Friedrich A. Lutz

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Corporate Cash Balances, 1914-43: Manufacturing and Trade
Volume Author/Editor: Friedrich A. Lutz
Volume Publisher: NBER
Volume ISBN: 0-870-14136-8
Volume URL: http://www.nber.org/books/lutz45-1
Publication Date: 1945
Chapter Title: The Movement of Corporate Cash Balances
Chapter Author: Friedrich A. Lutz
Chapter URL: http://www.nber.org/chapters/c4817
Chapter pages in book: (p. 9 - 16)•1.
THE MOVEMENT OF
CORPORATE CASH BALANCES
FROM 1914 TO 1929 THE TOTAL MEANS of payment in the United
States rose almost without interruption; contraction then occurred
until 1933; and this was followed by a fairly continuous rise, which
has been accelerated sharply during the present war period.
Against this background of the movement of the total volume of
money will the development of corporate cash balances be studied
in this chapter.
The most comprehensive figures on corporate cash balances are
those compiled from corporation income tax returns by the Bureau
of Internal Revenue and published annually inStatisticsof
Income; these data, however, are available only since 1926. Cash
balances of all reporting' nonfinancial corporations (numbering
from 260,000 to 320,000) and of all reporting manufacturing
corporations (numbering from 80,000 to 85,000) are compared
on Chart 1 with a series representing the total means of payment.2
This, last series includes demand and time deposits (with the
exception of government deposits) of all banks (including savings
banks) and currency in circulation outside the banks; it has been
selected for the purpose of comparison since corporations hold
their cash balances in the form of demand 'and time deposits as
well as in the form of currency. The chart shows clearly that the
1Thatis,all corporations submitting balance sheets. Not all corporations subject
to the corporation income tax submit balance sheets to the Treasury. Throughout
the period between 1926 and 1941 the percentage of the number of returns with bal-
ance sheets to the total number of returns fluctuated between 86.7 and 89.1 percent,
with the exception of 1926, when the percentage rate was 78.9, and of 1931, when it
was 82.9. The ratio of the gross receipts of those corporations which did not submit
balance sheets to the gross receipts of all reporting corporations fluctuated during the
thirties between 1.7 percent (1937) and 4.9 percent (1936). Because of the discon-
tinuance of the privilege of filing consolidated returns, the figures from 1935 onward
are not strictly comparable with those for earlier years.
2 The sources and description of the data used in all the charts in this study are
given in Appendix E.
910 Corporate Cash Balances, 1914-43
three curves have the same Chart 1—YEAR-END FICURES FOR TOTAL
pattern; that is, their year-MEANS OF PAYMENT AND CORPORATE
CASH BALANCES by-year direction or move-
ment and also their broad
swings are similar.3
Not only the direction
of the movement of the
three series but also the
amplitudeissimilar,at
least up to 1936. The simi-
larity of amplitude is re-
vealed by Chart 2, which
presents the ratios of the
cash balances of both non-
financial and manufactur-
ing corporationstothe
total means of payment.
Between 1926 and 1936
theratios are relatively
stable, that of manufactur-
ing corporations varying
between 5.8percentand
6.6 percent, and that of
nonfinancialcorporations
fluctuating between12.3
percent and 13.6 percent.
The fluctuations of the
I927 1930 1935 1940
ratios seem to be entirely
noncyclical; in other words, the movements of the cash balances of
all nonfinancial and of all manufacturing corporations reflect sur-
prisingly well the cyclical ups and downs of the total means of
payment over the years from 1926 through 1936. Through the
latter part of the boom of the twenties, through the great depres-
BExceptionsto the similarity in year-to-year movements are 1929, when total
means of payment cash balances of manufacturing corporations fell whereas cash
balances of nonfinancial corporations continued to rise, and 1930, when cash balances
of manufacturing corporations rose whereas the two other curves declined.In 1937
the decrease in total means of payment was much less marked than that of cash
balances.
Cash
Balances
Means ofMovement of CorporateCashBalances 11
sion with its severe contraction ofChart 2—RATIO OF YEAR-END
bank deposits, and through theCORPORATE CASH BALANCES TO
TOTAL MEANS OF PAYMENT following revival, tne corporations
World
neithergained cash at the expense 20 ,
_________
Waril
ofother cash holders nor lost cash
to them to an'7 marked
15 A!I Reporting Nonfinancial Corporations -15
J
Between 1937 and 1940 the
ratiosincreased —from11.9 to
10 -10
AllReporting Manufacturing Corporations
14.7percent in the case of all non-
financial corporations, and from
5
5.9to8.2 percent in the case of
manufacturing corporations. This
1927 1930 1935
period,however, is too short to be
used as a basis for drawing any far-reaching conclusions. It should
be noticed that the greatest increase occurs in the year 1940 and
probably reflects special circumstances due to the war.
