Financial Resources EDWARD A. WAYNE FEDERAL RESERVE BANK OF RICHMOND, RICHMOND, VA.
T h e expansion of financial resources in the South Atlantic States has been based on the improvement in income levels i n this region. The latter has resulted mainly from the shifting relative importance of agriculture and manufacturing in the regional economy. Reflecting improvement in the supply of credit i n these states has been a better-than-average growth in assets of such major financial institutions as commercial and mutual savings banks, savings and loan associations, and life insurance companies. The importance of other intermediaries in the regional money market-e.g., security dealers, credit unions, mutual funds-cannot be measured exactly in the absence of basic data. However, available information indicates that their growth has also met the increasing needs of business enterprise in the region.
T
HE ordinary connotation of the term “financial resources” is a fund of money, but it is preferable t o think of financial resources as the availability of funds to individuals and businesses. T o make more meaningful an examination of the availability of funds in the South Atlantic States, consider first the usual means by which chemical and other business firms raise funds. I n the main, chemical companies obtain their funds in the sanie m-ay, from the same sources, and with the same difficulties as other business firms. There are, of course, needs and problems pal ticularly important in the chemical industry-for example, the high rate of research expenditures and the everthreatening intrusion of obsolescence-but by and large the financial history of chemical companies follows the general pattern of most business concerns. First, in inost instances, the initial capital of a business comes from the personal funds of the owner or owners. Initial financing is mostly personal and local. The man just getting started in 3 new business seldom has access t o funds of big investors; he has to dig into his own pocket and scrape up the money vhere he can find it. The retirement fund of the Federal Reserve Banks. for instance, has a number of millions of dollars in it, but these dollars are not placed a t the disposal of someone with an idea and little else for “transmuting the base metals into the noble ones.” Secondly, personal and local funds are the primary contributors t o the financing of the initial expansion of a business. With the comparatively young firm off t o a good start and having a record of operations t o prove it, it can probably persuade a banker in its community to make the loan needed for expansion. But such a loan is as likely t o be secured by a mortgage on the businessman’s home as by one on the meager assets of his bu;siness. Another new source of fiinds that might help out a t this stage 444
is extension of credit by merchandise and equipment suppliers. And, of course, if the business is doing well, the owner has some retained earnings that enter the picture in a modest way. Thirdly, continued growth of the business is financed by mortgage loans secured by company property, the sale of securities locally, by a line of bank credit, and by retained earnings. (Retained earnings are included in this outline since reference is to both internal and external sources of funds. However, of primary concern here are the external sources of funds available t o business enterprise in the South Atlantic region.) Fourthly, when a company reaches maturity or ha? attained a solid position in the industry, it has all the usual sources of longand short-term funds a t its disposal: mortgage loans, term loans and regular bank loans, stock issues on a national basis, and public or private placements of bond issues. I n addition, it is in a position t o take advantage of new developments in corporation finance such as the saie and lease-back of real estate. Now its method of financing is within the framework of the national market, a matter of choice rather than the earlier talre-it-orleave-it and be-glad-to-get-it situation. This outline of sources of funds requires a number of additions and qualifications, For example, there is evidence of an inverse relationship between size of firm and the share of total investment financed from personal savings. Again, there are occasions when part of the initial investment is obtained from the public sale of securities. Similarly, part of the initial funds is often obtained from bank loans. As still another example, policy loans of life insurance companies are an important factor in mustering personal funds for the financing of new and small concerns. Finally, in newly organized firms with established parent companies, the pattcrn of financing will probably differ from this outline. INDICATORS OF’ FINANCIAL RESOURCES
The National Emergency Council reported t o the President in 1938 that there had never been enough capital and credit in the South t o meet the needs of its farmers and its industry. It added, I‘ , t h e South has not yet been able t o build up an adequate supply of credit , ,’, Since that time, however, there have been changes. Table I indicates the extent of growth in the resources of the major financial institutions in the South Atlantic States. (Data for 1953 are not available for some series shown. Hence Tables I and I1 use 1952 data for all of the series.) Listing the financial institutions t h a t make funds available t o individuals and businesses in the region and the sum total of their assets on a given date by no means completes the inventory of the financial resources of the area. There are a number of points yet to he considered.
