In the late 1930s, U.S. retailers started to combine the charge card format with the revolving credit account and created a new financial product. Customers were approved for a preset credit limit, typically about one month's salary, and they could charge purchases of large or small goods up to that limit. As Gunnar Trumbull notes, revolving credit is now so ubiquitous and so familiar to Americans that it is difficult to express just how revolutionary this new financial product was. Bamberger's (a subsidiary of Macy's) was the first to offer the product to its New Jersey customers in 1938; it was followed by Bloomingdale's, J. J. Newberry's, and Sears Roebuck. Even J. C. Penney, whose founder frowned on credit sales, adopted the program, if belatedly. Within two decades of its introduction, an estimated 88 percent of department store chains offered some type of revolving-credit charge card account. Bank-issued cards, such as MasterCard and Visa, naturally followed.
For most department store chains, the charge card accounts were not a profit source; the administrative and servicing costs of small consumer loans made them uneconomic for most lenders constrained by usury and small-loan fee limits. Retailers bore the costs because they saw the monthly bill as another way to reach customers with advertising, they could subsidize credit sales through markups paid by cash-and-carry customers, default rates were low, and the alternatives were still more expensive. Smaller chains without sufficient capital to carry the outstanding customer-credit accounts resold them to consumer finance companies. But the larger chains established finance subsidiaries, which packaged the small loans and sold them in blocks to banks that would otherwise have had little interest in financing retail receivables.
Unlike in the United States, consumer lending in postwar France was organized through collaborations between retailers, consumer finance companies, manufacturers, and banks. The financing of consumer durables mostly followed the automobile finance model. Cetelem was France's largest consumer credit company and it was simultaneously aggressive and selective in enlisting retailers to participate in its consumer credit operations. Unlike the store-based U.S. model, Cetelem made small loans economic through automation and pushing the costs of nonpayment on retailers. Cetelem, writes Trumbull, “was founded on the populist ideal of promoting access to modern products at a fair price” (p. 103). Yet it strove to distance itself from the unsavory image of so-called doorstep lenders, who adopted questionable lending and collection practices.
Why did the American and French experiences differ so profoundly? Trumbull argues that sources of the differences included, but were not limited to, the approach of central banks toward consumer credit, the concerns of labor unions, and, perhaps most importantly, alternative conceptions of the connection between consumer credit and the welfare state. By Trumbull's telling, however, the main source of the different U.S. and French experiences is that widely available, relatively cheap consumer credit in the United States offered an alternative to France's welfare state. Charitable pawn appeared in France in the 1600s as a form of poor relief that was institutionalized through a state takeover in the 1700s. This legacy of state intervention meant that private lending was suspect and little used as consumption insurance. And by the twentieth century the state provided direct support for those in need. Private credit was never viewed as a means to help the poor help themselves.
In the U.S., credit acted as a type of insurance in the case of injury, illness, unemployment, or the death of a breadwinner; it was the mechanism by which self-sufficient Americans navigated the ups and downs of family and work life. In flush times, credit afforded the possibility of saving through the accumulation of durable goods. In bad times, credit kept the collection agents from the door. The irony, of course, was that the libertarian approach was viable only so long as the state intervened to keep credit affordable for the poor. In the late nineteenth and early twentieth centuries, the Russell Sage Foundation's small-loan laws helped, as did the Morris Plan banks, credit unions, and state usury laws. All originated from a conviction that “access to credit on fair terms could help needy families to help themselves” (p. 23). When cheap credit did not work out, a generous bankruptcy code allowed overindebted households to escape the burdens of repayment. The system, in toto, placed the burden on lenders, who had to either find ways to make small loans profitable or abandon them.
Before reading Trumbull's engaging and thought-provoking book, I thought his juxtaposition of the United States and France was a bit odd, and I was slow to come around to his way of thinking about the connection between credit and welfare. But I now have a better appreciation for the multitude of car title loan, payday loan, and pawn shops that occupy strip malls across the South. One advertises up to $15,000 on a car title with “no credit hassles”; another, $20,000 instantly with no credit check. It is reassuring, I suppose, to think that the plucky, “down on his luck” laborer can pawn his pickup truck to get him through a proverbial rough patch, but even a cursory look at consumer affairs pages on the Web shows that the poor pay a lot more than the posted prices: a $1,000 repossession fee on a nonperforming $3,500 car title loan; finance charges on a nonperforming $601 loan that in three months add up to $2,000. Trumbull does not wade into these waters, but it would have been nice for him to have done so. Revolving credit at Macy's for the middle classes is one thing, but it is not clear that “cheap” credit for the poor really keeps the wolf at bay. It appears, in some instances at least, simply to delay the reckoning and to exchange one wolf for another.
