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Delinquent
Inside America's Debt Machine
Elena Botella
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Delinquent
Inside America's Debt Machine
Elena Botella
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About This Book
Publisher's Weekly Top 10 Fall Release in Business and Economics? A consumer credit industry insider-turned-outsider explains how banks lure Americans deep into debt, and how to break the cycle. Delinquent takes readers on a journey from Capital One's headquarters tostreet corners in Detroit, kitchen tables in Sacramento, and otherplaces where debt affects people's everyday lives. Uncovering the true costs of consumer credit to American families in addition to thebenefits, investigative journalist Elena Botellaâformerly an industry insider who helped set credit policy at Capital Oneâreveals the underhanded and often predatory ways that banks induce American borrowers into debt they can't pay back. Combining Botella's insights from the banking industry, quantitative data, and research findings as well as personal stories from interviews with indebted families around the country, Delinquent provides a relatable and humane entry into understanding debt. Botella exposes the ways that bank marketing, product design, and customer management strategies exploit our common weaknesses and fantasies in how we think about money, and she also demonstrates why competition between banks has failed to make life better for Americans in debt. Delinquent asks: How can we make credit available to those who need it, responsibly and without causing harm? Looking to the future, Botella presents a thorough and incisive plan for reckoning with and reforming the industry.
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PART I
The Principal Argument
1
The Time before the Debt Machine
We could have a country without much debt, and I know this to be true, because we once had a country without so much debt. Once you realize that Americans havenât always been as deeply indebted as they are now, it becomes easier to see that this system of debt had to be built, and hence, that our system of debt could also be torn down.
Credit cards, particularly, are a relatively recent invention. Although the first credit card, Diners Club, was invented in 1950, it took a while for credit cards to gain any traction. In 1961, while many stores had their own credit plans, only 1 percent of stores accepted general purpose credit cards issued by outside banks.1
Of course, while credit cards are new, credit is not.
Naomi Sizemore Trammel was born in 1887, and started working in South Carolinaâs textile mills at the age of ten; her father and mother had both died in quick successionâher father of a fever. While her younger siblings were taken in by uncles and aunts, she and her older sister Alma had to find jobs, so they found work spinning string and running frames of cloth. Naomi married at twenty-one to Percy Long, who worked in the weave room at Greer Mill, and who pitched for Greer Millâs baseball team, the Spinners. During the Great Depression, the mills laid off workers and cut back on hours.
âWe couldnât even find a job nowhere, everybody else was laid off around. That was a bad time. We got in debt, but nobody didnât refuse us. And when we all went back to work, we soon paid it off. It just come around so good,â said Sizemore Trammel. âWell, we was out of work a pretty good while. And there was a man, Frank Howard, we were trading with him, out there at the crossing, getting groceries and things from him, before that happened. And we always paid our debts. And weâs getting milk from another man. And so we got in debt with that, and they wouldnât cut us off. So when we went to work, weâd pay our bills. We can pay a little bit, you know, add on to our bills. First thing you know, we come out on top. It wasnât near hardâs it seem. But we didnât know what in world weâs gonâ do.â2
Thatâs what American debt looked like for much of the 1800s and 1900s. If you werenât a farmer, or a small business owner borrowing money for your company, typically, any money you borrowed was lent from whatever store sold the thing you needed to buy. Stores lent people like Naomi money to earn a profit on the goods they were selling, and occasionally, as a social courtesy, not necessarily to make a profit from the loan interest itself. These storekeeper-customer relationships were sometimes friendly, and sometimes predatory. Sometimes, like with Naomi, these relationships were personal, while for shoppers using installment credit at larger department stores during the same decade, the exchanges were at armâs length: credit, there, was provided after the submission of a formal application, with the merchant usually reviewing data from by a locally run credit bureau before making the lending decision.3 But by most accounts, the customers who purchased goods on credit in the late 1800s and early 1900s were less profitable for shopkeepers and department stores than those who purchased with cash.4 Credit was a means for retailers to drive sales, not its own center of profit; the costs of extending the credit and the interest collected generally canceled one another out.
