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FOR RELEASE ON DELIVERY
FRIDAY, M Y 21, 1976
4:00 P.M. E.D.T.

FRAMEWORK FOR FINANCIAL RESILIENCY
Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Conference on Financial Crises
of the
Salomon Brothers Center for the Study of Financial Institutions
of New York University




New York University
Graduate School of Business Administration
New York, New York
Friday, May 21, 1976

Summary and Conclusions
The American economy is in process of reducing financial
risks.

This is reaction to the escalation of financial risk in the

economy that has been going on since World War II and that culminated
in a severe recession from which we are now recovering.

The bright

young men who thought that if the risks they took in the management
of financial and other corporations paid off, they would make it
big, and if not, they could always find a new place to try, have
learned differently, or perhaps are gone.
The present more conservative phase may be long lasting.
The shock waves from the events of 1973 and 1974 seem to have set
in motion a trend toward greater financial caution.

The government

has helped the transition by increasing its borrowing as private
borrowers became more selective.

The Federal Reserve has held the

growth of the money supply moderate and plans to keep it that way.
There are two ways in which any inherent tendency condemning
the economy toward successive waves of increased risk could be reduced.
One is a change in our tax laws, to tax interest at the same rate as
dividends, while holding total revenue from the corporate income tax
steady.

This would reduce the present attractiveness of debt over equity

financing.

The other applies to banks.

There, insurance of deposits

should be increased, probably not to 100 per cent, but substantially
increased.

That would cost little, and it would increase the stability

of banks by giving assurance to depositors beyond the present $40,000
insurance limit.

Keeping larger deposits in place could greatly ease

the situation of banks at times of liquidity stresses.




FRAMEWORK FOR FINANCIAL RESILIENCY
Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Conference on Financial Crises
of the
Salomon Brothers Center for the Study of Financial Institutions
of New York University
New York University
Graduate School of Business Administration
New York, New York
Friday, May 21, 1976

The American economy, having passed through a long period
during which risks were escalating, now seems to be clearly in the
process of reducing financial risks.
escalation phase are familiar.




The data that accompanied the

Nonfinancial enterprises increased

-2-

the ratio of external to total financing from the low levels of
the 1950fs; within external financing they increased the role of
debt relative to equity, and within debt, that of short-term
to total debt.

Cash and liquid assets declined in relation to

short-term liabilities.
For the banking system, an analogous process meant
diminishing capital ratios, increasing reliance on purchased
funds, increasing "maturity intermediation," (transformation
of short-term liabilities into long-term assets) and reducing
the proportion of secondary liquid assets.
Most of these trends, in part displayed in the appended
tables, had been continuing with only minor interruptions since
the end of World War II, at which time the economy was perhaps
overly liquid as a result of financial consolidation in the
1930*s and the exigencies of wartime finance.

In point of fact,

it is difficult to indicate a historical period when the
financial structure was "right.1
1
A process of rebuilding liquidity and restructuring
balance sheets has been underway for most nonfinancial and
financial enterprises for well over a year.
how far it will go.




We do not know

We do know that similar reversals in 1967

-3-

and 1970 were no more than interruptions of a longer trend toward
higher risks.

I believe that the present phase of consolidation

is different.

The shock waves that emanated from the events

of 1973 and 1974 seem to have set in motion a trend toward
greater financial caution that promises to achieve a much more
satisfactory degree of financial consolidation than occurred on
these previous occasions.
The financial system is not condemned to move toward ever
higher degrees of risk, with ever greater reliance on government to
stave off

ultimate calamity.

On the contrary, it seems to me that

the degree of risk-taking in an economy fluctuates in long-term
cycles, extending over a number of business cycles, and that the
elevation of risk exposure on one side of this cycle produces
results which induce an extended period of movement toward safer
financial configurations.

If we think of insolvency as the ultimate

brink toward which the escalation of risk leads, then the early
part of the long-term cycle represents an exploration of the
approaches to the brink.

Nobody quite knows where it is.

Some

bold spirits press forward, and if they are observed not to fall
over, others conclude that the terrain is safe and follow.
Eventually some do go over, and the rest, having suffered a severe
scare, fall back.

The scare occasioned by the latest exhibitions

of financial brinkmanship, I would judge, has been sufficient to
induce a very sizeable retreat toward safer ground.




