UBC Theses and Dissertations

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UBC Theses and Dissertations

Installment credit in agriculture Winram, James Mills 1933

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B . C . LIBRARY .  INSTALLMENT  CREDIT  IE  | GAT HO. LEsihn. m$,M-: ,QklS  AGR j^W.UBa.  A THESIS.  SUBMITTED BY JAMES K I L L S WINRAM EOR THE'DEGREE OE FOSTER OE SCIENCE  AGRICULTURE y  AT THE .. UNIVERSITY OE "BRITISH •COLUMBIA. APRIL  1333.  :  F^J~i7  INSTALLMENT CREDIT I N AGRICULTURE. (INDEX) " I  History. a. D e f i n i t i o n  >  P.  1.  b . H i s t o r i c a l "background  P . 1.  c . The r i s e of the f i n a n c e companies  P.T.-3.  d. Installment  buying i n countries  outside  the U . S . P . 6,  II A r t i c l e s affected.  P . 8.  a . A p p l i c a t i o n to consumers and producers  goods  b . A p p l i c a t i o n to a g r i c u l t u r e I I I . Is - i n s t a l l m e n t  P.10.  c r e d i t e c o n o m i c a l l y sound.  a . A t t i t u d e of b u s i n e s s  P. 9.  leaders  P.12. P.14,  b . E f f e c t on d i s t r i b u t i o n  P.18.  c . Comparison between urban and r u r a l b u y i n g power  P.22.  d . Earm and urban b u y i n g power i n the U . S .  P.25.  e. Fartn and urban b u y i n g povver i n Sanaa a .  P. 31.  I V . Hazards a. Moral r i s k  P.33,  b . Crop f a i l u r e and uneven s e a s o n a l c . P a l l i n g p r i c e s and d e p r e c i a t i o n V . C o s t s and l o s s e s  returns  P.34. P.36.  .  a . Cost of the money  P.37.  b . Cost o f c r e d i t  P.38.  investigation  c . C o s t of c o l l e c t i o n s .  P.11.  d . Insurance  P.42.  on a u t o m o b i l e s  e. R u r a l i n s u r a n c e  P.44.  f . Rate's and t h e i r c a c l c u l a t i o n .  P.51.,-  Index VI  (continued)  What i n s t i t u t i o n i s best adapted to do t h i s  finaneing.  a . P r i v a t e brokerage houses  P.54.  b . Batiks  P.55.  c . Government i n s t i t u t i o n s V I I The e f f e c t  '  of i n s t a l l m e n t b u y i n g  a . On the b u s i n e s s b . On the c h a r a c t e r  cycle o f the  P.59, individual  P.61. P.62..  c . On s o c i e t y as a whole Appendix. Volume of a u t o m o b i l e paper i n Vancouver ¥inram Securities L t d . r u r a l References.  P.57.  .  experience*  (chart)  •PREFACE TO THE THESIS.  T h i s i s an e x p o s i t i o n of the h i s t o r y , methods and t h e o r y of i n s t a l l m e n t b u y i n g as i t a f f e c t s  several  important  a r t i c l e s o f modern commerce. The g e n e r a l e x p e r i e n c e description is f i r s t  and  o u t l i n e d and then urban p r a c t i c e  is  compared w i t h r u r a l p r a c t i c e . Except i n the case o f farm machinery the r u r a l d i s t r i c t s had never been a b l e to much i n s t a l l m e n t  c r e d i t up t i l l  a few y e a r s ago. I t  the aim of the w r i t e r to show the ways i n w h i c h c r e d i t has been s u c c e s s f u l o r u n s u c c e s s f u l ?jhere t h e r e i s the e x p e r i e n c e  get is  installment  i n the  cities  o f s e v e r a l y e a r s to draw on  and then to t r y to p o i n t out the s p e c i a l f e a t u r e s w h i c h would be l i f c e l y to a l t e r these c o n c l u s i o n s from standpoint  of r u r a l  business.  Installment  credit  and the purpose  i s the same wherever  of t h i s t h e s i s  i s to o u t l i n e i t s  t h e o r y and w o r k i n g s and- then to a p p l y the r e s u l t s agricultural  conditions.  the  applied general to  1.  INSTALMENT  CREDIT  IN  AGRICULTURE.  DEFINITION. The best d e f i n i t i o n o f i n s t a l l m e n t b u y i n g i s g i v e n by P r o f e s s o r ¥ . C . P l u m m e r of the U n i v e r s i t y o f P e n n s y l v a n i a . He s t a t e s t h a t i t i s a purchase,.. or s a l e , where the p r i c e o f the goods i s to be p a i d i n f i x e d p o r t i o n s at s t a t e d  intervals.  A s i d e from a cash or down payment w h i c h i s u s u a l l y made a t the time of s a l e , the t r a n s a c t i o n payment i n c o n t r a s t  i s s i m p l y one o f  deferred  to one o f c a s h payment and does not  differ  i n i t s n a t u r e from any o t h e r c r e d i t t r a n s a c t i o n . As s t a t e d above i n s t a l l m e n t c r e d i t p r o v i d e s f o r regular  and f i x e d  installments.  of funded debt i n c o n t r a s t  the payment o f debt i n  In t h i s r e s p e c t  to a demand o b l i g a t i o n which i s  payable a t the r e q u e s t o f the c r e d i t o r , or to the account w h i c h I s payable i n whole or i n p a r t s a t convenience o f the d e b t o r .  i t is a sort  charge the  I t a l s o stands i n c o n t r a s t  to  k i n d o f debt w h i c h runs f o r a s t a t e d p e r i o d and w h i c h i s be p a i d i n a lump sum at the end of the In b u y i n g on the  the to  period.  i n s t a l l m e n t p l a n the goods  are  d e l i v e r e d to the b u y e r , but the t i t l e to them g e n e r a l l y remains i n the s e l l e r and does not pass to the buyer  until  all  the i n s t a l l m e n t s are p a i d . D e f a u l t i n payment i n almost  all  cases g i v e s the s e l l e r the r i g h t to p o s s e s s i o n of the  goods. I t a l s o f o r f e i t s  a l l previous  payments.  HISTORICAL BACKGROUND. I n s t a l l m e n t b u y i n g was i n t r o d u c e d to the U n i t e d S t a t e s  i n 1807 by the founder of Cowperthwait and Sons o f New Y o r k City,  I t was a p p l i e d f i r s t to f u r n i t u r e but soon spread to  o t h e r b u s i n e s s c a r r i e d on by t h i s f i r m and to s i m i l a r companies such as Ludwig Bauman and Co.., and Jordan M o r i a r t y and Co, The f u r n i t u r e houses were v e r y c a u t i o u s i n the s e l e c t i o n of r i s k s . Customers dependent  on wages and s a l a r i e s amounted to  90 percent and the r e m a i n i n g 10 per cent was composed o f s m a l l b u s i n e s s men. The sewing machine b u s i n e s s was the next to w h i c h the system was a p p l i e d . The S i n g e r Sevjing Machine Co. began to s e l l on the i n s t a l l m e n t p l a n about profitable  1850. T h i s was not as  because the r i s k was g r e a t e r . The p u r c h a s e r s were  u s u a l l y people o f lower incomes. B u i l d i n g and Loan A s s o c i a t i o n s have been u s i n g t h i s p r i n c i p l e f o r the p a s t e i g h t y y e a r s , McCormick r e a p e r s and b i n d e r s have been s o l d i n t h i s manner almost from the b e g i n n i n g of t h e i r use and l a r g e r p i e c e s of farm machinery have been s o l d t h i s way f o r the p a s t f i f t y  or s i x t y y e a r s .  I n s t a l l m e n t s e l l i n g of p i a n o s began about f i f t y ago. T h i s was at f i r s t a v e r y h i g h grade b u s i n e s s because  years the  goods we£e bought c h i e f l y by people o f a h i g h e r s t r a t u m of s o c i e t y and the down payment was u s u a l l y o f at  least  one-:tlii'rd  the p r i c e . I n r e c e n t y e a r s cheaper p i a n o s have been s o l d i n t h i s manner and r e p o s s e s s i o n s are by no means uncommon. The l a s t twenty y e a r s have w i t n e s s e d a tremendous e x p a n s i o n b o t h i n volume o f s a l e s and the number o f i n d u s t r i e s a f f e c t e d , w i t h the g r e a t e s t i n c r e a s e t a k i n g p l a o e between 1920 and 1923, A f t e r  1923 i t d i d not i n c r e a s e as r a p i d l y and i n 1925  3  M r . M i l a n V . A y r e s , the s t a t i s t i c a l a n a l y s t of the  National  A s s o c i a t i o n o f P i n a n c e Companies e s t i m a t e d t h a t the volume o f i n s t a l l m e n t debt was 7 per cent g r e a t e r the end o f 1926 i t was 8 per cent  t h a n i n 1923 and by  greater.  •THE RISE OE THE EI NANCE COMPANIES. The f i n a n c e companies appeared because t h e y had a good enough c r e d i t r e p u t a t i o n to endorse the paper to banks and they were a b l e to g i v e more a t t e n t i o n to  the  individual  c o l l e c t i o n s than the banks were. The f i n a n c e company i s a new middleman because i t stands between the manufacturer and the d e a l e r , between the d e a l e r and the consumer, between the  banks  and the b o r r o w e r s . These o r g a n i z a t i o n s are r e f e r r e d to as f i n a n c e . , c r e d i t , d i s c o u n t or acceptance companies. I t was not u n t i l about 1915 or a l i t t l e  e a r l i e r t h a t they appeared  i n the  a u t o m o b i l e i n d u s t r y . Some are l a r g e c o r p o r a t i o n s d o i n g b u s i n e s s on a n a t i o n a l or even an i n t e r n a t i o n a l s c a l e w h i l e many are s m a l l and c o n f i n e t h e i r a c t i v i t i e s to one  city.  The f u n c t i o n of a f i n a n c e company i s s i m i l a r to  that  o f s, commercial bank i n t h a t i t has a s i m i l a r d i s c o u n t i n g function.  I t d i f f e r s from the bank i n t h a t i t s funds are  not  o b t a i n e d from d e p o s i t o r s and i t r a r e l y comes under the b a n k i n g law. The l a r g e s t company i n t h i s b u s i n e s s t o - d a y i s  the  G e n e r a l Motors Acceptance C o r p o r a t i o n , u s u a l l y r e f e r r e d to as G.M.A.C.  I t was formed i n 1919 as a s u b s i d i a r y o f G e n e r a l  M o t o r s . A l l the p r o d u c t s s o l d by G e n e r a l Motors C o r p o r a t i o n are f i n a n c e d by t h i s company a.nd|(fche t o t a l amount o f c r e d i t  4.  extended by i t on i n s t a l l m e n t  s a l e s i s almost a b i l l i o n  dollars  a year. The o l d e s t man i n the r e g u l a r a u t o m o b i l e  financing  b u s i n e s s was p r o b a b l y L . P . W e a v e r o f San F r a n c i s c o who began i n 1913. At t h a t time he had been engaged  i n the s e l l i n g o f  wagons and o t h e r v e h i c l e s on c o n d i t i o n a l s a l e agreements f o r about f i f t e e n y e a r s . Commercial Investment latter  I n 1927 h i s company s o l d out to  the  T r u s t C o r p o r a t i o n o f New Y o r k . The  o r g a n i z a t i o n i s t o - d a y the  second l a r g e s t  finance  company. I t was formed i n 1924 as a merger o f the Commercial Investment  T r u s t I n c . , w h i c h had been e s t a b l i s h e d  in Missouri  i n 1908, the M e r c a n t i l e Acceptance C o r p o r a t i o n s o r g a n i z e d i n I l l i n o i s i n 1905 and the Canadian Acceptance C o r p o r a t i o n L t d . I n 1927 the company purchased  the Chicago Acceptance C o r p o r a t i o n  and the L . P . W e a v e r Company, ^he f o l l o w i n g y e a r i t bought., the C a r o l i n a C r e d i t Company and the P i r s t Mortgage  Investment  Company o f T e x a s . I t a l s o owns a s u b s i d i a r y company i n Germany, one i n Prance and one i n S c a n d i n a v i a and has an agreement'with Britain.  operating  the U n i t e d Dominions T r u s t Company o f Great  I t owns o f f i c e s  i n A r g e n t i n a , B r a z i l , Cuba and P o r t o  R i c o as w e l l as n e a r l y a hundred b r a n c h o f f i c e s  i n the  United  States, I n the y e a r 1929 i t Its  loaned a t o t a l o f 1 2 8 2 , 1 6 3 , 0 0 0 ,  c h i e f c l i e n t s are the Dodge, N a s h , Graham P a i g e , l i u p m o b i l e ,  C h a n d l e r , Reo, Hudson E s s e x Companies, Radio C o r p o r a t i o n o f A m e r i c a and the American Piano Company.  M r , M o r r i s o f M o r r i s Banks "began f i n a n c i n g  automobile  s a l e s i n 1910, but o n l y s p a s m o d i c a l l y , . He began d e f i n i t e l y doing t h i s  i n 1919 when the I n d u s t r i a l Acceptance  was formed. T h i s i s t o - d a y one of the a b u s i n e s s of almost $100,000,000  Corporation  big s i x concerns,  a year  (figures  for  doing 1927 and  1928). I t has branches i n Buenos A i r e s , B r u s s e l s , London, Sydney and Sao P a u l o , as 'well as i n the North America. Its Compan3 , the  l e a d i n g c i t i e s of  c h i e f customers are the N a t i o n a l R a d i a t o r  J o h n s - M a n v i l i e Company and the  r  Studebaker  Corporation. The Commercial C r e d i t Company i s one o f the and a l s o one of the o l d e s t  companies  i n the b u s i n e s s .  o r g a n i z e d by M r , A . E . D u n c a n i n 1912, and i n 1928 i t $265,88.4,000.  Its  largest It  was  loaned  customers i n c l u d e the G e n e r a l E l e c t r i c  Company, K o l s t e r R a d i o , Wright Aero C o r p o r a t i o n , Chicago Pneumatic  Tube Company, Thomas A . E d i s o n I n c o r p o r a t e d ,  and. W i l l y s O v e r l a n d . I t has branches i n 158 c i t i e s  of  Chrysler the  U n i t e d S t a t e s and Canada and r e p r e s e n t a t i v e s i n 277 f o r e i g n c i t i e s and  towns.  ~ E a r l y i n 1918 Hare and Chase was formed to handle the b u s i n e s s o f the P a c k a r d Motor Car Company and a y a a r  later  the Merchants and M a n u f a c t u r e r s  S e c u r i t y Company was formed  i n C h i c a g o . The f i r s t  company has s i n c e gone i n t o  mentioned  l i q u i d a t i o n because o f i t s l o a n p o l i c y . The U n i v e r s a l C r e d i t C o r p o r a t i o n was o r g a n i z e d February  1928 by the E o r d Motor Company to handle i t s  ment f i n a n c i n g .  in  install-  In i t s f i r s t year's o p e r a t i o n s i t advanced  credi  t o t a l l i n g over |>75,000 ,000, I n Canada the UTord Motor Company's business  i s handled by T r a d e r s F i n a n c e C o r p o r a t i o n . A u t o m o b i l e s are f i n a n c e d by the f i f t e e n  companies i n t h i s b u s i n e s s  largest  I n the U n i t e d S t a t e s and many f i n a n c  a v a r i e t y of o t h e r goods b e s i d e s but none o f them appear handle farm m a c h i n e r y o r - e q u i p m e n t , s h o u l d be a r i c h f i e l d t h a t would undertake  to  I f t h i s . i s the ease t h e r e  f o r investment a w a i t i n g the  to f i n a n c e farm implement  companies  manufacturers  such as Massey H a r r i s , I n t e r n a t i o n a l H a r v e s t e r Company and others. The movement of form f i n a n c e companies grew v e r y rapidly after  1920 and by 1922 t h e r e were over a thousand  o r g a n i z a t i o n s h a n d l i n g automobile paper. Mr.Clarence Y.-Palitz> P r e s i d e n t of the C r e d i t A l l i a n c e C o r p o r a t i o n , when s p e a k i n g i n New Y o r k i n 1925 s t a t e d  t h a t at t h a t time t h e r e were one  thousand f i v e hundred o r g a n i z e d f i n a n c e companies and two thousand f i v e hundred i n d i v i d u a l s d a b b l i n g i n the  business.  INSTALLMENT BUYING I N GOUNTBIES-- O U T S I J J E . T H E UNITED STATES. I n s t a l l m e n t b u y i n g has a l s o i n c r e a s e a g r e a t l y i n other c o u n t r i e s b e s i d e s the U n i t e d S t a t e d .  I n Canada the  oldest  o r g a n i z a t i o n d e a l i n g e x c l u s i v e l y ' w i t h automobile f i n a n c i n g was p r o b a b l y the f i r m of Winram B r o t h e r s at V a n c o u v e r . T h i s  firm  was o r g a n i z e d as a p a r t n e r s h i p  least  i n J u n e , 1917 but f o r at  f i v e y e a r s p r i o r to t h a t date the members had been d i s c o u n t i n g automobile paper.  I n F e b r u a r y , 1932 the b u s i n e s s was i n c o r p o r a t  as Winram S e c u r i t i e s L i m i t e d .  7.  England has what i s known as the " h i r e purchase" and t h i s method has been w i d e l y used i n the s a l e o f m a c h i n e r y , ; , ; a g r i c u l t u r a l i m p l e m e n t s , a u t o m o b i l e s , f u r n i t u r e and m u s i c a l i n s t r u m e n t s . E i g h t y p e r c e n t of the p i a n o s , s e v e n t y p e r c e n t of the sewing m a c h i n e s , s i x t y p e r c e n t o f the a u t o m o b i l e s and  fifty  p e r c e n t of the f u r n i t u r e are s o l d on the p a r t payment b a s i s . ^ F r e n c h law r e c o g n i z e d a form o f c o n d i t i o n a l s a l e i n 'which the t i t l e passes to the buyer on payment o f the i n s t a l l m e n t . Such a s a l e i s known as a "vente** a  last  temperament".  I n Germany s a l e s on the i n s t a l l m e n t p l a n under w h i c h the t i t l e to the goods remains v e s t e d i n the vendor are customary and were becoming i n c r e a s i n g l y p o p u l a r up t i l l  1929. D u r i n g the  i n f l a t i o n p e r i o d such s a l e s were r a r e because at t h a t time the c u r r e n c y was d e p r e c i a t i n g so f a s t  t h a t s a l e s had to be made f o r  cash.  * C. Chisho Im  The Ilanchester G u a r d i a n Cotmnercial, S e p t . 