THE PLEASURES & PITFALLS OF BEING IN DEBT
DEAR KERMIT," wrote Molly Gordon to her husband not long ago, "now that you are leaving your job of directing the federal budget, I suppose you will be taking on again your old job of directing our family budget. I read that you have attempted to steer a national course between profligacy and parsimony. Well, I have been trying to follow this middle-of-the-road course with our family finances, but I have discovered that it's in the middle-of-the-road that most of the accidents seem to happen."
Mrs. Gordon's tribute to her husband on the occasion of his exit from Government service wittily expressed a major fact of life: the U.S. citizen as well as the U.S. Government is deeply in debt--and not only deeply but permanently. Increasingly, tycoons measure their millions as much by what they owe as by what they own. The federal budget shows a deficit of $3.8 billion for fiscal 1965, and Congress has just raised the debt ceiling from $324 to $328 billion. Personal debt, rising faster than the Government's, is above $264 billion; this year it will climb another $26 billion, or more than the combined gross national products of Ireland, Israel, Norway and Belgium. The debt of the average American family now stands at an awesome 60% of its after-tax income for one year. In a generation, most of the facts and beliefs about debt have profoundly changed. Virtually dead is the Puritan ethic that condemned spending beyond one's immediate earnings and followed Emerson's maxim:
Wilt thou seal up the avenues of ill?
Pay every debt, as if God wrote the bill.
The whole atmosphere of U.S. life invites more and more borrowing. Bankers cannot seem to shovel their cash out fast enough, are less interested in what a person or company can put up in the way of hard collateral than in what they have to offer in future earning power. Madison Avenue dances 1,500 advertisements a day before the average U.S. consumer, further tempting him to borrow and buy. The Government encourages borrowing not only by keeping interest rates low but also by making almost all interest payments taxdeductible. Says Donald A. Webster, the Minority (Republican) Economist for the Congressional Joint Economic Committee: "Thrift is the danger today."
Credit is, of course, at the very heart of capitalism: every capitalist society requires credit for expansion. What is new is the concept that not merely business but the individual consumer can "expand" by massively borrowing against future earnings. Inevitably, questions arise as to whether Americans are really steering a course between "profligacy and parsimony" or whether some accidents might be ahead.
Prosperity on the Cuff
Much of U.S. business prosperity is due directly to credit-fueled consumer purchasing. The automobile industry this year will sell close to 9,000,000 cars--three-fifths of them on credit. The nation's fastest-growing new industry, color television, this year will sell 2,300,000 sets--more than one-half on credit. Many an American sends his youngsters to college on a "dollars-for-scholars" loan, is up to his eaves in mortgage payments, buys his clothes on the cuff (65% of department-store purchases are charged), and then gets away from it all on a fly-now-pay-later plan.
People who count their pleasures in purchases are only too eager to adopt the new, ingenious forms of credit that have been invented. Some department stores offer special charge accounts for teenagers, breaking them into the habit with weekly payments of as little as $1. Other stores buy up lists of credit customers, then mail them unsolicited charge cards. Credit cards are a $633 million-a-year business and can be used to charter planes, get haircuts, or take an African safari. One of the fastest-rising innovations is the rubber check that does not bounce; under such catchy names as "instant money," banks extend a line of credit to their checking-account customers, permit them to write checks up to that amount, charge them interest of 12%. Customers almost feel square if they do not borrow, so insistent and friendly have the bankers become. As Ogden Nash put it:
Yes, bankers used to be like Scrooge before he encountered the ghost of Marley.
But along came TV and now they are Good Time Charlie.
Money & Masochism
The Good Time Charlies and other merchants of debt do not talk too freely about the true cost of all this credit, and too many borrowers have no idea what they are really getting into. "Wow! Just like a raise in pay!" exclaims a happy housewife in an ad for "revolving" charge accounts at a Chicago department store. What is seldom mentioned is that the interest on such credit amounts to 18% yearly. Finance companies charge up to 40%. Even the banks commonly advertise installment loans at 41% yearly -- but the true rate is 81%, because the lender keeps paying interest on the whole amount while the principal steadily declines. Anything bought on a three-year installment loan usually costs at least 25% more than when bought with cash.
