Scholarly work traces history of ‘loan sharks’
The simple commercial act of giving and taking money is nearly 2000 years old, and its extreme form called usury likely just as old. The two establish humans’ creative commercial instincts, as much as greed.
Over the years, man has weighed on a thin line that separates simple money lending and usury, the practice of lending at exorbitant interest rates and considered immoral, if not illegal. Religion has too. Islam, for example, forbids any taking of interest. In the Middle Ages, Christianity considered it sinful, and Jews considered it wrong to charge interest from fellow Jews, though not from others. Religious leaders such as Prophet Muhammad, Jesus, Gautama Buddha, Moses and Aquinas, and intellectuals from Plato and Aristotle to Cato and Cicero have spoken their mind on the practice.
Charles Geisst’s “Loan Sharks: The Birth of Predatory Lending,” is a history of the dubious practice in the U.S. from the 19th century until the Great Depression. It, strangely, addresses the more recent forms in a only five-page postscript. Regardless, Geisst’s work is the first historical one on the subject, and a highly rigorous one, tracing the practice and regulation, at times, of money lending in its varied forms. A reader can find products of the past that are strikingly similar to today’s payday loans. Or the process – creative ways in which interest charges are hidden, just like they are today by credit card issuers, among others.
Loans not only have legal and ethical dimensions, but an economic one too because of the impact they can have on commercial activity and markets.
“Loan sharking in its many forms has caused stock market panics, structural banking problems, and often has impeded economic recovery after severe economic downturns,” writes Geisst, who was an investment banker before turning a professor of finance. He also directly blames the 1929 Great Depression on large-scale lending to high-margin investors.
Geisst’s book shines a light on the all-important question: When does money lending turn into usury?
High interest rates are often but not always the result of higher risks. Still, as Geisst observes, the interest rate “in Rome it was 12 percent, in Elizabethan England 6 percent, and in the United States, it has ranged from 6 percent to 40 percent.” The truth is, there has rarely been a consensus on what constitutes unacceptably high interest rates, or when regulators should step in.
Society, obviously, needs to set boundaries, and protect innocent people from predatory lending by loan sharks even though – as the author argues – any intellectual underpinnings on what constitutes usury might be futile. In the U.S., payday lending is legal in 27 states, and banned in the rest and the District of Columbia. Nine other states permit some form of short-term lending.
The best way to fight usury is not via ban or even curbs, Geisst argues, but by expanding other options, presumably directly by governments or through its policies. In the U.S., the fight against loan sharks was started by a largely rural populist movement that led, among other things, to the creation of credit unions, Morris Plan Banks, which were similar to today’s microfinance institutions, and the Russell Sage Foundation, which came up with the model legislation called Uniform Small Loan Law. The law capped interest rates at a high 40 percent annually, but in the 1940s it was still seen as a step forward in curbing loan sharks.
Geisst’s book is aimed primarily at scholars, rather than lay readers, but would be useful for financial professionals, as much as regulators and ethicists who decry the extreme forms of money lending.
Geisst is currently the Ambassador Charles A. Gargano Professor of Finance at Manhattan College in Riverdale, New York. His previous books include “Collateral Damaged” (2009) and “Beggar Thy Neighbor: A History of Usury and Debt” (2013).