To Tell You the Truth
I
HAGGERTY reluctantly turned his eyes from the chic lines of his new sedan. Well, not exactly his, but it would be as soon as the formality of note signing was over. Hitherto, Haggerty had been an eccentric buyer: he had always paid cash. So, in spite of his hurry, he read the installment papers with more than casual interest. Something slowed him up. He read again. ‘Ah,’ he said, ‘no interest to pay? How’s that, Britton? ’
The manager explained. The timepayment price, he said, included ‘carrying charges.’
‘And how much,’ asked Haggerty, ‘might those charges be?’
The manager, looking a little bored, handed Mr. Haggerty a printed card. There was a cash price, a time price, and a monthly installment charge; but there was nothing about interest.
At the top of the card, however, printed in large type, was the legend: ‘Our Rates Are Lower.’ Haggerty read it thoughtfully.
‘Britton,’ he said to the impatient manager, ‘you know that blank I signed, telling all about my job, the mortgage on my house, what I owe, and how much insurance I carry. I made a mistake in filling that out, brother. It just came to me. Maybe I’d better fix it now. It is a small matter, but I want to be just as much on the up-and-up as you are.’
‘Sure,’ said Britton, heartily. He wondered, with some amusement, if Haggerty had misstated his age. Whatever the mistake was, it took only a second to correct it. Smiling, Britton started to return the application blank to the file. Suddenly he checked like a pointer. ‘Hey! What’s this?’
‘What’s what?’
‘You’ve inked out “Salary, $200 a month” and written in “My salary is higher.” Higher than what?’
Haggerty yawned. ‘How should I know? Higher than it would be if it were lower, maybe. Or maybe just higher than whatever it is your rates are lower than.’
‘Now listen, Haggerty . . .’
‘Listen yourself,’ snapped his customer. ‘Your rates are none of my business. Fine! Then my salary is none of yours. You make me hire a statistician to find out how much interest you charge. All right, hire yourself a detective to find out how many dollars I earn.’
II
No, Haggerty’s full name and address will not be mailed on request. There are reasons. In the first place, Haggerty is averse to publicity. In the second place, Mrs. Haggerty, who belongs to the same bridge club as Mrs. Britton, would be embarrassed. And, in the third place, the incident never happened.
I do not describe it in the hope that some day it may happen; but, like the mother who told her children not to stuff beans up their noses, I do suggest certain possibilities.
These possibilities come not only to buyers of cars on installments, but also to buyers of refrigerators and encyclopædias and what not.
For instance, a prospective installment purchaser who had just taken his third salary cut might write on his credit application blank: ‘Salary — grossly inadequate.’ Or, if the purchaser was a secretary who did most of the work of the boss, she could write: ‘Salary — about one tenth of what he owes me, the big loafer!’ All sorts of interesting variations on this theme will occur to any purchaser who gives his mind to it.
Conceivably, the objection might be raised by dealers that such information affords no basis for the evaluation of credit risks. But ‘Our rates are lower,’ or ‘Our rates are reasonable,’ gives practically the same basis for comparison of credit charges. And if the automobile dealer or even the dealer in amazing encyclopædias felt an urge to know the buyer’s resources, someone could be sent around to third-degree his employer. At first the sellers might resent this attitude on the part of buyers. Sellers might not take kindly to being told to find out the customers’ resources the best way they could. But when it was pointed out to them that this is what prospective buyers are now forced to do about rates, they would see the merits of the plan. After all, it costs less to hire an industrious detective than it does to hire a competent statistician.
This interesting game of ‘Now I’ll tell one’ can be played also with firms which sell furniture or radios or trips to Europe for a ‘carrying charge’ of ‘6 per cent.’ It can even be played with banks which lend money to consumers, repayable in monthly installments, at an advertised rate of ‘6 per cent.’
In the case of the bank loan, the procedure might be as follows. The applicant for a loan earns, let us say, $1000 a year. After ‘Annual salary’ on the blank he should write ‘$2000.’ At the next interview he should take a jocular attitude. ‘Misrepresent!’ he should exclaim, slapping the crossexamining vice president jovially on the back. ‘Quit your joking. You did n’t expect me to tell you my real salary, did you? Anyway, your rates are three times what you say they are. All I did was multiply my salary by two!’
