Paper Losses, Real Losses


Durant expanded not only horizontally but vertically, buying suppliers of glass, paint, sheet metal, spark plugs, lamps, and numerous other parts that go into making an automobile. Unfortunately he was much better at selling than at buying. Many of these purchases proved ill advised or overpriced, and some were total losses, eating up the company’s working capital. In 1910 General Motors, now vastly rich in assets, had to be rescued from a cash crunch by a syndicate of bankers. Durant lost control to a voting trust for five years, the life of the loan.

The bankers were as unimaginative and conservative as Durant was imaginative and reckless. Nonetheless they much strengthened the company financially by rationalizing its structure and unloading or writing off Durant’s major mistakes.

In his exile Durant was hardly idle. He founded another automobile company, Chevrolet, and turned it into a huge success with the Model 490. It cost a little more than the already legendary Model T but offered refinements and comforts that the Model T did not. It was the first instance of the mass-class concept that General Motors would use in the 1920s to claw its way past Ford and become the largest automobile manufacturer in the world.

That year, 1915, was also the year that the voting trust was due to expire, and Durant was working hard to regain control of General Motors, buying GM on the open market and collecting proxies from his many friends. He also induced the du Ponts, wallowing in cash thanks to World War I, to invest. By September Durant was back in power at GM, naming six directors, while the bankers named six and his ally Pierre S. du Pont named three.

The next year Durant took complete control when his cash-rich Chevrolet Motor Company was able to buy a majority of GM stock. In the next few years General Motors grew exponentially, and Durant’s fortune grew with it. In 1919 GM had more than half a billion in sales and sixty million dollars in profits, while its work force, expanding explosively to eighty-six thousand, turned out 397,000 cars and trucks. It seemed that the sky was the limit. It wasn’t.

The irony is that had Durant done nothing at all to support the price of GM, he would have triumphed.

In 1920 a short but vicious depression swept the economy. GM common split ten-for-one in early 1920 and stood at $42 at the end of March but began to decline steadily as the auto stocks led the market downward. Durant could have simply waited for the storm to blow over. Instead, responding to some deep psychological need, he obdurately and almost single-handedly tried to support the price. As Alfred P. Sloan put it, “He had about as much chance for success as if he had tried to stand at the top of Niagara Falls and stop it with his hat.”

It was then possible to buy stock by paying only 10 percent of the cost in cash. The broker would lend the rest, holding the securities as collateral. This could be very profitable if the stock went up. But if it went down, the broker would call for more and more collateral and would sell out the stockholder if he didn’t deliver it promptly. By the end of October GM was at $17. By November 10 it was at $14, one-third of its price in April, and his brokers would cut Durant no more slack.

Durant, no whiner, kept his troubles to himself as he maneuvered desperately to stay afloat. But Wall Street has the world’s most efficient rumor mills, and GM’s other major investors, the du Ponts and the Morgan Partners, pressed Durant to tell them where he stood. Finally, on November 10, he did so, and they were appalled. He had a margin call, due the next morning at the opening market, for $150,000, and he managed, just, to meet it. But the price declined to 13½ that day and triggered an avalanche of margin calls that he couldn’t meet.

Morgan and the du Ponts knew that if all of Durant’s GM stock was dumped on the market, the results would be disastrous for their own holdings and perhaps for the company as a whole. They had to help extricate Durant. They managed to prevent what would surely have been a major panic, but Durant lost nearly all his three million shares of GM stock as a result.

The irony, of course, is that had Durant only done nothing to support the price of GM, the paper losses would have been made up quickly in the boom of the 1920s. By 1926 GM stock was selling at $210, and Durant would have had, next to Henry Ford, the greatest fortune ever to come from an automobile. As it is, he has only the honor of being, again except for Henry Ford, the most important figure in American automotive history.