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Living with the U.S. Financial System: The Experiences of General Electric and Westinghouse Electric in the Last Century

Published online by Cambridge University Press:  13 December 2010

Mary A. O'Sullivan
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Abstract

Scholars have recommended taking a closer look at firms that raise funds from the financial system as a way of understanding the relation between finance and growth. This article explores the role of the U.S. financial system in providing funds to two prominent American firms, General Electric and Westinghouse Electric, over the course of the last century. The financial system's support was important for both companies, but there were important differences, as well as changes over time, in their patterns of financial dependence and autonomy. Two factors—investments in working capital and dividend policies-are important for explaining the financing patterns of both firms, suggesting clear hypotheses about the determinants of demand for corporate finance that can be tested in further financial histories. The findings also highlight the importance of looking at working, as well as fixed, capital in studies of enterprises' relations with the financial system, and of examining the money that flows out of companies as well as the funds that flow into them.

Type
Articles
Information
Business History Review , Volume 80 , Issue 4 , Winter 2006 , pp. 621 - 655
Copyright
Copyright © The President and Fellows of Harvard College 2006

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References

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8 WHS was incorporated in Pennsylvania as the Westinghouse Electric Company on January 8, 1886. A few years later, in 1889, the company took over an old charter granted to Chartiers Improvement Company by the state of Pennsylvania on April 9,1872, and changed the name on the charter to its own. In 1890, a new name, the Westinghouse Electric and Manufacturing Company, was adopted.

9 I also consulted archival records for GE at the Schenectady Museum Archives, Schenectady, New York, and for WHS at the Library and Archives Division, Historical Society of Western Pennsylvania, Pittsburgh, Pennsylvania. Although the GE collections contain a number of sources that refer to the issues of financing, investment, and dividends covered in this article, notably the minutes of the meetings of the company's board of directors from 1892 to 1984, most of the information contained therein is brief, and even perfunctory, and could almost always be gleaned from publicly available material (see note 21 for an example). The WHS collection is rich in material on technology, research and development, and engineering, but less relevant for an analysis of the company's financial history. However, there was some useful information on the company's organizational structure that was helpful for thinking about the relation between organization and capital utilization.

10 Beginning in 1971, U.S. companies were required by the Accounting Principles Board (APB) to disclose a “statement of changes in financial position,” which reported changes in a company's working capital position, as part of their audited financial statements. In 1987, the Financial Accounting Standards Board changed these disclosure requirements when it issued SFAS 95, which mandated that companies present a “statement of cash flow” that focuses more narrowly on changes in a company's cash and cash equivalents.

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12 Throughout the paper, when I speak of working capital I use the term to refer to what might more precisely be called “operating working capital.” It excludes the predominantly financial components of working capital, notably cash and short-term debt. As a result, it slightly understates the working capital required for operations, since some cash is obviously needed for operating purposes. Nevertheless, for prosperous companies like GE that maintain large cash reserves, operating working capital gives a more accurate picture of the liquid resources they really need to run their businesses than is supplied by total working capital.

13 GE, Annual Report, 1987.

14 All figures are adjusted for inflation and restated in 2000 U.S. dollars based on the Consumer Price Index. These figures include all long-term issues of equity and debt whatever their purpose.

15 These totals exclude the monies that GE and WHS generated from the sale of stock to its employees under stock-option plans. These amounts reached very high levels for GE, especially during the 1990s, therefore distorting the two companies' relative dependence on, and autonomy from, the financial system. See the discussion under the heading “Patterns of External Finance, 1976 to 2000.”

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21 Meeting minutes for GE Board of Directors, 192nd Board Meeting, 25 July 1912, 197, Schenectady Museum Archives. The reference in these minutes to the 1912 debenture issue is a good example of the type of information one finds on financing herein. The following statement was made under the heading “Debenture Bonds”: “The President expressed the view that if the future business of the Company shall make it necessary to procure additional capital, it should be obtained, in part at least, by the issue and sale of debenture bonds bearing in terest at a 5% or lower rate. The Board concurred in this view and upon motion, duly seconded, it was RESOLVED that an issue of 40-year debenture bonds callable at not exceeding 110 in total amount not exceeding $60,000,000, be and hereby is authorized, to be sold from time to time as required.” All of this information was also recorded in GE, Annual Report, 1913, 9.Google Scholar

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