Shortfall

by Alice Echols

  The City’s policies regarding withdrawals were B&L boilerplate, but its policies toward lending were not. There was nothing of the loan shark business about early building and loans. Chattel loans were understood to be completely at odds with the mission of B&Ls. However, at both Leven’s association and at the City moneylending was a key part of the business, and the terms were not advantageous to the borrower. At the City the borrower absorbed all expenses associated with the transaction. Even applying for a loan cost the applicant $10 (using 1916 as baseline, that would come to $220 today), and failure to pay on time was penalized. If the borrower failed to make payments over a three-month period the Board of Trustees could declare the loan due and payable and require payment of the interest and principal. And although B&Ls stressed that members’ money was backed by first mortgages only, the City’s bylaws allowed its Board of Trustees to invest pretty much where it pleased, not just in first mortgages.

  When propertied borrowers did business with the City they typically secured the promissory note with a deed of trust to a property that they would forfeit should they default on their payments. For example, when P.J. Hecox, a self-employed gardener who sold vegetables and fruit from his yard, borrowed $1,500 from my grandfather in 1924, he signed an agreement that stipulated:

  In case of any default, whereby the right of foreclosure occurs hereunder, the second party or the holder of the said note, shall at once become entitled to the possession, use and enjoyment of the property aforesaid, and to the rents, issues, and profits thereof, from the accruing of such right and during the pendency of foreclosure proceeding and the period of redemption, if any there be; and such possession, etc., shall at once be delivered to the second party, or the holder of said note on request, and on refusal the delivery of such possession may be enforced by the second party, or the note-holder by any appropriate civil suit or proceeding including action or actions in ejectment, or forcible entry, or unlawful detainer.

  In 1928, after apparently making no payments on his loan, Hecox, by now seventy-eight years old, lost possession of his ramshackle home on East Yampa Street because he had secured his loan with the deed to his property. He ended up renting a space behind a shoe repair shop, where he raised hens. My grandfather waited nearly four years before going after Hecox.64 He sometimes waited a few years before going after delinquent borrowers who owned property, perhaps to make his portfolio of loans appear more attractive and to detract attention from any bad loans he had made. The bottom line was that when borrowers defaulted, the City could legally take over their property and rent it out or sell it. Foreclosure was one way the City acquired so much property.

  According to histories of the thrift industry their biggest problem at this stage in their history was the amateurism of too many of their operators. But that didn’t describe the City or many of the other B&Ls that would go belly up during the Depression. These were, like the nationals, for-profit corporations designed to be maximally lucrative to their operators. Making them profitable involved misrepresenting them to the public. B&L men like my grandfather regularly ran advertisements that deliberately fudged the difference between their businesses and banks. “Come, deposit your money with us,” they beckoned. “You can withdraw it whenever you like.”65 Even though my grandfather eventually abided by the wishes of bankers and stopped advertising his business as a bank, in face-to-face encounters he described the City as a bank. Court records show that on at least one occasion he claimed that his banking business was separate from his B&L.66 The case involved an eighty-one-year-old chiropractor, Dr. Woody, who in 1929 had “loaned” Walter $15,000 at 6 percent interest. Disturbed by talk that the City wasn’t really a bank, Woody went to Walter’s office and confronted him. My grandfather proved persuasive. The next day Woody loaned him another $2,000. Four years later, Woody’s estate was in court suing the City for $17,500.

  B&L men further confounded the distinction between B&Ls and banks by handing out passbooks to customers who, unsurprisingly, understood themselves as depositors, not investors. Remember Tom, the pushy depositor during the bank run in It’s a Wonderful Life? Tom is the one who demands his money on the spot, and is incredulous and indignant when George replies that withdrawal require paperwork and a wait of sixty days.

  The front cover of a passbook for the City Savings Building and Loan. (Author’s archive)

  Lax regulation and definitional haziness about banks versus B&Ls would have made the building and loan business appealing to my grandfather. Moreover, as long as he remained a loan shark, which carried with it predatory associations, my grandfather’s dream of refashioning himself as an affluent professional would remain out of reach. As one New York Times writer noted, “men who wanted the approval of society” would not find it by making their living as a small lender.67

  Business must have been good because in February 1916, two years after acquiring the City, Walter moved his family from their modest house on East Willamette to one in the fashionable North End of town, adjacent to Colorado College. With four bedrooms and two and a half bathrooms, the twenty-year-old Victorian was nearly three thousand square feet. He made improvements over the years, among them turning the one-car garage into one that accommodated two cars. Like Harry Leven, he made sure the house at 1628 North Tejon was in his wife’s name.

