In this show I talk with Dr. Louis Hyman, a consumer credit historian. We talk about the history of debt relief.
He points out that the process of intervening in the debt of consumer began way back after World War I with the advent of new consumer debt opportunities. It does not matter if it was the refinancing of debt into small loans the debt consolidation loan was seemingly born the day after the first installment loan was born.
New immigrates to America in the 1920s migrated with little possessions and needed to purchase household items and this led to the flourishing of installment loans to buy good.
It wasn’t until after World War II that may disreputable debt poolers or debt adjusters seemed to be exploding. By the 1960s the National Foundation of Consumer Credit, the forefront of Consumer Credit Counseling Services, was formed to bring community budget advisors and non-profit groups together to intervene with consumers.
Dr. Hyman is very critical about the formation of the National Foundation of Consumer Credit and what he feels brought them together to flourish.
We continue our discussion with an extended discussion of the moral versus business realities of debt and credit.
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Steve Rhode: Hi. This is Steve Rhode, Your Get Out of Debt Guy from http://www.GetOutOfDebt.org, and you’re listening to The Get Out of Debt Guy Show. Today we’re talking with Dr. Lewis Hyman about the history of debt relief and when people started getting involved in helping consumers with problem debt. We hear so much on the news or through television commercials about all sorts of companies that will intervene between the consumers and their creditors, but when did that all start? If you just started noticing those commercials, you might be surprised by the long history of debt relief. Let’s go.
Steve Rhode: Well, I’m back again with Dr. Lewis Hyman, who is my favorite debt historian, who – Lewis, you – were you trained at Harvard, or were you teaching at Harvard?
Dr. Lewis Hyman: I both trained and taught at Harvard.
Steve Rhode: Okay. My favorite Harvard-trained debt historian, and we’re back today. We’re gonna talk about the history of debt relief. Lewis, people think that when they see these late info night – late night infomercials or they see ads on TV, that debt relief is something that’s just new – it’s only popped up in the last 5 or 10 years. In fact, you and I both know that it goes back, at least as far as my research goes, back into the 1940s, and helping people to get out of debt is nothing new, is it?
Dr. Lewis Hyman: No. No, Steve. It has a much longer history than you would think just by watching late nigh infomercials, which make it seem as if this is a new phenomenon. In fact, in all aspects of the way in which we think about debt, we think that debt is a new phenomenon, but it’s – has a very long history.
Steve Rhode: Just this morning I published a little thing from 1963 talking about debt adjusters and debt lumpers and the – and it mentions the outrage of the national press at that time of organizations that were taking advantage of consumers by promising them some type of debt relief, and yet the consumers were being sued by their creditors. So, in your history, what do you show back as the beginning of intervening in debt and consumers getting in trouble with it?
Dr. Lewis Hyman: Well, I think if we’re gonna talk about debt relief, first of all, we should take a step back and think about what it means to be relieved of one’s debts. Obviously, the easiest way to be relieved of your debt is to pay it back with your wages, but, of course, that is usually the trouble we all face when confronted with our debt. Now, another way to pay off your debt is to refinance, and like these sort of debt relief organizations, we think refinancing is very recent. But refinancing begins with the legalization of debt right after World War I. So, right from the get go, people were turning certain kinds of debts into other kinds of debts.
For instance, in the 1920s, we have, for the first time, small loans being legalized, which are like payday loans today or small loans from banks. What did people use these loans for? Mostly, to consolidate their other kinds of debt. What other kinds of debt did they have, Steve? They had debts to grocers, debts to shopkeepers, but, most importantly, debts on installment credit. People used installment credit to buy – their biggest purchases with installment credit were – was furniture. Before IKEA, before Craigslist, furniture was very expensive, and you had to borrow a lot of money for it. But if you didn’t pay your debts on time, it could be repossessed, and, suddenly, you’d be sitting in an empty apartment.
Now, these small loans, these were forms of what’s called unsecured debt. That is, you would be lent the money, but there was nothing they would take from you. They couldn’t repossess it, unlike furniture or installment credit, which was secured debt, so they could repossess these items from you. Unsecured debt, like credit cards today, is more – is riskier than secured debt, but it also allows for the borrower to have the certainty that their possessions won’t be taken away.
So, right from the beginning, there was this way in which different forms of debt, like the secured and unsecured debt, small loans, and installment credit, were turned into one another, and I wrote about this in my book. And this is sort of the beginning of the system of debt relief and refinancing. Now, a lot of the history of debt in the 20th century, then, is turning one kind of debt into another debt – installment debt into small loans in the 1920s or credit card debt into home equity loans in the 1990s and today. And for all of these kinds of transformations of debt, it results in benefits for the consumer – for the borrower.
