Passage II

SOCIAL SCIENCE: This passage is adapted from Financing the American Dream: A Cultural History of Consumer Credit by Lendol Calder (©1999 by Princeton University Press).

The statistical record of lending and borrowing in the early twentieth century is fragmentary and much of it based on interpolations, making it difficult to offer precise statements about the rising level of consumer debt. But all the numbers point in the same direction—up—at rates steeper than ever before. The best available figures are still those of Raymond Goldsmith. For every year after 1896, Goldsmith found that personal debt increased at rates well ahead of the rate of population growth. But from 1920 to 1929, the volume of consumer debt soared upward 131 percent, from $3.3 billion to $7.6 billion outstanding. The Depression interrupted this rising curve, but by 1937 consumer debt reached its pre-Depression levels and continued rising upward, until it was halted by credit controls during World War II.

This large increase in the volume of credit extended in the 1920s suggests that there were more borrowers than before, or that people were borrowing in larger amounts, or both. To throw light on this question, Martha Olney has used Goldsmith's data to calculate the increase of debt per household from 1900 to 1939. She found that before World War I, households increased their debt burden about four dollars per year. But in the 1920s, the increases averaged fourteen dollars per year. Looking at debt as a percentage of the income that could be used to pay it off, a more telling statistic than simple increases in the amount of debt, Olney found that between 1900 and 1920 debt hovered between 4 and 6 percent of income. But in the 1920s the ratio doubled, rising to almost 10 percent. The most impressive evidence produced by Olney's econometric analysis concerns "real debt"—that is, total debt that is deflated by an index of prices of major durable goods. Between 1900 and 1916 real debt actually declined somewhat. But from 1920 to 1929, real debt per household almost doubled, rising (in 1982 dollars) from $388 to $739. As Olney points out, the burden of debt on indebted households was in many cases much higher than that indicated by aggregate figures, because some households remained debt-free in the 1920s. But clearly many people in the 1920s became consumer debtors for the first time, or added significantly to their debt load.

The driving force behind this huge expansion of debt was, literally, the driver. By 1926 two of every three cars sold in the nation were bought on credit. Credit financing made the automobile the quintessential commodity of the American consumer culture. Credit plans also figured prominently in the selling of radios, refrigerators, and other expensive consumer durable goods.

Who was lending all this money? In the latenineteenth-century credit system, household lending and borrowing was generally conducted on the subterranean levels of society. Credit was usually a matter between private individuals. If it was necessary to go outside the circle of family and friends for a loan, the likely options were retailers, pawnbrokers, and illegal moneylenders, or "loan sharks."

But in the early twentieth century a new structure of household finance emerged. Erected by enterprising businesspeople, progressive reformers, and illegal lenders seeking a legitimate business, the new system included installment sales finance companies, retail installment lenders (particularly department stores), licensed consumer finance companies, and a number of other lenders, such as credit unions and personal loan departments of commercial banks. These new institutions brought capital, bureaucracy, and rationalized procedures to the very old business of consumption credit. They contributed to a system of credit Janet Ford aptly describes as "continuous, regular, organized, a series of increasingly impersonal, often visible bureaucratic transactions between individuals and institutions."

The new lenders brought the blaze of publicity to what had been formerly a hidden, private matter. Painfully aware of the stigma attached to their forerunners in the consumer lending business—pawnbrokers and loan sharks—the innovators of the credit revolution used advertising and "educational" public relations campaigns to bring lending and borrowing out of the urban shadows. In the process, they made household credit one of the most heavily promoted consumer services of the 1920s. By the end of the decade, phrases such as "Buy Now, Pay Later!" were standard in the vocabulary of American consumership.