Reckoning

by David Halberstam

  The Kettering engine was installed for the first time in the 1949 Cadillac. Although the car was large, it still got twenty miles to the gallon. That pleased him. What followed did not. Soon there were huge new cars with giant engines and loaded with accessories like air conditioners, power brakes, and power steering. American cars had surged not just in power but in size; they grew two feet wider and two feet longer than they used to be, and as they grew they needed still more power. The size of automobile engines in postwar America climbed at an amazing rate, from 90 to 100 horsepower, to 160, to 250, and finally Chevies with 325 and 400-horsepower engines. An ad for the 400-horsepower model said that driving it was “cheaper than psychiatry.” The gas mileage, of course, went steadily down. A New Yorker cartoon of that era showed a Cadillac in a gas station, its engine idling as the attendant was filling it up; the attendant yelled to the driver: “Turn off the motor. You’re gaining on me.” As Hal Sperlich, first of Ford and then of Chrysler, pointed out, auto engineers no longer sought maximum efficiency but deliberate waste.

  Extravagant waste was now feasible because of the discovery of immense new oil reserves—not, this time, in the American Southwest but in the Middle East. World War II had taught America the importance of oil. The new machines of war were fueled by oil. Etched in the minds of American planners were scenes such as the seaborne and airborne U.S. Navy systematically destroying the oil-starved Japanese in the South Pacific, and of combat engineers in France and Germany laying fifty miles of pipeline a day as they raced to keep up with George Patton’s tanks. It was not, some experts said, the American bombing of the German war machine that had crushed the Third Reich; it was the failure of the Germans to find sufficient oil to keep that war machine running. During the war the Allies had had access to 86 percent of the world’s oil. The significance of that statistic was not lost on the American national security establishment. Even as the war was ending, the Americans, the ascending Western power, aware that their own domestic oil production was somewhat stagnant, moved to strengthen their position in the Middle East. From 1939 to 1946, a time when geologists were finally understanding how rich the deposits in Saudi Arabia were, the American reserves increased only 6 percent, whereas the world reserves, mostly in the Middle East, increased 60 percent. The new world of American and Western oil was in the Arab fields—“our reserves,” as Harold Ickes, Franklin Roosevelt’s Secretary of the Interior, called them.

  Even during the war the Western nations were busy flattering the Saudis. The Americans, somewhat to the surprise of the Saudis, had offered them Lend-Lease aid, and when the Saudis had asked for very little, the Americans had not let that stand in their way. They gave the Saudis so much that, historian Herbert Feis wrote, “They have gone fishing for a carp and caught a whale.” Roosevelt, on his way back from the Teheran conference, stopped off to meet with King Ibn Saud, and, courting him, promised him an airplane; a few days later Winston Churchill, not to be outdone, promised him a Rolls-Royce. At the meeting with Roosevelt Ibn Saud raised the question of what would happen to the Jews; Roosevelt promised that he would not change his position on Palestine without consulting the Arabs.

  Quietly, without anyone’s completely understanding what was happening, the foundation for eventual crisis was being laid. The aspects of it were these: America’s energy resources were proving static, but the Middle East’s were richer than ever. Those reserves were so bountiful that the idea of an oil shortage seemed ludicrous; there seemed to be an overabundance of oil. This glut weakened the leverage of the proprietor states. In addition they were weak, many of them just emerging from colonialism, unsure of themselves and their power, and attributing awesome power to the Westerners who had dealt with them so knowingly in the past. Thus was their negotiating power severely limited in the beginning. Furthermore, they did business not so much with the Western governments as with the Western oil companies, which were virtually nations unto themselves. The companies inevitably became their political allies, while, in the United States, the State Department became the ally of the new state of Israel. The issue of American support for Israel had been raised but not resolved. But no one worried very much then about the contradiction; the Arabs were weak and divided, the West was strong, and the oil was so plentiful that a shortage was almost beyond comprehension.

