By John L. Chapman • August 23, 2026

Every so often a book written long ago, when read again in the present time, is seen to be tailor-made to provide the needed profound insights that cause policy-making fools inside the Beltway to finally wake up and “see the light” on their follies. Cato Institute historian Jim Powell’s Wilson’s War: How Woodrow Wilson’s Great Blunder Led to Hitler, Lenin, Stalin, and World War II is just such a book.

Published in 2005, Mr. Powell’s argument is deliberately provocative: America’s decision to enter World War I in 1917 was one of the greatest strategic blunders in American history, and its consequences reverberated for decades—helping create the conditions that produced Hitler, Lenin, Stalin and ultimately World War II. Now it should be quickly added, given the chatter at the time of the book’s release 20 years ago, the author is not at all claiming that “Wilson caused Hitler, Lenin, and Stalin.” It is Mr. Powell’s contention, well and forcefully made, that Wilson’s intervention altered the chain of events in ways that made those outcomes substantially more possible—and even more likely. His is a provocative argument that can withstand criticism; indeed, it is an enormous claim, with helpful lessons for today.

It is also an assertion that, given subsequent foreign policy disasters the Americans have engendered up to and including the current insane, illegal and unconstitutional war against Iran, deserves more serious consideration than it has received.

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SIDEBAR

WHO REALLY STARTED WORLD WAR I?

Before we judge Wilson’s decision to enter the war, we should remember something uncomfortable: the war itself was not inevitable. And so, before asking whether Woodrow Wilson was right to bring America into World War I, it is worth asking a more basic question: Why was Europe fighting in the first place?

The honest answer is that there was plenty of blame to go around—but very few historians think it was equally distributed, with perennial disputes about the weightings of that culpability. The long-term causes included nationalism, imperial rivalry, militarism, an arms race and an increasingly rigid alliance system. But none of those made war inevitable: Europe had successfully defused previous crises. The catastrophe of 1914 was ultimately the product of decisions made by particular governments at a particular moment.

The immediate trigger was the assassination of Archduke Franz Ferdinand by Gavrilo Princip, a Bosnian Serb nationalist, in Sarajevo on June 28, 1914. Austria-Hungary then decided to use the assassination as an opportunity to crush Serbia, by demanding terms for a settlement that Vienna knew Belgrade would reject. No small part of the Austro-Hungarians’ aggressive imperiousness toward Serbia was due to Germany, which gave Vienna what famously became known as the “blank check”—an assurance that Berlin would support Austria-Hungary even if its action against Serbia produced a wider war that could include the Serbs’ benefactor, Imperial Russia.

Russia then, predictably, mobilized in support of Serbia. Germany responded by declaring war on Russia and then France, fearing a two-front war. Its military strategy required invading neutral Belgium, bringing Britain into the conflict. Within the span of six weeks end-to-end, a Balkan assassination had become a European catastrophe. And a terrible thing about it was that all the belligerents were delusional about their own prospects in the incipient war, believing victory would be theirs quickly.

If one had to assign responsibility, Austria-Hungary bears the greatest immediate blame for deliberately turning the murder of a single individual in Sarajevo into a war against neighboring Serbia, while Germany bears enormous responsibility for encouraging Vienna to take that gamble and then escalating the conflict into a general European war. Russia deserves substantial blame for its own escalation; Serbia bears responsibility for the nationalist terrorism that produced the assassination, though that is not the same as responsibility for the ensuing world war. France coveted return of Alsace-Lorraine and began planning for a war of aggression against Germany as early as 1891, needing only an excuse to commence hostilities. And as English historian Nicholas Kollerstrom points out, the eventual British declaration of war was predicated on a fabricated narrative of defending Belgian neutrality, which many historians, including Bertrand Russell and George Bernard Shaw, criticized as hypocritical.

The larger lesson for today, however, is more important than the scorecard: World War I was not inevitable. Governments made a series of enormous strategic bets—and got the consequences catastrophically wrong. The men who started the war thought they could control it; they all thought that the war would end quickly, and in their favor.

They couldn’t, and it didn’t.

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So why then, really, did Woodrow Wilson seek American entry into the European conflict then raging in early 1917? After all, he had barely been re-elected in November 1916 by incessantly repeating his key campaign slogan, “He Kept Us Out of War”, which historians credit as an important factor in his narrow win.

According to Ambassador Benjamin Freedman, who knew Woodrow Wilson and was at the Versailles conference in 1919 with Bernard Baruch, the standard reasons given, including delayed response to the Lusitania sinking in 1915, the Zimmermann Telegram promoting a German-Mexican alliance, and the resumption of unrestricted submarine warfare by the Germans beginning February 1, 1917, played a smaller part than the reality: Americans entered the war due more to British Zionist promises of American entry to pressure Balfour over Palestine, and Wall Street bankers’ pressure on President Wilson to tip the scales in favor of Britain and France to ensure recovery of billions of dollars in Allied war loans.

Whatever the multi-faceted truth of Mr. Wilson’s motives in pushing for entry into a European war against the country representing the largest bloc of American descendants and immigrants in 1917 (indeed there were at the time 8 million Americans whose primary language was German), it is an evident verity that special interest corruption is part of the root cause, as is so often the case, and again has parallels to more recent events.

As stated, but repeated here again to silence critics, Mr. Powell is not arguing that Woodrow Wilson personally “caused” Hitler or Lenin or Stalin. History does not work that way. There were countless other forces at work, and nobody can prove any counterfactual case with respect to what would have happened had America stayed out of the war. But this is precisely what makes Powell’s argument so interesting.

The important question is not whether Wilson caused these later catastrophes. The question is whether his decision to intervene materially changed the chain of events that followed. Powell makes a powerful case that it did.

The counterfactual that nobody likes to consider

By 1917, Europe had already spent nearly three years destroying itself. Millions were dead. Economies were collapsing. Russia was on the verge of a Marxist revolution. Britain, France, Germany, and Austria-Hungary were exhausted. The United States could have stayed out, or at the least pushed for peace negotiations offered by German Chancellor Bethmann-Hollweg on December 12, 1916, which hinted of a status quo ante deal, far more actively than Mr. Wilson was in fact doing. Indeed Secretary of State Robert Lansing, who had replaced William Jennings Bryan when the latter honorably resigned his post in June 1915 due to Wilson’s seeming push toward entry into the European war even then, insisted that had not the Germans pushed for these peace talks, he was prepared to do so. But why then didn’t he?

Instead, President Wilson brought America into the war, famously declaring that the nation had a duty to “make the world safe for democracy.” The conventional American interpretation is that Wilson reluctantly did what was necessary. American intervention helped defeat Germany, ending the slaughter and allowing Wilson to try to build a new international order based upon democracy, self-determination and collective security.

It sounds noble. But what if it was catastrophically wrong?

Powell’s argument is that American intervention transformed what might otherwise have become a negotiated European settlement into a decisive Allied victory. That victory allowed Britain and France to impose the punitive Treaty of Versailles upon Germany. And here the connection to Hitler becomes difficult to dismiss.

Germany emerged from Versailles humiliated, economically crippled and politically unstable. The treaty’s territorial losses, reparations and “war guilt” provisions became enormously potent political weapons for German nationalists. Hitler did not create German resentment; he exploited it. Without America’s intervention, would Hitler have risen to power? Nobody knows. But it is entirely reasonable to ask whether Hitler’s rise would have been possible without the political and economic catastrophe, without the hyperinflation and revolution, that followed Germany’s defeat.

That is Powell’s point—and it is a point that should trouble anyone who believes that military intervention can be evaluated simply by examining the intentions of the people who order it. The further lesson here for today is that once decisions are taken, it is impossible to know how events will play out, and certainly arrogant and wrong-headed to believe that they can be controlled.

The Russian connection is even more extraordinary

The part of Wilson’s War that is most compelling as a counterfactual, however, is actually not post-war Germany; it is Russia. When the Russian monarchy collapsed in 1917, Alexander Kerensky’s Provisional Government inherited a country exhausted by war. The Russian people wanted the fighting to stop. Yet Kerensky, prodded and essentially bribed with a $325 million war loan ($8 billion today) by Woodrow Wilson, who wanted the Russians to remain a co-belligerent, continued the war.

The consequences were disastrous: Russia’s military position deteriorated, the government’s legitimacy evaporated, and political radicalization across Russian society accelerated. And this brought on Vladimir Lenin.

The German government had an obvious strategic interest in destabilizing Russia. Lenin, living in exile in Zurich, Switzerland after having been expelled from several European countries earlier (Germany, Austria-Hungary, and France), was an enemy of the Russian Provisional Government and an advocate of ending the war immediately. Germany therefore facilitated Lenin’s return to Russia in April, 1917, famously allowing him to travel through Germany in a sealed train. That decision helped change history.

But here is the counterfactual that Powell forces us to confront: what if Kerensky had refused Wilson’s de facto bribe, and had instead simply taken Russia out of the war? If Russia had withdrawn, as the vast majority of the Russian people in all classes and from all professions and walks of life wanted, what reason would Germany have had to facilitate Lenin’s return? After all, Lenin had been preaching about a global communist revolution since at least 1902, which would have destroyed the existing stable order in Germany if and when the Marxist-Leninist revolutionary fervor reached there; what reason would the Germans have had to let loose these Leninist furies in the East? The answer can only be that absent the desire to take Russia out of the war in 1917, the Germans had no incentive to help Lenin and he could not have moved out of Zurich.

And therefore, it follows that if Lenin had not returned when he did, would the Bolsheviks have seized power? If the Bolsheviks had not seized power, asks Powell, would Stalin ever have inherited the Soviet Union? If there had been no Soviet Union, what would the 20th century have looked like?

Obviously, we cannot answer those questions with certainty. But neither can we dismiss them as meaningless. The point of counterfactual history is not to pretend that we know what would have happened. It is to recognize that history was not inevitable. Different decisions could have produced different possibilities. And Wilson’s determination to keep Russia engaged in the European war was one of those decisions.

PHOTO: One of more than 116,000 Americans whose lives were needlessly snuffed out in 1918 by Woodrow Wilson’s great folly. Their deaths were in vain.

The danger of good intentions that are often plagued with corruption

This is ultimately why Wilson’s War matters today. President Wilson himself believed deeply that he was doing the right thing. That is not in dispute. The problem is that foreign policy should ultimately be judged by consequences, not intentions. This is a lesson Americans have repeatedly forgotten.

A president can sincerely believe that intervention will produce peace, and instead produce a larger war. He can believe that military victory will produce democracy and instead produce dictatorship. He can believe that the people who are advising him have pure motives, when instead, self-interested corruption is in play. He can believe that destroying a dangerous regime will make the world safer and instead create a vacuum that is filled by something worse (does any of this sound familiar?).

And here’s a big lesson history teaches over and over: once those forces are unleashed, the people who unleashed them don’t get to control what happens next. That is the fundamental problem with interventionist foreign policy.

The United States is extraordinarily good at destroying things. It is much less capable of predicting what will replace them. That distinction matters enormously. Vietnam was not World War I. Iraq was not Libya. Afghanistan was not Russia in 1917. Historical analogies can easily be abused. But the recurring intellectual error is remarkably similar: We will intervene, defeat the bad guys, and then build something better. History shows, however, this almost never happens. And when it doesn’t work out well, the consequences can last for generations.

What Wilson’s War should teach us in 2026

This is why a book published more than twenty years ago remains relevant. America is still the world’s preeminent military power (albeit a corrupt, fading and declining power). An American president can still however in any case unleash enormous military, air, and naval forces and combat power abroad, with consequences that may not become apparent for years—or decades. That power, which is often deployed in service to corrupt special interests, demands something more than good intentions. Before entering a war directly or funding proxies and assisting in one, Americans should ask questions that are frequently neglected:

What happens after we win?

Who governs the country we have destabilized?

What political forces will our intervention strengthen?

What happens if our assumptions are wrong?

Who benefits from the resulting chaos?

And perhaps most importantly: What if staying out produces a better outcome than intervening?

That last question is particularly difficult for Americans. We like to think of ourselves as “the good guys.” We believe that our motives are fundamentally different from those of other great powers, and that we are the “exceptional” nation. And because our intentions are always assumed to be sublime, we also then assume that our interventions will ultimately produce honorable results. But history provides considerably less support for that assumption than we would like.

It must also be candidly admitted here that just as America’s interests were hardly perfectly congruent with those of Britain, France, or Russia in the 1914-17 period, neither are America’s interests today necessarily congruent, even remotely so, with those of our two corrupt client states currently involved in intense kinetic combat on the other side of the world, for reasons having nothing to do with America’s national interest or security: Ukraine and Israel.

The most important lesson

The ultimate lesson of Wilson’s War is not that America should never fight. That would be absurd: there are indeed occasional wars worth fighting, such as the American Revolution. There are also circumstances in which failing to intervene likely produces consequences far worse than intervention itself, such as stopping the Ottomans in 1683 at Vienna.

The lesson here is more demanding: before sending Americans to war, we should understand that we are not merely deciding how to end one conflict. We are deciding which future becomes possible.

Wilson thought he was entering World War I to create a safer and more democratic world. Instead, Powell argues, American intervention helped create the conditions for Versailles, German revanchism, Hitler’s rise, the collapse of Russia’s fragile democracy and the Bolshevik seizure of power. Not to mention the severe downturn of 1920-21 and international monetary instability across the 1920s that helped spawn the Great Depression.

Did Wilson “cause” Hitler and Stalin? No. Can anyone prove that America staying out would have prevented either of them? No. But those qualifications should not obscure the larger point: Wilson changed history. He changed the balance of the war. He changed the terms of the peace. He changed the political incentives confronting Germany and Russia. And those changes altered the range of possible futures available to the world.

That is enough to make his decision worthy of profound scrutiny.

The greatest danger in foreign policy is not necessarily having bad intentions. It is perhaps having good intentions, influenced by corrupt self-aggrandizing special interests, combine with enormous power while being devoid of sufficient humility about the consequences of using that power.

That may be the most important lesson of Jim Powell’s Wilson’s War. And it is a lesson Americans would do well to remember before the next president tells us that another foreign war is necessary to make the world safe – or in the current moment, that we must attack a poor and harmless country in an unprovoked and aggressive manner, for completely false reasons, in service to a corrupt special interest.

Ultimately, Powell’s warning in this fine book is to heed the advice of John Quincy Adams in his famous speech on the floor of the U.S. House of representatives on July 4, 1821: America “goes not abroad in search of monsters to destroy,” intoned the 6^th president. The United States is a friend to liberty everywhere, he added – but guarantor – “champion and vindicator” – only of our own.

Mr. Chapman is an economist at Hill & Cutler Co., a merchant bank in Washington, DC.

– F.A. Seiberling, reminiscing in 1947 at age 87

F.A. Seiberling in 1898, at Goodyear’s founding

Introduction

“What a gorgeous holiday morning!” Penfield Seiberling thought to himself as he bounced down the stairs and headed to the breakfast room, in as good a mood as he thought possible for any man. Indeed, life was good for this newly-minted college graduate and aspiring clergyman: the prior day, July 3, 1921, “Pen” had celebrated his 23^rd birthday with family and friends. And today, per tradition, promised more of the same with a big gathering of the extended Seiberling clan of Akron, Ohio to celebrate July 4th. The ebullient young man had also just returned from a retreat at Chautauqua, NY, following his graduation from Princeton, where he had been the class orator at graduation; Penfield had then led the Princeton delegation to the New York gathering of students interested in Christian missionary work. Yes, nothing but a mountaintop on this fine summer holiday, full of fun and dreaming of the future! And thus he was anxious to seize the day.

