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Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

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'^^Sd SessSn**} SENATE COMMITTEE PRINT 

INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



TEMPOKARY NATIONAL ECONOMIC 
COMMITTEE 

A STUDY MADE FOR THE TEMPORARY NATIONAL 

ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS, 

THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION 

NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING 

AND DIRECTING A SELECT COMMITTEE TO MAKE A 

FULL AND COMPLETE STUDY AND INVESTIGATION 

WITH RESPECT TO THE CONCENTRATION OF ECONOMIC 

POWER IN, AND FINANCIAL CONTROL OVER, 

PRODUCTION AND DISTRIBUTION 

OF GOODS AND SERVICES 



MONOGRAPH No. 37 
SAVING, INVESTMENT, AND NATIONAL INCOME 



Printed for the use of the 
Temporary National Economic Committee 




^^3d SfoT^} SENATE COMMITTEE PRINT 



INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



lil TEMPOEARY NATIONAL ECONOMIC 
COMMITTEE 

A STUDY MADE FOR THE TEMPORARY NATIONAL 

ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS, 

THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION 

NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING 

AND DIRECTING A SELECT COMMITTEE TO MAKE A 

FULL AND COMPLETE STUDY AND INVESTIGATION 

WITH RESPECT TO THE CONCENTRATION OF ECONOMIC 

POWER IN, AND FINANCIAL CONTROL OVER, 

PRODUCTION AND DISTRIBUTION 

OF GOODS AND SERVICES 



MONOGRAPH No. 37 
SAVING, INVESTMENT, AND NATIONAL INCOME 



Printed for the use of the 
Temporary National Economic Committee 




UNITED STATES 

GOVERNMENT PRINTING OFFICE 

WASHINGTON : 1941 



^l^\,r FEB 2 1942 



TEMPORARY NATIONAL ECONOMIC COMMITTEE 

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman 

HATTON W. SUMNERS, Representative from Texas, Vice Chairman 

JAMES M. MEAD, Senator from New York 

WALLACE H. WHITE, Jr., Senator from Maine 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 

*HXJGH COX, Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 
*SUMNER T. PIKE, Commissioner 
Representing the Securities and Exchange Commission 
GARLAND S. FERGUSON, Commissioner • 

*EWIN L. DAVIS, Chairman 
Representing the Federal Trade Commission 
ISADOR LUBIN, Commissioner of Labor Statistics 
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General^Counsel 

*CHARLES L. KADES, Special Assistant to the General Counsel 

Representing the Department of the Treasury 

WAYNE C. TAYLOR, Under Secretary of Commerce 

•M. JOSEPH MEEHAN, Chief Statistician, Bureau of Foreign and Domestic Commerce 

Representing the Department of Commerce 

* « * 

LEON HENDERSON, Economic Coordinator 
DEWEY ANDERSON, Executive Secretary 
THEODORE J. KREPS, Economic Adviser 



•Alternates. 



II 



Monograph No. 37 
SAVING, INVESTMENT, AND NATIONAL INCOME 

BY 

*;: : : *.■ *;i ;*•, 
Gt}f.F&C4 to pM^t.^at; ;-.;-. 



ACKNOWLEDGMENT 



This Monograph was written by 

OSCAR L. ALTMAN 
Senior Economist, National Resources Planning Board 

The Temporary National Economic Committee is greatly indebted 
to the author for this contribution to the literature of the subject 
under review. 

The status of the materials in this volume is precisely the same as that 
of other carefully prepared testimony vjhen given by individual witnesses; 
it IS information sabmdtted for Committee deliheroiion . No matter vjhat 
the official capacity of the witness or author may be, the publication of 
his testimony, rejjort, or monograph by the Committee in no way sig- 
nifies nor implies assent to, or aptproval of, any of the facts, opinion,s, or 
recommendations, nor acceptance thereof in whole or in part by the 
niembers of the Temporary National Economic Committee, individually 
or collectively. Sole and undivided responsibility for every statement 
in such testimony, reports, or monographs rests entirely upon the respec- 
tive authors. 

(Signed) Joseph C. O'Mahoney, 
Chairman, Temporary National Economic Committee. 



TABLE OF CONTENTS 



Pas* 

Preface _ ix 

PART I 

Saving, investment, and national income . 1 

The problem 1 

The materials 2 

The flow of income 3 

Consumption, investment, and national income 8 

PART II 

Volume and components of saving 11 

Volum.e of saving 12 

Components of the savings stream 15 

Concentration of the components of the savings stream 15 

Concentration of savings by individuals 16 

Concentration of savings by trusts 19 

Concentration of savings by business enterprises.-. 20 

Concentration of gross saving by governments 24 

Concentration, taxation, and saving 25 

PART III 

The flow of savings 29 

The flow of savings through capital markets 29 

The role of capital markets ^ 29 

Savings through financial institutions 31 

Concentration through financial institutions 33 

Geographic concentration 33 

Concentration in the larger institutions 34 

Concentration through management and investment policies of 

life insurance companies 35 

Management of life insurance companies 36 

Interlocking relationships of officers and directors 37 

Nomination and election of directors 38 

Investment policies of life insurance companies 39 

Legal requirements 40 

The supply of securities 42 

Specific investment policies and practices 43 

Cash 44 

Government bonds 44 

Corporate bonds and notes 45 

Policy loans 45 

Urban mortgages 47 

Farm mortgages 48 

Summary 49 

Internal financing of business investment 50 

Significance of internal financing 50 

Internal financing of selected corporations 51 

Internal financing by all business enterprises 56 

Recent trends in the capital markets 58 

Interest and dividend rates 58 

Commercial banks and commercial loans 60 

Investment banking 61 

V 



VI TABLE OF CONTENTS 

PART IV 

Page 

Volume, direction, and control of investment 67 

Investment, consumption, and productive capacity 67 

Investment, the flow of income, and consumption 67 

Gross and net investment and productive capacity 69 

Volume and direction of investment 71 

Volume of investment and other offsets to saving since 1919 71 

Direction of investment and other offsets to saving since 1919.. 73 

Major fields of investment and offsets to saving 73 

Plant and equipment 74 

Residential construction 76 

Public construction 79 

Consumer credit 82 

Foreign investment 83 

Concentration of business investment and investment decisions 86 

Factors governing the level of investment 92 

General factors 94 

Growth of new industries 94 

Growth and shifting of population 95 

Changes in productivity and price levels 97 

Cost-price relationships 99 

Special factors 100 

Factors responsible for the prosperity of the twenties 104 

PART V 

Conclusion 107 



SCHEDULE OF TABLES 



Pace 

1. Gross national product and capital formation, 1919-40 13 

2. Relationship between offsets to saving and national income, 1921-39-. 14 

3. Aggregate income and savings of American consumers by 15 income 

levels, 1935-36 17 

4. Amount of income and share of total individual income received 

by the highest 1 percent of income recipients, 1918-37 18 

5. Savings by all fiduciaries in 1937 19 

6. Fiduciary incomes reported by individuals with net incomes of more 

than $6,000 and by those wfth incomes of less than $6,000 in 1937.. 20 

7. Changes in assets or funds in the principal savings institutions in the 

United States, 1922-39 32 

8. Geographical concentration in the control over four principal reservoirs 

of saving, 1937 34 

9. Net change in the outstanding amount of the principal classes of 

securities, 1933-39 42 

10. Summary of the sources and uses of funds of the Bell System, 1923-39-- 55 

11. Financing business investments in plant and equipment, 1923-39 57 

12. Interest yields on long-term United States Governments, high grade 

municipals, and Moody's Aaa corporates, 1929-39 59 

13. New, refunding, and "productive" capital issues by domestic cor- 

porations, 192 1-39 62 

14. Corporate bonds placed privately and offered publicly, 1934-39 63 

15. Corporate bonds and notes issued and placed privately, 1934-40 63 

16. Gross national product, capital formation, and consumers' outlav, 

1919-40 1- 68 

17. Gross and net capital formation, 1919-40 70 

18. Business gross capital formation, capital consumption, and net capital 

formation (excluding inventories), 1919-38 71 

19. Gross capital formation in current and 1929 dollars, 1929-38 72 

20. Major components of Kuznets' estimate of gross capital formation, 

1923-29, 1929, and 1937 73 

21. Composition of income-producing expenditures that offset savings, 

1925, 1929, 1937, and 1939 74 

22. Expenditures for new residential construction and number of nonfarm 

dwelling units constructed, 1920-39 77 

23. Construction of nonfarm residential units, by regions, 1924-26, 1936-38, 

and 1939 -- 77 

24. Total construction and the amount and sources of funds for public 

construction, 1920-39 80 

25. Uses of funds for public construction, 1920-39 81 

26. Amount and types of consumer credit, 1920-39 83 

27. Net commodity and service balance of trade, gold and silver move- 

ments, and capital movements, 1919-38 84 

28. Business investment in plant and equipment in major segments of the 

economy, 1923, 1929, and 1937 87 

29. Output of business capital goods in 1929 classified by length of expected 

useful life 93 

30. Population and amount of increase of population, by decades, 

1790-1980 96 

31. General index of the prices of business capital goods, 1920-39 98 

VII 



APPENDIXES 



Page 

Appendix I. Components of savings, 1925-29, and 1935-39 110 

II. Composition of gross saving by governments, 1921-39 111 

III. Number of fiduciary returns and undistributed compiled in- 

come of fiduciaries by balance income classes, 1937 111 

IV. Cumulative percentage distribution of undistributed com- 

piled income of all fiduciaries filing tax returns on Form 

1041, by balance income classes, 1937 112 

V. Gross savings by all, net income, and no net income non- 
financial corporations, 1923-37 113 

VI. Distribution by asset groups of gross savings by all non- 
financial corporations, 1931-37 114 

VII. Distribution by asset groups of gross savings by all non- 
financial corporations reporting a net income, 1931-37 115 

VIII. Distribution by asset groups of gross savings by all non- 
financial corporations reporting no net income, 1931-37-- 116 
IX. Distribution bv asset groups of gross savings by all corpo- 
rations, 1931-37 117 

X. Distribution by asset groups of gross savings by all corpo- 
rations reporting a net income, 1931-37 118 

XI. Distribution by asset groups of gross savings by all corpo- 
rations reporting no net income, 1931-37 119 

XII. Assets or funds in the principal savings institutions in the 

United States, 1922-39 120 

XIII. Sources and uses of funds of 58 industrial companies, 1930- 

39 121 

XIV. Sources and uses of funds of the Bell Telephone System, 

1923-39 122 

XV. Kuznets' estimates of gross capital formation, classified by 

seven major types, 1919-38 123 

XVI. Income-producing expenditures that offset saving, and gross 

national income, 1921-39 124 

XVII. Terborgh's estimates of expenditures for new durable goods, 

classified bj' five major types, 1919-39 125 

XVIII. Estimated expenditures for new durable producers' goods, 

1919-39, plant and equipment 126 

XIX. Estimated expenditures for new durable producers' goods, 

1919-39, plant 127 

XX. Estimated expenditures for new durable producers' goods, 

1919-39, equipment 127 

vin 



PREFACE 



In May 1939 one question dominated the T. N. E. C. hearings 
underlying' this study — why the United States continued to have idle 
men and idle machinery, why the United States did not reach out for 
the economic security, the personal opportunity, the health, and the 
standard of living that were within reach. 

That question has been changed. MiUions of Americans now ask 
whether we have enough idle men and enough idle machines to produce 
planes, ships, guns, and other military requirements without reducing 
our standard of living. The question is posed currently in terms of 
butter and guns. Can we produce both guns and butter, or must we 
sacrifice butter to guns? And if sacrifice is called for, to what extent 
is it the result of the fear that after the defense program has ended 
swords will be beaten into plowshares and factories designed for guns 
will produce too much butter? 

This study discusses the interrelationships of savings, investment, 
and the level of national income. It points out that the United States 
is a high-savings economy. Concentration has helped make it so. 
The distribution of income, the distribution of wealth, the incidence 
of the tax structure, the pattern of savmg habits, the institutional if 
not automatic character of much of individual saving, and the large 
amount of saving by corporations result m a large volume of savings 
at high levels of national income. To preserve the level of national 
income that makes this large volume of savings possible, it is indis- 
pensable that current savings be invested or otherwise offset. The 
amount of income not currently spent for consumption — the amount 
of mcome saved— must currently be returned to the income stream. 
During the twenties a large volume of oft'sets to savings was forth- 
coming. By the end of the twenties many of these outlets were con- 
tracting, and the depression followed. By the end of the thirties a 
multitude of inconspicuous changes and technological advances, 
unheralded by fanfares of stock speculation and nonproductive security 
flotations, had raised the level of consumption to a new high, but the 
failure to develop offsets to saving in the volume required by our 
savings potentiahties meant that our peak of consumption was 
reached without full employment. 

The intoxication of a national defense program must not obscure 
the fact that the United States did not solve this peacetime problem. 
The problems of attaining full employment, an unbroken circulation 
of income, and a stabilized, high level of economic activity have been 
shelved, not solved. They will reappear. They may reappear under 
more dangerous political conditions. They will have to be solved. 
In the meantime, this study may perhaps contribute something to 
understanding whether we can have more guns and more butter and 
at what point it is necessary to decide between one and the other. 



X PREFACE 

The body of this study was originally designed for publication in 
the fomi of chapters on savings and on investment in the summary 
report of the T. N. E. C. These chapters were rearranged and some- 
what expanded on short order into this monograph. Some of the 
peculiarities of arrangement and some of the madequacies of treat- 
ment may be explained on these accounts. 

Herbert Goodman was of great assistance in the collection and 
analysis of data, Mrs. Marguerite Coker typed the manuscript. 

Oscar L, Altman. 



PART I 
SAVING, INVESTMENT, AND NATIONAL INCOME 

The Problem 

Saving and investment are two of the most important factors 
determining the level of national income, the volume of production, 
and the amount of unemployment. The range of questions involved 
in these problems is suggested by the following list: 

A. With respect to the flow of national income: 

1. "VYliy must all current income be spent for consumption 

or capital goods, and why do the amounts so spent 
affect the level of national income and employment? 

2. Do hoarding and bank credit affect the level of national 

income and employment? How? 

3. Does full employment depend upon an expansion of 

investment? 

B. With respect to saving: 

4. How much of the national income is saved and by 

whom? 

5. Has taxation changed the volume and source of saving? 

C. With respect to the flow of savings toward investment: 

6. Through what channels do savings flow toward invest- 

ment? What is the function of the capital markets? 

7. Into what reservoirs and institutions do individual 

savings flow? Are these reservoirs and institutions 
concentrated? How are they controlled? 

8. How much do corporations save? To what extent 

does their expansion depend upon tapping the savings 
of others through the capital markets? 

D. With respect to investment: 

9. How much is invested year by year for the economy 

as a whole, and in what directions? 

10. Was the great depression brought on by a decline in 

investment? Was the recovery from 1933 to 1937 
and after 1938 accompanied by an expansion of 
investment? What kind of investment? 

11. Wliat factors govern the level of investment? Has the 

rate of investment declined? If so, in what fields? 
Are the causes temporary or permanent? 

12. How can opportunities for investment in private enter- 

prises be expanded? How can opportunities for 
public investment be expanded? 

13. Should the proportion of the national income used for 

purposes of consumption be increased? How? 



2 CONCENTRATION OP ECONOMIC POWER 

The Materials 

The Temporary National Economic Committee collected a large 
amount of material bearing on these questions. Witnesses before 
the committee testified that a large volume of investment was neces- 
sary, with present income levels and savings practices, to achieve a 
high standard of living and to eliminate unemployment. They dis- 
cussed both the type and the advisability of changes in fiscal, monetary, 
and business policies needed to reduce the amount of investment 
required for full employment. There was a considerable body of 
testimony dealing with conditions afl'ecting saving and investment 
in specific sectors in the economy. There was testimony, for example, 
on the effect upon the capital markets of savings by large corporations; 
upon the extent of concentration of savings through financial insti- 
tutions, particularly life insurance companies, and upon the effects 
of this concentration; upon the economic results of the present legal 
requirements governing the employment of the assets of savings 
institutions; and upon the effects of concentration through the func- 
tioning of large business enterprises, the patent system, and various 
types of trade practices. 

The materials bearing on saving, investment, and national income 
in the T. N. E. C. record were supplemented by some of the special 
studies prepared for the Committee. The studies of taxation, 
concentration of incomes, profits, life insurance, and financial char- 
acteristics of industry should be mentioned in this connection.^ 

Despite the large amount of information contained in the hearings 
and monographs, many important questions bearing upon the subject 
of this study remain almost untouched. For example, little is known 
of the criteria that in day-to-day business operations govern invest- 
ment decisions. Data on the amount saved by individuals at 
different income levels are indispensable for any study of the concen- 
tration of savings; but the existing data need extension and refine- 
ment. The effects of taxation in increasing or decreasing concentra- 
tion of income and wealth within the past two decades call for intensive 
investigation. 

But perhaps the greatest difficulty in dealing with the relationships 
of saving and investment to national income and employment is re- 
flected by the controversies that have buffeted the subject. Disagree- 
ment over alternative recovery and expansion policies, whether based 
on rational or irrational grounds, on knowledge or ignorance, has 
muddied the waters of analysis. The extent of this difficulty is not 
reduced because the words commonly used to discuss the problem 
are used in many dift'erent senses. For example, we think that buy- 
ing a bond has the same effect upon employment as building a house 
(we call both investment). We too often imply that a business enter- 
prise invests when it buys (or builds") plant and equipment, but that 
a government that does the same thing only spends; that individuals 
can save but governments cannot; and that hoarding by some does 
not result in the unemployment of others. 

1 Temporary National Economic Committee monographs: No. 3, Who Pays the Taxes? by Gerhard 
Colm and Helen Tarasov; No. 4, Concentration and Composition of Individual Incomes, 1918-37, "by Adolph 
J. Goldenthal; No. 12, Profits, Productive Activities, and New Investment, by Martin Taitel; No. 15, 
Financial Characteristics of American Manufacturing Corporations, by Charles L. Merwin, Jr.; No. 20, 
Taxation, Recovery, and Defense, by Dewey Anderson; and No. 28, Study of Legal Reserve Life Insurance 
Companies, by Gerhard Gesell and Ernest Howe. 



CONCENTRATION OP ECONOMIC POWER 3 

The Flow of Income 

The modern economy is a money economy. It is clmracterizcd by 
an elaborate division of labor and the organization of economic 
activity through business enterprises, principally corporations. 
Capital goods — factories, railroads, machines, roads — play a dominant 
role. The economy draws upon large amounts of power and energy 
from coal, oil, and water. 

The economic result of the interaction of these factors is the 
national income. The national income, which was approximately 
$74,000,000,000 in 1940, may be regarded both as the value of our 
productive activities and as the value of our claims against the results 
of these activities. 

The majority of the claims to the national income were paid out in 
cash, in the form of wages, salaries, dividends, interest, rent, royalties, 
and entrepreneurial withdrawals; but several million individuals, 
farmers and hired hands, for example, received some of their income 
in kind, in the form of food and shelter; while some claims against 
the national income, some incomes, rested in the hands of business 
enterprises in the form of retained earnings. The sum of all these 
claims was equal to the value of all the goods and services produced 
during the year, minus the value of all raw materials and of capital 
equipment consumed in the process of production. Allowances for 
the consumption of capital equipment by wear and tear, depreciation, 
depletion, and, to some extent, obsolescence, are deducted in the 
calculation of the national income. Part of the flow of funds to busi- 
ness enterprises for their products is retained to cover these capital 
consumption charges, and the spending of these funds depends upon 
business decisions. The value of the goods and services produced, 
minus the value of all raw materials consumed, but before the deduc- 
tion of depreciation and depletion allowances, is the gross national 
product.^ 

These incomes — individual, business, and governmental — ^are claims 
against all the goods and services produced. Ralph W. Manuel 
stated the relationsliip generallj^ in these words: 

The money in our pay envelope and in our dividend check that we are accus- 
tomed to think of as payment isn't final payment at all, of course. It is only 
incontrovertible evidence of our right to claim in the markets final and absolute 
payment in useful goods and services. Our money economy — or perhaps I 
should say our device of distributing the product through money income— rests 
squarely upon the presumption that the recipients of that money income or those 
to whom they give or trade or lend it will bring it back in due course into the 
markets to claim their product. It is unworkable on any other basis. ^ 

Wliat does the average John Smith do with his income? Most of 
it is quickly spoken for.^ In the average family, rent, food, clothing, 
medical care, education, and recreation accoimt for all the money 
that comes in. Income is quickly spent; nothing is saved. In 
1935-36, for example, the 59 percent of all American families with 
incomes of less than $1,250 on the average spent more than they 
earned. The difference was accounted for by gifts, loans, and trench- 
ing upon past savings. All that Smith earns is used to employ labor 

2 These concepts are discussed in tiie Bureau of Foreign and Domestic Commerce, Income in the United 
States, 1929-35, Washington, 1936, pp. 1-20; Simon Kuznets, National Income and Capital l<ormation, 
1919-35, New Yorlv, National Bureau of Economic Research, 1937, pp. 1-7; and Studies in Income ana 
Wealth, vol. I, New York. National Bureau of Economic Research, 1939. 

3 Hearings before the Temporary National Economic Committee, Part 9, p. 3/09. 



4 CONCENTRATION OF ECONOMIC POWER 

and buy materials; and his income circulates and turns up in the pay 
envelopes of others. 

But what of wealthier families? What does a wealthier John 
Smith II do with his savings out of a larger income? He may keep 
more dollars in Ms pocket; he may deposit them in a bank; he may 
pay an insurance premium; he may buy stocks and bonds; he may 
buy a house, or he may have a new house built; he may pay off his 
debts. \Vlien Smith II builds a new house or improves his old 
house or farm, he invests his savings himself. This results in the 
employment of men and in the payment of incomes to others in ex- 
change for goods and services. But when Smith II places his savings 
in a bank, or pays an insurance premium, or in some other way trans- 
fers his cash savings to someone else, the investment of those savings 
ceases to be John Smith's problem and becomes the problem of our 
savings banks, our life insurance companies, and our other financial 
institutions. 

In the United States today, the family that saves is generally not 
the family that invests. Though the amount of direct investment 
by individuals in farms, homes, and small enterprises is substantial, 
the bulk of their savings is transferred to savings or financial institu- 
tions. A larger proportion of individual savings is transferred to 
institutions now than before 1929. These, in turn, transfer them to 
others for investment. 

Business enterprises retain substantial claims against the gross 
national product, partly labeled depreciation and depletion allow- 
ances and partly labeled retained earnmgs or undistributed profits. 
Those business savings that are invested are, for the most part, 
invested directly. 

Government savings, hi some periods, have been substantial, but 
they are quickly spent for public construction, i. e., invested, or they 
are transferred to others in the communitv through a retirement of 
debt. 

How may income be used? In general, current income may be 
spent currently for goods and services, it may be locked away and 
hoarded, or it may be used to pay off bank debts. (Paying off any 
other kind of debt merely transfers the income from one person to 
another, presenting the second person with these three alternatives, 
but paying off bank debts reduces the volume of bank deposits.) 
When current income is currently spent — whether for consumption 
goods or for investment goods, for baby bottles or gas stations — the 
economy proceeds on an even keel. But if income is hoarded or used 
to pay off bank debts, deflationary forces start to operate. For 
"anyone who saves a part of his income and locks it away, thereby 
withdrawing it from circulation, to that extent exercises a depressing 
influence on prices, even though it may bo infinitesimal a,s regards 
each individual.'' ^ This depressing influence extends to employment 
and output. 

When Lauchlin Currie analyzed this problem in his testimonv before 
the T. N. E. C, he said: 

If we think of the national income as a stream of goods and services, all repre- 
sented by their dollar equivalents, we can take the next step and consider the 
factors that tend to keep the stream going uninterruptedly, and the factors that 
tend to obstruct and divert the stream. When a person earns wages and spends 

* Knut AVickst'll, Lectures on Political Economy, vol. U, New York. Macmillan, 1935. p. 11. 



CONCENTRATION OF ECONOMIC POWER 5 

them for living expenses as rapidly as he receives them, there is no interruption. 
When a corporation takes in money in exchange for the goods it produces and 
disburses it at the same rate for wages, materials, power, and dividends, there is 
no interruption. 

When, however, a part of the wages received or of moncj' realized for sales is 
not disbursed but is retained by the individual either in the form of cash or of 
deposits, or is used to pay off debts, or even if it is invested in securities, there 
may be an interruption in the even flow of the money stream. Whether there is 
or is not depends on whether the money thus withdrawn is kept idle, or hoarded, 
or whether it is returned to the stream through disbursement for new plant and 
equipment, or for renovation or enlargement of existing plant, or offset by the 
expenditure of an equal amount.^ 

There is a close relationship between an even circular flow of money 
and full employment. An economic system that is operating at full 
employment can renlain there if income recipients will currently buy 
what is currently produced. This is not an impossible condition; it 
does not require that housewives may not change from Ivory soap 
chips to Chipso, and that children may not turn from scooters to 
bicycles. Unless people are forced to buy whatever is produced — for 
example, by paying them in claim checks which must be traded 
against goods in a given time — there will always be some dislocations, 
there will always be too much of some commodities and too little of 
others at going prices. But these changes in demand can be met and 
solved with relatively minor price readjustments and redirections of 
output.^ The difficulty in maintaining full employment, once it has 
been reached, is rather that at times income recipients prefer not to 
buy any new goods. They prefer to hoard or to pay oft" bank debts. 
To complicate the matter, the prices of many of the goods that are 
most difficult to sell at such times are inflexible; while the expectation 
that any price reduction will be followed by another and yet another 
puts additional pressure upon flexible prices. As a result, more income 
may be hoarded, or more income may be used to pay off bank borrow- 
ings. A deflationary spiral has been set in motion. 

The preceding discussion has been in terms of the flow of income 
through the community. An unobstructed and continuous flow of 
income will maintain any level of employment. But only at high 
levels of income will an unobstructed and continuous flow maintain 
full employment. 

The explanation of this difl'erence revolves about those uses of 
income suggested by the terms saving and investment. These terms 
will need definition, however, since they are commonly used in more 
than one sense. Saving may be taken as the difl"erence between all 
income (including depreciation funds) arising from production, and 
the amount spent for consumption: for the Nation as a whole, savings 
would therefore be equivalent to gross national product minus con- 
sumers' outlay. Investment may be taken as all outlay other than 
•consumers' outlay. To define savings and investment further it is 
necessary to specify what particular kinds of goods and services, what 
particular kinds of outlays, fall in each class. 

Both investment and consumption involve spending — spending for 
pencils, turbines, movies, vocational training, factories, and spinach. 
There is obviously no hard and fast fine between consumption and 
investment. All of the distinctions assume that human beings are 
the end and not the means of economic activity. We do not com- 
monly consider false teeth an investment, yet in a slave economy 

' Hearings before the Temporarv National Economic Committee, Part 9, pp. 3521-3522. 
« Cf. D. H. Robertson, Banking Policy and the Price Level, London, King, 1926, pp. 6-18. 



Q CONCENTRATION OF ECONOMIC POWER 

false teeth for a laborer might be considered no less an investment 
than an automatic stoker for a coal furnace. For many families tha 
purchase of household furniture represents the largest single invest- 
ment they ever make, yet the most exhaustive study of savings ever 
made in this country classifies such outlays as consumption.^ The 
distinctions between consumption and gross investment are thus partly 
logical, partly purposive, and partly conventional. 

For the purposes of this study, following the studies of Simon 
Kuznets, it is convenient to make the term gross investment include — ■ 

Flow of finished producers' durable commodities — buildings, dynamos, trucks, 
etc.; in general, commodities that, without marked change and retaining their 
essential physical identity, are ultimately employed by business agencies in the 
process of production more than 3 years. 

Flow of residential buildings. 

Net change in stocks of commodities in the hands of enterprises, including raw 
materials, semifinished products, and finished commodities. 

Net change in gold and silver stocks. 

Net change in claims against foreign countries. ^ 

This definition of gross capital formation is the one most generally 
followed, but from some points of view it is clearly too narrow. It 
disregards the fact that "the most important investment of all is 
investment in the health, intelligence, and character of the people." ^ 
From the point of view of postponing expenditures, it should occasion- 
ally be broadened to include such consumers' durable goods as fur- 
niture, jewelry, passenger cars, and the like.^° 

In general, however, gross capital formation (investment) so defined 
includes the bulk of the outlays in modern society that are regarded 
as readily postponable, or that are subject to some degree of profit 
calculations. 

By defining investment, and therefore consumption, in this way, 
one very rough and general distinction appears. Consumers' goods, 
on the whole, will be purchased whenever individuals have adequate 
incomes. If families have incomes they will buy food, clothing, and 
entertainment, and they will pay their rent. But investment or 
capital goods will not necessarily be bought even if families and 
business enterprises have adequate incomes. 

The difference between the gross national product and gross capital 
formation (investment) represents consumption. Accordingly, the 
dift'erence between current income before deduction of depreciation 
and depletion allowances (whether paid out or retained in business 
enterprises) and outlays for consumption represents saving. But 
though, according to these definitions, saving is equal to mvestment — 
as in an accounting sense it must be — the important question in 
considering the level of income and employment is at what level the 
two are equal. The two are equal when the level of national income 
is $40,000,000,000— and there are 15,000,000 unemployed— and they 
would be equal if the level of national income were $100,000,000,000 — - 
when no one would be unemployed. 

' National Resources Committee, Consumer Expenditures in the United States, 1935-36, Washington, 
1939, p. 22. 

8 National Income and Capital Formation, 1919-35, New York, National Bureau of Economic Research, 
1937, pp. 34-39. Cf. the discussion by M. A. Copeland and by Walter Salant in Studies in Income and 
Wealth, New York, National Bureau of Economic Riscarch, 1939, vol. Ill, pp. 295-300, 309-311. 

» A. C. Pigou, Socialism versus Capitalism, New York, Macmillar, 1930, p. 138. 

11 The life of a piano, for example, may be many times longer than that of a machine tool. But the length 
of time for which a present outlay prepays services is surely not a sufficient criterion of investment. If it 
were, should not outlays for vocational training bo classified as investment? On the other hand, even if 
outlays for consumers' durable goods are considered as investment, a substantial part of the funds used to 
pay for them is ad hoc and would not be available if the outlays were not to be made. 



CONCENTRATION OF ECONOMIC POWER 7 

How saving is at all times kept equal to investment determines 
whether income and employment are increasing, decreasing, or just 
holding their own. Suppose an individual does not spend all of his 
income on consumption but keeps part of it in cash. This individual, 
from his own point of view, is saving. But unless this income is used 
to purchase investment goods and services, from the point of view of 
the economy the individual is hoarding. Since the comnnuiity's cuiTent 
income is just large enough to take the current output off the market — 
though in many cases individuals may not know exactly how large 
their incomes for the year will be after taxes and the like — a decrease 
in expenditures through hoarding makes it impossible to sell the out- 
put at current prices. Business enterprises have to reduce output, 
or prices, or both. Employment is curtailed. The rate of operations 
is decreased. Many of the persons who are currently saving — those 
whose savings are being invested as well as those whose savings are 
being hoarded — find that with the changed conditions their income 
falls. They find that the saving they had expected to realize with 
their previous income must now be curtailed. The reasons why 
savings should be affected in these ways are clear. Business enter- 
prises take inventory losses. Profits decline or turn into losses. The 
incomes of wage and salary workers are reduced. Unemployed 
workers and bankrupt and other business enterprises are forced to 
sell their possessions, thus absorbing a good part of the savings made 
by more fortunate individuals. Many people go into debt to pay 
for food, rent, clothing. In these ways the amount of new saving 
decreases, while an increasing amount of new saving is canceled by 
debts or by drawing upon old saving. The process of contraction, 
in other words, is not a voluntary one. The process of contraction 
will, in fact, continue until the whole community is forced to reduce 
its saving to an amount that can currently be absorbed. Saving 
decreases both in dollar amount and in proportion to national mcome. 
Thus depression forces people to reduce their saving by the poverty 
and distress it creates. ^^ 

A certain amount of income always goes into hoards. There is 
always a certain amount of income which for the time being is sub- 
tracted from current income. Yet there have been times when the 
community has operated at very high levels of employment and output. 
How may this be explained? In the first place, hoarding changes 
greatly in relative importance during the business cycle. At some 
stages of the business cycle current hoarding may be more than offset 
by dishoarding. But more important is the fact that there has been 
in the past an important counter-force to hoarding: the creation of 
new money by the banking system. Some individuals may have been 
reducing the income stream by putting money into hoards, but others 
were adding to the income stream by spending the new money they 
persuaded the banks to create for them. 

In some periods whatever hoarding takes place is exactly offset by 
the creation of new money. The income stream remains unchanged, 
and subject to the minor economic dislocations which always occur, 
the economic machine continues to operate at its current level. But 
bank credit and hoarding do not usually maintain such a nice balance. 

1' See J. M. Keynes, The General Theory of Unemployment, Interest, and Money, New York, Harcoiu"t, 
Brace, 1936; Oskar Lange and F. M. Taylor, On the Economic Theory of Socialism, Minneapolis, University 
of Minnesota Press, 1938, pp. 108-109. 

291143 — 41 — No. 37 2 



g CONCENTRATION OF ECONOMIC POWER 

When bank credit increases during the upswing, it tends to be greater 
than hoarding. Wlien the new money (bank credit) more than 
offsets hoarding, the mcome stream swells, and the level of economic 
activity rises. The volume of investment increases, and the volume 
of savings increases correspondingly. In a situation of this type it 
is precisely the injection of new purchasing power into the system 
that makes it possible for hoarders to subtract current purchasmg 
power without throwing the economic machine into lower gear. 
But the fact that hoardmg goes on reduces the stimulative effect of 
the bank credit. 

This is not the place for any extended discussion of the role of bank 
credit.'- The subject is mentioned here because without it no dis- 
cussion of saving and investment can be complete. Bank credit — new 
money — may offset hoarding in some periods, maintaming the con- 
tinuity of the income stream. The community pays a high cost, 
however, for its bank credit mechanism. Its motor is erratic. On 
the one hand, it may throw deflation into a power dive. For the 
bank credit mechanism may, and in periods of downswing does 
reinforce hoarding. Part of the current income stream is diverted to 
pay off bank loans, and the supply of money decreases. The balance 
of cm-rent income cannot take all the currently produced output oft" 
the market at current prices. Prices fall. Output decreases. Credit 
requirements become increasingly stringent. The first cycle is re- 
peated; and the economic recession becomes a rout. On the other 
hand — and this is more important at the present moment — it may 
accelerate the climb into rising prices and inflation. Financing both 
public and private expansion with bank credit swells the income 
stream, increasing the volume of funds directed to consumption and to 
investment. At first this will expand output, and produce more butter 
and more guns. But if the increasing national defense efforts prevent 
a corresponding expansion of the output of consumption and the usual 
investment goods such as construction, equipment, and mventories, 
prices will rise. The price rise will become serious if credit is used after 
full employment is reached. The remedy at that point will be to 
prevent the increases in the income stream resulting from defense 
outlays from expanding consumption and private investment. This 
may require heavier taxation, stimulation of the volume of savings 
to be exchanged for Government securities, and rationing. 

Consumption, Inves^tment, and National Income 

All the witnesses before the Temporary National Economic Com- 
mittee agreed that savings must be retiu'ned to the income stream — • 
spent for investment goods or in other ways offset — if the level of 
national income is to be maintained. Alvin H. Hansen stated this 
fundamental proposition as follows: 

It is highly essential that all that part of the current flow of income which is not 
expended on consumption goods, namely that part which is saved, shall be ex- 
pended either directly by the saver himself or indirectly through a borrower on 
new plant and equipment of some sort. If the amount which is saved is large, as 

'2 See, for example, D. H. Robertson, Banking Policy and the Price Level, London, King, 1926; Hearings 
before the Temporary National Economic Committee, Part 9, pp. 3706-3726 (testimony of Ralph A. Manuel) 
and pp. 4006-4079 (testimony of A. A. Berle, Jr., with respect to the possibility of using bank credit, through 
capital credit banks, to achieve both full employment and useful investment); and, with respect to one 
possible direction of banking reform, Henry Simons, A Positive Program for Laissez-Faire, Public Policy 
Pamphlet No. 15, University of Chicago Press, 1934; 



CONCENTRATION OF ECONOMIC POWER g 

it is liicely to be at a high income level, it is necessaiy tliat equally large outlets be 
available for these savings in equipment and plant expansion, and in residential 
and public construction. '^ 

But the witnesses went further. They pointed out that the most im- 
portant factors that govern the rate of saving — the level of national 
income, the distribution and concentration of income, the incidence of 
the tax structure, the level of interest rates — bring forth large volumes 
of savings in good years. If a high level of national income is reached, 
a large volume of savings will arise, and this will have to be currently 
invested or offset to realize and maintain both the level of national 
income and savings. In view of these relationships it is clear that, 
with given patterns of saving in relation to national income, a large 
volume of investment or other offsets is required to attain full em- 
ployment. 

The rate of saving at any given le'vel of national income may have 
changed since 1929. In 1928 and 1929, for example, the extra- 
ordinary profits, both realized and unrealized, that were being made 
in the stock market induced many people to withdraw large sums 
from their brokerage accounts for consumption purposes, and en- 
couraged many to save less out of their current income. The rising 
stock market both reduced the initial volume of saving and trans- 
formed the savings of some into the consumption of others.^* Con- 
sumption expenditures from these sources may have increased (and 
savings therefore decreased) by as much as two or three billion 
dollars. This shift probably did much to sustain prosperity after 
some of the basic investment outlets had begun to shrink toward 
the close of the 1920's.'5 

The amount of savings in proportion to national income has prob- 
ably increased since 1929, moving in the direction of the pre-boom 
relationship. Higher personal and corporate income taxes have 
tended to decrease the volume of savings; but pay-roll taxes to 
finance the social security program, the high rate of internal fmancing, 
especially by large business enterprises,^^ and the absence of spec- 
tacular stock market booms have had the opposite tendency. 

It is important to determine the effect of these factors on the 
rate of saving. If "we save a larger proportion of our income, we 
would have to have a correspondingly larger volume of saving-off- 
setting expenditures. If we save a smaller portion of our income, 
we will have to have a smaller volume of saving-offsetting expendi- 
tures.'' ^' 

Many weapons may be used simultaneously to increase the volume 
of employment and national income when they are low.^* They 
include stimulating investment, increasing consumption, and speeding 
the flow of savings toward investment. An analysis of saving and 
investment does not inevitably call for a larger program of invest- 
ment. Analysis merely attempts to describe how saving and invest- 
ment affect the flow of income and employment. Public policy 

13 Hearings before the Temporary Iviational Economic Committee, Part 9, p. 3501. 

» J. M. Keynes has suggested tliat "with a 'stock -minded' public, as in the United States today, a rising 
•Stock-market may be an almost essential condition of a satisfactory propensity to consume." The General 
Theory of Employment, Interest, and Money, New York, Harcourt Brace, 1936, p. 319. The New York 
Times has coran;ented that "any slump in the stock market makes itself felt in the same evening at night 
clubs" (November 23, 1937). 

'' Hearings before the Temporary National Economic Committee, Part 9, p. 3537. 

19 This is discussed, infra, pp. SO-'S: see the comment by J. M. Keynes, The General Theory of Employ- 
ment, Interest, and Money, New York, Harcourt Brace, 1936, p. 128. 

■' Hearings before the Temporary National Economic Committee. Part 9, p. Z^'il. 

1' J. M. Keynes, The General Tlieorv of Emplovment, Interest, and Money, New York, Harcourt Brace 
i936, pp. 313-332. 



IQ CONCENTRATION OF ECONOMIC POWER 

requires full employment, but there is grave doubt whether in normal 
times it requires such a large and relatively inflexible pattern of 
saving. 

Saving and investment have been singled out for so much discus- 
sion in recent years because they isolate two of the most dynamic 
factors that preserve, obstruct, or facilitate the flow of income and 
the volume of employment. But saving and investment are not the 
only factors that are involved. Price controls, cost-price relation- 
ships, fiscal and monetary policies, the structure and inertia of the 
bureaucracy in both business and government, and other factors 
affect the level of employment and output. To use an analogy sug- 
gested by Gerhard Colm, saving and investment resemble the gasoline 
mixture fed into an automobile motor: the more gas, the more power. 
But whether the motor operates efficiently or not depends upon 
whether the motor is well made, whether the spark gaps are of the 
right length, and whether the parts are in good working order. 



PART II 
VOLUME AND COMPONENTS OF SAVING 

Gross saving and gross investment are equal to the difference 
between the gross national product and consumption ; net saving and 
net investment are equal to the difference between the national in- 
come produced — gross national product minus the value of capital 
used up in the process of production — and consumption. 

Though the amount of saving is equal to the amount of investment, 
and may ideally serve as an independent calculation of the latter, 
estimates of saving have a more important function. They tell us 
who saves, in what form savings are made, and what paths savings 
must take to travel into investment. 

Different parts of the savings stream are more important in analyz- 
ing some problems than others. ''In some studies, the matter of 
primary interest is the relation between individual income and indi- 
vidual saving; in others, it is the total amount of savings, which 
includes, in addition, business savings and savings of public authorities. 
For the study of capital formation as a whole, it is the net total of all 
savings that is important. For the problem of the price of credit, 
it is of special importance to have information regarding the stream 
of money passing through the capital market; while for the study of 
capital formation as a whole, the total of funds available for invest- 
ment, mcluding funds not passing through that market may be of 
more interest." ^ Clearly, there are numerous savings problems that 
require study, but the available data and space permit examination of 
only a few of the more important ones. 

The chief difficulties in determining the volume of savings are 
the lack of continuous data and the scattered character of the data 
that are available. Many savers do not keep records of current 
mcome or of consumption expenditures. Corporations in general 
keep relatively good records, but the reported savings shown by their 
accounting methods are likely to show great distortions during 
periods of depression and rapid price changes. The data on savings 
by Federal, State, and local governments have been extended in 
recent years, but still leave much to be desired. The data on savings 
by family households were greatly improved by the National Re- 
sources Committee's studies of consumer incomes and expenditures 
in 1935-36,' but further data are required. For example, intensive 
studies are needed of the savings in high income brackets, of changes 
in savings patterns through the business cycle, and of savings and dis- 
savings separately. Another recent study has supplemented the 
National Resources Committee's income-expenditure approach by 

• League of Nations Committee of Statistical Experts, Statistics Relating to Capital Formation, Geneva, 
1938, p. 8. ^ . -u ■ 

2 Consumer Expenditures in the United States, 1935-36, Washington, 1938. This master study is bemg 
supplemented by regional studies, some of which have already been published. 

11 



12 CONCENTRATION OF ECONOMIC POWER 

analyzing the volume and components of savings with a balance 
sheet approach, that is, estimating savings from changes in the assets 
and liabilities of different classes of savers.^ Despite all the recent 
work that has been done on savings, however, it is clear that estimates 
of savings leave much to be desired. 

Furthermore, the character of the data does not permit adequate 
adjustment for such distortions as capital gains, capital losses, and 
other revaluations. These do not reflect current saving or dis-saving; 
they only record changes in the valuation of capital goods embodying 
past savings. But while capital gains and capital losses must be 
eliminated in calculating the volume of savings, they may nevertheless 
affect the current rate of saving. For example, in a period when 
stock and bond prices are rising and there is a substantial volume of 
capital gains (realized or unrealized), current income may be spent 
more freely. The existence of capital gains under such conditions 
may raise the proportion of current income that is spent for consump- 
tion. 

Volume of Saving 

The volume of saving may be investigated at different levels of 
"grossness": 

First, the study may distinguish between those who save and those 
who do not. Some save, others draw upon past savings, while others 
go into debt. The amount saved by the community is the algebraic 
sum of these savings and dis-savings, and this amount is significant 
as a measure of what the community is able to set aside. But the 
savings and the dis-savings of relatively homogeneous groups are 
necessary for a better understanding of savings trends, redistributions 
of the ownership of various types of property — farms, for example ^ — 
and differential movements of various types of interest rates. Par- 
ticularly in times like the present, savings and dis-savings patterns 
help to explain the currents of purchasing power and price movements. 

Secondly, the study may analyze gross or net savings, regardless 
of whether it distinguishes between savers and dis-savers. Estimates 
of gross savings, i. e., estimates before allowances for depreciation and 
depletion, are more accurate than estimates of net savings. The 
latter are subject to all the errors and limitations of the former plus 
those additional ones involved in estimating the amount (and the 
significance) of depreciation and depletion. Estimates of gross sav- 
ings are more significant than those of net savings. For some groups 
the concept of net saving is a logically defensible but not a very useful 
one. Families and, to a lesser extent, governmental bodies are not 
interested in depreciation and net savings separately. They are 
rather interested in the volume of funds available after consumption 
and ordinary expenses. The total of these funds, not depreciation 
and net savings taken individually, influence expenditure policy. 

Gross savings are more significant than net savings so far as the 
flow of national income and the level of economic activity are con- 
cerned. The volume of gross savings indicates how much is being 
subtracted from the current flow of national production, how much 
is not being spent for consumption goods. It states how much must 

3 R. W. Goldsmith, with the assistance of Walter Salant, "Volume and Components of Saving in the 
United States, 1933-37", Studies in Income and Wealth, New York, National Bureau of Economic Re- 
search, 1939, vol. Ill, pp. 215-315. 

* See J. C. Ellickson, "Savings in Land Ownership," Land Policy Review, November 1940. 



CONCENTRATION OF ECONOMIC POWER 



13 



bo spent on other than consumption goods if the h>vel of national in- 
come is to be maintained. 

The availabk^ data permit analysis of both gross and net savings, 
but, except for corporations, they do not permit analysis of savings 
and dis-savings separately. 

The gross savings in the United States during the past two decades 
are best measured by the amount of gross capital formation (gross 
investment). Savings measured in this way represent the end result 
for the community as a whole of individual, business, and govern- 
mental decisions to withhold income from consumption, to hoard, and 
to expand bank credit. 

The volume of gross capital formation, as estimated by Simon 
Kuznets, was 20.3 billion dollars in 1929. This amount was 1.8 billion 
dollars less than the 22.1 billion dollars saved in 1920, but 1.8 billion 
dollars greater than the 18.5 billion dollars saved in 1940.^ (See 
table 1.) These amounts are in dollars of different purchasing power. 
Adjustment for price indicates that real gross capital formation in 
1929 was one-third greater than in 1920 and perhaps 10 percent greater 
than in 1940. 



Table 1. — Gross national product and capital formation, 1910-40 
[In billions of dollars] 





Gross 
national 
product 


Gross capital for- 
mation 


Year 


Gross 
national 
product 


Gross capital for- 
mation 


Year 


Amount 


Percent 
of gross 
national 
product 


Amount 


Percent 
01 gross 
national 
product 


1919 


68.8 
82.8 
66.1 
67.2 
78.2 
79.8 
83.4 
88.8 
86.8 
90.1 
93.6 


19.3 
22.1 
11.5 
13.3 

18.2 
15.2 
19.2 
19.0 
18.2 
17.8 
20.3 


28.1 
26.7 
17.4 
19.8 
23.3 
19.0 
23.0 
21.4 
21.0 
19.8 
21.7 


1930 


82.7 
64.8 
47.1 
46.0 
55.2 
61.6 
72.7 
80.0 
70.3 
77.0 
82.0 


13.7 
8.5 
3.1, 
3.7 
5.5 
9.4 
13.8 
17.5 
12.7 
15.6 
18.5 


16.6 


1920 _..- 

1921 ._ 


1931 

1932 


13.1 
6.6 


1922. 


1933. 


8.0 


1923_ 

1924 


1934 

1935 


10.0 
15.3 


1925 


1936 1 


19.0 


1926 


1937 1 .. . . 


21.9 


1927 


19381 

1939 1 


18.1 


1928 


20.3 


1929 


1940 1. 


22.6 









1 To date (December 1940) Kuznets has estimated commodity products through 1938 and service outlays 
through 1935. All later data represent independent estimates. 

Source: Simon Kuznets, National Income and Capital Formation, 1919-35, New York, National Bureau 
of Economic Research, 1937, pp. 8, 40, and Commodity Flow and Capital Formation in the Recent Recovery 
and Decline, 1932-38, New York, National Bureau of Economic Research, 1939. 

Gross savings, as measm'cd by the volume of gross capital formation, 
fluctuate sharply. They reached low points of $3.1 billions in 1932 
and $3.7 billions in 1933; the high in 1929 was six and one-half times 
as great, and the high in 1940 v/as six times as great as the low in 1932. 

The volume of gross saving varies with the amount of gross national 
product, but it is a larger proportion of that product at high levels 
than at low. In 1929 gross capital formation was 21.7 percent of a 
gross national product of $93.6 bilHons; in 1932 it was 6.6 percent of a 
product of $47.1 billions; and in 1940 it was 22.6 percent of a product 
of $82.0 billions. 

' The components of gross capital formation ai-e set forth in appendix XV. Kuznets has not yet published 
estimates of gross capital formation for 1939 and 1940. Estimates for those years used here were prepared 
independently. 



14 



CONCENTRATION OF ECONOMIC POWER 



A large volume of gross savings is thus associated with a high level 
of gross national product, and the proportion of income saved tends to 
increase with an increase in income. The years of prosperity in the 
twenties, however, show a significant deviation from this pattern. A 
relatively stable volume of gross capital formation in those years was 
associated with increasing levels of gross national product, indicating 
that the proportion of income consumed was increasing. 

Somewhat different measurements of these magnitudes were sub- 
mitted to the T. N. E. C. by Lauchlin Currie, who testified with respect 
to those expenditiu-es that provide an outlet for or offset to savings.^ 
Currie's measurements (see table 2) indicate that offsets to saving vary 
with gross national income and that "the proportion of income saved 
tends to increase with an increase in income." ^ His measurements 
indicate that in 1923-28 consumption was apparently increasing rela- 
tive to income, suggesting that the rising stock market "was a force 
in the late twenties tending to hold down saving relative to income, or 
increase consumption relative to income." * 

Table 2. — Relationship between offsets to saving and national income, 1921-39 
[Amounts in billions of dollars] 











Percent of 










Percent of 




Offsets 


Adjusted 


Gross 


adjusted 




Offsets 


Adjusted 


Gross 


adjusted 


Year 


to 


offsets to 


national 


offsets to 


Year 


to 


offsets to 


national 


offsets to 




savings ' 


savings 2 


income ' 


national 
income 




savings ' 


savings 2 


income ' 


national 
income 


1921 


9.5 
11.9 


io.'g" 


63.8 
64.3 




1931 

1932 


8.4 
2.3 


9.5 

4.7 


63.9 
47.4 


14.9 


1922 


17.0 


10.0 


1923 


17.0 


14.9 


74.8 


20.0 


1933 


2.9 


2.6 


46.2 


5.7 


1924 


13.3 


14.8 


75.2 


19.6 


1934 


5.6 


4.5 


55.8 


8.0 


1925 


17.0 


15.5 


79.7 


19.5 


1935 


10.0 


8.2 


61.7 


13.4 


1926 


16.8 


16.9 


84.8 


19.9 


1936 


14.3 


12.6 


< 71.4 


17.6 


1927 


15.3 


15.9 


82.7 


19.2 


1937 


14.3 


14.3 


<79.4 


18.0 


1928 


16. 


