The large number of savings accounts in Europe tells us nothing about how often or how much money is deposited. In Britain, the post office savings bank had 14 million accounts in the 1930s, but many of these saw no activity once they had been opened. Regular saving fitted neither working people’s wallet nor their mentality. Wartime savings campaigns had little lasting effect. Mass Observation noted after the Second World War how ordinary Britons continued to take a cyclical, short-term attitude to saving, tied to ‘the cycle of the year and its seasons, spring-clean, summer suit, autumn holiday, Christmas party’. Saving was about scraping together a few shillings for a dedicated, short-term purpose, not a gradual build-up of wealth. As the investigator noted, ‘this tradition becomes a difficulty when large amounts are required to be saved. Saving is a matter of shillings, spending a matter of pounds.’47
‘Temptation resisted and hope rewarded,’ was how Samuel Smiles, the Victorian champion of self-help, summed up the ‘practical wisdom’ of thrift.48 By the 1950s, and with the full support of governments, savings promotions increasingly lured citizens with cars, TVs and holidays. Self-control was now about resisting small temptations to afford big-ticket items. In Western Europe, barely emerging from the rubble of war, savings banks worked hand in glove with manufacturers in special promotions that gave families the chance to buy a sofa on credit as long as they had saved a third of the price.49 Savings campaigners built on the new culture of credit, which had rebranded consumption as investment. Buying consumer durables was investment, not spending. This rhetoric was particularly important in fast-growing countries like Finland, where peasants turned into industrial workers in little over a generation. Saving grafted a new, urban consumer culture on to a rural ethos of thrift. In a 1952 book, Prime Minister Urho Kekkonen asked whether the Finnish nation had the patience to prosper. High inflation and low rates of interest meant old-fashioned saving made little sense. Instead, Finns were urged to invest in their home and appliances. The new national hero was the ‘target saver’, who had a monthly portion of his wages deducted for a radio, furniture or a trip to Paris.50 In societies undergoing rapid modernization, saving campaigns were a Trojan horse for the world of goods (see Plate 54).
The decisive change between the first two thirds of the twentieth century and the last had to do more with the radical turn-about of state action than the habits of their citizens. Put simply, saving required states to have a project, such as war or modernization. In the 1970s–’80s, states lost that sense of purpose, and with it the will to compel their populations to save. The new mantra was to treat citizens as adults and let them to spend and borrow as they saw fit. A UK parliamentary committee in 1971 put the new orthodoxy plainly: ‘our general view is that the state should interfere as little as possible with the consumer’s freedom to use his knowledge of the consumer credit market to the best of his ability and according to his judgement of what constitutes his best interest.’ The state might use ‘persuasion to influence the scale of values implied by their expenditure patterns’, but it ‘remains a basic tenet of a free society that people themselves must be the judge of what contributes to their material welfare’. To restrict their freedom in order to protect a ‘small minority who get into difficulties’ was misguided.51 Here, in a nutshell, was the rationale for credit liberalization, fifteen years before Margaret Thatcher’s ‘big bang’ threw open financial markets more generally.
The decline in saving, which began in the 1970s and then progressed in earnest from the 1990s, has not been a peculiarly American or Anglo-Saxon disease. Finns and Danes, for example, have consistently saved less than Anglo-Saxons since the 1970s. In Germany and Belgium, the household saving rate stubbornly stuck at 9–13 per cent in the 2000s. In Japan, Italy and the Netherlands, meanwhile, the decline in saving has been at least as pronounced as in the USA, Canada and Britain.
