Credit Where Credit Is Due
The Dynamic History of American Debt and the Devolution of Credit into Usury
Henry Ford was right. Americans deserve layaway.
The issuance of debt is a practice as old as commerce. Access to credit gives people and businesses the opportunity to utilize capital that they do not possess. Credit creates economic capabilities that would not otherwise exist and thus grows the economy. However, modern banking has denigrated this tradition into an unholy form of usury.
Credit is supposed to be a quid pro quo transaction. Because the lender assumes the risk of default, the debtor is obligated to reimburse their creditor with added interest. Repayment is not contingent on any excess wealth derived from the loan, but both parties benefit if additional value is created. In this case, the money supply expands at the same rate as economic production, which increases the total wealth in the economy. Fortunes can be made using credit.
Conversely, the lack of access to affordable debt can be detrimental to individuals, certain social groups, or even entire nations. Those who cannot leverage credit cannot expand their personal financial prosperity nor their broader economy.
A lesser-known cause of the American Revolution was the repudiation of fair credit by the British crown. The taxes on the colonies were minutiae compared to the brutal recessions caused by imperialistic banking practices. The American colonies were subjected to exploitive interest rates and an inability to issue their own credit. The unemployment that followed created the friction that fanned the flames of revolution.
Debt used to be seen as an opportunity. It was applied to create value through entrepreneurial ventures and allow the average man to build wealth from their own efforts. Credit was extremely valuable and was not given out indiscriminately. It was difficult to acquire credit because people had to convince a creditor to assume substantial risk. Value had to be recognized.
The modern system of credit flips this value-creating principle on its head. Risk has been removed from the equation, and debt is now used for excess consumption rather than production.
Banks can create credit from nothing to be used purely for undeserved expenditure. The lender is not risking their own capital, and the borrower is creating no additional value. The money supply increases while productive output is stagnant. Thus, wealth is only transferred from the debtor to a lender who put forth no risk. All the while generating relentless inflation.
True systems of free enterprise reward the prudent use of credit for all market participants. Our abusive banking system negates value creation and consolidates the spoils of debt into the pockets of creditors.
On the other hand, consumers have collectively lost the true purpose of utilizing credit. Rather than using debt for wealth-creating opportunities, it is abused to buy things that would not normally be affordable.
Easy access to debt inflates the value of assets when price discovery is related to the cost of financing rather than the total cost. This is why stocks and real estate values explode when interest rates are manipulated lower.
This change in sentiment towards credit is a surprisingly recent phenomenon. This transition is best displayed through a simple timeline.
1791–1815: The First Bank of the United States is established to pay off war debts and establish credit for the new country. Under Alexander Hamilton the bank was appropriately liquid but resembled the Bank of England. It heavily favored northern creditors that abused the riskless government debt, and it undermined local banks that loaned out actual capital.
1816–1836: The Second Bank of the United States is established to finance future wars. Just like the First Bank, it had similarly had staunch opposition. President Andrew Jackson revoked the charter, calling the bank unconstitutional and a threat to republican ideals.
1837-1913: The Gilded Age of America precipitated multiple decades of deflation and unmatched industrial growth. Credit was abundant and competitive but carried a high interest rate.
1913-1938: The U.S. Federal Reserve created by a cabal of private bankers. The issuance of currency became privatized under a central bank independent of the U.S. government. Lead to immense swings in financial markets, global war, and the Great Depression. The first vehicle loans are introduced.
1938: Federal National Mortgage Association (Fannie Mae) is created to give Americans easier access to credit subsidized by the U.S. taxpayer.
1950s: The first issuance of credit cards and revolving credit.
1960s: Beginning of credit bureaus
1970s: U.S. dollar loses gold peg; Equal Credit Opportunity Act gives wider access to credit and a decade of major inflation.
1980s: Era of highest average interest rates
1989: FICO created
1990-2008: Credit is guaranteed by the U.S. government via subsidized housing and student loans. Subprime lending led to asset bubbles and the eventual credit collapse of 2008.
2008-Today: Interest rates perpetually fall, creating the biggest financial bubble in human history. Access to credit has never been easier for the government, businesses, and consumers. Bank capital reserve requirement is ZERO. Fed balance sheet in the trillions and consumer debt is now higher than annual GDP.
The obvious trend is subsidization of credit at the expense of the currency. Debt has become a necessity in an era of perpetual inflation. There is no risk for creditors in the wake of the bailouts following the financial crisis. Thus, debt is superfluous and used for nearly every purchase, drowning Americans who can never afford to purchase assets outright.
Credit is supposed to grow the economy and benefit the lower-income earners to give them a chance at creating value. Now the lending practices facilitated by central banks and subsidized by the government have created a doom loop of debt.
Credit is now available for everyone… But at what cost?
High interest rates protected our purchasing power. Creditors and debtors were forced to evaluate the risk-reward ratio of every debt transaction. There needed to be recognized value created from every loan. This sentiment needs to return. We have lost the privilege of credit by prioritizing immediate gratification.
Layaway will save us.
"Americans have suffered under crippling inflation, and the Federal Reserve is to blame," said Rep. Massie. "During COVID, the Federal Reserve created trillions of dollars out of thin air and loaned it to the Treasury Department to enable unprecedented deficit spending. By monetizing the debt, the Federal Reserve devalued the dollar and enabled free money policies that caused high inflation.”
"Monetizing debt is a closely coordinated effort between the Federal Reserve, Treasury Department, Congress, Big Banks, and Wall Street," Rep. Massie continued. "Through this process, retirees see their savings evaporate due to the actions of a central bank pursuing inflationary policies that benefit the wealthy and connected. If we really want to reduce inflation, the most effective policy is to end the Federal Reserve."
“The Federal Reserve has not only failed to achieve its mandate, it has become an economic manipulator, directly contributing to the financial instability many Americans face today,” said Sen. Lee. “We need to protect our economic future, end the monetization of federal debt that fuels unchecked federal spending, and put American money on solid ground. We need to End the Fed.”
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless" -Thomas Jefferson