Regulating for Legitimacy: Consumer Credit Access in France and America
Executive Summary — Why have American households consistently borrowed so heavily? And why have their counterparts in France borrowed so little? This comparative historical analysis by HBS professor Gunnar Trumbull traces the roots of these different attitudes. In the United States, early welfare reformers embraced credit "on a business-like basis" as an alternative to expansive welfare states of the sort that were emerging in Europe. In France, early social planners saw consumer credit as a drain on savings that threatened to crowd out industrial investment. Regulatory regimes that emerged in the postwar period in the two countries reflected these different interpretations of the economic and social role of credit in society. Key concepts include:
- Market regulation has conventionally been justified in terms either of the public interest in correcting market failures or of the social welfare interest in restricting market functions.
- The case of consumer credit suggests that the historical context in which markets have been constructed as legitimate affects the way in which they are regulated.
- Americans have supported a liberal regulation of credit because they have been taught that access to credit promotes welfare.
- The French regulate credit tightly because they have come to see credit as both economically risky and a source of reduced purchasing power.
- These cases suggest that national differences in regulation may trace to historically contingent conditions under which markets are constructed as legitimate.
Theories of legitimate regulation have emphasized the role of governments either in fixing market failures to promote greater efficiency or in restricting the efficient functioning of markets in order to pursue public welfare goals. In either case, features of markets serve to justify regulatory intervention. I argue that this causal logic must sometimes be reversed. For certain areas of regulation, its function must be understood as making markets legitimate. Based on a comparative historical analysis of consumer lending in the United States and France, I argue that national differences in the regulation of consumer credit had their roots in the historical conditions by which the small loan sector came to be legitimized. Americans have supported a liberal regulation of credit because they have been taught that access to credit is welfare promoting. This perception emerged from a historical coalition between commercial banks and NGOs that promoted credit as the solution to a range of social ills. The French regulate credit tightly because they came to see credit as both economically risky and a source of reduced purchasing power. This attitude has its roots in the early postwar lending environment, in which loans were seen to be beneficial only if they were accompanied by strong government protections. These cases suggest that national differences in regulation may trace to historically contingent conditions under which markets are constructed as legitimate.