How America Learned to Live and Thrive With Debt—er, Credit
1950 Frank McNamara, the founder of Diners Club Card, charges dinner at Major’s Cabin Grill in New York—the first transaction made with a credit card.
It’s a trick question sometimes asked of business students: What is the most effective single word in the history of marketing, a word that managed by itself to almost double the market of a product? The answer: “Repeat.” Some shampoo-selling mastermind took the standard “Lather, rinse” and upgraded it to “Lather, rinse. Repeat.” The word didn’t precisely double sales of shampoo, because not everyone bothers, but it came pretty close. I don’t think we know the name of the genius who first put these six letters on bottles of shampoo, but whoever he or she was, their legacy is a tribute to the extraordinary impact you can have with a single word.
My candidate for the most disruptive idea of the last 85 years is also a single word. Once upon a time there was a thing called debt. You don’t have to be all that old to remember being brought up to think it was something to avoid. In fact, the aversion was stronger than that. Everyone from the poor to the upper middle classes regarded debt with horror, as a form of servitude, a permanent shadow over life.
And then debt turned into something else: something called credit. Of course, from the economic point of view, every debt is a credit somewhere else, so there is a sense in which debt and credit are the same thing. Psychologically, though, the story is very different. Debt is a negative: a burden, an obligation, a drag. Credit is an opportunity, an opening, a way out, a way forward; it’s full of possibilities and potential. Debt is etymologically linked with owing; credit is linked with belief, with faith.
At the peak of the credit bubble in 2006-07, rich and poor alike were deluged with offers of credit. In one week I counted a dozen unsolicited offers of credit, including calls from my bank, cold calls, letters, and e-mails. Ringing up my bank, even before I got a chance to be tortured by the automated phone system, I would be offered credit: “Would you like a loan?” My bank would ask me that before it even knew who I was. Corporations often try to be friendly and personable, as if they are actual people. Imagine for a moment what this behavior would be like in a human being: going round the street, walking up to total strangers, and before they even say hello, asking, “Can I lend you money?”
The invention of “credit” is apparent on balance sheets everywhere. At the start of the 1950s, American households had debt of 0.5 times their annual income. By the time the credit bubble popped, they had debt of more than twice their annual income. That’s an increase of more than 300 percent. That debt paid for a lot of things, many of them having to do with the life people most wanted, which is almost always the one that is just out of reach. By definition, you can’t quite afford the thing that is just out of reach. So you borrow and stretch for it. You might not willingly and consciously go into debt to do that. But if all you’re doing is exploiting the potential of credit—well, that’s different.
Except, of course, it isn’t. The gigantic expansion of debt is possibly the single most striking feature of modern economies over the last few decades. It isn’t only individuals who have blown out their balance sheets; corporations and governments have done it, too, and on an even bigger scale. The figure for total worldwide debt varies according to who’s counting, but a credible estimate from 2013 put it at 313 percent of global gross domestic product. Humanity has a mortgage more than three times the size of its income.
Until very recently, it was unfashionable to worry about this, either personally or at the macro level. Because every debt is a credit and vice versa, and we owe to each other rather than to the inhabitants of another planet, the system itself was sound. But the expansion in credit was like a climb up a very long, very steep mountain. The credit crunch was the moment when you do what you’re not supposed to do, and you look down. We gave ourselves a huge scare and started to wonder what we’ve done.
As the long slog out of the Great Recession continues, and with it the blame and recrimination and political arguments, let’s not forget the impact of one beautiful, dangerous small word, one whose associations are so positive and whose consequences are, sometimes, so ruinous.