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

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.