The Joe Walker Podcast - The Roaring Twenties And The Birth Of Consumer Credit - Martha Olney

Episode Date: December 7, 2020

Martha Olney is an economist and Teaching Professor in Berkeley's Economics Department.Show notesSelected links Follow Martha: Website | Twitter Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s, by Martha Olney Did Monetary Forces Cause the Great Depression, by Peter Temin Advertising the American Dream: Making Way for Modernity, 1920 – 1940, by Roland Marchand Traitor to his Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt, by H. W. Brands 'The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis', paper by Atif Mian and Amir Sufi Topics discussed How did Martha become interested in the history of consumer credit? 3:28 The birth of consumer credit. 6:54 How consumer credit companies and advertisers midwifed a change in cultural attitudes regarding borrowing. 16:41 What is the relationship between the increase in inequality and the rise in consumer credit during the 1920s? 31:34 Political elites in the Great Depression versus the Great Recession. 47:35 How did studying the 1920s prepare Martha for the Great Recession? 54:58 If private debt is capitalism's Achilles Heel, what should we do about it? 57:54 See omnystudio.com/listener for privacy information.

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You're listening to the Jolly Swagman podcast. Here's your host, Joe Walker. Ladies and gentlemen, boys and girls, swagmen and swagettes, welcome back to the show. If you're new to the show, welcome in particular. Do make sure you follow or subscribe to the show, depending on which podcast app you use, to make sure you never miss an episode. We try to release on a weekly basis, although we have been a bit all over the place recently. Our guest for this episode is Martha Olney. Martha is a teaching professor at the University of California, Berkeley, where she is a star having won many awards for her teaching. Martha co-authored economics textbooks with Paul Krugman, and she's a leading expert on the history of consumer credit.

Her 1991 book, Buy Now, Pay Later, investigates the birth of consumer credit in the 1920s, and it is the topic of this conversation. So without much further ado, please enjoy this chat with the great Martha Olney. Martha Olney, welcome to the show. Thank you very much. I'm happy to be here. It's so great to meet you, Martha. I originally came across your work via Amir Sufi who is I guess a pen pal of mine who has been on the podcast before when he was visiting Sydney at the end of 2019 and your book Buy Now Pay Later subtitled Advertising Credit and Consumer Durables in the 1920s is fascinating

to me because it really explains the crucial turning point in the history of consumer credit. And that investigation is never more relevant than in this present moment, because as you well know, Martha, household debt has taken an ever increasingly important role in macroeconomic cycles. So it's going to be fascinating to kind of return to the 1920s to where it all began. And perhaps we could begin by you telling me how you became interested in consumer credit in the 1920s. Oh, that's an interesting question. Thank you. So I started on this work when I was in graduate school. And a couple of things came together. One was I was, I knew I was interested in the Great Depression in the 1920s, the 1930s.

And that had a lot to do with my family history. My parents started high school in 1929. They graduated in 1933. And so they were in high school during the worst of the Great Depression. And so I grew up with stories about what life was like during the 1930s. And I think that always was in my head as to something that held my interest. And then when I was trying to find a thesis topic, to be honest, my thesis advisor said, go get Gary Walton's economic history textbook, and read through the chapter on the Great Depression. And read the chapter on the 1920s, and the chapter on the Great Depression, and find a paragraph that you want to change. And so that's what I did, was I went through the textbook, and I read through it. And I found,

oh, here's this comment that he makes about consumer spending in the 1920s. And I thought, I wonder if that's actually true. And so that was one of the things that got me started. And so I started by looking at consumer spending for durable goods in the 1920s and talking about what was called the consumer durables revolution. And what I brought to the table that had not been there before was the consideration of both advertising and the role of consumer credit and the confluence of those two things in boosting the consumer demand for durable goods starting in the 1920s. So what was the offending paragraph that you picked up on originally? Oh, heavens.

You know, it's been 40 years. I don't remember. I think it was just, I think it probably was, I may actually still have the old, old, old version here. I'm not sure. I suspect it was just that there was a comment about consumer spending without a lot of fleshing out and that I was interested in seeing what was really going on. One of the things that we knew when I was doing my work, based on the work of Peter Temin, Peter Temin had studied the Great Depression, and in his book that was published in, I believe, like 1976, he pointed out that there had been a drop in consumer spending in the 1930s that was not

explained by income and wealth effects. And so this had intrigued me. And my thesis advisor, Richard Such, was very keen on, you know, if you want to study the 1930s, you really have to understand the 1920s. And so he was the person who pushed me to look at the decade before the 30s to see what the antecedents were for this drop in consumer spending. And that's what got me to consumer durables, got me to credit, and ultimately got me to my story, which I fervently believe, about the role of consumer credit in the drop in consumption in the 1930s. Yeah, which is a crucial part of the story and something which recurred during the Great Recession of the 2000s. Let's talk about the consumer credit part, and then we can talk about advertising afterwards.

