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JUNE 1964
Investment Characteristics
of New Foreign Capital
Borrowed in the U. S ...... 2
A Further Note on City
Industrial P a tterns....... 13
E C O N O M IC R EV IEW
INVESTMENT CHARACTERISTICS
OF NEW FOREIGN CAPITAL
BORROWED IN THE U. S.
T
HE USE OF U. S. capital markets by
foreign governments and businesses is
intermingled with the problems of world
trade and aid as well as the continuing devel
opment of the economies of all nations. Such
matters are presently under discussion at the
United Nations Conference on Trade and
Development and at the GATT negotiations
in G eneva. The United States appears to
have
countered
temporarily
the
adverse
effects of foreign capital borrowing on the
balance of payments through the proposed
interest equalization tax; but still unanswered
is the long-term role of this nation in supplying
capital to a developing world and deter
mining the best methods of channeling these
funds.
2
A previous article in the E c o n o m ic
Review described the increase in the volume
of new capital borrowed in the United States
by foreign countries and organizations b e
tween 1958 and 1963.1 In that article, it was
shown that no single group or geographical
area was primarily responsible for the surge
in borrowing in this period. Part of the rise
was attributable to industrially developed
nations, but not to those of western Europe.
Underdeveloped countries did not borrow
heavily in the U. S. whereas some nations
with established economies based chiefly on
agriculture did increase their sales of new
1 "Foreign Capital Borrowing in the United States"
E c o n o m ic Review , Federal Reserve Bank of Cleveland,
Cleveland, Ohio, January 1964.
JUNE 1 9 6 4
issues. It was also evident that borrowing by
private organizations increased more rapidly
than the borrowing operations of foreign
governments or quasi-governmental organiza
tions.
In addition, the earlier article concluded
that there was no single factor which ex
plained the rise in foreign capital borrowing.
Some countries cam e to the U. S. in search of
development capital, while others were taking
advantage of the established and efficient
U. S. market structure and the relatively large
supply of capital available here. Other
borrowers were either seeking dollars to
finance their balance of payments deficits or,
occasionally, publicity and contacts in an
overseas market. Another determining factor
mentioned was the difference between the
cost of obtaining investment funds in the
United States and in foreign capital markets.
This second and concluding article dis
cusses the characteristics of new foreign
issues sold in the U. S. The article examines
the types of securities sold by foreigners in
the U. S. in the 1958-63 period, maturities
and interest rates, and the methods of sale
that were used. The study does not, however,
concern itself with the sources of funds
tapped by foreign borrowers.
percent of the long-term debt issues were
serial bonds.
In addition, a small but increasing pro
portion of the dollar volume of the debt issues
took the form of co n v ertib le d e b e n tu re s.
The volume of such issues rose from a single
convertible debenture issue of $3 million
in 1958 to a high of three issues totaling
$46.5 million in 1962. In the most recent
years, Japanese firms accounted for the bulk
of the convertible securities issued.
Almost 18 percent of the total dollar amount
of the capital borrowed in the survey period
was acquired by m eans of n o te s a n d lo an s.
This type of borrowing also increased, climb
ing from about $42 million in 1958 to nearly
$275 million in 1963. The growing use of
such intermediate-term sources of capital
was probably an outgrowth of the growing
proportion of foreign capital issues being
1.
FOREIGN CAPITAL BORROW ING
by Types of Issue
M illions of dollars
1500
CONVERTIBLE
DEBENTURES
1
1000
TYPES O F ISSUES
The individual issues included in this sur
vey of foreign capital borrowing were
grouped into four broad categories. (See
Chart 1.) B o n d s a n d d e b e n tu re s accounted
for more than three-quarters of the total
dollar volume of funds raised in the 1958-63
period. More than half of the bonds sold were
protected by sinking fund provisions, and 11
STOCKS and
A D R ’s
NOTES and
LOANS
500
BONDS and
DEBENTURES
0
’58 ’59 ’60
S o u r c e of d a t a :
’61 ’62
’63
F e d e r a l R e s e r v e B a n k of C l e v e l a n d
3
E C O N O M IC R EV IEW
privately placed with U. S. investors, rather
than being sold publicly. (Private placem ents
totaled nearly $ 9 0 0 million in both 1962
and 1963.) All of the notes and loans included
in this study were privately placed.
A fairly small proportion of the new
foreign capital—about 5 percent—was raised
through the sale of sto c k issu e s a n d A m e ri
c an D ep o sito ry R ec eip ts. The dollar vol
ume of such issues increased in 1958 and
1961, and rose above $60 million in 1963.
Sales of stock by Japanese com panies a c
counted for almost all of the new issues in
1963 and for one-third of the six-year total.
There was also a relationship between the
type of issue and the terms of borrowing.
Just over half the dollar volume of new
capital issues maturing in ten years or less
was in the form of notes and loans. M iscel
laneous bonds and debentures accounted for
another third of these intermediate maturities.
Sinking fund bonds made up the largest
volume of issues with maturities of more than
ten years. Table I shows the av erage maturity
TABLE I
Average Maturity of Selected
Foreign Securities Issued in the U. S.
A v e ra g e Maturity
For Six-Y ea r Period
1 9 5 8 -1 9 6 3
Type of Issue
Notes and l o a n s ..............
12 years
Serial bonds
(to final maturity)
. . .
13 years
Convertible debentures . .
Miscellaneous bonds and
debentures*.................
15 years
Sinking fund bonds . . . .
includes mortgage bonds
Source: Federal Reserve Bank of Cleveland
4
17 years
2 0 years
for the various types of issue, without any
weight assign ed for dollar value.