-4-

It is this process of approach and retreat that I
would like to examine in somewhat more detail.

Underlying the

process is a hypothesis that peoplefs expectations of a major
calamity are formed, much like other expectations, on the basis
of a weighted sum of past experiences.

Recent experience under

such a hypothesis typically receives high weight, experience far
in the past low weight.

If a major financial crisis, such as

the 1930fs, is only a few years behind, heavy weighting of recent
past experience will make firms and households cautious.

As the

experience fades into the past, it receives diminishing weight
relative to more recent experience when nothing adverse happened.
Thus the restraint of experience diminishes over several relatively
mild business cycles until the resulting escalation of risk leads
to a new crisis and the process begins once more.
Within this framework, I would like to examine some of
the mechanisms and elements in the post-World War II environment
that propelled business firms and banks in the direction of higher
risk as recollections of past calamities had faded.
three types of mechanisms:

I see at work

(1) genuine changes in the degree of

risk, especially as a result of government action of various sorts,
(2) a change in perception, in a downward direction, of the
probability of particular events, when the actual probabilities
have not declined, and (3) changes in attitudes toward risk, i.e.,
a reduction in risk aversion.




-5-

I shall begin by examining case (1) representing changes
in objective reality that imply a reduction in risk.

Government

has had a reasonable, although far from complete, degree of
success in using countercyclical fiscal and monetary policies
to reduce business risk from major recessions.

Even in 1973-74,

it took the combined interaction of food shortages, the oil
crisis, a simultaneous cyclical downturn throughout the
industrialized world, and the accumulated maladjustments of
previous years, including almost 10 years of inflation, to produce
the most severe recession of the post-war period.

In addition to

the risk reduction resulting from macroeconomic stabilization,
the government has employed microeconomic measures to limit
economic and financial risks for individuals and businesses,
among them programs for income maintenance, governmental assistance
to small businesses and farmers and even large firms in distress,
lender-of-last-resort facilities, deposit insurance, mortgage
insurance and guarantees, and stock market credit regulation.
I would add bank supervision and regulation to this list,
realizing that measures of this kind cannot achieve total protection.
Regulation, by its nature, cannot cover all contingencies.

Some

avenues toward excessive risk-taking are likely to remain open.
If the regulated erroneously concludes that everything that is
not marked as dangerous is therefore necessarily safe, he may be




-6-

misled.

Likewise, if the regulated is prepared to accept a

certain degree of risk in his operation, regulation that limits
particular forms of risk will not keep him from achieving his
preferred risk exposure.

It will merely foreclose for him his

preferred forms of risk, leaving open others that are second
best.

Thus regulation may lead the regulated toward the selection

of risks that he regards as suboptimal in kind, even if appropriate
in degree.
Next I turn to what seems to me a tendency to re-evaluate,
that is, change the perception of, risks that in an objective sense
are really invariant.

This arises, first, because asset markets,

like other markets, sometimes develop imperfections.

Some assets

are not always valued correctly, and innovative operators may then
be able to take advantage of this.

Their success, however, can

spawn imitators whose actions may contribute to an over-evaluation
of assets that originally were not undervalued.

There are many

obvious examples of this in the history of the stock and real
estate markets.
Second, a tendency to underestimate risk may occur
because the ultimate consequences of excessive risk do not
materialize immediately.

In terms of probability, a high risk

operation may work out well a number of times or for a considerable
period, before the failure whose probability was underestimated
does occur.

In the interim, erroneous assessments of the true

risk may proliferate.




-7-

Third, excessive risk-taking can result from the
tendency of portfolio managers to justify their decisions by
reference to the decisions of others similarly situated, rather
than by use of objective criteria.

When a "peer group" is

employed to represent the standard of sound practice, there is
no real check on a developing trend toward riskier portfolios.
Fourth, managers of investments, financial and real,
probably tend to underestimate covariance within portfolios or
assets or projects they manage.

For the expert whose job it is

to evaluate the risk and return of a particular asset, the specific
risk of that asset very easily comes to dominate his assessment
of general market risk.

In the event, as we have often seen,

market risk may dominate as most things tend to go up and down
together, and the result then is excessive risk-taking.
Fifth, even when risk is recognized and a risk premium
demanded, it may not always give the protection that is expected.
It is one thing to invest in a B bond and receive a risk premium
of one per cent per year for 30 years.

