Chapter 11
General Motors is a growth company, and the sum of all I have said is expressed in this fact. For most of the early period of General Motors' existence, it did not grow as fast as the automobile industry as a whole. But after 1918, and more particularly because of the measures taken by the modern administration, the corporation grew faster than the industry and became its number-one producer. We like to believe that we have made a contribution as an industrial leader. Employees, shareholders, dealers, consumers, suppliers—and the government to a large degree—have shared in the success of General Motors. Although progress has been achieved for all of these interests, the story of financial growth in this chapter reflects mainly the point of view of the shareholder.
How has the corporation served its owners? I believe this can best be seen by looking at the financial record of the business—how the funds were supplied or secured, and how they were used from the beginning to the present.
Our shareholders have derived a substantial monetary benefit from the success of the business through the distribution of about two thirds of the income realized since inception—a proportion which is larger than that distributed by most businesses. In order to secure these benefits, the shareholders have underwritten the growth of the enterprise by their willingness to reinvest the substantial sums required to meet the needs of the business as it grew. Of necessity, during periods of expansion of facilities and of peak working-capital needs, this has meant that dividends have been something less than average. The shareholders thus assumed the risk of building for the future with no certainty of a return, and in the early periods the return was slow in coming. The financial community in general at that time was bearish on the automobile industry and its prospects, including General Motors. Many companies then in the automobile industry—all with a desire for success —are no longer in existence, with consequent loss of their shareholders' investment. Thus, it seems only proper to measure the monetary return of General Motors' shareholders against the risks they assumed when investing in an enterprise with an uncertain future.
Broadly speaking, from the financial standpoint three periods have characterized the corporation's existence. The first was the long-term period of expansion from 1908 through 1929; the second, the depression and World War II years from 1930 through 1945; and the third, the post-World War II years, which brought a renewal of expansion.
Within these periods, however, there were sub-periods of expansion, contraction, and stabilization. I have related how Mr. Durant in the years 1908 and 1909 created the corporation by combining a number of enterprises, most importantly Buick and Cadillac and a few makers of car components, and how the tremendous problems of financing this endeavor cost Mr. Durant his position in the corporation in 1910. Then, this initial period of rapid expansion was followed by contraction and stabilization between 1910 and 1915 while the bankers pruned and righted the enterprise. The corporation grew slightly, but less than the industry. Again, between 1916 and 1920, particularly in the period 1918-20, Mr. Durant— now working in collaboration with Mr. Raskob and the du Pont interests—expanded the corporation by various financial means, including debt and stock issues.
The Early Expansion Period — 1918 through 1920
In the three years 1918 through 1920 the corporation's expenditures for plant and equipment totaled some $215 million. In addition, between January 1, 1918, and December 31, 1920, more than $65 million was invested in subsidiary companies not consolidated, bringing the total outlay to over $280 million. This was a truly staggering sum for that period when you realize that at the start of the program on January 1, 1918, General Motors' total assets were about $135 million and its entire gross plant amounted to only $40 million. By the end of 1920 total assets had reached about $575 million, more than four times the amount at the end of 1917, and gross plant of almost $250 million was more than six times as great as the December 31, 1917, balance.
Despite some unfortunate investments—Samson Tractor, for example—this expansion program established principles which were to guide the corporation's investments in the period after Durant lost control. As the annual report for 1920 stated it:
The officers and directors of the corporation have thought it unwise to undertake the production of materials that do not relate largely to the automobile [that is, the bulk of the production of which does not go into car production]. Thus: a comparatively small portion of the total tires produced are consumed by the automobile manufacturer, the larger percentage being sold directly to users of cars for replacement purposes; the greater part of the production of sheets and other forms of steel is consumed by trades other than the automotive industry; therefore investment in these fields has not been made. By the pursuit of this policy, General Motors Corporation has become firmly entrenched in lines that relate directly to the construction of the car, truck or tractor, but has not invested in general industries of which a comparatively small part of the product is consumed in the manufacture of cars.
The capital expenditures of the 1918-20 period were responsible for General Motors' great growth—of a different kind—in the 1920s. At the beginning of 1918 General Motors had just four passenger car manufacturing divisions—Buick, Cadillac, Oakland, and Olds— and one truck division. It had no capacity to manufacture a smaller car for the low-price field. It had no allied source of supply for many components and accessories—such as lighting, starting and ignition sets, roller and ball bearings—and no research facilities. Sales of General Motors cars and trucks in 1920 (393,000) were almost twice those of 1918 (205,000). Our productive capacity increased from 223,000 car and truck units a year at the beginning of 1918 to 750,000 units in 1922, a large part of the increase represented by facilities to make the popular-priced Chevrolet. In addition, the corporation had sufficient capacity to manufacture its own electrical equipment, radiators, antifriction bearings, wheel rims, steering gears, transmissions, engines, axles, and open bodies, and it had a source of supply of closed bodies, which were just becoming popular, through its interest in the Fisher Body Corporation. And General Motors had its own research facilities.
