With all of this talk about recession and after watching too much History Channel, I’ve been reading up about the Great Depression of the 1930s. Check out this excerpt from a paper entitled Main Causes of the Great Depression:
One obvious solution to the problem of the vast majority of the population not having enough money to satisfy all their needs was to let those who wanted goods buy products on credit. The concept of buying now and paying later caught on quickly. By the end of the 1920′s 60% of cars and 80% of radios were bought on installment credit. Between 1925 and 1929 the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion. Installment credit allowed one to “telescope the future into the present”, as the President’s Committee on Social Trends noted.
This strategy created artificial demand for products which people could not ordinarily afford. It put off the day of reckoning, but it made the downfall worse when it came. By telescoping the future into the present, when “the future” arrived, there was little to buy that hadn’t already been bought. In addition, people could not longer use their regular wages to purchase whatever items they didn’t have yet, because so much of the wages went to paying back past purchases.
Sound familiar? Now add in a stock market slump:
This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the maldistribution of wealth, the economy of the 1920′s was one very much dependent upon confidence. The market crashes undermined this confidence. The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of losing their jobs, and not being able to pay the interest. As a result industrial production fell by more than 9% between the market crashes in October and December 1929. As a result jobs were lost, and soon people starting defaulting on their interest payment.
So let’s see. First, people were spending too much. Then, people suddenly became afraid of losing their jobs, so they stopped spending. This meant businesses stopped making money, so… people lost their jobs.
Eighty years later, here we are getting mailed “economic stimulus” checks. But if people are truly scared, why wouldn’t they just hoard it as well? I still don’t understand macroeconomics for the life of me.