UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Installment credit in agriculture Winram, James Mills 1933

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1933_A4_W6_I5.pdf [ 18.84MB ]
Metadata
JSON: 831-1.0105294.json
JSON-LD: 831-1.0105294-ld.json
RDF/XML (Pretty): 831-1.0105294-rdf.xml
RDF/JSON: 831-1.0105294-rdf.json
Turtle: 831-1.0105294-turtle.txt
N-Triples: 831-1.0105294-rdf-ntriples.txt
Original Record: 831-1.0105294-source.json
Full Text
831-1.0105294-fulltext.txt
Citation
831-1.0105294.ris

Full Text

B . C . LIBRARY . | GAT HO. LEsihn. m$,M-::,QklS INSTALLMENT CREDIT IE AGR j^W.UBa. F^J~i7 A THESIS. SUBMITTED BY JAMES KILLS WINRAM EOR THE'DEGREE OE FOSTER OE SCIENCE AGRICULTURE y AT THE .. UNIVERSITY OE "BRITISH •COLUMBIA. APRIL 1333. INSTALLMENT CREDIT IN AGRICULTURE. (INDEX) " I H i s t o r y . 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 inance companies P.T.-3. d. I n s t a l lmen t buying i n c o u n t r i e s ou ts ide the U . S . P . 6, I I A r t i c l e s a f f e c t e d . P . 8. a . A p p l i c a t i o n to consumers and producers goods P. 9. b . A p p l i c a t i o n to a g r i c u l t u r e P . 1 0 . I I I . Is - i n s t a l l m e n t c r e d i t economica l ly sound. P . 1 2 . a . A t t i t u d e of bus iness leaders P .14 , b . E f f e c t on d i s t r i b u t i o n P . 1 8 . c . Comparison between urban and r u r a l buying power P . 2 2 . d. Earm and urban buying power i n the U . S . P . 2 5 . e. Fartn and urban buying povver i n Sanaa a. P. 31 . I V . Hazards a . M o r a l r i s k P . 3 3 , b . Crop f a i l u r e and uneven seasonal re tu rns P . 3 4 . 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 P . 3 6 . V . Costs and losses . a . Cost of the money P .37 . b . Cost of c r e d i t i n v e s t i g a t i o n P .38 . c .Cost of c o l l e c t i o n s . P . 1 1 . d. Insurance on automobiles P . 4 2 . e. R u r a l insurance P . 4 4 . f . Rate's and t h e i r c a c l c u l a t i o n . P.51.,-Index (cont inued) V I What i n s t i t u t i o n i s best adapted to do t h i s f i n a n e i n g . a . P r i v a t e brokerage houses P .54 . b . Batiks P . 5 5 . c . Government i n s t i t u t i o n s ' P . 5 7 . V I I The e f f e c t of i n s t a l l m e n t buying a . On the bus iness c y c l e P . 5 9 , b . On the cha rac t e r of the i n d i v i d u a l P . 6 1 . c . On s o c i e t y as a whole P . 62 . . Appendix . Volume of automobile paper i n Vancouver ( cha r t ) ¥ i n r a m S e c u r i t i e s L t d . r u r a l experience* References . . •PREFACE TO THE THESIS. Th 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 theory of i n s t a l l m e n t buying as i t a f f e c t s s e v e r a l important a r t i c l e s of modern commerce. The genera l exper ience and d e s c r i p t i o n i s f i r s t o u t l i n e d and then urban p r a c t i c e i s compared w i t h r u r a l p r a c t i c e . Except i n the case of farm machinery the r u r a l d i s t r i c t s had never been able to get 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 years ago. I t i s the aim of the w r i t e r to show the ways i n which i n s t a l l m e n t c r e d i t has been s u c c e s s f u l or unsuccess fu l i n the c i t i e s ?jhere there i s the experience of s e v e r a l years to draw on and then to t r y to po in t out the s p e c i a l fea tures which would be l i f c e l y to a l t e r these conc lu s ions from the s tandpoint of r u r a l bus ines s . In s t a l lmen t c r e d i t i s the same wherever a p p l i e d and the purpose of t h i s t h e s i s i s to o u t l i n e i t s genera l theory and workings and- then to apply the r e s u l t s to a g r i c u l t u r a l c o n d i t i o n s . 1. INSTALMENT CREDIT IN AGRICULTURE. DEFINITION. The best d e f i n i t i o n of i n s t a l l m e n t buying i s g i v e n by P ro fesso r ¥ .C .P lummer of the U n i v e r s i t y of P e n n s y l v a n i a . He s t a t e s tha 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 ed i n t e r v a l s . As ide from a cash or down payment which i s u s u a l l y made at the time of s a l e , the t r a n s a c t i o n i s s imply one of de fe r red payment i n con t r a s t to one of cash payment and does not d i f f e r i n i t s nature from any other c r e d i t t r a n s a c t i o n . As s t a ted above i n s t a l l m e n t c r e d i t p rov ides f o r the payment of debt i n r e g u l a r and f i x e d i n s t a l l m e n t s . In t h i s respect i t i s a so r t of funded debt i n con t r a s t to a demand o b l i g a t i o n which i s payable at the request of the c r e d i t o r , or to the charge account which Is payable i n whole or i n pa r t s at the convenience of the deb to r . I t a l so stands i n con t r a s t to the k i n d of debt which runs f o r a s ta ted pe r iod and which i s to be pa id i n a lump sum at the end of the p e r i o d . In buying on the i n s t a l l m e n t p l an the goods are d e l i v e r e d to the buyer , 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 u n t i l a l l the i n s t a l l m e n t s are p a i d . De fau l t i n payment i n almost a l l cases g ives the s e l l e r the r i g h t to possess ion of the goods. I t a l so f o r f e i t s a l l p rev ious payments. HISTORICAL BACKGROUND. In s t a l lmen t buying was in t roduced to the Uni ted Sta tes i n 1807 by the founder of Cowperthwait and Sons of New York C i t y , 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 other business 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 very cau t ious 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 remaining 10 per cent was composed of s m a l l business men. The sewing machine bus iness was the next to which the system was a p p l i e d . The S inger Sevjing Machine Co. began to s e l l on the i n s t a l l m e n t p l an about 1850. This was not as p r o f i t a b l e because the r i s k was g r e a t e r . The purchasers were u s u a l l y people of 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 us ing t h i s p r i n c i p l e f o r the past e igh ty y e a r s , McCormick reapers and b inders have been s o l d i n t h i s manner almost from the beg inn ing of t h e i r use and l a r g e r p ieces of farm machinery have been s o l d t h i s way fo r the past f i f t y or s i x t y y e a r s . Ins t a l lmen t s e l l i n g of pianos began about f i f t y years ago. This was at f i r s t a very h i g h grade business because the goods we£e bought c h i e f l y by people of a h igher s t ra tum of s o c i e t y and the down payment was u s u a l l y of at l e a s t one-:tlii'rd the p r i c e . In recent years cheaper pianos have been s o l d i n t h i s manner and repossess ions are by no means uncommon. The l a s t twenty years have wi tnessed a tremendous expansion both i n volume of sa 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 rea tes t increase t a k i n g plaoe between 1920 and 1923, A f t e r 1923 i t d i d not increase 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 ana ly s t of the N a t i o n a l A s s o c i a t i o n of Pinance Companies es t imated that the volume of i n s t a l l m e n t debt was 7 per cent g rea te r than i n 1923 and by the end of 1926 i t was 8 per cent g r e a t e r . •THE RISE OE THE EI NANCE COMPANIES. The f inance companies appeared because they 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 the banks and they were able to g ive more a t t e n t i o n to i n d i v i d u a l c o l l e c t i o n s than the banks were. The f inance company i s a new middleman because i t stands between the manufacturer and the d e a l e r , between the dea l e r and the consumer, between the banks and the bor rowers . 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 inance. , c r e d i t , d i scoun 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 that they appeared i n the automobile i n d u s t r y . Some are l a rge co rpo ra t i ons doing bus iness 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 ca l e w h i l e many are sma l l and conf ine t h e i r a c t i v i t i e s to one c i t y . The f u n c t i o n of a f inance company i s s i m i l a r to tha t of s, commercial bank i n tha t i t has a s i m i l a r d i s c o u n t i n g f u n c t i o n . I t d i f f e r s from the bank i n tha t i t s funds are not obta ined from d e p o s i t o r s and i t r a r e l y comes under the banking law. The l a r g e s t company i n t h i s business to-day i s the General 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 of General Moto r s . A l l the products s o l d by General Motors Corpo ra t i on are f inanced by t h i s company a.nd|(fche t o t a l amount of 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 d o l l a r s a y e a r . The o l d e s t man i n the r e g u l a r automobile f i n a n c i n g bus iness was probably L.P.Weaver of San F ranc i s co who began i n 1913. At tha t time he had been engaged i n the s e l l i n g of wagons and other v e h i c l e s on c o n d i t i o n a l sa le agreements f o r about f i f t e e n y e a r s . In 1927 h i s company s o l d out to the Commercial Investment Trus t Co rpo ra t i on of New Y o r k . The l a t t e r o r g a n i z a t i o n i s to-day the second l a r g e s t f inance company. I t was formed i n 1924 as a merger of the Commercial Investment Trus t I nc . , which had been e s t a b l i s h e d i n M i s s o u r i i n 1908, the M e r c a n t i l e Acceptance Corpora t ions organized i n I l l i n o i s i n 1905 and the Canadian Acceptance Corpo ra t i on L t d . I n 1927 the company purchased the Chicago Acceptance Corpo ra t i on and the L.P.Weaver Company, ^he f o l l o w i n g year 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 of Texas . I t a l so owns a s u b s i d i a r y company i n Germany, one i n Prance and one i n Scand inav ia and has an ope ra t ing agreement 'wi th the Uni ted Dominions Trus t Company of Great B r i t a i n . 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 Porto Rico as w e l l as n e a r l y a hundred branch o f f i c e s i n the United S t a t e s , In the year 1929 i t loaned a t o t a l o f 1282,163,000, I t s c h i e f c l i e n t s are the Dodge, Nash, Graham P a i g e , l iupmobi le , Chand le r , Reo, Hudson Essex Companies, Radio Corpo ra t i on of America and the American Piano Company. M r , M o r r i s of 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 on ly spasmod ica l ly , . 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 C o r p o r a t i o n was formed. This i s to-day one of the b i g s i x concerns , doing a business of almost $100,000,000 a year ( f i g u r e s f o r 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 'wel l as i n the l e a d i n g c i t i e s of Nor th Amer i ca . I t s c h i e f customers are the N a t i o n a l Rad ia to r Compan3r, the J o h n s - M a n v i l i e Company and the Studebaker C o r p o r a t i o n . The Commercial C r e d i t Company i s one of the l a r g e s t and a l so one of the o l d e s t companies i n the b u s i n e s s . I t was o rgan ized by Mr ,A .E .Duncan i n 1912, and i n 1928 i t loaned $265,88.4,000. I t s customers i n c l u d e the General 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 Inco rpo ra t ed , C h r y s l e r and. W i l l y s Over l and . I t has branches i n 158 c i t i e s of the Uni t ed Sta tes 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. ~Ear ly i n 1918 Hare and Chase was formed to handle the bus iness of the Packard Motor Car Company and a yaar l a t e r the Merchants and Manufacturers S e c u r i t y Company was formed i n Ch icago . The f i r s t mentioned company has s ince gone in to l i q u i d a t i o n because of i t s loan p o l i c y . The U n i v e r s a l C r e d i t Co rpo ra t i on was o rgan ized i n February 1928 by the Eord Motor Company to handle i t s i n s t a l l -ment f i n a n c i n g . In i t s f i r s t year's opera t ions i t advanced c r e d i t o t a l l i n g over |>75,000 ,000, In Canada the UTord Motor Company's business i s handled by Traders Finance C o r p o r a t i o n . Automobiles are f inanced by the f i f t e e n l a r g e s t companies i n t h i s bus iness In the Uni ted S ta tes and many f inanc a v a r i e t y of other goods besides but none of them appear to handle farm machinery or-equipment , I f t h i s . i s the ease there should be a r i c h f i e l d f o r investment a w a i t i n g the companies that would undertake to f inance farm implement manufacturers such as Massey H a r r i s , I n t e r n a t i o n a l Harves te r Company and o t h e r s . The movement of form f inance companies grew very r a p i d l y a f t e r 1920 and by 1922 there 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. M r . C l a r e n c e Y. -Pa l i t z> P res iden 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 speaking i n New York i n 1925 s t a t ed that at that time there were one thousand f i v e hundred organized f inance 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 bus iness . INSTALLMENT BUYING IN GOUNTBIES-- O U T S I J J E . T H E UNITED STATES. I n s t a l lmen t buying has a l s o i n c r e a s ea g r e a t l y i n other coun t r i e s besides the Uni ted S t a t ed . In Canada the o ldes t 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 probably the f i r m of Winram Bro the r s at Vancouver . This f i r m was organized as a p a r t n e r s h i p i n June, 1917 but f o r at l e a s t f i v e years p r i o r to tha t date the members had been d i s c o u n t i n g automobile paper . In Februa ry , 1932 the bus iness was inco rpora 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 sa le of machinery, ; , ; a g r i c u l t u r a l implements, au tomobi les , f u r n i t u r e and mus ica l i n s t rumen t s . E i g h t y percent of the p i a n o s , seventy percent of the sewing machines, s i x t y percent of the automobiles and f i f t y percent of the f u r n i t u r e are s o l d on the part payment b a s i s . ^ French law recogn ized a form of c o n d i t i o n a l sa le i n 'which the t i t l e passes to the buyer on payment of the l a s t i n s t a l l m e n t . Such a s a l e i s known as a "vente** a temperament". In Germany sa le s on the i n s t a l l m e n t p l a n under which the t i t l e to the goods remains ves ted i n the vendor are customary and were becoming i n c r e a s i n g l y popular up t i l l 1929. Dur ing the i n f l a t i o n p e r i o d such sa l e s were rare because at that time the currency was d e p r e c i a t i n g so f a s t that s a l e s had to be made f o r cash . * C. Chisho Im The Ilanchester Guardian Cotmnercial, Sept . 