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Home -> Neil H. Jacoby -> Business Finance And Banking -> Chapter 1 - continue

Business Finance And Banking - Chapter 1 - continue

1. Preface

2. Summary

3. Part 1 Chapter 1

4. Chapter 2

5. Part 2 Chapter 1

6. Chapter 1 - continue

7. Chapter 2

8. Chapter 3

9. Chapter 3 continue

10. Chapter 4

11. Part 3 Chapter 1

12. Part 4 Chapter 1

Size of Borrowing Concerns

While no direct evidence is available for measuring changes in the
average size of borrowing concerns, certain generalizations can be
made on the basis of indirect evidence. A sample of 84 large manu-
facturing corporations shows that they were relatively heavy bank
borrowers in 1920 and 1937, years of rapidly accelerating asset ex-
pansion (Table 12). However, their relative importance among
all business borrowers declined during the twenties and again in the
late thirties} by 1939 their borrowings were less important than in
1914. Apparently the growth of the large business concern in this
sector of the economy was insufficient over the entire period to main-
tain the relative importance of large companies among bank bor-
rowers, because large concerns, individually, were becoming less
dependent on banks for short-term credit.

An indication that the average size of borrowing concern may
have increased is found in the fact that the finance company and the
transportation and other public utility industries rose in importance
among bank borrowers; the major share of the business of all these
groups was conducted by concerns of large and increasing average
size. On the other hand, listings in the Reference Book of Dun 6?
Bradstreet) Inc. reveal that between 1920 and 1940 wholesalers,
traditionally frequent and heavy borrowers from banks, declined
in average size, as measured by net worth, and that service concerns,
which are typically small, increased markedly in their relative
frequency in the business system. The significance of this latter
development is lessened, of course, by the fact that in 1 940 service
concerns still accounted for a very small segment of the demand for
credit from banks.

The relative importance of these conflicting developments cannot
be weighed definitely, and therefore it is impossible to reach a final
conclusion as to the average size of borrowing concerns in 1940
compared with 1920. Study of the American business credit market
around 1940 (Chapter i) has shown that small and medium-sized
concerns were the predominant users of business credit at that time.
Perhaps the most that can be said is that there is no positive evi-
dence to suggest that this condition was different in 1920.

Security for Loans

Since loan statistics for early years refer only to total loans and
discounts, a study of trends in secured loans to business as
distinguished from other loans cannot be made, but data on total
loans and discounts of national banks indicate that collateral secu-
rity tended to become more important. Among this group of banks
the proportion of secured loans to total loans rose from 41.1 per-
cent in 1900 to 55.2 percent in 1940. Most of this increase was
attributable to the growth in the relative importance of real estate
loans. But total loans and discounts exclusive of those secured by
real estate mortgage collateral also reveal a trend toward greater
use of security devices; the proportion of secured loans to total
loans and discounts of national banks, exclusive of loans secured by
real estate, rose from 40.8 percent in 1900 to 52.9 percent in 1930
and then fell back to 43,2 percent in 1940. The rise to the peak in
1930 no doubt reflected the growing importance during the twenties
of loans secured by stock exchange collateral.

Maturity of Loans

Of special significance is the fact that the average contractual matu-
rity of bank loans tended to increase in the period under review. Ac-
cording to reports to the Comptroller of the Currency, about 57

percent of all bank loans in 1913 were made with original maturi-
ties of less than 90 days. In view of the relative unimportance dur-
ing those early years of loans secured by stock exchange and real es-
tate collateral, it seems reasonable to assign these over-all percent-
ages to business loans, i.e., to say that in 1913 about 57 percent of
bank loans to business were made with original maturities of 90 days
or less. In 1940, on the other hand, about one-third of the com-
mercial and industrial loans of all commercial banks consisted of
term loans with original maturities exceeding one year. On the
assumption that one-half of the 1 940 loans with maturities of less
than one year carried original maturities of more than 90 days, loans
with maturities of 90 days or under can be estimated as comprising
only slightly more than 30 percent of all business loans in 1940,
contrasted with 57 percent in 1913.


Credit Outstanding

Medium- and long-term business credit outstanding rose sharply
and fairly continuously between 1900 and 1940. The set-back that
occurred in the depression years of the 1930*8 was followed by an
increase which by 1940 carried total outstandings, including bank
term loans, to a figure five times greater than in 1900 (Table 13).
Coincident with this long-run expansion were significant shifts in
the sources from which medium- and long-term business credit was
acquired. The principal changes were a considerable decline in the
proportion of such funds acquired from the public, and an increase
in the proportion acquired from financial institutions. Life insurance
companies, whose assets increased nearly eleven- fold between 1906
and 1940, played an outstanding role in this increasing institution-
alization of the investment process.

