CREDIT

Credit allowed consumers and borrowers the power to buy something or receive money in exchange for future repayment with added interest. Credit card companies extended credit to consumers that allowed them to be in possession of goods and services before they were paid for. Businesses often purchased their raw materials from other businesses in advance through "trade credit," the most common form of short-term credit.

Credit was extended by individuals, businesses, and governments to pay for a variety of projects or purchases. The provision of credit generated debt that had to be repaid within a specified period of time. To protect themselves from the risk that a borrower might never repay, credit lenders charged the borrower interest. Commercial banks were the most important source of credit in the United States; they had the power to expand the amount of credit available in the economy through their willingness to assume the risk of extending credit to individuals and businesses.

In 1913 the Federal Reserve System was given the power to raise or lower the interests rate that determined how "expensive" it was for banks to extend credit. When interest rates were low, banks were more willing to borrow money from the Federal Reserve, which increased the amount of credit they could extend to consumers and businesses.

The amount of credit extended to consumers and businesses grew enormously in the twentieth century. Credit growth was fueled by the introduction of the credit card and the adoption of sophisticated "credit scoring" techniques that helped lenders analyze the creditworthiness of borrowers. To help fund World War II (1939–1945) and the Korean War (1950–1953), the Federal Reserve imposed "selective controls" on the amount of credit that could be offered to consumers. However by the 1990s the willingness of U.S. lenders to extend credit and of consumers to take on credit debt created a credit crisis. In 1996 a record 1.35 million U.S. citizens filed for bankruptcy, and by mid-1996 U.S. credit card balances had reached $444 billion.

See also: Federal Reserve System