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This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research
Volume Title: Financial Intermediaries in the American Economy Since1900
Volume Author/Editor: Raymond W. Goldsmith
Volume Publisher: Princeton University Press
Volume ISBN: 0-870-14101-5
Volume URL: http://www.nber.org/books/gold58-1
Publication Date: 1958
Chapter Title: The Role of Financial Intermediaries in Financing the MainInvestor Groups
Chapter Author: Raymond W. Goldsmith
Chapter URL: http://www.nber.org/chapters/c2585
Chapter pages in book: (p. 180 - 276)
CHAPTER VII
THE ROLE OF FINANCIAL INTERMEDIARIES INFINANCING THE MAIN INVESTOR GROUPS
1. Purpose and ScopeThe purpose of this chapter is to investigate the contribution madeby financial intermediaries to financing the main sectors of theeconomy. This will be done primarily by measuring the propor-tion of funds supplied by financial intermediaries to aggregate andto external financing for the several sectors during seven periodsmarked by the benchmark dates 1900, 1912, 1922, 1929, 1933, 1939,1945, and 1949, distinguishing between the main forms of financing,particularly between short- and long-term and between debt andequity financing.
The importance of the subject is obvious. The supply of fundsthrough loans or through the purchase of securities is an essentialif not the primary economic function of financial intermediaries.The role of these institutions' funds in financing different sectorsof the economy can be understood only through comparison tothe volume of internal financing and of external financing fromother sources. The difficulties in the way of measuring the relationsare great, as section 3 will indicate, partly because in comparisonto the significance of the subject very little systematic and quantita-tive work has been done on a comprehensive scale. This chapteris based mainly on sector statements de-veloped by A Study of Saving . . * , and on balance sheets of fi-nancial intermediaries prepared in the present investigation.1 En
1 In the absence of better figures, the funds supplied by financial intermedi-aries are measured as the change in their holdings of claims against, and securi-ties of, the various groups.
Certain of the tables (Tables 48, 51, 53, 74, and 76) are based, for nonfarmhouseholds, agriculture, and federal, state, and local governments, entirely ondata from A Study of Saving . . . , the only source in which the necessary ma-terial is available in reasonably comparable form for the entire period from1901 to 1949, and are not perfectly cOmparable, as to estimated holdings offinancial institutions and changes in them, with tables developed specially inthis study. There are minor differences in, coverage (A Study of Savingincludes bank holding companies and mortgage companies but excludes financecompanies and factors); also, this study utilizes some additional information andanalyzes the balance sheets of some financial intermediaries in greater detail orintroduces a few refinements in estimation. It was not possible to substitutethese newer figures in the tables mentioned, since short of a complete reworkingof the basic material an all sources of funds, internal inconsistencies between
z8o
FINANCING THE MAIN INVESTOR GROUPSits basic statistics, therefore, it does not extend beyond 1949.2 Inview of the limitations encountered and of the broad scope of thefield covered, which made it impossible to exhaust all potentialsources of information and to explore all or even most of the im-portant questions involved, this chapter, notwithstanding itslength, must be regarded as introductory in character and tenta-tive in its conclusions. It focuses on the share of financial inter-mediaries in financing each of six main sectors of the Americaneconomy, leaving the task of combining the separate sources-and-uses-of-funds statements and of examining the role of financial in-termediaries in the national process of saving and investment tosection 1 of Chapter IX.
2. SummaryThe material presented in the chapter permits the following sum-mary of tentative findings on the participation of financial inter-mediaries in financing the main sectors of the economy:
a. The share of financial intermediaries in total gross financing(i.e. external financing plus internal retained saving plus capitalconsumption allowances) is, as Table 45 shows, relatively low forall groups except the federal government. For the period as awhole it averages approximately 5 per cent for nonfarm house-holds and agriculture, and between 12 and 15 per cent for unin-corporated and corporate business and state and local governments.The very high rate for the Treasury—more than twice its totalfinancing—reflects the large dissaving by the federal government,which necessitated borrowing well in excess of total net financing(borrowing minus dissaving).
data on funds supplied by financial intermediaries and those supplied by othersources would have resulted. The differences between the estimates of supplyof funds by financial intermediaries in this study and in A Study of Savingare, however, rather small, with a few exceptions, particularly agriculture duringthe period 1946 to 1949—too small to affect any substantive conclusions that mightbe drawn from the figures. The tables showing the proportion of different typesof assets held by financial intermediaries (Tables 49, 50, 52, 54, 55, 56, 58, 61, 75,77 and 78), on the other hand, use the data for holdings by financial interme-diaries developed in this study and, therefore, are entirely comparable with thefigures used in the other chapters. The question of tying in with balance sheetdata does not arise in the remaining tables.
2 Sources-and-uses.of-funds statements for 1950 to 1952, comparable to thosefrom A Study of Saving . . . , were available from other sources only for non-financial corporations, and could be prepared for state and local governments.The basic tables, therefore, extend through 1952 for only those two sectors, butend with 1949 in the case of the other four.
i8i
FINANCING THE MAIN INVESTOR GROUPSTABLE 45
Combined Share of Financial Intermediaries inFinancing of Main Sectors of the Economy
(per cent)
Sector
1901to
1912
1913to
1922
1923to
1929
1930to
1933
1934to
1939
1940to
1915
1946to
1919
1901to
1919
I. Total financing1. Nonfarm households 6 5 10 —17 0. 1 11 52. Agriculture 14 22 1 128a 3 —5 6 43. Unincorporated
business 28 16 10 133a —13 3 23 74. Nonfinancial
corporations 16 12 18 422a —3 3 19 125. State and local
governments 17 22 16 27 19 —5 20 156. Federal government 7 137 —12 219 94 278 149 214
11. Saving and externalfinancing
1. Nonfarm households 9 7 15 636a 0 1 15 82. Agriculture 24 43 2 28a 5 —6 8 73. Unincorporated
business 55 20 20 45a ...45 5 35 124. Nonfinancial
corporations 24 18 29 12a 34a 6 27 235. State and local
governments 22 28 20 65 37. —8 27 216. Federal government 8 145 —15 233 97 288 133 228
a Figures of limited significance as denominator is negative.Source: Tables 48, 51, 53, 74, and 76. Figures for unincorporated business are very rough esti-
mates derived from data given in A Study of Saving. . . , Vol. I, Tables U-3 to U-6, and Vol. III,Table W-29.
b. The ratios are substantially higher when the supply of fundsby financial intermediaries is compared with only the sum of ex-ternal financing and internal saving. This is for many purposes amore appropriate measure, since funds supplied by financial inter-mediaries are on a net basis and therefore should be compared withother net concepts such as saving rather than with a gross conceptsuch as total internal financing. The share of financial intermedi-aries then averages one-fifth and one-fourth for the period as awhole in the case of nonfinancial corporations and state and localgovernments, but remains slightly below one-tenth for households,and is not much higher for unincorporated business enterprises.
182
FiNANCING THE MAIN INVESTOR GROUPSFinancial intermediaries thus supplied only the minority of fundsfinancing asset expansion in all sectors except the federal govern-ment.
c. The share of financial intermediaries in total net financinghas fluctuated considerably during the last half century. It wasvery small during the later thirties and World War II in all groupsexcept the federal government.3 1n normal periods (1901 to 1929;1946 to 1949) the share of financial intermediaries was highest(apart from the federal government) for unincorporated business, ap-proximately onethird, and for corporations and state and localgovernments, about one-fourth. For all groups except the federalgovernment the share was lower from 1946 to 1949 than in thethree decades before the Great Depression, particularly in thecase of agriculture and unincorporated business enterprises.
d. The picture is entirely different when attention is limited, asin Table 46, to external financing. In this field financial intermedi-aries have been predominant. For the period as a 'whole they havecontributed between one-third and three-fourths of total externalfinancing of all main groups. The share was highest for state, local,and federal governments and nonfarm households, and lowest fornonfinancial corporations and unincorporated business. Theseratios give an indication of the importance of the growth of finan-cial intermediaries and of the character of their investment policiesfor financing different sectors of the economy.
e. There has been a tendency, though far from regular, for theshare of financial intermediaries in external financing to increaseduring the last half century. The ratios for 1946 to 1949 are some-what higher than those for the three decades before the GreatDepression.4 For corporations, for instance, the share amounted tomore than one-half in 1946-1949 against not much over one-thirdbefore 1930; for state and local governments, and the federal gov-ernment, to three-fourths against less than one-half and approxi-mately one-fourth respectively. We shall have to wait for figurescovering a longer period after World War II before we can be rea-sonably certain that this increase in the share of financial inter-mediaries in external financing constitutes a significant structuralchange.
8 The very high shares shown in Table 45 for the Great Depression reflecta more than proportional reduction of the funds supplied by financial inter-mediaries during the period when total net financing was negative, rather thana supply of funds in excess of total positive net financing (as for the federalgovernment during most periods).
4 The high values for the period 1930-1933 again reflect more than propor-tionate reduction in funds supplied by financial intermediaries.
183
FINANCING THE MAiN INVESTOR GROUPSTABLE 46
Combined Share of Financial Intermediaries inExternal Financing of Main Sectors of the Economy
(per cent)
.
Sector
1901to
1912
1913to
1922
1923to
1929
1930to
1933
1934to
1939
1940to
1915
1946to
1949
1901to
1919
1. Total external financing1. Nonfarm households 70 48 57 74 1 69 68 562. Agriculture 43 46 —15 56 —92 74 48 443. Unincorporated
business 167 99 29 —71 106 128 136 394. Nonfinancial .
corporations 36 30 40 56 —122 16 53 375. State and local .
governments 43 43 51 67 878 28 74 746. Federal government 16 32 4 102 62 64 73 63
11. Short-term externalfinancinga
1. Nonfarm households 59 37 64 51 —25 67 29 862. Agriculture 51 46 42 55 41 —41 54 513. Unincorporated
business 274 177 9 —60 83 108 356 464. Nonfinancial
corporations 69 35 22 43 —335 16 19 19
III. Long-term externalfinancinga
1. Nonfarm households 81 59 53 129 317 73 90 702. Agriculture 58 50 —43 56 —29 103 50 693. Unincorporated
business 79 41 34 1438 153 66 52 314. Nonfinancial
corporations 29 26 42 26 —68 0 69 44
a Figure for share of financial intermediaries in short- and long-term financing of state, local,and federal governments are not given as it was not possible to segregate holdings of Treasurycurrency and other short-term government obligations in the asset statements of financialintermediaries.
Source: Same as Table 45.
f. The share of financial intermediaries is much higher for mostsectors in long-term than in short-term For the period
Unincorporated and nonfinancial corporate businesses are exceptions; theirshare is higher for short- than for long-term financing.
184
FINANCING THE MAIN INVESTOR GROUPSas a whole it averages at least 70 per cent of long-term financing forall groups except unincorporated and corporate businesses, forwhich it is slightly below one-half; whereas for short-term financ-ing it is not in excess of one-half. The differences are more pro.nounced after World War II than before 1930, a developmentwhich is partly attributable to the increasing of accruedtaxes which reduces the share of financial intermediaries in short-term financing. The high, increasing, and after World War II pre-dominant, share of financial intermediaries in the long-term ex-ternal financing of all major sectors of the economy, particularlyin their long-term debt financing, is possibly the most interestingfinding of this chapter.
3. Problems of MeasurementThe contribution of financial intermediaries to the financing ofthe other groups in the economy6 consists in supplying investorswith funds, i.e. immediately effective purchasing power in the formof money. Funds may be made available as a loan involving repay-ment at a fixed amount (generally at or very close to the amountloaned), usually at fixed dates which may vary all the way from afew days to a century or more, and calling for payment of interestat rates stipulated in advance; or in equity form, i.e. as a rule with-out obligation of repayment and without payment of a stipulatedrate of hire.1
This supply of funds does not, of course, exhaust the contribu-tion which financial intermediaries make to the financing of in-vestors, if that word is understood in the wider sense of financialmanagement. In addition to supplying funds directly, financial in-termediaries often assist investors in obtaining funds from othersuppliers, especially by means of sales of securities through theinvestment banking machinery; in starting operations; in the man-agement of their own funds; and in many other ways, e.g. by in-suring them against certain risks. But the direct supply of fundsis probably the most important contribution which financialintermediaries make to the financing of the economy; it is alsothe only field in which their contribution can be measured inquantitative terms and compared to that of other groups.
The measurement of funds supplied by financial intermediariesgroups will be designated as "investors" because it is they who
are responsible for practically all investment in the sense of capital formation.I Preferred stock, particularly of the cumulative type, Constitutes in most
respects an actual even if not a legal hybrid.185
FINANCING THE MAIN INVESTOR GROUPSand comparison of them with total financing and with the fundsprovided internally or by other suppliers, if it is to be done ade-quately, calls for a rather detailed statement of sources and usesof funds of the various investor groups.8 The outline of such astatement, adapted to the specific requirement of this study, isshown in Table 47.°
TABLE 47Main Items in Uses-and-Sources-of-Funds StatementSegregating Relations with Financial Intermediaries
I. Expenditure on reproducible new 8. Retained earningsdurable. tangible assets 9. Capital consumption allowances
2. Cost of purchase of old durable tangi- 10. Proceeds from sale of old durableble assets tangible assetsa. From financial intermediaries a. To financial intermediariesb. From others b. To others
3. Cost of purchase of new intangible 11. Proceeds from sale of new intangibleassets assetsa. From financial intermediaries a. To financial intermediariesb. From others b. To others
4. Cost of purchase of old intangible 12. Proceeds from sale of old intangibleassetsa assetsba. From financial intermediaries a. To financial intermediariesb. From others b. To others
5. Accrued claims 13. Accrued liabilities
6. Net increase in cash 14. Net decrease in cash7. Total uses 15. Total sources
a. Gross (1+2+3+4+5+6) a. Gross (8+9+10+11-1-12+14)b. Net (1+2—10+3—11+4--. b.Net(8+9+l0—2+11—
12+5—13+6—14) 3+12—4+13—5+14—6)
a Includes acquisition by holders as well as retirement by issuer or debtor which should beseparated.
b Includes sale by holders as well as repurchase or redemption by issuer or repayment bydebtor.
8 As the sources.and.uses-of.funds statement is a rather new accounting tool
which has been developed essentially during the last ten to twenty years, theliterature, particularly that combining economic and, accounting considera-tions, is rather scarce. The most detailed technical treatment will be found intwo unpublished documents: "Fund Flow Analysis in Economic Research," byH. H. Greenbaum, doctoral dissertation, Columbia University, 1952; and "FundFlow Analysis: Industrial Demands upon the Money Market," by W. F. Payne,mimeo., 1952, National Bureau of Economic Research.
9 The form of the statement shown in Table 47 should be regarded as illus-trative only. In actual application the nature of the available data would, ofcourse, call for several changes and simplifications. For example, some items(such as items in process of collection) might well be treated on a net basis—like cash in Table 47—rather than on a gross basis.
i86
FINANCING THE MAIN INVESTOR GROUPSIf such statements were available for the main groups of financial
intermediaries and of investors, and if they were sufficiently de-tailed (in particular subdividing items 3, 4, 11 and 12 of Table 47by distinguishing the major forms of intangible assets and of lia-bilities), it would be easy to determine the supply of funds byintermediaries to each investor group, either on a gross or on anet basis, and to compare it with supplies of funds from othersand with internal funds (items 8 and 9). Actually, of course, suchstatements are virtually unavailable. Worse still, they cannot bederived from balance sheets alone, or even from a combination ofbalance sheets and income accounts, even if both were available inmore detail than they usually are. Actual calculations of the shareof funds supplied by financial intermediaries in the total availableto the different investor groups must therefore be makeshifts, usingand so modifying the available data that they approximate as faras possible the correct figures that would be shown by a detailedsources-and-uses-of-funds statement.'°
With few exceptions estimates of the supply of funds by financialintermediaries to investors have to rely on combined balance sheetsand income accounts of groups of intermediaries and investors ifcomprehensive figures are wanted. The three main drawbacks ofthese sources are:
a. Lack of sufficient detail with regard to types of assets and,still more, with respect to the identification of the groups to whichthe funds are made available by the different financial intermedi-aries. Even in the case of loans made directly by financial inter-mediaries to investors, the nature of the borrower's operations isseldom indicated. Where funds are made available in the form ofpurchases of securities the situation is better in that the characterof the issuer is usually indicated, at least to the extent of distinguish-ing the half dozen major investor groups; but worse in that thererarely is any indication whether the securities were acquired inconnection with a new issue or whether they represent open marketpurchases of outstanding securities.h1 Similarly, the balance sheets
The annual reports of corporations filed with the Securities and ExchangeCommission are one of the few generally available sources giving practicallyall the information necessary to devise a sources-and-uses-of-funds statement ona net basis. They have been tabulated only for the years 1935 to 1939 (cf.Statistics of American Listed Corporations, 1941, Part 2, particularly additionsand charges to surplus in Tables 1, 2 and 4).
Some of the information could be obtained for certain groups of intermedi-aries by a very laborious analysis of portfolio lists for successive balance sheetdates. The point is that the available combined balance sheets or other data
187
FINANCING THE MAIN INVESTOR GROUPSof the groups receiving funds from financial intermediaries oftenfail to separate their liabilities to such intermediaries from thoseto other creditors, and practically never indicate either the originalpurchasers or the present holders of securities issued, which aregenerally unknown to the issuer.
b. Lack of correspondence between classifications, both by typeof assets and by investor groups, and between valuations used inpublished statements of financial intermediaries and in those offund recipients. This makes it impossible, except in a few cases, tocheck the amount of loans to investor group A (or of securities ofA) reported in the balance sheets of financial intermediaries groupB against the liabilities to B reported in A's balance sheet.
c. Necessity of using (1) differences in the value of holdings ofloans and securities (or of liabilities and securities outstanding) be-tween balance sheet dates in lieu of (2) net flow of funds arisingfrom the making and repayment of loans, the purchase and saleof other issuers' securities, and the issuance and retirement of ownsecurities. This is probably the most serious single technical obstacleto the accurate measurement of the share of financial intermediariesin financing the different sectors of the economy, particularly inrecent years when the balance sheet data available have becomemore abundant, more reliable and more detailed.
The nature of the difficulty will be understood if it is recalledthat changes in the reported value of holdings (or outstandings)between two balance sheet dates for every type of obligation orsecurity distinguished in the balance sheet (H1 — H0) are the resultof three separate factors:
1. The difference between cost of acquisition of securities, ormaking of loans, and proceeds from sale of securities, or collectionsof claims, (P — S). This difference represents a net money-flow, bothcomponent flows occurring between the two balance sheet dates.
2. The difference between realized gains and losses on the saleof securities (G — L). This again is a money-flow, but one in whichin many instances one of the two components—generally the pur-chase of the security (or the making of the loan)—antedates theopening balance sheet date.
3. The difference between write-ups and write-downs (U — D),i.e. essentially unrealized gains and losses. This is a purely account-ing magnitude without corresponding money-flows.
do not include information of this type and do not provide easy means ofobtaining it.
z88
FiNANCING THE MAIN INVESTOR GROUPSWe thus have:
(H1 — H0) = (P — S) + (G — L) + (U — D)
where each of the four brackets may be positive or negative. Foran analysis in which exact figures are needed, it is not permissibleto assume that the sum of realized capital gains and losses and ofwrite-ups and write-downs is zero for the period under investigation,so that the change in reported holdings (H1 — H0) can be treatedas equal to the difference between acquisitions and dispositions(P — S), which in turn can be taken as an adequate measure ofthe net supply of funds of one sector to another. Yet it is verydifficult, and for many groups of financial intermediaries and ofinvestors and for many periods almost impossible, to obtain com-prehensive and reliable information on the amounts of net realizedcapital gains and of net valuation Even where data onrealized and unrealized capital gains and losses are available theyare, as a rule, given only in one total for all assets, or at best for allsecurities or all loans together; and do not provide similar informa-tion for individual types of assets, such as would be necessary tocalculate net supplies of funds for these assets from the data onchanges in reported holdings.
Since satisfactory estimates by which to transform the availabledata on changes in reported holdings into the desired figures for netacquisitions or dispositions of securities and claims by the differentgroups of financial intermediaries and investors are not available,and in view of the very large amount of effort needed to make evenrough estimates with wide margins of error, this study adheres,though regretfully, to the still rougher though common approachof discussing the flow of funds on the basis of changes in reportedholdings.
That procedure may possibly be condoned if account is taken inthe analysis and interpretation of the figures of the differences be-tween changes in reported holdings and net flows of funds, if notin explicit and quantitative terms at least implicitly. These dif-ferences are obviously of very different importance for various typesof assets and liabilities, for different groups of financial intermedi-aries, and for different periods. Their size generally varies in pro-portion to asset price fluctuations. It is therefore smallest for short-
12 An attempt was made in A Study of Saving . . . , particularly Volume II.Chapter VIII, to transform the data on changes in holdings into estimates ofnet acquisitions and dispositions with the help of scattered data and heroicassumptions which are open to considerable margins of error. Even then onlyaggregates for broad groups of assets could be obtained.
189
FINANCING THE MAIN INVESTOR GROUPSterm obligations and largest for common stocks; and consequentlyrelatively larger for institutions which keep a substantial propor-tion of their assets in stocks and corporate long-term bonds, and forperiods in which asset prices have fluctuated violently. The lastdistinction is probably the most important one from a practicalpoint of view, as only a few groups of financial intermediaries holda large proportion of their assets in forms regularly subject to sub-stantial price fluctuations. It means that all inferences on supplyof funds and shares in financing drawn, as they must be, fromchanges in reported holdings, have to be treated with particularcircumspection for the period between the benchmarks of 1929 and1933, and with almost equal care for the periods between the 1922and 1929 and the 1933 and 1939 benchmarks. For these periods,and particularly for the years of the Great Depression, recourse toestimates, even if very rough ones, of valuation changes which haveentered into the differences in reported holdings is practically un-avoidable.
4. Non farm HouseholdsNonfarm households make use of external financing for essentiallythree purposes. The first is the acquisition of durable and semi-durable assets, the most important of which are houses for ownoccupancy, residential properties for rent, and durable and semi-durable goods for household or professional use.13 The second mainpurpose is the acquisition or carrying of intangible assets, primarilysecurities. Financing of current expenditures, which is the thirdmain purpose, may be occasioned by a reduction of income belowthe accustomed standard of consumption; by unexpected expendi-tures, mostly those caused by illness or death; by bulky nonrepeatingexpenditures such as cost of children's higher education; or simplyby the desire to enjoy a standard of living in excess of currentincome, perhaps in anticipation of future increases in income orgifts and inheritances. Tax accruals, i.e. the amount of taxes dueon income earned during a period but payable after its end, havebeen included in the statistics of nonfarm household liabilities inorder to conform to the principles of accounting, although theydiffer from other liabilities in not resulting from a flow of fundsand, hence, for many purposes may be excluded from the considera-tion of nonfarm household financing.
18 In the statistical data used, all private noncorporate investment in nonfarmresidential real estate has been attributed to households, and all investment innon-farm nonresidential property to unincorporated business enterprises.
190
FINANCING THE MAIN INVESTOR GROUPSIt is not always possible to allocate observed external financing
for nonfarm households among the different purposes, particularlybecause the proceeds of financing ostensibly undertaken for onepurpose may actually be used for others. Furthermore, the availablestatistics ignore financing of one household by another, and gen-erally do not permit one to distinguish between financing forhousehold and for professional use. We shall nevertheless followbroadly the classification of consumer financing by purpose as out-lined above, with awareness both of fuzziness in some of the theo-retical lines of demarcation and of practical difficulties in findingthe statistical data which fit the theoretical concepts.
a. SHARE IN TOTAL FINANCING
From 1901 through 1949 net external financing of nonfarm house-holds is estimated at $70 billion, i.e. borrowing of nonfarm house-holds during the period exceeded repayments by that amount. Al-though large in absolute terms, this is a small figure compared tothe combined income account or the balance sheet of all nonfarmhouseholds. It is equal to less than 10 per cent of total net worth ofnonfarm households at the end of 1949, or to the increase in networth since 1900; to less than one-sixth of their during thefirst half of this century; to about one-sixth of their expenditureson residential real estate and consumer durables, though to nearlyone-half of net expenditures on such assets, calculating deprecia-tion allowances on original cost to scarcely 2.5 per cent oftotal income; and to just about 3 per cent of total consumptionexpenditures.
So far as the statistics go, financial intermediaries have providedbetween one-half and three-quarters of total external financing ofnonfarm households over the last half century.15 If funds raisedfrom other households and from other sources about which noinformation is on record could be included among funds supplied,
14 The last two ratios are high in that they do not allow for that part oftotal external financing incurred for other purposes, but low in that they donot take account of rises in asset prices, particularly important in real estatefinancing.
15 This ratio, as all figures utilized in this section, refers only to direct fi-nancing of nonfarm households by financial intermediaries; that is, to loansmade directly by financial intermediaries to nonfarm households and to obli-gations of nonfarm households acquired from original creditors and held inthe portfolios of financial intermediaries. The ratio would, of course, be higherif advances made by financial intermediaries, primarily commercial banks, toconsumer finance organizations and to retailers (to enable the latter to extendcredit to nonfarm households) were included.
'9'
FINANCING THE MAIN INVESTOR GROUPSthe share of intermediaries would be somewhat lower. Even in thatcase, most likely it would still be over one-half for the period asa whole. Moreover, the figures used (see Table 48) treat tax ac-cruals as a part of external financing of nonfarm households; undera different treatment the share of financial intermediaries in acomprehensive total of external financing of nonfarm householdswould be higher.
Approximately three-fifths of recorded external financing fornonfarm households in the period 1901 through 1949 took theform of mortgages on residential real estate. The proceeds of suchmortgages are sometimes used for other purposes than to acquire orimprove residential real estate.'° On the other hand, some externalfunds raised in other forms, particularly by borrowing on securitiesor on unsecured personal notes, are actually used for financingresidential properties. Hence the true share of residential realestate financing within total external financing of nonfarm house-holds is probably not far from the indicated ratio of three-fifths.There is no question that the acquisition, holding, and improve-ment of residential real estate has been, by far the most importantsingle purpose for which nonfarm households require externalfinancing.
Tax accruals have accounted for one-tenth of the statistical totalof external financing by nonfarm households; and other purposes,much more difficult to disentangle statistically, for about 30 percent. Among them the acquisition of consumer durables appears tohave called for the relatively largest amounts of external funds, inthe period as a whole probably for as much as 25 per cent of totalexternal financing; funds used for current consumption seem tocome next, with borrowing for the acquisition or carrying of securi-ties of minor importance except during a few short
If attention is limited to total external financing and to the16 The treatment of loans made on vacant lots, in the statistics, is difficult.
The amount of such loans, however, probably was not so large (cf. A Study ofSaving . . . , Vol. II, Chapter IX, section 2.i) nor the share of financial inter-mediaries in them so different from that in all consumer financing, as to makethe uncertainty a serious matter.
