THE CONSUMER SECTOR'S DEMAND FOR ASSETS AND THE SUPPLY OF CORPORATE BONDS AND EQUITIES: AN INTEGRATION OF PORTFOLIO THEORY AND A THEORY OF THE FIRM Dissertation for the Degree of Ph. D. MICHIGAN STATE UNIVERSITY ROBERT HENRY GENTENAAR 1977 LI B R A R Y M35533 3 at“: University JIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII ll L L 31293 000991848 This is to certify that the thesis entitled THE CONSUMER SECTOR'S DEMAND FOR ASSETS AND THE SUPPLY OF CORPORATE BONDS AND EQUITIES: AN INTEGRATION OF PORTFOLIO THEORY AND A THEORY OF THE FIRM presented by Robert Henry Gentenaar has been accepted towards fulfillment of the requirements for Ph. D. degree in Economics Major professor Date Aggust 5, 1977 07639 ABSTRACT THE CONSUMER SECTOR'S DEMAND FOR ASSETS AND THE SUPPLY OF CORPORATE BONDS AND EQUITIES: AN INTEGRATION OF PORTFOLIO THEORY AND A THEORY OF THE FIRM By Robert Henry Gentenaar Within portfolio theory, relative interest rates are assumed to be dependent upon the relative supplies of assets. Previous investigations have concentrated on the demand for assets, usually ignoring equities and neglecting the study of the supply of these assets. The purpose of this study is to incorporate the supplies of corporate bonds and equities into a model containing the consumer sector's demand for assets and to measure the effects of a change in the money supply. The time period included in this study is l927-72, omitting 1942-49, a total of thirty-eight years. The sources and methods of data accumulation are fully explained in the Appendices. Demand equations were developed for the following assets held by the consumer sector: M = Money holdings ‘ (Currency and demand deposits) Dep = Savings deposits (Time deposits in commercial banks, savings and loan shares. and mutual savings deposits) Robert Henry Gentenaar GS = Holdings of state, local and federal obligations CB = Holdings of corporate bonds E = Holdings of equities The demand equations were specified in the following semi-log form: A 6 In W- a0 + 81 In N + 821n Y +i=§iri where: A = asset (one of the five) ri = rate of return on each of the assets (rate on money assumed to be zero) H = net worth (total of the five assets plus the value of the consumer sector's holdings of durables and housing minus holdings of mortgages and installment loans) Y = personal disposable income The 'best fit' is arrived at for each of the demand equations by means of regression analysis. Two theories of the firm are analyzed, however the traditional theory is found to be more compatible with portfolio theory. For this reason, the supply equations for corporate bonds and equities are derived using the basic assumptions of the traditional theory. The final model is composed of eleven equations, which include the five demand equations plus the two supply equations and four iden- tities. The identities include statements on net worth, money supply, deposit supply and corporate bond supply. These equations were then solved by means of a program incor- porating an iterative technique producing simulated values for each of the thirty-eight years. Robert Henry Gentenaar The money supply was then increased and new simulated values were obtained. The results indicate a 'good fit' between the simulated and actual values for the various assets and the rate of return on corporate bonds. The 'goodness of fit' for the rates of return on equity and government securities appears as somewhat lower than that of the ‘assets. An increase in the money supply has a positive, though almost continuously decreasing. effect upon the supplies of corporate bonds and equities and upon the demand for all assets except equities. There is a large negative effect upon the consumer sector's holdings of equities and a negative effect upon the rate of return on equities. while the other rates of return are affected in the same manner as their assets. The model indicates that for monetary policy to maintain the same effectiveness, throughout this time period. it must involve an almost continually increasing percentage change in the money supply. The model further indicates that when the consumer sector increases its demand for money, the rate of return on equity must drop to induce this increase. These changes then lead to an increase in equity financing relative to bond financing and a shift in the con- sumer sector's portfolio values from equities into the other assets, whose rates of return have risen. THE CONSUMER SECTOR'S DEMAND FOR ASSETS AND THE SUPPLY OF CORPORATE BONDS AND EQUITIES: AN INTEGRATION OF PORTFOLIO THEORY AND A THEORY OF THE FIRM By I Robert Henry Gentenaar A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1977 I in, I 7- .7 C” 9 7 ( Copyright by Robert H. Gentenaar 1977 To Mom and Dad iii ACKNOWLEDGMENTS I wish to express a special note of thanks to my committee chairman, Professor Robert H. Rasche. who allowed me many hours of I consultation and demonstrated an extraordinary amount of patience. My greatest debt is to my wife, Linda. who provided me with endless encouragement. iv TABLE OF CONTENTS LIST OF TABLES. LIST OF FIGURES INTRODUCTION Chapter I. DEMAND FOR MONEY. Hicks. Friedman. Latané . . . . . . Bronfenbrenner and Mayer Meltzer . . Heller Tobin. Sumnary . II. DEMAND FOR FINANCIAL ASSETS (EXCLUDING MONEY) . Feige. . . Tong Hun Lee Hamburger Chase. . Kardouche Nyerges . Summary . III. SUPPLY OF EQUITY AND CORPORATE BONDS . Equity Price Dividend Theory-~Pure Earnings Theory Gordon Leroy. Keran. . . . . Lerner and Carlton Page viii xi Chapter Page Gruber. . . . . . . . . . . . . . . . 54 Sprinkel . . . . . . . . . . . . . . . 54 Mascia. . . . . . . . . . . . . . . 55 Mama and Jaffee. . . . . . . . . . . . . 56 N01- NI Approach. . . . . . . . . . . . . 58 Robichek and Myers . . . . . . . . . . . 58 Modigliani and Miller. . . . . . . . . . . 59 Durand. . . . . . . . . . . . . 6l Solomon and Vickers . . . . . . . . . . . 62 Sametz. . . . . . . . . . . . . 64 Schwartz and Aronson . . . . . . . . . . . 65 Baumol and Malkiel. . . . . . . . . . . . 66 Vickers . . . . . . . . . . . . . . . 67 Summary . . . . . . . . . . . . . . . 70 IV. DEMAND EQUATIONS . . . . . . . . . . . . . 75 Method. . . . . . . . . . . . . . . 76 Time Period. . . . . . . . . . . . . . 78 Demand for Money . . . . . . . . . . . . 8l Savings Deposits . . . . . . . . . . . . 84 Corporate Bonds. . . . . . . . . . . . . 87. Government Securities. . . . . . . . . . . 89 Equities . . . . . . . . . . . . . . . 90 Summary . . . . . . . . . . . . . . . 93 V. SUPPLY OF EQUITIES AND CORPORATE BONDS. . . . . . 95 Definition of Variables . . . . . . . . . . 102 Supply of Corporate Bonds . . . . . . . . . 104 Summary . . . . . . . . . . . 105 VI. THE MODEL . . . . . . . . . . . . . . . l07 Definition of Variables . . . . . . . . . . l08 Solution Procedure. . . . . . . . . . . . 109 Results . . . . . . . . . llO Increase in the Money Suppl . . . . . . . . lZO Results of an Increase in M . . . . . . . . lZl VII. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . 128 Recommendations for Further Study. . . . . . . T32 vi APPENDICES Appendix A. J. Supply of Equity . K. Corporate Earnings and Taxes . L. Personal Disposable Income. BIBLIOGRAPHY. :mmmopw Money. Government Securities Corporate Bonds Housing . Durables. Equities. .‘ Installment Loans. Mortgage Loans. Rates of Return vii Page 133 135 141 144 152 158 165 166 167 169 170 172 173 F.‘ ply! ‘0 ‘7 Table ‘0 m N 0‘ 01 h (A) N o o o o o o o o d --J d d d d 01 k (A) N -‘ O . C C . . O 16. A-2. LIST OF TABLES Meltzer's Equations. Rate Elasticities ‘Feige's Coefficients Hamburger's Results (Part 1). Hamburger's Results (Part 2). Chase's Results . Kardouche's Results. Nyerge's Equations . Gordon's Equations . Keran's Results . Correlations Among Rates of Return. Elasticities from Demand Equations. Elasticities from Supply Equations. Simulated and Actual Values . Valuation of Variables After a lO Percent Change in Money Supply . . . . . Elasticities . Money (Currency plus Demand Deposits). Savings Deposits (Time Deposits plus Credit Union Deposits, Mutual Savin 5 Bank Deposits, and Saving and Loan Shares. viii Page 19 20 26 27 3O 33 37 44 50 81 93 106 111 122 124 134 134 Table Page 8-]. Gross Federal Debt. . . . . . . . . . . . . 135 8-2. Holdings of Federal Securities by Banking System. . . 136 8-3. Holdings of State and Local Governments. . . . . . 136 8-4. Holdings of Financial Intermediaries Other than Banks . . . . . . . . . . . . . . . . l37 8-5. Gross Debt (State and Local) . . . . . . . . . I38 8-6. Holdings of State and Local Securities by Nonfinancial Corporations, Banking Systems. Government Corpora- tions, and Credit Agencies . . . . . . . . . I39 8-7. Holdings of State and Local Securities by Financial Intermediaries Other than Banks. . . . . . . . 139 8-8. Holdings of State and Local Government Securities by State and Local Governments . . . . . . . . . 140 C-1. Gross Corporate Bonds Outstanding. . . . . . . . 141 C-2. Holdings of Corporate Bonds by Banking System C-3. Holdings of Corporate Bonds by Financial Intermediaries Other than Banks. . . . . . . . . . . . . I42 D-l. Housing . . . . . . . . . . . . . . . . 144 D-2. Housing Expenditure (Part 1) . . . . . . . . . l45 D—3. Housing Expenditure (Part 2) . . . . . . . . . l46 D-4. Expenditures on Private Nonfarm l-4 Family Units. . . J47 D-5. Housing Expenditures (Part 3) . . . . . . . . . 'l48 O-6. Depreciation. . . . . . . . . . . . . . . T49 D-7. Valuation of Housing . . . . . . . . . . . . l50 E-l. Durables . . . . . . . . . . . . . . . . l52 E-Z. Durables Constant 47-49 Prices. . . . . . . . . l53 E-3. Depreciation of Durables. . . . . . . . . . . 155 E-4. Durables in Constant 1958 Dollars. . . . . . . . 156 ix Valuation of Durables. Valuation of Equity 1927-45. Valuation of Equity 1969-72. Valuation of Consumer Sector's Holdings. Installment Loans . Mortgage Loans . Rates of Return. .‘ Supply of Equity Corporate Earnings and Taxes Personal Disposable Income . Page 157 160 162 163 165 167 167 169 170 172 LIST OF FIGURES Figure 1. Consumer's Holdings of Corporate Bonds (CBDC). 2. Consumer's Holdings of Government Securities (GSDC) . . . 3. ‘Consumer's Holdings of Equities (EDC) 4. Suppgy of Equity ES and Supply of Corporate Bonds C8 . . . . . . . . . . . . . . . 5. Rate of Return on Equity (RS) . 6. Return on Government Securities (CP). 7. Return on Corporate Bonds (RB). xi Page 114 115 116 117 118 119 119 INTRODUCTION Studies of the asset money have slowly evolved over the years into what has become known as portfolio theory. Within portfolio theory, relative interest rates are assumed to be dependent upon the relative supplies of assets. Previous investigations have usually omitted equities from their demand equations and have, in the articles reviewed, totally neglected any study of the supply of assets. Studies on the subject of equities usually confine themselves to the prediction of changes in the price of equity rather than the movements of the asset equity within the portfolio of the consumer sector. Many of the previous investigations have preoccupied them- selves with the study of only a relatively short and recent time period usually starting with a post World War II date. This paper has as its basic purpose the investigation of the assets of the consumer sector and the effects upon these assets when there is a change in the money supply. Including supply equations for corporate bonds and equities involved an attempt to integrate a theory of the firm and portfolio theory. The time period included in this study is 1927-41 and 1950-72, a total of thirty-eight years. Final data for the earlier portion of this period was not always readily available and the process by which the data was accumulated is explained in the Appendices. A short review of the evolution of portfolio theory is included in Chapter I while Chapter II examines several articles dealing with financial assets other than money. The purpose of Chapter III is to determine what theory of the - finn is appropriate for the development of supply equation for equities and corporate bonds. The first portion of Chapter III is devoted to a review of articles dealing with the determination of the price of equity while the latter portion reviews the differing theories of the valuation of the firm. Chapter IV is a presentation of the method used in arriving at demand equations while Chapter V is devoted to the derivation of supply equations for equities and corporate bonds. The demand and supply equations are joined in Chapter VI, and the results of a simulation are presented. The simulation is repeated after an increase in the supply of money and these results are also included within this chapter. The conclusion as well as recommendations for further study make up the final chapter (Chapter VII). The appendices explain the sources and methods of the collec- tion of data for the entire time period. CHAPTER I DEMAND FOR MONEY Very few topics have received the attention accorded to the demand for money; however, disputes still linger involving such impor- tant issues as the stability, determinants, and even the definition of money. Despite these differences, there exists an apparent con- sensus of opinion that money is properly examined in the context of a balance sheet. ‘ Accepting this approach to the study of money determines the manner in which the other assets are investigated. Therefore, for this study and possibly for economics in general, the continuing disputes are secondary in importance to this consentient element. In light of the above statements, a review of the subject of money was deemed necessary prior to an investigation of any other assets and accounts for the structure of this chapter. The remainder of this section will present a short review of the evolution of this approach to the investigation of the demand for money. The first task of this review is to settle on a definition of money. Higk§_ The conception of treating money as an asset in-a balance sheet dates back to 1935 when Hicks, purporting to be a novice on the subject of money, suggested simplifying the theory of money by incorporating marginal utility analysis. In value theory, we take a private individual's income and expenditure account: we ask which of the items in that account are under the individual's own control, and then how he will adjust these items in order to reach a more preferred position. On the production side, we make a similar analysis of the profit and loss account of the firm. My suggestion is that monetary theory needs to be based again upon a similar analy- sis, but this time, not of an income account, but of a capital account, a balance sheet. Re have to concentrate on the forces which make assets and liabilities what they are.1 Keynes departed from the Quantity Theory by specifying a precautionary and a transaction motive, mainly dependent on income, and a speculative motive, dependent on the interest rate. His empha- sis on treating money as an asset and the aggregation of all other assets into bonds, which as Harry Johnson points out is implicit in the use of a single rate of interest, results in an overly simplified version of the balance sheet approach.2 Friedman A leading proponent of the modern quantity theory, Friedman perceives money as ". . . one kind of asset, one way of holding 3 wealth." Viewing the quantity theory as a theory of money, Friedman explains that the determinants of money or any other asset are the 1J. R. Hicks, "A Suggestion for Simplifying the Theory of Money," in Readin s in Monetar Theor , ed. Friedrich A. Lutz and Lloyd N. Mintz (New YorE: The NIaEiston Co., 1951), p. 25. 2Harry G. Johnson, "Monetary Theory and Policy," American Economic Review 52 (June 1962):345. 3Milton Friedman, "The Quantity Theory of Money--A Restate- ment," reprinted in Readings in Macroeconomics, ed. M. G. Mueller (New York: Rhinehart and Hinstbn, Inc., 1971), p. 147. total wealth, the price and return of the various assets which are components of this wealth, and the tastes and preferences of the wealth holders. Based on an investigation of the period 1870-1954, Friedman found income velocity declining over long periods but increasing in the short run. To rationalize this conflicting behavior the concepts - of permanent income and permanent price were introduced. This led to the finding of a highly stable secular behavior of income velocity. 