A short history of consumer credit

Credit. It's been called "disciplined hedonism" - except that its users aren't lounging on a palm-fringed beach, they're working day in day out, so they can meet their everlasting loan repayments.

What's fun about it?

It's been described as a "pleasant but misleading detour" from true happiness in life, supposedly getting you to your goals but in actuality taking you in the opposite direction. It is pleasant. It feels like a gift. It feels like money from heaven. And the marketers play on this.

An instrument of greed and control

It's been called "An instrument of both greed and control".  Your greed, their control. That means your weakness is harnessed to their (the lender's) goals. You are harnessed by means of your weakness, and they drive you and all the other pack animals in the direction of their goals, whipping you as and when they see fit.

Like a donkey, there's nothing you can do about it. You're harnessed to debt, and to the job that allows you to meet your monthly repayments.

Work hard, get nowhere

And yet for all that working together in harness, being driven along forever - you get nowhere.

The myth is you get ahead through borrowing. But how is it possible to get ahead by getting behind?

We did learn something from our parents and grandparents - discipline and hard work. But we use them for the good of others. Which means that the fruits of our hard work go to others, not us.

And something else got tangled up in the harness. There is, and I say this with great caution, and many caveats, a thing called "productive debt".

  • IF you've done the calculations and they make sense;
  • and IF you've done the worst case scenario calculations, and they are manageable;
  • and IF it fits with a carefully thought through strategy;
  • and IF it fits with your current financial situation;
  • and IF you stick to the rules and are disciplined;
  • ... there can be such a thing as productive debt.

Live for today, pay it back for the rest of your life

Some of the earlier forms of debt were sold to people on the basis that it was productive debt. Sometimes it was genuinely designed to be. Later, however, people stopped being so cautious as marketers encouraged them to "have it all now".

Live to shop - live to pay it all off

This was when we were taught that we live to shop, we love to shop, we live to spend money. We weren't always this way! It's hard to remember a time when we didn't unquestioningly believe this, but there was such a time, not so long ago. But if you aren't interested in history, you will never learn this and other valuable lessons.

It's only in the 20th Century that this kind of debt has become the dominant kind. Even when applied to supposedly serious investments such as one's family home, people have been taught to buy up to the maximum bond the bank will give them. "Location, location, location" actually means "Take out the biggest possible bond, make the bank the biggest possible profits".

Location, location location: owe, owe, owe

In other words, "location, location, location" is just another term for "spend, spend, spend" - disguised as responsible investing.

Credit has always been around, often vilified. Jesus threw the moneylenders out of the temple but more recently the church has refused to criticize usury - in other words, lending money and charging interest.

But as discussed above, sometimes it was considered to have a place, in moderation. Before everything changed, got out of hand, and stopped working for our own good. It was around the 1920s that this changed - the same decade that Americans became consumers, and for the same reason.

The birth of the consumer was also the birth of the lifelong borrower

This was the decade in which Sigmund Freud's discoveries about the workings of the human mind were first put to use by his nephew, Edward Bernays. But not in the form of psycho-analysis, or seeing your "shrink".

No, first and foremost they were put to the service of the marketers, to persuade people, based on Freud's discoveries, that spending would make them happy, sexy, successful, beautiful, admired. And this message was spread largely through public relations.

What is public relations? It's something many people who are not in the world of marketing have only a vague idea of, yet it affects us all profoundly.

Public relations is propaganda, paid for by marketers and governments. Bernays was the coiner of the phrase "public relations" because he said that a more acceptable alternative was needed - propaganda is a bit bald, a bit ugly - but propaganda is what he was talking about, dressed up to look more respectable.

Public relations is the placing in the media of articles and news items by companies seeking to change public opinion to suit their objectives. In this respect it's no different to advertising. But here's the crucial difference - public relations, unlike advertising, is presented as objective news sourced by real journalists and editors.

So it's hidden advertising, and it works much better. Firstly, because people don't realize that it is advertising in disguise; and secondly, because it benefits from our belief that the media is objective and that we, as good citizens, ought to expose ourselves to it by keeping in touch with the news. We think of the media as essential - or at least, harmless. It's neither. It is the major medium of shaping us as consumers, tied to debt.

Consumer = lifelong slave

How did this happen?

Bernays's first corporate customers were trying to get people to think they needed things but just hadn't realized it. More shoes, more coats, than they needed to replace the old worn-out ones. He and other public relations (PR) practitioners got people to think that cars were sex symbols, not just vehicles. That cigarettes were a sign of liberated womanhood. He organized events like a march of smoking American debutantes that he called "Torches of Liberty" - and placed articles to report on and explain this "news".

To show us how well this approach worked, think about the fact that we still buy  cars and cigarettes for these reasons, nearly a century later.

