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A review by the

Federal Reserve Bank o f Chicago

Business
Conditions
1965

September

Contents
Trends in banking and finance

Commercial fertilizer
and agricultural production

Capital outflows slow

Federal Reserve Bank of Chicago

Trends
c
V_yontinued vigorous economic expansion

in the current year has been accompanied by
a record growth in bank credit. Loans rose
rapidly in the first seven months of the year—
especially those to industrial and commercial
borrowers. Mainly because of loan expansion,
and despite bank sales of U. S. Government
obligations, total credit of all commercial
banks rose at an 11 per cent annual rate in
the first half of 1965. This compares with an
8 per cent growth rate for the years 1963
and 1964.
While the demand for funds by the private
sector of the economy was strong, the supply
of funds seeking investment was also large.
Sufficient reserves were supplied to the bank
ing system to support a rapid growth in
deposits. Flows of savings into other financial
intermediaries, however, were somewhat
lower than in the same period of last year.
As a result, there were only mild upward
pressures on interest rates and yields on most

in banking and finance

categories of securities have varied within a
narrow range.
The accompanying charts compare the beBank credit climbs
as loan growth doubles

BU SINESS C O N D IT IO N S is published monthly by the Federal Reserve Bank of Chicago. Dorothy
M . Nichols was prim arily responsible for the article "Trends in banking and finance," Roby L. Sloan
for "Commercial fertilizer and agricultural production" and G eorge G . Kaufman for "C a p ita l out
flows slow."
Subscriptions to Business Conditions are availab le to the public without charge. For information
concerning bulk mailings, address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois
60690.

Articles may be reprinted provided source is credited.

ERRATA
Business Conditions, September 1965

Page 5, column 1

The bottom line of type should be read as the first line in the
column.
Page 15, column 1

Two words were omitted at the beginning of line 4. The sen
tence should read “These purchases had contributed to an out
flow of capital in every quarter during the Sixties except one
until the third quarter of 1963 when the tax went into effect.”
Page 15, column 2

A line was omitted from the sentence designated by the num
ber 1. The sentence should read “Legislation was proposed to
continue the interest equalization tax for two additional years
to December 31,1967, and to broaden its coverage to apply to
all nonbank credit maturing in one year or more extended to
residents of industrial countries outside the Western Hemi
sphere.”

Business Conditions, September 1965

M ore than half of 1965 loan rise
reflects business borrowing
per cent of increase in total loans (first 7 months)
0

havior of a number of major financial vari
ables during the first seven months of this
year with the same periods of 1963 and 1964.
Most comparisons are shown as cumulative
changes from the beginning of each year. The
data are not adjusted for seasonal variation,
but the seasonal patterns are indicated by sim
ilar movements for comparable months of
different years.

50 60

Biggest rise over last year
in manufacturing and trade
million dollars
♦280 ~
major Seventh District banks

durobles

♦240-

Lines ind ica te m argin by w hich
loan increases (cumulated m onthly

Loan d em an d strong

Through July, the increase in loans at the
major banks in leading cities was roughly
twice that in the same period of the previous
year. Available information indicates that
commercial and industrial loans, which com
prised about 40 per cent of their portfolios
at the end of last year, have accounted for
more than half of the 1965 expansion despite
the fact that business loans usually decline in

the early part of the year. Real
estate and consumer loans rose at
about the same pace as in 1964.
A t m ajor Seventh D istrict
banks, where the relative expan
sion of business loans was even
greater than nationally, demand
appears to have been broadly
based among industry groups.
Through July, loans to nearly all
types of business rose more, or de
clined less, than in the previous
year (see chart). Producers of dur
able goods—
especially machinery
—accounted for the largest share
of the gain over last year. These
firms are important steel users, and
while some of their credit needs
undoubtedly stemmed from the at
tempt to hedge against possible
strike-induced shortages of the
metal, the high rate of production
to meet current sales was also a
factor.

