Credit and Depression

The expansion of credit in the early part of the twentieth century caused a dramatic upswing in the amount of installment buying among people that could not necessarily afford to repay the debt. The increase in people incurring debt led to the Great Depression because people chose to incur debt rather than invest for their future. This caused a deficiency of money within the investment sector and a collapse of the economic system because of the debt heaviness of the American people. Ford Motor Company pioneered the installment plan of buying by offering cars on installment, allowing virtually everyone to own a car.

Prior to this, people paid their debts with cash or check, and credit was a rare commodity. Over time, companies aimed to get their products to the consumer, rather than to make sure the consumer could afford the product. The overall effect on the economy was it led to the collapse and the Great Depression. Credit was used to purchase consumer goods, that is, tangibles that could be seen and used immediately. These goods would also be used to enhance the prestige of an individual. The stock market was something intangible.

Most individuals could not see how the machinations of the market related to them on Main Street, as they felt their money did not make a difference in the way things were run. Additionally, large investors leveraged themselves against the market, hedging themselves and their fortunes on a turn of the market wheel. When they saw the market beginning to turn downward, they pulled their money and there was no leverage left in the economy, as the average citizen had tied their money into personal possessions. In other words, it was the rich that held the market up because they could afford to pay cash.
The credit boom ended up being a bust to the overall economy because it did little to allow the average person to invest in the markets. Works Cited Eichengreen, Barry and Kris Michener. “The Great Depression as a Credit Boom Gone Wrong. ” BIS Working Papers Sept, 2003 45-51. 05 Mar 2009 . Murphy, Sharon. “The Advertising of Installment Plans. ” Essays in History 371995 1-12. 5 Mar 2009 <http://www. etext. virginia. edu/journals/EH/EH37/Murphy. html>. Postrel, Virginia. “The Case for Debt. ” The Atlantic Online November 2008 1-4. 5 Mar 2009 <http://www. theatlantic. com/doc/print/200811/debt>.