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FEDERAL RESERVE BANK OF NEW YORK r Circular N o. 3 7 9 7 1 L Decem ber 21, 1951 J BULLETIN NO. 2 (REVISED) OF NATIONAL VOLUNTARY CREDIT RESTRAINT COMMITTEE Restriction of Business Capital Expenditures Financing T o all Financing In stitu tion s in the Second Federal R eserve D istrict : The national V oluntary Credit R estraint Committee has revised its Bulletin No. 2, and has issued a press statement in conjunction w ith the revision. Set forth below is the text o f the bulletin follow ed b y the text o f the press statem ent: RESTRICTION OF BUSINESS CAPITAL EXPENDITURES FINANCING The Voluntary Credit Restraint Committee has reviewed the outlook for business spending on plant and equipment and has revised Bulletin No. 2 as follows: 1 The economic outlook suggests the need for continued careful screening, under the Program, . of a l business capital financing programs. Business spending on plant and equipment i at record l s l v l and i contributing t shortages of basic materials. The prospects are that plant expansion ees s o programs w l remain at high l v l for some time t come;business requirements for outside financing il ees o are expected t remain large during 1952. At the same time, the supply situation in several basic o raw materials i l k l to become worse before i improves. Consequently, financing i s i u i n should s iey t ntttos exert continued devoted e f r s to channel funds used by business concerns i fot nto defense, defensesupporting and e s n i l c v l a purposes. seta iiin Plant expansion for nondefense and nonessential purposes consumes scarce materials and siphons o f funds which might better be used to finance the defense e f r . Thus i becomes a menace t the f fot t o soundness of the American d l a . Such outlays have apparently been large in 1951, although, thanks olr t careful screening, the amount financed by borrowed money and stock i s s has been held to a o s ue moderate sum. However, there w l come a time when these nondefense plant expenditures w l afford welcome il il support t business and employment. Business management and finance can jointly do a great public o service both now and l t r by timing plant outlays and the financing thereof with f l consideration ae ul of the foregoing f c o s atr. 2 Typical of the uses of funds which have a high priority under present conditions are the . following: increasing capacity for the production of defense goods and of basic raw materials (such as metals and petroleum) ; loans to railroads and other public transportation, e e t i , g s and water lcrc a , u i i i s loans under certain conditions t construction companies with bona f d contracts for the tlte; o ie construction of defense f c l t e , highways, s h o s port improvements, public u i i i s or r i r a s aiiis col, tlte alod. 3 Among the nonessential uses of long-term financing that might be postponed t a more . o propitious time are those for such purposes as: ( ) construction of f c l t e t improve the competi 1 aiiis o t v position of an individual producer of nonessential goods; (2) expansion and modernization ie expenditures of concerns in distribution or service l n s where the distribution or service i not ie s defense supporting; ( ) expansion and modernization programs for the manufacture of consumer 3 goods not related t the defense e f r ; and (4) purchase of existing plants or firms to improve the o fot d v r i i a i n of a company’ products. iesfcto s 4 The purpose for which funds w l be used, rather than the type of financing i the important . il s consideration in screening cap a expenditure financing under the Program. Thus, i i recommended it l t s that a l types of security i s e be screened— term l a s n t s debentures, bonds, preferred s o k l sus on, oe, tc, common s o k s l l as - c arrangements, or any other form of financing. Interim financing should t c , a e- e e ba k be screened by the same t s s that w l be applied t the screening of the ultimate financing. et il o 5 Financing i t t t o s are urged t give equal consideration t the needs of small as well as . ns i u i n o o large business in screening applications for long-term f inancing. 6 The financing of business plant and equipment programs should be screened under the Program . even though the project has received a c r i i a e of tax amortization, or has been a l t ed materials etfct lot under the Controlled Materials Plan. Such c r i i a e or allotments are important factors which etfcts should be given substantial weight by financing i s i u i n and by the regional committees in t e ntttos h ir screening, under the Program, of a financing proposal, but such c r i i a e or allotments should not etfcts automatically exempt financing from evaluation under the Program. Such screening i welcomed by s the O f c of Defense Mobilization. fie 7 Since there may be cases in which business management has decided for policy reasons against . applying for a c r i i a e of tax amortization, the absence of such a c r i i a e should not be taken a etfct etfct s conclusive evidence that proposed financing of a plant program does not conform t the lending o standards of the Voluntary Credit Restraint Program. December 1 , 1951. 9 (Press statement released with the bulletin) FINANCING OF BUSINESS CAPITAL EXPENDITURES High le el of business investment.— Business spending on plant and equipment i currently a v s t record l v l and i l k l to remain r l t v y high for some time t come. In the fourth quarter of ees s iey e a i el o 1951, i i estimated that such spending was at the rate of $25 b l i n per year, and for the year the t s ilo t t l i l k l t be $23 b l i n or more. These figures r f e t recent Department of Commerce r visions oa s iey o ilo elc e of plant and equipment expenditure esti a s and represent a 15 per cent increase over 1948, the m te , previous record year. Of the t t l for 1951, nearly $12 b l i n w ll be accounted for by manufacturing and mining, oa ilo i nearly $6 b l i n by public u i i i s and transportation, and the remaining $5 b l i n by trade, serv c ilo tlte ilo ie and o e . While a substantial part of these expenditures doubtless represents additions t productive th r o f c l t e that are e s n i l to the defense e f r , i seems likewise obvious that a large amount represents aiiis seta fot t expenditures that might better have been postponed u t l labor and materials were in more plentiful ni supply. Some decline from the record fourth quarter l v l would not be unexpected, but present ee indications are that t t l expenditures in 1952 may be about as large as for 1951. oa Need for outside financing.