The Impact of Public Policy on Consumer Credit
Interest rates were low as low as 0. It also had access to private capital. Provident issued its own bonds in order to raise capital, and the return on those bonds was capped at 6 percent annually. Provident proved highly successful, and by the early s it was being emulated across the country. In , the growing collection of charitable lenders founded the National Remedial Loan Society to promote the idea of credit as a basis for welfare. By forty charitable loan societies operated in most of the major U. One of the groups that emerged to support the idea of charitable lending was the new Remedial Loan Center of the Russell Sage Foundation, founded in The center was formed to promote the institution of charitable pawn.
One of its first activities was to purchase a large number of bonds in Provident Financial. But its researchers quickly came to believe that Provident and its kindred lenders would not be able to meet the seemingly insatiable demand for credit among U. They concluded that the only means to provide consumers with sufficient access to credit was to harness the power of private lenders. To this end, they lobbied state by state to enact small loan laws that would allow charitable lenders to make loans up to 42 percent per year—the amount that Russell Sage concluded was necessary for profitable small lending.
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They also supported a range of private lenders, including the Household Finance Corporation acquired by HSBC , which discovered that they could profitably make small loans below the proposed 42 percent threshold, and became strong advocates of the Russell Sage reforms. Through a set of state-level struggles to pass the new small loan laws, policymakers and the general public gradually came to see private credit as a legitimate tool for social justice. New private banks emerged that focused on providing small loans. These included the Morris Plan banks, launched in , which grew to branches by Emboldened by the success of the Morris Plan—and the growing perception that small lending filled a genuine social need—the first deposit-taking banks began opening personal lending offices in the mids.
Most prominent of these was National City Bank of New York, which on its launch in quickly became the largest and most successful commercial bank to offer small loans. Arthur Morris, founder of the Morris Plan banks, wrote in What was critical about the French experiments with social credit, and what distinguished them from their U. Unlike the United States, where social credit was conceived as a private-sector alternative to government-financed social policy, the French versions were both funded and managed by the state.
This had implications that extended into the postwar period. State participation reinforced the idea that credit was potentially exploitative, and could only be wielded responsibly by the state. The continued reputational cost of making small loans raised the barrier to commercial bank participation in personal lending. Partly because of the continued taint associated with small lending by private actors, it was not until financial liberalization in the s that French commercial banks fully embraced personal lending.
The main focus of contention in both countries was on regulations that limited the duration and minimum down payment for sales credit. In , to hold down inflation in the context of government spending to finance the Korean War, the United States imposed sales credit restrictions applied under Regulation W of the Federal Reserve Act.
Public responses to the two policies led to different outcomes. In the United States, popular opposition led first to a legislative initiative in that limited Fed discretion to set lending terms, and ultimately in the retraction of Regulation W just a year later. In France, restrictions on consumer lending remained in place, and were supplemented beginning in with a set of quantitative restrictions on the volume of credit each lending institution could offer.
As I argue below, the liberal treatment of consumer credit in the United States was a necessary but insufficient driver of high levels of household credit. In France, by contrast, administrative restrictions on credit terms and volumes directly impeded growth in credit use. I argue that one of the main reasons for these different outcomes had to do with the preferences of organized labor. The labor left in the United States already expressed support for consumer credit in the interwar period. First, after years of wartime restraint, workers aspired to acquire the kinds of new household goods that manufacturers had been promising.
Credit could get them access to these goods quickly. When the French banking executive Boris Mera visited the United States in , he was surprised to find that the largest U. Nearly half of all sales of cars and home furnishings at the time were made on credit, meaning that any restriction in credit access threatened to depress demand and lead to layoffs.
Finally, labor leaders saw credit as a means for workers to carry themselves through difficult financial periods. Credit also proved critical in sustaining workers, especially in the coal and steel mining sectors, through brutal early-postwar strike actions. It is difficult to assess how important strike loans were to the success of labor mobilizations in the s and s. The best-documented cases involved the strikes led by the United Mine Workers against U. Steel and its coal subsidiaries in western Pennsylvania and eastern Ohio and Pennsylvania. Wall Street Journal writer Edward Lally described these strikes, and his reporting on the experiences of mine workers during periods of work stoppage included the household finances of mining families.
His accounts reveal that although strikers had access to several sources of potential public relief, including local charities, poor relief, and food distributed by the Department of Agriculture, they relied first and foremost on credit. The bulk of credit to strikers was store credit. In case of a protracted strike, or set of strikes, the debt burden could become quite high. A decade later, Lally reports that the Union Supply Co.
