Poor and Irresponsible People.—Previous to the recent expansion of the instalment system, buying on the instalment plan, except houses and insurance, was practiced almost entirely by poor people. Not only were the people poor, but sometimes they were the least responsible individuals of the community. Under these conditions, losses to the dealer were great, and consequently the price charged for the credit so high that only those people bought on these terms who could not possibly make any other arrangements. Up until about ten years ago, there was strong social disapproval of the practice—it was looked down upon, and there is still a certain social stigma attached to buying clothing on time. It is only within the last five years that instalment buying has become a respectable thing to do.

Poor people continue to purchase on instalments, and the following statement by the president of a large clothing stores organization referring to experiences within his own establishments would indicate that there are still irresponsible buyers among them: “We find that such employees who have contracted the habit of instalment buying can be classed under the head of ‘floating’ help. Their services at best are uncertain, and the extravagance manifested in the purchase on time payments of personal luxuries is reflected in a general lack of reliability.”

Poor, Middle Class, Well-to-do, and Very Rich People.—At the present time, instalment buying is not by any means confined to the poorer classes. Indeed, all economic groups, except very rich people who do not bother with the system, are using it on an extensive scale. However, it is the judgment of those connected with the business that the proportion of the various groups using it is much larger for the lower income groups. From conversations which we have had with numerous consumers as well as with retailers engaged in the instalment business, we believe that there is a marked tendency for lower salaried and even well-to-do people with comparatively large incomes, but who anticipate larger incomes, to buy on deferred payments.

A study was made recently to ascertain the approximate proportion of heads of families using instalment credit in a city of 60,000 people.29 Five hundred and thirty-two families were canvassed, living in forty-one residence square blocks and constituting a sample of the classes of the entire population. Of these families, ninety-three, or seventeen and five-tenths per cent, made use of instalment credit for purchases of varying amounts, exclusive of insurance and real estate, which ranged from twelve dollars to fourteen hundred and twenty-five dollars.

It was found that forty per cent of the families canvassed in the poorer part of town bought on the instalment basis; twenty-five per cent of those canvassed in the middle class sections of town bought in this manner; and five per cent of the well-to-do families used the system.

This special study confirms the general belief that all classes are buying on instalments, but that the percentage of the various classes using the plan is greater for the lower economic groups.

The extensive use of the system by other than the poorer classes is evidenced by the fact that instalment selling of furniture is practiced by stores dealing with a high class clientele; also that whereas formerly only cheaper jewelry was sold on instalments now expensive articles are sold in this manner and the number of high-grade jewelers selling on deferred payments is steadily increasing. Only three or four years ago, the higher priced cars were sold on time-payments very quietly, but now it is reported that “as many of the expensive products of the General Motors Corporation as of their cheap cars are sold in this way.”30 In addition to expensive automobiles, this company sells electric refrigerators, the prices of which are such as to indicate that they are not bought, for the larger part, by poor families.

City and Country, East, West and South.—Everyone knows about the wide extent of instalment selling in the large cities, but there is a sort of general assumption that the “thrifty and honest farmer” is not being “enmeshed” in this “new and inviting system of 01712buying more than one can afford to pay for.” However, we are told that an investigation of several Mid-West and Southern states showed that the farmer has been the target of an equally vigorous selling campaign and that he too is buying on these terms. In a number of instances county agricultural agents have seen fit to warn farmers against the plan. In addition to tractors and other equipment, the farmers, like the other people, are buying automobiles and various smaller articles on time. In California, where the proportion of passenger cars to inhabitants is as one is to three and four-tenths compared with one is to seven over the country as a whole, the deferred payment system is not only in wide use but the keen competition for further business has made it difficult to sell a car except on eighteen months credit as compared with the usual term of twelve months. While instalment buying is found in the rural districts of all parts of the country, it may be true, as is commonly supposed, that there is more of it in the large cities, that is, when considered in relation to population or income. The Federal Reserve Bank of Boston, which is receiving regular monthly reports on instalment sales from leading New England department stores, says that from their experience, the larger increases in instalment business have been in the large cities, and that in the smaller towns and smaller stores this means of granting credit has not had such exceptional growth.31

What are the Articles Purchased on the Instalment Plans?—On account of the importance usually attached to the character of the goods bought on the instalment plan by those inquiring into the soundness of the instalment system, an effort has been made to find out what articles are actually most widely purchased on instalment terms. After giving the information gathered on the subject, an analysis of the goods with respect to their character and the use to which they are put will be attempted. Are they producers’ or consumers’ goods? Durable or quickly consumable? Necessities or luxuries?

Aside from houses, life insurance, and stocks and bonds, all of which are bought on instalments or an extensive scale, the principal items purchased are contained in the following list. They are arranged in the order of their importance as determined by the estimated volumes of credit outstanding at a given time on account of the sale of the various commodities.

The authority for selecting these commodities as the principal ones and omitting others as relatively unimportant is, first and foremost, the 01813results of the investigation of the Economic Policy Commission of the American Bankers’ Association, which have not been published but parts of which have appeared in print of various places; second, a questionnaire sent out by the School of Business Administration of the University of Oregon to 2105 consumers residing in all parts of the State of Oregon; third, the results of an investigation by the Farmers’ Loan and Trust Company of New York; and fourth, the writer's own correspondence and conversation with the officials of stores and dealers of all kinds doing a large instalment business in many different kinds of goods. There is quite general agreement among these various sources. Wide publicity is given to statements that instalment selling has been extended to the point where any commodity may be purchased on this plan. This may be true except for the products of the illegal liquor business which it is said may not be bought on any other terms than cash. At the same time, the total volume of sales of articles other than those mentioned is exceedingly small in comparison with the total volume of instalment credit outstanding at a given time, being only one-hundredth of one per cent according to the results of the investigation of the American Bankers’ Association referred to above. If one wished to extend the above list to include some of the articles next in importance, he could add books, furs, typewriters and motor cycles. Automobiles, standing far out and above all the other commodities, account for more than fifty per cent of the total instalment debt outstanding at a given time—more than all the rest of the commodities put together; household furniture comes second with approximately nineteen per cent; and pianos third with approximately seven per cent.

Distinction between Producers’ and Consumers’ Goods.—Wealth, as economists commonly use the term, is the collective name applied to goods, such as food, clothing, furniture, kitchen utensils, houses, automobiles, raw materials, tools, machinery, buildings, roads, etc., things which are material, scarce, useful, transferable, and which are necessary for the well-being of individuals and of society as a whole. The well-being of a society depends not only on the size of the social fund of such goods but also on their character. It is for this reason that in the analysis of a portion of wealth such as we are making, a useful distinction may be made by the use of the terms consumers’ goods and producers’ goods.

Wealth in such form that it is ready to gratify the wants of individuals immediately and directly, such as the clothes people are wearing, the furniture they are using in their homes, the houses they are living in, etc., is called consumers’ wealth or goods. Other wealth is in a form in which it may be used indirectly to satisfy human want. It is used, not for its own sake, but to help create other wealth or personal services. It includes the instruments of production and the goods in process of production. Examples are motor trucks, passenger cars in productive use, machinery of all kinds, factory and store building.

Importance of the Distinction between Producers’ and Consumers’ Goods.—The advantage of a stock of producers’ wealth lies in the fact that it makes labor more productive. Without tools and machinery or with a comparatively small supply of this form of wealth a people would lead a miserable hand to mouth existence. A large and increasing stock of producers’ goods increases the prosperity of a people. Producers’ credit has long been accepted as a most useful device as it 01914allows persons who own wealth, but who, on account of their ordinary occupations or from lack of ability, or for other reasons, cannot use it in a productive manner, to place it in the hands of those more able to employ it efficiently in production. The granting of instalment credit for production purposes meets with little or no criticism.

