What Price Credit?

Extract from an Address by Dwight P. Reordan Federal Reserve Bank of Dallas. Texas

A very wise man, in the tivilight of his life, once remarked, "I was once young and am now grown old, and my life has known many troubles, most of which never hap- pened." When I have finished my little discussion today, man)' of you will probably apply that comment to the condusion which I shall draw, and no doubt some of you will think that, like Don Quixote, I have co'njured up dragons from rvindmills and am tilting at them with a lanci of satire.

There was a time, not so long ago, when business men and bankers were somervhat diffident in speaking of or writing about general business conditions, but of recent years no such diffidence is apparent. Self-appointed economists have sprung up by the thousands, and each morning's mail brings to my desk, and to yours, learned discussions on the present business situation and with very positive prophecies as to the future. One can find a solution of all our economic ills by carefully reading all of these utterances, which are coming off the printing presses in ever increasing numbers, many of rvhich represent exquisite examples of the printer's art.

I can probably not add one iota to rvhat you already know, but you have asked me to speak to you. I have some thoughts on the current business situation, and I must express them. I shall discuss very briefly certain credit phenomena as I react to observation of their progress. I shall touch lightly on banking credit which is the only phase of credit which I can lay any pretense to knowing much about. Naturally, my comments on banking credit, for that reason, will be liinited, and I shall hasten on to a discussion of other phases of credit in which I can give my remarks freer rein.

It is my belief that a vast amount of bank credit is disbursed without intelligent analysis of the use to which the credit will be put or the ability of the-borrower to liquidate the credit u'ithin the terms of the obligation. If it were otherwise, we would never have bank failures,l and we do still have them in rather staggeiing numbers,l I do not subscribe to the belief that bad business conditions or crop failures in any given community are anything more than contributory factors to bank failures in such communities. I believe that too liberal an extension of credit to customers on the part of any bank, anylvhere, any time, made without due regard to the ability of the customer to repay the debt created within its terms, will inevitably lead to trouble for the lending bank and disaster for the borrowing customer.

Show me a community whose bank or banks always follow ultra-conservative policies, and whose bankers have the reputation of being cautious and close, and I will show you a community whose people are prosperous, happy and contented. Show me a community whose banks follow a pol- icy of lending to every one in the community merely to meet individual desire for credit, and I will show you a community without moral stamina, a community whose people have lost'the ability for self-support, and a community existing in an actual, though not always an apparent, state of insolvency. I shall say no more on that score as this audience well know what I am talking about and many of my auditors are, perhaps, thinking way beyond me.

Let's look at credit situation from another aspect. 'We have in late years installed different kinds of credit ma- chinery that I am frank to say, in its workings and rarnifications, leave me entirely bewildered. I don't even pretend to understand all the details of some of these operations, and I can only, in considering these matters, try to stay close to elementary things and think only of credit fundamentals.

There lvas a time rvhen office buildings, hotels and large apartment houses rvere built by men, or associations ot men, nsing their own money. In those days sometimes it became necessary for such enterprises to borrow money by giving first mortgages on the property. The operations were fairly simple. They only embraced contact between, at the most, several persons. f can understand that sort of operation-it is simple and it appeals to me. I can analyze it, know where it begins and where it ends. But there has come another day. Some financial genius discovered that first mortgages on real property could be split up into many parts and, under the name of "bond" or "debenture," could be sold to people from the Atlantic to the Pacific, from the Great Lakes to the Gulf. Of course the people who bought these atomic parts of first mortgages never saw the building that the mortgage was issued against; never saw the city in which it was located, but that made no difference because at the time they bought their bonds or their debentures the construction of the building had, perhaps, not even been started, nor grottnd broken. All of that was to go concurrently with the reception of their money in payment for the bonds.

Don't misunderstand me. I do not mean to say that these bonds may not represent, in most cases, a solvent investment on the part of the purchaser. I am merely calling to your attention that where such buildings are fabricated there goes hand in hand a pyramiding of credit transactions. It seems to me that these transactions must carry some overhead-that somewhere, somehow, a price is being put upon this thing above and beyond the actual cost of construction.

Flave you ever thought as you traveled from place to place and stopped at hotels constructed within the past few years, that you were entering a mortgaged building, that the bed you sleep in and the plate you eat from are covered by a mortgage that has been broken up and scattered throughout the nation, to that great army, the investing public?

Again, I see another aspect of the credit situation, a very important one, agricultural credit. Important,. because it affects directly so many people and indirectly our whole population. It has been well recognized for a good many years by men in every walk of life that something' needed to be done for agriculture and the persons engaged in that occupation. This general thought has more or less of late years crystalized into the one idea that what the farmers need is more credit, easier credit and cheapercredit. I submit that that sort of thing is paradoxial, that there can be no easy credit which is cheap, that the easier the credit, the higher its ultimate cost.

