The Rise of Consumer Credit in the 1920s

The phrase “buy now, pay later” entered the American vocabulary in the 1920s, and the practice it described transformed the American economy. In 1920 most middle-class families paid cash for everything except their house. By 1929, 60 percent of furniture, 80 percent of automobiles, and 75 percent of radios were bought on installment plans. Total consumer installment debt grew from about $1 billion in 1919 to more than $7 billion by 1929 — an unprecedented expansion of household borrowing. The rise of consumer credit was the financial scaffolding of the Roaring Twenties, and its collapse helped cause the Great Depression. and the wider story of the 1920s economy.

The Old Credit World

Before the 1920s, most consumer credit was local and informal. Country stores and small-town merchants extended credit to known customers, the company store in mining and mill towns deducted purchases from worker paychecks, and trade credit between businesses was the lifeblood of the commercial economy. The system was personal, slow, and limited to people with established reputations. It was not available to most urban workers, most immigrants, and most African Americans.

The formal consumer credit industry was tiny. The Morris Plan Bank of Norfolk, Virginia, founded in 1910 by Arthur J. Morris, had pioneered the small personal loan. The Household Finance Corporation, founded in 1878 as the Union Investment Company in Minneapolis, had grown slowly through the early twentieth century. The Beneficial Industrial Loan Corporation was a small Philadelphia firm. None of these institutions was a major force in the broader economy.

The New Credit Institutions

The 1920s saw the birth of a modern consumer credit industry. The most important new institution was the General Motors Acceptance Corporation (GMAC), founded in 1919 as a wholly owned subsidiary of General Motors. GMAC’s business was simple: it financed installment loans to buy GM cars. The innovation transformed the automobile market by making monthly payments — rather than the full sticker price — the basis of car ownership. Within a few years, GMAC was also financing cars made by other manufacturers, financing appliances and furniture, and even making personal loans.

Other automakers followed. Chrysler founded the CCF Credit Corporation in 1923. Ford founded the Universal Credit Corporation in 1928. By 1929, the National Automobile Dealers Association estimated that more than 80 percent of new cars were sold on installment.

The retail industry also created its own credit companies. The Commercial Investment Trust (CIT) Financial Corporation, founded in 1920, financed installment purchases through retailers. Sears, Roebuck operated its own consumer credit operation, financing purchases of washing machines, sewing machines, and furniture. Woolworth’s, Ward’s, and other major chains offered installment plans. Department stores issued their own charge plates — the ancestors of today’s credit cards.

Installment Plans, Charge Accounts, and Personal Loans

The 1920s saw three main forms of consumer credit.

Installment plans were used for durable goods: cars, furniture, washing machines, radios, phonographs, and jewelry. The buyer made a down payment of 10 to 25 percent, then paid off the balance plus interest and a carrying charge in monthly installments over 12 to 24 months. The seller retained title to the item until the final payment.

Charge accounts were used at department stores, especially by middle-class women. The customer paid the full balance at the end of the month, with no interest, in exchange for the convenience of not having to carry cash. The system was less profitable than installment plans but built customer loyalty.

Personal loans were used for general purposes: medical bills, education, weddings, funerals, or the consolidation of smaller debts. They were made by small loan companies, savings banks, and the new Morris Plan banks, which by 1929 numbered more than 100 branches across the country.

The Statistics of the Credit Boom

The numbers tell the story. By 1929, according to the National Bureau of Economic Research, more than 60 percent of furniture, 80 percent of automobiles, 75 percent of radios, 65 percent of washing machines, and 20 percent of jewelry in the United States was bought on installment. The average interest rate on an installment loan was about 11 to 22 percent per year — substantially higher than the 5 to 6 percent prevailing on home mortgages. The “carrying charge” — the interest and fees built into an installment contract — typically added 5 to 10 percent to the cash price of a good.

The expansion of credit was a major factor in the 1920s economic boom. It allowed the automobile industry to triple in size between 1920 and 1929, the radio industry to grow from essentially nothing to 10 million sets in American homes by 1929, and the appliance industry to introduce washing machines, electric irons, and vacuum cleaners to millions of households that could not have afforded them in cash. ## The Dark Side: The Salary Buyer

The 1920s credit system also produced a darker side. The “salary buyer” — the small loan company that lent to factory workers and clerks at high interest rates — was the era’s loan shark. The best of these charged 30 to 40 percent per year; the worst charged far more. State usury laws varied widely, and many small loan companies exploited the gaps. The result was a class of working-class borrowers trapped in a cycle of debt, paying interest month after month on loans originally made to cover a single emergency.

Reformers responded. New York State passed credit reform laws in 1927. Several states adopted versions of the Uniform Small Loan Law, originally drafted by the Russell Sage Foundation in 1906 and revised in 1916. The law set maximum interest rates of about 3.5 percent per month — still high by modern standards, but far below the rates of the worst salary buyers. To see the parallel transformation in automobile marketing,

The 1929 Collapse

The credit boom was, in the end, the economy’s most important structural weakness. The Federal Reserve warned in 1929 that consumer debt had reached dangerous levels. When the Stock Market Crash came in October 1929, the credit chain began to break. Households that had borrowed to buy cars, radios, and furniture struggled to make their payments as jobs disappeared. By 1932 the volume of installment credit outstanding had fallen by more than half, and the credit-fueled consumer economy had collapsed. The collapse of consumer credit was, in the view of many historians, the single most important channel by which the 1929 stock market crash became the Great Depression. For the broader cause,