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The Shark and the Hound

America’s long history of predatory lending


In the Old Testament, the Lord promised death unto the loan shark. “Lends at interest, and takes profit,” he said, “shall he then live? He shall not live. He has done all these abominations; he shall surely die; his blood shall be upon himself.”

This idea—that usury is immoral—has lurched around the world for well more than two thousand years. Cato and Seneca likened charging interest to murder. In the Koran, God declares that those who collect interest on loans “will not stand on the Day of Resurrection except like the standing of a person beaten by Satan leading him to insanity.” Gautama Buddha put it eloquently when he defined “right livelihood” as abstention from “pursuing gain with gain.”

But in 2017, everything is permitted, and the pursuit of gain with gain is candid and gleeful. On the streets of Oakland and Philadelphia and Santa Fe, payday lenders promise fast, easy money in a pinch. These businesses extend short-term credit to nineteen million cash-strapped American households every year. The loans are expensive and the penalties stiff, but desperate people have little choice, so they take them anyway, just to make rent or buy groceries. The result is a straightforward transfer of wealth from low-income communities—about $774 million in extortionate and unnecessary costs per year—to corporate profiteers. One loan mogul, Scott Tucker, was convicted on fourteen counts, including racketeering, in October for deceiving 4.5 million borrowers with misleading terms. Tucker’s case was notable for the fact that he registered his payday loan businesses at American Indian reservations to avoid usury laws. The Lord of the Old Testament would have laid him low.

So how did we get from there to here—from Pope Sixtus V declaring the charging of interest “detestable to God and man” to Scott Tucker’s company charging as much as 700 percent interest on short-term loans? As Charles Geisst argues in his book Loan Sharks: The Birth of Predatory Lending, the fairly straightforward ethical calculus of antiquity was, somewhere in history, replaced by one that works in favor of lenders instead of borrowers. “The old moral arguments about excessive interest lost that battle,” he writes, “because the fairness part was defeated by the notions that lenders must be compensated for the risks they incur and the market should decide how much that compensation should be. Usually, the ‘market’ has been what lenders say it is and they have gone mostly unchallenged.”

In the Old Testament, the Lord promised death unto the loan shark.

In his telling of the ominous history of predatory lending in the United States after the Civil War, Geisst recounts how loan sharking’s long swim from sin to economically justified conduct reflects the emergence of American free-market ideology. Lending with interest was a common practice in societies that forbade it, common enough anyway to require constant denunciations from religious and philosophical leaders. But it was in twentieth-century America that usury became a legally tolerable practice—up to a point, that is, though the point has constantly changed to accommodate the appetites of capital.

Bloodhounds of Money

An auspicious beginning: the first thirteen American colonies all had maximum interest rate laws, which were written into their colonial charters from Britain and retained in their state constitutions after Independence. Over the following century, each new state added usury laws to the books except for one: California, the original shark tank. There the gold rush had created a borrowing frenzy—would-be entrepreneurs arrived en masse without land or equipment, and they were easily persuaded to take out loans with alarmingly high interest rates in order to try their luck in the gold fields. It was a population of gamblers and a breeding ground for loan sharks. While prospectors sifted silt and blasted earth in pursuit of gold, gangs of wealthy entrepreneurs devised new ways to “invest in intangibles” or to multiply their existing wealth. The trick was to treat money itself as a commodity and charge a fee for its use. As with any other commodity under capitalism, whatever people were willing to pay was fair game.

By the mid-nineteenth century, a regional pattern emerged: large banks were concentrated on the East Coast, their services often inaccessible to small-time homesteaders seeking to live the dream of self-sufficiency and modest commercial trade west of the Mississippi. Private lenders stepped in to fill the gap in financial services. The terms were steep; but then, farming was tough—not to mention cyclical, with regular downturns that required immediate cash remedies. “Because the loan shark was frequently the only available source of funds,” writes Geisst, “borrowers rarely complained; they could either accept the loan shark’s terms or forgo the loan.” Interest was frequently as high as 20 percent per month. Private lenders were largely unregulated, and “an unregulated lender could charge whatever the market would bear—that is, whatever his customers would agree to—and did not have to worry much about the consequences.” Where usury laws were violated, it made little difference: borrowers were often too poor to afford lawyers. And, anyway, when it came to cases like these, loan sharks smelled blood: borrowers aiming to sue would likely need to take out a loan to secure counsel.