What upsets some experts is that the consumer debt is unevenly divided: half the population has practically no installment debt, and the other half carries most of the load. The people heaviest in debt are: 1) men who get a raise in pay and then spend prodigiously in the often mistaken belief that they will continue to climb; 2) newlyweds, who sometimes spend twice their annual income in the first year of marriage; 3) middle-aged couples with children to support. People with the least debt tend to be bachelors, spinsters, childless couples and New Englanders. About 2% of the debtors are dangerously in the hole, have to lay out 40% of their earnings to quiet persistent collectors. Declaring bankruptcy was once resorted to mostly by businesses; in the past decade, the number of personal bankruptcies has more than trebled, to last year's 155,000.
Many habitual debtors prefer to extricate themselves with the aid of one of the credit society's important specialists, the financial counselor, who is part psychologist, part father image and part accountant. The client turns over his salary checks to the counselor, who then gives him a meager allowance and gradually pays off his bills. Usual charge for the disciplinary services: from 3% to 5% of the client's income.
In such chronic debtors, many psychiatrists detect a glint of masochism. "Consider the language of debt," says Manhattan's Dr. Harold Greenwald. "People have to 'beat someone out of his money,' or debtors are 'pushed to the wall' by their creditors." One of Greenwald's patients wept after he paid off his last creditor; he felt as if he were leaving someone who needed him. San Francisco's Dr. Alfred Auerback believes that overwhelming debt creates enormous tensions and strains within families. "Young people today," says he, "assume they should have a car, a television set, nice clothes and the other luxuries merely for the asking."
Philosophers and theologians have always debated the morality of debt. Aristotle condemned the charging of interest as "most unnatural," the early Christians considered it sinful, and the Schoolmen of the Middle Ages equated it with usury--until the Reformation, and notably John Calvin, defended interest under certain conditions. The last of the Schoolmen really was Karl Marx, who preached that interest meant exploitation. Only lately have some of the Communist governments in Eastern Europe begun to move away from this paralyzing doctrine.
Obviously, whether debt is moral or immoral depends on its use. It can be highly moral when it implies trust between man and man and a civilized respect for contracts. Some clergymen are a bit embarrassed that in a national rating of 42 types of credit risks, the clergy ranked a mediocre 17th (best risks are business executives, worst are farm laborers). Union Theological Seminary's Professor Roger Shinn says that the key to the moral issue is whether credit enhances or restricts personal freedom. "Debt is wrong if it overburdens and blocks a person and destroys his freedom to act," says Shinn. "It is also wrong if it is used for self-indulgence or without intent to pay. But there is responsible debt too."
The U.S. Government may or may not serve as a model of responsibility, but it has become deeply committed to deficit financing. The Treasury in effect admits that the current national debt will never be substantially reduced. When a spurt of tax revenues during this year's first quarter temporarily narrowed the deficit to only $100 million, many of Washington's activist economists actually grew nervous; the last thing they want the Administration to do is balance the budget. They feel that the recent tax cuts are not enough to keep the economy stimulated and that increased Government spending is necessary. This is the new orthodoxy expounded by that old revolutionary, Britain's late John Maynard Keynes, the century's most influential economist.
In brief, Keynes considered purchasing power, or "aggregate demand," to be the most important force in any economy; the best way to maintain high demand, he said, is for the Government to borrow money and pump it into the economy to supplement private investments. Washington has been raising Keynes since New Deal days; in 25 years the budget has been balanced only six times. The anti-Keynesian arguments--notably that the system is bound to lead to Government control of the economy, that it can be inflationary, and that indefinite borrowing is impossible without a day of reckoning sooner or later--are still heard, but feebly. As long as the gross national product and the population expand, pro-Keynesians see no reason why Government borrowing should not continue to expand too.
Not everyone accepts Keynes as gospel. Treasury Secretary Henry Fowler refuses to be classified as Keynesian; he does not believe that debt necessarily leads to development, or that surplus necessarily leads to deflation. Economist Raymond Saulnier of Barnard contends that the economy has been expanding not because of Keynesian policies but largely because U.S. business has increased productivity faster than U.S. labor has pushed up wage costs--with the result that prices have held relatively stable. But even economic conservatives have lately accepted the idea of using deficits to stimulate the economy in slack years. Sighs Virginia Senator Harry Byrd: "Franklin Roosevelt was elected on a platform that pledged to cut governmental expenditures by 25%. Nobody would dare run on such a platform today."
