How Did Henry Ford Cause the Great Depression?

Mike Curtis

[A paper presented at the annual conference of the Council of Georgist Organizations, held in Cleveland, Ohio, 9 August 2009. Reprinted from GroundSwell, January-February 2010]

Henry Ford is perhaps the quintessential symbol of the phenomenal increase in productivity during the1920s before the Great Depression.

Production Model

We apply our labor, both mental and physical, to the natural resources. We separate them, we combine them, we change them in form and in place. First we produce the capital wealth - buildings, tools and machines, and inventories, which we use to give our labor a greater efficiency in producing the food, clothing, shelter, automobiles and televisions which we store, transport, and trade on their way to the ultimate consumer. So anything that gets a natural resource to the consumer in the desired form is part of production.

Where does money come into the economy? You can't eat it or drive around in it. You can't wear it or live in it. You spend it. It is a medium of exchange. It facilitates exchange. Finding someone who has exactly what you want and wants exactly what you have to exchange is much less efficient. With money we sell what we would otherwise trade and buy what we want in exchange. Money is also a store of value, and a measure of value, which is very important, not only in trade, but in contracts and other obligations. But, printing money, although it may have the same value, will not be equivalent to growing food, making clothes, or building shelter.

So, why is it that so many people who are willing and able to work, are unable to exchange their labor for the products of other people's labor?

One year things are going well, and the next, they're not. What causes any recession or depression? And how could they be prevented.

The economy is comprised of the same natural resources, the same infrastructure, the same capital - buildings, tools and machinery, the same technology, the same work force with the same knowledge and skills, and even the same money and banking system.

And yet, when it happens it seems like the establishment never expects it. Does history tend to repeat?

Why do people work in factories instead of producing their own food, clothing, and shelter?

Henry Ford introduced the assembly line in 1914, and for the next 13 years he made essentially the same car he produced in 1909.

What enabled cars to be built on the assembly line was the ability to make interchangeable machined parts. They had already figured out how to do it with rifles and sewing machines, but it was Ford's engineers that developed the method necessary to make big interchangeable machined parts.

However, people didn't work for Ford because 60,000 workers produced 6,000 cars a day. They didn't work for Ford because each worker made a car every 10 days, instead of a lifetime. They worked for Ford because by doing so they got better food, clothing and shelter than they could produce themselves - plus an automobile.

Ford paid $5 per Day, which was twice what Chrysler and Chevrolet were paying. High wages gave Ford faster workers larger production, and higher profits.

The price of a Ford went from $850 in 1909 to $290 in the mid 1920s. In today's dollars, that is a little over $20,000 in 1909 and a little over $3,000 in the mid 20s - an 85% reduction in the price. You could buy a car on credit. Half the cars in the whole world were Fords. Sixty percent of American families owned some brand of a car by the end of the decade.

Anything that could be sold in large quantities could now be made on the assembly line.

Before 1900 the majority of Americans lived in rural areas. In 1920 Agriculture still employed a very large percent of the people.

By the mid 20s a truck cost less than a team of horses. Tractors fell to nearly half their former price. Farm equipment was proliferating with pickers, threshers, and bailers. 6 million tons of commercial fertilizer were used each year during that decade.

Horse feed required 1 out of every 5 acres to grow feed. As tractors replaced horses 20% more farmland was available to grow food for sale in the market. As machines replaced farm workers, they went to the cities to work in the emerging factories

Every business that finds a way to produce things cheaper - expands their operations; lowers their prices; increase their sales, and makes greater profits. Isn't that how Ford became the 2nd richest man in the World?

Factories were being built and worked in by the people who were being replaced by machines: farmers and teamsters and the increase in population, including immigrants from other countries (although immigration was reduced).

Housing was being built for the workers in the cities and in the Suburbs, which were being developed because the affordable car could now take people to and from the city every day.

Roads were being paved; bridges were being built; electric generating stations were constructed; wires were being strung; and electric lights were proliferating - along with electric powered refrigerators and washing machines, radios, irons, fans, and toasters that were being bought and used in more and more homes. By the mid 20s nearly 70% of urban dwellings and over 20% of farms had indoor plumbing.

Electric was being supplied to the factories - illuminated by electric lights that were clean and healthy - with electric machinery that was more versatile and compact - with electric elevators which allowed multi story factories. They could operate day and night around the clock with many more workers per acre than before.

Steel and reinforced concrete and the elevator made possible the high-rise building that were epitomized by the Chrysler & Empire State Buildings at the end of the decade. Telephones became standard with real-time communication. Every new product created jobs making components - like steel, glass and rubber for automobiles.

The economy was exploding, and it seemed like nothing could possibly stop it. Then at the end of 1929 the greatest economy in the history of the world had collapsed. So what did cause the Great Depression of the 1930s. What causes any Recession or Depression?

It is so easy to conclude it was Over Production when we think of the overwhelming increase in the number of products in stores and warehouses that could not be sold for even what it had cost to produce them.

