Chapter 2
To tell how I came into General Motors it is necessary to begin with smaller matters than those I have described. I was born in New Haven, Connecticut, on May 23, 1875, a time when, to say the least, the style of the United States was quite different from what it is today. My father was in the wholesale tea, coffee, and cigar business, with a firm called Bennett-Sloan and Company. In 1885 he moved the business to New York City, on West Broadway, and from the age of ten I grew up in Brooklyn. I am told I still have the accent. My father's father was a schoolteacher. My mother's father was a Methodist minister. My parents had five children, of whom I am the oldest. There is my sister, Mrs. Katharine Sloan Pratt, now a widow. There are my three brothers—Clifford, who was in the advertising business; Harold, a college professor; and Raymond, the youngest, who is a professor, writer, and expert on hospital administration. I think we have all had in common a capability for being dedicated to our respective interests.
I came of age at almost exactly the time when the automobile business in the United States came into being. In 1895 the Duryeas, who had been experimenting with motor cars, started what I believe was the first gasoline-automobile manufacturing company in the United States. In the same year I left the Massachusetts Institute of Technology with a B.S. in electrical engineering, and went to work for the Hyatt Roller Bearing Company of Newark, later of Harrison, New Jersey. The Hyatt antifriction bearing was later to become a component of the automobile, and it was through this component that I came into the automotive industry. Except for one early and brief departure from it, I have spent my life in the industry.
Hyatt then was a tiny enterprise, employing about twenty-five people. A ten-horsepower motor drove all of its plant machinery. Its product was a special kind of antifriction bearing, invented by John Wesley Hyatt, who also invented celluloid, the first of the modern plastic materials, intended but never realized as a substitute for ivory in billiard balls. At that time antifriction bearings were not well developed or well known. But the Hyatt bearing was no cruder than other mechanical parts made in those days; and we were able to put some of our bearings on traveling cranes, paper-mill equipment, mine cars, and other machinery. We were doing a business, when I went with the company, of under $2000 a month. I was a kind of office boy, draftsman, salesman, and general assistant to the enterprise at a salary of $50 a month.
I did not then see much future in Hyatt and soon left it to become associated with a household electric-refrigerator enterprise which seemed to offer better prospects. It was making one of the early efforts to supply centrally located electric refrigeration in apartment houses. After about two years I came to believe that its particular product could not develop because of its complicated mechanism and high cost.
Meanwhile, affairs of the Hyatt Roller Bearing Company had not progressed very well—the company had never been on a profitmaking basis—and it came to the point where the individual who was promoting it, John E. Searles, was not willing to put up any more money to cover the losses. In 1898 it appeared that the company would have to liquidate. But my father and an associate of his combined to put $5000 into Hyatt with the understanding that I would go back for six months and see what I could do with it. I accepted the proposition and teamed up with a young man, Peter Steenstrup, who was then the bookkeeper, later the sales manager. At the end of six months we had made some advances in volume and economy, and a $12,000 profit, and that put the business in a position where we recognized that it might be made successful. I assumed the high title of general manager. I could not know then that through Hyatt I had entered one of the headwaters of General Motors.
For the next four or five years at Hyatt we had growing pains. It was difficult to get business, and when we got it and expanded, we needed working capital that we could not get outside the company. It was easier at that time, however, to build a business from scratch, because the government did not tax away the profits as it does now. In five years we made progress. Our profits got up to about $60,000 a year, and the prospects improved as the young automobile industry opened up a new market.
It was around the turn of the century that the automobile business began to break out in numerous small enterprises. Antifriction bearings came into the picture then and we began to get a few orders from those who were experimenting with automobiles. A letter I wrote to Henry Ford on May 19, 1899, asking for his business, is said by Allan Nevins in his biography of Ford to be on file in the Ford archives. Mr. Ford at that time was experimenting with automobiles, and was about to go into the business. But in the first decade of this century the application of our bearings in the mechanical arts expanded slowly. Most of the hundreds of automobile companies organized in that period made only sample cars and then expired. My partner, Mr. Steenstrup, did a great deal of traveling to make sales contacts with these embryo producers. When he saw or heard of someone who was going to make a new car, I would get in touch with the person and go into the problems from the engineering point of view. I would design Hyatt bearings into the axle or perhaps some other part, and in doing so facilitate the sale of our roller bearings in any subsequent production.
As our work became better known, I succeeded in getting myself into a position where I was a kind of consulting sales-engineer to a good many of those companies and their suppliers on bearing problems to which our particular product was applicable. I would be called in when any change of design or new design was contemplated and this gave me the opportunity to get our bearings incorporated into the rear axle or the transmission, or both.
This sales-engineering of ours continued at an increasing pace, especially from 1905 to 1915 when some of the manufacturers, such as Ford, Cadillac, Buick, Olds, Hudson, Reo, Willys, and others, began to develop important volume. Hyatt's business flowed logically wherever we had customers like these that stayed in business and grew. Our business became so good that it got to be a question of how rapidly we could expand our production, with new buildings, new machinery, new methods, and the like, to keep up with the rapidly expanding automobile business.