15.8 


86.2 


18.3 


1938 


5 8.2 


5 10.6 


< 70.8 


15.0 


1929 


18.0 


17.2 


90.0 


19.1 


1939 


»14.6 


6 12.0 


<75.7 


15.9 


1930 


11.3 


14.0 


79.8 


17.5 













' This series is a measure of the outlets for or offsets to savings. The components of the series are given 
In appendix XVI. The rationale of the components, and the sources of the data are more fully described 
inlHearings Before the Temporary National Economic Committee, Part 9, pp. 3520-3538 and 4010-4018. 

2 Consists of 60 percent of the offsets of the current year plus 40 percent of the offsets of the preceding year. 

3 The composition of this series is explained in Hearings Before the Temporary National Economic Com- 
mittee, Part 9, p. 4018: "Figures for 1921 to 1935 are derived from data pubhshed in National Income and 
Capital Formation, by Simon Kuznets of the National Bureau of Economic Research. From the published 
figures of gross national product was deducted imputed rents and gross savings of Government, so as to 
make them comparable with the 'income-producing expenditures' series. Figures for 1936 to 1939, inclusive, 
are estimates based on the national income data of the Department of Commerce." 

4 Estimated independently. 
6 Preliminai-y. 

Source: Hearings Before the Temporary National Economic Committee, Part 9, p. 4122. Prepared by 
Lauchlin Cuirie. 



« His figures, like those of Kuznets', are gross in that they include all outlays on plant, equipment, and 
residential construction, regardless of whether these outlays may be considered as replacement or expansion. 
They represent estimates by George Terborgh and others. Currie's offsets include four other series: Change 
in inventories, net foreign balance, change in consumer credit, and net Government contribution to pur- 
chasing power, which measures the difference between the outlays of public bodies that add to disposable 
cash income and the receipts that represent drafts upon disposable cash income. (The character and sources 
of the series are given in appendix XVI.) Increases in the volume of consumer credit, and public borrowing 
for other than investment purposes, represent dis-saving (and hence, ofl'sets to savings). Hence Currie's 
offsets to savings series, by including both gross savings in certain areas (i. e., the consolidated gross savings 
of savers and dis-savers) and dis-savings in other areas (savings that are offset) conceptually measure savings 
on a higher level of "grossness" than could be attained with outlays for gross capital formation alone. 

' Hearings before the Temporary National Economic Committee, Part 9, p. 3537. 

8 Hearings before the Temporary National Economic Committee, Part. 9, p. 3537. 



CONCENTRATION OP ECONOMIC POWER |5 

Components of the Savings Stream 

Data on the compononts of the savings stream, whicli must be 
estimated directly, are subject to much wider hmits of error than those 
on over-all savings, which may be estimated indirectly from over-all 
investment. Dangers in using data on savings components arise 
from three sources: difficulties in calculation, in the use of residuals, 
and in interpretation. Some of the difficulties in calculation arising 
from the inadequacy of the data and the presence of distorting revalu- 
ation entries have already been mentioned. Errors on these accounts 
are not compensating; and indeed, since residuals must be used some- 
where in the calculations, such errors become particularly trouble- 
some. Fmally, the interpretation of results, even with the best 
data, raises problems. For example, shall imincorporated enterprises 
be considered as individuals or as business enterprises? Both choices 
are unsatisfactory. The same c[uestion arises with small corporations. 
The following results are therefore presented as nothing more than a 
rough approximation. 

Three major components of the gross savings stream may be dis- 
tinguished: business enterprises, governments, and uidividuals and 
others. Savings by the first two components have been calculated 
directly; savings by individuals and others are the difference between 
gross savings (Kuznets' estimates of gross capital formation) and sav- 
ings by business enterprises and governments. The calculations them- 
selves appear in appendices I and II; the results are as follows: 

In the period 1925-29, gross savings averaged 18.9 billion dollars per 
year. Business enterprises accounted for 36 percent of these savings, 
governments for 10 percent, and individuals and others for 54 percent. 
Since the great depression the relative importance of governments and 
individuals has changed. In 1935-39, gross savings averaged 13.8 
billion dollars per year. Business enterprises accounted for 35 percent, 
and individuals and others for 66 percent. Governments dis-saved 
slightly. 

Concentration of the Components of the Savings Stream 

Each of the components of the savings stream is highly concentrated. 
In each of the savings components — individuals, trusts, business 
enterprises, and governments — a very small proportion of the units is 
responsible for the major part of the savings. 

There is no acceptable, detailed over-all picture of the concentra- 
tion of savings sources. There is, unfortunately, no simple way of 
determining the concentration of the total savings stream from the 
concentration of each of its sources, since many persons are found in 
more than one component. The available data, however, do indicate 
roughly that individuals in the higher income brackets, who are re- 
sponsible for the major part of the savings by individuals, are also the 
beneficiaries of (though they may not in all cases be charged with) 
the bulk of the savings by trusts and business enterprises. In short, 
as Carl Snyder has remarked, our economic and social system has 
placed "capital accumulation [saving] largely in the hands of a 
relatively few individuals." ^ 

• Capitalism the Creator: The Economic Foundations of Modern Society, New York, Macmillan, 1940, 
p. 7. 



16 CONCENTRATION OF ECONOMIC POWER 

Savings are concentrated because incomes are concentrated; and 
incomes are concentrated principally because the income from prop- 
erty is highly concentrated. On the average the difference between a 
medium-sized income and a large one does not arise from work — 
salary; but from property — dividends, interest, rents, etc., and the 
advantages that these make possible. The conclusions of A. C. 
Pigou, though dra^vn for Great Britain, are equally applicable to the 
United States: "Unequal distribution of incomes from property 
makes for unequal distribution of incomes as a whole, not only directly 
through its existence, but also indirectly through its effects on other 
incomes"; and that, furthermore, "inequality of income in one 
generation is * * * also a cause of inequality in the next 
generation." ^° 

CONCENTRATION OF SAVINGS BY INDIVIDUALS 

The concentration of individual saving within the higher income 
brackets is so striking that it needs no extended discussion. The most 
complete, and, fortunately, the most recent study of consumer 
incomes and expenditures, indicates that in 1935-36 the consumer 
units (families with one or more individuals) with incomes of less than 
$1,250 per year — 59 percent of all American units— on the average 
did not save." Families with incomes of less than $1,250 per year 
consumed more than they earned, the difference being accounted for 
by debts, trenching upon capital, and gifts. Above this point 
savings increased rapidly. At $l,750-$2,000 per year savings repre- 
sent 5 percent of income; at $4,000-$5,000, 21 percent of income; at 
$15,000-$20,000, 40 percent of income. Above the level of $20,000 
per year the study indicates that 51 percent of income was saved. 
The 110,000 families and individuals with incomes of $20,000 and more 
contributed 40 percent of the total savings of $6 billions. ^^ And 
the 927,000 families and individuals with incomes of more than $5,000 
contributed 79 percent of the total savings of $6 billions. (See 
table 3.) 

The amount that families (including single individual families) 
save varies with the amount of income they receive. For example, in 
1935-36 the 110,000 families with incomes of $20,000 and more saved, 
on the average, 50 percent of their income; but if the proportion of 
families with very high incomes in this group had been greater, the 
average percentage of income saved by the group would likewise have 
been greater. Similarly, if the average income in the group were 
unchanged, but the number of people and therefore the aggregate 
income in the group increased, the amount saved would have been 
larger. 

m Socialism versus Capitalism, London, Macmillan, 1939, pp. 17, 21-22. See also the testimony of Robert 
H. Jaek.son in hearings before the Senate Committee on Finance, 74th Cong., 1st sess., on the Revenue Act 
of 1935, pp. 177-182, and Josiah Wedgwood, The Economics of Inheritance, Harmondsworth, Penguin, 1939. 

11 This applies to all consumer units, except that it e.xcludes residents in institutional groups. One- 
individual families begin to save at incomes less than $1,250: men, above incomes of .$1,000; women, above 
incomes of $7.50. National Resources Committee, Consumer Expenditures in the United States, 1935-36, 
Washington, 1939, pp. 81-82. 

12 These conclusions for incomes of more than $20,000 must be interpreted with caution, since, as the 
National Resources Committee explained, "the number of schedules for high income families was very 
small" and it was necessary "to rely almost entirely upon extrapolations based on data for the lower income 
groups." Consumer Expenditures in the United States, 1935-36, Washington, 1939, p. 55, and appendix 
B, pp. 136-137. 



CONCENTRATION OF ECONOMIC POWER 



17 



Table 3. — Aggregate income and savings of American consianers ■ by 15 income 

levels, 1935-36 



Income level 



Under $500 

$500-$750 

$750-11,000 

$1,000-$1,250_... 

$1,250-$1,500 

$1,500-$1,750 

$1,750-$2,000_... 

$2,000-$2,500 

$2,500-$3,000 

$3,000-$4,000.... 

$4,000-$5,000 

$5,000-$10.000_-. 
$10,000-$15,000-. 
$15,000-$20,000-. 
$20,000 and over 

All levels. 



Number of 

families 
and single 
individuals 



6,710,911 

5,771,960 

5, 876, 078 

4, 990, 995 

3, 743, 428 

2, 889, 904 

2, 296, 022 

2,958,611 

1, 475, 474 

1, 354, 078 

464, 191 

595, 908 

152, 682 

67, 923 

110, 135 



39, 458, 300 



Aggregate 

income 

(millions) 



$2, 061 
3,615 
5,130 
5, 589 
5,109 
4,661 
4,214 
6,572 
4,005 
4,599 
2,045 
4,092 
1,747 
1,175 
4,645 



59, 259 



Savings 



Amount 
(millions) 



-382 

-254 
-97 
95 
196 
245 
587 
482 
742 
434 

1,218 
679 
473 

2,360 



5,978 



Percent 
of income 



-38.8 

-10.5 

-4.9 

-1.7 

1.9 

4.2 

5.8 

8.9 

12.0 

16.1 

21.2 

29.8 

38.9 

40.2 

50.8 



10.1 



Percent 
of total 
savings 



-13.4 

-6.4 

-4.3 

-1.6 

1.6 

3.3 

4.1 

9.8 

8.1 

12.4 

7.2 

20.4 

11.4 

7.9 

39.5 



100.0 



1 Includes all families and single individuals but excludes residents in institutional groups. 

Source: National Resources Committee, Consumer Expenditures in the United States, 1935-36, Wash- 
ington, 1939, table 8, p. 48. 



Individuals in the savings brackets do in fact receive more income in 
prosperity than in depression. ^^ This is one reason why savings 
increase faster than national income on the upswing. A. J. Goldenthal 
has studied the percentage of individual income received in the upper 
income brackets with the help of Federal income tax data. He found 
that the percentage of total individual income (including net capital 
gains and losses) received by the highest 1 percent of income recipients, 
rose from 13.0 percent in 1923 to 19.3 percent in 1928 and 18.5 percent 
in 1929, and stood at 13.3 percent in 1937 after having fallen sharply 
during the depression.^* The percentages do not show any significant 
trend over the two decades. Goldenthal noted, however, that they 
had a cyclical pattern, and that "income concentration increased 
during periods of business expansion and declined during periods of 
business contraction." ^^ 

If the percentage of total income received by the highest 1 percent 
of income recipients is adjusted for capital gains and capital losses,^® 
which affect the upper income groups in largest measure, the cyclical 
pattern becomes blurred. The highest 1 percent, on this calculation, 

'3 Though the amount of income received in the upper income brackets increases, the composition of na- 
tional income does not change. Employee compensation (salaries, wages, veork-relief wages, social security 
contributions of employees, and other labor income) constitutes about two-thirds of income paid out, with 
little regard to movements of the business cycle; while interest and dividends likewise remain steady, 
constituting .slightly less than one-sixth of income paid out. See the national income studies published 
from time to time in the Bureau of Foreign and Domestic Commerce, Survey of Current Business (for ex- 
ample, the issue of June 1940). 

'* Temporary National Economic Committee Monograph No. 4, Concentration and Composition of 
Individual Incomes, 1918-37, p. 16. Because of changes in the reporting of capital gains and losses, 1937 is 
overstated in comparison with earlier years. The level of these percentages is understated because the 
data on the higher incomes are not corrected for nonreporting or under-reporting of income. Whether this 
understatement is consistent from year to year, or whether itchanges with the amount of income subject to 
tax (which is allied to the business cycle) and with the amount of tax liability cannot be determined. Cf . 
Goldenthal's opinion that the understatement is consistent, and that it does not diminish the value of the 
data for the analysis of year-to-year data. Ibid., p. 15. 

" Temporary National Economic Committee Monograph No. 4, Concentration and Composition of 
Individual Incomes, 1918-37, p. 18. 

16 Goldenthal's calculations are based upon a definition of income which includes capital gains and losses 
because these "do influence the shares of the Nation's output of goods and services which individuals may 
claim and constitute a source from which many individuals may be said to acquire additions to their other 
income." Temporary National Economic Committee Monograph No. 4, Concentration and Composition 
of Individual Incomes, 1918-37, footnote 3, p. 10. 



18 



CONCENTRATION OF ECONOMIC POWER 



received an average of 14.2 percent of total income in 1927-29, com- 
pared with a maximum of 12.8 percent in the period 1918-1924 and 
12.2 percent in 1934 and 1935 (table 4). The percentages shift from 
year to year in accordance with the business cycle, but the increases 
in prosperity and the decreases in depression are not large enough to 
be statistically significant. 

Table 4. — Amount of income and share of total individual income received by the 
highest 1 -percent of income recipients, 1918-37 

[Income in billions of dollars] 



Year 


Income including 

capital gains and 

losses ' 


Income excluding 

capital gains and 

losses 2 


Year 


Income including 

capital gains and 

losses ' 


Income e.Kcluding 

capital gains and 

losses 2 


Amount 


Percent 
of total 


Amount 


Percent 
of total 


Amount 


Percent 
of total 


Amount 


Percent 
of total 


1918 

1919 

1920 


$7.2 
8.6 
8.4 
7.2 
8.2 
8.7 
9.6 
11.9 
12.1 
12.8 


12.8 
13.4 
12.4 
13.6 
14.2 
13.0 
14.2 
16.4 
16.2 
17.2 


$7.1 
8.1 
8.0 
7.0 
7.6 
8.1 
8.6 
9.6 
10.2 
10.6 


12.1 
12.3 
11.6 
12.6 
12.8 
11.9 
12.5 
13.2 
13.5 
14.1 


1928 

1929 

19.30 

1931 

1934 

1934 

1935 

1936 

1937 


$15.3 
15.0 
10.0 
7.4 
6.3 
6.5 
7.3 
9.3 
9.7 


19.3 
18.5 
14.6 
13.7 
12.7 
13.0 
13.4 
14.5 
13.3 


$11.1 
11.4 
9.9 
8.1 
6.5 
6.5 
7.0 


14.3 
14.0 
13 5 


1921 

1922 

1923 

1924 

1925 


13.3 
12.2 
12.2 
12.2 


1926 






1927 







I From Temporary National Economic Committee Monograph No. 4, Concentration and Composition 
of Individual Incomes, 1918-37, by A. J. Goldenthal, table 1, p. 16. For a discussion of reasons for the 
inclusion of realized capital gains and losses, see ibid., footnote 3, p. 10. 

■ Computed from ibid., table 10, p. 37, and table 12, p. 39, by eliminating net capital gains and losses 
from both total individual incomes and the incomes of the highest 1 percent. 

Source: Temporary National Economic Committee Monograph No. 4, Concentration and Composition 
of Individual Incomes, 1918-37, by A. J. Goldenthal. The income figures used represent "economic" 
income and "closely approximate what is commonly regarded as the total income of an individual less strictly 
business expenses" (p. 10). The data including capital gains and losses for 1935-37 are overstated relative 
to earlier years because of changed reporting methods: the first entry for 1934 is comparable with earlier 
years, the second with later ones. 

What type or types of income account for the concentration of 
individual incomes? Martin Taitel has noted that "the concentration 
of dividend income accounts for the major part of the wide spread 
between the incomes of individuals. For example, the major share of 
the difference between the average $50,000 income and the average 
$1,000,000 income is due to the difi'erence between the average amount 
of dividends included in these incomes." ^^ As incomes increase, 
a larger and larger proportion of successive additions, on the average, 
flows from dividends. In 1936, for example, 16.5 percent of the 
difference between average gross incomes of $2,411 and $5,000 was 
represented by dividends; but 61.2 percent of the difference between 
average gross incomes of $100,000 and $150,000 was accounted for 
by dividends; while no less than 75 percent of the difference between 
average gross incomes of $500,000 and $1,000,000 was accounted for 
by dividends. ^^ The inclusion of property income in other forms 
(interest, rents, and royalties, etc.) with dividends would account 
for substantially all of the difference between incomes of different 
sizes in the higher income brackets. 

" Temporary National Economic Committee Monograph No. 12, Profits, Productive Activities, and New 
Investment, p. 52. 

18 Temporary National Economic Committee Monograph No. 12, Profits, Productive Activities, and New 
Investment, by Martin Taitel, table X, p. 53. 



CONCENTRATION OF ECONOMIC POWER 



19 



CONCENTRATION OF SAVINGS BY TRUSTS 

The adoption of a separate income tax form for fiduciaries for 
1937 (Form 1041), by resulting in separate tabulations in Statistics 
of Income, has made possible a fairly accurate analysis of savings by 
trusts for the first time."^ In order to determine the amount saved 
by trusts, it was necessary to supplement the reported gross income of 
all trusts with an estimate of the relatively small amount of non- 
reported wholly and partially tax exempt income. ^^ 

There were 183,000 income tax returns filed by fiduciaries in 1937,^' 
including taxable and nontaxable returns, and returns with balance 
net income as well as those with no balance net income. Approxi- 
mately 26 percent of the balance net income received by fiduciaries — 
including estimated nonreported tax exempt income, and including 
statutory capital gains and losses — was saved; if capital gains and 
capital losses are excluded from gross income, fiduciaries saved 20 
percent of balance net income (table 5). The 183,000 fiduciaries 
saved at least $249 millions in 1937 ($352 millions including capital 
gains and losses). This was more than 36,700,000 American families 
with incomes of less than $3,000 (93 percent of the total number of 
families) saved in 1935-36. (The percentages of income saved by 
fiduciaries with different balance incomes are tabulated in appendices 
III and IV.) 

Table 5. — Savings by all fiduciaries in 1937 
[Millions of dollars] 



1. Gross taxable income (excluding partially taxable income) 

2. Partially and wholly tax exempt income ' 

3. Compiled gross income _ 

4. Total deductions-' 

5. Compiled balance income 

6. Distributed to beneficiaries 

7. Amount saved 

8. Percentage of compiled balance income saved 



Savings, 
with stat- 
utory cap- 
ital gains 
and losses 
included in 



$1,516 

101 

1,017 

260 

1,357 

1,005 

352 

26 



Savings, 
with stat- 
utory cap- 
ital gains 
and losses 
excluded 
from in- 
come 



$1,413 

101 

1, 514 

260 

1,254 

1,005 

249 

20 



1 The partially tax exempt income reported in gross taxable income was eliminated from line 1 and trans- 
ferred to line 2. Includes an estimated 20 million dollars of wholly and partially tax exempt income not re- 
ported for balance deficit trusts and for trusts with balance incomes of less than $5,000. Does not include 
estimated income below the exemption limit of interest of $5,000 of principal. 

■ After an estimated division of the deductions reported on Form 1040 returns between distributions 
(line 6) and other deductions. This allocation affects only the percentage saved, not the amount saved. 

Source: Bureau of Internal Revenue, Statistics of Income, 1937, Part 1, tables 12 and 13, pp. 173-178. 



The concentration of income received from fiduciaries in 1937 is 
suggested by the income tax statistics. Of the more than 6,300,000 
tax returns filed by individuals in 1937, less than 3,400,000 were tax- 

i» A more accurate analysis will be possible for 1938. Many trusts in 1937 filed on Form 1040, which was 
designed for the use of individuals, and which was used by fiduciaries until 1937. Form 1040 masked dis- 
tributions to beneficiaries. The Bureau of Internal Revenue announced that some 1938 returns were made 
on Form 1040, but that it adjusted the majoritv of these returns for distributions to beneficiaries. (Press 
Service No. 21-79, August 7, 1940). 

2° Such income received by balance deficit trusts and by trusts with balance incomes of less than $5,000 
was not tabulated in Statistics of Income, but was very" conservatively estimated at 20 million dollars. 
(Balance income is equal to net income before distribution to beneficiaries; and it is therefore equal to total 
income, not including tax exempt income, minus total deductions.) No estimate was made of the amount of 
tax exempt income below the exemption limit of the interest of $5,000 principal amount of tax exempts. 

21 On Form 1040 and Form 1041. 



20 CONCENTRATION OF ECONOMIC POWER 

able. Only 159,572 individuals reported income from fiduciaries. 
Thirty-eight percent of these reportmg individuals had net incomes 
of $6,000 and more, and they reported 81 percent of the fiduciary 
income (table 6). All of these individuals fell within the highest 1 per- 
cent of income recipients m 1937.-2 If the claims to undistributed 
fiduciary income were in proportion to fiduciary income receipts, the 
individuals with net incomes of $6,000 and more had an equitable 
interest in an additional $200,000,000 of income saved for them in 
1937 (exclu'ding their share of capital gains and losses). If this income 
had been distributed, the aggregate income of the highest 1 percent 
of income recipients would have been increased by approximately 
2 percent in 1937, and the concentration of income in that year would 
have, therefore, been slightly greater. 

Table 6. — Fiduciary incomes reported by individuals with net incomes of more than 
$6,000 and by those with incomes of less than $6,000 in 1937 



Number 
reportmg 



Amoimt of 
fiduciary in- 
come reported 



1. All individuals reporting income from fiduciaries^ 

2. Individuals with net incomes of less than $6,000 reporting fiduciary income. 
Percentage of total _. 

3. Individuals with net incomes of more than $6,000. 

Percentage of total - 



159, 572 
99, 026 

62 
60, 546 

38 



$830, 772, 000 
$163,266,000 

19 
$674, 506, 000 

81 



Source: Bureau of Internal Revenue, Statistics of Income, 1937, Part 1, table 7, pp. 133-137. 
CONCENTRATION OF SAVINGS BY BUSINESS ENTERPRISES 

It has been indicated that business enterprises in good years are 
responsible for somewhat less than two-fifths of the country's gross 
savings. These gross savings are represented by retained earnings 
plus allowances for depreciation and depletion, ^^ As such they are 
conservative estimates of the volume of gross saving.^* 

22 In 1937 any individual with a statutory net income of $0,075 and more fell in the highest 1 percent of 
income recipients. See Temporary National Economic Committee Monograph No. 4, Concentration and 
Composition of Individual Incomes, 1918-37, by A. J. Goldenthal, p. 26. 

23 The criticism has been made that the sum of retained earnings plus depreciation and depletion allow- 
ances overstates gross savings and the volume of funds available for financing replacement and expansion. 
George O. May criticized the testimony on savings and investment before the Temporary National Eco- 
nomic Committee on this point, arguing that in many cases book entries for depreciation "may be regarded 
as a recognition of an unpleasant fact or as an idle gesture— they will certainly produce no money for replace- 
ment if the company has no income from which a depreciation provision can be set aside." "The Rela- 
tionship of Depreciation Provisions to Replacement," Journal of Accountancy, May 1940, p. 343. He ex- 
plained that 46 percent of the total depreciation and depletion charges claimed on corporate income tax 
returns for the 7 years ending with 1935 were claimed by corporations which had no net income; and that 
these no-net income corporations constituted 64 percent of the total number of corporations. Id. 

It is, of course, true that the amounts of depreciation and depletion charged to current income are not 
necessarily earned. Nor are they available for investment unless they are earned. But in the above cal- 
culation of business gross savings and funds available for investment, retained earnings are added algebrai- 
cally to depreciation and depletion allowances. If any enterprise shows a loss, or if it distributes more in 
dividends than it has earned, retained earnings are negative, and the total amount available to it from 
internal sources is less than its allowances for depreciation and depletion. It its net loss or negative retained 
earnings are greater than its charges for depreciation and depletion, it has negative business savings. 

In the above calculations the negative savings, i. e., the unearned depreciation and depletion allowances, 
of some enterprises were subtracted from the positive gross savings of other enterprises. Hence the total 
of retainoii earnings, depreciation, and depletion used for all enterprises is a net figure; and this total was 
available for investment. 

It should be noted that the calculation of business gross savings for all enterprises as a group, though 
correct for the calculation of the amount of savings, minimizes both the difficulties involved in transferring 
savings through the capital markets and the economic significance of the results. (This point is discussed 
in Part III, infra.) The funds available to the General Motors Corporation and represented by its gross 
savings are not reduced because 1 ,000 corner grocery stores use up their capital funds and go out of business. 
It is, therefore, more important to investigate the distribution and the concentration of business gross sav- 
ings than to know what the algebraic total of savings for all enterprises is. 

The fact that gross savings computed as described were available for investment does not mean that these 
savings weie invested. Gross savings may be used to build up cash or pay off liabilities as well as to pay 
for plant and equipment. Cf. Eliot Janeway's book review of Idle Men, Idle Money in The Nation, August 
24. 1940. 

s-" Undistributed gross income is understated for three principal reasons: 

(1) In many cases business expenditures for machines, implements, dies, small tools, and other plant 
additions are charged directly to the income account. (In comparing estimates of business gross saving 



CONCENTRATION OF ECONOMIC POWER 21 

In 1923-29 business net savings constituted one-third of business 
gross savings, and depreciation and depletion constituted the remain- 
ing two-thirds. In recent years the relative importance of deprecia- 
tion and depletion in the total has increased. (See appendix V.) 

It is doubtful, however, whether the components of business gross 
savings, taken separately, have any great economic significance. 
Accounting practices vary as among corporations: some charge rela- 
tively low rates of depreciation and compensate by retaining a high 
percentage of their earnings; others charge relatively high rates of 
depreciation and pay out substantially all their earnings. There 
is no airtight wall between gross savings reflected by depreciation 
and depletion charges. For example, depreciation charges by public 
utility operating companies taken for Federal income tax purposes 
have been consistently larger than those shown in reports to stock- 
holders and the pubhc. Although a definitive study of such practices 
is yet to be made, it seems that in the middle 1920's depreciation 
charges publicly reported were, on the average, approximately one- 
half those taken for Federal income tax purposes. This proportion 
has been increasing gradually. At the present time it seems that 
depreciation charges taken for public reporting purposes are almost 
as large as those taken on Federal income tax returns. At the same 
time it appears that dividends paid represent an increasing proportion 
of net profits. Both the composition and the total of gross savings 
has been modified. Though few other industries show such a marked 
trend, it is apparent that the composition of business gross savings 
must be interpreted cautiously. The adoption of an undistributed 
profits tax, of an excess profits tax, and of liberalized depreciation and 
amortization provisions in connection with defense orders would all 
tend to increase the apparent importance of depreciation in the total. 
From the standpoint of savings analysis it is, therefore, more signifi- 
cant to treat business gross savings as a total, leaving to business 
enterprises the allocation among components that, seems best. 

The concentration of gross savings for enterprises of various sizes 
can be stated only for corporations. In 1937, the latest year for 
which data are available, all nonfinancial corporations reported gross 
savings of $2,837,000,000, approximately half the amount reported 

with estimates of business gross capital formation, i t is important to know whether given items are included 
in estimates of business capital formation and whether they are charged by business enterprises to capital 
account or to income account. Kuznets does not reduce his estimates of business gross capital formation 
because enterprises may charge some items to income account. Terborgh attempts to include in outlays 
for business durable goods only such as are normally charged to capital account, but there is no indication 
how well he has succeeded in doing so.) As May suggests, the line between depreciation and maintenance 
is to some extent indefinite and arbitrary. "The Relationship of Depreciation Provisions to Replacement," 
Journal of Accountancy, May 1940, p. 3-14. 

(2) The establishment of contingency and other reserves, when charged to current income, reduces cur- 
rent undistributed profits or business savings. For example, when a reserve is set up in connection with 
a portfolio of market securities, or with accounts receivable, and these reserves are charged to current income, 
the profits of the business enterprise are reduced, but the enterprise has as much funds after the bookkeeping 
reduction of net profit as before. 

(3) A very important source of understatement, particularly in periods of business recession and price 
decline, is the current accounting treatment of inventory. Inventory write-downs in such periods are 
substantial; they present no important problem in periods of prosperity and increasing prices. When 
prices remain constant or increase, goods are charged in and out at cost; and inventories at year-end are not 
revalued, because they are valued at cost or market, whichever is lower. During periods of falling prices, 
however, the application of the same accounting principle of cost or market, whichever is lower, has quite 
diflferent results. Inventory charged out at one price may be replaced by inventory purchased at a lower 
price, but at the end of the fiscal year all of the inventory is revalued. All of the goods purchased at higher 
prices are revalued down to the prevailing price level. The amount of gross saving is not decreased, however, 
when inventory bought in the preceding fiscal year is marked down, for example, from .$1,000,000 to .$800,000 
and the difference of $200,000 is charged to current profit and loss. Nor are the gross funds available from 
current receipts decreased because inventory purchases within the fiscal year are revalued at the end of the 
year. 



22 CONCENTRATION OF ECONOMIC POWER 

in 1929. These gross savings in 1937 may be allocated as follows (in 
millions of dollars) : 



Source 



Undistributed profits . 

Depreciation 

Depletion 

Gross savings. -- 



By all non- 
flnancial 
corpora- 
tions 



-762 

3,078 

521 



2,837 



By nonfinancial cor- 
porations 



With net 
income 



827 
2,323 



Without 

net 
income 



-1,589 
756 



412 109 



3,562 



(For the composition of gross savings by net income and no-net 
income groups, see appendix V.) 

Which corporations were responsible for these gross savings? This 
question can be answered for the 318,000 nonfinancial corporations 
that filed balance sheets with their income tax returns in 1937. These 
corporations reported gross savings of $2,869,000,000. (The non- 
financial corporations that did not file balance sheets reported nega- 
tive gross savings of $32,000,000.) These savings were largely con- 
centrated in the larger corporations: 

7.6 percent of the corporations (those with assets of more than 

$500,000) reported 92.9 percent of the gross savings. 
4.2 percent of the corporations (those with assets of more than 

$1,000,000) reported 87.5 percent of the gross savings. 
1 percent of the corporations (those with assets of more than 

$5,000,000) reported 69.8 percent of the gross savings. 
0.1 percent of the corporations (those with assets of more than 

$100,000,000) reported 30.4 percent of the gross savings. 
The 189,000 corporations (59 percent of the total) with assets 

of $50,000 and less had negative gross savings. 

The concentration of gross savings in the largest corporations is 
even more pronounced in bad years than in good. In 1933, for 
example, the nonfinancial corporations (submitting balance sheets) 
with more than $50,000,000 of assets reported 74.5 percent of the 
gross savings, compared with the 39.4 percent reported in 1937. 
(See appendix VI.) During the period 1931-37 the group of corpora- 
tions with more than $50,000,000 of assets never had a net loss, \diile 
those with less than $50,000 of assets never had a net profit. Daring 
the period 1931-37 the group of corporations with more than $50,000,- 
000 of assets had negative gross savings in only 2 years, 1931 and 
1932 — and then only because they elected to pay out part of their 
depreciation and depletion allowances as dividends; while the group 
of corporations with less than $50,000 of assets had negative gross 
savings every year — because their net losses were greater than their 
depreciation and depletion allowances. 

In the preceding discussion, all corporations have been considered 
as a group, whether they had net profits or net losses. But it has 
been suggested that this procedure unduly simplifies the analysis of 
savings: 

To deduct the deficits or losses of one group of corporations from the profits 
of another group of corporations is to assume that the corporate universe is a 
closed system in which the operating profits of one group of corporations — ■ 
profits which may be used for industrial expansion — may be diminished, can- 



CONCENTRATION OF ECONOMIC POWER 23 

celed, or converted into deficits by the losses of another group of corporations. 
This assumption is hardly realistic, for the successful corporations still have their 
profits.25 

Which nonfinancial corporations, then, among those earning a not 
profit were responsible for the gross savings of the group? This 
question can be answered for the 139,440 that (ih^d balance sheets in 
1937: '^ 

11.3 percent of the corporations (those with assets of more than 

$500,000) reported 85.2 percent of the gross savings. 
6.4 percent of the corporations (those with assets of more than 

$1,000,000) reported 79.5 percent of the gross savings. 
1.6 percent of the corporations (those with assets of more than 

$5,000,000) reported 63.1 percent of the gross savings. 
0.12 percent of the corporations (those with assets of "more than 

$100,000,000) reported 29.3 percent of the gross savings. 
On the other hand, 54.3 percent of the group, those with assets 

of $50,000 and less, accounted for only 2.6 percent of the gross 

savings. 

The gross savings by nonfinancial corporations are highly concen- 
trated; and the gross savings by financial corporations are even more 
highly concentrated. Consequently, during 1931-37, the only years 
for which data are available, concentration of gross savings among the 
larger corporations is greater for all corporations as a group than for 
nonfinancial corporations alone. In 1937, nonfinancial corporations 
with assets of more than $50,000,000 reported 39 percent of gross 
savings by the nonfinancial group; but all corporations with assets of 
more than $50,000,000 reported 45 percent of the gross savings by all 
corporations.^' 

Who are the beneficiaries of these savings by corporations? The 
corporation stockholders who are the legal as well as the beneficial 
owners of the profits distributed as dividends are the beneficial 
owners of the undistributed profits. ^^ 

If all corporation net income were paid out as dividends (or its 
equivalent), the bulk of what would otherwise be retained as 
undistiibuted profits would go largely to the highest income groups. 
Corporation stock ownership in the major corporations is highly con- 
centrated,^^ and dividend receipts are correspondingly concentrated.^" 

Rough calculations will indicate the amount of additional income 
that would accrue to the highest 1 percent of income recipients in 1937 

" Temporary National Economic Committee Monograph No. 9, Taxation of Corporate Enterprise, by- 
Clifford J. Hynning, p. 17. 

26 The gross savings of nonfinancial corporations, filing balance sheets, are tabulated by asset classes for 
net income and no-net income corporations separately in appendixes VII and VIII. 

" The gross savings of all corporations filing balance sheets are tabulated by asset classes for net income, 
no-net income, and both classes of corporations in appendixes IX, X, and XI. 

29 This was the rationale of the proposal in 1936 to repeal the corporation income, capital stock, and excess 
profits taxes: force the distribution of net income through a hish undistributed profits tax: and tax dividends 
Jullv under the personal income tax. See Hearings before the House AVays and Means Committee on the 
Revenue Act of 1936, 74th Cong., 2d sess.. p. 3. 

" See Temporary National Economic Committee Monograph No. 29, Distribution of Ownership in the 
200 Largest Non-Financial Corporations, by R. W. Goldsmith, R. G. Parmelee, J. C. Gorham, and others. 
The concentration of stock holdings in major petroleum companies was discussed before the Temporary 
National Economic Committee. In no case did the 100 largest stockholders of record of the major oil com- 
panies own less than 21.0 percent of the total number of outstanding common shares. The 100 largest 
stockholders of record owned 24.0 percent of the Texas Corporation, 47.3 percent of Standard Oil Co. (New 
Jersey), and 84.9 percent of Sun Oil Co. Hearings before the Temporary National Economic Committee, 
Part 14A, pp. 7713-7714, 800.3-8042. Mr. Gorham's study indicates that going behind the stockholders of 
record to the beneficial owners shows increased concentration within any corporation: and that a consolida- 
tion of benencial interests in all corporations shows yet higher concentrations. This is what one would 
-expect. The Meilon interests in Mr. Gorham's 200 corporations were found in many corporations: they 
iad aggregate holdings of $500,000,000 in the .$30,000,000,000 of stock in his sample of corporations. 

3« Cf. Edward D. Kennedy, Dividends To Pay, New York, Reynal & Hitchcock, 1939. 

29114a-^41=-No. 37 .3 



24 CONCENTRATION OF ECONOMIC POWER 

(those with minimum statutory net incomes of $6,075) if their bene- 
ficial interests in undistributed profits were considered as income. 
Undistributed profits of corporations earning a net income in 1937, 
after all taxes, were 1.3 billion dollars. Individuals with statutory 
net incomes of more than $6,000 in that year received approximately 
three-quarters of the total of 3.5 billion dollars of dividends reported 
by individuals. If the share of these individuals in the undistributed 
portion were the same as that in dividends distributed,^^ their share 
would be approximately 975 million dollars. This sum was approxi- 
mately 10 percent of the income received by the highest 1 percent in 
1937; and it represented saving for that group by corporations. It 
should be noted that saving in this form receives advantages under 
the present personal and corporation income tax law^s in comparison 
with savings out of statutory income. ^- 

CONCENTRATION OF GROSS SAVING BY GOVERNMENTS 

During the past 20 years there has been a reversal in the pattern 
of governmental saving. All governments taken as a group — Federal, 
State, and local — saved during the 1920's, but with the exception of 
4 years they dis-saved or had negligible saving in the 1930's. 

The meaning and magnitude of governmental saving has already 
been touched upon. It is advisable, however, to indicate in greater 
detail what governmental saving is. 

Saving is the dift'erence between current income and current 
expenditure, or, alternatively, the net increase in assets or net de- 
crease in liabilities, exclusive of gains or losses from the revaluation 
of assets. If a governmental body collected $10,000,000 in taxes, 
built a water supply system costing $1,000,000, and spent the bal- 
ance for operating expenses, it saved $1,000,000. If this govern- 
mental body spent $500,000 for the water svstem, $500,000 for debt 
retirement, and $9,000,000 for operating expenses, it saved $1,000,000. 
But if this governmental body raised only $9,000,000 from taxes 
and borrowed $1,000,000 to finance its plant outlay and debt retire- 
ment, its current income and current expenditures were $9,000,000, 
and it saved nothing. Governmental gross saving, therefore, equals 
capital outlays plus decreases in debt (or minus increases in debt).^^ 

During the decade of the 1920's the Federal Government spent an 
average of $250,000,000 per year for the construction of buildings, 
roads, harbors, and other capital improvements. Investments in 
machinery and equipment are not included in this sum, since outlays 
for these purposes are not readily available. This investment of 
$250,000,000 per year was financed with taxes; and at the same time 
the Federal Government reduced its debt. The cash (rather than the 
budgetary) receipts and expenditures of the Federal Government, 

31 It may not unreasonably be expected that the beneficial interest of the highest 1 percent of income recip- 
ients in undistributed profits would be larger than their interest in dividends paid out. To the extent that 
the highest 1 percent control dividend policies, they may find it advantageous to minimize personal income 
taxes by paying out a lower than average proportion of net profits as dividends. 

32 Twentieth Century Fund, Facing the Tax Problem, New York, Twentieth Century Fund, Inc., 1937, 
pp. 160-164. 

3' In computing savings each government must be treated as a consolidated basis: transfers to trust 
funds, etc., must be adjusted for. Goldsmith and Salant use the following formula for computing Federal 
gross saving: (a) Current receipts equal total receipts minus (i) capital receipts and fii) seigniorage; (b) 
current expenditures equal total expenditures minus (i) public works, including grants for pul)lic works, 
(ii) loans, (iii) subscriptions to capital stock and paid in surjilus, (iv) debt retirements, (v) cai)ital outlay 
of Work Projects Administration, Civil Works Admir.istration, and Civilian Conservation Corps; (c) 
current receipts minus current expenditures reiTcsent saving; (d) saving under trust accounts, increments 
on gold, etc. "The Volume and ComiJonents of Savins in the United States, 1933-37," Studies in Income 
and Wealth, vol. Ill, New York, National Bureau of Economic Research, 1939, p. 290. 



CONCENTRATION OF ECONOMIC POWER 25 

taken on a consolidated basis, constitute the most convenient state- 
ment of its over-all operating and investment activities. During 
1921-29 net cash income on the average exceeded net cash outgo by 
$280,000,000 per year.^^ Gross Federal savings on this basis there- 
fore averaged $530,000,000 per year during the period. 

State and local governments during 1921-29 spent an average of 
$1,800,000,000 per year on construction. On the average, they bor- 
rowed $800,000,000 per year, equivalent to 44 percent of construction 
expenditures.^^ On balance, State and local governments had average 
gross savings of $1,000,000,000 per year. 

Federal, State, and local gross savings during 1921-29 averaged 1.5 
billion dollars per .year, with the Federal Government accounting for 
one-third of the total. The concentration of savings among the re- 
maining 180,000 governments in the United States has never been 
determined, although it clearly is substantial.^® 

Since 1929 the distribution and character of governmental savings 
have changed. The States and localities continued to save each year, 
in considerable part with the aid of Federal funds, but the Federal 
Government did not. State and local gross savings ranged from $700,- 
000,000 in 1932 to $2,000,000,000 in 1934; in 1939 they were $1,500,- 
000,000. The Federal Government saved only in 1937 — a year marked 
by one of the sharpest business recessions on record. The decline of 
Federal savings, however, has decreased the concentration of gov- 
ernmental saving. 

Concentration, Taxation, and Saving 

The volume of saving in the United States is principally a function 
of four factors: the level of national income, the concentration of 
income, the prospective rate of return on savings (the rate of mterest, 
the rate of profit), and the amount of taxes collected and the incidence 
of those taxes. 

The relationship between the volume of saving and the amount 
and concentration of national income was suggested in preceding sec- 
tions. First, when national income increases, the amount of income 
received by those who account for the bulk of individual savings 
increases, and their savings increase. Secondly, when the national 

3* Calculation of savinf^s on this basis, instead of on the basis of gross, net, or otherwise adjusted debt, 
allows for transfers to trust and pension funds and other noncash outlays. (See appendix II.) 

35 Mocly's Investors Service has prepared a series of "productive" capital issues. This series contains 
all capital issues whose proceeds were used for "productive" purposes — for investment. During the 
period 1921-29 Moody's tabulations indicate that all issues by State and local governments were productive 
issues. See the convenient summary of these results in H. G. Moulton, G. W. Edwards, J. D. Magee,- 
and Cleona Lewis, Capital Expansion. Employment and Economic Stability, Washington, the Brookings 
Institution. 1940, pp. 27-29 and .349-3M. . , t 

28 One indication of concentration would be the character of construction outlays. In 1928, for example,, 
total public construction was divided as follows (in milions): 

Highways $1,270 

Sewerage disposal and water supply 300 

Public educational buildings 390 

Nonresidential buildings, excluding educational 348 

Naval and military 42 

Conservation and development "i- 

Miscellaneous '67 

Total 2,499 

Hearings before the Temporary National Economic Committee, Part 9, p. 4005. The most important 
construction categories are widely scattered. Of the .$1,270,000,000 of highway expenditures, 42 percent 
were made by States. 23 percent of counties, IS percent bv cities with a population of more than ',00.000, 
3 percent in cities with a population of 300,000 to 500,000, 6 percent in cities with a population of 100,000 fo- 
300,000, 4 percent in cities with a population of 50,000 to 100,000; 1 percent in cities with a population of 
30,000 to 50,000, 6 percent in smaller cities, and 1 percent in rural incorporated areas. Bureau of Foreign aiifi 
Domestic Commerce, Construction Activity in the United States, Washington, 1938, pp. 72-78. There 
appears to be .some slight overlapping in these figures. 



26 CONCENTRATION OF ECONOMIC POWER 

income increases, the proportion of that income received by those 
who account for the bulk of individual savings may increase — -at least, 
that proportion clearly does not decrease — and this may tend to in- 
crease further the amount saved. Thirdly, when the national income 
increases, undistributed profits increase (both in amount and in pro- 
portion to the national income) ; in the main, the beneficial interest 
in these savings accrues to those who are responsible for the bulk of 
individual savings. The distribution of wealth affects the volume of 
saving mainly by concentrating the distribution of income, though it 
may also affect the disposition to save at given income levels. 

The prospective rate of return on savings (rates of interest, rates 
of profit, depending upon the peculiar opportunities available to the 
saver) probably has only a very slight effect upon the volume of 
savings. This question has been discussed at length in economic 
literature; and one widely accepted theory holds that the greater the 
monetary compensation for saving, the more people will save. It is 
•sometimes assumed that saving (refraining from current consumption) 
is pamful, and that consequently no one will save unless he is paid 
for it. Whatever validity these propositions may once have had, 
they appear to have little at the present time. As F. H. Knight 
explained: 

The increase in wealth is to a large extent an end in itself as well as a means 
to the increase of income, and this also again to a rapidly increasing degree as the 
sl^andards of life are advanced. Men work "to get rich" in a large proportion of 
cases, not merely in addition to, but in place of, consuming larger amounts of 
goods. It is a grave error to assume that in a m.odern industrial nation production 
takes place only in order to further consumption. It is true to a great and ever- 
increasing degree tha.t consumption is sacrificed to increase production. What- 
ever our philosoph_y of human motives, we must face the fact that men do "raise 
more corn to feed more hogs to buy more land to raise more corn to feed more 
hogs to buy more land," and, in business generally, produce wealth to be used 
in producing more wealth with no view to any use beyond the increase of wealth 
itself.37 

The volume of saving is affected much more by a change in the 
national income than by a change in interest rates. There is always 
more savmg with a high level of national income and low interest 
rates than with a low national income and high interest rates. The 
last few years have indicated that even substantial declines in interest 
rates at levels of national income characterized by considerable 
amounts of unemployment have been unable to effect any declme in 
the rate of saving. 

Even with any given national income, concentration of income, and 
tax structure, it must not be assumed that savings increase as rates of 
interest increase. It may be true that some individuals will save 
more at a given level of income when interest rates rise, but others 
who have agreed to save through life insurance and other contractual 
plans may unnoticeabiy be finding themselves saving less. On the 
other hand, as interest rates fall, dividends on life insurance contracts 
decrease, and policyholders are expected to increase their premium 
payments. It is unlikely that these increases in premium payments 
are offset in full by decreases in other forms of saving. 

The larger the stake in such contractual forms of savmg, the 
harder it is to decrease saving when rates of interest fall. So far as 

3' Risk, Uncertainty, and Profit, reprinted in London by ttie London School of Economics, 1935, p. 319. 



CONCENTRATION OF ECONOMIC POWER 27 

life insurance is concerned, there is every pressure ui)on the poUcy- 
hokler to maintain his policy in force. Practically all attempts 
by the policyholder to do otlu^rwisc involve some loss of savings or 
risk of not being able to replace msurance protection. The life insur- 
ance companies rely upon the fact that those whose policies are of 
several years standing have a vested interest in continuing to save, 
even though interest rates declhie, for the decline in interest rates 
appears not to have affected all policyholders equally. One indication 
is that the older premiums (say the tenth or the fifteenth annual pre- 
mimn) have increased relatively more than the earlier ones. Another 
indication is that the branches of the life insurance business which have 
grown most rapidly in the past decade, despite the fall of interest 
rates, are those where the savings element is greatest: annuities and 
investment of balances. 

Insofar as saving does vary directly with its reward, it is essential 
to note that there is no one interest rate throughout the community. 
Savmg takes place at many different interest rates. The market for 
savings is a discontinuous and separated one.^* It is a paradox that 
those with small incomes, who find it hardest to save, receive the 
smallest net returns upon their savmgs. Any comparison of the cost 
of industrial insurance with that of ordmary life insurance makes this 
cost differential pamfully obvious. Those with the largest incomes, 
those who find it easiest to save, those whose saving is to some degree 
automatic, receive the highest rates of return upon their savmg not 
only because they employ lovv^ cost methods but because they have 
access to the best infomiation and the high yield opportunities. 

The effect of Federal, State, and local taxes upon the volume of 
saving by individuals deserves but has not yet received a compre- 
hensive theoretical and historical study. ^^ Certain facts, however, 
seem clear. 

The combined American tax structure is regressive in the lower 
income brackets. The Twentieth Century Fund reported that the 
combined tax structure was regressive for the lower income groups 
(up to about $2,000 per year), and distinctly progressive for the upper 
income groups. ^° A study of the tax structure in 1938-39 by Colm. 
and Tarasov indicated that the incidence was regressive at the lower 
income levels. The percentage of taxes borne to income was higher 
on those with incomes up to $500 than on those with incomes of $5,000 
to $10,000.^' 

The effect of changes in the composition and the v/eight of the tax 
structure is much less clear. Colm and Lehmann concluded that the 
net effect of changes in the Federal fiscal system between 1932 and 
1936 would be a decrease in total savings in an average year by 4 to 7 
percent. ^^ These changes would have modified the components of 

3» Even in life insurance the discounted net cost for 10 years of a $1,000 whole life policy, age 25, varied 
among the 20 largest companies from $55.93 to $87.04, i. e., by more than 50 percent. See Hearings before 
the Temnorary National Economic Committee, part 10-A, pp. 300 ff. 

35 How taxes affect the total volume of individual, business, and governmental savings depends upon 
how governments spend their tax collections. 

" Faeins the Tax Problem, New York, Twentieth Century Fund, 1937, eh. 17, especially pp. 233, 236-2.J7- 

<' Temporary National Economic Committee Monograph No. 3, Who Pays the Taxes?, p. 6. The per- 
centages varied onlv slightly between the $500-$l,000 level and the $5,000-$10,000 level, being 18.0 percent 
in the former and 17.9 percent in the latter. The low point was 17.3 percent in the $1,000-$!, 500 class. In 
view of the character of the data and the methods of calculation, these slight differences must be interpreted 
cautiously. c, • , t. u 

<2 Economic Consequences of Recent American Tax Policy, New York, New School for Social Kesearcn, 
1938, p. 42. 



28 CONCENTRATION OF ECONOMIC POWER 

savings. The conclusion with regard to the net effect of these fiscal 
changes was m part based upon the existence of an undistributed 
profits tax; without this tax the net effect might have been a smaller 
decrease or perhaps a slight increase in the volume of savings. Henry 
S. Dennison estimated that Federal, State, and local taxes fell 73 
percent upon consumption and 27 percent upon savings in 1936.*^ 
With the same methods, it appears that the tax structure in 1938 
and 1939 fell upon savings with approximately the same weight as 
in 1936.^* It appears, however, that the proportion of their income 
paid in taxes by the highest 1 percent of income recipients in 1936 
and 1937 was almost double that paid in 1928 and 1929 (13.4 percent 
and 11.2 percent compared with 6.0 percent and 5.5 percent). ^^ 

It remains to bo seen whether higher taxes in recent years have 
affected the volume of savhig in relation to national income. It is 
just as important, however, to distinguish the effects of taxation upon 
savings in various forms and from various sources. 

« H. S. Dennison, Lincoln Filene, R. E. Flanders, M. E. Leeds, Toward Full Employment, New York, 
McGraw Hill, 1938, p. 187. 

« Tax yields as reported in Commerce Clearing House, Tax Systems, 8th ed., Chicago, 1940, p. 315; cal- 
culations by the writer. 

