Was the U.S. Great Depression a Credit Boom Gone Wrong?

Postel-Vinay, Natacha

doi:10.2139/ssrn.3413697

Cited by 6 publications

(2 citation statements)

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“…18 Figure 2 shows that between World War I (WWI) and the Great Depression, Italy experienced a sustained growth of its credit-to-GDP ratio. Its pace was comparable to that of the USA (figure 3), which previous studies consider having experienced a credit boom in the 1920s (Eichengreen and Mitchener 2004;Gorton and Ordonez 2020;Postel-Vinay, 2022). However, figure 2 also shows that not all categories of banks contributed equally to this expansion.…”

Section: Historical Context: Credit Boom or Financial Development?mentioning

confidence: 55%

“…Economic history of interwar banking crises and economics literature on credit booms have found common ground in the study of the 1920s. The interpretation of the Great Depression as a credit boom gone wrong was already implicit in Kindleberger (1973Kindleberger ( , 1978, was formally advanced by Eichengreen and Mitchener (2004), and was recently restated for the USA by Postel-Vinay (2022). Recent research shows that the strategies of Chicago banks in the 1920s explain well their distress in the 1930s and reappraise the role of mortgage credit in the building up of the crisis (Postel-Vinay 2016.…”

Section: Introductionmentioning

confidence: 99%

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Credit Expansion, Leverage, and Banking Distress: The Puzzle of Interwar Italy

Molteni

2022

SSRN Journal

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Section: Historical Context: Credit Boom or Financial Development?mentioning

confidence: 55%

Section: Introductionmentioning

confidence: 99%

Credit Expansion, Leverage, and Banking Distress: The Puzzle of Interwar Italy

Molteni

2022

SSRN Journal

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Taming the Megabanks

Wilmarth¹

2020

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This book demonstrates that universal banks—which accept deposits, make loans, and engage in securities activities—played central roles in precipitating the Great Depression of the early 1930s and the Great Recession of 2007–09. Universal banks promoted a dangerous credit boom and a hazardous stock market bubble in the U.S. during the 1920s, which led to the Great Depression. Congress responded by passing the Glass-Steagall Act of 1933, which separated banks from the securities markets and prohibited nonbanks from accepting deposits. Glass-Steagall’s structural separation of the banking, securities, and insurance sectors prevented financial panics from spreading across the U.S. financial system for more than four decades. Despite Glass-Steagall’s success, large U.S. banks pursued a twenty-year campaign to remove the statute’s prudential buffers. Regulators opened loopholes in Glass-Steagall during the 1980s and 1990s, and Congress repealed Glass-Steagall in 1999. The United Kingdom and the European Union adopted similar deregulatory measures, thereby allowing universal banks to dominate financial markets on both sides of the Atlantic. In addition, large U.S. securities firms became “shadow banks” as regulators allowed them to issue short-term deposit substitutes to finance long-term loans and investments. Universal banks and shadow banks fueled a toxic subprime credit boom in the U.S., U.K., and Europe during the 2000s, which led to the Great Recession. Limited reforms after the Great Recession have not broken up universal banks and shadow banks, thereby leaving in place a financial system that is prone to excessive risk-taking and vulnerable to contagious panics. A new Glass-Steagall Act is urgently needed to restore a financial system that is less risky, more stable and resilient, and better able to serve the needs of our economy and society.

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Wilmarth Jr.

2020

Taming the Megabanks

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Was the U.S. Great Depression a Credit Boom Gone Wrong?

Cited by 6 publications

References 50 publications

Credit Expansion, Leverage, and Banking Distress: The Puzzle of Interwar Italy

Credit Expansion, Leverage, and Banking Distress: The Puzzle of Interwar Italy

Taming the Megabanks

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