It is quite another to

receive the same premium rate on a 90-day CD.

There is, in effect,

no reasonable risk premium that could compensate for substantial
risk in a short-term asset.

A belief to the contrary is likely to

lead to excessive risk-taking.







-8-

From the discussion of changing perception, i.e.,
re-evaluation, of objectively unchanging risks, I now turn to
the possibility that fundamental attitudes toward risk may
change over time, leading to a greater willingness to accept
risks that are correctly evaluated as such.

It should be borne

in mind that risk aversion is not necessarily good and that risk
neutrality is not necessarily bad.

Much economic theorizing

postulates risk neutrality on the part of the firm and risk
aversion on the part of individuals as ultimate wealth owners.
In the long run, one might assume, a sample of risk neutral
firms will out-compete a sample of risk averse firms, even though
a higher percentage of the risk neutrals may fall by the wayside.
First, a firmfs willingness to accept risk may increase
over time as older executives who had experienced the last big
crisis retire.
Furthermore, the attitude of "managers, toward risk
f
tends to depend on the structure of penalties and rewards.

The

manager who expects to be penalized for losses but not to be
greatly rewarded for gains will be very cautious.

Another who

has a chance to make it big if he wins, and thinks he can always
get another job if he misses, will lean in the other direction.
The increased use of stock options and management bonuses may
encourage this attitude.

It is my impression that, in the

-9-

investment business at least, the structure of rewards and
penalties was moving in the second direction before recent
calamities struck.
Finally, there may be a tendency to accept greater risk
with respect to the investment of money derived from past gains
than with respect to the original investment.
These situations, although based only upon casual
empiricism, seem to me to provide at least a partial explanation
of behavior observed in the not too distant past.
hypothesis is right -- the highest weight
expectations

If my basic

in the formation of

attaches to recent, often traumatic, experience --

most of these mechanisms that were pushing for greater risk-taking
are now operating in reverse.

The bright young men have learned

a lesson, or perhaps they are gone altogether.

Greatly increased

risk premia indicate a heightened awareness among investors as
to the risk being assumed.

These premia, in turn, create an

incentive for firms to move to less exposed positions.

The

location of the brink has been thoroughly explored, and some have
fallen over.

The question is how long and how far the retreat

from the brink will go.
I do not believe that there is a signpost telling us
where danger ends and safety begins.




There are only more safe and

-10-

less safe positions.

A fully informed investing public accurately

gauging economic risk will be making asset choices that guide
firms to positions reflecting the public preferences.

We should

bear in mind that a universal effort to achieve maximum safety
may send us on a long and thirsty journey as each of the travelers
tries to improve his liquidity or protect his solvency by forcing
a less advantageous position on the rest.
Improvement in balance sheet structures, both of
nonfinancial and financial corporations, is obviously very much
needed.

I would like to end with a short account of a few measures

that government has taken, and a few it could take, to shorten and
ease the trip, and to reduce artificial incentives to riskier
financial structures.
To begin with I would note that the monetary authority
has not sought to resolve liquidity and solvency problems by
inflating the economy.

The rate of growth of the money supply,

M]^ has been moderate over the last two years and the Federal
Reserve plans to keep it that way.

We have learned, moreover,

that whatever power inflation might have had in the past to float
the economy off any financial shoals has vanished today.

Inflation

has revealed itself as a threat to liquidity and solvency.
What government has done of late through its fiscal policy
is to take on some of the burden of debt that needed to be incurred




-11-

if savings were to be invested and jobs to be protected.
the entire

Over

post-war period, however, the Federal government

has been the one sector which has sharply reduced its debt relative
to its income.

As a result, all other sectors together have found

their debt/income ratios rising.

While this may have been an

additional factor making for higher risk, I would not accept for
a moment the implication that the government should increase its
debt in order to spare the private sector the need to increase its
own.

The private sector can live with higher debt/income ratios

than those of the late 40fs and the 50fs.

But the substitution

of public for private debt capacity during the recent recession
has been beneficial for the restructuring process as well as for
the maintenance of income levels.

