The Accounting System #9: Checking and Credit Card Virtualization

Previous: The Accounting System #8

It is really not much of a leap from letters of credit and a system of loans and deposits backed by a reserve of coin or cash to a checking system. Checking accounts did not become common until the 20th century, but they extended the accounting system in a very convenient way. Most people, most of the time, did not write checks for more money than they had on deposit. Merchants had ways of deciding whether or not to trust the check writer. Long before the advent of credit cards it was possible to make do with almost no cash or coin, if you were willing to use a check book for purchases.

This again added portability to the accounting system. Many people kept a careful record of the checks they wrote, the deposits they made, and their balances, thus manually doing their own accounting. That helped the banks and merchants by reducing the number of bad checks that had to be dealt with. At the same time, with checks being written all the time by millions of people, the number of transactions banks had to process became a major factor in the cost of banking. First adding machines, then tabulating machines, and finally computers were used to speed up the accounting process. At the national level the Federal Reserve System facilitated the transfer of checks so that you could send a check to anywhere in the nation and eventually it would be turned into your bank for collection.

With a systematic, universal checking system it would have been possible to eliminate coin and cash from the economy. The accounting system would have been universal, at least for monetary transactions. A dollar would have been whatever the central bankers at the Fed said it was, unrelated to the antiquated silver dollars of yesteryear. But many people did not have checking accounts. The banks did not want to deal with untrustworthy or unprofitable customers, so the cash system remained in use.

People who are used to modern credit cards, which are used to make transactions through point of sale terminals, personal computers, and smartphones, may not realize that for years credit cards were part of a system that still relied on paper. While a card could be checked for available credit by telephone, a credit card purchase was made on a receipt with a copy for the purchaser, one for the merchant, and one for the bank. The receiving bank then debited the card holders account and credited the merchants account. By the time credit cards were coming into general use, so were computers (mainframe computers). Again the accounting system extended its tentacles. A credit transaction was a small loan. If not paid off immediately it carried a high rate of interest. But it meant that the customer need do no bookkeeping: if there was no credit left, the merchant would decline the card. Shop 'till you drop took on a new meaning.

Again, with credit cards you did not need coins or cash, at least until your credit limit was reached.

Next: #10: The Federal Reserve and Accounting Money

The Accounting System #4: The Big Reversal

Previous: Banks, Credit Cycles, and Gold

Decade by decade, The Accounting System grew in size and importance. Since some of the accounting by corporations listed on the American stock markets was found to be fraudulent in the aftermath (pun intended) of the 1929 crash, the Securities and Exchange Commission (SEC) undertook to establish public accounting standards. Over time these came to be issued by the Financial Accounting Standards Board. The Generally Accepted Accounting Principles (GAAP) are used by all accountants in the United States. Similar systems are used in other nations.

When a statement about money is made that diverges from GAAP, accountants refer to those figures as non-GAAP. Non-GAAP figures issued by publically listed corporations during the Internet Stock Bubble led to the current era in which any non-GAAP figures released by traded companies are expected to be issued with an explanation of their relationship to GAAP figures.

The possession by individuals of gold coins and bullion (but not jewelry) was illegal in the U.S. from 1933 to 1974. Because there was inflation during this period, some economists claim the gold standard is necessary for a sound economy. Reasoning from ideology rather from fact, they refuse to look at the fact that using gold as money had been a historic disaster. Overall 1933 to 1974 for a great run for the American economy, showing that the gold standard had holding the nation back, rather than helping, back before 1929.

Credit cards as an idea go back at least as far as the novel Looking Backwards by Edward Bellamy, first published in 1887. Credit cards in their modern form first became common in the 1960s, when perhaps 100 million were mailed, often unsolicited, to bank customers. While there are many other forms of credit, including business loans, loans on property, and student loans, the credit card and its relative the debit card put The Accounting System in the pockets of most Americans (and their international equivalents).

This led to a paradoxical role reversal. We do our accounting in units of coin (the dollar in the U.S., originally silver coins issued by the Dutch and then Spanish governments). For portability these units are mainly represented by paper currency, mostly in the form of $20 bills accessed from ATMs. While banks count paper currency in their accounting systems, and businesses still account for such bills until they can be turned into real money (bank deposits), individuals seldom systematically account for the cash they carry or keep. Each note has a serial number, which the Federal government records, largely as a defense against counterfeiting.

In effect cash is now at the periphery of The Accounting System. Almost all money in the United States, and even globally, now consists of entries in the accounting system. These entries are not even hard copies on paper ledgers. They are held in computer databases. They are electronic representations of 1's and 0's. If something ate the banking aspect of the accounting system, they would disappear.

Thus units of value were once counted by coin, but now value is direct relation of numbers of virtual accounting dollars to whatever real goods and services they can buy at any given time.

The Internet itself led to another major expansion of The Accounting System, and a consolidation of its power over people. The Internet tied computers together, including the computers used by banks, government, corporations and individuals for accounting. This led to pressure on individuals and businesses to use electronic fund transfers rather than physical checks for all deposits and withdrawals. Physical checks are now photographed rather  than returned to their writers after cancellation. We are rapidly moving in the direction of it being difficult to use cash or even paper checks to make payments for goods and services. Physical property is increasingly identified; even ordinary jewelry diamonds have small serial numbers burned into them.

All sorts of extensions of The Accounting System have come into existence. Medical records are being virtualized. Most forms of messaging via Internet go into permanent records. Almost every action made by any individual on the Internet is recorded, and those "personal profiles" are increasingly being exchanged by corporations and governments.

