D. R. CAWTHORNE FEDERAL RESERVE BANK OF KANSAS CITY,KANSAS
F i n a n c i a l resources do n o t have location i n a n y way that corresponds t o t h a t of tangible factors s u c h a s people, water, land, a n d transportation facilities. This is especially t r u e of equity capital b u t m a y also characterize other forms where t h e investment decision is diffused a m o n g several individuals. This article enlarges o n t h i s viewpoint b u t also presents a general survey of financial sources available on a regional basis.
ERTAIN of the characteristics of financial resources cause their measurement on a regional basis to possess peculiarities not found in other resources. I n t,he first place money capital is a form of property-a claim to 7%-ealth-and not m a l t h in an economic sense. If one should estimate the value of all tangible economic resources in a given region, the claims to these resources n-ould represent a like but not an additional value. The residenk of a region may possess financial resources or claims to tangible wealth equal to, greater, or less than the value of t,he physical resources. I n the second place, money capital is the most mobile of resources, moving from one economic region to another in response to differentials in rat,e of return and in risks. Thus, while an economic region may be characterized by a comparatively high rate of saving, investment in local industry will depend mainly on whet,her regional opportunities are at least equal to those available elsewhere. The reverse also is true; favorable investment opportunities in a region attract outside capital to compete with local capital in their exploitation. It also is iinport,aiit to recognize t,hat money capital docs not constitute a single, honiogeneous class. Some of it will be devoted to short-term investment, either because its on-ner desires to employ it in a different form in the near future or because t'he institution through Tvhich it is managed must be prepared to meet short-term liabilities. Other money capit'al i s available for long-term investment, but a choice nil1 be made bctween the loiver risks of debt issues and the higher risks of common stocks. Economic regions differ in the amounts of t,hese types of capital t,lieir saving Tvill create. A given economic region may he simultaneously an exporter of short-term capital and an importer of long-term funds. Moreover, an a,ssessnlent,of the financial resources in a region such as the Kest North Central States may be undertaken from a variety of viewpoints. The inquiry may seek to ascertain the supply of money capital available to present and prospect'ive industry in the region. l l a n y invest,igations of this kind are made for the purpose of removing obstacles t,o regional grovth. Instead, the problem may be to determine the ext'ent t o ivhich the income of the region is derived from ownership of saving8 accounts, securities, and other forms of property. This orientation also relates to regional economic interests. A still different' type of question is posed when the appraisal is t80serve as a kind of market analysis of the availability of money capital in the region for financing a givcn industry-in t,he present instance, the chemical industry. The importance of distinguishing these alt'er2308
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native points of view stems from the fact that data relevant for one purpose mill be irrelevant and useless for another. For example, a number of investment t r w t s have their head offices in the West North Central States. These trusts purchase the securities of companies located throughout the country, using capital obtained through sales of their o m securities to savers in all of the states in the nation. These financial resources are of particular interest to corporate financial management but are not significant to the region's farmers whose needs also must be supplied. Finally, in est,imating the financial resources of this region, the v i e v is taken that the location of the head office indicates the point at \?hi& the investment decision is made. While this assumption admittedly is not valid in individual eases, only by the adoption of such a hypothesis is it possible t o assign a geographic location to a financial resource. Otherwise, the problem has no determinate solution; the board which chooses investments for a t,rust fund whose main office i s in Kansas City has one member Tvho lives in Detroit, one in Atlanta, and another in Kansas City. There is no way to dcterminc objcctivcly m-hich of the thrcc mereises the chief influence in the choice. Restricting the measurement of financial resources t o those. that can be recruit,ed to finance the growth of the chemical industry narrow the area in xhich relevant, data are to hc found and permits specific problems t o be formulat'ed. The pertinent quest,ions in a region having the economic struct#ureof the West S o r t h Central States are: 1. What is t,he niagnit'ude and rate of growth of financial institutions n-hose liabilities and related investment policies enable them to finance developments in the chemical industry? Hon- are these resources concentrated among the various institutions and t,hrough what instruments are funds made available to chemical companies? 2. K h a t volume of financial resource;: is held by institut,ions whose liabilities do not enable them to finance corporate expanpion? An important determinant of tmhesalability of corporate securities in a region is the possession of liquid resources by residents of the area. Obviously, a large part of these savings are not properly investible in corporate issues, yet they are a rough indicator of t8hepotential market for issues of all kinds. 3. How are the financial resources of the region to be inarshalled in support of the growth of a given industry? This question mise3 the problem of n-hether effort to obtain capital can be approached properly on a regional basis or whether the existing organization for the . distribut.ion of corporate issues largely disposes of the problem.