Greeting his mother on the way to a hurried breakfast, she nodded and told him his father wanted to see him in his study right away. As that was almost always a signal to turn serious, Penfield’s mood stiffened slightly as he walked down the hall to his father’s office and opened the door. “Good morning, Pen. Come here and take a look at something with me,” intoned Frank Augustus (“F.A.”) Seiberling, in a subdued voice that immediately formalized his son’s demeanor. Moving around the desk, Penfield noticed his father had spread out several bank statements, promissory notes, stock certificates, and a summary document highlighting the elder Seiberling’s net worth as of June 1921 in line-item detail, directly in front of him. Glancing at the latter document, Penfield’s gaze turned intense, and then became one of horror: There’s red ink everywhere, he stammered quietly to himself. For the first time, the severity of his father’s recent financial troubles and business reversal – F.A. had just been forced to resign from the Goodyear Tire & Rubber Company, which he had founded 23 years earlier – hit home to Penfield.

“Father, this is terrible!” the young man finally exclaimed, breaking a long silence after realizing F.A.’s equity in Goodyear was now essentially worthless, and many of his other holdings gone. “What are you going to do?”

Fifty-five years later, in recounting the story to a grandson, Penfield recalled his father’s stern response as one of the great teachable moments of his life: “He looked me right in the eye,” Penfield remembered, “and said with searing resolve, ‘I’m going to start all over, and do it all again – build another great company. And I want you boys to help me do it.’ It was a lesson in life I’ve never forgotten. My father had just been removed from Goodyear, and here was a man who had just lost about everything. He’d hidden from all of us how bad a situation we were in, but now, at age 61 – can you imagine – he was determined to begin again at his beginnings,” said Penfield, tears welling up in his eyes at the memory of the long ago conversation and the remembrance of his father’s steely courage and perseverance.

F.A. Seiberling’s Early Career and the Build-up of Goodyear: Trials and Triumph [1]

Indeed, just weeks earlier, on May 13, 1921, Goodyear (headquartered in Akron, Ohio), although at the time the world’s largest tire and rubber company, had faced receivership and undergone a recapitalization led by the investment bank Dillon, Read & Co. of New York. As part of the rescue plan, F.A., the company’s founder, Chairman and President, was removed, and his equity holdings vastly diluted.[2] In addition, several of his other properties and investments had gone sour or been claimed via collateral recourse in the devastating recession of 1920-21, and F.A. had set out for Princeton to see his son graduate in June, he recalled later with wit and irony, “on an extended vacation for the first time in my life.”

The fate of success can be a cruel mistress: for the full calendar year of 1920, Goodyear had posted sales of $192 million, and was producing more than 800,000 tires per month that spring in a continuation of the World War I boom. But the post-war recession was setting in, and by December of 1920 Goodyear made less than 118,000 tires on its way to a devastating 46% plummet in sales in 1921 (to $104 million), and the company’s first operating loss in its history. For F. A. Seiberling, known as the “Little Napoleon” of the rubber industry due to his diminutive 5’3’’ height and fiery nature, it was a personal and professional disaster. Blamed for Goodyear’s near-death due to over-extended finances and poor liquidity, F.A. also went, almost overnight, from being one of America’s wealthiest titans of business to pauper status. What he did in the wake of this professional calamity, and indeed with the rest of his life, contains timeless lessons worthy of study.[3]

Family origins and early career

The life of F.A. Seiberling (1859-1955) is in many ways a quintessentially American story, extending back to his family’s migration to this country: F.A. was a fifth-generation native born into a German immigrant family descended from an indentured servant. F.A.’s grandfather, Nathan Seiberling, had left the comforts of a family homestead and migrated from Pennsylvania to settle in northeast Ohio near Akron (south of Cleveland) in 1831, and proceeded to build up extensive farming and milling interests.[4]

John F. Seiberling II (1834-1903), F.A.’s father, was a lifelong Ohioan and entrepreneur, moving from Nathan’s farming business directly into varied enterprises, including the J.F. Seiberling & Co., makers of harvesting equipment, mowers, binders and reapers for agricultural applications, the Seiberling Milling Co. (wheat/flour millers and cereals), banking, a streetcar line, and a strawboard manufacturer.[5] Hailing from a strict German Lutheran family, F.A. had attended Heidelberg College in Tiffin, OH for two years in the late 1870s, but was expelled for reasons of insubordination and never graduated – a fact of which he was not proud and which he avoided discussing in later life, but led to a stern entry into his father’s enterprises full time in his late teens.[6]

Through much of the 1880s and 1890s, F.A. remained in business with his father, but also dabbled in several entrepreneurial ventures, with varying degrees of success – and failure.[7] He generally prospered alongside his father until the deep recession beginning in 1893, at the time far and away the worst in U.S. history. Begun by railroad and banking failures, unemployment peaked above 12% and was in double digits for close to five years, leading to massive labor unrest and railway strikes, a severe run on gold, and a deflationary spiral that ruined borrowers, especially enterprises in the farm belt.[8]

Sadly, one of the victims of the 1893 downturn was the J.F. Seiberling enterprise, which went into receivership in 1898. Having investments and businesses that supplied the heavily indebted agricultural sector, the Seiberling father and son duo were both essentially wiped out financially. And indeed, on a morning in June of 1898 when his life changed forever, F.A. Seiberling, approaching age 39 with three children under the age of ten and a fourth due the next month, found himself at a meeting in the Tremont Hotel in Chicago with a net worth “several thousand dollars poorer than nothing”; he had, as he said, “gone down to wreck and disaster with the Panic of ’93.”

The Founding and Growth of the Goodyear Tire & Rubber Company

F.A. was in Chicago to liquidate his and his father’s debts, when he ran into a business executive from Piqua, Ohio, H.C. Nellis. Mr. Nellis’ firm owned an abandoned straw-board factory in Akron that had been shuttered for over 4 years, another victim of the 1893 downturn. Nellis asked F.A., whom he knew was aware of the facility because of J.F. Seiberling’s earlier involvement there in strawboard, if F.A. could suggest any buyers. $140,000 in capital had been sunk into the factory buildings and equipment, but Nellis would part with it for $50,000. F.A. told Nellis he would be lucky to get $25,000 for it, and he himself would not pay more than half that.

Nellis then offered to sell it for $13,500, $3,500 down and the rest on a four-year note, and Seiberling impulsively agreed. That night he rode the train back to Akron, lying awake and thinking about what to actually do with the facility. The good news was, he had virtually “stolen” a factory and twelve acres of land; the bad news was, he had absolutely no money to help with the downpayment himself, and he had no idea what sort of enterprise was worth pursuing.[9] But by mid-morning the next day, as he talked to family and friends in order to raise the necessary $3,500, Seiberling had decided to go into the rubber business, focusing on bicycle tires and other assorted products such as rubber bands. He also decided to name the firm after Charles Goodyear, the inventor who had discovered the vulcanization process forty years earlier.

Beginning production less than five months later, the firm was profitable almost immediately.[10] The bicycle craze led to an exploding market, and by 1901 Goodyear had also entered the burgeoning market for pneumatic tires made for “horseless carriages” — a nascent industry centered at the time in Cleveland and Detroit, where the big early producer was Henry Ford. The early years were not without constant struggle, however, the most prominent of which was a series of legal skirmishes with the Kelly-Springfield Tire Company over patent infringement and supply agreements (Goodyear prevailed, though after costly litigation spread over years).[11]

In spite of hundreds of competitors in a highly fragmented industry, however, F.A. drove the Goodyear team to rapid growth and industry leadership within a decade. Having found his passion in rubber, F.A. was seen to possess traits shared by Steve Jobs, Bill Gates, Andrew Carnegie, and other great American business legends: indefatigable energy and determined will to succeed. He worked seven days per week and took no vacations for some thirteen years after founding the company, while at the same time branching his investment activities into other transport-related businesses. Over the course of the next twenty years, Seiberling came to be thought of as a force of nature in the industry, acquiring the nickname of the “little Napoleon of rubber”, and grew Goodyear to become the largest tire company in the world after 1916.

The firm grew the way all successful firms do: superior strategy and execution, and in time, buttressed by a reputation for superior quality. Goodyear became leading edge for its time in marketing innovation (e.g., licensing patents, agency deals), capital investment (invention of new and revolutionary tire-making equipment), strategy (regional sales offices and eventually regional production), and human relations (good wages for workers and company-subsidized benefits, including housing and recreation).

The company’s rise paralleled the industry’s, and helped drive rapid growth of the city of Akron. In 1900, Akron had 42,000 residents, growing to 69,000 by 1910, and tripling to 208,000 by 1920; this matched the explosion of automobile registrations in the United States, which stood at 8,000 in 1900, 200,000 in 1908, and 7.5 million by 1920. As for F.A. Seiberling himself, he was the company’s largest single share-holder, and a half-billionaire (in current 2013 dollars) by the end of World War I. The company’s motto, “Protect Our Good Name,” was one flowing from F.A.’s innermost core, an unquenchable drive-train to make Goodyear the world’s dominant rubber company by offering the highest quality products.[12]

Disaster and Unceremonious Exit from Goodyear

When war broke out in Europe in 1914, all belligerent countries suspended their currencies’ links to gold. This allowed governments to inflate currency stocks through the banking system’s fractional reserves, and while it assured higher prices in the future, it also ceded to government more direct control over societal resources, as governments and their agents were able to spend the newly-created money on munitions before taxpayers spent on consumer goods. The United States did not enter the war until 1917 as a belligerent, but suspended the gold standard in 1914 and again from 1917-19. Special currency printing through the Aldrich-Vreeland Act (the 1907 legislation that led to the creation of the Federal Reserve, and in this case allowed for printing of currency in an emergency, to be backed by bonds) was authorized, and again thanks to fractional reserves the U.S. money supply expanded dramatically during the war – doubling between 1915-20. This led to exploding commodity prices (as it had in all prior wars for the U.S., and would in later ones as well), shown in a few ways. First, Chart I shows the Producer Price Index (PPI) since 1913:

Chart I. Producer Price Index, 1913-Present, Log Scale

Note that the rise in producer prices was sharper between 1915 and 1920 than it has ever been at any other time in the last 100 years, rising by more than 150%. (And indeed, the next time the PPI increased by 150%, it took 58 years, between 1920 and 1978, to do so, albeit not before falling all the way back to 1915 levels by the end of the great deflation of 1933). Note further that the drop in commodity prices during the 1920-21 recession (all recessions are shaded in gray) is the sharpest drop in the last 100 years in the United States; as we will see in a moment, this rise and fall greatly impacted Goodyear, and sealed F.A. Seiberling’s fate.

This commodity price explosion is so critical to the lesson to be learned here, and how it nearly ruined F.A. Seiberling’s life, that we ask for reader indulgence in looking at the PPI again “up close” during the era in question, between 1913 and 1926:

Chart II. Producer Prices, 1913-26, Log Scale

The enormous explosion in producer prices was matched by increases in consumer and inflation-sensitive farm prices as well; agricultural land and asset prices were up 80% between 1915 and 1921, for example. Reading these price signals, and not being aware of the Federal Reserve’s “looser” policies or the ramifications of decoupling the dollar from gold, F.A. Seiberling pushed Goodyear forward by committing to investments in a far-flung empire, including new factories or operations in Arizona, Brazil, California and Canada. Because he did not trust (and never had trusted) New York banking syndicates, to fund this growth Seiberling raised new equity capital through two subscription offerings directly aimed at friends, family, and employees. He also bought rubber and other industrial commodities on forward contracts at these vastly-inflated prices by 1920; this seemed to be a prudent thing to do, to both lock in prices before they were raised yet again, and to gear up for what had seemed to be the likelihood of a long war. Further, Seiberling reasoned, even if the war ended abruptly (which it subsequently did), demand would then shift back to civilian desires for more autos.

But the end of the war brought a big deflation, and as the graphs show above, rapidly declining prices – the steepest decline in U.S. history, in fact, and far sharper a decline than that of 1929-33 (or more recently, 2007-09; see Chart I above to compare these episodes and their price drops). The government cancelled huge long term contracts, but there would be a lag to convert to civilian demand and production. A major recession began in early 1920 which was to carry over well into 1921; and Goodyear, which was so strong operationally and in terms of market share, was nonetheless caught in an extremely illiquid position.

Expectations of higher prices and demand had led to expansion of inventories which now could not be liquidated due to the severe deflation fueling the 1920-21 depression, and what became a steep drop-off in demand. Again, in terms of magnitude, Goodyear’s sales in 1920 totaled $192 million, but in 1921 sales fell to $105 million as the firm incurred a $5 million net loss, for the first time ever.

The maddening thing of it for F.A. was that the company had a fundamentally strong market position. By war’s end, for example, Goodyear supplied 60% of new inflatable and 35% of solid tires for trucks in the U.S.; 50% of the motorcycle market; and 60% of all carriage and buggy-maker needs. Goodyear was General Motors’ single biggest supplier, owing to Seiberling’s close relationship with W.C. Durant (at the same time, Firestone was Ford’s biggest supplier for decades). But the firm was reeling as the 1920 downturn turned into a mini-nightmare. Over 100,000 businesses went bankrupt that year, many over-leveraged or too-extended, like Goodyear. Industrial production fell 21% between mid-1920 and mid-1921, and this was enough to ensure unemployment tripled, from 3% to over 10% in the U.S. in that same timeframe. By the spring of 1921 Goodyear’s capital stock was nearly wiped out.

And thus F.A. Seiberling’s downfall came in May of 1921 when, due to his lack of support in the New York banking community, he struck out at getting support for working capital loans to bridge the firm until cash flow could again turn positive, as it surely would when longer term purchase contracts either ended or were re-worked, and the firm’s sales returned once the industry came back. Along with Seiberling, 26,000 Goodyear employees lost their jobs in 1920-21, as the Board voted to bring in Clarence Dillon of Dillon, Read & Co. to bridge the firm and also offer up support for new managerial talent.

Repassage and Renewal at Age 61: the Seiberling Rubber Company

For F.A. Seiberling, to have his heart and soul — 23 years of his life — ripped out of his chest at age 61 was the most devastating event in a long life of challenges. Further, because back in those days corporate finance practices were not formally developed, loans to a business were often made by the founder/entrepreneurs in the form of “full recourse” — F.A. had signed notes for these loans opening his own net worth to exposure. By the time he was removed from Goodyear, he was allowed to keep his house, some Goodyear shares, and little else. He was, in a financial sense, wiped out, having just a few years earlier had a 9-figure net worth statement.[13]

It was a reversal that, at age 61, would have broken most men, and in a September 1924 interview with Norman Beasley of MOTOR Magazine, F.A. conceded he had been badly hurt by the events of May 1921 at Goodyear — his life was changed forever, losing nearly everything.[14] And it had been damaging momentarily, too, to his psyche, he conceded.

But by the time he had that early summer morning conversation with Penfield, F.A. had regained his composure, and his resolve. As F.A. recounted to Beasley:

You know, a man is never a success until he is a failure. When trouble – if it was trouble – came to me, I refused to accept its presence. I was 60 years old. I had built, as I supposed, solidly. Circumstances prevented me from remaining [at the helm of Goodyear], but they did not prevent me from keeping faith in myself.

It is impossible not to think of losses, but, in thinking of them, I clung to this belief: ‘The man who feels sorry for himself is lost.’ I refused to have any sympathy for Frank Seiberling. It is easy to sympathize with ourselves under such circumstances, to ‘pass the buck’ and say, ‘I am not to blame.’ It is harder to shut out such thoughts, dig in your toes and keep pushing. I was sixty years old – at an age when Failure is accepted as the end of things, if it comes. To me, it only meant there was less time ahead of me to get back that which had been lost.

