The Tainted Origins of Germany's Largest Company


On this day in economic and business history...

There are only a few truly iconic cars in the auto industry's century-plus history, and only one model still regularly motors along the world's roads. It's the Volkswagen Beetle, and its lineage can be traced all the way back to May 28, 1937, the day Volkswagen was created in Nazi Germany. This company was initially known as "Gesellschaft zur Vorbereitung des Deutschen Volkswagens" (Society for Development of the German Volkswagen), but this was soon shortened to "Volkswagenwerk" when it was time to begin building Germany's "people's car," or volkswagen (the italicized spelling will be used here to signify the term for "people's car," rather than the company).

Adolf Hitler began pursuing his goal of a volkswagen shortly after coming to power in 1933. Inspired by the success of a rear-engined Porsche race car, Nazi strategists under Hitler's direction quickly recruited the legendary Ferdinand Porsche to submit his ideas. By early 1934 Hitler himself had seen this proposal, which called for, in essence, a fully functional full-size automobile that was comparable to other consumer cars of the day while costing about 1,550 Reichsmarks, then equivalent to roughly $210. Hitler then demanded a price below 1,000 Reichsmarks. After signing design contracts with Germany's Automobile Industry Association (the RDA) in mid-1934, Porsche and a team of designers and engineers would labor mightily for two years to meet this difficult requirement without sacrificing his original vehicular vision.

The prototypes all bore striking similarities to the production-model Beetle that became popular after the war. The final prototype models were ready in the fall of 1936 and went through intense stress testing for two months. Though the car wasn't perfect -- and no car with such ambitious goals could possibly be perfect -- its major faults were found and fixed, and the RDA had its report ready for Hitler's viewing by early 1937.

At this point, Hitler grew paranoid, as he often did. The leader of the RDA, Wilhelm von Opel, owned an eponymous automaker that had significant financial backing from Ford . This made Hitler fear that Opel might outsource or otherwise distribute the groundbreaking design to an American automaker. Henry Ford's well-known anti-Semitic attitudes and a glowing mention of Ford in Hitler's Mein Kampf were apparently not enough to quell this fear. At this point the volkswagen project was removed from RDA hands and given to the Nazi-controlled German labor front. This is how Volkswagen began: Financed with roughly 500,000 reichsmarks, the company was established in mid-1937 to accelerate production of the people's car.

When World War II broke out, Volkswagen's factories converted to manufacture war material, which continued until Germany's capitulation in 1945. It was not until the very end of 1945 that an occupied Germany began producing Volkswagen Beetles under British supervision. Volkswagen nearly didn't make it. By the late 1940s, the company was so moribund that Ford rejected the opportunity to take control of the Volkswagen plants, and the company survived only by supplying the British army.

The stocky but popular Beetle gradually captured the world's interest after the British re-established Volkswagen as a private company in 1948. This gave Volkswagen the resources needed to acquire Auto Union (now Audi) in 1965. In 1972, Volkswagen rolled a record-breaking 15 millionth Bug off its assembly line. This made the Beetle the best-selling automobile of all time, besting at last that other great vehicular icon, the Ford Model T. This legacy of postwar success has continued to the present day, and Volkswagen has now become the world's third-largest automaker by a narrow margin. Its tight relationship with Porsche also continues to this day, as Volkswagen gained full ownership of Porsche in 2012.

Echoes of 1929
How devastating was the Crash of 1929? For twodays in October, the Dow Jones Industrial Average suffered so violent a fall from so high a peak that it would not approach those heights in point terms for more than three decades (and in percentage terms it would take far longer). The first rival to the record point decline of October 28, 1929 came on May 28, 1962, when the Dow fell 5.7% while losing 34.95 points. This sharp drop still fell five points short of a new record despite starting from a level more than twice as high.

Nearly $20 billion in value was wiped out by the drop, which also saw the heaviest volume since 1933, causing ticker delays of more than an hour by the close of trading. Margin calls were blamed for the cascading sales despite a 70% margin requirement instituted in response to the chaos caused by the Crash of 1929, which saw some institutions offer margin rates as low as 10%. The economy couldn't be blamed in this instance: Good news prevailed in mid-1962, and the rather brief bear market that began during President John F. Kennedy's first year in office was nearing its end. In fact, Kennedy economic advisor Walter Heller noted that low inflation was dampening market returns, as the market had acted as an inflation hedge for much of the Eisenhower years.

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