Credit’s rapid take-off in the United States in part reflected a simple economic truth. Between the 1870s and 1920s, American incomes were rising by around 1 per cent a year. Americans thus not only enjoyed high wages but were beginning to expect even higher wages in the future. This created a mental disposition favourable to ‘buy now, pay later’. Growth, rising income, credit and consumption pushed each other forward. Such favourable conditions would reach Western Europe only in the booming 1950s and ’60s. Liberal credit, however, also benefited from liberal politics. The wheels of America’s credit engine were oiled by democratic culture and government support. It was political culture and institutional regulation as much as incomes that set the United States apart from Europe.
To trust people with money, you need to trust people in the first place. The United States made this transition more quickly than European class societies. In the early twentieth century, the stigma of shame that had stuck to debt was sidelined by a new chorus of voices that championed credit as the road to self-improvement and citizenship. Credit became all-American. ‘We Trust the People – Everywhere,’ the Spiegel House Furnishing Company advertised in 1905.18 Social reformers lent a helping hand, training ordinary Americans in the new art of credit. The Provident Loan Society was founded in New York in 1894, the biggest of its kind. Their immediate goal was to liberate workers from loan sharks, but in their campaign for legal lending they ended up laying the foundation for a new system of mass credit. Not only did they offer loans at a low rate of 12 per cent interest, they transformed the look of credit. As their name emphasized, taking out a loan was ‘provident’, not reckless. It was not even credit, they argued, more like rent. Regular repayments would teach the poor essential skills of saving, discipline and planning. Instead of spending their extra pennies on drink (men) or frills (women), families would put them aside to repay the loan for a larger, ‘more sensible’ purchase. Similar remedial societies sprang up in Britain, where the Provident Clothing and Supply Company offered customers a ‘cheque’ worth £1 of goods that had to be repaid in twenty weekly instalments of one shilling, plus one extra for interest; by the 1930s, the company had 1 million customers who converted their cheques at 14,000 shops.19 The difference was that in inter-war America, these philanthropic societies prepared the way for much larger personal-finance companies. Official lenders multiplied. Shops issued metal ‘charge plates’, an embryonic credit card (see Plate 52). By the 1940s, many offered revolving credit (at 12 per cent interest), enabling shoppers to keep shopping without having to pay off the balance.
Everywhere, the traditional emphasis on thrift and enterprise had been a way for middle classes to justify their position vis-à-vis the ‘feckless’ poor on the one hand, and the ‘extravagant’ elite on the other. The middle class was productive; the rest were not. Now, the American middle class championed credit as the handmaiden of both their personal comfort and the national interest. Driving around in a car and filling the home with goods – all bought on credit – was productive, not wasteful. It was a lifestyle everyone ought to emulate. ‘Consumption’ shed another layer of its negative image. Buying a washing machine on an instalment plan, its defenders pointed out, did not destroy wealth. It was an investment that provided utility for years before it wore out and ‘saved’ on servants and laundry services in the meantime. Consumer durables were capital goods, in the language of economists.
In his defence of instalment selling in 1927, the Columbia economist E. R. Seligman explained how such purchases not only increased an individual’s standard of living but made him a better, more productive citizen. Credit whetted his appetite for a better life. ‘The more varied, the higher, and the finer his tastes . . . the greater will be his intelligence, his efficiency and his capacity for real co-operation.’20 The entire nation gained. These arguments picked up on David Hume and fellow Enlightenment writers who, two centuries earlier, had defended ‘modest luxury’ as a way of making people more industrious and sociable.21 It needed the American high-wage economy and a democratic culture to convert such ideas into reality. ‘Going into debt for luxuries is wrong,’ one American told pollsters in 1926, ‘[b]ut instalment buying helps the family on a small income to raise its standard of living.’22 The democratization of credit completed the democratization of luxury.
