Centre for Economic Policy Research

5.4
Commercial and investment banking
The buoyant securities market of the 1890s was eclipsed by the post-World War I
boom. Beginning in 1922, Americans gradually became convinced that the 
economy had entered a ‘new era’ of permanent prosperity. Inflation was near
zero, unemployment was low and the economy was rapidly growing. As the stock 
market flourished, new issues flooded the market, concentrated in the ‘high tech’
industries (White, 1990). Educated by the government’s wartime bond drives,
more Americans invested in stocks and bonds directly or through investment trusts.
Figure 5.2 shows the well-known stock market boom of the late 1920s that
peaked in September 1929 and crashed the following month. Although it briefly
recovered, the market continued to decline, mirroring the long economic slump.
The surge in trading that boosted prices is seen in Figure 5.3, as measured by vol-
ume on the New York Stock Exchange. Underwriting boomed with an explosion
of new issues, concentrated in equities, as shown in Figure 5.4. At the same time,
profits of the commercial banks were stalled. Drawn by this extraordinary 
opportunity, more and more commercial banks entered the securities business. 
Conflicts of Interest in Universal Banking 59

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60 Conflicts of Interest in the Financial Services Industry
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Figure 5.2 Dow Jones, 1926-32
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