Credit in the 1920s

Naomi Zimmermann

Credit in the 1920s

The 1920s were a time of apparent optimism and the fruition of the American dream because of the growth of the consumer. People started to consume more and own more items than in previous generations and decades. There were several reasons for this, including urbanization, factories, and the unskilled worker, but it was also due to the use of credit. Credit was borrowing money, so Americans would buy lots more items and then just pay for them later. This fueled consumerism and created a larger US economy in the 1920s. It was on such a large scale that by this time, 75% of household goods were bought on credit. As Awesome Stories states, 99% of stock purchases were made with borrowed money, and This an investor only had to actually pay for 10% of the price of the stock before borrowing the other 90%, usually from banks, and purchasing stock.

The growing use of credit was ultimately one of the main causes for the Great Depression. When the stock market crashed in 1929, plunging the entire nation into the depression(the farmers had been experiencing it for years following the end of The Great War), it was largely because there was too much credit owned by people investing in stock. The credit was owned by banks and corporations as well as people. People, banks, and companies would buy stock in margins, or only a fraction of the price, using credit. Companies that had stock that was being invested in would see only a fraction of the money they should have been making flowing in because people didn’t have the money to back up their credit debt. As more people bought with credit, the demand for stocks kept going up. This system would have worked if the prices of the stock kept going up(which happens when the demands are higher). But, on the eve of the Stock Market crash, everyone realized that there had been over speculation and that investors didn’t have the money that they had borrowed, and people started selling the stock. This drove down the demand for stock, and therefore its price plummeted.

Another key issue with the credit system was that the credit wasn’t relative to the stock’s price shrinking or growing. So, if the price of stock goes down, an investor that had bought the stock on margin would still owe the banks(or wherever they had borrowed money from) the same amount. This created an issue when stock prices dropped, because almost all investors(people, banks, corporations) hadn’t paid off their credit and so they owed more money than they were going to make from the stock (because it wasn’t worth as much anymore). This led to people losing money and only catalyzed the cycle of everyone selling and not buying stock, driving the prices of stock down and bringing the economy deeper into the depression.

Links:

https://www.awesomestories.com/asset/view/Stock-Market-Crash-of-1929-Buying-on-Margin