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 tha
t 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.
My Years With General Motors Page 5