Cheap (3 page)

In the Age of Cheap we are all tourists, blindly reliant on the seller to wring out the best price from his suppliers and to reliably pass those savings on to us. Retailers, and in particular discount retailers, reliably betray this trust. Nobel Prize winner in economics George Akerlof illustrates the problem with a thought experiment. Imagine that a quart of high-quality milk wholesales for $1.00, and a quart of watered-down milk wholesales for 60 cents. A typical buyer might willingly pay up to 80 cents for the watered-down milk and up to $1.20 for the pure milk. In either case, mutual gains would be made from the transaction: Both the buyer and the seller know what he or she is getting, and both end up with what might be considered a fair deal. But if the customer is unable to distinguish quality, both grades of milk must sell for the same price—about 90 cents a quart. Under this system, honest brokers of pure milk go bankrupt, while corrupt watered-down milk sellers flourish. So, logically enough, soon all surviving merchants are watering their milk and pocketing large profits, and consumers believe they are getting a bargain when in fact they are being ripped off. Economists call this Gresham’s law, after Sir Thomas Gresham, a sixteen-century merchant who persuaded Queen Elizabeth to restore the debased currency of England. Its guiding principle is this: Bad money drives out good.

In America today, Gresham’s law rules, with sweeping consequences both obvious and subtle. The way we shop, the way we do business, and the way we think about money all reflect this new reality. The global economy challenges us to do more with less every day, a challenge both bracing and daunting. It is an intriguing time and a treacherous one for those caught unawares. It is my hope that this book will serve as both cautionary tale and road map, pointing out the road blocks and dangerous turns, the falling rocks and speed traps, while never losing sight of the scenery.

We must have cheap labor or we cannot sell cheap goods.
When a clerk gets so good she can earn better wages
elsewhere, let her go.

FRANK W. WOOLWORTH, QUOTED IN JOHN K. WINKLER,
FIVE AND TEN: THE FABULOUS LIFE OF F. W. WOOLWORTH

 

 

 

 

 

 

 

 

American history is replete with tales of celebrated bargains. Manhattan was purchased for a pile of trinkets, and the Louisiana Purchase for three cents an acre. But these were real estate deals at a time when our boundaries seemed limitless. In early America, beyond land, water, and air, very few things came cheap.

Until the industrial revolution, backbreaking, heart-aching labor was behind the production of almost everything we made, and objects of all kinds were scarce. As author Robert Kanigel writes of the pre-Civil War period: “The beautiful things, the useful things, the conveniences and comforts—were in short supply, cost too much, or couldn’t be had at any price. A wagon wheel was no trifle; neither was a stove. The great mass of people, at least by the standards of our time, had little. You could . . . point to inequities in the distribution of wealth and indirect capitalism. But with equal justice, you could point simply to how much trouble it was, how much labor and material it took, to make a plow, or dig a ton of coal, or generate even as much power as a horse.”

Precisely when we came unyoked from the harnesses of manual labor is a matter of debate, but historians tend to link our liberation to the army’s frantic scramble for firepower in the latter half of the eighteenth century. It is hardly surprising that guns were among the first mass-produced objects in America. Munitions were critically important in military and domestic life; farmers, ranchers, storekeepers, and nearly everyone else needed a firearm for peace of mind if not survival. Yet the amount of work that went into making guns was stunning, and their production was painstakingly slow. A skilled gunsmith making a flintlock musket or Kentucky long rifle began by hand-forging and reaming the barrel; he then carved the stock, assembled the locking mechanism, and finished each gun (again by hand) often with the help of an apprentice. Making a really fine piece took more than three hundred hours of labor, and the resulting product cost $40—about three times what the average person of the time made in a month. A fine firearm might have been well worth the price, but it was beyond the reach of the American rank and file. Most soldiers of the time would have been happy with a gun that reliably fired in the direction in which it was pointed. Unfortunately, not many had that luxury.

The revolution was waged with a hodgepodge of backfiring muskets and rifles, “fowling pieces,” pistols, and blunderbusses. Shortages were so severe that some soldiers were reduced to fighting with swords or axes. General George Washington lamented this, as did Benjamin Franklin, who early in 1776 wrote that “both arms and ammunition are much wanted.” While weapons imported from France were of high quality, most American guns were so shoddy that militias were accompanied in the killing fields by armorers, dodging enemy fire as they worked gamely to nurse busted muskets. This was, to say the least, an awkward approach to doing battle and a precarious one. Not surprisingly, the American arms industry felt pressed to do better. In 1794, fretting over the possibility of yet another war with England, now President George Washington proposed a bill to create public facilities to manufacture and supply the military with reliable weapons. The bill was passed and arsenals established in Springfield, Massachusetts, and Harpers Ferry, Virginia. Contracts were also opened to private companies. Two of the successful bidders, Simeon North and Eli Whitney, proposed to improve the quality and speed of gun manufacture through sophisticated mechanization.

Whitney, the better known of the two, was nearly broke at the time, having failed to retain financial control over his famous cotton gin. He desperately needed the gun-making contract but was so distracted by ensuing litigation that he neglected to pay much attention to the enterprise. A tireless self-promoter, he managed to take and get credit for being the first to mechanize gun manufacture through the use of interchangeable parts, a distinction for which he is known to this day. Unfortunately for schoolchildren everywhere, this distinction was unearned. As one scholar put it, “Except for Whitney’s ability to sell an undeveloped idea, little remains of his title as father of mass production.”

