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ßl^ n ikly (Rmæifr T W E LF T H F E DE R AL R E SE R V E D I S T R I C T FEDERAL RESERVE BANK OF SAN FRANCISCO itions . . . . Review of Business Twelfth District Bank Loans to Small B u sin e ss........................... 94 97 The International Finance C o rp o ra tio n ..................................... 102 REVIEW OF b u sin e ss c o n d it io n s employment data suggest some le v e lin g off in b u sin e ss a c tiv ity in th e Twelfth District during July. Nonagricultural employment, after accounting for seasonal varia tions, remained stable at the high June rate. On the other hand, insured unemployment (season ally adjusted) rose significantly above the June rate. These July developments are in contrast to those during the first half of 1956; employ ment increased and unemployment declined dur ing each of the first six months. It appears that a high level of retail trade was a m ajor factor contributing to strength in the District economy. Preliminary data (seasonally adjusted) indicate a rise in District department store sales in July. Despite declines in automo bile sales, total retail trade in June was above June 1955. Although separate District figures are not available, sales data for the eleven west ern states as a whole, of which District sales ac count for about 85 percent, indicate that total re tail sales during the first six months of 1956 were at a level significantly higher than during the same period last year. Total construction activity in the District, as suggested by dollar value of building permits is sued, was somewhat higher in July than in the same month a year ago. This result reflects large demands for nonresidential building, which more than offset a drop in residential building. P re liminary estimates indicate that total building activity in the District for the first half of this year was significantly above the corresponding year-ago figure. Demands for bank credit in the District also reflect this high level of business activity. Data from weekly reporting member banks show an increase in business and real estate loans during both June and July, but the dollar increase in total loans was less than in June. Member banks sold securities in June and July to meet this de mand for loans and to repay, in part, borrow ings from the Federal Reserve Bank. W hereas member banks in the District had net borrowed reserves in June (that is, borrowings from the Federal Reserve Bank exceeded excess re serves), they had free reserves (excess reserves P 94 r e l im in a r y larger than borrowings) in the first half of July 1956 which were greater than those of the same period in 1955. Retail sales continue at record but stable rate Total retail trade, despite declines in automo bile sales, continued to be a m ajor source of strength in the economy. Nationally, a prelim inary estimate indicates no change in retail sales from June to July. Sales in June, after adjust ment for seasonal variation, were at the record rate set in May. Department store sales in July, however, exceeded the June peak. Reduced sales by automobile dealers continued in July, as in the previous six months of the year, to be offset by increased sales by other types of durable goods outlets. According to the advance esti mate, food and apparel outlets, after accounting for seasonal differences, experienced declines in July. In June, seasonally adjusted sales at non durable goods stores in the nation were at a rec ord pace, with all kinds of nondurable goods outlets sharing in the high level of sales. F or the first half of 1956, total retail sales were 4 per cent above the corresponding half of 1955. Available data suggest much the same pattern of trade in the District during July. A prelim inary estimate shows a significant rise in Dis trict department store sales (seasonally ad justed) in July, which was also the case for de partm ent store sales nationally. Sales at District department stores in June were about 3 percent above the same month of 1955. This June rise was largely accounted for by similar percent in creases in Arizona, California, and the Pacific Northwest. New passenger car registrations in California during July dropped about 24 percent below the July 1955 figure. Except for January, California automobile registrations during each of the first seven months of this year have been substantially below the corresponding monthly figures for 1955. Department of Commerce estimates of retail trade in the eleven western states suggest that retail sales were stronger in the District than in the nation during the first half of the year. D ur ing June, large retail outlets in the W est rang up August 1956 MONTHLY REVIEW sales which were about 5 percent above June a year ago, compared with a slightly smaller figure for the country as a whole. Most of the regional strength was accounted for by substantial in creases in food and apparel sales. Furniture store sales in June were somewhat below a year ago. F or the first six months of 1956 total sales by large stores in the W est were somewhat more than 6 percent above the same period a year ago, compared with a somewhat less than 5 percent increase in the country as a whole. As in the na tion, declines in automobile sales during the first six months in the W est seem to have been off set, to some degree at least, by increases in sales of other durable goods. N onresidential building activity continues strong in the District A preliminary estimate of the value of total building permits issued suggests a significant increase in construction activity in the District during July compared with the same month a year ago. The rise in nonresidential construc tion more than offset a large decline in residen tial building activity. Building developments in California followed the same pattern. For the first six months of 1956 the dollar value of total building permits issued was significantly above a year ago. On the other hand, residential build ing activity during the first half of 1956 was substantially below the same period of 1955. F urther evidence of strength in industrial con struction in this region is indicated by scattered local reports. The value of industrial construc tion and expansion in Los Angeles County in June was much larger than in June of last year. The dollar volume of new plant and expansion building in Los Angeles County during the first half, of this year was more than double the amount announced for the corresponding period in 1955 and was the largest recorded for any half-year period. Construction activity in earth works and waterways seems to be a leading fac tor in announced plans for industrial construc tion in the West. W eakness in the regional demand for residen tial construction is reflected by declines in re quests for appraisals for Government-guaran teed loans from offices in this District. Requests for F H A appraisals showed a sharp decline from May to June and were well below June 1955. Requests for VA appraisals were also down sub stantially from May to June and were about 60 percent below June a year ago. District nonagricultural employment stable at high June rate A preliminary estimate shows that nonagri cultural employment (seasonally adjusted) in the District during July remained near the high June rate. A t the same time, insured unemploy ment in the region also increased 3^2 percent. Nonfarm employment leveled off in California but slipped in W ashington