View original document

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

For release in morning newspapers,
Friday, April l t, 1950,
i




THE CHALLENGE OF OPPORTUNITY VS, SECURITY

(An address by Thomas E. McCabe, Chairman of the Board
of Governors of the Federal Reserve System, before a
Seminar group of Life Insurance Executives sponsored
by the Life Insurance Companies of Massachusetts and
the Graduate School of Business, Harvard University,
Boston, Massachusetts, 7 p.m. April 13, 1950).

THE CHALLENGE OF OPPORTUNITY VS. SECURITY
(An address by Thomas B. McCabe, Chairman of the Board
of Governors of the Federal Reserve System, before a
Seminar group of Life Insurance Executives sponsored
by the Life Insurance Companies of Massachusetts and
the Graduate School of Business, Harvard University,
Boston, I.Iassachusetts, April 13, 19!?0).

I deeply appreciate the gracious invitation extended by you
through my good friend, Paul Clark, to be here today with so many old
business associates and to enjoy this opportunity to discuss some funda­
mental problems posed by your agenda.

For many years the company with

which I have been associated has consistently supported the executive
training program of the Harvard Graduate School of Business, and it is
a pleasure to be here with Don David and his staff.
In a real sense this is a unique occasion.

I doubt whether

there have been many occasions in the 190-year history of the life insurance
business in this country when such a large portion of its leadership has
been gathered together, aside from an association convention.

Wo previous

gathering, I am confident, ever had more worth while objectives.
Because this is a seminar of businessmen, the thought of joining
in it aroused in me a deep feeling of nostalgia.

I have spent more than

thirty of the best years of my life in business.

I must confess to you

that, if my public service has been helpful to the general welfare, it is
only because of the lessons so well taught by my business friends and
associates, like many of you here tonight, and because of the varied ex­
perience ivhich I acquired as a businessman.




_ 2 -

I have never been directly connected with the life insurance
business, except as a prospect and a customer, but I have always been a
strong proponent of your business,

Uy company was one of the early ones

to set up a group life insurance plan for its employees, and I was con­
stantly advocating the purchase of life insurance by my associates.

In­

cidentally, I have personal policies with approximately a dozen different
companies represented here today.

Over the years some of you have been

kind enough to ask me to serve on the boards of directors of your
companies, but it has been impossible for me to accept these generous
offers.
You have come here today, in this warmly vital academic atmos­
phere, not because of any specific emergency that requires immediate and
particular attention but rather in a spirit of inquiry and of stock-taking,
with the hope of producing a common basis for insurance in the broadest
sense, insurance against the possible economic hazards of the future.
This is the professional point of view.

I am glad, indeed, to pay

homage to it*

Government's Relation to Business
l I c of your discussion at this seminar will turn about the
.uh
problem of the relation of Government to business.

This is inevitable,

because the generation of businessmen to which we belong has had to face
the problem of Government and industry more acutely than any other,

Just

consider the sequence of events which l as rocked the world during the
i
period when we have been called upon to make our business decisions.




The period begins with the first Y/orld War of 19lU~19l3,

It

- 3 encompasses both the fantastic intoxication of the stock market spree of
the Twenties and the soul-shattering collapse of our markets, our morale,
and almost of our faith in the American business system during the early
Thirties.

The period culminates in the wars of the Forties, first the

shooting war with Germany and Japan, and now the long drawn out cold war
with Russia*

To have lived through and survived two World Wars, a boom

and a bust, r/ithin a short period of thirty-five years is indicative of
the strength, ingenuity, and resiliency of our enterprise system.
The essence of our American system of free enterprise is
its resiliency.

It rears men accustomed to face new situations and to

react to them with initiative, energy, and decision.

Our generation has

had to make many adjustments, not only to new business problems as such,
but also to a Government assuming new responsibilities in areas where
there \vere no guideposts.
Now I am still old-fashioned enough to believe that much of the
heart, the vision, the courage, and the dynamic strength of our great
country lies in its vast number of private enterprisers.