Sure. So the personal savings rate for the United States fell from 7.1 percent between 1898 and 1916 to 4.4 percent from 1922 to 1929 and I'm curious to hear you trace the contours of consumer credit through that period and and if you could just maybe firstly define what some of the common consumer durables included in that period, and then how consumer credit took on an increasingly important role. So before the 1920s, the common consumer durables were furniture and household appliances, excuse me, jewelry, books, carpets, pianos. Pianos were very important. And then, of course, starting...

Those are key. Pardon me? Sorry, I said those are key. It was a terrible pun. Okay. Oh, key. Sorry. You know what it was? It was okay um oh key sorry you know what it was it was the Australian key became k and I was kai kai it was kai it was kai um so okay got it we're good I try to moderate my accent I'm sorry don't worry don't worry please Ignore me. That's okay. Funny story. We traveled to Australia, oh gosh, about 15 years ago now.

And we went to Uluru and did the camel ride at dawn at Uluru. And the guy who was explaining how to get on the camel spoke perfect Australian English, which I, alas, I was the first person to get on the camel. And I could not understand a word that he had said about how to do it properly. And so I damn near died because I fell halfway off the camel and they had to push me back up on the camel because I was sort of hanging off by one leg off the camel because I had not understood where he had said. And because then once they pushed me back up, he looked at everybody else. And he says, now, as I said, when you get on the camel, and then he repeated what he'd said, and it's like, oh, now I understand what he said. I had not done it. But it's okay. Anyway, yes,

the piano was key. I got it. Back to where we were, the key durable goods before the automobile, appliances, pianos, furniture, and so on. And then the automobile, which in the United States starts somewhat in the 19-teens and really takes off in the 1920s. And then the role of consumer credit. I loved my story about the camel so much I lost track of the question. So those were the consumer durables, but then how did consumer credit increase? What were the magnitudes involved? What was the percentage increase, roughly speaking? So the increase in credit, the use of credit just about doubles over the 1920s period. And I want to make sure that we distinguish between consumer credit and mortgage credit. So typically, when we talk about

consumer credit, we're talking about the non-mortgage debt. So debt for buying cars and appliances and furniture and so on. And then, of course, later, starting in the 1940s, late 40s and into the 50s, we would add in their credit card debt as well. And the debt to income ratio, I'm looking at it, I don't have this on the top of my head, but I'm on my computer, so I can look at a chart. The non-mortgage debt to income ratio doubles between the 1920s, the beginning and the end of the 1920s. And so it's down around 5% in 1920 and about 10% by 1929. So there's this very, very rapid increase in the use of debt. Most of the consumer credit that was being issued in the 1920s was installment credit, and it did not come from banks. So in the United States, the banks were

not terribly interested in making loans to consumers. It was pretty much an attitude that if you were a consumer and you needed to borrow to buy something, didn't that in and of itself demonstrate that you were not a financially sound person, and therefore not someone that a smart lender would want to lend to? And so most of the installment debt came through what were called sales finance companies. In England, and I suspect also in Australia, they refer to it as higher purchase, H-I-R-E. So higher purchase. And in the US, it would be called installment credit. But those are the same, for whatever reason, two different names for the same thing. And so what would happen is if you went down to buy, say, an automobile, you would sign a contract that was a commitment to pay to the sales finance company, regular monthly payments. And at the end of the contract, you would own the car.

So similar to today, right? When you buy a car, you don't actually own the car until you pay it off. But the credit was not coming from a bank. It was coming from this independent company. Now, some of the earliest sales finance companies were established by the manufacturers themselves. So for instance, General Motors established GMAC, the General Motors Acceptance Corporation, and that was established in 1919. It was a separate corporate arm. And the reason it was separate was because in the financial markets, the assets that were held by the General Motors Acceptance Corporation, GMAC, were very, very liquid because they were these contracts for

buying a car. Most of them had a 12 to an 18-month maturity. As opposed to General Motors, whose assets were very illiquid. They were the huge plants and the factories where the automobiles were being manufactured. And so they could get much more favorable terms on the very liquid assets that were the sales finance contracts than they could on the manufacturing facilities. And so they had these as two separate corporate arms of the General Motors family. And so GMAC is the sales finance company. They called it a tied, T-I-E-D, a tied sales finance company, because it was tied to the manufacturer. And so a dealer who was trying to sell you a car, the dealer, you would go in, you'd say, I want to buy this car.

They'd say, can you pay cash? You would say, not so much. And the dealer would say, no problem. We have a deal for you. And would offer you this sales finance contract. And you probably thought it was a loan. But legally it was not. So it was not a loan of money. It was a legal contract for

you to pay for a good over a 12 or an 18 month period. The sales finance companies, because they were tied to the manufacturers, were very invested in boosting the sales of the goods, right? They all were, both the manufacturer and the sales finance company had the same goal, which is to maximize the sales, maximize the profit, but maximize the sales of General Motors. So that was how it started. There was a lot of profit to be made. And so there were a lot of independent sales finance companies that also came on the scene in the 1920s. And so by the end of the 1920s, you have a small handful of these tied sales finance companies