It should be noted that the book you are holding is just one of many written throughout American history with complaints about household debt. Benjamin Franklinâs Poor Richardâs Almanac, dating back to 1732, but widely quoted throughout the Victorian Era, was littered with adages like âThe second vice is Lying, the first is running into Debt.â5 The moral panic around consumer debt continued into the 1800s with Mark Twainâs The Gilded Age: A Tale of Today, into the 1900s with Upton Sinclairâs The Jungle, which described in great detail the Rudkus familyâs installment debt, and once the credit card arrived, in books like Hillel Blackâs 1961 Buy Now, Pay Later.6 But while there have always been some Americans in debt, and some who worried about the Americans in debt, the fact is our current moment is distinctive in two important ways. The first is that, by every conceivable measureâin absolute terms, per capita, adjusted for inflation, and as a percentage of household income or household assetsâthe amount of consumer debt is higher in the twenty-first century than it was at any point in the twentieth century, with the precise amount of credit card debt since roughly the year 2000 mostly ebbing and flowing in the opposite direction as what you might expect: more debt when the economy is doing well, and less debt when the economy is doing poorly.
What is less commonly discussed, though, is the second key distinguishing factor about American debt today relative to any other point in the past: the prices paid for credit card debt have risen substantially. The average credit card interest rate, 17.14 percent, reached a twenty-five-year high in May 2019, a fact that isnât explained by Federal Reserve interest rates, loan default rates, or any other cost of doing business.7 Sitting with these two facts together begs the question, why exactly are Americans saddled with more debt, and more expensive debt, than ever before?
While the rest of the book will take you on a tour of the United States as it sits today, introducing you to Americans in debt, and to the managers, investors, and machines that control that debt, I want to share with you a bit more about how Americans managed their budgets prior to the introduction of the credit card, because the more I came to understand about the history of debt in the United States the less certain I was that our status quo was defensible.
WHEN ALL CREDIT WAS âBUSINESSâ CREDIT
Until the 1910s and 1920s, most states capped maximum interest rates on loans as low as 6 percent or 8 percent per year. It was rare for a chartered bank to make a loan directly to an individual if that person wasnât a businessman.8 Although banks didnât lend directly to families, there were still a few (legal) options for cash loans, mostly pawn shops, and companies that issued installment loans, who were often at the time called âindustrial lendersâ because they focused on serving wage workers with industrial jobs in big cities. The largest of these industrial lenders, Household Finance Corporation, was founded in 1878, acquired by HSBC in 2003, and then sold off to Capital One and Springleaf Financial during the 2010s.9 As late as the 1910s, though, wealthy individuals were one of the most important forms of credit: in 1910, 33 percent of home loans came directly from another individual person, rather than a financial institution.10 When the first income tax was created by Congress in 1913, all forms of loan interest were tax-deductible, reflecting members of Congressâ assumption that people only borrowed money if they were entrepreneurs, not to cover normal household emergencies or buy household goods. With that assumption, all loans were assumed to be business expenses, so of course all loan interest would need to be deducted against business revenues to calculate taxable business profits.11
Until the introduction of the credit card, most working-class Americans had no non-mortgage debt at any given point in time, and in fact, that situation persisted until 1983: until that point, most Americans in the bottom half of the income distribution didnât have a single dollar of installment loan debt, auto loan debt, credit card debt, student loan debt, or retail debt. When working-class Americans did borrow money, to buy a car, or a dishwasher, or, less commonly, to deal with an emergency, the amounts borrowed were comparatively low. Non-âretailâ credit, by which I mean, credit that was not tied to a specific purchase, was even less common than retail credit. In 1950, families in the bottom half of income distribution had an average of twenty-seven cents worth of non-housing debt for every dollar of income. By 2016, that number had tripled: seventy-seven cents worth of non-housing debt for every dollar of income. For families in the top half of the income distribution, retail borrowing was already common by 1950, as postwar families outfitted their new homes with appliances and furniture purchased on credit, but their own levels of debt also tripled over the same period: these families had 10 cents worth of non-housing debt for every dollar of income in 1950, and thirty-seven cents in 2016.12
I donât mean to paint a utopian picture of life before credit cards. Life, clearly, was not perfect, and even if Congress assumed that all household borrowing was for business purposes, the questions of who received credit, and on what terms, were absolutely urgent.