— The amount of financing t be done via the s c r t e market, d r c o euiis iet placements and the commercial banks may be about as large in 1952 as i was in 1951; the need f t or outside financing i l k l t be especially heavy during the f r t half of the year. Payments of Federal s iey o is income and excess p o i taxes w l be substantially larger in 1952. Furthermore, whereas i 1951 rft il n accruals for tax l a i i i s ran in excess of payments and thus were a source of funds, the reverse may iblte well prove t be the case in 1952. The acceleration of tax payments in the f r t half of the year as the o is result of the “Mills plan” and the probability that corporations i general have not fully provided for n their income tax l a i i i s a s mean that the financing requirements of many companies w l be iblte l o il unusually heavy in the next few months. At the same time, retained earnings plus depreciation accruals are expected to show l t l i any ite f increase from the 1951 l v l Thus, corporations may well require a large volume of financing from ee. external sources such as commercial banks, l f insurance companies, and the s c r t e markets ie euiis during 1952. These prospects suggest the need for an especially careful screening o business financing programs f during the next few months. That there i room for r s r ct n nondefense uses of funds i suggested s eti ig s by the data on corporate new cap t s c r t e i s e , including private placements, during the f r t i al e u i i s s u s is nine months of 1951. The aggregate of such financing, $5.3 b l i n was si n f c n l larger than i ilo, giiaty n the comparable period in 1950. Of t i t t l an estimated $3.9 b l i n was accounted for by such h s oa, ilo defense and defense-supporting industries as railroads; public u i i i s and manufacturers of iron tlte; and s e l nonferrous metals, machinery, transportation equipment, chemicals, rubber, and petroleum. te, Of the remaining $1.5 b l i n roughly o e l a f re l c e financing by manufacturers of f ilo, n-il fetd ood, beverage, and tobacco products; paper; construction materials, and house furnishings and appliances; and the balance represented is u s by t ad , f n n i l and other companies. se r e iaca, Government policy re plant expansion.— In p r , the current record l v l of business spending at ees r f e t Government p l c . Through subsidy and exploration contr c , e f r s have been made t elc oiy a ts f o t o increase s upplies, l r e y of basic raw materials. Of greater aggregate s gn f c n e i the incentive t agl, i iiac s o plant expansion provided by accelerated amortization for tax purposes. Under t i program some hs 4,300 c r i i a e of tax amortization have been issued covering proposed plant investments amounting etfcts t $10.6 b l i n o ilo. The desire t build a great speed a plant capacity s f i i n t meet simultaneously the demands o t ufcet o of the defense program and the requirements of a high standard of living c v l a economy, has meant iiin that i has not been f a i l , until recently a l a t t give much attention t the development of w l t esbe t es, o o el integrated programs in the various s c o s of our tremendously complex economy. Incentives to plant etr expansion have not been limited to defense plants, narrowly d f n , but have been given t a fa r e i ed o i ly broad l s of i d s r e . it nutis On the other hand, f r t through N.P.A. c r i i a e and other controls over construction and is etfcts currently by means of the Controlled Materials Plan e f r s have been made t li i l s e s n i l fot o m t es seta construction. But C.M.P. i s i l in i s formative s a e . The practice of “over-allotting” has been s tl t tgs followed, based on the premise that not a l allotments would be u i i e , and i has been stated that l tlzd t an allotment i no guarantee that the s e i i d materials w l in fact be a a l b e S l - e t f c t o s pcfe il vial. efcriiain allows some use of materials without s e i i control under the program. pcfc These comments underline the d f i u t problems encountered in trying t determine, for the ifcl o expansion of productive plant and for the allotment o short materials, p l c e appropriate t a f oiis o part-defense, part- i l an economy. The d f i u t e are probably greater than they would be under c vi i ifclis conditions of a l o t war. Assistance under the Voluntary Credit Restraint Program w ll be welcomed l-u i by the O f c of Defense Mobilization through the process of screening financing for business expansion fie even though the projects may have received c r i i a e of tax amortization, allotment of materials etfcts under C.M.P., or some other similar recognition. There may be additional reasons for screening the financing of such projects under the Program. A c r i i a e of tax amortization does not necessarily mean that financing i required immediately etfct s s ince a considerable period may elapse before the materials w l become a a l b e Premature financing il vial. increases the probability that funds may be diverted t other uses not related t the project for which o o a c r i i a e has been obtained. In some c etfct ases only part of a plant project may be c a s f e as lsiid “essential” whereas the financing program may cover the entire venture. The character and type of financing proposed should be appropriate t the circumstances: thus i would seem reasonable t o t o i s s upon reasonably adequate debt retirement provisions in the case of projects which have received nit c r i i a e of tax amortization. I i conceivable that there may be cases in which financing i s i u i n , etfcts t s ntttos because of t ei intimate knowledge of a l c l s t a i n may have reason t doubt that a given project h r oa iuto, o has a reasonable chance of achieving i s o j c i e . t betvs A dditional copies o f this circular w ill be furnished upon request. A llan S proul, President.