I need hardly add that what is

beneficial during a recession may become a threat as the recovery
advances.
I

have in the past examined two devices that might reduce

the economyfs inherent pressure toward escalating risk, and I shall
mention them briefly.

One is a change in our tax system designed

to eliminate the tax bias toward debt and against equity.

We can

achieve this by reducing the tax deductibility of interest, thereby
increasing the tax base so that the corporate tax falling upon
dividends and profit retentions may be simultaneously reduced.
If the same tax rate were applied to income going into interest
payments, dividend payments, and profit retentions, the tax system




-12-

would be neutral with regard to the corporate choice between
equity and debt.

The problems of phasing into such a system —

it can only be done gradually -- are not inconsiderable, but could
most likely be solved.
A second reduction in our financial risk exposure applies
to the banking system.

Present insurance of $40,000 per deposit

protects 63 per cent of the dollar value of deposits in insured
banks, but leaves particularly large banks vulnerable to withdrawal
of deposits in excess of $40,000.

The historical loss experience,

even including U.S. National Bank in San Diego and Franklin,
indicates that it would cost little to raise the level of insurance
even up to 100 per cent.

Doing so, in addition to providing

insurance, would also help to minimize liquidity problems such as
arose in the case of the Franklin National Bank, where a rapid
runoff of CDs forced the Federal Reserve to substitute its credit
for that of large depositors.

However, it may not be wise to go

to 100 per cent insurance, even if some of the inherent regulatory
problems would be dealt with by graduated premiums.

Full deposit

insurance might eliminate the discipline now exerted over banks
by the market place.

Nor would I regard insurance as a full

substitute for a continued effort by the banks to improve their
capital positions.

Nevertheless, enlarged deposit insurance is

one of the avenues open to the government to increase the safety
of our financial structure.




Table 1

INTERNAL AND EXTERNAL SOURCES OF FUNDS
OF NONFINANCIAL CORPORATIONS—

End of
Year or
Quarter^/

Retained
Profits After
IVA and C C A - t '

,

Annual Flows in Billions of: Dollars
Gross
Capital
ShortInternal
Term
Consumption
Fund s_5/
Allowance^/
Debt^/

LongTerm
Debt2 .1

Net
Equity
, Issues— '

: 1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976-1

3.2
6.9
11.9
11.3
9.3
9.9
9.9
8.2
8.7
12.2
10.5
10.3
8.1
12.1
10.2
10.2
13.0
14.9
19.3
23.4
25.0
22.2
19.5
14.3
6.0
10.3
18.2
15.7
0.1
15.2
25.2

4.6
5.7
6.8
7.8
8.6
10.0
11.2
12.9
14.6
17.0
18.4
20.3
21.4
22.9
24.2
25.4
28.4
29.5
30.7
32.6
35.4
38.9
42.6
47.3
52.7
57.7
62.0
68.1
77.6
88.6
94.8

7.8
12.6
18.7
19.1
17.9
19.9
21.1
21.1
23.3
29.2
28.9
30.6
29.5
35.0
34.4
35.6
41.4
44.4
50.0
55.9
60.4
61.1
62.1
61.6
58.7
68.0
80.2
83.8
77.7
103.8
120.0

6.0
7.9
3.2
-3.6
18.4
8.0
-0.2
0.3
-0.4
15.4
5.6
1.0
1.6
10.5
4.3
8.0
6.6
11.8
11.3
21.4
16.7
8.9
29.9
32.5
11.4
9.9
25.2
44.4
53.1
-3.7
37.3

3.5
5.2
5.2
2.9
4.0
5.8
5.8
4.0
4.5
6.1
7.5
8.5
8.1
7.5
7.1
8.7
10.2
10.1
9.8
13.4
18.3
21.2
22.2
21.5
27.0
31.1
33.2
39.8
44.6
33.9
24.6

1.0
1.1
1.0
1.2
1.3
2.1
2.3
1.8
1.6
1.7
2.3
2.4
2.0
2.1
1.4
2.1
0.4
-0.3
1.1
*
1.3
2.4
-0.2
3.4
5.7
11.4
10.9
7.4
4.1
9.9
7.2

Averages :
1946-1950
1951-1955
1956-1960
1961-1965
1966-1970
1971-1975

8.5
9.8
10.2
16.2
17.4
11.9

6.7
13.1
21.4
29.3
43.4
70.8

15.2
22.9
31.7
45.5
60.8
82.7

6.4
4.6
4.6
11.8
19.9
25.8

4.2
5.2
7.7
10.4
22.0
36.5

1.1
1.9
2.0
0.8
2.5
8.7

Footnotes attached next page.