Needless to say, so rapid a growth could not have been financed entirely out of earnings. The industry was still getting started and in General Motors it was a case of laying a base for the years of high production ahead. To acquire the assets of Chevrolet and United Motors and to purchase a 60 per cent interest in the Fisher Body Corporation, General Motors paid with its own securities. But most of the expenditures were made in cash, and so the corporation had to go to the capital markets. On December 31, 1918, the board of directors authorized the sale of 240,000 shares of common stock to du Pont in order to provide additional capital for the expansion program. This netted the corporation close to $29 million. In May 1919 the corporation authorized Dominick and Dominick of New York and Laird and Company of Wilmington to form a syndicate to sell publicly an issue of 6 per cent debenture (preferred) stock. As Mr. Durant wrote the underwriters:
This corporation requires a large amount of additional money to avail [itself] of the opportunities ... to extend its business profitably and has decided that the most provident way to obtain this money is through the issue of additional debenture stock . . . Furthermore, it is greatly to the interest of a corporation carrying on such a business as ours to have as many persons as possible interested in its prosperity. Accordingly, it desires to issue and to have distributed as broadly as possible, within three months after the closing of the present Liberty Loan Campaign, $50,000,000 in par value of its debenture stock . . .
If you will proceed forthwith to form a syndicate for the purpose of distributing this proposed issue of debenture stock and . . . will definitely agree to take for such syndicate, $30,000,000 in par value thereof . . . we agree that such $30,000,000 par value of debenture stock, together with the whole or any part of an additional $20,000,000 thereof, shall be available to you . . .
When the syndicate was closed on July 2, 1919, only $30 million par value of the stock had been issued, with proceeds of $25 million to the corporation; none of the additional $20 million had been sold.
These issues were not enough to meet both the plant-expenditure and working-capital demands, particularly for inventories, which rose even more than expenditures for new plant and equipment. Early in 1920, therefore, in another major financing, holders of outstanding shares of 6 per cent preferred and debenture stock were given the right to subscribe to two shares of new 7 per cent debenture stock—to be paid for either wholly in cash or one half in cash and the balance with one share of the old 6 per cent preferred or debenture stock. Mr. Durant told the shareholders:
A careful forecast, looking far into the future, indicates that, for your corporation to continue occupying its leading position in the automobile industry, large capital investments will be required, which requirements can likely be better met by financing that portion of our growth which is not supplied from earnings, through the sale of a seven per cent. (7%) rather than a six per cent. (6%) senior security. This at once gives us an opportunity and a privilege; an opportunity to issue our senior securities at or above par, instead of at the substantial discount necessary in the sale of our present securities, and the privilege of extending to our senior security holders the right to subscribe to this new seven per cent. (7%) debenture stock on a most attractive basis.
The new issue was a failure. It revealed the concern with which the financial community regarded General Motors' growing inability to control its internal affairs. Mr. Durant and Mr. Raskob had hoped to raise about $85 million through the new debenture issue. They were able to raise only $11 million. Hence the du Ponts had to intervene, and with their aid General Motors sold more than $60 million worth of new common stock in the summer of 1920, and a little later borrowed over $80 million from a group of banks.
Altogether, General Motors increased its capital employed (Note 11-1.) by some $316 million during the expansion period from January 1, 1918, to December 31, 1920. Of this increase, $54 million came from earnings reinvested in the business after payment of dividends totaling $58 million. The rest of the increase resulted largely from the sale of new securities for cash and the issue of new securities in payment for properties acquired.
This increase of $316 million in the corporation's capital employed from the beginning of 1918 to the end of 1920 compares with: expenditures of some $280 million for plant and equipment and for investment in subsidiary companies not consolidated; and vastly enlarged working-capital (Note 11-2.)
items, of which the major one, inventories, increased $118 million, or from $47 million to $165 million.
A Short Period of Contraction—1921 and 1922
The expansion of 1918, 1919, and 1920 was followed by contraction in the pruning of 1921 and 1922. By the end of 1922 bank debt had been liquidated and inventories and plant were conservatively valued, and when the dust settled we were ready with a capacity to produce 750,000 cars and trucks a year, although we sold only 457,000 in 1922.
A Period of Firming Up—1923 through 1925
Although the year 1923 marked the start of a great new era of expanded production in the automobile industry, the three years 1923 through 1925 involved no important expansion of productive facilities in General Motors, for the Durant-Raskob program had provided a sufficient base to meet a considerable growth in the car market. Our sales of 836,000 cars and trucks in 1925 were 83 per cent greater than the 457,000 sold in 1922. However, in the three years 1923 through 1925 the corporation spent less than $60 million for plant and equipment while providing nearly $50 million for depreciation. The new controls operated so well that this increase in sales volume was accompanied by a decrease of $5 million in inventories, from $117 million at the beginning of 1923 to $112 million at the end of 1925. In the same period net working capital increased $55 million, or 44 per cent, while dollar sales went from $698 million in 1923 to $735 million in 1925 and net income increased from $72 million in 1923 to $116 million in 1925. All told, as a result of our producing more cars more economically, our net income totaled $240 million in the years 1923 through 1925. Of this sum we paid out $112 million to the holders of common stock and $22 million to preferred shareholders, a total of $134 million, or 56 per cent of the total net income for the period.
A New Period of Expansion— 1Q26 through 1929
The rapid growth in our sales through 1925 indicated the need for additional investment in plant and equipment, and in 1926 we began a new period of expansion which extended through 1929. This move was quickly justified, for in 1926 we sold a total of 1,235,000 cars and trucks, an increase of almost 50 per cent over the previous peak volume of 1925. Now, however, unlike the earlier periods, the needed funds were provided out of earnings, provisions for depreciation, and newly issued stock. Altogether, in these four years our investment in non-consolidated subsidiaries and miscellaneous units increased by $121 million and we added some $325 million to our investment in plant and equipment, including the plant and equipment acquired through the purchase of Fisher Body Corporation in 1926.
