Chapter Four

War and Credit

GOVERNMENT REGULATION AND CHANGING CREDIT PRACTICES

REPORTEDLY IN 1950, FRANK MCNAMARA, a businessman who had left his wallet in his other suit, in a flash of inspiration, conceived of the credit card while anxiously waiting for a bill. Diner’s Club International, purveyor of what has been called the first credit card, has claimed that McNamara thought to himself, “Why should people be limited to spending what they are carrying in cash, instead of being able to spend what they can afford?”¹ Historians, when they have remarked on the origin of contemporary credit, have largely gone along with this “great man” anecdote, attributing its conception to the savvy of a brilliant entrepreneur.²

In reality, however, the idea of the credit card did not appear ex nihilo in the mind of Frank McNamara, but emerged from a complicated network of institutions, policies, practices, and technologies that had only recently come into being. Without this existing infrastructure of debt, McNamara could never have had that insight in 1950, much less put it into practice. Though McNamara’s scheme, the travel and entertainment (T&E) card Diner’s Club, did succeed in providing credit for businessmen, it was more an extension of existing practices of department store customers than a true innovation. The majority of American consumers who were not traveling businessmen already had learned how to “charge it” at department stores, where revolving credit had become common during the 1940s as the inadvertent result of a federal policy called Regulation W.

As the federal government attempted to restrain inflation during World War II scarcity, it instituted both the well-known rationing program for many consumer goods, and launched the now forgotten first federal attempt to directly regulate consumer credit.³ With Regulation W, Roosevelt authorized the Federal Reserve, under a contorted reading of the Trading With the Enemy Act, to directly regulate how much consumers could borrow and the terms under which this borrowing could occur.⁴ Federal Reserve regulators, who feared another NRA-esque debacle, carefully attempted to cultivate the consent of the businessmen. Rather than acting decisively, regulators formulated rules piecemeal so as to avoid aggravating American business. Moreover, the Federal Reserve lacked the staff or experience to directly enforce the regulations on hundreds of thousands of businesses. Weak enforcement and uneven regulation remade the incentives and practices of lenders.⁵

As the war wore on, businessmen who initially agreed to Regulation W in the name of patriotism saw opportunities to obey the regulation in name but to break it in practice, so as to gain an edge against their competition. Some forms of credit, like installment credit, were heavily regulated, while others, like open accounts, went ignored. Nimbly dodging Regulation W’s grasp, many American retailers reorganized their businesses to create the first revolving credit plans, which could not be effectively regulated. While Regulation W reduced the overall amount of consumer debt during the war, it also destabilized established lending practices and encouraged a hybridization of installment credit and charge accounts—revolving credit—that combined interest charges and flexibility in a form outside Regulation W. In effect, from the beginning of World War II until the Korean War, Regulation W deeply shaped the course of credit practices in the American economy, pushing retailers and consumers towards revolving credit—the nucleus of today’s modern credit card.

The origin of today’s credit cards can be found in the larger structures of capitalism and public policy rather than in Frank McNamara’s dinner mishap. The more important question, then, is how did existing forms of consumer credit—installment credit and open account credit—converge to produce the new practice of revolving credit that became the foundation of today’s credit card. Revolving credit, where consumers pay back a loan over time with interest, like an installment account, but without a specific end date—like an open book charge account—was unlike any type of credit consumers had access to before. Revolving credit shifted the onus of deciding how much to borrow from the credit manager to the borrower, giving the consumer far more agency over borrowing. Revolving credit provided consumers with ready-access to flexible amounts of credit that was unsecured by the goods themselves. That is, no repossession was possible with revolving credit. For retailers, revolving credit offered a way to bind consumers to their stores and to get them to buy more. Despite these benefits, revolving credit was an extremely different practice of credit more suited to a time of prosperity than to wartime, which, in turn, begs the question: Why did retailers and consumers abandon their conventional credit techniques for revolving credit during World War II? Regulation W successfully curtailed the growth of consumer credit while it was in effect, but produced unexpected consequences for how businesses and consumers practiced debt, ultimately fueling the postwar credit boom.

Reform and Regulation

Even before the war, Rolf Nugent and Leon Henderson, who had worked together in the Department of Remedial Loans of the Russell Sage Foundation and who later designed Regulation W, were publishing articles like “Installment Selling and the Consumer: A Brief for Regulation,” that argued for an interventionist role for the government in consumer credit.⁶ Consumer credit, in their view, had grown too large and too exploitative. Installment credit was rife with consumer fraud, nonstandard contracts, and excessive finance charges. The lack of regulation, they believed, “exposed large groups of consumers to abusive practices.”⁷ Following the Russell Sage Foundation’s success in regulating the small loan field, Nugent and Henderson imagined that regulation of installment credit would help the consumer. In 1939 when Nugent had become head of the Department of Remedial Loans at the Russell Sage Foundation, he published his landmark, Consumer Credit and Economic Stability, which similarly argued that installment credit exacerbated the swings of the business cycle and could be best controlled with regulation of contract lengths and down payments. Nugent believed that the Federal Reserve, with its “extensive facilities for collection and interpretation of statistical data concerning business conditions and consumer credit movements,” would be the best choice to regulate installment credit.⁸ Under their guidance, in 1940 the Russell Sage Foundation published, The English Hire-Purchase Act:,1938: A Measure to Regulate Installment Selling, whose introduction called for the creation of a government agency given “direct control over instalment [sic] merchants” to redress the abuses of the installment credit system modeled on the British intervention of 1938.⁹

As Americans anticipated the return to war, economists and government officials contemplated the consequences of such a decision for the economy. Presented with the opportunity to join the group creating Regulation W, Henderson and Nugent brought their earlier perspectives to bear. Nugent’s idea for the Fed to directly regulate installment credit became the cornerstone of the regulation. Inflation, such as had happened during World War I, was deemed one of the greatest threats to the mobilization effort. When factories converted to war production, consumer goods would surge in price as their supply dropped. One seemingly easy option to lessen demand, and thus prices, was to reduce the available credit to consumers. By restricting credit access, Henderson and Nugent believed they could reduce the number of people who could afford to buy, thus lessening demand and replacing inflationary borrowing with disinflationary saving.

Such a control on installment credit could be effective because one quarter of all American families used the installment plan on the eve of World War II.¹⁰ Three-fifths of this installment borrowing was for automobiles and most of the rest was for other consumer durables, all of which grew scarce as American factories retooled for war, lessening the demand for those goods.¹¹ Installment credit could not be allowed to enable an “unjustifiable bidding up of prices,” as Federal Reserve Chairman Marriner Eccles commented.¹² Though the Supply Priorities and Allocation Board, and more generally the massive government contracts, determined what would be produced, market prices would still react to the shortage. With “two or three buyers for each automobile,” Eccles believed prices would rise quickly.¹³ Credit controls would mitigate the inflationary effects of demand under such scarcity.

The perceived need to regulate consumer credit pointed to both its importance and marginality. Consumer credit represented a large enough portion of the economy so that restricting it could significantly reduce consumption. Nugent had just argued in Consumer Credit and Economic Stability that in wartime the need to regulate consumer credit would be enormous. While there had been, according to him, a “moderate” inflationary expansion of credit during World War I, with the “more widespread use and more general availability of consumer credit” there would be a “far more substantial” increase by 1939.¹⁴ At the same time, consumer credit was marginal enough that cutting it back would not produce economic collapse. The economy could continue independently of consumer credit, particularly if government demand replaced consumer demand.

Restricting consumer credit nonetheless required a sudden reversal of federal policy, which had focused throughout the 1930s on expanding consumer credit access. As chapters 2 and 3 have shown, federal policy in the 1930s promoted consumer borrowing to stimulate the faltering economy. Before the United States entry into World War II, these policies remained in effect. As the economy suddenly expanded through government demand for wartime goods, an about-face in economic policy became necessary. Gone were the days of coercing demand from uncertain Depression-era consumers. Instead of fears of deflation, the dangers of inflation resurged. Altering the juggernaut of federal programs could not happen as quickly as declaring war.

From the beginning of the regulation, the Federal Reserve, guided by the Utah banker Eccles, had been anxious to regain lost power. The failure of the Fed’s monetary policies to stop the Depression had led to widespread doubt in its capacity to really guide the economy. New Deal agencies of the 1930s, like the Federal Housing Administration, now commanded vast control over the flow of capital in the United States. As Eccles noted to a meeting of Federal Reserve bankers, there had been “a good deal of encroachment” on the Fed’s control of the “credit mechanism” of the economy, since “Acts . . . were passed in 1933 and 1934” in which the Fed “lost a considerable amount of the power . . . over the money and credit system.”¹⁵ Regulation W would restore some of that lost institutional power, but not all. Though Eccles had come to a private understanding with Roosevelt that if any additional credit control powers were created, over housing for instance, they would go to the Fed, but existing institutional powers could not be taken away.¹⁶ As Regulation W went into effect, the Fed had to coordinate with other branches of government whose policies also affected the credit supply. The FHA, for instance, continued to use its powers to expand the supply of housing for defense workers. At the time of Regulation W’s enactment, its Title I program recommended no down payments and thirty-six month repayment plans—that diametrically opposed the Fed’s anti-inflation program.¹⁷ For the Federal Reserve, Regulation W was a way to regain lost bureaucratic power and institutional respect.

Bureaucratic fiefdoms, business practices, and consumer expectations did not change as easily as the issuance of an executive order. An adroitly managed transition called for more than well-crafted policies. It required federal regulators’ careful cultivation of the consent of the governed, both business and consumer alike. The Fed, accustomed to ready obedience from banks in need of loans, never anticipated how difficult it would be to police the entire U.S. economy.

