THE CREDIT FLOOD: Are Americans In Over Their Heads?

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MANY people worry about the size of the $272 billion federal debt.

But not so many worry over a far bigger U.S. debt: the money borrowed by individuals and corporations (which, incidentally, supports the greatest peacetime boom in history). For houses alone, Americans have gone $84 billion into debt; to expand and modernize, industry has borrowed $200 billion. Altogether, while the national debt has remained near its wartime peak since World War II, private and corporate debt has more than doubled, to a record $330 billion, or $4,000 for every man, woman and child in the country. Are Americans getting in over their heads? Will the boom collapse under the weight of private credit as it did in 1929?

No one knows, because the amount of credit never seems to be too big until after there is a collapse. However, all the evidence indicates that the enormous overall debt is not an immediate danger, largely because the U.S. economy has been growing faster than the debt. Since 1940, public and private debt has risen 195%; national income, on the other hand, has risen 257%. Thus, the total debt last year was only 2.2 times national income, v. 2.7 times in 1940. But on one fact everyone agrees: a debt of that size is only healthy so long as the economy as a whole is healthy.

A key part of the debt problem is consumer credit, because it is so sensitive to shifts in the economy, and can cause quick repercussions on the whole economy when it becomes top-heavy. It includes installments and single-payment loans from banks, pawnbrokers, etc., charge accounts and "service" credit, i.e., money owed to such people as doctors and lawyers, and even unpaid utility bills. Compared to the total debt, consumer credit is small—a mere $27 billion. But it has risen faster than any other private debt (up from $8 billion in 1940), and is still increasing at the rate of $500 million a month. And while total debt is increasing more slowly than the national income, consumer debt is increasing at a far faster rate than the personal income from which it must be paid off.

Installment credit, which accounts for $20 billion of the $27 billion of consumer credit, has grown from $87 a family in 1946 to $305. Almost half of the total has been lent on automobiles alone. About two out of three new autos are bought on credit; more than 65% of all used-car purchases are made on an installment plan. While more than half the nation's families are in debt to some extent, most of them manage to keep their installment debts below 10% of their annual earnings. But one in every ten U.S. families actually owes 20% or more of its annual income before taxes.

On a national basis, consumer credit now represents 11% of total income after taxes. Economists guess that most families can carry a debt equal to 15% of their annual income; hence, consumer credit is not yet at the maximum danger point. But since consumer credit has expanded 400% since war's end, v. only 60% for consumer incomes, the danger signals are flying —and credit men are worried.