I used to carry happiness
Like a golden ball,
I had to walk so timidly
For fear I’d let it fall.
But someone snatched it from me
And threw it to the sky -
Now my arms are empty
There’s none so brave as I.
Elizabeth Hollister Frost
Source: The Outlook, May 23 1928
The spread of the personal loan department idea, moreover, will enable borrowers to snap up bargains which otherwise they might have been forced to let pass. A young couple, for instance, has a chance to buy a set of dining-room furniture at a ridiculously low figure, but have not enough cash on hand. A personal loan department would be glad to advance them the funds.
In discussing the immediate questions raised by the banking innovation, its economic and sociological significance probably has not received enough attention. This creation of what is really a new instrument of credit is, like the installment purchase plan, another encouragement to average men and women to go into debt and then work themselves out again. Old-fashioned economists have been railing against this tendency for many years. As far as we can see now, though, their objections have been disproved by experience. Professor Edwin R. A. Seligman, the Columbia University economist, who, with a corps of experts, investigated exhaustively the whole installment-buying question, said:
“Installment credit is beginning to do for the consumer what the gradual development of the commercial banking system has done for the producer. If the credit is restricted to the proper commodities, under proper management, it will gradually throw off its abuses and will stand forth as one of the most signal contributions of the twentieth century to the potential creation of National wealth and National welfare.” With this, most of the ablest economists are in agreement.
The personal loan experiment is interesting sociologically because of the confidence it expresses in the average man’s honesty. J. P. Morgan stated that character was the only really important collateral. The National City Bank evidently believes that the average worker possesses that collateral.
Source: The Outlook, 23 May 1928
The advantages to the borrower are even clearer. Attorney-General Ottinger, of New York State, has made a long investigation of the loan shark industry, and he has found that an uncomfortably large proportion of his fellow-citizens have been paying interest ranging from 14 to 36 per cent for loans which they could not, in most cases, have obtained except from gougers. Because of these fearful rates, the victims have often slumped deeper and deeper into debt. New York’s laws against usury are probably as stringent as they can be made—those of many other States are certainly much laxer—but the framing of these provisions is extremely difficult, their enforcement even more so. Personal loan departments may not drive Shylocks out of business entirely, but they will force them to confine their attentions to a class with which reputable institutions would not care to do business.
Although it has not limited rigidly the purposes for which loans will be considered, the National City Bank expects that most of them will be for medical and other emergency expenditures, home improvements, and property charges. The whole plan is in the experimental stage. Only experience will show definitely what types of loans are the sound-est and the most productive of further business.
The lending of money to pay for an operation, to take a typical case, some-times will benefit not only the patient but the physician. The excessively scrupulous man will not postpone necessary treatment because he cannot raise funds and will not accept charity services. Nor will there be as much excuse for the non-payment of a doctor’s bill by a less meticulous patient.
“Since you are in debt,” the doctor might say, “why not transfer your obligation to the personal loan department, which makes a business of lending, and pay me?”
Source: The Outlook, 23 May 1928
A Bank Taps a New Stratum of Customers
THE National City Bank, the largest institution in the United States, has opened a new era in banking by the establishment of a Personal Loan Department which will make personal loans without collateral to salaried men and women in amounts rang-ing from $50 to $1, 000.
Interest will be charged at the rate of 6 per cent. There will be no other charge for investigation or service, and the only guaranty required will be the signature of two responsible co-makers on the borrower’s note. One year will be required for repayment. Deposits will be made weekly, semi-monthly, or monthly in a compound interest account in order to accumulate the desired amount. Interest, compounded monthly, is paid on these deposits.
This is a long and important step in the democratization of banking service, a process which has been going on at a rapid pace for the last fifteen or twenty years, and which has been of great value to the banks themselves and to the new strata of clients.
The new department received a prompt and cordial welcome. Leading bankers and industrialists, the newspapers, and the public all showed their approval, the business leaders and the press by the warmth of their comments and the public by rushing to take advantage of the offer. Nearly a thousand men and women applied for loans the day the department opened.
Various benefits that will accrue to the National City Bank and its new clients are immediately evident. Leaving aside for a moment the question of the Personal Loan Department’s own current dollar-and-cent profits, the bank is sure to gain indirectly through the publicity given the plan, the good will of its borrowers, and the discovery of new customers for other departments. Charles E. Mitchell, the National City’s president, said frankly that he desired “to make closer contact with the people of New York City and, specifically, those individuals minded to thrift.” Already among the applicants to the Personal Loan Department the National City has uncovered a substantial amount of business for its other subdivisions. Unquestionably, many of the new borrowers will return later to lend money in the form of deposits.
Whether the department will pay for itself directly no one knows yet, although the National City believes that it will. The answer to this question will be an important, though not a decisive factor with other banks in considering whether or not to follow the National City’s lead. They will be pretty sure to do so if the department can pay its own expenses, or even run at a small loss. After all, the 6 per cent interest on the loans is only one of several joint products, education and the creation of good will being the most valuable of the others. If the interest alone will pay for all of the joint products, it is obvious that the good will and the education can be put down as clear profit.