+160-

♦

120 -

- 4 0 l_

fo r 1965) exceeded increases fo r
the same p e rio d o f 1964 in each
business c a te g o ry

Federal Reserve Bank of Chicago

Total deposits have risen more

M o n e y and o th e r deposits

The counterpart of bank credit is, of course,
bank deposits. In recent years time deposits—
which include passbook savings and certifi
cates of deposit—
have accounted for the ma
jor share of deposit growth. Time deposits
grew very rapidly in response to higher rates
offered at some banks after the November
1964 ruling which raised the maximum rates
payable on savings of less than 1 year from
3V2 to 4 per cent, on time deposits less
than 90 days from 1 to 4 per cent, and on
those 90 days or longer from 4 to 4Vi per
cent. Through July 1965, total time deposits
rose at an annual rate of about 15 per cent.
Of the 13 billion dollar growth, about 2.5 bil
lion reflected the net increase in time certif
icates of deposit, most of which were issued
by the large banks in New York City.
In the second quarter, rising tax receipts
resulted in a shift of funds from private de
mand balances— major component of the
the
money supply— U.S. Government deposits,
to
which are not counted in the money supply.
The Treasury’s balance reached a peak in
May and remained at an unusually high level
through July.
The slower growth of money supply com
pared with 1963 and 1964 is largely attribut
able to greater than normal diversion into
time and Treasury deposits. As Government
expenditures reduce Treasury deposits to
more normal levels, these funds will be shifted
back to the public, adding to private demand
deposits. The effects on time deposit growth
are less certain. On a seasonally adjusted
basis, money supply rose at a 3 per cent an
nual rate for the January-July period. This
compares with a growth rate of 4.3 per cent
for 1964 as a whole.
The record expansion in total bank deposits

Business Conditions, September 1965

Total reserves were up more
than usual through July
m illio n

d o lla r s

. . . but part of the rise
reflected higher borrowings;
excess reserves fell further
million dollars

amounts of supporting bank reserves—
al
though less than if more of the expansion had
been in the form of demand deposits. Re
quired reserves rose more than 300 million
dollars from December to July compared with
a 50 million increase in the same period last
year.
Although total reserves were permitted to
grow rather rapidly to support the strong
and apparently healthy business advance, part
of these reserves were provided through dis
counts and advances to member banks. Aver
age daily borrowings rose above 500 million
dollars in June and July for the first time since
mid-1960. The Federal Reserve System also
acquired more than 2 billion dollars in Gov
ernment securities in the first seven months
required the creation of relatively large

of the year. Most of this was needed as an off
set to the gold outflow and other factors re
ducing reserves, including a greater than usual
increase in the currency component of the
money supply.
Meanwhile, the amount of excess reserves
in the banking system has declined to an av
erage level of about 350 million dollars. Ex
cess reserves are widely distributed among
country banks. Nevertheless, bankers’ efforts
to remain fully invested have squeezed much
of the slack out of bank reserve positions and
this has been facilitated by the increasing par
ticipation of smaller banks in the Federal
funds market.
As excess reserves declined and borrow
ings rose, the difference between them—
so
called “free reserves”—
declined and became
negative. Free reserves decline when deposit
growth absorbs a larger amount of reserves
in any given period than the Federal Reserve
makes available by means other than the dis
count window. This often occurs in a period
of rising business when credit demands are
very strong.
Issues and placements
of new securities continued
at high levels through first half
billion d o lla rs

I
7

1 1963

V I 9 6 4

state and local

corporate

Federal Reserve Bank of Chicago

sources. These include the temporary invest
ment of funds acquired in the capital markets
and repatriated from abroad, acquisitions by
Treasury investment accounts and purchases
by the Federal Reserve to provide for con
tinued growth of bank reserves.
In the short-term area, where rates have
risen significantly over the past two years, re
cent trends have been mixed. Treasury bill
rates reached their highs in late February but
showed a downward trend thereafter. Other
money market rates have generally held at
higher levels with the Federal funds rate—
the
rate at which member banks lend reserves to
other banks— excess of the discount rate
in
a large part of the time.
The overall abundance of investment funds,
coupled with continued efforts to maintain
short-term rates at levels high enough to deter
outflow of short-term funds, has been largely
responsible for the substantial disappearance

