ONE

WALTER REUTHER AND THE TREATY OF DETROIT

The weight of history on our results has been significant.

—RICK WAGONER, chairman and chief executive officer, General Motors

Once upon a time, General Motors was a symbol of success. After World War II, the automaker routinely captured more than 40 percent of the American automobile market, and in 1955, when an entry-level Chevrolet cost $1,450, GM’s market share climbed to 51 percent. The company’s brass was moved to complain (or so went the joke) “We’re still losing five out of every ten sales.”¹ In an age when GM was criticized for pursuing its own selfish aims rather than those of the country, Charlie Wilson, its outgoing president, testified, rather memorably, before the Senate Armed Services Committee, “What was good for the country was good for General Motors, and vice versa.”² Wilson’s remark didn’t fool anybody; GM, of course, was in business for its stockholders. To ensure that its profit targets were met, it methodically raised the prices of its cars, and year after year it had the highest sales, the highest profits of any company in America. The shareholders made out like bandits. From the end of the war until 1965, a span of two decades, the stock registered a stupendous, eightfold gain.

But as an institution, General Motors was already beginning to age. Shareholders did not at first notice the great transformation that was occurring in their status—their great disenfranchisement. But in a manner of speaking, they lost their claim; General Motors was sold out from under them. Oh, it wasn’t literally sold. But the gushing stream that was GM’s cash flow, which previously and properly had flowed to the stockholders, was quietly but most assuredly diverted. Over the next four decades, GM’s stock lost 60 percent of its value. The company continued to pay dividends, but the owners of America’s biggest industrial enterprise would have done better holding T-bills. Even though, over those many years, GM sold as many cars or more as in Wilson’s day, the putative owners—the stockholders—for all practical purposes had lost their title.

So who owned General Motors? Gradually, a revolution had taken place. A vanguard force—GM’s retired workers and its future retirees—had attached an opposing title; they had become entitled. Modestly at first, but in time overwhelmingly, Wilson’s car company became beholden to the huge pension benefits, as well as the lavish standard of health care, that it had pledged to its retired workers and their dependents. “What is good for General Motors is good for its retirees” was the new mantra.

By the dawn of the twenty-first century, Wilson would not have recognized his former employer. Over a fifteen-year stretch ending in 2006, GM poured $55 billion into its workers’ pension plan, compared to only $13 billion that it paid out in dividends. In other words, the company paid its pensioners four times as much—not including the money it spent on their generous health care benefits—as it did to its ostensible owners!

Walter Reuther was both the person most responsible for this crisis and one of the first to propose a solution. A passionate and scrupulous labor leader, Reuther came of age during the Great Depression, and the experience of seeing thousands of autoworkers (and millions of Americans) lose their jobs instilled in him a lifelong desire for basic security—what he was to call “social insurance.” Because Reuther was born in the first decade of the twentieth century, and because he grew up just as workers were organizing and demanding security, his life story would chart the evolution of social insurance in the United States—everything from pensions and health care to unemployment compensation. These benefits already existed in Europe, and much of Reuther’s philosophy was imported via his German-born father and grandfather, both of whom were ardent Social Democrats.

But in the United States, until very late in the nineteenth century, pensions were almost unheard of. Union Army veterans got pensions, but they had begun as compensation for war injuries, and only later had been extended to older veterans generally. Private employers simply did not offer pensions. “Retirement” as we know it—that is, a distinct phase of life devoted to family and to leisure after one’s working years—did not exist. Nor did the concept of unemployment.

Most people worked on farms or in small shops or mills. As they got older they didn’t stop working, they simply worked a little less. If old age did catch up with them, they turned to their families for food and shelter. The “problem” of old age was in any case not widespread. In 1900, only 4 percent of the population was over sixty-five. Retirement was less one of life’s standard passages, like adolescence or middle age, than it was an infrequent and brief preamble to the grave.

However, by the early twentieth century, notions of retirement were beginning to evolve. If you want to fix a date, 1907, the year Reuther was born, is as good as any. One reason was that people were living longer. Some of this was because of medical advances, and a good deal was due to the installation of sanitary plumbing and the eradication of unhygienic dwellings (and slums) where people were more likely to spread contagions.

A second factor was industrialization. The man who tended a farm could gracefully age on the job; the factory worker couldn’t. Shop stewards and department managers wanted their graybeards out, to make room for younger blood. The desire to manage its labor force motivated a newly formed rail freight business, American Express, to institute the first corporate pension, in 1875.³ The railroads gradually followed suit. Railroad pensions were similar in spirit to army pensions; the work was exceedingly dangerous, and benefits were largely a reward for risking injury and death.

As the “workplace” shifted to the city, companies figured that employees, white-collar workers in particular, would be easier to recruit if they were promised a pension. Also, since employees generally had to serve thirty years to be eligible, they would be more likely to stay on the job. As an executive of the Pennsylvania Railroad reckoned, “We feel sure that the pension system tends to keep our best men.”⁴ The rails were followed by banks, insurers, utilities—the sorts of companies interested in nurturing a stable and skilled workforce. Also, the tax code was amended so that money put into pension plans was deductible. For all these reasons, by the end of the 1920s a sizable minority of businesses offered plans.

This progress, however, accomplished very little for most blue-collar workers. Pensions were created by companies that reckoned it to be in the corporate interest. They were a tool for managing labor, not an entitlement due to labor. Even if some executives chose to award benefits for humanitarian reasons, the decision was theirs. The workers did not have a right to a pension, much less to a broader social security program. But this was Reuther’s ideal.

The young Reuther had been schooled on the rights of the workingman, including, especially, the right to a dignified retirement, the way other American boys were schooled in baseball. His father, Valentine, had emigrated to the United States in 1892.⁵ By then, Germany had already established a state insurance program. Valentine strongly believed in benefits for the masses in America as well. He settled in West Virginia, got a job driving a brewery wagon, and became a labor leader and devotee of the socialist Eugene Debs. Walter and his four siblings grew up in a strict home in which two religions held sway: Lutheranism and trade unionism.

Walter quit school, as was the custom, at fifteen to apprentice in a tool shop. When a mammoth die slipped, he lost a big toe. There is no record that his employer paid the bill, and for the young apprentice to have demanded “insurance” for the accident would have been laughable. In any case, hearing that a craftsman in Detroit could earn a dollar an hour, then a reasonable starting wage, in 1927 he left for the Motor City.

