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The Effect on Cost of Finance on the Prices of Industrial Goods / ההשפעה של הוצאות המימון על מחירי המוצרים התעשייתיים
א. הלפרין and A. Halperin
Quarterly Banking Review / רבעון לבנקאות
Vol. ד', No. 15 (טבת תשכ"ה - דצמבר 1964), pp. 49-54
Published by: Association of Banks in Israel
Stable URL: http://www.jstor.org/stable/24023511
Page Count: 6
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The writer begins his article by noting that price stability is difficult to achieve because of rising production costs, which, some believe can be offset by cheaper credit. Dr. Halperin explains that economists in Israel do not accept this argument, since finance costs represent a minor factor in the determination of the price of goods. On the other hand a lowering of interest rates would lead to increased demand for credit, to monetary expansion and consequently a rise in prices. The author analyzes the balance sheets of 63 industrial companies in Israel, including all those which have shares registered on the Stock Exchange (14 companies). The remainder were taken by him from the files of a large bank, and though all these industrial companies do not represent a true statistical sample, in his view they can serve as an indication of the general trend. He notes that the large bank referred to above might have favoured the better-established firms when granting credit. Nevertheless, despite this shortcoming and a lack of full uniformity regarding the dates of the balance sheets, their structure and classification of items. Dr. Halperin considers that the general portrait which was obtained from his investigation was basically representative. His investigation showed that "interest" paid on short term pank-credit was from one quarter to one third of the total cost of finance, so that the influence of a lowering of interest ratts payable to banks would be small. Furthermore, the writer quotes the Radcliffe Report to show that since monetary policy concentrates its efforts on influencing the banking system, the banks' share of industrial finance tends to contract. Changes in bank interest rates, he notes, will also influence the interest rates of some other industrial credits granted by other finance companies. Dr. Halperin presents a tabular summary of costs of finance, production costs, total sales, own-capital, equity capital and profit before tax and calculates the ratio of finance costs to production costs, to total sales, and to profits, before tax, and the relationship between profit and share capital and own-capital. These items are presented separately and together for 49 enterprises not registered on the Stock Exchange and 14 enterprises the shares of which are registered on the Stock Exchange. He concludes from this table that costs of finance are low both relatively to total production costs (4.1%) and to the total of sales (3.41%). Hence, bank-interest represents only about 1% of total costs or total sales. The lowering of short term interest rates can, therefort, affect prices by only a few tenths of one percent. However, lowering of finance costs can appreciably affect the profits of industry and increase its share in the national income. The author notes that this may therefore encourage investment in industry. He also points out that a return on the equity capital of 14.1% was not too bad. A final interesting conclusion is that those industrial companies whose shares are not registered on the Stock-Exchange recorded better results, with a lower ratio of finance costs to total costs and sales costs, and a higher level of profitability on capital. He remarks that this must have been due to the revaluation of capital in the case of those industrial companies whose shares are registered on the Stock Exchange and to the fact that two of the companies which belong to this group passed through a difficult time during the period under review.
Quarterly Banking Review / רבעון לבנקאות © 1964 Association of Banks in Israel