2. How did the introduction of buying things on credit contribute to the Great Depression?

The introduction of buying things on credit, specifically installment plans, significantly contributed to the Great Depression, though it wasn't the sole cause. Here's how:<br /><br />* **Overextension of Credit:** Easy credit allowed consumers to purchase goods like appliances, cars, and even stocks, far beyond their immediate means. This created a culture of consumerism fueled by debt, not actual purchasing power. People became over-leveraged, owing more money than they could realistically repay.<br /><br />* **Artificial Inflation of Demand:** The increased purchasing power (though artificial) created by credit led to a surge in demand for goods. Businesses responded by increasing production to meet this demand. However, this demand was not based on real wages or savings, so it was unsustainable.<br /><br />* **Stock Market Bubble:** Credit also fueled speculation in the stock market. People borrowed money to buy stocks, driving up prices to unrealistic levels. This created a bubble that eventually burst in 1929, marking the beginning of the Great Depression.<br /><br />* **Reduced Consumer Spending When the Bubble Burst:** When the stock market crashed and the economy began to contract, people lost their jobs and their incomes declined. Suddenly, they were burdened with debt they could no longer afford. This led to a sharp decrease in consumer spending, further exacerbating the economic downturn.<br /><br />* **Bank Failures:** As consumers defaulted on their loans, banks began to fail. This further restricted credit and deepened the economic crisis. The banking system was not equipped to handle the widespread defaults.<br /><br />* **Deflationary Spiral:** The decrease in consumer spending led to falling prices (deflation). This made it even harder for people to repay their debts, as the value of their assets declined while the value of their debt remained the same. This created a deflationary spiral, further deepening the Depression.<br /><br />In summary, while buying on credit initially stimulated the economy, it created an unsustainable bubble built on debt. When the bubble burst, the resulting defaults, bank failures, and decreased consumer spending significantly worsened the Great Depression.<br />