That is why, in the midst of ‘Failure’, I organized the Seiberling Rubber Company, and it is succeeding splendidly because there remain those who have and had confidence in me and are helping me in every possible way to travel the high road.

In other words, the world thrusts aside those who admit failure; but there is always an outstretched hand for the person who keeps a tight chin and fights.

Had I lost my optimism and belief in myself and instead kept the millions, I would have been a poor man. The pessimist is the most unfortunate of beings. No man was ever successful unless optimism prevailed throughout his character. Henry Ford is right about this, and I am, too.

Have you ever thought of the truth of this? Everything that has been accomplished in the world has been done by an optimist – nothing by a pessimist. It is easy to be pessimistic when things are breaking badly. Things can break badly for the optimist but because of his optimism he will make them right themselves and come his way.

You must remember this – I am past sixty years of age. It is not like starting over at age thirty, forty, or even fifty. There are fewer years allotted to me --- I have no time to waste on idle speculation or grief based on what has happened to me. I need my energy for work – not for worry. I need my hours for work – not for self-pity. The successful man never hits bottom. Always remember that. The successful man will be too resourceful to strike bottom. I believe I am justified in thinking I have resources that can be called upon in time of need; and optimism is at their base.

And so it was that in the summer of 1921 F.A. Seiberling announced his intention to form a new rubber company, following the tragedy of his ouster at Goodyear. Within a week of his solicitation for capital, more than $500,000 had been raised, and the company had occupied an old plant New Castle, PA by the end of 1921, and the following year in Barberton, OH. Just three years later the firm was up to $8 million in sales, and went on to become the seventh largest rubber company in the United States. Seiberling captured 0.7% of U.S. market share in 1922, and had doubled that to 1.5% by 1928, and 2.5% share ten to fifteen years later.

From the company’s inception, Seiberling Rubber supplied the aftermarket replacement demand only – they steered clear of supplying the Detroit automotive OEMs. They sold nationwide and in Canada through a network of independent dealers, whose loyalty to F.A., motivated by their knowledge of his commitment to superior quality and long-lasting products, was unmatched in the industry.

Further, as a niche manufacturer and supplier to the automotive sector’s independent dealers, F.A. knew that the firm must differentiate itself based on its service levels: viz., that Seiberling Rubber must pursue specialty product offerings not amenable to the long production runs and mass scale afforded by the big capital intensive majors such as Goodyear, Firestone, and Goodrich. And so indeed, by the 1930s the firm had a full line of niche offerings including sealed air tubes, fan belts, polishes/cleansers/waxes, tractor/truck/bus tires, horns/radios, latex rubber toys, garden hose, and even golf balls.

While never achieving a grand scale, Seiberling Rubber sales did peak at $54 million in the 1950s, and the company’s quality was considered industry-leading. F.A. formally retired at age 90 in 1950, and died in 1955, having come a long way back from the dark hours of May 1921.[15]

While in Akron to interview F.A. for the essay in MOTOR Magazine, an industry observer told Norman Beasley that F.A. Seiberling truly did not conceive of the word “defeat” being in the English language. F.A. himself ratified this precept by the indomitable confidence he had in himself: “Men don’t get anywhere in this world unless they have the power of imagination. They have got to be able to visualize and see things ahead of the other fellow. If you have got imagination and vision and energy and purpose, you can push on and land ahead of the other fellow. The greatest successes in life come from seeing things before others, and then having the courage to go to it, and hang on until you get there. A man who has the idea in his mind that he is going to win on the score of merit – on his own initiative – on the power that is within himself – he will surely get there.”

Key Lessons to Note about F.A. Seiberling’s Life

· Failure and expulsion from Heidelberg College led to an intense inner drive to succeed in life – and later led to strong eleemosynary support of higher education. This is an example of a “failure” and bad turn of events later being a catalyst for much greater good.

· Burning desire and perseverance carried him throughout his life. F.A. Seiberling not only had to re-invent himself in his early 60s after disaster befell him in 1921. He was also nearly bankrupted by the 1893 depression, and had generally failed in business by 1898 after trial and error in various businesses. Beginning Goodyear in 1898 was also an act of career re-invention. Later, the Great Depression caused struggle in his 70s and he never felt able to formally retire

· Indomitable belief in himself was a constant across his life.

· Refusal to dwell on the past, regardless of the circumstances

· Even though he rose to become one of the world’s richest men by the end of World War I, before he lost most all of his wealth after 1921, it’s interesting to note how much of that wealth materialized after age 45 and really age 50. F.A. experienced tremendous setbacks earlier in life, especially in the turbulent era after 1893.

· He learned a great deal through repeated failures, and through trial and error: he “embraced” his failures, to use the modern vernacular

· Held a fanatical belief in the importance of having a positive attitude. He was certain that optimism was a necessary and almost-sufficient condition for success and happiness; pessimism was a sure road to failure.

· Viewed life as one long struggle, that was no doubt colored by living in an incredibly turbulent era (Panic of 1893 and recession, Panic of 1907, 1920-21, 1929-33) – reinforced his views about the necessity for optimism

Footnotes

[1] Material for this essay comes primarily from the F.A. Seiberling and J. Penfield Seiberling papers at the Ohio Historical Society, Columbus, Ohio. Background references include The House of Goodyear (by Hugh Allen, Corday & Gross, 1949); Industrial Voyage (by Paul W. Litchfield, Doubleday & Co., 1954); The Goodyear Story (by Maurice O’Reilly, Benjamin Co., 1983), and Wheels of Fortune: The Story of Rubber in Akron (by Steve Love and David Giffels, University of Akron Press, 1999).

[2] Charles W. (“C.W.” or “Charlie”) Seiberling, F.A.’s younger brother, who had helped found Goodyear in 1898 and been with the firm ever since, was also removed from company management in May of 1921. C.W. would soon join his brother again, however, in forming the new venture described below, the Seiberling Rubber Company.

[3] As is discussed below, the downfall and loss of Goodyear occurred, in reality, due to events largely beyond F.A.’s control; specifically and ironically, due to forces unleashed by the U.S. government and the Federal Reserve that he himself – and most business professionals at the time – did not comprehend. While F.A. himself never became aware of or comprehended the details due to the Fed’s newness in that era, larger lessons were imparted from the events of 1920-21 that F.A. passed on to his progeny, which we detail below.

[4] F.A.’s Great-great-great-great-grandfather Michael Sauberlich (anglicized to “Seiberling”) left Ellmendingen, west of Stuttgart in Baden-Wurttemberg, Germany and arrived at Philadelphia (the port of entry for most German immigrants) in 1741, finally acquiring farmland of his own after 1748 near Allentown, PA (there still is today a Seiberlingville, PA nearby). F.A. got to meet his great-grandfather, John F. Seiberling (b. 1783), and saw him last on a visit to Allentown in 1873, when the latter, at age 90 and with tears in his eyes, presented F.A. with a gold coin from John F.’s father Frederick Seiberling, a veteran of the American Revolution.

[5] John F. Seiberling was a driven entrepreneur with an inventive mind, traits passed on to his son F.A.; John F. was the inventor of the Empire and Excelsior Mower & Reaper lines, leading brands of the day with sales throughout the farm-belt – F.A. travelled as far as Nebraska and the Dakotas in the early 1880s to service and repair them. John F. also patented a dropping attachment to Excelsior mowers, greatly aiding in farm productivity.

[6] However, F.A.’s failure at Heidelberg was a terrific growth experience for him and in fact was seminal in terms of inculcating a level of drive and discipline bordering on fanaticism, according to Penfield. F.A. was immediately forced to enter his father’s business and mature in the skills of commerce early on, but later became a firm believer in higher education: he was a great benefactor of several institutions of higher learning including Heidelberg, Buchtel College (later the University of Akron), and Lincoln National University near Gatlinburg, TN.

[7] Over the course of his 70 year career, beyond his father’s businesses, F.A. Seiberling was directly involved in many businesses – and many failures. Prior to founding Goodyear in 1898 he invested in or managed, through trial and error, coal mining, pulp and paper/paperboard, plate glass, woolen and felt, a powder company, and turpentine-making operations. Both before and after Goodyear, he was an officer and investor in railroads. Later on, in the 1910s, ‘20s, and beyond, he had interests in banking, fire insurance, mineral mining, and real estate development in Ohio, Georgia, and Tennessee. However, all these paled in comparison to his core life’s work in the rubber industry. And all told, it is fair to say, as Penfield described it, he never took time off from a 7-day workweek until he stepped back from active management of the Seiberling Rubber Company in 1938 at age 78, reverting to the Chairmanship of that firm until full retirement in 1950 due to failing health.

[8] Data and analysis of the depression in commercial activity beginning in 1893 can be found in Christina Romer, “Recessionary Episodes in the 19^th Century” (Journal of Economic History, 1989). While a matter for debate, in our view the 1893-98 downturn should be considered the second worst in U.S. history, after the Great Depression beginning in 1929. The economic pain from the run-on-gold deflation was so severe, debate about expanding the money supply to include silver, in order to relieve debtors, had animated the 1896 election. Meanwhile the 1920-21 contraction that brought down Goodyear, while “only” a year in length, was actually more brutal than the first year of the Great Depression, as we recount below.

[9] Years later Seiberling recounted: “Well the first question was, where is the $3500 coming from. You remember I had been through a disaster – I had no money, I had no credit. I had few friends left who had money and credit. The thought arose, where is the man who can lend me $3500? I got on the train and that night I don’t think I slept a wink coming from Chicago to Akron. I knew I had got a bargain, but the thought was running through my mind – what will I do, what business will I go into. I knew that there were foundations there for a paper mill. The manila paper business in Akron was very prosperous then. But it was one product and very monotonous. I finally hit upon rubber. I thought, the rubber business started in Akron, there’s rubber labor here. More than all that, it is a business that affords opportunity for invention, for new products and improved quality. Before I got into the station at 6 AM, I was a rubber man.”

[10] F.A. Seiberling had shown by the instinctual gamble he took in acquiring the facility sight unseen, and even more so with no business plan in mind, that he had the classic tacit judgment capabilities common to the most successful entrepreneurs. That is to say, he literally “smelled” an opportunity in the form of an undervalued asset, was unafraid of great risk, and set forth in pursuit of exploiting the opportunity. “Promoter, inventor, risk-taker, and charismatic leader” (according to Maurice O’Reilly, the Goodyear historian), F.A. capitalized on the resources at his disposal, including some knowledge of the history of the rubber business, which had come to Akron as far back as 1870 with the arrival of B.F. Goodrich. And happily, Akron was uniquely positioned geographically to capture the rubber tire market, with transportation waterways, railroads to all major markets, and of course easy access to auto production (which within a decade was centered solely on Detroit).

[11] In one of his life’s best learning moments, F.A. initially negotiated directly with Mr. Kelly, the founder and owner of Kelly-Springfield, then an industry behemoth, for a supply and distribution arrangement leveraging Kelly-Springfield’s patented products. But Kelly refused to hold true to his word, dealing with the then much bigger B.F. Goodrich Company instead, without informing F.A. And later, Kelly withheld $57,000 in payments due Goodyear in 1901, as retaliation for Goodyear’s marketing to Kelly customers with an allegedly patent-infringing tire. The firms sued and countersued, and F.A.’s lawyer urged him to settle at one point and accept a $30,000 settlement – money the cash-strapped Goodyear needed at the time. But F.A. was enraged by the lack of integrity Kelly had displayed, and demanded of his reluctant Board of Directors that the fight be carried through to courtroom verdicts. Goodyear prevailed on all counts eventually, fighting through to the Appeals Court level, but F.A. never relinquished a lifelong contempt for Kelly, or any business professional whose word was no good. “I never dealt with a man with so little mercy in my heart as I did with Kelly,” F.A. remembered later. “Just because he had gone back on his word to me and I was full of resentment. He had tried to kill us, he was unfair and I wasn’t in any mood to do business with him at all.”

[12] This was another lesson F.A. had learned “the hard way” in Goodyear’s early years. Goodyear had come out with a non-warrantied bicycle tire branded as the “Tip Top” tire in 1900. The firm attempted to build its share growth by producing and selling the Top Top brand cheaply. But the tires were made with very poor compounds and kept ripping in use. In spite of multiple iterative changes, the quality was never improved, and Goodyear acquired a reputation as a very poor quality tire vendor among bicycle users. It was harmful to the firm’s overall reputation, however, and impacted sales of automobile tires, F.A. felt, a decade after the Tip Top’s discontinuance. It burned into F.A.’s psyche a resolve to never again offer anything other than a supremely superior product.

[13] In a very real sense, the Federal Reserve brought Seiberling — and many tens of thousands like him — to complete ruination. For had the Fed not intervened after 1915 to support the war effort via big increases in the money stock, prices would not have been distorted in relative terms. And thus entrepreneurs like Seiberling would not have mis-read the false signals from wholesale prices after 1915, leading to massive malinvestment of capital in projects that could not pay off, as well as the forward contracts Goodyear pursued thanks to those false price signals. These contracts, primarily for rubber and related commodities, led Goodyear to become trapped in an illiquid cash squeeze in 1921 that, while the solvency of the firm was not in question, nonetheless led to the end of Seiberling’s career there; they could not support profitable activities in the face of dramatic drops in commodity and consumer prices. Such Fed activism, while designed ostensibly to help the economy, is in fact often de-stabilizing in terms of prices and the dollar’s value, and leads to errant investment and other business decisions. Human lives can be ruined as a result.

[14] He told Beasley that he had lost at least $18 million by leaving Goodyear -- $326 million in today’s currency.

[15] And, for better or worse, F.A. Seiberling died never comprehending the role Federal Reserve policy had played in engendering the boom/bust swing in prices that led to the severe recession of 1920-21, and his ouster from Goodyear. It likely would not have mattered after the fact, because he had determined to put the past behind him and not dwell on any hypotheticals. It is a cautionary tale for modern-era decision-makers and entrepreneurs, however; shifting, whimsical, non-neutral government policies must be taken into account as a variable that can materially impact outcomes.

Appendix

I. Major Philanthropic/Civic Pursuits

· Peoples’ Hospital Co-founder/Trustee (later Akron General Medical Center)

· Personally financed and built Goodyear Heights residential neighborhood for employees – 19 different home styles

· Gifted thousands of acres of parkland

· Lincoln Memorial University (President, Board of Trustees)

· Buchtel College Trustee and building donor

· Heidelberg College Trustee and building donor

· Rubber Manufacturers Association

· US Chamber of Commerce

· Associated Advertising Clubs of the World – force behind its founding an truth in advertising

II. Further charts showing terrible economic conditions of 1920-21 that claimed F.A. Seiberling as victim

By John L. Chapman, Washington, D.C.

I am the last of the old men of rubber ….rich and poor again by turns…..I have seen life from the mountaintops and the valleys. I fear there will be hard times ahead for America….but what happiest of days were those former times [of building Goodyear]….my baby — my giant! — F.A. Seiberling, Goodyear Tire & Rubber Co. founder, looking back at age 88

Introduction: Though Not Well Understood, Stable Money is Critical for Economic Growth and Prosperity

Readers of our column, and indeed all output from the investment research team at Alhambra Partners, well know that we are fans of sound money — that is to say, money that is dependably-valued over time, such that it allows for proper calculation of profits and losses, for investment planning and entrepreneurial deployment of scarce capital resources in an uncertain future, and for the maintenance of its worth in exchange so that it continually encourages such forward-looking — and thus risky — investment. As stewards of other peoples’ money, in any “macro” or global assessment of investment choices where a paramount goal is preservation of purchasing power, this is the first consideration for us, in fact. Russia, for example, is a country teeming with natural resources, a well-educated and hungry populace, and improving mechanisms to safeguard property rights — but without assurance that the ruble will not again go the way of its valuation path in the 1990s, the country remains a question mark for foreign direct investment.

