Excerpt: 'Beyond Our Means' by Sheldon Garon


From Chapter 11, “There is Money. Spend it”: America Since 1945:

“There IS money. Spend it, spend it; spend more.”

—Ford in Shakespeare’s Merry Wives of Windsor, Act II, Scene 2

Q. Mr. President, I would like to ask you a question about what people should do to make the recession recede.
Q. Buy what?

—President Eisenhower’s News Conference, April 9, 19581

Japanese and Chinese  leaders were not the only ones to lecture Americans about their lack of thrift. Some Americans too warned of the dire consequences of low saving rates in the United States. Those jeremiads fell on deaf ears. Until recently, that is. In the financial crisis that began in 2007, millions of Americans discovered they lacked the savings to weather the storm. They lost their jobs. They lost their homes.Suddenly Samuel Smiles’s Victorian-era injunction resonated in a different time and place. If working Americans, too, failed to accumulate “a store of frugal savings in prosperous times,” they would be driven into “bad bargains with their masters,” whether employers or mortgage companies.

How did Americans come to be such miserable savers? When I describe the current American predicament to European and East Asian audiences, few have doubts about what went wrong. Americans are profligate. They waste. They’re addicted to credit. They lack “our traditions.” But such explanations are caricatures ignoring a more variegated historical record. When we last left the Americans at the end of World War II, they were good savers. Most had gained access to institutions that made small saving attractive.

However, in the years following 1945, Americans once again diverged from the rest of the world—slowly at first, but with a gallop in recent decades. To explain the low level of American saving, we must consider an array of historical developments that distinguished the U.S. case from economies in Europe and East Asia.

The Decline of “Thrift”

Americans would never again save as they did in World War II. Following victory over Japan in August 1945, Americans spent down savings at a faster clip than at any other time. Personal saving rates plummeted. From 26 percent (1944) they sank to 9.6 percent (1946) and merely 4.2 percent in 1947. Aggregate personal savings fell from nearly $30 billion in 1945 to less than $10 billion in 1947.

There is nothing all that shocking about declining U.S. saving rates after 1945. We’d have been more surprised if Americans kept on saving as fiercely as Europeans and Japanese. Americans saved less because they could. The nation emerged from the war extraordinarily rich when other major belligerents lay stricken. The  United  States held half of the world’s manufacturing capacity and half of its monetary reserves. It had little need to demand austerity from citizens. No bombs had destroyed its cities requiring national savings campaigns to finance reconstruction.  America abounded in capital. While postwar Japan and Germany suffered hyperinflation at war’s end, the U.S. economy enjoyed impressive price stability. The United States simply did not experience the conditions that compelled postwar savings campaigns elsewhere.

Victorious Americans sat down to a well-deserved feast of consumer spending that others could only envy. Pent-up demand was enormous. Between 1941 and 1944, mean family income shot up more than 25 percent adjusted for inflation. The war effort commandeered most durable goods leaving households with large stores of savings. Manufacturers happily prepared war savers for the postwar splurge. At the height of hostilities, a Royal typewriter advertisement offered an interesting take on why the country fought. The war was about securing the right to “once more walk into any store in the land and buy anything you want.” With the return of peace, factories quickly retooled to produce goods for the new mass-consumption society.

What distinguished postwar American consumption patterns was the shift to widespread ownership of consumer durables. These trends first appeared in the 1920s. In the past, noted one Federal Reserve study, businesses owned durable assets and consumers purchased their services. Increasingly families bought those assets outright. It became normal for Americans to own homes rather than rent; purchase automobiles rather than take public transportation; buy washing machines instead of paying for laundry services. The ownership of mechanical refrigerators leaped from 44 to 80 percent of households between 1940 and 1950. Sales of new cars quadrupled from 1946 to 1955. By the late 1950s, three-quarters of households owned at least one automobile.

The postwar drop in saving rates coincided with the decline of promotional activities. Efforts to sell savings bonds at the grass roots became a pale imitation of what they had once been. In 1950 Harold Mackintosh, chairman of Britain’s National Savings Committee, visited his counterpart in the U.S. Savings Bond Division. Lord Mackintosh noted the modest scale of the Treasury Department’s postwar operations compared to his vibrant National Savings Movement. America lacked anything comparable to Britain’s neighbourhood “Street” Savings Groups. U.S. officials, he reported, expressed admiration for the army of British volunteers who went door to door encouraging neighbors to purchase National Savings Certificates. It didn’t help matters that the federal government had cut the staff of the Savings Bond Division to one-fourth of its wartime size by 1947.