All of them have lower interest rates. Debtors have more security of their possessions. And this is quite different than what we see with debt relief offered by these so-called credit counselors today and in the past.
Steve Rhode: It’s interesting that it was almost as if it was, “Welcome to America,” you stepped off the boat in Ellis Island, and the first thing you had to do was – ‘cause you came with very little, you had to buy a buncha stuff.
Dr. Lewis Hyman: That’s right.
Steve Rhode: And so, merchants made it very easy back then for people to get into some type of installment credit because there were people that wanted to buy stuff but didn’t have the cash on hand. So, it started – I guess that’s the American tradition.
Dr. Lewis Hyman: Yes. There’s a long tradition of dreaming of the good life. What are we but the promise of the good life in America?
Steve Rhode: So, with easy debt and easy credit, at some point, there came I – what we’ll call debt adjusters, and in this article I published today, it was called debt lumpers, which is my favorite term, but people who—
Dr. Lewis Hyman: It is a great term.
Steve Rhode: —people who wanted – who stepped in to intervene between consumers and creditors when consumers were having problems. When did that happen?
Dr. Lewis Hyman: That happened – it began in the 1950s. So, although we think of today as when we all came into debt, and our parents and grandparents tell us that we – that they never borrowed money at all. In truth, Americans borrowed a lot of money, particularly beginning after World War II, and after – in that moment after World War – in that moment after World War II, debt relief organizations begin to pop up across the country. And, as you see in your article, that – people begin to worry about what the real purpose of these debt relief organizations are because they seem to take the money of borrowers and not seem to pay off their debts. They act as these sort of dubious middlemen.
Steve Rhode: Yeah. The national publications—
Dr. Lewis Hyman: And by the mid—
Steve Rhode: The national publications are surprised that they’ve made false promises.
Dr. Lewis Hyman: Yeah. Yeah.
Steve Rhode: And they’ve profited themselves from intervening in this debt. But you were saying?
Dr. Lewis Hyman: Oh. Yeah. Even by the mid 1960s, as a way to avoid government regulation, they create a formal organization called the National Foundation for Consumer Credit, and the National Foundation for Consumer Credit sounds like it’s some kind of think-tank. It sounds like it’s some kind of pro bono organization, but what it actually is is a trade association of these debt relief companies so they can gather, trade information on the best ways to carry out their business, and to have a voice to speak with against government regulation.
Steve Rhode: Now, these days, NFCC is the champion of nonprofit credit counselors, but back in the history was there any evidence that it was nonprofit or charitable in that time, or was it for profit companies that banded together?
Dr. Lewis Hyman: They embraced both nonprofit and for profit companies, and so, if you look at the groups of people talking at their associations, which I would not recommend – it is incredibly tedious reading, even to the professional historians – you can see that they actually talked a lot about how to be profitable, how to get money out of debtors and make money off of creditors, to act as this middleman between borrowers and lenders, as well as there were – not to make it all sound like it was an evil conspiracy of profit. There were nonprofit organizations, but in the end, these groups were not as prominent in the organization as the for profit organizations.
Again and again, the – people at these – the National Foundation talked about the importance of educating consumers about debt. They made it a question not of conditions under which a debtor might have gone – might have lost their job or gotten sick or borrowed or been tricked into borrowing, but about how ignorant the debtor was. It goes back – again and again, back to how ignorant debts are, ostensibly, about what they’re doing wrong rather than chance – things in the economy they have no control over. Now, as a teacher, of course, I think the value of education is very high, but educating about debt once you’re in it, is not worth as much as you might think. These are situations that you can’t be educated out of. You can’t be educated out of not having a job. You can’t be educated out of getting sick.
Steve Rhode: So, what other evidence – historical writings – have you seen that talk about consumers being taken advantage of by debt adjusters? Have you read about or studied situations where consumers were paying fees to others to intervene in their debt?
Dr. Lewis Hyman: Well, it’s really interesting, Steve. I haven’t looked at the contemporary records, but if you just look at the records of the National Foundation for Consumer Credit in the 1960s, you can see how they took advantage of people, just very publicly, and telling each other how to do it more efficiently. Perhaps we should talk a bit about how this was done in the past.
Steve Rhode: Yes, please.