« Temporary National Economic Committee Monograph No. 4, Concentration and Composition of 
Individual Incomes, 1918-1937, by A. J. Goldenthal, p. 61. 



PART III 
THE FLOW OF SAVINGS 

The Flow of Savings Through Capital Markets 
the role of capital markets 

Savings may move toward the fiiiancmg of capital formation 
directly or indirectly. They move directly when they are spent for 
capital goods by the saver. They move indirectly when they are 
spent for capital goods by someone other than the saver. 

The indirect movement of savings into investment involves the 
transfer of savings from the saver, through one or a series of inter- 
mediaries, to the investor.^ A simple case may involve only the 
placing of mortgage money through a local real estate broker, or the 
deposit of funds with a building and loan association which lends 
these funds on mortgage. A more complex movement may involve 
two or more intermediaries. The saver pays a premium to his life 
insurance company; the life insurance company buys bonds newly 
issued by a business enterprise or a governmental body and offered 
through an mvestment banker or sold directly by the issuer. 

The transfer mechanism through which the process functions is 
often referred to as the capital market. This term is a convenient 
one if it does not obscure three important facts: that the capital 
market consists of not one but many markets, distinguished with 
respect to area, type of security, and character of borrower; that the 
connections among these markets are tenuous in many instances, and 
reflect in many cases a marked degree of imperfect competition; 
and that corresponding to these more or less separated markets are 
many interest rates rather than a uniform interest rate. Furthermore, 
the capital markets not only function to dispatch savings toward 
investment, but to exchange or convert old securities. 

The major savings or financial institutions in the capital market, 
as described by Donald H. Davenport, are the life insurance com- 
panies, the mutual savings banks, the commercial banks, the postal 
savings system, building and loan associations, investment trusts, 
and corporate and individual trustees. In recent years substantial 
amounts of savings have been accumulated through such other insti- 
tutional processes as the social security funds, the Federal, State, and 
other pension and retirement funds, and the United States savings 
C'baby") bonds. ^ The principal auxiliary mechanisms in the capital 
market are the stock exchanges, security brokers and dealers, and the 
investment bankers. 

To the individual saver the indirect movement of savings into 
investment offers many advantages. It means greater diversification, 

' See the discussion by D. H. Davenport of the mechanisms and processes by which savings travel toward 
investment. Hearings before the Temporary National Economic Committee, Part 9, pp. 3726-3734. 
2 Hearings before the Temporary National Economic Committee, Part 9, p. 3727. 

29 



30 CONCENTRATION OF ECONOMIC POWER 

greater security, greater liquidity. To the investor, the indirect 
movement of savings into investment opens the possibiUty of obtain- 
ing funds in larger amounts and on a variety of terms. To the com- 
munity the mobilization and allocation of savings through the capital 
market may result in their most profitable employment and expendi- 
ture. Savings in large and small amounts flow into savings reser- 
voirs, and it is expected that they are there assembled and auctioned 
off to the highest bidders. To the extent that savings really go to 
the highest bidder (taking into consideration the risk involved) and 
to the extent that the greatest rate of return corresponds with the 
greatest social need, savings are thus placed in their most effective 
employments. 

The direct movement of savings into investment, where the saver 
invests his own savings, though involving no transfer expenses, may 
not result in the most efficient use of savings. Net profits not paid 
out as dividends, i. e., income saved for corporation stockholders, may 
be invested directly by managements to yield a low rate of return in 
the same business. The interests of the management and the stock- 
holders are dissimilar in part, and the decision to save is largely inde- 
pendent of the stockholders. Stockholders' savings may, therefore, 
be used by the management to purchase securities, to acquire high 
cost business, to push expansion, or to finance other activities which 
stockholders would not finance with the savings they would individu- 
ally make from the corporation profits if these were all paid out as 
dividends.^ Complaints were made durijig the 1920's that growing 
corporate financial self-sufficiency was freeing investment policy from 
the "testing" of the capital markets. 

Whether the movement of savings, directly or indirectly, is toward 
the highest yield investments depends upon two major factors: first, 
whether the capital market mechanism operates without bias and in 
the full light of day; and secondly, whether concentration disturbs 
the competitive fimctioning of the markets. 

Various congressional investigations since 1931 have indelibly 
established the proposition that the unregulated markets of the boom 
era did not operate without bias. But the facts disclosed by the 
hearings on the sale of foreign bonds or securities in the United 
States,^ on utility corporations,^ on railroads, holding companies, and 
affiliated companies,^ on stock exchange practices,^ on protective and 
reorganization committees,^ and on investment trusts and investment 
companies^ have had their efl^ect. The enactment of the Securities 
Act of 1933, the Securities Exchange Act of 1934, the Pubhc Utility 
Holding Company Act of 1935, the revisions of bankruptcy and 
reorganization procedures, and the Investment Company Act of 1939, 
have done a great deal to remove the abuses of the boom era and to 

' See, for example, the interesting colloquy on the possible disadvantages to old policyholders (there are 
no stockholders in a mutual life insurance company) of writing new business (Hearings before the Tem- 
porary National Economic Committee, Part 4, pp. 1255-1257). 

* Hearings on the sale of foreign bonds or securities in the United States, pursuant to S. Res. 19, 72d Cong. , 
1st sess., 1932. 

5 Hearings on utility corporations, pursuant to S. Res. 83, 70th Cong., 1st sess., 1927. 

6 Investigation of railroads, holding companies, and affiliated companies, pursuant to S. Res. 71, 74th 
Cong., 1st sess., 1935. 

' Hearings on stock exchange practices, pursuant to S. Res. 84, 72d Cong., 1932; Report of Committee on 
Banking and Currency on stock exchange practices, pursuant to S. Res. 84, 72d Cong., and S. Res. 56 and 97, 
73d Cong., Rept. 1455, 73d Cong., 2d sess., 1934. 

' Reports on protective and reorganization committees, by the Securities and Exchange Commission, 
pursuant to sec. 211 of the Securities Exchange Act of 1934. 

^ Reports on investment trusts and investment companies, by the Securities and Exchange Commission, 
pursuant to sec. 30 of the Public Utility Holding Company Act of 1935. 



CONCENTRATION OF ECONOMIC POWER ^l 

make the capital markets function more nearly as they ar(> tlico- 
retically supposed to. It is probably true that the principles of full 
disclosure and adequate information — the indispensable conditions 
of a properly functioning market — are more thoroughly observed now 
than ever before. 

The hearings before the Temporary National Economic Committee 
considered the functioning of the capital markets from the point of 
view of concentration rather than that of disclosure. Though dis- 
closure has been stimulated, though the spotlight of publicity now 
searches many of the corners which were dark during the 192()'s, the 
fact remains that disclosure and publicity are not enough. Finan- 
cial institutions concentrate savings; and concentration creates 
control, bias, and power that may seriously disturb the free and 
competitive functioning of the capital markets. The Temporary 
National Economic Committee therefore focused attention upon 
concentration of resources, of savings, of investment decisions, and 
of investment policies. 

SAVINGS THROUGH FINANCIAL INSTITUTIONS 

Financial institutions are now the dominant factor in the security 
markets, and their relative importance is increasing. Their assets 
have more than doubled since 1922. In 1922, the assets of the 
principal savings institutions''' totaled 30 billion dollars; in 1929, 
55 billion dollars; and in 1938, 65 billion dollars (appendix XII). 
In 1937-39, the average annual increase in the assets or funds in these 
institutions was greater than in 1927-29 (table 7). Since the average 
national income in 1927-29 was higher than in 1937-39, the ratio of 
the increase of assets or funds in financial institutions to national 
income increased almost one-third, from 4.5 percent in the earlier 
period to 5.9 percent in the later. 

These data indicate thSit a larger proportion of American savings 
flows to mstitutions now than in the 1920's. Savings flowmg to life 
insurance companies — whether measured by premium income, total 
income, or increase in assets adjusted for change in policy loans — were 
substantially higher in proportion to national income in the 1930's 
than in the 1920's.^^ Though these facts suggest the eiTorts of the 
American people to save, even during the deepest depression on 
record, they suggest even more eloquently the automatic character 
of much of this saving, a substantial part of which could be discon- 
tinued or reduced only at some loss. 

An analysis of the forms of saving by individuals in the period 
1933-37 illustrates this situation in another way. From 1933 through 
1937 individuals saved 10.9 billion dollars. '^ This was the final 
result of saving 16.1 billion dollais in some forms, and of drawing 
upon 5.2 billion dollars in other forms. Individuals reduced their 
holdings of securities by 2.1 billion dollars, and their ownership of 
homes, automobiles, and household property by 3.1 billion dollars. 

1" Assets of life insurance companies, time deposits of commercial banks, assets of mutual savings banks, 
assets of building and loan associations, governmental pension and trust funds, postal savings, and amount 
of United States savings ("baby") tjonds outstanding. 

" Hearings before the Temporary National Economic Committee, pt. 9, p. 4055. 

12 R. W. Goldsmith and Walter Salant, "Volume and Components of Saving in the United States, 
1933-1937," Studies in Income and Wealth, vol. Ill, National Bureau of Economic Research, New \ork, 
1939, p. 237. 



32 CONCENTRATION OF ECONOMIC POWER 

On the other hand, they saved 16.1 billion dollars through financial 
institutions.^' These savings were represented by — 

Billion dollars: 

An increase in currency and deposits 8. 3 

An increase in insurance and pension reserves 9. 4 

A decrease in equities in building and loan associations 1. 6- 

A net increase in all these forms 16. 1 

Table 7. — Changes in assets or funds in the principal savings institutions in the 

United States, 1922-39 

[Amounts in millions of dollars] 



Year (as of June 30) 


Life in- 
surance 
assets less 
policy 
loans ' 

(1) 


Time 
deposits 
in com- 
mercial 
banks ' 

(2) 


Mutual 

savings 

bank 

assets 3 

(3) 


Build- 
ing and 
loan as- 
socia- 
tion as- 
sets ■■' 

(4) 


Govern- 
mental 
pension 
and trust 
funds 

(5) 


Postal 
savings 
deposits 

(6) 


United 

States 

sa\ings 

("baby") 

bonds 

(7) 


Total. 


1922 


















1923 


750 

753 

1,028 

1,224 

1,291 

1,341 

1,334 

1,144 

882 

225 

199 

732 

1,310 

1, 689 

1,811 

1,294 

1,689 


1,674 

1,008 

1,485 

1,186 

866 

1,690 

-439 

-62 

-1,245 

-4,321 

-3, 170 

866 

1,102 

893 

943 

167 

268 


553 
460 
548 
509 
589 
677 
318 
289 
897 

-58 
-167 
98 
108 
236 
236 

-73 
227 


600 
823 
743 

825 

822 

860 

679 

129 

-412 

-667 

-773 

-527 

-561 

-264 

86 

-85 

46 


115 
120 
151 
163 

181 

246 

255 

254 

250 

239 

253 

247 

290 

366 

1,451 

1, 144 

1, 231 


-6 

1 

-1 

2 

13 

5 

2 

21 

172 

438 

402 

11 

28 

36 

-16 

10 




3, 686i 


1924 

1925 

1926 

1927 

1928 




3,165^ 
3,954 
3,909 
3. 762: 
4,819 


1929 

1930 

1931 




2,149 

1, 775 

544 


1932 

1933 

1934 




-4, 144 

-3, 256 

1, 427 


1935 

1936 

1937 

1938 

1939 


62 
254 

478 
421 
606 


2,318 
3, 202 
5,041 
2, 852 
4,077 



1 Admitted value basis; includes fraternal insurance. No adjustments have been made for capital gains 
and capital losses through revaluation and sale of admitted assets. These are increases in the assets of the 
306 life insurance companies and of the fraternal orders included in the Spectator Life Insurance Yearbook 
as of Dec. 31 of the respective years. These increases were converted to a June 30 basis through the use of 
the percentages of the total life insurance assets which were held by the 49 companies reported on a monthly 
basis by the Association of Life Insurance Presidents, and published in the Bureau of Foreign and Domestic 
Commerce, Survey of Current Business. 

2 E.xcludes postal savings deposits. 

3 No adjustments have been made for capital gains and capital losses through revaluation and sale of assets. 

Source: Adapted from hearings before the Temporary National Economic Committee, Part 9, p. 4052. 
Column 1 is from the Spectator Insurance Yearbooks, Life Volume; columns 2, 3, 4, and 6, from the Bureau 
of the Census, Statistical Abstract of the United States; column 5, data for 1937 from a study made by the 
U. S. Treasury Department, with the other years estimated; column 7, from the Annual Reports of the Secre- 
tary of the Treasury. 

These 16.1 billion dollars of individuals' savings were concentrated 
through the major savings processes, and they became an investment 
problem for financial institutions. 

The importance of these savings processes may be stated in another 
manner. The savings represented by increases in the assets of life 
insurance companies, postal and mutual savings banks, governmental 
pension and trust funds, building and loan associations, time deposits, 
and United States savings bonds arise principally from the savings of 
individuals.^* During 1927-29 slightly less than half, and during 
1936-39 slightly more than half of individual savings flowed through 
these mstitutions. The savings represented by increases m life 
insurance assets and governmental pension and trust funds constitute 

13 A small but not determinate part of these savings was represented by currency hoards; to this extent 
the total of 16.1 billion dollars flowing to financial institutions should be reduced. 
i< Some savings by business enterprises and governmental bodies is included. 



CONCENTRATION OF ECONOMIC POWER 



33 



the major components of this flow. The net increase in the assets or 
funds of the seven processes described was 13.8 billion dollars in 
1929-39; but life insurance assets increased by 11.0 billion dollars 
and governmental pension and trust funds by 5.7 billion dollars. 
(The growth of each component may be traced in table 7.) The 
proportion of these assets or funds controlled by life insurance com- 
panies has increased sharply since 1924:'^ 



Year 


Assets or funds 
of principal 

savings 

institutions 

(millions) 


Assets of life 
insurance 
companies 
(millions) 


Proportion of 
life insurance 
assets to total 
assets or funds 
(percent) 


1924 


$36, 445 
48,070 
56, 813 
49,957 
56,903 
68, 873 


$9, 103 
12, 046 

16, 465 

17, 771 
21, 502 
26, 296 


25 


1927 


26 3 


1930 


29.0 


1933 


1936 


37.8 
38 2 


1939 







CONCENTRATION THROUGH FINANCIAL INSTITUTIONS 

The flow of savings through financial institutions shows a high degree 
of concentration, being directed in substantial part to the larger 
reservoirs in the East. 

Geographic Concentration ^^ 

In 1937, one-third of the life insurance assets, savings bank and 
time deposits, and building and loan association assets was concen- 
trated in New York; another thhd in New Jersey, Massachusetts, 
Pennsylvania, and Connecticut; and the remaining one-third was 
in the other 43 States. (See table 8.) Life insurance assets show 
the greatest geographical concentration. Forty-two percent of 
these assets were controlled in New York State, and 80 percent in 
the 5 States of New York, New Jersey, Massachusetts, Pennsylvania, 
and Connecticut. The 25 largest companies had 87 percent of all 
life insurance assets, and 57 percent of their assets were controlled 
from New York and Newark, 17 percent fl"om New England, and 4 
percent, from Pennsylvania. Thus 78 percent of the assets of the 25 
major companies were controlled from the financial East. The other 
savings institutions show similar concentration. Ninety percent of 
the assets of mutual savings banks are in 5 States,^^ with 54 percent in 
New York; and 59 percent of the assets of commercial banks are in 
5 States,^® with 29 percent in New York. The value of assets entrusted 
to corporate and individual trustees is not known with any precision^ 
but Davenport suggested that it may amount to $50,000,000,000, or 
almost twice as much as the assets of life insurance companies.'^ 
The control over trust assets rests primarily in New York, Boston, 
Philadelphia, and a few other cities. 

i» Excluding policy loans of the life insurance companies. Includes fraternal insurance. 

'» Discussed in Hearings before the Temporary National Economic Committee, pt. 9, pp. 3751-3768, 4057- 
4062. 

"New York, Massachusetts, Connecticut, Pennsvlvania, New Jersey. Hearings Before the Temporary 
National Economic Committee, pt. 9, p. 4059. For an explanation of this concentration, see Hearings 
Before the Temporary National Economic Committee, pt. 9, pp. 3770-3771. 

18 New York, Pennsylvania, Illinois, California, Ohio. Hearings Before the Temporary National Eco- 
nomic Committee, pt. 9, p. 4060. 

" Hearings Before the Temporary National Economic Committee, pt. 9, p. 3729. 



34 

Table 8. 



CONCENTRATION OF ECONOMIC POWER 

-Geographical concerdroiion in the cordi-ol over 4 principal reservoirs of 
saving, 1937 

[Amounts in millions] 



State 


Assets of 

legal reserve 

life 

insurance 

companies 


Savings 
bank and 

time 
deposits 


Building 

and loan 

association 

assets 


Total 


Percent 


New York 


$11, 107 
4,256 
2,174 
1,313 
2,253 


$7, 306 

1,225 

2,581 

2,366 

909 


$379 
792 
476 
597 
31 


$18, 792 
6,273 
5,231 
4,276 
3,193 


33.29 


New Jersey 


11.11 


Massachusetts - . . - 


9 26 


Pennsylvania - - . . - . - 


7.57 


Connecticut -- - .... 


5.66 






Subtotal ... . 


21, 103 
5,146 


14, 387 
10, 107 


2,275 
3,437 


37, 765 
18, 690 


66.89 




33.11 






United States ... 


26, 249 


24, 494 


5,712 


56, 455 


100.00 







Source: Hearings Before the Temporary National Economic Committee, pt. 9, p. 4062. 

Concentration in the Larger Institutions ^° 

The flow of savings is largely concentrated in the larger savings 
institutions. The 308 legal reserve life insurance companies reported 
admitted assets totaling 26 billion dollars at the end of 1937. The 
5 largest companies held 54 percent of this total, as follows: 





Assets 
(millions) 


Percent 
of total 


Aletropolitan 


$4, 720 
3,584 
2,520 
2,106 
1,349 


18.0 


Prudential 


13.7 


New York Life... ......_.. _ _. ,. _. 


9.6 


Equitable.. _ .. __. ... ... ..... 


8.0 


Mutual Life, New York ... ... _ .. 


5.1 






Total.. . . . . 


14, 279 


54.4 







The size of these companies and the extent of their concentration 
may be better appreciated from the statement that the Metropolitan 
is by far the largest business organization in the United States, and 
the Prudential is nosed out for second place by a mere $400,000,000. 
In fact, there are only nine corporations in the country as Large or 
larger than the smallest of these five life insurance companies — three 
industrials, two public utilities, and four railroads.-^ 

These five insurance giants, located in New York City and Newark, 
N. J., are surrounded by a host of companies that seem small only by 
comparison. For the next 11 companies hold 26 percent (6.8 billion 
dollars) of total life insurance assets, and the following 9 companies 
hold 7 percent (1.7 billion dollars). The 25 largest companies hold 
87 percent (22.8 billion dollars) of the total; the remaining 283 com- 
panies hold 13 percent (3.4 billion dollars). 

Other financial and savings institutions shov/ a similar though 
smaller concentration. The 543 mutual savings banks in 1939 held 
11.6 billion dollars of assets, but the 25 largest banks held 42 percent 
of the total. The 14,000 commercial banks in 1938 held 56.8 billion 

2" Hearings before the Temporarv National Economic Committee, Part 9, pp. 3751-376S, 4057-40.59. 

21 Assets in 1935 (in millions): Standard Oil Co. (N. J.), $1,89.3; United States Steel Corporation, $1,822; 
General Motors Corporation, -$1,492; American Telephone & Telegraph Co.. $3,998; Consolidated Edison 
Co. of New York, $1,377; Pennsylvania Railroad Co., $2,863; New York Central Railroad Co., $2,356; 
Allegheny Corporation, $1,379; and Southern Pacific Co., $1,678. See National Resources Committee, 
Structure of the American Economy, 1939, pp. 274-276. 



CONCENTRATION OF ECONOMIC POWER 35 

dollars of assets, but the 50 largest (being one-tliird of 1 percent of 
the total number of banks) held 46 percent of the assets. Tlic build- 
ing and loan associations are probably the least concentrated of all 
the savings institutions. 

The institutionalization of savings has the following characteristics: 
on the one hand are millions of persons employing the various savings 
processes; on the other hand is a relatively small munber of savings 
and financial institutions, in many cases interlocked through common 
officers and directors, that hold, manage, and control these savings. 
The extent of the concentration on the latter side lias been sketched, 
and it may be of interest to indicate the extent of the dispersion on the 
former. In 1937-38 there were, with many duplications, of course, 
m any class and among classes, 35,000,000 ordinary life policies, 
89,000,000 industrial policies, 31,000,000 savings depositors in com- 
mercial banks, 14,000,000 depositors in the mutual savings banks, 
6,000,000 members of building and loan associations, and 3,000;000 
depositors in the Postal Savings System. ^^ The interest of mdllions of 
people in these savings institutions — even though these interests are 
themselves highly concentrated -^ — explains why the Federal Govern- 
ment found it necessary during the depression to support both the 
debt structure of the economy and the solvency of the great financial 
institutions. As Senator O'Mahoney summarized the situation: 

Those who contend that every institution, the whole system, should have been 
permitted to go through the wringer, as the phrase has it, ar(! overlooking, are 
they not, the fact that we are no longer li\ ing in an individual economy, but we 
live in a corporate economy, represented by the aggregation of these tremendous 
assets by large institutions. 2' 

It is equally necessary to recognize that concentration of savings 
brings power and great responsibility to a handful of individuals. 
Again in the Senator's words, it may be said that: 

The whole economy of the whole people, and of the whole 48 States, depends 
upon the skill with which that discretion is carried out by the persons who are 
directing the investment of these huge savings. ^^ 

Badly directed investment will distort the directions of economic 
activity, and failure to invest will lower the level of economic activity. 

CONCENTRATION THROUGH MANAGEMENT AND INVESTMENT POLICIES 
OF LIFE INSURANCE COMPANIES 

The Securities and Exchange Commission made an exhaustive in- 
vestigation of legal reserve life insurance companies for the Temporary 
National Economic Committee. ^"^ These companies w^ere the only 
savings institutions investigated by the Temporary National Economic 
Committee. It has been pointed out, however, that life insurance 
companies held 42 percent of the assets or funds of the principal 
savings institutions in 1938, and that they are absorbing a larger share 
of the national income now than before the depression. Life insur- 
ance companies, therefore, constituted the most important single study 

22 Hearings before the Temporary National Economic Committee, Part 9, p. 4063. 

" See ciiapters on "Concentration of Ownership" in the Final Report of the Temporary National Eco- 
nomic Committee. 

2^ Hearings before the Temporary National Economic Committee, Part 9, p. 3774 

" Hearings before tlie Temporary National Economic Committee, Part 9, p. 3766. 

2« This h.id been recommended by President Roosevelt in his message suggesting an investigation. See 
S. Doc. 173, 75th Cong., 3d sess., April 12. 1938. The committee heard 131 witnesses in this connection 
between February 6, 1939, and March 1, 1940, whose testimony has been published in Hearings before the 
Temporary National Economic Committee, Parts 4, 10, lOA, 12, 13, and 28. 



36 CONCENTRATION OF ECONOMIC POWER 

that could be made of savings institutions. Since they interlock with 
other financial institutions, particularly the commercial and mutual 
savings banks, and since life insurance managements seem not un- 
typical of financial managements m general, it is not um-easonable to 
assume that much of the testimony presented with respect to life 
companies may be applicable to the other savhigs institutions. 

Management of Life Insurance Companies 

Who manage and control the life insurance companies? The 
affiliations, interests, control, and concentration represented by the 
directors and officers of life insurance companies have been investi- 
gated three times since 1906. They were investigated by the Arm- 
strong committee in 1906,^^ by the Pujo committee in 1913,^^ and by 
the Temporary National Economic Committee. All have shown 
that the life insurance industry is managed and controlled by a small 
number of men, and that the geographical and size concentration 
within the field is accompanied and accentuated by a concentration 
of control in the individual companies. 

Unfortunately, no adequate study has ever been made of the 
sociological, educational, and psychological factors characteristic of 
the management and directors of life insiu-ance companies.-® In the 
absence of such a study it is possible only to call attention to various 
factors which condition the outlook of the persons who are the principal 
executives of the largest life insurance companies. ^° They are old: of 
the 44 principal executives of the largest stock and mutual life insur- 
ance companies, 33 are between 60 and 80 years of age, and only 2 
are under 50. They are not drawn equally from all geographical 
areas: of the 43 born in the United States, 19 were born in the North- 
east and 13 in the Middle West. Their job tenure is not subject to 
unemployment: of the 36 who stated the number of years they had 
been principal executive, 22 had held that office (or another closely 
associated wdth it) for ten years or more. They went to college: 33 of 
the 44 went to college, many to graduate schools. Their experience 
and training have generally been outside the field of insurance: 15 
were lawyers, 10 w^ere businessmen, and 5 were actuaries; only 12 had 
been insurance men other than actuaries. Their other business con- 
nec lions are largely financial: of the 30 reporting business affiliations, 
21 were associated primarily with financial enterprises, and 9 primarily 
with industrial enterprises. Almost without exception they are at the 
present time in the upper income brackets: the average salary of the 
principal officers of the 25 largest mutual companies was $53,664 in 
1938, wath the presidents of the Metropolitan and the Mutual life 
receiving $125,000, those of the Prudential and New York Life 
$100,000, and that of the Equitable $75,000. The average salary of 
the principal officers of the 25 largest stock compar.ies was $34,364, 
w^ith 7 of the companies paying $50,000 or more.^' Less than three- 

" Report of the Joint Committee of the New York State Senate and Assembly to Investigate the Life 
In^iurance Companies, February 12, 1906. 

28 Report pursuant to H. R. 429 and 504, 1913. 

" Life insurance companies have made many studies of what makes a good agent, none of what makes a 
good executive. Little is known of the characteristics of the executive yroup. See '■'I'tie 30,000 Managers." 
T'orture, February 1940. Some specialized groups have been studied, e. s., Leo C. Rosten, Washinston 
I'ress Correspondents, Harcourt Brace, New i'ork, ISS.S; A. W. MacMahon and J. D. Millett, Federal 
Administrators, Oxford, N. Y., 1939; N. N. Gill, the Municipal Research Bureau (a dissertation in projJTess 
at the TTniversity of Chicago). 

30 The following discussion is based upon data in Who's Who, 1940, and Who's Who in Comrreree and 
Industry, 19'^ri, with respect to the i^rincipal executive in each of the major mutual and stock companies. 
The list of principal executives was compiled by the Securities and F.xchange Commission. 

*i For the exe.nitive salary scale of the msjor companies, see Hearings before the Temporary National 
Economic Committee, Part 13, Exhibit 13J6, p. 7011. 



CONCENTRATION OF ECONOMIC POWER 37 

tenths of 1 percent of American famili(»s have incomes as lar^e or 
larger than the sahiries of these hfe insurance company executives. 
They naturally move in the social and economic groups which such 
incomes make possible: they live in high rent city or suburban areas. 
They belong to many exclusive town and country clubs. In response 
to the geographical concentration of the insurance business they live 
in the East. They may be said to be characterized by an urban 
outlook. 

On the basis of these conditioning characteristics certain highly 
tentative suggestions may be developed with respect to investment 
policy. They may be expected to prefer large transactions and in- 
vestments, apart from the relative costs involved, to small ones; and 
to prefer security and conservatism in the form of conventional ac- 
counting ratios rather than in "character" as the old country banker 
knew it.^^ These conditioning characteristics may help to explain, 
too, why insm"ance executives uniformly opposed liberalization of 
legal investment reqmrements, despite the fact that they found great 
difficulty in investing their funds under present conditions.^^ 

Interlocking relationships of officers and directors. — Life insurance 
officers and directors have varied and far-flung financial and industrial 
connections. Data presented to the Temporary National Economic 
Committee indicated the facts with respect to the business affiliations 
of 135 directors on the boards of the 5 largest insurance companies — 
Metropolitan, Prudential, New York Life, Ec{uitable, and Mutual 
Life. This group of 135 directors also served as directors of 100 other 
insurance companies, 145 banks or other financial institutions, and 
534 industrial, real estate, or miscellaneous corporations. Each 
director of these 5 largest life insurance companies was on the aver- 
age a director of 6 other corporations.^^ The life insurance directors 
studied are predominantly directors of the "blue chip" industrials and 
public utilities. ^^ 

These 5 life insurance companies are interlocked through com- 
mon directors with 23 large commercial banks having total assets of 
almost 16 billion dollars. Their interlocking relationship is particu- 
larly strong with the New York City banks. These 5 major insur- 
ance companies have 2 or more directors in common with 12 of the 
largest New York City banks, including the National City, Chase, 
Guaranty, Bankers Trust, First National Bank, and Irving Trust; 
and they interlock with practically every large commercial and 
savings bank in the New York City area. There are 48 interlocking 
directors between the 5 largest insurance companies and 13 commer- 
cial banks in New York City.^^ Furthermore, bank directors fre- 

« For example, Mr. Thomas D. Buckner testified that his company, the New York Life Insurance Co. 
usually desired to make an investment in excess of $100,000. Hearings before the Temporary National 
Economic Committee, Part 2S, p. 14754. And the followinii colloquy involving Mr. John W. Stedman. Vice 
President of the Prudential Life Insurance Company, is interesting. Hearings before the Temporary 
National Economic Committee, Part 2S, p. 15269. After agreeing that his company would want at least a 
10-year certified balance sheet of any industrial company in which investment was contemplated, he was 
asked: 

The Vice Chairman-. Right on that point, will you develop whether or not an indisposition to purchase 
the securities of a new business venture is controlling? 

Mr. Stedmax. It would not be, in our judgment, suitable for the funds of life insurance: in other words, 
it is not a trustees' investment. 

The Vice Ch\irm\n-. Would no other consideration balance against the ab.sence of a 10-year record? 

Mr. Stedman. I think when we look back over the past 10 years I have to say no. 

3' See infra, pp. 39-42. 

3< Compiled from a questionnaire by the Securities and Exchange Commission. 

35 Including United States Steel Corporation, Bethlehem Steel Corporation, Great Atlantic & Pacihc 
Tea Co., American Telephone & Telegraph Co., Consolidated Edison Co. of New York, Atchison, 1 opeka 
& Santa Fe Ry. Co., General Electric Co., and E. I. Ou Pont de Nemours & Co. (Data compiled from 
replies to a Securities and Exchange Commission questionnaire.) 

36 Hearings before the Temporary National Economic Committee, Part 13, p. "OOfi. 



38 CONCENTRATION OP ECONOMIC POWER 

quently occupy strategic positions on insurance company boards 
through their assignment to the important financial committees which 
have general charge of the investment of insurance company funds. ^^ 

Nomination and election oj directors. — Life insurance executives and 
directors constitute a small group that is largely self-appointhig and 
self-perpetuating. The facts may be discussed first with respect to the 
mutual companies, which control $22,000,000,000 of assets, and, 
secondlv, with respect to the stock companies, which control $5,000,- 
000,000 of assets. 

The mutual companies are owned by their policyholders. They are 
operated on the principle that each policyholder 's entitled to one vote 
regardless of his financial stake in the company and of the amount of 
insurance he carries. The election mechanism and the legal election 
recjuirements make it difficult to nominate or to elect any director who 
is not sponsored by the management."^ Though the policyholders are 
widely scattered, New York State's insurance statutes require that 
individual nominations be supported by a petition of one-tenth of 1 
percent of the number of existing policyholders.^^ In the case of the 
Metropolitan Life Insurance Co., with its 25,000,000 pjlicyholders, 
this rec^uires a nominating petition signed by 25,000 policyholders. 
Securing such a large number of signatures, under the most favorable 
circumstances, is a difficult and expensive undertaking. No policy- 
holder would be financially justified in doing so. 

Furthermore, the companies do not have readily available a com- 
plete list of all policyholders, and the Metropolitan and the Prudential 
indicated that they would find it difficult to prepare one.^° 

Nomination is thus in the hands of the management. 

Election of the slate selected by the managemeTit is a foregone 
conclusion. Voting in most cases is a formality.^' In 1938, for 
example, the directors of the Equitable Life Assurance Society were 
elected by 532 votes, wdiich were cast for one-twentieth of 1 percent 
of the eligible voters. In that year 1.8 percent of the Metropolitan's 
and 2.5 percent of the Prudential's potential votes were cast.^- In 
the case of four elections of the Mutual Life which were examined a 
majority or all of the votes were cast by company employees who were 
also policyholders.^^ But even the small number of votes suggested 
by these illustrations is larger than the number required for election. 
According to section 94 of the New York insurance Inw a single vote 
is sufficient to elect the slate if no independent nomination has been 
made — and there has been no contested election in New York in 15 
years, except in the case of one small mutual assessment company in 

" Data compiled from replio.s to a Securities and Exehanse Commission questionnaire. 

3S It was indicated before the Temporary National Economic Committee that the Metropolitan first 
advertised the fact that an election was to take place after the close of the period within which the policy- 
holders might make independent nominations. Hearings before the Temporary National Economic Com- 
mittee, Part 4, pp. 1297-1298. 

39 Hearings before the Temporary National Economic Committee, Part 4, pp. 1397, 1405-1406. 

<" For the Prudential, see Hearings Before the Temporary National Economic Committee, Part 12, p. 
5921. The Mc'triipoiitan said that it had a card record of all persons carrying ordinary life insurance policies, 
and that it could iirepare a list from tliis file. But this would be insufficient. Though ordinary life insur- 
ance policyholders in the Metropfilitan pay for the bulk of the outstanding- insurance, they constitute le.ss 
than 10 percent of the total ninnber of jiolicyholders. More than SO percent of the total number of potential 
voters are industrial policyholders. The home offlce has no list of industrial policyholders. These lists 
are decentralised and kept in the various branch agencies charged with the collection of premiums. Ibid., 
Part 4, pp. 1305-1306. 

■" But data were presented to indicate that even the formalities were not correctlv observed. See Hearings 
Before the Temporary National Economic Committee, Part 4, pp. 129.^-1296, 1302-1303, 1313-1369, 1398, 1409- 
1410, and Part 12, pp. 5924-5925. 

*■ Hearings Before the Temporary National Economic Committee, Part 4, p. 1552. 

<3 Hearings Before the Temporary National Economic Committee, Part 4, pp. 1391-1392. 



CONCENTRATION OF ECONOMIC i'oWEIi 



39 



1932.^* Consequently, the niecluuiical and stereotyped methods used 
to advise pohcyhoklcrs of then- right to vote make httle diU'erence 
in the election results/^ Some policyholders learned for the hrst time, 
as a result of the insurance hearings, that they liad the riglit to vote.''^ 
The absence of any effective democratic control witliin life insurance 
companies has been noted many times." In 1927, James A. Bcha, 
superintendent of hisurance of the State of New York, described it as 
follows: 

All of the directors of our mutual life insurauce companies are men of affairs, 
men of good standing in their respective communities, and men of honor and 
ability. They serve on these boards as directors for a nominal fee. They are 
active in their own special work and undertakings, and can give only limited 
consideration to the affairs of these life insurance companies. 

While nominally elected by the policyholders, they are actually selected by the 
management of each of the companies themselves. Section 94, which provides 
for the election of directors, while intended to give policyholders a voice in the 
selection of directors, nevertheless sets up a plan which is not workable to accom- 
plish its object, and, as already stated, tlie directors are, for all intents and puri)oses, 
selected by the management of the company. It is these directors so selected 
who in turn elect the officers of the companies and are expected to supervise 
their management. ^^ 

The hearings before the T. N. E. C indicated that the situation des- 
cribed in 1927 prevails today. Indeed, the question may be raised 
whether, in view of the record of the lack of control by polic3diolders 
and the scale and complexity of the operations of the larger companies, 
effective democratic control by policyholders is possible and if it is, 
whether it would substantially improve the efficiencj^ of management. 
The nomination and election of officers and directors of stock life 
insurance companies present a different aspect. Stock companies are 
legally controlled by their stockholders; and special studies by the 
Securities and Exchange Commission indicate that officers and direc- 
tors frequently own a majority stock interest, and in almost all other 
cases, a substantial minority interest. The continuity of manage- 
ment in these companies suggests that such stock interest, coupled 
with control of the proxy machiner37^ (and in some cases, the use of 
long term proxies) connotes effective control. On the other hand, 
policyholders contribute the bulk of the companies' funds. The 
ratio of policyholders' liabilities to total assets in the seven largest 
stock companies ranged from 82 percent to 95 percent.*^ Further- 
more, six of these seven companies have participating policies out- 
standing. These policyholders have the right to share in the profits, 
but determination of the size of that share is the right of the stock- 
holders. 

Investment Policies oj' Life Insurance CoTwpanies 

In the 10 years from 1929 through 1938 the 26 largest life insur- 
ance companies acquired bonds, mortgages, and other assets totaling 
$26,000,000,000; in 1938, they made investments of $3,600,000,000, 
an average of $12,000,000 per v/orking day.^° The volume of funds 
handled by life insurance companies would by itself require an exami- 

<< Hearings Before the Temperary National Economic Committee, Part 4, pp. 1405-1406. 
" Hearings Before the Temporary National Economic Committee, Part 4, pp. 1553-1555. 
^6 Hearing's Before the Temporary National Economic Committee, Part 4, p. 1403. 
*' Hearings Before the Temporary National Economic Committee, Part 4, pp. 1555-1557. 
<8 Hearings Before the Temporary National Economic Committee, Part 4, p. 1557, quoting from New- 
York State Insurance Report, 1927, Part I, jjp. 8-9. 
«» Hearings before the Tcmixirary National Economic Committee, Part IDA, p. 101. 
51 Hearings before the Temporary National Economic Committee. Part lOA, pp. 94-95. 

291143 — 41— No. 37—4 



40 CONCENTRATION OF ECONOMIC POWER 

nation of their investment policies. But these pohcies have a quah- 
tative as well as a quantitative significance. The importance of these 
investment policies is enhanced by the dominant position of insurance 
companies in present-day securities markets and by the position of 
leadership of insurance executives and directors in financial matters, 
a leadership that interlocking relationships facilitates. The choice 
which life insurance executives make among alternative channels of 
investment is an extremely important one for the working of the 
economy. The levels of interest rates, investment, national income, 
and employment are all determined in part by how and where life 
insurance funds are invested. In these circumstances it becomes a 
matter of vital concern to examine the legal restrictions and the 
investment policies and practices of the life insurance companies. 

Legal requirements. — The investment policies of the major savings 
institutions are circumscribed by law. These legal requirements 
vary from State to State and from one type of savings institution to 
another. To simplify the discussion, the situation in New York 
alone will be described. This may be justified by the facts that the 
assets of the major savings institutions are to a substantial extent 
concentrated in New York, and that at least 25 vStates have modeled 
their requirements on New York's. ^^ 

The investments of savings banks and trustees of New York are 
largely governed by the "legal list." William R. White, Superintend- 
ent of Banks of the State of New York, described the legal list as 
follows: 

The legal list is a document ]>iiblished annually by the New York State Banking 
Department. It lists the securities which, in the opinion of the superintendent of 
banks, comply with the standards prescribed in section 235 of the banking law 
and which are therefore, in his opinion, legal for investment for savings bonks and 
for trustees. The fact that securities are excluded from the list is not to lie taken. 
as definitely meaning that those securities are not legal. However, the fact that 
securities are included in the list affords some protection to savings banks and 
trustees investing in those securities and, in fact, investm.ent in other securities 
is barred by savings banks and by trustees unless the instrmnent creating the trust 
authorizes investment beyond the list.^' 

White fiu-ther testified that the great majority of States have legal 
lists similar to the one in New York, and that some States incorporate 
by reference the New York legal list without setting up one of their 
own.^^ 

Apart from obligations of the United States, all of wliich are ehgible 
for investment, the legal list in 1931, the last year the list reflected 
the predepression situation, consisted of: 

Ohhgations of States $2, 301,000,000 

Obligations of municipalities 8, 773, 000,000 

Obligations of railroads ■ 7, 002, 000, 000 

Obligations of utilities 2, 166, 000, 000 

Total_ 20,842,000,000 

The situation has not changed materially since 1931, except for the 
railroads. By 1939 less than 1 billion dollars of railroad securities 
could have met the 1931 standards, though 2.5 billion dollars remained 
on the list because the statutory requirements had been relaxed.^* 

4' Hearings before the Temporary National Economic Committee. Part 9, p. 3803. 
52 Hearings befi.re the Temporary National Kconomic Committee, Part 9, p. 3793. 
M Hearings hefore t!}e Temporary National Economic Committee, Part 9, p. 3794. 

M Healings l^efore the Temporary National Economic Committee, Part 9, pp. 3794-3795, where the legal 
TequiremeJits ace outlined- 



CONCENTRATION OF ECONOMIC POWER 4J 

In the face of this conlraotion, the only move to liberaHzo tlie scope 
of the legal list was an amendment to the'banking law in 1938 authoriz- 
ing the State Banking Board, upon application of a group of savings 
banks, to add to the legal list corporate interest bearing obligations 
not otherwise eligible for investment. The additions to the list bj^ 
petition have not been substantial. Since the passage of the amend- 
ment the Board has added debentures totaling 577 million dollars. ^^ 

White was of the opinion that the legal list was unduly restrictive in 
some respects. He suggested that the securities of other industries — 
specifically foods, oils, tobaccos, and steel — might be made available 
for investment.^*^ Ho thought, too, that "there are undoubtedly a 
substantial number of corporations which fail to meet tlie technical 
recjuirements of the banking law, but whose securities might properly 
be considered as investments for savings banks or for trustees.'' " 
He pointed out that the secm-ities whicli had been on the legal list 
but had been removed would need a period of reseasoning before they 
became reeligible. If a railroad or a pubhc utility defaulted on its 
securities and was then reorganized, its new securities would not be 
placed upon the legal list, regardless of the future prospects of the 
company, until at least 6 years had elapsed. ^^ It may be interesting 
to note that the investigation of protective and reorganization com- 
mittees indicated tliat municipalities recognized this and frequently 
went to great lengths to disguise or cure defaults, since the}^ realized 
that one default might deprive them of their institutional market for 
manj^ years.^^ 

The New York regulations governing the investments of life 
insurance companies are somewhat broader than those governing the 
investments of savings banks and trustees. ^° Rather than describe 
these in detail, it may be more informative to summarize the provisions 
governing life insurance company investments in 1 1 States, including 
the prmcipal States in which the 26 largest companies operate: 

Some of the States are more liberal than others, but in general the legal restric- 
tions are somewhat similar. Generally speaking Government obligations of the 
United States and its various political subdivisions are eligible for investment and 
loan purposes, as are the oVjligations of the Dominion of Canada and its Provinces. 
Man_v of the States permit investments in obligations of political subdivisions in 
Canada, while a few authorize direct investment in Canadian industrials. 

Corporate obligations of some companies are legal investments in all States 
under a wide range of restrictions, limitations, and earnings requirements. Two 
of the States reviewed, tiiat is, Wisconsin and Iowa, permit the acquisition of 
corporate shares of any description, while two. New York and Ohio, specifically 
prohibit investment in common stocks. The other seven States permit investments 
in common stocks under various limitations. 

Loans on mortgages secured by real estate in the United States are generally 
permitted while some States permit loans on mortgages secured by real estate in 
Canada. 



M Hearings before the Temporary National Economic Committee, Part !), p. 3799. These debentures were 
issued by the following companies: American Telephone & Telegraph Co., Liggett & Myers Tobacco 
Co.. Mountain States Telephone & Telegraph Co., Soconv Vacuum Oil Co., and Southern Bell Telephone 
& Telegraph Co. 

51 Hearings before the Temporary National Economic Committee, Part 9, p. 3796. 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3795. 

'•" Hearings before the Temporary National Economic Committee, Part 9. p. 3795. 

*' See Securities and Exchange Commission, Report on Protective and Reorganization Committees, 
Part IV. Committees for the Holders of Municipal and Quasi-Municipal Obligations, 1930, pp. 9-12. Cf. 
thetcstimony of Mr. L. Arnold Frye, that in the event of default: "The market for itslthc municipality's] 
bonds is very much limited, and in consequence their value is diminished, because most of the institutions — 
and they are the largest buyers— whether or not they are required under the statute relating to fiduciaries 
and trustees and so forth, do in fact usually govern their purchases by the provisions of those acts and do not 
buy the bonds which are not on the legal list" (p. 10). 

f" Hearings before the Temporary National Economic Committee, Part 9, p. 3805. 



42 



CONCENTRATION OF ECONOMIC POWER 



Mortgage loans in all cases examined are restricted to first liens and may be 
made up to various percentages of the appraised value of the real estate at the 
date the loan is made. 

This percentage is 66% percent in all of the 11 States examined except Massa- 
chusetts and Iowa, which permit 60 percent, and Wisconsin, which permits loans 
only to the extent of 50 percent. In New Jersey, while the general provision is 
66% percent, under certain circumstances mortgages up to 75 percent of the 
appraisal value may be made. All States permit policy loans. In every instance, 
investment in real estate is definitely restricted to the business needs of the 
company although real property acquired as the result of foreclosure or in satis- 
faction of debts previously contracted may be held for a limited period.''' 

The Metropolitan and the Prudential, however, have constructed 
housing projects in accordance with special enabling legislation. The 
Lockwood Act of 1922 and a similar act in 1938 permitted the Metro- 
politan to construct two large-scale residential developments in New 
York City ; ""^ and the Prudential has entered into a slum clearance 
project in conjimction with the city of Newark, N. J.''^ 

The swpply of securities. — With the exception of United States 
Government seciu^ities, the supply of securities available for invest- 
ment since 1929 has not kept pace with the flow of savings to savings 
institutions. While the annual flow to these institutions, and partic- 
ularly to life insiu'ance companies, has continued at high levels, the 
amount of all securities outstanding and available for purchase, 
except Federal securities, has decreased. Default and unfavorable 
earnings have removed $5,000,000,000 of railroad securities from the 
legal list since 1931. An excess of retirements over new issues of public 
utility securities decreased the outstanding supply in that field by 
$739,000,000 from 1933 through 1939. The volume of outstanding 
State and local securities, and of foreign securities, decreased from 
1933 through 1939. Federal securities alone showed an increase 
during the period, as indicated in table 9. 



Table 9. — Net change in the outstanding amount of the principal classes of securities, 

1933-39 

[Excess or deficit (— ) of new issues over retirements] 

[Millions of dollars] 





Federal 


State and 
local 


Domestic corporate 


Foreign 




Year 


All 


Public- 
utilities 


Total 


1933 

1934 

1935 

1936 

1937 

1938 

1939 


2,010 
4,690 
1,450 
4,340 
3,200 
3,174 
3,111 


-350 

—m 

40 
-20 
-90 
269 
179 


-350 

-90 

20 

820 

-490 

242 

-313 


-109 
-17 
134 
212 

-628 
-34 

-297 


10 
-210 
-90 
-190 
-230 
-30 
-26 


1, 320 

3, 930 
1,420 

4, 950 
2,390 
3, 655 

2, 951 


Total, 1933-39 


21, 975 


-432 


-161 


-739 


-766 


20, 616 



Source: Securities and Exchange Commission. Selected Statistics on Securities and on Exchange Mar- 
kets, 1939, pp. A-1 to A.-3. Data for 1938 and 1939 have not yet been published. 

In view of the restricted supply of eligible private securities, the 
increase in life insurance company holdings of cash and Federal secu- 
rities, and White's testimonj^ as to the undue restriction, in some 

81 Hearings before the Temjioriiry Xational Economic Committee. Part 28, pp. 14800-14801. 

82 Hearings before the Tmiporai y Xational Economic Committee, Part 11, p. 5129. 

83 Hearings before the Temporary Xational Economic Comniittee, Part 1], p. 5081. 



CONCENTRATION OF ECONOMIC POWER 43 

respects, of State reti-ulatioii of invostnKMits, the attitude of life insur- 
ance executives toward the desirability of })roa(leiiin(i' tlie lethal list is 
particularly pertinent. 

Tlie insurance company executives were of the opinion that the 
existing regulations should be maintained. The president of the New 
York Life testified that the present restrictions seemed satisfactory, 
and that his company would like to be able to find more investments 
in the fields where they already were rather than to extend their 
investments to other fields. He added that his company had no 
desire to invest in common stocks."* A vice presid(Mit of the l^ru- 
dential (a New Jersey corporation) gave the following opinion: 

Mr. Gesell. You would feel then that the present investment laws under 
which you operate, namely, the laws of New Jersey, are sufficiently liberal for 
your purposes, and even if they were removed you would probably be still invest- 
ing in the same field in which you are now investing. 

Mr. Stedman. I think that is correct.^-^ 

A vice president of the Mutual Life testified that "I think that our 
law [in New York] is liberal enough for us to purchase any sound, 
high-grade industrial bonds we would consider stiitable for our invest- 
ment piu'poses." ^^ 

Sjiecific investment i^oUcies and practices. — Within the limitations 
imposed by legal lists and other legal requirements, the managers of 
life insurance companies and other regulated financial institutions 
have wide latitude. The investment pohcy actually followed depends 
upon the membership and outlook of the management group and the 
type of investment standards that group accepts as "sound." 

It is impossible in this section to discuss in any detail the composi- 
tion and year-to-year shifts of life insurance company assets. ''^ It is 
sufficient at this point to note that diu'ing the period 1929-38 the 
composition of the assets of the 26 largest legal reserve life insurance 
companies domiciled in the United States changed markedly."^ Cash 
and bank deposits, Government bonds, and real estate became rela- 
tively larger constituents in total assets; farm and urban mortgages 
became relatively less important; and policy loans and private secu- 
rities (railroad, public utility, and other stocks and bonds) retained 
approximately their relative positions. ^^ 

6* Hearings before the Temporary National Economic Committee, Part 28, p. 14753. 

6' Hearings before the Temporary National Economic Committee, Part 28, p. 15278. 

*' He added that he thought great care should be exercised in liberalizing laws and lowering standards 
because, as he explained, "It is not that I have fear in strong companies. It is the weak companies that 
would take advantage of that liberality." (Hearings before the Temporary National Economic Com- 
mittee, Part 28, p. 15306.) This opinion is interesting in the light of the testimony by Mr. Alfred Best, editor 
of some of the best known insurance statistical publications. Mr. Best discussed the 19 life insurance com- 
pany failures in 1930-38. In his opinion, the general cause of these failures was the holding of too much 
home office real estate, except that in one ease it was the holding of too much stock in other life insurance 
companies, and in another it was an investment in a speculative real estate scheme in the Texas grapefruit 
area. Hearings before the Temporary National Economic Committee, Part 28, pp. 15383-15414. 

" These matters are discussed in detail in Temporary National Economic Committee Monograph No. 28, 
Study of Legal Reserve Life Insurance Companies, by Gerhard Gesell and Ernest Howe. 