Reuther was hired at Ford’s (such was it known, for the company was identified with its proprietor). It had a huge plant, River Rouge, that functioned as a small city—machine shops, steel and glass mills, metal stamping. An intense, hardworking redhead, Reuther did not go in for drinking or after-hours carousing. Even while holding down a job, he attended high school in his spare time and then enrolled in a local college. Joined by his brother Victor, he also began to frequent left-wing political meetings in Detroit, where the talk centered on unionizing the auto industry. Auto companies paid decent wages by prevailing standards, but job security was woefully lacking. When Ford discontinued the Model T (just as Reuther arrived in Detroit) 100,000 workers were sent packing until its plant could be retooled. The Great Depression saw layoffs on a far larger scale. Jobless men would arrive at the plants at dawn and build bonfires at the gate while desperately waiting for a call to work.⁶

Reuther was especially aroused by the lack of job security. He campaigned in 1932 for Norman Thomas, the Socialist candidate for president, took photographs of local shantytowns (dubbed “Hoovervilles” after the White House incumbent), and agitated for better working conditions. Then, according to Reuther’s later account, Ford’s fired him for being an activist. Nelson Lichtenstein, Reuther’s best biographer, says he may have simply resigned. In any case, in 1932, he and Ford’s parted.⁷

There was no future for an organizer (or for much of anyone) in Detroit just then. Most of the unemployed went on relief. A smaller number, emblematic of the era, hopped freight cars and lived as hobos. Reuther and his brother conceived a far more novel—indeed, remarkable—plan. They resolved to travel the world. This was to be no grand tour of museums and opera houses, but a proletarian journey, via bicycle, of factories and mills. The Reuthers aimed to sample working conditions around the globe, so that they might import the best ideas to America. Crossing the Atlantic by ship, they disembarked in Hamburg early in 1933, just as the Nazi revolution was engulfing their ancestral homeland. The brothers had an idea of linking up with the opposition, and they did make contact with left-wing students as well as with some of their relatives. However, as Hitler’s control was becoming absolute, remaining in Germany seemed futile and they left for Austria and the Netherlands. There they waited until visas arrived for the Soviet Union. By late 1933, Walter and Vic were employed at the giant Gorky auto factory, a Stalinist imitation of the Ford plant at River Rouge.

Conditions were spartan, even though Walter and Vic were housed in the more favorable dorms reserved for foreigners. In terms of efficiency, the plant was light-years behind River Rouge. However, the brothers were infected with Gorky’s pioneering spirit. Walter, who learned passable Russian, published a critique of the plant in a Moscow English-language paper, and judging from their letters home, both Reuthers were smitten with the Soviet experiment. The Russian workers, though poorly paid, had at least minimal job protection and health care. That Stalin was already employing forced labor on a mass scale seems to have escaped their notice. Victor wrote, “We are watching daily socialism being taken down from the books and shelves and put into actual application.”⁸

After Gorky, they boarded a train for the Far East, where they saw appalling poverty in China and an ominous militarism on the rise in Japan. They returned home, in 1935, after thirty-two months. Irving Howe, the socialist writer who was the first to profile Reuther, said, “History had been thrust into their faces. ”⁹ But their effect on history was only beginning.

In Detroit, the newly formed United Automobile Workers was attempting to organize the auto industry. Reuther threw himself into union work, and quickly became president of the big UAW local on Detroit’s West Side. It was rough going; the auto companies (especially Ford) were adamantly opposed to unions. They hired spies and thugs to intimidate members, and as the Depression still raged workers were naturally afraid to enlist and risk their jobs. Many of the union’s shock troops were communists—who at the time, it should be said, were not quite the pariahs in American life they later became. Reuther was close to the communists and may have briefly been a member.¹⁰ However, he resisted the party’s attempt to enforce an ideological line, and as his power in the union rose, he distanced himself.

In 1937, the UAW shut down a critical GM plant in Flint. Alfred Sloan, the president of GM, viewed the action as illegal and refused to negotiate. Sloan was a managerial genius who had rescued GM from failure in the 1920s and propelled it into the number one spot, ahead of Ford. He was also very much opposed to organized labor activity. Like most corporate executives of that time, Sloan was ardently opposed to Franklin D. Roosevelt’s New Deal, and especially to FDR’s welfare programs. Unlike most, he had worked behind the scenes to finance the anti-Roosevelt American Liberty League, a racist and anti-Semitic fringe group.¹¹

If Sloan did not want a government welfare state, he certainly did not want a private one imposed on GM by employees. During the Depression, General Motors had continued to pay dividends to its stockholders even while twice cutting its meager wages and laying off half its workforce.¹² Sloan saw no reason to apologize. He ran the company for the benefit of the stockholders; he assuredly did not run a welfare agency.

Sloan beseeched the federal government to send in troops to break up the strike. Frances Perkins, the secretary of labor, refused. A passionate New Dealer and a proponent of welfare, Perkins leaned on GM to compromise. Sloan read the tea leaves and agreed to start talking. Henry Ford did not. In the spring of 1937, during a demonstration at River Rouge, he unleashed his goons, who caught up with Reuther on an overpass above the plant and severely beat him. However, the union agitation continued. In 1941, the UAW managed to shut down River Rouge. With the plant surrounded by thousands of striking picketers, Ford capitulated and agreed to government-supervised elections. Thus, by the time of Pearl Harbor, the UAW had been duly elected as the bargaining agent for most American autoworkers.

