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

The US Great Depression was preceded by almost a decade of credit growth. This review paper suggests that the 1920s credit boom went through two phases: one, up to around 1927, when credit grew in concert with money; another one, from around 1928 to 1929, when credit grew faster than money. Credit from commercial banks grew tremendously, and credit from savings institutions grew even more. The fact that money was relatively stable in the second phase fits Friedman and Schwartz's concession that the 1920s were not an inflationary decade. Rather, the credit boom was reflected in asset price inflations which occurred in certain parts of the economy, such as the real estate and stock markets. As the literature tends to show, the growth of credit made households and financial institutions vulnerable to shocks. While a decoupling of credit growth from money growth in the post-1945 period has been previously noted (Schularick and Taylor 2012), this paper suggests that such a decoupling already occurred in 1920s America. While monetary authorities managed to keep inflation in check, standard monetary policy tightening was not enough to quell the credit boom, which points to macro- and micro-prudential tools as potentially more successful alternative measures to keep credit under control