6' The 26 companies to wliich the discussion in this section is confined are as follows: Metropolitan Life 
Insurance Co., the Prudential Insurance Co. of America, New York Life Insurance Co., the Equitable 
Life Assurance Society of the United States, the Mutual Life Insurance Co. of New York, the Northwest- 
ern Mutual Life Insurance Co., the Travelers Insurance Co.. John Hancock Mutual Life Insurance Co., 
the Penn Mutual Life Insurance Co., the Mutual Benefit Life Insurance Co., Massachusetts Mutual Life 
Insurance Co., Aetna Life Insurance Co., New England Mutual Life Insurance Co., the Union Central 
Life Insurance Co.. Provident Mutual Life Insurance Co., the Connecticut Mutual Life Insurance Co., 
Connecticut General Life Insurance Co., Phoenix Mutual Life Insurance Co., Bankers Life Co., National 
Life Insurance Co., Pacific Mutual Life Insurance Co., State Mutual Life Assurance Co., Equitable Life 
Insurance Co. of Iowa, the Western and Southern Life Insurance Co., the Lincoln National Life Insurance 
Co., the Guardian Life Insurance Co. of America. (Hearings before the Temporary National Economic 
■Committee, Part 10.\, pp. III-IV.) 

«8 These summaries refer to the 49 major companies covered in the reports of the Association of Life Insur- 
■ance Presidents. See Hearings before the Temporary National Economic Committee, Part 4, pp. 1518- 
1519. 



44 CONCENTRATION OF ECONOMIC POWER 

1. Cash: The cash holdings of the 26 largest legal reserve life 
insurance companies increased by more than 500 million dollars from 
1929 to 1938, or from 102 million dollars to 665 million dollars; the 
Metropolitan and the Equitable each held more cash in 1938 than 
all 26 companies held in 1929."° Cash holdings increased approxi- 
mately 40 percent between December 1938 and August 1940."^ 

These cash and bank balances earned negligible amounts of interest. 
In 1929 the 26 companies together earned $3,700,000 upon their cash 
balances; in 1938, only $273,000. In 1929 all of the 26 companies 
reported interest income on cash balances; in 1938, after the cash 
holdings of the 26 companies had grown by 650 percent, 7 companies 
earned nothing, and another 7 earned less than $1,000. The New 
York Life, for example, reported $43 of interest income during 1938 
on cash balances aggregating 50 million dollars. The Prudential 
reported no interest income during the year on 95 million dollars 
of cash.^- 

All the executives who were questioned agreed that their cash^ 
holdings were greatly in excess of the amount normally required in 
the business. They explained that they held excess cash because 
they were unable to find investment outlets." There was no evidence 
that their inability to find investments, even in low-yield, short-term 
governments, was the result of any concerted investment policy. It 
should be pointed out, however, that the companies, even apart from 
their recent increases in cash, are probably more liquid than ever 
before by reason of their large holdings of governments. It would be 
to the advantage of any one company to invest its surplus cash; and 
if other companies followed suit, the competition would undoubtedly 
have a marked effect upon both long and short-term interest rates. 

2. Government bonds: Life insurance companies, together with 
other savings institutions have invested heavily in Government bonds 
since the depression. United States Govermnent bonds constituted 
2 percent of the assets of the 26 largest companies in 1929, 18.6 percent 
in 1938, and almost 19 percent in 1939.^* The yield on long-term 
United States Governments has at the same time fallen sharply, 
from 3.60 percent in 1929 to 2.36 percent in 1939. The yield of 
shorter term obligations has declined even more sharply. If the 
experience of one company discussed during the hearings is any guide, 
the life insurance companies have made relatively heavy investments 
in the shorter term maturities, for it was stated that this company in 
1937 earned only 1.9 percent on its govermnents.^^ The witnesses 
generally agreed that the insurance companies invested in govern- 
ments because they could not find any higher yield securities else- 
where, and because the decline in the yield on government securities 
was symptomatic of the decline in the yield of all classes of securities.^* 

'" Hearings before the Temporary National Economic Committee, Part lOA, pp. 98-100. 

'■ On the basis of reports of 35 companies reporting currently to the Association of Life Insurance Presi- 
dents, the cash holdings of these companies were 635 million dollars at the end of 1938, 763 m.illion dollars 
at the end of 1939. and 888 million dollars in August 1940. See Bureau of Foreign and Domestic Commerce, 
Survey of Current Business. 

" Hearings before the Temporary National Economic Committee, Part lOA, pp. 106-7. The Pacific 
Mutual was the only company to earn a noticeable return on its cash holdings. Of its total cash holdings: 
of 3.9 million dollars, 3.4 million dollars were at interest in California banks in 1938, and earned $39,944 
interest, or more than all the other companies except two. Hearings before the Temporary National Eco- 
nomic Committee, Part 28, p. 14824. 

" Hearings before the Temporary National Economic Committee, Part 28, pp. 14758, 15243, 15247, 15295- 
15296. 

'* Hearings before the Temporary National Economic Committee, Part lOA, p. 98. Data for 1939 are esti- 
mated from the reports of a larger number of companies reported in the Bureau of Foreign and Domestie 
Commerce, Survey of Current Business. 

" Hearings before the Temporary National Economic Committee, Part 4, p. 1225. 

?8 Hearings before the Temporary National Economic Committee, Part 28, p. 15260, 15295-15298, 15318. 



CONCENTRATION OF ECONOMIC POWER 45 

It may be intorestins; to note, however, that ahhoiio:h personal income 
taxes have increased the relative advantages to individuals of holdino; 
tax exempt securities, there has been a narrowing in the s])read 
between interest rates on governments and those on the highest 
grade private securities. ^^ This declining spread is in considerable 
part to be explained by the acquisition of government bonds by public 
institutions, and by private institutions to whom tax exemption pre- 
sents less advantage than to individuals. 

3. Corporate bonds and notes: Life insurance companies confine 
their investments in corporate bonds and notes to the issues of large 
corporations. With regard to the New York Life, for example, the 
president was questioned as follows: 

The Chairman. That is to say, your industrial investments are practically 
confined to the offerings of the large corporations? 
Mr. BucKNER. The large corporations.^'* 

Buckner also testified that the minimum investment by his com- 
pany was $100,000.^^ The testimony with regard to the Prudential 
indicated that corporate investments were made in sizable blocks. 
Indeed, the growth of the practice of private placement, i. e., the 
direct sale of securities by an issuing corporation to one or more 
insurance companies, indicates the magnitude of investment purchases 
most clearly.**' A vice president of the Prudential did describe the 
efforts of his company to make "small industrial loans," explaining 
that even in this class "we didn't want to go much below one hundred 
thousand, possibly fifty." In this range, certainly not the range of 
"small business," the Prudential found that it could make only two 
loans in 18 months through the efforts of one full-time man.^^ 

4. Policy loans: A policy loan is a loan made b}^ a life insurance 
company to a policyholder secured by his policy. Policy loans are 
the safest and highest-yield type of investment of life insurance com- 
panies. In 1932, when policy loans were 17.5 percent of total assets, 
they were responsible for 22.8 percent of total investment income. 
In 1938, when policy loans were 11.6 percent of total assets, they were 
responsible for 18.7 percent of total investment income. The 26 com- 
panies averaged a return of 5.79 percent upon their policy loans in 
1938, in comparison with 4.95 percent upon stocks, 4.74 percent upon 
mortgages, and 3.47 percent upon bonds.^^ 

The high interest rates charged on policy loans are not based upon 
compensation for risk, since there is no risk, in this type of investment. 
Policy loans constitute a riskless investment— safer even than United 
Government bonds: 

Mr. LuBiN. And is there any other type of investment an insurance company 
could make that would be as sound as such a loan? 

Mr. Howe. There is no possibility of loss involved in a transaction of that sort 
so long as the thing Ls accurately handled mechanically. 



" In 1925 the spread between the average yield on Moody's Aaa corporate bonds and the average yield 
on long-term United States Government bonds was 1.02 percent; in 1929, 1.13 percent; m 1933, 1.18 percent; 
in 19.38, 0.63 percent. (Yield on Moody's Aaa corporates from the Bureau of Foreign and Domestic Com- 
merce, Survey of Current Business, 1940 Supplement, p. 51; yield on long-term governments from Secretary 
of the Treasury, Annual Report of the Secretary of the Treasury, 19:39, p. 486.) The spread shown by the 
Treasurv's current indexes, published in the Treasury Department Bulletin (discussed m the issue of July 
1939, p. 20), as of January, is as follows: 1937, 0.62 percent: 19.38, 0.52 percent; 1939, 0.49 percent; 1940, 0.51 
percent. 

" Hearings before the Temporary National Economic Committee, Part 28, p. 14755. 

■9 Hearings before the Temporary National Economic Committee, Part 28, p. 14754. 

so This is discussed infra, pp. 61-65. 

*' Hearings before the Temporary National Economic Committee, Part 28, p. 15270. 

" Hearings before the Temporary National Economic Committee, Part lOA, pp. 8-10, 102. 



46 CONCENTRATION OF ECONOMIC POWER 

Mr. LuBiN. So in reality, the return is largest on the safest investment j'ou 
can make. 

Mr. Howe. That is right.^s 

The interest rate on policy loans is set forth in the policy contract. 
The contract rate was 6 percent until 1937, when a few of the major 
companies reduced the contract rate of interest on new policies to 5 
percent. A year later some of them extended the privilege of loans 
at 5 percent to old policyholders. 

Even with these reductions, the decline in the rate of interest on 
policy loans was much less than the decline in the rate of interest on any 
other type of investment. Life insurance company executives offered 
no clear explanation of this differential. Considerations of safety 
would have reduced the differential in favor of policy loans. The 
expense of making such loans is not great and cannot by itself account 
for the bulk of the differential.^^ No witness mentioned the fact that 
it might be necessary to keep the rates high merely to discourage bor- 
rowing, though Thomas D. Buckner indicated that policy loans were 
frequently followed by surrender of the policy.^^ No evidence was 
introduced to the effect that life insurance companies might have 
agreed on a uniform interest rate, though a large amount of testimony 
indicated the presence of inter-company agreements with respect to 
rates, surrender charges, and other important aspects of the business.^^ 

The question may be asked why policyholders, in view of these 
differentials, did not borrow from commercial banks, assigning then* 
policies as collateral. (They had to make such assignments in bor- 
rowing from insurance companies.) The answers to this question 
are revealing: 

(1) Though such loans presented practically no risk, they were not 
of the traditional commercial loan type that banks cared to make. 

(2) Though interest rates fell during the 1930's, they fell very 
unevenly. The rates on term loans to the larger corporations fell 
drastically; the rates on the better type of mortgage loans fell appre- 
ciably, in considerable part because of the activity of Government 
lending agencies. The rates on personal loans, however, fell least. 
For several years, therefore, there was no great advantage in borrow- 
ing money from a commercial bank rather than a life insurance 
company. Since 1936 or 1937 the further decline in interest rates 
and the mcreasing pressure of excess reserves have increased the 
willingness of commercial banks to make policy loans. For the 
first time one now sees advertisements of the willingness of commercial 
banks to make loans on life insurance policies at 4 percent.^^ 

(3) There may have been one other factor in the situation, illus- 
trated by the attempt by a $50,000 a year advertising executive to 
borrow $20,000 upon a policy which had a cash surrender value of 
more than this amount. A life insurance agent acted on behalf of 
the assured in attempting to obtain the loan from a New York City 

*' Hearings before the Temporary National Economic Committee, Part 28, p. 1480S. 

8* The cost as nearly as could be ascertained was said to be one-half of 1 percent per year. (Hearings 
before the Temporary National Economic Committee, Part 28, p. 15524, correcting hearings before the 
Temporary National Economic Committee, Part 28, p. 14739.) There are, of course, costs involved in 
making other investments. 

*5 Hearings before the Temporary National Economic Committee, Part 28, p. 14737. 

86 Generally discussed in Hearings before the Temporary National Economic Committee, Part 10. 

8' Cf. hearings before the Temporary National Economic Committee part 28, pp. 14815. 



CONCENTRATION OF ECONOMIC POWER 47 

bank. The bank did not make the loan, and wrote the insurance 
companj^ that — 

As you know, we find it difficult to obtain good loans today, hut nevertheless 
do not feel that we should take policy loans away from the insurance company 
where the business rightfully belongs. "^^ 

The hfe insurance company reproved the agent, explaining that — 

This company has very close relations with many of the large banks in New York 
City and elsewhere. Some of these banks for reasons of their own do not look 
with favor upon life insurance policies as collateral, and some of them out of 
regard for the life insurance business decline at least to solicit this type of 
business.^' 

In discussing the case, an officer of the company added that bankers 
had inquired whether their making policy loans would be objection- 
able to the company, but that — 

It has been communicated to me by my superior officers, and time and time 
again I have told inquiring bankers that we certainly had no objections what- 
soever to their making loans on life insurance if they thought that was good 
business."" 

5. Urban mortgages: At the end of 1938 the 26 major companies 
held 3.9 billion dollars of urban mortgages. On the average, 60 
percent of all urban mortgages were concentrated in 10 metropolitan 
areas,^^ with 32 percent of the total in New York City and 8 percent 
in Chicago. ^- 

Some of the New York City companies show a high degree of con- 
centration in the New York City area. Almost one-half of the 
Metropolitan's urban mortgages are on property there. Frederick 
H. Ecker gave several reasons why the Metropolitan's urban mortgage 
investments were so concentrated: 

In the first place, I think .you will find with almost all corporations, that they 
ordinarily have a very sizable percentage of their loans in the immediate area. 
It may run from 40 to 50 percent, some place in there. Now the reason is obvious 
that if it is a good area to lend in and there is a demand for money there, because 
it is the most readily supervised, your best people, that is your people at the top 
of the organization are more familiar with values close by than elsewhere. ^^ 

The mortgage holdings of the New England Mutual indicate that 
this explanation docs not always apply, since only 9 percent of its 
urban mortgages are on property in the home office city, and the 
largest metropolitan concentration is in Chicago (almost 25 percent 
of the total). «* 

The Mutual showed the highest degree of concentration, with 
89 percent of all its urban loans on New York City property. A 
nember of the company's real estate department testified that — 

Mr. McLaughlin. * * * From the beginning the Mutual has favored 
New York City loans, and they have proven to be very successful. Now, we 
have not made residential or farm loans since the latter nineties, and the reason 
for that is because of the losses we sustained in farm loans and residences that 
were made in the eighties and the latter seventies. 

Mr. Gesell. You have made no residential or farm loans since before 1900? 

Mr. McLaughlin. Yes; that is right — no; that isn't correct. We have made 
residential loans; no farm loans. 



88 Hearings before the Temporary National Economic Committee, Part 28, p. 15232. 
*• Hearings before the Temporary National Economic Committee, Part 28, p. 15232. 
M Hearings before the Temporary National Economic Commitiee, Part 28, p. 15232-15233. 
«' New York, Chicago, Philadelphia, Los Angeles, Detroit, Washington, Cleveland, San Francisco, 
Boston, and Buffalo. 

»2 Hearings before the Temporary National Economic Committee, Part lOA, pp. 201-206. 

M Hearings before the Temporary National Economic Committee, Part 28, p. 15141. 

«« Hearings before the Temporary National Economic Committee, Part 28, p. 15082-15089. 



4§ CONCENTRATION OF ECONOMIC POWER 

Mr. Gbsell. Residential loans have been rather slight, have they not? 
Mr. McLaughlin. In comparison with the whole, very light; yes.^^ 

The Mutual' s concentration in the New York City area is so great 
and so long-continued that it has no organization to make urban 
loans in other areas. ^^ 

Some of the largest companies indicated a general preference 
for large urban mortgage loans rather than small ones. This was the 
case with the Metropolitan,^' the New York Life,^^ and the Mutual, 
although the latter's post-depression experience has indicated that 
it may be difficult to dispose of large properties if these loans are 
foreclosed. ^^ 

6. Farm mortgages: Farm mortgages show a lesser concentration 
than urban mortgages, though 55 percent of the total are on property 
in Iowa, Illinois, Kansas, and Nebraska, with 25 percent in Iowa 
alone.' Less than 10 percent of farm mortgages were, for amounts 
greater than $25,000.2 

The Prudential owned more farm mortgages than any other com- 
pany, showing both the widest geographical and size distribution. 
The company gave three reasons for this investment policy: Its good 
experience with farm mortgages; its desire to invest premiums in 
those areas where they are collected; and the findings of the Arm- 
strong investigation in 1906 that concentration in urban mortgages 
was unwise and that diversification was preferable.^ But many 
companies do not take this view of the investment possibilities of 
farm mortgages. The Mutual has made no farm loans for 40 years, 
has made no survey of investment prospects in the field for at least 
10 years, and has no staff to make such loans.* The New York Life 
for a long time has had only a small investment in farm mortgages, 
and it explained that it would have to reorganize its staff if it wanted 
to make any.^ The New England Mutual explained -that the need 
for an enlarged organization was one element deterring them from 
farm mortgages.^ 

One explanation given many times during the hearings was that 
life insurance companies did not make farm mortgage loans in any 
area unless they had the opportunity of making a sizable number and 
amount of such loans. Glen E. Rogers of the Metropolitan explained 
that "in order for an insurance company * * * to lend money 
at present day rates of interest, we must be able to obtain a volume 
of loans of considerable size within a relatively small area." Further- 
more, "to build a branch office to service loans and to make loans, I 
believe, that $5,000,000 would be the minimum." ^ 

" Hearings before the Temporary National Economic Committee, Part 28, p. 15053. 

'6 Hearings before the Temporary National Economic Committee, Part 28, p. 15053. 

" Hearings before the Temporary National EconomJc Committee, Part 28, pp. 15143-15147. 

's Hearings before the Temporary National Economic Committee, Part 28, pp. 14751-14752. 

" Hearings before the Temporary National Economic Commitee, Part 28, p. — . The Metropolitan's 
experience with its $27,500,000 mortgage on the Empire State Building points in the same direction. The 
contract rate was set at 6 percent during construction of the building and 5 percent after 1940. The Metro- 
politan has negotiated a settlement, by which it has been receiving only 2).^ percent a year, and it explained 
that it could not foreclose because the property did not earn even that much. Hearings before the Tem- 
porary National Economic Committee, Part 28, pp. 15067-15060. 

1 Hearings before the Temporary National Economic Committee, Part 28, pp. 15171-15182. 

2 Hearings before the Temporary National Economic Committee, Part lOA, p. 172. 

3 Hearings before the Temporary National Economic Committee, Part 28, p. 15037-15038. 

* Hearings before the Temporary National Economic Committee, Part 28, pp. 1505.3-15055. 
' Hearings before the Temporary National Economic Committee, Part 28, p. 14756. 
9 Hearings before the Temporary National Economic Committee, Part 28, p. 15081-15082. 
'Hearings before the Temporary National Economic Committee, Part 28, p. 14955. 



CONCENTRATION OF ECONOMIC I'OWER 49 

SUMMARY 

From 1923 to 1929 individual savings flowing to savings institutions 
resulted in a growth of their assets and funds at the rate of $4,000,- 
000,000 per year. During the depression the flow of savings decHned 
sharply, but since 1935 has returned almost to the old level. The 
present flow of savings to these institutions is greater relative to na- 
tional income than before the depression. If to this flow of savings 
is added the flow of savings through idle demand deposits in commer- 
cial banks, and through trustees, foundations, and investment trusts, 
it would appear that investment outlets (over and above replacements 
and refundings) running into large figures, perhaps five or six billion 
dollars per year, must be found for these reservoirs every year if the 
savings of individuals are to be put to work. 

The major savings institutions must confine their investments 
largely to other people's debts — bonds, notes, mortgages, and policy 
and other loans. The institutions are for the greatest part not per- 
mitted to invest in stocks or other equities ; and what the statutes and 
the legal list have begun, managerial conceptions of sound investments 
have completed. Even if investment regulations w^ere broadened it 
is doubtful whether these reservoirs would soon depart in any sub- 
stantial measure from established investment patterns. 

Security outlets have been difficult to find during the last decade, 
principally because the economic machine has not been operating 
at high levels and therefore not creating securities in large volume. 
Total public and private debt decreased. The Federal Government 
went into debt, providing one outlet for savings, but other important 
borrowing segments contracted their debts. 

As a result, commercial banks, savings banks, insurance companies, 
and trustees have increasingly turned to Government bonds as outlets 
for their funds. In 1921, member banks of the Federal Reserve 
System held 2.6 biflion doflars of Government obligations, or 11 
percent of their loans and investments; in 1938, they held 12.3 bilHon 
doflars, or 40 percent. In the 1920's, two-tliirds of the assets of 
commercial banks were invested in short-term commercial loans. 
Today only one-third is so invested. The balanc^ is in governments, 
real estate mortgages, and other long-term securities.^ Savings banks 
show a similar trend to Government securities. From 1931 to 1938, 
the New York savings banks increased their holdings in governments 
from 5 percent to 23 percent of their assets.^ In the same 7 years, 
the 26 largest legal reserve life insurance companies in the United 
States increased their holdings of Governments from $347,000,000, or 
2 percent of their assets, to $4,500,000,000, or 19 percent. And both 
trustees and trust companies have been investing more heavily in 
Government securities, partly because of their unfortunate experiences 
with many corporate issues in recent years, and partly because the 
dift'erence"^between the rate of interest on Government securities and 
private securities has been decreasing.^" 

The concentration of funds in savings institutions, by sharply 
reducing the number of persons responsible for investment decisions, 
has hmited and restricted competition in important respects. 

s Hearings before the Temporary National Economic Committee, Part 9, p. 3748. 
» Hearings before the Temporary National Economic Committee, Part 9, p. 3801. 
>" Hearings before the Temporary National Economic Committee, Part 9, p. 3800. 



50 CONCENTRATION OF ECONOMIC POWER 

Concentration has made it possible to dam off part of the savings 
stream and divert part of the flow of savings into cash balances — 
idle cash hoards. This policy applied to both the new savings and 
the funds reflected by repayments of old securities (through transfer 
to the Government, repayment out of earnings, or otherwise) has re- 
duced the pressure upon interest rates, and has prevented them from 
falling to lower and competitive levels. The increase of cash balances 
has apparently not been necessary to the safe conduct of the insurance 
business. The insurance executives agreed that their companies have 
held and now hold too much cash, and bankers would undoubtedly 
agree with them. An inspection of balance sheets indicates that these 
enterprises, even without these cash hoards, are more liquid than ever 
before. Yet cash holdings continue to increase. Is it impossible to 
find investment outlets for these funds? It is curious to note that 
many hold the opinion that the unemployed could be absorbed in 
industry if wages were reduced, but only a few whisper that idle 
fmids could be absorbed if interest rates came down to competitive 
levels, for a reduction of interest rates to their competitive levels 
would do two things: on the one hand, it would stimulate the borrow- 
ing of funds, partly for refunding, partly for expansion; and, on the 
other, to the extent that saving does depend upon compensation, it 
would reduce the volume of savings. For both these reasons a reduc- 
tion of interest rates, under the conditions which prevailed in the last 
decade, would have tended to reduce cash hoards. 

The gravity of the situation lies in a fundamental paradox. On the 
one hand, is the necessity for the continuous reinvestment of funds in 
new enterprises, taking the risks which go with such enterprises. On 
the other hand, is the quest for security, which means conservative 
investment involving slight risk. 

The lower interest rates fall on "sound" securities, the higher become 
the net premiums required by insuiance companies. Fulfilling their 
contracts requires sound investment. The lack of such conservative 
investment outlets increases cash hoards. The growth of cash hoards 
slows dow^i the rate of economic activity, and thus destroys the base 
on which all incomxC rests, namely, the continuous operation of the 
economic system. As long as insurance companies and savings banks 
were small and their total assets represented only a small fraction of 
the savmgs to be invested, this was no problem. When honestly 
administered these relatively small funds could easily find 'trustees' 
investments." The problem has arisen as the companies have grown 
and expanded, as savings have become more and more institution- 
alized. 

To solve this problem requires frank dealing with this fundamental 
paradox. So far as life insurance is concerned it may require a shift 
away from contracts which require savings to others which will be 
essentially risk-spreading, and, strictly speaking, insurance contracts. 

Internal Financing of Business Investment 

significance of internal financing 

It has been indicated that business enterprises were responsible for 
roughly 36 percent of the country's gross savings in 1925-29 and 
less than 35 percent in 1935-39.^^ Business gross savings, consisting of 
funds made available from internal sources, are sufficient to finance 

11 See appendix I. 



OONOKXTRATION OF ECONOxMIC POWER 



51 



the bulk of business investments in plant ami e(|uipment. The 
remainder of the funds required to finance outlays for plant and equip- 
ment, for inventory expansion, and for other purposes, come from 
three principal sources. Enterprisers may tap the savings of others 
through the capital markets; they may obtain funds throui:;h the 
expansion of bank credit; or they may sell or convert some of their 
assets.'' 

In 1929 business outlays for plant and equipment reached an all 
time hioh of $10 billion. Net business savings in 1929 amounted 
to 2.5 billion dollars (2.3 billion dollars after adjustment for capital 
gains) ; depreciation and depletion totaled 5.1 billion dollars; and gross 
business savings were therefore 7.6 billion dollnrs, sufficient to finance 
three-quarters of the business investment in plant and equipment. 
It thus appears that even in 1929 American business enterprises 
were able to finance the bulk of their investments in plant and equip- 
ment from internal sources. In the period since 1935 the proportion 
of such investment financed internally has been substantially larger. 

The significance of internal financing of business investment was 
outlined as follows: 

Dr. Altman. In years of high business activity, business enterprises draw upon 
the capital markets, that is, the savings of individuals and institutional investors, 
but never since 1922 for more than $2,000,000,000 a year. During years of low 
activity business enterprises do not require any funds from the capital market. 
Instead, they contribute funds to the capital market, either by paying out divi- 
dends in excess of earnings or by converting depreciation and depletion allowances 
into bank deposits or securities, thus making them available to other tj'pes of 
investors. 

Mr. Henderson. But in all those years from 1922 to 1937, savings by indi- 
viduals, either through their own deposits in savings banks or through institutions, 
■continued, did they not? 

Dr. Altman. That is right. 

Mr. Henderson. In other words, as far as the use which the system makes of 
those savings is cojicerned, it taps them only in periods of high activity, but just 
the same, there is the problem of getting those savings employed each one of those 
years. '^ 

The importance and the growth of business internal financing 
suggests two questions. The first is the extent to which business 
enterprises in general need to tap the savings of individuals and others 
through the capital markets by selling stocks, bonds, or notes. The 
second is the extent to which the larger business enterprises, who 
have the easiest and cheapest access to the capital markets, need to 
tap the savings of others. Connected with this question is another 
direction of inquiry: Whether these larger enterprises are prepared 
to secure savings through the capital markets by issuing instruments 
(stocks, bonds, and notes) that financial institutions and individual 
savers can and will accept. In short, to what extent may blockages 
in the smooth flow of savings toward investment in plant, inventory, 
etc., arise because the enterprises that can tap savings don't need them, 
while those that need savings can't tap them? 

INTERNAL riN.\NCING OF SELECTED CORPORATIONS 

A great deal of specific information relative to the internal financing 
'Of individual corporations was oft'ered in evidence before the Tempo- 
rary National Economic Committee. 

12 Funds arising in these ways may be shifted by transfers among business enterprises. For example, a 
retailer may finance inventory or machinery purchases by an open book account with a wholesaler or dealer, 
"Who in turn mav borrow from a bank or issue securities. 

'3 Hearings before the Temporary National Economic Committee, Part 9, pp. 3696-3697. 



52 CONCENTRATION OF ECONOMIC POWER 

Edward R. Stettinius, chairman of the board of the United States 
Steel Corporation, testified that from 1921 through 1938, his company 
had invested $1,222,000,000 in pLant and equipment. Ninety-six per- 
cent of the whole amount came from internal sources— $938,000,000 
from depreciation reserves, $192,000,000 from profits retained, $50,- 
000,000 from tax refunds, a grand total of $1,180,000,000.'* He did 
not expect that hi's company would draw a substantial amount of new 
savings from the capital markets: 

Mr. Henderson. You are not at any time in the immediate future going to 
give any great amount of business to underwriting firms; you are not going to tap 
individual savings very much, isn't that about correct? 

Mr. Stettinius. That is correct. i^ 

Owen D. Young testified that the General Electric Co. now has 
resources of $322,000,000. Of this, $192,000,000 came from undis- 
tributed profits, $92,000,000 came from sales of stocks and bonds for 
cash, and $38,000,000 from properties acquu-ed in exchange for stock. '^ 

Mr. Henderson. And so to all intents and purposes your general experience 
parallels that of Mr. Stettinius' company [U. S. Steel] in that from your internal 
sources * * * vou could do the financing without tapjjing outside savings. 

Mr. Young. That is right. '^ 

Mr. Young went on to point out that from 1921 to 1939, the General 
Electric Co. did not spend as much for plant and equipment as was 
accumulated in depreciation reserves.'^ 

Alfred P. Sloan, Jr., chairman of the board of the General Motors 
Corporation, testified that Ms company had earned $2,300,000,000 in 
the last 18 years. Roughly, 80 percent of this had been paid out in 
dividends, 20 percent retained in the business. ''^ ''In the 18-year period 
there has iDeen substantially no outside financing," he testified.^'' Total 
funds available from internal sources aggregated $1,010,000,000, with 
$520,000,000 from allowances for depreciation and $490,000,000 from 
undistributed profits. Total expenditures on plant were $770,000,000, 
leaving a balance of $240,000,000 with which to finance subsidiaries, 
inventories, installment sales, etc.^' 

Mr. Nehemkis. Would it be a correct statement, Mr. Sloan, to say that General 
Motors is in a position today to do most of its internal financing out of earnings, 
and, in addition to finance the ultimate consumers of j^our product as well? 

Mr. Sloan. I think that is a correct statement of fact.^^ 

Even if the national income should jump to $80,000,000,000, 
requiring an increased demand for motor vehicles, "I am quite cer- 
tain," said Sloan, "that we can handle anything * * * from the 
internal funds without going into the money market." ^^ He explained 
further that in his opinion the present plant investment of the whole 
automobile industry had the capacity to take care of all normal 
demands in the future.^* 

F. B. Rentschler, chairman of the board of United Aircraft Corpora- 
tion, testified that the growth of his company (and of its predecessor 

1^ Hearings before the Temporary National Economic Committee, Part 9, p. 4026. 

•5 Hearings before the Temporary National Economic Committee, Part 9, p. 3597. 

>6 Hearings before the Temporary National Economic Committee, Part 9, pp. 3599, 3615. 

1' Hearings before the Temporary National Economic Committee, Part 9, p. 3620. 

" Hearings before the Temporary National Economic Committee, Part 9, pp. 3620-3621. 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3651. 

20 Hearings before the Temporary National Economic Committee, Part 9, p. 3651. 

" Hearings before the Temporary National Economic Commiittee, Part 9, pp. 3651-52, 4031-32. 

22 Hearings before the Temporary National Economic Committee, Part 9, p. 3651. 

23 Hearings before the Temporary National Economic Committee, Part 9, p. 3661. 
2< Hearings before the Temporary National Economic Committee, Part 9, p. 3665. 



CONCENTRATION OF ECONOMIC POWER 53 

companies) was largely independent of funds secured , tlu'ough the 
capital markets. During the period 1925-34, the company required 
approximately $12,500,000 of capital. With the exception of 
$2,000,000 advanced by a machine tool company and by the founders 
of the company, these funds were raised internally, through the sale of 
the company's products." Expansion between 1934 and 1939, 
following the disassociation of aviation equipment and transport 
companies, continued to be financed largely from internal sources. 
Rentschler summarized the experience of his company as follows: 

Our company has demonstrated its ability to expand its operations to meet all 
requirements and entirely from its earnings. We intend to continue this proced- 
ure as a matter of policy. Our company today is owned entirely by its approxi- 
mate 29,000 common-stockholders, free of any indebtedness whatever, and we 
believe with adequate working capital for the future.^^ 

John W. Barriger III, chief examiner of the Railroad Division of the 
Reconstruction Finance Corporation, presented figures on the railroad 
industry as a whole. From 1921 through 1937, Mr. Barriger testi- 
fied, 72 percent of the expenditures by railroads for plant and equip- 
ment were financed from internal sources, 19 percent from new issues 
of stocks and bonds, 9 percent from reductions in working capital." 

O. L. Altman discussed the financing of 58 large industrial companies 
for the years 1930 through 1939, on the basis of data compiled by A. 
B. Hersey.^^ The size of these companies is indicated by their 
$12,000,000,000 of assets in 1938; and the composition of this sample 
was as follows: 

9 steel companies $3, 600,000,000 

7 automobile companies 1, 600, 000, 000 

1 1 petroleum companies 3, 500, 000, 000 

23 machinery companies 2, 000,000,000 

4 rubber and tire companies 700, 000, 000 

4 tobacco companies 700, 000, 000 

58 companies in sample 12, 100,000, 000 

The sample of 58 companies is too heavily weighted with manufac- 
turers of producers' goods to be well-balanced, though it does cover 
roughly one-fifth of all manufacturing and mining. 

The investment and internal financing experiences of these 58 
companies is striking. During 1930-39 these companies had gross 
uses of funds of $5,557,000,000^: 



Use 



Amount 
(millions) 



Percent 



For plant and equipment 

For new investments (net) , -. 

To build up cash and bank deposits. 

To retire preferred stock 

For miscellaneous purposes 

Total 



,751 

365 

327 

12 

102 



85.5 

6.6 

5.9 

.2 

1.8 



100.0 



25 Hearincs before the Temporary National Economic Committee, Part 9, p. 3638. 

26 Hearing.s before the Temporary National Economic Committee, Part 9, p. 3637. 

2" Hearings before the Temporary National Economic Committee, Part 9, p. 3571. _ 

2' These are essentially the same companies discussed in hearings befon; the Temporary National Eco- 
nomic Committee, Part 9, pp. 3693-3095, for the period 1930-38. Hersey has carried thesn calculations 
through 1939: he discussed some of these data, under the title of "Souries and Uses of Corporation Funds, 
at a round table at the Annual Meetings of the American Statistical Association. December 1940. 



54 



CONCENTRATION OP ECONOMIC POWER 



The funds for their outlays came principally from their gross savings. 
Undistributed profits, depreciation, and depletion provided 83 per- 
cent of the total. External sources — the issue of stocks and bonds 
and the increase in current liabilities — provided 10 percent of the 
total. Conversion of assets provided the remaining 7 percent. 
These sources may be summarized as follows: 





Amount 
(millions) 


Percent 


From gross savings 


$4, 603 
435 
73 
43 
19 
167 
214 


82.9 


From issue of common stock . . 


7.8 


From sale of bonds . - . . . . --_..- 


1.3 


From increase in current liabilities... . . _. 


.8 


From decrease in inventories 


.3 


From decrease in accounts receivable. .. . . . ... 


3.0 


From decrease in holdings in marketable securities.. . _. . ... . ... 


3.9 






Total. . . ... - . 


5,554 


100 







During the period studied, the 2 years of greatest investment were 
1930 and 1937. The sample of 58 companies invested 1.3 billion 
dollars in the former year and 1.5 billion dollars in the latter. How 
were these investments financed? In 1930 business gross savings 
provided 40 percent of the funds; conversion of assets — reduction of 
inventories, accounts receivable, and holdings of securities — provided 
40 percent; and the capital markets provided the balance of 20 per- 
cent. In 1937 business gross savings provided 57 percent; conversion 
of assets, 17 percent; and the capital (and credit) markets, the bal- 
ance of 26 percent. (The year-by-year analysis of the sources and 
uses of funds for these 58 companies is summarized in appendLx 
XIII.) 

The relative importance of business gross savings as the principal 
source of investment funds is, of course, greater for some types of 
companies than for other. During 1930-38 the funds available to 
the 7 automobile companies within the sample of 58 companies dis- 
cussed, including the General Motors Corporation, were 31 percent 
greater than all their outlays for plant and equipment.-^ The 9 
steel companies in the sample, including the United States Steel 
Corporation, met 58 percent of outlays for plant and equipment from 
internal sources in 1930-38,^° despite the fact that some branches of 
the steel industry have undergone virtually a technological revolu- 
tion in the last decade. The 11 oil companies in the sample met 
more than 99 percent of their outlays for plant and equipment in 
1930-38 from funds accumulated from internal sources. ^^ Another 
studv of the operations of 11 major oil companies by A. R. Koch 
covers the period 1921-39.'- Between 1921 and 1930, these 11 
companies met 95 percent of their outlays for plant and equipment 
from internal sources. Between 1931 and 1939 internal sources were 
sufhcient to meet all such expenditures and permit a retirement of 
$100,000,000 of long-term debt. 

The Bell Telephone system is a striking illustration of the changed 
situation of manj?^ large companies with respect to the capital markets. 

29 Hearings before the Temporary National Economic Committee, Part 9, p. 4047. 

30 Hearings before the Temporary National Kconomie Committee, Part 9, p. 4048. 

31 Hearings before the Temporary National Economic Committee, Part 9, p. 4046. 

32 The Flow of Funds Through Selected Large Petroleum Companies, 1921-39, and the Resultant 
Changes in Financial Structure and Capital and Credit Requirements. This study is being prepared for 
the National Bureau of Economic Research. Findings mentioned here are used with the permission of 
the author and the National Bureau. 



CONCENTRATION OF F.CONOMIC POWER 



55 



Between 1925 and 1930 total assets of the Bell System increased from 
$2,900,000,000 to $5,000,000,000, and the book value of telephone 
plant increased from $2,500,000,000 to $4,000,000,000. The system 
made large net additions to plant in every year during 1923-30, 
ranging from $255,000,000 in 1923 to $409,000,000 in 1929; and 
tapped the capital markets for substantial sums each year. With a 
lower rate of investment in telephone plant after 1930, the system 
contributed funds to the capital markets in every year from 1931 
through 1937. Only in 1938 and 1939 has the system had occasion 
again to tap the capital markets. The data for the system for 1923-39 
are tabulated in appendix XIV, and are summarized in table 10. 
It should be noted that the pension fund system of the Bell System 
has been a significant source of funds for company use — and this as 
a matter of companv policy. The pension fund was established in 
1927. In 1939 the fund had $205,000,000 of assets and might have 
been considered one of the 25 largest insurance companies in the 
United States. The fund held $154,000,000 of notes and bonds of 
the Bell Telephone companies. ^^ 

Table 10. — Summary oj the sources and uses of funds of the Bell System, 1923-39 

(In millions of dollars] 



193S-39 



Uses of funds: 

Net addition to plant 

Cash and temporary investments 

Investments in affiliated companies... 
All otlier assets 

Sources of funds: 

Undistributed gross income ' 

Curnmt, accrued, and other liabilities 
Net sales of securities to public 2 



1923-30 


1931-37 


2.385 


333 


272 


-255 


93 


12 


69 


-10 


852 


313 


110 


9 


1,858 


-241 



201 
-3 
-13 
-2 

97 
18 



1 Undivided profits, surplus adjustments, depreciation, and notes sold to pension fund trustees. 
* Includes premiums on security issues. Entries refer to total issues, including premiums, minus relund- 
ings and repayments. 

Source: Summarized from appendix XIV. Refers to American Telephone & Telegraph Co. and asso- 
ciated companies, consolidated, through 1935; and A. T. & T. and principal subsidiaries, consolidated, 
after 1935. Data are from the Federal Communications Commission, but were rearranged and condensed. 

C. L. Merwin, Jr., studied the sources of funds of many enterprises, 
both large and small. ^* He found that depreciation allowances were 
the largest source of funds in practically all cases. With regard to a 
sample of 525 large corporations in 1935-37 he concluded that — - 

In general, net income plus depreciation provides enough funds to cover capital 
expenditures, but there are exceptions to this rule in particular industries in 
particular years. The capital markets, a relatively minor source of funds in the 
early phase of the recovery, assumed a more important role in the later years.^^ 

'3 See Federal Communications Commission, Investigation of the Telephone Industry in the United 
States, Washington, 1939, pn 462-466. Data for 1936-39 were supplied by the Commission. The Com- 
mission noted that— "When' the pension fund was first estatilished in 1927, and for some years thereafter, 
Bell System companies needed capital to build additional plant. Since the companies viewed the use 
of the pension fund for plant extensions as an economical means of obtaining needed capital, the trustee was 
instructed to and did invest a large portion of the pension funds in the unsecured notes of the Bell System 
companies." 

3< Temvwrary National Economic Committee Monograph No. 15, Financial Characteristics of American 
Manufacturing Corporations, chap. 6. 

25 Temporary National Economic Committee Monograph No. 15, Financial Characteristics of American 
Manufacturing Corporations, p. 174. 



291143— 41— No. 37- 



56 CONCENTRATION OF ECONOMIC POWER 

He also studied samples of large and small companies in bakings 
clothing manufacturing, stone-clay products, and machine tools, and 
summarized his results as follows: 

Sample tabulations indicate that there are industrial differences in the flow 
of funds patterns for small manufacturing corporations. Although depreciation 
is the chief source of funds and capital expenditures the principal disposal, these- 
items play more important roles, relatively, in the machine tool and stone-clay 
industries than in the baking and men's clothing industries. In these latter 
industries the current items take a particularly important part, while in all five 
industries studied their influence can hardly be ignored. In general, the current 
assets are built up during prosperous years at the same time that current liabilities 
are increased; and the current assets are liquidated during depression years 
concurrently with a retirement of current debt. The patterns for the small com- 
panies are tolerably similar to those for the large firms.^* 

INTERNAL FINANCING BY ALL BUSINESS ENTERPRISES 

The extent to which business enterprises in general finance their 
expansion from internal sources can be stated only very roughly. 
The analysis of all enterprises considered as one group is much less 
satisfactory than that of individual companies. The use of aggregate 
figures for all enterprises, in contrast with those of individual com- 
panies, reduces the clarity and increases the difficulty of interpreting 
the statistical results. Furthermore, the use of aggregate data washes 
out the flows of funds, within any one industrial group and among 
industrial groups, that constitute a major source of interest. 

Altman presented data to the Temporary National Economic 
Committee sketching the relative importance of internal and external 
financing of all business enterprises. From 1923 through 1929 busi- 
ness enterprises invested on the average $8,700,000,000 each year in 
plant and equipment, and of this, $6,400,000,000 or 74 percent, came 
from funds accumulated from internal sources: retained earnings, plus 
allowances for depreciation and depletion. During the 5 years 
1935-39, average outlays for plant and equipment were $5,800,000,000 
and of this $4,800,000,000, or 83 percent, came from internal sources.^^ 
(Table 11.) 

It is impossible to make a complete anaWsis of the sources and uses 
of funds of all business enterprises similar to that already described 
for individual companies. The data available in Statistics of Income 
consist of consolidated totals and are inadequate for that purpose. 
It is clear, however, that funds available internally, from current 
operations, are understated when they are represented by the (alge- 
braic) sum of retained earnings, and depreciation and depletion allow- 
ances, particularly in periods of depression and falling prices.^^ In 
any case, consolidating the gross savings of all business enterprises- 
simplifies the problem of maintaining tlie flow of funds through the 
business segment of the economy. In the calculation of savings for 
all enterprises the savings (gross or net) of some enterprises are offset 
by the dis-savings (gross or net) of others. Thus if A corporation 

•9 Temporary National Economic Committee Monograph No. 15, Financial Characteristics of American 
Manufacturing Corporations, p. 174. 

" Hearings before the Temporary National Economic Committee, Part 9, pp. 3684, 3092. Data there 
presented have heen revised in accordance with later estimates of the National Income Section of the Bureau 
of Foreign and Domestie Commerce. 

" See footnote 24, p. 20, supra. Another source of funds for investment, though not arising from current 
operations, is settlements of insurance claims. Every year business enterprises receive insurance settlements 
for property that has been destroyed by fire, shipwreck, flood, and other damage. The value of these 
settlements is not available, but a conservative estimate would indicate that business enterprises receive 
at least $150,000,000 a year for losses covered by insurance. 



CONCENTRATION OF ECONOMIC POWER 



57 



has a net profit of $1,000 after provision of $5,000 for depreciation, 
while B corporation has a net loss of $1,000 after charging $5,000 for 
depreciation, the aggregate for the two corporations is $10,000 of 
gross savings and no net savings. The two together must spend 
$10,000 for new investment goods to prevent contraction of the in- 
come stream. If A spends its $6,000 and B spends its $4,000, no 
transfer of gross savings need take place; but if the respective invest- 
ments are made in different amounts, or if A and B together do not 
mvost $10,000, some transfers must take place if all savings are to 
be invested. 



Table 11. — Financing business investments in plant and equipment, 1923-39 

[In millions of dollars] 





Gross saving 


"Produc- 
tive" secur- 
ity issues ' 


Outlays for 

plant and 

equipment * 


Year 


Net 
saving i 


Deprecia- 
tion and 
depletion ' 


Total 


1923 - 


2,432 

1,463 

2,851 

2,223 

996 

2,830 

2,390 

-4, 954 

-7, 781 

-8, 446 

-2, 488 

-828 

377 

1,152 

946 

-1,285 

829 


3,190 
3,282 
3,976 
4,551 
4,487 
4,799 
5,145 
5,118 
4,897 
4,550 
4,354 
4,265 
4,291 
4,414 
4,609 
« 4, 350 
» 4, 550 


5,622 

4, 745 
6,827 
6,774 
5,483 
7,629 
7,535 

164 
-2,884 
-3, 896 
1,866 
3,437 
4,668 
5,566 

5, 555 
3,065 
5,379 


1,624 

1,941 

1,824 

1,801 

1,781 

1,495 

1,787 

1,939 

796 

203 

106 

63 

94 

379 

635 

417 

191 


7,902 


1924 . 


7,650 


1925 


8,189 


1926 


9,126 


1927 


8,777 


1928 . - . 


8,846 


1929 


10, 157 


1930 


8,340 


1931 


5,123 


1932 


2,799 


1933 


2, 371 


1934 


3, 436 


1935 


4,349 


1936 - 


5,783 


1937 


7, 570 


1938 - 


5,389 


1939 


6,135 







1 Refers only to nonfinaneial business enterprises. Net saving as reported by the Department of Com- 
merce, Survey of Current Business, June 1940. Data for financial enterprises, and data for 1923-28 are 
unpublished. 

2 All business enterprises. From Solomon Fabricant, Capital Consumption and Adjustment, New York, 
National Bureau of Economic Research, 1938, pp. 32-33, 38. Estimates for 1936 and 1937 are preliminary, 
and are used with permission of Dr. Fabricant and the National Bureau. 

3 Compiled by Moody's Investors Service. "Productive" issues are those adding to capital goods, by 
aisinff funds for new construction, additions, improvements, and purchase of new equipment. 

< Estimates by George Terborgh. See Federal Reserve Bulletin, September 1939. and February 1940. 
' Estimated. 

Source: Adapted from Hearings before the Temporary National Economic Committee, Part 9, p. 4041. 

On the one hand, this is merely the mechanism by which society 
shifts resources (and the distribution of income from these resources) 
from one use to another; on the other hand, this situation affects the 
quality and the functioning of the capital markets. The evidence 
indicates that, to a significant extent, the bulk of business gross 
savings are made by the larger corporations, which have access to the 
capital markets by" reason of their size and importance.^^ These do 
not draw greatly upon the savings of others. It is a fair question 
to ask whether the capital markets are efficiently equipped to transfer 
funds to smaller enterprises which could make profitable use of them 
but which have, at best, only limited and high-cost access to those 
markets. 

The growth of internal financing has been pointed out with increas- 
ing emphasis since 1920. But its significance was seen only during 
the late 1920's. Attention was centered upon the large and increasmg 

" Supra, pp. 20-24 and appendixes VI-XI. 



58 CONCENTRATION OF ECONOMIC POWER 

volume of new security issues, neglectful of the fact that a larger and 
larger part of these issues went for "nonproductive," financml pur- 
poses — for investment trusts, public utility and railroad holding com- 
panies, and for building up "working" capital which might be and 
often was invested in securities and loans. The expansion of plant 
and equipment by business enterprises went on during the 1920's, 
but at a sober pace.^** The pace was not in step with the trends in 
security issues, and not greatly dependent upon them. 

Internal financing, not security issues, provides the bulk of "venture 
capital" for American industry. For only in a financial sense and 
not in a physical sense are depreciation and depletion funds used for 
replacement. The new building is not the same as the old; and the 
new machine is the best, the most efficient that can be bought. Funds 
from all sources — ^from depreciation and depletion, from retained 
earnings, from new security issues, and from sale and conversion of 
assets — are commingled. They become one fund to be spent for the 
welfare of the business. Both the size and the expenditure of the fund 
are determined by managerial decision — and in the major corporations, 
by persons who at best own only a small part of those funds. All 
investment is financed from this one fund. The steel industry in the 
past decade has been revolutionized with its four-high strip mills, 
automatic operations, and shift to lighter steel products. General 
Motors Corporation has "ventured" in refrigerators, Diesel engines, 
and Allison liquid cooled airplane motors. E. I. du Pont de Nemours 
& Co., Inc., stated that 40 percent of their sales in 1937 came from 
products they did not make in 1928.^' The Monsanto Chemical 
Co. reported that products they began to manufacture after 1929 
accounted for 39 percent of total sales in 1939.*^ These and coun- 
tless similar examples are all "ventures"; they were all made pos- 
sible by investments using "venture capital." But the bulk of the 
"venture capital" came from internal sources. 

Recent Trends in the Capital Markets 

The large volume of potential and realized savings; the concentra- 
tion of individual savings in savings institutions largely restricted to 
bonds and other debt instruments; the large volume of internal 
financing, particularly by the larger corporations, even those which had 
drawn heavily upon the capital markets in the 1920's; and the lower 
volume of capital formation in the 1930's compared with the 1920's; 
all these have aifected the capital markets. The growth of idle funds 
has already been described.*^ Some of the changes in interest rates, 
securities available for investment, commercial banking, and invest- 
ment should be treated at this point. 

interest and dividend rates 

Interest rates on all types of bonds and borrowings have fallen 
within the past few years, though not all classes of borrowers have 
benefited equally. The yields on long term United States bonds, 
municipals, and the highest grade corporates each fell by slightly 

" Infra, pp. 74-76, and appendixes XVII-X2^. 
« Annual Report, 1937, pp. 12-13. 
« Annual Report, 1939, p. 4. 
♦'Supra, p. 44. 



CONCENTRATION OF ECONOMIC POWER 



59 



more than one-third between 1929 and 1939, so that the spreads 
araono- these bonds have decreased (table 12). 

Table 12. — Interest yields on long-term United States Governments, high grade 
municipals, and Moody's AAA corporates, 1929-39 



Average 
yield 


United 
States 
Govern- 
ments 


Municipals 


Moody's 
AAA cor- 
porates 


Average 
yield 


United 
States 

Govern- 
ments 


Municipals 


Moody's 
Aaa cor- 
porates 


1929 

1930 


Percent 
3.60 
3.29 
3.34 
3.68 
3.31 
3.12 


Percent 
4.27 
4.07 
4.02 
4.65 
4.71 
3.95 


Percent 
4.73 
4.55 
4.58 
5.01 
4.49 
4.00 


1935 

1936 

1937 


Percent 
2.79 
2.65 
2.68 
2.56 
2.36 


Percent 
3.41 
3.07 
3.10 
2.91 
2.76 


Percent 
3.60 
3 24 


1931 


3 26 


1932 

1933 


1938 

1939 .. 


