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VIII

CO-OPERATIVE BANKING AGENCIES

Introduction

In previous chapters of this volume we have been considering banking in its relation to the world of business, the national and state banking associations being devoted almost exclusively to serving the interests of men engaged in the management of the larger commercial and industrial enterprises. There remain to be considered the banking requirements of and the banking facilities that have been provided for those classes of people whose incomes are small or who work for wages and who use the funds borrowed mainly for consumptive rather than productive purposes. We have already seen that loans on collateral may be used for consumption purposes, and that such loans are often extended by the regularly organized banks. We are here concerned, however, with loans to a class of people who cannot deposit as security collateral that is acceptable to banksthose who wish to borrow petty sums with which to meet temporary needs or emergencies.

The question of interest on consumptive loans is practically as old as recorded history. The Old Testament condemns all interest, except from foreigners, as being usury, and therefore unjust. The biblical law came to be incorporated into the civil code, and it was not until the beginning of the modern era that interest was legalized. The philosophy underlying this prohibition of interest appears to have been either a sympathetic regard for the poor or a recognition of the economic impossibility of their paying interest. Funds were borrowed at the time almost exclusively for consumptive purposesvirtually to prevent starvation-and such loans were necessarily almost in the nature of almsgiving. At any rate, to exact interest from a poverty-stricken peasant class seemed to violate every principle of common humanity. With the development of the borrowing habit by the capitalist class, however, the situation appeared in a very different light. When a borrower devoted the funds procured to productive industry, it was readily seen that he was making a gainful use of the loan and was therefore able to pay back the principal with a bonus, and also that the lender was foregoing a like

gainful use of the capital, and was therefore entitled to a recompense. Gradually loaning at interest became universally legalized; but even to the present day we find survivals of the old idea in the usury laws of the various states, which prohibit exorbitant interest rates, that is, above a certain prescribed maximum.

In our cities an extensive and enormously prosperous business has been developed in the making of loans to the poorer classes on the security of their current wages. While the risks in such a loaning business are great, the rates charged are often far higher than warranted by the conditions; and the poor have in fact been preyed upon by a class of dishonest dealers, who have taken advantage of the ing financial needs and the ignorance of borrowers.

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In recent years many institutions have been developed to remedy the evil of the loan sharks and to furnish funds to consumptive borrowers at lower rates. In particular, banks organized on co-operative principles possess many advantages in this connection. Such institutions have long played an important rôle in other countries, but it is only within recent years that they have been established in the United States; indeed, their development here can be said to have merely begun.

One form of co-operative institution, however—the building and loan association—is well developed in this country, and has long played an important part in accumulating the funds for home-building. Looked at from one point of view the building and loan association is a savings bank and its treatment might therefore have been reserved for the following chapter. It has seemed best, however, to include it here with the other forms of co-operative banking agencies; for in addition to being a co-operative institution its purpose is to save for consumptive rather than productive ends.

A. The Loan Sharks

169. THE SALARY LOAN BUSINESS IN NEW YORK CITY' BY CLARENCE W. WASSAM

A loan on salary is the advance of money by an individual or corporation to a salaried employee. The security given by the employee who obtains the money is an assignment of his wages due

Adapted from The Salary Loan Business in New York City, pp. 21-41. (Publication of the Russell Sage Foundation. Copyright, The Charity Organization Society of the City of New York, 1908.)

or to become due. This transaction has been called a loan without security, which in reality it is. In practice, however, in the majority of cases the lender is in a secure position; he loans only to individuals who have steady employment, and whose employers will recognize an assignment. The loans are of small amount, varying from $10 to $35, and the borrower must have a weekly wage sufficient to pay the full amount in case the company is required to pay the lender. The attitude of different employers toward the assignment of the wages of their employees is a matter of careful record on the part of the salary money lenders. If an employer will discharge a man when it is known to him that he has assigned his salary, the employees of this firm are considered good risks. It may appear to be a contradiction of terms that a man in danger of losing his position will be a better risk than one who is not in such danger, but the explanation is simple. One of the chief points which all loan companies emphasize is that the transaction will be perfectly confidential, and that the employer shall never know of the assignment. When the employee has broken the rule of the company and made the assignment of his wages, then it is that the loan company threatens to notify the employer, and rather than lose a good position the employee will pay the charges demanded by the loan company. From a legal point of view this threat is of little value, but in practice it is most effective.

