But it's a bum rap, scholars claim in two new books. In Financing the American Dream: A Cultural History of Consumer Credit (Princeton, 1999), Augustana College history professor Lendol Calder debunks the myth that easy credit led a virtuous nation of thrifty, hardworking producers down the primrose path to hedonistic consumer culture. In fact, Calder reports, Americans have always borrowed to buy, using "book credit" at the grocery store as early as during the Revolutionary War. Furthermore, credit cards don't sap the work ethic; they merely restructure it. Consumers drunk with easy credit eventually face the headache of working off their bills. Sure, 4 percent of credit-card debt ends up in default, but 96 percent is paid up!

Nevertheless, the triumph of the credit card did not come without a fight. Until the end of the nineteenth century, Calder points out, the United States enforced strict anti-usury laws, which capped the annual interest rate on personal loans at 6 percent. The laws reflected the Jeffersonian idea that wealth should come through work rather than money lending. But because of these laws, workers strapped for cash or between jobs had few options. Banks wouldn't loan small sums, because the loans weren't profitable at the mandatory 6 percent rate. Desperate borrowers turned instead to avaricious pawnbrokers and illegal lenders, who charged as much as 300 percent a year. For many of the poor, debt became a way of life. A worker might take a good suit to the pawnbroker "to soak" on Monday, redeem it on Saturday for Sunday use, and hock it again on Monday--treating a pawnshop as a "storage and loan."

Consumer credit's enemies were surprisingly powerful. Some illegal small-loan lenders were large enough to have branch offices in several cities, and their self-interested lobbying killed early efforts at loan reform. Labor leaders opposed installment plans as "dollar-down serfdom," because they feared that the threat of repossession would tether workers to their jobs and discourage strikes. Grocers demonized credit as "an alcoholic stimulation," because they thought installment plans would lure their customers away to buy big-ticket items that grocers didn't stock. Even commercial banks had reason to denounce retail lending. After all, if workers didn't have to save up for a big purchase, savings accounts would lose much of their appeal.

To credit's rescue came Arthur Ham, a twenty-six-year-old graduate student at Columbia University. After receiving a grant from the Russell Sage Foundation to study small loans in 1909, Ham made a career exposing the loan-shark industry. Eventually he took the battle to the big screen by producing a film. The Usurer's Grip (1912) played to packed houses. Thanks to Ham's crusade, state legislatures began replacing their anti-usury codes with his Uniform Small Loan Law.

ELSEWHERE ON THE WEB In a credit bind? Debt Couselors of America runs the Cheap Meals mailing list to help you economize, while the Motley Fool helps you calculate how long it will take you to pay off your debt. Then Credit in a Nutshell will try to make sure you don't get in trouble again.

Then in 1927, Columbia economics professor E.R.A. Seligman published a comprehensive two-volume vindication of consumer credit, funded by a grant from General Motors. In Financing the American Dream, Calder says that at the core of Seligman's argument was a "verbal sleight of hand" that "post-structuralist critics might envy." Economists of the day still clung to the Victorian idea that there were two kinds of debt: "productive" (borrowed to build something or make money) and "consumptive" (borrowed to finance anything fun). Seligman argued that all debt was productive, even if its product was simply the happiness and satisfaction of the borrower. Instead of "consumptive debt," he recommended a term less evocative of disease: "consumers' credit." The new thinking was catnip to lenders and retailers, whose ads quickly began propagating Seligman's philosophy. "A factory or a fur coat (...both of them may be bought on credit)," proclaimed a 1928 ad for Julian Goldman Stores Inc. "What is the difference in these transactions? Nothing--except size!"

Calder's history ends with World War II, which is when David Evans, a Boston-based consultant, and Richard Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology, pick up the story. Evans and Schmalensee work as consultants to Visa, and Paying With Plastic: The Digital Revolution in Buying and Borrowing (MIT, 1999) is an apologia as well as a history.

Legend has it the first credit card was born in 1950 over lunch at a Manhattan restaurant: Department store heir Alfred Bloomingdale and his colleague Francis McNamara dreamed up the idea of creating a third party to cover checks at restaurants. They called it Diners Club. But as Evans and Schmalensee explain, the scheme faced a "chicken-and-egg problem." Consumers didn't want a card until stores accepted it, and merchants wouldn't accept it until consumers carried it.

To solve the problem, and to work around federal laws that prevented banks from operating across state lines, banks joined together to form "network joint ventures," such as Visa and MasterCard. Under these arrangements, some member banks recruited consumers, others recruited merchants. The banks on both ends earned fees, and they shared the costs of maintaining the networks.

Because of an antitrust dispute twenty-five years ago, Visa allows its member banks to join up with MasterCard as well. But it refuses to allow them to collaborate with any other network. American Express executives, eager to break into the bank-card business, often rail against this stricture, but Evans and Schmalensee call the networks' efficiency "a tour de force."

The Justice Department is less appreciative. In October 1998--shortly before Paying With Plastic went to press--the government charged Visa and MasterCard with violating the Sherman Antitrust Act. (Wal-Mart and a group of big retailers have filed a related suit, charging that Visa and MasterCard have colluded to keep fees on their debit cards unfairly high.) The trouble is that today Visa and MasterCard have pretty much the same member banks. Do two ventures with the same owners really have an incentive to compete?

According to the government's complaint, in 1987 MasterCard was prepared to introduce the first "smart card"--a card with an integrated circuit that could store personal data. But MasterCard's board refused to proceed without Visa's go-ahead. Today both brands are still developing a smart card, sharing information all the while. The situation doesn't exactly encourage competition. As Visa International's president and chief executive put it in an unguarded moment in 1992, "If you have got one foot firmly placed on both sides of the street, who cares?"

Evans and Schmalensee insist that the Visa-MasterCard partnership does not harm competition or innovation. They point to Visa and MasterCard's rival advertising campaigns and to Citibank's recent decision to switch its primary allegiance from Visa to MasterCard because only MasterCard would allow it to relegate the network insignia to the back of its plastic cards. The reason no one has introduced smart cards, says Evans, is because the chip technology is too expensive. "It is a silly argument," he says. "The Justice Department is trying to fix something that isn't broken. This industry is extraordinarily successful."

Indeed, however the case turns out, the most popular complaint against the consumer-credit business is likely to remain what it was a century ago: The industry succeeds all too well at putting expensive credit in the hands of weak-willed shoppers.

David Kirkpatrick.