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Resources I n the first place, a statement t h a t as of December 31, 1953, the financial resources of the South Atlantic States amounted t o $X billion, a n increase of Y % from a year earlier, would not account for t h e flow of funds into and out of the region during the year. T h e develoDment and a m l i cation of new techniques by
__
Table I.
F i n a n c i a l Resources of Selected I n s t i t u t i o n s i n S o u t h A t l a n t i c States a n d t h e United States-1929, 1939, a n d 1952
Assets Commercial banksa Mutual savings banksQ Savings and loan associations Life insurance companies
g.2
__-_
S. A. 1952 as % S.A. U.S. U.S. Sl5,910 $188,604 8.4 591 25,233 2.3 3,022 22,585 13.4 3.1 91 _ 77,038 _ 2 , 3_ $21,914 $313,460 7.0
5 Bank figures for 1929 are as of June 30; for 1939 a n d 1952, a s of December 31. Source: Comptroller of the Currency: Home Loan Bank Board; Best's Life Insurance Reports; Life Insurance Association of America; Statistical Abstracts.
most institutions Of accumulating and investing funds has given considerable substance t o the theoretical mobility of funds. There are still impediments t o perfect fluidity of funds, but financial institutions are effecting increasing interregional flows. I n the second place, a snapshot of financial resources fails t o disclose the flow of funds that arises from individuals and businesses in direct contact with sources or investment outlets outside the South Atlantic region. Also, the mere statement in dollar terms of financial resources says nothing of the efficiency with which they are put t o work-the ingenuity, initiative, and the skill exercised in accumulating and investing financial resources. Further information on the financial resources of the South Atlantic region may be obtained b y going behind the institutional intermediaries and examining t h e fundamental sources of fundsnamely, the savings from individual income. Individuals in the aggregate do not spend for goods and services all their income available after taxes. They set aside a portion of it in a number of ways: deposits in savings accounts with banks, shares of savings and loan associations, payments of insurance premiums, payroll deductions for contributions t o pension funds, and t h e purchase of securities. The growing accumulation of financial and capital resources in this region stems from a n increasing volume of savings. The latter, in turn, is directly related as both cause and effect t o increases in income in the area. Here again, i t is the moving picture t h a t is important, not the snapshot. Incomewise, the South Atlantic region is still near the bottom of the ladder, but it has been climbing faster than most other regions in the country. I n 1953 total income payments in the region amounted t o $30.4 billion or 11.270 of the national total. This share of total income payments, though it continues t o be lower than the region's share of the nation's population, represents improvement; in 1929 it was only 8.2%. Of the nine census-classified regions in the United States, only the pacific States had a larger percentage increase in total income payments from 1929 t o 1953 than the 348% gain of the South Atlantic States. Despite a higher-than-average rate of Population W'wth, Per capita income Payments in the South region advanced from 64% of the national average in 1929 t o 79% in 1953. Increased income has meant increased savings-that is, increased financial resourcea available for productive uses. This relation of income t o savings is a common historical pattern. The significance of t h e improved income position of the region is reflected in t h e savings figures shown in Table 11. While the increased accumulation of financial resources has stemmed from the increased income of t h e region, it should be noted t h a t some of t h e present resources of t h e region have resulted not from local accumulation, but from transfer of funds from other parts of the country. The many firms t h a t have transferred their headquarters to or established branches in t h e South Atlantic States have brought with them funds which are reflected in the bank deposits of the region. It would be of interest t o know to what extent t h e increase in financial resources March 1955
(Millions of dollars) S. A. S. A. 1929 1939 as % as % S.A. U.S. U.S. S.A. U.S. U.S. 6.4 $4326 $ 65,233 $3973 $61,800 2.4 300 11,852 243 10,006 9,s 6.3 524 5,524 547 8,695 370 18,610 2.0 1 - 611 ~ -29,243 - _ 2 ._ $5133 $99,111 5.2 $5761 $111,852 5.2
has stemmed from this source. Unfortunately, there are no data available t h a t permit even informed guesses on t h e subject. The postwar experience of state and municipal governments i5 a further indication of the availability of financial resources i n the South Atlantic region. The story is a familar one: constantly increasing outlays but even faster growing backlogs of needs. From 1946 t o 1953 expenditures by the 48 states increased l6lyO. This rate was exceeded in seven of the eight South Atlantic States. Local governments throughout t h e nation had an average increase of 76% in their expenditures. This increase was exceeded by the local governments in every state in the South Atlantic region. A somewhat similar comparison is obtained when the data are reduced t o the common denominator of per capita expenditures,
Table 11. E s t i m a t e d Individual Savings i n Selected Media, S o u t h A t l a n t i c States a n d the United States--1939 a n d 1952 (Millions of dollars) 1939a S.A. U.S.
