Copyright (c) 2003 Florida Law Review
Florida Law Review

July, 2003

55 Fla. L. Rev. 807

LENGTH: 55123 words

ARTICLE: TRUTH, UNDERSTANDING, AND HIGH-COST CONSUMER CREDIT: THE HISTORICAL CONTEXT OF THE TRUTH IN LENDING ACT



NAME: Christopher L. Peterson *

BIO:

* Assistant Professor, The University of Florida Fredric G. Levin College of Law; J.D. 2001, University of Utah College of Law; University of Utah. Portions of the preliminary research for this Article were generously supported by a Mariner S. Eccles Research Fellowship in Political Economy. The author wishes to thank the following for helpful conversations, comments, and suggestions: Judge Wade Brorby, John Flynn, Leslie Francis, Tera Peterson, and Linda Smith.



SUMMARY:
... Consumer credit is older than money. ... If you cannot pay at the Time, you will be ashamed to see your Creditor; you will be in Fear when you speak to him; you will make poor pitiful sneaking Excuses, and by Degrees come to lose your Veracity, and sink into base downright lying; for, as Poor Richard says, The second Vice is Lying, the first is running in Debt. . . . Poverty often deprives a Man of all Spirit and Virtue: Tis hard for an empty Bag to stand upright . . . . The Borrower is a Slave to the Lender, and the Debtor to the Creditor, disdain the Chain, preserve your Freedom; and maintain your independency: Be industrious and free; be frugal and free. ... These lenders aggressively worked to distance themselves from the salary lending "loan sharks" which dominated turn-of-the century consumer financing. ... Additional substantive proposals included a national interest rate cap of eighteen percent prohibition of all wage garnishments and confessions of judgment in consumer credit cases, the establishment of a national commission on consumer finance, and creation of new, presidential power to control consumer credit rules during economic crises. ...

TEXT:
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I. Introduction



Consumer credit is older than money. 1 The practice of exchanging things of value in return for the obligation of future repayment is, paradoxically, one of humanity's most useful and dangerous social inventions. The earliest form of credit was probably a version of "you scratch my back and I'll scratch yours." The creditor was "in effect a gift giver who merely expect[ed] a 'delayed' reciprocal gift from the recipient." 2 Historians and archeologists speculate that interest itself probably originated some time during the late Paleolithic or early Mesolithic ages between, about 8000 and 5000 B.C.E. 3 With farming, the accumulation of capital in the form of livestock, tools, and seed took on an [*809] importance likely unfamiliar to the nomadic hunter-gatherers of earlier eras. 4 This desire to collect capital probably gave impetus to more clearly define the terms of previously ambiguous credit. 5 Loans were usually payable in either grain, animals, or metal. 6 The earliest historic interest rates ranged from 20-50% per annum, later stabilizing at 33% for loans on grain, and 20-25% for loans of silver. 7 Loans were made to invest in future production as well as for "nonproductive" purposes, the latter being accurately characterized as consumer credit. 8 There is, of course, no reason to suspect that greed, or, more charitably, the desire to successfully compete in a world of scarce resources, was any less a motive at the dawn of civilization than it is today. 9 Because creditors often lent to those in desperate need of food or shelter, the relative bargaining position of debtors often placed them at a significant disadvantage. 10 Also, in the absence of standard currencies, ambiguity over what constituted acceptable payment of a debt left wide latitude for abuse. 11 Thus, "[h]uman nature being what it is, trouble must have developed quickly. The rich extracted [*810] hard bargains and grew richer; the poor fell into perpetual debt and forfeited their meager possessions." 12 Consumer credit was one of the earliest tools of forced poverty, social oppression, and enslavement. 13



Thousands of years later consumer credit has played a similar role in United States history. With credit taking the form of indentured servitude, many of the earliest European colonizers borrowed their way to America using their bodies as security and often paying with their lives. 14 After a constitutional crisis and civil war won freedom for African-American slaves, the landed white Southern gentry turned to the high-cost credit system of share cropping as the next best substitute for whips and chains. 15 At the beginning of the twentieth century, entire generations of the working poor in large Eastern cities sacrificed their chances of joining the middle class to salary lenders. 16 At the beginning of the twenty-first century, "payday" lenders in almost every state have partnered with banks to avoid regulation and sold the same credit products as salary- lending loan sharks did a hundred years earlier. 17 These and other lenders- variously called [*811] predatory lenders, sub-prime lenders, fringe bankers, but more conveniently and equitably termed "high-cost" lenders-continue to extract the same hard bargains from the ignorant and desperate poor as their progenitors did five thousand years ago. 18



Today a debate claiming such notable expositors as Hammurabi, Moses, Plato, Dante, Shakespeare, Hai Jui, and Benjamin Franklin has been forged anew. From the late 1970s through the mid-1980s, many states eliminated or relaxed their regulation of consumer credit. 19 This was in response to factors such as the high market equilibrium interest rates of the [*812] period (which raised depository lender's costs of funds to the point that profitable lending was difficult within interest rate caps) 20 and the Supreme Court's decision allowing banks to export their home state's usury law to consumers in other states. 21 Since then the relatively low-priced consumer credit supplied to the middle class has continued to grow, financing consumer spending. In the wake of deregulation, however, markets for much higher priced loans extended to the financially vulnerable lower middle class, the working poor, and the desperate have seen comparably enormous growth. 22 Sensing widespread abuse, the nation's newsprint media has complained vitriolically, touching off a timely national discussion of an ancient topic. 23 For our society, like civilizations before [*813] it, the central quandary in high-cost credit policy has been balancing the need to protect the vulnerable with the need to facilitate economically and socially useful trade in credit.



This Article does not purport to resolve so dense an impasse. Instead it hopes to serve two more modest but related goals. The first is to provide a new conceptual tool for organizing discussions of consumer credit in general, and high-cost consumer credit in particular. The world's past civilizations have employed only relatively few types of strategies for addressing this fundamental dilemma. Unfortunately, historians-and in turn policymakers and legal practitioners-have not recognized the similarities between these strategies because most historical treatments focus either on one culture or on one strategy. When we step back and paint with the broader brush strokes of historical case studies, patterns of common social responses to consumer credit problems emerge. These patterns are important both because they provide a new way of organizing discussions about consumer credit policy and because they shed contextual light on the limitations of our current strategies. Sadly, most of our current consumer credit policies have histories of failure dating back hundreds or [*814] even thousands of years. Policymakers must be re-apprised of these failures.



The second insight of this Article is that, from a historical perspective, consumer credit price disclosure rules, such as the Truth in Lending Act (TILA), 24 are a unique and relatively recent strategy for protecting vulnerable consumers from abuse by predatory lenders. In the mid-1950s policymakers and scholars came to realize that the middle class, which was borrowing in greater numbers than ever before, was unable to compare the prices of credit. 25 Because creditors calculated interest rates in many different ways, quoted prices bore no meaningful relation to each other. 26 Following Massachusetts, 27 Congress passed the Truth in Lending Act in 1968 28 which required lenders to use uniform annual percentage rate (APR) terminology, as well as disclose many other aspects of credit contracts. 29 The hope was that with uniformly disclosed prices, consumers would be able to shop for the best deal, thus better protecting themselves and forcing creditors to offer lower prices. 30 Despite these hopes, in recent years credit disclosure rules have fallen from the favor of consumer advocates, legal service attorneys, and scholars bent on protecting working and lower middle class consumers. Where thirty years ago critics of disclosure were likely to be banking industry lobbyists, today's critics are more likely to be non-profit consumer activists. These activists complain that watered down disclosure laws are too complex, come too late in negotiations, and are not accurate enough. 31 Even worse, consumer activists complain the industry [*815] uses meaningless disclosure rules to deflect legislative pressure for more substantive consumer protections such as interest rate caps and generous bankruptcy discharge provisions. 32 While not denying these and other arguments, this Article suggests the problems of Truth in Lending may be those of a troubled adolescence rather than inherent limitations of the strategy itself. Unlike virtually all other consumer credit policies, disclosure is relatively untried. Having used disclosure regulations in earnest for only less than half a century, we may not have yet learned how to exploit their full potential. With aggressive and practical reform, Truth in Lending may blossom into a much more effective strategy than those which predate it by hundreds or even thousands of years.



Part II presents a new method of organizing consumer credit policy based on six traditional policy strategies and relying on examples from world history. Part III gives a chronological overview of consumer credit history in the United States. Part IV deals with the innovation and theoretical advantages of price disclosure as a seventh strategy. Lastly, conclusions are drawn for policymakers, scholars, and law practitioners.



II. Organizing the Problem: A Survey of Significant Debtor Protection Strategies in World History



American consumer credit law is preposterously unorganized. "Upon first exposure to the subject of credit regulation, the impression of the average attorney might be that the field is a maze, if not a mess, and probably both." 33 One recent commentator, smelling something more sinister, suggests the confusing character of consumer credit law remains entrenched because it provides a mirage of debtor protection which subverts more aggressive reform. 34 Requiring some conceptual method of organizing credit policy, legislatures, courts, attorneys, and scholars have fumbled, seemingly at random, for a system of categorization to begin thinking about credit law and policy. Thus, a wide variety of artificial categories have developed which break up credit policy into conceptual parts. For example, the Truth in Lending Act divides rules between open- [*816] and closed-end credit. 35 Some classify policies as either market- controlling or market-perfecting. 36 Others rely on the classic distinction between procedural and substantive rules. 37 Sometimes statutes and courts classify based on the distinction between retail and non-retail lenders. 38 The bankruptcy code makes much of whether credit is secured or unsecured. 39 Some creditors are depository institutions while others are not. 40 Finally, some statutes are "general" usury laws, while others are "special" usury laws. 41 Different rules, and in turn exceptions to those rules, exist for each of these different categories in each different conceptual scheme. When combined with simultaneous federal, state, and local regulation, these intersecting vertices create an impossibly complex jumble of meaningless distinctions. The result is not only that beginners have difficulty understanding the law, but also that legislatures and courts have difficulty designing rules which promote justice because these rules are based on arbitrary classifications.