Cultivating Consent for Regulation W

Economists of the Office of Price Administration (OPA) and Federal Reserve staffs met during the summer of 1941 to iron out their vision of what a politically viable control on consumer credit could look like.¹⁸ The OPA collaborated with the Fed, through Regulation W, to ensure that rationing would not result in inflation. Their previous experiences guided them in what was feasible and what was necessary. As chairman Eccles remarked, they were “fortunate in having a staff with real experience.” These experts like Henderson and Nugent, Eccles noted, had “been giving . . . thought to the fundamental questions involved in trying to operate selective credit controls for a long time,” and the regulation reflected the assumptions and conclusions borne of that experience as well as the necessities of wartime.¹⁹ Enormous difficulties confronted these framers of the regulation, but through their cunning and expertise they devised a system that they believed would accomplish their shared goal of restraining inflation.

Nugent and Henderson hoped that the regulation would lead to other long-term changes beyond the immediate concerns of inflation in a wartime economy. At the first meeting of the Federal Reserve to work out its tentative draft, Eccles announced that it was a “momentous meeting” to discuss Regulation W since it was not only an entirely new “field of action and responsibility” for the Fed, but also because “it may turn out to be a permanent instrument of control in the [Federal Reserve] System.”²⁰ The immediate consequences to the defense effort were paramount, but as Nugent and Henderson and the rest of the staff framed the new control they imagined it to be a permanent one, along with the Fed’s other powers in the economy, following Nugent’s plans in Consumer Credit and Economic Stability. For reformers like Nugent and Henderson, the regulation presented the opportunity for success at the federal level that the Russell Sage Foundation had had at the state level in the 1920s and 30s with its small loan law campaign. Regulation W could be the way to control unscrupulous installment credit as effectively as loan sharks did under the small loan laws.

For those opposed to Nugent’s substantial reforms, like the vice-chairman of the Federal Reserve, the Atlanta banker Ronald Ransom, the chief task of the regulation was helping the Fed in its primary responsibility to restrain macroeconomic inflation. Regulating the microeconomy was best left to other institutions—or just the free market.²¹ Ransom believed consumer credit was “very difficult” to regulate because it was not one industry but an interconnected system that extended across many sectors. The consumer credit industry encompassed a wide variety of businesses—auto dealer and furniture retailers’ installment plans, department stores’ charge accounts, industrial lenders’ companies, and commercial banks’ personal loans. Balancing those sometimes contradictory interests would take extraordinary political and policy adroitness. While credit appeared equivalent macroeconomically, at the level of the firm restricting consumer credit could have wildly different effects. Restricting cash loans and installment credit, for instance, had a more dire effect on those businesses—like small loan lenders, auto dealers, finance companies, and retailers who sold predominately on the installment plan—than on firms for whom consumer lending formed only a portion of their business, such as department stores, or firms for whom the wartime economy presented alternative sources of profit, like commercial banks and auto manufacturers. Small loan lenders and finance companies had nothing to sell but their money, but commercial banks, for example, could invest in wartime production. Regulators would have to mediate between all the different interest groups and still come up with a workable regulation that contained inflation but did not bankrupt businesses.

Business consent, so lacking during the NRA, was carefully cultivated during the creation of Regulation W and the NRA’s shortcomings came up frequently as industry representatives and regulators discussed the limits of Regulation W.²² Leon Henderson, for instance, had worked at the NRA during its failed attempt to regulate finance companies in the 1930s.²³ During the first Fed meeting, Ransom prayed, only half in jest, “If the Lord is kind to us, this will not be a repetition of N.R.A.”²⁴ It was, as Ransom remarked, “in the light of many of the experiences all of us had with the N.R.A. that we have approached the writing of this regulation.”²⁵ Wanting to regulate consumer credit, but also not overstep the constitution, the regulators hemmed to the less extreme modes of enforcement: inspection, regulation, and fines.²⁶ Imprisonment was not discussed, but neither was exactly who would handle these inspections or who would prosecute infractions. Written with business interests in mind, the regulators hoped compliance during wartime would be voluntary. The regulators, more than counting on the negative enforcement, hoped that most sellers would “desire to comply in good faith” during the time of war and that “trade associations and the leaders in the different lines” would convince their colleagues to conform to the regulation.²⁷

The Fed requested suggestions from bankers, economists, businessmen and others whose support would be necessary to maintain public legitimacy. Because of the need for business support, as the Board planned out its regulation, it also sought the feedback, as Chairman Eccles noted, of the institutions most “vitally interested” in the proposal.²⁸ For the regulation to be successful, the Fed needed the support of the manufacturers, distributors, and retailers who sold on the installment plan.²⁹ As Ransom told the first conference held of those involved in the installment trade, “without your full cooperation, without your good will, without your understanding that we are trying to do a job in a national emergency and in the public interest, we shall not make headway.”³⁰ Whatever their feelings about government regulation, the Fed hoped that appeals to patriotism would sway the support of business.

The public support of businesses and consumers depended on how necessary the regulations appeared, and while the legal justification came from stopping inflation, public support required that the regulators rhetorically frame the regulation as a way to save scarce war materiel, like the OPA rationing program.³¹ War aims could be easily defended, but not more abstract economic ideas. Citizens, even those with considerable profits at stake, understood the need to conserve strategic war materials. The abstract danger of inflation did not emotionally sway retailers and consumers like steel needed for a gun. The further a good was from defense materials, Ransom suspected—all too accurately it turned out—“administrative problems might become increasingly difficult,” since sellers and buyers alike would begin to resist the regulation’s imposition.³²

By giving business input in its creation, the writers of Regulation W believed that they could win the consent of the governed. The Fed regulators hoped that the regulation could be initially enacted weakly, achieve business buy-in, and then, if necessary, be made stricter. The regulation’s initial scope was, as Nugent planned, “sweeping but mild,” encompassing all installment sales less than $1,000.³³ Ransom remarked that they would “much prefer to tighten [the regulations] slowly rather than put them on tight and then loosen them.”³⁴ The kinks in the system could be worked out and then, when ready, the controls on credit and inflation truly enforced. The regulation was, above all else, malleable. The Fed wanted to act quickly but it also wanted to leave opportunity for revision and reflection. Ransom emphasized equally that the regulation was to be “flexible” and “open to amendment in the light of experience and . . . changing conditions.”³⁵ While weakness produced consent and flexibility allowed technocratic precision, over time they also allowed Regulation W to alter its function in subtle and unexpected ways. As political and economic pressures were brought to bear, unintended effects on credit practices were created.

Inside and Outside Regulation W

Proceeding with trepidation and fearful of irritating business leaders, the Federal Reserve implemented a loose version of Regulation W on September 1, 1941. Yet for its supposed mildness, the regulation even in its weak form reshaped the entire installment credit industry. It changed the way millions of consumers and hundreds of thousands of retailers conducted their everyday business, disrupting large corporations and sometimes entirely destroying small companies. At the same time, the regulation neglected widely used kinds of credit—charge accounts and personal loans—that could be easily used to evade the restrictions on installment credit. In reshaping American borrowing, the types of credit inside the regulation mattered as much as those outside.

Following Nugent’s framework in Consumer Credit and Economic Stability, Regulation W specified the minimum down payment and maximum contract length of a wide range of goods, but these terms were often at odds with the conventions of installment practice. Eighteen months seemed to be the maximum reasonable contract length to the regulators, with all goods requiring between 15 and 33 percent down payment, but these numbers had little to do with how installment credit worked in the real world.³⁶ Autos commonly had twenty-four month contracts and refrigerators thirty-six, but most installment sales were considerably less than eighteen months.³⁷ Such a regulation, Nugent believed nonetheless, would “have no more than a mildly restrictive effect on all but a few important commodities.”³⁸ Though the Fed tried to be clear that these were only minimums and that retailers could at their discretion always demand higher down payments and shorter contracts, misunderstandings arose for both retailers and consumers. At the same time, however, the regulation covered nearly all consumer durables, prescribing maximum contracts lengths and minimum down payments for a wide variety of goods. Though Nugent had initially suggested that the regulation be no tighter than the most conservative lending practices, as enacted, the regulation was more uneven.³⁹

Conventional contract lengths were often longer than those of Regulation W, yet at the same time the down payments were more onerous than were typical in the installment business. Even as the contract lengths were not particularly restrictive, the larger down payments roused the ire of installment-selling retailers.⁴⁰ David Craig, president of the American Retail Federation, felt that requiring “20 per cent down payment is more of a departure from current practice than [was] needed.”⁴¹ Even though such payments had clear precedent in past credit practices, the regulation compelled merchants to ask for a greater down payment than their customers were accustomed to by 1940. This frustration led even patriotic retailers to look for alternatives.

