The American Way of Debt

The average American family is now $4,700 in debt--an amount equal to 60% of its annual income after taxes. Americans plunged much more deeply into debt during April, the latest recorded month, when consumer installment credit grew by $744 million, an alltime monthly high. Such records discomfort many economic experts--notably including William McChesney Martin Jr.--who fear that the credit society may eventually lead to the kind of overbuilding, overbuying and overpricing that could bring on a recession.

While there is a great deal of talk about the national debt, it is a fact that the Federal Government is more prudent than the citizens: since 1945, the federal debt has gone up 42% and private debt has gone up more than 500%. Personal debts continue to swell about 10% annually, and nobody expects that the economy can continue indefinitely to support such gains. The personal total now tops $264 billion, of which 70% is accounted for by mortgages. The rest of it is mostly short-term and medium-term installment credit.

Personal & Business. The fastest-expanding area is auto credit, now at $25.4 billion. Ten years ago, the typical car buyer made a down payment of 30% and carried the balance over 28 months; today he puts down only 25% and finances the car over 32 1/2 months. Personal loans, like the kind Lyndon Johnson took out to help pay his income taxes, have also risen sharply, to $16.5 billion. Revolving credit in department stores, now $2.5 billion, has doubled since 1961. Credit cards still account for only $633 million, but are climbing by 20% a year.

Business borrowing is expanding even faster than consumer credit. New short-term bank loans to business rose from $3.5 billion in 1960 to $10.3 billion in 1964. Long-term corporate bond issues, which usually increase by $5 billion a year, will advance an estimated $8 billion in 1965. One of the newer and riskier forms of business finance is "trade credit"--credits extended by companies directly to their customers, without bank financing. The total of such credit outstanding now tops $100 billion, is expected to rise by $6.8 billion this year.

Good Risks. Is credit being stretched too far? The American Banker Association's delinquency figures have been gradually edging up, and mortgage foreclosures have doubled in the past four years (to 108,620 in 1964). Americans now typically spend 14.3% of their income to pay off their debts. While nobody knows for sure if that is too much of a strain, most lenders argue that the nation's rising levels of savings, income and sophistication prevent it from getting in too deeply. In addition, the major cause of the debt rise is that more people are buying houses--instead of merely paying rent--and thereby adding to their assets. ' Americans have historically proved to be excellent credit risks, paying off almost all of their debts even during the Depression. In the event of an economic downturn, the danger is not so much that people will default on their payments as that they will reduce their borrowing and thus buy less.

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