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date: 14 November 2019

The History of Credit in America

Summary and Keywords

The United States is a nation built on credit, both public and private. This article focuses on private credit: that is, credit extended to businesses and consumers by private entities such as banks, other businesses, and retail stores. Business credit involves short-term lending for items such as inventories, payroll, and the like; and long-term lending for the building of factories, offices, and other physical plant. Trade credit, bank loans, bonds, and commercial paper are all forms of business credit. Consumer credit is extended to individuals or households to fund purchases ranging from basic necessities to homes. Informal store credits, installment sales, personal loans from banks and other institutions, credit cards, home mortgages, and student loans are forms of consumer credit.

Until the 20th century, the federal government remained mostly uninvolved in the private credit markets. Then, after World War I and especially during the Great Depression, the government deliberately expanded the credit available for certain targeted groups, such as farmers and home buyers. After World War II the government helped to expand lending even further, this time to small businesses and students. Mostly the government accomplished its goal not through lending directly but by insuring the loans made by private entities, thereby encouraging them to make more loans. In the case of home mortgages and student loans, the government took the lead in creating a national market for securitized debt—debt that is turned into securities, such as bonds, and offered to investors—through the establishment of government-sponsored enterprises, nicknamed Fannie Mae (1938), Ginnie Mae (1968), Freddie Mac (1970), and Sallie Mae (1972). Innovations such as these by businesses and government made credit increasingly available to ordinary people, whose attitudes toward borrowing changed accordingly.

Keywords: credit, mortgages, banks, bonds, debt

Business Credit in the 18th and 19th Centuries

Throughout the colonial period, British merchants provided the credit that fueled trade between England, Scotland, and the American colonies. Although using a number of financial instruments—bills of exchange, notes, bonds, and book credit—it was the element of trust, based upon honest information between merchants, individuals, and families, that glued together this vast mercantile credit system.1 The Boston-based Jackson and Lee families, for example, established trading networks after the War of Independence that spanned the West Indies, Far East, and India. Their business and social networks lasted until well into the 19th century and became tied to other prominent Boston families. Economic conditions also played a vital role. As competition between merchants intensified from the mid-18th century onward, they extended more credit to attract customers. The competition often led to “credit bubbles,” such as the one that occurred in the early 1760s after the Seven Years’ War.2 After this bubble burst, deeply indebted borrowers had to trust that their creditors would allow them extra time to pay off their loans. But despite the periods of economic instability, British merchants continued to arrive in colonial seaports such as Philadelphia, offering business credit from established mercantile houses. It appears that commercial trust and confidence were able to survive even the bursting of speculative bubbles.3

Banks became another source of funding for business ventures. Formerly prohibited in the colonies, banks appeared in the post-Independence period and were both privately and state supported. (The Bank of North America, created by the prominent merchant Robert Morris and chartered by the Continental Congress in 1781 to help fund the War of Independence, was the country’s first commercial bank.) Whereas merchants provided the bulk of business credit prior to independence, by the beginning of the 19th century the number of banks was growing rapidly: 102 state-chartered banks existed by 1810, and there was more than twice that number by 1815. They were regionally focused, with four-fifths located in the northeast by 1835.4 Linked to merchant investment activities and loan practices, these banks bought (for a fee) financial instruments such as bills of exchange, the paper evidence of merchants’ loans.5 In return the merchant received bank notes which he or she could then use as money. For most of the 1800s, until a national currency was put into place, bank notes based upon debt from business transactions formed the basis of a large part of the new nation’s currency.

Regional economies continued to shape the myriad models of banking that emerged in the first half of the 19th century. In New England, for example, state governments imposed few regulations on the banking activities of small, one-office or unit banks. There, banks were established by merchant families or merchant groups, and the loans were mostly confined to individuals and businesses who were well known in the community (including, in many cases, the bankers themselves). A few prominent families—such as the Appletons, Lowells, and Browns—controlled several banks in their localities, and historians have identified long-running kinship networks in the area, such as the Brown, Ives, and Goddard families, who ran the Providence Bank of Rhode Island for some 130 years.6 The southern states, by contrast, saw the establishment of larger banks whose activities were inextricably linked to the region’s export of crops such as cotton. Although the regional banking systems were uniquely different, the combined effect throughout the antebellum period was to increase the amount of bank credit in the United States to significantly higher levels than in other countries, allowing for investment in a great number of projects.7 Overall, compared to the gross domestic product’s (GDP) estimated annual growth rate of 4.3 percent, US bank credit averaged a 6.3 percent growth rate in the decades up to 1860.8 Banking thus proved that it could be enormously profitable, drawing cotton factors, brokers, and merchants—all of whom brought together buyers and sellers of goods or financial instruments—into the banking business on a full-time basis. The Philadelphia merchant Nathan Trotter was one example. Starting out as an importer and metals dealer, Trotter left the business to his sons in order to pursue business lending full time.9 Other merchants became private bankers who imitated the activities of state-chartered banks by issuing notes that could be used as currency. Private bankers became entrenched within the US economy, with over 1,000 operating across the country by the eve of the Civil War.10

Merchants continued to play an important role in credit financing, however, because most banks did not extend loans to meet the aspiring needs of farmers, artisans, or small store keepers settling in newly opened territories. These smaller business ventures depended on mercantile (trade) credit for seed, tools, inventories, and other goods. Unlike a cash loan, trade credit consisted of allowing buyers to make use of their purchases before they had paid for them. The extension of trade credit to ordinary individuals enabled rapid settlement and expanded the number of business ventures. The role of trade credit within the mid-19th-century economy was substantial: in 1858, according to the Mercantile Agency, store keepers (out of an estimated 157,394 around the country) each owed approximately $14,500 to “jobbers” or wholesalers. Trade credit of nearly $2.3 billion comprised almost half of the nation’s entire GDP of around $4.1 billion.11 Mercantile credit was also important in the export of commodities, particularly cotton. Both northern and southern merchants acted as “factors” (go-betweens) for buyers and planters by vouching for their clients’ character with regard to credit, and by paying for and guaranteeing all credit advances.12

Within nascent industries such as the textile mills in New England—manufacturers of items such as yarn, woolens, and cotton cloth—merchants could also be found acting as an important source of funding. Drawing upon decades-long connections, owners of mills were able to negotiate short-term loans at low borrowing rates with their merchant creditors.13 In Philadelphia, the successful merchant Nathan Trotter began discounting (making loans against) the paper IOUs of manufacturers. As Philadelphia and the surrounding areas industrialized, Trotter made loans to foundries and mills of all kinds as well as canals and, eventually, railroads. Having working capital to meet immediate operating expenses was necessary if the fledging enterprise was to have any chance of success. In the early days of industrialization, meeting payroll and inventory needs, for example, was more important than taking out long-term loans to expand fixed assets such as buildings and equipment.14 A few lenders, Trotter among them, were willing to risk making longer-term loans of four to six months. They charged higher rates of interest to compensate for the greater risks.15

By the post-Civil War decades, Americans had built up surplus capital that could be invested in other projects. Established businesses and firms that could operate through retained earnings, particularly in New England, began looking for new investment opportunities other than the traditional areas of land and improvements. The bonds of banks, large industrial companies, and the nation’s expanding railroads increasingly became a focus. As a flexible form of loan from an investor, bonds had been bought and exchanged since the early 1800s but had received more attention during the Civil War after the bond drives of the Union financier, Jay Cooke, convinced the American public that investing in securities was financially sound and carried little risk. For investors large and small, novice or experienced, the railroads provided such an opportunity. Railroad corporations, such as the Pennsylvania Railroad, increasingly depended on bond issues for expansion; bond buyers, for their part, were in a more confident position to invest because in the event of the railroad’s failure, they had a better claim than stockholders to the company’s assets.16 During times of low inflation, moreover, bonds provided a solid investment as fixed-income securities.17 Accordingly, bonds dominated the investment patterns of the last quarter of the 19th century: the bond-to-stock ratio increased from 62 percent in the years 1875–1879 to 118 percent in the five-year period 1890–1895.18 Of course, the risk could become too great, especially during economic slumps such as the 1890s depression, when over 25 percent of railroad corporations found themselves insolvent.19 A short-term IOU, termed commercial paper, became another financial instrument of credit that companies sold directly to investors. As opposed to loans coordinated from a handful of small banks, these issues provided much larger, concentrated loans to businesses and avoided time-consuming negotiations.

