Full text of Business Conditions (Federal Reserve Bank of Chicago) : March 1952

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A review by the Federal Reserve Bank of Chicago

Business
Conditions
1952 March

Contents
Facts about bank capital

The new budget

Paying the taxes

Role of the cash budget

The Trend of Business

8-9

Facts about bank capital
Since 1939, District banks have more than doubled
their capital, largely by retaining profits.
But capital still lags behind deposit and risk asset expansion.
F or any c o m m ercia l bank , invested capital
is commonly considered to be the ultimate bul
wark against insolvency. Capital accounts are
expected to perform this function for any busi
ness, but they are regarded as doubly impor
tant in the case of banks, since the liabilities
thus protected represent the bulk of the na
tion’s money supply.
The responsibilities borne by bank capital
have undergone important changes in degree
during the last decade. The record of war
time multiplication of bank deposits and post
war shift into risk asset holdings is familiar
to everyone. Less well known are the exact
dimensions of the changes made in bank capi
tal structure to accommodate these increased
responsibilities. Because banking statistics are
commonly published as summary totals, data
on shifts in capital accounts are usually either
omitted or “netted out.” To provide a more
precise insight into changing bank capitaliza
tion, therefore, the Federal Reserve Bank of
Chicago has recently completed case studies
of 130 member banks scattered throughout the
Seventh Federal Reserve District. The high
lights of those studies are summarized below.

The sam ple surveyed

Each of the banks included in the survey
has been a member of the Federal Reserve Sys
tem since 1939. For analytical purposes, the
sample was selected in four groups:
“largest banks”— 10 of the largest banks
in the District’s major cities;
“large banks”— 28 other weekly report
ing member banks, including 21 per cent
2 Business Conditions, March 1952

Sharp differences in bank deposit
growth, milder variation in capital
and risk asset increases since 1941

"Smaller*

deposits

"Smallest"
0

100
Per cent increase

ISO
1 9 4 1 -5 1

200

250

of all District member banks with depos
its between 30 million and 100 million
dollars;
“smaller banks"— 38 banks located in
cities with more than 15,000 population,
including 14 per cent of member banks
with deposits between 10 and 30 million;
“smallest banks”— 54 banks located in
cities with less than 15,000 population,
encompassing 7 per cent of all District
member banks with deposits less than 10
million.
Previous studies had suggested that such a
“combination” breakdown—by size of city as
well as by size of bank—should reveal most
clearly any variation in capital trends.

The inflow of new capital

The tumultuous monetary and credit develop
ments of the forties left their mark in each
one of the sample banks, regardless of size
and location. Measured in terms of capital
additions, the response of the four groups of
banks was not dissimilar. Within the period
1939-1951, each group somewhat more than
doubled the total value of its capital accounts.
As shown in the table below, retained earnings
in each group accounted for at least four-fifths
of the total new funds invested. In both the
“largest” and “smallest” banks, retained earn
ings provided at least 95 cents out of every
dollar of new capital.
Cash sales of new common stock, usually at
a premium, provided the remaining cash ad
ditions to capital funds. The “large” banks
made greater use of stock sales than any other
group, obtaining one-fifth of their total increase
in capital through new flotations. Throughout
the period, these banks had earned a somewhat
smaller net return on their capital than had
any of the other groups. With roughly com
parable dividend policies, therefore, the relative volume of retainable profits was appreci
ably smaller in these “large” banks. As a
consequence, the volume of “outside” money

obtained by “large” banks through new stock
sales was no more than enough to make their
over-all increase in total capital accounts rela
tively comparable with the increases reported
by smaller institutions.
Retirement of various types of “preference
claims” absorbed a small portion of these new
capital funds. Such claims included capital
notes, debentures, and preferred stock sold to
the Reconstruction Finance Corporation, pre
ferred stock sold to private investors, and, in
one case, informal founder contributions. Ex
cept for the last item, these accounts formed
a part of bank capital structure, and their
retirement reduced the total of capital accounts.
For some individual banks, therefore, such
repayment involved a substantial reduction in
total capitalization, and necessitated accom
panying sales of new common stock. For the
sample as a whole, however, these retirements
siphoned off only about one-twentieth of the
total new funds accumulated. In each group
of banks, more than 90 per cent of the new
capital funds remained as net additions to total
capital accounts.
The twelve-year accumulation of retained
earnings has been gradually spread throughout
the capital accounts. At the end of 1951, the
sample banks had transferred nearly one-fourth

Sources and uses of bank capital since 1 9 3 9
1939-1951 totals, expressed in per cent

. . .

. . tw e lv e yea rs’
A m o n g th e se a ccu m u la tio n s
. . . and
. . . p r o v id e d
g ro u p s o f D is
o f re ta in e d
sa les of
n e w c a p ita l
tr ic t b a n k s . . .
e a r n in g s . . .
n e w s to c k ° . . .
fu n d s.

T h e se fu n d s
. . . a n d to
w e r e u s e d to
m ake net
re tire p r e fe r
a d d itio n s to
en ce c la im s . . . c a p ita l accou n ts.

“ La rg e st" banks

100

“ L a rg e " b a n k s

100

" S m a lle r" b a n k s

100

" S m a lle s t" banks

100

* includ ing premiums p a id fo r new stock.

of these funds into common stock accounts
through stock dividends and used an additional
half to build up surplus, allowing the final
one-fourth to remain in the undivided profits
column.
W hat about capital ratios?

