A Brief Postwar History of US Consumer Finance

by Andrea Ryan, Gunnar Trumbull & Peter Tufano

Overview — The growth of the consumer finance sector after World War II provided a bevy of new financial options for Americans. These options led to a "do-it-yourself" approach to consumer finance, and an increase in household risk taking. In this paper, Harvard Business School professors Gunnar Trumbull and Peter Tufano, along with former HBS research associate Andrea Ryan, discuss the major themes that dominated the expansive postwar sector, including some of the factors that set the stage for the recent subprime mortgage crisis. Key concepts include:

The authors identify four major consumer finance trends from the past 65 years: an increase in the number of available financial options including innovations; greater access to those options for more Americans; a trend toward a do-it-yourself approach in consumer financial services; and a resultant increase in household risk taking.
The type of debt households carry has changed dramatically over the past several decades. The share of household financial liabilities represented by mortgages increased from 59 percent in 1950 to 73 percent in 2008, while the share represented by consumer debt fell from 31 percent to 18 percent.

Author Abstract

This article describes the consumer finance sector in the US since World War II. We first define the sector in terms of the functions delivered by firms (payments, savings/investing, borrowing, managing risk, and providing advice). We provide time series evidence on major trends in consumption, savings, and borrowing. Examining consumer decisions, changes in regulation, and business practices, we identify four major themes that characterize the sector: (1) innovation that increased the choices available to consumers; (2) enhanced access in the form of broadening consumer participation in financial activities; (3) do-it-yourself consumer finance, which allowed and forced consumers to take greater responsibility for their own financial lives; and (4) the resultant increase in household risk taking.