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The article develops supply and demand functions for the commercial paper market. Between 1965 and 1968 the value of short-term debt issued by corporations more than tripled. The author estimates equations for supply and demand using quarterly data for the period 1954-1968. Results for several different industries are presented and discussed. Although the model worked will within the sample time frame, it performed less well for the two subsequent quarters, owing to structural changes in the market.

The article presents a discussion of Arthur I. Bloomfield's research paper on a survey of central banking in developing countries. The reviewer said that his research was lucid and comprehensive and the author is in general agreement with Bloomfield on the various issues he discusses. The author adds to Bloomfield's paper by describing the various steps taken by the monetary authorities in India in the late 1940s and throughout most of the 1950s. The steps were taken to strengthen the banking and credit system.

This article presents a discussion of E. M. Bernstein's paper about the financial problems of economic development. Bernstein discusses five facets of this problem: to decrease the size of the development program, to energize the inflow of foreign capital, to encourage domestic savings, to gather together the available resources, and to allocate the resources available to the private sector in a way that will stimulate the greatest increase in production. The author believes that this analysis leaves no room for argument.

The article presents a discussion of Gardner Patterson's research paper. The reviewer presents comments on terminology and the other is a matter of emphasis. The point of terminology has to do with the concept of mandatory saving. This type of saving means a reduction in consumption forced on people by an increase in prices. The author states that it is important to note how much additional money an economy is able to absorb in deciding how much deficit financing can be undertaken without risking inflation.

The three papers presented at this session have provided a fine balance of theoretical analysis and statistical investigation. The paper by Black and Scholes is a particularly commendable contribution, thoroughly professional in execution and a very constructive piece of work in its broader implications. The authors has previously derived an equation for the valuation of options from the condition that opportunities for profitable arbitrage will be eliminated in efficient capital markets. In the present paper they carefully analyze a sizeable body of data to examine the efficiency of the operation of the option market as it is now structured. They validate their formula for the pricing of options by showing that in the absence of transactions costs, buying "undervalued" contracts and selling "overvalued" contracts at model prices computed with foreknowledge of the actual variances of the returns on the underlying stock over the holding period would produce quite insignificant average gains or losses. But when ex ante variances are estimated from previous stock price histories, buying "undervalued" contracts and selling "over-valued" contracts at model prices would have produced significantly negative excess portfolio returns, while substantial positive excess portfolio returns would have been made by buying overvalued and selling undervalued options at market prices. These results indicated that the true value of options is somewhere midway between market prices and "model" prices based on historical data. [ABSTRACT FROM AUTHOR]

The article presents a list of books related to finance, including "Instalment Credit Computations for Yields, Charges, Rebates and Earnings," by Nathan A. Batchker, "Simulation of Information and Decision Systems in the Firm," by Charles P. Bonini, and "Paciolo on Accounting," by Ralph F. Brown and Kenneth S. Johnston.

In two papers and in a recent book I have presented theory and evidence which lead to the conclusion that a corporation's share price (or its cost of capital) is not independent of the dividend rate. As you may know, MM (Modigliani and Miller) have the opposite view, and they argued their position at some length in a recent paper.3 Moreover, the tone of their paper made it clear that they saw no reasonable basis on which their conclusion could be questioned. Since they were so sure of their conclusion, it would seem advisable for me to review carefully my thinking on the subject, and this meeting appears to be a good time and place to do so. [ABSTRACT FROM AUTHOR]

The article presents a discussion of Charls Walker's and Ira Scott's research paper on the role of governments in bank earnings. Walker discusses discount policy in the 1950s. The author of this article states that the research presents only the advantages of discounting and few of the disadvantages. Also discussed is the third paper entitled "Elements of Timing and Response in the Balance Sheet of Banking." The author states that he has had difficulty commenting on these papers because of the obvious subject matter diversity.

The article addresses the democratization of money. The author equates the economic importance of the use of checks or deposit currency with the ability to physically distribute goods through railways. The author considers government intervention into the regulation of deposit currency, as it is beginning to replace the use of currency and coins, which are provided to the public free of charge. The author argues against the criticism that this is a socialization of the banking system by stating that this subsidy would take the place of the costs of generating paper currency and coins, and would strengthen the banking system by the increase in individual bank business.

