By Joseph Nocera

America began to change on a mid-September day in 1958, when 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 dropped from the sky. Over the course of the next 12 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 100 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), 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 around Communist shelling of Nationalist Chinese forces on the island of Quemoy; the lead local story was about a proposed reorganization of Fresno's 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 25 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 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 ubiquitious financial instrument since the check, an unambiquous 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.

The precise date was Thursday, September 18, and if it marked the rise of the bank credit card in America, it also marked the beginning of something larger: the first stirring of what would become a full-scale financial revolution. 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 was the first inkling of the gradual but enormous changes in financial habits and assumptions of the middle class. Here was 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 another 20 years, 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.

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. The 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. For much of this century, many banks simply refused to make consumer loans widely available out of a belief that too much consumer credit was dangerous, and that people needed to be protected from themselves.

On the other hand, the rise of powerful finance companies such as Beneficial Finance and Household Finance, was the direct result of this refusal by banks to make personal loans. 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? Even during the Depression, credit was important; in many ways, it was the oil that greased 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.

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 the 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 passbook accounts. Such accounts were federally insured, which meant they were secure. In the wake of the Depression, security is what mattered.

The eagerness 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 less than $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." "The onslaught of consumer goods," as Mandell calls it, had begun in earnest: televisions, refrigerators, new models of automobiles and a raft of 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.

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, in 1970, it stood at $105 billion. It was as if the entire middle class was betting on the come -- betting that tommorrow would be better than today.

Almost alone among banks, Bank of America understood that growing optimism and fed off it. This was not surprising, for Bank of America was the one big bank in the country that embraced its middle-class customers, a stance that went back to its beginnings in 1904. Its founder, a big, blustery, blunt-spoken man named A.P. Giannini, was really the nation's first "consumer banker," and his single-minded focus on the "little fellow" (as he called his customers) became such an ingrained part of the bank's culture that even Giannini's death, in 1949, could not shake it. His successors at the bank treated his beliefs as if they had been etched on tablets, handed down from the heavens.

Of course, they had good reason to: Over the years, Bank of America had been amply rewarded for its willingness to cater to its middle-class constituents. It took less than two decades after its founding for the bank to become the biggest in California; it took only another two decades for it to become the biggest bank in the world. Thanks to Depression-era bank laws, it was forbidden to cross state lines in pursuit of customers, but within California its reach was unimaginably large. By 1960, it had smothered the state with more than 700 branches, and was said to have a business relationship of one sort or another with a staggering two-thirds of the citizens of California. It was widely known as MotherBank.

Even though installment loans were controversial in the 1950s -- "Can the bill collector be the central figure in the good society?" wrote Galbraith, who, like many intellectuals, objected not only to the rise in debt but to the consumer mentality that spawned it -- Bank of America never flinched. People were asking for installment loans, so it would provide them. Even as the New York Times was editorializing that installment loans needed to be brought under control, and President Eisenhower was asking for authority to rein them in, the bank was setting up one installment program for television buyers and another one for refrigerator buyers. At one point in the 1950s, the bank had a $60 million portfolio made up mostly of $200 refrigerator loans. "People would come into the bank four and five times a year, whenever they needed extra funds," recalls Kenneth Larkin, a lifelong Bank of America executive who retired in 1984. "There was vacation. There were back-to-school clothes. There were the holidays. There was tax time. There were medical emergencies."

Larkin was the assistant manager of a branch in Bakersfield at the time, rising steadily through the ranks. This meant that like every other officer in the bank's sprawling branch system, a big part of his job was devoted to making small loans to consumers. Among the things he most remembers is how cumbersome it used to be to make a small personal loan. Every time a man came in to the branch to get a loan, he had to sit down with the loan officer and fill out his family history -- even if he'd just been there a few months before. The loan officer had to re-evaluate the man's fitness to get a loan. The man had to return to the branch with his wife to sign a note. Only then would the loan officer transfer the funds to the man's account. With that much effort needed to generate a $300 loan, it was difficult to make a profit, despite the volume of such business.

