Consumer credit may seem like a fairly new invention – but it’s actually been around for more than 5,000 years!
In fact, many millennia before the credit score became ubiquitous, there is historical evidence that cultures around the world were borrowing for various reasons. From the writings in Hammurabi’s Code to the exchanges documented by the Ancient Romans, we know that credit was used for purposes such as getting enough silver to buy a property or for agricultural loans made to farmers.
Consumer Credit: 3,500 B.C. to Today
In today’s infographic from Equifax, we look at the long history of consumer credit – everything from the earliest writings of antiquity to the modern credit boom that started in the 20th century.
Consumer credit has evolved considerably from the early days.
Over the course of several millennia, there have been credit booms, game-changing innovations, and even periods such as the Dark Ages when the practice of charging interest (also known as “usury”) was considered immoral by some people.
A Timeline of Consumer Credit
Below is a timeline of the significant events that have helped lead to the modern consumer credit boom, in which Americans now have over $12.4 trillion borrowed through mortgages, credit cards, student loans, auto loans, and other types of credit.
The Ancients and Credit
3,500 BC – Sumer
Sumer was the first urban civilization – with about 89% of its population living in cities. It is thought that here consumer loans, used for agricultural purposes, were first used.
1,800 BC – Babylon
The Code of Hammurabi was written, formalizing the first known laws around credit. Hammurabi established the maximum interest rates that could be used legally: 33.3% per year on loans of grain, and 20% per year on loans of silver. To be valid, loans had to be witnessed by a public official and recorded as a contract.
50 BC – The Roman Republic
Around this time, Cicero noted that his neighbor bought 625 acres of land for 11.5 million sesterces.
Did this person literally carry 11.5 tons of coins through the streets of Rome? No, it was done through credit and paper. Cicero writes “nomina facit, negotium conficit” – or, “he uses credit to complete the purchase”.
Moral Concerns About Lending
800 – The Dark Ages in Europe
After the collapse of the Western Roman Empire, economic activity grinded to a halt. The Church even banned usury, the practice of charging interest on loans, for all laymen under Charlemagne’s rule (768-814 AD).
1500 – The Age of Discovery
As European explorers and merchants begin trade missions to faraway lands, the need for capital and credit increases.
1545 – England
After the Reformation, the first country to establish a legal rate of interest was England in 1545 during the reign of Henry VIII. The rate was set at 10%.
1787 – England
Philosopher Jeremy Bentham writes a treatise called “A Defense of Usury”, arguing that restrictions on interest rates harm the ability to raise capital for innovation. If risky, new ventures cannot be funded, then growth becomes limited.
The Birth of Modern Consumer Credit
1803 – England
Credit reporting itself originated in England in the early 19th century. The earliest available account is that of a group of English tailors that came together to swap information on customers who failed to settle their debts.
1826 – England
The Manchester Guardian Society is formed, and later begins issuing a monthly newsletter with information about people who fail to pay their debts.
1841 – New York
The Mercantile Agency is founded, and starts systemizing rumors about the character and assets held by debtors through a network of correspondents. Massive ledgers in New York City are made, though these reports were heavily subjective and biased.
1864 – New York
The Mercantile Agency is renamed the R. G. Dun and Company on the eve of the Civil War, and finalizes an alphanumeric system for tracking creditworthiness of companies that would remain in use until the twentieth century.
1899 – Atlanta
The Retail Credit Company was founded, and begins compiling an extensive list of creditworthy customers. Later on, the company would change its name to Equifax. Today, it is the oldest of the three major credit agencies today in the United States.
The Consumer Credit Boom
1908 – Detroit
Henry Ford’s Model T makes automobiles accessible to the “great multitude” of people, but they were still too expensive to buy with cash for most families.
1919 – Detroit
GM solves this problem by loaning consumers the money they need to buy a new car. General Motors Acceptance Corporation (GMAC) is founded and popularizes the idea of installment plan financing. Consumers can now get a new car with just a 35% downpayment at time of financing.
1930 – United States
By this time, efficient U.S. factories are pumping out cheaper consumer products and appliances. Following the lead of GM, now washing machines, furniture, refrigerators, phonographs, and radios can be bought on installment plans. It’s also worth noting that in this period, 2/3 of all autos are bought on installment plans.
