The Facts About the 
 Small Loan Business 
 
 And the Scientific Rate 
 of Fair Charges 
 
 BY V ^ 
 
 REGINALD HEBER SMITH 
 
 of the Boston Bar 
 
 Published by 
 
 American Industrial Lenders' Association 
 
 HARRISBURG, PENNSYLVANIA 
 
 10 Cents Per Copy 
 

 
 Copyrighted, 1922, by 
 Reginald Heber Smith 
 
o<H^ 
 
 The Facts about the Small Loan Business and 
 the Scientific Rate of Fair Charges 
 
 The following memorandum was submitted to the Committee on Legal Affairs, of 
 the Massachusetts General Court (Legislature) in March, 192 1, as Counsel for the 
 Legal Reform Bureau to Eliminate the Loan Shark Evil, Inc., New York. 
 
 A. The Loan Shark and the Era of Darkness 
 
 Ten or fifteen years ago it would have been impossible to present a 
 comprehensive statement of facts. Nothing was known about the small 
 loan business except that it had produced and was controlled by men who 
 operated without the law or in defiance of law, who charged barbarous 
 rates of interest, and who earned for themselves the obnoxious title of 
 "loan-shark." 
 
 From time to time, in different communities, little groups of earnest 
 and sincere people would wage an "anti-loan-shark campaign." There 
 would be a great hue and cry in the newspapers. These campaigns were 
 designed "to oust the loan-shark" and "to prevent the poor man from 
 paying excessive rates of interest." 
 
 These people, though well-intentioned, knew nothing about the busi- 
 ness. Instead of ascertaining the facts of the situation they were guided 
 by hysteria and false sentimentality. What they were trying to do, although 
 they did not realize it, was to prohibit the poor man from borrowing. 
 
 They failed. The loan-shark evil grew to vast proportions. The laws 
 were flouted. The borrowers were shamefully oppressed. The situation 
 everywhere drifted steadily from bad to worse. 
 
 B. Study and Research about the Business 
 
 Since 1910 a steadily increasing number of persons have studied the 
 small loan business in order to find out what was the matter and to 
 suggest constructive reforms that would accomplish something. Pioneer 
 in this field was the Russell Sage Foundation which established a Division 
 of Remedial Loans. Later came the Legal Reform Bureau to Eliminate 
 the Loan-Shark Evil. There were also legislative investigations, as in 
 Massachusetts and Illinois, and studies made by students of economics 
 and sociology. 
 
 In this way the facts became known. This new group of reformers had 
 the courage of their convictions. They stood by the truth. They incurred 
 desperate opposition from the loan-sharks and, unfortunately, from many 
 of the good elements in the community who had never learned the lesson 
 
 5657,90 
 
of their own failure and still believed that all you had to do was "oust the 
 loan-shark." 
 
 But these new reformers, armed with their facts, got results. First 
 one state and then another was persuaded to try their plan for regulating 
 the small loan business. When the plan was tried it succeeded. Where 
 the loan-shark was driven out he was out for good. Under the new plan 
 no complaints were heard. 
 
 Today, those who have taken the pains to inform themselves about 
 the small loan business, know that there is a plain, straightforward, 
 simple solution for the "loan-shark problem." The solution works because 
 it is practical instead of theoretical, it has been worked out by intelligence 
 instead of by hysteria; in a word, it stands four-square with the facts of 
 the situation. 
 
 C. The Controlling Facts 
 
 The fundamental facts, which can now be proved beyond the shadow 
 of a doubt, are these. 
 
 I . The Small Loan Business is a Necessity for the Borrower. 
 
 Careful studies have been made to find out what sort of people borrow 
 and what they borrow for. 
 
 For a long time it had been assumed, and many people still believe, 
 that the borrowers are "drunks" and "bums" who borrow to get drunk 
 or for other evil purposes. The actual facts are the exact reverse. 
 
 In 1914 the transactions of the Atlanta Loan and Saving Company 
 were examined and it was found : 
 
 373 persons borrowed because of sickness. 
 43 persons borrowed because of death. 
 
