History of Credit and Debt in America: How the American Dream Became a Financial Burden

The concept of credit and debt has been a part of American life for centuries, but its impact on the country's economy and individuals has evolved significantly over time.

In the early days of America, credit was largely based on personal relationships and word of honor. People extended credit to their neighbors and friends, and repayment was often made in kind or through social obligations.

This changed with the introduction of paper money in the late 1700s, which allowed for more widespread use of credit. However, the lack of regulation and oversight led to a surge in reckless lending and debt accumulation.

The American Dream, which has long been associated with homeownership and financial security, has become a financial burden for many.

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In pre-industrialization America, consumer credit was scarce and often came with harsh terms. Local grocers offered credit to frequent customers, but it was a rare privilege.

One hundred years ago, credit cards didn't exist, and personal loans were reserved for wealthy businessmen only. Everyone else had to borrow from family and neighbors or, more often, loan sharks.

Loan sharks preyed on the desperate, charging interest rates of 60% to 480%. This was the only option for those who couldn't afford to pay their rent and bills on time.

The system was set up for the working class to survive, but it came with a heavy dose of judgment and hierarchy. Store credit at the local general store was the norm, but it wasn't anonymous, and everyone in town knew who was behind on payments.

The wealthy, on the other hand, had access to banks, land loans, and early forms of commercial credit, which helped them build empires and grow generational wealth.

Cars were a luxury item for the wealthy in 1915, with prices averaging $2,000 (roughly $53,300 today).

Only the rich could afford to buy a car in cash, with Henry Ford's mass manufactured Model-T running at an "affordable" $850 (roughly $20,000 today).

Auto-makers started offering ways to help people buy cars in 1919, with two main options emerging: Ford's "Weekly Payment Plan" and General Motor Acceptance Corporation's (GMAC) installment credit plan.

Ford's plan required a down payment and weekly payments until the car was paid for in full, while GMAC's plan involved a 35% down payment and repayment of the remainder over a year in installments.

Most Americans chose GMAC's installment credit plan, which led to General Motors becoming the leading car maker and the birth of car finance companies.

These companies would lend money directly to people so they could buy cars on installment credit, and soon expanded their financing to other durable goods like radios, fridges, and furniture.

The installment credit scheme took off, making it safer and cheaper for Americans to borrow, and permanently changing the country's relationship to credit and lending.

A key factor in the success of installment credit was the presence of legal personal loan firms that followed usury laws and operated within the law.

The Great Depression and Wartime had a profound impact on credit and debt in America. During this period, bankruptcy laws were significantly relaxed, allowing more people to file for bankruptcy and start fresh.

People were desperate to escape the crippling debt that had accumulated during the Great Depression. In 1938, Congress passed the Chandler Act, which allowed individuals to file for bankruptcy without the need for creditors' consent.

The federal government also took steps to address the housing market crisis, which was a major contributor to the Great Depression. The Home Owners' Loan Corporation was established in 1933 to refinance and restructure mortgages, providing relief to millions of homeowners.

As the country entered World War II, the federal government began to play a more significant role in managing credit and debt. The War Labor Board, established in 1942, helped to regulate wages and prices, and the government began to issue war bonds to finance the war effort.

The creation of the Federal Housing Administration (FHA) in 1933 was a game-changer for the U.S. housing market. The FHA had one goal: to create jobs and stimulate demand for building materials.

To achieve this, the FHA created two programs: Title I Loans and Title II Mortgages. Title I Loans allowed homeowners to modernize their homes by installing electricity, and Title II Mortgages introduced the country to suburban living.

If you applied for a Title I Loan, you could select a repayment period that lasted either one month or up to five years. The interest on your loan would be less than any installment credit contract for a durable good.

The FHA's Underwriting Manual helped banks identify properties that met its "good" housing rating. This led to suburban homes being built to meet new housing codes and looking the same, which in turn made them more valuable to banks.

Banks saw suburban homes as having greater value than those in urban areas, and this gave them the confidence to expand into the personal loans business.

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During the Second World War, the government tried to contain inflation by regulating installment credit, but this led to a decline in sales.

Retailers responded by creating hybrid credit plans that weren't regulated, marking the first step towards revolving credit.

These hybrid credit plans allowed customers to open a charge account and repay their purchases over time, with the option to pay slowly or in small amounts, and interest was charged on the balance.

The use of revolving credit continued even after the war, and the government tried to regulate it during the Korean War, but this only made it more popular.