and a lot of small independent sales finance companies that were trying to break into the market. And do you have a sense as to whether this story was true in other Western nations during the 1920s? I have seen similar research on the UK, so particularly I think England, Scotland, Wales, and certainly saw the same thing there. And I suspect also in Canada, but to tell you the truth, I don't remember if I've seen research on Canada. And so if we think about household debt in a broad sense, it wasn't just consumer credit that was increasing, you know, for things like furniture and rugs and items like that. It was also mortgage credit as well for homes i think this is this is an overlooked aspect of that period of the roaring 20s leading into the great depression that there were potentially a serial arguably a series of real estate bubbles occurring around the united

states not just the now very well covered floridaland, but the flat craze in Chicago, you know, most of Manhattan's skyline was built during that period. I know this isn't sort of directly within the scope of the research that you originally undertook, Martha, but do you have any insights into mortgage credit during that period? I have to say not as much. So I haven't really done as much. I haven't done any research on the mortgage credit side. So I could only tell you what I know from having listened to other people's papers and because it's not my heart and soul, not so much.

Now, was the change in consumer demand an autonomous one or was it orchestrated by the efforts of consumer credit companies and advertisers? So that was the question I addressed in my thesis. And the argument that I made in the conclusion I came to was that the shift in consumer demand for durable goods was driven by the availability of credit and the advertising of both of the goods, but also of the availability of credit. There was a larger increase in purchases of durable goods, not just automobiles, but all durable goods in the 1920s than you would expect based on the patterns of income and wealth.

What were some of the common forms or some classic examples of that advertising? So a lot of the work that I did on the advertising side was I looked at print advertising, and I looked at national print advertising. So you would have had in the radio comes along around 1923. And so you would have had some of the advertisements on radio. But a lot of the advertising in that age was print advertising. There's a wonderful book by a historian who's passed away named Roland Marchand. And he wrote a book called Making Way for Modernity, I believe. But I'd have to put the phone down and look at the bookshelf behind me

to make sure I got the title right. And it was essentially, it's a historian, but it was really an art historian's eye looking at advertisements. And it's all about this period 1920 to 1940. It's a fascinating book. And looking at the way in which the advertisements and particularly the artwork in the advertisements created, supported, sustained a cultural shift in the society in the 1920s and the 1930s. So advertising in the United States really changes with World War I. And before World War I, you had in business schools, you had the beginnings of the marriage of psychology and advertising. So if you dial back to say to like 1902 or something, uh, advertising was all about providing information. And if you look at advertisements from the earliest part of the

20th century, they are today, we would say they're like 8.6 point font-point font packed with information, no pictures, and just lots and lots of information. And the idea was give the consumer lots of information and they'll buy the product. Then you get, starting around 1905, 6, 7, 8, the beginnings of this movement of teaching psychology in the business programs. I know there weren't business schools per se at the time, but in the courses where they were starting to talk about marketing and so on. When the psychologists got to advertising, what they said is, look, advertising needs to not be this information-based advertising.

It needs to appeal to emotions. And so you'd get textbook after textbook published 1912, 1913, 1914. And the textbooks, each one of them would have a list in it of what were the 10 top desires of humans, and to be loved, to feel warmth, to be fed. And they would have these lists of things that were the top 10 desires. And then they would talk about how advertising had to appeal to these desires. And so that movement of psychology into advertising had started. So sort of the birth of Madison Avenue had started before World War I. And so, you know, business people were a little bit skeptical. They weren't so sure this made a lot of sense. And then the war starts and the United States needs to sell a lot of bonds, a lot of liberty bonds, and ultimately a lot of victory

bonds. They need to get people to stop eating meat and to switch over to other foods. They need people to change how they're using agricultural products so that those things can be used for the soldiers and so on. And so the United States government undertakes this propaganda campaign to get people to change their consumer habits, and to buy the Liberty Bonds. And they use these principles of modern advertising. And so you have these fabulous posters. And if I was in my office, which as I said, I can't get into until July because of COVID. I have posters all around my office that I got from the gift shop at the National Archives that are these posters that were produced by the United States government, well, for the United States government in World War I to promote the sales of bonds and so on.

And that was seen as a wildly successful campaign. And so the doubts that businesses had had about this move to emotion-based advertising basically disappeared with World War I because they were shown with the advertising from World War I that you could appeal to emotion and that an appeal to emotion could change behavior. So then at the end of World War I, what are all these advertisers going to do? Well, they turn their skills towards promoting the sales of consumer goods. And so in the work that I did for the book, I looked at, in particular, I looked at advertisements in Ladies Home Journal. So I looked at every October issue of Ladies Home Journal. It was a very popular women's advertisements in Ladies Home Journal. So I looked at every October issue of Ladies Home Journal.

It was a very popular women's magazine in the United States. And looked at every October issue from 1900 to 1940. And I looked at every single advertisement and I cataloged it and what were they advertising and what was the appeal and how big was it and were there photographs and were they advertising the credit terms and so on. And you could just watch the move away from the information base to the emotion base, the move into electrical appliances and pushing people to use electricity, the move into automobiles and how an automobile will bring happiness and joy and love to your life. And then there would be down at the bottom, credit terms available, GMAC financing available, easy credit would be part of these advertisements.

