the american interest for a new thrift confronting the debt culture, institute for american values, barbara dafoe
Frank Capra's 1946 film It's a Wonderful Life is the American Film Institute's pick for the most inspirational American movie of all time. Set in the fictional New York town of Bedford Falls, the story's grand narrative is about the wondrous gift of human life, but its less lofty plotline is hardly much less grand. It's about the travails of George Bailey and Bailey Brothers' Building & Loan, an institution that is an inseparable part of a stable, prosperous and above all virtuous community, as Capra makes clear by contrast with the evil fat-cat banker, Mr. Potter. At the film's climax, George Bailey's Bedford Falls neighbors and customers merge into a single society, grateful, generous and all pulling together in the face of adversity.
In an America just emerging from the cauldron of the Great Depression and the Second World War, no one needed to point out to viewers what a building and loan was or why it meant so much to many small and mid-sized American communities. Everyone understood that thrift was socially constructive, for through the accumulation of individual savings everyone benefited from rising prosperity, better education and hope for a brighter future. What war bonds had been for national security, thrift and home-building institutions were for family security. The social capital created through thrift institutions limited social polarization and marginalized the depredations of greed, so the real small towns of America never decayed into Pottervilles. This wasn't just sentimental bunkum from Hollywood; in 1946, this was as real as a social fact could be.
It's a Wonderful Life still makes for great entertainment, but a hint of sadness pervades viewing the film today in a way it did not sixty, or even thirty, years ago. That is because the American culture of thrift, epitomized by no less beloved a Founder than Benjamin Franklin himself, is at best on institutional life support. Somehow we as a society have managed to undermine a precious social virtue and enthrone what amounts to industrial-scale loan-sharking. In doing so we have undermined a source of America's real wealth and thus put its global leadership at risk. What has happened to America's thrift institutions? How did it happen, and what can we do to recover before it is too late? Then and Now
The United States is experiencing a sharply growing polarization in access to institutional opportunities to save and build wealth. For most of the 20th century, nearly all Americans had access to grassroots institutions that helped them build a nest egg. These institutions included local retail banks, mutual savings banks, credit unions, savers' clubs, school savings-bond programs, building and loan associations, savings and loans, and labor union-sponsored savings plans. Some institutions, such as credit unions, building and loans, and labor union plans, grew out of a cooperative, nonprofit banking tradition expressly created for the "small saver." But even local retail banks offered passbook savings accounts and children's savings programs for families of modest means. Together, these institutions constituted a broadly democratic "pro-thrift" sector of the financial service industry.
In addition to providing opportunities to save, pro-thrift institutions also limited the amount of debt consumers could carry. Banks had strict rules for consumer lending. Americans who wanted to buy a house had to accumulate savings, apply to a local bank, document their credit-worthiness, undergo the scrutiny of the lending institution and usually make a 20 percent down payment.
Lending institutions were likewise constrained by government rules. Federal and state regulations set limits on the interest and fees lenders could impose, and some forms of thriftlessness were outlawed entirely. Lotteries were illegal in all states, usury laws prohibited predatory interest rates, and casino gambling was allowed in just a few venues like Las Vegas and Atlantic City. To be sure, some Americans still borrowed from loan sharks, pawned their wedding rings or gambled away the family farm. But such behavior was disreputable and well beyond the pale of responsible institutions as far as the vast majority of Americans were concerned.
Americans under the age of forty today can only gain knowledge of this reality by reading about it in books, for it can no longer be experienced directly. A thrift sector still exists, but it has ceased to be broadly democratic in its reach. The institutions that encourage thrift have moved uptown, catering to upper-income Americans with an ever-expanding array of tax-advantaged opportunities to invest and build wealth. The potential "small saver" has been left behind as prey to new, highly profitable financial institutions: subprime credit card issuers and mortgage brokers, rent-to-own merchants, payday lenders, auto title lenders, tax refund lenders, private student-loan companies, franchise tax preparers, check cashing outlets and the state lottery. Once existing on society's margins, these institutions now constitute a large and aggressively expanding anti-thrift sector that is dragging hundreds of thousands of American consumers into profligacy and over-indebtedness. America now has a two-tier financial institutional system-one catering to the "investor class", the other to the "lottery class."
The investor class, with ample access to institutions that foster wealth-building discipline, is served by a bevy of insurance agents, tax lawyers, stockbrokers, tax accountants, deferred compensation experts and investment bankers. They are likely to work in organizations with 401(k) plans, profit-sharing, Keogh plans, deferred income compensation and retirement savings programs. The lottery class, on the other hand, works in jobs that offer few pro-thrift benefits. As of 2004, seventy million of America's 153 million wage earners worked for employers without a retirement plan. Rather than being courted by investment firms, they are targets of modern-day, made-to-look-respectable loan sharks. Tens of millions of working Americans who might join the class of savers and investors under more favorable circumstances are being recruited into a burgeoning population of debtors and bettors.