Time Commercialbanks deposits $1,069 $14,731 Mutual savings banks ,266 10,520 Savings a n d loan 449 4,266 P ~ ~ ~ f e ~ a v i n g a * 100 1,259 22,315 Life _ 1 ,_ 758 $3,642 $53,091
S. A. as
%
S. A. as %
1952a
U.S.
S.A.
U.%y U.S.
7.3
$2,928
$39,046
7.5
2.5
516
22,578
2.3
10.5 7.9
2,585 253 5,121 811,403
19,143 2,617 59,252 $142,636
13.5 9.7 8.6 8.0
___ 7.9 6.9
~
of adata Savings on a bonds regional arebasis. omitted from these estimates because of unavailability Fiscal year basis. Life insurance figures estimated from d a t a o n reserves, policy loans, a n d premium notes for 49 companies. Source: Comptroller of the Currency. Home Loan Bank Board: Post Office Department; Life Insurance Assoc'iation of America.
The point here is that this region has been growing faster than the average in a number of ways, and the states and municipalities have had to keep pace. There seem to have been few if any instances in the region where there has been a failure t o raise t h e funds needed to provide the public services and the public plant and equipment needed by an expanding personaland business population. FINANCIAL INSTITUTIONS-COMMERCIAL
BANKS
An overwhelming proportion of savings is placed with financial institutions performing the dual function of gathering savings a n d making them available for productive uses. Since the investment of savings or capital formation is the principal means of increasing the efficiency of production and thus raising the standard of living, it is obvious t h a t the importance of these financial institutions can hardly be overestimated. Just as t h e scientist and t h e engineer contribute to t h e attainment of a higher level of
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Table H I .
Assets and Deposits of C o m m e r c i a l Banks, S o u t h A t l a n t i c S t a t e s a n d United States-Selected 1929- 1953
(Dollars in millions) .Tune 30, l 9 2 g June 30, 1933 June 30, 1939 S. A. S. A. % S. A. s. A. % R. A. s. A. % States U. S. of U. S. States U. S. of C . S. States U. S. of U. S. 1573 14,536 10.8 1573 15,202 10.3 2437 24,649 9.9 No. banks 6.5 3975 01,360 6.3 2807 44,771 Total assets 3972 61,799 6.4 7.9 6.4 1292 16,424 1007 16,630 Loansanddiscounts 2443 36,425 6.9 1212 22,226 5.5 5.7 920 16,196 Investments 698 13,108 5 . 3 6.4 6.3 3469 53,793 2291 36,023 Total deposits 2826 43,920 6.4 Source: Comptroller of the Currency.
output through t h e application of scientific industrial technology to the forms and uses of capital goods, so financial middlemen contribute their services and ingenuity to the provision of funds for the purchase of these goods. The results of these joint efforts are reflected in the large gains in this country's output. The strength of any financial system rests on its banking structure. The commercial banks in the United States comma,nd assets considerably larger in amount than the total for all other financial institutions. Not only can the commerical banking system lend the funds it accumulates from shareholders and depositors, it also can create new and additional funds through the very process of making loans. When a commercial bank makes a loan, it creates funds in the form of a credit to a deposit account. Commercial banks are the department stores of the financial world. The range of their lending activities extends from tmhe individual getting a small personal loan to the business giant borrowing millions. Their investments, n-hile predominantly in United StmatesGovernment securities, also include obligations of corporations, states, and local government,s. Just, like any other business, banks must keep their inventories busy; t8he inventories must be worked into good loans and invest,inents if the bank and the community are t o profit. Twenty-five years ago deposits in commercial banks in the South Atlantic States t,otaled $2.8 billion, 6.4% of the Cnited States' total. Since then deposits in banks of this area have grown at a faster rate than in the nation. By t,he end of 1953 they amounted to $15 billion or 8.5y0 of the national total. Also, the average total amount of deposits per bank has grown more rapidly in this region than it has nationally. The consequence has been a very real improvement in the ability of banks in general in the region to meet the credit, needs of the community. Accompanying the growth in these financial resources has been a significant change in the deposit structure of the region's commercial banks. Demand deposits have increased from about one half of total deposits in 1929 to over three fourths of the total today. It is demand deposit,s, of course, that finance the bulk of economic transactions, and the increase in their relative importance is a reflection of the expanded business activit,y of the region. Another consequence of the rising level of business activity and income in the South Atlantic region over the past quarter century has been a more rapid expansion of bank loans here than in the nation. For the average bank, loans provide the most profitable employment for its funds and thus the best, means of maximizing profits. Currently, loans are equal to one third of total assets of the region's banks, and investments in securities, primarily U. S. Governments, account for three fifths of the remainder. By drawing on the latter, these commercial banks could divert a substantial portion of their funds from investments and make them immediately available to mect tho demand for loans by individuals and businesses in South Atlantic States. There can be no question but that there has been a vast improvement in the banking resources of the region since 1938, when i t was contended that the South has had to look beyond its 446
