Racketeers and Suckers: When the Depression Hit the Building and Loans

The 1920s were weird. People went from keeping their savings under the mattress to buying Liberty Bonds to throwing money at building and loan associations promising 7 percent interest. It happened fast. And if you lived in Colorado Springs, the whole town was riding this wave of easy money and big promises.

Chapter 3 of Shortfall shows you what was really going on inside the B&L industry before everything fell apart. And honestly, it’s worse than you’d think.

The Roaring Twenties Were Built on Debt

Here’s what I found most striking about this chapter. The consumer revolution of the 1920s wasn’t fueled by rising wages. It was fueled by debt. By 1930, installment credit financed 80 to 90 percent of all furniture sales and up to 75 percent of automobile purchases. General Motors beat Ford not because it made better cars, but because it offered financing.

Being in debt used to be shameful. By the twenties, it was just how Americans lived.

Building and loan associations rode this shift perfectly. They blurred the line between savings and investment. Walter Davis offered 6 percent interest on deposits, which was already way more than regular banks. Other B&Ls in town went higher. The Dollar and Home associations advertised 7 percent. In a town where actual opportunities were drying up as the gold mines slowed down, these rates looked like a sure thing.

And people believed it. Why wouldn’t they? The guys running these associations were their neighbors. Fellow Masons. Fellow Elks Club members. People they saw at church.

The B&L Men of Colorado Springs

Echols introduces us to the three other B&L operators in town besides her grandfather. Each one had his own flavor of shadiness.

Willis Sims ran the oldest B&L in town, the Assurance. He was also president of the State Savings Bank. A Master Mason, a founding member of the Rotary Club, chairman of the local Liberty Bond drives. This guy was the definition of establishment. But he had no money of his own. So when a real estate deal came along, he started embezzling from his B&L to finance it. He built a fancy auto lodge near the Garden of the Gods, figuring tourists would flock to it. He borrowed $30,000 from his own B&L and took a $10,000 loan from his own bank. By the time the lodge opened, it was 1930 and tourists had stopped coming.

Fred Bentall was the outsider. A Democrat in a Republican town. A KKK leader in a community that opposed the Klan. He ran the Home B&L out of a messy office with records kept on scraps of paper stuffed into desk pigeonholes. He bought a ranch outside town and stocked it with cattle using depositors’ money.

Ed Sharer had spent years working for some of the richest men in Colorado Springs. He tried to make it as a real estate developer in Los Angeles and came back with nothing. He got involved with the Dollar B&L and used it to fund his own land deals. When an audit in 1927 found a $32,000 shortfall, he begged the auditor: “Think of my wife and children.” The state chose not to prosecute.

Here’s the thing. None of these men lived extravagant lives. Sims died owning a $40 radio and an old Chrysler. Bentall had a ranch and some cattle. They weren’t living large. They were desperate men making increasingly bad bets with other people’s money.

The Culture of Getting Ahead

Colorado Springs made it worse. The town had this painful combination of visible wealth and limited opportunity. The mining boom was ending. Tourism was becoming the main industry, which meant service jobs. Meanwhile, Spencer Penrose and other millionaires drove canary-colored luxury cars through town. The gap between rich and everyone else was right there in your face.

Four million Americans were playing the stock market. Newspapers and magazines ran tips on how to strike it rich. If you were a middle-class man running a building and loan, watching your more connected neighbors climb the social ladder, the temptation to cut corners must have been enormous.

And this is where Echols makes her sharpest point. People like to believe that financial fraud happens at a distance. Big banks on Wall Street, faceless corporations, anonymous transactions. But in Colorado Springs, everyone knew everyone. These B&L men were your neighbors, your fellow churchgoers, your lodge brothers. All those “social checks of personal obligation” that are supposed to keep people honest? They didn’t work at all.

Walter Davis and His Expensive Life

While the other three B&L men were quietly stealing small amounts, Walter Davis was spending big. His wife Lula discovered his affair with his young stenographer, Eva Terry, around 1923. Rather than confront and resolve it, the Davises entered this bizarre arrangement where Lula kept spending and Walter kept paying.

The numbers are staggering. Between 1926 and 1929, Davis spent over $33,000 (about $463,000 today) on boarding school for his daughter, European trips, Packard and Cadillac automobiles, and setting up Eva with an apartment, a baby grand piano, and $350 a month.

By 1930, Davis carried over half a million dollars in life insurance. The Denver Post ran a story about it, calling him one of the most insured men in Colorado. His wife kept the clipping. She was proud. But if you think about it for even a second, why would a building and loan operator need that much life insurance? That detail should have been a red flag. It wasn’t. Because after all, as Echols writes, Walter Davis was not their banker. He was the banker of working people and the middle class, the people nobody in Springs society worried about.

The Setup for Disaster

By the end of this chapter, every single building and loan in Colorado Springs was operating with a shortfall. Some from embezzlement. Some from bad investments. Some from paying interest rates they couldn’t afford. Most from all three.

The economist John Kenneth Galbraith had a theory about embezzlement. He called it the “time parameter.” Embezzlement increases during good times because nobody’s looking hard at the books. People feel richer than they are. The stolen money creates what Galbraith called “psychic wealth.” Everyone feels good until the economy turns and the auditors start checking.

The economy was about to turn very, very hard.

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