As of late, Americans have come to understand the idea of “Recession.” We are living through one right now, and will be continuing to do so for a good amount of time. Being an American History major at UCLA has offered me insight into the causes and problems associated with the Great Depression of 1929. In my mind, Americans should get to know what caused the Great Depression, not because I think there is some connection between the current recession and the Great Depression, but because it will assuage their pessimism a little and prove to them that the worst cannot be that bad. If you don’t like to read, here is a brief explanation.
During the 1920s, consumer credit was very easily accessible. One could buy an automobile, washer, dryer and radio, all on credit, making small monthly payments until it was paid off. At the same time, material wealth was being associated with status. The house you lived in, the appliances you had and, (literally) the car you owned projected your status in society. The sheer variety of products accessible to the average American, regardless of where you lived, created a desire for variety in every aspect of life. Quality and quantity worked together. While this may be obvious to Americans today, it was a relatively new concept at the beginning of the 20th C and into the ensuing decades. This love for deferred payment spilled over into lending practices by brokerage houses in the stock market. Brokerage houses used a policy called Buying on Margin, whereby they would cover a certain percentage of an investment in stocks in order to allow people to spend more and invest more. The problem was that these houses covered 9$ of the cost for ever 1$ invested, or a rate of 90%. This kind of policy would have worked, had the stock market not crashed. Once the stock market crashed, the brokerage houses asked for their loans back, consumers defaulted on those loans, brokerage houses closed, people began to take their money out of their banks, banks closed and people jumped off their rooftops after they lost all their savings, money, houses, farms, radios, cars and all their credit bought wealth. People were afraid to reinvest into the credit market because of their fear that they would have to pay that money back. So, a combination of lost brokerage houses, lost banks, low consumer confidence and low consumer spending resulted in a depression.
But, why did a lot of the world go into a depression? President William Howard Taft instituted what is called “Dollar Diplomacy.” If America invested in the destroyed economies of post-WWI Europe, then those countries would repay the debt when they invested in their own economies. America also tried to alleviate the pains on the German economy by passing the Dawes Plan, which allowed for Germans to pay their 33 billion dollar war debt. Unfortunately, like allowing people to buy on Margin at 90%, loans to these countries only resulted in these countries paying down their post-war debt. With a large amount of American currency circulating, the value of the dollar went down as the countries defaulted on their loans. In Germany, the deutschmark experiences hyperinflation, and was rendered useless.
The access to credit, like what was available before the depression, created a new culture. Before the last decades of the 19th century, a credit market for consumer goods was nearly nonexistent. Up until the widespread access to credit, the country experienced a series of financial Panics and Depressions, almost every 10-20 years starting in 1797. These depressions were caused by a host of economic issues, including the failing of banks and the bursting of land, railroad and housing bubbles. Starting in the post-WWII era, short recessions hit the US almost every decade. While these were shocks to the economy, they were short lived and the US economy was able to recover. Could it be that the access to credit allowed for the extreme cycle of prosperity and depression to turn into a less volatile cycle of prosperity and recession?
But, I am not economist. And, I hope someone who knows a lot about this could clarify through comment or whatever.
No comments:
Post a Comment