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 THE TREND 
 AND PROGRESS OF THE 
 
 MOVEMENT TO 
 
 IMPROVE SMALL LOAN 
 
 CONDITIONS 
 
 BY 
 
 ARTHUR H. HAM 
 
 
 
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 . 
 
 
 
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 The Trend and 
 Progress of the Movement 
 
 to Improve 
 Small Loan Conditions 
 
 By 
 
 ARTHUR H. HAM 
 
 >< 
 
 SECOND VICE-PRESIDENT PROVIDENT LOAN SOCIETY, NF.W YORK 
 
 CHAIRMAN NATIONAL FEDERATION OF REMEDIAL LOAN ASSOCIATIONS' 
 
 AMD FORMER DIRECTOR OF THE DIVISION OF REMEr.AL LOANS 
 
 RUSSELL SAGE FOUNDATION, NEW YORK 
 
 An Address before the 
 
 Seventh Annual Convention of the 
 
 American Industrial Lenders' Association 
 
 Chicago, September 23, 1921 
 
 PUBLISHED BY 
 
 American Industrial Lenders' Association 
 
 HARRISBURG, PENNSYLVANIA 
 
. 
 
 . ':.:: 
 
 i 
 
The TREND and PROGRESS 
 
 OF THE MOVEMENT TO IMPROVE 
 
 SMALL LOAN CONDITIONS 
 
 HE small-loan business is an old one in this 
 country, and some of the evils surrounding it 
 go back to our earliest records of the business. 
 It is said that Abraham Lincoln's first public 
 address, when running for election to the 
 legislature of Illinois, was devoted to a discussion of the 
 prevailing high interest rates on small loans, and he pledged 
 himself, if elected, to put through a law making such rates 
 illegal and punishable. His good intentions cannot be 
 questioned, but, like many others who came after him, he 
 was acting upon insufficient knowledge of the subject. 
 
 The first real attempt to make a serious and exhaustive 
 study of the subject before attempting a reform was that 
 begun by the Russell Sage Foundation in 1907-08, when it 
 financed preliminary investigations and publication of 
 reports on the salary and chattel loan business, by Dr. 
 Clarence Wassam and myself, then holding fellowships in 
 the Bureau of Social Research. 
 
 The preliminary studies showed the business of lending 
 small sums on security of pledge or mortgage of personal 
 property and assignments of wages to be an extensive one, 
 and that under the conditions which governed it a consider- 
 able proportion of borrowers were being exploited instead of 
 relieved. It was realized that the subject was an involved 
 one, but as the extent and manner of the operations of many 
 of the agencies engaged in the business were recognized as 
 an important cause of poverty and distress, the subject 
 came well within the purview of the Foundation. Con- 
 sequently I was assigned to make a further study of the 
 matter, and a year later was appointed Director of the Divi- 
 
sion of Remedial Loans which was organized by the Founda- 
 tion in October, 1910. 
 
 The object of the Division was to conduct a campaign of 
 public education with regard to the necessity for the small- 
 loan business as a part of our fiscal machinery and point out 
 the evil effects resulting from the operations of the prevailing 
 commercial agencies in this field; to procure intelligent, 
 reasonable legislation based on a desire to regulate rather 
 tha*n to annihilate the business; to secure the enforcement 
 of such laws and oppose the passage of drastic, impractical 
 laws; and to encourage the organization of remedial loan 
 societies that would make loans at the lowest rate consistent 
 with sound business principles and a reasonable but definitely 
 limited return upon capital. 
 
 These societies were expected to provide such competition 
 as would result in an improvement of the methods commonly 
 employed by money-lenders and to afford an object lesson 
 that would attract reputable capital into the business. It 
 was never expected or hoped that the remedial loan societies 
 would so grow in strength or in numbers as to monopolize 
 the field. They were intended as experimental agencies 
 an object lesson a stabilizing force. I know that the Divi- 
 sion was looked upon by the loan men as an enemy of the 
 business; that it was believed to be seeking to drive out the 
 money-lender and monopolize the field for the remedial loan 
 societies. It was even stated that the Foundation was seek- 
 ing in the small-loan field a profitable way of investing its 
 endowment. Nothing could be farther from the truth, but 
 the loan men were slow to realize it. 
 
 We found that usury, like profiteering, is readily de- 
 nounced but not so easily defined or prevented. We found 
 ourselves standing between two groups or forces; one repre- 
 senting the belief that all loans, no matter how small or upon 
 what form of security made should be limited in interest to 
 the ordinary banking rate; the other representing the belief 
 that competition untrammeled by law or regulation could 
 be trusted to establish interest rates, and that rates so fixed 
 were bound to be fair and reasonable. 
 