This program of expansion enlarged our facilities in several directions. We expanded our car-making capacity, especially for the Chevrolet Division, whose unit sales almost doubled in these four years, and for the new Pontiac. We expanded the capacity of our accessory-manufacturing divisions because of the growth in car assembly capacity. We made more components. We expanded our merchandising operations, including overseas assembly plants and warehouses, and so brought our products closer to the ultimate consumers. We had acquired a small manufacturing base, Vauxhall, in England in 1925, and we acquired an 80 per cent interest in a larger one, Adam Opel, in Germany in 1929. And we expanded a number of other activities such as the Frigidaire Division, and made investments in the aviation and diesel fields.
In sum, we more than doubled our gross plant during the period January 1, 1926, to December 31, 1929-from $287 million to $610 million—and our investment in non-consolidated subsidiaries and miscellaneous units rose almost two and one-half times, from $86 million to $207 million. Total assets were increased from $704 million to $1.3 billion. Our unit car and truck sales went from 1.2 million in 1926 to 1.9 million in 1929, while total dollar sales went from $1.1 billion to $1.5 billion.
Thanks to the financial and operating controls, we were able to finance virtually this entire expansion program out of earnings and depreciation and still pay out almost two thirds of net earnings to the shareholders. The only outside financing in this period was an issue of $25 million of 7 per cent preferred stock in 1927. The rest came from retained earnings. In 1926, however, the balance of the assets of Fisher Body Corporation was acquired for 664,720 shares of common stock, of which 638,401 shares were newly issued. Net income rose from $186 million in 1926 to $276 million in 1928— a record high—and $248 million in 1929. All told, we earned $946 million in the four years 1926 through 1929, of which $596 million (63 per cent) was paid to shareholders and the balance of $350 million reinvested in the corporation. Provision for depreciation totaled $115 million in this period.
Taking these two stages together, that is, 1923 through 1925 and 1926 through 1929, this is the record, using the year 1922 for comparison:
General Motors car and truck sales in the United States and Canada quadrupled, from 457,000 in 1922 to 1,899,000 in 1929, and dollar sales more than tripled, from $464 million to $1504 million. Instead of the runaway inventories of the preceding period, we achieved this phenomenal growth in production and sales volume with only a 60 per cent rise in inventories. (Net working capital rose from $125 million on December 31, 1922, to $248 million at the end of 1929, including cash and short-term securities, which rose from $28 million to $127 million.) Gross plant increased from $255 million to $610 million, and capital employed more than doubled, from $405 million to $954 million. Over the seven-year stretch we earned a total of $1186 million, of which $730 million (62 per cent) was paid out to shareholders, and $456 million was retained in the business.
Depression and Recovery—the 1930s
The early 1930s began with the depression, followed by stabilization and expansion in the middle of the decade. It ended with the industry under the influence of the preparation for World War II. With the big depression—from 1930 to 1934—there was contraction in General Motors. But this time, unlike 1920-21, and despite its greater severity, the contraction was orderly. Of necessity, dividend payments were lower in some of these years than in others, but in no year did the corporation fail to earn a profit or pay a dividend. In the years 1931 and 1932 the corporation paid shareholders more than its earnings, which reduced some of the capital accumulated in more prosperous periods.
For the 1930s as a whole, dividend payments totaled 91 per cent of net income, for we found that we had more funds than we could profitably invest under the generally depressed economic conditions of this period.
The most difficult years, of course, were the three following the stock-market crash. I have mentioned earlier that between 1929 and 1932 car and truck production in the United States and Canada fell 75 per cent, from 5.6 million units to only 1.4 million, and that in dollar sales the decline in the industry was even more precipitous—from $5.1 billion at retail to $1.1 billion, or 78 per cent. And yet General Motors was able to earn $248 million in this three year period and to pay shareholders a total of $343 million— $95 million more than the corporation earned. Despite the fact that dividends exceeded earnings, net working capital fell only $26 million, and the corporations holdings of cash and short-term securities actually increased by $45 million, or by 36 per cent, a case you might say of pure liquidation.
What accounts for this exceptional record in a period in which many durable-goods producers failed or came close to bankruptcy? It would be unfair to claim any particular prescience on our part; no more than anyone else did we see the depression coming. I think the story I have told shows that we had simply learned how to react quickly. This was perhaps the greatest payoff of our system of financial and operating controls.
As a result of the speed with which we acted when sales began to fall, we were able to reduce our inventories in line with the sales decline and to control costs so that operations remained profitable. Our sales declined 71 per cent, from $1504 million in 1929 to only $432 million in 1932, but our inventories were reduced 60 per cent, or by $113 million. With this decline of more than $1 billion in sales, net income fell $248 million but we managed to earn $165,000 in 1932 while paying out $63 million in dividends.
In the early thirties, as noted above, we did not feel the need to spend very much for new plant and equipment. In the five years 1930-34, such expenditures totaled $81 million; in 1932 we spent only $5 million. Moreover, during these years we retired some of our surplus plant and equipment. In later years as the plant was needed, we restored some of it to the active account.
