114 MULTIPLE PURPOSE RIVER DEVELOPMENT 



in many instances, the limit to a firm's rate of expansion is not set 

 by the diminishing attractiveness of profit opportunities in relation 

 to borrowing costs, but rather by its supply of managerial per- 

 sonnel. The firm undertakes as much investment as its staff can 

 handle successfully. Lintner believes this analysis to be particularly 

 applicable in periods of high employment. In depressions, firms 

 hesitate to borrow for fear of inability to repay, and the relationship 

 between the levels of taxation and of investment becomes much 

 stronger. Since our analysis supposes that a successful stabilization 

 policy precludes depression, we assume that an increase of retained 

 earnings of $1.00 would lead to only lOjZ? of added investment in 

 the firm. A rate of return of 21 per cent, the average rate of return 

 of large corporations in 1955 before taxes,-^^ is assumed for the 

 share of the tax cut that would be invested by the firm. 



The liquidity of the large firm would be increased by the remain- 

 ing 900 of increased retained earnings. Firms with a significant 

 amount of debt would be able to lower it; firms which raise funds 

 by financing their accounts receivable could reduce this practice; 

 those which are creditors would be able to increase their financial 

 assets— consisting in the case of large corporations primarily of 

 government securities. ^^ Thus, the major share of the increase of 

 retained earnings would add primarily to that large pool of low- 

 interest, low-risk, relatively liquid capital into which excess corpora- 

 tion funds are channeled, and from which the loans of large 

 corporations, governments, and financial institutions are drawn. 

 An increase in the supply of loanable funds in this market would 

 have several effects. To some extent, interest rates on low-risk 

 securities would fall and the severity of rationing would diminish, 

 leading to some increase of mortgages and perhaps even a small 



"This figure is derived as follows: 78 per cent of the tax cut goes to manu- 

 facturing, 17 per cent to utilities, and 5 per cent to trade. The average rate of 

 return of large corporations in manufacturing was 23.8 per cent (reported in 

 Quarterly Financial Report for Manufacturinir Corporations, Fourth Quarter 

 1955, Federal Trade Commission and Secinitics and Exchange Commission, 

 Washington, April 1956). The rate for utilities was estimated directly from 

 prevalent standards of rate regulation to be equal to 10 per cent. The rate for 

 trade, which is equal to 20 per cent, assumes that it stood in the same ratio to 

 the rate in manufacturing as in 1952. (Figures for 1952 from .SFC data.) A 

 weighted average yields our estimate. The concept of rate of return used by 

 the SEC may overstate the actual rate by 1 to 2 per cent. 



"C. E. Silbcrman, "The Big Corporate Lenders," Fortune, August 1956, p. 112. 