1 Using this information plus the inability to relate interest rates to changes in velocity, Friedman concluded that interest rates had very little effect on the demand for cash. Friedman disputed the transactions motive and speculative motive (based on the above findings) and concluded that money should be considered as “one of a sequence of assets, on a par with bonds, equities, . . ."4 In investigating these relationships, Friedman's definition of money included time deposits. By means of a simple correlation between the logarithm of real cash balances per capita and the logarithm of real income, an income elasticity of money of 1.8 was calculated which implies money may be a luxury good. Much of the importance of Friedman's articles lies in the definitions of his variables, for the controversy surrounding them greatly influenced the research of many investigators. 4Milton Friedman, "The Demand for Money: Some Theoretical and Empirical Results," The Journal of Political Economy 67 (August 1959 :349. v I IIJ.’ Lfléflé. With money defined as currency plus demand deposits and using GNP as a measure of income, Latané found interest rates were signifi- cant determinants of money demand and calculated the income elasticity of money to be approximately unity.s Attempting to explain the discrepancy between Latané's find- ings and their own, Friedman and Schwartz concede that the income elasticity for time deposits is greater than the income elasticity for currency and demand deposits. In defending the difference in interest elasticities, Friedman and Schwartz found it plausible that the interest elasticity for money narrowly defined should be greater than for the definition including time deposits. More interesting is the contention by Friedman and Schwartz that neither definition of money can be considered as correct but rather the decision regarding the definition is arbitrary.6 They explain that the basis for their decision to include time deposits in the definition was largely a matter of convenience, dictated by the data available, in that prior to 1914 time deposits and demand deposits could not be separated. Ironically, support for this line of reasoning exists in the General Theory, where Keynes considered not only including time deposits but such assets as treasury bills in the definition of money 5Henry Allen Latané, "Cash Balances and the Interest Rate--A Pragmatic Approach," Review of Economics and Statistics 36 (November 1954):460. 6Milton Friedman and Anna J. Schwartz, "Money and Business Cycles,“ Review of Economics and Statistics 45 (Feburary 1963):45. as a matter of convenience.7 Duesenberry suggested dispensing with the term money and replacing it with an explanation of whatever assets the author uses.8 Other writers, some included later have not been in agreement with this flexible definition of money and have attempted to arrive at 'the' correct definition. It is apparent, not only from the above articles but also those that follow, that the problem of prOper definitions has been a major source of difficulty in the investigation of money. Many of the differing conclusions can and have been attributed to differences in the definitions and as a consequence the measurements of not only money but also such variables as wealth, income, and even interest rates . Bronfenbrenner and Mayer To investigate the relationship between money holdings and interest rates for the period 1919-56, Bronfenbrenner and Mayer used currency and demand deposits as the definition of money.9 The independent variables chosen include the 4-6 month commercial paper rate, Goldsmith's series on total national wealth in 1929 and deflated private GNP. 7Referred to in a footnote in John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace andWorld, Inc., 1964), p. 167. 8James S. Duesenberry, "The Portfolio Approach to the Demand for Money and Other Assets," The Review of Economics and Statistics 45 (February 1963):9. 9Martin Bronfenbrenner and Thomas Mayer, "Liquidity Functions in the American Economy," Econometrica 28 (October 1960):813-18. '7‘ .r‘ .11 I 1n M = .1065 - .0928 1n r - .1158 In W + .7217 M_.l + .3440 GNP (.0032) (.0139) (.0883) (.0576) (.0862) r = .997 (Parentheses include standard errors) The interest elasticity was computed to be less than .1 and the negative sign for the coefficient of wealth, though not signifi- cant, led them to suspect that money may be an inferior asset. Meltzer Contending that the reason for the finding of a negative wealth elasticity was due to an incorrect definition of the wealth variable by Bronfenbrenner and Mayer, Meltzer attempted to arrive at the correct specification for not only wealth but also money.10 His approach consisted of running log linear regression equations using three definitions of money and four definitions of wealth. Three of Meltzer's equations, covering the period 1900-49 are reproduced below in Table l and as Meltzer indicates, the definition of wealth as either total assets (A) or as net worth (N) gives improved results over the definition used by Bronfenbrenner and Mayer (G). Both the series on total assets (A) and the series on net worth (N) were constructed from Goldsmith's estimates of total assets (A) for eight bench mark years and his yearly estimates of nominal wealth (G). 10Expressed in a footnote in Allan H. Meltzer, "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy 71 (June 1963):230. I” Table l.--Meltzer's Equations. Dependent Variable Correlation 1n M1 - .8 ln r .997 ln A .99 (9.1) (34.8) 1n M1 -l.00 ln r 1.08 1n N .98 (11.1) (32.9) 1n M1 - .50 1n r -.02 1n G .64 (5.6) (.65) It is readily apparent that the results are significantly influenced by the definition of wealth. Meltzer's equations suggest an income elasticity of approximately unity. The same magnitude is suggested for the interest rate elasticity which is considerably higher than that obtained by Bronfenbrenner and Mayer. Part of this discrepancy may be due to the fact that Meltzer used the yield on long term corporate bonds whereas, as previously noted, Bronfenbrenner and Mayer chose the short term rate. Heller: When using real wealth Meltzer concluded that the addition of real income contributes little information. In contrast, Heller ran the same equations and obtained just the opposite results, i.e., when using real income the addition of real wealth contributes little information. Using the broader definition of money revealed that income added little information. Based on these results, Heller concluded the constraint used depended on the definition of money with income 10 being the proper constraint for the definition including time deposits.‘1 Many difficulties arise in comparing Heller's results to Meltzer's findings. First Heller used a short term interest rate due to finding long term rates nonsignificant. Second the data used by Heller was quarterly observations for the period 1947-58, which might present problems in deciding on the appropriate interest rate since the Treasury was pegging interest rates up to 1951. Third, the measurement of wealth used by Heller was constructed in a different manner than that of Meltzer. The above articles by Bronfenbrenner and Mayer, Meltzer, Heller, and Latané differ greatly due in large part to their defini- tions of variables but they all provide support, in varying degrees, for the theory that the demand for money is inversely related to the interest rate. - These articles followed the procedure used by Keynes in that they assumed there existed a single interest rate. Using a single interest rate implies that all nonmoney assets are perfect substitutes and of course does not allow for the investi- gation of the allocation of the nonmoney assets. The fact that investors hold many assets implies that this perfect substitutability does not exist in the real world. The fact that there are obviously several interest rates led Joan Robinson to the conclusion that every asset should be considered as a potential alternative to every other asset including money. 11H. R. Heller, "The Demand for Money: The Evidence from the Short-Run Data," Quarterly Journal of Economics 79 (May 1965):294. ‘9 11 Prior to any of the above studies, she voiced the opinion that the demand and supply of every asset should be considered.12 12212 A theory of the capital account is concerned with the propor- tions of the assets and debts in the portfolios. Monetary theory, . therefore, should direct itself, according to Tobin, to the identifi- cation of the forms in which nonmonetary pr0portions of wealth exist, as well as the various independent interest rates, i.e., those not separated by a constant risk differential. Keynes's model aggregated all nonmonetary assets by assuming the existence of'thg_interest rate. The yields on the nonmonetary assets were not assumed as equal but rather the differences between them were constant. Tobin explains this freed the rate differentials from dependency on the relative supplies of assets and therefore by setting one rate the others are defined. The_interest rate was therefore determined by the supply of money relative to the supply of 'bonds' (the aggregate of all nonmonetary assets). Tobin defined a different model, termed the Cambridge Tradition, which again was composed of two assets. In this model the assets are physical capital and money, with money being the aggregate term. Tobin, however, faults this model for failing to recognize the function of the yield of capital. He then presents a so-called modern 12Joan Robinson, The Rate of Interest (London: Macmillan, 1952), pp. 5-9. 12 version of the money-capital model, where the yield on capital is dependent on the relative supplies of the two assets. Money and government debt are "one and the same" and Tobin describes a trivial extension of this model which includes government securities assuming that the yield differentials among these securi- ties and 'actual' money are constants.13 Livingston in reviewing Tobin's capital-money model claims that Tobin should have said money and bonds are perfect complements in that he meant the demand for money and bonds are one and the same.14 It is apparent that Livingston misunderstood the relationship among the assets in this model. In aggregating money and bonds Tobin has in fact specified that the differential in their yields is inde- pendent of their relative supplies. This in effect means the composi- tion of the asset termed money, which is defined as government debt, is a matter of indifference to the holders and this automatically defines the components of this asset as perfect substitutes. If in fact money and bonds were pefect complements, as suggested, then the doubling of bonds would have to be matched by a doubling of money and the composition would no longer be a matter of indifference, which would mean that their respective yields are not independent of their relative supplies. ‘3James Tobin, "Monetary Theory: New and 01d Looks; Money, Capital, and other Stores of Value," American Economic Review 51 (May l96l):32. 14Byron Miles Livingston, "Effects of Real Economic Growth, Inflation and Monetary Forces Upon Stock Market Prices, Analyzed by Means of a Wealth Model" (Ph.D. dissertation, New York University, 1972 , p. 10. 13 Livingston charges that in Tobin's model "one must also account for the change in the supply of bonds, if the government buys bonds from the public."15 This again is a misunderstanding of the model apparently stemming from Tobin's discussion concerning the effects of retiring long term debt through taxation. Tobin's model sees this action as deflationary due to the reduction in the supply of money, which is equivalent to government debt, relative to the supply of capital. Livingston apparently is trying to separate bonds and money which is contrary to the assumptions of the model. By taxing and then retiring bonds, the holders of bonds and money have in effect reduced their holdings of bonds relative to money but this does not determine the interest yields and therefore is inconsequential. The importance to the model is that the combined holdings of money and bonds have been reduced relative to the existing holdings of capital. Therefore investors will require a higher return on capital, which is the strategic variable in Tobin's model. The importance of Tobin's work, however, rests not on the formulation of this model but in the recognition that all forms of wealth as well as all independent rates of interest should be iden- tified for a proper investigation of the portfolio of wealth holders. This then identifies an interest rate for every asset that is an imperfect substitute for another asset rather than assuming a two 15mm, p. 11. 14 asset world with just one rate determined by the supply and demand of assets. The portfolio approach is a theory not only of the demand for money but of each asset which is a component of the portfolio. Rather than having a constant rate differential, the relative rates on the assets depend on the relative supplies and the portfolio approach is therefore concerned with the allocation among the various assets within the portfolio. By measuring the proportion of each asset in the portfolio we then are measuring the demand for that asset. By increasing the supply of one asset relative to other assets, the rate of interest on that asset has to go up relative to the rates on other assets to entice the wealth owners to accept the increased supply. Therefore the demand for that asset will go up relative to the other assets. Tobin sets up an accounting framework for the economy where each asset has its own rate of return and every sector has a demand for each asset, which is a function of the various interest rates (one for each asset). Each sector is constrained by its net worth, i.e., the sectors can choose the proportions held of each asset but they cannot choose their net worth. In conjunction with Brainard, Tobin established a fictitious 16 economy composed of six assets and three sectors. Income is entered in each demand equation to represent the influence of __¥ A 16William C. Brainard and James Tobin, "Econometric Models: Their Problems and Usefulness; Pitfalls in Financial Model Building," American Economic Review 58 (May 1968):100. 15 transaction volume on money holdings. The form of the equation for the demand of each asset is: Xj = (a0 +i§1airi + a7Y)W where: Xj = desired asset holding r1 = interest rate on each asset Y = income I W = net worth Summary The study of money has progressed from the investigation of a two asset economy to a theory that considers the choice of all assets in the portfolio. The problems of definitions are now compounded for the inves- tigator must now choose several interest rates that are determined to be independent and must define assets in addition to the term money. Settling on a proper definition of money becomes a process of elimination. Harry Johnson discusses four definitions. Two of them have not been reviewed in this paper. They are liquid assets (M3) and the Gurley and Shaw definition which includes all liabilities of financial institutions (M4).17 The term liquid assets appears nebulous and as a result suffers from the lack of a workable definition. Both (M3) and (M4) ¥ 17Harry G. Johnson, "Monetary Theory and Policy," American Eggnomic Review 52 (June l962):351-52. 16 were eliminated from consideration because they preclude the examina- tion of the allocation of financial assets by the consumer sector. The reasoning behind these definitions is the high degree of substi- tutability between these assets. Unless the assets are found to be perfect substitutes, and they were never found as such, there is no necessity to expand the definition.18 Friedman argued for the inclusion of time deposits (M2) not only because they are close substitutes for currency and demand deposits (Ml) but, as noted earlier, due to the available data prior to 1914. The findings of some of the articles discussed later do not unanimously support the contention that time deposits are strong substitutes for currency and demand deposits. In addition, this line of reasoning leads to the same conclusion as that given for excluding (M3) and (M4). Furthermore, the period examined in this study begins in 1927 which allows for a finer breakdown between these assets. Based on the above, there appears no compelling reason to expand the definition beyond (Ml), which has been the more popular version. The rest of this study when referring to money will, there- fore, assume it to be currency plus demand deposits. The demand equations used in this study were based on the equations derived by Tobin. The assets investigated include the consumer sector's holdings of money, savings deposits, corporate k 18When the objective is a more stable function, Laidler states that substitutability between the assets is a necessary but not a sufficient condition. David Laidler, "The Definition of Money," rePr1nted in Monetary Economics Readings on Current Issues, ed. illiam E. Gibson and GeorgeTG. Kauffian (New’YoFk?