Debt Isn’t (Necessarily) Dumb

I should have been thrilled to get off the 2008 real-estate Titanic just as it sank, but all I could see was a life raft shot through with holes.

I’d pulled the trigger myself.

Earlier in life, I had eked out scholarships to a tiny junior college. My parents said they could afford the rest. Someone let slip “the rest” meant the ungodly sum of $2,000. I knew they didn’t have that, so I went to the financial aid office and signed up for student loans. I was nineteen and felt very grown up. Then, for real college and graduate school, I did the same.

When I looked up from our near-death experience in home ownership, we were carrying almost $70,000 in student loans, most of it mine. You don’t get a degree in liberal arts to Go Ahead in life. I’d spent most of the money on dorms and beer living expenses and deferred the payments. This, oddly, my peers described as “normal.”

The financial class that saved us preached that borrowers were slaves to the lender. I could feel the chains. No sooner did we unload the moving van after selling our home in ’08, than we taped clip art $100 bills, 20 to a page, on the refrigerator. Every $100 paid down we colored in with green marker.

We ate beans and rice. We drank water. We sold Christmas presents on eBay (sorry, Mom). Cash gifts from family went straight to the loans. My wife took an extra job. I moonlighted with corporate carpet cleaners after dark. We moved chasing cheaper rent. It ran us ragged, but one by one the green bills filled in. Whenever a whole page turned green, we ate out and split an entrée.

Years passed. The green marker ran dry. Then, out of nowhere, we were crying in the car outside a bank depositing the last of the money. We were debt free, and we were never, ever going back.

We went back.

The second go-round, though, was different.

Poor people have twin assumptions about debt, peasant mentalities tucked into cultural corners, relatively unchanged since feudalism. Debt is a coping mechanism. It takes you nowhere and isn’t supposed to. If it works, it keeps you stuck. Debt is financial nicotine. Every drag extends its stay.

The second idea continues the logic. If you want to move ahead, the first thing to ditch is debt. Decent competency is a measure of success the poor can see from where they stand. Sure, it takes self-denial, hard work, and time, but you can imagine yourself owning a home and a car with no payments and probably know someone who does.

When I set off to research the financial advice everyday people used to Go Ahead, this is precisely what I expected to find: a long backstory where debt was evil, rare, and relatively recent. I thought I would find people living debt-free lives, working tirelessly to avoid the snares lenders laid in their paths. In my mental model, people in the olden days knew better than to borrow $70,000 for useless degrees. The ancient ways would be better.

I was wrong.

* * *

Most of America was bought on credit.¹ It was impossible to live without it. In a rural nation where everyone got paid at harvest, credit allowed seed, tools, wagon wheels, girls’ dresses, and men’s whiskey to change hands without resorting to fisticuffs. Even the money people paid with were paper slips of credit: bills of sale on unharvested crops or just shinplaster tokens to a local store. People paid with debt. The unit of account was dollars, but butter, bacon, and barley were what eventually changed hands. Many people went years running debts and paying down accounts without once touching a gold or silver coin. The story of a cash-only, debt-free, rugged-individualist America is entirely fictional. Without debt, Americans would have starved.

When debt is everywhere, refusing it seems silly. In history, literally everyone was doing it. What’s the problem?

Enter a strong contender for the personal finance GOAT: Benjamin Franklin. He is the most quoted American ever. Franklin’s essays are the most widely shared financial advice in American history.² You probably read these when Coach assigned them in eighth grade. (In an odd statistical anomaly, one in three history teachers’ first name is Coach.³ There is actual research on this.) The most memorable are Poor Richard’s admonitions to wake early, work hard, and that it is better to “go to bed supper-less, than rise in debt.”

Franklin feared bad habits: borrowed money gets spent on crap you don’t need. His Way to Wealth is directed at shoppers waiting for an annual discount blowout sale. Everyone was “offered, by the terms of this sale, six months credit . . . What madness it must be to run in debt for these superfluities?” Franklin’s sermon against buy now, pay later could just as easily have targeted companies like Klarna and Afterpay.

