Clearly it would be misleading to assign one sole cause (like the crash of '29) to the Great Depression. And while all the causes are valid, some are more interesting to examine than others because of the way they continue to shape our spending patterns
Relying on credit for purchases was a virtually new practice in the 1920s. Stretching out payment plans made the average American able to afford luxury items for the first time. However, buying an item on credit is not a payment as we all know--it is merely a promise to pay. Effectively then, every purchase on credit that we make carries a risk. What happens if we buy that expensive car, take out a student loan, etc., and then lose our job? Defaulting on a loan is equally bad for business as it is for the consumer.
SO....why did retailers do it? Why was the phenomenon of credit purchases so popular in the 1920s? Why do you think it is so prominent today, despite the fact that it proved to be a colossal mistake during the Depression?
During the 1920's the mindset of the average American was "I'm going to go out and get rich because I can". This was because banks were giving out loans so easily, even if the customer clearly could not meet the payments. The public were ignorant of the consequences and seemed to forget that they were going to have to pay back the bank at some stage. When they didn't, the banks suffered because they had given out a lot of their money. And since a bank's money is actually other people's money, they couldn't give out any more loans because they physically didn't have the money. This led to the banks collapsing and consumer expenditure as well.
ReplyDeleteThe credit card was such a prominent thing in the 1920s because everybody was doing it. And neighbors saw their neighbors doing it and then they wanted one to fit in. And banks would give out loans with out a care in the world. People would take out loans to buy all of the latest gadgets and the best cars. But when the bank asked for their money back, they didn't have it. The banks lost all of their money and this means all of the people lost their money.
ReplyDeleteBut it raises a good question about why people do it now. Our economy isn't really even that much better then it was at that time. It may be because people have a better sense of their money now and know that they can pay the money back. But people have to be sure that they won't lose their jobs or else they are back to square one.
If people really don't have the money to pay for something and loans do not exist, then nothing will ever be bought. Perhaps loans were used to stimulate the economy and to keep it flowing at the time. But, in the long term it actually was not beneficial to the economy at all because people got reckless with taking out loans. Now that loans have been introduced it is practically impossible to take them away to avoid future problems. With prices so high nowadays, it is impossible to sustain yourself without the help of banks even though that is what hurts our economy the most.
ReplyDeleteWell I believe that this was also new for retailers and banks. They didn't have a system thought out that would ensure money and ensure security. Not only did the citizens need to adapt by making sure they had the money to pay back, but the private sector needed to make sure that they were going to get their money. Loans and credit is a great system and on paper, it guarantees more money being spent, thus more potential for economic growth. In order for that to become completely true, a system and further knowledge of the system needed to be understood. There are of course still flaws in it today, but the fact that it has obviously gotten better and more organized from 1920, shows that the idea is successful and definitely has a spot in US economics.
ReplyDeleteI think the credit card was and still is extremely proper. Why not follow the "American Dream" and buy what ever you want? Everyone thinks about the short term pros, but not the long term cons. I think some people take advantages of credits cards, shoppaholics for example. Our bank system is more developed, but they are extremely harmful to our economy. But, there is really no alternative for banks.
ReplyDeleteWhen credit purchases arose in the 1920s, it was obviously taken advantage of. Like in 2012, when a new and improved idea or product is presented or advertised, a large rush of purchases or uses are made. The Progressive Era and all the other changes being made ultimately resulted in the Great Depression, with credit purchases being one of the main culprits. Loans were given in attempt to keep the economy alive, until eventually, the situation became increasingly unfortunate. I believe there was not enough understanding in economics and the knowledge needed to successfully sustain a nation in good condition. In today's time, (most) people are obviously more aware of budgets, debt, deadlines, etc.; The idea isn't brand new anymore. Not to mention, there is so much more money today than in 1920, that using a credit card is a necessity when you become an adult, regarding credit scores and such.
ReplyDeleteJust like the reading says, america's prosperity was undisputed which is under the promises of the continuous buying of manufactured product and persistent cash supply from the banks.Once people met a completely new way of spending, the using of credit card created a illusion that people could get money from the air and spend it in a lavish way and that is the end of the story, but the fact is that they were spending the money they have not made yet tomorrow on today,this excessive consumption is dangerous because no one would know what is gonna happen tomorrow. Unluckily,the growth of manufacture system of Europe and the fix of speculation killed the hope of america industry which lead to distort price level and unemployment, which is bad because people were not able to pay back their debt and since bank's money came from every one's pocket so the whole economy was crushed. Retailer accept the credit card payment because they are running the business anyway, they do not care about whoever either bank or consumer paid the bill at all, all they want is to get the money in the pocket.Still,the use of credit card is popular, i think the reason people like to slide their credit card instant of debit card is because they got a feeling that they are not spending their own money, and that just feels great.This is something that formed as a continues routine that is not going to stop. For instance,i feels a little bit hungry and want to eat a extra hot dog today, but the next hot dog i am taking belongs to tomorrow,do you think i care about that?not at all, because tomorrow i could take the hot dog from the day after tomorrow,as long as the routine goes well there would be no problem, but if some goes wrong by any chance, i am gonna be hungry for quiet a while.
ReplyDeleteI strongly agree with what Rob said. It was the mentality then and is the same now. But saying it was solely that mentality would be false, unless we fall into another great depression. In 1920's the confidence was out-weighing our judgement and preventing us from being able to foresee the inevitable future a skill that has been 'slightly' more honed in the past few decades. That will hopefully help to prevent that confidence from ruining the economy and perhaps even cause it to recover further.
ReplyDeleteOf course buying something on credit is not really buying it. The sellers had a great risk when they sold something on credit, because the client could suddenly not be capable anymore to pay the money they promised. But still the seller of the product could take an advantage of the credit buissnes because as the client payed the money back in parts he payed more money in the end than if he would have when buying it as once. Besides, getting money every month because someone owns it to you is like a stable salary-you don't get a huge amount of money you could loose at once.
ReplyDeleteAmerica seems to have developed this borrowing culture in the 1920's that we still have today. Back then, people were afforded this new technology that allowed them to buy things that hey normally could never afford. Credit may have pumped allot of dollars into the economy, but when people started not paying their debts, the credit that used to be a boost to the economy, now destroys it.
ReplyDeleteCredit purchasing gave people the ability to buy something that was previously lofty or unreasonable, with the allure of only paying 10% or a similar flat rate down on the purchase. I think that the introduction of widespread credit purchase phenomenon caused America to turn into the heavily consumer society that we now live in. With credit purchases, people are given a sense of being more wealthy than they really are, which allows them to buy more things than they can afford, which is now our version of "The American Dream."
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