_McGFaw-Hill Book Company. 1971), p. 188. 17 bonds, equities, and government securities. Definitions for the assets, other than money, are arrived at in the next section. Net worth is calculated as the total of seven assets (the above five plus holdings of durable goods and the valuation of housing) minus the consumer sector's holdings of mortgages and installment loans. CHAPTER II DEMAND FOR FINANCIAL ASSETS (EXCLUDING MONEY) The problems connected with the demand for money are present 'in the studies concerned with other financial assets. There is dis- agreement on the forms of the equations, the rates of return to be included, the proper constraints, and the grouping of assets. Need- less to say, the results are diverse and the explanations varied. An important objective of this chapter is the establishment of the proper grouping for the various nonmoney assets and for this pur- pose we undertake a survey of the literature. Feige Investigating the consumer sector's demand for demand deposits, time deposits, and savings and loan shares, Feige utilized ‘9 Independent variables included the actual interest three equations. returns on the above assets, the actual rate on mutual savings bank deposits, permanent income, per capita advertising expenditures by savings and loan associations, and nine dummy variables. The actual interest returns were computed by dividing the total interest payments by the average balance held during a particular period. The interest 9Edgar L. Feige, The Demand for Liquid Assets: A Temporal gross Section Analysis (Englewood Cliffs, New Jersey. Prentice H611, "Co, ’pp -00 18 A? '19-; ‘2 . u “I. ,;' -:o 1' 1" . i .Q :r'; ’0 o- q “-1.". an. or u t V Duo a U r I" g. 19 return on demand deposits was represented by the total service charges divided by actual balances and was of course negative. During the period covered, (1949-1959), many savings and loan associations offered nonpecuninary returns in the form of premiums. Since data on the amount of these returns was unavailable, Feige used per capita advertising expenditures as a proxy. The nine dummy variables were included to account for possible variation in the intercepts for a particular asset among different geographical and financial areas. Using a pooled time series, cross sectional approach covering the eleven years with 49 observations for each year (one for each state plus the District of Columbia), Feige's results are as follows (Tables 2 and 3). Table 2---Rate Elasticities. Lee's Results Feige's Results (Omitting Dummy Variables) nxd nxt nxs nxm nxy nxd nxt nxs nxm nxy Demand Deposit .31 -.10 .30 .04 .92 .37 .02 -.31 -.05 1.36 Time _ _ _ - Deposit -.13 .49 .55 .28 .69 .28 .15 .75 .01 1.24 Savings and - _ _ _ _ Loan Shares .10 .003 .18 .08 .63 .22 .12 .66 .12 1.98 As the tables indicate, all the own rates entered with the expected sign, and time deposits appear as weak substitutes for demand deposits. The remaining elasticities, however, suggest a mixture, some not in keeping with expectations. 20 Table 3.--Feige's Coefficients. 2 Y rd rt rS rm R Demand .365 535 -35 53 25 978 Deposits (.08) (48) (13) (13) (15) ' Time .122 -101 76 -44 -82 942 Deposits (.037) (37) (10) (10) (11) ° Savings and .069 - 4B ' .25 9 -14 968 - Loan Shares (.008) (19) (5.39) (5) (6) ' Notes-for Table 3: r return on demand deposits d V = permanent income rt = return on time deposits rs = return on savings and loan shares rm = return on mutual savings deposits Parentheses include standard errors In equation 1, savings and loan shares appear as complements to demand deposits but equation 3 shows them to be weak substitutes. Equation 2 has savings and loan shares as substitutes for time deposits while in equation 3 they are almost independent of one another. The income elasticity for demand deposits is approximately 1 while that for time deposits is only .69. This together with the finding of weak substitution between demand deposits and time deposits, if accepted, would be contrary to Friedman's explanation of the difference between Latané's and Friedman's own results referred to in the last section. To explain the finding of complementarity, Feige cites an article by Tobin and Brainard. However, their finding of possible 21 complementary assets is based on the assumption that there is more than one holder of the asset in question, i.e., the consumer sector and the financial sector.20 Feige logically concludes that the reason fer the complementarity is most likely due to an inadequate measure of the household's holdings of demand deposits. If this logic is correct then as the rate paid on savings and - loan shares increases the demand for demand deposits by the consumer sector declines but the holdings of demand deposits by savings and loan associations increase enough to more than offset the decrease in the consumer sector. Since the consumer sector holds the vast majority of savings and loan shares and it seems illogical that the savings and loan associations would convert more than a fraction of incoming deposits into demand deposits the implication of Feige's explanation must be the saving and loan shares and demand deposits are considered as very weak substitutes with a major source of saving and loan shares being time deposits or some other asset. Equation 2 shows that time deposits are very sensitive to both the rate of interest on savings and loan shares and the rate paid by mutual savings banks. Equation 3, however, implies that the savings and loan shares are not influenced by the rates on time deposits or mutual savings deposits. The three equations, therefore, estimate the influence of these rates on the three assets but the equations do not explain, with the possible exception of savings and loan shares, the source of these zo’James Tobin and William c. Brainard, "Financial Intermedi- aries and the Effectiveness of Monetary Controls,“ The American Economic Review 53 (May l963):393-97. I use‘ :. a} ' '- ..L. I“ n. F u; '4" eh i ' a?" .“9- -i I . . ... .4, 1" ~ u..,. M' .1 I\ I "d v. ‘ I ‘ ‘-Oc ' l n.3, 9-. .I. ' I“..\ u \ ”P 1' '1 a l’:: U..‘ a n r ) ‘ r ..o- All T. I .a. -fi‘ 22 assets, i.e., what assets in the portfolio are reduced to increase the holdings of time deposits and demand deposits. One reason for this lack of explanatory power may well be an incomplete listing of the assets of the consumer sector. This expla- nation may not be the root of the problem, however, as is evident in the review of Feige's study by Tong Hun Lee. Tong Hun Lee Omitting the dummy variables and the per capita advertising expenditure by savings and loan associations, Lee obtained the elasticities reproduced in Table 22] (to the right of Feige's results). Using the same data as Feige, Lee obtained a higher income elasticity for savings and loan shares than for demand deposits; however, the income elasticity of time deposits was still lower than that of demand deposits. Savings and loan shares are now seen as strong substitutes for demand deposits. Equation 2 shows savings and loan shares strong substitutes for time deposits whereas equation 3 has them as weak complements. Time deposits in equation 1 are almost independent of demand deposits but equation 2 shows them to be fairly strong substitutes. It would be difficult to arrive at a logical explanation as to why an increase in the rate on time deposits should increase the holdings of saving and loan shares. The purpose of Lee's review is 21Tong Hun Lee, "Substitutability of Non-Bank Intermediary Liabilities for Money: The Empirical Evidence," The Journal of Finance 21 (September 1966):454. 23 not, however, to explain the findings but rather to demonstrate that the use of excessive dummy variables can produce erratic results. In the same article, using data obtained from Friedman and Schwartz for the years 1934-60 (omitting 1942-45) and the Federal Reserve Bulletin for 1961-64, Lee examines the relationship between the yields of nonbank intermediary liabilities and the demand for - money. The stated purpose is to test the Gurley and Shaw and Friedman definitions of money. Gurley and Shaw maintain there is a close substitutability between these liabilities and money. Friedman and Schwartz, however, contend there is a close substitutability between time deposits and demand deposits but not between those assets and the liabilities of nonbank intermediaries. In an attempt to avoid problems of multicollinearity, two interest rates were selected, a weighted average of the rates on savings and loan shares, ism’ and a weighted average on long term and short term government securities, ig. Lee then subtracts from each of these average rates the yield on demand deposits, id, obtained in the same manner as in Feige's study. 1n El.i.--724.+ 1.073 ln Kg,- .091 1n (i -id) - .64 In (ism-id) en (.234) (.034) Pn (.101) 9 (.079 R2 = .985 o.u. = 1.359 where: M1 per capita money stock (narrow definition) p n permanent price Yn 53': permanent per capita net national product Parentheses contain standard errors. - I! 6' 1‘0 _'.'0:P'. '\ :u' h. 'l f. (S. t‘. ”1. id ‘ U . Jal‘. . on any! W O. ..0 n6:‘ 0' IUII o... 24 Lee concludes there is a close substitutability between non- bank intermediary liabilities and money based on the high interest elasticity (-.64). Using the broader definition (M2) led to the same conclusion. The coefficient of the yields on government securities suggests a low level of substitution; however, the coefficients were not statistically significant on either equation. Hamburger The objectives of this study are "l. to test a simple model of household investment behavior (portfolio selection) and 2. to determine the degree of substitution among liquid assets, and between 22 The data consisted of these assets and marketable securities." semi-annual observations covering the period 1952-62. Hamburger's equation is derived as follows: t = . + .. . . . A1 a1o gaurJ + a1yY + a1wW i = T,S,L,B j = T,S,B,E where: T = time deposits S = accounts at other savings institutions L = life insurance claims 8 = marketable bonds (including corporate, state and local, and federal obligations) E = equities 22Michael J. Hamburger, "Household Demand for Financial Assets," Econometrica 36 (January 1968):97. 25 W = real wealth measured as financial assets excluding equities (FA), or financial net worth excluding equities Y = real disposable income A* = real value of asset i desired by the household sector Hamburger states that A? is not observable and the adjustment process is explained by the fellowing equations. A. - A 1t i.t-l = 0i (Ait - A i t-l) 9593] Therefore the original equation becomes = + . . + - . . Ait eiaio I geiaijrjt I eiaith elalwwt » (I e1)A1,t-1 then Ait = b1.0 + Ibijrjt + bi J Yt + bint + A.A. y 1 1t-1 where: 6. = l-A. and a. = blk 1 1 1k 7:}- 1 The results from running this last equation are given in Tables 4 and 5. In both tables, the first equation for each dependent variable is the original estimate while the second equation presents the results when all the nonsignificant variables are omitted. According to Tables 4 and 5, the yield on equities enters significantly only in the bond equation. Hamburger concludes that the household sector treats equities as poor substitutes for the liabilities of financial intermediaries. Time and savings accounts were found to be very good substitutes. The finding of a positive Income coefficient for time and savings accounts is interpreted by 6 2 mxcmn tongue toe mppmoaou maca>mm use we?» Page“ we ompmc a ma vac; ummcopcm n he mxcmn mmcm>mm pazuas new acomummuommo mcoop umpmmumpm compmz cmngzo u so new mmcm>mm an amen moan; mo mmmcm>o twosome: u we commmwgamg mo Lotto ucmucmum commanum u 8m mucon mumgoagou Egon acop no man; mm< m.»uooz u mg soummgw mo mmmgmmv so» umumanum mm u an mmmpmscm co upmmx ucmua>mu m.>vooz u we acoggo ucmvcmum manpoca mommgucmcmm amap. Am_a.v A_a.v Amm.v Aaa.v Am_.v Am.mv mmam. mam. mop. mm.m .m..- ma..- m.m~- a mama. Amao.v Ampa.v Am_a.v Amm.v Aaa.v Am_.v A~_.V Aa.av mmmm. mam. mop. Pom. am.m mm.F- ma. - m_.- a.m~- m aam. _m~_. Amao.v Ammo.v Ao_a.v Amm.v Aa.FV mama. Pam. mam. Pmo.- mm.P- a.m_ 4 am._ camp. Amam.v Amoa.v Am..v Aam.v Amm.v Amp.v “mo.v Am.mv mama. mam. mam. m_o.- mm. - mm.P- mm. - .o. m.mp m _m._ mama. AmFP.v Amma.v Aam._v Amm.v Ama.v Aa.mv mama. mam. _mp. m~.~- m..m mm.F- m.m_- a ma.. mama. Ama_.v Rama.v Ap_a.v Aaa.pv AmF.PV Aaa.v Aam.v Am.FFV _amm. mum. a~_. Poo. mm.~- aa.m mm... mm. m.m_- h «m mpammgm> moo a mate so an ucwwmmmwm a; me me me -wmacm Sawmcmaa” I5 .AF penny mppamom m.gomgaasm:un.e m_ach 27 .e «Fame on mac: mg» cm cm>wm one meowawcaewc gmspo mucsooum maca>mm ecu muwmoawu mama co ope?» mo mmogm>m umpcmmmz u m.pm . mmam. Amo.v Amma.v ham._v “am.v Aam.v Am.av ma N mama. mam. mam. am.m- mm.m -.~- m.m- m mama. “ama.v Amaa.v Ammm.v Ram..v Ama.v Amm.v Am.a.v am m mama. mam. .aa. mam. ma.a- mm.a _m.m- m.m- m em a_aamta> . . . m m «goo «panacm> z a a ucauaaaam 32 m mm a ma - .1 woman; smug” pcovcoaoo .AN “Lame aa_=amm a.tmmaaasaz--.m a_aaa n": "I ‘I I0. '\ '6' I , ‘I 'I y . .h.5, 1,. :'l 11“ '4. 28 Hamburger as evidence that they are poor substitutes for money; how- ever, income only enters significantly in the equation for life insurance claims. He does suggest other interpretations are possible concerning this finding. Hamburger's investigation is quite relevant to the present study: however, his measure of the return on equities appears inade- . quate. The prices on shares of common stock are continuously fluctu- ating while the dividends paid are slower to change. This means that the yields are most apt to alter due to prices and therefore the investor may well view a change in the dividend yield quite differ- ently than a change in the actual return from equity. In effect then, an insignificant finding for the coefficient of the dividend yield may not signify that the return on equity is insignificant in the demand for the asset. Another problem exists in the definition of net worth. Admittedly the measurement of the value of common stock holdings is a difficult and at best an imprecise undertaking: however, to omit this value from net worth definitely results in an invalid constraint for the consumer sector. Net worth of the consumer sector could well be fluctuating in a manner far different from the fluctuations in the value used in Hamburger's study. Chase In a study of the household sector's demand for saving deposits (defined as time deposits, mutual saving bank deposits, saving and loan shares, credit union deposits, deposits in the 29 Postal Saving system, and government savings bonds), Chase uses the following equations: = 81 82 83 d (1) S oYp rs rc 6 (2) S = aYglrEZ(rc-rs)836d » where: S = real per capita holdings of savings deposits Y = real per capita permanent income p rS = average yield on savings deposits rc = average yield on corporate Aaa rated bonds d = deposit insurance dummy; 0 before insurance legislation, i.e., before 1934. The data covers the years 1921-29 obtained from Goldsmith, and 1934-41, 1946-65 from the Federal Reserve's flow of funds accounts. The regression results are reproduced in Table 6. In all cases the income elasticity of savings deposits is significant and approximately 1. The coefficient of rS in equation 2a (.269) shows that a 10 percent increase in both the yields of savings deposits and corporate bonds produces a 2.7 percent increase in per capita real savings deposits. Chase finds this "consistent with the hypothesis that a change in the yield on savings deposits elicits a change in the real quantity people will hold independently 3O soummcm we mmmgmmn com umumanum umpmmpmum comumz cancao mm 3o mLOLLw Ugwbcmum :wmucou mmmwsucmkmn. . . --- Ammaa.v --- Am_ma.v Ammmm.v Amm_.v ma-aam_ _a F mam map.- mam. mo.. mmm.- .a-ama_ am . . --- --- Amam.v Amm_.v Amaaa.v Aaam.v ma-aamp mm a mam mma.- ama. mam. mmm.- Pa-amm_ mm mm._ mam. Aaa_a.v Ammmo.v --- Ammaa.v Ammao.v Ammp.v mwnwmmfl mm mm.. mam.- mam. Nam. ama.- - mm .mm, mm._ mam. A~a_a.v --- Ama_.v Aoa_.v AaFmo.v Ammp.v wwwwmmn 8_ mm_. mmm.- mmm. mam. Pam.