3.19 
3 01 


1934 







Source: United States Governments: Average yield of all outstanding bonds due or callable after 12 years, 
compiled by the Treasury Department; municipal bonds: yields computed by the Standard Statistics 
Co.; Aaa corporate bonds: yields computed by Moody's Investors Service. Current figures since 1937 
from Board of Governors of the Federal Reserve System's Federal Reserve Bulletin; back figures from its 
Annual Report 1937, table 80. 

Interest rates charged their customers by commercial banks have 
shown similar or greater declines. Rates charged in New York City 
declined from 5.88 percent in 1929 to 2.26 percent in 1939, those 
charged in 8 other eastern and northern cities declined from 6.04 
percent to 3.37 percent, and those charged in 27 southern and western 
cities declined from 6.14 percent to 4.10 percent. ^^ 

Mortgage rates appear to have shown no such relative declines. 
The records of the Bowery Savings Bank in New York City indicate 
that nominal interest rates on their new urban mortgages decreased 
from 5.93 percent in 1929 to 4.41 percent in 1937.'^ The effective 
mortgage interest rates charged by savings and loan associations have 
shown general decreases throughout the country; in Illinois and Wis- 
consin, for example, they decreased from 7.4 percent in 1931 to 6.4 
percent in 1936.^'^ Mortgages insured by the Federal Housing Ad- 
ministration result in an effective interest rate, including insurance 
and costs, of approximately 5.2 percent; and these mortgages now 
constitute at least one-quarter of the total urban mortgages made.*^ 
Average interest rates probably reached 6 percent in 1940; and it 
would seem that the bulk of new urban mortgages are made at rates 
of 6 percent or less. 

Interest rates on farm mortgages have likewise not declined pro- 
portionately with those on bonds. In Iowa, for example, they de- 
creased from a nominal rate of 5.5 percent in 1929 to 4.9 percent in 
1935, and for the United States as a whole they appear to have 
decreased from 6.2 percent in 1929 to 5.5 percent in 1935.^* The 
average nominal rate of interest on farm mortgages outstanding was 
approximately 6 percent in 1929-33, and fell to 5 percent in 1939.'** 

" Board of Governors of the Federal Reserve System, Annual Report, 1936, table 44, p. 120; Board of 
Governors of the Federal Reserve System, Federal Reserve Bulletin, July 1939, p. 587. 

*5M. H. HofTman, "Rate of Return on New Mortgage Loans Made by the Bowery Savings Bank," 
Association News Bulletin of the Savings Bank Association of the State of New York, vol. XIX, p. 154. 

<6 Hearings before the Temporary National Economic Committee, Part 11, p. 5485. 

*i Hearings before the Temporary National Economic Committee, Part 11, p. 5484, supplemented with 
unpublished and preliminary estimates of the Federal Home Loan Bank Board. 

<8 Computed from data compiled by a Nation-wide Works Progress Administration project sponsored 
by the Bureau of Agricultural Economics. The contract rates charged by 26 major life insurance com- 
panies on new loans are tabulated in Hearings before the Temporarv National Economic Committee, lOA, 
p. 163. 

" D. C. Horton, "Regional Trends of Farm Mortgage Interest Rates, 1910-39", Agricultural Fmance 
Review, May 1940, p. 1. Cf. with estimates in Hearings before the Temporary National Economic Com- 
mittee, Part 28, exhibit 2270, p. 15498, that the annual interest charges on the estimated farm mortgage debt 
fell from 5.96 percent in 1929 to 5.59 percent in 1933, to 4.95 percent in 1938. 



60 CONCENTRATION OF ECONOMIC POWER 

More impressive than the decline in average interest rates ^° has been 
the reduction of the wide regional differences in rates existing before 
1933. It is not unfair to say that Government lending and refinancing 
were the indispensable conditions for these interest rate reductions.*^ 
Without Government intervention, the decline in farm mortgage 
interest rates would have been much more gradual and much more 
insulated from money market conditions. ^^ 

The large flow of funds to savings institutions which must invest 
in other people's debts, the importance of internal financing, and the 
increased preference for debts instead of equities by individuals, has 
led to a decline of yields on bonds relative to stocks. The yield on 
common stocks, measured by Moody's yields on 200 common stocks, 
increased by approximately one-half between 1929 and 1940, while 
interest yields on all types of credit instruments declined. 

COMMERCIAL BANKS AND COMMERCIAL LOANS 

The traditional field of the commercial banks has always been re- 
garded as the making of short-term, self-liquidating commercial loans. 
For two decades, however, commercial loans in particular, and short- 
term loans in general, have steadily been decreasing in importance. 
In 1921, short-term loans constituted 70 percent of all member bank 
loans and investments, and commercial loans by themselves consti- 
tuted 52 percent. In 1929, short-term loans were 63 percent, and 
commercial loans were 36 percent, of their loans and investments. 
By 1938, short-term loans were only 34 percent of loans and invest- 
ments, and commercial loans had fallen to 23 percent of the total. ^^ 

The growing self-sufficiency of large business enterprises, which has 
made them less dependent upon both bank credit and the capital 
markets, has been an important factor in the decline of the commercial 
and short-term loan. When many corporations paid off their bank 
debts through the issue of bonds and stock during the 1920's they at- 
tacked the field of short-term credit from another side. 

As a result the character of commercial banking has changed radi- 
cally. Two-thirds of all the loans and investments of commercial 
banks in 1938 represented United States governments, other securities, 
and real estate loans.®* In consequence, commercial banks have be- 
come primarily holders of fixed interest-bearing securities rather than 
commercial paper. Banks have openly recognized their function to 
provide the Nation's money and to furnish bookkeeping services. 
They have recognized their status as a service agency by instituting 
systems of service charges for their checking services; and in many 
cases they have provided space to facilitate the collection of public 
utility bills. They still provide a host of related trust, safe deposit, 

'» In part this reduction may be accounted for by liquidation of high interest rate mortgages through 
foreclosure and other distress farm transfers. 

" D. C. Horton, "Regional Trends of Farm-Mortgage Interest Rates, 1910-39", Agricultural Finance 
Review, May 1940, pp. 8-10. 

" Perhaps one important reason for the relatively small decline in farm mortgage interest rates has been 
the tendency to consider them in a class by themselves. Such an attitude insulates the interest structure 
on farm mortgages from general money market conditions. There were implications during the Temporary 
National Economic Committee hearings that there is a "reasonable" rate on farm mortgages removed 
from the general course of interest rates, and that if farm mortgages would not earn this rate it would be 
preferable to stop investing in them. There seems to have been, in addition, general reluctance for a life 
insurance company to take business away from other companies. It appears that the Metropolitan did not 
go after loans on the books of other companies, and that the Prudential instructed its agents not to "raid" 
the business of others (Hearings before the Temporary National Economic Committee, Part 28, p. 14979, 
and Part 4, p. 1224). 

M Hearings before the Temporary National Economic Committee, Part 9, p. 4056. 

" Hearings before the Temporary National Economic Committee, Part 9, p. 4056. 



CONCENTRATION OF ECONOMIC POWER Ql 

and intermediary financial services. They have eliminated interest 
payments on demand deposits and drastically reduced interest pay- 
ments on time deposits. The banks have had to uncover new sources 
of revenue to replace the commercial loan. They have established 
personal loan departments to make loans which are largely for con- 
sumption purposes; they furnish a large part of the working capital 
of the finance companies, which make similar loans; they have begun 
to advertise their willingness to make loans on life insurance policies; 
they have gone into home mortgage financing. Tiiey help finance 
Government lending activities through purchases of Government obli- 
gations. Since ad hoc Government corporations made loans on urban 
and farm real estate, extended intermediate term loans to business 
enterprises, made crop and production loans to farmers, financed 
foreign trade, and engaged in other banking activities, commercial 
banks aided the Government in doing that which they themselves 
did not care to do, or do on the same scale. 

Faced with declining outlets for the profitable use of their funds 
in short-term commitments, commercial banks have been forced 
into term loans. Their first term loans bore maturities of 2 or 3 years; 
soon loans were made for 5 years ; and at the present time term loans 
for as long as 10 or 15 years with serial maturities are not unusual. 
Such loans are competing with and replacing short-term bond and 
note issues, which were formerly handled by the investment banking 
machinery; and they even compete with long-term loans. Four of 
the 11 oil companies studied by Koch retired long-term bonds with 
term loans of 3-5 years at rates of interest ranging from IK to 3% 
percent,^^ Commercial banks recently invaded the prized investment 
banking field of equipment trust issues by making a lO-year term loan 
for the purchase of air transports. A survey by the Board of Gov- 
ernors of the Federal Reserve System of 400 reporting banks in 
101 cities in April 1939 indicated that approximately 25 percent of 
their outstanding commercial, industrial, and agricultural loans had 
a maturity when made of a year or more. About 70 percent of the 
loans for a year or more had a maturity when made of 3 years or 
more. The size of these term loans is evidence that they do not 
represent accommodation for small business. Fifty-six percent were 
for $1,000,000 or more, 32 percent for amounts ranging from $100,000 
to $1,000,000, while the remaining 12 percent were for g,mounts smaller 
than $100,000.5^ 

INVESTMENT BANKING 

In 1929, more than 10 billion dollars passed through the investment 
banking machinery on their way to business enterprises, of which ap- 
proximately 1.4 billion dollars represented refundings. The largest 
part of the balance was used for "financial" purposes, such as the 
building up of investment trusts, public utility and other holding com- 
panies, cash balances, and security portfolios. It has been estimated 
that less than 2 billion dollars of the total were used for "productive" 
purposes, that is, spent in ways that provided employment for men and 
machines (table 13). 

» A. R. Koch, The Flow of Funds Through Selected Large Petroleum Companies, 1921-39, and the 
Resultant Changes in Financial Structure and Capital and Credit Requirements. This study is bemg 
prepared for the National Bureau of Economic Research. Findings mentioned here are used with the 
permission of the author and the National Bureau. 

" Board of Governors of the Federal Reserve System, Federal Reserve Bulletin, July 1939, pp. 560-562. 



62 



CONCENTRATION OF ECONOMIC POWER 



It would be a grave error, therefore, to exaggerate the role of the 
investment banking machinery in supplying funds for the expansion 
of American industry. Investment banking has done its part, but 
this part has been subordinate to internal financing and direct invest- 
ment by individuals. Furthermore, investment banking has never 
fuianced more than a small segment of American investment. It is 
not now, nor has it ever been, concerned with the financing of small 
business enterprises, farms, and small homes. It has played little 
more than a minor role in the financing of new business enterprises 
and of building construction. Even in 1929, when the country was 
most conscious of its investment banking machinery, it is doubtful 
whether this machinery was directly concerned with providing the 
funds for much more than one-tenth of the country's total gross 
investment in plant, machinery, and other capital goods. 

Table 13. — New, refunding, and "productive" capital issues by domestic 

corporations, 1921—39 

[In millions of dollars] 





Capital issues 


"Produc- 
tive" 
capital 
issues 


Year 


Capital issues 


"Produc- 


Year 


New 


Re- 
fund- 
ing 


Total 


New 


Re- 
fund- 
ing 


Total 


tive" 
capital , 
issues 


1921 

1922 


1,701 
2,211 
2,635 
3,029 
3,604 
3,754 
4,657 
5,346 
8.002 
4,483 


568 

734 

530 

492 

618 

820 

1,850 

1,584 

1,374 

474 


2,269 
2,945 
3,165 
3,521 
4,222 
4,574 
6,507 
6,930 
9,376 
4,957 


864 
1,335 
1,624 
1,941 
1,824 
1,801 
1,781 
1,495 
1,787 
1,939 


1931 

19.32 

1933 

1934 


1,551 
325 
161 
178 
404 
1,192 
1, 225 
873 
382 


821 

319 

219 

312 

1,864 

3,387 

1,209 

1.267 

1,732 


2,372 

644 

380 

490 

2,268 

4,579 

2,434 

2,140 

2,114 


796 
203 


1923 


106 


1924 


63 


1925 .. 


1935 


94 


1926 


1936 


379 


1927 


1937 


635 


1928 


1938. 

1939 


417 


1929 


191 


1930 . 











Sources: New and refunding capital issues compiled by the Commercial and Financial Chronicle, as 
reported in Board of Governors of the Federal Reserve System's Annual Report, 1937, and Federal Reserve 
Bulletin. "Productive" capital issues are compiled by Moody's Investors Service. " 'Productive' issues 
are those adding to capital goods, by raising funds for new construction, additions, improvements and 
purchase of new equipment. 'Non-productive' issues comprise those for refunding, for acquisitions and 
mergers, and for worliing capital." The small percentage of corporate issues considered "indeterminate" 
was allocated 50 percent to "productive." Cf. Eddy, "Security Issues and Real Investment in 1929," 
Review of Economic Statistics, Volume XIX (1937), p. 79. 

In recent years even this small share has been diminishing. Cor- 
porate financing has tended more and more to bypass the investment 
banker. More and more the buyers of securities have dealt directly 
with the issuing corporations. 

This process of direct negotiation and direct sale is known as 
private placement. Life insurance companies are the principal buy- 
ers of securities in such transactions, though commercial baulks have 
employed direct negotiation and private placement to some extent. 

There have been many analyses of private placement. Insurance 
companies in general have defended the practice, while investment 
bankers have contended that private placement weakens or destroys 
the capital markets. It has been argued that private placement is 
the outgrowth of the Securities Act of 1933, with its restrictions, 
liabilities, 20-day waiting period, and burdensome disclosure. It has 
been contended that private placement destroys the liquidity of 
security holdings and removes the flow of savings from the "testing" 
of the markets. It has been concluded that, as a result, there has 



CONCENTRATION OF ECONOMIC POWER 



63 



been a ''log-jam" in the capital markets which retards investment 
and fosters unemployment. 

Amid the welter of claims and counter-claims, certain facts were 
established in hearings before the T. N. E. C. These facts do not 
completely describe the practice, though they do illuminate some 
important aspects of it. 

The proportion of corporate bond offerings placed privately has 
increased sharply in the past 3 or 4 years (table 14). In 1939 almost 
38.7 percent of corporate bond offerings were placed privately." 

Table 14. — Corporate bonds placed privately and offered publicly, 1934-89 
[In millions of dollars] 





Corporate bond offerings 


Percent- 
age of 


Year 


rp . , Placed 
^ °'^^' privately 


Offered 
publicly 


total 

placed 

privately 


1934 


510 
2,594 
4,215 
1,689 
2,160 
1,932 


94 
385 
402 
423 
710 
747 


416 
2,209 
3,813 
1,266 
1,450 
1 185 


IS 4 


1935 


14 8 


1936 


9 5 


1937 


25 


1938 -- 


32 9 


1939 -- 


38 7 











Source: Revised figures prepared by the Research and Statistics Section of the Trading and Exchange 
Division of the SecuriLies and Exchange Commission. 

Insurance companies are the most important buyers of corporate 
bonds at the present time, whether these securities are publicly 
offered through investment bankers, or whether they are privately 
placed by the issuing corporations. In 1934, 1935, and 1936 the 26 
largest legal reserve life insurance companies bought one-quarter 
of all the corporate bonds and notes issued; in 1937 and 1938 they 
bought almost one-half of the notes and bonds issued. ^^ During the 
5 years from 1934 through 1938 the 26 largest legal reserve life insur- 

5' Tabulations by Wall Street investment banking firms show a significantly higher proportion of cor- 
porate bonds and notes placed privately: 

T.\BLE l5.~Corporate bonds and notes issued and placed privately, 19.?i-i0 
[In millions of dollars] 



Year 


Aggregate 
corporate 
bond and 

note 
financing 


Private 
placements 


Percentage 

of aggregate 

privately 

placed 


1934 (estimated) 


456 
2,117 
4,026 
1,673 
2,043 
1,871 
2,300 


115 
335 
287 
285 
802 
818 
1,300 


25.2 


1935 


15.8 


1936 


7.1 


1937 . 


17.0 


1938 


39.3 


1939 - - - 


43.7 


1940 (estimated) 


56.5 







Source: Data compiled and estimated "by investment firms in Wall Street" as reported in New 
York Times, Jan. 1, 1941. 
The difference between the tabulations of the Securities and Exchange Commission and those of the 
investment banking firms would seem, in large part, to be attributable to term loans made by commercial 
banks, which were included by the latter as corporate notes. 

5« Hearings before the Temporary National Economic Committee, Part lOA, p. 125. The investing im- 
portance of the insurance companies is even greater than is indicated by these figures, since not all of the 
issues of bonds and notes were eligible for insurance company investment. 



54 CONCENTRATION OF ECONOMIC POWER 

ance companies purchased privately from the issuing corporation 
approximately 1.8 billion dollars of corporate bonds, ^^ or 90 percent of 
the amount estimated by the Securities and Exchange Commission 
to have been privately placed during the period. The 2.8 billion dollars 
of corporate bonds privately placed during 1934-39 have meant a 
loss of at least 60 million dollars of gross profit to the investment 
banking industry. 

Private placement is undoubtedly dependent upon, if indeed it 
is not the direct outgrowth of, the concentration of the flow of savings 
into savings institutions. If the American Telephone & Telegraph Co. 
could place an issue of $140,000,000 privately with 14 insurance com- 
panies, the explanation must rest upon the size and concentration 
of funds in these companies.^" This concentration and the resulting 
magnitude of the investment problem of the life insurance companies 
has already been sketched. It should be noted that the major life 
insurance companies have developed highly specialized investment 
staffs to cope with these problems. There is not one of the major 
companies which does not have or cannot have access to a full comple- 
ment of industrial analysts, statisticians, engineers, economists, 
accountants, and financial lawyers to handle investment problems.^^ 
They claim that these staffs are as adequate to evaluate the security, 
tenns, and price of a bond issue as the staffs of investment banking 
firms. On the other hand, issuing corporations have developed their 
own staffs, and they are in the position, in today's sellers' market, 
to obtain the competition of insurance companies, banks, and invest- 
ment bankers. ^^ The need for the technical assistance provided by 
the investment banker has thus decreased. 

In order to supplement the over-all data on the role of savings 
institutions, and particularly of life msurance companies, in the 
capital markets, several intensive studies were made of the sale, 
redistribution, and mechanics of sale of several high-grade bond 
issues. These studies, together with a comparable study by an in- 
vestment banking firm, indicated that on the average, sales by the 
investment banking (distributing) group during the first week after 
public offering were made as follows: ^^ 

Buyer: Percent of issue 

Banks 46. 5 

Insurance companies 38. 1 

Charitable and educational foundations 3. 8 

Security dealers 5. 1 

Individuals 6. 6 

Total 100. 

The institutional character of the buyers market was clearly indi- 
cated by these studies. Eighty-eight percent of the first public sales 
of these publicly issued securities were made to institutions. Further- 
more, the major part of the sales to security dealers undoubtedly 

»' Hearings before the Temporary National Economic Committee, Part lOA, p. 132. Five companies 
accounted for 86 percent of this amount. Hearing.s before the Temporary National Economic Committee, 
Part lOA, p. 129. 

«o An issue of debenture 234 's of 1970. The Prudential took a block of $59,000,000 and the New York Lif& 
took .$30,000,000. New York Times, November 28, 1940. 

»' For example, see hearings before the Temporary National Economic Committee, Part 28, pp. 15269r 
15290-15294, 15305. 

«2 In its discussions with the Equitable in 1937, for example, relative to a reduction of interest rates upon 
an old private placement, and a new, refunding private placement, the Shell Union Oil Corporation had 
the advice and aid of Morgan Stanley & Co., Inc. Hearings before the Temporary National Economic 
Committee, Part 24, p. 12930. 

w Hearings before the Temporary National Economic Committee, Part 24, p. 13005. 



CONCENTRATION OF ECONOillC POWER 



G5 



found their way to institutions within a short time. The difference be- 
tween the distribution efi'ected through pubhc offering and that effected 
by private placement is bhuTed when as in the case of one issue, the 
distributing group sold 74 percent directly to insurance companies and 
another 19 percent to banks. 

Further studies of some of these issues indicated that the banks 
were only temporary stopping places for these bonds. ^' The banks 
resold from one-half to four-fifths of their purchases from the dis- 
tributing group within 3 months, and life insurance companies were 
the principal purchasers, taking from two-fifths to three-fourths of the 
total amount resold.^^ In addition, the life insurance companies 
bought blocks of these issues on the open market and from security 
dealers, continuing to buy during the period studied (from date of 
issue to December 1939). 

The life insurance companies engaged in a large number of trans- 
actions to acquire their holdings. In the case of 2 small issues of 
25 and 30 million dollars, each purchasing company on the average 
made 66.5 separate purchases; and in the case of 2 larger issues of 140 
and 130 million dollars, each purchasing company, on the average, 
made 93 purchases of the first issue and 101 of the second. Most of 
these transactions were small. In all, the insurance companies made 
4,294 separate transactions in connection with the 5 issues studied. 
There were 32 purchases in $1,000 blocks and 142 in blocks of $2,000. 
More than one-third of the transactions were in blocks of $5,000 or 
less. More than three-quarters were in amounts of less than $30,000, 
though these accounted for only 21 percent of the total purchased. 

In the cases studied insurance companies w^ere the largest single 
group of purchasers, but they were obviously put to much time, effort, 
and expense to acquire the amounts they did. If one may judge by 
other evidence, they probably did not succeed in purchasing as much 
of these issues as they would have liked. Furthermore, if the issues 
had been privately placed, the probability is that the investment 
bankers' commission would have been divided between the issuing 
company and the life insurance buyers, with the former getting more 
for the bonds and the latter pa3ang less for them. 

These facts by no means describe all the elements in the controversy 
between private placement and public offering. The}' do indicate, 
however, that private placement has a solid institutional base de- 
rived from the concentration of savings and the coming-of-age of both 
the insurance companies and the issuing corporations. 

w See the supplement to the testimony of O. L. Altman in hearings before the Temporary National 
Economic Committee, Part 24, pp. 13021-13035. 

•« In the case of one issue, the United States Steel Corporation, SJ-^'s of 1948, the amount resold to insurance 
companies was only 7 percent of the total. This issue was different from the others, however, because in- 
surance companies had bought only a small part from the distributing group. The explanation for the 
small insurance participation in both cases was that the issue was regarded by the "trade" as a "banking 
issue" by reason of the short maturity and the industry involved. 



PART IV 
VOLUME, DIRECTION, AND CONTROL OF INVESTMENT 

Investment, Consumption, and Productive Capacity 

investment, the flow of income, and consumption 

Investment plays two important roles in the present-day functioning 
of the economic system.^ On the one hand, investment is the process 
by which the national plant, private and public, is maintained and 
expanded. On the other hand, investment is a principal determinant, 
as well as a major component, of the national income. 

Investment maintains and expands productive capacity. From this 
point of view investment in general increases the ability of the com- 
munity to produce consumption goods in the future, at the same time 
as it changes the kind of consumption goods that will be produced. 

In good times investment constitutes approximately 20 percent 
of the gross national income. In financial and accounting terms, 
approximately one-half of the gross investment in good years repre- 
sents replacement, the remainder representing expansion. In the 
same financial and accounting terms, approximately two-thirds of 
business investment, excluding net changes in business inventories, 
represents replacement. This summary division of investment 
between replacement and expansion must, however, be interpreted 
with caution. These allocations of investment between replacement 
and expansion are made in financial terms. They do not necessarily 
apply to real investment, to investment after adjustment for changes 
in prices, and in quality and type of product. These adjustments 
are difficult, complicated, and theoretically unsatisfactory, and the 
separation of real investment into maintenance and replacement 
suffers accordingly. In any event the very term replacement in a 
dynamic economy is misleading. The four-high continuous strip 
mill is not the same as the two-high discontinuous mill it replaces, 
nor is the new house the same as the old. The type, quality, and 
specification tolerances of the steel produced with the new machine, 
the standard of living and comfort in the new house, are different 
from the old. Gross investment, rather than net investment alone, 
changes the direction, tempo, output, and productive methods of the 

1 Investment (gross capital formation) as used in this study, was defined supra, pp. 5-8. It should be 
noted that the classification of an expenditure as investment, according to the treatment used here, does 
not depend upon wliether the expenditure yields a money income or is self-liquidating. Many a business 
and philanthropic investment is not designed to yield a money income. Many a private investment, 
undertaken as self-liquidating, is finally adjudged non-self-liquidating. Though these expenditures do not 
pay out, they were investments when they were made. Government investment is subject to similar 
criteria. If a self-liquidating toll bridge is an investment, so is a non-self-liquidating park. That the cost 
of the toll bridge is recaptured through service charges, while the cost of the park is met through taxes, 
does not affect the classification of both expenditures as investments. Neither is the classification of an 
expenditure as investment dependent upon the source of the funds used for payment. Investment may be 
financed on long-term or short-term, by savings or bank credit. There is no watertight comiiartment that 
makes savings finance investment and" makes bank credit finance all other types of expenditure. On the 
contrary, some savings go to finance installment sales, while the banking system, traditionally considered 
a lender of short-term credit, has played an important function in extending credits that may be used to 
finance investments. 

67 



68 



CONCENTRATION OP ECONOMIC POWER 



economy. For many purposes it is impossible, and even theoretically 
undesirable, to distinguish between replacement and expansion as 
components of gross investment. 

Investment has a second important function. Since investment 
distributes income in the process of producing capital goods, the 
curtailment of investment puts millions of people out of the income 
stream. A reduction in consumption follows the reduction of invest- 
ment. A rate of current investment equal to the current rate of 
saving leaves the flow of purchasing power imbroken, and maintains 
the level of employment, consumption, and national income. 

During the short periods represented by business depressions, the 
income-distributing aspect of investment may well be more important 
than the capital-goods-production aspect. Considered only m their 
physical aspects, the postponement of a new road for a year or two 
would not (greatly affect transportation costs, and 1 year's delay 
in constructing a new refinery would not substantially modify oil 
output and oil prices. Even the drying-up of investment for 2 
or 3 years would not substantially affect the capacity to produce 
consumption goods. The drying-up of investment does, however, 
seriously interrupt the flow of income. If $ 1 ,000 is saved and invested , 
the money turns up as income distributed within the community; if 
$1,000 is saved but not invested, income is decreased, and production 
and employment follow suit. 

In the past two decades the United States has enjoyed a large volume 
of consumption goods only when it was producing a large volume of 
capital goods. For example, the 17.5 billion dollars of capital outlays 
in 1937 were accompanied by 62.5 billion dollars of consumers' goods 
and services, while the 12.7 billion dollars of capital outlays in 1938 
were accompanied by only 57.3 billion dollars of consumers' goods and 
services. There has been no instance in the past two decades when 
the United States had to choose between a large volume of consump- 
tion and a large volume of investment. The choice has been between 
large amounts of both capital goods and consumption goods, and small 
amounts of both capital goods and consumption goods. (See table 16.) 



Table 16. — Gross national product, capital formation, and consumers' outlay, 

1919-40 

[In billions of dollars] 



Year 


Gross 
national 
product 


Gross 

capital 

formation 


Consum- 
ers' out- 
lay 


Year 


Gross 
national 
product 


Gross 

capital 

formation 


Consum- 
ers' out- 
lay 


1919 


68.8 
82.8 
66.1 
67.2 
78.2 
79.8 
83.4 
88.8 
86.8 
90.1 
93.6 


19.3 
22.1 
11.5 
13.3 
18.2 
15.2 
19.2 
19.0 
18.2 
17.8 
20.3 


49.5 
60.7 
54.6 
53.9 
60.0 
63.6 
64.2 
69.8 
68.6 
72.3 
73.3 


1930. 


82.7 
64.8 
47.1 
46.0 
55.2 
61.6 
72.7 
80.0 
70.3 
77.0 
82.0 


13.7 
8.5 
3.1 
3.7 
5.5 
9.4 
13.8 
17.5 
12.7 
15.6 
18.5 


69.0 


1920 


1931.... 


56.3 


1921 


1932.... 


44.0 


1922 


1933.... 


42.3 


1923 - 


1934 

1935 


49.7 


1924 


52.2 


1925.... 


19361 

1937 1 


58.9 


1926 


62.5 


1927 


1938 1 


57.3 


1928 


1939 1 


61.4 


1929 


19401 


63.5 









1 To date (December 1940) Kuznets has estimated commodity products through 1938 and service outlays 
through 1935. All later data represent independent estimates. 

Source: Hearings before the Temporary National Economic Committee, Part 9, p. 4007. Data there 
presented were taken from Simon Kuznets, National Income and Capital Formation, 1919-35, New York, 
National Bureau of Economic Research, 1937, and Commodity Flow and Capita! Formation in the Recent 
Recovery and Decline, 1932-38, Bulletin 74, New York, National Bureau of Economic Research, 1939. 



CONCENTRATION L^ ECONOMIC POWER 



69 



This is the usual relationship between the output of capital goods 
and the output of consumers' goods, but it is not a necessary" one. 
A reduction of consumption need be suffered only in periods of war 
and lai-ge-scale defense programs.^ Apart from such times the volume 
of consumption would not decline, even though the volume of capital 
formation decreased, provided the flow of income were maintained, 
provided the incomes of those dependent upon turnmg out investment 
goods were continued even though the output of investment goods 
were reduced. If this were done there would be the same output of 
consumption goods with a smaller output of investment goods. A 
larger proportion of our effort would be devoted to the output of 
consumption goods, but a smaller amount of effort would be devoted 
to the output of all goods. Part of the Nation's capacities would be 
unemployed. 

It is clear, therefore, that if the pattern and volume of saving remains 
unchanged, consumption can be maintained in only one of two ways. 
First, a volume of investment sufficient currently to offset the current 
accrual of savings must go on. This, of course, implies a correspond- 
ing growth of debt or equities. Or, secondly, some part of the com- 
munity must currently go into debt or draw upon past accumulations 
(dis-save) to an amount sufficient to oft'set the current accrual of sav- 
ings. This implies that the net savings of the community are reduced 
to zero. Investment, or dis-saving, or some combination of the two, 
must currently offset the current accumulation of savings if the level of 
consumption is to be maintained. But investment is preferable to 
dis-savmg as a device for maintaining consumption, since it, in addi- 
tion, keeps men in their jobs and adds to the country's wealth. On 
the other hand, when the void created by a decline in investment is not 
counterbalanced by an increase in dis-saving, we set in motion a 
tragedy that creates millions of idle men, thousands of idle machines, 
mounting personal insecurities, and widespread waste and disorganiza- 
tion. The Nation comes to have less goods of all kinds. The unem- 
ployed suffer the most, but all parts of the community are affected. 

GROSS AND NET INVESTMENT AND PRODUCTIVE CAPACITY 

In the course of producing the gTOSs national income, including the 
volume of gross investment, the existing stock of machinery, equip- 
ment, buildings, roads, bridges, dams, and other capital goods suffers 
wear and tear. The value of this wear and tear, or depreciation, 
represents a consumption of capital, and should be considered a charge 
against gross investment. Depletion and losses due to fire and similar 
hazards must similarly be accounted items of capital consumption. 
Furthermore, decreases in inventories or in net claims against foreign 
countries represent a decrease of the country's wealth. In financial 
terms, no addition can be made to the country's wealth unless the 
total of capital equipment, fixed plant, inventories, precious metals, 
and claims against foreigners is maintained ''intact."^ Net invest- 
ment is, therefore, gross investment, minus capital consumption, or 

2 These almost always require the diversion of capacities after full employment has been reached. If 
expansion of defense effort is required beyond the point where the economy is operating at full capacity, 
re-direction of productive efforts, at the expense of consumption, becomes necessary. 

3 Of. A. 0. Piffou, Economics of Welfare, London, Macmillan, 1932, 4th ed.. ch. 4; Solomon Fabricant, 
Capital Consumption and Adjustment, National Bureau of Economic Research, New York, 1938, ch. 2. 



70 



CONCENTRATION OP ECONOMIC POWER 



"the consumption of all durable capital goods utilized in the process 
of production." ^ 

For the economy as a whole, approximately one-half of the gross 
capital formation in 1929 and again in 1937 represented expansion. 
During the depression, however, capital consumption exceeded capital 
formation by $10.4 billions; during 1932 and 1933 alone dis-investment 
amounted to $8.0 billions (table 17). 

Table 17. — Gross and net capital formation, 1919-40 
(Private and public) 
[In billions of dollars] 



Year 


Gross cap- 
ital forma- 
tion 


Net capital 
formation 


Year 


Gross cap- 
ital forma- 
tion 


Net capital 
formation 


1919 


19.3 
22.1 
11.5 
13.3 
18.2 
15.2 
19.2 
19.0 
18.2 
17.8 
20.3 


10.5 

11.6 
3.7 
5.8 
9.7 
6.8 

10.6 
9.7 
8.9 
8.2 

10.1 


1930 

1931 


13.7 
8.5 
3.1 
3.7 
5.5 
9.4 
13.8 
17.5 
12.7 
1 15.6 
I 18.5 


3.9 


1920 


-.3 


1921 


1932 


-4.5 


1922 


1933 


-3.5. 


1923 - 


1934 


-2.1 


1924 . .- 


1935 


1.5 


1925 


1936 

1937 


5.5. 


1926 


8.2 


1927 


1938 

1939 


13.6 


1928 


16.3 


1929 


1940 


19.1 









I Estimated. 

Source: Hearing's Before the Temporary National Economic Committee, Part 9, p. 4008. Data there pre- 
sented were taken from Simon Kuznets, National Income and Capital Formation, 1919-35, New York^ 
National Bureau of Economic Research, 1937, pp. 40, 48. These dMa were revised and extended in Simon 
Kuznets. Commodity Flow and Capital Formation in the Recent Recovery and Decline, 1932-38, Bulletin 
74, New York. National Bureau of Economic Research, 1939. 

Note.— Gross and net capital formation apply to producers' durable commodities, residential construc- 
tion, net change in inventories, net change in gold and silver stocks, net change in claims against foreign 
countries. 



Two-thirds of business investment in plant and machinery in 1923- 
29 and in 1937 represented replacement; and the remainder represented 
expansion. On the other hand, business investment during 1931-34 
was insufficient to maintain plant and equipment ^ (table 18). The 
inclusion in these totals of capital formation represented by changes 
in inventories would make net capital formation fluctuate more 
widely. 

4 Simon Kuznets, National Income and Capital Formation, New York, National Bureau of Economic 
Resenrch 1919-35, p. 17. Estimates of net investment are subject to greater error than estimates of gross 
investment, since they involve additional possibilities of error which would not tend to compensate those 
involved in estimating gross investment. 

5 Estimates of capital consumption due to depreciation differ from the provisions for depreciation made 
by business enterprises and others. Business enterprises keep records of depreciation to help them recap- 
ture funds invested in capital goods. To do so they charge current receipts for current depreciation. Hence, 
depreciation is almost always based upon original cost. On the other hand, the subtraction of an allocated 
part of past investment, in terms of original prices, from present investment in current prices, gives no indi- 
cation of net investment. To compare gross investment and capital consumption, it is necessary to express 
both in the same prices. 



CONCENTRATION OF ECONOMIC POWER 



71 



Table 18. — Business gross capital formation, capital consumption, and net capital 
formation {excluding inventories), 1D19SS 

[In billions of dollars] 



Year 


Gross 
capital 
forma- 
tion 


Capital con- 
sumption 


Net 
capital 
forma- 
tion 


Year 


Gross 
capital 
forma- 
tion 


Capital con- 
sumption 


Net 
capital 


Amount 


Percent 
of gross 


Amount 


Percent 
of gross 


forma- 
tion 


1919 . . - 


9.0 
9.3 
6.1 
6.6 
8.6 
8.5 
9.3 

10.1 
9.9 

10.2 


6.3 
7.3 
5.5 
5.3 
6.0 
5.9 
6.0 
6.6 
6.5 
6.7 


70 
78 
90 
80 
70 
69 
64 
65 
65 
65 


2.7 
2.0 
.6 
1.3 
2.6 
2.6 
3.4 
3.5 
3.5 
3.6 


1929 

1930 

1931 

1932 

1933_... 

1934 

1935 


11.5 
9.3 
5.8 
3.1 
3.0 
4.3 
5.4 
7.3 
9.4 
7.1 


7.1 
6.7 
6.1 
5.2 
4.9 
5.1 
5.3 
5.0 
6.2 


62 
73 
105 

167 
165 
119 

98 
77 
66 


4.4 


1920 


2.5 


1921 


-.3 


1922 


-2.1 


1923 


-1.9 


1924 


-.8 


1925 


. 1 


1926 . ^ 


1936 

1937. 


1.7 


1927 


3.1 


1928 


1938 















Source: Hearings before the Temporary National Economic Committee, Part 9, p. 4008. Data there 
presented were taken from Kuznets, National Income and Capital Formation, 1919-35, New York, National 
Bureau of Economic Research. 1937; these data were revised and extended in pp. 40, 48. Commodity Flow 
and Capital Formation in the Recent Recovery and Decline, 1932-38, New York, National Bureau of 
Economic Research, 1939. 

Accounting calculations of the net expansion or the net contraction 
of business plant and equipment do not necessarily reflect changes in 
industrial capacity. As A. H. Hansen explained: 

It is quite possible that those capital outlays which were made on renewals and 
replacements, introducing through those capital outlays new techniques and 
improved machinery, ir\a,y have left 30ur total caj^ital plant as productive as 
before, despite the fact that the accounting figures would indicate a decline in the 
total capital stock. ^ 

Changes in prices constitute only one of the factors vitiating any 
simple inferences. Furthermore, as Hansen noted later: 

The expenditures from depreciation and depletion allowances may often have no 
relation to any specific worn-out machines. Newly built plant and equipment will 
not need to be replaced for many years and sometimes even decades, yet the 
annual depreciation allowances on such equipment will be available year by year 
for expansion.^ 

Volume and Direction of Investment 

VOLUME OF investment AND OTHER OFFSETS TO SAVING SINCE 1919 

In 1923-29 the total volume of capital outlays, according to the 
calculations of Kuznets,^ amounted to 128 billion dollars, an average of 
18.3 billion dollars per year. In 1935-38 they averaged 27 percent 
lower, or 13.4 billion dollars per year. Capital outlays reached their 
peak of 20.3 billion dollars iin 1929, fell off sharply to 3.1 billion dollars 
in 1932, and reached a post-depression peak of 17.5 bilhon dollars in 
1937 (appendix XV). Although the fluctuations in capital outlays 
were less sharp after correction for price changes — -in 1929 dollars, 

6 Hearings before the Temporarv National Economic Comm.ittee, Part 9, p. 3510. It should be noted that 
the concept of productive capacity is an elusive one. Some of its aspects are examined by George Terborgn 
in "The Problem of Manufacturing Capacity," Board of Governors of the Federal Reserve System, Federal 
Reserve Bulletin, July 1940. 
' Hearings before the Temporary National Economic Committee, Part 9, p. 3539. _ 

8 National Income and Capital Formation, 1919-1935, New York, National Bureau of Economic Research, 
1937, and Commodity Flow and Capital Formation in the Recent Recovery and Declme, 1932-1938, New 
York, National Bureau of Economic Research, 1939. 



291143— 41— No. 37- 



72 



CONCENTRATION OF ECONOMIC POWER 



from 20.3 billion dollars in 1929, to 3.7 billion dollars in 1932, to 18.2 
billion dollars in 1937 (see table 19)— they were still very much greater 
than the fluctuations in consumers' outlay.^ 

Table 19. — Gross capital formation in current and 1929 dollars, 1929-38 

[In billions of dollars] 



Year 


Gross cap- 
ital forma- 
tion cur- 
rent dollars) 


Gross cap- 
ital forma- 
tion (1929 
dollars) 


Year 


Gross cap- 
ital forma- 
tion (cur- 
rent dollars) 


Gross cap- 
ital forma- 
tion (1929 
dollars) 


1929 


20.3 
13.7 
8.5 
3.1 
3.7 


20.3 
14.2 
9.8 
3.7 
4.5 


1934 


5.5 
9.4 
13.8 
17.5 
12.7 


6 3 


1930 . 


1935 . 


10 7 


1931 


1936 


15 3 


1932 


1937. .- 


18 " 


1933 


1938 . 


13 f 









Source: Simon Kuznets, National Income and Capital Formation, 1919-35, New York, National Bureau 
of Economic Research, 1937, and Commodity Flow and Capital Formation in the Recent Recovery and 
Decline, 1932-38, New York, National Bureau of Economic Research, 1939. 

Lauclilin Currie discussed the volume and the changes in the relative 
importance of those expenditures that are generally considered to 
represent the major outlets for or offsets to gross saving, describing 
these as follows: 

1. Expenditures on plant and equipment charged to capital account: These are 
financed from such sources as depreciation allowances, retained earnings, borrow- 
ings, and stock issues. 

2. Private housing expenditures: Since the bulk of expenditures on new resi- 
dential construction is financed by borrowing, and little comes out of current 
income, it is customary to consider such expenditures as outlets for saving. 

3. Value of the change in inventories: An increase in inventories represents an 
increased value of goods produced but not purchased out of final consumer income. 
The monetary effect of a change, while it is taking place, is strictly analogous to 
the effect of plant and equipment expenditures. 

4. Net additions to disposable cash income attributable to public bodies: This 
category is chosen rather than expenditures on public construction because we are 
here more interested in the dynamics of the flow of income than in the measure- 
ment of the addition to the durable goods of the community. Public expenditures 
that add to disposable cash income more than tax receipts decrease disposable 
cash income, constitute an offset for an equivalent amount of current saving. 

5. Net foreign balance on current account: This represents the excess of pay- 
ments received by us from foreigners over payments made by us to foreigners on 
other than capital movements. An excess is a net addition to disposable domestic 
cash income and hence ma\' be regarded as an offset to domestic saving. It repre- 
sents goods produced and not sold to domestic consumers and hence, for present 
purposes, is analogous to plant expenditures. 

6. Net change in consumer credit: An increase in this category might either be 
treated as negative saving or as an outlet for current saving. The latter alterna- 
tive is adopted here.'" 

Currie testified that a high level of national income is associated 
with a large amount of oft'sets to saving. ^^ The gross national income 
of $90 billion in 1929 was associated with $18 bilhon of offsets; and 
the gross national income of 75.7 billion dollars in 1939 was associated 
with 14.6 billion dollars of offsets. On the other hand, the gross 
national income of 46.2 billion dollars in 1933 was associated with 2.9 
billion dollars of offsets to saving (appendix XVI). 

» See table 16. 

'» Hearings before the Temporary National Economic Committee, Part 9, p. 3533. The calculation of the 
individual items is described in pp. 4015-4018. 

11 Hearings before the Temporary National Economic Committee, Part 9, pp. 3538-3538. See table 2, 
p. 14, supra. In order to make the Kuznets gross national product figures comparable with the income- 
producing expenditures series, Currie adjusted the former by deducting imputed rents and gross savings of 
Government. Hearings before the Temporary National Economic Committee, Part 9, p. 4018. 



CONCENTRATION OF ECONOMIC POWER 



73 



DIRECTION OF INVESTMENT AND OTHER OFFSETS TO SAVING SINCE 1919 

Major Fields oj Investment and Offsets to Saving 

The directions of investment have changed materially since 1929. 
Two constituents of investment in 1937 were relatively more important 
than they had been in 1923-29: public construction was only slightly 
more important, for the substantial increase in Federal construction 
did little more than counteract the decline in State and local construc- 
tion; and the net accumulation of inventories in 1937 was $3,000,000,- 
000, the largest in any year since 1921. On the other hand, com- 
mercial construction lagged, and residential construction was the most 
depressed segment of investment. The situation may be conveniently 
summarized (table 20) in the following general categories: 

Table 20. — Major components of Kuznels' estimate of gross capital formation, 
1923-29, 1929, and 1937 



Item of gross capital formation 


Average 

of 
1923-29 


1929 


1937 


Amount of expenditure (billions): 

Business plant and equipment _. 


$9.7 

1.2 

4.4 

2.6 

.4 


$11.5 

2.4 

3.0 

2.9 

.5 


$9.4 


Net increase in inventories ... - . 


3.0 


Residential construction.. 


2.0 


Public construction 

Net foreign investments and increase in gold and silver stocks. 


2.9 
.2 


Total 


18.3 


20.3 


17.5 






Percent of total expenditures: 

Business plant and equipment 


53.0 
6.6 
24.0 

14.2 
2.2 


56.7 
11.8 
14.8 
14.3 

2.4 


53.7 


Net increase in inventories 


17.2 


Residential construction 


11.4 


Public construction __ _ . _ __ 


16.6 




1.1 






Total 


100.0 


100.0 


100.0 







Source: National Income and Capital Formation, 1919-35, New York, National Bureau of Economic 
Research, 1937, and Commodity Flow and Capital Formation in the Recent Recovery and Decline, 1932-38, 
New York, National Bureau of Economic Research, 1939. Appendix XV contains the detailed tabulations 
on which this summary is based. 

The composition of offsets to saving is a good indicator of the 
stability of any expansion. An expansion based upon an inventory 
boom or upon an increase in consumer credit is likely to be more 
''precarious" and short-lived than one based upon residential con- 
struction or plant expansion. ^^ Hence, the relative importance of 
the constituents of offsets to saving is summarized in table 21 for 
1925 and 1937, 2 years when the national income was approximately 
the same, as well as for 1929 and 1939. 

Between 1925 and 1929 private housing and non-profit construction 
shrank from 34 percent of the total offsets to saving to 21 percent, 
while plant and equipment rose from 48 percent to 57 percent and 
the net addition to inventories rose from 9 pei'cent to 12 percent. On 
the whole, the composition of offsets to saving between 1925 and 
1929 showed some worsening, with inventories and consumers' credit 
becoming more important. 

" Hearings before the Temporary National Economic Committee, Part 9, pp. 3517, 3533. 



74 



CONCENTRATION OF ECONOMIC POWER 



Table 21.— Composition of income-producing expenditures that offset savingsy 

1925, 1929, 1937, and 1939 



Type 



1937 



1939 1 



Amount of expenditure (millions) : 

Plant and equipment 

Private housing and nonprofit construction. 

Change in inventories 

Foreign balance 

Government net contribution 

C hange in consumers' credit 

Total 

Percent of total expenditures: 

Plant and equipment .._ 

Private housing and nonprofit construction 

Change in inventories 

Foreign balance 

Government net contribution 

Change in consumers' credit. 

Total 



8,189 

5,750 

1,523 

199 

529 

842 



17, 032 



10,157 

3,761 

2,146 

240 

696 

987 



7,570 

1,908 

3,072 

-13 

877 

891 



6, 135 

2,270 

990 

781 

3,573 

900 



17,987 



14, 305 



14,649 



48.1 
33.8 
8.9 
1.2 
3.1 
4.9 



100.0 



56.5 
20.9 
11.9 
1.3 
3.9 
5.5 



52.9 
13.4 
21.5 
-.1 
6.1 
6.2 



41.9 
15.5 
6.8 
5.3 
24.4 
6.1 



100.0 



100.0 



100. 



' Figures for 1939 are preliminary. 

Source: The components'of these totals are given, and the .series used in the preparation of these totals 
are described in appendix XVI. 

The recoveiy of 1937, from the point of view of the constituents 
of offsets to saving, was probably the most "precarious" in two dec- 
ades. Total offsets were largely dominated by an inventory boom, 
the largest, both absolutely, in dollar volume, and relatively, in pro- 
portion to total offsets to saving, since 1922. Inventories, which 
had constituted 8.9 percent of total offsets in 1925 and 12.2 percent 
in 1929, rose to 22 percent in 1937. The net Government contribu- 
tion to purchasing power was $877,000,000 in 1937, only slightly 
more than in 1925 and 1929. Larger expenditures were counter- 
balanced by larger tax collections.^^ 

In 1939, the net Government contribution to the community's 
cash income was 3.6 billion dollars, or 24 percent of total offsets to 
saving, while the increase in inventories constituted only 7 percent of 
the total. The Government net contribution was relatively higher, 
and the net increase in inventories relatively lower in 1939 than in 
1925, 1929, and 1937. Relative outlays on plant and equipment 
and on private housing and non-profit construction lagged the most 
in 1939 compared with 1925 and 1929. 

Plant and Equipment '* 

Plant and equipment outlays by all business enterprises were 10.2 
bilhon dollars in 1929, 7.6 billion dollars inl937, and 6.1 billion dollars 
in 1939. An analysis of plant outlays and equipment outlays sepa- 
rately indicates that the latter recovered much more completely than 
the former, as follows: 

[In billions] 



Year 


Plant 


Equipment 


1929... 




$4.6 
2.3 
1.9 


$5.6 


1937 




5.3 


1939 




4.3 









13 The Federal net contribution was sharply curtailed in 1937. Otherwise the total governmental net 
contribution would have been substaiitiallv higher. The Federal net contribution was 3.7 billion dollars 
in 1935, 4.3 billion dollars in 1936, 1.1 billion dollars in 1937, and 2.4 billion dollars in 1938. 

'< Terborgh's estimates. They are presented in detail in appendixes XVII-XX. 



CONCENTRATION OF ECONOMIC POWER 75 

Equipment outlays for all entorprises of 5.3 billion dollars in 1937 
were higher than those of any year in the 1920's except the 5.6 billion 
dohars in 1929. In view of the decreases in prices and increases in 
productivity during the period, the equipment outlays in 1937 un- 
doubtedly reflected more "real" investment and substantially more 
productive capacity than in 1929. Plant outlays followed a difl'erent 
course. The 2.3 billion dollars of plant outlays in 1937 were less than 
those in every year in the 1920's, and onlv half the outlay of 4.6 billion 
dollars m 1929. 

The explanation for these divergent trends m plant and machinery 
outlays is perhaps that increases in productivity, particidarly those 
designated as "managerial," may have reduced the demand for plant 
in relation to equipment. Followmg an exhaustive study of changes 
in productivity, it was reported that — 

In the automobile industry particularly, but in other manufacturing industries 
as well, improvements in plant lay-out appear to have been greatly stimulated 
by the depression, with resulting better continuity of the flow of work and savings 
in direct and supervisory labor, equipment, floor space, and inventories. '^ 

For example, in 1934 Packard, through changing its lay-out, cut floor 
space per unit of output nearly in half, and was left with a vacant 
building; while when Western Electric substituted straight-line for 
functional manufacture it reduced its required floor space by 17 per- 
cent.^^ At the levels of industrial production v/hich have prevailed 
in the last decade it has been possible to modernize machinery and 
equipment without adding substantially to plant floor space. 

It is interesting to note that annual expenditures for equipment did 
not increase greatly from 1923 to 1928. Currie testified that during 
this period, "despite rapidly mcreasing production, despite rapidly 
increasing consumption, and despite the smallness of the increase in 
equipment expenditmes, there was no evidence of any growing strain 
on our productive facilities." ^'' 

Plant and equipment outlays in mining and manufacturing, and in 
agricultm-e, recovered almost completely between 1929 and 1937. 
Outlays by railroads and transit companies in 1937 were 63 percent 
and 75 percent, respectively, of the 1929 totals. The 1929 levels, in 
both these cases, represented substantial declines from their 1923 
peaks. In the electric power and telephone industries, outlays in 
1937 were only 52 percent and 57 percent, respectively, of their 
1929-30 peaks. 

