High consumer indebtedness threatens future consumption spending if default
is expensive. Consumer spending collapsed in 1930, turning a minor recessi
on 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 viabl
e strategy in 1930 for avoiding default. Institutional changes lowered the
cost of default by 1938. When recession began again, indebted households ch
ose to default rather than reduce consumption.