Tag Archives: credit cards

I came across this graph in a NYTimes article by Catherine Rampell. As they say, a picture is worth a thousand words. (I could therefore quit right now, but let’s face it, I can’t).The graph shows our personal savings rate as a share of our disposable income.

In case you have eyes like mine, the far left corner is 1960, and the far right is today. That steady march downward began in 1980, and bottomed out in 2005.

Having just spent an inordinate amount of time with the Federal Reserve’s consumer spending data and other debt-related research for Not Quite Adults (much of which got left on the cutting room floor, so don’t worry), I was struck by one thing the above chart doesn’t report: the banks’ role in loosing credit cards on us, coupled with our own personal spending gluttony.

Debt was once a four-letter word in America. Scarred from the blight of the Depression, the “Greatest Generation” lived in fear of debt. For decades thereafter, the country’s ethos was to “pay as you go” with cold hard cash. The only alternative was to sit across the desk from a sanctimonious store owner and plead to be allowed to put the suit or dining room set on layaway.

Credit was confined to individual businesses and paid up at the end of the month. Many a summer evening about 5:00, in a panic because she had no idea what to make for dinner, my mother would send me to the meat locker for a pound of hamburger and to the grocery store for a head of iceberg lettuce and some potatoes. Ingredients in tow, I’d breeze through the store checkout line and tell the clerk to “put it on my mom’s account.” The clerk would duly search for the dog-eared index card in the “accounts” box and write down the total. I had no idea what “on mom’s account” really meant then, only that my mother never took much cash to the grocery store, and at the end of each month, she wrote a check for the bill. The full bill, mind you. If you got behind, the whispers began.

That was the extent of credit. Families lived within their means.  In 1957, four in ten households had no debts at all. [here's a nifty chart the Times put together on these figures.] And today? Well, not so much. In 2007,  only 25%  of Americans had no debt. Nearly half of all Americans have a credit card balance (typically about $3,000), according to the Consumer Finance Survey that the Federal Reserve Board publishes. In fact, we  Americans have on average $1.20 in debt for every dollar we earn today.

How did they do it? How did they have so little debt and manage to sock away $70,000 a year on average in liquid assets the 1960s? For one thing, that long-held value of thrift and the scourge of debt held people in check. For another, there were fewer things to buy, and they were way more expensive.

Just consider the remote control. When it first came out in the mid-1950s, only a few well-off families had one. A “Space Command” (it was the 1950s after all) remote control and television set cost a whopping $2,200 to $4,000 in today’s dollars. Today, it’s thrown in with the set and the average household has four remote controls. Technology and production efficiencies (not to mention globalization) have brought the prices of many things past generations thought luxuries into the realm of commonplace today.

But a key reason we just can’t seem to save? Credit cards. And so I finally return to the chart. A big dip in savings that began in 1980 coincided precisely with a huge change in the banking industry.

Banking, which had been a buttoned-up business for years, suddenly undid its collar and let loose beginning in the early 1980s. This shift began with the overturning of an obscure usury law in 1978, which gave credit card issuers much more leeway in charging high interest rates. Before that, the handful of credit cards available were confined to the really wealthy, and you basically agreed to hand over your first-born male child if you failed to pay up. Banks themselves were hamstrung by laws holding down the interests rates they could charge. It just wasn’t a money-maker back then to offer a credit card.

With the usury law overturned, the cash-strapped state of South Dakota saw the proverbial “gold in them hills” and lured Citibank of New York to come roost in the prairie by permitting it to charge even higher interest rates on its accounts than New York allowed. Citibank’s move unleashed the floodgates, and states like Delaware and others were suddenly scrambling to woo banks by allowing them to charge higher rates. The once moribund credit card industry, which had been stuck for some time with interest-rate ceilings that were even lower than the rate of inflation, suddenly had a new lease on life. Instant credit was suddenly available to the masses—no more disapproving looks from bankers or department store owners, no more layaway.

Perhaps it is no surprise that as credit cards hit the scene in the early 1980s, the serious rise of materialism followed. It was, after all, the era of Madonna’s material girl, of Michael Douglas’ Gordon Gekko slinking his way through Wall Street on the premise that “greed is good,” and Tom Wolfe’s bestseller Bonfire of the Vanities. A counter-culture t-shirt “no condo, no MBA, no BMW” captured the derision toward a newly minted group of free-spending big shots: the Yuppies.

The growing media blitzkrieg also promoted consumption. Debt was no longer a four-letter word, and in fact was now touted as keeping the country’s GDP afloat. Cable television, MTV, the Home Shopping Network all came of age in the 1980s, to be followed in the near future by increasingly savvy marketers and, of course, the Internet. Advertising is no longer confined to billboards, magazines, and a handful of television channels. It permeates every nook and cranny of our everyday lives. “Branding” is now a household word and U2’s Bono has convinced a generation that shopping and social responsibility go hand in hand: Buy that GAP t-shirt as part of the Red campaign and you can also save a life in Africa. But above all, buy that shirt. “Buycotts” have replaced “boycotts” as a form of protest for this latest generation.  It is no coincidence that one of the fastest-growing industries is self-storage—how to make the most of our space to organize our stuff or, even better, how to get more space somewhere else to store the stuff we don’t need but can’t possibly live without.

One could hope that this is all changing now. Savings is ticking back up, and consumers are holding back–mainly because they’re tapped the well dry. There’s a few small signs of a new ethos about shopping that at least pushes the pause button now before cha-chinging (much to economists’ chagrin). The Green Movement is taking hold and making us think about our toss-away culture. I hope this new outlook can take hold. But the cynic in me doubts it. Once those floodgates open up again and banks start loosening the credit lines (which they inevitably will), it will be back to business as usual. There are too many forces working against us: Madison Avenue, Wall Street, our short historical memories, to name three big ones. Maybe though, just maybe, this generation has learned something and will push back on those forces that convince us that spending and shopping are good for the country.