THE FINANCIAL ACCOUNTS that have, thus far, been prepared by national statistical authorities display a remarkable heterogeneity.1 In particular, there is no agreement as to whether it is most useful to measure the financing flows that are associated with income and expenditure transactions, or whether it is more desirable to compile balance sheets for individual economic sectors.


THE FINANCIAL ACCOUNTS that have, thus far, been prepared by national statistical authorities display a remarkable heterogeneity.1 In particular, there is no agreement as to whether it is most useful to measure the financing flows that are associated with income and expenditure transactions, or whether it is more desirable to compile balance sheets for individual economic sectors.

Basic Postulates

THE FINANCIAL ACCOUNTS that have, thus far, been prepared by national statistical authorities display a remarkable heterogeneity.1 In particular, there is no agreement as to whether it is most useful to measure the financing flows that are associated with income and expenditure transactions, or whether it is more desirable to compile balance sheets for individual economic sectors.

The purpose of this paper is to examine some of the theoretical considerations that might provide a foundation for a system of financial accounts, and some of the practical conclusions that appear to arise from these considerations. It is not its purpose to propose a form that might be adopted for the construction of financial accounts.

Most of the accounts that have so far been developed are compiled on the assumption that financing transactions are essentially passive reactions accommodating income, consumption, and investment transactions, and do not themselves induce any reactions in the other accounts. They are compiled on the assumption that, as far as the money and credit entries are concerned, the problem is to show the “main work that money and credit do in clearing markets.”2 Thus, in the system of equations underlying the Netherlands Central Economic Plan, there are no equations relating to the financing items in the Monetary Survey that it contains.3 This paper, on the contrary, is based on the assumption that financial transactions are positive factors inducing reactions in income and expenditure accounts. They are not merely passive reactions to income and expenditure transactions.

The first basic postulate of this paper is that it is important to measure borrowing and lending within a community. Yet these financing transactions may have meaning only insofar as they can be rationally explained. It is argued that a rational explanation of financing transactions requires a comparison of asset and liability aggregates. Thus, it follows that balance sheets are an essential part of an integrated system of income and financial statistics.

The second basic postulate is that all receipt and payment flows in an economy are interdependent. No single flow can be considered completely autonomous or completely induced. Any exogenous influence on a flow of transactions will lead to induced changes in all the other flows. These induced changes will, in turn, induce changes in the flow originally affected until the system settles with a new equilibrium structure of flows that is different from the original structure. Some of the flows and balance sheet entries (e.g., money, taxation and government expenditure, and exports) are more subject to exogenous change than others and should be highlighted in a system of accounts. Others (e.g., consumption) tend to be immune to exogenous change.

Certain fundamental assumptions form the basis of the argument; the three most important are as follows:

  1. The economic transactions during any period may be measured by the sum of the transactions of all economic units during the period.

  2. Each economic unit attempts to maintain certain rational relationships between all the economic factors that affect it, by making adjustments in those economic factors which it is able to influence.

  3. Each economic unit has a unique pattern of desires, but many units display considerable similarity of pattern.

If it is assumed that each economic unit tries to maintain stable relations between the several economic factors over which it has control, it is meaningful to measure these aggregates for individuals and groups of individuals, even though there may be no directly parallel relations for the community as a group. For example, the income of any unit may be considered by the unit to be exogenously determined. The unit may decide to divide its income between consumption and saving, and at the same time to divide its savings between the purchase of physical assets and loans to other units. If the forces determining them are stable, these relationships should be measured even though, for the economy as a whole, investment must equal saving, and investment plus consumption must determine income. However, the compilation of balance sheets for economic sectors is rational only if there is a reasonable degree of homogeneity in the desires of the units comprising each sector, and a reasonable degree of difference between the desires of units in different sectors.

In determining the criteria for economic accounts, certain relations, among others, are assumed to determine the pattern of action by economic units. These relations may be summarized as follows:

  1. Each economic unit regards the flow of liquid resources accruing to it as forming a single total for expenditure that is rationally allocated among different uses. Funds arising from income earned, current transfers received, depreciation allowances, debt maturities, capital transfers, borrowing, the sale of assets, and all other sources provide a single sum of available funds that is distributed rationally between consumption, the purchase of physical assets, the acquisition of financial assets, and redemption of debt. (For businesses, the distribution of dividends is considered to be analogous to consumption.)

  2. Each economic unit will wish to divide its total receipts between consumption and the acquisition of assets so that the marginal rates of satisfaction to be obtained from consumption and from the possession of assets are equal.

  3. Each economic unit will attempt to add to its receipts by borrowing if it believes that the present benefit to be derived from borrowing is greater than the capitalized future cost of the borrowing.

  4. Every economic unit owns some salable assets.

  5. The amount of assets that a unit wishes to hold will be dependent on the income of the unit and the rate of return on assets.

  6. An economic unit will divide its assets rationally between physical assets, nonliquid financial claims, and liquid assets, and will also attempt to make rational distributions within these groups.

  7. The desired ratios between these groups will be determined by desires for liquidity, the relative rates of return on different types of asset, and the income and wealth of the unit.

  8. The total wealth, the ratio of total assets to total liabilities, and the structures of both assets and liabilities, which each economic unit seeks to achieve, will alter with changes in expectations regarding the future.

  9. The prices, and hence the values, of existing assets are continuously adjusted so that the ratio of their value to the cost of newly available capital assets reflects the ratio of their return to the return on newly available comparable assets.

Certain of these assumed relations should be emphasized. The distribution of income between consumption and saving is assumed to involve independent but interrelated decisions. The distribution is not assumed to be one where “part of the disposable income is used for consumption while the remaining part equals savings.”4 The distribution of assets among physical assets, nonliquid financial claims, and liquid assets, and the acceptance of liabilities are assumed to reflect voluntary decisions to change holdings of these assets, or to change outstanding indebtedness.

From these assumptions, a number of criteria regarding the development of financial accounts may be derived. The net borrowing or lending by any sector may be viewed as the net withdrawal or release of resources from or to the rest of the economy. If an economic unit’s spending during any period is equal to its receipts, it makes no contribution to, and withdraws no resources from, the rest of the economy. If it spends more than it receives (i.e., borrows from the rest of the economy), it draws resources away from the rest of the economy. If it spends less than it receives, it makes resources available for use by the rest of the economy.5 Thus it may be considered that the influence of any sector leading to contraction or expansion of demand is indicated by its net borrowing or net lending.

In most countries, a dynamic equilibrium is possible only if persistent net borrowing and net lending desires are equalized. Certain economic units may be considered to have normal desires for persistent financing in one direction. Generally, persons wish to accumulate financial assets. A dynamic equilibrium can be maintained only if businesses and others are willing to become continually more indebted. On this basis, the personal sector may properly be considered as inducing expansion only when it wishes to lend less than might be expected on the basis of past experience, and the business sector may be considered as contributing to expansion only when it wishes to borrow more than might be expected.

If lendings and borrowings are among the significant factors determining the community’s receipt and outlay patterns, a set of integrated economic accounts must contain entries designed to explain their magnitude. Lendings are accumulations of claims on others or retirements of debt. Borrowings are acceptances of debts or the realizations of claims on others. In practice, net lendings for any unit will probably represent a sum of accumulations of some financial assets and retirement of some debts that is greater than the sum of realizations of some financial assets and acceptance of some debts.

As lendings and borrowings are changes in stocks of assets and liabilities, they cannot be adequately explained solely on the basis of flow analysis. Other things being equal, an individual who owes nothing should be more willing to accept a liability than one who is deeply indebted. A business that is suffering financial stringency should be more willing to build up its money holdings than one that is excessively liquid. It follows that changes in assets and liabilities can be understood only in the light of the total amounts outstanding.

If an integrated set of economic accounts is to recognize that financing transactions may represent forces influencing income and expenditure transactions, and if it recognizes that financial transactions may arise from the desire to change balance sheet ratios, it follows that a fully articulated set of economic accounts must include balance sheet statistics.

If this be granted, three basic questions must be answered: (1) For whom should balance sheets be compiled? (2) How should balance sheets be constructed? (3) How may balance sheet statistics best be integrated with other economic statistics?

The first question comprises two subquestions: (a) What criteria should determine the grouping of balance sheets? (b) Which groups of economic units have sufficient homogeneity and individuality to warrant their inclusion in separate sectors?

The second question also comprises two subquestions: (a) How should the assets and liabilities of each sector be classified? (b) How should the individual items be valued?

Likewise, the third question comprises two subquestions: (a) Is a complete formal integration of financial and income-expenditure accounts necessary? (b) What problems must be faced in attaining the desired degree of integration?

A fourth question also warrants attention: (4) How should the data be compiled?

Criteria for Sectors

The first of the relations, postulated above as determining the pattern of action by economic units, was that each economic unit regards the flow of liquid resources accruing to it as forming a single total for expenditure that is rationally allocated among different uses. One of the fundamental assumptions stated above was that each economic unit has a unique pattern of desires, but large numbers of units display considerable similarity in the form of their desires. These two hypotheses provide the basic foundations upon which criteria for the classification of the economy into sectors may be developed.

The requirements of balance sheet accounting are fundamentally different from those of national income accounting.6 The purpose of balance sheets is to measure the assets and liabilities that economic units accumulated in the past, the historic reactions of economic units to changes in their asset and liability positions, and the changes in financial relationships that were coincident with changes in the expenditure patterns of economic units. If some patterns of community reaction are derivable, the meaning of current asset-liability relations can be indicated, and the effectiveness of possible monetary, other financial, and other economic policies can be assessed. Income and expenditure accounts are purposely designed to provide a systematic presentation of the major economic flows in the framework of a comprehensive accounting system that facilitates the understanding of the statistical relationships among these flows, that is sufficient for an understanding of the allocation of resources among types of end use, and that is relevant to problems of effective demand.7 Thus financial accounts must be directed toward a measurement of the reactions of economic units, while national income and expenditure accounts are directed toward a measurement of the flows of resources that are produced and consumed within the economy.

