The periodic depressions are more serious because they seem so vast as to be uncontrollable. Until the whole reorganization is brought about, they cannot be wholly controlled, but each man in business can easily do something for himself and while benefiting his own organization in a very material way, also help others. The Ford production has not reflected good times or bad times; it has kept right on regardless of conditions excepting from 1917 to 1919, when the factory was turned over to war work. The year 1912-1913 was supposed to be a dull one; although now some call it "normal"; we all but doubled our sales; 1913-1914 was dull; we increased our sales by more than a third. The year 1920-1921 is supposed to have been one of the most depressed in history; we sold a million and a quarter cars, or about five times as many as in 1913-1914--the "normal year." There is no particular secret in it. It is, as is everything else in our business, the inevitable result of the application of a principle which can be applied to any business.
We now have a minimum wage of six dollars a day paid without reservation. The people are sufficiently used to high wages to make supervision unnecessary. The minimum wage is paid just as soon as a worker has qualified in his production--which is a matter that depends upon his own desire to work. We have put our estimate of profits into the wage and are now paying higher wages than during the boom times after the war. But we are, as always, paying them on the basis of work.
And that the men do work is evidenced by the fact that although six dollars a day is the minimum wage, about 60 per cent. of the workers receive above the minimum. The six dollars is not a flat but a minimum wage.
Consider first the fundamentals of prosperity. Progress is not made by pulling off a series of stunts. Each step has to be regulated. A man cannot expect to progress without thinking. Take prosperity. A truly prosperous time is when the largest number of people are getting all they can legitimately eat and wear, and are in every sense of the word comfortable. It is the degree of the comfort of the people at large--not the size of the manufacturer's bank balance--that evidences prosperity.
The function of the manufacturer is to contribute to this comfort. He is an instrument of society and he can serve society only as he manages his enterprises so as to turn over to the public an increasingly better product at an ever-decreasing price, and at the same time to pay to all those who have a hand in his business an ever-increasing wage, based upon the work they do. In this way and in this way alone can a manufacturer or any one in business justify his existence.
We are not much concerned with the statistics and the theories of the economists on the recurring cycles of prosperity and depression. They call the periods when prices are high "prosperous." A really prosperous period is not to be judged on the prices that manufacturers are quoting for articles.
We are not concerned with combinations of words. If the prices of goods are above the incomes of the people, then get the prices down to the incomes. Ordinarily, business is conceived as starting with a manufacturing process and ending with a consumer. If that consumer does not want to buy what the manufacturer has to sell him and has not the money to buy it, then the manufacturer blames the consumer and says that business is bad, and thus, hitching the cart before the horse, he goes on his way lamenting. Isn't that nonsense?
Does the manufacturer exist for the consumer or does the consumer exist for the manufacturer? If the consumer will not--says he cannot--buy what the manufacturer has to offer, is that the fault of the manufacturer or the consumer? Or is nobody at fault? If nobody is at fault then the manufacturer must go out of business.
But what business ever started with the manufacturer and ended with the consumer? Where does the money to make the wheels go round come from?
From the consumer, of course. And success in manufacture is based solely upon an ability to serve that consumer to his liking. He may be served by quality or he may be served by price. He is best served by the highest quality at the lowest price, and any man who can give to the consumer the highest quality at the lowest price is bound to be a leader in business, whatever the kind of an article he makes. There is no getting away from this.
Then why flounder around waiting for good business? Get the costs down by better management. Get the prices down to the buying power.
Cutting wages is the easiest and most slovenly way to handle the situation, not to speak of its being an inhuman way. It is, in effect, throwing upon labour the incompetency of the managers of the business.
If we only knew it, every depression is a challenge to every manufacturer to put more brains into his business--to overcome by management what other people try to overcome by wage reduction. To tamper with wages before all else is changed, is to evade the real issue. And if the real issue is tackled first, no reduction of wages may be necessary. That has been my experience. The immediate practical point is that, in the process of adjustment, someone will have to take a loss.
And who can take a loss except those who have something which they can afford to lose? But the expression, "take a loss," is rather misleading.
