We have now become a credit obsessed society, we buy everything on credit, be it our house, car, day to day living expenses, or even our whims. However, it was not that long ago there were no credit cards or easy access to money, and people had little to no chance of getting credit to pay for expenses. This leads me to ask the question, did our forefathers have the right idea when it came to credit?
Credit has been around since the dawn of mankind in one form or another, and the concept is simple, you borrow money in order to buy something you want but can’t afford at the moment. It is only within the last 100 years or so, with the creation of credit cards, have we really changed what we borrow money for. Back “in the good old days”, people were taking out loans to fund business ventures or to buy property, yes there were other purposes for loans, but this was the main purpose of them.
The concept of debt has been around for 1,000’s of years, and traditionally you would get a loan from the aristocrats, the extremely wealthy, and sometimes a lending institution. But there were definitely more people than businesses, out there to lend the cash. It is also during these years, our finance system was heavily unregulated with no real consumer protections in place, meaning if you were unable to pay back your debts you were in a lot more strife.
It has not been unusual in history to see you selling your kids, your wife and even yourself into slavery if you are unable to pay your debts. In other time periods, you would literally be thrown into jail, and I am sure we all remember history class where we were taught about people selling themselves into indentured servitude in order to get themselves over to America. This is something that Australia, thankfully, does not have in this modern day.
When it came to borrowing money from a financial institution, they would generally only lend this money if it was for business purposes, and only for a short period of time. Not the 30+ years we have become used to. This was done, as banks had the fear of not getting their money back, leaving them open to the risk of going bankrupt. We have now created a mindset where banks and other large lending institutions are too big to fail, and the government will bail them out if something is to go wrong. Has this led to banks being willing to take more risks in order to charge higher interest rates?
As time has passed, large scale lending has firmly become the domain of banks and other lending institutions, it is now rare to see an individual loan large amounts of money to others unless they are High Net Worth individuals who have ‘Money Managers’. Indeed since the early era of credit, we have seen debt evolve from being a necessary evil in order to purchase land, or growing a business, to now being a thing of convenience and social status. More and more people have become blasé to the amount of debt they take on and the long-term impacts of their financial decisions.
With the attitude change towards debt in the last few hundreds of years, we see more and more people take on high levels of debt which they will never repay. It is my belief today, we have and we no longer see debt as being our fault or even our responsibility; it is our entitlement to have the things we have. We have created this idea, that if you are unable to pay back your debt you will simply declare bankruptcy and be done with it, with little to no consequences, which is completely inaccurate. You can read more about this in my recent blog – Declaring Bankruptcy – A bleak outlook for individuals.
We have to accept, high consumer debt is here to stay, but I believe we should really change our attitude towards debt. I believe our forefathers did have the right idea when it came to credit, but maybe not their practices for getting the money back at all costs!
What do you think, did our forefathers have it right?
Rasad Merchant CPA
Strategy and Business Development Manager & Secretary of the Personal Insolvency Professionals Association (PIPA)
Rasad brings over 8 years’ experience working in the insolvency sector to Debt Cutter, where he is dedicated to achieving peak business performance. With a background as both a trusted business advisor, and as a business owner, Rasad uses his foresight to strategically manage business growth and opportunities.