US slide as an irredeemable debtor
By Dr R Balashankar
Debtor Nation: The History of American in Red Ink, Louis Hyman, Princeton University Press, Pp 376 (HB), $ 35.00.
America, with its strong dollar, pre-eminent economic position and enjoying the status of uni-polar power, notwithstanding is a nation in huge debt. The per capita debt has risen to an unforeseen amount of over a lakh dollars. How did US bring this plight on itself? To know the answer to that, one needs to go into the history of debt as Louis Hyman explains in Debtor Nation: The History of American in Red Ink.
Debt is, in fact, behind some part of the success of America’s capitalism. The growth of the consumer industry was fired by the loans that people were encouraged to take, the credit cards that became imperative and the greed to borrow from future spun off an economy that was the envy of everybody, till it lasted. Says Hyman, “By the end of the (twentieth) century, the choice to opt out of credit system no longer remained…The choice of whether or not to use the credit ceased to exist for the American consumer.”
Debt has always existed. Intra-family borrowings were the norm. But it became big business when someone realised that profit could be made from lending money. “…before 1917, it had never been legal to charge interest rates high enough to turn a profit and, equally important, lenders had never been able to resell their customers’ debts or borrow against them.” But consumer finance moved “from the shadowy margins of capitalism into its brightly lit boardrooms, remaking, in its wake, the entirety of the American economy.”
The Federal Housing Administration, the New Deal Policy makers’ response to the state-run Public Works Administration and the Home Owners’ Loan Corporation, is what “ultimately reshaped the way in which Americans borrowed mortgage funds and in the process remade where and how people lived, and how a new American economy was ultimately financed” says Hyman. Narrating the history of credit card Hyman says how the government, post Korean War, instead of focussing on the dangers of credit card, actually demanded its access for all. The departmental chains that took full advantage of it became America’s largest ever retail conglomerates. By 1960s, “For middle-class Americans, credit card became an entitlement. Rather than a privilege, it was a right deeply imbricated with suburban material culture and everyday middle-class shopping habits.” But as Americans increasingly found it difficult to pay back, debt mounted. It tripled from 1970 to 1979, the gap between what was loaned and what was repaid increased seven times, to $ 35 billion a year. Everywhere, in the face of uncertainty and declining real wages, Americans indebted themselves to maintain the life they had once been able to afford.”
In this booming debt market, new players came with new rules and little ethics. Borrowers became part of the productive economy. The geographical line in lending and borrowing blurred with capital moving freely from one country and continent to another, linking all in the plot. New types of loans, new rates of interests and other attractions made borrowing easy and tempting. Without thinking if they can return, Americans borrowed, imitated by people in other countries. It was a huge party where nobody had to care about who will clean up. “The same banal and brutal process of allocating capital that had made postwar America prosperous had come to undermine its long-term viability.”
Hyman says the American economy had grown dependent on credit to sustain itself, and if the credit stopped, no one knew what would remain. Every American was given a credit rating. Even a worker, looking for a job, had to have a good credit. “Americans had to use credit and develop a “good” credit identity if they were to take part in mainstream commercial life.” Elsewhere Hyman mentions that even if anybody wanted to reduce the borrowings, the environment in which they lived made reduction difficult. “While borrowing became more compulsory, paying back what was borrowed proved more difficult.” Thus building up the debt.
The Epilogue in the book focusses on the results and implications of this debt-driven economy. “The current financial crisis, rooted in those credit instruments, occurred not because capitalism failed, but because it succeeded. For the past forty years, profits for the owners of capital have soared while wages for most workers have stagnated. This is not a deviation from capitalism, but how capitalism operates.” Investments went into credit cards and mortgages instead of paying the workers directly. Hyman is emphatic that “Consumers ought to be able to borrow against their incomes to buy that washing machine today. But the financial system loses its purpose when it attains mastery over the real, productive economy. Finance must help us work, not work us over.” Indeed a pertinent point. Capitalism as came to be practiced in America in the last three-four decades changed the basic rules of the game. Debtor Nation captures the story of debt in America over the centuries, bringing the narration to a climax in the present financial crisis. Written in an engaging style, the book offers a new way of looking at debt, both the good and bad. Louis Hyman has a PhD in history from Harvard University, where he also taught.
(Princeton University Press, 41, William Street, Princeton, New Jersey 08540)