  Experts were only then beginning to realize how valuable the Saudi reserves were. Some explorers for SoCal had stumbled on the Saudi deposits in 1932 while working in Bahrain, a small island off the Saudi coast. They found oil in Bahrain, but some domelike structures on the nearby mainland looked even more promising. SoCal immediately set about trying to get the concession for the fields. They made their approaches through Harry Philby, a British Arabist (and father of the famed Soviet agent Kim Philby) who was advising the Saudi royal family and by chance also advising British Petroleum. King Abdul Aziz’s finance minister, Abdullah Suleyman, demanded 50,000 pounds sterling in gold for the concessions. (It all seemed like a scene from a bad 1930s movie about dealing with the Arabs.) SoCal offered 50,000 pounds, and the British, who were hardly interested in the field, treated the Saudis with exceptional disdain and made only a token offer. Aided by Philby, who had become a Muslim and served all parties, the Americans won. In 1945 SoCal joined Texaco in a company called Aramco, to develop the field. At the start the Americans were quite casual about the field, and they did not, to the irritation of the Saudis, get it operating very quickly. There was pressure from the Saudi government to get greater production, and Esso and Mobil were let in to speed the process.

  SoCal had at first thought the field unrewarding; it was only near the end of World War II that its full dimensions were revealed. The key was the giant Ghawar deposit; it was to other oil deposits, Christopher Rand wrote in his book Making Democracy Safe for Oil, what Everest was to other mountains. Some of the giant deposits in the Middle East were as long as 20 miles; Ghawar stretched for 140 miles and was up to 20 miles wide. Every time geologists tried to estimate how much oil was beneath the surface they seemed more staggered than before; it all but defied their calculations. This was truly the jewel of the Middle East. The Texas gushers had dwarfed all previous oil finds; now the Ghawar field seemed to mock those gushers too. The oil was close to the surface and close to the sea, and production in the postwar years soon became a fully automated process. In Texas it cost about $1 to produce a barrel of oil; in the Ghawar it cost 5 cents. The political problems of dealing with the Saudis were relatively minor; the companies had only to talk to one man, the king, and the government was conservative and feudal. One authority on the Saudis said it was not so much a government but a country run by one thousand people all of whom were cousins.

  If geopolitics in the Middle East were fraught with danger, no one seemed to worry about it at the time. Yet a good political-scientist-cum-statistician, starting in the fifties could probably have charted two curves predicting a crisis of considerable import. The first would have been the growing number of countries entering the oil culture and basing their economies on it. They were mainly Western European nations like France and West Germany, which, pushed by the Americans, who were financing and midwifing their recovery, were switching from coal to oil. That changeover was expedited by political considerations: The Americans and some of the European governments were wary of renewing their dependency upon coal, since the coal-mining unions were left-wing; oil, by contrast, seemed a labor-free energy. The second curve was that of rising, potentially anti-Western nationalism in the Middle East. But the intersection of those curves was still in the future; in the meantime the oil coming out of the Arab world was cheap and plentiful, a perfect support system for a nation splurging on bigger and heavier cars with more and more options. That binge shaped the decade of the fifties, years in America of a constantly expanding market. The car became the emblem of this rich new society and of its remarkable fluidity.

  No organization was better suited to exploiting this dynamic than GM with its differen
t stalls in the marketplace, a car for each stage of the upward social journey. In 1955 GM became the first American corporation to make $1 billion after taxes, on revenues of $12 billion. In that same year Harlow Curtice, the president of GM, received $750,000 in salary, bonuses, and stock options, which was both a reflection of the corporation’s success and a signal to the workers to be sure to get their share too. Big was becoming bigger as the smaller independent auto makers fell by the wayside, crushed by these giants who enjoyed economy of scale. Crosley died, Hudson and Nash joined to become American Motors, Packard merged with a frail Studebaker. The pattern was very clear. When Curtice took over in 1952, GM’s market share was 42 percent; three years later it was 50.9 percent. The joke at GM went: “The boss says we’re still losing-five out of ten sales.”