It is the granting of instalment credit for the purchase of what are generally classed as consumption goods that has brought forth severe criticism. Some people oppose it on what seems to be moral grounds. They will tell you that there is nothing wrong with borrowing to carry on one's business, but buying consumers’ goods before one has the money to pay for them is not right. It is a practice in most cases so inexcusable that it is, at least in a sense, morally wrong. There are many people including some economists who contend that credit for the purchase of consumption goods should not be extended for important economic reasons. They condemn it on the broad social and economic grounds that it is a detriment to the source of wealth, that is, it increases consumption, thereby decreases saving and thus tends to use up the social fund of wealth or keep it from increasing as it otherwise would. As will be seen later, we take certain exception to the assumption that consumers’ instalment credit is a detriment to the source of wealth.

This criticism of consumers’ credit is an old one, but as we shall point out is not entirely applicable to present day consumers’ instalment credit. Seventy-five years ago, a distinguished economist set forth the objection to consumers’ credit as follows:

Credit given by dealers to unproductive consumers is never an addition, but always a detriment, to the sources of public wealth. It makes over in temporary use, not the capital of the unproductive classes to the productive but that of the productive to the unproductive. If A, a dealer, supplies goods to B, a landowner or annuitant, to be paid for at the end of five years, as much of the capital of A as is equal to the value of these goods remains for five years unproductive. During such a period, if payment had been made at once, the sum might have been several times expended and replaced, and goods to the amount might have been several times produced, consumed and reproduced: consequently B's withholding 100 l. for five years, even if he pays at last, has cost to the labouring classes of the community during that period an absolute loss of probably several times that amount. A, individually, is compensated, by putting a higher price upon his goods, which is ultimately paid by B: but there is no compensation made to the labouring classes, the chief sufferers by every diversion of capital, whether permanently or temporarily, to unproductive uses. The country has had 100 l. less of capital during those five years, B having taken that amount from A's capital, and spent it unproductively, in anticipation of his own means, and having only after five years set apart a sum from his income and converted it into capital for the purpose of indemnifying A.32

Some Consumers’ Credit Leads to Increased Production.—While the above statement is true and the reasoning sound, the argument rests upon certain assumptions which are questionable under modern conditions. One should beware of any generalization that instalment consumers’ credit is always, or even in most cases, a detriment to the source of wealth. The problem of consumers’ credit as it exists at the present time is different from the one presented and worked out in a number of important respects. As we have seen, a certain part of the total volume of instalment credit is extended for the purchase of sewing machines, washing 02015machines and vacuum cleaners. It is generally accepted that approximately seventy-five per cent of all washing machines, sixty-five per cent of all vacuum cleaners and by far the larger part of all sewing machines are sold on this plan. These goods, generally classed as consumers’ goods, are labor saving devices, and by freeing the workers in the home from a certain amount of drudgery, release productive effort for other purposes. For example, if by working without any labor saving devices it takes the woman of the home a whole day to do the family washing, and if it takes only one-half day with the washing machine, the possession of which in some cases is possible only by an instalment system, then the individual has saved a half-day's time which may be used in furthering production as a scrub woman, factory worker, sales person, charity worker, political helper, or in the production of some other kind of wealth or service. The loan for the purchase of a family washing machine is usually classed as a consumers’ loan and yet the net result of the use of the machine may be, and sometimes is, an increased total production. When such is the case, and the purchase of the machine is possible only through a loan, then the consumers’ loan should not be condemned as a detriment to the source of wealth, but rather should be credited with being an aid to increased production. This is not an isolated case but is characteristic of a great deal of instalment buying among poor people.

Still Other Consumers’ Credit Is Not a Detriment to the Source of Wealth.—There are still other large quantities of consumers’ instalment credit which in their effects upon production and consumption are entirely different from the case presented from the writings of Mill, which was without doubt typical of the consumers’ credit of his time. At the present time, the users of consumers’ credit in many cases are also lenders for production purposes. At the very same time that they are buying on the instalment plan and using consumers’ credit, they are granting producers’ credit to others through savings account, life insurance reserves, and industrial bond holdings. The present situation if often as follows: the individual has a savings account or life insurance with a cash value of much more than enough to buy a radio set. he wishes to buy a radio set for seventy-five dollars. He could avoid a consumers’ loan by withdrawing seventy-five dollars of his savings from productive use and paying cash. In some cases he would actually do so if the commodity could not be had on any other terms than cash. But wherein would this be different, as far as its effects upon production and consumption are concerned, from letting his savings remain in productive use and buying the radio set on the instalment plan which would be contracting a consumers’ loan?

The following true illustration will bring out the point we are making that some consumer's instalment credit is not at all a detriment to the source of wealth. A gentleman told us that he started from his country home to buy a certain make of washing machine for one hundred and fifty dollars cash. On his way to town he stopped at a sale of thoroughbred cattle and there saw the opportunity to buy a young Jersey calf which particularly pleased his fancy for one hundred and twenty dollars cash only. Without hesitation he decided to buy the calf for cash and the washing machine on installments with a down payment of thirty dollars. If the washer could not have ben bought on credit, he would have bought it for cash. He contracted a consumers’ loan simply and 02116solely because he wanted to put his funds to a more productive use. Was this consumers’ loan a detriment to the source of wealth? Suppose he had paid cash for he washer and bought the calf on credit, would the producers’ loan have been a detriment to the source of wealth?

A question involving somewhat the same point might be asked thus: “What is the difference, as far as the increasing of production is concerned, between taking funds directly out of one's business to pay cash for a pleasure car and then replacing the money in the business by a producers’ loan, and not disturbing the business at all boy buying the car on instalments?” In the first case a producers’ loan made possible the sale of an automobile; in the second case a consumers’ loan made it possible. In both cases the amounts loaned would be the same, the wealth engaged in production would be the same, and the wealth being consumed would be the same. It is not the consumers’ loan, as is sometimes assumed, that is a detriment to the source of wealth, but the consumption of wealth itself. If one could say that the consumption of the car would not have taken place if it had not been for the consumers’ loan, and that the purchasing power which would have gone for the car would have been saved and used productively, then the consumers’ loan was a detriment to the source of wealth. But this assumption is contrary to fact in many, if not in most cases. Some people who buy automobiles on the instalment plan could and would buy them if there were no instalment system. And many of those who would not buy them if they were sold for cash only, could not do so simply because their purchasing power had been used for other consumption goods such as theatre entertainment, food, clothing, and other things bought on cash terms. It is saving and the employing of the savings productively that increases wealth and it is the increased consumption of wealth that is a detriment to the source of wealth. In our present credit system, where many instalment buyers are engaged in business with their own wealth and others are lenders for production purposes and borrower for consumption purposes at the same time, credit may not necessarily have anything to do with decreasing or increasing consumption in individual instalment transactions. As was explained above, a serious objection raised against consumers’ instalment credit is the one that it is a detriment to the source of wealth, that is, it directs goods from productive to consumptive use, thereby it increases consumption and tends to dissipate the social fund of savings or to keep it from increasing as it otherwise would. In analyzing particular instalment transactions, however, this objection loses much of its weight, as we found that in individual cases, which are characteristic of great volumes of instalment buying, consumers’ instalment credit does not increase consumption at all and in others it actually increases production.