by one-half of one percent. Total unemployment in California rose nearly 2 percent in July, while in W ashington it declined by more than 7 percent. After adjusting for seasonal factors, total ci vilian employment showed a slightly less than one percent increase, while total unemployment rose by somewhat less than 2 percent in the P a cific Coast states from May to June. Insured unemployment in the District (seasonally ad justed) declined 6 percent in June, compared with a 5 percent decline in May. These aggre gate movements were the result of an increase in total employment and no change in unem ployment in California; an increase in employ ment and a decrease in unemployment in O re gon; and no change in employment and a sig nificant increase in unemployment in W ashing ton. California employment showed an upward trend during each of the first six months of 1956, whereas employment in the Pacific N orth west tended, in general, to move downward dur ing the winter months and to recover in the spring months. Total nonagricultural employment, after ac counting for seasonal variability, rose about one percent in the District during June. This in crease reflected small rises in all District states except Washington, which showed a decline, and Idaho, where employment continued at the May rate. This June increase is a continuation of the upward trend in District nonagricultural employment which has manifested itself during each of the first six months of the year. FEDERAL RESERVE BANK OF SAN F R A N C IS C O Total manufacturing employment, after sea sonal adjustm ent, showed a slight increase in this region in June, reflecting increases in Cali fornia, Oregon, and the Intermountain states, coupled with a decline in Washington. F or the District as a whole, total manufacturing employ ment also showed a slow but upward trend dur ing each of the first six months of 1956. The W ashington picture is brightened some what by expected increases in manufacturing employment in the Seattle area, which accounts for about two-fifths of the state total. Besides the usual seasonal increases in such fields as food processing and lumbering, continued ex pansion in aircraft and fabricated metals is also expected to contribute to a tightening of the labor market in the Seattle area during the third quarter. The United States Department of Labor now classifies Seattle as an area where job opportunities for local workers are slightly in excess of job seekers. California employment in automobile assem bly operations has generally followed the na tional picture. Continued declines in employ ment reflect both the previously noted decrease in sales and the usual seasonal slowdown for the changeover to new models. Reduction in employment due to 1957 model changeovers is expected to last from July into September, with full scale production of new models getting un derway in late September or October. Paring of automobile dealer inventories since the early spring peak will probably be an important fac tor in strengthening production of new model cars. Seasonally adjusted figures for the nation show a $90 million decrease in automotive in ventories in June, a decrease somewhat greater than that in May but smaller than the April de cline. W ith the thirty-five-day strike in the steel industry over, steel mills in the nation are push ing to restore full operations. The industry es timates that it will require several weeks yet to fill delivery pipe lines, especially for structural and reinforcing steel. F or the week beginning A ugust 13, steel producers in the nation were estimated to be operating at about 86 percent of capacity, compared with 58 percent in the pre vious week. Prelim inary figures for the month 96 preceding the steel strike indicate a small de cline in steel ingot production in the Twelfth District during June. This decline followed a small dropping off of production in May. These small declines in May and June reflect problems in production scheduling at near-capacity out puts rather than any m arket weaknesses. District nonagricultural employment in other than manufacturing industries also showed sta bility at high levels during June. Construction employment, reflecting the over-all strength in building activity, increased nearly one percent in June, although W ashington and Nevada had declines. D uring the first half of 1956, construc tion employment in the District showed con tinued month-to-month increases. District em ployment in trade, services, government, and mining activities was, after seasonal adjustment, at about the same rate as in May. Except for some minor “ripples” in service, government, and mining industries, all kinds of nonagricul tural employment shared in the continued slow upward trend in monthly total employment dur ing the first half of 1956. Dem and for /oans continues strong in District Bank credit developments in the D istrict dur ing July continued to show strong demands for funds by the private—particularly the business— sector of the economy. In general, member banks in the District reduced their holdings of United States Government and other securities in or der to meet demands for loans, add to their ex cess reserves, and reduce their borrowings from the Federal Reserve Bank. Total loans from weekly reporting member banks in this District increased $48 million from June 27 to August 1. However, this dollar increase in July was sub stantially below the previous four-week June in crease and the year-ago four-week July increase. The July 1956 increase in loans was largely due to rises in commercial and industrial loans and in real estate loans. In contrast, commercial and industrial loans declined during July 1955 when nearly all of the total increase was accounted for by rises in real estate and consumer loans. Loans by reporting member banks to manu facturing and mining industries increased by more than $62 million from July 3 to August 1, August 1956 MONTHLY REVIEW nearly three times the increase during July a year ago. Loans to lumber and forest products industries showed the biggest increase. W hole sale traders decreased their indebtedness to member banks in July compared with a small increase in July 1955. The reduced demand for automobile credit in the currently depressed re gional market was reflected, in part, by the fact that sales finance companies decreased their debt to District reporting member banks by about $228 million from July 3 to August 1, com pared with a $5.3 million decline in their in debtedness a year ago. The high level of building activity led to in creases in real estate loans. Real estate loans from reporting member banks increased $41 million from July 3 to August 1, somewhat above the dollar increase during the four-week period of July a year ago. Judging from the category “other” loans in the reporting series, banks de creased their holdings of consumer loans com pared with a sizable rise in July 1955. To help finance the increase in loans, report ing member banks reduced their holdings of both government obligations ($116 million) and other securities ($52 million) from July 3 to August 1. In contrast, reporting member banks increased their total holdings of both United States Government and other securities sub stantially during July of last year. The past July reduction in United States Government obliga tions represented sales of long- and intermediateterm as well as short-term securities. Sales of securities by member banks