- - mm mama m .o i--mw111 - it. a moo cm 5: mm mm. 8 ca A to gch e a, L =_ a ca -waaam aamamm camumaam .aa_maam a.maagm--.a a_aah 31 of an induced switch out of marketable securities because it leads to a reduction of money holdings."23 He concludes the findings therefore imply that the demand for money is negatively related to savings deposit yields. Though Chase mentions other possibilities, the above statement appears void of any real meaning due to the omission of other assets - such as equities and government securities. Though the statement is correct, the finding is consistent with any number of hypotheses. ‘ What does appear significant in this study is the agreement with Hamburger's findings of strong substitutability between corporate bonds and savings deposits. Problems exist however, in that Chase's study has used the rate on corporate bonds as a proxy for all market- able securities. The present study finds a weak correlation between the return on corporate bonds and equities (r2 = .057) as opposed to a strong correlation between corporate bonds and savings deposits (r2 = .86). This would tend to discredit the use of the proxy used by Chase; however, he does not suggest a formula for calculating the return on equity and given the assumption that his proxy is correct would add credibility to his conclusions. Kardouche Attempting to determine the factors that influence savings and loan shares and time deposits, Kardouche employed both time- series and a pooled time-series cross-sectional approach. In the 23Samuel 8. Chase, Jr., "Household Demand for Savings Deposits, 1921-1965," The Journal of Finance 24 (September l969):653. 32 time series analysis the equations were obtained using quarterly data for the period 19521-1966IV (Table 7). Equation 2 is in log linear form and the coefficients show a high wealth elasticity (2.16) and a rather low own rate elasticity (.16), but the most interesting result is the positive elasticity for the yield on common stocks. Kardouche explains this positive coefficient as implying . that depositers would shift their savings into time deposits and out of stocks as the yield on the latter rose. Savers therefore appear to avoid high (rising) stock yields. Such behavior can be rationalized by assuming that savers move out of stocks at higher yields to avoid a potential capital loss involved. In fact, a chart of the yield on common stocks and of the relevant price index for common stocks revealed a close inverse relationship of stock yields to stock prices.“ Replacing the stock yield variable by a stock price index, Kardouche finds that rising stock prices "induce" shifts from time deposits into stocks and therefore concludes stocks are substitutes for time deposits. Albeit, this is an imaginative explanation, an even better one appears to be the admission that neither stock yields or a price index is a good measure of the return on equity. The finding of a close inverse relationship between stock yields and stock prices comes directly from the method in which stock yields are calculated. The return on equities should equal the yield plus expected capital gains and it is not clear that the price level or the yield is a good proxy for this return. 24George M. Kardouche, "The Competition for Savings," in Studies in Business Economics No. 107 (New York: National Industrial Conference Board,FInc., 1969), p. 50. 33 Am3~m> acmgsaov mummoamu me?“ u H mmcmgm coop new mam>mm we tampon com mmcauaucmaxm acmmmugm>cm mcoauamuommm :mo. ago mm=m>mm mo mapm> u we Am.goom ucm ccmucmumv axooum :oeeou co upma» u mum umummumum compo: cancao u go muwmoamc mmcm>mm pmauae co vpmm» n new momesau chommmm u mm Am.»voozv mucon mumsoagou om< co emu?» u u_ Ammauaacm m:_u=_oxmv cameo: Pmmucmcmw pm: n 3 upmwz :mop ecu mm=a>om n ma Aw:_m> ucmcgauv mucosa coop new mcm>mm u m u—maa uwmoamc mean u um woman; a muspucm mammzucmcma "muoz . . Ama.mv .Aam.av Aam.maav Amm.a_v Aam.mv . - me P mom m¢.p- mm.~- me. mu. up.m- mm mm, m m N p m m o m 1» ammo mpnmmco> . . Ama..v Aaa._v Ama.¢v Aam.mmv Amo.mv Amm.mv Aam.Pv Ama.~v .- mo F mom No.1 po.- eo.- mp.~ mo. ~_.- o~.- op. em p =_ N . . «am.~v Aam.Fv Amm.mv Amm..mv Aaa.mv Amm.av .Amo.mv Aaa._v . - mm a mam .a.F- mm.p- aa.m- ma. Na.m mm..- am.ap- ap.m a mm a _ . 1-1 -11 1111.3, - - - -1 goo m a so mm mm mm rm 3 m m sea mm “a iwmch unwmcwmwm comumaam .mupsmom m.m;o:ougmxuu.u manna 34 Kardouche has implied that increasing the price of stock increases the demand for stock. An explanation that allows for more rationality on the part of stock buyers is that the price of stock goes up due to increased demand and the increased demand can be attributed to an increase in the return to stocks relative to other assets resulting in a reallocation of assets. The increased demand has then - caused the increase in price rather than vice versa as Kardouche has concluded. ‘ Correlation does not mean causation and the finding of a negative coefficient for the stock price index in the time deposit equation does not necessarily result in Kardouche's explanation. The price of stock may be positively correlated to the demand for stock due to its being a measure or proxy for expected capital gains which are a portion of return. Accepting the price of common stocks as a proxy for the return on common stock and looking at Kardouche's equations one can agree with his conclusion, if not his explanation, that equities appear as substitutes for time deposits. This conflicts with Ham- burger's findings as noted earlier. Equation 3 has the interest rates in terms of differences in an effort to reduce collinearity. Equation 3 is a 'best fit' after trying and eliminating (it-is). This indicates that time deposits are not considered as substitutes for savings and loan shares which 'conflicts' with the results of the time deposit equation. In other words increasing the rate on savings and loan shares causes a decrease in time deposits but increasing the rate on time deposits does not affect the holdings of saving and loan shares. 35 Kardouche concludes that corporate bonds are a close substi- tute for savings and loan shares while time deposit rates are not significant. Running the time deposit equation in linear form but utilizing two interest rate differentials (is-it) and (ib-it), where 1b was one of seven different rates (7 equations), Kardouche rated the assets 1 as to their substitutability with time deposits. 1. Savings and Loan Shares Long term Government bonds Long term corporate bonds Common stocks Municipal bonds 3-5 year Government bonds Nasal-boom 3-month Treasury bills. Using the same procedure for the savings and loan equation the interest rate differential used was (ib-is). 1. Corporate bonds Long term Government bonds Municipal bonds Common stocks 3-5 year Government bonds 030'!th 3-month Treasury bills 5191999 Using quarterly time series data (1952-71) and linear regres- sion analysis, Nyerges investigated the demand for savings and loan shares. The equations in their final form included as independent 36 variables: disposable income, the average rate on savings and loan shares, a competitive institutional rate, an average rate on a poten- tially competitive market instrument and three seasonal dummy variables.25 Nyerges' equations as well as his elasticity calcula- tions are included in Table 8. Ranking the various assets on the basis of their relative _ elasticities (defined in note to Table 8), Nyerges found them to be in the following order of substitutability for savings and loan shares. 1. Mutual savings deposits Time deposits Long term Government bonds Corporate bonds 3-5 year Government bonds 0101th 9-12 month Government bills State and local bonds This conflicts with Kardouche's finding that time deposits are not significant in the savings and loan equation. Assets 2 through 7 had the same ranking in both the equation using the rate on mutual savings deposits and the equation using the rate on time deposits. The only surprising element in Nyerge's equations are the extremely high elasticities. They appear out of line with any of the 25Richard Nyerges, "The Demand for Savings and Loan Shares: An Empirical Test of the Static and Dynamic Influence of Interest Rates" (Ph.D. dissertation, M50, 1974). p. 79. Ipuav . tov‘c-s - I I? . .c)! Ii .5. :5- 333mm? 38. $6 3 399m: .3 fireman-2... 396 333 «333989 .8 3a.. a 3a.. 353332: 332...; cam-So - .m 3:33 32.92.33 «>229. 53:3 3.5.3 33333 5 3355:... 3383 .23 mac—>3. 73:: u an: amaaaaae us.p . mm 137 .maa.m.. .mam... .ammom.m .mm_.mv ._~m.mm A_maa.mm .amm..mm . - Amm.m . . aucom ma.mm «.mmo.- m~.m~_ a.mam_- m.ma~m- m.mm_m amamma. . maam mm... a. a. mm . oaataatom mm: m. amammm.. 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Amama.m. .maaam.mm . - Am... . . __.m m mm.amm ~a.amm- a~.m~. ...mm- _.~m_~- a..a~m mammmo. . mama mm -.m .m m «a m sagas a ma _ I I I 1.3 H3 3 3.1. 1. V3 3 as as is m .1... w w m. mm om mm. mm a.» mm mm m ‘0 19 a ”vs S s s s 1" ad 9 a L. U m N “S S 5 MN. ”Hm «Be .4“ mu. m. m m a re u .1... m. m. u .u. n a. .. “a. n a... m o w M. n. mm m. m. m. “an“ AM nu a 3 .mcomuuaou .momgoxz-i.w o_no» 38 other studies reviewed. Nyerge explains that the elasticities are calculated at the mean. The formula for calculating the own rate elasticity at the mean would be: nxr = E El x 3r where: Y = average holdings of savings and loan shares F = average rate on savings and loan shares 3%- = coefficient in the regression equation The coefficient of the own rate for the second equation is 2897.8. For the period 1952-71 the average rate on savings and loan deposits was .0369: this is an average of yearly rates obtained from the Savings and Loan Fact book and should be identical to Nyerge's average rate for he used the same data and interpolated to arrive at his quarterly rates. The elasticity calculated by Nyerge's is 5.76. Therefore: 2897.8 (2) = 5.75 or X .00199 ><|w<'oxw 11 leverage = lf')0 r = 14%) and x 0902 W1 00) x1 ll f' is the change in r brought on by a change in leverage 99 where: g' is a measure of the change in k brought on by a change in leverage Since the assumption was made that all earnings are paid out ‘ in either interest payments or dividends, the following equality must exist. (1) 6- kXP+ rB Solving for P _ 5-rB (2) P ‘ kX At the maximum value of the firm the following conditions must hold: %%-= and g%-- (3) V = PX + B (4) g! = x 333-3 + 1 = 0 (5) .32. = U [-r-B 3%] 'LUT-rB] X 3%- from (2) [RXJ‘P Substituting (5) into (4) yields: (6) 31‘3” 'kx ["3361 ' [62's] x35 +.1= o kZX 100 3r 3k do- rB , Substituting in the values for SB“ gfiga nd-E—-given earlier. (7) 38" '[r +- %f'] - Pg +.k = 0 °.(8)§-=%?_'£ From (3) ' (9) %%-= X %;-+ P = 0 or x = '3/23. (.0) g? kX [- a} -[0 r8] [k+x g: from (2) XUOGz Substituting (10) into (9) yields: _ -Pk2X2 kX(72f') - [o-rB]K + [o-rB] 79 . 2 1 = -Pk x K(-—f') - [3-rB]k + [O-rB] £9 2 k g—r' - [6Lr81k + [O-rB] £91 = -Pk2x 82 1 - -— B 2 k 7“ - k0 + krB + [o-rB] Yg' + Pk x = 0 Substituting (1) into this yields: 82 2 _. -—f' + KrB + PkBg' +Pk X = ko k x 82 ._ Tf' + rB + PBg' + M = 101 2 - _. orX[%zf'+r%+P%g'+Pk]=o X[§(§f' +r+Pg') +Pk] =6 X X Using the value for-% from equation (8) X[k—-£%1i(k--P9'-r+r+P9')+Pk]='6 or kxo[£1E%—1+P] =3 ° X = k [mg-HP??? (‘2) Equation (12) represents an expression for the optimum number of shares of equity. Substitution of (12) into (8) yields: ' k-P'- (13) 8 = 9;) _ 9.1;... Taking the logarithms of both sides of equation (12) (‘4) 1n X ' 1"l:""39"i“‘|’i"] = ln 6+ ln {L Expansion of the second term on the right hand side of equation (14) by means of the MacLaurin formula for functions of two variables yields: _ 1 h(r,P)-1na- ar‘l‘ Dru: P where on = k; B = f'-g' (15) ln X = C+ an+%r-§P where C is a constant. 102 Equation (l5) now is in a form comparable to the demand equations of earlier chapters. Definition of Variables X = number of shares of stock (valuation of shares divided by stock price index) EBT = earnings before taxes EAT = earnings after taxes RB = rate of return on corporate bonds ' SP = stock price index The model was expanded to include the effective corporate income tax due to the probable effect changes in this rate would have on the external financing by corporations. Corporations are allowed to deduct interest payments from taxable income and therefore the higher the tax rate the cheaper the use of bond financing, relative to the use of equity financing. A high corporate tax began during World war II and has remained high; however, during the l950$ and l9605 certain tax credits were introduced lowering the effective rate of tax paid by corporations.56 In the late 19605 a surtax was imposed increasing this tax. (A) EAT = EBT - TEBT where T = effective tax rate (B) .'. EAT = EBT (i-T) (C) .'. ln EAT = ln EBT + ln (l-t)- . 56Joseph A. Pechman, Federal Tax Polic (New York: N. N. Norton and Co., Inc., l97l), pp. ll7-120. 103 EAT g _ (D) From B EBT 1 T ' _ EAT (E) . . ln EAT - ln EBT + 1n EET' The first equation for the supply of stocks yielded: (1) ln x = 8.8503 - .1596 ln EBT - .4985 1n %§%-+ 7.3432 RB + .0013 SP (20.0966)(-3.2489) (-2.6333) (5.6372) (3.4892) R2 = .8608 on = .75 . A plot of the residuals against time indicated the need for a dummy variable 0 for (1927-33) and l for (l934-72). The addition of the dummy variable produced the final equation for the supply of equity. This dummy is identical to the one used in the demand equa- tions for money and savings deposits. (2) 1n x = 9.0262 - .1802 In EBT - .5186 ln §%%-+ 8.9091 R8 + (21.9331)(-3.9199) (-2.9688) (6.6382) .0011 SP - .0857 D/M (3.4557) (-2.6132) R2 = .8853 ' 0w = 1.13 The equation can be rewritten as: 1n X 9.0262 - .1802 1n EBT - .5186 1n EAT + .5186 1n EBT . . . OY' 1n X 9.0262 + .3384 1n EBT - .5186 1n EAT . . . Written in this manner, the sign of ln EBT is as expected although the sign of ln EAT is not as expected. 104 The remaining variables. the rate on corporate bonds, and the price of stock have the expected sign. As the rate on bonds rises, the cost of bond financing increases relative to equity financing and as the equation indicates the amount of equity increases. Of course, the increase in the amount of equity supplied due to an increase in the price of equity is as expected. §upply of Corporate Bonds . The model as defined in this chapter assumes the firm can influence the rate of interest paid on corporate bonds by changing its leverage. The firm in effect is fixing the price of its bonds at a level compatible with the investor's maximum valuation of the equity. In light of the above discussion, it is possible that a given quantity of bonds may be considered optimum at various interest rates, interfering with the interpretation of a supply curve for bonds. Manipulation of the equation for the optimum amount of bonds (l3) in the same manner as was done for the equation concerning equity does yield an expression for bonds which is independent of the interest rate. The model while not allowing for an accurate interpretation of a derived supply curve for bonds does, however, contain assumptions regarding the determinants of the rate of return for corporate bonds. In formulating the model, the rate of return for corporate bonds was assumed to be an increasing function of leverage (B/X). In deriving an equity supply equation, the effective corporate income tax was recog- nized as a possible influence on the external financing by corporations. 105 The following equation was based on this discussion and resulted in: RB= .0276 + .0007 %§-+ .2962 88 + .0423 ln ES} (15.1439)(7.4545) (5.4492) (7.1070) 2 R = .9035 D“ = .55 The rate on government securities (CP) represents the riskless rate. The positive coefficient for the variable ln E3; indicates that an increase in the effective tax rate results in a decrease in the rate on corporate bonds [ln EST: ln (1-T); %§§-= Zégflgéfl. This would indicate that an increase in the tax rate leads to more bond financing due to a decrease in the rate on corporate bonds. A plot of the residuals against time indicates the need for a dummy variable [0 for (l927-67) and l for (1968-72)]. The dummy variable in this equation is a proxy for a price expectations effect. 08 EAT 88 = .0311 + .0004 x + .2674 C? + .0353 ln—-— 5T1 + .0127 Dumb (20.3229)(5.2877) (6.4723) (7.5216) (5.1888) 82 = .9469 ow = 1.10 All coefficients have the expected sign and are significant. Summar The elasticities for the supply equations are given in Table l3. 106 Table l3.--Elasticities for Supply Equations. "98 "C? -“T "SP n£81 n88 x ln x .0001 .1834 -.l802 .3848 88 .2419 .1941 .2288 The equations indicate that a lo percent increase in the effec- tive tax rate produces a T500. percent increase in the number of shares supplied and a 2.3 percent decrease in the rate on corporate bonds. A l0 percent increase in the price of equity yields approxi- mately a 2 percent increase in the supply of shares, while 8 l0 per- cent increase in the rate on corporate bonds results in a 3.8 percent increase in the number of shares. The equation for the rate on corporate bonds indicates an increase of 2.4 percent would result from a 10 percent increase in CB 7?