On the assumption that each economic unit attempts to maintain certain rational relationships between the several economic factors that it is able to influence, it follows that in financial accounts all the transactions, assets, and liabilities of each economic unit must be consolidated in one integrated set of accounts. That is, if any accounts for a unit are included in the accounts for a sector, all its accounts must be included in the accounts of that sector, and none of its accounts may be included in the accounts of any other sector. Income and expenditure accounts may properly distill all flows into one set of sector accounts, bringing all similar flows into one account and leaving other noncomparable flows produced by any unit to be handled in another account. Thus, the sector account for enterprises may well include the production accounts of all “firms, organizations and institutions which produce goods and services for sale … [including] all unincorporated private enterprises…, all households… in their capacity as landlords of dwellings whether or not they occupy their own properties…, nonprofit institutions serving enterprises…, [and] all public enterprises… such as nationalized industries, the post office and local authority housing estates.”8 This system requires the production accounts of self-employed individuals to be placed in a set of sector accounts different from the set that records their consumption; it places the imputed rental product of a house-owner in a set of accounts different from those recording his imputed rental expenditure. That is, the income and expenditure accounts provide for “split personalities,” whereas the asset-liability relations that must be the center of balance sheet accounts, with one exception,9 make the provision of accounts for split personalities impossible, or an exercise in arbitrary unrealistic allocation.

If each economic unit has a unique pattern of desires, but large numbers of units display considerable similarity in the form of their desires, it follows that any sector classification for national balance sheet accounting must be based on the reaction of economic units to balance sheet changes. The definitions of sectors should include in each single sector all the economic units that are likely to have similar reactions to changes in their balance sheet relations, while excluding from that sector all units with different desires. In national income accounts, it is reasonable to include privately owned companies and government agencies in one sector, and also to include some of the accounts of self-employed individuals and all private houseowning accounts in the same sector. In fact, it is reasonable to put some of the accounts of almost all economic units in the enterprise sector. Similarly, it is reasonable to say that all governments provide welfare services and allocate all their welfare actions to one sector account. This splitting of the accounts of individual units, and the inclusion of disparate entities in single sectors in balance sheet accounting, would destroy the individualities that sector balance sheets should underline.

If economic units could not be classified into groups, each group having a certain degree of homogeneity and a certain degree of difference from other groups, there would be no case for creating sector accounts. However, similarities exist for certain economic units and fairly wide gulfs separate different types of unit from each other. Thus, individuals hold assets for reasons different from those influencing business. Yet all individuals may be expected to show considerable similarity in their reactions to forces influencing their balance sheets. At the same time, a certain degree of homogeneity may be expected in the reactions of businesses. The insensitivity of governments to a high level of indebtedness often amazes businessmen conditioned to the need to maintain balance sheet ratios that will satisfy shareholders, bankers, and others. The independence of national governments from balance sheet considerations permits a special treatment of their accounts and allows for the splitting of their balance sheets to include some of their accounts (e.g., those relating to central banking) with the accounts of other sectors. The reactions of foreigners may be relatively uninfluenced by the small parts of their balance sheets that appear as the country’s international indebtedness accounts.

It follows that the criteria for identifying and delimiting the economic units that should be joined together in a sector require (1) the inclusion, with few exceptions, of all the activities of any economic unit in one sector, and (2) the limitation of each sector to units showing generally similar reactions to changes in their assets and liabilities.

The Sectors

The economic units of an economy may be considered as forming two groups of sectors. One group consists of the sectors that, taken as groups, are able to exercise considerable independence of action because, as groups, they are not unduly constrained by the need to maintain balance sheet ratios. The measurement of the balance sheets of these sectors is useful not only for itself, but also because the liabilities of these sectors are important assets for the other sectors. The second group consists of the sectors that must, to a considerable degree, adjust their balance sheet relations to the balance sheet decisions of the independent sectors.

Three major types of sector form the independent group: (1) those sectors whose major activity is the creation of financial assets for other sectors, and the acceptance of liabilities of the other sectors, i.e., the financial sectors; (2) the government; (3) foreigners.10

The financial sectors may be sharply separated into the Monetary System and the Remaining Financial Sectors. The Monetary System may be envisaged as standing ready at all times to buy, or sell, at stated prices certain assets less liquid than money (the interest rate structure), and as being able to accommodate the associated changes in money. The rest of the economy may be envisaged as attempting to adjust its holdings of all other assets, and its liabilities, to its holdings of money. Except under conditions of hyperinflation, or when there is no demand whatever for loans and a complete unwillingness by the rest of the economy to sell financial assets, a change in the policies of the Monetary System must lead to an expansion or contraction of money, with consequent attempts by the rest of the economy to expand or contract the values of their other assets and their liabilities. Creators of financial assets other than money must do two things. They must create their own liabilities of such a type, and with such a yield, that they will be more attractive than money for others to hold. They must be able to find borrowers who will pay enough for loans to cover the interest and other costs of these institutions. The Monetary System also lends, but its monetary liabilities normally bear no interest. The lending rates of the Monetary System are the prices of marginal transactions in the money market. They determine the prices that must be demanded by the other financial institutions. Thus the Monetary System has an independence denied to all other parts of the economy, except the government.

There are limitations on the Monetary System’s independence; a Monetary System composed of one agency creating money, which is free to ignore international repercussions, is independent. If there is more than one bank in the community, each of the banks will have to maintain certain ratios of liquid assets to liabilities. In most modern societies, an agency (or agencies) is given a monopoly of creating the money with which the units in the banking system make settlement between themselves—reserve money. This agency is also usually given a monopoly of the issue of all, or most, of the economy’s currency. These Central Monetary Authorities are the only parts of the Monetary System that may be considered as having complete autonomy (even if this autonomy be voluntarily limited by considerations of social policy). Any set of financial statements should record the accounts of this autonomous sector separately from the accounts of all other sectors or subsectors.

In one respect, the autonomy of the Central Monetary Authorities is limited. Governments exist to give expression to social desires. Their total incomes and expenditures are determined largely in the light of social needs, irrespective of the financing implications of those decisions. Their asset holdings are generally only incidental to their main activities. Their creation of liabilities is influenced by considerations of social policy rather than by considerations related to their incomes and expenditures. Governments also differ from the Private Sector in that they are independent. Borrowing by units of the Private Sector must be limited by their prospective ability to redeem debts. Provided a government has the cooperation of the monetary system, it can always meet its national currency obligations. Hence it can determine its borrowing and lending policies solely in the light of social desires. This prerogative of the government limits the freedom of the Monetary Authorities. The latter must provide the finance that the government desires, and they must provide an amount of money consistent with the value of government securities issued. The community will try to bring its holdings of money, government securities, and other assets into alignment. Changes in the relative desires of the nonmonetary sectors for government securities and other assets, and changes in the relative availability of government securities, lead to changes in the prices of government securities. Unless the Monetary Authorities and the government are prepared to acquiesce in the prices so determined, the Central Authorities must be prepared to buy and sell government securities to the extent necessary to satisfy the desires of the government to issue securities, the desires of the Private Sectors to distribute their assets between securities and other assets, and the willingness of the Deposit Money Banks to react to changes in reserve money by buying and selling securities.11

In some countries there is only one autonomous agency—the Central Bank. In a large number of countries it shares its powers with a government currency (or coin) issuing agency. In some, Exchange Stabilization Funds create or destroy reserve money following changes in the economy’s holdings of international reserves, or other government agencies make direct loans to banks and thus influence the levels of reserve money.12 The accounts of all these essentially cognate organizations should be consolidated in one set of accounts. Where it is considered desirable, the accounts of the separate units may well be specified separately.

If the accounts of a significant sector are separated to show the accounts of subsectors, the desirability of presenting consolidated or combined accounts for the sector is usually an open question. Unless most of the units in a sector have a certain homogeneity, they should not be considered as forming a sector. Unless they present a certain nonhomogeneity, they should not be separated into subsectors. The Monetary System, however, has certain specific attributes of homogeneity and nonhomogeneity. Each part of the system creates some of the economy’s money. Unless a consolidated account is presented for the system, the creation of money will not be adequately explained. Unless separate accounts are presented for each significantly identifiable part of the system, the determination of monetary policy will not be adequately explained. For the Monetary System, both a consolidated account and separate accounts for each group of monetary institutions are significant parts of an adequate set of financial accounts.

The definition of the Monetary System and the identification of the groups of institutions for which accounts should be provided sometimes raise minor problems. In most countries, there is a group of Deposit Money Banks that may be readily identified. In many, there are financial institutions whose liabilities form a peripheral part of the community’s money. Where the monetary liabilities of these institutions form a relatively small part of the community’s money, and where their monetary liabilities are a small part of their total liabilities, it would seem preferable to include their accounts with those of the nonmonetary financial institutions.13 In many countries, some government liabilities are money; the coin issue is a responsibility of the government; the Post Office has checking deposit liabilities; the Treasury has direct monetary deposit liabilities.14 In these cases, the monetary activities of the government should be separated from its other activities. The accounts relating to its monetary activities (including its central banking activities) should be included with the accounts of other monetary institutions. An offsetting amount may be considered as a Claim on the Government.15 This is one of the few cases where the construction of satisfactorily integrated income and financing statistics is assisted by separating the activities of a single economic unit.

In some countries, there are institutions with very small or even no monetary liabilities whose purpose is solely or primarily to provide services to the Monetary System. These institutions should be considered part of the Monetary System rather than nonmonetary financial institutions or parts of the production-expenditure sectors.16

The Other Financial Institutions may conveniently be divided into Life Insurance Companies and Creators of Securities.

One of the most significant financial assets in the modern world is life insurance. Its relative size and its specific character warrant specification of the financial accounts relating to its issue. In return for a specific payment of money, Life Insurance Companies sell an essentially illiquid asset to the insured; in this way, they satisfy the demand of the community that its holdings be distributed between the different ends of the liquidity range of financial claims that are fixed in terms of money. After banks, Life Insurance Companies are usually the most important institutions providing financial assets for the rest of the community and satisfying the community’s willingness to accept liabilities. Hence, after banks, Life Insurance Companies provide the most significant source of information on the financial assets and liabilities of the nonfinancial sectors.

The remaining financial institutions are primarily institutions creating securities (even if called deposits) for sale to the private sectors of the economy. By selling securities, they satisfy part of the demand of the community for financial assets. By using the proceeds of these securities as loans, they also satisfy part of the willingness of the community to accept liabilities. In this way they form a further bridge between the asset-holding and liability-accepting (or lending and borrowing) desires of the economy. Being a part of the financial market, these institutions must adjust their actions to the conditions created in the rest of the economy. That is, to the extent that the Monetary System creates money, the government creates securities, and the community wishes to distribute its holdings between money, government securities, and other financial assets, these institutions may find holders for their securities. However, their freedom is strictly limited by the fact that they must find borrowers for the proceeds of their security issues, and the Monetary System is constantly satisfying the demands of a large part of the community to borrow, or to adjust its holdings of financial assets. Hence, the policies of these institutions must to a large degree be determined by monetary policy.

