Journal Article The Use of Adaptive Expectations in Stability Analysis: Reply Get access Donald R. Hodgman Donald R. Hodgman University of Illinois Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 75, Issue 2, May 1961, Pages 327–329, https://doi.org/10.2307/1884207 Published: 01 May 1961
The Review of Economics and Statistics196143(3), 257
D ESPITE the growth in importance of other financial institutions the behavior of the commercial banking system remains a principal consideration in most discussions of national monetary affairs. Explanations of the way in which the Federal Reserve System exerts its influence on the cost and availability of credit in the economy continue to rely heavily on hypotheses about the loan and investment policy of the commercial banking system. For example, the postwar doctrine of credit rationing appears to rest primarily on the observed behavior of commercial bankers in dealing with their loan customers. Less exclusively but still significantly, the effectiveness of debt management and Federal Reserve open market operations in influencing the terms of credit to private borrowers has been linked to the responsiveness of commercial bankers to changes in market prices and yields of government securities. concept of the commercial bank which undergirds the argument for the sensitivity of commercial bankers to yield differentials is basically similar to that of an individual investor concerned with the yield, risk, and liquidity of alternative financial instruments. By an appropriate development of risk considerations' and by (rather general) allusion to oligopolistic imperfections of competition within the banking industry,2 this model has been extended to cover the rationing of bank credit by nonprice means. Nevertheless, the state of our understanding of commercial bank behavior is not entirely satisfactory. If commercial bankers are sensitive to yield changes on government securities why have they moved so freely out of these securities whenever the demand for bank loans was strong? 3 If oligopolistic conditions within the banking industry occasion nonprice rationing of bank credit what is their specific nature and how do they exert their influence? purpose of this article is to contribute to our understanding of commercial bank behavior by examining some implications for bankers of the demand deposit relationship of their loan customers. Anyone who troubles to inquire of commercial bankers will discover that the deposit relationship of a loan customer is a primary consideration in determining the cost and availability of bank credit to that customer. Despite this fact, the literature of monetary economics has little or nothing to say about the deposit relationship as one of the determinants of the investment behavior of commercial banks. Rather, as I have mentioned, we have preferred to carry forward the discussion in terms of the broader analytical categories of yield, risk, and liquidity applicable to any investor. But a discussion of commercial banks which is couched in these more general terms abstracts from some of the essential features of commercial banks as specialized financial institutions. In particular it neglects the role of deposits as the principal source of an individual bank's power to lend and invest. In what follows we shall examine the significance of the deposit relationship for the individual bank and then explore its influence on such broader issues as the cost and availability of bank cred* This article is drawn from a more comprehensive study of commercial bank loan and investment policy supported by Merrill Foundation for the Advancement of Financial Knowledge, Inc. author wishes to acknowledge the helpful criticism of Professors James Duesenberry, John Lintner, Lawrence Thompson, and Dr. Parker Willis. 1 For examples see Ira 0. Scott, The Availability Doctrine: Theoretical Underpinnings, Review of Economic Studies, xxv (October I957); and my own Risk and Credit Quarterly Journal of Economics, LXXIV (May I960). 2 For examples see John H. Kareken, Lenders' Preferences, Credit Rationing, and the Effectiveness of Monetary Policy, this REVIEW, xxxix (August I957); Monetary Policy and Management of the Public Debt, Joint Committee on the Economic Report, 82d Congress, 2d Session, Statement of Paul Samuelson; and Warren L. Smith, On the Effectiveness of Monetary Policy, American Economic Review, XLVI (September I956), esp. 593-96. 'This movement is chronicled and discussed in John H. Kareken, Post-Accord Monetary Developments in the United States, Banca Nazionale del Lavoro (Rome), Quarterly Review, September I956, 588-607; and Warren L. Smith, op. cit., esp. 597.
Successful decisions are the hope of every manager. Snap decisions indicate a disregard for scientific thinking and reliance upon intuition and chance, or an unusual mental ability to simulate the problem, determine the strategic factors, and evaluate the alternatives. Historically, accounting has developed as the result of a specific need. The balance sheet model was presented to satisfy a need for financial information. Each ledger account is a model, or method, of measuring all transactions (the relevant factors) of a business which are relevant to the respective ledger account as it is specifically defined and by a method recognized as generally accepted by the accounting profession. To identify a specific ledger account as meaningful, the account must be defined in terms of the relevant business transactions which the model (ledger) will summarize, as well as the specific method or methods by which these relevant transactions will be measured. Finally, the specific ledger account must be defined as a relevant factor in the total accounting system, including its relationship to all other relevant factors of the system. Thus the accounting system itself, as we identify it, consists of a model summarizing the relationships of a large number of smaller models presumably for some specific purpose.
It is generally agreed that the purpose of any financial statement is to present useful information for decision-making by its readers. The growing popularity of the sources and applications of funds statement (hereafter referred to as the funds statement) indicates that this report presents information which is not readily found in the typical income statement or balance sheet. In meeting this need, accountants should determine what information is desired by readers of funds statements and then should design an appropriate report. A contemporary accounting scholar, Louis Goldberg. strongly dissented from this acceptance in 1951, stating that the shift in emphasis has been in the wrong direction and that the earlier concepts were more cogent, more satisfying and more rational. A shift out of cash into inventories, voluntary, or vice versa, might he one of the most significant financial changes during a period. Similarly a large decline in notes payable and increase in open accounts, or vice versa, may foretell an important change in financial or credit policy. These and analogous types of changes within working capital are not revealed in the orthodox statement.