My first personal experience with automobiles was much like that of others at the time. I wanted one but couldn't afford it. Only about 4000 cars were made in the year 1900, and they were expensive. My father bought one of the early Wintons as a family car. Around 1903 I bought for the Hyatt Company a car called the Conrad, which we got for company purposes, and incidentally used to go from the plant in Harrison into Newark for lunch and errands. It had a two-cycle engine with four cylinders, and was a good-looking car, painted red. But it was a lemon. The Conrad was manufactured from 1900 to 1903, and then passed out of the picture. We got another car, called the Autocar. This one worked better and I used it to some extent on business trips, and sometimes went to Atlantic City in it. Like the Winton and the Conrad, it was discontinued, but an Autocar truck was developed and became a factor in the automotive industry; Autocar was consolidated with the White Motor Company in 1953. The first car I bought for myself was a Cadillac, about 1910. As was the custom then, I got a Cadillac chassis and had the body made to order.
Early Cadillac engineering had an important influence on the industry and upon my operations in Hyatt. This was largely due to Henry Leland, who, I believe, was one of those mainly responsible for bringing the technique of interchangeable parts into automobile manufacturing. His first work in the industry was for Olds, around 1900. He was at the head of Cadillac when it went into General Motors in 1909, and he remained at the head of it until 1917, when he retired. Afterward he created the Lincoln car, which he sold to the Ford Motor Company.
Mr. Leland was one of my early acquaintances in the industry. He was a generation older than I and I looked upon him as an elder not only in age but in engineering wisdom. He was a fine, creative, intelligent person. Quality was his god. I had trouble at first, in the early 1900s, in selling Mr. Leland our roller bearings. He then taught me the need for greater accuracy in our products to meet the exacting standards of interchangeable parts. Mr. Leland came to the industry with a mature experience in general engineering and in gasoline engines, which he had long made for boats. One of his specialties was precision metalwork, which went back to his experience in toolmaking for a federal arsenal during the Civil War, and which he afterward developed in the Brown and Sharpe Company, machine-tool makers of Providence, Rhode Island. It has been called to my attention that Eli Whitney, long before, had started the development of interchangeable parts in connection with the manufacture of guns, a fact which suggests a line of descent from Whitney to Leland to the automobile industry.
The cluster of men who made the industry in the beginning was not large. As a supplier of an important component of the automobile, I came to know most of them over the period of the first twenty years of the business, and I learned a great deal from them as business associates and friends. In the early days I sometimes sold direct to automobile producers—Cadillac, Ford, and others— but more often I sold to a supplier, who, in turn, sold a component of the automobile to the assembler. One of the most important of these suppliers for me was the Weston-Mott Company of Utica, maker of axles; a rear axle would take six bearings, some of which were Hyatt types. After Charles Stewart Mott moved his company from Utica to Flint in 1906 to be close to the area where the automobile industry was developing, I made it a practice to visit him there once a month. I recall that both sides of Saginaw Street, the main street of Flint, were lined with hitching posts, and on Saturday night the street was crowded with the horses, wagons, and carriages that brought the farmers into town for their weekly shopping and night out. In that setting a small society of automobile and parts producers met socially and on business for several years: Mr. Mott, Charles Nash, Walter Chrysler, Harry Bassett, myself, and others, all of whom, except myself, were then in General Motors. I must have seen Mr. Durant there, too, but I can only recall seeing him on the train between New York and Detroit, and our saying "Good evening" and "Good morning." My real connection with General Motors then was through Mr. Mott, who had taken his company into General Motors in 1909, and was a supplier of axles to Buick, Oakland, and Olds. To be exact, General Motors acquired 49 per cent of his company's stock in 1909 and the balance in 1912. Through Weston-Mott I succeeded in getting Hyatt roller bearings into General Motors cars.
I first knew Walter Chrysler in Flint. As works manager and then head of Buick, he would pass judgment on my product when the axle designs came in from Weston-Mott. We saw a lot of each other in the course of time, in General Motors and out of it, and were personal friends throughout his life. In later years, when we were rival heads of our respective enterprises, Chrysler and General Motors, we sometimes took a vacation trip together, with business taboo on those occasions. Mr. Chrysler was a man of high ambition and imagination. He was a practical man with broad capabilities; Ins genius I think was in the organization of automobile production. Like Mr. Nash, he recognized the opportunity offered by the young and promising automobile business. They both were true leaders of its early development and became heads of great enterprises.
Over at the Ford Motor Company in Detroit, I—as a Hyatt salesman—used to see Mr. Ford and occasionally have lunch with him, but I conducted my business there mainly through C. Harold Wills, his chief engineer, and later the creator of the fine but short-lived Wills-Sainte Claire automobile. Mr. Ford owed much to Mr. Wills' talent in engineering, especially metallurgy. Because of our ability at Hyatt to produce and deliver reliably, we were eventually favored with 100 per cent of the Ford business to the extent that our bearings were applicable to the Ford design. As Mr. Ford's company grew, he became our best customer, with General Motors second. The development of Hyatt's volume caused me to open a sales office in Detroit on West Grand Boulevard. In later years, through an unpredictable chain of events, this office was to become the nucleus of the site of the General Motors Building in Detroit.
One day in the spring of 1916 I received a call from Mr. Durant, asking me to come in to see him. As the founder of General Motors and Chevrolet, Mr. Durant was a celebrated figure in the automobile and financial worlds. I have described how he had been out of General Motors for a number of years and was about to return at that time as president. I found Mr. Durant a very persuasive man, soft-spoken and ingratiating. He was short, conservatively and immaculately dressed, and had an air of being permanently calm—though he was continuously involved in big and complicated financial deals—and he inspired confidence in his character and ability. He asked me if the Hyatt Roller Bearing Company was for sale.
After all those years of building up the Hyatt business the idea of selling it was a shock to me, but it opened up a new vista in my thinking and caused me to analyze the situation at Hyatt. Mr. Durant's offer brought forcibly to my mind a combination of three factors that were developing in the business.