 95 persons borrowed for home expense, as repairs, assessments, etc. 
 203 persons borrowed for domestic causes, as to pay debts, buy furni- 
 ture, educate children, etc. 
 66 persons borrowed to meet emergencies brought about by unem- 
 ployment, bank-failure, etc. 
 201 persons borrowed for miscellaneous expenses, as debts, moving 
 
 expenses, etc. 
 105 persons borrowed in connection with their own small businesses. 
 56 persons borrowed because of their own extravagance or dissipation 
 
 or that of others in the family. 
 16 persons borrowed to make good on bad investments, bad manage- 
 ment, etc. 
 
 The experience of the National Federation of Remedial Loan Asso- 
 ciations is to the same effect. 
 
 An office in New York was examined as to its 2,444 loans to see what 
 
 4 
 
kind of men and women borrowed and what businesses they were in. The 
 results showed: 
 
 Business of Employers of 2,444 Borrowers 
 
 U. S. Government, 353; New York City, 553; New York 
 County, 21; New York State, 17; manufacturing, 246; mer- 
 cantile, 289; financial, 83; insurance, 75; newspapers, 146; 
 railroads, 70; steamship companies, II ; express, 19; telegraph 
 and telephone, 32; oil companies, 9; real estate, 22; con- 
 tracting and building, 31; warehousing, 11; grocery, 32; 
 tailoring, 40; printing and publishing, 52; public utilities, 42; 
 stationery, 10; restaurant, 9; medicine and surgery, 8; no 
 business, 16; miscellaneous, 247. 
 
 Positions Held by 2,444 Borrowers 
 
 Clerks, 247; post office employees, 245; other U. S. em- 
 ployees, 95; state department and court employees, 24; 
 city department and court employees, 177 ; New York County 
 employees, 14; fire department, 198; police department, 114; 
 proprietors and partners, 344; managers, 67; secretaries and 
 stenographers, 44; foremen, 40; agents, 33; salesmen, 113; 
 factory operators, 81; machinists, 34; inspectors, 33; tailors, 
 39; artisans, 24; pressmen, compositors, etc., 108; teachers, 
 18; doctors and dentists, 15; writers, 15; telegraphers and 
 dispatchers, 18; bookkeepers and accountants, 64; conduc- 
 tors, 3; miscellaneous, 222. 
 
 Other investigations verified these results. A mass of information on 
 this subject is contained in the Handbook of the Legal Reform Bureau, 
 pages 53-84. 
 
 Governor Cox, of Ohio, has said : 
 
 "I make bold to say the legalized loan office is more of a neces- 
 sity in an industrial community than, perhaps, a bank, for this 
 reason; it is the poor man who, when he needs money, needs it 
 worst." 
 
 The Massachusetts House of Representatives' Committee on Banks 
 and Banking, in its admirable report on the small loan business in 191 1, 
 stated that it found many persons who borrowed because of necessity. 
 See Bureau Handbook, page 42. 
 
 Clarence W. Wassam, Ph.D., who wrote an essay on the business in 
 connection with his work at Columbia University, New York, said: 
 
 "The necessity for borrowing money for a short period of time 
 is as old as the money economy under which it arises. It is common 
 to the man of large and of small means, to the entrepreneur in 
 business and to the man who works for a daily wage." (Bureau 
 Handbook, page 45.) 
 
 5 
 
The necessity of the business is recognized in the preambles of the 
 laws of several states. Thus, in Virginia (Laws of 1918, Chapter 402), 
 "It is recognized that that business of lending small sums of money upon 
 security that is not acceptable to banks, does and will exist and there is a 
 real need for the enactment of a law that will enable its continuance 
 under proper supervision." 
 
 Judge Frazer of the Supreme Court of Pennsylvania in the case of 
 Pennsylvania v. Puder said : 
 
 "The attempt in recent years to eradicate the evils of the so- 
 called "money loan-sharks," by proceedings instituted in Phila- 
 delphia and Pittsburgh, is a matter of general public knowledge, 
 and those who have given the matter close investigation and thought 
 concede that a prohibition of the business does not accomplish 
 the desired result, and that the only practical method of dealing 
 with the subject is by proper regulation. Our legislature in a 
 preamble to the Act of 191 5, omitted from the pamphlet laws but 
 shown in the certified copy of the act from the office of the Secre- 
 tary of the Commonwealth, recognizes the situation and the imprac- 
 ticability of prohibiting the business of loaning money in small 
 amounts and the need of regulation and supervision by law." 
 Other official statements recognizing the necessity of the business may 
 be found in Bulletins of the Department of Public Welfare of the City 
 of Chicago, for November, 1916, Vol. I, No. 4, page 23. 
 
