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4 - American Retailers and Credit Innovation
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 75-92
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From the turn of the century until the 1970s, American retailers that sold on credit did so mainly as a customer convenience. Offering extended payment terms allowed them to attract and retain customers. During most of this period, few lenders earned any profits on their customer credit accounts. Most treated lending as a sales promotion, similar to advertising costs, and cross-subsidized the lending departments out of sales profits. The emphasis on customer convenience pushed early retailers toward innovations that were initially costly but also tailored to improve the shopping experience. The first was the credit card itself; the second was the revolving charge account. Both would eventually be adopted by bank lenders, but had their roots in retail.
Ultimately, the way in which American retailers managed their credit programs helped change public perceptions of credit. Because retailers focused on the customer experience, they developed collections techniques that were highly accommodating to consumer borrowers. They rarely harassed late borrowers. They also rarely pursued so-called hard collections, meaning repossession, because their goal was to attract customers. Instead, they discovered the value of timely, friendly reminders for keeping repayment rates high. In order to maintain amicable relations with borrower-customers, they were also rigorous about evaluating the creditworthiness of credit applicants. Together, these policies taught American households that store credit was hard to get, but once one was approved, convenient and forgiving. It also led them to one of the most important insights of modern lending: keeping customers happy and treating them with respect, along with careful management of accounts and collections, could dramatically reduce the apparent riskiness of consumer credit.
Index
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 217-228
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3 - Banks against Credit
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 50-74
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While American banks were rushing headlong into providing consumer credit, their counterparts in France bided their time. Crédit Lyonnais was the first bank to offer personal loans in France, beginning in 1959, thirty-five years after the first full-fledged personal loan department was created by a U.S. bank. In three successive waves – 1962, 1972, and then beginning in the mid-1980s – France's major banks tested the water of consumer lending. On each occasion, they tried to compete with dedicated consumer finance companies by offering lower rates. On each occasion, they faced unexpectedly high costs associated with both nonpayments and administrative procedures, and were forced to pull back from the practice. What mattered most for the role of French banks in the evolution of consumer credit was something that did not happen: the failure of French banks to move earlier into personal and sales lending. Explaining such historical nonevents can be especially challenging for social scientists. This chapter relies on an explicit comparison with the experience of commercial banks in the United States to parse out causes.
One obstacle was the reputational cost of small lending. Unlike in the United States, the French small-loan sector was never fully rehabilitated in a way that made it feasible for commercial banks to enter the sector. Part of the problem was the link between credit and welfare. Early French welfare advocates envisioned a role for credit as a form of self help, just as they did in the United States. Indeed, self-help credit had deep roots in France, in the form of charitable pawn. France's monts-de-piété, a system of charitable pawn shops with origins in the middle ages, enjoyed a state-mandated monopoly on pawn lending. But the business model and governance of charitable credit in France took a different tack than in the United States that failed to provide a broader mantle of legitimacy for bank-led consumer lending. Ironically, the principle of charitable credit came to be so fully accepted in France that it was embraced by the French state, which in the wake of World War II absorbed the functions of charitable pawn into France's emerging welfare state apparatus. Unlike charitable pawn in the United States, which became the springboard for a broad private-sector effort to provide self-help through credit on fair terms, the French version never led to a popular linking of private credit with welfare.
Figures and Tables
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 11 August 2014, pp xi-xii
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5 - Selling France on Credit
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 93-119
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Consumer lending in postwar France was dominated by sales credit. These loans were offered not primarily by the retailers themselves, as in the United States, but by independent consumer finance companies that emerged from collaborations between banks and consumer goods manufacturers. The earliest were in the auto sector. Furniture and kitchen-equipment manufacturers quickly followed their lead. By the mid-1950s, a set of general-purpose sales credit companies had emerged that provided the bulk of consumer credit in France for an entire generation. Even large retailers that wanted to offer specialized credit products partnered with the big sales finance companies to provide it. This pattern of lending persisted through the postwar period. It shaped the way French lenders responded to computer and telecommunications technologies, new models of consumer lending, and financial deregulation in the 1980s.