While there were some relationships b e
tween the methods of borrowing and the
geographical location of the borrower, there
was not a significant correlation between the
two factors. In addition, there was no apparent
preference on the part of separate industry
groups for any specific type of issue, nor did
the business of the borrower seem to deter
mine the length of maturity or the interest
cost of the foreign securities sold in the U. S.
INTEREST CO STS
In the six-year period of 1958-63, fourfifths of the dollar volume of new foreign
debt issues sold in the United States, for
which interest rates were published, carried
coupon rates ranging from more than 4 ^
percent to less than 6 percent. With the
exception of State of Israel bonds first placed
on the market in 1959, very few of the debt
issues carried a rate of 4 percent, but onetenth of the new capital issues had rates of
more than 6 percent. The lowest reported
rate was 3 x/± percent; the highest, 8 percent.
A frequency distribution of coupon rates
shows a marked concentration of the number
of new issues at 5 ^ percent (see Chart 2).
The sam e concentration is apparent in a
distribution of the dollar volume of borrowing.
Rates of 5 percent and 5
percent also
appeared frequently. There was also a pre
dominance of "round-num ber" coupon rates
among foreign issues, i.e., rates quoted in
whole or half percentage points; hence, the
jag g ed nature of the frequency curve.
Chart 2 further illustrates the fact that
most of the new capital was raised at a coupon
JUNE 1 9 6 4
of all the dollar volume carry
FREQUENCY DISTRIBUTION of COUPON RATES
1958-63
ing coupon rates of 5 percent
or less.
N u m b e r of issues
50 I—
The impact of Canadian
participation in U. S. capital
markets is also evident in a
distribution of coupon rates
by the nature of the borrow
ers.2 A major proportion of
new debt issues sold by local
governments and government
corporations carried coupon
rates of 5 percent or less
becau se of the preponder
an ce of Canadian securities
in those groups. In contrast,
most
securities
issued
by
other national governments
5%
6%
carried coupon rates of 5
Rate level
S o u r c e of d a t a :
percent or more.
F e d e r a l R e s e r v e B a n k of C l e v e l a n d
rate of from 5 percent to 6 percent. When the
new capital issues are grouped by maturity
classes, the sam e characteristic is apparent,
except for maturities of more than 20 years;
here the largest dollar volume had rates of
5 percent or less. This seem ing inconsistency
of the longest maturities carrying lower rates
is explained by the fact that Canadian
borrowers were responsible for almost all
of the dollar volume of long-term borrowing.
C anadian governments and businesses were
able to borrow in the United States at rela
tively low rates, in comparison with most
other foreign borrowers. As an illustration,
C anadian issues accounted for all of the
borrowing with rates of 4 percent or less from
1958 through 1963 (with the exception of the
State of Israel bond issue), and for 89 percent
A similar interest rate pattern is apparent
when new issues are grouped by the stage of
economic development of the borrowing
nation. Three-fifths of the total indebtedness
incurred by industrial countries carried rates
ranging between 5 and 6 percent; there were
no new issues with rates of 4 percent or less
for these nations. O ver half of the borrowing
by underdeveloped nations was arranged at
rates of over 6 percent, with very few issues
carrying a rate of 5 percent or less. In con
trast, the group of agriculturally developed
nations—led by C an ad a—issued nearly onehalf of the dollar volume of their new debt
with rates of 5 percent or less. Almost all of
those lower-yield issues were Canadian.
2 Ib id . pp. 7 & 8.
5
E C O N O M IC REVIEW
3.
COUPON RATES and MATURITIES
of New Foreign Debt Issues in 1958
Percent
Y e a r s to M a t u r i t y
S o u r c e of d a t a :
F e d e r a l R e s e r v e B a n k of C l e v e l a n d
An attempt was made to construct a series
of annual yield curves using the coupon rates
on new foreign borrowing from 1958 through
1963. In most of the years the peak of the
curve fell at maturity lengths of ten to twelve
years, with rates in the very long-term range
equaling the short- and intermediate-term
coupon level. Chart 3 is fairly typical of the
six annual curves. The tendency of C anadian
organizations to borrow on a long-term basis
and the ability of that country to obtain low
interest terms in their U. S. borrowing prob
ably accounts for the skewed shape of the
yield curves.
While the type and maturity length of an
issue and the nature of the borrower im
6
portantly affect the interest cost of the borrow
ing, credit conditions at the time of issue are
also a major factor. In 1958, the first year
covered in this study, borrowing costs in the
United States had declined to a relatively
low level. A business recession had developed
in 1957, reaching a trough in April 1958,
and domestic interest rates declined sharply
between late 1957 and mid-1958. In the
second half of that year, however, there was
a recovery in market yields that was equally
as sharp, and the general rise in rates con
tinued through 1959. In 1960 interest rates
in the U. S. declined moderately to a level
that was maintained for an unusually long
period, lasting until mid-1963. At that time
JUNE 1 9 6 4
domestic interest rates were close to
the level that had existed at the end
of 1957.
Against this background, the trend
of rates on new capital borrowing in
the U. S. by foreigners followed an
expected pattern. In 1958 such rates
moved within a range of 4 to 6 per
cent, reflecting the relatively easy
credit conditions in U. S. capital
markets. The following year of busi
ness recovery resulted in an entirely
different pattern, as the yield curve
for "foreign " rates was reduced to a
4.
