On this Date in History: I read an article from the Wall Street Journal from January of 2008. It read that oil prices were around $90 a barrel and were expected to remain around that level. It had a quote from a learned man who said, at that time, that he expected the price of oil to drop to about $67 a barrel. While he didn’t put a time qualifier on the statement, about 6 months after this artcle came out the price of oil was over $140 a barrel. I related this story to one of my classes and one student said that it sounded like someone sucks at their job. The point is we often hear these great ideas and pontifications from “experts” that turn out to be wrong by a long shot, if not completely opposite of reality.
At the dawn of the 20th Century, animal power remained much of the energy that drove the economy, though certainly not as much as at the turn of the 19th Century. Aside from the railroads, animal power was particularly necessary for transportation and for agricultural interests. A United States Senator, Chauncey Depew, said with full confidence that “nothing has come along to beat the horse.” He suggested to those who might invest in alternative forms of transportation to “keep your money.” Now, one who is looked up to as one who had a great financial mind and who was quite savvy in investing was J. P. Morgan. Well, Morgan had a chance to get into the automobile business in 1908 when he was approached by William Crapo Durant for a loan. Durant and Benjamin Briscoe wanted financing for the proposed merger of their two fledgling automobile companies, Buick and Maxwell-Briscoe. Durant told Morgan that automobile sales would reach a half million per year. Upon hearing Durant’s prediction, one of Morgan’s partners sniffed, “If he has any sense, he’ll keep such notions to himself.”
Well, the deal didn’t go through and Briscoe is left to the asheep of history. But Durant soldiered on without any backing of financiers and formed a holding company on this date in 1908 with $2000 and without J.P. Morgan. Instead, he sold shares of stock and raised about $12 million in a couple of weeks. He called it General Motors. He acquired Olds Motor Works later that year, then subsequently bought Cadillac, Pontiac (originally known as Oakland), Cartercar, Ewing and Elmore. But, in 1910, Durant was in a tight financial situation and he turned to competitors of Morgan for help. Durant apparently used the financing to continue to acquire other companies. That led to more problems but, by then, automobiles were getting popular enough that I suppose JP Morgan had changed his mind. Around 1920, General Motors found itself with $30 million in debt and huge obstacles ahead. Durant went back to Morgan and Pierre du Pont who were two giants of the financial world. The financiers saved the company but effectively finished off Durant at GM. See, part of the deal was that Durant was out and du Pont took over as President. But, don’t feel too bad for Durant. He’s one of those guys who never quit, following the advice of the old gridiron sage, Granville Hambright who often told his Junior High football players that “a winner never quits and a quitter never wins.” Durant went on to found a new company. You might have heard of it…Chevrolet.
Dupont served as President of GM until 1923 when he turned the reigns over the Alfred P. Sloan who focused his attention on managing the company more effectively. Ever wonder why there are new models to cars every year? It was Sloan’s idea. How about the different pricing structure of different brands in the company? That was Sloan too. By the late 1920’s, GM passed Ford as the leader in automobile sales. For his company, Henry Ford focused his attention on more efficient manufacturing instead of management, marketing and finance. Later in the 20th century, GM became the largest corporation in the world…a title it later lost and did so in quite a spectacular fashion.
Some interesting aspects of this story. First off, it took the geniuses like Morgan a dozen years to figure out that a visionary like Durant was right all along. Durant had the vision but he didn’t have the know-how regarding making his dream come to fruition. What is interesting is that Henry Ford rebuffed the attempts of outside financiers to take over Ford Motor Company when things turned tough in the Depression. Yet, General Motors has an early history of near disaster before they got it right.
At the first part of the 20th century, General Motors needed help and so they went to private financial institutions for that help. When they were denied, founder Durant figured out a way to move ahead while some of his competitors went by the wayside. Then additional help came in the form of the previously reluctant Morgan. Ford probably worked with Morgan on a number of deals, but none with the expressed intent of saving the company. In fact, in the early 1920’s when Ford faced potential bankruptcy, Henry Ford turned down financing from big investment houses who required that Ford turn over control of the company, like Durant did. In the early 21st century, it’s deja vu. But, this time, General Motors turned to the Federal Government (taxpayers) to get saved and private investors (stock holders, bond holders) ended up with the short end of the stick. Instead of financiers like du Pont taking control of the company, the government fired the head of GM. Meanwhile, Ford did not take government money and continues to move forward and maintain control of the company, in the same tradition of the company’s founder, Henry Ford. While Ford Motor Company in late 2010 still had about $27 Billion in debt, it had reduced its debt by $4 Billion, had positive cash flow and the outlook for Ford looks bright in some circles with some analysts project Ford having more cash than debt by 2012. But, be careful, those are just “expert” opinions and remember, Morgan’s experts thought that the automobile was a loser investment 100 years earlier. What a difference a century makes. In some ways, not one bit. In other ways, a huge difference.
Weather Bottom Line: We got the light rain in the morning but it doesn’t look like it will help advance the notion of rain, let alone thunderstorms on Thursday evening or afternoon. It’s just too stable an atmosphere and that’s too bad because we need the rain. This was our big chance and it wasn’t too good to begin with. Look for a pleasant Friday with a return to hot, but relatively dry, conditions for the weekend into early next week.