Dr. Lewis Hyman: And then, you can talk about how it compares with today. So, the debts that a lot of the clients of these companies had were not from the corner grocer, but from big companies, like JCPenney or GMAC. They weren’t ignorant, broke people unable to get a loan, yet there was a refrain by these debt relief people that the debtors were in debt because they were ignorant. They would talk about, for example, how debtors couldn’t spell numbers. So, because they couldn’t spell numbers, they couldn’t write checks to their creditors. Therefore, they were in debt.
Steve Rhode: That’s pretty ignorant.
Dr. Lewis Hyman: Now, I imagine – yeah. It – there is – there are a lot of – millions of Americans who can’t spell, but they’re in elementary school. Right? This is not the way to create an industry. Right? It can’t be that there are so many people who can’t spell numbers that, suddenly, an entire industry pops up. It has to be the economy. It has to be the structure.
Steve Rhode: Well, call me cynical for a second, but what you’re saying sounds like it is a misdirection against what the reality of the day is.
Dr. Lewis Hyman: That is how I interpret it – that this discussion of blaming the debtor, rather than talking about why people end up in debt and what the situation is that they are actually intervening in as middlemen, really points the blame in – to the debtor, rather than to the structure of the credit relationship itself.
Steve Rhode: Is there historical evidence that shows that this group was attempting to defend consumers and intervene against debtor practices, or was it all trying to fix it after it already happened?
Dr. Lewis Hyman: Well, it seems like they were definitely trying to intervene and educate people about debt ahead of time. There’s lots of outreach programs to schools and churches and business groups and community organizations, and you also see the similar thing among repo men, so that groups that were in charge of tracking down debtors, repossessing, they also had similar outreach programs to schools and churches and things like that. But the truth of the matter was that they weren’t really effective. And I can’t help – and perhaps I’m too cynical – but read it as evidence that they knew that they had to do this for PR purposes. And they realized that if they didn’t do it, they would seem like bad people, but in the end, it wouldn’t affect anything at all. Their business kept growing year after year. Even if they told someone not to do it, they would continue to do it, and there were forces at work larger than they were.
Steve Rhode: One of the things that I’ve heard is that in the early days of the association, that it was actually organized or funded or founded, in part, by creditors themselves. Is that true?
Dr. Lewis Hyman: That may be true. I don’t know about the particular history, but there is – it would make a lotta sense to me because – we should talk about how this worked then. So, when a business – when a lender makes a loan, they don’t expect to get all their money back. They charge you some rate of interest that will cover their risk of not being paid back.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: Now, that part that is not paid back is out there. It’s money on the table, and that’s where these debt relief agencies come in. They say, “We can collect this debt.” They’re another form of repo man with a friendly face, claiming to be your friend, but they’re just another form of debt collection agency with the appearance of being an educational agency. And so, they take that money off the table and give it back to the creditor, of course, taking their cut. In this period, it was about 10 percent.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: They took about 10 percent of the debt in return for collecting it from the debtor.
Steve Rhode: All right, Lewis. Hold that thought. You’re listening to The Get Out of Debt Guy Show. We’re gonna take a little break. We’ll be right back.
Steve Rhode: Welcome back. This is Steve Rhode, your Get Out of Debt Guy. Today, we’re talking with Dr. Lewis Hyman, a credit historian, and we’re chatting about the history of debt relief. Before the break, we were talking about credit counseling, but let’s take a closer look at other groups that stepped in if you could not pay your bills. Some of these groups were called debt lumpers, debt adjusters, proraters, and others. I don’t think there’s any dispute that when there’s money involved, some bad people will come out to play, and history shows us that debt opportunists are nothing new.
So, let’s get back with our guest, Dr. Lewis Hyman. What about other types of debt relief intervention – people that stepped in and said that they could hold your creditors at bay? Have you come across in your research any other – like the early advent of, say, a debt settlement company or, as I said before, the debt lumpers? What was going on back in—
Dr. Lewis Hyman: Oh. Absolutely. Yeah. So, many of these people within the Foundation were, in fact, these debt lumpers. So, that’s what they did. They would step in when you owed money to a creditor. They – and then, you would send them a check every month or every week or give them money every month or week.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: And they, in turn, would pay off your creditors. So, in turn, then, this intermediate group would negotiate with creditors to reduce your debt or just to pay it off or to structure it in some new kind of way, and they would take a cut of the money – 10 percent. And sometimes, they made the debtor pay the 10 percent, and sometimes they made the creditor and debtor split it. But in every case, there was a charge, and they always made money on this – money – they always made money on the debt that they themselves had never lent.