 2. The Small Loan Business is Clean Banking Business for the Lender. 
 
 When it became apparent that the small loan business was a neces- 
 sity, it became obvious that the only constructive solution was to find a good 
 substitute for the loan-shark. To abolish or imprison one loan-shark and 
 not provide any other place for the small man to borrow merely meant 
 that another loan-shark would take his place. As our own Massachusetts 
 Committee on Banks and Banking said in 191 1 : 
 
 "Your committee had impressed upon it that money-hunger, 
 either the hunger of necessity or the hunger of wilful extravagance, 
 could not be satisfied by pure loan laws which amounted to prohi- 
 bition, any more than food -hunger could be gratified by pure-food 
 laws which amounted to prohibition." 
 Professor Eubank, Professor of Sociology and Dean of the Y. M. C. A. 
 College in Chicago, says: 
 
 "Before any campaign to oust the loan-shark can be effective 
 there must be some agency equipped and prepared to take its place." 
 And he goes on with these incontrovertible statements: 
 
 "No campaign of extermination will ever succeed. No amount 
 of condemnation will ever be effective. No negative laws, however 
 drastic, can permanently relieve the present abuses. As long as 
 we have citizens who want to borrow money — and we shall always 
 have them — so long will some loan agencies continue, and it is only 
 the better kind that will succeed in driving out the worse." 
 
When it was discovered that the small loan business consisted of 
 honest men and women who borrowed for honest reasons, it became clear 
 that the small loan business was nothing more or less than small banking 
 business. That seems clear now but it is only recently that it has become 
 clear. 
 
 And then came the next step. Why should not honest men put legiti- 
 mate capital into the business and place the whole business as high in 
 public esteem and confidence as the banking business ? 
 
 For, as Hon. Edwin R. Cox of the Pennsylvania Legislature has said : 
 
 "There is no reason why a small loan institution cannot be 
 made as responsible as a Federal Reserve Bank." 
 
 THE LICENSED INDUSTRIAL LENDER 
 
 A. Various Substitutes for the Loan-Shark 
 
 To take the place of the old-fashioned loan-shark, three types of offices 
 have come into being (Cf . Bulletin Dept. of Public Welfare, City of Chicago 
 for Nov., 1916, page 31): 
 
 (a) The purely charitable organization. 
 
 (b) The cooperative organization. 
 
 (c) The straight business organization. 
 
 1. The Charity. 
 
 The first of these, the charity, has played only an insignificant part in 
 solving the small loan problem and for the obvious reason that the average 
 borrower is not a "dead-beat" or a "bum." Nine times out of ten he is a 
 self-supporting, self-respecting workman. He may need a loan just as a 
 rich man or a merchant may need a loan but he does not intend to be 
 treated as a pauper, or a beggar, or as an object of charity. The average 
 American small borrower wants to go to some reputable place, like a bank, get 
 a loan because he is a good moral risk, pay the fair rate of interest, in short 
 to have it a straight out and out business transaction. (See a pamphlet called 
 "Why the Small Loan Business is Essential," published by People's 
 Provident Association, Kentucky.) 
 
 This charitable type of organization may have done some good, but as 
 a permanent solution of the loan-shark evil it has had only a small part 
 and therefore may be dismissed. 
 
 2. Credit Unions. 
 
 The second, the cooperative organization, is more interesting. The 
 credit union is the best example. The credit union movement has been a 
 great success in Italy; there are successful credit unions in the United 
 States, but it is a fact that, generally speaking, the credit union movement 
 has not developed as rapidly in this country as had been hoped. 
 
 It is not pertinent here to inquire whether this is because Americans 
 take slowly to the cooperative idea or what the trouble may be. The credit 
 
 7 
 
union has much to recommend it. It is entitled to encouragement. It 
 may ultimately be the final solution. 
 
