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Theories of Inflation and Consumer Instaiment Credit

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Theories of Inflation and Consumer Instaiment Credit THEORIES OF INFLATION AND CONSUMER INSTAIMENT CREDIT DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Riilosophy in the Graduate School of The Ohio State University By JOHN RAYMOND KREIDLE, B. S., M. B. A, -X w X * * * The Ohio State University 1959 Approved by: Adviser Department of Business Organization ACKNOWLEDGMENTS I wish to express sincere appreciation to those who have helped in the organization and development of this study. It is impossible to list here the names of all who have given generously of their time and knowledge to make this investigation possible. I am particularly indebted to my adviser, Dr. Elvin F. Donaldson, who was a continual source of guidance and without whose patience and understanding this study could not have been possible. I wish to thank Dr. Theodore N. Beckman and Dr. Robert Bartels, members of my reading committee, for their valuable criti­ cisms and suggestions. My thanks go to my wife and to the typist for their unselfish spirit and cooperation in devoting their time to the completion of this dissertation. John R. Kreidle ii TABLE OF CONTENTS Chapter Pag® I. INTRODUCTION ......................................... 1 Historical Review of Instalment Credit Theories. Purpose of the Investigation. Scope of the Investigation. Method of Investigation. II. INFLATION ........................................... 19 Why We Are Concerned with Inflation. Definition of Inflation. Distinguishing Attributes of Inflation. Theoretical Explanation of Inflation. Monetary Approach to Inflation. Expenditures Approach to Inflation. Anti-inflation Policies. Monetary Control Measures. Fiscal Policy. Direct or Selective Measures. Measuring the Amount of Inflation. Summary. III. THE ROLE OF INSTALMENT CREDIT IN THE ECONOMY ........... 93 Meaning and Function of Credit. History of Consumer Credit. Nature and Meaning of Instal­ ment Credit. Demand for Instalment Credit. Analysis of Consumer Instalment Credit by Type of Credit. Supply of Instalment Credit. Sources of Funds for Instalment Credit. Analysis of Instal­ ment Credit by Holder. History and Financing of Consumer Instalment Credit Institutions. Summary. IV. THE GROWTH AND IMPORTANCE OF INSTALMENT CREDIT ........... 160 Instalment Credit and the Economy. Instalment Credit in Relation to Economic Aggregates. Rela­ tionship of Durable Goods Expenditures to Dispos­ able Personal Income and to Total Expenditures. Instalment Credit Extensions, Durable Goods Ex­ penditures, and Total Consumer Expenditures. Instalment Credit Outstanding and Disposable In­ come. Instalment Credit Repayments and Income. Credit Purchases of Automobiles and Other Durable Goods. Instalment Credit in Relation to the Over­ all Debt Structure. Summary. ill iv Chapter Page V, ANALYSIS OF INSTALMENT CREDIT AS AN INFLATIONARY FORCE . 192 Forces Which Cause Inflation. Reconsideration of the Traditional Analysis of Instalment Credit. Instalment Credit a Nonindependent Variable. Credit as a Countercyclical Factor. Sale of In­ ventories. Changing Attitude toward Debt. Eco­ nomic Factors. Instalment Credit Fluctuations an Insignificant Inflationary Force. Transfer Funds. Instalment Debtors' Financial Position. Beneficial Results of Instalment Credit Expansion. Summary. VI. CAUSES OF INFLATION FROM 1929 TO 1953 ................. 232 Economic Growth and Inflation. Investment Expendi­ tures as the Primary Cause of Inflation. Employment. Effect of Wages on Prices. Government Expenditures, Business Investment, and Consumer Investment. Consumer Durable Goods, Instalment Credit, and Prices. Relative Importance of Each Type of Invest­ ment Expenditure. Summary. VII. SUMMARY AND CONCLUSIONS ................................ 266 Economic Rroblem of Inflation. Role of Instalment Credit in the Economy. Growth and Importance of Instalment Credit. Relation of Instalment Credit to Inflation. Inflationary Developments Since 1 9 2 9. Conclusions. BIBLIOGRAPHY . 2o2 LIST OF TABLES Table Page 1. Income and Physical Output When Planned Investment Exceeds Planned Savings .............................. 62 2. Price Indexes, Monthly Averages, 1929-1958 87 3. Instalment Credit Outstanding by Type of Credit, 1 9 2 9 - 1 9 5 8 ............................................. 117 k. Instalment Credit Outstanding by Holder, 1939-1958 .... 129 5. Holders of Automobile Instalment Credit ................. 133 6 . Holders of Other Consumer Goods Instalment Credit ......... 13^ 7 . Holders of Repair and Modernization Instalment Credit . 136 8. Holders of Personal Loan Instalment Credit ............. 137 9 . Balance Sheet of All Commercial Banks ................... 