Considered in isolation, the increases in bank
capital described above appear fairly large.
But the assets and liabilities supported by bank
capital have also undergone a rapid expansion,
and such expansion naturally raises the ques
tion, “Has the increase in bank capital been
‘enough’?”
The traditional method of determining the
sufficiency of bank capital is by the calcula
tion of certain ratios: total capital accounts to
total deposits; total capital to total assets; or
total capital to “risk” assets (total assets less
cash assets and holdings of U. S. Government
securities). For the sample banks, these ratios
have had their “ups” and “downs” during the
last decade. With few exceptions, asset and de
posit ratios fell, and risk asset ratios rose, un
der the impetus of large-scale bank financing
of Federal deficits during World War II. In
the postwar period, the reverse was true: de
posit and asset ratios recovered somewhat
while risk asset ratios dropped, as a result of
bank loan expansion and, in some cases, con
comitant sales of Government securities. For
many banks in the sample, 1951 ratios were
considerably below 1941 levels. Judged by
this comparison, the protection to depositors
afforded by bank capital has deteriorated over
the last ten years.
In point of fact, however, the emphasis
given to the principle of maintaining fixed
capital ratios appears to have diminished. In
regard to the capital-to-deposit ratio, the rec
ord of the sample banks is clear. As the chart
on page 2 indicates, deposit expansion was
much greater in the smaller size groups of
banks than in the “largest” banks. Yet the
increases in capital accounts were relatively
uniform among all size groups. Only for the
4 Business Conditions, March 1952

“largest” banks did the capital increase ap
proximate the rate of deposit expansion.
Either all but the “largest” banks were ignoring
the capital-to-deposit ratio, or else some other
factors were determining the role of capital.
Measured by changes in risk asset ratios, the
capital policies of the sample banks were more
uniform. Each group of banks increased cap
ital roughly two-thirds as rapidly as the re
ported growth in its risk asset holdings. This
still meant, however, that risk asset ratios at
the end of 1951 were appreciably below 1941
levels, and sharply below those of 1945.
When individual banks are examined, some
additional points come to light. Not only have
over-all ratios declined since 1941, but the
present ratios for many banks are below the
“screening” standards utilized by the national
authorities charged with bank supervision.
The chart below indicates the range of aver
age 1951 risk asset ratios reported by each of
the banks included in the sample study. Over
50 per cent of them fall below the screening
standard of the office of the Comptroller, and
82 per cent are below the standard applied by
the Board of Governors. The Federal Deposit
Insurance Corporation similarly utilizes a

Over two-thirds of banks
studied had risk asset ratios
below 20 per cent in 1951
Per cent of bonks

screening standard, in this case the national
average of the ratio of capital accounts to
total assets for all insured banks. By this
standard, too, many sample banks are defi
cient; 67 per cent of the sample cannot meet
the 1951 stanard.
One additional fact can also be noted. Of
the many banks whose ratios were below these
screening standards in earlier years, relatively
few have shown subsequent additions to capital
accounts large enough to remedy such deficien
cies. Many banks are bolstering capital ac
counts but few have raised their capital ratios to
the screening standards of supervisory authori
ties, or to the standards maintained in earlier
years.
Other factors determ inant

Do these facts prove that many banks are
in an insecure capital position today? For the
overwhelming majority of banks, this is not
the case. Rather, both bankers and supervisory
authorities are recognizing an increasing num
ber of other factors which must be considered
in determining capital adequacy. The basic
quality of loan and investment holdings, the
proven capabilities of bank management, and
the present and prospective level of business
activity can have a profound effect upon the
strain, or lack of strain, which bank capital
can be expected to face. Such factors are
carefully appraised in any bank, and it is they,
rather than the level of capital ratios, that
primarily determine the final supervisory posi
tion in regard to banks falling below the
“screening standards.” The latter are essen
tially administrative tools, not minimum re
quirements.
In weighing capital needs, therefore, each
bank is a unique case. No set formula can
give a “pat” answer to the problem. As much
as anything else, the record of bank capital
during the past decade demonstrates the rec
ognition given, both by banks and by super
visory agencies, to the importance of broader
and more qualitative considerations.

The new budget
Defense program produces peace
time records in Federal spending,
revenue, and deficit. Nondefense
sector of fiscal 1953 Budget dom
inated by long-term commitments.
T h e P resid en t ’s B udget for the fiscal year be

ginning next July 1 is record-breaking in all
its dimensions, for a year of relative peace.
It is estimated that the Federal Government
will spend, in terms of the conventional “bud
get accounts,” more than 85 billion dollars—
over a quarter of the anticipated national in
come—and collect about 71 billion in taxes
and other revenues. The resulting deficit is
set at more than 14 billion dollars.
A better picture of the Budget’s impact on
the economy is in terms of cash transactions
between the Federal Government and the pub
lic as a whole as discussed in the article on
page 15. Cash expenditures and revenues are
estimated at 87 billion and 77 billion dollars
respectively. The cash deficit forecast in the
President’s Budget thus will reach the some
what smaller, although still considerable, fig
ure of 10.4 billion dollars.
The impact of the rearmament program dom
inates the 1300 page Budget Document. Threefourths of all projected expenditures are for
defense and programs directly supporting the
defense effort. Demands of the defense pro
gram are also reflected in the reduction (from
pre-Korea levels) in total spending for non
defense activities. World events and our reaction
to them explain the passage of three bills in
creasing tax rates since June 25, 1950. These
tax increases and the higher levels of economic
activity explain the near-doubling in receipts
from fiscal 1950 to fiscal 1953, which should
result in total revenue more than half again as
5

