1. Olney “The Role of Credit in the Consumption Collapse of 1930” Vaughan / Economics 639 1

2. Overview Consumer spending collapsed in 1930, turning a minor recession into Great Depression. Households held unprecedented amount of installment debt. Down payments were large and contracts short. Equity in durable goods was, therefore, acquired quickly. Missed installment payments triggered repossession, reducing consumer wealth because households lost all acquired equity. Cutting consumption (particularly on non-durables) was only viable strategy for avoiding default. Institutional changes lowered cost of default by 1938. When recession began, indebted households defaulted rather than reduce consumption. 2

3. Note rising levels of non mortgage debt! 3

4. Note large declines in non-durable consumption in 1929-30! 4

5. 5 Note: Debt reduces consumption spending in early 1930s!