Consumer Credit in Post-War America

Standards of living improved in all Western countries after the Second World War. Incomes rose quickly, allowing more people to enjoy the use of products that were novelties or luxuries before the war, things like household appliances and cars. Homes were getting larger to fit all of the things people were able to afford for the first time. It was not all enabled by rising incomes though. Credit played a part too. In the United States, consumer credit was growing much faster than the economy overall during the 1950s.

Revival of Consumer Credit

Consumer credit was scarce before the 20th century. Even rich countries were considerably poorer then; few people were left with much after paying for bare necessities. Disposable income was a prerequisite for the emergence of consumer credit because no one could credibly commit to repaying a loan who could not afford the basic necessities of life. As the middle classes grew and new modern conveniences became available, at least to the comfortably well off, consumer credit became more common in 1920s America. But brisk growth in this area of lending was interrupted twice in close succession as loans for consumption evaporated during the worst years of the Great Depression and then the Second World War.

Outstanding consumer installment credit in the United States stood at just under $2.5 billion at the end of 1945. After years of rationing as materials and labor for producing consumer goods were redirected to war needs, the amount of consumer credit had contracted. In fact, in 1945, the nominal amount of installment credit outstanding was no greater than during the stock market crash of 1929, sixteen years earlier. That said, the pent-up demand was considerable and would transform consumer credit in short order.

By the end of 1949, after a few years of 25-75% growth per annum, consumer installment credit had grown to $11.6 billion, well above any historical level. This was still only about 4% of U.S. GDP at the time. Yet, even this 4% of GDP was approximately the same proportion as the level of credit card debt outstanding in the U.S. at the end of 2025, for comparison. Consumer credit would grow still further though.

Even in the post-war years, credit was offered in larger quantities in forms other than installment loans. Department stores offered revolving credit accounts to their customers. Banks also offered consumer credit, including through overdraft facilities, or ‘check credit’ plans as they were also called. Also consider that Diners Club launched the first credit card in 1950 and the first bank-issued credit card was launched in 1951. Before too long, banks in the US were growing this line of business through the unsolicited mailing of credit cards to prospective customers. Despite all of this, most consumer credit was still offered in the form of installment loans.

Installments

Some installment loans were used to finance nondurable goods, the simple day-to-day necessities, or services; some other loans were used to consolidate debts. However, the most common use of installment credit was to finance purchases of a durable consumer product, the sort of things which were becoming more obtainable for the middle classes, and even the lower middle classes, in the immediate post-war period. Credit was crucial though; in 1952, about 60% of car and major appliance purchases were made on an installment loan basis.

1952 Ad for a Television – Could be Bought on Credit

Car loans made up 40% or more of installment loans over the 1950s, the largest type of installment loan in the country. The next most common type was that used to acquire other non-car goods, followed by personal loans not associated with any particular consumer purpose, and lastly were installment loans used for repairs or modernizations. Consumer installment credit outstanding reached $19.4 billion by year-end 1952 or nearly 5% of GDP

Institutional Holders

Numerous financial institutions held consumer loans among their assets. Banks were very active in making or acquiring car loans, for example. In 1954, 17.0% of car installment loans were made directly by banks and another 23.1% were loans bought by banks following their origination. Most of the rest of the market was taken by non-bank sales finance companies. By the end of the decade, about 3,500 consumer finance companies operated in the United States.

In the market for other consumer goods, department stores and mail order catalogs continued offering credit to customers and actually gained in their market share of consumer finance. Otherwise, retailers themselves generally ceded some market share to financial institutions. Still, the volume of installment loans held by retailers stood at $4.1 billion in 1954, as compared to just $686 million in 1945 or $1.6 billion in 1941, just before American entry into the war. Yet, the 156% growth in installment loan holdings by retailers between pre-war levels and 1954 was dwarfed in size and growth rate by the 409% growth in loans held by commercial banks. The outstanding balance of consumer installment debt had grown to 5.8% of GDP by year-end 1954.

Besides banks, larger finance companies also funded loans by providing credit to dealers in cars and appliances so that they could in turn offer credit to their customers. One of the larger of these was C.I.T. Financial; another was General Motors Acceptance Corp. which was a captive finance subsidiary of General Motors. Captive finance arms of other non-financial companies became more common. Along with all of the above institutions, credit unions also held portfolios of installment loans. Together with institutions offering other products, there was clearly competitiveness among institutions offering consumer credit.

