Freeman

ARTICLE

The Last Billionaire

DECEMBER 01, 1959 by DEAN RUSSELL

Dean Russell, formerly of the Foundation staff, is Professor of Economics at Rockford College. This article is from a study he has recently made on the automobile and its impact on the American economy and government.

A man named Albert Strelow once passed up a large fortune because he thought the profits of Ford Motor Company were too small.

Strelow was a hard-working car­penter who had established a suc­cessful paint and carpenter busi­ness in Detroit around 1900. In 1903, he reconditioned an old wagon shop he owned, and rented it out for $75.00 a month to the newly-formed Ford Motor Com­pany as its first headquarters and factory.

The founders of that company had lots of ideas and plans, but not much cash. So they offered their landlord a 5 per cent interest in the company for $5,000. He took it.

The new company was success­ful from the start. Strelow got more than $15,000 in dividends over the next four years, plus an exceptionally high increase in the value of his stock. Then he heard about a promising gold mine in Canada. So he sold his 50 shares of Ford stock for $25,000—and bought into the gold mining ven­ture. As sometimes happens, the mining venture proved to be more glitter than gold, and Strelow lost his money. Some years later, he applied to the Ford Motor Com­pany for a job.

If he had held on to his stock for another 12 years until Henry Ford bought out his minority stock­holders, he would have received a total return on his $5,000 invest­ment of about $18 million.

A Detroit school teacher risked her savings of $100 in the new venture in 1903. When she sold her single share in 1919, she had re­ceived a total return of $355,000 on her investment.

A young clerk invested $1,000 in cash—plus a note for an addi­tional $1,400—and went to work for the new company. He used a small part of his dividends to pay off his note and to buy a few more shares of stock. After 16 years, he sold his stock for $30 million.

Nobody really knows how much Henry Ford himself got. At one time, he was offered a billion dol­lars for his company. By then, he had drawn many millions in divi­dends and salary, and had exten­sive other holdings.

Did He Really Earn It?

Can the effort and contribution of any one man really be worth a billion dollars to his fellow men? This writer casually put that ques­tion to 29 of his friends, associ­ates, and acquaintances. All of them are college graduates. All of them hold executive positions in various companies. The question was put to them in such a way that they had no idea they were being interviewed. In different ways and in different words, each of the 29 replied that no man could possibly be worth a billion dollars to his fellow men. Admittedly, 29 is a small sample, but it is here assumed that the result of the test generally represents the viewpoint of most business leaders in Amer­ica today. Perhaps their viewpoint is the correct one. Perhaps it isn’t. At any rate, the career of Henry Ford should be examined before a final decision is made. Just how did he manage to gain control of a billion dollars and more? Did he really earn it?

Henry Ford had already been in two unsuccessful automobile manufacturing ventures before 1903 and the founding of the Ford Motor Company. In none of the three ventures did he put up any actual cash. In each instance, he swapped his mechanical know-how and improved motor for an inter­est in the company—always a mi­nority interest—and went to work for the company on a salary basis.

In the third and successful ven­ture, Henry Ford and most of his partners were soon in strong dis­agreement on company policy. Ford wanted to use almost all of the company’s earnings for expansion. Most of the other stockholders fa­vored a more even split between expansion and dividends.

But most controversial of all was Henry Ford’s obsession with the idea that he could make a good car for $500 that would be bought by millions of Americans! That’s what he wanted the company to do. But in the early 1900′s, Ford’s vision of a mass-produced and low-priced car to put an entire nation on wheels seemed like a crazy idea to his partners and stockholders.

The controversy continued. So Ford decided that the best solution to the problem was to gain control of the company for himself. And that’s what he did.

Alexander Malcomson, the man who was Henry Ford’s equal part­ner in establishing the company, sold his 255 shares to Ford for $175,000. That was about seven times their original value. That purchase—added to his own original 255 shares—made Ford the majority stockholder in the 1,000-share company. Thus, in 1906, he became his own boss, and there­after did mostly as he pleased.

