The Rise & Fall of General Motors and the Subjugation of the Industrialized World

How the perfect storm of commercial forces created the world’s
largest corporation, enslaved us to gasoline, and ultimately brought the
car maker to its knees

By Marc J. Rauch
Exec. Vice President/Co-Publisher
THE AUTO CHANNEL

It was once said “If it’s good for General Motors,
it’s good for the U.S.A.”

  • Have you wondered why and how General
Motors, the world’s largest corporation could fail and go
bankrupt?

  • Have you ever wondered why gasoline is the primary fuel for passenger
cars and trucks for most of the world?

 • Have you ever wondered exactly how and why the United States could owe
50% or more of its national debt to oil producing countries?

Read this story and you’ll learn how and why.

Background – The need for speed and power

In the early years of the automobile industry there was uncertainty as
to which fuel, and what type of engine would power the new vehicles. There
was steam, electric and internal combustion. Although steam power had
proven its viability in the first stationary engines and in the first round
of land and sea vehicles or vessels, by the late 1800’s diesel was
already replacing steam because of its ability to produce higher torque
(needed to move heavy vehicles/vessels) and because it simplified the
process of locomotion by not requiring a team of men to start the coal or
wood fires and keep the water boiling. By comparison, diesel allowed faster
starting and required less continuous attention to keep the engine
running.

Electric motors could also provide high torque, but the motors required
a constant flow of electricity, which could only be guaranteed if the
vehicle was tethered to an electrical source. This was okay for light and
heavy trains that operated along a fixed roadway, but battery technology
and affordability was impractical for personal transportation devices that
had the ability to travel in all directions and to non-electrified
locations.

The internal combustion engine (ICE) was the solution. There were two
types available: spark ignited and compressed hot air ignited. Compressed
hot air ignited ICE uses diesel fuel. Spark ignited internal combustion
engines are today most commonly associated with gasoline, but ethanol,
methanol, natural gas and propane can also work.

Diesel engines were heavier, bulkier and more costly to produce. While
they could move heavier loads (torque), they couldn’t quickly provide
higher speeds. Additionally, diesels required a fuel injector technology
which at the time was also more costly and less reliable than fuel-air mix
carburetors. Consequently spark ignited internal combustion engines became
the dominant engine for passenger cars and light trucks.

At this point the two most available fuels for spark ignited ICE were
liquid; either alcohol (ethanol or methanol) or gasoline. Alcohol enjoyed
wide support from automobile pioneers, such as Henry Ford and General
Motors’ top scientists, because it could be produced almost anywhere
by almost anyone (alcohol distillation technology has been in the public
domain for hundreds of years). Alcohol fuels also produced superior
performance compared to gasoline. Alcohol-powered engines allowed for
higher piston compression, which deliver more speed and power. Gasoline
caused a knock in high compression engines that would literally
“knock” the engine to destruction. Only low compression, lower
speed engines could safely use gasoline. Early on, as speeds were measured
against human walking or horse riding, this was acceptable. But as roads
were leveled and paved and consumers wanted bigger faster vehicles this was
a huge limitation. One of the solutions to gasoline knock was to blend
ethanol into every gallon of gasoline. The alcohol quieted the knock,
thereby allowing the gasoline-ethanol blend to be used in better performing
engines.

Unfortunately alcohol suffered from two major impediments to universal
acceptance as a pure engine fuel. The first was cost. Alcohol production
has been heavily taxed since the founding of the United States, initially
to raise revenues to pay for the War of Independence. As usually happens
with taxes imposed to pay for one specific thing, it is nearly impossible
to retire the tax even after the initial purpose has been fulfilled. The
extra dollars are just too attractive to politicians who need to fund
pork-barrel projects to insure re-election, and there was always another
war that had to be paid for. (Prior to Congress passing a national
individual income tax 100 years ago, tax on alcohol routinely accounted for
as much as 40% of the Federal revenue.)

The Federal tax on alcohol reached new heights during the American Civil
War, rising to over $2 per gallon. Needless to say this was a devastatingly
high tax. Average weekly wages in the 1860’s were about $12 –
considered in respect to today’s average wages that would be like a
tax of $129 per gallon (in actuality, the current Federal tax on spirits
– drinkable alcohol – is $13.50 per gallon).

Kerosene was also taxed to help pay war costs: A whopping 10 cents per
gallon!