Possibly the applicant would not get the loan; but at least the banker would get some insight into the meaning of Job’s words: ‘Now it toucheth thee, and thou art troubled.’
III
When a man buys goods on time, he is asked to make a complete statement of his income. This statement is duly checked. If an annual salary, stated as $2000, turned out on investigation to be an annual salary of $1000, the applicant for credit would be invited to explain. If he replied, naïvely, that he always thought of salary in terms of two years instead of one year, and that on this basis his statement was correct, he would be told, in no uncertain terms, that when a credit man says ‘annual’ he means ‘annual.’ Yet the same credit man, when he says ‘6 per cent,’ does not mean 6 per cent per annum. He does not mean 6 per cent on the unpaid balance: he means 6 per cent on the original balance. If the original balance is $500, the average unpaid balance is approximately $250; the true annual rate on actual unpaid balances is therefore about 12 per cent.
If the applicant for credit who misstated his salary should explain that he made the misstatement, not to deceive, but to put his salary in terms more agreeable to the merchant or the banker, he would be regarded as a good candidate for psychopathic treatment, but not for credit extension. Yet many credit men, asked to explain 6 per cent which is not 6 per cent, reply blandly that buyers ‘are used to 6 per cent.’
If the salary prevaricator, pressed further for a reason for his peculiar conduct, replied, ‘Well, I said $2000 because, if I said only $1000, you would think my salary was too low,’ that would be considered further proof that the prospective buyer was mentally down and out. Yet when the credit man, pressed for a reason for his evasion, says, in effect, ‘If I stated our credit charge as 12 per cent, you would think it was too high,’ he is considered, at least by his employer, as mentally up and coming.
Or, if the prospective purchaser pleaded that a man who stated his salary correctly might be arrested, the credit man, if he were as inquisitive as he is reputed to be, would want to know under what law. Yet the same credit man assures us that he is unable to state his terms correctly, lest his firm be convicted of usury; and it does not occur to us to ask under what statute this could occur. As a matter of fact, installment sellers could charge anywhere from 30 to 200 per cent — and state the terms correctly and openly — and still be safe from conviction for usury. For installment sellers, rightly or wrongly, operate under a law entirely different from that which covers other lenders of money. They may sell goods ‘on whatever terms as to time and mode of payment’ they choose; and under the law these terms, ‘however unconscionable, shall not be construed as usurious.’
IV
The modern business man is not ruled by the slogan, ‘Every man for himself and the bankruptcy court take the hindmost.’ Because of a personal bias toward honesty for its own sake, or because of group pressure, the merchant is an honest man — at least, as long as he sticks to selling merchandise. The moment he starts selling the use of money, however, he sometimes descends, with breathtaking abandon, into the very pit from which he has laboriously climbed. He reverts to the otherwise outmoded doctrine of ‘letting the buyer beware.’ He seems to regard reticence about rates, not as a mean attempt to keep borrowers in the dark, but as a benevolent device to save them pain. Not only has he a thousand ways of evading questions about rates, but he has another thousand ways of rationalizing the evasions.
If the merchant offered his pretty fables about rates as pure symbolism, there might be no objection to them. In fact, his attempt to keep us children as long as possible, and to protect us from the harsh realities of adult consumer-credit life, would be rather touching. If the ‘6 per cent carrying charge’ on a refrigerator were offered in the same spirit as is the stork which adorns the infants’ department and the Santa Claus who strolls among the Christmas toys, we might smile appreciatively. But when the merchant insists that a 6 per cent loan really brings electric refrigeration, he is carrying symbolism too far.
Well, ‘what’s to do about it?’ — as the radio blithely inquires. We might do what the song just as blithely advises: ‘Put out the lights and go to sleep.’
On the other hand, we might find it money in our pockets to wake up to one basic fact: 6 per cent installment credit is a myth, pure and simple. No merchant makes small loans, repayable in monthly installments, for 6 per cent. Moreover, until merchants can obtain capital for next to nothing, and hire bookkeepers and collectors at approximately the same rate, there is no reason why they should be expected to make 6 per cent loans. The case against installment sellers is not their failure to lend money at impossible rates. It is their pretense that they do achieve the impossible.