Toward the end of the 19th century, as manufacturing ventures and railroad expansion flourished, corporations involved in industrial concerns were no longer perceived as high-risk places to invest in. In fact the opposite was true: their assets in terms of plant facilities and equipment, ability to fund projects through retained earnings, and effective issuing of bonds and commercial paper all made them appear very attractive to potential investors. Industrial business ventures were perceived as creditworthy and could now enjoy competitive rates when borrowing from banks and other sources of investment. Although southern industrial firms still often encountered difficulties in accessing credit, the securities of northern corporations operated at a national level, leading to an eventual dominance in the New York stock exchange.20

The large scope of industrial projects meant that they could not depend solely on loans from commercial banks, whose small size limited how much they could fund.21 The void provided opportunities for entrepreneurs such as J. P. Morgan, who used their connections to assemble pools of capital from investors. The resulting investment banks, the direct predecessors of the institutions that bear that name today, funded the mergers of massive industrial corporations: the merging of Federal Steel Company, National Steel Company, and Carnegie Steel Company to form the United States Steel Corporation, worth a staggering $1.4 billion in 1901, is one example of investment banking activities.22 This type of large-scale investment radically transformed traditional thinking about borrowing capital only for the short term to cover the costs of day-to-day operations.23 By the onset of World War I, long-term debt was a crucial component of any corporation’s balance ledgers, viewed by firms and their investment bankers as essential to have in the event of the need to restructure or to ward off failure.

Business Credit in the 20th Century

The first third of the 20th century witnessed an unprecedented rise in the number of banks. These were mostly one-unit banks because in most states the interest of small bankers had won out over the larger banks that had wanted to establish branches in other states.24 In the decade 1900–1910, the number of nationally chartered banks almost doubled, from 3,732 to 7,145, and that of state-chartered banks, trust companies, and loan companies rocketed from 4,659 to 13,257.25 There were pros and cons associated with one-unit banks. They were more community-oriented, and the bankers were familiar with the needs and struggles of their local borrowers. However, the banks were less stable during financial panics, and their financial failures added to the national economic crises of the 1920s and 1930s.

When banks were unable to lend, entrepreneurs filled the void with a system of loaning money to small businesses backed by accounts receivable, or payments due. Many businesses had significant amounts of accounts receivable, yet almost no banks recognized these assets as collateral for loans. “Factors,” as the new lending firms became known, not only made loans using a company’s receivables as security, but also tracked down delinquent accounts, took over the risk of nonpayment, and at times even bought the receivables outright at a discounted rate. The factors’ cost-effective services helped small businesses to compete with larger firms and made factoring an important fixture in business financing.26 Their services were especially important in the automobile industry, where auto wholesale and retail paper comprised 90 percent of the $1 billion factor market by 1933.27 By the end of the 1950s there were approximately 400 companies specializing in factoring activities.28

Another important source of lending, trade credit, proved remarkably important and resilient in times of both economic slumps and booms. In the 1954 recession, for instance, when the volume of total sales fell by $15.2 billion, bank credit also fell, in this case by $300 million. Trade credit, however, actually expanded to $4.1 billion. During the following boom year of 1955, when restrictions on the money supply meant that more businesses would have to rely on credit, bank credit expanded by only $6.3 million compared to trade credit’s increase of $10.7 billion.29 As a flexible financing tool, trade credit clearly stood in as a replacement for loans from banks; by 1962 there was approximately $111 billion in trade credit outstanding in the economy. That figure meant that the amount of trade credit was larger than all other forms of business credit, including state and local securities, bonds, and bank loans.30

Despite this growth in borrowing, the corporate culture of the 1960s and 1970s tended to err on the conservative side regarding how much debt a company should carry. Possibly an outcome from the Great Depression and the postwar years, many corporate executives believed that growth should be based upon reinvestment of earnings, as opposed to borrowing, and that debt interest payments, although tax deductible, should not exceed one-sixth of the company’s operating profits. As a tool, therefore, company managers and officials in these decades eyed debt cautiously, not necessarily seeing it as an opportunity that could be “engineered” for a corporation’s financial benefit.31

Financially creative moments regarding credit had occurred from time to time, however. One such instance was Clarence Dillon’s use of discounted cash flow (a method that estimates the value of an investment, taking into account factors such as the accumulation of interest) and net present value (the value of an investment in the present, as opposed to what it will be worth in the future) to outbid J. P. Morgan for the Dodge car company in the early 1920s.32 Dillon’s tactic demonstrated that a business’ future earning capacity could be included in the calculation of how much credit to extend.33 Scholars also contributed to the more positive view that debt could actually be beneficial for corporations. William Sharpe argued that in times of stock market volatility, debt was, in fact, a more reliable funding source because the interest on debt was tax deductible, making debt more cost-effective than equity. Two other economists, Franco Modigliani and Merton Miller, put forward the theory that the question of whether a firm was financed through equity in the form of stock, or through debt in the form of bank borrowing and bonds, had absolutely no impact on the firm’s value. As a further move in the rehabilitation of debt perception, Edward Altman came up with the Altman Z-Score, an analytical tool to predict a corporation’s risk of bankruptcy. All told, these academics were able to convince corporate executives and their investors and bankers that risks could be managed and that debt should be considered as a legitimate component of any firm’s investment portfolio.34

With this changed perception, by the 1970s leveraged buyout (LBO) firms such as Kohlberg Kravis Roberts (KKR) were able to argue that debt, rather than retained earnings, actually enforced greater discipline on managers. But part of this discipline required streamlining and efficiency so that companies could meet their payments, often resulting in downsizing of the company and its employees. Because dividends were taxed but interest on debt was exempt, the result was that the tax code ended up subsidizing the LBOs.35

Mortgage Lending to Households

For working families in the first half of the 19th century, achieving home ownership was difficult because there were few mortgage lending institutions. Although some Americans, including land speculators, had access to private sources of financing, commercial banks viewed mortgage loans as carrying too much risk. To fill this gap for ordinary individuals, some new financial institutions emerged to provide mortgages, largely based on European models and initiated by social reformers and financial entrepreneurs. The building and loan society (B&L) was one version; the first appeared in Philadelphia in 1831 as the Oxford Provident Building Association. For around the sum of $7 to $11 per month, a family could expect to own the house they lived in within twelve to fifteen years.36 A second model for mortgage lending was the mutual savings bank where all depositors shared ownership. Among the earliest mutuals were Boston’s Provident Savings Institution and the Philadelphia Saving Fund Society, both established in 1816. Benevolent donors paid the operational expenses and further cost reductions were achieved through limited hours of opening.37 Insurance companies also invested in mortgages, usually on a local level, but the mutual savings banks’ dominance of the mortgage market made it one of the largest types of business in the United States by 1860.38

Compared to the late 20th century, however, when over 60 percent of Americans owned their homes, homeownership levels in the United States remained relatively low throughout the 19th century. The 1890 census revealed that 37 percent of people living in the United States owned homes and that 29 percent of those carried an average mortgage of $1,139.39 Families and individuals buying properties in urban settings accounted for 60 percent of the new mortgage debt. The majority of mortgage funding still came from individuals rather than institutions, however.40 Until World War I, nationally chartered banks were not allowed to make loans for real estate, a restriction that was imposed by the National Banking Act. Savings banks loaned over 41 percent of their deposits as mortgages, but even so, this amount represented only 10 percent of total mortgage financing. State-chartered banks also played a relatively small role, and B&Ls represented only 7 percent of mortgage lending.41 One important source of funding remained with insurance companies but, with the exception of the largest firms, they mostly loaned only to local customers. Although prevalent in parts of Europe in the late 19th century, mortgage-backed securities were also largely absent.

