Innovations in Banking Practices and the Credit Boom of the 1920s

Business History Review, Forthcoming

28 Pages Posted: 24 Apr 2009 Last revised: 18 Dec 2012

Date Written: December 18, 2012

Abstract

For the development of banking the 1920s are important because in that historical period a set of new practices influenced banks’ lending policies that strongly favored credit expansion. Those innovations pertained to the measurement of credit risk and to new sales methods for banks. In particular, we describe the development of scientific credit analysis and the so-called credit barometrics. Credit barometrics were indicators or credit worthiness based on statistical analysis and replaced old rules of thumb. We document that these indicators were flawed and that they induced an erroneous belief in a future with rational and safe credit management. By studying the course of major New York banks as well as aggregate data we show how the innovations in banking methods contributed to the credit boom that ended with the crash in 1929.

Keywords: Banking Principles, Credit Booms, Competitive Strategies

JEL Classification: N22, G21, E32, B19

Suggested Citation

Rötheli, Tobias F., Innovations in Banking Practices and the Credit Boom of the 1920s (December 18, 2012). Business History Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1393765 or http://dx.doi.org/10.2139/ssrn.1393765

Tobias F. Rötheli (Contact Author)

University of Erfurt ( email )

Postfach 900 221
Nordhauserstrasse 63
D-99105 Erfurt
Germany
+49 361 737 4531 (Phone)
+49 361 737 4539 (Fax)

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