RESOURCES OF INSTITUTIONS PROVlDING CAPITAL TO CHEMICAL INDUSTRY The principal inat,itutions whose policics lead to inrcstment in chemical firms are life insurance cornpanirs, othcr risk carriors such as fire and casualty companies, investment trust,s, thc trunt departments of commeroial banks, and college and univcreity endowments. Commercial banks also hold 2 small volume of corporate securit,ics. Data are availahle for mcnsurcmcnt of the assets of these organizations. The chief area which cannot be
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-Resourcesmeasured consists of the securities owned by individuals, partnerships, and corporations. Unquestionably, the amount involved here is significant. Life Insurance Companies. The R e s t North Central region has 50 legal reserve life insurance companies lscated within its boundaries, having assets of 2.8 billion dollars a t the end of 1952. In that year, total assets increased $225,000,000. The assets of life insurance firms other than legal reserve companies aggregated approximately $150,000,000. While the assets of life insurance companies in the region represent only 4% of all life insurance company assets, the proportion has increased moderately in the years since 1941-a period when the industry as a whole has grown rapidly. The largest firm in the region had admitted assets of $618,000,000 a t the end of 1952 and eight others had assets of $100,000,000 or more a t that time. In the West North Central States, life insurance company assets are heavily concentrated in Des Moines, Iowa, where control of 45% of the total in the region is located. Most of the remainder is held by companies in Kansas City, the Minneapolis-St. Paul area, St. Louis, and Omaha. Although the published statements of these firms do not indicate the extent of their financial assistance to the chemical Industry, it is known that they make market purchases of securities and supply credit through direct loans and purchase and leaseback arrangements. Other Risk Carriers. The more common types of risk carriers other than life insurance concerns are fire, casualty, surety, marine, and health insurance companies. The West North Central region has a total of 133 joint stock and mutual companies carrying these risks. Typically, such companies are much smaller than life insurance concerns, the largest in the region having assets at the end of 1952 of $130,000,000 with only five firms holding total assets greater than 150,000,000. Total assets of these risk carriers were $1.022 billion, or 6% of the total in the nation a t the end of 1952. These assets increased $110,000,000, or 11%, in 1952. These companies show a decidedly higher preference for corporate shares than do the life insurance companies. The nature of their liabilities and potential claims makes real estate mortga,ges less interesting to these firms than to life risk carriers. Particularly in the case of larger organizations, the relative share of stocks in total investment also is increasing. It is estimated that the shares of chemical companies are one of the three or four most widely held types of corporate issues owned by these firms. Therefore, while total assets of these insurance concerns are considerably less than those of life insurance comDanies, they may furnish a significant part of the capital and, without question, they provide a larger share of the equity capital of chemical firms. Investment Trusts. The assets of investment trusts having their head offices in the West North Central States were approximately $;730,000,000 a t the end of 1953. This sum represented 18% of the assets of all open-end investment trusts in the United States and about 14% of the assets of all investment trusts, without regard to type. While these organizations do not make direct advances to firms or purchase new unseasoned issues, their absorption of shares from the market indirectly provides funds t o the chemical industry. The assets of these trusts increased about $110,000,000, or 14%, in 1953. Changes in market conditions will markedly affect this rate from year to year. Last year was not one which would be considered exceptionally favorable to growth of these trusts, however. Within the region, there are 12 such funds in operation. All Rut a negligible proportion of the assets and the growth is a& tributable to a group of funds in Minneapolis and another in Kansas City. Examination of the security portfolios of these funds reveals a substantial commitment in chemical sharessometimes as high as 8% of the assets. Trust Departments of Commercial Banks. Data on the assets November 1954
administered by the trust departments of commercial banks are entirely inadequate to indicate the magnitude of their operations. The deficiencies of data in this area are the result of several circumstances.
