Before organized consumer credit, there were five major lending sources: pawnbrokers, illegal small-loan lenders, retailers, friends and family, and mortgage lenders.
Indebtedness was common prior to the 1800s. Unfortunately, it was hidden from view in the grocer's book and the pawnshop ledger, in the butcher's tab and the memory of friends.
Early levels of national consumer debt were measured in 1858, when it was estimated the nation's total household debt load was 1.5 billion dollars. By 1890 the level of consumer debt had risen to 11 trillion dollars.
The 1890 census discovered the average household had about $880 of debt and only $475 in annual income. Compare that to 1998 when family debt was $33,000 and annual income was $32,800.
Between 1896 and 1916, short-term household indebtedness increased at rates as high as 15 percent a year, averaging an annual rate of 9.3 percent. From 1995 to 1999, consumer debt increased at an annual rate of only 7.78 percent.
Lending, borrowing and credit were ramping up towards the turn of the century. At the same time, lending by family and neighbors was vanishing in relation to lending activity from other sources. However, without organized sources of credit, the local pawnbroker and finance companies were the average man's best source.
Pawning has been around since 1462, when Franciscan friars in Perousa, Italy established the "mont-de-pietes" or "Banks of Pity" to enable struggling people to obtain small, collateralized loans. The Italian word "Monte" has several meanings: "mount, mountain", and "heap, sum". In the Middle Age the term "Monte" was currently used to indicate "goods or money collected or polled by one or more persons for trading."
Pawning was very common in America but was viewed differently than the negative image it has today.
Typical items that were placed on deposit in exchange for cash were shawls, bonnets, undergarments, dresses, suits, shoes, jewelry, bedding, musical instruments, clocks, tools, guns and furniture.
In 1803, New York City pawnbrokers were legally recognized and by 1898 the use of pawnbrokers was so common that in Pittsburgh it is estimated that pawnbrokers made one loan for every 11.6 city residents. In a 1907 survey of residents in the Bowery of New York City it was estimated that almost the entire population held at least one pawn ticket at all times.
Was pawning bad?
During those years people had very few places to turn for cash for emergency needs or to pay off creditors. Pawnbrokers were known as the "poor man's banker." Large numbers of people routinely used the pawnbroker to get much-needed cash. Many were longstanding, repeat customers.
The interest rates pawnbrokers charged could reach as high as 300 percent. Was this excessive? Part of the reason for such high interest rates was the need for the pawnbroker to make a profit on predominantly small loans, usually five dollars or less.