large as in the peak year of World War II.
Impact of the Budget

Citizens and Congressmen alike are reacting
strongly to both the over-all size of revenues
and expenditures and to the large gap between
them that is in prospect. Both aspects of the
Budget are properly matters for concern. The
magnitude of total spending is significant, for
it measures the volume of goods and services
diverted from consumers and businesses to the
Government’s use. With the Federal Govern
ment’s total expenditures nearing 90 billion
dollars, and its purchases of goods and services
alone (thus excluding transfer payments from
one group to another) exceeding 70 billion,
the diversion will be large next year, unless
total output is increased by far more than now
seems likely.
The other side of the ledger, the tax bill
needed to help do the diverting, is also a prob
lem because of its sheer size. At current
levels of taxation, difficulties which exist to
some extent at any level of taxation—adverse
effects on incentives, cases of differential treat
ment of persons who are in essentially similar
circumstances (the “loopholes” in tax laws),
and troublesome problems of administration—
have become much more severe.
The size of the anticipated deficit has prob
ably caused more alarm than any other aspect
of the new Budget. At a time when resources
are fully utilized, deficit Treasury operations
tend strongly to push prices up. A deficit of
the size contemplated for fiscal 1953 could
substantially increase the volume of liquid as
sets at the disposal of consumers and business
men. Unless the Treasury is able to borrow
the funds needed to meet expenditures in excess
of tax collections from nonbank sources, the
Treasury’s borrowing will increase the money
supply. At the same time, the defense program
is diverting a huge portion of output from civil
ian use. Thus, while the Government expen
ditures are supplying additional buying power
to the civilian economy, fewer goods are avail
6 Business Conditions, March 1952

able to satisfy consumers, should they seek
to convert this additional purchasing power
into goods. Unless the 1951 experience is re
peated and a substantial portion of the addi
tional income is sterilized via increased rates
of saving, strong inflationary pressures are in
prospect for fiscal 1953.
How large a deficit?

On the other hand, much of the alarm about
the size of the deficit may be exaggerated. It
is possible that when June 30, 1953 rolls
around, the net Treasury deficit may be con
siderably less than has been estimated. The
deficit figure that is relevant from the point
of view of inflationary pressures is not the
estimated 14.4 billion dollar budget deficit,
but the 10.4 billion cash deficit.
The receipts estimates will prove too low,
if past experience is any guide. The Treasury,
in estimating revenues in December 1951, had
the difficult job of forecasting national income
and other indicators of economic activity for
a period which will not begin until six months
after the estimate was made and will not end
for eighteen months. During the last ten years,
when income levels generally have been rising
fairly rapidly, tax revenues have been under
estimated regularly by a wide margin, in part
because of the inevitable tendency to assume to
some extent that present conditions will con
tinue to prevail.
The revenue estimates, moreover, are on the
basis of existing tax laws. The President re
quested that legislation be enacted increas
ing revenue by about five billion dollars. While
political savants aver that Congress will pass no
general tax increase in this election year, a
tax bill aimed at the major loopholes in the
tax structure might increase total tax collec
tions a good deal, perhaps by as much as two
or three billion dollars.
Still another factor which will affect the
size of the deficit will be the action taken on
certain proposed nondefense legislation in
cluded in the Budget estimates, the costs of

Defense spending increasing more
than revenue this year and next . . .

for one reason or another, the actual cash
deficit which will develop during the summer
and fall of this year may be very different
from what is indicated in the Budget.
Nondefense rigidities

which exceed a half billion dollars. These
proposals include Federal aid to education
programs, and increases in public assistance
grants, old-age and survivors insurance bene
fits, and veterans’ death and disability compen
sation benefits.
The most important determinant of the ul
timate size of the cash deficit will be the ac
tual volume of defense expenditures. Direct
spending for military services is estimated in
the Budget at 51.2 billion dollars for next year,
an increase of over 11 billion from the current
fiscal year. Nearly half the total expenditures,
and most of the increase, will be for major
procurement— aircraft—and for construction.
The timing of hard goods deliveries and of
construction progress is difficult to predict.
Since relatively small lags or speed-ups can
make large changes in actual expenditures, the
1953 estimates must be regarded as more un
certain than most Budget figures. Also, sched
uling of production and deliveries of military
hard goods can be accelerated or retarded by
pressures from procurement agencies and other
Government representatives. Not the least of
the factors which could affect the rate of mili
tary hard goods output might be the fear of
the inflationary impact of a large deficit. Thus,

Although spending for nondefense programs
traditionally has been considered good territory
for major cuts, both Congress and the President
have little room for maneuver in this area.
As a matter of fact, this year’s nondefense
budget—about one-fourth of total proposed
spending—to a large extent reflects Congres
sional action in earlier years, the expenditure
consequences of which are still with us.
The reason for this inflexibility is not hard
to find: the really big non defense spending
programs are those in which the amount to be
spent in any one year is not subject to annual
budgetary policy in the appropriation bills.
In these so-called “open-end” programs, what
is spent depends on the course of events and
the character of the basic statutes setting up
the programs. Thus the appropriation in fact
is not a directive to spend a certain amount,
but an estimate of what will be needed. The
biggest “open-end” program is the payment
of interest on the public debt. Neither the rates
of interest nor the size of the public debt, the
determinants of the interest bill, can be ap
preciably affected by Congress in appropriation
bills, given present taxes and expenditures.
Then there is a group of programs which
provide benefits or pensions to individuals, and
unless the enabling legislation is changed, Con
gress can control neither the number of persons
involved nor the size of individual payments.
Expenditures for old-age and survivors insur
ance, railroad retirement, and Federal employ
ees’ retirement benefits depend upon the num
ber of eligible persons reaching retirement age
and their previous earnings; the volume of un
employment insurance benefits depends upon
the amount of unemployment and previous
earnings of those unemployed. Public assist— continued on page 14

the

rpnn

E vtoence is accumulating that Government
officials responsible for guiding the defense
build-up have altered course in an attempt to
avoid the economic storm area which appeared
to loom ahead. According to official statements
the rearmament program has been “rephased.”
Necessary adjustments now can be made with
less disruption of the civilian economy and ad
ditional industrial capacity can be completed in
time to meet the heaviest drains upon supplies
of scarce materials.
Defense outlays were originally scheduled to
rise swiftly to a peak early in 1953 and then
decline to a level which would be “normal” for
some years to come. Now the peak has been
moved forward to mid-1954. The three services
had asked for over 70 billion dollars of spend
ing power for fiscal 1953. This total was pared
down to 52 billion in the President’s Budget.
It cannot be assumed that the nation has al
ready crossed the shoals of inflationary dan
gers engendered by rearmament—not with a
military budget three times the pre-Korea level.
Hopes for stability continue to rest, in large
part, upon the willingness of the inconstant con
sumer to save a large share of his income.
Moreover, the decision to reschedule procure
ment appears to be based to a large extent
upon a desire to restrict spending to an amount
the economy can “stand.” Unfavorable de
velopments abroad could quickly restore the
urgency of earlier months to defense planning.
Nevertheless, rescheduling of the arms pro
gram necessitates a re-evaluation of the outlook
for business in 1952 and subsequent years. The
peak of the boom which doubtless lies ahead
will be blunted, the cutbacks in nonessential
production will be less severe than originally

8 Business Conditions, March 1952

business

contemplated, and the contraction period after
the peak of arms spending will be less abrupt.
In short, the prospective period of high level
general business activity underwritten by Fed
eral spending has been lengthened along with
the procurement program.
Cancellations

defense

contracts

have received as much publicity as new grants
in recent weeks. As a result of recent Air Force
action, Fairchild will not build cargo planes
in Chicago as planned, and about 800 em
ployees have been laid off. Fisher Body will
not proceed upon its tentative order to make
special purpose lathes. Ford will assemble
some piston engines in the huge Government
plant on the outskirts of Chicago, but not in
the quantities contemplated when the operation
was launched a year and a half ago. Instead,
work is being started on order to build jet
engines. Deliveries are tentatively set for 1954.

Automobile output drops
to allowed levels
Million pationgor corf
4

0
1930

1951

1952

Detroit’s unemployment problems are
to be helped in time by placement of about
400 million dollars in new defense contracts in
that area. War work now can be awarded to
small firms and in distressed areas even when
bids are 10-15 per cent above the low bid sub
mitted on a particular job, and Detroit will
begin to benefit from this practice as the year
moves on. Continuing claims for unemploy
ment insurance in Michigan dropped about 20
per cent in January, partly as a result of the
completion of model change-overs.
An easing

of the m aterials supply

situation has been high-lighted by a series of
decontrol orders on the use of such materials
as chrome, stainless steel, and general purpose
synthetic rubber. In addition, the Air Force
has turned back a small amount (15 million
pounds) of aluminum from its second quarter
allotment. The NPA is reallocating this metal
to hardship cases.
Business capital expansion spurred by
the defense program continues to forge ahead
despite the slowdown in other sectors of the
arms build-up. A preliminary survey by Mc
Graw-Hill indicates that, in 1952, capital out
lays will exceed last year by a substantial mar
gin. District construction contract awards for

Employment trends follow
material allocation
Thousand production workers

manufacturing plants totaled 141 million dol
lars in the fourth quarter of 1951, more than
the high level of 118 million in the comparable
period of the previous year. Among the larger
projects recently announced for this area are
a 50 million dollar navy jet engine plant to be
built at Romulus, Michigan and an aircraft
parts plant for Milwaukee.
Common stock flotation has been making
an impressive comeback as a source of funds
for corporations. Midwest firms which have
issued stock recently or announced their in
tention to do so in the near future include
Owens-Coming Fiberglass, Marathon, Quaker
Oats, and Chain Belt.
Bank loans to business in large District
cities declined more than three per cent in the
first seven weeks of 1952 despite the heavy
need for funds to finance tax payments and
expansion programs. Partly, this drop in bank
loans stems from the fact that more corpora
tions are turning to long-term debt. It is
widely believed that the need for additional
working capital will be relatively permanent.
The proportion of life insurance company
money seeking corporate obligations has in
creased as a result of a reduction in the supply
of mortgages and municipals.
Retail sales have been good in the early
post-Christmas weeks despite the unfavorable
comparison with last year. In the following
table, percentage changes in sales at a sample
of District department stores in the six weeks
ending February 9 are compared with totals
for the same period in each of the past two
years.
Increase
Decline
over
from
1950
1951
Seventh District . . . .
Chicago ...................
Indianapolis .............
Detroit .....................
Milwaukee ...............
Other C itie s .............

.........— 11%
.........— 9
.........— 8
.........— 17
.........— 10
.........— 12

+ 9%
+ 7
+ 13
+ 7
+ 9
+ 15
9

Paying the taxes
Tax system characterized hy self-assessment, widespread use of
intermediaries, and substantial time lags in payment.
As m arch 15 approaches , millions of Ameri
cans are filing Federal income tax returns and
writing checks payable to the Collector of
Internal Revenue. These checks are among
the few direct payments that citizens will make
toward the cost of government. They, together
with similar payments to state tax collectors
this month and later this year, complete the
settlement of income tax liabilities for 1951.
Home owners are also paying local real estate
taxes for the year 1951 and all individuals
whose 1952 Federal income taxes will not be
fully covered by withholding are making the
first quarterly payment on account of 1952 tax.
Large as these direct payments may seem,
they by no means represent the average tax
payer’s entire share of the tax burden. A large
proportion of the nation’s 75 billion dollar tax
bill is paid indirectly in the form of income,
sales, and property taxes on businesses, taxes
which in a prosperous period by and large are
shifted to the ultimate consumers of the goods
and services produced by the firms bearing the
legal burden of the taxes.
To a very substantial extent, the “taxpayer”
is insulated from governmental tax collecting
agencies. Although he himself determines his
liability for personal income taxes, it is the em
ployer, the manufacturer, the farmer, or the
retailer who deals with the government on the
bulk of the tax burden the average citizen ul
timately bears.
The ta x collectors’ role

The role of the government tax collectors in
this system is a surprisingly small one. For
the most part, they confine their activities to
verifying tax returns and tax payments and at
tempting to locate and correct situations of in
10 Business Conditions, March 1952

tentional or unintentional failure to comply
with the law.
Nearly all the major taxes are “self-assessed,”
that is, the amount due is determined by some
one other than the tax collecting agency on the
basis of computations on some kind of a return.
Federal and state income taxes are the best
examples of self-assessment — individuals and
corporations file returns with the appropriate
information, which is checked by the tax col
lectors to the extent feasible within the limits
of their budgets and verification techniques.
In the case of withheld income taxes, for ex
ample, the employer determines who pays and
how much. He in effect collects the tax from
his employees and transmits it to the govern
ment. The self-assessment by the employee on
Forms 1040 and 1040A is a check and veri
fication of the employer’s computation.
Generally, excise and sales taxes are in a
sense self-assessed, too. In this case, business
men file returns indicating the volume of taxed
transactions during a specified period. The
measure of the tax may be retail or wholesale
sales, gross receipts from all sources, or charges
for admissions or the use of particular facili
ties. For those taxes paid through the pur
chase of special stamps, like tobacco taxes and
state liquor taxes, the purchase of the stamp
is a declaration and self-assessment. There are
some exceptions to the self-assessment of excise
and sales taxes. Where the tax administration
machinery is such that representatives of tax
collecting agencies are on the spot closely scru
tinizing the critical stages in the production or
distribution of taxed commodities, the taxpay
er’s declaration may be of only nominal sig
nificance. For example, representatives of the
Bureau of Internal Revenue supervise the with

drawal of whiskey from bonded warehouses,
the stage at which the $10.50 per proof gallon
Federal tax is payable. Federal taxes on liquor
and tobacco and customs are administered in
this fashion.

Bulk of tax bill paid
through economic intermediaries

P rop erly ta x an exception

In regard to local real estate taxes, the role
of the government tax collector is different; he
makes the initial determination and the respon
sibility of the taxpayer is more nearly confined
to writing his check for the amount stated on
the bill he receives. The local assessor values
the real estate, with the level and coverage of
the assessment determined by law, custom, and
the mobility or immobility of property on as
sessment day. Local governing bodies adopt
budgets and fix tax rates, and the county clerk’s
office applies the total of these rates to the in
dividual’s assessment. The product is the tax
liability, for which the taxpayer is billed.
Even here, the taxpayer’s role may be impor
tant in actual practice. For one thing, assess
ments can be appealed, and to a significant ex
tent are thus the product of negotiation be
tween taxpayers and assessing officers. Selfassessment of personal property is important in
the states that tax this class of property.
Need for public confidence

The fact that nearly 90 per cent of the 75
billion dollars in Federal, state, and local taxes
paid and accrued in 1951 is collected under
self-assessment procedures reveals the necessity
for a high degree of public confidence in the
justice of the tax laws and the tax administra
tion. Without this confidence, voluntary compli
ance might sag to the point where the weight
of the job of enforcement and verification on
the Bureau of Internal Revenue and state col
lection agencies would be overwhelming. Such
has been the case in a number of other coun
tries recently; the outcome usually has been
resort to arbitrary enforcement practices and
reliance on taxes easily enforced regardless of
their equity and adverse economic effects.
Adequate verification procedures by the tax

administrative organization are absolutely nec
essary to the protection of those who ultimately
bear the burden of the taxes, since there are
some intermediaries who compute tax liability
for others that do not have the same interest
in accuracy as those who actually shoulder the
economic load.
M iddlemen in ta x collection

The best known middlemen in the tax collec
tion process are the hundreds of thousands of
employers who, acting as nonofficial tax col
lectors, deduct Federal income taxes and the
lVi per cent social security tax from their em
ployees’ pay checks. Often, the amounts so
withheld are not paid directly to the collectors
of internal revenue, but pass through other in
termediaries, the commercial and Federal Re
serve banks.
Employers withholding more than 100 dol
lars in taxes during a three-month period are
required to remit these amounts shortly after
the close of each month directly to the Federal
Reserve Banks, or to the Treasury’s Tax and
Loan accounts in commercial banks. In the
Federal Reserve Bank of Chicago’s territory,
about 95 per cent of the 2.8 billion dollars in
withheld taxes collected under this system in
1951 went through the commercial banks.
11

Corporate and property
tax payments lag

property, are collected through intermediaries
of one kind or another.

tax ab le event

The timing factor

Federal liquor tax paid when liquor withdrawn from bond, prior to sale

Federal persona / income tax withheld as income received.

>tate sales tax paid during month following sales.

Fed era l p erson a l income tax not withheld paid in quarterly instalments os
earned through January 15 o f next yea r.

Illin o is property tax paid in May and September o f next year.

---- V —I3 X

tax p a id in fou r instalments in next year.

H-lM *
prepayment

tim e lag in tax payment

*1951 percentages

When withheld taxes are paid to commercial
banks, the banks send depositary receipts to
the Reserve Banks where they are validated
and returned to the employer.
Employers, depositary banks, and the Federal
Reserve Banks, are legally designated middle
men. The businessmen who pay sales and ex
cise taxes to governments are seldom inter
mediaries in the legal sense, for in most cases
they alone bear the legal liability for paying
the tax. Some state sales tax laws specifically
require that the retail sales tax be passed on to
the consumers through a separately stated extra
charge, and typically permit retailers to retain
a portion of the taxes collected from consumers
as reimbursement for the expenses they incur
in acting as unofficial tax collectors; this prac
tice is common in the payment of state tobacco
taxes. Whenever businesses pay taxes, they
shift the economic burden to consumers, em
ployees, suppliers, or stockholders. Thus, from
an economic standpoint they are in fact acting
as tax middlemen. Looking at it from this
angle, nearly all of our taxes, other than per
sonal income taxes not withheld, death and
gift taxes, and property taxes on nonbusiness
12 Business Conditions, March 1952

The time lag between the period in which
liability for tax is incurred and the time that
the tax is paid varies widely depending on the
type of tax and the government imposing it.
The Federal personal income tax is one in
which the time lag is at a minimum. With
holding for tax occurs as wage and salary in
come is received. Other income tax liabilities
are paid in quarterly instalments as the income
is being earned. The distinctive Federal income
tax treatment of farmers permits them to delay
paying their tax until January of the following
year. On the other hand, nearly all state
income taxes, both personal and corporate, are
paid in instalments beginning three or four
months after the close of the year on the
previous year’s income, with a consequent time
lag ranging from eight to eighteen months.
There will be substantial lags with respect to
the Federal corporate income tax, even with the
Mills plan for speeding up corporate tax pay
ments in effect. Prior to the Revenue Act of
1950, corporations were permitted to pay taxes
on their previous year’s income in four quar
terly instalments during the succeeding year.
When the changed payment procedure is fully
effective, in 1955 and thereafter, corporations
will have to make their tax payment in two in
stalments during the first six months of the
succeeding year. This year, under the transi
tional arrangements, corporations must pay 70
per cent of the tax due on 1951 incomes in the
first six months. This is still not comparable
to the current payment of Federal personal in
come taxes, since the tax is not paid during
the period the income is being earned, but the
following year.
Most sales taxes are remitted to governments
with only minor lags. Nearly all Federal ex
cise taxes must be paid by the end of the month
following that in which the taxable transaction

took place. State sales taxes, both general and
selective, are usually collected under similar
procedures, although in some cases the collec
tion period is quarterly rather than monthly.
Federal stamp taxes on liquor and tobacco
minimize the time lag between the transaction
and tax payment. In fact, the interval is neg
ative for in such cases, the tax is actually paid
prior to the time at which tax liability attaches,
that is, when the supply of stamps is purchased.
It is interesting that this is one case in which
the taxpayer has the unusual opportunity of
timing his tax payments for his own conven
ience, since he can purchase the stamps at
any time prior to the transaction. This oppor
tunity is not sought, however, by other tax
payers.
The time lags in tax payment reach their
greatest dimensions with respect to property
taxes, where delays of fifteen to twenty-four
months are general. In Illinois, for example,

N ew debits study availab le
Charges against checking accounts have
long been employed as a tool in measuring
current business activity, following trends,
and in attempting to predict developments.
Unfortunately, information concerning deb
its to individual accounts and clearing house
transactions in important cities has been a
wilderness of incomplete and often unre
liable data which required thoroughgoing
analysis and evaluation. A recent study
made by George Garvy of the New York
Federal Reserve Bank has now filled this
need.
Mr. Garvy’s 175 page monograph en
titled The Development of Bank Debits and
Clearings and Their Use in Economic
Analysis may be obtained at a cost of 25
cents per copy (15 cents in quantities of
ten or more) by writing to the Division of
Administrative Services, Board of Governors

the 1951 tax levy, to cover expenditures made
under budgets adopted by local governments
for calendar 1951, will be payable in instal
ments in June and September of 1952.
The fact that substantial time lags exist be
tween government expenditures and tax pay
ment generally complicates the problems facing
governments and taxpayers — for example, it
adds interest costs for tax anticipation notes
to local government budgets. Taxpayers suffer
when tax rates or economic conditions change
rapidly and by large margins, and their finan
cial planning has been based on stability in
either of these factors. The more nearly on a
pay-as-you-go basis tax collection is, especially
for those taxes paid by a large part of the pop
ulation and including many taxpayers who are
unfamiliar with or do not have access to so
phisticated methods of financial planning, the
more these problems, both for taxpayers and
governments, are alleviated.

of the Federal Reserve System, Washing
ton 25, D. C.
Bank debits have a number of advan
tages over most types of economic meas
ures. First of all, some debits and clearings
data go back almost 100 years. Secondly,
aggregates are available promptly and ac
count for a large proportion of national
totals. In addition, the data are provided on
a locality basis.
Unfortunately, the all inclusive nature of
the debit series necessitates that they be
used with care. The data are sensitive to
speculative or financial transactions which
may not reflect real activity. Nevertheless,
bank debits statistics provide an ever grow
ing storehouse of economic knowledge. Mr.
Garvy’s study combined with continuing
attempts to refine the data constitutes an
important step towards making this infor
mation more useful.

The budget continued from page 7

ance grants are related to the number of indi
gent persons receiving aid from state and local
governments and the cost of providing them
with a minimum subsistence. Veterans’ read
justment benefits and compensation and pen
sions depend on the number of eligible people
who apply for benefits under the statutes.
Economic conditions also directly affect the
farm price support and farm income stabiliza
tion programs; here spending depends on the
size of crops and the level of farm prices. Net
mortgage purchases by the Federal National

“Open-end” programs bulk large in
nondefense spending*
B illio n d o lla rs
Actual
1951

Estim ated
1952
1953

M a jo r " o p e n -e n d " p rog ra m s—
Retirem ent b e n e fits: old -a g e and
su rvivo rs insura n c e ,
ra ilro a d .
civil s e r v ic e ..........................................

2.1

2 .7

3 .2

V e te ra ns' re ad justm e nt b e n e fits . .

2.1

1.6

V e te ra n s' com pensation, p en sion s,
and insura nce b e n e fits .................

2 .9

3 .3

3 .0

Public a ssista n c e g ra n ts .....................

1.2

g ra n ts ............

1.1

Farm p ric e and income s u p p o r t ...

F N M A net m ortgage p u rc h a s e s ...

Posta l d e f ic it .............................................

I n t e r e s t ........................................................

4.1

4 .2

4 .8

T o ta l, m a jor " o p e n - e n d " program s .................................................

14.1

15.9

15.0

5 .5

6 .7

7.0

19.6

22.6

22.0

Unem ploym ent insura nce b e n e fits
and a d m in istra tio n

O th e r nond efe nse p ro g ra m s..
T o ta l, nond efe nse expenditu re s ..........................................

* Cash expenditures for fiscal
proposed legislation.

years ending June 30,

14 Business Conditions, March 1952

including

Mortgage Association to a large extent depend
on the state of the economy, in this case, the
desire of private investors to hold Government
guaranteed and insured mortgages. The postal
deficit is another “open-end” program, although
there is more room for expenditure control
here than in the other “open-end” activities.
A fourth of a fourth

The major “open-end” programs in the last
few years have accounted for about 70 per
cent of total nondefense expenditures. There
are other important programs which present
fixed and continuing charges, such as grantsin-aid to state and local governments for high
ways, airports, and public health activities. A
relatively small portion of total nondefense
spending—perhaps only a fourth—is really con
trollable through the traditional appropriation
process. Moreover, this small portion does
include a number of items which are tied to
the defense program, such as defense housing,
the Coast Guard’s port security activities, and
defense access roads. These and similar pro
grams may involve the expenditure of nearly
one-half billion dollars.
While total nondefense spending has receded
considerably from the fiscal 1950 peak (the year
ending just after the outbreak of the Korean
war), the “open-end” programs as a group are
expected to come close to the 1950 level in
the next fiscal year. In the past eighteen
months, widespread cuts have been made in
the remaining small segment of Government
spending, both by Congress in appropriations
legislation and by the President in the 1952
and 1953 Budgets. Thus, the nondefense bud
get offers limited scope for budget-balancing
through expenditure reduction. Realistically,
chances for a balanced cash budget for fiscal
1953, with the resulting better prospects for
inflation control, depend on other factors—
whether realized revenues deliberately or acci
dentally exceed and defense spending inten
tionally or unintentionally falls short of the
amounts forecast in the President’s Budget.

Role of the
cash budget
T he major function of the Federal Budget is
to serve as a dollar-and-cents work plan for the
Government for the next fiscal year. Like the
budget of a business, it presents the manage
ment’s proposed program to the board of di
rectors—in this case, the Congress. Through
the Budget, the President and Congress control
the operations and expenditures of the 60-odd
major agencies that make up the Government.
Like a corporation’s budget the Federal
Budget, as presented in the President’s annual
message, is set up so the totals refer to those
operating receipts and expenses which the man
agement programs on an annual basis. For
example, the receipts and expenditures of funds
for which the Government acts as trustee—
such as retirement and insurance funds—are
excluded, just as a corporation’s budget usually
excludes the company’s pension funds. The
conventional Federal Budget expenditure totals
include not only current cash payments to con
sumers, businessmen, state, local and foreign
governments, and the banking system, but also
currently accrued liabilities for future payments
and transfers from one Government agency or
account to another.
Thus, while the conventional Budget func
tions as an effective management tool, it does
not give a clear picture of current cash transac
tions between the Government and the public.
To assess more accurately the Budget’s eco
nomic impact, the data may be converted to a
“cash basis,” known as the consolidated cash
budget. This cash budget does not include all
Federal operations affecting economic activity.
For example, it does not show Federal guaran
tees or insurance of loans or increases in obligational authority which might affect business
activity long before the authorized funds were

spent. It does show, however, the actual flow
of money between the Government and the
public (excluding borrowing) in a particular
fiscal year. These cash figures indicate the vol
ume of Government expenditures actually ab
sorbing goods and services or adding to private
incomes, the receipts reducing private incomes,
and the deficits or surpluses affecting the pub
lic’s holdings of money and Government bonds.
They are thus a better tool for weighing the
immediate impact of the Federal Budget upon
private purchasing power, total demand, em
ployment, and prices.
The difference between the Government’s
cash position and the budgetary position varies
from year to year, the cash position usually ap
pearing more favorable. The gap between the
two methods arises largely from two bookkeep
ing factors. First, the conventional budget in
cludes far more intragovernmental and other
noncash expenditure items than noncash re
ceipts. Secondly, adjustment to the cash
basis involves consolidating with administrative
budget figures the cash receipts and expendi
tures of the various Government trust funds.
Since the most important trust funds, the social
security accounts, are accumulating reserves to
meet future requirements, they currently receive
considerably more cash from the public than
they pay out.
The table on the following page shows the
more important cash adjustments and the way
they affect the conventional budget figures for
fiscal year 1953.

Business Conditions is published monthly by
the federal reserve bank of Chicago. Sub
scriptions are available to the public without
charge. For information concerning bulk mail
ings to banks, business organizations, and edu
cational institutions, write: Research Depart
ment, Federal Reserve Bank of Chicago, Box
834, Chicago 90, Illinois. Articles may be re
printed provided source is credited.
15

Th e budget
b a sis

Adjustm ent
to ob ta in

Th e cash

cash b a sis

b a sis

(b illio n d o lla rs)

Receipts
T a x e s on in d ivid u a ls

3 0.7

3 0 .7

T a x e s on c o rp o ra tio n s

2 7 .5

2 7.5

E x c is e s a n d custom s

10.2

Em ploym ent ta xe s-

+ 4 .0

F o r o l d age a n d su rv iv o rs i n s u r a n c e

M is c e lla n e o u s re ce ip ts—

1.6

~?u

U n e m p l o y m e n t insurance d e p o s i t s from s t a t e s
Premiums f o r v e t e r a n s ' li fe i n s u r a n c e
O t h e r trust fu n d r e c e i p t s
Pro fits from s i l v e r c o i n a g e

+ -2
— .1
> 3 .4

T r a n s f e r s from G o v t , a g e n c i e s a n d trust funds

TOTAL

71.0

7 6 .8

+ 5 .8

Expenditures

On^cash

M ilita ry s e rv ic e s

5 1 .2

In te rn a tio n a l se c u rity a n d fo re ig n a id

10.9

11.0

A g ric u ltu re a n d n atu ral re so u rc e s

4 .7

T ra n sp o rta tio n a n d com m un icatio n

1.6

F in a n c e , co m m e rce , a n d ind ustry

H o u sin g a n d com m unity d e velo p m en t

E d u c a tio n a n d g e n e ra l re s e a rc h

.6
.6

S o c ia l se c u rity a n d la b o r—

2 .9

B e n e f i t p a y m e n t s on a c c o u n t o f —
O l d a g e a n d su rv iv o rs in s u r a n c e
F e d e r a l e m p lo y e s' retirem ent
U nem ploym ent in sura n ce — state w ith d ra w a ls

+ 2 .5
+ .3

R a i l r o a d r e t i r e m e n t t a x e s le s s b e n e f i t s

— .3

V e te ra n s ' s e rv ic e s a n d b en efits—

+ -8

4 .2

G e n e r a l G o v e rn m e n t—

in th e ta b le th a t a c
co u n t fo r th e 4 b illio n
d o lla r d iffe re n c e b e
tw e e n th e b u d g e ta r y

+ .2
— .5

D i s t r ic t o f C o l u m b i a m u n ic ip a l governm ent
G o v t , p a y m e n t to e m p l o y e s ' r e t i r e m e n t fun d

Interest—

6 . 3 ----------

— .3

I n t e r e s t p a i d G o v t , a g e n c i e s a n d trust fu nds

—

other

adjustm ents— net

(p rim a rily

TOTAL

Business Conditions, March 1952

- - > 1 .2

“I

S a v i n g s b o n d in t e r e s t a c c r u e d but n ot p a i d

A ll

■>4.9

1.5 •

1.2 ------ > 4 .8

Federal

— .4

e m p l o y e s ' c o n t r i b u t i o n s to r e t i r e m e n t fundI

a n d cash deficits.

I
+

In sura nce refunds, d iv id e n d s , a n d b enefits

>6.2

85.4

4 - 1.8

—

87.2

Full text of Business Conditions (Federal Reserve Bank of Chicago) : March 1952

FRASER