The first of these was that, because of the way Hyatt's business had evolved, it had come to depend upon a limited number of customers. Ford alone represented about half of the sales. This business if lost could not be replaced because no new customer of such magnitude existed: a complete reorganization would have to be undertaken.
Second, I recognized that the kind of roller bearing we made at that time was destined through the evolution of automobile design to be supplemented and perhaps superseded by other types. And what then? Another reorganization, a different product, in effect a new business. I have always been interested in improving a product; but this was a special-product business and the choice was whether to proceed independently or within an integrated enterprise. I may say that in the past forty-five years what I thought would happen to the product has happened. Hyatt's old type of antifriction bearing has gone out of automobile design along with other types of then existing antifriction bearings.
Third, I had spent my working life — I was forty years old then — developing a property and I had a large plant with a great deal of responsibility, but I never got much yield out of it in dividends. Mr. Durant's offer presented an opportunity to convert Hyatt's profits into readily salable assets.
Of the three factors, I think the second, the potential changes in the old Hyatt roller bearing, was decisive in my mind. Thus, the way I added it up was that, while Hyatt's short-term profit position was good, the long-term position would benefit from the proposed association; and Mr. Durant's offer promised a conversion of assets. I decided to take the offer, got my four directors together, and recommended that we tell Mr. Durant that we were prepared to sell at a price of $15 million. A couple of the directors thought the price was high, but I did not think so considering our strength and the growth potential of the automobile industry. I entered negotiations with two of Mr. Durant's associates, John Thomas Smith, his lawyer, and Louis G. Kaufman, the banker, and after a lot of dickering back and forth settled on a proposition to sell the property for $13.5 million.
When the question of payment came up, I agreed to take half in cash and half in the stock of a new enterprise that Mr. Durant proposed to organize, called United Motors Corporation. But when it came to closing the deal, I found that some of my Hyatt associates were unwilling to take stock in the new company. This led to my having to take more than my share of the stock and give up the equivalent in cash. Since my father and I owned a substantial part of Hyatt, I finished with an important position in the stock of United Motors Corporation.
Mr. Durant set up United Motors in 1916 to buy Hyatt and four other parts and accessory manufacturers. These properties were, besides Hyatt, the New Departure Manufacturing Company of Bristol, Connecticut, a producer of ball bearings; the Remy Electric Company of Anderson, Indiana, a producer of electrical starting, lighting, and ignition equipment; Dayton Engineering Laboratories Company of Dayton, known as Delco, a producer of electrical equipment using a system different from Remy's, and the Perlman Rim Corporation of Jackson, Michigan.
For the first time my business horizon widened beyond a single component of the automobile. I became president and chief operating officer of United Motors with a board of directors made up of the people who put their properties into the enterprise. Mr. Durant did not come on the board and did not concern himself with the affairs of this corporation, but left the management entirely up to me. On my own initiative, and with the approval of my board, I afterward brought into United Motors the Harrison Radiator Corporation and the Klaxon Company, then a well-known producer of horns; I organized the United Motors Service, Inc., which sold and serviced throughout the United States the parts made by the various United Motors companies. The combined group had net sales of $33,638,956 in its first year. Hyatt was the best earner.
For many years the United Motors group sold to manufacturers outside General Motors; but the leaders of General Motors foresaw that as a car producer it would eventually require most of the output of United Motors. Hence, in 1918, by mutual agreement, and largely through negotiations between John J. Raskob, then chairman of the Finance Committee of General Motors, and myself, United Motors' assets were acquired by General Motors.
The space I have given here to the Hyatt story is not a measure of its relative position in the General Motors scheme of things. It just gets me into the story in a logical way. I joined General Motors as vice president in charge of the same accessory companies that I had operated in United Motors. I also became a director of General Motors and a member of its Executive Committee, of which Mr. Durant was then chairman.
In General Motors from 1918 through 1920 my operating responsibility continued to be with the accessory group, but as a member of the Executive Committee of the corporation, my horizon again widened. Also, I had proprietary as well as professional reasons for taking an interest in the corporation as a whole, since most of my personal assets had been converted into General Motors shares. It was not long therefore before I began to take a close look at Mr. Durant's general policies.
I was of two minds about Mr. Durant. I admired his automotive genius, his imagination, his generous human qualities, and his integrity. His loyalty to the enterprise was absolute. I recognized, as Mr. Raskob and Pierre S. du Pont had, that he had created and inspired the dynamic growth of General Motors. But I thought he was too casual in his ways for an administrator, and he overloaded himself. Important decisions had to wait until he was free, and were often made impulsively. Two examples from my personal experience:
My office was next door to his in the old General Motors Building on New York's Fifty-seventh Street. I would sometimes go in to see him. One day in 1919 I went in and told him that I thought that, in view of the large public interest in the corporation's shares, we should have an independent audit by a certified public accountant. Our books were not then being so audited, though they had been earlier under the bankers' regime. Mr. Durant did not have a sound concept of accounting as such and did not realize its great significance in administration. However, when I spoke to him about it, he said at once that he agreed with me and told me to go and get one. That was the way he worked. He had a financial department to handle affairs of that kind, but since I had made the suggestion I got the assignment. I brought in the firm of Haskins & Sells, which had audited the accounts at United Motors. This firm still audits General Motors' accounts.
