THE ORIGINAL EDITION of Debts and Recovery ( 1938) came to be written and published because of the widespread view at the time that overindebtedness left as a legacy of the 1920s, while perhaps not the cause of the Depression, was responsible for the depth of the trough and the slowness of recovery. What my generation of economists had in mind was something quite like what modern writers (such as Hyman Minsky) mean when they speak of the "fragility" of the financial system. In the late 1920s, so we thought, the fraction of future income pledged for debt repayment had become so large that even the ordinary disappointments of the business cycle would have produced significant defaults. And given the layering of debts, one round of defaults would have inevitably undermined the basis of other debts and caused further defaults, thus exacerbating the downturn. Of course, when the downturn came it was larger than anyone imagined possible, and the financial system collapsed under the strain.
In addition to worsening the downturn of 1930-33, debt burdens offered a significant obstacle to recovery in 1934-36. This came about because of the pressure upon debtors to continue debt repayments even though the assets for which they went into debt had been taken over by creditors. A stock speculator whose account had been closed out at a loss, for example, still had to make repay-