MORE LIGHT ON INSTALMENT SELLING - 1927
PAYING FOR THINGS ON "EASY" TERMS has become such a conspicuous element in American life, and so large a factor in our prosperity, that the economists have been doing a great deal of worrying about it.
Recently there have been several particularly exhaustive studies of instalment selling which compel notice. A business man and student of economics writing in The Yale Review condemns the American development of partial payment buying as an economic sin for which retribution will be "automatic and inevitable." On the other hand, a University of Pennsylvania economist, after long and careful study, comes to the opinion that the new system is here to stay and performs a useful and important function in our economic structure. And a great Western newspaper has been carrying on an investigation for six months which leads it to the conclusion that instalment buying is, after all, economically sound. All of these reports have won editorial notice and comment pro and con.
If we turn first to the survey made by the Portland Oregonian, which that paper declares to be the most comprehensive and authoritative ever taken on the subject, we find many dissenting views recorded, with the more favorable predominating. Questionnaires were sent out to bankers in all the important cities of the country to be redistributed to leaders in various industries and trades. The answers to the questions are compiled as follows by The Oregonian:
From the replies and from other evidence gathered by the Oregon paper the following points are brought out as "safe and sound supplementary conclusions":
Instalment buying of necessities is sound economic practise and far better than the open-account system.
It is a matter of control and can not be considered an evil in itself.
It permits the consumer to benefit by the use of the goods while paying for them.
It causes a family to adopt a budget and may be the inception of future systematic saving.
It stimulates thrift, increases consumption and raises the standard of living.
It is a permanent part of our credit structure and method of distribution.
It increases the activity of men to keep pace with their buying —which is at the basis of prosperity.
It has not undermined the economic structure of the country by undue inflation of credit.
By increasing quantity production, it decreases the cost of goods to the consumer, despite financing charges.
It has contributed more than any other major factor in the rebuilding of business and the general readjustment that has taken place since the war.
It has eliminated class feeling and has made it possible for individuals of moderate incomes to enjoy pleasures and recreations of educational nature.
It is a menace when credit is extended injudiciously, but this same would hold against the open-account system.
It is a sound practise when the following economic principle is used as a guide: The down payment should be great enough to cover selling cost and depreciation up to the time the seller fails to get his first monthly payment, delinquency is definitely established and the merchandise repossest. Time payments should extend no longer than the salable life of the merchandise.
From the replies as classified and digested for The Oregonian by the Lumberman's Trust Company Bank of Portland, the following statement of majority opinion is drawn up:
Instalment buying is the backbone of America's prosperity, by leveling out the production curve. It has almost banished unemployment, creating more jobs through the increased production made necessary by the tremendous consumer demand.
It has reduced the average cost of necessities and luxuries through quantity manufacture. It has increased wages, encouraged thrift and ambition, prevented spasmodic business depressions and made it possible for the wage-earner of America to find contentment in the possession of those things which even the rich of other countries seldom can afford.
A minority are said to hold that "instalment buying and selling is a menace, causing the workman to pledge his future and place a mortgage on his earning power which will tend to bring a reckoning day that will shake the credit structure, should hard times develop."
In the cities surveyed it was reported that on the average about 39 per cent. of the workingmen's future wages was mortgaged for deferred-payment purchases. The purposes for which payments were made in these cities were proportionately as follows, we are told: "Homes, 28 per cent.; automobiles, 35 per cent.; clothing, 9 per cent.; jewelry, radios and non-essentials, 10 per cent.; and furniture, washing-machines and essential household equipment, 18 per cent."
The conclusions reached by The Oregonian seem to the Chicago Evening Post to be fairly representative of the business opinion of the nation. That "the advantages have been held to offset materially the disadvantages" is held to be "fortunate in view of the general belief that instalment buying will be a permanent business factor." But a business authority, The Commercial and Financial Chronicle (New York) finds it difficult to argue a healthy state of trade if 39 per cent. of the future wages of workingmen are tied up in instalment payments. It wonders "what part of the 39 per cent. of future wages mortgaged goes into luxuries." And it protests:
On the whole, mortgaging future wages and salaries is not to be commended. Salaries and wages are subject to change through the trends and necessities of trade. They are not fixt but fluid. In a way, then, these mortgages upon the future, fixt by employees, tend to hamper the conduct of business at its source; they tend to an unwritten compulsion upon employers to continue wages under which the mortgages have been issued. It has never been the policy to encourage wage-earners or salaried men to borrow upon their prospects.
It is much better to put savings in a bank until the time when the luxury can be bought and paid for. And it may be added that then in most cases the luxury should be denied and the necessity substituted. Furthermore, a general business energized by the consumption of luxuries is upon an unsound base.
The elaborate study of the "Social and Economic Consequences of Buying on the Instalment Plan," made by Prof. Wilbur C. Plummer of the University of Pennsylvania, and published in The Annals of the American Academy of Political and Social Science covers the whole field in a most painstaking manner. Professor Plummer reminds us that about $6,000,000,000 worth, or 15 per cent. of all goods bought at retail, are purchased on the instalment plan. The amount of instalment debt outstanding at a given time is $2,750,000,000. This looks large but is not so great in proportion to the total amount of outstanding credit in the country, which exceeds $120,000,000,000. About half of the instalment debt is for automobiles. It has been estimated that 75 per cent. of all automobiles, 85 or 90 per cent. of all furniture, 80 per cent. of all phonographs, 75 per cent. of washing-machines, 65 per cent. of vacuum cleaners, 25 per cent. of all jewelry, and the greater part of all pianos, sewing-machines, radios, and electric refrigerators, are sold by partial payment. About $140,000,000 worth of clothing is sold per annum on this plan.
