Wednesday, December 4, 2013

Spending and Rolling the Dice

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?

7 comments:

  1. 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.

    ReplyDelete
  2. In the 1920's the term credit was new to everyone, no one really knew how it worked or how much of an effect it would have on the economy. Everyone believed that this was an awesome new tool to pay even though it eventually become one of the main causes of the Great Depression. I believe retailers gave the opportunity for credit was to help people create new options in the world like entrepuenerships and starting businesses. The phenomenon of credit purchases were so popular because it was a new way to pay people when you did not have the money right in hand. Credit is so prominent today because now there is a better system with it. During the 1920's there were never background checks of what your job is and how much money you make which was one of the main issues with credit, although know credit card companies make sure you do not have a bad credit history so you are able to take out loans because they know they will be paid back. This is an overall better way to use credit because it gives banks an opportunity to say no to people who can not afford to pay the banks back.

    ReplyDelete
  3. Credit purchase was prominent both in the 1920's and today, but they are different. The phenomenon of credit purchase was very popular in the 1920's because it was like a fashion that everybody follows, that's why the retailers did it because it matched most people's flavor. But the situation in the 1920's was different from today, I believe it poisoned people to think that they can borrow as much as they could from the banks without considering the result even they didn't have enough money, that's the main reason that led to the Great Depression. People said that they had credit but they just keep doing it until it collapsed, which showed that the credit system was not even complete during the 1920's. By contrast, the credit system today is much better, when people borrow money that know what they should do to return these money back. Base on these two situation, the phenomenon of credit purchase in the 1920's was more like a fashion led by mistakes and it was different from today, although both of them are popular.

    ReplyDelete
  4. I think that retailers used credit in order to allow people to buy merchandise they would not have otherwise purchased. Even though there was a risk that people were purchasing things they could not afford, the retailers thought their reward would be greater and that they would eventually be paid off. In the 1920s, credit purchases were so popular because it allowed people to buy things the moment they wanted them; there was no lapse in time. Additionally, banks were giving out loans freely. Like we discussed in class, banks did not give a thorough background check to those seeking a loan. I believe that credits are so prominent today because people tend to spend and live a life that they can not necessarily afford. People today want instant gratification and by taking a loan out of by using credit, people are allowed to have materialistic things when they want it.

    ReplyDelete
  5. After I read this reading, I thought that since the banks were giving such big loans to anyone people could easily take advantage of the banks. Loans were also relatively brand new at the time so mistakes were bound to happen. Retailers thought there reward of money would be greater and that it would eventually pay off all depth in loans. Banks gave money freely with no background check. Even homeless people could borrow money and some even fled the country so they would not have to pay it back. Our credit system today is a lot better. In order to have a credit card you need to have a steady work income and a clear background. Credit Card companies and banks don't wan't to loose money or deal with fraud and stealing. The credit card system today is a faster, safer way to replace cash.

    ReplyDelete
  6. Retailers did it because of the high risk - high reward factor. Now, I am sure they didn't think it would be a risk when they first started, and they thought people would pay back their loans. But the reward aspect is if your selling to more people, and they pay back their loan, your making more money, even if the money comes in a little later because more people were getting loads. Credit purchases were popular because of the lavish lifestyle and mood of the 20's. Women were gaining more rights, and more events made people feel as if the times were changing. Credit made people think they could buy more things, and they probably didn't know the consequences if you didn't pay back the loan because it was a new invention. It is very prominent today because it helps companies go, if they do well and investors do well, more people will invest, which helps the company make more money, and become more valuable. And although it failed in the 20's, there is still a benefit in credit purchases, if done appropriately.

    ReplyDelete
  7. The idea of credit became such a phenomenon in the 1920's because it allowed people to buy things they normally couldn't afford. This is even true today with people and companies often going bankrupt because they cant pay the bills afterwards. Yes it poses a risk but it also allows for our economy and all other aspects of life to progress. For example, my father does real estate so that when he takes out loans for certain projects he assumes the risk of failing. If you put it in the words of "he is spending money he doesn't have" that is true but it's with the intention of gaining more money in the end for both him and the bank. His abilities to take out loans are also a result of his credit score with is a good way for banks to see his "track record". If credit scores were used in the early 19th century as well as more regulation on who the banks could loan to, there might never have been the crash of '29

    ReplyDelete