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Prosperity on $5 a day
Henry Ford’s revolutionary vision
Henry Ford had a problem. But it wasn’t a problem of the sort that won him sympathy from his fellow automobile manufacturers. His profits were growing too fast. Ford Motor Company had introduced the Model T in 1908, and the car became an immediate success. Ford’s profits doubled from 1910 to 1911, then doubled again in each of the next three years.
The secret of the Model T was that it was a car built for the masses at a time when most automobiles were designed for the classes. The initial price of $825 was low by comparison with other cars, but it was too high for Ford. He relentlessly reduced the price to $600, then $400, then into the $300 range. With each price reduction Ford broadened the potential market. “Every time you reduce the price of the car without reducing the quality, you increase the possible number of purchasers,” Ford explained. “There are many men who will pay $360 for a car who would not pay $440. We had in round numbers 500,000 buyers of cars on the $440 basis, and I figured that on the $360 basis we can increase the sales to possibly 800,000 cars for the year.” He was only a little off. Sales in the year the $360 price went into effect totaled 730,000 cars.
Still he wanted more. America’s industrial revolution until this point had been based on the principle of paying wages as low as possible and charging prices as high as possible. Ford had broken the template on the pricing side; now he went after wages. Ford wanted to ensure that his workers would be able to afford the cars that they built. He was not an economic theorist, merely a practical man. He realized that if American workers generally could not afford what they produced, the economy as a whole would hit a wall. If, on the other hand, workers were paid enough to be their company's customers, then a virtuous cycle would be set in motion.
And Ford’s excess profits problem would be solved. He was a farm boy with a knack for tinkering; he had never wanted to be a tycoon. At a meeting of the board of directors of Ford Motor in January 1914, he projected revenues and profits for the year based on different wage levels. The average wage in the automobile industry at this time was between $1.80 and $2.50 per day. On a slate, Ford chalked in a $3 wage, then $4, then $4.50, then $4.75. An exasperated board member, mocking Ford’s largesse, declared, “So it's up to $4.75. I dare you to make it $5.”
Which is exactly what Ford did. He strode out of the meeting and announced that henceforth Ford Motor Company would pay workers $5 for an eight-hour day. (Most companies required nine or ten hours from their workers per day.)
Some observers praised Ford for putting his workers' interests first. One Michigan editor proclaimed of Ford's announcement, “It is the most generous stroke of policy between captain of industry and worker that the country has ever seen.”
Ford didn’t consider himself particularly generous; he expected the new policy to be good business, broadly construed. “Our own sales depend in a measure upon the wages we pay,” he said. “If we can distribute high wages, then that money is going to be spent, and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous, and their prosperity will be reflected in our sales.” Summarizing his vision of a new template for the American economy, Ford said, “Country-wide high wages spell country-wide prosperity.”
No single action by a business leader ever had a more profound effect on the American economy. Ford’s competitors thought he was ruining the labor market in the automobile industry; and indeed he was by their reckoning. But they were compelled to follow his lead, until jobs in auto manufacturing became some of the most coveted in all of American industry. And Ford’s vision of a high-wage manufacturing economy became the basis of the golden age of the American middle class.
That golden age persisted as long as the American economy was a relatively closed system. It began to weaken under competition from foreign manufacturers in the final third of the twentieth century. Conceivably it could be revived as wages rose in other countries. To some degree this was happening in China in the early twenty-first century, where rising wages were producing the largest middle-class in human history.
But a global economy based on high wages? That seemed a stretch. Yet perhaps not more of a stretch than Ford’s revolutionary vision for America had seemed in 1914.