16 ,1926 ,  9,  APPLICATION TO CONSUMERS' AND PRODUCERS' GOODS. In o r d e r to s t u d y p r o p e r l y the use o f the payment p l a n i t i s n e c e s s a r y producers'  to make a d i s t i n c t i o n between  goods and consumers'  instruments  deferred  goods. The former  o f p r o d u c t i o n and goods i n p r o c e s s  includes  of p r o d u c t i o n .  By t h i s we mean such a r t i c l e s as m a c h i n e r y , f a c t o r y and s t o r e equipment, b u i l d i n g s , motor t r u c k s , and r a i l w a y equipment. T h i s form o f w e a l t h i s used i n d i r e c t l y to s a t i s f y human wants, Seligman e l i m i n a t e s t r a c t o r s  and farm machinery  from h i s d i s c u s s i o n on the grounds t h a t they are  production  goods and not consumption g o o d s . In 1926 the t o t a l volume o f farm machinery s o l d on time i n the U n i t e d S t a t e s was $ 2 8 , 0 0 0 , 0 0 0 and $ 7 1 , 0 0 0 , 0 0 0 w o r t h o f t r a c t o r s  were s o l d i n the same way,  Consumers' g o o d s , o n the o t h e r h a n d , are used to s a t i s f y human wants d i r e c t l y , . Examples o f t h e s e goods c l o t h e s , f o o d , houses, Fifty-nine  percent  are:  a u t o m o b i l e s , r a d i o s and s i m i l a r  articles.  o f the a u t o m o b i l e s were s o l d on time i n 1926  a c c o r d i n g to S e l i g m a n , He a l s o e s t i m a t e s t h a t e i g h t y  percent  o f the f u r n i t u r e  estimate  for  i s s o l d i n t h i s way, M i l a n V . A y r e s '  t h a t y e a r i s somewhat d i f f e r e n t .  new c a r s s e v e n t y - s i x p e r c e n t and e i g h t y percent  He s t a t e s t h a t among the  are s o l d on the i n s t a l l m e n t p l a n  o f the new t r u c k s .  In a l e t t e r  to  the  w r i t e r he p o i n t s out t h a t these e s t i m a t e s are o n l y g e n e r a l and he knows o f no way i n w h i c h t h e i r a c c u r a c y c o u l d be t e s t e d . . ' For the same y e a r i n Canada e i g h t y - t h r e e  percent  of  the  a u t o m o b i l e s were b e i n g purchased w i t h d e f e r r e d payments w e l l as f i f t y instruments.  percent  o f the farm machinery and m u s i c a l  as  Ml  10.  APPLICATION TO AGRICULTURE. Among the e a r l i e s t advocates i n Canada were the manufacturers  o f the  installment  o f f a r m i n g implements, who by  e x t e n d i n g c r e d i t over a p e r i o d o f y e a r s , enabled p i o n e e r to a c q u i r e the n e c e s s a r y machinery to produce l a r g e of f o o d . Without t h i s a s s i s t a n c e  system  farmers  quantities  the p u r c h a s e r would have been"  s e v e r e l y handicapped and the remarkable growth of a g r i c u l t u r e , e s p e c i a l l y i n Western Canada, can i n no s m a l l way be to the advantages of t h i s  attributed  system.  The l o c a l agents o f the Massey H a r r i s Company and I n t e r n a t i o n a l H a r v e s t e r Company e s t i m a t e  t h a t i n normal times  such as f i v e o r s i x y e a r s ago s i x t y percent  of the  farm  machinery i s bought on time i n Western Canada. In the  newer  d i s t r i c t s t h i s p e r c e n t a g e i s h i g h e r and at the p r e s e n t time i s about e i g h t y - f i v e percent  the  it  f o r the r e g i o n as a w h o l e . At the  p r e s e n t time t h e r e are no s o u r c e s from w h i c h exact f i g u r e s on t h i s subject  may be o b t a i n e d .  L e t t e r s were w r i t t e n to M r . H . M a r s h a 1 1 , C h i e f o f I n t e r n a l Trade B r a n c h , Dominion Bureau of S t a t i s t i c s ,  the  Dr.J.P.  B o o t h , Commissioner o f the A g r i c u l t u r a l Economics Branch o f the Department  of A g r i c u l t u r e and the L i b r a r i a n o f  the  Department o f A g r i c u l t u r e L i b r a r y at Ottawa, A l l of these men s t a t e d i n t h e i r r e p l i e s t h a t no d a t a i s a v a i l a b l e i n Canada which s e p a r a t e s r u r a l and urban i n s t a l l m e n t p u r c h a s e s . A s i m i l a r r e p l y was r e c e i v e d from M r . H a r o l d Stehman, o f the Department  of Commerce, W a s h i n g t o n , from M i s s Mary E«.Lacy,  the  L i b r a r i a n of the A g r i c u l t u r a l Economics L i b r a r y a t • W a s h i n g t o n and from M r . M i l a n V . A y r e s , the S t a t i s t i c a l A n a l y s t o f  the  11.  H a t i o n a l A s s o c i a t i o n of F i n a n c e Companies. T h i s i n f o r m a t i o n shows t h a t we c a n o n l y draw g e n e r a l c o n c l u s i o n s and then how they w i l l a f f e c t  agriculture.  The m a j o r i t y o f the a r t i c l e s purchased are t h a t i s , they do not need to be r e p l a c e d f o r s e v e r a l  durable. years.  A p o s s i b l e e x c e p t i o n to t h i s  i s the a u t o m o b i l e i n w h i c h  are a l a r g e i t e m o f expense.  Installment  repairs  c r e d i t s h o u l d not be  extended on goods w h i c h are q u i c k l y consumed o r rapidly. Life  estimate  depreciate  i n s u r a n c e w h i c h has been e s t a b l i s h e d f o r a v e r y  l o n g t i m e , has now reached enormous p r o p o r t i o n s , and i t may be s a f e l y s a i d to be one o f the most im.ports.nt c o n t r i b u t i n g factors  to our p r e s e n t day c i v i l i z a t i o n .  The p o l i c y h o l d e r  i m m e d i a t e l y c r e a t e s an e s t a t e , the payment f o r wlkich i n most cases extends  over a p e r i o d o f y e a r s .  It  i s thus an i n s t a l l m e n t  purchase and perhaps the most i m p o r t a n t of a l l purchases the d e f e r r e d  payment p l a n .  on  Ill IS INSTALLMENT CREDIT ECONOMICALLY SOUND„ It of  i s i n t e r e s t i n g to note t h a t i n 1925 the m a j o r i t y  economists and b u s i n e s s l e a d e r s o f the c o u n t r y viewed  i n s t a l l m e n t c r e d i t w i t h a l a r m and p r e d i c t e d t h a t i t would 1ead to extravagance and a back b r e a k i n g l o a d o f d e b t s . By the b e g i n n i n g o f 1928 i t was seen t h a t the p r e d i c t e d c a l a m i t i e s had not o c c u r e d and i n s t e a d the system had tended to s t a b i l i z e outputs  reduce p r o d u c t i o n c o s t s , r a i s e s t a n d a r d s  o f l i v i n g and  i n c r e a s e p u r c h a s i n g power throughout the c o u n t r y g e n e r a l l y . The most r e c e n t comment on t h i s s u b j e c t  i s g i v e n by  M r . H a r r y R . T o s d a l i n the January 1933 number of the H a r v a r d L B u s i n e s s Review.  He s t a t e s t h a t "The d i s a s t e r t h a t was  p r e d i c t e d f o r i n s t a l l m e n t s e l l i n g has not m a t e r i a l i z e d i f volume o f c r e d i t l o s s e s s u s t a i n e d mean a n y t h i n g . W h i l e i t known t h a t I n d u s t r i e s  is  i n w h i c h i n s t a l l m e n t s e l l i n g was  important have been g e n e r a l l y a f f e c t e d by the d e p r e s s i o n , to what e x t e n t t h a t f a c t what e x t e n t  i s due to the method o f f i n a n c i n g and to  i t i s due to the f a c t t h a t the goods  o p t i o n a l purchases one cannot  represented  say."  [Producers' c r e d i t has* been used f o r a l o n g time and i t meets w i t h no c r i t i c i s m because i t enables people w i t h w e a l t h to p l a c e i t i n the hands of o t h e r s more e f f i c i e n t l y .  so t h a t i t may be employed  On the o t h e r hand consumers' c r e d i t has been  o b j e c t e d to on moral grounds because i t enables people to buy goods before t h e y have the money to pay f o r them. Some r e c e n t changes i n the M a r k e t i n g of Consumer Goods."  13  "*"John S t u a r t M i l l  objected  t o i t on t h e g r o u n d that  A , s u p p l i e s g o o d s t o a c o n s u m e r B, t o t h e v a l u e to for  i fa dealer  o f £ 1 0 0 , payment  be made i n f i v e y e a r s , t h e c o u n t r y h a s h a d £100 l e s s productive purposes during those  capital  years.  Howeger t h e o l d c r i t i c i s m o f c o n s u m e r s ' c r e d i t directly  applicable to installment credit.  accepted  that Seventy-five  sixty-five  percent  percent  i s not  I t i s g e n e r a l l y ec  of a l l washing  machines,  o f a l l vacuum c l e a n e r s and t h e g r e a t e r .  p r o p o r t i o n o f a l l s e w i n g machines a r e s o l d ' on t h i s p l a n . These goods  generally classified  ?  saving devices  as consumers' goods a r e l a b o r  and b y f r e e i n g w o r k e r s  amount o f d r u d g e r y r e l e a s e p r o d u c t i v e  i n t h e home f r o m a c e r t a i n e f f o r t f o r other  Then t o o t h e p u r c h a s e o f an a u t o f o r p l e a s u r e  purposes.  c a n be done by  either paying  c a s h a n d t a k i n g t h e money o u t o f t h e b u s i n e s s o r  by p u r c h a s i n g  on t h e i n s t a l l m e n t p l a n a n d l e a v i n g t h e money i n  productive  channels  undisturbed.  t a k e money o u t o f p r o d u c t i v e  Installment buying  channels  a s do s a v i n g s  does n o t accounts  b e c a u s e ' t h e money i s i n a c t i v e u s e and g o o d s a r e b o u g h t ;  current  with  income. It  i s h a r d l y c o r r e c t t o l o o k on an a u t o ,  t r a c t o r or  p i e c e o f f a r m m a c h i n e r y a s b e i n g consumed a s s o o n a s i t i s \>l placed life  i n the hands o f a customer. D u r i n g  o f an a u t o i t w i l l  u s u a l l y pass through  s e v e r a l c u s t o m e r s , e a c h o f whom w i l l car,,  the seven years of t h e hands o f  use o n l y a p a r t o f the  so t o s p e a k . I n o t h e r w o r d s t h e p u r c h a s e r  auto , . o f a new^obtaxns  t r a n s p o r t a t i o n o f w h i c h he may. and o f t e n does s e l l Does n o t t h e f i n a n c i n g o f a n u n u t i l i z e d -fr " P r i n c i p l e s  of P o l i t i c a l  a portion.  stock of t r a n s p o r t a t i o n  Economy" 1915 e d i t i o n ,  pp513,14.  14  c o n s t i t u t e q u i t e as l e g i t i m a t e a c l a i m upon l o a n a b l e funds financing a.stock of  c a p i t a l goods? The more d u r a b l e  as  the  commodity the g r e a t e r w i l l be the p r o p o r t i o n of t h i s unused stock, S a l a r i e s and wages i n the U n i t e d S t a t e s f e l l and a h a l f  percent  nine  i n 1921 as compared w i t h 1930 w h i c h had  been a r e l a t i v e l y p r o s p e r o u s y e a r . D u r i n g the same p e r i o d business p r o f i t s f e l l entrepreneurs  t h i r t y percent.  The incomes o f farmer  would be i n c l u d e d w i t h i n the l a t t e r g r o u p . T h i s  would seem to i n d i c a t e t h a t time s a l e s to urban wage e a r n e r s are r e l a t i v e l y safe as compared w i t h s i m i l a r s a l e s to  farmers  who are more dependent  on f l u c t u a t i n g p r o f i t s . However i n  prolonged depressions  l a r g e numbers of wage e a r n e r s become  unemployed and can t h e r e f o r e  pay n o t h i n g w h i l e farmers  are  always sure o f food and s h e l t e r , ATTITUDE OF BUSINESS LEADERS. D u r i n g the e a r l i e r y e a r s ,  (1919 - 1927) i n s t a l l m e n t  b u y i n g was r o u n d l y condemned by many prominent f i n a n e i a l and i n d u s t r i a l men throughout the w o r l d . A t t h i s time l e a d i n g • ' A u s t r a l i a n bankers condemned t h i s form o f c r e d i t on the t h a t i t encouraged n e e d l e s s extravagance  grounds  i n a country which  has i t ' s income v e r y g r e a t l y i n f l u e n c e d by d r o u g h t . They c l a i m e d t h a t i t encouraged poor people to go i n debt  to  purchase l u x u r i e s . The m a j o r i t y of these men c o n s i d e r e d t h a t i n s t a l l m e n t b u y i n g was o n l y j u s t i f i e d i n the purchase o f * Mr.Thomas B u c k l a n d , P r e s i d e n t , Bank o f Hew South W a l e s , M r . Henry P . S t u r g i s , C h a i r m a n , Union Bank o f A u s t r a l i a , Mr.George J . C o h e n , C h a i r m a n , Commercial B a n k i n g Company o f Sydney, M r . Kenneth Goschen, C h a i r m a n , Bank of A u s t r a l a s i a .  15  useful,  p r o d u c t i v e goods such as land f o r p r o d u c t i v e  purposes,  farm implements and t r u c k s . Canadian bankers took a midway stand and s a i d t h a t  it  was a good t h i n g i f conducted c a u t i o u s l y . By t h i s they meant t h a t t h e r e s h o u l d be a f a i r  cash payment, the goods s h o u l d o n l y  be s o l d to a buyer o f good s t a n d i n g and the c o n t r a c t  s h o u l d not  be too l o n g drawn o u t . The g r e a t e s t a n t a g o n i s t  o f i n s t a l l m e n t b u y i n g i n the  U n i t e d S t a t e s was Senator Couzens. He d e p l o r e d the p r a c t i c e on the grounds t h a t thousands of young men were becoming so bound up w i t h f u t u r e  payments, t h a t they dare not take a  r i s k i n a new v e n t u r e o v e r l o o k e d the f a c t  of e i t h e r  reasonable  employment o r i n v e s t m e n t . He  t h a t v e r y few people have h i s own a b i l i t y  to d i s t i n g u i s h between sound and unsound i n v e s t m e n t s w h i l e i f they are p u r c h a s i n g a motor c a r or some o t h e r commodity they can  see d e f i n i t e l y what they are g e t t i n g f o r t h e i r money.  He s t a t e s t h a t c o s t s are too h i g h because the buyer the b u y e r , pays f i f t e e n to t h i r t y p e r c e n t i n t e r e s t . I f he .were to put hisA money i n a s a v i n g s bank and then purchase  the a r t i c l e f o r  he would not o n l y save t h i s charge but he would r e c e i v e or f o u r p e r c e n t can e f f e c t  a net  cash  three  on h i s d e p o s i t . By p o s t p o n i n g 'the purchase s a v i n g of e i g h t e e n to t h i r t y - f o u r  However l e t us not l o s e s i g h t o f the f a c t  he  percent.  t h a t money i s a  commodity and t h a t the r e t a i l p r o f i t i n c o n n e c t i o n w i t h d i s t r i b u t i n g i t s h o u l d c o r r e s p o n d to t h a t o f d i s t r i b u t i n g r e t a i l goods. The banks l o a n at a cheaper r a t e than the  other  finance  * S i r Vencent M e r e d i t h , P r e s i d e n t , Bank of M o n t r e a l , M r . C . A . B o j e r t , V i c e - P r e s i d e n t , Bank o f T o r o n t o ,  16  companies but t h e y are hot l o a n i n g t h e i r own money. They Loan t h a t o f t h e i r d e p o s i t o r s f o r w h i c h t h e y pay a v e r y low r a t e o f interest;  o r they may even l o a n t h e i r own bank n o t e s . A bank w i t h | 4 ,000 ,000 c a s h c a p i t a l can s a f e l y l o a n  s e v e r a l times t h i s much money. By p u t t i n g up t h i s money as a cash r e s e r v e w i t h the M i n i s t e r of F i n a n c e at Ottawa i t  can  i s s u e notes to the v a l u e o f $10,000,000 b e c a u s e ' C a n a d i a n law only r e q u i r e s a f o r t y percent  reserve  on n o t e s . D u r i n g the  moving season i t may i s s u e an a d d i t i o n a l f i f t e e n p e r c e n t .  crop In  a d d i t i o n to t h i s t h e r e would be s e v e r a l m i l l i o n d o l l a r s on d e p o s i t and n o r m a l l y o n l y twenty to t h i r t y p e r c e n t  of  this  would be w i t h d r a w n s u d d e n l y . These w i t h d r a w a l s c o u l d be cashed .w i t h bank n o t e s o f the  i s s u i n g bank. Thus the twenty  r e s e r v e might c o n s i s t o f #10,000,000  i n bank notes and i n t h i s  way $ 5 0 , 0 0 0 , 0 0 0 c o u l d be loaned s a f e l y . I f the banks o p e r a t e w i t h one hundred percent  efficiency  a s s u r e d o f a r e t u r n o f seven p e r c e n t  percent  could  they would be  on $.50,000,000 or $ 3 , 5 0 0 , 0 0 0  from an I n i t i a l c a p i t a l o f $ 4 , 0 0 0 , 0 0 0 , When these p o t e n t i a l p r o f i t s are compared w i t h the p o t e n t i a l p r o f i t s o f a f i n a n c e company the r a t e s o f f i f t e e n to t h i r t y p e r c e n t latter  are not e x h o r b i t a n t .  charged by the  Other r e t a i l l i n e s h a v e - a h i g h e r  p o s s i b l e p r o f i t than t h i s but s i n c e i t can be l a r g e l y c o n c e a l e d it  i s not c r i t i c i s e d to the same  extent.  S e n a t o r Couzens a l s o s t a t e s t h a t c h a r a c t e r  i s being  undermined because p e o p l e get goods w i t h o u t h a v i n g any p r e l i m i n a r y s a v i n g or s a c r i f i c e . T h i s argument l o s e s much o f i t s f o r c e i f we r e g a r d i n s t a l l m e n t b u y i n g as e n f o r c e d s a v i n g .  