But while individual borrowers were forced into submission, social and political activists began to fight back. As populism swept the South and Midwest in the 1880s, usury emerged as a bête noire for reformers determined to rescue the little guy. They railed against predatory lenders in fiery sermons laced with the moral fervor of holy decrees. “We will not pay our debts to the loan shark companies,” proclaimed Kansas populist Mary Elisabeth Lease in 1890. “The people are at bay; let the bloodhounds of money who dogged us beware.” And soon enough, these populists gained sympathizers in the press. When South Dakota farmers rose in protest against loan sharks, the New York Times remarked that “the money shark is doing more harm and causing more suffering than the drought of 1889.” In 1900, the Des Moines Daily News declared that “the loan shark who lives on blood money is the most nefarious of all humans.” The loan sharks were swimming vigorously, and in greater numbers, but the old doctrinal denunciations were still wielded like harpoons against them. Critics still spoke with the religious ardor of Protestant reformer Martin Luther, who called the usurer “a great huge monster, like a werewolf, who lays waste all . . . and yet decks himself out, and would be thought pious.” (“Behead all usurers!” Luther concluded.)

In an act of self-preservation, the loan sharks evolved. Instead of relying solely on high interest rates, which were bound to catch the eye of populist watchdogs, they demanded solid collateral up front. And if the borrower failed to make an interest payment, the lender would seize the collateral—and demand a fee in exchange for its return. Often this collateral amounted to furniture, household items, or personal effects—but sometimes it was land. The confiscation of the latter laid the groundwork for the American mortgage system.

Geisst recounts how loan sharking’s long swim from sin to economically justified conduct reflects the emergence of American free-market ideology.

Back East, the Wall Street banks were subject to usury laws, which often capped interest rates at 6 percent per year. They bent and circumvented them whenever possible, but they didn’t have the flexibility of the private lenders and fledgling loan agencies further West. The mortgages caught their eye, however, and an alliance was swiftly formed. Eastern insurance companies started buying up mortgages that Midwestern loan agents had packaged into trusts. The similarities of these practices to those that led to the housing crisis in 2008 are a matter of course; in fact, a distant prelude to our own Great Recession took place in Kansas during the late nineteenth century, when a mortgage boom led to a mortgage bust and “all alike, loaner and borrower, banker and farmer, were overwhelmed in a common ruin.”

The Market Made Me Do It

Payday lending, meanwhile, hell-spawned from a common and early loan shark practice called salary buying, was “a simple scheme in which a finance company paid a worker an advance on his weekly pay. When the worker was paid, the lender would deduct his fee, leaving [him] with less than the full value of his pay.” Simple indeed: this practice was and remains a transparently parasitic maneuver requiring zero labor on behalf of the lender, who simply makes money because he has it to begin with, while the borrower loses his earned income simply because he is poor.

As loan sharks continued to invent new ways to invest in intangibles, state and federal governments scrambled to keep up, with limited success. In the 1920s, state after state passed small-loan laws, capping rates and curbing exploitation, and reformers prematurely declared victory over the sharks. But the practice returned with a vengeance at the onset of the Great Depression.

By the 1930s, not only was the general population more destitute and vulnerable than ever before, but predatory techniques had evolved, and they were adopted by large corporations that operated in a legal gray zone by specifically seeking scenarios where no rule yet applied—what Geisst calls “sharks in sheep’s clothing.” It became clear that “unlicensed lenders were not the only loan sharks, only those charging the highest interest rates.” Usury had become embedded in many aboveboard financial practices, such as installment buying and other forms of consumer credit. Organized crime also thrived during the Depression, and legitimate and illegitimate usurers competed for prey, slowing the nation’s economic recovery and keeping millions in poverty.

