Issue: 27
Sent: 13-02-2006 03:20:11
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The Great Depression Part 2 - Lester Wills
Previously I discussed the large and growing inequality of wealth distribution in the US in the lead up to the Great Depression. This time I will look at the growth in personal debt.
In the 1920's there was unfortunately an oversupply of goods. It was not that the surplus products were not wanted, but rather that many could not afford to meet their demands. The wealthy on the other hand got what they wanted by expending only a small portion of their income.
Approximately three quarters of the US population would spend their annual income to purchase consumer goods such as clothes, cars and radios and of course food. The wealthy also purchased consumer goods. Whilst they purchased more expensive items and often more of them, they did not make up for the massive imbalance in wealth distribution with their purchasing habits.
After all, there are only so many cars a person can buy! During this period of imbalance, the US came to rely on two things, credit sales from the general population, and luxury spending and investment from the rich.
The obvious solution to the problem of people wanting to buy goods when they do not have the money is to allow purchases on credit. Credit cards as we know them did not exist but there were other methods of achieving the same end. The concept of buying now and paying later caught on rapidly with the result that the vast majority of the population, took to debt financing.
Consequently, by the end of the 1920's 60% of cars and 80's of radios were purchased on credit. Between 1925 and 1929 the total amount of outstanding credit grew by almost 120%. This strategy created an artificial demand for products that people could not afford.
The President's Committee on Social Trends noted that this approach "telescoped the future into the present", unfortunately, when the future arrived there was little to buy that hadn't already been bought. In addition, if people had not already bought it, they had no money left to buy it, as they were busy trying to keep up their repayments on the things they had already bought.
The US was also reliant upon luxury spending and investment from the rich. However, luxury spending and investment was dependent on the wealthy maintaining its confidence in the US economy. Such a situation does not present a problem, providing confidence is maintained.
One of the last pieces of the jigsaw was the search for higher and higher investment returns, which lead to wide spread stock market speculation, but more about that in Part 3.
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