This Part suggests a more natural way of approaching consumer credit policy based on the conceptual similarities between historical strategies. While many scholars have provided a rich history of consumer credit, none appear to have categorized the basic policy responses employed in history. 42 There have been six basic strategies for addressing the social [*817] problems endemic to consumer credit (plus one more recent addition) that retain significant relevance for contemporary American policymakers. 43 An exposition relying on historical examples sheds light on these strategies.



A. Debtor Amnesty: The Deceptively Simple Solution



Humanity's first conceptually distinct and enduring strategy designed to protect vulnerable debtors from creditor abuse was to issue government decrees forgiving, or at least ameliorating, debts. The Sumerians, generally considered the world's first civilization, occupied the southernmost segment of Mesopotamia between the Tigris and Euphrates rivers stretching roughly from modern Baghdad to the Persian Gulf. 44 Eventually supplanted by the Babylonians, Sumerian civilization is credited with developing the world's first wheeled vehicles, the first ox-drawn plows, the first city-states, and the first system of writing. 45 Alongside other trade practices, including pottery, weaving, metalwork, and masonry, was trade in credit. 46 Many documents dealing with credit have survived showing a system which carefully recorded and commonly extended loans. 47



Nevertheless, even in these first civilizations the harmful social side effects to otherwise beneficial lending developed early on. The principal [*818] problem then, as now, was how to deal with those debtors who could not or would not repay their obligations. The normal penalties for default were severe. 48 Free males, as the heads of households, were entitled to send their wives, servants, or children into forced servitude to pay off debts. 49 If the head of the household could not produce a working dependant, he was often enslaved or imprisoned. 50 Creditors who seized the human assets of a debtor were essentially free to do with the slave whatever the creditor chose. 51 The treatment of debt slaves was harsh indeed, often including gouging out the slave's eyes to prevent escape, and only providing enough food to sustain life. 52 Creditors sold a significant portion of the Sumerian population into debt slavery to live alongside prisoners of war. 53



This treatment, at times apparently offending even the ancient sense of social decency, led many Sumerian and Babylonian kings to "make justice." 54 This claim, coming down in the form of aristocratic boasting, "referred to the cancellation by royal decree of certain debts, such as any which had forced free people to sell themselves or their families into slavery." 55 For example, one of the earliest recorded legal codes, dating from about 2350 B.C.E., includes relief aimed at controlling abuses [*819] associated with debt. 56 Urukagina, a Sumerian King who promulgated the rules, included in his reforms amnesty for all persons imprisoned for failure to repay debts. 57 Similarly, Ammisaduqa (1646-1626 B.C.E.), a later Babylonian King, also canceled the debts of enslaved former citizens. 58



Although the details of these royal decrees of amnesty are sparse, they begin to sketch the outlines of problems that have plagued similar strategies ever since. Initially, forgiving some debts did not solve the real problem, only treating its symptoms after the fact. Debtors would still borrow, creditors would still lend, and in the absence of state intervention, default and its attendant problems still developed. Moreover, each decree was a limited one-time treatment rather than a permanent systemic reform. Executive pardons did nothing for those not lucky enough to fall under their limited jurisdiction. The conundrum of whether a creditor or debtor should bear the losses associated with default still existed. All that amnesty decrees could do was temporarily reverse fortunes of those who managed to capture the attention of fickle authority.



Nevertheless, as a social strategy, granting debtors amnesty from their obligations persisted. Then, as now, creditors tended to advocate harsh penalties to deter default on loans. In 1531, during his reign of Holland, Charles V of Spain passed a characteristic edict later described as the first specific bankruptcy statute in the Netherlands. 59 In its preamble, the law justified itself as attempting to remedy the expense connected with lawsuits and to provide for a pure administration of justice which would deal equally with the rich and poor. 60 Hoping to deter debtor default, the law provided that "all persons who absented themselves from their ordinary residences with the object of defrauding their creditors were to be regarded as common thieves, and if caught might be summarily dealt with and publicly hanged." 61 Ironically, the Spanish Crown consistently defaulted on its own debts, finding itself bankrupt on six subsequent occasions during the sixteenth century alone. 62

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Similar to Sumerian and Babylonian kings, Europe's princes also issued decrees canceling debts. The crucial difference, however, was that European princes usually canceled only their own loans or the loans of their closest allies and associates. For example,



Philip the Fair (IV) of France, 1285-1314, borrowed heavily at unstated rates, but instead of repaying his bankers he banished them, canceled his own debts and decreed that the principal of all other debts must be paid to the Crown. His principal creditor, the Order of Knights Templar, which had become largely a banking organization, was utterly destroyed. Edward III of England, 1312-1377, likewise repudiated his debts . . . and ruined his Florentine bankers. 63



Nobles were also known to orchestrate the cancellation of their debts by availing themselves to lingering church doctrines prohibiting interest, especially against foreigners. 64 While consumer and commercial debtors alike faced severe punishments such as summary public hangings, the deliberate and fraudulent default of royalty "could be punished only by the sanction of a future denial of credit." 65 Such royal "amnesty" was common enough to have market effect. Interest rates offered to nobility were much higher than those to towns and commercial ventures since repayment by nobles was relatively uncertain. 66 This aristocratic abuse of power demonstrates a central limitation of forgiving debt as a policy strategy: it is difficult to devise fair and efficient rules determining who deserves amnesty. Too often, those who receive discharge of their debts are those who least merit it. As we shall see, it is precisely this difficulty which more than any other afflicts the contemporary United States bankruptcy system.



B. Separating "Good" Credit from "Bad" Credit: Interest Rate Caps and Other Loan Contract Restrictions



Mesopotamian societies were not content with market anarchy and occasional capricious amnesty of their kings. The next great innovation in consumer credit policy is best exemplified in the famous Babylonian Code [*821] of Hammurabi written in 1750 B.C.E. 67 Legend tells us the Babylonian King Hammurabi ascended a mountain where Shamash, the God of Justice, gave him a divinely inspired code of law. 68 Under the rule of Hammurabi, Babylon developed from an insignificant city to the national capital of probably the most complex society of its time. 69 Following Hammurabi, Babylon remained the capital of the entire region for around 1500 years. 70 The Code set out over two hundred laws addressing social problems ranging from divorce to theft. 71 Audaciously, it attempted to create a comprehensive and timeless set of laws to govern Babylonian society. Hammurabi's laws included several distinct controls on the lending market designed to protect debtors. 72 Foremost was the world's first recorded maximum allowable interest rate cap, which limited rates to about 20% per annum for loans on silver and 33% on loans of grain. 73 The text of the code bears a remarkable similarity to interest rate caps adopted thousands of years later and which are still in force in many areas. The Code states: "If a merchant has given corn on loan, he may take 100 SILA of corn as interest on 1 GUR; if he has given silver on loan, he may take 1/6 shekel 6 grains interest on 1 shekel of silver." 74



A central insight behind interest rate caps is the recognition that while some loans are useful social agreements, others cause more harm than good. For early Babylonians, the central difference between acceptable and unacceptable loans was price. Thus, loans at interest rates in excess of the statutory caps were banned. However, the Code also prohibited dangerous loan characteristics not directly related to price. For instance, recognizing loans may have dangerous consequences not only for individuals but for whole families, the Code required both a husband and a wife to sign loan contracts encumbering joint property. 75 Other rules included a maximum allowable three years that a wife, servant, or child of a debtor could spend in slavery to pay off a man's debt. 76 Creditors could not take payments by force without the consent of the debtor. 77 Debts of either a woman or a man incurred before marriage were not binding on the other spouse after marriage. 78 Moreover, to prevent violations, Hammurabi's Code required [*822] creditors and debtors make their loan contracts in the presence of an official and witnesses. 79



Hammurabi's interest rate cap, along with its other lending format restrictions proved remarkably durable. The rate cap remained intact as law for 1200 years-well over an entire millennium. In 2000 years the only significant change was to equalize the maximum allowable rate of grain to match that of silver. 80 It is nonetheless unlikely the interest rate cap and other provisions were consistently enforced. 81 Records still exist documenting loans at 400% per annum during the period. 82 Still, the enduring legacy of this approach testifies to the success of the law as compared to what must have come before. Nevertheless, for a closer look at potential cracks in the construction of this impressive regulatory feat, we must turn to later civilizations with a more complete historical record.



