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

Published online by Cambridge University Press:  23 July 2013

Tobias Rötheli
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Abstract

The 1920s were important for the development of banking in the United States because new lending practices strongly favored credit expansion. Those innovations pertained to the measurement of credit risk and to new sales methods for banks. In particular, I describe the development of scientific credit analysis and so-called credit barometrics. Credit barometrics indicated credit worthiness based on statistical analysis and replaced old rules of thumb. These indicators were flawed and 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, I show how the innovations in banking methods contributed to the credit boom that ended with the crash in 1929.

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Articles
Information
Business History Review , Volume 87 , Issue 2 , Summer 2013 , pp. 309 - 327
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Copyright © The President and Fellows of Harvard College 2013 

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References

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27 One possible reason for this course of the series may be gleaned from the number of firms surveyed. This number grew until 1929 to its maximum of 4,404 and shrank to 4,328 in 1931, 3,697 in 1932, and 3,315 in 1933. Hence, it is possible that a survival effect boosted the value of the credit ratios in the Depression years.

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