But the people that were unemployed still wanted and needed the products of labor, and they were willing and able to give their labor - the very thing that produces those products - in exchange for those products.

In the 1930s some unemployed people did, in rather in-efficient ways, produce their own food, clothing and shelter. Many others had no opportunity to even try. The 1930s was definitely not the first time people had been locked out of the process. Historians believe that depressions have recurred for more than 800 years.

As more land was devoted to crops for feeding people instead of horses, and machines and fertilizer were grossly more efficient, it increased the quantity of food for sale. At the same time the people in Europe were producing their own food again, having bought a lot of it from the U.S. during WWI, so the world wide demand for food from the United States was falling. Not only the price of food per bushel, but the aggregate value of food was falling. Therefore, the income for farmers and the value of farm land fell was falling.

However, the value of land that was needed for new factories near the cities along the rivers was going up. You couldn't build a factory in a corn field in the middle of Kansas. You had to be along the navigable river, the railroad, the electric, water, and gas lines. So with every new product, the value of industrial land was bid up.

What happened to the value of land needed for housing workers? What happened to the value of agricultural land near cities - land that had lost value for growing crops, but was now connected by paved roads and cheap cars to the factories along the rivers? What happened to the value of land that was needed to sell all those cheap products that were coming onto the market?

As the value of industrial and residential commercial land went up with the increase in productivity, what happened to the incentive to sell? Are people more or less likely to sell when the price of land is going up? Land is like an antique. The more you are offered, the quicker the value increases, the less likely you are to sell.

The faster the price of land is bid up by those who stand to make enormous profits from selling cheap products, the less likely the owners of unused land are to sell. How many times can you sell the same piece of land? Can you make any more?

Technology replaces workers. It also enables more workers per acre. Electric lights and elevators enable factories to operate tier upon tier 24 hours a day with compact machinery. And, all this increases the rental value and the prices that are offered for land, which increases the incentive not to sell.

At some point the economy can no longer expand because not enough land is sold. Where are all the workers that were replaced by trucks, tractors, and farm machinery going to be reemployed? You can't put two things in the same place at the same time.

Phase one: As the workers who have lost their jobs also lose their purchasing power - there is a reduction in demand for the volume of goods already being produced.

Phase two: The more people get laid off, the less demand for goods. The less demand for goods, the less need for workers to produce them, and the more people get laid off.

The less demand for goods, the fewer sales and profits, which means the stock holders are able to buy less as well. With less demand for goods and services, what happens to the demand for land that's needed to produce them? The price of land tends to fall as well.

According to the statistics, interest rates went up and the prices that were offered for land began to fall several years before the depression actually started. However, looking at the charts, it seems that the economy continued to expand and unemployment remained rather low until some time in 1929 when it rose sharply and continued to increase until it reached 25% of the work force in 1932.

If the analysis were based on its own merits, a depression should be over soon after it begins.

As long as the price of land is increasing more than the return to capital, holding unused land would be a more profitable strategy. But, when interest rates are going up and the price of land is going down, the only logical thing to do is sell the land and buy some capital of equal value.

None-the-less, the psychology seems to prevail. As long as technology and productivity are increasing, there is every expectation that the value of land will increase with it. Governments promote the idea that the economy is improving soon after the official declarations that it is in decline. Even depressions don't last forever say the speculators: Wait until land values have recovered if you are going to sell.

Some land is sold, but not for years, and sometimes many, is enough land sold that nearly everyone can go to work and the normal level of employment is regained.

Every new invention, innovation, and new technology increases the amount that can be paid for land. Every reduction of interest rates increases the amount that can be borrowed for the purchase of land, buildings, machinery, and inventories. The savings on buildings, machinery and inventories enables producers to offer higher prices for land. But somehow, someway, the land must be sold or otherwise put into production, before people who are willing and able can go to work.

The more land that is put into production the more people are employed and reemployed, and when 95% of those who are willing and able to work have jobs we consider the depression over.

Every decade has its phenomenal increases in technology. In the '80s it was the personal computer, office buildings that came in a truck load at a time and were assembled in a matter of months, and modular homes. These advances were followed by the recession of 1991.

In the last decade we had the internet and robotics which doubled productivity in manufacturing. There was also the most recent advances in construction, which included prefabricated basements to go with bigger, better, and more attractive houses built in factories day and night, rain or shine. All this must have generated a multitude of great expectations in regard to the demand and value of land, and an increase in unemployment followed in 2008.

Recessions and depressions can be prevented by making the title to land conditional upon a payment of its rental value to society. The incentive would be to hold the least amount of land possible and produce as much as possible on it - limited by the rules of safety and environmental preservation.

Because land would not be bought and could not be sold it would be available as needed. There would be nothing to gain and everything to lose by holding it idle. Under these conditions there could not be recessions or depressions or unemployment among those who are willing and able to work.

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