The alcohol tax was not retired until Theodore Roosevelt’s
presidency about 40 years later, when the Free Alcohol Act brought the
price of corn ethanol down to 14 cents per gallon and molasses ethanol to
9.5 cents per gallon (versus gasoline at 22 cents per gallon).

Now you’ll recall that I said that there were two impediments to
universal acceptance of alcohol as a universal engine fuel. The second
problem was, ironically, alcohol’s easy production and ubiquitous
availability; it is too simple and easy to make.

By the middle of the 1800’s, as the world’s whale population
was drastically declining due to over-hunting, and the price of whale oil
was sky rocketing, an alcohol-turpentine blend was used as a less expensive
replacement for indoor lighting and heating. But with the development of
kerosene in the 1850’s, followed by the imposition of the much higher
alcohol tax in 1862, a new use was found for the sticky, smelly black goo
that freely seeped up from the ground in Pennsylvania (areas of Poland and
Azerbaijan experienced the same phenomena). This was the start of the
petroleum oil boom. Although kerosene has an obnoxious smell and black
smoke, at least it was cheap.

As the world’s interest in the new fangled automobiles soared
throughout the world it was found that the kerosene could be used as the
basis for engine fuel, and after additional refining the oil pioneers
developed gasoline. By this time one man and his company rose to world wide
prominence – John D. Rockefeller and Standard Oil. His enormous
wealth was contingent upon oil and its by-products, and in the time-honored
tradition of achieving wealth, he used it to secure political and
commercial support of his products.

The political bribes paid by Rockefeller catapulted support for the 18th
Amendment to the Constitution (the Volstead Act) over the top, insuring its
passage. This Amendment, commonly referred to as Prohibition, outlawed the
production of alcohol with almost no exceptions. Consequently, in the
crucial period just after World War I, as Americans were adopting a whole
new mobile lifestyle, the one fuel that could challenge Rockefeller’s
gasoline on both a cost and performance basis – alcohol – was
declared illegal. Ethanol was rendered dead as a competitor on the
commercial battlefield.

Before and during Prohibition, Henry Ford expressed his belief that
alcohol (ethanol) was the fuel of the future. His Model T, the product that
is said to have given birth to moving assembly line production, was
designed and built to use ethanol or gasoline by giving the driver
adjustable carburetor and spark advance controls that optimized the
performance of the fuel used.

Charles Kettering

Even after Prohibition commenced, General Motors’s top scientists,
Charles F. Kettering, Thomas A. Midgley and T.A. Boyd, continued their
belief that ethanol was the fuel of the future. Considering that it was
illegal to even produce the small amounts to conduct tests, alcohol was
still being experimented with as the best alternative solution to
gasoline’s knock problem.

However, in 1921, GM’s scientists discovered that by adding
tetraethyl lead to gasoline that the knock was subdued and the new
lead-gasoline fuel could be used in advanced higher compression engines.
This was the early days of the Roaring Twenties and in order to really
roar, the public needed a fuel to set them free.

The leaded gasoline didn’t just give GM the ability to build
vehicles with higher performing engines it gave them a unique process that
they could patent. GM combined their process with similar processes being
tested by DuPont Chemicals and Standard Oil, which gave GM three cents on
every gallon of leaded gasoline sold anywhere in the world. They quickly
determined that their share of profits in the sale of leaded gasoline would
be worth many billions of dollars over the next couple of decades.

The significance to understanding what this meant to General Motors is
not just calculated by profits earned, more importantly it explains why
General Motors – the world’s largest company and automaker –
would come to have no interest in developing vehicles that could get better
mileage per gallon of gasoline. It is essentially the same reason why
tobacco companies had no desire to lessen the addictive qualities of
cigarette smoking. The more gallons of fuel that a vehicle used translated
to more profits to GM. In essence, the vehicles could be used as a
loss-leader to stimulate gasoline sales.

This new stream of nearly incalculable profits meant that they
didn’t have to really compete on an even playing field with other
auto manufacturers:

• They could undercut competitions’ products because they
didn’t need to make profits from their vehicles, thereby driving the
competition into bankruptcy.

• They could accept worker demands that they knew the other car
companies would not be able to live with on a long term basis.

• Moreover, even if they didn’t undercut the price of their
competition or permit unrealistic employee compensation packages, the added
revenue gave them a marketing war-chest that could not be overcome –
also ultimately helping to drive a long list of car makers into
obscurity.

Any of the above could have given GM a huge edge over the competition,
but together it was impossible for most competitors to withstand.