The extent to which the accounts of the other Financial Institutions warrant subdivision into their component parts (Mortgage Institutions, Installment Finance Companies, Investment Trusts, etc.) will depend on the relative importance of the different types of institution, the availability of data, and the national statisticians’ desires to show detail.17

In many countries, there are financial intermediaries whose accounts are often classed with those of financial-asset creators. Financial intermediaries, whose own liabilities are not held to satisfy the asset-holding desires of the community (stockbrokers, real estate dealers, etc.), should be considered as producers of services and included with the rest of the income-producing units of the economy. Similarly, moneylenders who use their own resources rather than resources obtained through the issue of obligations should be considered part of the business or household sectors.18

The balance sheets for the Government Sector differ radically in significance from the balance sheets of the Private Sector. Economic units in the Private Sector must attempt to maintain some relation between their assets and liabilities, between individual types of asset, between individual types of liability, and between individual assets and individual liabilities. As has already been indicated, a government is always able to command liquidity and is independent of considerations arising from its own need to maintain desirable asset-liability ratios.

To a considerable degree, this freedom is fully available only to the National Central Government. Where Local Governments are independent of the Central Government, the accounts of the Central Government should be separated from the accounts of Local Governments.

It has already been suggested that the purely financial activities of the government should be recorded as part of the accounts of the Financial Sectors. The development, housing, and similar actions of governments resemble financial actions. At the same time, they are very similar to other consumption actions of the government, and in most cases should be regarded primarily as factors leading to the creation of government debt, or increasing the taxation requirements of the government. There is an argument for showing these accounts separately in that they help to explain their own reflections as recorded in the accounts of the borrowing sectors.

Many government financing transactions reflect long-term social policies that lead directly to financing surpluses or deficits (unemployment insurance, price stabilization programs, etc.). These activities frequently produce misleading effects in published government financial accounts. The accounting surpluses of government income stabilization agencies are nominally invested in government securities, and their deficits lead to a sale of government securities to the market, or borrowing from the government. In most countries, these long-term social policies account for a large part of government expenditure. They lead directly to the creation or retirement of debt held by the rest of the economy or to changes in government money holdings. Hence, in most cases, financing accounts should provide supplementary tables for the transactions of these government subsectors.

The accounts relating to the remainder of the Central Government’s transactions must provide the master account for the government. All government debt is homogeneous in that, irrespective of its origin, it is viewed by the debt-holding sectors as similar. Over-all government receipt and expenditure policy must be determined in the light of short-term desires for surpluses or deficits and long-term policies. Consequently, the accounts relating to the revenue and consumption activities of the government are the accounts that reflect the final current financing and financial policy of the government.

From the viewpoint of national financial accounts, transactions with foreigners may be considered as analogous to the transactions of an independent sector. The domestic assets and liabilities of nonresidents form only a small part of their total balance sheets. Hence, they form a balance sheet for a split personality with only the significance that such balance sheets may be expected to have. Domestic production and expenditure influence, and are influenced by, the balance of payments. Hence, the domestic sectors may be grouped together; and the transactions of the domestic economy with the foreign sector, and the claims of the domestic sectors on, and liabilities to, the foreign sector, may be measured by the balance of payments and international indebtedness accounts. The foreign sector’s asset account measures the nation’s foreign liabilities, and its liability account measures the nation’s foreign assets.

In many respects, balance sheet analysis must be focused directly on the reactions of the domestic private sectors. These are the sectors that must adjust their balance sheet relations to the balance sheet decisions of the independent sectors. These sectors may be separated into those which are primarily consuming sectors and those which may be thought of as primarily producing sectors—that is, those which account for the personal consumption in the national income and expenditure accounts, and those which account for the major part of the national output. These two groups form the household and the business sectors.

In some respects, the differences between the household and the business sectors are more fundamental for financial analysis than the simple difference that arises from the fact that, for the most part, one sector consumes what the other produces. The ratios of acceptable liabilities to assets are different for the two sectors. The desired values of assets relative to transactions differ. The desired composition of assets and the ability to change the desired ratios are different. Hence, the asset-liability patterns of business and households will differ, and the reactions of the two groups to economic changes produce differing financing desires.

One basic difference between the views of these two sectors toward their balance sheets arises because households hold physical assets only to the extent that these assets can satisfy certain of their consumption desires, while the ownership and use of physical assets are essential to the production of goods and services by businesses. The risks that a business may prudently accept in order to obtain the ownership of physical assets are larger than the risks that a household may prudently accept.

Businesses attempt to stabilize the incomes of shareholders over relatively long periods, and households attempt to reduce fluctuations in consumption over lifetimes. For business, the associated investment is usually in a form that is considered liquid, and borrowing for dividend stabilization would not be considered prudent by most lenders. The long-term stabilization of consumption by the household sector is likely to be associated with investment in forms that are considered to be illiquid (e.g., life insurance), and borrowing to permit consumption in advance of saving (e.g., hire purchase) is fostered by conservative bankers in developed economies and by moneylenders in less developed countries.

One incentive that businesses have for financial investment has scarcely any parallel in the consumer sector. Businesses use physical assets that steadily become antiquated, but a significant portion of them may be acquired for new investment or replacement only in relatively large discrete units. Hence, as their antiquation progresses, provision must be made for replacement by comparable, or different, assets if production is to continue profitably. This provision may take the form of applying some of the proceeds of sales to the retirement of debt, hence reducing the ratio of liabilities to assets and thereby increasing the ease with which the business will be able to borrow in the future. Or, the retained proceeds may be used to buy liquid financial assets that may be realized when the time comes for the replacement of antiquated physical assets.

The opportunities for possible advantageous purchases are likely to be greater for businesses, and hence the desire for liquidity for speculative purposes is likely to be stronger among businesses than among individuals. For consumers, purchases of goods and services are roughly equal to income. For businesses, purchases of goods and services are greatly in excess of income; and for businesses as a whole, transactions in goods and services, including interbusiness transactions, are greatly in excess of the community’s consumption. Nearly every business unit is in every respect larger than any individual household. This, together with the relatively higher liquidity desires of business, results in the average level of business liquid holdings being higher than the average liquid holdings of consumers. This increases the opportunities to profit by shifting from one liquid asset to another, and consequently reduces the real cost of liquidity.

It is easy to describe the differences between businesses and consumers. It is less easy to identify the two sectors precisely. In the preceding description, it was assumed that households receive wages, salaries, rent, dividends, interest, annuities, or other transfer income and either save it or spend it for consumption. It was assumed that businesses produce goods for sale and use the proceeds for the purchase of intermediate goods and services, savings, or income payments to households. But some individuals also produce goods and services and use the proceeds in part for direct consumption, thus not fitting unambiguously into either category. For income and expenditure accounts, the activities of these individuals may be separated into production and consumption activities, with only an adjusting entry for transfers between the two accounts; for financial accounts, however, this statistical solution is unacceptable. For example, a self-employed producer may acquire liquid assets in order to replace his machinery in the future; however, as long as he holds liquid assets, they also satisfy his need to have protection against personal catastrophe. In the construction of financial accounts, these self-employed producers could be considered as forming a separate sector, or they could be included in the business or the household sector. However, it would probably be unwise to segregate these economic units completely. They may be considered to be primarily consumers who obtain their incomes from production rather than from direct factor payments. Their financial decisions may be assumed to be decisions dominated by the influences that determine the decisions of consumers. Hence, self-employed producers may best be considered as part of the consumer sector. For certain purposes, however, it may be desirable to show at least part of their accounts separately; if this is so, it seems preferable to consider these units as forming a subsector of the consumer sector rather than a separate economic sector. Even if it were decided that they should be considered as a separate sector, it would in most cases be impossible to gather data on this sector’s accounts.

For most countries, the business sector should be limited to non-financial businesses organized in accordance with the national company or similar laws.19 Where specific legislation applies to partnerships, it might be possible to include in the business sector partnerships that maintain partnership accounts separate from the personal accounts of the partners. The accounts for the household sector should, conceptually, incorporate the accounts of all individuals.

In the construction of sector balance sheets, it must be remembered that no sector is truly homogeneous. Each economic unit is unique. Inevitably, diverse units will be combined within each sector. A balance must be struck between the need to keep the number of sectors sufficiently small so that the accounts may be comprehended, and the need to insure that there is not too great a diversity between the different units united within one sector. The business sector is not a collection of completely uniform units; it comprises large concerns whose financial decisions may be extremely sensitive to changes in the level and structure of interest rates for borrowing, the level and structure of yields and prospective yields of alternative assets, and alterations in the prospective liquidity of alternative assets. It also comprises relatively small concerns for which the cost of making these comparisons outweighs the prospective gains to be derived by altering asset-liability positions. Hence it may be desirable to compile separate balance sheets for a subsector of large companies and a subsector of small companies.20 In many cases, this classification may be approximated by a classification that distinguishes between companies whose securities are quoted on an organized stock exchange and those whose securities are not so quoted. This distinction may be significant per se. A company that is prepared to borrow from a market and publish information on its accounts is likely to have a target asset-liability position different from that of a company that borrows only from a few directly interested owners who do not have to publish data on their financial transactions.

The business sector also consists of enterprises engaged in a wide range of economic activities. Some are in expanding industries where the prospects of being able to meet liabilities are more favorable than in contracting industries. Some are in industries that enjoy a stable demand for their products, where the risks inherent in a relatively low degree of liquidity are less than in an unstable industry and where the opportunities for benefiting from liquidity may be either greater or less than in an unstable industry. To the extent that businesses in different industries have different asset-liability desires, separate balance sheets may well be constructed for separate industry groups.21

There is another, more fundamental, basis for separating businesses into two distinct groups. In the large majority of countries, most businesses are privately owned. Their production and pricing decisions are influenced almost exclusively by market demand and supply conditions; they must guarantee their liquidity by holding assets that may be realized through sale, or borrowing; and their source of borrowing is the private sector of the economy and private financial institutions. At the same time, in most countries, there are government-owned enterprises. The production and pricing policies of these enterprises may be at least influenced by considerations of social policy. They may be able to find sources of liquidity from the government, and they may be able to obtain borrowings from the government or with a government guarantee. Consequently, these two groups of businesses are likely to have markedly different desires with regard to the size and composition of their assets and liabilities. It follows that their balance sheets are likely to be markedly different in structure, and that it would be desirable either to construct separate accounts for these two subsectors of the business sector, or to limit the business sector to privately owned businesses and to include government enterprises as a subsector of government. On balance, it is probable that government enterprises are influenced more by considerations of a business type than by social policy, and in most countries it is therefore preferable to include them as a subsector of the business sector.

