by Alice Echols
Our lending landscape is, in some respects, not that different from what prevailed in the early twentieth century. However, the business of moneylending, as practiced a hundred years ago by my grandfather, differs in key respects from today’s vast and astonishingly lucrative world of payday loans, pawnshops, subprime automobile loans and auto title loans, and check-cashing operations.8 What unites past and present is need. Much of the popular literature about loan sharks stresses the newness of indebtedness in Gilded Age America. However, the idea that earlier generations of Americans lived largely debt-free is a myth. The Pilgrims were no strangers to debt and neither were colonial planters, including some of the nation’s more notable founding fathers. Farmers, who are often assumed to have been the most self-reliant and therefore the most virtuous of all Americans, were actually among those most dependent on credit. If anything, “a river of red ink runs through American history,” as one historian recently put it.9
Certainly the demand for credit grew with the spread of wage labor, which rarely permitted workers to practice “anticipatory thrift.” Borrowers went to loan sharks for a variety of reasons, including staving off repossession of installment purchases. Many borrowers also did so when they suffered a loss of income due to illness, an industrial accident, or unexpected medical bills or funeral costs. And of course there were layoffs—some temporary, others permanent—and these were particularly characteristic of the boom-and-bust world of mining.10 Working people’s dependence on loan sharks also owed something to the nature of banking in the early twentieth century. Commercial banks did not offer personal loans to low-income, high-risk borrowers. They catered to those who already had money and could afford to pay more on the money the bank might lend them than they earned on the money they had on deposit.11
The scarcity of credit meant that many ordinary Americans resorted to loan sharks, who secured their loans either through a chattel mortgage (that is, on movable personal property such as appliances, vehicles, and jewelry) or through wage assignment. Pawn dealers were also part of the moneylending landscape; they were actually in a more advantageous position than loan sharks because they had in their possession whatever had been pawned, be it jewelry, clothing, or a quilt.
Like today, usurious rates and deceptive and exploitative business practices were common. Loan sharks’ rates were often predatory—usually a simple annual interest rate between 20 and 300 percent, although rates could be considerably higher, especially if the loan was small.12 Loan men were also anything but transparent in their dealings with borrowers. According to one widely circulated article, small moneylenders were “suave and persuasive.” They were known to talk “blandly” while giving up almost nothing by way of details. And yet by the time the transaction was over, the borrower would have attached his name to as many as six documents. This article offers some sense of the paperwork a borrower might encounter:
There is a “mortgage of personal property,” which specifies the amount of the loan, but avoids any reference to the rate of interest. Ten or twelve paragraphs, safeguarding the lender’s rights, are found, but hardly a sentence relating to the equity of the borrower. There is a note or bond accompanying the mortgage, with the rate of interest disguised by provisions for weekly payments. You will find a bill of sale and a power of attorney ample enough to permit the “shark” to sign the client’s name to any document that he may think desirable.
Finally, the article warned people off of salary loans that could lead to their wages being garnished for an indefinite period.13
When borrowers ran into trouble repaying their loans, loan sharks employed techniques of intimidation. We know something of how this worked from a 1922 exposé of the loan shark business, which was still thriving in the twenties despite concerted and prolonged efforts to shut it down. The reporter, who worked for the business magazine Forbes, managed to obtain one loan company’s “confidential instructions” about how best to collect on a loan. With the delinquent borrower seated across the desk from you, lay into him, the memo advised, and stage a fake phone call to an attorney so he believes the firm is plotting legal action to force repayment.14 That fake phone call was one practice my grandfather could have dispensed with because his customers would have believed he was an attorney. This is perhaps why he continued to list himself as a lawyer in the city directory.
The smooth talk, the deceptive pitches, and all the perplexing paperwork that often proves ruinous to borrowers typified fringe finance, then as now. And so did the self-justifications that fringe financiers relied upon. Loan sharks frequently defended their work on the grounds that it actually benefited poor people and those who had fallen on hard times.15 They often portrayed themselves as misunderstood businessmen who were enabling working people to realize the American dream. In one article from a trade journal, a moneylender pushed back against the accusations hurled at his profession. Being a loan man didn’t make you hard-hearted and callous, he argued. If anything, it had put him in touch with human frailty, thereby “sensitizing” him, making him “feel more deeply the thrusts and jibes of his fellowmen.” This same author quoted another moneylender who said he had discovered in this business “romance and the spirit of humanity.” For him, the intimacy of the work—hearing so much about the “inner life” of his customers—was like nothing so much as “constantly living in many varicolored novels.”16 Similar arguments are made today. Several years ago the chairman of one the country’s largest check-cashing companies argued that critics who attack such businesses for turning a profit in low-income communities had it all wrong. “We’re the George Baileys here,” he insisted.17
The early twentieth-century moneylending business, while profitable, may not have been quite as lucrative as reformers’ exposés and historical accounts usually suggest. First of all, borrowers often defaulted on their loans. Moreover, running a loan-sharking operation required advertising, thorough investigation of applicants’ credit history, and substantial paperwork, which was meant to underscore the seriousness of the lenders and the transactions in question. Even a $6 loan required personal references and a twenty-four-hour wait.18 And there were legal costs to consider because loan sharks were occasionally prosecuted for usury. Even at the time, one investigative journalist, Charles Rogers, rejected some of the more sensationalistic claims against loan sharks. In a 1911 Atlantic Monthly article, Rogers reported that after factoring in expenses and losses, the profit from a $10,000 investment amounted to no more than $2,600 a year.19 Even squeezing out that amount of profit was hard work, Rogers argued, which is why loan sharks were so often extremely efficient and maximally enterprising.
