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MAY

1969

IN THIS ISSUE

Recent Economic
Developments in the
United K ingdom ........... 3

Some Financial Aspects of
Corporate Merger A ctivity
in the Fourth Federal
Reserve D is t r ic t........... 19

FEDERAL RESERVE

B A N K OF C L E V E L A N D

Additional copies of the ECONOMIC REVIEW may
be obtained from the Research Department, Federal
Reserve Bank o f Cleveland, P. O. Box 6387, Cleve
land, Ohio 44101. Permission is granted to reproduce
any material in this publication providing credit is
given.

MAY 1969

RECENT ECONOMIC DEVELOPMENTS
IN THE UNITED KINGDOM
Since the devaluation of the pound sterling in

than three successive years. However, since 1963,

1949, the balance of payments of the United

the United Kingdom has had such a deficit in each

Kingdom has been periodically weak. This weak

year. In addition to the deficits, periodic heavy

ness, however, did not appear to become en

withdrawals of short-term funds, reflecting dim in

trenched until the mid-1960's. Despite large-scale

ished confidence in the pound, have accentuated

financial assistance in the form

of short-term
1
and

the drain on the United Kingdom's international

International Monetary Fund

A large part of the recent deterioration in the

credits from other Group of Ten countries
credits from the
(IMF),

reserves since late 1964.

the British authorities were forced to

balance of payments occurred in the merchandise

devalue the pound again in 1967. This article first

account, following the normal pattern of the

examines the nature of the external and internal

United Kingdom's balance of trade. From World

problems that led to the 1967 devaluation and

War II to 1958, the growth in the volume of

then attempts to evaluate the progress of the

exports generally kept pace w ith that of imports;

British authorities in tackling subsequent prob

however, between 1958 and 1967, exports ex
panded less than imports. The share of British

lems.

exports in world trade had begun to decline before

BALANCE OF PAYMENTS SITUATION
Between World War II and 1963, the United

1958. The decline may have reflected in part the
erosion of the system of Commonwealth (formerly

Kingdom did not incur a deficit in its combined

Imperial) preference that favored entry of British

current and long-term capital accounts for more

goods into the markets of the British Common

wealth. In addition, there was a growing tendency

The Group o f Ten countries are:

Belgium, Canada,

France, Germany, Ita ly, Japan, the Netherlands, Sweden,

of both well-established and newly independent

the United Kingdom , and the United States.

countries

the

British

Commonwealth

to
3

ECONOMIC REVIEW
TABLE I
United Kingdom
Selected Balance of Payments Accounts
(Value in millions of pounds sterling)
Selected Balance o f
Payments Accounts (net)
Current and long-term
capital accounts
Goods, services, and transfers
Trade balance
Governm ent current payments:
M ilita ry
A id and payments to
international organizations
Other
Other (m ainly private) services
and transfers

1958

1960

1959

+£ 148

— je 112 —£ 457
+ 344 + 143 - 265
+
29 117 - 406

1961

14 - £ 37 - £ 7 6 9 —£ 294 - £ 97 -<£515 —£ 458
5 - 399 - 419
112 + 111 - 399 91 +
537 - 272 80 136 - 635 - 796
102 -

198

224 -

237 -

268 -

282 -

269 -

265

95 _
41 -

95 48 -

113 51 -

139 40 -

132 56 -

127 70 -

128
69

570

628

611

702

839

172

61 32 -

63 35 -

773
37

423

Sources: United
Kingdom , Central Statistical
September 1968 and March 1969

487

O ffice,

—

92
42
480

—

574

573

Economic Trends,

broaden their trading connections at the expense

customers has accentuated weaknesses in the

of British exports. Consequently, the volume of

current account of the United Kingdom's balance

British exports to the Commonwealth appears to

of payments since World War II. Historically, these

have declined since 1960.

short-term external sterling liabilities arose because

Also as part of the traditional pattern of the

a large part of world commodity trade was either

United Kingdom's balance of payments, the deficit

physically routed or financed through London.

