Paying with Plastic: The Digital Revolution in Buying and Borrowing, 2nd edition

by David S. Evans and Richard Schmalensee

MIT Press • 2005 • 367 pages • $62.00 hardcover; $24.95 paperback

Reviewed by J. H. Huebert

The market has an amazing ability to induce voluntary coop­eration among millions of people around the globe to provide goods and services we tend to take for granted. Leonard Read showed this by telling the story of a simple lead pencil. In Paying with Plastic, the authors relate the similarly impres­sive story of the credit card.

Today, of course, you can use your credit card almost anywhere to buy anything. But not long ago, credit cards were unheard of. If you wanted to borrow money, you went to the bank and took out a loan. Or you might have had a charge account at a store you frequented— but your bill had to be paid off each month. Early charge arrived in the 1950s, worked the same way, requiring full payment each month, and were narrowly targeted at business travelers.

Credit cards as we know them didn’t really exist until the late 1960s, when banks across the country joined together to form the organizations we now know as MasterCard and Visa. Few people who use credit cards today know the massive amount of voluntary coopera­tion that was required to bring them into existence and make our everyday card purchases possible.

Consider, for example, that MasterCard and Visa are joint ventures, owned by all the banks that issue those cards or offer accounts to merchants who accept them. As the authors note, the member banks remain com­petitors in all facets of their business, even the credit-card issuing business, but nonetheless cooperate at the card-system level to set standards and allow consumers to use the same cards across the country, and around the world, regardless of whom they bank with.

This should give pause to statists who insist we need antitrust laws to prevent businesses from collaborating with each other. Here we have banks “conspiring” in a way that unquestionably benefits consumers by maxi­mizing both convenience and competition.

Inventing the cards was one thing — but it’s another free-market miracle that anyone uses them. After all, when the Visa card and MasterCard were created, no consumers had one, and no businesses accepted them. The banks had to figure out how to make consumers want a credit card no one accepted and how to make businesses accept credit cards no one carried! Paying with Plastic explains how they did it.

And you may have noticed that when a merchant swipes your credit card, he does so through the same ter­minal, regardless of what type of card it is. How can one little machine not only handle different card brands, but also move money between the various banks involved, all in about two seconds? Again, the book provides an easily understood explanation. And although the authors don’t consider this implication, their discussion of this issue made me think about how the use of free-market money (say, gold) would be easier than ever given mod­ern technology.

If the book’s story has a villain, it is government. Many states, for example, have obstructed the growth of credit cards through usury laws — that is, they have imposed price controls. (Banks escaped this problem by moving their offices to friendlier states, such as South Dakota.) And, of course, federal antitrust authorities are always looking for new reasons to harass businesses that have done nothing more than voluntarily cooperate with consumers and each other. The authors do a fine job of explaining the economics of those and other gov­ernment interventions and how they harm consumers.

Unfortunately, the authors fail to note that banks themselves are not without fault — they benefit from government intervention that allows them to inflate the money supply and effectively steal from all of us. And the book’s brief history of money and banking also treats the abandonment of the gold standard too lightly.

Despite these shortcomings, the book focuses on those aspects of the credit-card business produced by peaceful cooperation. It shows how the market, not gov­ernment, coordinates human action on a grand scale to advance human welfare.

Accordingly, I recommend Paying with Plastic not only to those who want to know more about credit cards — and given their ubiquitous role in our lives, you should learn about them — but also to anyone seeking a detailed example of the great things even a hampered market can achieve.

J. H. Huebert ( is an attorney and a former FEE intern.