Steve Rhode: Now, in the 1963 preamble to the North Carolina legislation, it says, “Debt adjusters and their businesses and practices are known by several names: proraters, debt poolers, debt managers, credit counselors, budget systems, funding agencies, debt liquidators, and debt lumpers. And these practices have grown to such proportions that, for the most part, they have become a national menace preying upon unfortunate people and harassed debtors, and those engaged in such practices, except for a few, have engaged in false advertising, have falsely held themselves out as being competent and able to solve debt problems, regardless of any and all circumstances.” So, besides this group – this association, NFCC, have you seen in any of your research in looking back alongside of ads for installment credit – have you –do you remember seeing ads for, “We can get you out of debt”?
Dr. Lewis Hyman: Oh. Yes. This goes back to the 1920s – people talking about debt consolidation. Debt consolidation was the most frequent use of small loans in the 1920s. This has a very long history, but what is new is the smiling face of the friend – the smiling, friendly face of the friend that is the debt reliever in post war America. That’s what – that’s what’s new about the 1940s. Before then, it was very transparently someone just giving you money to settle your other debts, and what becomes – it becomes this – these groups to – that appear to be your friend trying to do you a favor, but, in fact, are just taking your money.
Steve Rhode: All right. Well, what do you predict – using your historical crystal ball, what do you predict for the future? Is it gonna change?
Dr. Lewis Hyman: I think as long as people borrow, they’re gonna need to refinance, and I think that until people are made aware of the other alternatives, such as conventional borrowing to pay back their debts, these people are still gonna intercede – we need to educate people about the real options that they have and not let them think that there’s only solutions offered by late night television. After all, Slap Chops are great at 2:00 AM, but when you sit up worrying, you need something better than a Slap Chop to find a new way to cut up your debt.
Steve Rhode: Do you see any possible way that consumers can resolve their debt and not feel bad about legal solutions, like bankruptcy? It seems that, historically, on one hand, credit counselors may or may not have done a good job, but it seems that their very existence has been to kind of put a face on, “Avoid bankruptcy,” and, “Bankruptcy is bad,” when, in fact, bankruptcy is the only legal solution to solving unmanageable debt. Is there a way that you think that we can undo that history and remove that stigma?
Dr. Lewis Hyman: I think you’re right, Steve. I think they’re turning – they’re trying to turn a business decision into a moral decision. That’s what they talk about constantly – that we need to save American values. They need to save American values by helping people repay their debts. But when we turn business into morality, all choices – all reason – go out the door because you have to be moral. Right? You have to be a good person. There’s right and wrong. But being moral is an end in itself. It’s not a means to an end.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: Businesses don’t make moral choices. They make rational choices.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: And they know that some people will not pay them back, and that’s risk. That’s not morality. It’s business, but in getting everybody to pay back through this morality, what if morality becomes just a way to help business – a means to an end. Then what is morality anymore? Debt relief operates in the shadows, claiming to be moral and educational. But it’s really a business picking up the scraps left behind, seeking out the highest risky people in a desperate situation and trying to form a relationship of trust, and then, they take their money. So, what is that morality? What is that—
Steve Rhode: I understand completely, and on one level, it’s somewhat painful for me to listen to because, at one point in my life, I founded and ran a credit counseling agency. And I thought when I did that, that I was really helping people who were in a very difficult situation, but the more I was involved in the industry, the more disturbed I became because I saws that it was about collections and quotas and special payments for meeting collection targets, and I got out. I couldn’t do it anymore, but the pervasiveness of it being an assistance to consumers even affected me.
Dr. Lewis Hyman: Well, it’s a hard place to be. I think that we all need to have a job somewhere. Right? I’m sure you need a job to pay your bills, and – but what it’s really about is that individuals are not creating this. It’s about the relationship itself. It’s about the credit relationship, and we need something bigger than you or me to step in. And we need a way to get the word out that there are other ways to resolve credit, that it’s a business decision, that it’s not a morality play, that people are not bad people for being in debt.
They are at the whim of forces – I mean, sometimes people borrow too much, but, for the most part, people are good people. They borrow in good faith, and then, something happens to them. And they do need a way out, and that way out is bankruptcy or a restructuring of their debt or something else. What is bad about some of these for profit debt relief companies is that they take advantage of people in their time of need while pretending to be their friend, and, for me, that is the most immoral thing of all.
