Credit Card Nation: The History Of America's Love Affair With Debt

Are Americans hardwired to repeat the mistakes that led to the great recession? This post from The Capital Spectator explores the American propensity for debt that can be traced all the way back to the Revolutionary War.

How did we get into this mess? More precisely, how did the United States, a bastion of financial insight and innovation, manage to wind up between the economic rock and the hard place at the opening of the second decade of the 21st century?

The short answer: poor decisions. From Wall Street to Washington, in real estate and banking, in livingrooms and boardrooms, choices were made and the consequences are on display. The most conspicuous blowback of the ignoble preferences of recent vintage: debt. Lots of it, which we’ll be living with for quite some time.

It’s not the first time that the U.S. has managed to find itself in a river of red ink. It’s our destiny at the moment, and it’s our history too…from the beginning. “The United States was born in debt,” reminds John Steele Gordon in Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt. Debt was hardly an innovation in the 18th century, although few countries, before or since, have tried to do so much with so little capital. “The American War of Independence was unique,” observes Jason Goodwin in Greenback: The Almighty Dollar and the Invention of America. “Never before had a nation gone to war without money to pay for it. Had the revolutionary Continental Congress managed to gather up all the gold and silver in the country, it wouldn’t have covered the cost of a year’s fighting.”

Old habits, apparently, die hard. The U.S., along with a growing slice of the world’s economy, is attempting once again to do more with less. Why, one might wonder, do we seem to relive the same old trials and tribulations? Perhaps it's because finance in America is somehow different, as Alexis de Tocqueville opined in Democracy in America , a timeless treatise from the late-1830s by a French political philosopher and historian who explores the finer points of what makes the republic tick. “Tocqueville conceded that there was nothing unique about American character traits,” writes Jack Cashill in his entertaining Popes and Bankers: A Cultural History of Credit and Debt, from Aristotle to AIG, published earlier this year. “He had known of people in other countries who were hardworking, restless, ambitious, religious, egalitarian, and individualistic. He had not known, however, nor had the world seen, a whole nation of such people.” Cashill cites what may be Tocqueville’s most insightful observation of the American psyche as it relates to finance:

Although Tocqueville did not dwell on the question of credit, he understood why Americans would available themselves of it. “When an immense field for competition is thrown open to all,” [Toqueville] continues, “when wealth is amassed or dissipated in the shortest possible space of time amid the turmoil of democracy, visions of sudden and easy fortunes, of great possessions easily won and lost, of chance under all its forms haunt the mind.” Under these circumstances, “The present looms large…and men seek only to think about tomorrow.”

Dreaming about making a fortune needs no explanation, of course, and so much of what makes America great (or much of what drives its enemies mad) is related to the possibilities surrounding the business of wealth creation. But the flip side is no less potent. It’s hardly surprising to find that a nation that has been so focused (some say obsessed) with earning a buck is also a nation with a strong preference for spendin it. In order to understand America, one has to understand the consumer. On that point, Cashill digs up a quote that comes as close as any to dissecting the connection between consumption and the American economy. One Edward Rumely, a consultant to Henry Ford. had a revolutionary thought in 1916: “Because of certain facts of human nature, there are always more people who will buy when they can pay for a thing gradually in the course of the next six months, than there are people with cash in their pockets to buy outright.”

Credit and debt are America’s history, but so too is this pair closely entwined with world history. Cashill traces the concept of usury—the charging of interest on loans—through the history of kings and philosophers, bankers and playwrights, economists and politicians, revealing that the only enduring truism is finance is that human nature is unchanging when it comes to money. But the book has yet to be written that answers the bigger question raised by Cashill and many other pundits of the economic scene: Why can’t we learn from the past?

It’s been done before in aviation, medicine, engineering, to name a few industries where progress is something other than wishful thinking. Finance, however, is different.

“The ethics surrounding credit and debit…find expression in the oldest written records, those of the Greeks and the Hebrews,” Cashill writes. “But the real history predates that, as the Mesopotamians kept records of borrowing and lending on stone tablets. And yet even when the terms of a loan were literally ‘written in stone,’ people sought to evade them…”

Not much has changed by the standards of the 21st century, although the details are forever in flux and the computer has replaced the stone. The details, of course, are more interesting, and quite a bit more complex. The last few decades have excelled in offering individuals, institutions and governments an array of possibilities for amassing a sizable bit of red ink.

Innovation is alive and well in finance, which is to say that usury has come a long way since it was banned in the Book of Exodus. Deciding if finance has progressed, on the other hand, well, that’s still an open debate.

This post has been republished from James Picerno's blog, The Capital Spectator.