Reply To: banks in the 1920s


Conditions are different during a boom than they are during a bust. After 1923, the 1920s was a period of boom. Interest rates were low because banks had created credit, i.e., the supply of credit was increasing faster than the demand for credit. Banks are happy to lend under these conditions even if interest rates are falling because there is almost no cost to creating credit.

Currently, interest rates are low because demand for credit has collapsed. Banks are reluctant to lend during a bust because of the perilous condition of their balance sheets. Even when the FR bails them out by buying their bad loans, the banks hold cash instead of making new loans. They do this because the nominal value of cash cannot decline, but the nominal value of loans and investments can.