Why Was Using Credit Not Common Before 1920?

Before 1920, the landscape of personal finance in the United States differed significantly from contemporary practices. The economic environment, prevailing consumption habits, the financial system, and deeply ingrained societal values collectively shaped an era where widespread credit use, particularly for consumer goods, was not a common feature of daily life. This era offers insight into the foundational changes that paved the way for modern credit-driven economies.

Economic Landscape and Consumption Patterns

Before 1920, the United States economy was largely agrarian, transitioning into an industrial phase. Most of the population resided in rural areas, engaging in farming or localized production. Economic activity was often decentralized, with goods produced and consumed locally. Consumer goods were not mass-produced or widely available, and households often relied on self-sufficiency, producing many of their own necessities.

Transactions were predominantly conducted using cash or through bartering. Disposable income for the average individual was also significantly lower than in later decades. Consequently, there was less inherent demand for consumer credit. The expensive, discretionary items that would later necessitate widespread credit, such as automobiles and major household appliances, were either non-existent or considered luxury items accessible only to the wealthy. This economic structure and consumption patterns did not foster extensive consumer credit for most people.

Limitations of the Financial System

Before 1920, the financial infrastructure was underdeveloped and not geared towards consumer lending. The banking system primarily focused on commercial and industrial loans, supporting businesses rather than individuals. Banks were typically local entities, operating conservatively and lacking the infrastructure to manage numerous small consumer credit accounts.

Mechanisms for assessing individual creditworthiness were largely absent. While commercial credit reporting agencies began to emerge in the mid-1800s to serve businesses, standardized consumer credit reporting as known today did not exist. Early consumer credit bureaus, like the Retail Credit Company (later Equifax) founded in 1899, primarily collected qualitative and fragmented information, often based on local merchant observations rather than comprehensive financial data. The modern concept of consumer credit, including installment plans or credit cards, was rare or non-existent, resulting in a lack of credit products for the general public. Even the Federal Reserve System, established in 1913, initially focused on stabilizing the monetary system and commercial banking, with its impact on consumer credit developing much later.

Societal Norms and Legal Environment

Before 1920, societal attitudes strongly emphasized thrift, self-reliance, and debt avoidance. Borrowing, particularly for personal consumption, often carried a significant social stigma, rooted in moral or religious beliefs that viewed debt as a personal failing. The social pressure to remain debt-free was substantial, and defaulting on obligations could lead to social ostracism.

The legal environment further deterred lenders and potential borrowers. While debtor’s prisons were largely abolished, the threat of severe consequences for unpaid debts remained in the public consciousness. Bankruptcy protections for individuals were limited; early federal bankruptcy laws primarily focused on commercial insolvency, with comprehensive individual bankruptcy relief becoming more established later. Usury laws, which regulated maximum interest rates, varied by state and could be strict, but they often failed to prevent loan sharking, where desperate individuals might face exorbitant rates ranging from 60% to 480%. These harsh realities made consumers wary of entering into debt agreements and contributed to the limited supply of formal credit.