Steve Rhode: The misdirection of, “Repaying your debt is moral,” has seemingly only held back American citizens from pushing forward any additional legislation which allows them any sort of power or control to intervene with their creditors. For – I lived in England for a couple years, and over there there are a number of different tools other than bankruptcy where consumers can put forward fair and reasonable repayment offers. But none of that legally exists in America today. It seems as if the perception is that credit counselors fill every available niche – or debt relief companies – every available niche outside of the one legal solution, which is bankruptcy.
Dr. Lewis Hyman: Well, in America we tend to believe that people are who they say they are, and we tend to believe that the market can provide all the solutions we need and that we don’t want a big government. And there’s a lot of reason to have that belief, but, certainly, in this situation, we are a little guy facing a giant company. There’s no possible way you could have as much power or knowledge as the big guy, and that imbalance – that inequity – is what you’re seeing here.
Steve Rhode: In your early records that you have, was there talk about putting forward national legislation, or was it only talk about how to form an association and self-regulate?
Dr. Lewis Hyman: There have been numerous attempts to regulate debt relief agencies over time and to talk about ways to regulate the ways in which money gets – some form of debt gets turned into other forms of debt.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: But, fundamentally, it’s very difficult to regulate because debt is, at root, cash. It’s money, and money can become whatever you want it to be. So, if you try to regulate – for instance, in 1986, they passed the Tax Reform Act of 1986, which got rid of the deduction on all forms of consumer credit interest, except for mortgages. Up until 1986, you could deduct any form of consumer credit interest – your credit cards, your car – off your taxes.
Steve Rhode: Yes.
Dr. Lewis Hyman: They regulated it so that it became just mortgages were deductible, and, suddenly, home equity loans exploded. Home equity loans exploded because they could pay other forms of debt.
Steve Rhode: Mm-hmm.
Dr. Lewis Hyman: That – because cash is cash is cash. And so, when you try to regulate debt or regulate the way in which forms of debt are refinanced, it’s very tricky because you can’t just control it. It pops out of your hand.
Steve Rhode: In the – I guess the point I was tryin’ to get at with that question was is there any evidence of the debt adjusters back in the day trying to push forward new laws that would give consumers power over their creditors, or was it all just about forming a trade association?
Dr. Lewis Hyman: I – oh. I see what you mean. Sorry about that. I have not done a lot of research into that. I am sure that if – it’s a totally viable topic of inquiry, but I haven’t actually looked at all the legal regulation of debt relief.
Steve Rhode: Okay. All right. That’s fair. Well, it’s always pleasure talking to you because people think this is all new stuff, and it’s not. It’s just cyclical stuff. So—
Dr. Lewis Hyman: It comes again and again, and there are changes.
Steve Rhode: Lewis, I appreciate your time, and I thank you so much. And I’m sure we’re gonna be talkin’ again soon.
Dr. Lewis Hyman: That would be great, Steve. Thanks so much, and please check out my new book that’s coming out, Debtor Nation: The History of America in Red Ink, available in Barnes & Noble and http://www.Amazon.com.
Steve Rhode: And, in fact, I just – for the record, I wanna say I’ve already preordered my copy. I’m just waiting for it.
Dr. Lewis Hyman: Oh. Thanks so much, Steve. I appreciate it.
Steve Rhode: So, look at this. I know you, and I’m waiting for it. So, I can’t wait for it to come out because I really think it’s a book that a lot of people that read my site and who I talk to should read. It’s very important stuff, and thank you for writing it. And you’ve got another one coming up maybe. Right?
Dr. Lewis Hyman: Yes. Next fall I have another book coming out that’s on this history of morality in debt in America – the intellectual history.
Steve Rhode: We’ll have to come up with some clever title for it, like Debtor Nation: Part Two, or something. Thank you for spending some time with me and learning more about debt and getting out of debt.
Debt is nothing new, and neither are all the lessons we’ve learned, forgot, and now fighting to relearn about how to deal with debt problems. Looking back in time is eye-opening because it helps us to see what has been tried before, and, hopefully, we’ve learned not to repeat those same mistakes again.
Did you like this show and wanna hear more? Just subscribe via iTunes, or subscribe to the free RSS feed from the http://www.GetOutOfDebt.org site. You’ll find the links for all of this on the right-hand side of the site. Do you have a question you’d like to ask? No problem. Visit http://www.GetOutOfDebt.org and follow the links to ask your question online.
A new week is upon us, and I can’t wait to see what happens this week to change the face of getting out of debt and debt relief services. It’s never a dull time when it comes to getting out of debt. Thank for joining us. This is Steve Rhode, your Get Out of Debt Guy, urging you to practice safe debt till we meet again. Bye for now.
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