17  There are many people who can o n l y save i f they have  entered  i n t o a d e f i n i t e c o n t r a c t w i t h r e g u l a r payments w h i c h they  are  reminded to meet. Seligman c o n s i d e r s t h a t a p o s s i b l e danger might  arise  out o f i n s t a l l m e n t b u y i n g "because i t a l l o w s i n f e r i o r goods to be s o l d to Ytforkingmen who have no i d e a o f v a l u e s . On the hand he m a i n t a i n s t h a t i f t h i s c r e d i t i s r e s t r i c t e d to p r o p e r commodities and i s g r a n t e d  other  the  to the r i g h t k i n d of  i n d i v i d u a l s i t w i l l g r a d u a l l y s l o u g h o f f i t s dangers and a b u s e s . When compared w i t h o r d i n a r y p r o d u c e r s '  credit  it  possesses  c e r t a i n a d d i t i o n a l advantages o f i t s own such as the d i s t r i b u t i o n of  r i s k over a wide v a r i e t y o f o c c u p a t i o n s , of g e o g r a p h i c a l  areas and o f i n d u s t r i a l  situations.  The e d i t o r s o f t r a d e j o u r n a l s w e r e , i n the m a i n , opposed to i n s t a l l m e n t b u y i n g up t i l l  1926. Even such a w e l l  known paper as the New Y o r k J o u r n a l o f Commerce i n the  issue  of October 2 1 , 1 9 2 5 , d e p l o r e d the widespread and i n c r e a s i n g use of  the d e f e r r e d  payment p l a n . I t p o i n t e d out t h a t though f i n a n c e  companies had s u f f e r e d time, business high l e v e l .  c o m p a r a t i v e l y few l o s s e s up t i l l  that  c o n d i t i o n s had been good and wages h e l d at a  I t was s t a t e d t h a t s'hould a, d e p r e s s i o n come the  d e a l e r s would f i n d goods on t h e i r  themselves w i t h l a r g e s t o c k s o f p a r t l y used  hands.  The November 14,1925 i s s u e of the Magazine" sounds a w a r n i n g a g a i n s t  "Hardware and M e t a l  extending i n s t a l l m e n t  credit  i n t o l i n e s f o r w h i c h i t i s not s u i t e d . I t d e p l o r e s the f a c t i n an age when every c l a s s o f b u s i n e s s  is dealing in  futures  that  the wage e a r n e r  i s b e i n g encouraged to mortgage h i s s a l a r y f o r  months ahead i n o r d e r t h a t he may buy something t h a t  he c o u l d  p r o b a b l y do w i t h o u t . Tbe a r t i c l e does r a t h e r g r u d g i n g l y admit t h a t many p e o p l e have been enabled to o b t a i n comforts of  life  t h a t they would o t h e r w i s e have had to do w i t h o u t . However the p r e d i c t e d d i s a s t e r s many o f the p r e v i o u s opponents  d i d not o c c u r and  began to r e c o n s i d e r t h e i r  arguments.  On November 18,1926 the "New Y o r k J o u r n a l o f Commerce" s t a t e d t h a t every phase o f economic l i f e has been a t t e n d e d by the a d d i t i o n o f a new form of c r e d i t a p p r o p r i a t e  to i t s own  c o n d i t i o n s . E v e r y g r e a t advance i n the development o f the n a t i o n has been f i n a n c e d on c r e d i t and p a i d f o r i n i n s t a l l m e n t s . Consumer c r e d i t p a i d i n i n s t a l l m e n t s i s s i m p l y the a d a p t a t i o n of the p r i n c i p l e to the advances to  individuals.  EEEECT ON DISTRIBUTION. A f t e r c a r e f u l s t u d y , men such as P r o f e s s o r W i l b u r C . Plummer, D r . E . R . A . S e 1 i g m a n , W i l l i a m T r u f a n t P o s t e r and W a d d i l l C a t c h i n g s began to advocate  i n s t a l l m e n t payments on the ground  t h a t t h e y were e c o n o m i c a l l y sound. The reason they gave was t h a t i n a p e r i o d o f i n c r e a s i n g p r o d u c t i v i t y the flow o f consumers' goods i n t o the markets' i n c r e a s e s f a s t e r  than the  flow  of money i n t o the consumers' p o c k e t s . T h i s can be shown by the f o l l o w i n g f i g u r e s c u l l e d from the S t a t i s t i c a l A b s t r a c t of the United. S t a t e s ,  1932. In 1920 the p o p u l a t i o n o f the U n i t e d S t a t e s  was 106,418,175 o f whom 3 9 . 1 p e r c e n t  or 4 1 , 6 1 4 , 2 4 8 were  gainfully  employed. Of these employed people 1.63 percent r e c e i v e d incomes of | 5 0 0 0 or more. The average  income o f the r e m a i n i n g 98,37  p e r c e n t was $ 1 , 2 6 1 , 4 0 . I n 1928 t h e r e were 4 7 , 0 1 8 , 7 4 1 people  gainfully  e m p l o y e d o f whom.2.11 p e r c e n t r e c e i v e d i n c o m e s o f  $ 5 0 0 0 o r more. The a v e r a g e i n c o m e o f t h e r e m a i n i n g 97.89 was f 1 1 5 1 . 5 0 or••$109.90 l e s s t h a n i n 1 9 2 0 . D u r i n g t h i s  percent  periodcl  t h e w e a l t h o f t h e n a t i o n was "being c o n c e n t r a t e d more and more i n t h e h a n d s o f a few p e o p l e Date. '•  ~WT~  as shown i n t h e f o l l o w i n g  Ho.of persons Their-total r e p o r t i n g incomes combined o f $10p!>000 o r incomes. more. . • . . .'. ..  (2T~  1920 3,649 1921 2,352 1922 4,031 1923-4,182 1924 5,715 1925 9,560. 1926 9^582 1927 11,122 1928 15,977  T h e i r combined s u r p l u s f o r investment a f t e r deducting |100,000 l i v i n g expenses f o r each i n d i v i d u a l .  m  T3)  727,011,000 463,002,000 892,748,000 912,988,000 1,237,939,000 2,317,759,000 2,384,090,000 2,833,218,000 4,451,205,000  table:  362,111,000 227,802,000 489,648,000 494,786,000 666,439,000 1,361,759,000 1,425,890,000 1,721,018,000 2,853,505,000  .  The s i g n i f I.catlce o f t h e s e f i g u r e s - i s t h a t t h o u g h employment h a d r e m a i n e d p r a c t i c a l l y  s t a t i o n a r y and t h e income  o f t h e s m a l l wage e a r n e r d e c l i n e d s l i g h t l y  t h e r e was  tremendous s u r p l u s a c c u m u l a t i n g f o r investment  a  purposes.(see  c o l u m n 4 ) T h i s s u r p l u s was  l a r g e l y i n v e s t e d i n machinery of  p r o d u c t i o n . The r e s u l t was  t h a t t h e r e was a t r e m e n d o u s i n c r e a s e  i n o u t p u t w i t h o u t a c o r r e s p o n d i n g ' i n c r e a s e i n . income t o a b s o r b it.  The f m i c t i o n o f i n s t a l l m e n t  credit  d i s t r i b u t i o n of. g o o d s b y f a c i l i t a t i n g  i s to a s s i s t the o r d e r l y  o f money. A n e x a m p l e o f t h e o v e r - e x p a n s i o n o f p r o d u c t i o n i s shown i n t h e a u t o m o b i l e S t a t e s has f a c i l i t i e s i n s p i t e of the f a c t auto  i n the  expenditure  of the machinery  i n d u s t r y . The U n i t e d  f o r p r o d u c i n g 8,000,000 a u t o s a y e a r that i n the best year  s a l e s o n l y 4,500,000 w e r e  sold.  i n the h i s t o r y of  From t h e s e f i g u r e s  it  i s apparent  t h a t i n d u s t r y does  not pay consumers as much money as i t eccpects consumers to pay for  i t s p r o d u c t s . I n o t h e r words b u s i n e s s i s conducted at a  profit.  There i s an a d d i t i o n a l d r a i n on consumers'  buying  power i n the form of s a v i n g s . Since, therefore, t h e i r current  consumers cannot buy the goods w i t h  income, i n d u s t r y has r e s o r t e d more and more to  the d e v i c e o f h a n d i n g them goods to be p a i d f o r out o f income. Had we not c o n t r i v e d to pass on to consumers  future  about  t h r e e b i l l i o n d o l l a r s w o r t h of excess goods those goods would not have been produced at a l l . For t h i s r e a s o n i n s t a l l m e n t b u y i n g h a d , up t i l l  1928,saved the c o u n t r y from a marked  b u s i n e s s d e p r e s s i o n . I n the f i v e y e a r s from 1921 to 1926 i n d i v i d u a l s a v i n g s i n banks a l o n e i n c r e a s e d over e i g h t  billion  d o l l a r s . Most o f these s a v i n g s were i n t u r n loaned out  to  i n c r e a s e the output o f i n d u s t r y s t i l l f u r t h e r ,  and t h i s would  have soon caused a r e c e s s i o n i n b u s i n e s s had the e f f e c t s been o f f s e t  not  by the volume o f goods bought on t i m e .  One r e s u l t o f i n s t a l l m e n t buying i s t h a t the  banks  are e x t e n d i n g c r e d i t on the consumer s i d e when f o r m e r l y i t ?i/as a l l extended on the p r o d u c t i o n s i d e . T h i s i n c r e a s e i n consumption has come about  l a r g e l y throughtthe  development  of f i n a n c e c o r p o r a t i o n s w h i c h are so conducted t h a t the banks are w i l l i n g to l e n d them money, w h i c h they would hot have on the a c c o u n t s r e c e i v a b l e o f the o l d i n s t a l l m e n t  lent  selling  houses, The net r e s u l t  i s t h a t a l a r g e volume o f  finished  goods have been d i s t r i b u t e d to consumers w h i c h o t h e r w i s e c o u l d  not have "been d i s t r i b u t e d . T h i s i s a form of c r e d i t e x p a n s i o n w h i c h does not b r i n g on "a d e p r e s s i o n . P r e v i o u s d e p r e s s i o n s have been brought on by an e x p a n s i o n of p r o d u c t i o n c r e d i t . But s i n c e t h i s i s expaaalona o f consumption c r e d i t i t to o f f s e t  serves  the e v i l s o f o v e r p r o d u c t i o n . The drawback to t h i s t h e o r y o f a v o i d i n g d e p r e s s i o n s  i s the f a c t  that  , c o n t r a r y to t r a d i t i o n a l economic t h e o r y , a  g i v e n s u p p l y does not produce an e q u i v a l e n t demand. The p r o d u c t i o n of a d d i t i o n a l goods does not o f i t s e l f  produce an  e q u a l demand. To i l l u s t r a t e t h i s l e t us assume t h a t a c e r t a i n farmer can buy i n a y e a r $10,000 w o r t h - o f goods because he earns t h a t much e v e r y y e a r . A f t e r due c o n s i d e r a t i o n he d e c i d e s to buy an auto to be p a i d f o r "out of income, r a t h e r than out of c a p i t a l " . The d e f e r r e d payments amount to $1000. For t h i s y e a r t h e n , h i s purchases amounted to 1 1 1 , 0 0 0 and the  total  s a l e s of the a u t o m o b i l e b u s i n e s s i n g e n e r a l has been s t i m u l a t e d by $1000. I n the f o l l o w i n g y e a r , however, he must reduce h i s c a s h purchases to § 9 , 0 0 0 i n o r d e r to pay the $1,000 on the  car.  C l e a r l y then he cannot c o n t i n u e b u y i n g at the $11,000 l e v e l u n l e s s he mortgages $2 ,000 of h i s f u t u r e  income. S i m i l a r l y i n  the t h i r d y e a r $3,000 would have to be mortgaged and so o n . As a result  i t i s p l a i n t h a t b u y i n g cannot be m a i n t a i n e d w i t h o u t  h a v i n g the consumer d o u b l e , t r e b l e and quadruple h i s debts as years•go on. The s t i m u l u s of i n s t a l l m e n t b u y i n g l a s t e d l o n g e r i n the p a s t t e n y e a r s than would appear from the above  illustration.  The i n c r e a s e d consumption gave more employment and t h i s p l a c e d a d d i t i o n a l p u r c h a s i n g power i n the hands o f consumers. way the e v i l s of i n c r e a s i n g debt were p a r t l y o f f s e t . it  In t h i s  Prom t h i s  can be seen t h a t i n c r e a s e d consumption caused by i n s t a l l m e n t  b u y i n g cannot delay  e l i m i n a t e the b u s i n e s s d e p r e s s i o n but can o n l y  it. A p o i n t which has not been g r e a t l y emphasized, i s t h a t  time payments make the p u r c h a s e r  l o o k ahead w i t h g r e a t care and  p l a n h i s e x p e n d i t u r e s w i t h more t h o u g h t f u l  i n t e l l i g e n c e . The  e v i l s o f the system w h i c h were b e i n g p o i n t e d out by prominent b u s i n e s s men i n 1925 and 1926 had not t a k e n p l a c e by 1928 and the m a j o r i t y o f the t r a d e j o u r n a l s were b e g i n n i n g to the i n c r e a s e d use o f t h i s form o f c r e d i t . the s u b j e c t Merchant  !I  advocate  I n i t ' s a r t i c l e on  i n the i s s u e o f January 26,1928 the "Maratime  t e l l s how the  l a t e L o r d Shaughnessy  saved h i s  first  hundred d o l l a r s . When a young men he d e c i d e d t h a t he had to do something to save money so he went to the l o c a l bank and asked them to d i s c o u n t h i s note f o r $100, Having e x p l a i n e d h i s  purpose  he got the money and met the note at the due d a t e . T h i s J o u r n a l p o i n t s out t h a t i n the same way i n s t a l l m e n t b u y i n g thrift  by c a u s i n g , young men to budget  encourages  t h e i r expenditures  in  advance. COMPARISON BETWEEN RURAL AND URBAN BUYING POWER. Having s a t i s f i e d ourselves that i n s t a l l m e n t c r e d i t r e l a t i v e l y sound we must next determine how w i d e s p r e a d i s  the  demand f o r i t . S i n c e demand i s d e s i r e backed up by p u r c h a s i n g power i t i s n e c e s s a r y  to know the p u r c h a s i n g power of  and urban d w e l l e r s i n o r d e r to compare the two,  farmers  is  The r a p i d development o f a g r i c u l t u r e i n the l a s t few decades w i t h the accompanying r i s e i n the p r i c e o f l a n d , equip ment and s u p p l i e s has r e s u l t e d i n an enormous i n c r e a s e investment and o p e r a t i n g c a p i t a l f o r each farm u n i t .  in  In  a t t e m p t i n g to m a i n t a i n the r e q u i r e d c a p i t a l to o p e r a t e most e c o n o m i c a l l y the farmer has found i t n e c e s s a r y to borrow.  T  he  c a p i t a l r e q u i r e d by the farmer has i n c r e a s e d to such an e x t e n t t h a t the a c c u m u l a t i o n of enough to own a complete farm has come to be p r a c t i c a l l y a l i f e t i m e j o b , ¥ h a t i s why more fartns are mortgaged to~day  not because the i n d u s t r y i s p o v e r t y  stricken. The b u y i n g power of the farmer i s not to be measured by p r i c e alone but by c o n s i d e r i n g , farm income as a w h o l e . T h i s i s shown by the expanding s a l e s o f m a i l o r d e r houses and farm implement companies from 1919 to 1929, I n the f i v e p r e v i o u s to 1929 the f a r m e r s '  income i n c r e a s e d f i f t y  w h i l e the f a c t o r y workers wage i n c r e a s e d e i g h t  years percent  percent,  However when the .post war- boom p e r i o d i s taken as a base a different  r e s u l t a p p e a r s . The f a c t o r y wage has gone up two  p e r c e n t w h i l e the farm income has gone down t w e n t y - s e v e n percent.  A b s o l u t e comparisons between farm income and urban  income have been common i n r e c e n t y e a r s but such comparisons are o n l y h a l f  t r u t h s because they p r e s e n t the farmer as b e i n g  i n such a d e p l o r a b l e s t a t e as to c h a l l e n g e h i s i n t e l l i g e n c e f o r s t i c k i n g w i t h f a r m i n g . In o r d e r to compare w i t h urban, income the l i v i n g o b t a i n e d from the farm s h o u l d be c o n v e r t e d to a c i t y v a l u a t i o n b a s i s .  The p r i m a r y c o m p e t i t i o n i n the farm f a m i l y i s between land investment expenditures  and l i v i n g .  family  the prime c o m p e t i t i o n i s between p h y s i o l o g i c a l and  non-physiological expenditures. mortgage d e b t s and payments  A d e c l i n e i n income w i t h  on farms r e m a i n i n g the same i s  accompanied by a d e c l i n e i n l i v i n g . reduced and i n t e r e s t previous  I n the urban  expenditures  I f payments  on farms  i s u n p a i d , l i v i n g may remain at  are  it's  level. P u r c h a s i n g power of Cash Farm Income.  Year.  Cash farm income f o r pro?Cash farm income F a c t o r y p r o d u c t i o n and expenses. for l i v i n g . -wages. 1919-20 100 100 100 2 0 - 21 64 32 96 2 1 - 22 57 30 84 2 2 - 23 76 57 116 2 3 - 24 84 66 119 2 4 - 25 95 81 117 2 5 - 26 97 85 117 2 6 - 27 92 74 119 2 7 - 28 98 84 121. The above t a b l e was t a k e n from '-Estimates o f A g r i c u l t u r a l Income i n the U . S . " by T o l l e y . J o u r n a l o f Parm E c o n o m i c s , January 1929. It  i s h a r d to reduce a f a r m e r ' s  income to a money  b a s i s . He Is g e n e r a l l y i n a b e t t e r p o s i t i o n than wage earners b e c a u s e : f i r s t , v a l u e s a l l o w e d f o r items s u p p l i e d by the are u s u a l l y w h o l e s a l e w h i l e urban f i g u r e s he has the  interest  on h i s investment  are r e t a i 1 ;  farm  secondly,  and i n p e r i o d s o f r i s i n g  p r i c e s he has h i s income i n c r e a s e d by r i s i n g land v a l u e s . The demand f o r the p r e s e n t use of i n s t a l l m e n t undoubtedly a r o s e out of the growth o f the a u t o m o b i l e The i n c r e a s e d  investments  has caused o t h e r  credit  industry.  i n automobiles which t h i s r e s u l t e d  industries  in  such as those s u p p l y i n g f o o d ,  c l o t h i n g , shoes and l i v i n g q u a r t e r s to s u f f e r .  Radios, pianos.  28  washing machines, t r a c t o r s be s o l d on the  and o t h e r commodities have had to  i n s t a l l m e n t b a s i s i n order to compete w i t h  the'  a u t o . D i s t r i b u t i o n i s the g r e a t problem of modern economics and this  i s one way to f a c i l i t a t e i t . The e s s e n t i a l s e r v i c e o f  i n s t a l l m e n t c r e d i t to the consumers the t o t a l payment  into f r a c t i o n a l  i s preformed by b r e a k i n g up  payments.  