-
Chapter 5: The New Debt Revolution
- University of Pennsylvania Press
- Chapter
- Additional Information
Chapter 5 The New Debt Revolution Recent investigations have shown fairly conclusively that in every city of more than 30,000 population there is one usurer to every 5,000 to 10,000 people; in cities where manufactories employing large numbers of workman have congregated these figures are greatly increased. —NewYorkTimes,1911 The new attitude toward debt emerging from the nineteenth century was best found in a book by Thorstein Veblen that was published in 1899. In his Theory of the Leisure Class, he described the new class of consumers who had grown rich over the previous decades. “Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure,” he wrote about the current consumers who provided demand for luxury goods during the Gilded Age. Their goal was to emulate other wealthy individuals in a quest for status and luxury. In previous centuries, the sumptuary laws tried to keep behavior like that to a minimum, without much success. During the Gilded Age, it was clear that behaving like wealthy bankers and industrialists was no longer condemned but encouraged. It was good for the economy. Despite the repeal of the usury laws in Britain and the experiments with repeal in the United States, high lending rates persisted. Consumption loans mostly were unaffected, as they had been for centuries. While business loans conformed to the realities of the markets, consumption loans with effective interest rates in excess of 100 percent were still common, with the poor and marginal borrowers paying the highest rates. The building societies and friendly societies did make reasonable interest loans available to many, but large portions of the population did not qualify to be their members and paid the price as a result. New Debt Revolution 181 Compound interest had long since become common practice, but its potential deleterious effects were not forgotten. In the view of John Maynard Keynes, it had become the preoccupation of society at the expense of societal growth and well-being as a whole. The earlier discoveries of Darwin and the demographic warnings of Malthus had been pushed aside by financial math. If only the benefits of evolution could have been reconciled with a solution to the dire predictions of population growth to produce a true societal state of well-being. But as Keynes saw it, the opposite was occurring. The rates of growth in population and the benefits of science were diverging. Immediately after World War I he wrote, “One geometrical ratio might cancel another, and the nineteenth century was able to forget the fertility of the species in a contemplation of the dizzy virtues of compound interest.” Finance was poised to assert its magic over politics and economics. Prohibitions against compound interest had long since disappeared and the only debate still surrounding it was legal. Most of the discussions about whether and when it should be charged were matters of contract law. A large body of literature developed on both sides of the Atlantic about the role of compound interest calculations in legal contracts, not unlike the discussion of usufruct and usury in Justinian’s day. Charging it, especially by legal guardians and the courts, was closely monitored so that borrowers or minors were not exploited by lenders or other intermediaries. The twentieth century introduced many new twists and derivations to the idea of credit and debt. The sharp increase in population generally put pressure on financial institutions to make credit more readily available. Credit unions, friendly societies, and building societies continued to grow but did not reach the larger part of the population, many of whom relied on “private lenders” for their borrowing needs. Specialized finance companies providing loans with high interest rates and payday lenders continued to flourish and saw an increase in demand for their services. Lending facilities for the working man and average citizen with a small or medium-size bank account were scant and loan-sharking was a far-reaching problem nationally . Money was readily available at 50 percent or more, but much less was available at lower rates. But the harm done to the economy was indeterminate because statistics were not kept on personal credit in the United States and would not be collected until the 1920s. The period before World War II was characterized by the continuing debate about the appropriate levels of interest charged for consumption, or consumer, loans as they were now called. The argument was remarkably similar to those of the past even though the credit markets...