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who benefits from credit?


While Austrians often trace out the effects that the issuance of unbacked currency has on the structure of production (the so-called Austrian Business Cycle Theory), there is also an effect upon individual households and the social mores surrounding the use of credit.

My favorite personal finance author, Dave Ramsey, writes on his website:

History also teaches us that debt wasn't always a way of life. In fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, "Buying on Credit is Folly." J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James "Cash" Penney because he detested the use of debt.

Henry Ford thought debt was a lazy man's method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn't offer financing until 10 years after General Motors did. Now, of course, Ford Motor credit is one of the most profitable of Ford Motor's operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt.

This historical context makes one wonder whether this is a continuous process that has been going on since 1913, with ever-increasing "leverage" in the household budget. The Washington Post reports today that "Between 1989 and 2004, the net worth of the average American family increased by 35 percent, but household debt more than doubled as more families used debt to finance day-to-day expenses." The graphic accompanying the story is telling:

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