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CHAPTER XXVIII

CONSUMPTIVE CREDIT INSTITUTIONS

From the point of view of the uses to which borrowed funds are devoted, credit was classified in chapter vii under the headings, investment, commercial, and consumptive credit. In the preceding chapters, the financial structure that has been developed under the modern capitalistic system in connection with investment and commercial credit operations, has been discussed; there remain to be considered only the financial agencies and institutions associated with the making of loans for non-productive purposes. Such loans, it may be recalled, are to be distinguished from investment and commercial loans in that the use to which the borrowed funds are devoted does not provide the means for paying the loan either within a short or a long period of time; they are not self-liquidating, but must be paid out of other resources. With the exception of the loans contracted through the building and loan associations, consumptive loans are, as we shall see, usually of very small size; and they are contracted by persons whose credit standing is commonly such that it would be impossible for them to secure funds from the financial institutions which we have been considering in preceding chapters.

Consumptive finance has been relatively neglected. A striking feature of the modern financial system has been the almost complete absence until very recent times of "legitimate" financial agencies organized for the purpose of extending credit for consumptive purposes. We found in chapter xix that commercial banks sometimes make consumptive loans secured by stocks and bonds and other collateral; and we have elsewhere seen that a vast amount of trade credit is extended by retail merchants and dealers for consumptive requirements. But the lending of money in small sums for consumptive

purposes has in the main been left to private interests which, acting without public grant of power, and indeed usually outside the pale of the law, have ruthlessly exploited precisely those classes of society which can least afford to be exploited. The explanation of the lack of legitimate financial institutions in the field of consumptive credit is apparently the ageold prejudice against the charging of high interest rates to persons in distressed circumstances. Since consumptive loans are not devoted to uses which will directly provide the means of repaying the loan, and since the borrower for consumptive purposes is commonly in reduced circumstances, such loans necessarily bear a much higher rate of interest than those made for industrial, commercial, or agricultural purposes. Hence lending for consumptive purposes is foredoomed to unpopularity. It will be recalled, moreover, that the Bible condemns all interest as being usury, and therefore unjust. The biblical law came in time to be incorporated into the civil codes of western European nations and it was not until the beginning of the modern era that any interest charge was legal. The philosophy underlying this prohibition of all interest is ascribable either to a sympathetic regard for the poor or to a recognition of the economic impossibility of their paying interest. In ancient times funds were borrowed almost exclusively for consumptive purposes-virtually to prevent starvation-and such loans were in consequence regarded as in the nature of almsgiving. To exact interest from a povertystricken class seemed to violate every principle of common humanity.

But with the development of capitalistic industry and the attendant borrowing of funds for productive purposes, the charging of interest appeared in a very different light. When a borrower devoted the funds procured to productive enterprise, it was readily seen that he was making a gainful use of the loan and was therefore able to pay back the principal with a bonus, and also that the lender was foregoing a like profitable employment of the capital, and was therefore entitled to a recompense. Gradually the charging of interest on such loans

was universally legalized; but even to the present day we find survivals of the old prejudice in the usury laws of the various states, which prohibit exorbitant interest rates, that is, rates above a certain prescribed maximum-slightly above the normal going rates.

The existence of usury laws has made it necessary for any financial agency which desired to make loans for consumptive purposes to charge unlawful rates of interest, with the result that the risks of fine and imprisonment involved contributed to still higher charges than would otherwise have prevailed. Various types of financial institutions have been developed through private initiative for the extension of consumptive credit to individuals in need of financial assistance. Some of them are of long standing, among the earliest forms of financial institutions, indeed; while others are of quite recent development. The passage of remedial loan legislation by a number of American states during recent years has, moreover, done much to place the business of consumptive lending on both a legitimate and a substantial basis.'

I. THE BUSINESS OF PAWNBROKING

One of the chief recourses of individuals in need of funds has always been the pawnbroker. Indeed, pawnbroking appears to be the oldest form of banking operation, if such it may be called; for from earliest times and with all peoples the pledging of personal effects as security for advances of money has existed in one form or another. At the present time pawnbroking plays an important rôle in furnishing consumptive credit in most if not in all of the leading cities of the world. Since the business of pawnbroking requires a dense urban population, it has had its greatest development in the United States during the last fifty years.

A pawnbroker is defined by the laws of the District of Columbia as "any person, corporation, member or members of a corporation or firm who loan money on deposits or pledge of personal property or other valuable things other than I See p. 706.

securities or printed evidence of indebtedness or who deals in the purchasing of personal property or other valuable things on condition of selling the same back again at a stipulated price.” The second part of this definition, relating to the purchase of property to be resold at a stipulated price, is especially important because it renders it impossible for individuals to resort to this means of avoiding laws which are directed only at the loaning of funds.

The pawnshop makes its profits by loaning its own capital. It does not as a rule borrow from banks. The earnings are derived either from an interest charge on the money loaned, or from a special charge of so many per cent a month, or from a combination of the two methods. In the absence of restrictive legislation, added profits are also often derived from the sale of unredeemed property that has been pledged.

Practically all of the states in the Union have passed legislation of one sort or another designed to control the pawnbroking business; and the municipalities in which pawnbroking establishments are located usually have ordinances which supplement the state legislation. The laws of the different states vary so widely that it is impossible to present a succinct summary of pawnbroking legislation. A few general statements will, however, suffice to indicate the nature of the regulation to which the business is subjected.

It is a common practice for either the state or municipal laws to require the taking out of a license; and in a few states the pawnbroker is required to give a bond at the time he obtains his license. A number of states fix the interest rates and charges which may be levied; and many state laws or city ordinances contain provisions governing the sale of unredeemed property. The better laws provide that a certain period of time usually from two to six months-must elapse after the period fixed for the redemption of the pledge before the effects can be sold. Advertisement of the sale is also commonly required. It is also the usual practice to require the pawnbroker to keep a register giving the name of the pawner, the description of the goods pledged, and the amount of money

loaned; while a number of states require, in addition, the residence of the pawner and the rate of interest charged. A great many laws do not make any provision for the disposition of a surplus above the amount of the loan, which is often received from the sale of pledged property. Those that do make provision require the surplus to be returned to the owner of the goods.

The interest rates and special charges vary widely in different states and cities. In Baltimore, for example, the interest rate is 6 per cent per annum, with the charges 2 per cent per month; in Chicago the interest rate is 3 per cent per month with charges forbidden; and in Philadelphia the interest is 6 per cent per annum, with charges 5 per cent per month.

Where city ordinances or state laws do not fix the duration of the loans, the general rule is to limit it for thirty days, though renewals, so long as the accrued interest is paid, are usually granted an indefinite number of times.

The following table shows the volume and the nature of the business of the pawnbroking concerns of Chicago for one month during the year 1898.1

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Since much of the property pledged with pawnbrokers consists of lost or stolen goods, the regulation of the pawnshops is usually vested in the municipal police. The most common

W. R. Patterson, "Pawnbroking in Europe and the United States," Bulletin of the Department of Labor, March, 1899, p. 274.

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