16 ,1926 , 9, APPLICATION TO CONSUMERS' AND PRODUCERS' GOODS. In order to study p r o p e r l y the use of the defer red payment p l an i t i s necessary to make a d i s t i n c t i o n between producers ' goods and consumers' goods. The former i nc ludes instruments of p roduc t i on and goods i n process 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 machinery, f a c t o r y and s to re 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. This form of wea l th 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 that they are p roduc t i on goods and not consumption goods. In 1926 the t o t a l volume of farm machinery s o l d on time i n the U n i t e d Sta tes was $28,000,000 and $71,000,000 worth of t r a c t o r s were s o l d i n the same way, Consumers' goods,on the o ther hand, are used to s a t i s f y human wants d i r e c t l y , . Examples of these goods a r e : c l o t h e s , f o o d , houses, au tomobi les , r a d i o s and s i m i l a r a r t i c l e s . F i f t y - n i n e percent of the automobiles were s o l d on time i n 1926 accord ing to Sel igman, He a l so es t imates tha t e igh ty percent of the f u r n i t u r e i s s o l d i n t h i s way, M i l a n V.Ayres ' es t imate f o r that year i s somewhat d i f f e r e n t . He s ta tes tha t among the new cars s e v e n t y - s i x percent are so ld on the i n s t a l l m e n t p lan and e igh ty percent of 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 po in t s out tha t these es t imates are on ly genera l and he knows of no way i n which t h e i r accuracy cou ld be tested. . ' For the same year i n Canada e i g h t y - t h r e e percent of the automobiles were being purchased w i t h defe r red payments as w e l l as f i f t y percent of the farm machinery and mus ica l ins t ruments . Ml 10. APPLICATION TO AGRICULTURE. Among the e a r l i e s t advocates of the i n s t a l l m e n t system i n Canada were the manufacturers of farming implements, who by extending c r e d i t over a pe r iod of y e a r s , enabled p ioneer farmers to acqui re the necessary machinery to produce la rge q u a n t i t i e s of f ood . Without t h i s a s s i s t ance the purchaser 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 sma l l way be a t t r i b u t e d to the advantages of t h i s system. The l o c a l agents of the Massey H a r r i s Company and the I n t e r n a t i o n a l Harves te r Company est imate that i n normal times such as f i v e or s i x years 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 percentage i s h ighe r and at the present time i t i s about e i g h t y - f i v e percent f o r the r e g i o n as a whole . At the present time there are no sources from which exact f i g u r e s on t h i s subject may be ob ta ined . L e t t e r s were w r i t t e n to Mr .H.Marsha11 , C h i e f of the I n t e r n a l Trade Branch , Dominion Bureau of S t a t i s t i c s , D r . J . P . Boo th , Commissioner of the A g r i c u l t u r a l Economics Branch of 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 of the Department of 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 ta ted i n t h e i r r e p l i e s that no data i s a v a i l a b l e i n Canada which separates r u r a l and urban i n s t a l l m e n t purchases. 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, of the Department of Commerce, Washington, from Miss 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 at•Washington 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 of the 11. H a t i o n a l A s s o c i a t i o n of Finance Companies. Th i s in fo rma t ion shows that we c a n on ly draw genera l conc lus ions and then est imate how they w i l l a f f e c t a g r i c u l t u r e . The m a j o r i t y of the a r t i c l e s purchased are d u r a b l e . that i s , they do not need to be rep laced f o r s e v e r a l y e a r s . A p o s s i b l e excep t ion to t h i s i s the automobile i n which r e p a i r s are a l a rge i tem of expense. In s t a l lmen t c r e d i t should not be extended on goods which are q u i c k l y consumed or deprec ia te r a p i d l y . L i f e insurance which has been e s t a b l i s h e d fo r a very long t ime , 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 of the most im.ports.nt c o n t r i b u t i n g f a c t o r s to our present day c i v i l i z a t i o n . The p o l i c y ho lde r immediately c rea tes an e s t a t e , the payment f o r wlkich i n most cases extends over a pe r iod of y e a r s . I t i s thus an i n s t a l l m e n t purchase and perhaps the most important of a l l purchases on the defer red payment p l a n . I l l IS INSTALLMENT CREDIT ECONOMICALLY SOUND„ I t i s i n t e r e s t i n g to note that i n 1925 the m a j o r i t y of economists and business leaders of the count ry viewed i n s t a l l m e n t c r e d i t w i t h a larm and p r e d i c t e d that i t would 1ead to extravagance and a back b reak ing load of deb t s . By the beginning of 1928 i t was seen that the p r e d i c t e d c a l a m i t i e s had not occured and ins t ead the system had tended to s t a b i l i z e outputs reduce p roduc t ion c o s t s , r a i s e standards of l i v i n g and increase purchas ing power throughout the country g e n e r a l l y . The most recent comment on t h i s subjec t i s g iven by M r . H a r r y R . T o s d a l i n the January 1933 number of the Harvard L Business Review. He s t a t e s tha t "The d i s a s t e r that was p r ed i c t ed 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 of c r e d i t l o s ses sus ta ined mean a n y t h i n g . While i t i s known that I n d u s t r i e s i n which 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 fec ted by the d e p r e s s i o n , to what extent tha t f ac t i s due to the method of f i n a n c i n g and to what extent i t i s due to the f a c t tha t the goods represented o p t i o n a l purchases one cannot say . " [Producers' c r e d i t has* been used f o r a long 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 wea l th to p lace i t i n the hands of others so that i t may be employed more e f f i c i e n t l y . On the other hand consumers' c r e d i t has been objected to on moral grounds because i t enables people to buy goods before they have the money to pay f o r them. Some recent changes i n the Marke t ing of Consumer Goods." 13 "*"John S t u a r t M i l l o b j e c t e d t o i t on the ground that i f a d e a l e r A , s u p p l i e s goods t o a consumer B, to the v a l u e of £100, payment to be made i n f i v e y e a r s , the c o u n t r y has had £100 l e s s c a p i t a l f o r p r o d u c t i v e purposes d u r i n g t h o s e y e a r s . Howeger the o l d c r i t i c i s m o f consumers' c r e d i t i s not d i r e c t l y a p p l i c a b l e t o i n s t a l l m e n t c r e d i t . I t i s g e n e r a l l y ec ac c e p t e d t h a t S e v e n t y - f i v e p e r c e n t o f a l l washing machines, s i x t y - f i v e p e r c e n t of a l l vacuum c l e a n e r s and the gr e a t e r . p r o p o r t i o n o f a l l sewing machines are s o l d ' on t h i s p l a n . These g o o d s ? g e n e r a l l y c l a s s i f i e d as consumers' goods are l a b o r s a v i n g d e v i c e s and by f r e e i n g workers i n the home from a c e r t a i n 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 e f f o r t f o r o t h e r purposes. Then too the purchase o f an auto f o r p l e a s u r e can be done by e i t h e r p a y i n g c a s h and t a k i n g the money out o f the b u s i n e s s or by p u r c h a s i n g on the i n s t a l l m e n t p l a n and l e a v i n g the money i n p r o d u c t i v e c h a n n e l s u n d i s t u r b e d . I n s t a l l m e n t b u y i n g does not tak e money out of p r o d u c t i v e c h a n n e l s as do s a v i n g s a c c o u n t s because ;'the money i s i n a c t i v e use and goods are bought w i t h c u r r e n t income. I t 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 machinery as b e i n g consumed as soon as i t i s \>l p l a c e d i n the hands o f a customer. D u r i n g the seven y e a r s o f l i f e of an auto i t w i l l u s u a l l y pass t h r o u g h the hands of s e v e r a l c u s t o m e r s , each o f whom w i l l use o n l y a p a r t of the auto , . car,, so to speak. I n o t h e r words the p u r c h a s e r 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 a p o r t i o n . Does not the f i n a n c i n g o f an u n u t i l i z e d s t o c k of t r a n s p o r t a t i o n -fr " P r i n c i p l e s of P o l i t i c a l Economy" 1915 e d i t i o n , pp513,14. 14 c o n s t i t u t e qu i t e as l e g i t i m a t e a c l a i m upon loanable funds as f i n a n c i n g a . s t o c k of c a p i t a l goods? The more durable the commodity the g rea te r w i l l be the p r o p o r t i o n of t h i s unused s tock , S a l a r i e s and wages i n the Uni ted S ta tes f e l l nine and a h a l f percent i n 1921 as compared w i t h 1930 which had been a r e l a t i v e l y prosperous y e a r . Dur ing the same p e r i o d business p r o f i t s f e l l t h i r t y pe rcen t . The incomes of farmer entrepreneurs would be i nc luded w i t h i n the l a t t e r group. This would seem to i n d i c a t e tha t time sa les to urban wage earners 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 sa les 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 depress ions l a rge numbers of wage earners become unemployed and can the re fore pay no th ing w h i l e farmers are always sure of food and s h e l t e r , ATTITUDE OF BUSINESS LEADERS. Dur ing 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 buying was roundly 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 . At t h i s time l ead ing • ' A u s t r a l i a n bankers condemned t h i s form of c r e d i t on the grounds tha t i t encouraged needless extravagance i n a country which has i t ' s income very g r e a t l y i n f luenced by drought . They c la imed tha 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 cons idered that i n s t a l l m e n t buying was on ly j u s t i f i e d i n the purchase of * Mr.Thomas B u c k l a n d , P r e s i d e n t , Bank of Hew South Wales , Mr . Henry P . S t u r g i s , Chairman, Union Bank of A u s t r a l i a , Mr.George J .Cohen,Chairman, Commercial Banking Company of Sydney, Mr. Kenneth Goschen, Chairman, Bank of A u s t r a l a s i a . 15 u s e f u l , p roduc t ive goods such as land f o r p roduc t ive purposes , farm implements and t r u c k s . Canadian bankers took a midway stand and s a i d that i t 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 that there should be a f a i r cash payment, the goods should on ly be s o l d to a buyer of good s tand ing and the con t r ac t should not be too long drawn ou t . The g rea tes t an tagonis t of i n s t a l l m e n t buying i n the Uni ted Sta tes was Senator Couzens. He deplored the p r a c t i c e on the grounds tha t thousands of young men were becoming so bound up w i t h fu tu re payments, tha t they dare not take a reasonable r i s k i n a new venture of e i t h e r employment or inves tment . He over looked the f a c t tha t very 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 investments wh i l e i f they are purchas ing a motor car or some other 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 that cos t s are too h i g h because the buyer the buyer , pays f i f t e e n to t h i r t y percent i n t e r e s t . I f he .were to put his-A money i n a savings bank and then purchase the a r t i c l e f o r cash he would not on ly save t h i s charge but he would r e c e i v e three or four percent on h i s d e p o s i t . By postponing 'the purchase he can e f f ec t a net sav ing of e ighteen to t h i r t y - f o u r percen t . However l e t us not lose s i g h t of the f ac t that money i s a commodity and that the r e t a i l p r o f i t i n connec t ion w i t h d i s t r i b u t i n g i t should correspond to that of d i s t r i b u t i n g other r e t a i l goods. The banks loan at a cheaper r a te than the f inance * 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 of Toronto , 16 companies but they are hot l o a n i n g t h e i r own money. They Loan that of t h e i r depos i t o r s f o r which they pay a very low ra te of i n t e r e s t ; or they may even loan t h e i r own bank no te s . A bank w i t h | 4 ,000 ,000 cash c a p i t a l can s a f e l y loan s e v e r a l t imes t h i s much money. By p u t t i n g up t h i s money as a cash reserve w i t h the M i n i s t e r of Finance at Ottawa i t can i s sue notes to the value of $10,000,000 because 'Canadian law on ly r e q u i r e s a f o r t y percent reserve on no tes . Dur ing the crop moving season i t may i s sue an a d d i t i o n a l f i f t e e n percen t . In a d d i t i o n to t h i s there would be s e v e r a l m i l l i o n d o l l a r s on depos i t and normal ly on ly twenty to t h i r t y percent of t h i s would be withdrawn suddenly . These wi thdrawals cou ld be cashed .-w i t h bank notes of the i s s u i n g bank. Thus the twenty percent reserve might c o n s i s t of #10,000,000 i n bank notes and i n t h i s way $50,000,000 cou ld be loaned s a f e l y . I f the banks cou ld operate w i t h one hundred percent e f f i c i e n c y they would be assured of a r e tu rn of seven percent on $.50,000,000 or $3,500,000 from an I n i t i a l c a p i t a l of $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 of a f inance company the r a t e s of f i f t e e n to t h i r t y percent charged by the l a t t e r are not e x h o r b i t a n t . Other r e t a i l l i n e s have-a h igher p o s s i b l e p r o f i t than t h i s but s ince i t can be l a r g e l y concealed i t i s not c r i t i c i s e d to the same ex ten t . Senator Couzens a l so s ta tes that cha rac te r i s being undermined because people get goods wi thout hav ing any p r e l i m i n a r y sav ing or s a c r i f i c e . Th i s argument loses much of i t s fo rce i f we regard i n s t a l l m e n t buying as enforced s a v i n g . 17 There are many people who can on ly save i f they have entered in to 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 which they are reminded to meet. Seligman cons iders tha t a p o s s i b l e danger might a r i s e out of i n s t a l l m e n t buying "because i t a l lows i n f e r i o r goods to be s o l d to Ytforkingmen who have no idea of v a l u e s . On the other hand he mainta ins tha 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 the proper commodities and i s granted 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 lough o f f i t s dangers and abuses. When compared w i t h o r d i n a r y producers ' c r e d i t i t possesses c e r t a i n a d d i t i o n a l advantages of 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 of occupa t ions , of geograph ica l areas and of i n d u s t r i a l s i t u a t i o n s . The e d i t o r s of t rade j o u r n a l s were, i n the main , opposed to i n s t a l l m e n t buying up t i l l 1926. Even such a w e l l known paper as the New York J o u r n a l of Commerce i n the i ssue of October 21 ,1925, deplored the widespread and i n c r e a s i n g use of the de fe r red payment p l a n . I t po in ted out tha t though f inance companies had suf fe red compara t ive ly few los ses up t i l l that t ime , bus iness c o n d i t i o n s had been good and wages h e l d at a h i g h l e v e l . I t was s t a t ed that s'hould a, depress ion come the dea le r s would f i n d themselves w i t h l a rge s tocks of p a r t l y used goods on t h e i r hands. The November 14,1925 i s sue of the "Hardware and Meta l Magazine" sounds a warning aga ins t extending i n s t a l l m e n t c r e d i t i n t o l i n e s f o r which i t i s not s u i t e d . I t deplores the f a c t that i n an age when every c l a s s of business i s d e a l i n g i n fu tures the wage earner i s being encouraged to mortgage h i s s a l a r y fo r months ahead i n order tha t he may buy something that he cou ld p robably do w i t h o u t . Tbe a r t i c l e does r a t h e r g rudg ing ly admit tha t many people have been enabled to o b t a i n comforts of l i f e tha t they would otherwise 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 d i d not occur and many of the prev ious opponents began to r econs ide r t h e i r arguments. On November 18,1926 the "New York Jou rna l o f Commerce" s t a t ed tha t every phase of economic l i f e has been at tended by the a d d i t i o n of a new form of c r e d i t appropr i a t e to i t s own c o n d i t i o n s . Every great advance i n the development of the n a t i o n has been f inanced 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 imply the adap ta t ion of the p r i n c i p l e to the advances to i n d i v i d u a l s . EEEECT ON DISTRIBUTION. A f t e r c a r e f u l s tudy , men such as P ro fe s so 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 Trufant Pos te r and W a d d i l l Catchings began to advocate i n s t a l l m e n t payments on the ground that they were economica l ly sound. The reason they gave was tha t i n a p e r i o d of i n c r e a s i n g p r o d u c t i v i t y the f low of consumers' goods i n t o the markets' inc reases f a s t e r than the f low of money i n t o the consumers' pocke t s . This 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 of the Uni t ed Sta tes was 106,418,175 of whom 39.1 percent or 41,614,248 were g a i n f u l l y employed. Of these employed people 1.63 percent r e c e i v e d incomes of |5000 or more. The average income of the remaining 98,37 percent was $1 ,261 ,40 . In 1928 there were 47,018,741 people g a i n f u l l y employed o f whom.2.11 p e r c e n t r e c e i v e d incomes of $5000 o r more. The average income o f the r e m a i n i n g 97.89 p e r c e n t was f1151.50 or••$109.90 l e s s than i n 1920. D u r i n g t h i s p e r i o d c l the 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 the hands o f a few peop l e as shown i n the f o l l o w i n g t a b l e : Date. Ho.of persons T h e i r - t o t a l T h e i r combined s u r p l u s f o r r e p o r t i n g incomes combined i n v e s t m e n t a f t e r d e d u c t i n g of $10p!