Motor Trucks versus Passenger Cars as Credit Risks.—Another feature of present-day instalment selling that tends to break down the dividing line between producers’ and consumers’ credit is the one that instalment credit for the purchase of motor trucks has been found by actual experience to be a less desirable credit risk than that for passenger cars. In the beginning of the recent expansion of the instalment system, it was believed by everybody that the truck being used for production was a more desirable credit risk than the pleasure car. Some of the most important finance companies now in existence were required by their bankers in the earlier stages of the business of handle a definite proportion 02217of truck paper along with the passenger car paper which was more freely offered.33 Sometimes more liberal credit terms were granted in the sale of trucks than in the case of passenger cars. The situation in regard to truck paper has been reversed. It may be that a feeling of pride made the family keep up the payments on the car; a great deal of explanation to the neighbor or friends is necessary when an individual “sells” his car two or three months after he has purchased it. But whatever the reason for the situation, it is a fact that, instead of truck paper being the preferred risk, as was at first expected, a number of banks have reversed their former position and now object to the handling of truck paper by their finance companies. This resulted in truck paper becoming a drug on the market for quite a while and it eventually forced the leading truck manufacturers to organize and operate their own finance companies.34

Producers’ or Consumers’ Goods?—Are the commodities most widely purchased on instalments production or consumption goods? In considering the first article on the list, automobiles, one would say that undoubtedly motor trucks (eighty per cent of which are sold on instalments), motor buses, and taxicabs are producers’ goods; also passenger cars when used for business purposes. This would include passenger cars when used by business and professional persons in carrying them to and from their places of business. There is no way of telling what proportion of passenger cars are production goods, as in many cases the same car is used in production by the owner in carrying on his business in the daytime and for pleasure in the evening and on Sunday. We believe the part that passenger automobiles play in production is larger than one ordinarily thinks, as they are apt to be thought of as consumption goods when of course this is not necessarily the case. Tractors, farm equipment and part of the improvements to buildings should also be classified as producers’ goods. Except the articles just mentioned, all the others enumerated above, eleven out of a total of fifteen, and including household furniture and pianos, the second and third commodities in order of importance, are ordinarily classed as consumers’ goods. They are bought for use in the home, and are in the hands of the ultimate consumer. Sewing machines, washing machines, and vacuum cleaners have thus been included under consumers’ goods, and they are usually so classed, but it should be pointed out that considered with respect to the use to which they are put, the dividing line between these labor saving devices in the homes and the machines in factories is not very distinct. We have called them consumption goods but they are also very much like production goods.

Durable or Quickly Consumable?—It is a commonplace that all wealth wears out. Some articles of wealth depreciate much more quickly than others and herein some writers see an important consideration in determining the soundness of the instalment system. They say if the life of the good is long, much longer than the term of payments, then instalment buying is a sound practice, but if the good depreciates quickly, and is consumed before the term of payments is completed, the plan is unsound.

Durability is a question of degree and all person would not classify articles in the same way. Nevertheless, it would seem that with the exception of clothing and possibly automobiles, all 02318the articles in our former list would fall under the heading of durable goods. Clothing is considered as a quickly consumable good. Automobiles, the most important commodity, is the one most difficult of classification. The fact that most cars are used for a number of years makes them relatively durable goods, but on the other hand some cars depreciate quickly. The constant replacement necessary to keep all automobiles in running condition would seem to indicate that possibly automobiles, or at least some of them, should be placed in the quickly consumable class. In the case of some radio sets, tractors and various farm equipment, a certain amount of replacement to make the goods usable is also necessary after a time. Exclusive of clothing and the doubtful item of automobiles, the remaining thirteen articles are unquestionably durable goods.

Necessities or Luxuries?—One investigator, after securing the opinions of numerous business men, came to the conclusion that,

Broadly speaking, it seems to us that instalment buying is justified insofar as the purchase of necessities is concerned. ... Insofar as the acquisition of luxuries is concerned, however, the consensus of opinion would seem to be that that phase of instalment selling which encourages the purchase of such articles in uneconomic and should be discouraged.35

Necessities and luxuries are two terms difficult of definition. A rather inclusive definition is one which defines necessities as those goods absolutely essential to the industrial efficiency of the individual. According to this definition, all goods consumed in excess of those necessary to maintain the individual at his maximum industrial efficiency would be luxuries. According to these definitions, the answer to the question as to whether a good is a necessity or luxury would depend entirely upon the individual or the class of individuals under consideration. It would be different for the manual laborer and the professional man, different for the small wage-earning group, the lower salaried group and the higher salaried group. We will not attempt to classify the articles as necessities or luxuries for this reason.

This question could be answered only by a thorough study of the incomes, expenditures and needs of individuals and various social and economic groups. Such a study would probably be practical only by using a sampling method, say by studying the needs of people in a number of city blocks which would include different economic groups using the instalment system. Sections of rural communities should also be studied. After such studies, one would be able to say with some degree of definiteness that washing machines, pianos and mechanical refrigerators were luxuries or necessities to such and such individuals and economic groups. We should find, however, that things regarded as necessities by one individual or some group are regarded as luxuries by another and vice versa. In other words, there are no objective tests of necessities, comforts and luxuries.

In attempting to classify the goods as necessities or luxuries, the point of greatest controversy is the automobile. There are those who believe that automobiles for the great mass of people who own them are pure luxuries, while others believe that the automobile by improving the health of the great mass of people makes them much more efficient workers and is therefore a necessity. Everyone would admit that the motor car is a necessity for the 02419physician, and would likewise contend that it is a luxury for the individual who is using one in place of cheaper motor-bus transportation when he does not have sufficient food, clothing and shelter. But whether automobiles are necessities or luxuries for the great number of people who own them one cannot say. It would depend a great deal upon the definition of the terms, and could be answered properly only by a thorough study, such as was mentioned above, into the incomes, expenditures and needs and particular individuals and economic groups using the automobiles.

The Rise of Finance Companies.—One of the effects of instalment buying has been the bringing into the present system of production a new middleman in the form of the finance company. An almost entirely new field of business has been created which has grown to colossal size within a few years’ time. The term middleman is applied, because, as will be developed in this chapter, the finance companies stand between the manufacturer and the dealer and between the dealer and the consumer and assist in an orderly productive process. They may also be thought of as middlemen on account of the fact that they stand between banks and borrowers. It will be brought out in this chapter and also in the succeeding one that finance companies borrow from banks and lend the borrowed funds to dealers and individual purchasers of goods bought on the instalment plan. The banks themselves are middlemen standing between the investors, a group of people having funds to lend, and another group of people, the borrowers, who have use for the funds. The finance company is simply an additional middlemen standing between the original investor and the ultimate borrower and performing certain special services.

The connection between the growth of the organizations which are variously known as finance, credit, discount or acceptance companies and the growth of instalment buying is one of cause and effect interrelationship. The selling of automobiles on the partial payment plan created a demand, as we shall see presently, for some special agency to finance the sales and the finance companies which were organized to supply this need made possible the great growth of instalment buying by providing the necessary credit facilities for the extension of the system buying. Each new increase in instalment buying reacted to cause a still greater demand for the service of the finance companies with a consequent increase in the size and number of such companies.