The demand i n the c i t i e s i s not c o n f i n e d to any one c l a s s though i t farmers  i s g r e a t e s t among the s m a l l income g r o u p . The  of the M i d d l e West and Southern S t a t e s of the  United  S t a t e s are u s i n g t h i s as much as the c i t y d w e l l e r s , Seligman found t h a t i n the case o f s t r i c t l y consumers goods, w i t h e x c e p t i o n o f hardware, the amount o f c r e d i t  the  i n c r e a s e d as he  went from s m a l l towns to l a r g e and from s m a l l s t o r e s to  large.  The farm machinery companies enabled the s e t t l e r s  to  get a s t a r t on the p r a i r i e s by s e l l i n g them machinery on t i m e . Without t h i s h e l p from the companies most of these men would have been unable to get  enough c r e d i t to s t a r t f a r m i n g . T h i s i s  a form of i n s t a l l m e n t c r e d i t , but the payments are u s u a l l y made once a y e a r a f t e r  harvest.  As a r e s u l t  o f the i n s t a l l m e n t l o a n i n g machinery being-  put i n t o a c t i o n hundreds o f thousands o f p e o p l e , some of whom had s c a r c e l y known what c r e d i t  i s , have been brought  into  the  network o f the c r e d i t system and are no?; u s e r s o f s e v e r a l thousand m i l l i o n d o l l a r s o f c r e d i t a n n u a l l y . T h i s c r e d i t evidenced by l e g a l Instruments  is  such as o r d i n a r y p r o m i s s o r y notes  c o l l a t e r a l t r u s t notes and c o l l a t e r a l t r u s t  bonds.  BARM AND URBAN BUYING POWER IN THE UNITED STATES. When comparing the bar c h a r t s on t a b l e A and t a b l e B  Table A THE PER CAPITA FARM INCOME IH EACH STATE. 1919 - 20 - 21 S t a t e s a r r a y e d a c c o r d i n g to s i x e o f per c a p i t a c u r r e n t income i n 1919. Rank.Per c a p i t a current (dollars) 1919 1920 1921  income  State A  1.  1064  832  628  Nev.  2.  953  746  487  Wyo.  3.  916  1064  726  Cal.  4.  630  621  451  Ore.  5.  669  347  150  S.D.  6.  614  659  533  Wash.  7.  609  569  328  Col.  8.  587  523  342  Ida.  9.  565  566  419  H.J.  10.  559  240  137  Ia.  11.  544  371  166  111?  12.  537  612  470  H.Y.  13.  534  365  268  D.C.  14.  533  537  319  Ariz.  15.  521  615  508  R. I .  16.  510  625  574  Ma s s.  17.  510  360  187  EL P.  18.  487  395  186  Kan.  19.  483  284  99  Heb.  20.  464  545  570  Conn.  21.  463  4 96  359  Wis.  22.  449  392  237  Utah.  23.  427  386  305  Mont.  24.  406  257  142  Minn.  1  1  I  J  1  1  L  27 Table A . ( c o n t i n u e d )  25.  1919 392  1920 374  FARM IUCOME ( c o n t i n u e d ) 1921 341 Me.  26.  279  327  190  Ohio.  27.  375  344  233  H . M.  28.  371  269  135  Ind.  29.  368  374  276  Penn.  30.  363  381  255  Mich.  31.  360  327  171  Tex.  32.  354  298  137  Ok l a .  33.  348  299  178  Del.  34.  339  444  387  Ver.  35.  324  228  ' 124  Mo.  36.  312  288  168  Md.  37.  298  192  99  S.C.  38.  296  372  379  ¥.H.  39,  277  242  164  Pla.  40,  275  217  156  1T.C.  41.  256  165  84  Ga.  42.  243  192  126  Ark.  43.  241  149  100  Mi s s .  44.  214  202  124  Va.  45.  240  164  108  La,  46.  213  170  109  Ky.  47.  207  204  151  5/.V.  48.  200  140  109  Ala,  49  192  165  121  Tenn.  The a o o v e d a t a i s  frotr  " Farm Income i n the U.S." by Leven.  28. Table B . THE PER CAPITA HOH PARTI IHCO ME IH EACH STATE. 1919-20-21. S t a t e s a r r a y e d . a c c o r d i n g t o s i z e of per c a p i t a c u r r e n t income i n 1919. Rank , Per s a p i t a incomei d o l l a r 3 ) 1919 1920 1921 S t a t e . 1. ' 956 1095 1176 D.G. 2.  928.  1045  958  H.Y.  3.  861  778  667  Del.  4.  825  977  926  Cal.  5.  822  898  814  111.  6.  820  972  850  He v .  7.  811  923  874  Wyo.  8,  794  949  788  iVici S 3 *  y»  759  760  611  Mont.  10.  756  752  6 78  Ore.  n .  756  881  628  Mich.  12.  751  795  567  Ariz,  13.  745  750  716  Wash.  14.  740  846  716  Md.  15.  739  867  759  R.I.  16.  738  844  626  Ohio.  17.  735  828  18.  725  850  641  Conn.  19.  708  649  569  S.D.  20,  704  773  729  Col.  21.  698  817  673  Penn.  22.  6 94  738  670  Heb.  23.  680  736  579  Okla.  24.  670  771.  708  Mo.  a  705  /mi  '•  — —  .„,,  n  in  i i .,.„„,  •  '  i  .i,,.,,,,,.,  1  II  j— -  ;  -  -  H.J.  1  i- , „ , .  .  _.  •'  I,  °—"  11 1  -  — •  =  29  Table B . ( continued o Rank. Per c a p i t a income ( d o l l a r s ) J 1920 1921. State. 1919 25. 6 70 738 ' 647 Minn. 26.  666  748  669  Tex.  27.  663  731  652  Kan.  28.  657  730  621  let •  29.  638  624  551  Ida.  30.  636  742  620  N.H.  31.  628  757  610  Ind.  3 2«  610  689  579  Wis.  33.  602  696  585  Ve r.  34.  592  706  617  Me.  35.  577  626  543  Ut a h .  36,  574  596  528  Ky.  37.  574  596  528  Va.  38.  564  725  546  W.V.  39.  562  542  4 78  40.  555  544  438  3«C *  41.  552  561  487  Ga. ,  42.  547  618  540  La.  43.  541  5 08  470  Miss.  44.  532  569  536  IT. M.  45.  531  574  529  Tenn.  46.  529  573  431  JT.C.  47,  500  523  431  Ala.  48.  463  504  450  3?la.  49.  529  573  512  U.D.  I/O 0 0  L_  30  i t would appear t h a t the c i t y d w e l l e r not o n l y has a l a r g e r income hut i t i s not s u b j e c t  to as g r e a t f l u c t u a t i o n s . The  y e a r s t a k e n i n c l u d e one y e a r o f r u r a l p r o s p e r i t y , 1919, one of average c o n d i t i o n s ' , 1920, and one of d e p r e s s i o n , 1921. In both cases the f l u c t u a t i o n s are In money income alone so the income o f the farmers  i s somewhat h i g h e r and s t e a d i e r  appear from the d a t a .  One t h i n g i s a p p a r e n t .  real  than would  -'he average  farmer  ,J  cannot s a f e l y handle as l a r g e a debt as the average  urban  d w e l l e r because o f h i s u n c e r t a i n money income. T h i s was p a r t i c u l a r l y t r u e o f the c o r n b e l t and wheat growing s t a t e s . There i s a d i s t i n c t r e l a t i o n s h i p between urban and r u r a l wages because  of competition. It  decrease  i s i n t e r e s t i n g to note t h a t as the average  from one s t a t e to another the urban incomes  about the same percentage  fluctuate  from y e a r to year i r r e s p e c t i v e o f  s i z e w h i l e i n the p o o r e r a g r i c u l t u r a l s t a t e s the fluctuate  incomes  incomes do not  q u i t e as w i d e l y as i n the w e a l t h i e r ones. There i s  one i m p o r t a n t c o n c l u s i o n to draw from t h i s . The more  prosperous  farmer cannot be s a f e l y l o a n e d as l a r g e a sum o f money e„n a l o n g t e r m c o n t r a c t as can the prosperous c i t y d w e l l e r . There are a p p a r e n t l y no a v a i l a b l e s t a t i s t i c s to the f a r m e r s '  relating  income from month to month. T h i s v a r i e s w i d e l y •  from one d i s t r i c t to a n o t h e r ,  and i t i s i n f l u e n c e d by the k i n d  of f a r m i n g p r a c t i c e d , by market p r i c e s , y i e l d s and  management.  When a farmer comes to ask f o r c r e d i t on the purchase o f farm machinery o r some o t h e r a r t i c l e w h i c h he wishes to have f i n a n c e d on the i n s t a l l m e n t p l a n the c r e d i t g r a n t o r would have to ask him the f o l l o w i n g q u e s t i o n s : F i r s t , what was h i s net  cash income l a s t y e a r ; s e c o n d l y , what k i n d of c r o p s does he r a i s e and when does he expect to market them; t h i r d l y , has he any o t h e r source o f Income such as l u m b e r i n g , r o a d - b u i l d i n g , or  c o n s t r u c t i o n work? A l l these q u e s t i o n s are n e c e s s a r y i n o r d e r  to determine what the a p p l i c a n t c o u l d r e a s o n a b l y be expected to pay i n each month o f the y e a r . If  at a , l l p o s s i b l e the c o n t r a c t s h o u l d have r e g u l a r  monthly payments though these need not n e c e s s a r i l y be o f the same s i z e . The advantage o f h a v i n g the c o n t r a c t drawn up i n this fashion is twofold, beneficial  From the l e n d e r ' s s t a n d p o i n t  because he i s e n a b l e d to keep i n c o n s t a n t  it  is  touch w i t h  the b o r r o w e r and the r i s k i s reduced by k e e p i n g the debt i n a more l i q u i d form. Prom the b o r r o w e r ' s s t a n d p o i n t advantageous  it  is  because the debt i s being s t e a d i l y cut down and  r e g u l a r h a b i t s o f payment a r e . e n c o u r a g e d . When the r i s k  is  reduced the r a t e s may a l s o be r e d u c e d . PARK AMD URBAN BUYING- POWER IN CANADA. T a b l e C shows the Canadian f a r m e r ' s buying power s i n c e the War. I t shows t h a t i n o n l y s i x o f the f o u r t e e n y e a r s was t h i s income r e l a t i v e l y h i g h , w h i l e i n the past f o u r y e a r s p r i c e s o f farm p r o d u c t s have f a l l e n f a s t e r  and f a r t h e r  the  than  those o f non-farm p r o d u c t s . I n t h i s p e r i o d i t has been r e l a t i v e l y h a r d e r f o r farmers to meet f i x e d c h a r g e s .  After  c o n s i d e r i n g a l l a n g l e s o f the problem i t can be s t a t e d the farmer cannot s a f e l y be loaned as much as the dweller.  urban  that  31  a}  *H o? r-  cv co  O  r-H  CO O  r-l  O  G^lOr-<tOC~-rHJ>-0!>-tOr-IOCOa> cr>^ ioa>coc\!<-'Ocr><- J>-comr-j  ,  oroooioooHOcowwooH  01  lOCO<OCOtOtOO>OtOCD2>-e^-rHo? © C 0 « D M I ) ( 0 C 0 O O H N O ( C < 0 H H r l r l r t  "5J<  ^  CO  ^ f O O r J i o o ^ O O M O ^ l O © O ^ O O ^ r - ^ O Q O t O C f t t O - v J W 1—I r - l  |—1 (—I r—I r-H r-H  r-l •r-l  • ?H  -p  CD to rj •r-l P 43  o -P hO«H • H M oJ o  ho •ho-cD  -P M -63  0 a <H -I- h, rH  r - l -PH • P t + ' <D r*1 -r-l •r-l CD r-| CD CD P n3  o  •r-l •*  3  0  CD CD>>  -p  O) CD  ^c-H  rQ  O  rCj  r P 'CO  O ho-pCr-0 o •H ho CD - H P P 3 r-1 p j •H QJ X)  nJ  CD  »0"- OJ(O^WCDMJ)0)OH« J  H W W W W N OJ N W W OJ (O tO tO cna>cncno^cncna^a>CT>cncncr>c* rH  I r—l r~l r-H <-H <—I I—I <—! i—I <—I H  H <—I  CD 01 U a> o  hQ^> b>  !H C CD >> o 03 (D - p r-l -i-l  <H O rC)  K  p|  •H  CD  P U -O Q aJ o -0 p<  CQ •H  P t P  <H  ha-r-l O o 3  •H p  CD (D  CQ  rH  *  -p  •r-l  5  xi p r-l P,3 S3  CQ  CT>  *  p  3  o CQ  3 PPt  CQ [:  O  a  aJ co a$ CD J-i  ft C P CQ CD CD -r-l CQO  JM rrt "j ^5 rH - P "Cf - H 0J r P  0  Qi f-i  •r-l  S-i  a>  tt  -p  <P  • CM CD  O O  r-H  -P <+-!  O  Xi  CD rH •H e  xi CD >  a  •H p , hO  0  r-l  *rfe -r-l  ra 3 •H Q  tn  •rH  CO OJ  cn  SH CD  03 CD  —< tn tO CD —i aj o PH R  •P  0 • • r*H  H  OJ tO  a> r-H  1 O rH O CD rZ! r O  M  o O  rM  mo W  -p  CQ  EH -rH H rH  «si o  Pi  -H  O •& O 0 o  o  <D M O O  co PH  Q O  In  •33  IV HAZAPJJS. MORAL RISK. P r o f e s s o r S . R . A . S e l i g m a n says t h a t t h e r e are no g r e a t e r r i s k s a t t e n d i n g consumers  1  c r e d i t s than p r o d u c e r s '  c r e d i t s i f p r o p e r l y a d m i n i s t r a t e d and t h e y are i n f a c t more liquid.  I t was p r e d i c t e d a few y e a r s ago t h a t i n s t a l l m e n t c r e d i t  would he p a r t i c u l a r l y l i a b l e to " f r e e z i n g up" i n time o f d e p r e s s i o n . T h i s i s not the ce.se because i n time, o f d e p r e s s i o n profits f a l l  faster  than wages and thus wage earners  t h e i r payments up b e t t e r  than entrepreneurs.  For t h i s  the i n s t a l l m e n t s y s t e m , i f p r o p e r l y h a n d l e d w i l l itself.  can keep reason  largely clear  T h i s means t h a t the terms s h o u l d not be extended f o r  too long a p e r i o d . Though i n s t a l l m e n t o b l i g a t i o n s w i l l have effect  the  of e m p h a s i z i n g a b u s i n e s s d e p r e s s i o n they are no worse  than o t h e r f i x e d o b l i g a t i o n s i n t h i s r e g a r d . The g r e a t e s t weakness o f the system i s t h a t i t throws a l a r g e s t o c k of used goods on the market at a time when t h e r e are few b u y e r s . T h i s c r e d i t i s based more on c o n f i d e n c e than on accumulated c a p i t a l . I t  i s o f course i m p o s s i b l e to measure  the  moral r e s p o n s i b i l i t y o f persons s e c u r i n g consumers c r e d i t to compare i t w i t h the moral r e s p o n s i b i l i t y o f those who d e a l i n p r o d u c e r s c r e d i t , Th^re are men who take p r i d e i n p a y i n g a l l t .. t h e i r debts no m a t t e r how d i f f i c u l t t h i s c l a s s i s the l a r g e s t ,  i t i s to do s o . F o r t u n a t e l y  '-^hen t h e r e are the people who take  on more debt than they can handle and when they are faced w i t h it  they throw up t h e i r hands. Such people can u s u a l l y be nursed  and  prodded  and  costs  money.  Finally there  dishonest  people  and  city  than  i n the  country.  A good  the  second  class  at  avoid  into  paying  borrowings  but  last  entirely.  class  it  most  this  their is  class  or  takes  of  an  a  is  he  is  way, As  do  business  a. t e n a n t t a n d he  two-thirds in  the  farmer  knows  evidence  of of  with  the  this the  is  have  we  operating  the  the  group  of  to  notes  able  fact  that  a  extended  by  to  avoid  the  much.safer  credit prior  Unless  in a  small  standing.  to  about  1930  commercial  security  banks  of  In Canada t h e p r o p o r t i o n i s g r e a t e r  only.  the  their  a capitalist, a good  time  fundamentally  urban d w e l l e r .  United States t o f a r m e r s was on t h e  personal  is  is  takes  common i n  limit  farmer  of  credit  more  g o o d man t o  average  himself  importance  it  grantor  able  exceedingly  the  but  probably  least  than he  small  credit  From a m o r a l s t a n d p o i n t man t o  debts  than  this.  CROP FAILURE AND UNEVEN SEASONAL RETURNS. There a r e credit  and  throughout  these the  three  are:  year  hazards-which  crop  failure,  are  uneven  peculiar  to  seasonal  and f l u c t u a t i n g , p r i c e s  of  farm  returns  agricultural  products. The widely  income  f r o m month to  successful  of  the  month throughout  Installment  purchase  monthly  payments  this  in  way.  monthly  some  from year and  also  to  The year  according  is  the  of  the  the  contracts  farmers  year are  and based  a difficulty  w h i c h must  cash  of  according to  majority  to  returns yields  and  diversification  be  a'farmer prices of  his  varies as  the  on  most  equal  overcome fluctuate  of  his  crops  business.  H i s a b i l i t y a.s a manager Is a l s o i m p o r t a n t . The f i r s t two r i s k s are u n p r e d i c t a b l e but the l a s t two can be determined f a i r l y if  the c r e d i t g r a n t o r knows the d i s t r i c t he o p e r a t e s The e v i l of uneven s e a s o n a l r e t u r n s  to the  in. farmer  may be p a r t l y overcome by h a v i n g him budget h i s expenses. would o n l y be r e a l l y n e c e s s a r y i n the case o f l a r g e  well  This  purchases  but i n t h i s case i t would be a good p r a c t i c e to have h i m submit a budget as w e l l as a f i n a n c i a l  statement.  p r e p a r e d budget enables a farmer to e s t i m a t e w i t h  A carefully reasonable  a c c u r a c y the average income w h i c h he may expect over a p e r i o d of y e a r s . A budget based upon y i e l d s or p r i c e s expected i n poor y e a r s s h o u l d be u s e f u l i n d i c t a t i n g what management problems s h o u l d be des.lt w i t h i n those y e a r s , thus making i t p o s s i b l e to prepare f o r those emergencies i n advance. The d i s a d v a n t a g e s  of the use of the budget l i e i n  the u n c e r t a i n t y of crop y i e l d s and p r i c e s . Time and t r a i n i n g r e q u i r e d f o r drawing i t up are o t h e r h a n d i c a p s . The weakness due to u n c e r t a i n t y o f p r i c e and y i e l d c o u l d be p a r t l y o v e r come by p r e p a r i n g s e v e r a l budgets and r e p r e s e n t i n g s e v e r a l p o s s i b l e c o m b i n a t i o n s w i t h v a r y i n g p r i c e s and y i e l d s .  I n time  the need f o r meeting p e r i o d i c a l payments f o r commodities t h a t c o n t i n u e to a f f o r d u s e f u l . s e r v i c e s w i l l  l e a d to more  accurate  v a l u a t i o n s and more i n t e l l i g e n t judgement on the p a r t o f the individual. The e v i l of crop f a i l u r e i s g r e a t e s t i n the one crop d i s t r i c t s . A s e r i o u s a t t a c k o f the b o l l .weevil'in"••the s o u t h e r n s t a t e s or a y e a r o f drought i n the wheat s e c t i o n i s s u f f i c i e n t  36  i n e i t h e r case to i n f l u e n c e the y i e l d a l a r m i n g l y and t h i s t u r n c u t s down the farmers  in  b u y i n g power. On a d i v e r s i f i e d  farm i t i s r a r e f o r a l l the e n t e r p r i s e s  to have low y i e l d s .  