§ 8. The chronic improvident borrower. Another type of necessitous, would-be borrower is the chronic improvident. Not only mental incompetents and drunkards, but many honest families live always near the border of want. It needs no general catastrophe, or no very unusual bodily or industrial accident, to reduce them to distress. Such persons and families, it must be remembered, are always outside of the normal loan market. They are not able to borrow enough to bring their rate of time-preference into uniformity with the market rate of interest. The kind and amount of security (pledges of capital) they have to offer is not acceptable, small loans to them involve such elements of risk and trouble, that ordinarily they can not borrow at perhaps double the prevailing market rate. Within their own economies, therefore, all things are adjusted to a high rate of time-discount. "When fortune frowns they too go to the usurer, taking with them the best pledge they can offer. An artist, now successful, tells that he and his wife have a peculiar affection for her engagement ring, because it paid their rent so many times-to the pawn shop at the beginning of each month, and back home again whenever any pictures were sold. Some struggling artists and inventors as well as gamblers and horsemen come to know the pawning value of every belonging - rings, stick-pin, watch, etc. In times of prosperity their saving takes the form of gold ornaments and diamonds (which make good pledges) as they dare not trust themselves to keep money until the time of dire distress. A struggling student of my acquaintance in New York walked twelve miles to exchange a Mexican dollar (his last coin) for forty-four cents with which to buy crackers. A very high rate of premium on present goods was involved in that action. The fact is that even the most improvident and ill-provided families have, involved in their domestic economies, a more or less definite rate of time-preference, and only when the pressure of present desire greatly increases, do they bring their scanty pledges to borrow money as the best way to adjust their incomes in accord with their time-choice.3

2 Such cases of dire necessity are in primitive communities usually relieved by a neighbor as a friendly duty, without charge, tho the borrower is under moral obligation not only to repay the loan but to render like friendly accommodation if it should be needed. This view long continued to be accepted as ethical, and charging a premium (interest) on loans was condemned by moral and religious codes. The Jews (and not they alone) retained the prohibition of "usury" among themselves, but permitted "usury" from strangers.

§ 9. Premium concealed in retail prices. The borrowing of goods without agreement to pay interest usually involves a premium on present goods. The high rate of time-preference among the chronically improvident is the foundation of the credit system in retail stores. In some cases merchants will not sell cheaper for cash than for credit, for fear of offending their main body of credit customers; but there are good reasons why such a difference should be made, and usually it is made if the buyer for cash quietly urges his proposition. In many stores there are two appreciably different prices, one for "slow pay," the other for "spot cash." Some stores specialize on the slow pay customers and sell on the instalment plan, assuring everybody, "Your credit is good here." If a bill paid at the end of the month is 5 per cent more than what may be called the fair cash price, the difference is equal to 60 per cent per annum on the month's average expenditure. This much is often paid by perfectly honest persons for the privilege of postponing payment. If a man with an income of $50 a month is always behind a month, and as a result pays 5 per cent premium on his purchases over cash prices, he is losing $2.50 a month, $30 a year, or 60 per cent of one month's salary, the amount which he is always in debt. Such a premium is paid only by the improvident, but that is a large class with recruits as well from colleges as from factories. Shopkeepers are forced to make this difference to earn the equivalent of interest on the capital thus invested, and to recover the costs of bookkeeping and collections, and the risk and loss of unpaid bills. The high rate paid by the purchaser becomes only a low net rate, on the average, to the shopkeeper. The economical thing for the customer to do would be to retrench expenses rigorously until he "gets $50 ahead" and is able to pay cash. He would be able to use this so as to increase his real income by $30 worth of goods a year; and meantime, and in any case, he could gain $2.08 a month by borrowing $50 at 10 per cent interest (42 cents a month) exorbitant as that rate seems, and paying cash for everything. The obstacle usually is weakness of will power.

3 To serve this class, public pawnshops have been established by the governments of many European cities, and by private benevolence in some cities of America.

The notoriously high retail prices paid by the poor even for cash purchases when made in very small quantities, is a penalty of the same kind for lack of a little capital. They buy a pound of sugar instead of a dollar's worth, a bucketful of coal instead of a ton at a time, etc., a practice costly of their own time and of the small shopkeeper's time who must get higher prices to make a bare living selling in that way. The time-premium outgo from the customer is usually not a corresponding time-premium income to the merchant, but merely pays for services and other store expenses.

Probably we should class as examples of the same type of loans, on a large scale, those made by governments in time of war. If the national territory, or the real or supposed national interests and honor, are threatened, the citizens often value them beyond any possible money-price. To win they are ready to sacrifice their lives, a fortiori they are ready to sacrifice a part of their material fortunes. The immediate need is large supplies to feed soldiers and to arm them with tools to burn, batter, and blow up the enemy. High rates of interest are offered by the government and large obligations are assumed for the future, to tempt its own citizens or those of foreign states to furnish the money to buy these supplies and instruments of destruction.