The Fresno Drop

Roman Mars:
This is 99% invisible. I’m Roman Mars.

Roman Mars:
In September 1958, Bank of America decided to try an experiment. One that would have far-reaching effects on our lives and on the economy. They decided, after careful consideration, to conduct this experiment in Fresno, California. The thinking was no one was paying much attention to Fresno, so if the plan failed, it wouldn’t get a lot of media attention.

Joseph Rusak:
Things were slow back then here. Fresno was not the big metropolitan area it is today.

Roman Mars:
That’s Joseph Rusak.

Joseph Rusak:
My name is Joseph Rusak. I’ve worked with Bank of America since 1956 and retired 1985. Started off as a teller and worked our way up as most of us young fellows did.

Roman Mars:
Joseph was there when all of this went down. And so in September of 1958, Bank of America sent out 60,000 pieces of mail to people in Fresno. Inside was a little plastic object that has become in equal parts, emblematic of opportunity, convenience and debt.

Nate Berg:
He’s talking about the credit card.

Roman Mars:
That’s reporter Nate Berg here to tell you what I’m talking about.

Nate Berg:
Bank of America had recruited about 300 merchants in Fresno to accept this new payment system. And they’d asked employees like Joseph to hand credit cards out to people they knew.

Joseph Rusak:
We did. We passed it around our friends and the neighbors. That’s about it.

Nate Berg:
But as for Joseph, he was skeptical about using a credit card himself.

Joseph Rusak:
Be honest with you. I don’t remember if I took a card or not, or if I waited a couple of years. But because as a banker, I don’t really believe in credit myself.

Nate Berg:
Why not?

Joseph Rusak:
Well, you have to pay back interest and I don’t like giving money away.

Nate Berg:
Joseph wasn’t alone. The whole town of Fresno was a bit nervous about this new credit card system.

Roman Mars:
The concept of credit wasn’t new, but it had never been done quite like this.

Ken Hallenbeck:
Going back into say the 1800s, early 1900s, you had credit with a store or some kind of a business. It was just kind of a ledger book type of thing.

Roman Mars:
This is Ken Hallenbeck. He’s a numismatist.

Ken Hallenbeck:
A numismatist.

Roman Mars:
That is someone who studies or collects currency.

Ken Hallenbeck:
Not just coins, but it’s paper, money, metals, tokens. Anything that’s a money or money substitute.

Roman Mars:
Ken is retired now, but he used to work at the American Numismatic Association.

Ken Hallenbeck:
Nu-mis-matic.

Nate Berg:
So back in the late 1800s, every place from the corner bar to the local pharmacy allowed patrons to keep open tabs. They’d record everything in a ledger book and allow their customers to charge up a bill that they’d typically pay back at the end of the month. For businesses, this was an accounting nightmare.

Roman Mars:
Stores could have hundreds of accounts, billing tabs for a dollar here and a dollar there, and with each chart, a shopkeeper would have to haul out a ledger book and look up a customer’s records just to complete a transaction.

Nate Berg:
Eventually store owners cut down on some of the paperwork by assigning customer’s account numbers, which they would inscribe on little tokens.

Ken Hallenbeck:
Most of them were round or oval with a hole in them and they had a number on them and that was your account number.

Nate Berg:
Ken has a collection of a few dozen of these old credit tokens, many dating back to the early 20th century.

Ken Hallenbeck:
I have one here. It says Pocahontas Pioneer Garage, but it has a head of an Indian on it. And on the back, it has a number 839.

Roman Mars:
After credit tokens came, something called charger plates. They look like little dog tags for the army. They were metal and had your name and information imprinted on them.

Nate Berg:
Shopkeepers could make an impression of your personal information directly onto the bill, instead of having to write it all down.

Roman Mars:
But the more accounts you had, the more charger plates and tokens you had to carry around with you. It still wasn’t a great system for the retailer or the customer.

Nate Berg:
So in 1949 a New York businessman named Frank X. McNamara came up with an idea for a single charge card that could be accepted at multiple establishments.