This was duly noted at the bank's San Francisco headquarters, and it led to several innovations in making personal loans available to the middle class. One wrinkle was called Timeplan, which created for the middle class something it had never had before: a line of credit. Under the plan, approved customers drew up to S1,000 -- and it was up to them to choose how much they wanted to borrow, and for what purpose. It was one of the bank's most popular loan programs.

And the other innovation? That was the credit card.

IT EMERGED FROM A think tank, a fact that suggests that some things had changed at the bank since the death of its beloved founder. Bank of America still saw itself as "an institution run in the interest...of the people it serves" (as Giannini used to phrase it), and still clung proudly to its role as the financial institution most closely in tune with "the little fellow." But in the fashion of many institutions that came of age in the 1950s, it began to operate in ways that were less instinctive and more rigorously managerial. Its ranks began to be filled with middle managers who wrote position papers and conducted studies. And for a time, at least, it had an in-house think tank -- "not an egghead group," its former leader insists, but a practical group, interested in divining which new products a bank customer might want and a bank might want to offer. It was called the Customer Services Research Department.

The leader of the group was a man named Joseph Williams, 41 years old, a Philadelphia banker so disenchanted with the way banking was done in the Esat, and so enamored of the philosophy of A.P. Giannini, that practically the first thing he did upon returning from Germany after World War II was drive across the country to San Francisco and ask for ajob at Bank of America. By 1956, when he convinced management that a small research group was the sort of thing a forward-thinking bank ought to have, he was among its growing corps of middle mamangers.

In theory, Williams and the six people in his department were supposed to be able to pursue any idea that struck their fancy. In practice, there was never any doubt that the bank's management expected to see a proposal for an all-purpose credit card. Three times before, the bank had begun to explore the possibility of issuing credit cards, most recently the previous year. A credit card clearly dovetailed with the direction the bank -- and the country -- was headed. Consumer credit was spilling out in every direction. Many Americans by then had a dozen or more different forms of credit: a gasoline card from an oil company, five or six department store charge plates, airline charge accounts if they traveled, installment loans for autos and refrigerators and maybe a loan or two from a finance company. In a holdover from the Depression, they also often had "an account" at the neighborhood pharmacy, the neighborhood grocery store and half a dozen other local stores. The value of a single card that could replace all those other forms of credit would be so instantly obvious, the bank believed, that not only would it be embraced by its current customers, but it would serve as a powerful tool in the bank's continuing quest to clasp ever more members of the middle class to its bosom.

Nor was Bank of America alone in thinking about an all-purpose credit card. This was a notion very much in the air by the late 1950s. On the East Coast, Chase Manhattan Bank was quietly preparing to issue credit cards, something it would do, with disastrous results, five months after Bank of America's Fresno drop. American Express, after much hesitation, was getting ready to launch its first charge card, after having given its upstart rival, Diners Club, an eight year head start. Diners Club in fact, had been the first charge card in America that could be used at more than one establishment. Its founder, a New York businessman named Frank X. McNamara, liked to say that he was visited with the crucial burst of inspiration one afternoon at a midtown restaurant when he finished lunch only to realize that he hadn't bought enough money to pay for it. As the name implies, Diners Club began life as a restaurant charge card, but even after it outgrew its origins, it was still aimed primarily at businessmen. Its appeal was convenience rather than credit, which it did not offer. (Customers were expected to pay their bills in full at the end of each month.) American Express, which would quickly dominate the "travel and entertainment" sector Diners Club pioneered, would stick to that same formula. But even without offering credit, Diners Club provided the conceptual breakthrough: It showed that one card could be used to buy different things at different places.

By the mid-1950s, in fact, there had been about a dozen attempts to create all-purpose credit cards. A number of small banks, eager to find a niche that would distinguish them from their larger rivals, had been the first to experiment with credit cards -- much to the annoyance of bigger banks: One early credit card experimenter was later described as "lowering banking's imaage by engaging in an activity more properly associated with pawnshops..." These early efforts invariably failed.