Consumer loans in the early postwar period were expensive to originate and manage. Successful lenders combined interest income with subsidies from retailers or manufacturers whose products they helped finance. Even with this extra source of income, the lenders faced a constant struggle to find profits in a challenging sector with narrow profit margins. Those that succeeded invested heavily in automation and continuously refined their strategies for controlling nonpayments. They also paid careful attention to their public image.
8 - Credit for Being American
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 168-190
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By the 1960s, the coalition in support of greater credit access in America was changing. American labor was becoming less enthusiastic about the virtues of consumer credit. It worried that high interest rates were disproportionately hurting poorer workers, and so fought the progressive liberalization of state usury caps. It sought legislation that would limit creative and misleading lending practices, including ballooning loans, wage garnishment, and loans secured against anything other than the product purchased on credit. More generally, it argued against promoting further credit access. Labor activist Sidney Margolis, writing in 1973, warned: “The one thing most debt-ridden families don't need is still easier credit. Raising rates to encourage easier credit…would be self-defeating for the low-income families.” But just as labor was becoming disenchanted with credit, other rights groups began seizing on credit access as part of a broader campaign that pushed the idea of economic citizenship. By shifting the terms of the discourse about credit from one of economic welfare to one of economic rights, these groups helped promote the idea of credit access even as the social costs of debt were becoming apparent.
The first rights-based groups to mobilize actively around credit access were poor urban blacks. In a series of public-private initiatives, coordinated through the federal Office of Economic Opportunity and nonprofit Urban Coalition, retailers, banks, and local governments experimented with supporting credit to poor welfare recipients who could not pass standard creditworthiness tests. This movement found its most compelling expression in the National Welfare Rights Organization (NWRO), a grassroots organization of welfare mothers that rallied around the cause of retail credit access. The NWRO was followed by the women's movement. For middle-class white women the NWRO credit campaign strongly evoked their own credit struggles. From the early 1970s, the National Organization for Women (NOW) spearheaded a campaign to secure personal credit ratings for women. This battle was won with the passage of the Equal Credit Opportunity Act (ECOA) of 1974. The NOW victory in turn opened the door for poor urban blacks. In 1977, an amendment to ECOA extended the definition of discrimination to include not just sex but also race. In the same year, the Community Reinvestment Act (CRA) required banks to lend in the communities where they took deposits. Within the space of ten years, credit had been reenvisioned as an encompassing economic right in America.
2 - Commercial Banks and Consumer Credit in the United States
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 22-49
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One feature distinguished the consumer loan sector in the United States from that in every other advanced industrialized country: the early entry of commercial, deposit-taking banks into consumer lending. In France, commercial banks made brief and unsuccessful forays into personal lending in the early 1960s and again in the early 1970s, then waited another decade before reentering the sector for good. This left the French consumer loan sector dominated by dedicated consumer finance companies that offered credit to finance the sales of autos and other products. American banks, by contrast, began to experiment with dedicated personal loan departments in the 1920s and 1930s. Banks were not the leaders in the consumer sector. For most of the postwar period, sales credit offered by auto lenders and national retail chains such as Sears and JC Penney accounted for the largest share of outstanding consumer debt. Nonetheless, bank engagement in the consumer loan sector had a profound impact both on the regulation of consumer lending and on consumer perceptions of borrowing. Because banks were seen as legitimate financial institutions, their engagement in consumer lending offered a seal of approval that made policymakers – and probably also households – more accepting of consumer credit. Moreover, because commercial banks were already making loans when new card payment technologies emerged, banks themselves became strong advocates for a new hybrid credit-payment card system that came to distinguish the American consumer credit system from that in other advanced industrialized countries.
Commercial banks faced two major obstacles to making consumer loans. First, banks relied heavily on reputation, and small loans in the early twentieth century were widely perceived as disreputable. Second, the fixed costs of small loans tended to make them unprofitable unless banks invested heavily in new kinds of automated loan-processing technology – technology that was not required for standard commercial loans. American banks quickly overcame these obstacles. Their early move into consumer lending is in large part a story of accident and opportunism.