By now, Reuther, a member of the UAW’s executive board, was very much focused on pensions. The Depression had exposed the plight of the rising number of elderly poor, and America was visited by all manner of political extremists, who stepped up the pressure for various forms of welfare benefits. The oddest of these was an elderly, out-of-work physician and onetime mining speculator in Long Beach, California, a Dr. Francis Townsend. Dr. Townsend wrote to the local newspaper suggesting a fantastic retirement scheme: that the government distribute $200 a month to each American over sixty and pay for it with a sales tax. When recycled through the economy, he argued, these lavish pensions would “abolish unemployment” forever. His proposal was fiscally unworkable, but in rural America it had the lure of an elixir. Millions of Americans joined “Townsend Clubs” and dozens of congressmen lined up in support.¹³

Social Security was enacted, in 1935, partly as a response. Roosevelt told Perkins, his labor secretary, “The Congress can’t stand the pressure of the Townsend Plan unless we have a real old-age insurance system, nor can I face the country without one.” But the new program hardly defused the pressure for pensions and other benefits. For one thing, Social Security fell badly short of its planners’ goals—which had been to provide universal, cradle-to-grave protection. New Dealers reluctantly omitted health insurance, which they feared was politically unsalable. Moreover, millions of workers were excluded from the retirement plan. Out of deference to the southern bloc in Congress, agricultural workers, many of whom were black, were deemed ineligible, as were local government workers. Even for those who did participate, benefits were too low to provide true “security.”

Also, from the day that Social Security was passed, conservatives agitated to repeal it. Reuther’s old boss, Henry Ford, fulminated that it would regiment society and diminish Americans’ freedom. Alf Landon, the Republican candidate for president in 1936, labeled it “a cruel hoax.”¹⁴

The opposition focused on whether the money would really be there to fund such a large entitlement, and the early experience with private pension plans was not exactly encouraging. Actuarial science was in its early days, and many corporate sponsors of pensions did not bother to fund their plans, or did so only on a halfhearted basis. (They simply paid benefits from general funds.) As business conditions worsened during the 1930s, sponsors came under stress, the railroads in particular. For instance, the Pennsylvania Railroad’s pension expense, only $235,000 in 1900, had swelled to an enormous $8 million in 1931.¹⁵ The burden of funding the railroads’ pensions was aggravated by the industry’s decline. Competition from trucking had sapped the railroads’ growth and led to an aging of their labor force. And the rails discovered, to their horror, that unlike wages, pension expenses could not be trimmed with the business cycle. Ultimately, railroad pensions had to be bailed out by Congress.¹⁶ This early pension fiasco was one that executives in other industries—autos, steel, and airlines, for example—should have committed to memory.

But no graying was visible in automobiles then. It was a young industry, poised for growth. Reuther spent the war years building a power base in Detroit and struggling with the UAW’s communist faction for control. He also forged ties to Washington. During the war, he made a splashy proposal to convert Detroit into a vast airplane factory; though his plan was impractical, it raised his public profile and established him as a political figure to be reckoned with. The union earned more points by pledging not to strike, and by putting up with wartime wage controls.

By the time Reuther gained unchallenged authority over the UAW, in 1947, the war was over and he had a pent-up list of demands. He also was envisioning a broader social role for the UAW, as an agent for achieving the welfare state that the New Deal had left unfinished. And he wanted it not just for autoworkers but for everyone. As early as 1949, the writer Irving Howe could see that the UAW could become a revolutionary catalyst: “a force molding American life.”¹⁷

Pensions and job security were first on Reuther’s agenda, with health care a close second. Sloan recorded his view of these demands in his memoir: “extravagant beyond reason.”¹⁸ However, the world was changing. By the war’s end, more than 7 percent of Americans were over sixty-five, nearly double the ratio of 1900. And experts in the new field of demography were forecasting (correctly) that the ratio would virtually double again, to 12 percent, by 1980.¹⁹ Retirees as a sociopolitical force were coming of age.

In a curious way, Americans’ first decade of experience with Social Security heightened, rather than alleviated, their concern for the aged. The level of the government benefit was unchanged since the Depression, and its value had been decimated by inflation. The program’s very inadequacy focused attention on the need for private pensions.

Government policy further stimulated the pension bandwagon. The United States levied an excess profits tax on corporations during the war, which sent companies scurrying for the tax shelter offered by retirement plans. Also, the government froze wages while still allowing firms to grant (or increase) noncash benefits. Thus pensions became a way to give somethingto strapped employees. The result was a pension stampede, tripling the number of Americans with coverage to six and a half million, or a sixth of the workforce.²⁰ However, many of these plans—including the one at General Motors—included only salaried (not hourly, or unionized) workers. This seemed patently unfair; what’s more, the government’s tax policy had changed the terms of the debate. If the United States was going to subsidize pensions, Washington was entitled to some say in how they were used. Pensions were now viewed as a benefit to labor; as the pension historian Steven Sass put it, Congress expected a “social return for its tax favors.”²¹

Congress had laid the groundwork during the New Deal with legislation establishing the right of workers to form unions and to bargain collectively. The key legislation was the National Labor Relations Act, or Wagner Act, in 1935. Though its effect was muted during the Depression, after the war union membership surged. Starved for wage hikes and squeezed by wartime inflation, the unions erupted after V-J Day with a series of crippling strikes against steel mills, packing plants, shippers, refineries—and General Motors. Unions might have derailed the entire economy, but President Truman intervened and seized the coal mines and the railroads.

The eruption turned out to be brief. As the cold war escalated, public sentiment turned rightward and less sympathetic to labor. Inflation ebbed, making wage hikes harder to justify. Big Business, as it was known, was dominated by a handful of cartels, and in the late 1940s it took a tough line. Some firms insisted on an outright pay freeze. However, pensions were seen as less inflationary. Reuther and other union leaders were nothing if not opportunistic, and increasingly demanded welfare-type benefits, or what they referred to as social insurance.

Ford Motor was at least mildly receptive. Now led by the founder’s grandson, Henry II, it was eager to soften the hard-edged image of the original Henry. In 1947 the company offered a small pension. But there was a large catch: workers would have to contribute to the plan, and it was packaged with a smaller wage hike (seven cents an hour instead of fifteen cents) than if the UAW opted for a contract with no pension. Reuther, uncharacteristically, was thrown off his game. He asked the members, most of whom did not have high school diplomas, to vote. Perhaps not surprisingly, they opted for the cash-only contract by a big margin—an embarrassment to their leader.²²

Reuther suffered a different sort of wound the next year, when gunmen fired through the kitchen window of his Northwest Detroit bungalow, nearly killing him (one bullet struck his chest) and permanently damaging his right arm. The assassination attempt boosted his moral stature just as the pension issue was coming to a head.¹

Ford’s new contract expired in 1949, and this time Reuther demanded a pension that was noncontributory for the workers. Warming the rhetorical flames, he insisted that the UAW would no longer tolerate a “double standard”—pensions for executives but not for men on the line.