1. Most state banking departments do not collect information on the assets held by the trust departments of state-chartered banks. I a the West North Central region, this causes two of the largest trust departments not to be reported. 2. Trust departments follow varied practices in valuing assets held in various trusts. Assets of $1,000,000 may be carried a t that value in one bank and a t a nominal value of $1 in another. 3. These departments participate in the management of the mounting volume of assets held by pension funds, yet such assets frequently are not included in the trust department statement. 4. The report of the Comptroller of the Currency on the fiduciary activities of national banks includes in the statement securities held as custodian. Inclusion of these assetq as a part of the financial resources of a region may lead to a double counting of certain assets. This dup!ication may occur if the trust department acts as the custodian of the assets of an investment trust having its principal office in the same city. The greatest difficulty in all these limitations is that it cannot be assumed that the deficiency is uniform from one region to another. Granting all of these weaknesses of the information relating to commercial bank trust departments, a crude measure is needed of the comparative importance of these agencies in directing the investment of financial resources. The reports of the Comptroller of the Currency indicate that the assets in living and court trusts of national banks in the West North Central region represent about 5.5% of the national total. If the assets held as agent and custodian are included, the proportion in the region is 6%. The annual increase in assets administered by trust departments is estimated to be $100,000,000. In the West North Central States, these four types of financial institutions-life and other insurance companies, mutual funds, and the trust departments of national banks-administer assets having an estimated value of 6.75 billion dollars. This aggregate is increasing a t an annual rate of approximately 1450,000,000 -an amount which exceeds the average annual external financing of the chemical industry. In addition to these resources for supplying long-term capital to industry, the region is served by 3300 commercial banks which had total assets of $16.1 billion on June 30, 1953. Over the 13year period beginning June 30, 1940, these assets increased 230%, compared with a growth of 167% in the country as a whole. Although banks traditionally have preferred to make only short-term loans, intermediate-term credits with maturities as long as 5 years have become more generally acceptable to these institutions since the war. Where the size of the local bank does not permit large loans to be made, banks in the region participate with banks in Chicago and New York in advancing funds to business borrowers. RESOURCES
OF INSTITUTIONS ACCUMULATING INDIVIDUAL SAVINGS
Certain institutional resources clearly are not available to finance the long-term capital requirements of industry because the investment policies of these organizations direct their funds into other channels. Therefore, as long as the public holds its assets in the form of claims on these institutions, no direct financial assistance to industry will be forthcoming from them. Nevertheless, accumulation of these claims is only partly the result of their particular fitness t o fill the investment needs of the public. Lack of familiarity with the merits of other investment media also plays an important role in diverting public savings t o these institutions. In certain states, mutual savings banks perform the service that in others is discharged by savings and loan associations and in still others by savings departments of commercial banks. The growing popularity of mutual fund shares and
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the expanding organization for marketing these securities doubtless will increase the competition for savings in many areas and ehould lead to wider public participation in the indirect o m e r ships of corporate shares. Inclusion of the resources of savings instit,utions in this review is justified on the premise that’ they afford an indication of savings habits and resources that are SUPcept,ible of diversion, a t least in part, to investment in corporate securities. Liquid Savings. I n the 12 p a r s from t,he end of 1940 t o the end of 1952, savings and loan aeiociatioris in the West S o r t h Central regiou experienced an increase in shares outstanding from $321,000,000 to $1,458,000,000, a growth of almost fivefold, or about $100,000,000 each year. In 1953, growth i ~ a ; about $175,000.000. Total savings deposits of operating banks were $2.019 billion at the end of June 1953, and were growing at ii rate of $135,000,000 annually. Information on a fern of t h ~ economically more important stat,esin the region also s h o w t h a t Treasury eavings bands have been accumulated in recent periods while being liquidated in the couiit#r;-as a whole. MARKETING
SYSTEM FOR CORPORATE SECURITIES
