The Land of Dignified Credit
I
TWENTY-FIVE years ago, when a single dollar was still an imposing piece of currency and sales psychology had not yet developed its formulæ for undermining caution, an outside realestate firm brought into our hitherto quiet county-seat town the slogan, ‘A Dollar Down and a Dollar a Week.’ Both the language and the methods of installment buying were new to our community. Our merchants did a good deal of credit business, and farmer accounts frequently ran a year, from one crop to another; but these transactions were always based upon property and character. It was quite another thing to trust anyone who happened to have a dollar in his pocket. Old-fashioned folk denounced the innovation; some even thought it immoral, and all expected the promoters of that subdivision to go bankrupt. My employer, the newspaper publisher, demanded cash before he would print their dollar-down advertisements. But they did n’t go broke. Instead, they prospered, and on some of the lots then sold now stand huge automobile-factories whose products are being disposed at the rate of millions of dollars a year, through the medium of a shrewd time-payment system that involves billions of bank credit and is of immense social significance.
That crude early phrase — a dollar down and a dollar a week — seldom confronts the eye nowadays in sophisticated sections. It was, however, the sledgehammer that broke down the sales resistance of a generation geared to small things, a generation that had known years of hard times in the nineties and therefore looked to its pennies. Meantime we have grown rich, not only in hard cash, but in euphemistic phrases, with the result that the public is invited, even harangued, to buy to-day and pay in the long tomorrows; to use, wear, ride, play, and listen while paying; to avail itself of the apparently endless supply of ‘dignified credit for the masses.’ Only the other day I read that ‘the traditional barrier to home-ownership no longer exists — the down payment is done away with in buying our houses.’
One who brings merely an honest face to the counter and a job to the notice of the credit man may buy a motor car for $12.60 down and $5 a week, a $200 talking machine for $5 down, a suit of clothes for $3 down and wear it away, jewelry for nothing down and a set of dishes thrown in. If one chooses to answer certain advertisements, one need not even show his face or explain his job: dishes, books, furniture, and what not will be brought to the door in response to a signed coupon and left there on approval for thirty days. All you have to do to secure possession is to pay the expressman a small sum and promise to pay the seller like sums each month, if you decide to keep the goods. If the goods are found unsatisfactory within thirty days they may be returned without charge. Credits can get no looser than that — the seller asks the buyer no questions, conducts no investigation, and has no information whatever about him except a name and an address.
Hire-purchase contracts are old in law and history. The Babylonians recorded them on bricks and the Romans on parchment scrolls. In realestate purchases they are obviously suitable, since real estate worth buying produces, or can be made to produce, revenue. In a settled land every family must pay rent or its equivalent. The expense for shelter and standingroom is inevitable; and if some prefer to pay that expense in the form of taxes, interest, insurance, and monthly sums to a creditor instead of as rent to a landlord, it is well that they have the opportunity to do so. Provided that a buyer’s bargain is sound as to price and terms, and his schedule of payments is not out of line with his earning power, he secures the satisfactions and securities of home-ownership without economic loss and with the chance for gain if property values increase. Moreover, he has bought something which cannot be stolen, lost, easily damaged, or soon worn out, and which consequently is rated good security for a relatively large loan.
Tools and machinery, likewise, have long been sold on hire-purchase contracts, in recognition of the patent fact that in capable hands they pay for themselves by increasing output. Railway-equipment trust certificates are a modern variant of this ancient credit form. Installment sales of sewing machines and other devices that reduce household labor and save servant hire fall into the same category, unless the time which they save is wasted.