17 In evaluating the relatively high shares of borrowing on securities in tOtalexternal financing in the late twenties and during World War II shown inTable 48, it should be remembered that the figures for nonfarm householdsinclude unincorporated brokers and dealers in securities, which could not besegregated comprehensively and for the entire period. It is known, however,that most of the borrowing on securities during World War II was attributableto unincorporated brokers and dealers and was connected with their participationin Treasury financing.
192
z C) 0
TAB
LE 4
8So
urce
s of F
unds
of N
onfa
rm H
ouse
hold
s and
the
Am
ount
and
Sha
re S
uppl
ied
byFi
nanc
ial I
nter
med
iarie
s
Source
1901
to
1912
1913
to
1922
1923
1930
1934
to
to
to
1929
1933
1939
1940
to
1945
1946
to
1949
Total
A inoun
t (bi
llion
s of d
olla
rs)
1.To
tal s
ourc
es o
f fun
ds55
.711
9.4
146.
633
.267
.319
3.7
177.
979
3.9
2.Su
pplie
d by
inte
rnal
sour
ces
51.1
107.
712
0.4
41.0
62.6
190.
814
9.9
723.
5a.
Net
savi
ng32
.174
.471
.16.
916
.914
0.5
102.
244
4.0
b. C
apita
l con
sum
ptio
n al
low
ance
s19
.133
.249
.334
.145
.750
.347
.727
9.5
3.Su
pplie
d by
ext
erna
l sou
rces
4.6
11.8
26.2
—7.
84.
72.
928
.170
.4a.
Not
es a
nd a
ccou
nts p
ayab
le2.
34.
18.
8—
7.3
2.4
0.5
9.3
20.1
b. T
ax a
ccru
als
0.1
1.7
1.2
0.1
0.6
2.8
0.6
7.2
c. M
ortg
ages
2.2
5.9
15.9
—2.
30.
41.
018
.341
.3d.
Oth
er..
..0.
31.
71.
3—
1.5
—0.
11.
8
4.Su
pplie
d by
fina
ncia
l int
erm
edia
ries
(cha
nge
in h
oldi
ngs)
3.2
5.7
15.0
—5.
80.
12.
019
.239
.3a.
Com
mer
cial
ban
k lo
ans,
excl
. mor
tgag
es1.
01.
65.
0—
5.2
0.7
2.5
2.2
7.9
b. O
ther
)rec
eiva
bleS
0.5
0.6
1.6
2.4
—1.
8—
1.3
0.6
2.5
c. M
ortg
ages
1.7
3.5
8.4
—3.
01.
10.
816
.428
.9Share (per cent)
5.Sh
are
of fi
nanc
ing
by in
term
edia
ries
a. T
otal
fina
ncin
g5.
74.
810
.2—
17.4
0.1
1.0
10.8
4.9
b. E
xter
nal f
inan
cing
md.
tax
accr
uals
69.5
48.3
57.1
74.2
81.
169
.068
.555
.8c.
Ext
erna
l fin
anci
ng e
xcl.
tax
accr
uals
71.6
56.7
59.9
1.2
3177
.4b
70.0
62.2
d. S
hort-
term
fina
ncin
g59
.237
.463
.651
.Oa
—24
.766
.629
.235
.8e.
Lon
g.te
rm fi
nanc
ing
80.9
59.1
52.8
129.
la31
7.2c
73.2
89.5
69.9
f. Lo
an fi
nanc
ing
69.5
48.3
57.1
74.2
a1.
169
.068
.555
.8
a F
igur
esof
lim
ited
sign
ifica
nce
as d
cnom
inat
or is
neg
ativ
e.b
Ver
y hi
gh b
ut w
ithou
t eco
nom
ic m
eani
ng b
ecau
se o
f the
ext
rem
ely
smal
l abs
olut
e si
ze o
f ext
erna
l fin
anci
ng e
xclu
ding
tax
accr
uals
.Fi
gure
of l
imite
d si
gnifi
canc
e as
den
omin
ator
is o
f sm
all a
bsol
ute
size
.So
urce
: A S
tudy
of S
avin
g .
..
, Vol
.I,
Tabl
e T-
6 an
d ot
her s
uppl
emen
tary
tabl
es.
FINANCING THE MAIN INVESTOR GROUPSfour- to twelve-year periods between benchmark dates, the varia-dons in the share of financial intermediaries are not very pro-nounced, except in the thirties. The share averaged slightly overthree-fifths between 1900 and 1933 (with a range between 45 and75 per cent) and returned to that level after the Great Depression.-When tax accruals are excluded from external financing the move-ments are less marked; the range is from 55 to 75 per cent. Tounderstand these fluctuations and their differences it is necessaryto look separately at the share of financial intermediaries in themain components of external financing of nonfarm households,primarily mortgages on residential real estate and short-term con-sumer loans.
b. SHARE IN HOME FINANCING
The share of all financial intermediaries in financing the acquisi-tion and operation of urban residential real estate owned by non-farm householdsl8 has been remarkably stable over the past fiftyyears, but the distribution among different types of financial inter-mediaries has varied greatly. These variations have resulted partlyfrom financial intermediaries' differing rates of asset growth andpartly from their differing trends in the proportion of assets heldin the form of mortgages on residential real estate.
The share of financial intermediaries in financing residentialreal estate rose considerably between the benchmarks of 1900 and1912, 1933 and 1939, and 1945 and 1949. It declined slightly be-tween 1912 and 1933, and during World War II. As a result, allthe net increase in the share of financing urban real estate by finan-cial intermediaries observable during the first half of this centuryoccurred after 1933. Even for the entire period including the furtherrise between 1949 and 1952, the increase in financial intermediaries'holdings of nonfarm residential mortgages was not spectacular,though certainly significant—from 67 per cent in 1900 to 90 percent in The smallness of the increase, however, is explained
18 The figures in Table 49 relate the holdings of all mortgages on residentialproperties to total nonfarm mortgages outstanding; hence in this discussion resi-dential nonfarm debt includes the relatively small proportion of debt on prop.erties owned by corporations.
Here, as in similar cases, a caution is necessary against using the differencebetween the aggregate share of holdings by financial intermediaries (as shownin the tables) and 100 per cent as a close measure of the share of holdings bynonfinancial owners, i.e. primarily individuals. When the calculated aggregateshare of holdings by financial intermediaries approaches 100 per cent, evensmall differences in concepts and coverage and small errors in estimation may
'94
TAB
LE 4
9Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Tota
l Non
farm
Res
iden
tial
(per
cen
t)M
ortg
ages
Out
stan
ding
Inte
rmed
iarie
s19
0019
1219
2219
2919
3319
3919
4519
4919
52
1. 2. 3. 4. 5.
Com
mer
cial
ban
ksM
utua
l sav
ings
ban
ksPr
ivat
e lif
e in
sura
nce
com
pani
esFr
ater
nal i
nsur
ance
org
aniz
atio
nsG
over
nmen
t tru
st fu
nds
7.0
22.6 6.3 0 ..
12.8
27.0
9.6
0.1 0
12.3
20.4 7.1
0.2 0
15.9
10.0 0.3
0.1
11.3
19.0
11.5 0.4
0.1
12.0
17.0
11.2 0.3
0.3
13.8
13.7
15.0 0.4
0.5
18.8
11.7
18.3 0.4
0.5
18.1
14.6
22.7 0.4
0.6
6. 7. 8. 9. 10.
Fire
and
mar
ine
insu
ranc
e co
mpa
nies
Cas
ualty
and
mis
c. in
sura
nce
com
pani
esSa
ving
s ban
k lif
e in
sura
nce
depa
rtmen
tsSa
ving
s and
loan
ass
ocia
tions
Cre
dit u
nion
s
0.9
0.1 ..
12.7 ..
0.7
0.1 0
17.4 ..
0.4
0.2 0
22.3 0
0.2
0.2 0
24.1 0
0.2
0.2 0
20.3 0
0.1 0.1 0
17.1 0.1
0.1
0.1 0
21.8 0.1
0.1
0.1
0.1
25.3 0.2
0.1 0
0.1
27.5 0.2
11.
12.
13.
Inve
stm
ent c
ompa
nies
Gov
ernm
ent l
endi
ng in
stitu
tions
Pers
onal
trus
t dep
artm
ents
Tota
l hol
ding
s by
inte
rmed
iarie
s
.. —
17.8
67.4
.. ..13
.1
80.9
0 ..10
.0
72.9
0.1 ..
6.5
69.3
0.1 ..
6.3
69.3
0.3
10.4 6.6
75.6
0.4
3.6
3.6
73.2
0.6
2.7
1.5
80.1
0.5 39 1.1
89.8
Tota
l out
stan
ding
(bill
ions
)$2
.9$4
.9$1
1.1
$27.
0$2
2.7
$24.
6$4
5.9
$66.
7
C., 0
Sour
ce: M
ortg
age
hold
ings
of f
inan
cial
inte
rmed
iarie
s fro
m ta
bles
in A
ppen
dix
A; o
utst
andi
ngs f
rom
Tab
le G
-1 (A
ppen
dix
Supp
lem
ent).
FINANCING THE MAIN INVESTOR GROUPSby the decline in the share of urban residential mortgages held bypersonal trust funds administered by banks and trust companies,which in some respects are closer to individual than to institutionalholdings. Without them the share of financial intermediaries inurban residential mortgages outstanding has risen markedly, from50 per cent in 1900 to 89 per cent in 1952. Thus, financial inter-mediaries have always supplied the bulk of external financing re-quired for nonfarm residential real estate.2°
Although the share of all financial intermediaries taken togetherhas shown a rising trend, several types of financial intermediariessupplied a considerably smaller proportion of residential realestate financing in 1952 than they did half a century earlier. Thechief example is personal trust funds administered by banks andtrust companies, the holdings of which are estimated, necessarilyin very rough terms, to have declined almost continuously from 18per cent of nonfarm residential mortgages outstanding in 1900 to7 per cent in 1929 and to only 1 per cent in 1952. This was the resultexclusively of a decline in the proportion of personal trust depart.ments' assets taking the form of nonfarm residential mortgages—overone-sixth in 1900; 6 per cent in 1929; but only 1 per cent in 1952.21 Asubstantial decline in the relative contribution to financing resi-
lead to a serious under- or overstatement of the true share of other holders. Theestimates of amounts outstanding, for instance, are usually expressed in termsof par or face value of the loans or securities. The data on holdings by financialintermediaries, usually taken from their balance sheets, often use a differentbasis of valuation, particularly in the case of securities, viz, original cost,sometimes modified by amortization of premium above par or other adjust.ments. These and similar discrepancies may easily amount to several per centof total holdings and outstandings, entirely disregarding errors in estimation ofeither outstandings or holdings. While such errors are not likely to lead to adistortion of the trend of the share of financial intermediaries' holdings, orto a serious misstatement of their level, they may sometimes give a wrongimpression of the share of noninstitutional holders when that share has be-come very small.
20 The statistics may ignore some junior mortgages or classify them withother liabilities. If so, the level of financial intermediaries' share in financingnonfarm residential real estate would be slightly lower than our figures indicate.What is more significant, the increase in the share of financial intermediarieswould be more pronounced, since junior liens were substantially more importantup to 1929 than after. the Great Depression, which wiped out many of them.
21 That nonfarm residential mortgages held by personal trust departmentsconstituted almost the same share in all such mortgages outstanding and inthe total assets of personal trust departments is purely a coincidence, due to thefact that the asset and mortgage totals had almost exactly the same absolutevalues in each of the benchmark years mentioned,
196
FiNANCING THE MAIN INVESTOR GROUPSdential mortgages is observable also in the case of mutual savingsbanks and of property insurance companies. Mutual savings banks,the more important lender of the two, in 1952 accounted for only15 per cent of all urban residential mortgages outstanding against16 per cent in 1929 and 23 per cent in 1900. These declines, how-ever, were more than offset by increases in the shares of commercialbanks, savings and loan associations and life insurance companies.At the turn of the century the three groups combined held slightlyover one-fourth of all nonfarm residential mortgages. By 1929 theirshare had risen to 46 per cent. By 1952 it reached 68 per cent.22 Thiswas due primarily to the relatively rapid growth of their total assets.In the case of commercial banks, the increase in the share of totalassets directed towards financing residential real estate (from 2per cent in 1900 to approximately 5 per cent in 1929 and 1952)was an important contributing factor.
Government lending institutions have never financed a substan-tial part of urban residential mortgage debt directly. Even in 1939their share in total mortgages outstanding was only 10 per cent,a large part of the holdings resulting from taking distressed mort-gages over from institutional and individual holders. By 1952 theshare of government lending institutions was down to 4 per centsince all of the portfolios acquired in the thirties held by theHome Owners' Loan Corporation had been liquidated. These fig-ures, however, do not give a full indication of the importance ofthe federal government in financing nonfarm residential real estate.From the mid-thirties on an increasing proportion of urban resi-dential mortgages, and particularly of those held by financial in-stitutions, have been insured by the federal government. Thisguarantee, not generally available to noninstitutional lenders, hasbeen a potent factor in increasing the share of financial intermedi-aries in financing residential real estate.23 By the end of 1952 finan-cial intermediaries (excluding personal trust departments and afew smaller groups) held approximately $25 billion of federallyguaranteed home mortgages. These guaranteed holdings constitutedwell over one-third of the total home mortgage debt outstanding,
22 If personal trust funds administered by banks and trust companies areincluded, the level is higher, but the increase much less spectacular—from 44per cent in 1900 to 52 per cent in 1929 and 69 per cent in 1952.
28 For an extensive discussion of these guarantees see The Role of FederalCredit Aids in Private Residential Construction and Its Financing, by Leo Greb-icr, National Bureau of Economic Research, Occasional Paper 39, 1953, Chap.ter III.
'97
FINANCING THE MAIN iNVESTOR GROUPSand approximately two-fifths of all home mortgages held by finan-cial
At the end of the period the stage was therefore reached whereapproximately nine-tenths of the funds required by nonfarm house-holds to finance acquisition and holding of residential real estate—mostly their own homes—was provided by financial intermediaries,25and where a large part of the mortgages evidencing this financingwere guaranteed in one form or another by the federal government.
While federal participation in the risk of financing residentialreal estate, even if not in supplying substantial funds for it, is aninnovation, the high share of financial intermediaries in providingthis type of financing goes back at least to the turn of the century,but it has become more pronounced over the last fifty years, par-ticularly since the far-reaching reorganization of financing tech-niques and institutions in the thirties.2° One of the most importantreasons for the increasing share of residential real estate financingprovided by financial intermediaries has been the progress madein standardizing loan terms, valuation procedures, and credit sur-veillance techniques, all of which have made it easier for financialintermediaries to make a very large number of individually smallloans without prohibitive cost, and since the Great Depression with-out substantial losses, though aided in this respect by the strongupward trend in real estate values and federal credit insurance. Asecond and possibly equally important factor in increasing the pre-dominant position of financial intermediaries in residential real
24 The estimate of approximately $25 billion is based on the assumption thatvirtually all of the $11.8 billion of Federal Housing Administration guaranteedhome mortgages and of the $14.6 billion of Veterans' Administration guaranteedloans are held by financial intermediaries. (Figures of institutional holdings ofFederal Housing Administration loans are given in its Annual Report, 1952,Table 15; no similar breakdown exists for the Veterans' Administration loans.)Veterans' Administration guaranteed loans can be made by nonapproved lenders,e.g., individuals, while guarantees of the Federal Housing Administration arevirtually limited to loans originally made by financial institutions.
25 In comparing this proportion with the somewhat lower share of financialintermediaries in nonfarm mortgages made (see ibid., pp. 256-258), it shouldbe kept in mind that a substantial proportion of home mortgages in the port-folios of some financial intermediaries, particularly commercial banks and lifeinsurance companies, are originated through other lenders, particularly mort-gage banks and brokers, who in fact act as the agents of the ultimate providersof funds.
26 On changes in techniques of urban residential mortgage financing and theirsignificance see J. E. Morton's Urban Mortgage Lending: Comparative Marketsand Experience, Princeton University Press for the National Bureau of EconomicResearch, 1956, particularly Chapter 4; see also John Lintner's Mutual SavingsBanks in the Savings and Mortgage Markets, Harvard University, 1948, Part II.
198
FiNANCING THE MAIN INVESTOR GROUPSestate financing was the growing predilection of individual saversfor assets which can be liquidated at short notice without loss evenif chosen at a sacrifice in yield compared to more risky investments.27This tendency has led to a reduction of the share of noninstitu-tional (and particularly individual) lending on residential realestate, and has limited it largely to purchase money mortgages andjunior liens. A third powerful influence has already been alludedto, the limitation of the federal mortgage insurance to loans madeby institutions. Finally, relaxation of legal restriction on real estateloans, particularly for commercial banks, has provided anotherstimulus.
C. SHARE IN SHORT-TERM DEBT
Residential mortgage financing is a compact field. It operates withreasonably standardized forms of credit, and is illuminated by goodcomprehensive current statistics, at least since the thirties. None ofthese characteristics applies to the financing of nonfarm householdsby means other than home mortgages. Here we lack benchmarkinformation of a comprehensive and reliable character on the totalvolume of nonfarm households' debt and its distribution by lenders;and we possess practically no trustworthy statistics even for partsof the field for the period before 1929. Any statement about thisaspect of the financing of nonfarm households which is intendedto apply to the whole field—such as Table 50—must, therefore, betaken as approxirnative only, particularly for the first part of theperiod; and it is limited in essence to a rather narrow concept ofhousehold financing that excludes most intra-family and otherintra-individual financing, such as the charge accounts of neighbor-hood stores or landlords. These limitations necessarily lead to anoverstatement of the share of financial intermediaries in short-termhousehold financing, and probably also to an overstatement of theincrease in that share (or an understatement of the decrease) dur-ing the period. Notwithstanding these which are pres-ently unavoidable and not likely to be remedied soon if at all,the figures point to a few important changes over the last fifty yearsin the role of financial intermediaries in the short-term financingof households.
27 Urban residential first mortgages in 1949 still yielded on the average 4.5per cent, or nearly 2 per cent more (i.e. three-quarters more) than high-gradecorporate or United States government bonds, while the difference in the latetwenties had amounted to only something like 1.5 per cent (or not much overone-third) of the yield on high-grade bonds.
'99
TAB
LE 5
0Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Tota
l Non
-Rea
l-Est
ate
Deb
t of
Non
farm
Hou
seho
lds
(per
cen
t)
1. C
omm
erci
al b
anks
2. M
utua
l sav
ings
ban
ks3.
Priv
ate
life
insu
ranc
e co
mpa
nies
4. F
rate
rnal
insu
ranc
e or
gani
zatio
ns0
5.
Gov
ernm
ent t
rust
fund
s6.
Sav
ings
ban
k lif
e in
sura
nce
depa
rtmen
ts7.
Sav
ings
and
loan
ass
ocia
tions
8. C
redi
t uni
ons
9. In
vest
men
t com
pani
es10
. Sal
es fi
nanc
e co
mpa
nies
11. P
erso
nal f
inan
ce c
ompa
nies
Tota
l hol
ding
sTo
tal o
utst
andi
ng m
ci. t
ax a
ccru
als
(bill
ions
)
Incl
udin
g ta
x ac
crua
ls36
.234
.626
.280
.320
.51.
50.
90.
40.
30.
13.
410
.68.
68.
420
.40
0.1
0.2
0.1
0.3
0.7
8.8
00
00
1.5
0.8
0.9
1.2
0.9
Type
1900
1912
1922
1929
1933
1939
1915
1919
0
18.8
28.4
24.2
0.1
0.1
0.2
16.8
8.5
6.8
0.5
0.3
0.2
0.8
0.5
0.4
00
00.
30.
10.
50.
10.
10.
10.
80.
51.
50
00
0.1
00.
13.
42.
55.
71.
28.
20
1.4
1.7
2.9
2.2
3.6
42.6
47.0
36.3
45.9
55.5
$2.3
$4.9
$11.
8$2
5.5
$16.
8
46.2
42.0
45.7
$17.
5$2
0.4
$29.
6
0
0
C) C)
1900
1912
1922
1929
1933
1939
1945
1949
Excl
udin
g ta
xac
crua
ls1.
Com
mer
cial
ban
ks46
.339
.932
.835
.426
.424
.343
.832
.82.
Mut
ual s
avin
gs b
anks
1.9
1.0
0.5
0.5
0.2
0.1
0.2
0.2
3.Pr
ivat
e lif
e in
sura
nce
com
pani
es4.
312
.210
.89.
826
.322
.413
.19.
24.
Frat
erna
l ins
uran
ce o
rgan
izat
ions
0.1
0.1
0.2
0.2
0.3
0.6
0.5
0.3
5.G
over
nmen
t tru
st fu
nds
....
..0.
811
.41.
00.
80.
56.
Savi
ngs b
ank
life
insu
ranc
e de
partm
ents
..0
00
00
00
7.Sa
ving
s and
loan
ass
ocia
tions
1.9
0.9
1.1
1.4
1.2
0.5
0.2
0.7
8.C
redi
t uni
ons
....
0.1
0.1
0.2
1.0
0.8
2.0
9.In
vest
men
t com
pani
es..
..0
00.
10.
10
0.1
10.
Sale
s fin
ance
com
pani
es..
....
4.0
3.2
7.6
1.9
11.2
11.
Pers
onal
fina
nce
com
pani
es..
....
1.6
2.2
3.9
3.4
4.9
Tota
l hol
ding
s by
inte
rmed
iarie
s54
.554
.145
.653
.571
.461
.564
.761
.9
Tota
l out
stan
ding
cxc
i. ta
x ac
crua
ls(b
illio
ns)
$1.8
$4.3
$9.4
$21.
9$1
5.0
$13.
2$1
5.2
$21.
8
Sour
ce: N
on-r
eal-e
stat
e lo
ans b
y fin
anci
al in
term
edia
ries
• Vol
. III
,. Ta
ble
W-2
2, li
nes I
II 7
, 8, 1
0 an
d 13
.fr
om ta
bles
in A
ppen
dix
A; o
utst
andi
ngs f
rom
A S
tudy
of S
avin
g
C)
C)
C)
FINANCING THE MAiN INVESTOR GROUPS1. The share of financial intermediaries in total short-term non-
farm household financing has shown no pronounced long-termmovement if tax accruals are included, amounting at most bench-mark dates to slightly less than one-half. As we may assume thatthe relative importance of short-term household financing not re.corded in the statistics was greater in the earlier years of the centurythan it is now—this applies particularly to credit extended byneighborhood stores, to borrowing from loan sharks, and probablyalso to other intra-individual financing—it is likely that there hasbeen a slight long-term increase in the share of financial, inter-mediaries.
2. The upward tendency of the share of financial intermediariesis considerably clearer and more marked if two forms of short-termhousehold financing as given in the statistics are excluded, namelytax accruals, which for reasons mentioned above might very wellbe regarded as not representing household financing at all, andborrowing on securities because they are undertaken primarily forinvestment or speculation rather than in connection with financ-ing the acquisition of tangible assets or bridging temporary gapsbetween income and expenditures. In that case the share of financialintermediaries in short-term nonfarm household financing, morenarrowly defined, has risen from not much over one-half in 1900to over three-fifths in 1949. If account is taken of the aforemen-tioned relative decline of unrecorded forms' of financing, the in-crease in the share of financial intermediaries in short-term house-hold financing over the past fifty years under the narrower defini-tion would seem to have been quite substantial.
3. The participation of financial intermediaries differs greatlyas between types of short-term consumer financing. It is obviouslynegligible in tax accruals and charge accounts. At the other ex-treme, loans on securities have been supplied almost exclusively byfinancial intermediaries except during a short period in the latetwenties; and policy loans have been made either by insurancecompanies themselves or by commercial banks, and hence havebeen financed entirely by intermediaries. These special fields ac-counted for approximately one-fourth of total short-term nonfarmhousehold financing, within the broader definition, throughout thePeriod.
4. It is thus only in two fields that changes in the participationof financial intermediaries may reflect structural changes in finan-cial organization—financing purchases of consumer durables and
202
FINANCING THE MAIN INVESTOR GROUPSproviding cash loans for emergencies. We do not know enough sta-tistically about the second field to be able to appraise changes quan-titatively, particularly because intra-individual financing has alwaysbeen quite important in this field. Nor can we evaluate changesin financing household acquisitions of perishables, which are notsegregated in the available statistics, and where unorganized lenderssuch as neighborhood stores and farm landlords have played a veryimportant and largely unrecorded role.
We are therefore limited to the financing of consumer durables,which is now quantitatively the largest field although it acquiredreal importance only after the twenties. The increasing importanceof consumer durables within short-term household financing, ofcourse, reflects the sharp increase in the proportion of consumerexpenditures on durables and the similar increase of the share ofconsumer durables in nonfarm households' assets. In 1900 and1929, for instance, holdings of consumer durables may be estimatedas constituting less than 9 per cent of all assets of nonfarm house-holds. Twenty years later, that share had risen to 11 per cent.28Similarly, expenditures on consumer durables represented less than8 per cent of total consumer expenditures around the turn of thecentury,29 but almost 12 per cent in 1929 and over 13 per centin 1949.80
Of particular importance for the development of short-termhousehold financing was the rise of the automobile. The familycar involved a relatively large outlay, forcing many prospectivebuyers to resort to credit. It was bought by a large proportion ofall households, and not once in a lifetime, like the previous chiefobjectives of consumer credit such as furniture and sewing ma-chines, but at intervals of only a few years. It lent itself excellentlyto standardized credit procedures, particularly because of its re-saleability in a broad market. All these characteristics made thefinancing of automobiles particularly suitable for large-scale opera-tions both by old line financial intermediaries, primarily com-mercial banks, and by new specialized institutions, particularlyfinance companies.
In 1929, hardly more than a decade after its full development,installment credit already accounted for 12 per cent of total short-
28A Study of Saving . . . , Vol. III, Table W.22.29 Simon Kuznets, "Long.Terrn Changes in the National Income of the
United States of America since 1870," !ncom.e and Wealth, Series H, Bowes andBowes, 1952, p. 168.
ao National Income, Department of Commerce, 1951 Edition, p. 150.
203
FINANCiNG THE MAIN INVESTOR GROUPSterm credit outstanding under the broad definition, and its sharerose to 25 per cent in 1939 and to almost 40 per cent in 1949. Iftax accruals and loans on securities are excluded the shares aresubstantially higher, but the increase is equally pronounced,namely from 30 per cent in 1929 to 40 per cent in 1939 and almost60 per cent in 1949. Not all installment credit is used to financethe purchase of consumer durables.3' On the other hand, somesingle payment loans and charge accounts, particularly those oflower unit price, are actually used to buy consumer durables, asare some policy loans. It may therefore be permissible to assumethat the share of financing consumer durables in total short-termhousehold credit is at least as high as the proportion of installmentcredit, and to use movements in the share of financial intermedi-aries in installment credit as indicative of their participation infinancing purchases of consumer durables by nonfarm households.
