Burton Folsom is senior fellow in
economic education with the Mackinac Center for Public Policy in Midland,
Michigan. This essay is adapted from his book Empire Builders (Rhodes and
Easton, 1998).
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.” []