It is from our

homes, our factories, our farms, and our marketplaces that we find the
well-springs of our economic power and strength.

Let us never forget that

our Government is the beneficiary and not the soiirce of that strength
and energy.
During the past decade of my life, I have devoted a major portion
of my time and effort to the Government,

This experience has only rein­

forced my basic belief that, in its relations rath business, the Government’s




-

k -

primary responsibility in a democracy is to create the most favorable
climate for industry, to -write fair and equitable rules of competition,
and to act as umpire in enforcing the rules of play demanded by the public
and written into law.
To put this thought another way, we cannot look to Government to
breed men fired with the capacity and the initiative that our free society
will continue to require*

For our form of society to flourish, we must

have many individual enterprisers constantly vigilant to nurture the vital
poiver necessary to promote a democratic existence.
This leads me to express a deep conviction,

I strongly believe

that we m i l have less concern with Government in business, and better
Government and better business, when the leaders of private enterprise take
time by the forelock and strive for statesmanship in their dealings with
the Government, with the public, and with their employees.

As leaders of

business with proud economic responsibilities, you share with other citi­
zens responsibility for contributing leadership in the formulation of
Government policies*

In a democratic system, there is no possible way

of divorcing political responsibility from economic responsibility.
Our Government can be no better than the leadership we give it.
During the four-year period of total war from 191*1 to 1 l 3 , we
9i>
developed an unparalleled spirit of business statesmanship.

Then, the

leaders of private industry, by identifying their interests and by uniting
their efforts wholly with those of Government, performed the greatest
industrial feat in the history of the world.

Beyond any question, it

was our industrial strength that distinguished us from all other




participants and gave us the decisive superiority in supply so essential
to victory in a total war.

It is not at all surprising that, during the

war period, business leadership reached a pinnacle in public goodwill, and
by its magnificent performance, both in the workshop and in the Government,
overcame much of the illwill which had been directed toward it during the
great depression of the Thirties.
I mention both the practical possibility and the obvious need
for united efforts on the part of the leaders of private industry and
Government because I do not see how we can preserve the American way of
life without such unity.

The words of Lincoln —

against itself cannot stand" —
were ninety years ago.

"A house divided

are just as applicable today as they

Then, the problem was the great moral one of

human slavery, complicated by the political and constitutional question
of States' rights.
vidual

Today, the problem is the great moral one of indi­

opportunity versus security, complicated by the political

pressures of capital, labor, and agriculture at home, and by the militant
forces of Communism abroad.
Understanding: The Key to Business Statesmanship
As I thought over the things that I wanted to talk about this
evening, it seemed to me that there was a certain pioneering or experi­
mental air to this conference which is challenging,

It is reminiscent

of the formative period in the CED during 19h2 when men like Paul Hoffman,
Ralph Flanders, Bill Benton, and others had many a similar meeting to
launch its program.




- 6 —

The seeds for various of our great economic research organisa­
tions, such as the National Industrial Conference Board, the National Bureau
of Economic Research, the Brookings Institution, the Twentieth Century Fund,
and your own Institute of Life Insurance, were undoubtedly planted in dis­
cussion groups not unlike this one.

To some extent such organizations are

a natural result as "thinking" men seek new ways to explore the increasing
complexities of an ever-changing world.

Each organization of this type

has made significant contributions toward a better understanding of
modern economic problems.

Perhaps another opportunity may be present here.

I have just returned from an extended trip to Chicago, Denver,
San Francisco, and Los Angeles,

One cannot cross this broad continent of

ours, visit its great cities, and read the history of the rise of the TTest
without developing a keen sense of appreciation of the vision, the courage,
and the iron will of our pioneers.

Their accomplishments in clearing the

land, farming it, extracting minerals, producing lumber and machinery,
building cities, and creating myriad types of industry were truly
tremendous.