Including sales finance companies and small loan companies, theshare of financial institutions in installment credit rose from 60per cent in 1929 to almost 70 per cent in 1939 and to 80 per centin 1949. Eliminating sales finance companies and small loan com-panies, the share is considerably lower, but the upward trend ismore pronounced. In 1929 financial intermediaries, within the nar-rower definition, supplied slightly over 10 per cent of total in-stallment credit directly (i.e., apart from their loans to sales financeand small loan companies which in turn may have enabled theseorganizations to finance purchases of consumer durables by house-holds). By 1939 this share approached 30 per cent and by 1949 itwas nearly 45 per cent. The share of financial intermediaries ininstallment credit, and hence by inference in financing the acquisi-tion of consumer durables by households, thus shows a rising trend.The rise is almost entirely attributable to the expansion of install-ment credit supplied directly or indirectly by commercial banks.
5. AgricultureAgriculture is a sector of the economy in whose total financingfinancial intermediaries have played a decreasing role; but theyhave supplied an increasing share of its external financing. Theexplanation of this apparent conflict of trends is, of course, a sharprise in the proportion of self-financing in agriculture.
31. The available statistics classify approximately 30 per cent of total install-ment credit in 1939 and 1949 as extended for purchases other than the financingof consumer durables. The figures shown in this paragraph and the next arebased largely on data in the Federal Reserve Bulletin for 1947, p. 592, and for1954, p. 386.
204
FINANCING THE MAIN INVESTOR GROUPSBetween 1900 and 1949 agriculture is estimated to have absorbed
a total of $144 billion of funds (Table 51). This, it is well to recall,is a net figure, with net absorption of funds in some periods offsetby net repayments in others. Not less than $131 billion of the totalmay be regarded as provided internally, a figure which representssaving (including the excess of land improvement over land de-terioration) plus capital consumption allowances. If depreciationis calculated on the basis of original cost, capital consumption al-lowances are estimated to have supplied $61 billion (or 46 percent of internal financing and 42 per cent of total financing); sav-ing provided the remaining $71 billion. Use of other methods ofcalculating capital consumption allowances would change the dis-tribution of internal financing between saving and depreciation.82The total amount of internal financing and its relation to totalfinancing, however, would remain unaltered. Of the more than $12billion33 of external financing, financial intermediaries suppliedabout $6 billion, or nearly one-half.
These broad and rough figures provide only a first impressionof the participation of financial intermediaries in the financing ofagriculture. For a fuller understanding and evaluation of theircontribution, at least four breakdowns of the over-all figures arenecessary. First, the fifty-year aggregates must be divided intoshorter periods of economically reasonably homogeneous character.Secondly, the contribution made by different types of financial in-termediaries must be distinguished. Thirdly, the main forms offinancing must be separated. Fourthly, we must look for significantdifferences as among branches of agriculture, different parts of thecountry, and farms differing in size or other important char-acteristics.
The data on which this study has been based permit the firstthree breakdowns, at least to the extent of providing separate figuresfor seven subperiods, distinguishing between long- and short-termfinancing, and identifying the share of the main types of financial
32 If, for instance, such allowances were calculated on the basis of replacementcost, only $59 billion or 45 per cent of internal financing would be allocated tosaving, while capital consumption allowances would contribute $72 billionor 55 per cent.
83 This figure makes rough allowance for the write-down of agricultural debtheld by financial intermediaries (see A Study of Saving . . . , Vol. I, Table A-65).The figures in Table 51, section 4, are not adjusted for these write-downs, sincethey can be estimated only very roughly. They therefore understate funds sup-plied by financial intermediaries (or overstate the repayment of funds of finan-cial intermediaries) by the amount of the write.downs.
205
Am
ount
(bi
llion
s of
dolla
rs)
15.4
16.2
21.8
22.7
14.5
16.6
—2.
2—
1.7
13.3
15.1
36.4
41.2
32.9
33.6
132.
014
3.7
10.1
11.3
15.1
1.6
13.7
38.9
28.9
119.
6
10.8
12.1
17.2
2.2
15.5
43.8
29.7
131.
33.
4—
0.1
4.7
—4.
65.
829
.919
.858
.9rs
i
4.1
0.8
6.8
—4.
07.
734
.720
.570
.66.
711
.410
.46.
27.
99.
09.
160
.70
5.4
10.6
—0.
6—
3.8
—0.
4—
2.5
3.9
12.4
2.1
3.4
—1.
0—
2.1
0.5
—0.
12.
55.
30.
10.
30.
10
—0.
1—
0.1
0.2
0.6
2.0
6.4
—1.
1—
1.8
—0.
8—
1.9
0.7
3.6
1.1
0.4
1.3
00
—0.
50.
42.
9
TAB
LE 5
1So
urce
s of A
gric
ultu
ral F
unds
and
the
Am
ount
and
Sha
re S
uppl
ied
byFi
nanc
ial I
nter
med
iarie
s
1901
1913
1923
1930
1934
1940
1946
toto
toto
toto
toSo
urce
1912
1922
1929
1933
1939
1945
1949
Tota
l
1. T
otal
sour
ces o
f fun
ds, c
xci.
land
cos
tsTo
tal s
ourc
es o
f fun
ds, m
d. la
nd c
osts
2. S
uppl
ied
by in
tern
al so
urce
s, cx
ci.
land
cos
tsSu
pplie
d by
inte
rnal
sour
ces,
mci
.la
nd c
osts
a. R
etai
ned
prof
its, e
xcl.
land
cos
tsR
etai
ned
prof
its, m
d. la
nd c
osts
b. C
apita
l con
sum
ptio
n al
low
ance
s3.
Sup
plie
d by
ext
erna
l sou
rces
a. N
otes
and
acc
ount
s pay
able
b. T
ax a
ccru
als
c. M
ortg
ages
d. N
et sa
les o
f far
m la
nd
0 C.)
0
Sour
ce
1901 to 1912
1913
1923
1930
1934
toto
toto
1922
1929
1933
1939
1940 to
1945
1946 to 1949
Tota
l
4.Su
pplie
d by
fina
ncia
l int
erm
edia
ries
Am
ount
(bill
ions
of d
olla
rs)
(cha
nge
in h
oldi
ngs)
2.3
4.9
0.1
—2.
20.
4—
1.9
1.9
5.5
a. C
omm
erci
al b
ank
loan
s, cx
ci. m
ortg
ages
1.1
1.6
—0.
5—
1.7
0.1
0.1
1.3
2.0
b. O
ther
rece
ivab
les
0.1
0.1
0.1
0.5
0.1
—0.
10.
21.
0c.
Mor
tgag
es1.
23.
20.
5—
1.0
0.2
—1.
90.
42.
5
Shar
e (p
er c
ent)
5.Sh
are
of fi
nanc
ing
by in
term
edia
ries
a. T
otal
fina
ncin
g, c
xci.
land
cos
ts14
.922
.40.
796
.4a
2.9
—5.
15.
74.
2To
tal f
inan
cing
, mci
. lan
d co
sts
14.2
21.5
0.6
128.
5k2.
6—
4.5
5.6
3.8
b. E
xter
nal f
inan
cing
42.9
46.3
56.3
a74
.2a
47.5
44.4
c. S
hort-
term
fina
ncin
g(e
xci.
3d)
51.1
45.8
42.2
a55
.2a
40.8
b54
.551
.3d.
Lon
g-te
rm fi
nanc
ing
58.4
49.8
56.2
a10
2.9a
49.5
68.8
e. L
oan
finan
cing
54.6
48.3
55.7
a90
.8a
53.4
58.0
a Fi
gure
s of l
imite
d si
gnifi
canc
e as
den
omin
ator
is n
egat
ive.
bF
igur
eof
lim
ited
sign
ifica
nce
as d
enom
inat
or is
of s
mal
l abs
olut
e si
ze.
Sour
ce: A
Stu
dy o
f Sav
ing
..
., V
ol.
1, T
able
s A-I
to A
-66.
FINANCiNG THE MAIN INVESTOR GROUPSintermediaries in the financing of agriculture. Unfortunately it isnot possible to extend the investigation to differences betweenregions, branches of agriculture and types of farms. Regional dif-ferences, however, will be discussed in another volume of thisseries.84 No comprehensive data are available to determine trendsin the contribution of financial intermediaries to financing differ-ent branches of agriculture or farms of different size. A considerableamount of relevant information could undoubtedly be extractedfrom data on agricultural debt in individual states, from farmmanagement studies, and from the information on farmers pro-vided in a number of general consumer household and expendituresurveys. An attempt to use this scattered material for over-all esti-mates was regarded as beyond the scope of this study.
Once the half century since 1900 is subdivided into about halfa dozen economic periods, a sharp contrast appears between thefirst two decades on the one side and the following thirty years—or, better, the period from the early twenties to the end of WorldWar TI—on the other side. From 1900 to 1922 external sources pro-vided approximately two-fifths of total funds used in agriculture,a rather high proportion even for a business sector and a very largeone for a consumer sector. The proportion was considerably higher—almost reaching one-half—for the period 1913 to 1922, which isaffected by the sharp rise in land prices and agricultural debt duringand after World War I, than during the period 1901 to 1912, whenthe share of external financing averaged only one-third althoughagriculture was then still in the stage of rapid expansion. Participa-tion of financial intermediaries in total external financing, however,did not vary much, slightly exceeding two-fifths in both periods.
From 1923 through 1945 agriculture did not on balance absorbany external funds. Indeed, repayments exceeded new financing byapproximately $7.5 billion, or one-half of the net absorption dur-ing About one-half of the net return of funds fromagriculture occurred during the Great Depression, and reflects pri-marily debt retirement under pressure. Similar small reductionsoccurred during the remainder of the twenties and thirties. The
34 See Capital in Agriculture: Its Formation and Financing since 1870, by AlvinS. Tostlebe, Princeton University Press for the National Bureau of EconomicResearch, 1957.
B5 If the comparison is made, as it should be, alter adjustment for changes inthe purchasing power of money, the size of net repayments between and1945 relative to the net absorption in the preceding two decades would be con-siderably lower, but would nevertheless amount to approximately one-third.
208
FINANCING THE MAIN INVESTOR GROUPSoutflow of $2.5 billion of funds from 1940 to 1945, on the otherhand, was a sign of farm prosperity and of restrictions on sometypes of spending, together resulting in the accumulation of largeholdings of liquid assets in farmers' hands.
Between 1923 and 1945 financial intermediaries also on balancereceived funds from agriculture (without taking account of farm-ers' deposits in banks or other financial intermediaries which arenot regarded as directly connected with the financing of agriculture)rather than supplying funds to it. The reduction, however, wasessentially limited to the Great Depression and World War II; newfunds approximately balanced repayments from 1923 to 1929 andfrom 1934 to 1939. For the entire quarter century financial inter-mediaries withdrew only approximately $2.5 billion (making ad-justments for debt write-downs), while other sources reduced theircontributions to the financing of agriculture by three times asmuch. As a result financial intermediaries held nearly 75 per centof total agricultural debt at the end of World War II, against lessthan 50 per cent in 1922.
After World War II, use of funds in agriculture was so high thatnotwithstanding a high level of farm income recourse again was hadto outside financing. From 1946 to 1949 the net absorption of ex-ternal funds amounted to nearly $4 billion, i.e. $1 billion peryear, or one-eighth of total funds used. This is considerably belowthe absorption of external funds during the first two decades of thecentury, when external financing accounted for more than two-fifths of total financing, and when its absolute volume (whichaveraged about $0.7 billion) was fully twice as large, taking accountof changes in the price level, as in 1946-1949. The share of financialintermediaries in external financing, on the other hand, was on thesame level after World War II as during the first quarter century,namely, at slightly over 40 per cent.86
The share of financial intermediaries differs considerably as be-tween long-term and short-term financing. For the period as awhole financial intermediaries supplied two-thirds of the net long-term (mortgage) credit absorbed by agriculture, as Table 52 indi-cates. The corresponding figures for short-term financing are much
36 Comparable figures have not been compiled for years after 1949, but theavailable data (Balance Sheet of Agriculture, Department of Agriculture, 1954)indicate that the absorption of external funds continued at the modest averageannual rate of approximately $1 billion during 1950-1952, while the share offinancial intermediaries in external financing was very high. The share offinancial intermediaries in external financing for the seven years 1946 to 1952is, therefore, considerably above 40 per cent, probably exceeding one-half.
209
TAB
LE 5
2Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Tota
l Far
m M
ortg
ages
Out
stan
ding
(per
cen
t)
0
Inte
rmed
iarie
s1900
1912
1922
1929
1933
1939
1945
1949
1952
I.C
omm
erci
al b
anks
5.8
13.8
13.6
9.6
9.6
8.9
10.9
16.1
14.6
2.M
utua
l sav
ings
ban
ks1.
61.
70.
51.
01.
20.
40.
50.
60.
73.
Priv
ate
life
insu
ranc
e co
mpa
nies
6.2
13.2
14.8
21.8
21.0
13.3
16.3
20.4
23.9
4.Fr
ater
nal i
nsur
ance
org
aniz
atio
ns..
00
0.2
0.2
0.2
0.3
0.4
0.5
5.Jo
int s
tock
land
ban
ks..
..2.
06.
24.
81.
30
0..
6.Fe
dera
l lan
d ba
nks
....
6.0
12.5
16.2
31.2
21.6
15.8
15.1
7.G
over
nmen
t len
ding
inst
itutio
ns—
....
....
11.3
8.8
4.4
3.9
8.Pe
rson
al tr
ust d
epar
tmen
ts17
.713
.110
.06.
56.
26.
73.
61.
61.
1To
tal h
oldi
ngs b
y in
term
edia
ries
31.4
41.9
47.1
57.7
59.3
73.4
62.2
59.4
59.9
Tota
l out
stan
ding
(bill
ions
)$2
.3$4
.3$1
0.8
$9.6
$7.7
$6.6
$4.8
$5.6
$7.1
Sour
ce: F
arm
mor
tgag
e ho
ldin
gs o
f fin
anci
al in
term
edia
ries f
rom
tabl
es in
App
endi
x A
; out
stan
ding
s fro
mSu
pple
men
t).
P1 0 0 0
G•l
(App
endi
x
FINANCING THE MAiN INVESTOR GROUPSless certain, but indicate a considerably lower share for financialintermediaries, apparently in the order of one-half or slightly less.
The relative contributions of different groups of financial inter-mediaries to the long-term financing of agriculture have variedconsiderably over the last fifty years. Four main trends stand out.
The first is the increase in the share of farm mortgages held bycommercial banks and life insurance companies. This expansionoccurred mostly before 1929, and was responsible for almost all ofthe increase in the share of financial intermediaries in the first threedecades of the century. During that period the share of commercialbanks and life insurance companies in farm mortgage debt increasedfrom 12 to 31 per cent, while that of all other financial intermedi-aries advanced only from 19 to 26 per cent. The increase was mostpronounced and regular for life insurance companies, whose sharein farm mortgages outstanding increased from 6 per cent at theturn of the century to 22 per cent in 1929, by which time they hadbecome the largest single group of mortgagees. The increase in theshare of commercial banks, on the other hand, was concentrated inthe period between 1900 and 1912, and accompanied the rapid ex-pansion of non-national banks (national banks were prevented frommaking mortgage loans until the twenties), particularly in ruralareas. A substantial decline in the share of commercial banks infarm mortgage financing during the later twenties reflects partlythe liquidation of numerous rural banks, and partly a marked re-duction of long-term credit to agriculture by operating banks. Bothcommercial banks and life insurance companies considerably low-ered the absolute amount of farm mortgages held between 1929 andthe end of World War II. The reduction was particularly pro-nounced for life insurance companies: from $2.1 billion to $0.8billion, or from 12 per cent to less than 2 per cent of their totalassets. Because of the sharp decline of total farm mortgage debt theshare of life insurance companies, however, declined only from 22to 16 per cent. That of commercial banks even rose from 10 to 11per cent, although the absolute volume of their farm mortgages wasalmost halved. In both cases part of the reduction in reported farmmortgage holdings represented write-downs on foreclosures or ex-changes for bonds of the Federal Farm Mortgage Corporation,although most of it reflected a net withdrawal of funds from agri-culture. After World War II, when the farm mortgage debt re-sumed its growth, both commercial banks and life insurance com-panies increased their share, repeating the pattern observed during
211
FINANCING THE MAIN INVESTOR GROUPSthe first twenty years of the century. As a result the share of com-mercial banks in 1952, 15 per cent of total farm mortgage debt, wasthe highest recorded, and that of life insurance companies, 24 percent, was slightly over the level of 1929 and 1933.
The second trend in farm mortgage financing is the result of thecreation of the land bank system in 1917. By 1929 federal andjoint stock land banks, both financed largely through the issuanceof bonds purchased by the general public and to a smaller extentby other financial intermediaries, held almost one-fifth of the totalfarm mortgage debt. Their share further increased during thethirties as they managed, with government assistance, to expandthe volume of their loans, while total farm mortgage debt declinedconsiderably. As a result land banks in 1939 held approximatelyone-third of the entire farm mortgage debt, or almost as much asall other financial intermediaries together. From then on their shareshrank rapidly as the joint stock land banks entered into liquida-tion and even the federal land banks, which were gradually trans-ferred to private ownership in the late forties, reduced their activi-ties. By 1952 the mortgage loans of land banks had declined to un-der one-half of the level of 1939 and contributed less than one-sixthof total farm mortgage debt.
The third trend, paralleling developments in many other fields,is the ascent of federal lending agencies during the thirties in thisfield, primarily the Federal Farm Mortgage Corporation, whichwas organized in 1934 to take over farm mortgage loans in distressin exchange for its own bonds. In 1939 this agency held 11 percent of the total farm mortgage debt. Its importance declined rapid-ly during and after World War II as its mortgages were liquidatedor taken over by other lenders. By 1952 its holdings representedless than 1 per cent of the total farm mortgage debt. However, theFarmers Home Administration, organized in 1939—apparently asa permanent part of the farm credit structure—primarily to facilitateacquisition of farms by tenants, in 1952 held an additional 4 percent of all farm mortgages.
The decline in the share of farm mortgages held in personaltrust funds administered by banks and trust companies constitutesthe fourth change. At the turn of the century these trust depart-nients, credited with almost one-fifth of the total farm mortgagedebt, were the largest holder among financial intermediaries. By1929 their share was down to less than 7 per cent, and by 1952 ithad declined to approximately 1 per cent. This shrinkage was
212
FINANCING THE MAIN INVESTOR GROUPSmainly the result of the reduction of the share of total personaltrust department assets invested in farm mortgages, from 14 per centin 1900 to less than 1 per cent in 1952.
The main importance of the concentration of farm mortgages inthe hands of financial intermediaries—from less than one-third in1900 to three-fifths in 1952—probably lies, as in other fields ofcredit, in the standardization of loan techniques and terms, andin the extension of the original maturity of the loans. Financialinstitutions naturally are more inclined and better equipped to puttheir lending activities on a systematic basis and to employ stand-ardized loan contracts than the scattered individual and nonfinan-cial business lenders who provided the bulk of farm mortgage credituntil World War I. Institutional lenders also have taken advantagemore rapidly of the improvements in the methods of credit analysisand of surveillance and guidance of borrowers which have beendeveloped during the last twenty or thirty years, and particularlysince the Great Depression.
The share of financial intermediaries in short-term financing offarmers is much more difficult to determine. The statistics, for ex-ample those in Table 51, show financial intermediaries to haveaccounted for approximately one-half of the total short-term financ-ing of agriculture, with only minor changes over the last fiftyyears. Both the level and its relative stability, however, are largelythe result of the crude methods of estimation which had to be usedin the absence of comprehensive and reliable data on short-termborrowing of farmers from noninstitutional creditors.
The absolute amount of short-term financing of agriculture byfinancial intermediaries increased sharply, from $0.5 billion in1900 to over $3 billion in 1922; shrank to $2 billion in 1933; re-mained at approximately that level through the end of WorldWar II; and then rose to over $9 billion by the end of 1952 (Table45). The movements of short-term farm financing thus were, asexpected, generally more violent than the changes in the farmmortgage debt. In relation to total use of external funds in agricul-ture, short-term financing provided by financial intermediaries wasmost important in the periods following World Wars I and II. Until1922 the share was only around one-fifth, but in the twenties itreached three-fifths. Thereafter it was about one-third, except fora very low level during the war.
Commercial banks have always supplied the bulk of institutional
213
FINANCING THE MAIN INVESTOR GROUPSshort4erm financing. Since the twenties, however, policy loans bylife insurance companies have come to play a secondary role, andsince the Great Depression loans by federal agencies Or by organiza-tions financed and sponsored by them have acquired substantialimportance in this field. As a result commercial banks providedonly about one-half of all short-term financing by financial inter-mediaries of agriculture during the 1930's, whereas they had fur-nished at least 85 per cent before the Great Depression. By 1952the share of commercial banks had further declined to two-fifthsif short-term loans made by government lending institutions areincluded, but had risen to almost three-fifths if such loans are
A final source of financing is provided by the sale of farm landto nonfarmers either for continued agricultural operation or forremoval from agricultural use, generally for the purpose of trans-formation into building lots. The funds raised by such sales canbe regarded as equity financing in contrast to the debt financingrepresented by mortgage and short-term loans. For the entire periodit is estimated roughly that agriculture raised less than $3 billionin this way, most of it during the first decade of the century andin the twenties. The figure is equivalent to about one-fifth of allexternal financing for the period as a whole. The relatively smallamounts of external financing procured in this way reflect the factthat the proportion of farm properties owned by nonfarmers didnot show a definite long-term trend over the period, so that thissource was limited mostly to the sale of farm land for building lots.Financial intermediaries, of course, hardly contributed to that typeof financing.
6. Unincorporated BusinessUnincorporated enterprises are an important object of financingfor at least one large group of financial intermediaries—commercialbanks. Unfortunately, discussion of the share of intermediaries inthe financing of unincorporated business enterprises is made par-ticularly difficult by the scarcity of reliable data on practicallyevery aspect of their financial operations; by the lack of detail ineven the rough estimates of debt financing that can be contrived;and by the almost complete absence of estimates of equity financing.Any judgment in this field must therefore be tentative; and thestatements which follow should be regarded only as approximative
Based on data in Appendix A. See footnote I of this chapter.
214
FINANCING THE MAiN INVESTOR GROUPSand at best correctly reflecting the direction and order of magnitudeof significant movements.88
a. Financing of unincorporated business enterprises by financialintermediaries has taken predominantly the form of short-termcredits. Participation in equity financing is ruled out by the legalform in which unincorporated enterprises operate. Long-term debtfinancing, particularly through mortgages, would have appearedquite small but for the convention, adopted for this study, of re-garding noncorporate ownership and operation of nonresidentialreal estate as an unincorporated business activity.
b. Only the minority of the short-term financing for the periodas a whole was provided by financial intermediaries. The roughstatistical estimates indicate a share of slightly less than one-half.The correct proportion is probably smaller because the estimates donot include part of the borrowing of unincorporated business en-terprises from individuals and from other noninstitutional sources.
c. The relation between short-term financing by intermediariesand by trade creditors changed considerably over the period. Theshare of financial intermediaries apparently was considerably higherup to World War I than afterwards. Between the benchmarks of1900 and 1922 the increase in short-term credit extended by finan-cial intermediaries seems to have been considerably larger thanthat of trade accounts payable. In the twenties financing from bothsources appears to have changed but little on balance. During thethirties financing by intermediaries was cut by more than one-half,while the volume of trade credit declined much less. Between 1939and 1949 financing by intermediaries increased relatively more thantrade financing. In absolute amount, financial intermediaries stillfurnished only approximately one-third of total short-term fi-nancing.
d. Commercial banks predominated among financial intermedi-aries furnishing short-term credits. None of the other groups offinancial intermediaries extended substantial amounts of short-termcredits to unincorporated business. Even government lending in-stitutions contributed only relatively small amounts, as the Recon-struction Finance Corporation in practice concentrated on loansto medium-sized and larger enterprises, most of which may be as-sumed to operate in corporate form.
38 The discussion is based primarily on data given in A Study of Saving .Vol. I, Tables U-3 to U6, and VoL III, Table W-29. It will be recalled thatownership and operation of residential noncorporate real estate has been treatedas part of household rather than unincorporated business activities.
215
FiNANCING THE MAIN iNVESTOR GROUPSe. Financial intermediaries probably were considerably more im-
portant in providing mortgage credit to unincorporated businessenterprises (including all urban nonresidential real estate holdingsin that category). An accurate statistical picture cannot be givenas the balance sheets of financial intermediaries do not include abreakdown of urban nonresidential mortgage loans by form of busi-ness of borrower. From very rough estimates of this breakdown itappears, however, that over the fifty-year period approximately 30per cent of mortgage financing of unincorporated business wassupplied by financial intermediaries, and it is probable that theshare increased over the period, at least after the thirties.
f. For short-term credits and mortgages together, the availabledata indicate that financial intermediaries provided approximatelytwo-fifths of all debt financing of unincorporated business enter-prises over the entire period. Because of the omission of some non-institutional financing from the figures, the true share of financialintermediaries probably was not much over one-third. It appearsto have been higher up to 1920 and since World War II than inthe intervening twenty-five years. The explanation probably is thatin periods of rapid asset expansion of unincorporated business en-terprises such as occurred in the first two decades of the century andafter World War II, the demand for external financing is relativelyhigh, and has to be satisfied to a considerable extent by financialintermediaries, primarily commercial banks.39
g. To assess the importance of financial intermediaries withinthe total financing of unincorporated business enterprises is very
Retained earnings and net investment by proprietors to-gether (the two cannot be separated statistically) are estimated forthe period as a whole at about $33 billion.41 This is approximatelytwice as large as total external financing even if allowance is madefor unrecorded financing by noninstitutional sources. Since finan-cial intermediaries provided about two-fifths of total external fi-
89 The picture is quite different if external trade financing is measured notby the volume of accounts payable but only by the excess of trade payables overreceivables. In that case there was hardly any net financing of unincorporatedbusiness enterprises by trade sources, i.e. by nonfinancial corporations. Virtuallyall external financing is then attributable to financial intermediaries.
405cc A Study of Saving . . . , Introduction to Vol. I, section 4d; and Vol. II,Chapter XIII.
41 The figure is calculated on the basis of depreciation allowances at originalcost and includes net inventory profits. If replacement cost depreciation allow-ances are used and inventory profits and losses eliminated, it is decreased toabout $22 billion.
216
FINANCING THE MAIN INVESTOR GROUPSnancing for the period as a whole, their share in total financing(excluding capital consumption allowances) was not much overone-tenth.
7. Corporationsa. SUMMARY
As the participation of financial intermediaries in the supply offunds to corporations is probably the most important of theiractivities, and the material, although restricted in some respects, ismore plentiful than for other sectors, the reader may wish a briefsummary. The findings regarding all nonfinancial corporations asa group will be set forth in subsection C; here we focus on differ-ences in the intermediaries' role in financing corporations in differ-ent industries and' of different size, and on changes in these rela-tionships during the half century covered by the study.