Another time I found Mr. Durant in his office with some people talking about the new office building that was to be put up in Detroit. It was to be called the Durant Building, but is now known as the General Motors Building. They were inspecting a map of Detroit. Mr. Durant, as usual, invited me to come into the discussion. They were considering a location in the Grand Circus Park area downtown. The United Motors sales office on West Grand Boulevard was uptown, north a couple of miles. I knew the location well and it was natural that I should think of it. There were good reasons for considering it for the new building: it was closer for everyone who lived on the north side of the city, and at that time the traffic there was lighter than downtown. I mentioned these things to Mr. Durant, whereupon he turned to me and said that the next time we went to Detroit we would all go up and take a look at it, and we did. I can see Mr. Durant now. He started at the corner of Cass Avenue, paced a certain distance west on West Grand Boulevard past the old Hyatt Building, which had become the United Motors Building. Then he stopped, for no apparent reason, at some apartment houses on the other side of the building. He said that this was about the ground we wanted, and turned to me and said, as well as I can remember, "Alfred, will you go and buy these properties for us and Mr. Prentis will pay whatever you decide to pay for them." I wasn't in the real-estate business. I didn't even live in Detroit. But I went ahead and organized the assembly of the properties and if I do say so myself, I think we did a good job. I assigned Ralph S. Lane, president of the United Motors Service Corporation, to handle the purchases of property. It is an interesting piece of business to buy up a block of small parcels of real estate. If you disclose your intention you influence the price. When we got the half block that Mr. Durant wanted, he said we ought to buy the rest of it. So we went back to work and bought the whole block. I don't know that he intended to use all of it immediately, but it was soon used. The General Motors Building which was built there started a new business district in Detroit. Mr. Durant's informal ways of doing business were often effective in that formative period, and for the confidence he placed in me on these and other occasions I had reason to feel well disposed toward him. The criticisms I make of him are purely from the viewpoint of basic business administration. I was particularly concerned that he had expanded General Motors between 1918 and 1920 without an explicit policy of management with which to control the various parts of the organization.
A distinction should be made between the expansion itself and the need for organization which grew out of it. There may have been disagreement at the time over the soundness of the expansion program, responsibility for which was shared by Mr. Durant and Mr. Raskob. But time in the long run has shown that the major part of the program, at least so far as the automobile developments were concerned, was sound and desirable. Since the automobile is a high value product made for a mass market, the industry needed an extensive capital structure. Mr. Durant and Mr. Raskob anticipated this need.
As to organization, we did not have adequate knowledge or control of the individual operating divisions. It was a management by crony, with the divisions operating on a horse-trading basis. When Walter Chrysler, one of the best men in General Motors, became a general executive of the corporation, he collided with Mr. Durant over their respective jurisdictions, I believe. Mr. Chrysler was a man of strong will and feeling. When he could not get the arrangement he wanted, he left the corporation. I remember the day. He banged the door on the way out, and out of that bang came eventually the Chrysler Corporation.
The significance of the weakness in General Motors' organization was not clearly visible during World War I and for a time during the postwar inflation. It first took critical form in late 1919 and 1920. At this time large sums were being allotted upon request to all divisions for plant-expansion programs, and, at the same time, rising material and labor costs ate up these funds before the projected expansions could be completed. There were overruns on appropriations—that is, expenditures beyond the established limits—by almost every division.
It was a case of competition among the divisions for available capital and of different preferences at the top. For example, Mr. Durant was strong on tractors. The Finance Committee on October 17, 1919, turned back his request for tractor appropriations with a request for further information on the expected return on investment. At the same meeting the Finance Committee supported a request of mine for about $7.1 million for the New Departure Division. Then Mr. Durant at an Executive Committee meeting on October 31, 1919, opposed the appropriation request for New Departure. Later in the same meeting the committee agreed to finance New Departure to the extent of one third of the request, the other two thirds to come from a preferred-stock issue. At the same meeting Mr. Durant opposed a request for $7.3 million for additional costs on the Durant (General Motors) Building in Detroit. According to the memory of Meyer L. Prentis, then treasurer of General Motors, Mr. Durant opposed the supplementary appropriations for the Durant Building because—in opposition to Mr. Raskob—he preferred to allocate funds to plant and working capital rather than to real estate. John L. Pratt, who had left du Pont to assist Mr. Durant, also remembers this difference in investment preference. The incident is recalled to my mind by the memory of Mr. Durant leaving the chairman's seat to take another one at the table and make the motions not to grant the requests. The Executive Committee supported him. There was in fact, as he saw, a shortage of funds to meet all these demands. Attention thereupon was given not to the question of how to divide scarce investment funds but how to raise more money.
The Finance Committee, meeting in New York on November 5, 1919, heard a report from Mr. Durant showing estimated receipts and expenditures for the fifteen months ending December 31, 1920, "and after discussion, it was moved and unanimously carried that the expenditures proposed in said report should go forward and immediate steps be taken to arrange for the sale of $50,000,000. par value debenture stock, and, if possible, an additional $50,000,000., making a total of $100,000,000."
That afternoon the Executive Committee met in New York and took up the same matter. The minutes say: "Mr. J. J. Raskob, Chairman of the Finance Committee, came before the meeting and made a brief report as to future financing. He recommended that the Company sell an additional amount of its debenture stock, and that it proceed to take action upon the several appropriation requests which were 'not granted' at the last meeting." The Executive Committee then unanimously passed the appropriations for the Durant Building, New Departure, the tractors, and the rest, and the Finance Committee approved them.
