Payday Loans Could Have Prevented the Great Depression

I understand how extreme of a claim this is, a simple payday loan could have stopped the worst financial crisis in American history. This may be a little extreme so let us tone it down a little bit: Payday loans would have delayed the Great Depression.

Before we discuss how payday loans could have prevented the Great Depression, let’s first quickly review what caused the Great Depression. The simple answer is: The stock market crashed. What most people never learn is: why did the stock market crash?

I am not going to pretend that this simple blog is going to break down a very complicated Macroeconomic issue but, in a nutshell, the Great Depression was caused by the following:

• The Federal Reserve System allowing the money supply to decline by 30% during the height of the depression.
• The lack of regulation on how much reserve money a bank had to keep caused banks to loan out as much money as they were taking in from their customers.
• The declining economic state caused bank runs, in which bulks of customers went to withdraw from their savings accounts due to worsening financial times.
• With banks lending out almost all their money, and the lack of the Federal Deposit Insurance Corporation (FDIC), which insures all savings accounts for up to $100,000 grand, citizens had no access to their savings accounts, thus losing all their money.

Payday Loans Are the Answer

How could payday loans have solved this? While it is entirely possible that payday loan lenders would have succumb to the same problems of the Depression, namely their money would have been lost in the bank runs, they could have played a key role in helping out money starved citizens.

A short term loan that uses one’s paycheck as collateral would have been a perfect solution to the Great Depression. Putting aside the fact that there was a 25% unemployment rate in the United States at the time, a payday loan would have helped businesses stay in business. The payday loan industry would have been so booming that it would have expanded, thus attracting more workers and creating more paying jobs.

Payday loans could have prevented the initial Great Depression, but they would not have fixed the problems with the United States financial system that the Great Depression did. Still the point is clear, payday loans can supply a valuable source of income to those in need. The majority of current day payday loan customers are in the middle or lower classes, much like those that were forced to temporarily live in Hoovervilles in the 1930s. Remember, when you are short on cash a payday loan just may be the answer. It just may have been the answer on October 28th, 1929 (Black Tuesday).

Additional Resources:

• The Great Depression
• John Maynard Keynes- The Economic Consequences of the Peace
• The Crash of 1929