The fact that the Russian government and its central bank cannot seem to understand this — or choose to ignore it, in order to optimize political manipulation of the ruble for the internal domestic benefit of the (de facto) Putin-led ruling class, is of course a loss both for the world and for the Russian people at large: much in the way of mutual gains from trade and investment is lost. And indeed, this is the best way to size up any currency and better understand the crucial function of money in civilized society. For only a well-functioning medium of exchange, one in which its users have strong and enduring confidence in its exchange value over time, permits the smooth trade and exchange of literally billions of different goods and services (both in the present, and across time, between present and future), via concomitantly permitting a deep division of labor and specialization in order to produce these billions of different goods. And in turn it is this specialization and division of labor that are themselves the primary driver of an ever-increasing productivity of labor, which is the root source of increase in output and real wealth. In other words, a well-functioning monetary unit is critical to improving standards of living and prosperity, along with the protection of property rights and an effective tax system that incites work, saving, and investment.

We take pains to mention this because at the moment we are deep into investigation of the short-term path of U.S. Dollar value both abroad and as it concerns latent domestic inflation, and hence its impact on global asset prices (and the U.S. stock market in particular). Sadly, this is now an ongoing project for us because we fear that the fundamental importance of sound money as a necessary condition for prosperity is lost on the modern political class in the United States, including the President, the Treasury Secretary, and the leadership at the Federal Reserve. Lip service is paid to promoting a “strong dollar”, but not since Rubin’s Treasury in the late 1990s has this been an overt policy concern in Washington (the trade-weighted value of the dollar has fallen sharply in the last decade as confirmation of this neglect, explaining more than anything the sclerotic growth of the U.S. economy — 1.9% per annum — since 2000, the worst stretch in U.S. history for growth outside of the 1930s).

Republicans are hardly better on this issue; Mitt Romney never mentions monetary issues and ignores them completely in his published plans for economic revival, for example (though in this election season Messrs. Paul, Johnson, Cain, and now Gingrich have all talked about the importance of monetary stability as a key factor in restoring sustainable prosperity in the U.S.).

And again, stating the obvious, monetary instability in Germany in 1919-23, when the price level rose more than one billion times in the 15 months leading up to the November 1923 destruction of the German Papiermark (and not coincidentally, the Munich beer hall putsch that landed an obscure rabble-rouser named Hitler in jail, but portentously paved his future ignominious destiny), is understood by all to be an unambiguous example of bad monetary policy. Less obvious, however, are cases of milder monetary mismanagement that nonetheless sow seeds of disaster in future years — this, in fact, this “zero-interest rate policy” for three more years, is a dagger pointed at our future, if not repealed.

A Case Study in Capricious Policy by the Federal Reserve That Greatly Damaged Lives

Indeed, monetary policy is often seen to be well-executed in the United States when measured solely by the yardstick of consumer prices — and as adjudged by members of the political class themselves — even as subterranean turmoil at the level of wholesale prices and errant investment decisions by entrepreneurs create economic havoc by causing distortions in capital allocation (i.e., waste of scarce resources), and subsequent losses and unemployment. To this day, for example, Alan Greenspan obfuscates matters by maintaining that he did nothing wrong to cause any of what became a global financial markets disaster and deep recession in 2007-2009, which confusion Messrs. Obama and Geithner ratify by blaming private sector greed and unscrupulousness that called for Dodd-Frank and a new, more intensive level of federal government oversight.

Perhaps then a concrete illustration of a real life example of Federal Reserve malfeasance that distorted entrepreneurial decision-making and led to malinvestment, job losses, and destroyed lives will best make the case that the Bernanke Fed is now playing with fire. For perhaps in showing the human toll can monetary manipulation be best seen for what it is — no better than a zero-sum game, and often one involving huge individual and collective losses.

The Founding of Goodyear Tire & Rubber Company

In the spring of 1898 Frank Augustus (F.A.) Seiberling was in Chicago on business when he quite by chance ran into a business executive from Piqua, Ohio, H.C. Nellis. Mr. Nellis’ firm owned an abandoned straw-board factory in Akron, Seiberling’s hometown, that had been shuttered for 4 years, in the midst of the 1893-96 recession (that was the most severe in history prior to the Great Depression — there had been massive labor strife and 10%+ unemployment for an extended period, and debate about expanding the money supply to include silver in order to relieve debtors had animated the 1896 election), and Nellis asked Seiberling if he knew of any buyers. $140,000 in capital had been sunk into the factory buildings and equipment, but Nellis would part with it for $50,000. Seiberling told Nellis he would be lucky to get $25,000 for it, and he himself would not pay more than half that.

Nellis then offered to sell it for $13,500, $3,500 down and the rest on a four-year note, and Seiberling agreed. That night he rode the train back to Akron, lying awake and thinking about what to actually do with the facility. By mid-morning the next day, as he talked to family and friends in order to raise the necessary $3,500, Seiberling had decided to go into the rubber business, focusing on bicycle tires, and other assorted products such as rubber bands. He also decided to name the firm after Charles Goodyear, the inventor who had discovered the vulcanization process. The firm was profitable almost immediately as the bicycle craze led to an exploding market, and by 1901 had also entered the burgeoning market for pneumatic tires made for “horseless carriages” — a nascent industry centered at the time in Cleveland and Detroit, where the big early producer was Henry Ford.

The Entrepreneurial Drive, Actualizable Only in a Free Market Economy, That is the Mainspring of Human Progress

Seiberling had shown by the instinctual gamble he took in acquiring the facility sight unseen, and even more so with no business plan in mind, that he had the classic tacit judgment capabilities common to the most successful entrepreneurs. That is to say, he literally “smelled” an opportunity in the form of an undervalued asset, and struck out in pursuit of exploiting it. “Promoter, inventor, risk-taker, and charismatic leader” (according to Maurice O’Reilly, Goodyear historian), Seiberling capitalized on the resources at his disposal, including knowledge and history of the rubber business, which had come to Akron as far back as 1870 with the arrival of B.F. Goodrich. Akron was uniquely positioned geographically to capture the rubber tire market, with transportation waterways, railroads to all major markets, and of course easy access to auto production (which within a decade was centered solely on Detroit).

Seiberling possessed other traits shared by Steve Jobs, Bill Gates, Andrew Carnegie, and other great American business legends: indefatigable energy and determined will to succeed. He worked seven days per week and took no vacations for some thirteen years after founding the company, while at the same time branching his investment activities into other transport-related businesses. Over the course of the next twenty years, Seiberling came to be thought of as a force of nature in the industry, acquiring the nickname of the “little Napoleon of rubber”, and growing Goodyear to become the largest tire company in the world. The firm became leading edge in marketing innovation (e.g., licensing patents, agency deals), capital investment (invention of new and revolutionary tire-making equipment), strategy (regional sales offices and eventually regional production), and human relations (good wages for workers and company-subsidized benefits, including housing and recreation).

The company’s rise paralleled the industry’s, and helped drive explosive growth of the city of Akron. In 1900, Akron had 42,000 residents, growing to 69,000 by 1910, and 208,000 by 1920; this matched the explosion of automobile registrations in the United States, which stood at 8,000 in 1900, 200,000 in 1908, and 7.5 million by 1920. As for F.A. Seiberling himself, he was the company’s largest single share-holder, and a near-billionaire (in current 2012 dollars) by the end of World War I. The company’s motto, “Protect Our Good Name,” was one flowing from his innermost core, an unquenchable drive-train to make Goodyear the world’s dominant rubber company.

The Federal Reserve Initiates a Century of Activism to Aid in Finance of World War I

When war broke out in Europe in 1914, all belligerent countries suspended their currencies’ links to gold. This allowed governments to inflate currency stocks through the banking system’s fractional reserves, and while it assured higher prices in the future, it also ceded to government more direct control over societal resources, as the government and its agents were able to spend the newly-created money before anyone else. The United States did not enter the war until 1917 as a belligerent, but suspended the gold standard in 1914 and again from 1917-19. Special currency printing through the Aldrich-Vreeland Act (the 1907 legislation that led to the creation of the Federal Reserve, and in this case allowed for printing of currency in an emergency, to be backed by bonds) was authorized, and again thanks to fractional reserves the money supply (M2) expanded dramatically during the war — doubling between 1915-20. This led to exploding commodity prices (as it had in all prior wars for the U.S., and would in later ones as well), shown in a few ways. First, Chart I shows the Producer Price Index (PPI) since 1913:

Chart I. Producer Price Index, 1913-Present, Log Scale

Note that the rise in producer prices was sharper between 1915 and 1920 than it has ever been at any other time in the last 100 years, rising by more than 150%. And indeed, the PPI increased by another 150% again — between 1920 and 1978 (albeit not before falling all the way back to 1915 levels by the end of the great deflation of 1933.

This commodity price explosion is so critical to the lesson to be learned here that we ask for reader indulgence in looking at the PPI again “up close” during the era in question, between 1913 and 1926:

Chart II. Producer Prices, 1913-26, Log Scale

The enormous explosion in producer prices was matched by increases in consumer and inflation-sensitive farm prices as well; agricultural land and asset prices were up 80% between 1915 and 1921, for example. Reading these price signals, and not being aware of the Federal Reserve’s “looser” policies or the ramifications of decoupling the dollar from gold, Seiberling pushed Goodyear forward by committing to investments in a far-flung empire, including new factories or operations in Arizona, Brazil, California and Canada. Because he did not trust (and never had trusted) New York banking syndicates, to fund this growth Seiberling raised new equity capital through two subscription offerings directly aimed at friends, family, and employees. He also bought rubber and other industrial commodities on forward contracts at these vastly-inflated prices by 1920; this seemed to be a prudent thing to do, to both lock in prices before they were raised yet again, and to gear up for what had seemed to be the likelihood of a long war. Further, Seiberling reasoned, even if the war ended abruptly (which it subsequently did), demand would then shift back to civilian desires for more autos.

But the end of the war brought a big deflation, and as the graphs show above, rapidly declining prices. The government cancelled huge long term contracts, but there would be a lag to convert to civilian demand and production. A major recession began in early 1920 which was to carry over well into 1921 and Goodyear, which was so strong operationally and in terms of market share, was nonetheless caught in an extremely illiquid position.

Expectations of higher prices had led to expansion of inventories which now could not be liquidated due to the severe deflation fueling the 1920-21 depression and its steep drop-off in demand. In terms of magnitude, Goodyear’s net profit level totaled $51 million in 1920 on sales of $192 million, but in 1921 sales fell to $105 million as the firm lost $5 million net.

The maddening thing of it for Seiberling was the company’s fundamentally strong market position. By war’s end, for example, Goodyear supplied 60% of new inflatable and 35% of solid tires for trucks in the U.S.; 50% of the motorcycle market; and 60% of all carriage and buggy-maker needs. Goodyear was General Motors’ single biggest supplier, owing to Seiberling’s close relationship with W.C. Durant (at the same time, Firestone was Ford’s biggest supplier for decades). But the firm was reeling as the 1920 downturn turned into a mini-nightmare. Over 100,000 businesses went bankrupt that year, many over-leveraged or too-extended like Goodyear. Industrial production fell 21% between mid-1920 and mid-1921, and this was enough to ensure unemployment tripled, from 3% to over 10% in the U.S. in that same timeframe. By the spring of 1921 Goodyear’s capital stock was nearly wiped out.

Seiberling’s downfall came in May of 1921 when, due to his lack of support in the New York banking community, he struck out at getting support for working capital loans to bridge the firm until cash flow could again turn positive, as it surely would when longer term purchase contracts either ended or were re-worked, and the firm’s sales returned once the industry came back. Along with Seiberling, 26,000 Goodyear employees lost their jobs in 1920-21, as the Board voted to bring in Clarence Dillon of Dillon, Read & Co. to bridge the firm and also offer up support for new managerial talent.

Lessons Learned and Application to Today’ Federal Reserve

For F.A. Seiberling, to have his heart and soul — 23 years of his life — ripped out of his chest at age 61, the time was devastating. Further, because back in those days corporate finance practices were not formally developed, loans to the business were often made by the founder entrepreneurs in the form of full recourse — Seiberling had signed these loans opening his own net worth to exposure. By the time he was removed from Goodyear, he was allowed to keep his house, and little else. He was, in a financial sense, wiped out, having just a few years earlier had a 9-figure net worth statement.

In a very real sense, the Federal Reserve brought Seiberling — and many tens of thousands like him — to complete ruination. For had the Fed not intervened after 1915 to support the war effort with big increases in the money stock, prices would not have been distorted in relative terms. And thus entrepreneurs like Seiberling would not have mis-read the false signals from wholesale prices after 1915, leading to massive malinvestment of capital in projects that could not pay off. This is the Fed’s contemptible legacy that carries forward to the present day: policy activism that is in fact de-stabilizing in terms of prices, and the dollar’s value.

It’s never too late to do the right thing, however, and for the Federal Reserve, it is past time to “put a stake in the ground” and declare a value for the dollar (working with Treasury) that can be defended. Even in seeming mild inflations such as we are now experiencing (i.e., roughly 3% currently), a terrible bond market collapse is now a distinct possibility, and certainly entitlement disasters await, too, absent any policy changes. And there are in any case already many faceless names of people who have been unable to find work in the present economic torpor, or seen a decline in their standard of living because they were or are on the wrong side of the prior dollar-manipulation. In short, Mr. Bernanke cannot much longer (if at all) rely on global investors to bail him out due to them having slightly worse currency management skills than Fed and Treasury economists or Beltway politicians. Indeed the devastation caused for F.A. Seiberling and his employees all those years ago points to a canon law of classical political economy that must per force be resurrected: sound money is as much a moral issue as it is one of prosperity-inducing efficiency. And indeed, for this reason, the Fed and monetary policy ought to become a central campaign issue in 2012 once again, as it was in 1896 and again in 1980.

Epilogue

F. A. Seiberling was badly hurt by the events of May 1921 at Goodyear — his life was changed forever, losing nearly everything. But he went forward stoically, and by that November had raised enough capital to start a new firm. In time, Seiberling Rubber Company would rise to become the world’s 7th largest in this industry — nothing on the scale of Goodyear, but a comeback nonetheless, borne of sheer determination. Seiberling died at age 96 in 1955, never fully apprehending what had happened back in 1920-21, and why there had been such a massive “clustering” of entrepreneurial errors such that a hundred thousand businesses would all fail at the same time. Today, fortunately, the Fed’s errors are much easier to see.

Abstract: What is “capital”? This term is oft-used but little understood in the investing and broader business worlds – indeed, even in the economics profession itself, there is confusion about its precise meaning. But it is a categorical magnitude of immense importance not only for investment decisions but also for the betterment of human life and indeed, the advancement of civilization itself. As investors we need to develop a precise understanding of this concept, and as citizens of a modern economy, we must defend its growth. In this paper we explain the term clearly, as well as how to think about it in its various applications. In the process we also answer important ancillary questions: what is its role in promoting economic growth? How do investors think about this concept in terms of asset allocation? What public policies are best for the inducement of capital formation and profit growth?

JEL Classification: A10, B12, B53, P12 JEL Keywords: Economics, Economic Growth, Economic Thought, Capitalism

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Introduction

The United States is one of the wealthiest countries in the world in terms of per capita income levels. Indeed, compared to the European Union, which has roughly the same population and similar demographics, the U.S. average income level is almost one-third greater.¹ The U.S. economy has also created sixty million jobs since 1970, while the EU has created less than one-fourth that total. Or in Japan, where by 1990 the economy had achieved 80% of U.S. income levels, a long period of slow growth has led to a true “recession” in living standards back to only 70% that of the U.S. today. Why is this so – why has the United States long had a more vibrant and dynamic economy?