Dec. 31, 1945 -__-_ S. 4. s. A. % States U. S. of U. S. 1,579 14,019 11.3 12,837 180,360 8 0 1,943 26.077 7.2 7,592 98,658 7,r 12,128 150.261 8.1
Years,
_ ~ _ _rjeC. _ _ ~ 31, _ _ _1953 __ s. A. s. A . yo States U. S. of U. S. 1,699 13,981 12.2 16,275 193,010 8.4 7.9 5,313 67,593 6,797 78.094 8.7 14,965 176.702 8.5
boundaries for the financing of virtuxlly all of its large indiistrirs and manv of its small ones. LIFE INSURANCE COMPANIES Second to the banking system, life inmrance companies are thc largest group of instit,utions performing the middleman role of gathering savings and making them available for productive uses. It is well known that a characteristic feature of this industry is the heavy concent'ration of business in the hands of a relatively small number of firms. A s a consequence, assets of life insurance companies in the South Atlantic States are a bit on the sparse sidt,. It is significant,, however, that there has been growth-again at a faster pace than in the country as a whole. The number of legal reserve life insurance companies located in the South Atlantic area increased from around 60 in 1929 to more than 120 in 1952. They had a sixfold growth in assets, increasing their share of the national total from 2 to 3%. During this period the share of insurance outstanding that was written by South At'lantic companies increased from 3 to 5%. These are modest but not negligible changes; during this period the in.. surance business experienced a fourfold growth. I n considering available financial resources, the investment, in the region by outside insurance companies is as important as the act,ua.l resources a t the command of resident, companies. Data supplied by the Life Insurance Association of America on a group of 49 companies, whose assets represent almost 907, of the total for all life companies, give an indication of the sin, of this investment. From 1939 to 1952 these companies increased their total investments, exclusive of Government securities, by $33.5 billion. Of this gain $4.5 billion (1235%) represented investments made in states of the South Atlantic: region. Of this amount, in turn, 81.2 billion went int,o industrial honds and stocks of companies in the region. Judging from past, performance, t'he leading life companies of t8his country have no hesitation in participating in the financing of the indust,rial expansion of the South -4tiant'ic region. Unfortunately, the information is not available t h a l would permit measurement of the extent t o which resident life insurance companies render financial aid to the regional economg. It, is generally accepted, however, that they meet a need for loans by small businesses t h a t for one reason or another are not supplied by the large insurance companies outside the area. In this connection, the experience of one southern company as set forth in hearings in 1949 before a Congressional committee is of interest. At the close of 1948 this company had almost one half its assets invested in mortgage loans. Over half the amount of these loans were commercial, buainess, and industrial mortgage loans rather than residential loans. Over 80% of the number of business loans were in original loans of less then $35,000. Indicative also of the financial aid extended by this company to small business is its bond account. Virtually all the industrial bonds held a t the end of 1948, equal t o about 17% of its total assets, represented private placements, direct negotiations, with the insurance company by small firms; 42% of these borrowers
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-Resources had assets of less than $1,000,000 and 63% had assets of less than $4,000,000. Among the private placements this company had made were loans for as small an amount as $25,000. SECURITY DEALERS
Security dealers and the markets they create and maintain by their activities constitute another major group of financial institutions that pull together savings and channel them into productive uses. Data provided by the National Association of Security Dealers show 241 dealers domiciled in the South Atlantic States. Many of these firms, of course, have branch offices in the principal cities of the area. In 1953 this group handled private corporate underwritings, including private placements for which they acted as intermediaries, totaling $193,000,000. The exact disposition of the securities is, of course, unknown, but it is fairly safe to assume that the bulk of them was sold to investors living in this region. Last year, for example, a Richmond dealer managed an underwriting group that had no trouble in disposing of a $4,000,000 issue of bank stock to investors in the State of Virginia. I n fact, most of the dealers would have been glad to have received larger allocations of the total issue. The $193,000,000 of securities underwritten by the region’s dealers in 1953 represents a large increase over the $24,000,000 underwritten in 1940. This growth was due to an increase in the number of dealers in the area-an increase of 27% between 1940 and 1953-and to more aggressive action on the part of the dealers in participating in the financing of local business. OTHER FINANCIAL INSTITUTIONS