The first group consisted of a large part of the public which 
 had any opinion on the subject whatever, and its views were 
 frequently and forcefully voiced by newspaper editors, 
 legislators, and would-be reformers, who traced their authori- 
 ties back to and before the dawn of the Christian Era and 
 justified their opinions by extensive quotations from the 
 Bible and the Roman law-makers. The other school, whose 
 members professed to believe that the solution was to be 
 found in unregulated competition, consisted largely of high- 
 rate money-lenders who viewed any restriction that promised 
 to be effective as an unwarranted encroachment upon their 
 rights and a violation of sound economic law. They could 
 not trace their family tree as far back as the first group. 
 Their patron saint was Jeremy Bentham, an economist of 
 the late i8th Century who gave birth to this famous doc- 
 trine: "If I borrow a sum of money with interest at 100 per 
 cent per annum and can find no one else willing to lend to 
 me at a lower rate, then the rate of 100 per cent is fair and 
 reasonable." This is not an exact quotation from the well- 
 known Jeremy, but is substantially correct. 
 
 The contention of the first group that banking rates 
 should govern small loans was effectively disproved by the 
 unsuccessful experiences of those agencies which attempted 
 to make small loans at banking rates on non-fluid and non- 
 substantial security. Of course, I know that we still have a 
 chain of loan agencies in many cities, organized to "lend to 
 workingmen on their character at 6 per cent per annum" 
 which are accomplishing "remarkable sociological results." 
 Suffice it to say that there has been nothing in their exper- 
 ience to justify the belief that small loans can be made at 
 banking interest. Such a belief has no basis other than 
 in sentiment, and a remedial plan based upon sentiment 
 without regard to knowledge and experience never cured 
 any evil, and never will. Small loans are a necessity in 
 our present state of civilization, and any attempt to work 
 unnecessary hardships on the lender, to compass him about 
 with unreasonable restrictions, has the inevitable result ot 
 forcing the borrower to pay a still higher charge than 
 
he "would 'otherwise pay. If borrowing under the law is 
 limited by impossible restrictions, then both borrower 
 and lender will defy the law and take their chances on its 
 being enforced. In the end the borrower always pays the 
 price in high interest charges. 
 
 The contention of the second group that the determi- 
 nation of the rate may be left entirely to competition 
 holds true only when the lender and borrower are on a sub- 
 stantially even footing. In large loans secured by real estate 
 mortgages or marketable securities, the law of competition 
 may have full play, the rate being determined by the lowest 
 figure at which money can be secured. But in the case of 
 small loans the inherent inequality of lender and borrower 
 vitiates this law. It can have no basis except in the ability 
 of the borrower to refuse the terms offered, if too onerous. 
 This the small borrower rarely can do. He goes to the loan 
 agency as a last resort and when his need for money is im- 
 perative. By reason of this urgency and his inability to get 
 money from another source, he is in no position to bargain, 
 with the result that the lender, unless otherwise controlled, 
 charges an unreasonable rate. 
 
 At the time the Division of Remedial Loans was organized, 
 most of the states were depending upon one of the two 
 theories, to which I have referred, to regulate the business, 
 and we spent much time in gathering data as to the effect of 
 such laws. I need not take up your time this evening to 
 describe our investigations, to recount the cases of rank ex- 
 tortion found to have occurred under the most drastic as 
 well as the most liberal types of law. You are doubtless all 
 familiar with the conditions which we found to exist. That 
 such laws were uniformly unsatisfactory in practice was 
 conclusively demonstrated, and we determined to advance 
 another plan of control which, though it could boast no 
 ancient lineage, seemed sound and practical i. e., reasonable 
 interest rates under state license and supervision. This plan 
 was based on a recognition of the small-loan business, not as 
 a parasitic growth but as a necessary element in our financial 
 system, and on a desire to attract into the business reputable 
 
capital which should furnish the sort of competition neces- 
 sary to keep profits within reasonable limits. It was our aim 
 from the outset to dissociate the small-loan business from 
 the character of some of those engaged in it; to show that it 
 was the practice of the loan sharks and not the need for loans 
 that was disreputable. To educate the public to a reali- 
 zation that the evil was inherent in the methods pursued, 
 which were more or less a product of the laws in force, and 
 not in the institution itself, was not an easy task. Our facts 
 and motives were at first questioned. The conscientious 
 objectors received able succor from the loan men them- 
 selves, who, perhaps not unnaturally, felt constrained to 
 oppose us as strenuously as they had opposed previous 
 interference from any quarter. If we had been able to con- 
 vince the loan men of our good faith, the story would not 
 have been so long in the writing. But, gradually, as 
 a result of speeches, articles, motion pictures, and meet- 
 ings, defense of borrowers, arrests and prosecutions, and 
 every available means of propaganda, we began to 
 secure results. 
 
 As a result of our study of existing conditions and existing 
 laws, we drafted a bill which required all lenders charging 
 more than the banking rate to submit to license and frequent 
 examination by the State Banking Department. This bill 
 set up numerous safeguards for the protection of borrowers 
 which experience had shown to be necessary, and provided 
 adequate penalties for violation, with power of enforcement 
 in the hands of the supervisory authority. It authorized 
 licensed lenders to charge on loans of less than $300, an 
 interest rate of 2 per cent monthly, to be computed on un- 
 paid balances as instalment payments were made, with a 
 small additional fee to cover the cost of drawing and record- 
 ing necessary instruments. A brief experience with this law 
 showed the difficulty of safeguarding the fee charge against 
 undue repetition and indicated that the interest rate alone 
 under all conditions was insufficient to cover the necessary 
 costs and yield a reasonable profit. An alternative provision 
 of a flat rate of 3 per cent per month without fees was sub- 
 
stituted, and in spite of determined opposition several states 
 were induced to enact the bill into law. 
 
