MM—Past, Present, Future

One of the most productive days in my life was the day in 1956 when it was agreed that Merton Miller—then a shy and retiring young man (would you believe it!)—would sit in my graduate course in "Money and Macroeconomics" at Carnegie Institute of Technology. It was an exciting course with excellent students. It took a broad view of the subject. One issue that was covered was the cost of capital as a determinant of the rate of investment. I had been intrigued by the subject ever since attending a National Bureau conference on Business Finance at which I gave a (fairly conventional) paper (Modigliani and Ziman, 1952). But mostly I listened to a paper by David Durand (1952) in which the possibility that financial structure would not affect the market valuation or the cost of capital was suggested, only to be rejected as not relevant to the actual capital markets. In preparing my lecture dealing with the cost of capital, I was able to provide (for a world of no taxes) a sort of proof of Proposition I, based on arbitrage. I reported the result to my class the next day, adding that I didn't really believe my result and there probably was something wrong. But Miller was instantly captured by the result because, he said, he knew of a recent paper (Allen, 1954) which provided empirical support for the result, even though it lacked a convincing rationale. We thus formed,