For helpful discussions and comments I thank the editors, Lee Aiston, Jeremy Atack, Michael Bernstein, Michael Best, Lou Cain, Nancy Folbre. Jerry Friedman, Joan Underhill Hannon, Carol Heim, Dorene lsenberg, Jim Kindahl. Paul Lockard, Daniel Raff, Elyce Rotella, Lisa Saunders, Harry Scheiber, Helen Shapiro, Geoff Shepherd. Richard Sutch, and the members of the Economic History Workshop at the University of Michigan. Ann Arbor. All are naturally absolved of responsibility for any errors or omissions. I acknowledge with gratitude access to the collections of the Baker Library of Harvard Business School. Financial assistance was provided by a Faculty Research Grant of the Graduate School of the University of Massachusetts, Amherst. Joanna Piccirillo provided research assistance.Google Scholar

¹ N.A.F.C. (National Association of Finance Companies) News, 12 (Dec. 1929).Google Scholar According to these estimates, 1.85 million new cars and 1.09 million used cars were sold in 1919, of which 1.2 million new cars and 0.5 million used cars were sold on the installment plan. Using the estimates of households in U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, 1975), Series A350, p. 43,Google Scholar and assuming no household bought more than one auto, 7 percent of households purchased an auto with credit in 1919. By contrast, 5.0 million new and used cars were sold on installments in 1925 and, under the same assumption, over 18 percent of households therefore bought an auto on credit. Seligman's estimates of the extent of financing are somewhat higher. Seligman, Edwin R. A., The Economics of Instalment Selling (New York, 1927), vol. I, pp. 100–8.Google Scholar

² The estimate is from Hanch, C. C., “Benefits of Installment Selling,” American Bankers Association Journal 20 (03 1928). reprinted by N.A.F.C. for distribution to its members (N.A.F.C. Publications, Baker Library, Harvard University).Google Scholar

³ This is according to documents in Chandler, Alfred D. Jr, ed., Giant Enterprise: Ford, General Motors, and the Automobile industry (New York, 1964), p. 168.Google Scholar

⁴ The secondary literature is fairly consistent in its characterization of the development of auto credit as a marketing device. See, for example, Michelman, Irving S., Consumer Finance: A Case History in American Business (New York, 1966), p. 205;Google ScholarPhelps, Clyde William, Financing the Instalment Purchases of the American Family: The Major Function of the Sales Finance Company (Baltimore, 1954), p. 32;Google Scholarand Seligman, Instalment Selling, p. 48.Google Scholar The dominance of production over consumption motives in establishing sales finance companies is consistent with the theory of institutional change advanced in Galbraith, John Kenneth, The New Industrial State (Boston, 1967).Google Scholar

⁵ Examples of the allegations are in N.A.F.C. News 12 (Dec. 1928); Brown, Victor L., “Operating a Successful Independent Finance Company,” An Address Before the 6th Annual Meeting of the N. A. F.C., 1929 (N.A.F.C. Addresses, Baker Library. Harvard University);Google ScholarGrimes, William A., Financing Automobile Sales by the Time Payment Plan (Chicago, 1926), p. 108;Google Scholar and N.A.D.A., Sell Cars—Not Terms: 1926 Yearbook (St. Louis, 1926), p. 21.Google Scholar

⁶ One account of this episode is in Dauten, Carl, Financing the American Consumer (St. Louis, 1956), p. 54.Google Scholar

⁷ National Automobile Chamber of Commerce, “Automobile Manufacturing Conducted Almost Entirely on its Own Capital,” General Bulletin No. G-1024, Dec. 15, 1925 (Pamphlet File, No. 3, Baker Library, Harvard University).Google Scholar

⁸ Evidence on duration is from Merrick, Robert G., The Modern Credit Company: Its Place in Business Finacing (Baltimore, 1922), p. 32;Google ScholarMoulton, H. G., “Commercial Credit or Discount Companies,” Journal of Political Economy 28 (12. 1920), pp. 827–39;CrossRefGoogle Scholarand Grimes, Financing Sales, p. 27.Google Scholar

⁹ Evidence on interest charges is from Creekmur, John W., “More Floor Plan and Other Legal Problems,” An Address Before the 9th Annual Meeting of N.A.F.C., 1932 (N.A.F.C. Addresses, Baker Library, Harvard University);Google ScholarChandler, Giant Enterprise, p. 167.Google Scholar

¹⁰ A thorough discussion of the functions of sales finance companies is in Seidman, Walter S., Accounts Receivable and Inventory Financing (Ann Arbor, 1957). The impotence of usury laws was upheld in court case after court case in the 1920s and 1930s.Google Scholar

