When Was Credit Invented? A Look at the 1920s

Credit represents a promise to pay in the future for goods or services received today. This concept is ancient, continuously adapting throughout history. While the 1920s marked a significant period for consumer credit’s widespread adoption, it was not the genesis of borrowing and lending. Instead, this era built upon millennia of evolving financial practices, reshaping how individuals acquired goods.

Roots of Credit

Credit dates back to ancient civilizations, long before currency. In Mesopotamia, as early as 3000 BCE, cuneiform tablets detail loans of grain or silver, often with specified interest rates. Temples and palaces served as early repositories for valuables and issued loans. These early systems included provisions for debt cancellation by rulers to prevent widespread debt slavery and maintain social stability.

During the medieval period, credit continued to be an integral part of commerce, particularly among merchants and traders. Lending was often based on trust and recorded in ledgers, facilitating transactions across vast distances. While religious doctrines sometimes restricted interest, mechanisms like mortgages secured by land emerged to enable borrowing for agricultural and commercial purposes. Specialized lenders, including Jewish financiers and Italian bankers, played a significant role in providing capital for various needs.

Credit’s Expansion Before the 1920s

As societies industrialized in the 19th and early 20th centuries, the groundwork was laid for broader consumer credit. Increased consumer goods production necessitated new ways for individuals to afford them. Department stores offered charge accounts, allowing customers to purchase items and pay later, typically within a monthly billing cycle. These accounts were specific to the issuing store and often relied on paper identification for transactions.

Layaway plans also became popular for consumers to acquire goods without immediate full payment. Under a layaway agreement, a customer would make a down payment on an item, and the store would hold it until the full purchase price was paid through a series of installments. John Wanamaker introduced one of the first known layaway programs in 1869, with retailers like Sears and Montgomery Ward adopting similar systems in the early 20th century. While not immediate credit, these plans accustomed consumers to deferred payment structures.

The 1920s: A Turning Point for Consumer Credit

The 1920s, often called the “Roaring Twenties,” ushered in an era of economic prosperity and a burgeoning consumer culture. Mass production techniques, exemplified by Henry Ford’s assembly line, made goods like automobiles, radios, and household appliances more affordable and accessible. This surge in available products, combined with rising disposable incomes, fueled a desire for immediate consumption.

Installment buying became a transformative financial tool during this decade, allowing consumers to “buy now, pay later.” Rather than saving for years, individuals could make a down payment and pay the remaining balance in regular, manageable installments over time. This method was particularly prevalent for big-ticket items, with over half of all automobiles and a significant portion of furniture and radios being purchased on installment plans by the end of the decade.

The rise of specialized finance companies was important in facilitating this credit expansion. Traditional banks were often hesitant to engage in consumer lending due to perceived risks and administrative complexities. Companies like General Motors Acceptance Corporation (GMAC), established in 1919, provided financing directly to consumers for automobile purchases, often requiring a down payment and repayment over about a year. Other firms, such as Household Finance Company, also emerged to offer personal installment loans, making credit more accessible and socially acceptable for consumers.