Preston Tucker: A Generation Too Late
[November, 2018 update: At Recode, Elon Musk: The Recode interview the discussion looks not just on Musk’s negative view of reporters and short sellers (and positive view of anime), but also at how incredibly difficult it is to launch a successful car company. Elon Musk and Tesla have had to fight the Securities and Exchange Commission (SEC), much as Preston Tucker decades earlier, as described below. Musk and Tesla also struggled through 2018 to ramp up production for the lower-prices Model 3. The updated article below begins with the Tesla Model S. And November 3, 2018 Verge story on SEC investigations of Tesla: Tesla subpoenaed in the SEC’s Model 3 investigation]
With the Tesla Motors Model S the latest cool car of the future, it’s worth looking back at past cars of the future, and the regulatory barriers past entrepreneurs have struggled with.
Ask your parents or grandparents about the Tucker ’48. After World War II everyone wanted one of these sleek new cars of the future–but only fifty people ever got one. George Lucas and Francis Ford Coppola bring this story to screen in Tucker: The Man and His Dream. The movie dramatizes the dangers of a mixed economy, with its meddling bureaucrats and myriad behind-the-scenes “arrangements” between politicians and businessmen. Central to the idea of free enterprise is, no surprise the freedom of enterprise, allowing entrepreneurs to innovate into any industry–to succeed by offering consumers a better product, and the equal freedom to fail. But though most businessmen claim to support free-enterprise, far fewer favor new competition in their own industry.
“Creative Destruction” is the phrase economist Joseph Schumpeter used to describe the innovation and competition in a free economy (story in “MTV & capitalism’s creative destruction” in Econ, Fall, 1987). Preston Tucker was a visionary, innovator, and entrepreneur. His vision was of an automobile on technology’s cutting edge, incorporating an aluminum engine, independent suspension, fuel injection, disc brakes, seat belts, and other innovations not seen outside the racetracks of his day. Many remember the Tucker’48 for its middle headlight that turned with the steering wheel.
Entrepreneurial vision by itself is not enough, and Preston Tucker needed financing to turn his dream car into reality. From the very beginning Tucker ran into stiff opposition from the Securities and Exchange Commission (SEC), an agency of the federal government. Even his first sales of franchises (the right to sell future Tucker automobiles, if and when they were produced) brought an SEC investigation. Tucker complained that selling dealerships wasn’t the same as issuing stock, but the SEC investigated anyway.
The SEC later caused costly delays in approving the initial Tucker stock offering. By selling stock in Tucker Corporation to the public, Tucker was inviting them to join his enterprise, to become part-owners and accept the risk of ownership–by sharing the profits of success, or the losses of failure. Funds raised from dealership and stock sales provided the money to design and build the first Tucker’48s.
But the SEC never stopped its harassment of Preston Tucker. The established auto industry didn’t want new competition, and their “Senator from Detroit,” Homer Ferguson, led the battle to crush Tucker Corporation. Further energizing the investigation of Tucker was SEC Commissioner Harry McDonald, also from Detroit. Regional SEC Chief Thomas B. Han apparently hated Tucker, and was relentless in his efforts to bring him down. The SEC may have spent more money investigating the Tucker Corporation than the Tucker Corporation spent designing and building the “car of the future.”
Tucker: a Man and His Dream is the story of a dream smothered by politicians and government bureaucrats working hand in hand with servile newspapers, corrupt journalists, and probably the big three automakers–Ford, General Motors and Chrysler. (How historically accurate is the movie in presenting the political and economic events of Tucker’s venture? See notes below and links to separate articles.)
Tucker’s story sounds a warning we would do well to heed–decades later–as today’s politicians call for new federal direction of investment in the American economy, and the SEC continues its long running campaign against Drexel Burnham Lambert and Michael Milken (Note: originally written in 1988. Government prosecutors succeeded in driving Drexel out of business and putting Michael Milken in jail.)
Preston Tucker was not alone
The actual role played by Ford, GM, and Chrysler lobbyists in putting Tucker out of business is a question for historians. American history offers many examples of congressmen and federal regulatory agencies protecting established companies from new competition. In a true free enterprise system, firms can only head off new competition by producing quality products efficiently, and keeping prices down. Had the Tucker Corporation survived, the Big Three automakers would probably have, decades earlier, adopted many of the Tucker’48’s new technological and safety features.
[Editor/author note: Though Elon Musk and Tesla faced an SEC investigation and costly penalties, Tesla also received over five billion dollars in state and federal subsidies designed to promote electric cars.]