How incredible. So I have three reactions to that. The first one is, obviously, this is occurring in a period where we're seeing the dawn of a lot of what Robert Gordon calls the great inventions, like dad's side of the family both my grandparents were born in 1919 and i often think about how that first 50 years of their life from you know like 1920 through to 1970 were one of the most amazing periods to be alive in human history the changes that that occurred during their lifetimes um but that was really the beginning of a lot of those inventions um coming through not least of all the the automobile and um radio as you mentioned martha um second reaction is it sounds like advertising you know the science of advertising took a great step forward in focusing more on emotion than information but from the vantage point of 2020 that still seems like a primitive approach to advertising because i think the tactics that a lot of advertisers use today are not changing people's emotion in order to

change their behavior but trying to change people's behavior in order to create a particular emotion so they'll get you to express your commitment or to act in a certain way in regards to whatever product they're trying to sell and once you've taken that action you then shift your emotions in order to be congruent with whatever it is you've done a similar sort of psychology to the psychological warfare that chinese practiced on u.s soldiers in prisoner of war camps where they'd have them write like essays um disavowing united states and democratic capitalism and and writing nice things about communism. So it was there in their own handwriting. Once you've like taken something, a very tangible course of action,

your emotions start to slowly come in line with that. Don't know if you have any reactions on that. And maybe I'm not accurately summarizing the approach to advertising in the 1920s. Yeah. I mean, I think, you know, the, the idea is, uh, and this is where I was, uh, where Marshawn's book was just, um, uh, such a powerful book for me when I read it. Um, the, the notion was buy this car and it will bring you joy. So I think that it really was, you know, change, change the behavior, which is to say, buy this car. And, and, and if you take this action, I don't know if change behavior, but take this action by the car. And, and, and these emotions will follow. And I just, I always remember this, this one photograph that was in Marshawn's book where there was a

radio, you know, the radios of the 1920s were these you know four foot tall pieces of furniture that were in the the living room and the family seated around the the radio in a circle and and Marshawn talking about how they were showing this the radio as completing the family circle that in the absence of the radio it would be an open circle and and but the radio completes the family circle, that in the absence of the radio, it would be an open circle. But the radio completes the family circle and creates this love and fulfillment. And so they're trying to get the action, which is to have you go by a radio, in order to experience that emotion of now the family will gather around and we will have this joyful time. And even the recalcitrant teenager will be there with a smile on his face as we listen to the radio on Saturday night.

Got it. I guess I'm talking about something slightly different. So the change of behavior I'm talking about wouldn't be buying the car. That's sort of like the ultimate goal. It'd be some kind of like intermediate step, like here, sit in the car, here are the keys, take it for a drive around the block, making someone comfortable with the car, making them feel like they already own it. But I suppose maybe, maybe salespeople did do that. I'm sure they did do that in the 1920s. They're not like mutually exclusive. Um, those, those approaches. My, my third reaction is, so advertisers became a lot more perceptive perceptive about using emotion to sell particular products but did they ever need to use emotion to make people feel more comfortable with credits specifically was that a hurdle that people needed to overcome in terms of cultural attitudes?

There certainly was a cultural shift from everything I've read and understand. There was an enormous cultural shift in attitudes towards credit in the 1920s. Now, I didn't see the advertisements used as a way of saying it's okay to use credit. But at the beginning of the 20s, the late teens, there was still this sense that the people who used credit were people who couldn't manage their family finances in order to buy the goods that they wanted. And so the use of credit was something

that you were ashamed about, that you didn't want your neighbors to know that you were using credit, because it indicated that you just, you know, if you had made better choices, you would have been able to go out and buy this thing and not buy it on credit. And by the end of the 1920s, thus the title of my book, Buy Now, Pay Later, by the end of the 1920s, the attitude is why only a fool would wait. You can have the car now. You can go in and buy the car and drive it off the lot, and then you can pay for it over the next 12 months. Why would you postpone having this wonderful experience of owning an automobile in order to save up money? Now, the question of how, so how'd that happen? It was not, this is one of the things I was looking for with the book was I was looking for, were there advertisements that were saying,

it's cool to borrow? And I didn't see that kind of thing in the advertisements. I saw the mention of credit and I saw the easy credit terms and that sort of a thing, but there wasn't a direct pitch to say, oh, you used to think this was a bad thing to do and you were ashamed, but no, you shouldn't be anymore. Instead, it was, it was something that was sort of somehow through the culture and through, through popular writings, through fiction. Um, uh, and in that kind of a way, and, and, um, there was, there's a quote that I have in the book that I, I borrowed from someone else and I'm, I'm'm sorry I don't have it on the top of my head to give the name right now, that just goes through a series of quotes from the 1920s about how the attitudes changed toward credit. went from something that you would be somewhat ashamed to use because it indicated you weren't a very good financial manager

to something you were proud to use because it indicated that you were interested in putting, well, in enjoying life. The roaring 20s. Exactly. So there's another structural shift. The skirts got shorter and the music changed and people borrowed money it's all there yeah that's right the trifecta um there's another big structural

shift that i'm interested in and that is inequality and the extent to which it's related to this boom in consumer credit. So at least according to Walter Scheidel, the high point of inequality in the US was 1929 and it was increasing throughout the 1920s. What is the nexus between this increase in consumer credit and inequality in the 1920s? I'm looking at a... Oh, I'm on radio. I was going to show you a picture on my wall

of an advertisement that is for the 1933 Packard. And one of the things that a lot of these advertisements were doing was... Sorry, Martha. Did you say the 1933 Packard? Yeah. What's a Packard? Oh.

