Dean Russell, formerly of the Foundation staff, is Professor of Economics at
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
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
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 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
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
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
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
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
$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
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.
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,
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
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?
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.
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 "
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.