The excuse for debt was that no one had enough money. But the more “real” money Americans got, like the greenback, the more debt they took. General Motors started selling automobiles on credit in 1919. At century’s end, GM made more profit lending on cars than building them. By 1998, there were more credit cards in America than citizens.

The easier it got to pay, the more people bought. In the 1990s, two professors held an auction for Boston Celtics tickets.⁴ Half of bidders were required to pay cash in twenty-four hours, the other half could use plastic. Credit-card bidders bid double. That was before you could pay with your phone. Researchers at UNC–Chapel Hill recently found smartphones increased spending an additional 4 to 10 percent⁵ because, and this is truly mind boggling, using a physical wallet adds ten extra seconds of time to think.

The great trap of consumer credit, as Franklin understood, is that it distracts from winning the game. Debt is a trap: it locks you into right now for a long time. It’s hard to take big risks sitting on a couch you’re paying 21 percent interest on. If you want to Go Ahead, ditch the consumer credit.

* * *

So, debt was bad, right?

Not exactly.

The wisest Founding Father sure borrowed a lot of money for a guy who would rather starve than owe.

Young Ben Franklin got his lucky break when a friend named Vernon asked him to visit New York City and pick up debts owed to said Vernon. Franklin promptly ran out of cash and started spending the money he’d been sent to collect. It took six years for him to confess and even longer to pay it back. When he started his printing business, his partner’s father loaned them four years’ pay. The people who sold him the equipment also did so on credit, then sued Franklin for not making his payments. To resolve the lawsuit, he borrowed again, this time from friends. Benjamin Franklin got his start by going deeply into debt.⁶

This is why Advice to a Young Tradesman says nothing about staying out of debt, but a lot about how to get more. Franklin’s goal wasn’t getting rid of credit, but to build such a sterling reputation that people loaned you a lot. “He that is known to pay punctually . . . may at any time, and on any occasion, raise all the money his friends can spare.”⁷ Debt created discipline: industry and frugality were not optional, because laziness ruined your rep. The first rule of credit was to never lose it.

This theme runs throughout American debt history. If you didn’t start out rich, there weren’t many ways to build a business without it. Puritan Cotton Mather preached a thirty-page sermon (church took longer back then) on how to use debt well. The leading business newspaper before the Civil War explained that credit in business was “what cream is to a nice cup of coffee:”⁸ harsh without it, but too much ruined everything.

One of the greatest rags to riches Americans of all time, a one-eyed uneducated sailor named Stephen Girard, spent twenty-five years as the richest man in the nation.⁹ Girard’s first ventures took on insanely high leverage. After he scored big, he slowly de-levered until he carried $1 of debt for every $2 of equity. It worked. Historians judge him the fourth-richest American to ever live,¹⁰ ahead of Henry Ford and Bill Gates.

Read the biographies of most famous entrepreneurial founders and at some point, usually in the early chapters, somebody else’s money shows up. It may be family, friends, or banks (and very often in-laws). Increasingly in the tech boom, it’s angel investors trading cash for equity. There are, of course, exceptions. Sara Blakely, who invented Spanx, built the whole thing from scratch on a shoestring cash budget. Dave Ramsey’s EntreLeadership program teaches small-business owners how to scale without debt. There are people who do this and do it well, but they are the exceptions that prove the rule.

* * *

It wasn’t just the 1 percent using leverage to Go Ahead. The primary business investment of American families was the home. From productive farms or suburban split levels, borrowing made most Americans’ longest stride forward possible.

From Iowa to the Dakotas, the land was often cheap but the seed and equipment to make them work required taking out loans. Only one in three American homes had a mortgage as late as the 1920s, but that stat is deceptive. Mortgages got paid off as quickly as possible. They were entrance fees, not life-long burdens. Even where the land was free, typical farm families took out mortgages between $500 and $800¹¹ to get their start. That is around $25,000 adjusted for inflation, interestingly close to today’s median student-loan debt burden.¹² Borrowing the startup costs for Us, Inc. has a long history.

The numbers have now flipped. Only one in three homes do not have a mortgage today. Why? The answer lies in one of history’s truly new, and in this case peculiarly American, revolutions: the long-term, fixed-rate, amortized mortgage.

