Culture of debt was driven by GM
There used to be a time when Americans frowned upon going into debt. But historians say that changed nearly 100 years ago. Stephen Smith looks back on how our debt-driven society hit the gas with General Motors.
A sign for GMAC Mortgage Corporate Headquarters in Horsham, Pa. (William Thomas Cain/Getty Images)
More on Spending, Auto Industry
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Kai Ryssdal: Back in March, the President's automotive task force took a little trip to Detroit. Members did fun things like drive the new electric Chevy Volt. They toured a Chrysler plant. And they tried to figure out whether Chrysler and General Motors ought to get another $39 billion in government loans.
As we now know, two of Detroit's Big 3 got that money and billions more. Loans and direct investments they're still trying to pay back. Lost in a lot of the talk about the bailouts Chrysler and GM got this past spring was this: That tied up in the history of Detroit is a history of Americans' relationship with credit.
On the face of it, General Motors is a car company. But GM was pretty much built on borrowing. Our borrowing. This seems hard to believe two years into a credit crisis but there actually was a time in this country when consumers frowned on going into debt for life's pleasures. That began to change about 100 years ago, as Stephen Smith of American RadioWorks told us this past spring.
STEPHEN SMITH: Back in the 1910s and 20s, factories across the country were pumping out an unprecedented wave of new consumer products.
FILM ANNOUNCER: America, industrial miracle of the century! From all the states flow bounteously the products of forest, mine and field...
This vintage promotional film celebrates the flood of new durable goods pouring over American consumers: like washing machines, phonographs, radios and refrigerators. But historian David Farber says there was a problem. Big-ticket items were still too expensive for many middle-class Americans, and there was no such thing as Visa or MasterCard.
DAVID FARBER: There was no consumer credit in the beginnings of the 20th century. There were no credit cards at all. So smart entrepreneurs started to think through the problem: how do you get people to buy things that they can't afford with the money in their pocket?
Cash up-front was a particular challenge for middle- and working-class people who desired that popular new machine called the automobile. An average family would have to save for about five years to buy a car.
The merry Oldsmobile -- along with the Buick, and the Chevrolet and other cars -- was made by an innovative young company called General Motors.
Farber: General Motors invented the credit system. They created the modern methods of advertising and marketing. General Motors was really at the forefront of creating in many ways what we think of as modern consumer capitalism.
Here's how GM helped spawn the American way of debt. In 1919, GM was trying to catch up with the world's number one automaker.
Henry Ford's Model-T was plain, simple, and relatively cheap. It came in one color: black. To buy one, you paid cash up front. GM cars were more colorful and more stylish and more expensive. David Farber says GM gained on Ford by starting a credit war.
FARBER: General Motors creates automobile loans, 1919 to 1920. They create the General Motors Acceptance Corporation. And that allows people to buy more expensive cars by going into debt.
Historian Lendol Calder says the socially conservative Henry Ford scowled at GMAC's auto loan business.
Lendol Calder: He had older views about whether it was a good idea for Americans to use debt to finance instruments like cars. He was against it.
Instead of the new-fashioned installment plan, Ford offered customers the old-fashioned lay-away plan.
Calder: What Ford asked people to do was to bring every week $5 to $10 and deposit it in an account run by their local automobile dealer. And then when they had enough money in the account -- only then could they take delivery.
Henry Ford thought he knew the American consumer better than executives at GM. But David Farber says Ford couldn't quite see that attitudes about credit and debt were changing.
Farber: You had a country in some ways based on the virtues of avoiding luxury, avoiding debt, of being thrifty, and then suddenly in the 20th century, as manufacturers are able to produce so many goods, they begin to wrestle with the possibility, Well, maybe it's good to go into debt. Maybe it's good to have luxury items.
Americans gobbled up the newly available credit. By 1930, most durable goods were bought on the installment plan -- including more than two-thirds of all automobiles. Soon, Ford dealers were forced to offer auto loans as well.
After World War II, the consumer-credit business grew at a dazzling pace. By the end of the 20th century, the General Motors Acceptance Corporation had loaned out more than a trillion dollars to car buyers. GMAC expanded into home mortgages and other kinds of credit as well. Historian David Farber says that our modern way of buying and borrowing owes a debt to Detroit.
FARBER: Bottom line, when I look at what General Motors was able to do from the 1920s at least through 1980s -- it wasn't chrome on cars, it wasn't necessarily a new six-stroke engine. It was that they were inventive, and credit was one of their greatest inventions.
The question now is whether General Motors can reinvent itself. Both GM and its credit arm, GMAC, are struggling with staggering debts. Both companies are running on federal bailout money -- they're essentially borrowing their futures from the American taxpayer.
This is Stephen Smith for Marketplace.
Comments
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From Bossier City, LA, 12/28/2009
Debt, like things, is not bad when used properly. Through teachings of my parents and schools, I was taught not to spend more than I make. Unfortunately, a lot of people think they have to have everything right now instead of working towards achieving a goal or trying to keep up with those whom they do not know.
12/27/2009
Indeed, who taught the American consumer to buy a product they had lived without for so long? Highways didn't come about until after we had seen what the autobahn offered Germany (an ability to move tanks and troops from one coast to another, necessary for a war with the Soviets should it occur).
So why did city dwellers need cars? Why did rural people need to replace the horse? Who needed to commute long distance from the country to the city--or from state to state in a way not reliant on railroad tracks?
Did the product come first, and demand was created later? Or did the demand come first, and the manufactured solution second?
From Milan, MI, 12/25/2009
Sure, the ability for most people to buy stuff on credit is a large part of the "culture of debt." But a consumer buying goods that he or she will keep and use long after it is paid off is one thing; buying one, then trading it in for next year's model and using that trade-in value to pay off the loan is another. Who invented the "model year" and convinced so many Americans that they had to have a recent model?
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