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. Several 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 typically 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.
Big Jake
When she noticed my still frozen white countenance, she
said, "Figgiu 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 Commare
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 Commare 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
De-Soto. 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 "lending 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 prodigals 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 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-income individuals can use to succeed
in the marketplace. How can people be better off when such legal
alternatives 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
un-enforcible 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-sharking - 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 lodge members 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.
At the time of the original publication, Dr. James
Doti was Associate Professor of Economics and Director of the Center
for Economic Research, Chapman College, Orange, California.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
August 1983, Vol. 33, No. 8.
Yourname@libertyhaven.com