In 1919, after a suit by the mi­nority stockholders compelled him to pay bigger dividends, Ford de­cided to buy out the remaining stockholders and become sole own­er of the company. He did, and the company became a totally family-owned enterprise.

There may have been no Ford Motor Company without the origi­nal financial backing of Malcomson. That is a debatable proposi­tion. But this much is certain: There would have been no Ford Motor Company—and no Model T—without Henry Ford.

This study is not intended to deny in any way the vital contribu­tions of men like Edsel Ford, John and Horace Dodge, James Couzens, Walter Flanders, Norval Hawkins, Peter Martin, Harold Wills, Charles Sorensen, William Knud­sen, and the many others who de­voted their genius to the success of the Ford Motor Company. Henry Ford could not have done it without their help. But while acknowledging the vital part played by Ford’s partners and employees, this is primarily the story of Henry Ford himself. Was his contribution to the American people worth the billion dollars he got from them in profits? Just what did he do for that money?

New Uses for Old Ideas

Some of Ford’s critics claim that Henry Ford himself contrib­uted few, if any, truly new and original ideas to the development of the automobile. For example, they point out that Ford once de­feated a patent infringement suit against his company by proving that his automobile engine was basically the same engine that had been invented in France in 1860 by Jean Lenoir.

Who deserves the credit for the mass production and efficiency con­cept of an assembly arrangement that brought the work to the man, instead of the other way round? At the Ford Motor Company, that idea was developed into an art that astounded everyone who saw it. But as Ford himself wrote, "The idea [for a moving assembly line] came in a general way from the overhead trolley that the Chicago packers use in dressing beef." Actually, the basic idea had been used successfully more than a cen­tury before either the meat packers or Ford Motor Company adapted it to their particular needs. In fact, the original idea may well have been conceived by the Venetian shipbuilders who were "mass producing" boats in the thirteenth century.

Ford’s policy of taking a small profit on many units, instead of a large profit on a few units, had been profitably used by many pro­ducers in other lines long before Henry Ford began producing his Model T. And several of those earlier manufacturers were also aware that it’s good business to service the product you manufac­ture and sell.

Specialization, division of labor, and interchangeable parts were standard practices among Ameri­can gun makers long before Henry Ford was born. (The builders of the great cathedrals in Europe during the eleventh century were also familiar with those ideas.) And the first manufacturer who ever had trouble with a supplier of raw materials or parts was well aware that vertical integration—Ford’s program to own or control his sources of supply—may be profitable from several different viewpoints.

Operating Policies

According to Mr. Ford himself, he gained his success by basing his actions on these five ideas and principles:

I. He observed that the American people could use millions of cars.

2.                   It was obvious to him that a durable and inexpensive single model was necessary to meet that need and demand.

3.                   He decided that the needed mil­lions of vehicles could be pro­duced both cheaply and profit­ably by weaving together both new and old technological ele­ments into an industrial complex designed to mass produce the type of car he had in mind.

4.                   His actual experience soon con­firmed his belief that price re­duction would result in market expansion.

5.                   He was of the opinion that high wages would mean more cus­tomers and, as a result, more profits.

Whether or not Henry Ford contributed new ideas, or merely improved upon existing ideas, is not at all vital to this story. The important question is this: Why was he so much more successful than his early competitors who had full access to the same ideas and inventions?

Well, there were two primary reasons. First, he and his associ­ates applied and perfected all the above ideas (and many more) better than had ever been done be­fore. Second, Henry Ford had a vision that drove him on. He ac­tually wanted the American farm­ers and factory workers to own and drive their own cars. He dreamed of a world in which everyone would be prosperous and happy. As he said, he put service first and the profits just naturally followed.

It can’t be proved, but perhaps Ford’s vision was a more powerful incentive than his profits. At any rate, he often claimed it was. We are safe in assuming that if either the profits or the vision had fal­tered in the beginning, there would have been no Ford Motor Com­pany as we know it today.