For his part, Franklin D. Roosevelt blamed usurers, among other financial malefactors, for the crash and relentless depression; he quoted the Bible to condemn the high-interest practices that flourished in and out of sanctioned institutions throughout the nation. But a decidedly moral view of American finance, where it had existed before, was losing its influence among observers of the American economy. In a collective effort to dodge blame, various banks, lenders, and other moneyed interests began to identify the nebulous “market” as the source of the nation’s ongoing financial ills. This insistence on self-regulating markets was the culmination of a great transformation in economic mentalities that political economist Karl Polanyi called the emergence of a “market society,” where markets are imagined to possess their own intrinsic logics, mechanisms, and moods—to which humans must adjust, not the other way around. The term “market,” which before would have been a cursory reference to supply and demand, now became a self-evident defense against populist reason, one that demanded no interrogation. When asked in 1929 why he lent so much at such high rates, one executive answered simply, “I can tell you why we loaned so much money. Because there was a demand for it at excessively high rates, over and above what we could get from what we would normally invest in.” Translation: the market made me do it. Next question.

Roosevelt implemented stricter lending policies, including a federal usury ceiling, but despite his efforts, predatory lending was “becoming more and more institutionalized, so charging a lender with usury ceiling violations became a much more complicated matter.” Meanwhile, the seeds of market libertarianism were sprouting in universities and clubs in the United States and Europe, its acolytes decrying Roosevelt’s interventionist economic policies as a disastrous curtailment of the organic flows and currents of the market—which was imagined as scientific, objective, self-correcting, and neutral, like the planet-sized organism in Stanislaw Lem’s Solaris.

In this schema, the pursuit of money was regarded as healthy and competition the cornerstone of freedom. Most government economic interventions led down what Friedrich von Hayek called “the road to serfdom” in his eponymous book, which laid the groundwork for postwar neoliberalism. There was little room in this budding worldview for the ethical censure of those who would charge excessive interest. Indeed, borrowers’ agreement to the terms was evidence of an intrinsic permissibility. And now that the flower of neoliberalism has fully bloomed: the purchase always justifies the sale, and all’s fair that the market can bear.

The Dispossessed

Geisst is a former investment banker, which is useful, in a way; he understands the intricacies of lending rates and usury laws, and his history is suitably detailed. But we’re hard pressed to find a former investment banker willing to turn his back on the premise of the industry, not just its worst habits, and Geisst here falls in line. In the end, he urges a compromise between lenders and borrowers, a sort of financial truce that compensates the former for the risks they take without permitting abuse of the latter by design.

But capitalism is abuse by design, and there can be no lasting truce between lenders and borrowers until the lenders are no longer motivated by profit. This is because capitalism doesn’t just permit exploitation of the working class by the owning class; it requires it. Abuse will manifest itself in every sphere dominated by capital, whether in compliance with or in violation of the law. Loan Sharks may not affirm this conclusion, but it demonstrates the principle.

The only way to fully take the predation out of lending practices is to remove the profit motive from financial services altogether.

The financial industry—its every hedge fund, every savings and loan association, every brokerage firm, and every mortgage company—is dedicated to one thing only: capital accumulation. Capital accumulation is the process by which capitalists turn large sums of money into even larger sums money. And where does that money come from to begin with? To take a cue from Marx, all value under capitalism is determined by labor, and all profit is generated by the exploitation of that labor. To compete in the market, businesses must pay obeisance to the profit motive—and since suppressing wages is the surest way to gain an advantage and outperform competitors, this inevitably results in a race to the bottom. Working people’s bodies and time are exhausted, and the fruits of their labor are extracted by their employers, who set about multiplying all of this through investment. All capital in the accumulation phase bears the mark of abuse.

Yet the cycle of abuse doesn’t stop with material production. Where there is capital accumulation there is always what Marxist geographer David Harvey calls “accumulation by dispossession,” the process of separating people from the basic resources they need to get by, like houses to live in, transportation to work, and even money itself—and then duplicitously offering to grant access to those resources . . . for a fee. Predatory lending is a prime example of accumulation by dispossession, designed to target and extract wealth from the bottom and siphon it to the top. It makes the rich richer and keeps the poor under their heel—which makes them more acquiescent workers and more desperate, reckless borrowers.

Marx imagined capitalism as a new relationship between money and commodities. The capitalist isn’t just a buyer or settler; the capitalist is someone who takes money and turns it into more money by manufacturing a commodity, or buying it with the intention “to sell more dearly.” What usury does is leapfrog this middle step by turning money itself into a commodity. Usury, then, is raw, streamlined uber-capitalism; according to Marx, it is capitalism “in abridged form, in its final result and without any intermediate stage, in a concise style, so to speak.” Wherever there is capitalism, it stands to reason that there will always be usurers, ruthlessly hoarding “money which is worth more money, value which is greater than itself,” while the masses toil.

