What caused the Tucker automobile corporation to fail?

Abstract

The mystery surrounding the rise and fall of the Tucker automobile

company remains a fascinating piece of U.S. automotive history for both

historians and economists. Francis Ford Coppola’s 1988 movie

Tucker: The Man and His Dream brought to life the difficulties Preston

Tucker faced as he tried to start producing a car years ahead of its

time. The movie is captivating because it attributes the collapse of the

Tucker Corporation to public choice theory. Despite the movie’s

portrayal of an alliance between the automobile industry and the S.E.C.

to bring down the Tucker Company, historians have found no evidence of a

conspiracy. Rather, the collapse of the Tucker Corporation can be

attributed to two problems. First, lack of financial planning and

refusal to utilize conventional loans scared away venture capital.

Second, the S.E.C.’s determination that pre-selling car features

was illegal left the Tucker Corporation financially bankrupt.

JEL Codes: M13, Z11

Keywords: Economic history, Entrepreneurship, Business economics

I. Introduction

The rise and fall of the Tucker Corporation remains an enigma of

U.S. automotive history. The 1948 Tucker automobile was heralded as the

car of tomorrow, and by performance standards, the car was years ahead

of its time. Inspired by Indianapolis 500 racecars, the Tucker ’48

“Torpedo” had disc breaks, fuel injection, a rear engine, and

a top speed of 120 miles per hour. For safety, the car featured seat

belts, pop-out windshields, and a middle light that turned with the

steering wheel. Only 51 Tucker ’48 cars were produced before the

company failed. But, as a testament to the Tucker Corporation, today

forty-seven Tucker Torpedoes are still road-worthy; as museum pieces,

each is currently valued at more than $250,000 (Tucker Club). This

creates an intriguing question for private enterprise economists: If

innovation is the source of economic growth in free enterprise, why did

the Tucker Corporation, with a superior new design to the American

automobile, go bankrupt? The purpose of this educational note is to

answer this question by examining the historical evidence.

Francis Ford Coppola’s 1988 movie, Tucker: The Man and His

Dream [c] Lucasfilms Ltd., is based on the rise and fall of the Tucker

Corporation. The film is captivating because it attributes the collapse

of the Tucker Corporation to public choice theory. (1) The movie depicts

Preston Tucker as a dynamic inventor and an optimistic and charismatic

salesman. The film begins with Tucker’s vision to build a “car

of tomorrow.” After convincing several deal-making individuals to

join his effort, Tucker pre-advertises the car and sells dealerships to

raise money to build a prototype of the Tucker ’48. As work on the

prototype begins, the movie reveals Tucker’s naivete to the greater

political forces at work to prevent the Tucker ’48 from being

produced. Responsible for Tucker’s demise are a conglomerate of the

“big three” automobile manufacturers, which are threatened by

the car’s innovations, and corrupt politicians who are controlled

by the automobile industry.

The film’s antagonist, U.S. Senator Homer Ferguson of

Michigan, the head of the War Assets Administration, needed backing from

the automobile industry to be re-elected. So, it was in the

Senator’s own interest to oversee the demise of Tucker Corporation.

The film portrays an alliance between the powerful automotive industry,

the U.S. senate, and the Securities and Exchange Commission (SEC). In

1946 the commissioner of the SEC was Senator Ferguson’s friend,

Harry McDonald, also from Detroit, Michigan (Rehmke, 1988). The film

alleges political pressure from the automobile industry to investigate

Tucker’s business dealings. (2) The SEC investigation leads to a

criminal trial for Preston Tucker and the other Tucker Corporation

executives. In spite of being acquitted at the SEC trial, the Tucker

Corporation was financially bankrupt. Although the film depicts a

captivating hypothesis for the failure of the Tucker Corporation,

artistic liberties were taken to enhance the plot and condense six years

of problems into a 110 minute movie. To date, historians have found no

direct evidence that the automotive industry was involved in the demise

of the Tucker Corporation (Rehmke, 1988). Understanding that Tucker: The

Man and His Dream was a dramatization, I turn to the historical facts to

better understand the collapse of the Tucker Corporation.

