Culture of debt driven by cars

[Barefootsies]

TEXT OF STORY

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 5 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 America 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 - 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 layaway plan.

Calder: What Ford asked people to do was to bring every week $5 - $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 re-invent 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.

http://marketplace.publicradio.org/d...03/09/pm_gmac/

[Ozarkz]

Wow that's interesting, Never knew that.

[kane]

I think the innovation they now need is a new car people want to buy. They have credit and often even offer very low or even zero percent interest. They just have so much more competition and they allowed themselves to get into the rut of selling only huge, expensive cars that they lost out on a lot of markets. They now need to create and market a line of cars the average person can afford. The days of many people being willing to pay 500, 600, 700 or more a month in a car payment are gone. If they can come up with some cool new cars that are affordable to the middle class they will be on the way to profit again.

[Barefootsies]

Originally Posted by kane

I think the innovation they now need is a new car people want to buy. They have credit and often even offer very low or even zero percent interest. They just have so much more competition and they allowed themselves to get into the rut of selling only huge, expensive cars that they lost out on a lot of markets. They now need to create and market a line of cars the average person can afford. The days of many people being willing to pay 500, 600, 700 or more a month in a car payment are gone. If they can come up with some cool new cars that are affordable to the middle class they will be on the way to profit again.

Agreed.

I think the U.S. government also needs to stop bailing them out, and put out an offer similar to what Germany is doing for cars over 10 years old. That would help stimulate the economy without the hand outs that generate little return for anyone.

[kane]

Originally Posted by Barefootsies

Agreed.

I think the U.S. government also needs to stop bailing them out, and put out an offer similar to what Germany is doing for cars over 10 years old. That would help stimulate the economy without the hand outs that generate little return for anyone.

I'm okay with them getting a loan as long as they show a solid plan to restructure that gives them a good chance of turning the company around and making it profitable again. But they can't just give them money and hope they do good stuff with it.

I have often thought if they offered some large reward for a car that can run on alternative fuels that would work well for the average person and be affordable you might have some smaller companies step up and produce something amazing.

[Barefootsies]

Originally Posted by kane

I'm okay with them getting a loan as long as they show a solid plan to restructure that gives them a good chance of turning the company around and making it profitable again. But they can't just give them money and hope they do good stuff with it.

I have often thought if they offered some large reward for a car that can run on alternative fuels that would work well for the average person and be affordable you might have some smaller companies step up and produce something amazing.

True. But I think it needs to be a two prong.

Germany is offering $3000.00 on every new car bought. You have to go have your 10 year old car crushed, and then go buy new, and you get a $3000.00 towards a new car. That would help stimulate the economy, plus get some money rolling to these car companies, and all the trickle down people.

[tony286]

think about its not just cars. Kids go to college they get all kinds of apps for credit cards. My wife's sister was 19 working part time at subway, gets a app in the mail. The kid filled it out honestly and they sent her a visa with a 10 grand line of credit. That's fucking criminal.

[kane]

Originally Posted by tony404

think about its not just cars. Kids go to college they get all kinds of apps for credit cards. My wife's sister was 19 working part time at subway, gets a app in the mail. The kid filled it out honestly and they sent her a visa with a 10 grand line of credit. That's fucking criminal.

wow. Have times have changed. In 1989 I graduated high school and started college. I was working part time at a small convince store. I got a credit card app in the mail and filled it out honestly. I was approved and given a $300 credit line. I actually had that card for about 10 years. After about 4 years of having it and not being late on any payment they raised my credit line to $500.

[kane]

Originally Posted by Barefootsies

True. But I think it needs to be a two prong.

Germany is offering $3000.00 on every new car bought. You have to go have your 10 year old car crushed, and then go buy new, and you get a $3000.00 towards a new car. That would help stimulate the economy, plus get some money rolling to these car companies, and all the trickle down people.

I like that idea. I think it is much better than just giving someone a tax credit if they buy a certain type of car.

[Barefootsies]

Originally Posted by kane

wow. Have times have changed. In 1989 I graduated high school and started college. I was working part time at a small convince store. I got a credit card app in the mail and filled it out honestly. I was approved and given a $300 credit line. I actually had that card for about 10 years. After about 4 years of having it and not being late on any payment they raised my credit line to $500.

Same here. Other than year. 1990.