were also higher in July than in June. Member banks in the District apparently also used funds from the sale of securities to reduce the amount of borrowings from this bank and add to their excess reserves during the first half of July. Average daily excess reserves were $45 million and borrowings were $19 million in the first half of July* This compares with $18 mil lion in excess reserves and $34 million in bor rowings during the second half of June and $35 million in excess reserves and $16 millon in bor rowings during the first half of July 1955. Thus, through the sale of securities, District member banks strengthened their reserve positions in early July compared to late June and early July a year ago. Twelfth District Bank Loans to Sm all Business m all business exemplifies for most people S the essence of the enterprise system, and it does in fact play a very im portant role in the production and distribution of goods and the performance of many services in our economy. According to the 1954 Census of Manufactures, businesses with from one to nineteen employees comprise almost two-thirds of the total number of manufacturing establishments. The predom inance of small business is even greater in other fields. F o r example, according to the 1948 Cen sus of Business, two-thirds of the retail firms employed two persons or less. In the personal, business, and repair services industry, firms with two or fewer paid employees comprised over 80 percent of the total number of such firms. T he success of all types of business, both small and large, is somewhat dependent on the credit available to them. However, some finan cing methods, such as capital issues, are less practicable for small businesses than for larger firms; and, consequently, credit extended by commercial banks has been an im portant source of funds to small business. This article will deal with the amount, maturity, and interest rates of loans of Federal Reserve member banks to vari ous types of small business. The estimates of small business loans are based on the results of a survey of business loans conducted by this bank and the Federal Reserve System on October 5, 1955. The survey and es timates of loans to all businesses are described more fully in the June 1956 issue of this Review and the April 1956 Federal Reserve Bulletin. F or the purposes of this article, small business has been defined as follows: manufacturing and mining firms with total assets under $1 m illion; wholesale trade firms, total assets under $250,000; retail trade, services, public utilities, con struction, real estate and all other industries, 97 FEDERAL RESERVE BANK OF SAN F R A N C IS C O total assets under $50,000. The 1946 survey of commercial and industrial loans, with which some comparisons will be made, used the same asset size classifications. In that survey, manu facturing and mining concerns with assets under $750,000 were included in the small business category, but all other size groups were the same in both surveys. Loans to small business by Twelfth District member banks amounted to over $600 million on October 5, 1955. These loans represented only 17.6 percent of the dollar amount outstand ing of all commercial and industrial loans at District member banks, but they accounted for over one-half of the number of total business loans. A 14 percent increase in the dollar vol ume of small business loans in the postwar dec ade stands in contrast to an over-all growth of 104 percent in total business loans in the Dis trict. The number of Twelfth District loans to small businesses declined 4 percent in the same period, while the number of total business loans increased 39 percent. On the other hand, small firms in the nation as a whole increased their borrowings in both number of loans and dollar volume by about 50 percent. As a percentage of the dollar amount of all commercial and indus trial loans at Twelfth District member banks, small business loans decreased from 31 percent in 1946 to 18 percent in 1955. A similar, but less sharp, decrease, from 22 percent to 15 percent, occurred in the nation. The number of loans to small businesses decreased in the same period from 76 percent to 53 percent of all commercial and industrial loans at District member banks. Nationally, the number of business loans made to small businesses fell from 76 percent in 1946 to 59 percent in 1955. In 1946, Twelfth District banks, which pos sessed only 13 percent of the total assets of all member banks in the nation, held almost onefifth of all small business loans. In 1955, only 14 percent of the nation’s small business loans were held by Twelfth District member banks, while the asset ratio remained unchanged. However, banks in this D istrict extended approximately the same proportion of total member bank credit to business in the United States on the two sur vey dates. Thus, it would seem that in the W est 98 many small businesses were being established in 1946, with a resultant strong demand for funds ; and the disproportionately rapid growth in the Twelfth District economy may have increased the average size of firms in the District more rapidly than in the nation. There are other pos sible explanations for the decline of small busi ness loans. F or example, it appears that small borrowers may be relying less on bank credit for expansion and more on retained earnings and trade credit. There may also be fewer firms in the small business category because of a gen eral increase in the price level, with a conse quent rise in asset values. Furtherm ore, the rate of new business formation, at a very high level in 1946, had declined by the survey date in 1955. In the District the average size of small busi ness loans increased from $5,675 in 1946 to $6,743 in 1955. Much of this increase can proba bly be traced to an increase in the price level. The average size loan to all businesses also increased from $13,786 in 1946 to $20,219 in 1955. In the nation as a whole, the average size of loan ex tended to small business was $5,904 in 1955, com pared with $5,615 in 1946. T Loans to S m all B 1 able u s in e s s by 1946 and B u s in e s s of B orrow er 1955 (in thousands) 1946-------- s ,----------1955N um ber D ollar N um ber D ollar of amount of amount loans of loans loans of loans 611,659 537,420 90.7 All businesses ......................... 94.7 M anufacturing and m in in g : 20.3 Food, liquor, and tobacco. 3.8 T e xtiles, apparel, and l e a t h e r ................................ 1.4 M etals and m etal products 5.1 P etroleum , coal, chem icals ......................... 0.6 O th e r m anufacturing and 9.5 m ining ............................. 238,200 91,650 29.3 5.0 369,011 88,433 13,670 42,530 2.0 8.5 23,293 98,558 7,730 1.5 32,001 82,620 12.3 126,727 48.7 227,050 28.0 131,467 W holesale (including com m odity dealers*) . . . 14.1 34.6 147,310 79,740 9.1 18.9 79,234 52,232 O th e r : ...................................... 25.7 l Sales finance com panies. T ran sp o rtatio n , e tc ............ 5.2 C onstruction ....................... 6.1 11.1 3.3 72,170 490 14,320 22,700 23,730 10,930 33.4 0.1 2.7 4.4 17.5 8.6 111,182 1,091 6,799 12,077 69,511 21,704 *Loans to commodity dealers on October 5, 1955— 191 loans, $460,660. **Includes loans to real estate firms on October S, 1955— 2,690 loans, $8,825,240. 