A Flood of Debt

November 7, 1955

The current prosperity has been mounting to ever higher peaks. In the third quarter of this year the total amount of goods and services produced in the U.S. (the “gross national product,” affectionately known as GNP) rose to an annual rate of $392 billion, the highest on record.

Official estimates also intimate that the increase in the gross national product in the third quarter was founded on consumer buying, itself at the annual rate of more than $256 billion, highest in history. But how stable is this economic paradise? For how many quarterly periods can we continue to build up new records? In Newsweek of Aug. 29, in a column entitled “A Flood of Credit,” I pointed out the large extent to which the current boom rested on credit expansion. An article on the same theme appears by Jules Backman in the October issue of a little magazine called Challenge, published by New York University. Though many of the statistical comparisons that Professor Backman makes cover the same ground as those in my Aug. 29 column, his own article adds some additional and very striking comparisons.

The boom in housing, in automobiles, and other durable goods has been financed to a large extent by personal debt. By the end of June 1955, the volume of automobile credit outstanding, at $12.5 billions, was 23 percent higher than twelve months earlier. Total consumer credit, at $32.5 billion, increased 13 percent during the same period. The August total of $33.6 billion compared with only $5.7 billion at the end of 1945.

Again, under the imprudent mortgage guarantees of the Federal Housing Administration and the Veterans Administration, mortgage debt on one- to four-family houses climbed from $66.3 billion at the end of 1953 to an estimated $82 billion in June 1955. Together, consumer credit and mortgage debt have increased from about $24 billion at the end of 1945 to about $110 billion, while total private debt has risen from $140 billion to $360 billion.

Are we too deep in debt? Professor Backman makes some judicious answers. He points out, quite rightly, that any exact quantitative measurement of the safe limit to personal debt is impossible. But he also points out that the current ratio of consumer debt to total personal income after taxes is the highest on record. To put it another way, the rate of increase in consumer credit has been greater than the rate of increase in consumer income.

And he makes a sensible observation that emphasizes the dangers in this situation. The safeness of consumer credit is not measured solely by the ability of the borrowers to carry the interest burden, or even to repay the principal. It is measured also by the impact of expanding debt on the future level of general business activity. When consumers spend beyond their incomes, they obviously stimulate the economy to the extent of their borrowing. A family earning $100 a week, for example may spend much more as it refurnishes a home, buys a car, a television set, or a refrigerator. But at some future date, the family will have to spend less than its current income if it is to repay the loan. If the total volume of consumer credit merely stops growing, part of the stimulus to the economy is lost. When repayments exceed new debt, recessionary tendencies may develop. Yet periods of borrowing must be followed by periods of repayment.

Considerations like these perhaps explain why our Federal monetary authorities are fearful of a further rise in credit, but fearful also of bringing the rise to a halt. Some officials discourage the idea of a further advance in the Federal Reserve discount rate even above 2½ percent because “it might rock the boat.” But may it not eventually rock the boat still more to allow credit expansion to continue? The country’s money supply (measured by bank deposits and currency) increased $10 billion at the end of July compared with the same date a year ago, largely as a result of a $9.4 billion increase in commercial bank loans in the same period. How long can we keep up this rate of money and credit inflation?