Why Credit Matters

By Karen Stevenson, 12 April, 2023

I have wondered for years what happened during the Great Depression of the 1930s. One day there was plenty of money, everyone was working and spending, and the next day everyone was broke. Where did the money all go? How could all that money evaporate? Did it all go into the pockets of a few rich people? Many many years later I understand it better. Lots of things happened, but one that is important is that credit suddenly disappeared.

Credit is a funny concept. Money is easy to understand. It's the dollars in my pocket and the dollars in my bank account. Without credit, money is what I have to spend, and I can only buy something when I have enough money to pay for it. But credit is like magic. If someone will lend me money, I can spend more than the dollars I have in my bank account. I can spend as much as someone will lend me. Credit multiplies what I can do with my money.

Big corporations and wealthy people have been able to take advantage of credit for a long time, but it wasn't until the 1920's that consumer credit took off. Anyone and everyone could get credit, and they could use it to buy things they couldn't otherwise have bought -- washing machines and cars and even houses. When everyone could get credit, there were lots more buyers, and the companies that made these products ramped up production. 

But when the stock market party stopped in 1929, everything else went with it. Banks couldn't lend because they were going out of business. When people stopped buying houses and cars and washing machines, the companies that built them shrank or closed their doors, and their employees lost their incomes. Those employees not only lost the ability to amplify their income with credit, they didn't even have old fashioned money in their pockets. So they bought even less, and more companies went out of business, and so on, and so on.

What happened in the 1930's was not so much that money suddenly disappeared, it was that credit suddenly disappeared. And eventually money also disappeared when 25% of the people in the country lost their jobs.