Footnotes to Table 1
1/Non-farm corporations.

2/Numbers for first quarter 1976 are preliminary and are at
seasonally adjusted annual rates.
3/Retained profits are on the old NIA basis through 1961
--reflect only the inventory valuation adjustment (IVA)-and are on the new NIA basis after 1961--reflect the
inventory valuation adjustment plus the capital consumption
adjustment (CCA) for underdepreciation. Retained profits
include foreign branch profits.
4/The capital consumption allowance is from the NIA and is
primarily tabulated by IRS from tax returns filed by nonfinancial corporations.
¿/Gross internal funds: retained profits after IVA and
(since 1962) CCA plus capital consumption allowance.
6/Short term debt:

7/Long term debt:

commercial paper, acceptances, finance
company loans, U.S. Government loans,
construction loans, 60 per cent of bank
loans N.E.C., profit taxes payable,
trade debt, and miscellaneous liabilities.
tax exempt and corporate bonds, multi­
family and commercial mortgages, and 40
per cent of bank loans N.E.C.

8>/Net equity issues:

new equity issues less equity
retirements.

*--less than 0.05.
Totals may not add because of rounding.
SOURCE:

Flow of Funds Section, Board of Governors of the
Federal Reserve System.

TABLE 2

EXTERNAL SOURCES OF FUNDS OF NONFINANCIAL CORPORATIONS:~
PERCENTAGE DISTRIBUTION OF ANNUAL FLOWS

End
Year or
Quarter^./

$ Billions
External
Sources
of Funds— '

♦

Per Cent
L.T. Debt4/
External
Sources

S.T. DebtV
External
Sources

1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976-1

10.5
14.2
9.4
0.5
23.7
15.9
7.9
6.1
5.7
23.2
15.4
11.9
11.7
20.1
12.8
18.8
17.2
21.6
22.2
34.8
36.3
32.5
51.9
57.4
44.1
52.4
69.3
91.6
101.8
40.1
69.1

57.1
55.6
34.0
n.m.
77.6
50.3
-2.5
4.9
-7.0
66.4
36.4
8.4
13.7
52.2
33.6
42.5
38.4
54.6
50.9
61.5
46.0
27.4
57.6
56.6
25.8
18.9
36.4
48.5
52.2
-9.2
54.0

11.7
11.8
14.4
22.9
44.4
71.0

56.1
22.4
28.8
49.6
42.7
29.3

35.5
56.1
56.4
47.0
51.4
55.8

9.5

33.3
36.6
55.3
n.m.
16.9
36.5
73.4
65.6
78.9
26.3
48.7
71.4
69.2
37.3
55.5
46.3
59.3
46.8
44.1
38.5
50.4
65.2
42.8
37.5
61.2
59.4
47.9
43.4
43.8
84.5
35.6

Averages :
1946-1950
1951-1955
1956-1960
1961-1965
1966-1970
1971-1975

Net Equity
Issues— '
Ext. Sources

!
Footnotes attached next page.




;

7.7
10.6
n.m.
5.5
13.2
29.1
29.5
28.1
7.3
14.9
20.2
17.1
10.4
10.9
11.2
2.3
-1.4
5.0
jr -

3.6
7.4
-0.4
5.9
12.9
21.7
15.7
8.1
4.0
24.7
10.4

;

_____

8.3
21.4
14.7
4.3
5.9
14.8

!

... i




Footnotes to Table 2
JL/Non-farm corporations.

2/Numbers for first quarter 1976 are preliminary and are at
seasonally adjusted annual rates.
^/External source of funds:

short term debt, long term debt,
and net equity issues. See
Table 1 for these data.

4/See the footnotes to Table 1 for the definition of this item.
n.m.--not meaningful.
'
v--less than 0.05.
Totals may not add because of rounding.
SOURCE:

Flow of Funds Section, Board of Governors of the Federal
Reserve System.

