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Solid credit, he explained, is based either “(1) upon the competence, character, and earning power of the borrower, or (2) upon documents representing genuinely self-liquidating transactions.” In the case of debit balances, however, stockbrokers extended credit on neither ground.

Instead, the ability of the borrowers to pay back the loan depended on “the general level of stock prices.” But those prices, Smith pointed out, were “a function of the volume of credit so granted.” The flaws in this system soon became tragically apparent, ruining many unwitting investors.

In a well-conducted bank, he wrote, When a man wishes to borrow…his credit is appraised and a loan is made proportionate to his credit standing.

Banks rarely, if ever, make loans to people with whose affairs they are not reasonably familiar.

In a February 1930 article entitled “The Revolution in Banking Theory,” Bernhard Ostrolenk sought to explain the forces at work behind the failure of so many banks during the previous decade.

For the first century and a half of our history, he explained, the federal government, and most of the states, had prohibited "branch banking"—the ownership of one bank by another—instead fostering a system of small, independent “unit banks.” It was felt, Ostrolenk noted, that “each bank should be a local institution, locally financed and managed, drawing funds from local depositors and using its financial resources for the development of local business enterprises.” The unit bank was well suited to financing the small, independent businesses that had dominated the American economic landscape throughout the 19th Century.

Local industries have merged with larger corporations.

Eager to cash in, individuals assumed large amounts of debt in order to purchase stock they should not have been able to afford.And stockbrokers, in pursuit of commissions and with an eye towards driving prices ever higher, readily extended these unwise loans, which were referred to as “debit balances.” Debit balances thus underwrote a financial system that was unsustainable.For Smith, the collapse of the stock market could be traced back to abuses of the simple principle of credit.In Chicago in 1923, he explained, the clothing manufacturers had agreed to implement an unemployment reserves system into which workers and their employers each contributed 1.5 percent of their weekly payroll.Anyone who lost their jobs through no fault of their own would then be able to receive 30 percent of their full-time earnings for up to seven weeks.

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Other Atlantic contributors, however, advocated an expanded role for the federal government so as to mitigate the social consequences of the economic downturn.

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