We're not very cultured in... It's a type of car. It doesn't exist anymore. Oh, right. Yeah. Sorry. So it's okay. So this is an ad for a 1933 Packard

and the advertisement, I don't know if you can see it. Nobody else but you and me can see it. But the advertisement is... We can put a photo up on my website. Oh, okay. I can take a picture and send it to you. The advertisement is using the photograph as a way of saying... It's almost like saying, you can be one of these rich people. Look, just buy this car and you will have this life like this rich person.

And then at the same time, here's an ad from 1933 for a 1933 Oldsmobile. Now I'm taking everything off my walls to show you. For a 1933 Oldsmobile. And again, you get this, so it's the century of progress and modern and so on. But the image that they're portraying is that you're going to be able to buy this car and you're going to be able to take, oh gosh, that you can only dream of with all of these rich people and these people in these fancy cars and the women in their long gowns and their furs. And it says the new Oldsmobile in front of Science Hall at the Chicago Exposition. Wow. So. um wow so so yeah so there was uh um so back to the question um yes the height of inequality and

what's the role of consumer durables is is it's a way for people who are not the rich to own the same things that the rich people were owning. So it's like we're going to have this wide inequality, but we're going to the absolute roots of human evolutionary psychology. It's not just absolute consumption that matters, but also relative status. Right. I find this so interesting because of the parallels to the modern era. Raghuram Rajan talks about the let the meat credit view of the US housing bubble which is that since the 1970s the median income for US workers has been stagnating or declining

for you know for unskilled and manufacturing workers and so the political economy response was well in order to allow people to keep enjoying and keep consuming the only other thing we can do is is let them make credit like ease um ease access to to consumer credit and to mortgage credit um And I wonder whether there was a similar dynamic happening during the 1920s because inequality is increasing. The rich have a lower marginal propensity to consume than the poor. So all of that money is pulling up in savings. And how do they get a return on that? Well, they can do it through credit and through loaning it out to the poor who then can try and keep up in this losing race

of conspicuous consumption by borrowing that money. Theoretically, yes. But? Well, the but is I would want to look actually at the portfolios of the rich people and see whether or not that stands up. And certainly the returns on consumer finance were high. So I calculated that for one contract I was able to find in the files, the effective interest rate was 35%. And that was not unusual. They had very high down payments, typically one fourth to one third down payments, but very short terms, 12 months.

And they did not have the understanding of interest that we have today. And so they would do things like say, we're going to assess a 6% interest on the amount you borrow. So you'd borrow $1,000. And they would just tack $60 on to that, even though you paid it off over time. And so it winds up being a lot more than 6% when you when you do that the math. The what I don't know is I don't know who owned the I don't know if the ownership of the sales finance companies that were making these profits on the consumer sales finance, on the sales finance contracts. I don't know if the owners who I don't know how widely owned those sales finance companies were. Right.

And I just don't know. I don't know. I don't know. It's an interesting question. You know, it's also the time when the Small Loan Act is in 1916. The Uniform Small Loan Act is 1916. And that's an effort to try to regulate what today we would call payday lending. So the small loan lenders who were making cash loans of a couple of hundred dollars through the Morris plan and others. And that was seen as the Uniform Small Loan Act was partly seen as being part of the progressive

era and let's take care of these poor people who can't take care of themselves kind of attitude. And so there was more of that paternalistic attitude and less of the capitalist exploitive attitude towards those people who were borrowing. I don't think, you know, maybe I could be wrong, but I would be surprised to see that in the 20s. Because, and part of the reason is that people don't believe that consumer credit is a good financial investment until after 1933. Because what happens is that, and this is the later part of the story in terms of getting us to the Great Depression, is that there were a lot of tiskers who were very worried about the run-up of consumer non-mortgage debt, so the installment

credit. And they were convinced that people having all of this installment credit was going to lead to the collapse of the economy, because all of these people were indebted and they were convinced that people having all of this installment credit was going to lead to the collapse of the economy because all of these people were indebted and they were going to default on all of these debts, and that was going to lead to the collapse of the American economy. Well, no, that's not what happens. What happens is you get into the Great Depression and you get much lower default rates on, for instance, the auto loans, then you would have predicted so that the, let me see if I can pull some numbers up here. And the unemployment rate goes from 2% to 3% in 1929 to 25% in 1933. So that, that increases tenfold. And the repossession rate goes from

