Note: I hired a young writer from Prescott, Arizona that I know, Andrew McIntire, to write an article as a ghost writer. I want to give him full credit for his work. I firmly believe that all of us are responsible for the financial demise of our country and the way we use credit is largely to blame.
Much has changed in America over the last one hundred years. Corporations have come and gone, Wall Street has had its ups and downs, and every year brings us a new standard for fashion in clothing. Additionally, the American mentality has shifted on almost every level from diet to finances. Most Americans have evolved in their philosophy of money and how they handle it. But is it a good evolution? Are we climbing the so-called evolutionary ladder, or are we getting caught up in harmful mutations? Or worse, are we de-evolving in our understanding of financial principles? To fully understand this, we must track our progress and see what the last one hundred years have brought us. Financially, what was the mentality of our great-grandparents one hundred years ago?
In 1910 the Sears, Roebuck, and Co. Catalogue contained the following line, “...buying on credit is folly” (Ramsey). In 1922 Henry Ford said in his book, “My Life and Work”, “…another rock on which business breaks is debt.” Later on he declared, “[Debtors will not] …work from free motives. The debt motive is, basically, a slave motive.” These quotes give us a glimpse of the pre-1950 mentality regarding money. Debt was regarded as foolish, or even a sin, and many of that generation were fondly remembered for “saving for a rainy day” despite what they may have wanted at the time. The Bureau of Economic Analysis in the 2010 National Income and Product Accounts Table reports that the average savings rate after the Second World War was nearly 10%, and during the war it rose to as high as 16% (US Dept. of Commerce). What this means is that saving was considered a necessary and prudent part of life by our grandparents, and our great-grandparents. It was simply the responsible thing to do. But the paradigm was already beginning to shift by the end of the 1950s.
In early 1958 Frank McNamara created the first credit card known as “Diner’s Club.” The economy was strong, and McNamara found a fertile market for his product (Wikipedia). After hanging on by so little for so long the average American had a strong desire to have their cake and eat it too. By 1960 Americans had charged over $340 million of today’s dollars on their newfound credit cards, and by 1970 the bill was 7 billion dollars spent via credit card, with an unbelievable 22% delinquency rate (Brooker and Levinstein). The credit card age had arrived with bang and it was almost instantly an industry measured in billions, not millions. The discipline of the past was sliding away. The splurge had started.
Meanwhile, personal debt continued to steadily climb from 1950 to 1965 but began to taper off by the early 1970s. In the late 70s, the debt trend began to rise yet again, but still the ratio of debt-to-income was below 60%. What this essentially means is that for every $100 of income, less than $60 was owed in personal debt. All of this changed in 1985 when the average American owed more than 60% of their income to their debtors. Since then, the trend has increased, with the difference between monies owed and income received reaching an all time low of 0% (Emmons). What this means is that since the year 2000 Americans have owed just as much as they have spent, or more, and in 2007 Americans had a negative savings rate of 10% (Ramsey).
Our nation is facing an enormous financial crisis, and these statistics show us the road that has brought us to where we are today. The big question now is “why?”
Between the years after the Second World War and the 80s the idea of personal debt became more and more accepted in the eyes of the public. The creation of the universal credit card and their sudden widespread distribution as well as concept of “keeping up with the Jones’s” began to permeate society. By the 1980s credit cards were fast becoming the norm, and the idea of saving was quickly becoming more and more nonstandard. Suddenly the buzzword of “rainy day” had been replaced by a new buzzwords, such as “leverage”, “home equity loan”, and “adjustable rate mortgage”. The idea of borrowing money was even beginning to appear in colleges and universities. By the 1990s the new craze was “90 Days Same as Cash” with furniture stores and electronics stores capitalizing on the fact that 70% of all same-as-cash accounts did not pay off in 90 days (Folgate).
All of these ideas pushed an attitude known as “instant gratification.” Whether or not this was intentional was beside the point. The marketing message was still clear: you can have it now. A lack of self-control and the sudden ease of purchasing goods without cash proved to be an expensive combination. An example of this can be seen at fast food giant, McDonald’s. Not very long ago McDonald’s did not accept credit or debit cards, and their average ticket was under $5 per customer. However, after they began accepting debit and credit cards the average order total jumped to over $7 per customer (Ramsey). Average sales receipt totals have increased with the use of credit cards, and the cards themselves have also increased in number. CreditCards.com reports that as of September 2009, there are more than 1 billion credit cards actively in circulation around the world. In 2008, Visa, MasterCard, Discover, and American Express customers chalked up nearly 2 trillion dollars spent with their cards, an 800 billion dollar increase over 5 years. In a crippling economic situation many families have found their primary source of income to be reduced or even cut off entirely. The need to save and cut back on spending has never been greater, but the trend has been that we are spending more, not less. This leads us to the question, “Can Americans start saying no in a stalled economy?”
What then does the future hold? Our current economy has brought us to a time of decision, and our next evolutionary transition is imminent. How will we evolve financially? Will the change be a step up as we overcome our obstacles, or will our actions result in an unnatural and harmful mutation of our financial understanding? Will we listen to the wisdom of past generations and cease from the over expenditure that has plagued us for so long? Or will our current trend continue to take us deeper into the debt we cannot dig ourselves out of? As of yet it remains to be seen. Our mistakes will either guide us or ensnare us as we take the next steps towards our financial fate.
Andrew took the time to list the works he cited. Here they are.
Works Cited
"Affluenza...Diagnosis" Pbs.com. Public Broadcasting Service, n.d. Web. 22 Feb. 2010.
Brooker, Katrina, and Joan Levinstein. "Just One Word: Plastic How the rise of the credit card changed life for the FORTUNE 500--and for the rest of us." Money.cnn.com. Cable Network News, 23 Feb. 2004. Web. 15 Feb. 2010.
Emmons, William R. Is household debt too high? Publication. Federal Reserve Bank of St. Louis, Dec. 1998. Web. 15 Feb. 2010. .
Financial Peace University. Perf. Dave Ramsey. The Lampo Group, 2008. DVD.
Folgate, Erik. "Stay Away From The “90 Days, Same As Cash” Trap." Web log post. MoneyCrashers.com. n.d. Web. 18 Feb. 2010.
"Quotes by and about Henry Ford." Abelard public education site. Ed. Abelard. abelard.org, Oct. 2004. Web. 15 Feb. 2010.
United States. Department of Commerce. Bureau of Economic Analysis. National Income and Product Accounts Table Table 5.1. Saving and Investment. Department of Commerce, 29 Jan. 2010. Web. 16 Feb. 2010. .
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