TABLE 3

TOTAL SOURCES OF FUNDS OF NONFINANCIAL CORPORATIONS: /
—
PERCENTAGE DISTRIBUTION OF ANNUAL FLOWS

End of
Year or .
Quartern1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976-1




Billions
Total
Sources
of Funds— '
18.3
26.8
28.1
19.6
41.6
35.8
29.0
27.2
29.0
52.4
44.3
42.5
41.2
55.1
47.2
54.4
58.6
66.0
72.2
90.7
96.7
93.6
114.0
119.0
102.8
120.4
149.5
175.4
179.5
143.9
189.1

Gr. Int. Fund sit/

J
1

Sources
42.6
47.0
66.6
97.5
43.0
55.6
72.8
77.6
80.3
55.7
65.2
72.0
71.6
63.5
72.9
65.4
70.7
67.3
69.3
61.6
62.5
65.3
54.5
51.8
57.1
56.5
53.7
47.8
43.3
72.1
63.5

Memo :
Ret.Profits—'
Tot.Sources
17.5
25.7
42.3
57.6
22.3
27.6
34.1
30.1
30.0
23.3
23.7
24.2
19.7
22.0
21.6
18.7
22.2
22.5
26.7
25.8
25.9
23.7
17.1
12.0
5.8
8.6
12.2
9.0
0.1
10.6
13.3

Per,Cent
L.T. Debt_4/
S.T. Debtih/
Total
Total
Sources
Sources
32. 8
29. 5
11. 4
-18. 4
44. 2
22. 3
- 0. 7

1. 1
- 1. 3
29. 4
12. 6
2.4
3. 9
19. 1
9. 1
14. 7
11. 3
17. 9
15.6
23. 6
17. 3
9. 5
26. 2
27. 3
11. 1
8. 2
16. 9
25. 3
29. 6
2.6
19. 7

19.1
19.4
18.5
14.8
9.6
16.2
20.0
14.7
15.5
11.6
16.9
20.0
19.7
13.6
15.0
16.0
17.4
15.3
13.6
14.8
18.9
22.5
19.5
18.1
26.3
25.8
22.2
22.7
24.9
23.6
13.0....

Total Debt5/
Total
Total
Sources
51.9
48.9
29.9
-3.5
53.8
38,5
-19.3
15.8
-14.1
41.0
29.6
22.3
23.5
32.7
24.2
30.7
28.7
33.2
29.2
38.4
36.2
32.2
45.7
45.4
37.4
34.1
39.1
48.0
54.4
-21.0
____32.7 ..... J —

Net Equity
Is sue sit/
Tot.Sources
5.5
4.1
3.6
6.1
3.1
5.9
7.9
6.6
5.5
3.2
5.2
5.7
4.9
3.8
3.0
3.9
0.7
-0.5
1.5
•k

1.3
2.6
-0.2
2.9
5.5
9.5
7.3
4.2
2.3
6.9
3.8

i

Footnotes to Table 3
_l/Non-farm corporations.

_2/Numbers for first quarter 1976 are preliminary and are at
seasonally adjusted annual rates.
_3/Total sources of funds:

gross internal funds plus external
sources of funds. See Tables 1 and
2 for data and definitions.

4/See Table 1 for data and definition.
¿/Total debt:

short term debt plus long term debt.
Table 1 for data and definitions.

See

*--less than 0.05.
Totals may not add because of rounding.
SOURCE:




Flow of Funds Section, Board of Governors of the Federal
Reserve System.

TABLE 4

SELECTED OUTSTANDINGS AND RATIOS
OF NONFINANCIAL CORPORATIONS!/
Outstandings in Billions of Dollars
’
. . .. . ..........
End of
Year or
Quarter^/
1946
1947
1948
1949
i 1950
! 1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976-1

Liquid
Assets^/
33.5
35.1
36.3
39.4
44.0
46.7
46.6
48.6
48.9
54.2
49.7
49.2
51.7
57.1
53.0
56.5
59.6
64.2
65.1
67.8
64.1
68.8
76.7
78.9
78.5
ä 89.1
93.1
100.1
113.1
132.4
133.2
1




Short
Term
Debt4/
41.5
49.5
52.5
49.0
67.7
75.9
75.8
76.6
76.4
92.0
97.8
98.8
100.6
111.7
116.1
123.0
129.8
141.8
153.5
175.3
192.0
201.6
231.3
263.9
275.8
285.4
310.7
356.0
i 412.0
408.4
412.6
. - . . - - -- -