1. Financial intermediaries have supplied throughout the perioda large part of long-term debt and preferred stock financing ofrailroads and public utilities. Since these industries make little useof short-term financing, it follows that financial intermediaries havepredominated in their total debt financing. The share of financialintermediaries has been considerably higher since the twenties thanduring the first two decades of the century. Indeed, beginning withthe thirties virtually all debt financing has been supplied by finan-cial intermediaries, and in the case of public utilities also a con-siderable part of equity financing. In these important industriesexternal financing is now predominantly institutional.
2. Manufacturing corporations have relied considerably less onfinancial intermediaries as a source of their external or their totalfinancing. The reason is that these corporations have provided mostof their funds internally, and have raised a considerable part ofexternal funds through the sale of common stock in which financialintermediaries did not participate to a large extent, through tradereceivables, and through tax accruals. In long-term and intermedi-ate debt financing, however, manufacturing corporations also haverelied more and more on financial intermediaries. Since the thirtiesvirtually all long-term debt financing has been provided by finan-cial intermediaries just as for railroads and public utilities.
S. We know relatively little about the financing of corporationsoutside of manufacturing, railroads, and public utilities, particu-larly on a historical basis. At the present time short-term bankcredit is of considerably greater importance for trade corporations,particularly those in wholesale trade, and for service and construc-
217
FINANCiNG THE MAIN INVESTOR GROUPStion corporations, than for manufacturing, mining, railroads, andutilities.
4. Short-term bank credit is more important for small than forlarge corporations. On the other hand, financial intermediariessupply a larger part of long-term debt and preferred stock financingin the case of large than of small corporations. Although the neteffect of these opposing tendencies is difficult to evaluate, probablythe share of financial intermediaries in total external financing issomewhat higher (outside of railroads and public, utilities) forsmall than for large corporations. It is also probable that thetendency for the share of financial intermediaries in externalfinancing to increase with corporate size has become more pro-nounced during the period. Indeed before World War I there maybe no correlation at all between size and the share of financial in-termediaries in external financing.
5. An essential feature of the share of financial intermediariesin the supply of funds is the great variability among industries andamong individual corporations within an industry, although adefinite systematic influence of size on specific sources of funds andon total external financing does seem to be present.
6. Insofar as the material permits the quantitative investigationof structural changes in the role of financial intermediaries in sup-plying funds to corporations, two trends emerge. The first is an in-crease in the share of financial intermediaries in long-term debtfinancing, pronounced enough to be reflected in a more moderateincrease in their share in external and total financing of large cor-porations. The second is the declining importance of short-termfinancing by intermediaries, primarily commercial banks, particu-larly for large corporations. The combined effect of these two ten-dencies probably has been to increase the share of financial inter-mediaries in supplying funds to large corporations, and to decreasetheir share in financing small corporations.
b. NATURE OF MATERIAL
Corporate business enterprises are of particular importance for aninquiry into the participation of financial intermediaries in financ-ing the different sectors of the economy. First, the financing of busi-ness, and that in twentieth century America means primarily corpo-rate enterprises, has traditionally been regarded as the main func-tion of most financial intermediaries so far as their lending andinvestment activities are concerned. Secondly, business corporations
218
FINANCiNG THE MAIN INVESTOR GROUPShave been, except in war periods, the largest users of funds in theeconomy.
For a picture of the role of financial intermediaries in financingcorporate business which is at the same time comprehensive andreasonably detailed, two sets of data are needed: first, sources-and-uses-of-funds statements for all corporations, and for those industrialor size groups that we want to distinguish; and second, statistics onholdings by financial intermediaries of the securities issued by thevarious groups of corporations. Of these data the sources-and-uses-of-funds statements, though still scarce, present the lesser difficulties.We possess since World War II fairly detailed annual aggregatesources-and-uses-of-funds statements for all nonfinancial corpora-tions, developed by the Department of Commerce. Similar state-ments for S00 large corporations, divided into about a dozen indus-try groups, compiled by the Board of Governors of the Federal Re-serve System, now go back to the late thirties. A comparable, thoughslightly less detailed and much more tenuous statement for allnonfinancial corporations was prepared for use in A Study of Sav-ing. . ., to cover the period back to 1900 on an annual basis, anda few attempts have been made to prepare similar statements forgroups of large corporations in the twenties and thirties.42, Theholdings of corporate securities by financial intermediaries havebeen estimated in this study for nine benchmark dates, both in theaggregate and separately for railroad, public utility, and all otherbonds. These materials enable us to present at least a rough sketchof the participation of financial intermediaries in the financing ofnonfinancial corporations as a group throughout the last fiftyyears. What we unfortunately cannot do, except to a limited extentfor the last few years, is to give similar pictures for individual in-dustries or for corporations of different size. This prevents us fromexamining quantitatively the differences in the role of financial in-termediaries in financing corporations in different industries or ofdifferent size, although we are able on the basis of scattered sta-tistics and of the literature to make broad statements about thesedifferences.44 In one field there is even a good statistical basis, though
42 See The Financing of Large Corporations, 1920-39, by A. R. Koch, NationalBureau of Economic Research, 1943.
43 Sources-and-uses-of-funds statements for railroads and some branches ofthe public utility industry are being prepared by other sectors of the CapitalFormation Project, but were not available in time to be used here.
44 There are at least three reasons why the comprehensive balance sheet sta-tistics of the Bureau of Internal Revenue, with their rich industry and sizedetail, cannot be used for this purpose, namely the failure to segregate bank
219
FINANCING THE MAIN INVESTOR GROUPSonly for recent years, viz, the distribution of bank credits, one ofthe most important sources of financing, among corporations indifferent industries and of different These figures, however,cannot be tied in with financing from other sources, and hence can-not be used to assess the relative importance of bank credit financing.
In the circumstances it has been necessary to divide the discussioninto two parts of different character. The first part (subsection c)is restricted to all nonfinancial corporations as a group, and isbased on the sources-and-uses-of-funds statement developed by AStudy of Saving. . . and on the estimates of holdings of corporatesecurities by financial intermediaries made in the present study.This part is comprehensive and quantitative in nature, althoughthe underlying figures are rough and subject to considerable mar-gins of error. The second part (subsections d and indicates prob-able differences in the share of financial intermediaries in financingcorporations in the main industries and corporations of differentsize. It is based on scattered information and largely limited to thelast decade or two.
C. ALL NONFINANCIAL CORPORATIONS
The historical data bearing on the participation of financial in-termediaries in the supply of funds to nonfinancial corporationsare of the roughest and had to be developed precariously fromscattered material of differing scope and reliability, as has beenindicated above. The resulting estimates, summarized in Table 53should nevertheless be sufficient to establish the order of magnitudesinvolved, and to indicate major structural changes in the relation-ships, though not in every detail, nor reliably as to every feature.
In a summary picture for the entire period of fifty-two years, thefollowing basic features emerge from Tables 53 to 55:
1. External financing supplied nonfinancial corporations withslightly over one-third of all funds if capital consumption allow-
debt from other liabilities; the absence of usable information on financingthrough the sale of securities; and the impossibility of obtaining matching in-formation on the holdings of corporate securities by financial intermediaries.
See particularly the results of the sample survey of business loans by banksas of November 30, 1946 reported in the Federal Reserve Bulletin, March, May,and August 1947. Similar, though of course much less detailed, data for 1939—derived from a sample of borrowers rather than from banks—are provided in"Industry and Commercial Debt—A Balance Sheet Analysis, 1939," by CarlKaysen (unpublished mimeographed report, National Bureau of Economic Re-search, Financial Research Program, July 1942).
220
FINANCING THE MAIN INVESTOR GROUPSances (at original cost) are regarded as a source of funds; but withnearly two-thirds if internal financing is limited to corporate saving.
2. Financial intermediaries supplied approximately two-fifths oftotal external financing. Their contribution thus was equivalent toslightly more than one-seventh of total financing if the latter in-cludes capital consumption allowances.
3. Most of external financing supplied by financial intermediariestook the form of purchases of corporate bonds. Bank credits (partlyin the form of term loans) and mortgage loans supplied approxi-mately one-fifth and one-seventh, respectively, of all funds raisedfrom financial intermediaries. Equity funds constituted only a smallportion—about one-sixth—of total funds supplied by financial inter-mediaries, but in relation to total equity financing of nonfinancialcorporations the intermediaries' share was substantial, particularlyin the case of preferred stock, of which about one-half was ulti-mately absorbed by them.
4. The importance of financial intermediaries was considerablyhigher for debt than for equity financing, and for long-term thanfor short-term debt financing. The intermediaries probably sup-plied not more than 11 per cent of all funds raised through sale ofstock, as Table 55 shows. On the other hand they accounted foralmost one-half of debt financing even if tax accruals are included.If the latter are eliminated, as not comparable to other debt financ-ing and as important only in the last decade of the period, the shareof financial intermediaries in debt financing rises to almost three-fifths. Their share in short-term debt financing is even more influ-enced by the treatment of tax accruals. If that item is included,financial intermediaries supplied slightly more than one-fifth of allshort-term debt; if it is excluded, their share is as high as three-tenths. Both ratios are substantially lower than the share of finan-cial intermediaries in long-term debt financing, which is close toone-half.
Turning to the changes in the structure of financing throughoutthe period, but disregarding the Great Depression and World WarII, we find, first, that external financing has been somewhat lessimportant since World War II in relation to internal financingthan before 1929 if capital consumption allowances are regardedas part of internal financing. The decline is much more pronouncedif internal financing is limited to retained earnings. In that caseexternal financing was on the average more than twice as large as
221
TAB
LE 5
3So
urce
s of F
unds
of N
onfin
anci
al C
orpo
ratio
ns a
nd th
e A
mou
nt a
nd S
hare
Sup
plie
d by
Fin
anci
al In
term
edia
ries
1901
1913
1923
1930
1934
1940
1946
1946
1950
1950
1901
1901
TO
TO
TO
TO
TO
TO
TO
TO
TO
TO
TO
TO
1912
SOURCE
(1)
1922
"A
(2)
1929
Study
(3)
1933
1939
1945
of
Savi
ng..
."F
igur
es(4
)(5)
(6)
1949
(7)
1949
1952
Dept.
ofC
omm
erce
Figu
res (9)
1952
Financial
Inte
rmed
.Fi
gure
s(1
0)
1949
(11)
1952
(12)
Am
ount
(bill
ions
of d
olla
rs)
1. T
otal
sour
ces o
f fun
ds40
.076
.186
.1—
0.6
28.9
75.4
110.
698
.611
3.9
..41
6.5
530.
4
2. S
uppl
ied
by in
tern
al so
urce
s22
.146
.047
.14.
128
.260
.571
.361
.355
.9..
279.
333
5.2
a. R
etai
ned
prof
its8.
720
.415
.0—
16.7
—3.
323
.937
.638
.629
.085
.511
4.5
b. C
apita
l con
sum
ptio
n al
low
ance
s13
.425
.632
.120
.831
.436
.633
.722
.726
.9..
193.
722
0.6
3. S
uppl
ied
by e
xter
nal s
ourc
es17
.930
.139
.0—
4.8
0.7
14.9
39.3
37.3
58.0
..13
7.2
195.2
a.
Bor
row
ing
4.1
15.2
10.1
—8.
8—
0.3
15.2
19.0
19.7
40.1
54.5
94.6
1. N
otes
and
acc
ount
s pay
able
3.0
11.1
2.8
—6.
4—
1.4
7.2
9.3
17.7
28.5
25.6
54.1
2. T
ax a
ccru
als
0.2
1.5
0.9
—2.
11.
78.
13.
2—
0.7
9.0
13.6
22.6
3. M
ortg
ages
0.8
2.6
6.4
—0.
3—
0.7
06.
52.
72.
615
.418
.0b.
Sal
e of
secu
ritie
s13
.815
.028
.94.
01.
1—
0.3
20.2
17.6
17.9
82.7
100.
61.
Bon
ds a
nd n
otes
8.2
6.5
12.2
1.2
—1.
5—
3.8
12.1
12.1
10.5
34.9
45.4
2. S
tock
s5.
68.
516
.72.
82.
63.
58.
15.
57.
447
.855
.2
4. S
uppl
ied
by fi
nanc
ial i
nter
med
iarie
s(c
hang
e in
hol
ding
s)6.
59.
015
.7—
2.7
—0.
92.
420
.827
.650
.878
.4a.
Com
mer
cial
ban
k lo
ans c
xci.
mor
tgag
es2.
24.
40.
6—
4.4
—0.
32.
72.
44.
08.
57.
87.
615
.4b.
Other receivables
00.1
0.2
0.8
—0.8
—0.3
01.7
01.7
c.
Mor
tgag
es0.
81.
74.
7—
0.7
—0.
2—
0.3
4.2
1.4
10.1
11.5
d.Bonds
3.2
2.5
5.3
0.4
0.8
0.2
12.3
11.7
24.7
36.4
e. Stocks
0.3
0.3
4.9
1.2
—0.3
0.2
1.8
5.0
8.4
13.4
1901
1913
1923
1930
1934
1940
1946
1946
1950
1950
1901
.190
1TO
TOTO
TOTO
TOTO
TOTO
TOTO
TO19
1219
2219
2919
3319
3919
4519
4919
4919
5219
5219
4919
52
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
5..
Sha
reof
fina
ncin
g by
inte
rmed
iarie
sSh
are
(per
cen
t)
a. T
otal
fina
ncin
g16
.211
.818
.2—
3.0
3.2
18.8
....
24.2
12.2
14.8
b. E
xter
nal f
inan
cing
36.1
29.8
40.2
16.3
52.9
....
47.6
37.0
40.2
c. S
hort
-ter
mfin
anci
ng68
.735
.421
.642
.5a
15.9
19.3
....
25.3
19.3
22.3
d. L
ong.
term
fina
ncin
g28
.925
.742
.125
.8—
67.8
068
.7..
..88
.244
.151
.7e.
Loa
n fin
anci
ng50
.040
.048
.219
.860
.8..
..44
.747
.446
.4f.
Equi
ty fi
nanc
ing
mci
.R
etai
ned
prof
its2.
11.
015
.545
.6a
0.6
4.0
....
13.7
6.3
7.9
Equi
ty fi
nanc
ing
exci
.R
etai
ned
prof
its5.
43.
529
.542
.9—
12.6
4.7
22.7
....
6.8
17.6
24.3
a Fi
gure
s of l
imite
d si
gnifi
canc
e as
den
omin
ator
b D
enom
inat
or is
of s
mal
l abs
olut
e si
ze.
Col
umn
Sect
ion
-
is n
egat
ive.
1.7
1-5
A S
tudy
of S
avin
g. .
., V
ol.
II, d
eriv
ed fr
om so
urce
s giv
en in
Tab
le B
-19
(App
endi
x Su
pple
men
t).8-
91-
4Su
rvey
of C
urre
nt B
usin
ess,
Sept
embe
r 195
4, p
. 5.
104
Der
ived
from
tabl
es in
App
endi
x A
exc
ept f
or li
ne e
, whi
ch is
bas
ed o
n su
m o
f the
cha
nge
in c
orpo
rate
stoc
k ho
ldin
gs o
f com
mer
cial
ban
ks,
mut
ual s
avin
gs b
anks
, priv
ate
life
insu
ranc
e co
mpa
nies
, fra
tern
al o
rgan
izat
ions
, priv
ate
pens
ion
fund
s, fir
e an
d m
arin
e in
sura
nce
com
pa-
nies
, cas
ualty
and
mis
cella
neou
s ins
uran
ce c
ompa
nies
, gov
ernm
ent l
endi
ng in
stitu
tions
, and
roug
h es
timat
es fo
r per
sona
l tru
st d
epar
tmen
tsan
d in
vest
men
t com
pani
es (e
stim
ate
base
d on
four
-fift
hs o
f net
new
issu
es o
f sec
uriti
es d
urin
g pe
riod)
.5
Col
. 10,
sec.
4, d
ivid
ed b
y co
l. 9,
sees
. 1-3
.11
1-4
Sum
of c
ols.
1to
7.
5D
eriv
ed fr
om se
ctio
ns1
to 4
.12
1-3
Sum
of c
ols.
9 an
d 11
.-
4Su
m o
f col
s. 10
and
11.
5D
eriv
ed fr
om se
ctio
ns1
to 4
.
Sour
ce
TAB
LE 5
4Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Dom
estic
Cor
pora
te B
onds
Out
stan
ding
(per
cen
t)
Inte
rmed
iarie
s19
0019
1219
2219
2919
3319
3919
4519
4919
52
1. C
omm
erci
al b
anks
9.8
11.5
13.9
12.1
10.7
10.2
10.6
8.0
6.7
2. M
utua
l sav
ings
ban
ks6.
45.
55.
15.
25.
54.
13.
55.
24.
93.
Priv
ate
life
insu
ranc
e co
mpa
nies
7.9
9.1
9.2
12.0
13.3
24.7
37.3
54.6
58.0
4. F
rate
rnal
insu
ranc
e or
gani
zatio
ns0
0.1
0.1
0.2
0.3
0.4
1.7
1.7
1.8
5. P
rivat
e no
nins
ured
pen
sion
fund
s..
..0.
20.
81.
11.
73.
97.
18.
96.
Gov
ernm
ent t
rust
fund
s..
00
00.
10.
20.
50.
50.
87.
Fire
and
mar
ine
insu
ranc
e co
mpa
nies
1.4
1.6
2.0
2.1
1.6
1.1
0.7
0.7
0.6
8. C
asua
lty a
nd m
isc.
insu
ranc
e co
mpa
nies
0.3
0.4
0.6
1.2
1.0
0.9
0.8
1.0
1.3
9. S
avin
gs b
ank
life
insu
ranc
e de
partm
ents
....
..0
00
00
010
. Inv
estm
ent c
ompa
nies
....
0.1
0.3
0.2
0.4
0.8
0.4
0.6
11. P
erso
nal t
rust
dep
artm
ents
8.7
8.0
14.9
17.3
13.0
20.9
13.4
10.2
9.9
Tota
l hol
ding
s by
inte
rmed
iarie
s34
.536
.246
.151
.346
.764
.673
.089
.593
.6a
Tota
l out
stan
ding
(bill
ions
)$6
.9$1
7.5
$24.
2$3
9.0
$38.
5$3
3.5
$27.
0$3
9.3
$50.
4
a S
eete
xt fo
otno
te 1
9.So
urce
: Cor
pora
te b
ond
hold
ings
of f
inan
cial
inte
rmed
iarie
s fro
m ta
bles
in A
ppen
dix
A; o
utst
andi
ngs f
rom
Tab
le G
-1 (A
ppen
-di
x Su
pple
men
t).
0 0 0
TAB
LE 5
5Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Dom
estic
Cor
pora
te S
tock
Out
stan
ding
(per
cen
t)
Inte
rmed
iarie
s19
0019
1219
2219
2919
3319
3919
4519
4919
52
1.C
omm
erci
al b
anks
0.8
0.9
0.9
0.8
1.6
0.8
0.3
0.3
0.2
2.M
utua
l sav
ings
ban
ks0.
30.
10.
10.
10.
20.
20.
10.
10.
23.
Priv
ate
life
insu
ranc
e co
mpa
nies
0.5
0.3
0.1
0.2
0.9
0.7
0.8
1.3
1.3
4.Fr
ater
nal i
nsur
ance
org
aniz
atio
ns..
....
..0
00
0.1
05.
Priv
ate
noni
nsur
ed p
ensi
on fu
nds
....
00.
10.
20.
30.
30.
60.
96.
Fire
and
mar
ine
insu
ranc
e co
mpa
nies
0.9
0.6
0.5
0.8
1.1
1.3
1.4
1.7
1.6
7.C
asua
lty a
nd m
isc.
insu
ranc
e co
mpa
nies
0.1
0.1
0.1
0.2
0.4
0.5
0.5
0.7
0.6
8.Sa
ving
s and
loan
ass
ocia
tions
....
....
00.
10.
10.
10.
29.
Cre
dit u
nion
s..
..0
00
00
00.
110
.In
vest
men
t com
pani
es..
..0.
11.
51.
61.
51.
61.
92.
611
.G
over
nmen
t len
ding
inst
itutio
ns—
00
00.
41.
00.
30.
10
12.
Pers
onal
trus
t dep
artm
ents
4.9
7.6
11.0
8.6
12.8
16.0
14.3
15.4
12.8
Tota
l hol
ding
s by
inte
rmed
iarie
s7.
69.
612
.912
.319
.322
.219
.622
.220
.5
Tota
l out
stan
ding
(bill
ions
)$1
2.3
$32.
1$5
7.1
$146
.9$6
2.5
$81.
1$1
26.2
$129
.9$1
95.0
Sour
ce: C
orpo
rate
stoc
k ho
ldin
gs o
f fin
anci
al in
term
edia
ries f
rom
tabl
es in
App
endi
x A
;fr
om T
able
G-l
(Ap.
pend
ix S
uppl
emen
t).
z C., 0
FINANCING THE MAiN INVESTOR GROUPSinternal financing between 1900 and 1929, while the two were ofapproximately equal size after World War 11.46
We find, secondly—and this is more important from our point ofview—that the share of financial intermediaries in total externalfinancing has increased considerably. It averaged somewhat morethan one-third between 1900 and 1929. After falling to a very lowlevel from the Great Depression to the end of World War II, theshare reached about one-half from 1946 to 1949, and 1950 to 1952,the last two periods covered in Table 53.
d. CORPORATIONS IN DIFFERENT INDUSTRIES
No comprehensive data exist for a systematic investigation of dif-ferences in the share of financial intermediaries in total or externalfinancing of corporations in different industries for the entire periodfrom 1900 to 1950, or even for a large part of it. We have to rely onscattered data of varying scope, detail, and quality, available forvarying periods. There is no point in examining these materials oneby one. We may instead limit ourselves to a few conclusions piecedtogether that seem at the same time significant for understandingthe role of intermediaries in financing different industries andreasonably well established. It is advisable to treat separately thethree main channels through which financial intermediaries havesupplied funds to corporations: the extension of short-term credit,mortgage loans, and the acquisition of securities, primarily long-term bonds. Commercial banks have made use of all three channels;some of the other financial intermediaries have generally limitedthemselves to long-term funds, and some—like property insurancecompanies and private pension funds—have provided funds almostexclusively through the acquisition of securities.
1. Railroads. Throughout the fifty-year period, the participationof financial intermediaries in the financing of railroads has beenessentially limited to the purchase of securities, particularly bondsand equipment trust certificates. Short-term credits by banks torailroads have always been small, both as a proportion of total
46 These ratios are based on estimates of undistributed profits using originalcost depreciation and not eliminating inventory profits and losses, a measure-ment appropriate in determining the share of different sources in total financing.If the figures for corporate saving had instead been based on replacement costdepreciation and had eliminated inventory profits and losses, as is sometimesdone under the social accounting approach (e.g., in A Study of Saving . .
the decline in the ratio of external to internal financing would have been lesspronounced.
226
FINANCING THE MAIN INVESTOR GROUPSfunds absorbed by the railroads and of total loans by banks.47Short-term financing by intermediaries was of some importanceduring World War I and in the thirties, and during those periodswas provided primarily by government lending institutions.
In contrast financial intermediaries have always contributed asubstantial part of the long-term debt financing of railroads, asTable 56 shows. At the turn of the century financial intermediariesheld about $2 billion of railroad bonds (including equipment trustcertificates), or nearly 40 per cent of the total This
TABLE 56Railroad Bonds
(billions of dollars)
CHANGE IN CHANGE IN HOLDINGS
TOTAL BONDSOUTSTANDING
OF FINANCIAL INTERMEDIARIES
Reported Estimated TotalYEAR (1) (2) (3)
1901-1912 4.59 1.80 2.231913-1922 1.04 1.15 2.43
1923-1929 1.51 1.65 2.89
1930-1933 0.08 —0.23 —0.30
1934-1939 —0.56 —0.93 —1.271940-1945 —1.73 —0.23 —1.721946-1949 —0.14 0.40 0.171950-1952 0.07 0.64 0.90
1901-1952 4.86 4.25 5.34
Column SourceI Derived from figures given in Appendix Supplement, Table G.2 (1900.
1939); in The Volume of Corporate Bond Financing since 1900, byW. B. Hickman, Princeton University Press for the National Bureau ofEconomic Research, 1953, p. 253 (1945, 1949); and in Individuals' Sav-ing: Volume and Composition, by I. Friend and V. Natrella, Wiley &Son, 1954, pp. 232-233.
2 From Appendix A, various tables.8 Col. 2 increased to cover intermediaries which do not report a break-
down of their corporate bond holdings, e.g. personal trust departments,private pension funds, and a few other smaller groups.
4? "Loans and bills payable" of all Class I railroads, as reported in Statisticsof Railways, which may be presumed to include all bank credits but also tocover other loans, amounted to only $132 million in 1922; $71 million in 1929;
$239 million in 1939; and $11 million in 1949.48 The share is reduced to less than 30 per cent if railroad bonds in personal
trust funds administered by banks and trust companies and a few other smallgroups for which a breakdown of their corporate bond holdings is not givenarc excluded.
227
FINANCING THE MAIN INVESTOR GROUPSfigure, of course, does not represent exactly the share of financialintermediaries in funds raised through the sale of debt securities,or the contribution made at the time the railroads originally raisedthe funds, but should nevertheless provide a rough measure offinancial intermediaries' share in long-term debt financing of rail-roads. Between 1900 and 1912 the holdings of financial intermedi-aries increased by nearly $2.5 billion, which is equivalent to ap-proximately one-half of the addition to the long-term debt of the
While this ratio again is not an exact measure, it indi-cates that during this period which witnessed the last large-scaleexpansion of the American railroad system, a very substantial partof total debt financing was provided by financial intermediaries.The role of financial intermediaries became still more importantjn the next two decades. Between 1912 and 1929 the increase inthe holdings by financial intermediaries (more than $5 billion in-cluding, and approximately $3 billion excluding, personal trustdepartments) was considerably larger than the total net long-termdebt financing of railroads of $2.5 billion.
From the mid-twenties to the end of World War II there hasbeen no net debt financing, or for that matter hardly any netfinancing, by railroads (for the postwar period see Table 57).Financial intermediarieshave, of course, continued to acquire partof new long-term issues—most of which were for refunding purposes—either when they were first offered or through later purchasesin the open market. They have also always held most of the equip-ment trust certificates issued by railroads, which have continued•to grow in volume. They have, moreover, played an important partin the financial reorganization of many railroads during the pasttwo decades. But on a net basis, and disregarding short-term move-ments, financial intermediaries have not made available any fundsto railroads. Indeed, the holdings of railroad securities by financialintermediaries declined between 1929 and 1952 by nearly $0.5 bil-lion, if nonreporting intermediaries (primarily personal trust de-partments) are excluded, and by as much as $2 billion if they areincluded. While part of these reductions reflect valuation changesrather than net sales, there is little doubt that during this periodfinancial intermediaries actually reduced the funds which they havemade available directly or indirectly to the railroads. The reduc-tion may have been as large as, or even somewhat larger than, the
49 Exclusion oF holdings oF personal trust departments and nonreporting inter-mediaries diminishes the share to approximately two-fifths.
