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

Martha L. Olney
The Quarterly Journal of Economics
Vol. 114, No. 1 (Feb., 1999), pp. 319-335
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2586955
Page Count: 17
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Avoiding Default: The Role of Credit in the Consumption Collapse of 1930
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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 payments 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.

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