One alternative was personal loans, which, though regulated offered a different structure than installment credit. Money could never be for just one purpose. If the regulations were to work, personal loans, whose cash could be used for any purpose including buying consumer durables, had to be restricted.⁴² Without the requirement for a down payment, a cash loan would be easier to acquire than an installment contract. Though thought of separately, cash loans could just as easily pay for medical bills as for a new washing machine. Borrowed money could also substitute for other expenditures. A loan could be used for rent, which would free up cash to buy a restricted article.⁴³ Personal loans for “medical expenses, funeral, grocery or other similar legitimate and necessitous bills [which had] no direct impact on supply,” as Edward Brown, the chairman of the federal advisory council and president of First National Bank of Chicago, wrote, could seriously undermine popular support of the regulation.⁴⁴ Yet, once borrowers had the money in their hands, what seemed important might change. B. E. Henderson, president of the Household Finance Corporation, a national small loan company, said that for many borrowers the “purposes change over night.”⁴⁵ Henderson did not think that his clients would always intentionally deceive, but he also did not assume that every dollar borrowed for a hospital bill necessarily went to the hospital. Borrowers might receive a $100 for a bill and have some left over to use for other purposes.⁴⁶ The regulation, however, expected each dollar to go for the purpose intended, which not only contradicted established practice, but the limits of human self-control.

When the representatives of many commercial banks’ personal loan departments, as well as those of industrial banks and credit unions, met to discuss the proposed regulation, they found Regulation W’s requirements unsettling for both their profits and the social purpose of personal lending.⁴⁷ Personal loan departments, National City Bank’s Roger Steffan wrote, would find the regulation “so disruptive to established fundamentals” as to be “dangerous.”⁴⁸ Facing this bureaucratic intrusion, Steffan thought, borrowers instead of taking out a reputable loan with the bank’s personal loan department, would “apply for a second loan at another bank, loan company, or even a loan shark” rather than “going through the red tape.”⁴⁹ Edgar Fowler, secretary of the American Association of Personal Finance companies, thought that deprived of one source of credit, borrowers would find another; “the whole history of loan shark legislation since 1890 proves their behavior.”⁵⁰ Applied to small loans, Steffan feared the regulation’s “economic dynamite” would “explode” the anti-loan shark reforms of the past twenty years, pushing borrowers to loan sharks who would ask fewer questions.⁵¹

As much as Regulation W’s proscriptions did cover personal loans and installment credit, there were important gaps, most importantly on open book credit.⁵² Open book credit’s absence from the regulation mattered the most of all because it represented such a huge fraction of consumer borrowing. In 1938, $7.9 billion was transacted on such charge accounts, or nearly one quarter of all retail sales.⁵³ Open book credit, Ransom explained to businessmen and other Fed officials, was simply too difficult to regulate. With no contracts and no scheduled payments, their potential for regulation was nightmarish. For reform-minded regulators, open book credit was not harmful because borrowers paid no interest and never faced repossession.

Yet for retailers, the absence of regulation offered an obvious way to evade Regulation W. The “thousands, possibly millions of instances” of open book credit, as one hardware trade representative put it, ought to be regulated as well as installment credit, since they had the same economic effect.⁵⁴ If customers could borrow on unregulated open book accounts, the trade representative persisted, then would this not lead to a “situation where everyone would sell on open account”?⁵⁵ The shifting of installment credit to open book credit would fundamentally undermine the regulation.

Fed officials dismissed the regulation of open book credit because of how it was financially practiced and culturally understood. Open book credit lacked installment credit’s contract, interest, and repayment schedule. Without these three features, finance companies would not buy the debt from the retailers. Without the ability to resell consumer paper, charge account sellers could not afford to extend nearly as much credit as installment sellers.⁵⁶ Evaders of the regulation who sought to substitute open book credit for installment credit, as one Fed banker conjectured, would quickly exhaust their “general line of borrowing power.”⁵⁷ Unless retailers wanted to get themselves into debt, they had to limit open account credit. Installment credit, backed in the last instance by commercial banks, was a potentially massive source for inflationary funds, which gave it a much higher priority for regulation. The cultural assumption that charge accounts were repaid monthly obfuscated the reality that these accounts often went unpaid for many months. Even though Ransom and the other Fed framers realized that “a good many open book accounts [ran] for long periods without payment,” the difficulty associated with their regulation and the cultural assumptions underpinning their extension made such regulation impossible.⁵⁸ This decision to regulate installment but not open book accounts, led to, what some thought, were unexpected consequences for Fed policy and business practice.

The Effects of Regulation W

Consumers, when the Fed first enacted the regulation, were unsure what to make of the new regulation. The uncertainty of the regulation paired with the government’s authority made interpretation of the regulation both necessary and powerful. While retailers and regulators spent large amounts of money on advertising in trying to correct these misunderstandings, consumers caught up in the uncertain remaking of the installment credit relation, began to assert their own interpretations of what the government wanted.⁵⁹ Though the regulation did not require merchants to extend credit as liberally as permitted by the regulation, consumers often did not feel the same way, misinterpreting Regulation W’s maximum contract lengths as government-mandated minimums.⁶⁰ For many consumers, the government decreed the proper lengths of contracts and amounts of down payments. In its desire, as Ransom explained, “not to put the brakes on quickly or to cause too much trouble,” the Fed had inadvertently created a new credit norm for the American shopper.⁶¹ Where the Fed regulators saw a maximum of eighteen months, consumers saw only eighteen months. For merchants to refuse to extend eighteen months of credit now seemed somehow unfair to their customers. The regulation had begun to remake socially acceptable contract lengths.

From the first announcement that regulation was coming, people rushed out to buy on the installment plan, fearing credit would soon be outlawed.⁶² This reaction drove the Fed to quickly disseminate the regulation and choose a fast deadline, before the frightened shoppers drove up prices. Despite their efforts, Roscoe Rau, of the National Retail Furniture Association, reported to the Fed that all the publicity surrounding Regulation W gave consumers the “wrong impression.”⁶³ An informal survey of auto buyers, when asked their opinion of Regulation W, found that they chose “confused” about 40 percent of the time when given the choice of “favorable,” “unfavorable,” or “confused.”⁶⁴ Confusion extended beyond autos, however. Some consumers thought the regulation was a “tax” or that the down payment on furniture (one-fifth) was the same as the more widely discussed down payment on automobiles (one-third).⁶⁵ Retailers were confused as well. By June of 1942 about 170,000 firms had registered as installment sellers under Regulation W.⁶⁶ Of three thousand registration forms sent by retailers in the Richmond Federal Reserve district, about half contained errors.⁶⁷

Retailers felt the effects of Regulation W almost immediately. Sales fell, not only because of fewer goods but because of reduced credit. October auto sales on the installment plan fell to two-fifths the level of a year earlier. The Dallas Federal Reserve Bank claimed that total auto sales in its area were only one-fourth of the previous year. In meetings with Dallas area auto dealers, bankers, and finance company owners, every single one reported that sales had “dropped materially.”⁶⁸ From August to September, furniture sales on the installment plan dropped by nearly a third, and refrigerator sales fell by 85 percent.⁶⁹ As the months wore on, it became clear that even as durable goods sales continued to drop, installment sales fell even faster.⁷⁰ In October 1942, installment sales of furniture were down 35 percent from the previous year.⁷¹ From August, 1941 to October, 1942, outstanding auto debt dropped from $2,313 million to $600 million, or nearly 75 percent.⁷² By 1943, more money was being lent on furniture than on autos.⁷³ Department stores reported a 40 percent drop in installment accounts receivable from January to October of 1942.⁷⁴ Even the venerable mail order company Spiegel’s reported installment sales and outstanding accounts had fallen to one-quarter of their prewar levels, which the secretary-treasurer of the company attributed entirely to Regulation W.⁷⁵

Borrowers also cut back on personal loans. Personal finance companies and industrial banks also lost loan volume, but at only half the rate of commercial banks.⁷⁶ The outstanding loans of personal loan departments of commercial banks’ loan outstanding dropped from $732 million to $460 million—37 percent—from September 1941 to September 1942.⁷⁷ Despite their more rapid decline, the regulation hit other personal loan lenders harder than commercial banks since commercial banks could fall back on business loans for firms expanding wartime production. Demand for business loans, the weakness of which had drawn commercial banks into the consumer credit business, returned with gusto as the government’s need for production expanded. As Chrysler, for example, stopped making autos and started making tanks, they required a $100 million loan to switch their factories over.⁷⁸ So much demand existed for wartime business loans that the American Bankers Association feared a scarcity of investment capital and called for voluntary curtailing of money for nondefense purposes.⁷⁹ Only $153 billion of the $380 billion spent by the federal government in the war years came from taxes. The remainder was borrowed from the private sector, including $95 billion from commercial banks.⁸⁰ Other financial institutions and consumer retailers, however, sharply felt the effects of Regulation W and began to speak out.

Regulation W’s success brought complaint from business owners, who as the reality of falling profit set in, began to fear for their enterprises. A Dallas department store manager told the head of the Dallas Fed that despite the reduced number of refrigerators produced, his store was still unable “to sell anywhere near the number it was able to obtain” because of Regulation W.⁸¹ Furniture stores selling heavily on the installment plan experienced painful contractions. As feared, when contract terms constricted, profits on the loans fell. The National Retail Furniture Association reported that revenue from credit fell by as much as half for some stores. The fears of some businessmen were exacerbated by inaccurate information from their own organizations. In October, for instance, the National Automobile Dealers Association sent out a bulletin to its membership that the Fed intended to raise the minimum down payment to 50 percent and drop the maximum contract length to twelve months on automobiles. Finance companies dealing in automobile loans also read this bulletin. Such a regulation would have more than halved their business. On the basis of just this one rumor, more than a hundred letters were sent to the Federal Reserve.⁸²

Consumers’ consent, as much as that of business, had to be delicately managed. Evidence from confidential internal Federal Reserve meetings suggests that regulators often based decisions as much on preserving Regulation W’s legitimacy as inflation or wartime need. The restriction on pianos, for instance, was not in the initial regulation but put in only after the vice-president of the Philadelphia Federal Reserve, C. A. Sienkiewicz, remarked that too many of the restrictions smacked of “class legislation.”⁸³ By restricting goods with upper-class cachet, like pianos, the regulation hoped to avoid what Sienkiewicz called the “appearance of discrimination.” Regulations on pianos were not needed to fight the axis, but to win public opinion. Sewing machines were, for the same reason, not restricted. Since sewing machines were, as Ransom explained, “limited so largely to a class, that by including them and involving the women of the country specifically in this regulation we bring down upon our heads a pretty solid front of opposition.”⁸⁴ Ransom explained that organs, for fear of “country churches” organizing against the regulation, were also unregulated.⁸⁵ Though conceived to fight a straightforward economic agenda, the regulation framers constantly thought about the regulation in terms of practical politics. Some Fed officials objected to such a politically minded plan, calling for a straight economic approach regardless of “political expediency.”⁸⁶ The reality of the situation, however, required such guile. It was not wise to have a class of people disciplined by the regulation to organize politically around a strong symbol of home such as the sewing machine or a symbol of religion such as the church organ.