PALLING PRICES AND DEPRECIATION, P a l l i n g p r i c e s c u r t a i l the farmers p u r c h a s i n g power and are a l s o l a r g e l y u n p r e d i c t a b l e . T h i s e v i l may be p a r t l y overcome by i n c r e a s i n g i n f o r m a t i o n w i t h r e g a r d to demand and supply. D e p r e c i a t i o n i s more i m p o r t a n t to farm c r e d i t to urban c r e d i t . Autos s o l d to farmers are s u b j e c t use than i n the c i t i e s and t h e r e f o r e be l a r g e r . The average  life  to  than  rougher,  the i n i t i a l payment must  o f farm machinery i s t e n  v a r y i n g a c c o r d i n g to l o c a l i t y , the user and the  years,  machine.  There are t h r e e r i s k s p e c u l i a r t o . a g r i c u l t u r a l F i r s t , the  low s a l e v a l u e of the produce p r i o r to i t s  production (harvesting),  s e c o n d l y , the r i s k o f  loans:  final  superabundance  i n y i e l d and r e s u l t i n g low p r i c e s and t h i r d l y a l a c k of d i v e r s i t y i n , p r o d u c t i o n . The demand f o r a g r i c u l t u r a l products i s r e l a t i v e l y i n e l a s t i c and f o r t h i s reason the a g r i c u l t u r a l income has not i n c r e a s e d as f a s t  i n the  l a s t t e n y e a r s as  i n d u s t r i a l workers income. Wages of urban workers have more r a p i d l y than c o s t o f  the  increased  living.  When we c o n s i d e r a l l the f o r e g o i n g d i s a d v a n t a g e s a g r i c u l t u r a l b u s i n e s s we may w e l l ask o u r s e l v e s whether  of  the  farmer i s e n t i t l e d to i n s t a l l m e n t c r e d i t at a l l . A c t u a l l y many of the d i s a d v a n t a g e s as to over-em.ph8.size  have been d e s c r i b e d i n such a way  t h e i r effects  and so f a r almost none o f  the advantages  o f farm c r e d i t have "been mentioned. R u r a l  s e c u r i t y i s s t r o n g 'because t h e r e i s a r e l a t i v e s t a b i l i t y o f demand f o r a g r i c u l t u r a l p r o d u c t s w h i l e the demand f o r s p e c i a l manufactured a r t i c l e s may be v e r y i r r e g u l a r . P r o d u c e r s o f l e a d i n g a g r i c u l t u r a l p r o d u c t s seldom resort  find  i t necessary  to  to a d v e r t i z i n g or demand c r e a t i o n , w h i l e whole  m e r c h a n d i z i n g and m a n u f a c t u r i n g i n d u s t r i e s have been b u i l t up and m a i n t a i n e d i n t h i s way.  V COSTS AED LOSSES. . We have mentioned most o f the hazards of the  install  ment b u s i n e s s . L e t us now c o n s i d e r the c o s t s and l o s s e s which it  e n t a i l s and ways i n w h i c h they may be reduced or even  avoided. COST OE THE IDHEY. One of the c h i e f company has to face  items o f expense w h i c h a f i n a n c e  i s the c o s t .of the money u s e d . The  initial  c a p i t a l i s o b t a i n e d by f l o a t i n g s t o c k s and bonds but i n a d d i t i o n to t h i s a c o n s i d e r a b l e amount of money i s u s u a l l y borrowed from the banks by r e d i s c o u r i t i n g notes and  contracts.  In the U n i t e d S t a t e s the f i n a n c e companies f o r m e r l y borrowed t h r e e to f i v e times t h e i r c a p i t a l at from f o u r and quarters  to f i v e p e r c e n t .  The r a t e s p a i d by r e t a i l e r s  c o r r e s p o n d i n g r e g i o n s were f i v e and a h a l f percent.  threein  to seven and a h a l f  In Vancouver the r a t e to f i n a n c e companies i s seven  p e r c e n t and to r e t a i l e r s  e i g h t to e i g h t and a h a l f  percent.  38  The r a t e s quoted f o r the U n i t e d S t a t e s were f o r the p e r i o d p r i o r to 1925 and up t i l l  then the l o s s r a t i o had been v e r y l o w ,  w i t h a l o s s amounting to o n e - f i f t h o f one percent  on an  aggregate o f new and used car paper amounting to $ 1 9 5 , 0 0 0 , 0 0 0 . * S i n c e the d e p r e s s i o n the volume o f automobile f i n a n c i n g has f a l l e n s t e a d i l y and the l o s s e s w i l l  be  c o n s i d e r a b l y h i g h e r than t h i s though j u s t what they w i l l  amount  to i s r a t h e r u n c e r t a i n as no exact f i g u r e s are a v a i l a b l e . A l a r g e number o f these investments  are t i e d up at the  present  time and r e p r e s e n t f r o z e n a s s e t s . We cannot p r e d i c t what p r o p o r t i o n of these f r o z e n a s s e t s w i l l u l t i m a t e l y be  lost.  COST OP CREDIT INVESTIGATION. A second c o s t credit  i s the expense of making the p r e l i m i n a r y  i n v e s t i g a t i o n s which are n e c e s s a r y  i f the c r e d i t i s to  be expended w i s e l y . There are s e v e r a l ?jays i n w h i c h a man's c r e d i t s t a n d i n g i n the community may be d e t e r m i n e d . When he buys an a r t i c l e i t i s n e c e s s a r y f o r him to f i l l a p p l i c a t i o n ¥/hich u s u a l l y r e q u i r e s references.  out a c r e d i t  the names of at l e a s t  These may be b u s i n e s s a c q u a i n t a n c e s ,  two  companies w i t h  which he does b u s i n e s s or even r e l a t i v e s . A f i n a n c e  company  w h i c h i s a member o f a c r e d i t a s s o c i a t i o n can phone i n the d e s c r i p t i o n o f the man a n d . h i s r e f e r e n c e s  to the  central  exchange and i t c a n . c h e c k up h i s accounts o u t s t a n d i n g  with  various firms. The c r e d i t exchange or c l e a r i n g house may even get i n t o u c h w i t h the c r e d i t departments o f the s t o r e s , merchants, p r o p e r t y owners from whom the borrower i s & S u r r e y made by C.C~Hanch~  coal renting  39  and any o t h e r m e r c a n t i l e e s t a b l i s h m e n t  w i t h which he i s  d e a l i n g to determine how he meets h i s o b l i g a t i o n s . A d i r e c t attempt i s made to determine h i s committments both past and p r e s e n t and then to compare them w i t h h i s income. Now-a-days the m a j o r i t y o f the r e t a i l b u s i n e s s f i r m s o f the community b e l o n g to such an a s s o c i a t i o n and they p o o l t h e i r knowledge for  mutual  protection. In a d d i t i o n to t h i s , r e p o r t s  m e r c a n t i l e agencies reports  can be o b t a i n e d from  such as R.G.Duns and B r a d s t r e e t s .  These  are e x c e l l e n t f o r l a r g e companies but they are  less  s a t i s f a c t o r y f o r the r e t a i l t r a d e because they are more expensive and do not g i v e the k i n d of i n f o r m a t i o n d e s i r e d . They r e l y on i n f o r m a t i o n r e c e i v e d from the b a n k s , from a financial  statement and from a p e r s o n a l i n t e r v i e w w i t h  borrower. This l a s t feature borrowers  the  i s not v e r y d e s i r a b l e as v e r y few  l i k e to know t h a t t h e i r c r e d i t s t a n d i n g i s b e i n g  i n v e s t i g a t e d and i t may. r e s u l t  i n the l o s s o f a good s a l e .  On the o t h e r hand i f the man i s h a r d to c o l l e c t from he not a d v e r t i z e the f a c t  but w i l l  will  probably give h i m s e l f a very  high r a t i n g . Some c r e d i t a p p l i c a t i o n s have space f o r a s i m p l e financial  s t a t e m e n t . T h i s i s more important  l a r g e one but i n any case i t i s n e c e s s a r y borrower's  i f the s a l e i s a  to know the  income and h i s p r i n c i p a l committaents.  p u b l i c a t i o n s and the columns o f newspapers showing what c o n t r a c t s  are a l s o u s e f u l f o r  the borrower has o b t a i n e d . They a l s o  l i s t b i l l s of s a l e r e g i s t e r e d , and l a w s u i t s before  Financial  c h a t t e l mortgages,  judgments  the c o u r t s . The b e s t p u b l i c a t i o n f o r  40  o b t a i n i n g t h i s s o r t o f i n f o r m a t i o n i n Vancouver i s the B . C . .Journal o f Commerce, Such an e l a b o r a t e  department  i s i m p r a c t i c a b l e and un-  n e c e s s a r y f o r a s m a l l c o u n t r y d i s t r i c t because everyone e l s e and the s t a n d i n g of the p u r c h a s e r  everyone knows i s known before  he ever t r i e s to purchase any goods on t i m e . I n the m a t t e r o f c r e d i t i n v e s t i g a t i o n the r u r a l d e a l e r has a d i s t i n c t  advantage  over the urban d e a l e r because he knows the c r e d i t s t a n d i n g o f h i s customers more f u l l y and any a d d i t i o n a l i n f o r m a t i o n w h i c h may be needed can he o b t a i n e d f o r the a s k i n g . The f o l l o w i n g elements of p e r s o n a l s e c u r i t y s h o u l d be checked up where c a r e f u l b u s i n e s s p r a c t i c e i s being f o l l o w e d . 1. P e r s o n a l c h a r a c t e r i s t i c s o f the b o r r o w e r . a. Honesty. b . Promptness i n p a y i n g d e b t s . c . A b i l i t y to produce income. d. T h r i f tin-ess. 2 . Net w o r t h o f the b o r r o w e r . a . Nature and v a l u e of p r o p e r t y . b , Nature and amount o f  indebtedness.  3. P r o s p e c t s f o r income. a . Past g r o s s income. b. Past operating  expenses.  c . C o n d i t i o n o f crops and l i v e s t o c k . d . A&aquacy o f c a p i t a l and l a b o r . e. Market c o n d i t i o n s .  41  COST OE COLLECTIONS. A t h i r d c o s t i s i n p r o v i d i n g the n e c e s s a r y facilities.  collection  No matter how much care i s taken i n p l a c i n g the  c r e d i t t h e r e w i l l always be a few people who, because o f l a c k of a b i l i t y to manage t h e i r own p e r s o n a l a f f a i r s , i n a b i l i t y to keep out o f t r o u b l e or a v o i d a c c i d e n t s and s i c k n e s s , are ynable to meet t h e i r payments p r o m p t l y . Such people w i l l  require  c o n t i n u a l p r o d d i n g and r e m i n d i n g to keep t h e i r payments up. In a p e r i o d o f f a l l i n g p r i c e s such as the l a s t t h r e e y e a r s when l a r g e numbers o f people have been thrown out o f employment o r have had t h e i r incomes reduced the work o f the c o l l e c t o r has increased tremendously. I t  i s a much more d e l i c a t e j o b to t r y  to o b t a i n money from people who are f u n d a m e n t a l l y honest are t e m p o r a r i l y out o f w o r k , than i t i s to go a f t e r  a man who  i s d i s h o n e s t or who i s easy g o i n g and a poor f i n a n c i a l Because o f the appearance  but  manager.  o f t h i s new c l a s s o f pwople who do  not meet t h e i r payments p r o m p t l y the c o s t s o f c o l l e c t i n g have i n c r e a s e d tremendously i n the l a s t , few y e a r s . The c o s t s o f t h i s department  are d e t e r m i n e d l a r g e l y by the judgment of the  person  who p l a c e s the c r e d i t . The c o l l e c t i o n c o s t s w i l l be kept down if  sound b u s i n e s s methods are used i n s e l e c t i n g the r i s k s . The q u a l i t y o f the goods s o l d i s another  affects  t h i n g which  the c o l l e c t i o n c o s t s , For example, i f a used car  is  purchased by a man on a moderate s a l a r y he u s u a l l y undere s t i m a t e s h i s expenses before he takeson the o b l i g a t i o n . Then if  the c a r i s i n poor shape he has to spend a l a r g e amount of  money on r e p a i r s and i t i s v e r y d i f f i c u l t  f o r him to meet b o t h  /<  42  the r e p a i r h i l l and the i n s t a l l m e n t payment. I t i s  difficult  to keep the payments up to date when the goods they are e x p e n s i v e to o p e r a t e Still  or when t h e y d e t e r i o r a t e  represent  rapidly.  a n o t h e r phase o f the c o l l e c t i o n process  apparent when the market v a l u e of the goods i s f a l l i n g  is rapidly.  Under these c o n d i t i o n s a borrower o f weak c h a r a c t e r becomes d i s c o u r a g e d and w i l l not t r y to keep up h i s payments. These people must then be made to understand t h a t 'when they f i n a n c e the pruchase of an a r t i c l e , money i s borrowed and t h a t  that  money must be p a i d back i r r e s p e c t i v e of what happens to  the  goods. They must a l o s be made to understand t h a t they do not own the goods u n t i l they are p a i d f o r and t h a t i f they abuse them they must make good the damage t h a t has been done. INSURANCE ON AUTOMOBILES. A f o u r t h c o s t i s the i n s u r a n c e c o v e r i n g c o n v e r s i o n , embezzlement, c o n f i s c a t i o n and s i n g l e i n t e r e s t c o l l i s i o n . few  Very  f i n a n c e companies i n s i s t on a l l these coverages on a u t o -  m o b i l e s but t h e y u s u a l l y r e q u i r e at l e a s t one o f them. These are c o s t s w h i c h the buyer knows n o t h i n g a b o u t , but which are p a i d by him n e v e r t h e l e s s . As a r u l e o n l y one or two of these coverages are put on and they are i n c l u d e d W i t h the f i r e , and  theft  c o l l i s i o n insurance. C o n v e r s i o n p r o t e c t s the f i n a n c e company when the  p u r c h a s e r f r a u d u l e n t l y d i s p o s e s o f or c o n c e a l s the a u t o m o b i l e and  then d e f a u l t s on the payments. The i n s u r a n c e company pays  off  the f i n a n c e company and the l a t t e r ' s  r i g h t s are  subrogated.  Then i f the c a r s h o u l d be found the i n s u r a n c e company may s e i z e  43 i t and do everything p o s s i b l e to enforce payment. Many companies have had a very unfortunate experience w i t h conversion p o l i c i e s . This p o l i c y i s intended to cover a c r i m i n a l . o r i l l e g a l act on the part of the purchaser and i t i s not intended to make a c o l l e c t i o n agency out of the insurance company. Embezzlement insurance p r o t e c t s the company from l o s s which may "be sustained through c o l l e c t o r s or', agents r e c e i v i n g payments f o r goods and pocketing the money.^ ..••Confiscation insurance i s put on to protect the finance company from l o s s when the'car i s c o n f i s c a t e d by the government. This was very important to Canadian companies about ten years ago when ears were being used to run l i q u o r into the United States-;*. When the d r i v e r s were caught the car was c o n f i s c a t e d even though a Canadian or American finance company might have a considerable equity i n i t . Even to-day most American finance companies i n s i s t on t h i s coverage. During the l a s t few years there has been an amendment to the Customs and E x c i s e Act of Canada (Section 181) which allows the Federal Government to s e i z e and c o n f i s c a t e a b s o l u t e l y , any  automobile,  i n which booireg l i q u o r has been found. Single i n t e r e s t c o l l i s i o n insurance, i s put .••.on by the finance companies to p r o t e c t themselves  i n those cases  where  the. purchaser smashes the car very badly and then abandons i t . Hone of these coverages are very valuable unless the insurance c company i s a. reputable one. The endorsements contain so many exempting phrases and clauses that the case has to be very clear cut before the finance company can c o l l e c t .  44  Eire every  finance  cases but  cost  of  this  latter  few y e a r s  that  it  . s e l l and, r a t h e r  t h a n have  ;  finance  insurance  companies  have loads  also  coverages p r o t e c t  required  increasingly  lose  some  the  on i t .  security.  liability  rapidly  hard  to  too many s a l e s Besides  t h e b u y e r up w i t h more d e b t  public  in  c o v e r a g e has,anrsen so  stopped i n s i s t i n g  h a n d l e . - These  for  is  the d e a l e r s  it  p u r c h a s e r may a s k  i n s i s t e d on. " b y a l m o s t  has become  i n some c a s e s  insurance  are  company and c o l l i s i o n  the  i n the l a s t  and t h e f t  v.  the  this,  t h a n he  can  In a d d i t i o n  and p r o p e r t y  to p r o t e c t h i m s e l f  from l a w s u i t s  As t h e b u s i n e s s  of  f i n a n c i n g grew some o f  organized their  own i n s u r a n c e  the  damage  resulting  .  f r o m an  accident i  companies of  t h i s was t h e f o r m a t i o n  General• .Exchange  Insurance  The,price protection  in  in August,  the  of  Is n o t  worthwhileness financing  as of  to the  the  insurance  percent,  but  made p o s s i b l e  have  run  Is p r o b a b l y  the b u y e r  because, i n s t a l l m e n t RURAL  are  of  The r a t e  for  the  the  of  example,  is  This  example of  is  of  two c h i e f  the  the costs  of view  cost  varies  the p r i c e  ahead.  