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The Role of Business Liquidity During the Great Depression and Afterwards: Differences Between Large and Small Firms

  • Helen Manning Hunter (a1)

This paper describes two contrary developments in corporate finance during the Great Depression. In 1930s downswings the top one percent of firms acquired unusually high rations of liquid assets to receipts, thus withdrawing funds from the spending stream. Smaller firms, however, were forced into highly illiquid positions (by postwar standards) by episodes of monetary restriction in 1931 and 1937. It is argued that both developments made the Depression more severe. A structural change is found after 1945 in the financial behavior of large firms. This is attributed to a new cyclical pattern of price change and lower business uncertainty during postwar recessions.

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1 The analysis presented here depends on the availability of the Internal Revenue Service's Statistics of Income data, which were first published in 1917. Comparison with years before 1917 is therefore precluded.

2 See a summary of such studies in Laidler David, The Demand for Money: Theories and Evidence, 2nd ed. (New York, 1977), pp. 130–33.

3 Chandler Lester V., American Monetary Policy, 1928–1941 (New York, 1971), pp. 233–39, 255–59, describes several contemporary investigations.

4 Hunter Helen Manning, “Corporate Demand For Cash: The Influence of Corporate Population Growth and Structure”, The Review of Economics and Statistics, 60 (08. 1978), 467–71.

5 Hunter, “Corporate Demand For Cash”, p. 468.

6 Porter Richard D., Simpson Thomas D., and Mauskopf Eileen, “Financial Innovation and the Monetary Aggregates,” Brooking Papers in Economic Activity, 1, 1979, p. 217.

7 Chandler, American Monetary Policy, p. 256, Table 16–7.

8 For an account of the controversy within the Federal Reserve about the use of member bank borrowing in the 1920s, see Friedman Milton and Schwartz Anna J., A Monetary History of the United States 1867–1960, Princeton, 1963, Ch. 6.Ratios for Member Bank Reserves and Member Bank Borrowing are derived from U.S. Department of Commerce, Historical Statistics, Part II Series 798 and 803. Recent years were derived from the 1982 Economic Report of the President (Washington, D. C., 1982), p. 308.

9 Lieberman Charles, “Structural and Technological Change in Money Demand”, American Economic Review, 69 (05 1979), 324–29.

10 Hunter, “Corporate Demand for Cash”, Table 1.

11 The prewar period is covered in Chandler, American Monetary Policy, pp. 233–39 and 255–59. For a description of credit rationing today, and for bibliographical references, see Mayer Thomas, Duesenberry James S., and Aliber Robert Z., Money, Banking, and the Economy (New York, 1981), Ch. 4.

12 Chandler, American Monetary Policy, pp. 315–20.

13 This procedure is suggested by Toyoda Toshida, “Use of the Chow Test Under Heteroscedasticity”, Econometrica, 42 (05 1974), 601–07.

14 Keynes John Maynard, “The General Theory of Employment”, Quarterly Journal of Economics, 51 (02 1937), 216.

15 Keynes John Maynard, The General Theory of Employment, Interest and Money (New York, 1936), 235.

16 For a different opinion see Temin Peter, Did Monetary Forces Cause the Great Depression? (New York, 1976), Chaps. 4 and 6. Temin does not distinguish between the positions of large and small firms, nor does he refer to the National Industrial Conference Board Study and other evidence about credit rationing cited by Chandler. These appear to be the main sources of disagreement with this paper.

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The Journal of Economic History
  • ISSN: 0022-0507
  • EISSN: 1471-6372
  • URL: /core/journals/journal-of-economic-history
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