In fact, the difficulty of running a successful small moneylending operation with reasonable rates for borrowers was made emphatically clear when semi-philanthropic remedial loan companies, set up in the early 1900s as alternatives to loan sharks, reluctantly concluded that they would have to abandon their affordable rates. There were just too many customers skipping out on repayment. As a consequence, reformers in the 1910s began to push for the creation of the Uniform Small Loan Law, which permitted small loan businesses to charge simple annual rates of 42 percent, together with a brokerage fee.20 By 1932, twenty-five states had enacted a version of the Uniform Small Loan Law.21
If loan sharking was not as lucrative as commonly believed, apparently neither were all small moneylenders always as relentlessly cutthroat as we might think. That same Atlantic Monthly journalist found that loan sharks could be more flexible in their dealings with borrowers than popular stereotypes suggested. Ruthlessness was bad business if practiced indiscriminately, he argued. Although a loan shark would not want to be seen as soft and malleable, neither would he want to be perceived as coldhearted to one and all. One can see the logic of this, and why someone like my grandfather, in contrast to many moneylenders today, did his best to avoid lending to those who were obviously bad risks.22
In my grandfather’s time, loan sharking was considered a lowdown, disreputable
business—a fact underscored by the dingy, poorly lit offices where loan sharks typically worked. This was not a line of work for respectable men, except for those such as Denver’s Stratton, whose business was so big and spanned so many states that he was no longer involved in its day-to-day operations. Despite being a disreputable line of work, loan sharking was, curiously, a place in which women regularly worked. In contrast to today’s male-dominated world of fringe financing, loan sharks of yesteryear relied heavily upon female labor. Female employees were not only cheaper but also less likely to be assaulted by angry borrowers, which is why they were often sent out on a “bawlerout,” which involved trapping a delinquent borrower and browbeating him as a “deadbeat” in front of family, friends, and fellow workers. I cannot determine when my grandmother became a stay-at-home wife, but it is plausible that she was still working by her husband’s side when he entered the moneylending business. If so, she likely handled the masses of paperwork generated by such a business.23
Being a loan shark had its frustrations, beginning with the long hours spent chasing down “slows” and “skips.” That’s probably why my grandfather always carried a cane, and it may be how he acquired a very visible scar on his hand. Moreover, it was not so profitable that his wife could stay at home with their daughter—a key metric of the respectability he craved. Perhaps more than anything, he too often felt at the mercy of his borrowers. After all, his was a realm of old-school debt. He had not figured out how to make money—real money—off other people’s lack of it.
Yet one would never know from his studio photographs that Walter Davis felt vulnerable or insecure about his standing. In those photographs he looks ruthless, his lips settled into a near sneer and with a stare best described as predatory. He also made a point of being tight-lipped, just as the big-time capitalists claimed they were. “Silence Is the Trait of Money Kings” was one of several such articles in his scrapbook, and it notes that J.P. Morgan hardly ever talked, and that other Wall Street figures also kept their “lips locked” on business matters. “No one ever made a mistake by not talking” was Wall Street financier George F. Baker’s advice. Their taciturnity, their “cloaks of silence,” had everything to do with the fact that the money business, claimed this journalist, was “a precise science” that could be fatally undone by something as seemingly trivial as a misplaced comma.24 Like Wall Street titans, loan sharks also emphasized playing things close to the chest, and this became my grandfather’s mode as well.25 Years later the chauffeur who drove my grandfather between Colorado Springs and Denver reported that his boss remained silent throughout the entire journey. But even at this juncture, as he tracked down “skips” and “slows,” the photographs suggest he was doing his best to provide visual evidence of his bloody-minded determination to have his way with the world.
