The Changing Philosophy of Small Loan Regulation
| Author | Rolf Nugent |
| Published date | 01 March 1938 |
| Date | 01 March 1938 |
| DOI | http://doi.org/10.1177/000271623819600130 |
| Subject Matter | Articles |
205
The
Changing
Philosophy
of
Small
Loan
Regulation
By
ROLF
NUGENT
T HE
effort
to
protect
necessitous
borrowers
against
oppressive
loan
contracts
winds
like
a
fine
thread
through
the
tangled
skein
of
history.
The
policies
for
the
protection
of
borrowers
varied
materially
and
their
similarities
defy
nice
classifications.
Nevertheless,
it
seems
possible
to
draw
some
crude
generalizations
concerning
the
relation
of
regulations
imposed
upon
money
lending
to
the
kind
of
so-
ciety
in
which
they
were
formulated.
THE
CHARGING
OF
INTEREST
We
find,
for
instance,
that
interest-
taking
was
tabooed
among
most
primi-
tive
tribes.
In
more
advanced
trading
societies,
interest
was
usually
per-
mitted,
subject
to
restrictions
upon
rates
of
charge
and
to
restraints
upon
the
use
of
certain
forms
of
security.
The
era
of
private
capitalism
brought
a
new
philosophy
of
absolute
freedom
of
contract.
This
philosophy,
how-
ever,
did
not
represent
the
jettisoning
of
public
interest
in
the
necessitous
borrower.
On
the
contrary,
it
con-
tended
that
the
unrestrained
play
of
the
forces
of
demand
and
supply
in
the
market
would
provide
the
most
effec-
tive
regulation
of
interest
charges.
Whether
any one
of
these
philoso-
phies
was
ever
effective
or
could
be
effective
under
certain
social
and
eco-
nomic
conditions,
need
not
be
dis-
cussed
here.
It
is
sufficient
to
say
that
none
has
proved
adequate
under
modern
conditions.
This
assertion
is
confirmed
by
an
extensive
record
of
trial
and
error
in
England
and
in
the
United
States.
The
attempt
to
prohibit
small
loans
led
to
the
creation
of
an
illegal
market
in
which
the
borrower
and
the
lender
conspired
to
avoid
the
law.
Re-
straints
upon
the
use
of
certain
types
of
security
led
either
to
still
higher
charges
or
to
the
use
of
new
and
fre-
quently
more
dangerous
collection
de-
vices ;
and
general
interest
limitations
were
flouted
by
evasive
devices
and
other
chicanery.
Nor
was
complete
freedom
of
contract
a
more
satisfac-
tory
solution.
England
repealed
her
usury
laws
in
1854,
and
Massachusetts
and
Maine
followed
this
example
shortly
there-
after.
But
the
failure
of
the
British
laissez
faire
policy
was
indicated
by
parliamentary
investigations
in
1898
and
1925.
Maine
and
Massachusetts
became
the
headquarters
for
chain
high-rate
loan
companies,
and
by
1917
both
states
had
adopted
other
means
of
meeting
the
small
loan
problem.
In
spite
of
this
record,
policies
of
prohibition,
restraint,
and
freedom
of
contract
continue
to
be
accepted
in
some
quarters
as
mutually
exclusive
alternatives
for
the
control
of
the
small
loan
business.
A
poll
of
individual
legislators
in
any
state
would
prob-
ably
indicate
a
range
of
opinion
as
wide
as
these
three
philosophies.
In
cer-
tain
areas,
one
or
another
philosophy
predominates.
Thus,
in
several
agri-
cultural
states
prohibition
continues
to
be
the
dominant
policy.
And
in
California,
whether
by
accident
or
by
design,
freedom
of
contract
is
the
present
rule.
DEVELOPMENT
OF
MODERN
LEGISLATION
In
other
areas,
however,
these
di-
vergent
philosophies
have
been
merged
into
a
new
form
of
control.
More
than
one-half
of
the
states
in
the
Union
now
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