Commare N'Ciuzza and the Loan Shark; J. Doti

I had just purchased an Italian lem onade and was contentedly licking a chunk of lemon peel embedded in the ice as I walked across the intersec tion of Aberdeen and Taylor. Just then, two black sedans screeched around the corner, and I froze in my tracks as I heard the nerve-shatter ing 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 drag ging and pulling-Commare N'Ciuzza. Almost a year earlier I had met and befriended Commare N'Ciuzza. Dr. James Doti is Associate Professor of Economics and Director of the Center for Economic Research, Chapman College, Orange, California. James Doti Commare N'Ciuzza and the Loan Shark 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 survi ved the uni versi ty' s construc tion 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 495 496 THE FREEMAN August issues of the Fra Noi newspaper. The stark interior, however, belied the heated exchanges that generally in volved the relative merits (usually demerits) of the Chicago White Sox and Chicago Cubs. In another im portant ritual, I felt proud to be in vited on Friday nights to join fami lies on their front porches to engage in lively conversations that typi cally 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 mater nally treating my shock in the best way she knew how.

"Mangia, Mangia!" she com manded 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 mak ing 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 fa miliar 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 neigh borhood 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, "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 re cently 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 1983 COMMARE N'CIUZZA AND THE LOAN SHARK 497 Big Jake as a normal part of neigh borhood, 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 no ticed 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 refrigera tor 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 be yond all doubt the noble intentions of Big Jake. Her story, however, did, little to romanticize him. It all happened thirty years ear lier 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 or dered to leave.

With Tony out of a job and Com mare N'Ciuzzajust 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 naivete 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 shoot ing-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 undernour ished.

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 every498 THE FREEMAN August thing 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 pay ments, 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 BigJ ake 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 dis tinguishes 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 no ticed he was happily applying a Brillo pad to the three-inch whitewalls that adorned his tires.

Principles of Economics I always relate a shortened ver sion 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 deter mined 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 sup ply of loanable funds will be equal. Of course, higher interest rates will be necessary for those loans that in volve greater risk-otherwise, loan able 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 in terest rates that depend on the spe cific circumstances and, in particu 1ar' on the risks associated with various loans. This description of capital markets, however, suggests that high-risk loan candidates like a Commare N'Ci uzza 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 gov ernmental policies that take the form of usury laws (ceilings on the maxi mum interest rate that can be le gally 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 as sume when granting such loans. Contempt for lenders in general and in particular for lenders-of-last resort has a long historical tradi tion. This is evidenced by the fact that usury laws have been enacted 1983 COMMARE N'CIUZZA AND THE LOAN SHARK 499 throughout most of recorded history. The rationale for such laws can be found in many scholarly works, in cluding the writings of Aristotle and Thomas Aquinas and the Bible. Protestations against "lending at usury" are even found in the unlike liest place of all-The Wealth ofNa tions. Adam Smith contradicts his basic belief in the efficacy of the free market when he states: In countries where interest is permit ted, the law, in order to prevent the ex tortion of usury, generally fixes the high est 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 ex ample, 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. So ber 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 ad vantageous 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 lit tle 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 projec tors," usury laws would prevent or, at least, make it legally difficult to lend to high-risk borrowers-gener ally low-income individuals. Laws Against the Poor Even though the most noble in tentions may be behind the exis tence of usury laws, their impact is to take away alternatives and elim inate legal options that lowerin 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 ineq uitable and inefficient aspects of usury laws also apply to the ceilings that governmental agencies place on the interest rates that financial in stitutions are allowed to pay on de posits. Such deposits can be inter preted as loans that savers have 500 THE FREEMAN August extended to financial institutions. To be sure, the deregulation of finan cial markets in recent years has helped savers receive a more com petitive return. But because of de lays 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 sav ings account balances (usually lower income families and individuals) are receiving a less than competitive re turn.

Perhaps Commare N'Ciuzza was able to understand all of this in ob serving life outside her kitchen win dow. 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 al lowed her to understand something that has eluded even the greatest of scholars. The impact of usury laws, how ever, cuts far deeper than discrimi nating against the poor and disad vantaged. This is something even Commare N'Ciuzza did not fully un derstand. 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-determina tion 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 some thing can everywhere be made by the use of money, something ought every where 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 peo ple, who respect the laws of their coun try, the credit of all those who cannot give the very best security, and obliges them to have recourse to exorbitant usur ers.(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 1983 COMMARE N'CIUZZA AND THE LOAN SHARK 501 abhorrent aspects of loan-shark ing-the tactics that caused my mo mentary fright on Aberdeen Street take place because of laws that make market-determined interest rates il legal.

Several years ago I returned to "Little Italy." Commare N'Ciuzza was gone, of course, and even her home was replaced by a new resi dence that took on a Spanish motif but had a strange contemporary look about it. The bespectacled professor who answered the door of the resi dence 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 Gar ibaldi stood on the spot where lodge The Only Sound Policy members spent countless hours ar guing sports trivia. Asking around, I found that the Lodge Hall had been moved to a room in the newly constructed Senior Cit izens' Center. When I got there, I found a brightly painted and spa ciously furnished room with the lat est 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 com panion, "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. ~ IDEAS ON LIBERTY WHAT elevates the wage rates paid to the American workers above the rates paid in foreign countries is the fact that the investment of capital per worker is in this country higher than abroad. Saving, the accumu lation of capital, has created and preserved up to now the high standard of living of the average American employee. All the methods by which the federal government and the govern ments of the states, the political parties, and the unions are trying to improve the conditions of people anxious to earn wages and salaries are not only vain but directly pernicious. There is only one kind of policy that can effectively benefit the employees, namely, a policy that refrains from putting any obstacles in the way of further saving and accumula tion of capital.

LUDWIG VON MISES, "The Economic Role of Saving and Capital Goods"