credit  price  to  charged  ears  true  distribution  that  the in  from e l e v e n  s a l e s w h i c h have of  to been  i n the  o f most  of  the  b u t as  interest  the. i n c r e a s e d  so r e d u c e d  finance  ...  economic p o i n t  existence  cost.  new a u t o m o b i l e s  twenty-three  1925 by G . M . A . C .  Corporation.  i n s t a l l m e n t . f i n a n c i n g - . From t h e question  c o m p a n i e s . An  t h e money u s e d and the  form o f  the  long  articles  credit.  INSURANCE. Farm m a c h i n e r y r e q u i r e s  coverages.with  the p o s s i b l e  scarcely  exception of  any o f  fire.  these  A heavy  insurance burden  45  of cost i s thus removed- from the shoulders of the purchaser. The insurance p r o t e c t i o n that the farmer r e q u i r e s most when purchasing a l a r g e quantity of goods on time i s p r o t e c t i o n against l o s s of income. I t i s , a t present, very hard to get insurance against crop f a i l u r e , because the success or f a i l u r e of a crop i s due to a number of varying f a c t o r s such as c l i m a t e , s o i l f e r t i l i t y and management. Insurance on growing crops may  take one of two  forms:  e i t h e r a c o n t r a c t covering one s p e c i f i c hazard such as h a i l or f r o s t or - a blanket contract i n s u r i n g the farmer against many of the hazards to which h i s crops are exposed. The. term crop insurance i s u s u a l l y a p p l i e d to the l a t t e r form of contract.. This form of insurance was f i r s t attempted  i n the United States  i n 1899 but the company l a s t e d only one year. Other attempts were made i n 1917 and 1920 but they a l l met wiith f a i l u r e . Crop insurance i s s t i l l decidedly i n the experimental stage. H a i l and f r o s t insurance have been more s u c c e s s f u l and the former i n p a r t i c u l a r has held a f a i r l y good p o s i t i o n W i t h premiums of about twenty m i l l i o n d o l l a r s a year i n the United S t a t e s . F r o s t insurance i s not used to any great extent outside- those s t a t e s which have l a r g e c i t r u s p l a n t a t i o n s . P r i c e f l u c t u a t i o n s may be p a r t l y insured against i n some commodities by the p r a c t i c e of dealing i n futures or hedging.This  can only be preformed where there i s .a d e f i n i t e  exchange and to ensure f u l l p r o t e c t i o n an close contant must be kept w i t h the exchange to take advantage of p r i c e changes. F a c i l i t i e s have, been provided f o r the increased use of hedging by g r a i n farmers and the p r a c t i c e of p r o t e c t i n g themselves  46  against  price  fluctuations  A lack h i s goods  o f storage  on t h e m a r k e t  able  price  to s e c u r e  later  safer income  risk  slough  a s s o o n as t h e y a,re h a r v e s t e d .  On the  facilities  period  and a warehouse  increase it  f o r a more  o f the y e a r . credit  receipt  t o s e c u r e an  He t h u s becomes a  b e c a u s e he h a s a f a i r l y  i s a very secure  form o f  steady  collateral  , - . ' . " The A n n u a l  recommended t h a t thirty-three  Convention  on new c a r s  of Finance  down payment installments.  on t h e P a c i f i c Very  installments  s h o u l d be f o r t y  the f i r s t ,  few f a r m e r s have a p e r i o d i c  demanded:as  this  forty  the  onegpayinent, In the case  i s payable  o f s e v e n months o r l e s s . percent  s  income  of the cash p r i c e  the down payment a n d t h e r e m a i n d e r  payment p l a n r e q u i r e s  u s e , except  does n o t i n v o l v e ' t h e  s a l e s ,• one< h a l f  lump sum a t t h e e x p i r a t i o n  number  or c o n t i n u o u s '  business  t  companies.  p l a n s were d e v e l o p e d .  w h i c h s-tric±ly s p e a k i n g  of installment  twelve  percent, with a :similar  b y t h e more c o n s e r v a t i v e  and t h r e e - p a y m e n t  than  down payment w i t h  By 1926 t h e method was i n g e n e r a l  Coast,  i n 1924,  and i n t h e c a s e o f u s e d c a r s  from, month: t o month and to h a n d l e two-payment  Companies  t h e t e r m s be n e v e r l e s s  and one t h i r d p e r c e n t  a d d i t i o n a l , monthly  principle  the farmer is:  •  TEEMS. . .- •  of  the farmer  income b u t he i s a b l e  for installment  security.  spreading.  i n t h e s e a s o n . ' I n t h i s way he n o t o n l y i s .  a larger  income o v e r a l o n g e r  of  forces  to s e l l h i s c r o p b i t by b i t or to h o l d  favorable  the  space  is  to  o t h e r ; h a n d a s the s t o r a g e able  b y t h i s means  is in a  1'he t w o -  a s a down p a y m e n t ,  while  the •  47  remainder i s payable i n two i n s t a l l m e n t s , one-half i n four months : and the 'other h a l f i n eight months. The three-payment plan has the down payment unchanged but the remainder i s d i v i d e d into  :  •three parts payable r e s p e c t i v e l y i n t h r e e , s i x and nine months. The same p r i n c i p l e i s a p p l i e d to used cars except that the down payment i s g r e a t e r . There i s one important f a c t o r which must be kept i n mind when s e l l i n g any a r t i c l e on the installment p l a n . The terms must be such that the a r t i c l e w i l l be paid f o r long before i t s period of usefulness has e x p i r e d . A d d i t i o n a l s e c u r i t y :  or a d d i t i o n a l endorsements w i l l be necessary i f such terms  cannot be arranged. Otherwise the changes are that the l o a n w i l l ' n o t prove very s a t i s f a c t o r y . Hr.J.H.Smith, the former c r e d i t manager of the Hudson's Bay Company at Vancouver, issued the following' f i g u r e s w i t h regard to Installment purchases from department s t o r e s . These' figures'would apply almost e n t i r e l y to urban buyers but they f u r n i s h a concrete example of the dangers of -small down payments and extended terms. I n i t i a l down payments. The reports'show that where i n i t i a l down.payments were accepted at l e s s than, twelve • percent of the purchase p r i c e , t h i r t y - e i g h t percent of such accounts went bad, while, on the other hand, when the down payments exceeded twenty-five percent of the o r i g i n a l purchase p r i c e only fourteen percent went bad. This experience suggests that a number of bad accounts can be l a r g e l y eliminated by having a l a r g e r cash payments Iir such a sale i s made where the  down payment i s v e r y s m a l l t h e r e s h o u l d he  some p a r t i c u l a r l y  e'xtenuating c i r c u m s t a n c e s to j u s t i f y i t . Monthly not exceed  Terms. Where t h e m o n t h l y  extended  did  s i x " months, s i x t y p e r c e n t o f the a c c o u n t s were  C o n s i d e r e d good w h i l e terms  e x t e M e d o v e r one y e a r and n o t more  t h a n e i g h t e e n months r e s u l t e d accounts  terms  classified  i n only ten percent of  as b e i n g g o o d . Terms e x c e e d i n g  m o n t h s showed two  p e r c e n t g o o d . T h i s shows c l e a r l y  p r o p o r t i o n o f bad  to good a c c o u n t s  t h e c o n t r a c t i n c r e a s e s . The  such  eighteen that  the  i n c r e a s e s as t h e t i m e  reason f o r t h i s  danger o f t h e market; v a l u e o f the a r t i c l e  of  i s that there i s  falling faster  than  t h e p a y m e n t s a r e made. Once a b u y e r l e a r n s t h a t he owes more oh t h e a r t i c l e  than i t would  loses a l l desire far  c o s t t o r e p l a c e . i t he  t o m e e t h i s p a y m e n t s and he may  rapidly  even go  so  a s t o a s k t h e f i n a n c e - company t o r e p o s s e s s i t .  SECURITY TO B l TAKEN. M o s t o f t h e a u t o m o b i l e s and  farm machinery  sold i n  t h e U n i t e d S t a t e s a r e s e c u r e d by a c h a t t e l m o r t g a g e . I n Canada on the o t h e r h a n d t h e g o o d s a r e g e n e r a l l y :  a conditional b i l l two  o f s a l e . The  legal  i n s t r u m e n t s Is t h a t In the former  u p o n a s a n owner who forfeits  d i f f e r e n c e between case the buyer  ( u n d e r t h e t e r m s o f most  m o r t g a g e s ) as s o o n a s he d e f a u l t s  i s looked  the  latter final  payment i s made. The M a j o r i t y o f t h e s a l e s c o n t r a c t s i n British  Columbia  article  may  be  p r o v i d e t h a t upon d e f a u l t  s e i z e d and  He  chattel  i n payment. In the  does not pass to the buyer u n t i l  or  these  has p l a c e d a m o r t g a g e on h i s e q u i t y .  t h i s ownership  case ownership  s e c u r e d by a l i e n  i n payment t h e  h e l d f o r twenty days. Should  the  buyer ,all  fail  t o redeem t h e a r t i c l e d u r i n g t h i s  rights  be u n a b l e  t i m e he  forfeits.  i n . i t . On t h e o t h e r hand s h o u l d .the'^Ti n a n c e company to s e l l  the a r t i c l e  for sufficient  to clear  the debt  i t may s u e t h e p u r c h a s e r f o r t h e b a l a n c e . Where t h e s e c u r i t y is  a c h a t t e l m o r t g a g e a n d t h e p u r c h a s e r d e f a u l t s he h a s o n l y  f i v e days i n w h i c h  t o redeem t h e a r t i c l e  once i t h a s b e e n  s e i z e d . Most c o n t r a c t s a l s o p r o v i d e t h a t upon d e f a u l t a l l t h e p a y m e n t s become d u e . • I t i s a f u n d a m e n t a l l y sound p r i n c i p l e .that i t i s unwise easily.  t o o v e r l o a d a n y p u r c h a s e r w i t h more t h a n he c a n p a y f o r The M o r r i s P l a n B a n k s o f t h e U n i t e d S t a t e s w h i c h make  a practice  of loaning  relatively  small  t o workers^, a n d s a l a r i e d p e o p l e w i t h  i n c o m e s v e r y r a r e l y l o a n a man more t h a n t e n  p e r c e n t o f h i s a n n u a l i n c o m e . He h a s d i f f i c u l t y than t h i s i  With farmers a c o n s i d e r a b l y higher percentage  t h i s c o u l d be S a f e l y l o a n e d b e c a u s e 'and  i n handling'more  a g r e a t p a r t o f the food. The u s u a l t e r m s  than  t h e f a r m p r o v i d e s a home '' .  o f t h e .Canadian- f a r m  implement  companies i n B r i t i s h Columbia  a r e one t h i r d  in  t h e . t i m e t o r u n o v e r one y e a r .  the f a l l .  Agricultural do  They do n o t l i k e  income i s so u n s e t t l e d  though,  c a s h and t h e b a l a n c e  t h a t t h e terms  often  e x t e n d o v e r t h e y e a r . I n .most', case-s t h e p a y m e n t s a r e made  e i t h e r q u a r t e r l y o r i n .the f a l l *.. P r o f e s s o r G o r d e e f m a i n t a i n s t h a t the• f e n a n t f a r m e r i n America  i s a t a disadvantage because  he cannot g e t any c r e d i t .  T h i s i s u s u a l l y t r u e b u t i f he h a s a g o o d r e p u t a t i o n i n t h e district  f o r s t e a d i n e s s he c a n u s u a l l y o b t a i n a n a u t o m o b i l e o r  farm implements  by making the i n i t i a l  c a s h payment. T h i s i s  50  a l m o s t the  only form of c r e d i t " a v a i l a b l e  must have c r e d i t useful there  to o p e r a t e .  i s p l e n t y o f i n c e n t i v e to pay. be  a legal  t h e b u y e r has  he  Onee t h e p a y m e n t s  stop  seized.  instrument an  f i n a n c e company i s s e c u r e d  which covers  i n v e s t e d i n t e r e s t and  d e a l e r who  v a l u a b l e goods a l s o by  the  by  in'which  endorsement  s o l d the g o o d s . In a d d i t i o n to t h i s most  c o m p a n i e s make a p r a c t i c e o f h o l d i n g b a c k one o f the  yet  Installment credit i s p a r t i c u l a r l y  Y/e h a v e s e e n t h a t t h e  of the  and  f o r d e a l i n g w i t h p e o p l e r e c e i v i n g s m a l l incomes because  t h e g o o d s may  having  to h i m  cash value  o f the  to t e n  percent  c o n t r a c t t o a c t as a r e s e r v e  against  loss. 'CREDIT I i W E S T I G A T I O N .  .'  . :  When a p r o s p e c t i v e p u r c h a s e r c r e d i t he  u s u a l l y has  to f i l l  a s k s f o r h i s name, a d d r e s s , o f one  or two  references.  employment a t t h i s contingent  i n a c r e d i t a p p l i c a t i o n . This  income, p r o p e r t y  owned, and  Some r e p o r t s / m a y a s k  and  similar  been secured  c r e d i t bureau In-order  i n f o r m a t i o n . Once  i t may  be  other  obtained.  the  information secured  determine whether or not  whether  the p u r c h a s e r  the  f i n a n c e company  i s a safe  risk.  of  payments  c o n t r a c t s a r e b e i n g made r e g u l a r l y and " p r o m p t l y .  the b a s i s of the  local  - p r e v i o u s l y , t h e amount  money o w i n g t o o t h e r r e t a i l e r s and w h e t h e r o r n o t on  this  show j u d g m e n t s o u t s t a n d i n g ,  o r not goods have been r e p o s s e s s e d  of  dependents,  f o r w a r d e d to the  t h a t a c r e d i t r e p o r t c a n be  A good c r e d i t r e p o r t s h o u l d  names  the l e n g t h  j o b , l e n g t h o f r e s i d e n c e , number o f  liabilities  i n f o r m a t i o n has  a p p l i e s to a d e a l e r f o r  On can  51 The  credit grantor  i n a s m a l l town knows whether  the  borrower i s an honest man; t h a t he pays h i s notes p r o m p t l y or makes arrangements  f o r t h e i r r e n e w a l "before they are due. He  knows whether he has a f a i r  e q u i t y i n h i s farm, i s r e c o g n i z e d  ;as a good farmer and h i s debts are such t h a t under o r d i n a r y crop and p r i c e c o n d i t i o n s he whould be a b l e to-.'.meet . the  payments.  A l l ...this- i n f o r m a t i o n i s known b e f o r e the purchaser ever a p p l i e s ..for  c r e d i t so the e l a b o r a t e  . c i t y are not  credit reporting f a c i l i t i e s  o f the  necessary;  BATES AND THEIR CALCULATION. .The  f i n a l method whereby l o s s e s may be overcome i s  by c h a r g i n g a r e l a t i v e l y h i g h r a t e f o r t h e use o f the money. V a r i o u s methods are u t i l i z e d by f i n a n c e companies f o r c o n c e a l i n g these r e l a t i v e l y h i g h i n t e r e s t The car  charges.  i n t e r e s t may be. charged on the cash p r i c e o f the  even though one%thl.rd may be p a i d down on the  purchase.  A n o t h e r way i s to have the f i n a n c e charge i n c l u d e the  insurance  lumping the two items o f f i n a n c e and i n s u r a n c e t o g e t h e r t h o u g h i t were a f l a t r a t e .  Still  another method i s  as  utilized  when the c o n t r a c t runs o v e r a y e a r , and the t w e l t h payment i s l a r g e r ; a b a l l o o n n o t e . The i n t e r e s t i s f i g u r e d on the• t o t a l amount and then on the amount o f the b a l l o o n n o t e . The excuse g i v e n to the b u y e r ,  i f he s h o u l d q u e s t i o n t h i s , i s t h a t p a r t  of the c o n t r a c t w i l l have to be f i n a n c e d a second t i m e . A c o n c r e t e example i s f u r n i s h e d i f we suppose  the  i n t e r e s t r a t e i s f i g u r e d a t e i g h t p e r c e n t . ' A c t u a l l y the buyer pays more than t h i s because p a r t o f the b a l a n c e owing i s p a i d a t the end o f the f i r s t fconth, p a r t a t the end o f the second  and so on t i l l  the t w e l t h . On each o f t h e s e payments he was  Charged e i g h t p e r c e n t  interest  f o r a y e a r . To f i n d the  true  r a t e m u l t i p l y 12 w h i c h r e p r e s e n t s the number o f months i n a y e a r by 12 w h i c h r e p r e s e n t s the number o f months  outstanding.  T h i s would have to be d i v i d e d , by the sum o f the months or 78 and a c o e f i c i e n t o f 1.84.6 Is o b t a i n e d . To use t h i s c o e f f i c i e n t where the  interest  charged i s e i g h t p e r c e n t we m u l t i p l y 8 by  1.85 and o b t a i n 1 4 . 8 p e r c e n t as the t r u e r a t e o f  interest  charged. When t h e r e a r e only, f o u r payments the would be determined as f o l l o w s :  12 i 4 1+2+3 + 4  coefficient  - 4 . 8 . Os.ing t h i s  method f o r each s u c c e s s i v e p e r i o d we a r r i v e a t the scale of  following  coefficientss  2 months c o e f f i c i e n t i s 8.  8 months c o e f f i c i e n t i s 2 . 6 6 6 .  3  "  "  .9  "  4  "  "  " .4.8  10  "  5  "  "  « 4.  11  "  6•• " 7  "  ;•: " 6.  " 3.428 12  11  «  " .  M  .  " 2.4  , " 11  "  2.181 "2. " 1.846  " 3.  The above f o r m u l a i s the one advocated by P r o f e s s o r S e l i g m a n . I t ha.s the advantage  o f b e i n g simple to c a l c u l a t e and r e q u i r e s  no m a t h e m a t i c a l t a b l e s  to w o r k i t  out.  Another method o f f i g u r i n g r e a l i n t e r e s t by the use o f a m o r t i z a t i o n t a b l e s  rates  is  ( H a r t , Mathematics of F i n a n c e ) .  