Effects Of Consumer Credit On Distribution
( Originally Published 1939 )
What influence has the expanding use of consumer credit had on the processes and costs of distribution? This question has not yet been adequately explored, and until comprehensive data become available it is impossible to do more than speculate about it.
The first and most obvious effect of instalment selling, of course, is to add service and interest charges to the price the consumer has to pay. As we have seen, these charges are substantial-usually several times as high as the return which the same consumer receives on his own savings. So far as the individual is concerned, he could save money by "borrowing" his own savings and "repaying" himself, or by deferring the purchase until he has ac-cumulated enough money to pay cash. But these alternatives to the "easy payment plan" involve either the disadvantage of waiting or the exercise of will power, or both.
The charge for consumer credit, therefore, is what the buyer pays for the "economic service" involved in providing him now with goods he might otherwise have to wait for and in compelling him to save enough to pay for them after they have been delivered, rather than before. So long as the consumer is aware of the alternatives offered to him and fully understands what he is paying for and how much he is paying for it, consumer credit cannot be regarded as more wasteful or unnecessary than any other distributive cost. When the credit charges are concealed in the purchase price, however, or the buyer is misled or deceived as to the terms of the contract, the situation is exactly the same as if there were misrepresentation of the nature of the product itself.
However, in spite of the fact that some consumers could save money by paying cash instead of buying on the instalment plan, it is undoubtedly true that many families with small incomes would find it difficult or impossible ever to accumulate enough money to make a lump sum payment for a high-priced article like an auto-mobile or electric refrigerator. Without the possibility of buying such products with small (and compulsory) monthly payments many families would be unable to own them; and the money they now spend for them would be spent for other purposes. On the other hand it is undeniable that, from the standpoint of the borrower, consumer credit is unwisely extended in many cases. With a shrinkage of family income, repayments on the debt contract be-come a burdensome item in the family budget. But they must be met in order to avoid repossession even though this may involve curtailment of more necessitous expenditures.
Instalment financing and consumer credit have unquestionably had an important effect in widening the market and increasing demand for many kinds of household and other durable goods which sell for high unit prices. This in turn has probably made possible the economies of mass production and resulted in lower selling prices than if the market for these goods were limited to those able and willing to pay cash for them. The effects of consumer credit on prices and costs-like those of advertising-are complex and varied. While these charges add directly to the price consumers pay, the indirect effect of consumer credit has probably been to widen the market and thus lower costs and prices.
By stimulating the demand for the kinds of goods sold on the instalment plan, consumer credit may cause a shrinkage in the demand for other types of goods. Here again the effects on consumers' choices and on the distribution of consumer expenditures is not clear, but there is some evidence that sales of jewelry and other products have been relatively depressed by the development of instalment selling for durable household goods. Under certain conditions, however, as when capital facilities, labor, and bank credit are in ample supply, an increase in the demand for one kind of goods-whether induced by consumer credit or by other means -will cause an increase, rather than a shrinkage, in the demand for other goods.
Another question which needs investigation is the extent to which instalment and other forms of consumer credit help to stabilize the flow of consumers' purchasing power and the operation of industries and trades producing and distributing instalment goods. It seems evident that the demand for consumers' durable goods, and therefore production and employment in the industries supplying them, would be subject to much wider fluctuations through the different phases of the business cycle if these goods had to be paid for in full on delivery. This in turn might result in higher costs and prices.
Any valid appraisal of consumer credit and of its effects not only on the individuals directly concerned, but on the whole system of distribution, cannot be rendered without a more searching examination than has been possible in this survey. Fortunately the forthcoming report of the Russell Sage Foundation and the comprehensive series of studies of consumer credit now being carried on by the National Bureau of Economic Research promise to provide much of the information needed for such an evaluation.