1Less than 0.05. August 1956 MONTHLY REVIEW Shifts in loan shares by business of borrower As shown in Table 1, shifts occurred among the m ajor groups of small business firms (m an ufacturing and mining, trade, and other) in the Twelfth District in the shares of loan totals, both in dollar amount and in number of loans. M anu facturing and mining concerns increased their dollar share of small business loans from 44 per cent in 1946 to 60 percent in 1955 and at the same time decreased their share of the number of loans from 51 percent to 32 percent. In the nation as a whole, small manufacturing and min ing firms increased their shares in both dollar amount and number of loans. These small firms differed from all businesses in this category in that the latter decreased both their dollar and number share of all loans to business in the Dis trict as well as in the nation. About one-third of the amount outstanding at Twelfth District member banks and 93 percent of the total num ber of loans to all firms engaged in m anufactur ing and mining was extended to those firms with total assets under $1 million. The average size of loans to small business borrowers in the man ufacturing and mining group was higher than the average size loan to all small business, prob ably reflecting the larger size and larger capital needs of these firms. W ithin the manufacturing and mining group, the largest single segment of small business borrowers at Twelfth District member banks on October 5, 1955 was that clas sified as “all other manufacturing and mining” (lumber, furniture, paper, printing and publish ing, and stone, clay, and glass m anufacturers). Credit extended to this group was one-fifth of the dollar volume and 14 percent of the number of loans to all small business borrowers. In both the District and the nation, small re tail and wholesale trade firms decreased their share of total dollar volume and number of small business loans during the past decade. W hole sale and retail firms also decreased their bor rowings in this District in absolute terms. A part of this decrease may be accounted for by the difference in the dates of the two surveys— late November 1946 and early October 1955. Trade firms’ borrowings usually exceed repay ments in the period from October through No vember. “O ther” small businesses increased their share of total small business loans both in dollar amount and in number of loans in the District and the nation. More than one-half of the loans in this category in the District were made to service firms. Loans to small service firms in creased from 4.4 percent of the amount out standing to all small businesses in 1946 to 11.4 percent in 1955. The share of the number of loans to these borrowers almost doubled—from 11.7 p e rc e n t to 19.2 p e rc e n t — in th e sam e period. The growth in loans to service firms was probably a direct effect of the increased dispos able income in the postwar period. It is also likely that service firms are those which find it most difficult to grow in size and thus, despite the rapid growth in the District, have not moved into larger size groups to the extent that other ty p e s of firm s m ay h av e d u rin g th e sam e period. The nature of their business involves personal contact with the consumer and thus obviates the extensive use of machinery and other capital goods. It is this latter kind of in vestment which contributes much to the shift ing of firms from one size group to another. T a b le 2 I n t e r e s t R a t e s to S m a l l B u s i n e s s b y B u s i n e s s of B orrow er (percent per annum ) All loans Short term 5.56 Long term 6.44 5.36 5.97 5.66 5.05 5.21 5.98 5.38 5.06 5.37 5.65 5.89 6.40 5.04 6.44 . . 6.85 5.76 6.13 6.17 7.87 5.88 5.06 7.06 6.08 5.56 6.26 5.71 6.00 4.84 8.67 8.23 5.65 7.39 6.96 . 5.91 5.56 6.44 , , 5.44 . . 5.50 . . 5.66 5.78 . . 6.15 . . 6.06 . . 6.60 5.90 5.48 5.22 5.37 5.27 5.76 5.56 5.77 6.40 6.44 7.10 5.97 5.77 6.47 5.81 6.66 6.38 6.67 A ll business ......................................... M anufacturing and m in in g : Food, liquor, and to b acco ......... T extiles, apparel, and leath er. . M etals and m etal p ro d u c ts ......... Petroleum , coal, chem icals . . . . .. .. .. .. T rad e: O th e r : Commodity d e a l e r s ....................... Sales finance companies ............ . . 5.03 Farm s, consum er, e tc.................... . . 8.49 C onstruction .................................. R eal e s t a t e ...................................... . , 5.63 All other ......................................... .. 6.25 B y S iz e of B a n k $1 billion and o v e r ........................... $500 million— $1 billion ................ $250 million— $500 m i l l i o n ........... $100 million— $250 m illi o n ........... $ 50 million— $100 m il l i o n ............ $ 20 million— $ 50 m illi o n ............ $ 10 million— $ 20 m illi o n ............ $ 2 million— $ 10 m illi o n ............ L ess th a n $2 m illi o n ....................... FEDERAL RESERVE BANK OF SAN F R A N C IS C O Sm all business loans vary by size of bank C hart 1 LOANS OUTSTANDING TO SMA L L BUSINESS BY SIZE OF BANK OCTOBER 5,1955 In the Twelfth District 60 PERCENT on October 5, 1955, almost ■ 1 PERCENTAGE OF SMALL BUSINESS LOANS (DOLL AR VOLUME) two-thirds of the loans to 1 I SMALL BUSINESS LOANS AS PERCENT OF TO T AL LOANS small commercial and in (DOLLAR VOLU ME ) dustrial firms were made by banks with total depos its over $250 million. Gen erally, small business loans tend to be concentrated, in both do llar am ount and number, in the portfolios of the larger banks. (F o r ex ample, following the black columns in either Charts 1 or 2, a descending line could N ote: Size of bank was determined by total deposits as of October S, 19SS. Branch offices were con be drawn showing the vari sidered the same size as the system to which they belonged. Bank size groupings by total deposits are as follows: 1) $1 billion and over; 2) $500 million-$l billion; 3) $250 million-$500 million; ation in proportion of either 4) $100 million-$2S0 million; 5) $50 million-$100 million; 6) $20 million-$50 million; 7) $10 million-$20 million; 8) $2 million-$10 million; 9) less than $2 million. dollar or num ber share of each bank size.) On the Interest rates depend more on business of other hand, at the smaller banks, a larger part of borrower than on size of lender their total dollar holdings of commercial and in dustrial loans consisted of loans to small business Small businesses paid approximately 1.2 per (C hart 1, blue columns). A t all size banks the centage points more for credit extended them proportion of business loan portfolios repre (5.91 percent) than did all businesses com sented by the number of loans to small business bined (4.74 percent). Small businesses may be was an almost constant 50 percent (C hart 2, new businesses and therefore present a greater blue colum ns). The average size of loan to risk to the lending institution. Small firms, it small business ranged from a high of $10,624 at was found in the 1946 survey, also had more banks with total deposits of $250-$500 million loans secured than unsecured. The need for secu to $2,617 at banks with less than $2 million de rity probably evidences greater risk and in that posits. It would be expected that the smaller survey these secured loans were made at higher banks would make smaller individual loans, in interest rates than unsecured loans. Also, the part because of their location in the smaller servicing costs to the bank of a loan remain cities. However, the average size of loans at the fairly constant regardless of the size of the loan. largest