The advent of industrialization saw thousands of prewar immigrants and farmers flood into American cities in search of work. The challenges of city living created unprecedented demand for small-dollar, short-term loans. Yet making small loans to wage earners was an expensive business. First, it was risky — the same factors that necessitated borrowing in the first place (low wages, periodic unemployment, and unexpected expenses such as medical bills and home repairs) translated into high loss rates. Second, the costs of small loans is high relative to the amount borrowed —operating expenses such as rent, employee wages, and utilities are very similar regardless of whether the customer borrows $50, $500, or $5,000. In order to cover losses and those operating expenses, therefore, the effective interest rate on a small loan will have to be higher.

As a result, prohibitively low usury ceilings made it impossible for working families to borrow the money they needed from legitimate lenders. Illegal loan sharks filled the void, creating a reign of terror in American cities.