Accounting Principles, 11th Edition

Feature Story

And Then There Were Two

Debt can help a company acquire the things it needs to grow, but it is often the very thing that kills a company. A brief history of Maxwell Car Company illustrates the role of debt in the U.S. auto industry. In 1920, Maxwell Car Company was on the brink of financial ruin. Because it was unable to pay its bills, its creditors stepped in and took over. They hired a former General Motors (GM) executive named Walter Chrysler to reorganize the company. By 1925, he had taken over the company and renamed it Chrysler. By 1933, Chrysler was booming, with sales surpassing even those of Ford.

But the next few decades saw Chrysler make a series of blunders. By 1980, with its creditors pounding at the gates, Chrysler was again on the brink of financial ruin.

At that point, Chrysler brought in a former Ford executive named Lee Iacocca to save the company. Iacocca argued that the United States could not afford to let Chrysler fail because of the loss of jobs. He convinced the federal government to grant loan guarantees—promises that if Chrysler failed to pay its creditors, the government would pay them. Iacocca then streamlined operations and brought out some profitable products. Chrysler repaid all of its government-guaranteed loans by 1983, seven years ...