Yahoo Finance 5 Great Money Lessons From the 1920s You Should Use Today
When someone mentions the 1920s, you might picture one of two extremes. One is the classic “Roaring 20s” image, with flappers in bucket hats and the decadence of F. Scott Fitzgerald’s “The Great Gatsby.” The other is the Great Depression — the fallout when all that prosperity caught up with Americans.
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We’re in “the 20s” again, but few people use the words “booming” or “prosperous” to describe this decade. As of 2024, 77% of Americans describe the country’s economy as poor or “only fair,” according to a study by the Pew Research Center. Money is tight, but we have plenty to learn from the 20s of a century ago.
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Monitor Your Risk
The 1920s were a time of unprecedented prosperity. The rapidly expanding use of electricity caused utility values to skyrocket, and the value of other companies’ stocks followed suit. One economist proclaimed that stocks had reached “what looks like a permanently high plateau.”
The market’s success persuaded the non-wealthy to begin investing, and banks took advantage by lending money to consumer investors. People would borrow up to 90% of a stock’s cost and repay the bank when they sold for a profit.
If the stock price declined, banks would demand immediate repayment to protect their assets, and people’s get-rich-quick schemes landed them underwater.
The Lesson: If Something Sounds Too Good To Be True, It Probably Is
There’s no such thing as a sure thing when investing, and hype often doesn’t pan out. Understand the risks of your investments, and only invest what you can afford to lose.
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Balance Your Portfolio
The 1929 market crash caused some Americans to lose everything. People lost their life savings, and stocks became worthless pieces of paper. Those who had invested with borrowed money were in debt.
Prices crashed all over the market, but the crash looked steeper for stocks that had been soaring. Those stocks were in booming industries such as steel, utilities, consumer retail, electrics and radio — industries people thought would keep rising.
If you were an investor in 1929, you might have put all your money in General Electric or RCA. The crash would have been unexpected and wiped out everything you had.
The Lesson: Diversify Your Investments
Even the Financial Industry Regulatory Authority discourages investing in a single product type, no matter how promising it seems. Any industry or market can fall at any moment, so it’s essential to spread the wealth.
Borrow Responsibly
Consumer borrowing changed entirely in the 1920s when dealerships began working with consumer banks to extend car loans. Working families could suddenly buy cars and access a standard of living they’d never experienced before. There was no turning back.
Soon, people started financing all kinds of household amenities, from vacuum cleaners to furniture. Everyone wanted to keep up with the Joneses.
Then, the Great Depression brought it all crashing down. Banks protected their remaining assets and stopped lending to consumers. Working people lost their jobs or saw their income drop precipitously. Over the next four years, wage income dropped by 42.5%. If you couldn’t repay your loans, you’d lose your house, car and whatever else you financed.
The Lesson: Only Borrow What You Can Safely Repay
Debt and repossession are still significant concerns. In the first quarter of 2024, 7.9% of auto loans and 8.9% of credit card balances slipped into default.
In the 2020s, we know a job loss or financial crisis can happen to anyone. Before signing any loan agreement, create a plan to pay it back, even if your income drops.
Spend Thoughtfully
Conspicuous consumption was a key driver of the 1920s consumer lending boom. From 1919 to 1929, the number of cars on the road more than tripled, while radio sales increased 1,400%. Cigarettes, makeup and sized off-the-rack clothing made life more convenient — and expensive.
Radio and print ads were critical drivers of this “demand culture.” Billboards and signs in shop windows heralded the season’s latest must-buys, while radios brought dynamic audio advertisements into the home. Ads generated a consumer frenzy, leading many people to spend — often using money they didn’t have.
The Lesson: Avoid Impulse Purchases
Before buying something, consider its importance and whether it fits your budget. Don’t buy it if you can’t pay immediately — never overspend for a trend.
Save for Emergencies
In 1929, many banks lost large chunks of their assets to stock crashes and defaulted loans. With less cash on hand, banks couldn’t keep up with withdrawal requests. In the next few years, 9,000 banks failed, and depositors lost $7 billion in savings.
Faced with a nation of panicked bankers and consumers, President Theodore Roosevelt signed the Banking Act of 1933 and created the Federal Deposit Insurance Corporation. Today, the FDIC guarantees up to $250,000 of your deposits in any FDIC-insured bank, making it safe to put aside money for a rainy day.
The Lesson: Fund a Savings Account in a Trusted Bank
Experts now recommend having enough in the bank to cover three months of living expenses, but 30% of Americans haven’t reached that benchmark. The market crash and the Great Depression are the cautionary tales teaching us that we all need to start putting money in an FDIC-insured bank to ensure we survive bumps in the road.
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