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The Leveraging of Corporate America

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03/17/2014

A new NBER paper documents a strong, secular increase in US corporate borrowing during the Keynesian era.

Unregulated U.S. corporations dramatically increased their debt usage over the past century. Aggregate leverage – low and stable before 1945 – more than tripled between 1945 and 1970 from 11% to 35%, eventually reaching 47% by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes.

Not surprisingly, this change reflects government policy:

Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role.

Further evidence for the long-term lengthening of the economy's capital structure, not from technological improvement, but from the government's policy of always keeping interest rates below their market levels.

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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