228
0 0 C.,
TAB
LE 5
7So
urce
s of F
unds
of 2
0 La
rge
Rai
lroad
s(d
olla
rs in
bill
ions
)
Sour
ce
1916 to
1949
1950 to
1952
1946 to
1952
1916 to 1949
1950 to 1952
1916 to 1952
1.To
tal s
ourc
es o
f fun
ds$1
.61
$2.9
0$4
.51
100.
0%10
0.0%
100.
0%
2.Su
pplie
d by
inte
rnal
sour
ces
1.69
2.02
3.72
105.
069
.782
.5a.
Ret
aine
d pr
ofits
.0.4
40.
861.
3027
.329
.728
.8b.
Cap
ital c
onsu
mpt
ion
allo
wan
ces
1.04
0.92
1.96
64.6
31.7
43.5
c. O
ther
0.21
0.25
0.46
13.0
8.6
10.2
3.Su
pplie
d by
ext
erna
l sou
rces
—0.
080.
870.
79—
5.0
30.3
17.5
a. T
rade
pay
able
s—
0.08
0.09
0—
5.0
3.1
0b.
Ban
k lo
ans,
shor
t-ter
ma
aa
aa
a
c. B
ank
loan
s, lo
ng-te
rma
aa
aa
a
d. A
ccru
ed in
com
e ta
xes
—0.
120.
240.
12—
7.5
8.3
2.6
e. O
ther
cur
rent
liab
ilitie
s—
0.13
0.06
—0.
06—
8.1
2.1
—1.
3f.
Mor
tgag
es, b
onds
, oth
er li
abili
ties
0.08
0.41
0.49
5.0
14.1
10.8
g. C
apita
l sto
ck0
0.04
0.04
01.
40.
9h.
Oth
er so
urce
s0.
170.
040.
2110
.61.
44.
6
a In
clud
edw
ith o
ther
shor
t- an
d lo
ng-te
rm li
abili
ties.
Sour
ce: F
eder
al R
eser
ve B
ulle
tin, 1
949,
pp.
632
-633
; 195
0. p
. 641
; 195
2, p
. 643
; 195
3, p
. 717
; 195
4, p
. 819
.
FINANCING THE MAIN INVESTOR GROUPSreduction in total railroad debt of $2 billion, which also is affectedby writedowns.
Up to the twenties the railroads procured a substantial part oftheir external funds through the sale of stock. Financial intermedi-aries did not participate to a large extent in this form of financingexcept in the late twenties. It may be estimated most roughly thatbetween 1900 and 1922 railroads raised almost $2 billion throughsale of stock (excluding intercorporate while theholdings of railroad stock by financial intermediaries (excludingpersonal trust departments) increased by not much over $50 million.Between 1922 and 1929, however, the holdings of financial inter-mediaries increased by nearly $1 billion, most of the rise being dueto the advent of investment companies, while net stock issues totaledonly $0.3 billion. Although part of the reported increase in holdingsrepresents valuation changes and another part intercorporate trans-actions, financial intermediaries during this period probably ac-quired considerable amounts of outstanding railroad stock fromindividual holders and some newly issued stock directly or indirectlyfrom the issuers, in both cases contributing to the equity financingof railroads.
It thus appears that financial intermediaries contributed a sub-stantial part of the total external financing of railroads between1900 and 1929, when the demand virtually ceased. For the periodas a whole their share, based on a net supply of funds of approxi-mately $9 billion, mostly in the form of purchases of long-termdebt securities, probably was equivalent to at least three-fourths ofthe total external financing of railroads. The proportion in totalfinancing was, of course, considerably lower.
2. Public Utilities The financing of public utility corporations,primarily in the electric light, power, and telephone industries, hasbeen similar to that of railroads in that short-term credits have beennegligible,5' and a large part of long-term fixed-interest funds havebeen supplied by financial intermediaries. The two industries, how-ever, differ greatly in that the net demand for funds by publicutilities continued throughout the period instead of ceasing in1929.
50 A Study of Saving. . . , Vol. I, Tables V-27 and V-28.51 In 1937, for example, notes payable of electric, gas, and water utilities regis-
tered with the Securities and Exchange Commission were equal to only 0.5 percent of their assets (Statistics of American Listed Corporations, Part I, Table 64).Statistics of Income shows a ratio in 1949 of 1.5 per cent for the broad concept ofall "bonds, notes and mortgages with an original maturity of less than one year"(or electric and gas utilities.
230
FINANCING THE MAIN INVESTOR GROUPSUp to the twenties, financial intermediaries apparently supplied
only the minority of the funds raised by public utilities throughsale of bonds (cf. Table 58). Between 1900 and 1922 financial in-termediaries, even including personal trust departments, acquiredabout $2 billion of public utility bonds, while the amount out-standing increased by nearly $6 billion. During the twenties finan-cial intermediaries provided more than half the long-term bondmoney raised by public utilities. Their share has been still highersince the Great Depression. Between 1933 and 1952 holdings ofpublic utility bonds by financial intermediaries went up by $12billion, although total outstandings grew by only $8 billion. Finan-cial intermediaries thus took over, during that period, a consider-able part of the long-term debt financing formerly supplied to pub-lic utilities by noninstitutional investors. For the entire half cen-tury, the increase in holdings of public utility bonds by financialintermediaries, $18 billion, was practically equivalent to the totalamount of funds raised by public utilities through the sale ofbonds.52 Even allowing for the roughness of the figures it is evidentthat over the last twenty years virtually all net debt financing ofpublic utilities has been supplied by financial intermediaries.
TABLE 58Public Utility Bonds(billions of dollars)
CHANGE IN Cl-lANGE IN HOLDINGS
TOTAL BONDSOUTSTANDING
OF FINANCIAL INTERMEDIARIES
Reported Estimated TotalYEAR (1) (2) (3)
1901-1912 8.78 0.72 0.921913-1922 2.06 0.62 1.121923-1929 4.42 2.32 3.751930-1933 1.04 0.08 0.171934-1939 —0.86 1.76 3.001940-1945 —1.31 0.94 —0.371946-1949 5.95 5.09 5.911950-1952 4.20 2.74 3.69
1901-1952 19.23 14.27 18.19
Source: Same as in Table 56.52 If personal trust departments are excluded the increase in holdings exceeds
$14 billion, or three-quarters of the total growth in outstandings.
231
FINANCiNG THE MAIN iNVESTOR GROUPSFinancial intermediaries also played a considerable role in pro-
viding public utilities with preferred stock money, but the quanti-tative relationships cannot be exactly determined. By the end of1949 life insurance companies alone held about 10 per cent of pre-ferred stock outstanding. The total holdings of financial intermedi-aries, even excluding personal trust departments and a few otherintermediaries, may have amounted to as much as one-fifth of allpreferred stock outstanding.
There is little doubt that only a small proportion of the fundsraised by public utilities through common stock has been providedby financial intermediaries, although the exact ratios are again un-certain and their fluctuations over time cannot be traced. At theend of 1949 financial intermediaries, other than personal trust de-partments, probably held less than $1 billion of common stock ofutilities, mostly in the hands of management investment and prop-erty insurance companies, when the total market value of utilitycommon stock was approximately $12
Financial intermediaries thus have played an important role inthe external financing of public utilities, particularly since thetwenties. For the period 1946 through 1952 a sources-and-uses-of-funds statement is available for a large segment of the industry,the 36 companies covered in Table 59 in 1946 accounting for ap-proximately 68 per cent of total assets of all It showsthat bank loans and long-term debt, almost all of which may beregarded as supplied by financial intermediaries, represented aboutone-half of total external financing, though less than one-third oftotal financing. As financial intermediaries also provided substantialamounts through purchases of preferred stock and smaller onesthrough common stock, their aggregate share in external financingprobably approached three-fifths.
3. Other Industries: Major Groups. In contrast to the situationin the railroads and public utilities, a considerable part of thefinancing of other nonfinancial industries (a grouping which in-cludes manufacturing, mining, trade, service and construction) hastaken the form of short-term bank credit. The acquisition of bondsand debentures by financial intermediaries has also played an im-portant role in some of these industries, though generally a lesserone than in railroads or utilities. Participation of financial inter-mediaries in equity financing has been small in these industriestoo, although not negligible for preferred stock.
53 Appendix F, Tables F-i and F-il.54 Federal Reserve Bulletin, June 1949, P. 630.
232
C) z C) 0
TAB
LE 5
9So
urce
s of F
unds
of
36 L
arge
Pub
lic U
tiliti
esbi
llion
s)z
(dol
lars
in
1946
1950
1946
1946
1950
1946
Sour
ceto 1949
to19
52to
1952
to 1949
to 1952
to 1952
1.To
tal s
ourc
es o
f fun
dsS8
.45
$8.0
6$1
6.51
100.
0%10
0.0%
100.
0%
2.Su
pplie
d by
inte
rnal
sour
ces
2.81
2.99
5.80
33.3
37.1
35.1
a. R
etai
ned
prof
its0.
430.
611.
045.
17.
66.
3b.
Cap
ital c
onsu
mpt
ion
allo
wan
ces
2.06
2.05
4.11
24.4
25.4
24.9
c. O
ther
0.32
0.33
0.65
3.8
4.1
3.9
3.Su
pplie
d by
ext
erna
l sou
rces
5.64
5.07
10.7
166
.762
.964
.9a.
Tra
de p
ayab
les
0.19
0.18
0.37
2.2
2.2
2.2
b. B
ank
loan
s, sh
ort-t
erm
0.21
—0.
050.
162.
5—
0.6
1.0
c. B
ank
loan
s, lo
ng.te
rm0
—0.
010
0—
0.1
0d.
Acc
rued
inco
me
taxe
s—
0.09
0.58
0.49
—1.
17.
23.
0e.
Oth
er c
urre
nt li
abili
ties
0.05
0.12
0.17
0.6
1.5
1.0
f.M
ortg
ages
, bon
ds, o
ther
liab
ilitie
s3.
631.
475.
1043
.018
.230
.9g.
Cap
ital s
tock
1.56
2.73
4.30
18.5
33.9
26.0
h. O
ther
sour
ces
0.08
0.06
0.13
0.9
0.7
0.8
Sour
ce: F
eder
al R
eser
ve B
ulle
tin, 1
949,
p. 6
33;
1950
, p. 6
41;
1952
, p. 6
43;
1953
, P. 7
18 a
nd19
54, p
. 819
.
FINANCING THE MAIN iNVESTOR GROUPSHere we do not have the materials for even a rough historical
sketch of the share of financial intermediaries in the supply offunds such as we were able to piece together for railroads andpublic utilities. We are virtually limited to the period after WorldWar II. The only sector for which some historical material isavailable back to the twenties consists of large manufacturing cor-porations. The pertinent data are summarized in Table 60.
We may first limit ourselves to the consideration of the directparticipation of financial intermediaries (i.e. loans made directlyto the large corporations and their new securities acquired at is-suance). We then find by examining Table 60 that, possibly con-trary to common impression, the reliance of large manufacturingcorporations on financial intermediaries as a source of funds wasconsiderably greater after World War II than during the twentiesor thirties. In the period from 1921 to 1929 a group of 84 largemanufacturing corporations (accounting for nearly one-third ofthe total assets of manufacturing corporations reporting to theBureau of Internal Revenue, and for approximately one-half ofthose with assets of over $10 billion) reduced their indebtedness tobanks; and on balance issued no bonds in the financing of whichintermediaries could have participated. The aggregate net supplyof funds by financial intermediaries to these corporations thereforewas negative. From 1934 to 1939 net changes in bank debt werenegligible. Even if it is assumed that all net new bonds issued wereacquired by financial intermediaries, they would have furnishedonly about one-fifth of recorded external and less than5 per cent of total After World War II, on the otherhand, large manufacturing corporations borrowed on balance sub-stantial amounts from the banks and increased their funded debtvery materially. On the same assumptions (i.e., the acquisitionof virtually all net new bond issues by financial intermediaries andthe omission of tax accruals and some other categories of liabilities),about two-fifths of recorded external financing and well over one-tenth of total financing was supplied by financial intermediaries.
We may, however, go one step further a.nd also consider indirect55 The figures of Table 60 on which this ratio is based are incomplete as
they do not cover mortgages, tax accruals, and several minor types of liabilities.If allowance could be made for these sources of external financing, the share offinancial intermediaries would in most periods he slightly lower than is mdi.cated in the text.
58 Total financing for the purposes of this calculation includes, in addition toexternal financing, both undistributed earnings and capital consumption a!-lowances.
234
TAB
LE 6
0Fi
nanc
ing
of L
arge
Man
ufac
turin
g(p
er c
ent)
Cor
pora
tions
z 0
1921
-193
9 A
. R. K
och,
The
Fin
anci
ng o
f Lar
ge C
orpo
ratio
ns, N
atio
nal B
urea
u of
Eco
nom
ic R
esea
rch,
194
3, p
p. 6
7, 1
03, 1
07. B
ased
on 8
4 co
rpor
atio
ns.
1940
-195
2 Fe
dera
l Res
erve
Bul
letin
, var
ious
issu
es, e
.g. 1
953,
p. 7
13. B
ased
on
199
to 2
02 c
orpo
ratio
ns, i
nclu
ding
mos
t of t
hose
inK
och'
s stu
dy.
TOTA
LR
ECO
RD
EDFI
NA
NC
ING
a
INTE
RN
AL
FiN
AN
CIN
GEX
TER
NA
LFI
NA
NC
ING
Tota
l
Und
is-
tribu
ted
Earn
ings
bTo
tal
Shor
t-ter
m D
ebt
Secu
ritie
sN
otes
Tota
lPa
yabl
eTo
tal
Bon
dsSt
ocks
YEA
R(1
)(2
)(3
)(4
)(5
)(6
)(7
)(8
)(9
)
1921
-192
910
089
3511
—7
—7
18—
119
1934
-193
910
081
2619
110
84
4
1940
-194
510
084
3116
174
—1
—2
0
1946
-194
910
077
3923
82
1611
5
1950
-195
210
065
3035
235
1210
2
1946
-195
210
070
3430
164
1410
3
a To
tal e
xclu
des
tax
accr
uals
and
seve
ral m
inor
type
s of l
iabi
litie
s. A
lso
excl
udes
mor
tgag
es fo
r 192
5-19
29 a
nd 1
934-
1939
.ç)
b N
et p
rofit
afte
rta
xes l
ess d
ivid
ends
.Y
ear
Sour
ce
FINANCING THE MAiN INVESTOR GROUPSforms of financing: the acquisition of outstanding securities byfinancial intermediaries from other holders, and the loans made byfinancial intermediaries which enabled their borrowers to acquirenewly issued or outstanding securities of the selected large corpora-tions. The first of these forms of indirect financing was of consider-able importance in the thirties and forties as the share of holdingsof corporate bonds by financial intermediaries in total outstandingsrose greatly.57 The second form was at its height in the late twen-ties, evidenced in the extraordinary expansion of bank loans onsecurities to the banks' own customers as well as to security brokersand dealers. These indirect forms of financing cannot be measured,since it is impossible to segregate the loans on securities made to thecorporations included in the statistics of Table 60, or the acquisi-tion of their outstanding securities by financial intermediaries. Itis evident, however, that if these indirect forms of financing aretaken into account they would offset much, or even all, of the re-duction in bank loans shown in Table 60 for the twenties. In thethirties and forties inclusion of these indirect forms of financingwould increase the share of financial intermediaries considerablybeyond the proportion indicated by direct financing alone.
There is one other point—this time concerning a form of financ-ing rather than a group of corporations—on which historical dataare available, the share of financial intermediaries in supplyingfunds through the acquisition of bonds to nonfinancial corpora-tions other than railroads and public utilities. Table 61 showsdevelopments similar to those with public utility bonds. Financialintermediaries absorbed only approximately two-fifths of net bondissues from 1901 to 1922, and as little as one-fourth from 1923 to1929 because of heavy issues of real estate bonds only very fewof which were acquired by financial institutions. But since then,except in the Great Depression, they have increased their holdingsof industrial and miscellaneous bonds by more than total out-standings, thus virtually pre-empting this field of financing.58
57 See Table 54.58 Table 61 presents us with an apparent anomaly: The estimated increase
in holdings by financial intermediaries over the entire period from 1901 through1952 is in excess of total bond issues (net of redemptions) plus bonds outstand-ing in 1900. While the excess is not much over $2 billion (estimating the amountof industrial and miscellaneous corporate bonds outstanding at the end of 1900at approximately $0.5 billion; Hickman, op. cit., p. 255), it indicates—togetherwith the fact that there were still small noninstitutional holdings of such bondsat the end of 1952—substantial discrepancies in coverage or errors of estimationin columns 1, 2 or 3 of Table 61 or in all of them. Specifically, either column 1
236
FINANCING THE MAIN INVESTOR GROUPSTABLE 61
Industrial and Miscellaneous Corporate Bonds(billions of dollars)
CHANGE INTOTAL BONDSOUTSTANDING
CHANGE IN HOLDINGSOF FINANCIAL INTERMEDIARIES
Reported Estimated TotalYEAR (1) (2) (3)
1901-1912 2.32 0.64 0.821913-1922 2.97 0.75 1.271923-1929 8.22 1.32 2.181930-1933 —1.69 —1.30 —2.021934-1939 —4.35 0.98 1.661940-1945 —2.37 0.58 0.051946-1949 6.01 7.19 8.831950-1952 6.14 5.45 7.141901-1952 17.25 . 15.61 19.92
Figures include manufacturing, mining, trade, services, real estate, investment,finance and miscellaneous corporate bonds outstanding.
Source: Same as in Table 56.
4. Other Industries: Minor Groups. Returning to the scatteredmaterial on industries outside the railroads and public utilities andlarge manufacturing corporations, Tables 62 to 67 and other rele-vant data permit the following tentative conclusions:
(a) Short-term bank credit is at the present time of considerablygreater importance, measured by its share in total assets, for tradecorporations, particularly those in wholesale trade, and for serviceand construction corporations, than for manufacturing or for miningfirms (Table 62). Its role varies greatly, however, within those broadgroups. Among manufacturing industries, for instance, the share ofshort-term bank credit is relatively high for the food, tobacco, tex-tiles and leather industries; and relatively low for the metal, the
is understated—it would seem by approximately $3 billion—or column 3 is over-stated by the same amount, or the difference is allocable in part to each of thetwo columns. It is likely that differences in coverage (omission of some minorcategories of bonds from column 1) and in valuation (essentially par value incolumn 1, book value in column 3) account for a good part of the discrepancy,and that most of it is attributable to the period from 1930 to 1939. The twomain conclusions that can be drawn from Table 61—the relatively small propor-tion of net issues acquired by financial intermediaries up to 1929, and theacquisition by them of more than total net new issues since the mid-thirties—are not invalidated, or even seriously affected, by these defects of the figuresthat have to be used.
237
TAB
LE 6
2
C-) 0 0 C-,
Rel
atio
n of
Bon
ds, N
otes
and
Mor
tgag
es P
ayab
le to
Sel
ecte
d B
alan
ce S
heet
item
s of
Cor
pora
tions
in D
iffer
ent I
ndus
tries
, 194
9
Co
1B
ON
DS
ETC
. OF
LESS
TH
AN
1 Y
EAR
OR
IGIN
AL
MA
TUR
ITY
AsPERCENTAGE 0F
OR
BO
ND
S ET
C. O
FY
EAR
MO
RE
OR
IGIN
AL
MA
TUR
ITY
ASPERCENTAGE
0F
Tota
lTo
tal
Acc
ount
sTo
tal
Tota
lA
sset
sLi
abili
ties
Paya
ble
Ass
ets
Liab
ilitie
sEq
uity
INDUSTRY GROUP
(1)
(2)
(3)
(4)
(5)
(6)
1.M
anuf
actu
ring
2.5
7.6
30.6
9.9
30.0
14.3
2.M
inin
g3.
510
.353
.513
.840
.518
.3
3.Tr
ansp
orta
tion
0.9
2.0
21.0
32.5
68.3
56.1
4.C
omm
unic
atio
ns2.
25.
255
.130
.071
.850
.85.
Elec
tric,
gas,
and
othe
rut
ilitie
s1.
52.
975
.341
.879
.885
.86.
Who
lesa
le tr
ade
7.4
16.4
34.3
7.0
15.6
12.0
7.R
etai
l tra
de4.
412
.236
.88.
222
.812
.1
8.Tr
ade
not a
lloca
ble
6.1
15.9
39.8
7.8
20.4
11.9
9.B
anks
....
....
....
10.
Insu
ranc
e ca
rrie
rs..
....
....
..11
.R
eal e
stat
e4.
67.
294
.848
.275
.097
.612
.O
ther
fina
nce
11.1
20.8
170.
124
.145
.239
.713
.Se
rvic
es5.
611
.760
.221
.744
.934
.1
14.
Con
stru
ctio
n5.
29.
530
.46.
311
.512
.715
.A
gric
ultu
re6.
517
.477
.612
.032
.415
.616
.N
ot a
lloca
ble
5.9
11.4
26.9
12.4
24.1
10.8
All
indu
strie
s2.
23.
447
.411
.417
.928
.9
Sour
ce: T
reas
ury
Dep
artm
ent,
Rel
ease
S-3
079,
June
20,
195
2, T
able
3.
FINANCING THE MAIN INVESTOR GROUPSpetroleum and coal, and the stone, clay and glass industries (Table63). There is an obvious correlation between the importance ofshort-term bank credit in financing and the share of inventories intotal assets. Hence inter-industrial differences in the share of financ-ing through short-term bank credit during much or all of the periodunder review were probably similar to those now observed (what.ever the level of the ratios of bank credit to total assets or liabilities).In 1927, at least, the earliest year for which comprehensive data areavailable, the differences in the importance of short-term bank creditas a means of financing were approximately the same as in 1949,both for major industry groups (Table 65) and, though less clearlyso, for manufacturing subgroups (Table 66). Two differences ap.pear: the considerably higher level of the ratios in 1927 than in1949; and the narrower range of inter-industrial differences in thetwenties than in the late forties.
(b) Since the mid-thirties, when term loans by banks acquiredimportance as a form of financing, such loans have constituted alarger share of total assets in the manufacturing and service indus-tries than for public utility or trade corporations (Table 67). Thedifferences between broad industrial groups, however, appear tohave narrowed since 194! and 1946. Within manufacturing, theshare of term loans in total assets has been above average for theoil, paper, and tobacco industries, and below it for the metal andtextile industries.
(c) Neither the records of fund suppliers or recipients yield directcomprehensive data on the industrial distribution of mortgageloans made by financial intermediaries to corporations, or of thebonds and stock of nonfinancial corporations other than railroadsand public utilities held by financial (except thoseacquired by direct placement). Thus nothing can be said with con-fidence about differences as between individual industries in theparticipation of financial intermediaries in long-term financing,outside of the railroads and public utilities.e. CORPORATIONS OF DIFFERENT SIZE
No statement of sources and uses of funds exists for corporationsof different size, nor do we have information on the distribution of
Statistics of this type could be derived from available raw material forsecurity holdings of insurance companies and investment companies. The la-borious task of working them up, however, would still leave large gaps withrespect to the security holdings of commercial and savings banks, private pensionfunds and personal trust departments, and would provide no information onthe distribution of mortgage loans among financial intermediaries.
239
TAB
LE 6
3Sh
are
of C
omm
erci
al B
anks
in th
e D
ebt F
inan
cing
of M
anuf
actu
ring
Cor
pora
tions
, 194
9(p
er c
ent)
SHA
RE
OF
SHO
RT-
TER
M B
AN
K C
RED
IT
SHA
RE
OF
BA
NK
CR
EDIT
INTO
TAL
LIA
BIL
ITIE
S
SHA
RE
OF
BA
NK
CR
EDIT
INLI
AB
ILIT
IES
EXC
LUD
ING
TAX
AC
CR
UA
LS
IN S
HO
RT-
TER
MLI
AB
ILIT
IES
md.
Exci
.Ta
xTa
xA
ccru
als
Acc
rual
s
SHA
RE
OF
LON
G-T
ERM
BA
NK
DEB
T IN
LON
G-T
ERM
LIA
BIL
ITIE
SLe
ss th
anO
ne Y
ear
Tota
lO
ne Y
ear
and
Mor
eLe
ss th
anO
ne Y
ear
Tota
lO
ne Y
ear
and
Mor
eIN
DU
STR
Y(1
)(2
)(3
)(4
)(5
)(6
)(7
)(8
)(9
)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
18.5 5.2
21.8
55.6
28.1
38.3
30.4
20.5
18.8
Food
Toba
cco
man
ufac
ture
sTe
xtile
mill
pro
duct
sA
ppar
el a
nd fi
nish
ed te
xtile
sLu
mbe
r and
woo
d pr
oduc
tsFu
rnitu
re a
nd fi
xtur
esPa
per a
nd a
llied
pro
duct
sPr
intin
g an
d pu
blis
hing
Che
mic
als a
nd a
llied
pro
duct
sPr
oduc
ts o
f pet
role
um a
nd c
oal
22.6
16.1
6.5
27.7
19.7
8.0
25.6
35.9
26.2
23.1
3.1
29.2
25.8
3.4
57.8
77.9
15.7
10.5
5.2
20.0
13.4
6.6
13.9
19.5
24.3
17.7
6.6
27.9
20.3
7.6
20.4
23.9
14.8
8.9
5.9
19.1
11.5
7.6
11.7
16.5
22.1
13.0
9.1
27.2
16.0
11.2
17.4
23.4
17.7
4.6
13.1
22.0
5.7
16.3
8.3
12.7
11.0
6.9
4.1
13.0
8.1
4.9
10.6
13.7
15.5
9.5
6.0
21.0
12.8
8.2
14.5
24.0
17.9
2.2
15.7
19.7
2.4
17.3
5.4
6.9
27.6
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
11.
Rub
ber p
rodu
cts
8.7
4.3
4.4
10.2
5.0
5.2
9.0
12.9
8.5
12.
Leat
her a
nd le
athe
r pro
duct
s23
.620
.53.
128
.224
.43.
823
.028
.352
.013
.St
one,
cla
y an
d gl
ass p
rodu
cts
13.6
3.5
10.1
19.8
5.0
14.3
5.2
9.0
33.9
14.
Prim
ary
nonf
erro
us m
etal
s10
.74.
66.
113
.35.
7.
7.6
8.4
13.3
13.7
15.
Prim
ary
iron
and
stee
l5.
61.
62.
05.
02.
22.
82.
44.
06.
1
16.
Fabr
icat
ed m
etal
pro
duct
s9.
24.
64.
612
.46.
26.
26.
19.
319
.817
.M
achi
nery
9.7
4.7
5.0
12.6
6.1
6.5
6.7
10.1
17.3
18.