For champions like Seligman, freedom of credit and freedom of choice were two sides of the same coin. In an ‘age of liberty’, it was only natural that credit, too, was freed from paternalist controls.23 In reality, however, the American government was anything but aloof. The New Deal played a crucial role in boosting the market for personal credit. The world depression (1929–31) had choked mortgages and the entire housing industry. Roosevelt’s response was twofold. One was to offer direct help to those facing default via the Home Owners’ Loan Corporation. By the time it was shut down in 1936, it had provided assistance to one in ten mortgagors. More decisive in the long run was the Federal Housing Administration, created in 1934. The FHA did not itself lend money. Rather, it acted as an insurer for lenders, underwriting mortgages. It was a lifesaver. The mortgage crunch had been aggravated by the small size of the private banking sector, and banks had largely turned up their noses at private customers. The FHA suddenly made personal loans and mortgages less risky. Before the first year was out, over 8,000 banks had signed up to the scheme. A decade later, almost half of all mortgage funds were federally insured.24
It was a golden handshake between the banks and the state, and of historic importance for the expansion of private credit. For one, a home tends to be far more expensive than a radio or a fridge. Mortgages thus make up a much larger part of personal credit than ‘unsecured’ consumer credit. There is, secondly, a close correlation in modern credit societies between mortgage debt and other consumer credit. The greater the former, the greater tends to be the latter.25 What is decisive is mortgages rather than home ownership as such. Greece and Italy today have a higher home-ownership rate than the United States, but people there inherit homes and take out less credit.26 Mortgages, by contrast, simultaneously accustom households to taking on big debt and serve as a collateral that enables them to borrow more for other purposes. Mortgages thus raised the high-water mark of consumer credit generally. Finally, the banks’ entry into private credit opened up an untapped pool of capital. Before the New Deal, most loans had come from finance companies. By 1940, commercial banks had outpaced them.27
We must not, however, fall into caricatures of free-spending Americans and frugal Europeans. We are dealing with degrees and tendencies, not absolutes. Not all Americans greeted consumer credit with approval. As late as 1930, eminent Federal Reserve bankers blamed instalment credit for feeding Americans’ ‘passion for indulgence’ and causing the Depression.28 After the Second World War, J. K. Galbraith and others continued to worry about America being swallowed up by debt. If credit was becoming more democratic, access was never fair or equal. In the 1920s, blacks were twice as likely to buy their furniture on instalments as whites, who were more likely to ‘charge it’. With few black merchants around and little collateral, black families were largely excluded from charge cards and in-store credit.29 The Federal Trade Commission reported similar racial divides in 1969. The European reaction, too, was complex. In Britain, 7 million new hire-purchase agreements were signed in 1936 alone.30 The Nazis railed against consumer credit as anti-German but were unable to stop its expansion. After the war, consumer credit shot up rapidly and paid for 15 per cent of retail sales in West Germany. Enterprising travel agents offered the first holidays on credit. During the 1970s, consumer credit in Germany more than quadrupled.31
Ordinary Europeans, then, did not have a natural aversion to borrowing. Rather, it was their governors who rationed credit. In Italy, Mussolini’s 1936 banking law strictly limited the number of bank branches and credit providers.32 It is difficult to take out a loan if there are no lenders to go to. In France, after the war, the Conseil National du Crédit, similarly,
fixed the number of credit institutes. In 1966, a French customer wishing to buy a TV on instalment had to first make a cash deposit of 25 per cent of the purchase price – a German needed to put down only 10 per cent, a Briton a mere 5 per cent and, on top, they had half a year longer to make the last payment. It should not come as a surprise, therefore, that sales of TVs and other consumer durables were lagging behind in France.33 Older Christian fears of usury retained their resonance in France longer than in America or Britain, all the way to the 1989 Neiertz law, which capped credit rates at 20 per cent. The West German state, meanwhile, showered savers with favours. Savers were exempt from paying income tax on the first DM600 interest they earned; in 1993, when automatic withholding was introduced, the exemption was raised to DM6,000.34 Japan offered similar tax exemptions. By comparison, attempts to control credit in the United States were short-lived. In 1942, a regulation was passed to limit revolving credit to a maximum of eighteen months and a ceiling put on down payments. A decade later, it was gone, after lobbying from shops.