The end of the war brought sharp reductions in those institutions that had promoted systematic saving among the greatest numbers. The Treasury Department’s wartime School Savings Program enrolled some 200,000 schools and sold $2 billion in savings stamps and bonds, but many schools dropped the program after the war. The government discontinued sales of savings stamps in 1970. The revival of school savings banks partially filled the void. Pupils regularly made small deposits that were then placed in special savings accounts at the banks. The number of children with such accounts grew during the 1950s. As in the prewar era, however, school savings banks failed to reach most young Americans. School banks claimed only 6.3 million depositors in the early 1960s—not much more than the 4.6 million depositors in 1929 despite substantial population growth. Aside from the geographically limited mutual savings banks, few banks were willing to handle the unprofitable small savings of schoolchildren. Only one bank in the entire state of Illinois reportedly ran a school savings program in 1963. Other banks abandoned student savings, citing large numbers of inactive accounts. By the late 1960s, school savings banks had all but disappeared.

Of more immediate consequence was the precipitous drop in saving at the workplace. As many as twenty-seven million employees had purchased war bonds, week after week. Following the war, participation in payroll savings plans sank to just five million in 1950. Patriotic and peer pressure had eased. The banks might have taken over the payroll savings plans as they did in Japan and elsewhere. In fact few American banks did so. The abrupt decline of payroll savings undoubtedly low­ ered saving rates among ordinary Americans. Experiments today by behavioural economists confirm the positive impact on saving of automatically enrolling employees in 401(k) retirement plans. When payroll savings plans no longer enrolled large numbers, working people likely did not save at comparable rates in the banks.

As Americans savored the fruits of mass consumption, thrift fast lost its cultural cachet. In 1956 the journalist William Whyte complained that “thrift now is un-American.” No longer identifying saving with morality, people “save little because they do not really believe in saving.” The word “thrift” itself had become quaint—as likely to invite ridicule as admiration. The New York Times mocked the American Bankers Association’s Thrift Week in 1954 by trotting out its own set of antithrift homilies. “Thrift is a wonderful virtue,” declared the daily, “especially in an ancestor.”

Nor were the children spared in the culture industry’s assault on thrift. Generations of young Americans have been raised on the Disney film Mary Poppins. Although the story is set in Edwardian England, the movie reflected the emerging consumerist values of postwar America. In the original British novel about the magical nanny, the father (a banker) had been a minor character. In the Hollywood version of 1964, Mr. Banks hogs the stage as the embodiment of all that’s wrong with old-fashioned prudence. Joined by a cast of musty bankers, he encourages his children to experience the joys of saving. For as he sings,

If you invest your tuppence

Wisely in the bank

Safe and sound

Soon that tuppence,

Safely invested in the bank, Will compound.

Michael and Jane will have none of it. Creatures of the new age, the children spend that tuppence. They buy bread to feed the birds—their act of consumption sweetened by generosity. But no longer would the word “thrift” roll off the tongues of Americans, nor would dedications to Prudence or Temperance adorn banks and city squares.

Saving without Sacrifice

This is not to say that Americans stopped saving. One of the nation’s best kept secrets is that people saved greater portions of income during the postwar decades than at any time other than World War II. Ironically, at the very moment America developed into a mass-consumption society, saving became widespread. Household saving rates recovered from early postwar lows. From 1950 to 1990, according to the latest measure, rates ranged between 7 and 11 percent. Continental Europeans and Japanese saved at considerably higher rates. Still, it is remarkable that Americans continued  to engage in small saving in banks, bonds, and insurance—on top of assuming mortgages and buying consumer durables.

How do we explain this? First off, high economic growth in the postwar decades enabled Americans both to consume and to save comfortably. Thanks to nearly full employment and high rates of unionization, prosperity was distributed more evenly than at any other time. From 1947 to 1973, real median family income doubled, while incomes of the lowest three-fifths rose at a much faster rate than those of the top fifth. The high level of income equality contributed to mass saving. Already in the late 1940s, two-thirds of surveyed households were saving. Americans resembled postwar Japanese or West Germans in achieving higher saving rates as real incomes rose, but they differed in one important respect. Unlike, say, Japanese families who typically afforded a television in 1960 by cutting back on vital expenditures such as housing, most Americans could have their cake and save some too.

