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The Origins of Financial Accounts in the United States and Italy: Copeland, Baffi and the Institutions

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The Financial Systems of Industrial Countries

Abstract

The paper analyses the birth of financial accounts in the US and in Italy. We start by looking at Morris A. Copeland, the first scholar who rationalized the account framework. We debate the intellectual environment that influenced Copeland’s work, namely the building of national accounting and the discussion on business cycle measurement. We summarize the Federal Reserve’s intervention that led to the regular presentation of the flow of funds in the 1950s. We then explore the multiple intellectual sources of the “Italian way” to financial accounts, underlining the role of Paolo Baffi, chief economist of the Bank of Italy in the 1950s. The Italian case epitomizes the idea that statistics are not neutral: in their conception and design they reflect the needs of the institutions which implement them. Multiple examples are given of how the rhetorical needs of the Italian central bank shaped the definition of the building blocks of the financial accounts and their presentation. We conclude by describing the later interaction between the evolution of macroeconomic theory and the rise of financial accounts in the 1960s and 1970s, a loss of interest in these statistics in the 1980s and 1990s, and its revival in recent years, mostly influenced by the financial crisis.

The authors wish to thank Franco Cotula, Eugenio Gaiotti, Claire Giordano, Donald D. Hester, and Richard Walton for useful suggestions to previous versions and Elisabetta Loche, of the Bank of Italy’s Historical Archives (hereafter ASBI), for help with research. Giuseppe Acito, Roberto Barbato and Maurizio Castellani prepared the tables. The paper covers the 1940s and 1950s and does not describe in detail the development of financial accounts after the 1960s. All translations of original material in Italian are ours. The views expressed are those of the authors and do not involve the responsibility of the Bank of Italy or of the Eurosystem.

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Notes

  1. 1.

    A survey of the origins of national accounts goes beyond the scope of this paper. On the subject see Vanoli (2005).

  2. 2.

    McCloskey’s (1985) challenge should not be forgotten: ‘…the Keynesian revolution in economics would not have happened under the modernist legislation for science. The Keynesian insights were not formulated as statistical propositions until the early 1950s, 15 years after the bulk of younger economists had become persuaded they were true. By the early 1960s the Keynesian notions of liquidity traps and accelerator models of investment, despite repeated failures in their statistical implementations, were taught to students of economics as matters of scientific routine. Modernist methodology would have stopped all this cold in 1936: where was the evidence of an objective, controlled and statistical kind ?’

  3. 3.

    Some defence of Mitchell can be found in Kydland and Prescott (1990). See Della Torre (1993) and (2000) on the links between institutionalism, national accounts developed at the NBER, Mitchell’s work, and theory of the business cycle.

  4. 4.

    Kuhn’s conviction – that scientific revolutions are never brought about by one scholar only – is borne out by Copeland himself, who wrote in the preface to his work: ‘Mention should be made, too, of a study that to some extent parallels the present attempt to organise debt and credit information and relate it to gross national product information, Raymond Goldsmith’s study of saving and capital markets in the United States. Had some of the results of Goldsmith’s study become available a year or so earlier, my task would have been easier.’ Copeland was referring to Goldsmith’s research, which eventually became part of the monumental work, A Study of Saving in the United States. Goldsmith’s use of the balance sheets of institutional sectors and of flow of funds falls outside the scope of our work and merits specific treatment.

  5. 5.

    ‘The Leontief set of measurement resembles the set of moneyflows measurement presented here’, Copeland (1952), 2.

  6. 6.

    In his seminal work of 1935, Hicks said ‘we shall have to draw up a sort of generalised balance sheet, suitable for all individuals and institutions’. Furthermore, ‘monetary theory needs to be based … upon a similar analysis, …, not of an income account, but of a capital account, a balance sheet.’ Hicks’s contribution was fundamental in guiding monetary theory towards an interpretation of money as a store of value instead of a means of exchange. On Hicks, see also Chap. 3 by Massaro.

  7. 7.

    Young (1957) provides an application of US flow of funds to the years 1953–1955. See also Taylor (1958).

  8. 8.

    Sigel (1962) discusses the integration of US flow of funds with the national accounts. For the recent integration of US macroeconomic accounts see Antoniewicz et al. (2005).

  9. 9.

    An early survey on different national approaches may be found in E. Hicks (1957a).

  10. 10.

    W.C. Mitchell, ‘Fenomeni e fattori dei cicli economici’, in Mortara (1932). The text that Baffi translated was the first chapter of Mitchell’s book Business Cycles.

  11. 11.

    It is quite probable, as Della Torre (2006) points out, that the Italian experience with the ‘money circuit’ during the war (an attempt to cancel out, via compulsory saving, the inflationary effects of monetary financing of the State’s expenditure) may have had a role in defining Baffi’s scientific programme. In fact the money circuit functioned in so far it had no leaks: a detailed knowledge of the liquidity situation of the different classes of actors was instrumental in pointing out possible leaks. One could say that the money circuit was (as an intellectual stimulus) the dictatorial counterpart of the inflationary gap discussed in the same period in the US.