¹¹ This is the definition of time price in Grimes, Financing Sales, p. 48 and Seligman, Instalment Selling, vol. 1, p. 289. But some other, less clear, discussions seem to imply that the time price was simply higher than the cash price and the charges were all added to this higher base. See, for example, Michelman, Consumer Finance, p. 207.Google Scholar

¹² The standard was first announced in National Association of Finance Companies, “Resolution Adopted at the General Meeting, Dec. 1924, ‘Supplementing the Fundamental Principles for Financing the Sale of Passenger Automobiles Payable in Monthly Installments’” (N.A.F.C. Publications, Baker Library, Harvard University).Google Scholar

¹³ Under the alternative “no recourse” plan, if a buyer defaults, the sales finance company repossesses and resells the car and absorbs any remaining loss but the dealer has no legal responsibility. Since the dealer cannot then lose any money on buyer default, no dealer reserves are collected.Google Scholar

¹⁴ Hold-backs were a common practice in the early 1920s but by the late 1920s most sales finance companies held back nothing on new auto contracts and 5 to 10 percent on used cars. The extent of the hold-back depended upon the finance company's assessment of the likelihood of a particular dealer writing bad contracts; they could, therefore, vary among dealers of one product line. Ayres, Milan V., “Diversification and the Future of Financing,” An Address Before the 5th Annual Meeting of N.A.F.C., 1928 (N.A.F.C. Addresses, Baker Library, Harvard University). Note also that a sales finance company, then as now, user a dealer's retail contracts to retire the dealer's wholesale financing notes and so usually no money actually changes hands when the retail contract is sold to the finance company.Google Scholar

¹⁵ The figures are from Merrick, Credit Company, p. 33; Rasp, C. D., “Rebates to Dealers,” An Address Before the 6th Annual Meeting of N.A.F.C., 1929 (N.A.F.C. Addresses, Backer Library, Harvard University); and a sample contract filed in N.A.F.C. Publications, Baker Library, Harvard University.Google Scholar

¹⁶ In 1926 Milan Ayres asserted effective interest rates ranged from 15 to 40 percent; Ayres, Milan V., Installment Selling and Its Financing, A Report to the Economic Policy Commission, American Bankers Association, May 1926, p. 40.Google Scholar

¹⁷ The contract is the only sample filed in N.A.F.C. Publications (Baker Library, Harvard University).Google Scholar

¹⁸ The effective interest rate is computed assuming each monthly payment covers interest accumulated on the outstanding principal plus a payment to reduce outstanding principal. For example, if Mr. Harrington had borrowed $420 at 34.4 percent, the first monthly payment of $48.90 would cover interest in the amount $12.04 (420 times 0.344/12) and principal of $36.86. The second payment of $48.90 would cover interest of $10.98 [(420 minus 36.86) times 0.344/12] and principal of $37.92. The loan would be paid off after 10 months.Google Scholar

¹⁹ Phelps, Clyde William, The Role of the Sales Finance Companies in the Amercan Economy (Baltimore, 1952), p. 52. This source contains probably the most detail on the genealogy of the sales financing industry.Google Scholar

²⁰ Grimes, William H., The Story of Commerical Credit: 1912–1945 (Baltimore, 1946), p. 4.Google Scholar

²¹ Phelps, Role of Sales Finance Companies, p. 52.Google Scholar

²² Seligman, Instalment Selling, vol. 1, p. 43.Google Scholar

²³ Grimes, Story of Commercial Credit, pp. 24, 30, 58–60.Google Scholar

²⁴ Reprinted in Chandler, Giant Enterprise, p. 67.Google Scholar

²⁵ Grimes, Financing Sales, p. 33;Google ScholarNevins, Allan and Hill, Frank, Ford: Expansion and Challenge, 1915–1933 (New York, 1957), pp. 267–68.Google Scholar

²⁶ Nevins and Hill, Ford: Expansion and Challenge, p. 465. Finance companies were also established by the manufacturers of Pierce-Arrow autos and Packard autos, and the independently established Industrial Finance Corporation received a Studebaker contract.Google Scholar

²⁷ The estimate is from Seligman, Instalment Selling, vol. 1, p. 49.Google Scholar

²⁸ Moody's Manual of Investments: American and Foreign (New York, 1928).Google Scholar