Elec
trica
l mac
hine
ry5.
42.
82.
66.
53.
43.
14.
25.
69.
019
.Tr
ansp
orta
tion
equi
pmen
t7.
45.
51.
99.
06.
72.
36.
88.
811
.920
.M
otor
veh
icle
s and
par
ts5.
93.
42.
59.
25.
33.
93•
96.
630
.221
.In
stru
men
ts, p
hoto
grap
hic
and
optic
al g
oods
; clo
cks a
ndw
atch
es13
.46.
07.
417
.98.
09.
98.
012
.329
.522
.M
isc.
man
ufac
turin
g in
clud
ing
ordn
ance
19.1
10.8
8.3
23.2
13.1
10.1
14.2
18.5
59.8
Sour
ce: Q
uarte
rly F
inan
cial
Rep
ort,
U.S
. Man
ufac
turin
g C
orpo
ratio
ns, F
eder
al T
rade
Com
mis
sion
and
Sec
uriti
es a
nd E
xcha
nge
Com
mis
sion
, Fou
rthQ
uarte
r, 19
49.
TAB
LE 6
4Sh
are
of C
omm
erci
al B
anks
in D
ebt F
inan
cing
of R
etai
l and
Who
lesa
le T
rade
Cor
pora
tions
, 195
0(p
er c
ent)
SHA
RE
OF
SHO
RT-
TER
M B
AN
K C
RED
IT
SHA
RE
OF
BA
NK
CR
EDIT
INTO
TAL
LIA
BIL
ITIE
S
Less
than
One
Yea
rTo
tal
One
Yea
r and
Mor
eIN
DU
STR
Y(1
)(2
)(3
)
SHA
RE
OF
BA
NK
CR
EDIT
INLI
AB
ILIT
IES
EXC
LUD
ING
TAX
AC
CR
UA
LS
IN S
HO
RT-
TER
MLI
AB
ILIT
IES
SHA
RE
OF
LON
G-T
ERM
mci
Excl
.Ta
xTa
xA
ccru
als
Acc
rual
s(7
)(8
)
BA
NK
DEB
T IN
LON
G-T
ERM
LIA
BIL
ITIE
S(9
)
Less
than
One
Yea
rTo
tal
One
Yea
ran
d M
ore
(4)
(5)
(6)
I. R
etai
l tra
de1.
Bui
ldin
g m
ater
ials
and
farm
equi
pmen
t2.
Gen
eral
mer
chan
dise
3. F
ood
4. A
utom
otiv
e de
aler
s and
gas
serv
ice
stat
ions
5. A
ppar
el a
nd a
cces
sorie
s6.
Fur
nitu
re, h
ome
furn
ishi
ngs
and
equi
pmen
t7.
Eat
ing
and
drin
king
pla
ces
8. M
isc.
reta
il st
ores
21.8
19.3
2.5
24.5
21.7
2.8
23.0
26.5
21.1
11.3
5.9
5.4
15.0
7.9
'7.1
7.8
11.4
25.4
10.7
7,8
2.9
12.6
9.2
3.4
9.7
12.8
16.2
9.9
7.5
2.4
13.1
9.9
3.2
9.1
13.1
18.2
10.8
7.6
3.2
12.4
8.7
3.7
9.8
11.8
16.9
22.7
18.5
4.2
24.4
19.9
4.5
24.1
26.7
23.5
9.1
4.7
4.4
9.7
5.0
4.7
6.9
7.7
19.7
12.9
9.7
3.2
13.8
10.4
3.4
12.5
13.6
18.9
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
II.
Who
lesa
le tr
ade
I. M
otor
veh
icle
s and
aut
omot
ive
equi
pmen
t12
.29.
92.
313
.711
.12.
612
.013
.817
.9
2. D
rugs
, che
mic
als a
nd a
llied
prod
ucts
9.9
8.4
1.5
11.3
9.6
1.7
11.3
13.4
18.8
3. D
ry g
oods
and
app
arel
19.9
18.7
1.2
22.0
20.6
1.4
19.9
22.1
28.6
4. G
roce
ries a
nd fo
od sp
ecia
lties
33.7
30.8
2.9
55.8
32.8
3.0
41.3
44.9
28.6
5. F
arm
pro
duct
s: g
oods
for
imm
edia
te c
onsu
mpt
ion
17.6
14.4
3.2
19.5
15.9
3.6
17.6
20.0
21.4
6. E
lect
rical
goo
ds14
.914
.30.
617
.216
.60.
615
.618
.59.
4
7. H
ardw
are,
plu
mbi
ng a
ndhe
atin
g eq
uipm
ent
18.6
16.1
2.5
22.7
19.6
3.1
18.2
22.7
31.6
8. M
achi
nery
, equ
ipm
ent a
ndsu
pplie
s17
.615
.32.
320
.317
.72.
618
.021
.326
.5
9. M
isc.
mer
chan
t who
lesa
lers
27.6
25.5
2.1
30.6
28.3
2.3
29.3
33.0
23.1
Sour
ce: Q
uarte
rly F
inan
cial
Ret
ort,
U.S
. Ret
ail a
nd W
hole
sale
Cor
pora
tions
, 195
1, F
eder
at T
rade
Com
mis
sion
and
Sec
uriti
es a
nd E
xcha
nge
Com
mis
sion
.
TAB
LE 6
5Fi
nanc
ing
Rat
ios o
f Maj
or In
dust
ry G
roup
s, 19
27
CO
MM
ON
BO
ND
ED D
EBT
PREF
ERR
EDST
OC
KN
OTE
S PA
YA
BLE
AS
%O
F:
AN
D M
OR
TGA
GES
AS
%O
F:
ST
OC
K
AS
%O
F
TOTA
L
EQU
ITY
a
AS
%O
F
TOTA
LTo
tal
Tota
lA
ccou
nts
Tota
lTo
tal
Ass
ets
Liab
ilitie
sPa
yabl
eA
sset
sLi
abili
ties
ASS
ETS
ASS
ETS
IND
UST
RY
GR
OU
P(1
)(2
)(3
)(4
)(5
)(6
)(7
)
1.M
anuf
actu
ring
5.8
21.5
105.
17.
327
.411
.262
.12.
Min
ing
4.2
14.0
111.
07.
926
.35.
065
.03.
Publ
ic u
tiliti
es(in
clud
ing
trans
porta
tion)
1.8
3.6
85.3
30.8
61.0
7.4
42.0
4.Tr
ade
13.0
35.4
107.
44.
211
.49.
254
.45.
Fina
nce
3.4
4.4
165.
65.
46.
92.
020
.26.
Serv
ice
9.0
18.9
140.
720
.643
.28.
943
.07.
Con
stru
ctio
n10
.618
.472
.38.
615
.03.
639
.08.
Agr
icul
ture
12.1
29.5
212.
18.
220
.08.
151
.19.
Not
allo
cate
d14
.855
.612
5.0
3.2
12.3
9.3
49.4
All
indu
strie
s4.
58.
411
7.3
12.1
22.4
6.2
41.2
a St
ated
val
ue o
f com
mon
stoc
k pl
us su
rplu
s.So
urce
: Sta
tistic
s of I
ncom
e fo
r 192
7,pp
.37
2-37
3.
S C,, S 0 0
TAB
LE 6
6
z Dl
DI 0 0 0 C.,
Fina
ncin
g R
atio
s of M
anuf
actu
ring
Cor
pora
tions
, 192
7
'J1
CO
MM
ON
NO
TES
PAY
AB
LEA
S %
OF
:
BO
ND
ED
DE
BT
AN
DM
OR
TGA
GES
As %
OF
:
Tota
lTo
tal
PR
EF
ER
RE
D
ST
OC
K
A.S
%O
F
TOTA
L
STO
CK
EQur
rya
%TO
TAL
Tota
lTo
tal
Acc
ount
sA
sset
sLi
abili
ties
Paya
ble
Ass
ets
Liab
ilitie
sA
SSET
SA
SSET
S
IND
UST
RY
(1)
(2)
(3)
(4)
(5)
(6)
(7)
1.Fo
od, b
ever
age
and
toba
cco
7.3
31.0
118.
99.
741
.414
.656
.02.
Text
iles
9.1
33.6
122.
53.
513
.012
.860
.23.
Leat
her
9.4
35.9
130.
32.
49.
317
.256
.54.
Rub
ber
4.0
10.5
33.3
15.8
41.9
165
45.7
5.Lu
mbe
r and
woo
d11
.638
.319
6.0
4.2
14.0
5.5
64.1
6.Pa
per a
nd p
ulp
4.5
15.4
96.1
12.6
43.4
10.4
60.4
56.4
7.Pr
intin
g an
d pu
blis
hing
7.8
22.2
103.
69.
326
.58.
7
8.C
hem
ical
s2.
611
.260
.06.
428
.07.
1
9.St
one,
cla
y an
d gl
ass
25.2
125.
85.
628
.612
.567
.962
.710
.M
etal
s4.
617
.810
0.7
7.9
31.0
11.8
11.
Mis
cella
neou
s7.
224
.511
3.6
4.6
15.8
13.8
56.9
a S
tate
dva
lue
of c
omm
on st
ock
plus
surp
lus.
Sour
ce: S
tatis
tics o
f Inc
ome
for 1
927,
pp.
372-
373.
FINANCING THE MAIN INVESTOR GROUPS
TABLE 67Term Loans of Banks
as Percentages of Major Industry Groups' Total Assets
Industry GroupJune 30,
1941aNovember
1946b20,
1. Manufacturing and mining 1.16 2.11a. Food, liquor and tobacco 0.95 2.82b. Textiles, apparel and leather 0.48 1.00c. Metals and metal products 0.67 1.86d. Oil, coal, chemicals and rubber 1.62 2.51e. All other manufacturing and mining 1.67 2.04 •
2. Wholesale trade 0.12 1.023. Retail trade 0.33 1.164. Public utilities 0.62 1.375. Service 0.79 2.056. Finance and all other corporations 0.10 0.09
All corporations 0.43 0.82
a Term loans of 99 banks (incLuding those to unincorporated business) fromTerm Lending to Business, N. H. Jacoby and R. J. Saulnier, National Bureauof Economic Research, 1942, p. 54, reduced on basis of 1946 relationship to elimi-nate term loans to unincorporated business (term loans by these banks appar-ently account for approximately 68 per cent of term loans of all commercialbanks; ibid., p. 30). Total assets of corporations as of end of fiscal year 1940 fromStatistics of Income for 1940, pp. 96-129.
b Term loans from Federal Reserije Bulletin, 1947, p. 504. Total assets of corpo-rations as of end of fiscal year 1946 from Statistics of Income for 1916, pp. 146.79.
holdings of corporate securities by financial intermediaries classi-fied by size of the issuer. Statistical analysis of the relation betweencorporate size and the share of intermediaries in financing is there-fore impossible. We are limited to indirect measures such as theratio of notes payable and bonded debts to assets or to all liabilities.Such balance sheet ratios do provide a general impression aboutthe proportion of funds supplied by financial intermediaries, sincebank debt constitutes a large proportion of notes payable, and sincethe share of corporate bonds held by financial intermediaries isknown. It can further be assumed that a positive correlation existsbetween the proportion of bonds outstanding held by financial in-termediaries and the size of the issuer. While such indirect indica-tors are valuable in the absence of more adequate information,their approximative nature and the substantial margin of errorwhich attaches to them must be kept in mind. Even these indirectmeasures are, with few exceptions, available only for the.last dec-
246
FINANCING THE MAIN INVESTOR GROUPSade or two; and often they are limited to manufacturing corpora-tions—not such a serious drawback as it might seem, since the manu-facturing industries account for nearly two-thirds of the total assetsof all nonfinancial corporations other than railroads and publicutilities.
For nonfinancial corporations, data are available for the periodafter World War II which permit us to separate 300 large corpora-tions accounting for approximately one-third of total assets fromthe remaining 500,000 corporations .The figures are summarized inTable 68 for the periods 1946-1949, 1946-1952, and 1950-1952.
The main difference between the two groups is the considerablylower share of bank debt and trade payables, and the higher shareof stocks, in the total and the internal financing of large corpora-tions. The share of bonds and mortgages is, rather unexpectedly,approximately equal for both groups.°° These data, the only sta-tistics available for all nonfinancial corporations, which segregateonly the very large corporations (average assets approximately $300million) from the aggregate of moderately large, medium-sized, andsmall corporations, show no marked relationship between size offirms and the share of financial intermediaries in the supply offunds. The lower share of bank credit in the financing of verylarge corporations is probably offset by the higher share of financialintermediaries in stock financing, particularly in the form of pre-ferred stock, and in long-term debt financing.
Study of the relationship between methods of financing andcorporate size requires a less coarse size breakdown and separatefigures for the major industrial groups. The necessary data areavailable only for manufacturing and trade corporations. For thesethe following conclusions are indicated, and probably apply also tononfinancial corporations outside of manufacturing and trade:
1. Bank credit is more important as a source of funds for smalland medium-sized than for very large corporations. This is indi-cated in Tables 69 and 70.
Business-size differences in the share of bank credit in total assetsor total liabilities are not very pronounced in Table 69, which re-.flects the situation of manufacturing corporations at the end of1949. The explanation is that the proportion of term loans from
6O This may be due to differences in the classification of liabilities for alland for the 300 large corporations, which possibly distort the picture, obtainedas a residual, for corporations other than the selected 300.
247
TAB
LE 6
8. S
ourc
es o
f Fun
ds o
f Lar
ge a
nd O
ther
Non
finan
cial
Cor
pora
tions
,19
46-1
952
AM
OU
NT
(BIL
LIO
NS
OF
DO
LLA
RS)
SHA
RE
(PER
CEN
T)
All
Non
-30
0A
llA
ll N
on-
300
All
finan
cial
Larg
eO
ther
finan
cial
Larg
eO
ther
Cor
ps.
Cor
ps.
Cor
ps.
Cor
ps.
Cor
ps.
Cor
ps.
SOU
RC
E(1
)(2
)(3
)(4
)(5
)(6
)
194
6-19
52
1. T
otal
sour
ces o
f fun
ds
I. To
tal s
ourc
es o
f fun
ds19
4 6-
1949
C.,
2. S
uppl
ied
by in
tern
al so
urce
sa.
Ret
aine
d pr
ofits
b. C
apita
l con
sum
ptio
n al
low
ance
s3.
Sup
plie
d by
ext
erna
l sou
rces
a. T
rade
pay
able
sb.
Ban
k lo
ans
c. A
ccru
ed in
com
e ta
xes
d. O
ther
liab
ilitie
se.
Mor
tgag
es, b
onds
f.C
apita
l sto
ck
212.
574
.313
8.2
100.
010
0.0
100.
0
117.
24&
9a78
.355
.259
.153
.067
.619
.348
.331
.826
.084
.949
.620
.129
.523
.327
.121
.3•
95.3
30.3
65.0
44.8
40.8
47.0
24.3
3.3
21.0
11.4
4.4
15.2
12.5
2.1
10.4
5.9
2.8
7.5
8.3
4.6
3.7
8.9
6.2
9.4
3.8
5.6
4.4
5.1
27.9
10.5
17.4
13.1
14.1
12.9
6.0
6.9
6.1
8.1
98.6
33.2
65.4
100.
010
0.0
61.3
21.6
b89
.762
.265
.1
c)
2.7
4.1
12.6 5.0
100.
0
2. S
uppl
ied
by in
tern
al so
urce
s60
.7a.
Ret
aine
d pr
ofits
48.9
b. C
apita
l con
sum
ptio
n al
low
ance
s20
.3
3. S
uppl
ied
by e
xter
nal s
ourc
es39
.4a.
Tra
de p
ayab
les
12.7
b. B
ank
loan
s5.
2c.
Acc
rued
inco
me
taxe
s—
1.7
d. O
ther
liab
ilitie
s5.
5e.
Mor
tgag
es, b
onds
13.8
f.C
apita
l sto
ck5.
52.
62.
95.
67.
84.
4
38.6
22.7
9.9
37.3
9.4
28.7
9.2
18.3
11.5
39.1
4.0
0.9
25.8
28.0
—0.
7
29.8
0.6
8.3
4.5
28.8
37.8
0.4
8.4
0 C.) 0
14.8
9.3
0.9
—1.
1
34.6
4.1
6.1
3.6
2.7
—0.
7
8.7
1.8
4.6
1.2
15.0
2.7
18.4
.
(1)
(2)
(3)
(4)
(5)
(6)
1950
-195
2
I.To
tal s
ourc
es o
f fun
ds11
3.9
41.1
72.8
100.
010
0.0
100.
0
2.Su
pplie
d by
inte
rnal
sour
ces
55.9
22.3
c33
.649
.154
.346
.2a.
Ret
aine
d pr
ofits
9.5
19.5
25.5
23.1
26.8
b. C
apita
l con
sum
ptio
n al
low
ance
s26
.910
.716
.223
.626
.022
.3
3.Su
pplie
d by
ext
erna
l sou
rces
58.0
18.8
39.2
50.9
45.7
53.8
a. T
rade
pay
able
s15
.12.
412
.713
.35.
817
.4b.
Ban
k lo
ans
8.5
1.5
7.0
7.5
3.6
9.6
c. A
ccru
ed in
com
e ta
xes
9.0
4.2
4.8
7.9
10.2
6.6
d. O
ther
liab
ilitie
s4.
92.
82.
14.
36.
82.
9e.
Mor
tgag
es, b
onds
13.1
4.5
8.6
11.5
10.9
11.8
f.C
apita
l sto
ck7.
43.
44.
06.
58.
35.
5
a In
clud
es o
ther
inte
rnal
sour
ces o
f $4.
5 bi
llion
.b
Incl
udes
oth
er in
tern
al so
urce
s of $
2.3
billi
on.
cInc
lude
s oth
er in
tern
al so
urce
s of $
2.1
billi
on.
Col
umn
Sour
ce1
Surv
ey o
f Cur
rent
Bus
ines
s, Se
ptem
ber 1
954,
p. 5
.2
Fede
ral R
eser
ve B
ulle
tin, 1
954,
pp.
818
, 820
; 195
3, p
. 713
; 195
2, p
p. 6
42-6
43;
1950
,pp
. 640
.641
; 194
9, p
p. 6
32-6
33.
3C
ol. 1
min
us c
ol. 2
.4.
6D
eriv
ed fr
om c
ols.
1 to
3.
TAB
LE 6
9R
elat
ion
of B
ank
Cre
dit t
o Li
abili
ties a
nd A
sset
s of
Man
ufac
turin
g C
orpo
ratio
ns o
f Diff
eren
t Siz
e, 1
949
(per
cen
t)
CO
RPO
RA
TIO
NS
OF
ALL
CO
RPO
RA
TIO
NS
WIT
H A
SSET
S($
000,
000)
OF:
Less
1/4
1050
100
TYPE
OF
CR
EDIT
SIZE
Sth
an '/
4to
1to
50
to 1
00an
d ov
er
1.Sh
are
of b
ank
cred
it in
tota
l lia
bilit
ies
14.0
14.5
17.2
19.7
17.2
10.7
a. C
redi
t of l
ess t
han
1 ye
ar7.
211
.112
.313
.39.
34.
0b.
Cre
dit o
f 1 y
ear a
nd m
ore
6.8
3.4
4.9
6.4
7.9
6.7
2.Sh
are
in li
abili
ties e
xclu
ding
tax
accr
uals
17.5
15.8
21.0
24.8
21.7
13.4
a. C
redi
t of l
ess t
han
1 ye
arb.
Cre
dit o
f 1 y
ear a
nd m
ore
9.0
8.5
12.0 3.8
15.0
16.7
6.0
8.1
11.8
5.0
9.9
8.4
3.Sh
are
of sh
ort-t
erm
ban
k cr
edit
a. In
tota
l sho
rt-te
rm li
abili
ties
10.3
14.9
15.7
17.2
14.3
6.9
b. In
shor
t-ter
m li
abili
ties e
xclu
ding
tax
accr
uals
16.6
16.7
20.3
23.4
21.1
10.6
4.Sh
are
of lo
ng-te
rm b
ank
cred
it in
long
-te
rm li
abili
ties
20.0
16.0
26.3
31.6
24.0
16.7
5.Pr
opor
tion
of sh
ort-t
erm
ban
k cr
edit
toot
her n
otes
and
acc
ount
s pay
able
31.2
25.8
34.0
43.8
45.1
19.3
6.Sh
are
in to
tal a
sset
sa.
Ban
k cr
edit
of le
ss th
an 1
yea
r2.
04.
03.
33.
52.
51.
2b.
Cre
dit o
f 1 y
ear o
r mor
e1.
91.
21.
31.
72.
11.
9c.
Oth
er lo
ng-te
rm d
ebt
7.7
6.4
3.8
3.6
6.8
9.6
Tota
l ass
ets
(bill
ions
)$1
09.7
3$2
.62
$5.8
1$1
2.16
$34.
76$5
4.39
Sour
ce: F
eder
al T
rade
Com
mis
sion
—Se
curit
ies a
nd E
xcha
nge
Com
mis
sion
,Q
uarte
rly F
inan
cial
Rep
ort,
U.S
. Man
ufac
turin
g
C-) '-I 0 1)1
C-, 0 0 0
Cor
pora
tions
, Fou
rth Q
uarte
r, 19
49.
TAB
LE 7
0Li
abili
ty S
truct
ure
of R
egis
tere
d M
anuf
actu
ring
and
Mer
chan
disi
ng C
orpo
ratio
ns, 1
937,
by
Size
(per
cen
t of t
otal
ass
ets)
a E
xclu
des
fund
ed d
ebt m
atur
ing
with
in o
ne y
ear.
b St
ated
val
ue p
lus c
apita
l sur
plus
.So
urce
: Sta
tistic
s of A
mer
ican
Lis
ted
Cor
pora
tions
, Sec
uriti
es a
nd E
xcha
nge
Com
mis
sion
, Par
t 1(1
940)
, Tab
le 6
4.
ASS
ET S
IZE
MA
NU
FAC
TUR
ING
(1,0
34 C
OR
POR
ATI
ON
S)M
ERC
HA
ND
ISIN
G(1
69 C
OR
POR
ATI
ON
S)
Not
esFu
nded
Pref
erre
dC
omm
onN
otes
Fund
edPr
efer
red
Com
mon
OF
CO
RPO
RA
TIO
NPa
yabl
eD
ebta
Stoc
kSt
ock1
'Pa
yabl
eD
ebts
Stoc
kSt
ock"
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Less
than
$1
mill
ion
3.5
1.1
10.9
66.7
4.0
2.5
29.8
53.2
to 3
mill
ion
4.0
1.9
11.4
54.1
4.5
1.6
12.8
34.0
3 to
5 m
illio
n4.
74.
510
.148
.66.
20.
619
.844
.25
to 1
0 m
illio
n4.
15.
112
.748
.83.
42.
923
.643
.710
to 2
0 m
illio
n3.
45.
212
.548
.04.
02.
817
.133
.120
to 5
0 m
illio
n3.
26.
211
.947
.74.
83.
514
.232
.250
to 1
00 m
illio
n2.
86.
715
.641
.40.
17.
114
.739
.610
0 to
200
mill
ion
2.5
7.6
16.7
45.4
....
..44
.120
0 to
500
mill
ion
1.6
10.9
9.8
47,7
..1.
4..
5&0
Ove
r 500
mill
ion
0.8
5.9
8.1
50.3
....
....
Cor
pora
tions
of a
ll si
zes
2.1
7.0
11.5
47.7
2.0
3.4
11.5
42.7
FINANCING THE MAIN INVESTOR GROUPSbanks (i.e. credits with an original maturity of more than one year)increases with the size of the corporation, while the share of short-term bank credit decreases, the two movements nearly offsettingeach other except for very large corporations. For these the propor-tion of total bank credit is definitely lower than for all other groups.Since term loans by banks represent essentially a new developmentoriginating in the mid-thirties, one might expect that at earlierdates the share of bank credit declined more regularly with increas-ing size of corporation.
Table 70, based on the balance sheets for 1937 of manufacturingand trading corporations registered with the Securities and Ex-change Commission, lends some corroboration to this surmise.Notes payable (which, it should be recalled, include various liabili-ties in addition to bank borrowing) are definitely higher in relationto either total assets or total liabilities for small than for largecorporations. The ratio is highest, however, not for the smallestcorporations but for those of medium size ($1 to $10 million totalassets). This irregularity may be due to the fact that the sample isnot adequate for very small corporations. Unfortunately no com-parable data are available for any date before the Great Depres-sion, but there is no reason to doubt that the inverse correlationbetween corporate size and share of bank credit was also presentthen. Indeed, the difference between the share of bank debt in largeand in small corporations may well have been larger before thanafter the Great Depression, since it is known that the ratio of bankcredit to total assets and liabilities of all nonfinancial corporationsother than railroads and public utilities was higher in the first threedecades of the century than in the thirties and forties,°' and thatlarge corporations made relatively little use of bank credit, at leastin the twenties.62
The relation between business size and the use of funds providedby financial intermediaries is shown for trade corporations in Tables71 and 72 for 1950 (data for 1949 being unavailable). As in the caseof manufacturing, the share of total bank credit in total liabilities
61 The share of notes payable in total assets of all manufacturing corporationsin 1927 was nearly 6 per cent (Table 65), compared to 2 per cent in 1937 (Table70; corporations registered with Securities and Exchange Commission) and 4per cent in 1949 (Table 69; all manufacturing corporations). See also A Studyof Saving . . . , Vol. III, Table W.31.
62 In Koch's sample of large manufacturing corporations (op. cit., p. 67) notespayable in the mid-twenties amounted to only about 1 per cent of total assets.This is considerably less than the comparable ratio for 1937 (Table 70), andstill more below the ratio for 1949 (Table 69).
252
TAB
LE 7
1R
elat
ion
of B
ank
Cre
dit t
o Li
abili
ties a
nd A
sset
s in
Ret
ail T
rade
Cor
pora
tions
, 195
0(p
er c
ent)
CO
RPO
RA
TIO
NS
COR
POR
ATI
ON
SW
ITH
ASS
ETS
($00
0,00
0)O
F:
TYPE
OF
CR
EDIT
OF
ALL
size
sLe
ssth
an ¼
1/4
to 1
1to
55
to 1
010
to50
50to
100
100
and
over
I.Sh
are
of b
ank
cred
it in
tota
l lia
bilit
ies
13.1
13.3
14.2
17.1
20.4
15.2
11.3
5.3
a. C
redi
t of l
ess t
han
1 ye
arb.
Cre
dit o
f 1 y
ear a
nd m
ore
9.4
3.7
10.1 3.2
11.2 3.0
13.2 3.9
13.0 7.4
8.7
6.5
8.7
2.6
2.9
2.4
2.Sh
are
in li
abili
ties e
xclu
ding
tax
accr
uals
a. C
redi
t of l
ess t
han
1 ye
arb.
Cre
dit o
f 1 y
ear a
nd m
ore
15.6
11.2 4.4
14.4
11.0 3.4
16.9
13.3 3.6
20.4
15.8 4.6
23.8
15.2 8.6
18.0
10.3 7.7
13.6
10.5 3.1
7.6
4.1 3.5
3.Sh
are
of sh
ort-t
erm
ban
k cr
edit
a. In
tota
l sho
rt-te
rm li
abili
ties
11.9
12.8
13.9
16.6
17.6
13.1
12.6
3.4
b. In
tota
l sho
rt-te
rm li
abili
ties,
excl
udin
gta
x ac
crua
ls15
.114
.317
.220
.921
.917
.316
.85.
2
4.Sh
are
of lo
ng-te
rm b
ank
cred
it in
long
-te
rm li
abili
ties
17.0
15.0
15.7
18.9
28.0
19.1
8.2
17.0
5.Pr
opor
tion
of sh
ort-t
erm
ban
k cr
edit
toot
her n
otes
and
acc
ount
s pay
able
23.0
19.7
25.7
33.3
37.9
31.0
28.3
8.3
6.Sh
are
in to
tal a
sset
sa.
Ban
k cr
edit
of le
ss th
an 1
yea
rb.
Ban
k cr
edit
of 1
yea
r and
mor
ec.
Oth
er lo
ng-te
rm d
ebt
3.4
1.3
5.0
3.9
1.2
4.5
4.1
1.1
4.1
4.7
1.4
4.5
5.0
2.8
5.9
3.1
2.3
8.6
3.2
0.9
9.0
0.9
0.8
3.6
Tota
l ass
ets
(bill
ions
)$2
3.55
$5.8
7$4
.76
$3.3
1$1
.06
$2.7
5$1
.06
$4.7
3
TAB
LE 7
2R
elat
ion
of B
ank
Cre
dit t
o Li
abili
ties a
nd A
sset
s in
Who
lesa
le T
rade
Cor
pora
tions
, 195
0(p
er c
ent)
0
CO
RPO
RA
TIO
NS
CO
RPO
RA
TIO
NS
WIT
H A
SSET
S($
000,
000)
OF:
TYPE
OF
CR
EDIT
OF
ALL
SIZE
S
Less
than
1/4
¼ to1
1 to 5
5to
10
10 to 5
050
and
over
1.Sh
are
of b
ank
cred
it in
tota
l lia
bilit
ies
23.6
15.6
18.8
23.3
31.8
37.3
34.4
a. C
redi
t of l
ess t
han
1 ye
ar21
.513
.316
.921
.629
.7.3
4.0
32.0
b. C
redi
t of 1
yea
r and
mor
e2.
12.
31.
91.
72.
18.
82.
4
2.Sh
are
in li
abili
ties e
xclu
ding
tax
accr
uals
26.5
16.7
21.1
26.7
35.5
42.2
37.3
a. C
redi
t of l
ess t
han
1 ye
ar24
.114
.219
.024
.833
.238
.534
.7b.
Cre
dit o
f 1 y
ear a
nd m
ore
2.4
2.5
2.1
1.9
2.3
3.7
2.6
3.Sh
are
of sh
ort-t
erm
ban
k cr
edit
a. In
tota
l lia
bilit
ies
25.3
16.2
19.9
25.2
33.8
38.8
37.2
b. In
tota
l sho
rt-te
rm li
abili
ties,
excl
udin
gta
x ac
crua
ls28
.917
.622
.929
.738
.544
740
.9
4.Sh
are
of lo
ng-te
rm b
ank
cred
it in
long
-te
rm li
abili
ties
14.2
12.9
12.2
11.7
16.8
26.7
17.3
5.Pr
opor
tion
of sh
ort-t
erm
ban
k cr
edit
toot
her n
otes
and
acc
ount
s pay
able
47.1
24.3
33.9
48.1
71.0
100.
798
.3
6.Sh
are
in to
tal a
sset
sa.
Ban
k cr
edit
of le
ss th
an 1
yea
r9.
85.
87.
410
.014
.416
.513
.9b.
Ban
k cr
edit
of 1
yea
r and
mor
e1.
01.
00.
80.
81.
01.
61.
1
c. O
ther
long
-term
deb
t3.
13.
22.
93.
02.
63.
43.
7
Tota
l ass
ets
(bill
ions
)$1
7.67
$3.3
1$5
.01
$4.8
3$1
.60
$1.6
9$1
.23
0 0 0
FINANCING THE MAIN INVESTOR GROUPSor in total assets is higher for medium-sized than for small andparticularly than for very large corporations in retail and whole-sale trade. The level of the share of bank credit, however, isslightly lower in retail but considerably higher in wholesale tradethan in manufacturing. Furthermore, the asset size at which bankcredit reaches its highest proportion to total assets or liabilities isslightly higher in retail trade than in manufacturing. In otherwords, trade corporations as they grow in size become more inde-pendent of bank credit only well after manufacturing corporationsdo. The importance of long-term debt increases irregularly withsize in trade corporations as it does in manufacturing, and the risein the share supplied by financial intermediaries may be assumedto be steeper.
2. Probably the share of financial intermediaries in mortgagecredit to nonfinancial corporations, about which almost nothing isknown in quantitative terms, tends to increase with the size ofthe borrower. Whether or not this assumption is correct is of rela-tively small importance within the entire financing picture, sincethe share of mortgage loans in total financing is rather small formost nonfinancial corporations except, of course, real estate corpo-rations. For these there is little doubt, despite lack of quantitativeevidence, that there is a marked positive correlation between sizeof the mortgage or of the mortgagee and the share of financialintermediaries as suppliers.
3. It is quite certain, although statistical corroboration is woe-fully lacking, that the share of corporate bonds held by financialintermediaries tends to increase with size of issuer. Financial inter-mediaries, by the very nature of their operations, concentrate onissues of well-known firms with a high financial rating, and theseare usually corporations of large size. In addition the share offunded debt (bonds and debentures) in total financing increasesmarkedly with size. Among manufacturing corporations long-termdebt (excluding term loans from banks but including unfundeddebt) amounted at the end of 1949 to 4 per cent of assets for corpo-rations with assets of less than $5 million, to 7 per cent for thosewith assets between $5 million and $100 million, but to nearly 10per cent for corporations with assets of $100 million or more63(Table 69). From the combination of these two tendencies the
83 The increase probably would be more pronounced if figures were availableseparately for bonds and debentures, permitting elimination of unfunded long-term debt, for which the positive correlation with size may well be less pro-nounced if it exists at all.
FINANCING THE MAIN INVESTOR GROUPSshare of funds supplied by financial intermediaries through long.term debt securities undoubtedly increases, and probably to a verymarked extent, with the size of the corporation.64 Indeed, for verylarge corporations it may be inferred from the relationship betweentotal bonds outstanding and the holdings of financial intermedi-aries (Table 73) that virtually all long-term debt money is nowsupplied by financial intermediaries. This is certainly not the casefor smaller corporations. Hence, the difference in the proportionof total funds supplied by financial intermediaries through bondsand debentures is in fact considerably larger than that indicatedby the balance-sheet share of long-term debt in total liabilities ortotal assets.
4. Similar relations probably prevail for the supply of funds inthe form of preferred stock, although the statistical material isscarcer still. The proportion of preferred stocks to total assets ortotal external financing increases with size of corporation (Table70), although much more irregularly and less markedly than in thecase of funded debt. The preferred stock holdings of financial in-termediaries are also concentrated in issues of large corporations,but probably to a lesser extent than in the case of bonds and de-bentures. Business-size differences in the contribution of financialintermediaries to financing are therefore probably less pronouncedfor preferred stock than for funded debt, though still noticeable.
5. Participation by financial intermediaries in financing throughcommon stocks is largely limited to property insurance companies,investment companies, private pension funds and personal trustdepartments. In all cases except personal trust departments, mostof the holdings Consist of the issues of large corporations. Thusthere is hardly any doubt that the contribution of financial inter-mediaries through the acquisition of common stock—in any casesmall in relation to total common stock financing—is substantiallyhigher for large than for small corporations.
64 An indication of this relationship is provided in Table 73 comparing thedistribution, by asset size of issuer, of (I) all corporate bonds, notes and mort-gages with original maturity of over one year outstanding at the end of 1947;(2) all corporate bonds issued from 1945 to 1949; and (3) corporate bonds heldin 1948 by 28 large life insurance companies, which account for approximately60 per cent of corporate bond holdings of all financial intermediaries (70 percent if personal trust departments and private pension funds are excluded).Though the inclusion of mortgages obscures the relation, it is clear from acomparison of columns 1 and S of Table 73 that the bonds of small and medium-sized issuers account for a smaller percentage of institutional portfolios thancorresponds to their share in outstandings, while the opposite relation holds forbond issues of large corporations.
256
TAB
LE 7
3Pe
rcen
tage
Dis
tribu
tion
of L
ong-
Term
Deb
t by
Size
of I
ssue
r, 19
45-1
949
a. z r) a. z P1 '-4 0 C., 0
ALL
CO
RPO
RA
TEB
ON
DS,
NO
TES
AN
D M
OR
TGA
GES
NEW
BO
ND
CO
RPO
RA
TE B
ON
DS
HEL
DIN
SUR
AN
CE
CO
MPA
NIE
SBY
28
LIFE
(194
8)
Acq
uire
dA
SSET
SIZ
E O
F O
BLI
GO
RO
VER
ON
E Y
EAR
(194
7)(1
)
ISSU
ESa
(194
5.19
49)
(2)
All (3)
in D
irect
Plac
emen
ts(4
)O
ther
(5)
Und
er $
5 m
illio
n26
.70.
33.
05.
40.
3$5
to 1
0 m
illio
n4.
10.
82.
95.
10.
410
to 5
0 m
illio
n11
.47.
315
.622
.37.
850
to 1
00 m
illio
n8.
412
.113
.513
.513
.410
0 m
illio
n an
d ov
er49
.477
.064
.352
.777
.5U
nallo
cate
d..
2.4
0.7
0.9
0.6
All
oblig
ors
100.
010
0.0
100.
010
0.0
100.
0
Am
ount
, all
oblig
ors (
billi
ons)
$50.
11$9
.09
$17.
28$9
.25
$8.0
3
a O
niy
issu
es o
ffer
ed th
roug
h in
vest
men
t ban
kers
to g
ener
al p
ublic
; hen
ce to
be
com
pare
d w
ith c
ol. 5
.C
olum
nSo
urce
1St
atis
tics o
f inc
ome
for 1
947,
Par
t II,
p. 2
48.
2Es
timat
ed o
n ba
sis o
f Cos
ts o
f Flo
tatio
n 19
15 to
191
9, S
ecur
ities
and
Exc
hang
e C
omm
issi
on, p
p. 1
6-28
.3-
5in
vest
men
t Bul
letin
59,
Life
Insu
ranc
e A
ssoc
iatio
n of
Am
eric
a, F
ebru
ary
1950
, p. 4
.
FINANCiNG THE MAIN INVESTOR GROUPS6. While for separate types of financing a fairly definite and rea-
sonably reliable picture can be obtained of the relation betweenbusiness size and the share of financial intermediaries in financingnonfinancial corporations other than railroads and public utilities,it is difficult to estimate the share of intermediaries in total financ-ing, or even external financing only, in relation to corporate size.We are hampered not only by the lack of quantitative precisionin the surmises about the share of financing intermediaries in dif-ferent forms of financing, but also by the absence of sources-and-uses-of-funds statements for nonfinancial corporations of differentsize which would permit combining the information for the differ-ent types of financing. Such a combination is particularly hazardousbecause the direction of the relationship between corporate sizeand the share of financial intermediaries differs by type of financ-ing, the correlation being negative for short-term bank debt, butpositive for most other forms of financing, particularly term loansby banks, long-term bonds, and preferred stock. It is probably safeto say, however, that the share of financial intermediaries in totalexternal financing is substantially higher for large than for smallnonfinancial corporations other than railroads and public utilities,and probably has been so throughout the period since 1900. Therelation for total financing is probably in the same direction; i.e.,financial intermediaries are likely to have accounted for a largerproportion of combined internal and external financing of largethan small corporations.
Finally—though one would not want to be positive on this point—the tendency for the share of financial intermediaries in financingto increase with corporate size is probably more pronounced nowthan it was before the Great Depression. This would follow fromthe growth in relative importance of term loans by banks and hold-ings of corporate bonds by intermediaries, both of which are posi-tively correlated with size; and from the decline of short-term bankloans, for which the correlation is negative. Indeed one might beinclined to venture the guess—and nothing but a guess is possible—that in the first two decades of the century, for nonfinancial corpo-rations other than railroads and public utilities, the correlation be-tween corporate size and the share of financial intermediaries intotal financing was negative rather than positive.
8. State and Local GovernmentsFor the period from 1901 through 1952 securities outstanding,which represent practically all external financing done by state
258
FINANCING THE MAIN INVESTOR GROUPSand local governments, have increased by $28 billion, of whichfinancial intermediaries have taken approximately $22 billion (cf.Table 74). On the other hand, retained current income totaled $67billion, and net capital expenditures came to $39 billion.65 Ex-ternal financing has provided, for the period as a whole, less thanthree-tenths of total net funds (external financing plus retained in-come). It averaged approximately one-half before 1929; and aftererratic behavior between 1930 and 1915 it accounted for approxi-mately one-third of total funds for the period 1946-1952, but thisratio may not be representative for an extended postwar period.
State governments and local units differ considerably in degreeof reliance on external financing. For state governments externalfinancing has provided only approximately one-eighth of total netfunds; for local governments, more than two-fifths. Whether theshare of financial intermediaries in total external financing has beensignificantly different for particular groups of state or local govern-ments, and especially whether they have differed for certain groupsof municipal issues and certain types of their securities, it is im-possible to say, since the balance sheets of financial intermediariesas a rule fail to provide any breakdown of aggregate holdings ofstate and local government securities.
The share of financial intermedãaries in total external financinghas shown a definite increase, though not without interruptions,from slightly more than two-fifths between 1901 and 1922 to ap-proximately one-half in the twenties and two-thirds in the GreatDepression. From 1934 to 1939 the increases in the holdings of stateand local government securities by financial intermediaries wereconsiderably larger than the very small total external financing bystate and local governments. During World War II state and localgovernments reduced their securities outstanding by nearly one-fifth, but financial intermediaries liquidated their holdings only toa considerably smaller extent. As a result, the share of financial in-termediaries in state and local government securities outstanding(including sinking fund holdings) increased throughout the thirtiesand early forties to 72 per cent at the end of 1945. If sinking fundholdings are excluded from outstandings, the share of financial
65 Both figures are calculated on the basis of original cost depreciation; ifreplacement cost is used, they are reduced to approximately $50 billion and alittle over $25 billion respectively. It is hardly necessary to recall that the budgetsof state and local governments generally do not use concepts like retained incomeand net capital expenditures, but that these figures have been constructed, aswell as possible, from the data now available (for some of the conceptual andpractical difficulties involved cf. A Study of Saving . . . , Volume II, ChapterXvii).
259
z C-.
, 0 C) 0 C,,
TAB
LE 7
4So
urce
s of S
tate
and
Loc
al G
over
nmen
t Fun
ds, a
nd th
eA
mou
nt a
nd S
hare
Sup
plie
d by
Fin
anci
al In
term
edia
ries
0
Source
1901
to
1912
1913
to
1922
1923
to
1929
1930
1934
to
to
1933
1939
1940
1946
to
to
1945
1949
1950
to
1952
1901
to
1949
1901
to
1952
1.To
tal s
ourc
es o
f fun
ds6.
011
.920
.2A
mou
nt (b
illio
ns6.
614
.6of
dol
lars
)20
.922
.432
.210
2.5
134.
7
2.Su
pplie
d by
inte
rnal
sour
ces
a. R
etai
ned
inco
me
b. C
apita
l con
sum
ptio
n al
low
ance
s
3.6
2.3
1.3
5.9 3.4
2.6
13.7 9.6
4.1
4.0
14.3
0.1
7.2
3.9
7.1
24.5
16.4
16.2
10.5
8.3
5.9
24.0
18.1 5.9
82.3
49.2
33.1
106.
367
.339
.03.
Supp
lied
by e
xter
nal s
ourc
esa.
Bor
row
ing
b. S
ale
of se
curit
ies
2.4 ..
2.4
6.0 .. 6.0
6.5 .. 6.5
2.6
0.3
0.4
—0.
42.
20.
7
—3.
66.
00.
30.
1—
3.9
5.9
8.2 0
8.2
20.2 0.4
19.8
28.4 0.4
28.0
4.Su
pplie
d by
fina
ncia
l int
erm
edia
ries
(cha
nge
in h
oldi
ngs)
1.0
2.6
3.3
1.8
2.8
—1.
04.
47.
314
.922
.2
5.Sh
are
of fi
nanc
ing
by in
term
edia
ries
a. T
otal
fina
ncin
gb.
Ext
erna
l fin
anci
ng17
.442
.921
.743
.316
.350
.7
Shar
e (p
er26
.719
.167
.1
cent
)—
4.7
19.8
27.6
b74
.022
.789
.014
.573
.716
.578
.2
a F
igur
eof
lim
ited
sign
ifica
nce
as d
enom
inat
or is
of s
mal
lb
Figu
re o
f lim
ited
sign
ifica
nce
as d
enom
inat
or is
neg
ativ
e.abso
lute
size
.
Sour
ce: A
Stu
dy o
f Sav
ing
..
., V
oLI,
1955
, Tab
les
to G
-21
and
supp
lem
enta
ry d
ata
from
sour
ces l
iste
d th
ere.
FiNANCING THE MAIN INVESTOR GROUPSintermediaries in state and local government securities outstanding,as shown in Table 75 declined from three-fifths in 1900 to a littleover one-half in the early twenties, showed a minor upward trendto the Great Depression, shot up during the thirties and earlyforties to over three-fourths, and remained at about that levelthrough 1952. After World War II financial intermediaries main-tained their high share in securities outstanding.66
The marked increase in the share of all financial intermediariesin the external financing of state and local governments obscuressharp shifts in the shares of different groups of intermediaries asshown in Table 75. The most radical change is the virtual disap-pearance of mutual savings banks as suppliers of such financing.These banks at the turn of the century had been the most im-portant institutional source of financing of state and local govern-ments, owning one-third of outstanding state and municipal securi-ties, and making available approximately one-fourth of their totalfunds to state and local governments. Mutual savings banks in-creased the absolute volume of their holdings of state and localgovernment securities slowly and sporadically from less than $600million in 1900 to approximately $900 million in 1929, but at thesame time the share of these securities, because of the sharp in-crease in total outstandings, fell from fully one-third to only 6 percent. After the Great Depression mutual savings banks virtuallyliquidated their holdings of state and local government securities,particularly during World War II. From World War I on, themain reason for the withdrawal of mutual savings banks fromfinancing state and local governments probably was the reduction inthe yield of state and local government securities compared to thatof other high-grade securities like United States government andprime corporate bonds, a reduction primarily due to the privilegeof tax exemption. This privilege made state and local governmentsecurities particularly attractive to individuals and corporationssubject to high rates of income tax, an effect that increased as in-come tax rates rose in the thirties and forties. For mutual savingsbanks, which until recently were not subject to income taxation,
86 The data may overstate the proportion of state and local government securi-ties held by financial intermediaries because such securities may now be carriedon the average at slightly above par in the balance sheets of financial intermedi-aries, whereas the statistics of outsiandings are all expressed in par values. Whilethis circumstance and a few other less important statistical difficulties may, andprobably do, lead to a slight overstatement of the share of financial intermedi-aries, the error is not likely to be of considerable size and should not affect themain trends shown.
261
C)
P1 P1 0 C) 0
TAB
LE 7
5Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Stat
e an
d Lo
cal G
over
nmen
t Sec
uriti
es O
utst
andi
ng(p
er c
ent o
f out
stan
ding
s exc
ludi
ng si
nkin
g fu
nds)
Intermediaries
1900
1912
1922
1929
1933
1939
1945
1949
1952
1.Fe
dera
l Res
erve
Ban
ks..
....
0.1
0..
....
..2.
Com
mer
cial
ban
ks10
.513
.812
.614
.115
.119
.426
.831
.534
.73.
Mut
ual s
avin
gs b
anks
33.5
20.6
7.8
6.2
5.2
3.4
0.6
0.4
1.1
4.Pr
ivat
e lif
e in
sura
nce
com
pani
es4.
14.
94.
13.
94.
99.
84.
95.
13.
95.
Frat
erna
l ins
uran
ce o
rgan
izat
ions
0.8
2.5
3.2
3.3
2.6
2.9
2.5
2.0
1.1
6.G
over
nmen
t tru
st fu
nds
0.3
0.4
1.5
3.1
4.0
7.3
7.4
7.7
8.2
7.Fi
re a
nd m
arin
e in
sura
nce
com
pani
es1.
41.
91.
31.
51.
00.
90.
81.
83.
28.
Cas
ualty
and
mis
c. in
sura
nce
com
pani
es0.
91.
21.
31.
40.
90.
91.
!2.
02.
79.
Savi
ngs b
ank
life
insu
ranc
e de
partm
ents
....
..0
00
00
010
.Sa
ving
s and
loan
ass
ocia
tions
..0.
10.
10.
20.
20.
10.
20.
30.
311
.In
vest
men
t com
pani
es..
..0
00
00
00
12.
Gov
ernm
ent l
endi
ng in
stitu
tions
....
....
0.3
1.6
3.3
2.0
3.5
13.
Pers
onal
trus
t dep
artm
ents
8.7
9.2
20.1
20.6
21.5
23.3
30.3
24.0
20.5
Tota
l hol
ding
s by
inte
rmed
iarie
s60
.054
.452
.054
.555
.569
.677
.876
.779
.2
Tota
l out
stan
ding
cxc
i. si
nkin
gfu
nds (
billi
ons)
$1.7
$3.8
$9.0
$14.
6$1
7.5
$18.
0$1
4.9
$20.
8$2
9.3
Sour
ce: H
oldi
ngs o
f sta
te a
nd lo
cal g
over
nmen
t sec
uriti
esfr
om T
able
G.l
(App
endi
x Su
pple
men
t).by
fina
ncia
l int
erm
edia
ries f
rom
tabl
es in
App
endi
x A
; out
stan
ding
s
FINANCING THE MAIN INVESTOR GROUPSstate and local government securities lost their attractiveness astheir yield fell more and more below that of other investments ofcomparable quality.
The same forces, only in reverse, may be seen at work in the in.crease of state and local government security holdings of personaltrust funds administered by banks and trust companies, most of thebeneficiaries of which are individuals subject to relatively high in-come tax rates. These departments seem to have accounted forless than one-tenth of state and local government securities out-standing in 1900 and 1912, when the tax exemption privilege wasof virtually no importance. They increased their share to one-fifthand more for the benchmark dates from 1922 through 1939, andreached a peak with 30 per cent in 1945. This resulted partly fromthe increasing size of assets administered by personal trust depart-ments. It also reflected in the early years the rising share of state andlocal government securities within these funds. The decline in theshare of personal trust funds between 1945 and 1952 is not due to anabsolute decline in their holdings of tax-exempt securities, but sim-ply to the fact that the funds were not large enough to absorb a pro-portion of the heavy net issues equal to the share they had held in1945 after a period of fifteen years in which state and local govern-ments had, on balance, made no appeal to external funds.
Commercial banks sharply increased their participation in thefinancing of state and local governments, both in absolute termsand in relation to total outstandings. Their share in outstandingsrose fairly steadily from approximately one-tenth in 1900 to fullyone-seventh in 193& Since then they have increased their holdingsof state and local government securities sharply to $4.0 billion in1945 and to $10.2 billion in 1952. As a result, commercial banks in1952 were the most important single source of financing for stateand local governments, owning over 30 per cent of their total securi-ties outstanding, more than any one other group of financial inter-mediaries, and more than all noninstitutional holders together. Thisrise paralleled the absolute growth of total assets of commercialbanks between 1933 and 1945, though state and local governmentsecurities in 1945 accounted for a smaller proportion of total assetsthan in 19133. Between 1945 and 1952, however, commercial banks'holdings of state and local government securities rose more rapidlythan total assets—their share increased from 2.5 to 5 per cent—andmore rapidly than the total debt of state and local governments..One of the reasons for the increasing importance of state and local
263
FINANCING THE MAIN INVESTOR GROUPSgovernment securities among commercial bank assets, and of theirholdings to the total supply of such securities, is again the taxexemption feature, which in a period of rising corporate tax ratesconstitutes an attraction for commercial banks, whose profits aretaxable; an attraction which does not extend to mutual savingsbanks or life insurance companies, whose earnings, broadly speak-ing, are not subject to corporate income tax. Another reason is theclose connection between commercial banks and their own localitiesand states, which in many cases may have made participation in thefinancing of the heavy expenditures required after World War IIappear in the nature of accommodating a regular important cus-tomer.
State, local and federal trust funds have supplied about $2.5 bil-lion, or 8 per cent of total external financing for state and localgovernments during the period as a whole. Their share rose fromvirtually nothing before 1912 to 2 per cent in 1922, and to 7 percent in 1939 and after World War II. Financial intermediaries otherthan banks and private and public trust funds participated only toa minor extent in financing state and local government securities,and increased their share slowly though steadily. Insurance compa-nies, savings and loan associations, and a few other smaller groupstogether accounted only for 7 per cent of state and local govern-ment securities outstanding in 1900, 10 per cent in 1929, and 15per cent in 1952.
As a result of these developments the financing of state andlocal governments has become predominantly an institutional af-fair. The only other group participating in it substantially areindividuals in the upper income brackets, and even they apparentlynow supply less than one-fifth of the external financing of state andlocal governments. But if personal trust departments are included,because their beneficiaries belong to the same group of people, theshare for individuals in the upper income groups rises to abouttwo-fifths. This distribution of the sources of external financing ofstate and local governments is obviously determined more by thetax exemption privilege than by other considerations. Except forthat privilege, state and local governments could not finance solarge a part of their external requirements at such low rates eitherfrom wealthy individuals (directly or through personal trust de-
• partments), who are subject to high personal tax rates, or fromcommercial banks, which are liable to approximately as high corpo-
264
FINANCING THE MAIN INVESTOR GROUPSrate profit taxes; these two groups in 1952 held about three-fourths oftotal state and local government securities outstanding.6?
9. Federal GovernmentDuring the last half century the federal government68 has absorbedmore external funds than any other sector of the economy exceptfinancial intermediaries. It has also made more use of funds fromfinancial intermediaries, in absolute amounts or in relation to itstotal external financing, than any other group. The transactions ofthe federal government were so large during both world wars thatthey entirely dominated the national flow of funds in the war pe-riods, but they have been of rather secondary importance for mostother periods, a contrast not duplicated by the behavior of othersectors 69
From 1900 through 1949 the federal government utilized nearly$700 billion of funds, raising nearly $400 billion from currentrevenue and small amounts from imputed depreciation allowances.External funds totaling approximately $285 billion were absorbed,of which more than $20 billion were raised during World War I andthe years immediately following, about $45 billion during the de-pression of the thirties, and over $240 billion during World War II(Table 76). During the remaining nearly thirty years of the periodthe Treasury generally was able to reduce its external financing, inthe aggregate by nearly $25 billion.
