SOME IMPLICATIONS OF THE GROWTH OF FINANCIAL INTERMEDIARIES

Abstract

THERE IS A GROWING impression that secular inflationary forces pose a serious threat to a fully employed market economy. Whether the authorities of the Federal Reserve can contain these forces through general monetary controls is increasingly questioned in light of the rapid postwar growth of non-commercial bank financial intermediaries whose operations are not directly controllable by these authorities. The rapid growth of these financial intermediaries is not open to question.' The public has shown a rising preference for holding financial assets in the form of deposits and shares of intermediaries rather than in commercial bank deposits. In terms of total assets of principal financial institutions (commercial banks, life insurance companies, savings and loan associations, and mutual savings banks), the share of commercial banks has dropped from 70 to 55 per cent between 1945 and 1956, and over these same years deposit liabilities of commercial banks have declined from 64 to 52 per cent of total liabilities. Interestingly, the relative drop in commercial bank deposits has taken place solely in their demand deposits. Some students apparently feel that the relative decline of commercial banks in financial operations has seriously reduced the power of the Federal Reserve to control inflation. They contend that the central banker, in attempting to promote sustainable economic conditions by controlling the over-all quantity and quality of liquidity and finance, is manipulating a relatively shrinking sector of the total financial apparatus and that its controls are increasingly