By B. G. WILLS Manager, Southern California Department

In this article Mr. Wills traces the evolution of our credit system from producers' credit to distributors' credit and finally to the third and present era, known as consumers' credit or installment financing. This latest adaptation of the machinery of credit has enabled the consumer to purchase not only the necessities but the luxuries of life, and it is said that unless a more conservative course is adopted, general prosperity will be affected. The writer takes the position that insurance agents have an important mission to perform in detecting the "installment thief" and directing automobile dealer clients into reputable financing channels. Mr. Wills has made a thorough study of installment financing and the economic effects of the over-expansion of the system, and this article on the subject should be of interest to every thoughtful reader. - Editor.

The growth of installment buying has been the subject of serious discussion between the leading bankers of the country for a period of months and we are reminded that it is true that Time is the great leveller and as it passes, truth becomes established, fallacies disappear, the new and impossible become the old and accepted fact. Unfortunately, however, in the passing of Time erroneous statements are temporarily accepted as facts.

Credit is the all important thing, but credit of itself, without the necessary supporting insurance protection, would be unable to stand alone. Credit has had two distinct eras, as it began first with what is known as producers' credit when it was found necessary for banks and other financial institutions to protect creditwise the manufacturers of the country. Then as production reached the point when it became rather burdensome for distributors, it was necessary to devise what has become known as distributors' credit, which was of tremendous aid not alone to distributors, but to the producers, and within recent years we have come to the third era - consumers' credit.

This last and most widely discussed of all the credits has a very human appeal inasmuch as it has placed the consumer in the position where he could purchase any article to satisfy an impulsive whim and he, likewise, could purchase the necessities of life in addition to the extravagant and foolish luxuries. It is the consumers' credit that we know more intimately as installment purchases. The people of this country are mortgaging their future incomes into the billions and the inevitable result may possibly be disaster unless the bankers direct this impulse into the proper channel. The humble laborer of today, by the use of consumers' credit, can bring to his home greater luxuries than princes of years gone by ever dreamed of.

CONTINUED PROSPERITY DEMANDS ELIMINATION OF WASTE

The wealth of this country is placed, in round numbers, at $325,000,000,000. There are in excess of forty-five million savings bank depositors with deposits estimated in excess of $24,000,000,000. The income of the American people is approximately $64,000,000,000 and of this amount 15% is probably saved as against 10% prior to the World War. The American people have been adding to their comforts and pleasure by installment purchases. A 1926 survey shows that 20% of the jewelry, 45% of the pianos, 65% of the furniture and vacuum cleaners, 75% of the washing machines and automobiles and 8o% of the phonographs are acquired by the mortgaging of future incomes and through this consumers' credit accessories to comfort, pleasure and social improvement may be had before accumulations equal to their cost are available. When the vast number of dollars that are involved are considered and the welfare of the vast number of people indulging in this mortgaging of incomes, it seems worth while to give thought to preserving general satisfactory conditions, for neither wealth nor income are permanent unless properly safe-guarded. This implies that the continuation of our present purchasing power depends in the future upon the limiting of our expenditures sufficiently to regularly provide funds for profitable investment. We have reached the point in our activities where the purchase of commodities and the purchase of sound securities, either purchased outright or on the installment plan, must go on to insure continued prosperity. To this end, economic waste must be eliminated.

Speaking more directly concerning the automobile, if it is true that of the total 1926 production of cars of all makes 10% or more were repossessed by sales agencies and financing companies for non-payment, in the face of the trade anticipation of a repossession ratio of 1%, it clearly shows that the people are buying automobiles and other commodities for which they cannot pay. There is a point up to which consumers credit is constructive, but beyond that point it is destructive and if the wild orgy of installment purchasing without due consideration being given to the inevitable result continues, then we are to become a nation of mortgaged servants.

AUTOMOBILE IS MOST GENERALLY DESIRED ARTICLE IN HISTORY

The time has gone by when it should be said that a man has been "sold" on the installment plan up to or beyond his income, as that automatically takes him out of the market for the necessities of life. Quite naturally, the mind of man runs to the automobile when it is considered that of all the people employed in the oil fields to produce gasoline, of which 80% of the total output is used for automobiles, their minds naturally run in that direction, and that of all the men employed in the steel and iron mills have the automobile in mind, since probably one-seventh of all the steel and iron is used for the automobile, and of all the men that work in the lead mines must think of an automobile when one-seventh of the net result of their efforts is consumed by that industry and the same is true of all the men in the copper industries and of all the men who make plate glass for over one-half of that output is consumed by the motor car. It is but little wonder that there never has appeared among mankind in all its history an article more generally desired.

There was a time in the history of this country when it was a disgrace to have a mortgage on the old family homestead. It was the family skeleton and the children were never permitted to know of the disgrace. But all that is changed and it has been brought about by this credit we are trying to understand, known as consumers' credit or installment financing.

THE INSTALLMENT THIEF

Some of the finance companies, specializing in automobile paper, are charging outrageous rates and we have had as a result of such business procedure, a new kind of thief come into our midst known as the "installment thief." This individual purchases an automobile under lease contract for a payment less than that which instills within him a sense of ownership and he has no intention of completing the payments under the contract, but only hopes to use the automobile until it is repossessed. The dealer selling that automobile is not particularly interested because there is some finance company who is perfectly willing to buy that paper without recourse, in other words, without the endorsement of the dealer selling the automobile, and then comes the insurance company who will accept the various risks involved and to whom in the last analysis the automobile has been sold. All this sort of thing has eliminated the exercising of commercial intelligence and has been grossly unfair to the accepted theory of the law of average.

DUTY OF THE INSURANCE AGENT

Insurance agents of this country have a very great mission to perform rather than merely to be classified as order takers. They should be constantly on the alert for the "installment thief." It should be their duty to direct their automobile dealer clients into finance connections outside of the pawnbroker type and into connections where reasonable rates are charged and where business is conducted on a sound banking basis and where the conditional sale contract or chattel mortgage agreement, whichever you call it, is carefully scrutinized and where the article that is sold has a true value and was not purchased to satisfy an impulsive whim. Something that will not wear out and lose its value before the payments are completed and something that has not been bought where the desire is not sufficiently great to undergo sacrifice in order to retain the possession of it. The agent should be on the lookout for the high rate finance company and its method of operation. He should appeal to his local banker to assist in adjusting the credit situation. These men are experienced in their business, for they assisted in protecting the producer against himself and, later, assisted in the protection of the distributors against themselves. The insurance agent and the local banker are under a great obligation to the American public, which has proved itself worthy of credit and which is entitled to the protection of the banker and other financial institutions against the extravagant use and abuse of credit and there should be no place in business for the automobile dealer, or any dealer, or any finance company, who mercilessly traps customers in his installment net to advance his sales and increase his own comforts and conveniences to the detriment of others. The agent writing automobile insurance should be proud of the part that he has to play in the solution of this problem.

[Fireman's Fund Archives: 4-1-3-4-38; 0407.]