THE RECESSION of 1973-75 was the most severe economic contraction in the postwar era. By the first quarter of 1975, real gross national product had declined nearly 7 percent from its 1973 peak, about twice the decline in real GNP from peak to trough in 1957-58, the most severe previous postwar recession. Why was the recent recession so severe? What were the forces behind this sharp drop in aggregate demand? One salient feature of the 1973-75 period was the unusually unfavorable shift in the balance-sheet position of American households. Recent theoretical and empirical research on the "life cycle" and "liquidity" hypotheses—both of which stress the importance of the consumer's balance-sheet position to consumer expenditure decisions'—suggests that this might be an important contributor to the severity of the recession.