As initially written, Regulation W disproportionately affected the urban poor, who did not have access to the open credit of higher-end retailers. Low-end clothing stores that sold on credit witnessed a fantastic collapse in profits. The Association of Credit Apparel Stores, a group of 451 stores that catered to lower-income patrons and sold 97 percent of their goods on installment credit, told the Fed that their businesses “[could] not survive under the regulation as now written.”⁸⁷ Like furniture stores, nearly half of their sales were “add-on’s,” which were restricted by the regulation and whereas their down payments averaged only 7 percent, for repeat customers there was no down payment.⁸⁸ Prices at installment stores were generally higher, with a 55 percent markup compared to 40 percent markup at cash or charge account stores, but lending standards were low.⁸⁹ With the regulation extended to clothing, however, shoppers, who frequented them because of the easy credit, stopped buying.

As their 97 percent installment business constituted only 4 percent of all American installment sales, the Association of Credit Apparel Stores felt that the regulation disproportionately targeted them and, because of their small importance, had little effect on inflation, while at the same time hurting lower-income Americans.⁹⁰ Charge accounts simply accounted for more buying. In 1939, charge accounts had nearly ten times the sales volume of installment sales of clothing.⁹¹ In contrast to the installment clothing stores, during the first few months of 1942 sales rose at department stores, where cash customers and middle-income charge customers, fearing wartime scarcity, bought absurd amounts of clothing. While low-income people had their buying curtailed, the Association argued, those able to buy with “cash or on charge accounts” had gone on a “buying spree” on woolen goods all out of proportion to their needs.⁹² Installment clothing stores were marginal to the economy, but not marginal to their customers, who had no other way of buying them. Buying for a $1 down and a $1 a week at stores like New York’s Dejay Clothing and Washington D.C.’s Liberal Credit Clothing, seemed unsavory to the Fed officials, but it gave low-income Americans clothing that they wanted when they wanted it.⁹³

Very clearly, Fed officials aimed Regulation W at a class of people, if not the working class, then at least those who either chose to or had to use installment plans to finance their purchases. Listed articles could always be paid for in cash, regardless of the regulation, but only if the buyer had the cash to buy. At the same time, however, installment plans were not eliminated. Credit was still available. A refrigerator that normally sold on a thirty-six month contract could still be sold on an eighteen-month contract. As Nugent pointed out, for a good quality refrigerator, which sold for $150 in 1941, the difference between a thirty-six month contract and an eighteen-month contract was $5.00 per month versus $7.50 per month.⁹⁴ Ransom believed that part of Roosevelt’s support for the control was that he did not want workers’ “increasing income to run away because of a run-away in prices.”⁹⁵ Regardless of class, if something was really desired, $2.50 could probably be found to purchase it.

As the wartime economy kicked off the long postwar boom, however, many working Americans began to find that they could come by $2.50 more easily than during the Depression.⁹⁶ As Carl Parry, one of the economists who designed Regulation W remarked, it was not the high-income group that was getting the defense economy’s “new money,” but the lower income.⁹⁷ The high-income group always had money, but working-class consumers had been deprived since the 1920s. This regulation restricted the group most likely to spend the money they received, not out of profligacy, but a decade of deprivation. Of course, if working-class Americans—who had been hit so hard in the 1930s—found themselves with unprecedented amounts of money in defense jobs, saved that money instead of spending it, then the regulation would not be a bad thing, so the thinking went. If it was paternalist class legislation, Regulation W had the best of intentions for both workers and the economy.

The difficulty was not, then, finding that $2.50 for many working-class Americans in the wartime economy if they really wanted that refrigerator, but in adjusting salesmen and consumers’ expectations and habits. Conventionally, refrigerators had long-term repayment plans because sellers sold them at the per month price that ice delivery would cost. If consumers were used to paying X dollars per month for ice, they could pay the same X dollars and get the use of a modern electric refrigerator, which after three years they would own outright. Such pricing schemes made installments fit the conventions of prices and budgets that people had for their daily expenses. More than simply denying the lower-income consumer commodities like refrigerators, which were “really doing something for the health of his family,” as one Fed official criticized, the threat of Regulation W was in the unraveling of credit conventions that made buying and selling easier for both consumer and seller.⁹⁸

Regulation W disrupted these conventions of price and practice for both retailers and consumers. Some companies collapsed, others turned to alternative sources of profit, while still others adapted, attempting innovative new forms of credit. New market constraints created new market challenges and opportunities. The Fed might call these experiments evasions within a loose regulation, but to firms trying to get their share of the wartime profit, novel credit practices were strictly business.

Tightening the Regulation and the Spread of Hybrid Credit

The Federal Reserve regulators believed in categories. To them, the names of different kinds of credit were not just words, but scientific descriptions of the real world. Regulation W’s effectiveness turned on the reality of these distinctions. Without a way to describe commercial activities, those activities could not be controlled. Regulators asserted that, “it [was] recognized by credit men that instalment [sic] credit is suited to one type of customer and charge credit to another,” but even as they insisted among themselves that these distinctions between credit were real, retailers and consumers found ways to make new kinds of credit so as to evade the Fed’s control.⁹⁹

Part of the difficulty with regulating consumer credit was the artifice of the distinction between charge accounts and installment credit. Regulators complained that the two forms of credit had a “considerable variation in detail” and also “overlapped a great deal.”¹⁰⁰ Fed definitions of credit meant less than retailers’ practices of credit. Merchants, especially the smaller ones, answering to no one on how they ran their credit business, created whatever jury-rigged system worked. Charge accounts were for convenience and installment plans were for using future income.¹⁰¹ Regulation W, not the demands of commerce, required merchants to adhere perfectly to definitions of credit in order to obey the regulations. Compliant retailers aligned their credit systems with the Fed’s regulations, creating a more homogenous credit environment for borrowers and lenders alike. These retailers offered credit, Brown explained, “on the basis of the regulation’s definitions rather than on the basis of the terms used by the merchants.”¹⁰² Ironically, as Regulation W defined how to practice certain kinds of credit, all a retailer needed to do was to invent a new kind of credit, outside the regulations, to give customers what they wanted—more borrowing power.

The Fed anticipated trouble with “hybrid” types of credit that were somewhere between installment credit and charge accounts. Charge account borrowers often used their accounts to spread payments out over several months. Brown believed that this practice had its roots in the “custom” created during the depression when merchants pressured customers to keep buying and to pay when they could. The practice was still called a charge account, he believed, because of the “opprobrium attached in some people’s minds to the word ‘installment.’” Merchants who extended charge credit to customers unable to pay off their debts in one payment not only violated the regulation but violated the customer’s “good faith.”¹⁰³ Giving charge accounts to those who could only pay over time would violate the regulation on installment credit, even if such partial payments were not formally required.¹⁰⁴

Despite the existence of this system before Regulation W, regulators attributed the increase in the use of the serially liquidated charge account to the regulation’s tightening grip. While some sellers used charge accounts in “good faith,” Fed officials like E. A. Heath also believed that other merchants “obviously acted in bad faith in establishing so-called charge accounts for the express purpose of avoiding down payment requirements.”¹⁰⁵ Fed investigators found that most stores using charge accounts with partial payments had, until the regulation, been strictly installment stores. The stores continued to provide installment payment books, verbally told customers that they ought to pay bi-weekly or monthly, and advertised “open a charge account and pay $_____a week. No down payment.”¹⁰⁶ Customers familiar with paying in installments, even if not told explicitly, would continue to pay in installments out of habit, the regulators believed. Charge account or not, lower-income “customers have been educated to instalment and almost inevitably will pay for goods purchased on credit on an instalment basis.”¹⁰⁷ Of course, customers learned how to repay their debts not only through installment credit or charge accounts at department stores, but through charge accounts kept with grocers and butchers as well. They learned to repay debts when they could for this convenience credit. To institute a new definition of charge accounts to mean single repayment, as one regulator suggested, the Fed would not only violate customs surrounding charge accounts but begin to make the accounts more like business loans, which had interest.¹⁰⁸

There were clear provisions for the regulation of charge accounts and installment credit, but how were these partial-payment charge accounts that seemed to intentionally blur the categories of control handled? How could they control lending outside of these categories? How could they decide what was one kind of credit and not the other? The regulators, though exhaustive lists of the qualities of the different forms of credit existed, seemed to even deny the possibility of hybrid forms of credit.¹⁰⁹ The Fed regulators debated endlessly around this problem, which they called the “Twilight Zone” question, both for its liminal, otherworldly quality and for the difficulty in seeing a solution.¹¹⁰