Mining and manufacturing outlays have been closely associated 
w4th industrial production, since 1920.^* Increases in productivit}^ and 
efficiency during the period have tended, however, to reduce the 
amount of investment associated with given levels of production. 

Agricultural outlays for equipment were 14 percent higher in 1937 
than in 1929, despite the fact that plant outlays were more than one- 
third lower. The growing strides of mechanization are indicated by 
the continued high level or post-depression equipment expenditures: 
1936-39 was 6 percent higher than 1926-29, despite the increases in 

'5 David Weintraub, Effect of Current and Prospective Technological Dcvelonments Upon Capital 
Formation, Report G-4 of the National Research Project of the Work Projects Administration, 1939, pp. 
12-13. (Reprinted in American Economic Review Supplement, vol. XXIX, 1939, pp. 15-32.) 

'6 Ibid., pp. 12-13, footnote 29. 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3524. 

'* See Currie's testimony, Hearings before the Temporary National Economic Committee, Part 9, p. 3520, 
et seq. Since this testimony, the estimates of outlays have been slightly revised, while the Federal Reserve 
Board index of industrial production has undergone substantial revision. Board of Governors of the Federal 
Reserve System, Federal Reserve Bulletin, August 1940. 



7g CONCENTRATION OF ECONOMIC POWER 

productivity and the decreases in prices that had occurred in th& 
meantime.'^ 

Railroad outLays for plant are far short of the level of the late 
twenties; the abandonment of trackage is continuing, while the con- 
struction of new unified railroad terminals in the twenties did not 
need to be repeated or extended in the thirties. Equipment expendi- 
tures in 1937 were as high as in 1929, though less than half of what 
they had been in 1923. The volume of carloadings has decreased by 
one-third from 1926-29, the average number of serviceable freight 
cars and locomotives has decreased, and the speed and efficiency of 
railroad transportation have increased. 

Outlays by electric power and telephone companies reached their 
peaks after the depression had begun. In 1929 these utilities were 
in the middle of long-range expansion programs. It would have been 
inadvisable and unprofitable sharply to curtail these programs. This 
factor, rather than a response to public appeals to help combat the 
depression, determined their investment policies in 1929 and 1930. 
On the whole, these outlays expanded capacity beyond the then de- 
clining requirements, and were probably one factor in depressing 
outlays in later years. Furthermore, both these fields have shown 
great increases in productivity in recent years. As a result, in 1937 
plant and equipment outlays were only 52 percent and 57 percent of 
their respective peaks. The decline in plant outlays was much mor& 
severe than in equipment outlays.^" 

Residential Construction 

The volume of residential construction does not follow the general 
curve of business activity. It was virtually at a standstill during the 
World War boom; it did not follow the 1927-29 boom; and it did not 
follow the 1937-38 recession. 

It is clear that residential construction follows long swings. The 
volume of construction rose from $2 billion in 1919 to a peak of $5 
billion in 1925; declined during 1926-28 to $4.4 billion; declined sharply 
in 1929-30, with 1929 being $1.2 billion below 1928, and 1930 being 
$1.4 billion below 1929; reached a low of $375 million in 1933; and 
rose steadily to $2.1 billion in 1939 ^i (table 22). The trend is still 
upward. The number of nonfarm residential units built each year 
fluctuates in rough accordance with the dollar volume of investment 
in housmg. The number of units built rose from 247,000 in 1920 to 
a peak of 937,000 in 1925, and then fell to 509,000 in 1929. It reached 
a low of 54,000 in 1933. In 1939 the number of residential dwelling^ 
units constructed was 465,000. 



" Hearings before the Temporary National Economic Committee, Part 30, pp. 16922-17081. For a more- 
general treatment, see Bureau of Agricultural Economics, Technology on the Farm, 1940, especially pp. 3-21. 

2' Hearings before the Temporary National Economic Committee, Part 9, pp. 3530-31. 

21 Terborgh's estimates (table 22). Kuznets' estimates (appendix XV) show a similar pattern. The 
estimates of Peter A. Stone, which were prepared on a different basis, are on a substantially lower level but 
their pattern is similar to the Kuznets and Terborgh estimates. See Temporary National Economic Comr 
mittee Monograph No. 8, Toward More Housing, by Peter A. Stone and R. Harold Denton, p. 19^ 



CONCENTRATION OF ECONOMIC POWER 



77 



Table 22. — Expenditures for new residential construction and number of nonfarm 
dwelling units constructed, 1920-39 



Year 


Expendi- 
tures 


Dwelling 
units con- 
structed 


Year 


Expendi- 
tures 


Dwelling 
units con- 
structed 


1920 


Millions of 
dollars 
1,712 
2,016 
3,414 
4,395 
4,772 
6,141 
4,843 
4,645 
4,355 
3,193 


247, 000 
449, 000 
716,000 
871.000 
893, 000 
937, 000 
849,000 
810, 000 
753, 000 
509, 000 


1930 


Millions of 

dollars 

1,824 

1,379 

515 

373 

419 

81-3 

1,374 

1,740 

1,618 

2,060 


286, 000 

212,000 

73,000 

54,000 

55, 000 

144,000 

280,000 

300, 000 

347, 000 

405,000 


1921 


1931 . 


1922 _ 


1932... 


1923 


1933 


1924_ _ 


1934 . 


1925.. 


1935 


1926 


1936 . 


1927 


1937 


1928 


1938 


1S29. 


1939 







Source: Expenditures represent estimates by George Terborgh, in Board of Governors of the Federal 
Reserve System, Federal Reserve Bulletin, September 1939 and February 1940. 

Dwelling units from Temporary National Economic Committee Monograph No. 8, Toward More 
Housing, by Peter A. Stone and R. Harold Denton, p. 22. 

Relatively more units are provided now, as compared with the 
twenties, in the form of one-family dwellings: ^^ 



Units provided by— 



1-famiIy houses... 
2-family houses... 
Apartment houses 

Total.. 



Average, 
1924-26 



Percent 
59 
17 
24 



Average, 
1936-38 



Percent 
75 
5 
20 



100 



100 



1939 



Percent 

76 
5 
19 



100 



Construction in the West and South has shown greater recovery 
than in the Northeast and North Central areas. In 1939 the South 
and West were providing residential units at the rate of two-thirds 
their predepression peaks; while the Northeast was building at one- 
third, and the North Central area at two-fifths the predepression 
peaks. Consequently, relatively more of the nonfarm residential 
units are being built in the West and South now than in the twenties ^^ 
(table 23). 



Table 23. — Construction of non-farm residential\units, by regions, 1924-26, 1936-38, 

and 1939 

[Number of residential units in thousands] 





Average 1924-26 


Average 1936-38 


1939 


Area 


Number 
of units 


Percent 


Number 
of units 


Percent 


Number 
of units 


Percent 


Northeast 


306 
242 
210 
135 


34 
27 
24 
15 


90 
57 
97 
59 


30 
19 
32 
19 


113 
104 
150 
98 


24 


North Central 


23 


South 


32 


West 


21 






Total . . . 


893 


100 


303 


100 


465 


100 







Source: Hearings before the Temporary National Economic Committee, Part 11, p. 5477. Data for 1939 
from Bureau of Labor Statistics. 



" Hearings before the Temporary National Economic Committee, Part 11, p. 6476. Data for 1939 
from the Bureau of Labor Statistics. 

" Hearings before the Temporary National Economic Committee, Part 11, pp. 4949, 5477. Data for 1S39 
from the Bureau of Labor Statistics. 



78 CONCENTRATION OF ECONOMIC POWER 

Isador Lubin discussed the type of housing that is available and the 
amount of construction required to provide for normal needs. He 
pointed out that an importlmt percentage of American families lives 
in substandard housing. Approximately 4,000,000 dwelling units, 
about 16 percent of the total, are "unfit for human occupancy or in 
need of major repairs." More than 5,500,000 dwelling units lack a 
"bathroom. More than 7,000,000 units lack hot water, electric lights, 
or indoor toilet. Thus, even if no expansion of housing facilitijas were 
required, the country needs to re-house a substantial portion of the 
population.^* 

The increase of population and the number of families will, however, 
require an expansion of residential facilities. Lubin estimated that 
during the next 10 years an average of 280,000 additional families 
per year will require housing,^^ that approximately 45,000 dwelling 
units per year will be torn down, and consequently that a minimum 
of 325,000 new units per year will be required. ^"^ If the 4,000,000 
residential units which are substandard at the present time are to be 
slowly eliminated, over as long a period as 20 years, an additional 
200,000 units per year will be requu'ed. Such a minimum program 
will not, of course, keep housing conditions at their present level. A 
large number of houses each year will have to be classified as obso- 
lescent, particularly since half our houses are more than 25 years old 
and one-fourth are 50 years old. Lubin concluded that "with 525,000 
additional units [per year] for the next 10 years, there will hardly be 
any increase in the standards of the American people in terms of their 
Tiousing." -^ 

Despite these minimum requirements, only 345;000 units were built 
in 1938; 465,000 units (including 6,041 units made available for 
occupancv by the United States Housing Autliority) were built in 
1939.-^ 

What kind of houses should be built? What kind of houses can the 
American people aftord to pa,y for? Stone and Denton conclude, on 
the basis of studies by the Federal Housing Administration and the 
Bureau of Labor Statistics, that "new housing is not available to 
those earning less than $1,000 per year, and is available only to a 
very limited extent to those earning between $1,000 and $2,000 per 
year." ^^ 

It is apparent that the construction industry is not building for the 
mass market. Instead, the industry is organized to provide facilities 
for the liighei" income brackets. Until the output of the construction 
industry is changed, housing for families with incomes of less than 
$1,500 will continue to be bought on a second- or third-hand basis. 
Until new construction is specifically designed for the lower income 

24 Hearings before the Temporary National Economic Committee, Part 11, pp. 4958-4961. 

25 It should be pointed out that the increase in the number of families is greater than this. The National 
Resources Committee estimates that the number of families will increase by 4.5 millions in 1930-40, and by 
4.3 millions in 1940-50. Residential Building, 1939, p. 17; cf. its Problems of a Changing Population, 1938. 
p. 25. 

26 Hearings before the Temporary National Economic Committee, Part 11, pp. 4966-1967. This estimate 
assumes a vacancy rate of 2 percent or less. 

2' Hearings before the Temporary National Economic Committee, Part 11, p. 4967. Stone and Denton 
■estimate that the requirements, on these assumptions, may range from Lubin's 525,000 to 600,000 dwelling 
units per year. Temporary National Economic Committee, Monograph No. 8, TowardMore Housing, p. 22. 

28 Hearings before the Temporary National Economic Committee, Part 11, pp. 4968, 4947. Data for 1939 
construction from the Bureau of Labor Statistics. Data for United States Housing Authority from Reports 
of its Research and Statistics Section. 

29 Temporary National Economic Committee Monograph No. 8, Toward More Housing, pp. 24-25. 
See the testimony bv Lubin and Davison in Hearings before the Temporary National Economic Committee, 
Part 11, pp. 4949-4966, 5479, 4977-4980. 



CONCENTRATION OF ECONOMIC POWER 79 

families, tlio liiglior income families will move into the new houses 
while the lower income families will come into the older ones.^° 

It was emphasized dnring the liearin<2;s that it is not impossihle to 
reorient the private residential construction industry and jn-ovide 
lower cost houses. This industry has shown some re-dir(»ction in 
recent years, since the cost of the new dwelling; units constructed — 
not the cost of identical units — declined in the past decade even 
though the cost of construction increased. One-family dwellings, on 
the average, cost $4,900 in 1929, and $4,100 in 1988. The average 
cost per dwelling unit for all types of dwellings decreased from $4,600 
in 1929 to $3,700 in 1938. (these figures do not includes the cost of 
land.)^^ Part of this decrease is attributable to the decrc^ased size 
of residential units, part to a change in the quality of the housing 
product, and a large part to improvements in lay-out, heating units, 
and other details. Furthermore, there has been a shift toward one- 
family dwellings in response to these factors whicli have been asso- 
ciated with suburbanization and the use of cheaper land. 

Public Construction. 

Public construction outlays during 1921-29 averaged 2.7 billion 
dollars per year, or 23 percent of all construction outlays in the United 
States. (Maintenance included in both cases.) As the depression, 
deepened, private construction decreased more rapidly than public, 
so that by 1934 the latter constituted 51 percent of the total. After 
1934 there was a slight expansion of private as compared with public 
construction, reducmg the share of the latter to 41 percent of the 
total in 1938. 

The absolute volume of public construction, however, did not return 
to the level of the late twenties until 1936, and the average outlays in 
1936-38 were smaller than in 1928-30. (Table 24.) 

The sources of the funds for public construction were changed 
drastically by the depression. Federal funds in the twenties paid for 
one-eighth of public construction and maintenance; at the present 
time they pay for more than one-half. 

Durmg 1920-29 the Federal Government spent directly an aver- 
age of $267,000,000 per year for construction and maintenance (ex- 
cluding aid to States). Federal aid to States during these years 
averaged $79,000,000 per year. Federal funds, directly and in- 
directly, thus paid for 13 percent of all public outlays for construction 
and maintenance; State and local funds paid for the remaining 87 per- 
cent, equal to average expenditures of $2.4 billion per year. 

3" The question was raised during the hearings on housing whether famihes with incomes of $1,500 might 
not be more comfortably housed in second-hand houses originally built for higher income groups than in 
new but cheaper houses built for them. The question is pertinent on the basis of English experience with 
low-cost housing, since some of their projects were not well built and have shown high rates of depreciation. 
(Hearings before the Temporary National Economic Committee, Part 11, p. 4984.) 

There are four important considerations on the question of new as compared with second-hand housing. 
First, the present type of construction, by encouraging and indeed by depending upon "hand-me-downs" 
afTects the structure and stability of property values adversely. Blighted areas grow more rapi<lly. Risks 
and consequently rents are increased. An increase in the rate of handing property down from one income 
group to another may temporarily give the lower income groups better housing than they could afford to 
construct for themselves— but with the drawbacks of capital losses for property owners, destabilization of 
property values, and homes badly designed for the new occupants. Secondly, technological advance has 
been rapid, and the expensive older houses lack many modern facilities. Experience in low-cost construction 
will improve both the quality and comfort of the low cost product. Thirdly, a substantial proportion of 
existing residential units is or soon will be substandard or unsafe. Families living in these houses can only 
be provided for by houses designed to fit their incomes. Fourthly, many of the shortages arc in rapidly 
growing areas, such as Washington, D. C, and textile areas in the South, or in circumscribed areas, such as 
those inhabited by Negroes in New York and Chicago. In these areas there are no second-hand houses, or 
the supply of second-hand houses is inadequate. In these areas failure to provide construction for the lower 
income groups must inevitably lead to overcrowding. 

31 Bureau of Labor Statistics, Building Construction, 1921 to 1938, Bulletin No. 668, 1940, p. 6. The net 
construction cost per dwelling unit under the United States Housing Authority program declined from 
$3,000 in September 1938 to $2,500 in June 1940. See report by Research and Statistics Section, No. 16, July- 
10. 1940. 



80 



CONCENTRATION OF ECONOMIC POWER 



Table 24. — Total construction and the amount and sources of funds for public 

construction, 1920-39 

(Includes maintenance and part of work relief 
[In millions of dollars] 



Year 


Total con- 
struction 


Public con- 
struction 


Sources of funds for public con- 
struction 


Direct 
Federal 


State and 
local 2 


Federal 
aid 3 


1920 


8,563 
8,062 
9,346 
10, 920 
12, 049 
13, 063 
13, 779 
13, 944 
13, 710 
13,488 
11,814 
8,689 
5,445 
4,044 
4,860 
5,578 
7,731 
8,376 
8,225 
9,117 


2,044 
2,325 
2,358 
2,228 
2,555 
2,819 
2,862 
3,189 
3,330 
3,309 
3,733 
3,424 
2,539 
1,918 
2,474 
2,548 
3,496 
3,079 
3,390 
3,806 


504 
402 
283 
204 
203 
191 
184 
199 
233 
276 
328 
368 
399 
437 
509 
675 
916 
643 
603 
681 


1,501 
1,848 
1,993 
1,947 
2, 264 
2,536 
2,592 
2,907 
3.014 
2,952 
3,288 
2,844 
1,949 
1,133 
1,203 
1,125 
1,316 


39 


1921 

1922... 


75 
82 


1923 

1924 


77 
88 


1925 . - - - 


92 


1926 - . - 


86 


1927 


83 


1928 


83 


1929 

1930 

1931 


81 
117 
172 


1932 


191 


1933 

1934 

1935 

1936 


348 

757 

758 

1.264 


1937 

1938 


1, 524 913 
1,782 1,005 


1939 


1,986 1,139 



1 Includes 50 percent of work relief expenditures on work relief construction and allocated either to "direct 
Federal" or "Federal aid" construction. 

2 Includes construction financed by loans from the Reconstruction Finance Corporation and the Public 
Works Administration. 

' Includes grants-in-aid and Works Progress Administration expenditures on State and local projects. 

Source: Hearings before the Temporary National Economic Committee, Part 9, pp. 4063-4064. Data 
there presented were taken from the Bureau of Foreign and Domestic Commerce, Construction Activity 
in the United States, 1919-37, 1938, and Survey of Current Business, as revised to date by unpublished 
material. 

These relationships were changed with the depression. Construc- 
tion outlays financed with State and local funds contracted sharply, 
and they have not recovered to predepression levels. Thev fell from 
3.3 billion dollars in 1930 to 1.1 billion dollars in 1933 and^ 1935, and 
1.2 billion dollars in 1934, and expanded to only 1.8 billion dollars in 
1938, an amount substantially below everj^ year in the twenties ex- 
cept 1920. The share of the Federal Government, of course, in- 
creased markedly. Construction and maintenance outlays paid for 
directly bv the Federal Government increased from $276,000,000 in 
1929 to $916,000,000 in 1936, $643,000,000 in 1937, and $603,000,000 
in 1938. The increase in Federal aid ^- resulting in public construc- 
tion and maintenance was much greater. In no year during the 
twenties was Federal aid more than $92,000,000; in 1935 it was 
$758,000,000; and the inauguration of the work relief program raised 
the amount of Federal aid resulting in public construction and main- 
tenance to $1.3 billion in 1936 and'$1.0 billion in 1938. 

Wliat was built by Government during the past two decades? 
Highways accounted for the largest share of construction outlays. 
They took not less than 40 percent of total construction outlays in all 
years during the past two decades and as much as 50 percent in some 

32 Includes grants-in-aid; Federal loans by the Works Progress Administration; and 50 percent of work 
relief expenditures for State and local public works, estimated as the physical amount of construction 
equivalent or comparable to construction by other methods. Does not include loans by the Reconstruction 
Finance Corporation or the Public Works Administration. 



CONCENTRATION OF ECONOMIC POWER 



81 



(table 25). In 1929, for example, outlays for highways amounted to 
1.2 billion dollars, while total public construction outlays were 2.5 
billion dollars. In 1937, $850,000,000 of the total outlays of $2,209 - 
000,000 (excludmg relief outlays) went for highways, and an (esti- 
mated physical) equivalent ^^ of $202,000,000 of $448,000,000 of Works 
Progress Administration expenditures going toward construction were 
spent for highways. 

Table 25. — Uses of funds for public construction, 1920-39 
(Maintenance and work-relief construction excluded) 

[Millions of dollars] 



Year 



Total 
public 
construc- 
tion 



High- 
ways 



Sewer- 
age dis- 
posal 
and 
water 
supply 



Public 
educa- 
tional 
build- 
ings 



Nonresi- 
dential 


Naval 


Conser- 


buildings, 


and 




excluding 
public 


mili- 
tary 1 


develop- 
ment 


educational 




86 


363 


55 


108 


252 


52 


133 


154 


48 


122 


63 


65 


125 


51 


79 


158 


42 


73 


189 


36 


61 


214 


39 


63 


248 


52 


72 


255 


66 


86 


286 


79 


111 


318 


78 


135 


269 


73 


139 


147 


84 


168 


107 


114 


246 


128 


109 


319 


37 


212 


338 


214 


219 


306 


245 


253 


293 


313 


352 


324 



Miscel- 
laneous 
construc- 
tion 



1920 
1921 
1922 
1923 
1924 
1925 
1926 
1927 
1928 
1929 
1930 
1931 
1932 
1933 
1934 
1935 
1936 
1937. 
1938 
1939 



1, 536 
1,753 
1,786 
1,645 
1,904 
2,142 
2,138 
2,395 
2,499 
2,458 
2,827 
2,615 
1,881 
1,297 

1, 559 
1,667 
2,111 
2,209 

2, 308 
2.825 



640 

840 

851 

783 

951 

1,056 

1,039 

1,190 

1,270 

1,248 

1,481 

1,323 

916 

675 

821 

622 

876 

850 

900 

950 



153 
178 
201 
203 
263 
278 
285 
312 
300 
253 
343 
270 
156 
81 
131 
159 
215 
174 
179 
255 



197 
279 
348 
359 
369 
415 
414 
382 
390 
387 
361 
273 
142 
56 
74 
165 
249 
226 
273 
399 



42 

44 

51 

50 

66 

120 

114 

195 

167 

163 

166 

218 

186 

86 

66 

105 

184 

220 

165 

232 



' Includes expenditures for construction of new vessels. 

Source: Hearings before the Temporary National Economic Committee, Part 9, p. 4065. Basic data 
from the Biu-eau of Foreign and Domestic Commerce, Construction Activity in the United States, 1915-37, 
1938, table 3, p. 18. Data for 1936-39 are from work sheets of the Bureau of foreign and Domestic Commerce. 

It has been indicated that since 1933 the expansion of direct and 
indirect Federal expenditures for construction merely counterbalanced 
the decline in State and local construction outlays.^* Total public 
outlays were not changed by the larger Federal outla}^, and hence did 
not take up any of the slack resulting from the decline of private 
construction. 

The divergent trends in public construction outlays are important- 
in any consideration of the divergent trends in the ownership of public 
property and the course of public debt. During the twenties the debt 
of State and local governments increased at the rate of 780 million 
dollars peryear.^^ Net State and local debt^^ increased from 6.7 billion 
dollars in 1920 to 14.5 billion dollars in 1929. During all this period the 
Federal debt was being reduced. The net Federal debt " fell from 
24.3 billion dollars to 16.7 billion dollars. 

33 The estimated physical equivalent was 50 percent of the amount of Works Progress Administration 
exDenditure. 

31 For a useful survey of Federal outlays, and loans to State and local governments under the Public 
Works Administration, see its America Builds: The Record of P. W. A., 1939. 

» Up to May 1938 Moody's Investors Service considered all State and local bond i.ssues as "productive"— 
that is, as resulting in capital outlay. See H. G. Moulton, O. W. Edwards, J. D. Magce, and Cleona Lewis, 
Capital Expansion, Employment, and Economic Stability, Washington, D. C, Brookings Institution, 
1940, pp. 349-354. 

39 After deduction of State and local securities held in State and local pension, trust, and investment funds. 

37 After the deduction of Federal securities held in Federal trust and sinking funds. 



§2 CONCENTRATION OF ECONOMIC POWER 

The burden of financing both pubUc construction and rehef has been 
shifted in part from State and local governments to the Federal Gov- 
ernment and has been a major factor in altering the course of Govern- 
ment debt. The net debt of State and local governments increased 
from 15.2 billion dollars in 1931 to 15.5 billion dollars in 1939, while 
net Federal debt momited to 38.4 billion dollars by June 30, 1939*.^^ 
A good share of this increase in Federal debt is represented by public 
works of various kinds, loans, and advances. The Federal debt in- 
creased by 21 billion dollars in 1931-38; and the National Resources 
Planning Board estimated that 14.5 billion dollars of this amount was 
represented by public construction, and by loans, advances, and stock 
purchases (less repayments). Amortization of public construction,, 
plus losses and write-offs of other investments, were estimated at 2.9 
billion dollars, and net investment at 11.6 billion dollars. ^^ These 
estimates are admittedly rough, but they indicate approximately the 
growth of assets that w^ould be shown on Federal accounting records, 
if, like private business records, they^ capitalized outlays for plant and 
securities. 

Consvmer Credit 

An increase in consumer credit may be treated as dis-saving or as 
an outlet for current saving. Currie treated it as the latter. *° 

According to the estimates of Rolf Nugent, the volume of consumer 
credit nearly doubled in 1923-29, increasing from $4,357,000,000 to 
$8,183,000,000. The 4 years of liquidation that followed left consumer 
credit at $4,807,000,000 in 1933. The succeeding 4 years witnessed a 
rapid expansion, an expansion largely dominated by automobile 
financing. There was an expansion of 9 percent in 1934, 16 percent 
in 1935, 22 percent in 1936, and 12 percent in 1937. "The rate of 
expansion during the first 4 months of 1937 was certainly greater than 
for any similar period between 1923 and 1937, and it probably far 
exceeded that for any simJlar period in the history of consumer 
credit." ^^ Preliminary calculations indicate a contraction of con- 
sumer credit by $1,400,000,000 in 1938, followed bv an expansion of 
$900,000,000 in 1939 (table 26). These estimates '"probably under- 
state the outstanding amounts and cyclical movements of consumer 
credit." *^ 

The credit to finance purchases of durable goods dominates the 
movements of consumers' credit. Such capital financing first became 
the most important element in consumer credit with sales of automo- 
biles on the installment plan. Though automobile paper is still the 
most important component of consumers' capital financing, furniture, 
washing machines, radios, refrigerators, etc., are important elements. 
Within the past few years consumers' financing has been extended to 
"soft goods" — clotliing, haberdashery, and the like — even on a mail- 
order basis. A large part of the sales of these types of goods are made 
on a credit rather than on a cash basis. It has been estimated that 
60 percent of the automobiles, 40-50 percent of household appliances 
and furniture, 27 percent of the jewelry, and 12 percent of the depart- 

38 Treasury Department, Annual Report of the Secretary of the Treasury, 1939, pp. 454, 509-512. 

3» Hearings before the Temporary National Economic Committee, Part 9, pp. 4090-1093. 

<" Hearings before the Temporary National Economic Committee, Part 9, p. 3523. 

^' Consumer Credit and Economic Stability, New York, Russell Sage Foundation, 1939, p. 107. 

" Consumer Credit and Economic Stability, New York, Russell Sage Foundation, 1939, p. 107. 



CONCENTRATION OF ECONOMIC POWER 



83 



ment store goods are sold on the installment plan.*^ These percentages 
undoubtedly understate the importance of consumers' capital financing 
since some sales are financed through direct cash loans. Installment 
credit has become so accepted that "for a large section of the market 
the amount required as a down-payment and the amount of the peri- 
odic installments are more important elements in determining the size 
of the market than the total purchase price." *^ 

Table 26. — Amount and types of consumer credit, 1920-39 
[Millions of dollars] 





Total consumer credit 


Types of consiimer credit 
outstanding 


Year 


Amount 

outstanding 

(end of 

year) 


Change 

during 

year 


Consumers' 

capital 
financing • 


Income- 
period 
financing 2 


Consumers' 

deficit 
financing 3 


1920 


* 2, 601 

< 2, 581 
<3,311 
4, 3.57 
4, 668 
5,510 
6, 1.58 
6,375 
7.196 
8,183 
7,570 
6, 442 
4,957 
4,807 
5.222 
6,080 
7,435 
8,326 
6 6, 926 
« 7, 826 










1921 


i -20 

< 730 

< 1, 046 

311 

842 

648 

217 

821 

987 

-613 

-1,128 

-1,485 

-150 

415 

858 

1,355 

891 

5 -1,400 

5 900 








1922 








1923 . 


1,610 
1,730 
2, 300 
2,670 
2,660 
3, 170 
3,710 
3,140 
2,440 
1,560 
1,620 
2,040 
2,710 
3,760 
4,330 


2,150 
2,270 
2,500 
2,700 
2,800 
3,060 
3,340 
3,100 
2, 550 
1,890 
1,830 
2,000 
2. 290 
2,600 
2,900 


597 


1924 


668 


1925 

1926 

1927 


710 

788 
915 


1928 

1929 

1930 

1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938 


966 
1,133 
1,330 
1,452 
1,507 
1,357 
1,182 
1,080 
1,015 
1,096 


1939 

















1 Credit used to finance the purchase of goods that have some durability. 

2 Credit used to finance consumers' expenditures between dates when incomes are received. 

3 Credit used to finance consumption in excess of income. 
* Estimated. 

5 Preliminary. 

Source: Data for 1923-37 from Rolf Nugent, Consumer Credit and Economic Stability, New York, 
Russell Sage Foundation, 1939, pp. 116-124. The Board of Governors of the Federal Reserve System prepared 
the estimated data for 1920-22 and the preliminary data for 1938-39. 

Foreign Investment ^^ 

A commodity and service export balance signifies payments of in- 
come within the country without corresponding increases in the current 
output of goods for domestic consumption. The difference between 
exports and imports of commodities and services is represented by 
securities, banking balances, direct investments, and by gold, silver, 
and currency inventories, all of which constitute an offset to domestic 

« D. Holthausen, M. L. Merriam, and Rolf Nugent, The Volume of Consumer Credit, 192G-38, New York, 
National Bureau of Economic Research Bulletin No. 79, 1940, p. 5. 

<i Rolf Nugent, Consumer Credit and Economic Stability, New York, Russell Sage Foundation, 1939, 
p. 133. Indeed, Nugent pointed out that many installment buyers did not know the purchase price— they 
knew only the amount of the weeklv payment. 

<5 In genera!, see the annual reports bv the Bureau of Foreign and Domestic Commerce, Balance of Inter- 
national Pavments of the United States, Washington, D. C; Paul D. Dickens, America's Direct Invest- 
ments in Foreign Countries, 1929 and 1936, published bv the Bureau of Foreign and Domestic Commerce, 
Washington, D. C, 1931 and 1933; Paul D. Dickens, Direct Foreign Investments in American Industry, 
1937, constituting ch. II in Temporarv National Economic Committee Monograph No. 6, Export Prices 
and Export Cartels; and Cleona Lewis, America's Stake in International Investments, Washington, D. C, 
The Brookings Institution, 1938. 



84 



CONCENTRATION OF ECONOMIC POWER 



savings. A net increase (decrease) in claims against foreign countries 
represents investment (dis-investment) by the United States; it is 
equal to the excess of commodity and service exports over imports 
minus the inflow of gold and silver. ^^ 

A commodity and service export balance is the resultant of changes 
in all of its components. A given balance may arise at different ab- 
solute levels of commodity and service exports and imports. Though 
the absorption of domestic savings in metals, securities, and short- 
term funds will be the same for any given balance, the stimulating 
effect of that balance upon employment and production, both at 
home and abroad, may differ with the absolute levels of the com- 
ponents. 

The United States had an excess of commodity and service exports 
over commodity and service imports in 18 of the 20 years from 1919 
through 1938. The balance was 3.1 billion dollars in 1919 and de- 
clined sharply thereafter; between 1922 and 1938 it never was more 
than 727 milhon dollars; and in 7 of those years it was less than 200 
million dollars. The balance of trade of 1 billion dollars in 1938 was 
the largest since 1921, and this balance, if the war continues, will 
probably be even larger in 1941 and 1942, in view of the British and 
Canadian war orders, the decreased exporting ability of the warring 
nations, and the present and prospective activities of the Export- 
Import Bank, the Reconstruction Finance Corporation, and other 
agencies in the field of foreign trade. 

Foreigners paid for this excess of exports over imports in two ways: 
by shipments of gold, silver and currency, and by transfer of title to 
American and foreign securities. 

The relationships of these three elements, summarized in table 27, 
may best be considered by dividing the years since 1919 into three 
periods: 

Table 27. — Net commodity and service balance of trade, gold and silver movements, 
and capital movements, 1919-38 

[In millions of dollars] 





Net excess 

of com- 
modity and 
service ex- 
ports over 
imports ' 


Gold, silver, 

and 

currency 

exports or 

imports (— ) 


Net export (— ) oi 


import of ca 


pital 


Year 


Long term ' 


Short term ' 


Residual ' 


Total 


1919 


3,065 
2,204 
1,414 
450 
167 
712 
386 
156 
507 


250 
50 

-786 
-235 
-245 
-266 

42 
-112 

99 


-376 
-829 
-671 
-717 
1 
-602 
-487 
-602 
-723 


-1,781 
-240 
-86 
375 
3 
216 
-61 
350 
900 


-1,158 

-1, 185 

129 

127 

74 

-60 

120 

208 

-783 


-3,315 


1920 


-2, 254 


1921 

1922 


-628 
-215 


1923..-. 


78 


1924 

1925 

1926 

1927.... 


-446 

-428 

-44 

-606 



1 Includes merchandise adjustments for (1) commodity exports and Imports which are either entirely or 
partly omitted from the official trade data; and (2) corrections for certain recorded trade figures for balance-of- 
paynients purposes. 

2 Covers the net movement of funds in security transactions as reported by the Treasury Department,, 
and other transactions involving particularly the transfer of properties not represented by security issues. 

' Includes the net movement of capital in short-term banlcing funds and in brokerage balances as re- 
ported by the Treasury Department; the net change in Phillipine Government accounts with the United 
States Treasury; net paper currency movements; and miscellaneous capital items. 

* Includes, in addition to possible errors and omissions in the estimated items, unreported stabilization 
fund operations and other transactions not exactly reflected for balance-of-payments purposes in the 
reported figures. 

" Exclusive of movements of earmarked gold and silver. 



CONCENTRATION OF ECONOMIC POWER 



85 



Table 27. — h'et commodity and service balance of trade, gold and silver movements, 
and capital movements, 1919-38 — Continued 

[In millions af dollars] 





Net excess 

of com- 
modity and 
service ex- 
ports over 
imports 


Gold, silver, 

and 

currency 

exports or 

imports (-) 


Net export (-) or 


import of capital 


Year 


Long term 


Short term 


Residual 


Total 


1928 


725 
447 
629 
160 
131 
215 
461 
183 

-153 
-13 

1,001 
658 


232 

-135 

-258 

166 

-91 

83 

-1,329 

-2, 075 

-1,182 

-1,469 

-1,864 

-3,111 


-662 

-137 

-267 

219 

217 

49 

202 

462 

773 

522 

23 

114 


-188 

-80 

-485 

-709 

-409 

-385 

184 

1,076 

392 

359 

308 

1,302 


-107 
-95 
381 
164 
152 
38 
482 
354 
170 
601 
532 

1,037 


— 957 


1929 . 


— 312 


1930 


-371 


1931 -.- 


-326 


1932 


—40 


1933 - 


-298 


1934 - 


868 


1935 -. 


1,892 


1936 


1,335 


1937 


1,482 


1938 


863 


1939 


2,453 







Source: Bureau of Foreign and Domestic Commerce, Balance of International Payments of the United 
States, 1937, pp. 112-113; ibid, 1938, p. 2; and ibid., 1939. 

From 1919 until 1930 the United States made substantial foreign 
loans and direct investment abroad. Large amounts of European, 
Canadian, and South American securities were acquired.*" Large 
sums were invested directly; by 1929 the United States had acquired 
7.5 billion dollars of direct investments abroad, distributed as follows:** 

Billion 
dollars 

Canada 2. 

Cuba and West Indies 1. 1 

Mexico and Central America . 9 

South America 1. 5 

Western Hemisphere 5. 5 

Europe 1. 4 

Africa • 1 

Asia . 4 

Australia and New Zealand . 1 

Total 7. 5 

Investments in securities and direct investments abroad helped provide 
the funds to pay for the excess of U^nited States exports over imports 
from 1919 to 1930. 

From 1930 to 1934 the situation was dominated by foreign liqui- 
dation of short-term dollar assets in the United States, in part for 
conversion into long-term holdings, and in part to pay for our favorable 
balance of trade. 

Since 1934 the movement of capital has been dominated by our 
large imports of gold and silver. Gold stocks have reached an all-time 
high, and they are still growing. Shipments of gold and silver to the 
United States since 1934 have established credits for foreigners; they 
are the substitute for the security flotations of the twenties. Unlike 
the latter, which supported a substantial export balance, the credits 

*' For some comments on this process, see Cleona Lewis, America's Stake in International Investments, 
Washington, D. C, The Brookings Institution, 1938, esp. pp. 376-397. Methods of floating foreign securities 
during these years were Investigated in Hearings on the Sale of Foreign Bonds or Securities in the United 
States, pursuant to Senate Resolution 19, 72d Cong., 1st sess. 1932. . _ . „ . . ,n„c 

*' Bureau of Foreign and Domestic Commerce, America's Direct Tnvestments m Foreign Countries— lydb, 
Washington, D. C, 1938,, p. 5. 



36 CONCENTRATION OF ECONOMIC POWER 

from gold and silver shipments have been used to buy American 
securities or to build up short-term assets. 

The course of the European war will probably initiate a new trend, 
in which metal shipments, together with liquidation of foreign hold- 
ings, ^Vill finance an increasing export balance. 

Concentration of Business Investment and Investment 

Decisions 

There are elements of concentration m both investment and saving. 
The effects of concentration upon the volume of savings and upon the 
flow of savings through savings institutions and the capital markets 
have already been discussed. At this point it is proposed to discuss 
the concentration of business investment and of business investment 
decisions. Though Government investment is concentrated among a 
relatively small number of the 175,000 governments in the United 
States, it cannot meaningfully be treated from this point of view; 
and residential construction, which is decentralized and relatively 
unconcentrated, need not be. 

Though the concentration of business investment and the concen- 
tration of business mvestment decisions are subjects of first-rate 
significance for the functioning of the economic system, surprismgly 
little is known about them. A fairly complete treatment would 
attempt to provide satisfactory answers to at least the following 
questions: What is the amount of investment in different segments 
of the economy? What is the concentration of investment within 
each of these segments, and within the whole economy? How much 
is invested by large and small business enterprises? How much by 
corporations and other types of business enterprises? How much 
by old and new business enterprises? Who is responsible for invest- 
ment decisions m different segments of the economy? How large is 
this group? Does it consist of men trained in business and finance, 
or of men trained in engineering and research? What is the role of 
investment bankers, lawyers, accountants, and other professional 
consultants in determining the amount and direction of investment? 
Wliat are the background, training, outlook, interests, environment, 
and other major characteristics of the group of persons responsible 
for the bulk of our investment decisions? What criteria and data 
do they employ m deciding when, where, and how much to invest? 

Practically nothing is known about some of these questions at the 
present time, and about none are the data complete. 

Recent investigations have thrown much light on the relative 
importance of different sectors of investment. Table 28 summarizes 
these data on busmess investment in plant and equipment for 3 years: 
1923, the peak year of railroad investment; 1929, the peak year of 
business investment; and 1937. 



CONCENTRATION OP ECONOMIC POWER 



87 



Table 28.^ — Business investment in plant and equipment in major segments of the 
economy, 1923, 1929, and 1937 



Business segment 



Total business investment in plant and equipment (millions) 

Transportation and utilities: 

Railroads 

Electric power 

Telephones 

Transit 

Other utilities _ _ 

Total 

Mining and manufacturing.. 

Other: 

Agriculture 

Commercial and miscellaneous 

Total 

Total. _ 



1923 



$7, 902 
Percent 



34 
100 



$10, 157 
Percent 



38 
100 



1937 



$7, 570 

Percent 

7 
5 
5 
1 
2 



39 
100 



Source: See appendix XVIII. Estimates by George Terborgh, in Board of Governors of the Federal 
Reserve System, Federal Reserve Bulletin, September 1939 and February 1940. 

Business investment in plant and equipment accounted for more 
than half of total investment by the Nation in 1923, 1929, and 1937. 
How many business enterprises v^ere responsible for the bulk of this 
business investment? 

It appears from table 28 that 27 percent of business investment in 
1929 and 20 percent in 1937 were made in the field of transportation 
and public utilities, a field predominantly characterized by large enter- 
prises. The investments made by individual companies in these 
broad fields can be calculated only with considerable difficulty. On 
the other hand, the concentration of capital assets (the net book value, 
after deduction of reserves for depreciation and depletion) will furnish 
a very rough index of the flow of investment. A special study of 
corporation income tax returns by the National Resources Com- 
mittee ^^ presented data, on a consolidated basis, of assets and income 
in major lines of activity. According to this study the 92 largest 
transportation and other public utility corporations and their sub- 
sidiaries held 81.9 percent of the net (depreciated) capital assets in 
this group in 1929, and the largest 92 corporations held 88.4 percent 
of the net capital assets in 1933. The Treasury Department's Sta- 
tistics of Income for 1937 furnishes the latest data available on this 
point, although these data seriously understate the degree of concen- 
tration of assets.^" In 1937 there were 114 transportation and other 
public utility companies with assets of more than $100,000,000; and 
these companies held 63 percent of the net capital assets in the group. 
Investment decisions in the field of transportation and public utilities 
were even more concentrated than these data indicate. Apart from 
the common and interlocking directors, who constitute a significant 
fraction of the total executive officials in the field, ^^ the holding com- 
pany structures in electric light and power, natural gas, water, and 

<9 National Resources Committee, The Structure of the American Economy, Washington, D. C, 1939, 
appendix 11, p. 286. , , ,„„^ 

6» Onlv railroads have the privilege of filing consolidated tax returns under the Revenue Act of 1934. 
The studies of the National Resources Committee show that the degree of concentration of assets is under- 
stated even when corporations file on a consolidated basis, as they did before 1934. ■ 

" National Resources Committee, The Structure of the American Economy, Washmgton, D. C, 1939, 
appendLx 12, p. 298, et. seq. 



291143— 41— No. 37- 



gg CONCENTRATION OF ECONOMIC POWER 

railroads act still further to reduce the number of persons ultimately- 
responsible for investment decisions. 

Approximately 40 percent of business investments in plant and 
equipment are made in the fields of manufacturing and mining. 
Holdings of net capital assets in these fields show a substantial degree 
of concentration. In 1929 the 82 largest manufacturing corporations 
and their subsidiaries held 42 percent of the net capital assets of all 
manufacturing corporations; and in 1933 tlie 78 largest held 46 percent 
of the net capital assets. ^^ The Statistics of Income data for 1937, 
which, it has been pointed out, seriously understate the degree of 
concentration of assets, indicate that the 77 manufacturing corpora- 
tions with assets of more than $100,000,000 held 34 percent of the net 
capital assets in the group. The concentration in the manufacturing 
sub-groups naturally varies with the character of the product and the 
type of technology and financial structure. The concentration in a 
few industrial sub-groups may serve to illustrate the situation: 

Thirty-nine liquor and beverage companies had assets of more 

than $5,000,000; they held 28 percent of the net capital assets 

in the group. 
Fifteen tobacco companies had assets of more than $10,000,000; 

they held 81 percent of the net capital assets in the group. 
One hundred and nine apparel and clothing companies had assets 

of more than $1,000,000; they held 36 percent of the net capital 

assets in the group. 
Thirty-four printing and publishing companies had assets of more 

than $10,000,000; they held 24 percent of the net capital assets 

in the group. 
Three motor vehicle companies had assets of more than $100,- 

000,000; they held 68 percent of the net capital assets in the 

group. 

These data refer only to corporations. But corporations carry on 
practically all the business in the transportation and public utility 
fields and the bulk of the activity in the various fields of manufac- 
turing. The role of corporations in manufacturing may be indicated 
by the ratio of corporate value of product to total value of product. 
According to the data computed from the Census of Manufactures, 
corporations were responsible m 1929 for the followmg percentages of 
total value of manufacturing product: ^^ 

Percent 

Food and tobacco 89. 2 

Textiles and leather 82. 2 

Lumber and stone, clay and glass 89. 1 

Paper 97. 1 

Printing and publishing 86. 9 

Chemicals 97. 4 

Metals 97.8 

Miscellaneous manufacturing 91. 9 

Trade and construction are characterized by many more business 
units and by large numbers of unincorporated enterprises. In the 
field of trade, corporations are responsible for 63.9 percent of the 
total value of product. In 1937, the 173 corporations in the field 

" National Resources Committee, The Structure of the American Economy, Washington, D. C, 1939, 
appendix 11, p. ?85. 

M Solomon Fabrirant, Capital Consumption and Adjustment, New York, National Bureau of Economic 
Research, 1938, p. 54. 



CONCENTRATION OP ECONOMIC POWER §9 

with assets of more than $10,000,000 hold 30 percent of the net capital 
corporate assets. In the field of construction, corporations accounted 
for 54.9 percent of the total value of product.'^* In 1987, tlie 238 
corporations with assets of more than $1,000,000 in th(> incorporated 
segment of the field held 47 percent of the net capital corporate assets. 

The over-all concentration of business wealth is indicated by two 
rough estimates by the National Resources Committee. In 1933 the 
200 largest nonfinancial corporations and their subsidiaries owned 
instruments of production (land, buildings, and equipment) estimated 
at 59.9 billion dollars. This was equal to 64.2 percent of the amount 
held by all nonfinancial corporations. This same group of corpora- 
tions had physical assets (instruments of production plus inventories) 
estimated at 63.8 billion dollars. This represented 59.6 percent of the 
107 billion dollars of physical assets held by all nonfinancial corpora- 
tions, and 46 to 51 percent of the 125 to 140 billion dollars of aU 
industrial wealth. ^^ 

This discussion of concentration is not concerned with the presence 
or the absence of competiton, or with the price, production, or other 
business policies flowing from them. The discussion is directed merely 
to the number of business enterprises that are responsible for the bulk 
of business investment. The 200 largest nonfinancial corporations 
in 1933 held 64 percent of the net capital assets of all corporations. 
They probably account for approximately the same proportion of 
investment by corporations. It is probable that 5,000 corporations 
hold two-thirds of business net capital assets and therefore account 
for roughly the same percentage of investment by all business enter- 
prises. (This excludes agriculture, but includes all other unincor- 
porated and incorporated enterprises.) Since there are approximately 
2,100,000 business enterprises in the United States at the present time, 
it would seem that one-quarter of 1 percent of all the business enter- 
prises are responsible for two-thirds of business investment 

How large is the group of men responsible for business investment? 
It has been estimated that there are probably 4 to 5 officials in each 
of the larger companies who are responsible for the determination of 
business policy.^^ Taking the dominant group of business enterprises 
as approximately 5,650 on the basis of sales and assets, and assuming 
4 to 5 top executives per company, and adding several thousand 
lawyers, accountants, investment bankers, and other professional 
persons, Fortune magazine estimated that 30,000 persons constitute 
the managers of our business economy. 

This estimate does not seem too small. On the contrary, decisions 
with respect to business policy may probably be ranked in a hierarchy, 
with the number of officials responsible for policy varying with the 
type of decision under consideration. The decision with regard to 
how much, when, and where to invest is undoubtedly one of the most 
important policy decisions, and would tend to be made by a relatively 
small gi'oup. Overlapping directorships to some extent affect invest- 
ment decisions, for questions of making one business enter another's 

" Data on valuo of product from Solomon Fabricant, Capital Consumption and Adjustment, New York, 
National Bureau of Economic Research, 1938, pp. 53-54; data on net capital assets from Bureau of Internal 
Revenue, Statistics of Income, 1937, Part 2, Washington, D. C, 1940. 

" National Resources Committee, The Structure of the American Economy, Washington, D. C, 1939. 
p. 106. Industrial wealth includes total national wealth less agricultural wealth, governmental wealth, and 
residential housing. 

" "The 30,000 Managers," Fortune, February 1940, p. 58. 



90 CONCENTRATION OF ECONOMIC POWER 

field must occasionally arise. Some illustrations in connection with 
tJie operations of life insurance companies have been given, but these 
questions are met tliroughout the field of enterprise. Furthermore, 
even separate business enterprises to some degree fall into "interest 
groups." The National Kesources Committee analyzed eight such 
groups, and found that the assets of the corporations in these groups 
aggregated $98,000,000,000 in 1935, distributed as follows: Railroads, 
$24,000,000,000; utilities, $25,000,000,000; industrials, $25,000,- 
000,000; and banks, $24,000,000,000." No quantitative effect can 
be assigned to the activity of these "interest groups," but their 
activity is clearly to limit and reduce the number of business executives 
responsible for investment decisions. 

It is probable that the control of investment decisions has become 
relatively more concentrated within the past two decades. There 
are several pointers in this direction. Large corporations have 
become relatively more important in the economy through growth, 
merger, and absorption, as the automobile, electric light and power, 
copper mining, air transportation, and petroleum industries indicate. 
The growth of hotel, food, drug, variety, and other chains has con- 
centrated investment decisions in these fields. The number of new 
enterprises started each year has declined in recent years; while the 
number of business enterprises per thousand of population declined 
from a high of 18.5 in 1926, to 15.6 in 1933-35, and then increased 
slightly to 16.1 in 1938.^^ 

With regard to two of the questions posed at the beginning of this 
section, namely, what are the background and origin of the people who 
make business investment decisions and what are criteria they 
employ, the data leave much to be desired. F. W. Taussig and C. 
S. Joslyn in 1932 made the most comprehensive study that has ever 
been made of the social classes that supply American business leaders, 
and of the relative importance of hereditary and environmental factors 
in determining the contributions of the various classes.^^ They foimd 
that the bulk of American business leaders come from a business or 
professional background and from corresponding income levels; that 
business families make the largest contribution to the class of business 
executives ; that laboring families make extremely small contributions ; 
that a large and increasing proportion of American busmess executives 
have coUege or technical training; and that more than one-quarter 
of the American business leaders had friends or relatives interested 
as owners or executives in the business giving them their fu'st position. 
■ There is room for a thorough-going dynamic analysis of business 
executives to supplement this study of origins; and no such survey 
can afford to neglect the effects of similar income levels, similar 
residential and vacation areas, and means of group intercommunica- 
tion. 

Even less is known of the criteria that actually determine invest- 
ment decisions. There are theoretical formulations of the criteria 
that, rationally evaluated, determine investment and expansion .^° 

5^ structure of the American Economy, Washington, D. C, 1939, appendix 13, p. 306. 

s* From estimates of population and number of business enterprises. Bureau of Foreign and Domestic 
Commerce, Statistical Abstract of the United States, 1939, pp. 2 and 307. 

5' American Business Leaders, a Study in Social Origin and Social Stratification, New York, Macmillan , 
1932. See the references there given; F. L. Allen, Lords of Creation, Harper, New York, 1935; and Karl 
Mannheim, Man and Society in an Age of Reconstruction, New York, Harcourt Brace, 19'tO, pp. 79-91. 

6" Among the recent works in this field, the following may be cited: J. R. Hicks, Value and Capital, New 
York, Oxford Press, 1939: A. G. Hart, "Anticipations, Business Planning, and the Cycle," Quarterly 
Journal of Economics, February 1937; N. Kaldor, "The Equilibrium of the Firm," Economic Journal, 
March 1934; Ben W. Lewis, "The Corporate Entrepreneur," Quarterly Journal of Economics, May 1937. 



