American Unthrift

IF the flat statement were to be made that one city-dweller in every twenty — one voter in every four — finds it necessary at some time during the course of a year to discount two days’ labor for the immediate price of one, finds it necessary to borrow money at 120 per cent, the general public, and even economists too, perhaps, would exclaim that the thing was impossible. Yet such a statement is approximately demonstrable.

The loan-office, with a fixed place of business, frankly announced by a sign and advertised in the newspapers, and lending money on salary or chattel mortgage to strangers, is virtually an American institution. Twenty years ago it was almost, unknown here, and in its organization and method of doing business it is not known to-day outside this country. To any one who doubts the startling percentage of city borrowers, I offer the following facts.

Except in one or two New England States and some of the Southern States, these loan-offices flourish generally throughout the country to-day; and, even in the states excepted, there is no want of ‘ vest-pocket ’ lenders, of whom more will be said hereafter. To get information in regard to the established offices, write to the assessors of any cities you may select; the answers will show that the proportion of loanoffices to the average city’s population is about the same the country over— one such office for every twenty thousand people. Certain investigations, which can readily be verified in a similar way, show that the average loanoffice, during the course of a year, clears from eight hundred to a thousand loans — or, to come back to my original assertion, one loan to one person in twenty in the city in question. When one considers the number of ‘vestpocket’ lenders and persons who practice usury as a ‘side line,’ it is apparent that the proportion of borrowers must be even greater; but, as these irregular lenders and the extent of their operations cannot be accurately traced, they are left out of the computation.

‘It is the oldest, or one of the oldest, commercial enterprises in the world,’ said the manager of a loan-office, as I stood in his office and watched the borrowers come and go. A surprising number were respectably dressed, and a majority even of the shabbier customers afforded, to a close observer, unmistakable signs of being in employment. Whenever a patron entered and found another borrower in the place, there were signs of mutual uneasiness. The business was accomplished with dispatch, the only hitches, apparently, occurring in the case of persons appearing for the first time.

‘And it looks as though it wall never become respectable,’ said the manager, resuming his reflections after a pause. ‘It is mentioned in the ethical writings of the ancient Hindus, and the Chaldeans had a statute applying to usury three thousand years before Christ kicked the money-changers out of the Temple. And yet it seems to thrive.’

The manager was a rather more scholarly person than one would expect to find in his professional pursuit. He had, apparently, been driven into the business to satisfy his belly-need; and had found that, for a comfortable salary, he had put himself beyond the reach of most of those social amenities which make life worth while. Thrown upon his own intellectual resources, he had evidently taken a certain flagellating delight in delving into the history and bibliography of his business.

That his statement as to the growth of usury was a truthful one became apparent on the most casual investigation. Every state in the Union has a statute forbidding the exaction of interest beyond a certain percentage. In most states the limit is six per cent per annum; in a few it is eight per cent, and in some others a rate of ten per cent is legal if stipulated in the paper binding the loan. In a majority of the states these hoary statutes have been supplanted by others imposing a heavy license tax on those who make a business of lending money, as distinguished from banking operations. Within the past decade there have been written into many state codes laws imposing pains and penalties on persons convicted of practicing usury; and these clauses lie cheek-by-jowl on the same page with those other statutes licensing a business that, apparently, cannot be suppressed. Yet, except in some eight or nine states, scattered throughout the South and New England, there is scarcely a city of twenty thousand or more inhabitants lacking one or more ‘loan-offices,’ established in a professed place of business, and with signs and newspaper advertisements informing the man who wants to borrow money, ‘ with or without security,’ where to apply for it.

The‘vest-pocket’ usurer, whose clientele is limited to those with whom he is personally acquainted, does business in every hamlet. In the cities, also, the ‘vest-pocket’ man may be found, concealing his occupation and avoiding the payment of high license taxes; while few, indeed, are the factories and mercantile establishments where one cannot find some employee who loans money to his fellows in sums ranging up to the amount of the weekly wages, and charges them therefor from ten to twenty per cent interest per week.

One firm of three brothers has loanoffices bearing its name in more than twenty cities, and, presumably, many more conducted in the name of the local manager wherever such concealment of identity seems expedient. The name of another money-lender is blazoned in gold letters on the doors of offices in nearly forty cities. Oddly enough his business is conducted under the active supervision of women managers,— a fact which may furnish matter for speculation to those who contend that women are not acute and exact in such matters, as well as to persons who believe that the usurer’s most profitable occupation is snatching the last crust from the mouths of the needy. Still another money-lender —— the only Hebrew among those cited — who has offices scattered all over the country prefers to mask his identity in different cities as this or that ‘ Security’ or ‘ Trust ’ company. Firms known to conduct half a dozen or more offices are numerous, and there are a vast number of local houses.