Are Danes and Italians saving too little, or are Germans saving too much? The answer can be found only by viewing saving alongside credit, income and assets. For a family without any security, not to put aside some money might be foolish. For another, with a low-interest mortgage and a pension fund, it might be far less so. A rising credit-card bill is a drop in the ocean for households enjoying rising incomes and property values. In Britain, for example, the gross household saving ratio fell sharply from 11 per cent in 1992 to 2 per cent in 2007, and the ‘mean’ unsecured consumer credit had risen to £10,000 when the 2009 Great Recession hit – that is, as many households owed less than £10,000 as owed more than that. Mean mortgage debt stood at £100,000. These are large figures, but they were dwarfed by mean housing and pension wealth, which was over £200,000.52
Economists, by and large, turn to two models to explain what has happened to saving: the lifecycle and the permanent-income hypotheses. Both saw the light of day in the 1950s; Franco Modigliani articulated the former, Milton Friedman the latter.53 For Keynes, the primary motive for saving had been almost irrational pride: to leave a bequest for posterity. Emerging data showed this did not square with reality. People were saving for their own future, not just for their descendants, Modigliani pointed out. They adjusted their consumption over time to get the most out of life (to maximize a stable utility function, in the language of economists): saving more when they were young and had few assets, building up wealth in their peak-income middle years, and then ‘dissaving’ and selling off assets during old age. Friedman, similarly, stressed that people took a long view. How much they consumed depended not on their disposable income at that moment but on what they expected to earn in the future.
Both models took for granted that people were able to build up wealth and make rational, long-term decisions about saving, borrowing and spending. The lifecycle model would have been of little use to earlier generations stuck in a revolving door and condemned to live from hand to mouth. Since the 1970s, these hypotheses have faced a number of challenges. The bequest motive, it was recognized, did matter and could not be written off altogether.54 So did the precautionary motive for saving. In Germany, the elderly kept saving much more than the lifecycle model predicted, while in the US workers were saving surprisingly little for retirement.55 The permanent-income hypothesis, meanwhile, was broadly right about the very long run but had little to say about fluctuations in consumption in the short run. Variations between countries posed a further dilemma. The lifecycle hypothesis explained why growth and saving were related; since consumption is assumed to depend on lifetime, not current, income, in periods of high growth the young were getting richer than their parents and so the share of saving would rise over time. The decline in saving since the early 1970s broadly followed what the model predicted, but it was a mystery why the USA, with 2 per cent growth during 1960–85 – where thirty-year-olds could look forward to having double the lifetime income of a grandparent – ended up with the same age consumption profile as Japan, where growth was more than double that and a similar young adult could expect to be four times as rich as a grandparent.56
The problem with the permanent-income theory is not that people do not factor in their future earnings, but that they do not always see their whole life ahead of them.57 They make decisions looking ahead only to the next phase. The future is intermediate and seen in little chunks. And whether it looks rosy or bleak depends on the formative years that came just before. A large-scale survey following German savers between 2003 and 2007 found that those born between 1966 and 1975 saved much more than those born a decade earlier.58 This generation entered the labour market in the mid-1990s at the very time when the pension system was reformed. Uncertainty about future security, reinforced by the spread of low-paid, part-time jobs, prompted them to tighten their belts and keep them tight, even once conditions, objectively, improved. Such cohort effects are an important piece of the German saving puzzle.
In the world at large, however, savings took a nosedive in the 1980s and ’90s, as cheaper credit instruments were rolled out and people began to look beyond saving for thei
r future security. Why stop and save, if it was possible to step on the credit escalator and move up, borrowing against future earnings? Pension plans, shares and bonds and, especially, rising property prices all made saving less relevant.59 Once of interest to a small elite, the movement of stocks and real-estate value became the breakfast reading matter of the middle classes. Financial products multiplied in leaps and bounds. In the early 1980s, there were thirty-six types of mortgages on offer in Australia: by 2004, an aspiring home-owner could pick from among 3,000.60 For many, the mortgage took the place of the savings account.
It was in this period, too, that personal banking and credit cards started to reach the poor as well as the rich. The escalator of consumer credit switched gears and got more crowded. To move, it needed the prior bancarisation of the people, in the apt French term. In 1966, fewer than two in ten French adults had a current account: ten years later, it was nine out of ten. In earlier generations, lenders had exercised a moral check on the borrower’s character and the purpose of a loan. By the 1980s, such paternalism was dead. ‘NatWest can give you a personal loan to take to the sales – after that you’re on your own,’ as one British bank advertised the new spirit of choice.61 Rising incomes and deregulation encouraged a search for customers. In Britain, the number of people with credit facilities tripled between the mid-1970s and the mid-1990s.
