You made that part of the record, did you?

Senator BENNETT. Yes, that is what I offered it for. I would like to have it back.

Senator DOUGLAS. The Dalmo statement that its bank rate financing is 6 percent is or is not accurate. If it is not accurate, then under a lending law Dalmo would be compelled to state what its true rate is. If it is accurate, I think it would be excellent to have a 6 percent rate compared with the prevailing rates. If you believe in competition, even though it may hurt, it is a good thing to have a comparative rate stated so that the buyer can be more informed.

All we are trying to do is to get a clear separation between the cost of the article and the cost of the credit. This permits the consumer to make comparisons on both, comparisons on the cost of the credit, comparisons on the price of the article. And if we assume that on the whole we have competition in the retail field-which I think is generally true-it would seem that if there is an effort made to change the price in order to compensate for a lower interest rate, this could be detected by the buyer by enabling him or her to make comparisons with prices in other stores.

All we are asking for is that the full truth should be known. The charge is made that this might hurt business. I cannot believe that the truth really hurts anyone in the long run. It compels businesses to conform to standards, and it is ultimately a deliverer rather than chainer.

In any event, Mr. Black, I want to thank you for coming down. Mr. BLACK. Thank you, very much, sir.

And, Senator Bennett, I consider it quite a privilege and honor. Senator DOUGLAS. I hope you get a good rest.

(The following was received for the record:)

Senator PAUL H. DOUGLAS,

U.S. Senate Office Building,

Washington, D.C.

JULY 20, 1961.

DEAR SENATOR DOUGLAS: I am enclosing a list of sources for my statement on the truth in lending bill, as requested. I am also enclosing a copy of my statement with the sources given in footnotes.

May I again thank you for the opportunity given me to testify.
Respectfully yours,

STATEMENT OF HILLEL BLACK, AUTHOR

HILLEL BLACK.

My name is Hillel Black. I would like to state from the outset that I am not an economist. I am a freelance writer and reporter and I make my living by writing books. My newest book is entitled "Buy Now, Pay Later." As a reporter, my main concern in writing this book was to examine in human terms the breadth and meaning of on-the-cuff living in the United States, what it is doing to all of us in concert, and how it affects our individual lives and the lives of our children. I would add that in my research I explored the theories of the academician as well as the more immediate reality of the debt sellers and buyers. This meant going down to the marketplace and talking and corresponding with hundreds of people from every section of the country. My research involved digesting Government reports, newspaper stories, business and consumer magazines as well as the testimony heard by two U.S. subcommittees. I would like now to report some of my findings.

A new enterpreneur has entered the American marketplace. Actually we have known him for a long time. In fact, we have been dealing with him ever since we purchased our first car or refrigerator or, for that matter, hairpins or girdles. This new entrepreneur is our local auto dealer, department store owner, or Main Street retailer. We once knew him as a seller of merchandise. What perhaps

many of us do not know is that merchandise in many instances no longer is his main item. The new item that he now wants to sell us is debt.

The sale of debt in the United States has become an awesome business. Today, one out of two Americans owe money for something they bought on time or cash they have borrowed. To put it another way 100 million Americans are currently in debt.1 Furthermore, many of them are virtually living on time. Babies are born on the installment plan, people go on African safaris and hunt polar bear and, if they outsmart the bear, have him stuffed, all through the flick of a credit card. Even funerals are paid for on what the English quaintly call the never-never.

2

The amount of money owed for such time purchases as cars, salamis, TV sets, furniture, personal loans, mink coats, and even candy come to more than $54 billion as we entered June 1961. This is more money in dollars than was spent by the Federal Government from the administration of George Washington through the second term of Franklin Delano Roosevelt. That $54 billion does not include mortgage payments.

Being in debt, I might add, is not new. The Babylonians, the Egyptians and the Romans extended credit. Even the Puritans on the Mayflower bought passage on an installment plan. What makes it different today is that we in midcentury America are witnessing a consumer credit explosion. Never have so many owed so much. And never has so much been paid by consumers for debt itself. The interest and finance charges that we are paying on consumer debt alone comes to $32 billion according to an estimate made not long ago by the Boston Better Business Bureau. This I would suggest is a most conservative figure. It has now reached the point where frequently more money is being made from the finance charges than from the sale of the merchandise. This rather startling development occasionally creeps into print.

