By fulfilling wage earners’ needs for small loans at a reasonable rate of interest, Morris Plan banks democratized the banking industry.
On April 5, 1910, the first Morris Plan bank, the Fidelity Savings and Trust Company, opened in Norfolk, Virginia, with $20,000 in capital. The bank’s modest quarters on the sixth floor of an office building were also the law offices of its founder, Arthur J. Morris, an enterprising attorney in his late twenties.
As a member of the law firm of Morris, Garnett, and Cotten of Norfolk, Morris specialized in banking and corporate law and was well acquainted with the bankers in the area. A few years earlier, Morris had been surprised to learn, when a railroad employee asked for his help in securing a personal loan to pay for surgery that the man’s wife needed, that no bank was interested in making such a loan, despite the fact that the man was steadily employed and earning a good salary. Morris got the loan for the railroad employee by agreeing to be a surety on the loan. Other requests for assistance followed, and within two years, Morris personally had guaranteed forty-two loans for a total of $26,000. These experiences inspired him to investigate the lending sources available to wage earners who lacked the collateral necessary to secure loans from banks.
Through extensive investigation, Morris learned that 80 percent of the American people had no access to bank credit. Other than a few charitable organizations that made small loans to “worthy” individuals, the sources of small loans for wage earners were almost exclusively limited to family and friends, pawnbrokers, and loan sharks. Commercial banks covered the borrowing needs only of businesspeople and some affluent depositors.
Having determined that there was a demand for unsecured small loans from banks or other mainstream lending institutions, Morris began to study how the demands for such loans could be met. He found that several European countries already had a solution. In Germany, several hundred banks known as Schulze-Delitzsch served industrial and agricultural workers by making small loans and accepting small deposits. Similar banks were thriving in Austria-Hungary, Belgium, France, and especially Italy, where the equivalent of millions of dollars was loaned annually by the “People’s Bank.”
After spending some time in Europe investigating the operation of these small-loan banks, Morris returned to the United States and attempted to interest his banker friends in the personal loan plan he had formulated, which later came to be known as the Morris Plan.
A typical Morris Plan loan required two cosigners. It was discounted at the rate of 6 percent, and an additional 2 percent loan fee was charged. Thus on a loan of $100 the borrower would sign a note for $100 but receive only $92. The sum of $100 would be repaid in weekly installments of $2 each over a period of fifty weeks. Instead of repaying the loan directly, however, the borrower would make installment payments on an investment certificate. When the payments on the investment certificate equaled the amount of the loan, the loan could be canceled or a new loan made, at the option of the borrower. Another method of lending was to sell an investment certificate in a given amount on the installment plan. The investment certificate, when issued, paid interest at a higher rate than passbook savings in a conventional bank. The proceeds from the sale of these certificates helped to finance the lending activity. Holders of these certificates could obtain loans without cosigners by pledging the certificates as collateral. In both kinds of loans, a penalty of 5 percent per week was charged for delinquent payments.
These cumbersome loan arrangements were necessary to circumvent the usury laws in most states, which limited the amount of interest that could be charged, typically at 6 or 8 percent per annum. Although the nominal (stated) rate on a Morris Plan loan was 6 percent, the effective rate (the rate actually charged) on outstanding balances was about 19 percent. The reason is that the debtor did not receive the full face amount of the loan, given that it was discounted. Furthermore, the debtor did not have the use of the money for the full term of the loan, as it had to be paid back in weekly installments. Although the Morris Plan violated the spirit of the usury laws, it made small loans available to average persons at charges that were reasonable considering the administrative costs involved in handling small installment payments.
Morris and the Morris Plan banks also pioneered credit insurance.
The Morris Plan soon became part of a chain operation through the establishment of Morris Plan companies in Baltimore, Maryland, and Atlanta, Georgia. By 1912, additional offices opened in Memphis, Tennessee; Richmond, Virginia; and Washington, D.C. The average loan amount was $123.50, and credit losses amounted to less than 0.1 percent. In less than 2 percent of the loans did cosigners have to make payments.
