Internal Funds and Automobile Industry Investment: An Evaluation of the Seltzer Hypothesis

Discussion of the role of internally generated funds as a dynamic and influential determinant of investment decisions has been renewed lately in the macroeconomic investment literature. While there is a current revival, the hypothesis is not a new one. In the classic study of the financial history of eight leading American automobile manufacturers over the period 1910 to 1926, Lawrence H. Seltzer concludes that “the greatest part of the growth in their capital resources was derived from reinvested profits; and that this source accounts for much the greater part of their present invested capital.” He estimates that for the period through 1926 net aggregate reinvested profits were equal, on average, to almost 80 percent of the value of tangible invested capital.3 Seltzer suggests that this remarkably high percentage was the result of the unique situation of the automobile industry, although carefully pointing out that the general importance of internal funds may be greater than commonly realized.