Introduction to Finance

DISCUSSION QUESTION 1
Are you concerned about the size of the national debt? Why, or why not?
7.3
Role and Major Sources of Savings 
Historical Sources 
As the size of U.S. businesses expanded, the importance of accumulating and converting large 
amounts of fi nancial capital to business use increased. The corporate form of organization 
provided a convenient and fl exible legal arrangement for bringing together available fi nancial 
capital. These advantages of the corporation over sole proprietorship, or private ownership, 
and partnership are described in Chapter 13.
Developments in public transportation were often too costly and speculative for private 
promoters to undertake. The magnitude of early canal, turnpike, and railroad construction was 
such that the government undertook much of the fi nancing of these projects. In fact, until the 
end of the nineteenth century, governmental units contributed more funding to these eff orts 
than did private interests. Since this government fi nancing was accomplished largely through 
bond issues rather than current revenues, the ultimate source of funds was the savings of indi-
viduals who bought the bonds.
federal statutory debt limits 
limits by Congress setting the 
maximum amount of national debt 
that can be outstanding
1
For statistics relating to the national debt, see, U.S. Department of the Treasury, http://www.treasurydirect.gov/.

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C H A PT E R 7 Savings and Investment Process
Foreign Sources of Savings 
Foreign investors purchased large amounts of the 
securities sold by government and private promoters to develop the United States. In par-
ticular, foreign capital played a decisive role in the development of the nation’s early trans-
portation system.
The huge role that foreign capital played in the economic development of the United 
States is found in the developing nations of today. These nations now face many of the 
fi nancial problems that the United States experienced during its early years. Private sav-
ings in many of these countries are negligible because almost all current income must be 
used for immediate consumption. Individual nations and such international organizations 
as the World Bank supply large amounts of capital to the developing nations of the world to 
increase their productive capacity.
The fl ow of development capital not only stimulates economic expansion in these coun-
tries but also makes their capital much more effi
cient. For example, speedier transportation 
reduces the amount of goods in transit, thus releasing working capital for other purposes. In due 
time, as internal capital formation increases, it is hoped that the need for foreign capital will be 
eliminated and that these countries can then enjoy an independent capital formation process.