MONEY--MASTER OR SERVANT?
In December, 1920, business the country over was marking time. More
automobile plants were closed than were open and quite a number of those
which were closed were completely in the charge of bankers. Rumours of
bad financial condition were afloat concerning nearly every industrial
company, and I became interested when the reports persisted that the
Ford Motor Company not only needed money but could not get it. I have
become accustomed to all kinds of rumours about our company--so much so,
that nowadays I rarely deny any sort of rumour. But these reports
differed from all previous ones. They were so exact and circumstantial.
I learned that I had overcome my prejudice against borrowing and that I
might be found almost any day down in Wall Street, hat in hand, asking
for money. And rumour went even further and said that no one would give
me money and that I might have to break up and go out of business.
It is true that we did have a problem. In 1919 we had borrowed
$70,000,000 on notes to buy the full stock interest in the Ford Motor
Company. On this we had $33,000,000 left to pay. We had $18,000,000 in
income taxes due or shortly to become due to the Government, and also we
intended to pay our usual bonus for the year to the workmen, which
amounted to $7,000,000. Altogether, between January 1st and April 18,
1921, we had payments ahead totaling $58,000,000. We had only
$20,000,000 in bank. Our balance sheet was more or less common knowledge
and I suppose it was taken for granted that we could not raise the
$38,000,000 needed without borrowing. For that is quite a large sum of
money. Without the aid of Wall Street such a sum could not easily and
quickly be raised. We were perfectly good for the money. Two years
before we had borrowed $70,000,000. And since our whole property was
unencumbered and we had no commercial debts, the matter of lending a
large sum to us would not ordinarily have been a matter of moment. In
fact, it would have been good banking business.
However, I began to see that our need for money was being industriously
circulated as an evidence of impending failure. Then I began to suspect
that, although the rumours came in news dispatches from all over the
country, they might perhaps be traced to a single source. This belief
was further strengthened when we were informed that a very fat financial
editor was at Battle Creek sending out bulletins concerning the
acuteness of our financial condition. Therefore, I took care not to deny
a single rumour. We had made our financial plans and they did not
include borrowing money.
I cannot too greatly emphasize that the very worst time to borrow money
is when the banking people think that you need money. In the last
chapter I outlined our financial principles. We simply applied those
principles. We planned a thorough house-cleaning.
Go back a bit and see what the conditions were. Along in the early part
of 1920 came the first indications that the feverish speculative
business engendered by the war was not going to continue. A few concerns
that had sprung out of the war and had no real reason for existence
failed. People slowed down in their buying. Our own sales kept right
along, but we knew that sooner or later they would drop off. I thought
seriously of cutting prices, but the costs of manufacturing everywhere
were out of control. Labour gave less and less in return for high wages.
The suppliers of raw material refused even to think of coming back to
earth. The very plain warnings of the storm went quite unheeded.
In June our own sales began to be affected. They grew less and less each
month from June on until September. We had to do something to bring our
product within the purchasing power of the public, and not only that, we
had to do something drastic enough to demonstrate to the public that we
were actually playing the game and not just shamming. Therefore in
September we cut the price of the touring car from $575 to $440. We cut
the price far below the cost of production, for we were still making
from stock bought at boom prices. The cut created a considerable
sensation. We received a deal of criticism. It was said that we were
disturbing conditions. That is exactly what we were trying to do. We
wanted to do our part in bringing prices from an artificial to a natural
level. I am firmly of the opinion that if at this time or earlier
manufacturers and distributors had all made drastic cuts in their prices
and had put through thorough house-cleanings we should not have so long
a business depression. Hanging on in the hope of getting higher prices
simply delayed adjustment. Nobody got the higher prices they hoped for,
and if the losses had been taken all at once, not only would the
productive and the buying powers of the country have become harmonized,
but we should have been saved this long period of general idleness.
