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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.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102