²⁹ Precise estimates vary. See Epstein, Ralph C., The Automobile Industry: Its Economic and Commercial Development (Chicago, 1928), p. 164;Google ScholarKatz, Harold, The Decline of Competition in the Automobile Industry, 1920–1940, Ph.D. Dissertation, Columbia University, 1970 (Reprinted New York, 1977), pp. 15–18.Google Scholar

³⁰ Epstein, Automobile Industry, p. 39;Google ScholarSeltzer, Lawrence H., A Financial History of the American Automobile Industry (Boston, 1928), p. 53.Google Scholar

³¹ Epstein, Automobile Industry, p. 137; Seltzer, Financial History, p. 53.Google Scholar

³² A recent analysis is in Marx, Thomas G., “The Development of the Franchise Distribution System in the U.S. Automobile Industry,” Business History Review 59 (Autumn 1985), pp. 465–74.CrossRefGoogle Scholar Also Epstein, Automobile Industry, pp. 132–136.Google Scholar

³³ Grimes, Financing Sales, pp. 21–22; Seltzer, Financial History, p. 99.Google Scholar

³⁴ Ford's dealer policy is discussed in Nevins, Allan, Ford: The Times, the Man, the Company (New York, 1954), pp. 344, 403.Google Scholar

³⁵ The claim is made in Epstein, Automobile Industry, p. 140.Google Scholar

³⁶ Hewitt, Charles M. Jr, Automobile Franchise Agreements (Homewood, IL, 1956), p. 16.Google Scholar

³⁷ Franchise contracts are discussed in Marx, “Franchise System,” p. 466; Katz, Decline of Competition, p. 79.Google Scholar

³⁸ The cancellation clause is discussed in Macaulay, Stewart, Law and the Balance of Power: The Automobile Manufacturers and Their Dealers (New York, 1966), p. 11.Google ScholarSee also Hewitt, Franchise Agreements, pp. 24–25.Google Scholar

³⁹ Macaulay, Law and the Balance of Power, pp. 11–12.Google Scholar

⁴⁰ Estimates of monthly variation in sales are in Chandler, Giant Enterprise, p. 133;Google Scholar and Prescott, R. B., “Twenty-Five Years of Growth,” Automobile Trade Journal, 1 12 1924, pp. 94–95.Google Scholar See also Moran, Lee, “Automobiles—Big Business by Small Business Men,” in American Bankers Association, ed. Proceedings: Consumer-Instalment Credit Conference (New York, 1947), p. 61.Google Scholar

⁴¹ Grimes, Financing Sales, p. 20, argues the point.Google Scholar

⁴² Concerns over labor problems are recounrted in Chandler, Giant Enterprise, p. 134.Google Scholar

⁴³ Grimes, Financing Sales, p. 21.Google Scholar In 1923 one analyst estimated it would tie up $50 million of Ford cash if the company were to carry winter inventories on its books. Prentiss, Don C., Ford Products and Their Sale: A Manual for Ford Salesman and Dealers in Six Books (Detroit, 1923), pp. 424–25.Google ScholarN.A.F.C. estimated that about 75,000 G.M. cars and trucks were in dealers' stocks before the Spring 1923 buying season commenced; N.A.F.C. News, 18 (June 1929), p. 1.Google Scholar

⁴⁴ Epstein, Automobile Industry, p. 39.Google Scholar

⁴⁵ The claim was made by Creekmur, John W., “Floor Plan Problems,” An Address Before the 8th Annual Meeting of N.A.F.C., 1931 (N.A.F.C. Addresses, Baker Library, Harvard University).Google Scholar

⁴⁶ Seltzer, Financial History, pp. 53–54.Google Scholar

⁴⁷ It was no secret that this was the reason bankers to lend. See Sloan, Alfred P. Jr, My Years with General Motors (New York, 1963; reprinted, Garden City, 1972), pp. 354–55;Google ScholarMoran, “Automobiles”, p. 60.Google Scholar

⁴⁸ Macaulay, Balance of Power, p. 11, and Hewitt, Franchise Agreement, p. 25, both link dealership demand and the resulting power of manufactures as exercised through the franchise agreement.Google Scholar

⁴⁹ Epstein, Automobile Industry, p. 140; Hewitt, Franchise Agreement, p.65.Google Scholar

⁵⁰ The Ford episode is recounted in Seltzer, Financial History, p. 116; Chandler, Giant Enterprise, p. 13.Google Scholar

⁵¹ National Automobile Dealers Association (N.A.D.A.), Back to Selling: 1921 Yearbook (St. Louis, 1921), pp. 54–56.Google Scholar