C ap ita l m a rke ts and in terest rates

Heavy reliance on bank credit had no ap
parent dampening effect on offerings and
placements of corporate and municipal secur
ities. These markets handled gross new issues
of nearly 13 billion dollars in the first half of
the year. Although the supply of investment
funds was also large, an upward adjustment
in yield averages was experienced about mid
year when new issue volume reached a peak.
The increased pressure on rates, however, did
not reach into the mortgage area where slight
ly reduced offerings were absorbed by con
tinued large supplies of investment funds.
Rates on Government issues held quite
stable through July despite sales by com
mercial banks. Strength in the Government
securities market reflected both the seasonal
decline in outstandings in the first half and
widespread demand from a number of

Yield trends mixed within narrow range
p er ce n t

6.00
5.60

♦SOURCE: Federal Home lo a n Bank Board

m o

m j

Business Conditions, September 1965

Yield d iffe re n tia l
between long- and short-term
Government securities has narrowed
per cent

number of years to maturity

of a rate spread between securities with differ
ent maturities. This is illustrated by the flat
tening of the “yield curve” for U. S. Govern
ment securities. As of mid-August the differ
ence in the investment yield on three-month
Treasury bills and the longest coupon Treas
ury bond was slightly more than Va of a per
centage point. But with such a small incentive
for holding long-term issues, any increase in
uncertainty as to the outlook for the domestic
economy or in the international area would
cause short-term obligations to have a strong
er investor appeal. This would intensify
downward pressure on short-term rates and
thus tend to reestablish more normal yield
spreads.

Commercial fertili zer
and agricultural production
^ 1 he increased availability and use of man
ufactured plant foods have had a key role in
boosting the capacity of American agricul
ture. Even in the face of widespread and
costly programs to restrict production, out
put has risen nearly one-third since the end
of World War II and the margin of unused
capacity has increased substantially.
The growth of output—
actual and latent—
is the result of many forces all complexly
interrelated and mutually reinforced. While
it is not possible to determine precisely the
effects of the greater use of fertilizer alone,
or of any other one development, some stud
ies have indicated that over three-fifths of
the rise in per acre production of agricultural

commodities between 1940 and 1955 was
directly attributable to the increased utiliza
tion of commercial fertilizers; since 1955
about half of the increase in corn yields in
the Midwest appears to have been associated
with the further increase in usage. The de
pendence upon fertilizers in the further ex
pansion of agricultural production in the
United States in the years ahead and espe
cially in the older agricultural regions of the
world appears destined to become increas
ingly important.
Although the use of fertilizer in the United
States has been increasing for many years,
the rise has been especially rapid since the
end of World War II. From 1910 to 1945,

Federal Reserve Bank of Chicago

annual usage in terms of plant nutrients—
N, P20 5, K20 —
increased from slightly less
than 1 million tons to about 2.8 million; by
1964 annual usage exceeded 10 million tons.

Fertilizer use rises sharply
million tons

“

All nutrients increase sharp ly

The most striking gain in recent years has
been in nitrogen. Following the widespread
introduction of the new production technol
ogies developed during World War II, the
use of this nutrient doubled between 1945
and 1951. It doubled again by 1959 and
nearly doubled again by 1964 when about
4.4 million tons were used.
Utilization of potash as fertilizer in 1945
was about equal to that for nitrogen. Al
though consumption has more than quad
rupled during the past 19 years, the expan
sion in tonnage has been less rapid than for
nitrogen. In 1964 about 2.7 million tons
were used.
Phosphate used as fertilizer at the end of

All areas show gains
in fertilizer use
million tons

II r

1946

'48

'50

'52

'5 4

'56

'58

'6 0

'62

'64

World War II was about double that of
either nitrogen or potash. The amount has
more than doubled during the postwar pe
riod, rising to about 3.4 million tons in 1964.
With fertilizers, as with other items used
in producing agricultural commodities, the
amounts are determined largely by relative
costs, availability and knowledge of their
effectiveness.
The sharp increase in usage of nitrogen
relative to other plant nutrients following
World War II appears to have resulted from
several factors. The need for nitrogen for
munitions greatly increased the demand for
this material during the war. Erection of
many new nitrogen plants and the develop
ment of new production technology sub
stantially boosted the productive capacity to
supply these needs. With the disappearance
of military demand for nitrogen following
the conclusion of major hostilities in 1945,
a large part of this capacity became avail
able to supply nitrogen for agriculture. In