‘Three features of this business,’said my pessimistic manager, ‘never fail to furnish me with at least one surprise per week, each. They are: the average American’s lack of thrift, the average man’s utter ignorance of arithmetic and simple interest, and the extraordinary resourcefulness of the people who swindle us.’

As soon as money-lending became systematic — when the business developed beyond the ‘vest-pocket’ stage, and lenders began lending money to strangers without security —the swindlers came into the field. The commonest scheme is for the swindler to post himself as to the address, employers, etc., of some workman who may never have had any need to borrow. Then the swindler comes to the lender and gives the other man’s name and address, supplementing the information with details as to the work he is doing, the salary paid him, and so forth. The lender’s custom, when a new patron appears, is to tell the borrower to return in a day or two and get the money he wants or a refusal. In the interim, of course, he inquires into the customer’s statements, and finds out everything possible concerning his financial standing and character.

The method originally employed by the first houses organized to lend money to strangers, was to make inquiry by telephone or mail, disguising the queries so as to make it appear that the information was wanted by a small tradesman, or by some one who was contemplating hiring the prospective borrower. The thing that made the impersonator’s scheme feasible was the necessity for circumspection on the part of the lender, lest the prospective patron’s employer might learn that the man was borrowing money of a ‘Shylock.’ In a majority of such cases, employers are prone to discharge the workman forthwith, rather than be bothered with possible garnishment and the like — although such methods are seldom resorted to by the lender nowadays. One office where I made especial inquiry, lost, I was told, through dishonest borrowers and impersonators, as much as eighteen per cent of the amount loaned out each month. The agent told me he knew not one case, but a score of cases, where an incorrigible drunkard or loafer impersonated some wage-earner in his own family.

In all such instances the lender works at a disadvantage, for although the public has only a vague idea of the ethics of the loan business, it is commonly considered almost a virtue to swindle a usurer. Another source of heavy loss is the journeyman laborer. Many craftsmen see the world without expense by wandering all over the country; and, in nearly every town they visit, they are too apt to work only long enough to get themselves some sort of a standing with employers. This standing they use for the purpose of borrowing all the money they can get before ‘jumping’ the town. Sometimes they defraud three or four lenders in one city, but this form of swindling is passing. Nowadays, the losses from this source are considerably modified by a more or less effective interchange of local information as to borrowers. The large concerns with offices scattered over the country can, of course, trace a defaulting borrower still further, Their safety, as well as that of the smaller houses, has been increased by the close unionizing of many trades. Nowadays a man who travels to another city for work usually carries his union card and, naturally, cannot have it changed to fit a new alias each time, in case he desires to defraud a lender.

When my friend the manager spoke of the ethics of his business he was, perhaps, not far wrong. That the usurer fills a want and meets a condition is evident. The frowns of forty centuries have not daunted him. He has multiplied as population has increased, and here he still is taking his profit — an outrageous profit it is true, as the borrower views it; but the fact that he is allowed to take it with but scanty interference demonstrates that he is firmly intrenched behind the necessities of the community. The greater part of the excessive interest charged is, according to the showing made by the loan-offices, due to the importance of charging off a large amount each year to profit-and-loss, on account of defaulted loans, loans settled by borrowers who refuse to pay more than the legal rate and who cannot be bluffed, loans settled at less than legal interest, expense of guarding against defaults, and, finally, heavy license taxes, legal or illegal.

A brief summary of conditions revealed by the books and card-indexes of three firms in three different cities may throw some light on this condition. In the case of one of the cities mentioned, the books and indexes of the loan-offices were gone over by accountants appointed by a court, and found to be in good condition. The court was trying an action brought by certain loan-offices in a Middle Western city to enjoin the imposition of a license tax, which they claimed amounted to confiscation. After some difficulty, for capital is proverbially timid in these matters, the books of the firms in the other cities were available for inspection. The entries of the three firms were averaged, and the result proved as follows: —

Average capital: $10,000.

Average number of loans outstanding the year round: 400.

Average size of loan: $20.

Terms of loan: usually to be paid in four monthly installments, averaging $7 each. On smaller loans the rate is somewhat higher; and on larger ones, made to the better class of borrowers, a trifle less.

Fixed expenses: salaries, $3000 per year; office-rent, $600; advertising, $400; license (legal or illegal), $1500.

Losses on defaults and settlements, at legal or less than legal interest: $1500.

