Henry Ford and the Triumph of the Auto Industry
Ford Had the Vision, Perseverance, and Ability to Make Cars for the Multitude
JANUARY 01, 1998 by BURTON FOLSOM
Anyone strolling by 58 Bagley Street in Detroit early in the morning of June 4, 1896, would have seen a strange sight: Henry Ford, ax in hand, was smashing open the brick wall of his rented garage. He had just started his first gas-powered car, and it was too big to fit through the door. Ford would tell the story over and over in the years following—the rain that night, the brief drive down Grand River Avenue to Washington Boulevard, and the seven years it took him to build his “quadricycle.” What was most remarkable, though, was not the event itself—others had already figured out how to build cars and make them run. What was remarkable was that Ford grasped the implications of a horseless carriage and had the vision, perseverance, and ability to make cars for the multitude of Americans. Many experts scoffed at the car. Woodrow Wilson called it the “new symbol of wealth’s arrogance.” But Ford dreamed of improving its quality, cutting its price, and selling millions of them to average Americans all over the country. Here are five key points to consider about Ford’s remarkable venture into making and selling cars.
1. Success for any entrepreneur in the emerging auto industry was not inevitable.
Ford’s path to building his car for the multitudes had many curves and hills, not to mention detours and dead ends. “No man of money even thought of it as a commercial possibility,” Ford later wrote. This meant problems raising money. His business manager, James Couzens, once said that Ford was thrown out of so many offices in Detroit that one time he just sat on the curb and wept. Even those who were making cars seemed only to want them for racing, and they always tried to get the highest price possible for each one. Thomas Edison and others promoted the idea of electric cars, but Ford believed in the gas-powered internal combustion engine. And he failed twice before he finally started Ford Motor Company in 1903. Right from the start Ford insisted on quality. “When one of my cars breaks down,” Ford wrote, “I am to blame.” He searched throughout the world for the best materials he could find at the lowest cost. Once he discovered the French were using vanadium steel—an exceptionally strong metal—in their racing cars. No American seemed to know how to make it, so Ford brought an immigrant to Michigan to build a steel mill and make some for him. “[T]hat is the kind of steel I want for the universal car I am going to build,” Ford said. Shortly thereafter, he was using 20 different kinds of steel in his cars—one for strength, one for elasticity, another for durability, and so on. From 1903 to 1908, Ford made several different cars, including the Model N and Model K, but none satisfied him completely. Customers began to buy his product, however, and sales jumped from about 1,700 cars in 1904-05 to almost 8,500 in 1906-07. That gave Ford the cash to start buying out many of his partners. By 1906, he had a majority of the stock in Ford Motor Company, and that winter he locked himself in a back room to build his universal car: the Model T. After more than a year of tinkering, the Model T was ready to sell. It turned out to be the big breakthrough Ford was looking for. It was not luxurious, but it took people from one place to another and did so cheaply and safely. Most early cars cost at least $2,000. Ford priced his first Model Ts at $850.