  As my grandfather’s business practices indicate, building and loan associations, formed in the interest of the common good, were once again changing. Hijacked by operators whose goal was lining their own pockets, they became concerns where a loan shark like my grandfather could make himself comfortably at home. As early as the 1910s an economist, someone sympathetic to the thrift industry, admitted that some building and loan associations were no better than loan shark outfits.68

  Button-down types, wheeler-dealers, scam artists, speculators, and usurious moneylenders—by the early twentieth century the building and loan industry was filling up with them. The permeability between the respectable and illicit was even acknowledged in some of the early scripts for It’s a Wonderful Life. At least two scripts (one by left-winger Clifford Odets) called for two Georges—the original man on the bridge who wants to commit suicide and the other George, the rich philanderer he could have become. When George embarks on his angel-assisted journey, he finds not a desolate and corrupt world without him, but a world with a bad George. As we shall see, these discarded scripts capture better than Capra’s movie the culture of building and loan associations in some American towns and cities.69

  3

  Racketeers and Suckers

  “A decade of debauchery” was how Franklin Delano Roosevelt summed up the 1920s. To economist John Kenneth Galbraith, writing some thirty years later, the decade ushered in a period of shameful speculation in which getting rich became the new normal. Galbraith pointed his finger at ordinary Americans who had succumbed to the lure of easy money. According to this view, the twenties represented the tipping point, when the mass consumption of mass culture corroded America’s core values. Hard work and self-denial were the victims of this new consumerism, in which hedonistic individualism reigned supreme. It was only during the Great Depression that America sobered up, came to its senses, and was finally redeemed.

  Through most of the last century U.S. historians often shared this censorious opinion of the Jazz Age, but more recently historians have shown that mass culture and mass consumption did not always play out in predictable ways. For one, scholars have demonstrated that the surge in unionism in the 1930s was at least partly due to the participation of the working classes in mass culture. Going to the movies, listening to the radio, and shopping in chain stores had the effect of breaking down parochial ethnic enclaves and of homogenizing the American working class—a precondition for the development of class-based solidarity, a sense of “we-ness” that facilitated unionism. Historians of gender and race have also shown that sites of mass consumption could play out in ways that increased autonomy and freedom.1 We cannot really grasp the e
ra if we don’t also acknowledge the profound and sometimes empowering newness of the period. Imagine the thrill of sitting behind the wheel of an affordable automobile for the first time or the wonder of watching a movie with so many strangers in a darkened movie palace. Think of George Bailey’s excitement as he prepares to set out to travel, before his plans are upended by his father’s stroke. Who can’t identify with his desire to avoid his father’s fate of unrelenting hard work and self-sacrifice?

  That said, by decade’s end income inequality had never been greater, and Americans had developed a different relationship to money as mass culture reached more deeply into American society. It was a time of technological innovation that featured radios, movies, and automobiles, and the eye-catching advertising used to market them. Underwriting the go-go twenties was debt. Particularly striking is the unprecedented extent to which personal debt was becoming, in the words of historian Louis Hyman, “commercially profitable, institutionally resellable, and legally available.”2 This change was aided by the passage in many states of uniform small loan laws and the phenomenal expansion during the interwar years of installment credit. By 1930 installment credit financed the sale of between 80 and 90 percent of all furniture, and between 60 and 75 percent of automobiles. In fact, General Motors succeeded in pulling ahead of the Ford Motor Company by offering customers financing. Consumers would discover that usury laws offered them no protection from deceptive and predatory installment lenders, including GMAC.3

  Nevertheless, loans for consumer purchases doubled during the 1920s, from $3.3 billion to $7.6 billion. In another signal that times were changing, some banks began moving into the area of personal loans, although they limited their lending to white-collar professional men. In this period, American capitalism executed a turnabout as the ideals of hard work, discipline, and self-denial began to give way to the virtues of spending and the pleasures of consumption. Being in debt, once considered shameful, was becoming a way of life for Americans.4

  People, even the working classes, caught the investment bug. Why let your money gather dust when you could invest it? After World War I some Americans fell for the pitch of Charles Ponzi, who promised to pay investors 50 percent on their money. Ponzi’s pyramid scheme of paying off old investors with the money of newer investors soon collapsed, but that wouldn’t stop others from using his methods. And soon enough other opportunities beckoned—in oil, real estate, mining, utilities, and building and loan associations, some of which began to offer depositors inflated rates of interest.

  Indeed, the building and loan industry is a good barometer of the shift in attitude toward money. It had been established during the old regime; it was called the “thrift” industry, after all. However, by the early twenties many B&L operators were offering interest rates so lucrative that they blurred the distinction between savings and investment. Walter Davis was offering as much as 6 percent interest, a full 2 percent more than the Assurance, the town’s oldest B&L, or any of the town’s banks. Soon enough in Colorado Springs and elsewhere the rates would go even higher, with the result that B&Ls began to attract greater numbers of middle-class depositors. One measure of the thrift industry’s growing appeal is that by 1925 the Magazine of Wall Street, a leading personal finance and investment weekly, was carrying regular stories on building and loans.5

