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10 Moments That Made American Business
How a debt-ridden banana republic became the greatest economic engine the world has ever known
February/March 2007 | Volume 58, Issue 1
It was a revolutionary concept that would have consequences Henry Ford never imagined and made him one of the most famous people in the world. In 1932 Aldous Huxley published his classic novel of the future, Brave New World , in which the people of that world reckon time not from the birth of Christ but from the birth of Henry Ford.
In 1908 Ford introduced the Model T. It was designed to be both rugged—to handle the usually awful roads of that time—and cheap to manufacture. At $850 not only was it much less expensive than the average automobile, it also cost only about a penny a mile to run. It was an instant success: 10,607 Model T’s sold that year, more than two and a half times as many cars as had been sold in America just eight years earlier.
Ford, having designed what he regarded as the perfect vehicle (and for its time it was), bent all the company’s efforts to reducing manufacturing costs to make the Model T accessible to an ever-larger segment of the population. In 1913 he introduced the assembly line, a fundamental concept in manufacturing ever since.
By 1916 the price of a Model T had dropped to $360, and Ford sold 730,041 of them that year. By 1920 Ford was building half the cars in the world, and the 5,000-year reign of the horse as the prime local mover of humans and freight had come to an end.
The cheap car remade the American economy. By the 1920s automobile manufacture was consuming 20 percent of the nation’s steel production, 80 percent of its rubber, and 75 percent of its plate glass. The need for roads gave an enormous boost to the construction industry and stimulated quarrying and cement manufacture. By the 1920s automaking had become the country’s largest manufacturing industry. It still is.
No country in world history has seen the economic growth the United States experienced in the first 150 years of its existence. And no industrialized nation has experienced a depression to equal what the United States endured from the fall of 1929 to the winter of 1932–33. In those three and a half terrible years the country went from blue-sky prosperity to near collapse. Unemployment increased from 3.1 percent to 26 percent, a figure that would have been far worse had not many jobs been made part time. Hours worked declined by 30 percent. Industrial production dropped by nearly half, as did GDP. The country produced 4 million automobiles in 1929 but only 1.7 million in 1931. The federal government’s budget went from a surplus of $734 million in 1929 to a deficit of $2.7 billion in 1932.
By the end of that year, as the nation waited for Herbert Hoover to finish his term on March 4, economic matters were deteriorating nearly by the minute. The index of industrial production declined 12.5 percent between December and March. Farm mortgages were being foreclosed at the rate of 20,000 a month. Then, in February, the banking system began to collapse. Were it to go, everything else would go too, for a modern economy can no more function without a banking system than a living body can function without a circulatory system.
More than 5,000 banks, mostly small and rural, had collapsed since 1929, and the sight of crowds outside banks demanding to withdraw their money had become common. But now panic began to become generalized, and every bank was feared to be failing. On February 14, 1933, the governor of Michigan ordered all the state’s banks closed for eight days to prevent a fast-spreading panic from engulfing the entire state banking system.
Panic, of course, is highly contagious, and state after state followed Michigan in ordering its banks closed. By March 4, every bank was shut in 32 states, and most were in 6 more. In the remaining 10 states withdrawals were sharply limited, in Texas to no more than $10 a day. On inauguration day the New York Stock Exchange announced it would not reopen that morning and did not say when it would. The mightiest national economy on the face of the earth nearly ceased to function.
If one needs proof of the importance of psychology as a force in the economic universe, the first week of the Roosevelt administration provides it. On March 4 Roosevelt gave one of the very few inaugural addresses that have been remembered. The very first paragraph contains a line that has become an enduring part of the American political lexicon: “Let me assert my firm belief, that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
The American people, listening by radio, responded. In the first week of the Roosevelt Presidency, the White House received 450,000 letters and cards. The Hoover White House had needed one clerk to handle its mail; Roosevelt needed 70. The next day the President ordered all the nation’s banks closed and Congress into session. Congress met the following Thursday, March 9, to consider the Emergency Banking Relief Act. The House passed it by acclamation in 38 minutes. It passed the Senate with equal speed, and Roosevelt signed it into law that evening.
On Sunday Roosevelt gave his first fireside chat to an enormous radio audience. He told the country that when the banks began to reopen the following day, they would have had their books examined and would be a safer place to keep one’s money than under the mattress. The country believed him, and money and gold began to flow back into the banking system. The heart of the American economy, stilled for a week, began to beat again.