Later, in a study of our appropriations procedure, I reflected on this situation as follows: "The practical result [of the lack of a proper appropriations procedure], therefore, was that the approval of any member of the Executive Committee of an Appropriation Request by a Division over which he had supervision, necessarily carried with it the support of the other members of the Executive Committee. In other words, from the practical standpoint, the supervision supposed to be exercised by the Executive Committee was more theoretical than practical."
Accordingly, everyone who had an appropriation request to make was to be satisfied; but fortune was not entirely in accord. The debenture-stock sale was not successful. An effort was made to raise $85 million, but only $11 million was realized. This was the first signal from the outside financial environment that the corporation was in conflict with realities, despite its growth in sales from $270 million in 1918 to $510 million in 1919, which would become $567 million in 1920.
The competition for capital appropriations brought to the fore the whole question of financial organization. On December 5, 1919, Mr. Durant stated in the Executive Committee that the prevailing method of handling appropriation requests was unsatisfactory, a proposition on which all could agree. He outlined a procedure for investigating these requests and reporting them to the president. I embodied this in a motion for a special committee, of which Mr. Pratt was made chairman. At the same time I moved that another committee be appointed to work out regular rules of procedure to govern such requests. I was made chairman of this "Committee on Appropriation Request Rules." The aim of the committee was properly to place responsibility for authorizing expenditures. This was one of three projects in the field of organization which I undertook in this period.
The main thing to note here is that neither the Executive Committee nor the Finance Committee had the needed information or the needed control over the divisions. The divisions continued to spend lavishly and their requests for additional funds were met. The minutes of the Executive and Finance committees in late 1919 and early 1920 show continued massive overruns on appropriations. In one meeting the Executive Committee approved $10,339,554 in overruns on current appropriations, of which Buick, Chevrolet, and Samson Tractor took the largest share. The meeting was not unusual. Overruns on capital investment had become the rule.
The question of the corporation's ability to meet an economic slump came up at the end of 1919. On December 27 of that year I moved and the Executive Committee unanimously passed the following resolution:
RESOLVED, that a committee be appointed to study and recommend a policy for the Finance Committee to follow in the matter of providing cash surplus to meet increased capital requirements, should a serious recessing in business occur, or should plants be suddenly shut down due to serious strikes extending over a period of several months.
The imminence of a slump, however, was still unsuspected by us, as it was by most people in the United States. For this reason, I presume, the leading committees did not then appreciate how critical would be the significance of the lack of control over the actions of the divisions. Late in February 1920, however, Mr. Haskell informed the general managers, with the approval of the Executive Committee, of the "necessity of again presenting to the Executive Committee all appropriation requests which may be affected by change in conditions, before proceeding with the work thereby authorized." It was a mild warning, with no teeth of enforcement in it.
Inventories followed the same runaway course as the overruns on capital expenditure. In November 1919 production schedules for the coming fiscal year were set 36 per cent higher than for the closing year. These production schedules were made by rule of thumb, or the division manager's ambition. To meet the schedules, the divisions began immediately to make heavy purchases of inventory. Late in March 1920 the Executive Committee approved for the corporation as a whole an optimistic production schedule of 876,000 cars, trucks, and tractors for the year beginning in August 1920. In March and April, Mr. Raskob, as chairman of the Finance Committee, began making arrangements for the sale of $64 million worth of common stock to provide money for continuing capital expenditures aggregating about $100 million. The du Ponts, J. P. Morgan and Company, and some British interests participated in this effort, and representatives of the new interests came on the board.
In May 1920 the minutes of the Executive Committee show that Mr. Raskob took pause, and expressed apprehension over unplanned expenditures for plant and equipment and rising inventories. Failure to remain within limits for inventory—then set at $150 million—he cautioned, could endanger the corporation's financial position.
A week later a special Inventory Allotment Committee consisting of Mr. Durant, Mr. Haskell, Mr. Prentis, and myself approved a detailed list of maximum permissible expenditures for each division. Even with reduced production schedules, however, the division managers failed to stay within their authorized limits on inventory or capital expenditures, and nothing was done effectively to control them. This was decentralization with a vengeance.
While the expenditures continued upward, the automobile market, after a brief rise in demand in June 1920, went down. In August both the Finance and Executive committees sharply warned the division managers to stay within the expenditure limits set in May. Early in October the Finance Committee appointed an inventory committee headed by Mr. Pratt to try to get control over the situation. But the damage was done. Total corporation inventories in January 1920 had stood at $137 million; in April at $168 million; in June at $185 million; in October at $209 million, exceeding by $59 million the limit set in May. And the worst was yet to come.
In September the bottom dropped out of the automobile market. To meet the situation Mr. Ford cut his prices on September 21 by 20 to 30 per cent. Mr. Durant, supported by the division sales managers, attempted for a time to maintain prices and to guarantee dealers and customers against any reduction. By October the situation had become so serious for General Motors that many managers were having difficulty in locating cash to pay invoices and payrolls. In that month we borrowed about $83 million from banks on short-term notes. In November all the major car-producing divisions, except Buick and Cadillac, had virtually shut down their plants, and those two were operating at reduced rates. The whole economy of the United States fell into a slump.
Before these events took place I had become increasingly disturbed by the trend of affairs inside General Motors. In late 1919 and early 1920 I developed a plan of organization intended to correct deficiencies in the operating organization, and presented it to Mr. Durant. He appeared to accept it favorably, though he did nothing about it. I think this was due in part to the fact that he was not prepared then to take up organizational matters; he was overburdened with all manner of immediate operating and personal financial problems which made it extremely difficult for him to consider a broad plan of this kind.