RATES on FOREIGN BORROWING in the U.S. and
SELECTED U.S. INTEREST RATES
Percent
8
7
6
5
spread of 4^2 to 5J/2 percent. The
4
narrowed spread during a business
expansion no doubt reflects the in
ability or refusal of financial institu
3
tions or markets to meet the credit
\ 14 3-5 YEAR U.S. G O V T. BONDS
needs of m arginal borrowers. On the
other hand, these dem ands are fre
2
quently satisfied during periods of
credit expansion as reflected in the
1
wider rate spread. In 1960 credit
1958
1959
1960
1961
1962
1963
conditions shifted again with the
S o u r c e of d a t a : F e d e r a l R e s e r v e B a n k of C l e v e l a n d
onset of another business recession,
and the spread for coupon rates on foreign
INTEREST RATE DIFFERENTIALS
issues again widened. The range of rates was
still relatively high in 1960 because U. S.
In Chart 4 market interest rates on domestic
credit policy had been designed to prevent
debt issues in the U. S. are presented in order
sharp declines in short-term interest rates as
to illustrate, in part, the market conditions
a deterrent to further deterioration in the U. S.
under which foreign capital was raised. The
balance of payments. With very few ex cep
general range of coupon rates on foreign
tions, rates on foreign borrowings continued
issues is shown by the light area on the chart
in the 5 to 7 percent range through 1963.3
from 1958 through 1963. It is apparent from
3 The gradual rise in U. S. interest rates that occurred
in the second half of 1963 did not affect the cost of
foreign borrowing substantially because few foreign
issues were sold or placed after the interest equalization
tax was proposed in July.
the chart that foreign borrowing costs were
high in relation to concurrent yields on U. S.
domestic issues. Several explanations can
7
E C O N O M IC R EV IEW
be offered: as a group, the foreign issues may
not have matched the quality of the U. S.
issues and as a result may have carried a
higher rate; the predominance of long-term
issues within foreign borrowing may have
resulted in a higher range of rates; and
finally, it is probable that many foreign issues
bore relatively higher rates in order to over
come U. S. buyer resistance to investing in
another nation.
In addition, many foreign issues were sold
at a discount, i.e., sold for less than par value,
thereby providing the buyer with an effective
yield that exceeded the coupon rate. In 1958,
for exam ple, 22 of the 39 financing operations
involved a sale price below par. The number
of such discounted issues declined in the
succeeding three years, as the total number
of foreign borrowing decreased, but then
increased moderately in 1962 and 1963. The
av erage difference between the effective
yield and the coupon rate for the six-year
period was 0 .2 0 percent. The av erage differ
entials were smallest in 1958 and I960, both
years in which there was a sharp but unsus
tained drop in U. S. interest rate levels.
Few of the new foreign issues were sold in
the U. S. at a premium, i.e., at a price in
excess of par value; only 9 issues were sold
at a premium in the six years covered by the
study. In addition, the discount in yield was
quite small, amounting to only O .lL p ercen t.
There did not appear to be any pattern in
sales or placements that were m ade at a
premium.
Q U A LITY RATIN GS
Another characteristic of the foreign capital
issues tabulated in the study was the existence
of investment ratings applied to the issues.
About one-fourth of the dollar volume of
foreign issues carried an investment rating
and the number of rated issues declined over
the six-year period because of the increase
in the proportion of issues privately placed.
It is possible, however, to determine an aver
ag e coupon rate for rated versus nonrated
foreign debt securities for 1958 through
1962, as shown in Table II.
TABLE II
Characteristics of Rated and Nonrated Foreign Securities
Issued in the U. S.
Rated
Nonrated
Year
A ve ra g e
coupon
rate
A vera ge
dollar
size
A ve ra g e
maturity
A vera ge
coupon
rate
A ve ra g e
dollar
size
A v e ra g e
maturity
1958
4 .6 3 %
$20.2 mil.
17.6 yrs.
5 .3 5 %
$13.1 mil.
1 3.2 yrs.
1959
5.08
35.0
23.1
5.36
15.6
15.9
1960
5.30
20.8
23.0
5.75
10.6
18.3
1961
5.56
17.5
20.0
5.52
7.7
9.7
1962
5.42
26.7
18.3
5.73
21.0
16.0
Source: Federal Reserve Bank of Cleveland
JUNE 1 9 6 4
With the exception of 1961, rated issues
carried lower coupon rates, on the average,
than the issues without ratings during the
five-year period despite the fact that rated
issues had substantially longer maturity
lengths. Presumably, rated issues have a
higher investment quality and thus can be
sold publicly at a lower interest cost.
RATE C O M P A R ISO N S
Even using the average coupon rate for
rated issues only, foreign borrowers paid a
relatively high price for capital in the U. S.
The com parative cost of capital here may
not have been the principal attraction for
many of these foreign borrowers. To illustrate
this point, comparisons have been m ade for
five nations that used the U. S. markets
between 1958 and 1963 relating their costs
of borrowing in the U. S. to their domestic
interest rate levels.4 U. S. borrowing includes
capital raised by both governments and busi
nesses and placed both publicly and privately.
Rates in the United States are averages
(where applicable) of the coupon yields on
new issues during the year.
Australian borrowing in the U. S. was
chiefly for purposes of financing the opera
tions of the Commonwealth. Although almost
all of the new issues floated in the U. S. had
maturities of 20 years, the best available
domestic rate to use for comparison is the
series on 12-year Australian government
bonds, published by the International Mone
tary Fund. In all but one of the six years in
the period under review, coupon rates ob-
tained in the U. S. by Australia were higher
than concurrent av erage domestic rates. The
difference between coupon rates in the U. S.
and market yields in effect in Australia at
the time of the borrowing ranged from plus
21 basis points in favor of the U. S. to minus
60 basis points, i.e., in one month the rate in
the U. S. was 21 basis points below the
Australian rate, while in another borrowing,
the U. S. rate was 60 basis points above the
Australian level.