In the spring of 1942, the gaps in Regulation W became too big to ignore, particularly on charge accounts. Open book charge accounts, despite the Fed’s early hopes to the contrary, had become a serious impediment to the regulation by 1942. Installment sellers and financiers complained that a lot of their business had moved to “department stores which [sold] on charge accounts.”¹¹¹ Merchants and consumers used charge accounts to “avoid the instalment credit requirements” through “serial liquidation” of the charge account.¹¹² Stores intentionally allowed customers to use charge accounts to pay for goods over time, rather than just at the end of the month. Rumors had begun to flow to the Fed of department stores that would place the goods on the charge account to evade the regulation if a customer had a frozen installment account.¹¹³ What began as an obscure maneuver to avoid Regulation W was becoming a “widespread and growing abuse of the charge account privilege,” dangerously disturbing the perfect categories necessary for effective regulation.¹¹⁴

Ronald Ransom tightened the control of Regulation W, as he had imagined doing from the very beginning. The Federal Reserve extended the regulation to encompass charge accounts in the hope that such restrictions would help stop evasions. The charge account regulations were expected to make Regulation W have an even greater effect on consumer credit. The Fed tried to force retailers to only use charge accounts for convenience credit—not for long-term financing. Charge purchases would now have to be paid off within three months—on the tenth day of the second month to be exact—or the account would be frozen.¹¹⁵ Charge accounts that went too long without repayment would be converted into formal installment plans, limited in size and duration by Regulation W. To help borrowers repay their charge debts, Fed officials promoted a program that would allow retailers to convert overdue charge account debt into installment debt, placing such serially-liquidating charge accounts back in the regulatory categories of Regulation W.

At the same time, installment credit also became more restrictive. Regulating charge accounts was only one part of Ransom’s broad plan, by the spring of 1942, to reduce the outstanding consumer debt by nearly half over the course of the next year, from $9.5 billion to $5.5 billion.¹¹⁶ Debt reduction soaked up demand and, equally importantly, allowed the consumer to borrow more during the postwar peace when many economists feared a return to depression. One Fed official declared that it was the Fed’s responsibility that the debtor was “sold on the fact that this is the time to get out of debt so that he will not be overburdened when the defense program is over.”¹¹⁷ To this end, the Fed expanded Regulation W to cover more goods, shorten contract lengths, and raise down payments.¹¹⁸ Regulating well beyond the goods needed for the war, Regulation W now covered luggage, athletic equipment, film projectors, and even opera glasses.¹¹⁹ By this point, the Fed’s restrictions were all more conservative than prewar lending practices, virtually guaranteeing the resistance of business. Though Ransom wanted retailers to adhere more strictly to the rules of Regulation W by further restricting installment credit, the Fed increased retailers’ incentive to find ways to evade.

As the new regulation on charge accounts went into effect in the spring of the 1942, retailers froze accounts across America. In New York, retail executives estimated that stores froze a quarter of all accounts.¹²⁰ In the months preceding the enforcement’s deadline, customers had made unprecedented “heavy payments” on their debts, retailers claimed. Whether it was for fear of losing the convenience of the accounts, or as James Malloy, the president of the Credit Bureau of Greater New York and the credit manager of Abraham & Strauss, believed, “the patriotic response of customers in cleaning up their credit indebtedness in line with the antiinflation program of President Roosevelt,” charge account payments came in at an unheard of rate.¹²¹ Retailers believed that there would be an overall shift from credit to cash. They were right. Over the next few years, cash sales rose much faster than either charge account or installment sales. Even as cash sales rose, credit practices changed as stores embraced the serially liquidated charge account.

The Fed hoped the conversion would force businesses not to use charge accounts to avoid the controls on installment credit, but retailers resisted being pushed back into the Fed’s categories. Department stores, even when pushed, seemed at first to rarely use it, preferring to prevent their customers from buying anything else rather than turning their charge accounts into installment accounts. In 1943, a survey of Ransom’s own sixth federal reserve district, encompassing most of the South, found most stores prohibited the conversion and those few that had not used it had only a few per month.¹²² For instance, Burdine’s, a department store in Miami, preferred to close 7 percent of consumer’s charge accounts per month rather than convert them to installment credit, claiming that Burdine’s did not want to see the customer “getting himself deeper in debt by charging merchandise on open account.”¹²³ Such noble sentiments might have been true, but it might equally have been the case that the retailers did not want to alienate good customers by forcing them onto an installment plan.

Retailers that adopted the serially liquidated charge accounts that evaded regulation were hostile to the Fed’s increased attention to the problem. In Iowa, for instance, the retailers felt, “credit paying habits [had] apparently stabilized in accord with the Regulation” and this increased objection to serially paid charge accounts was unfair and would disrupt consumer confidence in the regulation and the government at large.¹²⁴ Fed official Heath met with many of Des Moines’s merchants, small loan bankers, and credit men, whom he described as “definitely antagonistic.”¹²⁵ Local businessmen could not understand how further regulation was meant to help the war effort and, citing the sacrifices made by Iowa’s citizens already, demanded an explanation—such as the president of the largest women’s clothing store in Des Moines, for “a requirement so ridiculous” as that on serially liquidated accounts.¹²⁶ People in Iowa had always paid a little bit at a time on charge accounts; restricting payment to one lump sum was “completely foreign to common practices.”¹²⁷ Despite the similarity to installment credit’s serial payments, the distinction to the merchants was clear, since they made “no specific agreement to make periodic payments.”¹²⁸ The president of the Retail Credit Association of Des Moines objected that their credit could be classified with the installment credit of “lower priced stores and lines of merchandise.”¹²⁹ Disrupting consumer practices of serial payment, moreover, was dangerous to collecting since money “easily slip[s] away for other purposes.”¹³⁰ For these retailers, and others like them across the country, Regulation W provided incentives to develop new forms of hybrid credit.

Most retailers did comply with the new regulation, using new technologies like the Charga-Plate and the Addressograph to efficiently track their customers’ accounts. These new technologies made the freezing of accounts easier and as they fit neatly into the regulation, and their use spread quickly throughout the country during the war. The use of Addressographs and Charga-Plates mechanized payment. The Charga-Plate was a metal card imprinted with the name and account number of the customer. The Addressograph allowed for the mechanical addressing of charge accounts. In combination, these two technologies, both of which existed before the war but were promoted by the account tracking needs of Regulation W, allowed for easier surveillance of customer accounts. In Germantown, Pennsylvania, Allen’s department store, for instance, transferred the Addressograph plates of charge accounts in default to a separate drawer. Without the Addressograph plate, additional charges could not be made, and at the same time, notifications could be easily mailed in bulk, allowing Allen’s to comply with Regulation W.¹³¹ Because of their convenience for tracking accounts under Regulation W, these new devices flourished.

Charga-Plates served a similar function, equating a number with each customer and their address that would mark a sales slip as the charge was made. Initially stores kept Charga-Plates at the checkout, instead of letting customers carry them around. Some stores like Cleveland’s upscale Halle Bros. Co., gave customers small paper “credit cards” to show the cashier.¹³² The credit card had the Charga-plate number and the customer’s name on it. If the customer had the card, the cashier did not have to look their name up in the long, repetitive list of numbers. Frozen accounts would not be on the list.¹³³ Though cumbersome, plates and lists of numbers were easier to keep track of than numbers written in log books. Typical of the credit cards was one from Buffalo’s J. N. Adam store that told its customers that “charge accounts are now regulated by the Government. However, those customers who pay their bills . . . need have no concern regarding the Government regulations.”¹³⁴ J. N. Adam sent each customer a new credit card every month if their account had been paid. The card implored the customer to “always carry it with you!” and reminded them that, “your credit card is evidence of a promptly paid account.”¹³⁵ Signing one’s name to the card meant you were the upstanding kind of person who paid your bills. Department store credit cards, from their very inception, were invested with the morality of credit as well as the mechanisms of surveillance.

Despite regulators’ efforts, the charge account continued to hybridize to avoid the pressure of the regulation. Retailers evading the regulation promoted a new kind of charge account that customers paid back flexibly over time. Retailers that obeyed the regulation expanded the use of new technologies to track individual charge accounts, reducing the cost of offering them to customers. Though installment credit continued to have the highest outstanding levels, other practices of debt began to emerge that supplemented and sometimes substituted for installment credit. The serially liquidated charge account and the Charga-Plate were the first steps toward a new consumer credit practice—revolving credit—that would be the basis of the modern credit card.¹³⁶

The Transition to the Postwar

Following Ransom’s tightening in 1942, Regulation W’s scope continued largely unchanged through the remainder of the war. Small adjustments were made, but the larger features of the program remained. Consumer debt fell tremendously, as Ransom had planned, from $2.4 billion at the end of 1941 to $455 million at the end of 1945.¹³⁷ At the end of the war, the regulation even began to loosen as the Fed decided to end controls on the ever-contentious charge accounts.¹³⁸

Yet as the end of the war appeared in sight, Fed regulators met with business representatives in January of 1944 to decide whether or not Regulation W should continue into the peacetime. A Fed regulator reported that at a 1944 meeting of New York commercial bankers, economists, small loan lenders, and department store executives, there was a general fear that removing or relaxing the regulation after the war might “be damaging to the nation’s entire credit picture and would be undesirable from a social point of view.”¹³⁹ Too much credit would encourage Americans to over-borrow. Returning to the installment credit of the 1930s might also, they feared, bring back the Depression as well. Fears of postwar inflation resulting from pent-up wartime demand and a lack of goods could be a good reason for the regulation, claimed John Paddi of the commercial bank Manufacturers Trust Company.¹⁴⁰

As the war ended and peacetime appeared imminent, however, many different kinds of firms began to express their dissatisfaction with the regulation. Stores that relied on more liberal credit policies, rather than merchandizing, were increasingly more likely to oppose the regulation. Expressing a common position, clothing-store executive J. A. Kaufman, president of the Warwick’s clothing chain based in New York, felt that the regulation had accomplished its wartime aims by reducing indebtedness, but as the war was coming to an end its purpose had been “completely served.”¹⁴¹ The Retail Credit Institute (RCI), a trade association of credit-heavy retail merchants, wrote a letter to Truman calling for the end to controls.¹⁴² Nathan Sachs, the president of the RCI, remarked that such regulation would “be the beginning of the end of private enterprise and distribution in this country.” Ample credit was needed for returning veterans to “re-equip their homes . . . after migration to a new environment” occasioned by wartime shifts in the location of industry.¹⁴³ Credit restrictions, as well, Sachs argued, would encourage workers to cash their savings to enjoy a “progressive standard of living” when that standard could, instead, be borrowed for.

