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Lending in the Shadow of the Law

When asked why he did not read over the loan documents before signing them, John Doherty explained: “I was anxious to get the money, I didn’t bother about it.” In February 1910, the twenty-three-year-old railroad clerk walked into the offices of the Chesterkirk Company, a moneylender with offices in lower Manhattan. He was looking to borrow some money. Repayment was guaranteed by the only security Doherty had to offer: his prospective wages and, in his words, his “reputation.” After a brief investigation of Doherty’s creditworthiness, the loan was approved. The office manager placed a cross in lead pencil at the bottom of a lengthy form and Doherty signed where indicated. He received $34.85 in exchange for his promise to repay the loan principal plus $10.15 in combined fees and interest in three months. The interest charged was significantly greater than the 6 percent per year allowed in New York State.1
By the early twentieth century, small loans secured by a lien on the borrower’s future wages, or “salary loans,” had become a common source of credit for urban working-class laborers like John Doherty. One 1908 study concluded that there were at least thirty known salary lenders operating in New York City and likely many others whose presence could not be ascertained because they did not advertise publicly. Anecdotal evidence confirms that the number of workers who patronized salary lenders was quite high, at least in certain trades. One transportation company employee in New York City estimated that at least 90 percent of his coworkers had taken out salary loans. Of course, salary lenders were by no means the only game in town. Chattel lenders, who made loans secured by a lien on the borrower’s household goods, as well as pawnbrokers, who had been providing credit to poor borrowers for centuries, also operated in New York City.2
State usury laws, dating back to the nineteenth century, failed to halt the spread of high-cost, small-sum lending. By the time Doherty sought out a loan, New York State strongly discouraged high-cost lending by capping the interest rate on salary loans at 6 percent and imposing additional procedural requirements on lenders. Other states did the same. These regulations made it nearly impossible for lenders of small sums to turn a profit if they charged the legally allowed rate. A 6 percent charge on a large loan of $3,500 would allow the lender to recover a $210 fee, which was sufficient to cover its administrative costs and interest. But the same percentage charge on a $35 loan yielded a fee of barely more than $2, which was insufficient to cover the lender’s fixed costs of making the small loan, plus interest and a small profit. Strict usury laws did not eliminate the small-sum lending business in New York, however. Demand for such loans was high and, if the usury laws could be evaded, the business was profitable. The small loan business therefore operated in a shadow zone, outside the bounds of state and local law.3
Yet “loan sharks,” as chattel and salary lenders were often called, could not escape the watchful eyes of progressive reformers. Unlike their fellow progressives who battled the employers of child labor and producers of impure food and drugs, lending reformers were initially wary of heightened governmental interference in the marketplace. Rather than attempting to regulate lending out of existence, reformers first took a different approach: they mobilized employers, landlords, and newspapers against the “sharks.” Reformers called upon private corporate employers to police the lending industry by refusing requests from loan sharks to seize their employees’ wages. They also urged employers to form their own lending operations, to keep workers from resorting to the sharks.4 At the same time, reformers lobbied commercial landlords to oust illegal lenders renting space in their properties and pressured city newspapers to reject advertisements from loan sharks. Perhaps sensing a story, some papers signed on to the campaign and regularly carried news of the “war” on the sharks, sometimes bringing unwanted publicity to lenders or their lawyers. Through these channels, reformers tried to harness the power of private industry to cut off lenders’ routes of access to working-class borrowers and their wages.5
John Doherty eventually found himself at the center of a courtroom showdown between the reformers and their adversaries to define the proper boundaries of state intervention in the small-sum lending market. This fight was a long time in the making and deeply rooted in the changing economy of New York and the nation. Before his loan became the subject of litigation, Doherty was no different from the many thousands of working-class men and women who had reason to borrow small sums. The financial exigencies of working-class households like Doherty’s propelled the explosion of loan-sharking in early twentieth-century American cities.6

Modernity and the Need to Borrow