By 1935 sales from our United States and Canadian plants had recovered to more than 1.5 million cars and trucks—about 80 per cent of the 1929 peak and a nearly threefold increase in three years. The next year our United States and Canadian car and truck sales approached the 1929 mark and in 1937 they set a record of 1,928,000 units. Net income, however, was $196 million in 1937, which was not up to the $248 million earned in 1929 or the $238 million in 1936. Earnings in 1937 were adversely affected by a six-week strike early in the year and by increasing costs. For example, the average straight-time wage rate for the corporation's U.S. hourly rate employees in 1937 was 20 per cent higher than in 1936 and 28 per cent above the 1929 rate. But since our investment needs were relatively slight, dividend payments totaled $202 million in 1936—the highest on record—and $170 million in 1937; for the two years, dividends were 85 per cent of net income.
This rapid recovery in sales and output meant that our production facilities were again under strain. As noted above, we began to reactivate that part of the idle plant that had not been made obsolete by product or technological change. And we began to need new facilities, too. As output grew rapidly during 1935, we undertook a comprehensive survey of the corporation's manufacturing properties at home and abroad to assess our productive capacity in the light of what appeared to be the future sales possibilities. In the annual report for 1935 I wrote:
The rapid evolution of processing which is constantly going on in the automotive industry, due to the yearly turnover of models, produces a very rapid obsolescence of productive facilities. Naturally, specific tools and machine equipment, when changed, are provided, so far as volume is concerned, in harmony with the sales outlook of the following year. For these reasons, during the years of the depression, the actual capacity of the Corporation's plants for the production of current products had been reduced. In addition, further limitations have been placed on capacity due to the increased number of models apparently necessary to provide the essential coverage of the various markets in which the Corporation is competing. Increased complications of manufacture incident to changed style and added technical features have also had an important influence.
Equally important is the fact that, while the number of hours worked per week by productive workers of industry has been going through a process of reduction, through evolution, the depression period brought about a further demand for the reduction of weekly operating schedules for the workers . . . With the reduction of hours, irrespective of circumstances that might justify such hours, the impossibility of maintaining the annual averages of previous years has tended to reduce the capacity of plant and equipment, as compared with previous years.
The corporation, therefore, in 1935 authorized expenditures to reorganize, readjust, and expand the manufacturing facilities. They eventually exceeded $50 million.
Production and sales continued to expand rapidly, and so we made another survey of General Motors' operating facilities in relation to current and expected demand for its products. We gave consideration to three special factors affecting capacity: the trend toward a shorter work week, the probability of a reduction in operating efficiency, and the likelihood of some interruption of production due to labor difficulties. The latter two expectations proved correct for 1937.
Because of these factors, capacity of the Chevrolet Division was inadequate. The division had been unable to meet the demand for its products during each of the preceding three years. (In both 1935 and 1936 Chevrolet car and truck production topped one million.) Several other divisions had suffered from inadequate capacity, although to a lesser degree, and the development of new products in the General Engine Group and Household Appliance Group had placed these operations in a position where expansion was essential to exploit the new products properly. The capacity shortages, moreover, were not due to bottlenecks in localized areas; the corporation's productive facilities were very well balanced in that respect. But this meant that any fundamental increase in capacity would require expenditures on a broad front. We authorized a program, therefore, calling for an expenditure of more than $60 million for new capacity, in addition to substantial expenditures for modernization and replacement. This expansion program was completed in 1938.
The economy turned sharply downward during the latter part of 1937 and the first half of 1938, and then reversed itself to move upward at a rather rapid rate. Consumer sales of automobiles in the United States generally followed this economic trend. The economy paused during the first half of 1939 and then swung upward in the last half of the year, accelerated by the influence of the outbreak of war in Europe.
Over the decade of the 1930s as a whole, the corporation spent $346 million for new plant and equipment. This was a large capital expenditure in view of the generally liquidationist character of the 1930s, but quite small in comparison with our outlays during the preceding decade. Total capital expenditures, however, were $46 million less than our provision for depreciation. We were able to pay shareholders $1191 million in dividends, 91 per cent of our earnings, between 1930 and 1939, as compared with $797 million in the 1920s. This was done without reducing the corporation's liquidity. On the contrary, net working capital rose from $248 million on January 1, 1930, to $434 million on December 31, 1939. Cash and short-term securities went from $127 million to $290 million. And capital employed rose slightly, from $954 million to $1066 million.
World War II—1940 through 1945
Very large demands were made on General Motors during the next six years, and the corporation, I think I can say, like most of American industry, responded with distinction. When World War II began, General Motors rapidly converted itself from the nation's largest manufacturer of automobiles to the nation's largest producer of war materials. And when the war ended, General Motors rapidly reconverted to peacetime production, a capability, in both instances, that derived from our scheme of management and a great deal of planning.
Car and truck production, however, actually advanced 32 per cent during 1940, as the defense program stimulated purchasing power in the economy at large. General Motors' defense production totaled only $75 million during the year (compared to $1.7 billion of commercial sales), but orders mounted rapidly toward the end of the year and by the end of January 1941 defense contracts with our own and allied governments totaled $683 million. In 1941 defense production came to over $400 million (compared to commercial sales of $2 billion), and by the time of Pearl Harbor defense products were being delivered at the rate of $2 million a day.