A “near banker” was how the Colorado Springs police chief described Walter Davis after he went on the lam in 1932.26 In the years before the stock market crash America was loaded with near bankers. By 1929 there were 25,000 banks operating under fifty-two different regulatory regimes—the result of President Andrew Jackson’s war on central banking a century earlier. Until the Great Depression forced its reorganization, America’s banking system was an incoherent muddle. For example, while national banks were required to join the Federal Reserve, which was created in 1913, state-chartered banks were under no obligation to join, and few did. With the economy roaring, those in charge of state banks brushed aside the notion that they might need a backup source of liquidity. What this meant was that if a financial panic hit, the majority of American banks, and their depositors, were unprotected and on their own. Haphazard, undercapitalized, and unevenly regulated, the banking system imparted dangerous elasticity to the term “bank.” Many were little better than pawnshops run by “little corner grocery-men calling themselves bankers,” as Senator Carter Glass, one of the key men in the establishment of the Federal Reserve System, noted.27
In the lead-up to the Depression, plenty of B&L men, including my grandfather, masqueraded as bankers. However, when building and loan associations first migrated to America from England there was nothing banklike about them. They were self-help societies organized by the working classes—people not served by the country’s national banks. Operating as nonprofits, they kept no physical offices and had no salaried officers. Very often they rented space for their monthly meetings in churches, community halls, or taverns. In bigger cities they were often organized along ethnic lines, and sometimes consisted of people who had lived together in the same neighborhoods in Europe. Building and loans at this stage owed their success to the fact that they were mutually owned, which meant that association members had a stake in their safe and sound operation.28
B&Ls had a specific aim: to foster homeownership among the working classes through the practice of thrift.29 They developed distinctively in different regions and states, and over time they came to look less and less like self-help societies, which complicates efforts to generalize about their methods of operation. But in many places in this period they operated as follows: A prospective homebuyer would invest his savings in shares of a building and loan association. He would then borrow against these shares to finance his house at a low rate of interest. A borrower was usually required to subscribe for an amount of association stock that was equal to the loan he hoped to borrow. Along with a membership fee and premium paid on the loan, which was determined by auction, the borrower made monthly payments on the loan, which carried an annual interest rate of 6 percent, and monthly installment payments on the shares. During the term of the loan, the association’s officers would distribute any ensuing profits as dividends to the membership. When the shares were paid up, the loan was effectively liquidated.
Historian Lendol Calder explains the way the process worked on the ground, through the example of a borrower desiring a $1,400 house loan. The borrower would buy ten shares in an association of his choice, at one dollar each. As a member of the association, he would be allowed to bid for the privilege of receiving a loan for $2,000, which typically could be obtained at a 30 percent premium. He would then receive an actual loan of $1,400 to pay his contractor to put up the house. For security, the house and the borrower’s shares were mortgaged to the association. Repayment of the loan occurred gradually as the new homeowner paid monthly dues on his ten shares and interest on the loan to the association. After eight or nine years of payments the debt would be declared paid and the mortgage would be released.
Even an influential official and booster of the thrift industry admitted that the building and loan contract was “crude and very few people understood it.”30 But B&L home financing had real advantages over other methods of home financing. Until the thrift industry changed the landscape of home finance, the preferred method of homeownership involved saving money until one could build—a prohibitively expensive option for all but a sliver of the population. Even many white-collar workers, who on average earned $1,000 a year, found themselves priced out of a housing market that required substantial money up front. With houses for low- and moderate-income families ranging in price from $1,000 to $4,500 in the late nineteenth century, accumulating the money for one’s house could take as long as fifteen years.31 As a consequence, for many people owning a home happened late in life, with the result that homeownership was of little help in building assets. For those with resources, methods of financing included savings banks, relatives, and the many small investors operating through mortgage dealers. But for those of modest means, the B&L method was a godsend because it did not require a substantial down payment and it enabled interest and principal to be paid off in monthly payments in an amortized home mortgage.32
Building and loan associations grew slowly and spread unevenly, taking root first in the East, particularly in New Jersey, Massachusetts, Maryland, New York, and Pennsylvania. Between 1880 and 1893 B&Ls really took off as more than five thousand new associations formed. (Philadelphia became known as the “Cit
y of Homes” because of its more than nine hundred building and loans.) By 1893 there were 5,838 B&Ls operating in every state and territory, with 1.4 million members. Their assets came to $473 million, and they held mortgages of half a billion dollars. After private lenders and savings banks, building and loans were the third-biggest home mortgage lenders.33
The appeal of building and loan associations owed a lot to the fact that they were local, small, and democratically run. The average B&L had assets of no more than $90,000; sixty percent of all associations had fewer than two hundred members, most of them of modest means. In this period, real estate mortgages made up roughly 90 percent of the assets of the average thrift.34 They practiced a kind of participatory democracy, with frequent meetings in which each shareholder, no matter how great the number of his shares, had one vote only, even when it came to electing association officers.
The people organizing B&Ls saw these “poor men’s banks” as part of a movement, a larger cooperative movement promoting mutuality and reciprocity, values they deemed increasingly vital (and under siege) in a world of industrial capitalism whose guiding principle seemed cutthroat competition. By the 1890s the culture of building and loans included America’s first important labor organization, the Knights of Labor, and the Farmers’ Alliance, which spawned the anti-monopoly People’s Party, as well as the Women’s Christian Temperance Union. The Knights of Labor, in particular, generated thousands of cooperatives across the country. This ethos of mutuality, the working classes’ pushback against the ruthlessness of industrial capitalism, was for a short time an antidote to the ideal of rugged individualism.35