just under 5%. So on new cars, the repossession rate, let me do that one, the repossession rate goes from also from 3% to five and a half percent. So unemployment goes from three to 25. And the repossession rate goes on new cars goes from three to five. So and and what the foreclosures on on mortgages were much greater than the foreclosures on cars. And so this experience during the Great Depression of the extraordinarily low repossession rate on these automobiles, that was the piece that convinced people that consumer credit was a good financial investment. So that convinced the people who would be funding the credit, that this was something they should look at. The banks were not interested in this at all. And that's why the tides, the fact that the sales finance companies were tied to the manufacturer was important, because everybody actually saw it as this is going to

be a losing proposition. But General Motors is going to do it because this is how they're going to sell their cars. And it turns out that, well, actually to tell you the truth, the sales finance part winds up being the really profitable part because people make sure they make those payments. Now, the story that I tell, I shouldn't say story because it makes it sound like it's not like legit research, but the argument I would put forth is that the contracts, these installment contracts that were signed in 1929, 1930, 31, 32. Those contracts were, were based on or written in the language that the contracts had been written throughout the 1920s, where the assumption was, if you're a borrower, and you're going to take out one of the installment contracts, and then you're not going to pay, we need to be really harsh with you, the borrower who doesn't pay. Because the reason you're not paying is because you're some sort of a cheat.

And we don't like cheats. And so we're going to have these really harsh terms, so that you have every incentive to make these payments. And so the terms were that if you failed to make the payments on your contract, and you didn't, you know, you didn't fulfill the contract to buy the car, they would repossess the car and then they would sell the car and any equity that you had built up in the car, they would keep. Now, today you're like, who cares, right? Well, that's because today we go in and we buy a car with no down payment and we get a seven-year loan. They were going in and buying a car with a one-third down payment and getting a 12-month loan. And so everybody had equity in the car. And so they knew that if they didn't make the payments, the car would be repossessed,

and they would lose the money that they had put into the car so far. And so there's this big financial incentive to make the payments. And so this is actually, here we get to the story about what happens in the Great Depression. You asked me earlier about the shift in consumer spending for consumer durable goods. And that was the argument I make is that the increase in demand for durables was a result of the consumer credit and the advertising shifting demand above what you would expect given income and wealth. But then what happens in the 1930s? What happens in the 1930s is that we see a drop in consumer spending that we can't explain with income and wealth. And that was the thing that Temin had pointed out initially

that had started my whole life of examining this thing. And my argument is, well, what happens is people face, either they actually are laid off or all you really need for this to happen is people get worried that they might be laid off or there were lots and lots of workers that were experiencing 10% wage cuts. So you get one of these 10% wage cuts and you still want to make the payments on your car. Well, if you're still going to make the payments on your car, when you've had your wages cut 10%, you're going to have to cut back everywhere else. So you're not going to buy as much food. You're not going to buy the clothing. You're not going to buy the shoes. Today, we would say you're not

going to go out to eat, right? People didn't eat in restaurants as much then as we do now, but you're not going to go out to eat. You're going to have spaghetti. You're not going to go out to eat, right? People didn't eat in restaurants as much then as we do now, but you're not going to go out to eat. You're going to have spaghetti. You're not going to have the more expensive meats. And that's exactly what people did in the 1930s. So they did not default on their cars. They paid off the car loans, but they cut back on every other part of consumption they could. And that dropped the consumption spending. And that's what shot the unemployment up in 1930. So it's really the very harsh penalty for defaulting that leads people not to default in 1929, 30, 31, 32, 33, which unfortunately causes consumption spending to fall. And which changes the attitude of the investors towards these sales finance contracts. Because now it's like, oh, oh, consumer credit is

not only high interest rate, it's low risk. This is a win, right? So they had thought it was high interest rate because it was high risk. It turns out it's high interest rate and low risk. That turns out to be a pretty good thing. Now, at the same time, what's happening over here on the legal end is those penalties where they took away what was called the surplus. So they took away any equity you'd built up in the car. Those penalties were perceived as being punitive, highly punitive. And so there was a series of court cases in which individuals who had had their automobiles repossessed took the finance companies to court and sued on the grounds that these were excessively punitive penalties, remedies in the legal term. And they won. And they won here, and they won there, and they won there.

These are state cases. It's not federal law. It's state law. So it has to be settled in a state by state basis. But consistently, the courts were ruling that people who could not make these payments through, quote, no fault of their own because they had lost their jobs should not be secondly penalized through these very harsh default penalties, and that the pattern of keeping the surplus, so retaining the equity, needed to stop. And so it should be less expensive for individuals to default on these contracts, and less punitive, because it wasn't that they were scofflaws, it's that they were out of luck, they lost their job. So then the economy has this double dip, right? So we get a second recession in the United States. We get a second recession, 37, 38, before we had fully recovered from the first recession. And in the second recession, the repossession rates go way up. Because no longer do you have as much incentive to make sure that you pay off the car. You're not going to lose as much.

