Monetary Interest Paid by Households as a Percent of Disposable Personal Income

Graph #1: Monetary Interest Paid by Households as a Percent of DPI, 1946-2021

Arthurian theory:

Interest cost to households rose from 1% of DPI in 1946 to 2% by 1951. Those costs rose to 3% by 1956, 4% by 1963, and 5% by 1977. That's fact, not theory.

Usually, a normal yearly pay raise is around 3%, they say. But the source graphs behind that claim only go back to 1998. Lacking better data, let's suppose the 3% annual pay increase was typical going all the way back to 1946. 

In 1956 households were paying 3% of their disposable income just to cover their interest costs. In other words, the pay raise that year barely covered the cost of interest. In later years, the annual interest cost kept rising -- reaching 8% by 1986 -- but the old reliable pay raise kept plugging along at 3% annual.

Maybe we should allow for inflation, which started climbing in the mid-60s. Raises would have increased; that's just part of the inflation. Does this affect this analysis? No, because the pay raises are reflected in the "disposable income" numbers, and the interest paid is shown as a percent of disposable income. Inflation did increase our income, yes. But even so, "monetary interest paid" increased faster than income in those years. That's what the graph shows.

Anyway, the inflation mostly impacts the graph (and the economy) after 1965 or so, and by then the annual interest cost amounted to more than four and a quarter percent of income and was still climbing. Even if pay raises amounted to more than 3% annual, the interest paid by households each year increased faster than after-tax income all through the 1950s and '60s and '70s, as the graph shows.

Reviewing what we know, annual interest costs after 1956 were higher than annual pay raises. Interest costs made gains on income every year. So the cost of interest, all by itself, could have been enough to get the Great Inflation going in the 1960s, as people struggled (many even going on strike) to keep their income from falling behind their costs.

Thus the rising cost of finance created the Great Inflation. That's Arthurian theory. Everyone else blames oil or wages.

This same cost problem, the cost of finance, would have affected the business world. One price increase that comes to mind is the 1962 increase by U.S. Steel. President Kennedy was not happy about that one.

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My goal here, as always, is to show that the rising cost of finance is the one factor we can reasonably hold responsible for the decline of the US economy in the decades since the second World War.