The Credit System in the West

The Credit System in the West

W. Lacey Amy

Busy Man’s Magazine 1 October 1909

This magazine is presumably the parent of MacLean’s Magazine.
It is also the background to the "Luke Allan" novel The Westerner, 1923/drf

TO the query as to what had been the foundation for the great progress in the Canadian West, a student of the country would unhesitatingly answer: “the credit system.” And yet when questioned as to what was now doing as much as anything else to retard the growth of the country, the same man would answer in the same way. The business system that has been and is the all-prevailing feature of exchange in that country is credit.

It was not the trust of one man in another that made credit a success. It was the knowledge that the creditor was debtor to some other person and that barter was only possible under such a condition. It is not trust and confidence that makes credit still reckless, but the force of habit and the apparent inability to break it. Credit between man and man is almost as great as ever, although now everyone sees its disadvantages.

Until a couple of years ago all business was done on paper or on trust. Transactions involving thousands of dollars were carried on without the exchange of a cent or of only a few dollars. The country was new, settlers had little available cash, men had to live and supplies had to be procured. From crop to crop or for the first couple of years of a settler’s life there the merchants carried the people, the seller put the buyer in possession on paper payment. Credit was an absolute necessity. Bills would run for three or four years and yet be just as good at the end of that time as when incurred. Year after year the same farmer would buy his provisions without even explaining that he couldn’t pay the last bill. Then when he got the money from a good crop he would usually pay up and proceed to keep his credit good by running another bill. Without this accommodation the country could never have been settled.

But conditions have changed. Credit is not much more a necessity to the west than it is to the east. Still in the ordinary business it continues almost as strong as ever, the banks being the only ones to curtail reckless lending. Up to the winter of 1906 the banks were as free and easy credit-givers as were private individuals. Money was offered to every man with a fairly straight eye and any proposition short of a tram-car line to the moon. Men secured money when they didn’t need it, bought real estate in order to find a place for it, made their profits and returned the money—with a request for another loan. In 1906 the profits were irregular and after a few losses the banks began to use judgement. However, credit had got such a firm hold of the people that in many towns they seemed to know of no other way of doing business. Thus it continues to the present time, only a few of the smaller towns and villages having seen the inauguration of a cash system.

The extent of credit varies according to the district. In agricultural districts fed by small towns the merchants carry the farmers from crop to crop with non-payment in bad crop years. In ranching districts it is much worse. Ranchers may not visit their supply town more than once a year and often not that often. I know of several ranchers who “come in” only once in two years. As one old two year-variety rancher said to me, “its terrible the money you spend when you get to town.” In such a town ranchers will run bills for years. One rancher will cart out the supplies for a half dozen and the merchant may never see his debtor for several years. The result is that the amount in a merchant’s books will run to incredible amounts. In one city in Alberta, the proprietor of what would be called a small hardware store in the east had $40,000 on his books, and another store of the same kind in the same city was carrying $30,000. The slump of 1907 and 1908 forced them to a closer inspection of “charges” and the amounts were materially decreased.

Accounts are sent out only quarterly by many merchants and often at greater intervals, although this is rapidly changing. What I discovered in the fall of 1906 upon landing in the west was the quarterly account system prevailing in my line of business (newspaper). I started right in on monthly accounts and was met for the first few months by angry merchants wanting to know if I didn’t think them good for the money or was I so hard up that I had to collect every month. Fortunately I persisted and had the satisfaction of convincing them of the wisdom of monthly collections, many of them being displeased when their bills were not collected monthly.

Therein comes another feature of the credit business—that you can bill nine out of ten business men till you eat up the bill without getting any recognition. You have to make a personal call to collect. And the majority of those who owe you will have to figure from their bank book to see if there are enough funds to meet their checks. It is not an uncommon thing to have checks returned marked “no funds,” the maker merely saving in answer that he didn't think the bank would cash it, but he thought he'd risk it.”

Several attempts have been made to start a cash system in western towns but only a few have succeeded. Sometimes the jealousy of the merchants interfered, sometimes they will not trust each other, and sometimes the public itself rises in protest. A railway town is sure to be a strong credit town. Railwaymen are paid by check on the 15th of each month. Bills are always sent out in consideration of this date and more payments are made at the stores in the four days following pay day than during all the rest of the month. A railway man never pays cash. Invariably he pays for last month’s purchases out of this month's check. As a rule he sets aside so much to deposit in the bank, and the remainder is spread around in payment, the deposit never being touched however small a part of his indebtedness the remainder may cover. Thus a merchant may be omitted on pay day while the bank account grows, or while investments in real estate continue. It was a knowledge of the manner in which they were being held off while the banks or investments were receiving the money that banded many merchants together last year to demand quicker payments.