Being the good middle manager that he was, Williams studied those failures and came away encouraged. The other programs had been small-scale; Bank of America had a much larger canvas to work with. The other programs hadn't been structured properly; Bank of America would do it right. Williams had friends at Sears and Mobil Oil, and those friends secretly allowed his team to observe their credit operations. Out of this latter research, incidentally, came a number of the standard features of credit cards, features that have remained remarkably unchanged to this day. The idea of a 25-day grace period, a time during which customers could pay off their balances without facing interest charges, emerged from that research, as did the idea of charging 18 percent a year on credit card loans -- a figure that would be seemingly set in stone for the next 30 years, even as every other manner of interest rate fluctuated wildly. There was no black magic involved: The bank just assumed that if a 25-day grace period and a monthly interest charge of 1 1/2 percent (which amounts to 18 percent a year) were good enough for Sears, with its 50 years of credit experience, then they were good enough for Bank of America.

By the middle of 1957, Williams was making presentations to the bank's top management, and gearing up for a launch the following year. Every step was taken cautiously; reading the documents now, you can almost see the bank's new bureaucracy congealing around the plan. Fresno was chosen as the first test site partly because of its size -- with a population around 250,000 it offered the critical mass the bank thought necessary to make a credit card work -- and partly because a staggering 45 percent of Fresno's families were Bank of America customers. But at least as important was Fresno's relative isolation; if the card bombed, the bank reasoned, the damage to its reputation would be minimal.

To talk now to people who were there at the creation is to be impressed with something else -- something that takes you by surprise after all this time, even though it shouldn't. Today, credit cards are so commonplace that everything about them seems second nature: the physical feel of them, the way a transaction is conducted, the look of the statement that comes at the end of the month -- everything. But nothing was second nature then. Nothing about how credit cards should work was obvious. The credit card trailblazers like Joe Williams were making it up as they went along, groping for answers that didn't yet exist, learning a business as they were inventing it.

So invent it they did. They concluded, on the basis of nothing but their own intuition, that credit limits for the cards should range between $300 and $500. In that age before instant electronics, they came up with the concept of "floor limits" ranging from $25 to $100, which allowed the card holder to charge that much without the merchant having to call the bank to get approval. They decided that the merchant who accepted a BankAmericard would have to pay Bank of America 6 percent of the purchase price -- the "merchant discount," it was called, which was expected to be a crucial source of profit -- plus $25 a month for the "imprinters" the bank gave it. The bank had started using computers, so engineers were brought in to program them to perform such novel tasks as alerting the bank when credit card customers were spending more than their limit allowed. The bank's marketing staff assumed that advertising would have to be unsubtle and nonstop. ("The plan represented a new buying habit and therefore required heavy educational promotion," as the bank's in-house historian euphemistically put it.)

Most important of all, Williams and his group saw that a credit card could be used in two ways. It could be used either as a device offering convenience -- as a Diners Club card did -- or as a device generating an instant personal loan. Williams structured BankAmericard so that it would do both, depending on the card holder's preference. In hindsight, that is what made BankAmericard so different from any financial product that had come before it. It handed the keys to the customers. It was he or she alone who got to make the decisions about how, and when, to spend large sums of money -- and how, and when, to pay the money back. It could be used impulsively or carefully; frequently or sparingly; for emergencies or for shopping sprees. And then, when the bill arrived, it was he of she alone who decided whether to pay back the money all at once (with no interest), or in installments (with interest). The crucial point is that the customer was in control of financial decisions that had always before required the explicit approval of a banker of loan officer. One major reason previous credit card programs had flopped was that most banks feared giving their customers that much control. Bank of America had no such qualms.

Williams also had to grapple with a peculiar paradox, one that would crop up again and again in this early years. It's another one of those things we have tended to forget as credit cards have become commonplace: A successful credit card program requires the participation of not just customers but store owners as well. In fact, it requires thousands of store owners, all of whom have to be recruited with the promise that there will be enough card holders to make accepting the card -- and handing over 6 percent of the purchase price to a bank -- worth their while. At the same time the bank is recruiting merchants, though, it must also recruit card holders -- promising them that there will be enough merchants signed up to make carrying the card worth their while. It was a chicken-or-egg dilemma. Which came first, the customers or the merchants?

