One of my favorite books on consumer credit–and one that dramatically reshaped the way I think about policy questions involving consumer credit–is Lendol Calder’s marvelous book, “Financing the American Dream.” Among Calder’s insights is his observation that every generation of Americans has believed that the current generation wasn’t as frugal and financially responsible as earlier generations–regardless of what “current” and “earlier” describes, and going back until at least the mid-19th century. I thought of Calder as I was recently reading an article by F.B. Hubachek on usury regulations and small-loan laws:
The phenomenal increase in small loans to consumers by banks is too well known to require elaboration. Retail instalment credit selling had its original impetus earlier but it also has shown in the last decade a constantly increasing volume. There has resulted not only a staggering aggregate per capita consumer debt but a revolution in the public attitude toward owing money. The far-reaching consequences on the national economy extend into the production and distribution system and exert heavy influence on real wages….
The attitude of the average man toward indebtedness and thrift has been changed. He has been beset on every side by selling pressure calculated to make him want to enjoy today the benefits of tomorrow’s earnings and minimizing the weight of the resulting debt burden. Where once he had to obtain money in order to obtain goods, there are now several commercial sources of credit not only willing but anxious to accept his promise to pay. This complete revolution in the consumer’s attitudy toward borrowing has been too gradual to be detected during any one year, but comparison of today with 1920 makes the extent of the change dramatic.
The year this pining for the good old days of frugal America? 1941. And I’ll be if you went back to 1920 you could find similar groans about the “staggering” amount of consumer debt being layered on and the negative effect on consumer morality. (From Law and Conemporary Problems, 1941).
troll_dc2 says:
Perhaps you are right, but I would be more comfortable if you could provide specific evidence.
February 12, 2010, 3:27 pmLior says:
It’s possible for all of the groans to be accurate, of course. All that’s required is that the ratio of debt to assets (or the income stream) increase with time, with social attitudes shifting accordingly but with a time lag.
February 12, 2010, 3:44 pmAUH2O says:
But nothing here establishes that such laments were “myths.” In fact, they were each correct at every turn. Americans in 1941 WERE less financially responsible than they had been before. So too now.
February 12, 2010, 3:46 pmMark Field says:
And your evidence for this is….
February 12, 2010, 4:33 pmPascal says:
Prior to the Depression home loans were limited to terms of five years maximum. One can recall when auto loans were extended to 36 months, then 48 and the conservatives worried about the loans being upside down.
February 12, 2010, 4:38 pmProf. S. says:
I disagree with any argument that my generation (Generation X) is less frugal than baby boomers.
The way I figure, I have to pay for 2 retirements: 1 for myself and 1 for the baby boomers who are determined to suck up as much wealth as possible by depleting Social Security and other government benefits. If I hear any baby boomer complain that my generation isn’t frugal enough, then they are free to deposit a portion of their social security check (which they have just started receiving) into my 401(k) account.
February 12, 2010, 4:45 pmERH says:
What people want is the 1950s, a period of relative prosperity with a president who believed in a nation should pay down it’s debt, and an expanding middle class.
February 12, 2010, 4:49 pmTheNino85 says:
Something I’ve always wondered about this line of reasoning, whether applied to economics or culture. There’s always the subtle, unspoken assumption that “obviously, this cannot be a permanent phenomena.” Why not? Why can’t every single generation be right, and the system under consideration is degenerating each generation? It would seem to make sense, especially in the cultural arugment, that the culture is becoming “corrupt” slowly rather than rapidly. Such a degrading system over time seems to lend support to the claim that “it used to be better”, not a flaw.
Don’t get me wrong, I’m not saying that this is the case. Rather, without any supporting evidence, it seems like this is a flawed argument, and any evidence that could be used to support this claim would be better off standing on its own. So why even bother making this argument?
February 12, 2010, 4:56 pmShelbyC says:
And of course, our generation is doubling down on that behavior by running up the national debt in addition, so we’re asking gen Y or Z to pay for our retirement, their own retirement, and the national debt.
February 12, 2010, 4:58 pmLawGuy5000 says:
I could only find data going back to 1980 that shows household debt as a % of income, and there has definitely been an upward trend since then. There is no historical data before that. Though if someone wanted to compare the consumer credit outstanding going back to 1943 with personal income, perhaps we would find more insight.
My instincts are Lior and AUH are more or less correct: consumer debt has been increasing as a % of personal income for a long time. The “frugality” of the past was probably a result of there being less credit products available. I doubt it was a result of some glorified old-fashioned virtue.
February 12, 2010, 5:04 pmFXKLM says:
This isn’t really unique to consumer morality. You see the same trend with respect to sexual morality and foul language (going back much further than the 19th century). I suspect that’s because those are areas where social norms tend to change over time. If you judge Americans in 2010 by the standards of 1950, they’re going to fall short. But if you judge the Americans of 1950 by the standards of 2010, you’d find a lot of faults there as well.
February 12, 2010, 5:18 pmMark N. says:
I don’t actually see very consistent trends in that data. Here’s a graphical plot.
It looks like there’s a moderate upwards trend in the homeowners’ debt, although it goes through waves (it’s at the same level right now as in the mid-1980s), and the renters’ debt doesn’t show much overall trend at all, though there was a big bubble of it around 1998-2004.
February 12, 2010, 6:00 pmPaul Kay says:
It looks as if — except for the latter part of the Great Depression (when presumably credit was virtually unobtainable) and WW II (when savings was an an official national priority. Some of us remember Savings Bonds née War Bonds) — household debt has risen pretty consistently since 1900, giving support to the commentators who have suggested that maybe there is something to the idea that U.S. households have consistently taken on increasing debt for the last century, tolerance for debt growing apace.