Of the total external supply of funds, $255 billion (nine-tenths)was raised through the sale of securities, netting repayments and re-tirements against new issues. The rest was provided mostly by theissuance of currency (including Treasury currency in circulation aswell as gold certificates held by the Federal Reserve Banks), mostof which in turn was absorbed directly or indirectly by the generalpublic. To follow the participation of financial intermediaries inthe external financing of the federal government, it is therefore
67 This assumes, as is probably correct, that only a small proportion of stateand local government securities in personal trust funds or held by noninstitu-tional investors is in the hands of people with moderate incomes.
68 Refers to the Treasury and to government corporations and credit agencies.Federal land banks are included, although the Treasury's proprietary interestin them ended in 1947.
69 The distinction between current and capital expenditures and the estimatesof capital consumption allowances, of course, are not taken directly from thebudgets of the federal government, but are roughly estimated from budget andother data; for derivation and limitations of these figures, see A Study of Sav-ing . . . , Volume II, Chapter XVIII.
265
TAB
LE 7
6So
urce
s of F
unds
of F
eder
al G
over
nmen
t, an
d th
e A
mou
nt a
nd S
hare
Supp
lied
by F
inan
cial
Inte
rmed
iarie
s
a Fi
gure
s of l
imite
d si
gnifi
canc
e as
den
omin
ator
is n
egat
ive.
b N
umer
ator
exc
lude
s Tre
asur
y cu
rren
cy.
Sour
ce: A
Stu
dy o
f Sav
ing.
..
, Vol
.I,
Tabl
es F
-i to
F-3
0.
Source
1901
to
1912
1913
to
1922
1923
1930
to
to
1929
1933
1931
to
1939
1940
to
1945
1946
to
1949
Total
Amount (billions
of dollars)
1.To
tal s
ourc
es o
f fun
ds1.
85.
81.
73.
724
.555
.59.
683
.42.
Supp
lied
by in
tern
al so
urce
s1.
0—
18.9
7.8
—4.
2—
12.6
—18
5.1
9.9
—20
2.1
a. R
etai
ned
inco
me
0.8
—19
.27.
5—
4.4
—13
.2—
187.
28.
8—
207.
0b.
Cap
ital c
onsu
mpt
ion
allo
wan
ces
0.2
0.3
0.3
0.2
0.7
2.1
1.2
5.0
3.Su
pplie
d by
ext
erna
l sou
rces
0.8
24.7
—6.
07.
837
.124
0.6
—19
.628
5.5
a. B
orro
win
g0.
82.
40
014
.210
.62.
030
.21.
Cur
renc
y0.
81.
90.
2—
0.2
13.5
2.9
5.6
24.8
2. O
ther
00.
5—
0.2
0.2
0.7
7.7
—3.
55.
4b.
Sal
e of
secu
ritie
s0
22.3
—6.
07.
822
.923
0.0
—21
.625
5.3
4.Su
pplie
d by
fina
ncia
l int
erm
edia
ries
(cha
nge
in se
curit
y ho
ldin
gs)
0.1
8.0
—0.
28.
023
.015
4.0
—14
.317
8.7
Shar
e (p
erce
nt)
5.Sh
are
of fi
nanc
ing
by in
term
edia
ries
a. T
otal
fina
ncin
g7.
413
7.3
—12
.221
8.5
93.9
277.
514
9.O
a21
4.2
b. E
xter
nal f
inan
cing
b16
.532
.310
2.5
62.1
64.0
73.3
a62
.6c.
Lon
g-te
rm fi
nanc
inge
35.8
3•5a
103.
110
0.8
67.0
66.4
a70
.0
c N
umer
ator
and
deno
min
ator
exc
lude
Tre
asur
y cu
rren
cy.
d Fi
gure
of l
imite
d si
gnifi
canc
e as
den
omin
ator
is o
f sm
all a
bsol
ute
size
.
FINANCING THE MAIN INVESTOR GROUPSsufficient to observe the changes in their share in government sçcuri-ties outstanding, the more so since in this case differences betweenthe face value of the Treasury's obligations as shown in its ownstatements and the value at which they are carried in the balancesheets of the holders, though not negligible, are of considerably lessimportance than for other saver groups and in no way obscure thepicture.
From 1900 to World War I the net borrowing of the federalgovernment was insignificant; small issues in some years, particu-larly to finance the acquisition and construction of the PanamaCanal, were offset by net retirements in others. During this period,as during the preceding two decades, the bulk of the federal govern-ment's debt—very small compared to the government's budget, tonational income, or to national assets—was held by the nationalbanks as cover for their note The share of Treasury securi-ties held by commercial banks actually rose from 42 per cent in1900 to 65 per cent in though the absolute amount of theincrease—a little over $250 million—was very small in proportionto the growth in the total assets of the banking system. The increasefor commercial banks occurred at the expense of the holdings ofindividuals, nonfinancial corporations, and also of other financialintermediaries, groups which had absorbed most of the securitiessold just before the start of the period to finance the Spanish-American war. Holdings of other financial intermediaries weresmall, and declined sharply from less than $150 million, or 12 percent of United States government securities outstanding in 1900,to not much over $20 million in 1912. This was due mostly to areduction of the holdings of mutual savings banks, as those of in-surance companies and other financial intermediaries were almostnegligible throughout the period.72 The concentration of UnitedStates government bonds in the portfolios of national banks was,of course, the result of the extra income that they enabled nationalbanks to make, which was not available to other holders, andwhich made it possible for national banks to buy United States
70 Approximately 85 per cent of United States government securities held bycommercial banks in 1900 and 97 per cent in 1912 were in the hands of nationalbanks.
7' At the end of 1916 the share of Treasury securities held by commercialbanks stood at 69 per cent.
72 Holdings of financial intermediaries other than commercial banks wouldbe shown as slightly higher in absolute amounts, and their decline would pos-sibly appear less pronounced, if account could have been taken of the undoubt-edly small holdings of personal trust departments in 1900 or 1912.
267
FINANCING THE MAiN iNVESTOR GROUPSgovernment bonds at yields out of line with those of other high-grade investments and therefore not attractive to other investors.
Of the $22 billion increase in the federal debt between 1912 and1922, almost entirely reflecting borrowing in connection with WorldWar I., $8 billion, or 36 per cent, was provided by financial inter-mediaries. The share was smaller for the war period proper. It maybe estimated that of the $25 billion increase in the federal debtbetween the end of 1916 and the end of 1919, not much overone-fourth was supplied by financial intermediaries. About three-fourths of the funds required to finance World War I thus camefrom individuals, nonfinancial business and nonprofit organizations,mostly the. former. As a result, the share of financial intermedi-aries declined to less than two-fifths in 1922, well under the levelof 1912 and 1900.
Participation in the government's war financing had two sig-nificant consequences for financial intermediaries. The first wasthat the large-scale acquisition of government securities by the bank-ing system—$5.5 billion from 1912 to 1922, or $4.5 billion between1916 and 1919—contributed considerably to the expansion of bankcredit during and immediately after World War The holdingsof United States government securities by commercial banks, more-over, underwent a change of function. They now were held pre-dominantly as secondary reserves rather than as cover for notes.The second consequence was that for the first time since the CivilWar, government securities came to constitute an appreciable pro-portion of the total assets of financial intermediaries, not only forcommercial banks (10 per cent in 1922), but also for savings banks(17 per cent), life insurance companies (10 per cent), propertyinsurance companies (21 per cent), and the personal trust depart-ments of banks and trust companies (5 per cent).
Developments between 1922 and 1929 are interesting. A combiria-tion of net debt retirement by the Treasury, maintenance of hold-ings, at least in the aggregate, by financial intermediaries, and heavysales or redemptions by noninstitutional holders, contributed toincrease the share of financial intermediaries in total United Statesgovernment securities outstanding from per cent in 1922 to over50 per cent in 1929 (Table 77). Virtually the entire increase wasattributable to a small rise in the holdings of commercial banks inthe face of a much larger expansion of their total assets and a
73 Commercial bank deposits increased by about $20 billion between 1912 and1922, approximately $10 billion of the increase occurring between 1916 and1919.
268
TAB
LE 7
7Sh
ares
of F
inan
cial
Inte
rmed
iarie
s in
Tota
l Uni
ted
Stat
es G
over
nmen
t Dire
ct a
ndFu
lly G
uara
ntee
d Se
curit
ies O
utst
andi
ng(p
er c
ent)
C)
C) 0
inte
rmed
iarie
s19
0019
1219
2219
2919
3319
3919
4519
1919
52
1.Fe
dera
l Res
erve
Ban
ks—
—1.
93.
110
.25.
28.
77.
39.
22.
Com
mer
cial
ban
ks41
.664
.819
.928
.634
.734
.232
.526
.123
.7S.
Mut
ual s
avin
gs b
anks
8.2
1.0
4.7
3.3
3.5
6.5
3.8
4.4
3.5
4.Po
stal
savi
ngs s
yste
m—
..0.
30.
20.
82.
51.
01.
21.
05.
Priv
ate
life
insu
ranc
e co
mpa
nies
0.5
0.1
3.8
2.1
3.6
11.3
7.4
5.9
3.8
6.Fr
ater
nal i
nsur
ance
org
aniz
atio
ns0.
10.
20.
10
00.
10.
10.
10.
17.
Priv
ate
noni
nsur
ed p
ensi
on fu
nds
....
00.
30.
30.
30.
50.
80.
88.
Fede
ral t
rust
fund
s..
..0.
54.
71.
9.9.
38.
113
.315
.39.
Stat
e an
d lo
cal t
rust
fund
s..
....
..0.
20.
40.
61.
11.
610
.Fi
re a
nd m
arin
e in
sura
nce
com
pani
es3.
10.
51.
31.
71.
11.
20.
51.
01.
011
.C
asua
lty.a
nd m
isc.
insu
ranc
e co
mpa
nies
00.
10.
71.
20.
71.
20.
61.
01.
112
.Sa
ving
s ban
k lif
e in
sura
nce
depa
rtmen
ts—
....
..0
00
00
13.
Savi
ngs a
nd lo
an a
ssoc
iatio
ns..
..0.
10.
10.
20.
20.
90.
60.
714
.C
redi
t uni
ons
....
....
00
0.1
0.1
0.1
15.
Inve
stm
ent c
ompa
nies
....
00.
20
00
0.1
0.1
16.
Join
t sto
ck la
nd b
anks
....
0.1
00
00
00
17.
Fede
ral l
and
bank
s—
—0.
20.
10.
30.
20.
10
018
.G
over
nmen
t len
ding
inst
itutio
ns—
..0.
50
0.2
1.7
0.6
0.8
0.9
19.
Fina
nce
com
pani
es..
....
0.3
0.1
00.
10
0.1
20.
Pers
onal
trus
t dep
artm
ents
....
3.9
5.5
10.4
7.3
4.4
5.8
6.5
Tota
l hol
ding
s by
inte
rmed
iarie
s53
.566
.738
.251
.468
.381
.970
.069
.769
.5To
tal o
utst
andi
ng (b
illio
ns)
$1.2
$1.4
$23.
0$1
6.3
$24.
0$4
7.6
$278
.7$2
57.2
$267
.4
Sour
ce: A
ppen
dix
A.
FINANCING THE MAIN iNVESTOR GROUPSreduction by over one-fourth in the federal debt outstanding; and tothe first stages of the substantial accumulation of Treasury securi-ties by government pension and trust funds. Smaller increases byother groups of financial intermediaries (e.g. the Federal ReserveBanks, property insurance companies, personal trust departments)were offset by a decline of the share of Treasury securities held bymutual savings banks and by life insurance companies—together,from 8 to 5 per cent of total federal debt—which reflected sharpreductions in both absolute amounts and proportion of total assets.
From 1929 to 1939 financial intermediaries supplied virtually thetotal long-term (excluding Treasury currency) financing of thefederal government. This applies not only for the ten years takentogether, but also for the subperiods 1930-1933 and 1934-1939, whichdiffer considerably in economic character but are similar in thatthe federal government had almost continual recourse. to debtfinancing. Within the decade of the thirties, federal securities out-standing increased by $31 billion to nearly $50 billion at the end of1939; and in the same period, reported holdings of financial inter-mediaries rose by $31 billion to nearly $40 As a result theshare of financial intermediaries in outstandings shot up from 50to 80 per cent. It thus surpassed in 1939 even the highest pre-WoridWar I proportion. What is more significant, virtually all types offinancial intermediaries now participated in the financing of thefederal government, and for most of them this participationabsorbed a substantial part of their total assets.
Of the $31 billion debt financing of the federal government be-tween 1929 and 1939 the banking system supplied almost three-fifths, while life insurance companies contributed approximatelyone-sixth and government trust funds one-eighth. In rate of in-crease however, commercial banks were far exceeded by life in-surance companies, mutual savings banks, savings and loan associa-tions, and. government trust funds, each of which increased theirholdings of Treasury securities fivefold between 1929 and 1939.Moreover, the large-scale financing of the federal government rep-
74 A small part of the increase in the holdings of both financial intermediariesand of other holders represents not net purchases but exchanges for other assets,primarily in connection with the mortgage refinancing operations of the HomeOwners' Loan Corporation and the Federal Farm Mortgage Corporation. Ifaccurate figures on cash flows wcre available they would probably show a shareof financing by financial intermediaries not much different from the 97 per centindicated by the rough comparison of changes in securities outstanding and inreported holdings.
270
FINANCING THE MAiN INVESTOR GROUPSresented a change in investment policy for insurance companies,commercial banks, and mutual savings banks, the result primarilyof a dearth of other high-grade investment opportunities; whilethe increase in the holdings of the Federal Reserve Banks, thepostal savings system, savings and loan associations and governmenttrust funds was primarily the result of the expansion of theirtotal assets. This difference is evident in the movements of theshare of United States government securities in total assets as shownin Table 78.
By far the largest demand for external funds by the federal gov-ernment, of course, was caused by its participation in World War II.Between the end of 1939 and the end of 1945 the government raisedno less than $230 billion through the sale of its securities, virtuallyall in the four years 1942-1945. This financing is equivalent tofive times the total federal debt outstanding at the beginning of1939. To make another significant comparison, it is equal to ap-proximately one-third of the total national assets of 1939.
Financial intermediaries supplied approximately $155 billion, orslightly more than two-thirds of these massive requirements of thefederal government, quintupling their 1939 holdings and in almostevery case sharply increasing the proportion of United States gov-ernment securities in total assets. Nevertheless, the share of financialintermediaries in total government debt at the end of the waramounted to only 70 per cent, 10 points below their share in 1939,although the absolute amount was higher than that at all previousbenchmark dates. Commercial banks alone accounted for almostone-half of total funds supplied to the federal government by finan-cial intermediaries. The share of the banking system as a whole(including mutual savings banks, Federal Reserve Banks, and the
postal savings system) was even as high as two-thirds. Next came,as in 1929-1939 though at a great distance, life insurance companiesand government trust funds, each of which absorbed almost one-tenth of the securities sold by the federal government to financialintermediaries.
This large-scale participation in the financing of the federalgovernment was made possible only through considerable increasein the share of total assets made available to the Treasury, eventhough total assets increased sharply for most financial intermedi-aries and at the same time the absolute volume of financing forother sectors of the economy evidently did not decline and evenexpanded. In the case of commercial banks, for example, federal
271
TAB
LE 7
8Pr
opor
tion
of T
otal
Ass
ets o
f Mai
n G
roup
s of F
inan
cial
Inte
rmed
iarie
s Inv
este
d in
Uni
ted
Stat
es G
over
nmen
t Sec
uriti
es(p
er c
ent)
r) C.) C-,
'-1 0 C, 0
Inte
rmed
iarie
s19
0019
1219
2219
2919
3319
3919
4529
4919
52
1.Fe
dera
l Res
erve
Ban
ks—
—8.
39.
434
.613
.153
.841
.447
.62.
Com
mer
cial
ban
ks5.
23.
59.
77.
118
.125
.156
.542
.533
.63.
Mut
ual s
avin
gs b
anks
4.2
0.3
16.5
5.4
7.8
26.2
62.8
53.2
37.3
4.Po
stal
savi
ngs s
yste
m—
..54
.614
.916
.290
.493
.994
.193
.25.
Priv
ate
life
insu
ranc
e co
mpa
nies
0.3
010
.11.
94.
118
.545
.925
.6-
14.0
6.Fr
ater
nal i
nsur
ance
org
aniz
atio
ns4.
01.
23.
40.
40.
25.
121
.014
.310
.9
7.Pr
ivat
e no
nins
ured
pen
sion
fund
s..
..10
.010
.010
.015
.045
.035
.025
.08.
Fede
ral t
rust
fund
s..
..10
0.0
80.2
21.4
96.6
99.5
99.6
99.7
9.St
ate
and
loca
l tru
st fu
nds
....
..5.
010
.052
.857
.056
.010
.Fi
re a
nd m
arin
e in
sura
nce
com
pani
es9.
20.
819
.78.
812
.020
.434
.637
.830
.711
.C
asua
lty a
nd m
isc.
insu
ranc
e co
mpa
nies
00.
423
.511
.812
.629
.051
.047
.642
.812
.Sa
ving
s ban
k lif
e in
sura
nce
depa
rtmen
ts..
....
6.7
31.2
67.2
46.9
34.8
13.
Savi
ngs a
nd lo
an a
ssoc
iatio
ns..
..1.
00.
30.
91.
928
.110
.18.
014
.C
redi
t uni
ons
....
00
5.4
3.1
48.5
19.1
15.8
15.
Inve
stm
ent c
ompa
nies
....
0.9
0.9
0.6
1.1
4.6
5.2
2.9
16.
Join
t sto
ck la
nd b
anks
....
10.8
0.6
0.9
9.3
00
0
17.
Fede
ral l
and
bank
s—
—5.
21.
74.
43.
911
.810
.56.
918
.G
over
nmen
t len
ding
inst
itutio
ns—
—17
.01.
11.
68.
24.
78.
68.
1
19.
Sale
s fin
ance
com
pani
es..
....
2.0
2.7
0.8
19.8
1.8
1.7
20.
Pers
onal
fina
nce
com
pani
es..
....
4.6
2.1
04.
00.
20.
321
.Pe
rson
al tr
ust d
epar
tmen
ts..
..5.
03.
010
.010
.027
.530
.029
.2
Sour
ce: A
ppen
dix
A.
FINANCING THE MAIN INVESTOR GROUPSgovernment securities accounted for 57 per cent of total assets atthe end of 1945 compared to 25 per cent in 1939. For life insurancecompanies the rise was equally sharp—from 19 per cent to 46 percent.
In all these respects—a sharp increase of holdings of Treasurysecurities in absolute terms and in relation to total assets; a declinein the proportion of total federal debt carried by financial inter-mediaries; and the dominant position of the banking system amongintermediaries as supplier of funds to the federal government—changes between 1939 and 1945 paralleled those observed duringWorld War I. Developments since 1946, however, are in contrastto those after World War I. This time financial intermediaries sub-stantially reduced their holdings of government securities. Theywere able to do so primarily because the Treasury had very largecash balances at the end of the war, which it used, together withcash surpluses during most of the period, to reduce its total debtby $22 billion between the end of 1945 and 1949. The decline inholdings of Treasury securities was small—approximately $15 bil-lion or 7.5 per cent—for all financial intermediaries together. Thesmallness of the decline was due to continued rapid accumulationof Treasury securities by government trust funds and private pen-sion funds. Excluding them, the reduction in holdings of Treasurysecurities by financial intermediaries is close to $30 billion, or fullyone-sixth of their holdings at the end of World War II. The propor-tion is even 'arger for commercial banks, Federal Reserve Banks,life insurance companies, and savings and loan associations (ap-proximately one-fourth). The sharp curtailment of funds madeavailable to the federal government usually involved equally largedeclines in the shares of federal government securities in total assets.
The same tendencies continued in the three years aperiod during which the net external financing by the federal gov-ernment was very small—totaling only $8 billion—and erratic. Com-mercial banks and life insurance companies continued to reducetheir holdings of Treasury securities, though much more slowlythan in the first years after the war, while government trust fundscontinued .to absorb amounts approximately sufficient to offset thereduction in Treasury securities carried by the former two groups.The amount and proportion of United States government securities
" Not covered in Table 76. But main movements in the holdings of UnitedStates government securities by financial intermediaries can be followed inTable 77.
273
FINANCiNG THE MAIN INVESTOR GROUPSheld by all financial intermediaries thus was approximately thesame at the end of 1952 as three years earlier.70
As a result of these divergent tendencies, the share of financialintermediaries in financing the federal government, measured bythe percentage of Treasury securities held, was only moderatelyhigher at the end of 1949, or 1952, than it had been in 1929, al-though the absolute amounts involved were, of course, severaltimes higher. The increase in the share of all financial intermedi-aries from approximately 50 per cent in 1929 to 70 per cent in1952 was mostly due to a sharp increase in the share of federalsecurities taken by pension and retirement funds, particularly byfederal, and state and local government funds. Public pension andretirement funds accounted for less than 5 per cent of the federaldebt in 1929, but for over 15 per cent in 1952, while the share ofprivate intermediaries (even including the Federal Reserve Banks)hardly increased at all—standing at 45 per cent in 1929, 55 percent in 1949, and 50 per cent in 1952.
The share of financial intermediaries as a whole and of theirmain groups. differs, of course, as between different types of securi-ties through which the federal government finances itself, particu-larly as between long-term, medium-term and short-term financing.These differences can be followed in detail only since World WarII, but that is fortunately the most significant period for this pur-pose.
At the end of 1949 financial intermediaries (excluding personaltrust departments and some smaller institutions) held 59 per centof the federal debt. Financial intermediaries held 60 per cent of theshort-term (less than one year) debt, 46 per cent of the medium-term (one to ten years) debt, and 85 per cent of the long-termdebt.77 These figures are more informative if holdings by UnitedStates government funds, mostly pension and retirement funds, areeliminated. (They owned $39 billion, mostly in long-term specialissues.) It then appears that other financial intermediaries accountedfor 59 per cent of the short-term securities issued by the Treasury,44 per cent of its medium-term securities, but only 27 per cent
76 For a detailed discussion of changes in holdings of government securitiesafter World War II see The Federal Debt, by Charles C. Abbott, TwentiethCentury Fund, 1953, particularly Chapters 8 to 10.
77 The classification is based on nearest maturity or call date, savings bondsbeing regarded as medium.term securities. This is obviously a classification fromthe holder's point of view rather than that of the Treasury (except in the caseof savings bonds), which in many cases could extend the maturity by not ex•ercisirig its call privileges.
274
FINANCING THE MAIN INVESTOR GROUPSof its long-term bonds. Thus, the longer the maturity the smallerthe proportion held by financial intermediaries. This is to be ex-pected, since the financial intermediaries with the largest absoluteholdings—commercial and Federal Reserve Banks—by the natureof their operations participate mostly in short-term financing. Thus,of total holdings of commercial banks 40 per cent were short-termand only 4 per cent long-term federal securities. In contrast, lifeinsurance companies held one-half of their Treasury securities inlong-term maturities, and mutual savings banks approximately one-third, while most of the remainder consisted in both cases ofmedium-term obligations. Details of the distribution of holdings ofTreasury securities by maturity for the main groups of financialintermediaries at the end of 1945, 1949 and 1952 can be followedin Table 79.
There are thus three periods during which the federal govern-ment has absorbed funds on a large scale, the two world wars andthe thirties. Financial intermediaries furnished about one-third ofthe funds during World War I; about two-thirds during WorldWar II; and practically 100 per cent during the thirties. They also,as a rule, increased their holdings, or at least decreased them butlittle, in periods when the total federal debt was stable, or whenthe Treasury supplied rather than absorbed funds. As a result theholdings of United States government securities by financial inter-mediaries increased by $179 billion between 1900 and 1949, or byalmost 70 per cent of the total increase in the federal debt. Gov-ernmental organizations supplied 22 per cent, the commercial bank-ing system 26 per cent, and other private financial intermediariesthe remaining 21 per cent. Financial intermediaries thus were themain source of supply of funds for the federal government not onlyfor the period as a whole, but also for all significant subperiodsexcept World War I.
275
c) 0 C
TAB
LE 7
9Sh
are
of M
ain
Hol
der G
roup
s in
Fede
ral D
ebt,
by M
atur
ity, 1
945,
194
9, a
nd 1
952
(per
cen
t of t
otal
out
stan
ding
)
Rep
ortin
gIn
stitu
tions
Mat
urity
Excl
udin
gU
nite
d(y
ears
to fi
rst
Uni
ted
Stat
esFe
dera
lC
omm
er-
Mut
ual
Life
Prop
erty
Stat
esca
ll da
te)
All (1)
Gov
t.A
ccou
nts
(2)
Res
erve
Ban
ks(3
)
cial
Ban
ks(4
)
Savi
ngs
Ban
ks(5
)
Insu
ranc
eC
ompa
nies
(6)
Insu
ranc
eG
ovt.
Com
pani
es A
ccou
nts
(7)
(8)
Oth
er(9
)
I. D
ec. 3
1, 1
945
1. L
ess t
han
170
.069
.629
.139
.60.
20.
40.
40.
430
.02.
1to
15a
50.3
49.0
0.7
37.8
4.7
4.1
1.6
1.3
3. 1
5 an
d ov
erb
75.2
55.2
0.1
4.0
6.9
23.4
0.8
40.0
24.8
Tota
l61
.651
.88.
850
.73.
97.
41.
19.
838
.4
II. D
ec. 3
1, 1
949
1. L
ess t
han
159
.759
.518
.638
.10.
70.
51.
70.
240
.32.
1 to
15a
45.8
44.5
2.9
27.4
5.9
5.9
2.3
1.3
54.2
3. 1
5 an
d ov
erb
84.6
26.8
4.9
4.0
5.4
11.6
1.0
57.8
15.4
Tota
l59
.243
.87.
424
.24.
56.
01.
815
.440
.8
III.
Dec
. 31,
195
21.
Les
s tha
n 1
58.9
58.7
19.4
36.4
0.6
0.7
1.5
0.2
41.1
2.1
to 1
5a45
.841
.36.
219
.66.
16.
62.
84.
554
.23.
15
and
over
b10
0.0
....
....
....
100.
0..
Tota
l57
.840
.59.
321
.83.
63.
82.
017
.342
.2
a In
clud
esal
l Uni
ted
Stat
es S
avin
gsb
Incl
udes
all S
peci
al Is
sues
.So
urce
: Tre
asur
y B
ulle
tin, M
arch
194
6, p
p.
Bon
ds.
51 if
.; M
arch
195
0, p
p. 3
3, 3
5; M
arch
195
3, p
p. 3
7, 3
8.