The "drop" was Williams' solution to this problem. Rather than recruit card holders, he decided to create them. He would mail cards to anyone who did business with Bank of America, free of charge. He fully expected that they would view the arrival of the card as a wonderful new service the bank was providing. If they didn't see it that way, Williams asumed, they would just toss it away.

Whatever the drawbacks of the drop -- as it turns out, there were many -- it had one overriding virtue. Fresno's shop owners knew for a fact that on the day the program began, some 60,000 people would be holding BankAmericards. That was a powerful number, and it had its intended effect. Merchants began to sign on. Not the big merchants, like Sears or Montgomery Ward, which had their own proprietary credit cards and saw the bank's entry into the credit card business as a form of poaching. Rather, it was the smaller merchants who first came around. Larkin remembers visiting a drugstore, hoping to persuade its owner to accept BankAmericard. "When I explained the concept of our credit card," he says, "the man almost knelt down and kissed my feet. 'You'll be the savior of my business,' he said. We went into his back office," Larkin continues. "He had three girls working on Burroughs bookkeeping machines, each handling 1,000 to 1,500 accounts. I looked at the size of the accounts: $4.58; $12.82. And he was sending out monthly bills on these accounts. Then the customers paid him maybe three or four months later. Think of what this man was spending on postage, labor, envelopes, stationery! His accounts receivables were dragging him under."

A store owner who accepted the card card was, in effect, handing his back office headaches over to the Bank of America. The bank would guarantee him payment -- within days instead of months -- and would take over the role of collecting from the customers. As for the bank, in addition to taking its 6 percent cut, the card was a way to get its hooks into businessmen who were not yet Bank of America customers.

Whenever you're trying to do something new in business, you have to make some assumptions that can't be tested beforehand. In the case of BankAmericard, some of the assumptions Williams made were clearly naive. One, certainly, was his belief that people would react to the arrival of that first card with equanimity; he never understood the emotional power of this new device, the way it would bring people's conflicting feelings about credit bubbling to the surface.

He missed something else, too. Williams was a Bank of America man through and through, but he'd never been a loan man at the B of A, which meant that his passionate belief in the goodness of "the little fellow" had never been tempered by the experience of lending him money. He'd never had the experience of looking a man who was behind in his payments straight in the eye, and asking him when he'd be able to start paying back the loan. He'd never had to order the repossession of a new car. One of the reasons an all-purpose credit card was such a revolutionary device was that it made the act of borrowing money so much more impersonal than it had ever been before; with cards coming in the mail, nobody was going to be looking anybody straight in the eye. Yet at the same time, it was much more dependent on the sheer good faith of the borrower, since there was no collateral. A subtle but important shift was taking place in the dynamic between lender and borrower, and Williams -- so busy struggling over the complicated details and so convinced that the BankAmericard was destined for instant success -- was oblivious.

Thus he wound up assuming that only around 4 percent of credit card users would get behind on their payments. That, after all, was the percentage of the bank's installment loan customers who were deliquent, and he saw no reason why credit card delinquencies would be any different. He also assumed, as the author of an in-house BankAmericard history would later report, that "collections would never be a problem" and that "everyone would love Bank of America." The writer added dryly: "All of the mistakes and problems that resulted, and extended themselves for a year and a half, were inextricably bound up in these...determinations."

THE FRESNO DROP went smoothly. More to the point, perhaps, it went quietly. "There wasn't a big parade or anything," says Williams, but there wasn't a great outcry either -- no ringing condemnations of the evils of credit, nor any of the loud protestations about unwanted credit cards that would come later, and would be such a hallmark of the early phase of the credit card business. More than 300 small shop-owners were signed up by the time of the launch, with more promising to do so once they were sure that people were using the card. Williams remembers that Florsheim Shoes -- another of those institutions tied to the rise of the middle class -- was the first chain to accept BankAmericard. The card was a novelty at first; just as Americans spent hours staring at the test pattern of their new TV, so did the citizens of Fresno gather around the check-out counter to watch someone pay with a BankAmericard. This was the 1950s, after all, a time of wonder at the miraculous march of progress. BankAmericard was part of that march.