The Worm Turns

Ironically, however, I believe that it was this exalted position that
led to their inconceivable plummet.

The gasoline profits allowed General Motors to become a bloated,
inflexible entity, incapable of – and disinterested in – meeting the
challenges of new design, technologies, demographic shifts, societal
attitudes about the environment, and the up-start band of oil-dictators
called OPEC. As the years passed, and as new faces came onboard, the
knowledge of this gasoline-profit advantage was lost. They thought they
were invincible…they thought they were successful solely because they
built a better car.

Normally a strong market competitor will strive to set a pace via
product improvement that catches the competition off guard. Typical
marketing thrusts would be to announce new and improved formulations that
deliver more for the consumer’s money, or a longer-lasting
ingredient, or better for your health. Up until the mid 1970’s, when
it was too late, General Motors only promoted “bigger” or
“more powerful” vehicles. And, of course, “bigger”
and “more powerful” translated to more gasoline used. American
brand competitors followed the lead, tripping over the low bar set by GM.
Where GM survived and prospered because of the billions in gasoline profits
the other car makers had to try and survive only on product features and
benefits, but it wasn’t enough for even the most creative auto makers
and most innovative efforts.

Now, I will agree that most Americans probably wanted bigger and more
powerful vehicles in the 30’s, 40’s, 50’s and 60’s
– much as we still do today during the gasoline-price crisis.
However, GM did little or nothing to deliver the bigger, more powerful
vehicles while at the same time consuming less fuel. Again, up until the
mid 1970’s GM mostly scoffed at the smaller more fuel efficient
vehicles that were coming from Europe and Japan. If they designed a small
sporty car to compete with a foreign import it was still more powerful and
it used more gasoline.

At the same time GM filled it’s executive offices with inept or
redundant managers, they allowed the best and brightest new technology or
design people to go foreign manufacturers, they retained for decades the
services of advertising and marketing consultants whose only talent was in
knowing how to waste more money each new model year, and they built up the
walls around themselves until they couldn’t see the figurative and
literal tsunami that was coming from Japan.

Perhaps, if the 70’s gasoline crisis didn’t happen, and if
the environmental movement failed to take hold, or if the gasoline
companies could have continued to lie about the negative effects of
leaded-gasoline – and get away with it – then General Motors
might have been able to exist without their share of profits from the
patents. But the combination of these factors created the perfect storm
that set the stage for GM’s tumble.

I readily acknowledge that others before me have cited GM’s lack
of effective action as the cause of their near demise and current shaky
existence, but I believe that no one has ever put together and articulated
the reason why GM would have permitted itself to fall into this position.
Many analysts have opined that GM would be okay if it wasn’t for the
heavy pension packages that they committed to. Some analysts suggest that
as the foreign car makers open factories in the U.S. that they will succumb
to the same pension problems and end up struggling like GM. I think that GM
might never have survived the competition after WWII if they didn’t
have those billions of extra dollars. I also believe that Mercedes, BMW,
Honda, Toyota, Kia, Hyundai, Nissan and every other foreign brand that
establishes a factory here will not go through the same debilitating
pension mistakes because they just don’t have the extra financial
wherewithal to get themselves into the same hot water. They may fail, but
it’s more likely that they would fail from their own original stupid
mistakes.

When General Motors rushed to Washington in 2008 to beg for financial
assistance Presidents Bush and then Obama, and all of Congress, should have
said no; they should have told GM to get the money from their buddies in
the oil industry, which had just experienced a record-breaking profit year.
In case there’s anyone out there who is uncertain of how the oil
industry makes most of their money, it is from the sale of gasoline for
automobiles. Instead of the American public being threatened with “GM
is too big for us to lose,” the oil industry should have rightly been
assigned that responsibility, particularly since we were already paying for
the second and third Middle-East oil wars and providing security for the
entire world’s ocean-going oil tankers.

Then, as if Washington didn’t already mishandle the GM financial
collapse by giving away our money, the car maker was allowed to escape any
responsibility to common stock shareholders, a no-nothing maybe bond
swindler* was appointed “Car Czar,” and a member of
Exxon’s Board of Directors was named as CEO of the restructured
General Motors. The company continues to be deluded into thinking that
their tired brand names have any real market value, they have bet their
future on becoming a significant player in a giant communist country,
they’re chasing an electric technology fantasy that is still decades
away from being meaningful, and they have pretty much abandoned the
flex-fuel position that they spent several years and untold dollars trying
to establish by finally building more powerful cars that used less
gasoline. I was present at numerous GM presentations when they pushed and
pushed and pushed E85 and flex-fuel vehicles. If it was a wrong direction
– and perhaps it was since GM has made so many wrong decisions
– then why are many of the executives that were involved still with
the company? Why did they bring Bob Lutz back into the fold, again?