>000 or incomes. |100,000 l i v i n g expenses '• more. . • . . .'. .. f o r each i n d i v i d u a l . ~WT~ (2T~ T3) m 1920 3,649 727,011,000 362,111,000 1921 2,352 463,002,000 227,802,000 1922 4,031 892,748,000 489,648,000 . 1 9 2 3 - 4 , 1 8 2 912,988,000 494,786,000 1924 5,715 1,237,939,000 666,439,000 1925 9,560. 2,317,759,000 1,361,759,000 1926 9^582 2,384,090,000 1,425,890,000 1927 11,122 2,833,218,000 1,721,018,000 1928 15,977 4,451,205,000 2,853,505,000 The s i g n i f I.catlce o f these f i g u r e s - i s t h a t though employment had remained p r a c t i c a l l y s t a t i o n a r y and the income of the 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 a tremendous s u r p l u s a c c u m u l a t i n g f o r i n v e s t m e n t p u r p o s e s . ( s e e column 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 o f 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 tremendous 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 to absorb i t . The f m i c t i o n of i n s t a l l m e n t c r e d i t i s to a s s i s t i n the d i s t r i b u t i o n of. goods by f a c i l i t a t i n g the o r d e r l y e x p e n d i t u r e of money. An example o f the o v e r - e x p a n s i o n o f the machinery of p r o d u c t i o n i s shown i n the a u t o m o b i l e i n d u s t r y . The U n i t e d S t a t e s has f a c i l i t i e s f o r p r o d u c i n g 8,000,000 autos a y e a r i n s p i t e o f the f a c t t h a t i n the best y e a r i n the h i s t o r y of auto s a l e s o n l y 4,500,000 were s o l d . From these f i g u r e s i t i s apparent that i n d u s t r y does not pay consumers as much money as i t eccpects consumers to pay f o r i t s p roduc t s . In o ther words business i s conducted at a p r o f i t . 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 . S i n c e , t h e r e f o r e , consumers cannot buy the goods w i t h t h e i r cu r ren t income, i n d u s t r y has r e so r t ed more and more to the dev ice of handing them goods to be pa id f o r out of fu tu re income. Had we not c o n t r i v e d to pass on to consumers about three b i l l i o n d o l l a r s worth of excess goods those goods would not have been produced at a l l . For t h i s reason i n s t a l l m e n t buying had, up t i l l 1928,saved the country from a marked business d e p r e s s i o n . In the f i v e years from 1921 to 1926 i n d i v i d u a l savings i n banks alone increased over e igh t b i l l i o n d o l l a r s . Most of these savings were i n t u r n loaned out to inc rease the output of 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 business had the e f f ec t s not been o f f s e t by the volume of goods bought on t ime . One r e s u l t of i n s t a l l m e n t buying i s tha t the banks are extending c r e d i t on the consumer s ide when fo rmer ly i t ?i/as a l l extended on the p r o d u c t i o n s i d e . This inc rease i n consumption has come about l a r g e l y throughtthe development of f inance co rpo ra t i ons which are so conducted that the banks are w i l l i n g to lend them money, which they would hot have l e n t on the accounts r e c e i v a b l e of the o l d i n s t a l l m e n t s e l l i n g houses, The net r e s u l t i s tha t a la rge volume of f i n i s h e d goods have been d i s t r i b u t e d to consumers which otherwise could not have "been d i s t r i b u t e d . This i s a form of c r e d i t expansion which does not b r i n g on "a d e p r e s s i o n . P rev ious depress ions have been brought on by an expansion of p roduc t ion c r e d i t . But s ince t h i s i s expaaalona of consumption c r e d i t i t serves to o f f s e t the e v i l s of o v e r p r o d u c t i o n . The drawback to t h i s theory of a v o i d i n g depress ions i s the f a c t that , con t r a ry 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 supply does not produce an equ iva len t demand. The p roduc t i on of a d d i t i o n a l goods does not of i t s e l f produce an equal demand. To i l l u s t r a t e t h i s l e t us assume that a c e r t a i n farmer can buy i n a year $10,000 wor th -o f goods because he earns tha t much every y e a r . A f t e r due c o n s i d e r a t i o n he decides to buy an auto to be pa id f o r "out of income, r a the r than out of c a p i t a l " . The de fe r red payments amount to $1000. For t h i s year then , h i s purchases amounted to 111,0 0 0 and the t o t a l s a l e s of the automobile business i n gene ra l has been s t imu la t ed 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 cash purchases to § 9 , 0 0 0 i n order to pay the $1,000 on the c a r . C l e a r l y then he cannot cont inue buying at the $11,000 l e v e l unless he mortgages $2 ,000 of h i s fu ture income. S i m i l a r l y i n the t h i r d year $3,000 would have to be mortgaged and so on. As a r e s u l t i t i s p l a i n tha t buying cannot be mainta ined wi thout having the consumer doub le , t r e b l e and quadruple h i s debts as years•go on . The s t imulus of i n s t a l l m e n t buying l a s t e d longer i n the past ten years than would appear from the above i l l u s t r a t i o n . The inc reased consumption gave more employment and t h i s p laced a d d i t i o n a l purchas ing power i n the hands of consumers. In t h i s 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 . Prom t h i s i t can be seen that inc reased consumption caused by i n s t a l l m e n t buying cannot e l i m i n a t e the business depress ion but can on ly delay i t . A po in t which has not been g r e a t l y emphasized, i s tha t time payments make the purchaser look ahead w i t h great care and p l a n h i s expendi tures w i t h more though t fu l i n t e l l i g e n c e . The e v i l s of the system which were being po in t ed out by prominent bus iness men i n 1925 and 1926 had not taken p lace by 1928 and the m a j o r i t y of the t rade j o u r n a l s were beginning to advocate the i nc rea sed use o f t h i s form of c r e d i t . In i t ' s a r t i c l e on the subjec t i n the i s sue of January 26,1928 the "Maratime Merchant ! I t e l l s how the l a t e Lord Shaughnessy saved h i s f i r s t hundred d o l l a r s . When a young men he decided that 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 scoun t h i s note f o r $100, Having exp la ined h i s purpose he got the money and met the note at the due da te . This Jou rna l po in t s out that i n the same way i n s t a l l m e n t buying encourages t h r i f t by causing, young men to budget t h e i r expendi tures i n advance. COMPARISON BETWEEN RURAL AND URBAN BUYING POWER. Having s a t i s f i e d ourse lves that i n s t a l l m e n t c r e d i t i s r e l a t i v e l y sound we must next determine how widespread i s the demand f o r i t . Since demand i s d e s i r e backed up by purchas ing power i t i s necessary to know the purchas ing power of farmers and urban d w e l l e r s i n order to compare the two, The r a p i d development of 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 of 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 increase i n 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 a t tempt ing to ma in t a in the r e q u i r e d c a p i t a l to operate most economica l ly the farmer has found i t necessary to borrow. T he c a p i t a l r e q u i r e d by the farmer has inc reased to such an extent that the accumula t ion 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 pover ty s t r i c k e n . The buying power of the farmer i s not to be measured by p r i c e alone but by cons ide r ing , farm income as a whole . This i s shown by the expanding sa l e s of m a i l order houses and farm implement companies from 1919 to 1929, In the f i v e years p rev ious to 1929 the farmers ' income increased f i f t y percent w h i l e the f a c t o r y workers wage inc reased e ight pe rcen t , However when the .post war- boom p e r i o d i s taken as a base a d i f f e r e n t r e s u l t appears . The f a c t o r y wage has gone up two percent w h i l e the farm income has gone down twenty-seven pe rcen t . Absolu te comparisons between farm income and urban income have been common i n recent years but such comparisons are on ly h a l f t r u th s because they present the farmer as being i n such a dep lo rab le s t a te as to cha l lenge 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 rming . In order to compare w i t h urban, income the l i v i n g ob ta ined from the farm should be conver ted to a c i t y v a l u a t i o n b a s i s . The primary compe t i t i on i n the farm f a m i l y expendi tures i s between land investment and l i v i n g . In the urban f a m i l y expendi tures the prime compe t i t i on i s between p h y s i o l o g i c a l and n o n - p h y s i o l o g i c a l expend i tu res . A d e c l i n e i n income w i t h mortgage debts and payments on farms remaining the same i s accompanied by a d e c l i n e i n l i v i n g . I f payments on farms are reduced and i n t e r e s t i s unpa id , l i v i n g may remain at i t ' s p rev ious l e v e l . Purchas ing power of Cash Farm Income. Yea r . Cash farm income f o r pro?Cash farm income Fac to ry p roduc t i on and expenses. f o r l i v i n g . -wages. 1919-20 100 100 100 20- 21 64 32 96 2 1 - 22 57 30 84 22- 23 76 57 116 23- 24 84 66 119 24- 25 95 81 117 25- 26 97 85 117 26 - 27 92 74 119 27- 28 98 84 121. The above t ab l e was taken from '-Estimates of 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 of Parm Economics , January 1929. I t i s hard to reduce a f a rmer ' 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 because: f i r s t , va lues a l lowed f o r items s u p p l i e d by the farm are u s u a l l y wholesa le w h i l e urban f i g u r e s are r e t a i 1 ; second ly , he has the i n t e r e s t on h i s investment and i n pe r iods of r i s i n g p r i c e s he has h i s income inc reased by r i s i n g land v a l u e s . The demand f o r the present use of i n s t a l l m e n t c r e d i t undoubtedly arose out of the growth of the automobile i n d u s t r y . The inc reased investments i n automobiles which t h i s r e s u l t e d i n has caused other i n d u s t r i e s such as those s u p p l y i n g food , c l o t h i n g , shoes and l i v i n g quar te rs to s u f f e r . R a d i o s , p i anos . 2 8 washing machines, t r a c t o r s and other commodities have had to be s o l d on the i n s t a l l m e n t bas i s i n order to compete w i t h the' au to . D i s t r i b u t i o n i s the great problem of modern economics and t h i s 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 of i n s t a l l m e n t c r e d i t to the consumers i s preformed by breaking up the t o t a l payment in to f r a c t i o n a l payments. The demand i n the c i t i e s i s not conf ined to any one c l a s s though i t i s g rea te s t among the sma l l income group. The farmers of the Middle West and Southern Sta tes of the Uni ted States are u s ing t h i s as much as the c i t y d w e l l e r s , Seligman found that i n the case of s t r i c t l y consumers goods, w i t h the excep t ion of hardware, the amount of c r e d i t increased as he went from sma l l towns to l a rge and from sma l l s to res to l a r g e . 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 ime . Without t h i s he lp 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 rming . This 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 year a f t e r h a r v e s t . As a r e s u l t of the i n s t a l l m e n t l o a n i n g machinery being-put i n to a c t i o n hundreds of thousands of peop le , 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 i n t o the network of the c r e d i t system and are no?; users of s e v e r a l thousand m i l l i o n d o l l a r s of c r e d i t a n n u a l l y . Th i s c r e d i t i s evidenced by l e g a l Instruments such as o r d i n a r y promissory 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 char ts on t ab l e A and t ab le B Table A  THE PER CAPITA FARM INCOME IH EACH STATE. 1919 - 20 - 21 Sta tes a r rayed accord ing to s i x e of per c a p i t a cur ren t income i n 1919. Rank.Per c a p i t a cur ren t income ( d o l l a r s ) 1919 1920 1921 1. 2 . 3. 4 . 5 . 6. 7. 8. 9. 10. 11. 12. 13. 1 4 . 15. 16. 17. 18. 19. 20. 21 . 22. 23. 24. 1064 953 916 630 669 614 609 587 565 559 544 537 534 533 521 510 510 487 483 464 463 449 427 406 832 746 1064 621 347 659 569 523 566 240 371 612 365 537 615 625 360 395 284 545 4 96 392 386 257 628 487 726 451 150 533 328 342 419 137 166 470 268 319 508 574 187 186 99 570 359 237 305 142 N e v . Wyo. C a l . O r e . S.D. Wash. C o l . Ida . H . J . I a . 111? H.Y. D . C . A r i z . R. I . Ma s s. EL P. Kan. H e b . Conn. Wis. Utah. Mont. M i n n . State A 1 1 I J 1 1 L 27 Table A . (cont inued) 1919 1920 FARM 1921 IUCOME 25. 392 374 341 Me. 26. 279 327 190 Oh io . 27. 375 344 233 H. M. 28. 371 269 135 Ind . 29. 368 374 276 Penn. 30. 363 381 255 M i c h . 31 . 360 327 171 Tex. 32. 354 298 137 Ok l a . 33. 348 299 178 D e l . 34. 339 444 387 V e r . 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 P l a . 40, 275 217 156 1T.C. 4 1 . 256 165 84 Ga. 42 . 243 192 126 A r k . 43 . 241 149 100 Mi s s . 44. 214 202 124 V a . 45 . 240 164 108 L a , 46 . 213 170 109 Ky. 47. 207 204 151 5/.V. 48 . 200 140 109 A l a , 49 192 165 121 Tenn. The a o o v e data i s f ro t r " Farm (cont inued) Income i n the U.S." by Leven. 28. Table B . THE PER S ta tes CAPITA HOH PARTI IHCO a r r a y e d . a c c o r d i n g t income ME IH EACH STATE. 1919-20-21. o s i z e of per c a p i t a cur ren t i n 1919. Rank 1. , Per 1919 ' 956 s a p i t a 1920 1095 incomei 1921 1176 d o l l a r S t a t e . D . G . 3 ) 2 . 928. 1045 958 H . Y . /mi 3 . 861 778 667 D e l . '• — — 825 977 926 C a l . 4 . 5. 822 898 814 111. n . „ , , in i i . , . „ „ , • . i , , . , , , , , . , 6. 820 972 850 He v . ' i II 1 7. 811 923 874 Wyo. j — ; I, i- , „ , . 8, a 794 759 949 760 788 611 iVici S 3 * - - . = y» Mont. _. - - — • 10. n . 756 756 752 6 78 Ore . 881 628 M i c h . 12. 751 795 567 A r i z , 13. 745 750 716 Wash. 14. 740 846 716 Md. 15. 739 867 759 R . I . 16. 738 844 626 Ohio . 17. 735 828 705 H . J . 18. 725 850 641 Conn. 19. 708 649 569 S .D . 20, 704 773 729 C o l . •' 1 °—" 11 1 21 . 698 817 673 Penn. 22. 6 94 738 670 Heb. 23 . 680 736 579 O k l a . 24. 670 771. 708 Mo. 29 Table B . ( Rank. Per 1919 c a p i t a income ( d o l l a r s ) 1920 1921. S t a t e . 25 . 6 70 738 ' 647 M i n n . 