Another difference, when compared to more recent times, is that the length of the mortgage was short and varied by region: three to four years in the South and the West, with an average of six years in the East.42 The interest rate was not fixed, but variable, and the entire principal had to be paid at the end of the mortgage term. These somewhat restrictive conditions often forced would-be home buyers to take out second and even third mortgages from local brokers and builders at interest rates as high as 18–20 percent.43 Yet even with the restrictions, by the 1880s, debt accrued from mortgage borrowing was three times higher than overall wealth.44

The Federal Government Reshapes the Mortgage Markets

Generous mortgage lending practices at the building and loan societies (B&Ls) spurred a housing boom throughout the 1920s, characterized by a massive increase in home construction and real estate speculation. Toward the end of the decade, after the bubbles had burst, the impact of this unprecedented amount of debt became clear, as financial institutions reined in their mortgage lending and home-owning families struggled to avoid foreclosure. In the early years of the Great Depression, President Hoover signed the 1932 Federal Home Loan Bank (FHLB) Act, with the intention of setting up banks that would discount (buy) home mortgages, thereby allowing institutions to continue to make loans. The concept was based on the earlier federal land banks established in 1916, when the aim was to provide more lending to farmers. The federal government’s hands-on intervention for troubled mortgage holders and the construction industry increased dramatically after Franklin Roosevelt’s presidential win in 1932. His administration created the 1933 Federal Home Owners Loan Corporation (HOLC) designed to help homeowners on the brink of default by buying their mortgages and refinancing the loans along more realistic terms. With both the principal and the interest backed by the government, lenders had to accept the HOLC bonds as guaranteed payment. In 1935, at the height of its success, the HOLC held more outstanding mortgage debt than either commercial banks or life insurance companies, approximately 12 percent across the country.45 HOLC’s intervention was still not enough to prevent massive foreclosures, however: an average of 250,000 homeowners still lost their homes each year from 1931 to 1935. House construction also plummeted by 90 percent from its peak in 1925. Outstanding mortgage debt in the United States dropped for the very first time since records began.46

Landmark legislation in the 1930s defined US mortgage lending for the remainder of the 20th century. The National Housing Act (1934), which created the Federal Housing Administration (FHA; 1936), established an insurance system for mortgage lenders that was backed by the federal government. In addition to stabilizing the nation’s banking system the FHA also passed laws to support commercial banks in their mortgage lending practices, encouraging the banks to lend to a wider range of people. In 1934, another government entity, the Federal Savings and Loan Insurance Corporation (FSLIC), was formed to secure the deposits of saving and loan societies (S&Ls, as the B&Ls came to be known), strengthen their management structure, and provide them with tax breaks.

The Federal National Mortgage Association (FNMA), or Fannie Mae, was created in 1938 to issue bonds and with that funding to buy, from lenders, Federal Housing Authority and (later) Veterans Administration (VA) mortgages at face value. FNMA then sold the mortgages to investors across the country. It was the first example of the federal government creating a national network to interconnect investors, lenders, and mortgage borrowers. In the prosperous decades after World War II, big lending institutions accrued large amounts of capital that allowed them to offer increasingly attractive mortgage terms: the size of down payments was reduced and monthly payments were spread out (amortized) over more years. The New Deal measures, plus postwar legislation such as the Servicemen’s Readjustment Act of 1944 (GI Bill), which provided loans for veterans purchasing homes, resulted in an enormous increase in home ownership in the United States—from 44 percent in 1940 to 62 percent in 1960.47 It also meant that American families were now spending a greater amount of their disposable income on mortgages, a rise from less than 19 percent in 1949 to over 40 percent by 1967.48

The private sector initially entered the secondary-market purchasing of government-backed loans in 1949. From that point on, private companies bought and sold these loans in the same way as any other tradable asset, and insurance companies invested in them. The Johnson administration’s Housing and Urban Development Act of 1968 divided FNMA into two entities: Fannie Mae, a private, government-sponsored enterprise (GSE) that could securitize its debts and remove them from the government’s balance sheet; and Ginnie Mae, or the Government National Mortgage Association (GNMA), which guaranteed the payment of principal and interest on securities that lenders had issued on FHA-insured and VA-guaranteed loans. Ginnie Mae’s mortgage-backed securities were first issued in 1970.49 That same year, the Emergency Home Finance Act allowed Fannie Mae to expand from FHA- and VA-backed mortgages to the regular mortgage market. With the aim of preventing Fannie Mae from becoming a monopoly, this legislation also created the private Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac. Outside of the US Treasury, these three entities—Fannie Mae, Ginnie Mae, and Freddie Mac—became the largest issuers of debt in the national capital markets. Fixed income investors were particularly drawn to these mortgage-backed securities, but S&Ls became their biggest buyers. Restricted to lending only within their local markets, S&Ls were able to use the mortgage-backed securities to invest indirectly in other geographic locales.50 The S&Ls were deregulated in the early 1960s, enabling them to provide even more mortgage financing. Their lending continued to expand after 1970, when Freddie Mac became a secondary mortgage market for S&L loans, allowing the S&Ls to make new loans even when their deposits declined.51 By 1980, as a result of direct and indirect mortgage subsidization by the federal government, the US mortgage markets comprised the world’s largest capital market. The dollar amount of mortgages outstanding exploded from $55 billion in 1950 to $1.2 trillion in 1980.52

In the 1970s, the FHA started to serve lower-income mortgage seekers. Partly as a result of this expansion, home ownership reached the 70 percent mark by 1980.53 Simultaneously, the banks increasingly pursued new forms of financing, such as turning second mortgages into “home equity loans” that borrowers could then use to purchase consumer goods. The banks also offered a way of combining first and second mortgages into so-called piggyback loans, provided interest-only loans, and advanced adjustable-rate mortgages (ARMs). As a result, by the turn of the 21st century, a very large number of mortgages in the GSEs’ portfolios were considered to be extremely risky. In 2001, two-thirds were in the government-mandated categories of low- and moderate-income, “underserved areas,” and “special affordable” or very low-income mortgages. The GSEs even started to buy mortgages from banks that had failed to conduct any background checks on the applicant’s financial information, thereby approving the aptly termed “no-docs loans” to thousands of Americans.

Consumer Loans

Perhaps the earliest and most common form of consumer credit began when local shopkeepers allowed customers to run tabs for their purchases. Then, from the mid-to-late 1850s, installment credit became more popular in purchasing furniture, farm equipment, sewing machines, pianos, and other relatively expensive durable goods. The purchases were paid off over time, with interest.54 Manufacturers were the source of most installment financing; they realized that keeping their factories operating at near-full capacity was easier if they found ways of bringing their pricey products into the homes of ordinary Americans.55 Moreover, it appeared that buying in installments, as an article in Scientific American argued, actually changed consumer behavior. In one example, women’s “curious reasoning” led them to pay $50 for a sewing machine on the installment plan, compared to $25 when bought outright—despite the fact that they could afford to pay the $25 upfront. The availability of installment financing and the changed attitudes that it brought about significantly boosted the sales of durable goods. At mid-century, Americans spent only 2 percent of their income on durable goods, but by 1880 that figure had increased to 11 percent.56 By the end of World War I, almost 25 percent of families in the United States depended on installment credit to buy durable goods.57

Of course, Americans also needed credit in times of financial crises caused by loss of employment, health issues, unanticipated emergencies, or slumps in the economy. They turned to pawnbrokers for short-term loans to tide them over.58 Already a solid fixture in Europe, pawnbroking emerged in the United States in the early 1800s and spread rapidly.59 Jewish traders entered the field in large numbers, and for many people they came to represent all that was considered objectionable about this form of lending. Yet pawning was popular: most American cities had more licensed pawnbrokers than savings banks.60 By the early 1900s, New York had one licensed pawnbroker for every 23,000 residents; Chicago had a ratio of 1:27,000; and Boston and San Francisco’s ratio stood at 1:9,000.61

Reformers tried to discourage commercial pawnshop lending by forming “remedial loan societies.” The Collateral Loan Company of Boston, for example, founded in 1857 and known as the Pawner’s Bank of Boston, aimed to combine profit and philanthropy as a means to aid the working poor in times of crisis. These societies received financial backing from prominent individuals in investment backing such as J. P. Morgan, George Baker, and Solomon Loeb, as well as from William E. Dodge, the philanthropist and industrialist.62 Since this lending concentrated only on people with valuables to pawn, however, the truly destitute still had to depend on borrowing from illegal sources.63

In the countryside and rural areas, families took out “chattel” mortgage loans—that is, loans that were backed by household goods, livestock, or other moveable, non-real estate property. They used the loans to buy durable goods such as farm machinery or to tide them over when funds were low. For farm families the loans may have been used to sustain the households until crops were harvested and sold. In urban areas, small-loan companies provided similar financing, with the first of these companies arising in Chicago in 1870. Backed by attachments to future wages or by pledges of furniture and other goods, households received loans in amounts between $10 and $40. Interest rates could be as high as 300 percent per annum, which technically made the loans in violation of state usury laws. But the finance companies grew, many in the form of national chains. The first of these was the Household Finance Corporation, founded by Frank J. Mackey in Minneapolis in 1878. Other small-loan chains flourished in the late 19th and early 20th centuries, with one having a hundred offices operating around the country. With the growing availability of small loans, household debt (including mortgages) in America reached an average of $880 by 1890, when the annual wage of nonfarm workers was $475.64