And what accounts for the significant differences in living standards?

The short answer to these questions, if a bit technical, is to say that the U.S. is more capitalistic than these other countries.² That is to say, the level of capital investment in the U.S. (on a per capita basis), and concomitantly, the profitability of American business, are superior to that of most other countries in the world. Sadly, however, many Americans do not appreciate this fact, nor do many policy-makers, here or elsewhere. Indeed, though they do not apprehend this, policy in Europe and Japan has not been conducive to a higher level of wealth creation or material improvement in their standard of living precisely because it has been less capitalistic; this is, therefore, why they lag the U.S. in a relative sense.

It can thus be said that illiteracy with respect to this basic axiom of economics has been very costly to the peoples of the world, and it is important to impart understanding on this point if we hope to improve policies in the future. To do this, we begin at the top by delineating economics as being concerned with the allocation of society’s scarce resources among innumerable competing uses.³ Textbooks commonly point out that the study of economics helps us understand what is produced, how it is all produced, and who consumes these produced goods. In this sense, it is a body of knowledge which provides critical insights into the pressing social problems of the day – in this or any other era – including how to improve living standards.

But more than this or at a deeper level, economics is the study of individual human action.⁴ All human beings confront a daily situation of relative wants: beyond food, clothing, shelter, and basic necessities, humans live in a constant state of non-satiety. That is to say, they desire material, intellectual, or spiritual improvement to their momentary living conditions. To say it still differently, they have ends, for which they are aiming via the use of scarce and costly means. The study of economics helps us to understand the choices individuals make between these scarce and costly means to achieve their ends.

Central to our understanding of basic economics is knowledge of the crucial concepts of capital and the role of profit.⁵ These terms are often used in common business discourse, and in the case of the former especially can often mean different things, which sows confusion as to their definition. But both are crucial to the process of economic growth and to human progress, as well as to discernment of optimal investing strategy as market conditions change over time. In what follows below we define these terms, explain their variegated usage and importance, and how they are applied in analysis of economic policy or financial markets performance. The seminal role of capital in the process of economic growth is also highlighted.

The Fundamental Economic Problem

The pervasive challenge – and primordial fact – of every human life is scarcity.⁶ There is never enough of any economic good; indeed, this is the heart of the very definition of what the term “economic good” means. For indeed, any item which is in unlimited supply – that is to say, there is no cost to obtain it – is commonly referred to as a “free good”, as opposed to an economic good.⁷

Scarcity, in turn, necessitates choice, or at a collective level, rationing. Man has an unlimited demand for economic goods (his “ends”), but limited resources (or “means”) to accomplish his aims. How then, given scarcity and the need for choice among limited resources, can man maximize the attainment of his ends? This is the individual human- level analog to the societal goal of maximal economic growth and prosperity, and in economic policy terms we may thus ask, what legislative initiatives or framework induces a strong economy and high standard of living? Per the above figures on income and standard of living comparisons, what did the United States do that Europe and Japan have (evidently) not equaled over time?

One very critical way to ensure strong growth – to optimize the “battle” against scarcity – is to increase productivity; that is to say, to increase output per unit of input.⁸ Indeed, this is the primordial source of economic growth and the mainspring of human progress: an ever-increasing rise in the productivity of labor. And this can only happen via the accumulation of capital that stems from saving. Capital is the fundamental and essential driver of an improved standard of living.

What is Capital?

“Capital” as a term has different meanings depending on the connotation, but all are related. It is generally defined as machines, equipment, or tools that aid in the productive process which in turn generates final consumption goods. For example, when Robinson Crusoe, stranded ship-wrecked on an island, fashioned nets for fishing and a long spear to shake berries from a tree, he had, however crudely, formed capital with the nets and spear. These were capital goods in the sense that they made Crusoe’s labor more productive: previously he had had the near impossible task of catching fish by hand, and collecting berries a few at a time by climbing into the trees.

Now he might haul dozens of fish per day, and shake hundreds of berries from a tree at once with the stick; he was now far more productive with his labor time, as his daily output had increased dramatically with the aid of these tools.⁹

How is Capital “Formed?”

This begs the question about the process through which these capital goods were produced. Clearly, to make the nets and the long shaking stick or spear, Crusoe had to either sacrifice leisure time – which is a cost, or literally, an investment of his time – or he had to take time directly from the productive labor required to procure berries and fish, that he in turn could consume in order to survive. In either case, there is an opportunity cost to produce capital goods, and let us suppose that it would take a week of his labor to make the nets and the spear. During this time, he normally would have “produced” and consumed 500 berries and ten fish. For him to take a week off to pursue his investment in capital goods, that is to say, to pursue the (literal) act of capital formation, he must have saved up the sustenance required for that week. In other words, he must have saved roughly 500 berries and ten fish from previous production in order to take the time to produce the new labor-saving and –enhancing tools. The act of saving is the antecedent corollary to any subsequent capital formation or investment.¹⁰

Continuing with this example for the purposes of illustration, note that Crusoe’s act of saving and investing in the development of these tools represents a forward-looking act (of investment) on his part. That is to say, peering into an unknown future, Crusoe has undertaken a risk, that may not bear out (or provide a return) in the fullness of time. All acts of capital investment are in this sense risky.¹¹ Crusoe does so in any case having calculated that his scheme will, literally, bear fruit and provide a return to him for the wealth he put at risk (in this case, 500 berries and ten fish).

Related Uses of the Term “Capital”

In the scenario above in which we have just described Crusoe’s investment of a week’s “wages” in pursuit of the ability to garner much higher productive output by building tools that will aid his work efforts, it is often said that he “put his capital at risk” in pursuing the investment in the nets and the shaking stick. In this sense, “capital” connotes stored purchasing power that represents the savings built up to “purchase” the capital goods (in this case, by literally expending labor time in making them, but in an exchange economy Crusoe could of course have traded his saved funds for already-produced nets and spears). To say this more broadly, capital can represent “liquid” assets or funds on a personal or corporate balance sheet that can be expended on procurement of capital goods. Thus, Crusoe “invested capital” in tools that would, in theory, aid his productive output (if the forward-looking investment were to work out).

Such liquid funds (which are often deposited in a financial institution such as a bank) are sometimes referred to as “financial capital”, and in similar fashion, the skills and knowledge that accrue to an individual through education are sometimes referred to as “human capital.”¹² Karl Marx and his followers, more pejoratively, have often used the term “capital” to connote property or wealth of any kind. They refer to the bourgeoisie, or propertied classes, as having interests in opposition to the proletarian laborers who have not accumulated any wealth property. All of these uses of the term “capital” have in common the attribute that, whether actively or passively, directly or indirectly, they describe an asset that is intended to produce an income stream. Again, because of the forward-looking nature of investment, a positive return or an income stream is not a given; capital assets can earn losses, too – but even this is just a negative income stream and does not take away from the fundamental nature and intent of a capital asset.

It is also important to realize that the existence of capital, whether (1) of the tangible physical kind as embodied in capital goods (that is to say, real, physical capital, such as factories, machines, equipment, or tools), or (2) of the financial kind as embodied in equity or debt claims on income-producing assets, or (3) of the human kind as embodied in knowledge and skills acquired through education, implies prior saving and sacrifice (in terms of foregone consumption opportunities). That is to say, all capital assets, in whatever form, involve stored (pre-saved) purchasing power. To say this differently, capital assets represent purchasing power (or, as the case may be, the capitalized value of a future income stream) that has been earned through the production garnered via previous employment of labor and (still other) capital assets.

The Difference between Money and Capital

This last point is of crucial importance for the pursuit of optimal economic policies that will induce solid growth and an improving standard of living. What we have shown is that capital is an “income producing-capable” asset that must be When interest rates are increasing, more people are withdrawing funds saved for future consumption in order to support present consumption. What this implies, in other words, is that in the intermediation of funds dedicated to present versus future consumption, a structure of production or, said equivalently, an economy-wide This scenario represents an indictment of central bank monetary manipulation and overt influencing of the structure of interest rates. For indeed, the central bank, in a fiat money regime, can create

Government-created money therefore draws away real resources from the (real) productive process, and sets in motion future liquidation of any malinvestment that always involves a human toll in unemployment and resource idleness.

Why Capital (and Profits) Matter: A Brief Primer on Economic Growth

Assuming away any monetary manipulation and interest rate-interference, what the foregoing discussion shows is the seminal role capital plays in the process of economic growth and improvement in the standard of living. Capital investment leads to a more productive workforce, which is to say to a more output per capita and per unit of input. This leads directly to rising incomes and living standards. By its very nature, capital investment is forward-looking and speculative, and hence entails risk. The act of investing capital with regard to a future-anticipated return is thus at its essence an entrepreneurial act, that is, an action taken that involves risk-bearing and a judgment made about future conditions.

Those entrepreneurs who are successful are those who have adjudged the future more correctly than their fellow forward-acting investors, and this is signaled to them by the earning of a return which exceeds their cost of funds.¹⁴ They are rewarded with profits, the ultimate market signal of value creation and consumer approval, and of course the build-up of after-tax earnings is itself a form of capital accumulation. Successful entrepreneurs and business professionals who guide their enterprises to profitability assume command of more and more of society’s resources; those who earn losses lose the ability to control the deployment of the scarce assets of society. Indeed, the play- out of profit versus loss over time is nothing more than the allocative mechanism of markets in action: resources flow to the (profitable) ends desired by consumers, while losses are seen to be mistakes from previous forward-looking capital investments that are now, ex post, seen to have been in error. The losses remove these mistakes, and the very fact of profits and losses creates market-wide knowledge that informs all market participants.

In no case, however, can a society progress much beyond subsistence level without an increase in capital invested per worker. And as soon as the capital invested per worker slows or stultifies, so will economic progress in that society. The ever-increasing level of profit in an economy is a direct result of a continual increase in the productivity of labor, and likely sign of a concomitant further accumulation of capital; and, thus, of an ever-advancing society.

How Should Investors Think about Capital?

For investors, conclusions from the foregoing are straightforward. At a macro-level for the purposes of global diversification, funds should be allocated to those countries who are capital-friendly; that is to say, those economies where capital investment is welcomed and rewarded. It implies a regime of sound money, low marginal tax rates on capital gains and corporate profits, and a defense of property rights and against any expropriation by government or others. Bureaucratic regulations are also kept to a minimum in such an economy, and the policy climate is conducive to entrepreneurial risk-taking. The United States in the 19^th century represented just such an archetype environment for investors, and indeed, it was primarily British capital that built-out the

U.S. across the century in astounding gains in the American standard of living.¹⁵

Similarly, at the level of the individual company, corporate managements who are good stewards of their firm’s capital, pursue judicious R&D, stick to a well-defined and internally-consistent strategy, and attain profit levels consistently above their industry average are very good long-term investments.¹⁶

Summary and Implications for Public Policy

Capital is the fundamental driver of increasing productivity, and the ultimate source of all wealth creation in human life.

Therefore [1] any attempt to pursue higher taxes on capital gains and corporate profits;[2] any pursuit of an unsound currency policy that falsifies interest rates and involves an inflation in the quantity of money and credit in the economy (made available for immediate government spending); [3] any restriction on cross-border trade that involves capital controls; or [4] any stultification of the entrepreneurial energies that are latent in an unhampered market economy are all, by definition, anti-capitalistic. That is to say, they are retrograde because they are anti-growth, anti-prosperity, and anti- progress. Conversely, the simple solution to end any economic torpor, and to incite strong and sustainable long-term economic growth, is to pursue policies which encourage and defend the formation of capital in an economy.

For Further Reading

Garrison, Roger. 2000. Time and Money: the Macroeconomics of Capital Structure. London: Routledge Publishing.

Kirzner, Israel. 1966. An Essay on Capital. New York: Augustus M Kelley.

Lachmann, Ludwig. 2007 (1956). Capital and Its Structure. Auburn, AL: Ludwig von Mises Institute.

Lewin, Peter. 1999. Capital in Disequilibrium: The Role of Capital in a Changing World. London: Routledge Publishing.

Rothbard, Murray N. 1962. Man, Economy, and State. Los Angeles: Nash Publishing.

Footnotes

John L. Chapman
August 26, 2023
9000 Words

August 29th, 2023 is the 125th anniversary of the founding of the Goodyear Tire and Rubber Company. What began as a small job shop on East Market Street in Akron, Ohio producing carriage and bicycle tires and various rubber sundries such as horseshoe pads, poker chips, or rubber bands eventually rose to become a dominant global tire manufacturer soon to produce its ten billionth tire, and one of the most famous corporate brands in business history. Goodyear’s iconic blimp is known worldwide, and as the 6^th longest tenured member of the Dow Jones Industrial Average (1930-99), Goodyear is synonymous with the American blue-chip companies who birthed the institutions of industrial capitalism and the tremendous broad-based wealth it generated in this country – and then around the world – across the 20^th century.

However, even as the Akron tire-maker now rightly celebrates its storied history and long list of breakthrough innovations that have helped make modern life so enriching compared to earlier epochs in human history, a confluence of major industrial, competitive, technological, and financial challenges has led the firm to its own historic crossroads and a currently-ongoing investor-led internal debate, the outcome of which may terminate the firm’s independence as early as year’s end.[1]  A brief review of Goodyear’s past successes and the recent events that have led up to the current moment, along with an honest assessment of the Akron tire-maker’s competitive strengths and challenges does, happily, point to a vibrant future for an independent and prosperous Goodyear, and perhaps even one day again status as the world’s largest tire-maker if the firm’s leaders will pursue changes going forward as outlined below.   

Summary History & Major Advances That Helped Build Akron across 125 Years

Along with companies such as B.F. Goodrich, Firestone, and General Tire, Goodyear helped make Akron the “Rubber Capital of the World” during the 1910-20 decade, when the rise of the automobile fueled huge demand for tires and led to a tripling of Akron’s population in just ten years. At its height, Akron was the 32^nd largest city in the United States and a big factor in national commerce.[2]

As far as Goodyear’s accomplishments and contributions, first to American and then to global mobility, they are many and legion, and not limited to automobile tires. To name a few examples, from the supply of newly-developed pneumatic tires for Henry Ford’s Model T to the first tubeless tire, first pneumatic truck tire that paved the way to long-haul trucking and an explosion in commerce in America, first all-weather tread, first self-sealing fuel tank, first use of synthetic rubber in tires and other applications, first hydraulic-disc brakes, first electrically-heated rubber-based de-icing equipment for airplanes, first use of Nylon and Rayon in passenger and truck tires, first tires on the moon, first development of polyurethane foam, the first Run-Flat tire, and inclusive of such applications as a polymer that can be used to create artificial blood vessels that are more durable and flexible than current technology for things like heart surgery, Goodyear has long been a leader in rubber chemistry and the technical development and useful exploitation of highly-engineered polymers and elastomers.

In fact, Goodyear has throughout its history been seen as a highly capable technology company broadly speaking, from its early leadership in lighter-than-air dirigibles to fighter aircraft manufacturing during World War II to Goodyear Aerospace’s Staran, one of the world’s first and fastest parallel-processing computers used for scientific and engineering calculations, including applications such as air traffic control. This strong tradition in basic and applied research continues to this day: in the last 20 years, Goodyear has averaged better than 300 newly-granted patents per year, and trails only Japan’s Bridgestone Corporation and France’s Michelin Group in research and development investment in the tire & rubber industry.  The firm has also funded and been the beneficiary of world-class polymer science research in a long-running win-win partnership with the University of Akron.