In many countries, the self-employed subsector comprises two distinct groups: farmers and individual providers of services (merchants, professional practitioners, and others) and self-employed craftsmen. These two groups are subject to different economic stimuli, and hence are likely to have different asset-liability structures. For certain purposes, it may be desirable to compile separate balance sheets for these two subordinate sectors.

Many economic units do not fit conveniently into any sector classification. Of these, perhaps the most significant are charitable organizations. These organizations are consumers in the sense that they buy services produced by others so that individuals other than the organization may consume. They are often organized as companies, but are not producers in the sense of creating goods and services. A large part of their income often arises from earnings on investments; hence their investment policies are similar to those of financial institutions. Yet they create no liabilities for others to hold as assets, and therefore they cannot be considered part of the financial sector. In national income accounts they are usually classed as consumers.22 In some financial accounts they are classed as financial institutions.23 Neither of these treatments is satisfactory. In some financial accounts they are considered to be a separate sector. This treatment may be the best theoretically, but it seems to give an undue importance to these organizations. Probably the best that can be done is to recognize their corporate ownership and include them, with other nonfinancial institutions, as part of the business sector.

Balance Sheet Entries

The assets and liabilities to be identified for each sector or subsector should be the items that are believed by holders to have specific qualities. These qualities, and consequently the specification required, should be influenced largely by the factors that lead to the acquisition of assets, and the acceptance of liabilities.

Assets may be of two clearly distinguishable types, financial, i.e., claims on others (their liabilities), and nonfinancial, i.e., physical property and claims to resources required for the creation of directly consumable goods and services.

While a financial asset must be the liability of someone other than its holder, there is no fundamental reason for accounts of debtors and creditors to be mirror reflections of each other. Thus a marketable fixed-term bond will have a liquidity value to its holder markedly different from that of a nonmarketable bond with the same fixed term. The two should be separated in the accounts of asset holders. Yet both bonds may appear to be identical fixed-term obligations to their issuers and should be recorded together in the liability accounts.

In attempting to classify financial assets and liabilities, liquidity criteria should be the dominant consideration determining the form of classification. Assets are held to provide income and liquidity. Economic units will change the composition of their stock of assets, or will change the relations between their assets and their liabilities, as desires for liquidity change, as the apparent liquidity of assets changes, and as current yields on financial and other assets change. These desires to alter the composition of assets and liabilities will be both the product of changes in the prices of assets and the forces leading to changes in their market prices. While variations in the desired composition of assets and liabilities will be influenced by changes in receipts and expenditure desires, and hence will reflect financial flows, they will also be determined by the pre-existing structures of assets and liabilities and the subsequent structures of assets and liabilities that are desired.

Liquidity criteria may be of two essentially different types. They may derive from the form of an asset, or from the character of its issuer. All claims on foreigners appear to differ in certain respects from claims on residents. This difference has certain purely xenophobic elements. More importantly, a claim on a foreigner carries an exchange rate risk that is not present in a security issued by a resident, even if this is a risk that the claim will appreciate in terms of national currency. Hence, even in a classification of assets and liabilities by type rather than by obligor, foreign assets and liabilities should be differentiated from their domestic counterparts.

Financial assets may be money or immediate claims to money payments, or they may be expressed in fixed money value payable at a specified time. Alternatively, they may be claims to residual values payable at an indeterminate time.

Money, being the most liquid of all assets, occupies a unique position in the range of assets available to the community. After money, assets may be ranged, conceptually, in a descending order of liquidity; but in practice, a statement of this array is impossible. Some assets are so close in nature to money (e.g., savings deposits) that only by an arbitrary decision may they be separated from money. Certain securities (e.g., treasury bills) may, in certain respects, be more liquid than quasi-money. Extensive work to define items precisely and to arrange them accurately in a liquidity array is not likely to be fruitful.

While money may be considered as the most liquid of assets, and while certain types of money (e.g., token coins and notes) may unequivocally be classed as money, for most countries a strict delimitation of money is likely to be impossible. Changes in certain types of asset that are classified as money may have a significance different from that pertaining to other types of money. Consequently, it is reasonable to provide separate statements for currency and deposit money.

Quasi-money may be defined to include those assets which are superficially similar to deposit money but which are not regarded by their holders as money. Its similarity to money justifies granting it a special place in a liquidity array and a separate recording in any schedule of assets. Money should be specified, but, for certain analytic purposes, it may be the sum of money and quasi-money that should be related to other magnitudes.

Financial assets with a fixed monetary value, other than claims on the monetary system and foreign exchange, may conveniently be classified as bonds,24 annuities and cash values, and loans. Securities may be the obligations of governments or of others. They may be the obligations of national or foreign governments, or of central or local governments. The ability of national central governments to issue securities without consideration of the eventual problem of their redemption leads national central government bonds to occupy a unique position in a liquidity array of the community’s assets.

Bonds, irrespective of their issuer, are liquid only to the extent that they may be effectively realized. Some bonds issued by some governments are redeemable on demand and are almost equivalent to quasi-money. In some analyses their amounts are added to quasi-money, on the assumption that the community is indifferent in its views of the two assets.25

Assets may be considered liquid only to the extent that they may be converted into money and to the extent that their holders have assurance that this conversion will be possible in the future. In most cases, bonds are repayable on a fixed date, or within a narrow range of dates, and yield a predetermined interest income. Thus a bondholder has a predetermined income and a capital value obtainable at a certain future time. If a bondholder is free to sell the sum of values represented by a bond, he is able to obtain a present money value for his asset. If for any reason a bond is not marketable, or if restrictions are placed on its marketability (e.g., it may not be sold to the monetary system, or to insurance companies), it does not provide the same degree of liquidity that is available in a marketable bond. Asset holders presumably take different views of fully marketable bonds, bonds marketable with restrictions, and nonmarketable bonds. The asset arrays included in financial statements should recognize these differences.

Securities are sometimes differentiated in their essential marketability in that they either are, or are not, discountable at the central bank. A discountable bond will be a preferred asset for the monetary system, and the almost certain availability of a possible bank buyer will make it an asset superior to a security that is not discountable.

The liquidity of a bond is directly related to the certainty with which it may be realized in the fairly near future. This potential realizable value is the probable range of its possible prospective price. At any moment, the price of a bond is the discounted value of all its future interest payments plus its redemption value. The rate of interest applicable to the bond determines this discounted value. However, any change in the rate will have a greater effect on the current price of long interest and redemption streams than on short ones. The prospective short-run price of a short-term bond cannot differ greatly from its present price. In developing an array of assets, all bonds cannot be listed individually by liquidity. Probably the best that can be done is to classify them into three groups, according to their maturity at the time their values are measured: short-term, medium-term, and long-term. Other national government bonds (i.e., bonds of provinces, states, departments, municipalities, and regional authorities) probably follow central government bonds in the liquidity array. In most countries, the certainty of their redemption is an aspect of national policy.

The presumable greater certainty of repayment distinguishes all government bonds from bonds issued by the private sector. The latter are subject to a default risk to the extent that there is a risk of their issuers’ becoming bankrupt.

Annuities and other cash values are assets. Their importance in the community’s asset structure is likely to influence the relations between various assets and liabilities that the community may wish to obtain. Thus, if the practice of holding life insurance is widespread, individuals and partnerships (and to a lesser extent companies) may not wish to hold other financial assets as alternatives to life insurance. A community with large holdings of life insurance may be more ready to accept large liabilities, or a community with a high propensity to borrow may guard against the consequent risks by carrying a relatively large volume of life insurance. In most countries, life insurance is the most common form of right to an annuity, or cash value, that the community holds. Life insurance policies also have certain qualities different from most comparable rights. In modern societies, the value of life insurance contracts (irrespective of how this value is measured) is large in comparison to the value of other assets.

The other main category of financial asset fixed in money terms comprises the wide range of other loans that develops in any community. This group must be heterogeneous, extending from secured bank loans obtained by profitable conservatively financed companies to the highly dubious personal loans extended by some moneylenders. One of the most significant components of this group is the mortgages granted primarily to private households, but which should probably also include mortgages obtained by businesses, other than mortgages that are the formal security for bonds. In most communities, there is a market for mortgages. These markets vary from country to country in the liquidity that they give to mortgages, and vary within a country depending on the type of mortgage. However, in most cases, mortgages are likely to be more liquid than other loans. Another component that is frequently significant is consumer installment credit (hire purchase).

All the preceding financial assets have a fixed redemption value. However, the essence of company organization is that its residual ownership is eventually held by members of the household sector. At intermediate stages, it may be held by other members of the business sector, or by financial institutions. But since this equity ownership can have no final redemption value, the prices of equities and their liquidity attributes cannot be determined by a final redemption sum. The absence of a final redemption makes the price of equities less subject to changes in the rate of interest than is the price of bonds.

In turn, it should be recognized that some equities carry a fixed yield and may be redeemable at a stated price, but at an unstated time. These securities have a liquidity value, which should be recognized in financial accounts, that is different from equities with a fluctuating yield and is dependent on the profitability of the company and its dividend distribution policy; these securities are redeemable only on the demise of the company.

Equities that are not eligible for sale on any market are not as liquid as marketable equities. Many of the nonmarketable equities differ little from the marketable type. There may be some tendency for companies whose shares are not marketable to follow financial policies different from those of companies which must publish reports on their actions and thereby face the scrutiny of public comment. Generally, however, nonmarketable equities are liabilities of smaller companies or of large companies owned by a very few individuals. There is one specific type that is important in most countries. Many companies own the entire equity in other companies. For a variety of reasons, they prefer to own the equity in an operating company rather than to amalgamate the physical assets of that company with their own. Ownership of physical assets in a foreign country is usually possible only by the ownership of direct investment in a foreign subsidiary. Equities in subsidiaries (including foreign direct investment) are different from other nonmarketable equities and probably deserve separate recording in the financial accounts of their owners.

