people chose the bank that was most convenient. To the extent that banks bothered to do anything that might be considered marketing, such efforts usually consisted of offering, say, a free toaster to customers who opened up a Christmas Club account. At most banks, such accounts also lacked interest payments.

It wasn’t just the law that held bankers back; snobbery was at work too. Up until the late 1970s, when alternatives to passbook accounts finally forced banks to pay attention to their middle-class customers, most bankers looked down their noses at such business. Within the culture of banking, it was corporations that mattered, not consumers. Making loans to large companies was the most prestigious activity in all of banking; making consumer loans, on the other hand, was considered slightly disreputable, and such loans were ceded to finance companies, which were also considered slightly disreputable. This was so even though, as Bank of America executives were fond of pointing out, bankers were quite happy to lend large sums to finance companies, which would relend that money at far higher interest rates to people in need of short-term loans. This distinction between a bank’s loan customers and a finance company’s loan customers, which had less to do with the law than with institutional prejudice, was nonetheless one of those unwritten but inviolable lines of demarcation that then characterized American finance.

Bank of America was different. It was a bank with the mentality of a finance company and proud of it. It eagerly embraced the customers other banks disdained, and in that embrace it found enormous success. The bank had been founded in 1904 by the legendary A. P. Giannini, the son of an Italian immigrant who had settled in San Jose, California, forty-five miles south of San Francisco. Giannini was a particular American archetype: the populist entrepreneur. A big, blustery, blunt-spoken man, he had both predatory instincts and a common touch, along with an instinctive knack for commerce. At the age of fifteen, he joined his stepfather’s produce wholesale company, and helped build it into the dominant company of its kind on the West Coast. At the age of thirty-four, he began his second, more enduring career as a banker. His explicit goal in starting his bank was to make money available for “his” people in and around the San Francisco area, many of whom were the Italian immigrant farmers in the Santa Clara Valley who sold their fruits and vegetables to Giannini’s produce company. He named his new institution the Bank of Italy.

To a remarkable degree, Giannini held to that original goal, although his definition of “his” people expanded as his ambitions did. Long after the bank had delved into other businesses, like corporate lending, Giannini never forgot that it had been built by attracting deposits from, and lending money to, “the little fellow,” as he called his customers. He never let anyone else forget it either. He was full of aphorisms promoting the essential goodness of the common man and the wisdom of lending to him. “The little fellow is the best customer that a bank can have, because he is with you,” Giannini once told a congressional committee. “Whereas the big fellow is only with you so long as he can get something out of you; and when he cannot, he is not for you anymore.” He saw clearly that by making thousands of small loans, rather than fewer but larger commercial loans, the bank’s own risks were reduced. He understood that loyalty bred loyalty. After the San Francisco earthquake of 1906, when other banks in the area wanted to enforce a six-month moratorium on loans, Giannini went down to the pier, used a plank and two barrels to set up a desk, and began to lend money to virtually anyone who asked for it. By 1918, fourteen years after it was founded, the Bank of Italy was the fourth largest bank in California, with $93 million in assets. Three years later, after an acquisition binge, it was the state’s biggest bank. By 1945, it had a new name, Bank of America, and assets of $5 billion. It had become the largest bank in the world.

In focusing on “the little fellow,” Giannini was a good sixty years ahead of his time; when Citibank finally grew large enough to overtake Bank of America, its surge was largely the result of its own willingness to chase after the middle class. But Giannini had another, larger vision of banking in America, which he pursued during the second half of his life with a relentless single-mindedness. He saw a nation where a handful of large banks would have branches all across the country, and a banking system that would allow customers to use branches not only to make deposits or obtain loans, but to buy insurance and conduct all their financial business. In this, too, Giannini was ahead of his time; not until the late 1970s, after the regulatory barriers separating financial institutions had begun to crumble, did Giannini’s idea of a financial “supermarket” come into vogue.