Ancient Rome also set maximum allowable interest rate caps. High-cost debt played a crucial and volatile role in Roman politics from the earliest stages. 83 In the fifth century B.C.E., Romans were only one of several ethnic groups present in Italy, and were still far away from domination of the Mediterranean. 84 Class struggle, which would reemerge in centuries to come, manifested itself dramatically. 85 In 494 B.C.E., a violent civil revolt took place. 86 A large number of poor plebeians withdrew from the city and gathered on a hill overlooking the Tiber River where they preceded to elect their own shadow legislature, officials, and tribunes, essentially seceding from the Roman republic. 87 The revolt has since come to be known as the first secession. 88 The outcome of this revolt and many others like it during the period is historically unclear. However, [*823] the cause of the revolt is not: "[b]y all accounts the principal cause of the first secession was a debt crisis." 89



The situation facing poor Romans of the period should by now come as no surprise to readers. 90 Many historians, both modern and ancient, have focused on one uncannily familiar story which may have lit the fire. 91 Apparently, a war veteran's farm was destroyed during a battle with a rival tribe. 92 The loss of his farm, combined with government tax demands, forced the veteran to borrow money at dangerously high rates. 93 When he was unable to pay, his creditor imprisoned and tortured him. 94 Eventually, the veteran appeared in the city Forum where those who heard his story were so enraged they took to the streets rioting. 95



The first major codification of Roman law, called the Twelve Tables, was in part a response to the debt crisis of the first secession. 96 For reasons undoubtedly similar to those the Babylonians relied upon, the Twelve Tables included an interest rate cap and some basic provisions to enforce it. 97 Under the Twelve Tables the legal maximum interest rate was set by weight at one ounce per pound per year, which amounts to 8 1/3% per annum. 98 Creditors found contracting for greater rates were liable in Roman courts for fourfold damages. 99 This basic legislative approach [*824] remained intact for the duration of the Roman Republic and the Empire, although the legal maximum varied with political tides. During the third century B.C.E. the maximum legal rate was lowered for a short time to 4 1/6%. 100 In 88 B.C.E., Sulla raised the interest rate cap to 12% per annum. 101 This rate remained the legal limit for centuries and was adopted by the later Empire and the Byzantine Empire. 102



Although interest rate caps provided some protection for Romans, they were poorly enforced throughout Roman history. 103 Pawn shops and other lenders that catered to the higher-risk poor consistently charged three to ten times the legal maximum. 104 The rate caps also proved too inflexible in comparison to the volatile Roman economy. In particular, the availability of gold and silver from mining and foreign conquest dramatically affected market prices for the use of money. 105 Moreover, both the Republic and the Empire faced the persistent problem of rich currency hoarders, who would hide away vast fortunes in coins, thus decreasing the available supply of cash and raising prices for the use of money. 106 When the supply of money was low, interest rate caps were probably all but ignored, thus affording almost no protection to debtors.



The problems with interest rate caps were not limited to Rome. Around 2000 years later on the other side of the globe, fundamentally analogous problems plagued China during the late Ming dynasty. Following a hundred years of foreign domination by Mongolians with the clan of Ghengis Kahn at their head, the famous Chinese leader Chu Yuan-chang (later referred to as the Hung-wu emperor) solidified control over many competing factions and succeeded in driving the Mongolians out of Northern China. 107 In 1368, Chu Yuan-chang founded the Ming dynasty, which would last for the terms of fifteen succeeding emperors until its overthrow by Manchurian invaders in 1644. 108 By the late sixteenth century, the Chinese government suffered from inept administration of rural agrarian masses by a literary bureaucracy. 109 Prevailing Chinese law [*825] fixed a maximum allowable interest rate for loans at 36% per annum. 110 The statutes also forbade the collection of interest at amounts greater than the original principal. 111 Hoarding of coin wealth, supply limitations, and failed attempts to introduce paper currency made cash a rare and expensive commodity. 112 Nevertheless, lending for consumption purposes appears to have been widespread. 113 In 1587, over 20,000 pawn shops operated in China. 114 Once again, the interest rate cap was poorly enforced. Wealthy families commonly lent money to poor farmers at illegal interest rates. 115 Foreclosures on the homes of poor rural farmers undercut, on an enormous scale, the ability of the poor to survive. 116 As one historian explains:



Agrarian exploitation of the poor . . . was far from limited to . . . isolated incidents. It affected all walks of life and was carried out on a large and small scale without surcease generation after generation. Essentially, such exploitation was the economic basis of the bureaucracy as an institution. Official families, who collected rents from landholdings and interest from the moneylending business, were an integral part of the rural economy. 117



When subsistence farmers fell behind on payments, wealthy creditors hired local "roughnecks" to collect. 118



The story of one eccentric civil servant explicitly shows the entrenched role of high-cost lending at this time in China. 119 Hai Jui was a civil servant who worked his way up the Chinese bureaucracy with a maverick attitude extremely rare in the Confucian ordered civil service. 120 Hai Jui achieved notoriety with the Chinese masses early in his career by remonstrating the son of a powerful dignitary for financially abusing his position. 121 Having attained fame for an unostentatious lifestyle, Hai Jui did the unthinkable by openly criticizing the emperor Chia-ching. 122 Hai Jui wrote the emperor [*826] a letter describing him as "vain, cruel, selfish, suspicious, and foolish." 123 Reportedly, Hai Jui purchased a coffin and said goodbye to his family before sending the letter. 124 Chia-ching was deeply disturbed by the reproach, and sentenced Hai Jui to death for insolence. 125 Before the sentence was carried out, Chia-ching passed away and Lung-ch'ing ascended to the throne in 1567. 126 Lung-ch'ing commuted the sentence, and Hai Jui emerged from prison more prestigious than ever. 127 Eventually, Hai Jui attained the rank of governor over the richest and most developed prefecture in the entire empire. 128



But for Hai Jui, challenging endemic high-cost lending proved more politically dangerous than even challenging an emperor. As governor, Hai Jui attempted to enforce previously ignored credit laws and stretched procedural rules in order to prevent poor farmers from losing their homes. 129 In doing so he confronted the richest landowners in the province who profited from money lending, and thereby created enemies who would eventually erode his power. 130 When the poor learned the governor had personally heard the complaints of dispossessed landowners, his offices were flooded with as many as three to four thousand petitions a day. 131 Other civil servants, possibly linked to lending interests, accused Hai Jui of "encourag[ing] hoards of riffraff to make false charges against men of substance." 132 These accusations, fueled by otherwise impotent claims of personal impropriety, cost Hai Jui his post and forced him into early retirement from which he never politically recovered. 133 All this was in spite of Hai Jui's formidable contribution of organizing the dredging of two commercially important rivers. 134



Perhaps Ming society would have done well to incorporate the lending reforms Hai Jui attempted to establish. Within fifty years Ming society entered a period of peasant rebellions hastening the overthrow of the dynasty by Manchurian invaders from the North. 135 Hai Jui probably would [*827] not be surprised by the incident which one Chinese source attributes as the cause of the first rebellions:



The incident involved four soldiers and an oppressive moneylender, appropriately named Ch'ien (money). The moneylender bribed the commander of the garrison to join him in a plot to force the soldiers to repay much more money than they had actually borrowed. This piece of chicanery prompted the soldiers to mutiny and organize local famine victims to ally with them in rebellion. 136



This story should not surprise us, given its remarkable similarity to the war veteran thought to have provoked the first secession in Rome.



There can be little doubt that interest rate caps were a significant improvement over the violent and chaotic markets of our earliest civilizations. As a social policymaking strategy, interest rate caps combined with other lending format restrictions have endured at least since the Code of Hammurabi and are still in effect throughout much of the United States and the modern world. Nevertheless, the experiences of Rome and China begin to show the limitations of the policy. Interest rate caps and other lending format restrictions presume to prevent mutually agreeable contracts. Effective policing of these rules requires more resources than most societies are willing to spend. Although extremely different societies have chosen the "oldest continuous form of commercial regulation[,]" interest rate caps and similar format restrictions have traditionally garnered limited success in curbing harmful consequences of high cost lending. 137 The policy has also cultivated black-market cultures which have come to threaten the very foundations of otherwise successful dynasties.



C. Separating "Us" from "Them": Selective Protection Strategies



While some societies have attempted to separate harmful loans from beneficial credit, others have attempted to separate individuals "deserving" of protection from those who are not. This strategy of selective protection is as old as that of interest rate caps. The best example of its evolution is [*828] found not far from Babylon in ancient Israel. Unlike Babylon to the East, which had a long tradition of monarchy, the Hebrew culture was tribally organized prior to roughly the first millennium B.C.E. 138 The Hebrew people were seminomadic in small ranges near towns, relying on herding domesticated animals and occasional farming. 139 They lived both in tents and in houses. 140 Having settled on the land bridge between Africa and Asia, the Hebrew culture was subject to invasion from many directions and by many peoples. 141 From early on, Hebrew culture developed a strong sense of tribal unity and cooperation in order to compete with outside threats. 142



The early Hebrew laws concerning high-cost lending reflect this sense of tribal unity, by extending legal protection only to other Hebrews. Deuteronomy, which describes Yahweh's laws as delivered by Moses (probably around the 13th century B.C.E.), states:



You shall not charge interest on anything you lend to a fellow-country-man [l'ahika], money or food or anything else on which interest can be charged. You may charge interest on a loan to a foreigner [nokri] but not on a loan to a fellow- country-man, for then the Lord your God will bless you in all you undertake in the land which you are entering to occupy. 143





Thus, the Hebrews took action to prevent corrosion of community bonds and to provide at least some outlet for the wealthy to lend excess capital. Protection against the dangers of owing interest to rival outsiders was probably an added benefit in the competitive inter-tribal anarchy which characterized the ancient East Mediterranean coast. Moreover, by simply banning interest within the Hebrew community, the rule probably had lower administrative costs than those legal systems forced to distinguish between legal and illegal loans on the basis of interest rate caps. Recently two economists described the likely role of the Hebrew [*829] rules as trying "to make sure that individuals did not reduce themselves to a level of poverty, where they would be burdens on the community." 144



Not surprisingly, the Hebrew injunction against charging any interest to other Hebrews was followed infrequently. 145 The story of Nehemiah is enlightening in this regard. By the 5th century B.C.E. the Persian empire dominated Israel. 146 During the reign of Artaxerxes I (464- 424 B.C.E.), Nehemiah, a Jewish cup bearer to the King, was appointed governor of Jerusalem. 147 Nehemiah tells his own story in his rare, first person dictated book in the Old Testament. 148 Apparently arriving in 445 B.C.E. from the Persian capital of Susa, Nehemiah organized the rebuilding of the walls around Jerusalem. 149 Nehemiah instituted a number of reforms directed at high- cost lending: 150



