Advertisement

From Cradle to Bankruptcy? Credit Access and the American Welfare State

  • Jan Logemann
Part of the Worlds of Consumption book series (WC)

Abstract

Despite nearly two decades of sustained economic growth both in the United States and across Western Europe, practices of consumer credit still differed notably in the late 1960s. As one contemporary observer pointed out, “About one-half of all Americans both approve of and use installment credit. At the other extreme, only one-fourth of the Germans approve of it, and only one out of ten actually has any installment debt.”1 West Germans, studies found, were much more likely to use their expanding savings to purchase new consumer durables. American households also maintained a considerable savings rate, but for different purposes. Asked in 1966 about the intended purpose of their savings, 45 percent of American family units stated that they were saving for a “rainy day” (such as illness, unemployment, or other emergency), 31 percent for retirement or old age, and 22 percent for education.2 In the absence of a more elaborate, cradle-to-grave social welfare system, Americans saw a greater need to set aside funds for these life events and risks. In contrast to West Germans, American consumers did not view saving for consumer goods as an attractive alternative to obtaining them through consumer debt.

Keywords

Credit Card Consumer Credit Federal Housing Administration Consumer Debt Personal Bankruptcy 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Notes

  1. 1.
    George Katona, Burkhart Strumpel, and Ernest Zahn, Aspirations and Affluence: Comparative Studies in the United States and Western Europe (New York, 1971), 3.Google Scholar
  2. 3.
    On “passive indebtedness” as a leading cause for bankruptcy in the United States, see, for example, Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (New York, 2003), which criticizes the overconsumption thesis.Google Scholar
  3. 4.
    For a critique of the triumphalist narrative of credit as the great “democratizer,” see Lendol Calder, “The Evolution of Credit in the United States,” in The Impact of Public Policy on Consumer Credit, ed. Thomas Durkin and Michael Staten (Boston, MA, 2002), 23–34. Calder similarly rejects cultural jeremiads that decry the expansion of consumer credit as a decline in thrift; instead he emphasizes the social disciplining nature of increased credit obligations.CrossRefGoogle Scholar
  4. 6.
    On transatlantic differences in the significance of private and public consumption, see Jan Logemann, “Is It in the Interest of the Consumer to Pay Taxes? Transatlantic Differences in Postwar Approaches to Public Consumption,” Journal of Consumer Culture 11 (2011): 339–65.CrossRefGoogle Scholar
  5. For historical context on the broader transatlantic contrast in social models, see, for example, Avner Offer, The Challenge of Affluence: Self-Control and Well-Being in the United States and Britain since 1950 (Oxford, UK, 2006);Google Scholar
  6. and Tony Judt, Postwar: A History of Europe since 1945 (New York, 2005).Google Scholar
  7. A recent comparative study on the development of the welfare state in Germany and the United States: Marcus Gräser, Wohlfahrtsgesellschaft und Wohlfahrtsstaat: Bürgerliche Gesellschaft und Welfare State Building in den USA und in Deutschland 1880–1940 (Göttingen, 2009).Google Scholar
  8. 7.
    On the notion of welfare regimes, see Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton, NJ, 1990).Google Scholar
  9. 8.
    See, for example, Christopher Howard, “Is the American Welfare State Unusually Small?,” Political Science and Politics 36 (2003): 411–16.Google Scholar
  10. 9.
    On changing attitudes toward credit buying, see esp. Daniel Horowitz, The Morality of Spending: Attitudes towards the Consumer Society in America, 1875– 1940 (Baltimore, MD, 1985);Google Scholar
  11. and Lendol Calder, Financing the American Dream: A Cultural History of Consumer Credit (Princeton, NJ, 1999).Google Scholar