The most significant feature of this epoch was the philosophy

of opportunity.

There were no insurmountable obstacles for those who were

willing to work and to fight,
Yet, in appraising the efforts of our pioneers, we must be
historically accurate and consider the negative factors in the picture
which became more significantly evident with the passage of time,
thinking of the reckless destruction of our natural resources —

I am
particularly

of our forests and our top soil, the cankerous sores that were permitted to
develop into the form of slum areas in our cities, and the lack of public




- 7 responsibility on the part of some of our giant pioneers after they had
gained their fortunes#

Ue have great admiration today for those well-

known benefactors of the past who gave fortunes to establish many of our
renowned universities, hospitals, and research centers.

But at the same

time, we are rightly critical of those business leaders of yesterday who
more often were merely voices of opposition than statesmen trying to view
objectively the problems of their day.
Is the Pendulum Swinging Back?
One of your first speakers this morning had as his subject "The
Decade of Opportunity.”

Every decade in American history has warranted

this distinctive title.

It will continue to be appropriate to future

decades provided we remain free and dedicated to a philosophy of opportunity*
I agree with Mr. Hiller, however, that the present situation does give the
title timely significance.
In the past few months we have witnessed the construction of
a succession of roadblocks along a highway on which a sizable portion
of the world had been traveling.

Elections in New Zealand, Australia,

and recently in Englad presage at least a pause in that journey*

Liillions

of individual citizens in these nations are considering afresh their
personal responsibilities to the governmental machinery they have created —
what they want Government to do, and how much.
This is reassuring news.

It means that those of us who are

proponents of our American combination of opportunity, personal liberty,
political democracy, and a dynamic free enterprise system now have a more
receptive audience around the world.




Let us not fail to keep the faith.

- 8 V e must use this pause to refresh and revitalize our
f
abilities and our talents to deal constructively and courageously with the
problems we face,

I am convinced that the public, if given the facts

and wise leadership, will not demand restrictive laws that curb and hamper
our

thriving industry.

If industry exercises adequate self-discipline

and shows proper regard for the public welfare, it need have no fear.

In

other words, we must maintain that delicate balance between business and
Government that our form of democracy envisioned without the responsibilities
of either becoming superimposed on the other*
The Life Insurance Business in Its Modern Setting
How let us take up the life insurance 'business and analyze it in
its broad relations to our society and to the issues posed by the times
in which we live.
reared.

Life insurance is the business in which you have been

You depend on it individually for your livelihood.

It is your

lifeblood and no competent authority exists that can equal you in knowledge
of its problems.

You have the "inside" view.

But is the "inside" view enough?

From my conversations with

some of you in the past, I am convinced that you are beginning to take
a more objective "look-see" at your relations to the economy.
to the good,

This is all

V'ithout the broader point of view you cannot have the true

perspective that enables you to see the woods for the trees,
A very simple touchstone comes to mind,

Yr hear much today of
.e

certain very familiar statistics with respect to the growth of the life
insurance business.




They show that nearly eight times as many people have

- 9 life insurance today as in 1900, that the amount of policies in force
totals over 200 billion dollars,and that four of every five American
families have an average of $5,000 worth of such protection.
do these statistics mean tc you?

Now what

V/hat do they really mean?

They certainly do indi.cate that the life insurance business is
very large, that it has undergone very rapid expansion, and that it now
disposes of huge resources.
that.

The overall totals are convincing proof of

But what about the averages?

policies.

Many people hold several insurance

Do the four out of five families actually covered by life

insurance have insurance r>rotection in any substantial volume?
of this insurance is group insurance?

H ot/

much

How much is burial insurance?

Does an average tell the story or does it tend to obscure v/hat
some say is the real picture?

Is it possibly true that life insurance is

much less widely dispersed than these averages would seem to imply?
very large policies have lifted the average materially?