By totaling the expense and the losses it will be seen that a loan-office doing business with strangers on a standing capital of $10,000 must charge off seventy per cent of the standing (not the working) capital for all operating charges before it can earn anything for itself.

When one begins to calculate profits, several considerations must be included within the scope of the problem. A glance at the terms of the loans will show that each borrower paid $8 interest on a loan of $20, the loan being cleared in four months. Comparing the number of loans outstanding, on the average, throughout the year, it is obvious that the loan-office was able to keep about $8000 at work. Inasmuch as the average loan is closed in four months, it follows that the loanoffice turns over its average working capital three times each year at simple interest.

Setting the problem down in dollars, and supposing that the office started the year with an absolutely clean slate, the account would stand something like this: —

First four months: amount loaned $8000; interest due at the end of the first four months, under the terms of the average $20 loan, $3200.

Second period of four months: the same.

Third period of four months: the same; making a total gross interest profit of $9600 for the year, on an active capital of $8000.

From this, deduct the $7000 before itemized as expense and losses, and it will be seen that the three loan-offices furnishing the average here set down cleared an average profit for the year (1908) of $2600. This was an even 26 per cent on the average capital set aside by the various owners of the offices named.

It will be noted that no mention is made in the foregoing computation of the possibilities of compounding. This omission is due to the fact, heretofore indicated, that the average loan-office, with a capital of $10,000, is able, as a rule, to keep only four fifths of its money employed. Experience, comparatively recent, has taught the backer of the loan-office that the most economical results are to be obtained from an office working on $10,000, or, at the outside figure, $15,000 capital, and employing four persons. Attempts to extend the business of any one office beyond this scale have resulted disastrously.

The American loan-office as it is conducted to-day can be successfully conducted only by rigid adherence to the rule — ‘personal investigation of each borrower.’ If the man who finances a loan-office desires to compound his interest, he can do so only by opening new offices working on the plan outlined in the foregoing paragraphs — which could hardly be called compounding. Aside from the economical working of an office of the sort mentioned, borrowers fight shy of a crowded office, the majority of them, for sufficient reasons, not caring to extend their list of personal acquaintances while borrowing from a loan-office— much less, to run the risk of meeting old friends at an office patronized by more than an average number of clients.

Considered in its larger aspects, after the brief survey already made of its nation-wide extent, the business of lending money as it is conducted in the United States to-day is, perhaps, most interesting as an appalling exhibit of prevalent American unthrift. When one considers that, in addition to the loan-offices with a fixed place of business, there are heaven only knows how many lesser usurers, the problem becomes a nice one for the experts who are attempting to diagnose the commercial ills that affect the nation — despite our seeming prosperity and enormous commerce. Some few of the economists who have considered the problem have fastened the guilt of the present stringency in the financial affairs of the body of the nation, upon the increased production of gold — alleging that, as money has become more plentiful, it naturally requires more money to buy a given article. The general public, less contemplative in so vital a case, has chosen to lay the blame for the higher cost of living upon certain rich men who are believed to possess secret control of the transportation and marketing of a considerable portion of the food and staple supplies. For an economist who, instead of undertaking a survey of the affairs of the nation as a whole, should study carefully and in detail the movement of money, the figures here cited might prove interesting. When one urban dweller in every twenty finds it necessary at some time during the year to borrow money at the rate of 120 per cent per annum, it ought to be fairly evident that the increased production of gold — the world’s accepted standard of value — has not wrought any beneficent change in the status of the average American.

What is perhaps the most disheartening phase of the business becomes apparent when one undertakes to estimate the benefit that the loan-office affords to the really needy — the class popularly supposed to furnish the bulk of its business. As a matter of fact, the modern American money-lending establishment fails utterly to reach the really poor. Three fifths of the loans made nowadays by the established loan-offices are made on salaries — that is, to persons in employment who sign a note-of-hand secured by nothing more than the fact that they have a job.

The loan-office affords no relief to persons out of work and in want — no matter how honest they may be. It prefers to lend money on a salary rather than on a chattel mortgage on personal effects. Some offices even scorn jewelry left in pledge. Experience has taught both borrower and lender that a man established in a salaried position will make a greater effort to pay promptly than one who gives a chattel mortgage.

‘Three fourths of the loans on chattel mortgage have to be extended,’has become a maxim among money-lenders. The reason is obvious. No man contemplates with equanimity any prospect of losing his employment; and troubles with money-lenders, once they become public, result almost invariably in the discharge of the borrower by his employer. This fear, it is true, is usually a vague one. The lender in nearly all cases finds it to his interest to conduct his operations discreetly, and will not air the business except in extreme cases. He may be trusted not to kill the goose that lays the golden egg until the fowl stops laying, and is apparently pluming for a flight to another roost.

