For 10 years [during the Roaring Twenties], between the destruction of World War I and the misery of the Great Depression, people in North America were actually happy.
With money in their pockets and a renewed sense of optimism after the end of the Great War, Americans and Canadians developed an insatiable appetite as consumers and a newfound appreciation for leisure during the 1920s.
Innovative, mass-produced goods became available for the first time, making some industrialists fabulously wealthy, and the automobile was all the rage. Zipping around town in their new Ford Model Ts, Americans saw their first movies, flocked to live sporting events and swung their fringed dresses — part of a fashion movement characterized by wild costumes — dancing in liquor clubs.
The Roaring Twenties were marked by people spending like crazy, partying, buying mansions and yachts, and (most importantly) racking up the 1920’s version of the credit card.
The narrative of the day included all the exciting new technologies (radio, telephone, automobiles, etc) that supported the idea that this new prosperity was real and durable.
Now … about that…where did the prosperity actually come from? Let’s turn back to the credit card:
In November 1930, before anyone knew how Great the Depression would be, Charles Persons published an article in the Quarterly Journal of Economics called “Credit Expansion, 1920 to 1929, and Its Lessons.”
His thesis was stated forcefully in the first paragraph: “The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade.”
He then meticulously documented data on the stunning growth in borrowing by households during the 1920s. As is common in the run-up to severe economic downturns, there was a tremendous growth in mortgage debt. “The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages”, Persons wrote.
In nominal terms, outstanding mortgage debt grew by more than eight times from 1920 to 1929, according to Persons. Persons also highlighted the rise in installment debt, or consumer debt used to purchase new furniture, clothing, sewing machines, and cars. Martha Olney at Berkeley examined the rise in purchases of cars and other durables during the 1920s, and concluded that “societal attitudes toward borrowers changed radically between 1900 and 1920; by the mid-1920s, buying on credit was considered normal, not sinful.”
Persons concluded his 1930 article with a statement that is eerily similar to many we here today: “The past decade has witnessed a great volume of credit inflation. Our period of prosperity was based on nothing more substantial than debt expansion.”
Repeat after me: “prosperity” resulting from credit inflation is a false dawn.
It’s been tried over and over again and it always fails. This time the Central Banks feel they have the dynamic under control because they can control the asset markets with greater and more powerful precision. They routinely interfere with the pricing mechanisms both overtly and covertly. In this regard, yes, it is different this time.
But what is not different is that the laws of economics still lurk, unrepentant, waiting patiently to emerge, and when they do the next depression will make the Great Depression lose the moniker of “great” because it will be rather minor by comparison.
In the meantime, it’s really hard to sit by, being prudent, when all of the forces of government and the private banking cartel are arranged against the prudent, and tilted towards the reckless.
For example, if you are a corporate CFO and you did *NOT* borrow heavily to buy back shares and ramp up your EPS fraudulently, then your stock was punished.
So not many sat out the credit boom and remained prudent:
This all works until it doesn’t.
When it doesn’t look out below. The damage will be extraordinary and lasting.