Dr. James Doff is Associate Professor of Economics and Director of the Center for Economic Research, Chapman College, Orange, California.
I had just purchased an Italian lemonade and was contentedly licking a chunk of lemon peel embedded in the ice as I walked across the intersection of Aberdeen and Taylor. Just then, two black sedans screeched around the corner, and I froze in my tracks as I heard the nerve-shattering sound of guns being fired. The next moment I felt I was being dragged and pulled by someone whose powerful hands were firmly gripped around my shoulder. Sev eral minutes later I was pleased to find I was sitting in the kitchen of the woman who had done the dragging and pulling—Commare N’Ciuzza.
Almost a year earlier I had met and befriended Commare N’Ciuzza. At the time I was a student at a new university that was built on a large portion of an old neighborhood known as “Little Italy.” This neighborhood had once served as the melting pot for newly immigrating Italians into Chicago. Those who still lived in the small portion of neighborhood that survived the university’s construction looked upon the few students who lived there with a mingling of fear and suspicion. It was only after people noticed my special friendship with Commare N’Ciuzza that I was allowed to take part in the many neighborhood rituals.
One of these rituals included my being allowed to enter the hallowed doors of the Italo- American Lodge Hall (Post #28). The Lodge Hall consisted of a motley assortment of kitchen chairs arranged around an old rattan coffee table that held back issues of the Fra Noi newspaper. The stark interior, however, belied the heated exchanges that generally involved the relative merits (usually demerits) of the Chicago White Sox and Chicago Cubs. In another important ritual, I felt proud to be invited on Friday nights to join families on their front porches to engage in lively conversations that typical]y involved comparing the vocal range of Mario Lanza with the old maestro Enrico Caruso.
With the sound of gunfire still ringing in my ears, I sensed the strong taste of Commare N’Ciuzza’s homemade Italian wine on my lips and realized that she was maternally treating my shock in the best way she knew how.
“Mangia, Mangia!” she commanded as she brought cookies to the table.
The sight of the familiar “S”shaped cookies which are intended for wine-dunking calmed my nerves. So, too, did the bountiful supply of food that was accumulating on the table as a result of the rapid-fire trips that Commare N’Ciuzza was making to and from the refrigerator. That is, rapid-fire for someone whose large slippered feet never left the ground but, rather, slid along the floor.
Commare N’Ciuzza was a large woman. I first saw her on my way home from school when she would invariably be sitting with her head out the window and her bosom supported by the windowsill. As a result of her husband’s passing ten years earlier, she was still wearing the familiar black Sicilian mourning dress that I noticed adorned many of the older women in the neighborhood. Our friendship was slow to develop. But from the moment she discovered that my mother came from her hometown in Sicily, she decided it was her calling in life to protect and watch over me. With Commare N’Ciuzza, as with most Italians, that meant making sure I was always well fed. In fact, everyone in the neighborhood called her “Commare” (Godmother) because of her strong maternal instincts.
“Mangia, Mangia!” she continued to command as I slowly dunked the “S”-shaped cookies into the wine.
When she noticed my still frozen white countenance, she said, “Fig-giu mio, don’t-a be scared. That’s-a only Big-a Jake and his-a boys. They come-a to collect-a their money.”
She went on to explain that Big Jake, the local loan shark, had recently loaned money to a family that everyone in the neighborhood (I never found out why) called gypsies. She shrugged in a characteristic Italian way as she said, “They buy-a car but they don’t~a pay so Big-a Jake come-a to scare them.”
When I began to deride Commare N’Ciuzza for accepting the likes of Big Jake as a normal part of neighborhood, she interrupted me before I could complete my harangue.
“Don’t-a say bad things about Big-a Jake. He’s-a good-a man. I light-a candle for him on-a Sundays.”
The high regard that Commare N’Ciuzza evidently held for Big Jake aroused my interest. When I began to ask her more direct questions about her association with him I noticed she looked over me in silence, obviously pleased with the interest she had succeeded in arousing.
“Mangia, Mangia!” she continued as her latest sortie to the refrigerator resulted in an unfamiliar eggplant dish being set in front of me.