There came a time when the common people, both men and women, raised a great outcry against their fellow-Jews. Some complained that they were giving their sons and daughters as pledges for food to keep themselves alive; others that they were mortgaging their fields, vineyards, and houses to buy corn in famine; others again that they were borrowing money on their fields and vineyards to pay the king's tax. "But," they said, "our bodily needs are the same as other people's, our children are as good as theirs; yet here we are, forcing our sons and daughters to become slaves. . . ." I was very angry when I heard their outcry and the story they told. I mastered my feelings and reasoned with the nobles and the magistrates. I said to them, "You are holding your fellow-Jews as pledges for debt." I rebuked them severely and said, "As far as we have been able, we have brought back our fellow-Jews who had been sold to other nations; but you are now selling your own fellow-countrymen, and they will have to be bought back by us!" . . . "What you are doing is wrong . . . . Let us give up this taking of persons as pledges for debt. Give back today to your debtors their fields and vineyards, their olive-groves and houses, as well as the income in money, and in corn, new wine and oil." "We will give them back," they promised, "and exact nothing more. We will do what you say." So, [*830] summoning the priests, I put the offenders on oath to do as they promised. . . . And they did as they had promised. 151



There is no independently corroborating evidence of Nehemiah's actions. 152 One historian interprets Nehemiah's credit reforms as similar to earlier acts of Sumerian and Babylonian Kings who granted amnesty to those sold into slavery for debt. 153 Although Nehemiah's reforms did not fundamentally change the Hebrew rule in Deuteronomy, they do shed light on its social operation. It would seem that, without strong leadership, early Hebrews lent and borrowed from one another with serious social consequences in spite of the injunction in Deuteronomy. 154 Moreover, from a contemporary American perspective, the racial orientation of the strategy is unadaptable to a democratic society committed to equal protection. Historically, it is unclear whether the moneylenders' new-found filial charity derived from Nehemiah's exhortations had any enduring effect. Most scholars doubt that the situation facing Hebrew debtors significantly changed for at least another three hundred years. 155 Their lot probably only improved when the Hebrew Hasmonean state expanded, making foreign poor people a suitable substitute for religiously protected Hebrews. 156



Many other cultures have used formal and informal mechanisms to protect favored groups from the consequences of high-cost debt. For instance, the Indian Dharmasastras provides for different interest rates varying with the caste of the debtor. 157 Under the rule, lenders provide much lower rates to Brahmins than other caste members, without regard to the personal credit history of the individual. 158 While selective protection strategies may have some success for protected group members, they also [*831] probably encourage class division and racism. Despite egalitarian pretensions of the United States, as we shall see, this strategy too was later imported to the new world.



D. Everyone for Themselves: Self-Help Free Markets



While the earliest high-cost credit policy strategies attempted to prevent or remedy undesirable credit outcomes through government or religious rules, later strategies began, in one way or another, to harness market forces. While microeconomic theory as we currently recognize it did not begin to develop until the eighteenth century, social and governmental strategies for mitigating the problems associated with high-cost debt began to recognize the benefits of relying on market forces much earlier. Reforms adopted in the surprisingly liberal society of ancient Athens are illustrative. At the zenith of its power and cultural sophistication, ancient Athens had "no law restricting the rate of interest." 159 Foreshadowing the economic arguments of thinkers such as Adam Smith, Jeremy Bentham, and David Ricardo, Athenian culture focused on individualism, personal responsibility, and balance in determining economic outcomes. 160



The story of how Athenians arrived at this approach probably starts around the beginning of the 6th century B.C.E. At this time, Athenian society had intensely polarized. Recent advances in trading throughout the Mediterranean, the growing use of coined money, and competition from free slave labor had put pressure on subsistence farmers around Athens. 161 Credit was already common and took on many different forms: some credit was secured by land, but often it was secured by the freedom of the debtor where, similar to other early civilizations, default meant slavery. 162 The gap between rich and poor became so wide that revolution threatened. 163 Although this situation was complex, early writers are universal in their agreement that the primary cause of the crisis was high-cost debt. 164 One historian summarizes the situation thus:



Solon tells us plainly of the overt abuses in his own day. A large part of the soil of Attica had come into the possession or at least under the control of the rich; many Athenians were [*832] suffering under a load of debt; some of these debtors, helpless to relieve themselves, had been forced into exile and had been living so long abroad that they had forgotten the good Attic speech; others, free-born though they were, had become slaves; and of these many had been sold into slavery abroad and so were in the worst case of all. Broadly speaking, the land and the greatest part of its products belonged to the rich; and the poor were constrained to toil for them as their slaves without mercy or redress. Here were causes enough for bitterness and discontent. While the rich enjoyed their ease and all the luxuries and comforts that the times afforded, the poor were condemned to a life of hopeless drudgery at home or the worst of evils in the ancient world, exile in a foreign land. 165



To stave off collapse of the city-state, the community appointed the poet and orator Solon, later called the father of Athenian law, to unilaterally rehabilitate its government. 166 The situation must have been very grave judging by the radical character of Solon's reforms and their acceptance. 167 Solon took several one-time measures to stabilize the situation including canceling or reducing many debts, freeing all enslaved for debt, and repurchasing those sold abroad for debt at state expense. 168 Solon also permanently outlawed enslaving defaulting debtors. 169 But this relief came at a price, for Solon is attributed to the law, "[m]oney is to be placed out at whatever rate the lender may want." 170



Solon's deregulation encouraged Athenians to rely on their own judgment. 171 Unregulated interest rates reflected Athenian commercially- oriented values. 172 Historians speculate it was this deregulation which helped creditors accept Solon's reforms. 173 In any case, the changes appear to have had a lasting and generally positive effect on the Athenian society. Unregulated credit prices proved effective in encouraging the finance of maritime trade. 174 "Bottomry loans," where a creditor advanced maritime traders the value of the ship's cargo before a voyage and assumed the risk [*833] of shipwreck, played a vital role in Athenian trade. 175 Lenders could invest in shipping loans at whatever price the risks of the voyage demanded. 176 Merchants engaging in risky, long distance trade could shop for high-priced loans from respectable law abiding creditors, rather than black market money lenders. 177 One scholar emphasizes that in Athens, credit was more often used to the mutual benefit of people in similar economic situations, as opposed to lending by the rich to the poor-common in most of the ancient world. 178 Athens developed a banking system which "changed money, received deposits, made loans to individuals and states, made foreign remittances, collected revenues, issued letters of credit and money orders, honored checks, and kept complete books." 179 Although lending did not develop to modern standards of complexity, it nevertheless had its own kind of sophistication which was fundamental to sustaining the ancient Athenian lifestyle. 180



But, for the poor and unwary, the historical record tells a different story indeed. Unregulated credit prices allowed unscrupulous lenders to charge the highest rates to those in extreme need. 181 In this period we find some of the most expensive loans in recorded history-as high as 9,000% per annum. 182 Borrowers probably intended these loans, like most high-cost loans, to be short term, but they were nevertheless often compounded over long periods of time. 183 Creditors were free to calculate interest in whatever way they chose, probably charging interest compounded at frequent intervals. 184 Because high-cost lending was so profitable, a class of creditors catering to the vulnerable poor and ignorant grew and thrived. 185 High-cost lenders became prevalent enough to create a deep and lasting influence on Greek drama and literature and an ancient variety of modern loan sharks became a typical character in Athenian plays. 186 Perhaps it was the dramatic social pain associated with expensive debt which induced contempt for lending by two of the world's greatest philosophers. We should not underestimate that both Plato and Aristotle, observing the effect of unregulated interest rates on their society, concluded that all interest [*834] should be banned. 187 Plato, for example, condemns lenders for "'planting their own stings into any fresh victim who offers them an opening to inject the poison of their money; and while they multiply their capital by usury, they are also multiplying . . . the paupers.'" 188



The Athenian credit market is emblematic of the free market strategy for controlling the harmful consequences associated with high-cost lending. Moreover, it mirrors much of the debate concerning credit regulation today. Athens stands as an example that since ancient times unregulated interest rates (with basic limitations such as the elimination of debt slavery) could be socially and economically productive. Yet, modern advocates of free market lending should also stand warned that unrestricted interest rates left sophisticated lenders free to exact ruinous contracts on those in vulnerable bargaining positions.



E. Give Them What They Want: Charitable Lending



Even societies deeply committed to controlling credit markets have come to realize the benefits of harnessing market forces in designing social policy. A fifth strategy, still often used in contemporary America, looks to undercut high-cost lenders by offering cheaper, less dangerous loans subsidized by the charitable impulses of powerful social or government institutions. An early example of the use of this strategy to control the harmful consequences of high-cost debt evolved in late fifteenth-century Italy. Influenced by Aristotelian contempt for credit as well as the ancient Hebrew impulse to protect vulnerable group members, medieval Roman Catholic religious doctrine strongly condemned taking any interest. 189 Most historians agree that the prejudice fundamentally retarded commerce. 190 Merchants had difficulty devising strategies to finance business ventures. 191 Throughout the middle ages the poor were afflicted by extreme poverty, due in no small part to the lack of strong international and domestic trade. 192



But toward the end of the fifteenth century, things began to change. The threat from the black death improved considerably. 193 Increased international and domestic trade invigorated the economy. 194 The printing press was invented. 195 Eventually the ideological grip of medieval [*835] scholasticism finally began to loosen. 196 Questioning the wisdom of their outright interest ban, Italian religious and secular authorities began to search for new ways to alleviate the suffering of the poor. Black market money lenders and pawnshops catering to the desperate poor had long existed in spite of religious condemnation. 197 In this period many Italian leaders came to agree that small loans to the poor were inevitable and even necessary to save those in extreme need. 198



As a result, religious leaders established charitable pawnshops which intended to charge only enough to cover costs of operation. 199 Called mons pietatis, such pawnshops met much controversy, but nevertheless found Papal approval at the Fifth Lateran Council in 1515. 200 The term translates literally as "mountain of piety." 201 Appropriately, the Latin word for mountain often carries a loose proverbial reference to making large promises followed by small performances. 202 Papal authorities reasoned that where the montes pietatum charged more than the original principal they were not receiving usury but, rather, contributions to defray operation costs. 203



The montes pietatum offered key theoretical advantages which may explain their acceptance in the face of strong opposition from many Catholic thinkers. Rather than simply prohibiting certain types of loans, the montes required no one to do anything against their will, thereby eliminating the risk of motivating a black market. 204 By offering cheaper credit to the poor, the montes harnessed the market force of demand to put [*836] private lenders out of business. 205 Debtors had no reason to pay the high prices of traditional pawnshops, since they could obtain money from a more trustworthy source at a lower price. 206 It is probably exactly these reasons which have fed charitable attempts to undercut private lending throughout history.