The trouble with being ahead of your time is that very few people are out there with you. So it was with Giannini. No matter how hard he pushed for his grand vision, he met fierce, unyielding resistance. At every turn, he ran headlong into a different, more powerful strain of populism: the country’s deep and abiding suspicion of the power of bankers. It is that fear of bankers—a fear that goes back to America’s agrarian roots, when the annual preharvest bank loan was as vital to a farmer’s well-being as the weather itself—that has largely shaped federal bank policy for most of this century. Bank laws have been driven by the idea, often unspoken, that small banks are more benign than big banks, and that local bankers, living and working in a community, will react more favorably to local borrowers than will larger, more remote institutions. This is why, to this day, there is still no bank in America that can truly be said to operate nationwide and why the country has closer to 11,000 banks than the 1,000 or so Giannini envisioned.

This fear of bankers infuriated Giannini. He saw it as fundamentally irrational, a product, as he once described it, “of horse and buggy minds.” It was incomprehensible to him that the government would allow nationwide department stores but not nationwide banks. More than that, it offended him that people would fear his ambitions, for it so deeply violated his sense of himself as a paternalistic force for good. He lashed out at state and federal regulators intent on curbing his expansionist appetites. Usually, he lost. In 1927, Congress passed the McFadden Act, the first of the modern bank laws, which outlawed interstate banking. According to a number of accounts, the law was aimed squarely at Giannini, who by then owned a bank in New York. After President Franklin Roosevelt ordered his famous bank holiday in 1932, regulators came very close to refusing to allow Bank of America to reopen with other banks, an action that would have destroyed it. The Depression only made Washington even more wary of banks, and the result was the Glass-Steagall Act, which created strict barriers separating banks from the likes of insurance companies and investment firms. By the time Giannini died in 1949, at the age of seventy-nine, his bank, like every other bank in the country, had seen its options drastically pared back and its turf much more narrowly defined.

Ah, but what turf it was! Here was Bank of America’s singular advantage: Its home base was California—sunny, glorious California, the second-largest state (in terms of land mass),¹ the fastest-growing, and after World War II especially, the most dynamic. Perhaps most important of all, sunny, fast-growing, dynamic California was one of the few places in the country that allowed statewide branch banking. This was also something that had embroiled Giannini in bitter feuds with regulators; a California banking commissioner once called the idea of statewide branch banking un-American. But this time Giannini won. In New York, by contrast, branches were only permitted citywide, and in many states, such as Texas and Illinois, even that much was forbidden. In Texas, banks were allowed one physical location, and nothing else. Years later, after technology and urbanization began to make such rules archaic, disputes actually broke out over whether the installation of automatic teller machines violated the prohibition against branch banking.

Is it any wonder that Bank of America became the biggest bank in the country? With branch banking as its engine, operating in a state as big and as fast-growing as California, how could it not have become the biggest bank? Between 1940 and 1960, California more than doubled in population, growing from 6.9 million to 15.7 million people, becoming the nation’s most populous state. During those same years, Bank of America’s sprawling branch system rose from fewer than 500 branches to more than 700. Newcomers streaming into the state could usually find a Bank of America branch just around the corner.² And because the shadow of Giannini still hung so heavily over the bank, it had never lost that obsessive focus on its constituency, which it now defined as the broad middle class that had begun to spring up after World War II. At the Bank of America, the branch manager was king; everything headquarters did was aimed at making it easier for him to attract customers and to give them what they wanted. And what did those customers want? They wanted credit.

* * *

Consumer credit—that is, the taking on of personal debt—has always occupied a peculiar place in the American psyche. On the one hand, there is no aspect of personal finance more likely to inspire anxiety and even fear. At any given moment in our history, one can find ringing denunciations of consumer credit and “usurious” interest rates, calls for reform, worries that things have finally gotten out of hand. “Rather go to Bed supperless than rise in Debt,” wrote Ben Franklin, and Americans have been echoing that sentiment ever since. Credit historian Lewis Mandell points out that in the early 1800s, many states, upon being granted statehood, passed a usury ceiling, rolling back interest rates, as their very first law. Among the reasons banks originally refused to make consumer loans widely available was out of a belief that too much consumer credit was dangerous and that people needed to be protected from themselves.

