History of Consumer Credit in America
"Nothing in the area of finances has so dominated or influenced the direction of our society in the last few decades as much as debt. It's amazing when you consider credit cards have only played an influential role in American life since the 1980s. It was once unusual to finance a car purchase, and mortgages used be mostly for G.I.s who were getting their starter homes." - Larry Burkett (Debt Free Living)
I'm currently reading (listening to) Debt Free Living: Eliminating Debt in the New Economy by Larry Burkett (affiliate links: Book | Audio). The title tells you what it's about, but I wanted to share with you, some insights from one of the chapters that really made me say... "ooohhhh! That explains so much!"
I often listen to books on my commute, and I'll admit that this one (the narrator) is not that captivating, but the content is great. The first half of the book are a handful of scenarios of young folks and how they stumble into financial trouble, and later how they manage to dig their way out. There's certainly bits of every story that are relatable, and the rest are helpful in understanding how easy it is to head down the wrong financial road early in life, like many of us have.
I want to share a history lesson with you from one of the chapters of the book because I think it provides some eye-opening context for the debt problem that is plaguing America at this time. Many people have been affected by the most recent recession (2008 ish) and while I'm usually more of a forward thinker, the past can give us some great lessons as we try to build our futures. Let's dig in...
Interlude 1: Quick history lesson
There are many types of loans and extensions of credit that have become the "norm" in America over the past 80 or so years. The availability of credit hasn't always been this prevalent. Here are a handful of types of loans that have become popular in the last century.
- credit cards
- car loans
- 30 year mortgage
- consolidation loans
- finance company loans
- parental loans
- student loans
The author then asks this question: How did our culture change so quickly?
And in a sentence... the cycle of debt and credit changed everything...
The Great Depression - post World War II. (1930s-1950s)
The Great Depression forced Americans to be conservative, but after World War II, there we several million ex-G.I.s (Government Issue - used to describe soldiers in World War II) who needed homes, jobs, and educations.
- Banks didn't want to extend credit to the enormous number of men who had no credit history.
- As a last resort, the government stepped in and became the lender.
- The G.I. Bill was born (education and housing to wartime veterans with a government guarantee).
- The economy boomed.
- The GIs went to college and bought houses and took on debt to do it.
- This was the first time the American government supported private lending.
- The American people loved how this was working and a whole new idea was born... consumer credit.
The government soon extended the credit offerings to non-vets through various government backed entities. This allowed for easier purchasing of goods and services, which in turn had an affect on supply and demand, inflating prices along the way.
Once this cycle began, conservative folks were forced to borrow to compete for products they couldn't afford to buy with cash.
At this point private lenders started providing loans (knowing they could make money from the booming economy as well). Young Americans flooded the housing market and inflation became the norm from this point forward.
Mortgage lenders started using a rule of thumb of no more than 25% of the males monthly income could be used to pay for housing.
Longer-Term Loans (1960s)
In a greed fed economy, mortgage lenders realized they could get more people into homes by offering longer term loans (30 year loans)
Low income families could now afford more house than ever before because the payments were lower over a longer period of time.
The conservative generation who suffered through the worst of the great depression was now retiring and handing over the reigns of businesses to a generation who had been raised on credit and held a more aggressive financial view.
- Nearly every segment of the economy was now dependent on credit. Even consumer items like clothing, medical care, and travel were available through credit cards.
- The American people could now borrow against the equity on their assets like their homes, stocks, and businesses.
- America was now back where it was before the great depression and dependent on debt to provide growth in the economy.
- Mortgage lending rule of thumb became 40% of both incomes paving the way for the two income trap.
1980s and 1990s
- Debt was driving the entire economy.
- Consumers were forced to borrow the equity out of their homes in order to educate their children and purchase cars.
- Leasing cars became very popular.
- Family financial problems started becoming the norm.
- Fannie Mae and Freddie Mac were bailed out by the government and the tax payers absorbed hundreds of billions of dollars worth of bad mortgage loans.
- American household debt nearly doubles between 2000 and 2007. $13.8 trillion.
Woah! Isn't that crazy? This stuff fascinates me, and I'm sure I didn't really do the information justice. If your interested, check out the book and give it a read. This chapter alone is worth it!
I'm not blaming anyone in this, it just struck me to connect the dots on the history of debt. Just a series of events that compounded problems on top of one another. I'm just grateful to have worked hard to pay off our debts in our twenties so we can work on compounding interest on the positive side of the equation.
We've had to give up on some things we thought we might have by now, but that's ok. Getting in tune with how God wants us to handle our money provides so much peace and makes much more sense to me now than when I was chasing worldly possessions (still happens from time to time, but everything is budgeted for).
What do you think of the history of consumer credit? What did you learn that you hadn't thought about before? Leave a comment.