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Private Sector Debt Matters Too: Theoretical Perspectives on Credit and the Building of Financial Accounts

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The Financial Systems of Industrial Countries

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Abstract

Many authors in the 1930s created a theoretical framework that described financial interactions within the enterprise sector as a whole and between firms and the household sector, giving equal importance to stocks and flows. These authors include Schumpeter, Keynes and Fisher. Soon after World War II discussions started on conceptual and practical problems regarding the design of financial accounts. This phase culminated in the SNA 68, the international accounting manual which provided an integrated view of financial phenomena across sectors. The work was done mostly by statisticians, the most prominent being Copeland and Stone. As data on financial accounts became regularly available, some economists used them to fathom the long-term tendencies of the American economy. Some of them signalled that the remarkable post-war economic growth was accompanied by significant increases in private debt, which grew to such an extent as to potentially jeopardize the long-term prosperity of the American economy. Authors in this vein include Minsky, Kaufman and Teplin. The need for financial accounts to monitor the economy was initially felt in the 1930s, when the Great Depression was unfolding. Their availability today might help to design solutions for a healthy return to growth after the 2007–09 world recession.

I would like to thank Riccardo De Bonis, Robert Gadsby and Claire Giordano for comments on a previous version. The views expressed are those of the author and do not necessarily correspond to those of the Bank of Italy.

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Notes

  1. 1.

    Schumpeter considered savings to be generated mostly from profits: “[the] constant revolution of industrial and commercial methods is constantly yielding profits, the first, most natural and most important source of ‘mobile resources’ or of ‘savings’” (Schumpeter 1927: 304).

  2. 2.

    “Innovation is, in this case, not any more embodied typically in new firms … Although credit creation still plays a rôle, both the power to accumulate reserves and the direct access to the money market tend to reduce the importance of this element in the life of a trust” (Schumpeter 1928: 384).

  3. 3.

    “My Prices and Production, originally published in England, should be considered as an essential complement to the present publication. … I have, in the later publication, concentrated on the successive changes in the real structure of production, which constitute those fluctuations.” (Hayek 1933: 17).

  4. 4.

    However, a clear perception of the issue was recent in the Anglo-American literature as well. See the contribution of Crick (1927).

  5. 5.

    The other economists in the circle were Mises himself, Hayek and Haberler.

  6. 6.

    A second edition of the book, slightly revised, was published in English in 1940. Our quotations are from the English edition.

  7. 7.

    “So far as old securities … are concerned, it is immaterial from the point of view of real capital formation or its utilization how many times and at what prices these existing titles to a share in the yield of real capital exchange hands.” (Machlup 1940: 21)

  8. 8.

    One has to bear in mind that the definition of saving and investment in the Treatise is not the same as that in the General Theory. The difference is due to the definition of income in the Treatise: “the definition of income, which I there employed, differed from my present definition by reckoning as the income of entrepreneurs not their actually realised profits but (in some sense) their ‘normal profit’” (Keynes 1936: 77).

  9. 9.

    “When there is disequilibrium between savings and investment, this is much more often due to fluctuations in the rate of investment that to sudden changes in the rate of savings, which is, in normal circumstances, of a fairly steady character.” (Keynes 1930, v. II: 95).

  10. 10.

    Keynes acknowledges the influence of Schumpeter on his ideas: “Professor Schumpeter’s explanation of the major movements may be unreservedly accepted” (Keynes 1930, v. II: 95–96).

  11. 11.

    Schumpeter in 1954 noticed a different treatment by Keynes in the Treatise and in the General Theory of the view that bank loans create deposits: “The deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums lent have practically disappeared in the analytic schema of the General Theory” (Schumpeter 1954: 1114). More in general, the need to consider the entire evolution of Keynes’s analytical framework, and not just his 1936 book, has been suggested by various post-Keynesian authors, such as Vicarelli (1984).

  12. 12.

    This lending of money by individuals is very similar to the concept of “credit out of surplus cash balances” that appears in Machlup.

  13. 13.

    In this vision, a bank is basically a unit characterized by safe liabilities.

  14. 14.

    The full list of assets includes goods and productive equipment.

  15. 15.

    The OECD, Organisation for Economic Co-operation and Development, became the successor of the OEEC in December 1960. The OECD had an enlarged mandate, and its members were western European countries as well as the US and Canada. Participation in the OECD was extended to other countries in the subsequent years.

  16. 16.