Roman Mars:
He called it the Diner’s Club card. And with it, you could make charges at a number of New York restaurants and hotels.

Nate Berg:
But unlike the credit card of today, you could only use your Diner’s Club card in certain places.

Roman Mars:
The idea caught on somewhat. About 20,000 people signed up, mostly businessmen. It wasn’t a smash success, but still the bank started to see an opportunity.

Joe Nocera:
So you have this giant change taking place right around World War II, and especially in the aftermath of World War II when the American economy was basically the only economy in the world that was still standing.

Roman Mars:
That’s Joe Nocera, columnist for the New York Times and author of ‘A Piece of The Action’, how the middle class joined the money class.

Joe Nocera:
People having gotten through the war, now settling down, getting married, raising kids, wanting to live in the suburbs, there were suddenly things they wanted to buy. A refrigerator for example, or as came into vogue, a television.

Nate Berg:
So maybe you’d have a Sears account. You could buy things there and pay your bill at the end of the month.

Roman Mars:
But if you didn’t have an account with a store, you’d have to go to a bank and get a traditional loan for any relatively large purchase.

Joe Nocera:
Whether it was a car, whether it was a sofa, whether it was a refrigerator, you’d go to the bank every single time. Every single time, you had to have collateral to pay for it. Every single time the banker would have to figure out whether you were a good credit risk. It was a pretty cumbersome process, both for the consumer and for the bank.

Nate Berg:
Bank of America wanted to find an easier way to make these small loans.

Joe Nocera:
Bank of America was, in the 1950s, the premier consumer-oriented bank in the United States. Bank of America really believed in the idea that it would grow by helping consumers.

Nate Berg:
So it was Bank of America that decided that they would basically give clients a card that they could put in their pockets that would give them roughly a $500 line of credit.

Roman Mars:
Unlike the Diner’s Club, Bank of America wanted their customers to be able to use their card anywhere, not just at restaurants. And where the Diner’s Club had to be paid off within 60 days, bank of America would allow its customers to pay them back whenever they wanted. They’d call their new credit card, the BankAmericard.

Joe Nocera:
You could spend it all down, you could pay part of it back, you could pay it all back.

Nate Berg:
You didn’t have to get a banker to approve your purchase and you didn’t have to pay the bank back by any specific time. They called this ‘revolving credit.’

Roman Mars:
The card was essentially an instant loan. Of course, it was a loan with an interest rate attached.

Joe Nocera:
This was one of the profound shifts in the way people handle money. Instead of the banker being in control of your money, of setting the terms for how you dealt with your money, with a credit card, you are the ones setting the terms and you are the one making the decision about what to do with your money.

Roman Mars:
Now, all Bank of America had to do was convince retailers to accept credit cards as payment and convince people to use them.

Joe Nocera:
Now because they were a new invention and because people didn’t really know what they were and because there were no laws surrounding credit cards, the way they tested the card was they simply sent a mailing to basically every Bank of America customer in Fresno, California.

Roman Mars:
Which brings us back to Fresno.

Nate Berg:
They called it ‘the Fresno Drop.’ Bank of America mailed out 60,000 credit cards all over the city. Fresno had become a laboratory for the future of personal finance.

Roman Mars:
The Fresno Drop was supposed to be a controlled experiment where the bank could test the concept and work out any kinks.

Nate Berg:
But within just a few months of the Fresno credit card drop, Bank of America got word that one of its competitors in California was planning a similar program.

Roman Mars:
So Bank of America quickly expanded. Mass mailings went out in the central valley cities of Modesto and Bakersfield and then eventually to the state’s bigger cities of Sacramento, San Francisco and Los Angeles. Within 10 months of the Fresno Drop, more than a million BankAmericards had been mailed out across California.

Nate Berg:
Once the cards had begun saturating the bigger cities, fraud and theft were rampant.

Joe Nocera:
People would go around to mailboxes in the suburbs and steal cards on days when they knew the cards were being dropped.