Business Conditions, September 1965

addition, there was an
increasing awareness
Acreage fe rtilize d and rates per acre increase
of the complementary
N utrients applied
effect n itrogen had
p er a cre fe rtiliz e d
A cre ag e
with phosphate and
N itro g e n
Potash
fe rtiliz e d
Phosphate
C rops
potash on crop yields.
1954 1959
1954 1959 1954 1959 1954 1959
(per cent)
(pounds)
Soils were often rich in
natural phosphate and
34
46
39
35
30
35
Intertilled crops
61
50
39
34
64
27
28
25
30
C o rn
60
potash but lacking in
49
64
67
31
33
25
30
C o tto n
58
nitrogen. Farmers for
99
60
7 5 121 148 117 188
97
Tobacco
many years had grown
7
32
34
21
7
33
33
23
L a rg e s e e d e d le g u m e s
legumes—largely clov
34
93
54
58
78
33
40
F ruits
73
84
64
76
59
71
89
66
63
er and alfalfa— help
to
V e g e ta b le s
32
22
9
12
22
53
17
7
O th e r
increase the nitrogen in
19
24
Close-growing crops
29
27
19
16
35
25
the soil. These long-es
24
19
14
18
27
W heat
28
37
23
tablished cropping sys
24
22
18
17
28
20
O a ts a n d b a r le y
30
33
tems, however, were
24
17
32
27
58
23
15
30
O th e r
subject to change as
14
28
33
20
40
43
12
H ay and pasture
13
manufactured nitrogen
34
36
48
27
37
27
30
Crops and pasture
30
became available in in
SOURCE: U.S.D.A., estimates com pilec i from A g ricu ltu ra 1 Census.
creasing amounts and
with declining costs—
as horses and oats gave
way to trucks and trac
harvested acreage of crop and pastureland
tors, legumes are giving way to commercial
receiving at least some fertilizer in the latter
fertilizer.
year. Acreages of intertilled crops such as
corn, cotton and soybeans are fertilized in
M o re acres and h e a v ie r rates
far greater proportion and generally more
Farmers have boosted the amounts of fer
heavily than either the close growing crops
tilizer applied per acre and increased the
or pastureland, partly because such crops
number of acres fertilized. Data recently
generally yield a much higher income per
published by the U. S. Department of Agri
acre. In addition, close growing crops such
culture provide some measure of rates of ap
as oats and barley are often grown as nurse
plication on different crops through 1959,
crops on which heavy applications of ferti
the latest census year for which such infor
lizer could result in excessive foliage and
mation is available (see table). Although
shade out the young seedlings.
fertilizer use has increased nearly 3 million
The average application per fertilized acre
tons since 1959, the pattern of use probably
in 1959 was well over 100 pounds of plant
has not changed greatly.
nutrients—15 pounds more than in 1954.
The total acreage to which fertilizer was
Tobacco, potatoes and vegetables received
applied increased about three-fifths from
the heaviest applications per acre. Com re
1954 to 1959, with about half of the total
ceived the most fertilizer, however, account

Federal Reserve Bank of Chicago

ing for nearly a third of the total. Although
the proportion of pastureland receiving fer
tilizer is relatively low, it ranks second to
corn in total fertilizer use because of the
large acreage.
Sizable increases in fertilizer use have oc
curred in all parts of the country, but the
areas of most rapid growth have been in the
Lake and Corn Belt states (which includes
the Seventh Federal Reserve District) and
especially in the Plains and Mountain states.
The sharp rise in the latter two areas has
been from a very low level of consumption
due to the later adoption of fertilization in
these areas compared with other regions. In
the early Forties, about 17 per cent of all
fertilizer was used in the Lake, Corn Belt,
Plains and Mountain states. In recent years,
however, these four areas have accounted
for about half of the total consumption and
last year accounted for more than threefourths of the annual increase in total fer
tilizer use.
G reater use of fertilizer
has boosted crop production