The Duesenberry-Bosworth (DB) paper (and the impressive amount of work which ties behind it) are a welcome addition to the literature on models of the financial sector. In the first instance, there has been considerable interest in recent years in moving away from models with a heavy dosage of term structure and risk structure equations towards a model in which interest rates are explicitly determined by portfolio behavior of demanders and suppliers of various financial assets. Needless to say, the DB effort takes a giant step in this direction. To me at least, the other main attraction of the DB effort is that it attempts to exploit the flow of funds data, whose promise has long been touted but is as yet unrealized. The present paper reports a number of policy simulations with their complete macroeconometric model. The general structure of the model is given in the paper before us but most of the details are omitted. The model, however, is described more extensively in research which has recently been reported elsewhere. Since it is difficult to evaluate the simulations reported without some reference to the underlying model, I will be pardoned if I say a few words on this score. [ABSTRACT FROM AUTHOR]

Professor Katz has opened a neglected area of study in the pricing processes of the securities markets with what is, on the whole, a very estimable first effort. The rash of bond reclassifications in recent years found us with little or no knowledge of their effects, particularly with respect to yields. In this regard Katz's paper is a needed and welcome one. It may also be that, as his paper says, investigation will reveal something of bond market efficiency, though this is much more problematic and conjectural than the more narrowly framed problem of repercussions on yield of rating change. [ABSTRACT FROM AUTHOR]

Recent discussions of the Eurodollar market have revealed considerable controversy among economists over its structure and impact. In the hope of clarifying the functioning of the market, this paper presents two models in which Eurobanks are viewed as a special type of intermediary in the financial sector of the United States. These overseas banks issue Eurodollar deposits, time deposits denominated in dollars, and acquire U.S. and foreign securities and non-deposit branch claims on U.S. commercial banks. Changes in asset yields, including the Eurodollar deposit rate, alter the size and composition of the balance sheets of Eurobanks, U.S. commercial banks, and the public. These models will be used to determine (1) how the behavior of transactors in the Eurodollar market affects the impact on U.S. interest rates of monetary disturbances in the United States; (2) how the size of the market is affected by these disturbances; (3) whether switches into Eurodollar deposits by the public are likely to lead to an induced expansion of the market; (4) whether raising Regulation Q ceilings is expansionary or contractionary; and (5) the importance of Regulation Q ceilings to the size of the market. The Gramley-Chase-Smith financial sector model is reviewed and modified in Section I and extended in Section II to include Eurodollar transactions. Section III presents an alternative model of the Eurodollar market, in which Regulation Q ceilings are imposed on U.S. time deposit rates. Section IV is a summary of the results. The major limitation of this paper is its omission of induced changes in foreign interest rates, the inclusion of which would require the addition of a foreign financial sector to the models, and in spot and forward exchange rates, which are taken to be pegged by the exchange authorities. [ABSTRACT FROM AUTHOR]

The authors respond to comments by Professor Eugene Carter concerning their paper "A Simultaneous Equation Approach to Financial Planning." They state that while matrix inversions are utilized in solving linear simultaneous equations, their own model utilizes nonlinearities that prevent the use of a straight-forward matrix inversion technique. They suggest their own model does a more effective job of portraying financial decision making than other models. They comment on the accuracy of projections for Sears-Roebuck and mention a discussion about if the U.S. Securities and Exchange Commission should permit or require projections in equity prospecti, considering the method for making financial projections is well-developed.

To take a representative sample of Keran's approach to empirical research, consider his equation (7), reproduced as equation II-1 in Table 1 of the H & K paper. This equation purports to show that the "major factors determining stock prices are ... expected corporate earnings and current interest rates" (Keran, p. 31). What it actually shows is an index of stock prices regressed on the current and one lagged value of a long-term interest rate, and on the current and 19 lagged values of corporate profits, with the coefficients constrained to lie along a sixth-order polynomial of the Almon variety. Despite the continual use of the term, "expected corporate earnings," when referring to these lagged values, no attempt is ever made to disentangle the presumed forecasting weights from the presumed explanatory coefficients, nor to validate the expectation by direct predictive tests, nor to compare its predictive performance with other possible proxies. [ABSTRACT FROM AUTHOR]

The article comments on the papers "The Changing Role of U.S. Banks in International Financing," by George H. Chittenden, "The International Money Market: Structure, Scope and Instruments," by Fred H. Klopstock, and "The Integration of European Capital Markets," by Oscar L. Altman, all published within the issue. The author looks at changes occurring in European capital markets, international money markets, and commercial bank lending. The movement toward better organized markets for long-term capital in Western Europe is discussed.