Newspaper men, who are called upon to investigate a large number of cases involving alleged rapacity on the part of the money-lender, are generally somewhat cynical in such matters. In most instances the foreclosure of a chattel mortgage by the lender means that he has an uncomfortably long line of such loans outstanding in some particular neighborhood, and that he is taking the action for the sake of the moral effect it may have in the cases of the other delinquents. A reputation for persistent and consistent hard-heartedness in such matters is likely to bring results as disastrous to the usurer as it docs to the small tradesman. He has his prospective, as well as his present clientele to consider; and both are limited.

Money-borrowing — or rather borrowing and discounting the future, which seems to be unusually popular at present — may be termed a great national palliative, which, in turn, has had other palliatives applied to it by well-meaning persons; but thus far the remedies suggested have all been offered by one class of people. These would-be healers are well-meaning folk whose hearts have been wrung by tales of atrocities practiced upon the poor by ‘ loan-sharks.’ Legislation has proved of no use. Some few philanthropists have given sufficient attention to the problem to make them chary of law, and have attempted to meet the condition by ‘competition.’ Loan-companies designed to serve the laudable double purpose of furnishing needy persons with money at a fair rate of interest, and of lowering the rates charged by the ordinary loan-office, have been experimented with in a number of cities. These quasi-philanthropic concerns have as a rule been planned either as offices organized and conducted in the same way as the regular loan-offices, or as loan-funds operated in factories, etc., for the sole benefit of the employees.

The philanthropic loan-office, designed to deal with all comers and to meet the professional usurer on his own ground, is naturally the more interesting, because it offers a fair basis for comparison with its rival, and furnishes a reasonable opportunity of testing the veracity of statements made as to returns. In nearly every case, the philanthropic loan-office dealing with strangers has been abandoned by the backers after they found that doing business along regular loan-office lines at a ‘fair’ rate of interest meant simply the furnishing of benefactions instead of loans. In most instances, no detailed financial statement as to defaults, extensions, etc., can be had from them, but one case, that of a Cincinnati institution, affords some interesting figures.

The Cincinnati concern was set in motion by a ‘ practical ’ man, who hoped to get into running order a machine that would provide loans on chattels at moderate rates for the self-respecting poor. The necessary capital was furnished by local philanthropists, and the plan was given a fair and prolonged trial. After successive readjustments of terms and practice, the office was finally brought to a point where it met the conditions imposed by the backers — that it be self-supporting. When it reached that point the manager found to his disgust that he was charging 48 per cent per annum on the smaller loans; furthermore, that he was not reaching really needy folk at all; and, finally, that, in order to remain selfsupporting, the office was compelled to refuse applications from persons, a considerable number of whom were afterwards able to obtain loans from the ‘Shylocks,’ at the latter’s higher rate. The manager gave the public a detailed statement of the case, which was investigated and found to be correct.

There are now, principally in the Eastern States, a number of loan-organizations conducted for the benefit of the employees of various factories, department stores, and the like. Inasmuch as these are close corporations, doing business only with the employees of the particular concerns in question, they do not offer a fair basis for comparison with the operations of the professional usurer. They do not lend money to strangers, but to persons known to those having the loan-fund in charge; also, in collecting payments on loans they have obvious advantages over the usurer. Some of them have a system whereby the amount due on the loan is withheld from the employee’s pay envelope, without regard to his ability to make some particular payment with comfort.

These industrial concerns are capitalized in various ways: sometimes by the employer acting alone, sometimes by his cooperation with his employees, who furnish part of the capital by assessment, while some few corporations have loan-funds capitalized wholly by their employees. In the two last-named cases, there is of course an object-lesson in thrift furnished by the operations of the loaning system. In order that the cooperative industrial loan-fund be conducted with success, it is of course necessary that thrifty employees be offered a greater inducement than savings banks can give in order to get small investors to contribute their share of the capital. This fact, combined with the necessity of paying some one to manage the business, and the further necessity of charging off a certain number of inevitable defaults, results in an interest-charge exceeding the legal rate. In other words, the employees, in order to protect themselves from usury, are compelled to practice usury themselves. The rate of interest charged by these industrial loan-organizations varies between fifteen and thirty per cent — the former rate being virtually the minimum, although special conditions obtaining in some shops may make a slightly lower rate possible.