The federal alphabet agencies have a long history of suppressing competition. The Interstate Commerce Commission (ICC), for example, according to many history textbooks, was set up to protect the farmers from the economic power of railroads. That is how the government publicized the ICC, both then and now. Yet the original ICC legislation was drafted by railroad industry lawyers. The ICC was actually designed to protect established railroads from cutthroat competition– that is, competition from the Preston Tuckers of the day. [2]
In economics this is called regulatory “capture theory.” The idea is that no matter how well-meaning a new regulatory agency, before long the it will be “captured” by the industry it was designed to regulate. [3] The Federal Aviation Authority (FAA) was supposed to protect consumer safety by regulating the airlines. Instead, the FAA protected established airlines from competition–and virtually no new airlines were approved by the FAA from its founding until deregulation under the Carter administration.
Government by decree
Tucker biographer Charles T. Pearson explains the political economic system Preston Tucker had to battle, and entrepreneurs still battle today; “During the Roosevelt Administration there developed a system of government by decree, under which even minor officials practically made and enforced their own laws. In practice, it was reversion to an almost feudal form of government, in which heads of departments and bureaus became little dictators!’4 One of these “little dictators” was Wilson Wyatt, head of the National Housing Agency (NHA).
Launching a major enterprise stretched Tucker’s business skills to the limit. He was stretched still further defending his enterprise from Wilson Wyatt and the NHA.
After World War II, the government disposed of many of the manufacturing facilities built during the war. Tucker, as the movie showed, bid for a giant empty plant in Chicago and an the right to lease it from the War assets Administration (WAA). But Wyatt’s NHA tried to reverse the WAA decision and award the plant to the Lustron Corporation to build prefabricated housing.
While Tucker was defending his private-sector financing efforts from ongoing SEC attacks, Wyatt had already lined up $12 million and $52 million government loans for Lustron from the Reconstruction Finance Corporation (RFC), the federal investment agency created during the New Deal. Tucker was drawn into this complicated political battle, which before it was over involved five government agencies. [5] Tucker fought back the only way he could, by finding politicians motivated and able to fight Wyatt, Senator Ferguson, and the others arrayed against him.
— [Editor’s Note: Reader Ed Moore emailed the following correction to my story. I had received an earlier email saying my account of events was inadequate (okay, actually he said it was just wrong). Anyway, here is Mr. Moore’s email:
I realize that this article was written fourteen years ago. But its current posting on the web requires some response–especially since Lustron’s story is far less well-known than Tucker’s. Wyatt had been rejected by the RFC for a $52 million dollar loan for Lustron Corp.–the company that Wyatt was trying to get the Chicago Dodge plant for.I would also be careful quoting Coppola’s movie since it is does contain some creative liberties that are not factual–if you watch the movie, the characters claim that Lustron was awarded the plant. This is not true. According to Senate committee hearing records, Wyatt’s claim on the Chicago Dodge plant was rejected and also quashed Wyatt’s hopes of getting money from the RFC for Lustron. Wyatt immediately resigned in protest.As a matter of fact, Lustron was not awarded a loan until June 1947 and a plant in Columbus, OH. Actually Tucker and Strandlund (Lustron’s president and founder) probably had much in common as both had a dream of delivering a product that far exceeded in quality and vision what was currently being offered to consumers and both ran up against entrenched forces that desperately wanted to see their failure.]
[back to original article] On May 28, 1948, just when Tucker Corporation began to turn the corner with both its manufacturing challenges and financing difficulties, the SEC and the justice Department launched a dramatic new full-scale offensive. The SEC leaked news of an internal report it said would blow Tucker Corporation sky high. The leaks seemed aimed at influencing a then impaneled grand jury, which soon called for an indictment–and Tucker was dragged into court. Though the charges were later shown to be mostly fabricated by the Justice Department and the SEC, the damage was done. See: JAN. 22, 1950: JURY ACQUITS TUCKER OF FRAUD, Wired, January 22, 2010:
1950: Along with seven business associates, Preston Tucker – founder and
namesake of the Tucker Car Corporation and the creator of the ultramodern Tucker ’48 sedan – is found not guilty of 25 counts of mail fraud, five counts of violating SEC rules and a single count of conspiracy to defraud.
The company, however, would not survive the bad press and production delays that the trial imposed. The name “Tucker” would become synonymous with a failed business dream.