Harnessing these market forces, the montes pietatum did find some success. By 1509, eighty-seven of these pawnshops had been set up in the Italian peninsula. 207 Over the next two centuries the idea spread throughout the continent under sponsorship of the church, municipalities, and independent charities. 208 As the Catholic church lost influence, many of the montes failed, but others were taken over by municipal governments. 209 A few of the largest and strongest still exist today. 210



Unfortunately, the montes pietatum and strategies like them have faced several drawbacks in spite of their visionary appeal. First, charitable attempts to undercut private lenders such as the montes pietatum are subject to the tides of ideological fashion, whereas private lending is supported by the inexorable and constant desire for profit. For instance, the most vocal advocates of the montes at their outset were the Franciscan Observant Order of Friars. 211 Their charitable motives where at least supplemented and possibly dominated by their demagogic antisemitism. 212 "Paced by Bernardino da Feltre (d. 1494), the Observantine preachers regurgitated the oft-discredited charges of ritual murder, incited mobs to attacks on Jewish life and property, and harangued the people and their magistrates to destroy the Jews . . . ." 213 The noble intentions of early administrators of the montes were polluted by the desire to drive Jewish pawnbrokers from business and from Italy itself. 214 Whether the montes would ever have grown from infancy without the fuel of racial hatred is unclear.

[*837]

Charity is also easily corrupted on a much smaller level, and often with spoiling consequences. English attempts to institute charitable pawnshops in the early 1700s are illustrative. The first major charitable pawnshop to appear in England, the Charitable Corporation, was founded in 1699, and chartered in 1707. 215 It operated without incident for about thirty years "until rumors that huge amounts of money were being embezzled on the basis of fictitious pledges began to gain credence." 216 After Charitable Corporation officials fled the country, an enormous scandal ensued creating a long standing public mistrust against charitable alternatives to pawnbrokering in England. 217 Lamentably, in consumer credit as elsewhere, the motivation of charity is rarely more contagious than hate or greed.



A separate drawback to charitable attempts to displace private lenders derives from private lenders' desires not to be displaced. Obviously pawnbrokers resent attempts by government or charitable institutions to drive them out of business. This resentment may be more acute where the social reformers engage private lenders in subsidized competition, rather than instituting uniform command and control style rules such as interest rate caps. The former attack private lending at the root of its business-the demand for credit-whereas the latter merely regulates the way business may be conducted. Such private opposition to charitable lending often stifles charitable lending institutions in their infancy. A hundred years after the Charitable Corporation debacle, British reformers again tried to organize a charitable pawnshop, which again met with failure. 218 This time private lenders organized a strong resistance aimed at government, investment, and customer levels. 219 The opposition proved so effective as to convince one disgruntled ex-pawnbroker to state:



A little more mature reflection convinced us that a few individuals with a limited fund could not hope to withstand for more than a very short period the opposition of a body so powerful their in number, their riches, and their union as the pawnbrokers of the Metropolis, and that if a successful competition should ever be established against them it must be by a body as numerous, as rich, and as united as themselves. 220

[*838]

This opposition was not merely for the purpose of mobilizing support and resources for charitable lending projects. It is easy to imagine private pawnbrokers strategically engaging in marketing and price campaigns to drive vulnerable charitable lenders, who still required customers to pay overhead, out of business. But even where private lenders do not intentionally besiege charity credit, benevolent lenders usually advocate thrift and are unwilling to encourage indebtedness, thus carrying a much lower profile and in turn a smaller base of customers. Charitable lending strategies have historically lacked the profit-driven zeal to successfully compete with private lenders.



However, the most formidable obstacle faced by charitable lending regimes is mobilizing sufficient capital resources. This problem is also doubtlessly engendered by the opposition of private lenders, but is still a menacing limitation to the strategy in its own right. Even the earliest of the montes pietatum, founded at the headwaters of the social current creating the most successful of Europe's charitable pawnshops, often found accumulation of capital reserves for their non-profit venture prohibitive. 221 Wealthy Christians, despite the considerable religious pressure towards charity exerted by the fourteenth-century Italian Catholic church, were simply unlikely to invest in the montes. 222 Although some of the montes survived past infancy, quite simply, "many suffered or failed from undercapitalization." 223 Without profit there is little or no incentive to supply the necessary assets to conduct charitable lending on any meaningful scale.



Advocates of this strategy often turn to government to help mobilize the capital when they realize the support of private beneficiaries is inadequate. A noted British scholar has concluded, based on failed British attempts to establish charitable lending, that governmental support is a virtual prerequisite to any meaningful success. 224 However, successful governmental rent-seeking behavior is costly, inconsistent, and unpredictable, especially when opposed by powerful, organized private lobbies. While the supply of expensive capital for consumer lending has continued unabated for millennia, the supply of governmental subsidies for low- cost loans to the poor has been meager and sporadic. 225 Governments, almost always controlled by the society's power elite, face the same absence of incentive to provide charitable lending to the poor as private [*839] citizens. 226 Additionally, government strategies are burdened in stimulating lower-priced loans by the costs of immobile bureaucracy and tax collection. 227



The limitations of charitable attempts to undersell private lenders aside, this strategy nevertheless has retained advocates and limited successes for centuries-and for good reason. The strategy harnesses the demand for lower-price loans to extend protection to vulnerable debtors. Unfortunately, as the montes pietatum demonstrated, these successes are limited by serious structural problems, particularly supply problems, which have come to afflict similar American strategies in the twentieth century.



F. Strength in Numbers: Cooperative Lending



For thousands of years, families have extended low-cost and non-interest bearing loans to family members to insulate the family from the dangers of high-cost debt. 228 This informal cooperation can be an effective method of pooling a small and trusted group's resources to overcome short term deprivation and income shocks. However, the potency of this familial cooperation is limited by the size of the family's resource pool, as well as by the strength of the familial bonds tying the group together. In eighteenth- and nineteenth-century Europe, some groups began to expand and organize this cooperative lending strategy. The earliest formally organized cooperative lending groups were probably the British building societies. In the late eighteenth and early nineteenth century, Great Britain was in the nascent stages of industrialization and undergoing a revolution in financial markets. 229 A new class of urban salaried industrial workers was emerging. 230 Demographic shifts from rural agricultural work to urban industrial work contributed to widespread housing shortages. 231 The enlightenment fostered a new focus on self-help and entrepreneurialism. 232



Seeking to cope with the industrial revolution, a small group in Birmingham innovated a new way of pooling resources to purchase homes. 233 In 1775, a small club, Ketley's Building Society, formed with the [*840] purpose of pooling resources to purchase homes for members of the club. 234 None of the members alone were able to gather enough cash to cover the cost of building a new house. 235 In the newly formed club, members could contribute a specified amount each week into a common building fund. 236 As soon as enough resources were gathered, the club would purchase land and build a home for one of the members as determined by lot. 237 Members who had received their home were obligated to continue making their weekly contributions. 238 When the club had purchased a home for every member, the society was terminated. 239 Although the first Birmingham building society and the others which followed were limited to providing purchase money for home building, they nevertheless furnished their members with the ability to permanently acquire relatively inexpensive credit. 240 After a group member acquired a home, the member would have significant real property upon which to secure relatively low-cost loans to overcome short term needs or income shocks. 241 By establishing a building society, a group could insulate member families, and in turn entire neighborhoods, against financial predators. 242



As Germany began to experience the same structural precedents which spurred British building societies, it too developed organized cooperative lending institutions. Unlike British building societies, German institutions did not limit themselves to financing homes. 243 Modern credit unions trace their genealogy to two upper-middle class German financial innovators. 244



Herman Schulze, mayor of the town of Delitzsch, sought to create an institution which could lend capital to mechanics, tradesmen, and other local merchants. 245 After unsuccessfully pursuing charitable investments from wealthy benefactors, in 1850 Schulze turned to organizing cooperative societies which would pool resources. 246 These early Schulze-Delitzsch credit cooperatives sold shares, then lent the proceeds to [*841] members who could demonstrate efficient operation and a likelihood of profit for their small businesses. 247 Members bought their share in the union on an installment plan, similar to British building societies' weekly investment requirement. 248 Because every member of the union shared equally in the risk that a borrowing member might default, Schulze-Delitzsch organizations excluded all but relatively stable small merchants from membership. 249



Frederick William Raiffeisen, mayor of the village of Flammersfeld, organized similar cooperatives hoping to focus not on merchants, but on impoverished families. 250 After many failed ventures, Raffeisen forswore all charitable efforts and instead focused on self-sufficiency and mutual benefit. 251 Thereafter, he limited membership to individuals with unimpeachable character, widely vouched-for moral responsibility, and steady incomes, with successful results. 252 With careful management, both men organized credit unions which successfully loaned money not based on collateral, but upon the character of the borrower as judged by all other members of the union. 253 With widespread and growing demand for these basic financial services, the early German credit unions grew quickly. 254 By 1882, Germany boasted over 3,000 Schulze-Delitszch credit cooperatives. 255 By 1888, there were 425 Raffeisen credit unions. 256 Taking cue from British and German predecessors, cooperative credit organizations spread to Italy, Austria, France, Belgium, and then throughout Europe. 257 Organized cooperative lending spread across the Atlantic first into Quebec, Canada and then into the United States. 258 In the latter half of the nineteenth century and throughout the twentieth century, cooperative lending institutions grew rapidly both in variety and in number throughout the western world. 259

[*842]

Nevertheless, when viewed as a strategy for providing protection against the dangers of high-cost debt, cooperative credit organizations have, like other social strategies, encountered significant structural limitations. For instance, vulnerability to fraud and incompetence tends to make cooperative lending institutions unstable. Cooperative credit organizations have a strong incentive to add more members, and thus pool more resources. More members mean each member suffers less loss upon loan default. But as the union's membership grows, losses may become more likely, since members are less capable of judging the credit worthiness of individual members applying for loans. Moreover, the larger the group, the more conflicting perspectives to accommodate.