Character of Debt

The changing character of medium-term and long-term business
debt may be measured by changes in outstanding corporate bonds
and bond offerings during the period 1900-1940. The tendency
after 1900 was for the average size of outstanding corporate bond
issues to increase. Medium-term issues, that is those with an original
maturity of from i through 15 years, rose in median size from
$3.8 million in 1900 to $17.0 million in 1939, while issues of long
term, that is those with an original maturity of over 1 5 years, rose
during the same period from $15.0 million to $32.1 million. These
observations are confirmed by data on yearly offerings. Bonds of
under $i million represented 13.6 percent of all amounts offered
in 1900, 9.4 percent in 1910, 6.7 percent in 1920, 2.1 percent in
1930, and 0.9 percent in 1938. The average asset size of corpora-
tions issuing bonds also increased: the median size of concerns
issuing medium-term bonds rose from $68 million to $163 million,
while the median size of concerns issuing long-term bonds rose
from $83.5 million to $191 million.

During the same period marked changes occurred in the indus-
trial composition of the corporate bond market. Among issuers of
medium-term bonds the order of relative importance in 1 900 was
railroads, first; other public utilities, second; and manufacturing
concerns, third. By 1939 this order was wholly reversed, with
manufacturing in first and railroads in third place, and with the
distributive and service industries in a position of far greater
importance than in 1 900. Among issuers of long-term bonds, pub-
lic utilities replaced railroads as the most important single industry;
distributive and service industries grew substantially in importance;
and within the manufacturing group the relative importance of such
industries as chemicals, petroleum, rubber, and iron and steel in-

The term to maturity of corporate bonds tended to become less
dispersed and to concentrate at the intermediate level, both the very
short and the very long maturities being less important components
of the total at the end of the period than at the beginning. Finally,
there was a marked tendency away from secured issues, which fell
from 91 percent of total outstandings in 1900 to 42 percent in
1939, and a clear tendency, especially among medium-term bonds,
for refinancing issues to increase in relative amount.

Since these data refer to all corporate debt securities outstanding
or offered during the period, no direct inferences are possible con-
cerning changes in the characteristics of corporate debt securities
held by commercial banks. Not only would the exercise of manage-


rial judgment lead banks to hold something other than a random
sample of outstanding securities, but banks have been subject to
changing legal limitations over the years, which have affected their
freedom in investment policy. The character of this legislation will
be reviewed in Chapter 8 ; in general it served increasingly to limit
banks to the holding of bonds of relatively high grade. A reasonable
conclusion, therefore, is that data on the composition of their port-
folios, if available, would reveal the same broad shifts shown by
data on all outstanding bonds, namely, tendencies toward larger
size of issue and of obligor and toward intermediate-term issues
(from five to fifteen years) which would frequently be unsecured.

Direct Lending to Business

In the thirties an outstanding development in the long-term seg-
ment of the business credit market, which apparently had no paral-
lel in the short-term segment, was the growth in the relative impor-
tance of direct lending, in contrast to the acquisition of funds in
the open market. Private placements of corporate securities
accounted for 29.2 percent of the total gross proceeds of all corpo-
rate securities issued in 1934-355 the percentage rose to 42.4 per-
cent in 1942-43, and then fell to 31.2 percent in 1943-44.

After 1934 certain shifts occurred in the general character of
issues privately placed and in the agencies active in this market, but
the data pertaining to the shifts are not wholly satisfactory and the
period for which they are available is so short that it is hazardous
to venture definite conclusions as to the direction of change. In
general, the insurance company seems to have become a more im-
portant factor in the private placement market, accounting for an
estimated 60 percent of private placements in 1934 and about 87
percent in 1939 and 1940. Somewhat erratic variation is found in
the industrial composition of private placements; on the whole,
industrial corporations became a smaller proportion of the total,
and public utilities a larger proportion. Data are not available on
the average size and term to maturity of private placements and on
changes in these features of the issues over recent years.

In the medium-term field the term loan grew from negligible
amounts in 1933 to a point where, in 1940, such loans held by com-
mercial banks equaled one-half of all corporate securities held by the


banks. However, the period for which data on these credits are avail-
able is short and it is again hazardous to venture generalizations on
changes in the nature of the market up to 1940. The evidence sug-
gests, at least, that the tendency was for term loans to be made in
smaller average amounts, increasingly to smaller companies, and,
toward the end of the period, increasingly for new money as con-
trasted with refinancing purposes.


In order to study changes in the functional position of the com-
mercial banking system since 1 900, it is convenient to divide bank
assets into the broad categories of "business" loans (including loans
to financial enterprises other than banks), loans secured by real
estate, other loans (including agricultural loans and loans secured
by stock exchange collateral), "business" securities, and other
securities. A further breakdown which would separate out loans on
stock exchange collateral, consumer loans, term loans, and various
types of investment securities would be useful, but the principal
purposes of this study are satisfied by the broad categories indicated.
The data presented in Charts 21 and 22 cover national banks only
an unavoidable limitation since this is the only group of banks
for which satisfactory estimates of this distribution of assets for
earlier years can be made. Nonetheless these data may be taken as
fairly representative of the commercial banking system as a whole.
The history of structural change between 1900 and 1940 in the
assets of commercial banks falls naturally into five fairly distinct
periods: 1900-1915, 1916-22, 1923-28, 1929-35, and 1936-40.
From 1900 to 1915 nearly all types of bank assets grew at about
the same rate which, considering the length of the period, reflects a
remarkable stability in the functional position of the banking sys-
tem. 14