An amortized mortgage is paid down with each payment. A fixed interest rate means the payment never changes. Earlier loans did not have these features. They required huge down payments (40–50 percent), short terms (one to five years), and payments changed at renewal.

FDR swept into power with a plan for mortgages with (gasp) fifteen-year terms, fixed rates, amortized payments, and low upfront costs (20 percent). These numbers only got better over time. Today, down payments can be as low as 3.5 percent and loans last for thirty years.

The cumulative effect of these mortgages is an American superpower. By locking in an interest rate, buyers can refinance if inflation goes down but are never forced to refinance if it goes up. Canada, the UK, Sweden, and most places in the world do not have this privilege. Their rates rise with inflation.

The Super American Mortgage is a leveraged play against inflation. It is a bet against the dollar, which historically loses about 3 percent of its value every year. You effectively sold the dollar short—leveraged five to one—and locked in the gains for half your lifetime. Every other such speculative investment requires a massive net worth and a very big margin account on the Chicago Board of Trade. You get yours at any bank in the country. Plus, it comes with a good school district.

Meanwhile, the paid-for home is a poor man’s strategy in a rich world. The areas of the United States with the lowest rates of mortgage debt are also the poorest, and vice versa. The most paid-for houses in the country are in West Virginia. Globally, Europe, yes Europe, has a higher percentage of debt-free homes than the United States, led by Romania at a shocking 96 percent free and clear. Romania is beautiful, but not awash in six-figure jobs.

For everyday people, American real estate and the fixed-rate mortgage have been like a pulley on life’s ladder, making each step up faster and easier. Being able to risk a very small loss (the down payment) for a very large gain, American families became land speculators en masse.

* * *

Before we go all “Ode to Joy” on debt, it’s worth remembering how emotional owing is. The strategies of the poor, to wallow in debt or get out altogether, highly correlate to good sleep.

We’ve seen Ben Franklin. But why don’t you know Richard Anderson?¹³ Like Franklin, he was very good at getting into debt, but very bad at getting out. The reason his name is not in your history books as vice president or even president is very simply that he died from debt.

Anderson was obsessed with real estate speculation. He bought everything that came to market. His star was rising, and his finances should have, too. Congressman at twenty. Friends with President Monroe. A shoo-in for Senate if he ran. But he didn’t run. He couldn’t afford to.

“I have borrowed of A for a few days—then of B to pay A, then of C to pay B,” reads his diary from 1817. Unable to sleep, he penned panic attacks in cursive letters. “My debts must be paid. My debts must be paid!”

Seeking a way out, he begged political friends for a good-paying government job. There was only one, minister to the newly formed nation of Colombia. Big title, big pay. Everyone who heard told him not to go. He didn’t speak Spanish, and every other American sent to Colombia so far had died. He went and died, too—killed by credit (and malaria). Debt is powerful. Dangerously so.

* * *

Americans encountered three types of debt. Debts of desperation, dumbness, and determination.

Desperation has its own sad history.¹⁴ Medical bills were a leading cause of bankruptcy as far back as we have records. When a child absolutely must see the doctor, most families sacrificed their ladder up to build a bridge to survival. These debts and their aftermath are tragic, though less tragic than the doctor not coming or the NICU not existing. When my brother was born prematurely, the bill was so large my mother still remembers sitting in stunned silence in the kitchen reading it. They took a loan from a Lutheran charity. It took years, they often joked, to own him free and clear. That was a debt worth taking.

Debts of dumbness are different. Consumer credit is bookended by screams against it from Ben Franklin to Dave Ramsey. In between, many Americans put their fingers in their ears and celebrated buying things they didn’t need with money they didn’t have. But no one got ahead paying 20 percent interest on last year’s fashion statement.

Some business debts are dumb, too. If you possess even a moderate fortune, like a young Richard Anderson, risking it all serves little purpose.

But if you have no fortune at all, there is far less to risk. Debts of determination, like small-business loans, fueled many climbs from the bottom. The Franklins of the world have nothing to lose but their sleep. Viva la revolución!