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Avoiding Default: The Role of Credit in the Consumption Collapse of 1930

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  • Martha L. Olney

Abstract

High consumer indebtedness threatens future consumption spending if default is expensive. Consumer spending collapsed in 1930, turning a minor recession into the Great Depression. Households were shouldering an unprecedented burden of installment debt. Down payments were large. Contracts were short. Equity in durable goods was therefore acquired quickly. Missed installment pa5niients triggered repossession, reducing consumer wealth in 1930 because households lost all acquired equity. Cutting consumption was the only viable strategy in 1930 for avoiding default. Institutional changes lowered the cost of default by 1938. When recession began again, indebted households chose to default rather than reduce consumption.

Suggested Citation

  • Martha L. Olney, 1999. "Avoiding Default: The Role of Credit in the Consumption Collapse of 1930," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 319-335.
  • Handle: RePEc:oup:qjecon:v:114:y:1999:i:1:p:319-335.
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    File URL: http://hdl.handle.net/10.1162/003355399555927
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