That

And that the

direct stake in life insurance, or in the fate of the life insurance
business, of the great mass of American families is much less than the
figures would seem to imply?
I raise these questions, not in a spirit of criticism, but to
seek their true and wider meaning.

Do you yourselves know the ans\ver?

Is there any danger that you consider your business to be more broadly
rooted in American society than it actually is?

I know that you have

recently begun to sponsor basic research into such problems as the volume
of savings and investment.




I think that was a wise decision.

My questions

-

10

-

relate to the scope of your research program.

Is it really broad

enough?
As you know, we in the Federal Reserve System are able to
throw a little light on some of the questions I posed above.

The

volume of savings in relation to investment is very important to us,
and we have taken the initiative to find out some of the answers.
Our Surveys of Consumer Finances among American families have not
directly covered the face amounts of life insurance in force, but
they have covered life insurance ownership and annual premiums paid,
They confirm that four of every five American families do have
some life insurance protection.

At the same time they show that

somewhat less than half of the families having policies pay as
much as $100 a year in premiums and that about one family in four
pays less than $5>0 a year.

These figures clearly indicate that the

average is raised to 05,000 by the inclusion of some very large
policies#

Interest of the Life Insurance Business in the
Federal Reserve System
The stake of American families in life insurance introduces
my next point.

That point concerns the responsibilities, policies,

and operations of the life insurance companies in relation to those
of the Federal Reserve System.
responsibilities are common.




In certain areas, as I see it, our

-

11

-

The basic responsibility of the Federal Reserve System is to
focus all its operations on the maintenance of economic and financial
equilibrium and stability in the economy.

This we do through operations

designed to influence the supply, availability, and cost of money and credit.
We labor under no illusion that we alone can maintain that equilibrium and
stability.

'le know that we cannot.
Jf

The health of our economy reflects

many forces, both public and private.

Some of them have their soxirce be­

yond our boundaries because the American economy is part and parcel of a
world economy.

At the same time, we in the Federal Reserve System are

humbly conscious of the part we do play and of the serious responsibilities
that have been delegated to us by the Congress.
Some of our actions and recommendations are directed solely to
the short-run outlook in the economy, designed to maintain sound, high-level
economic and financial stability.

True economic and financial stability,

however, involves much more than day-to-day maintenance of stability at a
high level of activity.

It also includes the preservation of a balanced,

yet flexible, structure of finance and industry, wise long-run public
policies with respect to taxation and expenditure, and wise long-run
monetary policies.
The longer I have been associated with public life, the more I
have become aware of the necessity of widespread public understanding and
support if public duties such as ours are to be discharged in the common
interest.

There is almost nothing we can do in performing our duty that

will meet with universal commendation.

Almost any action we may take is

bound to be unpopular with some group or other, and come under their attack.




-

12—

These attacks, however, have little force if our actions are well con­
ceived, are in the general welfare, and are sufficiently understood by
the various levels of community leadership.
A Congressional subcommittee of the Joint Committee on the Eco­
nomic Report, under the distinguished chairmanship of Senator Douglas, re­
cently held long and exhaustive hearings on the central problems of monetary,
credit and fiscal policy.

They inquired into the essential nature of our

responsibilities and the character of the instruments and policies that we
had available to deal with them.
In my judgment, the subject matter of those hearings was of particu­
lar interest to the business of the life insurance companies of this country.
I had expected them to play a much more prominent part in the hearings than
they did.

I had hoped that that part would indicate their broad concern

with, and understanding of, the basic issues.

Because of its long-time

financial commitments to its policyholders, the life insurance business,
more than any other, has a fundamental stake in the preservation of longrun economic and financial stability.

Y e in the Federal Reserve System
/

should expect to find in its ranks our severest critics when we fail properly
to appraise our responsibilities.

