In 1930, consumption fell more rapidly than is explained by income declines, turning a bad recession into the Great Depression. Yet despite its importance, this drop remains unexplained. This project offers an explanation. Household indebtedness stood at an unprecedented high in 1929. Much of this was installment debt. Default on an installment contract resulted in wealth-reducing repossession without compensation. Although installment payments were up to 30 percent of monthly pay, households did not default when income fell in 1930. This project suggests the unexplained drop in consumption was the means by which households avoided default: when households anticipated wage cuts, they immediately reduced consumption so they could pay off their debts and avoid costly default. The project illustrates the importance of institutional characteristics. Subsequent change in default consequences lessened the sensitivity of consumption to current income fluctuations. This project pursues the analysis of two existing household surveys of income and expenditure; coding and analysis of a household survey covering the years 1928 and 1933 for the same families; analysis of the pattern of wage cuts in the 1930s; and historical analysis of the legal environment governing default consequences, the extent of default, the prices of used durable goods, and the impact of the practices of collateralization and securitization on a lender's ability to adjust existing credit terms.
