The Growing Accessibility of Credit: A Concern?
This morning, as I threw on my over-ear headphones and tapped the ‘smart shuffle’ button on Spotify, a song I’d never heard of by J. Cole caught my attention, and soon compelled me to rethink my perception of the American credit system. For those of you who are unaware of J. Cole (Jermaine Lamarr Cole), he is an American rapper who has touched on a variety of themes throughout his music career, most notably structural inequality, political corruption, and unjust incarceration.
Source: US Magazine
Released in 2016, "She's Mine Pt. 2" by J. Cole is a song from his album “4 Your Eyez Only”, a project dedicated to his late friend James McMillan Jr. Cole raps through the eyes of his late friend, introspecting on his life after being swept into the world of drugs and incarceration. He reflects on his friend's journey of turning his life around, only to be tragically killed at the age of 22. After listening to it, I interpreted it as a harsh exposition of the ‘dirty secrets’ of the world. For example, he says that Santa Claus is representative of “greed / And the need to purchase sh*t from corporation / That make a killin’ because they feed / On the wallets of the poor who be knockin’ on they door / Every Black Friday just to get some sh*t they can’t afford / Even with the discount, write a check, that sh*t bounce / But as long as we got credit, it don’t matter, the amount.” In these lyrics, Cole tackles the fundamental dependence of American consumers on private credit and this phenomenon’s net harm on society. In this article, I further contextualize Cole’s verse, explaining the deeper economic implications behind it.
The system of credit was not always as accessible as it is today. Following the American Revolutionary War, it was wealthy merchants – both domestic and international – who funded the credit that private banks supplied to speculators and traders. Importantly, this circumstance was solely for the funding of business ventures, not ordinary consumer interests. These loans, though, fueled the entrepreneurial industrial development that occurred in the early and mid 19th century. Industries including textile, rail, and even agriculture were benefited significantly by long-term, low-interest loans during this time period. Because these industries flourished during the Industrial Revolution, the system of lending became perceived as creditworthy and opened up new avenues for investment, thereby leading to more competition among banks.
Because credit was so inaccessible, anything that was even moderately unaffordable was out of the purchasing question for the majority of individuals. With demand for many products being limited to the wealthy class, consumer spending stagnated. The solution was simple. Companies like the Singer Sewing Machine Company began selling their $100 machines under installment plans, proving to be a huge success (for context, the average American worker made under $500 annually in the 1850s). Following this, commercial banks realized they could expand their revolving credit systems to the average consumer. Still, the majority of individuals – mostly rural farmers – only borrowed to purchase large-scale essentials like land and agricultural equipment.
Over the next couple of decades, as both wages and inflation increased, credit services expanded and became more and more competitive, lessening interest rates. With assistance from the federal government, borrowing and paying later became a feasible alternative to direct spending. For instance, the urbanization boom between 1870 and 1930 prompted the Federal Home Loan Bank (FHLB) Act of 1932, discounting mortgages and increasing the accessibility of homeownership. Likewise, the US–Soviet space race in the 1960s, which highlighted flaws in American education, fueled the federally-backed rise of student loans. In 1950, the first charge card was developed, gaining widespread popularity. This simple tool eventually became more and more complicated with loyalty programs, private labeling, and credit scores.
Source: ThoughtCo
Undeniably, the availability of short-term credit has increased the quality of life of the average American as a whole. But some, including J. Cole, have recognized that we may be surpassing the apex and becoming too dependent. With periodic spikes in inflation over the last two decades, Americans’ appetite for credit is increasing. Per the Bank of America, households with an annual income of less than $50,000 use five percentage points more of their available credit on average than do households with an annual income over $125,000, highlighting the greater dependency on credit among lower classes. It is for that same reason that the average household debt for Americans grew by 4.8% between 2022 and 2023.
While credit-backed, capitalist consumerism stimulates economies, it also disproportionately harms lower classes. In a cycle of overspending and living paycheck to paycheck, borrowers fall into the ‘debt trap.’ The convenience of credit has thus contributed to the increase in income inequality over the last 80 years.
References:
https://www.marketwatch.com/guides/banking/american-debt-2024/
https://www.creditsesame.com/blog/debt/americas-credit-dependency-is-rising/
https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/