Ford responded that if the employees didn’t fund their pension, the company would have to pay for it by raising car prices, which it was unwilling to do. John Bugas, a Ford vice president, sent Reuther a condescending rejection, which he also released to the press. “Old-age security is a highly desirable goal, but it must be paid for,” Bugas said dismissively. “There is no ‘kitty’ from which Ford can draw.” Reuther cheekily retorted that Ford could fund its workers’ pensions “from the same source that is used to finance security for high paid executives.”²³

At the UAW convention in Milwaukee that summer, he demanded a $100 a month pension and a hospitalization plan equivalent to 5 percent of payroll. At a time when Social Security provided retirees with on average only $28 a month, this was bold in the extreme. But it was only the beginning of Reuther’s demands. What the union required, he declared to twenty-five hundred cheering delegates, was nothing short of “a full social welfare program”—health care, a pension, death benefits, disability: the works.²⁴ Noting that Ford, as well as Chrysler, had already said no, Reuther sarcastically observed, “Security in your old age . . . is reserved to only the blue bloods. They can have security, but if you live on the wrong side of the railroad tracks you are not entitled to it.” As for GM, its president, Charlie Wilson, stood to get a pension of $25,000 a year (the equivalent of about $250,000 today). Contrasting this with the rank and file, Reuther thundered, “If you make $1.65 an hour they say, ‘You don’t need it [a pension], you are not entitled to it, and we are not going to give it to you.’ We are going to change that in America, and we are going to start in the next couple of weeks.”²⁵

And now Reuther had the political wind at his back. The recent labor laws had significantly enhanced the unions’ power. John L. Lewis’s coal miners successfully struck for pensions after the war. Moreover, government policy, which was looking for a way to reward workers without stoking inflation, increasingly tilted toward pensions. The National Labor Relations Board, a federal agency created during the Depression to, among other things, investigate unfair labor practices, was watching pension negotiations closely. In 1948, in a case involving Inland Steel, the board ruled that companies had to at least bargain on pensions. That was a critical breakthrough. The next year saw dozens of strikes against steelmakers. Trying to avert an economic collapse, President Truman formed a special panel that recommended pensions (but not inflationary wage hikes) for steelworkers. The steel industry rapidly capitulated.²⁶

Perhaps more relevant to the UAW’s impasse with Ford, the auto market was booming. Families migrating to the suburbs were buying their very first cars. Once chosen, their preferred brand could be hard to shake—or so argued Reuther, who had an instinct for the companies’ most tender spot. If Ford was struck, GM would be handed a golden opportunity to win the loyalty of first-time consumers. Record sales had weakened Ford’s appetite for a strike, and the Wagner Act weakened it further. Management now had to play by rules; the days when it could send in goons to crush a few skulls were over. Fortune predicted, “The industry probably cannot stand off for long the auto worker’s drive for security in the form of a pension scheme.”²⁷ Two months after Reuther’s appearance in Milwaukee, Ford agreed to provide the workers with a monthly pension of $100, less whatever a worker stood to receive from Social Security.

Reuther actually liked this convoluted structure, theorizing that it would give Ford an incentive “to go down to Washington and fight with us.”²⁸ (The higher the federal benefit, the less that Ford had to chip in.) The unions had been waiting, with growing impatience, for Congress to raise Social Security, and also to pass national health insurance, which Truman had proposed in 1947. For a brief interlude after the war, a federal pension was considered not just probable but “a political certainty.” Even Senator Robert A. Taft, a conservative who had famously opposed New Deal welfare programs, argued that the government had a duty to redress the disadvantage suffered by nonunion labor. “If a steelworker and a miner are to receive [a pension],” the senator reasoned, “why not a molder or a waiter?”²⁹

Though he bargained for private benefits, Reuther strongly preferred public ones. He had a European notion of labor and industry as economic partners (a notion wholly foreign to Sloan and Wilson at GM). Within the UAW, the benefits section was known as the “social security department,” signaling Reuther’s credo that, ultimately, welfare benefits were the responsibility of government. Corporate pensions were a stopgap.

Proof of Reuther’s socialistic attitude was his frequent demand for higher wages and benefits without any increase in car prices. The latter ran counter to his members’ economic interests (since higher prices would mean more dollars available for autoworkers). But Reuther fancifully included the general public, and especially the workingman, in the UAW’s constituency; he did not want the car-buying public to pay the price for union gains. He frequently argued that labor, management, and the public each had a worthy and defensible stake in corporate institutions— notably in GM—an argument that infuriated Wilson. For one thing, Reuther did not represent car buyers per se. For another, prices were none of the UAW’s business.

GM had been forced to put up with government quotas, price controls, and meddling by the Labor Board during the war and its aftermath; now the company was anxious to return to normalcy, which the executives defined as operating its business with a free hand. Sloan, who had retired from day-to-day management but was still presiding as chairman, feared that expanding the federal welfare state would further, and perhaps irretrievably, entangle his company in the maws of government.

Looking across the Atlantic, welfare states were already emerging in Europe. Between the end of the war and 1948, the British government took over the country’s coal mines, railroads, and gas and electric companies, all with rather little ado. The French leader General Charles de Gaulle nationalized Renault, France’s leading automaker. In speeches and interviews, Wilson, an engineer like Sloan but fifteen years younger and less parochial in his worldview, argued that American industry and labor should work through their issues rather than submit to takeovers by the state—what Wilson termed “the philosophy of class conflict from Europe.” The fear of creeping statism was very real. As Business Week warned, “British socialism seems a closer threat than Russian communism.”³⁰

Strangely, Big Business, which led the attack against expanded government benefits, seemed not to notice that it was the only alternative provider. As Harry Becker, who headed the UAW social security department, wrote, either Congress would deliver on social insurance or it would be “sought from employers across the collective bargaining table.”³¹ Business was determining who would carry the burden of benefits several generations hence—and it was choosing itself rather than Washington!

The UAW pressed the issue by dabbling with collective, union-run health plans and pensions. In an intriguing case, in the city of Toledo, Ohio, where auto-industry workers labored in hundreds of smaller shops, the UAW local proposed an area-wide “social security plan,” including a pension for every worker. It would be jointly administered—that is, all of the local businesses’ pension contributions would be pooled. At a stroke, this would resolve two major issues. Unlike in a single-company plan, workers could change jobs and keep their pension rights intact. And the risk of pension default was obviously much less when the assets were pooled.