2. Ford was imaginative and willing to take risks.
With sales on the rise, Ford did something daring: he further slashed the price of a Model T—sometimes so steeply that he risked taking losses. “Our policy is to reduce the price, extend the operations, and improve the article,” Ford wrote. “You will notice the reduction of price comes first.” He explained, “We have never considered any costs as fixed. Therefore, we first reduced the price to a point where we believe more sales will result.” From 1908 to 1913, Ford knocked down the price from $850 to $600, and sales leaped from about 18,000 to 168,000. “Every time I reduce the charge for our car by one dollar, I get a thousand new buyers,” Ford rejoiced. Meanwhile, he kept improving his product. “We will rip out anything once we discover a better way,” he promised. One better way was his development of assembly-line production. He didn’t invent the assembly line, but he adapted it perfectly to car production. When Ford was selling only ten cars a day he would have a skilled mechanic complete most of each car from start to finish. As sales surged to almost 1,000 per day, that system became impossible. Ford and his staff decided to freeze the design of the Model T. Then they broke down the making of a car into dozens of small tasks. Each worker specialized in one of these tasks, such as attaching the engine to the frame or putting on the steering wheel. Workers stood next to each other beside a long conveyor belt and performed their specialized tasks until, one by one, the Model Ts were complete. They came off the belt every 30 seconds. The assembly line slashed the time needed to complete each car from about 12 ½ hours to 1 1/2. That enabled Ford to meet the crushing demand for Model Ts—sales were about 78,000 in 1911-12, before the assembly line and over 248,000 in 1913-14, after the assembly line was fully in operation. Naturally, Ford cut the price during this time from $690 to $550, which made it affordable to another layer of middle-class Americans. One argument against the assembly line was that the work was monotonous. Ford almost conceded this point when he said, “There is not much personal contact—the men do their work and go home.” Ford did keep his factories well lighted and ventilated, and he worked hard to prevent accidents on the job. But the work was not challenging. Partly as a result, he (and many other industrial employers) had high rates of turnover and absenteeism. Ford found himself spending $100 to train each new worker, though many stayed only for a month or two and then quit. Ford’s reaction to this problem was dramatic: in 1914 he doubled his minimum wage to five dollars a day and cut daily working hours from nine to eight. The experiment caught the industrial world by surprise. His competitors were startled; his workers were energized. Ford himself was ecstatic. Some of the most talented workers in Detroit lined up by the thousands to apply for jobs with Ford. He couldn’t hire as many as he would have liked because turnover and absenteeism almost disappeared overnight. No one wanted to lose his job. As a result, production surged and profits skyrocketed. Ford happily paid the higher wages and also cut the price of the Model T by over 10 percent in 1914, 1915, and again in 1916. With each cut, more and more of his workers could afford to buy the cars they were making. Ford was delighted to violate “the custom of paying a man the smallest amount he would take.” And yet “[t]here was . . . no charity in any way involved. . . . The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made.” Ford was so pleased that in 1922, when Model T sales began to top a million a year, he raised his minimum wage to six dollars a day. Meanwhile, he cut the price to about $300. With all of their manufactured steel, vulcanized rubber, and processed plate glass, Model Ts were selling at about 25 cents a pound—perhaps the best bargain in the industrialized world. Sales passed one million in 1920, and peaked at almost 1.8 million in 1923. At that time, well over half the cars on the roads were Model Ts, and Ford had become a billionaire. Not only did he put America on wheels, he changed the way businessmen priced their products and paid their workers. He had helped centralize the auto industry in Michigan and secured that state’s place in the nation’s industrial future. He was an American folk hero and a national celebrity. The mere presence of Henry Ford in a barbershop for a shave was an excuse for scores of locals to press their noses to the glass to get a good look at this man who had changed their world so profoundly.
3. The early auto industry, unlike the railroad business, was usually governed by the free market.
In political and economic philosophy, Ford did not consistently favor laissez faire, but his strong individualism usually put him on the side of the free market. He argued that private enterprise was the way to solve problems in America. “The welfare of the country is squarely up to us as individuals,” he said. “That is where it should be and that is where it is safest. Governments can promise something for nothing but they cannot deliver.” Ford himself, by contrast, was providing tens of thousands of jobs, all with good wages and only eight-hour days. Those people often shunned as second-class citizens did well with Ford. Blacks found the color barrier easier to cross at the company, and they were hired by the thousands. Ford also hired handicapped people whenever he could—including bedridden patients who happily screwed nuts and bolts together in mini-assembly lines in their rooms. Ex-convicts often found themselves with clean slates at the Ford Motor Company. Once, when driving to work, he saw a vagrant on the road. Ford eagerly picked him up and gave him a job in the factory. In this case, the man quit after six weeks, but Ford was at least content that he had given the man a chance. Ford relished the opportunity to compete for buyers in an open market. All he wanted was the freedom to operate as he thought best—to decide whom to hire, what to pay, what kinds of cars to make, and how much to charge. He expected to rise or fall on the basis of his decisions. He rose to the top because he made wise choices.