⁵² The point is also made in Seligman, Instalment Selling, pp. 29–30; Seidman, Accounts Receivable, p. 15; N.A.D.A., 1926 Yearbook, p. 16.Google Scholar

⁵³ These borrowing ratios are cited in “The Rojtman's Tractor Race”, Fortune, 57 (Feb. 1958) pp. 106–11 ff., as the reason J. I. Case Company, an agricultural implements firm, established its financing subsidiary.Google Scholar

⁵⁴ See, for example, Ayres, Installment Selling, p. 43; N.A.D.A., 1926 Yearbook, pp. 18–19.Google Scholar

⁵⁵ Manufactures readily admitted they accepted lower finance charges. See Allen, Floyd A., “Trends and Policies in Modern Business,” An Address Before the 6th Annual Meeting of N.A.F.C., 1929 (N.A.F.C. Addresses, Baker Library, Harvard University),Google ScholarGrimes, Commercial Credit, p. 60; Hewitt, Franchise Agreements, p. 98.Google Scholar

⁵⁶ See for example, N.A.D.A., 1926 Yearbook, pp. 18–19.Google Scholar

⁵⁷ Manufactures viewed subsidies as smart business practice, not an illegal or underhandedtactic. Ayres, Installment Selling, p. 43; Seligman, Instalment Selling, vol. 1, p. 83.Google Scholar

⁵⁸ Brown, “Successful Independent”; Grimes, Financing Sales, pp. 67–73.Google Scholar

⁵⁹ The ratios are from Grimes, Financing Sales, p. 66; “Successful Independent” In 1934 borrowers paid trustee fees equal to 0.4 percent per year on the face value of the collateral, but the minimum payment was $1,000 per year so an issue of less than $250,000 incurred fees in excess of 0.4 percent. “Collateral Trust Agreements,” Proceding of the Group Meeting at the 11th Annual Meeting of N.A.F.C., 1934 (N.A.F.C. Addresses, Baker Library, Harvard University), p. 14.Google Scholar

⁶⁰ “Collateral Trust Agreements,” Brown, “Successful Independent.”, In 1922 borrowers paid 6 to 8.5 percent on collateral truct notes but 10 to 11 percent for bank loans; Merrick, Credit Company, pp. 15–16.Google Scholar

⁶¹ The connection between rates and Fed policy is made in Lewis, H. Bertram, “Tight Money and Time Sales,” Automobile Trade Journal and Motor Age (Feb. 1929), pp. 38–39ff.Google ScholarBrown, Victor L., “Financing Under Depression Conditions,” An Address Before the 8th Annual Meeting of N.A.F.C., 1931 (N.A.F.C. Addresses, Baker Library, Harvard University) urges N.A.F.C. members to continue lobbying the Fed for a change in discount policy.Google Scholar

⁶² For 1935 to 1937, however, G.M.A.C's profit rate was 5.9 percent, Universal-C.I.T. and C.C.C.'s profit rates averaged 7.5 percent, and the average profit rate for 26 independent sales finance companies was 8.7 percent; U.S Federal Trade Commission, “Motor Vehicles Industry: Summary and Conclusions”, Seventy-Fifth Congress, Third Session, June 5, 1939, p. 8.Google Scholar

⁶³ The accusations are in N.A.F.C. News, 12 (mid-Dec. 1928); Brown, “Successful Independent.”Google Scholar

⁶⁴ Allen, “Trends and Policies” Grimes, Financing Sales, p. 80;Google ScholarSims, Lee G., “The Local Company and the National Association,” An Address Before the 11th Annual Meeting of N.A.F.C., 1934 (N.A.F.C. Addresses, Baker Library, Harvard University).Google Scholar

⁶⁵ N.A.D.A., 1926 Yearbook, pp. 18–19.Google Scholar

⁶⁶ See the dealer accounts in N.A.F.C. News 12, (Dec. 1928).Google Scholar

⁶⁷ The claim is made in Ayres, Milan V., “Instalment Selling Through the Depression,” American Bankers Association Journal 23 (03. 1931), pp. 742ff;Google Scholar and Dauten, Financing, p. 61.Google Scholar

⁶⁸ The need for sales financing practices to move counter to sound banking practices if sales are to be smoothed over the business cycle is discussed in Busey, John L., “Time Payment Electric”, in American Bankers Association, ed., Proceedings, p. 130.Google Scholar

⁶⁹ The episodes are recounted in Nevins and Hill, Ford: Expansion and Challenge, pp. 105–13; Sloan, My Years, p. 8; Chandler, Giant Enterprise, p. 12.Google Scholar