  Blurring this distinction between savings and investment proved profitable, and it played a role in the massive expansion of the B&L industry in the twenties. Between 1920 and 1924 the number of building and loan associations in the United States grew from 8,633 to 11,844.6 By the fall of 1929 the New York Herald Tribune, citing an industry source, reported that the number of building and loan associations had grown 70 percent since World War I.7 Growth was especially strong in the West, but in many parts of the country the thrift industry took off. Take Manhattan, which by 1925 reportedly had two B&Ls with combined assets of $30 million.8 By 1930, building and loan associations held nearly 50 percent of the country’s institutionally held mortgage debt on one- to four-family houses.9

  The expansion of the B&L industry was also attributable to the explosion in home construction, which soared in the twenties because wartime restrictions on building had produced a serious housing shortage.10 Nationwide, hundreds of associations formed in order to take advantage of the overheated real estate market. Many of these newer associations offered members very low down payments and second mortgage financing, which was far riskier for the lender than first mortgage financing. Over time, such lenient financing would play out very badly, just as it did during our own recent subprime mortgage crisis.11

  The breakneck speed with which the thrift industry grew stemmed as well from the proliferation of for-profit stock concerns masquerading as building and loans. In many respects the new “permanent” or “guarantee” associations followed the nationals’ business model—the seductively high interest rates along with the extra fees, the penalties borne by shareholders, and terms that disguised their actual position as investors. They also featured two different classes of stock, an arrangement all too typical today of public companies and investment consortiums. The holders of one class of stock—a minority—held the exclusive right to hold annual meetings, elect the directors, make the bylaws, manage the business, and control its assets. Those that held the other, inferior class of stock—both investors and borrowers—had few rights. They could share in the profits, but only according to the less-than-favorable terms named in their contracts. Forget shareholder democracy. Upon signing up, members were required to authorize one or more association officers to vote their proxy at stockholders’ meetings. A culture of freewheeling, unregulated finance took hold, with officers routinely advancing loans to themselves. When Colorado’s B&L law was amended in 1927, it actually benefited for-profit operators. And the “reform” B&L bill of 1931 duplicated many of the worst provisions of the 1927 act.12 The legislators who served on the governor’s special committee investigating Colorado’s thrift industry would blame its collapse in 1932 on the growing numbers of these new-style B&Ls.13

  Finally, key to the growth of the building and loan business were Liberty Bonds. In Colorado Springs the two associations that formed in the twenties announced their arrival with a pitch involving war bonds. In fact, Dollar Building and Loan Association, Home Building and Loan Association, and the City all competed for customers holding issues of Liberty Bonds and War Savings Stamps that would stop paying interest—of roughly 4 percent—after December 15, 1922. One big ad for Dollar urged readers to present their bonds and stamps so that the association could either collect the principal and interest for the customer or assist them in converting them into the association’s 7 percent tax-free building and loan certificates. Home also advertised a 7 percent rate, while the City’s ads offered 6 percent on savings accounts for those converting Victory War Bonds. Colorado Springs had been a heavy subscriber to these bonds, and studies show that people who had taken the plunge and invested were inclined to do so again. Nationally, 22 million Americans, many of modest means, purchased Liberty Bonds. One survey of six hundred mothers (almost all of them foreign-born) working in unskilled positions in Chicago packinghouses showed that a full 84 percent of their families owned Liberty Bonds.14

  For many, buying war bonds made the world of investment feel less risky. Lots of people who had believed the best place for their money was in their own house or backyard now turned to small banks, building and loan associations, and a range of investment companies—everything from local opportunities to Wall Street securities.15 During and immediately following World War I, a number of factors—Liberty Bond campaigns, employee stock ownership plans, and the elimination of the cruder sort of “bucket shops,” betting parlors that constituted a shadow world of securities exchange—dramatically increased the numbers of Americans, including working people, who were participating in the world of investments. Before long slick stock promoters were taking advantage of these novices. They often targeted farmers,
offering them stock, which would turn out to be worthless, in exchange for their Liberty Bonds. The extent of swindling was such that the movement for a national blue-sky law, meant to protect consumers from securities fraud, gained momentum in these years.16

  U.S. Treasury Secretary William McAdoo saw the Liberty Bond campaign as a critical part of the “powerful stream of romanticism” he believed necessary to mobilize Americans behind the war effort. (Courtesy of the Prints and Photographs Division, Library of Congress, cph 3c07238)

  In Colorado Springs a speculative culture was already well established, with all kinds of people, including laborers, trading in stocks and futures.17 After all, this was a town whose 1906 city directory included more than six pages of small-print listings devoted to mining companies whose stock was sold throughout the country. My grandfather was just one of many townspeople who owned a few mining stocks. By the twenties, with the downturn of mining in Cripple Creek and all those Liberty Bonds coming due, there were plenty of businessmen eager to invest townspeople’s money.18 In other communities, such as Youngstown, Ohio, unscrupulous businessmen even opened up shop as “Liberty Bond scalpers” and bought war bonds at a steep discount from investors who had no idea how to go about selling their bonds.19 There is, of course, an irony in the way that Liberty Bonds, which were originally promoted as furthering both thrift and the common good, became yet another example of the individualistic, acquisitive culture of the twenties.