Many retailers at the end of World War II remained uncertain about the strange new revolving credit emerging organically from the interstices of Regulation W. Toward the end of the war, revolving credit came up during a discussion between Fed officials and prominent department store managers. Kenneth Richmond, vice-president of New York’s Abraham & Strauss, had “never gone in for revolving credit but [thought he] may have made a mistake.”¹⁴⁴ Other prominent businessmen, at war’s end, persisted in their skepticism of revolving credit. Representatives of Macy’s, while discussing revolving credit with a Fed representative, were leery of a credit system that “ke[pt] the customer continuously in debt.”¹⁴⁵ Revolving credit, with less structure than installment credit, supposedly “stimulate[d] credit” and sales, while still having more “firmly fixed” limits than a charge account.¹⁴⁶ Revolving credit was supposed to give the customer more flexibility and the store additional sales. Much as it might want more sales, Macy’s did not want to keep its customers in perpetual debt. What would that say about the kind people who shopped at Macy’s?

While opinions varied on whether credit regulation would help retailers, there was little disagreement over whether credit itself would help sales. A national survey reported in the New York Times found that 66 percent of retailers favored easing regulations¹⁴⁷ What retailers completely agreed upon was the desire to expand the use of credit in their businesses. Ninety-eight percent of retailers “plan[ned] to go after more charge account business after the war,” citing the need to expand volume, increase customer loyalty, and help workers maintain their savings.¹⁴⁸ Ninety-six percent of retailers believed that credit would increase sales and that “credit [was] a more powerful selling force than cash.” Credit was seen as the gateway to increased sales. The clock could not be turned back to 1940. Charga-Plates, Addressographs, serially-liquidating charge accounts in the twilight zone, strict charge account due dates, and the equivalence between installment and charge account credit had all become well-known practices.

Regulation W’s continued existence after World War II, however, was uncertain, as the emergency that had legally justified it under the Trading with the Enemy Act ended. The Fed regulators, however uncertain about the future of the regulation, were certain in their desire to continue it and to show they could be responsible in relaxing as well as tightening the regulation. In the Fed’s annual report to Congress in 1946, they reaffirmed the importance of regulating consumer credit to prevent both inflation and depression, since there was, the Fed officials believed, no way to prevent “excessive expansion and contraction except governmental regulation” of installment credit.¹⁴⁹ Amendments continued to be issued if only, as acting Governor Evans wrote, for “‘symbolic significance’ . . . to remind people that Regulation W is still in existence . . . and to show that the Board is still of no mind to relax the regulation.”¹⁵⁰ Given the power over consumer credit, the Federal Reserve did not casually relinquish it but merely loosened it until it had no effect, creating no need to explicitly take the power away.

Charga-Plate in the Postwar Era

The new revolving credit practices developed during World War II persisted into the postwar period, even when no longer regulated. While half of stores loosened their installment terms, only about a tenth of them loosened charge accounts.¹⁵¹ Eighty-eight percent of stores maintained the end of the second month policy created under Regulation W.¹⁵² Following the war, revolving credit and the Charga-Plate were “revolutionizing credit sales and sweeping the country,” as one credit professional put it.¹⁵³ The practices that were inadvertently promoted by Regulation W were all found in the new revolving credit programs, which made them easier to accept despite being different from the traditional credit practices of open book charge accounts and installment credit.

Retailers, following the war, pushed “to add new and revive dormant charge accounts.”¹⁵⁴ Though charge accounts had grown slightly during the war from $12.4 to $12.8 billion of annual sales, retailers hoped to push those numbers even higher.¹⁵⁵ Prior to V-J day, 66 percent of department store sales were paid in cash, in contrast to the prewar period when cash was only 40 percent of sales.¹⁵⁶ There was a lot of opportunity to expand consumer borrowing. By January of 1947, consumer credit made a triumphant return without the strict wartime regulations. A National Retail Dry Goods Association (NRDGA) survey of 106 cities found that new credit applications were up 42 percent, and charge account sales up 25 percent.¹⁵⁷ Seventy-six percent of NRDGA retailers reported “campaigns to get customers to say ‘charge it.’“¹⁵⁸ When one store offers “generous credit,” as a one Boston department store official said, “competitors have to follow suit.”¹⁵⁹ Behind the credit managers of these firms, however, were commercial banks, whose loans to business had risen to over $2 billion outstanding, more than a third higher than in May of 1945.¹⁶⁰ By August 1946, consumer credit outstanding passed $8 billion.¹⁶¹ Consumer credit continued to rise in 1946, charge accounts by two-thirds and installment credit by 60 percent.¹⁶² By 1947, the prewar, all-time high peak of $10 billion was exceeded.¹⁶³

Revolving credit had existed before the war, albeit briefly, but was confined to only a few stores and was primarily experimental. Shortly before the war began, Bloomingdale’s, the well-known New York department store, instituted a plan for “a new type of extended payments” named “permanent budget accounts” (PBAs), that in 1940 increased their installment payments outstanding by a half million dollars, or about 15 percent.¹⁶⁴ Regulation W ended its use.¹⁶⁵ Unlike the stores that used revolving credit to evade installment credit regulations, Bloomingdale’s followed the spirit of the regulation, putting its permanent budget accounts on the same footing as its installment credit. Bloomingdale’s only wartime advertisement that mentioned the permanent budget account, incidentally, included the PBA along with other ways to finance purchases at Bloomingdale’s under Regulation W. The advertisement stated that PBAs, like installment credit, also required a down payment.¹⁶⁶ It is unclear whether Bloomingdale’s or the Fed decided to treat the PBA like installment credit, but the effect was the same. There was little incentive for customers to use the revolving credit accounts when the charge accounts, there and elsewhere, allowed them to buy without down payments—at least at the beginning of the war. But as the war ended, Bloomingdale’s, like rest of American retailers, embraced revolving credit.

While only 12 percent of stores in 1947 had PBAs like those of Bloomingdale’s, 42 percent of the stores offered “easy credit” with 86 percent of those stores having 0.5 percent service charges on their charge accounts.¹⁶⁷ These charge accounts looked more like revolving credit, incorporating serial liquidation and charging interest. While half the stores maintained the same terms as under Regulation W, the other half loosened their terms. Half of those stores refunded the service charge if the payment was complete in ninety days.¹⁶⁸ In practice, if not in name, more than half of NRDGA stores offered revolving credit.

A 1949 survey of retailers found that 75 percent of major stores had instituted revolving credit plans since the war’s end.¹⁶⁹ The conversion to revolving credit was made substantially easier by the social and accounting similarities with open account credit. During the war, Charga-Plate systems, which were not hampered by Regulation W in any way, had become more common. All larger stores and many smaller ones used it for tracking purchases and bills.¹⁷⁰ All the revolving credit systems relied on the Charga-Plate to keep track of accounts. Advertisements promoting revolving credit commonly had a picture of the Charga-Plate as well. In a 1949 survey of the NRDGA stores, nearly all of the stores with revolving credit used the Charga-Plate system and 70 percent required the Charga-Plate to authorize the account.¹⁷¹ The old days of giving a clerk one’s name and address to post the bill to a charge account were gone.¹⁷² Revolving credit and the Charga-Plate grew together.

Retailers using the Charga-Plate system for billing could easily add revolving credit. A Bloomingdale’s credit manager extolled the ease of adding revolving credit, since “actual billing is the same as that of a regular charge account with the exception of the carrying charge feature.”¹⁷³ R. H. Bulte, a St. Louis credit manager, told a crowd of credit managers that he did not “believe you [would] have too much of a problem in setting it up. The bookkeeping procedure is no different than on your regular account.”¹⁷⁴ Retailers could use the “same bill and print ‘permanent budget account’ or ‘revolving credit’ on it.” The service charge could just be an additional line item. With the Charga-Plate, Bulte continued, “it is an easy matter to put an identification signal on it. There isn’t too much difficult with what you already have in the regular accounts.”