The advertising campaign unveiled in Fresno was also a classic product of the 1950s, managing to evoke that guileless mix of ambition and innocence we've come to associate with that era. "Carry Your Credit In Your Pocket!" those first ads exuberantly announced. "Just One Payment To Make At The End Of The Month!" they added. "It's easy to know where your money goes when you see it there in black and white in one concise statement!" the copy read. "You can budget payments, too, if you wish and still add more purchases on your BankAmericard -- thanks to the flexible payment feature...." It's as if no one at the bank could conceive that there might ever be a problem with letting members of the middle class carry their credit in their pocket; as if a "flexible payment feature" posed no potential dangers or unintended consequences; as if everything asociated with having a credit card was good and wholesome and quintessentially American.

In fact, that is exactly what the bank believed. Throughout its long history of extending consumer credit, Bank of America had always made an implicit distinction between "good" credit and "bad" credit. The kind of credit it extended, of course, was the good kind -- the kind that made it possible for good, upstanding citizens to achieve the American dream. The kind that made the consumer society tick. The kind, as Larkin once said, that was based on "the inherent honesty of the great majority of people." This sentiment did not change just because the bank was now issuing credit cards.

Williams himself had an almost prudish view of his new device. He always saw the card as a device aimed at helping middle-class families -- a vehicle for making their life easier and better, just as the bank's other credit programs did. "The biggest thing a credit card can do is enable families to take advantage of sales -- to buy your skis in the summer and your barbecue grill in the winter," Williams says. "I wanted people to understand that their goal should be to make credit pay them, instead having them pay for credit. If they overspent," he adds with a paternalistic smile, "then you might have to rap their knuckles once in a while."

Larkin recalls the bank's nervousness when it decided to expand the program to Los Angeles. Los Angeles was home to (in his words) "the fast Hollywood crowd, the blue suede shoe boys." Partly, that nervousness stemmed from the bank's fears -- not unjustified -- that there might be problems in Los Angeles with credit card fraud, and with collections. But it was also due to the fact that, while the blue suede shoe boys would undoubtedly enjoy having a credit card, they were probably not going to use it to buy skis in the summer.

In the end, though, the main thing old Bank of America hands remember about the Fresno test is how short it was. It had only been running for a few months when the bank began hearing rumors that another California bank was going to inaugurate a competing credit card program -- and would make its first drop in San Francisco, Bank of America's back yard. A friendly merchant slipped a copy of the other bank's plans to someone at Bank of America, which not only confirmed the rumor but galvanized everyone associated with the BankAmericard. Suddenly, all the caution that had characterized the Fresno experience was abandoned.

The bank's new credit card executives knew they needed at least a year to gauge the results of the Fresno drop; instead, within three months, they were rushing credit cards to customers in Modesto, north of Fresno, and in Bakersfield to the south. ByMarch 1959, tens of thousands of BankAmericards were being given to customers in San Francisco and Sacramento; by June, tens of thousands more were arriving in the mail in dreaded Los Angeles. In each of these cities, every employee in every Bank of America branch, from the most veteran branch manager to the greenest teller, was assigned to sign up merchants, which they did with abandon. By October 1959, 13 months after the Fresno test had begun, BankAmericards had been dropped in every nook and cranny in California. In that time, some 2 million cards were put into circulation; more than 20,000 merchants had agreed to accept it. The other California bank never bothered to unveil its competing card. And two months after that, Joe Williams resigned.

WHAT HAD GONE WRONG? It's hard, in hindsight, to think of anything that hadn't gone wrong. The bank's frantic effort to push credit cards out the door had degenerated into a small catastrophe. Delinquent accounts? They weren't 4 percent as Williams had predicted; they were 22 percent. Collections? Williams, convinced that the BankAmericard program would never have to worry about collecting on its loans, hadn't even bothered to set up a collections department. Fraud? It was rampant. Resistance to the bank? It was everywhere, especially among the larger merchants, who hated the idea of paying 6 percent to Bank of America, and resented its attempt to get into the credit card business. Bank of America salesmen got nowhere with them. As a result, those early merchants were predominantly from "the league of pawnshops, taverns and bail bond houses," as one writer would later describe them.