All this does not automatically mean Americans and Britons forgot about saving. It depends on how we measure it. By one estimate, the US saving rate would shoot up from 5 per cent to 10 per cent in the 1990s if capital gains from dividends, interest and rental income were taken into account. Nor does it automatically mean that people save less because they are addicted to consuming more and more. In Britain, the saving ratio was falling between 2000 and 2008 but so was consumption’s share of GDP – because people’s disposable income as share of GDP was shrinking.62
The popular icon of this evolutionary burst was the credit card. Gold, silver, platinum or red (to support the fight against AIDS and malaria), it came in all colours. Revolving credit – the ability to borrow without the need to repay the loan in full at the end of the month – advanced most rapidly in the Anglo-world. In the United States, Citibank launched its credit card in 1961, shortly followed by American Express, but these were for an elite. Credit rationing by class and race remained the norm. It was in the 1990s that risk-based pricing systems delivered unsolicited credit-card offers not only to low-income families but to ‘children, dogs, cats, and moose’, as Alan Greenspan told the US Senate Committee on Banking during the hearings on his nomination as chairman of the Federal Reserve in 2000. In 1970, only 17 per cent of Americans had a credit card. Thirty years later, it was 70 per cent. In Britain, the number of credit cards in the 1990s jumped from 12 to 30 million.63
Revolving credit mattered because shopping with ‘plastic’ changed shopping behaviour. Already in the 1950s, American department-store managers noted how store cards encouraged customers to shop more frequently, although it did not lead them to spend more per sale than those using a thirty-day charge account.64 Credit cards did this on a bigger scale. In Britain, outstanding consumer credit as a share of consumer expenditure jumped from 8 per cent to 15 per cent in the 1990s. Arguably, there is a connection between having a credit card and buying more stuff. The uptake of credit cards has, however, remained uneven. Almost nine out of ten Brits, Swedes and Dutch had one in 2004, but only every second Italian. It is also worth pointing out that a high number of credit cards is not only related to a higher propensity to shop but also to higher overall access to banking and assets. Britons, often charged with credit bingeing, also had more life-insurance policies, private pension plans, bonds and interest-bearing deposit accounts than the average European.65
Credit cards are sometimes held up as symptomatic of spendthrift Anglo-Saxons vis-à-vis more frugal cultures elsewhere. This is a distorted reading of the evidence. The democratization of consumer credit and rising personal debt in the 1990s and 2000s have been global phenomena. In virtually all developed societies, personal debt jumped to record highs. Some simply started out from a lower base than others; one exception is Japan, where households carried a high burden of debt to begin with and kept it constant. Borrowing on ‘plastic’ is a small affair compared to overall consumer credit; even in the United States at the height of the credit boom in 2008, credit cards amounted to merely 8 per cent of lending for home purchases. That the French, Germans and Japanese use plastic less frequently than Americans, Britons or, for that matter, the Dutch and the Swedes – and tend to pay back their monthly balance in full when they do – does not mean they do not borrow. They simply use other channels of credit such as personal loans (France), instalment plans (Germany) or cash advance and borrowing from shinpan kaisha, consumer finance companies (Japan).66
The interesting contrast between countries lies less in the growth of personal debt than in its composition. As a share of disposable income, total credit in the Netherlands and Denmark doubled between 1995 and 2007, reaching levels that make American households look positively restrained; Danes are roughly twice as deep in debt as Americans. Virtually all of it was for mortgages, however. Credit for goods and services made up a higher share in Britain and Germany (15–20 per cent); in Poland and Austria, it reached 40 per cent of total personal credit. Mortgages, then, make up the bulk of consumer credit, but they do so to a larger or smaller degree. It is a common misunderstanding to presume that because renting is widespread in the Netherlands and Germany, mortgage debt must be smaller, too. Land and property costs much more in Maastricht and Munich than in Missouri, which means that those Dutch and Germans who buy a home carry a disproportionately large burden of debt. The big difference between the Anglo-world and the rest in the 1990s and early 2000s was that, for the latter, unsecured credit (plastic, instalments, loans) shrunk as a share of private debt. It took the 2008–11 contraction of credit for this to happen in the US and Britain.67