Thus, as cooperative lending groups became larger, they were forced to adopt democratic ideals and management checks and balances in order to safeguard the common pool of funds. For instance, the New World's first credit union, the Caisse Populare in Quebec, organized trustees into different committees to oversee the operation of their credit union. 260 Some members were assigned to a conseil d'administration which watched over the day-to-day affairs of the union, while the commission de surveillance was responsible for guaranteeing the books were properly kept. 261 The spirit of cooperation was essential because those with oversight responsibilities were ineligible to receive loans in order to avoid conflicts of interest. 262 And, unlike commercial banks, trustees received no compensation. 263 While these policies and their natural outgrowths, such as salaried professional management, have made large-scale cooperative lending possible, they have not succeeded in eliminating the risks. As the 1980 savings and loan scandal made clear, cooperative lending may be as vulnerable to fraud and mismanagement today as it was two centuries ago.



But, perhaps more importantly, cooperative lending by its nature tends to exclude those who are in most desperate need of its advantages. From the beginning, organized cooperative lenders have rigorously limited their membership to those with common bonds and relatively stable financial backgrounds. The first British building societies confined membership to groups of no more than twenty close neighbors and friends. 264 Many German cooperatives required costly entrance fees which functionally excluded undesirable members. 265 Early Quebec credit unions excluded all but respected French speaking Catholics and garnered community support [*843] with anti-Semitic hate speech. 266 Moreover, many potential members who met the racial, religious, and character prerequisites of cooperative credit did not meet formal and informal financial requirements. 267 It took little time for cooperative lenders to recognize that impoverished applicants had nothing to offer other members in the way of mutual benefit. 268 These applicants sought not cooperation but charity, and were therefore excluded.



III. Echoes of the Past: High-Cost Consumer Credit Policy in the United States



The United States has permutated variations of each of these major high-cost consumer credit policy strategies. Debtor amnesty, interest rate caps and other contract restrictions, selective protection, deregulated free markets, charitable lending, and organized cooperative lending have all been used by American policymakers for at least a century. However, American high-cost consumer credit policy has materialized obedient to no logical pattern, instead tracking the twists and turns of history and cultural change. This Part briefly surveys this evolution by focusing on the recurrent strategic limitations which have plagued our imported high- cost credit policy strategies. This Part also discusses the radical cultural revolution in middle-class American values with respect to consumer credit.



A. High-Cost Consumer Credit Policy Prior to 1900



European colonies in North America established their first laws dealing with high-cost credit following the English system of the time. 269 The basis for most modern state usury laws comes from imported English interest rate cap statutes. In particular, the colonies applied the Statute of Anne, which set a maximum allowable interest rate of five percent per annum. 270 The Statute of Anne, passed in 1713, was deeply influenced by receding but still influential medieval predispositions against the taking of interest: "[t]he statute[] . . . bear[s] witness to the Church's continued prejudice against the practice of usury in any form." 271 Specifically, the statute forbade charging interest "above the value of five pounds for the [*844] forbearance of one hundred pounds for a year." 272 The statute attempted to send a strong message of deterrence by including a damages provision establishing a fine which was triple the amount lent for charging above the five percent cap.



[A]ll and every person . . . which shall . . . receive . . . payment for one whole year, of and for their money or other thing, above the sum of five pounds for the forbearing of one hundred pounds for a year . . . shall forfeit . . . the treble value of the monies, wares, merchandizes, and other things so lent. 273



The basic interest rate caps of the colonies and (after independence) the States, modeled on the Statute of Anne, formed the backbone of attempts to control harmful consequences of high-cost lending in the United States. The caps set interest rate ceilings at different levels ranging between four percent and ten percent. 274 After independence, most states set their maximum interest rates at six percent. 275 Many of these interest rate caps, now called "general usury laws," have survived in one form or another until today. 276 The colonies also fashioned debt enforcement laws in the English pattern, which strongly favored creditors. 277 States at times would raise or lower their ceilings. 278 In 1867, Massachusetts followed the lead of England and other European countries in abolishing its interest rate cap. 279 A few states in turn followed Massachusetts. 280 Nevertheless, the legislative approach of low interest rate caps was relatively stable, normally encountering only mild tampering. "With very few exceptions, general usury laws were the only statutes regulating credit costs in the United States prior to the twentieth century." 281 The simplicity and durability of the early State interest rate caps echos many historical precedents. Thus, the American "combination of rigorous enforcement of debt and legal maximum rates of interest comes down from Hammurabi [*845] through Rome, through seventeenth-century England, to the modern United States." 282



1. The American Thrift Ethic



Culturally, Americans viewed debt supporting commerce as necessary and enterprising, but conversely placed a large social stigma on borrowing for personal consumption purposes. 283 One author in 1838 explained widespread American comfort with commercial lending in terms of personal trust:



As the credit system is the offspring of confidence, and as no man reposes confidence where he deems it likely to be abused, the existence of this extensive and universal system of credit may be taken as evidence of a general belief among those who have commodities for sale, that those who desire to obtain them, have the disposition, and will have the means of paying for them, in such manner and at such times as may be agreed upon. 284



This focus on confidence is enlightening in regard to the reluctance of mainstream commercial lenders to extend credit for consumption purposes. Quite simply, unlike commercial debtors, consumption borrowers were not trusted. 285 The papers of Benjamin Franklin reveal popular thinking about individuals who borrowed for consumption purposes:



Think what you do when you run in Debt; You give to another Power over your Liberty. If you cannot pay at the Time, you will be ashamed to see your Creditor; you will be in Fear when you speak to him; you will make poor pitiful sneaking Excuses, and by Degrees come to lose your Veracity, and sink into base downright lying; for, as Poor Richard says, The second Vice is Lying, the first is running in Debt. . . . Poverty often deprives a Man of all Spirit and Virtue: Tis hard for an empty Bag to stand upright . . . . The Borrower is a Slave to the Lender, and the Debtor to the Creditor, disdain the Chain, preserve your Freedom; and maintain your independency: Be industrious and free; be frugal and free. 286

[*846]

But in spite of strong social messages against personal debt, especially debt at high prices, "[h]igh rates no doubt existed in commercial and personal transactions. But high interest rates were vigorously opposed by colonial law and custom and were therefore negotiated secretly . . . ." 287 Low interest rate caps reflected this cultural norm. 288 It was not possible for lenders to make a profit from short term loans of small amounts without charging rates in excess of the legal limits. 289 Accordingly, normal citizens generally could not purchase the use of money from legal lenders. 290 In this way, the law acted as an agent of socialization against all borrowing for consumptive purposes.



The American thrift ethic stifled development of debtor amnesty policies. Defaulting debtors, particularly consumer debtors, found little public sympathy. 291 In addition to interest rate caps, colonists also imported English debtor prisons. 292 Imprisonment for debt was surprisingly common in the eighteenth and early nineteenth centuries:



Thus, in 1830, there were in Massachusetts, Maryland, New York, and Pennsylvania three to five times as many persons imprisoned for debt as for crime. The Suffolk County Jail in Boston alone for the decade 1820-1830 contained 11,818 imprisoned debtors from a total population ranging from 43,000 to 63,000. 293



Although some states pushed for reform in the 1830s, debt peonage was not federally outlawed until after the Civil War. 294 Northern states only felt compelled to outlaw debtor prisons when Southern whites began circum-venting emancipation with debt peonage. 295



Gradually, the bankruptcy system evolved to become the primary mechanism of providing American debtor amnesty. Throughout Europe, the earliest bankruptcy rules were exclusively creditor collection remedies which provided virtually no protection for debtors. 296 It was not until 1706 [*847] that short-lived English bankruptcy law included discharge of a limited number of debts for a limited number of debtors. 297 Nearly a century later in 1800, the United States adopted its first bankruptcy law. 298 Like early American interest rate caps, debtor amnesty provisions included in early American bankruptcy laws bear a surprising resemblance to their ancient Mesopotamian predecessors. Like the occasional Sumerian and Babylonian royal decrees forgiving debts for favored subjects, nineteenth century American bankruptcy debtor amnesty rules responded to financial crises, were short lived, and were capriciously limited in scope. 299 For example, a financial panic spurred the 1800 Bankruptcy Act, which was repealed in only three years. 300 While the act included narrow provisions providing for discharge of some debts, only merchants were eligible. 301 And, while the law allowed release from debtor prison for those obtaining discharge, there is some evidence that only the relatively influential consistently acquired this amnesty. 302 For instance, Robert Morris, a member of the Constitutional Convention and a prominent financier, managed to liberate himself from a Pennsylvania debtor prison. 303 Those without such prominence were not so lucky. 304



Our second and third bankruptcy rules were similarly inconsistent in providing amnesty for imprisoned and defaulting debtors. The Bankruptcy Act of 1841, which became effective in 1842, was promptly repealed in 1843. 305 Perhaps contributing to its short life was the controversial innovation of extending limited debt discharge rights to non-merchant debtors. 306 The post-Civil War economic crisis spawned the relatively enduring Bankruptcy Act of 1867. 307 It also provided limited debt discharge rights, but survived for less than a decade. 308

[*848]

