The Explosion of Credit — Card and Electronic Money

Last time, money was completely severed from its metallic backing. A pure credit currency, unbound by the quantity of gold — its birth was also the opening of an age in which money would swell explosively.

From the latter half of the twentieth century into the present day, money multiplies at a speed and scale never seen before. A single card that fits in the palm of the hand turned ‘pay later’ into something taken for granted, banks gave birth to money itself through lending, and that flow came to cross borders and circle the globe. And money ceased to be a thing of paper or metal, changing its form into numbers inside a computer. What this chapter shows is the light and shadow of an age in which credit swells without end.

The Invention of the Card — Buying Without Holding Money

The story begins in New York in 1950. When the businessman Frank McNamara finished a meal at a restaurant, he realized he had forgotten his wallet — this anecdote is said to have given rise to the Diners Club card. The mechanism founded by McNamara and the lawyer Ralph Schneider allowed members to pay ‘on account’ at several shops and settle it all together later.

Until then, a shop’s ‘tab’ belonged only to that shop. The novelty of Diners Club lay in the point that a single card was good at many shops. This is regarded as the forerunner of the modern credit card.

At the end of the 1950s, cards issued by banks also appeared. The BankAmericard issued by Bank of America was the representative example, and this later developed into the international brand VISA. Cards spread in an instant. You could shop without carrying money, and moreover defer payment — this convenience greatly changed the shape of people’s consumption.

Banks Give Birth to Money — The Trick of Money Creation

Alongside the card, there was another great force that swelled money. It is ‘money creation’ by banks. This is one of the least understood, yet most important, mechanisms in the history of money.

We ordinarily tend to think that a bank merely re-lends the money it has taken in. But in reality, when a bank makes a loan, it gives birth to the deposit itself anew. When a bank lends to someone, for example, it records the amount in that person’s account. This recorded deposit was not carried in as cash; it is money newly created on the spot. In this way, the money circulating in society as a whole (the money supply) swells to many times the original seed capital. This is the phenomenon called money creation.

Because money is born merely by writing numbers in a ledger, this was once called ‘fountain-pen money.’ Now, since it is merely a matter of typing numbers into a computer, it is also called ‘keystroke money.’ Note that views are divided even within economics on how to explain this mechanism, and there are said to be various theories on points such as whether lending comes first or deposits come first.

Here we should recall the event of the previous chapter, when the backing of gold vanished. As long as money was bound by the quantity of gold, money creation too had a natural limit. But now that the chains of gold are off, the ceiling on how much money can increase is, in the end, entrusted to people’s credit and the judgment of each nation. The two mechanisms of the card and money creation pushed money up to a scale never seen before, within that vessel whose hoops had come undone.

Money Becomes Numbers — Globalization and Electronization

Toward the end of the twentieth century, money undergoes two more great changes. One is ‘globalization,’ the other ‘electronization.’

In the 1980s, the world’s major nations loosened financial regulations one after another. The liberalization of interest rates and of capital movement advanced, and money came to cross borders with ease. London’s financial market reform was called the ‘Big Bang,’ and the world’s funds were linked into one vast market. At the same time, with the development of computers and communications technology, money no longer needed to be physical banknotes or coins. The ‘money’ in a bank account is now nothing other than numbers recorded in a computer. To make a transfer is to rewrite those numbers.

Because money became numbers, its movement became the speed of light. In an instant, vast sums of capital circle the world, and new financial products — mechanisms called derivatives that wager on future price movements and the like — are born one after another. Money pulled away from the real economy, and the financial world in which money gives birth to money swelled on its own.

Credit Swollen Too Far — The Bubble as Destiny

In an age when credit swells explosively, a ‘bubble’ arrives as if by destiny. It is the phenomenon in which money increases too much, flows into stocks and land in search of a place to go, and prices soar far apart from their true value.

The classic example was Japan in the latter half of the 1980s. When a rapid rise in the yen advanced following the Plaza Accord of 1985, monetary policy was greatly loosened to soften its effect, and the world overflowed with vast amounts of money. That capital flowed into stocks and real estate, and the Nikkei average stock price climbed toward its all-time high through the end of 1989. Along the way, there was a scene in which the world’s stock markets plunged all at once on Black Monday in October 1987, but Japan’s frenzy overheated still further afterward. The true nature of that heat — the heat that prompted the saying that the land price of Tokyo could buy all of America — was credit swollen too far itself.

But what has swelled must someday shrink. Entering the 1990s, Japan’s bubble collapsed, stock and land prices plunged, and a long age of stagnation arrived. As long as money stands upon credit, when that credit grows excessive it swells, and when anxiety spreads it deflates all at once. Money that has lost its backing in gold became a being that repeats expansion and contraction upon the unstable ground of human psychology.

From paper to numbers, and then to a flow racing around the world. Money, by the power of credit, swelled to a height never seen before. Yet that expansion was, at the same time, nurturing a fundamental question about money. Central banks print it, banks give birth to it through lending, and prices lurch wildly by psychology — is this money truly worthy of trust? As distrust of credit swollen too far quietly spread, in 2008, one who doubts money itself appears.