Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste —
‘BEFORE YOU INVEST—IN VESTIGATE”
BUYING on the INSTALLMENT plan is a new phase of our economic evolution which has become firmly rooted since the war. Within the past few years there has been an amazing growth in the amount of credit used in consumption buying, and the whole tendency has aroused the most critical concern of many of our leaders in economic thought. The movement was pioneered in the United States, and Canadians fell readily into line. Today, the practice of buying on the forward payment plan has spread throughout the world. The purchase of goods under such an arrangement, especially where the merchandise is destined for early consumption or obsolescent before its usefulness is spent, is not only unsound in principle, the economists argue—since it discounts and dissipates future earnings, and mortgages happiness and prosperity—but gnaws at the very vitals of the country’s trade and commercial expansion.
As usual, when revolutionary principles are involved there is a wide diversity of opinion, and so far no real opportunity has been provided to test the soundness of the theories of the opposition. Installment buying goes merrily on, with the rank and file of the populace piling up obligations which it must contrive in some manner or means to meet in succeeding months. If business keeps up, and jobs and satisfactory wages hold, then, no doubt, all will be well; but if fickle Fortune turns the wheel and we enter a period of depression, what will be the result?
This phase of the subject was vividly revived when stocks were crashing in early November. The fear was then expressed that with buying power acutely impaired there would follow wholesale and necessary default of payment on goods contracted for, when the financial prospects were more alluring, the cumulative effect of which would be the inundation of dealers with returned commodities, which in turn would be forced back on the manufacturer for lack of a fresh outlet, or because of inadequate finances to carry them. Thus would be created a vicious circle which would leave damaging scars on the business structure as a whole.
The Chamber of Commerce of the United States estimates that approximately one-sixth of the goods sold at retail in that country is sold on time payments. No figures showing the ratio which obtains in Canada are available, but the volume of installment buying is large and steadily growing. Such goods as automobiles, radios, furniture, and other items in the luxury or semi-luxury class are sold today very largely on a credit basis. Many retail stores have established departments with special facilities for customers who wish to buy on credit or the deferred payment plan. Business of this character is solicited by some of our largest retail institutions. According to some plans, a small rate of interest is applied on unpaid balances.
In others, no interest is charged but the customer contracts to make specific payments regularly.
Business has long been used to the practice of borrowing for productive purposes. Credit for consumption goods however, is a new development, the soundness of which has not yet been fully established, although our growing experience with business of this type results in a lengthy list of arguments in its favor, if conducted on sane and proper lines. The old principle of “pay as you buy” seems to have been supplanted by the newer idea of “pay as you use.” Professor Seligman, of Columbia University, is one of the authorities who has examined and reported on this essentially modern practice. He has found that, in the main, consumption credit is not inconsistent with the principles of sound economics.
The Real Estate Example
"DUYING on the installment plan, or an adaptation of this practice, was first employed in the real estate field. In the purchase of a home one did not expect to pay for it at once. Indeed, the usual practice was to make a small cash payment and borrow the balance at a fixed rate of interest, with the privilege of renewal at the maturity date, if the borrower was not financially able to discharge the obligation. In fact, a good many business men in financing a home found it desirable to borrow and retain their private funds for use in their business, where they hoped to get a much larger return from it than the seven per cent which they paid on the borrowed sum.
Formerly, the extremely poor and the ne’er-do-wells bought or attempted to buy goods on credit. Old-time standards demanded rigid frugality; one must not buy what he could not pay for immediately. Even today there are certain classes of goods which do not find a place in the new scheme of things. In the case of goods of a perishable nature, or those which rapidly deteriorate and are likely to become consumed or useless before complete payment has been made, the practice is obviously unsound. But exponents of the new thrift theory hold to the view that where commodities are fairly durable—for example, in the case of furniture, without which " a newly purchased house would be useless—the time system of payment can properly apply, all factors being favorable to this mode of payment. The list can be greatly enlarged and in it are included many articles in the luxury class, which, while fairly lasting in quality, yet exact such financial demands in the aggregate that they impose a severe burden upon the small wage earner who fails to resist their appeal.
Where sound necessities are concerned, it may be argued that it is much better to set aside small monthly payments for them while they are being used than to do without them, for lacking this objective and incentive to save, the money would probably be frittered away otherwise. Conditions, of course, vary with individuals, and as for the party who discounts his earning capacity far in advance, and makes no provision for the unforeseen eventualities that may follow in the wake of a business depression, he is treading on dangerous ground and should be discouraged. Such practice corresponds to speculation in the stock market with insufficient margin.