By the end of the Korean War in 1953, revolving credit plans and inventions like the Charga-Plate had made consumer business a central aspect of American finance.

The Charga-Plate and Addressograph simplified bookkeeping duties and made it easier for retailers to manage hybrid credit accounts and freeze accounts as needed.

In 1951, a speech titled "Consumer Credit—Man's Greatest Invention" was given by Barney Lenihan, praising consumer credit as the "miracle of the Twentieth Century."

This myth of credit as the great democratizer is a story that has been largely bought into by Americans, who believe that consumer credit has given them more freedom of choice in the marketplace.

The American standard of living was indeed bought on the installment plan, but this doesn't mean we should celebrate consumer credit with exaggerations.

The business of personal finance was originally conceived by its founders as an exercise in social welfare that would liberate workers from the unfreedom of wage labor.

Lenders and reformers who organized the licensed small loan industry saw themselves as upholders of the American Dream, but not the consumerist dream of easy living on a high standard.

They had in mind a dream that pictured America as a country where wage laborers who worked hard and saved their money could rise up in the world and become independent producers.

The public has looked elsewhere for stories that make sense of the rising levels of indebtedness in this century, because the peddling of debt makes people nervous.

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The post-war period in America saw a significant shift in credit and debt practices. The government encouraged homeownership by offering low-interest mortgages through the Federal Housing Administration.

Veterans returning from World War II were eligible for these mortgages, which helped fuel a housing boom. The GI Bill also provided low-interest loans for education and business ventures.

The ease of obtaining credit led to a surge in consumer spending, which in turn fueled economic growth. However, this also led to a rise in personal debt, as Americans took on more credit card debt and other forms of debt to finance their purchases.

The average American's debt-to-income ratio increased significantly during this period, making it harder for some individuals to pay off their debts.

In the 1950s to 1980s, the US government's debt grew rapidly, reaching over $845 billion by 1979. This was largely due to increased borrowing from foreign governments.

During this period, personal debt also increased significantly, with people taking out more loans from banks to buy houses and relying on credit cards to purchase everyday items.

The 1980s saw a massive surge in debt, with the government's debt reaching nearly $3 trillion by 1989. This was a staggering increase from the previous decade.

By 1989, the US had become accustomed to living with high levels of debt. In fact, the government's debt had grown by over $2.1 trillion in just two decades.

Here's a brief timeline of the US government's debt growth:

Today, individual debt has reached even more alarming levels, with Americans holding over $1.1 trillion in credit card debt as of 2025. This has created a culture of overspending, where people feel pressure to keep up with their debt payments.

The first federal loan was made in 1792 to the Bank of the United States, which was established to stabilize the national currency.

The government's decision to issue bonds to finance the Revolutionary War marked the beginning of the national debt, which has been a persistent feature of the US economy ever since.

In the early 19th century, the Second Bank of the United States was chartered to manage the national debt and stabilize the currency.

The bank's policies, including the requirement that state banks hold a percentage of their deposits in gold or silver, helped to reduce inflation and stabilize the economy.

The government's decision to suspend specie payments in 1862, during the Civil War, led to a sharp increase in the money supply and a corresponding rise in prices.

The creation of the Federal Reserve System in 1913 gave the government greater control over the money supply and helped to stabilize the economy during times of crisis.

The 1971 decision to abandon the gold standard, which had previously pegged the value of the dollar to gold, gave the government greater flexibility to implement monetary policy and manage the national debt.

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The American Debt Culture is a complex phenomenon that has been shaped by the country's history of credit and debt. In 1951, the president of the National Consumer Finance Association, Barney Lenihan, praised consumer credit as "the miracle of the Twentieth Century" that made a greater contribution to human welfare than the wheel, the railroad engine, or even atomic energy.

The idea that consumer credit has democratized access to goods and services is a myth that has been perpetuated by the credit industry. In reality, the business of personal finance was originally conceived as a way to liberate workers from the unfreedom of wage labor, not to enable easy living on a high standard.

The myth of credit as the great democratizer has been largely ignored outside of the credit industry, likely because the peddling of debt makes people nervous. The public has looked elsewhere for explanations of the rising levels of indebtedness in this century, leading to the popular narrative of the myth of lost economic virtue.

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The concept of the American Dream, which pictures America as a country where wage laborers can rise up and become independent producers, has been distorted over time to focus on easy living on a high standard. This shift in focus has contributed to the normalization of debt as a means of achieving the American Dream.