CONCENTRATION OF I]CONOMIC POWER 9 J 

But such formulations may easily imply a false dcfiniteness to the 
criteria inducing investment and suggest the application of a dis- 
passionate rationality. Since there is no well defined stopping place 
along the continuum from competition to monopoly, no individual 
businessman can with perfect assurance select the theoretical criteria 
that should govern his actions. Furthermore, estimates of prospective 
retmTis vary widely, and are subject to substantial margins of error, 
and within these wide limits many nonbusiness factors sway decisions. 
These estimates for large enterprises cannot theoretically be checked, 
in retrospect, against the amount of the national income. The 
national income, and business profits in general, are the result, as well 
as the cause, of these investment decisions. Indeed — 

it may be said that investment decisions which in themselves alone might be 
unwise because of their being based upon too optimistic a view of business might 
actually prove to be correct if all corporations made the somewhat doubtful 
investment decisions and from so doing greatly increased the velocity of money.®' 

In any event, Martin Taitel has shown that usually there is a definite 
association between profit rates and (noncash) asset expansion rates 
of corporations carrying on similar activities; but that a high profit 
rate has not in itself been sufficient to guarantee a high rate of asset 
expansion, and a low profit rate has not prevented rapid expansion of 
assets. ^^ 

It is important to know what parts concentration, bureaucracy, 
politics, personality, and social groupings play in the determination 
of when, how much, and where investments will be made. Concentra- 
tion of markets, patents, sources of raw material, or wealth may retard 
or prevent investment which disturbs the value of existing properties, 
even though such investment promises favorable returns. ^^ It is 
interesting to note that the new technological processes and changes 
in markets in steel associated with the continuous wide sheet and strip 
mill were first met by the smaller corporations in the steel industry. 
Was the lagging of the United States Steel Corporation behind the 
procession the result of banker domination, or the growth of a bureauc- 
racy? Do these factors explain why the finance committee of the 
corporation never approved more than 55 percent of the engineers' 
budget recommendations between 1929 and 1937? ^* All large 
enterprises, whether in business or government, are bureaucratic, 
using that term in a technical sense. But Shelby Cullom Davis 
pointed out that bureaucracies in the popular sense, i. e., bureauc- 
racies characterized by red tape, rigidity, and formalism, grow up in 
many industries, particularly in those with a large capital investment 
and a secular downtrend. In such enterprises investment decisions 
are made "with more hesitation and deliberation," and "the influence 
of capital, not venture, equity capital, but yield-demanding, bond 
capital, is apt to play a more predominant role — and this influence 
is apt to be strongly on the conservative rather than the expansionist 
side." ^^ 

9> Shelby Cullom Davis, The Investment Decisions of Industry, a multilithed pamphlet, 1939, p. 9. 

62 Temporary National Economic Committee Monograph No. 12, Proflts, Productive Activities, and 
New Investment, pp. 107-122. ^ , xt -.- i. 

«3 This is discussed further at infra, pp. 100-102; cf. Anna R. Burr, Portrait of a Banker, New \ ork, 
DufBeld. 1927, p. 241. 

M Shelby Cullom Davis, op. cit., pp. 5-7. 

« Ibid., p. 4. The same suggestion was made in more popular fashion by Roger W. Babson: 1 he great 
drag upon business today is that the pessimists who are old men engaged in declining industriesand who are 
doing business in tax-burdened cities, hold the strings to the money bags." "Why the Pessimism / in the 
Washington Post, October 7, 1940. 



92 CONCENTRATION OF ECONOMIC POWER 

Researcli is becomino; more and more institutionalized in the hands 
of large corporations. This makes it possible to finance more expen- 
sive, longer range researches, but it concentrates command over the 
results. ^^ Since large-scale enterprise "undoubtedly is more unwieldy 
and cumbersome in the making of its investment decisions than a 
small corporation dominated by one individual," institutional slow- 
ness is a natural result. ^^ This at times is reinformed by the desire 
and the ability to maintain the values of existing processes and 
products by delaying the adoption of research findings. 

Many other questions need to be considered in determining the 
criteria governing investment decisions. To what extent does the 
pressure to maintain cash dividend payments limit or postpone outlays 
for expansion and modernization? Is capital timid, or is the manage- 
ment that asks for capital timid? ^^ Is it true that non-economic 
considerations affect investment decision, as has been alleged in the 
explanation that utility investment programs were continued into 
1930 at the request of President Hoover? In some cases the export 
of American capital in the twenties was facilitated by special rewards 
to various foreigners (undisclosed at the time) and by commissions to 
investment bankers that were substantially greater on foreign loans 
than on domestic ones.^^ To what extent may investment decisions 
be affected by institutional factors of this character? To what extent 
do social conditionings affect the direction and the timing of invest- 
ment? No satisfactory answer can be given to any of these questions 
at the present time. 

Factors Governing the Level of Investment 

Investment is often treated as a transaction governed by fine profit 
or interest calculations. Such a treatment is misleading. Govern- 
mental investment perhaps indicates this most clearly. 

Outlays by the Federal, State, and local governments for highways, 
schools, water systems, and other properties are not based upon 
clearly measurable profit considerations. Of course, everyone who 
uses the wider, shorter road with reduced grades that replaces a 
narrow, winding road will enjoy advantages. Automobile owners and 
operators will save on gas, oil, repairs; commercial users will, in 
addition, save on salaries and interest charges. It is possible roughly 
to calculate these duect savings to automobile owners and operators, 
and it has been suggested that public agencies mvest in roads up to 
the point where the additional cost of the road is less than the addi- 
tional profits to the users of the road. But such calculations are in- 
exact and incomplete. Some of the benefits from the new road may be 
widely diffused. Railroad stockholders may be affected adversely, 
while other property owners receive windfalls. The decision to invest 
or not to invest in roads must thus deal with many immeasurables, 
many imponderables, and many conflicting interests. Yet the 
decision to invest or not to invest in roads represents almost the 
closest profit calculation in the whole field of Government investment. 
With respect to other aspects of public investment — for national 

M Shelby Cullom Davis, op. cit., p. 3. 
^' Shelby Cullom Davis, op. cit., p. 15. 
9« Ibid., p. 16. 

6» Cf. Cleona Lewis, America's Stake in International Investments, Washington, D. C, The Brookings 
Institution, 1938, pp. 376-387, 



CONCENTRATION OF ECONOMIC POWER 



93 



defense, health, housing:, and recreation— it becomes clear at once 
that public investment is not, and cannot be closely responsive to 
profit considerations. 

It has not been so generally recognized that private investment is, 
to a substantial degree, not related to close profit calculations. More 
than 70 percent of the total value of the output of capital goods for 
business use in 1929 had an expected life of more than 10 years.^° 
Knowledge of the future is so limited that even an investment with an 
expected life of 10 years must be governed less bv exact and conclusive 
information than by hope. As the expected life of an investment 
increases, the amount of information with respect to its future profit- 
abihty grows smaller; and the elements of hope and confidence must 
necessarily loom larger. If a business enterprise constructs a dam 
with an expected useful life of 60 years, no one can say with any 
assurance whether the dam will or will not pay its way. No one knows 
what the level of electricity prices will be during the next 60 years; no 
one knows what wages, materials, and service cost levels will be; no 
one knows how long electricity will continue to be generated by water 
power. The situation was the same when the railroads were built. 
At that time it was impossible to say whether any of the railroads 
would pay out. The growth and movement of population, and the 
development of industrialization and large-scale specialized business 
enterprise — none of which could be foreseen with any precision — have 
bailed out these and many other projects. The public subsidies, 
grants, and other advantages were never publicized; and the repeated 
bankruptcies of most of the roads have been forgotten. 

Whether investments pay out depends not only upon specific factors 
affecting each industry, but upon two general factors. The fu'st is 
the future level of prices. Any substantial change in the general level 
and structure of prices will seriously affect the profitability (and the 
solvency) of business enterprises. The second is whether the country 
operates on a level of full employment or on a level of more or less 
serious unemployment. Unless major changes in consumption habits 
take place, present investments will pay out only if future investments 
continue to be made at a high rate. Only by continuing to make 
investments in the future in large volume, assuming no change in 
present savings patterns, will sufficient income and purchasing power 

'" This may be illustrated as follows: 

Table 29. — Output of business capital goods in 1929 classified by length of expected useful life 



Expected useful life 



5 years or less 

More than 5 years to 10 years - 
More than 10 years to 15 years 
More than 15 years to 20 years 
More than 20 years to 25 years 
More than 25 years to 30 years 
More than 30 years to 40 years 
More than 40 years to 50 years 
More than 50 years- _. 

Total 



Source: Solomon Fabricant, Capital Consumption and Adjustment, New York, National Bureau 
of Economic Research, 1938, p. 181. 




94 CONCENTRATION OF ECONOMIC POWER 

be distributed to the community to purchase the goods and services 
produced with present investments. 

Confidence must be an important element in investment. But con- 
fidence is more than close profit calculation; it has substantial com- 
ponents of hope, imitation, and public opinion. There are styles or 
cycles in investment just as in ladies' hats. To some degree the intro- 
duction of private generating plants and of factories to manufacture 
glass bricks is subject to the same influence as the replacement of 
mahogany furniture by Swedish modern. It is easier to have con- 
fidence when immigration is substantial, when population is growing 
rapidly, when there are large shifts from rm-al to m'ban areas, when 
foreign trade is increasing, than when these factors are not present. 
Large-scale spending for national defense or war increases economic 
activity and results in privately and publicly financed expansion. 
This is obvious, and it may be disregarded here, since depression 
and unemployment are not wartime phenomena. Apart from de- 
fense and war expenditures, it is necessary to examine some of the 
major growth factors and some of the other factors that aft'ect expan- 
sion. Changes in basic growth factors, coupled with the doubts 
created by political and social developments, accounted for a large 
part of the decrease of confidence and lack of investment at home 
during the thirties. 

The factors governing the level of investment may be conveniently 
though not rigidly grouped under two heads: general factors which 
affect many industries or areas at the same time, and specific factors 
which affect one or at most a few industrial segments. 

GENERAL FACTORS ^^ 

There are four wide and general factors that affect investment. 
These are the growth of new industries, the growth and migration of 
population, and changes in productivity and the prices of capital 
goods. A fourth factor, lack of balance in cost-price relationships, 
is often thought to have such a wide, general effect upon total invest- 
ment and is discussed here for that reason. War and large-scale 
national defense efforts have been intentionally omitted from this 
list — though it is obvious that they may give rise to greater invest- 
ment booms than any or all of the four factors mentioned. 

Growth of New Industries 

The growth of great new industries makes for an optimistic outlook, 
increases the general profit possibilities in business and industry, and 
increases the booms while it dampens the depressions of business 
cycles. Some of the great new industries of the past are household 
names. They are commonly — and correctly — associated with the 
great American booms. The canal boom of the 1830's; the railroad 
booms before and after the Civil War; the growth of the electrical 
industries after 1900, a growth which overlapped the rise of the auto- 

" The factors discussed in this section are based upon the testimony on savings and investment presented 
to the Temporary National Economic Committee, although they have a somewhat different emphasis. 
See Hearings before the Temjjorary National Economic Committee, Part 9. 3ince these hearings, criticisms 
have been leveled at the testimony concerning these factors and their implications. See especially, Ma- 
chinery and Allied Products Institute, Saving and Investment in the American Enterprise System, pub- 
lished by the Institute, Chicago, 1939; and H. G. Moulton, G. W. Edwards, J. D. Magee, and Cleona 
Lewis, Capital Expansion, Employment, and Economic Stability, Washington, D. C, the Brookings 
Institution, 1939, especially ch. IX. 



CONCENTRATION OF ECONOMIC POWER 95 

mobile and its associated road building, oil, rubber, and other indus- 
tries, particularly after the World War — all these come readily to 
mind. 

Long before the great depression students of business cycles recog- 
nized that economic progress came by spurts rather than at a uniform 
rate. Such notable writers on business cycles as Spiethoff, Wicksell, 
Cassel, Schumpeter, and Robertson have stressed the discontinuity 
and the jerkiness of economic progress. 

The discontinuity of industrial development fundamentally modi- 
fies the course of business cycles. As Hansen explained: 

In periods when great new industries are rising to maturity over several decades, 
it is likely that booms will be very vigorous and carried to high points, and de- 
pressions will be short-lived. And similarly in periods when great new industries 
have reached their maturity and ceased to grow, and equally important new in- 
dustries have failed to take their place, it is likely that booms will be less vigorous, 
prosperity relatively short-lived, and depressions deep and prolonged." 

Each generation forgets the histoiy of its predecessors; each mini- 
mizes the depressions, the expansions, the booms, and the periods of 
unemployment of the past. It is necessary to reemphasize the jerki- 
ness of economic progress, the dependence for great bursts of pros- 
perity upon the growth of great industries, or upon the growth of 
clusters of smaller industries that induce the investment of capital on 
a large scale. During and after the great depression this reemphasis 
became known as the thesis of "economic maturity," and those 
who proposed it were credited as thinking that the growth of the 
United States was finished. This conclusion is unwarranted. In a 
dynamic high-savings, high-investment economy, there is no assur- 
ance that maturity has been reached. A single industry or a group 
of related industries in such an economy may reach maturity, but the 
economy as a whole need not. For example, if airplanes became so 
efficient, so simple, and so cheap that they came to possess the same 
advantages over automobiles that automobiles possessed over horse- 
drawn carriages, the airplane manufacturing, servicing, and supply 
industries might furnish the impetus for another long wave of invest- 
ment. No one knows whether this will or will not be the case. No 
one knows whether the same thing may not occur in plastics, resi- 
dential construction, television, and a horde of other industries born 
or yet to be born. 

The sooner such an industry or group of industries inducing large- 
scale investment is found, the longer and more intense its period of 
development, the easier it will be to find outlets for our savings, and 
the higher will be the level of employment and income. But if such 
outlets are not found, and the potential volume of savings in relation 
to national income is not changed, it is certain that the economy will 
fail fully to utilize its resources and manpower. 

Growth and Shifting of Population 

Our rapid increase of population induced a vast capital outlay for 
the housing, transportation, utilities, and all other facilities which 
are basic for modern life. The rapid increase of population reduced 
economic risks and added a tone of buoyancy and optimism to eco- 
nomic development. As Hansen noted: 

A rapid growth of population minimized the risk of new ventures. If optimism 
had carried railroad building too far at the moment, if a city had temporarily 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3514. 



96 



CONCENTRATION OF ECONOMIC POWER 



overbuilt, the damage was short lived. Expansion and growth soon made good 
the error. Businessmen could look far into the future with gigantic plants, with 
anticipatory capital outlays, investment plans which had no relation to the 
present, and which were based upon the expectation of growth and expansion. ''^ 

The population of the United States increased from 3,900,000 in 
1790 to 123,000,000 in 1930. Except during the decades ending in 
1910-30, when the absohite increases in population were approxi- 
mately the same, the absolute increase in population in each decade 
was larger than in the preceding one. The decade ending in 1940, 
however, shows a sharp reversal in this trend. The growth in the 
10 3^ears ending in 1940 will be less than two-thirds of the average 
of 15,600,000 in the 3 preceding decades. After 1940 the decennial 
increases in population will become steadily smaller and smaller 
(table 30). 

Table 30. — Population and amoimt of increase of population, by decades, 1790-1980 

[In thousandsl 



Decade ending— 


Popula- 
tion 


Increase in the 
decade 


Decade ending— 


Popula- 
lation 


Increa.se in the 
decade 




Amount 


Percent 


Amount 


Percent 


1790 


3,929 

5, 308 

7,240 

9,638 

12, 866 

17,069 

23, 260 

31,502 

39,904 

50, 262 






1890 

1900 

1910 

1920 

1930 

19401 

1950 

1960 

1970_ _ 

1980 


63,056 
76, 129 
92, 267 
107, 190 
123,091 
131,669 
140, 561 
146, 987 
151, 170 
153,022 


12,794 
13,073 
16, 138 
14, 923 
15, 901 
8,894 
8,892 
6,426 
4,183 
1,852 


25.5 


1800 


1,379 
1,931 
2,399 
3,228 
4,203 
6,191 
8,242 
8,402 
10, 358 


35.1 
36.4 
33.1 
33.5 
32.7 
36.3 
35.4 
26.7 
26.0 


20.7 


1810 


21.2 


1820 -. 


16.2 


1830 


14.8 


1840 


7.2 


1850 

1860 


6.8 
4.6 


1870. 


2.8 


1880 


1.2 







1 The absolute and percentage increases during the decade 1930-40 are based upon a population of 
122,775,000 as of 1930. This is the figure of tlie Bureau of the Census, rather than the corrected figure de- 
veloped by the National Resources Committee. 

Source: Hearings before the Temporary National Economic Committee, Part 9, p. 4007, from the National 
Resources Committee, The Problems of a Changing Population, Washington, 1938, pp. 21, 24. 

The decade of 1930-40 saw a reversal of the tide of immigration. 
The United States for the first time had a net excess of departures 
over admissions. ^^ 

This change in population growth and immigration has had, and 
will continue to have, three important consequences. First, a change 
in the age composition of the population. The number of persons 
aged 60 or more increased from 10,500,000 in 1930 to 13,300,000 in 
1940, and is expected to increase to 31,300,000 by 1980.^^ The 
number of young people has decreased. Secondly, the absolute 
annual increase in number of families reached its peak in 1920-25. 
It is estimated that the average annual increase in the number of 
families was 577,000 in 1920-25 and 479,000 m 1935-40.'^ Thirdly, 
families are steadily growing smaller. 

The change in age composition may affect, to some extent, the 
direction and even the amount of construction, while the smaller in- 
creases in population and families will call for smaller increments of 

'3 Hearings before the Temporary National Economic Committee, Part 9, p. 3504. 

'< Department of Commerce, Bureau of Foreign and Domestic Commerce, Statistical Abstract of the 
United States, 1939, p. 98. 

" National Resources Committee, Problems of a Changing Population, 1938, p. 32. 

'9 L. J. Chawner, Residential Building, National Resources Committee, Housing Monograph Series, 
No. 1, 1939 ,p. 17. 



CONCENTRATION OF ECONOMIC POWER i^y 

new construction." On the other hand, the larger number of dwelhng 
units in existence now, as compared with the past, will result in a 
larger replacement demand than formerly. 

A movement of population within the countr}^ will induce the same 
demand for investment in housing, schools, and utilities as an increase 
in population. At the end of the eighteenth century the population 
of the countiy was largely confined to a strip along the x\tlantic coast. 
During the nineteenth century the growth and movement of popula- 
tion filled in the area from coast to coast and from border to border. 
Internal migration still goes on, and the recent migrations from th^ 
Dust Bowl to California and the Pacific Northwest have been brought 
sharply into public consciousness. Though the net migration frorn- 
rural to urban areas in the twenties was lower than net migration iii 
the thirties, the gross migration (rural-urban, urban-rural, and rural- 
rural) may not have been substantially smaller. 

Urbanization has been one evidence of our internal and external 
migration. Three percent of the population lived in places w4th 
8,000 or more inhabitants in 1790; today more than half of the popu- 
lation lives in such places. ^^ Internal migration accelerated this 
urbanization, and in the 1920's was almost wholly responsible for it. 
In the decade ending in 1930, for example, Los Angeles County 
gained 1,183,000 people through internal migration. During 1921-30, 
internal migration increased the population in the metropolitan areas 
of New York, Los Angeles, Chicago, and Detroit by 4,540,000; and 
the urban population of the country by more than 8,300,000."^ This 
drift from the country to the city began slowing down in 1926, and 
was reversed in 1932 and 1933; the migration after 1934 was smaller 
than in 1922-26, but it left the farm population in 1940 lower than 
that in 1930.^° 

The movement of industry furnishes an interesting commentary 
on the movement of population. Despite the growth of suburbs, 
there has apparently been no widespread movement of industries out 
of the major industrial areas. In this respect, the movement of the 
textile and the boot and shoe industries into the South has been 
exceptional. In general, the older industrial areas have declined in 
relative but not in absolute importance. For the most part industrial 
movement is to outlying areas rather than to distant areas. The 
diffusion is taking place within the 200 major industrial counties in 
the United States, although there is some probability that it may be 
extended to an additional 50 counties.*^ 

Changes in Productivity and Price Levels 

Changes in the physical productivity of a dollar's worth of invest- 
ment in plant and equipment aft'ect the dollar level of investment. 
The lower the prices of investment goods fall, the more the physical 
productivity of investment expenditures increases, the smaller the 
dollar amount of investment necessary to maintain and increase 
output. 

" Assuming no change in the quality of construction or in the amount of housing; space per capita. 

'8 Bureau of Foreign and Domestic Commerce, Statistical Abstract of the United States, 1939, p. 6. 

'» C. W. Thornthwaite, Internal Migration in the United States, Philadelphia, University of Pennsyl- 
vania Press, 1934, pp. 30-31. 

'» On the basis of preliminary census testimony, cf. testimony of Conrad Taeuber before the Senate ' 
Committee holding hearings on Civil Liberties and Violations of the Rights of Labor, May 6, 1940. 

81 Daniel Creamer, Is Industry Decentralizing? Philadelphia, University of Pennsylvania Press, 1935, 
pp. 73-74; National Resources Committee, Structure of the American Economy, 1939, pp. 56-59. 



9§ CONCENTRATION OF ECONOMIC POWER 

Increases in productivity during the past two decades appear to 
have been more important in reducing the dollar volume of invest- 
ment than decreases in prices. Except for the years 1931-36 the 
prices of business capital goods have fluctuated within a narrow range 
(table 31). But the price indexes of capital goods leave much to be 
desired. The goods are relatively understandardized; and adjust- 
ment of the components of the index for changes in productivity is 
extremely difficult. A grinding machine employing an improved 
abrasive may still be labeled a grinding machine in an index of machine 
tool prices, though its capacity be substantially increased. Hence, 
the price indexes have a serious upward bias; they would show sub- 
stantial reductions if they could be corrected for increases in pro- 
ductivity. 



Table 31. — General index of the prices of business capital goods, 1920-39 

[1929=100] 



Year 


Index 


Year 


Index 


1920 


130.2 
102.4 
93.0 
103.5 
101.4 
99.5 
99.4 
99.2 
98.0 
100.0 


1930 


95.7 


1921 


1931 


88.7 


1922 


193? 


82.1 


1923 


1933 


80.5 


1924. 


1934 - - - 


87.2 


1925 . 


1935 


88.4 


1926 . . . 


1936 


90.4 


1927 


1937 


98.5 


1928 


1938 


98.5 


1929... 


1939 


97.8 









Source: Solomon Fabricant. Capital Consumption and Adjustment, New York, National Bureau of 
Economic Research, 1938, table 32. Data for 1936-39 are unpublished, but are reproduced by specirj per- 
mission of Dr. Fabricant and the National Bureau of Economic Research. The index includes machinery, 
machine tools, electric cars, processed capital equipment (total weight, 17), and various types of construction 
(total weight, 7). 

The productivity of capital investment has been increasing con- 
tinuously. The most comprehensive survey of changes in productivity 
indicated in 1938 that — ■ 

The available data in the major fields of economic activity show that the average 
output per man-hour in most industries increased after 1929, even during years 
of declining production, although the increases were then often at a slower rate 
than before. With recovery in production, the pre-1929 rates of increase were 
either resumed or exceeded. ^'^ 

Some of the more important factors leading toward increased produc- 
tivity in recent years have been: (1) An increasing utilization of 
large-capacity equipment, accompanied by decreases in equipment 
expenditures per unit of capacity. Such equipment, furthermore, 
permits the use of refinements and auxiliary devices, and requires 
less floor space. (2) A growing importance of industrial measuring, 
recording, and controlling devices. These installations are relatively 
inexpensive, but contribute substantially toward an increase in the 
effective capacity of existing installations. (3) Improvements in the 
composition of metals, together with mechanical changes. These 
have substantially increased the productive efficiency and the dura- 
bility of machinery. Improvements have been effected in paints, 

'2 David Weintraub, "Effects of Current and Prospective Technological Developments Upon Capital 
Formation," .\merican Economic Review, Supplement, vol. XXIX, 1939, p. 16. Much of this section is 
based upon this article. See Works Progress Administration, National Research Project, Production, 
Employment, and Productivity in 59 Manufacturing Industries, Washington, D. C, 1939, iu 3 volumes, 
pt. 1, ch. 3. 



CONCENTRATION OF ECONOMIC POWER QQ 

varnishes, and lacquers. Soil fertility has been increased, disease- 
resistant varieties have been developed, and oth(^r chemical and 
biological improvements have contributed to yields. (4) "Mana- 
gerial" improvements. These have resulted in better plant utilization, 
more efficient factory layout, and more effective flow of production. 
The effects of increases in productivity upon investment are strik- 
ingly clear in many industries. ^^ The amount invested in plant and 
machinery in the automobile industry has declined since 1926. In- 
vestment in fixed capital in 1938 was 38 percent less than in 1926, 
while output (of vastly improved quality) was greater by 22 percent.** 
In 1926, the fixed capital invested in the iron and steel industry was 
valued at 3.8 billion dollars; in 1937, at 3 billion dollars; yet capacity 
was 57.8 million tons in the former year, compared with 69.8 million 
tons in the latter. ^^ The data presented by the United States Steel 
Corporation to the Temporary National Economic Committee illus-' 
trate these trends for one company. Between 1926 and 1937 the 
book value of fixed assets decreased from 1.7 billion dollars to 1.4 
billion dollars, but ingot capacity increased from 22 million to 25 
million tons. The estimated value of fixed capital in the privately 
owned segment of the electric light and power industry was 7 billion 
dollars in 1926, and 10.9 billion dollars in 1938; output (measured in 
index numbers) rose from 106 in 1926 to 239 in 1938.^^ Thus, from 
1926 to 1938 investment increased by 56 percent, but output increased 
by 125 percent. In the railroad industry, with a $17,000,000,000 
investment in plant and equipment, creosoting has doubled the life 
of a tie, and heavier rails and steel rolling stock have reduced replace- 
ment costs. Locomotive tractive power has increased, more efficient 
locomotive designs and the widespread use of water treatment have 
reduced repairs and increased both the capacity and the life of steam 
engines. The decrease in passenger traffic, the decline in less than 
carload lot shipments, and the increase in the average length of haul 
have reduced the wear and tear. Utilization of existing plant has 
increased. Train speeds have increased sharply, and terminal facili- 
ties operate with greater rapidity. Finally, in the machine tool 
industry a recent survey indicated that of a total of 1 1,610 machines 
purchased in 1936-37, the 4,666 acquired for the specific purpose of 
replacing old ones were substituted for 7,377 machines. "It may well 
be assumed that the total capacity of the machines used for replace- 
ment was at least equal to that of the machines which were scrapped." *^ 

Cost-Price Relationships 

Investment is retarded when the level of costs is too high in relation 
to the level of prices. This lack of balance may arise in two ways. 
First, the effects of an increase in productivity and efficiency may not 
be passed on in the form of lower prices, improved qualities, or both. 
The failure of prices to adjust to this basic factor conditioning economic 

'3 In general, see Works Progress Administration, National Research Project, Production, Employment, 
and Productivity in 59 Manufacturing Industries, Washington, D. C, 1939, in 3 volumes. 

Changes in accounting practices affect the capital values cited in this paragraph. These seem to be the 
best figures available; and in any case the inferences made on the basis of these and other data appear to need 
little qualification. 

6* Spurgeon Bell, Productivity, Wages, and National Income, Washington, D. C, The Brookings Institu- 
tion, 1940, pp. 288-290, 299. 

'5 Data compiled by the American Iron and Steel Institute, as of January 1. Cf. Bell, Productivity, 
Wages, and National Income, Washington, D. C, The Brookings Institution, 1940, pp. 288-289. 

w Bell, op. cit., pp. 275-277. 

" David Weintraub, "Effects of Current and Prospective Technological Development Upon Capital 
Formation," American Economic Review, Supplement, vol. XXIX, 1939, p. 16. 



100 CONCENTRATION OP ECONOMIC POWER 

activity ^^ prevents the optimum allocation of resources, and it makes 
it impossible for the community to enjoy the expanded output which 
is the fruit of economic progi'ess.^^ In general, however, this type of 
cost-price derangement grows slowly and probably without serious 
effects upon the course of the business cycle. Secondly, prices and 
costs may get out of line during the swing from prosperity to depres- 
sion and back again.^° Some prices, such as those of agricultural 
products, are relatively flexible, while others, such as public utility 
charges, wages, and rents, are more or less rigid. VHien business 
activity declines some prices therefore fall more quickly and more 
rapidly than others. Depression m the economic system is thus 
accompanied by dispersion in the price structure. If during the down- 
swing the price of wheat falls faster than the prices of tractors and 
farm machinery, this relationship puts an additional obstacle — but 
seldom the most important one — ^in the way of investment in farm 
machinery. Similarly, if concerted action or speculation results in 
sharp price increases during the upswing, an incipient investment 
boom may be choked off. There are undoubtedly many individual 
mstances where sticky costs are maintained at a level that discourages 
investment. In these cases bringing costs and prices into competitive 
alinement would expand output and encourage investment. 

It is doubtful, however, whether price dispersion (including the dis- 
persion of cost-price relationships as a special case) may be con- 
sidered as a general deterrent of investment and economic activity. 
The question is essentially whether price dispersion causes business 
cycles, or whether price dispersion is merely another aspect of business 
cycles.^^ 

When a boom comes to an end, depressing and deflationary forces 
throw the price structure out of balance. This lack of balance acts 
further to retard mvestment. Is the remedy an extension of price 
flexibility to all parts of the economic system? Probably not, since 
this would involve a corresponding reduction in incomes and business 
activity. Indeed, the expectation that all prices will fall may accel- 
erate the downswing, while the knowledge that some important prices 
are rigid may serve as a stabilizing influence.^^ 

: Lack of balance between costs and prices should probably be con- 
sidered as affecting specific segments of investment at specific times 
rather than as affecting the level of investment generally. Any sub- 
stantial price dispersion is probably the result of a decline of invest- 
ment and is to be cured by an increase in investment. 

SPECIAL FACTORS 

The factors which stimulate or retard investment in specific in- 
dustries are numerous. While none of them can be discussed here 
in any detail, it is worth while to sketch the more important of them. 

88 See the National Resources Committee's The Structure of the American Economy, which discusses 
three "basic factors which condition economic activity — changes in techniques of production, in available 
resources, and in consumer wants" (pp. 126-129). 

" The possibility that the community may prefer to take part of the fruit of its progress in the form of 
increased leisure does not affect the argument made here. 

M National Resources Committee, The Structure of the American Economy, pp. 129-1.52. 

« Cf. the discussion by Alvin H. Hansen, "Price Flexibility and the Full Employment of Resources," in 
National Resources Planning Board, The Structure of the American Economy, Part II: Toward Full Use of 
Resources, 1940, pp. 27-34. 

«2 See J. R. Hicks, Value and Capital, New York, Oxford Press, 1939, p. 265. 



CONCENTRATION OF ECONOMIC POWER JQ]^ 

Monopolies and restraints of competition clearly restrict production 
and limit investment.^^ It is obvious that this is the case where one 
business enterprise is the sole or the principal producer in the field, 
or where a small cluster of major enterprises constitutes or dominates 
the scene. Hearing:s before the Temporary National Economic 
Committee indicated that patent, license, and cross-license arrange- 
ments may have the same effect of restricting competition and 
investment. ^^ In the glass industry, for example, all the basic patents 
are controlled by two companies, their subsidiaries, and their asso- 
ciates, either directly or through cross-licensing. There are numer- 
ous references in the hearings to the restriction of output and 
investment these conditions made possible, including buying up 
licenses and then closing down their plants, and refusing licenses to 
prospective producers.^^ Research in, and production of, beryllium 
were retarded several years because of an inability to obtain assurances 
by cross-license or promise of amicable working arrangements.^^ 
Monopoly restrictions in the optical glass industry were successfully 
prosecuted under the antitrust laws, and similar actions are pending 
in the aluminum, magnesium, and other industries. ^^ 

Unwieldy financial structure or faulty business organization may 
retard investment and expansion. There seems little doubt, for 
example, that a substantial amount of new investment in the railroad 
industry could be used. If the industry were not already encumbered 
by such a heavy burden of debt, additional capital could be obtained. ^^ 
Recognition of this fact has led to proposals for a Government cor- 
poration to build and lease equipment to the railroads.'''' The resi- 
dential construction industry, though undoubtedly subject to rigid if 
not monopoly prices for certain types of labor, materials, and furnish- 
ings, is organized to sell a product that has a limited rather than a 
broad market. Residential construction is handicapped by other 
factors besides concentration upon narrow markets ; it is handicapped 
by inadequate standards and supervision of construction (a factor 
now partially remedied by the Federal Housing Administration) ; by 
unplanned, even irresponsible, real estate subdivisions that invite 
neighborhood deterioration; and by the delay and cumbersomeness 
of foreclosure and tax sale procedure. The last two elements in 
many cities have made it extremely difficult to acquire plots of any 
size in areas that were subdivided but only sparsely built upon before 
1929, and that later become tax delinquent. 

The character of the capital markets is an important factor affecting 
investment. The investment banking machinery was developed to 
serve large business enterprises. It has handled the refundings, 

93 In goneral, see Edward Chamberlin, The Theory of Monopolistic Competition, Cambridge, Harvard 
University Press, 1936, and Joan Robinson, Economics of Imperfect Competition, London, Macmillan, 1933. 

'■i For a general discussion of the patent system, see Hearings before the Temporary National Economic 
Committee, Part 3. 

95 Hearings before the Temporary National Economic Committee, Part 2, pp. 377-677. The bill of com- 
plaint in the antitrust suit filed by the Department of Justice against the Hartford-Empire and other com- 
panies alleges that from 1925 through 1938 a large number of business enterprises that were ready and willing 
to invest in the glass bottle industry were refused licenses. The bill alleges many instances where com- 
petitors' plants were bought and closed down. See the complaint in United States v. Hartford-Empire Co. 
et. al., civil action 4426, District Court for Northern District of Ohio, Western Division, December 11, 1939. 

"5 Hearings before the Temporary National Economic Committee, Part 5, pp. 2011-2059. 

«■ For a popular statement of the problem, see Thurman Arnold, The Bottlenecks of Business, New York, 
Reynal and Hitchcock, 1940. 

9' It is interesting to note that in some cases railroads going into bankruptcy, freed from the payment of 
bond interest, increase their investment outlays. 

9» Hearings before the Temporary National Economic Committee, Part 9, pp. 3547, 3854-3855. 



1Q2 CONCENTRATION OF ECONOMIC POWER 

transfer of ownersliip, reorganizations, and mergers of large enter- 
prises, but it is not clear that it has supplied even large corporations 
with substantial amounts of "venture capital." Its services have not 
been rendered under that basic condition of competition that every 
buyer have access to every seller and vice versa. ^ It is doubtful 
whether the investment banking machinery can be reoriented to 
help supply capital to small business enterprises, and this has led to 
suggestions that investment trusts undertake the job and that a new 
set of regional credit banks be created.^ Interest rates on mortgages 
have been reduced in recent years, in large part because of Govern- 
ment competition, but it is still doubtful whether business without 
Government intervention can handle home mortgages, farm mortgages^ 
and consumer financing cheaply. 

The most efficient allocation of productive resources demands that 
new investment be directed to those areas where the rates of return 
are highest. This is possible only when industries operate under com- 
petitive conditions, when anyone may enter the industry. In many 
industries requiring a large investment and characterized by a small 
number of large-scale producers, these conditions do not prevail. 
Capital has flowed out of the fixed plant in the automobile industry 
since 1926, despite high rates of return.^ Oil pipe lines, owned by the 
major companies, earned in 1938 from 20 percent to 50 percent per 
year upon invested capital.* The small independent producers must 
ship thi'ough these pipe lines, since the capital required and the risk 
involved (for non vertically integrated companies) in building pipe 
lines are too great. ^ Thus the small companies must pay their large 
competitors a profit which one small producer characterized as an- 
alogous to the old Standard Oil rebates." A large company can build 
its own line in these circumxStances.'' Furthermore, there are indica- 
tions that proration of production in the oil industry has not only 
restricted output, but that it has discouraged investment by small 
producers relative to investment by the larger ones.* It appears, 
in addition, that it may diminish total investment relative to total 
output.^ 

In the preceding paragraphs some of the factors retarding invest- 
ment in specific situations have been outlined. It is desirable briefly 
to note some stimulating factors. Subsidies, in one form or another, 
are stimulative elements. The tariff is the most general form of 
economic subsidy, and it is often implemented by administrative 
control and inspection devices. Silver and gold mining have received 
unusual subsidies since 1934. The increases in the Treasury price of 
silver increased United States production from 32.5 million fine 
ounces in 1934 to 71.3 million in 1937 and 63.9 million in 1939.^'* 

1 See the case studies in Hearings before the Temporary Xational Economic Committee, Parts 22, 23, and 
24. 

■ See "Adequate Long-Term and Short-Term Financing," hy William Sanders, Harold Vatter, and Har- 
old Wein, and by P. R. Xohemkis, Jr., in Temporary National Economic Committee Monograph No. 17, 
Some Problems of Small Business. 

3 See Federal Trade Commission, Report on the Automobile Industry, Washington, 1939, pp. 487, 618, 
and 671. 

* Hearings before the Temporary National Economic Committee, Part 14-A, p. 7796. 

5 Hearings before the Temporary National Economic Committee, Part 15, pp. 8517 et seq. 

6 Hearings before the Temporary National Economic Committee, Part 14, p. 7338. 

' When the Sun Oil Co. could not obtain freight rates from the railroads equivalent to what their costs 
would be with a pipe line of their own they built the line. Hearings before the Temporary National Eco- 
nomic Committee, Part 14, p. 7177. 

* Hearings before the Temporary National Economic Committee, Part 14, pp. 7342-7343. 
8 Hearings before the Temporary National Economic Committee, Part 14. p. 7345. 

10 From an average price of 64.64 cents per fine ounce in 1934 to 71.11 cents in 1940. Production outside the 
United States showed smaller but yet substantial increases. Treasury Department, Bulletin of the 
Treasury Department, September 1940, p. 51. 



CONCENTRATION OF ECONOMIC POWER 2Q3 

The increase iii the Treasury price of gold from $20.67 to $35 an ounce 
has greatly expanded domestic output, and, by making the United 
States the chief buyer of gold, it has supported exports of American 
commodities. Air transportation and aircraft manufacture are 
subsidized in many ways. Postal contracts in 1931-38 furnished a 
transportation subsidy estimated at $80,000,000." Research, special- 
ized weather reports, and directional and other beacons are furnished 
free or below cost.^- In the past 14 years governments have invested 
$186,000,000 in airports and terminal facilities ^^ and most of this 
was dictated by civilian rather than military needs. The grade 
crossing elimination program of the railroads cost governments 
$196,000,000 through September 30, 1937.'^ The merchant marine 
receives both construction and operating subsidies.'^ 

Industry in the past decade has shown pronounced dynamic 
qualities, despite the complaints about the lack of ''venture capital" 
and the continuance of a large volume of unemployment. New 
products have been introduced, and old products have tapped new 
markets. In 1926 the 205,000 refrigerators produced sold for an 
average price of $390; in 1937 the 2,310,000 refrigerators produced 
sold for an average price of $173. The output of washing machines 
increased by 74 percent in the same period, while prices w^ere halved.'^ 
In the past decade the consumption of rayon yarn increased from 
48.5 to 285.7 million pounds,"" and the introduction of new and 
improved artificial fibers, such as nylon, is continuing at a rapid rate. 
Bus transportation, alcoholic beverages, and plastics have become 
important industries. 

Many older industries have made substantial investments within 
the decade in response to changed sources of power, new processes, 
and technological developments. Improved processes for making 
kraft papers, and for manufacturing newsprint from rapidly growing 
softwoods are developing these industries in the South. The textile, 
rubber, carpet, and furniture manufacturing industries are expanding 
in the South. Wage and tax differentials, subsidies, and other com- 
mercial inducements, and the desire to weaken or escape from unioniza- 
tion are important factors in this movement. The steel industry 
has undergone a technological revolution. From 1924 through 
1937, 27 continuous strip mills were installed at a cost of $500,000,000; 
and more than three-quarters of this 13,300,000 gross tons of new 
capacity was installed after 1930.^^ This new construction almost 
doubles the 15,000,000 ton capacity (as of 1929) of the old-style hand 
mills, which are consequently being rapidly dismantled. ^^ Produc- 
tivity in the automobile industry has increased steadily through a 
large number of technological changes, including the stamping of 
all-steel bodies; inspection by photo-electric cell; improved spraying 
with fast drying synthetic enamels; and automatic welding, milling, 
reaming, boring, and polishing machines.^" Since the early twenties 

11 Excess of postal payments over revenues minus handling charges. See Federal Coordinator of Trans- 
portation, Public Aids to Transportation, Washington, D. C, 1940, 3 vols., vol. I, p. 147. 

12 Ibid., vol. I, p. 149. 

13 Ibid., vol. I, p. 162. 
'< Ibid., vol. II, p. 300. 
15 Ibid. .vol. I, p. 41. 

1^ Hearings before the Temporary National Economic Committee, Part 30, p. 17329. 

1" Ibid., exhibit 2632. p. 16886. 

1* Hearings before the Temporary National Economic Committee, Part 30, p. 16393, and exhibits Nos. 
2460 and 2472. 

■« Ibid., pp. 16458, 16470-16471, 16510-16515. Other technological developments have come from improve- 
ments in open-hearth furnaces, cold wire drawing, scarfing, and continuous butt welding. 

21 Ibid., pp. 16359-10366. 

291143 — 41— No. 37 8 



2Q4 CONCENTRATION OF ECONOMIC POWER 

the telephone industry has been changed from manual to dial phones; 
at the present time approximately 60 percent of the phones are dial; 
and during 1935-39, a total of 1,250,000 phones were converted to 
dial use.^^ 

Finally, no discussion of technological change and its effect upon 
investment can omit agriculture. Agriculture alone of all the pro- 
duction segments of the United States had a post-depression rate of 
investment in machinery and equipment greater than its pre-depres- 
sion rate. In 1929, a total of $613,000,000 was spent for equipment; 
in 1937, $697,000,000. The number of tractors on farms increased 
from 900,000 in 1930 to 1,600,000 in 1939. 2- This increase is symp- 
tomatic of the mechanization of other aspects of agriculture.^^ It is 
interesting to note that mechanization has taken place despite the 
reduction in acreage subsidized by the Agricultural Adjustment 
Administration and despite the fact that the labor supply on the 
American farms during the decade 1930-40 was the largest in the 
country's history.^* And the end of mechanization in agriculture is 
not yet in sight. Indeed, the prospect of the wide adoption of a 
mechanical cotton picker hangs like the sword of Damocles over the 
labor force attached to cotton. 

Factors Responsible for the Prosperity of the Twenties 

Hansen and Currie pointed out that the prosperity of the twenties 
rested upon a large volume of investment, upon a large volume of 
offsets to saving. 

Hansen indicated that five factors were responsible for the large 
volume of capital formation and of offsets to saving in the twenties. ^^ 
First, residential building reached an all-time high in this decade. 
Residential construction "fed on an accumulated backlog of housing 
requirements caused by the virtual cessation of house building during 
the war. It fed, moreover, on the great growth of population in this 
decade," '^ and from the rapid urbanization of this rapidly growing 
population. Secondly, there was a large volume of public construction 
financed by heavy State and local borrowing. The volume of public 
construction, too, reflected the growth and urbanization of population, 
but in greatest measure it represented the development of the hard 
road network of the country. Thirdly, the United States for the first 
time (with the exception of the World War period) found an outlet 
for saving in foreign investments. The expansion of American enter- 
prises abroad and the purchase of foreign securities provided foreign 
countries with purchasing power and enabled us to export more to 
them than we imported. Fourthly, there was a tremendous growth of 
consumer credit. This enabled American industry to tap new levels 
of consumer demand and helped finance the extraordinary growth of 
the automobile industry. Finally, "there was the prodigious growth 
of the great automobile industry, together with all the related in- 
dustries, which it fostered and sustained, including rubber, oil, glass, 

21 Ibid., p. 16653. 

22 Hearings beforft the Temporary National Economic Committee, Part 30, p. 16947. 

23 Ibid., pp. 16941-169-16. 

2' It is possible ttiat, in part, this mechanization may be explained by (1) a transfer of land ownership 
during the depression and (2) a realization by farmers that it is possible to earn a higher income by investing 
capital in machinery and equipment and applying these to rented land rather than by investing part of this 
capital in land andfarming fewer acres. Cf. J. W. Schultz, "Capital Rationing. Uncertainty, and Farm 
Tenancy," .Journal of Political Economy, June 1940. 

25 Hearings before the Temporary National Economic Committee, Part 9, pp. 3512-3513. 

26 Hearings before the Temporary National Economic Committee, Part 9, p. 3512. 



CONCENTRATION OF ECONOMIC POWER jQf^ 

steel, road equipment machinery, cement, and otlier materials entering 
into the_ constructioy of the wholly new network of hard-surfaced 
roads." •' 

Hansen explained that these five factors provided the main props to 
the prosperity of the twenties. Their income creating force was, in 
large part, spent by 1929.-^ Currie noted that the income-creating 
force of these five factors may have been weakened earlier. He noted 
that from 1923 to 1928 consumption was apparently increasing rela- 
tive to national income. It was suggested that the rising stock market 
created capital gains which increased the willingness of individuals to 
spend larger shares of their income for consumption, and hence made 
"it possible for a more or less stable volume of capital expenditures to 
support a rising national income." -^ 

Was the large volume of investment during the twenties abnormal? 
Did the country enjoy high levels of national income before 1920 with 
relatively lower levels of investment? May it be possible in the 
forties to support a level of national income high enough to eliminate 
unemployment with relatively lower levels of investment than pre- 
vailed during the twenties? These questions are of basic significance 
for the functioning of the American economy. 

The data for the period preceding 1920 are much less complete than 
for the post-war period. It is impossible to say whether the volume of 
savings (and investment) relative to national income at full employ- 
ment was lower before the World War than in the twenties. ^° The 
absolute volume of saving in the twenties was, however, higher than 
before the World War. The increase in prices and production and the 
full utilization of resources during and immediately following the 
war, radically modified the level of national income, the level of 
individual incomes, and perhaps to some degree the distribution of 
individual incomes. These combined to increase the dollar volume 
of savings, which in turn required an increased volume of investment 
for the achievement of full employment. Fortunately, increased 
outlets for investment were available. ^^ 

There is no indication that the structure of incomes and the patterns 
of consumption in the United States will bring forth smaller volumes 
of savings at given levels of national income in the forties than in the 
twenties.^- If this is so, prosperity in the forties, as in the past two 
decades, will depend upon a large volume of investment to offset a 
large volume of savings. For the moment the national defense 
program is providing a large and increasing volume of oft'sets to 
savings. The United States will face grave questions when the 
armament boom is over: Are we prepared to preserve a high level 
of income and employment while shifting from an armament to a 
peace economy? And how much public investment will be required 
to supplement private investment to achieve this end? 
. The steady and unspectacular stream of improvements tends to 
reduce the amount of gross investment required to maintain output. 

2' Hearings before the Temporary National Economic Committee, Part 9, p. 3513. 

28 Ibid. 

29 Ibid., p. 3537. 

30 The pre-war volume of investment, whatever its proportion to national income, wa,s not, however, 
financed solely with American savings. The importation of capital bridged the gap between domestic 
investment and domestic savings. 

3! Without the growth of consumer credit and the inducement to increase consumption relative to income 
ofEered by the stock market in the later twenties, the volume of capital formation required for full employ- 
ment would have been substantially greater. 

32 Supra, pp. 17-18. 



106 CONCENTRATION OF ECONOMIC POWER 

Hence unless great new industries appear, industries that make 
investments m large amounts possible, the vokd to full employmenris 
the prosaic one of reducing prices, increasing output, and increasing 
the proportion of mcome that is consumed. This is a difficult «nd 
unexciting road, because restrictive practices prevent adequate 
t^TSZZ :fL^'^ "^^^^ '^'^ ''^^ ^« ^i--t inc^ome to thoseTho 



save instead of consume. 



PART V 
CONCLUSION 

The United States has a dynamic econoni}^, an adaptable industry, 
a highly developed social and business organization, and a skilled 
and industrious population. These advantages, helped by a high 
degree of occupational and regional specialization, and applied to a 
magnificent endowment of natural resources, have resulted in the 
highest standard of living in the world. That standard of living is 
not measured merely in material thmgs: in goods and in services. 
That standard of living has meant opportunity, liberty, mobility, and 
personal assurance. That standard of living has brought change and 
progress, and has fostered a dynamic character and an optimistic 
outlook. 

We must preserve and extend these achievements. But we can do 
this only by seeing that our economic system operates efficiently. 
Our economic system can operate as efficiently as our djmamos and 
our steel mills. Our economic system can operate at full employment, 
it can produce a high level of national income with enough goods and 
services for all. It can do these things without transforming an 
unemployed worker into a soldier and without trading a breath-taking 
dam for a series of tank traps organized in depth. 

The question is, How? How can a democracy achieve a high stand- 
ard of living? How can a democracy secure that sustained high level 
of output and income that mean personal opportunity and security? 

The prosperity of the United States has always, except in periods 
of war, been based upon a large volume of investment and a large 
volume of saving. The concentration of individual incomes, the 
concentration of wealth, the character of tax structure, the desire for 
business self-sufficiency, and the institutional, automatic character of 
many of our savings processes — these elements have combined to 
produce a high-savings economy. Even at low levels the people 
would attempt to save; but they would not succeed in saving very 
much. If the national income fell low enough the country would be 
unable to save anything. As the pressure of depression and unem- 
ployment decreases, as the level of national income increases, the 
volume of saving increases. But the volume of saving increases 
faster than the national income, being a larger proportion of the 
national income at high levels than at low. 

The problem of our economy, to put idle men and machines to 
work, and to keep them at work, demands continuity of the income 
stream. All incomes must be spent for consumption or for investment. 
If incomes are not spent, the economic machine begins to falter; if 
they are spent, the economy continues on an even keel. 

Investment is but one type of spending. Investment is spending 
for capital goods: for roads, machines, buildings, and equipment. 

107 



IQg CONCENTRATION OF ECONOMIC POWER 

Unless we are prepared to modify the rate of saving at high levels 
of national income, we must be prepared to invest the volume of 
savings that will be created at these lerels. If the American people 
at reasonably full employment will, for example, save $25,000,000,000 
per year, they must be prepared to find investments or other offsets 
for $25,000,000,000 each year, every year, to stay at that level. If 
offsets are not found, the savings themselves will be lost, national 
income will decrease, and production and employment will fall off. 
Savings that are hoarded and not invested or otherwise offset run to 
waste. In the process billions of precious irreplaceable man-hours 
of labor are lost, while millions of people cannot get the homes, the 
food, and the good things of life they could so easily produce. 

Savings move toward investment directly and indirectly. A large 
part of business savings is invested directly, without going through 
the capital markets. A substantial part of Government savings comes 
from current receipts, is invested directly, and hence does not move 
through the capital markets. A large part of individual savings, 
however, flows through savings institutions and capital markets, which 
concentrate control over them. 