Business liked it no better than it liked Social Security. Red-baiting was becoming a popular sport (Senator Joseph McCarthy was on the brink of celebrity) and any approach with a whiff of collectivism raised the fear of socialism. Toledo executives, led by the publisher of the Toledo Blade, mobilized to stop the pension pool with an all-out newspaper and radio campaign. As the historian Jennifer Klein has written, the attack became vitriolic, culminating in a front-page Blade editorial decrying the “blight” that the pension proposal “casts on this industrial community.”³² Not surprisingly, the plan withered.

However, to marginalize the Toledo plan, companies were forced to grant single-employer pensions, committing them to provide a “defined benefit” (that is, a stipulated monthly sum to retirees for the duration of their lives) regardless of the eventual obligation to the company. While Wilson was pondering this doleful precedent, Reuther played his final card.

Both GM and Chrysler had contracts expiring in 1950, but as it happened, Chrysler’s expired first. Intuitively sensing the potential to divide and conquer, Reuther demanded from the company not just a pension but a contractual promise to fund the pension. Chrysler insisted that the union could rely on its overall corporate good health (an assurance that would seem laughable a generation later). Reuther wisely refused to take Chrysler’s word for it, and the UAW struck. Chrysler still delegated labor relations to an outside law firm, as though negotiating with the UAW were just a detail.³³ Perhaps the company doubted that the UAW could enforce a strike over such a technical issue as actuarial soundness. “That was a new expression,” Douglas Fraser, a unionist who had joined the industry as a metal finisher in 1936, admitted.³⁴ The UAW hired actuaries to explain it to the rank and file. The workers stayed out for a hundred days, after which Chrysler surrendered. The crushing loss of business dashed all hopes that Chrysler might overtake Ford as the number two producer.

GM met with the union while Chrysler was suffering through its agony. Further lessening GM’s appetite for confrontation was the fact that it had earned record profits in 1949 and had just declared a stockholder dividend of $190 million—the largest payout ever by an American corporation. GM’s main problem was a lack of enough cars to meet the insatiable appetite for its product, a deficit GM was promising to remedy with “plenty of new cars.” It surely did not want a strike.

The UAW submitted a thirty-seven-page bargaining proposal, illustrated with a drawing of a well-groomed autoworker, in suspenders and necktie, who looked altogether respectable (not the sort who might walk off the job or seize your plant). The brief made a point of noting that its average worker had only seven years’ experience, and only a fifth were over fifty— so few would be drawing pensions anytime soon. As regards health security, the union trenchantly remarked, “Although we in America are foremost in our efforts to analyze and cure disease, we have lagged far behind in organizing ourselves to meet the economic and social costs of medical care.”³⁵

Left unstated was the fact that those young GM workers eventually would age. GM knew that, of course. But they would not age overnight. And Reuther put an enticing carrot on the table—a willingness to sign a five-year deal, thus a respite from labor strife until 1955. To Charlie Wilson, the GM executive, that was too much to resist. Talks proceeded swiftly. Two weeks after the end of the Chrysler strike, GM agreed to a landmark deal: a pension of $125 a month (minus the Social Security benefit) funded by the company, a wage hike with a cost-of-living formula, and hospital and medical insurance at half the cost.

Fortune billed it “The Treaty of Detroit.” The union had won the basic welfare protections (the pension was equivalent to $1,040 a month in today’s money) that Reuther had craved. What is notable is that American business was so starved for labor peace that it also greeted the “treaty” with enthusiasm. Fortune crowed, “It has been so long since any big U.S. manufacturer could plan with complete confidence in its labor relations that industry has almost forgotten what it felt like.” Sloan emphasized this aspect in his memoir, writing that the accord “represented an effort to introduce an element of reason, and of predictability” into GM’s labor relations.³⁶

But a few voices recognized the danger. Noting the long-term, nearly incalculable nature of pension obligations, the Nation checked its liberal instincts and wondered, “Who knows whether the steel, coal, or any other companies will be able for a long and uninterrupted period of years to continue to pay the agreed amounts into the funds now set up?”³⁷

Peter Drucker, a young management consultant, struck a similarly foreboding note in an article titled “The Mirage of Pensions.”³⁸ He doubted whether any company—even GM—could gauge the strength of its capital structure four decades hence. Drucker was more prescient about GM than were its own executives. The consultant also observed that new pension plans presented a particularly knotty financial problem. In theory, from the day an employee was vested, his employer would make annual contributions to finance his retirement. But a new plan typically endowed all the existing employees—for whom no money had been set aside—with full credit. Therefore, firms faced a catch-up obligation, particularly for employees who were nearing retirement. At Ford Motor, still a privately owned firm, the estimated liability was a staggering $200 million.

AFTER THE BREAKTHROUGH in automobiles, numerous other unions won pensions, many of which were similarly linked to Social Security. As Reuther had hoped, in the early 1950s Social Security was repeatedly raised. But with the federal benefit rising, the link became a chain that dragged the company pensions lower—something the unions hadn’t really intended. Thus the UAW demanded an end to the link. Reuther now felt free to seek higher company benefits in addition to whatever was awarded in Washington.

Reuther found clever ways to extract more in every round, both higher levels and new types of benefits. Companies watched their cash wages closely; they found it easier to say yes on items such as pensions, disability, and health care. The UAW exploited this by negotiating wages first; then, as Fraser recalled, “we fit in the programs, pensions, health care.” The seemingly routine process of “fitting in” higher benefits began to build daunting future obligations. But to the companies, pensions seemed painless. The near-term cash expense was small, the day of reckoning distant. The accounting was primitive; a pension sweetener didn’t necessarily “cost” the company in terms of reported profits.

Also, there were sizable tax advantages to the employee as well as to the employer. A worker was taxed on each dollar of wages; he wasn’t taxed on his pension until many years later, and if he instead received a dollar in the form of medical benefits, he wasn’t taxed at all. The system thus conspired to push both management and unions into the margins of the contract; the battle increasingly was over fringe benefits.