1^1 10. Balance Sheet of Sales Finance Companies ............... l*+5 11. Sources of Funds Available to Four Major Sales Finance Companies, 1929-1955 1^8 12. Balance Sheet of All United States Credit Unions ....... 153 1 3 . Balance Sheet of Consumer Finance Companies ............... 155 11+. Relation of Consumer Durable Goods Expenditures to Disposable Personal Income and Total Consumption Expenditures, 1929-1958 .............................. 169 1 5. Instalment Credit Extensions in Relation to Consumer Durable Goods Expenditures and Total Consumer Expenditures, 1929-1958 ..... ........... ..... 173 16. Instalment Credit Outstanding and Disposable Personal Income, 1929-1958 ...................................... 178 v vi Table Page 17* Instalment Credit Repaid and Disposable Personal Income, 1929-1958 ..................................... l8l 18. Credit Purchasers of Automobiles and Other Durable G o o d s ................................................ 184 19. Net Public and Private Debt and Consumer Instalment Credit, 1929-1958 ............................... • • 186 20. Reasons for Borrowing from Consumer Finance Companies, Commercial Banks, and Credit Unions ..................... 218 21. Gross National Product and Consumer Price Index, 1929-1958 .......................................... 235 22. Employment and Consumer Price Index, 1929-1958 243 2 3 . Average Hourly Wages and Output Per Man-hours, 1929-1958 .......................................... 24? 24. Investment Expenditures and Consumer Price Index, 1929-1958 .......................................... 251 2 5 . Consumer Durable Goods Expenditures, Instalment Credit, and Consumer Price Index, 1929-1958 .................. 257 2 6 . Relation of Net Instalment Credit Change to National Income, Disposable Personal Income, and Total Invest­ ment Expenditures, 1929-1958 . ................. 262 LIST OF CHARTS Chart Page 1. Income Flows and the Money Market ......... 38 2. Planned Investment Exceeding Planned S a v i n g s ........... 60 3 . Price Indexes, Monthly Averages, 1929-1958 90 4. Consumer Instalment Credit Outstanding, 1929-1958 ........ 114 5. Other Instalment Credit Outstanding, 1939-1958 115 6. Sources of Funds Available to Four Major Sales Finance Companies, 1929-1955 150 7* Economic Aggregates and Instalment Credit, 1929-1958 . • . l6l 8. Consumer Durable GoodB Expenditures as Per Cent of Disposable Personal Income, 1929-1958 ................. 170 9 . Consumer Durable Goods Expenditures as Per Cent of Personal Consumption Expenditures, 1929-1958 . ....... 171 10. Instalment Credit Extended as Per Cent of Consumer Durable Goods Expenditures, 1929-1958 ................. 17^ 11. Instalment Credit Extended as Iter Cent of Consumer Expend itures, 1929-1958 .............................. 176 12. Instalment Credit Outstanding as Per Cent of Disposable Personal Income, 1929-1958 ............... * ......... 179 1 3 . Instalment Credit Repaid as Per Cent of Disposable Personal Income, 1929-1958 182 14. Total Debt and Consumer Instalment Debt, 1929-1958 .... 188 15. Type of Debt as Per Cent of Total Debt for Selected Years . 190 16. Gross National Product and Consumer Price Index, 1929-1958 ........................................... 23^ vii viii Chart Rage 17. Total Investment Expenditures, Gross National Product, and Consumer Price Index, 1929-1958 ................... 238 18. Employment and Consumer Price Index, 1929-1958 .......... 2^2 19* Total Investment Expenditures, Government Purchases of Goods and Services, Gross Private Domestic Investment, and Consumer Durable Goods Expenditures during Infla­ tionary Periods, 1 9 2 9 - 1 9 5 8............. 250 20. Consumer Durable Goods, Instalment Credit, and Prices, 1929-1958 256 21. Changes in Consumer Price Index, Consumer Durable Goods, and Instalment Credit, 1929-1958 ....... ........ 258 CHAPTER X INTRODUCTION Critical attention has been directed toward the fluctuations of instalment credit, as to whether the rapidly increasing volume of outstanding credit affects economic stability. It is questioned whether this credit contributes specifically to inflation by accelerating and expanding expenditures for automo­ biles and other consumer durable goods. It is wondered also whether contraction of consumer credit adversely affects the economy. Con­ cern is expressed that disorder in the financial mechanism and weak­ ness in market demand for automobiles and other durable goods might result from repayment of credit out of declining Income. In addition to such possible direct effects of instalment credit, apprehension is expressed also for some indirect effects transmitted to other sectors of the economy. Achievement of sound economic growth is regarded by some peo­ ple as a function of the regulation of consumer instalment credit. Confidence in such control is based on the assumption of a relation­ ship between consumer Instalment
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