The Chrysler Bailout of 1979: A Retrospective

On the verge of bankruptcy, Chrysler was in desperate need of a $1.5 billion loan from the federal government in 1979. The fear of millions of jobs being lost, along with resurgent German and Japanese auto industries, had many concerned that an already weak economy could be pushed into a depression. All these factors eventually led to the federal government bailing out Chrysler in 1979. In this article, we explore several factors that contributed to the company's decline and what was behind that government bailout.

What Led to Chrysler's Bailout?

There is no single factor that drove Chrysler to the brink of bankruptcy. However, when you combine all of the factors, it's clear how the company fell into such a desperate situation over time. The following are some of the key factors that led to the company's decline.

High Gas Prices

Chrysler was affected by two major spikes in oil and gas prices during the 1970s. The rise in energy prices was partly due to the Iranian Revolution and the resulting 1979 energy crisis, which caused a drop in the global supply of crude oil.

This created a chain reaction, leading many consumers to cut back on the purchase of big-ticket items like cars. Those who were in the market for new ones simply went to Chrysler's Japanese and German competitors, which offered more fuel-efficient cars that could accommodate their already tight budgets.

High Interest Rates

High energy prices helped contribute to high inflation, which forced the Federal Reserve to raise interest rates to fight spiraling costs. The more interest rates rose, the more the economy slowed, and the more expensive it became to obtain financing to purchase a new car. The high interest rates and a slow economy caused many consumers to simply put off their automobile purchases until later on.

Falling Automobile Sales

With high gas prices and high interest rates, the inevitable started happening at Chrysler: falling sales. While its competitors, Ford (F) and General Motors (GM), were affected as well, they were much larger and were better able to withstand a fall in sales compared to Chrysler.

Types of Vehicles Sold

In 1979, Chrysler specialized in making large cars, vans, and recreational vehicles. As oil and gas prices rose sharply, many consumers purchased the more fuel-efficient cars that were produced by their competitors.

A second problem that Chrysler experienced was that, unlike its competitors, Chrysler would produce automobiles on speculation versus building the cars as the orders were received by the dealers. Since Chrysler's dealers were having trouble selling the company's inefficient cars, this led to an inventory build-up on its lots.

Downgraded Debt

With the massive amounts of unsold cars and dropping sales, many credit-rating agencies downgraded the company's debt. To raise money, Chrysler either had to pay more interest on any debt to keep the company running or forgo raising additional funds in the markets. Chrysler chose not to raise funds in the public markets, meaning it had to make what little working capital on hand to work.

This caused the company to lose vast amounts of money, and within six months, the company went from $1.1 billion in working capital to just over $800 million. Analysts were worried that the company's working capital could drop to $600 million, violating its credit agreement with 180 banks, and putting the company in default.

Heavy International Competition

After World War II ended, American automakers were the premier car manufacturers in the world. However, in the late 1960s, Germany and Japan began aggressively marketing cars in the U.S. The cars they made were generally perceived to be of better quality and more fuel-efficient than American cars.

As the cost of oil and gasoline rose sharply, many consumers decided that they would rather own fuel-efficient cars rather than gas-guzzling American cars. Chrysler found its sales dropping as many buyers chose cars made by foreign competitors. This meant that Chrysler was left with unsold cars that consumers no longer wanted to buy.

Why Was Chrysler's Bailout Spared?

The bailout of Chrysler was an important milestone in U.S. history. It came at the height of the Cold War and the perceived economic decline of the U.S. was in full force. For many, the fall of an American icon would have led the country down a path of economic hardship that would be hard to break. However, there were many other reasons why Washington refused to allow this giant to disappear.

National Security Implications

In 1977, Chrysler was awarded the contract to build the M-1 Abrams tank. NATO was looking for a tank to replace its older models since the 1960s. The fear was that if Chrysler went under, the country's national security would be compromised by the loss of a manufacturer of tanks, trucks, and other vehicles. At the height of the Cold War, it was believed the country had to be ready for anything.

Saving Jobs

Had Chrysler been allowed to fail, there would have immediately been 360,000 jobs lost. According to the Congressional Budget Office in 1979, this would have caused a nationwide ripple effect and the loss of an additional 360,000 jobs as dealers and many communities that were dependent on the automaker were forced to make drastic cutbacks as a result of the bankruptcy.

The fear was that with the economy in a recession, the job losses would continue to mount. The bankruptcy of the company would also force $800 million in unfunded pension obligations for the automaker's employees onto the federal government.

Saving Suppliers

If Chrysler went under, many of its suppliers would have had a difficult time surviving as well. They could have continued to work with Ford and GM, but the effects of bankruptcy at Chrysler would have at least forced them to increase layoffs, which would have affected many communities across the country.

Improving American Automobiles

Throughout the 1960s, the quality of American cars had declined sharply. Many consumers felt that the Japanese and the Germans made better-quality cars. This was one reason why so many stopped buying American cars.

The potential bankruptcy of Chrysler was a wake-up call for the auto industry. It either had to start producing more reliable, better-quality cars or it would continue to face major declines in sales.

The Bottom Line

Different factors worked to put Chrysler on the verge of bankruptcy in 1979, forcing the company to lobby Congress and the White House for a $1.5 billion loan to stay in business and protect millions of jobs. While many wonder whether the bailout worked, the company managed to reverse course, developing cars that the public wanted to buy like the K-car, Avery, and minivan.

In 2008, Chrysler would receive billions in a new bailout from the U.S. government—this time because of the financial crisis that decimated automotive sales over the following few years. Chrysler filed for Chapter 11 bankruptcy in April 2009 before being acquired in total by Fiat in 2014.