Credit in the United States (Part 2)

< Credit in the United States (Part 1)

The increased geographic distance between family members forced many people to depend upon third-party institutions for any financing they might need. They were also encouraged to seek more financing than they had previously used. According to Nugent,

Incentives to thrift disappeared with intimate community life.

Family traditions, conservative consumptive habits, and reputations for stability gave way to competitive standards of living as the principal basis for prestige. These changes helped to explain two important developments in the field of consumer credit which began shortly after the Civil War. One was the extension of installment merchandising to low income classes; the other, the rise of the small loan business.

It is important to note that the vast geographic size of the United States contributed in no small way to the development of its consumer credit industry. In European countries, the much shorter distances that had to be traveled, along with the smaller number of large industrial cities, enabled families to remain not only close but independent of outside institutions in meeting their financial needs. This fact may help explain why the consumer credit industry in general has been far less successful in most European countries than in the United States and why the credit aspect of credit cards may lack some of the appeal to Europeans that it has had to many Americans.

Following the First World War, increasing sales of automobiles, electric washing machines, vacuum cleaners, and other household durables led to strong growth in the use of consumer credit. Merchants, sales finance companies, small loan offices, credit unions, industrial banks, and even some commercial banks expanded their credit operations. In 1928, the First National City Bank of New York, then the largest bank in the world (today’s Citibank), organized a personal loan department. According to Harold Cleveland and Thomas Huertas, researchers for Citibank, the bank started making personal loans in response to a plea by the attorney general of New York for more lenders to engage in personal lending to offset the high rates charged by loan sharks. Many other banks followed First National City Bank’s lead in spite of their long-standing prejudice against consumer credit. the 1890s. All social and economic classes were represented among installment purchasers of automobiles; hence, installment buying acquired respectability. Although some automobile manufacturers, such as Ford, were slow in implementing installment sales plans, other companies embraced this new marketing tool. General Motors soon became the leader in installment sales.

In the period between the First World War and the onset of the Great Depression, open book credit granted by retail merchants also increased. According to data collected by the Department of Commerce, during the first half of 1930 only 47.4 percent of department store sales were made for cash; 7 percent were made on an installment contract basis, and the remaining 45,6 percent were open book. During the Great Depression, which brought a reduction in sales of discretionary items such as durable goods, installment credit decreased significantly while open book credit decreased relatively little, indicating that this type of merchant credit was generally used for cheaper, nondiscretionary items.

The importance of the automobile in stimulating and legitimizing consumer credit sales cannot be overemphasized. The growth of installment sales of automobiles tended to remove the stigma that installment selling had acquired at the hands of low-grade installment merchants in the 1890s. All social and economic classes were represented among installment purchasers of automobiles; hence, installment buying ac¬quired respectability. Although some automobile manufacturers, such as Ford, were slow in implementing installment sales plans, other compa¬nies embraced this new marketing tool. General Motors soon became the leader in installment sales.

In the period between the First World War and the onset of the Great Depression, open book credit granted by retail merchants also increased. According to data collected by the Department of Commerce, during the first half of 1930 only 47.4 percent of department store sales were made for cash; 7 percent were made on an installment contract basis, and the remaining 45,6 percent were open book. During the Great Depression, which brought a reduction in sales of discretionary items such as durable goods, installment credit decreased significantly while open book credit decreased relatively little, indicating that this type of merchant credit was generally used for cheaper, nondiscretionary items.

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