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 V e r . 34. 592 706 617 Me. 35. 577 626 543 Ut ah . 36, 574 596 528 K y . 37. 574 596 528 V a . 38. 564 725 546 W.V. 39. 562 542 4 78 40. 555 544 438 3«C * 41 . 552 561 487 G a . , 42 . 547 618 540 L a . 43 . 541 5 08 470 M i s s . 44. 532 569 536 IT. M. 45. 531 574 529 Tenn. 46. 529 573 431 JT.C. 47, 500 523 431 A l a . 48. 463 504 450 3?la. 49 . 529 573 512 U.D. cont inued o I/O 0 0 J L_ 3 0 i t would appear that the c i t y d w e l l e r not on ly has a l a rge r income hut i t i s not subjec t to as great f l u c t u a t i o n s . The years taken i nc lude one year of 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 r e a l income of the farmers i s somewhat h igher and s t e a d i e r than would appear from the da t a . One t h i n g i s apparent . ,J-'he average farmer cannot s a f e l y handle as l a rge a debt as the average urban d w e l l e r because of h i s u n c e r t a i n money income. Th i s was p a r t i c u l a r l y t rue of the corn 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 c o m p e t i t i o n . I t i s i n t e r e s t i n g to note tha t as the average incomes decrease from one s t a t e to another the urban incomes f l u c t u a t e about the same percentage from year to year i r r e s p e c t i v e of s i z e w h i l e i n the poorer a g r i c u l t u r a l s t a t e s the incomes do not f l u c t u a t e qu 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 important 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 loaned as l a rge a sum of money e„n a l o n g term con t r ac t as can the prosperous c i t y d w e l l e r . There are apparen t ly no a v a i l a b l e s t a t i s t i c s r e l a t i n g to the fa rmers ' income from month to month. This v a r i e s w i d e l y • from one d i s t r i c t to another , and i t i s i n f luenced by the k i n d of farming 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 of farm machinery or some other a r t i c l e which he wishes to have f inanced on the i n s t a l l m e n t p lan the c r e d i t g ran tor 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 econd ly , what k i n d of crops 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 other source of Income such as lumber ing , 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 ques t ions are necessary i n order to determine what the a p p l i c a n t cou ld reasonably be expected to pay i n each month of the y e a r . I f at a , l l p o s s i b l e the con t rac t should have r egu l a r monthly payments though these need not n e c e s s a r i l y be of the same s i z e . The advantage of hav ing the con t rac t drawn up i n t h i s f a s h i o n i s t w o f o l d , From the l e n d e r ' s s tandpoint i t i s b e n e f i c i a l because he i s enabled to keep i n constant touch w i t h the borrower and the r i s k i s reduced by keeping the debt i n a more l i q u i d form. Prom the bor rower ' s s tandpoint i t i s advantageous 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 of payment a re .encouraged. When the r i s k i s reduced the ra tes may a l so be reduced. PARK AMD URBAN BUYING- POWER IN CANADA. Table C shows the Canadian fa rmer ' s buying power s ince the War. I t shows tha t i n on ly s i x of the four teen years 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 four years the p r i c e s of farm products have f a l l e n f a s t e r and f a r t h e r than those of non-farm p roduc t s . In t h i s pe r iod i t has been r e l a t i v e l y harder f o r farmers to meet f i x e d charges . A f t e r c o n s i d e r i n g a l l angles of the problem i t can be s t a ted that the farmer cannot s a f e l y be loaned as much as the urban d w e l l e r . 31 01 rH nJ CD o? r- cv co O r-H CO O r - l O G^lOr-<tOC~-rHJ>-0!>-tOr-IOCOa> c r > ^ j i o a > c o c \ ! < - ' O c r > < - , J > - c o m r - -o r o o o i o o o H O c o w w o o H l O C O < O C O t O t O O >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 » 0 " - J O J ( O ^ W C D M J ) 0 ) O H « H W W W W N OJ N W W OJ (O tO tO c n a > c n c n o ^ c n c n a ^ a > C T > c n c n c r > c * r H I r—l r~l r-H <-H <—I I—I <—! i—I <—I H H <—I a} *H -p o -P • H M ho • <H -I-5 o r*1 -r-l CD CD xi p S3 •r-l •* CD CD • ?H hO«H oJ o ho-cD 0 a -p CQ •H ho r-1 p j h, rH r- l -PH • P t + ' <D •r-l CD r-| P ,3 n3 r-l P O) 3 CD 0 ^ c - H rQ O >> rCj rP 'CO ho r-X) -0 CD - H P P •H QJ P U -O Q aJ o -0 p< r-l •r-l CD to CT> - p * rj •r-l CD 01 P U a> 4 3 o -P M -63 hQ^ > b> !H •r-l C CD (D >> o 03 <H - p r-l -i-l O rC) P t P <H ha-r-l O o K • H p 3 CD (D p 3 o CQ p| 3 P O • H * Pt a CO -p o 3 CD CQ • H ^5 CQ [: aJ co CD J-i ft C P CD -r-l CQ JM rrt "j rH -P "Cf -H 0J rP 0 f-i a$ CQ CD O CQ S-i •r-l a> -p tt <P • CM CD -P <+-! O Xi CD rH xi CD •H e > a •H p , hO r - l 0 *rfe -r-l ra 3 •H RQ O O r-H tn •rH CO OJ cn SH CD Qi tO CD •P 03 CD —< tn —i aj o PH 0 • • OJ r*H tO H a> r-H 1 -O rH O CD rZ! rO M o r M O m o -p W 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 ro fes so r S . R . A . S e l i g m a n says tha t there are no g rea te r r i s k s a t t end ing consumers 1 c r e d i t s than producers ' c r e d i t s i f p r o p e r l y admin i s t r a t ed and they are i n f a c t more l i q u i d . I t was p r e d i c t e d a few years ago that 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 of d e p r e s s i o n . This i s not the ce.se because i n time, of depress ion p r o f i t s f a l l f a s t e r than wages and thus wage earners can keep t h e i r payments up be t t e r than en t repreneurs . For t h i s reason the i n s t a l l m e n t system, i f p r o p e r l y handled w i l l l a r g e l y c l e a r i t s e l f . Th i s means tha t the terms should 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 the e f f ec t of emphasizing a business depress ion they are no worse than other f i x e d o b l i g a t i o n s i n t h i s r ega rd . The g rea tes t weakness of the system i s tha t i t throws a large s tock of used goods on the market at a time when there are few buyers . Th i s c r e d i t i s based more on confidence than on accumulated c a p i t a l . I t i s of course imposs ib le to measure the moral r e s p o n s i b i l i t y of persons s ecu r ing 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 of those who dea l i n producers c r e d i t , Th^re are men who take p r ide i n paying a l l t .. t h e i r debts no matter how d i f f i c u l t i t i s to do so . F o r t u n a t e l y t h i s c l a s s i s the l a r g e s t , '-^ hen there are the people who take on more debt than they can handle and when they are faced w i t h i t they throw up t h e i r hands. Such people can u s u a l l y be nursed a n d p r o d d e d i n t o p a y i n g m o s t o f t h e i r d e b t s b u t i t t a k e s t i m e a n d c o s t s m o n e y . F i n a l l y t h e r e i s a s m a l l g r o u p o f f u n d a m e n t a l l y d i s h o n e s t p e o p l e a n d t h i s c l a s s i s p r o b a b l y more common i n t h e c i t y t h a n i n t h e c o u n t r y . A g o o d c r e d i t g r a n t o r i s a b l e t o a v o i d t h e s e c o n d c l a s s o r a t l e a s t a b l e t o l i m i t t h e i r b o r r o w i n g s b u t i t t a k e s a n e x c e e d i n g l y g o o d man t o a v o i d t h e l a s t c l a s s e n t i r e l y . From a m o r a l s t a n d p o i n t t h e f a r m e r i s a m u c h . s a f e r man t o do b u s i n e s s w i t h t h a n t h e a v e r a g e u r b a n d w e l l e r . Unless h e i s a. t e n a n t t f a r m e r h e i s h i m s e l f a c a p i t a l i s t , i n a s m a l l w a y , a n d he k n o w s t h e i m p o r t a n c e o f a g o o d c r e d i t s t a n d i n g . As e v i d e n c e o f t h i s we h a v e t h e f a c t t h a t p r i o r t o 1930 a b o u t t w o - t h i r d s o f t h e o p e r a t i n g c r e d i t e x t e n d e d b y c o m m e r c i a l b a n k s i n t h e Un i t ed States t o f a r m e r s w a s o n t h e s e c u r i t y o f p e r s o n a l n o t e s o n l y . In Canada t h e p r o p o r t i o n i s g r e a t e r t h a n t h i s . CROP FAILURE AND UNEVEN SEASONAL RETURNS. There a r e t h r e e h a z a r d s - w h i c h a r e p e c u l i a r t o f a r m c r e d i t a n d t h e s e a r e : c r o p f a i l u r e , u n e v e n s e a s o n a l r e t u r n s t h r o u g h o u t t h e y e a r a n d f l u c t u a t i n g , p r i c e s o f a g r i c u l t u r a l p r o d u c t s . The i n c o m e o f t h e m a j o r i t y o f t h e f a r m e r s v a r i e s w i d e l y f r o m m o n t h t o m o n t h t h r o u g h o u t t h e y e a r a n d a s t h e most s u c c e s s f u l I n s t a l l m e n t p u r c h a s e c o n t r a c t s a r e b a s e d o n e q u a l m o n t h l y p a y m e n t s t h i s i s a d i f f i c u l t y w h i c h m u s t be o v e r c o m e i n some w a y . The m o n t h l y c a s h r e t u r n s o f a ' f a r m e r f l u c t u a t e f r o m y e a r t o y e a r a c c o r d i n g t o y i e l d s a n d p r i c e s o f h i s c r o p s a n d a l s o a c c o r d i n g t o t h e d i v e r s i f i c a t i o n o f h i s b u s i n e s s . His a b i l i t y a.s a manager Is a l so impor tan t . The f i r s t two r i s k s are unp red ic t ab l e but the l a s t two can be determined f a i r l y w e l l i f the c r e d i t g ran tor knows the d i s t r i c t he operates i n . The e v i l of uneven seasonal r e tu rns to the farmer may be p a r t l y overcome by having him budget h i s expenses. This would on ly be r e a l l y necessary i n the case of la rge 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 him submit a budget as w e l l as a f i n a n c i a l s ta tement . A c a r e f u l l y prepared budget enables a farmer to est imate w i t h reasonable accuracy the average income which 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 years should be u se fu l i n d i c t a t i n g what management problems should 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 disadvantages 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 other handicaps . The weakness due to u n c e r t a i n t y of p r i c e and y i e l d cou ld be p a r t l y over -come by p repa r ing 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 combinat ions w i t h v a r y i n g p r i c e s and y i e l d s . In time the need f o r meeting p e r i o d i c a l payments fo r commodities that cont inue 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 lead 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 part of the i n d i v i d u a l . The e v i l of crop f a i l u r e i s g rea tes t i n the one crop d i s t r i c t s . A se r ious a t t a ck of the b o l l .weevil ' in"••the southern s ta tes or a year of 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 luence the y i e l d a l a r m i n g l y and t h i s i n t u r n cuts down the farmers buying power. On a d i v e r s i f i e d farm i t i s r a re 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 purchas ing power and are a l so l a r g e l y u n p r e d i c t a b l e . This e v i l may be p a r t l y overcome by i n c r e a s i n g in fo rma t ion w i t h regard to demand and supp ly . D e p r e c i a t i o n i s more important to farm c r e d i t than to urban c r e d i t . Autos s o l d to farmers are subject to rougher, use than i n the c i t i e s and therefore the i n i t i a l payment must be l a r g e r . The average l i f e of farm machinery i s ten y e a r s , v a r y i n g accord ing to l o c a l i t y , the user and the machine. There are three 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 l oans : F i r s t , the low sa le value of the produce p r i o r to i t s f i n a l p r o d u c t i o n ( h a r v e s t i n g ) , s econd ly , the r i s k of 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 nc rea sed as f a s t i n the l a s t t en years as the i n d u s t r i a l workers income. Wages of urban workers have increased more r a p i d l y than cos t of l i v i n g . When we cons ide r a l l the fo rego ing disadvantages of a g r i c u l t u r a l business we may w e l l ask ou r se lves whether 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 disadvantages have been desc r ibed i n such a way as to over-em.ph8.size t h e i r e f f ec t s and so f a r almost none of the advantages of 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 rong 'because there i s a r e l a t i v e s t a b i l i t y of demand f o r a g r i c u l t u r a l products 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 very i r r e g u l a r . Producers of l e a d i n g a g r i c u l t u r a l products seldom f i n d i t necessary to r e s o r t 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 merchandizing and manufacturing i n d u s t r i e s have been b u i l t up and main ta ined i n t h i s way. V COSTS AED LOSSES. . We have mentioned most of the hazards of the i n s t a l l ment bus ines s . Le t us now cons ide r the cos ts and losses which i t e n t a i l s and ways i n which they may be reduced or even avo ided . COST OE THE IDHEY. One of the c h i e f items of expense which a f inance company has to face i s the cost .of the money used. The i n i t i a l c a p i t a l i s obta ined by f l o a t i n g s tocks and bonds but i n a d d i t i o n to t h i s a cons ide rab le amount of money i s u s u a l l y borrowed from the banks by r ed i scour i t i ng notes and c o n t r a c t s . In the Uni ted Sta tes the f inance companies fo rmer ly borrowed three to f i v e t imes t h e i r c a p i t a l at from four and th ree -quar te rs to f i v e pe rcen t . The ra tes pa id by r e t a i l e r s i n cor responding reg ions were f i v e and a h a l f to seven and a h a l f pe rcen t . In Vancouver the ra te to f inance companies i s seven percent and to r e t a i l e r s e ight to e igh t and a h a l f percent . 38 The r a t e s quoted f o r the Uni ted Sta tes 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 very low, w i t h a l o s s amounting to o n e - f i f t h of one percent on an aggregate of new and used car paper amounting to $195,000,000.