This blog used to be about debt. Now it's about a few more things. But really, it all comes back to debt. Trust me.

Saturday, December 9, 2006

The Birthplace of Modern Debt

South Dakota, USA

That's right. You would probably have less credit card debt today were it not for the government of South Dakota.

The year was 1979. As my father likes to remind me, interest rates and inflation were in the high double digits. He maintains to this day that it was all Jimmy Carter's fault.

Credit card companies were hemorrhaging money because of "usury laws" in most states. The cost of money was 19%, but in New York, for example, the law capped loan interest rates at 12%. Banks were screwed.

They deserved it, right? Well, it was complicated. Because of the caps on interest rates, the average Joe couldn't get a loan from any bank that didn't sanction bone breaking in the terms and conditions. Banks weren't allowed to charge so-called "risky" lower middle class borrowers enough interest to cover the risk.

That would have been the end of it. Mr. Average Joe would have to live within his means and say no to this stupid Atari contraption the kids would be begging for in a couple of years.

But then, two things happened.

1. South Dakota got rid of interest rate limits.


Within weeks, Citibank moved its credit card operations to South Dakota, along with a few thousand jobs the governor could tout in the next campaign.

They started charging 19% or more for credit card debt.

In New York, the cap on credit card interest rates was 12%. Citibank would not be in business today were it not for South Dakota.

2. The Supreme Court decided that, when it came to interest rates, it didn't matter where the borrower lived.

So even though there was a legal limit of 12% in New York, if Average Joe was borrowing from a bank in South Dakota, that bank could charge him as much as he was willing to pay (or as much as they could get past him in the fine print).

Within months, all the banking giants came calling, and South Dakota became the credit card capital of the world. Other states followed. Delaware became the credit card capital of the East.

And by then it didn't matter. Average Joe would be buying a lot more than Atari in the next couple of decades. It was the making of the modern American consumer, courtesy of South Dakota.

Where did I learn this? Frontline. The best thinking cap show on television.

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