Financial Crises: Understanding the Postwar U.S. Experience

By Martin H. Wolfson | Go to book overview

7
The Silver Crisis of 1980

The financial crisis of 1974 was the most far-reaching and the severest of any that had previously occurred in the postwar period. Moreover, the recession, which ended in March 1975, was the deepest of any since the Great Depression. As a result, although balance sheet ratios improved during the recession, both the corporations and the banks turned their attention in 1975 and 1976 toward a further rebuilding of their liquidity and balance sheets.

Capital expenditures of nonfinancial corporations declined, and debt ratios improved. The balance sheets of commercial banks also improved during this period, due to the weak loan demand and a desire on the part of the banks to reduce their loan exposure following the 1974 crisis.

These favorable financial developments in the corporate and banking sectors began to change in 1977, however. They turned negative in 1978 under the pressure of an expanding economy.

Real investment in plant and equipment by nonfinancial corporations posted strong gains in both 1977 and 1978. Moreover, this investment was no longer financed primarily out of internal funds. Credit market borrowing as a percentage of investment, which was abnormally low in 1975 and 1976, rebounded strongly in 1977 and 1978.

An increasing proportion of the debt used to finance investment spending was short-term. As a result, the maturity ratio of total debt outstanding, after improving in 1975 and 1976, again began to deteriorate in 1977 and 1978. In addition, the liquidity ratio for nonfinancial corporations peaked in the last quarter of 1976 and the debt-equity ratio increased in 1977 and 1978.

By the second quarter of 1978 economic activity was expanding strongly. The unemployment rate fell to under 6 percent in 1978, and the capacity utilization rate climbed to 87.1 percent by December. The GNP price deflator increased by 14.7 percent during the year, and compensation of employees in nonfinancial corporate business jumped by 15 percent. At the same time, productivity growth slowed sharply. After increasing at an average of 2.6 percent per year from 1975 through 1977, the output per hour of all employees (in 1972

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