* Since the depress ion the volume of 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 losses w i l l be c o n s i d e r a b l y h igher than t h i s though j u s t what they w i l l amount to i s r a the 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 la rge number of these investments are t i e d up at the present time and represent f rozen 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 asse ts w i l l u l t i m a t e l y be l o s t . COST OP CREDIT INVESTIGATION. A second cost i s the expense of making the p r e l i m i n a r y c r e d i t i n v e s t i g a t i o n s which are necessary 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 which a man's c r e d i t s t and ing i n the community may be determined. When he buys an a r t i c l e i t i s necessary f o r him to f i l l out a c r e d i t 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 the names of at l e a s t two r e f e r ences . These may be bus iness acqua in tances , companies w i t h which he does bus iness or even r e l a t i v e s . A f inance company which i s a member of 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 of the man and .h i s references to the c e n t r a l exchange and i t can.check up h i s accounts ou ts tanding w i t h va r ious f i r m s . The c r e d i t exchange or c l e a r i n g house may even get i n touch w i t h the c r e d i t departments of the s t o r e s , c o a l merchants, p roper ty owners from whom the borrower i s r e n t i n g & Surrey made by C.C~Hanch~ 39 and any other mercan t i l e es tabl ishment 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 present 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 of the r e t a i l bus iness f i rms of the community belong to such an a s s o c i a t i o n and they pool t h e i r knowledge f o r mutual p r o t e c t i o n . In a d d i t i o n to t h i s , r epor t s can be obtained from m e r c a n t i l e agencies such as R.G.Duns and B r a d s t r e e t s . These r e p o r t s are e x c e l l e n t f o r l a rge companies but they are l e s s s a t i s f a c t o r y f o r the r e t a i l t rade because they are more expensive and do not g ive 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 fo rma t ion r e c e i v e d from the banks, from a f i n a n c i a l statement and from a persona l i n t e r v i e w w i t h the borrower. This l a s t fea ture i s not very d e s i r a b l e as very few borrowers l i k e to know that t h e i r c r e d i t s tanding i s being 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 of a good s a l e . On the other hand i f the man i s hard to c o l l e c t from he w i l l not a d v e r t i z e the f a c t but w i l l probably g ive h i m s e l f a very h i g h 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 imple f i n a n c i a l s tatement. This i s more important i f the sa le i s a l a rge one but i n any case i t i s necessary to know the bor rower ' s income and h i s p r i n c i p a l committaents. F i n a n c i a l p u b l i c a t i o n s and the columns of newspapers are a l so use fu l f o r showing what con t r ac t s the borrower has ob ta ined . They also l i s t b i l l s of s a l e r e g i s t e r e d , c h a t t e l mortgages, judgments and l a w s u i t s before the c o u r t s . The best p u b l i c a t i o n fo r 4 0 o b t a i n i n g t h i s so r t of i n fo rma t ion i n Vancouver i s the B . C . .Journal of Commerce, Such an e labora te department i s i m p r a c t i c a b l e and un-necessary f o r a s m a l l country d i s t r i c t because everyone knows everyone e l se and the s t and ing of the purchaser i s known before he ever t r i e s to purchase any goods on t ime . In the matter of 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 dea le r has a d i s t i n c t advantage over the urban dea l e r because he knows the c r e d i t s tanding of h i s customers more f u l l y and any a d d i t i o n a l i n fo rma t ion which may be needed can he obta ined f o r the a s k i n g . The f o l l o w i n g elements of pe r sona l s e c u r i t y should be checked up where c a r e f u l bus iness p r a c t i c e i s being f o l l o w e d . 1. Pe r sona l c h a r a c t e r i s t i c s of the borrower . a . Honesty. b . Promptness i n paying deb t s . c . A b i l i t y to produce income. d . T h r i f t in-ess . 2 . Net worth of the borrower . a . Nature and value of p rope r ty . b , Nature and amount of indebtedness . 3. P rospec ts f o r income. a . Past gross income. b . Past ope ra t ing expenses. c . C o n d i t i o n of crops and l i v e s t o c k . d . A&aquacy of 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 cos t i s i n p r o v i d i n g the necessary c o l l e c t i o n f a c i l i t i e s . No matter how much care i s taken i n p l a c i n g the c r e d i t there w i l l always be a few people who, because of l ack of a b i l i t y to manage t h e i r own persona l a f f a i r s , i n a b i l i t y to keep out of t r o u b l e or avo id acc iden t s and s i c k n e s s , are ynable to meet t h e i r payments prompt ly . Such people w i l l r equ i r e c o n t i n u a l prodding and reminding to keep t h e i r payments up. In a p e r i o d of f a l l i n g p r i c e s such as the l a s t three years when l a rge numbers of people have been thrown out of employment or have had t h e i r incomes reduced the work of the c o l l e c t o r has inc reased t remendously. I t i s a much more d e l i c a t e job to t r y to o b t a i n money from people who are fundamental ly honest but are t e m p o r a r i l y out of work, than i t i s to go a f t e r a man who i s d i shones t or who i s easy going and a poor f i n a n c i a l manager. Because of the appearance of t h i s new c l a s s of pwople who do /< not meet t h e i r payments promptly the cos ts of c o l l e c t i n g have increased tremendously i n the l a s t , few y e a r s . The cos t s of t h i s department are determined l a r g e l y by the judgment of the person who p laces the c r e d i t . The c o l l e c t i o n cos ts w i l l be kept down i f sound business 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 of the goods so ld i s another t h ing which a f f e c t s the c o l l e c t i o n c o s t s , For example, i f a used car i s purchased by a man on a moderate s a l a r y he u s u a l l y under-es t imates h i s expenses before he takeson the o b l i g a t i o n . Then i f the car i s i n poor shape he has to spend a la rge amount of money on r e p a i r s and i t i s very d i f f i c u l t f o r him to meet both 4 2 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 d i f f i c u l t to keep the payments up to date when the goods they represent are expensive to operate or when they d e t e r i o r a t e r a p i d l y . S t i l l another phase of the c o l l e c t i o n process i s apparent when the market va lue of the goods i s f a l l i n g r a p i d l y . Under these c o n d i t i o n s a borrower of weak charac te r becomes d i scouraged and w i l l not t r y to keep up h i s payments. These people must then be made to understand that 'when they f inance the pruchase of an a r t i c l e , money i s borrowed and that that money must be pa id back i r r e s p e c t i v e of what happens to the goods. They must a lo s be made to understand that they do not own the goods u n t i l they are p a i d f o r and that i f they abuse them they must make good the damage that has been done. INSURANCE ON AUTOMOBILES. A f o u r t h cost i s the insurance cover ing 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 . Very few f inance companies i n s i s t on a l l these coverages on auto-mobiles but they u s u a l l y r equ i r e at l e a s t one of them. These are cos t s which the buyer knows no th ing about , but which are pa id by him n e v e r t h e l e s s . As a r u l e on ly one or two of these coverages are put on and they are i n c l u d e d Wi th the f i r e , the f t and c o l l i s i o n i n s u r a n c e . Convers ion p r o t e c t s the f inance company when the purchaser f r a u d u l e n t l y d isposes of or conceals the automobile and then d e f a u l t s on the payments. The insurance company pays o f f the f inance company and the l a t t e r ' s r i g h t s are subrogated. Then i f the car should be found the insurance company may se ize 43 i t and do everything possible to enforce payment. Many companies have had a very unfortunate experience with conversion p o l i c i e s . This policy i s intended to cover a criminal.or 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 protects the company from loss which may "be sustained through c o l l e c t o r s or', agents receiving payments for goods and pocketing the money.^ ..••Confiscation insurance i s put on to protect the finance company from loss when the'car i s confiscated by the government. This was very important to Canadian companies about ten years ago when ears were being used to run liquor into the United States-;*. When the drivers were caught the car was confiscated 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 Excise Act of Canada (Section 181) which allows the Federal Government to seize and confiscate absolutely, any automobile, in which booireg l i q u o r has been found. Single interest c o l l i s i o n insurance, is put .••.on by the finance companies to protect 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 v. E i r e and t h e f t i n s u r a n c e are i n s i s t e d on. "bya lmost every f i n a n c e company and c o l l i s i o n i s a l s o r e q u i r e d i n some cases but the c o s t of t h i s l a t t e r coverage has,anrsen so r a p i d l y i n the l a s t few y e a r s t h a t i t has become i n c r e a s i n g l y hard to . s e l l ; and, r a t h e r than have the d e a l e r s l o s e too many s a l e s the f i n a n c e companies have s topped i n s i s t i n g on i t . B e s i d e s t h i s , i n some cases i t l oads the buyer up w i t h more debt than he can hand le . - These coverages p r o t e c t the s e c u r i t y . In a d d i t i o n the purchaser may ask f o r p u b l i c l i a b i l i t y and p r o p e r t y damage . i n s u r a n c e to p r o t e c t h i m s e l f from l a w s u i t s r e s u l t i n g from an a c c i d e n t i As the b u s i n e s s o f f i n a n c i n g grew some o f the f i n a n c e companies o r g a n i z e d t h e i r own insurance companies . An example o f t h i s was the f o r m a t i o n i n Augus t , 1925 by G . M . A . C . o f the General• .Exchange Insurance C o r p o r a t i o n . ... T h e , p r i c e o f the money used and the p r i c e o f the p r o t e c t i o n i n the form o f i n s u r a n c e are the two c h i e f c o s t s o f i n s t a l l m e n t . f inanc ing- . From the economic p o i n t o f v iew the q u e s t i o n Is not as to the e x i s t e n c e o f the cost but as to the w o r t h w h i l e n e s s o f the c o s t . The r a t e of i n t e r e s t charged i n f i n a n c i n g new automob i les f o r example, v a r i e s from e leven to twenty - th ree p e r c e n t , but the. i n c r e a s e d s a l e s wh ich have been made p o s s i b l e have so r e d u c e d the p r i c e of ears that i n the l ong run the buyer Is p r o b a b l y ahead . Th is i s t r u e o f most a r t i c l e s because, i n s t a l l m e n t c r e d i t i s d i s t r i b u t i o n c r e d i t . RURAL INSURANCE. Farm mach inery r e q u i r e s s c a r c e l y any o f these insurance c o v e r a g e s . w i t h the p o s s i b l e e x c e p t i o n o f f i r e . A heavy burden 45 of cost i s thus removed- from the shoulders of the purchaser. The insurance protection that the farmer requires most when purchasing a large quantity of goods on time i s protection against loss 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 factors such as climate, 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: either a contract 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 insuring the farmer against many of the hazards to which h i s crops are exposed. The. term crop insurance i s usually applied to the l a t t e r form of contract.. This form of insurance was f i r s t attempted in the United States i n 1899 but the company lasted 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 successful 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 position With premiums of about twenty m i l l i o n dollars a year in the United States. Frost insurance i s not used to any great extent outside- those states which have large c i t r u s plantations. Price fluctuations may be p a r t l y insured against i n some commodities by the practice of dealing i n futures or hedging.This can only be preformed where there is .a d e f i n i t e exchange and to ensure f u l l protection an close contant must be kept with the exchange to take advantage of price changes. F a c i l i t i e s have, been provided for the increased use of hedging by grain farmers and the practice of protecting themselves 46 a g a i n s t p r i c e f l u c t u a t i o n s by t h i s means i s s p r e a d i n g . A l a c k o f s torage space f o r c e s the farmer to s l o u g h h i s goods on the market as soon as they a,re h a r v e s t e d . On the other ; hand as the s t o r a g e f a c i l i t i e s i n c r e a s e the farmer is: a b l e 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 i t f o r a more f a v o r a b l e p r i c e l a t e r i n the season. ' In t h i s way he not on ly i s . ab le to secure a l a r g e r income but he i s ab le to secure an income over a l o n g e r p e r i o d o f the y e a r . He thus becomes a s a f e r r i s k f o r i n s t a l l m e n t c r e d i t because he has a f a i r l y s teady income and a warehouse r e c e i p t i s a v e r y secure form o f c o l l a t e r a l s e c u r i t y . • TEEMS. . .- • , - . ' . " The Annua l Convent ion o f F inance Companies i n 1924, recommended t h a t on new cars the terms be never l e s s than t h i r t y - t h r e e and one t h i r d p e r c e n t down payment w i t h twelve a d d i t i o n a l , month ly i n s t a l l m e n t s and i n the case o f used c a r s t the down payment s h o u l d be f o r t y percent , w i t h a : s i m i l a r number o f i n s t a l l m e n t s . By 1926 the method was i n g e n e r a l u s e , except on the P a c i f i c C o a s t , by the more c o n s e r v a t i v e companies . Very few farmers have a p e r i o d i c or cont inuous' income from, month: to month and to hand le t h i s b u s i n e s s the s onegpayinent, two-payment and three-payment p l a n s were d e v e l o p e d . In the case o f the f i r s t , w h i c h s-tric±ly speak ing does not i nvo lve ' the p r i n c i p l e o f i n s t a l l m e n t s a l e s ,• one< h a l f o f the cash p r i c e i s demanded:as the down payment and the remainder i s payab le i n a lump sum a t the e x p i r a t i o n o f seven months or l e s s . 1'he two-payment p l a n r e q u i r e s f o r t y p e r c e n t as a down payment, wh i le the • 47 remainder i s payable i n two installments, one-half in four months : and the 'other half i n eight months. The three-payment plan has : the down payment unchanged but the remainder i s divided into •three parts payable respectively i n three,six and nine months. The same p r i n c i p l e i s applied to used cars except that the down payment i s greater. There i s one important factor 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 plan. The terms must be such that the a r t i c l e w i l l be paid for long before i t s period of usefulness has expired. Additional security :or a d ditional endorsements w i l l be necessary i f such terms cannot be arranged. Otherwise the changes are that the loan 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 credit manager of the Hudson's Bay Company at Vancouver, issued the following' figures with regard to Installment purchases from department stores. These' figures'would apply almost e n t i r e l y to urban buyers but they furnish 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 less 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 pay-ments exceeded twenty-five percent of the o r i g i n a l purchase price only fourteen percent went bad. This experience suggests that a number of bad accounts can be large l y eliminated by having a larger 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 . M o n t h l y Terms. Where the monthly terms extended d i d not exceed 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 over one y e a r and not more tha n e i g h t e e n months r e s u l t e d i n o n l y t e n p e r c e n t o f s u c h a c c o u n t s c l a s s i f i e d as b e i n g good. Terms e x c e e d i n g e i g h t e e n months showed two p e r c e n t good. T h i s shows c l e a r l y t h a t the p r o p o r t i o n o f bad to good a c c o u n t s i n c r e a s e s as the time o f the c o n t r a c t i n c r e a s e s . The r e a s o n f o r t h i s i s t h a t t h e r e i s danger o f t h e market; v a l u e o f the a r t i c l e f a l l i n g f a s t e r than the payments are made. Once a buyer l e a r n s t h a t he owes more oh the a r t i c l e than i t would c o s t to r e p l a c e . i t he r a p i d l y l o s e s a l l d e s i r e to meet h i s payments and he may even go so f a r as t o a s k the finance- company to r e p o s s e s s i t . SECURITY TO B l TAKEN. Most o f the a u t o m o b i l e s and farm machinery s o l d i n the 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 mortgage. In Canada on the : o t h e r hand