Dedication
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp v-vi
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10 - Credit and Welfare
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 209-216
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Over the course of almost a century, American households were taught to approach consumer credit as socially progressive and economically virtuous. By the 1990s, household credit was viewed on both the left and right of the political spectrum as an effective tool for improving poor households’ access to economic prosperity. The idea that free access to financial markets could play a role in generating social equality dominated the third-way politics of the Bill Clinton presidency, and carried through seamlessly to the George Bush presidency under the new label of the ownership society. To some degree, the focus on financial markets as a boon to the working poor simply made a virtue of necessity. As tax rates fell, rising social demands met declining government revenues, and the political left turned to the markets to finance its social goals. It legalized gambling so that the winnings could go to support education. It embraced housing and financial assets as a means to invest for future retirement – an approach that came to be known as asset-based welfare. Expanded access to consumer credit was one piece of a broader societal project that included home ownership, private retirement funds, and stock market investments.
The surprise of these market-welfare policies of the Clinton and Bush administrations was that they did not generate a strong backlash. Household debt increased dramatically through the 1990s, and poorer households no longer enjoyed those benefits that had softened the financial costs for earlier borrowers. Above all, the cross-subsidy for poorer households had disappeared; in fact, they had reversed. From the late 1980s, new risk-based pricing schemes meant that it was the relatively modest borrowers who were helping subsidize generous credit terms for the more affluent.
1 - Introduction
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 1-21
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At the beginning of the twentieth century in America, small household loans were both commonplace and a source of general concern. Social reformers fought to limit the economic and social impact of small lenders they decried as loan sharks; reputable businesses steered clear of sales credit because of the questionable consumers they worried it would attract. By the 1970s, credit in America had been reimagined as a legitimate tool of household finance that was understood to have broad social and economic benefits. This transformation in the moral economy of credit accompanied a revolution in lending technologies and the regulatory treatment of credit. Ultimately, these changes allowed American households to amass unprecedented debt – debt that eventually precipitated the worst financial crisis of postwar America. To understand the origins of that crisis, we need to understand not just the shifting habits of consumers but also what happened to lenders as the public moved from opposing credit to embracing it. This book traces how that transformation occurred.
Research into the origins of America's enthusiasm for credit has primarily focused on household demand. Historians have emphasized the role of credit in providing financial discipline, the ability to meet real material needs during economic downturn, and the role of credit in meeting goals of social aspiration. Behavioral economists have noted a pervasive tendency of consumers to favor near-term consumption. Because credit allows us to move consumption forward in time, humans seem to be hardwired to want to borrow. Sociologists have argued that the flattening of real wages and the decline of welfare programs in the 1970s drove households to rely more on credit for their everyday needs. Whatever the precise mixture of causes, household demand for credit seemingly has always been high. Rare indeed are lender complaints about a lack of consumer demand for credit. Less scholarly attention has been applied to how that demand has historically been met: on the supply of credit, companies that competed to provide it, regulators who wrote the rules for the sector, and a range of nongovernmental groups that came to see access to consumer credit as a means to achieve their own societal goals. This does not imply that the reasons for consumer borrowing were unimportant. Lenders and their supporters have always told stories about why consumers borrow.
7 - The Politics of Usury
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 146-167
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Usury laws are the oldest and most common response to societal concerns about the high cost of consumer lending. They are politically attractive in that they seem to draw a hard line against exploitative lending. Where they have been used, they are supported by a coalition of religious conservatives and pro-welfare liberals. As often as they have been employed, though, usury laws have been equally criticized. Two strains of critique have dominated. France's liberal Finance Minister Anne-Robert-Jacques Turgot (1775), for example, decried interest-rate caps as an infringement on private contracts. British utilitarian Jeremy Bentham (1787), by contrast, argued against interest rate caps primarily on the grounds that restricting access to financial markets hurt the poor. Both critiques point to an apparent dilemma: interest rate caps seem to sacrifice access to credit in the interest of consumer protection. Yet, for small lenders in the postwar period, the reality of usury regulation was more nuanced, and the apparent policy dilemma of access versus protection more complicated.