 But for all present and practical purposes the credit union alone is not 
 an adequate substitute for the loan-shark. 
 
 There are not enough credit unions to fill the need. 
 The Boston Post said editorially on April 28, 1920: 
 
 'The credit union is the best answer to the small loan problem, 
 and it would be a complete answer if there were, say 1,500 of the unions 
 in the state instead of 60." 
 
 To increase from 60 to 1,500 is an increase of 2,600 per cent. That 
 cannot be accomplished overnight. While the legislature should do all it 
 can to encourage the credit-union idea, it must recognize that for imme- 
 diate, practical purposes, some other solution is necessary. 
 
 3. The Licensed Lender. 
 
 That solution has been found in the licensed industrial lender. The 
 licensed industrial lender is nothing more or less than a bank which makes 
 small loans as a business proposition. 
 
 B. Why a Special Business for Small Loans ? 
 
 The industrial lender or the licensed small-loans office has been the 
 one practical, business-like, effective solution. He competes with the 
 unlicensed lender, drives him out, and keeps him out. 
 
 Some persons have thought that there ought not to be special offices 
 for small borrowers and have said the banks should do the business. Gov- 
 ernor McCall, of Massachusetts, urged this in his inaugural address in 
 191 6. A newspaper reporter consulted the presidents of all the leading 
 banks in Boston and stated : 
 
 "Presidents and managers are of one opinion in this matter. 
 That the risk is too great in many cases, that separate departments 
 would be required to handle the business, and that for these reasons 
 there would be little or no profit in the business for the banks." 
 (From copy of article on file in Massachusetts Supervisor of Loans' 
 office.) 
 
 Samuel Spring, Esq., in an article on Banking published in the current 
 North American Review says this: 
 
 "Modern business would perish without the free use of credit. 
 No one today would say even to the small business man — "neither 
 a borrower nor a lender be." Yet when it is said that the worker 
 or farmer needs a small loan on his unsecured note and is forced to 
 go to the loan-shark because no bank will accommodate him, most 
 bankers conclude that a thrifty worker does not need to borrow. 
 It serves him right, is the verdict, if he has to pay a grotesque rate 
 of interest; the lesson will teach him thrift. Yet how shallow such 
 a conclusion is. Misfortune, unemployment, sickness, the needs of 
 
 8 
 
a large family — these set back workmen to conditions of piercing 
 need. . . Moreover there are seasonal demands upon the worker 
 just as there are upon the farmer or the business man. The fall, 
 with the need of storing up coal, clothing the children for school, and 
 preparing for the winter represents a genuine strain in the great 
 bulk of American homes. In brief, we have here a repetition of the 
 familiar credit needs of modern economic life — only on a Lilliputian 
 scale." 
 
 The fact remains that existing banks, both urban and rural, cannot 
 handle small loans at a profit and that as a result there is a gap in 
 the present banking structure. 
 
 Very recently it has been suggested that the state should do this busi- 
 ness. It is not necessary to waste time or space pointing out that this is 
 no practical immediate solution. On this point Senator John Dailey, of 
 Illinois, said last year (Year Book of American Industrial Lenders' Asso- 
 ciation in 1920, page 71) : 
 
 "I am going to sound a note of warning. The socialist and the 
 demagogue are active. The socialists are asking for state insurance 
 and the state's participation in private business. They will ask 
 that the state take charge of the lending of money. See if they 
 don't. You want to be on your guard. Your business is a private 
 enterprise; it is as legitimate and proper a function of private en- 
 deavor as any other class of business. The management and conduct 
 of purely individual and private business by the government itself 
 is the socialistic program, no matter how disguised it may be, no 
 matter whether it is advocated by soap-box orators, parlor socialists, 
 or bolshevistic professors." 
 
 It is clear that the small loan business is akin to banking business but 
 has so many distinct elements that it is most wisely conducted as a distinct 
 business. 
 
 This is the history and the reason for the existence of the licensed 
 small loan lender. 
 