in the merchandise trade account was more than

Moreover, it was convenient fo r trading nations to

offset by a surplus in the services account during

hold

most of the period from World War II to 1963. In

pound was an international currency. In addition,

balances in London because the British

recent years, the private sector has continued to

official financial institutions of countries w ithin or

earn a substantial surplus on services, but increased

otherwise associated w ith the British Empire devel

Government payments overseas reduced the net

oped the practice of holding balances in pounds to

surplus in the total services account to a level that

back issues of local currency.

has not been enough to cover the merchandise

Just before World War II, the United Kingdom's

deficit since 1964 (see Table I). Government

international reserves nearly matched its external

payments were incurred on an increasing scale, not

short-term sterling debt (see Chart 1); however,

only to maintain m ilitary establishments overseas

the demands of the war led to the liquidation of a

but also to provide economic assistance to less-

substantial portion of British investments overo
seas as well as to the accumulation of external

developed countries, particularly former colonial
territories.
A large volume of short-term external debt in
the form of sterling balances held fo r overseas

1968

+£
+
—

129 -

1967

1966

64
4
152

126 -

534

1965

+£
—
-

1964

1963

1962

^ A . R. Conan,

The Problem o f Sterling

M artin's Press, 1966), p. 68.

(New Y o rk: St.

MAY 1969
1964, as increases in British liabilities to central

C h a r t 1.

U N ITED K IN G D O M : IN T E R N A T IO N A L RESERVES
a nd STERLING LIABILITIES
End

o f S e le c te d

B illio n s

P e r io d s

banks in North

America and Western Europe

(including outstanding currency swaps under spe
cial arrangements) and to the IMF have offset

of pounds

decreases in liabilities to other holders. In general,
S T E R L IN G L IA B IL IT IE S

however, the net total of the United Kingdom's

N E T o f C L A IM S

short-term external liabilities has continued to be
about five

times

larger than its international

reserves. This illustrates a major United Kingdom

IN T E R N A T IO N A L
RESERVES

d ifficu lty: inadequate short-run liquidity in the

form of o fficially held international reserves. In
1967
N OTE:

S e p t. 1 9 6 8

F ig u re s w ith in b a rs in b i llio n s o f d o lla r s a t r e le v a n t e x c h a n g e r a te .

Last en try: Sept. 68
Sources o f d a ta :

contrast, the United Kingdom's total identified
foreign assets (both short- and long-term) exceed
its foreign liabilities by an appreciable and growing

B a n k o f E n g la n d a n d In te r n a tio n a l M o n e ta r y F und

margin.

short-term liabilities that were about six times as
large as the United Kingdom's international re

THE DOMESTIC ECONOMY
UNDER CONSTRAINT

serves. The remainder of officially held securities

The weakening of the overall balance of pay

was sold in 1967 in order to increase international

ments position in the 1960's indicated the need to

reserves (as normally defined). Of the total of

strengthen the domestic economy if the United

£1,132 m illion in international reserves at the end

Kingdom was to compete more effectively with

of September 1968, £ 619 m illion was in the form

other industrialized countries. By 1963, it had

of gold and the balance (£ 513 m illion) in interna

become clear that the United Kingdom's prospects

tional currencies; in September, the sterling bal

of entering the European Economic Community

ances agreement was confirmed, as discussed later

(the Common Market) were slight, and because of

in this article.

sluggishness in the domestic economy, the British
Kingdom's

Government decided to promote an expansionary

short-term external liabilities in sterling changed in

The composition of the United

climate that favored a higher rate of productive

postwar period, as obligations that arose

investment. Despite a rise in employment and a

during World War II were paid o ff and replaced by

spurt in production in the second half of 1963,

the

new liabilities, reflecting postwar accumulations of

industrial output increased, on average, by less

pounds by members of the sterling area out of the

than 2 percent a year after 1960, compared with

trading surpluses of these countries w ith the rest

an average annual increase of more than 3 1/2

of the world.

percent between 1948 and 1960. Private business

A further change has occurred since

investment (private fixed capital formation less
3

Bank o f England,

Quarterly Bulletin,

pp. 264-275.