When United Mine Workers tried to get workers back on strike in the fall of , for example, many were still paying off debts from strikes the previous spring. Some attributed the willingness of local stores to extend strike credit to a fear of retribution. Observing the coal strikes, one observer notes that of the thirty-four families cut off from credit by the Union Supply Co. Local stores were accustomed to providing workers with credit, because work needs in the coal mines varied widely over the course of the year. For company stores, credit typically came in the form of scrip, a company-issued currency that allowed workers to make purchases in advance of their end-of-month paycheck.
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Over time, the steel and mining unions became more organized in their support of strike credit. The first example of explicit union support for worker strike credit in the United States was in the Youngstown, Ohio, steel strike of As part of a union effort to extend the strike, for which employers thought worker support was waning, the Amalgamated Association union agreed to secure an additional nine months of store credit for its workers.
In the steel strikes of , steelworker locals in western Pennsylvania and eastern Illinois prearranged mortgage and debt moratoria with local banks and stores. This turned out to be important in mobilizing workers to strike, since the recession of had left them short of work, and many workers were still repaying loans incurred to cover this down period. When they were unable to negotiate moratoria, union locals would step in to support individual workers who were unable to keep up with their interest payments.
During the protracted Anaconda copper mine strike in Butte, Montana, the local bank refused to foreclose on workers who held mortgages. The position of French organized labor could hardly have been more different than in the United States. For French labor, which participated in the discussions, credit was seen as primarily detrimental to workers. Drevelle, to the CNC:. We are not hostile to credit under certain conditions, but we believe we are in the first instance French; we are not those people from across the Atlantic, where one is practically born on credit, because, if I am not mistaken, in that country, they have births financed by credit.
On the one hand, the short-term benefits of consumer credit could not be denied. It allowed workers to purchase household goods like refrigerators, washing machines, and automobiles. This became especially important with the rise of government-supported home loans that increasingly gave workers houses that they then needed to furnish. Growth in consumer credit also drove a rapid growth in demand for the products of industrialization, especially automobiles and household equipment.
The high demand in turn created new employment opportunities.
Research: The Rise in Consumer Credit and Bankruptcy: Cause for Concern? | C.D. Howe Institute
Despite this apparently virtuous cycle, the left, and especially the labor left, was wary of consumer credit. For labor organizers, it was galling to see hard-fought wage gains lost to high-interest payments on consumer loans. Credit also seemed to have a secondary effect on workers, which increasingly concerned union leadership. Over the course of the s, observers on both the right and the left noted that consumer credit seemed to deradicalize rank-and-file labor union members.
By giving quick access to desirable consumer goods, credit undermined trade union arguments that workers were not benefitting sufficiently from the postwar prosperity. The calming effect of material acquisition by the working classes was seen to promote social and political stability. Consumer credit plays a social, economic, and political role of first order. Bearing up under an accumulation of debts—and the claim on future income that this implied—workers seemed to become more hesitant to risk losing their jobs, and thus less willing to strike.
Most critical was the communist CGT, which from a high point in the immediate postwar years had by the mids lost much of its militant edge. Writing in , one CGT representative to Parliament saw credit as the problem: If French labor was concerned about the effects of worker borrowing, French commercial banks were also not enthusiastic about lending to them. The reticence of commercial banks to make small loans left the consumer lending market to a relatively small set of consumer finance companies that focused on providing sales finance.
Regulators initially viewed these companies—Creg, Sofinco, Cetelem, and others—with skepticism, and they operated at the margin of the financial system. The first major U. By the end of World War II, thousands of banks boasted personal lending departments that offered small loans on interest. Dedicated consumer finance companies, which had dominated small lending in the interwar period, were relegated largely to financing automobile sales.
This difference in the role of banks in consumer lending in France and the United States proved decisive for the trajectory of consumer credit markets in the two countries. One impact was on regulation. As regulators in the early s contemplated credit controls, U. A second and potentially more important impact was on the broad public perception of consumer lending. The central role of U. In the United States, banks engaged in consumer lending tended to be trusted unit banks embedded in their local communities, and they brought deep legitimacy to consumer borrowing.
If banks were willing to make consumer loans, then consumers could assume that they were useful. In France, consumer lenders worked hard to portray themselves as consumer-friendly, but they never gained the respect that bank lending would likely have conferred. Why then did U. For commercial banks in both France and the United States, the central fact of early postwar consumer credit was that it was largely unprofitable.
The problem had little to do with the riskiness of individual borrowers, as later theories of adverse selection would suggest. In fact, most early consumer credit was working-class credit, and the regular wages of workers made them reliable payers. Small lenders did take pains to reduce nonpayment rates.
Early Morris Plan banks in the United States required each borrower to be accompanied by two co-signers. French postwar retail lenders employed either door-to-door collections or relied on the judgment of retailers who were familiar with their customers. Whatever the approach to assessing risk, default rates remained almost uniformly low. The high cost of consumer credit derived mainly from the small size of each loan.