 C. Public Opinion and the Licensed Lender 
 
 Wherever the licensed lender has been allowed to conduct the small 
 loan business the loan-shark has been driven out. Where licensed lenders 
 operate there are no complaints about extortion or usury (Bureau Handbook 
 page 24). _ 
 
 There is only one reason why the licensed lender has not driven the 
 loan-shark out of every state in the Union. That reason is a mistaken 
 public opinion. Of course, the loan-shark rights the licensed lenders bit- 
 terly; but as they cannot fight in the open and are forced to resort to 
 bribes and trickery, they have been given short shrift by state legislators. 
 Loan-shark opposition has been an asset in the campaign to have the 
 business done by licensed lenders. 
 
 But public opinion, here and there, has been a stumbling block. In 
 
some states there has been a carrying over of the old attitude of hysteria 
 and false sentimentality. People have said : Loan-sharks were in the small 
 loan business; licensed lenders are in the small loan business; hence 
 licensed lenders are loan-sharks. Upright and sincere people have not 
 troubled to get the facts and thus they have confused licensed lenders with 
 loan-sharks. This confusion in the minds of honest people has been the one 
 thing which has saved the loan-shark from extinction. 
 
 Hon. Raymond B. Fosdick, Chairman of the Federal Commission on 
 War Camp Community Service in the United States and France during 
 the world war, in an address before the Academy of Political Science, New 
 York, November n, 191 1, stated: 
 
 " . . . Our main obstacle is the ignorance of the virtuous. It is 
 the belief that banking rates of interest can be imposed on a business 
 which is conducted without security. It is the blind opinion that 
 you can run a small loan business at 6 per cent per annum and make 
 it pay. It is the false hope that laws prohibiting an interest in 
 excess of 6 per cent can be imposed. Before adequate legislation 
 can be had, these illusions must be destroyed, and the only way in 
 which they can be destroyed is by a thorough knowledge of the 
 facts brought about through an educational campaign. . " 
 
 In 1920 an attempt was made to drive the loan-shark from Kentucky. 
 The drive was defeated by this "ignorance of the virtuous." See the 
 Louisville (Ky.) Herald for February 11, 1920 (editorial) and the Courier 
 Journal for the same date (editorial). 
 
 The rub of the situation is this. The licensed lender goes into the 
 small loan business as a legitimate enterprise. He is a straightforward 
 business man. He will not disobey or evade the law. He will comply with 
 every clause of the law, If he does not make a decent profit he does not break 
 the law, but he does get out of the business. 
 
 The state must regulate the business. That is agreed on all sides- 
 Regulation involves fixing the rate of interest which may be charged. 
 
 That is the difficulty. If the rate is fixed too low, the licensed lender 
 loses money and gets out of the business, and when he gets out, the loan- 
 shark slips back in again. 
 
 Before going on to examine what the fair rate must be it is essential to 
 nail down the fact that the licensed lender and the loan-shark are as far 
 apart as the two poles; they have nothing in common, they are irrecon- 
 cilable foes, where one exists the other cannot. They are as distinct as a 
 bank is distinct from a bucket shop. 
 
 The Chicago Department of Public Welfare, November (191 6) Bul- 
 letin, called "the loan-shark number" on page 31 says of the licensed 
 lender companies: 
 
 "These organizations keep within the law and so are not to be 
 confused with the loan-shark whose characteristic is that of usurious 
 money-lending" 
 
 10 
 
The Superintendent of Banks for Ohio, speaking of the law which 
 made it possible for the licensed lenders to operate in Ohio, said (The Loan- 
 Shark Evil, Bulletin published by the Legal Reform Bureau in February, 
 1919, see page 2) : 
 
 "The operation of the restrictive provision of the law has re- 
 sulted in putting out of business many money-lenders who had 
 lived by the unlawful profits of their investments. Men of high 
 character and correct business methods, satisfied with the lawful 
 returns upon their loans, have taken their place. 
 
 "The law has put dignity and confidence into the loan business 
 heretofore unknown, so that loan transactions stand upon the same 
 footing as other business transactions and neither the borrower nor 
 the lender has anything to cover up or be ashamed of." 
 
 In cities where they have offices, the licensed lenders are esteemed 
 members of the local chambers of commerce. Their national association 
 is a member of the United States Chamber of Commerce. 
 