Really no loss is taken at all. It is only a giving up of a certain part of the past profits in order to gain more in the future. I was talking not long since with a hardware merchant in a small town. He said:
"I expect to take a loss of $10,000 on my stock. But of course, you know, it isn't really like losing that much. We hardware men have had pretty good times. Most of my stock was bought at high prices, but I have already sold several stocks and had the benefit of them. Besides, the ten thousand dollars which I say I will lose are not the same kind of dollars that I used to have. They are, in a way, speculative dollars.
They are not the good dollars that bought 100 cents' worth. So, though my loss may sound big, it is not big. And at the same time I am making it possible for the people in my town to go on building their houses without being discouraged by the size of the hardware item."
He is a wise merchant. He would rather take less profit and keep business moving than keep his stock at high prices and bar the progress of his community. A man like that is an asset to a town. He has a clear head. He is better able to swing the adjustment through his inventory than through cutting down the wages of his delivery men--through cutting down their ability to buy.
He did not sit around holding on to his prices and waiting for something to turn up. He realized what seems to have been quite generally forgotten--that it is part of proprietorship every now and again to lose money. We had to take our loss.
Our sales eventually fell off as all other sales fell off. We had a large inventory and, taking the materials and parts in that inventory at their cost price, we could not turn out a car at a price lower than we were asking, but that was a price which on the turn of business was higher than people could or wanted to pay. We closed down to get our bearings. We were faced with making a cut of $17,000,000 in the inventory or taking a much larger loss than that by not doing business.
So there was no choice at all.
That is always the choice that a man in business has. He can take the direct loss on his books and go ahead and do business or he can stop doing business and take the loss of idleness. The loss of not doing business is commonly a loss greater than the actual money involved, for during the period of idleness fear will consume initiative and, if the shutdown is long enough, there will be no energy left over to start up with again.
There is no use waiting around for business to improve. If a manufacturer wants to perform his function, he must get his price down to what people will pay. There is always, no matter what the condition, a price that people can and will pay for a necessity, and always, if the will is there, that price can be met.
It cannot be met by lowering quality or by shortsighted economy, which results only in a dissatisfied working force. It cannot be met by fussing or buzzing around. It can be met only by increasing the efficiency of production and, viewed in this fashion, each business depression, so-called, ought to be regarded as a challenge to the brains of the business community. Concentrating on prices instead of on service is a sure indication of the kind of business man who can give no justification for his existence as a proprietor.
This is only another way of saying that sales should be made on the natural basis of real value, which is the cost of transmuting human energy into articles of trade and commerce. But that simple formula is not considered business-like. It is not complex enough. We have "business" which takes the most honest of all human activities and makes them subject to the speculative shrewdness of men who can produce false shortages of food and other commodities, and thus excite in society anxiety of demand. We have false stimulation and then false numbness.
Economic justice is being constantly and quite often innocently violated. You may say that it is the economic condition which makes mankind what it is; or you may say that it is mankind that makes the economic condition what it is. You will find many claiming that it is the economic system which makes men what they are. They blame our industrial system for all the faults which we behold in mankind generally. And you will find other men who say that man creates his own conditions; that if the economic, industrial, or social system is bad, it is but a reflection of what man himself is. What is wrong in our industrial system is a reflection of what is wrong in man himself.
Manufacturers hesitate to admit that the mistakes of the present industrial methods are, in part at least, their own mistakes, systematized and extended. But take the question outside of a man's immediate concerns, and he sees the point readily enough.
No doubt, with a less faulty human nature a less faulty social system would have grown up. Or, if human nature were worse than it is, a worse system would have grown up--though probably a worse system would not have lasted as long as the present one has. But few will claim that mankind deliberately set out to create a faulty social system. Granting without reserve that all faults of the social system are in man himself, it does not follow that he deliberately organized his imperfections and established them. We shall have to charge a great deal up to ignorance.
We shall have to charge a great deal up to innocence.
Take the beginnings of our present industrial system. There was no indication of how it would grow. Every new advance was hailed with joy.
