IRC

HARPOONING THE LOAN SHARKS

by Gabriel Kirkpatrick, CUNA Archivist

Since the beginning of civilization, loan sharking has flourished wherever there existed need for small loans. Preying on the poor and the needy, the loan sharks wielded considerable influence and power over their communities from ancient Damascus to present-day New York. By charging exorbitant rates of interest, sometimes as high as 1000%, they kept their debtors enslaved, and too often, used threats, torture and even violence to collect. Nothing deterred them. The tenets of religion, laws again usury, small loan laws, law enforcement agencies, government regulation, all tried and failed to drive them out of business. They continued to flourish within and outside the law in every country because they filled, and continue to fill, an enormous gap in the provision of financial services. The poor, the needy, the desperate still find the loan shark a ready alternative for loans.

Missionaries found loan sharks in Africa, in Central America, in the South Pacific. English civil servants found them in Fiji, in India, in Australia. American workers found them in every state. Wherever the need existed, there was the loan shark. Edward A. Filene called them "the greatest boot-legging business" and set out to find an alternative means of helping the masses control their own finances and eliminate the need for the loan sharks.

His was not the first effort to combat the menace. The Morris Plan Banks operated in a few states and were permitted by law to charge higher interest rates on small loans, but with a maximum limit set on rates and fees.

The axias, voluntary, unlicensed savings and loans operated primarily among immigrant groups in large American cities. They made loans only to members of the ethnic groups they served. Because they were unregulated, however, their rates of interest on loans were often set extremely high.

Remedial loan societies were small loan companies which operated in a few states as semi-charitable organizations. They were funded by philanthropists and operated under special state charters. They made loans at small interest rates and did make a profit within the social responsibility requirements of their charters.

Some large companies made loans available to their employees at low rates of interest and deducted repayments from wages. This practice varied widely in interest charges and repayment options. Some churches also made small loans available to members of their congregations, though this was not a widespread alternative. The churches were more likely to make charitable donations to needy families.

When Filene introduced credit unions in Massachusetts, he promoted them as strong alternatives to the loan sharks and "bulwarks against usury." Besides offering small loans, the credit unions also promoted thrift. Through their cooperative nature, Filene saw the credit unions as giving members control over their own finances. To him, such economic democracy would benefit not only credit union members but also society as a whole by increasing the buying power of the ordinary worker. In dozens of speeches and articles, he stressed again and again the connection between improving the financial condition of the average worker and the economic prosperity of society. Primary in this philosophy was the empowerment of the average person and the elimination of the need for the loan shark.

The spread of credit unions alarmed the loan sharks. They fought the credit union laws in every state, but the ultimate passage of state laws did not destroy loan sharking. They continued to grow particularly in major cities where the need was greatest and where their activities might have the best chance of going unnoticed. Boston, New York, Atlanta, Dallas, Detroit, San Francisco, among others, struggled against the small loan rackets. Perhaps the most famous such fight was the crushing of the "juice rackets" in Chicago in the 1960s. The city brought down segments of the local "mob" in trials that linked loan sharks to incidents of torture, extortion, arson, and even murder.

Despite such competition and crackdowns, the loan sharks continue to survive as effectively as they did in ancient Athens and Damascus or twentieth-century New York and Atlanta. The prevalence of check-cashing centers, which make loans on government checks at high interest rates, certainly creates the potential for expansion of loan sharking. Debit cards with fees attached are now available for customers of these centers. Perhaps the 500% to 1000% interest rates are gone, but the likelihood of levying exorbitant fees for the privilege of cashing a check makes the possibility for the revival and expansion of loan-sharking all too real.

Copyright © 2008 - Credit Union National Association, Inc.