 In about half the states public opinion has been educated and under- 
 stands that the licensed lender is the solution of the loan-shark problem. 
 In those states the law is adequate. 
 
 In Massachusetts it would seem that many persons still are confused 
 in their minds, for the Massachusetts law is not adequate to attract suffi- 
 cient loan capital to adequately supply the legitimate demands for indus- 
 trial loans of $300 or less in even the larger centers of population, and after 
 all these years most of the towns and rural communities are without any 
 legitimate small loan service. 
 
 ADEQUATE LEGISLATION 
 
 A. The Scientific Rate 
 
 The vital point in legislative regulation is the establishment of an 
 adequate rate. 
 
 The scientific rate is now known to be j}4 per cent per month. 
 This fact is most simply proved as follows: 
 
 1. The two national remedial organizations interested in improving- 
 the small loan business have drafted model laws: 
 
 The Division of Remedial Laws of The Russell Sage Foundation in 
 its "Uniform Law" fixes the rate of 2>H per cent per month. 
 
 The Legal Reform Bureau to Eliminate the Loan-Shark Evil has 
 also fixed the rate at 33^ per cent per month as necessary in all 
 the circumstances. 
 
2. All states which have enacted or amended remedial loan laws since 
 191 6 have established the 3>£ per cent rate or its equivalent by 
 supplementing certain fee charges to the interest rate. These 
 states are 
 
 Arizona 
 
 Indiana 
 
 Virginia 
 
 Connecticut 
 
 Iowa 
 
 New Hampshire 
 
 Georgia 
 
 Maine 
 
 Ohio 
 
 Illinois 
 
 Maryland 
 
 
 Pennsylvania 
 
 Michigan 
 
 
 In March, 1921, the 3^ per cent law was enacted in Iowa, the vote 
 in the House being unanimous and all but three in the Senate. 
 
 3. The 3^ P er cen t rate is endorsed by unimpeachable and unbiased 
 
 sources. 
 
 The 2>y2 per cent law was introduced into the Connecticut legislature 
 in 1919, with the endorsement of nearly every charity in the state. (Copies 
 of the letters of endorsement have been printed and a set has been given 
 to the Senate Chairman of the Committee on Legal Affairs.) 
 
 So, also, in Kentucky the 3^2 per cent bill was sponsored by the social 
 agencies of the state. (A set of copies of those letters of endorsement has 
 also been given to the Senate Chairman of the Committee on Legal Affairs.) 
 
 While the 2>H per cent battle was on in Kentucky, telegrams were 
 sent from licensing officials of Illinois, Indiana, Pennsylvania, Connecti- 
 cut, and Maryland stating that the ^A P er cent l aw had worked well 
 in those states. (Copies of these telegrams have been given to the 
 Senate Chairman of the Committee on Legal Affairs.) 
 
 Prof. E. E. Eubank, dean of the Y. M. C. A. College in Chicago says: 
 11 It has been determined by careful studies that j}4 per cent is as 
 low a rate as can be made." (First Report of Department of Trade 
 and Commerce, State of Illinois (1918), page 8.) 
 
 Robert W. Sharp, New York, author of "The Chattel Mortgage Loan 
 Business — The Disease and the Remedy," says: 
 
 "The rate legalized in several states, namely 2>A P er cent P er 
 month, is equitable." (Pamphlet published by Legal Reform 
 Bureau, February, 1919, entitled "Necessary Rate for Small Loans," 
 see page 8.) 
 
 A scientific statement setting out accounts of actual loan offices may 
 be seen in the 1919 Year Book of the American Industrial Licensed Lenders' 
 Association, page 38. 
 
 See also the Bureau Handbook, pages 114-118; also pamphlet on 
 "Why a Higher Rate?" etc., by C. S. Francis, published in 19 19, by Legal 
 Reform Bureau. 
 
 4. The 2>A per cent rate has been stated to be the scientific rate by the 
 
 metropolitan newspapers of Massachusetts. 
 