2. The Origin of American Selective Protection: Our Tradition of Credit Discrimination



The American credit culture prior to the twentieth century only can be understood against a backdrop of formal and informal discrimination against non- European races and women. This fact is easily overlooked given the stark absence of treatment of race and gender in most financial and credit histories. For example, a discussion about credit for African-Americans prior to the Civil War can only be dominated by the institution of slavery. Rather than asking whether credit was available to slaves, scholarship often focuses on how slaves were used to secure credit for their European captors. 309 It is naive to suspect that after emancipation equal access to inexpensive credit became easily available for African- Americans. At the end of the Civil War, over ninety percent of blacks lived in the South, where the white elite was determined to preserve as many of the economic aspects of slavery as possible. 310 African-Americans usually had no resource to provide for themselves besides their own labor. 311 High-cost credit played an important role in perpetuating the power of white elites. A large portion of the black population found sustenance in sharecropping, which relied on a cycle of poverty and debt to enforce the subordination of black workers. 312 Sharecroppers received no pay for their work until the sale of the crop at harvest time. 313 With no available cash source, black agricultural workers were forced to turn to high-cost credit to survive. 314 Interest rates on supplies and money loaned to Southern blacks were high, often exceeding fifty percent. 315 When the farming season ended and black workers sold their share of the crop, there were rarely enough proceeds to cover debts from the previous season. 316 Thus, sharecroppers were forced to borrow again year after year, each time [*849] hoping that the next crop would allow them to pay off their debt and perhaps save a little extra money. Moreover, white landowners and creditors often cheated black workers. In Texas, for example, the widespread practice of shutting out black workers without compensation immediately before harvest, after they had farmed the entire agricultural season, found judicial sanction in the courts. 317 Very few African-Americans were resourceful enough to gather enough cash and credit to purchase their own farms, hence almost all black agricultural workers faced lives of gripping poverty exacerbated and entrenched by high-cost lending. 318



Similarly, it is somewhat futile to speak of access to credit when women had neither governmentally recognized, protected property rights, nor the right to vote. In American history, access to credit for women was often a function of their relationships to men. 319 The ability to borrow requires a creditor's trust that the debtor will be able to raise and turn over the amount loaned plus interest. Because women were excluded from the basic mechanisms of the market economy, they could not consistently guarantee repayment without enlisting in some way the cooperation of a male. Where women did try to borrow, their exclusion from lower- priced lenders forced them to turn to pawnbrokers or other high-cost lenders, often with "devastating effects upon a family's real income." 320 The story of one New York single mother is illustrative:



Mrs. Zulinsky . . . one day found that her entire life's savings of six hundred dollars had been stolen from her mattress. Charity could not support three children, so Mrs. Zulinsky was forced to become, in the slang of the day, "a furniture dealer." Her table, her two beds, all her chairs, and "even the marble clock surmounted by a bronze horseman armed with a spear" were hauled down to the pawnshop and "put up the spout." When night fell, Mrs. Zulinsky's family was "sitting on boxes and sleeping on the floor," but the immediate emergency had been bridged. 321



Throughout the nineteenth century approximately three quarters of pawnbroker customers were women, usually borrowing at rates around 300% per annum. 322

[*850]

3. The Rise of Salary Lending



High-cost consumer debt was by no means limited to ethnic minorities and women. By the latter half of the nineteenth century, there was an upsurge in lenders catering to a clientele of married, working class, white men with steady jobs. 323 These creditors, known as salary lenders, 324 were the precursor to today's payday lenders. Their borrowers "were frequently regular employees of large organizations: government civil servants, railroad workers, streetcar motormen, and clerks in firms such as insurance companies." 325 Such workers, often recent immigrants or former agricultural laborers, formed the foundation of the emerging lower middle class of urban American society. 326 For the lender, they represented good credit risks. These men usually borrowed to meet unexpected needs such as family illness or moving expenses. 327 Nevertheless, they held steady jobs and had family obligations which prevented them from skipping town. 328 High-cost lenders targeted such workers because they had a steady supply of disposable income which made them likely to repay. 329 Moreover, frequent minor income shocks made the workers likely to borrow. 330



It was these high-cost lenders whom working class people in the Eastern U.S. cities first came to describe as "loan sharks." 331 Although the term was new, the tactics of the lenders were not. Initially, these loan sharks charged very high interest rates. 332 In fact, rates in excess of one thousand percent annually were common. 333 Reminiscent of high-cost loans in ancient Athens, principal amounts were generally small, and due in a short period of time. 334 But, very often the loans would end up compounding over great periods of time. 335 The records of one salary lender in New York City showed that out of approximately 400 debtors, 163 had been making payments on the loans for over two years. 336 Nor was the length of these loans merely a result of the debtor's unwillingness or [*851] inability to pay. The most essential characteristic of these early salary lenders, and perhaps all loan sharks in general, was the tendency to manipulate loans into "chain debt." 337 This was accomplished by a broad variety of means. The first and perhaps most important were late fees, which were often assessed even where the creditor was only minutes or hours late. 338 Commonly, creditors "deliberately maneuvered a borrower into a late payment, by falsely suggesting that a late payment would be overlooked or by claiming that a payment sent by mail arrived after the payment deadline." 339 It is easy to imagine the incentive a salary lender might have in closing shop early on a Friday afternoon when working customers might rush in to make a last minute payment. Sometimes, individual late fees were nearly as much as the principal itself. 340 We can expect that other tactics reflected those used throughout history, including "creative" calculations of the interest, a broad assortment of other fees (such as origination fees, collection fees, broker fees, pledge storage fees, and insurance fees), and refinancing induced by balloon payments. The key in chain debt is for the lender to collect the most money while reducing the amount owed to as little as possible. 341



In a typical transaction, a debtor would borrow five dollars on Monday, and repay six on Friday. 342 This 20% per week loan translates into a 1040% per annum rate. 343 African-Americans borrowing in the South were often charged rates twice as high in the same type of transaction, where a loan of five dollars was repaid with seven at the end of the week. 344 The charge of one or two dollars itself seems fairly innocuous for any one given week. But, when a debtor lost a job, was not paid for his work, became ill, had a family member become ill, or was prevented from paying for any other reason, the simple transaction rapidly swelled into an enormous drain on an already strained budget.



Profits from extended-term salary lending fueled the late nineteenth-century upsurge in high-cost lending. 345 As the industry grew, so too did the horror stories, often the only circulated evidence of what was becoming a crisis. Moreover, the surge in high-cost lending would significantly contribute to a transformation in American culture:

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There was, for example, the employee of a New York publishing house who supported a large family on a salary of $ 22.50 per week and had been paying $ 5 per week to a salary lender for several years, until he had paid more than ten times the original loan. Or the case of a Chicagoan who borrowed $ 15, paid back $ 1.50 per month for three years before fleeing the city to escape the debt. Or the case of a streetcar motorman who, in 1912, had seventeen Chicago loan companies attempting to collect $ 307 on an original loan of $ 50 after he had already paid $ 360. Or the claim of another Chicago borrower that he had borrowed $ 15, ten years later had repaid $ 2,153 and still owed the original $ 15. 346



In this period, pawnbrokers also grew quickly alongside salary lenders. In 1812, New York City had ten licensed pawnbrokers, but by 1897 the number had grown more than ten times to 134 licensed pawnbrokers. 347 Similarly, San Francisco, where there were no state usury laws, was home to 243 pawnshops by 1897. 348 Moreover, credible turn of the century studies estimated one in five American workers owed money to salary lenders. 349 Although individuals indebted to salary lenders and pawnbrokers could not have known it, their stories bore remarkable similarity to those told for thousands of years.



Unfortunately, as in Babylon, Rome, and Ming China, government interest rate caps provided little or no protection for those in the grips of such high-cost lending. 350 First, many lenders evaded usury caps by phrasing the contract as a purchase or assignment of future wages, rather than a loan. 351 Second, lenders could easily take advantage of the time-price doctrine to avoid interest rate caps. 352 Under this doctrine, where a physical good was purchased over time on installments, it was not considered a loan under English law for purposes of a statutory interest rate cap. 353 Because American general usury laws were modeled on their English predecessors, U.S. courts almost invariably considered purchases of physical products over time as exempt from usury laws. 354 This led some [*853] lenders to avoid interest rate caps by, for example, requiring the debtor to "purchase" a worthless oil painting at the time the loan contract was signed. 355 The debtor would owe the same amount of money, and could immediately throw the painting away, but the transaction would be at least superficially legal. 356 Third, statutes indicating the interest rate cap often did not clearly describe how interest was to be calculated under the cap, leaving wide ambiguity over the actual amount legally chargeable. 357 Some lenders would engage in "note shaving," where a loan would be offered at a legal rate, but additional mandatory fees would create a true price well above that contemplated by legislators. 358 Other lenders would charge interest on money already repaid by the debtor, thus dramatically increasing the overall amount the debtor would have to repay. 359 Fourth, lenders would also require debtors to sign forms when taking out the loan which granted the creditor power of attorney long before any payment dispute arose. 360 When and if the debtor tried to challenge the contract in the judicial system, he might find out he had already waived his right to do so. 361 Whether or not this was in fact legal, power of attorney forms no doubt deterred many debtors from trying to contest the contract. 362 Even if the debtor was not dissuaded, the creditor could, without the debtor's knowledge, appear before a court and confess judgment on an unpaid debt, thus enlisting the power of the state to help in collection. 363 Fifth, some state court systems were structured such that the income of lower justices of the peace and magistrates was provided for through court fees. 364 Thus, "[j]ustices who found for salary lenders could often attract a good deal of business and thus earn tidy sums, so that it was in the economic interest of justices to look with favor upon suits by lenders." 365 Sixth, even where there was no economic incentive, lenders still retained the formidable advantage of initiating suits. 366 Pleadings, choice of venue, and choice of jurisdiction could all offer litigation savvy lenders the ability to shape [*854] lawsuits to their advantage. 367 For example, we can expect lenders would know when to bluff and when to sue simply because they had inside information about the personal views of various judges. Seventh, loans made above interest rate caps prior to the turn of the century must have made their way to the courts for adjudication relatively infrequently. 368 This is not to say that there were no cases where courts found loans above the statutory limit. 369 But, compared to the number of illegal loans that were made, we can expect only a very few of these cases ever made it to court. After all, anyone who had the money to hire an attorney to sort through salary lenders' complex legal contracts would use that money to pay off the debt. Eighth, public prosecutors would very rarely take the initiative to seek out those lending in excess of legal limits. 370 Outside of New York, there was not one state officer specifically charged with enforcement of usury laws. 371 This meant that the complex and time consuming business of enforcing interest rate caps was easy for officials to ignore. In this way, generations of lenders offered and collected upon loans which violated certainly the spirit, if not the letter, of general usury laws. Moreover, high-cost lenders' legal ingenuity helped them to maintain at least a thin veil of legality throughout much of the nineteenth century.



