The American Dream and Consumer Credit

By Stephen Smith

Here's one history lesson you probably didn't get in elementary school: the American dream was bought on the installment plan.

The conventional story goes that we, as a nation, descend from a thrifty people who hacked their prosperity out of the New World wilderness through hard work, frugality and self-denial. In this fiscal state of grace, personal indebtedness was a sinful thing, a moral failing.

Only in the past century, the story continues, have Americans driven themselves from their economic Eden. We've binged on credit to satisfy a relentless hunger for iPods and designer baby blankets and second homes with three-car garages. While there's truth in this familiar narrative, the real picture is more complicated.

"There never was a golden age of thrift," historian Jackson Lears wrote in The New York Times in 2006. "Debt has always played an important role in Americans' lives - not merely as a means of instant gratification but also as a strategy for survival and a tool for economic advance."

"A river of red ink runs through American history," says Lendol Calder, author of Financing the American Dream - A Cultural History of Consumer Credit. "Americans have always lived in debt. The Pilgrims came over on the installment plan." London merchants essentially financed the New World expedition with the Pilgrims agreeing to work without profit for seven years.

In the 19th century, moralists differentiated between "productive" and "consumptive" debt. Getting a loan to buy a farm or start a business was productive. But borrowing to satisfy personal appetites was generally frowned upon. Even so, some celebrated Americans went deep into debt to keep up with the neighbors; Thomas Jefferson, for one, had champagne taste but a hard-cider budget. And because physical money - coinage - was so scarce in rural America, 19th century farm families commonly ran up debts with local stores.

The practice of Americans buying consumer goods on the installment plan dates back to the Civil War. Manufacturers realized that more people could afford to buy sewing machines and parlor organs if they bought now and paid later. By the early 20th century, increasingly efficient American factories churned our more and cheaper products, like washing machines, refrigerators, phonographs and radios. Most of them could be bought on installment.

But it was the automobile that really accelerated the American way of debt.

In 1908, Henry Ford's first Model-T rolled out of the factory. Compared to other cars, it was modest and inexpensive - a "car for the great multitude," Ford declared. The Model-T cost $850 ($20,156 in current dollars). But the multitude found it hard to scratch together cash up-front. An average family had to save for years to buy Ford's "affordable" car.

"So smart entrepreneurs start to think through the problem," says historian David Farber, author of Sloan Rules - Alfred P. Sloan and the Triumph of General Motors. "How do you get people to buy things that they can't afford with the money in their pocket?"

In 1919, GM's answer was to loan consumers the extra money they needed. GM president Alfred P. Sloan and his corporate lieutenants created a financing arm called the General Motors Acceptance Corporation (GMAC). Many of the early auto loans required a 35 percent down payment, with the rest due in installments over the course of a year (before repair bills started stacking up). This was called selling cars "on time."

"General Motors invented the credit system. They also created modern methods of advertising and marketing. GM was at forefront, in many ways, of what we think of as modern consumer capitalism," Farber says.

The socially conservative Henry Ford scowled at GMAC's auto loan business. "Ford had older views about whether it was a good idea to use debt to finance cars," Caldor says. "He was against it."

While many Ford dealers offered their own payment schemes, the Ford Motor Company stuck to an old-fashioned layaway plan. It was called the "Weekly Payment Plan." Customers could select the style of car they wanted and make a down payment. "Ford asked people to bring in $5 to $10 a week and deposit it in an account run by their local dealer. And then when they had enough money in the account - only then could they take delivery," Caldor says.

Ford's "Weekly Payment Plan" failed miserably, says Farber. "Americans wanted fancy cars, ones they could buy on credit. So Ford lost." General Motors overtook Ford as the leading American car maker. And by 1928, Ford Motor Company set up its own auto loan subsidiary.

Americans gobbled up the increasingly-available credit for durable goods. By 1930, most appliances, radios and furniture were bought on the installment plan, including more than two-thirds of all automobiles.

Meanwhile, another form of consumer credit had also been expanding in the first decades of the 20th century: "personal" loans. In earlier times, middle and working-class people who needed to borrow relatively small amounts of money got turned away by banks and other financial institutions. They relied instead on relatives, pawnshops or loan sharks.

By the 1920s, newly-formed firms with respectable sounding names like Household Finance Company (HFC) and Beneficial Loan Company hoped to chase away the shadows hanging over the small-loan business.

The Household Finance Corporation made a promotional film in the 1930s encouraging Americans to take out small loans to pay off other debts.

An HFC promotional film from the mid-30s featured an average-looking, middle-class couple in their modest living room. Having packed their young children off to bed, the husband and wife worry about how to get the cash to pay for groceries and an overdue doctor bill. Just then, a program comes on the radio explaining the virtuous nature of personal loans for borrowers of "good character and living habits."

This was the Depression, and some 25 percent of Americans were out of work. Millions more saw their wages or hours substantially cut back. But the promotional film assured that a "self-respecting" family could turn to HFC for help.

"Why do people borrow money?" the narrator asks. "Household loans are made primarily for the purpose of helping families get out of debt." Others borrow for business needs, travel, education and moving expenses, he explains.

"That may be the very help we need!" the wife concludes.

The systems and sources of consumer credit exploded in the years following World War II. In the 1950s and early 60s, charge cards like Diners Club and American Express became popular. In the late 1960s, a credit card revolution led to Visa, MasterCard and Discover. According to a Federal Reserve study, 75 percent of American families now buy with plastic. The median outstanding balance is $3,000.

At every stop on this American journey of indebtedness, social commentators have proclaimed the virtues, but more often the vices, of consumer credit. In the mid-1920s, sociologists Robert and Helen Lynd uneasily observed the increasing materialism and indebtedness of town folk in Muncie, Indiana. "The automobile has apparently unsettled the habit of careful saving for some families," they wrote in their best-selling book, Middletown. Some people, the Lynds noted, even mortgaged their homes to buy a car.

Other observers said fretting over debt is a misplaced worry. Some hailed the growing "democratization" of credit, as middle and working-class Americans got access to financing that was once reserved for the privileged. Historian Lizabeth Cohen, author of A Consumer's Republic - The Politics of Mass Consumption in Postwar America, observes that "economic abundance and democratic political freedom, both equitably distributed…became almost a national civil religion" in mid-century America.

Writing in the Atlantic in 2008, libertarian Virginia Postel declared, "The expansion of consumer credit is one of the great economic achievements of the past century." She praised the convenience and autonomy modern credit provides at relatively reasonable cost.

While the debt-is-dangerous and the democratization-of-debt stories are powerful, the reality may be far more prosaic: debt is why we continue to put in long hours at work even though we live in the wealthiest society in history. Once the credit-card purchase is complete, it's payback time. Literally.

"What follows is weeks, months, sometimes years of hard work to pay back the bills," Caldor says. "That's not hedonism to me. That looks like discipline."

In this view, the installment plan gets workers to show up on time, to meet their social obligations, and to keep fueling the consumer society that powers American prosperity.

In other words, there's a bumper sticker pasted to the tailgate of the modern American dream. It reads: "I owe, I owe, so off to work I go."

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