I submit again that we are on the wrong trail entirely; that maybe the farmer, as a class, has had the doubtful enjoyment of too much credit, and, perhaps, the credit extended tg that industry has somewhat exceeded the ability of that industry to take care of its obligations so incurred. From my view, there seems to be no dearth of credit agencies anxious and willing to extend all kinds of credit to the agricultural industries in this country, but I do not believe that there is any sound reason to extend credit promiscuously simply because the applicant happens to be engaged in the business of farming. There are in every section, in every state and in every community, without respect to what the crop results may have been during the past year or years, a large number of men engaged in the business of farming amply able to take care of any obligation incurred, and those men are not now nor have they in the past experienced any trouble in securing such credit accommodation as they needed in the conduct of their affairs. There are also very many persons engaged in this business of farming who may at this time be experiencing great difficulty in securing any sort of credit for current operations. I think, perhaps, in many cases those men have been given an overdose of credit in the past, and those liquidated debts are still on their shoulders and in the minds of credit agencies.

I say to you again in this connection that bad conditions and crop failures do not break farmers-they only eliminate that class of farmer who has been unable in the past to accumulate enough to carry him over the lean season and who is already saddled with debts which he could have liquidated in years of good crops and high prices. These men are paying the pricre of credit, although they are, perhaps, not as much to blame as the person or the credit agencies who, in the past, burdened them with debt and failed to enforce liquidation when the borrowers were able to pay.

There is another phase of credit activity that has in recent years grown to enormous proportions. I am speaking of credit obligations issuing from political subdivisions, States and counties, districts and municipalities.

Every citizen worthy of the name takes a natural praiselvorthy pride in his State, his county and his home town or city. He is ambitious for progr€ss of his own community and r,vants the public improvements of his locality to equal or excel his heighbors' accomplishments. These ambitions and desires find expression in the construction of modern streets and highways, and in the erection of beautiful and expensive buildings, such as city halls, court houses and auditoriums.

All of these things satisfy our civic pride and make our country a most desirable one from a standpoint of convenience and comfort;'but along with the satisfaction of these desires comes the accumulation of a tremendous public debt. In accomplishing these improvements we are, in so many instances, going far beyond our current public revenue and setting up bonded debts which in their very terms obligate repayment, in large part, by generations yet unborn.

No doubt, in many cases, before the bonds now issued have matured the improvements purchased with the proceeds will have lost their usefulness and have passed completely out of the picture. This is a phase of credit that bears a direct relation to every human bein$ in the United States and it behooves every one of us to give the most

t/

careful attention and study to every new issue of such public debt. This sort of credit is very easy to obtain and if used extravagantly and carelessly will impose a burden upon production quite beyond any corresponding econo'mic value and, maybe, beyond the capacity to repay.

I suppose every business man or banker that discusses credit during these days must have something to say about installment credit. I am, of course, familiar with that school of thought which looks upon installment selling as a great curse. That other school of thought that sees in installment selling only an unmitigated blessing is also well known to me. I am likewise familiar with the class which considers installment selling sound enough in principle but greatly abused in practice.

Personally, I have no fault to find with the principle of installment buying and selling if the same credit test is applied to each specific sale that should be used in any other sound credit transaction. I mean the matter of selling only to solvent people with the obvious and known ability to liquidate any indebtedness incurred within the terms of the obligation. I know this, that many men of my association are carrying in their daily work a great burden of debt incurred by their inability to resist every passing desire to enjoy every comfort and most of the luxuries of life, to be paid for out of their future income. I don't believe that any individual can, over a long period, be prosperous, happy and contented with the spectre of debt always with him, and often before him.

The accumulation of personal debts leads to all sorts of demoralization in the moral fibre of citizenship. I have never known a case of a crooked clerk or official of a bank that did not start by going into debt or a desire to live beyond his means, and then the incurring of the debt, and later embezzlement, use of his employer's funds, punishment and disgrace-the price left for somebody to pay.

Of course, you understand in my consideration of these things, there is an entire absence of the Pollyanna attitude. My inherent dispositiotr, ffiJr' life's training and association have been along conservative lines and with conservative men.

Not long since f heard a definition of credit, which greatly impressed me, and here it is: "Credit is exactly like morphine; in the hands of those who understand its dangers as well as its benefits, in the time of emergency, it is a most helpful and useful invention, but either credit or morphine used habitually leads inevitably to the gutter."

You may have formed the opinion in liste.ring to me that I think at the present time, the year of our good Lord, 1927, that the United States of America is fairlv well saturated with credit. If you have formed that opinion, you have gauged me correctly. If you have formed the opinion that I believe, in a general way, there has been and i5 still too much disbursement of credit in every line of endeavof, you are again entirely right in your conclusion.

The use of credit is constructive, helpful and useful-a blessing to mankind-the abuse of credit is destructive, harmful and useless-leads invariablv to economic disaster.

San Fernando Club Elect Officers

At the regular monthly meeting of the San Fernando Lumbermen's Club on June 8, the following officers were elected to serve for the coming six months: President, W. Packman, Hammond Lumber Co., Van Nuys; Vice President, T. Nelson, Patten & Davies Lumber Co.. Reseda, and Secretary-Treasurer, Jack H. Fairfield, Hayward Lumber & Investment Co.. San Fernahdo.

The San Fernando Lumbermen's Club was formed in 1924 and, meets the second Wednesdav of each month at the

Black Cat Cafe, San Fernando. At its meetings, special speakers address the members on subjects of real interest to the lumber trade. Ladies' Night is held twice a year and is generally a dinner dance which are not only greatly enjoyed by the ladies but also by the lumbermen themselves.

The San Fernando Club is a very progressive organization and its membership includes the lumber dealers in the San Fernando Vallev.