Source: The Outlook, 23 May 1928
STOCKS declined about 5 or 10 per cent in October and it looked as though the depression in business was to be the dominant factor. The recession, though, was brief. Prices soon headed upward once more.
Since speculation was becoming rampant and foreign countries had taken all the money they needed, the Reserve banks started to contract the supply of credit by their open market operations and to raise its cost. They bought Government securities and, at the beginning of this year, raised rediscount rates to 4 per cent. Stocks kept rising, so they advanced – rediscount rates another half per cent. These increases brought about the fairly severe June liquidation, deflating prices almost 10 per cent and releasing more than $200, 000, 000 in funds from the market.
Rediscount rates were jumped to 8 per cent in July but the market refused to go down any further. Business was nourishing again and holders simply refused to sell. Before the end of the summer another rally had acquired such momentum that prices went to new high records.
Funds were needed to finance the rally and the stock market’s competition with business for loans forced in-terest rates to the highest levels they had reached in more than eight years. In July and at the beginning of this month, the call money rate soared to 10 per cent. Learned financial writers insisted that such rates should bring about deflation as a milder credit stringency had done in March, 1926, but the speculators who had bought stocks stubbornly refused to sell them. They held on for dear life even though the return on the securities they held was, in many cases, less than half the interest they were paying on the money they borrowed with which to buy them. The Federal reserve banks could not raise rates still further. To do so might hamper business or bring back the gold sent abroad a year ago.
Today the deadlock persists. No outside influence can be exerted safely to bring prices down. If they fall, they will fall of their own weight. Or, to use the most popular current metaphor—Nobody can kill the present market. It will have to commit suicide.
Source: The Outlook, 17 October 1928
THE most serious interruption to the stock market advance came in the early spring of 1926. The conditions which apparently brought it about are worth reviewing because they resemble in many ways those which have prevailed for the last few months.
There was no let-up in business activity. The records show that commerce and industry were making splendid progress in March while stock prices were falling 10 or 15 per cent. A shortage of credit was chiefly responsible. Business and speculation both had been making such large in-roads into the available supply of credit that the Federal Reserve banks raised their rediscount rates to 4 per cent and pumped funds out of the open market by selling Government securities. This squeeze in money induced speculators to dump their holdings.
Since the deflation in stock prices had released enough funds for business needs, the Reserve banks intervened again on the side of easy money and the stock market started another advance which continued, with only trifling set-backs, until last autumn.
In the meantime, two important changes had occurred. Business activity had begun to dwindle and the Federal Reserve authorities had used their power to bring interest rates down to the lowest point they had reached since 1920. This policy may have been prompted in part by the desire to stimulate commerce and industry, but the chief purpose was to release some of our gold to foreign countries, the most important of which either had just stabilized their currencies or were in the process of doing so.
Here were the two major influences on security prices pushing strongly in opposite directions. The phenomenon is neither an unnatural nor an unusual one, but the issue is seldom as clearly drawn as it was in the autumn of 1927.
Source: The Outlook, 17 October 1928
OBITUARIES of the “Coolidge bull market” may be premature but the long and persistent advance in stock prices that has lasted for four years has already become one of the major events in American financial history.
To the speculator who trembles when one of his issues drops five or ten points, its course may have seemed erratic at times, but a longer range view shows that the upward march has suffered only comparatively minor interruptions.
After the exciting post-war boom, the market mounted the toboggan near the end of 1919 and started a slide which lasted throughout most of the next year. In 1921 and 1922 prices recovered moderately but they slumped again in 1923 and the early part of 1924. It was in the spring and summer of 1924 that the “Coolidge bull market” got under way.
The first half of 1924 had seen something of a depression in business which was largely the result of unfavorable conditions in the agricultural areas. The Federal Reserve authorities have been criticized sharply for some of their recent acts but, at this time, they obviously chose the proper course. They pumped money into the open market by purchasing $500, 000, 000 worth of Government securities and emphasized the easy money situation by reducing rediscount rates from 4 1/2 per cent, where they had been established in 1923, to 3 per cent. The gold attracted by the high interest rates of previous years had widened the credit base to very comfortable proportions.
Aided by the Reserve policy, business threw off its depression and, by its activity, helped to justify higher stock prices, which soon materialized. The other forces working to boost prices were the growing supply of investment capital and an increasing preference for common stocks. The popularity of common stocks was undoubtedly accentuated greatly by Edgar Lawrence Smith’s book. “Common Stocks As Long Term Investments,” an inviting survey of the profits that had been made since the beginning of the century in high-grade junior securities. A furious burst of buying followed the re-election of President Coolidge but the event itself was probably not a major influence, except in that it prevented radical interference with business. Under any conservative President, the stock market’s history would probably have been the same.
Source: Outlook, October 17 1928