    A few years later Richard Stone led another group of experts, working for United Nations (1953). In 1953 A System of National Accounts and Supporting Tables (SNA 53) was published. The project was more ambitious, as for each of the same three domestic sectors of the OEEC System of 1951 there was a capital account (Capital Reconciliation Account).

  17. 17.

    For example, in Austria the domestic non-bank sector was divided, as suggested in the general definitions, into three sectors but the data were all from the income accounts. Data on banks were not provided. A similar situation applied to many other countries. Only four countries provided broad financial information: France, Germany, Italy and Norway. But, even for these few countries, the data presented were of doubtful usefulness for comparative purposes.

  18. 18.

    Toniolo, in his history of the BIS, claims that “Research and its dissemination was traditionally regarded at the BIS as a tool for central bank cooperation.” (Toniolo 2005: 323).

  19. 19.

    It is very likely that the revised structure of the Annual Report was due to Paolo Baffi and Frederich Lutz, who had been nominated external consultants for the BIS Annual Report at the end of 1956, replacing Per Jacobsson who had moved to the IMF. Baffi and Lutz held this position until 1960.

  20. 20.

    We observe that the financial sector does not appear in this ideal list.

  21. 21.

    Some parts of the table were still very condensed, however.

  22. 22.

    Professor Sayers became a member of the influential Radcliffe Committee in 1957. This reference by Dorrance confirms Sayers’s early exposure to financial accounts theory.

  23. 23.

    The article by Baffi is examined in chapter 2by De Bonis and Gigliobianco.

  24. 24.

    The Appendix was prepared by Dorrance and Aubanel.

  25. 25.

    In that period two sets of financial accounts were prepared in the Netherlands by two different institutions. The two data sets diverged in many respects.

  26. 26.

    Against a background of poor productivity growth, and a struggle against inflation, the aims of British monetary policy were set out in 1956 in the White Paper on Economic Implications of Full Employment. This was followed in May 1957 by the appointment of the Radcliffe Committee “to inquire into the working of the monetary and credit system, and to make recommendations”. Within a few months the question of monetary policy became very urgent, due to the balance-of-payments crisis of September 1957. The Radcliffe Committee was composed of nine members, two of them, Cairncross and Sayers, from the academic world.

  27. 27.

    The Bank of England responded quickly to the requests. The publication of its Quarterly Bulletin started at the end of 1960. Data and comments on the financial surplus of the private sector appear in the first number of this new publication. Fuller financial accounts were made available in 1963. Some years later, the Department of Applied Economics of the University of Cambridge undertook empirical work on sectors’ financial balance sheets (Stone and Roe 1971).

  28. 28.

    A major task promoted by the ECB was the move from annual to quarterly financial accounts (see ECB 2007). The ECB also has the merit of commenting the data, either in its Monthly Bulletin or in occasional papers by its staff. An interesting example, on households’ portfolio, is the article by Gadsby and Giron (2010).

  29. 29.

    From 1948 to 1957 the growth of the American economy averaged 6.1% per year; after 1957 it decelerated, but was still robust at 4.5% between 1957 and 1962.

  30. 30.

    The buy-back of shares goes in the opposite direction to the suggestions of Simons (1936) and Jones (1947). Kaufman (1986) had also been sceptical about this.

  31. 31.

    Palumbo and Parker (2009), commenting on sector net lending in the periods 1960–79, 1980–99, and 2000–07, notice that in 2000–07 “what was unprecedented was the household sector’s dramatic shift from funding the investment of other sectors to borrowing from them” (Palumbo and Parker 2009: 83).

  32. 32.

    We will not go into an examination of the current financial crisis, although we wish to stress that two Reports published in 2009 interpret the 2007–2008 financial crisis along lines similar to those of Fisher, Minsky and Kaufman. Brunnermeier et al. (2009) are close to the endogenous vision of Minsky (1964): “financial crises are predominantly caused by market dynamics, not just by external shocks, though such shock … may well have been the trigger” (Brunnermeier et al. 2009: 5). The Turner Report, along similar lines to Kaufman (1986), suggests that the crisis is due to the interaction of macroeconomic imbalances and financial innovations, with a special role for credit securitization (Turner 2009: 42–43). The Turner Report suggests monitoring various financial indicators over time, many of them on the debt of the private sector (Turner 2009: 83).

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

    Riccardo Massaro

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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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Massaro, R. (2012). Private Sector Debt Matters Too: Theoretical Perspectives on Credit and the Building of Financial Accounts. 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_3

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