No one ever thought of "capital" and "labour" as hostile interests. No one ever dreamed that the very fact of success would bring insidious dangers with it. And yet with growth every imperfection latent in the system came out. A man's business grew to such proportions that he had to have more helpers than he knew by their first names; but that fact was not regretted; it was rather hailed with joy. And yet it has since led to an impersonal system wherein the workman has become something less than a person--a mere part of the system. No one believes, of course, that this dehumanizing process was deliberately invented. It just grew. It was latent in the whole early system, but no one saw it and no one could foresee it. Only prodigious and unheard-of development could bring it to light.
Take the industrial idea; what is it? The true industrial idea is not to make money. The industrial idea is to express a serviceable idea, to duplicate a useful idea, by as many thousands as there are people who need it.
To produce, produce; to get a system that will reduce production to a fine art; to put production on such a basis as will provide means for expansion and the building of still more shops, the production of still more thousands of useful things--that is the real industrial idea. The negation of the industrial idea is the effort to make a profit out of speculation instead of out of work. There are short-sighted men who cannot see that business is bigger than any one man's interests.
Business is a process of give and take, live and let live. It is cooperation among many forces and interests. Whenever you find a man who believes that business is a river whose beneficial flow ought to stop as soon as it reaches him you find a man who thinks he can keep business alive by stopping its circulation. He would produce wealth by this stopping of the production of wealth.
The principles of service cannot fail to cure bad business. Which leads us into the practical application of the principles of service and finance.
CHAPTER X
HOW CHEAPLY CAN THINGS BE MADE?
No one will deny that if prices are sufficiently low, buyers will always be found, no matter what are supposed to be the business conditions.
That is one of the elemental facts of business. Sometimes raw materials will not move, no matter how low the price. We have seen something of that during the last year, but that is because the manufacturers and the distributors were trying to dispose of high-cost stocks before making new engagements. The markets were stagnant, but not "saturated" with goods. What is called a "saturated" market is only one in which the prices are above the purchasing power.
Unduly high prices are always a sign of unsound business, because they are always due to some abnormal condition. A healthy patient has a normal temperature; a healthy market has normal prices. High prices come about commonly by reason of speculation following the report of a shortage. Although there is never a shortage in everything, a shortage in just a few important commodities, or even in one, serves to start speculation. Or again, goods may not be short at all. An inflation of currency or credit will cause a quick bulge in apparent buying power and the consequent opportunity to speculate. There may be a combination of actual shortages and a currency inflation--as frequently happens during war. But in any condition of unduly high prices, no matter what the real cause, the people pay the high prices because they think there is going to be a shortage. They may buy bread ahead of their own needs, so as not to be left later in the lurch, or they may buy in the hope of reselling at a profit. When there was talk of a sugar shortage, housewives who had never in their lives bought more than ten pounds of sugar at once tried to get stocks of one hundred or two hundred pounds, and while they were doing this, speculators were buying sugar to store in warehouses. Nearly all our war shortages were caused by speculation or buying ahead of need.
No matter how short the supply of an article is supposed to be, no matter if the Government takes control and seizes every ounce of that article, a man who is willing to pay the money can always get whatever supply he is willing to pay for. No one ever knows actually how great or how small is the national stock of any commodity. The very best figures are not more than guesses; estimates of the world's stock of a commodity are still wilder. We may think we know how much of a commodity is produced on a certain day or in a certain month, but that does not tell us how much will be produced the next day or the next month. Likewise we do not know how much is consumed. By spending a great deal of money we might, in the course of time, get at fairly accurate figures on how much of a particular commodity was consumed over a period, but by the time those figures were compiled they would be utterly useless except for historical purposes, because in the next period the consumption might be double or half as much. People do not stay put. That is the trouble with all the framers of Socialistic and Communistic, and of all other plans for the ideal regulation of society. They all presume that people will stay put. The reactionary has the same idea. He insists that everyone ought to stay put. Nobody does, and for that I am thankful.
Consumption varies according to the price and the quality, and nobody knows or can figure out what future consumption will amount to, because every time a price is lowered a new stratum of buying power is reached.
