Is There a Case for Minsky’s Financial Fragility Hypothesis in the 1920s?

Abstract

Hyman Minsky's financial fragility hypothesis reflects the competitive pressures faced and decision-making criteria used by firms in a market economy characterized by business cycles [Minsky 1975, Chaps. 4-6; 1982b]. His firm is profitand growth-oriented, so that in the expansionary phase of the business cycle the firm invests in its own growth. Understanding that investment, expansion, is its key to future profits and continued existence, the firm is ready to commit funds to investment projects as long as the expected demand price of capital is at least equal to its supply price. The sources of these funds that finance such projects are the focus of Minsky's hypothesis. Since funds for internal finance are limited, external sources must be utilized. It is the preponderance of debt usage, the accumulation of balance sheet debt over time, and the resulting move towards financial fragility with which Minsky's hypothesis is concerned. Minsky has noted that this hypothesis is appropriate for developed capitalist systems [Minsky 1 982a, pp. 15-48]. It is the task of this article to test its relevance in the U. S. consumer durables sector during the 1920s. The first section of the article will briefly describe Minsky's financial