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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. It seemed that the economic boom would last forever, and households were not concerned about the leverage they were taking on, let alone how they would seek debt relief if they took on too much.
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.”
Both the Great Depression and our recent Great Recession were preceded by large increases in household debt driven by new lending technologies. The 1920s had the installment loan; the mid-2000s had the subprime mortgage loan. Is it a coincidence that the two most severe recessions in the last 150 years were preceded by a dramatic expansion in household debt driven by new lending technologies? This is a central question of our book.