The article presents a list of books received, including "Economics and the Modern World," by Lawrence Abbott, "A Study of Company-sponsored Foundations," by Frank M. Andrews, and "An Introduction to Analysis and Policy," by George Leland Bach.

The article discusses the important contribution that non-financial institutions make to money markets. The article focuses on the short-term investment practices of non-financial corporations, and outlines any changes in these practices since 1939. The article explains that, because of the significant increase in money-market investment, these investments can have a real impact on the growth of various sectors. The article addresses the determinants of types of securities held by non-financial corporations and trends in corporate short-term investment practices. The author notes that corporate portfolio managers have significant cash for investment, and market growth is evident by the number of companies selling commercial paper directly and sales changes in commercial paper houses.

The article presents a list of books related to business and finance. Some of the books are "The Politics of Israel: The First Decade of Statehood," by Marver H. Bernstein, "Guidebook to California Taxes With Special Emphasis on Relationship to Federal Taxes," by Russell S. Bock, "The Mechanics of Inflation," "Marxism and Freedom: From 1776 Until Today," by Raya Dunayevskaya, "Prosperity through Competition," by Ludwig Erhard, "Practical Financial Statement Analysis," 4th ed., by Roy A. Foulke, "Supply and Demand," by Hubert Henderson, and "Corporate Bonds: Quality and Investment Performance," by W. Braddock Hickman.

The article presents a list of books received including "Determination: An Analysis of Wage Criteria," by Jules Backman, "Principles and Policy," by Royall Brandis, and "City Expenditures in the United States," by Harvey E. Brazer.

The article presents a discussion of research papers by Professors Scott, Walker, and Horwich. The author discusses three points about Scott's paper. The first point is about the impact of Federal Reserve discount policy upon banks' liquidity standards. The second is the statement that institutional developments affecting the supply of and demand for loanable funds will, by increasing the tendency of interest rates to go up and down, raise the premium that banks put on liquidity. The third is the proposition that comparing 1929 with 1956, banking liquidity lessened.

A discussion of several conference papers that examined monetary policy is presented. The author notes that one of the papers offered a clear argument on the role of monetary policy in international finance. The author also explores the idea of flexible exchange rates and the problems that inflation may present. The author proposes that a deflation of income would actually solve many of the economic problems the U.S. is facing in the postwar period.

Econometric model building of the type represented in the Duesenberry-Bosworth paper was at best an attempt to see whether systems of, say more than 25 equations, add much to our knowledge of the economy and the response to policy changes. They have not, I believe, at least to this point, and I am not optimistic about a change in the next few years, instead of commenting on the details of the particular models presented at this session, I will explain some of the reasoning that brings me to that conclusion. Before doing so, let me make clear that my comments are not directed at either "theory" or empirical science. There is very little of either in current econometric practice. I view my comments as a criticism of large models, models of twenty-five or more equations, not as a criticism of modelling or testing economic hypotheses. [ABSTRACT FROM AUTHOR]

The article presents commentary from George C. Pinches about two papers in the current issue, "Adaptation, Information, and Dependence in Commodities Markets" by Martell and Philippatos (MP), and "The Tokyo Stock Exchange and the Capital Asset Pricing Model" by Lau, Quay, and Ramsey (LQR). He believes the paper by MP needs to provide more information about the definition of filter rules, commission structure, funds required to use the filter rules described, and risk measurement. He also has reservations abut the authors' pooling of wheat and soybean futures. He also believes the paper by LQR needs to explain the existence of lower excess returns for Japanese stocks.