Getting people to buy more things than they needed gave industry a great boost and it still relies heavily on this approach. The only limit was what people could afford. So that was the next opportunity? Raise sales even higher by getting people to borrow to buy.

It worked well. Too well. Not only did "consumer credit" - widespread borrowing - become the instrument of our slavery, but it has been blamed for the biggest economic destabilization and crash of modern times - the Great Depression.

Borrowing to buy shares as a get-rich-quick scheme, acceptable because "everyone's doing it" has been blamed for the stock market crash that led to the Great Depression - and it was only the Second World War, ten years later, that rescued economies around the world.

One virtuous loan

What about the one "virtuous" loan, the one we all "cannot do without" and are in fact encouraged to get as soon as possible, as a responsible adult- the home mortgage?

What our grandparents could tell us if we'd listen (and we've been trained not to - another web of the harness - but one that I won't go into here, not just yet) - what they could tell us is that the famous and ubiquitous home loan did not always exist. The home loan as we know it did not exist in the early part of the 20th Century. And the idea that we should live in bigger and bigger houses has grown with the home loan - remember, "profit, profit, profit".

In those days people might borrow money for the building materials, from family, friends, anyone who had money to lend. They might club together in what were called "building societies" which still exist today as stokvels, to help each other and be helped in turn. They might put down 10% or 50% as a deposit, and repay the loan, and therefore own the house in a couple of months, or up to ten years.

A different picture

The picture is clear: the aim of the loan was to get the house built and paid for as soon as possible. Not to create an entire industry that survives on permanent indebtedness. Twenty year mortgages, paying forever, buying bigger houses than necessary - all this was still coming.

In 1893, these informal "building societies" were the third largest lenders for home-buyers - after private individuals and savings banks.

Lending as a part of life - later a foundation stone of the economy

Mostly they had no fancy premises and paid nobody a salary. Mostly, people were not making a living or a career out of lending money to other people who repaid the loans for at least 20 years, often much more as they moved, sold, and bought new houses and started all over again.

Getting the picture? Lending as a part of life ... borrowing continually and thereby creating salaries and career paths for lots of other people - scarcely featured.

Another important point - besides paying off your house in something like 8 years, you were paying capital and interest from the start. Nowadays, you pay the interest first - for the first few years you scarcely pay for your actual house at all!  You only pay for your house when you have almost repaid the loan! Think about that one ...

Back to the story.

Where were the banks at this point? With their marble foyers, hushed concourses, massive advertising budgets and great illuminated signs? In those days they didn't like long term loans as they found them risky. And some were not even allowed to make loans of this kind. And very few people owned their homes - rates varied between 11% and a little over 50% - and of these owners, only about half made use of a loan.

Taking a loan meant taking responsibility

Taking a mortgage was understood to help - but to be a great responsibility too. Many hours were spent working out how to keep the borrowed amount as low as possible. And people worked it out for themselves, they took responsibility for what they could repay, unlike today where they go by what the banks tell them.

Having made the decision, bought or built according to the amount they felt they could afford to repay, home-owners then "toiled, scrimped and laboured" to repay the loans. They would cut out all non-essential purchases; pay cash for everything else they bought. People reported mending clothes long past their usual lifespan; walking rather than taking a streetcar to save on the ticket; polishing their own shoes and doing without visits to the barber. Little things we would say, but they made a difference.

Evolution and revolution

Borrowing to buy a home has long been an acceptable loan. What about smaller loans for furniture, appliances, even clothing and groceries? This was really not considered a good idea until around the 1930s. While the changeover from home loans as described above to the bank-financed home loan of today was an evolution, buying clothes and groceries on your credit card was a revolution.

Retailers led the way. This in itself is very interesting. We know today that many furniture and other retailers aren't too interested in selling you furniture - that is just a vehicle for selling you credit. And credit is where they make their real profits in the form of interest. Hence they aren't too interested in cash buyers.

Yet at the dawn of this kind of lending, the aim was to help people lift themselves out of hardship and into the American Dream. It's changed, of course - now it's about instant gratification opf your every whim, garages stacked with yesterday's "must-haves" which we quickly tire of, and massive waste.

For a long time banks tried honestly to restrain people from getting carried away on credit. Nowadays they pay only the most insincere lip service to this sentiment.

You see, for most of history, usury (charging interest for lending money) was frowned on or even illegal. Religions forbade it - even today credit has to be packaged differently for Muslims wanting to stay within their religious laws. Aristotle considered charging interest a crime against nature as well as against humanity because money, unlike wheat, cannot reproduce itself. The laws were serious. You couldn't be buried in a Christian grave - it was a mortal sin to lend money and charge interest. Until recently, a punishment like this really mattered to people. But as early as the 1500s, the market economy was starting to take over from the moral economy. It took a while, but from then on I suppose it was a matter of time before we got to where we are today.

Aladdin's lamp?

