ABSTRACT
In June 1970, the surprise announcement of the bankruptcy of the Penn Central Railroad sent shock waves through the commercial paper market. The fear of a financial crisis—of larger proportions than the events of 1966—developed among market participants. To understand the background to this crisis, readers again trace developments in the corporate and banking sectors and in Federal Reserve policy. The expansion of the economy resumed in 1968 after the growth recession that occurred from June 1966 to October 1967. Investment in plant and equipment contributed strongly to the expansion, beginning in mid-1968. The decline in internal funds combined with an increase in capital expenditures to cause an increase in the financing gap of nonfinancial corporations during 1969. The chapter examines monetary and financial policy, and the flow of funds for the commercial banking sector, in order to explain how banks were able to prevent their lending to nonfinancial corporations from dropping as drastically as it did in 1966.