This pretense will continue as long as installment sellers fancy that it takes an exceptional mind to comprehend the necessary spread between retail and wholesale credit prices. Already merchants are aware that shoppers endure, without flinching, the knowledge that a few yards of silk at Gimbel’s cost more per yard than a thousand yards of silk at Cheney Brothers’ factory; but merchants do not believe that shoppers could bear, with equal fortitude, the news that a loan of $100 at Gluckstein’s Department Store, repayable in ten monthly installments, costs more per dollar than a loan of $100,000 at the First National Bank, repayable in full at maturity. As consumers, our only hope of getting the truth about installment rates is to convince merchants that we are made of stern enough stuff to face the truth, and that we are fed up with ‘6 per cent,’ ‘lower,’ and ‘reasonable’ substitutes.
If insistence on the bald facts necessarily results in a collapse of installment selling, the sooner the collapse occurs the better. If it results in a drop in the volume of installment loans, it might be a wholesome drop. The volume of stocks and bonds sold under the new caveat venditor law may not be as large as it was when ‘to the best of our knowledge and belief’ constituted a blanket release from responsibility for misstatement. But neither will the volume of losses of gullible investors be as large. The stopping of any abuse cuts down somebody’s profits. But that is no reason for perpetuating the abuse.
As a matter of fact, an exact statement of credit rates would hurt only those merchants whose carrying charges are now trade scandals. Installment sellers as a group would find, as have the personal finance companies operating under the Small Loan Law, that to be truthful is not only self-respecting, but also profitable.
The Small Loan Law was drafted primarily for the benefit of borrowers. The Russell Sage Foundation knew, however, that no law is beneficial to one group which is oppressive to another. Therefore, it proposed that lenders charge enough above operating costs to make a reasonable profit. In return, it demanded an equally frank admission of the borrower’s right to know, at the outset, that small loans are more costly than large loans, and exactly how much more. As far as interest rates are concerned, the Small Loan Law allows about as much privacy to money lenders as a Times Square show window provides for the pretty girls who make cigarettes.
Lenders must state their maximum rates of 3½ per cent a month on actual unpaid balances. They may not charge an investigation fee. They may not make a charge for delinquencies. They may not deduct interest in advance. Yet apparently the personal finance companies, operating under this law in twenty-seven states and making an annual volume of loans of about $350,000,000, do not find this law oppressive.
Possibly installment charges need not be restricted by law, but certainly they should be stated openly, in monthly terms on actual unpaid balances. The installment principal changes monthly; an annual rate is therefore misleading. Nobody can compare ’lower,’ or ‘reasonable,’ with ‘6 per cent.’ But everybody knows the difference between 1 per cent and 2 per cent a month. What is more important, everybody knows the difference between 2 per cent a month and the 6 per cent a month which is often collected by installment booksellers, sewing-machine companies, and irresponsible agents of responsible financing corporations.
V
Why, after all, should merchants state the price of goods openly and resort to all sorts of subterfuges to conceal the price of money? Possibly the answer lies in the history of merchandising. In the beginning, the merchant was frankly a ‘chiseler.’ He used claws and fangs to get ahead. In his ‘dickering’ stage, he took the same pride in getting the better of a buyer that a prize fighter takes in throwing his opponent. As he advanced through the ‘trade’ stage to his present conception of ‘service,’ he accepted honesty as a policy. He has never accepted it as a principle, and he is still self-conscious about it even as a policy. He has a lingering suspicion that fairness to purchasers is a sign of weakness rather than of strength. To compensate for this ‘weakness,’ he is as hardboiled in his buying as he fears himself to be soft in his selling. And whenever the opportunity arises in selling, he tends to revert to his old methods. Installment selling was a fine opportunity for such backsliding. So was the merchandising of securities by banks.
This will to conceal facts, for the sake of a supposed advantage, is a hangover of merchandising itself. It has nothing to do with the personal ethics of individual merchants. If sellers once got an old-fashioned Calvinistic ‘conviction of sin,’ they might be ready to throw the whole business of installment rates out into the light. Sunshine is the only therapy that is needed.