December 1963,

expenditures

residential

construction)

counted fo r only 8.1 percent of Gross National
5

ECONOMIC REVIEW

Product in 1963, in contrast to 8.7 percent in

toward eventually achieving economic stability.

1960.

Instead, the Government embarked on a policy of

As they had done since World War II, wage

containing internal demand while proceeding, as

rates continued to rise faster than output in the

far as the balance of payments constraint allowed,

1960's. In the three years ending in 1963, wage

with the task of restructuring the economy.

rates increased at an average annual rate of 4

From November 1964 to devaluation in No

percent. But partly because of overtime pay and

vember 1967, there were four clearly marked

partly because employers frequently pay more

phases of British economic policy, all of which

than contract rates when labor is in short supply,

appeared to affect the balance of payments. The

weekly earnings increased even faster, by 4.6

first phase, one of recovery, began in November

percent a year. Im port prices, which have a

1964, when Bank rate (the Bank of England's

marked influence on industrial costs in the United

discount rate) was raised by two percentage points

Kingdom, declined during 1961 and 1962, but a

to 7 percent; taxes on petroleum, tobacco, and

succeeding rise in 1963 offset the decline (see

wines and spirits were also raised, and a temporary

Table II). Domestic wholesale and retail prices

surcharge was imposed on imports. A t the same

continued to increase less rapidly than wages

time, banks were asked to restrict credit expan

between 1960 and 1963, and the average rise in

sion. In response to these measures, a temporary

export prices was even lower, reflecting in part the

improvement in the balance of payments on the

need to meet foreign price competition.

current and long-term capital accounts appeared in

In 1964, therefore, public expenditure led the
way in stimulating economic expansion, increasing

the first quarter of 1965 (see Chart 2).
The next phase began in the second quarter of

by 11.3 percent over 1963, compared w ith an

1965, when adverse influences were felt, including

average annual increase of 7.5 percent during the

the effect of measures the United States adopted

1960-1963 period. Industrial output rose by 7.7

to strengthen its own balance of payments. An

percent over the year, outstripping the increases in

increase in British income taxes had already been

wages and prices (see Table II). Moreover, a greater

scheduled fo r the fiscal year beginning in April

proportion of GNP was devoted to productive

1965. In addition, the April Budget incorporated

investment. Unfortunately, the achievement of a

higher taxes on consumption as well as stricter

higher rate of growth had an immediate adverse

controls on overseas investment. In A pril, the

effect upon the balance of payments of the United

Bank of England called fo r Special Deposits (a

Kingdom. A large balance of payments deficit was

form of required reserves) from the main commer

incurred during 1964, and the change in Govern

cial banks, and in May, all banks were requested to

ment in October 1964 was followed by a crisis of

keep total loans w ithin 105 percent of the amount

overseas confidence in the pound that persisted

outstanding in November 1964. Against this back

almost unabatedly until the 1967 devaluation.
Thus, Britain's struggle to overcome its balance

ground, the authorities decided to reduce the
temporary im port surcharge imposed in late 1964

of payments deficit began in earnest in the closing

from 15 percent to 10 percent at the end of April

months of 1964. The Government that assumed

1965 and to cut Bank rate in June from 7 percent

office in October rejected devaluation as a step

to 6 percent. Restrictions on instalment credit

MAY 1969

TABLE II
United Kingdom
Selected Economic Data
(Index averages fo r period)

73
77
83
85
83
89
94
99
99
101
100
105
112
114
115
113
118
120
124
127
127
127
131
132
131
132
133
134
134
134
132
132
132
133
135
137
138
140
142

93
93
95
96
96
96
98
99
100
101
100
101
102
104
105
103
104
105
105
104
106
107
107
108
108
108
108
108
109
109
107
106
106
106
105
105
105
105
105