The loan companies do not rely entirely upon intimidation and fear in the collection of their money. They require the borrower to sign a bill of sale of his salary or authorize an attorney to do the same for him. In case the matter is brought before a court it is contended by the loan company that the transaction is not a loan of money but a purchase of salary, like the purchase of any other commodity; and since the transaction is one of purchase and sale there can be no claim of usury. In the majority of cases the loan company demands in addition to the assignment of the salary of the borrower the assignment of from one to three other employees. These assignments become effective if the borrower fails to meet his obligations.

A few illustrations will aid in the understanding of the transaction. A salaried man is in need of money. He has a good position and receives fair wages, but an emergency arises in which his income will not meet the demands made upon him and he is compelled to secure a small loan. He calls at a loan broker's office and applies for a loan. If his references are good and the firm by which he is employed has a rule prohibiting any employee from making an assignment of his

wages under penalty of discharge, the money is secured without difficulty. The necessary papers are signed, by which he agrees to pay a certain amount each week until the debt is canceled. If he meets the payments promptly, the transaction is closed, the borrower receives a receipt in full and his signature from the papers signed, and the documents themselves are destroyed. In case of failure to meet a payment when due, he is at once notified that his part of the agreement has not been fulfilled, that the promise of secrecy is no longer binding, and unless the matter is settled at once his employer will be notified. The danger of losing a good position is generally sufficient to force the payment of whatever the loan company demands. When the borrower is employed by a private concern whose attitude toward an assignment of the wages of an employee is unknown, or when the loan company for any reason questions the security offered by the borrower, from one to three endorsers are required as additional security. Should the investigation of the applicant and the endorsers prove favorable, the money is advanced. In this way the wages of several different employees become surety for the loan.

If for any reason the borrower defaults in his payments, within three days a notice of assignment is filed upon the employer for each of the assignees at the same time and for the same amount.

The reasons assigned for loans of this kind are numerous. It is the opinion of a prominent money lender in the city that about 75 per cent of the individuals who borrow from loan companies are men with families who are temporarily in need and are helped out of difficulty by a loan, and that 25 per cent are men who could get along better without the money, as it is spent in gambling, intemperance and vice. The managers of five different loan offices expressed the opinion that a majority of persons who patronize their offices are men with families who are honest and industrious, but who have met with some temporary emergency which the loan helped them to overcome.

Sickness or death in the home is perhaps the most common cause of temporary need. Another common cause is found in the custom of demanding rentals in advance. This, coupled with the expense of moving, frequently exceeds the savings of a household. It appears, also, to be a common practice among clerks and young employees to borrow a small amount of money when in need of a suit of clothes or anything which requires an unusual expenditure. Life insurance premiums, interest on mortgages, and similar obligations, Christmas

and birthday presents, are some of the less frequent but still not uncommon objects for which money is secured from the loan brokers.

It is extremely difficult to ascertain the number of salary loan offices in New York City. Some of them do not advertise and some advertise under different names. Thirty different offices, however, are known, and it is probable that the whole number is very much larger. Based upon the minimum number of offices there would be about $300,000 capital invested, which would make possible a business of $1,200,000 annually, if the loans were made for an average of twelve weeks. This is believed to be a very conservative estimate.'

The number of persons directly influenced by the loan business includes not only the employee but his family as well. Assuming that the average office has one thousand customers, there would be thirty thousand employees who are making payments every pay day to the loan companies. There are some duplicates included in this number, but they are more than overbalanced by the conservative estimate of the number of offices. Inasmuch as a large majority of those who borrow are married men with families, it is reasonable to conclude that at least one hundred thousand individuals in New York City are directly affected by the salary loan business.

The nature of the salary loan business necessitates a higher rate of interest than that charged by the ordinary banking corporation. In every state which has seriously attempted to regulate and not prohibit loans on salary the legal rate has ranged from 1 to 3 per cent per month, depending upon the amount of the loan. It appears from the following data, however, that the rates charged by these companies are excessive and that the profits in the business are enormous.

Many instances could be cited to give an idea of the profitableness of the salary loan business. The owner of a prominent office in the city recently offered to guarantee a young man $10,000 net profit per year if he would invest $8,000 in an office. He said he was almost certain that the returns would be much larger. A careful examination of the books of one of the offices in the city showed that in one month a net gain of $541.00 was realized upon loans aggregating $1,889.00, a clear profit of 28.64 per cent in one month. Based on this rate of profit the annual net income from an office with $10,000 capital would be $34,368. An owner of two large offices in the city is authority for the statement that a friend of his began business in

The number of loan offices as well as the volume of business has been substantially reduced in the last few years.-EDITOR.

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