L e t #400 be the amount to be f i n a n c e d ; the r a t e charged 8 p e r cent or $ 3 2 . 0 0 . E a c h monthly payment i s 432/12 or $ 3 6 . 0 0 . The r e a l r a t e can be determined by the f o l l o w i n g f o r m u l a :  53  36 = 4 0 0 ( l / a  a t i ) . .09 - ( l / a _ a t i ) . i i s t h e r e a l r a t e 12| .12] m o n t h . ; i = 1 . 2 1 5 . By t a b l e s a n d i n t e r p o l a t i n g ; t h e r a t e f o r t w e l v e m o n t h s •, i s 12  x 1.215  -14  per  .58%.  • To a r p e r s o n a c c u s t o m e d t o "borrowing f r o m t h e "bank these r e a l  I n t e r e s t r a t e s may  overlooked  that  t h e b a n k has  o f . s e c u r i t y * hen  too  1!  depositors finance  the  on w h i c h I t p a y s l i t t l e  l a r g e as  the  profit  o r no  on a r e t a i l  b e n e f i t s t o be c o n s u m e r i s the the  buyer i s able  derived.  The  the is not  by  s t a t i n g the  to w e i g h t t h e  significant  charges  costs with  comparison to  the  the  a l t e r n a t i v e o f p a y i n g a d e f i n i t e amount f o r  p r i v i l e g e of o b t a i n i n g  of saving  interest while  profits.  W i t h t h e s e f a c t s i n mind, and the  t h e money e'f i t s  credit transaction is  retail  be  matter  i t s c a s h c a p i t a l . When t h i s  c o m p a r e d to o t h e r  i n a l u m p sum  not  s p e c i a l p r i v i l e g e s i n the  bank i s l o a n i n g  company i s l o a n i n g  considered  seem h i g h "but i t s h o u l d  t h i s o.utlay by  the  commodity i n the p r e s e n t ,  postponing h i s purchase t i l l  or  the  future. However t h e to be  considered  unwilling  i n other  forms of  i s not  c r e d i t presents  to ask  l o s s of time n e c e s s i t a t e d b a r r i e r s to i t s . use  c h a r g e s made f o r i n s t a l l m e n t  the  only real  cost  c r e d i t . Many p u r c h a s e r s  t o m o r t g a g e t h e i r homes o r  a n o t e . Even the  higher  interest rate  a- f r i e n d t o in obtaining  t h a t are credit.  as r e a l as  are  endorse bank the  VI \TOAT INSTITUTION i s BEST ADAPTS© TO DO THIS FINANCING? . Source o f consumers' 6onsumers<l  credit:  y " ° k stocks Depo s i t s ^  B u  Loan on i n s t a l l m e n t ^  a n  n , ,_ , .Discount installment Consumers ^ f t r  0 1  a r i  c  o  n  t  r  a  c  t  s  <  ":: IV...';: , "'iJffe^must f i r s t s t r a c e  ^  paper  • F i n a n c e companies,  the p r e s e n t p r a c t i c e when an  a u t o m o b i l e .'is;..purchased i n o r d e r to d i s c u s s w h i c h type o f i n s t i t u t i o n i s b e s t adapted  to f u r n i s h i n s t a l l m e n t  credit.  The i n d i v i d u a l b u y i n g a car on time i s u s u a l l y r e q u i r e d pay o n e - t h i r d cash and the, b a l a n c e w i t h i n a year at  to  regular  monthly i n t e r v a l s . : The p u r c h a s e r u s u a l l y s i g n s a l i e n or a c o n d i t i o n a l s a l e agreement secured by p r o m i s s o r y notes or one consolidated note.  In many o f the S t a t e s i n the United  States  c h a t t e l mortgages are used i n s t e a d o f l i e n s . The c a r d e a l e r then d i s c o u n t s the  contract with a  f i n a n c e company and the m a j o r i t y o;f the f i n a n c e companies rediscount  then  these n o t e s w i t h the b a n k s . In t h i s case the bank  u s u a l l y does the. c o l l e c t i n g d i r e c t l y . The f i n a n c e company, d e a l e r and the p u r c h a s e r f o r the payments name paper  the  are a l l j o i n t l y and. s e v e r a l l y l i a b l e  so the banks are r e a s o n a b l y safe as  three  i s l o o k e d upon as good s e c u r i t y . The bank i n t u r n has .secured i t s funds from other  consumers by a c c e p t i n g t h e i r money f o r d e p o s i t o r  s e l l i n g bank  s t o c k . The banks and the f i n a n c e companies are thus middlemen i n the d i s t r i b u t i o n o f  credit.  PRIVATE BROKERAGE HOUSES. The f u n c t i o n o f the f i n a n c e company i s to d i s c o u n t  the n o t e s o f t h a t l a r g e group o f people whose r e s o u r c e s or c apparent  c r e d i t r i s k do not measure up to the standard set by  .the b a n k s . ' The bank c o u l d not handle t h e i r accounts they are not l a r g e enough to be p r o f i t a b l e but the  because finance  company i s a b l e to charge h i g h e r r a t e s than the bank and can therefore  a f f o r d to devote more time to each i n d i v i d u a l .  In  a d d i t i o n the funds are borrowed f o r a l o n g e r p e r i o d than bank ivould care to l o a n , and the payments are i n s m a l l  the  lots  w h i c h must be c a r e f u l l y handled and r i g i d l y w a t c h e d . The i n c r e a s e d r a t e s t h a t a f i n a n c e company r e c e i v e s enables i t  to  spend more time and money i n making c o l l e c t i o n s . Other f i n a n c e companies p l a c e t h e i r r e c e i v a b l e s i n t r u s t w i t h some t r u s t a g a i n s t ' the t r u s t e e d  company and i s s u e s h o r t term debentures notes w h i c h are s o l d to the b a n k s . A  t h i r d method o f r a i s i n g funds, i s by s e l l i n g c o l l a t e r a l bonds r u n n i n g f o r a p e r i o d of up to t e n BANKS.  years.  ..... The c r e d i t s t r u c t u r e  endangered  trust  o f t h e 7/hole c o u n t r y may be  i f sound b u s i n e s s p r i n c i p l e s are not f o l l o w e d i n  dispensing i n s t a l l m e n t ' c r e d i t . This a p p l i e s equally w e l l the  to  i n j u d i c i o u s g r a n t i n g o f c r e d i t i n any: f o r m . For t h i s  r e a s o n the banks have to e x e r c i s e , some c o n t r o l over these who are d i s p e n s i n g t h i s  credit.-  Consumers' c r e d i t i s v e r y s m a l l i n p r o p o r t i o n to the c r e d i t extended i n o r d i n a r y p r o d u c t i o n and m a r k e t i n g and as a consequence d u r a b l e g o o d s - w i l l always have to be financed for at l e a s t part  o f t h e i r v a l u e by the b a n k s . Thus  we see t h a t t h i s new form o f bank c r e d i t does not  threaten  56  the batiks w i t h any nev d a n g e r .  As a matter o f f a c t  of f i n a n c e companies are p a r t i c u l a r l y safe  the notes  because they  d i s t r i b u t e the r i s k over a wide v a r i e t y o f o c c u p a t i o n s , of i n d u s t r i a l a c t i v i t i e s and g e o g r a p h i c a l  locations.  When a man buys a c a r on time the d e a l e r  discounts  the paper w i t h a f i n a n c e company. The f i n a n c e company i n t u r n d i s c o u n t s at  l e a s t a p o r t i o n of i t s contracts  w i t h the  bank.  Both the f i n a n c e company and the bank o b t a i n t h e i r funds by selling securities certificates  such as s h a r e s , bonds, or d e p o s i t  to o t h e r consumers,  companies and d e a l e r s  ^'hus the banks,  finance  are a l l middlemen i n the d i s t r i b u t i o n of  c r e d i t . V e r y o f t e n one company or i n d i v i d u a l may combine the functions department  of a l l t h r e e . T h i s i s u s u a l l y the case when s t o r e s s e l l household equipment on time or when  farm implement companies' latter  agents s e l l t h e i r goods. Though the  appear to be o p e r a t i n g more e f f i c i e n t l y i n d i s t r i b u t i n g  c r e d i t the f a c t  remains t h a t t h e i r . r a t e s  Ere usually higher  t h a n on a u t o m o b i l e s . The r e a s o n f o r these h i g h e r c o s t s extent  due to the f a c t  i s to a g r e a t  t h a t the s e l l e r o f goods i s at  same time a s e l l e r of c r e d i t ,  the  In g e n e r a l , the s e l l e r s h o u l d be  concerned e x c l u s i v e l y w i t h meeting the demand f o r the goods he has f o r s a l e . He s h o u l d h o n e s t l y r e p r e s e n t those goods f o r what they a r e , and i t i s h i s i n t e r e s t  to s a t i s f y the  customer  as to q u a l i t y and p r i c e . A person who lends money, on the o t h e r hand , i s concerned p r i m a r i l y w i t h the a b i l i t y of the customer to pay  57 and n a t u r a l l y he w i l l not can  l o a n more than he b e l i e v e s the  buyer  pay. When garm goods are s o l d on the i n s t a l l m e n t p l a n  these two e n t i r e l y d i f f e r e n t  business  operations  are  conducted  by the same p e r s o n and t h e r e i s danger t h a t the s e l l e r i n h i s d e s i r e to s e l l goods w i l l at the same time extend c r e d i t which i s beyond the c apac i t y o f the buyer to pay. The f u n c t i o n of the banks i s to p r o v i d e a d d i t i o n a l c r e d i t to t h e ' f i n a n c e demand fov c r e d i t  company d u r i n g these seasons when the  i s h i g h . In t h i s way the f i n a n c e company i s  enabled to keep a l l i t s money w o r k i n g w i t h o u t h a v i n g to hoard some f o r a few months. Then too the f i n a n c e company i s u s u a l l y a b l e to borrow money from the bank at seven or e i g h t  percent  and l o a n out on i n s t a l l m e n t f i n a n c i n g at f o u r t e e n  thirty  to  percent. These are the types o f i n s t i t u t i o n s best adapted  to  handle i n s t a l l m e n t c r e d i t . P u r c h a s e r s might borrow more c h e a p l y from f r i e n d s or o t h e r p r i v a t e sources but t h i s  latter  method of f i n a n c i n g i s o n l y open to- a few as trie f r i e n d s may not have the funds on hand at the time o f  purchase,  60VSRKMHIM INSTITUTIONS FOR DISPENSING _ CREDIT. 1  A government  i n s t i t u t i o n s i m i l a r to the F e d e r a l Farm  Loan Board might be set up but i t would stand a much s m a l l e r chance of b e i n g s u c c e s s f u l because a g r e a t d e a l more  attention  and d e t a i l e d work' i s r e q u i r e d i n m a k i n g . c o l l e c t i o n s . Cheaper r a t e s might p o s s i b l y be o b t a i n e d by b o r r o w i n g from a c r e d i t u n i o n or a c o o p e r a t i v e bank such as the P e o p l e s ' Banks of Quebec. At p r e s e n t the r a t e s of these i n s t i t u t i o n s are  nearly  58  as h i g h as those of ' f i n a n c e companies but i f the money was b e i n g l o a n e d on a d e f i n i t e form o f s e c u r i t y they might lower t h e i r  safely  rates.  Seligman m a i n t a i n s t h a t the g i v i n g of c r e d i t i s a ' m a t t e r o f p r i v a t e and not p u b l i c e n t e r p r i s e ,  and the g i v e r  cannot be expected to a c t from a l t r u i s t i c m o t i v e s . In p r o d u c t i o n the d i r e c t r a s u l t  i s a flow o f goods which can be  s o l d , w h i l e i n consumption the d i r e c t r e s u l t satisfactions  i s a flow o f  w h i c h cannot be s o l d . The l e n d e r who i g n o r e s  d i s t i n c t i o n i s a p t ^ t o mix p h i l a n t h r o p y w i t h f i n a n c e . if  Therefore  the s t a t e i s g i v i n g c r e d i t i t s h o u l d c o n s i d e r whether  credit w i l l private  be used i n p r o d u c t i v e u t i l i z a t i o n whereas  this  the  the  l e n d e r need o n l y l o o k to the s e c u r i t y . Though t h e r e i s  ho s o c i a l e v i l i n consumption c r e d i t sound as a g e n e r a l  rule.  i t i s not  financially  59  THE ••EFFECT OP INSTALLMENT BUYING. ON THE BUSINESS CYCLE. C r e d i t c o n d i t i o n s have been one of the factors referred the  important  i n p r e c i p i t a t i n g p r e v i o u s b u s i n e s s c r i s e s . The c r e d i t to has been p r o d u c e r s '  c r e d i t but w i t h the spread o f  i n s t a l l m e n t system a new f o r c e , consumers'  "become g r e a t enough to have an e f f e c t  credit  has  on the b u s i n e s s  cycle.  Has t h i s new i n f l u e n c e been good or bad? An i n c r e a s e  i n trie volume o f c r e d i t r e l a t i v e  to  goods produced w i l l  tend to cause a r i s e i n the g e n e r a l  of p r i c e s or a f a l l  In i t ' s  level  r e c i p r o c a l , the v a l u e of the d o l l a r .  T h i s r i s i n g p r i c e l e v e l s t i m u l a t e s a b u s i n e s s boom. However when all  the f o r c e s of l a b o r and c a p i t a l are being u t i l i z e d : . t o t h e i r  fullest  extent,  extensions  the t o t a l output  increase  appreciably  of goods. Once t h i s has happened any  expanaion o f c r e d i t i n bank d e p o s i t s ,  of c r e d i t cannot  increases  and t h i s  further  p u r c h a s i n g power, by an .increase  i s used to b i d up the p r i c e of goods  and s e r v i c e s a l r e a d y i n e x i s t e n c e . I t ' c a n be seen from t h i s t h a t the c o n s t a n t l y volume of. p r o d u c e r s '  c r e d i t has no p r o p o r t i o n a t e  p r o d u c t i o n , but s i m p l y r a i s e s  increasing  increase  in  the g e n e r a l l e v e l o f p r i c e s .  TheBe r i s i n g p r i c e s i n t u r n p r o v i d e an i n c e n t i v e f o r e n l a r g i n g i n d i v i d u a l businesses against  one another  and r e s u l t  i n b u s i n e s s men b i d d i n g  f o r labor which i s already f u l l y  employed.  The borrowers of p r o d u c t i o n c r e d i t , by b i d d i n g up the  prices  of s e r v i c e s and commodities cause an expansion i n the  pecuniary  volume o f t r a d e , However t h e r e i s no c o r r e s p o n d i n g  increase  60  i n the p h y s i c a l volume o f t r a d e and t h e i r borrowings merely i n c r e a s e the a l r e a d y l a r g e mass o f d e b t s . Upon the  slightest  o c c a s i o n t h i s l e a d s to demands f o r l i q u i d a t i o n and p r e c i p i t a t e s a  crisis. The  e x p a n s i o n of i n s t a l l m e n t c r e d i t , on the  other  hand.,: p l a c e s i n c r e a s e d buying power i n the hands of the consumers and t h i i r e s u l t s effect  i n a l a r g e r demand f o r goods. The  of t h i s e x p a n s i o n i s to o f f s e t  the o v e r p r o d u c t i o n e v i l s  of an i n c r e a s e i n p r o d u c t i o n c r e d i t or at any r a t e to its  effects.  postpone  F o r m e r l y i n p e r i o d s of d e p r e s s i o n , c o n d i t i o n s  c o u l d not become b e t t e r u n t i l the s u r p l u s o f goods i n d e a l e r s ' hands had been d i s p o s e d o f , How the e f f e c t  of time payments on  i-  i  p e r i o d s o f d e p r e s s i o n w i l l be to r e t a r d r e c o v e r y because t h e r e is  added to the s u r p l u s i n d e a l e r s '  hands, l a r g e q u a n t i t i e s of  r e p o s s e s s e d goods which must a l s o be d i s p o s e d of and s t i l l  other  goods i n the hands o f consumers w h i c h have not been p a i d f o r . When the p e r i o d of r e c o v e r y comes the i n s t a l l m e n t buyers may be making back payments, p l u s accumulated charges and  interest,  and they w i l l have no money f o r new goods. In  a c t u a l p r a c t i c e the buyers f i n d t h e i r e a r n i n g s c u r t a i l e d but not e n t i r e l y s t o p p e d , u n l e s s they "become anemployed,_and they keep r e d u c i n g t h e i r , l i a b i l i t i e s as the d e p r e s s i o n c o n t i n u e s . For  t h i s r e a s o n ' p r o p e r l y e x t e n d e d ' " i n s t a l l m e n t c r e d i t can o n l y  d e l a y r e c o v e r y i£ few, months. One way to overcome t h i s would be to i n c r e a s e buying power by new e x t e n s i o n s o f c r e d i t w h i c h would s t i m u l a t e and  sales  h a s t e n r e c o v e r y . I n s t a l l m e n t c r e d i t used i n t h i s way would  be the v e r y d e v i c e f o r h a s t e n i n g p r o s p e r i t y and  lifting  61  b u s i n e s s out o f a d e p r e s s i o n . I t  i s easy f o r buyers to meet  payments when the v a l u e s of the goods purchased a r e - i n c r e a s i n g . The w o r s t f l u c t u a t i o n s of the b u s i n e s s c y c l e c o u l d be a v o i d e d by expanding i n s t a l l m e n t c r e d i t i n a p e r i o d o f d e p r e s s i o n and c o n t r a c t i n g i t i n boom t i m e s . However at  present  the c o m p e t i t i o n between d e a l e r s and between f i n a n c e companies , makes the r e s t r i c t i n g o f t h i s c r e d i t r a t h e r d i f f i c u l t . ment c r e d i t , w i t h o u t . c o n t r o l , c o u l d a c c e n t u a t e  Install-  booms and  d e p r e s s i o n s . T h i s i s a l s o t r u e of the o t h e r forms of c r e d i t . THS  OF INSTALLMENT CREDIT ON THE CHARACTER OF THE INDIVIDUAL.  