Alongside the small-loan companies, illegal lenders also flourished in urban centers because, unlike their rural counterparts, workers in cities received regular pay disbursements with which to pay back loans. A 1911 work published by the Russell Sage Foundation roughly calculated that one out of every five workers living in cities with over 30,000 residents borrowed money from loan sharks. In an attempt to stamp out the illegal lending trade, the Foundation tried to promote regulation of the small-loan industry.65 As a philanthropic organization, it proposed new legislation to raise the maximum legal interest rate to a monthly 3.5 percent or yearly 42 percent, and to require that lenders declare their interest rates upfront. Over time these laws brought in new entrants, ultimately lowering the cost of borrowing. Between 1912 and 1940 the small-loan business increased twenty-five fold. Borrowers used the money for a range of purposes, including paying for emergencies such as medical care or simply to make ends meet.66

The amount of outstanding consumer debt continued to increase. It more than doubled during the 1920s. During the Depression years of the 1930s, despite an initial dip, borrowing remained high. After 1937, when pre-Depression levels were reached, the volume of consumer debt steadily increased, only slowing after regulations imposed limits during World War II.67

Another way to provide affordable loans came in the form of credit unions, institutions organized to serve people in the same workplace, church, or fraternal order. Credit unions operated similarly to building and loan societies (B&Ls) by requiring members to buy shares in the union through installments, thus providing an incentive to save. The 1934 Federal Credit Union Act allowed credit unions to operate under a state or federal charter, a status similar to commercial banks. Approximately 8,700 credit unions existed across the country by 1940, with their 2.5 million members carrying an average loan of $110.68

With few exceptions—including Amadeo Giannini’s Bank of America, founded in San Francisco as the Bank of Italy in 1904—commercial banks did not offer loans to ordinary people. This changed in 1924, however, after a commercial bank in New Jersey opened a small-loan department. Other banks quickly followed suit, realizing that making small consumer loans was perhaps not as risky as formerly perceived. There were 208 banks with personal loan departments by 1929 and, as the Depression years brought a decline in borrowing by businesses, this number increased to over 700 as a shift toward consumer lending began. Banks became the leader in providing cash loans to customers by 1930.69

The automobile industry provided another avenue for purchasing through installments. Sales finance companies emerged to allow both dealers and consumers to buy cars and pay the cost over time. Americans embraced buying cars this way, even though with interest rates of over 30 percent it added up to 22 percent to the cost of the car.70 Vehicle manufacturers established special financial subsidiaries to facilitate and lock in installment buying. The best known was the GM Acceptance Corporation (GMAC), set up by General Motors Corp. in 1919. GMAC sponsored research that promoted the benefits of buying on installment. One academic hired by the auto company believed that, “Installment selling has increased production, stabilized output, reduced production cost and increased purchasing power.” Rather than causing consumers to buy recklessly, he argued, being able to meet payments in a timely manner actually forced the consumer to be more disciplined in their spending.71 Critics of installment buying, including politicians and many bankers, remained more skeptical, however, with the Federal Reserve refusing to rediscount the paper of sales finance companies.72

Although consumers reduced their expenditures in the first years of the Depression, after 1933 they resumed making purchases through installment credit.73 Sensing this demand, more commercial banks entered into the area of consumer lending, initially by financing car purchases—so much so that by 1940 banks had become the largest provider of consumer installment credit.74 In the fifteen-year period from 1945 to 1960, installment credit increased dramatically to reach $45 billion.75 Two-thirds of households held debt, and half of that was in the category of installment debt.76 Instead of proposing legislation to regulate credit, the federal government instead persuaded Americans to save. The forty-year period after World War II witnessed savings rates between 7 percent and 11 percent. So although individuals carried more debt, the burden was offset by higher pay and low inflation, enabling their savings to grow.77

Credit Cards and Fringe Lenders

The proliferation of bank credit cards throughout the 1970s further transformed consumer credit. Popular because they were accepted by a variety of merchants and retailers, these cards also allowed the holder to carry a month to month balance. The credit cards constituted the first large-scale implementation of adjustable interest rates on consumer loans, and one which also introduced the borrower to the risk of fluctuating interest rates.78

Launched in 1949, the Diners Club card was the first credit card that could be used for entertainment and travel needs. It came with an annual fee, did not offer revolving credit (that is, the balance had to be paid in full every month), and charged merchant participants a 7 percent fee.79 Franklin National Bank of Long Island introduced the first all-purpose bank credit card in 1951. Just two years later there were sixty credit card plans operating throughout the United States, but this was still a relatively insignificant number compared to the roughly 14,000 banks in existence.80 From 1958 to 1959, most bank-card issuers added the revolving credit facility. Then, in the mid-1960s, two developments resulted in the formation of recognized credit card name brands. The California-based Bank of America—Visa’s predecessor—licensed its card across the country in 1966, followed, one year later, with four banks forming the California Bankcard Association, soon to be known as Master Charge. Over 11,000 banks had joined either one or both of these national credit systems by 1978.81 Sixty million Americans carried either a Visa or Master Charge card, and the spending charged to them almost equaled the amount placed on retailers’ cards.82 Just over half of all households had a bank credit card in 1986,83 and by 1998 that figure had increased to two-thirds.84 Average annual charges escalated from $885 to $3,753 through the 1980s, representing a leap that was twice as great as the rise in disposable income. By the early 1990s, the consequences of this trend became apparent: almost 16 percent of families had the same amount of credit card debt as their take-home earnings, and 8 percent had debt representing over twice the amount of their income.85 Even in lower-income households, credit card usage more than doubled from the early 1980s to the mid-1990s. All told, between 1968 and 2000, revolving credit increased from $2 billion to a staggering $626 billion, with credit cards being the primary generator.86

Wishing to expand their customer base, competition between credit card issuers became increasingly fierce. College campuses became the scene of mass-marketing strategies, and card issuers signed up students without parental consent. For a commission, college administrators provided student mailing lists.87 As a result, two-thirds of students in four-year institutions had a bank credit card by 1996.88 Small businesses and the self-employed also became marketing targets; by the mid-1990s, personal credit cards had become a crucial funding source for small businesses. Even though the availability of small business loans had increased, 46 percent of owners preferred to fund their businesses with their personal credit.89 Since there was no check on where the spending went, individuals could still deduct the interest payments on credit card debt even if the loan had been used to finance a nonbusiness related venture such as a vacation.

Two Supreme Court decisions had enormous consequences for credit card issuers and borrowers. Marquette National Bank v. First National Bank in 1978 declared that nationally chartered banks could set their own home state’s higher interest rates on credit card balances in every state, even those states with very strict legislation regarding regulation of interest rates. In return for Citibank agreeing to locate its headquarters in South Dakota, the state agreed to waive all of its usury laws. The net effect of this Supreme Court ruling was that there were no interest-rate ceilings, or considerably raised ceilings, in thirty-three states. Unsurprisingly, by 1984, the percentage of bad loans in these unregulated states was substantially higher than in states with controls on interest rates, 1.38 percent and 0.85 percent respectively.90 A second Supreme Court decision, the 1996 Smiley v. Citibank ruling, effectively removed any last remains of regulations concerning interest rates and fees.91 At a time of wage stagnation, having access to credit, and specifically revolving credit, was important for American families.92 A survey conducted by the American Bankers Association found that in 2002, however, almost 50 percent of credit card borrowers paid only the minimum monthly amount due on their outstanding balances.93

For those who chose not to go the traditional credit route, or had no access to it, the burgeoning fringe lending market became an important source of credit funding. Fringe lenders such as Cash America, for example, a Texan pawnshop company founded in 1984, even traded on the national stock exchanges. Two developments had helped the spread of fringe lending. The 1978 Marquette ruling had also stated that fringe lenders could “export” any privileges they had; if they were chartered in a deregulated state they could operate in the same way in any state.94 With the safe-harbor laws of the 1990s enacted in some states, fringe lenders could operate with less fear about liability. Mainstream banks also became involved: Citicorp (later Citigroup) bought Associates First Capital Corporation, a subprime lender; Wells Fargo joined with Cash America on a venture to develop automated payday loan kiosks.95 With the successful efforts of the banking lobby, strict regulations were thwarted. Legislation such as the 1988 Fair Credit and Charge Card Disclosure Act touted the need for “transparency,” but included no provisions to either control interest rates or prohibit high fees.96 It was questionable, however, if the average consumers of fringe loans would make better decisions even if they did have more information.

Securitization

Securitization, the process whereby a debt is turned into a security such as a bond, was a big reason why mortgages and other kinds of consumer credit became so widely available. Investors favored the securities because of the steady income streams they provided. When mortgages, car loans, and even credit card debts began to be securitized, investors snapped them up, and their enthusiasm encouraged the investment banks to create even more of the instruments.97 Since investors could not always investigate the underlying asset of any given security, they turned to credit rating agencies whose job it was to assess the risk of the bond. This process was fine, so long as the securities were fairly simple and straightforward: for example, the bonds based on the debts of the federal government and big businesses had long been understood by market analysts and sophisticated individual investors. As investment banks produced increasingly more complex financial instruments, however, it became difficult for the credit rating agencies to keep pace with the myriad technical challenges involved when making an assessment.