The Model T

Let’s examine that vision—Henry Ford’s "crazy idea" that he could build a car so cheap and so good that millions of people would buy one. When he first talked about it, most of his listeners tended to dismiss him as a crack­pot. But as we know, Mr. Ford stayed with his idea. And his famous Model T made its appear­ance late in 1908.

In the beginning, the price was not $500 but $825. But even so, as the advertisements said with some justice, "No car over $2,000 offers more except in trimmings."

True enough, there were no trimmings—and the car wasn’t ex­actly beautiful to gaze upon. But it was simple to operate and re­pair, and it generally got you where you wanted to go. If there happened to be a good road handy, the Model T would operate just fine on it. But its specialty was rough roads, mud holes, ruts, and bridgeless streams—just the sort of practical and rugged vehicle de­manded by the road conditions of that time. And Henry Ford was right—the people began buying them by the thousands, then by the hundreds-of-thousands, and finally by the millions.

In 1909, the Ford Motor Com­pany produced and sold 10,607 cars. That was less than 10 per cent of the total number of cars produced and sold by the entire automobile industry that year.

By 1914, Ford had 42 per cent of the total business with 248,307 Model T’s. Meanwhile, his price had dropped to $440, with a promise to refund $50.00 of that price to all purchasers during 1915 if the company sold 300,000 cars during the year.

That goal was easily exceeded and the refunds promptly made. Anyone could buy a car for $390. And old but still serviceable Model T’s could be had for less than $100. Henry Ford’s crazy idea of a mass-produced and low-priced automo­bile was no longer considered crazy. His concept of an America on wheels was well on its way to reality.

$5.00 for Eight Hours

It was also in 1914 that Mr. Ford initiated his revolutionary policy of a minimum wage of $5.00 for an eight-hour working day.

The automobile workers had al­ways earned a higher wage than their counterparts in other indus­tries. If they hadn’t, they would never have left their old jobs in the first place—especially not the trained mechanics that the new industry had to have. But Ford’s $5.00 minimum was more than double the going rate!

The automobile workers had also generally worked shorter hours than employees in the older indus­tries. But Ford’s policy was an eight-hour day at a time when twelve hours was still the standard in many places.

The announcement of that revolutionary labor policy of Ford Motor Company caused a riot in Detroit. More than 10,000 men ac­tually stormed the plant in their frenzy to get jobs.

Also in 1914, the profits of the Ford Motor Company exceeded $30 million. Most of that belonged to Mr. Ford himself, and as ma­jority stockholder he controlled the disposition of all of it.

Here is what Henry Ford gave in return for that multi-million dollar profit. He produced an ex­cellent car for $390. He paid wages twice as high as his competitors. He cut the working day down to eight hours.

In 1921, a depression year, Ford produced and sold 845,000 Model T’s. That was almost 55 per cent of the total passenger automobile business. It was, of course, a better car than the one of 1914. The price was also lower—$325. And the Ford employees were earning higher wages. Henry Ford’s personal profit for the year was about $75 million.

In 1923, Ford produced more than two million cars and trucks. Every few seconds, a new Model T rolled off the end of that world-famous assembly line. But even so, Ford sales dropped to less than half of the total automobile busi­ness for that year.

In 1925, the Ford Motor Com­pany sold about 1.5 million cars—and its percentage of the total sales for the industry dropped closer to 40 per cent. In 1926, Ford’s per­centage of the business dropped to about 33 per cent, and the outlook was for a continued steady de­cline.

On May 26, 1927, Henry Ford produced his last Model T. After making 15 million of them, he stopped production and closed down his plants. Why?

Consumers’ Choice

The answer is simplicity itself. The American people had stopped buying them! They bought some, of course, but not as they used to. They were buying cars made by Ford’s competitors—Chevrolet, Overland, Dodge, Essex.

In an effort to hold his market in the mid-1920′s, Henry Ford chanted his magic formula once again. Raise wages, he said. And increase production, improve the product, and cut prices. It was done. For a short while during that period, the Model T "Runabout" was priced at $260.