Y e have a right to count on its warm sup­
/

port when we take actions, sometimes unpopular actions, to maintain and pre­
serve a balanced, long-run monetary position.
Security versus Opportunity —

A Paramount Issue

Let us now turn to a most difficult issue, an issue of primary
importance from the standpoint of the life insurance business.
the issue of "Security versus Opportunity."
paramount issues of our times.

I refer to

It has been called one of the

Don David, in his recent article on "The

Danger of Drifting," said, "I see our apparent desire for security every­




- 13 where —

not only in the demands of labor for pension funds and so on, but

also, and even more significantly, in some of the attitudes and actions cf
management. 1
'
This issue arises in many forms.

It underlies the growth of

statism abroad where it takes the form of restrictive economic and financial
controls that jeopardize innovation and economic flexibility in the pursuit
of full employment.

It takes the form of over-concentration on pension and

seniority rights at the expense of mobility in our working forces.

In the

capital markets it takes the form of a shift of saving patterns to fixed in­
vestments, and a reluctance to furnish funds for venture capital.

There

should, of course, be no conflict or issue between the twin goals of security
and opportunity.

Both are needed in our society.

They must be held in delicate balance.

Both have a role to play.

Vr cannot really enjoy security if we
.e

\mdermine the economic bases on which it rests.
How does the issue of security versus opportunity impinge on the
life insurance business?
It impinges, I think, on both sides of the balance sheet.

The

life insurance business was founded and built on the concept of security.

It

exists to provide security, security to mitigate the hazards of death, of dis­
abilities, and of old age.

These hazards are real.

It is the glory of the

life insurance business that it developed a technique by which their financial
effects could be held within bounds, particularly for people of moderate
means.
But in so doing, the life insurance business contributed to the
psychological basis of the problem of security that is challenging us today.




- lb It is the life insurance business more than any other that discovered,
how to provide financial security against certain types of hazard, and
having demonstrated that such security was feasible, turned on the full
blast of its merchandising activities —

its advertising and selling —

to make the people security conscious*
Please do not misunderstand me*

Your industry’s achievements

in selling are outstanding in oiir enterprise history.

The concept of

security has now become an accepted fact in our philosophy, howe\r
er,
so much so that we are beginning to express concern about it.

Certainly

the life insurance business is not primarily responsible for the current
overemphasis.

But it should not be overlooked that their efforts may

have helped unwittingly to sow the wind from which we may reap a
whirlwind.
As insurance leaders, you cannot afford to sit on the sidelines
when this concept, the very one on which your business is built, threatens
to become oversold,

I would suggest that you review with the greatest

care your promotional activities, your sales appeal, and your advertis­
ing, to see how they can be better attuned to the spirit and problems
of these new days, particularly to the need to reinvigorate the spirit
of venture and enterprise in our society.
The Life Insurance Business an 1 the Shortage
of Equity Finar ci:'
.. g
The problem of "Security versus Opportunity" affects your
business most immediately on the asset side of your balance sheet,




- 15 namely* the fact that your assets consist overwhelmingly of debt instru­
ments.

Y e hear a great deal today about the alleged shortage of funds
f

for equity financing in spite of the fact that current savings are very
large and that personal savings are at the highest level in our history.
! e also hear some voices today that question whether there is a shortage
T
of equity financing in view of the current high level of investment
expenditure in our economy and the contribution to this expenditure made
by equity funds, particularly equity funds in the form of retained earnings.
My statement last August on the equity capital situation pre­
sented my basic thoughts on this subject.

The widespread and favorable

response to this statement, including comments from leaders in your industry,
gave impressive indication of the concern of many thoughtful leaders about
the need for a more adequate flow of venture capital.
However, I want to state here again my personal position on this
problem.

I feel that there is a shortage of equity capital —

equity capital at a reasonable cost.

that is, of

I base that judgment primarily on the

fact that the businessman who wants to obtain equity capital in the market
finds it very costly to obtain.
I recognize that some aspects of the high cost of equity capital are
possibly transitory.

But my studies of the subject have convinced me that

there are stubborn, structural factors in the situation which must be dealt
with over the longer-run period.