In 2023 this tradition continues as Goodyear has developed an impressive tire industry lead in fitments for electric vehicles [“EV’s”],[3] as well as making progressive advances in solutions for fleet management, autonomously-driven vehicles, “smart tires” using embedded sensors and IoT [“Internet of Things”] technology, and environmentally-sustainable recyclable products – Goodyear is moving along with the rest of the industry toward the elimination of petrochemicals in rubber tires and earlier this year announced the industry’s first “90% green” tire.[4]

To say the least, Goodyear’s influence in the last century on an ever-improving living standard for Americans and hundreds of millions of others around the globe has been considerable, even if understated and unknown to most.

The globalization of commerce and newly-emergent patterns of industrial organization that have ensued since 1900 ushered in many changes that affected the rubber industry, including consolidation such that today, Goodyear is the last of the major American producers left standing. Though the firm last produced passenger tires in Akron more than 40 years ago,[5] Goodyear still employs some 3,000 workers in Akron at its corporate headquarters and in research and development. Smaller in scale and down from more than 100,000 employees at century’s end,[6] the firm is still a global manufacturer and marketer, with 74,000 employees across 57 plants in 23 countries, making more than 700,000 tires every workday, all year long. After spending most of the 20^th century as the world’s largest tire-maker, Goodyear now ranks third, again behind only Michelin and Bridgestone.    

Without question, therefore, Goodyear takes a well-deserved bow this month to celebrate 125 years of amazing and highly contributory progress, and as an enduring institution that helped build Akron in material ways, the company is one in which all Akronites can feel pride and continue to cheer pursuant to its enduring success.[7]

Current Challenges Have Put Goodyear in the Crosshairs of Activist Investors, Threatening Independence for the First Time Since 1986

However, amidst this month’s quasquicentennial observance and beneath the surface of the everyday flow of news, Goodyear faces considerable financial and competitive challenges that threaten its independence, and indeed the coming 90 days may well determine its long-term fate in a boardroom drama that has been playing out since May 11^th.

On that morning Palm Beach-based billionaire Paul Singer and his firm, Elliott Investment Management, one of Wall Street’s most famous “activist investors” pursuant to driving change in distressed or underperforming businesses, announced a significant stake in Goodyear shares, and demanded conversations with Goodyear’s CEO, Rich Kramer, and the Goodyear Board of Directors. Elliott released a website with a 41-page analysis of the tire-maker’s competitive strategy and current operating pressures that decried Goodyear’s 20+ years of underperformance vis-à-vis both industry competitors and broader benchmarks for U.S. equities such as the S&P 500 Index. See here:

In short, it is true that Goodyear has been steadily losing global market share in tires, from an asserted 24% in 2001 to around 8.4% today. And, having just announced its 3^rd consecutive money-losing quarter in 2Q2023, the Akron tire-maker has been far less profitable of late than either of its two bigger competitors, Michelin or Bridgestone, or even other, smaller tire-makers who are doing well such as Pirelli, Hankook, or Sumitomo Rubber. It does beg the question, why is the rest of the industry growing and profitable, while Goodyear has lost $300M so far this year? Why the systematic long term underperformance in the firm’s shares? It can’t all be due to adverse currency movements, inflation, or unfair competition, as American CEOs sometimes complain.[8]

Elliott asserted that they had developed solutions to Goodyear’s ongoing market challenges and requested five board seats, the sale of Goodyear’s corporate-owned auto-service retail stores, and a detailed review of all company operations to determine a new way forward this fall (that certainly would not preclude fundamental changes in ownership and/or management), all geared toward increasing the share price of Goodyear stock. Goodyear issued a statement that afternoon welcoming Elliott’s input and promising to meet with them “to discuss their views in more detail.”

Shares of Goodyear stock jumped more than 20% in the immediate aftermath of the Elliott announcement, and recently were up by more than 50% since early May, evincing investor desire for change in Goodyear’s leadership and strategy. Precisely 75 days after Elliott’s demand letter, on July 25^th, Goodyear announced a settlement agreement with Elliott wherein the tire-maker agreed to expand the Board of Directors by three members suggested by Elliott, and form a Board-level review committee to examine all of Elliott’s suggested ideas that would ostensibly lead to improving Goodyear’s market valuation: by Elliott’s math, Goodyear shares, trading in the $10-11 range earlier this spring, would be worth more than $32 per share if their suggested initiatives would be pursued.

Elliott for its part of the settlement agreed to certain standstill, voting, and non-disparagement (of Goodyear management) provisions: Mr. Singer and his team have agreed to manifest a “net long” (positive) position in Goodyear shares in case they seek a specific Board action in the next year; to not acquire more than 9.9% of the firm’s common equity; or, do anything other than to vote in favor and be supportive of Goodyear management actions in the year ahead.

A “Strategic and Operational Review Committee” has been set up to fully review all of Elliott’s ideas and report back to the Goodyear Board no later than November 15^th; this review committee is comprised of 5 board members, chaired by Chairman and CEO Rich Kramer, and consists of two existing and two of the three new Elliott-approved directors (but not the one new board member with direct automotive industry experience, at Ford Motor Company!), along with input from three Wall Street firms (Evercore, Lazard, and Goldman Sachs) and “a major consulting firm.”

What Could Happen This Fall: The Shadow of Sir James Goldsmith

All of this portends big change in the time ahead for Goodyear after weeks of uncertainty this fall: asset sales, management changes, and even totally new ownership are all in the range of possible outcomes in the time ahead, and certainly Goodyear’s continued independence is now in question and at serious risk.

A review of the Akron tire-maker’s corporate strengths and the industry’s competitive landscape, however, suggests a very bright future now for a vibrant and independent Goodyear if the firm will commit to a bolder strategic path than that shown in recent years.

First, while activist investors such as Elliott play an important and positive role in the market for corporate control and in the optimal allocation of capital in a complex modern economy, they are far from being blessed with perfect foresight or prescient industry analysis. In 1986, for example, another activist, the corporate raider Sir James Goldsmith, acquired an 11.4% stake in Goodyear’s common equity on the way to an attempted $4.7 Billion take-over (and subsequent intended break-up) of the firm. Goldsmith’s central assertion was that the sum of the parts of Goodyear at the time was worth more than the whole, and he wanted the firm broken up, promising better performance from the tire company once divorced from other corporate divisions, including the firm’s high-profit crown jewel, Goodyear Aerospace, as well as an oil & gas pipeline, a motor wheel business, and real estate and other holdings.

In a frankly shameful outcome, Goodyear management, rather than fight Goldsmith by defending the merits of their diversification strategy, elected to pay him a “greenmail” ransom that netted the raider a $93 million payday ($255 million in 2023 dollars) in return for him dropping his take-over bid; Goodyear also agreed to a 40% share buy-back on terms pari passu to Goldsmith’s valuation, in a transparent attempt to hide the de facto bribe paid to Goldsmith to cease and desist in his take-over efforts. This leveraged recapitalization did indeed double Goodyear’s share price in the short term, but led to burdensome indebtedness and subsequent forced asset sales (including, tragically, the aerospace division now earning handsome profits – for Lockheed Martin), which prodded Robert Mercer, then Goodyear’s CEO, to tell a congressional committee that the firm emerged from its “war” with Mr. Goldsmith “weaker and wounded.”

In an ironic denouement to the entire affair, Goodyear shares were trading at less than half their pre-Goldsmith raid value 4 years later: so much for “industry focus” that activist investors typically demand! While the Goldsmith bid differs in fundamental ways from the approach of Paul Singer and Elliott Management (the sell-assets-first mentality is eerily similar, however), the lesson here is clear: smart external investors can miss, and sometimes spectacularly so, the bigger strategic picture of an industry and how firms can best build a sustainable competitive advantage – and thus, in-and-out investors are sometimes blind to the real long-term intrinsic valuation of companies they target.

And indeed, what Mr. Singer and the Elliott team have missed here are the true underlying strengths of Goodyear: the power of its global brand, the strong objectively positive view of Goodyear quality still held by much of the tire-consuming public, its core capabilities as a firm that go well beyond tires, the importance and advantage of the retail arm in Goodyear’s service-delivery ecosystem, and the considerable growth possibilities open to Goodyear as a world-class technology firm steeped in applied knowledge of commercial developments and potential uses for highly-engineered polymers and elastomers that are fundamental building blocks in what is a $1.47 trillion fast-growing global market for high-margin rubber- and plastics-based complex-input products (and of which rubber is itself a $400 billion component, meaning that Goodyear has strong organic growth opportunities in its core business with improved marketing).

A Way Forward for a Strong and Independent Goodyear

While the Singer/Elliott Management critique was useful and offered rigorous and fair analysis of many aspects of Goodyear’s current operations and Go-to-Market and brand strategies that need improvement,[9] selling off the highly profitable auto-service retail assets as Elliott demands, let alone broader operations such as the currently unprofitable European business (or ultimately, putting the firm itself on the block) would be a tragic mistake (as well as, selfishly, very bad for Akron and the employees there, and various plants within the Goodyear ecosystem).  Goodyear can instead once again return to global industry leadership in tires and move into highly-profitable value-added product segments utilizing its world-class knowledge base in polymer science if the following bold actions across ten initiatve areas ensue:

• Invest in strong retail presence globally. Goodyear operates approximately 1,000 company-owned outlets around the world, where it offers its products for sale to consumers and commercial customers and provides repair and maintenance services. It is one of the world’s largest operators of commercial truck service and tire retreading centers, and offers a leading service and maintenance platform for commercial fleets. As even Elliott conceded, this retail/commercial services business is more profitable than the core tire business itself, due to higher-margin value-added service offerings as well as tire sales. It is also a distinctively important asset to have when pursuing OEM (“Original Equipment Manufacturer”) contracts with the auto-makers, who comprise 20% of tire industry sales volume.

Rather than divest this business unit as Elliott is demanding, Goodyear should expand it, worldwide. Most of the real estate locations are prime, and offer Goodyear endless “free advertising.” While there is channel conflict with the independent tire dealers and other retail purveyors of Goodyear products, this is tantamount to the “row-boat in an ocean” of opportunity metaphor, and easily manageable with effective communications and channel support.[10] Goodyear’s corporate-owned stores are a rounding error in the totality of point-of-sale locations for tires, and indeed there are sound reasons why an effective “omnichannel / multichannel” Go-to-Market approach should benefit both Goodyear and channel partners.  Co-op advertising and integrated communications including for things such as sales leads or inventory back-up will benefit all channels, and Goodyear can use its store network for price leadership/signaling/consistent-sales-and-product-messaging purposes too, to the benefit of all channel players. Lastly, it is worth noting that Bridgestone has more than double the investment in retail stores in the United States than Goodyear has, and the other tire-makers with global footprints [Michelin, Continental AG, et al.] all have significant retail operations around the world, especially in their home territories.  All of them benefit from close-up direct end-user customer feedback, too, that would be lost forever to Goodyear in a retail divestiture.

Once all the benefits of an anchored retail channel network are well-understood, it is hard to fathom why their divestiture was deemed so crucial to Elliott’s analysis unless Elliott’s real motivation is a guaranteed short term “pop” to the share-price at the expense of the long-term health of the company, and/or as a prelude to a broader break-up of Goodyear as per the Goldsmith solution. Beyond the loss of thousands of jobs in Akron and elsewhere in the Goodyear ecosystem, though, any break-up of the firm for the benefit of short-term shareholders would be a huge missed growth opportunity (and a blow to consumers worldwide who benefit from choice of competitive offerings).   

• Invest heavily in global advertising AND BE STRATEGIC about it. There’s a reason why well-known companies in competitive industries like Coca-Cola or Procter & Gamble still spend 10-11% or more of total revenues on advertising and promotion: it is a crucial “key success factor” wherein Goodyear must revert to prior form. Goodyear was one of the first advertisers (1901) in major national print media such as the Saturday Evening Post or Collier’s 120 years ago; an original television show sponsor from the late 1940s; an original 1967 Super Bowl advertiser; and as early as 1925 had apprehended that the logo’d blimp was a powerful promotional advertising tool.

But in recent years the seminal importance of advertising in mass consumer goods for purposes of increasing awareness and demand generation has been lost to Goodyear management. And alas, the firm has been disadvantaged here for the better part of 20 years as its scale has shrunk, and thus is not generating the cash flows needed to invest in critical growth driver areas including R&D, capital expenditures for plant productivity, and advertising. In this latter area, Michelin and Bridgestone have been outspending Goodyear both in absolute and relative (i.e., percentage of revenues) terms for more than a decade

.This is a direct causal factor of adverse market trends for Goodyear: the three firms were close in market share 20 years ago (in the high teens), while today Goodyear is a distant 3^rd (at 8%+) and Michelin and Bridgestone are still atop the global tire-maker share totals (with 13-14% share each). It would seem that Goodyear has relied on its Blimp fleet to remain top-of-mind with consumers as, other than NASCAR circuit sponsorship and the Cotton Bowl football game, there is little advertising to speak of in North America; in Europe and Asia-Pacific, meanwhile, the firm seems heavily reliant on social media – and now a 4^th Blimp in Europe.[11]

Bridgestone, meanwhile, has in recent years had high-profile associations such as with the Indianapolis 500-style racing circuit, the National Football League and National Hockey League,[12] while Michelin has long been an intensive and smart global advertiser with the iconic Michelin Man, one of the world’s longest-running active trademarks in existence as their corporate symbol since 1898, and the globally-published and equally classic Michelin Guide having originated in 1900. Leveraging the Guide to tie in and attach to drivers’ and travelers’ pursuits toward leisure and better and happier lives has bred generations of loyal customers, and is a core building block in a globally-coordinated advertising strategy across television commercials, outdoor signage/murals from Shanghai to New York, print ads, online ads, and sponsorships.   

(See graphic: in 2022 per the latest full year, Goodyear invested $375 million in global advertising, or 1.80% of revenues; Bridgestone was at $869.2 million and 2.75% of revenues; and Michelin, which doesn’t break out advertising from other sales/marketing expenses, may well have spent some 4% of revenues, or $1.26 billion in promoting its offerings.)

Bluntly, skimping on advertising has been a serious error over time,[13] the correction now of which will yield big dividends for Goodyear quite rapidly (for example, everyone “knows” Coca-Cola, but can there be any doubt as to what would happen to Coke sales and profits if its advertising budget were cut in half? Similarly, Nike, Inc. makes wonderful shoes, but they are not, per se, superior in technical fabrication to Adidas or New Balance or many other good brands; it was Michael Jordan, Tiger Woods, Annika Sorenstam, LeBron James and the like who built Nike – Goodyear needs to follow the same path while continuing to make great tires and other offerings).

Goodyear’s optimal way forward for advertising would be a few credible celebrities with multi-year endorsement contracts who would bring to Goodyear what, say, golfer Phil Mickelson did for 14 years in working with KPMG as their main brand ambassador: possess and dispense solid product knowledge that helped when meeting with clients and prospects, as Mickelson often did (this is how to make celebrities effective and value-added, versus mere TV spots such as, say, Aaron Rodgers for State Farm Insurance).[14] If, for example, the universally appealing and business-savvy Dwayne “The Rock” Johnson – whom Ford Motor Company recently paid up to $15 million per year -- were an intelligent, articulate, humorous and knowledgeable spokesman for Goodyear in the United States, and someone such as baseball player Shohei Ohtani were the same in Japan, there is little doubt Goodyear’s sales and brand name approval would move sharply higher.