Once the United States became a belligerent, of course, all our efforts were given to converting to volume production for all-out war. Total defense production for 1942 came to $1.9 billion, with $352 million of commercial production. By 1943 we had our engineering and production capabilities in full swing and defense production rose to $3.7 billion. In 1944 it rose slightly to a war peak of $3.8 billion; physical production was up even more, that is, by 15 per cent as against 3 per cent in dollar volume, since we reduced our prices as production expanded. After V-E Day, of course, partial reconversion began as war contracts were canceled, and full reconversion got under way after V-J Day. During 1945, therefore, war production dropped off to $2.5 billion and commercial production rose slightly, to $579 million. All told, General Motors produced nearly $12.5 billion of defense products. In producing this immense flow of war material, we made all possible use of our existing facilities, converting and in many instances expanding them, at a cost of over $130 million in the years 1940-44. We also operated some $650 million of plants owned by government agencies.
The war years were not years of high earnings and dividends. Although our sales volume expanded from $1377 million in 1939 to $4262 million in 1944, earnings did not grow. At the beginning of the war, and well before the profit-renegotiation law was passed, we adopted the policy of limiting our profit margin before taxes, on military business, to one half of that realized on civilian business in 1941, when the conditions of a competitive market still prevailed. Wherever possible, we took war-production contracts on a fixed price basis, and we made it a practice to reduce prices as we were able to cut costs. Between 1940 and 1945, therefore, we earned a total of $1070 million on a sales volume of $17,669 million. Of these earnings we paid shareholders a total of $818 million in dividends. Our dividend payments, which had gone to $3.75 per share of the then outstanding $10 par value common stock in 1940 and 1941, were down to $2 per share in 1942 and 1943 and $3 per share in 1944 and 1945.
Although shareholders received 77 per cent of net income during the years 1940-44, our liquidity increased very substantially, owing to the fact that war shortages and priorities made it impossible to replace equipment on a normal schedule. Our capital expenditures of $222 million were less than our provision for depreciation in these five years. Between January 1, 1940, and December 31, 1944, therefore, we increased our net working capital from $434 million to $903 million, and our cash and short-term securities rose from $290 million to $597 million. In 1945 we increased our capital expenditures to a record $114 million; our net working capital declined to $775 million and our cash and short-term securities to $378 million.
The old epochs in our financial history, which reflected both the business cycle and our investment decisions, sometimes separately, more often together, came to an end, and we moved into the great cycle of expansion which we have known since World War II. A few things should be noted before proceeding.
The strategic question in industrial finance, assuming you have something to work with in the way of a going business, is how to optimize its elements. The latitude for opinion, or subjective judgment, here is wide. But I think it would be generally agreed that, in principle, debt enhances the return on the stockholders' investment, while at the same time increasing the risk involved. It would be agreed, I think, that both Mr. Durant and Mr. Raskob had a strong desire to spend and had little inhibition about debt. Mr. Durant carried this attitude far enough into practice in General Motors to create a situation between 1918 and 1920 that would more than serve the expansion needs of the corporation for the following six years. Even so, the expansion of 1918-20 might have worked without crisis if it had been assisted by management and financial controls. In his personal affairs it was obviously debt that brought disaster to Mr. Durant in the economic slump of 1920. So much for that.
It is equally evident that from 1921 to 1946 the corporation avoided long-term debt. I myself had feelings against debt, perhaps because of what I had seen of it in my experience. And yet I cannot really say that we had an anti-debt policy in that period. The facts show that we were in general able to do without it. We needed little expenditure up to 1926; and from 1926 through 1929 it was not difficult to expand within the framework of earnings while paying dividends at what we considered a reasonable rate. In other words, we paid off and grew, without debt, except for bank loans during short periods in the 1920s. The 1930s being a time of contraction, the question of debt did not arise. During the war years we arranged for a bank credit of $1 billion, through the government, to finance receivables and inventories, but borrowings under these arrangements were limited. The maximum borrowings were $100 million and were outstanding for less than a year.
When we came to the postwar period, however, despite our liquidity, we were to meet all the financial questions again, including the necessity of providing for large capital expenditures and obtaining additional capital funds through debt as well as stock issues.
The Postwar Era—1946 to 1963
Over the seventeen years 1946 to 1963, our plant expenditures came to more than $7 billion. This amount was nearly seven times the value of the plant at the start of the period. Since increased costs, due to inflation, of equipment and construction accounted for a sizable portion of the postwar expenditures, this ratio does not indicate the increase in physical volume. Net working capital during the seventeen years increased $2753 million (from $775 million to $3528 million). Of total plant expenditures, $4.3 billion, or 61 per cent, was covered by provision for depreciation. The rest necessarily had to come from either reinvested earnings or new capital, or some combination of both. During these seventeen years, General Motors earned about $12.5 billion, and retained over $4.5 billion, or about 36 per cent—a larger proportion of earnings than had been our practice in the past, owing to the needs of the business. Even so, to meet the planned expansion we had to go to the capital markets—for the first time, with the minor exceptions noted, since the early twenties—for a total of $846.5 million during the seventeen-year period, of which by the end of 1962 we had made provision for repayment of $225 million. In addition, about $350 million of common stock was issued, principally for purposes of employee programs during the period 1955 through 1962. Hence between reinvestment of earnings and the sale of new securities, the capital employed in the business in this period rose from $1351 million to $6851 million.