“Debt as a proportion of total assets fluctuated during the first half of the century, from 5 percent in 1900 to 9 percent in 1933 and then to 4 percent in 1945. It then rose rather steadily over the postwar period, from 4 percent in 1945 to 16 percent in 1983.” Wolfe, Edward N. TRENDS IN AGGREGATE HOUSEHOLD WEALTH IN THE US., 1900-83.Review of Income and Wealth. Series 34, Number 3, 1989. http://www.roiw.org/1989/1.pdf
It would be interesting to discover whether during the relatively brief periods of constant or decreasing household debt — the Depression and WW II years — whether the belief that debt was increasing persisted.
February 12, 2010, 6:14 pmJim says:
This is my sense too. Financial innovation over the last 100 years has increased the availability of credit to individuals. On net this is a good thing, since there are many benefits to being able to borrow. At the same time, the number of people with credit troubles will also increase since there are more people using credit.
February 12, 2010, 6:15 pmscattergood says:
Um, household debt to earnings power is only a small part of the picture. When the gov’t and industry pays a large portion of your health care it will skew the picture. I suggest that you look at the chart on this link: http://www.chrismartenson.com/blog/crisis-explained-one-chart-debt-gdp/11570
It shows a a slow increase in TOTAL DEBT to GDP from 1953 to 1982, and then a HUGE acceleration in that rate of TD/GDP ratio frm 1982 on. The question is why?
The other question is what will happen as we decelerate the rate of growth or it starts moving in the other direction? A lot of economic pain.
February 12, 2010, 6:38 pmnewrouter says:
“And I’ll be if you went back to 1920 you could find ”
The Depression of 1920-21
http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321
February 12, 2010, 7:14 pmHarry Eagar says:
The view is different from the bottom of the pyramid. See Peter Schwed, ‘God Bless Pawnbrokers’ (1975); John Caskey, ‘Fringe Banking: Check Cashing Outlets, Pawn Shops and the Poor’ (1996) and Pete Daniel, ‘Breaking the Land: The Transformation of Cotton, Tobacco and Rice Cultures since 1880′ (1985).
In 1940, there were at least 10 million tenant and sharecropper families in the South whose consumer debt exceeded 100% of assets.
February 12, 2010, 7:44 pmFub says:
IANA economist, but from general reading about the 1929 crash I recall that credit for stock purchases was in fact “easy” for individuals. Large numbers of very unsophisticated people were buying stock on ~10% margin. That strikes me as very “easy” credit.
February 12, 2010, 7:50 pmThe Myth of Lost Financial Virtue: | Liberal Whoppers says:
[...] original here: The Myth of Lost Financial Virtue: [...]
February 12, 2010, 7:59 pmarbitrary aardvark says:
In 1620 when 10 of my ancestors came on the mayflower, they did so with borrowed money. I think it was paid back in 7 years, mostly with furs. The local indians were somewhat unsophisticated about consumer debt. Land was pledged for purchase of fancy clothes and booze. This was often the chiefs selling or mortgaging the tribe’s land, a sort of comingling or embezzlement by today’s standards.
February 12, 2010, 10:54 pmBoth the pilgrims and indians were for the most part very frugal, because there just wasn’t a lot of wealth to go around.
Inflation is a similar trend – people have been complaining about inflation since at least the revolutionary war period, because paper money gets inflated. I’m a debt hawk; i paid cash for law school, my house, my car. I admit today I bought this laptop on credit.
Nostalgia | Little Miss Attila says:
[...] As they say, it ain’t what it used to be. [...]
February 13, 2010, 12:28 amNorm says:
I agree with those who note it is possible for each generation to be less responsible for a very long time until eventually everything goes to hell.
The other point is that borrowing can be good or bad. It makes sense to borrow for productive assets, such as an education, passage to a new world, lodging, perhaps a first car ( and for medical and once in a lifetime things like weddings and funerals) but it is stupid to borrow for consumption if you would like to consume as much as possible in your lifetime. You wind up paying in interest what you could be enjoying in stuff if you could defer gratification a bit. Too much of the latter borrowing leads to bankruptcy and social problems.
So as credit becomes more available, some improve their productivity while others are irresponsible.
February 13, 2010, 12:29 amA. Zarkov says:
The total debt to GDP ratio (public + private) peaked in 1929, fell until about 1953 and then trended up until 1980. Then it took off (Reagan get some or all of the blame). The graph is here. So yes consumers, companies and government were profligate in the 1920s, but then became frugal for a long time until 1980. So it does appear that with the exception of the 1920s each generation is less frugal than the last.
Why are banks and companies lending so much money to people who can’t or won’t pay it back? Securitization. Debt is repackaged and sold off to investors who have less information about the borrowers. This informational asymmetry has allowed or more accurately facilitated ever greater levels of debt until the financial system breaks down. See Hyman Minsky.
February 13, 2010, 12:13 pmAllan Walstad says:
Borrow what you can’t pay, and your car or whatever may get repossessed, not to mention it may be harder to get a loan in the future. Lend to someone who can’t pay back, and you won’t get paid. In short, make bad choices and suffer the consequences. Make better choices, generally enjoy better results. Poor choices made by other individuals are their business. I suggest each of us would do well to mind our own business rather than critiquing how others mind their business.
Except, if you have fiat money being jerked around by a central bank, distorting the information signaled by prices, including information about people’s time preference and the availability of actual savings. It’s everybody’s business to wise up and put a stop to that.
February 13, 2010, 2:48 pmLouetta Wykle says:
One of the reasons why so lots of people do not benefit greatly from speedy weight loss diets is because they go from eating heavy meals to starving themselves suddenly. This is the most harmful thing that you can do to your body. Your body needs lots of minerals and vitamins to function properly.
March 11, 2010, 2:25 am