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Was Depression-Era Debt as High as It Is Now?

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Question: When we hear comparisons between today’s economy and that of the Great Depression, I wonder: Had as many people and institutions been as highly leveraged then as now? Were personal and institutional debt as high then as they are now? And was the government in the same debt situation then as it is now?

Paul Solman: Well, buying stocks on margin (with as little as 10 percent down back then – not possible today) certainly was a major factor in the stock market crash. The Dow Jones peaked at 381 in late 1929; three and a half years later, it bottomed at 42. Today’s Dow Jones would have to sink to about 1,500 to match that performance.

Perhaps the most famous American economist of the era, Yale’s Irving Fisher, wrote “The Debt-Deflation Theory of Great Depressions” in the very early ’30s, ascribing a major role to consumer and business indebtedness. When prices dropped (DEflation), Fisher argued, debt became more onerous, leading to loan defaults. It’s one thing to pay 8 percent interest, say, on a loan when the dollar is losing value (inflating) at 3 percent a year. You’re only paying 5 percent. But if the dollar is RISING in value, the money you owe is rising also, and your real cost is 8 percent+.

I don’t have the data close at hand, but American consumers in the Depression didn’t have credit cards, however, or zero-down payment home loans, so the burden wasn’t as great as a percent of income, I’m quite sure.

As for the government, the national debt was only 16 percent or so of GDP in 1929. At the start of this downturn, it was closer to 70 percent, not counting the Baby Boom liabilities for social security and Medicare. So as a country, we’re going into this much more deeply in debt.

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