  12. For the spread of consumer credit during the interwar years, see also Martha Olney, Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s (Chapel Hill, NC, 1991).Google Scholar
  13. 10.
    On the campaigns against loan sharks and for the introduction of small loans banks, see Michael Easterly, “Your Job Is Your Credit: Creating a Market for Loans to Salaried Employees in New York City, 1985–1920,” Enterprise & Society 10 (2009): 651–60; and Bruce Carruthers, Timothy Guinnane, and Yoonseok Lee, “Bringing ‘Honest Capital’ to Poor Borrowers: The Passage of the Uniform Small Loan Law, 1907–1930,” Yale Economics Department Working Paper 63 and Yale University Economic Growth Center Discussion Paper 971, June 3, 2009.CrossRefGoogle Scholar
  14. 11.
    Lizabeth Cohen, A Consumer’s Republic: The Politics of Mass Consumption in Postwar America (New York, 2003);Google Scholar
  15. Kathleen Donohue, Freedom from Want: American Liberalism and the Idea of the Consumer (Baltimore, MD, 2003).Google Scholar
  16. 12.
    See, for example, “Business and Finance: Mass Credit,” Time, August 31, 1931: “no inhalation has come about; installment selling has withstood Depression well.” On the limited number of defaults (and the problematic economic consequences that this entailed), see also Martha Olney, “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930,” Quarterly Journal of Economics 114 (1999): 319–35.CrossRefGoogle Scholar
  17. 13.
    Rolf Nugent, Consumer Credit and Economic Stability (New York, 1939), 122.Google Scholar
  18. 15.
    See Ronald Tobey, Technology as Freedom: The New Deal and the Electrical Modernization of the American Home (Berkeley, CA, 1996).Google Scholar
  19. On credit expansion during the New Deal, see also Jordan Schwarz, The New Dealers: Power Politics in the Age of Roosevelt (New York, 1993), esp. 235.Google Scholar
  20. 16.
    Alvin Hansen, After the War—Full Employment (Washington, D.C., 1942), 1.Google Scholar
  21. 17.
    On the notion of “growth liberalism,” see Robert Collins, More: The Politics of Economic Growth in Postwar America (Oxford, UK, 2000).Google Scholar
  22. 18.
    Alvin Hansen, Economic Policy and Full Employment (New York, 1947), 131.Google Scholar
  23. 19.
    Council of Economic Advisers, Business and Government: Fourth Annual Report to the President (Washington, D.C., 1949), 6.Google Scholar
  24. 20.
    This Federal Reserve policy, born in response to wartime circumstances, was employed into the early 1950s as a Keynesian tool to achieve economic stability by temporarily restricting access to consumer credit by means of controlling minimum down payments, interest rates, and maturity rates. Regulation W, it should be noted, was by and large not an attack on the institution of consumer credit itself. The ability of consumer credit to increase mass purchasing power and spur aggregate domestic demand was always acknowledged, as was its ability to boost domestic durable goods consumption during peacetime conversion. On Regulation W, see Irving Michelman, Consumer Finance: A Case History in American Business (New York, 1966), 256–77.Google Scholar
  25. 22.
    “Credit Curb Eased for Home Repairs,” New York Times, September 26, 1945, 29. Even though little empirical evidence could be mustered to prove that regulation of credit terms actually crowded out potential low-income buyers, critics such as Milton Friedman largely succeeded in likening Regulation W to an arbitrary and discriminatory tax conceived by elitist administrators. See Milton Friedmann, “Speech Published in Symposium on Consumer Credit and Consumer Spending,” University of Pennsylvania Bulletin 57 (1957): 67.Google Scholar
  26. 23.
    Clyde Phelps, Financing the Installment Purchases of the American Family (Baltimore, MD, 1954): 29–31.Google Scholar
  27. The same argument was made by CIT Financial Corporation president Arthur Dietz, “Die 36-Milliarden Dollar-Frage: Die Bedeutung des Teilzahlungskredites in amerikanischer Sicht,” in Schriftenreihe des Wirtschaftsverbandes Teilzahlungsbanken e.V. 7 (Dortmund, 1956), translation of speech in English given by Dietz on April 6, 1956.Google Scholar