Obviously there is a distinction between such goods and those which cannot be applied to future production, which depreciate in use without producing value to offset that depreciation, and which can give the owner nothing more tangible than entertainment, comfort, luxury, pride of possession, and a sense of social superiority, such as comes to Mrs. Johnson when she spies Mrs. Richards looking enviously upon the delivery of the new Johnson piano, or to Miss Shaughnessy when her new frock — $5 down and $3 a week for ten weeks — charms Billy Maguire and makes jealous the less fashionably but perhaps more warmly clad Miss O’Malley down the street. Where the first cost is the only cost, or practically so, one negative factor is removed from the installment equation; perhaps the most satisfactory installment ‘buys’ from that standpoint are books and pictures, with furniture a close second. But when an article combines high costs of operation, upkeep, and depreciation with little or no earning power, costing money every day from the moment it enters one’s possession until the day it leaves, then it would seem that such an article is, on the very face of things, unsuited for carrying longterm credit, especially to purchasers of small means dependent upon wages.
Yet reality gives the lie to theory. Actually the largest volume of installment trading proceeds in precisely that kind of goods — automobiles. Eighty per cent of all automobiles manufactured in 1925 — approximately 3,000,000 — were sold on deferred payments. On the basis of an average price of $800, the sales of new cars totaled $2,400,000,000, of which the contract cars totaled $1,920,000,000, and the credit extended on them$1,280,000,000. But the trade on used cars has also been brisk, and the percentage of used cars sold on credit is probably larger even than the percentage of new cars sold on credit. Also more used cars are sold than new ones. Consequently the volume of credit extended in the field of retail automobile sales in 1925 was not far from $2,500,000,000. Practically all of it was extended by banks and discount companies, in the ratio of four bank dollars for one company dollar. As bank funds are the accumulations of savers and the balances of traders, it follows that the savers are financing the spenders, and work is financing leisure, to an impressive extent. These figures are conservative to a degree; in 1923-24 motor-car production reached $3,476,000,000, but this included trucks and cars for export, with which we are not here concerned.
While the automobile is the big frog in the installment puddle, it has plenty of company. Pianos were the first luxury-article to be vended systematically on time-payment plans, and 90 per cent of all musical instruments are to-day sold in that way. Add to the $2,500,000,000 worth of automobile debts written in 1925 the commitments for musical instruments, household appliances, furniture and other furnishings, radios, clothes, tires, books, furs, and the numerous other articles dealt in on the installment plan, and the year’s total credit extended in installment accounts must approach, and may exceed, $5,000,000,000. This is one twelfth of the estimated national income — though estimates of national income are not highly convincing — and more than a tenth of what is available for direct spending, since the savers still insist on tucking away about 20 per cent of the country’s annual takings. Indeed, if they did not, installment credits, and other credits likewise, would be greatly curtailed.
Business, consequently, has invaded future purchasing power to the extent of $5,000,000,000. Most of the notes which are part of this vast sum will be paid off within the coming twelvemonth, but until they are canceled the debtors, presumably, will buy less for cash or on open account than they would buy if they were free of debt during the interim. Of course, if wages go higher, that would take up part of the slack, and easy money poured into the installment game may stimulate buying sufficiently so that the lag will not be noticed for a time. Nevertheless, the situation is such that a busy year may well be followed by a quiet one in the installment lines. This tendency has already been noted; certain parts of the country that bought automobiles briskly in 1923 bought fewer in 1924 and came to the front again in 1925, although the general condition of those districts, from the standpoint of crops and payrolls, was better in 1924 than in 1923. The fact that automobile credit is being cheapened by manufacturers entering the credit field, through subsidiary discount companies, may hide for some time to come the tendency to periodicity inherent in the invasion of future earnings on twelve months’ paper, but that tendency is almost certain to appear as time runs on. Marvelous things can be done with ledgers and figures by shrewd financiers; but, after all, credit is not and never has been a bottomless pit, as all discover who proceed long upon that assumption. The pit is deeper than it was before the war, and its contents are being more skillfully handled, but the bottom is still there.
It is not my purpose to read the automobile trade a lecture. This article deals with the installment situation in general; and, if the automobile trade occupies a large place in it, that is merely because the automobile industry, with its usual initiative, has blazed the way of late with novel and efficient credit-methods which represent the keenest practice in the installment field. I have a wholesome respect for the automobile industry; by and large I suppose that no great industry is better managed or does more business on the capital invested. Certainly none has shown more initiative and courage, especially in its early years. Nevertheless, the leadership which the automobile trade is giving the installment interests at present leads straight toward trouble. It is forcing the pace in trading in futures on a gigantic scale, and some day events will call the turn — perhaps not soon, but eventually.