By the beginning of the twentieth century, major shifts in the American economy had rendered more households dependent on wage labor, and subject to the boom and bust cycle of industrial employment, than ever before. Fewer workers labored on farms, and more in factories, compared to prior generations of Americans. The portion of the population living in cities was also rising. Although small firms persisted in some sectors, there was significant business consolidation in industries like chemical production and lighting manufacturing, as companies such as General Electric and DuPont Chemical bought up their competitors. For unskilled workers, especially, employment was often uncertain and cyclical. Periodic economic downturns, such as the panics of 1893 and 1907, exacerbated these trends.7
The population was also growing, thanks in part to waves of immigration from southern and eastern Europe at the turn of the century. John Doherty’s family was among those who immigrated to the United States in the late nineteenth century. Although Doherty was born in New York, his father and grandparents emigrated from Ireland, as did many of his neighbors. Doherty’s father, a retired druggist, had emigrated in the 1850s, while his mother, the child of two Irish immigrants, was born in New York. In Doherty’s East Side neighborhood over 90 percent of the population was born outside the United States or had one or more parents born outside the United States. The neighborhood was overwhelmingly of white, European descent. Austrians and Irish dominated. Doherty’s neighbors in his building on East 58th Street reflected the immigrant and working-class character of the neighborhood. Three out of the four male household heads were foreign-born, naturalized citizens; the lone first-generation American was the son of two German immigrants. Only one of the nineteen building occupants was the child of two native-born parents. In New York City overall, over 40 percent of the population in 1910 was foreign-born and white. The city itself was overwhelmingly white; black New Yorkers made up less than 2 percent of the total population.8
Borrowing and lending played a vital role in the everyday lives of urban workers such as John Doherty. Families and individuals were enmeshed in a web of formal and informal credit relationships with relatives, local merchants, landlords, moneylenders, and charitable organizations. Within the span of a year, a single family might borrow from an array of sources, including family members, charitable organizations, their landlord, or a pawnbroker. Like working, saving, or buying insurance, borrowing was just one of many survival strategies.9
We do not know why John Doherty was in need of a loan in February 1910. Doherty earned a decent wage of $70 per month as a clerk for the Erie Railroad, where his older brother, James, also worked. He had no known involvement with public or private charity. He lived with his parents and younger brother, whom he and his brother James supported with their earnings. Assuming John and James Doherty earned roughly equivalent salaries, the income for Doherty’s family of five would have been about $1,680 per year, a sum higher than most estimates of the cost of living for a family of five in New York City at this time. The family’s finances were sufficiently stable that Doherty’s youngest brother, George, sixteen, could go to school full time. Unexpected expenses, however, frequently gave cause for borrowing among workingmen’s families. Sickness or death in the family ranked among the most common reasons for taking out a loan. Nobody in the Doherty household died around this time, but a more distant family member may have died or someone may have fallen ill.10
Doherty’s family was fortunate to have two wage earners. Few working-class households could get by on a single source of income. Most studies estimated that a family of five, like Doherty’s, would require at least $1,000 per year to support itself without the aid of charity. Households cobbled together enough to survive each week from a range of sources, which often varied from week to week. Wages were an important part of this equation. To avoid dependence on outside support, such as charity, friends, family members, or borrowing, families generally required at least one wage earner with steady employment. At the same time, reliance on a single wage earner was risky, given the low wages of many working-class jobs and the frequency of job loss because of poor performance, injury, or lack of work. A worker might also be put out of work because of a union strike. The most stable households, like Doherty’s, had two steady wage earners who both worked in relatively high-paying jobs.11
In contrast, households without the steady income of a single breadwinner needed the income of more family members to be self-supporting. For example, Elizabeth York, a thirty-nine-year-old native-born New Yorker and mother of four, relied on her daughters’ wages, supplemented by unpredictable contributions from her husband, a carpenter, and her own earnings from occasional laundering, cleaning, and other domestic work. Working male household members usually earned more than their female counterparts, who often did poorly paid, unsteady domestic work. Janitress positions, like the one eventually secured by Elizabeth York, sometimes provided only enough to reduce or cover the monthly rent. Food, clothing, and other necessities could not be purchased without additional income.12