EFFECT  T h i s phase o f i n s t a l l m e n t c r e d i t i s c o n s i d e r e d • because of the f e e l i n g o f v i o l e n t antagonism which many, w e l l () •. . • • known b u s i n e s s men e x h i b i t e d toward i t . Senator Couzens was the c h i e f opponent i n the U n i t e d S t a t e s * He, and o t h e r s  in this  c o u n t r y as w e l l , c o n s i d e r e d t h a t when a young man mortgaged h i s future  e a r n i n g s he was d e m o r a l i z i n g h i s own c h a r a c t e r  because  he was spending-more money than he had earned,. T h e y ' f e l t t h a t i t would l e a d to e x t r a v a g a n t h a b i t s , t h a t i t would make people i m p r o v i d e n t by d i s c o u n t i n g the f u t u r e f o r p l e a s u r e - a t present  the  time. D u r i n g a p e r i o d o f f a l l i n g p r i c e s such as we have  encountered d u r i n g the l a s t t h r e e y e a r s a u t o m o b i l e s and other commodities have had t h e i r v a l u e s lowered so f a s t purchasers'  e q u i t y was decreased as f a s t  or f a s t e r  that  the  than they  c o u l d make the payments. Then when a purchaser got out of work or had h i s wages cut he found t h a t he had no e q u i t y on which t o borrow t h keep up the payments.  I f he t r i e d to s e l l the goods  62  he o f t e n  Learned t h a t he c o u l d not o b t a i n enough money to  l i q u i d a t e the d e b t . had to r e p o s s e s s adverse e f f e c t  The r e s u l t was t h a t the f i n a n c e company  the g o o d s . T h i s s o r t of t h i n g does have an  on human c h a r a c t e r .  On the o t h e r hand  c o n s e r v a t i v e l y managed f i n a n c e companies were a b l e to  extend  the time f o r payment and d u r i n g the y e a r 1931 p a r t i c u l a r l y , hundreds o f c o n t r a c t s had to be r e f i n a n c e d and the reduced by as much as f i f t y  percent.  We must not o v e r l o o k the f a c t has i t s b r i g h t e r s i d e because  payments  that installment buying  i t has r a i s e d the s t a n d a r d o f  l i v i n g of people r e c e i v i n g moderate  i n c o m e s . B y t e a c h i n g them #  h a b i t s o f s y s t e m a t i c s a v i n g and spending i t has enabled them to purchase goods w h i c h they c o u l d not o t h e r w i s e have o b t a i n e d . The farmer has been enabled to buy h i s t r a c t o r  through t h i s  form o f c r e d i t , p e r m i t t i n g him to c u l t i v a t e a much w i d e r a r e a and i n c r e a s i n g many times the p r o d u c t i v i t y of h i s f a r m . ? / i t h t h i s l a r g e r income he has not o n l y p a i d o f f the i n s t a l l m e n t on his  machinery but has been a b l e to remove the burden of h i s  mortgage much sooner than would o t h e r w i s e have been the  case.  There has never been a time when everybody p a i d cash and i n s t a l l m e n t b u y i n g s i m p l y s u b s t i t u t e s  an o r d e r l y type of  c r e d i t to r e p l a c e the o l d hap hazard- book account  type.  THE EEEECT ON SOCIETY AS A WHOLE. The d i f f e r e n c e i n the demand f o r producers and consumers c r e d i t i s based on the f a c t t h a t the consumer t h i n k s and f e e l s i n terms o f u t i l i z a t i o n of s e r v i c e s and commodities w h i l e the producer measures h i s p r o s p e r i t y i n terms of p r o f i t s . * P h i H i p s Adams, Canadian Bankers M a g a z i n e , October,1930  In the one case what comes i n i s s a t i s f a c t i o n o f wants and i n the o t h e r ,  money o r money s w o r t h . S i n c e t h e r e i s no way of 1  comparing the s a t i s f a c t i o n s o f one i n d i v i d u a l w i t h e those o f another  it  i s hard to say a c c u r a t e l y whether the i n d i v i d u a l  is  g e t t i n g h i s money's w o r t h out of i n s t a l l m e n t b u y i n g . Through t h i s form o f c r e d i t the i n d i v i d u a l secures  the  immediate  enjoyment o f goods w h i c h c o u l d not o t h e r w i s e be o b t a i n e d the f u t u r e depends  i f at a l l . Whether o r not t h i s i s an  advantage  on the c o s t of the s e r v i c e , the s a t i s f a c t i o n d e r i v e d  from p r e s e n t t&e  till  enjoyment c o n t r a s t e d w i t h f u t u r e  i n d i v i d u a l ' s r a t e of d i s c o u n t i n g the  c o n s u m p t i o n , and  future.  Great c r i t i c i s m has been l e v e l e d a t i i n s t a l l m e n t b u y i n g on the ground t h a t though t h e r e may be a temporary spurt t h i s w i l l  be f o l l o w e d by a decrease  However, i n the l o n g r u n at  least,  i n future  p r o d u c t i o n and p u r c h a s i n g  power are c o r r e l a t e d . The p r i n c i p l e i n v o l v e d i s t h a t ment b u y i n g i f s u f f i c i e n t l y  sales.  install-  g e n e r a l c l e a r s i t s e l f . There i s  an e q u i v a l e n t i t e m o f income f o r every i t e m of o b l i g a t i o n i n s o c i e t y at  large. There i s o f t e n a c r i t i c a l stage i n the m a r k e t i n g ,;>  p r o c e s s when a l a r g e p r o d u c t i v e ^ p o w e r has not y e t found  its  market and when the p o t e n t i a l d e s i r e f o r goods has not been translated  i n t o e f f e c t i v e demand.. One of the  functions.of  installment credit  important  i s to h e l p i n d u s t r y over t h i s  d e a d l o c k . For s h o r t p e r i o d s an i n c r e a s e i n output does not always mean an i n c r e a s e i n p u r c h a s i n g power and business c y c l e s w i t h t h e i r r e c u r r i n g p e r i o d s o f d e p r e s s i o n are due to  this  d i s l o c a t i o n o f s u p p l y and demand. The s u p p l y of one t h i n g  64  constitutes  the demand f o r another and i f we s u p p l y the r i g h t  t h i n g , the i n c r e a s e i n p r o d u c t i v e power w i l l f i n d i t s awn market. T h i s form of c r e d i t f u r n i s h e s an i m p o r t a n t a d d i t i o n to the goods at the command o f s o c i e t y , c-reated "by f o r c e s t h a t would not have been so f u l l y u t i l i z e d had i n s t a l l m e n t c r e d i t not e x i s t e d . I n s t a l l m e n t c r e d i t i s s a f e r than o r d i n a r y bank c r e d i t because when the b u s i n e s s o u t l o o k becomes u n c e r t a i n , s e l l i n g can  cease a l t o g e t h e r .  As a consequence the volume of  install-  ment paper w i l l d i m i n i s h each month and i t would c o m p l e t e l y d i s a p p e a r w i t h i n a y e a r . On the o t h e r hand the bank i s compelled to extend i t s c r e d i t to f i r m s of d o u b t f u l s o l v e n c y i n bad times so as to t i d e them over the  difficulty,  Consumers c r e d i t i s a more s t a b l e form of c r e d i t than p r o d u c e r s c r e d i t because the s i z e o f the c r e d i t c r e a t e d bears a more exact r e l a t i o n to the v a l u e o f the goods changing hands and  this factor in i t s e l f  Then too d i v e r s i t y o f f i s k is  tends toward more b a l a n c e d p r o d u c t i o n . i s tremendously i n c r e a s e d when c r e d i t  extended to the i n d i v i d u a l consumer r a t h e r  than to  the  p r o d u c e r and merchant, Summarizing t h i s work we may say t h a t t h e r e are  three  bases f o r the development of the c r e d i t system, F i r s t a sense of b u s i n e s s m o r a l i t y or what may amount to the same t h i n g , a r e c o g n i t i o n of the f a c t  t h a t honesty i s the best p o l i c y . Secondly  a r e l a t i v e l y s t a b l e monetary s t a n d a r d f o r d e f e r r e d payments and t h i r d l y , a l e g a l system d e s i g n e d to safeguard the r i g h t s of ' i n d i v i d u a l s and to enforce prompt f u l f i l l m e n t  o f c o n t r a c t s . The  e v o l u t i o n o f these t h r e e supports o f the c r e d i t system has been one o f the most s i g n i f i c a n t f e a t u r e s  of the t r a n s f o r m a t i o n from  m e d i e v a l to modern i n d u s t r i a l s o c i e t y .  S i z e of c o n t r a c t . ( d o l l a r s ) URBAN RURAL ( s t e ps) (steps) fd f, . d. -fd f . .d -f<  Class inteeval - 99  6  -6  -36  1  100-199  7  -5  -35  4  -5  -20  200-299  7  -4  -28  4  _4  -16  300-399  2  -3  - 6  2  -3  _ 5  400-499  5  -2  -10  4  -p  -'8  500-599  2  -1  - 2  600-699  1  0  700-799  1  1  800-899  2  2  1000-1199  v,., 4 ,5  1200-1399  5 .5  1400-1599  6 .5 1  1600-1799  7 .5  1800-1999 34 12.5 - 104.5 - - 3 . 0 8 34 -3.08  4  0  1  1  1  1  4  3  2  6  3  3  9  4  4,5  18  2  6.5  13,13  1  7.5  7.5  1 34  8.5  8.5  '7,5 •117 steps.  X 100 - -|308;?-..  Mean i s $ 6 5 0 - $308 ™ $342.  - .6  -1  3  900-999  fd  12.5  -56  63  63 - 56 -. .206 s t e p s . 34 .206 X 100 $20.60 Mean i s $ 650.00 + $20,60 s  The g r e a t e s t d i f f e r e n c e between r u r a l and urban business  i s i n the matter of s i z e o f c o n t r a c t .  The l a t t e r  is  c h a r a c t e r i z e d by c o n t r a c t s n e a r l y t w i c e as l a r g e as those of the  former.  S i z e of Rural Glass f. interval  cU" -fa (steps)  -10  6  -1  11-20  16  0  21-30  8  1  31-40  1  2  notes , (d o 1 l a r s ) fd  f  -6  Urban, -fd d. (steps )  2  -3  -5  8  -2  • - 16  8  9  -1  -9  2  5  0 .  fd.  41-50  3  7  1  7  51-60  . 4  2  2  4  1 34  3  61-70  3 34  5  15 25  -6  3 14 '  -31  25-6 ... ,56 steps s. 5 5 . 6 0 34  14-31 - - . 5 steps zz. - $ 5 . 0 0 , 34  Mean r u r a l note, i s  Mean urban note  •$15.00 - f | - 5 . 60 =$20.60 There ' i s a l s o q u i t e a d i f f e r e n c e made on the two c l a s s e s difference contract.  is  $35 - $5.00 = $30.00 i n the s i z e o f phe payments  of c o n t r a c t s  but the percentage  i s not as g r e a t as i t i s i n the case o f s i z e of  the  T h i s i s a h e a l t h y ' s i g n because i t i n d i c a t e s t h a t  the  r u r a l buyers do not c o n t r a c t purchasers.  as f a r In advance as the  urban  Additional Bote, A t the p r e s e n t time the N a t i o n a l A s s o c i a t i o n of F i n a n c e Companies i s a c t i v e l y l o b b y i n g i n the U n i t e s S t a t e s Congress to amend the F e d e r a l Reserve A c t by making the notes f i n a n c e companies e l i g i b l e f o r d i s c o u n t . The arguments  which  are advanced i n f a v o r of t h i s amendment are t i i a t d u r i n g the b a n k i n g c r i s e s s u b s t a n t i a l l y a l l s e c t i o n s o f the c o u n t r y have been h i t by the narrow base of F e d e r a l Reserve  eligibility  facilities. C r e d i t has been p r o v i d e d by Congress f o r everyone but the consumer  almost  the man who r e a l l y needs and want  to buy goods. These b i l l s make i t p o s s i b l e to expand consumer c r e d i t s a f e l y so as. to complete the c r e d i t c h a i n . Without, consumption t h e r e can be no p r o d u c t i o n and no b u s i n e s s . To s t i m u l a t e consumption i s one o f the g r e a t e s t needs of  the  p r e s e n t s i t u a t i o n , and c r e d i t f o r consumption i s e s s e n t i a l that  to  end. The g r e a t e s t source of c r e d i t f o r consumption i s i n  the f i n a n c e companies w h i c h s u p p l y funds to f i n a n c e  deferred  payment s a l e s . E v e r y y e a r they s u p p l y consumer c r e d i t amountin to b i l l i o n s o f d o l l a r s . That c r e d i t i s not so f r e e l y a v a i l a b l e as i t ought to be .and e a s i l y c o u l d b e . , T h e remedy i s s i m p l e . It  i s to make the notes o f f i n a n c e companies e l i g i b l e f o r  r e d i s c o u n t w i t h F e d e r a l Reserve Banks, I f t h a t were done,  the  .banks c o u l d l o a n f r e e l y to sound f i n a n c e companies and r e t a i n t h e i r l i q u i d i t y because they c o u l d c o n v e r t the  finance  companies' notes i n t o c a s h at need. There i s no q u e s t i o n about  68  the soundness o f such n o t e s .  They c o n s t i t u t e the  safest  commercial paper a v a i l a b l e to banks. The a u t h o r i t i e s have t r i e d many schemes such as "open market o p e r a t i o n s " and o t h e r s to f o r c e c r e d i t through the commercial banks to b u s i n e s s . The v a r i o u s schemes never -worked. I t i s now c l e a r l y e v i d e n t t h a t t h e r e i s  g r e a t need  f o r e l i g i b i l i t y o f f i n a n c e company paper and o t h e r good commercial paper o f a ready or s e l f - l i q u i d a t i n g  character,  based upon commodity or merchandise t r a n s a c t i o n s .  I f the base  of e l i g i b i l i t y f o r r e d i s c o u n t at F e d e r a l Reserve Banks had been broadened t h r e e y e a r s ago, many banks would have been saved and the  l o s s o f m i l l i o n s of d o l l a r s of d e p o s i t o r s ' The t e x t of the b i l l  money s a v e d .  i n t r o d u c e d i n the House of Senate  as number S.74 7 and i n t r o d u c e d i n the House o f R e p r e s e n t a t i v e s • as number H.R.4551 i s as  follows:  73rd C o n g r e s s . 1 s t S e s s i o n . "Be i t enacted by the Senate and House of R e p r e s e n t a t i v e s of the U n i t e d S t a t e s of America i n Congress A s s e m b l e d , That the F e d e r a l Reserve A c t b e , and the same hereby i s , amended by adding a f t e r  s e c t i o n 13 a new s e c t i o n to be known as s e c t i o n 13b,  and to r e a d as  follows:  "The n o t e s , d r a f t s ,  and b i l l s of exchange d e c l a r e d  e l i g i b l e f o r d i s c o u n t i n s e c t i o n 13 s h a l l i n c l u d e the notes of f i n a n c e and c r e d i t companies, the proceeds o f which have been o r are to be used f o r one or more o f the f o l l o w i n g  purposes?  "(a) F o r the purchase o f o b l i g a t i o n s or evidences of indebtedness payment plan?  c r e a t e d i n the m a r k e t i n g of goods on a d e f e r r e d  " ( b ) F o r the purchase of goods f o r r e s a l e ; "(c)  F o r the purchase of o b l i g a t i o n s or evidences of  i n d e b t e d n e s s g i v e n f o r the purcha.se of goods f o r r e s a l e ; and " ( d ) F o r the purchase of accounts r e c e i v a b l e growing out of the s a l e o f g o o d s , " Should t h i s b i l l for  be passed t h e r e w i l l be p r o v i s i o n  a tremendous i n f l a t i o n o f c r e d i t i n the U n i t e d  States.  71  R u r a l Business  Ol  1  1  1  _—I  —I  if git  1  -_J  1  L  # /t>*o */16»  £ t z e  of  Contract  The r e l a t i o n between s i z e o f c o n t r a c t and percent cash as they a f f e c t repossessions. S o u r c e : ,Vinra>:] S e c u r i t i e s L t d . , e x p e r i e n c e f o r 1930 , 1 9 3 1 , 1 9 3 2 . Urban B u s i n e s s <  t  1  1  (  1  1  1  1  /CO  So  Percent  •  cash  6o -  •  •  • •  -  •  • *  •  •  • * •  • •  •  • (  1 •Size  Red  dots  •  •  •  1  -  •  •  •  1  •  1  •  1  of contract"  repossess/ons;  blacK  dots  paid  7A  APPENDIX. The d a t a shown on the p r e c e d i n g t a b l e s would seem to show t h a t where more t h a n f i f t y  percent  cash was p a i d , on b o t h  r u r a l and urban b u s i n e s s t h e r e was l i t t l e or no chance of a repossession. W i t h the r u r a l b u s i n e s s where s m a l l e r percentages followsJ  c a s h were p a i d the chances of r e p o s s e s s i o n were as 40 p e r c e n t  or more c a s h , chances of r e p o s s e s s i o n  30  "  "  "  ,20  »  "  »  -20  "  "  1 to'4.34  ,  «  »  "  1 to 3 .  ,  »  »  "  1 to  c a s h or l e s s ,  0  "  11  of  2.  1 to 2.4'  The c o r r e s p o n d i n g urban e x p e r i e n c e was as  follows*.  40 percent  or)more c a s h , chances of r e p o s s e s s i o n  1 to 4 .  30 p e r c e n t  or more c a s h , chances of r e p o s s e s s i o n  1 to  3.2  20 p e r c e n t  or more c a s h , chances of r e p o s s e s s i o n  l.to  2.6  20 p e r c e n t  c a s h or l e s s , chances o f r e p o s s e s s i o n  1.to. 2 . 4  Both-..these s e t s of f i g u r e s show t h a t t h e r e i s a c l o s e c o r r e l a t i o n between the percentage the c o n t r a c t . urban  of cash and the q u a l i t y of  T h i s r u l e h o l d s e q u a l l y w e l l f o r b o t h r u r a l and  business. The l e n g t h o f the c o n t r a c t  i s a p p a r e n t l y not as i .;•  i m p o r t a n t f o r r e p o s s e s s i o n s were as common among l o n g  contracts  as among s h o r t ones. There was- no important d i f f e r e n c e  between  r u r a l and urban e x p e r i e n c e on t h i s p o i n t . There was c o n s i d e r a b l e difference  i n the e f f e c t  of s i z e of c o n t r a c t . N e a r l y a l l the  r u r a l r e p o s s e s s i o n s were on c o n t r a c t s of $300 or l e s s w h i l e than h a l f as many urban r e p o s s e s s i o n s were found i n t h i s  less  class.  73  ,REFERENCES USED. Seligrnan, E . R . A . , The Economics of I n s t a l l m e n t s e l l i n g . Plummer, W i l b u r - C , on the  S o c i a l and Economic Consequences of B u y i n g  Installment Plan.  Bartlettj  John L . and C h a r l e s II.Reed-, R e t a i l C r e d i t  Practice.  L e e , V i r g i l P . , P r i n c i p l e s of A g r i c u l t u r a l C r e d i t . 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