Buy Now, Pay Later

We've heard a lot about debt lately. According to some (mostly conservatives), public debt is illegal, immoral and probably fattening as well. This is only a slight variation on themes we have heard ever since Franklin Delano Roosevelt was inaugurated in 1933.

Our current economic downturn, though, was not caused by public debt. It was brought on by a breakdown in the over leveraging of private debt. It was a consequence of financial deregulation and the resulting bubble in housing. After the bubble collapsed, in 2007, 2008 and 2009, we saw a massive reduction in overall debt in the U.S. Overall borrowing (net increase in debt, including US state and local government, federal government, financial companies, non-financial companies, and US household borrowing) dropped like a shot from about four and a half trillion dollars in 2007 to two and a half trillion in 2008 to negative 438.4 billion dollars in 2009. Yes, federal government borrowing increased, but that increase was overwhelmed by reductions in borrowing and spending by state and local governments and private borrowers.

"Neither a borrower nor a lender be," Polonius advises Laertes in William Shakespeare's Hamlet.

That's very bad advice if the goal is economic prosperity. In fact, debt (properly managed and regulated) was the foundation of our postwar prosperity. Without consumer debt, aggregate demand for products would be a fraction of what it became in the 1960s.

Just imagine the consequences to the economy if we were to abandon "buy now, pay later." Actually, I don't have to imagine it. I remember it. If my grandmother wanted to buy something at the department store - say a winter coat - she would put it on "lay-away." She would pay the store a certain portion of the price and the store would set it aside (or lay it away) until she completed paying for it. Then she could take it home.

It was possible in the 1940's to take out a loan for a major purchase such as a car. It helped to know the banker. That was possible, since most banks were local businesses. That made travel a problem. Only local businesses would accept a check made on your local bank. If you went on a trip you needed to take enough cash for expected expenses. There were no credit cards.

If you worried about being robbed of your cash, you would buy traveler's checks before setting out. To cash a traveler's check, you had to countersign it in front of the cashier. That system was "pay now, buy later."

The ordinary transactions of daily life were very much more complicated sixty years ago than they are now.

Do you remember long distance telephone calls? I'll save that for another time.