The practical problem with interest-rate caps was that small loans were by their nature expensive to administer. Any interest rate that felt acceptable to the public – the biblical rate of 6 percent was a common reference point – made most small loans uneconomical. The fact that small lending still happened was a testimony to the ease with which the true costs of lending could be hidden. One way was through noninterest charges. Fees for late payments, agent commissions, credit insurance, and the reporting of interest as a discount were all common practices that had been accepted by regulators in order to allow lenders to charge higher effective interest rates than state usury caps seemed to allow. These workarounds meant that usury caps came at the cost of transparency, because they made it harder for consumers to assess and compare the total costs of loans. The second way to hide high interest charges was through cross-subsidies. When loans were tied to the sale of a specific product, revenue from the sale could be used to offset a lower interest rate charged to the consumer. Frequently, this meant that cash customers were subsidizing credit customers. Lenders also commonly provided a cross-subsidy among their borrowers, with the profits from larger loans going to offset losses from administering smaller loans.
Frontmatter
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 11 August 2014, pp i-iv
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6 - Credit and Reconstruction
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 120-145
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World War II marked a change in how French and American policymakers conceived of consumer credit. Prior to the war, credit was debated in terms of its impact on workers and welfare. In the wake of the war, credit narratives were recast to emphasize the link between consumer lending and industrial production and economic growth. Yet how credit and growth were related was a matter of significant disagreement. Basic questions about consumer credit – including its effect on prices, household savings rates, and ultimately economic growth – became the focus of national policy debate. In the absence of definitive empirical evidence, national narratives diverged. In America, a coalition of organized labor and government policymakers came together around the idea of credit as a spur to growth. In France, a similar coalition of labor and policymakers came to the opposite conclusion. This chapter traces the role of lenders, organized labor, and central banks in framing these two alternative narratives about postwar consumer credit.
Consumer credit posed a particular conundrum for industrial policy. On the one hand, economic leaders saw the postwar demand for new products as the engine for manufacturing growth. With new housing driving a need for new household technologies, consumer credit could help to satisfy that demand. There was also an efficiency logic to credit. By speeding such purchases, credit could allow manufacturers to increase scale, and this would in turn lower costs for everyone. On the other hand, policymakers in both the United States and France worried that consumer credit would absorb capital that was needed by industry, thereby crowding out industrial investment. They also worried that liberal credit terms, and the heightened demand it generated, could aggravate the challenge of managing inflation. Both countries experimented with selective restrictions on consumer loans in order to fight inflation. In the United States, between 1950 and 1952, the Federal Reserve acting under Regulation W set mandatory thresholds for the down payment and repayment period on installment loans. Initially, these required household borrowers to pay at least 33 percent of the cost of a credit purchase up front (the down payment requirement) and repay the loan within a year. The restrictions were intended to hold down inflation even as the government relied heavily on debt to finance the Korean War effort. In France, similar restrictions on lending terms were introduced in 1954. From these similar starting points, French and American policy diverged.
Contents
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp vii-x
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9 - Deregulation and the Politics of Overindebtedness
- Gunnar Trumbull, Harvard Business School
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- Consumer Lending in France and America
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- 05 August 2014
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- 11 August 2014, pp 191-208
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The deregulation of France's financial sector in the early 1980s led to a boom in credit extension. Household indebtedness grew from 1984 to 1989, increasing from an average of 3 percent to 7 percent of disposable income per household. The share of houses with outstanding consumer debt increased from 39 percent to 53 percent. By the standards of the United States, these numbers were still small. Nonetheless, the growth in the use of credit led French policymakers to question the logic of consumer-credit extension. Some saw it as a positive sign – a democratization of credit that allowed households to behave more like companies. Lenders made the case that easier access to credit, and in particular to the new flexible forms of revolving credit, allowed households to behave in more “adult” ways. The dominant interpretation, however, was that consumer credit was being used in ways that would prove socially and economically disruptive.
What followed was a political backlash that was driven by a range of social and policy actors who worried that consumers were overindebted, and that the government should act to reduce their debt. Explanations for both the cause and the consequences of this overindebtedness (surendettement) differed. Some blamed the new revolving-credit accounts that had been popularized with Cetelem's launch of the Carte Aurore. Consumer finance companies accused banks of making loans without rigorous credit checks. Others blamed the lack of a central credit registry, allowing borrowers to approach multiple lenders for loans. Why exactly consumers would want to borrow so heavily was also up for dispute. Some applauded the fact that consumers were finally able to use credit without having to worry about the moral implications. Others argued that consumers were using credit to compensate for stagnant real wages, and that the appropriate response was higher wages, not more credit. From the American perspective, what is striking about these debates was the relatively low level of indebtedness at which they occurred. From liberalization in 1984 until a debate emerged about overindebtedness in 1988, household consumer indebtedness doubled; yet it had still only reached the level of indebtedness already experienced by American households in the early 1950s.