That tried and true formula had always worked before. It had al­ways brought more sales and more profits, not less. It had made Henry Ford a billionaire. But this time, it didn’t work. After 1924, sales and profits continued down­ward. The consumers preferred to pay a higher price for a Chevrolet.

Ford’s declining profits soon turned into heavy losses. What had happened?

In the early 1920′s, Ford’s com­petitors had decided that the American people were willing to pay a higher price for a more styl­ish car, a closed car, a more com­fortable car, a car with a gear shift and similar mechanical im­provements. Mr. Ford disagreed, and stayed with his rough-and-ready Model T.

He was wrong and his com­petitors were right. The consumers said so, with their own money—and Henry Ford’s Model T was through. Later on, he came back with his Model A, but that is an­other story. (Ironically, the vast changes brought about by the Model T seem to have made the instrument of the change itself obsolescent!)

True enough, no one man was responsible for putting America on wheels and for perfecting ma­chines that enabled farmers all over the world to produce more in less time and with less toil. And no single person, however dedi­cated, deserves more than a frac­tion of the credit for creating completely new industries and changing the living and thinking habits of the people of an entire nation. It required the full time and best efforts of many men to supply the tools and know-how that enabled millions of workers to earn more by producing more, and thus to lead more comfortable and happier lives. But, unques­tionably, Henry Ford was the leader of the few thousands who do deserve the credit for it.

Was Ford’s leadership and con­tribution worth the billion dollars and more that he got in profits? Or did Henry Ford profit at the ex­pense and loss of his customers and the American people in gen­eral?

Voluntary Exchange

Well, first, he didn’t force any­one to buy his product. He couldn’t. Millions of free and in­dependent persons voluntarily chose to exchange their hard-earned money for a Model T, rather than to buy something else with it. In fact, they sometimes put their names on a list and waited many months for delivery.

Those purchasers of Model T’s were of the strong opinion that they profited by the exchange. That’s the only reason they bought them. And when they no longer considered the Model T a good buy, they bought the product offered by Ford’s competitors.

Beyond any question, the em­ployees of Ford Motor Company were sure that they profited by swapping their labor for Ford wages. There were hundreds of eager applicants for every avail­able job.

Ford’s dealers, agents, and sub­contractors profited greatly from their business with him. There was much competition for those Model T agencies. And many of the dealers became millionaires in their own right.

The Ford Motor Company was naturally one of the nation’s larg­est taxpayers, as well as the source of the earnings of hundreds-of thousands of other taxpayers. So the government certainly profited in many ways—including war pro­duction—from Ford’s efforts.

Everyone Gained

From a social viewpoint, Henry Ford was a pioneer in hiring Negroes, physically handicapped persons, and old people who wanted to work but couldn’t get jobs elsewhere. He also hired hun­dreds of probationary ex-convicts who otherwise would have been kept in prison. Certainly they profited. The American people in general also profited greatly when Henry Ford fought and defeated the "Selden patent" that once threatened to monopolize and ham­string the young automobile indus­try. The living and working con­ditions of industrial employees throughout the country (and in various foreign nations as well) were improved immeasurably when Mr. Ford gave the architect, Albert Kahn, free rein to express his revolutionary ideas about changing the dark and dismal fac­tories of the early 1900′s into the bright, clean, and airy places that are now the general rule. And we should never forget that Henry Ford offered a new car at the lowest price the world has ever known—$260.

By any meaningful and realistic test, Henry Ford earned every penny of his vast fortune. It was rightfully his to do with as he chose. It so happens that he chose to establish the Ford Foundation to give most of it away for the purpose of hospitals, education, and other similar projects for the general public.

We American people have now arranged our government and economy so that there can never again be another billionaire. In a democracy, we have the political right to do that if we want to. But that fact has no bearing whatever on whether or not the services of a person may be worth a billion dollars to his fellow men.

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December 1959

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