Source: International M onetary Fund,
supplement

_
-

77
90
91
90
90
93
96
99
100
100
102
104
107
107
108
108
109
110
111
112
113
115
116
117
118
118
119
120
120
119
119
120
121
123
124
125
126

Financial Statistics,

Cost o f
Living
(1958=100)

Weekly
Wage
Rates
(1958=100)

E xp o rt
Prices
(1958=100)

65
66
68
74
81
86
88
91
94
97
100
101
101
104
109
112
112
111
112
113
115
116
117
118
121
122
122
123
126
126
127
128
129
129
130
132
136
136
138

59
61
62
67
73
76
80
85
92
97
100
103
105
110
114
116
118
118
119
121
123
124
125
126
127
130
133
133
134
136
136
136
137
141
143
147
147
149
151

72
73
77
91
95
92
92
93
96
101
100
99
101
101
102
104
104
105
106
106
107
108
108
109
109
110
110
112
114
114
114
115
115
116
117
122
124
126
127

Im por
Prices
n
00

Em ploym ent
(1958=100)

Industrial
O u tp ut
Prices
(1958=100)

LO
05

1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963 I
II
III
IV
1964 I
II
III
IV
1965 I
II
III
IV
1966 I
II
III
IV
1967 I
II
III
IV
1968 I
II
III
IV

Industrial
Production
(1958=100)

75
76
86
114
112
102
101
105
107
108
100
99
99
97
96
99
100
100
102
104
104
103
104
104
104
103
104
105
107
106
106
106
104
105
110
117
117
118
119

various issues; 1967/68

ECONOMIC REVIEW

C h a r t 2.

UNITED K IN G D O M : CURRENT and LONG-TERM CAPITAL ACCOUNTS
in BALANCE of PAYMENTS
Mi llions of dol l ars

M i l lio n s o f p o u n d s

L a s t e n try :
S o u rc e

a n d AFTER

d e v a l u a t i o n o f No v . 18, 1967

'6 8

o f d a ta :

U n ite d

K in g d o m , C e n t r a l S t a t is t ic a l O f f ic e

were tightened in June and July, and in July, the

taxation was modified) or consumption taxes, it

Government announced its intention to curtail

did introduce a new Selective Employment Tax to

public expenditure programs. By the final quarter

be levied after September 1966. The latter tax was

of 1965, the balance of payments showed a

to be refunded, after a time lag, w ith a premium to

marked improvement (see Chart 2).

manufacturing companies and in full to certain

Pressures, however, again began to build up in

specified industries, such as transportation. How

the third policy phase (February 1966 through

ever, the m ajority of the service industries were to

December 1966), due at first to economic sanc

receive no refund. The purposes of the measure

tions that the British Government imposed on

were to obtain short-term financing fo r the Gov

trade w ith Rhodesia, which had assumed indepen

ernment, to increase revenue, and to divert man

dence late in 1965. In February 1966, commercial

power from the service industries to productive

bills and acceptances were brought for the first

industries.

time w ithin the 105 percent ceiling imposed on

By mid-1966, a deterioration in the economic

bank lending. Moreover, restrictions on instalment

outlook, due in part to a strike of British seamen,

credit were tightened further. Although the Bud

necessitated the introduction of further restrictive

get fo r the fiscal year beginning in April 1966 did

measures. In mid-July, the Bank of England made

not raise income taxes (the system of company

an additional call fo r Special Deposits from the

MAY 19G9
main commercial banks and raised Bank rate by

The ceiling on bank loans was lifted in April,

one percentage point back up to 7 percent. A few

although the banks were encouraged to continue

days later the Government (1) increased taxes on

to use discretion in their lending, and restrictions

consumption by 10 percent, (2) tightened restric

on instalment credit were eased between April and

tions on instalment credit again, (3) intensified

August.

