In this paper I refer to the consumer savings rate. This does not include real asset investment as a part of savings and is expressed relative to disposable income. Also, the investment figures given refer to only the households sector of the economy and are expressed as a proportion of the total households investment.
Over the period (1955–1975) there has been a shift away from real asset investment as a proportion of total investment. For instance, the ratio of the 1975 proportion of real asset investment to the 1955 proportion is 0.388.
To further quantify the shift away from real asset investment, I have done a simple statistical analysis. I divided the period into two periods (1955-1964 and 1966-1975). Ideally, I would have divided 1965 into two halves and included them in the appropriate periods. The lack of easy access to half-year figures prevented this, however.
Except for temporary reversals, there has been a steady growth in the nation’s economy over the 21 years. To avoid giving greater emphasis to the later years in each period, I have concentrated on ratio figures for each year instead of dollar amounts. Specifically, for each year I calculated the ratios of various components of investment to total investment. For each ratio type, I then calculated the mean and median for each period. To compare the two periods, I then calculated the ratio and difference between the periods for the mean and median figures.
This analysis also indicates a shift away from real asset investment relative to total investment. The ratio of the second period mean to the first is 0.771. The corresponding figure for the medians is 0.784.
The mean and median figures indicate only slight changes in the public’s preference for direct financial investment. There has been a considerable increase in the volatility of direct financial investment, however. The standard deviation of the proportion of direct financial investment is 0.072 for the first period. The second period figure is 0.122.
The big gainer according to this analysis is indirect financial investment. The ratio of the means is 1.16 and the ratio of the medians is 1.10.
Real asset investment consists of two components, consumer durables and housing. Consumer durables contributed to a slight increase in the public’s preference for real assets. A substantial housing trend overshadowed this.
The figures indicate a large trend away from housing relative to total investment over the period 1955–1967. There has been a partial recovery since then, although recent levels are still much below the mid-1950’s levels.
Three reasons come to mind as significant influences on the housing market. First, the period right after World War II saw the return of many young men and the start of the baby boom. This provided a great impetus to the housing market. The period of increased housing demand was not confined to the early stages of the baby boom. Many families waited until they saved up for a down payment or until a second or later child was born. Also, many families moved into bigger homes as the family size increased. Eventually however, the demand for housing subsided and then rose as persons born during the baby boom grew up and started their own families.
The second reason concerns the role of government in the housing market. The percentage of publicly owned or subsidized housing has increased considerably over the 21 years. The government’s contribution to this housing would not be reflected in the households sector housing figures.
The third reason concerns the availability of mortgage credit. In recent years interest rates have been high. With government regulations limiting the interest rates on home mortgages, this market has become less attractive for lenders. Also, banks have at times in recent years suffered disintermediation because of the limits placed on them by Regulation Q. This has impacted on their ability to supply the mortgage market. The resulting tight home mortgage credit conditions have depressed the housing market.
1955 saw an impressive economic recovery after the 1953–1954 decline. GNP was up 8% for the year while consumer prices were stable. Unemployment declined to about 3½% by the summer and remained close to that level for the balance of the year.
An important factor in the recovery was the Federal Reserve’s policy of “active ease” in 1954. Another factor was the rise in consumer spending during 1954 and 1955. The consumer savings rate fell approximately 1% from 1954 to 1955. Domestic car sales amounted to 7.4 million, a one-third increase over 1954. Outlays for residential construction reached nearly 17 billion, an increase of 3 billion over the 1954 level.
Consequentially, it is not surprising that the 1955 proportion of real asset investment (0.516) was the highest over the entire 21 year period. The housing trend over the period, which was mentioned earlier, also contributed to this high figure.
The high figure for real asset investment was balanced by a low figure for indirect financial investment of 0.339.
The events of 1967 produced a considerable amount of uncertainty in the minds of Americans. The Vietnam war was in full swing and there was a war in the Middle East. Rioting occurred in the cities. Foreign exchange and gold speculation followed the British devaluation of the pound. The U.S. payments position deteriorated sharply. President Johnson asked for a tax increase.
Partially in view of these uncertainties, households invested large amounts in liquid assets. In particular, the proportion of savings account investment rose from 0.241 in 1966 to 0.407 in 1967. Correspondingly, the proportion of credit market investment fell from 0.204 to 0.032, and the proportion of real asset investment fell from 0.314 to 0.252.
Another factor in the shift toward liquid assets may have been that in 1966 the public invested unusually large amounts in credit market instruments relative to savings accounts. The figures for 1967 tend to offset those for 1966.
In 1969 disintermediation occurred on a large scale. The proportion of indirect financial investment dropped from 0.592 in 1968 to 0.334 in 1969. This is the lowest level over the 21 year period.
1969 was a year of exceptionally tight government monetary and fiscal policy. The Federal Reserve discount rates were raised in December 1968 and April 1969, bringing them to the highest levels in forty years. Member bank reserve requirements on demand deposits were raised in April. System open market operations also reflected the tight monetary policy. The 10% income surtax imposed in July 1968 was continued through 1969.
As a result, the growth rate of M1 was only about 2½% for the year. The proportion of money investment fell from 0.138 the year earlier to 0.018.
The tight economic policies caused interest rates to soar. Banks could not remain competitive because of Regulation Q limits. Interest rate ceilings were extended to savings and loan associations in 1966. Because of the long-term nature of their loans, they were particularly hard hit. Overall, savings account investment fell from 0.228 of total investment in 1968 to 0.070 in 1969.
The reductions in money and savings account investment were balanced by an increase in credit market investment. It rose to 0.405 of total investment, its highest level over the period.
The major U.S. economic event of 1971 was the New Economic Policy announced by President Nixon on August 15. The main elements of this policy in the domestic area included wage-price controls and a series of tax proposals designed to stimulate the economy.
Even before the freeze, there had been a shift toward intermediation from its low point in 1969. The Federal Reserve’s open market operations supported a M1 annual growth rate of about 10% for the first half of the year. With such a high growth rate, it is not surprising that interest rates continued to decline from their high in 1969. This enabled banks to attract funds previously lost due to Regulation Q. Correspondingly, the investment in credit market instruments was negative.
The New Economic Policy lowered interest rates even further. With inflationary expectations reduced, yields on high-quality corporate bonds tumbled by as much as 80 basis points during the third week in August. Funds continued to flow out of the credit markets and back into the banks.
The NEP also reduced indirect financial investment in some areas. It appeared to have relieved some of the uncertainties caused by inflation, thereby lessening the demand for cash. This, combined with a tightening of monetary controls by the Federal Reserve, lowered the growth rate of H1 for the second half of the year. Overall, the proportion of money investment for the year was 0.081. This is less than the year before, but still much higher than in 1969.
The price freeze and the proposal to eliminate the excise tax on passenger automobiles caused a surge in new car sales. This helped real asset investment at the expense of direct and indirect financial investment.
Overall, the proportion of indirect financial investment rose from 0.755 in 1970 to 0.800 in 1971. This is the highest level for indirect financial investment over the 21 year period. Direct financial investment fell to -0.108, its lowest level for the period.
Flow of Funds Reports
Annual Report of the New York Federal Reserve – 1955, 1967, 1969, 1971
Annual Report of the Council of Economic Advisors – 1955, 1967, 1969, 1971
Economic Report of the President – 1956, 1968, 1970, 1972
© 1977 Stephen Leibowitz