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A more important difference between the cost of investment funds today and in the twenties lies in the trend of interest rates. Although interest rates have gone up moderately in recent months, they are still low in historical perspective. Corporate bond yields currently average 3.1 percent as compared with 7.0 percent in the early twenties, 5.2 percent in 1929, and 3.8 in 1939. Commercial loan rates charged customers by banks in principal cities now average 2.2 percent as compared to 2.8 percent in 1939 and much higher rates in the twenties. Lower rates, of course, are paid by large, well-established firms, while new and small concerns typically pay higher rates. It is rather striking that the average rate paid on the very substantial amount of term loans extended by banks—that is, loans with maturity over a year—is slightly less than 2 percent. Such loans were virtually unknown prior to the mid-thirties.

If we turn to table 9, we will see what I said of the ratio. You take the bond yield of the first column and the dividend yield of the second column. "You will see that the latter in January was 5.4 which does not differ much from the ratios up to the middle twenties. After that, of course, we went into the bull market.

On the basis of earnings, you will see the ratio of 11.3 today is the same as last year, and in the middle twenties you have comparable figures.

In the bull market, of course, they sold on a very much different basis.

The CHAIRMAN. Mr. Secretary, cannot a strong argument be made that the current dividend yield on common stocks in their ratio to price indicates that people are not interested in equities?

Secretary HARRIMAN. If you compare the current period with the recovery period in the middle twenties, you will see that the present dividend yield in relation to the market value is not much different than it was for the average between 1922 and 1926.

You have to get to 1927, 1928, and 1929 before your dividend yield was lower in relation to price.

From the standpoint of earnings, you will see the recent ratio is the same or about the same as between 1923 and 1926. So that your price today in relationship to dividend and earnings is much the same as it was between 1923 and 1926.

So, it does not lend color to the idea that stocks are selling at a very low basis, compared to their dividend yield and earnings.

The CHAIRMAN. Do they sell at a low basis in relation to the low interest rates you are speaking of?

Secretary HARRIMAN. In relation to the low interest rate, yes.

The CHAIRMAN. So that people have a choice of going in for low interest rates or taking these equities!

Secretary HARRIMAN. Yes.
The CHAIRMAN. And they are taking the low interest rates?

Secretary HARRIMAN. There is a large amount of savings that is going into insurance policies and increasing assets of insurance companies which are going into bonded indebtedness,

I resume from my statement, page 21. While the adjustment of the premiums on Government long-term bonds and the advance in the short-term rates have resulted in some adjustment of yields, the general policies with respect to the management of the public debt have not been changed. I comment on this only briefly since the officials responsible for these matters have already presented their analyses and views to the Congress. My point is that, insofar as the availability of funds for the needs of business is concerned, the changes in money markets have influenced the rate structure only in a slight degree. The changes do not alter the general picture of low costs for borrowed capital.

In summary, then, I would emphasize that our economy is still in an inflationary situation and that sound policy demands that the level of taxation is maintained. Both capital formation and consumption are at record levels. We are utilizing all our economic resources. The major effect of any lowering of taxes, therefore, would be to raise demand and thereby prices, rather than to bring forth increased supplies.

This does not mean that the present rates or structure of taxes that have a bearing upon the availability of risk capital should be retained beyond the present period of inflationary pressure. These inflationary pressures undoubtedly will disappear. Tax adjustments will then be necessary and desirable. One important objective of such relief, it seems to me, would be to encourage business investment, particularly as financed by equity capital. However, as I have indicated earlier, business capital expenditures are already taking a relatively large share of our national output. In view of the other demands upon that output, and the resulting inflationary pressures, I do not believe that now is the time for tax reductions that would lower Government revenues in order to stimulate additional investment. (The tables referred to are as follows:)

TABLE 1.-Gross national product or expenditures, 1929–47

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1 Includes new industrial, commercial, and public utility construction and producers' durable equipmen 1 expenditures excluding farm machinery and tractors.

2 Includes new residential and institutional construction, farm construction, and equipment expenditures, and net change in business and farm inventories. The net decline in inventories 1932-34 was large enough to more than offset the positive items in this category.

