A Brief History of Debt

The credit and debt system was established long before the written word. Thousands of years ago, counting tokens were invented to track trades and obligations. In fact, historians tell us that the art of writing was invented to enable mankind to record financial dealings.

Initially, receiving anything more than the sum lent was considered inappropriate. Eventually, the time value of money became understood as ancient merchants realized the loss of capital led to lost profits. The Sumerians developed the concept of interest and methods to calculate interest and record transactions. With that development, along came debt.

During the 1300s, the Italian banking system invented modern lending: using bills of exchange, bank loaned money in dozens of currencies for safe transport over poorly-guarded highways. Stolen bills of exchange could not be "cashed" by robbers, allowing 100 gold coins held in Venice to be used in Florence. Bills of exchange became currency among merchants and lenders, increasing the value of the underlying gold. Access to lending was available to merchants and nobles only, not ordinary workers.

Until recently, most middle-wealth and working-class people had no debt because banks refused to loan them money. This changed when a New York State Attorney General, intent on curbing the loan sharking that victimized the middle-wealthy and working-classes, pressured banks to make consumer loans available. In 1928, the National City Bank of New York offered loans at 12% interest to working class customers, receiving 500 loan applications on the first day. The high interest rate and low default rate made early consumer loans very profitable.

During the Depression, the US government backed and guaranteed low-interest loans while encouraging banks to loan money enabling consumers to buy modest homes and cars. After World War II, US government-backed home loans were made available to military veterans. By the 1970s, a half-dozen federal government agencies guaranteed home loans.

By 1989, the US government guaranteed 40 percent of home mortgages while backing loans for education, small businesses and farms.

The Credit Card

The US’ first credit cards were used in the 1920s to facilitate sales of fuel to car owners. By 1938, several gasoline companies were accepting each other's cards at gas stations.

The use of plastic cards to pay merchants formally was invented in 1950 by Ralph Schneider and Frank McNamara as a means of consolidating multiple cards. The Diners Club introduced the first "general purpose" charge card but it required holders to pay bills in full with each statement. American Express and Carte Blanche followed soon after.

In 1958, Bank of America created BankAmericard, which evolved into Visa. Mastercard was launched in 1966 by several credit-issuing banks. Given the US’ highly-fragmented banking system, credit cards allowed people traveling throughout the country to access their credit where they could not directly access their own banks.

By the 1960s, credit cards took hold of US consumers’ pocketbook, freeing them from the constraints of needing money to make purchases and providing full access to money they had not yet earned. Freeing consumers of such constraints transformed the role of credit cards in the US: by the 1990s, all US consumer debt exceeded $1 trillion.

Current US and Credit Card Debt

Total US consumer debt – revolving & non-revolving – stands at $2.253 trillion, including $961.6 billion in revolving and 1607.1 billion in non-revolving personal debt. Until recently, economic stability, low interest rates and a competitive financial services sector generated robust growth in consumer borrowing and handsome profits for credit card and financial firms.

Americans now hold more than $950 billion dollars in credit card debt alone while continuing to spend more money than they earn. Why are they doing so?

First: “Generation Xers” are carving a new direction for society by moving straight into debt after being raised to believe they simply can "charge it" whenever they wish to consume a good or service. They appear not to be particularly well-educated as to the inevitable implications of such actions and it is quite evident they do not know the true cost of the goods they buy when charging them. (The average credit card debt of Americans aged 25 to 34 increased by 55% between 1992 and 2001. The average young adult household now spends approximately 24% of its income on debt payments.)

Second: Given prodigious spending habits, Americans no longer are saving. In 2005, the American savings rate was -0.5%, the lowest since the 1929 Depression, and a trend that mirrors American consumers’ increased indebtedness. People without savings must charge all required goods and services, as they continue splurging on discretionary items.

By 2020 total US credit could reach $1.3 trillion. With a default rate of 5%+ suggests that the consumer debt recovery business is likely to be extremely stable at the very least for years to come, offering lucrative investment opportunities.

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