On the other hand, among the reasons finance companies prospered was because they saw this refusal by banks to make personal loans as a yawning void, which they rushed to fill. Despite the denunciations, despite the free-floating anxiety, Americans have always borrowed money to buy things—if not from a bank, then from somebody: from a finance company or a credit union or a department store or a loan shark, for that matter. There isn’t another Western country that has relied so heavily on consumer credit; between 1958 and 1990, there was never a year when the amount of outstanding consumer debt wasn’t higher than it had been the year before.

Years later, a retired Bank of America executive could look back on his lifetime in the credit card industry and say proudly, “Consumer credit built this country.” Whatever one’s feelings about personal debt, it is difficult to disagree with this assertion. The rise of the consumer society, in particular, would not have been possible without a widespread willingness to take on personal debt. How could General Motors have sold its first mass-market automobiles without that other mass-market innovation, the auto loan? How could Singer have sold sewing machines without extending credit? How could Sears have sold refrigerators?³ Even during the Depression, credit was important; in many ways, it was the grease that oiled the economy. People asked for credit because they didn’t have any choice; merchants granted it because they didn’t have any choice. These were painful, discouraging transactions for everyone involved—a constant reminder of how tough times were and how close people were to the brink.⁴

Well into the 1950s and beyond, the Depression remained the nation’s dominant economic memory. It had been such a searing experience that people who lived through it adopted a set of financial habits and attitudes that would last long after the event itself had receded into the country’s subconscious. The ethos of thrift was one natural result of the Depression experience. So was an aversion to financial risk. That’s why so few people even thought about the stock market and why the vast majority of Americans were content to keep their money in bank passbook accounts. Such accounts were federally insured, which meant they were secure. In the wake of the Depression, security was what mattered.

The desire of the middle class to take on debt in the 1950s was the first crack in the relentless financial logic of the Depression. For the burgeoning middle class, seeking a loan was no longer an act of desperation but one of cautious optimism, no longer primarily about need but about want. Loren Baritz, an historian of the middle class, reports that between 1947 and 1959, the percentage of families earning under $3,000 dropped from 46 to 20, “while the percentage of families earning between $7,000 and $10,000, a high middle class income, rose from 5 to 20 during the same period.” “The onslaught of consumer goods,” as Mandell calls it, had begun in earnest: televisions, refrigerators, new models of automobiles, and a dozen other modern conveniences. People wanted these things. The logic of the Depression said they should go without until they had saved the money to buy them. But Americans were tired of going without. So rather than wait and save, they took out personal loans or bought on the installment plan. And when they saw that nothing bad happened as a result, they did it again, adding the television loan to the refrigerator loan to the auto loan. “Of all families within the income range from $3,000 to $4,000, 48 percent had installment payments to meet,” noted economist John Kenneth Galbraith in The Affluent Society, his best-selling attack on the consumer society Americans were greeting with such enthusiasm. “For nearly a third of those,” Galbraith added ominously, “the payments commanded more than a fifth of the family income before taxes.”

Thus did Americans begin to spend money they didn’t yet have; thus did the unaffordable become affordable. And thus, it must be said, did the economy grow. Between 1945 and 1960, consumer credit simply exploded, going from $2.6 billion to $45 billion. A decade later, it stood at $105 billion. It was as if the entire middle class was betting that tomorrow would be better than today.

Almost alone among banks, Bank of America understood this growing optimism and fed off it. Like other forms of credit in other times, installment credit was controversial in the 1950s. In the first eight years after World War II, as installment loans grew by an astounding 700 percent, there was increasing concern in Washington and among many economists that personal debt was rising too fast. “Can the bill collector be the central figure in the good society?” wrote Galbraith, who, like many intellectuals...

Table of contents

• Cover
• Dedication
• The Unintended Consequences
• Introduction: The Money Revolution
• Part I: The Shape of the Wave
• Part II: Ground Zero
• Part III: Bulls and Bears
• Acknowledgments
• About Joseph Nocera
• Notes
• Selected Bibliography
• Index
• Copyright