the goods are g e n e r a l l y s e c u r e d by a l i e n or a c o n d i t i o n a l b i l l o f s a l e . The l e g a l d i f f e r e n c e between these two i n s t r u m e n t s I s t h a t In the former case the buyer i s l o o k e d upon as an owner who has p l a c e d a mortgage on h i s e q u i t y . He f o r f e i t s t h i s o wnership (under the terms o f most c h a t t e l mortgages) as soon as he d e f a u l t s i n payment. In the l a t t e r case ownership does not pass to the buyer u n t i l the f i n a l payment i s made. The M a j o r i t y o f the s a l e s c o n t r a c t s i n B r i t i s h Columbia p r o v i d e t h a t upon d e f a u l t i n payment the a r t i c l e may be s e i z e d and h e l d f o r twenty days. Should the buyer f a i l t o redeem the a r t i c l e d u r i n g t h i s time he f o r f e i t s . , a l l r i g h t s in. i t . On the o t h e r hand s h o u l d .the'^Ti nance company be u n a b l e to s e l l the a r t i c l e f o r s u f f i c i e n t to c l e a r the debt i t may sue the p u r c h a s e r f o r the b a l a n c e . Where the s e c u r i t y i s a c h a t t e l mortgage and t h e p u r c h a s e r d e f a u l t s he has o n l y f i v e days i n w h i c h to redeem the a r t i c l e once i t has been 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 the payments become due. • 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 t o o v e r l o a d any p u r c h a s e r w i t h more than he can pay f o r e a s i l y . The M o r r i s P l a n Banks o f the U n i t e d S t a t e s w h i c h make a p r a c t i c e o f l o a n i n g to workers^, and s a l a r i e d p e o p l e w i t h r e l a t i v e l y s m a l l incomes v e r y r a r e l y l o a n a man more than t e n p e r c e n t o f h i s a n n u a l income. He has d i f f i c u l t y i n handling'more than t h i s i W i t h f a r m e r s a c o n s i d e r a b l y h i g h e r p e r c e n t a g e than t h i s c o u l d be S a f e l y l o a n e d because the farm p r o v i d e s a home 'and a g r e a t p a r t o f the f o o d . '' . The u s u a l terms o f t h e .Canadian- farm implement companies i n B r i t i s h Columbia are one t h i r d cash and the ba l a n c e i n the f a l l . They do not l i k e t h e . t i m e to r u n over one y e a r . A g r i c u l t u r a l income i s so u n s e t t l e d though, t h a t t h e terms o f t e n do extend over the y e a r . In .most', case-s the payments are made e i t h e r q u a r t e r l y or i n .the f a l l *.. P r o f e s s o r Gordeef m a i n t a i n s t h a t the• f e n a n t farmer i n Ame r i c a i s a t a d i s a d v a n t a g e 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 but i f he has a good r e p u t a t i o n i n the d i s t r i c t f o r s t e a d i n e s s he can u s u a l l y o b t a i n an aut o m o b i l e or farm implements by making the i n i t i a l c a s h payment. T h i s i s 5 0 almost the o n l y form of c r e d i t " a v a i l a b l e to him and y e t he must have c r e d i t to o p e r a t e . I n s t a l l m e n t c r e d i t i s p a r t i c u l a r l y u s e f u l 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 r e i s p l e n t y o f i n c e n t i v e to pay. Onee the payments sto p the goods may be s e i z e d . Y/e have seen t h a t the f i n a n c e company i s s e c u r e d by h a v i n g a l e g a l i n s t r u m e n t which c o v e r s v a l u a b l e goods i n ' w h i c h the buyer has an i n v e s t e d i n t e r e s t and a l s o by the endorsement of the d e a l e r who s o l d the goods. In a d d i t i o n to t h i s most companies make a p r a c t i c e o f h o l d i n g back one to t e n p e r c e n t o f the c a s h v a l u e o f the c o n t r a c t to a c t as a r e s e r v e a g a i n s t l o s s . 'CREDIT IiWESTIGATION. .' . : When a p r o s p e c t i v e p u r c h a s e r a p p l i e s to a d e a l e r f o r c r e d i t he u s u a l l y has t o f i l l i n a c r e d i t a p p l i c a t i o n . This a s k s f o r h i s name, a d d r e s s , income, p r o p e r t y owned, and names o f one or two r e f e r e n c e s . Some reports/may ask the l e n g t h o f employment a t t h i s j o b , l e n g t h o f r e s i d e n c e , number o f dependents, c o n t i n g e n t l i a b i l i t i e s and s i m i l a r i n f o r m a t i o n . Once t h i s i n f o r m a t i o n has been s e c u r e d i t may be forwarded to the l o c a l c r e d i t bureau I n - o r d e r t h a t a c r e d i t r e p o r t can be o b t a i n e d . A good c r e d i t r e p o r t s h o u l d show judgments o u t s t a n d i n g , whether or not goods have been r e p o s s e s s e d - p r e v i o u s l y , the amount o f money owing t o o t h e r r e t a i l e r s and whether or not the payments on o t h e r 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 "promptly. On the b a s i s o f the i n f o r m a t i o n s e c u r e d the f i n a n c e company can d e t e r m i n e whether or not the p u r c h a s e r i s a s a f e r i s k . 51 The c r e d i t g ran to r i n a sma l l town knows whether the borrower i s an honest man; tha t he pays h i s notes promptly or makes arrangements f o r t h e i r renewal "before they are due. He knows whether he has a f a i r equ i t y i n h i s farm, i s recognized ;as a good farmer and h i s debts are such tha 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 able to-.'.meet . the payments. A l l ...this- i n f o r m a t i o n i s known before the purchaser ever a p p l i e s ..for c r e d i t so the e labora te c r e d i t r e p o r t i n g f a c i l i t i e s of the . c i t y are not necessa ry ; BATES AND THEIR CALCULATION. .The f i n a l method whereby l o s s e s may be overcome i s by charg ing a r e l a t i v e l y h i g h r a t e for the use o f the money. Var ious methods are u t i l i z e d by f inance companies fo r concea l ing these r e l a t i v e l y h i g h i n t e r e s t charges . The i n t e r e s t may be. charged on the cash p r i c e o f the car even though one%thl.rd may be p a i d down on the purchase . Another way i s to have the f inance charge inc lude the insurance lumping the two items o f f inance and insurance together as though i t were a f l a t r a t e . S t i l l another method i s u t i l i z e d when the con t r ac t runs over a y e a r , and the t we 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 gu red on the• t o t a l amount and then on the amount o f the b a l l o o n no te . The excuse g i v e n to the buyer , i f he should ques t ion t h i s , i s that par t of the c o n t r a c t w i l l have to be f inanced a second t ime . A concre te example i s fu rn i shed 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 igh t pe rcen t . ' A c t u a l l y the buyer pays more than t h i s because pa r t of the balance owing i s pa id a t the end o f the f i r s t fconth, pa r t a t the end of the second and so on t i l l the t w e l t h . On each o f these payments he was Charged e igh t percent i n t e r e s t for a y e a r . To f i n d the t rue ra te m u l t i p l y 12 wh ich represents the number o f months i n a year by 12 which represen ts the number o f months o u t s t a n d i n g . This would have to be d i v i d e d , by the sum of 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 i n t e r e s t charged i s e igh t percent we m u l t i p l y 8 by 1.85 and o b t a i n 14 .8 percent as the t rue r a t e o f i n t e r e s t charged. When there are only, four payments the c o e f f i c i e n t would be determined as f o l l o w s : 12 i 4 - 4 . 8 . Os.ing t h i s 1+2+3 + 4 method f o r each success ive pe r iod we a r r i v e at the f o l l o w i n g sca l e of c o e f f i c i e n t s s 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 .666. 3 " " ;•: " 6. .9 " M " 2.4 4 " " " .4.8 10 " . , " 2.181 5 " " « 4 . 11 " 11 " 2 . 6 • • " 11 " 3.428 12 " . " " 1.846 7 " « " 3. The above formula i s the one advocated by Professor Se l igman. I t ha.s the advantage of being simple to c a l c u l a t e and r equ i re s no mathemat ical t ab l e s to work i t ou t . Another method of f i g u r i n g r e a l i n t e r e s t ra tes i s by the use of a m o r t i z a t i o n t ab l e s (Har t , Mathematics of F i n a n c e ) . Let #400 be the amount to be f i n a n c e d ; the ra te charged 8 per -cent or $32 .00 . Each monthly payment i s 432/12 or $36 .00 . The r e a l r a t e can be determined by the f o l l o w i n g formula : 53 36 = 4 0 0 ( l / a a t i ) . .09 - ( l / a _ a t i ) . i i s the r e a l r a t e per 12| .12] m o n t h . ; i = 1 . 2 1 5 . By t a b l e s and 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 months •, i s 12 x 1.215 -14 .58%. • To a r p e r s o n accustomed t o "borrowing from the "bank t h e s e r e a l I n t e r e s t r a t e s may seem h i g h "but i t s h o u l d not be o v e r l o o k e d t h a t the bank has s p e c i a l p r i v i l e g e s i n the m a t t e r o f . s e c u r i t y * 1 !hen too the bank i s l o a n i n g the money e'f i t s d e p o s i t o r s on w h i c h I t pays l i t t l e or no i n t e r e s t w h i l e the f i n a n c e company i s l o a n i n g i t s cash c a p i t a l . When t h i s i s c o n s i d e r e d the p r o f i t on a r e t a i l c r e d i t t r a n s a c t i o n i s not l a r g e as compared to o t h e r r e t a i l p r o f i t s . W i t h these f a c t s i n mind, and by s t a t i n g the charges i n a lump sum the buyer i s a b l e to weight the c o s t s w i t h the b e n e f i t s to be d e r i v e d . The s i g n i f i c a n t comparison to the consumer i s 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 the p r i v i l e g e o f o b t a i n i n g the commodity i n the p r e s e n t , or o f s a v i n g t h i s o.utlay by p o s t p o n i n g h i s purchase t i l l the f u t u r e . However the i n t e r e s t r a t e i s not the o n l y r e a l c o s t to be c o n s i d e r e d i n o t h e r forms of c r e d i t . Many p u r c h a s e r s are u n w i l l i n g to mortgage t h e i r homes or to ask a- f r i e n d to endorse a n o t e . Even the l o s s o f time n e c e s s i t a t e d i n o b t a i n i n g bank c r e d i t p r e s e n t s b a r r i e r s to i t s . use t h a t are as r e a l as the h i g h e r charges made f o r i n s t a l l m e n t c r e d i t . V I \TOAT INSTITUTION i s BEST ADAPTS© TO DO THIS FINANCING? . Source o f consumers' c r e d i t : 6onsumers<l B u y " ° a n k s tocks Loan on i n s t a l l m e n t paper Depo s i t s ^ ^ n f t r , 0 1 , _ a r i , . D i s c o u n t i n s t a l l m e n t ^ • Consumers ^ c o n t r a c t s < Finance companies, ":: IV...';: , "'iJffe^must f i r s t s t r ace the present p r a c t i c e when an automobile .'is;..purchased i n order to d i s cus s which type of i n s t i t u t i o n i s best adapted to f u r n i s h i n s t a l l m e n t c r e d i t . The i n d i v i d u a l buying a car on time i s u s u a l l y r equ i r ed to pay o n e - t h i r d cash and the, balance w i t h i n a year at r egu l a r monthly i n t e r v a l s . : The purchaser u s u a l l y s igns 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 promissory notes or one c o n s o l i d a t e d n o t e . In many of the Sta tes i n the United Sta tes c h a t t e l mortgages are used in s t ead o f l i e n s . The car dea le r then d i scoun t s the con t rac t w i t h a f inance company and the m a j o r i t y o;f the f inance companies then r ed i s coun t these notes w i t h the banks . 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 inance company, the dea le r and the purchaser 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 fo r the payments so the banks are reasonably safe as three name paper i s looked upon as good s e c u r i t y . The bank i n tu rn has .secured i t s funds from other consumers by accep t ing t h e i r money for 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 inance companies are thus middlemen i n the d i s t r i b u t i o n o f c r e d i t . PRIVATE BROKERAGE HOUSES. The f u n c t i o n o f the f inance company i s to d iscount the notes o f tha t l a r g e group of people whose resources or c apparent c r e d i t r i s k do not measure up to the standard set by .the banks. ' The bank cou ld not handle t h e i r accounts because they are not l a r g e enough to be p r o f i t a b l e but the f inance company i s ab le to charge h igher r a t e s than the bank and can there fore 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 for a longer p e r i o d than the bank ivould care to l o a n , and the payments are i n smal l l o t s wh ich must be c a r e f u l l y handled and r i g i d l y watched. The inc reased r a t e s tha t a f inance company r ece ives 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 inance companies p lace 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 company and i ssue shor t term debentures aga ins t ' the t r u s t e e d notes which are so ld to the banks . 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 t r u s t bonds running fo r a p e r i o d of up to t en y e a r s . BANKS. . . . . . The c r e d i t s t r u c t u r e of the 7 /hole country may be endangered i f sound bus iness p r i n c i p l e s are not fo l lowed i n d i spens ing 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 e q u a l l y w e l l to the i n j u d i c i o u s g r a n t i n g of c r e d i t i n any: form. For t h i s reason the banks have to exerc i se , 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 c r e d i t . -Consumers' c r e d i t i s ve ry sma 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 roduc t ion and marketing and as a consequence durable g o o d s - w i l l always have to be f inanced f o r a t l e a s t p a r t of t h e i r va lue by the banks. Thus we see tha t t h i s new form of bank c r e d i t does not threaten 5 6 the batiks w i t h any nev danger. As a matter of f ac t the notes of f inance companies are p a r t i c u l a r l y safe 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 of occupa t ions , of i n d u s t r i a l a c t i v i t i e s and geograph ica l l o c a t i o n s . When a man buys a car on time the dea l e r d i scounts the paper w i t h a f inance company. The f inance company i n tu rn d i scoun t s at l e a s t a p o r t i o n of i t s con t rac t s w i t h the bank. Both the f inance company and the bank ob ta in t h e i r funds by s e l l i n g s e c u r i t i e s such as shares , bonds, or depos i t c e r t i f i c a t e s to o ther consumers, ^'hus the banks, f inance companies and dea le r s 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 . Very of ten one company or i n d i v i d u a l may combine the func t i ons of a l l t h r e e . This i s u s u a l l y the case when department s to res s e l l household equipment on time or when farm implement companies' agents s e l l t h e i r goods. Though the l a t t e r appear to be ope ra t ing 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 ac t remains that t h e i r . r a t e s E r e u s u a l l y h igher than on au tomobi les . The reason f o r these h ighe r cos ts i s to a great extent due to the f a c t that the s e l l e r of goods i s at the same time a s e l l e r of c r e d i t , In g e n e r a l , the s e l l e r should 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 should hones t ly represent 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 other 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 loan more than he be l i eves the buyer can pay. When garm goods are s o l d on the i n s t a l l m e n t p l an these two e n t i r e l y d i f f e r e n t business opera t ions are conducted by the same person and there i s danger that 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 ty of the buyer to pay. The f u n c t i o n of the banks i s to provide 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 company du r ing these seasons when the demand fov c r e d i t i s h i g h . In t h i s way the f inance company i s enabled to keep a l l i t s money working without hav ing to hoard some fo r a few months. Then too the f inance company i s u s u a l l y able to borrow money from the bank at seven or e ight percent and loan out on i n s t a l l m e n t f i n a n c i n g at four teen to t h i r t y pe rcen t . These are the types of 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 . Purchasers might borrow more cheaply from f r i e n d s or o ther p r i v a t e sources but t h i s l a t t e r method of f i n a n c i n g i s on ly open to- a few as trie f r i ends may not have the funds on hand at the time of purchase, 60VSRKMHIM1 INSTITUTIONS FOR DISPENSING _ CREDIT. A government i n s t i t u t i o n s i m i l a r to the Fede ra l Farm Loan Board might be set up but i t would stand a much sma l l e r chance of being s u c c e s s f u l because a great dea l more a t t e n t i o n 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 ra tes might p o s s i b l y be obtained by borrowing from a c r e d i t union or a coopera t ive bank such as the Peoples ' Banks of Quebec. At present the ra tes of these i n s t i t u t i o n s are near ly 58 as h i g h as those of ' f inance companies but i f the money was being loaned on a d e f i n i t e form of s e c u r i t y they might s a f e l y lower t h e i r r a t e s . Seligman main ta ins that the g i v i n g of c r e d i t i s a 'matter of 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 ac t from a l t r u i s t i c mot ives . 