For any lending transaction, the basic administrative cost—including loan application, credit check, bill mailings and reminders, and the associated bookkeeping—were essentially invariant. This meant that small loans were, in proportion to the loan itself, relatively costly to administer. In the s, the U. Russell Sage Foundation estimated that U.
By the s, large lenders estimated that consumer loans below 18 percent could not be made profitably. The problem for banks was that they relied heavily on their reputations, and that loans at such high rates were generally considered to be ethically questionable. The high interest rates that would be needed to make consumer lending profitable would damage their reputations with their other clients. Nonbank lenders who focused exclusively on consumer borrowing did not have similar reputational concerns. The willingness of U. First, they had learned the technology of making small consumer loans during the interwar period.
In , the Title I program created under the new Federal Housing Act provided federal insurance for consumer loans intended for home improvement. By removing uncertainty associated with repayment, and by setting a federally mandated interest rate on consumer loans set at 10 percent , the Title I program induced many banks to experiment with consumer lending.
What they learned was that consumers were reliable borrowers. One industry observer noted in And, in part because of the work of nonprofit groups to promote credit as welfare-enhancing, banks were spared the reputational costs that otherwise might have kept them from moving into consumer loans. A survey of consumer lenders in found that most banks that had launched credit cards in the s and s had lost money on them. The reason has to do with the fragmentation of the postwar banking sector.
In , the United States had 14, banks. Most were unit banks that were restricted by state regulations from having branches. They were also bound by Regulation Q under the Federal Reserve Act, which banned interest on demand deposits checking accounts and capped interest on time deposits savings accounts. What banks discovered in the s and s was that consumer credit, and especially the new revolving credit card accounts, was a powerful inducement to attract new depositors. Attracted by the prospect of a loan, borrowers would open savings accounts and provide a source of new capital for lending.
The credit card business also attracted new commercial customers, because retailers who agreed to accept early credit cards also typically moved their banking operations to the same bank. More than the free toasters that banks occasionally offered as an inducement, credit was the lure that banks used to attract new depositors. In France, the moral economy of consumer lending led banks to stay away. In fact, the French government periodically encouraged banks to enter the consumer lending field, in the hope that added competition would reduce consumer borrowing rates. In , and again in , banks dabbled with making personal loans, but quickly withdrew.
The main problem was that banks were unable to make small loans efficiently. Since the s, dedicated consumer finance companies in France had been investing in automations that allowed them to process small loans at a relatively low cost. Cetelem, for example, moved to fully computerize its lending records in It also pushed some of its financing and nonpayment costs onto retailers and manufacturers by retaining 10 percent of capital as a retailer guarantee and delaying payments to retailers by three months. These personal relationships imposed higher administrative costs, with less reliable repayment.
And, critically, French banks at the time were making strong returns on industrial lending in the context of indicative planning by the French government. The high cost and low return of small consumer loans eventually declined with computerization, telecommunications, and deregulation in the early s. This move coincided with a decline in economic planning and the rise of capital markets as an alternative source of industrial finance.
By the late s, French banks were moving aggressively into the consumer lending segment. The relatively late move by French banks into consumer lending had a lasting impact on both public policy and on public attitudes toward consumer credit. First, because banks did not participate in consumer lending, they were at best indifferent to government policies that restricted consumer credit access. In the United States, banks argued vehemently for the abolition of Regulation W.
In France, similar qualitative and subsequent quantitative restrictions on consumer lending—under the so-called credit corset—went unopposed by commercial banks. Had banks been actively involved in consumer lending, it is likely that the regulatory treatment of the sector would have been different. Second, consumer lending never enjoyed the legitimacy that bank participation in the sector might have conferred.
Without bank participation, regulators and consumers looked on consumer credit as a sort of shadow financial system. The absence of banks in the consumer lending sector in France during the mids also changed the way French consumers learned to think about credit and payment. In , dedicated consumer finance companies in France began offering credit cards that combined electronic payment with a revolving credit facility. They responded in when, with support from the French government, a coalition of major French banks created the alternative electronic payment network, carte bleue , to provide efficient payment that was not linked to a credit facility.
Only in did a nonbank lender, Cetelem, launch a successful payment card, the carte aurore , which was directly linked to a revolving credit account. Only from that moment did French consumers begin to associate electronic card payment with access to credit. Banks in the Northeast issued their first credit cards in the mids. Bank of America created the first interbank payment network in The early move by banks into lending meant that credit access and electronic card-based payment became inextricably connected.
By , 2, different banks offered credit cards affiliated with one of the two major credit networks, Interbank Mastercard and Bank Americard Visa. New banks that wished to affiliate with the networks were required by the terms of membership to offer revolving credit accounts. Separate debit payment cards that drew directly from customer savings or checking accounts emerged in the United States only in the s.
The tendency of U. A combination of state, associational, and private sector actors all played roles. First, the idea of credit as welfare was not initially embraced as a component of the state welfare system, as it was in France.
