Doomsayers have denounced consumer debt for decades. But today, for the first time since the 1930s, consumer chickens have come home to roost, with a debt crisis in the housing markets and a looming student loan debt disaster. Debtor Nation digs through a century of trade publications and government documents to offer an

Black Friday, 2011

Newscom

institutional history of the business-government interaction that created our current, massively over-leveraged consumer debt system.

Unfortunately, Louis Hyman’s moralizing gives him excessive faith that, after a century of perverse consequences, government regulation will magically develop the ability to steer credit appropriately. He starts with a distortion that reflects his limited understanding of finance: Before the 20th century, he says, consumer debt was unprofitable. In fact, it was profitable, but bundled. Strapped consumers—whether Victorian factory laborers or today’s white-collar workforce—have always sought loans to cover the gap between cash on hand and their need for goods. Going back to ancient times (according to David Graeber’s Debt: The First 5,000 Years), most consumer lending was store credit, recorded in account ledgers, but without an explicit interest charge. (Newt Gingrich’s no-interest Tiffany charge account is a survival of this earlier practice.) The retailer’s profit was the cost of goods plus the implied cost of credit, less bad debt chargeoffs. The key 20th-century change was unbundling: Rapidly falling information costs created a consumer lending market separate from store credit—which fueled a massive consumer economy while creating new systemic risks.