Automotive Financing and the Pursuit of Happiness
During the early 1920s many new high-tech goods were introduced in America, including the automobile and radio. The automobile, unlike the radio, brought a unique consumer challenge - How would the average person afford one?
It was for this reason automotive financing was born.
Today, buying things on credit has become routine in America, from computers to luxury cars, financing is how many Americans purchase things.
To better understand the history of automotive financing I turned to the Library of Congress and their massive collection of historical documents. In my research I came across an interesting bit of correspondence between L.Q. White, a Boston bank owner; Everett Sanders, the Secretary to the President of the United States; and D.R. Crissinger, Governor of the Federal Reserve.
Mr. White wrote to the White House to share his opinion that automotive lending was bad for America, believing automotive loans would burden consumers with monthly payments and reduce their ability to purchase other items, thereby impairing many other industries. Mr. White also believed that, contrary to law and policy then, many of the loans that had originated at local dealers were being purchased by corporations, bundled and then guaranteed by the Federal Reserve.
Excerpts from Mr White’s letter:
“My impression is on account of the tremendous loans that ever bank all over the country is extending to buyers of automobiles, that such loans are handicapping every other industry. The buyer of even the cheapest automobile obligates himself, for instance, to pay twelve notes maturing a month apart, $15 a month besides making an initial payment of perhaps $25 or $50 on a low priced car.”
“It seems to me that no industry should be allowed to employ excessive amounts of money thru the Federal Reserve by taking on this tremendous amount of small loans, which seems to be the manner of buying automobiles today. The very fact that the workman perhaps earning $20 to $25 a week is handicapped by having these payments to meet each month, certainly means a hardship for every other industry, and in time, would bring nothing but disaster to the automobile business as well as all other businesses.”
D.R. Crissinger, the Governor of the Federal Reserve, wrote in response:
“Discount companies find it extremely profitable because they have learned that the family will sacrifice other convenience, every other luxury and often necessities rather than give up the automobile. This makes of course the assurance of payments to discount corporations that handle the paper at a large discount from the selling of automobiles and the security is reasonably safe because the vendors of the automobile guarantee the loan in addition to his intense spirit to pay on the part of the buyer.”
This wasn’t the only time the Federal Reserve addressed automotive lending in the 1920s.