Chapter XII. Deferred Settlement And Credit Expansion.
The general bearing of settlement in trade, deferred by promises to pay in the distant future, has been several times referred to in preceding chapters; but its bearing upon the general welfare is so marked in many ways as to deserve more particular treatment. The special form by which one man becomes a purchaser on the strength of future abilities may have little importance in the total result, but some peculiarities of the different forms are worthy of mention.
A standing account without definite period of settlement easily becomes a temptation to waste, as well as a source of worry, when the account is extended. A friend remarks, “You never seem so well off as when you don't expect to pay for what you buy, although the reason may be that you can't pay for it.” The fact that the day of settlement may be indefinitely postponed makes the temptation to overestimate the chances of future ability. An account almost certainly insures the purchase of ordinary supplies without asking the price, and only frequent and complete settlement makes safe for ordinary people the expenditure of income through store accounts.
Promissory notes due at a definite time have less [pg 159] effect upon the imagination; yet payment a year hence seems always easier than payment now. Only repeated bitter experiences teach one to say, as I once heard an old gentleman, when offered a horse to replace his dead one without limit as to the time of payment, “That sounds very well, my friend, but it is a mighty hard way at the latter end.” Every farmer familiar with country auctions, with a year's credit upon purchases, sees the effect of such postponements in magnifying the value of articles purchased.
A note secured by chattel mortgage in the nature of the security is less extended and has the distinct hardship of future payment presented in the possible loss of the chattel offered as security. The chattel mortgage, therefore, becomes a favorite method for short time delays in payment, not only because the security is good, but because the full attention of the maker is given to the necessity of payment.
A most familiar form of deferred payment for farm property is the mortgage note, secured by a deed entitling the holder to take possession of the farm, or real estate of any kind, upon failure of the maker of the note to meet its conditions. This is esteemed the best possible security for payments long deferred, because the ordinary values of real estate in a growing country like ours increase rather than diminish. Except in cases of overvaluation from speculative investment, or in the settlement of a new country under misconception of its conditions, the security remains ample. And even then the lender has no greater risk than the borrower. Since final settlement by foreclosure of mortgage [pg 160] involves the law's delay, increased by the natural sentiment growing up about a home which has been occupied for years, such mortgage notes are only to a limited extent available in general commerce. In large measure they are likely to stand between the original purchaser and seller. The exception to this is found in investment of large trust funds, as with insurance companies and endowments of colleges and other benevolent institutions. In these cases a permanent investment, with stated income, is desirable, and mortgage notes with five to ten years' credit give better rates of income than long time bonds of great corporations or governments. The ease with which purchase is made by a mortgage tempts many a young man to promise more than he can fulfil. The weight of the farm mortgage is felt throughout the country, doubling the disaster of every deficient crop. Variations from the mortgage in deeds of trust and instalment contracts have essentially the same relation to credit, involve essentially the same burdens, and differ only in the legal forms for taking possession of the real estate in default of payment.
Where a company or a community defers payment for its purchases, it is said to issue bonds, which are simply formal notes, usually with attached notes, or coupons, for interest at stated times, issued by qualified officers under specific legislation. These are so easily understood and tested for their quality as to become a part of the general credit of the country. They gain a well understood market value, and pass from hand to hand with greatest readiness. This fact adds to the ease with which they may be issued, while the extended [pg 161] time, from ten to thirty years, increases both the convenience of possession and the readiness to issue. The people of a city do not hesitate to supply themselves with magnificent waterworks at the expense of the people a generation later. Thus municipal indebtedness is easy to contract, and the hard lesson of paying for dead horses is seldom effectually learned. More insidious still is the temptation to issue the bonds of a county for the building of a railroad, whose prospective benefit in adding to the value of lands is indefinitely magnified. A community of farmers already burdened by mortgages can be tempted into additional burdens in county bonds from expectation that a new railroad will double the value of their farms. The facility with which states and nations negotiate bonds is so well understood that it scarcely needs mention. Yet the burdens of taxation so grievously felt are often self-inflicted by the people who favor unbounded indebtedness. It is rarely the case that a well-to-do school district is not better off when it meets the cost of its schoolhouse by immediate taxes rather than to postpone payment by bonds.
The organization of a stock company involves a peculiar system of deferred payments, in that every holder of stock becomes in a sense both debtor and creditor. He is debtor to all his associate shareholders, and is also their creditor to the extent of his share. Stock certificates, like bonds, may pass from hand to hand with ease, and foster the innate spirit of speculation among a commercial people. The organization of a stock company, especially of a great trust, [pg 162] is made relatively easy from this fact, and in this way the general credit of a people is indefinitely extended. A prosperous corporation is likely to distribute the results of its prosperity by increased issues of stock, and the readiness with which the public accepts such issues makes natural, though vicious, the so-called watering of stock, familiar to all. The immediate object of watered stock in fairly managed companies is the immediate distribution among shareholders of any increased value without increased cost. As the farms along a line of railway may have doubled their value with no expenditure in improvements, so the railroad itself may have doubled its value in the possibility of earnings through the rapid development of settlements along the line. In ordinary ways this increased value will be shown in the market price of the stock, but an issue of more stock to the present holders of stock certificates will keep down the price of individual shares and yet give the benefit of the increased value to shareholders.