One of the schemes adopted to encourage cash buying was the offering of a ten per cent, discount for cash. And yet this had surprisingly little effect, the majority of the people preferring credit even for a month to a discount for cash.

When the discount was first spoken of in one city some of the merchants thought it was impossible to give that much. In spite of the high prices asked they claimed they would be losing money on such a discount. A man interested in bringing in the cash system visited a certain store in a city and was met by that argument given in all honesty. The man did not show the merchant, as he could have done, where he was making a profit as high as 200 per cent, and even more on some of his stock.

He argued, “What is the average length of time your accounts run—average in amount?” (for the large accounts run much longer than the smaller ones, as a rule).

“Oh, about a year,” answered the merchant.

“And what is money worth here?”

“Eight per cent.”

“At what do you figure your percentage of loss?”

“About three per cent or maybe more.”

“Now,” said the advocate of cash, “you argue that you would lose money on allowing a ten per cent, discount, whereas on your own figures credit is costing you eight per cent, for interest, and three per cent for loss, with all the extra cost of billing, a higher-paid bookkeeper, inability to take advantage of cash discount at all times, to say nothing of the worry. In all, fifteen per cent, would scarcely cover your credit system.” And the merchant had been so brought up to credit that he had never thought of it in that way.

Scarcely any man in the west knows what he is really worth nor within a wide margin. He may estimate himself as worth a hundred thousand, and he might have to borrow to buy a new hat—but the chances are he would run a bill for it. To do business in the west a man must have a large bank account or buy on credit. People expect him to give credit, and many a good business received mention in Dun’s bankrupt list during the past two years, only because the ready cash was not available. A man worth fifty thousand dollars can be forced into bankrupcy for as many cents.

In real estate deals the credit system or something similar is in force, although to a limited extent since the slump. Up to 1907 men were most reckless with their real estate speculations. A man bought with a five dollar bill and sold for another bill, the transaction being repeated a dozen times on a five-dollar bill. And yet each seller would probably be making a few thousand dollars. A speculator would buy an option for a week or a month. In the meantime he would sell, and sometimes two or three sales took place on options before the first option had expired. Or perhaps a man’s last cent might be expended entirely upon a re-sale before the second payment was due. In fact four-fifths of the real estate purchases were made with no prospect of a second payment being available unless another sale was made. Thus, it often happened that a man might make his first payment on property, the title to which was in the hands of a man who figured in a half dozen sales before. The last buyer might make all his payments in due course, and yet never secure the title to the land because some one of the previous half dozen buyers had failed in his payments. The credit system as carried out in this, led to some roguery, of which little was heard outside the west.

Small payments, and even notes only, would buy most valuable property. A company of eight young men purchased a quarter-section close to a town, by giving their notes only to the owner. It cost them $50 apiece to have the company formed and the land divided into lots. Not another cent did those men put up. The property was immediately put on the market and double the price of the land was realized in a month. And, strange to say, the title was handed over when the notes were given. Scores of instances of a similar transactions took place on a basis that would never be entertained in the east. At the present time hundreds of acres of British Columbia fruit lands are being sold from options only, the middleman being willing to stake all his money on his ability to dispose of the land, and the owner freely allowing the middleman to try it.

The hard times of 1907 is working a great change in the business of the west, and one that is already proving a fine thing for the country. Directly it has curtailed credit on account of the inability of the merchants to collect the bills they had allowed to run so long a time. The banks closed down on promiscuous money lending, and the merchant must pay his bills from his receipts. It was not the experience of others who attempted to do a credit business, it was not the arguments against credit, but the chilling knowledge that thousands of dollars were uncollected, that forced him to use the cash register instead of the day-book. Honesty in the speculator did not pay his store accounts. When his real estate deals did not pan out, he left town and all his debts; he would have paid if he could, and that was all the merchant got for his leniency.

But still the credit system abounds to an extent that should be understood by the Easterner who contemplates entering business in the west. More is required than sufficient capital to purchase a business. It is some time before the cash receipts will pay the expenses. He must remember that while he may have five thousand dollars of good debts on his books, there may not be five dollars in the till to pay the wages.

But then it is probable when that time arrives that he has fallen into the system in his own transactions. He will simply pay by running a bill.