When I asked her, pleadingly, to get on with the story, I half-expected to hear a story that would prove beyond all doubt the noble intentions of Big Jake. Her story, however, did little to romanticize him.
It all happened thirty years earlier during the worst part of the Great Depression. Commare N’Ciuzza, her husband Tony and their five children were renting a small apartment. But when Com-mare N’Ciuzza’s three year old son urinated on one of the landlord’s pepper plants, a fierce battle ensued and the upshot was that Commare N’Ciuzza and her family were ordered to leave.
With Tony out of a job and Com-mare N’Ciuzza just able to make ends meet with her work as a seamstress, the family had no place to go. But with a loan from Big Jake, they were able to buy the house where she still lived.
When I asked her how she was able to make payments to Big Jake, she replied, “We rent-a bedroom in-a my house and my Tony he find-a work. Big-a Jake we pay-off in-a two years.”
When I asked why she didn’t go to a bank for the money, she smiled at my naiveté and said, “Figgiu mio, you think-a the banks are gonna give-a money when my Tony no have-a job. They don’t-a even give money to my-a brother Salvatore and he works-a for the city.”
But could she accept the shooting-the unrelenting pressure that must have sent chills through the hearts of people who just could not pay? When I put this question to her, she could only shrug and remind me that I had stopped eating.
Commare N’Ciuzza was bringing more food to the table as I got up to leave. The only strategy that worked at this point was to leave as quickly as possible. As I turned to thank her, I heard her mutter something in Italian about how the youth of today were all too thin and undernourished.
On the way home I was startled to see the head of the “gypsy” clan, Rocco, happily engaged in washing his newly purchased used ‘58 De-Soto. When I asked him if everything was OK he smiled and said, “Sure, I forget-a to pay, but Big-a Jake remind-a me. I pay him, and now Big Jake he’s-a happy.”
When I asked him how he was going to continue making the payments, he said having a car would make it possible for him to drive to work in the suburbs where his brother-in-law had just bought a pizza parlor.
I tried to question him further about his dealings with Big Jake but it was difficult to get his attention away from the DeSoto. As he worked feverishly on polishing a large strip of chrome, I noticed the proud and satisfied look on his face that so distinguishes a new car purchaser from the rest of humanity. Not wishing to disturb him from his euphoria, I quietly walked away. As I left, I noticed he was happily applying a Brillo pad to the three-inch whitewalls that adorned his tires.
Principles of Economics
I always relate a shortened version of this story to my principles classes in economics when I discuss the determination of interest rates in a free market. As with other goods, the price of loanable funds is determined by supply and demand. A simple analysis of the supply and demand of loanable funds in a free market, however, offers no economic rationale for the illegal operations practiced by Big Jake. When interest rates are allowed to reach their natural levels, the demand and supply of loanable funds will be equal. Of course, higher interest rates will be necessary for those loans that involve greater risk—otherwise, loanable funds will not be supplied to high-risk borrowers.
Thus, we should not expect to see a single determined market rate of interest but, rather, a variety of interest rates that depend on the specific circumstances and, in particular, on the risks associated with various loans. This description of capital markets, however, suggests that high-risk loan candidates like a Commare N’Ciuzza or Rocco would be able to obtain legal loans in the free market if they were willing to pay the market-determined price. What, then, explains the existence of illegal loan operations?
By and large, the Big Jakes of this world are created as a result of governmental policies that take the form of usury laws (ceilings on the maximum interest rate that can be legally charged). Such laws serve to cut off the supply of loanable funds to high risk borrowers by making it legally impossible to compensate lenders for the added risks they assume when granting such loans.
Contempt for lenders in general and in particular for lenders-of-last-resort has a long historical tradition. This is evidenced by the fact that usury laws have been enacted throughout most of recorded history. The rationale for such laws can be found in many scholarly works, including the writings of Aristotle and Thomas Aquinas and the Bible.
Protestations against “]ending at usury” are even found in the unlikeliest place of all—The Wealth of Nations. Adam Smith contradicts his basic belief in the efficacy of the free market when he states:
In countries where interest is permitted, the law, in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty . . . . The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people, than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage. (The Modern Library edition, pp. 339-40.)