The First in Big Data
1950 – United States
By 1950, typical middle-class Americans already had revolving credit accounts at different merchants. Maintaining several different cards and monthly payments was inconvenient, and created a new opportunity.
At the same time, Diners Club introduces their charge card, which helps open the floodgates for other consumer credit products.
1955 – United States
Early credit reporters use millions of index cards, sorted in a massive filing system, to keep track of consumers around the country. To get the latest information, agencies would scour local newspapers for notices of arrests, promotions, marriages, and deaths, attaching this information to individual credit files.
1958 – United States
BankAmericard (now Visa) is “dropped” in Fresno, California. American Express and Mastercard soon follow, offering Americans general credit for a wide range of purchases.
1960 – United States
At a time when the technology was limited to filing cabinets, the postage meter, and the telephone, American credit bureaus issued 60 million credit reports in a single year.
1964– United States
The Association of Credit Bureaus in the U.S. conducts the first studies into the application of computer technologies to credit reporting. Accuracy of data is also improved around this time by standardizing credit application forms.
1970 – United States
The first Fair Credit Reporting Act is passed in the United States. It establishes a standard legal framework for credit reporting agencies.
1980s – United States
The three biggest credit bureaus attain universal coverage across the country.
1989 – United States
The FICO score is introduced, and quickly becomes a standard system to measure credit scores based on objective factors and data.
2006 – United States
VantageScore is created through a joint-venture between the top three credit scoring agencies. This new consumer credit-scoring model is used by 10% of the market, and 6 of the 10 largest banks use VantageScore.
The Information Age has enabled a new era in consumer credit and assessing risk – and today, credit reports are used to inform decisions about housing, employment, insurance, and the cost of utilities.
Learn more about how data, the internet, and modern computing is changing credit in Part 2 of this series.
The Anatomy of the $2 Trillion COVID-19 Stimulus Bill
A visual breakdown of the CARES Act, the $2 trillion package to provide COVID-19 economic relief. It’s the largest stimulus bill in modern history.
The Anatomy of the $2 Trillion COVID-19 Stimulus Bill
The unprecedented response to the COVID-19 pandemic has prioritized keeping people apart to slow the spread of the virus. While measures such as business closures and travel restrictions are effective at fighting a pandemic, they also have a dramatic impact on the economy.
To help right the ship, the Coronavirus Aid, Relief, and Economic Security Act — also known as the CARES Act — was passed by U.S. lawmakers last week with little fanfare. The act became the largest economic stimulus bill in modern history, more than doubling the stimulus act passed in 2009 during the Financial Crisis.
Today’s Sankey diagram is a visual representation of where the $2 trillion will be spent. Broadly speaking, there are five components to the COVID-19 stimulus bill:
|Category||Total Amount||Share of the Package|
|Individuals / Families||$603.7 billion||30%|
|Big Business||$500.0 billion||25%|
|Small Business||$377.0 billion||19%|
|State and Local Government||$340.0 billion||17%|
|Public Services||$179.5 billion||9%|
Although the COVID-19 stimulus bill is incredibly complex, here are some of the most important parts to be aware of.
Funds for Individuals
Amount: $603.7 billion – 30% of total CARES Act
In order to stimulate the sputtering economy quickly, the U.S. government will deploy “helicopter money” — direct cash payments to individuals and families.
The centerpiece of this plan is a $1,200 direct payment for those earning up to $75,000 per year. For higher earners, payment amounts will phase out, ending altogether at the $99,000 income level. Families will also receive $500 per child.
There are three other key things to know about this portion of the stimulus funds:
- There will be a temporary suspension for any student loan held by the federal government. This means no payments required and no interest accrued until the end of September, 2020.
- Borrowers with federally backed loans can request forbearance on mortgage payments for up to six months.
- There will be an expansion of unemployment benefits, including a four-month enhancement of benefits. This plan includes freelancers, workers in the gig economy, and furloughed employees.
Amount: $500.0 billion – 25% of total CARES Act
This component of the package is aimed at stabilizing big businesses in hard-hit sectors.