Histor­
ical
Cost
Equity6/

Total
Debt5/
80.5
93.7
102.2
101.5
124.1
138.1
143.8
148.5
152.9
174.5
187.8
197.4
207.4
225.9
237.6
253.2
270.2
292.3
313.7
348.9
383.9
414.6
466.6
520.7
559.6
1 600.4
1 658.6
748.8
! 844.3
874.7
; 883.2
L-. .-. .-

i
i
;

i
!

j

_ -J

96.5
110.6
124.5
136.0
151.6
168.0
179.1
191.5
201.0
216.3
231,2
244.8
255.2
269.8
281.0
292.4
308.2
322.6
342.6
364.9
392.2
418.3
439.6
466.7
485.7
514.0
548.3
598.6
653.5
646.0
n . a.
.........

Current
Cost
Equity!/
113.3
133.9
148.9
155.7
173.8
192.2
202.0
214.9
222.5
245.3
269.0
286.6
297.2
313.2
320.0
329.5
343.7
359.1
380.6
405.8
439.3
473.7
508.2
553.4
595.5
643.3
| 701.3
j
780.1
| 922.2
1002.1
n . a.
i
.

-

Liquid
Assets
, S.T. Debt
0.807
0.709
0.691
i 0.804
0.650
0.615
0.615
0.634
0.640
0.589
0.508
0.498
0.514
0.511
0.457
0.459
0.459
0.453
0.424
0.387
0.334
0.341
0.332
0.299
0.285
0.312
0.300
0.281
0.275
0.324
0.323
i- - -- -

Ratios of Outstandings
Historical
Cost Equity
S.T.Debt
Total
Capitaliza­
Total
tions/
Debt

0.516
0.528
0.514
0.483
0.546
0.550
0.527
0.516
0.500
0.527
0.521
0.501
0.485
0.494
0.489
0.486
0.480
0.485
0.489
0.502
0.500
0.486
0.496
0.507
0.493
j
0.475
0.472
0.475
0.488
0.467
0.467
- - . . . _ -. . . -

0.545
0.541
0.549
0.573
0.550
0.549
0.555
0.563
0.568
0.554
0.552
0.554
0.552
0.544
0.542
0.535
0.533
0.525
0.522
0.511
0.505
0.502
0.485
0.473
0.465
0.462
0.454
0.444
0.436
0.425
n. a.

i-

(L

.

...

Current
Cost Equity
Total
Capitaliza­
tion^/

j
j
1
i

0.585
0.588
0.593
0.605
0.583
0.582
0.584
0.591
0.593
0.584
0.589
0.592
0.589
0.581
0.574
0.565
0.560
0.551
0.548
0.538
0.534
0.533
0.521
0.515
0.516
0.517
0.516
0.512
0.522
0.534
n.a.
.i.

!
;
I
|
j
i




Footnotes to Table 4
l./Non-farm corporations.

2/Numbers for first quarter 1976 are preliminary.
¿/Liquid assets:

4/Short term debt:
¿/Total debt:

demand deposits, currency, time deposits,
U.S. Government securities, State and local
obligations, commercial paper, and security
R.P.'s.
see footnotes to Table 1 for a definition.

short term debt plus long term debt. See
footnotes to Table 1 for definitions.

¿/Historical cost equity represents the capital stock of nonfinancial corporations using historical cost accounting.
Financial assets are valued at par or book value, while fixed
assets and inventories are valued at historical cost after
deducting depreciation on a straight line basis, which is the
most common accounting method used in published statements of
condition. The number for 1975 is preliminary.
_7/Current cost equity represents the capital stock of non-

financial corporations using current cost accounting.
Financial assets are valued at par or book value, while fixed
assets are valued at current prices after deducting depreciation
on a double declining balance basis. The number for 1975 is
preliminary.
¿/Total capitalization is the sum of total debt plus historical
cost equity when the numerator of the ratio is historical cost
equity and is the sum of total debt plus current cost equity
when the numerator is current cost equity.
n.a. -- not available.
Totals may not add because of rounding.
SOURCE:

Flow of Funds Section, Board of Governors of the Federal
Reserve System.