How the Industrial Revolution created modern debt

February 7, 2012

This is an excerpt from Paper Promises: Debt, Money and the New World Order, published this week by PublicAffairs.

Consumers have always borrowed money from friends, neighbors and relatives. Merchants would not exist without credit; the habit of making debts on a “slate” in the local butcher or greengrocer was still common in the middle of the twentieth century. But the local merchant would normally offer credit only to a known, local customer; serial defaulters, or those deemed to be untrustworthy, would be refused business. In David Copperfield, Mr. Micawber’s failure to repay merchants required him to cadge off his friends.

But the modern idea of widespread consumer credit (in the form of national lenders, credit cards, etc.) really dates to the Industrial Age. A peasant’s income is unlikely to grow over the long term; at best, it will be highly variable, with bumper harvests in good years giving the peasant sufficient income to pay off debt incurred in bad years. But two or three bad harvests in a row could be ruinous.

This point illustrates a wider truth. The granting of a loan requires both the creditor and the debtor to be confident that the latter’s income will grow sufficiently to repay the debt. Think of a retailer that sells a washing machine, or television, in installments. Clearly the customer does not have the money now; otherwise he or she would pay upfront. Moreover, the overall bill, including interest, will be greater than the cash price. So the debtor must be confident that he will stay in employment to pay the larger sum. In addition, he or she will probably be confident that their future income will rise so as to offset the additional interest. A growing economy makes that calculation all the more likely.

The Industrial Revolution changed the pattern of human civilization. It allowed economic growth to expand at a much faster rate than ever seen before. This was probably down to the use of carbon-based fuels (wood, coal and, eventually, oil) to power technologies to replace human and animal labor. This resulted in a substantial increase in productivity.

Think of an economy as a business with inputs and outputs. An agrarian economy is often dubbed a subsistence economy; it takes all the energy of the workers (and their livestock) to produce the food necessary to live. A bull may plow a field, and reduce the effort of the farmer, but it takes a lot of land to feed the bull. The economy (business) does not produce a profit. Carbon-fuelled machines transform the situation. Initially, man naturally exploited those fuels that were easiest to reach; chopping down trees, getting coal nearest the surface and so on. So the output, in terms of goods and energy produced, was much greater than the effort put in.

The movement of people from the land to the new industrial cities also required an agrarian revolution. Those remaining on the land had now to produce a surplus, enough to feed the industrial workers as well as themselves. Fortunately, this happened, thanks to the consolidation of smallholdings, new farm machinery, crop rotation and a host of other small reforms. In turn, these improvements allowed the population to grow.

So we now had economic growth and population growth. The next stage emerged as workers gathered in factories. Initially, the conditions were terrible – long hours, low pay (albeit better than a farm laborer’s income) and non-existent safety standards. In the crowded towns, sanitation was poor, disease spread quickly and life expectancy was severely restricted. But factories made a big difference in that they grouped workers together and made it easier for them to organize in their own interest. That was very difficult for geographically dispersed agricultural workers. Steadily over the nineteenth century, trade unions grew in membership and workers flexed their muscles through strikes. Governments started to recognize their power and buy them off. Bismarck, a hard-headed pragmatist, introduced old-age pensions in Germany as a way of recruiting worker support for the Hohenzollern monarchy.

Competition for skilled workers also drove wages up, creating a new, more prosperous category within the working class. Those with skills and above-subsistence pay were more attractive to lenders.

At the same time, the Industrial Revolution was creating a greater need for credit. Arguably, it started with the farmers. Larger farms, new machinery, new crops – all this required investment, which in turn required borrowing. Farmers would take on this risk if the extra production was sufficient to offset the interest costs. But their calculations depended on modestly rising, or at least stable, commodity prices. It was falling commodity prices in the US in the late nineteenth century that created the support for William Jennings Bryan’s populist crusade.

Industrial workers also required credit. A house in town, however humble, required furniture – beds, tables and chairs. Few could afford the expense upfront. In his excellent history of US consumer credit, Lendol Calder dates the development of installment plans (or hire purchase) to the early years of the nineteenth century. Cowperthwaite & Sons, a New York furniture retailer, was one of the first to adopt the practice. The Singer sewing-machine company took up the idea with enthusiasm later in the century.

The idea of installment plans was far from new; John Law sold shares in the Mississippi Company in installment form. But a system based on regular payments was suited to an industrial age where workers received regular income. Installment selling greatly widened the potential market for a retailer’s goods, and the financing charges more than offset any bad debts. In practice, one wonders if the approach was really that much different from the old habit of allowing customers to buy “on the slate.” Presumably such retailers marked their prices higher to allow for both the time value of money and the occasional bad debts. Psychologically, however, it was an important step forward. Consumers liked the ability to get their goods upfront and found the prospect of a series of small payments easy to swallow, even though they ended up paying more for the goods in the end.