  28. 26.
    Richard Brown and Susan Burhouse, “Implications of the Supply-Side Revolution in Consumer Lending,” Saint Louis University Public Law Review 363 (2005): 363–99. As these deductions were phased out after 1986, home equity loans (which were exempt from the reform) became the financial product of choice for tax-subsidized debt. See “Playing the New Tax Game,” Time, October 13, 1986.Google Scholar
  29. 27.
    See Charles Haar, Federal Credit and Private Housing: The Mass Financing Dilemma (New York, 1960) for a more detailed discussion. Taking the Survey of Consumer Finances as his basis, economist Paul Merz estimated that personal deductions for housing expenses amounted to well over 1 billion dollars in 1954 alone and closer to 3 billion annually by the late 1950s—a substantial number if one considers that total income tax revenue in 1954 amounted to $29.5 billion and federal outlays to individuals (mostly Social Security) $12.6 billion. See U.S. Office of Management and Budget, Budget of the United States Government, Historical Tables, http://www.whitehouse.gov/omb/budget/ Historicals, tables 2.1 (Receipts by Source) and 11.3 (Outlays for Payments for Individuals).Google Scholar
  30. 28.
    On the development of student lending, see Patricia Somers, James Hollis, and Tim Stokes, “The Federal Government as First Creditor in Student Loans: Politics and Policy,” Educational Evaluation and Policy Analysis 22 (2000): 331–39.CrossRefGoogle Scholar
  31. 29.
    Preferential treatment to home owners amounted to discrimination against those who were compelled to rent, as economist Paul Merz pointed out. It also skewed the equity of the personal income tax as middle- and upper-income groups were the main beneficiaries of these tax subsidies. See Paul Merz, “The Income Tax Treatment of Owner-Occupied Housing,” Land Economics 41 (1965): 247–55.CrossRefGoogle Scholar
  32. 30.
    John Galbraith, The Affluent Society (Boston, MA, 1958).Google Scholar
  33. 32.
    For a recent survey of postwar credit developments in the United States that emphasizes the growing risks for consumers, see Andrea Ryan, Gunnar Trumbull, and Peter Tufano, “A Brief History of U.S. Consumer Finance,” Business History Review 85 (2011): 461–98.CrossRefGoogle Scholar
  34. 34.
    See, for example, “Feds Ban on Racial data on Credit Application Hits,” Washington Post, August 13, 1976, and Nancy Ross, “Minority Applicants, Single Men Facing Discrimination by Lender,” Washington Post, June 14, 1980, E1. Racial biases remained pronounced in automobile financing, as lawsuits reveal: Diana Henriques, “New Front Opens in Effort to Fight Race Bias in Loans,” New York Times, October 22, 2000, 1. On credit discrimination in an urban context and legislatives efforts to remedy these problems, see Dan Immergluck, Credit to the Community: Community Reinvestment and Fair Lending Policy in the United States (New York, 2004).Google Scholar
  35. 35.
    On increases in lending to minorities (despite continuing inequalities) and the difficulty of ascertaining the role of the CRA and similar legislation (such as the Home Mortgage Disclosure Act of 1975) in these changes, see Rapahel Bostic, “Trends in Equal Access to Credit Products,” in The Impact of Public Policy on Consumer Credit, ed. Thomas Durkin and Michael Staten (Boston, MA, 2002), 171–203.CrossRefGoogle Scholar
  36. On the CRA, see also William Apgar and Mark Duda, “The Twenty-Fifth Anniversary of the Community Reinvestment Act: Past Accomplishments and Future Regulatory Challenges,” FRBNY Economic Policy Review 9 (June 2003): 169–91;Google Scholar
  37. and Therese Wilson, “Responsible Lending or Restrictive Lending Practices? Balancing Concerns Regarding Over-Indebtedness with Addressing Financial Exclusion,” in The Future of Consumer Credit Regulation: Creative Approaches to Emerging Problems, ed. Michelle Kelly-Louw, James P. Nehf, and Peter Rott (Aldershot, 2008), 91–106.Google Scholar
