According to Harvard professor James Medoff and financial analyst Andrew Harless, one of the most baleful influences on America’s economic health—and a reason for the declining standard of living of both blue- and white-collar workers—is the moneylending sector, which includes many commercial and investment banks and individual investors. In the authors’ view, the lenders have for the past few decades pursued interests radically different from those of most Americans, with the connivance of a Federal Reserve System run by men who are themselves former investors and bankers. While it is well known that private firms have had an exploitative and impersonal relationship with their workers, few people understand how the lenders exploit the exploiters and make things even worse for the workers at the bottom of the hierarchy.

For many people, corporate debt is a more distant problem than personal debt, which has spiraled to ever greater heights as revolving credit has become a norm of American life. The emergence of a class of people living in perpetual debt is not at all a bad thing for bankers who oversee the use of credit cards. Fully aware of the profits to be made off customers who do not pay the full balance due each month, bankers now offer credit cards to those who in past years would have been considered unacceptable risks. The upshot today is that 90 percent of credit card revenue stems directly from use of the revolving-credit policy. Encouraging this trend has been the change in the federal funds rate which in the 12 years up to 1992 fell from 13.4 percent to 3.5, while the average credit card interest rate rose from 17.3 percent to 17.8. Banks are now able to borrow money at a low rate and relend it at a very high rate.

While there is a high rate of default among those who never should have been issued credit cards in the first place, the losses pale in comparison with the profits made off those in debt. Accustomed to a certain standard of living, many Americans refuse to change their spending habits even if interest rates go up. What the authors call “upwardly mobile interest rates” have resulted in a 900 percent jump in receivables for the credit card industry between 1983 and 1993.

Paralleling the rise of personal debt is the growth of corporate debt, whose effects may not be as visible to the average worker—until he gets his pink slip. As Medoff and Harless put it, “American capitalism has taken on a new look. At one time, it was a system based on owning. It is now a system based on owing.” In 1958, when debt was at a higher level than in any other year of the 1950’s, only 4.6 percent of the cash flow came from interest payments (excluding firms in the business of borrowing and lending money). In 1985, the figure had already gone up to 15.9 percent—in what was the lowest-debt year of the 1980’s. In some sectors of the economy, the figure is much higher—in manufacturing, for example, it had climbed to 36 percent by 1992. Contributing to the rise in corporate debt are tax-deductible interest payments and leveraged buyouts of financially unhealthy conglomerates. Another reason is the dwindling number of top executives who were alive during the Great Depression, when massive debt was usually a sign of certain financial doom. Younger executives have fewer qualms about owing large sums of money.

Whatever the reason for a company’s slide into debt, the upshot is almost always the same—efforts to “downsize” and cut costs by dumping workers and relying on temporary help. Job security is a thing of the past, as is the notion that hard work will lead to a promotion or higher wages. Hourly earnings have fallen steadily in both the service and manufacturing sectors since 1973, and health insurance and pensions are harder and harder to come by. For young blue-collar workers, things are particularly bad, with the goods-producing sector experiencing the biggest decline in real wages. Things aren’t much better for white-collar workers. In fact, a 1994 Bureau of Labor report found that the biggest jump in the number of “displaced” workers was among “managers and professionals and technical, sales, and administrative support workers.” The victims are largely middle-aged white men. Women are insulated by their relatively lower wages and, one suspects, by affirmative action, though the authors do not discuss this.

In our time, Medoff and Harless write, “the needs of lenders have acquired an almost sacrosanct status.” While the Federal Reserve System does much of its business in secrecy—until 1994, it did not even announce its decisions until months after they were made—it does not enjoy the immunity to partisanship that one might imagine. In the authors’ view, the Federal Reserve System is in thrall to the lenders, which is not surprising in view of the backgrounds of many top officials at the Fed—former bankers and investors who may hope someday to reenter the lending sector. “A high inflation rate, even if only temporary,” write Medoff and Harless, “looks particularly bad on the resume of a former Fed governor, especially if he or she is looking for a job in private-sector banking.” It is therefore in their personal interest to keep interest rates and the value of the dollar high.

When appointing a top Fed official, the President often tries to placate the lending class, for if he does not, the appointment may be derailed. Former Vice Chairman Alan Blinder, a Clinton appointee, learned the price of questioning pro-lender policies when many “anonymous sources” within the Fed vilified him so savagely that he left his post shortly after taking it. When Clinton appointed Felix Rohatyn to succeed Blinder, a campaign to derail his appointment was begun by Florida senator Connie Mack. Which isn’t surprising—for percentage of total income represented by direct interest income, Florida ranks third out of all 50 states.

The erosion of living standards can be reversed, but not while the Fed keeps its status as a semisecret body immune to democratic pressures but wielding enormous power (a power recognized by Richard Nixon, who put heavy pressures on his appointee Arthur Burns to keep interest rates down and thus insure plentiful jobs, which would reflect well on Nixon when election day rolled around). The entire subculture of the Fed needs to change, so that the interests of lenders will no longer be the sole concern. Fed officials could receive bonuses for helping to keep employment up, and lenders could be issued inflation-adjusted bonds. But past efforts at reform have faced fierce opposition from a powerful financial elite which milks the middle and working classes and bankrolls our candidates for high office.


[The Indebted Society, by James Medoff and Andrew Harless (Boston: Little, Brow) 241 pp., $24.95]