This concentration has made possible the increasing liquidity of 
savings institutions and the uneven flow of savings into different sec- 
tors of the economy. Legal and customary investment standards 
require savmgs institutions to invest in other people's debts. Un- 
fortunately, during the past decade no one except the Federal Gov- 
ernment has been willing to go into debt. As a result, savings institu- 
tions have had difficulty in finding outlets for their funds. The outlet 
for funds might be broadened by permitting them to invest directly 
in homes, hospitals, and factories; and by permitting or encouraging 
them to buy equity securities. 

Government bonds have provided substantial outlets for institu- 
tional and individual savings in the past decade. If the volume of 
saving continues undiminished, if others continue to show a reluctance 
to go into debt, if the investment policy of institutions continues 
unchanged, the present pressure toward the increase of Government 
debt appears inevitable. 

Investment is the best offset to saving. In addition to helping 
maintam the level of income and employment, it adds to the country's 
productive capacity. A high rate of saving and investment facilitates 
the rapid introduction of new products and new methods. 

It is essential to distinguish between investment as an offset to 
savings — as a community device for keeping men and machines at 
work — and investment as a way of distributing the national income 
in the future. 

The usefulness of investments does not always depend upon 
whether they do or do not yield an income. Factories, railroads, and 
other business enterprises may be operated even though they are in 
bankruptcy or reorganization. The future output of goods and serv- 
ices is not necessarily affected by failure of investments to pay out — ■ 
though the future distribution of income is. It is necessary to dis- 
tinguish between industry and business, between making goods and 
making money. 

Investments, regardless of their profitability, may be of varying 
social desirability. We probably need investment in hospitals more 
urgently than we need investment in factories to manufacture spun 



COXCENTRATION OF ECONOiMIC POWER JQQ 

glass shoes. But investment is not related to need. Investment is 
generally related to prospects of profit, though the relationship is 
rough, inexact, and disturbed by gusts of optimism and pessimism. 
Private enterprise cannot and will not provide the things that are 
needed unless the people are able and willing to bu}^ them at a price 
yielding a profit to the producer. There is no reason to assume that 
the distribution of income and consequently the structure of consum- 
ing and saving habits — the determinants of demand — are closely re- 
lated to the needs of the population. A change in the distribution of 
income would change demand and the relative profitability of dift'erent 
lines of enterprise. 

Monopoly and concentration play important roles in determining 
the volume of investment. The development of new areas, products, 
industries, and skills brings profits to some but losses to others. 
If there are competitive conditions and no great concentrations of 
power and income, the profits act as an incentive while the losses 
do not act as a brake, since the profits go to one group while the losses 
accrue to another. If monopoly and concentration are present the 
situation is different. The prospect of losses to old investments acts 
as a brake to new investments in the same or competing fields. 
Monopoly, concentration, and even wide-spread holdings, create 
vested interests that impede investment in new fields. At the same 
time they lead to restriction of output and limitation of investment 
in existing fields. 

A large volume of savings is not always better than a small volume. 
The choice depends upon whether large investment outlets are avail- 
able. If adequate investment outlets are not available, the country 
will be better off if more income is spent for consumption and if the 
volume of savings is reduced, than if savings were attempted, hoarded, 
and finally wasted. The increasing number of older people, the grow- 
ing amount of annuity incomes paid under life insurance contracts, 
and old-age and other income payments under social secm'ity legis- 
lation may in the future involve a substantial amount of dis-saving, 
and possibly a reduction in the volume of savmgs. 

Saving and investment should not be ends in themselves. After a 
nation has accumulated a certain amount of capital goods, it may 
prefer to devote relatively more eft'ort to consumption. If adequate 
investment outlets for our potential volume of savings cannot be 
foimd, it may be necessary to encourage higher levels of consumption. 
This encouragement may be temporary or it may be permanent, 
depending upon the emergence of new and vigorous growth factors 
inducing large amounts of investment. 



APPENDIXES 



Appendix I. — Components of savings, 1925-29 and 1935-39 
[MUlions of dollars] 





Gross 
savings ' 


Business enterprises 


Government 


Individuals and 
others 


Year 


Net sav- 
ings by 
business 
enter- 
prises 2 


Depreci- 
ation 
and de- 
pletion 3 


Gross 
savings 
by busi- 
ness en- 
terprises 


Percent 
of total 


Govern- 
ment 
savings < 


Percent 
of total 


Individ- 
uals and 
other 5 


Percent 
of total 


1925 

1926 

1927. 

1928. 

1929 

1935 

1936 

1937 

1938 

1939 


19,211 

19, 037 
18, 208 
17, 824 

20, 298 

9, 355 
13.817 
17, 497 
12, 744 
6 15, 600 


2,851 
2,223 
996 
2,830 
2,274 

-26 

1,014 

910 

-1,397 

778 


3,976 
4,551 

4,487 
4,799 
5,145 

4,291 

4, 414 

4, 609 

« 4, 350 

6 4, 550 


6,827 
6,774 
5,483 
7,629 
7,419 

4, 265 
5,428 
5,519 
2,953 
5, 328 


35.5 
35.6 
30.1 
42.8 
36.5 

45.6 
39.3 
31.5 
23.2 
34.2 


1,613 
1,894 
2,027 
1,766 
1,762 

-1,107 

-1,293 

1,647 

981 

127 


8.4 
9.9 
11.1 
9.9 

8.7 

-11.8 

-9.4 

9.4 

7.7 
.8 


10, 771 
10, 369 
10, 698 
8,429 
11, 117 

6,197 
9, 682 

10, 331 
8,810 

10, 145 


56.1 
54.5 
58.8 
47.3 
54.8 

66.2 
70.1 
59.0 
69.1 
65.0 



1 Gross capital formation, as estimated by Simon Kuznets in National Income and Capital Formation, 
1919-35, New York, National Bureau of Economic Research, 1937, p. 40. and Commodity Flow and Capital 
Formation in the Recent Recovery and Decline, 1932-38, Bull. 74, New York, National Bureau of Economic 
Research, 1939. 

2 Estimates by the National Income Division of the Department of Commerce. Data for 1929-39 frqm 
Survey of Current Business, June 1940. Data for 1925-28 are unpublished. No estimates of savings by 
different components have been made for 1930-34, since business savings for these years reflect large re- 
valuations which cannot be corrected for. 

3 Solomon Fabricant, Capital Consumption and Adjustment, New York, National Bureau of Economic 
Research, 1938, pp. 32, 33, 38. Estimates for 1936 and 1937 are preliminary and are used with permission of 
Dr. Fabrieant and the National Bureau. 

< The computations of gross savings by governments are given in appendix II. 

6 Gross savings minus business and governmental savings. Not estimated for 1930-34; see note 2. Other 
estimates of individual savings are not precisely comparable with this one. For purposes of convenience, 
however, several other estimates may be summarized: 

The estimate by Maurice Levin, H. G. Moulton, and Clark Warburton, America's Capacity to Consume, 
Washington, Brookings Institution, 1934, was 17.8 billion dollars for 1929. Excluding 6.2 billion dollars of 
capital gains, their estimate is 11.6 billion dollars (pp. 96, 260, 261, 265). 

The estimate by the National Resources Committee was 6 billion dollars in 1935-36. Consumer E.\pendi- 
tures in the United States, Washington, 1939, p. 51. 

The estimates by W. H. Lough were (in bDlions): 1925, $10.6: 1926, $10.6; 1927, $10.4; 1928, $8.5; 1929, .$9.3. 
High Level Consumption, New York, McGraw Hill, 1935, p. 306. Lough's method would tend to eliminate 
capital gains. 

The estimates by Clark Warburton were (in billions) : 1925, $9.7; 1926, $11; 1927, $11.2; 1928, $10.9; 1929, $11.6. 
"The Trend of Savings," Journal of Political Economy, vol. 43, 1935, p. 84. 

The estimates of R. W. Goldsmith with the assistance of Walter Salant, converted to a gross savings basis, 
excluding consumers' durable goods except houses, were (in billions): 1935, $2.4; 1936, $7.8; 1937, $5. 

6 Estimated. 

no 



CONCENTRATION OF ECONOMIC POWER 

Appendix II. — Corn-position of gross saving by governinents, 1921-39 
IMillions of dollars] 



111 



Year 


Cash receipts minus cash ex- 
penditures ' 


Public construction 2 


Gross savings by government 


Federal 


State and 
local 


Total 


Federal 


State and 
local 


Total 


Federal 


State and 
local 


Total 


1921 

1922 

1923 

1924 

1925 - 

1926 -- 

1927 

1928 

1929 

1930 

1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938 

1939_ _ 


250 

54 

301 

319 

295 

509 

459 

78 

235 

-386 

-2,419 

-1,880 

-1,928 

-3,428 

-3, 730 

-4, 337 

-1,092 

-2, 377 

-3, 651 


-898 

-802 

-649 

-934 

-824 

-753 

-827 

-811 

-931 

-1,116 

-1,365 

-724 

811 

1,157 

771 

373 

215 

455 

78 


-648 

-748 

-348 

-615 

-529 

-244 

-368 

-733 

-696 

-1.502 

-3, 784 

-2,604 

-1,117 

-2,271 

-2,959 

-3, 964 

-877 

-1,922 

-3, 573 


397 

306 

223 

231 

217 

193 

196 

232 

271 

357 

460 

499 

606 

978 

1,106 

1,858 

1,632 

1,883 

2,300 


1, 356 

1,480 

1,422 

1,673 

1, 925 

1, 945 

2,199 

2,267 

2,187 

2,470 

2,155 

1,382 

740 

826 

746 

813 

892 

1,020 

1,400 


1,753 

1,786 
1,645 
1,904 
2, 142 
2,138 
2, 395 
2.499 
2, 458 
2,827 
2,615 
1,881 
1,346 
1,804 
1,851 
2,671 
2,524 
2,903 
3,700 


647 

360 

524 

550 

512 

702 

655 

310 

506 

-29 

-1,959 

-1,381 

-1,322 

-2,450 

-2,624 

— 2,479 

'540 

-494 

-1,351 


458 

678 

773 

739 

1,101 

1,192 

1,372 

1,456 

1,256 

1,354 

790 

658 

1,551 

1,983 

1,517 

1,186 

1,107 

1.475 

1,478 


1,105 

1,038 

1,297 

1,289 

1,613 

1,894 

2,027 

1,766 

1,762 

1,325 

-1,169 

-723 

229 

-467 

-1, 107 

-1,293 

1,647 

981 

127 



' The net governmental contribution to or subtraction from purchasing power. "This series attempts to 
measure the difference between the outlays of public bodies that add to the community's disposable cash 
income and the receipts that represent drafts upon disposable cash income." Hearings before the Tem- 
porary National Economic Committee, pt. 9, p. 4017. Data from p. 4011, corrected and brought up to date 
by later material. 

2 Hearings before the Temporary National Economic Committee, pt. 9, p. 4140, brought up to date with 
Bureau of Foreign and Domestic Commerce, Survey of Current Business, June 1940. Does not include 
outlays for machinery and equipment, which represent a use of savings. Includes the equivalent of that 
part of relief outlays estimated to result in construction. 

Appendix III. — Number of fiduciary returns and undistributed compiled income 
of fidxiciaries, by balance income classes, 1937 



Balance income class i 



Number of 
returns 



Undis- 
tributed 
compiled 
income (in 
thousands 
of dollars) 2 



Over $1,000,000 

$500, 000 to $1,000,000 _.'- 

$250,000 to $500,000 

$100,000 to $250,000 

$50, 000 to $100,000 

$25,000 to $50,000. 

$20, 000 to $25, 000... 

$10, 000 to $20,000 

$5,000 to $10,000 

$1,000 to $5,000 -_ 

Under $1,000 

Total 

Fiduciary returns filed on Form 1040 ^ 
Returns with zero balance income 

Total, all fiduciary returns 



29 

74 

191 

938 

2,172 

5.382 

2,899 

14, 096 

23, 980 

87, 040 

33, 745 



2,327 
5,161 
17, 059 
33, 196 
37, 160 
47, 906 
15, 581 
44,298 
36, 885 
42, 213 
6,043 



170, 546 

12, 247 

180 



287, 826 
63, 982 



182, 973 



351, 808 



> Statutory net income (statutory gross income minus statutory deductions) before distribution to bene • 
ficiaries. 

2 Statutory gross income plus tax-exempt income minus statutory deductions and distributions to bene- 
ficiaries. 

3 Fiduciary returns filed on Form 1040 were not classified into balance income classes because they con- 
bined distributions to beneficiaries with statutory deductions. 

Source: Compiled from Bureau of Internal Revenue, Statistics of Income, 1937, pt. 1, tables 12, 13, and 15. 
Tax-exempt income for balance deficit trusts and for all trusts of balance incomes of $5,000 and under has 
been estimated at $20,000,000. 



112 



CONCENTRATION OF ECONOMIC POWER 



Appendix IV. — Cumulative percentage distribution of undistributed compiled income 
of all fiduciaries filing tax returns on Form IO4I, by balance income classes, 1937 



Balance income 



More than 
More than 
More than 
More than 
More than 
More than 
More than 
More than 
More than 
More than 
All trusts 3 



$1,000,000. 
$500,000... 
$250,000... 
$100,000... 
$50,000-... 
$2.'i,000_... 
$20,000.... 
$10,000.... 

$5,000 

$1,000 



Total number of trusts 

Total undistributed compiled income. 



Cumulative 
percentage 

of total 
number of 

returns 



0.01 

.05 

.16 

.71 

1.98 

5.14 

6.84 

1.5.11 

29.17 

80.21 

100.00 



170, 546 



Cumulative 
percentage 
of total' un- 
distributed 
compiled 
income ' 



0.81 

2.60 

8.53 

20.06 

32.97 

49.61 

55.02 

70.41 

83.22 

97.89 

100. 00 



$287, 826, 000 



' Statutory net income (statutory gross income minus statutory deductions) before distribution to bene- 
ficiaries. 

' Statutory gross income plus tax-exempt income minus statutory deductions and distributions to bene- 
ficiaries. 

3 Excluding the 12,247 returns filed on Form 1040 which had an undistributed compiled income of 
$63,982,000. Such returns were not classified into balance income classes because they combined distri- 
butions to beneficiaries with statutory deductions. 

Source: Compiled from Bureau of Internal Revenue, Statistics of Income, 1937, pt. 1, tables 12, 13, and 15. 
Tax-e.xempt income for balance deficit trusts and for all trusts with balance incomes of $5,000 and under 
has been estimated at $20,000,000. 



CONCENTRATION OF ECONOMIC POWER 



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120 



CONCENTRATION OF ECONOMIC POWER 



Appendix XII. 



-A^-^sets or funds in the principal savings institutions in the United 
States, 1922-39 

[Amount in millions of dollars] 



Year (as of June 30) 


Life in- 
surance 
assets less 
policy 
loans 1 

(1) 


Time de- 
posits in 
commer- 
cial 
banks 2 

(2) 


Mutual 
savings 
banks 
assets 

(3) 


Building 
and loan 
associa- 
tion 
assets 

(4) 


Govern- 
mental 
pension 
and trust 
funds 

(0) 


Postal 

savings 
deposits 

(6) 


United 
States 

savings 

("baby") 

bonds 

(7) 


Total 


1922 


7,600 
8,350 
9,103 
10, 13] 
11,355 
12,646 
13, 987 


11,717 
13,391 
14, 399 
15,884 
17,070 
17,936 
19, 626 
19, 187 
19, 125 
17, 880 
13, 559 
10, 389 
11,255 
12, 357 
13, 250 
14, 193 
14, 360 
14, 628 


6,352 
6,905 
7,365 
7,913 
8,422 
9,011 
9,688 
10, 000 
10, 295 
11,192 
11,134 

10, 967 
11,065 
11,173 
11,409 
11,645 
11,572 

11, 799 


3,343 
3,943 

4,766 
5,509 
6,334 
7,156 
8,016 
8, 695 
8,824 
8,412 
7.745 
6,972 
6,445 
5,884 
5,620 
5,706 
5, 621 
5,667 


444 

559 

679 

830 

993 

1,174 

1.420 

1,675 

1, 929 

2,179 

2,418 

2,671 

2,918 

3,208 

3,574 

5,025 

6,169 

7,400 


138 

132 

133 

132 

134 

147 

152 

154 

175 

347 

785 

1,187 

1,198 

1,205 

1,232 

1,268 

1, 252 

1,262 




29,594 
33, 280 


1923 


1924 


36, 445 


1925 




40, 399 


1926 


44, 308 


1927 


48, 070 


1928 


52, 889 


1929 

1930 


15,321 
16, 465 




55, 038 
56, 813 


1931 


17, 347 
17, 572 

17, 771 

18, 503 
19, 813 
21. 502 
23, 313 
24. 607 
26, 296 




57, 357 


1932 -. 

Y933 

1934 

1935 


62" 

316 

794 

1,215 

1,821 


53, 213 
49,957 
51.384 
53, 702 


1936 


56, 903 


1937 . 


61, 944 


1938 

1939 --- 


64, 796 

68, 873 







• Admitted value basis; includes fraternal insurance. These figures are publislied for 306 life insurance 
companies and for fraternal orders in the Spectator Life Insurance Yearbooks as of December 31 of each year. 
June .30 figures were estimated by using the percentages of the total life insurance assets which were held by 
the 49 companies reported on a monthly basis by the Association of Life Insurance Presidents, and published 
in the Bureau of Foreign and Domestic Commerce, Survey of Current Business. 

2 Excludes postal savings deposits. 

Source: Adapted from Hearings before the Temporary National Economic Committee, Part 9, p. 4052. 
Column 1 is from the Spectator Insurance Yearbooks, Life Volume; columns 2, 3, 4, and 6, from the Bureau 
of the Census, Statistical Abstract of the United States; column 5, data for 1937 from a study made by the 
United States Treasury Department, with the other years estimated; column 7, from the Annual Reports 
ofthe Secretary of tlie Treasury. 



CONCENTRATION OF ECONOMIC POWER 



121 



Appendix XIII.^ — Sources and uses of funds of ,58 i7idustrial companies, 1930-39 

[In millions of dollars] 



USES 

1. Capital expenditures 

2. Net new investments 

3. Increase in inventories 

4. Increase in receivables 

f). Increase in marketable se 

curities 

6. Increase in cash 

SOURCES 



gross m- 



7. "Undistributed 

come" 

8. Issuance of common stock. . 

9. Issuance of preferred stock. 

10. Increase in lont^-term debt. 

11. Increase in short-term 

notes, accounts payable, 
and other current lia- 
bilities 

12. Residual 



ANALYSIS OF UNDISTRIBUTED 
GROSS INCOME 

7a. Net income 

7b. Minus, dividends paid 

7c. Plus, depreciation allow- 
ances 



767 
200 
-209 
-145 

-175 
114 



529 

162 

4 

100 



-236 
-2 



719 
699 



371 

66 

-357 

-157 

86 
-154 



-200 
-21 



165 
556 



1932 


1933 


1934 


1935 


1936 


1937 


1938 


1939 


145 


191 


299 


442 


632 


866 


576 


462 


39 


13 


-44 


-0 


13 


36 


6 


36 


-275 


72 


145 


135 


277 


507 


-349 


35 


-193 


-27 


-3 


130 


164 


33 


-52 


83 


-100 


132 


-91 


-113 


-36 


-101 


44 


140 


63 


-162 


' 


149 


-5 


-141 


323 


133 


6 


212 


358 


654 


693 


835 


527 


720 


-11 


-10 


-7 


18 


119 


148 


4 


7 


-7 


-5 


-1 


-33 


-5 


52 


-1 





-117 


-83 


-114 


-60 


-21 


-10 


324 


42 


-125 


66 


88 


177 


236 


156 


-299 


180 


-68 


39 


-9 


-14 


21 


19 


-9 


-58 


-100 


63 


233 


549 


902 


1,077 


420 


713 


298 


241 


269 


323 


669 


742 


393 


531 


405 


390 


393 


428 


460 


500 


500 


537 



10 year 

net 
totals 



4,751 

365 

-19 

-167 

-214 
327 



4,603 

435 

-12 

73 



43 

-102 



4,741 
4,721 



4,582 



Notes. — "Capital expenditures" exclude and "net new investments" include large acquisitions of exist- 
ing fixed property which became part of consolidated net property account. "Increase in inventories" 
represents net increase in book value with certain adjustments. "Undistributed gross income" and "net 
income" excludes certain credits and includes certain charges in the nature of revaluations or capital gains 
or losses applicable to fixed property, investments, inventories, and long-term debt. "Issuance of com- 
mon and preferred stock" and "increase in long-term debt'-' include transactions in reacquired securities 
and net premiums or discounts. "Issuance of common stock" and "dividends paid" exclude stock divi- 
dends. The residual net source reflects principally changes in contingency reserves and miscellaneous 
assets and liabilities. It represents in part, and to an unidentified extent, unexpended gross receipts from 
sales, less expenditures not included in specific uses or deducted from specific sources, and less amounts 
by which funds obtained through liquidation of current assets may be overstated. 

Source: Data compiled by A. B. Hersey, Division of Research and Statistics, Board of Governors of the 
Federal Reserve System. Data are subject to revision. Data for essentially the same sample for 1930-38 
are published in Hearings before the Temporary National Economic Committee, Part 9, pp. 4044-4048. 



122 



CONCENTRATION OF ECONOMIC POWER 



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CONCENTIIATIOX OF ECONOMIC POWER 



123 





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CONCENTRATION OF ECONOMIC POWER 



Appendix XVI. — Income-producing expenditures that offset savings, and gros^ 

national income, 1921-39 

[In millions of dollars] 





Gross 
national 
income 


Income-producing expenditures that offset-saving 




Adjusted 
total 7 


Adjusted 
total as 
percent 
of gross 
national 
income 


Year 


Plant 
and 
equip- 
ment ' 


Private 
housing 
and noili- 

proflt 
construe 

tion2 


Change 
in inven- 
tories 3 


Foreign 
balance ' 


Govern- 
ment * 


Change 
in con- 
sumer 
credit e 


Total 


1921 -. 


63, 751 

64, 295 
74, 784 
75, 161 
79, 686 
84, 813 
82, 708 
86, 167 
89, 984 
79, 764 
63, 901 
47, 446 
46, 217 
55, 839 
61,681 

9 71, 400 
8 79, 400 
8 70, 800 
8 75, 710 


5,233 

5,784 
7,902 
7,650 
8,189 
9,126 
8,777 
8,846 

10, 157 
8,340 
5, 123 
2,799 
2,371 
3,436 
4,349 
5,783 
7,570 
5.389 

9 6, 135 


2,313 

3,801 

4,821 

5,229 

5, 750 

5,535 

5,357 

5,019 

3,761 

2,291 

1, 735 

709 

458 

521 

913 

1, 536. 

1,908 

1,817 

6 2, 270 


47 

514 

2,964 

-1,056 

1,523 

1,246 

308 

102 

2, 146 

-631 

-1,190 

-2, 369 

-1,106 

-1,552 

767 

1,790 

3,072 

-604 

9 990 


1,327 

293 

-91 

530 

199 

-39 

301 

518 

240 

388 

47 

32 

195 

460 

183 

-152 

-13 

1,001 

9 658 


648 

748 

348 

615 

529 

244 

368 

733 

696 

1, 502 

3,784 

2,604 

1,117 

2,271 

2,959 

3,964 

877 

1,922 

9 3, 573 


8 -20 

8 730 
8 1, 046 

311 

842 

648 

217 

821 

987 

-613 

-1,128 

-1,485 

150 

415 

858 

1,355 

891 

9-1,400 

9 900 


9,548 
11, 870 
16, 990 

13, 279 
17, 032 

16, 760 
15, 328 
16, 039 

17, 987 
11, 277 

8,371 
2,290 
2,885 
5,551 
10, 029 

14, 276 
14, 305 
9 8, 150 

9 14, 649 






1922 

1923 

1924 

1925 

1926 

1927 

1928 

1929 

1930 

1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938 

1939 


10, 941 
14, 942 

14, 763 

15, 531 

16, Sr.9 
15, 901 
15,755 

17, 208 
13,961 

9,533 
4,722 
2,647 
4,485 
8,238 
12, 577 
14, 293 
9 10, 612 
9 12, 049 


17.0 
20.0 
19.6 
19.5 
19.9 
19.2 
18.3 
19.1 
17.5 
14.9 
10.0 
5.7 
8.0 
13.4 
17.6 
18.0 
9 15.0 
9 15.9 



1 Estimates by George Terborgh. (See Appendices XVIII-XX, infra.) From "Estimated Expenditures 
for New Durable Goods," in Board of Governors of the Federal Reserve System, Federal Reserve Bulletin, 
September 1939 and February 1940. 

2 Estimates by D. L. Wickens and R. R. Foster, for the National Bureau of Economic Research; the 
Department of Agriculture; and the Department of Commerce. 

3 Principally from Simon Kuznets, Commodity Flow and Capital Formation. National Bureau of Eco- 
nomic Research, N. Y. (1938). 

* Compiled from the Bureau of Foreign and Domestic Commerce, The Balance of International Pay- 
ments, Washington, D. C, various years. 

s This series attempts to measure the difference between the outlays of public bodies that add to the 
community's disposable cash income and the receipts that represent drafts upon disposable cash income. 
Computed by the Board of Governors of the Federal Reserve System. 

8 Estimates for 1923-37 by Rolf Nugent, Consumer Credit and Economic Stability, Russell Sage Found- 
ation, New York, 1939. Other years, by the Board of Governors of the Federal Reserve System. 

' Equal to 60 percent of the current year, plus 40 percent of the preceding year. 

8 Estimated. 

9 Preliminary. 

Source: Testimony by Lauchlin Currie. Hearings Before the Temporary National Economic Committee. 
Savings and Investment, Part 9, pp. 4010-4018, 4122, as revised. Sources and methods were described on 
pp. 4015-4018. The footnotes on sources and methods are condensed from Currie's testimony. 



CONCENTRATION OF ECONOMIC POWER 



125 





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126 



CONCENTRATION OF ECONOMIC POWER 



Appendix XVIII. — Estimated expenditures for new durable producers' goods, 

1919-39 

(PLANT AND EQUIPMENT) 

[In millions of dollars] 



Year 


Total 


Railroads 


Electric 
power 


Tele- 
phones 


Transit 


Other 
utilities 


Mining 
and man- 
ufactur- 
ing 


Agri- 
culture 


Commer- 
cial and 
miscel- 
laneous 


1919 

1920 

1921 

1922 - 

1923 

1924.. 

1925 

1926 

1927 

1928 

1929 

1930 

1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938 

19393 


7,095 
8,327 
5,233 
5.784 
7,902 
7,650 
8,189 
9,126 
8, 777 
8,846 
10, 157 
8,340 
5,123 
2,799 
2,371 
3,436 
4,349 
5,783 
7, 570 
5,389 
6, 135 


374 
630 
550 
434 

1,077 
901 
728 
883 
751 
673 
840 
865 
360 
164 
101 
218 
166 
306 
525 
238 
362 


260 
437 
276 
395 
723 
827 
766 
704 
722 
679 
774 
835 
538 
257 
113 
126 
166 
251 
400 
422 
373 


132 
203 
229 
265 
318 
385 
385 
404 
397 
457 
615 
612 
408 
253 
171 
185 
206 
261 
348 
318 
333 


123 
162 
100 
151 
180 
133 
123 
116 
130 
135 
135 
124 
132 
61 
46 
78 
117 
109 
101 
83 
107 


155 
181 
137 
236 
245 
355 
300 
380 
427 
348 
369 
298 
243 
127 
57 
73 
86 
135 
162 
110 
135 


3,121 
3,538 
2,034 
2,169 
2,680 
2,352 
2,726 
3,169 
2,854 
3,052 
3, 596 
2, 541 
1,435 
930 
992 
1,460 
1,807 
2,403 
3,122 
1,995 
2,425 


1, 237 
1,376 
556 
575 
750 
704 
800 
845 
907 
901 
992 
730 
411 
191 
234 
356 
591 
729 
919 
764 
695 


1 1,693 

1 1,800 

1 1,351 

1,559 

1,929 

1,993 

2,361 

2,625 

2, 589 

2,601 

2, 836 

2,335 

1,596 

816 

657 

940 

1,210 

1,589 

1,993 

1,459 

1, 705 



> Excludes ships built for the Emergency Fleet Corporation. 
' Figures for 1939 are preliminary. 

Source: Estimates by George Terborgh, Board of Governors of the Federal Reserve System, Federal 
Reserve Bulletin, September 1939 and February 1940. 



CONCENTRATION OF ECONOMIC POWER 227 

Appendix XIX.^ — ■Estimated expenditures for new durable producers' goods, 1919-30 

(PLANT) 
[In millions of dollars] 



Year 


Total 


Rail- 
roads 


Electric 
power 


Tele- 
phones 


Transit 


Other 
utilities 


Mining 
and 
manufac- 
turing 


Agricul- 
ture 


Commer- 
cial and 
miscel- 
laneous 


1919 

1920- 

1921 

1922 

1923 -. 

1924 

1925 

1926 

1927 

1928 

1929 

1930 

1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938 

1939' 


3,166 
3,738 
2,475 
2,644 
3,280 
3,307 
3,591 
4,185 
4,133 
4,103 
4,562 
3,768 
2,182 
1,192 
867 
1,129 
1, 258 
1, 650 
2,294 
1,776 
1,851 


143 
243 
212 
175 
361 
382 
373 
492 
447 
438 
503 
521 
284 
126 

85 
122 

83 
139 
188 
117 
152 


156 
262 
163 
229 
412 
463 
421 
380 
383 
353 
387 
409 
258 
121 
52 
57 
73 
108 
172 
182 
160 


64 

109 

90 

107 

143 

177 

192 

206 

196 

227 

328 

310 

154 

80 

42 

44 

48 

62 

100 

88 

90 


63 

82 
59 
85 
74 
56 
52 
51 
77 
90 
82 
So 
69 
29 
21 
30 
40 
45 
39 
41 
54 


113 

122 

93 

157 

166 

238 

199 

239 

285 

227 

256 

Kv) 

174 

86 

35 

47 

57 

92 

117 

72 

90 


1,497 

1,753 

1,013 

976 

1,049 

908 

1,036 

1,320 

1,171 

1,227 

1,441 

1, C'?7 

515 

387 

373 

524 

552 

728 

1,053 

755 

775 


545 
510 
245 
270 
340 
322 
328 
320 
368 
360 
379 
223 
146 
74 
104 
115 
180 
187 
222 
182 
175 


585 
657 
600 
645 
735 
761 
990 
1,177 
1,206 
1,181 
1,186 
997 
582 
289 
155 
190 
225 
289 
403 
339 
355 



Appendix XX. — Estimated expenditures for yiew durable producers' goods, 1919-39 

(EQUIPMENT) 
[In millions of dollars] 



1919- 
1920- 
1921- 
1922- 
1923- 
1924- 
1925- 
1926- 
1927- 
1928- 
1929.. 
1930- 
1931- 
1932-. 
1933- 
1934- 
1935- . 
1936- 
1937- 
1938- 
19391 



3,929 


231 


4,589 


387 


2,758 


338 


3,140 


259 


4,622 


716 


4,343 


519 


4,598 


355 


4,941 


391 


4,644 


304 


4,743 


235 


5,595 


337 


4,572 


344 


2,941 


76 


1,607 


38 


1,504 


10 


2,307 


96 


3,091 


83 


4,133 


167 


5,276 


337 


3,613 


121 


4,284 


210 



104 

175 
113 
166 
311 
364 
345 
324 
339 
326 
387 
426 
280 
136 
61 
69 
93 
143 
228 
240 
213 



68 


60 


42 


1,624 


692 


94 


80 


59 


1,785 


866 


139 


41 


44 


1,021 


311 


158 


66 


79 


1,193 


305 


175 


106 


79 


1, 631 


410 


208 


77 


117 


1,444 


382 


193 


71 


101 


1,690 


472 


198 


65 


141 


1,849 


525 


201 


53 


142 


1,683 


539 


230 


45 


121 


1,825 


541 


287 


53 


113 


2,155 


613 


302 


39 


112 


1, 504 


507 


254 


63 


69 


920 


265 


173 


32 


41 


543 


117 


129 


25 


22 


619 


130 


141 


48 


26 


936 


241 


158 


77 


29 


1,255 


411 


199 


84 


43 


1,675 


542 


248 


62 


45 


2,069 


697 


230 


42 


38 


1,240 


582 


243 


53 


45 


1,650 


520 



2 1, 108 

i 1, 143 

2 751 

914 

1,194 

1,232 

1,371 

1,448 

1,383 

1,420 

1,650 

1,338 

1,014 

527 

502 

750 

985 

1,300 

1,590 

1,120 

1,350 



1 Figm-es for 1939 are preliminary. 

2 Excludes ships built for the Emergency Fleet Corporation. 

Source: Estimates by George Terborgh, Board of Governors of the Federal Reserve System, Federal 
Reserve Bulletin, September 1939, and February 1940. 



INDEX 



Page 

Agricultural Economics, Bureau of: Technologj' on the Farm, cited 76 

Agriculture, mechanization of 75, 104 

Airplanes and investment 52-53 

Allen, F. L., Lords of Creation, cited 90 

Altman, Oscar L., cited 51, 53, 56, 65 

Arnistrong committee: Report on Investigation of Life Insurance Com- 
panies, cited 36 

Arnold, Thurman: The Bottlenecks of Business, cited 101 

Automobiles and investment 52, 54, 103, 104 

Babson, Roger W. : Why the Pessimism?, cited 91 

Banks: 

Assets of 120 

Credit, creation of 7-8 

Investment banking 61-65, 101-102 

Loans of 60-61 

Management of 37-38 

Savings through 34-35 

Barriger, John W., Ill, cited 53 

Bella, James A., cited 39 

Bell, Spurgeon: Productivity, Wages, and National Income, cited 99 

Bell Telephone System: 

Internal financing of 54-55, 122 

Private placement of investment 64 

Berle, A. A., Jr., cited 8 

Beryllium industry 101 

Best, Alfred, cited 43 

Buckner, Thomas D., cited 37, 45 

Bureaucracy and business 91 

Burr, Anna R . : Portrait of a Banker, cited 91 

Business cycle. (See Income, flow of.) 

Business enterprises, concentration of savings b}' 20-24 

Capital formation: 

Amount of 13, 110, 123 

Types of 123 

Capital gains and losses 12, 17-19 

Capital goods. (See also Investment) : 

Price index of 98 

Productivit}^ of. (See Productivitj'.) 
Capital markets: 

Bias of 30-31 

Investment, effect on 101-102 

Role of, in flow of savings to investment 29-32 

Chamberlin, Edward: The theory of Monopolistic Competition, cited 101 

Chawner, L. J.: Residential Building, cited 78, £6 

Civil Liberties and Violations of the Rights of Labor, Hearings on (Senate), 

cited 97 

Colm, Gerhard, and Fritz Lehmann: Economic Consequences of Recent 

American Tax Policy, cited 27 

Colm, Gerhard, and Helen Tarasov: Who Pays the Taxes?, cited 27 

Commerce Clearing House : Tax S^ystems, cited 28 

Concentration : 

Causes of 16 

Financial i nstitutions and savings concentration 33-50 

Geographic 33-34 

Investment 86-92, 109 

Saving 15-28, 108 

129 



130 INDEX 

Page 

Confidence and investment 94 

Construction: 

Public 25, 79-82, 104, 111 

Residential. {See Housing.) 

Consumer credit 82-83, 104, 124 

'Consumption : 

Amount of, by years 68 

Definition of 5-6 

Encouragement of 109 

InvestmcBt and 68-69, 105 

Copeland, M. A., and Walter Salant: Studies in Income and Wealth, 

cited 6 

Corporations: savings by 21-23 

Cost-price relationships and investment 99-100 

Creamer, Danief: Is Industry Decentralizing? cited 97 

Credit : IBank's creation of 7-8 

Currie, Lauchlin, cited 4-5, 14, 72, 75, 82, 104, 124 

Davenport, Donald H., cited 29, 33 

Davis, Shelby Cullom: The Investment Decisions of Industry, cited 91, 92 

Debt, governmental 81-82 

Defense expenditures: 

Banlv credit and 8 

Investment and 94, 105 

Deflation 4-5 

Dennison, H. S., Lincoln Filene, R. E. Flanders, and M. E. Leeds: Toward 

Full Employment, cited 28 

Depreciation: 

Amount of 110, 113 

Calculation of 12 

Deduction of, in calculating income 3, 11, 20, 69-70 

Productive capacity and 67, 69-71 

Use of allowances for 20-21, 57-58, 67, 71 

Dickens, Paul D.: America's Direct Investments in Foreign Countries, 

cited 83, 85 

Dis-saving and investment 69 

Dividends: source of concentration 18 

Du Pont de Nemours & Co 58 

Ecker, Frederick H., cited 47 

Ellickson, .T. C: Savings in Land Ownership, cited 12 

Employment : and profitability of investment 93 

Fabricant, Solomon: Capital Consumption and Adjustment, cited 57, 

70,88,89,93,98, 110 
Pederal Communications Commission: Investigation of the Telephone 

Industry in the United States, cited 55, 122 

Federal Coordinator of Transportation: Public Aids to Transportation, 

cited 103 

T'ederal Reserve System, Board of Governors of the: 

Annual Report, 1936, cited 59 

Annual Report, 1937, cited 62 

Federal Trade Commission: Report on the Automobile Industry, cited 102 

Fiduciaries: 

Income of 19-20, 111-112 

Savings, concentration of 19-20 

Finance, Committee on (Senate): Hearings on Revenue Act of 1935, cited_ 16 

Financial corporations: Savings by 23 

Financial institutions {see also Insurance): 

Function of 4 

Savings through 31-33, 49 

Financial structure: Effect on investment 101 

Foreign and Domestic Commerce, Bureau of: 

Balance of International Paj-ments of the LTnited States, cited 83, 124 

Construction Activitv in the United States, cited 25 

Survey of Current Business, cited 17, 32, 44, 57, 110, 111 

Foreign bonds or securities, sale of: Hearings on (Senate), cited 30, 85 

Foreign investment 83-86, 104 

Fortune Magazine: The 30,000 Managers, cited 36, 89 

Frye, L. Arnold, cited 41 



INI>EX 



131 



Page 

Future, knowledge of, and investment decisions 93 

General Electric Co _^._ 52 

General Motors Corporation 52, 58 

Gesell, Gerhard, and Ernest Howe: Study of Legal Reserve Life Insurance 

Companies, cited 43 

Gill, N. N.: The Municipal Research Bureau, cited 36 

Glass industry 101 

Goldenthal, A. J.: Concentration and Composition of Individual Incomes, 

1918-37, cited 17-18, 20, 28 

Goldsmith, R. W., R. G. Parmelee, J. C. Gorham, and others: Distribution 

of Ownership in the 200 Largest Non-Financial Corporations, cited 23 

Goldsmith, R. W., and Walter Salant: "Volume and Components of Sav- 
ing in the United States," Studies in Income and Wealth, cited-- 12, 24, 31, 110 

Government bonds 41, 44-45, 59 

Hansen, Alvin H., cited 8, 71, 100, 104 

Hart, A. G.: Anticipations, Business Planning, and the Cvcle, cited 90 

Hersey, A. B., cited " 53, 121 

Hicks, J. R.: Value and Capital, cited 90, 100 

Highwav construction 80-81, 92 

Hoarding 4-5, 7-8, 50, 108 

Hoffman, M. H.: Rate of Return of New Mortgage Loans Made by the 

Bowery Savings Bank: cited 59 

Holthausen, D., M. L. Merriam, and Rolf Nugent: The Volume of Con- 
sumer Credit: cited 83 

Horton, D. C: Regional Trends of Farm Mortgage Interest Rates, 

1 910-39, cited 59, 60 

Housing 42, 76-79, 96-97, 101, 104, 124 

Howe, Ernest, cited 45-46 

Hynning, Clifford J.: Taxation of Corporate Enterprise, cited 23 

Income: 

Alternative uses of 4-5 

Amount of: 

Aggregate, bj' years 13-14, 124 

By income classes 17 

Concentration of 17-19 

Definition of 3, 11 

Factors affecting 1, 10, 105-107 

Fiduciarv 111-112 

Flow of 3-10, 68, 107-108 

Savings: Percentage of 13-14 

Installment selling 83 

Insurance: 

Assets of companies 120 

Cash holdings of com.panies 44 

Concentration and 33-50 

Investments of companies 3&-48 

Management of companies 36-39 

Private placements of securities and 62-65 

Savings and 26-27. 3 1 -?3 

Interest, rates of: 

Inducement to save, as 26-27 

Policy loans of insurance companies 45-46 

Recent trends of 58-60 

Yield on government and priva te securities 44-45 

Internal financing of business 50-58, 121-1 22 

Internal Revenue, Bureau of: Statistics of Income, cited 19, 20, 89, 1 1 1-1 19 

Investment: 

Amount of 13, 68, 70-72, 125-127 

Banks and 60-65 

Components of 6, 72-86, 123 

Concentration of, in business 86-92 

Criteria governing decisions on 90-92 

Definitions of 5-6,67,69,72 

Direct 62-65 

Factors governing level of 92-104 

Flow of savings to 4,29-31, 108 



132 INDEX 

Investments — Continued. Page 

Interruption of 6, 68 

Prosperity of 1920's and 104-106 

Roles of _1 67 

Terminology of 2 

Usefulness versus, profitability of 108-109 

Jackson, Eobert H., cited 16 

Janeway, Eliot, cited 20 

Kaldor, N. : The Equilibrium of the Firm, cited 90 

Kennedy, Edward D. : Dividends to Pay, cited 23 

Kevnes, J. M.: General Theory of Employment, Interest, and Money, 

cited 1 - I _ 7, 9 

Knight, F. H.: Risk, Uncertainty, and Profit, cited 26 

Koch, A. R.: The Flow of Funds Through Selected Large Petroleum Com- 
panies, 1921-39, and the Resultant Changes in Financial Structure and 

Capital and Credit Requirements, cited 54, 61 

Kuznets, Simon: 

Commodity Flow and Capital Formation in the Recent Recovery and 

Decline,'cited 13, 71, 73, 110, 123, 124 

National Income and Capital Formation, cited 13, 70, 71, 73, 110, 123 

Labor Statistics, Bureau of: Building Construction, cited 79 

Lange, Oskar, and F. M. Taylor: On the Economic Theory of Socialism, 

cited 7 

Large businesses. (See Concentration.) 

League of Nations Committee of Statistical Experts; Statistics Relating to 

Capital Formation, cited 11 

Levin, Maurice, H. G. Moulton, and Clark Warburton; America's Capacity 

to Consume, cited 110 

Lewis, Ben W.: The Corporate Entrepreneur, cited 90 

Lewis, Clcona: America's Stake in International Investments, cited 83, 85. 92 

Lough, W. H.: High Level Consumption, cited 110 

Lubin, Isador, cited 78 

McLaughlin, John G., cited 47-48 

MacMahon, A. W., and J. D. Millett: Federal Administrators, cited 36 

Machinery and Allied Products Institute: Saving and Investment in the 

American p]nterprise System, cited 94 

Managerial improvements 75 

Managers of business 36-39, 89-90 

Mannheim, Karl: Man and Society in an Age of Reconstruction, cited 90 

Manuel, Ralph W., cited 3, 8 

"Maturity," economic 95 

Mav, George O.: Relationship of Depreciation Provisions to Replacement, 

cited 20, 21 

Merwin, C. L.: Financial Characteristics of American Manufacturing Cor- 
porations, cited 55-56 

Money: 

Banks' creation of 7-8 

Function of 3 

Monopolies and the level of investment 101-102, 109 

Monsanto Chemical Co 58 

Moody's Investors Service, cited 25, 57, 62. 81 

Mortgages: 

Farm 48 

Insurance companies' investment in 47 48 

Urban 47-48, 59 

Moulton, H. G., G. W. Edwards, J. D. Magee, and Cleona Lewis: Capital 

Expansion, Employment and Economic Stal^ihty, cited 25, 81, 94 

National Resources Committee: 

Consumer Expenditures in the United States, cited 6, 11, 16, 17, 110 

Prolilems of a Changing Population, cited 78, 96 

Residenti.al Building, cited 7S, 96 

Structure of the American Economy, cited 34, 87-90, 97, 100 

New industries and investment 94-95. 103-104 

Nugent, Rolf: Consumer Credit and Economic Stat)ility, cited 82, 83, 124 

Oil companies : Monopolistic practices and investmejit 102 

O' Mahoney, Senator Joseph C., cited 35 

Patents and the level of investment -- 101 



INDEX ]^33 

Pigoii, A. C; Page 

Economics of Welfare, cited 69 

Socialism versus Capitalism, cited 6, 16 

Plant and equipment outlays 74-76, 124, 126-127 

Population and investment 95-97 

Prices : 

Flexibility of 5, 100 

Level of: Effect on profits 93, 98 

Private placen\ent of securities 62-65 

Productivity and investment 97-99 

Profits and "investment 92-93. 108-109 

Progress : Jerkiness of 95 

Property : Source of concentration 16, 18 

Pros])erit\ of the twenties : Factors responsible for 104-106 

Public utilities: Depression outlays of 76 

Public Works Administration: America Builds, The Record of P. W. A., 

cited 81 

Pujo committee: Report on life insurance companies, cited 36 

Purchasing power. (See Income, flow of.) 

Railroads, holding companies, and afiftliated companies, Hearings on 

(Senate) , cited 1 30 

Railroad outlays 76, 94 

References to literature and sources. (See name of author or agency.) 

Rentschler, F. B., cited _./. 52-53 

Replacement (See Depreciation.) 

Rol3ertson, D. H. Banking Policy and the Price Level, cited 5,8 

Rogers, Glen E., cited 48 

Rosten, Leo C: Washington Press Correspondents, cited 36 

Sanders, William, Harold Vatter, Harold Wein, and P. R. Nehemkis, Jr.: 

Some Problems of Small Business, cited 102 

Saving: 

Amount of: 

Business-enterprise 52-57, 110, 113-119 

Bv income classes 3-4, 16 

By years 13, 1 10 

Fiduciarv 19 

Government 24-25, 1 10-1 1 1 

In institutions 120 

Business-enterprise 20-24, 51-58, 110 

Components of 15, 1 10-1 1 1 

Concentration of sources of 15-25, 107-108 

Data available 2, 1 1-13 

Definitions of 5-6, 1 1-12, 24, 1 1 1 

Desirability of 109 

Factors governing rate of 9, 25-28, 107 

Flow of, to investment- 4, 29-31, 108 

Funds of institutions of 120 

Governmental 24-25, 110-1 1 1 

Insurance and 26-27 

Internal financing and 50-58 

Offsets to 14, 72, 108, 124 

Problems concerning 11 

Rate of interest as a stimulus to 26-27 

Taxation and 25-28 

Saving and investment: 

Materials for study available 2 

Problem, nature of 1 

Schultz, J. W.: Capital Rationing, Uncertaintv, and Farm Tenancv, 

cited 1 -- 104 

Securities and Exchange Commission: 

Reports on investment trusts and investment companies, cited 30 

Reports on protective and reorganization committees, cited 30, 41 

Simons, Henrv: A Positive Program for Laissez-Faire, cited 8 

Sloan, Alfred P., Jr., cited 52 



134 I^^DEX 

Small business: Page 

Loan policies and : 46, 61 

Oil pipe lines and 102 

Savings of 22 

Snj'der, Carl : Capitalism the Creator, cited 15 

Spending. (.See Income, flow of) 

Standard of living: factors in ... 107 

Stedman, Jolin W., cited 37, 43 

Stettinius, Edward R., cited 52 

Stock Exchange practices, hearings on (Senate), cited 30 

Stone, Peter A., and R. Harold Denton: Toward More Housing, cited 76, 78 

Subsidies and investment 102-103 

Tacuber, Conrad, cited 97 

Taitel, Martin: Profits, Productive Activities, and New Investment, cited 18 

Taussig, F. W., and C. S. Joslyn: American Business Leaders, a Study in 

Social Origin and Social Stratification , cited 90 

Taxation and saving 25-28 

Technical advances and investment 98-99, 103-104 

Temporary National Economic Committee: citations of publications of 
{ste also name of witness or author) : 
Hearings: 

Part 2 101 

Part 3 101 

Part 4 30. 35, 38, 39, 43, 44 

Part 5 101 

Part 9 5, 8, 9, 

14. 23, 29, 31-35, 40, 41, 49, 51-54, 56, 57, 60, 68, 70-73, 75, 76, 
80, 82, 94, 96, 101, 104, 105, 111, 120, 121, 124. 

Part 10 35, 46 

Part 10-A 27,35, 39,43-45,47,48,63, 6i 

Part 11 42, 59, 77, 79 

Part 12 35, 38 

Part 13 35-37 

Part 14 102 

Part 14-A 23. 102 

Part 15 102 

Part 24 64,65 

Part 28 35, 37, 42, 43-48, 59, 60, 64 

Part 30 76, 103, 104 

Monographs: 

No. 3: Who Pays the Taxes 2, 27 

No. 4: Concentration and Composition of Individual incomes, 

1918-37 2, 17, 18, 28 

No. 6: Exj)ort Prices and Export Cartels 83 

No. 8: Toward More Housing 78 

No. 9 : Taxation of Corporate Enterprise 23 

No. 12: Profits, Productive Activities and New Investment-- 2, 18,91 
No. 15: Financial Characteristics of American Manufacturing 

Corporations 2, 55, 56 

No. 17: Some Prol)lems of Small Business 102 

No. 20 : Taxation, Recover}^, and Defense 2 

No. 28: Study of Legal Reserve Life Insurance Companies 2, 43 

No. 29: Distribution of Ownership in the 200 Largest Non- 
Financial Corporations 23 

Terborgh, George, cited 57,71,87, 124-127 

Terminology, difficulties with 2 

Thornthwaite, C. W.: Internal Migration in the United States, cited 97 

Treasury Department: 

Annual Report of the Secretary, 1939, cited 82 

Bulletin, September 1940, cited 102 

Trusts: Concentration of savings by 19-20 

Twenties: Factors responsible for prosperity of 104-106 

Twentieth Centur}^ Fund: Facing the Tax Problem, cited 24, 27 

United Aircraft Corporation 52-53 

United States Steel Corporation 52 



INDEX 135 

Page 

Utility corporations, hearings on (Senate) , cited 30 

"Venture capital" 58 

Warbiirton, Clark : The Trend of Savings, cited 110 

Wavs and Means, Committee on (House) : Hearings on the Revenue Act 

of 1936, cited 23 

Wedgewood, Josiah: The Pieonomics of Inheritance, cited 16 

Weintraub, David: Effect of Current and Pi-ospective Technological De- 
velopments Upon Capital Formation, cited 75, 98, 99 

Who's Who, cited 36 

Who's Who in Commerce and Industry, cited 36 

Wickens, D. L., and R. K. Foster, cited 124 

Wicksell, Knut: Lectures on Political Economy, cited 4 

Works Progress Administration: Production, P^mployment, and Produc- 
tivity in 59 Manufacturing Industries, cited 98,99 

Young, Owen D., cited 52 

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