Recently the Wall Street Journal' recorded the remarks of a leading merchandiser of men's wear who began instituting service charges on credit accounts in 1954. According to the clothing merchant his firm in recent years "has earned as much money from service charges on credit accounts as we have in our normal cash business. It's a source of income clothing merchants are foolish to ignore." Also recorded in the Wall Street Journal were the auto industry profit estimates for the first quarter of 1960. The estimates showed that out of the dealers' average profit of $70 per new car, $43 or more than half came from the financing charges.

Forbes Magazine informed its readers that a leading manufacturer of musical instruments has learned to make money from financing installment purchases of organs and the like. In 1957, the manufacturer formed a captive sales finance company. Forbes offers this exuberant quote from an executive in the firm : "We are making almost as much money from our financing business as we do from manufacturing and selling." "

I might add the boom in captive finance companies started in 1950 when the consumer credit explosion got underway. These captive finance companies are subsidiaries of large manufacturing and retail concerns. Their aim is twofold: To help finance their dealers and thus move goods and to reap the sizable profits that come from selling credit. The range of firms that have set up captive finance companies in recent years include a large manufacturer of TV sets and appliances, a leading maker of floor coverings and wall coverings and a large auto maker, to mention only a few.

Even many of the Nation's retail merchants are using merchandise as a tool to sell credit. William Whyte Jr., writing in Fortune, notes that some department stores are making more profit on the interest charges on revolving credit

1 New York Times Sunday magazine, article by Paul A. Samuelson, MIT economist, Aug. 28, 1960, p. 13; "The Powerful Consumer," George Katona (McGraw-Hill Book Co., 1960). p. 13; statement of American Industrial Bankers Association, consumer credit labeling bill hearings, 86th Cong., 2d sess., p. 744, 2d paragraph. Most of the above sources do not appear to include noninstallment credit such as single payment loans, charge accounts (according to finance professor, Jules I. Bogen, New York University, there are 20 million). credit cards (57 million). No doubt there is considerable overlapping here. One should also take into consideration the 110 million histories in the Nation's credit bureaus. Again the qualificaton should be made that not all of these are actve.

2 Board of Governors of the Federal Reserve System, monthly releases.

3 Information Please Almanac Atlas and Yearbook, 1961, "Receipts and Expenditures of the National Government" (in millions of dollars), p. 644.

4 Newspaper clippings not available.

The Wall Street Journal, first item in column headed "Business Bulletin," June 23, 1960, p. 1. Consumer credit labeling bill hearings, 86th Cong., 2d sess., p. 528.

than they are on the goods themselves. The most hardened creditmen are flabbergasted, he says, adding: "Department-store people don't quite have a guilty conscience on the subject, but when they start talking about high administrative overhead, the service to the customer, etc., only the humorless can keep a straight face." He goes on to quote one department store executive, who after closing the door, said: “It's fantastic. Eighteen percent a year Imagine it. We didn't expect they would all stay bought up, but if you want to know whether we like the plan, just ask us if we like money.""

One of the most interesting and in a way curious aspects of debt merchandising is the sale of debt to children. In fact it has reached the point where some merchants are carrying on vigorous sales campaigns to get youngsters as young as 12 to buy on time.

Here, in part, is how it is done. A disc jockey in Lancaster, Pa., would tempt his teenage listeners with this offer: Each youngster receives a free 45 L.P. record of a hit song. All the child has to do is request an application to join a local store's new program-a teenage credit account.

One merchant sells his on-the-cuff living to teenagers by promoting the plan with local school authorities and the Parent-Teachers Association. When the youngster joins the plan he receives a white honor charge card with the credit limit set at $25. If all goes well at the end of the first year he is given a silver charge card. At the end of the second year the teenager receives a gold card, he's recommended to the local credit bureau, and his limit is raised to $50. And all this can be accomplished without parental authority of any kind. It would appear that among the boons of living on time even our children can win status through debt."

Sometimes efforts to get children into the debt habit can be coated with irony. One pied-piper of debt in Missouri unhappily announced that his store had only 120 teenage credit accounts. He added ruefully: "We had a couple of accounts that bought nothing but candy."

99 10

Some

One of the unusual aspects of teenage credit is that unlike adult debt, the credit grantor generally has no legal way of forcing junior to pay up. Thus, if junior persists in being a deadbeat he usually is charged off to profit and loss. pied-pipers of debt, though, do not give up so easily. One credit manager calls on the parents and informs them that unless they pay their child's overdue bills their youngsters will be publicly exposed in court. If the parents insist that legally he has no case, the credit manager replies: "I know we can't win, but do you want your kid to have a court record?"