Just as important, ordinary Americans gained unprecedented ac­ cess to safe institutions that facilitated small saving. Postwar saving built upon the New Deal’s federal deposit-insurance system and the wartime savings bonds program. These innovations smoothed out prewar unevenness in saving based on region, race, gender, and class. America’s Golden Age of Saving occurred neither in Franklin’s time nor in the Victorian era. It materialized a mere two or three generations ago, be­ginning in World War II and ending in the 1980s.

U.S. savings bonds in fact persisted. Small-denomination bonds were how most Americans saved in wartime. In 1945 the $42.9 billion in savings bonds exceeded totals in any other type of savings—life insurance, commercial banks, mutual savings banks, or savings and loan associations. Postwar Americans remained fond of savings bonds, particularly E bonds and the new H bond. While institutional and corporate investors abandoned savings bonds for higher-yielding investments, individuals maintained or even increased their bond holdings in the fifteen years following World War II. The bulk of E bonds purchased in wartime were held not only to the ten-year maturity, but beyond.

The populace also saved at banks as never before. The majority of American families entered the postwar era without a bank account. In 1946, 61 percent of surveyed households lacked a basic savings account, and 66 percent possessed no checking account. Historically commercial banks had not been friendly to small savers. Financial institutions were often inconveniently located, and bank failures in the 1930s had done little to inspire popular trust. Big changes followed the end of the war. Between 1946 and 1960, the proportion of households with savings accounts rose from 39 to 53 percent. It peaked in 1977 at 77 percent. Conversely, ownership of savings bonds declined from 63 percent to 30 percent in 1960. Savings accounts offered certain advantages over savings bonds. Some paid higher interest. Money could be withdrawn from the bank anytime, whereas savings-bond holders received less interest if they cashed out before maturity.

Savings and loan associations emerged as the fastest growing segment of the savings market. Individual savings in S&Ls doubled from 1945 to 1953. Successors to the building and loan associations, the S&Ls specialized in accepting deposits and making mortgage loans. A series of federal interventions supported their expansion. Hit hard in the Great Depression, savings and loan associations gained a new lease on life in 1932. Legislation set up Federal Home Loan Banks, which advanced low-interest loans to the associations to stimulate home ownership. In the postwar years, small savers flocked to the more than six thousand S&Ls. Many of these banks had moved to more convenient locations, and some opened branches. Aggressively advertising, managements engaged in what they called “thrift promotion.” Besides offering school savings accounts, the associations expanded Christmas clubs and vacation clubs whereby depositors saved for short-term goals.

Postwar changes to the federal deposit-insurance system further convinced savers to shift to the S&Ls. Savings and loan accounts were not insured by the Federal Deposit Insurance Corporation. Established in 1934, the Federal Savings and Loan Insurance Corporation provided weaker protections to S&L customers. In 1950–51 Congress strengthened provisions for paying depositors in case of defaults, increasing public confidence in the  S&Ls. Few suspected that  their  accounts were not in fact guaranteed by the “full faith and credit of the United States,” unlike those covered by the FDIC. Still, the FSLIC protected S&L customers for the next three decades. Until it didn’t. But that’s another story.

Moreover, discourses of thrift held their own against the champions of consumption during the 1950s. Make it a “Thrifty ’50,” advertised Minneapolis’s Farmers and Mechanics Savings Bank. The Treasury Department revitalized savings bonds campaigns to “encourage thrift” and “regular, systematic savings habits.” Such efforts resulted in in­ creased participation in payroll savings plans. In 1954, ads for savings bonds appeared monthly in 800 magazines and 50 farm journals, and on 90,000 street cars and buses; 3,100 radio stations regularly broadcast spots for bonds. Supporting the sales efforts were national tours made by “Mrs. U.S. Savings Bond,” the lucky contestant chosen annually from finalists at the Mrs. America pageant.