Belgian borrowing was also restricted to
the national government, with a common
maturity of 15 years. The statistical series on
long-term government bond yields in Belgium
is the series on 4 percent re n te s ("unified
deb t" bonds with no maturity), published by
the IMF. In this case, the rates obtained in
the U. S. were substantially above domestic
yields, with an av erage spread of one per
centage point during the month of each
borrowing operation.
New capital obtained in the U. S. by C an ada
was raised by a wide variety of governmental
units and businesses. For comparison pur
poses, domestic rate av erages of C anadian
market yields on 4 0 bonds, including those
issued by provinces, cities, public utilities,
and industries, have been used.5 It is apparent
from the table that C anadian borrowers ob
tained lower interest rates in the U. S. than
were available in C an ada in five of the six
years from 1958 through 1963. Because few
of the new C anadian issues sold in 1961 were
governmental, the av erage rate obtained in
the U. S. that year may not be representative.
4 The borrowing of four of these nations in the U. S.
was discussed in some detail in the January 1964
E c o n o m ic R eview article.
5 This series is compiled by McLeod, Young, Weir, &
Company of Toronto and Montreal.
9
E C O N O M IC REVIEW
TABLE III
Annual Interest Rates on Foreign Borrowing
in the United States and in Foreign Markets
Australia
Belgium
Canada
Japan
N o rw ay
Year
Rate
in
U. S.
Domes
tic
Rate
Rate
in
U. S.
Domes
tic
Rate
Rate
in
U. S.
Domes
tic
Rate
Rate
in
U. S.
Domes
tic
Rate
Rate
in
U. S.
Domes
tic
Rate
1958
4.88
4.97
—
4.57
4.32
4.93
—
7 .90
5.38
4.76
1959
5.50
4.91
5.25
4.27
5.10
5.63
5.00
7.90
—
4.61
1960
5.25
4.99
—
4.30
5.25
5.81
7.25
7.91
5.75
4.58
1961
5.50
5.27
5.50
4.36
5.66
5.55
5.50
7.60
5.50
4.64
1962
5.50
4.92
5.25
4.26
5.02
5.51
6.32
7.48
5.50
4.66
1963
5.00
4.60
—
4 .9 7*
4.98
5.46
6.09
7.48
5.38
4.63
Ave rag e spread
in favor of
U. S.
rates
+ 0 .3 3
+ 1.04
0.43
1.64
+ 0.85
* Change in statistical series
Note: ‘‘Rate in U. S.” is the average coupon yield on new capital issues sold or placed in the U. S. capital markets. The domestic
rates are: for Australia, Belgium, and Norway, the series on long-term government bonds as published by the International
Monetary Fund; for Japan, the average yield on 7-year industrial bonds published by the Bank of Japan; and for Canada,
the 40-bond yield average compiled by McLeod, Young, Weir and Company.
Source: Federal Reserve Bank of Cleveland
Nevertheless, the C anadian experience con
trasts with that of Australia and Belgium.
Norwegian borrowers, all governmental,
also paid higher rates in the U. S. than were
being ch arged in their own capital markets.
For Norway, the U. S. spread over rates on
12- to 15-year government bonds ranged
from 35 to more than 100 basis points. In
contrast, the Japanese differential, using yields
of 7-year industrial bonds published by the
Bank of Japan, favored their borrowing in
the United States by a very wide margin.
Japan and, to a lesser extent, C an ada prob
ably reflect the capital market situation in
countries experiencing a high growth rate.
Higher interest rate levels are also typical
TO
of many underdeveloped areas with a short
ag e of investment capital and less developed
financial markets. In the case of Australia,
Belgium, and Norway, the supply of invest
ment capital available domestically may have
been so limited that the higher cost of borrow
ing in the U. S. did not act as a deterrent. In
fact, several studies of the relationship b e
tween interest rate differentials and foreign
borrowing in this country indicate some
insensitivity to interest rate levels.6
6 A number of studies on foreign capital borrowing in
the United States were published in 1962 and 1963.
Among those that dealt with the question of comparative
interest rates are:
Bell, Philip, "Private Capital Movements and the U. S.
JUNE 1 9 6 4
It might also be pointed out that interest
rates in most of the other capital supplying
nations of the world are as high as or higher
than the levels obtained by foreign borrowers
in the U. S. For example, market rates on
public authority bonds in Germ any ranged
from 5 3 percent to nearly 7 percent in the
1958-63 period, while monthly yields on
long-term government issues in G reat Britain
varied from 4.72 percent to 6.59 percent.
In the Netherlands, Switzerland, and Sweden,
yields on government bonds were below 5
percent but access to the capital markets of
these nations is severely restricted. It should
be rem em bered that the government bond
rates used as com parisons represent the lower
range of borrowing costs in the individual
countries. Foreign borrowers would probably
be faced with higher rates. To illustrate, some
Commonwealth countries borrowing in G reat
6 (continued)
Balance of Payments Position” , F a c to rs A ffe c tin g
th e U n ite d S ta tes B a la n ce o f P a y m e n ts , Joint
Economic Committee, U. S. Congress, 1962.
Gemmill, Robert F., "New Foreign Bond Issues in the
U. S. Market” , F e d e ra l Reserve B u lle tin , Board of
Governors of the Federal Reserve System, May 1963.
Kaufman, George G .( "Foreign Long-Term Borrowing in
the United States” , Business C o n d itio n s , Federal
Reserve Bank of Chicago, September 1963.
Kenen, Peter B., "Towards an Atlantic Capital Market” ,
Lloy d s B a nk R eview , Lloyds Bank Limited, July
1963.
Meek, Paul, "United States Investment in Foreign
Securities (excluding Canadian and IBRD Issues)” ,
U.
S.