A few finance companies had been operating in the discounting of accounts receivable since about 1900,36 but it was not until about 1915 or a little earlier that they made their appearance in the automobile business. There is some question as to just how rapidly these companies have grown and even as to how many there are at the present time. The estimates of the number at the present time range from 800 to 1700 with “more than a thousand” being a common estimate. It was recently disclosed that there were no less than 111 such companies operating in one of the western36 Federal Reserve Bulletin, January 1923, p.37.02520cities.37 These companies have come into existence quickly and some of them are consolidating or going out of business altogether while others are being organized. The fine profits made by the earlier companies caused other companies to be organized quickly. Their operation on the whole has been very profitable. The failures which have been comparatively few have been due principally to mismanagement or to legal defects in the sales agreement.38 some of these companies are large organization doing business on a national scale while others are very small and confine their activities to a single city. One concern starting in 1912 with $300,000 capital, now has $67,000,000 in assets. It is still growing by buying up smaller companies and turning them into branches.39 Some of these companies specialize in financing automobiles general or a particular make of automobiles. Others specialize in financing furniture or machinery. And still others deal in paper arising from the sale of any or all kinds of goods. Some of the finance corporations are subsidiaries of the manufacturer for the marketing of whose products they provide credit facilities. Others are subsidiaries of commercial banks. Some manufacturers, when they are in a position to do so, are said to dictate the companies with which the dealers of their products must do business.40

The Function of the Finance Company: Wholesale Financing.—Finance companies in function are in certain respects like commercial banks, although very few of them are incorporated under the banking laws and subject to regular examination by the state banking departments.41 It is one of their functions to supply funds to dealers with which the dealers can buy and carry a stock of goods. This activity is sometimes referred to as wholesale financing. They also extend credit on a large scale to individual purchasers of goods bought on the instalment plan. This is sometimes called retail financings. the one service helps the dealer to buy goods, the other helps him to sell them on the instalment plan.

When automobiles began to be sold on the deferred payment basis, the ordinary commercial banks were not prepared and were not willing to perform these functions, at least on the scale that was necessary if instalment selling was to take place in large volumes. Many dealers were doing business on very small capital of their own and they needed financial help to lay in and carry during the winter months the costly stock necessary in this business. They sometimes wanted funds for longer periods than commercial banks were accustomed to lend, due to the seasonal demand for their product. They also wanted to pay back in instalments. The manufacturers were not in a position to give financial aid to their dealers. It is difficult and at times impossible for a manufacturer of automobiles to carry his entire output through the winter months either in his factory or on the sales floor of his dealers. Several years ago it was reported that even the Ford Motor Company found it necessary, due to financial pressure, to “dump” its entire finished stock on its dealers.42 Since the banks were not42 Hodges, H. G., “Financing the Automobile,” The Annals of the American Academy of Political and Social Science, November 1924, p. 52.02621willing to render financial services and the manufacturers were unable to do so, some agency in the financial structure was demanded which would lend to dealers and to their numerous instalment customers on a large scale, assume the attending risks, make the necessary credit risk investigations and perform the details of supervision and collection.

Retail Financing.—The practices of finance companies in extending credit to individual purchasers of goods bought on the instalment plan are so varied that it is impossible to generalized as to their methods, except i the automobile business where there is uniformity. When a individual buys an automobile on the instalment plan he is usually required to pay in cash at least one-third of the purchase price, and to give a series of promissory notes of equal amounts covering the balance which are due at monthly intervals. Sometimes one note is given instead which provides for a schedule of equal monthly payments. Payments are made over periods of time ranging from three to twelve months or more. The conservation finance companies would like to restrict the instalment credit on automobiles to a period of not more than twelve months. The dealer if he is able to do so sells these notes outright to a finance company and thus is effect receives cash for the goods sold on the instalment plan. When the dealer is able to sell the notes in this manner, his legal responsibility ends, and the business from then on is between the instalment buyer and the finance company. In most cases, however, the dealer is required to endorse his customers’ paper and assume the responsibility for its payment. The dealers are against the practice of dealer endorsement and the finance companies are strongly in favor of it. The National Automobile Dealers’ Association has protested vigorously to the National Association of Finance Companies against dealer endorsement, but the practice continues.43

Some of the finance companies discount the instalment notes in the regular way with banks located in the territory where the notes originate. Others place their receivables in trust with some trust company and issue short-term debentures against the trusteed notes which are sold to banks. Sometimes collateral trust bonds running for a period of about ten years are sold. In any case, the finance company secures additional funds with which to finance more instalment sales.

Collections of instalment notes when they are due are made sometimes by the finance company and sometimes by the dealer, depending altogether upon the arrangement previously agreed upon by them. Sometimes collections are made by the banks. If the instalment notes are discounted at the bank in the regular way, the original maker of the note is usually notified by the discounting bank to make payments to it direct. The bank in this case is only a collecting agency, however, and in case any instalment is not paid on the day it is due, such instalment is deducted by the bank from the finance company's balance. The finance company then makes its own collections from the delinquent debtor.

The Present of the Finance Company in Our Banking System.—The present position of the finance company in our banking system is well stated by the Division of Analysis and Research of the Federal Reserve Board when it says:

There are in the United States a vast number of companies and individuals whose 02722resources, or apparent credit risk, do not measure up to the standard required by banks. It is largely these that the finance company is called upon to finance. It does not necessarily follow that such subjects are not good credit risk, but merely that insofar as the bank is able to investigate, they do not fulfill the usual requirements. In addition, payments of the loans made to this class may be spread over a longer period than that for which a commerical bank will advance funds. The payments, too, are probably in small lots, such as instalments, which must be carefully watched and rigidly collected when due. Collateral offered as security is in small lots, such as a group of small accounts receivable. As a result, commercial banks find this class of business unprofitable at the usual rates of interest. If they changed more, it would lead to legal difficulties in some cases, and nearly always to dissension among those borrowers who have to pay the higher rate. Finance companies, however, by dealing only with this class of customers can charge more without causing dissatisfaction among customers. This increased income enables it to carry the investigation further and to protect itself in making a loan, and also to watch developments after the loan is made. In short finance companies are an intensified part of our commercial banking system.44

Finance companies are sometimes called “highly specialized commercial banks” because of their likeness to commercial banks in their discounting function, and there is, in fact, great similarity between the two institutions in this respect. However, there is considerable objection to using this expression in describing finance companies. Commercial banking rests primarily on the deposit principle which is not the case with finance companies and on account of this difference, which seems fundamental, some students object to the use of this expression in connection with finance companies.45

An Economic Effect of the Finance Company—Equalized Production in the Automobile Industry.—The development of the finance company has had the very desirable economic effect of making possible steady production in an industry the demand for the product of which is seasonal in character. The volume of sales of automobiles in the beginning of the industry was subject to extreme seasonal fluctuations.46 Due to the increased use of closed cars, the seasonal fluctuations are not so great as they were formerly, but they still exist. If the automobile plant was to be run at its maximum efficiency, it was necessary for production to be equal and continuous the year round. Expensive machinery lying idle part of the time increase unit costs. The importance of steady production in a business with large overhead costs cannot be overstated. Steady production means lower costs to the manufacturer and in the automobile business has meant lower prices to the consumer.

The industry in its beginning was confronted with the difficult problem how to secure steady production to meet a seasonal demand. The manufacturer needed his own capital as well as what he could borrow for manufacturing purpose. Besides, he could not carry his entire output over the winter months for other than financial reasons. He did not have the storage space and even if he could have provided 02823such space the problem would not have been solved. Cars must be distributed geographically when the spring demand arises for transportation reasons. As we have told above, the dealer could not take the cars off the manufacturer's hands, because he did not have funds of his own and could not secure them from the regular banks for this purpose. It was the development of the finance company that solved the problem. The finance company extended credit to the dealer, permitting him to lay in his stock as it was finished at the factory. The manufacturer was paid in cash. Production was continuous. Transportation was more easily effected as it was spread over a longer time and the spring rush was lessened. The dealer was able to show his stock on his sales floor and have it ready for immediate delivery to meet the seasonal demand. It was in such manner as we have just outlined that the finance company has helped to bring about a more efficient and orderly procedure in the manufacture, transportation and sale of automobiles.