And so there's less incentive to pay it off. It's okay. You don't want to lose the car, but you'd rather eat. And the repossession rates go much higher. Do you think the political class and elites more broadly were more willing to redistribute society's resources, more attentive to the little guy during the 1930s than they were in the aftermath of the Great Recession?

Certainly what I read in the court cases, the courts certainly were. So the courts were certainly more attentive to the little guy and not and not wanting to, to re-penalize people who had lost their jobs. In comparison with the post 2008 crash, I think, you know, I think I, it's hard to say. I mean, I, I post-2008, there was such a split, right? There were the people who saw the people who borrowed as having been greedy. And then there were the people who saw the people who borrowed as having been snickered um and um uh which i kind of i think maps over your political priors pretty well yeah yeah yeah and i mean that's sort of really how how the tea party movement got started right yeah it was um a reaction to the idea that the the people who

got greedy who would then be might then be let off the hook and you know why should we be paying for their mistakes yeah yeah and and it's it it's And the way in which the real estate, the brokers, the mortgage brokers, the way in which the mortgage brokers were selling the loans to people without fully disclosing the terms. And, you know, in California, we saw a lot of the really crazy terms on some of these loans. And it was such a mix. It wasn't an episode in 2008. It was not an episode that you can characterize in one breath, because there were people who were going out there and were flipping houses, and they knew exactly what they were doing. And they were borrowing, and they were exploiting what was available. And they were taking advantage of the system in order to buy houses for cheap and turn them and flip them and and make boatloads of money um and then there were people who uh were

fulfilling their lifelong dream of owning their own home uh and those are two those are two different groups of people who had two different sets of experiences. And so I don't think we can say, you know, oh, yeah, they were all a bunch of people who should have just paid their debts. Or, oh, yeah, they were all a bunch of people who were taken advantage of. I think it's a both and and not an either or. I agree. And I would try to extract myself from the moralizing language of political debate and just think more about

what are the underlying structural forces driving this. And for whatever reason, I'm very attracted to that explanation of stagnation and slowing growth, more rent seeking and rising inequality since the 1970s. And then the political economy responses let them eat credit. I find that quite persuasive. And then obviously you layer on all the other proximate causes and you get a big credit driven housing bubble but just to come back to that difference oh sorry do you want to react to that yeah i was just going to say i i think um in

looking i don't know the data for other countries but in the united states looking at the um the rise of the home equity lines of credit um and in and in terms of let them eat credit. Um, and, and that was, that really starts around 1991, um, the rise of these HELOCs and, um, those, you know, I thought a lot about the work that I had done on the twenties and thirties when that was happening, because there were, you know, there were billboards, every, you know, you drive along, there'd be these huge billboards about how you should go down and borrow money. And they'd have, you know, these people who look sad, these people who looked happy, and the people who looked happy had taken out a HELOC. And, and what were people doing, you know, they were taking out a HELOC,

and then buying a boat, or they were taking out a HELOC and going to Europe, or they were taking out a HELOC and putting their kid through college or taking out a HELOC and putting a deck on the back of the house. And the increase in home equity lines of credit as a share of disposable income mirrors the drop in saving in the 1990s to 2008 period, so that you get this rise of credit taken out through home equity that compensates for the drop in personal saving. And people drove the consumer spending straight up through that use of home equity credit. It's pretty, it was a, in the same sense in which you're talking about your grandparents living through the 20s and 30s and me thinking about my parents living through the same period because they were born four years before your grandparents. Boy, I tell you, living through the 1990 to 2010 period as somebody who pays attention to issues around credit was an equally like, wow, wow, whoa. Sort of like how the public health people, right?

The public health people today are living through this like, whoa. That was for people who think about issues around credit. That was that 20-year period, 1990 to 2010. Yeah, a strange and deranged time and just to sort of uh echo what you said i'm aware of the research by artif mean and amir sufi which finds a negative correlation between income growth mortgage credit expansion in like zip codes around america during a period in the early to mid 2000s yeah um which reinforces that just to come back to the response of political elites in the 1930s my sense is that the memories

of the political violence in the 1910s were still fresh and the political class in the 1930s was much more willing to self-sacrifice and redistribute in order to get the society back on track than was the political class in the aftermath of the great recession who was sort of supporting the golden handshakes and the quantitative easing and the bailing out of the bankers and it strikes me that the perhaps the most famous biography of fdr is titled a traitor to his class yeah that um it's i mean it's hard to quantify that i am speculating yeah to a great extent it rings true so just looking back on that period of the 1920s, what about that history did you learn that made you well positioned to understand what was happening in the 2000s? I guess we've touched on some of that already. Did you feel like you had a unique insight into what was unfolding?

I did. Because I felt like what I had learned from my study of the 20s and the 30s was that people who are indebted are not necessarily going to walk away from that debt. And that in my period, they wanted to keep the car and they were going to keep the car by cutting back on their consumption elsewhere. And I think that what happened in 2008, nine, seven, two, well, it's really like 2005, six, seven, eight, was, was people didn't want to lose their houses. You know, they didn't want to walk away from the house. And this is where this distinction between the person who was buying the house to flip it and the person who was buying the house to live in it. The people who were buying those houses to live in the houses, they didn't want to walk away from the house.