A Little History
INSTALLMENT buying has grown out of modern business practices. Business and finance are in a state of constant change. Borrowing for consumption, or any other kind of borrowing for that matter, was an extremely rare occurrence in the Middle Ages. In fact, the church took a definite stand, when it decried all interest-taking, regardless of the rate, as usury and a sin. The interest-taker was regarded as a publican and sinner who fattened on the misfortunes of others.
As time went on and productivity increased, a greater need of capital for productive purposes arose, and consequently a new conception of the uses of surplus capital, so that it seemed no longer a sin or a crime to lend money at interest. In fact, the lender came to be regarded in the light of a benefactor by contributing to increased production, employment, and the general betterment of economic conditions.
This new theory was summed up by Adam Smith in his Wealth of Nations, written in 1776, when he said: “By what a frugal man annually saves, he not only affords maintenance to an additional number of productive hands for that or the ensuing year, but . . he establishes, as it were, a perpetual fund for the maintenance of an equal number in all times to come.”
This view persists, and while the basic principles of thrift are still intact, modern practice and theory permit of some new orientations, the most revolutionary of which concerns the subject we have been discussing, namely, the present-day trend toward the use of credit for consumption as well as for strictly productive purposes.
Shakespeare once remarked that “borrowing dulls the edge of husbandry.” He had probably in mind a loan enforced by the rigors of an unfortunate circumstance, or a credit entered for food or clothing because the purchaser at the time had not the money to pay for them. Under such circumstances, borrowing must inevitably lead to discouragement and failure, and in this sense the practice is unsound and inherently vicious.
The Situation Today
TET US examine the effect of this present-day tendency upon general business. Mass production has increased tremendously in Canada as well as in the United States during the past decade. Factories turn out goods on a big scale which are expected to find a market. If there is a market for a portion of these goods only, then production must be curtailed and men thrown out of work. If the ultimate consumer bought only what he could actually pay for, total sales of commodities, especially those of the luxury class, would be greatly reduced. This would result in a circumscribed market for our products, necessitating the employment of fewer hands. But, it is urged, let these surplus workers direct their energies to producing wheat and corn, or to the manufacture of boots and shoes, and in this way contribute something that is of vital need to the community. In answer it may be pointed out that what is needed at the moment in these industries is not increased production but broader markets. So that if the energies of workers now engaged in the semi-luxury or luxury division were diverted into the channels outlined, the result would probably mean overproduction and a slack time all round. As it is, the special groups take up the slack, and are supported by public buying to a large extent on the installment pian.
The automobile is as good an illustration as any of what a special industry can contribute to the general economics of the public’s welfare. A few years ago, the tremendous development of the motor industry was regarded with apprehension by some business leaders on the ground that the product was not vitally essential, and was withdrawing both capital and labor from essential lines, which were bound to suffer in consequence. Experience has not confirmed these views, for so far from imposing a restraint upon general business development the automobile industry has contributed very materially to the commercial expansion of Canada and the United States. A decline of fifteen per cent in business activity means a turn from prosperity to depression, and it seems logical to assume that the credit buying of the public has contributed something to our prosperity. Whether the practice will in time react to the general disadvantage of business under circumstances outlined above, remains to be seen.
“Keeping up with the Joneses”
1SJOT every practice that has been em' ployed to keep factories busy and payrolls high, however, can be defended. “Forced obsolescence” is a term that has been created to describe the tendency on the part of manufacturers in several lines to bring about a revision of styles in order to stimulate markets, and thus keep factory volume up. No industry is more assiduous in this respect than the motor industry. Each year sees new styles in motor cars, with entirely superficial changes perhaps, and affecting no such radical alteration in the fundamentals of motor or equipment as would add to its value and power. These changes in style, however, are designed to promote buying from that large element of the public, which is a stickler for the latest. So in radios, in dress styles, and in many other lines are markets thus maintained and stimulated, even although the new buyers are merely replacing goods that are still far from worn out. They suffer in style only. It is doubtful if productive activity and prosperity are synonymous in this case, and the general practice is in no way consistent with the new conception of thrift that has taken such firm hold in our economic thoughts and actions.
If this new practice adds to a worker’s comfort and happiness by enabling him to use and enjoy the things he wants, which he would be denied, if forced to purchase on a strict cash basis, can it be wholly wrong? It is conceivable that it may lead to increased effort and productivity, provided of course the purchaser does not assume too heavy a burden.
That we have not lost the sense of thrift in our forefathers is vividly attested by the steadily mounting totals of savings deposits with the banks, and the amazing growth of life insurance carried by our citizens. Of course, as in all things, prudence and wisdom are essential if the present tendency proves desirable in its results. The theorists are sharply divided. We have not attempted here to settle the problem for good and all, but to present in brief some of the diverse views that have been formulated.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.