The railroad industry, by contrast, frustrated Ford because it was strongly regulated by the Interstate Commerce Commission. When he bought the Detroit, Toledo, and Ironton Railroad to bring supplies to his factories at Highland Park and River Rouge, he tried to “reduce our rates and get more business. We made some cuts, but the Interstate Commerce Commission refused to allow them! Under such conditions why discuss the railroads as a business?” Ford would just make cars instead. The early car industry had no such federal regulations, but it did have monopolists who wanted to use government to stifle competition. George Selden, for example, received a U.S. patent in 1879 for a gas-powered internal combustion engine. Although Selden never made or sold any cars, he argued that those who later did so were violating his patent rights. He sued for royalties and the lower courts upheld his patent. American car makers formed the Association of Licensed Automobile Manufacturers, paid Selden royalties of 1.5 percent per car, and determined who would be allowed to make cars. All American automakers except one joined the association. Always the individualist, Ford refused to join, refused to pay license fees, and refused to let other automakers tell him how to make his cars. He went to court and argued that Selden’s patent did not cover the modern internal combustion engines he was using. After long litigation, the courts eventually agreed with Ford. The monopoly was broken in 1910. After the Selden patent decision, Ford and the other automakers just naturally looked to market forces to solve their business problems. The building of roads and highways, for example, was urgent with the growing number of cars. Car taxes were only a small source of revenue for road building, so Ford made gifts of land and money for that purpose in Michigan. Other private groups built highways, raising millions of dollars from those who had the most to gain from good roads: car manufacturers, tire makers, and cement producers among others. The Dixie Highway, from Detroit to Florida, and the Lincoln Highway, from Indianapolis to San Francisco, are examples of highways largely built and operated by private groups.
4. Success in the auto industry meant satisfying consumer wants.
“It is strange,” Ford wrote in 1922, “how just as soon as an article becomes successful, somebody starts to think that it would be more successful if only it were different. There is a tendency to keep monkeying with styles and to spoil a good thing by changing it.” What Ford was ignoring here were the changes in auto technology that had been made after he froze the design of the Model T. By the early 1920s, for example, General Motors cars had automatic starters, hydraulic brakes, and balloon tires. William Knudsen left Ford for General Motors, and under his leadership the Chevrolet began to challenge the Model T. Even with sales slipping, Ford refused to change. His Model T still appealed to the purse, but not so much to the eye, ear, or back. The new Chevrolets were more stylish, less noisy, and more comfortable to ride in. As a Chicago woman wrote Ford, “My bones will not talk agreeably to one another” after a long drive in a Model T. What’s more, by 1924 the new Chevrolet had a water-pump cooling system, an oil gauge on the dash, a reliable ignition system, a foot accelerator, and a gas tank in the rear for safety and convenience. And the new Chevys came in all colors. The era of Ford dominance was over. In 1927, shortly after the 15 millionth Model T rolled off the assembly line, Henry Ford could no longer ignore the complaints from his dealers and the slump in sales. His response, however, startled everyone: he abruptly shut down his factories, laid off his workers, and went to work on a new car. For the next 18 months, Ford and his staff crafted his next creation—the Model A. The new car was exquisitely made and sold 1.7 million in 1929—which partly vindicated Ford’s entrepreneurship. One of his problems, however, was that General Motors was changing models each year to incorporate new technology and cater to fashions in style. Ford’s strategy of manufacturing a good car, putting it on the assembly line, and selling it almost unchanged for 15 years no longer appealed to American consumers. Ford, however, was stubborn and slow to change his ways. The sales of the Model A dropped steadily during the early 1930s, and Ford fell permanently behind General Motors in car sales. Even his development of the powerful V-8 engine in 1932 did not win him back most of his old customers.