per cent, 1940*100

Factors influencing use

A number of factors probably have in
fluenced the upward trend in fertilizer use,
but those making the primary contribution
have been the research and educational pro
grams of various government and private
agencies, the relatively low cost of fertilizer
materials and Government programs that
have withdrawn land from production.
Research has provided better information
on soil requirements and more reliable esti
mates of probable yield response from appli
cations of plant nutrients. The development
of new equipment and new forms of ferti
lizer have enabled farmers to apply plant
foods more easily and effectively. The de
velopment of higher analysis fertilizer has
reduced the volume of material that had to
be handled in order to obtain a given appli
cation of plant food.
While the development of new technol
ogies in production, distribution and appli
cation of fertilizer has been impor
tant, a factor not to be overlooked
in the rapid growth of fertilizer us
age has been its relative cheapness
in terms of increased crop output
as compared with other items used
in agricultural production.
Fertilizer prices edged higher
during a brief span of years follow
ing World War II, but since the
early Fifties have remained virtu
ally stable. While the index of
prices for all crops has trended
lower over this period, crop prices
have been substantially supple
mented by direct Government
payments to farmers. As a result,
increased applications of fertilizer
have continued to yield a relatively
high return in terms of the dollar

Business Conditions, September 1965

Fertilizer use in other developed
countries exceeds United States
Primary nutrients a pp lied (1960-61)
N itro g e n

Phosphate

Potash

T o ta l

(pounds p er a cre o f c ro p la n d )1

N e th e r la n d s

192

119

407

Japan

111

271

W . G e rm a n y

105

2 38

D e n m a rk

135

U n ite d S ta te s

S p a in

In d ia

0 .3

0 .2

2 .5

W o r ld 2

’ Including m eadow and pastureland.
E x c lu d in g mainland C hina and N o rth K orea.
SOURCE: N a tio n a l Plant Food Institute.

value of this increased output. Moreover,
since the mid-Forties an index of prices of
all the major items used in agricultural pro
duction has nearly doubled. This price rela
tionship has made it increasingly attractive
to substitute fertilizer for those other produc
tion inputs for which it can be substituted
effectively.
Government programs which have re
stricted the acreage planted to crops have
also had a significant effect on farmers’ pur
chases of plant nutrients. Inasmuch as these
programs have provided relatively high price
supports and payments for production on
smaller allotted acreages as well as penalties
for overplanting, farmers have cultivated their
allotted acreage intensively, and sharply in
creased the per acre application of fertilizer.
Use to rise fu rth e r

Although the use of fertilizer has in
creased markedly, rates of application are

indicated to be lower in most areas than
those which would yield maximum profits at
current price levels. Studies made by the
U. S. Department of Agriculture indicated
a decade ago that about $3 of additional
production of crops and pasture were ob
tained with an additional $1 of fertilizer ap
plied. Obviously, the amount of fertilizer
used was substantially below that which
would have been most profitable. All avail
able evidence indicates that most farmers
are still using less than the optimum amounts
of fertilizer although by a much smaller mar
gin than in 1954.
While the amount of fertilizer used has in
creased sharply, such developments as new
hybrids, closer plant spacings, minimum til
lage, irrigation and greater applications of
herbicides and pesticides have increased po
tential crop production per acre and, there
fore, the optimum amounts of fertilizer
needed to achieve the full benefit from these
items.
For many years farmers attempted to
maintain soil fertility by growing rotations
of crops which included legumes and using
livestock systems of farming. In recent years,
however, the practice of continuous crop
ping of intertilled crops boosted production
of the major crops and the requirements for
plant nutrients. Even on the more produc
tive soils, heavier applications of fertilizer
are necessary to supply the amounts required
to maintain soil fertility. Estimates by the
National Plant Food Institute indicate that
the amount of nutrients removed by crops
harvested in 1963 exceeded the amount sup
plied by fertilizers by about one-fourth, in
dicating that nearly 3.4 million additional
tons of fertilizer would have been required
to completely replace the amount of nutri
ents extracted from the soil by crops.
Although economic conditions differ great-

Federal Reserve Bank of Chicago

ly in other regions of the world and therefore
affect the level of optimum fertilizer usage,
a comparison of fertilizer use in the United
States with that in other countries illustrates
the level of use that is reached under some
economic conditions. In the 1960-61 pe
riod, fertilizer consumption in the United
States in terms of plant nutrients per arable
acre amounted to about 34 pounds, lagging
far behind most other developed countries
(see table). Comparable estimates for the
Netherlands and Japan, for example, indi
cate that fertilizer was used at rates of about
407 and 271 pounds, respectively. For the
world (excluding Mainland China and North