Trade credit is a financial asset that in a liquidity array would be halfway between true financial assets and physical assets. Most financial assets are held because individual economic units wish to hold them and are trying to maintain certain asset values. No individual or company desires to extend trade credit for its own sake. It does so only to increase sales. In many respects, trade credit should be regarded as an income-earning asset with a low liquidity value. An individual account outstanding may be relatively liquid. However, if a firm is in a business where it is customary to extend trade credit, it may expect to remain in business only if it replaces maturing trade credit by new extensions of credit. Trade credit is, in many respects, more analogous to inventories than to financial assets. Individual entries in accounts and individual units of inventory may be realized. However, a stock of both must be maintained. By themselves, they normally produce no direct income. Their maintenance is a cost that restricts the acquisition of other assets or calls for borrowing in order that they may be financed.

Nonfinancial assets are primarily the community’s physical capital. There are conceptual assets represented by the valuation placed by individual economic units on their monopoly positions. A set of sector balance sheets recording the ownership values visualized by members of the community should provide an item for goodwill, patent rights, royalties, etc. However, these are relatively insignificant in comparison to the community’s physical capital.

Physical assets are of two forms. The first is the long-term physical investment that has been undertaken in order that future consumption may be larger than past consumption. The second is the stock of inventories held by the community. The physical stock of long-term investment goods, owned by any economic unit, may be changed only by relatively small amounts in any one period. The stock of inventories may alter, or be altered, relatively rapidly in response to short-run economic changes. Economic units may express changes in their expectations by attempting to increase inventories in advance of expected increases in the physical demand for the goods that they produce, or in advance of expected increases in the prices of the goods that they produce or consume. Anticipated declines in demand or prices will produce a reverse reaction. Conversely, a disappointment of previous expectations may lead to quite sharp changes in inventories. An ex ante discrepancy between saving and investment is reconciled, in the first instance, partly by changes in inventories. One of the first sources through which excessive demand may be satisfied is through the consumption of inventories. An excess of expenditure desires by the community over expected receipts will be reflected in unexpectedly large net receipts by those in possession of inventories, with a consequent disinvestment in inventories. Disappointed sales prospects will lead to an accumulation of, and undesired investment in, inventories. Hence, inventories are a sensitive element in the balance sheets of economic units. Changes in them provide guides to the degree to which the community has been able to satisfy its desires to maintain a satisfactory asset-liability structure. At the same time, changes in the desire to hold inventories will be associated with changes in the desire to hold other assets, and in the willingness to accept liabilities.

The long-term investment, or fixed assets, held by the community may be divided into income-producing and consumption-producing assets. In large part, this is a distinction between the household sector’s assets and the assets of the other sectors. In part, however, if accounts providing for mixed sectors are compiled, a separation of the assets of the mixed sectors may provide some guide to the reasons underlying changes in the balance sheets of these sectors.

Income-producing assets may be either reproducible plant and equipment or nonreproducible land and improvements. One of the prime links between income theory and monetary theory is to be found in the ratios of desires, money: other financial assets: reproducible physical assets. Changes in desired asset-liability relations lead to changes in the demand for goods and services largely through changes in the demand for reproducible fixed assets. Changes in the desired holdings of income-producing assets will be reflected in pressures that might lead to changes in their prices. Because reproducible fixed assets have a real cost of production, there are limits to their probable price movements. A rise in the demand for them can be satisfied without too much delay. A desire by the community to increase its holdings of physical reproducible assets can have effects on their supply, and consequently upon the national product and income. A decline in the demand for reproducible physical assets will lead to their not being renewed, while their producers shift, insofar as possible, to other uses of their own resources. In this way, a decreasing desire to own these assets will have a depressing effect upon the national product and income.

Reproducible assets may be separated into Buildings and Equipment. In some respects, the changes in demands for equipment are likely to be reflected (and to be reflectable) more quickly in the market for goods and services than are changes in the demand for buildings.

Land and its improvements are largely nonreproducible, and changes in desires to hold land will affect its price primarily and have little or no effect on its supply. The price of land is the discounted present value of its expected perpetual income. There are no reasonable limits to the possible variation in this discounted value. Consequently, changes in the valuations placed on this type of asset must have their influence on other economic variables through their effect on the desires for other assets, or for liabilities, rather than directly through the factor markets.

In some respects, improvements to land approach the status of reproducible assets and thus differ slightly from land itself. Whether provision should be made for their specification in sector balance sheets is probably more a question of the availability than of the desirability of the data.

It should be emphasized that any proposal to include nonreproducible assets in a set of financial accounts must be limited strictly to the holdings that are entered in the balance sheets of economic units which are influenced by changes in their holdings. Thus the value placed on agricultural land owned by agricultural households is a significant economic fact. The value probably recorded for Snowdonia in the accounts of the U.K. National Trust is a purely nominal, if not fictional, entry. The values of undeveloped natural resources, which are sometimes considered to be part of national wealth, have no place in sector balance sheets.

Changes in consumption-producing assets have less significance than changes in income-producing assets. However, the effect of changes in the demand for housing in all countries, and for consumer durable goods in wealthy economies, has long been considered significant. Provision should be made for these assets in any complete set of sector balance sheets.

The analysis of liability accounts is essentially simpler than the analysis of asset accounts. All liabilities are financial. There are no problems in their measurement, similar to those that arise in the measurement of nonfinancial assets. To the debtor, the creditor’s residence is not as significant as the reverse relation. A liability is a debt irrespective of its holder’s nature. Consequently, no separate classifications for foreign liabilities need be provided among the liabilities. Insofar as a country’s international balance of indebtedness is significant, the liabilities to foreigners will be indicated in the asset accounts provided for foreigners.

The most important difference between different types of liability is that between the more important group of redeemable liabilities that envisage the surrender of real assets by the debtor at some future time, and the less important group of nonredeemable perpetual equities.

Some redeemable liabilities are repayable on demand at the option of the lender; others are redeemable at some predetermined time or during a predetermined period. In many respects, demand liabilities, other than money, have a liquidity disadvantage to the borrower that differentiates them from term liabilities. Demand liabilities may have to be met at short notice; repayment of term liabilities may be planned and provided for in the future.

Most of the banking system’s liabilities are demand liabilities. Some quasi-monetary liabilities may differ superficially from monetary liabilities in that they technically are repayable on notice. In practice, this requirement of notice is only rarely enforced. A few securities are repayable on demand and consequently are liabilities more liquid than predetermined payments. In liability analysis, these securities resemble the most significant nonmonetary demand liabilities—loans. Demand loans arise in large part from trade credit that represents a financial lag between the transfer of ownership in goods and services and the final money payment arising from that transfer. While, on the borrower’s side, trade credit may not have the involuntary aspects that it appears to have from the lender’s point of view, its ancillary nature differentiates it, in the borrower’s sight, from other demand loans that he may accept.

Some term liabilities represent a combined series of principal and interest payments that must be made for a predetermined period. Others represent a series of interest payments that end with the payment, at a predetermined date, of the principal value of the liability. There are three significant types of amortizable liability: securities, loans, and annuities. On the liability side, the distinction between amortizable liabilities that arise from installment credit and other liabilities is probably more significant for most modern wealthy economies than the associated classification of asset accounts. In size, however, the most significant amortizable liabilities are those arising from annuity contracts. Insofar as governments, charitable institutions, and even some businesses, other than life insurance companies, may have liabilities on account of life insurance contracts, even financial accounts that provide for the presentation of separate accounts for the life insurance sector should also provide for the separate specification of life insurance liabilities owed by other sectors.

Fixed-term liabilities may be classified as either securities or loans. From a liquidity viewpoint, however, the term of a contract is probably more important than its nature. Relatively liquid assets must be accumulated to meet short-term liabilities, unless further borrowings may be obtained or the liabilities are to be defaulted. The acceptance of long-term liabilities permits the acquisition of illiquid assets. Hence, for the determination of asset-liability relations, security and loan liabilities should be analyzed in terms of their maturity.

Nonredeemable liabilities are, with few exceptions, equities in residual values. These may be represented by securities or by other less formal equity contracts. The only really significant difference is between those securities which bear a fixed yield, and thereby impose a fixed predetermined charge on the borrower’s income, and those where the charge on the borrower’s income is determined by the income itself and by the profit distribution policy agreed between the borrower and the lender.

Valuation of Balance Sheet Entries

Sector balance sheet accounts should serve more than one purpose. Consequently, the valuation problems to be faced in their compilation are more serious than they would be if single purpose accounts were envisaged. In the construction of income-expenditure and financing accounts, the problems of valuation are not serious. The use of current market prices follows from the principles upon which these accounts are based. While balance sheets are the historical end of a long series of transactions, they must measure stocks of assets and liabilities at a given instant if they are to be useful. Insofar as economic units attempt to maintain asset-liability ratios, they attempt to maintain relations between items at the values currently placed on them. That is, balance sheets that are intended to provide a series of data explaining the reactions of economic units should consist of items valued at current prices.

In the valuation of financial assets, it might appear that, because a financial asset is a liability, the sum of the values of all such assets except equities should equal the sum of all liabilities, and that the sum of equity values should be equal to the real wealth of the community.26 For financial analysis, however, this apparent truism is false. It is true that the sum of financing flows in any period must be nil (or the sum of domestic borrowings minus lendings must equal net borrowing from foreigners). Yet it does not follow that the sum of the values of assets as valued by their holders must be the same as the sum of the values of liabilities as valued by those who have accepted them. A holder of a marketable security may intend to sell it before its maturity date. If so, the eventual redemption value of the security will have only a remote significance to him; the only value that will be significant to him is its current market value. To the issuer, on the other hand, this value may have only a remote significance; he will value his liability at an amount directly related to his eventual obligation to redeem the security. While these two values are different, they are the values that are significant in the accounts of the asset holder and the liability acceptor. Hence, they are the values that should be recorded in financial accounts. This observation parallels the earlier statement that there is no fundamental reason why the financial asset and liability accounts should be mirror reflections of each other.27

The entries discussed in the preceding section may be grouped in the following categories: Monetary and Quasi-Monetary Items, Foreign Exchange, Marketable Domestic Securities, Nonmarketable Domestic Securities, Marketable Foreign Securities, Nonmarketable Foreign Securities, Annuities, Direct Loans, Other Financial Assets, Fixed Assets, Inventories, and Conceptual Assets. In certain respects, the problems to be faced in the valuation of assets are different for each of these groups. The problems are simplest for the monetary and quasi-monetary items. They are money values in themselves, and their valuation for balance sheet purposes raises no problems.

Foreign exchange is foreign money rather than domestic money. Its valuation in terms of foreign money raises no problems. The conversion of its value into domestic terms is entirely an exchange rate problem. In most cases, foreign exchange can be converted into national currency at a known exchange rate. In the absence of exchange controls, the valuation problem is simple. Even with exchange controls, balances are usually convertible even if the conversion must be made through unofficial channels. In compiling balance sheets for all sectors, the existence of unofficial markets must be recognized. Balances held by official national holders will usually be convertible at an official rate, and this rate may be used for their valuation. Balances held by private holders may, in some cases, be convertible only through unofficial markets, and the rates prevailing in these markets must be recognized in the valuation of private holdings.

Some of the remaining assets are marketable; others are not effectively marketable. The holders of marketable securities will be influenced by the market values when considering the amounts of these securities that they wish to hold, or when deciding to increase or decrease their holdings. It follows that financial accounts should provide for the recording of marketable securities at current market values.

The valuation of marketable foreign securities involves no problems significantly different from the valuation of marketable domestic securities, except that, in the construction of national financial accounts, it is the price of the security on national markets that is significant if this price differs from the price of the security on the home market. In most cases, however, the price of a foreign security on national markets will be equal to its price on foreign markets, converted at the rate of exchange effective for the conversion of proceeds from sales of securities.

The proposal that marketable securities be recorded in national balance sheets at their current market values differs from generally accepted accounting conventions. In most company balance sheets, securities are valued at cost or at the market price, whichever is the lower, or at cost plus amortized discount or minus amortized premium. When the market price is lower than cost, the first convention provides a market price valuation. When cost is less than the market price, or when the second convention is adopted, it is doubtful if asset holders are influenced solely, or even largely, by accounting valuations. Evidence in support of this view is provided by the common accounting practice of indicating the market value of securities as a memorandum item when it differs from the conventional value included in the balance sheet total.28

The appropriate valuation of annuities is not simple. An annuity has four values: its cash surrender value, its current actuarial value, its accumulated cost, and its face value. The cash surrender or loan value of an annuity is a real value to its holder. It is a precise and realizable value that is of significance when measuring his short-term liquidity position. In any set of balance sheets designed to indicate liquidity, provision should be made in the asset accounts of annuity holders for recording the cash surrender values of annuities. At the same time, the cash surrender value is not the only value placed on an annuity. In most cases, the cash surrender value is considerably less than the capital “face value” of the annuity. Every purchaser of an annuity hopes eventually to obtain (or hopes that his heirs will obtain) a value at least equal to the face value. This is the value that measures the long-term protection against catastrophe that is provided by an annuity; consequently, this value has a place in the asset records. Presumably, an adequate set of asset accounts would provide two entries for an annuity: the cash surrender value and the difference between the cash surrender value and the face value. In some asset accounts, the current value of annuities is recorded.29 This value is significant to the debtor on annuity contracts but not to the asset holder. The accumulated cost of an annuity is nothing more than an historical fact; in asset and liability accounts, it should be ignored on the principle that bygones are bygones. For measures of financing, however, the cost of annuities during the period probably is the significant measure.30

Since there are no markets for nonmarketable securities, direct loans, and other financial assets, there can be no market values for these assets. The only values that can be placed on them is their face, or money, values. Their identification in an asset schedule indicates that their real liquidity values may be less than the liquidity values of marketable securities that may be entered at lower money values.

Inventories are held either for sale or for consumption with the prospect of their complete or partial replacement by purchase. Both their potential realizable product and the opportunity cost of their replacement is determined by their market prices. Consequently, their current price value for balance sheet analysis is their current market price at the time of valuation.

Any valuation of fixed capital must be arbitrary. Two positive statements may be made. The market value of a fixed capital asset is likely to be different from its cost. It may be assumed that fixed capital assets would not be acquired unless their value to their holders would be at least equal to their cost. The complete combination of fixed assets of a business may have a market value considerably greater than their combined cost. Conversely, all of an economic unit’s fixed assets, or any part of them, even if new, may well be salable only in “secondhand” markets at prices well below their original cost. To an owner who does not desire to sell all of his assets, or who would be unwilling, if they had to be replaced by new assets, to sell part of them second hand, their market value is irrelevant. Except when prices are rising rapidly and the sale of assets provides an opportunity for monetary capital gains, or when economic depression makes bankruptcy a quite possible fate, owners of fixed assets are unlikely to consider the market value of these assets. The value of fixed assets that is most likely to be decisive in determining the asset-liability decisions of economic units is the conventional accounting value placed on the assets. In most cases, this conventional accounting value is original cost less depreciation as computed by the accountants.31

The proposal that fixed assets be valued at original cost less conventional depreciation involves the acceptance of depreciation allowances as conventionally computed by accountants. This assumes that the depreciation allowances entered in their books are accepted by businessmen as the measures of asset depreciation that have an influence on their decisions, irrespective of the method used to compute the allowances. Measures of depreciation that are not consistent among individual economic units may be accepted as valid determinants of the values of fixed assets as viewed by their owners. If statisticians accept the hypothesis that owners of fixed assets value these assets and react to changes in their values in the way that economic units have always claimed to react, most of the problems regarding the computation of depreciation disappear for purposes of balance sheet analysis.

Conceptual assets are conceptual, i.e., they exist only as entries on the balance sheets. It therefore follows that their valuation in financial accounts should be the book values as recorded in balance sheets.

The valuation of liabilities does not raise problems comparable to those involved in the valuation of assets. Generally, liabilities are money values equal to the values obtained at the time they were incurred. The fact that some liabilities are bought and sold and have a market value is a fact of little relevance to a debtor. Even if liabilities are redeemable by purchase at less than their stated value, debtors are rarely in a position to benefit from this opportunity. They usually must provide for redemption by the maturity date of the liability. Consequently, in most cases, the effective value of a liability is its stated monetary value.

In some cases, the money value received in return for the acceptance of a liability is different from its stated value; it is then reasonable to assume that the difference between the two is equivalent to the capital value of the difference between the true interest cost of the liability and its stated yield. On this assumption, the appropriate value of the liability is its stated value minus that part of its discount or plus that part of its premium not amortized at the date of measurement.

Annuities are a special case where the measure of amortization is unique. The current actuarial value of an annuity is an irrelevant fact when considering the value of an annuity to its holder. It is, however, the relevant fact when measuring annuities from the viewpoint of the debtor. Consequently, financial accounts should provide, on the liabilities side, for the entry of annuities at their actuarial value.

Equities are surplus values; they should be recorded in the liability accounts at the values that equate both sides of the individual balance sheets of economic units. It should be noted that this valuation will not provide a measure of equities that will produce balance in the asset-liability accounts of the community as a whole. Insofar as the marketable values of marketable financial assets differ from their money values as liabilities, insofar as the cash surrender values are not closely related to the actuarial values of annuities, and insofar as the face values of annuities differ greatly from their actuarial values, the algebraic sum of financial assets and liabilities will not equal the values of nonfinancial assets and will not provide a converse measure of the real wealth of the community.

There is another, and perhaps more important, discrepancy in the accounts if they are measured in the manner proposed here. Changes in balance sheets will arise from three factors: transactions, changes in market values, and accounting adjustments. The financing entries in the sector accounts will reflect transactions only. Thus there will be a discrepancy between financing and balance sheet accounts. Probably, this discrepancy can be dealt with only by introducing a further set of entries in the complete structure of accounts. These entries would provide for an analysis of changes in balance sheets arising from transactions and of changes arising from other factors. If the balance sheets are to be integrated with the income and expenditure accounts, a set of balance sheet accounts would presumably have to include the following data: balance at the end of the previous year; and, for the current year, changes arising from transactions, changes arising from other factors, and balance at the end of the year.32 On this basis, capital gains and losses would be brought into the accounts at the time they arise; whether or not they are realized would be immaterial. This proposal is made on the assumption that capital gains and losses are effective determinants of economic action as soon as economic units become aware of their existence. The possibility of their realization will lead to shifting of assets and liabilities. The significant point is that it is their accrual, and not their realization, that produces incentives to financing actions.

Extent of Integration

At first thought it might seem desirable to envisage the development of a completely integrated set of income, expenditure, financing, and balance sheet accounts. This would involve a complete set of statements for each of the sectors identified above. However, the arguments for this approach are not as compelling as might appear at first.

The balance sheets of both the financial system and the government differ in significance from those of the other domestic sectors. These two sectors are independent in the sense that their income and expenditure decisions are not greatly influenced by their balance sheet relations. For the government, this independence is clear. Although individual banks more than any other institutions make decisions directly in the light of balance sheet criteria, the balance sheets for the banking system as a whole are determined essentially by the policy of the monetary authorities and by stable, known, liquidity criteria. Hence, changes in the balance sheets of the banks result from the decisions of the monetary authorities taken in the light of social policy aims rather than in the light of true balance sheet criteria. The balance sheets of other financial institutions are primarily reflections of the lending and borrowing decisions of the private sector rather than statements explaining income and expenditure decisions of financial institutions.

Changes in the balance sheets of the financial system and the government explain changes which are, in fact, forced on the balance sheets of the other sectors. (It is true that, to a certain extent, they also reflect changes initiated in the other sectors.) These changes in the balance sheets of the private sectors are forces leading to production, consumption, and investment decisions by the private sectors. Fully integrated accounts are really necessary for only these private sectors.

It follows that, while there may be arguments favoring fully integrated accounts for all sectors, any arguments based on the considerations outlined in this paper are not overwhelmingly strong. There are good arguments for a system of partial integration. A set of accounts that incorporates the income and expenditure transactions of the financial system in the accounts of the business sector, while presenting balance sheets for the financial sectors,33 should be regarded as having a satisfactory degree of integration and identification. A set of accounts that incorporates the financial system completely in the accounts of the private sector should not be regarded as a set that provides a satisfactory degree of identification, even if the intrasector transactions or balances identify the relations of the nonfinancial sectors with the financial sectors.34

Technical Problems of Integration

Three important problems arise in integrating balance sheet accounts with other economic accounts. These are the problems arising from imputations, the timing of transactions, and split personalities.

National income accounts include a number of imputed transactions. The financial items in balance sheets must record acknowledged claims on, the obligations of, individual economic units. It has been argued that the presence of imputations in national income accounts makes the compilation of an alternative set of transactions accounts that are limited to actual payments in money or credit an illuminating exercise.35 There may be arguments for a set of accounts limited to transactions giving rise to payments as distinct from conventionally measured income and expenditure accounts. The need for the integration of income, expenditure, and balance sheet accounts is not such an argument, however. There can be no single entry imputation in national income and expenditure accounts.36 For every imputed income entry, there must be an imputed expenditure entry. If the imputation relates to one economic unit only (e.g., imputed rent by a business), it may be recorded as an imputation on both sides of the unit’s accounts with no effect on its net financing. If these imputed transactions for a single economic unit are recorded in different national income sector accounts, there are difficulties in integrating these transactions in a set of accounts involving one balance sheet only. However, this is an aspect of the split personality rather than of the imputation problem.

If the imputed transaction affects two economic units (e.g., the payment of wages in kind), there should be an imputed expenditure represented by the service provided by one sector and an imputed receipt by the same sector representing the imputed payment by the receiving sector, with countervailing entries in the other sector’s accounts. This argument presumes that both sectors are aware of the imputations and may be considered as reacting, to them. There are significant cases where only one sector is aware of an imputation. Taxes accrued, but not assessed, are the most important. An economic unit can estimate its accrued taxes and enter them as a liability that must be met. Until the unit’s taxation return is received and recorded by the taxation office, the government cannot know the level of taxation accruals, and they should not be recorded in the government’s balance sheet, if the balance sheet is to be a meaningful document. On the assumption that savings are measured net of accrued tax payments, an increase in taxes payable represents a borrowing from the government by the paying unit and hence a financing transaction for the paying unit. At the same time, it should not be considered a financing transaction for the receiving unit. Changes in dividend reserves may give rise to similar discrepancies between the balance sheets of the business and the household sectors. These are examples of proper discrepancies between balance sheets mentioned above. However, their effects differ from those of discrepancies arising from differing valuations of items. In all probability, the best treatment for the discrepancies is that accorded to them by the U.K. Central Statistical Office in National Income and Expenditure, table on “The Financing of Investment,” where they are, in fact, recorded as a discrepancy entry.

National income and expenditure accounts conventionally record transactions “when a sum of money, or the equivalent, becomes due and assignable,”37 i.e., they include accrual items. It may be argued that balance sheets should record completed transactions and hence should exclude accruals. However, if provision is made in the accounts for trade credit and similar items, the question of accruals should raise no serious problems. The peculiar attributes of accruals account for the apparently anomalous treatment suggested above, where it was proposed that they should be considered closer to inventories in their economic significance than to other financial claims.38 The only real problem with accruals arises when they are imputed accruals that are not recognized by one party to the transaction.

The split personality question is the most serious of the integration problems, and there may be no completely satisfactory solution for it. Insofar as national accounts involve significant allocations of income and expenditure by single units to the accounts of more than one sector, the purpose of constructing integrated accounts is frustrated. Formally correct accounts in which the financing transactions are reconciled may be constructed without much difficulty. Thus the net profit of self-employed income earners may be deducted from the savings of the business sector and added to the savings of the personal sector and the investment by self-employed persons, and investment in owner-occupied dwellings may be similarly transferred in the accounts. The resulting calculations of the financing balances of the business and personal sectors may then be reconciled with financing balances derived from balance sheet data for the business sector and the personal sector (including self-employed persons).39 However, such an exercise does little more than calculate the net errors and omissions in the accounts. For the business sector, the balance sheet data will cover a smaller group of individual units than is, in fact, covered by the income and expenditure data. For the personal sector, the balance sheet data will cover a wider area than is covered by the income and expenditure data. Consequently, the asset-liability relations shown in the balance sheet data will describe the actions of groups different from those whose actions are described in the income and expenditure accounts. It thus becomes impossible to derive meaningful conclusions from a combination of the two sets of data.

A formal integration may be achieved by first identifying the production accounts of identifiable subsectors (e.g., self-employed persons, government agencies) and then attempting to identify items in the balance sheet items of the full sectors that relate to the production transactions of the subsectors.40 Formally, these accounts may be reconciled: the financing totals derived from the production accounts will be conceptually equal to the financing totals derived from the balance sheets. However, such a reconciliation must be a purely formal, non-informative exercise; it ignores the first principle enunciated in the introduction to this paper as explaining the actions of economic units.41 To permit examination of the significant relations, the accounts of the subsectors would have to be recombined, that is, the subsectoring would have served no purpose from the viewpoint of integration.42 The only informative approach to this problem would seem to involve a reorganization of the conventional income and expenditure accounts. Insofar as income and expenditure accounts are sector accounts, it would be desirable to have all the entries in the accounts of enterprises relating to the activities of self-employed persons and owner-occupiers of dwellings transferred to the account of the personal sector. The accounts of government enterprises as defined by the UN experts43 might be transferred to the government account. Finally, a separate account should be established for public corporations. At the same time, the general government accounts should be separated into their component parts. If this were done in the income and expenditure accounts,44 meaningful comparisons could be made with the forms of significant sector balance sheets that it should then be possible to compile.

In attempting to integrate balance sheet and income-expenditure accounts, the totals for the transactions categories should be kept consistent with accepted practices in the compilation of income and expenditure accounts.45 The income and expenditure accounts have proved a most useful addition to the body of economic statistics.46 Economists are familiar with their content, significance, uses, and weaknesses. Integration of income and expenditure accounts with balance sheet accounts should not be an end in itself. An abandonment of national income accounts for some other form of statistical record is not a means toward integration justified by the objective of integration.

Compilation of Balance Sheets

Conceptually, financial accounts may be compiled in three ways. Balance sheet data and statements on sources and use of funds may be gathered for all economic units. Statements may be computed for some or all of the units on the basis of partial samples or similar surveys. Statements, or parts of them, may be computed for some units on the principle that every liability is an asset of another economic unit. The last two methods may be used in combination. Theoretically, the first of these alternatives is the most desirable. It is also completely impractical.47

In practice, one or both of the last two methods of compilation must be used to provide financial data. In most countries, balance sheets are available for the monetary system, and they should be available for the government. In many countries, statements are available for the life insurance sector.48 It is possible to prepare balance sheets for the corporate business sector, but it is impossible to gather balance sheets for all households.

For the household sector and, given limitations on resources, frequently for the business sector, reliance must be placed on sample surveys and indirect compilations. For example, the liabilities reported by banks as due to businesses and households, if properly compiled, may be recorded as the assets of businesses and households; or production and sales data may be used as a source for estimates of changes in physical assets. In some cases, the available balance sheets of financial institutions do not contain data sufficiently adequate to provide the information needed for the indirect compilation of balance sheets of partner sectors; therefore, the subclassification of known totals must be based on sample surveys. (For example, banks may report total deposit liabilities or total loans, but the classification of these totals into deposits held by, or loans made to, households and businesses must be made on the basis of data gathered from sample surveys.)49

An audited balance sheet is a true statement of what it purports to describe. Compilations that balance on both sides, without the use of residuals, are likely to be accurate descriptions of defined magnitudes. Sample surveys, at best, produce only approximations to the truth. Although recent advance in statistical techniques has done much to transpose sample surveys from the realm of fantasy to that of respectability, these surveys can never enter the “Kingdom of Unquestionable Accuracy.” There are many cases where there is no practical alternative to the use of survey data. However, the inherent accuracy of balance sheets should make statisticians biased toward using them whenever possible.

These considerations lead to the conclusion that every effort should be made to persuade banks, insurance companies, other financial institutions, and governments to provide as much data as possible. Information that may not appear necessary for preparing adequate balance sheet data for these particular sectors may be invaluable for the indirect compilation of balance sheets for other sectors. It may be said that requests based on this argument impose an unreasonable burden on the original compilers of balance sheets. However, to compile data by surveys rather than indirectly from contra balance sheets involves in part the substitution of the survey team for the balance sheet accountant. Surveys are not cheap. From 1946 to 1957 the direct costs of the Federal Reserve Surveys of Consumer Finances (i.e., excluding the wage and other costs allocated to the general budget of the Board of Governors) averaged approximately $170,000 a year, and in one year (1956) exceeded $450,000.50

There is one point where a program based on the extension of monetary statistics would require a change in banking statistics. At present, data on the monetary system’s liabilities to, and its claims on, the private sector only rarely distinguish between accounts relating to the business and household sectors.51 The best classification that is obtainable in practically all cases combines these data in a set of accounts that distinguishes only the domestic private sector. As indicated in the Appendix to this paper, even where supplementary data provide further classifications of loans and deposits, these classifications are usually based on the business of the borrower, or depositor, or the purpose of the loan, without a clear distinction between the household and the business sectors, and they usually include data relating to self-employed households in the same categories with data relating to business.

The absence of data on the liabilities of governments is the most striking hiatus at present.52 A program undertaken by central banks and statistical offices for the development of national financial statistics should, in many countries, start with an analysis of the accounts of the central government.

It follows that a program for the compilation of financial accounts for all sectors of the economy can best be conceived as a program for the improvement of monetary statistics, for their extension to include the statistics of financial institutions other than banks, and for the improvement of statistics on government finance. If this program were wedded to a program for the collection of data on the physical wealth of the community, an adequate, and reliable, set of balance sheets for all sectors of the economy should emerge.


This paper proposes that a program for the construction of national financial accounts should envisage the compilation of a series of balance sheets for each of the important economic sectors, with the items classified by liquidity and valued at current prices. In order that this system of national financial accounts might be properly integrated with a system of national income, expenditure, and financing accounts, changes in the balance sheet entries should be identified as changes arising from transactions, or as changes arising from alterations in market values and accounting adjustments.

A program for the compilation of financial accounts could be developed along several lines. Given the availability, and the relatively high reliability, of data provided by financial institutions and of the data to be found in the accounts of governments, it follows that a program for the compilation of financial accounts should be, in large part, a program for the development of the statistics relating to banks, other financial institutions, and governments. It might well be considered as a program with two parts:

  1. The improvement of monetary statistics, and the development of comparable statistics for other financial institutions and governments;

  2. The compilation of data on the community’s physical capital.

In most countries, the experience of the national monetary authorities should provide the basis for the first part of this program and the experience of statistical offices should provide the basis for the second part. In a large number of countries, the complete program might well be conceived as a cooperative venture, with the central bank, or other monetary authority, compiling the data developed from financial records and the central statistical office, or similar institution, compiling the data developed from records of physical assets.

APPENDIX: The Classification of Bank Deposits and Loans

In at least four countries, bank deposits held by the private sector of the economy are classified by type of holder. In only one of these four (the United States) is this classification fully comparable with the structure of economic sectors outlined in this paper, in that the holdings of noncorporate businesses are separated from those of corporations and other individuals. In one country (Japan), the holdings of corporations are separated from noncorporate holdings; in the other two (Ceylon and India), all business holdings, further classified by type of business, are separated from personal holdings, but business holdings are defined to include the deposits of self-employed households.

Bank loans to the private sector are classified by borrower or purpose in at least 26 countries. In 13 countries,53 the classification is according to the purpose of the loan without identifying the type of borrower. In 12 countries,54 the classification separates business from personal borrowings; the types of business are identified, and loans to self-employed households are included in business. In only one country (the United States) are loans classified by those to the corporate business, the noncorporate business, and the consumer sectors.


Mr. Dorrance, Chief of the Finance Division, has been a lecturer at the London School of Economics and a member of the staff of the Bank of Canada.


This paper was prepared for the Expert Group on Statistics of Changes in Financial Assets and Liabilities, convened by the Conference of European Statisticians, Geneva, Switzerland, February 23–27, 1959.


Ralph A. Young, “Federal Reserve Flow-of-Funds Accounts” in “Recent Developments in Monetary Analysis,” Staff Papers, Vol. V (1956–57), p. 328.


Central Planning Bureau, Scope and Methods of the Central Planning Bureau (The Hague, 1956), Appendix II.


Ministry of Finance, Division for Economic Affairs, Economic Survey, 1957 (Helsinki, 1957), p. 16.


If this paper had been written a quarter of a century ago, these sentences would probably have read: “If it invests more than it saves, it provides a net demand for the product of other economic units. If it saves more than it invests, its demand for the economy’s production is less than its contribution to production.”


Throughout this paper, the model of national income accounts presented in United Nations, Statistical Office, A System of National Accounts and Supporting Tables (Studies in Methods, No. 2, New York, 1953), is taken as the standard model for national income accounts.


Ibid., pp. 2 and 3.


Ibid., p. 11.


As is noted below, the accounts relating to certain government functions may be shown separately from other government accounts, without, in fact, violating the principle of “no split personalities.”


See below for a discussion of the special significance of foreign assets and liabilities held by residents (p. 187).


In some countries this adjustment may require the Central Bank, or the Central Bank and the Deposit Money Banks, to hold all (or essentially all) the government securities. (See International Monetary Fund, International Financial Statistics, August 1952, for comparative data on the ownership of government debt in 23 countries.)


E.g., the Development Bank in Greece, the Reconstruction Loan Corporation in Germany, and the National Finance Corporation in the Union of South Africa.


E.g., the Development Institutions in Colombia, Costa Rica, Ecuador, Guatemala, Haiti, Mexico, Peru, Turkey, the Union of South Africa, and Yugoslavia.


E.g., France and Viet-Nam.


Probably as “Other Loans” in the classification of assets outlined below.


E.g., discount houses in the United Kingdom.


As accounts develop, data for the different types of institution may not become available simultaneously. Hence, accounts for some of the subsectors may be easily obtained as an early step in the development of financial accounts and should be used to provide indications of a fully integrated measure of transactions.


In the U.K. Classification of Bank Advances, loans to professional gamblers are included with loans to financial institutions.


In less highly developed countries, a different basis of separation may be appropriate. Where the company form of organization is not extensive, a separation into rich and poor may be the appropriate classification. In most underdeveloped countries, a classification of individuals into those who hold bank deposits and those who do not would effectively separate individuals largely influenced by business considerations from those predominantly influenced by considerations of consumption.


The following comparison of the financing of two groups of U.K. companies in the years 1949–53 demonstrates the possible significance of this type of subsectoring for the business sector:

article image

Data are from National Institute of Economic and Social Research, Company Income and Finance, 1949–53 (London, 1956).


An example of the difference in experience of firms in different industries is provided by the following data (from National Institute of Economic and Social Research, op. cit.) on net borrowing for two groups of U.K. companies:

article image


See United Nations, op. cit., pp. 11 and 12.


This was the original U.S. flow-of-funds treatment; see Board of Governors of the Federal Reserve System, Flow of Funds in the United States, 1939–1953. (Washington, 1955), pp. 210–12. The current U.S. flow-of-funds treatment is to include charitable organizations with consumers; see quarterly flow-of-funds accounts, Federal Reserve Bulletin, August 1959.


The term “bond,” as used here, includes all securities repayable on predetermined money terms and thus includes treasury bills, certificates of indebtedness, treasury notes, etc.


E.g., the table, “Composition of Total Domestic Liquid Resources, and the Parties Holding Them,” in Netherlands Bank, Report for the Year 1957 (Amsterdam, 1958), pp. 62–63.


This is the view of most writers on this subject. Thus, Stamp, in Wealth and Taxable Capacity (London, 1930), and The National Capital and Other Statistical Studies (London, 1937), used essentially the capitalized value of equity income as a measure of the national wealth. Hicks is specific on this point: “The balance-sheets of ‘companies’ and of ‘government’ must frankly be adjusted so as to maintain consistency with the personal sector. The shares and bonds, as they appear in the balance-sheet of the ‘companies’ sector, must be entered at the values which have been given them in the balance-sheet of the personal sector, not at the values given them by the companies. In spite of this, we must hold to the principle that the net assets of companies are nil. This means that we must not attempt to value the real assets of companies directly. We must accept the ‘shareholders’ value’ of these real assets—not the value which is set upon them by the company, but the value which is implied in the market value of the shares” (The Social Framework, Oxford, 2nd ed., 1952, pp. 277–78). Goldsmith states that a set of sector balance sheets should be compiled so that “When all intergroup and intragroup relationships are eliminated we obtain instead of a combined national balance sheet a national wealth statement” (A Study of Saving in the United States, Princeton, 1955–56, Vol. III, p. 4). Edey and Peacock refer to differences in creditor and debtor valuations as “… inconsistencies [which] do, of course, occur, and we have to accept the fact that this is one of the aspects of life not susceptible of satisfactory treatment in accounts” (National Income and Social Accounting, London, 1954, p. 214).


Page 186.


See the balance sheet of the Staff Retirement Fund, in International Monetary Fund, Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1959 (Washington, 1959), p. 215.


E.g., the table, “Activos Líquidos de Empresas y Particulares,” in the annual reports of the Bank of Mexico.


E.g., the table, “Capital Account of the Personal Sector,” in Central Statistical Office, National Income and Expenditure (London, annually).


The difference between the significance of fixed assets to financial businesses and to other businesses is reflected in the different accounting conventions normally used by the two groups. Fixed assets are of no significance to most financial businesses, and their acquisition is usually written off to current expenditure. Fixed assets are significant to other businesses, and the depreciation formulas they use lead to write-offs extending over a considerable number of years.


This method of recording was first used by B. Korn, C. A. Oomens, and H. Rijken van Olst, of the Netherlands Central Bureau of Statistics, in the discussion of “Het verband tussen de nationale balans en het stelsel der nationale jaarrekeningen,” Statistiche en Econometrische Onderzoekingen, Third Quarter 1950.


The French Ministry of Finance, in its “Rapport sur les comptes de la Nation” (published in Statistiques et Etudes Financières), the Canadian national transactions accounts (Financing of Economic Activity in Canada, a study prepared for the Royal Commission on Canada’s Economic Prospects, Ottawa, 1959), and, presumably, the Norwegian accounts (see Statistisk Sentralbyrå, Kredittmarkedstatistikk, 1955) include financing but not balance sheet accounts in this form.


This is the form of the accounts for the Netherlands, Germany, Italy, and Sweden. It will be argued later in this paper that balance sheets of this form also provide an important source of statistical data for compiling the accounts of the private sectors.


This is one of the Federal Reserve Board’s arguments for the desirability of a complete set of flow-of-funds accounts separate from national income accounts (op. cit., p. 7).


See Central Statistical Office, National Income Statistics: Sources and Methods (London, 1956), p. 9.


See United Nations, op. ext., p. 13.


Page 191.


This is the method adopted by the French Ministry of Finance (op. cit.).


This is the principle on which the U.S. flow-of-funds accounts are constructed. It is also, in essence, the principle underlying the treatment of this problem in the Canadian national transactions accounts.


“Each economic unit regards the flow of liquid resources accruing to it as forming a single total for expenditure that is rationally allocated among different uses” (p. 170).


This argument is directed solely to the integration problem. Significant information on the operation of the economy, additional to that provided by a comparison of income and expenditure accounts with balance sheets, may be provided by subsectoring the income and expenditure accounts. It is difficult to see what purpose would be served by subsectoring the balance sheets.


I.e., excluding public corporations (op. cit., p. 11).


Insofar as the U.K. national income and expenditure accounts are sector accounts, they are, in fact, classified on these bases.


This is not the principle on which the U.S. flow-of-funds accounts are compiled (op. cit., pp. 15–16).


This sentence might well be classed as an understatement.


This generalization is rash; in Yugoslavia and other Eastern European countries, financial accounts are compiled by analyzing all transactions passing through the banking system, and balance sheets are compiled or estimated for practically all economic units.


International Financial Statistics contains life insurance statistics for 19 countries. Unfortunately, the data for many countries are in arrears.


However, see below for a comment on the presently available data of this type.


Board of Governors of the Federal Reserve System, Annual Reports.


International Financial Statistics is able to attempt a separation of monetary data relating to the business sector from those relating to the household sector only for Canada, the United States, and Yugoslavia. Fragmentary data are available for France and the Union of South Africa.


International Financial Statistics is able to present financial accounts of the government for only 30 countries, and in many of these, the data are deficient in many respects.


Argentina, Burma, Ceylon, Colombia, Costa Rica, the Dominican Republic, Ecuador, Greece, Guatemala, Honduras, Nicaragua, Paraguay, and Peru.


Brazil, Canada, Germany, India, Ireland, Italy, Japan, Korea, New Zealand, Pakistan, the Philippines, and the United Kingdom.