 In the meantime, the American Association of Small- 
 Loan Brokers had been organized by some of the farsighted 
 loan men. Opportunities for contact and exchange of views 
 between them and ourselves became more frequent, and 
 then came the epochal day when a committee of that Asso- 
 ciation, consisting of Messrs. Harbison, East, Watts, 
 Hubachek, Aufderheide, and Col. Hodson met with Mr. 
 Glenn, General Director of the Foundation, Mr. Hilborn, 
 Attorney for the Division of Remedial Loans, and myself in 
 my office. For three days we debated the subject and 
 finally agreed upon a redraft of the bill which was to be 
 known as the "Uniform Small Loan Law." The new draft, 
 besides other minor amendments, permitted a flat interest 
 rate of 3^ per cent per month without fees or other charges. 
 A higher rate had been proved to be unnecessary; a lower 
 rate had proved insufficient to provide capital needed to 
 meet the demand for loans in the small cities; a combination 
 of a lower rate with additional fees had proved too susceptible 
 of abuse. The new rate was based upon definite information 
 concerning the necessary costs of operation and was keyed 
 to the business of the lender of average capital in the mod- 
 erate-sized cities. 
 
 The drafted bill reflected a desire to do justice to both 
 borrower and lender. It recognized the fact that small- 
 loan agencies, unlike banks, have no deposits and must do 
 business on their own capital; that their security is not 
 substantial or fluid; that small loans on chattel mortgage 
 or wage assignment security require more investigation than 
 bank loans; that instalment repayments necessitate a large 
 bookkeeping and collecting system; and that reputable 
 capital would not come into the business unless it could see 
 the prospect of profit above the necessarily high overhead 
 cost. The bill also recognized the necessity of protecting the 
 borrower; of seeing that he understands the terms of the 
 loan and of his contract, that he shall receive a receipt for 
 all payments; of providing a means of recovery in case of 
 
 8 
 
overcharge and of giving the supervisory power free access 
 to all necessary data that he may determine whether the law 
 is being religiously observed. 
 
 Of course, the new bill encountered strenuous opposition 
 from the public who considered the rate of interest too 
 liberal, and from lenders who considered it too low and 
 thought the law too drastic in other respects. 
 
 I will not detail the efforts made to line up support for the 
 bill, how the social and civic agencies eventually came to 
 our assistance and newspapers rallied to the cause. No 
 history of the movement would be complete if it failed to 
 give large credit to such agencies and to the public-spirited 
 men in the various states who gave us their help. The time 
 allotted will not permit me to do more than refer to that 
 fact. One by one the barriers were forced down and the 
 striking fact before us is that in the short space of five years 
 this bill is now a law, either in toto or in large part, in nearly 
 half the states of the Union, and has fulfilled our hopes 
 and expectations. Its constitutionality has been definitely 
 established. It is being ably administered by state officials 
 who have come to have an appreciation of the importance 
 of the business, a respect for the licensed lenders and a real- 
 ization of the earnestness and sincerity of purpose of the 
 American Industrial Lenders' Association and its constituent 
 state bodies which are striving to police the business and 
 maintain it upon its new and high plane. The new law has 
 vindicated the belief that neither a laissez-faire policy nor 
 coercive measures will cure the evil of usury that the 
 remedy lies in the creation of something that will facilitate 
 credit and increase the monev in circulation and the means 
 
 m 
 
 and sources bv and from which it can be obtained. 
 
 
 
 The law has reduced unnecessary borrowing and lightened 
 the burden of the deserving borrower. It has reduced the 
 losses of the lender, legitimatized the business and those 
 engaged in it. It has substituted respect for disrepute. It 
 has saved the borrowing public from the payment of excess 
 interest running into many millions of dollars. 
 
 In bringing about this new and highly desirable condition. 
 
the American Industrial Lenders' Association has played a 
 very important part, and it is destined to play an even more 
 important part in the further advance of the law and the 
 complete metamorphosis of this once sordid business. I 
 am not going to indulge in fulsome praise of your efforts. 
 I doubt whether you yet deserve a place in the roll of fame 
 beside the Christian martyrs or those who have given their 
 lives in the cause of humanity. You have simply had the 
 good sense to recognize the right road when you saw it, the 
 courage to stand up and be counted in favor of a proposition 
 which to the lending fraternity generally was anathema, the 
 will and determination to stick to your declaration of prin- 
 ciples and by fair dealing and honest practice gain the 
 confidence of your clientele, the cooperation of the agencies 
 of reform and the respect of the general public. These I 
 think you have already obtained to a marked degree and 
 will ultimately possess in their entirety if you continue to 
 follow the course you have charted. 
 
 10 
 

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