“ while a l.9 percent increase is produced by a lo percent increase in the riskless rate (CP). CHAPTER VI THE MODEL The chapters pertaining to portfolio theory led to the following consumer demand equations: DC (1) ln M = -3 88215347 + 1.24244386 ln v - 20.19516660 RDep - .65375116 RS - .13969467 D/M (2) 1n DepDc = -2.52547982 + .52525174 1n 8 + .52525174 1n v + 20 39762009 RDep - 4.12420050 cp - .27484175 RS - .15552298 D/M ' (3) ln CBDC = 3.43993633 + .68307775 1n 8 - .31692225 1n v + 38.95753461 88 - 8.03327367 cp - 1 04375522 Dum (4) ln GSDC = -4.77986824 + .66709168 ln 8 + .66709168 1n v - 27.43156066 RDep - 8.35616007 88 + 3.5209788 cp - 1.37142766 RS - .32l96928 Dummy (5) ln 5°C = -8.31229230 + 2.92563327 ln 8 - l.504l4603 ln Y - 7.69642069 R8 + .95521985 RS - .46582767 Dum The supply equations for corporate bonds and equities obtained from the theory of the firm are: 107 108 5 EA = 9.02617808 - .18020110 1n EB - .51864152 1n 1;-+ 8.90913312 R8 + .00106732 SP - .08570217 D/" (7) 88 = .03109303 + .00042506 E%§-+..26738338 cp + .03525902 1n Efl.+ 8 .01273940 Dumb (6) ln E In addition to the above seven equations, four identities _ are included to complete the model. DC 00 (8) M? = M S DepDC DC +M (9) Dep (10) CBS 0° CB 0c + Dep0c + CB0c + C8 DC DC (ll) N=M +GS +E +Dur+Hous -Loan-Mort. Definition of Variable557 Endogenous (1) RS rate of return on equity (2) CP commercial paper rate used as a proxy for the rate of government securities (3) CBDc = corporate bonds held by consumers (4) GSDc = federal, state and local securities held by consumers (5) EDC = corporate stock held by consumers (6) ES = corporate stock supplied by the corporate sector (7) RB = rate paid on corporate bonds (8) H = wealth of the consumer sector defined as assets 3 through 5 plus assets 9 through l2 minus assets l3 and 14 57 Note: an explanation of the source and/or method of data accumulation is available in the Appendices. 109 Exogenous (9) MDc = currency and demand deposits held by consumers (lO) DepDc = savings deposits held by consumers (ll) Dur = durables held by consumers (l2) Hous = value of housing and related land held by consumers (l3) Mort = value of mortgages owed by consumers (14) Loan = installment loans of consumers I (15) CBS = corporate bonds supplied by the corporate sector (16) Y = personal diSposable income (l7) RDep = rate paid on savings deposits = weighted average of the rates paid on mutual savings deposits, saving and loan shares and time deposits (l8) ln EB = logarithm of corporate earnings before taxes (19) ln fl? = logarithm of corporate earnings after taxes divided by corporate earnings before taxes (20) SP = stock price index (2]) CBD0 = corporate bonds held by other than the consumer sector (22) M00 = currency and demand deposits held by other than the consumer sector (23) MS = total money supply (24) D/M, Dumb, Dum, Dumy = various dummy variables §gjution Procedurg_ Equation (l) was solved for the rate of return on equitieS' yielding: (1)1 RS = -5.9383 - 1.5296 ln MDC .2137 DIN + 1.9005 1n Y - 30.8912 RDep - Equation (2) was solved for the rate of return on government securities producing: 110 DC (2)1 CP = -.6124 - .2425 1n Dep + .1274 1n W + .1274 1n Y + 4.9458 RDep - .0666 RS - .0377 D/M Equations (8) and (9) then become: 0c = M5 00 (8)] M - M DC S (9)1 Dep = Dep The eleven equations using 11, 2], 8], 91 were solved by means of the Sim Program58 which incorporates an iterative technique. The program solves the first equation for the dependent variable and uses this value in solving the second equation. In each step the initial values are replaced by the new calculated values for the dependent variables. When the program has arrived at calculated values for all the dependent variables in the system, these calculated values are compared with the previous values. If the change from the previous value is greater than 1 percent (as specified in this study), the process is repeated. When none of the dependent variables is changed by greater than l percent. the model is considered solved. Results The results for the expost simulations for the data period [1927-41. l950-72] are presented in Table l4. For purposes of comparison, the simulated values are listed next to the actual values for each year. 58The Sim Program was developed by Morris Norman. Table 14.--Simu1ated and Actual Values. 1‘11 Year CBDC , C8Dc GSDC 65°C 5°C 5°C 11 11 Actual Simulation Actual Simulation Actual Simulation Actual Simulation 1927 19692.635 22048.503 13173.994 23248.595 114233.514 68186.372 302124.632 268522.412 1928 20516.814 23860.986 12581.717 13386.473 155904.668 169396.940 349047.238 367553.193 1929 21078.314 23017.268 12695.463 10636.003 138275.027 155437.655 334547.547 351623.084 1930‘ 21396.872 19418.859 12964.887 9246.496 93433.011 112083.566 281589.105 294491.383 1931 22247.835 16366.634 14853.637 12185.476 46957.584 49711.919 219548.492 213755.043 1932 22026.466 15428.936 16630.606 17535.804 38676.985 40578.758 199326.303 195531.079 1933 21354.121 18638.787 16415.807 15599.591 57125.164 62006.841 215257.464 216592.724 1934 19870.669 16415.807 16831.375 13134.531 54611.513 63576.552 213516.659 215344.394 1935 17925.866 16881.945 16663.900 16797.746 77188.055 72402.782 236286.673 _230559.979 1936 16268.728 17658.985 16432.231 20150.815 97246.085 88168.056 266358.254 262367.412 1937 14972.942 15568.423 18106.024 16697.261 64796.055 68528.158 241894.644 244778.904 1938 L4779.554 16898.836 17676.653 15351.984 72692.973 73570.543 252364.190 253060.939 1939 13974.646 16983.541 17343.967 19555.268 73203.609 63703.832 258666.456 254377.205 1940 12964.887 14943.026 17257.464 21375.485 64215.507 59934.046 260378.565 262200.104 1941 11203.707 11684.284 19930.370 25488.942 55215.556 54666.152 271858.111 277355.270 1950 5100.021 5591.484 77574.962 78198.051 134054.270 141068.378 652171.940 660307.909 1951 6444.614 5024.092 77110.906 83868.049 152055.369 156373.085 700928.787 710568.228 1952 6260.404 5710.147 78983.954 85391.343 169736.073 164062.052 740762.880 740936.962 1953 6118.058 5808.049 81308.025 79221.262 165049.383 170075.885 755600.734 758321.274 1954 6093.635 6925.739 82125.184 85391.343 226839.954 210449.290 836154.034 ‘ 823903.443 1955 7672.717 7302.704 88079.932 82867.647 268337.287 267801.148 916889.750 911359.309 1956 7934.693 7669.449 91949.979 81308.025 268874.498 279009.190 957153.201 956365.270 1957 9000.181 8006.428 94183.473 72911.379 241107.941 266998.949 959454.050 962955.213 1958 10229.183 9063.404 91766.263 80740.856 343519.789 362217.450 1094066.556 1100635.839 1959 10229.183 9471.097 100709.962 86249.540 384615.726 406362.135 1182771.896 1189341.592 1960 11025.874 9936.797 104192.976 92226.243 382314.947 368796.397 1205728.306 1179269.443 1961 11271.131 10894.355 104715.246 99707.881 508387.891 497823.064 1365767.643 1349844.554 1962 11158.982 11338.962 103880.866 94183.473 428908.977 412916.222 . 1330502.352 1305005.887 1963 11170.146 12173.296 108228.499 103053.134 543616.873 548531.507 1504677.253 1505252.575 1964 11813.521 12874.450 114005.275 105979.398 614767.853 644351.717 1638466.320 1661238.?10 1965 13399.866 13891.050 118184.235 116657.783 689002.377 720715.682 1785921.763 1816236.364 1966 15184.038 14913.170 129573.038 114462.210 626560.113 632857.147 1802633.116 1793415.257 1967 18977.323 17500.767 128540.589 146532.130 796514.012 765282.251 2090108.765 2075453.884 1968 23789.510 29911.551 133252.353 160974.299 949793.622 845767.688 2376622.086 2306476.062 1969 31132.264 32112.479 154662.407 153891.025 842117.400 746387.365 2384560.624 2288760.B77 1970 41192.027 35774.835 146385.671 156529.536 857274.400 797310.924 2542748.186 2487890.730 1971 49513.469 39104.780 132587.754 165214.515 953519.280 1011555.699 2829256.146 2910172.077 1972 54775.594 42958.938 138275.037 183505.515 1126518.840 1318493.032 3198701.780 3426612.654 r2 .9187 .9429 .9812 .9451 Mean error -789.149 1042.643 1576.217 1948.006 RMSE 3521.077 12703.451 43695.342 46305.056 Table 14.--Continued. 1'12! £5 85 CBS CBS RS 85 88 88 C? C? Year Actual- Simulation Actual Simulation Actual Simu- Actual Simu- Actual Simu- lation lation lation 1927 2186.375 2594.113 32577.635 34926.341 .168 -.124 .046 .057 .041 .091 1928 2223.861 2411.490 34194.814 37530.882 .233 .332 .046 .051 .049 .060 1929 2291.587 2328.548 34773.314 36723.327 .245 .492 .047 .051 .059 .060 1930 2477.487 2243.966 36339.872 34364.?78 .162 .421 .046 .041 .036 .023 1931 2558.049 2273.328 36889.835 31003.585 .077 .051 .046 .037 .026 .009 1932 2560.608 2373.213 36030.446 29439.281 -.081 -.345 .050 .031 .027 -.008 1933 2649.166 ' 2423.577 34789.121 32070.291 -.204 -.137 .045 .042 .017 .031 . 1934 '2591.520 2423.577 33194.669 29732.842 -.072 .075 .040 .036 .010 .011 1935 2542.746 2401.863 31565.866 30519.319 .007 .082 .036 .036 .008 .011 1936 2397.064 2380.343 30964.728 32361.575 .221 .138 .032 .03? .008 .016 1937 2192.944 2214.983 29685.942 30288.293 .317 .249 .033 .033 .010 .001 1938 2153.824 2330.877 29846.554 31958.810 .131 .074 .032 .034 .008 .003 1939 2069.371 2271.056 29106.646 32113.123 .156 -.028 .030 .036 .006 .010 1940 2061.110 2190.752 28466.887 30440.932 .059 -.020 .028 .033 .006 .007 1941 2067.303 2175.470 27583.707 28069.763 - -.030 .044 .028 .031 .005 .025 1950 2221.638 2088.079 35735.021 36223.?14 .068 .111 .026 .030 .015 .024 1951 2237.244 2201.733 38931.614 37509.855 .142 .134 .029 .029 ..022 .036 1952 2296.175 2237.244 43612.404 43062.108 .175 .116 .030 .032 .023 .035 1953 2287.009 2155.979 46969.058 46656.864 .189 .168 .032 .030 .025 .023 1954 2246.211 2223.861 50449.635 51281.365 .168 .133 .029 .032 .016 .021 1955 2177.647 2214.983 53284.71? 53515.96? .190 .209 .031 .032 .022 .021 1956 2094.353 2230.542 56898.693 56636.126 .205 .230 .034 .034 .033 .022 1957 2088.079 2179.825 63214.181 1 62221.144 .194 .261 .039 .034 .038 .017 1958 2230.542 2337.880 68905.183 67736.513 .186 .241 .038 .036 .025 .019 1959 2312.305 2366.104 71860.183 71106.131 .157 .228 .044 .038 .040 .027 1960 2284.723 2433.291 75308.874 74215.658 .120 .152 .044 .041 .039 .037 1961 2517.446 2565.734 79948.131 79575.05? .111 .156 .044 .042 .030 .040 1962 2375.587 2406.672 84502.982 84685.324 .186 .125 .043 .041 .033 .028 1963 2517.446 2489.905 88418.146 89424.199 .085 .122 .043 .041 .036 .028 1964 2527.536 2530.064 92404.521 93470.159 .10? .154 .044 .041 .040 .025 1965 2620.184 2565.734 97802.866 98291.080 .138 .140 .045 .043 .044 .027 1966 2657.125 2532.596 108020.038 107749.556 .106 .136 .051 .04? .056 .03? 1967 2951.297 (2782.208 122676.323 121203.161 .109 .031 .055 .053 .051 .056 1968 3200.301 3297.764 135569.510 141680.201 .101 -.013 .062 .068 .059 .069 1969 3278.037 3278.037 147539.264 148522.606 .088 .007 .070 .074 .078 .088 1970 3297.764 3317.610 167304.027 161886.749 .044 .028 .080 .076 .077 .084 1971 3324.252 3301.064 186096.468 175703.39? .067 .050 .074 .073 .051 .068 1972 3367.750 3374.492 198275.594 186445.632 .053 .047 .072 .072 .047 .058 r2 .8618 .9953 .4583 .8634 .6382 Mean error .3919 -?73.467 -.0028 -.0005 .0006 RHSE 139.592 3520.132 .1081 .0051 .0146 113 The statistics at the bottom of each column of simulated values show the correlation (r2) mean error between the actual values and the simulated values and the root mean square error (RMSE). The statistics indicate a 'good fit' between the simulated values and the actual values for the various assets and the rate of return on corporate bonds (R8). The 'goodness of fit' for the rates . of return on equity (RS) and government securities (CP) appears to be much lower than that of the assets. The actual and simulated values are plotted in Figure 1-7. Analysis of these figures indicate the following capabilities of the model. Corporate bonds--Figure 1 appears to give an excellent indica- tion of yearly changes in consumers' holdings of this asset, with the major exception being the depression years of 1929-33. The actual holdings of corporate bonds by the consumer sector increased by 130 percent during the years 1968-72 while the simulated values increased by only 44 percent. Figure 1, excluding the above mentioned subperiods, demon- states a high degree of accuracy in both the prediction of yearly changes in holdings by consumers and in the magnitude of these holdings. Figure 4 indicates a high degree of accuracy in the simulation of the supply of corporate bonds. Government securities--Figure 2 indicates a lower degree of explanation of yearly changes in the holdings of government securities than was found for corporate bonds. The most apparent weakness in 114 .Amcmppou mo mco__pwzv Auamuv mucom mamcogcou mo aware—o: m.cmaam:ou .P mcamwm m n m w m w w w w w m m m w w m m w .1... I d d d d 1 A‘d d d 1 1000“ (\I\\ .88. \\|11. . \ . ‘ .oooom .ooonm .88» .803 .884 22.23.». 802. oooon 083 22.83 115 .Amcmppoc mo mcomppwzv Auomov mmwuwcsumm acmsccm>ou mo mmcpupo: m.cosam=ou .N meammm m 2 0 5 o 5 o o 5 0 v: 7. no .0 a. :5 A4 :5 .5 w w w m 6|. w m w 61. T 4 d d u q d d 5“" .188— .8060 .0080. .889 H0088 nxunnunmw 116 .1972 =g~o ‘1955 '1950 <|94O -|935 -l930 -ooqoo_ .ooodON .ooqcom .ooqco¢ .ooqcoo .ooqcom -OOOdoh .OOQdom .ooqaom .ooodoq_ -ooqco:_ .ooodom; L08.83 H7 .Amcmppoc mo mzowppwz. mmmu mucom mpmcoacou mo apnqzm. corpse; Eouuom .Ammcmnm mo gunssz. mmm hawzcm mo apnqsm. :o_ucom gob .e mesmpm m 5 1950 1972 91970 «1965 ~1960 -1935 -|930 5 B - 1 ((4940 0.5.3.365. 203:3. ._o=.o<.. 00Q0v 00000. OOQGm. 00QO0N 000w CONN 00¢N 000m 000m 000m 00mm 00¢m 118 ..mm. xuwzcu :o assumm mo mama .m mesmpm m 2 O 5 O 5 O O 5 O 7 7 6 6 5 5 4 3 3 m. w m. m m. m 9 9 on. 1 u q u u 1 ..l I... a ””1 0&1 out 0N1 5.8.52.8 91 0' 226.35. 0 .. .29 a. r34) 1‘ 22:04. . lNEOBBd 119 .mfimm. macom mpmgoqcou co ccaumm. co_ucoa Eopuom .m mesmwm .HAmu. momuwczumm u:chcw>ow co cczpmm. cowugom nob .m mczmwu m 15372 41971) -I9€55 -H96C) -|9£55 -H35C) -|9¢K) -H335 d1930 20203. 8. Aceto—aE—mm N0. L 00. Iwaouad llllJ O 8 20394. 0.0.5.355. 120 the estimation of the magnitude of consumers' holdings is found in the later years 1956-60, 1966-68, 1971 and 1972. Eguities--Figure 3 provides an excellent picture of the yearly changes in the consumer sector's holdings as well as the magnitude of these holdings. Figure 4 demonstrates a 'good fit' between the simulated and . actual values for the supply of equity with the major exception being the years 1927-35. Rate of returncu1equity--Figure 5 indicates that the direction of change in this rate is accurately estimated in 26 of the 38 years but the magnitude of the change tends to be exaggerated between the years 1927-32. Rate of return on government securities--The difference between the simulated rate and the actual rate is 1 percent or less for 21 of the years. The direction of change is correctly predicted in 21 of the years (Figure 6). Rate of return on corporate bonds--Figure 7 indicates that the difference between the simulated and actual rate is 1/2 of 1 percent or less for 33 of the,years. The direction of change is correctly predicted in 25 of the years. Increase in the Money Supply The increase in the money supply in this model is not synony- mous with an open market operation but rather represents an immediate increase in wealth such as would occur as a result of a gift, from a source outside the model. Induced changes in the assets are therefore brought about by a wealth effect as well as the substitution effects. 121 The results of a 10 percent increase in the stock of money are presented in Tables 15 and 16. The first column for each variable in Table 15 contains the simulated value resulting from the increase in the supply of money while the second column for each variable lists the money supply multiplier for each year in the data period. The money supply multiplier for the assets was calculated by . dividing the change in the money supply for each year into the differ- ence between the original solution value (not the actual value), and the sdlution value obtained with the new money supply data. The money supply multiplier for the rates of return was found Chan e in Percent x 100 . S . C ange in‘Mb . S1nce M 15 in millions, this gives the change in basis points per million dollar by using the following formula: changes in the money supply. In the case of the supply of equity, E5, the money supply multiplier is calculated for both the number of shares (A), and the valuation of shares (B). Results of an Increase in MS Corporate bond holdingsf-An increase in the supply of money induces consumers to increase their holdings of corporate bonds in every year of the entire period (Table 15). The elasticities (Table 16) indicate that the effect of an increase of money is relatively small being more pronounced in the years 1927-41, than in the years 1950-72 where the elasticities are decreasing over time. Government securities--As evidenced in both Tables 15 and 16, an increase in the supply of money has a very large positive, though 122 Table 15.