High interest rates After the 1973 oil crisis and the 1979 energy crisis, the US economy was affected by stagflation. In an effort to fight excessive inflation, the Fed adopted a tight monetary policy, raising interest rates (as an illustration, the federal funds rate increased from 11% in 1979 to 20% by June 1981). This affected all players as it led to a plunge of stock market prices, on the one hand, and an economic recession, on the other. Furthermore, Massey was particularly hit hard: since it mainly financed its operations with short-term debt, its financing cost went up dramatically. Low demand The above-mentioned contractionary monetary policy pushed the American economy into recession. Massey's renewed drive into North America (by 1978, it had introduced a new range of large, high-horsepower tractors and an improved baler line) unfortunately coincided with the slow down in US demand. The company's efforts to penetrate the North American market thus remained unsuccessful.
Debt level and structure Massey's financing choices over the years brought with them many problems, which aggravated the already grim situation in the product markets. First, during its expansion in the 1970's, Massey levered itself immensely. Compared to its two main competitors, it systematically had the highest Total Debt/Capital ratio (in 1980: 80.85% compared to 53.56% for International Harvester and 40.28% for Deere & Company). While this might have been justified by the growth strategy, it turned out to be very damaging for the company in view of the current situation. What was more unusual was the fact that it used short-term debt to finance its business operations, fixed asset capital maintenance , and long-term principal and interest repayments. As a result, Massey was much more affected by the increase in interest rates...