These may involve special institutional

adaptation as well as modifications in the security laws and in the tax




-

structure.

16

-

These other factors affect particularly the availability

of equity financing to smaller established concerns and newly launched
enterprises, and present a very serious obstacle to the progressive
emergence of newer types of industry,
I do not regard the large investments now being made from
retained earnings as conclusive with respect to the problem of whether
a shortage of equity capital exists.

If opportunities for investment

are large, it is natural that some favorably-situated enterprises
should make an effort to take advantage of them.

If a shortage of

equity capital exists on the market, these investments would have to
be made predominantly by those concerns which do not have to go into
the market for equity funds because they can obtain them by retention
of earnings.
Price is the recognized, sensitive indicator of the relation­
ship of market supply to market demand.

The current price of equity

financing relative to debt financing is certainly high by any modern
standards.

Furthermore, analysis of the factors making the current

price of equity capital high shows that several inflexible elements
are very important.

To me, the evidence adequately confirms the

assertion of businessmen everywhere that outside equity financing
is difficult to obtain on terms which would be reasonable for them
to accept.
At this point, I should like to say that I am profoundly
disturbed by the long-run implications of a situation in which equity




: 17 financing is too dependent on retained earnings.

It raises not only

the question of a fair deal for stockholders and of the tax return
to the Government, but also it has disturbing implications with
respect to the maintenance of competition in our economy.

Ultimately,

over-reliance on retained earnings as a source of equity would lead
to an over-concentration of industry and to a lessening of the
competitive forces on which we rely to keep our industry dynamic*
Sound ways srust be found ■ and I hasten to emphasise "sound ways" —
—
to open up the channelu of outside equity fir.amin"*

Clearly, they

must be opened, up if concerns, large as well as small, with lower
ratios of retained earnings, are to be able to compete effectively in
our expanding markets*
Y / a is the significance of this equity capital problem to
iht
the investment policies of insurance companies?

7 e are all conscious
J

of the ferment that is stirring in the insurance world with respect
to their investment activities, with the movement that is on foot
to seek changes in legislative restrictions that, in some States,
limit or prohibit insurance companies from investing in common stocks*
I stated my position on this controversial question last
August as follows:
" . . . consideration _/should7 be given to a liberalization
of the investment opportunities1 open to fiduciary institu­
tions, particularly the life insurance companies* In view
of the large volume of individual savings flowing into pri­
vate pension and insurance reserves, the legal restrictions
on insurance companies and other fiduciaries which prohibit




-

18

-

them from investing in corporate stocks should be reviewed*
These restrictions, rightly established many years ago as
safeguards needed at that time, may, in the light of changed
savings and investment patterns, now be out of date. I
recommend that the life insurance'companies, in cooperation
with the proper State authorities, explore fully the oppor­
tunities for investing in common stock with the aim of
modifying these restrictions.’
'
That is still my position,

I feel that a careful review of

our legal restrictions on the investment opportunities of fiduciary
institutions is in order,

I would now be inclined to make one addition

to that position, namely, that the study, in so far as it applies to
the life insurance companies, be broadened to include the whole
problem of the role which insurance companies should properly play
in relation to the equity requirements of our growing economy, and
that it not be limited to the question of whether or not life insur­
ance companies are to be permitted to invest in common stocks.
making this addition I wash to emphasize the word "whole",

In

I think

it would be a grave mistake to limit the scope of the study merely
to the question of whether the insurance companies are to be permitted
to enter the market and add to their portfolios a diversified list of
"blue chips".
From your "inside" view, the shortage of equity financing
poses a dilemma.

In the first place, you are acutely aware of the

rise in the cost of insurance to the public that has resulted from
the sharp decline in the average rate of interest on bonds and
mortgages since the 1920's.




On the other hand, you are deeply

-

19

-

conscious of the fact that the insurance funds committed to your care
are a sacred trust.