That these industrial institutions, if generally operated throughout the country, would rob the ordinary loanoffice of a considerable portion of its patronage, and deprive the ‘fellow employee,’ and the ‘vest-pocket’ man, whose rates are the highest of all, of their opportunities for usury, is apparent. The people reached by the industrial concerns are the very cream of the usurer’s patronage. What the elimination of these folk from the clientele, actual and prospective, of the loanoffice would lead to, in the way of still higher interest-rates for those still at the mercy of the loan-office, remains to be seen, inasmuch as the industrial concerns are, so far, not numerous. It is, however, a prospect not to be considered with any great equanimity, in view of the unquestionable fact that employers generally would look with more favor on a proposition to start such a loan-fund than they would on any proposal to increase wages.

One other fact worth noting in the case of these industrial loan-enterprises has been fairly well established. They fail to stop a certain proportion of employees from resorting to the ‘Shylock.’ Experience shows that there are always a number of employees who do not care to have their fellows or their employers know when they fail to make both ends meet. In addition to these, there is the usual percentage of transient employees who resort to the loan-offices in times of stress because they are not eligible as borrowers from the fund, or from other motives sufficient to themselves.

Disregarding people who might be reached by industrial or cooperative loan-agencies of the kind just considered, there still remains the bulk of the loan-office patrons — persons employed by smaller factories or firms which do not have a working force large enough to make an industrial loaning enterprise feasible. For these the loan-office is still the only refuge in time of stress brought by sickness, birth, and, frequently, by death. The office also stands there as a beguilement to those who lack the thrift and self-denial necessary to accumulate the purchase price of some coveted article, no matter whether the thing desired be a Christmas gift for some ‘ best girl,’ or a necessary article of furniture or wearing apparel. And also there are, and always will be, unnumbered persons with whom the cost of a bare living so closely approaches the amount of the weekly wage, that the delayed purchase of necessary wearing apparel, furniture, and the like, becomes, at some time or other, a very real and pressing emergency. To these the loan-office must continue to appeal successfully

I have said that the philanthropic loan-office and the industrial loan-fund, in order to do business successfully, have found it necessary to weed out prospective borrowers more vigorously than the ‘loan-shark ’; and that the ‘loan-shark,’ with his higher rate of interest, has, in turn, a dead-line beyond which he cannot operate at a profit. Beyond this second line are the people who need a loan most cruelly of all, and who are unable to get it at any price — unless they are fortunate enough to possess certain stock articles which custom has made the pawnbroker’s familiar security. Just what a dollar is worth to these people when obtainable in the form of a loan is a matter of pure conjecture. That the great majority of them are negatively honest, in that they do not steal, is certain. What percentage of the whole number would prove honest borrowers when dealing with a loan-office specially designed to meet their needs can, of course, be determined only by actual practice.

There is another pressing need for money of which the prosperous think seldom, — I mean the increased chances for getting a job which a little cash confers on a man out of employment. It is not only that cash supplies him with meals and carfare. Many a man has forfeited his chance of a position by reason of an unpaid boardbill or shabby clothes. There are plenty of workmen in every large city to-day who carry from office to office perfectly useless letters of recommendation from their last employer, men whose honesty, for the practical purposes of a loan-office, can be measured with as much exactness as that of the man who is able to get a loan by virtue of being at work.

The loan-office that will serve those who are needy and self-respecting must, evidently, be prepared to make a much longer time-loan than any of the agencies already considered, philanthropic or otherwise, have thus far been willing to offer. The loan must be made upon no security beyond carefully investigated evidences of good character, good habits, and industry. Interest and partial payments cannot be expected until the borrower finds employment. The rate necessarily cannot be determined until actual operations have shown the percentage of defaults in this class of borrowers. It remains to be seen whether such an institution can ever be conducted on a self-supporting basis at something like the rate the loan-office now charges persons with chattels, or persons in employment. Should such an institution ever be proved practicable, though it might not herald a millennium, it would mark a considerable stride in the direction of service to the people.

In the mean time the great mass of people who own no commercial security will, under the stress of real or fancied necessity, be compelled to resort to the loan-office when wanting a loan. For these folk there is apparently no hope of a lowering of the rates nowin force. Competition by industrial or employers’ loan-funds does not promise to lower the loan-office rate to those not fortunate enough to be employed where they can obtain a cooperative loan. On the contrary, by the paradox already noted, such competition will, if it ever becomes extensive, be likely to cause a rise in the loanoffice rate, or a closer weeding-out of borrowers. For the generality of borrowers who will or must patronize loanoffices there is little to be offered in the way of advice save the mocking adjuration: ‘Put money in thy purse,’ to which may be added the sage advice, well understood by those who have had experience, ‘ Never borrow an amount exceeding two thirds of one month’s wages.’