II. History of the Tucker Corporation

Preston Tucker (1903-1956) was born September 21, 1903, in Capac,

Michigan. While growing up, Tucker spent his time after school in

garages during the formative years of the automobile industry. Upon

graduation, Tucker went to work for Studebaker as a sales person. By

1930 he had become a regional sales manager for the Pierce-Arrow

Corporation (Ford, 1995). At the Indianapolis 500 Preston met the

legendary engine designer Harry Miller, and in 1935 they formed the

Miller-Tucker Corporation. The company built high-performance engines

for the Ford Racing Team at Indianapolis. In 1943 Miller died, and the

Miller-Tucker Corporation could not meet the engine performance needed

to win at Indianapolis, so Henry Ford cancelled the contract, and the

company folded (Tucker Club).

At the onset of World War II, Tucker moved to California and

started a company to design and build a “combat car” for the

army. The car was an armored narrow-wheelbase vehicle with a machine gun

turret on top. Ironically, with a top speed of more than 115 mph, the

army rejected the car because it was deemed “too fast” for

combat (Tucker Club). But the U.S. Navy ordered the car’s gun

turret for use in P.T. boats as well as B-17 and B-29 bombers. As the

war came to a close, orders for the gun turret stopped, and Tucker

started working on new car designs.

During World War II Detroit’s automobile factories were

converted into military equipment production facilities. While the war

raged in Europe and the Pacific, Preston Tucker had ambitions to build

the “Car of Tomorrow” in both performance and safety.

In 1945 World War II ended, and Tucker began the Tucker Automotive

Corporation in his barn with only a few thousand dollars. But the U.S.

military had large factories to build planes, tanks, and ships that were

no longer needed. The War Assets Administration (WAA) was set up to

oversee the liquidation of these military installations, including an

old Dodge plant in Cicero, IL. Tucker won the lease as the only bidder

on the plant. By signing the lease in July of 1946, Tucker was allowed

to move into the Dodge plant and agreed to pay $1 million by October 1,

1946, for two years rent and $2.4 million a year thereafter. After

failing to make the rent payment, the WAA agreed to extend his rent

payment date to March 1, 1947. When Tucker again failed to make a

payment, the WAA gave Tucker an ultimatum date of July 1, 1947. Also,

they insisted that the Tucker Corporation must have $15 million in an

escrow account in order to renew the lease (Time 1947).

To raise the money for the lease, Tucker initially decided to get a

bank loan, but for $15 million, banks required control of the Tucker

Corporation. So, Tucker decided instead to sell car dealerships to raise

the money. With no working prototype, the Securities and Exchange

Commission (SEC) started investigating the sale of Tucker dealerships or

franchises. Tucker argued that although his business needed permission

from the SEC to sell stock or securities, a business does not need

permission to sell dealerships or franchises. The SEC disagreed and

required the Tucker Corporation to amend all dealer contracts to state

that there was a significant risk of bankruptcy. With this amendment in

place, the Tucker Corporation was only able to sell $6 million worth of

dealerships, rather than the goal of $15 million (Ford, 1995).

After signing the lease on the Dodge plant, Tucker faced a second

major hurdle in November 1946 when the National Housing Agency (NHA)

ordered the WAA to terminate Tucker’s lease. The lease for the

factory was to be given to the Lustron Corporation to start building

prefabricated housing (Rehmke, 1988). The NHA based this decision on the

perception that houses were more important than cars in the post-war

economy. So from November 1946 until February 1947, the WAA (headed by

Senator Homer Ferguson from Detroit Michigan) tried to break

Tucker’s lease. Tucker spent these four months fighting this breach

of contract in court. In February 1947 the federal court sided with

Tucker. The Tucker Corporation was allowed to keep the plant and the

verdict extended the deadline for the first lease payment to July 1,

1947.

Facing a lease requirement of $15 million due July 1, Tucker still

was short $9 million. To raise the money, Tucker decided to sell stock.