The Credit Significance of Finance Companies.—Heretofore, business men —wholesalers, manufacturers, etc.—have been the main users of credit. Within the brief period of five or six years, the hundreds of finance companies have discovered and made use of new credit capacity which has never been utilized before. Hundreds of thousands of people, some of whom had scarcely known what credit is, have been brought into the network of the credit system, and are now users of several thousand million dollars of credit annually. This credit is evidenced by legal instruments such as ordinary promissory notes, collateral trust notes and collateral trust bonds which are put on the money market and sold and which are evidences of the increased demand for credit. In the next boom period of the business cycle, assuming that business will continue to fluctuate in the future as it has in the past, instead of an old and somewhat experienced group of business men who will be borrowing more as the boom develops, there will be in addition a whole new group, of people, some would say an untried, untested group, who will have borrowed extensively and who will also perhaps be borrowing more. What effect will this have upon the so-called credit strain which accompanies the intense business boom?

One wonders if all or even most of these people realize to the fullest extent the possible woes of the debtor in a period of business depression when his income is reduced or stops altogether. The individual instalment debts are evidenced by notes and legal agreements many of which contain flexible clauses giving large powers to creditors. Heretofore, when the periods of liquidation and depression came, some business men, at the most a comparatively few individuals in the community, have gone into bankruptcy. At the present time, the credit system touches innumerable homes, and one wonders if there will be innumerable bankrupt households enmeshed in the credit system when the next period of unemployment comes. Will the automobile, washing machine and radio be taken away with the neighbors as spectators? Perhaps the family will be allowed to keep the goods, and if so, will it become helpless and subservient before creditors who may prove to be relentless ones?

These questions call up dark pictures, maybe entirely too dark. In a period of depression all instalment buyers will not be out of work, and those who are employed may simply stop buying everything but bare necessities and continue the regular payments in spite 02924of the reduced income. They would be helped somewhat by the fact that a period of time usually elapses between the crisis and the time when wages begin to fall, thus giving them time to adjust their expenditures to their incomes. Then, too, many instalment buyers are salaried persons whose incomes are fixed for a period of time in advance, thus assuring the individual a regular income until his instalment debts have been paid. The term over which instalment payments extends is usually not a long one, the average being seven or eight months or perhaps less. It is believed by some people that there will be an orderly renewing of credit until the periods of recovery and prosperity come again, when the instalment debtor can and will continue his payments even though in some cases the goods have been consumed. It should be pointed out that if the individual borrowers cannot pay, the finance companies must receive a renewal of credit from the banks. If the banks will not renew loans, and in periods of crisis they frequently will not, what will happen? Will the finance companies have built up reserves when the critical time comes for just such emergency or will they too, like numerous individual instalment buyers, find themselves in bankruptcy?

No one can definitely answer the various questions we have raised. In a discussion later on in our study, we are attempting to consider some of the probable cause and effect relationships of instalment buying on the credit system in the various phases of the business cycle, but the thought we are bringing out here is simply that the finance company has been responsible for bringing into the network of the credit system an army of new credit users and creating a situation which seems filled with possible disastrous consequences to the credit system and to the individuals who may find themselves enmeshed in it. While this is undoubtedly true, we do not mean to imply that finance companies and consumers’ credit should be condemned on this account and done away with if possible. Banks and producers’ credit are accepted generally as most useful and necessary parts of our industrial organization and yet on occasion they have caused considerable disturbance in our economic life. Credit, that is producers’ credit, has been looked upon as being a contributing cause of the extreme fluctuations in business, which constitute what is known as the business cycle, and yet no one suggests that we eliminate producers’ credit altogether, simply because of the possible dangers lurking in its use.

Producers’ Credit and the Period of Prosperity and the Business Boom.—The causes of the rather regular recurring ups and downs of business, which constitute what is known as the business cycle, are somewhat a matter of controversy, but probably most of those who have given the matter thought would agree that credit conditions are in important consideration, particularly in the period of prosperity and in the precipitation of the crisis. “Credit conditions” as a cause of crises and depressions has heretofore meant producers’ credit conditions, but on account of the extension of the instalment system, consumers’ credit is a new force that is being considered as a possible factor in causing future ups and downs of business. At the present time, it is freely predicted that instalment buying will cause the next crisis and depression. A recent forecast in this respect says that,

A distinct recession in business and possibly a panic within two or three years would not be surprising.... It will be the result of overextension of the instalment business, which today is eating into the vitals of business like a cancer.69

The exact way in which instalment buying will bring on the next business recession and possible panic is not explained in connection with this prediction, so it is not possible for us to examine the facts and reasoning upon which this specific conclusion is based.

A particular way in which credit has operated heretofore to influence business conditions is through its effect on the general level of prices, which in turn has affected production and brought about a condition known as overexpansion of credit. The truth has long been established through 04641deductive reasoning and verified to some extent by inductive study70 that an increase in the volume of credit relative to goods produced will tend to cause a rise in the general level of prices or a fall in its reciprocal, the value of the dollar. It is also an orthodox view that a rising price level temporarily stimulates trade, bringing on prosperity and a business boom. However, when the entire stock of material equipment of industry and the available supply of labor are being utilized to their fullest extent, further extensions of credit cannot increase appreciably the total output of goods.71 The increased credit simply increases the monetary purchasing power, by an increase in bank deposits, which is used in competitive bidding for services and other economic goods already in existence. An illustration of this point may be found in the marked and unhealthy advance in the price of wool in 1919. It is said that this could not have occurred if Boston and other banks had not granted unusual credits to wool dealers. With these funds wool dealers competed against each other for wool, boosting prices to abnormally high levels with consequences painful to themselves and hardly to the permanent advantage of the wool grower. A similar situation obtained throughout the entire industry among makers woolens and worsteds and among clothiers. All were attempting to handle more business, but the credit secured for the purpose was absorbed in a sellers’ market for materials labor, yielding still higher prices rather than an increased output. As for wholesalers and retailers, the summer of 1920 disclosed holdings of large stocks purchased at high prices, and in very many instances obligations under contracts for abnormally large deliveries in later months. These unhealthy conditions were due to the excessive volume of credit granted by the banks.72

The point we are attempting to bring out is that the constantly increasing volume of producers’ credit which accompanies the period of prosperity and business boom after a time does not bring about a commensurate increase in production, but simply raises the general average of prices, which brings about undesirable economic consequences. The rising price level, making great profits possible, provides an incentive for enlarging the individual business, and results in competitive bidding of business men for the supply of labor which is already fully employed and for the available supply of materials which is already in existence. The borrowers bid up the prices of services and commodities, and so cause an expansion in the pecuniary volume of trade. However, they produce no corresponding increase in the physical volume of trade. Their borrowings merely increase still more the mass of debts which upon the slightest occasion leads to demands for liquidation and precipitates a crisis.