controls on funds flowing out of the country and

Freed from legislative restraint at the end of

foreign travel expenditures by United Kingdom

June, incomes surged upwards, paving the way for

residents, and (4) announced further cuts in public

a consumer spending boom. However, dock strikes

investment programs and Government spending

at major British ports began late in September and

overseas. A t the same time, the Government

continued

into

November, frustrating

exports

imposed a freeze on increases in incomes and

more than imports; in response, the outflow of

prices to be effective until the end of 1966 and a

foreign-held funds increased. Bank rate was raised

period of severe restraint on such increases for the

by one-half of one percentage point in October

first half of 1967. The third policy phase ended

and again in early November, mainly to keep it in

with a substantial balance of payments surplus in

line w ith interest rates in other world financial

the fourth quarter of 1966, although this was

centers. Faced w ith the enormous task of restoring

largely attributable to delays in some imports in

foreign confidence in the pound through a further

anticipation of the removal of the remaining 10

bout of domestic restrictions (perhaps foreshadow

imports at the end of

ing a return to stagnation), while a major part of

November.
The fourth and final phase began w ith the

foreign trade was paralyzed, the British Govern

United Kingdom's balance of payments still in

percent on November 18, 1967.

percent surcharge on

surplus in the first quarter of 1967, although by a
much smaller amount than

ment decided to devalue the pound by 14.3
Apparently, the steps taken by the British

in the preceding

Government to restructure and strengthen the

quarter. The freeze on incomes and prices had

economy in the period before devaluation were

checked their upward trend, but economic activity

insufficient. Two measures passed in 1966, invest

again showed signs of stagnating, and a second

ment grants to industry to encourage moderniza

attempt to enter the Common Market was frus

tion

and an official

Industrial

Reconstruction

trated. Unemployment was rising, and industrial

Corporation to foster more efficient industrial

production had fallen slightly from the level in

groupings, hardly had time to take effect. Employ

early 1966 (see Table II). The British authorities

ment training programs, whether sponsored by the

gradually began to relax the restrictive policies

Government or by private industry, were probably

that continued into the autumn of 1967, despite

started on too small a scale. A shorter standard

the adverse effect that the closing of the Suez

workweek

hours,

introduced

during

Canal in June had on the merchandise trade

1964-1966, actually may have added to costs at a

balance. Between January and May 1967, Bank

critical time. Finally, the Selective Employment

rate was lowered one-half of one percentage point

Tax apparently did not induce the shift in employ

in three stages to 5 1/2 percent, and the April

ment to manufacturing from the service industries

1967 Budget was neutral in its economic impact.

that was intended.

ECONOMIC REVIEW

STRUCTURAL WEAKNESSES

to raise productivity. This, in turn, would seem to

The chronicle of events that led to the devalua

depend upon a higher rate of capital investment as

tion of the pound in 1967 tends to confirm the

well as the cooperation of management and labor

existence of structural

the

to maximize output from the available capital

British

economy.

Each

weaknesses w ithin

expansion

equipment. The rate at which British enterprises

quickly resulted in a deterioration in the balance

economic

have increased business fixed investment and the

of payments, and equilibrium was regained only

absolute level of capital equipment per worker has

by bringing about virtual domestic stagnation.

been estimated to be lower than in other indus

As a result, GNP has grown more slowly in the

trialized countries, w ith the exception of Italy.4 It

United Kingdom than in other major countries.

appears that the United Kingdom w ill have to

For example, between 1958 and 1967, in the

overcome the deficiency in capital equipment if it

United Kingdom, GNP increased at an average

is to be competitive; this tends to justify the

annual rate of 5.9 percent in current pounds or 3.2

attempts of successive British Governments to

percent in constant pounds, while in the United

stimulate industrial investment.