Korea), fertilizer use was only 14 pounds
per arable acre, less than half the rate for
the United States.
Numerous estimates have been made by
various private and Government agencies on
the probable consumption of fertilizer by
United States farmers over the next several
years. All projections indicate a sizable in
crease. The Tennessee Valley Authority, for
example, indicates that total plant nutrients
used by 1975 will rise to 13-15 million tons
compared with 10.5 million in 1964. It
should be noted, however, that in the past,
projections of this type have generally fallen
short of the actual levels achieved.

Capital outflows slow
1 he outflow of long-term capital abroad
has been a large contributor to the persistent
deficit in the United States balance of pay
ments. In 1964 there was a net outflow of 4.4
billion dollars of long-term capital— from
up
3.7 billion in 1963 and 2.9 billion in 1962.
The accelerated outflow continued into the
first quarter of 1965 when it was over twice
as great as in the first quarter of 1964.
Long-term capital outflows may be divided
into four major categories: 1. direct invest
ment, 2. purchases of new foreign securities,
3. purchases of outstanding foreign securities
and 4. other long-term capital movements in
cluding bank loans with maturity of one year
or over. Except for purchases of outstanding
securities, the outflow in each category was
considerably greater in 1964 than in 1960.
Direct investm ent

■2
j

Direct investment abroad includes all over

seas investment by American residents in
which managerial control is an important con
sideration. Such investments (net of reinvest
ment of undistributed earnings on these in
vestments) have increased rapidly in the past
two years, and in the first quarter of 1965
were over twice as large as in the first quarter
of 1964. The exceptional increase in the first
quarter probably resulted, in part, from a
speedup in planned investments in anticipa
tion of possible restrictions in later periods
by either the United States or foreign govern
ments.
Overseas direct investments are motivated
primarily by the prospects of earning greater
profits abroad than at home. Since the midFifties, economic activity has risen faster in
most Western European countries than in the
United States. In part, goods produced in
American plants abroad replace exports to
these countries. On the other hand, foreign

Business Conditions, September 1965

has exceeded new investment by more than
50 per cent.

O utflow s of long-term capital
rose sharply in 1964
and first quarter of 1965

N e w fo re ig n securities

m illion d o lla r s

r
s e a so na l l y a d j u s t e d , q u a r t e r l y rat e

lOOOr
U

800p

/
d i r e c t in v e s t m e n ts , n e t

/
J

investments may stimulate exports of raw
materials, semi-manufactured goods and ma
chinery to overseas plants. Frequently, deci
sions to invest in firms abroad are motivated
by high foreign tariff walls, exchange restric
tions or other regulations which severely re
strict market penetration through exports.
About half of the net direct investment
abroad in recent years was directed to West
ern Europe; another 20 per cent was to Can
ada. Although direct investments have an un
favorable impact on the balance of payments
at the time the investment is made, earnings
in subsequent years have a favorable impact
and in the aggregate have exceeded annual
new investments in the long run. In the Six
ties, income on foreign direct investments

Sales of new foreign securities in the United
States rose rapidly in the early Sixties. Many
foreign governments and business firms found
that the limited size of capital markets, high
interest rates and/or official government in
tervention— limit the amount of both inter
to
nal and foreign borrowing—
made it difficult
or impossible as well as costly to meet credit
needs either at home or in foreign capital
markets outside the United States.1 While
some of the foreign securities marketed in
this country have been resold to foreigners,
most were purchased by American residents
and have resulted in a net outflow of dollars.
In 1962, more than 1 billion dollars of
newly issued foreign securities were pur
chased by United States residents—
twice the
volume of the previous year. When it seemed
as if this amount would double again in 1963,
an interest equalization tax was imposed on
resident purchases of securities maturing in
three or more years issued by foreign indus
trialized countries outside the Western Hem
isphere. The tax was designed to reduce the
effective yields on such securities to American
investors by about 1 per cent— approxi
the
mate spread between yields on foreign and
domestic securities of similar issue size and
maturity.
The tax has caused two markets to develop
for new foreign securities in the United States
— for nonresidents, the other for Ameri
one
cans. On the latter market, the security yields
are quoted after adjustment for the tax liabil-*
!For a description o f the restrictions of foreign
capital markets and a more complete analysis of why
foreigners borrow in the United States see “Foreign
Long-term Borrowing in the United States,” Busi
ness Conditions, September 1963, pp. 5-9.

