When a dealer sells a piano on the instalment plan, he does not ordinarily give his customer at once full title to the piano; instead he "leases" it at a rental equal to the amount of the instalment payments agreed upon, with a further agreement that as soon as the payments under the lease equal the agreed price for the piano, then these payments shall cease and full title shall pass to the customer. By this simple device he protects himself in part against an unscrupulous purchaser who might, if he had full title, dispose of the piano, spend the cash that he received in payment, and leave the dealer only the doubtful privilege of suing him for fulfilment of his contract. Under the "lease" arrangement, the customer has no right to resell the piano until his own payments have been fully completed. It is, of course, recognized that a "lease" of this kind is essentially a legal fiction - just as the mortgage which conveys the title to the lender of money is a legal fiction. Nevertheless it is a fiction which is useful and indeed indispensable.

When a manufacturer of railroad equipment sells an order of millions of dollars' worth of cars or locomotives to a railroad, he protects himself in the same way. The title is retained in his own hands; the railroad merely "leases" the rolling stock with an agreement that on completion of the payment of a certain amount, the "lease" shall become inoperative and the title will be taken by the railroad. Thus the railroad company - just like the individual who buys his piano on the instalment plan - is unable to dispose of the cars. A point of greater practical importance is that, in case of receivership or financial embarrassment, the seller of the cars or locomotives can take them back if he chooses; they belong to him, not to the railroad.

There are some variations of this procedure but they do not affect its principle. The chief variation consists in the introduction of a financing company between the manufacturer of railroad equipment and the railroad company which purchases the equipment. The financing company takes upon itself the burden of paying the manufacturer, and receives title to the cars or locomotives. This title it may offer as security for an issue of equipment trust obligations in the form of bonds or notes.*

Equipment bonds enjoy an excellent reputation for safety: in fact, it is claimed that there has been no default on them since they have been in use. Even though a railroad may go into receivers, hands and become almost a total financial wreck, it cannot afford under any conditions to give up its rolling stock, and must therefore maintain its annual payments. For this reason it happens that the equipment trust bonds, even of railroads that are actually in receivership and that have defaulted on practically all of their other obligations, frequently sell on a basis of 5 to 6 1/2%. The equipment trust bonds of sound railroad corporations are in great demand and sell customarily on a basis of 4 to 5%.

* These equipment trust obligations may be called either bonds or notes almost indiscriminately; as they generally run for 10 or 15 years, it is perhaps a little better to speak of them "bonds".

It has been at times suggested that the same principle might be more widely applied, as for instance in selling machinery and other essential equipment to manufacturing corporations. The difficulty, however, arises that outside the railroad field, transactions which could be financed by equipment trust obligations are of comparatively small size, and could not easily be standardized in such a way as to make them appeal to the investing public. The average investor, even though he may be a bank official and well acquainted with financial practice, does not care to spend much time in analyzing and investigating propositions that are put up to him when he goes into the market to buy a security. He wants to get something that is standardized and familiar. It is only after years of active effort that a new financial method ordinarily can be introduced. For this very reason there is, perhaps, a real opportunity which some one will sooner or later seize, to apply the equipment trust method more widely and thus facilitate the sale of many kinds of machinery.