BUYING ON THE CUFF

Credit Weathered the Recession Well

AS every schoolboy knows, it was wildly inflated credit that brought on the 1929 crash. When consumer credit rose to a record $44.8 billion at the end of 1957, many an economist wondered uneasily whether history would repeat itself. Would credit, which had helped speed the postwar boom, bring on and accelerate an economic downturn? Now that the recession is waning, the answer is in. The credit structure not only surprised the experts but showed strengthening timbers that no one ever suspected it had.

As the recession picked up momentum in early '58, the fear was that installment buying would plummet and, with a wave of repossessions by finance companies, pull the economy down farther. Nothing like that occurred. Total U.S. consumer credit (including installment buying, charge accounts and personal loans) inched down to $43 billion in July, only 4% below its December high; installment debt, the biggest hunk of the total, dropped only 2.7%. Thus, credit continued to be a big support under the economy.

The remarkable way in which the U.S. consumer kept up his credit payments despite the recession contributed to economic stability. With a record total of $78.5 billion in savings accounts, he had a fat roll to draw on. With the resources at his command, plus unemployment compensation and other supplementary benefits, he kept up his credit payments while cutting back on new commitments. Says a Los Angeles banker: "The consumer is not as wild an individual as many thought. For the most part, he is serious about satisfying his obligations."

In areas hard hit by unemployment, repossessions (especially of autos) and delinquencies on installment payments naturally rose. But even they were not alarming. In Detroit, businessmen reported a "definite upsurge" in repossessions and mortgage foreclosures. In Worcester, Mass., where non-farm unemployment reached 10%, loan companies reported repossessions up from a normal .5% to nearly 2%. In Gary, Ind., dependent on steel, auto repossessions rose from five per 1,000 to 23.

But in most parts of the U.S., businessmen reported that repossessions during the recession were "insignificant." In the Midwest, says Vice President Keith Cone of Chicago's La Salle National Bank, "the rise in delinquencies and repossessions was just not alarming at all." By prodding the creditor to be more cautious in his lending and thus weeding out many a weak credit risk, the recession actually im proved collections in some places. Sanger Bros. Department Store in Dallas and one of San Francisco's biggest department stores reported that collections were better during the recession than before it. Said Emil J. Seliga, president of Chicago's Talman Federal Savings and Loan Association: "The line of delinquencies this year is no more than the last two years. Sometimes I almost pinched myself because it seemed too good to be true."

The thing that had the consumer pinching himself--and proved the real surprise of the recession--was the change in philosophy among creditors. In the '305, a man who fell a month or two behind in payments lost what he had bought on time. But banks, finance companies and stores now realize that what is good for the consumer is also good for them. To avoid repossessions they go out of their way to rearrange terms, give the borrower a better break. Chicago's Talman Savings and Loan announced in June that people who had had loans for two years and lost their jobs could skip their payments for up to six months.

Paradoxically, one of the great worries about credit, the little or no down payment required for purchases, actually turned out in many cases to be to the advantage of both consumer and creditor. A man who had bought a car with no money down and 36 months to pay had so little equity in the car that he was apt to say "Come and get it" if pressed too hard to pay. Result: many a creditor carried his jobless customers to save himself the trouble and cost of repossession--and usually got his money when the customer's lot improved. Says the vice president of a Cleveland bank: "Our psychology is different from what it was in the 19303. We haven't gotten panicky this time. If a man had a steady record and didn't go to Florida when he was laid off but came in and talked to us, we carried him until he got a job."

No one believes that the credit structure is earthquake proof. If the downturn had lasted six months longer, it might have shaken down many of the props that held up the credit structure.

But the recession showed clearly that credit is not the great danger to the economy that many people thought it was. After six months of declining, consumer credit turned around in August as people switched to buying more than they paid off. In effect, many a consumer wisely used the recession to pay off debts--and now is in shape to step up buying again.

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