Federal Reserve Bank of Chicago

ity. A recent new issue by the Australian gov
ernment, for example, was priced to yield
5.63 per cent to nonresidents and only 4.98
per cent to residents.
Some issues are sold entirely to nonresi
dents even though marketed in this country
because local markets are often neither suf
ficiently broad nor experienced to handle
large issues successfully. In addition, many
foreign investors have become accustomed to
the procedures and characteristics of the
United States market and prefer to do busi
ness here. Sales of such securities to foreign
ers do not result in an outflow of capital. Such
operations, however, produce income for the
American underwriters and enhance the pres
tige of the United States as an international
money market. Recently, new securities mar
keted here by the governments of Denmark
and New Zealand and the city of Tokyo were
sold entirely to foreign investors.
Sales of new foreign securities dropped
abruptly following the imposition of the
equalization tax in mid-1963 but rose again
in 1964. Canada, which is exempted from the

tax, increased its importance as the major
foreign borrower in the United States. In
1964, Canadian securities accounted for 65
per cent of the total United States purchases
of new foreign securities, compared with only
42 per cent in 1962. Although overall pur
chases of foreign securities declined 15 per
cent from 1963 to 1964, the dollar volume of
Canadian securities rose slightly. At the same
time, American purchases of new Western
European issues dropped sharply from 272
million dollars in 1963 to 35 million in 1964.
O utstanding fo re ig n securities

A broad and active market also exists in
the United States for outstanding debt and
equity securities of foreign governments and
major business firms. Trading is similar to
that in domestic securities. Some foreign
issues are listed on national security ex
changes, while others are traded “over-thecounter.” The interest equalization tax ap
plies to the purchases of any foreign security
by United States residents from foreigners.
Transactions between residents do not pro
duce an outflow of dol
lars and therefore are
exempt from the tax.
N et direct investment overseas
The ownership of for
First q ua rter
eign securities is typ
1962
1963
1964
1964
I960
1961
1965
ically noted on market
(million dollars)
quote sheets so that
Total
1,674 1,599 1,654 1,976 2,376 420
959
the p u rch aser may
W . Europe
962
724
9 2 4 1,3 4 2 2 8 8
504
867
know whether his pur
C anada
302
451
314
365
250
66
213
chase would be subject
Latin America
95
-3 2
173
69
3
4
156
to the tax or not.
54
Japan
n.a.
29
30
68
73
15
The impact of the
O ther1
371
451
16 6
550
555
39
231
interest equalization
Earnings on
tax on capital outflows
investments 2,355 2,768 3,050 3,134 3,741 946 1,043
resulting from United
States purchases of
n.a. N o t a va ila b le .
’ Includes in tern a tio na l o rganizations.
outstanding foreign se
curities from foreign-

Business Conditions, September 1965

United States purchases of new foreign securities
First q u a rter
1960

1961

1962

1963

1964

1965

(million dollars)

Total
W . Europe

555

523 1,076 1,250 1,063

127

302

195

272

C a nada

221

237

457

693

700

Latin America

10 7

102

201

Japan

n.a.

101

164

O th e r’

203

15 0

221

12 7

189

n.a. N o t a va ila b le .
'Includes inte rn a tio n a l organizations.

funds. S h ort-term
funds may also have
been used by foreign
ers as temporary re
placements for longerterm borrowing sub
ject to the equaliza
tion tax. The recorded
outflow of short-term
capital reached 2.1 bil
lion dollars in 1964—
almost three times the
amount in 1963.
Stem m ing flo w

ers was marked and immediate. These pur
chases had contributed to an outflow of cap
ital in every quarter during the Sixties except
the third quarter of 1963 when the tax went
into effect. Since then, American residents
have sold more outstanding foreign securities
to foreigners in every quarter than they have
purchased from them.
O th e r lo n g -te rm cap ital