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 f low of 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 i s a f low of s a t i s f a c t i o n s which cannot be s o l d . The lender who ignores t h i s d i s t i n c t i o n i s apt^to mix p h i l a n t h r o p y w i t h f i n a n c e . Therefore i f the s t a t e i s g i v i n g c r e d i t i t should cons ider whether the c r e d i t w i l l be used i n p roduc t ive u t i l i z a t i o n whereas the p r i v a t e lender need on ly look to the s e c u r i t y . Though there i s ho s o c i a l e v i l i n consumption c r e d i t i t i s not f i n a n c i a l l y sound as a genera l r u l e . 5 9 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 important f a c t o r s i n p r e c i p i t a t i n g previous business c r i s e s . The c r e d i t r e f e r r e d to has been p roducers ' c r e d i t but w i t h the spread of the i n s t a l l m e n t system a new f o r c e , consumers' c r e d i t has "become grea t enough to have an e f f ec t on the business c y c l e . Has t h i s new in f luence been good or bad? An inc rease i n trie volume of 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 genera l l e v e l of p r i c e s or a f a l l I n i t ' s r e c i p r o c a l , the value of the d o l l a r . This 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 bus iness boom. However when a l l the fo rces of l abor 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 f u l l e s t e x t e n t , ex tens ions of c r e d i t cannot increase app rec i ab ly the t o t a l output of goods. Once t h i s has happened any fu r the r expanaion of c r e d i t increases purchas ing power, by an . increase i n bank d e p o s i t s , and t h i s 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 eady i n e x i s t e n c e . I t ' c a n be seen from t h i s that the cons t an t l y i n c r e a s i n g volume of. p roducers ' c r e d i t has no p ropor t iona te increase i n p r o d u c t i o n , but s imply r a i s e s the genera l l e v e l of 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 provide 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 and r e s u l t i n business men b idd ing aga ins t one another f o r l abor which i s a l ready f u l l y employed. The borrowers of p roduc t ion c r e d i t , by b i d d i n g up the p r i c e s of s e r v i c e s and commodities cause an expansion i n the pecuniary volume of t r a d e , However there i s no corresponding increase 6 0 i n the p h y s i c a l volume of t rade and t h e i r borrowings merely inc rease the a l r eady l a rge mass of debts . Upon the s l i g h t e s t occas ion t h i s leads 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 c r i s i s . The expansion of i n s t a l l m e n t c r e d i t , on the other hand.,: p laces increased buying power i n the hands of the consumers and t h i i r e s u l t s i n a l a r g e r demand f o r goods. The e f f e c t of t h i s expansion i s to o f f s e t the overproduc t ion e v i l s of an inc rease i n p roduc t ion c r e d i t or at any ra te to postpone i t s e f f e c t s . Formerly i n pe r iods of d e p r e s s i o n , c o n d i t i o n s could not become b e t t e r u n t i l the surplus of goods i n d e a l e r s ' hands had been d isposed of , How the e f f ec t of time payments on i-i per iods of depress ion w i l l be to r e t a r d recovery because there i s added to the surp lus i n d e a l e r s ' hands, la rge q u a n t i t i e s of repossessed goods which must a l so be disposed of and s t i l l other goods i n the hands of consumers which have not been pa id f o r . When the pe r iod of recovery comes the i n s t a l l m e n t buyers may be making back payments, p lus accumulated charges and i n t e r e s t , 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 earnings c u r t a i l e d but not e n t i r e l y s topped, unless they "become anemployed,_and they keep r educ ing t h e i r , l i a b i l i t i e s as the depress ion con t inues . For t h i s r e a s o n ' p r o p e r l y extended'"instal lment c r e d i t can only de lay recovery i£ few, months. One way to overcome t h i s would be to increase buying power by new extens ions of c r e d i t which would s t imula te sa les and hasten r ecove ry . Ins t a l lmen t c r e d i t used i n t h i s way would be the very device f o r has ten ing p r o s p e r i t y and l i f t i n g 61 bus iness out of a dep re s s ion . I t i s easy fo r buyers to meet payments when the va lues of the goods purchased a r e - i n c r e a s i n g . The worst f l u c t u a t i o n s of the business c y c l e could be avoided 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 of depress ion and c o n t r a c t i n g i t i n boom t imes . However at present the c o m p e t i t i o n between dea le r s and between f inance companies , makes the r e s t r i c t i n g of t h i s c r e d i t r a the r d i f f i c u l t . I n s t a l l -ment c r e d i t , w i t h o u t . c o n t r o l , cou ld accentuate booms and d e p r e s s i o n s . This i s a l so t rue of the other forms of c r e d i t . THS E F F E C T OF INSTALLMENT CREDIT ON THE CHARACTER OF THE INDIVIDUAL. Th i s phase of i n s t a l l m e n t c r e d i t i s cons idered • because of the f e e l i n g of v i o l e n t antagonism which many, w e l l ( . . • •) • known business 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 Uni ted States* He, and others i n t h i s count ry as w e l l , cons idered that when a young man mortgaged h i s fu ture earnings he was d e m o r a l i z i n g h i s own charac te r because he was spending-more money than he had earned,. They ' f e l t that i t would lead to extravagant h a b i t s , that i t would make people improvident by d i s c o u n t i n g the fu ture f o r p leasure -a t the present t ime . Dur ing a p e r i o d of 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 three years automobiles and other commodities have had t h e i r va lues lowered so f a s t that the purchase r s ' equ i t y was decreased as f a s t or f a s t e r than they cou ld make the payments. Then when a purchaser got out of work or had h i s wages cut he found that he had no equ i ty on which to borrow t h keep up the payments. I f he t r i e d to s e l l the goods 6 2 he of ten Learned that he cou ld not ob t a in enough money to l i q u i d a t e the debt . The r e s u l t was that the f inance company had to repossess the goods. This so r t of t h i n g does have an adverse e f f e c t on human c h a r a c t e r . On the other hand c o n s e r v a t i v e l y managed f inance companies were able to extend the time f o r payment and du r ing the year 1931 p a r t i c u l a r l y , hundreds of con t r ac t s had to be re f inanced and the payments reduced by as much as f i f t y pe rcen t . We must not over look the f ac t that i n s t a l l m e n t buying has i t s b r i g h t e r s ide because i t has r a i s e d the standard of l i v i n g of people r e c e i v i n g moderate incomes . # By teach ing them h a b i t s of sys temat ic sav ing and spending i t has enabled them to purchase goods which they cou ld not otherwise have ob ta ined . The farmer has been enabled to buy h i s t r a c t o r through t h i s form of 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 wider area 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 farm. ?/ i th t h i s l a r g e r income he has not only pa id o f f the i n s t a l l m e n t on h i s machinery but has been able to remove the burden of h i s mortgage much sooner than would otherwise have been the case. There has never been a time when everybody paid cash and i n s t a l l m e n t buying s imply 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 ep lace 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 that the consumer th inks and f e e l s i n terms of u t i l i z a t i o n of s e r v i c e s and commodities wh 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 . * Ph i H i p s Adams, Canadian Bankers Magazine, October,1930 In the one case what comes i n i s s a t i s f a c t i o n of wants and i n the o t h e r , money or money 1s wor th . Since there i s no way of comparing the s a t i s f a c t i o n s of one i n d i v i d u a l withe those of another i t 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 i s g e t t i n g h i s money's wor th out of i n s t a l l m e n t buy ing . Through t h i s form of c r e d i t the i n d i v i d u a l secures the immediate enjoyment of goods which cou ld not otherwise be obtained t i l l the fu ture i f at a l l . Whether or not t h i s i s an advantage depends on the cost of the s e r v i c e , the s a t i s f a c t i o n de r ived from present enjoyment con t ras t ed w i t h future consumption, and t&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 f u t u r e . 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 buying on the ground tha t though there may be a temporary spur t t h i s w i l l be fo l l owed by a decrease i n fu ture s a l e s . However, i n the long run at l e a s t , p roduc t ion and purchasing 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 that i n s t a l l -ment buying i f s u f f i c i e n t l y genera l c l e a r s i t s e l f . There i s an equ iva len t i tem of income f o r every i tem of o b l i g a t i o n i n s o c i e t y at l a r g e . There i s o f t en a c r i t i c a l stage i n the marketing ,;> process when a la rge productive^power has not yet found i t s 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 t r a n s l a t e d i n t o e f f e c t i v e demand.. One of the important f u n c t i o n s . o f i n s t a l l m e n t c r e d i t i s to help i n d u s t r y over t h i s dead lock . For shor t per iods an increase i n output does not always mean an increase i n purchas ing power and business cyc les w i t h t h e i r r e c u r r i n g pe r iods of depress ion are due to t h i s d i s l o c a t i o n of supply and demand. The supply of one t h i n g 6 4 c o n s t i t u t e s the demand f o r another and i f we supply the r i g h t t h i n g , the inc rease i n p roduc t ive power w i l l f i n d i t s awn market. This form of c r e d i t fu rn i shes an important a d d i t i o n to the goods at the command of s o c i e t y , c-reated "by forces that 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 lmen t c r e d i t i s safer than o rd ina ry bank c r e d i t because when the bus iness out look becomes uncer ta in , 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 i n s t a l l -ment paper w i l l d i m i n i s h each month and i t would comple te ly d isappear w i t h i n a y e a r . On the other hand the bank i s compelled to extend i t s c r e d i t to f i rms of doub t fu l so lvency i n bad times so as to t i d e them over the d i f f i c u l t y , Consumers c r e d i t i s a more s t ab le form of c r e d i t than producers c r e d i t because the s i z e of the c r e d i t c rea ted bears a more exact r e l a t i o n to the value of the goods changing hands and t h i s f a c t o r i n i t s e l f tends toward more balanced p roduc t ion . Then too d i v e r s i t y of f i s k i s tremendously inc reased when c r e d i t i s extended to the i n d i v i d u a l consumer r a the r than to the producer and merchant, Summarizing t h i s work we may say that there 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 bus iness 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 that 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 tandard fo r defer red payments and t h i r d l y , a l e g a l system designed 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 of c o n t r a c t s . The e v o l u t i o n of these three supports of the c r e d i t system has been one of the most s i g n i f i c a n t fea tures of the t rans format ion from medieval 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 ) C lass RURAL ( s teps) i n t e e v a l f . .d -f< - 99 6 -6 -36 100-199 7 -5 -35 200-299 7 -4 -28 300-399 2 -3 - 6 400-499 5 -2 -10 500-599 2 -1 - 2 600-699 1 0 700-799 1 1 800-899 2 2 900-999 3 1000-1199 v,., 4 ,5 1200-1399 5 .5 1400-1599 6 .5 1600-1799 1 7 .5 1800-1999 f d 1 4 '7,5 34 •117 12.5 f , 1 4 4 2 4 URBAN (s teps) . d . -5 _4 -3 -p -1 - f d - . 6 -20 -16 _ 5 - ' 8 fd 4 0 1 1 1 3 2 6 3 3 9 4 4,5 18 2 6.5 13,13 1 7.5 7.5 1 8.5 8.5 34 -56 63 63 - 56 -. .206 s t eps . 34 .206 X 100 $20.60 Mean i s $ 650.00 + $20,60 s 12.5 - 104.5 - -3 .08 s t eps . 34 -3 .08 X 100 - -|308;?-.. Mean i s $650 - $308 ™ $342. The g rea tes 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 of c o n t r a c t . The l a t t e r i s c h a r a c t e r i z e d by con t r ac t s n e a r l y twice as la rge as those of the former . Size of notes , (d o1 la r s ) R u r a l Glass f . i n t e r v a l cU" ( s teps) - f a f d f Urban, d . (steps ) - f d f d . -10 6 -1 -6 2 -3 -5 11-20 16 0 8 -2 • - 16 21-30 8 1 8 9 -1 -9 31-40 1 2 2 5 0 . 41-50 3 7 1 7 51-60 . 4 2 2 4 61-70 3 5 15 1 3 3 34 -6 25 34 -31 14 ' 25-6 ... ,56 steps s. 55.60 34 Mean r u r a l note, i s •$15.00 - f | -5 . 60 =$20.60 14-31 - - . 