My anxiety about the management of the corporation and the direction it was taking became such that in the early summer of 1920 I asked for a thirty-day vacation to get away and decide what I should do. Everything I owned was tied up in the stock of the corporation. At first I thought that, like Mr. Chrysler, I should retire from General Motors. I had a potential offer of a partnership in the banking firm Lee Higginson and Company, with the prospect of working on industrial analysis. The offer came from Mr. Storrow, who, as I have described, had directed the financial affairs of General Motors in the 1910-15 period, and who had since become the principal backer of Nash Motors. I hesitated about making this change, and went to Europe to think it over. My hesitation was due to the fact that I did not feel that I should protect my financial position by selling my shareholdings while Mr. Durant, rightly or wrongly, was trying, with every resource at his command, to maintain the market value of General Motors stock in the crisis. In England I ordered a Rolls-Royce with the intention of going on a tour with my wife, but I never took delivery of the Rolls or made the tour. I returned to the United States in August, and finding that a considerable change had taken place and that the situation was coming to a head, I decided to wait.
The business slump of 1920 was accompanied, as is often the case, by a break in stock-market prices. This, together with the near closing of most of the General Motors plants, brought to an end an era in the corporation's history. A record of the events leading to Mr. Durant's resignation from General Motors was written down by Pierre S. du Pont in a letter to his brother Irenee du Pont, then president of E. I. du Pont de Nemours & Company. The letter was dated November 26, 1920.
Dear Sir:
Recent developments in General Motors Corporation's affairs make it necessary to record developments of the past two weeks, which I do from notes made by me and from circumstances that are still clearly in mind. Before dealing with this part of the history I should like to record a few words in regard to my previous understanding of Mr. Durant's personal affairs.
Since my first acquaintance with Mr. Durant some years ago he had never up to Thursday, November 11th, 1920, said anything to me concerning his personal affairs. When the du Pont interests bought into the General Motors Company and acquired an investment of $25,000,000. worth of stock at slightly above par, it was understood from Mr. Durant that he, possibly together with his immediate family, held a similar amount of stock (including his holdings in the Chevrolet Company, which was then, as now, a holding company of General Motors Common stock) . It was known to us at that time that the larger part of Mr. Durant's stock stood in the name of brokers, but this was supposed to be a matter of convenience. I am quite sure that if Mr. Durant was a borrower on this stock at the time, nothing was said about it. During the months that followed our acquisition of stock up to last spring I knew at times that Mr. Durant had permitted his stock to be lent in the street. I also knew that he was at times purchaser of stock, both directly and through advising people to buy. I had never supposed that he purchased other than by payment outright or in amount within his ability to carry, in view of his seemingly large fortune. I do not remember his mentioning any case in which he was a seller of stock, nor does it appear now that he has ever been other than a purchaser. I have never abetted Mr. Durant in any thoughts of stock and market control which he mentioned to me; in fact, what little has been said would tend to discourage market operations rather than to encourage them; but, as I said before, Mr. Durant has never spoken to me about personal affairs and it has never appeared that the stock operations were anything but personal. I have a strong impression, which Mr. Raskob confirms, that Mr. Durant was entirely out of the stock market in the spring of 1920. I have supposed that he owed no money, particularly on brokers' accounts. When syndicates were formed in recent months by Morgan & Company, it was my understanding that Mr. Durant would not operate in the stock market in any way, as it is impossible for two parties to act independently in a satisfactory way. I have been disappointed during recent weeks to hear Mr. Durant mention supporting the market, in view of the fact that the Morgan syndicate was not doing so properly. My judgment has been against this independent action, but I am not sure that the subject has been discussed in a way that has indicated to Mr. Durant any clear cut ideas on my part; in fact, I have pictured his purchases to sustain the market as being limited to a number of shares well within his supposed purchasing power and that of his immediate friends who might be helping him in placing the stock. I have felt quite certain up to November 11th that Mr. Durant was not operating in the stock market and was not a borrower of money.
Notwithstanding the above opinions that were quite firmly fixed in my mind, there have been rumors of Durant's speculations. Both Mr. Raskob and I have felt that Morgan & Company have been ignorant of the extent of Mr. Durant's operations since they became purchasers of General Motors Common stock. Morgan & Company have had every opportunity to question Mr. Durant on the subject and I have not felt it my duty to pry into Durant's affairs. Some time within the past six weeks Mr. [Dwight W.] Morrow of Morgan & Company asked Mr. Raskob and me some questions regarding Mr. Durant's personal affairs, particularly as to his possible stock market operations. To this we replied that we knew nothing of his personal affairs and that he had never confided in us. I advised Mr. Morrow that he question Mr. Durant personally, as we felt sure that he would be candid in his answers. This led to a meeting in Mr. Morrow's office in November, 1920 at which he, Mr. Durant, Mr. Raskob and I were present. During that meeting I stated that it was fair that the partners in ownership of General Motors stock should know each others position and informed the meeting on the part of the du Pont interests that all of our stock, both General Motors and Chevrolet, was held by the company, unpledged, and that we were not buyers or sellers of stock in any amount. I also stated that I, personally, was not a borrower of money on the stock; that my shares were held by me, and that I had not bought or sold stock recently. I stated that so far as I knew, none of the individuals in the du Pont group were borrowers on General Motors stock or operating in any way. Mr. Morrow stated that the shares purchased by Morgan & Company and their friends were still held and that there was no intention to sell. I do not remember that Mr. Durant made as positive a statement on his part, but he did not give any intimation that he was a borrower on the stock or operating in the market in any way. Mr. Morrow asked him the direct question whether he knew of any weak accounts in the market, to which Durant replied "no." He left us with the impression that his holdings were as clear as our own. Knowing Mr. Durant and the peculiarities of his makeup, I do not think that he intended to deceive us in any way; but Mr. Morrow, who was not inclined to be as generous, I think censures Mr. Durant severely for his failure to be frank with us.