-—Valuation of Variables After a 10 Percent Change in Money Supply. .021 Year caDc Multiplier 65°c Multiplier 5°C Multiplier v Multiplier ‘1927 .23248.s95 .435 .39815.040 6.005 45661.008 - 8.166 266502.032 - .732 1928 25539.971 .604 26688.819 4.789 101214.773 -24.514 317148.319 -18.123 1929 24661.534 .599 21461.159 3.942' 92041 975 -23.088 303439.221 -1?.548 1930 20826.885 .549 18939.406 3.782 65643.903 -18.121 261757.233 -12.773 1931 ‘ 17343.967 .429 22225.599 4.404 31761.178 - 7.873 209110.760 - 2.037 1932 16333.933 .428 31132.264 6.427 26423.261 - 6.691 198011.58? 1.172 1933 19692.635 .513 27119.275 5.605 41027.588 -10.207 210248.931 - 3.087 1934 17413.482 .416 23860.986 4.471 40741.398 - 9.517 206604.727 - 3.643 1935 17836.461 .341 29495.707 4.535 47524.469 - 8.886 222204.334 - 2.984 1936 ' 18620.157 .300 34509.848 4.483 59041.744 - 9.093 251750.727 - 3.314 1937 16366.634 .261 27722 510 3.611 46910.650 - 7.081 238076.879 - 2.195 1938 17783.032 .269 26003.853 3.238 49662.232 - 7.267 243982.941 - 2.759 1939 17836.461‘ ' .228 32435.215 3.446 43695.482 - 5.354 251832.790 - .681 1940 15724.889 .179 36206.719 3.396 40457 204 - 4.459 262700.149 .114 1941 12246.556 .112 41606.014 3.214 37949.060 - 3.333 282334.050 .993 1950 5796.445 .017 119730.660 3.480 102847.234 - 3.203 675763.791 1.295 1951 5208.254 .015 128540.589 3.533 114005.275 ' - 3.351 725636.716 1.192 1952 5913.540 .016 130875.269 3.467 119610.989 - 3.388 755302.243 1.095 1953 6002.912 .015 121297.320 3.174 124243.670 - 3.457 767912.665 .723 1954 7158.101 .017 130875.269 3.322 153583.550 - 4.154 826376.562 .181 1955 7540.170 .017 127516.356 3.193 194852.862 - 5.216 897309.016 - 1.005 1956 7918.840 .018 124492.406 3.049 203821.522 - 5.309 938779.836 - 1.242 1957 8250.260 .017 112195.706 2.790 194463.546 - 5.151 944039.786 - 1.343 1958 9330.091 .018 124616.961 2.997 263287.008 - 6.758 1060464.168 - 2 744 1959 9749.780 .019 131531.284 3.065 298045.071 - 7.333 1141257.780 - 3.255 1960 10208.745 .018 139246.358 3.162 272665.214 - 6.465 1145146.288 - 2.295 1961 11203.707 .020 151145.768 3.328 366957.017 - 8.467 1286017.469 - 4.130 1962 11626.009 .018 142628.696 3.057 304674.722 - 6.831 1261402.145 - 2.752 1963 12481.465 .019 155437.655 3.199 405955.976 - 8.706 1431782.748 - 4.486 1964 13187.1?4 .018 159372.578 3.100 477825.079 - 9.670 1565625.274 - 5.552 1965 14200.039 .017 173164.969 3.131 539824.842 -1o.023 1710390.142 - 5.865 1966 15214.436 .016 169058.485 2.955 476393.751 - 8.469 '1710299-146. - 4.499 1967 17836.461 .017 213629.824 3.378 581868.642 - 9.234 1978959.307 - 4.858 1968 30485.304 .027 232349.969 3.325 647581.543 - 9.234 2201355.528 - 4.898 1969 . 32728.450 .028 223462.747 3.130 ‘ 568638.394 - 7.997 2203280.190 - 3.846 1970 36388.206 .026 225708.585 2.956 610479.504 - 7.983 2394578.063 - 3.987 1971 39695.773 .024 236806.824 2.883 778403.262 - 9.389 2774532.395 - 5.462 1972 43521.050 262498.330 2.944 1017643.278 -11.214 3231635.397 - 7.268 Table 15.--Continued. 123 ES Multipler S . Year (Number of ‘ A ‘ CB Multiplier RS Multiplier RB Multiplier CP Multiplier ’ Shares) Number Valuation 1927 2746.273 .055 3.878 36143.034‘ .441 .493 -1.338 .064 .025 .116 .091 1928 2594.113 .066 6.152 39209.180 .603 .141 -1.701 .059, .029 .092 .115 1929 2507.396 .065 5.309 _ 38366.166 .598 .011 -1.752 .059 .029 .092 .11? 1930 2421.155 .069 4.024 35762.339 .545 .070 -1.916 .050 .035 .056 .129 1931 2423.577 .066 2.010 31990.371 .433 .360 -1.803 .044 .031 .036 .118 1932 2522.485 .071 1.792 3033?.334 .424 .738 -l.858 .038 .033 .018 .123 1933 2570.871 .072 2.752 33118.161 .510 .516 -1.844 .049 .034 .056 .122 1934 2583.757 .06? 2.437 30733.019 .417 .334 -1.?05 .043 .029 .038 .113 1935 2550.386 .053 2.753 31484.518 .345 .304 -1.379 .043 .025 .036 .089 1936 2519.964 .044 2.859 33315.882 .298 .230 -1.149 .044 .022 .041 .078 1937 2337.880 .040 ’1.735 31074.705 .258 .099 -1.140 .039 .020 .024 .075 1938 2465.130 .041 1.971 3284?.955 .270 .287 -1.09? .041 .021 .027 .073 1939 2394.668 .033 1.601 32966.259 .228 .374 - .926 .042 .016 .033 .062 1940 2314.618 .028 1.200 31219.428 .178 .381 - .82? .039 .014 .031 .055 1941 2289.297 .023 .815 28631.007 .112 .291 - .668 .03? .012 .047 .044 1950 2182.006 .008 .641 36428.996 .017 .180 - .244 .035 .004 .043 .016 1951 2300.772 .008 .720 37694.389 .015 .157 - .230 .034 .004 .055 .015 1952 2337.880 .008 .753 ‘ 43264.812 .015 .176 - .223 .036 .003 '.055 .015 1953 2250.708 .007 .68? 46852.809 .015 .122 - .219 .034 .003 .042 .014 1954 2321.572 .007 .947 51511.058 .01? .158 - .213 .037 .004 .041 .015 1955 2312.305 .00? 1.126 53755.363 .017 .084 - .210 .03? .004 .040 .014 1956 2326.220 .007 1.134 56879.19? .017 .060 - .205 .038 .003 .041 .013 1957 2273.328 .00? .997 62462.048 .017 .033 - .209 .039 .004 .037 .014 1958 2440.602 .007 1.411 68009.052 .019 .054 - .202 .040 .003 .039 .014 1959 2467.597 .007 1.483 71377.50? .018 .059 - .194 .042 .003 .047 .014 1960 2532.596 .00? 1.447 74490.159 .018 .128 - .188 .045 .003 .056 .013 1961 2673.116 .007 1.818 ?9876.873 .020 .127 - .183 .046 .003 .059 .012 1962 2504.890 .006 1.471 84971.428 .018 .15? - .178 .046 .003 .04? .012 1963 2591.520 .006 1.722 89724.333 .018 .157 - .170 .046 .003 .04? .012 1964 2633.318 .006 1.878 93778.691 .018 .123 - .161 .046 .003 .043 .010 1965 2665.108 .006 1.87? 98602.892 .017 .128 - .149 .047 .002 .045 .010 1966 2628.057 .005 1.578 108046.582 .016 .128 - .143 .051 .002 .055 .010 1967 2884.192 .005 1.801 121532.440 .017 .224 - .128 .057 .002 .073 .009 1968 3415.230 .005 2.103 142259.945 .027 .262 - .116 .072 3002 .086 .008 1969 3394.800 .005 1.756 149123.778 .027 .24? - .114 .078 .002 .105 .008 1970 3432.349 .005 1.65? 162484.994 .026 .220 - .106 .080 .002 - .101 .00? 1971 3415.230 .005 1.715 176266.352 .023 .194 - .098 .07? .002 .084 .006 1972 3487.708 .004 1.834 187022.250 .021 .195 - .090 .076 .001 .074 .006 Table 16.--Elasticities. 124 Year CBDC 65°C 5°C 8 ES CBS 1927 .544 7.126 -3.303 - .075 .587 .348 1928 .704 9.937 -4.025 -1.371 .757 .447 1929 .714 10.178 -4.079 -1.370 .768 .447 1930 .725 10.483 -4 143 -1.112 .790 .407 ~ 1931 .597 8.239 -3.611 - .217 .661 .318 1932 - .587 7.754 -3.488 .127 .629 .305 1933 .565 7.385 -3.383 - .293 .608 .327 1934 .608 8.167 -3.592 - .406~ .661 .336 1935 .565 7.559 -3.436 - .362 .618 .316 1936 .544 7.126 -3.303 - .405 .587 .295 1937 .513 6.603 -3.155 - .274 .555 .260 1938 .523 6.938 -3.250 - .359 .576 .278 1939 .502 6.586 -3.141 - .100 .544 .266 1940 .523 6.938 -3.250 .019 .565 .256 1941 .481 6.323 -3.058 .180 .523 .200 1950 .367 5.311 -2.709 .234 .450 .057 1951 .367 5.327 -2.709 .212 .450 .049 1952 .356 5.327 -2 709 .194 .450 .047 1953 .336 5.311 -2.695 .126 .439 .042 1954 .336 5.327 -2.702 .030 .439 .045 1955 .325 5.388 -2.724 - .154 .439 .045 1956 .325 5.311 -2.695 - .184 .429 .043 1957 .305 5.388 -2.717 - .196 .429 .039 1958 .294 5.434 -2.731 - .365 .439 .040 125 Table 16.--Continued. Year 08°c 65°c EDC v E5 68S 1959 .294 5.250 -2.666 - .404 .429 .038 1960 .274 5.098 -2.607 - .289 .408 .037 1961 .284 5.159 -2.629 - .473 .419 .038 1962 .253 5.144 -2.621 - .334 .408 .034 A 1963 .253 5.083 -2.599 - .488 .408 .034 1964 . .243 5.038 -2.584 - .576 .408 .033 1965 .222 4.844 -2.510 - .583 .387 .032 1966 .202 4.770 -2.472 - - .463 .377 .028 1967 .192 4.579 -2.397 - .465 .367 .027 1968 .192 4.434 -2.343 - .456 .356 .041 1969 .192 4.521 -2 381 - .373 .356 .040 1970 .171 4.420 -2.343 - .375 .346 .037 1971 .151 4.333 -2.305 - .466 .346 .032 1972 .131 4.305 -2.282 - .569 .336 .031 126 almost steadily decreasing, effect upon the consumer sector's holdings of this asset. Equityr-The tables indicate a large negative effect upon the holdings of equities. If 1928-30 are ignored the elasticities for the years 1927-41 are approximately constant and all are larger than those for 1950-72 which again appear relatively constant. This would .indicate that the effects of an increase in the money supply have a large and relatively predictable effect upon the equity holdings of consumers. Wealth:-The effects upon wealth appear mixed, being negative through 1939 (except for 1932), positive from 1940-54 and negative from 1955-72. The period 1940-54 contains the smallest money supply multi- pliers for equity holdings (Table 15), which indicates that the reduc- tion in the value of equity holdings by the consumer sector is greater than the combined increases in the other assets, except for the years 1940-54. Equity supply and corporate bond supply--Both of these variables respond positively to the increase in the money supply in ever year of the data period. Table 16 indicates that the percentage increase in both the equity supply and the corporate bond supply brought about by a 10 percent increase in the supply of money has decreased throughout most of the data period. For each of the variables, the effect is larger in the first portion of the period (1927-41) than in the latter portion (1950-72). Table 16 implies that for the years 1927-41, the percentage increase brought about by the increase in the money supply is approxi- mately twice as large for equity supply than it is for corporate bond 127 supply. During 1950-72 this difference is apparently enlarged in that the percentage effect on equity supply is now roughly 10-12 times that on the corporate bond supply. Rate of return on equity--Increasing the money supply decreases the rate of return on equity. Table 15 shows the magnitude of this effect is larger for the years 1927-41 and is steadily decreasing in -absolute value for the years 1950-72. Rate of return on corporate bonds--Table 15 indicates a posi- tive but quite small and almost continuously decreasing effect upon this rate brought about by an increase in the money supply. Rate of return on government securities--Increasing the money supply has a small and steadily decreasing positive effect upon the rate of return on government securities (CP). CHAPTER VII CONCLUSIONS AND RECOMMENDATIONS The manner in which the model has been specified dictates that the entire increase in the supply of money will be added to the holdings of the consumer sector. The rate of return on money has been assumed to be zero being exogenously fixed at that level. When the supply of any asset is increased, the structure of rates of return, on this and other assets, must change in a way that induces the public to hold the new supply. When the assets' own rate can rise, a large part of the necessary adjustment can occur in this way. But if the rate is fixed, the whole adjustment must take place through reductions in other rates or increases in prices of other assets.59 As evidenced in the last chapter, the only rate of return that was reduced when the supply of money was increased was the rate on equities. In fact, every asset and every rate in the model except for equities and the rate on equities, increased when the money supply was increased. According to this model, the consumer sector adjusted its portfolios in favor of government securities, money, and corporate bonds at the expense of their equity holdings. 59 James Tobin, "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking_(l969):26. 128 129 An increase in money stock results in an increase in money holdings. The consumers can be induced to hold this additional money only through reduction in other rates. The only rate in the money demand function is the rate on equity; therefore this rate must be reduced. An increase in the money supply increases all assets except - equities in each of the years. The effect of the change in money, however, is diminishing through time. This would indicate that mone- tary policy, in order to have the same magnitude of effect on the con- sumer sector, would have to consist of almost continuously increasing percentage changes in the money supply. The consumers then invest in those assets whose rates of return have gone up relative to equities (corporate bonds and govern- ment securities). The increase in consumer holdings of government securities is much greater than that of corporate bonds which coin- cides with the changes induced in the rates of return of these assets. Since the rate of return on corporate bonds has risen relative to the rate of return on equity, equity financing has become 'cheaper' relative to bond financing resulting in a larger increase in equity financing. Two of the major hypotheses concerning the channels of influence by which changes in the supply of money affect the stock market are that money exerts an indirect influence via changes in interest rates, or that changes in the supply of'money possess a direct influence by means of changing expenditures. Keran (see pages 46-53 of this paper), is an advocate of the indirect hypothesis suggesting that changes in the money supply 130 influence the stock market through its effects upon corporate earnings and the long term bond rate. Another article advocating this hypothesis is authored by Roma and Jaffee and the following is a paraphrase of their explanation of the channel of influence. Given the demand for money, an increase in the supply of money reduces interest rates and increases interest sensitive expendi- tures such as capital investments. The increase in expenditures causes an increase in the firm's sales increasing earnings and there- fore dividends. Increasing the supply of money directly reduces the riskless interest rate component of the investor's discount rate and leads to a reduction in the risk premium?-0 The advocates of the direct approach include Sprinkel and .Mascia (see pages 54-56 of this paper). Sprinkel explains the influ- ence of an increase in the money supply as stemming from the imbalance created between the desired and actual amounts of money held, resulting in a rearrangement of portfolios and thus in an increase in price of all assets including equities?I In this study the increase in the money supply becomes an increase in the holdings of money by the consumer sector and there- fore represents a reduction in the holdings of equity in every year of the data period. An attempt has been made to integrate the theory of the firm with portfolio theory with the objective being the observation of the 60'Kenneth E. Roma and Dwight M. Jaffee, "Money and Conmon Stock Prices," The Journal of Finance (December l971h1045.47. This .is a paraphraseof'their statements. 6] Beryl Wayne Sprinkel, Money and Markets (Homewood, Illinois: Richard D. Irwin, Inc., 1971), pp. 232-33. 131 effects of a change in the money supply upon the holdings of assets by the consumer sector and upon the supplies of corporate bonds and equities. No matter which hypothesis one adheres to this paper points out the importance of the assumptions concerning the formulation and changes in the demand function for money. If money is assumed to have - an indirect influence then the rate of return on equity appears in this model as a key variable. The consumers are induced to hold the increase in money by means of the reduction in the rate of return on equity. A pertinent question would then be, is the rate of return on equity an important variable in the demand function for money? Support for the inclusion and importance of the rate of return on equity in the demand function for money is found in the following statement by Hamburger. When currency plus demand deposits and the liabilities of financial intermediaries are viewed relative to other assets, they are both equally effective substitutes for bonds, whereas the latter are relatively poor substitutes for equities Second, interest rates appear to be the most important determinants of the short run movements in household money balances. The two interest rates used here--the yield on financial assets and the yield on equities--explain nearly one-half of the variance in the relative quarterly first differences in real money balances. Third, marketable financial assets do not appear to be much closer substitutes for money (narrowly defined) than equities. 0n the margin equal percentage increases in the yields on these asgsts will set off similar shifts from money to equities. 62Michael J. Hamburger, "The Demand for Money by Households, Money Substitutes, and Monetary Policy," Journal of Political Economy 75 (December 1966):621. 