FINANCIAL CRISES: THEORY AND EVIDENCE IN THE POSTWAR U.S. ECONOMY (UNITED STATES)

The object of the dissertation is to understand the causes of the financial crises that have occurred in the United States since World War II. On the basis of a review of the major theories of financial crises, a conceptual framework is constructed with which to approach the data. This framework situates financial crises near the peak of the expansion phase of the business cycle, as the financial condition of the corporate sector begins to deteriorate. It contends that financial crises are to be understood by examining the credit market, in particular the failure of the supply of credit to accommodate the demand for credit. Hypotheses are formulated concerning the reasons for the development of financial difficulties in the corporate sector, the factors influencing the demand and supply of credit, and the defining patterns of a financial crisis. The financial crises of the postwar period are then examined in detail. Beginning with the "credit crunch" of 1966, the survey extends through the threatened loan default by Mexico in 1982. It includes the events surrounding the failure of the Penn Central Transportation Company in 1970, the collapse of the Franklin National Bank in 1974, the silver crisis of 1980, and the Penn Square and Drysdale incidents of 1982. Corresponding to the nature of the subject matter being investigated, the method employed is historical, institutional, and dynamic. The results of the investigation are summarized in a model of financial crises. The main conclusions are as follows: the source of the financial crisis can be traced back to the difficulties that corporations have in meeting debt payment requirements and previously-incurred commitments for investment spending, due to a decline in their profits near the peak of the expansion phase of the business cycle; this necessitous demand is accommodated, primarily by means of liability management, by the commercial banks for their established customers; surprise events, such as the sudden imposition of an institutional constraint or an unexpected bankruptcy, can disrupt the continued flow of credit and bring about a financial crisis: a sudden and intense demand for money.