Plastic Money...?!?

Many of us use credit cards, but only a few know its history and its existence. Let's try to find out the birth and bringing up of Credit Card - a powerful and significant financial tool in today's global economy...!

What is credit?

The word credit basically means giving someone time to pay. Whenever you sell something to another person and they promise to pay you back later, you are giving them credit. In effect, you are loaning a sum of money, which will be repaid to you some time in the future.

The word credit actually comes from Latin, the old Roman language. The Roman word ‘credere’ meant trust. In other words, when you sell something to another person but give them time to pay, you trust them to pay you back.

In many cases, the person loaning the money or giving credit will make a small charge - usually a percentage of the total - each month or each year until the money is repaid. This fee is called interest.

How long has credit existed?

Credit was first used by the ancient civilisations of Assyria, Babylon and Egypt around 3000 years ago. It spread to Europe as trade routes developed - putting people from these Arab lands in contact with Europeans - and really took off during the Middle Ages.

In the 12th century, large trading fairs were commonplace in Europe and people travelled from far and wide to buy and sell things. Traders went from one fair to the next, so credit was extremely important to them. They use credit to buy things in one place and then get the money to pay for them in another by selling the goods at a profit. In Italy, trade agents were soon to be found at each large fair. Their job was to record the details of this constant round process of buying, selling and repayment.

During this period, the idea of paying in instalments gained widespread acceptance. However, it was a form of payment that was only available to people who could afford it. Only those with a regular income could be confident of their ability to pay for things over a period of time. Such people were mostly traders - the growing middle class.

In 1730, a merchant called Christopher Thornton, who lived in Southwark, London, published an advertisement to attract customers. It read 'rooms may be furnished with chests of drawers or looking glasses at any price, paying for them weekly, as we shall agree'. Over 250 years later, you will find the same idea being used by all the large furniture retailers to encourage their customers to 'buy now and pay later'.

By the 14th century, the bill of exchange - the forerunner of modern banknotes - was established on the understanding that gold or silver was available at all times to cover its value. Only in the 17th century did banks and governments begin to issue paper money with a greater face value than they had gold or silver to guarantee it.

Sellers put up with not being repaid for quite long periods of time. The famous Wedgwood furniture firm was not repaid by a London buyer for three years. In part, this was because the banks changed very little interest - usually about 2% per year. Interest rates above 5% were banned until 1832.

Cheques were not in general use until after around 1875. Before then, debts were settled by about one-third cash and two-thirds bill of exchange. But the use of cheques increased quickly towards the end of the 19th century as the number of bank branches grew. This made it easier to transfer money between traders in different parts of the country and increased people's use of the credit provided by the banks.
 

Well, with this history now we learnt how and why the Credit term was used. It certainly has the roots of today’s Plastic Money or Credit Cards for that matter. Tomorrow we will see how this Credit was being used in the 19th Century.

Stay tuned and keep learning...!