P riv a te
and
G o v e rn m e n t
In v e s tm e n t
edited by R. F. Mikesell, University of
Oregon Books, 1962.
A b roa d ,
Rothwell, Jack C., "Foreign Borrowing in the U. S .",
B usiness Review , Federal Reserve Bank of Phila
delphia, November 1962.
TABLE IV
Underwriting Spread on New
Foreign Issues Sold in U. S.
(Annual Averages)
Year
Spre ad
Number of
relevant
issues
1958
0 .2 9 %
9
19 5 9
1960
1961
1962
0.22
0.20
6
4
1963
0.23
0.25
0.20
6
8
5
A v e ra g e for
6-year period
0 .2 3 %
Source: Federal Reserve Bank of Cleveland
Britain in 1963 obtained coupon rates that
were half a percentage point higher than the
existing yields on long-term British govern
ments, and those countries were considered
favored borrowers.
U N D ERW RITIN G CO STS
Interest costs, whether represented by
coupon rates or effective yields, do not
account for all of the borrowing costs in
curred by an organization raising funds in
the capital markets. There are a number of
other fees that must be paid, e.g., under
writing costs, taxes, and legal fees. It is
generally accepted that such marketing
costs have been quite low in U. S. markets,
probably because of the high degree of
organization and efficiency. The interest
equalization tax proposed last year would
have the effect of increasing borrowing costs
for the countries that have not been granted
an exemption from the tax.
1 1
E C O N O M IC R EVIEW
Underwriting and administrative costs vary
rather widely for foreign borrowers in the
U. S. The interest cost to the borrower was
not available for many of the new foreign
issues tabulated in this study. When avail
able, however, it was possible to compute the
underwriting spread by subtracting the re
offering yields. Such spreads do not include
all marketing costs such as legal fees and local
taxes, but do give an indication of the extra
costs of borrowing in this country. The data
are presented in Table IV.
While the number of issues represented in
Table IV is only a small part of total new issues
covered by the study, the sam ple is sufficient
to draw some conclusions. Underwriting
spreads on C anadian securities were smaller
than for most other countries. In addition,
spreads on Australian borrowing of about
0.22 percent were somewhat lower than the
Belgian and Norwegian averages of 0.28
percent.7 The rather curious relationship
between the size of the average spread and
the number of applicable issues is probably
due to the fact that borrowing by less frequent
visitors to the U. S. markets was high in 1958
and 1962; apparently the underwriting spread
for these nations was higher than for the
more frequent borrowers such as Norway
and Australia.
W ere the underwriting spreads incurred
in the U. S. more of a burden to the borrowers
7 The Norwegian average, in turn, can be broken down
into an average spread of 0.26 percent on borrowing by
the Kingdom of Norway and 0.31 percent on new issues
sold by the city of Oslo.
12
than similar costs in other capital markets of
the world? To the contrary; from the scant
information that is available, the U. S. ranks
the lowest in these borrowing costs among
the major nations.8
C O N C LU S IO N
It appears that the bulk of new foreign
capital reviewed in this study was raised in
the United States for three reasons: accepta
bility, accessibility, and availability. Because
the U. S. dollar is a key currency, funds
raised in dollars are widely accepted in
international commerce. Add to this the
tremendous need for capital that exists in
the world, and the stage is set for substantial
dem ands for dollar funds. It is recognized
that the United States has the most efficient
capital markets with the fewest restrictions on
prospective borrowers. Moreover, available
investment funds in the United States are
much larger than the amounts available in
foreign capital markets.
A change in interest rates on new foreign
issues probably has its most important in
fluence on those issues that can be postponed
or shifted into another capital market, but
the number of such issues may be limited.
Some observers anticipate a sudden surge in
new foreign issues in the U. S. capital m ar
kets following either enactment or defeat
of the interest equalization tax proposal.
8 See, for example, Kenen, Peter B. "Towards an
Atlantic Capital Market," Llo y d s B a n k R eview , July
1963.
JUNE 1 9 6 4
A FURTHER NOTE ON
CITY INDUSTRIAL PATTERNS
A
N EARLIER STUDY of seven major cities
found that "con vergen ce" had taken
place in the economic makeup of those
cities.1 That is to say, the composition of
employment in the seven cities between the
C ensus years 1950 and 1960 had been
altered so that the industrial profile of each
of the cities was becoming more like the
others, but without necessarily giving up
its individual specialty. Because the seven
cities included in the study were too few in
number to establish definitive statistical rela
tionships, the convergence thesis was offered
only as an hypothesis. The purpose of the
present article is to test the hypothesis further
by exam ining data for 19 additional cities,
bringing the total to 26 selected cities.
1 Cutler, A. T., C h a n g in g E c o n o m ic P ro file s o f
S e le cte d U. S. C ities , Federal Reserve Bank of Cleve
land, October 1962.
SELECTIO N O F CITIES
The 26 cities selected for this study are
shown in Table I. They are all in the Eastern
or North Central regions of the United States
with the exception of Baltimore, which is
assigned by C ensus to the Southeast, but is
sufficiently similar to the other cities to be
included here. New York, Chicago, and
Washington are omitted; New York and
Chicago are excluded becau se their pre
dominance in size tends to obscure com
parisons of industrial composition, and W ash
ington because occupational patterns are
unique. With these important exceptions, the
list includes cities that range in size from
Philadelphia, with nearly 4 million in its
metropolitan area, down to Syracuse, N. Y.,
with about 350,000.
The unit of the study is the Standard Metro
politan Statistical Area. (The earlier study, by
13
E C O N O M IC REVIEW
contrast, was in terms of the "urbanized
a re a " unit.) The second column of Table I
shows the populations of the 26 SM SA 's as of
1950, in descending order of population.
