The problem with debt

Americans, like the British, don’t fear debt, or rather don’t fear it enough (there is nothing necessarily wrong with going into debt). Whether as governments, businesses or individuals, the Americans and the British have the confidence to go into debt and invest, to go into debt to manufacture and market new ideas, confident that a market can be created, and to go into debt and buy, confident that they will keep their jobs. Consequently loans are made easy to obtain. This is the glory of capitalism, and its downfall.

Many farmers were in debt in the 1920s. Farmers had mortgage payments on their farms or else had taken out loans for their machinery; many of them had both. But prices for their crops and their cattle were dropping before the crash on Wall Street and farmers found it difficult to meet their mortgage or loan payments. Some sold their land to clear their debts, others were simply evicted. Farm bankruptcies increased five-fold from the previous two decades and the number of farms dropped for the first time in America’s history.

And what was happening on Wall Street? People were ‘speculating’ is the short answer, some 600,000 of them. Speculators don’t intend to keep their shares for long. In fact many of them used their savings or even worse, borrowed money to buy stock. The temptation is understandable when one considers that $1,000 of fast-rising stock could be bought for just $100 and a loan for the rest. This was called buying ‘on the margin’. With share prices constantly on the rise, they could sell quickly, pay off their loan and make a nice profit. Banks facilitated the speculators, lending $9 billion in 1929 alone, and banks were also directly involved in buying shares themselves. But markets don’t always rise, in fact they often fall and when the market fell, nay crashed, in 1929 many, many speculators, those who had bought ‘on the margin’, were left with worthless shares and were in debt.

And with banks having lent so much money, when those investors that had savings in the banks, came to withdraw their money to pay off their own debts, the banks didn’t have it. So, people lost their savings, as many as ten million. The biggest bank to fail was the Bank of the United States in New York which went bankrupt in December, 1930. Almost one-third of New Yorkers saved with it. It was the worst banking failure in American history up to that point.

But still the spiral of debt had one more vicious turn to make. For as people were now forced to hold back on their spending, less goods were bought, and so less goods needed to be made and so less people needed to be employed. And for those businesses that had invested in expansion expecting their markets to continue to grow, there was no employment to be had: between 1929 and 1932 more than 100,000 businesses failed. Consequently unemployment rose at an alarming rate. And with no savings to fall back on, indeed most likely at least some debts – the consumer boom had been aided by people buying goods on hire purchase and houses had been bought with mortgages – unemployment meant goods had to be returned, it meant mortgage foreclosures, or else the rent couldn’t be paid. Families that had been living comfortable lives plummeted into poverty. These were ordinary people, helpless victims of a force they had no control over yet had in a small way at least, contributed to: the Great Depression.