When Did Installment Credit Explode on the American Scene?
Learn about the pivotal era when installment credit became a cornerstone of American consumerism and economic growth.
Installment credit allows consumers to acquire goods or services immediately by agreeing to make regular, fixed payments over an extended period. This financial arrangement enables individuals to manage larger purchases without requiring the full amount upfront. The method fundamentally changed how Americans accessed durable goods and shaped the modern consumer economy.
The Precursors to Widespread Installment Credit
Before the widespread adoption of modern installment credit, consumer financing in the United States primarily relied on informal and limited arrangements. Local merchants often extended “book credit” to trusted customers, allowing them to defer payment for goods until a later date. This system was generally unsecured and lacked formal terms.
Other methods included pawnbroking and loans from family or friends for small sums. For larger items, a form of installment selling did exist, particularly with high-value goods like sewing machines in the mid-19th century. The Singer Sewing Machine Company, for instance, pioneered this approach by offering machines for a down payment and subsequent monthly installments. These early plans were typically direct agreements with manufacturers or specific retailers, remaining limited in scope.
Layaway plans, where a customer made incremental payments to reserve an item until fully paid, gained commonality later, particularly during the Great Depression. Before the 20th century, borrowing was usually for productive assets or necessities, with a social aversion to debt for non-essential purchases. The credit landscape was fragmented, lacking standardized, widely available financing.
The Roaring Twenties and Consumer Revolution
The 1920s marked the period when installment credit truly became a driving force in the American economy, transforming consumer behavior and access to goods. This decade, characterized by economic prosperity and technological advancements, saw a dramatic increase in the production of expensive durable goods. Innovations like Henry Ford’s assembly line drastically reduced manufacturing costs, making automobiles, radios, refrigerators, and washing machines more affordable for the average American household.
Despite lower prices, the upfront cost of these new consumer goods remained substantial for most families. Installment plans offered a solution, enabling consumers to purchase items with a small down payment and regular, fixed payments over time. This model rapidly gained acceptance, shifting cultural norms from an emphasis on thrift to an embrace of consumerism. By 1927, over 60% of American automobiles were sold on credit, and installment purchasing was widely available for nearly every other large consumer item.
The proliferation of installment sales fueled the consumer revolution. Companies like General Motors recognized the potential of organized financing to boost sales. In 1919, General Motors established the General Motors Acceptance Corporation (GMAC) to provide financing specifically for automotive customers. This demonstrated the strategic importance of consumer credit. The ability to acquire modern conveniences without immediate full payment reshaped household budgets and expectations, embedding debt as an accepted part of the American lifestyle.
Driving Forces Behind Its Adoption
The rapid growth of installment credit was propelled by industrial, economic, social, and financial factors that converged in the early 20th century. Mass production techniques, like Henry Ford’s assembly line, played a foundational role. These methods dramatically increased the volume of goods produced while lowering unit costs, making products like automobiles and household appliances accessible to a broader market. This increased supply created demand that cash-only purchases could not sustain, necessitating new financing models.
Economic conditions following World War I also contributed significantly. The United States experienced robust economic growth, characterized by rising wages and increased disposable income for many urban workers. This newfound affluence, combined with mass-produced goods, fostered a desire for a higher standard of living and modern conveniences. The public’s eagerness to spend fostered credit expansion.
Aggressive marketing and advertising campaigns further fueled adoption. Companies increasingly portrayed installment plans as a pathway to a modern, convenient lifestyle. Advertisements appealed to desires for social status and time-saving benefits, making credit a culturally acceptable means to achieve these aspirations. This shift represented a departure from earlier social norms that prioritized thrift and saving over debt.
The emergence of specialized financial institutions was also instrumental. While commercial banks initially hesitated to engage in consumer lending, finance companies stepped in. Firms like Household Finance Corporation and General Motors Acceptance Corporation (GMAC) began specializing in consumer loans. These companies made it possible to resell consumer debt, linking personal lending to larger capital markets and making credit cheaper for consumers.
Post-War Normalization and Expansion
Following World War II, installment credit evolved into an indispensable component of the American economy. The post-war economic boom, coupled with a renewed surge in demand for consumer goods, solidified its role. Returning soldiers and growing families sought to establish homes in burgeoning suburbs, leading to increased purchases of cars, appliances, and furniture. Installment plans became the expected method for acquiring these items, integrating into daily financial life.
This period also saw the introduction of early forms of general-purpose credit cards, building upon the foundation laid by installment loans. In 1950, the Diners Club card emerged, initially as a charge card for restaurant payments, requiring full monthly repayment. This innovation provided convenience and gained widespread use. Soon after, in 1958, Bank of America launched the BankAmericard, which introduced revolving credit, allowing cardholders to carry balances month-to-month with interest. American Express also introduced its first charge card in 1958.
These early credit cards, distinct from traditional installment loans, further normalized consumer debt and regular payments. They expanded the reach of credit beyond single-item purchases, making it a flexible tool for a wider array of transactions. By the mid-20th century, installment credit was a fundamental mechanism supporting the nation’s consumer-driven economy, widely accepted by businesses and consumers.