The first column shows the percentage in
creases in population between 1950 and
1960.2
Examination of Table I indicates that there
was no "con vergen ce" effect in population,
i.e., the smaller cities did not gain relatively
more in population and the larger cities did
not gain relatively less. Nor was there a
reverse relationship.3 Although the population
statistics do not conform to the convergence
hypothesis, they do indicate the general
nature of the 26 cities being discussed in this
article.
DURABLE G O O D S EM PLOYM ENT
A test of the convergence hypothesis in
durable goods employment is presented in
Table II. The data are arranged so that the
first column can be taken as the dependent
variable, and the second as the independent
variable. The second column shows employ
ment in durable goods manufacturing in 1950
2 For this table, as with all following tables, it was
necessary to make adjustment for changes that occurred
between the two Census periods in the geographical
coverage of a number of SMSA's. Figures for counties
that had been added to or subtracted from the coverage
during the interval were subtracted from, or added to
the figures reported for the SMSA as defined by the
1960 Census. For certain of the New England SMSA's
the adjustment process required an estimation by ratio
methods, insofar as specific county or township data
were lacking.
3 A two-variable linear correlation, with column 1 as
the dependent variable, yields an r value of —.09 and
an r2 value of only .007, which is far below the level
of significance.
14
in each of the metropolitan areas as a per
centage of total employment. The first column
shows the change in that percentage between
1950 and 1960. For example, in 1950 Detroit
had 40.6% of its total employment in durable
goods manufacture, but in 1960 it had 33.7%
(not shown in table). The c h a n g e in share (a
decline of 6.9%) is recorded in the first
column. The individual metropolitan areas
are arranged in order of the first column
TABLE I
Population
SM SA
(as of 1950)
Philadelphia, Pa.
Detroit, Mich.
Boston, Mass.
Pittsburgh, Pa.
St. Louis, Mo.-III.
Cleveland, Ohio
Baltimore, Md.
MinneapolisSt. Paul, Minn.
Buffalo, N. Y.
Cincinnati, Ohio-Ky.
Milwaukee, Wis.
Kansas City,
Mo.-Kan.
Providence, R. 1.
Indianapolis, Ind.
Youngstown, Ohio
Albany-SchenectadyTroy, N. Y.
Columbus, Ohio
Rochester, N. Y.
Dayton, Ohio
Allentown-BethlehemEaston, Pa.
Akron, Ohio
SpringfieldHolyoke, Mass.
Toledo, Ohio
W ilkes-BarreHazleton, Pa.
Hartford, Conn.
Syracuse, N. Y.
% Change in
Population
1 9 5 0 -6 0
Population in
1950
(thousands)
1 8 .3 %
24.8
7.4
8.7
18.6
22.6
22.5
3,671
3,016
2 ,370
2,213
1,681
1,466
1,337
28.0
20.0
18.5
18.9
1,1 17
1,089
904
871
27.6
7.3
26.4
20.6
814
737
552
528
10.5
35.8
20.1
36.1
515
503
488
457
12.3
25.4
438
410
15.7
15.4
407
396
- 1 1.5
29.1
23.7
392
358
342
JUNE 1 9 6 4
figures, ranging from the largest declines in
the durable goods shares, through the smaller
declines, and up through the increases.
It is seen by inspection that there was a
tendency for cities that had large relative
declines in employment in durable goods
manufacturing to be those with relatively
large shares in durable goods at the begin
ning of the period. Likewise, the cities that
showed m arked gains in durable goods m anu
facturing (near the bottom of the table) were
in general those with a relatively small
specialization in durable goods m anufac
turing for either C ensus year. Correlation
analysis confirms the statistical significance
of the relationship.4
OTHER EM PLOYM ENT C A TEG O R IES
A similar pattern em erges in respect to
employment in nondurable goods m anufac
turing, employment in finance, and employ
ment in services. Data for these three cate
gories are consolidated in Table III, which
shows, as does Table II, the c h a n g e s in sh are
of total employment that occurred in each
category. In this table, however, the various
metropolitan areas are arranged in a standard
alphabetical order.
N o n d u rab le G ood s E m p lo y m e n t. The
first two columns of Table III apply to employ
ment in nondurable goods manufacturing.
Here, because of the alphabetical arran ge
ment of the cities, the convergence effect is
not readily apparent (as in Table II). None
theless, it is there, with the roles of the respec
tive cities being altered. Among the cities
that were strongest in nondurable goods
manufacturing in 1950, Providence, PhilaTABLE II
Durable Goods Employment
as Share of Total
SM SA
(as of 1950)
Detroit, Mich.
Dayton, Ohio
Youngstown, Ohio
Albany-SchenectadyTroy, N. Y.
Toledo, Ohio
Buffalo, N. Y.
Cleveland, Ohio
Pittsburgh, Pa.
Syracuse, N. Y.
SpringfieldHolyoke, Mass.
Rochester, N. Y.
Indianapolis, Ind.
Cincinnati, Ohio-Ky.
Milwaukee, Wis.
Columbus, Ohio
St. Louis, Mo.-III.
Philadelphia, Pa.
Kansas City,
Mo.-Kan.
Allentown-BethlehemEaston, Pa.-N. J.
MinneapolisSt. Paul, Minn.
Baltimore, Md.