132 This paper further demonstrates that changes in the supply of money effect the relative supplies of corporate bonds and equities which tends to, in the case of equity, reinforce the reduction in the rate of return on equity. Recommendations for Further Study The intention of this paper was to incorporate the supply side in the investigation of adjustments in consumers' portfolios induced by changes in the supply of money. One area of weakness in the reviewed literature is the lack of interest in the supply of assets. Since relative interest rates on all imperfect substitutes are viewed as being dependent upon the relative supplies of these assets, it appears that much more investigation of the supply of assets is (needed. Another major weakness of the reviewed articles, including the present study, is the lack of a definitive treatment of expecta- tional variables (such as the rate of return on equity). There is a great deal of interest in the ability to predict changes in the stock market and some of the articles reviewed dealt with this complex problem. However, until we can explain past behavior, exercises such as prediction appear premature. There appears to be a need for a great deal of study in the areas of both the demand and the supply of assets before much faith can be placed on predictions made that stem from relationships that are not fully understood. APPENDICES APPENDIX A MONEY APPENDIX A MONEY (Currency plus Demand Deposits) Appendix A (and the fOllowing appendices) explain the methods of data collection utilized in the study. All data is in current year end values expressed in millions of dollars unless otherwise specified. Data for the period 1950-72, with the exception of equities, durables, and housing was taken directly from the Federal Reserve Flow of Funds Accounts 1945-1972. Data for the earlier period, 1927-41, was extracted mainly from the works of Raymond Goldsmith et a1., i.e., A Study of Saving in the United States, Vol. 1; Studies in the National Balance Sheet of the United States, Vol. 2; and The National Wealth of the United States in the Postwar Period. For this period, year end levels of consumers' assets were as a rule not available except for certain bench mark years; however the procedures utilized in arriving at these bench mark levels are either evident from the tables or are explained in the footnotes.63 63Raymond 11. Goldsmith, Dorothy 5. Brady, and Horst Mender- shausan, A Study of Savingjn the United States (Princeton, New Jersey: Princeton University Press, 1956). pp. 42-101: and Raymond W. 133 134' The procedures used in accumulating data on each asset for the period 1927-41 are explained in the following tables. Table A-l.--Money (Currency plus Demand Deposits). Years: 1927-41 Reference: A Study of Saving in the United States, Vol. 1 Location: Table L3 column 5, p. 382 plus Table L5 column 7, p. 385 ' minus Table U-l column 1, p. 853 Table A—2.--Savings Deposits (Time Deposits plus Credit Union Deposits, Mutual Savings Bank Deposits, and Saving and Loan Shares). Years: l927-41 Reference: A Study of Saving in the United States, Vol. 1 Asset: Time Deposits Location: Table L6 column 6, p. 386 Asset: Credit Union Deposits Location: Table L40 column 2, plus column 4, p. 427 Asset: Saving and Loan Shares Location: Table J5 column 2, p. 441 minus Table L41 column 3, p. 429 plus Table J6 column 1, p. 443 Asset: Mutual Savings Bank Deposits Location: Table L28 column 2, p. 413. Goldsmith, Robert E. Lipsey, and Morris Mendelson, Studies in the National Balance Sheet of the United States, Vol. Z‘TPrinceton, New Jersey: Princeton University Press, 1963), pp. 72-85. APPENDIX 8 GOVERNMENT SECURITIES APPENDIX 8 GOVERNMENT SECURITIES (Federal, State, and Local Securities) Federal government securities held by the consumer sector equal gross federal debt minus (holdings of the banking system, state and local governments, financial intermediaries other than banks, government corporations and agencies, nonfinancial corporations, and foreigners).64 Table B-l.--Gross Federal Debt. Reference: A Study of Saving_in the United States, Vol. 1 Location: 1927-28, Table F? column 1, p. 985 1929-32, Table F19 column 1, p. 1017 1933-41, Table F19 column 1, p. 1017 plus Table F20 column 1, p. 1019. Holdings of federal securities by the banking system equal holdings by the Federal Reserve plus (holdings of operating and closed conmerci a1 banks, mutual savings banks and postal savings).65 64Goldsmith, Lipsey, and Mendelson, pp. 72-85. 6*oldsmith, Brady, and Mendershausen, p. 94 135 136 ‘Table B-2.--Holdings of Federal Securities by Banking System. Years: l927-41 Reference: Bankidg and Monetary_Statistics Asset: Federal Securities held by Federal Reserve Location: p. 343 _ Reference: A Study of Saving in the United States, Vol. 1 1. Asset: Federal Securities held by operating commercial banks Location: Table V74 column 3, p. 57? 2. Asset: Federal Securities held by closed commercial banks Location: Table V76 column 3, p. 579 3. Asset: Federal Securities held by Mutual Savings Banks Location: Table L29 column 7, p. 415. 4. Asset: Federal Securities in Postal Savings Location: Table L43 column 3, p. 431. Table B-3.--Holdings of State and Local Governments. Years: l927-41 Reference: A Study of Saving in the United States, Vol. 1 1. Asset: Holdings of state governments Location: Table G17 column 5, p. 1071 (Fiscal year data averaged to give year end data) 2. Asset: Holdings of local government Location: Table GB column 5, p. 1057. Holdings of financial intermediaries other than banks include holdings of operating and closed savings and loan associations plus holdings of (credit unions, joint stock land banks, insurance 137 companies, government trusts, life insurance departments of savings banks, pensions, and investment companies).66 Table B-4.--Holdings of Financial Intermediaries Other than Banks. Years: 1927-41 . Reference: A Study of Savingdin the United States, Vol. 1 .1. Federal Securities held by: Operating and closed saving and loan associations Location: Table J2 column 7, p. 436 plus Table V48 column 21, p. 536 Federal Securities held by: Credit unions Location: Table L41 column 8, p. 429. Federal Securities held by: Joint stack land banks Location: Table V77 column 3, p. 580 Federal Securities held by: Insurance companies Location: Table 16 column 1, p. 456 plus Table 110 column 7, p. 462 plus Table V56 column 6, p. 555 plus Table 114 column 5, p. 467. Federal Securities held by: Government trusts Location: 1927-28, Table F9 column 3, p. 989 1929-36, Table F23 column 3 plus column 6, p. 1026 1937-41, Table F23 column 3 plus column 6, p. 1026 plus Table 06 column 2, p. 705 Federal Securities held by: Life insurance departments of savings banks Location: Table V54 column 6, p. 551 Federal Securities held by: Investment companies Location: Table V62 column 3, p. 563 plus Table V72 column 6, p. 573 plus Table V60 column 3, p. 559 plus Table V48 column 11 plus column 12, p. 536 Federal Securities held by: Government corporations and credit agencies Location: 1927-28, Table F-7 column 2, p. 985 1929-41, Table F19 column 2, p. 1017 66Goldsmith, Brady, and Mendershausen, p. 96. 138 Table B-4.--Continued. 9. Federal Securities held by: Nonfinancial Corporations Location: Cumulative total of (first difference) Table V73 column 2, p. 575 minus sum of columns 9-13 Table V48, p. 535. 10. Federal Securities held by: Foreigners Location: Table K6 Line 18 gives bench mark years. Remaining years interpolated. Reference: Financial Intermediaries in the American Economy Since ' 1900 Federal Securities held by: Pensions Location: Table A10 Line 8, p. 371, gives the percentage of total assets invested in federal securities for the years 1922, 1929, 1933, 1939, and 1945. Using total assets obtained from A Study_of Saving in the United States, Vol. 1, Table 116 column 1, p. 469, andinterpolating for remaining years. Consumers' holdings of state and local securities equal gross debt minus holdings of (nonfinancial corporations, banking system, government corporations and agencies, financial intermediaries other than banks, and state and local trust funds).67 Table B-5.--Gross Debt (State and Local). Reference: A Study of Savingljn the United States, Vol. 1 Location: 1927-41, Table 621 column 1 plus column 2, p. 1077 67Goldsmith, Lipsey, and Mendelson, pp. 72-85. 139 Table B-6.--Holdings of State and Local Securities by Nonfinancial Corporations, Banking Systems, Government Corporations, and Credit Agencies. Reference: A Study of Saving in the United States, Vol. 1 Years: 1927-41 1. State and local securities held by: Nonfinancial corporations Location: Table V73 column 3, p. 575 _ 2. State and local securities held by: Banking system Location: Table V74 column 4, p. 57? plus Table V76 column 3, ‘ p. 579 plus Table L29 column 8, p. 415 3. State and local securities held by: Government corporations and credit agencies Location: Table F14 column 4, p. 998 Holdings of financial intermediaries other than banks equal holdings of operating savings and loan associations plus (insurance companies, life insurance departments of savings banks, and face amount investment companies). Table B-7.--Holdings of State and Local Securities by Financial Intermediaries Other than Banks. Years: 1927-41 Reference: A Study of Savingdin the United States, Vol. 1 1. State and local securities held by: Operating savings and loan associations Location: Table J2 column 6 minus column 7, p. 436 2. State and local securities held by: Insurance companies Location: Table I6 column 2, p. 456 plus Table 110 column 8, p. 462 plus Table V55 column 7, p. 553 plus Table V56 column 7, p. 555 plus Table 114 column 6, p. 467. 3. State and local securities held by: Life insurance departments of savings bank Location: Table V54 colunn 7, p. 551 la 140 Table B-7.--Continued. 4. State and local securities held by: Face amount investment companies Location: Table V72 column 7, p. 573. Holdings of state and local government equal holdings of state and state own securities, local holdings, and state and local ° trust funds. Table’B-8.--Holdings of State and Local Government Securities by State and Local Governments. Years: 1927-41 Reference: A Study of Saving_in the United States, Vol. 1 l. Holdings of: State and state own securities Location: Table 617 column 4 plus column 3, p. 1071 (avera e of fiscal year data to obtain year end estimates) 2. Holdings of: Local governments Location: Table GB column 4 plus column 3, p. 105? Years: l927-41 Reference: gigancial Intermediaries in the American Econogy Since 900 Holdings of state and local trust funds Location: Table All line 10b, p. 373 shows that 90 percent of total assets were in state and local securities up to 1933, when the percentage fell to 85 percent. The percentages for years 1939 and 1945 were computed by taking the amounts on Line 9 Table A11 as a percentage of total assets. Total assets were obtained from A Study of Savin in the United States, Vol. 1, Table 619 column 6 plus co umn‘ll, p. 1073. Intervening years were then found by inter- polation. APPENDIX-C CORPORATE BONDS APPENDIX C CORPORATE BONDS Consumers' holdings of corporate bonds equal gross bonds outstanding minus (holdings of banking system, financial intermedi- aries'other than banks and foreigners).68 Table C-1.--Gross Corporate Bonds Outstanding. Years: 1927-41 Reference: Statistical Measures of Corporate Bond FinancingdSince 1900 Location: p. 21. Added to these figures from A Study of Savin in the United States, Vol. 1, Table V26 c0Tumn 3, p.'50 plus Tagge R41 column 1, p. 635 plus Table V26 column 1, p. 507. Table C-2.--Hdldings of Corporate Bonds by Banking System. Years: 1927-41 Reference: A Study of Saving in the United States, Vol. 1 Location: Table V74 column 5, p. 577 plus Table L30 column 5, p. 417 plus a percentage of column 4 Table V76, p. 579. The percentage is obtained from Table V50 column 15, p. 543. 68Goldsmith, Brady, and Mendershausen, p. 65. 69For explanation of calculation of corporate bonds outstand- ing, see Raymond W. Goldsmith, A Study of Savin in the Unites States, Vol. 2 (Princeton, New Jersey: PFincetonTUniversity Press,’l§55), p. 304. 141 142 Holdings of financial intermediaries other than banks equal holdings of (life insurance companies, other insurance companies, insurance departments of savings banks, investment companies, credit unions, and pensions). Table C-3.--Holdings of Corporate Bonds by Financial Intermediaries Other than Banks. ' Years: 1927-41 Reference: A Study of Saving in the United States, Vol. 1 1. Holdings of corporate bonds by: Life insurance companies Location: Table 16 column 3, p. 456. Holdings of corporate bonds by: Insurance departments of savings banks . Location: Table V54 column 8, p. 551 Holding of corporate bonds by: Insurance companies Location: Table I10 column 10, p. 462 plus Table I14 column 7, p. 467 plus Table V55 column 8, p. 553 plus Table V56 column 8, p. 555 Holdings of corporate bonds by: Investment companies Location: Table V60 column 4, p. 559 plus Table V62 column 4, p. 563 plus Table V69 column 3, p. 571. Holdings of corporate bonds by: Credit unions Location: Table L41 column 9, p. 429 Holdings of corporate bonds by: Foreigners Location: Table K6, p. 1089 gives data for 1922, 1933, and 1939. Total outstanding bonds for 1945 obtained from The Share of Financial Intermediaries in the NationET_' Wealth and National Assets 1900-1949, Occasional Paper 42. From these figures subtract individual holdings and holdings of financial intermediaries-- line IIl4, p. 62 and line IIl4, p. 93 in A Study of Savin s in the United States, Vol. 3. Remaining years foun by interpolation. 70Goldsmith, Brady, and Mendershausen, p. 65. This same type procedure is used to arrive at individual's holdings. 143 Table C-3.--Continued. Holdings of corporate bonds by: Pensions Years: l927-41 Reference: Financial Intermediaries in the American Economy Since 1900 Location: Table A10 line 5, p. 371 gives corporate bonds as percent of total assets for 1922, 1929, 1933, 1939, and 1945. Total assets of pension funds obtained from A Study of Savin in the United States, Vol. 1, Table 116 c61umn 1, p. 4 . Remaining years fbund by interpolation. APPENDIX 0 HOUSING APPENDIX 0 HOUSING In this study the asset housing is defined as the valuation of 1-4 family nonfarm house and land. Table D-1.--Housing. Years: 1927-41 Reference: A Study of Saving in the United States, Vol. 3 Location: Table W1, p. 14, 1.15 percent of column 47] Years: 1950-58 Reference: The National Wealth of the United States in the Postwar Periodw Location: 1.15 percent of column 8 Table 810, p. 233 The data was extended to cover the period 1959-72 since no comparable figures were found in the literature for this period. The method employed, explained in the following tables, was based upon the figures obtained by Goldsmith for 1950-58 and the explanations given of the procedures utilized in arriving at these figures.72 71Valuation of underlying land estimated to be 15 percent of structure value. See Raymond W. Goldsmith, The National Wealth of the United States in the Postwar Period (Princeton,New Jersey: Princeton Un1versity Press, 1962), p. 235. 72Ibid.. pp. 226-35. 144 1' 45 Table D-2.--Housing Expenditures (Part 1). .. 8:7": 81:21 Expenditures Alterations 1959 19233 18181 4468 1960 16422 15524 4680 1961 16188 15303 5139 1962 18638 17619 5344 1963 _ 20064 18966 4438 1964 20612 19485 4438 1965 20351 19238 4438 1966 17964 16981 4585 19352 .9283 196? 17885 1690? 4938 18985 .9406 1968 22423 21196 5018 24030 .9331 1969 23689 22393 5453 25941 .9132 1970 21914 20715 5940 24272 .9029 1971 32478 30701 6377 35066 1972 41567 39293 6951 44879 Average .9262 Notes to Table D-2: Column Reference Construction Review Calculated by multiplying the average of column 6 (.9262) by the column 5 figures for 1971, 1972. 3 Column 2 figures multipled b .9453 (obtained in Table 0-3 . Construction Review 5 Construction Review' 2 (Except 1971, 1972) 2 for 1971, 1972 146 Table D-3.--Housing Expenditures (Part 2). Year Total 1-4 Column 35 Expenditure ,Family Column 2 1946 3300 3150 .9545 1947 5450 5124 .9402 1948 7500 6900 .9200 1949 7257 6426 .8855 1950 11525 10666 .9255 1951' 9849 9370 .9514 1952 9870 9440 .9564 1953 10555 ' 10049 .9521 1954 12070 11579 .9593 1955 14990 14487 .9664 1956 13535 12980 .9590 1957 12615 12098 .9590 1958 13405 12855 .9590 Average I .9453 Notes to Table D-3: Column Reference 2,3 The National Wealth of the United States in the Postwar Period. Starting in 1959, the column 2'series includes farm dwellings. To obtain nonfarm 1-4 family units, the average figure of column 4 (.9453) was multiplied by column 2 figures for 1959-72 to obtain column 3 figures in Table 0-2. 4 Column 3 divided by column 2. 147 Table D-4.--Expenditures on Private Nonfarm 1-4 Family Units. Year 021:5 Setglgment Add;:;ons 12t?13 Ex3263153285 Alterations (x 1.1180679) 1959 18181 273 4334 22788 25479 1960 15524 233 4540 20297 22693 1961 15303 230 4985 20518 22941 1962 17619 264 5184 23067 25790 1963 18966 284 4305 23555 26336 1964 19485 292 4305 24082 26925 1965 ' 19238 289 4305 23832 26646 1966 16981 255 4447 21683 24243 1967 16907 254 4790 _ 21951 24543 1968 21196 318 4867 26381 29496 1969 22393 336 5289 28018 31326 1970 20715 311 5762 26788 29951 1971 30701 461 6186 37348 41758 1972 39293 589 6742 46624 52129 Notes to Table D-4: Column Reference 2 Column 3 of Table D-2 3 .015 of Column 273 4 .97 of additions and alterations from Table D-274 5 Total of columns 2, 3, and 4 6 Column 5 times 1.1180679 (This figure calculated in Table D-5). 