5. The New Deal was the real undoing of Henry Ford.
A major push for a planned economy came from President Franklin Roosevelt after his election in 1932. He believed that more government was the solution to the Great Depression. One of his proposals was the National Recovery Act (NRA), which required American business to regulate itself through signed codes of behavior that would legally bind all companies within an industry. Competition would be almost completely eliminated. Under most codes, the industries would set production quotas, prices, wages, and work hours. The law also gave labor the right to organize and collectively bargain. As Ford said when the NRA was being prepared, the government “has not any too rosy a record in running itself this far.” As American industrialists rushed to Washington to comply with the NRA, Ford resisted and refused to sign any code. “I do not think that this country is ready to be treated like Russia for a while,” Ford wrote in his notebook. “There is a lot of the pioneer spirit here yet.” However, General Motors, Chrysler, and the smaller independents eagerly signed the Blue Eagle codes that, under penalty of fine and imprisonment, regulated all aspects of their businesses. Ford was astounded: his colleagues preferred stability and government regulation to competition and free trade. He was especially irritated when Pierre S. du Pont, the former head of General Motors, urged him at a party to sign the code. As journalist Garet Garrett has written, “But for the Ford Motor Company, it would have to be written that the surrender of American business to government was unanimous, complete, and unconditional.” Ford stood almost alone, defying the law, and pronouncing it un-American and unconstitutional. He needed a legal loophole to keep out of jail, and his lawyers found him one: he didn’t have to sign the auto industry code, he now argued, as long as he complied with its provisions. This he did with good humor. “The code minimum wage is hardly a good dole,” Ford jibed. Later he said of the code, “If we tried to live up to it we would have to live down to it.” No government bureaucrats would leaf through his books and tell him how to run his business. NRA chief Hugh Johnson and President Roosevelt, however, wanted government control as well as compliance. They tried to pressure Ford into signing the code, and when he refused they tried force. Ford would receive no government contracts until he signed—and with the large increase in government agencies during the 1930s, that meant a huge loss of business. When a Ford dealer’s bid on 500 trucks for the Civilian Conservation Corps was $169,000 below the next best offer, the government announced it would reject the bid and pay more because Ford refused to sign the auto code. Finally, in May 1935, the Supreme Court struck down the National Industrial Recovery Act, killing the NRA, and Ford again was allowed to compete for any car business he wanted to. Ford had little time to celebrate—he spent much of the rest of the 1930s and early 1940s trying to escape union organizers. Roosevelt signed the Wagner Act, which allowed unions to organize on terms that put employers at a disadvantage. Eventually, Ford Motor Company would be organized and Ford would lose much of his authority to set wages or working hours. Roosevelt’s New Deal had almost doubled the national budget. Somebody had to pay for the new government programs for farmers, businessmen, veterans, silver miners, youth, the unemployed, and many others. First, Roosevelt hiked the income tax on the rich with a marginal rate of 79 percent (later 91 percent). Next he supported the first federal taxes on cars, tires, and gasoline. Then he promoted the Wealth Tax of 1935, which instituted an inheritance tax of 70 percent on large estates. The first of these taxes was hard on Ford; the second was hard on all car owners; the third made it impossible for Ford to give his company to his only child, Edsel, or to Edsel’s children. The wealth tax captured Ford’s attention, if not his wealth. He was 72 years old and refused to turn over two-thirds of his estate to the government. His lawyers advised him that one way out of his tax problems was to set up the Ford Foundation. Gifts to foundations were tax-deductible, so Ford could dump his fortune in the foundation, put Edsel in charge of it, and thereby save $321 million in inheritance taxes and keep his business in the family. Ford’s maneuver preserved family control of Ford Motors, but it took his capital out of investment, froze it in the foundation, and put it, after his death, in the hands of the bureaucratic types he had fought all his life. Raymond Moley, a New Dealer who turned conservative, scoffed at the “projectitis” of the Ford Foundation and its “big and expensive staff of busy people who think up and sort out innumerable projects, to be bestowed with plenty of money upon specially created agencies or upon professors hard pressed to live on their academic salaries.” As historian Allan Nevins observed, “In a real sense, Henry Ford’s factory, his fortune, his life-work, had been socialized.”