American History Revised (47 page)

Long before it became a recognized management tool for improving productivity, George Eastman provided his employees with high-quality working conditions.

What the
New York Times
was referring to was not just his consumer product, but the way he ran his business. George Eastman’s treatment of employees set the standard for enlightened capitalism. He recognized that his greatest challenge was recruiting, training, and retaining the highly skilled workforce needed to make Kodak a success. He reduced employee working hours and introduced strict safety standards on the factory floor that cut worker accidents 80 percent in just three years. Other medical innovations included a Fresh Aid Fund, a medical department, and a disability benefit plan. He also instituted an employee profit-sharing plan, a savings system, a retirement program, and a life insurance program. This had never been done before in the United States—or anywhere else, for that matter.

He was an equal-opportunity employer. Many of his employees were women. When MIT recommended one of its professors for a senior position at Kodak, Eastman hired her on the spot. When asked to contribute to the all-black Tuskegee Institute, he made “by far the largest single contribution ever made to Negro education.” He then made an equivalent contribution to another black school, the Hampton Institute. Believing
every man deserved a second chance, he instructed his staff to take extra measures to hire handicapped workers and ex-convicts. Compared with most businessmen, then and now, who believe the purpose of a business is to serve the stockholders, Eastman took a broad view and included other constituencies such as workers and the community. “Mr. Eastman,” said one associate, “was the only man I ever knew who started out a conservative and wound up a liberal.”

He was a liberal, but not a bleeding heart. Money must be earned. He was dead set against “gift stock”: he dug into his pocket and made cheap stock available to employees, but on the condition that they contribute 2 percent of their earnings. When he took his company public and became a rich man, he set aside 18 percent of his personal profit and distributed it to his workers, with the following note: “This is a personal matter with Mr. Eastman and he requests that you will not consider it as a gift but as extra pay for good work.” Such fairness stood in sharp contrast to other corporations such as Ford, which in 1913 had a staggering 370-percent annual employee turnover, or Andrew Carnegie’s United States Steel Corporation, where the modus operandi was “I have always had one rule: When a workman sticks up his head, hit it.”

George Eastman, progressive capitalist

Looking for a young man to strengthen his business, Eastman went to Harvard Business School and asked to recruit its top MBA student. The man was Marion Folsom. Folsom joined Eastman Kodak and rose to the position of treasurer. Together, Eastman and Folsom structured Kodak’s groundbreaking pension and retirement plan. (Folsom, because of his work with Eastman, served on every advisory committee developing the Social Security Act, and eventually became Secretary of Health, Education, and Welfare.)

Eastman could be as hard-nosed as any of his fellow industrialists: “In business it is war all the time,” he once wrote. When a friend complimented him for being so organized and disciplined, he responded, “Yes, one has to be hard, hard in this world. But never forget, one must always
keep one part of one’s heart a little soft.” This included his sales to the War Department in World War I—a time when wartime profiteering, as in most wars, was rampant. Not for Eastman: he voluntarily refunded $335,390 to the U.S. government, representing the profits made by Eastman Kodak on war contracts. $152,620 of this was returned in 1919, $182,770 in 1922. Recognizing Eastman’s extraordinary gesture (unequaled in all of America), the president of the United States wrote him this letter:

Eastman’s social innovations “attracted the attention of visitors from every state in the United States, from England, Australia, South America, Mexico, China, and Japan.” Finally he gave away 75 percent of his fortune to philanthropy while he was alive. This, too, was unusual. Most magnates, such as Ford, Guggenheim, and Rockefeller, kept accumulating their money and left it to foundations to manage after their deaths. Not Eastman. “Men who leave their money to be distributed by others are pie-faced mutts,” he said. “I want to see the action during my lifetime.” With that, he resigned from day-to-day management of Kodak to supervise his gifts to educational institutions and the city of Rochester, New York. A number of these gifts were given anonymously, under the name of “Mr. Smith.”

