TCS Daily


Giving Credit Its Due

By Joshua Livestro - March 16, 2004 12:00 AM

British headline writers are famous for not pulling any punches. The tragic story of Stephen Lewis is a case in point. "Credit 'kills' a family man," the Daily Mail claimed on its front page last week. Lewis, a 37-year-old father of two from Worksop, England, committed suicide -- possibly as a result of his inability to deal with mounting credit card debts. In its editorial ("Killed by credit" -- no quotation marks there), the paper put the blame for this tragedy squarely with "greedy, irresponsible banks and credit card companies" who seemed to have had no qualms about "luring Stephen Lewis into a quagmire." If the financial services industry can't put its own house in order, the paper warned, politicians should be asked to do it for them.

What happened to Stephen Lewis is of course a tragedy. But the invention by the Daily Mail of killer credit cards and lethal loans contributes nothing to our understanding of his misfortune, or indeed of the importance of credit to our economies and societies. Mr. Lewis' death might highlight the need for better financial education -- his was a particularly serious case of a man unable to handle the responsibilities that come with access to personal credit. Perhaps banks and companies would do well to bring information about the right way of handling debt out of the small print and into the limelight.

There can be little doubt, however, that the responsibility for the handling of personal debts should remain with the people who incur those debts. After all, they are the ones who have profited most from the increased access to credit over the last 30 years. Take the example of England, the Daily Mail's home country. As recently as 1970, access to credit was virtually non-existent. At the same time, only 30 percent of all households had central heating or telephone lines. Nearly 40 percent didn't even have a washing machine. Thirty years later, all these items have become standard household goods, not least because of the increased availability of bank loans, credit cards and hire-purchases schemes.

Credit didn't just provide people with new purchasing power. It also provided industry with the capital for further research and development. It's like a virtuous cycle in which increased access to capital by consumers begets increased access to affordable consumer goods and services. As a result, former luxury items like mobile phones, home computers and CD-players have lost their elitist status -- even though their quality has increased dramatically. Ten years ago, no one apart from a lucky few could afford an Internet connection. Now nearly half of all households have one. In that same decade, mobile phones have become essential household items, with almost 70 percent of all households owning at least one cell phone. CD-players, once a toy for the upper classes, can be found in 85 percent of all homes. Access to credit provides people with the means of living the good life.

The doom merchants of Britain's Observer newspaper seem to find this difficult to stomach. In a fit of nostalgia for the good old days of the 1970s (when everybody was equally poor), one of its commentators warned that the growth of the credit industry has "turned a nation of stable savers into a nation of credit-happy consumers, intoxicated by their new purchasing power." He warns that thanks to the growth of the credit culture, total debt now stands at £900 billion -- almost twice what it was ten years ago. It leaves the average Briton with a debt of £5,300. It all seems serious stuff, until you realize that this total debt is less than 20 percent of the total current value of Britain plc. In a recent report, the Office of National Statistics puts a price tag on the whole of the British Isles. The National Balance Sheet showed that by the end of 2003, Britain was worth nearly £5 trillion. It also showed that while private debt has indeed grown over the last decade, the net value of people's homes and gardens have grown even faster. It currently stands at £2.7 trillion, more than double the 1994 £1.2 trillion.

It puts the debt figure in a completely different light. Instead of engaging in "credit-happy consuming", it seems people are simply turning assets into capital in order to invest in a better quality of life for themselves and their loved ones. And in doing so, they are quite capable of distinguishing between essential purchases like food and drink on the one hand and quality-of-life enhancing goods and services like electronic goods and holidays on the other. The former are almost always paid for in cash or by debit card, the latter predominantly by credit card. Credit seems be used by most people as a means of putting the icing on the cake of life.

Instead of taking pot shots at the credit industry, we would do better to recognize its vital contribution to the raising of our living standards. After all, as Hernando de Soto explained in his The Mystery of Capital, credit is the very thing that "raises the productivity of labor and creates the wealth of nations. It is the lifeblood of the capitalist system and the foundation of progress." It is time we started giving credit its due.


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