But setting the maximum interest rate that can be charged to “very little above the lowest market rate” would preclude the granting of loans to those individuals and businesses that entail a greater degree of risk. Rather than preventing the lending of capital to “prodigals and projectors,” usury laws would prevent or, at least, make it legally difficult to lend to high-risk borrowers—generally low-income individuals.
Laws Against the Poor
Even though the most noble intentions may be behind the existence of usury laws, their impact is to take away alternatives and eliminate legal options that lower-in-come individuals can use to succeed in the marketplace. How can people be better off when such legal alter natives are taken away?
It should be noted that the inequitable and inefficient aspects of usury laws also apply to the ceilings that governmental agencies place on the interest rates that financial institutions are allowed to pay on deposits. Such deposits can be interpreted as loans that savers have extended to financial institutions. To be sure, the deregulation of financial markets in recent years has helped savers receive a more competitive return. But because of delays in the deregulation process, many kinds of deposits, particularly those below a specified minimum balance, are still subject to interest rate ceilings. As a result, depositors who have lower checking and savings account balances (usually lower-income families and individuals) are receiving a less than competitive return.
Perhaps Commare N’Ciuzza was able to understand all of this in observing life outside her kitchen window. I tend to think, though, that it was her good common sense and the practical impact that such laws have on the most disadvantaged that allowed her to understand something that has eluded even the greatest of scholars.
The impact of usury laws, however, cuts far deeper than discriminating against the poor and disadvantaged. This is something even Commare N’Ciuzza did not fully understand. The fact that illegal loan markets develop in free markets to get around the restrictive impact of usury laws does not mean that an efficient market solution is achieved in spite of the existence of usury laws. Illegal loans are unenforcible in our courts, and since more expensive and morally intolerable methods of enforcement are applied, Big Jake’s interest rates are higher than would have occurred if market-determination rates were allowed.
Adam Smith seemed to sense this in the following statement:
In some countries the interest of money has been prohibited by law. But as something can every-where be made by the use of money, something ought everywhere to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of the money, but for the risk which his creditor runs by accepting a compensation for that use. He is obliged, if one may say so, to insure his creditor from the penalties of usury . . . . If this legal rate should be fixed below the lowest market rate, the effects of this fixation must be nearly the same as those of a total prohibition of interest. The creditor will not lend his money for less than the use of it is worth, and the debtor must pay him for the risk which he runs by accepting the full value of that use. If it is fixed precisely at the lowest market price, it ruins with honest people, who respect the laws of their country, the credit of all those who cannot give the very best security, and obliges them to have recourse to exorbitant usurers.(p.339.)
Thus, the gun-toting tactics of Big Jake that Commare N’Ciuzza could only shrug over result from laws that place a ceiling on the legal interest rate that can be charged. Big Jake had no legal recourse in enforcing his contract. As a result, the most abhorrent aspects of loan-shark-ing-the tactics that caused my momentary fright on Aberdeen Street—take place because of laws that make market-determined interest rates illegal.
Several years ago I returned to “Little Italy.” Commare N’Ciuzza was gone, of course, and even her home was replaced by a new residence that took on a Spanish motif but had a strange contemporary look about it. The bespectacled professor who answered the door of the residence had never heard of Commare N’Ciuzza.
Even the Lodge Hall was taken over by a new “greenbelt” park. As far as I could figure, a statue of Garibaldi stood on the spot where lodgemembers spent countless hours arguing sports trivia.
Asking around, I found that the Lodge Hall had been moved to a room in the newly constructed Senior Citizens’ Center. When I got there, I found a brightly painted and spaciously furnished room with the latest issues of Time, Newsweek and the Chicago Tribune, but no Fra Noi. I also noticed that no one was there.
On my way out of the building I heard an elderly man ask his companion, “Did your son- in-law get-a good rate from Big-a Jake?”
“No, he go to First-a Federal and-a do better.”
Well, at least Big Jake is still around. But now even Big Jake has competition.