We began our broad planning for this postwar growth long before the war ended. I presented a concept of a postwar program in 1943 in a speech called "The Challenge," which I made to the National Association of Manufacturers. I argued in this speech that, in the postwar period, industry would meet an enormous pent-up demand for its products and we should boldly plan on tin's assumption. In doing so I argued against that body of opinion among economists which prophesied economic doom after the war, and, I might add, it was for me not only a matter of argument but also of laying the money on the line. In other words, we recognized that an urgent need would exist, when the war ended, to convert plants from war to peace production as quickly as possible in order to satisfy consumer demand, provide peacetime jobs, and fulfill our obligations to our shareholders, and that all this represented opportunity. Accordingly we had our staff begin to make long-term studies of demand, projecting our position for five to ten years ahead on the basis of the over-all economic outlook, probable consumer demand, and our productive and financial capacity to meet the demand.
On the basis of these studies I announced a postwar program calling for the expenditure of $500 million. This was considered a tremendous sum, and the announcement caused considerable comment. It was considerably more than the corporation had spent on new facilities in either the 1920s or 1930s, and was three fourths larger than the value of our net plant at the end of 1944.
The program, as our 1944 annual report summarized it, involved:
. . the rearrangement and reorganization of plants, machines and other facilities to be used in producing the cars, trucks and other items that make up General Motors' peacetime products. It calls for the replacement of equipment sold to others during the war. It provides for the modernization of equipment and for replacement of worn tools of all kinds that have been subjected to severe wartime usage. It includes expansion of facilities to meet postwar needs, all in proper balance between short term and long term prospects . . .
So, two years before the war ended, we in General Motors were preparing for the day when we could return to mass production of cars and trucks. Detailed expansion plans were developed for each division, and we also made plans to renew peacetime relationships with the thousands of suppliers and subcontractors with whom General Motors had done business before the war, many of whom were associated with us in war production. Wherever practicable, for example, we advised our prewar suppliers that they could plan on orders for certain peacetime goods as soon as war conditions permitted. We thereby made it possible for them to make their own postwar plans and reduce the time they needed for reconversion.
At the time the postwar plan was formulated, we expected that General Motors would be able to finance the full costs out of earnings and depreciation and other reserves. As we converted facilities to war production in 1941, 1942, and 1943, for example, we had set aside reserves of $76 million to cover what we estimated would be the cost of reconverting them back to commercial output. And we had been accumulating very substantial liquid assets against the day when we could again buy new plant and equipment. Thus, at the end of 1944, we had a net working capital of $903 million, including cash and short-term securities totaling $597 million.
Our wartime estimate of the cost of the postwar expansion program was remarkably accurate, considering the degree of inflation that occurred in the cost of construction and new capital goods. Reconversion costs were $83 million, as compared with our reserve of $76 million. And total plant expenditures from 1945 through 1947, when the first big expansion program was substantially completed, came to $588 million, as compared with our estimate of $500 million.
Our estimates of our postwar working-capital needs, however, were on the low side. These needs were increased greatly, not only by the expanded volume of business we were to do in the postwar period, but also by the tremendous inflation which occurred. In the prewar period, 1935-39, our year-end net working capital averaged $366 million and our inventories $227 million. For the five postwar years, 1946-50, net working capital had increased to an average of $1099 million and inventories to $728 million.
By the end of 1945 most of the corporation's plants were closed by the United Automobile Workers strike, and our cash and investment in short-term securities had dropped $219 million, to $378 million. By the time the strike was settled, on March 13, 1946, liquidity was even lower. Labor troubles continued in some of the plants for another sixty days, and strikes in other industries created shortages of materials which held back the rise in production after our own labor troubles had been solved. As a result, the corporation was unable to earn a satisfactory profit during the initial reconversion period, despite the abnormally high level of demand. In 1946 we earned only $87.5 million, which was $21.4 million less than our dividend payments.
Even before the strike had been settled, the corporation had determined that additional capital might be needed and had requested a study and report on possible financing. By mid1946 arrangements were completed to borrow $125 million on 2/2 per cent twenty and thirty-year notes from a group of eight insurance companies. Other alternatives had been explored, but the private placement of promissory notes with these institutional investors who had a surplus of long-term funds seemed the most expeditious and the cheapest method of financing. The private-placement negotiations were settled quickly and did not entail the waiting period and filing of documents necessary under a public offering.
The proceeds of this borrowing were received on August 1, 1946, and gave the corporation a good deal more flexibility in meeting its increased capital needs. But the Financial Policy Committee felt that the corporation needed still more capital of a permanent nature, and on August 5, 1946, it authorized Mr. Bradley to negotiate with underwriters "with a view to determining the basis upon which it might be possible to sell a new issue of $125,000,000 preferred stock." The committee had considered other methods of obtaining permanent capital. One factor in our decision was that we could market a preferred-stock issue which we could retire at will, under specified conditions, but which did not have any mandatory provisions requiring retirement by a certain date. As things worked out, however, the public market would not absorb as much preferred stock as we had hoped, except under terms we thought to be too stringent. As a result the issue had to be cut down to $100 million, that is, one million shares of $3.75 preferred offered at par. The stock was offered on November 27, 1946, and yielded the corporation $98 million after underwriting discounts and commissions. This was the first public sale of securities by the corporation in almost twenty years and was a very successful offering.
