It was John N. Bellows, a Detroit classics teacher, who wrote in 1842 that lenders have just as much of an interest to sell to consumers as consumers have in purchasing a service or product on credit. Because of that, he cited in the John C. Bellows Papers, the lender must bear his share of inherent risk that is associated with the new expansion of what was quickly becoming the “credit economy”. Around this time, the morality of debt and the relationship between the lender and consumer in society, legislation, and business shaped the architecture of the debt collection industry we see today.
While the 1840’s certainly was not the beginning of debt (the American Revolutionary War of 1775 was almost entirely funded by an early system of government financing), it marked a change in the way our country uses and abuses debt and crediting that persists to this day. Let’s take a brief overview and examination of the history of debt collection and perhaps in the process identify some commonalities that exist in contemporary society.
As America continued its blossoming industrialization giving birth to million-dollar companies, industries, and individual business owners and business men, the evolution and existence of debt to finance the growth, construction, and businesses that made the U.S. the wealthiest in the world. “Debt”, as we know it today, is simply a vehicle for prosperous economic development and sustainable growth established by the U.S. Constitution. It’s as natural to the business and economic cycle we’re familiar with as are booms, crashes, recessions, and recoveries.
A business man’s written and contractual word to pay back a financial obligation is expected to be as trustworthy and concrete as stone. Contracts that bond a lender and a consumer are as natural and vital to America’s early and mid-periods of industrialization as steel and cotton. Debt collection as an industry and practice was born in the 1700’s, but the standardization and popularization didn’t come until the mid 1850’s, right around the time of Bellows’ writing, when lawyers of lenders began demanding payments from consumers who skipped on their financial obligations, agreements, and contracts.
While the customary practices and tactics among those early debt collection lawyers are today considered to be archaic and ineffective, they were the early foundation of the industry’s work. Often, early debt collectors employed aggressive techniques to collect neglected or defaulting debt payments that sanctioned bullying threats of lawsuits, litigation, and even jail time. While today defaulting on a debt is not a crime and therefore not punishable by incarceration, back then it was common for a lawyer to utilize a “writ of attachment” – a lien to satisfy an owed debt – secured by physical property such as a home or business or in the event a borrower is completely broke, they secured themselves with jail time.
During the standardization period of debt collection, many landmarks were established. Among them included the proposed dissolution of creditor’s rights, published by Hunt’s Merchant Magazine in 1846, that eventually caught the attention of lawmakers hoping to plant some consistency in the debt management industry. The publication suggested lenders and consumers should uniformly agree to securitization, consequences for credit default (which later lead to the implementation of the credit report), and the eventual write-off of bad loans by the lender. This work would later influence many of the credit protection laws active and present today.
A descendent of Benjamin Franklin, Lewis Tappan founded the first credit reporting agency in the 1850’s after failing and breaking a milling textile business by accumulating over $1 million in receivables debt. The Mercantile Agency’s goals were to bring moral regulation and standardization by shared information to help creditors and lenders “judge” just how trust worthy a business man should be when seeking a loan. Their early system was antiquated and for the most part unorganized but succeeded in instituting the mentality among lenders that the history of a consumer is an accurate indication in how they will behave when paying back their future financial obligations. As a result, the need to imprison defaulting borrowers quickly vanished.
In the years following, the economic cycle brought about prosperity and wealth, recessions, depressions, and panic; and borrowing money to finance one’s life went mainstream for Middle America. Mortgages became the standard for home owning and building in the early 1900’s and the creation of the Federal Reserve in 1913 stabilized the way banks fund themselves, consumers, and their business by provided liquidity to a recovering nation following the Great Depression. Bankruptcy bills and legislation, though pondered, enacted, and abandoned many times for decades leading up to the 1900’s, finally took a enduring foothold in American law. The Bankruptcy Act gained momentum and became permanent, still in place to this day, and permitted a formal system for filling both voluntary and involuntary bankruptcy.
Today, the most influential piece of legislation protecting lenders, consumers, and debt collection agencies alike is the Fair Debt Collection Practices Act, first applied in the 1970’s, and undergoes continual revisions (the most recent of which was in 2007 requiring stricter moral standards among the debt collection industry). Usury, the unethical but still legal practice of charging exorbitant interest rates on consumer loans and debt, continues today and is common among payday lenders and the small and micro-loan industry, just as it was 150 years ago.
Other similarities exist today that shaped and fostered the birth of debt in America. In the most general of senses, the purposes and practice of commercially borrowing cash to finance business and supplement cash flow remains uninterrupted. Consumer debt today is more common than ever, with nearly $2 trillion in credit card balances outstanding in 2010, according to reports by the Federal Reserve. Cash and the early liquid currencies and assets of colonial America are still king, while credit and debt is simply a convenient double-edged sword.
The most common similarity between today’s commercial and consumer debt climate and that of early America is that the balance and relationship between the lender and consumer is still a delicate one. Attempts to keep the relationship communal and beneficial for both sides of the fence are today challenged by predatory lending schemes and intentional and strategic defaults on financial obligations from unethical borrowers. The only continuation that’s guaranteed for the next 150 years is the inevitable needs of borrowers, the eagerness of lenders, and a government body that stands between the two in an attempt to keep the symbiotic relationship fair, balanced, and justified.
Photo Attribute: Progress in Action
Data and statistics from Wikipedia.org
John Rainier, Strategy Officer, Deca Financial Services, Deca Financial Services is an accounts receivable management firm.