The Drop

September 18th, 1958. Fresno, California. A perfect storm is brewing. The Great Depression of the 1930s imposed 2 decades of frugal living on American families. They had to continue living below their means during the Second World War, as resources went towards the war effort. But by 1958, the age of austerity was in the rearview mirror. By 1958, Americans had watched the economy expand and their wealth grow year after year for over a decade. They began to ask themselves: Why should I wait until I’ve saved enough money to buy something when I can buy it now and pay it back when I get more money later? So merchants began offering buy now pay later programs in the form of ‘charge cards’ (Basically credit cards with no interest. Note that credit cards have not been invented yet. That’s what we will be covering in this blog post).

Soon enough, consumers find themselves signing up for a charge account with one store to buy a TV, then another store to buy a fridge. Yet another with their local gas station, and one more at their pharmacy. Much like what we face with loyalty cards today, Americans found themselves with too many charge cards. At the same time, merchants struggled to keep an accurate ledger for each customer and update it with the transactions made each day. Both buyers and sellers benefitted from purchases made on credit but had grievances with the existing system. If only a third party could abstract away the functionality of charge cards and provide a simpler interface to its clients (CS246 moment)…

We know this abstraction today to be the credit card. But as with most innovations, the hardest part is getting everyone on board. To quote a piece from the Washington Post:

"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… 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?"

Bank of America (a misnomer, for they only operated in California at the time) made a decision: the customer comes first. In 1958, around half of the 250,000 residents of Fresno, California banked with BofA. On September 18th, these Fresno residents woke up to find a piece of plastic in the mail in an event now known as ‘the Drop’. The piece of plastic was called the BankAmericard, and it offered a $500 line of credit that could be used with vendors that also banked with BofA. If that sounds like a bad idea to you, it’s because it kind of was. Credit fraud and loan defaults cost them a lot of money, but everything worked out in the end. I’ll spare you the details; a quick Google search for ‘when was Visa founded’ should tell you all you need to know.

Hedonic Treadmill

At age 52, French philosopher Denis Diderot found himself unable to afford a dowry for his daughter’s wedding (I guess he’s dealing with the consequences of being a guy whose job is to sit down and think all day :P). Luckily, he helped write one of the best Encyclopaedias of his time (the 1700s), an encyclopaedia that Empress Catherine the Great of Russia was a fan of. Hearing of Diderot’s financial woes, Catherine offered to buy Diderot’s library of books for something equivalent to $50,000 today—more than enough to cover the dowry.

With the leftover money, Diderot bought himself a nice gown and put it into his wardrobe. And that should have been the end of the story, except Diderot is a philosopher and philosophers are mental, so the story goes on. The gown looked out of place in the wardrobe. According to Diderot, there was no more unity in the house (again, philosopher—mental). So he replaced the rest of his wardrobe, but of course the house was still in disunity. The rug, the chairs, the tables, the artwork, all had to be upgraded. And once all that was done, he wrote an essay about it titled “Regrets on Parting with My Old Dressing Gown,” driving home the completely irrelevant but nonetheless true fact that philosophers are, say it with me: mental!

This story is the origin of the Diderot effect - the phenomenon where buying one new thing serves as the justification for buying something else, in an endless spiral of consumption. For example, after I upgraded my phone last year, I then decided my earbuds and data plan needed upgrades too, even though I never even thought about that before getting my new phone. Businesses take advantage of the Diderot effect too. When I was shopping for a new suit last summer, I was informed of a promotion where if a suit and a dress shirt were purchased, I would get a tie for free. I ended up doing exactly that, even though I already have enough dress shirts and ties. At McDonald’s, I might have my water bottle with me, but am I really going to drink water when I can make my order a combo by adding a Coke?

Diderot needed a cash injection from a Russian empress to finance his spending spree. With credit cards, we now each have a Russian empress, condemning society to meet the same fate as our mental philosopher. Here’s another excerpt from the same Washington Post article:

“What made BankAmericard so different from any financial product that had come before it [is that]… 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 or 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 or loan officer.”

Innovations that push humanity forwards always come with unintended consequences. Nuclear fission gave us an efficient energy source, as well as the world’s most deadly weapon. The internet democratised information, but it came at the cost of our own privacy. Social media has connected people around the world while making it more polarised. Credit cards have empowered the buying power of the middle class, but they have also put society on a hedonic treadmill that has irreversibly changed the way we think about money.

I’m not saying credit cards are bad. I think it is a brilliant financial innovation that plays a crucial role in the prosperous consumer economy that we live in. I just think the side effects of the credit card are not acknowledged often enough. Like Diderot, we struggle to find unity in our lives when our neighbour has a nicer house or a faster car. Credit cards give us the financial means to make that next upgrade, thus giving birth to the ‘more is better’ mentality—Once I have this, then I’ll be happy.

More-is-better mentality has infiltrated our psyche even beyond material possessions. Have you ever been completely satisfied with your life until a friend accomplishes something amazing? Have you then felt the need to do that same thing, or “one-up” them? As a student, I’m satisfied with my marks until I see someone with higher ones. I’m satisfied with my internship until I see someone with a cooler one. We all know that comparison is the thief of joy and that there will always be someone ‘better’ than you, but for me, the more-is-better mindset always seems to prevail, and I am always striving to reach the next goal—Once I do this, then I’ll be happy.

My hope is that by starting to understand the origins of the more-is-better mindset, we can begin to resist it. Not to totally overcome it, but to think twice before succumbing to our desires. Maybe I can order the burger and fries without a Coke. Maybe I can buy the suit without the dress shirt and tie. Maybe I can celebrate the success of a friend without trying to replicate it myself. Maybe once I can do this, then I’ll be happy.

And now, the photo gallery.

2 weeks ago, I left Ontario for the first time in almost 6 years to travel Central Europe. Was surprised to meet a US President in Budapest 😛 (Click on the small circles below to navigate between images)

View of the Hungarian parliament building from next to my hotel.

Some of the opening scenes of The Sound of Music were shot here, in St. Gilgen, Austria.

Ngl food was mid