Outflows of long-term United States capital
resulting from other than direct investments
or the purchase of foreign securities are classi
fied as other long-term capital. This category
covers bank loans and credit extended by in
dividuals and nonbank businesses for over
one year.
Long-term lending by these institutions
rose sharply since 1962, in part as replace
ments for other forms of credit subject to the
interest equalization tax and in part in antic
ipation of possible additional restrictions.
The outflows of this type of long-term funds
doubled from 1962 to 1963 and again from
1963 to 1964. Western Europe, which was
affected the most by the interest equalization
tax, was the primary recipient of United States

Because of the con
tinued rise in the net outflow of long-term
capital and the failure of the balance of pay
ments to respond adequately to previous cor
rective actions, several additional measures
were undertaken early in 1965 to help reduce
the deficit by reducing the outflow of capital.
1. Legislation was proposed to continue
the interest equalization tax for two additional
years to December 31, 1967, and to broaden
its coverage to apply to all nonbank credit
maturing in one year or more extended to
the Western Hemisphere.
2. All commercial bank loans with matur
ities of one year or more extended to foreign
ers in industrialized countries outside the
Western Hemisphere were made subject to
the tax.
3. Bank and nonbank business firms were
requested to voluntarily restrict the amount
of dollars used overseas.
Banks were requested to restrict their total
loans to foreigners to no more than 5 per cent
above the volume outstanding at year-end
1964. The guideline encompasses all bank
loans, whether short term or long term and
whether or not subject to the equalization tax.
Nonbank financial institutions were re-

Federal Reserve Bank of Chicago

quested to keep their
foreign credit exten
O ther long-term capital outflow, net
sion (other than their
liquid investments)
First q u a rter
with maturity of 10
1963
1964
I960
1962
1964
1965
1961
years or less to no
(m illion dollars)
more than 5 per cent
Total
258
591 1 ,2 9 8 2 7 5
453
200
263
above the level of De
W . E u ro p e
16
115
84
504
671
161
135
cember 31, 1964.
C anada
-3 2
-1 0
37
2
276
0
47
These firms were
-2 1
L a tin A m e ric a
159
108
39
115
40
120
also requested to gradJapan
34
n .a .
108
120
135
61
33
ually reduce their
O th e r1
57
-1 0
-1 0
101
16
13
136
holdings of liquid in
n.a. N o t a va ila b le .
vestments abroad to
'Includes in tern a tio na l o rganizations.
year-end 1963 or 1964
levels, whichever was
lower.
The restrictions on overseas credit are not
measures have had the desired immediate
expected to reduce the ability of financial in
impact. Primarily because of reversals in
stitutions to finance United States exports;
capital flows, the balance of payment was in
ample provision is made for the complete fi
surplus in the second quarter of the year for
nancing of the anticipated rise in United
the first time since 1957.
States exports during 1965. In addition, par
At the time the program was announced in
February, overseas loans of many banks and
ticipation in Export-Import Bank loans and
Federal Credit Insurance Association insured
nonbank lenders were already more than 5
export loans are exempt from the program.
per cent above the amounts at the end of
Quantitative guidelines have not been im
1964. As a result, a slowdown and even a
rollback in foreign credit extension was to
posed on direct overseas investments because
be expected. In addition, many business
of the long-run favorable impact of these on
firms have reported intentions to postpone
the balance of payments. However, United
States business firms have been requested to
new overseas investments or, where this was
limit or postpone current new investment
not feasible, to borrow the necessary funds
abroad.
abroad where investments are not likely to
expand exports or to increase overseas earn
It is recognized, however, that the an
ings substantially in the near future. In addi
nounced measures will not cure the basic
causes of the deficit. This can only be
tion, these firms have been asked to utilize
brought about by increased domestic effi
foreign financing where possible.
ciency, more competitively priced exports
Im p ro v em e n t p erm an ent?
and, conditions permitting, reduced govern
The long-run impact of the current pro
ment spending abroad. The measures can,
gram on capital movements is difficult to
however, help to buy the time in which the
evaluate. Early evidence indicates that the
more fundamental adjustments can be made.
16

Full text of Business Conditions (Federal Reserve Bank of Chicago) : September 1965

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