We now come to Thursday, November nth, 1920. Without any idea in the heads of Mr. Raskob or the writer that Mr. Durant was involved in any way, on the date above mentioned Mr. Durant asked us to lunch with him. At the meeting he stated that he had been informed that "the bankers" had demanded his resignation as President of the General Motors Company, to which demand he was ready to accede, as he was determined to "play the game," for the reason that the company as well as he, personally, "was in the hands of the bankers" and must act accordingly. I immediately took exception to his statement about the company, explaining that our borrowings were not greater than could be prudently carried in view of our large working capital and other assets and in view of the cash balance carried by the company and the forecasts of our financial affairs. I explained that our banking partners concurred in this opinion and saw no difficulty in carrying our loans until liquidation through the operations of the business could be accomplished. Mr. Durant stated that he was worried about his personal accounts but made no definite explanation, and no opportunity was presented for an inquiry, which did not seem necessary at the time. However, after leaving this meeting, Mr. Raskob speculated on the probable meaning of Mr. Durant's words. In answer to Mr. Raskob's question the next day as to the condition of Mr. Durant's affairs and particularly] as to whether his indebtedness amounted to "six or twenty-six million dollars," Mr. Durant replied that he would have to look up the matter. Mr. Raskob and I left New York on Friday (12th) and did not return until the following Tuesday, November 16th, at which time we went to Mr. Durant's office in the morning, with the determination to endeavor to find out his true position, as we had agreed in conversation that Durant's personal affairs, if seriously involved, might indirectly affect the credit of General Motors Company. Mr. Durant was very busy that day, seeing people, rushing to the telephone, and in and out of his room, so that, although we waited patiently for several hours, interrupted only by lunch time, it was not until four o'clock that afternoon that Mr. Durant began to give us figures indicating his situation. He had pencil memoranda of the number of loans at banks. The total memoranda, as written down by us from what he said, showed an indebtedness of twenty million dollars, all presumably on brokers' accounts and supported by 1,300,000 shares of stock owned by others and by an unknown amount of collateral belonging to Durant; also, $14,190,000 which Durant estimated he owed personally to banks and brokers, against which he held three million shares of General Motors stock, this, of course, exclusive of the 1,300,000 shares owned by others. Mr. Durant stated that he had no personal books or accounts and was wholly unable to give definite statements as to the total indebtedness; what part of it was his personal and what part was the indebtedness of others on which he had lent collateral without other commitment. Apparently, he had no summary of brokers' accounts in hand. However, the whole situation, besides being very involved, seemed very serious. Mr. Durant promised to ask his brokers for accounts in order to make some positive statement.
On Tuesday evening (Nov. 16th) Mr. Durant had a call from McClure, Jones & Reed, brokers, for $150,000, to support his account. This amount was fixed up in some way.
On Wednesday (Nov. 17th) we inquired for the brokers' accounts and found that directions had been given to make the statement as of the close of business Wednesday, November 17th, so that nothing could be done that day. Meantime, the statements already given appeared so indefinite that Mr. Raskob and I were loath to believe the accounts in any way accurate. However, the situation seemed serious enough to warrant speculating on a plan for relief. We decided that, in order to avert a crisis, it might be possible to organize a company to take over Mr. Durant's holdings, issuing $20,000,000. of notes, which would be offered as collateral to the holder of obligations, and that the du Pont interests might invest $7,000,000., or even $10,000,000. in securities of the company in order to furnish cash to liquidate pressing accounts and make payments, in part, of others.
On Thursday, November 18th, the broker accounts started to come in, and it required all of that day to get the statement in shape that was agreed upon by Mr. Durant as correct. The statement, however, was not capable of accurate checking, excepting from the broker accounts presented. There was nothing to show that these covered all the broker accounts, and there was nothing very definite in regard to bank loans, nor to the syndicate accounts in which Mr. Durant was involved as lender of collateral. However, a summary sheet was made up from the data and given to the typist for copying late Thursday afternoon. About that time Mr. Durant called Mr. Raskob and me to his office, stating that some of the Morgan partners were to call upon him shortly and asked us to be present at the meeting. We told him that his position differed so entirely from that represented to us and to Morgan & Co. that it was impossible for us to sit in a meeting with him and the Morgan partners, unless he agreed to make a complete statement to them. He did not agree to this point and we left the room. About 6:30 p.m. we started to leave for the hotel and met Messrs. Morrow, [Thomas] Cochran and [George] Whitney, who had met Mr. Durant, with a promise on the part of Mr. Whitney to return at nine o'clock that evening. Mr. Morrow called me aside and stated that they wanted to get in touch with me for a few minutes' interview. He and his associates and I then repaired to Mr. Raskob's room and, after a few preliminaries, I asked whether Mr. Durant had made a complete statement to them. To this Mr. Morrow replied "yes," and produced a copy of the typed summary which I had prepared but which I had not yet myself seen in finished form. Then ensued a discussion of the whole subject, in which the Morgan partners outlined their opinion of the extreme seriousness of the situation and the panic that might result, in the event of Mr. Durant's failure, which might possibly involve the failure of several brokers and some of the banks, particularly as there were two large and critically weak accounts in the street. Mr. Morrow stated that he would give up an engagement and return at nine o'clock and I agreed to break an engagement and do likewise. Our conversation occupied not much more than a half hour. I returned to the hotel and, together with Mr. Raskob, went to the office at the appointed time, where three Morgan partners had assembled. Mr. Raskob outlined to Mr. Morrow our rough plan of giving assistance, in which it appeared that, we representing the du Pont interest, were willing to help materially in this very desperate situation. Mr. Morrow stated that he thought the plan impossible of execution because of the very critical condition in the market and recommended that we endeavor to place a loan of $20,000,000. among the banks, in order that an offer of cash for all Mr. Durant's indebtedness might be made. Mr. Raskob and I agreed on part of the du Pont interests that we could furnish $7,000,000.00, and sufficient additional collateral toward the project. The Morgan partners were very complimentary as to the willingness of du Pont to help in the situation, Mr. Cochran using the expression that "there are two firms in this country who are real sports, viz., du Pont and Morgan."