Installment credit had other advantages for the retailer, especially when compared with outright credit. On those occasions when they did default, buyers had usually made several payments, ensuring any loss was limited. In addition, the law made it clear that the seller retained the rights to the goods until all the installments were paid. For the same reason, buyers were reluctant to default, knowing as they did that they would lose both the goods and their cash.

In the twentieth century, manufacturers joined retailers in the installment credit club. The car industry led the way. Houses aside, a car would be most families’ biggest single purchase, and manufacturers would have limited their market had they sold only to those with ready cash. Selling cars via installments had two other advantages. People are naturally cautious when it comes to buying new products – they don’t want to be the family on the block that buys the unfashionable or unreliable model. They will thus pay careful attention to what their friends and neighbors buy. A manufacturer that offers easy purchasing terms may thus establish his product as the main brand; the first buyer will bring in imitators.

In addition, increased production will bring economies of scale. Lower costs can be passed on to consumers in the form of lower prices, allowing the market leader to undercut its competitors. One reason why the Ford motor company lost ground in the 1920s, despite the early success of its Model T, was that General Motors used installment selling to establish itself as the leading brand. A rival Ford plan which gave consumers the chance to save up to buy a car – a sort of “pay now, buy later” – proved to be a flop. Ford was eventually forced to follow GM’s lead and set up its own financing arm. The link between consumer finance and manufacturing was established, and has never gone away.


From the book Paper Promises: Debt, Money and the New World Order by Philip Coggan. Reprinted by arrangement with PublicAffairs (, a member of the Perseus Books Group.  Copyright © 2012.


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Wow. You have your economic history dead wrong, Mr. Coggan — principles more-or-less correct, facts simply wrong.

Fact: the accumulation of surpluses in agricultural economies started in the Neolithic; those surpluses financed, oh, Stonehenge, the Pyramids, the Mayan cities, the Trojan War — any class of non-agriculturalists, and any non-agricultural activity, was supported by surplus produced by agriculturists. How could it have been otherwise?

So the move from subsistence economies to economies which extract and re-allocate agricultural surpluses, which you associate with the 18th-19th centuries, actually happened some five thousand years earlier — not a trivial error.

As to individual households, as opposed to economies: systems which finance peasant production have been in existence since at least the late Roman Empire. All the various forms of sharecropping are a form of agricultural credit, as are the Indian village moneylenders and the parallel figures in other traditional societies.

What I believe you are trying to get at is the development of consumer credit for, broadly speaking, industrial workers. This has nothing to do with subsistence or surpluses or productivity — only with the joint expectation of lender and borrower that continued employment will enable continued debt service. That’s not particularly interesting.

There are plenty of interesting things to be said about the structural shift to an economy which is radically based on ever-increasing consumer consumption, but I don’t think that is your topic.

Anyway, the confusion of a subsistence household — one which eats everything it grows — with a subsistence economy, which by your definition could only be the aggregate of isolated Paleolithic hunter-gatherer bands, leads you into some unfortunate historical bloopers.

Posted by acebros | Report as abusive

Actually, all it takes for a _personal_ expectation of increased income in the future is a good plague or civil war to wipe out the competition. As a recent study at Warwick University showed, the Black Death and the English Civil War both coincided with some of the biggest leaps in per capita income in the whole millennium. No Industrial Revolution is necessary.

Or, since this is the US edition of Reuters, an ever-expanding frontier will do almost as well.

And in any case, there are other things that can cause people with money to start trying to lend it. Such as not having anything else to do with it. In the 15th Century a glut of financial products around Florence gave us the Renaissance. In the 21st, a glut of financial products around New York gave us the current mess. Heigh-ho.

I rather think that I shall not be buying this book.

Posted by Ian_Kemmish | Report as abusive

Ian, it doesn’t even take a plague — just the perpetual optimism of youth. BTW the dramatic rise in real wages after 1350 was first demonstrated before WWI by an English husband-and-wife historian team whose names escape my decaying memory….In any case, Coggan has an interesting topic but he seems to have spun the book out of an evidently fertile mind with not so very much attention to the data. Too bad.

Posted by acebros | Report as abusive

As with all systemic problems, when local banks got big enough to go national and then international greed and profit became more important than helping “store” local successes and make more by lending a portion to others.
Morals and intergrity were used to compare banks not profit, hence decay in the banking industry. Which gave rise to investment schemes with effective lobbying of government ruling bodies.

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