He was a totally unselfish man: at the age of seventy-seven, starting to suffer from a spinal ailment that threatened to cripple him, he shot himself so as not to be a burden to others. His suicide note read, “My work is done. Why wait?”

1936
Rarely have the history books gotten so much so wrong.

On October 29, 1929, the stock market lost $10 billion in share values—more than twice the amount of currency in circulation in the entire country at the time.
Bernard Baruch, the renowned financier and presidential economic advisor, sent a cablegram in November to Winston Churchill: “Financial Storm definitely passed.” In June 1930 President Herbert Hoover received a delegation requesting a public-works program to help speed the recovery. “Gentlemen,” he said, “you have come sixty days too late. The depression is over.” Indeed, many investors who prided themselves as “bottom fishers” proceeded to jump into the market and scoop up bargains. How did they fare?

They lost most of their money. Despite five 30-percent rallies, the market kept falling back to new lows. The Depression (now—with the benefit of historical hindsight—spelled with a capital D) was beginning to accelerate into an abyss. By year’s end of 1932, after three years of falling share prices, 80 percent of the stock market’s value had been wiped out. According to historical stock charts, the stock market didn’t recover its 1929 level until 1954—twenty-five years later.

But wait! This assumes that investors dumped all their stocks in 1932. Suppose they had held on to their stocks? They would have recouped all their losses by late 1936—not 1954. How can this be?

Sophisticated investors don’t take simple numbers at face value—they look at all numbers in context. According to investment adviser Mark Hulbert, historical stock charts are misleading because they oversimplify the reality by ignoring other factors such as deflation, dividends, and the index itself. The early 1930s economy was characterized by 18-percent deflation, thus calling for an upward adjustment in real purchasing power. Dividend yields, to compensate for the drop in share prices, were a handsome 14 percent. Finally and most important of all, the Dow was a skewed measure, consisting of only thirty stocks. Which stocks are selected has a major impact on the Dow average (fast-growing IBM, for example, was excluded from the Dow for forty years during 1939 to 1979). According to research firm Ibbotson Associates, by using the overall market index rather than the Dow, and taking into account the factors of deflation and high-yield dividends, the stock market had fully recovered by 1936.

Investors who panicked and dumped their stocks obviously got killed. Those who were patient and held on, however, saw their depleted holdings bounce back fivefold and made out like bandits. This is a useful lesson for Americans who saw their stock market portfolio collapse 30 to 40 percent in 2008. What goes down, must come up.

1945
Between 1945 and 1950, the U.S. GNP grew almost 50 percent—the greatest five-year boom in economic history. This is a remarkable performance, coming right after an artificially stimulated wartime economy. Usually after a
war, the economy goes into a serious recession (as it did in 1780 and 1865). Post-World War II was expected to do the same. Testifying to Congress about the effect of the end of World War II on the economy, U.S. Secretary of Commerce Henry Wallace warned, “During the next four years … unless drastic steps are taken by Congress, the U.S. will have nearly 8 million unemployed and will stand on the brink of a deep depression.”

Even the Russians got into the act. They offered to be the recipient of $10 billion of American aid in the form of capital equipment. The benefit to America? The manufacture of so much equipment would rescue capitalist America from its postwar economic woes. Needless to say, President Truman was not amused.

“There should be no mincing of words,” said the Truman administration’s ranking postwar planner. The end of the wartime military spending would cause “an immediate and large dislocation of the economy,” with the “severity of this shock … increased by the sudden ending of the war.” In August 1945, 53 million people were in the employed labor force. Twelve million of them were in the armed forces, most of them scheduled for swift mustering out. Where would these people go?

What the government planners failed to recognize was the stimulus provided by excess capital. During the last two years of the war, Americans had saved almost 25 percent of their take-home pay. By mid-1945, Americans’ liquid assets (savings accounts and war bonds) totaled an astonishing $140 billion—three times the entire national income in 1932. Add 1945 individual income of $120-plus billion, and Americans had more than a quarter of a trillion dollars to spend during the first year of peace.