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Debtor Nation: The History of America in Red Ink

Author(s):Hyman, Louis
Reviewer(s):Shester, Katharine L.

Published by EH.NET (November 2011)

Louis Hyman, Debtor Nation: The History of America in Red Ink.? Princeton, NJ: Princeton University Press, 2011.? xii + 378 pp.? $35 (hardcover), ISBN: 978-0-691-14068-1.

Reviewed for EH.Net by Katharine L. Shester, Department of Economics, Washington and Lee University.

In this book, Louis Hyman, Assistant Professor at Cornell?s ILR School, follows the evolution of America?s consumer credit system throughout the twentieth century.? His story begins in 1917, when personal debt existed only on the fringes of the economy, and continues through 2000, by which time the U.S. economy had become leveraged on debt.? America?s growing dependence on borrowing was supported by rising wages for much of the post-war period, but by the mid-1970s, consumer debt continued to grow amidst a much darker economic climate.? Real wage growth stagnated while the securitization of credit card and mortgage debt encouraged riskier lending.? At times near the end, the book reads as an ominous prelude to the current financial crisis.?

In the Introduction, Hyman states that historians have often neglected the history of business and politics in search for the ??human? face of capitalism,? and that in doing so, they have ?miss(ed) the opportunity to tell an all-too-human story of how our choices … have brought this debt-driven economy to pass? (p. 6).? In Debtor Nation, Hyman does just this, discussing the changing incentives that policymakers and investors faced and how their decisions collectively created and adapted the structure of American consumer debt.? He states that the ?profit motive, government policy, technological progress, and even chance all played necessary but not sufficiently all-encompassing roles? and that the ?shifts in lending and borrowing practices were neither inevitable nor obvious? (pp. 8-9, 2).?

Hyman?s story begins with the legalization of personal loans in 1917 (chapter 1).? Until this time, restrictive usury laws made it unprofitable for lenders to legally loan money to risky borrowers.? The Russell Sage Foundation, a nonprofit concerned with improving living conditions for the working class, led the push for higher interest rate ceilings in an attempt to protect the poor from loan sharks.? Installment credit was shortly introduced in the 1920s, in response to increased demands of the auto industry.? By 1920, the majority of people who could afford to pay cash for a car had already done so and the auto industry needed consumer financing to create additional demand.?

In chapter 2, Hyman discusses how the government?s policy response to the collapse of the housing market of the 1930s resulted in longer-term, amortized loans and a more unified mortgage network across the U.S.? Decreased demand for commercial loans required banks to look elsewhere for investment opportunities and commercial banks that were previously hesitant to invest in personal debt invested in FHA loans (chapter 3).? Credit continued to evolve during World War II when, in an attempt to fight off inflation, the government tried to curb consumer demand by establishing minimum down payments and maximum contract lengths for installment credit.? Without altering profit incentives, this regulation encouraged businesses to find a way around the restrictions and resulted in the expansion of revolving credit (chapter 4).?

Throughout the 1950s and 1960s, Americans ?borrowed their way to prosperity? (p. 132).? The value of extended loans increased annually, but rising incomes and tax incentives allowed the growth rate of outstanding debt to remain fairly constant.? Department stores led the way in credit innovation, loosening credit limits in an attempt to increase sales.? Store credit became so profitable that by the early 1960s, banks began competing with department stores by offering their own credit cards (chapter 5).?

By the mid-1960s, credit had become commonplace in middle-class Americans? lives, as ?Home buyers borrowed their mortgages, financed their cars, and charged their clothes? (p. 173).? Despite the widespread availability of credit for most (i.e., middle-class white men), discrimination existed, leading to a two-tiered credit system.? Activists and policymakers pushed for credit reform to promote credit ?fairness,? resulting in the emergence of objective, computer-based credit models, and increased credit availability to women and minorities (chapter 6).?
By the early 1980s, investment in credit card debt went from being marginally profitable to a leading investment and by the early 1990s it had become twice as profitable as investment in business loans (chapter 7).? Mortgage-backed securities became popular as the development of tranches allowed securities to have different maturities and interest rates.? The availability of credit cards continued to become more widespread and the securitization of credit card debt in the late 1980s lifted the capital bottleneck that constrained consumer spending.? By the end of the 1990s, credit card and mortgage debt was financed through securities markets.? The assumed risk of the debt was predicated on models based on data from only a few years, and the combination of more subprime borrowers, larger debt burdens, and floating interest rates created an economy highly sensitive to changes in the interest rate.? While Hyman?s story ends before the current financial crisis, the last chapter sets the stage well and after reading it, a crisis seems inevitable.? Hyman does address the current crisis in the Epilogue, stating that ?the current financial crisis, rooted in those credit instruments, occurred not because capitalism failed, but because it succeeded? and that the large expansion of consumer debt from the 1980s onward was due to the high returns to consumer lending (p. 284).?

Debtor Nation provides a detailed account of how corporations, banks, and government transformed America?s economy into an economy dependent and leveraged on debt.? It tells an important (and often underemphasized) story about the evolution of modern credit and stresses the economic incentives that businesses and politicians faced at every step.? Hyman largely leaves the demand-side of the story to others, but I would have liked to have learned more about the relative magnitude of consumer debt throughout the period.? In particular, I would have enjoyed seeing how the relative size of mortgage and credit card debt, as a proportion of income, changed over time.?

Overall, Hyman has written an insightful book about the evolution of U.S. credit markets.? Debtor Nation is particularly relevant given the recent financial crisis and after reading it, it is clear that a complete story of the crisis must begin decades earlier.? I recommend this book to anyone wanting to know more about U.S. credit markets, or about how the U.S. became so dependent on debt.?

Katharine L. Shester is an Assistant Professor of Economics at Washington and Lee University.? Her current research assesses the effects of public housing on community-level outcomes in the mid- to late-twentieth century.???

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Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Household, Family and Consumer History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII