Postwar Changes in the American Financial Markets

Abstract

This essay surveys developments in the American financial markets since World War .11,with particular attention to ch~ges that have occurred either between the pre~war and post-war years or within the last several decades.The primary emphasis is on the interaction between the financial markets and the.uonfinancia1 economy, in the sense of the demands that the nonfinancial economy has placed on the financial markets and the ways in which the financial markets have responded to these demands.In addition, much of this essay focuses on the evolving ro~e of government in the financial markets, and on changes that it has bro~ght about.Three major trends emerge as predominant during the post-war years.First, a sustained rise of private debt financing, including the borrowing of both businesses and individuals, has almost exactly matched the decline of outstanding federal government debt relative to nonfinancial economic activity.Second, the economy's reliance on financial intermediaries has continued to increase; together with a series of innovations, the further advance of intermediaries has reduced barriers and frictions interfering with efficient capital allocation.Third, in contrast to the sharp relative decline of its role as a direct borrower, the federal government has widely expanded its activities in guaranteeing and intermediating the private sector's debt, as well as in regulating private £inancia1 transactions.

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