By modern standards, the federal debt is actually not growing very fast. In the past decade, while consumer debt has more than doubled and corporate debt has jumped 360%, Federal Government debt has gone up only 15%. And because the federal debt is rising much more slowly than the U.S. population, the per capita federal debt has declined in the past 20 years from $1,900 to $1,600--meaning that Americans are by no means saddling their grandchildren with an unbearable load.
Building Around the World
The ability to go into debt has launched many new nations, and preserved or vastly changed old ones. A postwar proliferation of international credit agencies--notably the World Bank -- has provided 51% credit that has strung railroads through jungles in Colombia, built highways in Ethiopia, and industrialized Italy's Mezzogiorno. Some countries have borrowed too enthusiastically. Overwhelming debts have brought inflation and economic chaos to Indonesia, Argentina, Ghana and other extravagant governments, which perhaps will never be able to pay up.
Significantly, the attitude toward consumer credit in most foreign lands remains nearly medieval. All industrialized countries have taken to installment buying since World War II, but not in the relaxed American manner. In Japan, it is still considered vaguely dishonorable. Even in such countries as France and Mexico, borrowing is for the well-to-do, bankers and borrowers have a well-founded suspicion of each other, and mortgages are high and hard to get. In Germany, where the word for "debt" still retains its Biblical meaning of "guilt" (Schuld), consumer debt averages out to only $32.50 per person. Europe's credit famine has not only slowed the Continental boom and made housing scarce, but also has led to a rush of foreign borrowing in the U.S. that has aggravated the U.S.'s balance-of-payments deficits.
The confident handling of credit has been a mighty force in the growth of the domestic American economy, and a decisive reason why the U.S. has expanded faster than Europe. But considerable concern remains that Americans may be getting themselves too deeply in the red. There are three specific worries: 1) that generous credit will lead to the kind of overbuying, overbuilding and overpricing that could set the nation up for inflation and recession; 2) that if recession comes, it could bring a wave of defaults and repossessions; and 3) that if the economy slows down, Americans might sharply cut back on their buying and borrowing, and thus aggravate the recession.
Betting on the Future
The most prominent worrier is Federal Reserve Chairman William McChesney Martin Jr. In his Wall Street-shaking speech last month, he stressed that one of the disquieting similarities between the 1920s and the 1960s is "a large increase in private domestic debt." Martin and some other credit experts are concerned about the spiraling of corporate debt, which rose 61% last year, now tops $400 billion. They also lament the "sloppiness" of the debt--meaning that eager lenders are reaching downward to extend credit to borrowers who never before would have qualified for it. To moderate the rapid growth of credit, the Federal Reserve has been tightening up slightly on interest rates and the money supply. But credit in the U.S. remains cheaper and more plentiful than in almost any other nation, and many bankers argue that more tightening is in order.
Though nobody really knows if credit has reached a peril point, there are some disturbing signals. Private debt lately has been increasing at a somewhat faster rate than the nation's gross national product, personal income or personal savings. The number of businessmen who fell into bankruptcy last year because they could not collect the debts owed to them by other businessmen was higher than in almost any other year since World War II. The percentage of personal income that went for installment payments, which held at 13% in the late 1950s, jumped in 1962 to 14% and is pushing this year toward 15%. Mortgage foreclosures have doubled since 1960 (to last year's 109,000). In a society where advertising and merchandising are highly seductive, there are bound to be weak or credulous people --perhaps too many--who fail to keep their debts in line.
On the other hand, Americans have traditionally been sound risks, even during the Depression. Today's rate of installment delinquencies is small (1.58%). Besides, figures on failures can be misleading unless they also take account of the changes in the quality of American life. Consumer credit is expanding not only because people are borrowing more, but also because more people are borrowing--as an increasing number of Americans rise to the affluent middle and upper-middle classes. A generation or two ago, the average American family made regular payments for rent, streetcar fares, laundry service, blocks of ice and movie tickets--none of which counted as payments of debt. Today the family makes regular payments to finance a house, a second car, a home laundry, a refrigerator and a color TV--all of which count toward installment debt.
If Americans can be criticized for enjoying now and paying later, they can also be praised for building equity and acquiring assets. And the assets of ordinary Americans are much bigger and faster growing than their liabilities. For the great majority of Americans, debt is a means--to acquire one's own house, to achieve mobility, to invest in education or travel or plain comfort. Properly used and managed, it is not a sign of trouble but a bet on the future.
This file is automatically generated by a robot program, so reader's discretion is required.