Debt does not exist in isolation but must be related to wealth and income. A $1,000 credit-card statement will terrify the pauper but hardly bother a prince. How much assets households sit on, sadly, is not a straightforward matter, as many found out the hard way when the bubble burst in 2008–9 and homes were found to have been seriously overvalued. The escalator of credit stalled. Behind the world recession lurked two larger imbalances of credit. One resulted from a historic realignment between private debt and income, most pronounced in the United States. For a century, roughly from the 1870s to the 1970s, Americans borrowed more and more, but they did so on rising incomes and assets. The big spurt in instalment plans and cash loans in the 1930s was offset by net increases in assets and, indeed, savings.68 Default was not a problem in the booming 1950s and ’60s. Wage stagnation since the 1970s changed that. It was then that America turned into a ‘debtor nation’.69
The second imbalance was a global one between nations such as the United States and Britain, which loved to buy on credit, and countries such as Germany and China, which loved to sell them cars and clothes but did not like to buy much in exchange and, instead, locked their earnings away in savings. It is an interesting question whether it is more foolish to consume too much or too little. That the Japanese needed to spend more and save less had been a staple of American diplomacy in the 1980s. What made the global imbalance trigger a crisis in 2009 was that debt in the meantime had become a global market. Banks channelled excess savings from one side of the world back into sub-prime mortgages on the other. It was like pouring oil on fire.
Notwithstanding the severity of the world recession, it is important to view the story of debt in the longer context of wealth accumulation. The 1980s to the early 2000s – that is prior to the sub-prime real-estate bonanza – saw real gains in net worth. By 2001, households in the United Kingdom and Japan owned six times as much net wealth as they owed in liabilities; in Germany, it was five times; in the United States, four.70 The 2009–11 crisis may have wiped off a few years
of inflated gains, but it did not cancel the longer rise of wealth built up over decades. Personal debt continues to be dwarfed by private wealth and the more so, the richer the country. Tellingly, the 2004/5 European Social Survey found that British, German and Scandinavian households suffered less from financial stress than their poorer neighbours in Portugal, Greece and Eastern Europe.71
The revolution of personal credit advanced furthest in the Angloworld with the introduction of second mortgages and home-equity withdrawal in the 1990s and 2000s. The home was turned into a cashpoint. Historically, this was a radical conclusion to twentieth-century developments which put the private consumer on a par with the business creditor. And it wasn’t only that private credit assumed a greater share of credit overall. Consumers started to be treated as miniature businessmen with the right and ability to cash out all their assets to finance other plans; the extension of economic theory to marriage, divorce and childrearing – most famously by the Chicago Nobel Prize-winner Gary Becker in the 1960s – and the treatment of households as units of production and consumption was one part of this broader shift.72 Age-old distinctions between fixed and mobile wealth were swept aside. Why should brick and mortar be treated differently from, say, a car or jewellery? Why prevent consumers from tapping into the housing wealth they had built up to spend it on something else? For centuries, republican writers had idealized the home as the anchor of citizenship and community in a restless world of commerce. Now, in the Anglo-Saxon world, the anchor was cut loose. The home was swept away by an international market in credit and debt. Beginning in the 1970s, home-equity refinancing was given a boost by Ronald Reagan’s 1986 Tax Reform Bill which with one hand gave tax privileges to ‘second mortgages’ and with the other took them away from all other types of loan. The cheapest point of credit was now the home. In most of continental Europe, by contrast, the home stayed put in its own legal and material zone. Instead of promoting the easy flow from one sphere of credit to another, France, Germany and Italy retained firewalls between them. Mortgages continued to require considerable down payments of 20–40 per cent – one reason why people saved so much in these countries. Flexible mortgages and easy refinancing remained foreign words.
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