For many a year and more than l care to remember l have studied and looked deeply into rules and regulations governing
lending, of any kind! When l first read about this law and how it affected lending right up until the 1940's l was surprised to learn, that certain companies could keep
interest rates higher than the norm.
The
Uniform Small Loan Law (USLL) allowed specially-licensed lenders to charge much higher interest rates than those allowed by most state usury
laws. In return, small-loan brokers had to adhere to strict standards of transparency. The USLL was the
Russell Sage Foundation's primary device to combat the problem of high-rate lending to poor people in the first half of the twentieth century. The Foundation drafted successive versions of the law and fought for its passage in
state legislatures. About two-thirds of the states had passed the USLL when the Foundation ended this
effort in the 1940s. This paper describes the USLL and reports
econometric models of which states passed the USLL and when. We find that the demographic and political factors that occupied much of the Foundation's own discussion played little role. Measures of state economic structure as well as the presence of
credit unions and banks, on the other hand, are powerful correlates of the state's passage. There is no evidence of
spatial dependence across states in the law's passage.
For its first 40 years the Russell Sage Foundation (
RSF) was heavily involved in efforts to reform the conditions under which poor
Americans obtained credit. Through its lobbying, publications, and other efforts, the Foundation operated as the clearing house for information, leader of several reform proposals, and primary interlocutor for lenders and industry groups that sought to improve their industry's image. This paper focuses on one particular initiative, the Uniform Small Loan Law (USLL). The USLL formed the heart of the Foundation's early efforts to improve
credit conditions for poor people. The USLL reflected two central ideas. Supporters thought that making small loans was an inherently expensive business, and that the only way to encourage legitimate lending was to let capital earn a realistic profit. The law also reflected a perception that borrowers were hurt less by high interest rates than by other features of "loan-sharking," such as lack of transparency. This paper focuses on the USLL's passage: which states passed the law and when. Section 1 provides background on the problem of credit for poor people, as well as the RSF's views of the problem. Section 2 focuses on the law itself. Section 3 describes the data and methods we employ, and Section 4 discusses our results.
1. Credit for the Poor and the Foundation's activities: Starting in the 1890s, U.S. reformers came to view credit as a serious problem in causing or exacerbating poverty (Calder 1999: 112-123). In their eyes, borrowers usually sought small loans only because of financial necessity: unexpected medical expenses or loss of income due to unemployment. The dire circumstances for such emergency borrowing drove small debtors into the hands of usurers, loan sharks, and
other unscrupulous lenders. The Foundation was established in April of 1907 and credit for poor people remained a major focus until
World War II. The first approach it tried was to publicize the problem (via a "crusade") and warn borrowers about the dangers they faced. But mostly the RSF tried to cultivate new sources of credit that could drive out the "loan sharks." This included Remedial Loan Societies, charitable lenders that
extended credit to poor people at much lower rates than those charged by for-profit lenders. RSF provided financial and organizational support to a number of remedial loan societies, and to their national organization. RSF also played a key role in the early U.S. credit-union movement, but the Foundation's ardor for credit unions cooled by the 1920s. One reason was the intellectual understanding noted above.1 Institutional and personal conflicts were also important.
Edward Filene's
Twentieth Century Fund staked out credit unions as its policy turf, and while the Fund tried several times to work with the RSF, the relationship remained awkward. The personal problems stemmed from repeated conflict between
Roy Bergengren, who was Filene's man for the credit-union groups, and various figures at the Foundation. The RSF also tried to promote
consumer lending by commercial banks, again seeking market competition that might reduce costs to borrowers. Commercial banks were late entrants into this field, in part because of legal restrictions on the lending activities of national banks. RSF assisted several
New York banks in setting up these new loan departments.2 It also considered various legislative measures, although these ran aground of the question of whether state laws legalizing personal loans applied to federally-chartered banks. In general and despite RSF efforts, commercial banks were slow to make small loans to individuals (RAC 28/216, p.7).