 12 
 
The Boston Herald said editorially on April 23, 1920: 
 
 "The Law today allows the lender to collect interest at the rate 
 of 3 per cent on loans of less than $300. To advance this charge by 
 y 2 per cent is said to conform to the results obtained by an extensive 
 survey of the business covering many American cities; 3^ per cent 
 is found to be the scientific rate. . . the measure ought to be restored 
 by amendment to its original form." 
 
 The Boston Post said editorially on April 22, 1920: 
 
 'The present law permits a charge of 3 per cent on loans under 
 $300. The ostensible purpose of the new bill is to allow an increase 
 to sH per cent a month on such loans. There seems to be no objec- 
 tion to that for it has been demonstrated by careful experiment in 
 various parts of the country that 3^/2 per cent is the 'scientific rate' " 
 
 The Boston Evening Transcript said editorially on April 21, 1920: 
 
 "An increase from 3 to 3^2 per cent a month as the authorized 
 interest charge would meet all reasonable requirements." 
 
 The Boston Evening Record said editorially on April 21, 1920: 
 
 "The legal rate on small loans in this state has been 3 per cent. 
 Experience has suggested that this is too low for brokers to do 
 business at a profit. An increase to 3^ per cent was petitioned for. 
 No objection was registered against this petition. . . . 
 
 "The 2> l A P er cent rate i s established in Connecticut, Maine, 
 Pennsylvania, Illinois, Indiana, Maryland, Georgia, and Iowa. 
 It is believed to be adequate. In the light of such evidence at hand 
 the legislature might properly grant the proposed increase from 3 to 
 3 l /2 per cent here." 
 
 The Boston American, on April 22, 1920, featured a news story based 
 on an interview with Walter S. Hilborn, Esq., and saying that the 3^ 
 per cent rate was proper but that any higher rate was improper. 
 
 B. Comment on the 3V2 Per Cent Rate 
 
 When it is stated that the legal rate cannot be fixed lower than 3K 
 per cent per month or 42 per cent per year, that rate sounds high to the 
 man who can step into a bank, put up collateral and get his loan at 6-7-8 
 per cent per annum. 
 
 There are three big differences which, after a little reflection, are clear: 
 
 1 . The risk involved in the small loan is much greater. The small loan 
 
 is a personal risk. The bank loan is against collateral or business 
 assets. 
 
 2. The licensed lender cannot charge the borrower for the expenses of 
 
 the loan, whereas the banks can and do. The loans are for sub- 
 stantial sums falling due at one time. 
 
 13 
 
A savings bank lends on a real estate mortgage. It looks up the 
 title. It charges the borrower with the lawyer's bill for examining 
 title or title company's fees for insuring title. The loans are for 
 large sums. A licensed lender lends on character. He looks up 
 the borrower's reputation, employment, etc. He cannot charge 
 the borrower with that expense. The loans are for small sums 
 repayable on weekly or monthly instalments for about a year. 
 
 The j}4 per cent rate is fixed to include both interest and all expenses. 
 
 3. In proportion to the amounts loaned, the percentage of cost of con- 
 ducting loans business is far greater. Suppose it costs a bank $10 
 to make a $1,000 loan for three months. At 6 per cent the bank 
 received $15.00 and makes a profit of $5.00. 
 It costs just about as much to hand a hundred dollar bill out to a 
 borrower as a thousand dollar bill. Rent, overhead, bookkeepers' 
 wages, stenographers' wages, stamps, telephone, stationery are 
 all about the same in the small loan office as in the bank. But 
 suppose the cost is only $9.00 (10 per cent cheaper than the 
 bank). At 3^2 per cent the licensed lender gets $10.50 for the 
 three months' interest on $100. His profit is only $1.50. This is a 
 profit on his capital of just 6 per cent per annum. As all costs are 
 included in the rate fixed by law, the rate obviously must be high 
 enough to include and cover all legitimate costs. 
 
 C. The Practical Answer of Experience 
 
 After all, practical experience is a better guide for legislative action 
 than mere theoretical reasoning by persons without actual experience. 
 
 The practical experience in a score of states is this : (Cf . Bureau Hand- 
 book, page 24) 
 
 When the rate is 3>£ per cent the small loan business is done by licensed 
 lenders who employ clean methods only; there are no loan-sharks; there 
 are no complaints of oppression, and licensed lenders cooperate with the 
 officials in policing the business. 
 