A good idea of how credit seduces us is the term "Aladdin's lamp" which was used by a countess who convinced a furniture dealer to lend her his furniture on the understanding that she might, someday, actually buy it. She thought this was such a magical way of instantly getting everything she wanted, and paying later, that she recommended it to her friends.

This is interesting too because it is my belief that magic is really just another word for short cuts, for trying to break the rules of the universe. Getting something for nothing is magical thinking -  and it always backfires. It is really nothing more than wishful fantasizing and laziness, reluctance to do what you know you need to do, the desire to escape the consequences of your actions. Much of the desire for credit is magical thinking. Especially nowadays when we use it for everything.

Somebody "gets away with it" - but it's not going to be you!

This little story is said by some to be the beginning of the hire purchase agreement. And it IS an Aladdin's Lamp - but not for the lender, not the borrower.

Another thing that started changing some time ago, but only really got out of hand in the 20th Century, was possessions. For millennia most people owned very little. In the 19th Century, the average (even fortunate) family owned a little basic furniture, farming implements, clothing, shoes, if they were lucky, a horse.

In Tess of the D'Urbervilles, it is a major setback for Tess when one day, after walking many miles in her workboots, with her good boots in her arms to reduce wear, she hides them in a hedge until she needs them ... but they are found, mistaken for discarded rubbish, and she loses them. And when her family loses their horse in an accident, it literally moves them down a social class, from struggling but managing peasant class to farm labourers.

Even in our own lives we can remember when we had a single "party dress", one "good" or "best" shirt, our "church outfit". Do you still have a single party dress or church outfit?

As we entered the coal and oil age, the technological age, people started trading age-old farm implements for new improved but also expensive ones -  and only credit could make it happen. Large scale consumer credit is bound up with our times. Only credit could create "industrialized man".

There's an old joke about credit, much told back in the days when people were far more unsure about it. The joke was that being indebted was like the guy who jumped off a building. About halfway down, someone leaned out and asked him how we was doing. "So far, so good" was the reply.

The essentials - and the things "we cannot live without"

Then came the stock market crash of 1929. a commentator at the time who had accurately predicted the crash blamed it on inflated stocks and greedy investors, everyone from millionaires to "the elevator boy". He said it was the same people who had been buying cars and fridges, radios and fur coats, the "essentials" as well the things we convince ourselves we cannot live without. Another interesting thing - when everyone's doing something, should you be too?

Then, as now, credit critics foresaw that the real test of credit would be when times were tough, not easy. Way back then, they were predicting that shortsighted greed would lead lenders to lend to people who were hoping to get themselves out of a hole through borrowing. Today the average South African spends 83% of his or her income on debt repayment and unbelievably, in other countries it is even higher, above 100% which seems impossible. Around 1930, it was less than 10%. This is the scenario they warned about way back then, only really come to its peak in recent times.

So the pattern is more borrowing for more, often frivolous things, paying loans off for longer, more of your income going into repaying debt, lending for perceived pleasure, not necessity, and irresponsible lending. An earlier commentator consoled himself by saying that at least nobody would buy "beefsteak and eggs" on credit, but he was wrong. We even buy toothpicks on credit now. And credit on credit.

"Creative financing" makes the unaffordable appear to be affordable - for a while. Residuals and revolving credit. More people offering to help you get a loan or get out of the trouble loans got you into. Floods of junk mail jamming your postbox, offering you "easy credit".  Clever ways to hide what it's really costing you. To hide the fact that you cannot afford it. Above all, ways to help us lie to ourselves.

Credit - ways to help us lie to ourselves

And credit has become an essential part of maintaining the usual middle class way of life. You simply cannot live as you expect to live, without it. Which means that it's only the unusual, the lucky, the off-beat who are living differently. Our neighbours are in the same boat as us. Which makes it hard to do things differently.

Castles in the air

We laugh at "castles in the air", at people with dreams of Hollywood stardom, marrying fairytale princes, or hitting the jackpot. Yet there is good reason to think that the two car home for the middle class person is just as much of a fantasy. We just haven't realized it yet.

One more thought: if you're expecting all this "coming to our senses" to make any change in the world at large, think again. There is a growing belief that the string of recent bubbles - the dotcom, the sub-prime - are not out of the ordinary - they are now business as usual. Bubbles used to be very rare and much soul-searching, weeping and wailing followed.

Now some people think that pumping up a bubble, getting ordinary people to jump aboard, making a quick buck and then getting out before it all collapses, is how it's going to be from now on. Some people are even looking for the next bubble to get in on, and out of.

It's a way of transferring funds from the ignorant to the unscrupulous. The attraction is quick wealth, without effort, responsibility or work of any kind. The "guarantee" is that "everyone's doing it, it's safe, the market will never come down".

The point is that it is no longer a once in a lifetime thing. There are people who believe that America's economy, and by emulation everyone's, cannot function any other way anymore.


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