banks, with deposits over $1 billion, was Therefore, the charge to the borrower included $5,630, less than that at all banks except those in the interest rate is larger in proportion to his with deposits under $20 million. Branch offices, interest in the case of the smaller loan than for which are included in the size class of the total larger loans.1 In addition, of course, the smaller branch system, probably account for many of businesses do not have the alternatives available the small loans reported in this category. to the larger ones— shopping around among the A t Twelfth D istrict member banks with de banks of the state or the nation, issuing com posits over $2 million, more small business loans mercial paper, or entering the capital markets were made for less than one year than for a directly. longer term. O n the other hand, the smallest banks, those with total deposits under $2 mil 1 D ata developed in the 1946 commercial and industrial loan survey indicated that the size of loan is one of the most im portant deter lion, held three times the dollar amount in long m inants of interest rates. The relationship for the data in the 1955 term loans that they held in short-term loans. survey will be discussed in a subsequent article. 100 August 1956 MONTHLY REVIEW C hart 2 By type of business, small transportation, communi NUMBER OF LOANS TO S M A L L B US I N E SS BY SIZE OF BANK cation, and public utility OCTOBER 5 ,1 9 5 5 firms paid the highest aver 80 PERCENTAGE OF SMALL BUSINESS LOANS age interest rate (8.49 per I------- 1 SMALL 8USINESS LOANS AS PERCENT OF T O T A L LOANS cent) in the District (T a 60 ble 2 ). These loans were - -« f-Imade primarily to unincor porated firms for more than one year. The lowest aver age rate (5.03) was paid by small sales finance com panies, whose average size loan was $10,328 and who bo rro w ed alm ost ex c lu sively for less than one year. BANK Generally, short- or long SIZ E term ra te s to co rp o rate N ote: Size of bank was determined by total deposits as of October S, 1955. Branch offices were con sidered the same size as the system to which they belonged. Bank size groupings by total deposits small businesses were low are as follows: 1) $1 billion and over; 2) $500 million-$l billion; 3) $250 million-$500 million; 4) $100 million-$250 million; 5) $50 million-$100 million; 6) $20 million-$50 million; 7) $10 er than those to unincorpo million-$20 million; 8) $2 million-$10 million; 9) less than $2 million. rated borrowers, possibly small business loans in the District than in the because the corporations were somewhat larger nation. In the District, term loans constituted than the unincorporated businesses. However, about one-third of total loans both for small short-term rates to small corporate textile, ap businesses and for all business borrowers. In parel, and leather firms, and to commodity deal the nation as a whole, 28 percent of the loans to ers were higher than long-term rates to these small business were term loans, while all bor firms. Corporate retail firms with assets under rowers made one-third of their loans on this $50,000 paid higher interest charges on long basis. In some industries, small-business term term loans than did partnerships or sole proprie borrowings were a larger proportion of all loans torships in this field. to small firms than were term borrowings of all Interest rates paid by small businesses varied sizes of businesses. For example, while all real less by size of bank than by business of bor estate firms borrowed 29 percent of their total rower. The highest average interest charged loans for more than one year, small companies (6.60 percent), by banks with total deposits of of this type made 75 percent of their loan agree less than $2 million, was only 1.6 percentage ments on this term basis. The food, liquor, and points greater than the lowest rate, paid to banks tobacco an d th e re ta il tra d e in d u s trie s also of the $250-$500 million size class. In general, showed a large difference in small-business term small businesses paid higher interest rates for borrowings as compared with their counterparts long-term loans at banks of all sizes than they of all sizes. paid for loans with m aturities of less than one Summary year. Small corporate firms, however, paid 5.9 percent for short-term loans and 5.6 percent for It would appear that since 1946 small business long-term loans at banks with deposits over $1 debt has increased in dollar volume but de billion. creased in both number of loans and its share of the total of the business loan portfolios of Term loans more important in District Twelfth District member banks. Of the dollar than in nation volume, the share of the manufacturing and min Term loans (business loans with a m aturity ing and the “other” sector of commercial and of more than one year) were a larger portion of industrial firms has increased, while trade firms n LI .J. Jjl Lb. 101 FEDERAL RESERVE BANK OF SAN F R A N C IS C O have decreased their indebtedness to member banks. The larger the lending bank, the greater its share of dollar volume and number of all bank loans to small business, but the smaller proportion these loans were of the banks’ total business loan portfolios. The interest paid on loans to small business seemed more dependent on the business of the borrower than on the size of the lending institution, the form of business organization, or m aturity of the loan. The International Finance Corporation the completion on July 20 of this year of final action by France and the Federal Republic of Germany for membership, the way was paved for the inauguration of the Interna tional Finance Corporation (IF C ). W ith the ad dition of these two nations, a total of 31 nations1, including the United States, had acceded to the organization. As a result, the condition specified in the Articles of Agreement of the Corporation, that at least 30 nations accounting for a minimum of $75 million of the total authorized capital of $100 million must join the organization before it could come into existence, had been fulfilled. The IFC , an affiliate of the International Bank for R e c o n s tru c tio n and D e v elo p m e n t (W o rld B ank), was formally organized by July 26. Each member was required to pay in full by August 23, 1956 for its subscribed share of capital stock, in either gold or dollars; the United States share is $35.2 million. The International Finance Corporation is the first international organization authorized to make investments without governmental guar anties for repayment and in any form it considers appropriate, with the single exception of an in vestment in capital stock. The W orld Bank is em powered to make long-term loans abroad but re quires a guaranty from the government of the borrower. The United States E xport-Im port Bank, a Government corporation, also extends long-term loans abroad, but in many cases it may require a governmental guaranty. Neither institution, moreover, is permitted to provide venture capital. As a consequence, a need has been felt for an institution with broader lending powers and, even more important, one which W it h a The members are Australia, Bolivia, Canada, Ceylon, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Ethiopia, Finland, France, Germany, Guatemala, H aiti, Honduras, Iceland, India, Japan, Jordan, Mexico, Nicaragua, Nor way, Pakistan, Panama, Peru, Sweden, the United Kingdom, and the United