Some measure of the drain on our resources during the reconversion period is provided by the fact that our net working capital declined $7 million during 1946, and our cash and short-term securities dropped $42 million, even though we raised $223 million of new capital during the year. Had we not gone to the capital market, our net working capital would have dropped by $230 million during 1946.
With these new funds, and with the expansion program that had already been prepared, the corporation was ready to move. By 1948 unit sales from our United States and Canadian plants had risen to 2,146,000 cars and trucks—or almost equal to the prewar high established in 1941—and net income rose to $440 million, up from $288 million in 1947 and only $88 million in 1946. Unit sales established an all-time high in 1949, although general business declined, and our profit margin improved, too, so that net income went up to $656 million. We also were able to raise our inventory turnover ratio very substantially: Inventories declined $65 million on a $1 billion rise in sales. And because our expansion program had been completed, our plant expenditures were relatively modest —$273 million in 1948 and 1949, only $64 million more than our provision for depreciation. Our capital position improved so rapidly, in fact, that we decided to prepay the $i25-million note issue in December of 1949, thereby eliminating our debt. We were also able to increase our liquidity and to pay substantial dividends.
Our next major expansion was an outgrowth of the Korean War. We had learned from experience that wars create a backlog of unsatisfied demand. After a good deal of thought we concluded that the long-run potential of the car market required a large expansion of our productive facilities and justified spending corporation money on new plant facilities for defense production that ultimately could be used for commercial operations. I outlined my views in a letter dated November 17, 1950, to the members of the Financial Policy Committee, with the following recommendations:
1. We should make a survey, which is under way, to determine the quantitative measurements of the trend of demand over the next ten years, with particular reference to that after five years. Consideration should be given to such peaks as may develop due to deferred demand resulting from the curtailment of production incidental to the rearmament program.
2. We should develop a broad outline of a master plan to meet such prospective increase in production, if any, as our judgment may determine. This should include ways and means to best carry out such expansion. It should embrace the various categories of production involved in the Corporation's present scheme of things—each category following its own potential. This broad outline should be [filled] in as more facts become available . . .
3. We shall be called upon to provide facilities for the rearmament program. Such needs should be integrated with the proposed master plans in broad outline so that we shall be able to move more rapidly and efficiently when, and if, the circumstances justify. We should use corporation funds for such new plants needed for armament if that gives us better control over same from the long term position in relation to the master plan. Accelerated depreciation and high taxes make the use of corporation funds all the more feasible. We should avoid conversion. The policy should be, expansion.
And the policy was expansion indeed. In the four years 1950 through 1953 we spent $1279 million on new plant and equipment —about one third of it for defense facilities. During this period, however, our earnings were restricted by the excess-profits tax and by the fact that the margin on defense business under our policy was lower than on commercial sales. All told, we were able to reinvest $871 million in the business after paying dividends of $1.6 billion, or 65 per cent of net income. These retained earnings, together with $563 million in depreciation accruals, were only $155 million more than plant expenditures of $1279 million. Only the $155 million was available, therefore, to meet other requirements—for example, advances to steel suppliers and the costs of tooling up for defense production. Inflationary costs had left their mark on the corporation's capital structure. Our net working capital had declined slightly between December 31, 1949, and December 31, 1953, despite the need of added capital due to a 76 per cent rise in dollar sales.
At the beginning of 1954, with our financial resources already under strain, we announced a forward program of plant expenditures calling for an outlay of $1 billion in two years. This program was designed to provide additional capacity for our automotive divisions to meet the needs of an expanding market, and to modernize the existing facilities. We also had to add very substantially to our facilities for the production of automatic transmissions, power steering, power brakes, and V-8 engines.
With a plant-expenditure program of this magnitude, and the inflationary pressures on costs, it was clear that we would have to raise new capital if we were to continue to pay out a substantial part of each year's earnings in the form of dividends. Toward the end of 1953 the Financial Policy Committee reviewed the problem and determined that a debt issue could be sold to advantage. In contrast to the situation in 1946, however, the insurance companies and other institutional investors did not have any excess funds available; they were, instead, committed for some time ahead. Hence we turned to the public market and in December 1953 sold an issue of $300 million of twenty-five-year 3/4 per cent debentures, netting (after deducting underwriters' fees and commissions) $298.5 million. This, too, was an outstanding success.
But it was still not enough. In January of 1955 our plant-expenditure program was expanded from $1 billion to $1.5 billion (and later to $2 billion). In analyzing our future capital requirements, therefore, we decided that we would need to raise more outside capital. As Mr. Curtice, then president of the corporation, stated before the United States Senate Committee on Banking and Currency in March of that year:
Our recent decision to seek further outside capital resulted from our analysis of our forward capital requirements. This analysis was based upon our projections of economic trends and the outlook for the highly competitive automobile market. It led us to the conclusion that additional permanent equity capital in the area of 300 to 350 million dollars is needed if we are to be ready to share in the country's growth and meet expanding needs for the goods we make and at the same time maintain a reasonable dividend policy.
And so in February 1955 we offered holders of common stock the right to subscribe to 4,380,683 shares of new stock (five-dollar par value) at the rate of one share for each twenty shares held. The subscription price for each new share was $75; at the closing date of the offering, the stock was selling at 96%. The stock offer was underwritten by a group of 330 underwriters, but the underwriters had to subscribe to only 12.8 per cent of the issue. The net proceeds to the corporation approximated $325 million after payment of underwriting fees and commissions. This was the largest industrial common-stock issue in the United States up to that time and was a remarkable success, attesting to the correct evaluation of the market at a time when many experts considered an issue of this size to be a great risk.
