Robin Stein traces the ascendancy of the credit card industry to its deft reaction to high inflation and usury laws:
Had circumstances been less dire, the news of four urgent phone calls from a New York bank in a single day likely would have been easier to ignore. “Nobody’s historically more suspicious of outsiders than South Dakotans,” Bill Janklow, the former governor of South Dakota, told Frontline in a recent interview.But it was 1980, South Dakota’s economy was a mess, and suspicion was an instinct that Janklow could not afford. “We were in the poor house,” he recalled. “It cost 42 cents a bushel in 1980 to haul wheat. When something’s only selling for $2.20 a bushel, you certainly can’t afford to be paying almost 50 cents a bushel to ship it.”
The calls were from Citibank, which was having a serious problem of its own. “It was very simple,” said Walter Wriston, then the chairman of Citibank. “We were going broke.”
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By 1980 Citibank was being squeezed between New York state usury laws and double-digit inflation rates. “You are lending money at 12 percent and paying 20 percent,” Mr. Wriston explained. “You don’t have to be Einstein to realize you’re out of business.”The bank employed 3,000 people in its credit card unit in Long Island at the time, a fact that Mr. Wriston hoped would entice New York lawmakers to offer relief. “All you have to do is lift the usury ceiling to some reasonable amount and we’ll stay here,” Mr. Wriston recalled telling New York’s political leaders. “And they said, ‘Ah, ha! You really won’t move. We’re not going to do anything.’”
What allowed Wriston to make good on his threat to leave New York was a little-noticed December 1978 Supreme Court ruling. The Marquette Bank opinion permitted national banks to export interest rates on consumer loans from the state where credit decisions were made to borrowers nationwide.
So by early 1980, with New York refusing to go along, Citibank set out on a search for new place to base its credit card division. The pickings were slim. Usury laws were still on the books in the vast majority of the states. And federal banking rules required that before banks could set up operations outside their home state, a formal invitation had to be issued by the legislature of the state they wanted to enter. Local bankers had prevented any state legislature from ever extending such an invitation.
This was why Mr. Wriston was so eager to court Mr. Janklow.
In an effort to stimulate the local economy, South Dakota was in the midst of eliminating its usury laws. Mr. Wriston told Mr. Janklow that if South Dakota would quickly pass a bill inviting Citibank into the state, he would bring 400 jobs. To preempt concerns from local banks about new competition, Citibank also promised to open only “a limited” bank. “We’ll put the facility in an inconvenient place for customers and we’ll pay different interest rates,” Mr. Wriston recalled telling Mr. Janklow. “All we want to do is use it to issue cards.”
For Mr. Janklow, it was an easy decision.
“To me, this wasn’t a credit card deal, it was a jobs deal,” he said. “It was an economic opportunity for the state. I was slowly bleeding to death.”
With bipartisan support and backing from South Dakota’s banking association, Janklow proposed a special “emergency” bill. “Citibank actually drafted the legislation,” he said. “Literally we introduced it, and it passed our legislature in one day.”
The arrangement ultimately brought 3,000 high-paying jobs to South Dakota and a host of new suitors from banks across the country. Citibank seemed to just be the beginning.
“It did fall out of the sky,” Mr. Janklow said. “I was going to sleep at night thinking that we were the new financial center of America.”
But other states were quick to catch on. Delaware, which passed similar legislation the following year, would foil Mr. Janklow’s dreams. “By that time, we’d captured a lot, but we thought we were going to get them all. Chase, Manufacturer’s Hanover, Chemical — they all went to Delaware. They were coming here,” he said.
South Dakota would never become the next New York or Hong Kong, but Bill Janklow carved out a niche in credit card operations that remains one of the largest sources of jobs in the state. “The tragedy to me is that if Delaware would have waited one year,” he said, “we would have had 20,000 more jobs in this state today.”
The day Citibank first called will always remain bittersweet to Mr. Janklow. “Four different messages in one day from four different directions,” he added. “That’s never happened to me before or since.”
The inflationary spiral that pushed Citibank to the precipice of disaster propelled the credit card industry into a decade of enormous profits. The elimination of usury restrictions paved the way for double-digit growth. Cardholders, it turned out, were willing to keep on paying 18 percent interest long after inflation subsided and the Federal Reserve lowered the interest rates it charged banks.
Between 1980 and 1990, the number of credit cards more than doubled, credit card spending increased more than five-fold and the average household credit card balance rose from $518 to nearly $2,700. With the cost of money sinking and average balances climbing, profits soared.