For an analysis of the reasons for the relative stability of the
ratio of cash balances of nonfinancial and manufacturing corpora-
tions to the total means of payment, a comparison of the cash
balances of all business enterprises, grouped together, with the
cash balances of consumers would be desirable.But since the
published statistical material does not lend itself to such a com-
parison, the contrast made here is between the cash balances of
nonfinancial corporations and the rest of the cash balances. The
latter include cash balances of financial corporations, noncorporate
enterprises, and consumers.Within this group, however, the
cash balances of consumers undoubtedly dominate.4 If this is so,
it seems at first glance reasonable to expect that the total cash
balances of financial corporations, noncorporate enterprises, and
consumers will behave differently from the cashbalances of
4The cash balances of nonfinancial corporations up to 1941 never amounted to
more than 14.7 percent of the total means of payment. This leavesroughly 85 per-
cent for noncorporate enterprises, financial corporations, andindividuals.If the
assumptionmade that noncorporate enterprises held the same amount of cash bal-
ances as corporate enterprises (an estimate which iscertainly too high), they would
have had roughly one-sixth of this 85 percent. On the basis of figures for demand
deposits held by financial corporations, published in the Federal Reserve Bulletin
of May 1944 (p. 432), cash balances of such corporations can be estimated at slightly
more than 6 percent of the total meansof payment in the hands of noncorporate
enterprises, financial corporations, and individuals. Thus the first two of these three
groups did not hold more than one-quarter ofall the balances in the hands of the
three groups combined. The statement in text therefore seems justified.12 Corporate Cash Balances, 1914.43
corporate enterprises(excluding financial corporations).The
aggregate of business enterprises during business contractions
liquidate part of their inventories to consumers and increase them
during boom periods. On the other hand, they diminish their
wage and dividend payments in recession years and increase them
in periods of business expansion. On this account, therefore, they
are likely to receive more cash from consumers than they pay out
to them during recession and vice versa during revival. It follows
that at first during recession they increase their cash holdings at
the expense of consumers. But this additional cash is not likely
to remain in the hands of business enterprises. As long as they
have bank debts they will use the cash to pay back the debts
either because they are pressed by the banks for repayment or
because repayment is made voluntarily in order to save interest
charges. The additional cash then disappears to the extent to
which it is used to reduce bank debts. Part of the additional cash
may also find its way back to consumers through the retirement
of long-term security issues.Moreover, faced with a smaller
volume of business, enterprises do not need the same amount of
money to carry on transactions and are therefore able to use
part of the cash which was formerly required for transaction
purposes to reduce their debts still further.5 The reverse is true
in business expansion.Such behavior tends to keep stable the
ratio of business cash balances to the total means of payment.6
As long as deposits are either canceled or created through the
reduction or the increase, respectively, in bank borrowing, the
stability of the ratio of corporate cash balances to the total means
of payment is explainable even though the aggregate of business
enterprises tend to pay out more cash to consumers than they
receive from them in an upswing and tend to receive more than
they pay out in a recession. As will be indicated in Chapter 9, it is
5 Of course, it is possible that companies may choose to keep the same amount of
money as before because of increased uncertainty concerning the future, which
usually accompanies depressions.
6 Business in recession, may, of course, choose to have a higher ratio of cash to
expenditures than in revival, just as consumers may increase the ratio of their cash
balances to their expenditures during recession.If the assumption is made that the
expenditures of consumers as a whole fall in recession in about the same proportion
as the expenditures of business enterprise, then a relatively stable ratio of business
cash balances to the total means of payment indicates that if business and consumers
increase the ratio of cash to expenditures in recession (as is undoubtedly the case),
they do so in roughly the same proportion.Movement of Corporate Cash Balances 13
possiblethat the picture will be different if bank deposits are
backed mainly by securities.
GROUPS OF CORPORATIONS
The relative movement of cash balances cannot be expected to be
similar for all the subgroups into which corporations may be
divided. For an analysis by subgroups, it is not possible to make
use of Statistics of Income data for industries, since the figures
are not comparable for successive years because of the frequent
reclassification of companies.7 However, a comparison of our
samples of large and of medium-sized and small manufacturing
corporations with the total for all reporting manufacturing cor-
porations as given in Statistics of Income indicates clearly the wide
variation in the behavior of cash balances of different groups of
corporations.
For such a comparison we have computed indexes (1926-29=
100) for cash balances of large, of medium and small, and of all
reporting manufacturing corporations, as shown on Chart 3. An
index of the total means of payment also is presented on the chart.
The straight lines for the three series excluding all manufacturing
corporations are trend lines based on data for the period 19 19-39;
for the all manufacturing series, the trend is based on the years
1926-39. Four significant facts are revealed by the comparison.
