By John Steele Gordon
The concept of the “creative destruction” of capitalism was popularized by the Austrian economist Joseph Schumpeter in his 1942 book, Capitalism, Socialism, and Democracy. It refers to the fact that competition and innovation — two of the most important hallmarks of capitalism — destroy old industries while creating new ones. This is to the long-term benefit of the economy as a whole, if often to the short-term hardship of individual people and companies.
Nowhere can this be more clearly seen than in comparing the companies in the Dow Jones Industrial Average in 1956 with those in today’s Dow. The DJIA seeks to represent the American economy as a whole by choosing the 30 stocks that best embody it. As the economy has evolved, so has the list. The 1956 list was heavy with manufacturing and oil.
Today, only one of those 30 firms is still on the list, Procter & Gamble. The others, including such mid-20th century industrial icons as General Motors and General Electric, have been replaced with such 21st-century high-tech icons as Microsoft, Nvidia and Apple as well as financial companies such as Goldman Sachs and JPMorgan Chase.
Of the two retail companies on the 1956 list, F.W. Woolworth went out of business in 1997, and Sears Roebuck is down to a mere five stores from a peak of 2,705 in 2011. Retail on today’s list is represented by Amazon and Walmart.
Banking is as subject to Schumperterian destruction and creation as every other industry. The number of paper checks clearing today, for instance, is a tiny fraction of the number clearing 30 years ago — bad news for check-printing companies — replaced by direct deposit and online banking.
And one banking service that was ubiquitous in 1956 has now vanished altogether: the traveler’s check.
International travel for pleasure was rare in the 18th century, except for sons of the aristocracy taking the grand tour. These fortunate few would arrange for a circular letter of credit, allowing them to draw money from foreign banks that had an established relationship with the issuing bank.
The first recognizable traveler’s check was issued in 1772. But they were rare until 1872, by which time international travel had become much more common, thanks to the rising middle class and much easier means of travel. Thomas Cook and Son, a British company that arranged tours, began issuing travelers checks in 1872, and American Express began doing so in 1891. While many other banks began issuing them as well, these two companies were the major players, with American Express overwhelmingly dominant in this country.
Traveler’s checks were very convenient for the traveler and they were also very profitable for the issuing company. American Express not only charged a fee for issuing the checks, they had the use of the money, interest free, until the checks were cashed — in other words, a positive float. In the 1950s, traveler’s checks were held for an average of more than 90 days.
But capitalism was changing banking. In 1950, a group of investors established Diner’s Club, the first major credit card. At first, credit cards were supposed to be paid off every month. But the merchants were paid sooner and this meant that there was a negative float that had to be financed, cutting into profits.
In 1958, American Express saw capitalist opportunity and started its own credit card service. It was able to out-compete Diners Club and achieve dominance precisely because the positive float from its traveler’s checks financed the negative float from the credit card. In the long term, however, the credit card killed the traveler’s check business entirely.
