Financial History Issue 130 (Summer 2019) | Page 28

that their debts would be repaid from their future wages. By 1900, “chattel loans,” cash advances secured by a lien on the borrower’s per- sonal property, and “salary loans,” secured by an assignment of the borrower’s future wages, had become a common source of credit for urban, working-class laborers. Buying goods “on time” or “on install- ment” had also grown to be part of every- day life. Merchants sold clothing, furni- ture and sewing machines on credit to working-class buyers, who agreed to pay back the sales price plus credit charges in regular installments, and risk repossession of their purchases if they failed to repay the debt. In this period, the law governing house- hold loans was ancient and varied from state to state. Even as legal control over other matters of economic life had begun to move from the states to the federal gov- ernment, a hodgepodge of state and local law continued to govern the business of making and collecting small loans in the early 20th century. Small cash loans were essentially out- lawed in most states because of restrictive lending laws that dated back to the 19th century. Lenders could not make a profit if they charged interest at the low rates allowed under these statutes, known as “usury laws.” In contrast, selling goods “on time” was hardly regulated at all, thanks to a longstanding legal distinc- tion between cash loans and sales credit. Although merchants often charged one cash price to customers who paid upfront and another to customers buying on time, the law did not treat the difference between these prices as interest on a loan under the judge-made “time-price” doctrine. Cash loans were subject to state usury laws, but sales of goods on time were not. Over the course of the 20th century, however, the states adopted new rules to govern small-sum lending, through a pro- cess that was both national and, yet, highly localized. Nationally, lenders formed pro- fessional trade associations to lobby for their interests, and the largest companies operated branches across multiple states. Reformers likewise founded large national organizations, as well as nationwide fed- erations of local groups, to draft legisla- tion and lobby for change. These groups then attempted to guide the development Draft of the Uniform Small Loan Act, 1923. of lending regulations across the country, often through the creation of model state laws drafted by experts in the field. Legal localism persisted, however. Even after the New Deal’s reconfigura- tion of federal-state relations in the 1930s and the growth of the federal government in the decades that followed, the states retained primary authority over small loans. As a result, each state followed its own course, but often in imitation of a model law or another state’s strategy. Most began by limiting the reach of credi- tors seeking to collect unpaid debts before eventually enacting substantive rules restricting loan terms and then, finally, wrestling with the problem of how to ensure the law’s enforcement. The phases of small sum lending regulation also tracked shifting ideas about the proper role of the state in the marketplace, as well as changes in the relative strength of state and federal regulatory power. The Uniform Small Loan Law drafted in the 1910s, for example, reflected that era’s faith in the ability of expert reformers to curtail abusive business practices and the reformers’ trust in the power of better legal infrastructure to enable the flow of 26    FINANCIAL HISTORY  |  Summer 2018  | www.MoAF.org private capital into the market. The law also affirmed the traditional primacy of the states in regulating this form of commerce. Indeed, even after the federal government joined the fray in the 1960s and then reduced the states’ power over some forms of lending in the decades that followed, the states still retained significant authority over the governance of small loans. For most of the past century, campaigns for the adoption and enforcement of new lending rules played out in dozens of statehouses and in hundreds of state and local courthouses, rather than in a few centralized venues. In each state, local players and state-level political dynamics could shift the balance in deciding when and how to police small-sum loans, and so the tempo and rhythm of legal change varied considerably from place to place. To date, historians of law and Ameri- can capitalism have underemphasized the challenges of state-level economic gov- ernance in the modern era. The litera- ture on the legal history of 20th-century capitalism is large and growing, including studies on diverse topics such as taxation, the stock market, long-haul trucking and consumer credit. Yet, although there is a rich body of work on state and local governance of the marketplace during the 19th century, most historians of the 20th century have focused on national state-building and federal economic regulation, particularly when considering the 1930s and subse- quent decades. They have shown how national policy privileged particular groups and forms of economic growth, and shaped middle-class markets for housing, labor, education and consumer goods. But even as the federal government expanded over the course of the century, states and localities retained primary con- trol over many key aspects of commercial life, operating within the American system of divided regulatory authority known as “federalism.” Federalism is the first of three reasons why governing small-sum lending has proved to be especially tricky over the course of the past century. Cash lenders and their capital have been able to move easily across state boundaries, operating in one jurisdiction while lending to bor- rowers elsewhere by mail. Lenders’ mobil- ity, coupled with the limited authority