Our stock and debenture issues made it possible for us to carry out our expansion program and at the same time continue our policy of paying liberal dividends. In the three years of expansion 1954 through 1956, we spent $2253 million on new plant and equipment, increasing our gross plant 74 per cent (from $2912 million to $5073 million). Provisions for depreciation totaled $874 million, and after paying out $1620 million or 57 per cent of earnings in dividends, we reinvested $1222 million. As a result, our net working capital increased by $510 million during this period of extraordinary capital expenditures, and our holdings of cash and short-term securities (exclusive of securities earmarked for payment of tax liabilities) almost doubled, from $367 million to $672 million. Our liquidity increased still more in 1957, since capital expenditures declined fairly rapidly with the completion of the big expansion program, while depreciation accruals continued to rise.
We had come through a critical expansion and our financial condition was stronger than ever. The period 1957 through 1962 was to include two recession years (1958 and 1961) and also the best year for dollar sales and earnings in the corporation's history (1962) . In reviewing the events of this period, I feel that they offer indisputable evidence of our financial maturity. The recession year 1958 saw General Motors' sales of U.S.-produced cars and trucks decline 22 per cent from the previous year, yet the accelerated impact that declining unit sales have on earnings was effectively moderated. Earnings in 1958 of $2.22 per share were only 25 per cent less than the $2.99 per share in 1957. These results were due in no small part to the effective and timely financial controls which we had built into our organization over the years.
Plant expenditures in the 1958-62 period, including the cost of overseas expansion projects, totaled $2.3 billion, or about as much as was spent in the major expansion years of 1954-56. Nevertheless, depreciation accruals were sufficient to finance these expenditures in the United States, while local borrowings were used to finance a portion of the expansion in Germany. As a result, the corporation was able to pay out $3.3 billion in dividends over the period, or 69 per cent of earnings. In addition, net working capital was increased $1.7 billion.
Taking the postwar period as a whole, therefore, the shareholders fared rather well. Notwithstanding a better than six-fold increase in the stated dollar value of our gross plant—from $1012 million on January 1, 1946, to $7187 million on December 31, 1962—which was financed out of earnings and depreciation reserves, we nevertheless paid shareholders a total of $7951 million or 64 per cent of net income in dividends. Over the period, dividends per share, after adjusting for stock splits, rose from 50 cents per share in 1945 to $3 per share in 1962, and the market price of a share of stock rose from $12.58 to $58.13.
The financial story of General Motors is a story of growth—in goods and services, in the number of people involved, in physical facilities, and in financial resources. Between August 1, 1917, when the old General Motors Company became the General Motors Corporation, and December 31, 1962, the number of employees increased from 25,000 to over 600,000 and the number of shareholders from less than 3000 to more than one million. The corporation expanded its sales of cars and trucks produced in the United States and Canada from 205,000 units in 1918 to 4,491,000 in 1962, and, in addition, sales of cars and trucks manufactured in General Motors' plants overseas totaled 747,000 units. Dollar sales rose even faster, from $270 million in 1918 to $14.6 billion in 1962, and total assets grew from $134 million to $9.2 billion. This is a measure of the significance of General Motors as an institution in American economic life.
The measure of the worth of a business enterprise as a business, however, is not merely growth in sales or assets but return on the shareholders' investment, since it is their capital that is being risked and it is in their interests first of all that the corporation is supposed to be run in the private-enterprise scheme of things. The record shows, I believe, that we have done a very creditable job for the shareholders, without neglecting our responsibilities to our employees, customers, dealers, suppliers, and the community.
I described my philosophy of financial growth in the annual report for 1938, as follows:
Due to the force of economic necessity and through a process of evolution, the units of industry have become larger and larger. This is because of the continuously broadening market for industry's products and services resulting from the production of more useful things at continually lowered prices. There is superimposed upon this evolutionary process the additional influence of an increasing integration of manufacturing processes involved in mass production. The effect of such an evolution on the capital structure is to require ever increasing amounts of capital.
The financial growth of General Motors has followed that course. The total capital employed in the business has grown from about $100 million in 1917 to about $6.9 billion today without unduly burdening the corporation or its shareholders with debt, primarily by plowing back earnings. Of the $6.8-billion growth in capital, about $800 million, after subsequent repayments, was raised by resorting to the capital market. An additional $600 million was raised through the issuance of new stock, of which $250 million was for the acquisition of existing companies and $350 million for employee programs. All the rest of the growth in capital—a total of nearly $5.4 billion—came from reinvestment of earnings. And yet, unlike the situation in some rapidly growing companies, the reinvestment of earnings was not at the expense of dividend payments to the shareholders. Over this forty-five-year period, dividend payments totaled nearly $10.8 billion, or 67 per cent of total earnings. This growth in the capital employed in General Motors reflects the progress of the corporation. In an economy based on competition, we have operated as rational businessmen, a fact I have tried to demonstrate with a close description of the development of our approach to management. The result has been an efficient enterprise. It should be noted that a rising successful economy like that of the United States is not only an opportunity, it is also very demanding on those whose ambition is to excel in it. Our performance has been demonstrated day by day in our production and distribution of goods useful to the community. I shall be glad for General Motors to be judged by this performance.