School savings programs may not have achieved the nationwide coverage we saw in many other societies. Yet where they existed, baby boomers learned habits that stayed with them long after the word “thrift” became passé. In 1951 an estimated  six million  students  attended schools that ran weekly Savings Stamp Days; a total of fifteen million went to schools offering training in “thrift.” School savings banks did best in cities where school systems cooperated with savings banks and other banks. Metropolitan school districts commonly employed directors of thrift education. New York City accounted for one-third of the national total of pupils with savings accounts in 1947. New York State boasted 1.2 million school depositors in 2,203 schools in 1958. Maintaining its dynamic prewar program for Minneapolis pupils, Farmers and Mechanics Savings Bank ranked a close third in total school savings be­hind two New York savings banks. With its incomparable 845 branches throughout California, the Bank of America worked closely with nearly five thousand schools, achieving 1.6 million student accounts by 1963. Decades later one encounters Minnesotans and New Yorkers who insist that school programs started them on a lifetime of saving.

If the passion for “thrift” declined after 1960, the widespread commitment to saving did not. George Katona, long-time surveyor of consumer behavior, was emphatic on this point. Writing in 1965, he dismissed arguments that the nation had lost the will to save because of easy credit or the spread of pension plans. In the minds of “very many Americans, the accepted or desired standard of living consists not only of the possession of consumer goods,” but also of the accumulation of ample reserve funds. Americans, he concluded, were “security-minded” as well as “thing-minded.”

“Buy Anything”: The Political Economy of Abundance

Americans might have saved at rates of 7 to 10 percent indefinitely. But beginning in the 1980s, something snapped. No one factor explains the collapse of household saving in this country. Several long- term developments combined with more recent changes to produce a perfect American storm.

These developments were in large part related to the emergence of consumer spending as the mainstay of both economic policy and popular culture in the United States. In the course of the twentieth century, the U.S. government increasingly promoted consumption, not saving, as the engine of growth. The origins of such thinking are diffuse. Some labor leaders and theorists began arguing for the socio­ economic benefits of consumption as early as the 1880s and 1890s. A better-paid workforce, they reasoned, would consume more, leading to increased production and still higher wages. The business community, for its part, had long insisted that a wealthy economy rested on consumers indulging their desires and circulating money rapidly. At the height of World War I, manufacturers and retailers resisted the U.S. government’s war savings campaign more forcefully than elsewhere. Advertisers in the 1920s discovered ingenious methods to stoke consumer demand, contributing to widespread purchases of home appliances and automobiles.

In the ensuing Great Depression, the most forceful proponents of mass consumption were progressives associated with Keynesianism.

Figure 36. U.S. Personal (Household) Saving Rates, 1946–2010 (Percent of Disposable Personal Income). Source: U.S. Department of Commerce, Bureau of Economic Analysis.

This was, to be precise, Keynesianism spoken with an American accent. Back in England, John Maynard Keynes challenged the conventional wisdom that  saving was always a good thing. In an oft-quoted radio address in 1931, Keynes informed listeners that it would be “harmful and misguided” to save more than usual amid the present downturn. For, “whenever you save five shillings, you put a man out of work for a day.” Therefore, “O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales,” armed with the “added joy that you are increasing employment, adding to the wealth of the country.” Nonetheless, Keynes would never be a champion of increased consumer spending per se. It was “quite right,” he also told his audience, to save more when the economy was not in recession. Above all, Keynes advocated countercyclical policies focused on government spending. In times of deep recession, governments should spend at extraordinary levels to stimulate production, employment, and ultimately consumer demand. Yet in boom times, and especially wartime as we have seen, Keynes favored programs to encourage, even compel greater saving.

American Keynesians, on the other hand, approached saving and spending with exceptional optimism. Although some echoed the master in emphasizing countercyclical policies, many others sought to create a high-growth economy that would be permanently sustained by mass consumption. The words they chose are telling. Visions of “abundance” abounded. These were deeply rooted in images of an America blessed by ample land and bountiful harvests. By the late nineteenth century, many became persuaded that industrialization would solve the age-old problem of scarcity and produce consumer goods for the entire society. The Great Depression did not dash this optimism, but stoked it. The problem was not overproduction, they concluded, but “under­consumption.” And the solution would be to increase “mass purchasing power.” Proclaimed the liberal columnist George Soule in 1932, “everyone ought to have a large enough income to buy what he needs.”

Excerpted from Beyond Our Means by Sheldon Garon. Published by Princeton University Press. Copyright © 2012 by Princeton University Press. Reprinted with permission.