11

One problem credit managers have had to solve was the criteria they could use to decide which children would make good credit risks. Many teenagers, through part- or full-time jobs, have both the capital and capacity to pay their debts. But, asked the credit managers: How do we judge their credit character; that is, their paying habits? Unlike their parents who make up the 110 million credit histories in the Nation's credit bureaus, teenagers have simply not lived long enough to build up their own debtors' dossiers. So the Pied Pipers of debt had to search elsewhere to find whether children would pay back what they owed. One credit manager told me how he solved the problem.

"If the parents show a good credit record," he said, "we take a chance on the children. If their record is bad, then the child's record will be bad. Although we don't tell the kids why we reject them, they know it's because their parents owe a lot of money." "

According to the inexorable logic of these credit sellers, we are like the Jukes and Kallikaks who pass on our credit sins from generation to generation. One might question whether the rejected teenager always knows his parents are looked upon as credit bums. And one may further wonder, if the child does know, whether this is the healthy way to handle youngsters.

Since teenage debt is so recent an innovation—it didn't really get started until the late 1950's-credit managers are still experimenting with the solution to an important problem: How do we convince parents the debt habit is good for their children?

"Budgetism: Oplate of the Middle Class," Fortune magazine, May 1956, starting p. 133. • Interview with credit manager.

Speech by a credit manager before the 27th Annual Credit Management Division Conference of the National Retail Merchants Association, May 3, 1960.

Clippings not available. Belleve source Wall Street Journal.

"Interview with a union official whose job includes working in the consumer credit field. "Interview with a credit manager.

73079-61--10

A major selling point used to convince parents that their children should acquire the debt habit is to tell them that teenage credit teaches youngsters financial responsibility. As one credit manager said, it gives "young adults an early education in how to use credit, planning purchases, and assuming responsibility." Another has called teenage credit "living educational programs in money management." Said a third: "Its purpose is *** to promote their early appreciation of a good credit standing in their community." To sum up, teenage credit is not a business but a "community" service. But is it? 13

Perhaps one could find childhood debt justifiable if it taught youngsters the true cost of credit. But this lesson is ignored in the credit sellers appeal to both parents and children. For example, all that one program tells its young customers is: "The terms will be $2 weekly plus a small service charge to be paid for from their own allowance or earnings.' Not even a monthly percentage is quoted. Not only is it impossible for youngsters to calculate the true annual interest rates but the service charges may be greater than the charges applied against adult accounts.

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Here is how it may work. Revolving credit is the plan most frequently used in teenage time buying. The service charge for revolving credit usually amounts to 12 percent a month on the declining balance, or 18 percent simple annual interest. The minimum charges apply when the ceiling rate of 12 percent per month yields less than a certain amount. This means that since many teenage accounts cannot rise above $25, the teenager may have to pay the higher rates. Consumer Report " observed:

15

"In New York State, for example, the legal minimum charge is 70 cents a month. At that rate, a junior account of $25 would cost $8.40 a year in carrying charges; that's 33.6 percent in true annual interest terms. In Colorado the legal minimum is $10 a year, a 40 percent charge. In California and Florida the legal minimum is $1 a month. This comes out to $12 a year, or 48 percent in true annual interest for such an account. In Kansas the minimum is $15, or 60 percent at true annual interest. And in Montana the legal minimum is a generous $20 a year; on a $25 teenage account that amounts to an interest charge of 80 percent."

Thus, we have the unbelievable situation where interest rates of up to 80 percent have actually been legalized. One also can't help wondering whether parents would be so agreeable to allowing their children to learn so-called responsible money management if they knew that their youngsters could be paying between 33 and 80 percent for their credit education. But the "Pied Pipers" of debt are not concerned with a parent rebellion, since neither the parents nor the children could hope to figure out what teenage credit actually costs.

Along with this enormous pressure to get all of us into the debt habit, there is another disturbing factor. When it comes to knowing the cost of credit, the consumer is undoubtedly one of the most ignorant and easily deceived. We are almost completely incapable of shopping wisely when we buy on time. The irony is that in his own country the American consumer who buys on time is treated like an ignorant tourist in a foreign land. Incapable of even translating the value of the coin he uses, he readily accepts the first price given him.

If these seem like strong words, I need only refer to survey after survey that points up the consumer's abysmal ignorance of the cost of credit. One study published in the Journal of Marketing, October 1955, was made in the twin cities of Champaign and Urbana, Ill. Jean Mann Due, the author of the survey, reported: "Although the respondents readily answered questions relating to amounts of credit contracted, approximately two-thirds of the users of installment credit did not know the amount of the carrying charges or interest rate on their most recent installment purchase."