Instalment Credit and the Period of Prosperity and Business Boom.—It is common practice when an instalment sale is made for the purchase to give his personal note to the retailer which is discounted with a bank either directly or through the medium of a finance 04742company.73 Regardless of who discounts the notes, the proceeds are usually taken in bank deposits which make it possible for the retailer or finance company to finance more instalment sales which give rise to more instalment notes which may in turn be used as a basis for another loan and another increase in bank deposits. In this way instalment sales result largely in an exchange of personal credit for bank credit. It would seem for this reason that the effect of an increase of instalment credit would be precisely the same as that of other bank credit as far as the business cycle is concerned. It would seem that an expansion of instalment credit in a period of depression, if sales are thereby stimulated, would be a very desirable procedure from the point of view of the business cycle. Control of credit expansion so that production is increased to what is regarded as a proper degree, is a principle accepted as sound by all bankers. However, it is also an accepted principle of bankers that credit expansion should be checked when it becomes dangerous. To expand instalment credit in a period of business boom would seem to have precisely the same effect upon price levels, production and overexpansion of credit as the expansion of producers’ credit would have. Additional pecuniary purchasing power in the form of bank deposits is created, while a corresponding increase in goods produced is not possible, due to the fact, as stated before, that in a period of intense business boom the industrial army with its full equipment is already at work. The increasing of instalment credit in a period of business boom would, therefore, like the increasing of producers’ credit in such a time, help toward the piling up of debts, a condition known as overexpansion of credit which paves the way for crisis, liquidation and depression.

Instalment Credit and the Federal Reserve System.—In current discussions the fear is frequently expressed that instalment selling in such large volumes will obstruct or vitiate the efforts of the Federal Reserve Banks in their attempts to “stabilize the general credit situation” 74 and through this means lessen the excessive peaks and slumps of the business cycle. The time or condition at which further extensions of credit should be discontinued in a period of prosperity will continue to be a difficult problem for banks and business men in the future as it was before the great expansion of the instalment system. But if the Federal Reserve Banks are able, through changing the rediscount rate or by selling or buying government securities in the open market, to stabilize the general credit situation, it would seem that instalment credit, an element included in the general credit situation and at the present time bound up inseparably with it, could be controlled in exactly the same way. The difference between instalment credit and other kinds of consumers’ credit, as well as a great deal of producers’ credit, as far as the effects on price levels, production and overexpansion of credit in a business boom are concerned, is one of mere quantity rather than one of difference in kind. The fact that debts are paid back in instalments rather than in a lump sum cannot make any great difference. The fact that instalment debts have been contracted for consumers’ goods rather than for producers’74 An expression used by the Federal Reserve Board. See American Economic Review, March 1925, pp. 43 ff.; also American Bankers’ Association Journal, May 1926.04843goods cannot make any difference, if we are right in our contention that producers’ loans also cannot increase production appreciably when the entire supply of labor and equipment of industry are already fully employed, as is the case in a period of intense prosperity or business boom.

The Total Volume of Credit and the Volume of Instalment Credit.—When the estimated volume of instalment credit is given in absolute numbers, as is usually the case, it looks large and is large, but when considered in relation to the volumes of other kinds of credit outstanding, many of which, if not all, are liable to influence the business cycle, one realizes that there is a possibility of concentrating attention on instalment credit, one dangerous element in the credit situation, to the exclusion of others equally dangerous.

“What is the total volume of credit outstanding at the present time and how does it compare with the total volume of instalment credit outstanding?” Mr. Carl Snyder, Statistician of the Federal Reserve Bank of New York, in an investigation of the total volume of all kinds of credit outstanding at the present time, has estimated that the amounts known and those which may be estimated which are loaned from one class of people to another in the United States at the present time total something like one hundred and twenty or one hundred and thirty billion of dollars, and in addition to this amount there are large volumes of credit, totaling many billions, which are not estimable.75 These figures make allowance for duplication, that is, they do not include money borrowed simply for the purpose of reloaning. These loans consist of: first, ordinary bank loans which range from fifteen to twenty billions and at the time of his writing were around twenty billions; second, Federal Reserve loans, an amount which has varied as widely as from nearly three billions to less than two hundred million; third, forty or fifty billions of corporation bonds and mortgages and more than thirty billions of Federal, state and municipal government bonds; fourth, real estate and farm mortgages amounting to something like eight to ten billions of farm mortgages and some fifteen billions or more of urban mortgages; and fifth, there is a large volume of current and casual credit extended by manufacturers, jobbers, retailers and dealers of all sorts to their customers. The amount of this credit is quite incalculable but its volume is large.

No one knows what the volume of instalment credit outstanding is at the present time. It is estimated that exclusive of houses the total instalment debt outstanding at the end of 1925 was approximately $2,750,000,000. This is the estimate which was made last spring by the Economic Policy Commission of the American Bankers’ Association,76 and is the figure used and commonly accepted as an approximation by bankers and others. Since there is much borrowing for the purpose of reloaning in the instalment business, the actual amount owing from certain groups to other groups on account of the instalment business would be much greater than the two and three-quarter billions. From the point of view of the business cycle, all forms of credit are probably not equally influential. Instalment credit is perhaps as76 The Evening Bulletin (Philadelphia), May 5, 1926; Credit Monthly, September 1926, p. 8; Duncan, A. E., “The Economics of Instalment Buying,” an address delivered before the National Association of Supervisors of State Banks, July 20, 1926, at Columbus, Ohio.04944influential as any other form of credit, granting our contention as set forth above that an increase of instalment selling in a period of prosperity would react unfavorably by its tendency to raise the average of prices with undesirable consequences; but even so, the observation to be made on the facts is the comparative smallness of the volume of instalment credit—so small, in fact, as to be almost negligible. An expansion of instalment credit in a period of prosperity would seem to be an unwise procedure from the standpoint of the ups and downs of business as it would tend to increase the price level and thus bring on crisis and depression, but to say that instalment credit in itself will be the cause of the next crisis and depression, would seem to be an overstatement of the importance of instalment credit as a causal factor. The important consideration for bankers, business men, and all others who would like to decrease the extreme fluctuations of business is the whole credit situation rather than one minor phase of it. Over expansion of credit helped to cause crises and panics before the instalment system on a large scale had been introduced, and it would be the wise policy to watch the expansion of those older forms of credit which are known to have helped to cause fluctuations in business in the past and which will undoubtedly do it again, as well as this new and potentially dangerous form of credit. The assertion which has been made a number of times by responsible persons that instalment buying will be the cause of the next crisis and panic is a bold statement in view of the enormous quantities of other kinds of credit outstanding, the increasing of which, as is known from past experience, would exert strong influence on the business cycle.

At the present time, we are in the prosperity phase of the business cycle, and since it is the increasing of credit in this period which brings about undesirable consequences, an important question at the present time is whether instalment selling is on the increase. This is a question of fact and one might think at first glance that it should be answered easily, but such is not the case. It is a very much debated point, because the facts necessary to the settling of the question are not available. For example, it is not known how much instalment paper has been used as a basis for bank loans of various kinds. If this information were available for a period of time it would be exceedingly valuable for our purposes, as it would be some indication of the expansion or contraction of instalment credit. The report of the Economic Policy Commission of the American Bankers’ Association, referred to above, contained the results of an investigation into instalment sales for the years 1923 and 1925. The conclusion was that instalment sales had increased seven per cent in the two years’ time. This is much less than in commonly supposed to be the case.

It is interesting to note that throughout the period 1920-26, the period in which the great expansion of instalment buying has taken place, there has not been any great increase in the general average of prices, at least as indicated by the index numbers of prices of wholesales commodities as compiled by the Bureau of Labor Statistics, United States Department of Labor, which are show in the following table.77

When one considers that the index numbers show a decline in the price

level in 1926 over 1925, he feels that instalment credit is not plunging us headlong into crisis and depression via an increasing price level. However, there may be a possibility that instalment buying may endanger the credit structure by bringing into operation a sequence of events for which there is no precedent in the history of business cycles. An orthodox view has been that an intense boom in a particular industry could develop only under the stimulus of a rise in the prices of its products, and yet the price of automobiles has fallen greatly during the development of the tremendously great boom in the industry. This is easily explained, however, as it is price relative to costs that is significant. Falling costs have had the same effect as rising prices.