The tremendous increase in instalment-selling in the last six or seven years is attributed by Dr. Plummer chiefly to stiffening competition, modern advertising and high-pressure salesmanship, increased incomes of the working classes, and an ability of our producers to create beyond the ability of our consumers to purchase on a cash basis. The argument that people are going into debt for luxuries is met by this writer with the assertion that labor-saving devices in the home really release productive effort for other purposes. He also denies that instalment-buying necessarily takes wealth out of productive channels, arguing that savings accounts and capital are turned into such channels while various goods are bought with current income. After all, he says, it is absolutely impossible to draw the line between necessities and luxuries, since it is a matter of individual point of view. The tremendous rise of finance companies to take care of instalment credits has added a new element to our banking system. Their services, of course, are highly paid for, and the compensation divided between them and the retailers means that "it costs the buyer as much more to buy on the instalment as it would if he borrowed the money at an interest rate of from 11 to 40 per cent. and paid cash."
Dr. Plummer finds it hard to say whether instalment-buying makes people more, or less, thrifty, but statistics show that during the period of intense development of the new system savings have grown, not only absolutely but considered in relation to the rise in prices, on a per capita basis and in proportion to income.
True, a piling up of credits may lead to a period of depression, but Professor Plummer seems to think that instalment-selling alone can not take much of the blame for the next depression, because it is so small a part of our total volume of credit. He points out that commodity prices have been going down rather than up in the last six years, and that the instalment plan by encouraging mass production has actually made automobiles cheaper. So the new system can not be said to have produced price inflation. While instalment-buying, through piling up a huge quantity of unpaid-for goods in addition to unsold stocks, may prolong the next depression, Professor Plummer suggests that new extensions of instalment credit may be just the thing to pull us out of the slump. His study of the effects of the system in the region affected by the anthracite strike of a year ago indicates "that selling on the instalment plan is a sound way of doing business."
After stating various facts he sets down his own personal opinion as follows:
We believe that the instalment system performs a useful function in our economic structure, and that it is here to stay. There are abuses which must be eliminated, such as extending credit without regard for any principles of sound credit. This kind of instalment credit brings disaster to both borrower and lender as does the unwise extension of every other kind of credit. Then, too, there are dangers lurking in the use of the system which must be guarded against. But we believe that the system is an important contribution to modern economic organization, and that in time to come it will be recognized as such, even by those conservative people who, at the present time, see little good in it.
Finally, we turn to the unfavorable article in The Yale Review by C. Reinold Noyes, a St. Paul business man and student of economics. He seems to agree with the railroad president who called it "the uneasy payment plan" the other day. After an extended canvass of the subject, Mr. Noyes asserts that the instalment plan is the method of milking dry the now extremely prosperous working class. "The day of reckoning will come sooner or later." According to Mr. Noyes:
From the standpoint of the consumer the disadvantages of financing prosperity on next year's income consist primarily of all the age-old disadvantages of being in debt. From the standpoint of the producer, the fundamental weakness of this practise is its futility.
The partial-payment plan, insists Mr. Noyes, is a "process of exaggerating the peaks and valleys of the business cycle by which a fool and his money are parted for the years to come." He believes that:
When the next period of general depression is upon us, those manufacturers and retailers who have been unduly stimulating their sales by the deferred-payment plan will doubtless find their market flooded with second-hand automobiles and other apparatus of living, "repossest" from delinquent purchasers. At the same time their normal market will have contracted, due to the diminished purchasing power always present in hard times. Finally, the frame of mind of the consuming public will be adverse to going into debt, as it always is when the future is gloomy and uncertain. Each one of these factors operating singly is enough to depress any industry. The simultaneous combination of all three in these specific industries will greatly enhance the normal contraction of business, and the effects will be extremely severe. Perhaps such an experience is the only lesson which will cure these trades of a wholly fallacious and unsound economic policy. And, perhaps, the losses inflicted on the purchasers who can not retain their partially paid-for utilities will also exercise a wholesome restraint in the future upon the consuming public.
Since practically all consumers' instalment paper is carried by retailers, or is discounted by them with banks or finance corporations "with recourse," any crumbling of this credit structure will immediately involve retailers only. Manufacturers will at first suffer only in respect of a contraction in their markets. Nevertheless, in an effort to maintain their outlets and to sustain their dealer organizations, it is highly probable that many will, in the early stages of a depression, step in with relief measures and so become themselves involved, through advances and guaranties, in a gradually worsening credit situation which will eventually prove their own undoing as well.
Eventually, concludes this writer, the effects of the collapse will become general, "and the economic sins of our intemperate producers and consumers will be visited upon all of us"—"retribution for economic sin is automatic and inevitable."
Source: The Literary Digest for March 5, 1927