JACKSON 1

Michael W. Jackson

A02-92-6779

Warren 11A

10 March 2000

Credit Reliance:
The Move towards a New Depression

The economic boom of the late 90's has allowed Americans to gain a sense

of economic security lost in the recession of the late 80's. The current economic

conditions are however not conducive to continued prosperity. The factors, which

are of great concern, share many similarities to the causes of the Great Depression.

These conditions are the division between the wealthy and the poor, the great

amount of speculation in the stock market, and the reliance on credit. These

factors have positioned the American economy for a collapse comparable to that of

the Great Depression, and if these conditions persist unabated the economic

prosperity of today will be gone tomorrow.

The unequal distribution of wealth is a factor that was highly influential in the

Great Depression. In 1929 the top 0.1% of Americans had a combined income

equal to the bottom 42% (Gusmorino 1). This great disparity in the income between

classes lead to the creation of social unrest within the nation. The division of wealth

as well created a surplus of consumer goods, as the wealthy were able to purchase

their goods for a small portion of their income whereas the poor and middle class

spent all of their income on consumer goods such as food, clothes, radios, and

cars. The poor and middle class had an approximate income of $2,500 a year

where as a wealthy family had an income of $100,000. "The wealthy family could
 JACKSON 2

not be expected to eat 40 times more than a family that earned $2,500 a year, or

buy 40 cars, 40 radios, or 40 houses" (Gusmorino 2). The solution to this crisis in

the economy was credit sales, luxury spending and investment by the rich. In the

time period between the Great Depression and today the disparity between the

wealthy and the poor decreased dramatically as the depression wiped many middle

and upper-middle class people out. The reinvestment in the nation and World War

II broke the cycle of debt and the nation began to broaden the gap in distribution of

wealth. The economy today is at a considerable parallel to the economy of the

1920's. The top 1% of this nation now owns more wealth than the bottom 95%

(Calder 35). This return to income disparity has Americans angry, as it is the

average citizens feeling that the rich are getting richer and the middle class is

disappearing. The wealthy families' income per year is now at about $250,000 and

the minimum income for a family is now about $18,000 (Albion 1). The wealthy

today similarly cannot be expected to eat 13 times the food, have 13 cars, 13

televisions, or 13 houses. The new unequal distribution of wealth in today's society

is remedied in the same manner as in the 1920's with a turn to the investment of the

wealthy in stock and the reliance of the average consumer on credit.

A significant factor to balance the economy in a period of wealth imbalance

as seen in the 1920's and the 1990's is the investment by the wealthy in the stock

market. The market in the 1920's was ruled considerably by the top 1% of America.

This was the class that possessed significant expendable income to invest. The

market however while in the hands of few was open to great swings and shifts in

sentiment by the minimal number of investors. The market of the 1920's was able
 JACKSON 3

to remain at high levels due to considerable speculation on stock which lead to

inflated prices and the markets collapse in 1929. Speculation is the process by

which a person would invest in the stock market with a small amount of actual

assets but a considerably high amount of credit. This was done with

accompaniment of the idea that the stock would gain points to cover this lending of

credit. This system of investment worked well in a period of economic security,

however when the market became unfavorable the high amounts of credit invested

were not able to be recovered and the market lost its foundation. The stock market,

after the fall of 1929, took a considerable amount of time to mount a rally and return

from the crash. The market has progressed slowly as investment returned and the

new influx of investors has spurred a return to over extension with inventions such

as day trading. The market today is controlled by the big investor as well as the

small investor but continuing trends in the first quarter of 2000 have shown the

effect of large investors on the market today. An alarming realization, however, is

that the amount of margin that investors are using in their portfolios has increased

dramatically in recent years. The rise in margin use by investors is akin to the

speculation on the market in 1929. The difference between margin and

speculation is that with margin it is based on your account value where as

speculation was not based on any set limit. The stock market as well has played a

crucial role in economic prosperity and it is this factor which is of greatest concern

in reference to the susceptibility of the US economy to collapse. The market has

now seen the Dow fall from its highs above 11,000 to a current position below

10,000 in about a two-week period (as of 3/3/00). This may just be a minor market
 JACKSON 4

correction, however, it could also be a sign of economic slow down as the large

investor moves from heavy investing to a state of asset preservation. If the market

slows the imbalances of disproportionate wealth cannot remain in hibernation and

the economy may fall.

The final sector of considerable importance in relation to economic prosperity

or the lack thereof is the consumer credit industry in America. In the 1920's

consumer credit was a balancing factor along with speculation that preserved the

booming economy while the gap between wealth increased. The idea held in the

1920's that the middle class could "telescope the future into the present" through

credit (Gusmorino 3). In the 1920's, 60% of cars and 80% of radios were

purchased on installment credit (Calder 54). Between 1925 and 1929 outstanding

installment credit doubled from $1.38 billion to $3 billion (Mandell 25). This type of

purchasing placed the average customer in an endless cycle with the inability to

purchase anything with their wages as all income went to paying off past

purchases. When the market crashed the credit industry collapsed along with it as

the average consumer no longer could purchase nor pay off their debt. This led to

the collapse of the credit industry in America. The credit industry, broken in

America after the depression, did not develop its strength until the invention of the

plastic credit card. This development now allowed a person the ability to spend

their money at many locations and with this new found freedom consumer spending

increased dramatically. Today, credit plays a crucial role in economic welfare as

the process of buying a car, purchasing a home, or even going to the grocery store

involves some form of credit. The greatest contributing factor to the growth of credit
 JACKSON 5

has been the expansion of the credit card industry within America and the

technological advancements that allow the consumer to access their money

instantaneously. The credit card debt today is estimated at approximately $550

billion and grew some $20 billion by Jan 31st, 2000 (Scherer 1). Americans today

view the plastic pieces of money in their wallets as a way to have the luxuries of the

rich at a modest monthly price. This mentality may delay the filing of bankruptcy by

many Americans but as seen in the depression of 1929 all of this over-extension

can lead to only one possibility, economic ruin.

The three significant factors of the Great Depression are alive and well today

and it is this realization that must be understood in America by all of its citizens.

The most significant problem in society today is the issue of credit. It is the entity of

credit that has left this society overextended and maintained the balance of

economic boom. However, if any of the other factors that caused the Great

Depression (end of stock speculation, greater inequality in the distribution of wealth)

represent themselves the pursuing economic collapse will be unbelievable. This

determination is based on the interrelated nature of the three factors that cause

economic collapse unequal distribution of wealth, stock speculation, and credit.

Americans today need to realize that the economic success currently is but a

cyclical pattern of boom and bust and it is disbelief in economic turn around that

has caused many Americans to feel that this amazing period of growth will never

end.
 JACKSON 6

Works Cited

Albion Monitor, "Why Americans are Angry" http://www.monitor.net/monitor/10-9-

95/angry.html 03/05/2000

Clader, Lendol. Financing the American Dream. New Jersey: Princeton

University press, 1999.

Gusmorino, Paul A., "Main Causes of the Great Depression." Gusmorino World

(May 13, 1996). Online. Internet:

http://www.escape.com/~paulg53/politics/great_depression.shtml.

01/11/2000

Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne

Publishers,1990.

Scherer, Ron. 'Tis the Season for Credit-Card Debt.

http://www.csmonitor.com/durable/2000/01/06/pls2.htm 01/11/2000