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To the contrary, credit came to be seen as a private-sector alternative to the welfare state, and advocates pushed hard for private lenders to be able to operate on a business-like basis. In France, where early charitable pawn became absorbed into the welfare system, the idea of welfare-enhancing private credit did not emerge.
Second, labor came to have very different views of consumer credit. French unions saw credit as reducing worker purchasing power and contributing to the embourgeoisement of the working classes. Unions in the United States saw credit as giving workers access to material benefits, increasing employment and wages by driving demand and scale, and, instrumentally, as a means for workers to support themselves through strikes.
Third, banks in the United States moved early to offer consumer credit, even if it was not usually a profitable area of business. Operating under legal restrictions against competing based on deposit rates under Regulation Q , revolving credit accounts became a popular way to lure in new customers. In France, where banks were making profitable loans to finance large industrial projects, consumer lending was too time consuming and too unprofitable.
Taken together, these three factors drove Americans to see credit as either benign or welfare enhancing. For France, these factors pushed toward an approach to consumer credit that was cautiously accepting, so long as the credit was accompanied by adequate regulatory protections. These attitudes remained remarkably stable through the s and s. At that time, rising concerns about over-indebtedness of French households led policymakers to see credit as a potential social trap that threatened permanent social and economic exclusion. After a brief experiment with deregulation, new regulations were put in place starting in that placed limits on credit extension.
These included limits on advertising, on usury, and a reform of the personal bankruptcy system that embraced a strict standard of contractual obligation. As housing markets boomed in the late s, their bet seemed to be justified. First-time homebuyers, who tended to hold less equity in their houses, experienced dramatic profits due to high levels of leverage.
With newfound wealth in their homes, they were able to roll over credit card debt into loans secured on home equity. As home values fell, consumer bankruptcies rose dramatically. In France, where households had not borrowed against their homes, bankruptcy rates remained stable. Consumer Bankruptcy Filings in France and America, per 1, Apart from its direct economic effects, the bursting of the housing bubble in severely strained the American narrative linking market access to prosperity.
This reality posed a fundamental dilemma for U. On the one hand, they embraced social welfare goals. On the other hand, they believed deeply in free access to markets. For much of the past century, these two goals had seemed to be complementary, or at least compatible. The financial crisis that began in revealed a new reality, as it became hard to ignore that the higher interest rates charged to poorer borrowers were regressive in their consequence.
So long as poor consumers continued to borrow, their interest payments worked to defeat the effects of social transfers intended to improve the material condition of the poor. What the earned income tax credit provided, high interest payments on consumer debt took away. If markets had changed in ways that made them a threat to the social goals of the left, could their commitments to equality in economic outcomes be made compatible with a sustained embrace of markets? In this way, the financial crisis of signaled the end of a deeply held ideal of American political economy: Raghuram Rajan, Fault Lines: Home equity loans that were expensive by the standards of home mortgages were relatively inexpensive relative to other forms of consumer credit, so households rolled credit card debt into second and third mortgages.
Herman Schwartz, Subprime Nation: Brown and Susan E. Louis University Public Law Review 24 , Mach, and Kevin B. Family Finances from to Louis Hyman, Debtor Nation: Princeton University Press, , Doctrines and Practices New York: The previous 20 years may perhaps turn into referred to as the golden period of neurobiology. Following the overwhelmingly profitable reaction to the 1st printing in hardcover, the most well liked issues in SelectiveNeurotoxicity are actually to be had during this specific softcover edition".
Researchers are supplied with well-grounded details at the mobile and subcellular pursuits of neurotoxins and their mode of motion on the point of ion-channels, receptors and neurotransmitters. Having rented a house, the Posts felt it necessary to fill the bare rooms, floors, and walls in a manner befitting a middle-class couple expecting to entertain guests. After some comparison shopping and some whittling down of their original wish list, the young couple purchased furniture and carpets from Schuneman and Evans department store on terms of two-thirds down and the balance in sixty days.
For the kitchen, Walter bought a used stove from a friend for six dollars down and fifteen dollars later. In particular, let us look at it in relation to net worth Figure 4. In this chart, non-mortgage consumer credit relative to net worth is on the bottom line and mortgage credit relative to net worth is on the top one.
Considering that bottom line and looking at the actual numbers, you find that the series rounds to 4 percent every single year since , except for when it rounds to 3 percent. I refer to this particular ratio as the Great Constant of Economics. It is certainly not something that shows a great upward trend. But historically the numbers who are delinquent with payments or default on their loans have been very small compared to the numbers who pay their bills on time. Today, when consumer bankruptcies are at an all-time high and some banks are forced to erase from their books 5 percent of their credit card loan balances from debtors who cannot pay, jeremiads against credit are shrill to the point of being hysterical.