  The trends continued through the rest of the fifties, and the decade ended with the Big Three seemingly healthier than ever, confident that as there had been no limits in the past, there would be no limits in the future and that there would always be more people buying larger cars with more options. The scale became larger, the companies became wealthier, the industry became tighter and more controlled. Colossal GM dominated and determined pricing. Ford watched it like a hawk, and Chrysler watched Ford and tried to survive. The games within games that this monopoly occasioned were intriguing, a parody of competition. In 1956, for example, Ford brought out a brand-new model to go against a Chevy that was in the last year of that model’s three-year cycle. That move seemed to favor Ford in the market. But because GM was so powerful, Ford was quite cautious about putting a higher price on its new car; the price it chose was only 2.9 percent more than that of the previous year’s model. Undaunted, GM charged ahead; it gave its old Chevy a minor cosmetic change and raised its prices between $50 and $166. Ford then dared to reach for a little more; a week later it put its price up another $50. Ted Yntema of Ford later told Senator Estes Kefauver’s Senate Monopoly subcommittee that this pricing episode was “like a boxing game where you try to guess what your opponent is going to do....We made a very bad guess.” In response to another Kefauver question he admitted that yes, if Ford had cut the price it might have sold more cars; what he did not say was that Ford was afraid to cut the price, for fear of getting into a price war with GM that it would most assuredly have lost. Because of GM’s ability to raise prices without fear of being undercut by the competition, hundreds of thousands of people had to pay more for their cars, and neither Ford nor GM was under much competitive pressure to produce a better machine. Only a few observers of the industry seemed to see that in a situation like this, all companies were bound to develop bad habits. What had happened, of course, without anyone realizing it, was that the industry had become monopolistic—what Patrick Wright called a shared monopoly—and monopolies, free of fresh challenges and new ideas, inevitably become cautious and staid. At the time, George Romney of American Motors, which was struggling along, warned of what was happening. While the Big Three, he pointed out, were musclebound and mindless in the domestic market—increasingly locked into practices that their best people knew were destructive but unable to break out of so profitable a syndrome—their European subsidiaries were often innovative, because on the Continent they encountered genuine competition. Romney realized that he was different from the other auto men, that his insights were an involuntary result of the precariousness of his position, but he was also sure that he was right, that, in his words, “there is nothing more vulnerable than entrenched success.”

  In the postwar years, not only did the number of automobile companies decline but the cost of doing business went up—because of large labor settlements and the inflated salaries and bonuses for management. Yet the very scale made it harder and harder to create a new company. “I thought then, and I know I was right, that something terrible was happening,” Romney said years later. “A healthy sector of an economy needs births as well as deaths.” The one significant postwar challenge to Detroit had come in 1945, when Henry Kaiser had tried to enter the auto business. If anyone had the ability and the resources to make it as an outsider in the closed world of autos, then it was Henry Kaiser. “No industrialist since Henry Ford has achieved so much in so short a time,” Fortune once said of him. Henry Kaiser was not a small-time operator.

  He had started as a road-paving man on the West Coast. By the time he took on Detroit he had succeeded in gravel, aluminum, and steel. He had been a principal builder of the Bonneville, Grand Coulee, and Shasta dams, as well as the San Francisco—Oakland Bridge, and during the war his factories made vast numbers of planes and military vehicles, while his shipyards turned out fleets of standardized vessels by assembly-line methods. He had long coveted a place in Detroit, and during the war, even while he was commanding prodigious war-related enterprises, Kaiser had a team of some of his best engineers tear down all kinds of cars and study them. He wanted his own people, not Detroit engineers, doing this, because he did not want to be a prisoner of Detroit’s techniques. He saw himself as the rightful heir of the first Henry Ford: He dreamed of building a small, $400 car for Everyman; he would be the common man’s industrialist. Right up until 1945 he went back and forth on the decision to try Detroit. In the spring of 1945 he decided to pull back. “We didn’t, any of us, want to live in the East,” said his son Edgar. (His offices were in Oakland, California.) But when it became clear that Henry Ford did not plan to use his Willow Run facilities after the war, Kaiser became interested. UAW officials, fearing postwar unemployment, encouraged him.