States. http://fraser.stlouisfed.org/ 102 Federal Reserve Bank of St. Louis might act as a stimulant to private investment from foreign and domestic sources for the de velopment of certain types of industries, espe cially in the underdeveloped countries. The omission from the IF C charter of the guaranty requirement is one of the most note worthy features of that document. The practice of the W orld Bank, and the E xport-Im port Bank in some instances, of requiring a guaranty has produced complaints from potential borrowers. It has worked a hardship on private enterprise in the borrowing countries in some cases. This has been true, for example, in those countries where it has been difficult to separate a Govern ment guaranty from Government ownership or domination. It may also have the effect of divert ing resources from private to public enterprises and may result in a distribution of available re sources among competing uses other than that which would result from purely economic con siderations. IFC helps bridge investment gap A postwar development that has contributed to the need for a greater flow of capital to produc tive private enterprise abroad is the fact that most of the United States postwar private for eign investment, as well as that of other nations, has been concentrated in direct investments, in which investors have a voice in management. In the case of the United States these direct invest ments have been in manufacturing, mining, smelt ing, agriculture, and petroleum, whose products can be sold in world markets, preferably for hard currencies. These types of investment promise a quick return because they earn foreign exchange directly and thus reduce the problem of noncon vertibility which has discouraged much of the private foreign investment in recent years. But the economic sectors in the less developd coun August 1956 MONTHLY REVIEW tries that need fostering are those which produce for local consumption and do not contribute di rectly to foreign exchange earnings. Industries of this type, however, may, and often do, save foreign exchange by reducing the need for im ports. Public funds have been available for basic facilities but have not been advanced for enter prises manufacturing for domestic markets. W hile enterprises of this latter variety often times are eligible for loans from the W orld Bank or the E xport-Im port Bank in all other respects, they lack sufficient equity investment to qualify. There exists, therefore, a real need for funds for the development of productive capacity in certain fields of capital goods and consumer durables and nondurables manufacture which will provide greater diversification in the underdeveloped countries. In many instances the building up of such capacity is necessary to complement the de velopment of foreign exchange-producing enter prises. F or these reasons, various member govern ments of the United Nations formulated plans for the International Finance Corporation, whose prim ary purpose is to help fill the gap in private investment, not solely with its own limited re sources but by lending encouragement to private investors, both foreign and domestic. O rganization and operation of the IFC Membership in the IF C is open only to mem bers of the W orld Bank. The close relationship of the Bank and the IF C is reinforced by the fact that the President of the W orld Bank is ex officio the chairman of the Board of the IFC, and those Directors of the Bank who represent at least one member of the IF C serve as the Corpo ration’s Board of Directors. This tie-in between the IF C and the Bank will facilitate the coordi nation of the policies of the two organizations. The IF C plans to rely rather heavily on the staff and facilities of the Bank in order to cut down administrative expenses and minimize duplica tion and will reimburse the Bank for its services. U nder no circumstances, however, is the Corpo ration permitted to borrow from the Bank. The IF C is empowered to make investments in productive private enterprises to supplement pri vate capital in cases where such capital is not available in sufficient volume on reasonable terms. Although securities purchased may carry the right to participate in profits, they cannot include voting or management rights. In addition, the IF C will act as a clearing house for the ex change of information on the investment climate, conditions, and opportunities. The Corporation will also direct its efforts towards the improve ment of conditions for private investment in member countries. The Articles of Agreement of the IF C set forth the terms under which the Corporation is authorized to make investments in the territories of its member countries. These investments may take any form deemed appropriate by the Cor poration—with the im portant stipulation that the IF C should not invest in capital stock, either preferred or common. Other than this restriction, the Corporation can arrange whatever terms it wishes for its participation in the profits of the enterprise, without any responsibility for man agement or any voting rights. Since the authors of the IF C charter contemplated the eventual sale of these securities to private investors, the investments may carry a provision for conver sion into capital stock if it would facilitate their sale. The profit-sharing arrangements of IFC, and IFC-induced, investments have the added advantage of imposing a smaller burden on the debtor nation’s balance of payments than a fixedinterest investment that necessitates annual pay ments. In the latter case, a transfer problem may arise each year when the fixed payments are due, while remittance of profits can be postponed if foreign exchange reserves are low. F or the indi vidual enterprise, the ability to service the debt out of profits rather than to meet a rigid schedule of payments would provide clear advantages, particularly during the formative period. The IF C can finance its operations from two sources : the capital subscriptions of the members and the sale of its own obligations to the public, which is permitted under Section 6, Article II I of the charter. In addition, the Corporation antic ipates that it will sell its investments to private investors when the enterprise concerned has achieved a stable and profitable earnings record. In this manner, funds will be released for addi tional investments elsewhere. Initially, the IF C 103 FEDERAL RESERVE BANK OF SAN F R A N C IS C O does not plan to issue its own obligations but will rely on the paid-in capital funds of its members. The capital contributions now available from the 31 members total $78.4 million. In addition to the provision that no govern ment guaranty is required for IF C investments, no restrictions are placed on the expenditure of the proceeds of the Corporation’s investments. Affirmative approval of the recipient country is not required, but no investments will be under taken if any official objection is made. The IFC , as an international organization, will have cer tain privileges and immunities, which may be waived in the event that it finds itself in an unfair competitive position in relation to other private industries. IF C investments, however, will have the same status as investments by private in vestors. This equality of treatment does not pre clude the negotiation of agreements with the host country for special arrangements for the transfer of earnings or for the purchase of necessary ex change like any other private investor. IFC