The Borrowers
Culture of debt 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 GM sign on a steel beam above a highway (Chip Somodevilla/Getty Images)
More on Auto Industry, America's Financial Crisis
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Kai Ryssdal: The president's automotive task force is in Detroit today. Members are doing fun things like driving the new electric Chevy Volt, they're touring a Chrysler plant and somewhere along the way, they're trying to decide whether Chrysler and General Motors ought to get another $39 billion in government loans. On the face of it, GM is a car company. But it knows more about loans than you may think. It was pretty much built on borrowing -- our borrowing. This seems hard to believe right now, but there actually was a time when consumers frowned on going into debt for life's pleasures. That began to change about a hundred year or so years ago. And as we continue our coverage of this country's changing relationship with credit, Stephen Smith of American RadioWorks takes us back to the beginning.
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, radio 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, 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 Viroqua, WI, 03/10/2009
CORRECTION I misspoke when I said the book was written upon the 50th anniversary of the company. In fact, it was published in 1976. CIT has just now passed its century mark, however.
From Viroqua, WI, 03/10/2009
This story was factually inaccurate. GMAC was not the first one into the major auto finance business in 1919, CIT Finance beat them to it by three years:
"Mass production techniques soon brought products like automobiles and radios within purchasing range of the average consumer. In 1916, CIT teamed with the Studebaker automobile company to provide financing to car buyers, who put one-third down and paid the balance in eight monthly installments. The arrangement with Studebaker’s 4,000 dealerships nationwide was the first of its kind with such a wide reach."
http://www.cit.com/about-cit/centennial/the-cit-story/a-new-venture/index.htm
They went on to be the major financial partner with the Ford Motor Company, despite Henry Ford's reluctance. This can be further documented in the history of that venerable firm written to honor it's 50th anniversary: Full Faith and Credit, written by my father, William L. Wilson.
03/09/2009
Please edit your articles more carefully. "American's" and "it's credit arm" are incorrect. These should read "Americans" and "its credit arm", respectively -- no apostrophes.
From Los Gatos, CA, 03/09/2009
This is an informative article. Thanks.
One factor not mentioned, however, is that this kind of consumer credit system can work, but only if the goods are made domestically. When consumer spending, even based on debt, drives employment, wages etc. for middle class jobs in the US, the money is continuously recycled. When the money for manufactured goods all flows overseas, and the exports of the US are only services like, say, investment banking, things don't work so well. In fact, what they do is create teh crisis we have now, destroy the middle class, and accelerate the transfer of wealth from the middle class to the executive/banker class.
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