I knew I was opening an interesting book when I picked up Lendol Calder’s „Financing the American Dream: A Cultural History of Consumer Credit”. But I had no idea that, in reading the historical chapters, I would stumble onto the microfinance of the early 1900s. Published in 1999, Calder’s book tracks the rise of consumer credit, from Victorian society’s scorn for debt, to credit as a practical life necessity in modern societies. It’s a great read. And against the backdrop of the 2008-2010 credit crisis, this book is as poignant as ever.
However, what astonished me most is that modern microfinance, it turns out, has its almost exact equivalent in North America in the early 20th century. The public of rich countries is currently enthralled by the notion that a supposedly innovative set of morally-driven credit institutions could create a better society, a world without poverty, more empowered individuals… This is so much an instance of history repeating itself, it’s almost creepy. Calder writes how well-meaning people in America tried lending to the poor to help them escape poverty by building up the licensed small-loan industry – before World War I, before the Model T, before Morgan Stanley – and failed. As Calder explains on pp. 111-112, the licensed small-loan industry was created to help the poor take charge of their lives through small enterprise. But credit did not create more entrepreneurial, freer human beings; instead, as an unintended consequence it created the consumer culture of the USA which we know today.
“The lenders and reformers who organized the licensed small-loan industry did not view themselves as advance agents for debt-based mass consumerism. On the contrary, through the mid-1920s small-loan lenders conscientiously resisted modern consumerism, at least what they could see of it. The business of personal finance was perceived as an exercise in philanthropy and social welfare, as a way of liberating workers from the clutches of poverty and the loan shark. In order to combat the odium attached to their business, small-loan lenders characterized themselves as upholders of the American dream. Not the consumerist dream of easy living on an increasingly high standard, but an older dream, one which pictured America as a country where wage laborers who worked hard and saved their money could rise up in the world and become independent producers [the dream of modern microfinance]. Small-loan lenders hoped that with an advance of “capital” and a little financial advice, some workers, at least, would be enabled to take charge of their lives and become “capitalists” themselves.
If the founders of the personal finance industry had known the consequences of their actions, if they had known that they were helping to lay the financial foundation for a culture of consumption, they might have stopped lending and moved into some other line of social work. In fact, when lenders realized what was happening, that is what a few of them did. The others continued to hope that their business directed borrowers onto the straight and narrow path of Victorian thrift, self-discipline, and productive independence. In this hope small-loan lenders were not being entirely selfless; the thrifty borrower made payments, the prodigal borrower did not.
But what they intended never materialized. Instead of building a society of independent, thrifty, and hardworking small businessmen, personal finance companies helped to build a debt-driven consumer culture.”
This rise of debt-fueled consumerism occurred in a context of rapid growth and industrialisation in the USA, where jobs and rising incomes gave debtors the opportunity to pay off their consumer debt. If microfinance is to have the same consumerist effects in the growth-hampered, non-industrialising countries of the South, it seems it could well be a catastrophe.
Maybe microfinance is all about believing in the American dream – from rags to riches by hard work. That would explain why a few success stories could enthrall an entire community of educated people, to the extent that hard empirical evidence is discounted.
So much more could be read into Calder’s amazing book. But I’ll leave that for my dissertation.