(1) The trend line for cash balances of large corporations,
based on the interwar period, is steeper than that for total means
of payment and also that for all reporting manufacturing corpora-
tions. This can be accounted for in part by the growing importance
in the economy of the large manufacturing corporations in the
sample. Of the 78 companies which constitute our sample of large
corporations shown in Chart 3, 45 publish sales figures. Since the
cash balances of these 45 companies show, on the whole, the same
movements as those of the 78 (see Chart 4), the smaller group
can be considered representative of the larger sample.If the
sales of the 45 companies are compared with the value of output
of the entire manufacturing, industry (as given by the biennial
census of manufactures), the growing relative importance of the
7SeeStatistics of Income for 1934, Part 2, p. 4; and J. F. S. S. Burr, and
G. M. Peterson, "Income Forecasting by the Use of Statistics of Income Data," Review
of Economic Statistics, Vol. XI (1929) pp. 171-96.14 Corporate Cash Balances, 1914-43
Chart 3—INDEXES OF YEAR-END CASH BALANCES OF MANU-
FACTURING CORPORATIONS AND OF TOTAL MEANS OF
PAYMENT
World World
Wan Waril
I I I I I I I I I I I I ' I I
Cash Balances, 78 Large Manufacturing Co porationsI I
(SamplA)
210
Total Means of Payment
CashBalances, All Reporting
Manufacturing Corporalions
I
Manufacturing/
Cash Balances, Medium-Sized and Small
1111 1.1 I II.
____________________________________________________________ _________________________________________________________ _______________________
1915 1920 1925 1930 1935 940
Cashbalances of our sample of large manufacturing corporations show
a cyclical influence in the early thirties only in so far as their increase
is retarded; balances of other groups of corporations decline. Grow-
ing importance in the economy of the large corporations in our sample
is indicated by the steeper trend of their cash balances.Movement of Corporate Cash Balances 15
Chart4—YEAR-ENDCASH BALANCES OF SAMPLES OF LARGE MANU-
FACTURING CORPORATIONS
large corporations of the sample is reflected by the more rapid
rise of their sales. The 1937-39 average of the value of output
of manufacturing industry as a whole was only 15.5percenthigher
than the 1919-21 average, whereas the corresponding increase for
the sales of our sample of 45 large manufacturing corporations
was more than 53 percent. It is worth pointing out here that at
the end of the interwar period cash balances of large manufactur-
ing corporations were higher in relation to sales than at the begin-
ning, a fact which will be considered later.
(2) The trend of the cash balances of all reporting manufac-
turing corporations is not much different from that of the total
means of payment. This is, of course, simply another way of
saying that the ratio of the cash balances of these corporations
to the total means of payment is very stable.
It should be emphasized that the trend of the cash balances of
all reporting manufacturing corporations shows a greater rise than
that of the value of product of manufacturing industryas given by
the census. Although the latter includes noncorporate enterprise,
the bulk of the total output is produced by corporations. There-
fore, the conclusion that manufacturing enterprises asa whole in16 CorporateCash Balances,
the period 1926-39 show a tendency to increase their cash balances
at a greater rate than their output seems justified.
(3) The horizontal trend of the cash balances of the sample
of the medium and small corporations reflects the declining relative
importance of these companies in the economy. For this group of
corporations, also, the increase in cash balances during the period
studied is greater than that for sales.
(4) The four curves show a marked dissimilarity, not only
with respect to their trends but also with respect to th'eir cyclical
movements. The most striking difference is that the cash balances
of our sample of large manufacturing corporations in the early
thirties do not differ much from their predepression level, whereas
the three other curves show a decline in the depression years, with
the cash balances of medium and small corporations decreasing
even more than those of all reporting companies.
SUMMARY
(1) The cash balances of the corporate universe follow the general cyclical
pattern shown by the total means of payment.
(2) The ratio of cash balances of all corporations to the total means of pay-
ment is relatively stable through recession and upswing in the period
from 1926 through 1936. No cyclical movement is discernible.
(3) Cash balances of all groups show a tendency to increase more rapidly
than output (sales).
(4) Cash balances of different groups of corporations within the corporate
universe show different movements. Their trends reflect the changing
importance of the groups within the whole. Their cyclical movements
vary widely. In particular, the large corporations of our sample in the
early thirties show the influence of the recession only in so far as the
increase in their cash balances is retarded. Cash balances of all reporting
manufacturing and of medium and small corporations, on the other
hand, show an absolute decline during the recession of the thirties.
Thus it is seen that the behavior of cash balances of different
groups of corporations differs widely and it is necessary to keep
in mind that the movement shown by the samples used in this
study is not representative of the corporate universe; an explana-
tion of this difference in behavior will be made in Chapter 5.The
next three chapters, as well as Chapter 5,willbe devoted to an
analysis of the causes of the movements of cash balances of large
and of medium and small corporations in the interwar period.

Corporate Cash Balances, 1914-43: Manufacturing and Trade

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