Financial History Issue 130 (Summer 2019) | Page 15
rather struggled to improve their access to
business loans, mortgages, insurance and
investment vehicles like mutual savings
banks. They did it the traditional Ameri-
can way, called self-help. In other words,
when they found themselves unreason-
ably excluded from incumbent financial
institutions, they formed their own and
got down to business.
In fact, the history of financial innova-
tion in the United States can be told as the
story of groups excluded from incumbent
institutions creating their own markets
and intermediaries. When British authori-
ties told Philadelphia merchants Thomas
Willing and Robert Morris that they could
not form a commercial bank to alleviate
the severe shortage of money and credit
afflicting the colonial economy in the
1760s, they both joined a revolutionary
movement that overthrew those authori-
ties and established the Bank of North
America, the new nation’s first incorpo-
rated joint-stock commercial bank. When
artisans, farmers, mechanics and retailers
found that that bank, and its emulators,
lent more freely to merchants than to
them, they chartered their own commer-
cial banks. So, too, did Irish, German and
other immigrants when they believed they
were not getting a fair shake.
Early commercial banks lent to busi-
nesses and did not seek, or even want,
deposits from individuals. Their business
model excluded the poor, who joined
forces with philanthropists to create
mutual savings banks, an early type of
mutual fund. For-profit savings banks also
cropped up, as did building and loan asso-
ciations, which, along with wealthy indi-
viduals and life insurers, supplied the bulk
of mortgages to middle class homeowners
and small proprietors for over a century.
The working poor and middling types
also developed their own life and health
insurance via non-profit fraternal asso-
ciations. Their organizations proved so
successful at minimizing adverse selection
and moral hazard that by the late 19th
century big life insurers began to cater to
Irish depositors of the Emigrant Savings Bank in New York City withdrawing money
to send to their suffering relatives in the old country, March 13, 1880.
the poor as well, with small denomination
industrial life insurance policies. After
World War II, inexpensive group term
life policies offered by employers as fringe
benefits supplanted industrial insurance.
While savings banks accepted deposits
from the poor, they would not lend to them,
leaving low-income individuals exposed to
the predatory practices of pawn brokers
and other chattel lenders, note shavers/loan
sharks and salary buyers/payday lenders.
Credit unions, industrial banks, loan societ-
ies and lombards arose to lend small sums
for short terms to low income borrowers
on easier terms. Despite the nominally high
interest rates they charged, however, lenders
generally did not find the market a lucrative
one, so sharks still lurked, especially where
usury laws limited lawful competition, as
they long did in economically backwards
places like Arkansas.
Financial regulations, like interest rate
caps, often did more to hurt downtrod-
den groups than to help them. Bankers,
brokers and insurers found loopholes in
almost every law that tried to coerce them
into behaving in ways that they believed
were not in their best interest. Rather than
fruitlessly try to force financiers to lend
to members of groups that believed they
were being discriminated against, regula-
tors long encouraged self-help instead.
Instead of telling incumbent life insurers
to insure the lives of German immigrants,
for example, New York policymakers
allowed Germans to form their own insur-
ers, like the Germania, which today is a
Fortune 500 Company called Guardian
Life Insurance Company of America. Sim-
ilarly, Irish immigrants formed mutual
savings banks, like the Emigrant Sav-
ings Bank, which served Irish immigrants
for generations before demutualizing in
1986. At the other end of the financial
spectrum, Jewish immigrants excluded
from WASP-y social and business circles
formed investment banks like Lehman
Brothers and Goldman Sachs.
After the Civil War, African Americans
who did not want to pay the high premiums
demanded by incumbents on the basis of
biased actuarial tables formed their own life
insurers. The most efficient of them earned
fortunes and in the process helped thou-
sands of Black families to insure against the
death of their breadwinners. Insurers like
North Carolina Mutual proved so success-
ful that white-controlled insurers realized
that Black lives really do matter and began
to buy Black-owned insurers, like Standard
Life Insurance Company of Atlanta, or
to court African Americans directly with
more reasonable rates. By the 1960s, hold-
ing income constant, African Americans
were more likely to have life insurance
coverage than Whites.
www.MoAF.org | Summer 2019 | FINANCIAL HISTORY 13