II
Banks, as I said, furnish four fifths of the credit extended to the public on motor cars. They do this chiefly by discounting the notes of finance companies which carry the other fifth on the strength of their capital stock and reserves. The growth of finance companies, both in number and resources, has been amazing. Some six hundred are members of a national association, and there is hardly a county-seat town where one of these companies does not stand ready to assist customers into debt. One concern, starting in 1912 with only $300,000 capital, now has $67,000,000 in assets and a turnover of nearly $200,000,000 a year. It is still growing, branching out, buying up smaller companies and turning them into branches. Present indications are that this automobile financing, which has been highly profitable, will be curtailed by the entry of manufacturers into the field, through their subsidiary finance companies, but even so the installment business shows such vitality that the finance companies no doubt will find opportunities in other lines.
A comprehensive description of the interrelations of buyers, dealers, discount companies, and bankers is impossible in a paper of this length. The fundamental, however, is that the discount company acts as a go-between. As a collector it stands between dealer and customer; as a financier it stands between the dealer and the banks. It takes the time customer’s notes off the dealer’s hands and collects them, most efficiently. It gives the dealer his money promptly, and the banker his money when due; the companies have excellent records in that regard. Procedure varies widely in different localities and among various companies in the same field. Some of the notes — or, in the trade phrase, ‘paper’ — arising from these transactions are sold outright by the dealers and endorsed by them without recourse, thereby releasing them from further liability in that connection; but the remainder, and considerably the larger part, they endorse in the ordinary manner and so are bound to see the deals through to the end. Many banks require trust agreements from the borrowing discount companies, whereby a trustee holds certain blocks of notes as security for company notes; others require surety bonds as additional safeguards; still others loan to finance companies of high standing without collateral.
As the finance companies grow in age and resources, the tendency is toward eliminating complications of all sorts in order to arrive at ‘clean deals.’ The late James B. Forgan said he would not loan a man a cent more on a bill of lading than he would loan him without it. More and more banks are taking the view that dealer endorsements, surety bonds, and trustee agreements are not worth the work they entail.
Finance companies charge well, but on the whole not usuriously, for the services they render and the risks they take. Their rates vary from two to three per cent above the bank rate. If the banks are loaning at six per cent, the time buyer pays eight or nine per cent. An automobile buyer who commands bank credit by virtue of his possessions and reputation would save money by going to his bank and hiring the money as against buying on time and letting the dealer sell his note series to a discount company. Nevertheless many substantial persons pay the high rate, perhaps because it is less bother, perhaps because they would rather not discuss with their bankers loans for such a purpose. By borrowing directly, they would not only save the differential in interest rate, but might also secure an additional discount on the list price from the dealer. Many a dealer gives five per cent discount on a clean cash deal, with no ‘trade-in.’ The going discount-company rates are due for diminution all along the line, since the financing branch of one of the great manufacturers has announced its intention to buy automobile paper from its dealers on a six per cent basis, plus a small charge — a standard which competition cannot ignore. This liberality, however praiseworthy in itself, tends to pull more customers into the credit orbit and increase the number of cars sold on time.
In Germany and Russia the disastrous effects of currency inflation were mirrored to the world; but the public does not as yet appear to grasp the truth that the bank check is a form of currency and that many of the evil effects of inflation inevitably follow undue expansion of credit, even though currency output remains stationary, or nearly so. Overexpansion of credit encourages overexpansion of plants, heavy output by manufacturers, and overstocking by their customers. The danger of overstocking dealers’ shelves is now generally recognized, both by manufacturers and by dealers; but there seems to be no general recognition as yet of the equal danger of overstocking consumers’ households on credit.