  12. 12.

    Banca d'Italia, personal file.

  13. 13.

    See the short biography of Baffi in Gigliobianco (2006).

  14. 14.

    The ‘statistical motivation’, in terms of the 1964 table, emerges clearly in the research paper published by two of its main authors. See Ercolani and Cotula (1969).

  15. 15.

    Both difficulties are well known and were mentioned by Baffi himself, who acknowledged that progress since 1948 had been slow (Baffi 1957, p. 316).

  16. 16.

    Annual Report for the year 1948, Banca d'Italia, pp. 189–192.

  17. 17.

    Archivio Storico della Banca d'Italia (ASBI), Studi, cart. 343, fasc. 1, last page.

  18. 18.

    The final part of the Annual Report, read by the Governor at the Annual Meeting of the Bank, was (and still is) called ‘Concluding Remarks’.

  19. 19.

    Menichella’s ‘Concluding Remarks’ have been reprinted in Cotula, Gelsomino and Gigliobianco (1977), Vol. ii. The original quotation appears on page 24.

  20. 20.

    Cotula, Gelsomino and Gigliobianco (1997), Vol. ii, page 38.

  21. 21.

    Cotula, Gelsomino and Gigliobianco (1997), Vol. ii, p. 21.

  22. 22.

    Baffi (1957), p. 318.

  23. 23.

    See Desrosières (1993) and Tooze (2001).

  24. 24.

    The distinction appears in Annual Report for the year 1960, Table 109 (and in English in the Abridged Version of the Report for the year 1960, Table 34).

  25. 25.

    Baffi (1985), § 11.

  26. 26.

    Baffi (1957), p. 322.

  27. 27.

    Baffi (1957), p. 322.

  28. 28.

    Documents regarding this trip, including correspondence between Menichella and Holtrop, Governor of De Nederlandsche Bank, can be found in ASBI, Studi, cart. 383, fasc. 2, sfasc. 83.

  29. 29.

    The correspondence is in ASBI, Carte Baffi, cart. 346.

  30. 30.

    Holtrop (1957), p.303.

  31. 31.

    Hicks (1957b) in ASBI, Carte Baffi, cart. 346/2.

  32. 32.

    Polak (1959), pp. 1–8.

  33. 33.

    Menichella (1955), p. 589.

  34. 34.

    On the innovations brought about by Carli, see his biography in Gigliobianco (2006), in particular pp. 292–297.

  35. 35.

    Banca d'Italia (1965), pp. 107–125 (the point we are interested in is on p. 122). More information and data can be found in Cotula and Caron (1971).

  36. 36.

    The reference is to the working party that finally produced the ESA70.

  37. 37.

    Banca d'Italia, Annual Report for the year 1964, ‘Considerazioni finali’, p. 493.

  38. 38.

    In the Annual Report for 1967 the first explicit attempt – i.e. not confined to internal memos – was made to link the financial accounts to the capital account.

  39. 39.

    On this point again see Ercolani and Cotula (1969), p. 20.

  40. 40.

    Hester and Tobin (1967a), (1967b) and (1967c) collected the school’s most important contributions in three volumes, published by the Cowles Foundation.

  41. 41.

    ‘The national income analysis had Keynes…[but] the Keynes of flow-of-funds analysis has not yet revealed himself’, Duesenberry (1962).

  42. 42.

    As Buiter (2003) noted, ‘Tobin’s mistrust of the representative agent approach and his relaxed attitude towards micro foundations are consistent with his decision to pursue the empirical implementation of complete systems of portfolio balance and flow-of-funds models using asset demand specifications that were eclectic or ad-hoc as regards the selection of arguments.’

  43. 43.

    The applications were heterogeneous, a feature they shared with the Keynesian macroeconomic models (see Visco 2005).

  44. 44.

    One Italian application is Modigliani and Cotula (1973). Regarding the incorporation in the Bank of Italy’s econometric model see Fazio et al. (1970).

  45. 45.

    Regarding the United States, ‘… we see more and more clearly one of the ways in which everything depends on everything else … as Bob Solow once put it’, Taylor (1963). As far as the United Kingdom is concerned, ‘The whole is reasonable only if the parts are’, Bank of England (1972).

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  1. Bank of Italy, Economics, Research and International Relations, Rome, Italy

    Riccardo De Bonis & Alfredo Gigliobianco

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  1. , Economic and Financial Statistics, Bank of Italy, via Nazionale, Rome, 00184, Italy

    Riccardo De Bonis

  2. , Science Economiche Gestionali e Sociali, Università degli Studi del Molise, via de Sanctis, Campobasso, 86100, Italy

    Alberto Franco Pozzolo

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De Bonis, R., Gigliobianco, A. (2012). The Origins of Financial Accounts in the United States and Italy: Copeland, Baffi and the Institutions. In: De Bonis, R., Pozzolo, A. (eds) The Financial Systems of Industrial Countries. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-23111-7_2

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