Farrington Manufacturing, the company that sold the Charga-Plate system, encouraged the connection between Charga-Plate and revolving credit by issuing special Charga-Plate cards to be used. These cards were different in color than those of the regular charge accounts, but could be used with the same machines and allowed the customers to say the same magic words to operate them—“charge it”!¹⁷⁵ The manager of the Charga-Plate division of Farrington Manufacturing, William Brian, reinforced the social advantages of using Charga-Plate for revolving accounts to other credit managers, since through the “special colored plate . . . distinction and individuality [were] obtained from this type of credit selling, grading up the budget buyer without conflicting with regular account buying or paying habits.”¹⁷⁶ Because of the shoppers’ experience and the ease of using the already existing Charga-Plate system, Brian reported that “retailers [were] enthusiastically accepting this new Charga-Plate service in ever increasing numbers.”¹⁷⁷ Farrington not only offered the physical system, but instruction in “a workable plan that has been well proved” on the new revolving credit system.¹⁷⁸

The many stores that converted to Charga-Plate systems, and began using revolving credit plans, also invested heavily in new machinery. For stores like Woodward & Lothrop in Washington, D.C., the conversion included not only staff training in the new systems, but installing Charga-Plate-based billing and Addressograph machines in a special credit building to take advantage of the efficiency gained from a centralized credit department for its many stores.¹⁷⁹ These investments allowed for greater sales, but these expenses were all sunk costs. Once the conversion was made, it was not easily undone.

The Charga-Plate’s equivalence of charge and revolving credit enabled a new kind of social democracy at the checkout counter. The failure of installment coupon books, promoted unsuccessfully before the war, highlights the social appeal of revolving credit. Many retailers had created installment coupon books.¹⁸⁰ Half of the NRDGA membership used coupon books in their stores.¹⁸¹ These coupons, though widespread, were little used. Initially, they seemed like a good idea. Installment credit could be used for smaller purchases. It was not practical for customers who wanted to buy $16.58 worth of goods to fill out a contract—work out terms and down payment, for each purchase at the cash register—while other customers waited behind them. Instead, customers would first go to the credit manager, arrange a line of credit, and receive a coupon book, usually in increments of $25. These coupon books cut down on the clerical work required for managing each individual sale. The amounts were fixed and the contracts standardized. The customer could buy exactly $25 worth of goods in one sale or buy $2.50 worth in ten sales; either way the credit department would only have to keep track of one purchase of the coupon book, which made billing much easier to handle.

Coupon books never really caught on both because they were a hassle and because they forced poorer customers to mark themselves socially when using them. Compared with the ease of revolving credit accounts, coupon books were a total hassle. Though their interchangeability with cash at the register made them easier to use for the credit department and the sales clerk, they nonetheless imposed limits on the customer that limited their appeal. The customer could not buy just an additional $5 of goods, only $25. Richmond believed that the customer had “to make up his mind . . . and then arrange for [a] book,” rather than pick out the things that he or she wanted in the store and go to the checkout. Coupon books required filling out contracts and paperwork each time the book ran out.¹⁸² Consumers and retailers frequently complained about all the “red tape” coupons entailed.

In addition to the bureaucratic hassle, shoppers who had to present coupons instead of cash or a Charga-Plate might feel stigmatized as “lower income” than those who “qualify[ied]” for a charge account and could use their Charga-Plates.¹⁸³ Reflecting a commonly reiterated statement among credit professionals, a St. Louis credit manager remarked that “the revolving credit is a little more dignified, and a more dignified way, for our customers . . . to shop, rather than the coupon method. Sometimes it might be embarrassing for a woman to pull out a coupon in the store.”¹⁸⁴ The coupon books, because they marked a customer as someone who did not have the cash and did not qualify for a charge account, were never very popular in more affluent stores.¹⁸⁵ Revolving credit eliminated the need for installment coupon books. For stores that conveyed a middle- or upper-class image, unlike the discount installment clothing stores, the revolving credit account provided a means for customers to enjoy the pleasure of shopping—based partially on a certain performance of affluence, while enabling them to borrow for their purchases. For lower-income customers, the revolving credit plan allowed them to behave in stores just like the more affluent. For middle-class patrons, they could use installment credit without the threat of lost class prestige. Revolving credit allowed the performance of wealth for everyone. As a Detroit credit manager, S. C. Patterson, explained, the revolving credit customer “gets her “Charga-Plate” or other customer identification media the same as a 30-day account.”¹⁸⁶ At the checkout line, “she can say ‘Charge it’” like a rich woman, even though she paid by the month. This experience of shopping was, Patterson insisted to other credit managers, “important to your charge customer, and if you do not believe so, I think you are deluding yourself.”

But while the experience of shopping became more uniform, the customers were all quite different, especially in terms of income. Bloomingdale’s credit manager, Robert O’Hagan, said “the PBA taps a practically untouched field of continuous revolving business from customers who may not be eligible for a regular charge account, or who are so used to buying everything on a budget that this is the only type of account that appeals to them.”¹⁸⁷ While credit managers emphasized that half of customers using revolving credit would be eligible for charge accounts, the flip side of that was that half would not. A credit sales manager of a large Brooklyn department store remarked that half of his competitor’s new PBA accounts were new accounts.¹⁸⁸ Revolving credit plans brought in new customers and new sales to stores.¹⁸⁹ But with these new customers and sales came new expenses, as one Columbus credit manager noted.

Early revolving account managers described the system as promoting a great deal of sales and just breaking even, but that quickly changed. Increased sales brought additional profits, as did the interest on the unpaid balances. Revolving accounts, when popularized after the war, typically charged customers 1 percent per month in interest. A 1949 survey found that 65 percent of stores with revolving credit charged 1 percent, and 35 percent charged ½ percent.¹⁹⁰ Installment coupons had typically earned V percent per month; the revolving credit plan charged double that.¹⁹¹ The annual interest on V percent per month was about 6 percent, while that 1 percent per month was about 13 percent. Bloomingdale’s O’Hagan described, in 1949, their “great success in increasing store volume by opening up among the lower income groups, a practically untouched field.”¹⁹² If anything, the biggest problem stores using revolving credit reported were customers developing a “tendency to overbuy.”¹⁹³ One credit manager said in 1951 that the revolving charge account was “a big source of revenue to the credit office.”¹⁹⁴ More than breaking even, revolving credit balanced out the losses of all complete debt losses and went “a long way to pay your credit office expenses.”¹⁹⁵ Revolving credit provided profits to those willing to make the investment in the new system.

Sales grew because shoppers, unrestrained by coupon books or quick repayments, could buy anything. Following the war, the permanent budget account became a centerpiece of Bloomingdale’s advertising, with large-scale ads focusing on promoting the PBA’s utility for the postwar consumer. A December 1946 advertisement, for instance, explained how the fictitious “Ann Smith” told “Bloomingdale’s, I Love You . . . When [The] Credit Manager Explained How A Permanent Budget Account Work[ed].”¹⁹⁶ Smith’s “love” resulted from the credit manager’s explanation of “how she could have three evening dresses at one time” for the “New York winter season” and “some mighty attractive and attentive gentlemen,” and would have eight months to pay it off.¹⁹⁷ Men, too, could purchase sets of matching shirts, ties, and handkerchiefs, along with quality suits, on the “Permanent Budget Account—the charge account with the many months to pay and the small service charge.”¹⁹⁸ Clothes, cookware, lawnmowers, anything could be had on the new PBA. Was this the promise of consumer democracy?¹⁹⁹

Revolving credit made explicit the suspicion that an account might never be completely repaid. Unlike open accounts or charge accounts, which maintained the fiction of convenience credit, revolving credit made explicit that the customer was borrowing beyond their ability to repay, if only for that month. Retailers fretted over the implications of this, but could not deny that the credit plan had boosted sales. While the revolving charge accounts were sometimes called permanent budget accounts, credit managers still seemed uncomfortable with the idea of permanent indebtedness.

Yet even as customers appeared similar at check out—all saying “charge it!”—stores also began to strictly differentiate them when the bills came due. Customers found that stores began to force them to make a choice between the open book charge account and the revolving credit account. Unlike installment credit, one customer could not have both a regular charge account and a revolving charge account. Abraham & Strauss (A&S), for example, forbade customers from having both; they offered their own PBA, “for budget-minded people.”²⁰⁰ Advertisements featured parents with “royally furnished” nurseries, college seniors who were “the best dressed girls on campus,” and fathers who kept “the family budget on an even keel.” Promoted as economical and judicious like the old A&S charge accounts of the 1920s, the PBA was nonetheless a mutually exclusive alternative to the traditional charge account.

A&S had different practices for the PBA as well. With a 1 percent interest rate, customers paid a little over a 12 percent interest rate per year on a balance that need never be fully paid off.²⁰¹ Customers were reminded that they could “continually charge the difference between what you owe and the amount of credit you have established.” Customers, naturally, had to have their “identification card” containing their PBA account number to shop so that the store could make use of all the modern billing machines. The importance of the emergence of revolving credit was marked in the new dichotomous definition of “charge account”—a “regular charge account” was like the old open book credit but with firm repayment dates, and a “revolving charge account” was the new revolving credit.

While the popularity of revolving credit relied on the conflation of Charga-Plate practice with charge accounts, retailers also used the plan to clearly differentiate customers who paid in thirty days from those who paid over many months. Three-fourths of stores forbade customers from having both a regular charge account and a revolving credit account. Customers who were “slow pays,” that is, tended not to pay when the bill was due, could now be switched over to the revolving account.²⁰² One Minneapolis department store had a small card printed with a check box that simply said, “Please transfer my regular charge account to the revolving charge plan,” for customers believed to be slow in paying.²⁰³ Most switched without complaint. Because the revolving account looked and felt like a charge account, even if the finances differed customers rarely resisted since there was no social stigma attached. Retailers could then worry less about slow paying customers, since they would be charged interest on the balance.