The common theme running through the three papers prepared for this session is the nature and effectiveness of the international balance-of-payments adjustment process. Klein projects the effect of exchange-rate changes on national balance-of-payments positions. Kenen assumes fixed exchange rates and simulates the effects on the U.S. balance of payments of changes in U.S. monetary and fiscal policy. Adler and Stevens analyze the relationship between foreign direct investment by U.S. firms and U.S. exports, and then use their model to simulate the effect of several kinds of policy measures (exchange-rate, tariff and tax-rate changes) on that key aspect of the adjustment process. [ABSTRACT FROM AUTHOR]

This paper analyses the movements in the total and the form of the external financing of the firms covered in the Nonfinancial Corporate Business Sector of the Flow of Funds Accounts over the period 1956 to 1973. It is centrally concerned with the determinants of the volume of short and long-term debt raised by these firms. On average, short-term debt issues accounted for about one-third of the total debt issues of these firms. The relative proportion of short and long-term debt varies significantly and has a marked cyclical pattern, however. Short debt expands very rapidly as the expansion approaches its peak and falls off dramatically in the subsequent recession. Long debt increases more slowly during the expansion and persists at relatively high levels well into the recession. The first issue to which the paper is addressed is that of whether there is any evidence that is consistent with the hypothesis that this variability arises in part because business firms manage the maturity of their debt issues in an attempt to lower the average cost of the debt they issue. If so, how important is this factor as opposed to a more straightforward attempt to finance short assets predominantly with short liabilities and long assets with long debt? A second issue of interest is whether the variability in the volume of long and short term debt issued in the period 1966 to 1973, and in particular around the time of the turmoil in the commercial paper market in mid 1970, was different from what one would have expected on the basis of earlier financing behavior. [ABSTRACT FROM AUTHOR]

This paper has introduced L(W[sub 0], k, A) and R(W[sub 0], k, A) as three-parameter risk measures embodying decisions about a reference level about which deviations are to be measured, the relative importance of small versus large deviations, and the range of deviations that will be included in the risk measure. The popular risk measures of variance, semi-variance, mean absolute deviation, and probability of an outcome worse than some prespecified level are special cases of L(W[sub 0], k, A) and standard deviation is a special case of R(W[sub 0], k, A). These risk measures were shown to differ in their choice of one or more of the parameters W[sub 0], k, and A. It was shown that both L and R are monotone increasing functions of A; however, neither L nor R are necessarily monotone increasing functions of k. Clearly L(W[sub 0], k, A) and R(W[sub 0], k, A), are not the only potentially useful functions of the three decision parameters that have been implicit in the selection of the popular risk measures; they are, however, a rich and fairly general family. Further study of their properties should lead to advances in the theory of risk and specification of criteria for the selection of risk measures. This paper has attempted to establish a foundation for these advances. [ABSTRACT FROM AUTHOR]

The interrelated model provides a useful framework for a time series econometric study of household behavior. This paper summarizes the discussion in a longer paper scheduled for publication. In addition, a suggested extension and some preliminary results are presented. The interrelated model is a generalization of the familiar partial adjustment model. That model suggests that net investment in any period closes some fixed proportion of the gap between desired and actual stock holdings. In the multi-asset generalization, net investment in each asset is determined by the disequilibrium in all other asset holdings, as well as its own disequilibrium. Therefore, the model explains the allocation of wealth among assets, and also the allocation of income to wealth holding as determined by the desired level of asset holding. The extension of the model discussed below restricts the model to the portfolio allocation problem for a given level of total wealth. [ABSTRACT FROM AUTHOR]

In this paper, conditions are discussed under which maximum wealth does not correspond to maximum welfare. As one might suspect, these conditions involve situations in which capital investment on the part of the individual firm influences not only the wealth of its stockholders but also the prices and/or characteristics of existing assets available to stockholders in the market. In these situations changes in nominal stockholder wealth due to corporate investment may not correspond in direction to the concomitant changes in the size of stockholders' "real" opportunity sets. The discussion of conditions under which changes in wealth do not measure changes in welfare naturally leads to consideration of (a) conditions under which the price maximization rule is equivalent to maximization of stockholder welfare, and (b) alternative investment criteria which avoid the problems associated with price maximization. With respect to the optimality of the price maximization rule it is argued that rather stringent conditions on capital market structure are required. This is particularly true of, though not limited to, the case of uncertainty. As for alternative investment criteria, a simple and "operational" welfare maximizing rule is given of which price maximization is a special case under appropriate conditions. The welfare rule, however, applies to all capital market structures. [ABSTRACT FROM AUTHOR]

The article presents commentary from Uri Ben-Zion about an article written by Robert W. Resek, "Multidimensional Risk and the Modigliani-Miller Hypothesis," which appeared in the March, 1970 issue of the "Journal of Finance." In that paper Resek claimed to present a proof that the Modigliani-Miller proposition concerning the indifference of a firm's cost of capital to its capital structure was mistaken. In the current paper Ben-Zion argues that Resek himself is mistaken, and that the Modigliani-Miller proposition still holds.

