Consumption on credit has been a driving force for the economy as long as there has been an economy. Even though mass credit is new, the use of credit goes back in the United States all the way to the Pilgrims. It is not a new way to do business, but the sheer volume of business done on credit is new.
The heave use of credit made its way into the society in the late 1800’s and early 1900’s. Songs were written to encourage people to avoid living off debt. Clothing stores opened up with the basic principle of selling clothes on payments. Banks were eagerly handing out money to borrowers.
After the stock market crash of 1929, bankers tightened up their belts. It was a painful lesson to endure and they were in no hurry to relive it. Lenders still handed out loans, but now the restrictions were much tighter. Long term mortgages were only extended out for around seven years. Borrowers only qualified to get around 25% of the man’s income (regardless whether the woman of the house also worked).
World War II shocked the economy once again. Soldiers came back from risking their lives with little or no credit history. Lenders were leery about giving loans to untested borrowers. The government stepped in to help out these Veterans and their families. The Veterans Administration established housing benefits and the government began backing the loans.
Lenders were enticed by the volume of new money flowing into the market. The industry professionals that had weathered the Stock Market Crash were gone. Fueled by the influx of borrowers, lenders once again began to loosen restrictions on credit.
The length of time for a mortgage term was expanded and long term loans found their way to 30 years (and now sometimes even more). Affordable housing became something you could pay each month instead of something that you could actually buy.
Retailers followed the mortgage industry and more consumers began to purchase everything on revolving credit. Furniture, cars, appliances and even clothing or groceries could be purchased today and paid for over the next several months or weeks. It offered people the opportunity to buy things they might not otherwise be able to afford.
The next crash was felt in the 1970’s and 1980’s. Banks folded by the thousands (not by the half dozen). TRADITIONAL interest rates climbed to double digits (and even into the 20% range). But the economy recovered quickly and the problems and lessons were easily forgotten.
The credit lifestyle that is prevalent in the first few years of the 21st Century shows all the signs of the other crashes. People, companies and even the government are in the habit of extended the spending well beyond the income. Something has to give and when it does hopefully we will learn something from it this go around.
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