Introduction to Finance

Domestic Supply Of Savings 
As capital formation began increasing at a faster and 
faster rate after the Civil War, the demand for funds also increased. Wealthy Americans and 
foreign investors could no longer provide funds at a rapid enough rate. Britain was investing 
heavily in India because of political commitments, and the other European countries were not 
large or wealthy enough to continue supplying funds in quantities adequate to sustain U.S. 
growth. The American family soon took over the function of providing savings for the capital 
formation process. Per capita income rose to a level at which American families could aff ord 
luxuries well beyond the subsistence level and they could also save part of what they had 
earned. Thus, the United States gradually developed to the stage where it could generate suffi
-
cient capital to fi nance its own expansion. Ultimately, the result was a change in the country’s 
status from a debtor nation to a creditor nation.
Creation of Savings
It is from individuals that most fi nancial intermediaries accumulate capital. Individuals, as a 
group, consistently represent a savings surplus economic unit. Corporations also represent an 
important source of savings. However, their large demand for real asset investments, as is also 
the case for unincorporated business fi rms, generally results in a net need for external funds. 
While fi nancial intermediaries can also save, their primary role in the U.S. fi nancial system is to 
aid the savings-investment process. A third potentially important savings sector is governments 
(federal, and state and local). However, the U.S. government, in particular, has operated as a sav-
ings defi cit unit in recent years due to budget defi cits. Thus, the ability to provide adequate funds 
to meet investment needs primarily depends on the savings of individuals and corporations.
Economic unit savings
occur when an economic unit’s income exceeds its expenses, 
taxes, and real asset investments. Savings are held in the form of cash and other fi nancial 
assets. A