To solve the appraisement problem, two investment banks—Salomon Brothers and First Boston—invented the collateralized mortgage obligation (CMO) in 1983 for Freddie Mac. As debt instruments, CMOs grouped residential mortgages together into a pool, and then split that pool into “tranches” according to the amount of risk involved. Initially, only mortgages backed by Fannie Mae and Freddie Mac were included but, over time, the CMOs accepted even subprime mortgages. After a few years, the biggest buyers were pension funds and international investors. Such high investment in securitized debt products allowed for $60 billion of new money to be placed into home financing throughout the 1980s.98 Securitization spread to other types of loans. The first securities backed by auto loans appeared on the market in 1985, followed by Bank One issuing securities backed by credit card loans. By 1986, investors owned more than $2 billion in credit card debt securities.99

Backed by other bonds or riskier loans, collateralized debt obligations (CDOs) appeared in the late 1980s. Instead of making loans from their depositors’ money, banks now amassed huge amounts of CMOs, CDOs, and other debt instruments that were largely backed by low-grade assets. These products were then swiftly cleared off the banks’ books. So much new available credit provided a powerful motivation for lenders to persuade consumers, companies, and governments to borrow more. As a result, total household debt as a percentage of disposable income increased dramatically, from a little under 72 percent in 1979 to 103 percent in 1999.100

As long as Americans continued to save, however, this accelerating amount of household indebtedness did not automatically amount to a negative trend. In the decades after World War II, although consumer debt had escalated, the savings rate had also remained high. Even by the early to mid-1980s, the savings rate as a percentage of disposable income ranged from 9 to 11 percent, and it was approximately 7 percent in the early 1990s.101 Between the mid-1990s and the mid-2000s, however, a steep decline took place. The savings rate fell to 3.7 percent and then a hit a low of less than 1.4 percent in 2005. Enticed by tax code regulations and the finance industry, many Americans now believed less in traditional saving and instead prioritized investing in mutual funds, money market funds, and their own homes. New opportunities in consumer credit instruments were offered even to less-affluent households with incomes that previously would have disqualified them from getting loans, further discouraging saving.102

Student Loans

The start of the US–Soviet race into space, after the 1957 launch of Sputnik, and the fear that Americans were falling behind in the sciences prompted the federal government to enter the student loan market. The way people thought about taking out loans for a college education changed after Congress passed the National Defense Education Act, which offered low-interest loans to students.103 Title IV of the 1965 Higher Education Act (HEA) provided additional aid through loans and grants and presented incentives for the states to create similar programs. The government also encouraged private lenders to enter this new student loan market, focusing largely on middle-income families, through the Guaranteed Student Loan (GSA) program which was part of the HEA.

In 1972, as a way of expanding private-sector lending, the government created the Student Loan Marketing Association, better known as Sallie Mae. By the early 1980s, loans had overtaken federal, state, and private grants to become the largest source of financial aid for college students: in just three years, from 1977 to 1980, the amount of loans had doubled in quantity to reach $9 billion. Many analysts critical of this development believed that colleges were artificially raising their tuition and fees at rates well above the level of inflation in order to take advantage of the growing demand for a college education. There was a well-known salary discrepancy between those with and those without a college degree, and this gap only became wider as formerly well-paid blue-collar jobs started to disappear. By the late 1980s, the student default rate on government-guaranteed loans was often as high as 30 percent, higher than on any other type of loan.104 By the mid-1990s, median student debt stood at $15,000, a figure compounded by the fact that two-thirds of these students were also carrying high interest rates on at least one bank credit card. Average student debt in 2002 stood at $3,176.105 Although the use of credit had made a college degree a reality for many Americans, it had also come with a hefty price tag since substantial indebtedness undermined many future career plans.

Discussion of the Literature

The scholarship on private credit in the United States breaks down fairly neatly into two categories: business and consumer. Historians have tended to specialize in one or the other; surveys that cover both business and consumer credit over the entire course of American history have only recently begun to appear.106 Interest in the history of consumer credit rose significantly beginning in the 1990s due to the explosion of home mortgages, auto loans, credit cards, and student loans within the US economy; the interest further intensified after the financial crisis of 2007–2008. Business credit, by contrast, remains a specialist subject, except for the financing activities of Wall Street’s more colorful individuals and firms.

Mercantile, or trade, credit has long appeared as a subject within histories of long-distance and domestic trade.107 By contrast, the literature devoted specifically to bank credit is voluminous, reflecting the diverse forms and activities of banks since colonial times. Within this literature, a few works focused on the way banks were contested and how dominant groups shaped the institution of banking.108 Historians have studied forms of credit financing that were specific to regions, such as farm mortgages in the West. The South especially, as an economy deeply shaped by slave ownership and slave labor, had peculiar patterns of credit both before and after the Civil War.109 When bond financing enabled a number of highly visible mergers, acquisitions, and hostile takeovers in the 1980s, investment banks and other Wall Street financiers became appealing topics for popular as well as scholarly treatments.110 Other types of business credit, such as commercial paper and sales finance companies, remain far less covered in the historical literature.111 In addition, the institutions that surround business credit should be considered a core part of the subject. Such institutions include bankruptcy laws and courts, credit reporting firms, and credit rating agencies. Older works on bankruptcy focused on its legislative and legal aspects, while more recent works probe the cultural meanings of business failure.112 Historians have produced histories of credit reporting firms such as Dun & Bradstreet, but credit rating agencies (Moody’s, S&P, and Fitch) await historical treatment.113

Several recent works investigate the growth of consumer credit and its cultural implications.114 A handful of other studies cover specific eras or different forms of consumer credit. Recently, historians have focused on credit for the working poor, including pawnbroking and other forms of fringe lending.115 A number of works trace the history of the securitization of mortgage debts during the 20th century.116 Consumer credit reporting is an important thread within the topic of consumer credit, but until recently, uncovering its history was stymied by the highly fragmented nature of the phenomenon. A very recent book by Josh Lauer offers the first history of this elusive subject, up to World War II.117 Both consumer credit reporting and credit scoring during the latter half of the 20th century remain under-researched by historians. A few articles in the socio-economic literature have investigated the institutional roots and evolution of organizations such as Fair, Isaac and Co., the creator of the FICO score.118

Primary Sources

Business Credit

Business credit is a specialized field, and sources such as ledgers require some knowledge of accounting practices during specific eras. Merchants’ correspondence is another possible source for tracing the history of lending practices. Both ledgers and correspondence can be found in merchants’ papers and, for the South, in the papers of planters and factors. Factors’ papers are rare and are held in collections such as the Southern Historical Collection, University of North Carolina Library; the Georgia Historical Society, Savannah; and the Department of Archives and Manuscripts, Louisiana State University. Numerous mergers and acquisitions within the banking sector mean that many older bank archives have disappeared, been scattered, or are placed within other collections. One place to begin is Harvard Business School’s Baker Library, Special Collections, which holds manuscripts produced by individuals and firms in the course of their regular business operation. State government archives, especially the reports by state commissioners, may contain information on early banks. Some statistical information on national and state banks, as well as trust companies, is available from the annual reports of the Comptroller of the Currency.

For researchers interested in the cultural and political dimensions of credit, the period leading up to the U.S. Civil War remains a fruitful area of study. During the so-called Bank War, politicians, lawyers, newspaper editors, and others published numerous pamphlets on aspects of banking. Commercial journals such as Journal of Commerce, Hunt’s Merchants’ Magazine and Commercial Review, and Bankers’ Magazine often weighed in on the debates and published statistics compiled by the state and federal governments. The debates within Congress were recorded in the Register of Debates and the Congressional Globe. The R. G. Dun collection of 19th-century credit reports (1841–1889) in Baker Library, Harvard Business School, is an unparalleled source for analyzing the norms of credit granting throughout the United States. The sheer number of handwritten ledgers, however, renders this source somewhat difficult to use, and researchers would benefit from focusing on specific towns, cities, states, or geographical regions.

Business manuals, published beginning in the 1870s on subjects such as retailing, are an excellent and accessible source for researching the assumptions behind business and (to a lesser extent) consumer lending. When the credit function became professionalized during the 1890s, manuals on credit granting began appearing. The authors of these handbooks often wrote about the practices of an earlier generation, giving a window into procedures and routines that may not have been documented by contemporaries. Credit Monthly, the trade journal of the National Association of Credit Men, along with the association’s Proceedings and Bulletins are other excellent sources.

