It may come as a surprise to many readers that consumer credit actually expanded during the difficult years of the 1930s. Part of this expansion was driven by the private sector, but a significant portion was engineered through New Deal policies, policies that were aimed at putting money not in the hands of wealthy institutions or individuals, but in the hands of the people — average, everyday working Americans to purchase or refinance a home or farm, to acquire an automobile or electric appliance, to refurbish or remodel an existing structure.
Given the common public perception that excess consumer debt played a major role in the economic collapse of 1929, the fact that consumer credit actually expanded during the New Deal may come as something of a shock. But while it is true that widespread speculation and the practice of buying stocks on margin — often with borrowed funds — played a key role in the great crash of October 1929, the consumer credit industry (which was born in the 1920s) came through the crisis battered, but largely in tact.
Why? First, as Lendol Calder argues in his fascinating book, Financing the American Dream, in spite of the great hardship caused by the Great Depression, most people remained determined to pay off their installment loans (retail credit extended for the purchase of goods). As such, even though there were many more delinquencies and defaults in the wake the crash, the rates for both remained relatively low, in part because most retail creditors preferred to extend the life of the loan rather than attempt to repossess an article. A second factor was that the rapid rise in the unemployment rate after 1929 was not accompanied by a similar rise in consumer debt. On the contrary, in the years immediately following the collapse of the stock market, borrowing rates fell, with the result that consumer debt dropped from a high of $7.6 billion in 1929 to a low of $3.3 billion in 1933.
This fall in borrowing sparked fears among many economists that “frozen credit” would prevent or forestall the economic recovery. To reverse this trend, President Hoover established the Home Loan Bank System through which twelve banks selected by the government were provided $125 million in additional capital for home loans. But as Calder points out, it was too little too late. Neither the Home Loan Bank System nor the newly established Reconstruction Finance Corporation injected enough capital into the economy to reverse the downward slide into the Depression.
At first, there was no reason to suspect the incoming Roosevelt Administration would behave any differently, as FDR spoke often about the need to maintain a balanced budget. But within hours of his inauguration, this perception was overturned. To bring a halt to the banking crisis, FDR signed the Emergency Banking Act, which provided the banks with much needed capital and restored the public’s confidence in the banking system. This was followed by the Glass Steagall Act, which further regulated the banking industry and established the all important Federal Deposit Insurance Corporation (FDIC).
With over 90 percent of all bank deposits now insured by the Federal Government, new capital flowed into the banks and the possibility of bank runs was all but eliminated. This greatly reduced the banks needs for liquidity and made consumer loans for things like mortgages and home improvements much more attractive. As a result, the proportion of bank loans going to consumers rose dramatically from roughly 9 percent in 1929 to over 20 percent by 1939.
Other, less well known provisions followed. In the summer of 1933, for example, the Roosevelt Administration created the Electric Home and Farm Authority (EHFA). A subsidiary of the Tennessee Valley Authority (TVA), the EHFA purchased inexpensive electrical appliances and then made them available to working people via installment loans with a typical repayment period of three to four years. To reduce farm foreclosures and help the agricultural community contribute to the overall recovery, the Roosevelt Administration made capital available to farmers through the establishment of twelve “Banks for Cooperatives” under the auspices of the Farm Credit Administration. Initially most of these loans were used to refinance farm mortgages or provide capital for agricultural production, but for the first time in US history, they were also allowed for the purchase of non-agricultural purposes, such as household appliances.
Perhaps the most significant means by which the Federal Government made loans available to working Americans, however, came through the New Deal provisions in housing. In June 1933, the Roosevelt Administration established the Home Owners Loan Corporation (HOLC). The HOLC made direct low interest loans available to families facing foreclosure. Equally important, the loans were extended beyond the typical five to seven year term to between twenty and thirty years, and the practice of making a balloon payment at the close of the loan was replaced by amortization. These practices were extended by the establishment of the Federal Housing Authority (FHA) in 1934. Unlike the HOLC, the FHA did not make loans directly to consumers, but it helped support the mortgage industry and make funds available to working families by providing lenders with loan guarantees through a federal insurance fund. Taken together, these provisions revolutionized the mortgage industry and greatly expanded American home ownership-even during the Great Depression, Housing starts, for example, went from 93,000 in 1933 to 530,000 in 1940.
Having survived the difficult years between 1929 and 1933, and having been bolstered by the early provisions of the New Deal, consumer lending in the United States experienced a period of growth in the New Deal that is not only is impressive in dollar terms, but also in establishing new practices and means of borrowing that would continue well into the post-war years. Thanks to such provisions as federal deposit insurance, the extension and amortization of mortgages, and the New Deal’s overall support of the concept of consumer lending, the generation of working Americans that lived through the Great Depression found themselves in a position to gain access to the funds they needed to build a better future for themselves and their families.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.