Driving Credit Growth

Numerous economic and social changes drove adoption of consumer borrowing. Rising incomes were one. At the time, there were growing ranks of well-paid salaried workers. These new middle classes had stable incomes and would be more willing to take on debts than, for example, someone who earned his income from volatile entrepreneurial ventures, the sort which generated most middle-class incomes in an earlier era. The middle class was particularly important; installment credit usage was higher among the middle classes than among the poor or rich in America.

Family formation was also a stimulant since new households often have high expenses but incomes for younger salaried workers were still low. This became truer as the average age of first marriage, already declining for decades, fell sharply to 22.8 for men in 1950 as compared to 24.3 in 1940 or 25.9 at the start of the century. This encouraged borrowing against future (and presumably higher) incomes by young households.

Suburbanization, steadily growing in the 20th century but most notably in the 1950s, was also a crucial element to the story. In the suburbs, people were more likely to own their own homes, requiring that they provision themselves with more appliances. Owning a car, and often more than one of them, was more important too. These things would be bought on credit

1950s

A short recession in 1953-54, after the end of the Korean War, caused a small pause in credit growth. Back then, the pace of growth in installment credit began to slow shortly before the recession and growth did not accelerate again until a few months after it had ended. The credit downturn was a bit longer than the recession itself. But growth returned in 1955, with consumer installment credit outstanding rising by around 15% per annum in 1955 and 1956. The same pattern of slowing consumer credit preceding a recession which would end shortly before consumer credit inflated once more was repeated in a short 1957-58 recession as well.

After the years of uneven growth, installment credit outstanding reached $39.2 billion at the end of 1959, or 7.3% of GDP, and except for a 1960-61 recession, kept growing at 10% annual rates through the mid-1960s. In this long period, as important a driver as income growth was, consumer debt nonetheless grew much faster than incomes. Indeed, between 1950 and 1964, gross national product grew at an average rate of 5.8% per year but installment consumer credit grew at an average rate of 10.5% annually. For further comparison, disposable personal incomes grew 5.5% per year over the same period. By the end of 1964, consumer installment debt outstanding reached 8.8% of GDP, well over double start-of-1950 levels.

Regulation and Controls

Consumer credit was, not much earlier than at the start of this period, almost completely unregulated. Starting with Indiana in 1935, states increased regulation of consumer credit. By 1959, thirty-one states had enacted some retail installment sales regulation. States set maximum limits on consumer installment loan sizes, usually between $300 and $500. Maximum interest rates were set to 2-3% per month and these rates were often distinct from those found in general usury laws. Other rules established licensing and disclosure requirements, prepayment rights, and any insurance mandated on the financed goods.

The state-led licensing and regulation of installment finance, especially before the 1960s, may have led to the fractured nature of the industry, where many finance companies operated only regionally. Different state regulations were later partially harmonized with the Uniform Consumer Credit Code.

As for the federal government, some credit controls were suspended by the Federal Reserve during the 1953-54 recession to stimulate the economy. This certainly may have encouraged the extension of credit. That said, there was a perception among some that credit quality in the consumer market deteriorated over the decade. Longer terms on consumer installment loans and higher loan-to-value or lower down payment requirements are evidence of this. In a further sign, personal bankruptcies in the United States grew from 16,000 to 191,000 between 1948 and 1967 and wage garnishment became more common too. Federal regulation was soon afterwards increased with the Consumer Credit Protection Act of 1968, which mandated new disclosures among other regulations.

Lesson

Much has been said about how American industry after the Second World War successfully transitioned from making armaments to making consumer goods. This was not a preordained outcome. At the end of the First World War, many economies in the western world, though to a lesser extent the United States, entered into a prolonged depression or at least a long stagnation. The transition from a wartime to a peace economy proved a tortured process in Europe particularly. The same did not happen after the Second World War, but this was not the obvious result of transition. A boom in household consumption was no doubt important to facilitating this. Yet, it may not have been enough on its own. Insofar as consumer credit was growing faster than incomes used to support consumption, the provision of consumer credit was crucial to the postwar story too.

More from the Tontine Coffee-House

Read about milestones in consumer credit, including the introduction of credit scores and credit cards. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.