Loan Sharks: The Birth of Predatory Lending

  • By Charles R. Geisst
  • Brookings Institution Press
  • 401 pp.

Nefarious banking practices have long been with us.

The term “loan sharks” is derived from the predatory practices of those denizens of the sea. Given that, I fully expected Loan Sharks: The Birth of Predatory Lending to be a blood-soaked tale of bookies, leg-breakers, and mobsters.

Instead, I got an exhaustive and well-researched history of the banking and lending practices of some of America’s most renowned citizens and corporations. The bookies, leg-breakers, and mobsters come out looking pretty good in comparison.  

The author of Loan Sharks is Charles R. Geisst, a former investment banker who is currently the Ambassador Charles A. Gargano Professor of Finance at Manhattan College. Geisst, who has penned 19 other books, including Collateral Damaged and Beggar Thy Neighbor: A History of Usury and Debt, knows his subject.

Advertised as “the fascinating history of America’s undeclared and ill-defined war on usury and loan sharking from the late nineteenth century through the Great Depression,” Loan Sharks reminds me of some of the declared, but just as ill-defined, American wars on, say, poverty and cancer. The result was, of course, just as successful.

People have been lending money to each other since money was invented. The advent of coins — cash (or whatever else was smaller than a goat) — that could be used to purchase something made loans a lot easier. The first person who asked for interest on a loan has been lost to history. I suspect he was murdered. In fact, the term “money lender” has long had a nasty ring to it. Jesus threw a bunch of them out of the temple. 

But that did not deter future money lenders, who came to be known as bankers. Now, banking is a necessary endeavor, but there have always been abuses, so governments since antiquity have tried to set limits on how much interest could be charged.

In ancient Rome, it was 12 percent. Late payers were presumably thrown to the lions. In Elizabethan England, the top interest rate was 6 percent That makes the English seem reasonable, but one must remember that this was during an era when stealing a loaf of bread got you hanged.

What about the United States? Well, since colonial times, the rate in various jurisdictions has ranged from 4 to 40 percent. That last figure is not a typo. The U.S. has a history of making it very easy to borrow money and almost impossible to pay it back. That has proven to be a burden that falls disproportionately on small borrowers.  

Geist quotes Mark Twain: “If a man owes a bank a dollar and cannot pay, he has a problem. If a man owes it a million and cannot pay, the bank has a problem.” Some of our most distinguished citizens have borrowed so much money that they couldn’t meet their interest payments and either declared bankruptcy or threatened to drag down their lenders if the loan terms weren’t moderated.

Such people are not thrown to the lions. They are elected president.

Geisst makes it clear that the usury laws that tried to limit how much interest a lender could charge in the United States were doomed to fail. As the economy expanded, the need for easy money quickly made any interest-rate limits obsolete. Gangsters easily found their way around such laws, and so-called legitimate bankers made sure they were not put at a disadvantage.

The comparison between “gangsters” and “bankers” may be harsh, but is not really pejorative when you consider that what was once considered usurious loansharking in this country is now common practice.

With some exceptions made for societal reasons (school loans and the like), the free market now decides what interest rates you will pay. That’s why someone with great credit may pay 21 percent to a bank for a credit card when the bank only offers 1 percent on the money in its savings accounts. The difference allegedly makes up for the money the bank loses on its bad debts.

I say “allegedly” because it doesn’t make sense to me. Why should we pay for the money a bank loses on a bad loan to a casino operator? (See “president,” above.)           

Snore alert: Loan Shark is not the easiest of reads, especially since Geisst spends much of his time explaining how the banking and financial systems have developed, and regularly collapsed, since the Civil War. But there are gems to be found even among sleep-inducing chapters.

I particularly liked his explanation of how American banks helped impose onerous interest rates on German reparations after World War I. As the distinguished British economist John Maynard Keynes pointed out before quitting the Allies’ reparations committee in disgust, the terms of the payment plan would mean that Germany could never meet its obligations and would wind up in hock for more than it originally owed. That sounds awfully familiar, doesn’t it?

In America, such practices usually led to foreclosure. Elsewhere, to World War II.   

Geisst basically points out that “loan sharking” and usury are the inevitable result of the American system of doing business. Capitalism at its best — and worst. He suggests one solution to mitigate the worst aspect: Since rigid limits on interest rates have been shown not to work, perhaps there should be adjustable limits so people would not be stuck with predatory loans they have no chance of paying back.

As Geisst notes, Albert Einstein reportedly said that doing the same thing over and over while expecting different results was the definition of insanity. 

 Lawrence De Maria, once a Pulitzer-nominated New York Times reporter, has written more than a dozen thriller and mysteries on Amazon.com. The only thing he lends is advice, which is rarely taken. His most recent thriller, Shadow of the Black Womb, is available at ST. AUSTIN’S PRESS (BOOKS BY DE MARIA).  

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