How much more would Europeans have borrowed in a more credit-friendly environment? A fair bit, the evidence suggests. When controls on hire purchase were briefly relaxed in Britain in 1958–60, credit jumped up dramatically.35 In most of Europe, easy credit had to wait for the liberalization of financial services and for lower interest rates in the 1980s and ’90s. In Italy, as late as 1995, every second person who applied for credit was turned down. By 2002, nine out of ten got the credit they wanted.36 More bank branches and lenders meant cheaper, easier credit.
European caution and control stemmed from a mixture of three factors: fear of inflation, social welfare and class snobbery. In the 1950s, the top priority of governments in France and West Germany was to prevent inflation from killing the economic miracle. Too much credit threatened to divert capital away from investment. It was also feared to sharpen social conflict. Consumers needed to be protected against themselves, especially the most vulnerable classes. The West German social market model aimed at harmony within growth and prioritized saving over borrowing accordingly. Easy credit would only tempt households to fritter away their hard-earned bacon. By contrast, with a little help from the taxman, Bausparen and Vermögensbildung (putting money into a building society and for wealth formation) would encourage them to save for a home and bolster social equality.
The rise in instalment credit in the early 1950s sparked a moral panic. Newspapers reported cases of workers who were up to their ears in debt and laid down their tools on the eleventh day of a month, calling in sick to avoid having their wages seized by their creditors – legally, sickness pay could not be ‘attached’. A lot of this was sensationalism. One investigation found that a mere 1 per cent of all users of instalment credit had ended up in difficulty and had their wages attached.37 Rather, alarmism reflected paternalism and class bias, and a touch of nationalist pride. After all, was it not savings that had made Prussia great? Strong Germans risked degenerating into a nation of debtors and weaklings, the last thing that was needed after a humiliating defeat. Unlike for the American middle class, credit continued to leave behind a bitter aftertaste for many German Bürger and, the more educated they were, the harder they found it to swallow that ordinary folk might borrow, too. The Bildungsbürgertum – the educated bourgeoisie – took a dim view of the lower orders’ capacity to derive genuine, civilized pleasures from additional spending. In what remains one of the most original accounts of luxury, first published in 1912, Werner Sombart, a Bildungsbürger and patriot par excellence, stressed that the uncultured nouveau riche were naturally extravagant. Their showing-off was a universal of history. Luxury, he wrote, reflected the ‘inability of the simple and crude human being to derive any but material pleasure from life’.38 Such class prejudice cast a long shadow, well into the miracle years of the 1950s and ’60s. In public, the middle classes were vocal champions of thrift. In private, interestingly, they topped the league of borrowers. Available data from credit institutes shows that civil servants (Beamte) made up a disproportionately large group of customers.39 It is difficult to avoid the conclusion that the bourgeoisie’s paternalist impulse to protect ‘ordinary’ consumers from themselves drew at least part of its strength from a class interest in keeping credit to itself and hoi polloi at bay.
Where credit was rationed, it gave a boost to older, more informal credit networks. The resilience of the itinerant credit trader and the strength of mail order mirrored the relatively slow advance of private banking in post-war Europe. True, Crédit Lyonnais in France, the Midland Bank in Britain and German banks all introduced personal loans in 1958–9, but these reached a tiny clientele only. A decade later, one in five Frenchmen had a current account, and most British workers were still paid in cash. Banks handled only a small portion of consumer credit – roughly a third in Britain in 1966. Someone who wanted to borrow to buy a car was more likely to go to a finance house. Credit for furniture and clothing came from shops and mail order.