The real hero here was Simeon North, a steady and humble maker of scythes and other small agricultural implements who pioneered both interchangeable parts and its corollary, mass production. Using a manufacturing technique that would later be linked to efficiency expert Frederick Winslow Taylor, North broke down the gun-building process into a series of basic tasks and distributed the work among a group of semiskilled laborers. This radical departure from traditional gun making led to a cheaper and more consistently reliable product. As North reported in 1808, “To make my contract for pistols advantageous for the United States and to myself I must go to a great proportion of the expense before I deliver any pistols. I find that by confining a workman to one particular limb of the pistol until he has made two thousand, I save at least one quarter of his labor, to what I should provided (that) I finished them by small quantities; and the work will be as much better as it is quicker made.” This “de-skilling” of the gun-making process transformed gun smithing from a masterly craft to a well orchestrated routine, thereby growing efficiencies well beyond expectations. North not only fulfilled the terms of his contract within his deadline, but was awarded another one to produce an additional twenty thousand pistols, the components of which were “to correspond so exactly that any limb or part of one pistol may be fitted to any other pistol of the twenty thousand.” The first contract known to stipulate interchangeable parts, it was a resounding step in the inexorable march toward low price.

WHITNEY’S FAMOUS GIN, though not the font of mass production he claimed, nonetheless played a critical role in lowering the price of textiles. The gin separated cotton fiber from seed, cleaning more cotton in minutes than a battalion of humans could in a day. With the adaptation of James Watt’s steam engine as a power source, cotton cleaning became almost entirely mechanized, and within a few years of the gin’s patenting in 1774, the blizzard of cotton fiber spread beyond New England’s booming textile industry to Europe and as far away as Russia. The value of the U.S. cotton crop rose from $150,000 to more than $8 million in a decade.

World demand for fabric that was cheaper than linen and cooler than wool made cotton a very desirable commodity, accounting for more than 50 percent of all American exports by the middle of the nineteenth century. Once the gin made cleaning cotton fiber so cheap, the expectation grew that cotton itself would be cheap. The cotton gin reduced the labor required to extract and remove seeds, but planting and picking remained a distinctly human chore. To meet the expectation of low price, the farming and picking of cotton had to be cheap as well, and this meant cheap labor. There is no cheaper labor than the slave variety, and it makes sense that the cotton gin led to an emphatic boost to the slave trade. The American South was by then growing 60 percent of the world cotton supply, and nearly three-quarters of all slaves were involved in cotton production. By the time those slaves were set free shortly after the Civil War, the mass merchandising of textiles and other “dry goods” was well under way, and the expectation of cheap fabric was deeply ingrained in the American psyche.

To imply that the cotton gin or interchangeable revolver parts changed everything would be to overreach. North’s and Whitney’s innovations planted the early seeds of systematized mass production, but it took more than half a century for those seeds to take root and sprout. “I don’t like the word “revolution,” Merit Roe Smith, historian at the Massachusetts Institute of Technology, told me. “It’s misleading. Real industrialization didn’t happen overnight. It began after the War of 1812 and took about forty years to really take off.”

By the waning days of the nineteenth century, mass manufacture was a given, accounting for more than 50 percent of the nation’s production. This dramatic shift in the way things were made led to a striking reduction in the price of consumer goods, as well as to a sharp decline in the status and power of craftsmen. Craftsmanship was still important, of course, but in many cases it was not quite as important as it was before the advent of industrialization. One observer wrote, “As low cost is the main object of American industry, no premium is placed on craftsmanship for its own sake. Only so much accuracy and refinement of finish are put into the article as are necessary if it is to meet the standard of the quality range for which it was originally designed.”

 

 

 

AS AMERICA’S population shifted away from ranches and farms, thickening the concentration of people and capital in urban centers, there was a growing demand for a new kind of store to match the nation’s speeded-up system of manufacture. Philadelphia haberdasher John Wanamaker was there to meet that demand. A deeply religious man, Wanamaker considered good business his ministry, attacking even the smallest transaction with Calvinistic fervor and an ambition deeper even than his piety. In 1861 he and his brother-in-law, Nathan Brown, opened Oak Hall, a men’s clothing store, at Sixth and Market Streets on the site of George Washington’s executive mansion. (Even this early in his career, Wanamaker displayed a knack for the dramatic.) Oak Hall prospered based on Wanamaker’s then-radical policy: “One price and goods returnable.” In 1869, he opened his second store at 818 Chestnut Street, and capitalizing on both the untimely death of his brother-in-law and his own growing reputation, he renamed the company John Wanamaker & Co. Both enterprises were extremely successful, but Wanamaker had in mind something even grander, something on the scale of London’s Royal Exchange or Les Halles in Paris. In 1875 he bought an abandoned Pennsylvania Railroad freight depot, an enormous, sprawling structure big enough to hold his vision. He renovated the space spectacularly into what he called in overheated advertisements “the Grand Depot for merchandise.” If not America’s first department store, historians agree, it was certainly its first grand department store.

Forever the evangelical, Wanamaker summarized his entrepreneurial vision in “The Evolution of Mercantile Business,” an address he gave at an annual meeting of the American Academy of Political and Social Science. “The evolution in trade was inevitable, because it was waterlogged by old customs that overtaxed purchasers; that there was at work for a long time a resistless force moving towards the highest good of humanity; that the profit therefrom to individuals who have risked their own capital, as any man may still do if he chooses, has been insignificant, compared to the people benefited both by the cheapening of the comforts of life and by the improved condition of persons employed . . . ”