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Holden Caullfield narrates his story from a mental institution somewhere in California near Hollywood. He is taking a much needed "rest" from his former life of boarding schools and expulsion.
The sequence of events that Holden narrates from his room at the mental institution reveal much about why Holden is there in the first place: he's depressed, has violent urges, contemplates suicide, and even has physical side effects from his depression like nausea and headaches. Salinger includes details, like Holden's mention of his psychoanalyst, to suggest that Holden's mental breakdown is genuine and not 'phony.'
Holden is in a "Rest home" as he tells his story. His location can be interpreted in many different ways because for all we know he could be at a psychologist. One student in my AP class mentioned a mental institution but my teacher disagreed and told us just because it was a closed space didnt mean he was in a mental institution.
Of course Holden has his breakdown in New York City. After several days wandering the streets of the city and showing greater signs of depression (loss of appetite, disappearing feeling, loss of sex drive, etc.), he has some kind of revelation in Central Park when he lets Phoebe reach for the brass ring on the carousel. He realizes that he can't be "the catcher in the rye" and preserve childhood innocence.
The rest happens "off stage" but the reader can assume that Holden's parents become aware of his situation and seek help for him. Holden is narrating the story from a rest home or mental institution in California. We know this because his brother visits him there. The story is often presumed to be his session with a psychiatrist.
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