The data presented above delineate cert,ain measures oi t h e financial size of the West Xorth Central region and indicate that iuetitutions of t’he area can and do financc corporat,e espaiisioii through direct loans, purchase and lease back agreements. :~nc\ purchase of equity securities. Supplemciiting these coiit,ributions to corporate capital are the purchases of bonds and stocks hJindividuals, partnerships, and corporations. Unfortunately, rio measures exist through which one may even approximate t’l!c$ importance of the region in this respect. Where the corpor:ltc, financial problem is t,o be reeolvd through long-term direct l o n ~ i s . the financial executive recognizes the iuatitutions through whicli funds Kill be obtained. But, xhen new equity issues are i o he employed, regional considerations become unimportant. Corporate equities ordinarily are not marketed on a rcgioiial basis simply because the system for niarlceting securit’ies i p not’ organized along such lines. Security dealer relationship? :UP vertical rather t,han lateral--dealers in cities of the \Test, Sort21 Central region usually are associated with originat,ing housci. in Nen York when securities a,re offered for sale. Selection of ii given dealer in New York by a company \Till cause certain YCgional resources to be tapped for Corporate use while a different choice will lead to the rccruitment of resources from diffewni regions. It, will bc a matter of indifference to the compari!’ whether one or the other of these choices is made, E O long as the highest bid for the securit’ies is obtairiccl. Since most conpanies finance exclusively through a single originating house, the geographic distribution of its issues will follow the pat,tern of t,hc associated dealer organization. Essentially, this means that \lie question of regional financial resourwF is of no more than minor significance in the corporate decision t o mise equity capital from the American capital market. Prospect. An attempt, to project the future growth of financial resources in the region confronts the necessity of formulating an hypothesis about the reasons financial inst,itutions are located aF they are. Commercial and savings banks and commercial hank
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trust’ departments are tied rather closely to the general ewrioiriic: prospects of the regions they serve although occasionall). :L f i r i r i of this kind is able to surmouut t h e limitations of its ininicvli:i(c’ erivironment and widen the area i n which it obtains the r(:se)ur(w it administers. Organizations such as life insurance conLpi,tiit.q :mi other risk carriers and the ii trust,s are not, s o re!st.ricted and are able to gather fin urces from Che c,iitii,c. count’ry through well-developed salca organizations. Coniniuiiication among markets and informational Sources is 80 coniplt so s.rvift.?and eo inexpensive that, no location is greatly supi:rioi ic i otjli(w in this respect. Nor iloes there appear to be any optimtl size xyhich enables small coiiipaiiics to g r o v more rapid:- t1i:iri ~ l i larger r firms. Perliaps the most importailt. detlelminants of the grov t, individual firms in the insuraiice aiid investment trust buliirit are the skill and ingenuity of management. -4bility to adap (I chaiigirig needs, prudence and foresight in the selection iif i l l vest,ments, and organizing talent are not regional re~oiii~i~!~~:. In so far as t,hey may be concentrated in a felv places, they ciin Iw tlrawn to new employments by challenging opportunitie.. Thcw tJypes of institutions in the West8Xorth Central region have ( h i onstrated their abilit,y t,o niaiiitniii :], :.:itf, of growth that i’ullv matches that- of similar coiiipriiicjs i u tlic’ r w n t r y . On the above premise, this gronth is mor(’ ~impc~rly :ittributable to tho sltill~ involved in their manageiuciit tIi2iii to t h lias enjoyed comparativ~lyf a ~ ~ o i ~irianme ~ ~ h l c conditions tliroughout, the poptwar period. BIBLIOGRAPHY ( 1 ) Aries. 1%.S..
and Cziner. I < , 31.. “Riski in Investine in Clieiui-
( 2 ) E:berstadt, B. F., “InvestnieiiL fiankiiip and the i‘ticmlcni Industry,” Ibid., 174, No. 5074. 5 (1951). (3) (leistacker, C. A, “Financial Problems in Chemical Industry Expansion,” Ibid., 174, S o . 5074, 7 ( I 9 3 l ) . ( 4 ) iioover, E. ll., and Fisher, ,Joseph T,,. “Research in Kegional Economic Growth,” P t d l r i n h i r r the Study of Eco?mniic Growth, Universities--.National Bureau Committee o n T3ooiioinic Research, Kew Yolk, 176-250 (1949). ( 5 ) Odum. Hoir-ard W., and Moore, Harry Estill, “Arne gionalism,” Henry Holt, New Yorlr, 1938. ((i! Hatchford, B. V.. “Patterns of Economic Deveioynicnt,” Soulhcrn Economic J., XX, S o . 3,217,31 (January 1994). (7‘) Sinnpson, Paul B., “Regional Aspects of Business Cyoles o n d Special Studies of tho Pacific Xorthwest.” study prepared f u r Ronneville Administration and supported by Univc Oregon and the Social Science Research Council, 195 ( 8 ) Singer, H. W., ”The Distribution of Gains between 11 and Borrowing Countries,” The dmerican Economic Supplement, XL, No.2, 47:1--85 (1930). wh, Elmer, “The Future of the Great Plains Reappiaiwcl.” J . Farm Econonzics, 31, 917--21 (1949). (1 0 ) Stewart, W. Blair, “Shiits in the Geographic and liiclnsti i d Pattern of Economic Actirity,” The American Econamir I& cicw Proceedings, XXXVI, KO.2, 36-51 (1946) (11) I’iniiig, Rutledge, “The Iiogion as a Concept, in Businesa C h ~ l o Analysis,” Econonzeirira, 14, KO.3, 183-214 (1946). (1 2 ) Wiesenberger, Arthur, “InT-estmmt Companies,’“ A-4rtl~ur Wiesenberger and Co.. S e w York, 1953. ~ ? 1 2 G E l \ 7 E Dfor
review hlarch ”4 1.154
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