5 steps zz. -$5.00, 34 Mean urban note i s $35 - $5.00 = $30.00 There ' i s a l so qu i t e a d i f f e r e n c e i n the s i z e of phe payments made on the two c l a s s e s of con t r ac t s but the percentage d i f f e r e n c e i s not as great as i t i s i n the case of s i z e of the c o n t r a c t . This 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 that the r u r a l buyers do not con t rac t as f a r In advance as the urban purchasers . A d d i t i o n a l Bo te , At the present time the N a t i o n a l A s s o c i a t i o n of Finance Companies i s a c t i v e l y lobby ing i n the Uni tes States Congress to amend the Fede ra l Reserve Act by making the notes f inance 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 favor of t h i s amendment are t i ia t dur ing the banking c r i s e s s u b s t a n t i a l l y a l l s ec t ions of the country have been h i t by the narrow base of Fede ra l Reserve e l i g i b i l i t y f a c i l i t i e s . C r e d i t has been provided by Congress fo r almost everyone but the consumer 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 there can be no p roduc t ion and no bus iness . To s t i m u l a t e consumption i s one of the grea tes t needs of the present 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 to that end. The g rea tes t source of c r e d i t fo r consumption i s i n the f inance companies which supply funds to f inance deferred payment s a l e s . Every year they supp ly consumer c r e d i t amountin to b i l l i o n s of 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 could be. ,The remedy i s s imp le . I t i s to make the notes of f inance companies e l i g i b l e f o r r ed i scoun t w i t h Fede ra l Reserve Banks, I f that were done, the .banks cou ld loan f r e e l y to sound f inance companies and r e t a i n t h e i r l i q u i d i t y because they could convert the f inance companies' notes in to cash at need. There i s no ques t ion about 68 the soundness of such no tes . They c o n s t i t u t e the safes t 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 ope ra t ions" and others to force c r e d i t through the commercial banks to bus ines s . The va r ious schemes never -worked. I t i s now c l e a r l y evident that there i s great need fo r e l i g i b i l i t y of f inance company paper and other good commercial paper o f a ready or s e l f - l i q u i d a t i n g c h a r a c t e r , 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 ed i scoun t at Fede ra l Reserve Banks had been broadened three years ago, many banks would have been saved and the loss of 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 ' money saved. The t ex t of the b i l l in t roduced i n the House of Senate as number S.74 7 and in t roduced i n the House of Representa t ives • as number H.R.4551 i s as f o l l o w s : 73rd Congress . 1st S e s s i o n . "Be i t enacted by the Senate and House of Representa t ives of the Uni ted Sta tes of America i n Congress Assembled, That the Fede ra l Reserve Ac t be , 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 read as f o l l o w s : "The n o t e s , d r a f t s , and b i l l s of exchange dec la red e l i g i b l e fo r d i scoun t i n s e c t i o n 13 s h a l l i nc lude the notes of f inance and c r e d i t companies, the proceeds of which have been or are to be used f o r one or more of the f o l l o w i n g purposes? "(a) For the purchase of o b l i g a t i o n s or evidences of indebtedness crea ted i n the marketing of goods on a deferred payment plan? "(b) For the purchase of goods f o r r e s a l e ; " ( c ) For the purchase of o b l i g a t i o n s or evidences of indebtedness g iven f o r the purcha.se of goods fo r r e s a l e ; and "(d) For the purchase of accounts r e c e i v a b l e growing out of the sa le of goods," Should t h i s b i l l be passed there w i l l be p r o v i s i o n f o r a tremendous i n f l a t i o n of c r e d i t i n the Uni ted S t a t e s . 71 R u r a l Business Ol 1 1 1 —I _—I - _ J 1 1 L if git # /t>*o */16» £ t z e of Contract The r e l a t i o n between s i z e of con t rac t and percent cash as they a f f e c t r epossess ions . Source: ,Vinra>:] S e c u r i t i e s L t d . , experience f o r 1930 ,1931,1932. Urban Business < t 1 1 ( 1 1 1 1 • -• • -• • • • • • • • • * • * • • • • - • • • -• • ( 1 1 1 1 • 1 /CO So Percent cash 6o • S i z e of c o n t r a c t " Red dots repossess/ons; blacK dots paid 7A APPENDIX. The da ta shown on the preceding t ab les would seem to show that where more than f i f t y percent cash was p a i d , on both r u r a l and urban business there was l i t t l e or no chance of a r e p o s s e s s i o n . With the r u r a l business where smal le r percentages of cash were pa id the chances of r epossess ion were as f o l l o w s J 40 percent or more cash , chances of repossess ion 1 t o ' 4 . 3 4 30 " " " " , « » " 1 to 3. ,20 » " » , » » " 1 to 2 . -20 " cash or l e s s , 0 " 11 1 to 2.4' The corresponding urban experience was as follows*. 40 percent or)more cash , chances of repossess ion 1 to 4. 30 percent or more cash , chances of repossess ion 1 to 3.2 20 percent or more cash , chances of r epossess ion l . t o 2.6 20 percent cash or l e s s , chances of r epossess ion 1.to. 2.4 Both-..these se ts of f i g u r e s show that there i s a c lose c o r r e l a t i o n between the percentage of cash and the q u a l i t y of the c o n t r a c t . This r u l e holds e q u a l l y w e l l fo r both r u r a l and urban bus ines s . The l eng th of the con t rac t i s apparen t ly not as i .;• important f o r repossess ions were as common among long con t rac t s as among short ones. There was- no important d i f f e r ence between r u r a l and urban experience on t h i s p o i n t . There was cons iderab le d i f f e r e n c e i n the e f fec t of s i z e of c o n t r a c t . Near ly a l l the r u r a l repossess ions were on con t rac t s of $300 or l e ss wh i l e l e s s than h a l f as many urban repossess ions were found i n t h i s c l a s s . 73 ,REFERENCES USED. Seligrnan, E . R . A . , The Economics of Ins ta l lmen t s e l l i n g . Plummer, W i l b u r - C , S o c i a l and Economic Consequences of Buying on the In s t a l lmen t P l a n . B a r t l e t t j John L . and Char les II.Reed-, R e t a i l C r e d i t P r a c t i c e . 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 . L e v i n , M a u r i c e , Income In the Var ious S t a t e s , 1919,20,21, E l i o t , C l a r a , The Farmer ' s Campaign fo r C r e d i t . D a n i e l i a n , N . R . , Theory of Consumers' C r e d i t . F o s t e r , W.T.and W a d d i l l C a t c h i n g s , Business -without a Buyer , Canada Year Book, 1932. S t a t i s t i c a l A b s t r a c t of the Uni ted State 's , 1932, Uni ted States^)^Department of A g r i c u l t u r e Year Book, 1931, Magazine and Trade J o u r n a l A r t i c l e s . The Farmer ' s Income. Washington , D . C . ( U . S . D . A . Farmers' B u i . 7 4 6 ) . What the Farm Cont r ibu ted d i r e c t l y to the Farmer 's l i v i n g . (Farmers ' B u l l e t i n 635) . I n s t a l lmen t B u y i n g , (Supplement to January 1927 issue of Annals of the American Academy of - P o l i t i c a l and S o c i a l Sc i ence . ) The Nature and U n c e r t a i n t y of the Farm Income, ( U . S . D . A . Yearbook 1921, pp 1-6). Es t imates of A g r i c u l t u r a l Income i n the Uni t ed S t a t e s , by H.R. To H e y , ( Jou rna l of Farm Economics ,Jan.1929,pp 46-63) . Farm Income Problem, by R . J . M c F a l l , (Annals of American Acaderay of P o l i t i c a l and S o c i a l S c i e n c e , March 1929, pp 7-15) . E f f e c t s of Ins ta l lmen t s e l l i n g on S t a b i l i t y , (Annals of Amer. Acad , of Pol? and Soc. Sc ience , Sept.1928) 7^  REFERENCES USED (CONTINUED) The Economics of H i r e Purchase . ( IN The S t a t i s t , v . I l l , n o . 2 6 0 5 , Jan .28 ,1928 , p .130 ; no.2606, Eeb .4 ,1928 , p l 8 2 ; no.2608, Eeb.18 ,1928 , p .257-58; no.2609, Eeb .25 ,1928 ,p .298; no.2606, Feb .4 ,1928 , p .182 ; no .2612, Mar .17 ,1928 , p .442-443; no.2613, Mar .24 ,1928 , p .485-86; no.2624, June 9,1928, p.1077-78; no. 2626, June 23,1928, p.1164) Reaearch i n A g r i c u l t u r a l income, ( i n Journa l of Farm Economics, Jan . 1928, pp 71-83. ) F a c t o r s a f f e c t i n g expendi tures of Farm Fami ly incomes i n • Minneso ta . ( M i n n . A . E . S . B u i . 2 4 6 ) The Growth of In s t a l lmen t s e l l i n g . A new i n t e r n a t i o n a l business system. r(ih Economic Review , v .8 , no.4 J u l y 25 ,1928 ,p.'27) L e s t e r , O r r i n C . s A D o l l a r down and ten to go; The pros and cons of i n s t a l l m e n t s e l l i n g . (Survey, v . 6 1 , n o . 3 , Nov.&,1928, ) Noyes, C . R e i n o l d . F i n a n c i n g P rope r ty on Next y e a r ' s income, ( i n The Y a l e Review, v . 16, n o . 2 , Jan..2927,- p .227-242) . Bank C r e d i t , P r i n c i p l e s and ope ra t ing proceedure. Glenn G.Munn.. The Bank C r e d i t I n v e s t i g a t o r , R u s s e l l F .Pruden . Banking P r i n c i p l e s and P r a c t i c e . Ray B . W e s t e r f i e l d . Bank C r e d i t , Methods and P r a c t i c e . Thomas J.Kavanaugh. U n i v e r s i t y Debaters Manual 1928-29. Phe lps . Proceedings of the 10th and 11th Country L i f e Conferences. Trends i n R e t a i l D i s t r i b u t i o n by B l o o m f i e l d . REFERENCES NOT AVAILABLE. Arguments f o r and. aga ins t i n s t a l l m e n t s e l l i n g before N a t i o n a l Bus iness Conference at Babson Park (Mass.) ( i n Commercial and F i n a n c i a l C h r o n i c l e ¥ . 1 2 1 , O c t . 3 , 1925, p .1635-1637) . B o i l i n g , C . L . S e l l i n g goods In deferred payment terms. £ i n Business O r g a n i z a t i o n and Management, v . 1 0 , June 1924, P.189) Chamber of Commerce of the Uni ted Sta tes of Amer ica . Domestic D i s t r i b u t i o n Dept . Ins ta l lmen t s e l l i n g ; an approach to the problem. Washington, D . C . , 1926, 9p Mimeographed. Cheney, O .H . P r i n c i p l e s which should be a p p l i e d to merchandizing by i n s t a l l m e n t s e l l i n g ? an address by O.H.Cheney. Fourteenth annual meet ing , Chamber of Commerce of the Uni ted S t a t e s . Washington, D . f e ; i 9 2 7 21p, D o y l e , R' .S. Taxa t ion of income de r ived from i n s t a l l m e n t s a l e s . t i n N a t i o n a l Income Tax M a g a z i n e , v . 4 , Feb.1926,p.53-56) The e f f e c t of i n s t a l l m e n t buying on bus iness , ( i n The A n n a l i s t , v . 29 , no .730 , Jan .14 ,1927, p.83) This a r t i c l e , which i s from the Royal Bank of Canada, i s a d i s c u s s i o n of the arguments f o r and aga ins t t h i s type of c r e d i t . In h i s . c l o s i n g , paragraph of t e n t a t i v e conc lus ions the! author makes t h i s statement? "Increased consumption i s In i t s e l f a process tending toward cumulat ive buying power, and t h i s f a c t o r , together w i t h the d i v e r s i t y of r i s k i n consumers' c r e d i t , seems to stamp t h i s new development, p r o p e r l y c o n t r o l l e d , as a d i s t i n c t step fo rward . " Farmers ' Loan and Trus t Company. Ins ta l lmen t buying. New York 1926. 23p. F o s t e r , W . T . , and Ga tch ings , W a d d i l l , Ins ta l lment s e l l i n g and fu ture buying., ( i n N a t i o n ' s B u s i n e s s , v . 1 4 , n o . 9 , Aug.1926) Hanch ,C.C. B e n e f i t s of i n s t a l l m e n t s e l l i n g , ( i n American bankers assoc . J o u r n a l , v . 2 0 , n o , 9 . Mar. 1928.-) Jameson, Mary E t h e l , Ins t a l lmen t buying; a se lec ted l i s t of r e f e r ences , ( i n L i b r a r y J o u r n a l , v . 5 1 , no.10,May 15,1927) 'Knauth, Oswald W, Where the danger l i e s i n i n s t a l l m e n t buy ing . ( i n American Bankers A s s o c . J o u r n a l . v . 2 0 no .10 .Apr .1928) Meech ,S .P . Economic aspects of i n s t a l l m e n t s e l l i n g . ( i n the Journa l of Business of the U n i v e r s i t y of Chicago , v . l , n o . l Jan ,1928, p .60-82) Midas G o l d ; A study of f a m i l y incomes " o v e r s e l l i n g " and time payments as a broadener of markets.. B u t t e r i c k p u b l i s h i n g Go. ,1925. N a t i o n a l a s s o c i a t i o n of c r e d i t men. Debt , of p u b l i c r e l a t i o n s . In s t a l lmen t Merchandis ing Survey. New York .1927 , N a t i o n a l a s s o c i a t i o n of c r e d i t men. Deb t . o f p u b l i c r e l a t i o n s . In s t a l lmen t s e l l i n g . New Y o r k , 1927. 15 p . mimeographed, N o r r i s , G.W. Ins t a l lmen t s e l l i n g , ( i n T e x t i l e W o r l d , v.69 , Jan. 30,1926 , p.568-570) O r r , W.W. In s t a l lmen t buy ing : and dangers i n the i n s t a l l m e n t p l an by J .W.Tregoe. ( i n Acceptance B u l l e t i n , Jan,30,1926) Pound, A r t h u r , The land, of d i g n i f i e d c r e d i t , ( i n A t l a n t i c Month ly , Eeb.1926,p.252-260) P u e l i c h e r , J o h n H . The i n s t a l l m e n t c r e d i t need, ( i n American bankers A s s o c i a t i o n J o u r n a l , v .20 ,no ,12 ,June 1928, p.964,995) Tregoe, J . H . m B i l l i o n s i n i n s t a l l m e n t buy ing , ( i n Nat ions B u s i n e s s , Dec.1925, p.22-23) 77 R e t a i l C r e d i t Proceedure , by N o r r i s A . B r i s c o . P r e n t i c e - H a l l '• 'Inc.'70 F i f t h Avenue, New York C i t y . 1 9 2 9 . C r e d i t and C o l l e c t i o n Correspondence by James H . P i c k e n . A . W . Shaw Company, 669 Cass S t r e e t , Ch icago , 111. 1928. Lew of Ins t a l lmen t Sales of Goods, by W. C . S s t r i c h . Lawyers Coopera t ive P u b l i s h i n g Company, Roches te r , lew York . 1926. C r e d i t s , C o l l e c t i o n s and Correspondence by Dwight S .Bee b e and Geoffrey S .Ch i Ids . Alexander Hamil ton I n s t i t u t e , A s t o r . P l a c e , New York C i t y . 1927. In s t a l lmen t ga les of F u r n i t u r e , Automobi les , Hardware,Radio and J e w e l l r y i n B u f f a l o . Bureau of Business Research ,Univ , of B u f f a l o , B u f f a l o , N . Y . November 1927. Merchandise repossess ions i n the Ins t a l lmen t f u r n i t u r e t r ade . The Bueeau of Business Research , Ohio State U n i v e r s i t y , Columbus, O h i o , 1927. S e l l i n g through the In s t a l lmen t P l a n . The Blackman Company, 120 West 42nd S t . , New York C i t y . 1926. The Modern C r e d i t Company, by Robert G . M e r r i c k . Norman, Remiggton Company, Char les S t . at Mulberry , - Chicago 111.1922. F i n a n c i n g Automobile Ins t a l lmen t S a l e s , by Haro ld S . W r i g h t , A.W.Shaw and Company,669 Cass S t . Ch icago , I l l i n o i s . 1927. A t r e a t i s e awarded f i r s t p r i z e f o r 1926 by the Commercial Trus t Company, F i n a n c i n g Automobile Sales by the Time-payment P l a n , by W i l l i a m A .Gr imes . A.W.Shaw Company,669 Cass S t . 'Chicago ,111 . 1926. A t r e a t i s e awarded f i r s t p r i z e f o r 1925 by the Commercial Trust Company. 7c? U.S.Bureau of F o r e i g n and Domestic Commerce. Ins t a l lmen t sa les i n F o r e i g n Lav.. B r i t i s h Empire and L a t i n Amer ica . Compiled by Guerra E v e r e t t . Washington, 1925* Young, D .R . Growth of In s t a l lmen t buy ing , ( i n American Bankers A s s o c i a t i o n Jou rna l v , 1 ? , March 1925 , p .541-543, ) Wickens , D . L . The R u r a l Merchant{s C r e d i t Sa l e s , ( i n C r e d i t W o r l d , v .17 , no.7 ,Mar .1929 ,p.4-6,) M o r r i s , A . J . , Canada, f a s t adopt ing the U.S .sys tem of Consumers C r e d i t , (Commercial and F i n a n c i a l C h r o n i c l e , June, 1929) James , A . S . , K a n s a s Jobber forms a f inance company to s e l l on a cash b a s i s ; Farmers Finance Co. ( N a t i o n a l Petroleum News, May 8,1929) Y e s , the farmer can meet h i s p a y m e n t s . ( P r i n t e r ' s Ink,Aug.15,1929) Methods of Ins t a l lmen t Sales A c c o u n t i n g , by E . A . S a l i e r s , Un iv . of I l l i n o i s , Urbana, 111,1926, The E f f e c t s on the Consumer of Ins t a l lmen t C r e d i t , Feb,1929 i s sue of C r e d i t Stores Magazine. 370 Seventh A v e . , N . Y . C . The S o c i a l and Economic Aspects of Ins ta l lment Buy ing , i n the January,1929 i s sue of the Jou rna l of Business of the U n i v e r s i t y of Chicago . Ins t a l lmen t s e l l i n g of A i r p l a n e s , ( i n A p r i l 1929 issue of Airway Age, 30 Church St., New York C i t y . ) I n s t a l lmen t P l an f o r Insurance Premiums. ( in the A p r i l 12,1929 i s sue of The A n n a l i s t , Times Square, New York C i t y ) Ins t a l lmen t S e l l i n g and the Business C y c l e , ( i n the March 31 , 1928 i ssue of Acceptance B u l l e t i n , 120 Broadway, New York C i t y . ) 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0105294/manifest

Comment

Related Items