For Reuther, no form of security was truly a “fringe.” In 1955, he began to agitate for protection against layoffs, the bane of autoworkers since the Depression. The auto industry was still quite cyclical, and in each downturn thousands of workers were sent home. What Reuther wanted was a “guaranteed” wage (regardless of whether the employee was actually working). Ford Motor released a statement loaded with self-serving truth:

The only security—the only guarantee—worth anything to Ford employees is that their company will be healthy, competitive and progressive enough to be able to employ them at a high rate of wages and benefits. When any proposed security scheme impairs this healthy condition—no matter how attractive may seem the arguments in its favor—such scheme will impair the real security of the worker.³⁹

Reuther made it plain the union would strike, a point he was careful to repeat with regularity. During a negotiating session, Ford offered what it felt was a reasonable compromise. As Bugas, the Ford executive, read the details aloud, Reuther recognized it as similar to a GM proposal he had already rejected and blurted out, “How the hell do you get a Chevy on a Ford assembly line?” Then he led his team out of the room.⁴⁰

The automakers’ real problem, in the sense that it weakened their negotiating hand, was that they were rolling in money. In 1955, GM earned more than $1 billion—a first for an American corporation. Most of its profits were paid out in dividends; in the postwar era, companies felt a keener responsibility to provide stockholders with income. Dividend yields ranged in the high single digits, and increases in GM’s dividend were big news. The New York Times would report that the directors had gathered around the oval table in the boardroom, following a meal of “roast turkey and cranberry sauce with fresh peas and mashed turnips,” and hoisted the dividend like Santa delivering goodies to his children.⁴¹ To refuse a union demand, no matter how much it might have been in the corporate interest, ran a risk in the short run of a strike that would turn off the golden spigot to shareholders.

Bargaining in such a balmy climate, the UAW did even better in 1955 than it had in 1950. Pensions were boosted 50 percent. Including Social Security, workers could expect to retire on $175 a month—a heady 75 percent increase in five years.

Disabled workers got a double pension.⁴² Paid vacations were stretched to three weeks, plus seven holidays. And idled workers would now get a “supplemental” benefit in addition to state unemployment compensation. The “supplemental” stipend was small, but Reuther knew it was just an opener. After three subsequent contract rounds, laid-off workers would be guaranteed an astonishing 95 percent of regular pay for at least six months while they were on furlough.

Sloan was especially stung by the supplemental benefit. He wrote in his memoir that GM had disagreed with several aspects of the plan but, “Ultimately, the entire industry conceded the point,” as if even he were unsure how it had happened.⁴³ However, the UAW was already planning for an even costlier benefit—health care for retirees. Once the employers’ essential responsibility for social insurance was established, the Big Three found it impossible to resist—partly because there were only three manufacturers, or only three that counted. GM, Ford, and Chrysler routinely carved up 90 percent of the market, with GM alone claiming roughly half of that share. As oligopolists, they could build benefit costs into the price of cars and not suffer a competitive loss. GM knew when it announced a price hike that Ford and Chrysler would follow suit. For all their talk of open markets, Big Auto (like Big Steel) lived in a cloistered universe in which true competition was lacking. Therefore, almost any cost seemed tolerable. The automakers failed to grasp that pensions were different. Pensions created long-term obligations that could outlast even their prosperity.

By 1960, 40 percent of American workers (including most of those who belonged to unions) had won or been granted pensions.⁴⁴ Only a decade after the Treaty of Detroit, pensions had become an American institution, one that was radically reshaping people’s lives. Fewer men were working after sixty-five, and as the UAW social security department, which kept close track of national trends, reported to Reuther with some astonishment, “an increasing number of older men in good health are choosing to retire rather than go on working.” The trend was stark; in 1920 among U.S. males, six of ten senior citizens were in the labor force; in 1960, only three of ten.⁴⁵ Older Americans, their pensions safely in hand, were looking forward to a few years of fun, not just a rocking chair.

With its usual impeccable timing, the UAW set its sights on a new entitlement—early retirement with full pensions. This would liberate autoworkers from the factory while still in vigorous middle age, and serve the union’s purpose of moving workers through the system faster, so that more younger members could be recruited.

However, a hint of the danger embedded in its pension strategy unexpectedly emerged right under the UAW’s nose. The union had always had trouble getting the automakers to inject the cash to fund their pension plans. GM’s plan was frequently 30 percent or more below full funding; Chrysler’s occasionally dipped 50 percent under.⁴⁶ Such proportions reflected the amount that employees stood to lose if a plan was terminated—in a bankruptcy, for instance.² This was not a worry for the Big Three, but as the auto industry consolidated in the 1950s, the “independent” producers—Nash, Hudson, Studebaker, and Packard— increasingly struggled.

In 1954, Packard failed, and the employees lost a hefty chunk of their pensions. The remaining independents, American Motors (formed by a merger of Hudson and Nash) and Studebaker, were obliged to keep raising pension benefits, in line with the industry leaders. However, they did not have the cash to fully fund. As a UAW actuary, quoted in James Wooten’s chronicle of pension legislation, recounted, “we soon woke up to the sad fact that ‘fully funded pension plans’ are among the rarest animals.”⁴⁷

Pensions without funding were merely expressions of intent that, if things went well, the workers would get paid. Put differently, they were an attempt to fob off on a future generation the burden accrued by the present one. (In pension plans, this is an ever-present danger.) In truth, unfunded pensions did not provide security; as Drucker warned, they were more a “mirage” than real. But in 1959 Studebaker agreed, as it were, to burnish the mirage—to increase the pension, its third such hike in six years.

This was a reckless step, and the union was partially complicit. The UAW permitted companies that were behind in their contributions to amortize their catch-up payments over thirty years, much like a family with a mortgage. With each liberalization of benefits, payments were restructured over a new thirty years, as if a new mortgage had been issued. This deferred the ultimate due date, fostering an illusion of solvency. Putting off the pension funding date was a way of stretching the math, and enabled (or so it seemed) a firm to pay greater benefits.⁴⁸

In Studebaker’s case, both union and management found something to celebrate (at least in the short term). The union could revel in a pension increase while Studebaker could hang on to more of its scarce cash. In effect, they jointly signed on to the fiction that Studebaker could afford a pension plan that was clearly beyond its means. It was a cynical arrangement, one that illustrated the strong temptation to award gains in the present at the expense of a later generation.