Hanging on in the hope of higher prices merely made the losses greater,
because those who hung on had to pay interest on their high-priced
stocks and also lost the profits they might have made by working on a
sensible basis. Unemployment cut down wage distribution and thus the
buyer and the seller became more and more separated. There was a lot of
flurried talk of arranging to give vast credits to Europe--the idea
being that thereby the high-priced stocks might be palmed off. Of course
the proposals were not put in any such crude fashion, and I think that
quite a lot of people sincerely believed that if large credits were
extended abroad even without a hope of the payment of either principal
or interest, American business would somehow be benefited. It is true
that if these credits were taken by American banks, those who had
high-priced stocks might have gotten rid of them at a profit, but the
banks would have acquired so much frozen credit that they would have
more nearly resembled ice houses than banks. I suppose it is natural to
hang on to the possibility of profits until the very last moment, but it
is not good business.
Our own sales, after the cut, increased, but soon they began to fall off
again. We were not sufficiently within the purchasing power of the
country to make buying easy. Retail prices generally had not touched
bottom. The public distrusted all prices. We laid our plans for another
cut and we kept our production around one hundred thousand cars a month.
This production was not justified by our sales but we wanted to have as
much as possible of our raw material transformed into finished product
before we shut down. We knew that we would have to shut down in order to
take an inventory and clean house. We wanted to open with another big
cut and to have cars on hand to supply the demand. Then the new cars
could be built out of material bought at lower prices. We determined
that we were going to get lower prices.
We shut down in December with the intention of opening again in about
two weeks. We found so much to do that actually we did not open for
nearly six weeks. The moment that we shut down the rumours concerning
our financial condition became more and more active. I know that a great
many people hoped that we should have to go out after money--for, were
we seeking money, then we should have to come to terms. We did not ask
for money. We did not want money. We had one offer of money. An officer
of a New York bank called on me with a financial plan which included a
large loan and in which also was an arrangement by which a
representative of the bankers would act as treasurer and take charge of
the finance of the company. Those people meant well enough, I am quite
sure. We did not want to borrow money but it so happened that at the
moment we were without a treasurer. To that extent the bankers had
envisaged our condition correctly. I asked my son Edsel to be treasurer
as well as president of the company. That fixed us up as to a treasurer,
so there was really nothing at all that the bankers could do for us.
Then we began our house-cleaning. During the war we had gone into many
kinds of war work and had thus been forced to depart from our principle
of a single product. This had caused many new departments to be added.
The office force had expanded and much of the wastefulness of scattered
production had crept in. War work is rush work and is wasteful work. We
began throwing out everything that did not contribute to the production
of cars.
The only immediate payment scheduled was the purely voluntary one of a
seven-million-dollar bonus to our workmen. There was no obligation to
pay, but we wanted to pay on the first of January. That we paid out of
our cash on hand.
Throughout the country we have thirty-five branches. These are all
assembling plants, but in twenty-two of them parts are also
manufactured. They had stopped the making of parts but they went on
assembling cars. At the time of shutting down we had practically no cars
in Detroit. We had shipped out all the parts, and during January the
Detroit dealers actually had to go as far a field as Chicago and
Columbus to get cars for local needs. The branches shipped to each
dealer, under his yearly quota, enough cars to cover about a month's
sales. The dealers worked hard on sales. During the latter part of
January we called in a skeleton organization of about ten thousand men,
mostly foremen, sub-foremen, and straw bosses, and we started Highland
Park into production. We collected our foreign accounts and sold our
by-products.
Then we were ready for full production. And gradually into full
production we went--on a profitable basis. The house-cleaning swept out
the waste that had both made the prices high and absorbed the profit. We
sold off the useless stuff. Before we had employed fifteen men per car
per day. Afterward we employed nine per car per day. This did not mean
that six out of fifteen men lost their jobs. They only ceased being
unproductive. We made that cut by applying the rule that everything and
everybody must produce or get out.
We cut our office forces in halves and offered the office workers better
jobs in the shops. Most of them took the jobs. We abolished every order
blank and every form of statistics that did not directly aid in the
production of a car. We had been collecting tons of statistics because
they were interesting. But statistics will not construct automobiles--so
out they went.
