ABSTRACT
The threat of a financial crisis developed again in 1974. The crisis was precipitated mainly by the effective failure of Franklin National Bank, at the time the twentieth largest bank in the United States. The Federal Reserve acted as a lender of last resort to prevent instability in foreign as well as domestic financial markets. It is necessary to follow the developments in the economy, and especially in the corporate and banking sectors, that created the conditions in which the crisis developed. These domestic developments, however bad, were nonetheless overshadowed in 1971 by the continuing balance of payments deficits of the United States and the difficulties of the dollar. Monetary policy had eased in response to the supply-induced recession, but it began to tighten again once the oil embargo was no longer disrupting the economy. Finally, the liquidity ratio of nonfinancial corporations also declined to new lows in 1974.
