A Basic Understanding of Credit Goes a Long Way

Ben Franklin’s Advice to a Young Tradesman may seem trivial to anyone who has the most basic understanding of financial or economic theory. Amazingly, if more of the current generation were to read and heed its message, our society would not be in the precarious condition we are. The counsel is simple: be fiscally responsible. Unfortunately American (not to mention European) households, businesses, and even our Federal Government have neglected to do so. For too long people have abused access to credit to live beyond their means, building up incredible amounts of debt that they cannot pay off.

Franklin wrote “Money is of a prolific generating Nature. Money can beget money, and its Offspring can beget more, and so on”. Possessing money has benefits beyond its current value as investing in anything from a capital that can increase business revenue, pay off immediate debts to free up cash to continue operations or loan out at a higher rate can yield a net profit. However, if loans are not used properly, the reverse is true. Debt naturally accrues over time if not reinvested, and the amount owed will increase.

Over time, especially in recent generations, credit markets have developed with modern markets. It has allowed small businesses to be established and families to buy homes without immediate cash because their future income streams will provide the necessary funds to cover the cost. In many senses it has vastly increased the current standard of living, but if the recent recession has demonstrated anything it is the danger of our inability to properly plan for the future. Families bought homes they would never be able to pay for because of adjustable rate mortgages they did not understand, governments have promised benefits to satisfy the current generation without regard to the cost it would have on the future to engender present political support, and creditors stood to gain on mounting interest payments. They never perceived of an inability to collect because newer loans could be obtained to pay current obligations. When credit froze, the whole system nearly shut down. The basic concept had been forgotten and institutions became over-extended. We became lazy, assuming that because we could obtain money, we were obtaining wealth when all we were really obtaining was insurmountable debt. The attitude that “The Way to Wealth…depends chiefly on two Words, INDUSTRY and FRUGALITY” was ignored. Spending grew, savings became negative, and rather than wasting “neither Time nor Money”, huge populations did both. Franklin’s message needs to be circulated once again for its simplicity and value to rekindle the fundamental necessities of hard-work and industrious nature as the proper qualities of wealth accumulation.

The Delusion of Franklin-era Capitalism in 2011.

I recently had a political-philosophical conversation with a friend who informed me that he was simply too meritocratic to believe in any system other than Capitalism. While I acknowledged that Capitalism might (emphasis on might) be the best system anyone has yet come up with, to label it “meritocratic” at this point in our history seems like a bit of a misnomer. Sure, someone from a difficult background who works particularly hard may “pull themselves up by their bootstraps.” But for every unique case like this, there are many more cases of socially advantaged people who work very little and do well and socially disadvantaged people who never stood a chance. Before someone labels me a Marxist, I am not advocating the end of the system, just suggesting that we see our current Capitalist apparatus for what it really is, flaws and all.

Pieces like Ben Franklin’s “Advice to a Young Tradesman, Written by an Old One” seem to serve as something like Creation Mythology for a nation that still desperately clings to the idealized notion of meritocratic Capitalism. In this piece, a successful old man gives a young man advice on how to succeed in the business world. The nuggets of wisdom sound a lot like what your grandfather might tell you about succeeding in life: “Time is money…credit is money…pay punctually…appear a careful as well as an honest Man.” The old man ultimately advises that the “Way to Wealth…depends chiefly on two Words, Industry and Frugality.” The reader is to believe that if you do these virtuous things and live a prudent life, you will find financial success. This may have been true in Colonial America where everyone was new to this hemisphere, and access to opportunity was essentially equal. However, a lot’s changed in the last 250 years.

Markets grow more complex, income inequality rises, and how well you do in the Capitalist system becomes increasingly about where you were born and to whom, as opposed to whether or not you stayed long hours at your corner shop. However, we as a nation can’t seem to get the picturesque economic image that Ben Franklin paints out of our collective consciousness. It is much easier to believe that such a meritocratic system, so ripe with American values, exists, as opposed to examining the mess we call our financial system in earnest.