Studebaker enjoyed a revival when it introduced the Lark, a boxy compact intended to compete with Volkswagen’s popular, hump-shaped Beetle. As if besotted with its momentary prosperity, Studebaker approved a fourth, if modest, pension increase in 1961. Then the Lark fizzled, and in 1963 Studebaker went belly up. Reuther implored the company to do what it could for pensioners. Studebaker’s reply signaled that there was nothing to be done.⁴⁹ Thousands of employees, including some who had worked forty years on the line, lost the bulk of their pensions. The failure was truly a watershed. The workers lost a devastating $15 million in benefits.⁵⁰

Even before the collapse, the UAW’s social security department was thinking about the need for federal insurance of pensions, much like deposit insurance in banks. The Studebaker bust put pension solvency on the front page. A pension committee formed by President Kennedy was tasked to explore reforms, and the UAW began a protracted push for legislation.

Reuther by now was a force in American politics, and in particular in the Democratic Party. The UAW was a formidable vote-getting machine, and Reuther had the ear of senators and presidents. He frequently testified on issues such as retirement, health care, jobs, and poverty. He also underwrote civil rights demonstrations, including the epochal March on Washington.³ Nor did he let up on socialized insurance. As he reminded a business audience, “The drive for collective bargaining programs did not mean a relaxation of Labor’s interest in governmental programs.”⁵¹ He was ahead of his time on a range of issues, such as the need for pension portability for workers who changed jobs, the lack of health care for the uninsured, and the already alarming increase in medical costs.

However, Reuther had less success in Washington than he did in Detroit. Although Medicare was introduced in the mid-1960s, America refused to adopt the velvety universal protections of European welfare states. Welfare gains came mostly at the bargaining table, which meant that unionized labor such as factory workers made out much better than those nonunion “molders and waiters.” And the future obligations of unionized industry—autos, steel, rubber, and so forth—grew apace.

IF THE UAW was energized by the Studebaker collapse, the automakers blithely ignored it. In the short run, the disappearance of a competitor merely strengthened their oligopoly. As one-car families became two-car families, assembly lines were humming. GM had an aura of invincibility: in the early 1960s its Chevrolet division alone sold more passenger cars than all of Ford.⁵² At the corporate level, its sales and also its profits ranked first among all U.S. companies for ten years running—an awesome streak.

With GM’s prosperity seemingly limitless, the expedient course in any one year was to give the union what, or nearly what, it wanted. Sloan, who published his memoir in 1963, the year he retired, claimed credit for preventing the union from seizing control of “basic management prerogatives” such as production schedules; he was silent on the costs of benefits, perhaps because they would become clear only over time. Looking back over his decades of bitter dispute with the UAW, Sloan concluded, “The issue of unionism at General Motors is long since settled,” with “workable relations” having been achieved.⁵³ This was a wishful appraisal.

Negotiations had become a ritual, almost Shakespearean struggle, certain to go down to the last moment when a strike would either begin or, mercifully, be avoided. The talks in 1961 took place in the massive GM headquarters, then located four miles from downtown Detroit, in a room with a long mahogany table, two dozen blue upholstered chairs, microphones, and golden drapes. A reporter described how “Mr. Reuther” would emerge from the endless sessions, smile at the waiting cameras, and, in response to shouted questions, combatively stake his ground before he and his “entourage” were whisked into a union-owned Oldsmobile.⁵⁴

Generally, contracts lasted three years, so the pressure on the companies was nearly relentless. In 1961, Reuther led 255,000 GM workers on strike and scored a deceptively costly settlement. Though wages rose by only 2½ percent, pensions were boosted by much more—12 percent—and Reuther also won full health insurance for employees and half the cost of hospital, medical, and surgical insurance for retirees. There were myriad small improvements in benefits, too.⁵⁵ From the standpoint of the corporate books, such promises were “free” (they did not appear on GM’s balance sheet). But in economic terms, they were practically suicidal.

The longer-term pattern was that pensions and other benefits were leaping well ahead of inflation, wages, or other costs. The growing complexity of the benefit structure fueled the union’s ability to navigate the system and, inevitably, to boost its take. Perusing the union archives, one has the feeling of wandering through the files of a vast institution of the state—a cabinet-level bureaucracy, maybe, or a government insurance agency. There is voluminous information on, and correspondence with, pension and health plans around the country, a veritable trove of data on the expanding social safety network.

As its expertise grew, the union began to sound faintly presumptuous, almost arrogant. A statement from the UAW to General Motors on proposed improvements to the benefit for laid-off workers, in preparation for the 1964 round, runs to fifteen pages. It asserts that the previous supplemental benefit “fell far short of meeting management’s full responsibility to laid-off workers.”⁵⁶ It is no longer a matter for GM to negotiate; it is GM’s responsibility.

But the union, of course, was entitled to craft its agenda. It was management’s job to hold the line. By granting ever richer benefits that would encumber GM into the hereafter, the executives were banking on GM’s continued strength into the distant twenty-first century. At the time, GM’s execs felt they had every reason for confidence. In 1963, the company’s profit margins were at a peak.⁵⁷ What’s more, it employed some 405,000 active workers, a solid base from which to support its pensioners, of whom there were just 31,000. Its contributions into the pension fund (plus the fund’s income) totaled $95 million, compared with only $25 million that it paid in benefits, so the plan was operating at a tidy surplus.⁵⁸ GM did not consider that it might repeat the experience of the railroads, which had become saddled with an aging workforce just as their growth waned. On reflection, it was the executives in Detroit who were truly presumptuous.

THE 1964 BARGAINING was the last to occur before, in the well-greased General Motors engine, one could detect the first faint sounds of a cough. GM continued to sell one out of every two cars in America, and the contract that emerged from the 1964 talks was a monument to its, and the overall industry’s, prosperity. GM had just reported the highest net income by any U.S. company ever, and the contract raised pensions by an astounding 50 percent. In 1950, the GM benefit had been equivalent to a $45 a month pension for a thirty-year veteran, or $125 a month including Social Security. In only fourteen years the pension had tripled; a single worker could now retire on $315 a month.