The Accounting System knows what your balance is, your debt level and credit worthiness, where you shop, what you like, what you own, and whether you can get permission to drive or fly on a commercial airline or cross an international border.

The Accounting System is not just counting and recording. It is an increasingly active system that determines the fates of individuals. It has traps for the unwary and free rides for the privileged. Parts of it are fair, but much of it is biased.

Next, the virtualization of money will be examined at a much higher level of detail.

Next: #5: Physical Money as Portable Accounting

[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]

Citicorp Stole from Its Credit Card Customers

Citibank, or Citigroup as the parent company is known, just plain stole money from its credit card customers in California using a computerized theft system that must be the envy of hacker gangs. They have agreed with the Attorney General of California to give as-yet undetermined millions of dollars back to the victims.

This criminal adventure is just the latest in a long series of crimes committed by Citibank during its history. In many cases transactions that would be crimes were legalized by bribing elected officials to write laws to Citibank's liking. See my Citibank page for an outline of this criminal history.

According to a Press Release from the California Office of the Attorney General Edmund G. Brown, Jr., Citibank used a sophisticated computer program for the thefts, called a "credit sweep process." For a variety of reasons a credit card account might show a temporary positive balance, for instance if a customer paid their monthly bill twice, or returned a purchased item for credit. The positive balances were detected by a computer program that automatically disappeared them from the victim's statements. The program was especially designed to target consumers who were deceased, had sought bankruptcy protection, or were involved in litigation.

The release indicated that "Citi" also stole from customers in the other 49 states in the United States of America, but it appears that the settlement only affects California, and that the the governments of the other states either can't be bothered or can be bribed.

A whistleblower who discovered the fraud was fired by Citibank. A Citibank executive said "Stealing from our customers is a business decision, not a legal decision."

The California investigation was launched in 2005. The Citibank actions violated the California False Claims Act.

The settlement [See State of California ex rel Mellon v. Citigroup Final Judgment] provided for a permanent injunction against credit sweeps in California, refunds for the victims including 10% interest, a penalty of $3.5 million to be paid to the State of California, and an independent audit of the process.

While I can applaud Jerry Brown for this action, in general the astonishingly corrupt Legislature of the State of California has done a terrible job regulating credit card companies. In fact, credit cards were deregulated (I think back in the 1980's). Back in the good old days the state set maximum interest rates and late penaltied. The industry argued that if it were deregulated interest rates and penalties would drop due to competition. An even stronger argument was a flood of money to the campaign funds of politicians, Republican and Democrat alike. Of course after deregulation late penalties and interest rates jumped and never came down.

Computer programmers from corporate fraudsters like Citibank talk of all kinds of tricks used to milk the public. The simplest is sending out bills after the first of each month. Many customers pay bills once a month, coinciding with when rent is due. The credit card bill arrives after that, is put in a pile, and is not paid until the end of the month, by which time a penalty is added to it. Billions of dollars have been stolen that way.

According to consumers, banks even simply allowed physical payments to ripen in a warehouse for a week or so before processing them. Most people pay their bills barely on time, so the extra week made the payment late and added a penalty. Complaining customers were told the fault must be with the U.S. Postal Service. Another scam is having payments post the day after they are received due to arbitrary deadlines that make no sense in this computerized world [ See Why Your Credit Card Payment Posts Late].

California - and the rest of the nation - needs real banking and credit card reform. Don't expect to get it as long as you keep voting for the Democratic and Republican Party machines' candidates.

Barack Biden Boys Ball Club

Presumed Democratic Party nominee Barack Obama decided that women did not need to be represented on the party ticket, instead choosing notorious plagierizer, bank corporation errand boy, and militarist Joe Biden, currently Senator from Delaware, as his running mate.

There had been speculation that if Senator Obama did not choose Hilary Clinton for the ticket, he would at least choose a woman. But Barack Obama is all about getting elected, and he figures with no women on either of the two major party tickets, women will tend to vote Democratic as they have in the past. Pleasing the financial establishment is more important that pleasing women, so the man who brought us the new bankruptcy law (basically making getting out of consumer debt through bankruptcy proceedings impossible, though corporations can still easily shed their debt), Joe Biden, got the spot.

But what else would you expect of Barack Obama, a man who knows the Democratic Party was founded by a slave trader (President Andrew Jackson), who stewed his ambition in the corrupt Chicago school of Democratic Party politics, and whose campaign has been marked by vague promises targetting the nation's most naive Democratic primary voters?

Joe Biden's bid for the Vice-Presidency brings up deeper issues of Democracy in the United States. He is a Senator from Delaware. The population of Delaware is about 865,000, ranked 45th of the states. Yet Deleware gets 2 Senators, the same as California with a population of about 36.5 million. Buying a Senator in California is expensive (both Diane Feinstein and Barbara Boxer are already fabulously wealthy), but apparently buying Joe Biden was mere pocket change for MBNA, a bank known mainly for its credit card business, which was absorbed into Bank of America a few years back.

Of course Joe Biden is not an entirely bad man. Within the mainstream spectrum he has often been on the side of things I like, especially where social issues (abortion, women's rights, civil rights) don't interfere with economic issues (like MBNA's ability to charge what it liked for credit card interest and fees, then change the bankruptcy laws to trap its customers in perpetual debt slavery).

Expect leading Democratic Party women to stand behind their men; that is how they get their own bread buttered.

Want to show that you are not trapped in the two party system? The Green Party has an all woman ticket, former member of the House of Representatives from Georgia, Cynthia McKinney, and civil rights activist Rosa Clemente.

More data:

New York Times background article on Joe Biden