The most obvious industry to receive support will be the airlines. About $58 billion has been earmarked for commercial and cargo airlines, as well as airline contractors. Perhaps in response to recent criticism of the industry, companies receiving stimulus money will be barred from engaging in stock buybacks for the term of the loan plus one year.
One interesting pathway highlighted by today’s Sankey diagram is the $17 billion allocated to “maintaining national security”. While this provision doesn’t mention any specific company by name, the primary recipient is believed to be Boeing.
The bill also indicates that an inspector general will oversee the recovery process, along with a special committee.
Amount: $377.0 billion – 19% of total CARES Act
To ease the strain on businesses around the country, the Small Business Administration (SBA) will be given $350 billion to provide loans of up to $10 million to qualifying organizations. These funds can be used for mission critical activities, such as paying rent or keeping employees on the payroll during COVID-19 closures.
As well, the bill sets aside $10 billion in grants for small businesses that need help covering short-term operating costs.
State and Local Governments
Amount: $340.0 billion – 17% of total CARES Act
The biggest portion of funds going to local and state governments is the $274 billion allocated towards direct COVID-19 response. The rest of the funds in this component will go to schools and child care services.
Public and Health Services
Amount: $179.5 billion – 9% of total CARES Act
The biggest slice of this pie goes to healthcare providers, who will receive $100 billion in grants to help fight COVID-19. This was a major ask from groups representing the healthcare industry, as they look to make up the lost revenue caused by focusing on the outbreak — as opposed to performing elective surgeries and other procedures. There will also be a 20% increase in Medicare payments for treating patients with the virus.
Money is also set aside for initiatives such as increasing the availability of ventilators and masks for the Strategic National Stockpile, as well as providing additional funding for the Center for Disease Control and expanding the reach of virtual doctors.
Finally, beyond the healthcare-related funding, the CARES Act also addresses food security programs and a long list of educational and arts initiatives.
Hat tip to Reddit user SevenandForty for inspiring this graphic.
Visualizing the 700-Year Fall of Interest Rates
Could interest rates enter negative territory permanently? This chart plots trend data over 700 years, showing that it could be a possibility.
Visualizing the 700-Year Decline of Interest Rates
How far can interest rates fall?
Currently, many sovereign rates sit in negative territory, and there is an unprecedented $10 trillion in negative-yielding debt. This new interest rate climate has many observers wondering where the bottom truly lies.
Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.
The Evidence on Falling Rates
Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.
Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.
Centennial Averages of Real Long-Term “Safe-Asset”† Rates From 1311-2018
*Real rates take inflation into account, and are calculated as follows: nominal rate – inflation = real rate.
†Safe assets are issued from global financial powers
Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.
The average real rate between 2000-2018 stands at 1.3%.
Why have interest rates been trending downward for so long?
Here are the three prevailing theories as to why they’re dropping:
1. Productivity Growth
Since 1970, productivity growth has slowed. A nation’s productive capacity is determined by a number of factors, including labor force participation and economic output.
If total economic output shrinks, real rates will decline too, theory suggests. Lower productivity growth leads to lower wage growth expectations.
In addition, lower productivity growth means less business investment, therefore a lower demand for capital. This in turn causes the lower interest rates.
Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.
In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.
3. Economic Growth
Dampened economic growth can also have a negative impact on future earnings, pushing down the real interest rate in the process. Since 1961, GDP growth among OECD countries has dropped from 4.3% to 3% in 2018.
Larry Summers referred to this sloping trend since the 1970s as “secular stagnation” during an International Monetary Fund conference in 2013.
Secular stagnation occurs when the economy is faced with persistently lagging economic health. One possible way to address a declining interest rate conundrum, Summers has suggested, is through expansionary government spending.
Bond Yields Declining
According to the report, another trend has coincided with falling interest rates: declining bond yields.
Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.
The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.
In fact, the historical record would imply that we will see ever new record lows in real rates in future business cycles in the 2020s/30s
Although this may be fortunate for debt-seekers, it can create challenges for fixed income investors—who may seek alternatives strategies with higher yield potential instead.
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