73Ibid., p. 226. See Note 3. 74Ibid., p. 226. See Note 4. Table D-5.--Housing Expenditures (Part 3). Additions . Year 331: Setglgment Altegggions Total Expenditure €313$2 g ' 1946 3150 47 1268 4465 4860 .9187 1947 5124 77 1998 7199 7461 .9649 1948 6900 104 2393 9397 10718 .8767 1949 6426 96 2134 8656 9635 .8984 ‘ 1950 10666 160 2328 13154 13430 .9794 1951 9370 141 2415 11926 13955 .8546 1952 ' 9440 142 2703 12285 14224 .8637 1953 10049 151 2866 13066 15435 .8465 1954 11579 174 2923 14676 16147 .9089 1955 14487 217 3275 17979 20242 .8882 1956 12980 195 3584 16759 19532 .8580 195? 12098 181 3786 16065 18519 .8675 1958 12855 193 3743 16791 18629 .9013 Notes to Table D-5: Reference: The National Wealth of the United States in the Postwar Period. Column Source 2 Reference, Table 82 column 1, p. 226. Reference, Table 82 column 3, p. 226. Reference, Table 82 column 4, p. 226 Sum of columns 2, 3, and 4. Reference, Table 85 column 1, p. 229. Column 5 divided by column 6. The average is .8944, reciprocal 1.1180679. This latter figure was used to calculate column 6 of Table D—4. VOW-b0) 149 Table D-6.--Depreciation. Depreciation Year Expenditure Depreciation InveEEMent Stggk asogefgegt 1945 174237 1946 6311 4450 1861 176098 .02554 1947 8006 4539 3467 179565 .02578 1948 10227 4651 5576 185141 .02590 ‘1949 9437 4779 4658 189799 .02581 1950 12471 4918 7553 197352 .02591 1951 12030 5073 6957 204309 .02571 1952 11938 5218 6720 211029 .02554 1953 12732 5366 7366 218395 .02543 1954 13340 5526 7814 226209 .02530 1955 16337 5710 10627 236836 .02524 1956 15095 5907 9188 246024 .02494 1957 14052 6091 7961 253985 .02476 1958 1400? 6286 7721 261706 .02475 Notes to Table D-6: Reference: The National Wealth of the United States in the Postwar Period. Column Source 2 Reference, Table BS column 2, p. 229. 3 Reference, Table B5 column 4, p. 229. 4 Reference, Table 85 column 7, p. 229. 5 Reference, Table 810 column 5, p. 233. 6 Column 3 divided by previous year's column 6. The average being .02543. 150 opvmmm m.mm~ mummmm camp. Numm Nmmom w.we~ mN—Nm Nump Nm¢0¢m P.wm~ mammnm eemm mnom omew— n.0NN wmnpv pump mmpomu m.m_N mmmemm momm 00mm unmep m.mo~ pmmmm camp mummmn n.~oN owmamm whom ppmm mwsmp ¢.mmp cmmpm mom— mmerm m.oa— mommmm amen mmom mmoop m.mwp macaw momp mmmoom o.m~— momeem mvmm ommm mumvp n.0np memem soap opoumm m.em— omommm some pmmm meomp p.pmp memem moap empmmm ¢.nm~ mmmmmm omom mopm wmmup e.¢mp oemom mmmp omemwe v.~m— mmummm Nnoop mums mommp m.m¢~ mmmom ammp oummm¢ o.m¢— Pmpmpm omeop cums oopmp m.m¢~ mmmmw mmmp moveme m.m¢~ monmom mmoop upeu mmomp m.~¢p ommmw «map svmppe w.o¢— ¢no~m~ ompm mwpn mnmo— p.oep pemmm Pomp mmwmmm —.mmp mwmmmm comm ammo ¢¢~op ~.mm~ mmmmm ommp Pampwm ¢.mm— mmmmmm mmmpp mmmm ¢¢mwp ¢.mm— mnemm amm— mospmm mmmp sum”... .ww.....wwoe oo.ww.w.e 5..”wu...a 2..........e .WWM..._ xww......wom .mwwwmmwuxa .... ocaupuemnxu mmecm>< pmzcc< e. xooom eem 286» .mcvmao: mo :o_ue:.m>uu.~1c mgnep 151 w ass—cu was.» s asapou .m esspou mm ouczom meow .xuoum m.cmmx mzo.>mca ow mm asapou. pewsumm>cw um: m.gmmx some meannm an capabaopmu «nummm.v mmu .g anicsapouormmrmeh .covcme eczema; we» a. magnum taupe: 8:» mo appomz pagoPuez ash sage mcam.e mmmp .m esspou «sews e asapou ..e.a apnea e esspoo e. eeae_=o_eo mmuoem. com coppewumcqmu xpceo» omacm>e mp memmo.. n csapou cw mesa.» m.comx acvumumcq wasp» mammo. .m eeepoo an eoe.>_e N ee=_ou .mmmcwmam peaceau mo x0>e=m new 3mw>mm cowuuacumcou sock .e-o apnea eoee e ee=_ou .mucaom Md'l-O N eszpou "a.o opeee 6» moaoz APPENDIX E DURABLES APPENDIX E DURABLES - Table E-l.--Durables. Years: l927-41 Reference: A Study of Saving in the United States, Vol. 3 Location: Table W-l column 12, p. 14 Years: 1950-58 Reference: The National Wealth of the United States in the Postwar Peri 06 Location: Table A38 column 2, p. 183 The data was extended to cover the period 1959-72, employing methods similar to those procedures utilized by Goldsmith for the years 1950-58.75 751616.. pp. 241-307. 152 153 ooomp mumnap am: mocm swam oomnm 00mm Fnoom mmap amomp womecp spun pmon meem caowm pmNN smpmm. swap oommp uspnmp map: mmmm Noam «peem NNNN mnumm ema— pommp o—mmmp e amepp «New smmmu mm¢~ meoem mmap saewp smmupp mm: some comm Penom Noam momsm ama— mmmmp cone—p ape maoN caNN ommap mpsm macaw mmap ompwp Naomop we Numm NONN Pnpmp QNNN menmm mmap moomp oaowa mum pmmm mmpm mmonp monm monmm pmap pea—p opcpa aoop mmmpp mmap ommm— noon Npamm omap Nmmop smoow New cams men— mummp Namm “FNPN aca— mwma mmmmm FNFF mmmm mmmp mommp oomm mesap wea— voww mammo aoo— ooom apvp mvmpp w~¢~ momap Reap mama mmmnm cam aomm aaNp ampo— mapm woamp meap Fomo mNo—m meap Esau Eccecoz fin...” fin“: eemugs 88%”...5 Sega... swam? asfimmea egg...“ .8. .mooFte me-ee eeeoneou no_eee=e--.~-m 6.88» 154 .mom .8 .Nmm 6.88» m csspou mapq mom .a .mmm apneh m asapou mseps p csapou .mucmgmmom a .amm .a .mmm «Fae» p cszpou ma—a pew .a .nmm mpnmh N caspou .mucmcmemm m .m =ESFou macws m asapou u .e csapou mazes N cszpou o .amm .g .oom «Fame e csspou mspa oaw .a .ehm apne» P =E:_cu .mucmgmmmm m .meu .a .pwm aneh p caspou nape mmu .a .Nmm «pack a :sspou .mucocmema a .mmu .a .eem opeee N esspoo nape eam .a .Nem apnea F caepoo .ooeoeoeom m .Pem .a .a—m «Pooh _ caspoo mafia mmw .a .Nmm m—nm» m caspou .oocmemmmm N muezom csspou vowcma cezumoa on“ c. mwueum aware: ecu mo cupemz pecovuez an» ”mucmcmmmm . mm-mea. “5286» "mum «Fan» on mmuoz 155 Table E-3.--Depreciation of Durables. Net Stock Depreciation Year Expenditure Depreciation Investment (K) aszgficggt 1945 57527 1946 18661 11458 7203 64730 19.92 1947 21733 12664 9069 73799 19.56 1948 22451 14092 8359 82158 19.10 1949 23809 15568 8241 90399 18.95 1950 29919 17468 12451 102851 19.32 1951‘ 26528 19220 7308 110158 18.69 1952 26013 20373 '5640 115798 18.49 1953 29181 21664 7517 123315 18.71 1954 29611 23102 6509 129824 18.73 1955 36472 24979 11493 141317 19.24 1956 35047 26881 8166 149483 19.02 1957 35378 28564 6814 156297 19.11 1958 33059 29683 3376 159673 18.99 Notes to Table E-3: Column Source 2 Table E-2, column 2 plus 3 Table E-2, column 4 plus column 5 4 Table E-2, column 6 plus column 7 5 Table Er2, column 8 plus column 9 6 Column 3 divided by column 5 of the previous year Table E-4.--Durab1es in Constant 1958 Dollars. 156 Year Expenditure Depreciation Invegiment Stzgk 1958 37.9 178.75 1959 43.7 34.07 9.63 188.38 1960 44.9 35.91 8.99 197.37 1961 43.9 37.62 6.28 203.65 1962 49.2 38.82 10.38 214.03 1963 53.7 40.79 12.91 226.94 1964. 59.0 43.25 15.75 242.69 1965 66.6 46.26 20.34 263.03 1966 71.7 50.13. 21.57 284.60 1967 72.9 54.24 18.66 303.26 1968 81.3 57.80 23.50 326.76 1969 85.6 62.28 23.32 350.08 1970 83.8 66.73 17.07 367.15 1971 92.5 69.98 22.52 389.67 1972 104.9 74.27 30.63 420.30 Notes to Table E-4: Column Source 2 Survey of Current Business 3 .1906 (average of column 6 Table E-3) times previous year in column 5. 4 Column 2 minus column 3 5 The first figure (178.75) obtained from The National Wealth of the United States in the Postwar Period, Table A38 column—l, p. 183. Remaining years are cumulative using net investment. 157 Table E-5.--Valuation of Durables. 3,4 Table E-4 column 5 Stock . StOCK Year 1958 Current 1958 Column 3: in Prices Price Price Column 4 Current Prices 1958 178.75 178.75 1959 188.38 170.8 170.3 1.0029359 188.93 1960 197.37 169.7 170.3 .9964768 196.67 - 1961 203.65 169.8 170.3 .9970640 203.05 1962 214.03 168.5 170.3 .9894304 211.77 1963 . 226.94 172.1 170.3 1.0105695 229.34 1964 242.69 172.8 170.3 1.0146799 246.25 1965 263.03 171.1 170.3 1.0046975 264.27 1966 284.60 172.3 170.3 1.0117439 287.94 1967 303.26 177.3 170.3 1.0411039 315.73 1968 326.76 181.7 170.3 1.0669406 348.63 1969 350.08 189.9 170.3 1.1150910 390.37 1970 367.15 200.9 170.3 1.1796829 433.12 1971 389.67 204.2 170.3 1.1990604 467.24 1972 420.30 209.7 170.3 1.2313564 517.54 Notes to Table E-5: Column Source Figures for 1959-62 from Goldsmith's price index found in Table 39 column 9, p. 171 in Studies in the National Balance Sheet of Data for 1963-72 ibundfiby multiplying the price index obtained from Sdrveyof Current Business (1957-59=100) by 1.6712 (the average factor between that the Uhited States, V01. 1. price index and the price index used by Goldsmith) Column 3 divided by column 4 Column 2 times column 5 APPENDIX E EQUITIES APPENDIX F EQUITIES Years ' Method 1950-68 Institutional Investors and Corporate Stock--AL Background’Study, pp. 30 and 306 adding foun- dations, colleges, universities, and personal trusts to make figures comparable to earlier data. 1927-41 The net change in the number of shares of common stock held by individuals located in A_Study of Saving_in the United States, Vol. 1, Table V-lO column 3, p. 483. Stock prices obtained from Studies in the National Balance Sheet of the UnitediStates, Vol. 1, Table 39 cOlumn 10, p. 170. The method employed in this study for deriving estimates of the valuation of common stock held by the consumer sector for the years 1927-41 and 1969-72 is based upon the process utilized by Gold- smith et al. in obtaining these estimates for 1946-58.76 Estimates of these values for the years 1922, 1929, 1933, 1939. and 1945 were calculated by Goldsmith et a1.77 76 Raymond W. Goldsmith, Robert E. Lipsey, and Morris Mendelson, Studies in the National Balance Sheet, Vol. 2 (Princeton, New Jersey: Princeton University Press, l963ii'pp. 316-17. 771616.. pp. 72-85. 158 159 The calculation of the estimates is explained in Tables F-l through F-3. The fDrmula n-l(I) n-l (E) n-l(I) S = BM 11 — - 22er — II — . t-n ti=o E t-i Ygo t'Y A t-Y1=Y E t" was then utilized to compute the factor T which was then used to adjust the yearly net changes in order to arrive at the values Gold- smith et a1. obtained for the above mentioned bench mark years where: BMt = bench mark value at year t %-= beginning of year price divided by end of year price NI = net change in number of shares held by the consumer sector %~= end of year price divided by average price St-n = market value of shares held by consumer sector at n years prior to bench mark year of t 160 cum... oe.o.. ~..a.e. a... mm.. mam. «ea mea. ~.m~m ommNm .m.~m¢ .o.. q... .me .mm woa. a.-. .a... .m.m~e ao.. oN.. mam mam mea. ommam ommam om.mm. eo.. mo.. am. m.. Nea. .eumm momem ~m.~.o Na. mm. .m. can .ca. ma.¢o o..mm m~.mme ma. um. mmm .mm ova. omum. mucus oo.e¢m oo.. oo.. emm mme ama. oucm. aomm. oo..o. mo.. 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N.@. .a.. .Na. mo.ca Lao. ou.ca cmo> mu.ca gem> mu.ca waecm>< mu.ca mo ueu u< .0 ucm mo new u< mmo.ca .m.p.=.mmu.ca vmumnnu< .z cem> m:.e> .euo. we .m.».=. . moamm. zmz gem> we ucu new. mo new .me-e~m. 53.588 46 ee.pe=.e>--..-a 6.88. 161 .cmm» ac.umomca .o w :E:.ou c.6pno o» e :E:.ou an mu.>.u new 0 seabou pue.wm:m ”we .q Analog». mzha 6.,6e.. . 6.86. ”N ..o> .66665m 665.e= 6;» .6 b66em 66:6.6m .meo.cez 6:6 e. 66_e=em e666 66e_6beo 6636.. wee. gap: 6:.»665m .m cs:.ou mac.s m =e=.ou .m cs:.ou was.» m :E=.ou .rn. .q .o. caspou am m_me_ ._ ..o> .mmpmpm www.ca 6;» 6o pmmzm mo:e.mm .eco.amz ugh c. mm.c=um c. =m>.a xmuc. mu.ca 6;» Sec. um»m.=u.mu .cm..cem eo>.a 6.3520. 65p we om: an um>.emo ( .9... d .m 555... o.> 6.86. .. ..6> .66566m e6e.e= 6;» e. me.>6m co heeam < . . mucaom :s=.ou “.1. 6.36. op mmpoz ..m-. 6.86. 162 c. n :E:.ou .o manem>n 6;. m. em.. m.:a.. m :E=.ou a8 n6..q...ze em. a N cs:.ou 83.8 o :E=.oo m m =5=.cu an nm..a.p.:s amena.. m :Es.ou ac.nmumca . m cE:.ou a8 nm..n.u.=s N cs=.oo n .cmun. nm:.e.axm 8. mean» 686;. go. xmnc. mu..a xuoum .o muenom .xmnc. mu.cq .uoum soc. no.n.=u.eu m.n.m =..w..=m m>cwmmm .eemnm. N muczom ce:.oo "N1. 6.86. o. mmuoz .nnnNN. ...Nmn. mommnn. a.mo.¢. wo.. m.mon m... .mom. NNa. nmnnmo. ommmmN. .nNONN. ..aonm. mo.. n.mmm o... .maN. .na. on.ma o.mao.. namoo.. m.n.Nm .o.. N.nmm .o.. omom ona. mnmm.a .anamo. awm.wo. m.wow. ma. N.amm .m. mama aoa. ooomeo. ommmnN. mna. muncoa no.8 . a eno> cem> mu... . 1coucmuc. . . on... .m...:. 6 a:.n=.uxm .npo. 8.0 new: kn ncmzun maecmw< m mancm>< enm> mo new .2 an> .euo. . .8... H 6 mm. 62 cnm> . n m i .N.-888. .8.=em .6 88.868.6>--.~-a 6.86. 163 Table F-3.--Va1uation of Consumer Sector's Holdings (in Billions). Notes to Table F-3: Reference: Background Study. Column 2 0301-50) Source Reference. p. 413 Reference, p. 413 Column 3 divided by column 2 Reference, pp. 305-6 Column 5 divided by column 3 (The average is .92). Total Value Value of all Indi- Year of Stock for Stock of Domestic Column 3% vidual Column 54 All Domestic Corp. Excluding Column 2 Holdings Column 3 Corporations Intercorp. Hold. (Millions) 1952 225.4 180.8 .80 169742 .94 1953 219.7 177.3 .81 165041 .93 1954 298.0 246.4 .83 226888 .92 .1955 352.3 290.3 .82 268425 .92 1956 351.4 291.0 .83 268825 .92 1957 313.5 262.4 .84 241194 .92 1958 448.7 372.4 .83 343504 .92 1959 499.1 417.7 .84 384707 .92 1960 494.8 416.6 .84 382476 .92 1961 658.8 553.4 .84 508294 .92 1962 564.2 470.5 .83 428769 .91 1963 698.3 595.0 .85 543399 .91 1964 792.2 673.4 .85 614706 .91 1965 893.5 757.7 .85 689120 .91 1966 811.2 689.5 .85 626304 .91 1967 1034.8 879.6 .85 796556 .91 1968 1229.4 1045.0 .85 949489 .91 Avg .84 Avg .92 Institutional Investors and Corpdrate Stock--A 164 Notes to Table F-3 (continued): Column 5 indicates that the consumer sector held 92 percent of all outstanding stock (excluding intercorporate holdings). Taking 92 percent of the values in column 9 of Table F-2 produces the values used for this study. APPENDIX G INSTALLMENT LOANS APPENDIX G INSTALLMENT LOANS . Table G-l.--Installment Loans. Reference: Household Capital Formation and Financing 1897-1962 Years: 1927-41 Location: pp. 127-30, column 7 165 APPENDIX H MORTGAGE LOANS APPENDIX H WNMWLMM _ Table H-1.--Mortgage Loans. Reference: Studies in thngational Balance Sheet of the United States, V011 2 Years: l927-41 Location: Table IV bllc-5 column 3, p. 292 and Table IV b11c-6 column 3, p. 293 166 APPENDIX I RATES OF RETURN APPENDIX I RATES OF RETURN _ Table I-l.--Rates of Return. Rates of Return on Years Reference Time Deposits 1927-41 A Study_of Savin in the United States,Vol. l, TaEle [23 column 2, p. 407 Time Deposits 1950-72 Savings and Loan Fact Book Saving and Loan Shares 1927-72 Savings and Loan Fact Book Mutual Savings Deposits 1927-41 Savings and Loan Fact Book Mutual Savings Deposits 1950-72 National Fact Book Mutua av1ngs anking Corporate Bonds l927-41 Banking and Monetary Statistics (Moody's Aaa) Corporate Bonds 1950-72 Economic Report of the President (Moody's Aaa) Commercial Paper rate 1927-34 Historical Statistics of the Unitea States Commercial Paper rate 1935-38 Federal Reserve Bulletin Commercial Paper rate 1939-72 Economic Report of the President Stock Price 1927-62 Studies in the National Balance Sheet of the United States, V61. 1, Table 39 Calumn 10, pp. ITO-71. 167 168 Table I-l.--Continued. Rates of Return on Years Reference Stock Price 1963-72 Obtained by averaging the December- January stock prices for 1955-72 found in Surveydof Current Business to arrive at year end levels. These figures were multiplied by 3.6846 which was the average factor between these stock prices and those found in the previously cited reference for the years 1955-62. APPENDIX J SUPPLY OF EQUITY APPENDIX J SUPPLY OF EQUITY . Table J-l.--Supply of Equity. 1927-41 1969-72 1950-68 Obtained in the same manner as equity holdings of con- sumers using net issues in place of the change in holdings of individuals. Institutional Investors and Corporate Stock--A Background Study, p. 413. ‘ 169 APPENDIX K CORPORATE EARNINGS AND TAXES APPENDIX K CORPORATE EARNINGS AND TAXES Earnings before taxes plus the capital consumption allowance divided into total taxes gives the effective tax rate. The preceding is the manner in which Joseph Pechman calculated the effective tax rate and is the method used in this study.78 Table K-1.--Corporate Earnings and Taxes. Asset: earnings before taxes, corporate taxes (total), and capital consumption allowance Years: 1929-41 Reference: National Income Supplement to Survey of Current Business Years: 1950-72 Reference: Survey of Current Business Asset: Corporate taxes Years: 1927, 1928 Reference: Federal Finances 1923-1932, p. 77. 78Joseph A. Pechman, Federal Tax Polic (Washington, D.C.: The Brookings Institute, 1971), pp. 117-18. 170 171 Note to Table K-l: Pechman estimates the corporate tax rate for 1927, 1928 at approximately 1 percent greater than that for 1929.79 The earnings before taxes for 1927-28 were obtained by multiplying the total taxe: paid by the reciprocal of the tax rate (1929 rate plus 1 per- cent . 791616.. pp. 115, 307. Eta-4.- 1 I ..~.u\1)..1.o1..~ 8. 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