 Goodyear should also reprise its long-tenured slogan from 80 years ago that every driver in America for an entire generation had ringing in their heads when they thought of tires: The Greatest Name in Rubber. Goodyear. The Greatest Name in Rubber.[15] Add to this “sticky” advertising in the form of an unforgettable ad jingle or slogan, such as what the legendary  “I’d like to buy the world a Coke” and “Where’s the beef?” campaigns did for Coca-Cola and Wendy’s, respectively, and Goodyear will be on its way again.   

• Pursue global AND intelligent diversification. The tire business is inherently cyclical, and hence strategic diversification – i.e., the kind that has logic to it grounded in core capabilities of the firm – has always made sense. Sir James Goldsmith demanded more “focus” from Goodyear management in 1986, and while he may have had a point in terms of Goodyear owning and managing hotel and resort properties in Arizona or crude-oil gathering operations, he surely crippled the company in forcing a sell-off of the high-profit crown jewel that was Goodyear Aerospace, an industry in which Goodyear had great depth of knowledge and a long history. Goodyear’s CEO at the time, Robert Mercer, was right in pursuing diversification and in retrospect did not defend himself then as he should have. Here in 2023, Michelin Group has an explicit corporate goal to achieve at least 20% while targeting 30% of revenues in 2030 to be “non-tire related”, and certainly Bridgestone and Continental AG are both already far more diversified now than Goodyear.

In one very real sense, the corporate-owned auto-service retail stores are a step toward smart diversification (and hence another argument against their divestiture), as the higher-margin services provided there are the product of inelastic demand and not prone to cyclicality the way tires are. A bigger play for Goodyear overall however is diversification into the $1.47 trillion rubber-and-plastics sector wherein Goodyear’s depth of expertise in rubber chemistry and polymer science can be parlayed into engineered products borne of advanced materials.  

For example, last year Trelleborg Group, the Swedish tire-maker also moving deep into high-profit engineered polymer solutions, bought Minnesota Rubber & Plastics, an American company that positions Trelleborg to tap new product markets in areas such as medical products/health care and water treatment applications.[16] Again, Goodyear has a long tradition of excellence in research and development and has enormous potential growth areas available to it in adjacent polymer-based product markets such as those Trelleborg is now attacking.

Goodyear also has opportunities to move natively and organically into rubber-based products with higher margins: the $75 billion athletic footwear industry comes to mind. Goodyear has long dabbled in footwear, from its earliest products (from 1905) including shoe soles and heels, to its current licensing deal with Skechers to provide custom outsoles offering “increased grip, stability and durability”.  This industry segment is an attractive one for entry: it is global and fast-growing, would not require exorbitant capital, offers new brand growth opportunities in a market that, although led by Nike and Adidas, is then quite fragmented, and plays into deep Goodyear strengths, as running shoes are oftentimes made of more than 70% rubber. Whether or not use of the “Goodyear” name versus “Winged Foot” or some other brand moniker would make sense for shoes is a topic for further research, but it is not hard to see a billion-dollar brand built here in a mere few years with 14-15% operating margins. And, it promises robust growth in a fan base that then become lifelong Goodyear customers, and positive word-of-mouth virally-spread branding in the same way the Michelin Guide attracts loyal lifetime Michelin customers.        

• Seek consolidating “1+1=3” acquisitions. The global tire industry may total some 300 firms if all kinds of tires are considered (i.e., giant mining/construction vehicles all the way down to rubber-wheels for lawnmowers or tricycles), but as a practical matter, roughly 40 or so produce the entire global supply of passenger car, truck/bus, and specialty markets [Aviation, 2- and 3-wheelers, Off-the-Road or OTR, Farm, Racing, et al.] tires. Of these, the top three firms (Michelin, Bridgestone, and Goodyear) have slightly more than one-third of the global market share, and the top 16 have about three-fourths. The industry is concentrating over time, as for example in the United States, only #3 Goodyear and #18 Titan International (with $2.17 billion in revenues in 2022) remain independent among the top 20 global producers.

Given intense global competition and the economies of scale that underlie the chain of activities across the tire industry, from purchasing through to production and marketing and distribution, there is surely going to be more consolidation in the years ahead. Given this, the Goodyear Board of Directors and management face a stark choice: ignoring the option to become some sort of specialty niche manufacturer (which in any case would make no sense given Goodyear’s present scale), will it be better to be an acquiror, or an acquiree, in the years ahead? To say it differently, by the year 2040, it is likely that the number of firms comprising three-fourths of all tire production and sales will shrink from 16 currently, to 10 or less then: China, India, Japan, and South Korea will have a few big global tire-makers, and then perhaps France, Germany and the USA one each.[17]

In a capital-intensive industry where scale and scope economies are pervasive, it will always be preferable to be bigger rather than smaller. For Goodyear’s Board to conclude from the November 15^th review that either part of the business [say, Europe] or the entire firm should be sold off, as is now under consideration with the Goodyear special review committee and is apparently happening at the moment with the venerable United States Steel Corporation, would be a tragedy for Akron, lost jobs in other Goodyear communities around the world and, frankly, a strategic error.

Why? Because given the firm’s already-existing global scale, historic industry contributions and immense brand equity in tires and rubber that is unequalled around the world and very hard to replicate, Goodyear commands the market power to be a surviving acquiror in the coming industry roll-up, rather than a target. It is unthinkable that either Michelin or Bridgestone would forfeit their independence when they understand that consolidation will mean higher sustained profits for the remaining firms in the industry in the years ahead; should Goodyear exit the game, given the changes to come that are favorable to those remaining, when they have such a superior platform from which to build?

Goodyear took steps toward a major merger via a 16-year global partnership with Sumitomo Rubber Industries in Japan, the world’s 5^th largest tire-maker, whose ending in 2015 was shrouded in mystery (later, in 2021, Goodyear acquired Ohio-based competitor Cooper Tire in a $2.8B deal, while Sumitomo entered into a major distribution deal with Michelin). But whatever happened with Sumitomo, the lack of pursuit of “1+1=3” consolidation deals, given the inherent strategic logic here, is perplexing.[18]

In fact, the value of Goodyear shares can be optimized if the firm pursues acquisitions that fill out gaps in market coverage and offerings, particularly in Europe and Asia. Again, Goodyear’s superior brand power in tires and rubber is a huge advantage and major building block to being able to acquire businesses profitably, and several candidates would be logical merger partners in the years ahead. For example, Titan International in the U.S. – which already licenses the Goodyear brand for farm tires – would vault Goodyear into global pre-eminence in OTR product markets; Yokohama Rubber would add scale and resources to compete seriously in Japan and across Asia; and Cheng Shin Rubber (Maxxis and CST brands) would offer high-quality leverage to grow in Taiwan and China. Nokian Tyres, the high-quality Finnish tire-maker, could do the same for Goodyear in Europe.[19]       

• Tighten up Go-to-Market execution, sales, and brand strategy.  Goodyear’s sales and marketing systems appear to be broken at the moment, as evidenced by a $307 million loss in the first half of 2023 on a 3% decline in revenues versus 2022, while literally all other major competitors have seen sales gains and steady profits so far in 2023 thanks to price increases sticking.[20] Meanwhile the global economy is growing at a 2.8% pace; did the Akron tire-maker suddenly experience a drop in quality? No. What’s missing is energy and sales execution in front of dealer, OEM, retailer and end-user customers that ensures loyalty that sustains sales over time. And unfortunately, this has been problematic since the firm achieved an all-time high in sales revenues way back in 2011.[21] Lack of advertising investment is one driver of chronically moribund sales and its unhappy concomitant, secularly declining market share, but there are other issues facing Goodyear which, fortunately, are easy to fix.

  

  First, Goodyear must implement an omnichannel/multichannel marketing strategy and commit to its excellence in service provision to channel partners. According to Elliott Management, Goodyear angered wholesale channel partners such as American Tire Distributors [ATD], the largest wholesaler in the country, by pulling all business from them in the 2018 formation of its captive distributor partnership with Bridgestone, Atlanta-based Tire Hub.[22] An effective multichannel Go-to-Market approach will treat all distributors as well as the captive entity as valued partners in a cover-the-oceans approach that needs no apologies for including a corporate-owned distributor (for similar reasons as to why a captive retail network can make sense if employed effectively alongside other independent retailers carrying Goodyear brands), and will offer 24/7 support programming (including co-op advertising).[23]

Failed Go-to-Market execution is revealed as the core issue in what was perhaps Elliott’s most critical finding: Goodyear’s industry-low operating margins are due to deficiencies in distribution and branding that have cost them at least 270 basis points [that is, nearly three percentage points] in profit margin, and inferior Selling, General, and Administrative [“SG&A”] cost management another 114 basis points versus peer competitors. These lost margin points go a long way toward explaining operating and net profit lags vis-à-vis peer competitors.[24] Elliott cites three drivers of recent problems and poor performance leading to sales and profit gaps at Goodyear:

a.    Lost business due to the cut-over to Tire Hub and then logistical inefficiencies there, after which the distributor tried to win volume orders back through lower pricing, which then cut into profit margins.[25]

b.    Poor brand management that has led to sales confusion and then rejection by tire dealers: Goodyear has 376 product SKUs for cars and light trucks, versus just 200 for Bridgestone and 150 for Michelin for the U.S. market, with minimal price dispersion between Goodyear’s product offerings relative to their peers.[26]

Further, 85% of Goodyear’s SKUs account for just 5% of their volume, suggesting significant inefficiencies in Goodyear’s brand offerings with respect to production, distribution, warehousing, and advertising.[27]

c.     An operating cost structure that is inefficient compared to competitors, which is due most often to too many people or the wrong people doing the wrong job, or over-payments, from everything for labor – which is demonstrated by the Goodyear CEO’s exorbitant pay compared to his counterparts at Michelin and Bridgestone – to building rent. As raw materials costs have increased since 2016, thus cutting into gross margins, it has been imperative for the tire-makers to decrease outlays for selling, general, and administrative costs; Bridgestone and Michelin have done a better job of this than Goodyear, whose profitability has therefore suffered.  

The good news is all of these issues are quickly remediable. Cost management is no different than an overweight person going on a diet – it involves discipline, and Elliott was right to call for a review of operations. The product pricing and branding issue can be addressed via product line stream-lining coupled with improved sales training and dealer support. Relationships with firms like ATD can and need to be repaired.

With respect to marketing strategy, the bigger issue here – and again something totally missed by Elliott – is not the development of a captive wholesale distributor per se, but rather the inability to handle the inevitable channel conflict deftly and the teaming up with mortal enemy Bridgestone. The Japanese tire-maker is on an impressive growth run in recent years and is keen to supplant Goodyear atop the tire wars in North America; why align with them here when there was no reciprocal arrangement made in Japan or elsewhere in Asia, to help Goodyear on their turf? The partnership with Bridgestone needs revisiting, though the good news is, independent tire dealers report early logistical problems with Tire Hub have been solved and the firm is growing now, and already the 3rd-largest tire wholesaler in the United States, after ATD and the Michelin/Sumitomo-owned National Tire Wholesalers [NTW].

• Increased management and employee ownership of Goodyear shares. There is considerable empirical evidence that senior management purchases and sales of the stock in public companies affect both investor confidence and the valuation of these firms, and hence insider ownership changes are tracked and followed. The signal sent when senior managers purchase shares in their own companies is indelible, and indeed, there is also evidence that wide share ownership among employees can improve firm performance and valuation. The bad news for Goodyear shareholders is that the firm’s senior management appear to have no confidence in the firm’s future: management insiders have not bought a single share of Goodyear common stock on the open market since at least mid-2021, but plenty have sold.[28]

Further, management insiders and directors appear to own less than 1% of the shares outstanding, which is not atypical for large cap companies like Amazon, but raises an eyebrow for a small-cap stock like Goodyear.  Similarly, while Goodyear installed a Stock Purchase Plan decades ago for select employees at some Goodyear locations, it is a pedestrian add-on to the employee benefits package and not even mentioned on the corporate website.   

An easy set of correctives here will involve revamped compensation that is heavily weighted toward stock and not cash for key managers, along with a roll-out of an Employee Stock Ownership Plan [ESOP] that offers generous share sales at a discount to employees on a permanent basis. Share purchase options and discounts can be tied to job tenure and/or performance, but the key is to intensify Goodyear insider and employee ownership and fortify the firm’s culture around this: firm performance will axiomatically improve.   

• World-class commitment to Goodyear employees. Goodyear offers fairly standard employee benefits in terms of insurance, retirement planning/health care assistance, paid vacations, some tuition reimbursement, and the like. Indeed, the total package of benefits may even be “above average” in at least some geographies around the world. However, recurring to a former theme at Goodyear instilled from its earliest days by the founder, Frank A. Seiberling, the right long-term strategy here is to become known as the “best company in the world” to work for.[29] In the modern world, where there is hyper-efficiency of comparative information flows in things like corporate care of employees through facilities such as online job boards (where at the moment, alas, Indeed.com has Goodyear rated as “Below Average” as a company to work for), attracting and retaining the best employees has never been more urgent. Beyond health care coverage and retirement assistance, the big investment here would be a deepening of education reimbursement programs (why not make reimbursement unlimited in return for tenure commitment to Goodyear service?), but so many “little” assistance programs, from subsidized meals in the plants to low-interest small loans to health cub facilities onsite to sports league sponsorship can matter a great deal by building loyalty and morale. This is an area where the best firms moving forward will be best-in-class in engendering strong and unremitting employee loyalty.

• Return to racing beyond NASCAR. All the tire-makers agree that support for auto racing from its inception as a sport more than 100 years ago has conferred one constant side-benefit: tire technology improvement ensues in general and to the great benefit of all drivers: all tires become safer, more durable, and steadier-riding. This is certainly true of Goodyear, where Paul Litchfield, the firm’s legendary CEO  whose involvement in Goodyear spanned 59 years, began the firm’s supply of racing tires in England in 1904. Even today, the demands of the sport, to build tires that can withstand extreme conditions and at the same time offer enhanced durability, safety, and smoothness, impel a relentless advance in quality improvements for all tires.

Secondarily, there are undeniable benefits to the de facto free advertising and brand promotion that accrue to racing tire sponsors. Goodyear’s long association with the NASCAR racing circuit, dating to 1954, has been astute for this and the technology uplift. However Goodyear had by the year 2000 turned away from virtually everything else: the IndyCar and Formula-1 racing series are two among many major opportunities in motor sports that Goodyear long ago abandoned.[30] As de facto dual investments in both R&D and advertising, motor sports sponsorship can yield great benefits; Goodyear can’t be everywhere in racing, but would benefit from broadening its commitments beyond NASCAR

• Return to Russia and thus be positioned to dominate Eurasia. In 2021, Goodyear had more than $200M in sales in Russia and a growing book of business, with around 1,000 employees working there in sales, distribution, and support. But after the Russo-Ukrainian War broke out, the firm elected to leave Russia entirely and 2022 sales plummeted to $55M, on their way to zero this year. This represents a tragic reversal for a firm which just a few years ago looked into building a $200-250M plant in that country.  And competitively it is a missed opportunity, given that firms such as Michelin, Bridgestone, Continental AG and Nokian, all with tire manufacturing plants in Russia and long tenures in the country, decided to fully sell out and exit.

Of all the Western and Japanese firms producing in Russia, in fact, only Titan International tried to maintain its plant operations there as normally as possible, but has had to curtail operations severely, though even in that case, bowing to political pressure, the Illinois-based OTR tire-maker has suspended inbound investment. Meanwhile, Pirelli and Yokohama have greatly reduced operations in their Russian plants but are hoping to maintain a presence going forward.  