In the fall of 1959 the Survey Research Center of the University of Michigan conducted a nationwide study." 18 Prof. George Katona, the author of the Michigan study, noted: "Obviously, many people believed that the cost of installment buying is lower than it actually is." He added this significant comment: "On practically any item of knowledge or information we have studied, we find that high-income people, people with college educations, and people with personal experience in the matter studied are better informed than other people. But this finding is not sustained on the item of cost of installment credit."

13 Consumer Reports, May 1960, pp. 264-265.

14 Release issued by a store that sells teenage credit.

15 Consumer Reports, May 1960, pp. 264-265.

16 Statement by George Katona, Survey Research Center, University of Michigan, consumer credit labeling bill hearings, 86th Cong., 2d sess., starting p. 803.

William Whyte, Jr., writing in Fortune in May 1956, examined the budgets of 83 young couples in the $5,000 to $7,500 income bracket. The author observed: "With a few exceptions, the couples reveal themselves as so unconcerned with total cost or interest rates that they provide a veritable syllabus of ways to make $2 do the work of $1."

Finally, I need only refer you to the previous testimony before this very committee of William Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System and the financial expert in the United States. Mr. Martin noted that he too was personally confused in an attempt to figure out the cost of credit when buying on time.

Mr. Martin, of course, had a good reason to be confused when he bought on time. When the consumer buys now and pays later he will be at a total loss to find a standard finance or interest rate method quoted to him. Banks will use one method, department stores another, small loan companies a third. All these rates are deceptively lower than what the consumer in effect is truly paying. The consumer if he wants to figure out the cost of debt must be a mathematical wizard. I might add this occurs only when the consumer borrows or buys on time. For both business and government the cost of money is always quoted in terms of simple annual interest. This is the one yardstick by which the cost of debt can be compared. But the consumer is never told the cost of credit in simple annual interest.

This tremendous pressure to have us buy on time at a cost we can't calculate must be measured in another way. How does debt living affect our lives? What are some of the strains that are being put upon us? By the end of this year 125,000 families will have gone into bankruptcy." To put it another way, more families will go bankrupt in 1961 than did so during the depths of the depression. It has reached the point where a Chicago collection agency has actually set up an employment service for people who can't pay their bills. The employment bureau finds people second jobs so that they can pay off their creditors and still feed their families.18

The pressure of debt living has been further heightened by the bill collector, the shadow who always walks with debt. In fact, there is a new breed among us, the specialists in friendly anxiety. Let me quote just one of them. He is a former psychology instructor who is now a research director for a debt collection agency. He said, "You can't get away from the use of fear in collecting bills. We can't offer the debtor anything positive like a nice frosty cake. We can only offer relief from anxiety, and, therefore, the collector has to make sure that a certain amount of anxiety is present.”

I might add this gentleman belongs to a small group of psychologists who have anointed the credit industry with their special talents. Unbelievably we have actually reached the point where men trained to alleviate anxiety spend their time instilling it.

Sometimes, of course, fear is not enough to make people pay up. Then the debt collector must turn to the ultimate weapon, one which has caused economic destitution for thousands. That weapon is the wage garnishee. Under a wage garnishee the credit grantor gets a court order which forces the debtor's employer to turn over part or all of his wages to the creditor. Many employers find the paperwork too costly and simply fire the garnisheed debtor. No one knows just how many wage garnishments are filed in the United States each year. But the total must run into hundreds of thousands. In Chicago alone, over 58,000 wage garnishment suits were filed in 1959.20 Ironically, 130 years ago only 13.000 delinquent debtors were imprisoned throughout the United States. Then we had debtors' jails. Today we do not. It is fair to assume that in the America of the 1960's thousands and thousands of people will be impoverished because of the garnishee.

These figures, however, tell only part of the story. Perhaps it can best be summed up by the tragic tale of one man, William Rodriguez." The following actually took place on the weekend of February 5, 1960, in the city of

"The Consumer Bankruptcy Problem Today," a paper prepared for presentation at the 13th Annual National Consumer Credit Conference, Louisiana State University, Mar. 23, 1961. by Linn K. Twinem.

18 The Wall Street Journal, Oct. 13. 1959, p. 20, "Bill Collecting Company Uses Psychologist To Recover More Debts, Gain New Business."

Same source as footnote 18.

Credit Union Bridge survey.

Files of the Chicago Daily News and interview with Hary Schaudt, Daily News reporter who handled stories.