Editor’s Note: This is the second in a series of articles by Paul Thompson, author of “What You Need to Know About Today’s Credit Unions,” that is aimed at new CU employees and volunteers and which offers a background on the history of credit unions.
By Paul Thompson
The easiest and quickest source of credit for the poorest households in the 19th and early 20th century was the pawn shop. An article of clothing or some other object could be pawned for cash and later redeemed. If the borrower failed to repay the loan, the pawned article was sold. Most pawners were women who needed to stretch their husbands’ often meager pay. Many customers made regular visits to "my uncle," as they referred to the pawnbroker.
The typical loan was five dollars or less, which meant the pawnbroker needed a high rate of interest to make any money. States and municipalities allowed pawnbrokers to charge more than the legal interest rate ceiling of 6% or 7%, but often the pawnbroker tacked on extra charges that raised the real interest rate much higher.
Small loan companies provided credit to those a bit higher on the social-economic scale, the wage and salary earners created by the industrializing U.S. economy. In New York, one investigator found that two-thirds of the city's personal lending came from small loan brokers.
The lenders were men who had some capital and used it to make loans of $10 to $40 for short periods of time. At a legal usury rate of 7% per year, a loan of $20 for a month would yield the lender a profit of 10 cents. Obviously, this would not cover the expenses involved in making the loan. Either lenders charged illegal rates, or worked around the law by charging separate fees or other artifices. Some lenders charged what we might consider reasonable interest, albeit illegal under the usury limits, others gouged their customers.
Because many employers would fire any worker who fell into debt, there was great pressure on borrowers not to default on loans. The small loan broker was castigated as a "loan shark," and the trade was periodically subject to journalistic exposés and attacks by crusading district attorneys. But it continued to flourish because it was needed.
Rise of Installment Purchasing
The rise of installment purchasing made credit available to somewhat more well-to-do Americans, enabling them to purchase the encyclopedias, sewing machines, and other domestic appliances that became part of the middle-class lifestyle. It made it possible for people to afford the cars coming off the assembly lines. The term "consumptive credit" gave way to the less negative "consumer credit."
An emotionally significant variant of installment credit was the home mortgage, where the buyer put down a hefty down payment, typically 30% of the price of the home, and then paid off the remainder of the price and interest in regular monthly payments over a period of four to 10 years. These mortgages were provided by savings banks, individuals, and savings and loan associations.
In the next installment, we'll look at the rise of credit unions and other attempts to provide urban workers credit at reasonable rates.
Paul Thompson, CUDE, is a former speechwriter with CUNA. His book, "What You Need to Know About Today's Credit Union," can be found on lulu.com.