C hange in Employment
Durable
in Durable
G o o d s Mftr. G o o d s Mftr.
as % of
as % of Total
Employment Employment
1 9 5 0 -6 0
1950
-6 .9 %
4 0 .6 %
-6 .7
-4 .1
44.9
-4 .0
-3 .3
-1 .6
-1 .3
-1 .1
-0 .5
-0 .2
+ 0.2
+ 0.2
+ 0.7
31.8
19.7
29.7
26.3
29.4
31.5
26.1
1.1
1.3
1.6
1.8
21.2
31.2
20.3
17.9
28.6
16.2
16.6
16.1
+ 1.9
10.5
+ 2.0
25.1
+ 2.0
+ 2.3
12.7
17.5
Hartford, Conn.
Providence, R. 1.
+ 2.6
+ 2.8
25.3
+
+
+
+
4 Using the first column as the dependent variable, the
coefficient of correlation (r) is —.77 and the coefficient
of determination (r2) is .59.
Boston, Mass.
+ 2.8
Akron, Ohio
+ 3.5
12.6
12.3
Statistically, this is significant when examined in
terms of the F-ratio.
W ilkes-BarreHazleton, Pa.
+ 4.8
4.7
20.8
15
E C O N O M IC R EV IEW
delphia, and Boston showed appreciable
declines in nondurable goods employment
as a share of total employment over the
1950-60 interval. At the other end, cities such
as Pittsburgh, Detroit, Dayton, and Columbus,
where the nondurable goods share was low
in 1950, showed appreciable g a in s in that
share during the ten-year interval. The
results of the correlation test confirm this
for the nondurable goods relationship.5
E m p lo y m e n t in F in a n c e . The second
pair of columns in Table III represents the
Census category "finance, insurance and
real estate." Cities that were outstanding in
the share of employment represented by this
category in 1950 included Hartford, Boston,
Minneapolis, and Columbus. O ne of the
four showed a decline in share between 1950
and 1960 and the other three showed rela
tively small gains. At the other end, cities with
relatively small employment in finance in
1 9 5 0 , R o ch ester, A llen tow n -B eth leh em Easton, and Youngstown, scored relatively
large gains over the ten-year interval. The
correlation measurement for this pair of
series is significant at the 95% probability
level.6
E m p lo y m e n t in Services. The conver
gen ce effect is less marked in employment in
services than in other sectors. (See the third
pair of columns of Table III.) As used here,
"se rv ic es" include several Census items, in
cluding employment in business and repair
services, in entertainment and recreational
services, and in professional and related
5 The r value —.70 and the r2 value .48 are again
significant, according to the F-table.
6 The r value is —.65 and the r2 value is .42.
16FRASER
Digitized for
services. (Government em ployees such as
school teachers are not included.)
The three cities for which employment in
services was an outstandingly high propor
tion of total employment in 1950 were Boston,
Columbus, Minneapolis. The "ch an ge in
sh are" for those cities between 1950 and
1960 tended to be on the low side. At the
other end, the cities that were low in the
services component in 1950 (including such
steel or coal mining cities as Youngstown,
Allentown - Bethlehem - Easton, and Wilkes Barre-Hazleton) showed increases over the
ten-year interval that were not substantially
different from those of the "h igh service"
cities. Thus, in this area, the convergence
effect is somewhat blurred.
Under such circum stances, use of correla
tion analysis becom es particularly significant.
The test shows a much smaller degree of
relationship than the ones previously de
scribed.7
HIGH SP EC IA LIZA TIO N AREAS
In the case of highly specialized metro
politan areas, it is appropriate and feasible
to deal in terms of particular industries rather
than with broad categories such as "du rab le
goods m anufacturing" or "nondurable goods
m anufacturing." The 11 SM SA 's that are
presented in Table IV have an outstandingly
high degree of specialization in a particular
industry.8 This is highlighted in the second
7 The r value is —.42 and the r2 value only .17. Ac
cording to the F-table, the relationship is scarcely more
than could be considered significant at the 95%
probability level.
8 The selection of the 11 cities is based on measure
ments of specialization described in Gunnar Alexandersson, T h e I n d u s tr ia l S tr u c t u r e o f A m e ric a n
C itie s . University of Nebraska Press, 1956.
TABLE III
Nondurable Goods, Finance, Services
SM SA
(As o f 1950)
C hange in
Nondurable
G o o d s as Share
of Employment
1 9 5 0 -6 0
Employment in
Nondurable
G oods
as % of Total
Employment
1950
C hange in
Fin.-lns.-R.E.
as Share
of Employment
1 9 5 0 -6 0
Employment in
Fin.-lns.-R.E.
as % of Total
Employment
1950
C hange in
Services
as Share
of Employment
1 9 5 0 -6 0
Employment
in Services
as % of Total
Employment
1950
Akron, O h i o .....................
-7 .4 %
3 6 .3 %
+ 0 .5 5 %
2 .6 1 %
+ 2 .8 %
1 5 .4 %
Albany-SchenectadyTroy, N. Y .....................
-0 .8
12.9
+ 0 .6 1
3.09
+ 4 .6
16.2
-2 .3
24.1
-0 .9
-2 .4
-0 .5
-0 .4
12.1
+ 0.58
+ 0.49
+ 0.32
1.88
4.14
5.82
3.06
4.23
+ 2.2
+ 0 .5
+ 2.0
+ 2.4
13.7
19.2
Allentown-BethlehemEaston, Pa.-N. J..............
Baltimore, M d ...................
Boston, M a s s .....................
Buffalo, N. Y .....................
Cincinnati, O hio-Ky.
. . .
Cleveland, O h i o ..............
Columbus, O h i o ..............
Dayton, O h i o ..................
Detroit, M ic h .....................
Hartford, C onn..................
Indianapolis, Ind................
Kansas City, Mo.-Kan. . . .
M ilwaukee, W is .................
Minneapolis-St. Paul, Minn. .
Philadelphia, P a ................
Pittsburgh, P a ....................
Providence, R. 1.................