In addition to banks, insurance companies, and security dealers, the South Atlantic region has the same variety of money dealers that is found in other sections of the country, You will find here mutual savings banks, credit unions, savings and loan associations, sales finance companies, mortgage companies, industrial banks, trust companies, consumer loan companies,
pension trust funds, and mutual funds, not t o mention the wide assortment of Government agencies for lending or for insuring or guaranteeing loans made by private lenders. Among these secondary institutions the growth of savings and loan associations has been particularly great in the South Atlantic region. The resources of these institutions have grown from about $500,000,000 in 1929 t o more than $3 billion a t the end of 1952. They have more than doubled their share of total savings and loan assets in the country, increasing from 6% in 1929 to 13% in 1952. The largest association in the nation is located in the region, and of 39 companies in the country with assets of $35 million or more, nine are located in the South Atlantic States. These firms limit their lending almost entirely to individuals acquiring homes, but they are another mark of the growing availability of funds in the area. Industrial development corporations such as those of the New England States have been of negligible importance in the financial resources picture of the South Atlantic States, and there is no strong indication that this situation will change. CONCLUSION
The marked growth in the financial resources of the South Atlantic region is both a cause of and a result of the fundamental changes that have occurred in recent decades in the economy of the area. T h e declining relative importance of agriculture and the dynamic industrialization of the area have contributed t o a substantial improvement in income levels. That, in turn, has provided the basis for the expansion of South Atlantic financial institutions, generally a t a faster rate than in the nation as a whole. The region’s financial resources are of course not adequate in every respect. The important fact is that the financial institutions of the region have had marked and sound growth with a very definite improvement in their ability to finance the expanding business activity of the region. RECEIVED for review September 13, 1954.
ACCEPTED November 20, 1954
Reprints of this symposium may be purchased for 75 cents each from the Reprint Department of the American Chemical Society, 1155-16th St., N. W., Washington 6, D. C.
Phase Changes in Soap-Oil Dispersions B. W. HOTTEN AND D. H. BIRDSALL Calgornia Research Corp., Richmond, Ca1;f.
D
ISPERSIONS of soaps in nonaqueous liquids are commercially important in the form of lubricants, gelled fuels, surface coatings, and waterproofing agents. The present investigation was concerned primarily with plastic dispersions of soaps in oils in the form of lubricating greases, but the method of study used is applicable to other solid-liquid dispersions as well. Complete phase diagrams were obtained by Vold and Vold (9) for a limited number of soap-oil systems. These consisted of lithium and sodium stearates in Decalin and in cetane. Phase boundaries were established by observations under polarized light and in an x-ray diffraction camera. In the present investigation, a simple method was sought of establishing major phase relationships which could be used for a wide variety of dispersions. When soap-oil systems are heated,
March 1955
a modification in properties of the individual components is t o be expected as well as a modification in their relationship t o each other. Thus, the viscosity of the oil will decrease; the soap particles may soften, expand, and split apart; and the absorption of oil within the soap particles may increase. In most systems, the soap will finally dissolve completely in the oil. It was thought that the more important changes of this type would be reflected in the differing rate of separation of the oil from the soap over a broad temperature range, and a simple vacuum filtration technique was used t o measure this property. Previous studies of separability of grease components have been made with the aid of special pressure filtering devices. Herschel (3) devised a press to separate the oil from greases through a filter paper membrane. He found that the separation rate of the oil
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