Even without resorting to the judicial system, creditors could place enormous pressure on debtors. A nineteenth-century creditor was free to confront the friends and family of a debtor who had already paid the principal of a loan thrice over, subjecting the borrower to terrible social embarrassment. 372 A common tactic was



to employ a "bawler-out"-usually a woman with a stentorian voice and rich vocabulary. The bawler-out went to the borrower's place of work or neighborhood and, in a loud voice, denounced him for his dishonesty in refusing to repay the loan. To avoid further embarrassment or the possibility of being fired, the borrower might well seek a settlement. 373

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The lender could also threaten to garnish the wages of the debtor, which in the social climate of the time was tantamount to threatening the debtor with unemployment. 374



Lingering Victorian condemnation of personal debt created a culture of silence which masked the increasingly pervasive indebtedness of the working and lower-middle class. 375 With debtor prisons only recently outlawed, debtors kept their obligations private. Although there are a number of surviving records of commercial lending at legal or nearly legal rates, there is very little surviving documentation of higher-priced illegal loans. 376 In the late 1880s, Congress became concerned enough to direct the census of 1890 to estimate the total amount of private debt. 377



Robert Porter, the census superintendent, "feared that the people regarded their debt . . . as a part of their private affairs, and that they would resent any inquiries in regard to it." The image was not a pleasant one: unarmed census workers thrown out of the homes of angry debtors resentful of governmental prying into their personal affairs. Porter concluded that any attempt to ask the people about their debts would cause collateral damage to the rest of the survey, enough to wreck the entire 1890 census. 378



Realizing the citizenry would never reveal the extent of their personal debts, census officials relented and instead tried to estimate private debts on the basis of public records. 379



4. Policy Responses to the Late Nineteenth Century High-Cost Credit Boom



The social havoc associated with late nineteenth-century salary lenders and pawnbrokers forced American credit policy into a period of dramatic evolution. Elites, as well as the working and still vulnerable middle class, united to adopt a variety of policies new to America, but not to world [*856] history. For instance, many Americans searched for redress in the philanthropy of the rich. 380 Social elites founded several charitable lending institutions in the late 1800s. 381 Following the European mons pietatis and later municipal pawnshops, a group of wealthy Boston citizens organized a philanthropic pawnshop called the Collateral Loan Company in 1859. 382 Like its European predecessors, the Collateral Loan Company aimed to provide relatively inexpensive pawn loans to poor clients in need of emergency credit. 383 If loans were not repaid, the pawned security was sold at public auction. 384 A board of directors chosen by shareholders who had invested capital in the company, as well as the mayor of Boston and the governor of Massachusetts, led the company. 385 Shareholders would receive limited dividends on their capital investment, but the real appeal of the business was almost certainly charitable. 386



Other institutions, both in Boston and elsewhere, emulated the Collateral Loan Company. 387 In 1888, Massachusetts expanded charitable lending beyond philanthropic pawn loans by incorporating the Workingmen's Loan Association in Boston. 388 The Massachusetts state legislature acted to create a business "for the purpose of loaning money upon pledge or mortgage of goods and chattels or of safe securities of every kind or upon mortgage of real estate." 389 The most prominent example of a charitable lending company in the United States is the Provident Loan Society of New York, founded in 1894. 390 Key charitable investors included J. Pierpont Morgan, Percy Rockefeller, and Cornelius Vanderbilt. 391 Similar to the Italian mons pietatis, the charitable pawnshop charged rates that were low compared to commercial pawn shops, but still "high enough to cover all costs of operation . . . and to allow an accumulation of a surplus-which could be used only for expansion of the business or for gifts to charitable organizations, not to increase the return to contributors of capital." 392 The society's founders feared that personal financial problems exacerbated by high unemployment rates following the [*857] recession of the early 1890s were causing "deterioration in the social conditions of the working class." 393



Widespread high-cost lending also spurred the middle class to more aggressively organize cooperative lending associations in order to insulate themselves from the risks of high-cost debt. The first American building society, modeled after earlier British counterparts, was formed in 1831, and by the late nineteenth century savings and loan associations became entrenched. 394 By 1893, thirteen states- California, Illinois, Indiana, Iowa, Kansas, Maryland, Massachusetts, Missouri, New Jersey, New York, Ohio, Pennsylvania, and Tennessee-boasted more than 100 savings and loan associations. 395 While the first credit unions modeled on German and then Canadian institutions did not appear in the Untied States until 1909, they thereafter quickly followed on the heels of British modeled societies. 396



Finally, the rise of the loan sharks along with the financial panic of 1893, created momentum to once again attempt to pass a federal bankruptcy law. 397 Opposition to a federal bankruptcy law by Western and Southern representatives fearing Northern bias stalled the law until 1898, when numerous amendments favorable to debtors secured its passage. 398 Growing middle class access to credit, as well as increasing sympathy for the plight of non- commercial debtors who had been preyed upon by unscrupulous lenders, brought about a fundamental change in the purpose of American bankruptcy law. 399 While previous laws were primarily creditor collection devices with parsimonious discharge provisions meant only to ease temporary financial crises, the 1898 Act aimed to give bankrupts a "fresh start." 400 Although the focus of Congressional debates was still upon commercial transactions, 401 under the new law, consumers and merchants alike were free to voluntarily enter bankruptcy. 402 Discharge was no longer contingent upon creditor consent. 403 The list of restrictions on the right of discharge was significantly narrowed and, in fact, only a few debts were exempted from discharge. 404 And, perhaps to limit the use of bankruptcy as a salary loan collection device, creditors could no longer [*858] force wage earners into involuntary bankruptcy proceedings. 405 Thus, the 1898 law was not only a device to secure an equitable division of property among creditors, but also a device to deal out discharge of debts to deserving debtors. 406



With more generous discharge provisions came increasingly complex and costly procedural rules for administering bankrupt estates. "At least seventy percent of the [1898] Bankruptcy Act, if not more, was procedural." 407 The process soon became so complex that a specialized sub-discipline of law practice emerged. 408 Creditors elected a trustee, and organized into a creditors' committee. 409 Although venue was in federal district courts, it was necessary to appoint "referees in bankruptcy." 410 Federal district court judges delegated almost all of the judicial and administrative duties to referees, who eventually evolved into today's bankruptcy judges. 411 The subject of bankruptcy policy debate switched from whether to grant discharge to the best way to grant it, thus charging the courts with a whole new system of commercial administration. 412 After 1898, bankruptcy debates became contests between efficient formalistic rules versus justice-oriented discretionary standards. 413 Despite these complexities, the law became America's first non-transitory bankruptcy law, and although it was often amended, it remained in force for eighty years. 414



B. High-Cost Consumer Credit Policy from 1900 to the End of World War II



The progressive new bankruptcy law, combined with interest rate caps and fledgling charitable and cooperative lending efforts, proved incapable of stemming the growing and dangerous tide of late nineteenth century high-cost credit. As the twentieth century began, the number of high-cost [*859] creditors and debtors continued to grow. 415 By 1907, 90% of the employees of New York's largest transportation company made weekly payments to salary lenders. 416 An influential study estimated one in five American workers owed money to a salary lender. 417 Others have argued, based on analysis of data from Pittsburgh, that this ratio actually underestimated the number of debtors obligated to turn-of-the-century "loan sharks." 418 While rates ranging from 20% to 300% were normal, rates well in excess of 1,000% were also still common. 419 The situation of many of the nation's poor was becoming so acute that socially sensitive elites could no longer ignore it. 420 Newspapers around the country ran exposes and aggressive editorial campaigns on the evils of loan sharks, with headlines indistinguishable from those found today. 421 Even the slow-to-change judiciary began to respond with a smattering of harshly worded opinions. 422 One federal judge characterized a high-cost lender as having "brought on conditions which were yearly reducing hundreds of laborers and other small wage-earners to a condition of serfdom in all but name." 423



For the first time in American history, significant numbers of wage earning consumer debtors began to seek amnesty from their creditors by declaring bankruptcy under the 1898 law. But salary lending and other forms of high-cost credit persisted. Prior to becoming Attorney General, Charles D. Thatcher noted many consumer debtors only declared bankruptcy after a struggle to pay off their debts, which often included turning to salary lenders as a last resort. 424 Borrowers would often attempt to negotiate a repayment plan to satisfy their obligations. 425 Using aggressive collection tactics, salary lenders would undermine the effectiveness of these informal work-out plans by crowding out other [*860] creditors. 426 Salary lenders often served as a final weight breaking a wage earner's back and forcing him into bankruptcy. 427



Charitable and cooperative lending societies grew in response to wider perception of high-cost lending problems. In 1909, fifteen philanthropic lending societies existed throughout the United States. 428 By 1915, this number more than doubled to thirty-eight. 429 Moreover, cooperative lending institutions also grew quickly between the turn of the century and the stock market crash of 1928. 430 While these charitable and cooperative endeavors helped many people, they were not nearly large enough to deal with the magnitude of problems associated with high-cost lending. 431 Much like