They were putting down roots in that house. and this is in me and in Sufi's work as well, was you saw these huge drops in other consumption spending by the people who were heavily indebted. And this didn't surprise me. It was exactly what I would have predicted, that these people were going to do what they could to try to keep their house. Now, the challenge was that some of these financial instruments they had were insane, right? So if you had one of these, they had the 228s and the 327s, where you paid principal only for the first two or three years, and then the interest got added on at a market rate instead of the teaser rate that you'd been brought in with, the principal got added on, the interest got added on with the market rate after two or three years.

And their payments could easily double, if not more, as a result of this change of terms. And a lot of, because of the way the contracts were written and the disclosures that were provided, people did not know. They were not told, your payment is currently $1,400, but at the end of this two-year period, it's going to become $2,987. And so, yeah, you could do the math. You could find an Excel program and figure out how to use Excel and put all the numbers in and calculate what the monthly payment was going to be. But it wasn't in the disclosures. And people struggled and worked and a lot of people

tried really hard to hold on to those houses. And the only way to do that was to cut back their spending every place else. Final question, Martha. If private debt is capitalism's Achilles heel, what should we do about it? Oh, my goodness. If private debt is capitalism's Achilles heel, what should we do about it? You know, it's interesting to think about that question in the light of the pandemic. And I know, you know, the way I think the way that you all you guys are like back to normal life, I think, for the most part in Australia. Approximately. Yeah, we're not. And our governor in California just announced today that we're moving into another shelter in place because our ICUs are full.

And people went and visited their families. We had Thanksgiving holiday the end of November. And despite all the warnings, people went and visited their families. And so I believe, I don't know, how strongly do I believe this? I think I believe, how is that? I think I believe that coming out of this pandemic and the shelter in place and the change in behaviors. I think there's a chance for a reset. I'm not, my hesitation is, will there be a reset?

I don't know. Maybe, maybe not. But I think there's a chance for a reset in terms of consumer spending and saving and almost back to what I was saying about how the use of goods and spending to fill emotional needs. That part of what, at least here in the California and in the Bay Area where I live, where, where this, the, the old economic life has really gone away. Um, and you're not going out to eat and you certainly aren't going to the movies. The movie theaters are all closed. Um, so you can't go to the movie theaters. You can't go to the bars. You can't go to the clubs. Um, you can't, you can't get on an airplane and well,

you can if, if you want to quarantine for 14 days, but you really can't get on an airplane. Well, you can if you want to quarantine for 14 days, but you really can't get on an airplane and go and make yourself feel better by traveling. And people are, because this has lasted, if the shelter in place had lasted six weeks and that had been it, and then we've been able to go back to normal life. I think normal life, everybody would have gone back to the way it was, but we've been in this now eight and a half months, almost nine months. Um, I was last in my office on March 13th and I'm not supposed to be allowed back into my office until July of 2021 at the earliest. Um, and, um, so we've been at this for nine months and people are discovering that joy doesn't have to come from goods, that fulfillment doesn't have to come from spending money. And that's not good for the macroeconomy in terms of employment. And this is always the, I mean, this is always the conundrum, right? Is that if I and others decide to cut back on our spending, that may be good for us individually,

but it means that people whose jobs, depending upon our spending, aren't going to have those jobs anymore. So my- Fallacy of composition. Yeah. I mean, my niece worked for Airbnb. She doesn't work for them anymore. So my, my, yeah, I mean, my, my niece worked for Airbnb. She doesn't work for them anymore. They don't need as many workers. Her

husband worked for a caterer. He doesn't work for them anymore because they don't need, they're not catering. Um, and so on the one hand, maybe, who knows, maybe, maybe we're going to see a reset and people are going to find those emotional needs through less spending than they used to. Maybe not. Maybe it's all going to go back to the way it was before March of 2020. And maybe Airbnb will take off again and the catering business will take off again and they'll all get jobs back where they used to have jobs. But the credit question is tied up with that, right? Because some of that spending to fulfill those emotional needs was credit financed. And it'll be interesting to see the confluence of all of these things. Will, indeed. I'm going to be a pessimist and take the other side of that bet

and say that given human nature and the need to signal status, conspicuous consumption will be with us for a long time. Yeah, you may be right. We'll see. We shall see. We shall see indeed. Yeah, hopefully sooner rather than later. But yeah. Martha, thank you so much for your time. It's been a great pleasure speaking with you. Well, thank you very much for the invitation. It was really an honor. I appreciate being here. Thank you so much for listening.

I hope you enjoyed that conversation as much as I did. For links and notes covering everything we discussed, you will find those on my website, josephnoelwalker.com. That's my full name, J-O-S-E-P-H-N-O-E-L-W-A-L-K-E-R.com. The audio engineer for the Jolly Swagman podcast is Lawrence Moorfield. Our very thirsty video editor is Al Fetty. I'm Joe Walker. Until next time, thank you for listening. Ciao.