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
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: Suggested Citation