Bankruptcy court records can be used to study, for example, the effects of particular national bankruptcy acts, none of which lasted beyond a few years prior to the establishment of the first permanent law in 1898.

Consumer Credit

Sources for consumer credit are diffuse for the 17th through 19th centuries. For the first half of the 20th century, the most important commentaries on the personal loan industry are the studies commissioned by the Russell Sage Foundation, beginning in 1909 and continuing through the 1930s with the groundbreaking works of Louis N. Robinson and Rolf Nugent. Research on installment selling should begin with the volumes authored by Edwin R. A. Seligman in the 1920s.119 In addition, the National Bureau of Economic Research (NBER) published a number of studies of consumer credit in the 1930s and 1940s. Trade journals such as Personal Finance News, Industrial Lenders News, and Credit Management Year Book are other good sources, as is the Nilson Report, which covered the credit card industry during its formative period. Researchers should also consult the annual reports of banks and other lenders. The US census of 1890 contained the first statistics on the nation’s housing and mortgage lending, which became the basis for several studies, including George K. Holmes and John S. Lord’s Report on Real Estate Mortgages and D. M. Frederiksen’s “Mortgage Banking in America.”120 Sources for the history of mortgage lending beginning in the Great Depression are numerous. The records of the federal government agencies (especially the Federal Housing Administration) and debates and hearings in the US Congress are a good starting point.

Researchers wishing to study the early suppliers of credit for lower-income Americans could start with city and business directories to identify pawnbrokers and other fringe lenders during the 19th century. Annual reports of the Provident Loan Society of New York can be found in the Digital Collections of Columbia University Libraries. Scattered documents of the National Federation of Remedial Loan Associations are available in various digital archives.

Further Reading

Balleisen, Edward. Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press, 2001.Find this resource:

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation Building. Cambridge: Cambridge University Press, 2000.Find this resource:

Calder, Lendol. Financing the American Dream: A Cultural History of Consumer Credit. Princeton, NJ: Princeton University Press, 1999.Find this resource:

Calomiris, Charles, and Stephen Haber. Fragile by Design: The Political Origins of Banking Crises and Scarce Capital. Princeton, NJ: Princeton University Press, 2014.Find this resource:

Fleming, Anne. City of Debtors: A Century of Fringe Finance. Cambridge, MA: Harvard University Press, 2018.Find this resource:

Hyman, Louis. Debtor Nation: A History of America in Red Ink. Princeton, NJ: Princeton University Press, 2011.Find this resource:

Lamoreaux, Naomi R.Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England. Cambridge: Cambridge University Press, 1994.Find this resource:

Lauer, Josh. Creditworthy: A History of Consumer Surveillance and Financial Identity in America. New York: Columbia University Press, 2017.Find this resource:

Mann, Bruce. Republic of Debtors: Bankruptcy in the Age of American Independence. Cambridge, MA: Harvard University Press, 2003.Find this resource:

Morrison, Alan, and William Wilhelm. Investment Banking: Institutions, Politics, and Law. Oxford: Oxford University Press, 2007.Find this resource:

Olegario, Rowena. A Culture of Credit: Embedding Trust and Transparency in American Business. Cambridge, MA: Harvard University Press, 2006.Find this resource:

Olegario, Rowena. The Engine of Enterprise: Credit in America. Cambridge, MA: Harvard University Press, 2016.Find this resource:

Olney, Martha. Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s. Chapel Hill: University of North Carolina Press, 1991.Find this resource:

Price, Jacob. Capital and Credit in British Overseas Trade: The View from the Chesapeake, 1700–1776. Cambridge, MA: Harvard University Press, 1980.Find this resource:

Skeel, David. Debt’s Dominion: A History of Bankruptcy Law in America. Princeton, NJ: Princeton University Press, 2001.Find this resource:

Woloson, Wendy. In Hock: Pawning in America from Independence through the Great Depression. Chicago: University of Chicago Press, 2010.Find this resource:

Woodman, Harold. King Cotton and His Retainers: Financing and Marketing the Cotton Crop of the South, 1800–1925. Lexington: University of Kentucky Press, 1968.Find this resource:

Notes:

(1.) Jacob M. Price, “What Did Merchants Do? Reflections on British Overseas Trade, 1660–1790,” Journal of Economic History 49, no. 2 (June 1989): 278.

(2.) Kenneth O. Morgan, Slavery, Atlantic Trade and the British Economy, 1660–1800 (Cambridge: Cambridge University Press, 2000), 78–79.

(3.) Thomas Doerflinger, A Vigorous Spirit of Enterprise: Merchants and Economic Development in Revolutionary Philadelphia (New York: W. W. Norton, 1987), 53, 160.

(4.) Joseph van Fenstermaker, The Development of American Commercial Banking, 1782–1837 (Kent, OH: Kent State University, 1965), tables 4, 12, 13, 14, 16, 17, and A-1.

(5.) Roy A. Foulke, The Sinews of American Commerce (New York: Dun and Bradstreet, 1941), 134–136, 138–139.

(6.) Naomi Lameroux, “Banks, Kinship, and Economic Development: The New England Case,” The Journal of Economic History 46, no. 3 (September 1986): 647–667.

(7.) However, Calomiris and Haber argue that the restrictions on banks prevented competition and gave rise to “segmented monopolies.” Charles Calomiris and Stephen Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (Princeton, NJ: Princeton University Press, 2014), 163–171.

(9.) Elva C. Tooker, “A Merchant Turns to Money Lending in Philadelphia,” Bulletin of the Business Historical Society 20, no. 3 (June 1946): 71–85.

(10.) Howard Bodenhorn, “Private Banking in Antebellum Virginia: Thomas Branch & Sons of Petersburg,” Business History Review 71, no. 4 (Winter 1997): 514. Richard Sylla estimates that in the 1850s private banks may have accounted for one-third of all commercial banks, and over one-quarter of all bank capital. Richard Sylla, “Forgotten Men of Money: Private Bankers in Early U.S. History,” Journal of Economic History 36, no. 1 (March 1976): 175–177, 185.

(11.) Mercantile Agency circular, January 1858, repr., Business History Review 37, no. 4 (Winter 1963): 438–439. The nominal GDP figure is from Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth.

(13.) Tooker, “A Merchant Turns to Money Lending in Philadelphia,” 82–83; Naomi R. Lamoreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge: Cambridge University Press, 1994), 82; and Barbara Vatter, “Industrial Borrowing by the New England Textile Mills, 1840–1860: A Comment,” Journal of Economic History 21, no. 2 (June 1961): 216–221.

(14.) Bodenhorn, History of Banking, 86, 88, 90.

(15.) Tooker, “A Merchant Turns to Money Lending in Philadelphia,” 82–83.

(16.) See for example, Albert Churella, The Pennsylvania Railroad. Vol. 1, Building an Empire, 1846–1917 (Philadelphia: University of Pennsylvania Press, 2013).

(17.) Jonathan Barron Baskin and Paul J. Miranti Jr., A History of Corporate Finance (Cambridge: Cambridge University Press, 1999), 160–161.

(18.) Peter Tufano, “Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U.S. Railroads in the Nineteenth Century,” Business History Review 71, no. 1 (Spring 1997): 7.

(19.) Baskin and Miranti, History of Corporate Finance, 150–151.

(20.) Glenn Porter and Harold Livesay, Merchants and Manufacturers: Studies in the Changing Structure of Nineteenth-Century Marketing (Baltimore: Johns Hopkins Press, 1971), chapter 7; and Gene Smiley, “Postbellum Banking and Financial Markets in the Old Northwest,” in Essays on the Economy of the Old Northwest, ed. David C. Klingaman and Richard K. Vedder (Athens, OH: Ohio University Press, 1987), 213.

(21.) Calomiris and Haber, Fragile by Design, 185.

(22.) Edward Sherwood Meade, “Capitalization of the United States Steel Corporation,” Quarterly Journal of Economics 16, no. 2 (February 1902): 214–232.

(23.) George P. Baker and George David Smith, The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value (Cambridge: Cambridge University Press, 1999), 47.

(24.) George A. Selgin and Lawrence H. White, “Monetary Reform and the Redemption of National Bank Notes, 1863–1913,” Business History Review 68, no. 2 (Summer 1994): 238–239; and John A. James, “The Development of the National Money Market, 1893–1911,” Journal of Economic History 36, no. 4 (December 1976): 895.

(25.) US Department of the Treasury, “Annual Report of the Comptroller of the Currency, December 7, 1931”, 3, 5.

