The specter of the loan shark is often conjured by advocates of price deregulation in the market for payday loans. If binding price caps are imposed, the argument goes, loan sharks will be spawned. This is the loan-shark thesis. This Article tests that thesis against the historical record of payday lending in the United States since the origins of the quick-cash business around the Civil War. Two different types of creditors have been derided as “loan sharks” since the epithet was first coined. One used threats of violence to collect its debts but the other did not. The former has been less common than the latter. In the United States, the violent loan sharks proliferated in the small-loan market after state usury caps were raised considerably and these loan sharks dwindled away as a source of credit for working people before interest-rate deregulation began to be adopted at the end of the 1970s. The other type of loan shark thrived both when usury ceilings were very low and when they were very high or even removed. Deregulation does not starve the nonviolent species of loan shark into extinction but instead feeds it. Hence the loan-shark thesis is seriously flawed. It does not accord well with the historical record of the market for payday loans.
Defenders of expensive, subprime credit products like payday loans often claim that imposing interest-rate caps on consumer credit will bring back the loan sharks that were said to have been starved into extinction by the policy of financial deregulation. This is the loan-shark thesis. The thesis is often asserted in passing by advocates of interest-rate deregulation,1 but it has recently been defended in detail in an article published in Banking Law Journal entitled “History Repeats Itself: Why Interest Rate Caps Pave the Way for the Return of the Loan *809 Sharks.”2 According to its authors, Justice David Baker and MacKenzie Breitenstein, “it is possible if interest-rate caps are again used as a primary means of regulating consumer credit that the loan-shark industry will return to prominence as regulated lenders will quit lending to high risk borrowers.”3 This is said to be the perverse consequence of trying to regulate the price of consumer credit. Outlawing high prices spawns loan sharks, who are the worst sort of creditors. They beat or kill debtors who are late with their payments. Rate caps, we are told, unintentionally drive credit-constrained consumers into their clutches because price ceilings ration legal credit away from the least-advantaged and riskiest applicants. According to Baker and Breitenstein, the history of credit regulation in the United States teaches us this lesson.4
But in this Article I will show that, depending on how we define “loan shark,” this intuitively plausible thesis is either false and indeed exactly wrong, or too simple and thus misleading. Historically, there have been two distinct types of creditors that were derided as loan sharks, one using threats of violence to collect its debts but the other not. The former has been less common than the latter. In the United States, the violent loan sharks proliferated in the small-loan market after state usury caps were raised considerably and these loan sharks dwindled away as a source of credit for working people before interest-rate deregulation began to be adopted at the end of the 1970s. The other type of loan shark thrived both when usury ceilings were very low and when they were very high or even removed. Deregulation, we must realize, does not starve the nonviolent species of loan shark into extinction but instead feeds it. That is the perverse consequence of removing the cap on interest rates in the market for small loans.
Once we adopt a more nuanced view of what a loan shark is, it becomes clear that no policy can eliminate this type of creditor once and for all. There will always be loan sharks of one sort or *810 another. The aim of public policy ought to be to minimize both varieties and not just the violent species. The regulatory strategy that best achieves this goal is the moderate price cap, neither too low nor too high (let alone rescinded). What history teaches us is that an interest rate capped between the extremes in the small-loan market has reduced the total loan-shark population more effectively than the policy of interest-rate deregulation favored by those who subscribe to the loan-shark thesis. While it is true that excessively low interest-rate caps do have perverse consequences for the population this policy is meant to protect, we have to recognize that interest-rate deregulation also has perverse consequences because it spawns at least as many loan sharks as financial repression. The history of payday lending since its origins at the end of the nineteenth century illustrates this double-sided perversity of interest-rate regulation.5
II. What Is a Loan Shark?
As Ronald Goldstock and Dan Coenen observe, “The term ‘loanshark’ lacks a precise definition; neither linguists nor lawyers have concentrated on the term.”6 They also correctly note that “differing generations have assigned the term differing connotations.”7
The epithet loan shark is an Americanism and emerged in popular discourse late in the nineteenth century.8 It is one of a family of slang metaphors that likens some object of opprobrium to the predatory behavior of the shark (“card shark,” “land shark,” “money shark,” “legal shark”). Though any sharp lender may be described disparagingly as a loan shark, from the beginning this particular phrase was associated with a set of expensive small-loan products that had come into existence around the Civil War, in particular the chattel mortgage and the salary loan. The chattel-mortgage lender advanced cash on the *811 security of a debtor’s furniture or household possessions, while the salary lender or salary broker took a wage assignment to ensure repayment.9 The latter product was the original payday loan, tied as it was to the debtor’s payment cycle, but in the popular press of the day these vendors of what was typically an unamortized cash advance were regularly labeled as loan sharks. The anathema was applied not narrowly, to the exceptionally unscrupulous lender, but broadly, to the industry as a whole. Lending in this fashion, at high rates and on the security of a wage assignment, was widely viewed as predatory behavior.
