The Roaring Twenties » Buy Now, Pay Later: Consumerism, Advertising and the Stock Market

Buy now, pay later

By the mid-1920s many Americans were earning more than before. But a car, a radio or a washing machine still cost a lot of money. Most families could not save up and pay all at once. The answer was credit.

Key terms:

• Hire purchase: a way of buying where you pay a small deposit, take the goods home at once, and pay off the rest in weekly or monthly instalments. Americans called this 'buying on the instalment plan'.
• Consumerism: a way of life in which people are encouraged to keep buying new goods, even ones they do not strictly need.
• Advertising: paid messages that try to persuade people to buy a product.

Hire purchase made a huge difference. A family could drive away in a car after paying only a deposit. By the late 1920s a large share of cars, radios and furniture was being bought this way. Shops sold more, factories got more orders and took on more workers, and those workers had wages to spend. That helped keep the boom going.

There was a catch. Buying on credit cost more in the end, because the buyer paid extra charges. If a buyer missed payments, the seller could take the goods back. Families could end up owing more than they could manage, but while jobs were plentiful few people worried.

Advertising and the new consumer society

At the same time, electricity reached most American homes. Factories made a flood of new electrical goods: vacuum cleaners, washing machines, electric irons, refrigerators and, above all, radios. Adverts told families that these goods saved time and made life modern. Hire purchase meant they could actually afford them.

Together these things created consumerism. Owning the latest goods became a sign of success. This was good for business, because factories that had learned to make goods quickly (through mass production) now had millions of eager buyers.

The stock market craze

Key terms:

• Share: a small part of the ownership of a company. Shareholders can earn a share of its profits.
• Stock market: a market where shares are bought and sold. The main one in the USA was the New York Stock Exchange on Wall Street.
• Speculation: buying shares mainly to sell them quickly at a higher price, rather than to earn a share of profits over time.
• Buying on the margin: buying shares by paying only part of the price yourself and borrowing the rest from a broker.

As companies made big profits, their share prices rose. The Dow Jones index of leading company shares climbed from about 60 in 1921 to over 380 in September 1929. People saw others making money and wanted a share. Buying shares became popular with ordinary people as well as the wealthy.

Some leading figures encouraged this. In August 1929 the businessman John J. Raskob gave an interview to the Ladies' Home Journal called 'Everybody Ought to Be Rich'. He argued that anyone who saved fifteen dollars a month and put it into good common stocks would have 'at least eighty thousand dollars' after twenty years.

How buying on the margin worked

Many people could not afford to buy many shares. So brokers let them pay as little as 10 per cent of the price and lent them the rest. The shares themselves were the broker's security for the loan.

While prices kept rising, buying on the margin looked like free money. Billions of dollars were borrowed this way. More buyers pushed prices higher, which attracted still more buyers. Buying on the margin was a major reason the stock market became so popular, but it also made the market fragile. Why that mattered comes later in this investigation.

Exam-style question

Describe TWO features of EITHER hire purchase in the USA in the 1920s OR buying shares on the margin in the USA in the 1920s. [6 marks]