Bluntly, this is now a huge growth opportunity for Goodyear. For both moral and economic reasons the Akron tire-maker should return to Russia as soon as possible and commit to becoming the #1 tire producer there in the years ahead, with a plant facility there. Russia is now the 6^th largest economy in the world[31] and is poised to grow rapidly alongside the emerging BRICS free trade zone and bloc.[32]  Russia also still captains economic coordination for the Commonwealth of Independent States [“CIS”], a bloc of 11 nations across Eurasia, with some 240 million people.[33] In the decades ahead these Eurasian nations are only going to grow and intensify motor vehicle usage; demand expansion for tires there and within all the BRICS nations, especially China, India, and Iran when the latter joins, will far outpace tire demand growth in the West. Acting now will give Goodyear big advantages in the decades ahead. Russia is the gateway to big growth opportunities across Eurasia in the 21^st century and it is imperative Goodyear be positioned to participate in and feed the growth in an exploding motor vehicle population there.  

• Recapitalization to manage debt and fuel needed investments. The foregoing analysis has briefly summarized growth opportunities that abound on Goodyear’s horizon, both organically within the $280B global tire business, growing at 3% per year indefinitely and where Goodyear’s global share is below 9%, as well as via “1+1=3” acquisitions, both within the tire business and in adjacent product markets entailing expertise in highly-engineered polymers, a $1.47 trillion market also growing ahead of global GDP for many years ahead.  Additionally, by leveraging its core capabilities in rubber chemistry – and its globally respected brand name – Goodyear has the option to pursue diversification in product markets like athletic footwear, where, for example, most running shoes are made of at least 70% rubber.

Assuming Goodyear remains independent going forward, a big challenge ahead for the Akron tire-maker will be to set forth a new strategic path for growth by choosing judiciously from among these several possible attractive alternatives – surely a “nice problem to have.” Regardless of the path chosen, new investments of whatever kind, alongside continuing needs for R&D funding and capital for new/improving products [such as the development of “smart” and 100%-renewable tires] and production processes, as well as more growth funding fueling advertising, add up to big capital needs in the years ahead.  Additionally, Goodyear’s debt burden is now uncomfortably high: long term debt now totals over $8 billion and the firm’s Debt-to-EBITDA ratio is more than twice that of Bridgestone or Michelin. While debt repayments are not an immediate problem, the coming years will need to entail concerted efforts to reduce debt via improved cash flows and smart management of controllable expenses and working capital.

All this adds up to an imperative need to recapitalize the firm soon. Goodyear’s bond rating is “BB-” by both Fitch and S&P, and while both regard Goodyear’s outlook as “stable”, there is no capacity to take on further debt now. Issuance of any kind of equity via a standard seasoned offering would surely be dilutive, and hence the best path forward for Goodyear would be to pursue a PIPE transaction [Private Investment in Public Equity], that is, a private placement negotiated with a strategic investor, or a going-private transaction where the firm is de-listed and placed in control of long-term patient capital investors who are committed to Goodyear’s long term growth [as opposed to those with a short-term horizon, as per Elliott Management or traditional activist investors like Sir James Goldsmith].

Fortunately, Goodyear’s long term growth prospects are so considerable, and its capabilities and base assets that include the attraction power of a global brand with a storied history so deep, it will not be hard to find a path to a full multi-billion dollar recapitalization given a solid and coherent plan for growth going forward.              

The bottom line is, Goodyear rightly celebrates its historic anniversary on August 29^th, firm in the knowledge that its place in American business history is secure.  Further, while seriously challenged at the moment, perhaps even in an existential way, the venerable tire-maker can look to the future with confidence if it will now pursue the course corrections suggested in the foregoing. One thing is certain: if Goodyear’s current leadership could speak to the firm’s confident, peripatetic, and boundless-energy genius founder, F.A. Seiberling, who gambled the firm’s future on one turn of the wheel more than once in those early years, his advice would boom out to them through the mists of time: Fortune favors the bold, he would proclaim. And then he’d offer a repassage to two historic slogans the firm must never again neglect or fail to assert:  Goodyear is The Greatest Name in Rubber. The whole world will come to know this, and thus the enduring imperative, first heard in the halls of every Goodyear workplace in 1915, will be heard again as well:  Protect our good Name.    

Mr. Chapman is an economist and 6^th generation Akron native, currently writing a book about Goodyear’s heroic entrepreneurial founder, F.A. Seiberling, and his colossal struggle against more than 150 domestic competitors to build the world’s largest rubber company by 1916. 

FOOTNOTES

[1] Sadly, a sale of the firm or its forced merger with another tire-maker, such as is currently now underway at United States Steel Corporation over in Pittsburgh [U.S. Steel is being pursued by Cleveland Cliffs], would bring with it lost jobs in Akron and elsewhere in the Goodyear ecosystem. Mergers of consolidation or partial break-ups can bring short-term profits to the acquired target or selling company’s investors, and is an express strategy of Elliott Management, the activist investor who put Goodyear in play on May 11^th and demanded board seats and a strategic review of all options for Goodyear’s future [see below for description of recent events driven by Elliott]. 

[2] Today Akron ranks around 136^th, with its population down one-third from the peak of 60 years ago.

[3] John Healy of Northcoast Research Holdings told Modern Tire Dealer earlier this year that Goodyear was THE industry leader in technology for Electric Vehicles, which bodes well when, according to Elliott Management’s research, EV’s are 50% of all new vehicles in 2030 and 80% by 2040. 

[4] Goodyear’s CEO Rich Kramer and VP of Operations and Technology Chris Helsel both affirm that Goodyear’s goal is a 100% recyclable, renewable, ‘’green” tire by 2030.

[5] Indeed in 2022, Bridgestone opened Akron’s first new tire-making facility in 70 years.

[6] Goodyear had 132,000 employees and more than 100 plants worldwide at its height during the 1980s.

[7] All readers are encouraged to view the fascinating newly-released 55-minute documentary of the firm’s history, milestones, and future prospects, available at the firm’s website or on YouTube.

[8] In its May 27, 2022 issue, Fortune magazine named Goodyear CEO Rich Kramer as one of the ten worst/most overpaid corporate chieftains in America. Mr. Kramer has been CEO since April of 2010 and a year later took on the Chairman’s role as well. Goodyear’s share price has been flat across those 13 Kramer years; market share has continued to fall. Mr. Kramer’s compensation totals were > $47M for the three years 2020-22, while Florent Menegaux has made $3-7M per year at Michelin during this time and Shuichi Ishibashi made $2M running Bridgestone last year. Worse, a search back into 2021 reveals that there has not been a single insider purchase of Goodyear shares other than option exercises in the last few years, and many of those Exec Comp shares are then quickly turned into cash anyway. There have been several insider sales of GT shares, however. This of course sends a terrible signal to investors and raises concerns that Goodyear’s senior management has no faith in the future of their own company.

[9] For example, Elliott hired a consultant to benchmark Goodyear’s operating margins and Selling/General/Administrative cost structure versus peer industry competitors, and found Goodyear wanting.

[10] Corporate-owned retail outlets comprise about 6% of all tire sales; sales from independent tire dealers are 11X these corporate stores.

[11] To their credit, Goodyear’s marketing strategists apprehend the popularity of NASCAR, a racing circuit with a tremendous fan base in the United States [and satellites in Canada, Mexico, Brazil, and Europe, where, alas, Continental AG and Pirelli are the tire sponsors] and strong viewership. The problem is, again, lack of resources to do more.  

[12] Sumitomo Rubber has had the same arrangement with Major League Baseball, and Doublestar/Kumho Tire with the NBA.

[13] The advertising gap was strangely left entirely unaddressed by Singer/Elliott; again, this begs the question as to how long-term their perspective really is.

[14] Hot off the presses on August 22, it was revealed that State Farm and Rodgers have parted ways after 12 years’ worth of endorsements and commercials, due to fall-out over Rodgers’ comments about Covid vaccines.  Rodgers had effectively become the brand spokesman for State Farm, and made roughly $3M per year for his pitchman services. Obviously, prior to the Covid controversy, State Farm had perceived great benefits from its association with Rodgers.

[15] Enduring slogans can cement perpetual brand power in place in consumer minds, that then generates a self-reinforcing loyalty among consumers. Just Do It. The brand name associated with that slogan need not be mentioned as its recall is automatic. General Electric was one of the largest market cap companies in the world for 25 years, during which time every GE ad was laced with the maxim, We bring good things to life. The dropping of that slogan in 2004 was strangely coincident with the beginning of GE’s downfall.  Similarly, Goodyear should never have abandoned The Greatest Name in Rubber, and after its re-adaptation must never do so again. Goodyear’s current lead slogan is “More Driven”, which is decidedly uninspirational. A secondary slogan — meant more for employees and channel partners — that reinforces The Greatest Name in Rubber is Goodyear’s maxim first published in 1915 and still occasionally reprised today: Protect our good Name. A secondary slogan such as We Know Rubber would also support The Greatest Name in Rubber.     

[16] Subsequent to this, in May of this year Trelleborg completed the sale of its tire and wheel business to Yokohama Rubber, as they now find too much demand for engineered polymers in automotive products with higher margins in areas such as brakes, engine, steering and transmission systems, as well as body seals and fuel tank straps.

[17] Pirelli is 46% Chinese-owned and perhaps fully so eventually, given their strong performance in recent years.

[18] And again, this important strategic option was left unaddressed by Elliott Management in their analysis released on May 11^th.

[19] Yokohama and Cheng Shin are, respectively, the 8^th and 9^th largest tire-makers in the world, and both have wide share ownership such that getting a deal done would be easier than more closely-held rivals [Hankook Tire in South Korea, for example, is dominated by a single shareholder with a 43% stake; Sumitomo would similarly have been a hard deal to close given that firm’s links to the Sumitomo keiretsu]. As for Nokian, Bridgestone once owned 10% of Nokian shares and had joint marketing and research agreements in place, but that stake was reduced to 3% in 2019. Nokian is now wrestling with problems in its Russian operations at the moment due to the Russo-Ukrainian War and indeed recently announced an intention to exit Russia. Caution is therefore advised now but long term this is a great company with a “Ritz-Carlton quality” reputation in Europe.

[20] It is true that the U.S. Dollar [USD]/Japanese Yen [JPY] exchange rate has moved sharply against the JPY in the last 18 months [by about 15% in 2022 and 14% so far in 2023], thereby improving Japanese tire-makers’ export sales and dollarized results, but this translates to a few percentage points at best [and Goodyear has production facilities at Tatsuno in Japan and in several plants across Asia, so should not lose regional sales due to currency moves]. Meanwhile the USD/Euro exchange rate has been little changed in 2022-23, and in any case Goodyear is the only major tire-maker in the top ten to be earning losses in 2023.

[21] In inflation-adjusted terms, Goodyear’s sales of $22.7B in 2011 would be $31B today, meaning the firm’s top line is around 32% lower in 2023. It’s true capacity has been rationalized and Goodyear has sought to move to higher-margin premium offerings, but the company’s industry footprint has suffered – and indeed, in 2011, revenue/tire was $125; it was $112 in 2022.

[22] Tire Hub was formed as a 50-50 joint venture in 2018, combining the distribution assets and infrastructure of Goodyear and Bridgestone in the United States.  

[23] Analysts at Modern Tire Dealer affirm what John Healy at Northcoast Research has long emphasized in his industry reporting: high-touch engagement and support of downstream channel partners is critical to tire-makers’ success.  It seems so obvious that it is a point that need not be mentioned, yet conversations with independent dealers and distributors affirm that some companies [e.g., Michelin, Pirelli] are now far more helpful to the channel than others. As Woody Allen famously said, 80% of success in life is showing up.  Sadly Goodyear has not been world-class in channel support during its era of market share decline.       

[24] For the last several years Goodyear has been in the 5% operating margin range, whereas Michelin and Bridgestone have been near 10-12%. Other peer competitors including Pirelli, Sumitomo, Hankook and Yokohama are similarly more profitable than Goodyear.

[25] Specifically, Elliott compared average Sell-In and Sell-Out prices [viz., the price the manufacturer/distributor receives from the retailer, and the price the retailer receives from the end-user consumer, respectively] for Goodyear products sold through the company-owned wholesaler and then Tire Hub between 2016 and 2022, and found that Goodyear’s prices to the channel rose 24%, while the tire dealers’ prices to consumers who bought Goodyear rose 38%; Goodyear clearly sacrificed profit to drive volumes. Meanwhile, Elliott found that during the same period Michelin’s, Pirelli’s, and Continental AG’s Sell-in price increases [34%, 36%, 40% respectively] were all greater than their dealers’ Sell-Out price hikes [27%, 21%, and 33% respectively]. That is to say, Michelin, Pirelli, and Continental AG all displayed pricing power vis-à-vis tire dealers that Goodyear lacked. Confused branding may also have played a part here in impacting sales volumes, in addition to problems in Tire Hub’s strategy and operational execution in its start-up period.        

[26] For example, the most common High-Value Added [HVA] tire in the U.S. market now is sized as *235-Width, 60-Aspect, 18-Inch*.  Goodyear has eight separate styles [SKUs] in this size – all priced within $53 of each other [$192-$245].  Bridgestone also has 8 SKUs in this size, ranging from $196 to $312 [$116 top to bottom], while Michelin has 6 SKUs ranging from $230 to $312 [$82 top to bottom]. Bridgestone and Michelin employ a classic good-better-best pricing structure and manage their brand offerings to efficiently offer choices to their dealers based on understood feature trade-offs.  Goodyear however sows confusion with its pricing and offerings, and in any case cannot “buy business” merely because it comes in lower price points: indeed Goodyear’s structure encourages dealers to gravitate toward the low end of its pricing range, perceiving no real added value at the higher end.    

[27] In other words, of Goodyear’s 376 product SKUs, 56 of them [15% of the total] yield 95% of total revenues for Goodyear!  That’s not an “80-20 rule”; that’s a 95-15 scenario!  There are thus costly inefficiencies packed into their production and product marketing, and confused pricing further begets confused branding in the eyes of dealer customers.

[28] Particularly ugly are cases such as CEO Rich Kramer’s on December 8, 2021, when Mr. Kramer exercised options on $2.5M worth of shares at $10.12 as per his management contract, but then turned around at the same moment and sold 175,000+ shares at $22.33 each for $3.9M. The signal Mr. Kramer sent was acute: Goodyear shares were trading 12-13% lower down to $19.25 the following week (of December 17, 2021), torching $840 million in corporate value.  Shares did recover in January 2022 but again: a signal was sent.   

[29] F.A. Seiberling, Goodyear’s founder, and his brother Charley [“C.W.”] developed a legendary reputation of fealty toward their employees, via above-average pay scales and such initiatives as interest-free loans to workers and the development of Goodyear Heights housing for the firm’s early factory workers. 

[30] Indeed, beyond NASCAR, Indycar, and Formula 1, racing sponsorship in such premier platforms as the World Endurance Championship (WEC), World Rally Championship (WRC), FIA GT World Cup, IMSA WeatherTech SportsCar Championship, 24 Hours of Le Mans, FIA World Touring Car Cup (WTCR), and FIA Formula E Championship are a few among many opportunities for Goodyear to intensify its presence in motor sports. No tire-maker can cover all of them but there are opportunities out there.

[31] On a Purchasing Power Parity basis.

[32] And indeed, the collective GDP of BRICS now exceeds that of the G-7, in Purchasing Power Parity terms.

[33] Nations involved in trade and economic/security cooperation within the CIS are Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan and Uzbekistan. Russia is a gateway to all of them and the increase in automobile usage there will outstrip growth in the developed countries in the next 40 years. Goodyear needs to be positioned to win this business.

MISCELLANEOUS INSIGHTS