From “Loan Sharks” to Commercial Banks, Redefining the Legitimacy of Unsecured Lending in the United States,1900-1945.
Interestingly, this divide has been put on the forefront of the current political agenda, as both Bernie Sanders and Hilary Clinton have included the desire to uphold a “community” oriented vision of banking in their platform. While it is interesting to notice that access to credit has been identified as an aspect of US inequalities, this agenda usually dates the segmentation from the 1970s and the neo?liberal (attention au sens US de liberal) reforms of the banking industry. However, my research shows that it dates from an period, and was actually a result of the banks' early business practices towards individual consumers.
Banks started providing “unaffected” loans of money -loans not tied to the purchase of good or assets- only in the mid 1930s, for many political and economic reasons (Hyman 2008, Trumbull 2014). The Personal Loan Departments of banks, which appeared the in 1930s generally adopted a model of consumer credit targeting wage earners and relying on the worker's future income as a way to pay back loans, on instalment. This contrasted very much with the way business ethics institutions (Chambers of Commerce, Legal Aid Societies and philanthropic institutions) had tried to regulate the personal loan business since the early 20th century: they were directly fighting “salary loans”, as an illegitimate form of credit. Monthly or weekly advances of small sums, collected by means of wage-assignment procedures were associated with very immoral practices, a business only carried by usurious loan “sharks”. Borrowing on one's wages was a highly taboo practice, associated with new forms of “slavery”. In contrast, regulated small loan lenders, operating under the Uniform Small Loan Laws, mostly offered loans on chattel mortgages, loans made out on tangible, real property and not the future earning capacity of the borrower. The numerous crusades carried country-wide against “loan sharks”, were precisely aiming at getting rid of any form of unsecured lending and pushed for a model of secured personal loans legitimized by the physical collateral. This was seen both as less risky for creditors, and less dangerous for borrowers, who did not have to assign their wages, and hence their workforce. The illegitimacy (and confused legal status) of “salary loans” was a definingwere trait of the consumer credit business, up until banks took over this business in the 1940s. Only then did unsecured loans to individual consumers deemed legitimate.
However, as US banks succeeded in building a morally acceptable form of personal lending, they simultaneously restricted the range of borrowers for whom these services were available. Bankers explicitely focused on the “higher class of borrowers”, “the cream of the community”, as one banker would put it. Moralizing the market implied a strong differentiation among practices and clients : “salary loans” were acceptable transactions to the extent that they were mostly made to respectable clients. My research shows that the regulation process, far from being a linear one (from inacceptable to acceptable, from illegitimate to legitimate), redefined the market categories and practices, and particularly through the shaping of a legitimate offer of credit. Market legitimacy was achieved only through this strong status differentiation processes, and in turn these processes created the hierarchies which are still visible today. Banks, or credit card companies are legitimate small loan suppliers, payday lenders are not ; unsecured personal loans paid on instalment, or credit card revolving credit are legitimate, pay day lenders are not. This, in turn, created internal hierarchies among clients. Those were symbolic hierarchies, established through the type of loans made and the public discourse which surrounds them: credit to the poor was framed as highly illegitimate. The hierarchies were also economic, as banks eventually lent mostly to middle class customers. This also created strong geographical disparities, as commercial banks providing personal loans mostly settled in the Midwest and the North East, while “fringe” banking institutions were mostly established in Southern states, and in poor inner city neighborhoods. Finally, this research necessarily deals with the racial structure of the credit industry. This general social segmentation is therefore strongly linked to a moral division, the origin of which is, at least partly, endogenous to the regulation process. This follows the line of research led by Fourcade and Healy (2013), which tries to link the studies of moralities in markets and the production of social structure through market devices, or, in our case, market regulation.
Interestingly, this separation has been put on the forefront of the political agenda, as both Bernie Sanders and Hilary Clinton have included in their platform the desire to uphold a “community” oriented vision of banking. While it is interesting to notice that access to credit has been included as an identifiable aspect of US inequalities, this agenda usually dates the roots of this segmentation back to the 1970s and the liberal reforms of the banking industry. However, our research shows that this separation dates from an earlier point in time, and was actually a result of banks' early business practices towards individual consumers.
Fourcade, M. and Healy, K., “Classification situations: Life-chances in the neoliberal era”, Accounting, Organizations and Society Volume 38, Issue 8, November 2013, Pages 559–572
Hyman, L. Debtor Nation. A history of America in red ink, 2008
Trumbull, G., Consumer lending in France and America : Credit and Welfare. 2014