You must always safeguard that trust by stressing

security and maintenance of value of your capital fund, if necessary
at the sacrifice of yield,
I wish to treat this problem in a somewhat broader setting.
I sympathize sincerely with your concern over the decline in the aver­
age rate of return on your portfolio, and the effect of this decline
on the cost of insurance protection.

At the same tine, the stability

of life insurance investment is so crucial to the stability of our
financial structure that I would be loath to regard the desirability
of a higher rate of portfolio return as an adequate justification for
any move that might reduce the quality of the portfolio.

Lly concern

springs from additional considerations,
I am impressed first with the very large volume of invest­
ment funds which have been entrusted to you to administer.

I am

further impressed with the large accretions to those funds that take
place annually.

You gentlemen in this one line of business administer,

subject to various legislative safeguards, a significant fraction of
our current savings.

Your decisions, consequently, determine what

kinds of investment such savings will finance.

If our economy can be

reasonably expected to need each year a sufficient volume of new
debt financing to furnish a sound investment for these savings, I
would be inclined to let well enough alone.

If this result cannot

reasonably be expected, however, the public would have cause for




-

alarm.

20

-

That is why it is important to ascertain the facts, and

having ascertained them, to take appropriate action*

I do not think

v e will achieve the goal of a balanced economy, or that our economy
/
will maintain a long-run stability, if a disproportionately large
volume of our savings is earmarked for fixed interest investment in
the form of bonds and mortgages compared with the additions to the
supply of such investments*

If this were to occur, we would find

that the cost of bond financing and mortgage financing would persistently
decline relative to the cost of other types of financing*
Heed for -'tudy_of the Insurance Business
tV3stmei:t ProMesa
Please do not misunderstand me or jump to conclusions that
are not in my mind.

I know that many of you are prepared to say,

"LIcGabe is implying that it is a disproportionate flow of insurance
funds into bonds and mortgages which has been largely responsible
for the present low interest yields and the shortage of equity capital,
when we all know that it is the tax structure and the monetary policies
of the Federal Reserve System that are responsible."
I am fully aware of the primary importance of fiscal poli­
cies in our over-all financial situation, and have so expressed
myself on various occasions.

I dealt rath our monetary problems

exhaustively before the Douglas Subcommittee to which I referred
earlier.

I am not certain, however, that the large volume of insurance

company investments channelled by custom and law into bonds and




-

21

-

mortgages 13331 not also contributed materially to current disparities
between the cost of debt and equity financing.

I plead with you,

therefore, to inaugurate studies to determine what the true facts
are.
If, on the basis of the

findings, it appears reasonable

to infer that life insurance business by virtue of its successful
growth now manages total funds in excess of the amount that prudent
consideration would allocate for investment in bonds and mortgages,
what is the broader significance of such an inference?

Surely, it

is more than a simple move to channel insurance funds into "blue
chip stocks".

The whole field of productive investment open in our

economy should be examined, not merely the field of common stocks,
to see where life insurance funds may be made available, both pru­
dently and constructively.
I have some preliminary judgments as to what such an inquiry
would show, and also some suggestions as to the types of outlets that
may have potentialities.

First, I am inclined to feel that examina­

tion m i l reveal a real need for permitting additional outlets for
insurance investment.

I think that new and more liberal legislation

will be indicated.
Second, I am impressed with the fact that since the existing
legislation was written, the economy of the United States has passed
from a debtor to a creditor status.

This change in status cannot

be neglected among the vital factors that have contributed to the




-

22 -

fall in interest rates from the much higher levels that prevailed a
generation ago.

I think it highly doubtful that, even in the fairly

long future with which you are necessarily concerned, we will see a
return to those portfolio yields so far as they may reflect investments
in high grade bonds and mortgages.

It cannot be overlooked that our

change from a debtor to a creditor position implies lower interest re­
turns for funds invested at wholesale.