2. The Uniform Small Loan Law: Most of the Foundation's efforts went into the creation and promulgation of a uniform law to cover small-loans. Support for the USLL involved two tasks: writing (with other interested parties) a model law, and then encouraging its promulgation and passage. This "uniform law strategy" was relatively new to
American politics. In the 1880s, the
American Bar Association (ABA) devised a long-term plan to standardize state laws. Legal variability across states was an ongoing problem. National legislation to deal with various social and economic problems was simply
1. The conceptual underpinnings of the credit-union and USLL approaches are quite different. Credit unions are non-profits that distribute all surplus to members. The entire point of the Uniform Small Loan Laws was to attract private capital into this type of lending with the promise of profits. Credit unions experienced little of the legislative opposition that the Uniform Small Loan law encountered. 2. One bank that set up a new loan department was the First National City Bank of New York, whose president, Charles Norton, joined the RSF board of trustees in 1918, not an option because of how the U.S. constitution allocated powers between state and national government. The uniform law strategy seemed to offer a solution: promulgating uniform laws at the state level ensured constitutionality and defused the problem of multiple jurisdictions. RSF staff believed that a decision in one state could establish (political) precedent in other states (LC 4, "Anti-Loan Shark Committee" folder). One of the prime movers behind uniform laws was the National Conference of Commissioners on Uniform State Laws (NCCUSL). This group emerged from the ABA in the late 1880s and was later supported by the American Law Institute (Grant 1938, p.1086). Together, they promoted model laws, eventually including the Uniform Commercial Code (Frank 1998, White 1997). The first law proposed by the NCCUSL was the Uniform Negotiable Instruments Act of 1896, adopted in thirty-eight states and territories by 1910 (Lapp 1910). This was followed by a uniform warehouse receipts act, uniform sales act, and so on (Guild 1920).
RSF correspondence suggests that the foundation tried to coordinate with the NCCUSL on laws pertaining to credit:
3. As a commercial law serving a social purpose, the USLL was something of a hybrid. One feature of the uniform-law strategy seems odd for the USLL. As Smythe (2005) emphasizes for the Uniform Sales Act, there are issues where legal differences across states impose higher transactions costs. A firm might prefer that all the states in which it does business have identical laws to reduce legal uncertainty and the costs of inter-state sales. No such strong rationale applies for the USLL. Some of the larger chain lenders that operated under the USLL might well have preferred that the small-loan law in each state be similar. But they rarely lent across state lines.
RSF and the USLL:
At first, the RSF extended its "crusades" approach and pushed state authorities to enforce existing laws. A more ambitious strategy entailed pushing particular legislation. Starting in 1910, Ham was involved with state efforts to regulate the small loan business. By 1913 Ham, working with the National Federation's Committee on 3. One letter of 17 November, 1919, was sent to a J. Hansell Merrill, appointed by the NCCUSL to consider anti-loan shark laws. See LC 4, "Anti-Loan Shark Committee" folder.
Legislation, had determined eight key features that state laws should contain. All successive drafts of the USLL negotiated over the next decades reflected these ideas. They included: (1) Licenses for USLL lenders; (2) Bonds to ensure compliance; (3) A maximum interest rate higher than that allowed for banks (3.5% per month), coupled with a prohibition on ancillary fees; (4) Enforcement by public officials; (5) Penalties for violation; (6) Notice to employer and to wife in the case of assignment of wages; (7) Records that can be inspected by supervision officer; (8) Borrowers to receive memorandum of transaction along with relevant sections of state law.
The USLL defined a small loan as $300 or less (average annual earnings of a non-farm worker were $1,434 in 1925). The first incarnation of the USLL was New Jersey's Egan Act, passed in 1914.4 Ham's role in passage of the Egan Act went well beyond that of technical advisor. He drafted the legislation and organized support at each stage. This pattern continued, with revisions to the Uniform Law and efforts to pass it in other states. Between 1911 and 1915, six states including New Jersey passed versions of the USLL. As opposition formed, the law passed on close votes in six more states in 1917, but failed in California. The Foundation mustered a considerable lobbying effort. By 1929, RSF staff had visited more than thirty states to urge adoption of the law (RAC 28/216). When Leon Henderson was hired by RSF in 1925, his first act was to visit states where the USLL was in operation. Through 1929 he organized support for the Act in the states where it was in play, and fought efforts to weaken the law in states that had enacted it.
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