(26.) William H. Hillyer, “Four Centuries of Factoring,” Quarterly Journal of Economics 53, no. 2 (1939): 309; and Foulke, Sinews of American Commerce, 188–191, 198–199.

(27.) Wilbur C. Plummer and Ralph A. Young, “Sales Finance Companies as Credit Agencies,” in Sales Finance Companies and their Credit Practices, by Wilbur C. Plummer and Ralph A. Young (New York: National Bureau of Economic Research, 1940), 38.

(28.) “The Autocrat of 12 Per Cent Money,” Fortune, March 1958.

(29.) Carl Rieser, “The Great Credit Pump,” Fortune, February 1963, 122–124, 148, 150, 152, 157.

(30.) Martin H. Seiden, The Quality of Trade Credit (Cambridge, MA: NBER, 1964), 1–5, 15, 26.

(31.) Baker and Smith, The New Financial Capitalists, 48.

(32.) Discounted cash flow is a method of valuation that uses the projected free cash flow of a company at a future date and then discounts this amount to arrive at a net present value.

(33.) Charles R. Geisst, Collateral Damaged: The Marketing of Consumer Debt to America (New York: Bloomberg Press, 2009), 53–54.

(34.) Charles R. Geisst, Beggar Thy Neighbor: A History of Usury and Debt (Philadelphia: University of Pennsylvania Press, 2013), 215; and Geisst, Collateral Damaged, 69–70.

(35.) Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco (New York: HarperCollins, 1990), 139.

(36.) Robert A. Lynn, “Installment Credit before 1870,” Business History Review 31, no. 4 (Winter 1957): 415; and Foulke, Sinews of American Commerce, 182.

(37.) Foulke, Sinews of American Commerce, 139–140.

(38.) Alan L. Olmstead, “Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development,” Journal of Economic History 32, no. 4 (December 1972): 811–813.

(39.) Sheldon Garon, Beyond Our Means: Why America Spends While the World Saves (Princeton, NJ: Princeton University Press, 2011), 89; and Lendol Calder, Financing the American Dream: A Cultural History of Consumer Credit (Princeton, NJ: Princeton University Press, 1999), 68.

(40.) D. M. Frederiksen, “Mortgage Banking in America,” Journal of Political Economy 2, no. 2 (March 1894): 206–209.

(41.) Frederiksen, “Mortgage Banking in America,” 225–226.

(42.) Frederiksen, “Mortgage Banking in America,” 206, 209.

(43.) Marc A. Weiss, “Marketing and Financing Home Ownership: Mortgage Lending and Public Policy in the United States, 1918–1989,” Business and Economic History, 2nd ser., 18 (1989): 110.

(44.) Kenneth A. Snowden, “Mortgage Lending and American Urbanization, 1880–1890,” Journal of Economic History 48, no. 2 (June 1988): 275.

(45.) Kent W. Colton, “Housing Finance in the United States: The Transformation of the U.S. Housing Finance System” (working paper, Joint Center for Housing Studies, Harvard University, July 2002), 4. HOLC stopped making loans in 1936 and was liquidated in 1951.

(46.) Colton, “Housing Finance in the United States,” 2; and Richard K. Green and Susan M. Wachter, “The American Mortgage in Historical and International Context,” Journal of Economic Perspectives 19, no. 4 (Fall 2005): 94–95.

(47.) Vincent J. Cannato, “A Home of One’s Own,” National Affairs 3 (Spring 2010): 73–74.

(48.) Robert D. Manning, Credit and Debt in the Age of Influence: Can U.S. Bankruptcy Reform Avoid the Recessionary Abyss? University of Houston Law Center, Institute for Higher Education Law and Governance Monograph 02–08 (Houston, TX: University of Houston Law Center, 2002), 4.

(49.) US Department of Housing and Urban Development, The Secondary Market in Residential Mortgages (1982), 12; and Louis Hyman, Debtor Nation: The History of America in Red Ink (Princeton, NJ: Princeton University Press, 2011), 23–225.

(50.) Hyman, Debtor Nation, 229, 232–234.

(51.) Green and Wachter, “The American Mortgage in Historical and International Context”; and Weiss, “Marketing and Financing Home Ownership,” 113.

(52.) Michael Lewis, Liar’s Poker: Rising through the Wreckage of Wall Street (New York: W. W. Norton, 1989), 105.

(53.) Green and Wachter, “The American Mortgage in Historical and International Context,” 93.

(54.) Lynn, “Installment Credit before 1870.” He could find almost no credit terms in advertisements for furniture during the 1850s.

(55.) John P. Watkins, “Corporate Power and the Evolution of Consumer Credit,” Journal of Economic Issues 34, no. 4 (December 2000): 916.

(56.) Calder, Financing the American Dream, 56, 72, 167–173, 181. The quotation is from Scientific American 51, August 9, 1884, p. 80.

(57.) Martha L. Olney, “When Your Word Is Not Enough: Race, Collateral, and Household Credit,” Journal of Economic History 58, no. 2 (June 1998): 410.

(58.) Peter R. Shergold, “The Loan Shark: The Small Loan Business in Early Twentieth-Century Pittsburgh,” Pennsylvania History 45, no. 3 (July 1978): 196–199.

(60.) Woloson, In Hock, 156–157.

(61.) Woloson, In Hock, 63, 71.

(62.) Woloson, In Hock, 119, 159–163.

(63.) Shergold, “The Loan Shark,” 220.

(64.) Calder, Financing the American Dream, 40, 50–54, 73, 100, 117–118.

(65.) Calder, Financing the American Dream, 118, 124–135. The estimate comes from Arthur H. Ham, “Remedial Loans as Factors in Family Rehabilitation,” Proceedings of the National Conference of Charities and Correction (New York: Russell Sage Foundation, Department of Remedial Loans, 1911), p. 11.

(66.) Louis N. Robinson and Rolf Nugent, Regulation of the Small Loan Business (New York: Russell Sage Foundation, 1935); Bruce Carruthers, Timothy Guinnane, and Yoonseok Lee, “Bringing ‘Honest Capital’ to Poor Borrowers: The Passage of the U.S. Uniform Small Loan Law, 1907–30,” Journal of Interdisciplinary History 42, no. 3 (Winter 2012): 393–418; and Foulke, Sinews of American Commerce, 201.

(67.) Calder, Financing the American Dream, 18–19; and Martha L. Olney, Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s (Chapel Hill: University of North Carolina Press, 1991), 86–92. Statistics on total consumer and installment debt prior to World War II differ among researchers.

(68.) Calder, Financing the American Dream, 202–205.

(69.) M. R. Neifeld, “What Consumer Credit Is,” Annals of the American Academy of Political and Social Science 196 (March 1938): 72; Geisst, Collateral Damaged, 48; Calder, Financing the American Dream, 284–285; Hyman, Debtor Nation, 78–79; and Geisst, Beggar Thy Neighbor, 188.

(70.) Foulke, Sinews of American Commerce, 198–199; and Martha L. Olney, “Credit as a Production-Smoothing Device: The Case of Automobiles, 1913–1938,” in “The Tasks of Economic History,” special issue, Journal of Economic History 49, no. 2 (June 1989): 380–381.

(71.) Edwin R. A. Seligman, “Economic Problems Involved in Installment Selling,” Proceedings of the Academy of Political Science in the City of New York 12, no. 2 (January 1927): 83–94; and Edwin R. A. Seligman, “Installment Selling,” Time, November 28, 1927.

(72.) Paul J. Kubik, “Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes Regarding Consumption and Consumer Credit,” Journal of Economic Issues 30, no. 3 (September 1996): 831–836.

(73.) Calder, Financing the American Dream, 274; and Paul R. Moo, “Legislative Control of Consumer Credit Transactions,” Law and Contemporary Problems 33 (Fall 1968): 658.

(74.) Neifeld, “What Consumer Credit Is,” 72; and Calder, Financing the American Dream, 285.

(75.) Geisst, Collateral Damaged, 61, 318; and Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit (New York: Basic Books, 2000), 31, 38.

(76.) Joseph Nocera, A Piece of the Action: How the Middle Class Joined the Money Class (New York: Simon and Schuster, 1994), 21–22.

(77.) Garon, Beyond Our Means, 191, 204, 206, 208, 321–322.

(78.) Geisst, Beggar Thy Neighbor, 216.

(79.) Geisst, Beggar Thy Neighbor, 1–10.

(80.) Timothy Wolters, “‘Carry Your Credit in Your Pocket’: The Early History of the Credit Card at Bank of America and Chase Manhattan,” Enterprise and Society 1 (June 2000): 323, 327.