 When the rate is substantially lower than 3^ per cent, the licensed 
 lender cannot enter or stay in business, so the loan-shark takes the licensed 
 lender's legitimate place, exorbitant interest and fees are charged; the loan 
 business is done secretly; the provisions of the loan law are generally 
 violated ; there is inadequate capital available for loan service. 
 
 In Alabama the legal rate of interest allowed was fixed at ^ per cent 
 per month. A license fee of $2,000 per annum is required. No licensed 
 lender could do business under these conditions. The loan-sharks do all 
 the business and charge 40 per cent per month. (See Welfare Bulletin of 
 the City of Chicago for November, 1916, page 1 1.) 
 
 In Colorado, where the legal rate is 1 per cent per month, the law 
 cannot be enforced. There is no licensed lender in the state; the loan- 
 sharks charge what they please, which includes recompense for their risk 
 of violating the criminal sections of the law. Therefore the law makes a 
 bad condition worse. 
 
 14 
 
In Illinois, before the $}4 per cent law was adopted, the legal rate was 
 7 per cent and the result was that only loan-sharks did the business. (See 
 Chicago Department of Welfare Bulletin, pages II, 12.) When the 3>2 
 per cent bill was before the Illinois legislature in 191 7, U. S. Judge Kenesaw 
 M. Landis wrote as follows (See First Report Department of Trade and 
 Commerce, State of Illinois, page 6) : 
 
 "Dear Senator Austin: I have been asked to write to 
 you about a bill to regulate loan agencies. Such judgment 
 as I have is the result of what I have learned during my ser- 
 vice on the bench. 
 
 "Of course this (?>£ per cent) seems a tremendous rate of 
 interest for money but we are dealing with a very practical ques- 
 tion. The loans are small in amount and extend for a short 
 period of time in view of which it is my judgment that a 3^ 
 per cent per month rate is a just rate. 
 
 "At all events it certainly is better than 20 per cent a month 
 which, unless you gentlemen do something, will continue to be 
 exacted." Very truly yours, 
 
 Kenesaw M. Landis 
 The Chicago Tribune said : 
 
 "Forty- two per cent a year sounds usurious but we must remem- 
 ber that we are confronted with a condition, not a theory, and that 
 the present condition is ten times or more worse than the proposed 
 remedy. Loaning on wages is a precarious occupation and high 
 rates of interest are necessary." 
 
 In Kentucky the legal rate of interest was and is 6 per cent. The loan- 
 sharks thrive by charging generally a rate of 300 per cent per annum. In 
 1920 a drive was made to get the scientific rate of 3>£ per cent per month. 
 Many good people in the state thought that too high, and opposed it, and 
 by so doing kept their state in the hands of the loan-sharks and deprived 
 the public of decent and fair small loan service. 
 
 The Kentucky Conference of Social Work appointed a Committee on 
 the small loan business. In a printed document called "Smashing the 
 Loan-Shark" (See page 2, 127) the Committee states that the rates charged in 
 Kentucky for small loans were 
 
 I 5 1° 50 per cent a month. 
 185 to 600 per cent a year. 
 The Louisville Herald for February II, 1920, put the thing in a nutshell 
 when it said editorially: 
 
 It is not a question of 6 or 10 per cent versus 42 per cent but of 
 42 per cent versus 1,000 per cent. And that is a tremendous, a liberating 
 influence. 
 
 Revised February, IQ22. 
 
 60 State Street, Boston, Mass. 
 
 Published by the 
 
 American Industrial Lenders' Association 
 
 Harrisburg, Penna. 
 
 15 
 
^^ - ASSESSED FOKfi DUE. THE_ r urT H 
 
 OVE^|% 
 
Photomount 
 
 Pamphlet 
 
 Binder 
 
 Gaylord Bros. 
 
 Makers 
 
 Syracuse, N. Y. 
 
 PAT- JAN 21, 1908 
 
 
 &§££» ■'■'. 
 
 YC 23783 
 
 
 JasJSSeS^ 
 
 565790 
 
 UNIVERSITY OF CALIFORNIA LIBRARY 
 
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