City of Debtors: Law, Loan Sharks, and the Shadow Economy of Urban Poverty, 1900–1970

Peter Laudani, a truck driver in Brooklyn, had been struggling for over a year to pay his bills when he saw a commercial for small loans in 2010. The television ad promoted what the lender, Western Sky, called “The Problem Solver Loan.” Laudani had no shortage of problems. In 2009, in the midst of the Great Recession, he had been laid off from his job. Things went downhill from there. Although Laudani was not unemployed for long, the pay at his next job was not as good—$4 to $5 less per hour—and the bills soon began to pile up. Western Sky offered a solution: a $1,000 loan repayable over two years, with monthly payments of $166.95 to be deducted directly from the borrower’s bank account. Laudani’s total payments over the course of the loan would amount to $4,156.79, plus any late charges he incurred. He paid a little over $2,500 on the debt before defaulting.¹

Some might call this loan sharking. Expressed as an annual percentage rate, or APR, the cost of Laudani’s loan was over 190 percent per year—well above the legal limit in New York State. The State Attorney General subsequently filed suit, alleging that Western Sky had violated New York’s licensed lender law and civil and criminal usury laws. New York regulators also put pressure on the banks that processed Western Sky’s payment requests, seeking for them to cut ties with the lender. The office of the Attorney General had a problem, however. Western Sky was not located in New York. The company lent money over the Internet, from an office located on the Cheyenne River Sioux Reservation in South Dakota where, it claimed, the law of the Sioux Tribe governed. The lender argued that New York had no power to stop tribal lenders from doing business with borrowers like Laudani, while New York insisted that it must be allowed to shield its own residents through the enforcement of its consumer protection laws.² In short, the lawsuit raised hard questions about the scope of the state’s authority to regulate small-sum lending.

Such questions have arisen repeatedly over the past century in different forums and have continued to challenge policymakers. Although the case against Western Sky eventually settled and the company shuttered its operations, the conflict between Western Sky and New York State illustrates some of the enduring challenges that states have confronted in policing the market for small loans.³ For decades, small-dollar loans have puzzled policymakers and ordinary Americans because they raise tricky questions about the role of the state in the marketplace. These loans are troubling because they implicate a fundamental policy question: What is the meaning of justice within capitalism? For more than a century, Americans have asked: Is there a way to grant low-income workers small amounts of credit at lower cost? Can law make small loans safer and, if so, where should we draw the line between necessary protection and overreaching paternalism?

Although these same questions have come up again and again, the answers have changed over time, as the business of lending small sums to working-class borrowers has grown and developed from a handful of smaller, marginal enterprises into a big, modern business. The problem of how to regulate small loans first arose in the late nineteenth century with the invention of the “salary loan” business, which offered quick cash to working-class borrowers who pledged their future wages as collateral. More than a hundred years later, the same problem remains in a different guise, as the Consumer Financial Protection Bureau works on new regulations to govern modern forms of small-dollar credit such as payday loans. My dissertation, City of Debtors, explores the decades in between, chronicling the development of the small-sum lending business, from the Progressive Era through the War on Poverty in the 1960s. It also examines how Americans have attempted to make these forms of credit safer by shaping and reshaping the...