A good many bankers, however, do recognize this danger. Some two hundred of the leading banks in the country made an effort over a year ago to regulate automobile credit in the interest of conservatism. After conferring with representatives of the leading discount companies, these interests jointly agreed upon the Chicago Resolutions, adopted at that city on December 10 and 11, 1924. These Resolutions embodied a credit code which it was hoped the buyers and sellers of automobile paper would adhere to, thereby correcting recognized abuses and reëstablishing fundamental principles disregarded in the stress of competition.
All finance and bonding companies were urged to purchase, discount, lend upon, or guarantee only such automobile retail paper as met the following requirements: —
‘On monthly installment paper covering new passenger-cars, the maximum maturity shall not exceed twelve months, payable in equal monthly installments.
‘On monthly installment paper covering new passenger-cars, the minimum down payment by purchasers shall not be less than either one third of the cash or 30 per cent of the time selling price at point of delivery, including accessories and equipment.
‘On monthly installment paper covering used passenger-cars, the minimum down payment by purchasers shall not be less than either 40 per cent of the cash or 37 per cent of the time selling price at point of delivery, with a maximum maturity of twelve months, payable in equal monthly installments.’
East of the Rockies these standards were to become effective February 1, 1925; and ‘as soon thereafter as may be feasible’ on the installment-mad Pacific Coast, where easier terms had long prevailed.
Considering the peculiar inappropriateness of the automobile as a chattel in long-term credit, and the strength of the sponsoring banks and discount companies, the Chicago Resolutions seemed reasonable and likely to stick. But they did n’t. Cheap money and heavy output of cars proved too much for the conservatives. ‘The stress of competition,’ which the Resolutions referred to as the cause of the very condition which the Resolutions attempted to cure, continued its acquisitive wrestling, and the Resolutions were soon torn into scraps of paper. In some districts they are still adhered to; in others they were never applied; in still others they were tried and failed. Enough dealers would sell, enough discount companies would buy, and enough bankers would lend on the terms and conditions which the conservatives sought to outlaw, to upset the reform programme entirely. Other attempts to regulate the credit flow to automobile retail sales will be made from the inside, but something more than reason and logic is usually required to teach erring human nature its economic lessons. The failure of the Chicago Resolutions indicates that the trade in retail automobile credits, and other installment lines likewise, will go on until it gets its ‘comeuppance’ from an alarmed public. Thereafter it will be more cautious.
III
The claim that automobile paper is ‘self-liquidating,’ though often advanced, is ridiculous. The larger discount companies, it is true, have excellent records at their banks; but this is the result, not of the much overrated ‘honesty of the people,’ but of their prompt and tireless collection-departments, which lose no time in getting after delinquents. By no means all automobile paper is paid when due; extensions of one, two, and three months are not unusual even in these piping times, and many a secondhand sale is forced by the customer’s inability to meet his obligations and the certainty that he will lose his equity entirely unless he sells promptly. Repossessions are relatively few, because the debtor prefers a small loss to a large one and because the market is still absorbent. But the inference contained in the self-liquidating claim, that all time buyers of cars meet their contracts fully and automatically, is false. Discount companies earn their money by taking risks that banks refuse to take and by performing efficiently collection services that dealers do not care to undertake.
In attempting to regulate retail automobile credits from the inside, the bankers and the more conservative discount-company heads were foredoomed to failure because, for excellent reasons, they could not take their case to the public. They did not want to ‘start anything’ which would shake public confidence or unduly diminish trade. They realize that high production involves high consumption; and that limiting automobile sales through limiting credit would reduce employment in many lines, since the automobile industry is an important user of many basic products — notably steel, rubber, plate glass, paint and varnish, and machine tools. To hit the automobile industry unfairly or unnecessarily is to hit the nation. Consequently the conservatives in the saddle at Chicago in December 1924 did not carry their warning to the people. That warning went to the manufacturers and money-lenders and dealers, but it did not reach the man in the traffic jam. And, as long as the latter keeps on mortgaging his future to buy motor-transportation at rates that make his trade profitable, manufacturers, money-lenders, and dealers will keep on supplying his wants. In an easy money market there is practically no way of checking installment buying except through propaganda appealing to the common sense of common people.