The Automobile Industry, Misdirected Production, and the Next Crisis.

—Another way, in addition to its effect upon price levels, by which instalment buying may help to cause the next crisis is developing in the automobile industry, a condition known as misdirected production or overproduction as some prefer to call it. The automobile industry is a very important consideration as it is responsible for fifty-four per cent of the instalment debt, exclusive of houses, outstanding at the present time.78 By misdirected production is meant the building up of a productive capacity and the turning out of a finished product so great in relation to the demand for the finished product, that it is impossible to sell the amount produced at a profit; on the contrary, it is necessary to sell at great loss. As production is carried on in anticipation of demand, such a condition is possible, even very probable, inn an industry which is going through a period of intense boom, and in which there seems to exist such great optimism for the future.

Everyone agrees that the automobile business has been built up to its present position as one of our greatest industries largely through the instalment system; also that the maintenance of its position depends almost entirely upon the continuance of the system. Automobile manufacturers and others who venture opinions on the subject say that if automobiles were sold for cash only, the sales would amount to possibly only thirty-five per cent of the present volume. Notwithstanding the fact that the industry is burdened to some extent with unused productive capacity at the present time,79 the optimistic manufacturers are said to be laying plans for still larger factories and more extensive facilities.80 While

it is denied in some quarters,81 there is some evidence to indicate that instalment selling of automobiles is still on the increase,82 thus furnishing stimulus for further expansion. It is sometimes said that in order to increase sales still further many automobiles are being sold allowing excessive amounts for old cars, and that many are being sold to irresponsible buyers on terms that are too easy, that is, the down payments are too small as judged by more conservative credit standards and the term over which payment is made is too long. Just how much basis in fact there is in these charges, one cannot say. At any rate, the automobile industry has been expanding rapidly and continues to do so, and if the leaders of the industry should for any reason whatever misjudge the future demand, the automobile plants would have restrict output or close down altogether. If this should occur, the consequences would undoubtedly be disastrous for the automobile industry. We have stated elsewhere that the business has been subject to the law of increasing returns to a marked degree, and have recounted how this has reacted favorably in the development of the industry. However, in case it is necessary to restrict output, the reaction would be most unfavorable. The unit costs will be increased due to the spreading of the overhead expenses over a fewer number of units. The increased cost will mean higher prices and less cars sold and consequently still higher prices with less and less sold.83 The danger point in the situation lies in the fact that if the motor boom should collapse in any way, it may and probably would be followed by a collapse in some of the industries dependent upon the motor industry, and from these it would spread to industry generally. The automobile industry uses eighty-four per cent of the products of the rubber industry, fifty per cent of the plate glass industry, eleven per cent of the iron and steel, sixty-five per cent of the upholstery leather and millions of pounds of cotton fabric, and billions of gallons of gasoline, and furnishes the railroads 3,040,000 carloads of freight

annually.84 It is also a major factor in the support of fire, theft and casualty insurance companies, as well as finance companies and banks. The seventy-nine automobile plants and accessories factories employ 234,000 persons at the present time, 85 and there are 3,584,232 persons directly and indirectly in the industry.86

The automobile industry may not help to cause the next crisis and depression by developing the condition described above as overproduction, but the business ranks with agriculture as our leading industry and it requires no stretch of the imagination to see it overexpanded in relation to future demand. There is optimism prevailing among those in the business and the industry is in the midst of an intense boom. It has been built up by increased sales stimulated by extending larger and still larger volumes of credit. It has now reached the point where seventy-five per cent of the cars sold are on credit. Will it be eighty per cent next year? If for any reason it becomes necessary to restrict credit, the tendency would be for the amount bought to decrease, and this may possibly initiate a collapse such as that referred to above which might bring on a general recession of business.

Instalment Buying, Depression and Recovery.87—There are grounds for believing that the next period of depression will be prolonged on account of the instalment selling of the present. The reasoning is that heretofore when the crisis and depression came, there were huge stocks of goods in the hands of retailers, wholesalers and manufacturers which had been produced under high cost conditions, and there was no hope of recovery from the depression until these goods were bought. Since millions of people were unemployed, there was little buying and the larger the accumulated stocks in the warehouses, the longer the period until these stocks were sold. In the next depression, in addition to the merchandise in the hands of the producers which cannot be sold, there may be large quantities of repossessed goods, and still other huge quantities of goods in the hands of the consumers which will not be paid for. When the period of recovery comes the instalment buyers will be making back payments, plus accumulated service charges including interest, which will have mounted sky high as time passed, instead of buying new goods. The flexible clauses in the instalment contracts will, without question, permit the additional charges. But in addition to the difficulty of back payments, the stocks of goods, including the repossessed good, must be sold before recovery can come and this set of circumstances will cause recovery to be delayed longer than otherwise would be the case if there had been no instalment system. There is no way of actually knowing that will happen but this view of the situation seems a reasonable one.

On the other hand, there is the possibility that new extensions of credit will be granted in the latter part of the depression period, which will stimulate sales and hasten recovery. In other words, instalment selling may be the very device for hastening prosperity and lifting industry out of depression just as it is believed to have done in a number of lines of trade, particularly the automobile business in the depression 05348of the letter part of 1920 and the year 1921.88 In fact, logical to believe that if instalment selling were expanded in a period of depression, thereby increasing sales and encouraging production, it could be looked upon as a most useful agency from the standpoint of the business cycle. It would certainly seem, from the viewpoint of lessening the fluctuations of business, that the desirable procedure would be to expand instalment credit in a period of depression and restrict it in a period of prosperity and business boom. This, of course, is easier said than done, as keen competition existing between banks, between finance companies, between manufacturers, and between dealers in different kinds of goods as well as the same kinds of goods89 makes the restricting of instalment credit in a period of prosperity very difficult. Wide publicity has been given to the broadsides delivered at instalment buying by several prominent individuals, automobile manufacturers and bankers, who are engaged in the practice themselves on an extensive scale. “It is being overdone,” “It has gone too far,” they say, and one wonders if they, in their respective business units, are decreasing the volumes of instalment sales. The instalment business has been, and is at the present time extremely profitable for these groups of business men, and which of them will put his foot on his instalment business and see it go to his competitor? For the exercise of control over the expansion and contraction of credit, one looks to the banking system—the banks as individual institutions as well as the Federal Reserve System. If the Federal Reserve Banks are able to control the general credit situation, as they are trying to do, and if they are wise enough to know the time or condition at which further extensions of credit should be discontinued in a period of prosperity, it would seem that instalment selling under such control might be a most useful device for lessening the extreme fluctuations of business. However, there is no getting away from the fact that instalment credit, like the older forms of credit, is a potentially dangerous phenomenon which without control will tend to help cause crises, panics and depressions, just as the older forms of credit have done heretofore.

Selling on the instalment plan assumes a regular income on the part of consumers. For this reason, it is frequently said that as long as people are employed, the instalment system will run smoothly, but when unemployment comes, the instalment debtors may be harassed by their creditors and the instalment sellers may be forced into bankruptcy. In this connection, the experience of the anthracite coal mining district of Pennsylvania during the strike which occurred there from September 1, 1925, to February 14, 1926, is worth considering. We are not attempting to generalize in any way on the basis of the experience of the anthracite regions; that is, we are not attempting to say what would happen in case of nationwide unemployment such as occurs in 05449a period of general depression. The strike was a local matter. In this territory almost all business activity is dependent upon the operation of the mines, and when the strike came, almost the entire community was unemployed for a period of five and one-half months. Information in regard to what happened to instalment buying when the strike came was secured by conversation and correspondence with numerous consumers, dealers of all kinds, finance company officials and bankers living or doing business in the anthracite regions. There is general agreement in regard to the facts given and opinions expressed.