The biggest disaster was in Los Angeles, just as the bank had feared. Here is where Bank of America got its first lesson in credit card fraud. It learned that crooks were quick to decipher the symbols on a stolen credit card, so they knew what the floor limit was. That way, they could make hundreds of small purchases under the limit without having to worry about a merchant calling the bank and finding out the card was stolen. It discovered that prostitutes were adept at lifting cards from johns. It learned how easy it was for merchants to cheat them. It learned that thieves could break into its warehouse and steal unembossed BankAmericards, which they would then offer to sell back to the bank. Because credit card crime was so new, the bank had a hard time getting the police interested in pursuing these thefts; because it feared the thieves would emboss the cards and use them, it often did buy them back.

It was in Los Angeles that Bank of America also first learned something about the risks that came with handing out credit cards indiscriminately. You couldn't drop thousands of credit cards on a large American city and not expect to have problems; it was crazy to have thought otherwise. In Los Angeles, there were problems with people getting duplicate cards; problems with once-good customers seeing the card as free money and running up charges they had no intention of repaying; problems with people who were simply not good credit risks getting the card. In one infamous case, the branches were asked to come up with a list of people who should not get a BankAmericard; because of a mix-up, everyone on the list got a card. Later, Williams would blame the Los Angeles branches, claiming that they had been too lax in compiling their lists of customers who should be mailed BankAmericards. Most other bank executives, though, blamed Williams for not realizing that not all Bank of America customers were equally credit-worthy. According to this view, his lack of loan experience was a crucial flaw, as was his unwillingness to confront head-on the mounting problems. Whenever other executives asked him what he was doing to staunch the red ink, he would airily dismiss their concerns. "All is well," he would say. But it wasn't. By the time Williams resigned, 15 months after the launch, the bank had officially lost $8.8 million on its new credit card program. For a bank in the 1950s, that was a huge sum of money. And that wasn't the half of it. The real figure -- when hidden costs like advertising and overhead were included -- was closer to $20 million.

As painful as this financial loss was for the bank, the loss of face hurt almost as much. Williams's decision to mail out the bank's new credit card created a furor across the state. "Regularly there appeared an item," according to the bank's own account, "usually a report or a statement from a congressman that {said}: 'A rapidly expanding credit-oriented economy is morally and financially ruinous to the public welfare.'" Larkin went to church one Sunday morning and heard his minister denounce credit cards from the pulpit. Editorial writers all over California took up the cry, pointing out that people were being handed a device they had never asked for and didn't want -- one that could only get them into trouble. "The credit card has introduced a new kind of addiction," wrote a journalist named Martin J. Meyer. "Debt addiction." Others objected to the fine print they found buried in the card holder agreement. It said that the person to whom the card was issued could be held responsible for any purchase made, even if the card had been lost or stolen. After this became widely known, there was another round of condemnation.

And the people most adamant about rejecting the credit card were the ones Williams had been most eager to mail cards to. These were the "taste-makers," as he called them -- each town's leading citizens. Williams knew these people were not likely to be profitable customers, since they undoubtedly had the means to pay their bill in full each month, thus avoiding interest payments. But he was sure that they would give the program some cachet which would help attract a better class of merchant, many of whom openly worried that only the "wrong" people would use the card. Instead, the taste-makers turned out to be the ones most likely to cut their cards into tiny pieces and mail them back to the bank, or to complain to reporters about the unwarranted intrusion of this new device into their lives. In some cases, they even took their money out of the bank as an expression of anger and dismay. Thus did another of Williams's assumptions turn into a public relations fiasco.

EVENTUALLY, IT ALL came to a head. There came a moment when the bank's top management, stung by the growing criticism, and unable to ignore the mounting losses, had to decide whether to stay in the credit card business or abandon it, as so many smaller banks had done before it. In the bank's own retelling, this moment came during a series of meetings of its Managing Committee, a small group chaired by the bank's chief executive, a soft-spoken, gentlemanly man named Clark Beise. Naturally, the BankAmericard program had acquired the stench of failure; no one in the bank wanted to be associated with it. The facts, as they were presented to the committee, were awful. No one could say with any certainty whether the program was salvageable. The head of the bank's installment loan division was asked to sit in on these sessions, which he did "with misgivings." And naturally, the members of the committee, these rational, 1950s legatees of their boisterous founder, looked out into the future of their bank and their country and saw credit cards as a part of both. (Besides, adds the bank's credit card historian, they realized that "every conceivable mistake had already been made.")

