Case Studies
Mortgage Rates
 Usury came to mean "excessive interest rates" and the idea of limiting interest rates to reasonable levels was adopted as government policy. For 100 years Maryland financial institutions had lived with state laws setting usury ceilings. But then, in the 1970s, inflation drove interest rates up. Maryland’s financial institutions were faced with paying out higher interest rates to depositors than they could earn by providing home mortgage loans. And the result was that the yield available to banks and thrift institutions, insurance companies who traditionally may have made mortgage loans or purchased mortgage loans became unattractive relative to other investment alternatives. While this helped the financial institutions, it devastated Maryland’s housing industry.
Pressures to change the law mounted in the Maryland Legislature. A bill to raise the usury ceiling passed easily. Interest rates on mortgages shot up to 12%...then gradually came in line with interest rates across the nation. The action by the Maryland legislature to raise usury ceilings ended the crisis. Interest rates did increase, but mortgage loans did become available.
General Motors
 The nation’s largest auto maker had a policy of getting the quickest possible return on any capital investment…money put into plants and equipment. As long as sales were strong and profit margins wide, GM could cover the inefficiency of old age in its assembly plants. Then, in the 1970s, several events cracked the comfortable cocoon of
General Motors. A series of oil shortages, new government regulations, and changing consumer preferences shook the foundations in Detroit. Every fourth car in the U.S. was now foreign made.
In 1980, General Motors, America’s symbol of blue-chip profitability reported an annual loss. It was the company’s first since 1921. The changing market meant changes in car making. Things like the energy crisis, the concern over the availability of oil, meant that their products were going to have to get hundreds of pounds lighter, engines were going to have to get a lot more efficient.
Their experience told them though, if they invested in new plants, its usable life was many years. And that meant they really had to think about this decade and beyond. In 1981, GM Chairman Roger Smith announced a ten year 80 billion dollar expansion program, which included the construction of new assembly plants. The Orion Plant, north of Detroit, represented the first wave in that strategy. GM spent 500 million dollars to build an assembly plant, making extensive use of computers and robot technology. As far as the auto industry goes, the rate of return on building the plant paid off because the time that it takes to build a car in the new plant is less than it took to build a similar car in an old multi-story plant..
| Comment & Analysis by Richard Gill Essentially what GM had to do in deciding whether or not to make this new investment was to compare the expected rate of return on the investment with the cost of the money needed to finance it…that is, the interest rate. Had interest rates been too high, GM’s Orion Plant would never have been built. |
The Big Apple
 In 1976, two young Steve Jobs and Steve Wozniak of Californian decided to take a gamble on computer chips. In four years they were multimillionaires.
In January, 1976, Jobs the promoter began pestering Wozniak the designer to build some printed circuit or PC boards so other hobbyists could build their own computers. They put in a thousand dollars total. The garage at Steve Jobs’ parents’ house was the place Wozniak tested the Apple I and started working on future models.
Marketing expert Mike Markkula was so impressed with the computer’s potential…he took some of the fortune he’d made while at INTEL and provided expansion capital in return for a partnership. At theWest Coast Computer Fair in the spring of 1977, Apple stole the show.
The design of the Apple II set it apart from its competitors. First, it was expandable. Second, the computer had more memory capacity, and, when Wozniak came up with a disc drive, it revolutionized the way that information was entered and stored. Apple developed a floppy disc that could work and that they could market before anybody else. By 1980, the Apple II dominated the personal computer market. The company had 1,000 employees working at plants from Ireland to Singapore. Annual sales hit 300 million dollars.
On December 12, Apple went public. The big winners, however, were Apple’s founding entrepreneurs, Steve Jobs and Steve Wozniak, who had in a relatively short time become multimillionaires.
| Comment & Analysis by Richard Gill According to the great economist Joseph Schumpeter, large profits in a capitalistic system derive from innovation and are fully justified by the benefits that innovation brings. They are the superabundant rewards given by the system to those who are clever enough, daring enough, enterprising enough to come up with something new. But the original entrepreneurs weren’t really risking big money and the huge profits these entrepreneurs made did not last that long since IBM and other makers quickly swooped down into the personal computer market. |
|
