Consumer Credit at the time of the Great Depression…

January 30, 2009

“Our own outlook on consumer credit had always been that of the conventionally trained banker who had lived through the depression years of the 1930’s.  This attitude might be expressed as, ‘What? Loan money to people who has no net worth? People who are not even customers of the bank? Excuse us!’” (‘Small-Town Aspects of Installment Lending’, Merten J. Klauss, President, First Security Bank & Trust Company, Charles City, Iowa, National Consumer Credit Symposium, 1958.)

From the mouth of a small town banker, this was the nature of consumer credit lending in the period of the Great Depression. In the 1930’s banks did not lend readily to consumers.  Bank deposits fueled consumer credit by passing through finance companies heavily regulated by small loan laws.  Separate business entities from the conservative banks, these finance companies were the legatees of remedial societies and other charitable-philanthropic agencies who had once provided loans as an alternative to loan sharks in urban centers.  They were seen as institutions that ‘helped’ honest people out of difficult situations at a reasonable rate of interest; not as sources of money for consumer spending.

Consumer credit is the lynchpin of the current economic crisis.  If mass consumer spending is the basis of the U.S. economy, and if this spending has largely been drive by the dynamics of the consumer credit market, then we are a very long way from Depression Economics.  This raises serious questions over the degree to which insights from the 1930’s will provide immediatly appropriate solutions to easing the current crisis…

One Response to “Consumer Credit at the time of the Great Depression…”

  1. danielbeunza Says:

    George Soros’ comparisons of the credit crisis to the Great Depression spurred some thoughts.

    First, I wonder how useful these comparisons to the 1930s are. Obviously, there are differences in the two historical events, and there’s always some dimension or other in which today’s crisis is worse. Which can then be used to make the point that our present conundrum is “worse than ever.” So, in general, I don’t see this as very useful.

    At the same time, my ongoing research on the history of the hedge fund industry suggests that there are some elements of the 1930s that may be relevant. The 1929 was followed by some of the most stringent regulation of the capital markets: the Securities Act of 1933 and the Securities and Exchange Act of 1934. Investment funds were forbidden to use leverage, to pay managers according to their returns, and to use derivatives. The outcome of this was a sleepy Wall Street through the post-war years. It was from a loophole in this regulation (that allowed for rich people’s investment clubs) that the hedge fund industry was born.

    The point, in any case, is that the delegitimization of Wall Street brought in regulation that eliminated innovation. How to avoid that now?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: