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federal R e s e r v e Ba n k OF DALLAS Dallas, Texas, December 21, 1951 T o the Financing Institution A ddressed: There appears below the text o f Bulletin No. 2 (revised) o f the national V oluntary Credit R estraint Committee, together with a statement issued in conjunction therewith. This material is being sent to all financing institutions at the request o f the committee. Y ours very truly, R. R . G ILBERT President B U L L E T IN N U M B E R 2 (R E V IS E D ) OF TH E N A T IO N A L V O L U N T A R Y C R E D IT R E S T R A IN T COMMITTEE RE STR IC TIO N S OF BU SINESS C A P IT A L E X PE N D ITU R E S FIN AN CIN G The V oluntary Credit R estraint Committee has reviewed the outlook fo r business spending on plant and equipment and has revised Bulletin N o. 2 as fo llo w s: 1. The econom ic outlook suggests the need fo r continued careful screening, under the program , o f all business capital financing program s. Business spending on plant and equipment is at record levels and is contributing to shortages o f basic materials. The prospects are that plant expansion program s will remain at high levels fo r some time to com e; business requirem ents fo r outside financing are expected to remain large during 1952. A t the same time, the supply situation in several basic raw materials is likely to becom e worse before it improves. Consequently, financing institu tions should exert continued devoted efforts to channel funds used by business concerns into defense, defense-supporting, and essential civilian purposes. Plant expansion fo r nondefense and nonessential purposes consumes scarce m aterials and syphons off funds which m ight better be used to finance the defense effort. Thus it becomes a menace to the soundness o f the Am erican dollar. Such outlays have apparently been large in 1951, although, thanks to careful screening, the am ount financed by borrowed m oney and stock issues has been held to a m oderate sum. H owever, there will come a tim e when these nondefense plant expenditures will afford welcome support to business and em ploym ent. Business management and finance can join tly do a great public service both now and later by tim ing plant outlays and the financing th ereof with full consideration o f the foreg oin g factors. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 2. Typical o f the uses o f funds w hich have a high priority under present conditions are the follow in g: Increasing capacity fo r the production o f defense goods and o f basic raw materials (such as metals and p e tro le u m ); loans to railroads and other public transportation, electric, gas, and water utilities; loans under certain conditions to construction companies with bona fide contracts fo r the construction o f defense facilities, highw ays, schools, port improvements, public utilities, or railroads. 3. A m ong the nonessential uses o f long-term financing that m ight be postponed to a m ore propitious time are those fo r such purposes as: (1) construction o f facilities to improve the com petitive position o f an individual producer o f nonessential g o o d s ; (2) expansion and modernization expenditures o f concerns in distribution or service lines where the distribution or service is not defense su pporting; (3) expansion and modernization program s fo r the m anufacture o f consumer goods not related to the defense e ffort; and (4) purchase o f existing plants or firms to im prove the diversification o f a com pany’s products. 4. The purpose fo r which funds will be used, rather than the type o f financing, is the important consideration in screening capital expenditure financing under the program . Thus, it is recommended that all types o f security issues be screened— term loans, notes, debentures, bonds, preferred stock, com m on stock, sale-lease-back arrangements, or any other form o f financing. Interim financing should be screened b y the same tests that will be applied to the screening o f the ultimate financing. 5. Financing institutions are urged to give equal consideration to the needs o f small as well as large business in screening applications fo r long-term financing. 6. T he financing o f business plant and equipment program s should be screened under the program even though the p roject has received a certificate o f tax amortization, or, has been allotted materials under the Controlled M aterials Plan. Such certificates or allotments are im portant factors which should be given substantial w eight by financing institutions and by the regional com m ittees in their screening, under the program , o f a financing proposal, but such certificates or allotments should not autom atically exem pt financing from evaluation under the program . Such screening is welcomed b y the Office o f D efense Mobilization. 7. Since there m ay be cases in w hich business m anagement has decided fo r policy reasons against applying fo r a certificate o f tax amortization, the absence o f such a certificate should not be taken as conclusive evidence that proposed financing o f a plant program does not conform to the lending standards o f the V oluntary Credit Restraint Program . T E X T OF ST A T E M E N T ISSUED B Y V O L U N T A R Y CREDIT R E S T R A IN T COMMITTEE FIN A N C IN G OF BU SINESS C A P IT A L E X PE N D ITU R E S High Level o f Business Investm ent— Business spending on plant and equipment is currently at record levels and is likely to remain relatively high fo r some tim e to come. In the fou rth quarter o f 1951, it is estim ated that such spending was at the rate o f $25 billion per year, and fo r the year the total is likely to be $23 billion or m ore. These figures reflect recent Department o f Commerce revisions o f plant and equipment expenditure estimates, and represent a 15 per cent increase over 1948, the previous record year. O f the total fo r 1951, nearly $12 billion will be accounted fo r by m anufacturing and mining, nearly $6 billion by public utilities and transportation, and the rem aining $5 billion by trade, service and other. W hile a substantial part o f these expenditures doubtless represents additions to produc tive facilities that are essential to the defense effort, it seems likewise obvious that a large amount represents expenditures that m ight better have been postponed until labor and materials were in m ore plentiful supply. Some decline from the record fourth quarter .level would not be unexpected, but present indications are that total expenditures in 1952 m ay be about as large as fo r 1951. Need fo r Outside Financing— The amount o f financing to be done via the securities market, direct placements and the com m ercial banks m ay be about as large in 1952 as it was in 1951; the need fo r outside financing is likely to be especially heavy during the first half o f the year. Payments o f Federal incom e and excess profit taxes will be substantially larger in 1952. Furtherm ore, whereas in 1951 accruals fo r tax liabilities ran in excess o f payments and thus were a source o f funds, the reverse m ay well prove to be the case in 1952. The acceleration o f tax payments in the first half of the year as the result o f the “ Mills Plan” and the probability that corporations in general have not fu lly provided fo r their income tax liabilities also mean that the financing requirem ents o f many companies will be unusually heavy in the next few months. A t the same time, retained earnings plus depreciation accruals are expected to show little if any increase from the 1951 level. Thus, corporations m ay well require a large volume o f financing from external sources such as com m ercial banks, life insurance companies, and the securities markets during 1952. These prospects suggest the need fo r an especially careful screening o f business financing pro gram s during the next few months. That there is room fo r restricting nondefense uses o f funds is suggested by the data on corporate new capital securities issues, including private placements, during the first nine months o f 1951. The aggregate o f such financing, $5.3 billion, was significantly larger than in the com parable period in 1950. O f this total, an estimated $3.9 billion was accounted fo r by such defense and defense-supporting industries as railroads, public utilities, and m anufacturers o f iron and steel, nonferrous metals, m achinery, and other transportation equipment, chemicals, rub ber, and petroleum. Of the rem aining $1.5 billion, roughly one-half reflected financing by m anufac turers o f food, beverage, and tobacco products, paper, construction materials, and house furnishings and appliances, and the balance represented issues by trade, financial, and other companies. Government Policy re Plant E xpansion— In part, the current record levels o f business spending reflect governm ent policy. Through subsidy and exploration contracts, efforts have been made to increase supplies, largely, o f basic raw materials. Of greater aggregate significance is the incentive to plant expansion provided by accelerated amortization fo r tax purposes. Under this program some 4,300 certificates o f tax am ortization have been issued covering proposed plant investments am ount ing to $10.6 billion. The desire to build at great speed a plant capacity sufficient to m eet simultaneously the demands o f the defense program and the requirements o f a high standard o f living civilian econom y has meant that it has not been feasible until recently at least, to give much attention to the devel opm ent o f well-integrated program s in the various sectors o f our trem endously com plex econom y. Incentives to plant expansion have not been limited to defense plants, narrow ly defined, but have been given to a fairly broad list o f industries. On the other hand, first through N .P.A. certificates and other controls over construction and currently by means o f the Controlled Materials Plan efforts have been made to limit less essential construction. But C.M.P. is still in its form ative stages. The practice o f “ over-allotting” has been follow ed, based on the prem ise that not all allotments would be utilized, and it has been stated that an allotment is no guarantee that the specified materials will in fa ct be available. Self-certification allows some use o f materials without specific control under the program . These comments underline the difficult problems encountered in trying to determine, fo r the expansion o f productive plant and fo r the allotment o f short materials, policies appropriate to a part-defense, part-civilian econom y. The difficulties are probably greater than they would be under conditions o f all-out war. Assistance under the Voluntary Credit Restraint Program will be wel comed by the Office o f Defense M obilization through the process o f screening financing fo r business expansion even though the projects m ay have received certificates o f tax amortization, allotment of materials under C.M.P., or some other similar recognition. There m ay be additional reasons fo r screening the financing o f such projects under the pro gram. A certificate o f tax am ortization does not necessarily mean that financing is required imme diately since a considerable period m ay elapse before the materials will becom e available. Premature financing increases the probability that funds may be diverted to other uses not related to the p roject fo r which a certificate has been obtained. In some cases only part o f a plant p roject m ay be classified as “ essential” whereas the financing program m ay cover the entire venture. The character and type o f financing proposed should be appropriate to the circum stances; thus it would seem reasonable to insist upon reasonably adequate debt retirem ent provisions in the case o f projects which have received certificates o f tax amortization. It is conceivable that there m ay be cases in which financing institutions, because o f their intimate knowledge o f a local situation, m ay have reason to doubt whether a given p roject has a reasonable chance o f achieving its objectives.