(81.) Lewis Mandell, Credit Card Industry: A History (Boston: Twayne, 1990), 23–25, 29–30, 38.

(82.) Nocera, Piece of the Action, 190. In the mid-1970s, thrifts and credit unions began issuing credit cards, too. Mandell, Credit Card Industry, 48–51.

(83.) However, the greatest number of credit cards (as opposed to billings) was held by retailers. Mandell, Credit Card Industry, xxi, 92.

(84.) Hyman, Debtor Nation, 220.

(85.) Manning, Credit Card Nation, 11–13; and John P. Watkins, “Corporate Power and the Evolution of Consumer Credit,” Journal of Economic Issues 34, no. 4 (December 2000): 924.

(86.) Thomas A. Durkin, “Credit Cards: Use and Consumer Attitudes, 1970–2000,” Federal Reserve Bulletin (September 2000): 623; and Edward J. Bird, Paul A. Hagstrom, and Robert Wild, “Credit Card Debts of the Poor: High and Rising,” Journal of Policy Analysis and Management 18, no. 1 (Winter 1999): 129, 132. The authors found that default rates among poor households actually fell between 1989 and 1995, a fact that was “difficult to reconcile” with higher bankruptcy rates. In 2000, the combination of credit card debt and consumer loans for autos and appliances totaled $1.5 trillion. Twenty years earlier, total credit card debt had been very much smaller—just $50 billion (Manning, Credit and Debt in the Age of Influence, 3). In 1978, commercial banks held as much revolving credit as retailers, but by 1993, the banks held five times as much. J. C. Penney became the first major department store to accept Visa in 1979; Sears, one of the holdouts, did not do so until 1993. See Robert M. Hunt, “The Development and Regulation of Consumer Credit Reporting in America” (working paper, Federal Reserve of Philadelphia, Working Paper Series, no. 02–21, November 2002), 11; and Nocera, Piece of the Action, 306.

(87.) Nocera, Piece of the Action, 251.

(88.) Eric Gould, The University in a Corporate Culture (New Haven, CT: Yale University Press, 2003), 55.

(89.) Manning, Credit Card Nation, 228–232; and Gwendolyn Bounds, “The Great Money Hunt,” Wall Street Journal, November 29, 2004.

(90.) Hyman, Debtor Nation, 246–247.

(91.) Garon, Beyond Our Means, 347.

(92.) Nocera, Piece of the Action, 392.

(93.) Geisst, Collateral Damaged, 29.

(94.) Consumer Federation of America, “States Grant Payday Lenders a Safe Harbor from Usury Laws” (press release, September 7, 1999).

(95.) Manning, Credit and Debt in the Age of Influence, 6.

(96.) Mandell, Credit Card Industry, 90.

(97.) Geisst, Collateral Damaged, 100.

(98.) Lewis, Liar’s Poker, 136–137.

(99.) Mandell, Credit Card Industry, 88.

(100.) The measure does not include car leases, payday loans, pawns, and rent-to-own contracts. See Manning, Credit and Debt in the Age of Influence, 4.

(101.) Garon, Beyond Our Means, 344.

(102.) Before the revisions, the savings rate was thought to have been around 8 percent until the early 1980s. Garon, Beyond Our Means, 344, 353.

(103.) Lawrence Gladieux, “Federal Student Aid Policy: A History and an Assessment,” in Financing Postsecondary Education: The Federal Role. Proceedings of the National Conference on the Best Ways for the Federal Government to Help Students and Families Finance Postsecondary Education (Washington, DC: Brookings Institution, 1995); and Roger L. Geiger and Donald E. Heller, “Financial Trends in Higher Education: The United States” (working paper, Penn State Center for the Study of Higher Education, Working Paper Series, no. 6, January 2011).

(104.) Geisst, Collateral Damaged, 104.

(105.) Manning, Credit Card Nation, 166–170; Jessica Silver Greenberg, “Majoring in Credit-Card Debt,” Businessweek, September 4, 2007; and Eric Gould, The University in a Corporate Culture (New Haven, CT: Yale University Press, 2003), 54–55.

(107.) Jacob M. Price, Capital and Credit in British Overseas Trade: The View from the Chesapeake, 1770–1776 (Cambridge, MA: Harvard University Press, 1980); Doerflinger, A Vigorous Spirit of Enterprise; Foulke, Sinews of American Commerce; Lewis E. Atherton, The Frontier Merchant in Mid-America (Columbia: University of Missouri Press, 1971); and Porter and Livesay, Merchants and Manufacturers.

(108.) Bodenhorn, History of Banking; Lamoreaux, Insider Lending; Richard Sylla, “Forgotten Men of Money: Private Bankers in Early U.S. History,” Journal of Economic History 36, no. 1 (March 1976): 173–188; Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, NJ: Princeton University Press, 1957); and Calomiris and Haber, Fragile by Design.

(109.) Allan Bogue, Money at Interest: The Farm Mortgage on the Middle Border (Ithaca, NY: Cornell University Press, 1955); Harold Woodman, King Cotton and His Retainers: Financing and Marketing the Cotton Crop of the South, 1800–1925 (Lexington: University of Kentucky Press, 1968); Elizabeth Thompson, The Reconstruction of Southern Debtors: Bankruptcy after the Civil War (Athens, GA: University of Georgia Press, 2004); and Roger Ransom and Richard Sutch, “Debt Peonage in the Cotton South after the Civil War,” Journal of Economic History 32 (1972): 641–667.

(110.) Ron Chernow, The House of Morgan (London: Simon and Schuster, 1990); Alan Morrison and William Wilhelm, Investment Banking: Institutions, Politics, and Law (Oxford: Oxford University Press, 2007); Baker and Smith, The New Financial Capitalists; Burrough and Helyar, Barbarians at the Gate; Lewis, Liar’s Poker; and Michael Lewis, The Big Short: Inside the Doomsday Machine (London: Penguin, 2011 [2010]).

(111.) Hillyer, “Four Centuries of Factoring”; James, “The Development of the National Money Market”; and Plummer and Young, Sales Finance Companies and Their Credit Practices.

(112.) Edward Balleisen, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America (Chapel Hill: University of North Carolina Press, 2001); Scott Sandage, Born Losers: A History of Failure in America (Cambridge, MA: Harvard University Press, 2006); Charles Warren, Bankruptcy in United States History (Cambridge, MA: Harvard University Press, 1935); Peter Coleman, Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607–1900 (Madison: State Historical Society of Wisconsin, 1974); Bruce Mann, Republic of Debtors: Bankruptcy in the Age of American Independence (Cambridge, MA: Harvard University Press, 2003); and Skeel, Debt’s Dominion.

(113.) Rowena Olegario, A Culture of Credit: Embedding Trust and Transparency in American Business (Cambridge, MA: Harvard University Press, 2006); James Norris, R. G. Dun and Co., 1841–1900 (Westport, CT: Greenwood Press, 1978); and Timothy J. Sinclair, The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness (Ithaca, NY: Cornell University Press, 2005).

(114.) Calder, Financing the American Dream; and Hyman, Debtor Nation.

(115.) T. H. Breen, The Marketplace of Revolution: How Consumer Politics Shaped American Independence (New York: Oxford University Press, 2004); Allan Bogue, Brian Cannon, and Kenneth Winkle, “Oxen to Organs: Chattel Credit in Springdale Town, 1849–1900,” Agricultural History 77, no. 3 (Summer 2003): 420–452; Lynn, “Installment Credit before 1870”; Olney, Buy Now, Pay Later; Woloson, In Hock; Anne Fleming, City of Debtors: A Century of Fringe Finance (Cambridge, MA: Harvard University Press, 2018); Mandell, Credit Card Industry; Manning, Credit Card Nation; and Nocera, A Piece of the Action.

(116.) Kenneth Snowden, Mortgage Banking in the United States, 1870–1940, Research Institute for Housing America, Special Report (2013); Weiss, “Marketing and Financing Home Ownership”; and David Mason, From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry, 1831–1995 (Cambridge: Cambridge University Press, 2004).

(118.) Lauer, Creditworthy; and Martha Poon, “Scorecards as Devices for Consumer Credit: The Case of Fair, Isaac & Company Incorporated,” Sociological Review, special issue, 55, issue supplement s2 (October 2007): 284–306.

(119.) Robinson and Nugent, Regulation of the Small Loan Business; Seligman, “Economic Problems Involved in Installment Selling”; and Seligman, “Installment Selling.”

(120.) George K. Holmes and John S. Lord, Report on Real Estate Mortgages (Washington, DC: US GPO, 1892); and Frederiksen, “Mortgage Banking in America.”