Just Good Capitalism

As a devoted capitalist and marketing guy I have to say that the GM
action in seeking an inexpensive, exclusive fuel to power the growth of the
automobile age was at first blush a great example of what capitalism is
about. The problem is that capitalism allowed to run amuck is nearly as bad
as unchecked socialism. It may be a convenient inexpensive capitalist idea
to dump waste materials from a chemical plant into the river that flows
behind the factory, but if the water is also used for drinking by the
community down-river who you hope will buy your products, the free-market
idea becomes a dead-market reality. In effect, this was the result of
General Motors’ patented process as the legacy of the leaded gasoline
process continues to plague us.

Chained to Oil

We in America and in all industrial nations of the world, no longer
“drink” from an unpolluted spring; we haven’t for more
than half a century. We are addicted to using fuel that robs each and every
one of us of our hard earned money. What’s more, over-hyped worrisome
economic or political news about oil, and the greedy cycle of oil commodity
speculation keeps all segments of the financial markets teetering on the
brink of disaster. The richest and most wonderful country in the world has
become just another debtor-nation. 50% or more of our national debt is owed
to other countries to pay for the oil that we helped discover, subsidize,
and then protect through two world wars and several regional conflicts. And
we are forced to fund terrorist regimes who would like to see us dead.

We willingly support an industry that has given us mass murder
billionaires.

This should be hanging in the
post office

Every gallon of gasoline or diesel fuel that we buy props up
people like Hugo Chavez, Mahmoud Ahmadinejad, Saddam Hussein, Muammar
Gaddafi, Bashar Assad, Osama bin Laden, the so-called Saudi royal family,
and even Vladimir Putin. It doesn’t matter that three of these men
are now dead; the system will continue to churn out new monsters like a
well-oiled machine. Their wealth and power is directly derived from our use
of gasoline, whether we buy their respective oil or not. The oil and
gasoline market is not an open, supply and demand marketplace. It is a
tightly closed, tightly controlled fixed enterprise that doesn’t
permit rogue competitors or independent action. Boycotts or restrictions on
the purchase of oil from an especially insidious dictatorship are an
irrelevant weapon; to the point that even threatening such action is a
joke. If we refuse to buy oil from Iran, for instance, we still have to buy
it from someplace. As we pull oil from the new source, a void gets opened
that must be filled. So the Iranian oil fills that void, and another
country (customer) who doesn’t share our sense of moral outrage
rushes in to buy the Iranian oil – at the same global market price.
The other trick that the oil producers use is to sell and/or ship their oil
to a middlemen country, such as Canada or India, where it is re-labeled and
invoiced and sent to us. So we, the public, are the only ones negatively
affected.

When General Motors lost their way ninety years ago the United States
lost its economic and energy independence.

Notes on the story:

Obama must have had his thinking
cap on the night he decided on the Rattner
appointment

*My reason for calling Steven Rattner a “no-nothing” is best
exemplified by the criticism that he recently leveled at Mitt Romney, after
Romney criticized the GM bailout. Rattner said, “If Mr. Romney
disagrees, he should come forward with specific names of willing investors
in place of empty rhetoric,” Rattner wrote. “I predict that he won’t be
able to, because there aren’t any.”

While I agreed that there were probably no willing investors to bailout
GM – they would have had to be insane – Rattner (Obama) should
have forced the oil industry to come to GM and Chrysler’s rescue. How
would he have forced them to do it? Simple, he would have said the
following: “Either you provide the funds or we withdraw our military
and you have to provide your own protection for your oil fields and tanker
shipments around the world. In addition, I will give immediate emergency
orders to jumpstart a serious alternative fuel program in the U.S. and we
will phase gasoline out of use forever.”

If this option was ever explored, we should have been told. If the
option was explored and the oil industry refused, we should have been told.
If Obama appointed someone as “Car Czar” and he didn’t
have the imagination to make a suggestion like this, then he never should
have been appointed to this position. But then what should we have expected
from a president who is without any experience or imagination of his
own.