A. Original Intent
What was thought to be predatory or shark-like about the salary loan, however, was not the use or threat of violence to collect the debt. Salary lenders did not beat or kill borrowers who defaulted on their loans.10 These creditors also did not have ties to organized crime families, which scarcely existed at this time.11 The collection methods of the first loan sharks were certainly aggressive, but in contemporary accounts one almost never reads about acts of brute force. To compel repayment, salary lenders pestered debtors incessantly at home, or sent “bawlers-out” to make a scene at work, or processed wage assignments, or used the powers of attorney they had taken to confess judgment before justices of the peace.12 They did not have to lay a hand on customers in arrears to do a profitable business. Indeed, many firms had a preference for hiring women as loan agents because, as one news story explained, “they give an appearance of harmlessness to the lending establishment, and an outraged borrower is not so anxious to kick the manager out of a window if *812 she is a woman.”13 The salary-lending businesses were not thuggish, even though the vast majority operated in defiance of the applicable usury statute.
The “bite” in the salary-loan transaction that provoked the loan shark epithet came not at the end, when the debt was collected, but at the beginning and referred to the peculiar structure of this credit product, which took the form of a trap. According to Neifeld’s Manual on Consumer Credit, published in 1961, “[t]he essence of loan shark deals is small amounts for short terms, with an effort to keep the principal out all the time to secure repeated renewals of the interest charge.”14 It was lending in this fashion, to prolong the interest payments and to ensnare borrowers in debt, that qualified a creditor as a loan shark in the original sense of the phrase: “Loan shark evils appear where the method of lending requires the entire indebtedness of the wage earner to mature at one time. Inability to pay anything but the interest on the loan almost inevitably results from this method of lending money.”15
Neifeld’s Manual on Consumer Credit appeared at the beginning of a decade in which the idea of what a loan shark is was about to change and acquire its more modern connotation, but the manual merely summed up the widely held view that had crystallized over the previous half-century. “The real aim of loan sharks,” explained Avon Books’ How and Where to Borrow Money, “is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity.”16A scholarly study on The Small-Loan Industry in Texas, published in 1960, noted that, while the loan shark always charges a high rate of interest, “he does more than this. He loans for ... too short a period of time ... making the payments too high, and ... encouraging renewals or refinancing.”17 “This insistence upon planned, orderly liquidation of the loan is one of the hallmarks of the honest lender,” reported an earlier scholarly article.18 “The unlicensed *813 loan shark, on the other hand, seldom wants his principal so long as he gets his interest.”19 Even as late as 1982, after the associations of the loan shark had already begun to change, Playboy Paperbacks’ The Complete Guide to Credit and Loans could still say “the major feature [in this type of credit transaction] is that the loan shark is more concerned in collecting the interest than the principal.”20 Violent debt collection was not identified as a necessary element, let alone the defining trait, of the loan-shark deal.
B. A Second Sense
But the word association of the loan shark epithet changed quickly during the 1960s. Exposés of mob lending operations captured the headlines in cities like Chicago and New York and helped to redefine this opprobrium.21 The emphasis shifted to the method of debt collection, which was depicted as extortionate. A loan shark came to be understood as a black-market creditor with ties to organized crime who employed violence, or threats of violence, to compel repayment of a debt. In 1968, Congress enacted the Consumer Credit Protection Act,22 the second title of which proscribed “Extortionate Credit Transactions.”23 Though the phrase loan shark did not figure in the legislation itself, popular and legal commentary equated the extortionate credit transaction with loan-sharking, thereby shifting the emphasis in the concept to the back end of the exchange.24 How repayment of a debt is compelled became the defining trait of the loan-shark transaction. The idea now implied violence. This new understanding increasingly supplanted the original conception, *814 which emphasized the cost of the debt and the trap-like nature of the repayment plan. If “loan-sharking” is made synonymous with the extortionate credit transaction, then ironically the turn-of-the-century salary lenders, for whom the epithet had been invented, could no longer be classified as loan sharks.
Court opinions over the course of the twentieth century nicely registered this transformation in the image of the loan shark. In People ex rel. Chicago Bar Ass’n v. Wheeler,25 one of the first opinions to employ this colloquialism, the Illinois Supreme Court explained that “the ‘loan shark’ business, so-called, ... is said to consist in the loaning of small amounts of money to clerks and other salaried employés, and to other persons, on chattel mortgages covering household goods, etc., at usurious rates of interest, from 10 per cent. upwards a month.”26 Here the clientele, the nature of the loan product, and the cost are emphasized; there is no mention of violence. Fast-forward forty years and the same idea is still being expressed by the Supreme Court of Kansas in State ex rel. Fatzer v. Molitor:27
defendants engaged in what was commonly known as the “loan shark business,” the principal object of which was to collect and exact usurious rates of interest from laboring people, wage earners and others of small means who are forced by necessitous circumstances, such as sickness and other emergencies which placed them in critical situations, necessitating their obtaining funds to borrow small sums of money.28
Another ten years elapses before the first association of the phrase with violence is recorded, in Macari v. N.Y. Mid-Hudson Trans-Corp.,29 issued by the Supreme Court of New York: “[T]he deceased was deeply indebted to ‘loan sharks’ and was fearful of his safety.”30