In those pre-Watergate days the public had far more faith in its public officials, and Tucker’s reputation and company were ruined. In the movie, Tucker himself delivers a dramatic final summation to the jury. His speech echos the theme of Robert Higg’s book Crisis and Leviathan (25th Anniversary Edition): Critical Episodes in the Growth of American Government–that the growth of cozy government/business relationships in America threatens both liberty and prosperity.
Actor Jeff Bridges, as Preston Tucker, shares his vision of America:
When I was a boy I read about Edison, Ford, the Wright brothers. They were my heroes. Rags to riches wasn’t just the name of a book. It was what this country was all about.We invented the free enterprise system, where anybody, no matter who he was, where he came from, what class he belonged to, if he came up with a better idea for anything, there was no limit to how far he could go.But I grew up a generation too late, I guess. The way the system works now, the loner, the crackpot, the dreamer with some damn-fool idea that ends up revolutionizing the world, well, someone like that is squashed by big business before he knows what hit him. The new bureaucrats would rather kill a new idea than let it rock the boat.If Benjamin Franklin were alive today, he’d probably get arrested for flying a kite without a license.We’re all puffed up with ourselves right now because we invented the A-bomb and we beat the daylights out of the Nazis and the Japanese …but if big business closes the door to the little guy–you, me–the little guy with new ideas, we’ve not only closed the door to progress and hard work, we’ve sabotaged everything we fought for. We might just as well let the Japanese and the Germans walk in here and tell us what to do. What’s the difference? If new ideas can’t be allowed to flourish, then we’ve just exchanged one set of rulers for another. Right?” [6]
And one of the jurors quietly mutters: “Right!”
Retreat to the old world
In the old world, before America’s market economy developed, entrepreneurs needed the blessing of the state to survive. Kings granted monopolies to manufacturers, and subsidized enterprises they favored. (Part of the mercantilist system that survived for centuries in Spain and Portugal, and was passed on to delay economic development for centuries more across Latin America)
The two world wars partially returned the American economy to that age. Preston Tucker’s story illustrates the result. In his biography of Tucker, Indomitable Tin Goose: A Biography of Preston Tucker, Charles Pearson lays bare the injustice of the system, as he compares the government’s persecution of Tucker with its subsidies of industrialist Henry Kaiser.
Like Tucker, Henry Kaiser set out to build automobiles, but Kaiser had both the government’s blessing and the government’s money. Charles Pearson observes: “While Tucker was being tried [in court], Kaiser applied for and got a heavy RFC loan to develop and tool new models…”[7] Stock in Kaiser’s automotive enterprise, says Pearson, “never paid a dividend, yet when the company failed there was no public investigation of what Kaiser had done with $54,000,000 of stockholders’ money, why he needed more money, or where the car was he had promised when he sold his stock!” [7] Step by step Pearson compares Henry Kaiser’s enterprise with Preston Tucker’s.
[For a negative view of Preston Tucker’s enterprise, see The Tucker Car: Did the Big Guys Do It In?, originally in The Freeman, January, 1989]
Notes
1. See, for example, “History Defalsefied” chapter 2 in Henri Lepage’s, Tomorrow Capitalism, Open Court, 1982; The Incredible Bread Machine, World Research Inc., San Diego, 1974, Burton Folsom, Entrepreneurs vs. the State; also see Robert Wiebe, Businessmen and Reform; James Weinstein, The Corporate Ideal and the Liberal State.
2. Gabriel Kolko, Railroads & Regulation, 1877-1916, Princeton Univ. Press, 1965.
3. George Stigler, “The Theory of Economic Regulation” Bell Journal of Economics and Management Science, Spring. 1971.
4. Charles T Pearson, The Indomitable Tin Goose:Preston Tucker, a Biography, Pocket Books, 1960, p. 79.
5. Ibid., p. 77.
6. Robert Tine, Tucker: The Man and His Dream, Pocket Books, 1988, pp. 179-180.
7. Pearson, p. 205.
For further reading on the SEC, see The SEC and the Public Interest by S. Phillips and Zecher, MIT Press, 1981. For more on Preston Tucker see “A Tucker Memoir: A Dream as Bright as Its Chrome;” New York Times, September 18, 1988, (in Forum), by Philip S. Egan, author of the forthcoming Design and Destiny: The Making of the Tucker Automobile. Also see “Three Men and a Car,” Autoweek cover story on Preston Tucker, July 4, 1988.
[Originally published in October, 1988 issue of Econ, a publication of the Reason Foundation.]