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Unraveling the Collapse: Credit's Role in the Great Depression of 1930

Explore how consumer spending decline led to the Great Depression due to heavy installment debt burden, repossession risks, and necessity for cutting consumption to avoid default in language from Olney's "The Role of Credit in the Consumption Collapse of 1930" and Vaughan's Economics 639 Overview.

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Unraveling the Collapse: Credit's Role in the Great Depression of 1930

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

  2. Overviewfrom Abstract 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 …because households lost all acquired equity. • Cutting consumption was the only viable strategy …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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