Part I of this paper discusses briefly the methods used in the calculation of the variance--co-variance matrix and correlation coefficients and the nature and sources of the data. In Part II we present an analysis of correlation among pairs of domestic and foreign assets over different lengths of holding periods. Part III contains an analysis of correlation among pairs of domestic and foreign identical industries. The paper closes with the presentation of the influence exchange rate variations have on the stability of earnings from foreign assets. [ABSTRACT FROM AUTHOR]

A conference paper is presented that looks at money demand and supply functions. Several theories about money supply are discussed including one in which it does not have any influence on national income or prices and another that allows for a link between national income, money, and prices. A particular aim of this paper is to generate a monetary theory that incorporates policy with consumer behavior and bank behavior.

A conference paper is presented that focuses on the pricing of new automobile financing. In his research the author uses the cost of the vehicle's credit as the finance rate and argues against the criticism that this is not a measure of pure interest and opts to use the U.S. Federal Reserve System's method for estimating the finance rate. During 1952-1962 sales finance companies competed more heavily with other financial institutions and the car manufacturers' own lenders.

This paper seeks to identify an optimum set of monetary-fiscal policies to aid in economic adjustments to general and complete disarmament on a specified model. A solution is located by econometric analysis of the effects of changes in taxes and of government expenditures on GNP, employment, and the federal budget. The implications, potentialities, and limitations of surplus budgets, reduction of federal debt, and monetary expansion for disarmament adjustment are also explored. The obstacles to the adoption of the proposed policy are appraised, and a strategy for overcoming them is suggested, which would, incidentally, help to overcome structural obstacles and also conserve for the civilian economy some of the dynamic economic contributions of national defense. While much excellent work has been done on defense economics, there has been relatively little specific and technical discussion of disarmament economics, particularly of the bearing of fiscal and monetary theory upon it.However, the Program of Research on Economic Adjustments to Disarmament (READ) has now in press a report of two years of research on the problem, which will deal at some length with monetary-fiscal adjustments. This paper will serve as a preliminary report on a part of our findings, although obviously the particular conclusions I draw reflect only my own opinions. [ABSTRACT FROM AUTHOR]

The article presents a list of books the publications received for review.

The article lists books received including "Business Reports: Investigation and Presentation," third edition, by C. R. Anderson, A. G. Saunders, and F. W. Weeks, "Economics: An Introduction to Analysis and Policy," second edition, by George L. Bach, and "Introduction to Mathematical Economics," by D. W. Bushaw and R. W. Clower.

A conference paper is presented that examines firm income taxation and asset expansion. The author explores some of the problems associated with the measurement of asset expansion during periods of changing price levels. The author investigates the impact that changes in corporate income tax rates have on asset expansion and offers some suggestions on how to stimulate investments by means of special tax measures.

A discussion of several conference papers that examined postwar monetary policy in the U.S. is presented. The author begins by discussing the paper that examined international trade. The author points to the growing trend of government intervention in trade and questions if the forces that promote equilibrium in a free exchange market can still function in a market guided by governments. The author also explores domestic bank lending policies and increases in short-term interest rates.

This article presents a discussion on several papers that examined postwar economics in the U.S. The author discusses the government bond holdings of life insurance companies and the common stock shares purchased by colleges and universities with money from endowments. The author also discusses a paper that examined some of the philosophical forces that have shaped investment activity in the U.S. The author explores how the purchasing power theory had been applied by investors in their financial decision making. The author also discusses trends in securities prices following the end of World War II.

The article presents a conference paper in response to another paper published in this same issue titled "Cost of the Marshall Plan to the United States," by Seymour E. Harris. The author notes that Harris may not have had the advantage of reading the 240 page report containing the U.S. President Harry Truman's proposals for European recovery. The author considers the role of financial measures in economic recovery, stabilization loans, and the validity of the cost estimates of the Plan.