In recent years a substantial number of empirical studies have been conducted concerning aggregate commercial bank behavior [2, 8, 11, 14, 15, 17, 18]. Although the scope of these studies has varied widely, none has included an adequate treatment of the relationship between commercial bank liability management and earning asset adjustments. The importance of the relationship between liability management and commercial bank asset behavior has been alluded to in the literature [3, 5, 6, 13, 18]; but there has been very little empirical investigation of the subject. Moreover, little is known about which assets and liabilities are primarily involved. By increasing or decreasing earning assets, the commercial banking system can create or eliminate deposits, thus affecting the supply of both money and bank credit. Since liability management and asset behavior are very closely related, it seems that an adequate understanding of this relationship is essential to understanding the money supply process.

The general framework employed in analyzing diversification among securities involves the mean-variance theory of portfolio selection described by Markowitz [8]. Observation of the securities comprising the efficient set indicates which financial sssets possess attributes (i.e., expected return and covariances) making them worthwhile components of an optimally diversified portfolio. This paper will be concerned with forming an efficient set from four security classes—common stocks, preferred stocks, corporate bonds, and U.S. government bonds (hereafter denoted CS, PS, CB, and GB, respectively). The first objective will be to derive and analyze an efficient set from a sample of these securities in order to determine which securities have potential benefits for diversification.

Much effort has been recently devoted to investigating and expounding the properties of the measure called “duration.” Two properties claimed for duration are (1) that it is a good indicator of the average life of a payments stream and (2) that it measures the elasticity of the present value of such a stream with respect to the discount rate. Unfortunately the theoretical justifications of the second, more important, property have been based upon the analysis of either a change in a discount rate constant for all future time periods, or, more generally, a parallel shift in the term structure of interest rates.

This paper examines the stationarity of beta coefficients, especially in regard to recent, major stock market trends. In addition to the usual correlation tests for stationarity, this paper describes a more direct method for testing the stationarity of portfolio betas. The method involves the use of paired t-tests which show separately the degree of stationarity for each portfolio beta. In the process of testing for stationarity, the portfolio betas also are adjusted for measurement error using a formulation suggested by Blume [3].

Taking a fresh look at the factors bearing on profitability of carrying coal from Newcastle to London in the eighteenth century, Professor Hausman finds that average ship loads rose and technology improved during the period. He notes that this is consistent with Adam Smith's dictum that England's effort to monopolize the colonial carrying trade, through the Navigation Acts, would divert capital from domestic to colonial shipping, thereby raising rates of return in the former and lowering them in the latter.

If the “smart money” was out of Franklin before its financial difficulties became public knowledge, just what elements of Franklin's balance sheet were the sagacious analysts reading and why weren't the banking authorities aware of this information? The purpose of this paper is to determine what balance-sheet and income-statement figures, if any, could have been arrayed in an ex post early-warning system to spotlight Franklin's developing problems.

Taking issue with such earlier theorists as Schumpeter, who believed that the rise of bureaucratic structures would stifle the innovative process that lies at the heart of capitalism and thus lead on to socialism, Professor Livesay discusses the careers of three innovative leaders who used the bureaucratic form of organization to keep innovation alive and to realize its implications. He argues that with shrewd leaders like Andrew Carnegie and Henry Ford II (and less well-known ones like Howard Stoddard) at the helm, bureaucratic organizations have been the mechanism of highly dynamic policies rather than the agency of socialistic stasis.

The asset and liability portfolios of financial institutions generate patterns of future cash flows that must conform to many restrictions in order to assure solvency and profitability. Many institutions, including insurance companies and pension funds, have definite and certain future commitments of funds. These institutions may wish to invest funds now so that their cash inflows (investment with accumulated earnings) will match their future commitments. In principle, the simplest way to meet future commitments exactly is to purchase single payment notes (or zero coupon bonds) which mature on the commitment dates. For long-term commitments, such instruments are not readily obtainable, at least in the United States. Most available bonds promise coupon payments over time so that these payments would have to be reinvested at unknown future interest rates in order to realize an accumulated sum at any future date when a commitment must be discharged. Since future interest rates are unknown at the initial moment of investment, it is not certain what accumulated earnings will be at future dates. In the absence of default, the risk of not meeting future commitments may be minimized by adopting investment strategies based on the concept of duration. Duration is a measure of the average maturity of an income stream; it is a weighted average of the dates at which the income payments are received, where the weights add to unity and are related to the present value of the income stream. Dating from the initial work of Macaulay [9] and Hicks [6], duration has been shown to be important in constructing portfolios that are hedged or ‘immunized’ from the possible ravages of interest rate uncertainty.