loan policy in process of formation Although the IF C has opened for business only very recently, a number of applications for IF C funds have been received; and some princi ples of loan policy have been enunciated. There is no specific statement in the charter as to the type of enterprise eligible for IF C financing, other than that it must be a “productive, private enterprise.,, Nevertheless, it would appear, from various interpretations and sources,1 that the IF C intends to concentrate primarily on invest ments in industrial enterprises, although invest ments in agricultural, financial, commercial, and other businesses will also be undertaken. No investments will be made for so-called “social” purposes such as housing, hospitals, and similar public welfare activities. Public utilities, trans portation systems, and other basic facilities also will not benefit directly from IF C financing pro grams for several reasons. The amounts involved in the construction of such facilities are too large for the resources of the IFC , and there are fre quently limitations on the profits of these enter 1Articles of Agreement of the International Finance Corporation and Explanatory Memorandum as approved for submission to Governments by the Executive Directors of the International Bank for Reconstruction and Development, and The Journal of Commerce, New York. 104 prises which diminish their attraction for private investors. Furtherm ore, other organizations such as the W orld Bank are better equipped to finance this type of project. Concerns engaged in pros pecting for petroleum or minerals will probably not receive aid from the IF C because the capital requirements for such ventures are high and the risks great. Beyond these guides, the Articles of Agreement state that the investments of the Cor poration should be diversified— both on a geo graphical basis and by type of enterprise. The IF C plans to proceed conservatively in its investments in the early years of its operation and does not anticipate quick returns on them. The size of individual investments is not speci fied ; however, the limits imposed by the available capital will probably result in a preference for numerous small loans rather than a few large loans. The principal consideration of the IF C will be a diversified portfolio. The IF C may invest in either a new or an existing enterprise. There are no provisions in the charter that speci fy that new private capital must be invested along with that of the IFC . But it is generally expected that additional private capital will be invested in such enterprises. In the process of making invest ments, the IF C will consider the project both in terms of its future success and the attractiveness of the investment to private investors. No re quirement is contained in the charter as to pri ority among purchasers when an investment is sold. As a rule, the IF C will probably give other private investors in the enterprise the first choice of refusal and will take into consideration the sit uation in the local capital markets before placing their investment on the market. The future of the IFC The success of the International Finance Cor poration will be measured largely by the volume of private foreign investment induced by IF C operations rather than by the actual dollar amount of its own investments, which will be limited by the authorized $100 million capital fund and future issues of its own obligations. It is hoped that the example of its own favorable ex perience will encourage private investors to in crease their investments and thus overcome their reluctance based on previous unfavorable experi August 1956 MONTHLY REVIEW ences during times of stress and under the handi caps of trade and exchange controls. If the IF C stimulates the flow of private investment from both foreign and domestic sources, the main ob jective will have been accomplished. But there are many problems to be faced and solved. One of the m ajor difficulties that has confronted private foreign investment in the post war years has been the fear of nonconvertibility and expropriation. Despite improvement in some countries recently, IF C investments must con tend with these same barriers. The prestige of IF C and the W orld Bank behind the Corpora tion’s investments, however, may stimulate action to improve the investment climate in the recipi ent country. Successful enterprises assisted by IF C financing can also be expected to demon strate the advantages of attracting foreign capi tal. Improvement in the balance-of-payments sit uation of many of the underdeveloped countries in the past several years, moreover, provides a more favorable setting for private investment. The ability of the IF C to generate significant private interest in foreign investment depends to some extent upon profit rates in alternative in vestments. In the postwar period, profits have been high in the capital-exporting nations, ne cessitating an even higher rate of profit to attract funds abroad and to compensate for the addi tional risks that might be incurred in foreign investment. Domestic sources of capital for in vestment, especially in the less developed coun tries, have also been slow to invest funds in enter prises producing for domestic consumption when high rates of profit are obtainable in export in dustries or in the purchase and sale of real estate. As a consequence, the payment of commensurately high rates of profit might be necessary to attract private capital in the industrial enter prises in which the IF C invests. It should also be pointed out that the “productive” enterprises in which the IF C plans to invest are not necessarily synonymous with the most profitable enterprises. The continued operation of the IF C hinges partly upon the Corporation’s success in turning over its funds by sale of its investments to pri vate investors. The problems here are very simi lar to those experienced by the W orld Bank and the E xport-Im port Bank in sales from their loan portfolios. The earlier maturities and the higher quality paper held by the two Banks are more easily placed with private investors, while the less desirable obligations tend to remain unsold. This situation might also arise in the sale of IF C investments, with the high quality and successful investments readily disposed of and the less de sirable investments left in the hands of the Cor poration. Once the IF C investments are sold, moreover, the protection of the IF C will be lost —possibly to the disadvantage of the private in vestor. Although the activity of the IF C in the early years of its existence is likely to be somewhat limited in scope, the formation of the Interna tional Finance Corporation is a significant step towards encouraging an increased flow of private investment both from capital-exporting coun tries and from domestic sources. As the future of the organization becomes clearer and as the ini tial problems are solved, its role in international finance will also be enhanced. There are provi sions in the IF C charter which permit increases in authorized capital, and the issuance of the Cor poration’s own obligations will provide addi tional resources. Should the movement of private investment funds prove adequate in the long run, the corresponding reduction in the need for the IF C will provide the real indicator of the organi zation’s effectiveness. 