Discussion ensued as to the treatment of Mr. Durant, Mr. Morrow making the suggestion that one-fourth of the equity in the shares should remain with Durant and that some portion of this equity might have to be used in order to help place the notes. He stated in the beginning that Morgan & Company would ask no commission or payment of any kind for their services in the deal. This division of the equity was discussed with careful consideration of justice to Mr. Durant and those carrying the load. After this preliminary discussion, the Morgan partners stated that they must go as carefully as possible into Mr. Durant's accounts before any attempt was made to float a loan. This investigation they proposed to start upon immediately and, therefore, went to Mr. Durant's room, and checking of the accounts was carried forward and the proposition of relief presented to Mr. Durant by Mr. Morrow. Mr. Durant thought that one-fourth of the equity returned to him was harsh. Mr. Morrow then moved to one-third. Mr. Durant suggested to me that 40% to him and 60% to the du Pont interests would be more nearly fair. This part of the negotiations was all in good spirit and with apparent endeavor on all sides to be just in a difficult situation. Checking of accounts and discussion of the subject continued without interruption until about 5:30 o'clock Friday morning, about which time Mr. Durant and I signed a memorandum, agreeing to the general proposition of a $20,000,000 note issue and issue of stock to support the $7,000,000 furnished by the du Pont interests; also, the loan of additional collateral, estimated at 1,300,000 shares. Memorandum also agreed that the equity in the stock representing the selling price above $9.50 per share, plus costs and interest, should be divided one-third to Durant and two-thirds to du Pont. Even at this date the total indebtedness was uncertain and the syndicate accounts still involved.
After a hurried breakfast we all retired for a couple hours' sleep and returned to business at 9:30 o'clock that morning. Messrs. Morgan & Co. arranged a loan of $20,000,000. with the principal banks in New York before five o'clock that evening (Nov. 19th). In the meantime, the plan was suggested that the du Pont interests take 8% Preferred stock for their cash, and for the loan of collateral, 80% of the Common stock, the latter representing the equity in the selling price of the stock above $9.50, plus costs and interest. Twenty per cent, of this common stock was set aside for the bank interests furnishing the loan of $20,000,000. On that day the du Pont Finance Committee met and agreed to divide the 80% Common stock equally with Mr. Durant, leaving the proportions 40% Durant, 40% du Pont and 20% bankers. This is the plan that has been finally consummated. While rumors of the deal were active on Saturday (Nov. 20th), announcement was not made until Monday (Nov. 22nd), when Morgan & Company started to gather in the stock. Throughout the whole transaction the Morgan partners have appeared to greatest advantage. They threw themselves into the situation wholeheartedly, stating at the start that they asked no compensation. They have acted with remarkable speed and success, the whole deal involving $60,000,000. or more, having been planned and practically completed in less than four days, in which are included a Saturday and Sunday.
On November 30, 1920, Mr. Durant resigned as president of General Motors.
With all I have said in appraising Mr. Durant's methods, he was no more responsible than was Mr. Raskob for the collision between General Motors' expansion and the business cycle. Mr. Raskob went ahead pushing the expansion and paying the bills. Mr. Durant's management methods let things get out of control. I have heard that Mr. Durant became pessimistic about the national economy in late 1919, but I can find no record of it. On the record, both Mr. Durant and Mr. Raskob were strong, optimistic expansionists. They seemed to disagree on occasion only on what to put the money into.
I think that Mr. Durant's personal stock-market operations were motivated essentially by his great pride in General Motors and everything relating to it, and by his unbounded confidence in its future, a judgment that has been well vindicated over the years. I think also that the arrangement the Morgans and du Ponts made with him to take over his stock obligations in such a critical period was a generous one.
Consider the following: Mr. Durant in 1921 sold back to the du Ponts his interest in the company formed to bail him out. He received for his interest 230,000 shares of General Motors stock, whose market value at the time of acquisition was $2,990,000. Mr. Durant's disposition of those shares is not part of this story. However, their market value if he had held them to the time of his death, March 19, 1947, would have been $25,713,281, on which he would have received an aggregate of $27,033,625 in dividends and from the sale of rights.
To return to the events of 1920, the slump in the national economy and its impact on the corporation, the lack of control of operations, and Mr. Durant's resignation shook the enterprise to its foundation and started an entirely new period in its history—which is where the main part of my story begins.
