Are Americans In Over Their Heads?

MANY people worry about the size of the $272 billion federal debt.

But not so many worry over a far bigger U.S. debt: the money borrowed by individuals and corporations (which, incidentally, supports the greatest peacetime boom in history). For houses alone, Americans have gone $84 billion into debt; to expand and modernize, industry has borrowed $200 billion. Altogether, while the national debt has remained near its wartime peak since World War II, private and corporate debt has more than doubled, to a record $330 billion, or $4,000 for every man, woman and child in the country. Are Americans getting in over their heads? Will the boom collapse under the weight of private credit as it did in 1929?

No one knows, because the amount of credit never seems to be too big until after there is a collapse. However, all the evidence indicates that the enormous overall debt is not an immediate danger, largely because the U.S. economy has been growing faster than the debt. Since 1940, public and private debt has risen 195%; national income, on the other hand, has risen 257%. Thus, the total debt last year was only 2.2 times national income, v. 2.7 times in 1940. But on one fact everyone agrees: a debt of that size is only healthy so long as the economy as a whole is healthy.

A key part of the debt problem is consumer credit, because it is so sensitive to shifts in the economy, and can cause quick repercussions on the whole economy when it becomes top-heavy. It includes installments and single-payment loans from banks, pawnbrokers, etc., charge accounts and "service" credit, i.e., money owed to such people as doctors and lawyers, and even unpaid utility bills. Compared to the total debt, consumer credit is small--a mere $27 billion. But it has risen faster than any other private debt (up from $8 billion in 1940), and is still increasing at the rate of $500 million a month. And while total debt is increasing more slowly than the national income, consumer debt is increasing at a far faster rate than the personal income from which it must be paid off.

Installment credit, which accounts for $20 billion of the $27 billion of consumer credit, has grown from $87 a family in 1946 to $305. Almost half of the total has been lent on automobiles alone. About two out of three new autos are bought on credit; more than 65% of all used-car purchases are made on an installment plan. While more than half the nation's families are in debt to some extent, most of them manage to keep their installment debts below 10% of their annual earnings. But one in every ten U.S. families actually owes 20% or more of its annual income before taxes.

On a national basis, consumer credit now represents 11% of total income after taxes. Economists guess that most families can carry a debt equal to 15% of their annual income; hence, consumer credit is not yet at the maximum danger point. But since consumer credit has expanded 400% since war's end, v. only 60% for consumer incomes, the danger signals are flying --and credit men are worried.

Early this year, when repossessions of used cars started to rise, credit men tightened up on auto purchase terms. Now, credit men often will not make loans on pre-1950 cars. As a result, repossessions have declined, but so have sales of used cars, to the dismay of the dealers (see Autos). The used-car market has shown how quickly any change in credit is reflected in sales of consumer goods.

Actually, the big danger of overexpanded consumer credit is not only that people will find it impossible to meet payments on their debts. A worse danger is that in time of declining incomes, consumers will be forced to allot so much money to paying off their debts that they will have little left over for other buying. That would dry up purchases and shut down factories and hasten a recession.

The Government now has control over almost every kind of debt except consumer credit. If it wants to tighten up on housing credit, it can boost rates on Government-insured mortgages; if it wants to restrict bank loans, it can boost reserve requirements. But it has had no direct control over consumer credit since the Federal Reserve Board's power to fix minimum down payments and maximum payoff periods (Regulation W) expired last year.

Federal Reserve Board Chairman William McChesney Martin makes no secret of the fact that he would like FRB's power to control consumer credit restored--and it should be. Since the power is far-reaching, it must always be carefully applied; FRB would probably impose no consumer credit controls now, even if it could. But if consumer credit continues to increase at its present rate, controls will be needed. They would, no doubt, cause some temporary dislocations as credit dried up where it was overextended. But that would be far better than letting credit expand indefinitely, until the boom collapsed under its weight.

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