Infested Waters

No banking policy could properly address the drive that motivates predatory lending: that those with capital seek to multiply it without laboring themselves. Aggressively capping interest rates doesn’t stop—to return to the words of Gautama Buddha—the “pursuit of gain with gain.” The only way to fully take the predation out of lending practices is to remove the profit motive from financial services altogether.

Unsurprisingly, one experiment to this effect is covered in Loan Sharks and then unceremoniously discarded. In the 1880s, around the time that Mary Lease warned of the eternal bloodhounds of money, activists banded together to stanch the hemorrhaging of hard-earned money from their communities. If the loan sharks relied on being the only game in town, the working class’s best strategy was to throw its own hat into the ring. Thus emerged what became known as “remedial lending societies,” including mutual savings banks, church loan bureaus, and credit unions. One church in New York City, St. Bartholomew’s, provided loans at rates that were below the legal maximum, and well below the worst loan sharks, to its parishioners for decades—ceasing only during that brief window in the 1920s when reformers mistakenly believed the loan shark was vanquished.

Still, remedial lending societies were private entities and borderline commercial enterprises and some, including churches and credit unions, behaved like it, protecting their bottom line over their clients’ financial health when the ultimatum presented itself. Yet another populist solution holds still more potential to advise us today, since it directly intervenes in the cycle of exploitation that bolsters private enterprise and capital accumulation. That solution is public banking.

Mary Lease demanded public banking as early as 1890. In the same pissed-off speech where she railed against the “bloodhounds of money,” she announced, “We want the abolition of the National Banks [meaning large private banks that operated across state lines], and we want the power to make loans direct from the government.” Of course, federal public banking is an idea that has yet to come to fruition, but one state did establish a public bank in 1919: North Dakota.

To be specific, “The Bank of North Dakota” is the designation given to the State of North Dakota when it does banking. They are, technically speaking, one and the same. The populist Non-Partisan League invented the idea specifically to protect the state’s farmers from predatory lenders, who dogged the region in the early twentieth century. The Bank of North Dakota has been fully operational for ninety-eight years, and it is beloved by state residents across the political spectrum, who credit it for helping the state weather the Great Recession. It grants student loans, farm loans, and housing loans—and since its overall economy relies on strong graduates, farmers, and homeowners, it lacks an incentive to exacerbate the financial distress of its own clients, purely from a budgetary perspective.

In 2017, Oakland, Philadelphia, and Santa Fe all have city proposals to establish public municipal banks. In public banking, as in health care, the state is guided by more than the profit motive—namely, it risks self-damage if it forces borrowers into debt, for those suffering people will either become more eligible for public-funded programs or will otherwise drain the resources of the state. Right now, there is a contradiction in banking—it’s a hugely consequential feature of public life, and yet it rests in private hands and is thoroughly oriented to maximize private gain. Because the state is at least partially incentivized by the prospect of improving the financial health of its citizenry, and thus its overall economy, a public bank can help resolve that tension—especially if paired with an array of other universal social programs which can supplement the financial services offered through the state.

But the logic of risks and incentives isn’t the only reason to give public banking a shot. As a society, we could benefit from a return to moral thinking around economic questions. After decades of evangelical neoliberalism, with its numbing platitudes about market freedom, a little old-fashioned fire and brimstone populism couldn’t hurt. After all, it is still the case that, as Mary Lease observed, “Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street.”

Which is to say that the Scott Tuckers of the world accumulate their wealth by dispossession. The payday and subprime and predatory lenders grow fabulously wealthy, daily pursuing gain with gain, while ordinary people are greeted with loss upon unfathomable loss. To end predatory lending means to reject this cycle, to insist on the fundamental unfairness of a system that relies on legally sanctioned economic abuse and invents only new methods of exploitation. And it means retaking the means of our own subsistence, the fruits of our labor, and the peace of mind that comes with knowing we’ll each make it to the first of the month without capsizing into infested waters. It means a world without sharks.