Party Like It's 1914, Part I

The Ford Motor Company has announced that it will sell 300 million new equity shares to raise the cash to meet its health care obligations to the UAW. ("Ford to sell 300 million common shares") Aside from the fact that this gives both unions and management tremendous incentive to push for government-run and taxpayer-funded health care (otherwise known as "socialized medicine"), using a company's capitalization to pay expenses unrelated to production is self-defeating for the company, and adds to the inflationary wage/price spiral that has inhibited economic growth and development ever since Keynes' disproved theories became unquestioned economic dogma. Ironically, this has not only happened before, the Ford Motor Company led the way.

In January of 1914 Henry Ford raised the basic wage rate at the Ford Motor Company from $2.34 per day to $5.00 (See Robert Lacey, Ford, The Man and the Machine, 1986). At first limited to certain classes of machinists and widows with children, the increase caused so much envy among all workers that Ford was forced to make $5.00 the basic minimum for everyone. Workers employed at other auto plants and unemployed people from across the country descended on Ford in search of jobs, causing riots that had to be broken up with fire hoses in subzero weather. A number of small businesses located near the Ford plant were destroyed during the disturbances.

Other auto manufacturers were forced to raise their pay rates to keep qualified workers. The increase in pay unlinked to increases in productivity started an inflationary wage/price spiral. Exacerbated by the inflationary monetary policies instituted in the First World War with the hijacking of the new Federal Reserve System to finance government deficits instead of private sector capital formation, Ford's unilateral wage increase eventually resulted in a typical autoworker in 2009 making in wages and benefits more than twice in one hour what an autoworker made in 1909 in an entire week — Saturdays included.

Contrary to the Keynesian fallacy that inflation results in genuine wealth creation, the increase is almost pure illusion. We don't have the time to do in-depth research, so the following figures are necessarily approximate, but they give a good idea of the effect that inflationary Keynesian economic policy and theory have on real income.

According to the Bureau of the Census, U.S. median income in 2007 was approximately $50,000.00, subject to an effective federal tax rate of about 20.7%, which we'll round to 20% (this includes the workers' share of FICA, c. 7.5%). That left approximately $40,000 in disposable income for the "typical" wage earner. This is a lot of money, but what does it mean? The average price of an automobile in 2006 was $22,651, or 45.3% of median disposable income. The average price of a house in 2000 was $120,000.00, or 240% of median disposable income.

In comparison, a Ford worker making $5.00 per day, six days a week in 1914, could expect to take home $1,250.00 — all of it disposable. A Model T Ford "Runabout" in 1914 cost $440 (and was reduced to $345 in 1916), or 35.2% of disposable income. An elderly uncle of mine recalls that his father purchased a farm in Lancaster County, Pennsylvania, in 1906 for $400, or 32% of the lowest-paid Ford worker's disposable income. (I used anecdotal evidence because the Census Bureau only goes back to 1940 for house prices.)

Thus, the modern autoworker can expect to spend approximately 280% of his or her annual disposable income on transportation and housing, compared to the autoworker of the early twentieth century's approximately 70% of disposable income. Using only these crude approximations, we conclude that the autoworker of 1914 was at least 200% better off than his or her modern counterpart.

"But," you are tempted to say, " what about the quality of life, and the vastly increased goods and services available to today's worker?"

To that we answer, if Say's Law of Markets were in operation instead of disrupted and undermined by Keynesian economics, ownership of the means of production was widespread, and all new capital formation financed out of "pure credit" (see The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings), production would equal income. Workers' real income would increase rather than decrease as they were able to take advantage of advancing technology and economies of scale as owners as well as providers of labor.

Ultimately, the issue seems to boil down to 1) lack of understanding of money, credit, banking, and finance, 2) bad uses of credit, and 3) defining "power" as control over others rather than control over your own life. We will look at each of these in subsequent postings.