105 FEDERAL RESERVE BANK OF SAN F R A N C IS C O B U S IN E S S IN D E X E S — T W EL FT H D ISTRIC T1 (1947-49 averages: 100) T o ta l nonagri T o ta l C a r D ep’t Retail c u ltu r a l m f ’g loadings store food E le c tr ic e m p lo y e m p lo y ( n u m sales prices <> 4 C o ppe r3 power ber)* m ent m ent (v a lu e )2 W a te rb o rn e foreign trade3»1 In d u s tria l p ro d u c tio n (p h y s ic a l v o lu m e )1 Year and m o n th 1929 1933 1939 1947 1948 1949 1950 1951 1952 1953 1954 1955 Lum ber Petroleum * C ru d e R e fin e d C e m e n t Lead* 95 40 71 97 104 100 113 113 116 118 112 122 87 52 67 100 101 99 98 106 107 109 106 106 78 50 63 98 100 103 103 112 116 122 119 122 54 27 56 96 104 100 112 128 124 130 133 145 165 72 93 94 105 101 109 89 86 74 70 73 105 17 80 106 101 93 113 115 112 111 101 117 29 26 40 90 101 108 119 136 144 161 172 192 122 119 123 118 116 110 123 106 106 106 106 105 106 106 120 128 127 132 129 123 120 153 157 160 159 155 128 130 75 71 67 70 72 67 63 130 40 91 128 131 128 119 129 125 117 119 118 117 106 106 105 105 105 105 130 128 128 122 129 125 135 145 149 160 173 70 77 77 82 74r 80 134 129 131 140 135r 136 E x p o r ts 1m po rts ‘ '99 102 99 103 112 118 121 120 125 ” 55 100 102 97 105 120 130 137 134 141 102 52 77 106 100 94 97 100 101 100 96 104 30 18 31 99 104 98 105 109 114 115 113 122 64 42 47 96 103 100 100 113 115 113 113 112 190 110 163 129 86 85 91 186 171 140 131 164 124 72 95 81 98 121 137 157 200 308 260 307 200 191 196 196 197 206 198 125 125 126 126 126 128 128 142 141 142 141 142 145 146 111 99 106 107 104 98 98 119r 123 122 126 126 125 123 112 113 111 112 112 112 112 152 171 189 174 152 143 164 299 368 349 363 348 325 328 199 204 219 203 211 215 129 130 130 130 131 132 146 146 146 146 147 148 107 99 103 105 107 105 130 124 128 131 122 126 112 111 112 113 113 114 136 126 150 175 354 323 395 397 1955 Ju n e Ju ly A ugust Septem ber O ctober N ovem ber December 1956 Jan u a ry Feb ru ary M arch A pril M ay June B A N K IN G A N D C REDIT ST A T IST IC S — T W EL FT H D ISTRIC T (amounts in millions of dollars) M e m b e r bank reserves and related iter n s C o n d itio n Item s of all m e m b e r banks* Year and m o n th 1929 1933 1939 1947 1948 1949 1950 1951 1952 1953 1954 1955 Loans U .S . and G o v 't d is c o u n ts s e c u ritie s Dem and T o ta l deposits tim e ad ju ste d 7 deposits 2,239 1,486 1,967 5,358 6,032 5,925 7,093 7,866 8,839 9,220 9,418 11,124 495 720 1,450 7,247 6,366 7,016 6,415 6,463 6,619 6,639 7,942 7,239 1,234 951 1,983 8,922 8,655 8,536 9,254 9,937 10,520 10,515 11,196 11,864 1,790 1,609 2,267 6,006 6,087 6,255 6,302 6,777 7,502 7,997 8,699 9,120 10,191 10,392 10,559 10,665 10,931 11,115 7,557 7,407 7,375 7,487 7,238 7,298 11,212 11,163 11,312 11,465 11,665 11,876 8,995 9,021 9,054 9,067 9,005 9,084 11,193 11,323 11,476 11,669 11,837 12,030 12,157 7,143 6,819 6,731 6,730 6,566 6,482 6,396 11,794 11,233 11,112 11,530 11,144 11,262 11,392 9,070 9,095 9,103 9,099 9,139 9,294 9,233 B an k rates on short-term business loans* Factors affecting reserves: Reserve ba nk credit* — — + 3.20 3.35 3.66 3.95 4.14 4.09 4.10 + + + + + + 34 2 2 302 17 13 39 21 7 14 2 38 C o m m e r cial^* Tre a s u r y 10 0 110 192 510 + 472 930 -1 ,1 4 1 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 -2 ,6 8 5 + + + + 23 150 245 698 482 + 378 + 1 ,198 + 1 ,983 + 2 ,265 + 3 ,158 + 2 ,328 + 2 ,757 10 23 17 43 46 8 - 193 253 148 245 81 434 + + + + + + 217 200 276 174 205 417 84 87 71 82 22 5 6 - 322 76 178 270 233 405 143 + + + + + + + 136 95 188 371 217 341 240 M o n e y in c irc u lation* __ — + — — — + + + + Bank debits Index 31 eitles*»13 Reserves11 (1947-49xa 100)* 6 18 31 206 209 65 14 189 132 39 30 100 175 185 584 2,202 2,420 1,924 2,026 2,269 2,514 2,551 2,505 2,530 42 18 30 95 103 102 115 132 140 150 168 172 9 8 18 15 18 17 2,495 2,415 2,541 2,417 2,575 2,530 166 177 173 171 181 183 99 7 35 7 47 32 8 2,554 2,488 2,516 2,578 2,498 2,404 2,519 188 179 183 190 182 186 197 1955 Ju ly A ugust Septem ber O ctober Novem ber D ecem ber + 4.17 + 4.25 + + — + + + + + 1956 Jan u a ry Feb ru ary M arch A pril M ay Ju n e Ju ly + 4.34 + + 4.44 + — — + + + 1 A djusted for seasonal variation, except where indicated. E xcept for d epartm ent store statistics, all indexes are based upon d a ta from outside sources, as follows: lum ber, N ational Lum ber M anufacturers Association and U.S. B ureau of the Census; petroleum , cem ent, copper, and lead, U.S. B ureau of M ines; electric power, Federal Power Commission; nonagricultural and m anufacturing employm ent, U.S. B ureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. B ureau of L abor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. B ureau of th e Census. 3 D aily average. * N ot adjusted for seasonal variation. * Los Angeles, San Francisco, and Seattle indexes combined. 1 Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and W ashington cus tom s d istricts; startin g w ith July 1950, “ special category” exports are excluded because of security reasons. 8 Annual figures are as of end of year, m onthly figures as of last W ednesday in m onth. 7 D em and deposits, excluding interbank and U.S. G ov’t deposits, less cash item s in process of collection. M onthly d a ta partly estim ated. * Average rates on loans m ade in five m ajor cities. • Changes from end of previous m onth or year. 10 M inus sign indicates flow of funds out of the D istrict in the case of commercial operations, and excess of receipts over dis bursem ents in th e case of T reasury operations. 11 E nd of year and end of m onth figures. & D ebits to to ta l deposits except in terbank prior to 1942. D ebits to dem and deposits exoept U.S. G overnm ent and interbank deposits from 1942. p— Prelim inary. r— Revised. 106 August 1956 MONTHLY REVIEW NEW BOOKLET AVAILABLE DESCRIBING FEDERAL RESERVE OPEN MARKET OPERATIONS A new booklet, F ederal R eserve O perations in the M oney and Government S ecurities M arkets by Robert V. Roosa of the Federal Reserve Bank of New York, is now available. It presents a picture of the setting and methods of carrying out Federal Reserve open market opera tions, which are a major instrument of monetary policy. The necessary background is given by a description of the money market, with its instru ments and institutions, and the Government securities market and its in terrelationships with the money market and the other parts of the capital market. There is a detailed study of the functions of the “Trading Desk,” the informal name for the Securities Department of the Federal Reserve Bank of New York, which serves as the information post and operating arm of the Federal Open Market Committee. This comprehensive account of the details of Federal Reserve System open market operations will be an aid in analysis of the relations between open market activities and general credit policy. This booklet is the fourth in a series that the Federal Reserve Bank of New York has published over the past five years. The first was on factors affecting bank reserves, the second on the money market, and the third on the Treasury and the money market. The aim in all of these publications has been to draw together materials that are, for the most part, generally well known within the Federal Reserve System, but have not yet found their way into the published literature available to students of money and banking. Copies of the new booklet, as well as of the earlier studies, may be ob tained by addressing requests to the Federal Reserve Bank of San F ran cisco.
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