Installment Accounts - Credit Cards of the 1920s

This is a bit of a detour from the usual posts - but I have been seeing this pop up at several places. Their seems to be this idea out there that this housing bust is very different from the 1920's - mostly due to the invention of credit cards.

I will not go into the history of usury - that can be googled or wikied. Instead I am going to focus on the rise of credit in the 1920s - the period immediately preceding the Great Depression. While there were not these electronic credit card with magnetic strips that we think of today - there was a huge rise in installment accounts.

There is a great lengthy article which mostly focuses on the Advertising for Installment Plans During the 1920's - but here are some key parts -

Without credit, a customer needed to save enough cash to cover the full price of the car. That was impossible for most Americans. As Olney noted, in order to purchase an automobile with cash during this time period, a typical American family would have to save for almost five years.17 With the spread of credit between 1919 and 1929, the percentage of households buying cars on installment more than tripled, rising from 4.9% to 15.2%.18 The creation of GMAC accounted for a large portion of this increase. In 1925, GMAC was three times larger than its nearest competitor, financing almost half of all installment purchases of automobiles that took place in that year. 19

With this dramatic increase in the installment selling of automobiles came the expansion of this technique into the markets for other major durable goods. According to credit expert Rolf Nugent, the success of automobile installment plans "tended to remove the stigma which installment selling had acquired at the hands of low-grade installment merchants in the 1890s."20 In fact, credit was used in the purchases of up to 90% of major durable goods by the end of the 1920s.21 Average purchases of major durable goods rose from 3.7% of disposable income between 1898 and 1916 to 7.2% between 1922 and 1929. Accompanying this rise in purchases of durables was a drop in the personal savings rate, from 6.4% of disposable income in the former period to 3.8% in the latter.22

So as savings were dropping people were purchasing more and more - more cars and more durable goods. The beginning of keeping up with the Jones. The big difference is that these days people are not just using their credit cards, store cards, and auto payment plans - they are HELOCing the debt as well. Once the credit card is maxed people would just refi or transfer the balance to the HELOC account and then felt free to spend again. After all they were very responsible by "paying off" those credit cards. This time the hole is just a bit deeper.