Repossession of Goods or Re-extensions of Credit?—With the exception of automobiles, which we will discuss presently, the fulfillment of instalment contracts on the part of the buyers was postponed until after the strike was over. That is, a sort of moratorium was arranged. All payments were suspended. The customers were allowed to keep the goods. Most of the dealers said they had no more repossessions than they would have had if there had been no strike. When the strike was over practically everyone resumed payments. The case of automobiles was somewhat different. The finance companies repossessed a considerable number of cars and the customers were quite willing for them to do so, as they could not afford to run them. One company says perhaps the larger part of its cars were repossessed. In some cases these cars were taken to other parts of the country and sold. In others, they were put in storage and restored to the buyer when the strike was over under a new financing agreement.

Extra Charges of Re-extension of Credit?—In view of the fact that payments were suspended during the strike, and money was thus owing for a longer period than was anticipated when the goods were sold, inquiry was made as to whether extra interest or extra financing charges were added. In some cases, for example, in the piano business, an extended lease or “raised” contract was made which included interest for the extended period. In the case of department stores, extra charges were sometimes made. In a large number of cases, however, one retailer said seventy-five per cent, the buyers were not willing to pay the additional amounts. When such was the case, no additional charge was made. When repossessed automobiles were redeemed by the buyers after the strike, a new financing contract was written which frequently included payment for storage charges on the car for the period of the strike. In those cases where the buyers were allowed to keep the cars although payments were suspended, sometimes additional charges were made but more often they were not. In the cases where such charges were made, the rate was about the same as on the original purchase.

Losses.—Dealers and finance companies were forced to take losses higher than in normal times. As we have pointed out previously, dealers and finance companies carry on their instalment business largely with funds borrowed form banks. Whether or not the individual buyers paid interest for the additional time of their loans, the dealers and finance companies had to pay such interest at the banks. This was perhaps the main source of loss to retailers. The losses on instalment accounts generally were about the same as on other kinds of credit such as ordinary charge accounts. Several retailers told us that their losses on instalment accounts were less than on their charge accounts. The banks had no losses. They would have suffered 05550in case of default by dealers and finance companies but the dealers and finance companies were able to stand all losses.

Were the Effects of the Strike on the Instalment System Such as to Give One Confidence in the System?—This is the question that was asked of all those with whom we discussed the subject of instalment buying and the strike. The answers received were invariably to the effect that everything in their experience was such as to indicate that selling on the instalment plan is a sound way of doing business. The strike has been over for almost a year and the same dealers and finance companies are doing business on the instalment plan with the same customers in the same way as they did before the strike.

Did Instalment Debts Have Any Deterring Effect on the Calling of the Strike?—The view is sometimes expressed that debt tends to have a stabilizing effect on workers. It is thought that their respect for obligations or their fear of consequences will make them hesitate to give up their jobs. It was the opinion of everyone with whom we discussed the subject that the instalment obligations of the miners had absolutely no deterring influence whatever on the calling on the strike.

Instalment Buying Is Creating a Generation of Spendthrifts.—It is the view of some people that “this system of allowing individuals to buy more than they can pay for” is creating a generation of improvident people—spendthrifts. It is causing individuals to form habits of extravagant spending, rather than the socially desirable habit of saving. The practice of thrift has been a copybook maxim for generations and our parents brought us up to believe that saving is a virtue. There was a time when being in almost any kind of debt was considered somewhat of a family disgrace. Moreover, buying on the instalment plan was considered one of the lowest forms of debt that one could contract—it was looked down upon socially. It was considered an arrangement for persons who were poor, improvident—not able to take care of their own affairs. They needed a collector to tell them under threats how to dispose of their money on pay day. Now what has happened? Respectable people, without any feeling of shame, ride around in motor cars, even expensive one, which are not paid for. When one's neighbor drives out in a new car, the odds are exactly three to one that he is borrowing from the future, living beyond his means. Respectable people are wearing expensive furs and jewelry, bought on time. Instalment buying has acquired an air of respectability; the automobile is said to be responsible for our looking at this old practice in a new light. It is the opinion of some people that the conditions here described are having a deteriorating effect upon the character of individuals. And what is more important, children are being reared in this environment, and they, not having had lessons of thrift instilled into them, will be economically less responsible than their instalment-buying parents.

Instalment Credit Has a Disciplinary Value—It Inculcates Habits of Systematic Spending and Saving—Its Use Educates for Responsibility.—There is another side to the question. The comments just made rest on the 05651assumption that instalment buying causes more spending and more extravagant spending than would otherwise occur. We have questioned this assumption previously in this study. We have pointed out that in some individual cases, instalment buying of consumers’ goods, to say nothing of the producers’ good bought in this manner, actually lead to increased production. In still other cases instalment consumers’ credit does not increase consumption at all as in commonly supposed to be the case. Then, too, was there ever a golden age when everybody paid cash? Was there not in the good old days a great deal of consumer's credit in the form of book credit or charge accounts or open accounts which was theoretically payable at the demand of the creditor, but which was actually paid, if ever, at the convenience of the debtor? Open account credit may have been more respectable than instalment credit, but its social and economic effects frequently were the same. There are those who believe that instalment buying is replacing to some extent the older form of credit. Perhaps it is true, as its friends claim, that instalment buying is substituting a plan, an orderly method of payment for an arrangement which sometimes had little system in it. It is possible that the use of this kind of credit has a disciplinary value for the economically irresponsible and others. Hundred of thousands of people are receiving an education in the use of credit, including the responsibilities attending its use. It may not take foresight to buy on time, but it certainly takes forethought to meet one's obligations when they are due. Since credit, as a rule, is not given to irresponsible persons, and since it is a thing so universally desired, there may be something to the point that it is causing some individuals, particularly those in the lower social and economic groups, to live in such a way that their credit will be always good with those who extend credit.

How the Actual Facts Concerning the Effects of Instalment Buying May Be Ascertained.—A careful, detailed, unprejudiced study of the incomes, expenditures, needs and saving habits of groups of individual over a period of time and the effects of instalment buying on them would be of the greatest assistance in determining the actual effects of instalment buying on the habits and consequently the character of individuals. We have in mind investigation something on the order of those made by Rowntree in York, England, on Poverty, and Unemployment, and also the one made long ago by Booth on the Life and Labour of the People of London. Many difficulties would be encountered in the investigation, to be sure, but it could undoubtedly be made. There is still a great deal of secretiveness about installment buying; also information which some people have is not worth much even when they are willing to give it. But on the other hand, we have spoken with numerous consumers, who have definite information and who possess intelligent opinions as to the effects of instalment buying upon their savings, and who are glad to give one the benefit of their experiences. The study would be practicable only by using the sampling method, say by studying intensively the people living in a number of city blocks or sections of rural communities, but if the groups studied were representative of the various social and economic groups in different sections of the country, the results would be invaluable. There is another way in which the question as to the effects might be settled; experience with the system on a large scale over a long period of time may make evident 05752its consequences to all. The beneficent results claimed for it by its friends may be so obvious as to “win over” those opposed to it. Or if disaster overtakes us, as the opponents of the system prophesy, then even its strongest supporters may be convinced of their folly. However, until the careful, detailed, unbiased studies such as we have spoken about are made, or until experience with the system on a large scale over a long period of time makes its effects evident to all, the arguments on the subject will be based largely on opinion rather than on fact, and consequently will be inconclusive.