Everyone knows that, but many refuse to recognize it by their acts. When a storekeeper buys goods at a wrong price and finds they will not move, he reduces the price by degrees until they do move. If he is wise, instead of nibbling at the price and encouraging in his customers the hope of even lower prices, he takes a great big bite out of the price and gets the stuff out of his place. Everyone takes a loss on some proposition of sales. The common hope is that after the loss there may be a big profit to make up for the loss. That is usually a delusion. The profit out of which the loss has to be taken must be found in the business preceding the cut. Any one who was foolish enough to regard the high profits of the boom period as permanent profits got into financial trouble when the drop came. However, there is a belief, and a very strong one, that business consists of a series of profits and losses, and good business is one in which the profits exceed the losses.
Therefore some men reason that the best price to sell at is the highest price which may be had. That is supposed to be good business practice.
Is it? We have not found it so.
We have found in buying materials that it is not worth while to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials.
With bad transportation one has to carry larger stocks. At the time of revaluing the inventory in 1921 the stock was unduly high because transportation had been so bad. But we learned long ago never to buy ahead for speculative purposes. When prices are going up it is considered good business to buy far ahead, and when prices are up to buy as little as possible. It needs no argument to demonstrate that, if you buy materials at ten cents a pound and the material goes later to twenty cents a pound you will have a distinct advantage over the man who is compelled to buy at twenty cents. But we have found that thus buying ahead does not pay. It is entering into a guessing contest. It is not business. If a man buys a large stock at ten cents, he is in a fine position as long as the other man is paying twenty cents. Then he later gets a chance to buy more of the material at twenty cents, and it seems to be a good buy because everything points to the price going to thirty cents. Having great satisfaction in his previous judgment, on which he made money, he of course makes the new purchase. Then the price drops and he is just where he started. We have carefully figured, over the years, that buying ahead of requirements does not pay--that the gains on one purchase will be offset by the losses on another, and in the end we have gone to a great deal of trouble without any corresponding benefit.
Therefore in our buying we simply get the best price we can for the quantity that we require. We do not buy less if the price be high and we do not buy more if the price be low. We carefully avoid bargain lots in excess of requirements. It was not easy to reach that decision. But in the end speculation will kill any manufacturer. Give him a couple of good purchases on which he makes money and before long he will be thinking more about making money out of buying and selling than out of his legitimate business, and he will smash. The only way to keep out of trouble is to buy what one needs--no more and no less. That course removes one hazard from business.
This buying experience is given at length because it explains our selling policy. Instead of giving attention to competitors or to demand, our prices are based on an estimate of what the largest possible number of people will want to pay, or can pay, for what we have to sell. And what has resulted from that policy is best evidenced by comparing the price of the touring car and the production.
YEAR PRICE PRODUCTION 1909-10 $950 18,664 cars 1910-11 $780 34,528 "
1911-12 $690 78,440 "
1912-13 $600 168,220 "
1913-14 $550 248,307 "
1914-15 $490 308,213 "
1915-16 $440 533,921 "
1916-17 $360 785,432 "
1917-18 $450 706,584 "
1918-19 $525 533,706 "
(The above two years were war years and the factory was in war work).
1919-20 $575 to $440 996,660 "
1920-21 $440 to $355 1,250,000 "
The high prices of 1921 were, considering the financial inflation, not really high. At the time of writing the price is $497. These prices are actually lower than they appear to be, because improvements in quality are being steadily made. We study every car in order to discover if it has features that might be developed and adapted. If any one has anything better than we have we want to know it, and for that reason we buy one of every new car that comes out. Usually the car is used for a while, put through a road test, taken apart, and studied as to how and of what everything is made. Scattered about Dearborn there is probably one of nearly every make of car on earth. Every little while when we buy a new car it gets into the newspapers and somebody remarks that Ford doesn't use the Ford. Last year we ordered a big Lanchester--which is supposed to be the best car in England. It lay in our Long Island factory for several months and then I decided to drive it to Detroit.
There were several of us and we had a little caravan--the Lanchester, a Packard, and a Ford or two. I happened to be riding in the Lanchester passing through a New York town and when the reporters came up they wanted to know right away why I was not riding in a Ford.