Such propaganda is now getting under way, despite the diffidence of bankers and the coolness of newspapers which reflect, in their attitude, the influence of an enormous volume of automobile advertising. The grocery trade has been hard hit by installment selling, and so we find the National Grocers Association telling the world that many installment buyers let their grocery bills run overdue in order to keep up payments on luxury goods. To lose the car or phonograph would be to tell one’s neighbors a dismal truth; but no one except the little grocer on the corner knows the sad story his ledger tells. The National Hardware Association recently went on record to the same effect. Installment debtors not only use vast sums of credit for which they pay, but, by running bills overdue, they also use merchants’ credit for which they do not pay. A Western banker says that a neighbor boy told him: ‘The car’s ours now; we have just met the last payment.’ Within a week the family had moved, owing the landlord three months’ rent.
In order to possess nonessentials many families cut down on essentials, set a less nourishing table, buy fewer shoes, and skimp on living-quarters. The family that runs a car and yet cannot afford to install a bathroom may be found in every town. Statistics of trade increases in installment lines are clearly not net gains for the nation, because part of those gains must be offset by lessened buying in other lines. No wonder the spokesmen for those other lines are beginning to be heard.
Anti-installment sermons are coming also from the mourners’ bench, from firms which have tried selling on futures to Tom, Dick, and Harry, and live to rue their experience. Their explanations, after the merchandising cant of the time, usually dwell upon their duties to cash and substantial credit customers; but reading between the lines one infers that their adventures in installment selling simply did not pay. Presumably these firms did not advance prices to time-payment customers sufficiently to cover the risks and expenses involved, or their volume of deferred-payment business was not enough to let them maintain a sufficiently capable organization to follow up debtors and enforce collections. At any rate their experience ought to go some distance toward convincing the public that installment buying skies costs and prices, and to dispel the myth that installment debts are, from the creditor’s standpoint, self-liquidating.
But the hardest blow yet struck at the installment trade came from another quarter — from organized labor. Headquarters of the International Typographical Union issued a broad criticism of the practice, containing, among others, these points: —
‘Good wages and healthful workingconditions cannot add greatly to the wage-earner’s happiness if he persists in getting into debt. The root of the evil is the tremendous growth of the credit business, which in the last decade has raised a need of defense against the high-pressure type of salesman. . . . Insinuating salesmen, trained in selling-psychology and in “credit desire,” abetted by wives jealous of neighbors’ displays, are constantly waiting to take the breadwinner in a weak moment and unload something on him.'
Here, too, as in the case of merchants who have fared ill in the installment game, it is necessary to analyze motives a little. Union printers overloaded with installment contracts are likely to be sluggards in paying union dues; that, I dare say, is the root-reason for this particular criticism. Union labor has plenty of other good, selfish reasons for objecting to arrangements which, in effect, enforce upon conscientious workingmen a new sort of peonage. A union man carrying a load of contract debts is likely to suffer long and stand much. In a strike he must have more help from headquarters than his fellow who has larger savings, untapped credit, and few or no obligations. Whether you think this effect of installment debts is good or ill depends upon which side of the employment fence you sit upon; Judge Gary might think it good while President. Lynch thinks it bad. But both the industrial leader and the union head no doubt would agree that debts discourage many workers to the point where they cannot do good work, and that thrift surpasses extravagance as a foundation of worker responsibility.
IV
In preparing this article I have talked to bankers and merchants in widely different parts of the country, and I have heard and weighed all sorts of arguments in favor of installment trading. Losses are surprisingly light. One large finance company, specializing in automobile paper, lost less than one fifth of one per cent thereof over an eight-year period. Actually it is safer to loan on pleasure cars than on trucks, because frequently ability of a truck buyer to pay depends upon his keeping the truck busy, whereas the pleasure-car buyer’s earnings come from another and presumably more dependable source. I realize that the discipline of debt makes some men where it breaks others. Stimulating the sense of possession in a man of tenacious character is likely to steady him and stir his ambition. Likewise I am sure one merchant spoke the truth when he said that in this rough world of ours many a working girl could never get far enough ahead to own in fee simple a wardrobe suitable for her job. Likewise countless deserving clerks and laborers could never get homes of their own unless real estate and furniture were sold on the installment plan. Labor certainly is a better financial risk under the present immigration laws than it was before; and with our enormous gold stock, and the facilities offered by the Federal Reserve Bank, likelihood of a depression fades into the far distance. Statistics of savings-bank deposits, life insurance in force, and stock-ownership by employees are all most reassuring.
