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Autos spurred the credit boom

Cars manufactured by General Motors, which include Cadillacs, Pontiacs, GMC and Saab's, wait for buyers at a dealership in Los Angeles.

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TESS VIGELAND: So some of those college students we spoke with have had credit cards since high school. The positive spin, you learn credit responsibility early on. But whenever it starts, it's clear we have a love affair with borrowing. Another piece of evidence -- the two and a half trillion dollars the Federal Reserve says Americans now owe in consumer debt. And that doesn't even include mortgages. But a century ago the idea of "Buy now Pay Later" didn't exist, at least outside of maybe running a tab at the country store. That changed when Americans began another love affair, with the automobile. Stephen Smith of American Radio Works takes us through the history of credit.


Stephen Smith: Back in the 1910s and 20s factories around 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 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.

Music: Come away with me Lucille, in my merry Oldsmobile...

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 was really at 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 No. one automaker.

Music: The little old ford, it rambled right along, the little old Ford rambled right along...

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 to use debt to finance instruments like cars. And 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 into an account run by their local automobile dealer. And then when they had put 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 that well, maybe it's good to go into debt. Maybe it's good to have luxury items.

American's 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 the 1980s, it wasn't chrome on cars, it wasn't necessarily a new six-stroke engine. It's 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 it's 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.

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