The credit market, then, was segmented, not transparent or competitive.40 This was one reason Europeans borrowed less. Rationing especially affected big amounts. There was little shopping around for the best credit deal. When turned away by one lender, most families abandoned the search for credit and put the next large purchase on ice. Smaller amounts were a different story. What the suburban department store was in the United States, mail order was in Britain: the primary school of consumer credit. For working-class families, it provided easy access to the world of goods within the comfort of the home. Banks were for toffs, mail order for the people. On post-war housing estates, class, community and personal relations underwrote credit in ways not so different from street lenders a century earlier. In 1970, at their peak, mail-order firms employed 3 million agents, mostly local women with slightly higher status to communicate respectability and a lifestyle to emulate. ‘Every Friday evening,’ a local catalogue lady recalled, ‘my neighbours and friends would come and sit in my kitchen, drink tea, look at the catalogue again – [and] pay their cash.’ 41
SAVING AND SPENDING
It is tempting to treat credit and saving as opposites, but for most households in modern societies they have been complementary strategies. What has changed is their relative function and the balance between them. Like institutional credit, saving was a modern invention. And as with personal loans, saving was initially promoted by social reformers before finding an ally in the state. On both sides of the Atlantic, the first savings banks opened in the early nineteenth century, set up by philanthropists to teach workers and small traders the virtues of thrift, sobriety and independence. Saving, they hoped, would break the vicious cycle of extravagance and poverty and set the poor on a path of industriousness and self-improvement. In the late nineteenth century, postal savings grafted national networks on these local initiatives. It was the two world wars that put the state into the driver’s seat. War bonds and savings stamps became a matter of national survival. As with new forms of credit, saving advanced through a transnational network of exchange and emulation. Japanese reformers first took a leaf out of the Belgian and British postal saving books in the 1870s. A century later, they would export savings promotions to South Korea, Singapore and Malaysia. Across the world, schoolchildren deposited their pennies with their teachers in weekly thrift parades. No country rivalled Japan’s savings crusades. After the Second World War, 8 million schoolchildren participated in children’s banks (kodomo no ginkō). In the 1970s, postal savings halls gave Japanese savers privileged access to swimming pools, hotel rooms and wedding halls. By then, Japan’s household savings rate stood at 23 per cent.42
There can be no doubt that these savings promotions were among the most extensive campaigns of behaviour change orchestrated by states in the modern period. Their contribution to war and peace is equally clear. Savings kept the war machine running, among victors and the defeated alike. Most Americans entered the Second World War not saving at all but emerged from it holding US savings
bonds. In the 1950s–’70s, savings played a vital role not only in Japan and Korea but in other fast-industrializing countries like Finland, channelling capital from households to industry. The question is about the extent to which these campaigns actually moulded new ‘habits’ and ‘enduring cultures of thrift’, as one recent historian has argued, and can explain why today ‘America spends while the world saves.’ 43
Putting it like this both exaggerates the habitual nature of saving and the gulf between short-sighted, spendthrift Anglo-Saxons and the supposedly forward-looking thrifty rest. Habits are routines that are repeated regularly and acquire a subconscious force of their own. There is little evidence that savings campaigns made thrift habitual. Quite the opposite: the historical record suggests saving is fickle. Households switched behaviour, often dramatically, in response to changing pressures and stimuli. That is precisely why patriotic appeals or coercion was required to get people to save in the first place. Singapore was honest when it called its plan ‘forced-saving’, by which 50 per cent of a worker’s gross wage had to be paid into the Central Provident Fund set up in 1955; the rate was lowered to 36 per cent in 1986, where it has stayed to this day – the employee contributes 20 per cent, the employer 16 per cent.44 In fascist Italy, the voluntary saving scheme was so unpopular that it had to be shelved in 1931. Several decades of aggressive campaigning did nothing to prevent the rapid collapse of saving in Japan and Korea at the end of the twentieth century, when rates plummeted from 12 per cent and 24 per cent respectively in 1990 to below 1 per cent by 2007. The same schoolchildren who had routinely dropped off their yen in savings drives, week after week, year after year, turned to credit and spending in middle age once stagnation hit and consumer credit became more readily available.45 It is doubtful whether savings campaigns planted a culture of wise housekeeping and foresight. Financial literacy looks no brighter in Japan or Korea than in Britain, according to the OECD. When South Korea adopted the US bankruptcy code in 2004, a stunning 8 per cent of the population defaulted, twenty times that in the United States.46
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