14 The increase in total assets of national banks during this period amounted to
about $450 million, annually, or an average rate of 6 percent per year. The average
rate of increase for business loans also was about 6 percent, and the volume expanded
on the average by about $150 million, annually. When holdings of business securities
are added to business loans, the average annual increase of this combined series is found
to be $190 million, or an average annual rate of about 7 percent. The average annual
rate of growth for these series, as estimated here, is based on the assumption that the
series increased at a constant rate each year.
Changes after 1900 in the earning assets of national banks fall
into five distinct periods. In the first three periods business loans
plus bank investments in private corporate securities rose almost
continuously; it was not until after 1929 that a sharp decline

In the period 1916-22, seven years of war and postwar readjust-
ment, nearly all bank assets shared alike in expansion and contrac-
tion j during 1 920, however, business loans made by banks expanded
somewhat more than assets as a whole. 15 As revealed in the preced-
ing analysis the changes in corporate financial structure which took
place during the entire period particularly those changes that
represented the impact on credit demands of rising commodity

15 Over the entire seven-year period the annual increase for total assets of national
banks averaged $1,270 million 5 that for loans to business, $370 million j and that for
loans to business plus holdings of business securities, $460 million. In each case the
average dollar increase represented an average annual rate of growth of about 8
During the twenties, bank holdings of business securities rose
. relative to other assets, but not enough to offset the relative de-
cline of bank loans to business.

prices and inventory values were such as to increase demands for
short-term relative to long-term financing. But while the asset
structure of banks underwent fairly substantial changes within this
period, the structure at the end was very much like that which had
prevailed at the outset.

Significant changes set in, however, during the period 1923-28.
Despite the fact that the average annual rate of total asset growth
of national banks was almost equal to the 1900-1915 rate (5 per-
cent annually, compared with 6 percent in the earlier period), the
rate of growth of loans to business (2 percent) was considerably less
than in the earlier years. It is this structural change in bank assets
which is frequently referred to as the "decline" of the commercial


loan. The decline, however, was merely a loss of relative position
by the "business" loan, and was attributable entirely to the greater
growth of certain other commercial bank lending functions, namely,
loans secured by real estate and by stock exchange collateral, and
heavier investment in corporate securities.

The tendency for bank holdings of business securities to increase
during the years 1923-28 is especially noteworthy. When these
assets are added to bank loans to business, the total is found to have
increased at an average annual rate of 5 percent, which is not far be-
low the average rate of increase during the period 1900-1915.
Since the rate of growth for this combined series in the period
1923-28 was the same as that for total bank assets, its relative
position among bank assets at the end of the period differed little
from that at the beginning. This stability, however, veiled a signifi-
cant change in the way in which banks met their continuing business
financing function. During the period, the function was met in-
creasingly through the purchase and holding of private corporate
securities and the extension of credit on the security of stock ex-
change collateral and real estate mortgages and, relatively speaking,
decreasingly through the extension of business loans of traditional
form. Again, this behavior of bank assets reflects shifts during those
years in corporate asset structure and financial policy. As reviewed
above, all these changes seemed to conspire against the growth of
short-term credit and to promote the more extensive use of medium-
and long-term funds, in the form of debt or equity.

In the years 1929-35 business loans and private corporate secu-
rities declined more than total bank assets, and in 1936-40 they
failed to recover at as fast a rate and as persistently as total bank
assets. The result is that, while the relative importance among com-
mercial bank assets of business loans and business securities, com-
bined, did not differ markedly in 1928 from what it was in 1900
(37 percent of total assets in 1928 compared with 36 percent in
1900), in 1940 it had fallen to but 18 percent of total bank assets.
It is useful, nevertheless, to distinguish between the periods
1929-35 and 1936-40, because in the latter period the absolute
amount of bank loans to business was increasing, in sharp contrast to
the years 1929-35 when liquidation by the business economy of its
indebtedness to banks was almost uninterrupted.

Possibly a more effective measure of the changing stake of the



commercial banking system in Chart 23 GROSS INCOME OF NA-
the business credit market would TIONAL BANKS BY S UR CES,

be provided by data on the in-
come derived by banks from van-
ous types of assets. Such an analy-
sis is impossible, however, since
in distinguishing between income
from loans, investments, and fees
a further distinction cannot be
made between income earned on
funds and services extended to
business enterprises for business
purposes and income earned from
other sources, e.g., from con-
sumer loans, government securi-
ties, and the like. In general, the
outstanding facts about the data,
as shown in Chart 23, are, first,
that the relative importance of in-
come from loans and that from
investments remained practically
stable until 1930; second, that
between 1931 and 1935 the for-
mer lost ground to the latter in a spectacular fashion} and, third,
that this shift in the relative importance of income sources was
checked and even reversed slightly in the last of the periods which
we have selected for our analysis of bank assets, namely, 1936-40.


The years 1931-35 witnessed a
rise in the importance of in-
vestments and a decline in the
importance of loans as sources
of bank income. Income from
services tended persistently to
rise after 1920.

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