Nate Berg:
The system was being abused, but the system was also randomly mailing out pre-approved credit cards that allowed anyone to buy up to $500 of whatever they wanted.

Joe Nocera:
Dead people were getting cards, dogs were getting cards. It was just very, very willy nilly.

Roman Mars:
Despite these mass mailings, the cards didn’t catch on right away. It was hard to convince stores to accept them. They had to pay a percentage of the sale to the bank and it was hard to get customers to use them.

Nate Berg:
And when people did start using the cards, they didn’t always pay the money back, which was a bit of a surprise to Bank of America. People had mostly been pretty good about paying back traditional loans.

Joe Nocera:
And what they forgot was in those days when you made a loan, the customer looked the banker in the eye and the banker looked the customer in the eye and they both had this kind of relationship and the customer would not want to let the banker down. Whereas with a credit card, it was an anonymous thing.

Nate Berg:
And this anonymity meant one in four people weren’t paying their credit card debts.

Roman Mars:
In 1959, about a year after Bank of America did their first mass mailing in Fresno, they had mailed out more than 2 million BankAmericards. But they hadn’t made a single cent from their experiment. In fact, they lost about $20 million.

Nate Berg:
And so the bank started making a few changes.

Joe Nocera:
They really started to think about it differently.

Nate Berg:
Bank of America set up a collections department and an anti-fraud unit. People who weren’t paying their bills had their cards revoked.

Roman Mars:
And the government also started to regulate the credit card industry. In 1968 the ‘Truth in Lending Act’ made it illegal to mail out credit cards to people who’ve never asked for one.

Joe Nocera:
From that point onward, instead of getting a card in the mail, you got instead a solicitation to apply for a card, which in one form or another exists to this day.

Nate Berg:
It wasn’t until 1961, three years after the Fresno Drop that Bank of America actually turned a profit on their crazy credit card experiment. By 1968, they were making about $13 million a year.

Joe Nocera:
The Bank of America system, which became a nationwide system, eventually became known as Visa. And the other cards that had competed with Bank of America, they also consolidated and they became MasterCard.

Roman Mars:
The major credit card companies now make lots and lots and lots of money every year, which is great for them. Maybe not so great for the rest of us.

Nate Berg:
Today, over 70% of American adults have at least one credit card, and the US as a whole has about $900 billion in credit card debt. In 2009 more credit card reform was passed. It prevents arbitrary interest hikes, stops credit card companies from specifically marketing to college kids, prohibits certain types of abusive fees, but a lot of people think more reform is needed.

Roman Mars:
The experiment in Fresno created a tool that made buying things much, much easier. You no longer had to put on a suit and a tie and go to the bank for a loan every time you wanted to get yourself something nice. The credit card facilitated an unprecedented amount of economic freedom for the middle class, and that aspect was intentional and maybe even noble, but it’s important to keep in mind that first and foremost, the credit card was designed to make money for banks, and everything about their design betrays that primary objective. Credit cards don’t have to be complicated. They don’t have to trick you, but they do because they were designed that way.

  1. Michael Tipton

    As a person that lives in Fresno I jump with joy when my city is even mentioned. Now you tell me we were the start of credit cards?!?! Thanks for teaching me something about my own city 99PI

  2. Joe

    Ok, Love this show and this episode. However, when it ended I felt surprised, like it had cut off halfway through. I heard the history part, but the design side never really was discussed. Why are the cards the size they are, why the number length, when did the magnetic stripe appear, etc.
    Anyway, just a thought.
    Keep up the great work guys.

  3. Lewis

    This is one of my favorite 99PI’s to date. Being on the older end of Millennials, I’ve never known an adulthood without credit cards as we know them today. I like Joe’s request on understanding a little more behind the design of cards, magnetic stripe (incl. issues with fraud, the move to chip cards, etc.).

    I’m also interested (and maybe this is more of a Freakonomics podcast) to learn more about the macroeconomic effect of these massive, anonymous lines of credit. It felt like the podcast was going that way towards the end and I’m really curious to learn what consumer debt has done to the overall economy.

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