Morris interested Wall Street in his idea through a friend, Fergus Reid, a prominent Norfolk financier. In February, 1914, the Industrial Finance Corporation
The Morris Plan Corporation of America
Through his Morris Plan concept, Arthur J. Morris made it possible for the average wage earner to borrow money on the basis of steady income and good character, without having to pledge collateral or pay an exorbitant rate of interest. The availability of small loans through the Morris Plan deprived many loan sharks of their prey. It was reported that in the city of St. Louis the establishment of a Morris Plan bank drove fifteen loan sharks out of business within a period of less than a year. This effect was foretold in a study of small-loan conditions and practices conducted by the Russell Sage Foundation in 1907 and 1908. The researchers concluded that the most effective way of combating abuses in the small-loan business would be to attract reputable lenders by making the small-loan business profitable. Abuses could be avoided through the implementation of strict state licensing requirements and regulation.
Complicating the spread of Morris Plan companies was the lack of uniformity in state laws. In 1916, the Russell Sage Foundation, in cooperation with a money-lending group, drafted what has become known as the Uniform Small Loan Law.
Paralleling the spread of Morris Plan banks—or industrial banks, as they were generically termed—was the spread of credit unions.
During the 1920’s, strong competition to industrial banks developed from the growth of finance companies, which made small loans and financed consumer purchases of automobiles, home appliances, and other household goods. Morris Plan companies pioneered in the field in automobile financing in 1919 with an arrangement with the Studebaker Corporation. During the 1930’s, the Morris Plan companies charged ahead in the consumer finance field. The percentage of unsecured personal loans dropped from 87 percent of the companies’ loan portfolios in 1932 to 60 percent in 1936.
Most commercial banks had looked askance at the small-loan business, but the hardships of the Great Depression years of the 1930’s, coupled with low returns on government securities, caused commercial banks to open commercial loan departments. In 1935, the Bank of America, which had pioneered in offering low-cost loans since its founding in 1904, announced its willingness to finance automobiles. By 1940, commercial banks held fifteen times more consumer credit than they had in 1930.
When Morris Plan banks were initiated in 1910, few wage earners could obtain loans from commercial banks; by the end of the twentieth century, few wage earners were refused a loan. Arthur J. Morris always stressed that the industrial supremacy of the United States depended on mass production, and for mass production to succeed, there must be mass consumption. Mass consumption could come about only through mass credit. Morris made consumer credit his life’s work, because he saw credit as the lever for realization of human hope. His efforts brought on the forces that democratized credit and the banking industry.
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Calder, Lendol. Financing the American Dream: A Cultural History of Consumer Credit. Princeton, N.J.: Princeton University Press, 2001. Focuses on the period 1890-1940, when the legal and institutional bases of modern-day consumer credit were established. Draws on a variety of sources from the period, including personal diaries and correspondence, government and business records, newspapers, and advertisements. -
Cole, Robert H. Consumer and Commercial Credit Management. Homewood, Ill.: Richard D. Irwin, 1980. A comprehensive textbook on consumer and business credit. Explains the development of consumer credit and changing attitudes of consumers, retailers, and lenders. -
Germain, Richard N. Dollars Through the Doors: A Pre-1930 History of Bank Marketing in America. Westport, Conn.: Greenwood Press, 1996. Examines trends in the marketing of U.S. banks up to the 1930’s, including developments in the services offered and in customer relations. -
Grant, James. Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. New York: Farrar, Straus and Giroux, 1992. A Wall Street analyst with street sense traces the long cycle of relaxation of credit practices that brought about the democratization of credit and the socialization of credit risk. Must reading for anyone who wants to probe the inner mysteries of money, credit, and banking. -
Harold, Gilbert. “Industrial Banks.” Annals of the American Academy of Political and Social Science 196 (March, 1938): 142-148. A concise treatise on Morris Plan institutions. Although quite short, this article is one of the most particular and definitive treatments of the subject matter of industrial banking available. -
Klebaner, Benjamin J. American Commercial Banking. Boston: Twayne, 1990. Traces the evolution of commercial banking in the United States. The historical perspective greatly assists an understanding of the contemporary scene. -
Mayer, Martin. The Bankers. New York: Weybright and Talley, 1974. Interesting journey into the world of banking by a best-selling author of similar books about law, Wall Street, and Madison Avenue. The dynamic writing makes this book read like an adventure story.
McFadden Act Regulates Branch Banking
Banking Act of 1933 Reorganizes the American Banking System
Federal Credit Union Act
Banking Act of 1935 Centralizes U.S. Monetary Control