The credit debit-card boom

On Friday Jathon Sapsford has a fascinating Page One story in the Wall Street Journal on the revolution in how Americans purchase goods and services (subscription required). Some of the interesting bits:

For the first time, Americans used cards — credit, debit and others — to buy retail goods and services more often than they used cash or check in 2003…. By letting consumers buy things with unprecedented convenience and speed, cards have transformed the economy. They have helped keep consumer spending strong even through terror attacks and recessions. When people pay with plastic, they tend to spend more — often more than they have in the bank. Thus, credit cards also have fueled an explosion in consumer debt. It is expected to hit $838 billion this year, an increase of 6.8% from 2003 and more than double what it was ten years ago. The aircraft carrier USS Harry S. Truman went completely cashless earlier this year. The Navy issued MasterCards to all 5,000 sailors aboard. On payday, seamen insert cards into a machine that electronically loads money stored onto each card. They then use the cards for all onboard purchases. The Navy estimates sailors on the Truman buy 250,000 soft drinks monthly. When it was a cash ship, somebody had to collect half a ton of quarters each month from all the Truman’s vending machines. Those coins then had to be redistributed. Now it’s all settled electronically. An added benefit: Shipmates can use the same cards while visiting nightclubs or movie theaters on shore, as well as to send money home. The Navy has even put a swiper by the door of the chapel as a substitute for the Sunday church-service collection plate, says Cmdr. Boyle McDunn, a chaplain aboard the Truman…. Some Christians see the pervasive use of plastic as part of a dark biblical prophecy. Pat Robertson, founder of the Christian Broadcasting Network, has said that plastic may signal the cashless society of the end times foreshadowed in the Bible. Mr. Robertson’s network accepts contributions from supporters on both Visa and MasterCard…. For roughly 60 million Americans without bank accounts, however, living without cards is getting harder. They can’t easily rent cars or stay in hotels, among other things. “You’re effectively locked out of the American Dream if you don’t have some kind of plastic, and it’s going to get worse,” says Mr. Simmons, the hip-hop mogul, whose RushCard lets holders put their paychecks onto plastic. U-Haul International Inc., the truck-rental company, has begun issuing “payroll cards” to about 3,000 of its employees, or about 17% of its work force. They are mostly hourly workers who lack bank accounts. Workers can withdraw cash once a week from any automated teller machine without paying a fee, and they can use the cards wherever Visa is accepted. They can even get cash back after a purchase from the supermarket without any charge. The company, meanwhile, says it is saving about $500,000 a year in costs associated with issuing checks.

The only odd thing about the piece is the large number of paragraphs devoted to warning that the explosion of credit has led to a similar explosion in personal debt. I’d accept that, except for this piece of information contained in the story:

Last year, cash was used in 32% of retail transactions, down from 39% in 1999. Credit-card usage has remained stable, accounting for about 21% of purchases during that time. Meanwhile debit cards, which take money out of checking accounts immediately after each purchase, shot up to 31% of purchases last year, from 21% in 1999.

An increase in debit card puchases, unlike an increase in credit card purchases, would not necessariy lead to an increase in household debt. One possibility is that the use of any kind of card automatically increases purchasing size, so expenditures via debit card are larger than those with cash. If credit card expenditures remain constant, that would increase debt. UPDATE: Bruce Bartlett has an interesting and related NRO essay on why, despite the proliferation of plastic, the use of cash persists at all in the advanced industrialized states. His theory — gray market economies:

According to the Treasury Department, in 1990 there was $1,105 of currency in circulation for every American. By March of this year, that figure had risen to $2,455, an increase of 122 percent. It is highly unlikely that all of this increase is due to the needs of consumers to buy more goods and services, because per capita personal consumption expenditures only rose by 79 percent over the same period. This suggests that at least 35 percent of the increased demand for cash was for underground economic activity. A further indication that this is the case is shown by looking at the composition of currency in circulation. Since 1990, 84 percent of the increase in currency is accounted for by $100 bills. Such bills now represent 71 percent of the monetary value of all U.S. currency, up from 52 percent in 1990. Average people do not ordinarily use $100 bills, but they are used heavily in the underground economy, which includes drug dealing and other illegal activity. Hence, it is reasonable to assume that the increased demand for $100’s is due almost entirely to an increase in the underground economy.

Read the whole thing.