Why are Americans so hooked on spending money they don't have?

We seem almost addicted to paying with credit cards and letting the bills pile up. But our spendthrift habits are actually quite recent.

In Colonial America, for example, personal debt was viewed as a moral transgression. Those who resisted the seduction of material possessions proved their "worthiness" for otherworldly salvation by accumulating rather than spending their wealth.

The rise of industrial capitalism in the mid 19th century reinforced working class attitudes toward saving. In the new and uncertain economic order, an increasingly urban work force employed a variety of informal credit systems (fraternal organizations, extended families, shopkeepers) and continued saving. This was essential, given inevitable spells of unemployment and personal crises such as health problems, widowhood, and retirement. In the absence of social welfare programs, "saving for a rainy day" was the most reliable strategy for avoiding poverty and the social shame of the poorhouse.

Birth of a credit economy

At the turn of the century, a rising standard of living -- increasingly fueled by credit -- contributed to the expansion of the US consumer economy. But the very act of borrowing demanded a new form of labor discipline. Americans who failed to demonstrate a reliable work ethic were denied access to loans. During this period, the company store became the embodiment of credit as a form of social control.

During World War II, "old school" attitudes toward saving and debt reached their apex. Fearful of the devastating experiences of the Great Depression and determined to support America's military forces through consumer rationing and the purchase of war bonds, the nation's personal savings rate soared.

Fast-forward to the early 1980s and the onset of banking deregulation. Following the 1981-82 recession, national "money center" banks faced mounting losses on Third World, residential, and commercial real estate loans. Deregulation also ended their access to cheap depositors' funds in the form of fixed passbook savings rates. Even their credit card divisions suffered: Citibank logged more than $500 million in credit card losses between 1979 and 1981. But before long, a sharp decline in inflation and advances in computer processing technologies dramatically increased the profitability of "revolving" consumer loans. Seeing their opportunity, banks flooded the market with easy-to-secure credit.

These offers of easy credit -- arriving by the fistful in our mailboxes -- have continued to seduce consumers. With household income stagnant since the mid-1970s and continued disruptions to employment due to industrial restructuring and recessions, Americans increasingly have relied on "floating their debt." The rapid growth of credit card debt has been fueled by aggressive marketing campaigns. According to the National Directory of Advertisers, the combined annual marketing budget of the big three (Visa, MasterCard, American Express) had reached nearly $900 million by the end of the 1990s, up from only $75 million in 1985.

Americans have become so hooked on "consuming" that credit card profits have propelled an extraordinary consolidation of the banking industry. In 1977, according to the Credit Card Industry Directory, the top 50 banks accounted for about one-half of the credit card market. Today, 10 banks control over 80 percent of the credit card market.

The new math

Meanwhile, the dramatic increase in "revolving" debt underlies a profound shift in how we borrow. No longer an earned privilege, credit cards have become a social class entitlement: humorously called "Yuppie Food Stamps." Not surprisingly, "net" credit card debt has climbed from about $51 billion in 1980 to over $615 billion in 2003, according to the US Federal Reserve; penalty fees have jumped from $1.7 billion in 1996 to $7.3 billion.

Such numbers explain the sharp increase in the industry's profits, 20 percent in 2001, according to the Credit Card Industry Directory, with an impressive return on assets of almost 4 percent -- the highest since 1989. Overall, according to US Federal Reserve data, three out of five US families have credit card debt. The average "revolving" net balance of the debtor households has surged from over $10,000 in 1998 to about $12,000 in 2002.

Today, as public debate rages over how to increase the personal savings rate, it has continued to plummet -- from a post-war average of about 8 percent through the late 1980s to less than 5 percent in the mid-1990s and then to 2.8 at the end of 2000. (The 2000 rate would be even lower had the US government not changed the definition of personal savings in 1998 to include more household assets -- thus showing our savings rate deceptively on the upswing.) This compares with 11 to 15 percent rates in countries such as Germany, Japan, and China.

In 1997, when the Smithsonian Institution unveiled its new Discover "affinity" credit card, their marketing campaign had the nerve to quote our most famous American skinflint. "Ben Franklin [said] A penny saved is a penny earned," read one promotion. "But now a penny spent can earn you free US Savings Bonds."

Ben Franklin would roll over in his grave if he knew that his moral advice was being used to discourage "old school" values of self-discipline and thrift to promote "new school" values of self-indulgence and debt.

Furthermore, at an Annual Percentage Rate of 19.9 percent, most account holders would have had to spend hundreds of dollars in order to "earn" their reward of a $50 savings bond (worth about $25). Such is the "new math" of our credit card nation.

Robert D. Manning is the Caroline Werner Gannett Professor at Rochester Institute of Technology and author
of "Credit Card Nation."

This story ran in The Boston Globe on 06/29/2003.