He proposed to SEC an initial public stock offering of $20 million. The

SEC agreed to the stock sale conditional on Tucker first building a

working prototype. On June 19, 1947, the prototype nicknamed the

“Tin Goose” was finished. The public presentation of the Tin

Goose created excitement in automotive world, and SEC cleared the way

for a July 15th initial public offering of Tucker Corporation stock

(Ford, 1995).

In the fall of 1947 things appeared to be going better for the

Tucker Corporation. The company had built the ’48 prototype and was

converting the former Dodge plant for its first production run. But by

the spring of 1948, problems were again mounting. The initial public

offering of the stock had only raised $15 million, rather than the

expected $20 million. Production had not yet started even though the

company had hired 1,600 new employees. The Tucker Corporation company

had no source of revenue and needed money for steel and car parts. The

company also needed $2.4 million for its 1948 lease payment. So Tucker

decided to set up a pre-purchase plan for the Tucker ’48. According

to the plan, customers would pre-pay for their car’s accessories.

Upon payment customers could pre-order the features they wanted,

including a radio, seat covers, and car color before each Tucker

’48 was assembled. In early 1948 the Tucker Corporation raised $2

million by pre-selling accessories (Ford, 1995).

On May 28, 1948, an SEC investigation determined that pre-selling

accessories was not only illegal, but also fraudulent. The SEC ordered

production of cars stopped and the factory shut down for its ongoing

investigation. On June 15, 1948, Preston Tucker responded to the

allegations against him in an open letter published in newspapers across

the United States (Tucker, 1948). But in January 1949 the plant was

closed, and the Tucker Corporation was bankrupt. October 5, 1949, the

SEC brought Preston Tucker and his board of directors to trial on

charges of fraud (Ford, 1995). On January 22, 1950, a grand jury found

the defendants not guilty. But the Tucker Corporation was liquidated,

the WAA confiscated the factory for failure to make the lease payment,

and all of the assets of the Tucker Corporation, including the fifty-one

cars, were sold for 18 cents on the dollar. The WAA then leased the

building to the Lustron Corporation for pre-fabricated housing.

After being acquitted, Preston Tucker decided to try building cars

again. In 1951 he moved to Brazil and started a new car company. He

designed the “Carioca” sports car, but unfortunately, Preston

Tucker was diagnosed with lung cancer before production could begin. He

continued working on the “Carioca” until his death December

26, 1956 (Ford, 1995).

III. Conclusion

Despite the portrayal of an alliance between the automotive

industry and the SEC to bring down the Tucker Corporation in the 1988

movie Tucker: The Man and His Dream, historians have found no evidence

of a conspiracy. Rather, historical evidence suggests that the demise of

the Tucker Corporation was the result of two problems. First, the

company’s lack of financial planning led to continual crises.

Tucker’s refusal to utilize conventional bank loans combined with

the company’s attempt to sell dealerships and stock before building

a car prototype scared away normal venture capital. Second, unable to

sell additional stock or dealerships, the Tucker Corporation needed

money to start producing cars. With no inventory to sell and the

SEC’s determination that pre-selling car features was illegal, the

Tucker Corporation was financially bankrupt.

References

Economicthinking. 2008. Gregory Rehmke.

http://ift.tt/16MNLxM

(accessed July 1, 2008).

The Henry Ford Organization. 2008.

http://ift.tt/1D9XjBv. (accessed July

1, 2008).

The Tucker Automobile Club of America. 2008.

http://ift.tt/1CtePxI (accessed July 1, 2008). Time. 1947.

“Tucker Torpedoed?” June 23.

http://ift.tt/1D9Xhtk

Tucker, Preston. 1948. “An Open Letter to the Automobile

Industry in the Interests of the American Motorist by Preston Tucker

President, Tucker Corporation” The Henry Ford Organization. June

15, http://ift.tt/1CteQS8 (accessed

July 1, 2008).

George Langelett

South Dakota State University

(1) Public choice theory is the idea that the government is an

organization. Like all organizations, the government has its own agenda

and acts on behalf of its own self-interest.

(2) Economists call this the capture theory of regulation. Even a

well meaning regulatory agency over time becomes “captured” by

the industry it was created to regulate.

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