It may have been the case that debt in the late 1800s and early 1900s wasnât a major part of life for Americans who werenât farmers or small business owners, but of course, for much of American history, most people were farmers or worked on farms. According to the 1860 census, of the 8.3 million Americans who were considered to have an âoccupationââfree, adult men, mostlyâ3.2 million, or nearly 40 percent, were counted as farmers or farm laborers.13 An additional 4 million Black Americans lived in slavery, the vast majority of whom were forced to work in agriculture.14 These enslaved people made up roughly 15 percent of the countryâs population.15 All-in, roughly half of American adults spent their days farming, some in enslavement, and others who kept fruits of their labor.
Our highly unequal system of banking has its roots in this era. Before the Civil War, enslaved people were a valuable form of collateral that made it easier for White enslavers to get loans: lenders considered enslaved Black people to be even better collateral than land, because people can easily move or be moved, while land is fixed in place. And as a result, credit was more accessible to slaveholders than it was to free farmers in the North or West.16 JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bancorp are all known to have accepted enslaved people as loan collateral.17
Contemporaries who lived through the Civil War might have initially assumed that the Confederacyâs defeat would ruin White enslavers financially, but these enslavers became the major beneficiaries of the National Bankruptcy Act passed in 1867. The founding fathers had planned for a federal bankruptcy law, even giving Congress the power to legislate bankruptcy in the Constitution, but Congress had a hard time reconciling the competing interests of creditors and debtors, farmers and merchants. Earlier attempts at writing bankruptcy legislation, in 1800 and in 1841, were both repealed within three years of their passage.18
The 1867 law, passed just one year after the Civil War ended, was considerably friendlier to debtors than the 1841 law. According to historian Rowena Olegario, although Southerners made up only a quarter of the population, they held most the debt in 1867, and accounted for 36 percent of all bankruptcy filings under the 1867 law. The new law gave Southern enslavers a chance to protect their land and other assets: former Confederates were given a fresh start, and the children and grandchildren of former enslavers remained at the top of social and economic life in the South through the 1940s.19
The average interest rate for farm mortgages in the South after the Civil War was around 8 percent, but other types of debt relationships emerged as well: sharecropping and tenant farming.20 As Mehsra Baradaran writes in The Color of Money: Black Banks and The Racial Wealth Gap, under a sharecropping arrangement, âSharecroppers paid for the land, supplies, and tools using credit, and they paid back their debts with their crop yields, typically with nothing left to spare. Usually the landlord did the calculations himself, and the illiterate debtor would have to trust that he had made no surplus year after year.â21 Persistent indebtedness, clearly, was not invented in the twentieth century.
Sharecroppersâ debt could be said to be a close cousin of the institution of slavery, and a distant cousin of the types of debt Americans hold today. Black southerners could be arrested and jailed under vagrancy laws if they didnât show a work certificate from a White employer, and even if Black southerners saved enough cash, laws often stopped Black people from buying land owned by White people.22 Itâs easy to look at the situation of most Black southerners in the late 1800s and early 1900s, and identify that their sharecropping debt wasnât a voluntary arrangement: White political elites had foreclosed on the alternative ways that Black southerners could have made a living. The question of whether Americans today have freely chosen their debts is much thornier.
While their position may have been enviable compared to Black sharecroppers, the burdens of debt nevertheless weighed on White farmers in the South and West, and many ordinary White farmers demanded looser credit at lower interest rates. When William Jennings Bryan gave the famous âcross of goldâ speech at the Democratic National Convention in 1896, arguing that the gold standard helped wealthy bankers at the expense of farmers, who paid higher loan interest rates as a result, it helped him leave the convention with the Democratic nomination for the White House.23 For American farmers, the terms and availability of credit could make the difference between destitution and sufficiency.
The case of home mortgage credit in the twentieth century follows a similar arc: who received credit, and on what terms, determined who would become rich, and who would remain poor. Black families in the 1920s through the 1950s were forbidden, even in most northern cities, from receiving mortgages to buy houses in White n...