estate security, show a strong tendency to put all banks and trust companies on a common level, except for the advantages that inure especially to members of the Federal Reserve system.

Along with these considerations is the problem of getting the State institutions into the Federal Reserve system. Federal Reserve officials have admitted frankly that the system will not be fully successful unless the bulk of the 20,000 state institutions in the country, in addition to the 7,600 national banks, are brought into it.

168. THE FEDERAL RESERVE SYSTEM NOT A HARMONIZING

AGENCY

BY A. D. WELTON

Fifty years of experience under a banking system which confused commercial banking with all other kinds and all other kinds with commercial banking has left what seems to be an ineradicable trace on the new banking system. National banks, facing competition from state institutions not subjected to similar restraints, have declined to welcome the provision which permits the Federal Reserve Board to confer trust company powers on them. State banks have objected to such an expansion of the powers of national banks, not because they have any particular fear that commercial banking will be contaminated, but they desire to keep the advantages they have over their competitors.

In most of the states the laws permit state banks to do all kinds of banking business, including the exercise of trust company functions. How this came about is not material. The important thing is that it came about and that it promotes the confusion of ideas about the various kinds of banking business. Theoretically and ideally commercial banks should confine themselves to commercial banking; trust companies should confine themselves to fiduciary matters, and savings business should be done by savings banks. Again, theoretically, if the various kinds of banking business are done by a single institution the departments should not be mixed up with one another. Practically, and because of the banking laws of the states and the apparent desire of bankers to engage in all branches of banking, reformation seems to be out of the question, but the situation contains no reason for permitting national banks to step outside of the field of commercial banking. The tendency to demand this and to permit

Adapted from Journal of the American Bankers' Association, VIII (1916),

658-59.

it finds its impulse in the desire of national banks to compete on equal terms with state institutions. Moreover, in the towns and smaller cities there is not enough banking business of a single kind for one bank or trust company. To serve the community adequately one bank must do various kinds of business.

Instead of harmonizing the different kinds of banks and the different kinds of banking the Federal Reserve Act has apparently had the opposite effect. Rivalry between state and national banks is keener than ever and it springs from the difference in the laws under which they are organized. Efforts to have state laws modified so as to remove all doubt of their contravention by the application of section II (k) of the Reserve Act have intensified the condition. The state banks think they have more reason for not joining the system now than they had a year ago.

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 banks— those who wish to borrow petty sums with which to meet temporary needs or emergencies.

The question of the rate of interest that should be paid on consumptive loans is practically as old as recorded history. The Bible condemns all interest 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 pressing financial needs and the ignorance of borrowers.

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

1 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