Did it really happen that way? It's impossible to know for sure, since virtually everyone involved in that decision is now deceased. But that's the legend as it has been handed down, and subsequent events would suggest that it is reasonably close to the mark. After Williams left the bank, a massive effort was begun to clean up after him. First, all of the men who had been part of Williams's team were given new assignments as far away from credit cards as possible. Then, the business was turned over to the loan men. "That's when the bank began to bring installment credit thinking to the management of credit cards," says Larkin. An effective collections department was set up. An anti-fraud unit was established. Losses were written off. People who were clearly not planning on paying their bills had their cards taken away; merchants suspected of cheating the bank were dropped from the program. At the same time, realizing the need to lower the resistance of larger, more reputable merchants, the new credit card department began cutting the merchant discount, in some cases to as low as 3 percent.

And for the first time, the bank faced up to the realization that not everyone in California was as convinced of the virtues of credit as it was. This is what Williams had most lost sight of as he had prepared to unleash his new device upon an unsuspecting world. It is what the bank most needed to come to terms with now. In an attempt to repair its tattered image -- to explain itself, really -- the bank's advertising department wrote an open letter to its customers across the state, 3 million families in all. Part apologia, part sales pitch, the letter was both an admission that it had offended people with its mass mailings of cards, and an attempt to recapture the moral high ground from its critics. It read in part:

"As for its encouraging extravagance, it seems to us that this is a problem which every individual must resolve for himself. Only you can determine to what extent your income and circumstances permit you to buy on credit. It is not our intention to encourage 'easy money' or a 'free spending program.' In fact, we believe our job is to assist you in any way possible to maintain sound and sensible control of your finances."

It took well over a year for the BankAmericard program to right itself, but gradually it did. In his 1960 report to shareholders, Beise predicted that the BankAmericard would soon become "a significant source of earnings." By the following April, the card had turned a profit.

Between 1958 and 1966, Bank of America had the California credit card business all to itself. Other banks, knowing about the huge early losses but not about the later profits, stayed away. For much of that time, the number of BankAmericards grew only slightly; not until 1963 did the bank even bother to drop cards again in any significant number. It was largely content to manage the million or so cards in circulation after the program had been cleaned up.

Yet a funny thing was happening. Each year, the cards in circulation were gaining a little wider acceptance. Each year, more customers were taking them out of their desk drawers and using them. In 1960, there were 233,585 were in use; by 1964, that number was up to 430,442; by 1968, it was over a million. Each year Bank of America customers used the card to buy more things ($59 million worth of sales in 1960; $400 million by 1968), and to take on more debt ($28 million in 1960 versus $252 million in 1968). And each year, Bank of America made a little more money, from $179,000 in 1961 to $12.7 million in 1968.

Today, credit card executives like to say that the card has become so entwined into the fabric of American life that people have no choice but to carry one. Their feelings about debt, and about the card itself, are largely irrelevant. "Have you ever tried to rent a car without one?" asks Alex "Pete" Hart, the former head of MasterCard. But that wasn't true in the 1960s. People did have a choice. There was no imperative to use a credit card. In the spring of 1965, the bank conducted a widely-publicized stunt, in which a man lived for a month without cash, using only a BankAmericard to make purchases. But the stunt was hardly necessary, for by then it was obvious that the card was gaining acceptance. For whatever reason, more and more Californians were choosing to use it -- choosing to make their own decisions about their level of personal debt, implicitly accepting the bank's shifting of responsibility from itself to them.

The first shot in the money revolution had been fired.

Originally Published: https://www.washingtonpost.com/archive/lifestyle/magazine/1994/11/04/the-day-the-credit-card-was-born/d42da27b-0437-4a67-b753-bf9b440ad6dc/