We took out 60 per cent. of our telephone extensions. Only a
comparatively few men in any organization need telephones. We formerly
had a foreman for every five men; now we have a foreman for every twenty
men. The other foremen are working on machines.
We cut the overhead charge from $146 a car to $93 a car, and when you
realize what this means on more than four thousand cars a day you will
have an idea how, not by economy, not by wage-cutting, but by the
elimination of waste, it is possible to make an "impossible" price. Most
important of all, we found out how to use less money in our business by
speeding up the turnover. And in increasing the turnover rate, one of
the most important factors was the Detroit, Toledo, & Ironton
Railroad--which we purchased. The railroad took a large place in the
scheme of economy. To the road itself I have given another chapter.
We discovered, after a little experimenting, that freight service could
be improved sufficiently to reduce the cycle of manufacture from
twenty-two to fourteen days. That is, raw material could be bought,
manufactured, and the finished product put into the hands of the
distributor in (roughly) 33 per cent. less time than before. We had been
carrying an inventory of around $60,000,000 to insure uninterrupted
production. Cutting down the time one third released $20,000,000, or
$1,200,000 a year in interest. Counting the finished inventory, we saved
approximately $8,000,000 more--that is, we were able to release
$28,000,000 in capital and save the interest on that sum.
On January 1st we had $20,000,000. On April 1st we had $87,300,000, or
$27,300,000 more than we needed to wipe out all our indebtedness. That
is what boring into the business did for us! This amount came to us in
these items:
Cash on hand, January $20,000,000
Stock on hand turned into cash, January 1 to April 1 24,700,000
Speeding up transit of goods released 28,000,000
Collected from agents in foreign countries 3,000,000
Sale of by-products 3,700,000
Sale of Liberty Bonds 7,900,000
TOTAL $87,300,000
Now I have told about all this not in the way of an exploit, but to
point out how a business may find resources within itself instead of
borrowing, and also to start a little thinking as to whether the form of
our money may not put a premium on borrowing and thus give far too great
a place in life to the bankers.
We could have borrowed $40,000,000--more had we wanted to. Suppose we
had borrowed, what would have happened? Should we have been better
fitted to go on with our business? Or worse fitted? If we had borrowed
we should not have been under the necessity of finding methods to
cheapen production. Had we been able to obtain the money at 6 per cent.
flat--and we should in commissions and the like have had to pay more
than that--the interest charge alone on a yearly production of 500,000
cars would have amounted to about four dollars a car. Therefore we
should now be without the benefit of better production and loaded with a
heavy debt. Our cars would probably cost about one hundred dollars more
than they do; hence we should have a smaller production, for we could
not have so many buyers; we should employ fewer men, and in short,
should not be able to serve to the utmost. You will note that the
financiers proposed to cure by lending money and not by bettering
methods. They did not suggest putting in an engineer; they wanted to put
in a treasurer.
And that is the danger of having bankers in business. They think solely
in terms of money. They think of a factory as making money, not goods.
They want to watch the money, not the efficiency of production. They
cannot comprehend that a business never stands still, it must go forward
or go back. They regard a reduction in prices as a throwing away of
profit instead of as a building of business.
Bankers play far too great a part in the conduct of industry. Most
business men will privately admit that fact. They will seldom publicly
admit it because they are afraid of their bankers. It required less
skill to make a fortune dealing in money than dealing in production. The
average successful banker is by no means so intelligent and resourceful
a man as is the average successful business man. Yet the banker through
his control of credit practically controls the average business man.
There has been a great reaching out by bankers in the last fifteen or
twenty years--and especially since the war--and the Federal Reserve
System for a time put into their hands an almost limitless supply of
credit. The banker is, as I have noted, by training and because of his
position, totally unsuited to the conduct of industry. If, therefore,
the controllers of credit have lately acquired this very large power, is
it not to be taken as a sign that there is something wrong with the
financial system that gives to finance instead of to service the
predominant power in industry? It was not the industrial acumen of the
bankers that brought them into the management of industry. Everyone will
admit that. They were pushed there, willy-nilly, by the system itself.
Therefore, I personally want to discover whether we are operating under
the best financial system.