Consumer Lending in France and America
- Credit and Welfare
- Gunnar Trumbull
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- 05 August 2014
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- 11 August 2014
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Why did America embrace consumer credit over the course of the twentieth century, when most other countries did not? How did American policy makers by the late twentieth century come to believe that more credit would make even poor families better off? This book traces the historical emergence of modern consumer lending in America and France. If Americans were profligate in their borrowing, the French were correspondingly frugal. Comparison of the two countries reveals that America's love affair with credit was not primarily the consequence of its culture of consumption, as many writers have observed, nor directly a consequences of its less generous welfare state. It emerged instead from evolving coalitions between fledgling consumer lenders seeking to make their business socially acceptable and a range of non-governmental groups working to promote public welfare, labor, and minority rights. In France, where a similar coalition did not emerge, consumer credit continued to be perceived as economically regressive and socially risky.
3 - Regulation Released
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- By Gunnar Trumbull, Harvard Business School
- Edited by Peter A. Hall, Harvard University, Massachusetts, Wade Jacoby, Brigham Young University, Utah, Jonah Levy, University of California, Berkeley, Sophie Meunier, Princeton University, New Jersey
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- The Politics of Representation in the Global Age
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- 05 June 2014
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- 07 April 2014, pp 53-72
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Between roughly 1975 and 1984, French consumer and producer groups met more than one hundred times in a range of venues and subgroupings to negotiate a set of agreements that would address the growing concerns of French consumers. Borrowing ideas from Ralph Nader's movement in the United States, and from countries like Sweden and Britain that already had established consumer protections, French consumer groups attempted to negotiate their own domestic consumer protection regime directly with industry. The negotiations they conducted ran the full gamut of consumer grievances, including product pricing and inflation, informative labels, misleading advertising, product quality and safety, legal terms covering sales to consumers, dispute resolution, doorstep sales, and product liability. By the mid-1980s, most of these negotiations had failed, and the French state stepped into the regulatory gap. Legislators created powerful new regulatory agencies that imported an American-style consumer protection regime into the heart of French markets. In a society that had been famously producer oriented, consumers emerged as a new focus of public policy.
The rise of consumer protections across the advanced industrialized countries during the 1970s and 1980s poses an acute challenge to dominant theories of interest representation that emphasize the weight of industry. Most influential among these were the capture theories proposed by Mancur Olson (1965) in The Logic of Collective Action, and elaborated by George Stigler (1971), Sam Pelzman (1976), Russell Hardin (1982), and many others. In these approaches, large societal groups face obstacles to coordination that place them at a disadvantage relative to concentrated interests when pursuing their goals in public policy. Such organization-focused interest group theories were deeply influential in the fields of politics, economics, and public policy. Yet they emerged during a period in the late 1960s and 1970s when diffuse interests, including environmentalists, women, retirees, and consumers were proving highly effective at mobilizing and influencing public policy. Of these groups, consumers – the diffuse interest par excellence – posed perhaps the greatest empirical challenge.
A Brief Postwar History of U.S. Consumer Finance
- Andrea Ryan, Gunnar Trumbull, Peter Tufano
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- Business History Review / Volume 85 / Issue 3 / Autumn 2011
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- 19 October 2011, pp. 461-498
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- Autumn 2011
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In this brief history of U.S. consumer finance since World War II, the sector is defined based on the functions delivered by firms in the form of payments, savings and investing, borrowing, managing risk, and providing advice. Evidence of major trends in consumption, savings, and borrowing is drawn from time-series studies. An examination of consumer decisions, changes in regulation, and business practices identifies four major themes that characterized the consumer finance sector: innovation that increased the choices available to consumers; enhanced access in the form of consumers' broadening participation in financial activities; do-it-yourself consumer finance, which both allowed and forced consumers to take greater responsibility for their own financial lives; and a resultant increase in household risk taking.