Retirees got a further and very significant boost from 50 percent to 100 percent of health care costs. In a pen stroke, the company thus committed to pay for procedures and drugs whose range would be limited in the future only by the (unforeseeable) powers of medical science. Even in that year, the list of covered treatments ran to nine pages, from X-ray and radiation therapy to in-hospital treatment for “nervous or mental conditions” to obstetric and pre- and postnatal care. With improved technology and society’s liberalizing view of health care, the cost of caring for an army of hundreds of thousands of people and their families was rising exponentially.⁵⁹ This posed a grave future risk, even if it barely dented the companies at the time.

WITH SUCH IMPRESSIVE GAINS, Reuther feared that the union was becoming vulnerable. If the automakers ran into hard times, UAW benefits would surely become a target. Thus, in the mid- and late 1960s, Reuther increasingly focused on how to make secure what the union had won. In 1966, he testified in favor of government pension insurance. Private pensions were now a leviathan industry with $85 billion in assets. (The UAW alone had a thousand different plans with employers in autos, aerospace, and related industries.) It was not hard to imagine that another Studebaker was out there somewhere. The next year, Reuther returned to Congress to speak on Social Security. Though the union was still pushing for a full federal pension, Reuther was more concerned with the system’s solvency. Sounding like a latter-day Republican, he warned that Social Security’s reserves, which were held in trust funds, would only be as sound “as the willingness of the American people to support them.”⁶⁰

He was back on the Hill again to recommend an experimental program of incentives (again, a pretty Republican idea) for hospitals “to encourage methods of holding down unit costs [and] ascertain optimal utilization patterns.”⁶¹ At first glance, this was strange: Reuther’s members had their health care paid for, no matter what the price or how frequent the service. But with costs rising so speedily, Reuther sensed that sooner or later the golden protections he had won might come under attack. A brief prepared by an aide, “Salient Facts Relative to Health Care in the U.S.,” laid out the galloping rate of health care inflation (double that of the economy at large). What was worse, 60 percent of Americans had no insurance for prescription drugs; 34 percent had none for hospitalization.⁶² Someone in the UAW underlined in magic marker the subheading “Failure of Private Health Insurance.” A full generation before Hillary Clinton, as First Lady, would attempt to pass a national health care bill, the UAW had glimpsed the essential inability of the private sector to deal with health care.

IN THE MID-1960S, as Reuther had feared, auto profits did slow down. In 1966 GM cut the dividend. By the following year, the stock was off by a third. The trouble first appeared in a mild, seemingly remediable form. GM was having to placate the government’s new safety director and address mechanical defects in its vehicles brought to the public’s attention by a pesky Harvard law school graduate, Ralph Nader.⁶³ (Nader’s 1965 best seller, Unsafe at Any Speed, specifically targeted the GM Corvair.) But GM’s troubles went deeper. In 1967, the Japanese Datsun made its debut in American showrooms; it was an instant hit. Late that year, an analysis in the New York Times of the problems facing James Roche, GM’s new chief executive, highlighted the efforts of a U.S. senator to break up the company as a would-be monopolist. Way down in the article, the Times mentioned a more ominous problem—“the rapid rise of foreign car sales in the home market.”⁶⁴ The problem, which “could not be ignored much longer,” according to the article, did not dissuade GM’s new management team from adhering to the usual pattern with labor. One month later, they agreed to yet another lofty raise in the pension (about 24 percent), plus an escalator with built-in raises in subsequent contract years.⁶⁵

Would it ever stop? By now, no one in the upper echelons of the auto companies had as long an institutional memory as Reuther. They scarcely realized how their companies had aged, but Reuther, marking the twentieth anniversary of the first automobile pension, compiled some figures that should have awakened the executives at long last. Since 1949, Ford had paid pensions to 49,000 employees, for a total of $387 million. And as those formerly young workers aged the expense was rising sharply. By the end of the 1960s the annual payout was $60 million, and in the future it would be much more.⁶⁶ An independent analysis of pensions in rubber, autos, and steel concluded that pensions had been rising at nearly triple the rate of wages.⁶⁷

And the pressure was on for more, as inflation was eroding the value of pension checks. Inflation terrified Reuther—it was a scourge that neither the companies nor the union could check, and it reaffirmed his view that only society at large, rather than collective bargaining, could provide his members with the ultimate security he hungered for. In the late ’60s, the political and the economic were frequently intertwined: union bosses commonly spoke out on the Vietnam War (which, in turn, spurred economic troubles) or on the nascent environmental movement. Such issues now aroused Reuther nearly as much as wages and production schedules.

In keeping with his broader agenda, Reuther was building a conference center for the UAW, on remote Black Lake in lower Michigan, where he envisioned that the union might explore such themes. This took him back to his days as a blue-collar traveler offering prescriptions for Soviet industry. At heart, he was a social engineer as much as a labor leader—a trait that inevitably irked the executives. Black Lake was his indulgence. Reuther frequently visited the construction site, and in May 1970 he set off in a small Lear airplane with his wife, his architect, and his nephew for a final inspection before the center opened. They were late taking off, and a light rain was falling. Just short of the airport, the plane crashed in the woods. Reuther and everyone else on board was killed. Thirty thousand autoworkers stayed home to mark Reuther’s funeral, and even the automakers paid tribute to their longtime foe, halting their assembly lines for a precious three minutes.⁶⁸

REUTHER’S SUCCESSORS were bent on showing that the UAW would improve on his gains, starting with the contract round that year. Their demands, which included larger pensions and full benefits for early retirees, genuinely alarmed the bosses at GM. One out of seven American car buyers was defecting to imports—whose labor costs were dramatically lower— and the combination of slowing sales and rising costs was putting a squeeze on GM’s profits. Perhaps GM felt it was necessary to take a strike to demonstrate that the game had changed. In any event, the union did strike. The company bore it for nine weeks—the most costly work stoppage in industry history.⁶⁹ Then it could bear no more. Acknowledging defeat, GM dropped its demand that workers pay a share of the future increase in medical costs—in fact, medical benefits were improved. What’s more, GM raised the pension more than 40 percent above the previous contract, to five times as high as in the famous 1950 treaty.⁷⁰ Reuther was dead, but the welfare state was alive and well. It would be the burden of American industry in the future—and of the auto industry in particular—to pay for it.