None of these arguments, nor all of them put together, quite justify the present landslide of easy credit toward the consumer. From the banking standpoint the test is yet to come; the experience, while favorable so far, is too short to be a safe guide to the future. ‘The people are honest’ — unquestionably most of them are; but more of them are honest in good times than in bad, and if a family becomes waterlogged with debt it sinks somewhat, honest or no. Dodging the installment collector is, even now, a popular indoor sport, references to which are ‘sure-fire stuff’ with vaudeville audiences inured to the game. There are better methods of applying the discipline of debt than through luxury goods; its most fruitful practice requires an enduring object for which one can sacrifice without remorse. Wages are high and may continue so, but in every country of large exporting power labor must compete with foreign labor through the price competition of goods for sale in world markets; no legislation can entirely ward off that risk.
Finally, it is axiomatic that the roots of industrial depression are not to be found in the closing of factories and the reduction of staffs. Those are symptoms, not causes. One cause is overexpansion of credit, easy money which stimulates too much buying and selling at too high prices, too heavy goods-production, too many long-term deals, until at last confidence is undermined and creditors call the turn. In so far as installment buying and selling inflates credit — and it does just that on a tremendous scale — it is setting the stage for future reversal.
A banker put the case thus to me: ‘A general situation like that is merely the net of a huge number of personal deals. If all of those deals are sound, there can be no possible danger financially, though there may still be some encouragement to extravagance. But, considering the mutations of employment and the chances of illness, it is not sound personal finance for a wageearner to tie up more than 25 per cent of his disposable annual balance in long-term debt contracts. His disposable annual balance is not at all the same thing as his income. If a family man earns $200 a month and his fixed necessary expenses are budgeted at $150, his disposable balance is $50, and he can pay $12.50 a month on installment purchases without danger of getting caught and also save steadily. A bachelor might go further without danger. If part of the income is derived from securities, the margin of safety rises. But the facts are that too many persons have contracted to pay out practically all their disposable surplus. This means that unlooked-for expenses or loss of income may mean the loss of goods under contract or a cut in the standard of living. To save a phonograph the family may go short on milk, and to save the motor car a lad may go to work when he should be going to high school. There is nothing wrong with installment buying as a system; but by every test I can apply it is being overdone in enough cases to alarm me, not only as a banker, but as a citizen.’
I have quizzed many employers as to the effect of installment buying on their employees. Only one could be found who gave whole-hearted approval. The others expressed various shades of disapproval, and for various reasons. I was told of the poor devil who has to borrow money from his boss each week, because he has overbought on contract goods. Also every town seems to have at least one unfortunate whose sales resistance is so low that his contracts total more than his earning power for the next year.
Into their decalogues for salesmen our best business houses have written this phrase: ‘Thou shalt not oversell the dealer.’ When the words ‘or consumer’ are added thereto, and the amended sentence is accepted by the responsible business community, all will be well in this Land of Dignified Credit for the Masses. For the consumer is financially all ‘skin and bleed’; he is no artificial person with large reserves, like the corporation, but merely an optimistic, rather inexperienced flesh-and-blood fellow with a job, a family, a home, and an overweening appetite for the good things of this earth. Hit him, and he does two things—he bleeds and he hits back, usually by electing to office politicians who are bad for business. Our serious radical movements, those which put substantial blocs into Congress and affected legislation, have all been counter-attacks by the debtdriven. Those business men who are busily making debtors through credit sales may well take a few minutes off to ponder the possible social and political results of overselling the consumer on deferred payments.