Mutual aid societies, including fraternal organizations, provided an additional source of financial assistance to their members in times of need. Neither charities nor commercial enterprises, these voluntary associations were organized to insure members against the hazards of modern life and guard them against sliding into poverty. Dues-paying members were entitled to receive a specified monetary benefit in the event that they suffered some unexpected financial hardship, such as sickness, disability, or death. Moreover, unlike charitable or state-funded assistance, a household’s receipt of benefits from a mutual aid society did not carry the stigma of “dependence.” In the early twentieth century, New York City was home to over two thousand landsmanshaftn, a particular form of mutual aid society formed by Jewish immigrants that came from the same region or town in Central and Eastern Europe. Other immigrant groups formed their own societies, as did African-American migrants to New York, who joined fraternal lodges in large numbers. General studies of mutual aid in New York City found membership in such societies to be widespread, even among the lowest income households. According to one estimate, by 1910 approximately one-third of all adult men belonged to some form of fraternal organization.13
Monetary assistance from state or municipal sources is notably absent from most household budgets in this period. By 1900, New York City had done away with “outdoor” poor relief, public funds disbursed directly by the government to the poor living outside institutional settings. New Deal–era social welfare programs did not yet exist and mothers’ pensions would not be instituted in New York State until 1915, over the vigorous objections of some private charitable organizations. State assistance was provided through institutions like municipal clinics, almshouses, and hospitals; public funds were also provided to some privately run institutions for the care of delinquent children. Families seeking public assistance had a difficult choice: keep the family together and potentially forgo help or allow the household to be broken up by the institutionalization of its members. Mary Lafferty, a mother of two, struggled with this choice a number of times between 1903 and 1914. For the most part, she found ways to avoid commitment of her children to public facilities.14
Children were alternately the cause and the cure for financial hardship. Many parents, such as Russian immigrant Anna Gruzinsky, lost children in their infancy. In this period, roughly one to two infants out of every ten born in New York City died before reaching the age of one. Children who survived required food, medical care, and often, if both parents worked outside the home, childcare. Working mothers, such as Mary Lafferty and Anna Gruzinsky, relied upon family members or charitable organizations to watch their children. A sick child could mean more medical expenses and job loss if time away from work was required to obtain medical care. Once children reached adolescence, however, they could add their wages to the household’s income. In most working-class households, unmarried working daughters, like their fathers, were expected to turn over their pay envelopes to their mothers on payday.15
For women with children, desertion was also a concern. Male household heads, however, did not always leave for good. Husbands often returned home after weeks or months of separation. Meanwhile, deserted wives struggled with whether they should pursue their husbands’ return and monetary support through legal action. Mary Lafferty’s husband deserted his family multiple times, beginning in 1903. After the second desertion, Lafferty and her children were forced to move back in with her mother. Mary Lafferty eventually tracked her husband down in Baltimore, where he “begged her to return to him.” Mary Lafferty was conflicted. As she explained, she did “not know whether she ought to return to him or not, as she feels she cannot trust him, but she is very much discouraged trying to support herself and the three children; she is still working at Macy’s earning $7. a week.” The Laffertys eventually reunited but, four years later, Mary Lafferty again suspected that her husband was lying to her about his earnings and was putting money aside so that he could “run away again.” Mr. Lafferty deserted the family again in January of 1914.16
Much like some husbands, household expenses were unpredictable and might vary from week to week. Housing, medical expenses, and burial costs were the most common expenses that families had to manage on short notice. An eviction notice from the landlord often caused a struggling family to seek outside assistance, through charity or a loan, to pay overdue rent or relocate. Many poor families moved frequently, although often within the same neighborhood. The Lafferty family, for instance, had at least fifteen different addresses between 1903 and 1918, almost all in the Bronx. Medicine and doctors...