Regulating Bad Business: The Rise and Fall of Small Lenders in US, UK, and Japan

• In Event: Regulating Economic Competition in the Era of Populist Politics

Abstract

This paper explores the rise, reinvention, and fall of traditional small lenders in the U.S., U.K., and Japan over the course of the 20th Century. It argues that moral conceptions of consumer credit markets were critical to the ways in which these markets were regulated, and to how regulation in turn transformed the small lending sector as it evolved from illegitimate to legitimate business. In many ways, the stories of the rise and fall of small lending in these countries share common elements. In each country, small lending moved from a largely unregulated, informal activity to a highly institutionalized—and profitable—part of modern economic life. At the same time, unsecured small lending was transformed from a marginal, ethically suspect business rife with exploitation and corruption into a normal tool of household finance. Yet the stories also hold important differences. American small lenders that arose in the late 19th century were largely displaced by commercial banks in the years immediately before and after World War II—only to return in the late 20th century in the form of payday lending. Japanese small lenders that grew and prospered through much of the postwar period retained their socially marginal status until the early 2000s, at which point revised usury regulations pushed them out of business. In the U.K., small doorstep lenders that emerged in the mid-nineteenth century survived through the 20th century without becoming either fully socially normalized or displaced by bank lenders. By studying the different fates of these national sectors, the paper uncovers the conditions under which government regulation induces a sector to become socially legitimate.

Author

• Gunnar Trumbull, Harvard University