Thursday, August 14, 2008


(Week 3 - Thursday Aug 14)

There have been many reports in the media which document the financial distress in people's lives that often accompanies the use of credit cards. Is there perhaps, dare I call it, a "redemptive" side of the credit card question? If we can approach our experience with their use with sufficient awareness, it is possible, in my view, that it may yet be turned to good account.

The emergence of credit cards in people's lives can serve as personal view into the inner workings of the financial system. In earlier times people lived a daily existence that was far less immersed in the details of money. The business of banking was some mysterious affair that took place behind the temple-like facade of a building downtown. The average person made only a rare visit there to borrow a few dollars when times were tight. Many lived out there lives without making the trip at all. They mostly grew corn, built their houses and raised their families.

Now we carry around the keys to the banking system itself in the plastic cards in our wallets. At one time, the decision to create and issue money was made by gray men in paneled rooms after sober deliberation. Today, we the consumer routinely cause vast quantities of money to be created and put into circulation very quickly, often on mere impulse, at the cashier's counter. That we don't realize it doesn't change the fact of its occurrence.

If we take care to track the effects of our use of the card through our monthly statements, it is not difficult to see that the high charges for "interest," fees and penalties on that newborn money quickly absorbs future potential buying power, thus creating a self-fulfilling need to create and bring into circulation ever more quantities of money (increasingly not for discretionary items, but for gas and groceries). The vicious cycle of "debt" expansion is thereby accelerated, and its workings laid bare before our eyes.

At length we are drawn into the revolving-door trap of making minimum monthly payments. Now we are working to pay only the "interest," fees and penalties, and making little, if any, headway in paying down the loan. When we finally stumble and fall on the minimum-payment treadmill, bankruptcy is the next step. This financial dead end has been the natural tendency of the money-issuance-by-private-bank-loan principle all along, particularly since its formal institutionalization in the Federal Reserve Act of 1913.

Much economic travail has transpired under its influence, but until recent decades it has been prevented from running completely amok by the humanity of bankers themselves. This will be a strange saying to some, and it is not to suggest that bankers have always been beyond reproach in their dealings (certainly they have not), but it is significant that at the point of the credit card loan transaction (and other practices in modern banking) the banker is no longer there. The human element has been removed, and now it is between us and the machine.

The credit card phenomenon is running amok as one aspect of finance that is conducted virtually completely via electronic means. Both the financial profession and the people it serves have been shoved equally aside, but it is alike in both their interests to get back together and start talking to each other. That is the critical lesson to be learned from our experience with the credit card.

If we have the wit to see it, the credit card crisis constitutes a unique opportunity for people to get a close look into the workings of the adverse principle at the core of the monetary system from their own experience, and come to a reckoning with their own part in it. We all have something to take responsibility for. The respectful dialogue that could rise out of that epiphany is the first step in implementing a solution that goes to the heart of the system.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.