  38. 36.
    David Caplovitz, “Consumer Credit in the Affluent Society,” Law and Contemporary Problems 33 (1968): 641–55.CrossRefGoogle Scholar
  39. 37.
    Robert Samuelson, “Common Purpose: Extending Retail Credit to the Poor,” Washington Post, July 6, 1969, 85. On the Sears campaign, see also Cohen, Consumers Republic, 382–83, and esp. Felicia Ann Kornbluh, The Battle for Welfare Rights: Politics and Poverty in Modern America (Philadelphia, PA, 2007), chap. 5.Google Scholar
  40. 39.
    Matt Olson, “Medical Debtors to the Poorhouse,” The Progressive 65, no. 7 (July 2001): 30.Google Scholar
  41. 43.
    On this shift, particularly in the mortgage market, see Martha Poon, “From New Deal Institutions to Capital Markets: Commercial Consumer Risk Scores and the Making of Sub-Prime Mortgage Finance,” Accounting, Organizations and Society 34 (2009): 654–74.CrossRefGoogle Scholar
  42. 45.
    Robert Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit (New York, 2000), esp., 11, 21–22 and 161–63.Google Scholar
  43. On the generation and recruitment of debt “revolvers,” see also Brett Williams, Debt for Sale: A Social History of the Credit Trap (Philadelphia, PA, 2004), chap. 3, an academic exposé of the social consequences of the “supply-side revolution.”CrossRefGoogle Scholar
  44. 48.
    On the emergence of the industry and the prevalence of repeat borrowing, see Michael Stegman and Robert Faris, “Payday Lending: A Business Model that Encourages Chronic Borrowing,” Economic Development Quarterly 17 (2003): 8–32.CrossRefGoogle Scholar
  45. 49.
    Brown and Burhouse, “Implications,” 363. By 1999, 50% of filers claimed health problems, childbirth, a death in the family, or medical bills as primary reasons for their bankruptcy, as opposed to only 11% three decades earlier. See Melissa Jacoby, Teresa Sullivan, and Elisabeth Warren, “Rethinking the Debates over Health Care Financing: Evidence from the Bankruptcy Courts,” New York University Law Review 76 (2001): 375–418.Google Scholar
  46. On consumer bankruptcy in the United states generally, see also Teresa Sullivan, Elizabeth Warren, and Jay Westbrook, As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America (Washington, D.C., 1999)Google Scholar
  47. and Teresa Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, The Fragile Middle Class: Americans in Debt (New Haven, CT, 2000).Google Scholar
  48. Charles Luckett, “Personal Bankruptcies,” in The Impact of Public Policy on Consumer Credit, ed. Thomas Durkin and Michael Staten (Boston, MA, 2002), 69–102, summarizes the results of numerous studies conducted during the 1990s.CrossRefGoogle Scholar
  49. 51.
    Michelle Doty et al., “Seeing Red: The Growing Burden of Medical Bills and Debt Faced by U.S. Families,” The Commonwealth Fund Issue Brief 42, pub. 1164 (August 2008). The practice is not entirely a recent phenomenon, however; many medical facilities began accepting charge cards as early as the 1960s. See “Credit: The Importance of Being in Debt,” Time, October 30, 1964.Google Scholar
  50. 52.
    Angela McGlynn, “College on Credit Has Kids Dropping Out” Hispanic Outlook in Higher Education 16 (January 30, 2006): 26–27; Manning, Credit Card Nation, chap. 6.Google Scholar
  51. 53.
    Iain Ramsay, “Consumer Credit Law, Distributive Justice and the Welfare State,” in Oxford Journal of Legal Studies 15 (1995): 177–97.Google Scholar
  52. 57.
    European Credit Research Institute data cited in Ramsay, “Comparative Consumer Bankruptcy.” On transatlantic differences in household lending patterns, income-to-debt ratios, reasons for default, etc., see Nicola Jentzsch and Amparo San Jose Riestra, “Consumer Credit Markets in the United States and Europe,” in The Economics of Consumer Debt, ed. Giuseppe Bertola, Richard Disney, and Charles Grant (Cambridge, MA, 2006), 27–62.Google Scholar

Copyright information

© The German Historical Institute 2012

Authors and Affiliations

  • Jan Logemann

There are no affiliations available

Personalised recommendations