Financial Crises: Understanding the Postwar U.S. Experience

By Martin H. Wolfson | Go to book overview
Save to active project

1974: Franklin National

The threat of a financial crisis developed again in 1974. The crisis was precipitated mainly by the effective failure of Franklin National Bank, at the time the twentieth largest bank in the United States.

This time the crisis had international ramifications. Franklin had large Eurodollar liabilities, and its difficulties were followed by the failure of a German bank, Bankhaus I.D. Herstatt; both banks had financed unsuccessful foreign‐ exchange speculation by heavy borrowing in the Eurodollar interbank market. The Federal Reserve acted as a lender of last resort to prevent instability in foreign as well as domestic financial markets. Such activity to protect markets overseas was a significant expansion in the use of lender-of-last-resort activities.

Before discussing the crisis itself, however, it is necessary again to follow the developments in the economy, and especially in the corporate and banking sectors, that created the conditions in which the crisis developed.

The 1970 recession ended in November, but the growth of the economy in 1971 was disappointing. Real GNP recovered strongly in the first quarter of the year from its low point in 1970, but growth in real GNP for the rest of the year averaged only 2.9 percent. Such low growth is atypical for the first year of recovery from a recession.

In addition, the capacity utilization rate increased only slightly from its low point of 75.9 percent in November 1970, and the unemployment rate averaged close to 6 percent for most of the year. Despite this evident slack in the economy, prices continued to increase at a 5.8 percent rate during the first half of the year.

These domestic developments, however bad, were nonetheless overshadowed in 1971 by the continuing balance of payments deficits of the United States and the difficulties of the dollar. The dollar came under increasing attack from speculators in 1971, and foreign central banks were forced to take in increasing amounts of dollars to maintain the system of fixed exchange rates.

The pressure became too much in late summer; President Nixon announced a New Economic Policy (NEP) on August 15th to try to address the domestic and international difficulties. The NEP suspended convertibility of the dollar into


Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this page

Cited page

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
Financial Crises: Understanding the Postwar U.S. Experience


Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 269

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?