Credit through the ages — from beads and mirrors to plastic cards

Press, 2 October 1979, Page 23

Credit through the ages — from beads and mirrors to plastic cards

by

NORMAN TAYLOR,

of Arison. a former senior executive

of Barclays Bank. London.

The traveller who wants to set foot outside his own country has had one consistent problem since the days of Marco Polo, and probably before. He is travelling through strange lands encountering strange people who “don't know him from a bar of soap." How does ■ he establish his credentials and, more importantly, arrive at an agreed form of exchange for the - goods and services he wants on his travels? , I he crux of the matter lies in being ■ able to supply something which the * people he is travelling amongst will •accept Most early travellers who encountered primitive peoples found that ; anything flashy like cheap beads and * mirrors would serve the purpose. It was not too long, however, before items .of real intrinsic value were demanded. J But because pieces of paper were un- ‘ acceptable, silver and gold bars became . popular. J The next development was the adulteration of these metals. Lead mixed with the gold, or more blatantly, gold-coated lead blocks found the trusting foreigner out of pocket yet again. But not for long. The recipient soon learned to demand some form of guarantee that the pieces of metal were genuine. Hallmarks on silver and gold served a useful purpose here, but coinage eventually came into fairly general use. Even today the Marie Therese dollar is accepted as legal tender in some parts of the Middle East. All these forms of currency, however. suffered from one very great disadvantage: they could be easily stolen and the sheer effort of looking after their money supply must have discouraged many would-be travellers. With the development of banks in the seventeenth century (another fascinating. but separate story) it became the habit for men of substance to carry

letters from a banker in one country to a fellow banker in another. These letters would identify the bearer and give him what we would call today a “credit rating.” These letters of credence, or “letters of credit,” as they became known, gradually gained in popularity. Last century a go-ahead bank took the outrageous step of printing and distributing a "letter of credit” to clients whose credit-worthiness was sufficiently high. Its format and signatures were communicated to its corresponding banks in other countries and it stated that the issuing bank would guarantee its clients’ drafts up to a specified figure. This allowed the client to draw against the letter of credit, such drawings being marked by the negotiating banks.

Thus, if one took a “letter of credit” for £SOO. one could draw, say £IOO in five different countries, or any other

Then came another great step forward in travel. In 1891 the American Express Company introduced a new sort of paper they called travellers’ cheques. The travellers’ cheque was basically a piece of paper, issued by a bank or reputable travel agent, which was signed once by the .client on purchase when he would pay the face value of the piece of paper, plus a commission to the issuing agent. When cashing the cheque, the holder signed again and the two signatures were compared. If the encashing bank was satisfied the signatures were identical it would pay out the local equivalent of the original amount. The great advantage of travellers’ cheques was, however, that it was possible to cash them not only at banks but eventually also at shops, hotels, and restaurants.

Although they were not as bulky or as risky as cash, all these paper substitutes’had to be safeguarded. They also suffered other disadvantages. They were, for instance, by no means accepted universally. Usually only the larger hotels and restaurants would accept travellers’ cheques.

The holder was always al the mercy of the recipient as to the rate of

exchange and other charges. Even tod. hotels tend to have a very poor ra of exchange compared with commerci. banks and many impose an exti charge to cover their services. Although man ? firms issuing travel lers' cheques claim an instant refun-, service in case of loss, it sometime can be difficult in a strange town to find their representative at a time when they' are open and then fill out the forms that enable the refunds to be issued. Travellers’ cheques have therefore to be guarded with almost the same vigilance as cash requires. The sheer inconvenience of looking after a bundle of paper in a strange place was still there.

Now the computer age has come up with something better, simpler, and easier—a piece of plastic. Yes, I mean those very controversial (at the moment) credit cards. Plastic money has several advantages over the travellers’ cheque. The charges under the card go directly in foreign currency to the bank where the client’s account is maintained. This means that the user gets the best rate of exchange ruling on the day of receipt. There ,is nothing to guard except one small piece of plastic and if it is lost the maximum loss, should anyone be able to forge the signature, is usually limited to a small figure.