In the United States, nearly all of the states ignored the liberal examples of their ancestral countries in Europe and retained interest rate ceilings from the moment they achieved statehood. (The existence of such ceilings in almost all states helps explain why usury laws have been more of a problem for the credit card industry in the United States than in Europe.) But despite that limitation, the general use of credit in the fledgling nation was widespread. In fact, there is little, if any, difference between the way credit is used in the United States today and the way it was used in the early 1800s, with the single exception of technology.
Records indicate that both installment credit and a form of revolving credit were widespread in the early days of the Republic. Economist Rolf Nugent noted, in Consumer Credit and Economic Stability, that “in rural areas, horses, plows, carriages, seed, clocks, and household furniture were frequently sold for promissory notes payable after the harvest.” Installment sales were commonplace in urban areas, particularly for high-priced durable goods designed for household use. Installment credit in the early 1800s was used in much the same way as it is used today. It was granted specifically for a single purchase and required both a down payment and a formal contract that permitted the merchant to retain title to the article until the purchase price had been paid. For instance, Cowper Waite and Sons, which was founded in New York in 1807 and appears to have been the first firm in the United States to specialize in furniture, sold goods on installment terms from its very inception.
Another type of early credit, which was similar to the revolving credit used by most present-day credit card companies, was known as “open book” credit. While both term and installment credit were used for more expensive items, open book credit was generally used for cheaper goods that were purchased more frequently. Open book credit was most often found in rural areas, but it was also relatively common in many early American cities. Other sources of credit in the early years of the nineteenth century were physicians, who often had to collect their fees on a delayed basis, and pawnbrokers. In New York City, pawn broking had developed to such an extent that in the year 1828, pawnbrokers reported 149,000 pledges, (A pledge is a consumer loan made with a piece of collateral to secure its repayment.)
As installment credit gradually proved to be successful over the first half of the nineteenth century, manufacturers began to borrow the notion from the merchants. One of the earliest and most successful manufacturers to utilize the installment plan was the Singer Sewing Machine Company. Other manufacturers began to sell big-ticket consumer durables, such as pianos, household organs, and stoves, directly to consumers through agents by about 1850.
The period after the Civil War was characterized by a growing volume of installment credit sales. Following the successful example of Singer and other manufacturers, local merchants, particularly furniture dealers, began to offer installment credit. During the 1870s, installment credit was extended to sales of encyclopedias as well as to sales of all types of household equipment. In the 1880s, some merchants began to sell jewelry on this basis. As foreign immigration accelerated, an increasingly common sight was the “customer peddler” who sold a variety of goods to non-English-speaking arrivals.
A parallel development was the growth of the small loan business, which apparently began in Chicago about 1870 and spread rapidly to other cities throughout the United States. As a result of widespread abuse in this industry, regulation soon arose in many states. Partly to counter the abuses, laws permitting credit unions were passed in 1909. In 1910, Arthur J. Morris opened a bank that made small loans to consumers at a rate of just 6 percent per year. “Morris-plan” loans were made for a variety of purposes but were usually for emergencies and were also most often for relatively small amounts. Over the next decade, Morris plan banks spread to thirty-seven states.
The spurt of industrialization following the Civil War began the long-term trend toward urbanization in the United States. A son who had learned a trade from his father-metalworking, for example— might discover that in another city there was a big demand for his skills and wages were much higher. The gradual movement of family members from rural communities to large cities helped weaken the family bond, as well as the reliance of family members upon one another for ’ the provision of financing.