During the 1940s, department stores embraced revolving credit to boost sales and Charga-Plates to control costs. Most shoppers preferred revolving credit to traditional forms of credit because it gave them more control over their spending and more social status when they shopped. By the late 1940s, revolving credit and American retail had firmly entwined.

The Korean War and the Last Gasp of Regulation W

As Truman entered the war, Congress passed the Defense Production Act of 1950, which gave him broad powers over the control of the economy.²⁰⁴ Truman favored the style of Regulation W rather than a return to the rationing of World War II.²⁰⁵ Direct restrictions on production would, after all, hamper the “economic strength” that Truman felt made the West “superior to their enemies.”²⁰⁶ Fighting communism, rather than fascism, required the juxtaposition of free enterprise to communist command economies. Unlike Roosevelt, who had justified the first Regulation W in a convoluted fashion under the Wartime Powers Act, the Defense Production Act gave Truman clear authority to regulate for inflation control.²⁰⁷ Even so, the effectiveness of Regulation W during World War II derived from business’s consent, not from clear legal authority. As America entered the Korean War, the Federal Reserve, which Truman asked to once again enforce Regulation W, was to encounter a business community far less amenable to its regulatory goals.

The American economy had changed quickly since the end of the war, and retailers had grown very dependent on consumer credit. The stupendous growth in sales volume depended on charge accounts. By 1950, Charga-Plate systems for both charge and revolving credit accounts had become integral to American retail.²⁰⁸ A NDGRA survey found that by 1951, 76 percent of credit sales were through charge accounts—with 19 percent revolving and 57 percent regular—for stores selling more than $20 million a year on credit. The Philadelphia credit bureau, in a letter intended to show the Fed that charge accounts were still being used in America, provided them with a table of Charga-Plate accounts used in large cities.²⁰⁹ In some cities, the system had been in place for only a few years, but in that time charge accounts and Charga-plates had become synonymous. Charga-Plates systems could not be regulated.

Unlike installment credit, which was still carried out with pen and paper contracts, charge accounts, now mechanized, proved an enormous obstacle. Charga-Plate billing machines were not like computers today. They could not be reprogrammed. Farrington Manufacturing had hardwired assumptions about lending into the levers, relays, and gears of the accounting machines. The introduction of Regulation W with the freezing of charge accounts would make all that investment worthless. A Fed study found “it would be extremely difficult for a large number of stores to comply with a freezing mechanism on charge accounts . . . [and] some stores might be unable to comply fully even at considerable expense to themselves.”²¹⁰ Employees, trained to use the machines, were unfamiliar with any other system and could not go back to an earlier model. Retailers needed mechanical billing to remain competitive, since it cut accounting costs so much. Typical of the stern letters the Fed received was one from Aaron Frank, the president of the large Northwest department store chain Meier & Frank, which explained that they doubted they could comply with a regulation that froze charge accounts.²¹¹ Inquires made to Charga-Plate’s Farrington Manufacturing, by Frank, only confirmed his fears that there was no way to reconcile the Charga-Plate system with a World War II-style regulation on charge accounts. Frank Neely, chairman of the board of Rich’s department store in Atlanta, wrote one official to “call [his] attention to the fact that merchants have developed a new type of open credit in amounts that are very sizable.”²¹² Neely explained that revolving credit was the “big bugaboo” for the reinstitution of Regulation W, since customers could transfers balances from their open account to a revolving account to “dodge the restrictions.”²¹³ Lamenting revolving credit’s expansion, Rich also emphasized its intractable reality.

The Fed, under pressure from large retailers, recognized the constraints of the situation. If charge accounts could not be regulated, then neither could revolving credit be, since they both depended on the same technologies. The similarities that made the switch to revolving credit easy, also made them indivisible. Faced with such technical and political difficulties, the Fed did not impose charge account regulations.²¹⁴ Installment credit would be regulated, but charge credit, both regular and revolving, would not.

Regulation W was reenacted on September 18, 1950, but only for installment credit, and business opposition was immediate.²¹⁵ With widespread access to revolving credit, however, consumers could easily substitute for the regulated installment credit. Opposition to the regulation during the Korean War was anything but marginal, especially since the regulation fell unevenly on installment credit businesses that did not offer revolving credit. Most business groups actively tried to have the regulation repealed.²¹⁶ Installment sellers and their trade organizations, likewise, claimed the regulation’s effects on inflation were “fallacious.”²¹⁷ President of the National Foundation of Consumer Credit, John Otter, claimed that there was “no shortage of . . . radios, televisions, refrigerators, washing machines, and vacuum cleaners.”²¹⁸ While during World War II government demand had cut heavily into consumer production, the expansion of the economy since the war and the comparatively smaller war in Korea, made for less of an effect on retailers’ inventories. The government’s demand on the economy was much less than during World War II.²¹⁹ While nearly half of the national output was devoted to defense during World War II, less than a quarter was similarly allocated during the Korean War. Without a shortage of inventory, demand could not outstrip supply, which was the justification for the controls. Business achieved a widespread consensus against the regulation.²²⁰ Even Federal Reserve Board members, shockingly, spoke out publicly against the use of selective controls.²²¹ Credit professionals, like Arthur Morris, moreover, denounced the regulations on ideological grounds, as an “abhorrent interference with individual liberty.” The defense of liberty against communism, which justified the war, was turned against the regulation.

The explicit lack of restrictions on revolving credit further propelled its use. Before the Korean War, despite the preponderance of Charga-Plate, revolving credit was still restricted geographically and by the type of store that used it. Investigating revolving credit, Fed official Philip Webster found it only in large department stores of major cities, particularly on the East Coast.²²² The Atlanta Federal Reserve reported that in the South there was “extensive use of ‘revolving’ charge accounts” that they thought had been instituted to create “a loophole to any future Regulation W.”²²³ In Boston plans could be found with no down payment and twelve months to pay, to 10 percent down and six months to pay. In New York, terms were no longer than ten months and with never more than a $120 credit limit. Revolving credit seemed, at the outset of the war, to be replacing older charge accounts, not installment credit plans. Durable goods retailers still offered installment plans, for the most part. Some stores explicitly restricted the revolving credit to “soft goods.”²²⁴

Despite wartime regulations on traditional installment credit, the reported statistics on it continued to improve because revolving credit, unregulated, was lumped with installment credit.²²⁵ The New York Times reported that despite a drop in durable good sales, the decline in installment credit was “made up by the growing trend in stores toward budget plans or revolving credit.”²²⁶ By 1952, even the old installment seller standby, furniture, was being sold on revolving credit. For goods other than automobiles, revolving credit became an alternative to the installment plan. Advertisements in the New York Times from furniture house like Sachs and Gimbels, as well as department stores like Bloomingdale’s, encouraged “young moderns” to buy their furniture on “budget accounts.”²²⁷

By May of 1952, the opponents of the regulation had won. The “months of pressure exerted unrelentingly by manufacturers, distributors, and retailers,” as the New York Times reported, as well as internal disagreement over the regulation’s efficacy, led the Fed to end controls.²²⁸ Installment sellers across the country immediately relaxed terms, advertising “no down payments.”²²⁹ In Dallas, installment sales grew by 50 percent in one month.²³⁰ Televisions, air conditioners, laundry machines, and refrigerators sold especially well. Most of the country, however, saw no buying spree, showing the regulation’s limited effect if consumers could use revolving credit instead.²³¹

By the end of the Korean War, revolving credit became ubiquitous across the country. In 1953, Bullock’s department store advertised the PBA for the first time in Los Angeles.²³² By 1955, some department stores began to do away with their installment plans altogether, consolidating all sales into either revolving credit plans or regular charge accounts.²³³ A. L. Trotta, an official with the NRDGA, believed that this system would “eventually be the sole type of account maintained by stores.” Though other retailers and credit managers felt this single vision of credit to be “utopian,” the New York Times reported, Trotta believed in a future where, in terms of credit, all customers were treated equally with “no stigma . . . attached to the customer who spaces out payments.” Revolving credit held out the possibility of a future where consumers of all classes could borrow in exactly the same way.

Conclusion: Regulation, Evasion, and Revolving Credit

Regulation of consumer credit of such a novel scope as Regulation W had never been seen before or since. It was the last attempt to fully restrain consumer credit. Large enough to be meaningful if reduced, consumer credit was still small enough that the economy would not topple. Consumer credit during World War II was not foundational to the U.S. economy. By the Korean War, however, retail businesses relied on consumer credit, not only for profit, but for the central operations of their businesses. Regulations so stark in scope as those during World War II could no longer be enacted. Following the Korean War, regulators of consumer credit focused not on restraining it, but in making its access more democratic. As will be shown in the next two chapters, credit had become so central to upward mobility that the government, instead of focusing on its dangers, demanded its access for all.

Department stores that took advantage of this new revolving credit system witnessed fantastic sales growth and increased profits. It is no coincidence that the stores that most fully exploited the new charge systems, Filene’s, Abraham & Strauss, Bloomingdale’s, Foley’s, Burdine’s, and others, grew to become America’s largest retail conglomerate in the postwar era—Federated Department Stores. Even its nearest rival department store conglomerate, the May Department Stores Company, was composed of avid revolving credit retailers like Marshall Field’s, Kaufmann’s, Meier & Frank, Famous Barr, and Lord & Taylor. Growing out of the cities and into the suburbs in the postwar period, they brought the new revolving credit to a debt-driven suburban periphery. In these department stores Americans learned the pleasures, benefits, and dangers of putting it on the card.