  He soon decided to become partners with Joe Frazer, a maverick figure in Detroit, a supreme salesman, an Iacocca before Iacocca, who had been successful in earlier incarnations at Chrysler and Willys-Overland, among other companies, and who had decided to produce his own car. (Frazer as a Detroit insider in 1942, hearing that Kaiser was planning to build a car, had called his ideas half-baked.) Kaiser, a man of limitless confidence and optimism, was one of the great risk-takers of his era. He had dazzled most Americans with his shipbuilding successes during the war and was primed for even greater success in the postwar era. Golden years were just ahead of America, he liked to say. Look, he would tell doubters, at the $43 billion accumulated by Americans during the war in savings bonds. That was just waiting to be taken by the right entrepreneur. “That’s not debt,” he said. “That forty-three billion is pure venture capital.”

  He was constantly expanding his operations, delving into new areas. He liked to boast that every time he went to see Fred Feroggiaro, his man at the Bank of America, the banker would caution him in the same way.

  “Henry, your cash position is weak.”

  “Fred,” he would answer, “why don’t you get a record of that so you won’t have to waste your time telling me the same thing again and again?”

  He and Frazer were able to rent the Willow Run plant from the government for very little. Everything seemed to be in place. Yet everyone who had any experience with the automobile industry warned against his entry. The stakes were too high, the costs too great, and the existing companies too strong. If anything, with young Henry Ford about to rejuvenate Ford, the competition was likely to become more formidable than ever before. Those doubts never moved Kaiser. “They tell me I’m going out on a limb,” he said. “Well, that’s where I like to be—way out on a limb. We’re going to service the nation, the whole world. We’re going to produce thirteen million cars.” Besides, getting into something like autos was part of a dream to him. The problem with most of what he did, he often said, was that you built a bridge or a dam and, no matter how great a job it was, when you were finished, it was done. “I want to get into a business that will know no end,” he added, “where you build something and then keep on building it.”

  Kaiser and Frazer made two public stock offerings. The Kaiser name was an extraordinary draw, and the results were remarkable. Wall Street was stunned. The first offering went at $24 a share, the next one at $20. After the first issue, which raised $16 million, H
enry Kaiser called in Clay Bedford, who was in charge of manufacturing.

  “What do you think, Clay?” he asked.

  “Not bad, Henry,” said Bedford. “The only thing wrong is you should have moved the decimal point over, made it a hundred and sixty million, and then multiplied by two. With three hundred and twenty million we might have a chance.”

  The two offerings raised some $53 million. The sum pleased Frazer, who, unlike the Kaiser men, was confident they had enough money. In January 1946, Frazer gave a dinner in honor of Henry Kaiser at the Detroit Club. That night many of the city’s auto potentates turned out to meet the new gun in town. There was a certain edginess, for this was a society that did not freely admit newcomers. Many top General Motors executives were there, and K. T. Keller, the head of Chrysler, showed up. The Ford people were noticeably absent. Kaiser, who became quite expansive that night, kept referring to Keller as “my good friend J.T.,” which did not exactly ease the suspicion of him. He and Joe Frazer, he told the gathering, were not taking this step lightly. This was serious business. Why, he said, they had raised more than $50 million, and they intended to spend all of it right here in Detroit. “Give that man one white chip,” said a voice from the back of the room, referring to the smallest chip in a poker game. That was it, one white chip, for in truth, on the scale of what it took to make autos now—production facilities, supplies, dealerships, labor—that was all the two of them had, one chip in the poker game.