Now, let me say at once that my objection to bankers has nothing to do
with personalities. I am not against bankers as such. We stand very much
in need of thoughtful men, skilled in finance. The world cannot go on
without banking facilities. We have to have money. We have to have
credit. Otherwise the fruits of production could not be exchanged. We
have to have capital. Without it there could be no production. But
whether we have based our banking and our credit on the right foundation
is quite another matter.
It is no part of my thought to attack our financial system. I am not in
the position of one who has been beaten by the system and wants revenge.
It does not make the least difference to me personally what bankers do
because we have been able to manage our affairs without outside
financial aid. My inquiry is prompted by no personal motive whatsoever.
I only want to know whether the greatest good is being rendered to the
greatest number.
No financial system is good which favors one class of producers over
another. We want to discover whether it is not possible to take away
power which is not based on wealth creation. Any sort of class
legislation is pernicious. I think that the country's production has
become so changed in its methods that gold is not the best medium with
which it may be measured, and that the gold standard as a control of
credit gives, as it is now (and I believe inevitably) administered,
class advantage. The ultimate check on credit is the amount of gold in
the country, regardless of the amount of wealth in the country.
I am not prepared to dogmatize on the subject of money or credit. As far
as money and credit are concerned, no one as yet knows enough about them
to dogmatize. The whole question will have to be settled as all other
questions of real importance have to be settled, and that is by
cautious, well-founded experiment. And I am not inclined to go beyond
cautious experiments. We have to proceed step by step and very
carefully. The question is not political, it is economic, and I am
perfectly certain that helping the people to think on the question is
wholly advantageous. They will not act without adequate knowledge, and
thus cause disaster, if a sincere effort is made to provide them with
knowledge. The money question has first place in multitudes of minds of
all degrees or power. But a glance at most of the cure-all systems shows
how contradictory they are. The majority of them make the assumption of
honesty among mankind, to begin with, and that, of course, is a prime
defect. Even our present system would work splendidly if all men were
honest. As a matter of fact, the whole money question is 95 per cent.
human nature; and your successful system must check human nature, not
depend upon it.
The people are thinking about the money question; and if the money
masters have any information which they think the people ought to have
to prevent them going astray, now is the time to give it. The days are
fast slipping away when the fear of credit curtailment will avail, or
when wordy slogans will affright. The people are naturally conservative.
They are more conservative than the financiers. Those who believe that
the people are so easily led that they would permit printing presses to
run off money like milk tickets do not understand them. It is the innate
conservation of the people that has kept our money good in spite of the
fantastic tricks which the financiers play--and which they cover up with
high technical terms.
The people are on the side of sound money. They are so unalterably on
the side of sound money that it is a serious question how they would
regard the system under which they live, if they once knew what the
initiated can do with it.
The present money system is not going to be changed by speech-making or
political sensationalism or economic experiment. It is going to change
under the pressure of conditions--conditions that we cannot control and
pressure that we cannot control. These conditions are now with us; that
pressure is now upon us.
The people must be helped to think naturally about money. They must be
told what it is, and what makes it money, and what are the possible
tricks of the present system which put nations and peoples under control
of the few.
Money, after all, is extremely simple. It is a part of our
transportation system. It is a simple and direct method of conveying
goods from one person to another. Money is in itself most admirable. It
is essential. It is not intrinsically evil. It is one of the most useful
devices in social life. And when it does what it was intended to do, it
is all help and no hindrance.
But money should always be money. A foot is always twelve inches, but
when is a dollar a dollar? If ton weights changed in the coal yard, and
peck measures changed in the grocery, and yard sticks were to-day 42
inches and to-morrow 33 inches (by some occult process called
"exchange") the people would mighty soon remedy that. When a dollar is
not always a dollar, when the 100-cent dollar becomes the 65-cent
dollar, and then the 50-cent dollar, and then the 47-cent dollar, as the
good old American gold and silver dollars did, what is the use of
yelling about "cheap money," "depreciated money"? A dollar that stays
100 cents is as necessary as a pound that stays 16 ounces and a yard
that stays 36 inches.