It does not, however, imply

correspondingly lower retiirns for situations where the investment of
funds is married to the management of money.
To me, this means that large institutional investors can no
longer afford to regard themselves exclusively as wholesalers of money
in the bond market or in the mortgage market#

To obtain satisfactory

average yields, institutional investors must increasingly seek oppor­
tunities where successful investment Involves more than the skilled
management of a bond or mortgage portfolio.

Opportunities of this kind

may be expected to become increasingly more numerous in our wealthy
creditor economy.
"That I am saying is not altogether new to you.

In seeking

prudent and new outlets for its funds, the insurance business is already
experimenting along these lines.

Your relatively recent projects in

building, owning, and managing housing developments and certain commercial
structures of stable value are a case in point, as is also the decision
made by some of your Massachusetts companies, sponsors of this seminar, to
support the Research and Development Corporation#




I would suggest that you look in still other directions.

For

some time now I have been greatly impressed by the steady drain upon our
timber reserves throughout the United States, in Canada, and in Alaska.
The war used tremendous quantities of high-grade lumber and our mounting
construction and industrial requirements cut deeper and deeper into the
remaining forests- The growth cycle of trees is very long.

The indications

are that, as existing supplies continue to dwindle, lumber reserves will
become an increasingly profitable investment over the years.
Is there an opportunity for insurance companies to place their
funds at work in this area which only a few can afford to finance because
the commitment must cover such a long span of years?

Frankly, I do not know.

I do suggest, however, that it represents the type of investment that you
should examine with the greatest care.

Insurance funds are very long-term.

In general, they should find their most appropriate outlet in supplying the
very long-term investment needs of our economy.

I mention this merely as

an illustration of the possibilities of investment that you might find it
advisable or profitable to explore.
I have referred earlier to the difficulties in financing of
smaller-sized businesses and to the serious challenge this presents for
the future maintenance of a dynamic free enterprise system.

Considerable

attention, I am glad to say, is now being paid to this problem by various
responsible groups both inside and outside of Government, including your
own business.

’
That the best approach to an effective solution may be is

not at this stage crystal clear.

Probably there will need to be a number

of approaches tried experimentally before we find the full solution.




I am

-

2b -

personally more and more inclined to some financial mechanism that will
provide for tapping our great pools of resources if one can be worked out
within a framework of private finance.
Such a mechanism was suggested a few years ago by the Committee
for Economic Development in the form of a capital bank plan.

I know that

you will agree with me in the assertion that no such mechanism will ever
achieve substantial results unless the operating resources available to it
are sufficient to support the rendering of effective merchandising, account­
ing, and engineering services along with needed financing services.

Grant­

ing an effort to supply a combination of needed services, I should think
that a fundamental contribution to filling a recognized gap in existing
financial facilities might well result, especially if it can be done as a
private undertaking or with a minimum of Government assistance.

Here is

surely an area of opportunity for the insurance business to serve not only
its own interest but the public interest as Trail.
Today's Challenge
In conclusion, I would like to reaffirm a point of view I ex­
pressed last summer.
the future of America.

As you will gather, I am a confirmed optimist regarding
I firmly believe that the basic characteristics of

our economy are expansion and growth.

Economic expansion today presents a

strikingly different challenge from that of a hundred years ago.

Then, the

frontier of development was the opening up of our great western resources.
The geographic frontier is gone, but we still have a frontier.
is technology —

That frontier

the technology of producing more and better goods with the

resources we know are available and the technology of distributing those




goods on a mass basis for the constant improvement of the standard of
living of all*
To realize our potential of sustained expansion, we need to be
more concerned with opportunity and less with security.

We further need

to be concerned with assuring a steadily increasing flow of investment
funds into opportunities involving equity ownership.

I sincerely believe

that, if we are in earnest, ways and means can be found for accomplishing
this purpose that are fair and equitable to everyone concerned.

The life

insurance business can play a most significant role in this undertaking.