NOTE.-Detail will not necessarily add to totals because of rounding.
Source: U. S. Department of Commerce, Office of Business Economics.

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TABLE 2.Percentage distribution of gross national product, by major expenditure

segments

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1 Includes new industrial, commercial and public utility construction and producers' durable equipment expenditures excluding farm machinery and tractors.

2 Includes new residential and institutional construction, farm construction and equipment expenditures,
and net change in business and farm inventories. The net decline in inventories 1932–34 was large enough
to more than offset the positive items in this category.

NOTE.-Sum of detail may vary from 100.0 percent by 0.1 due to rounding.
Source: U. S. Department of Commerce, Office of Business Economics.

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1929 1930. 1931. 1932 1933 1934. 1935 1936. 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946. 1947

Billions of
dollars

85. 1
76. 2
64.8
49.3
46. 6
53. 2
59.9
68.4
74. 0
68.3
72.6
78. 3
95.3
122. 2
149.4
164.9
171.6
177.2
196.8

Percent

3.1 3.3 2.9 2.9 3.1 3.0 3. 2 3. 3 4.0 4. 2 3.4 3.3 3. 5 4.9 11.9 11.5 12. 2 10.6 10.9

Percent

92.5 92.9 94. 3 99.9 99.4 97.5 93.9 91.5 90.7 94.4 92.9 92.0 86.3 74. 3 68.0 66.9 70.9 81.1 83. 6

2.9 5.2 5.3 1.4 3.7 4.7 10. 2 20.8 20.1 21.6 16.9 8.3 5.5

1 Chiefly individual income taxes, but also including such items as estate and gift taxes and personal property taxes. Business taxes are not included.

2 Including excise taxes.
Source: U. S. Department of Commerce, Office of Business Economics.

TABLE 4.Nonfarm plant and equipment investment, total and components as

percentage of gross national product

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Source: U. S. Department of Commerce, Office of Business Economics. The years 1919–28 based on unpublished data.

TABLE 5.—Major items of gross saving, 1947

[Billions of dollars] Gross private saving:

Personal saving--.
Undistributed corporate profits_

Capital consumption allowance_.
Government saving: 1

Federal (including $3,900,000,000 of loans abroad)

State and local--1 Surplus on income and product transactions. Source : U. S. Department of Commerce, Office of Business Economics.

10.9 10.6 12.4

1

12. 0

2

TABLE 6.-Sources and uses of corporate funds, 19471

[Billions of dollars]

Uses

26. 7

2

14. 2

.5 6.7

Plant and equipment:?

New

Government-
Inventories (book value).
Receivables (trade):

From business-
From consumers.

From Government
Other current assets (excluding cash and U. S. Government secu-

rities)

4. 0 1. 3 -.2

2

1 All United States corporations, exclusive of banks and insurance companies. 2 Does not include outlays charged to current account.

TABLE 6.—Sources and uses of corporate funds, 1947-Continued Sources

26.7

Retained profits 8

10.1 Depreciation

4.3 Cash (on hand and in banks).

-1.0 U. S. Government securities_

1.5 Payables (trade): From business.

1.0 From Government

.0 Federal income-tax liabilities.

2.3 Other current liaibilities

.7 Net new issues -

4.1 Total new issues.

6.6 Plant and equipment.

3.3 Working capital.-

1.1 Refunding, refinancing, etc.

2. 2 Total retirements..

2.5 Mortgage loans--

.7 Bank loans (excluding mortgage loans): Long-term

1.4 Short-term

1.6 3 Includes depletion.

Source : Estimates drawn from various sources, largely Commerce and Securities and Exchange Commission.

TABLE 7.Changes in corporate securities outstanding and in their ownership,

1946–47
[Billions of dollars)

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TABLE 8.—Comparison of prewar and postwar relation of stock issues to total amount of new money issues,' 1919-47

All corporations ?

(percent) 1919–28_ 1929 1980-41

25 1946_

42 1947

26

1 New capital issues include issues for the purchase of existing assets. 2 Excluding investment and holding companies. Source : Commercial and Financial Chronicle.

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