The bankers who do straight banking should regard themselves as
naturally the first men to probe and understand our monetary
system--instead of being content with the mastery of local banking-house
methods; and if they would deprive the gamblers in bank balances of the
name of "banker" and oust them once for all from the place of influence
which that name gives them, banking would be restored and established as
the public service it ought to be, and the iniquities of the present
monetary system and financial devices would be lifted from the shoulders
of the people.
There is an "if" here, of course. But it is not insurmountable. Affairs
are coming to a jam as it is, and if those who possess technical
facility do not engage to remedy the case, those who lack that facility
may attempt it. Nothing is more foolish than for any class to assume
that progress is an attack upon it. Progress is only a call made upon it
to lend its experience for the general advancement. It is only those who
are unwise who will attempt to obstruct progress and thereby become its
victims. All of us are here together, all of us must go forward
together; it is perfectly silly for any man or class to take umbrage at
the stirring of progress. If financiers feel that progress is only the
restlessness of weak-minded persons, if they regard all suggestions of
betterment as a personal slap, then they are taking the part which
proves more than anything else could their unfitness to continue in
their leadership.
If the present faulty system is more profitable to a financier than a
more perfect system would be, and if that financier values his few
remaining years of personal profits more highly than he would value the
honour of making a contribution to the life of the world by helping to
erect a better system, then there is no way of preventing a clash of
interests. But it is fair to say to the selfish financial interests
that, if their fight is waged to perpetuate a system just because it
profits them, then their fight is already lost. Why should finance fear?
The world will still be here. Men will do business with one another.
There will be money and there will be need of masters of the mechanism
of money. Nothing is going to depart but the knots and tangles. There
will be some readjustments, of course. Banks will no longer be the
masters of industry. They will be the servants of industry. Business
will control money instead of money controlling business. The ruinous
interest system will be greatly modified. Banking will not be a risk,
but a service. Banks will begin to do much more for the people than they
do now, and instead of being the most expensive businesses in the world
to manage, and the most highly profitable in the matter of dividends,
they will become less costly, and the profits of their operation will go
to the community which they serve.
Two facts of the old order are fundamental. First: that within the
nation itself the tendency of financial control is toward its largest
centralized banking institutions--either a government bank or a closely
allied group of private financiers. There is always in every nation a
definite control of credit by private or semi-public interests. Second:
in the world as a whole the same centralizing tendency is operative. An
American credit is under control of New York interests, as before the
war world credit was controlled in London--the British pound sterling
was the standard of exchange for the world's trade.
Two methods of reform are open to us, one beginning at the bottom and
one beginning at the top. The latter is the more orderly way, the former
is being tried in Russia. If our reform should begin at the top it will
require a social vision and an altruistic fervour of a sincerity and
intensity which is wholly inconsistent with selfish shrewdness.
The wealth of the world neither consists in nor is adequately
represented by the money of the world. Gold itself is not a valuable
commodity. It is no more wealth than hat checks are hats. But it can be
so manipulated, as the sign of wealth, as to give its owners or
controllers the whip-hand over the credit which producers of real wealth
require. Dealing in money, the commodity of exchange, is a very
lucrative business. When money itself becomes an article of commerce to
be bought and sold before real wealth can be moved or exchanged, the
usurers and speculators are thereby permitted to lay a tax on
production. The hold which controllers of money are able to maintain on
productive forces is seen to be more powerful when it is remembered
that, although money is supposed to represent the real wealth of the
world, there is always much more wealth than there is money, and real
wealth is often compelled to wait upon money, thus leading to that most
paradoxical situation--a world filled with wealth but suffering want.
These facts are not merely fiscal, to be cast into figures and left
there. They are instinct with human destiny and they bleed. The poverty
of the world is seldom caused by lack of goods but by a "money
stringency." Commercial competition between nations, which leads to
international rivalry and ill-will, which in their turn breed wars--
these are some of the human significations of these facts. Thus poverty
and war, two great preventable evils, grow on a single stem.
Let us see if a beginning toward a better method cannot be made.