Rochester, N. Y ..................
St. Louis, Mo.-lll.................
Springfield-Holyoke, M ass. .
Syracuse, N. Y ...................
Toledo, O h i o ..................
W ilkes-Barre-Hazleton, Pa..
Youngstown, O hio . . . .
+ 0 .1
+ 1.7
+ 2.8
+ 1.0
-0 .6
-1 .5
-0 .8
-2 .3
-2 .4
-2 .3
+ 0 .4
-7 .4
-1 .8
-2 .2
-4 .0
-0 .7
+ 0 .3
+ 3.6
+ 0 .7
15.8
13.8
14.8
10.8
7.0
9.3
6.0
7.2
12.3
13.0
13.6
11.9
20.2
6.2
25.8
13.2
16.8
22.5
9.1
8.5
22.6
3.7
+ 0 .4 8
+ 0 .5 2
+ 0 .4 2
+ 0.14
+ 0.46
+ 0.57
-0 .5 5
+ 0.88
+ 0.51
+ 0 .5 9
+ 0 .5 7
+ 0.36
+ 0.63
+ 0.31
3.65
5.19
2.38
3.27
12.12
4.99
5.28
3.74
5.56
4.31
3.27
+ 2.09
+ 0.62
3.08
1.55
4.1 1
+ 0.98
+ 0.87
+ 0 .6 3
3.80
3.98
2.88
+ 0 .7 9
2.09
1.98
+ 0.65
+ 0 .3
+ 1.8
+ 3.6
+ 3.3
+ 4 .1
+ 0 .8
+ 0 .8
+ 1.4
+ 1.6
+
+
+
+
2.1
1.6
3.4
2.2
+ 3.1
+ 2.2
+ 2.2
+ 1.8
+ 4.1
+ 2.6
+ 3.3
21.2
16.0
19.2
17.1
20.7
15.3
15.1
17.6
18.1
18.4
15.5
20.4
17.8
15.8
14.6
16.4
17.1
16.6
19.0
15.8
13.7
13.7
E C O N O M IC R EV IEW
TABLE IV
Employment in Specialty Industries
% Change in
employment
in specialty
1 9 5 0 -1 9 6 0
Employment in
specialty as % of
total employment
19 5 0
Employment in
specialty as % of
total employment
1960
W ilkes-Barre-Hazleton, Pa.
M i n i n g ................................................
-8 1 %
22 .6 %
4 .9 %
Providence, R. I.
Textile mill products...............................
-5 1
17.9
8.4
Detroit, Mich.
M otor vehicles and e q u ip m e n t ..............
-2 7
28.1
18.5
-2 6
11.2
8.1
-1 0
31.7
23.9
- 9
18.3
16.2
S M S A and
Specialty
Albany-Schenectady-Troy, N. Y.
Electrical machinery
...........................
Akron, Ohio
“Other nondurable g o o d s” (includes rubber)
Pittsburgh, Pa.
Primary metals (includes s t e e l ) ..............
Allentown-Bethlehem-Easton, Pa.
Primary m e t a l s ..................................
Youngstown, Ohio
Primary m e t a l s ..................................
Dayton, Ohio
M a c h i n e r y .........................................
Rochester, N. Y.
“Other durable g o o d s”
(includes photo equipm ent).................
Milwaukee, Wis.
M a c h i n e r y .........................................
column where the number employed in a
specialty industry is shown as a percent of
total employment. The third column gives the
corresponding percentage for 1960. The first
column, which shows the percentage change
in employment in the specialty industry be
tween 1950 and 1960, governs the order of
the listing of the cities. (The percentage
changes in column 1 are not changes in
shares, but are changes in employment.
Thus, for example, in Detroit there were
27% fewer employees in the motor vehicle
and equipment industry in 1960 than there
were in 1950.) Employment declines in many
18FRASER
Digitized for
-
3
12.1
8.1
-
2
27.2
24.2
+
5
22.0
18.2
+ 10
19.4
18.7
+ 13
15.7
16.1
of these cities were substantial, with per
centage decreases in the specialty ranging
from 81% in the case of mining in WilkesBarre-Hazleton to 2% in steel in Youngstown.
Not all centers, however, had declines in
employment in the specialty industry; for
example, in Dayton, Rochester, and Mil
waukee, the specialty industries registered
increases. But, on the other hand, in two of
the three cities a relative decline did occur
in employment in the specialty industry (com
pare the second and third columns of the
table). Only one SMSA out of the 11 in the
table registered an increase in employment in
JU N E 1 9 6 4
the specialty industry when m easured as a
share of total employment, namely, Mil
waukee, W isconsin, where the machinery
industry accounted for 15.7% of total employ
ment in 1950 and 16.1% of total employ
ment in 1960.
C O N C L U S IO N S
The evidence cited above supports the
earlier view that the industrial compositions
of cities in the Eastern and North Central
regions tended during the nineteen fifties to
becom e more like each other. This phenome
non is simply a tendency that represents the
net outcome of many economic forces. But
the m agnitude and velocity of such a ten
dency should not be exaggerated in that the
specializations of various cities remain;
Pittsburgh is still an important center of steel
making, despite the relative decline of steel;
Detroit is still the capital of auto manufacture,
despite some dispersion to other auto centers.
The individuality of Am erican cities thus
remains, with a tendency to becom e more
like each other thus far only blurring slightly
the individual contours of the cities involved.
Further research is obviously needed to
answer questions implicitly raised by this
study. For exam ple, what patterns have
em erged in other parts of the country? In
d ecad es other than the nineteen fifties? Is the
tendency of the nineteen fifties a new phen
omenon?
19
Fourth
Federal
Reserve
District
@FedFRASER