States, GNP increased at an average annual rate of

On the other hand, both the quality of the

6.5 percent in current dollars and 4.7 percent in

British labor force and the rate of increase in its

constant dollars. The spread between the rates of

skill do not appear to be significantly different

growth in the United Kingdom and leading coun

from those in other industrial countries. Instead,

tries in Western Europe has been even greater.

the lower efficiency o f labor and the amount of

Some of the structural constraints can be

"feather bedding”

in British industry seem to

identified fairly easily. For example, the United

reflect unfavorably on managerial competence and

Kingdom

energy and the ability of labor unions to deal w ith

has less opportunity to reduce the

relatively uneconomic use of manpower resources

new production techniques, unemployment, and

in agriculture and self-employment than in other

job demarcation. The lower quality of British

industrialized countries because the United King

management is apparent in the higher rates of

dom

return earned on net assets of subsidiaries of

has been industrialized much longer. In

addition, growth of total employment in the

United

States firms

the United

Kingdom,

United Kingdom is very slow. As is apparent from

compared w ith British firms in the same industry.5

Table II, employment gains have averaged less than

Moreover, access to the resources of parent corpor

1 percent a year, except in the early 1960'swhen

ations in the United States does not insure the

the postwar crop of babies was entering the labor

success of the British subsidiary, as suggested by

market. Because of the relative lack of opportu
nity fo r increasing the labor force, long-term
economic growth has tended to be limited by the
rise in labor productivity, which has been esti

Richard E. Caves and Associates,

Prospects

Britain's Economic

(Washington: The Brookings In s titu tio n , 1968),

pp. 271-272.

mated at 3 percent a year in real terms in recent
years.
Thus, it appears that the chief way to improve
the performance of the British economy would be
Digitized for10
FRASER

John H. Dunning, "U . S. Subsidiaries in B ritain and

their United Kingdom C om pe tito rs,"
1 (A utum n 1966), p. 10.

Business Ratios

No.

MAY 1969

C h a r t 3.

UNITED K IN G D O M :

UNEMPLOYMENT RATE*

Per cent

• R a t io

o f w h o lly

L a s t e n try :

u n e m p lo y e d

to ta l

e m p lo y e e s .

M a r . ’6 9

S o u rc e s o f d a ta :

N a t i o n a l I n s t i t u t e o f E c o n o m ic a n d S o c ia l R e s e a rc h ( L o n d o n ) a n d U n it e d K in g d o m , D e p a r t m e n t o f E m p lo y m e n t
a n d P r o d u c t i v it y

the better performance of American subsidiaries

weak in resisting union demands for substantial

run by American managers when compared with

wage increases or the continuance of restrictive

United States subsidiaries run by British managers.

practices.

British labor unions have generally adhered to

This may account fo r the fact that fewer

attitudes formed during the Depression of the

man-days have been lost through strikes in the

1920's and 1930's, despite considerable change in

United Kingdom than in other industrial coun-

the industrial climate since then. As a result,

tries.

restrictive practices aimed at job preservation are

ever, has probably been greater than suggested by

prevalent even though they militate against higher

a direct comparison of man-days lost through

productivity and earnings. The bargaining position

strikes.

of the unions has been strengthened by a histori

concentrated in industries such as metals, engineer

cally low level of unemployment, averaging less

ing, and ship- and vehicle-building that produce a

The damage to the British economy, how

The

British strikes have been heavily

than 2 percent during the post-World War II period
(see Chart 3). Moreover, official economic policy
has generally been directed toward maintaining the
low level of unemployment.

In these circum

stances, British management has been relatively

0
United Kingdom, Royal Commission on Trade Unions
and Em ployers' Associations,

M inistry o f Labour

Written Evidence o f the

(London: Her Majesty's Stationery

O ffice, 1965), A ppendix X V I, p. 69.

ECONOMIC REVIEW

major proportion of the country's exports, or in
industries such as transportation that handle the

TABLE III

exports (see Table III). Because over 90 percent of

Distribution of Man-days Lost Through Strikes,
by Industry
United Kingdom and United States
Annual Average 1960-1966
(Percent of Total)

British strikes have been unofficial and generally
called w ith

little or no warning, it has been

suggested that, during the 1960's, strikes caused a
greater loss of national income in the United

United
Kingdom

Kingdom than in other industrialized countries
where such strikes occur less frequently.7

GROWTH OF PUBLIC SECTOR
The rapid expansion of a large public sector is
another characteristic of the British economy that
has tended to hinder the execution of economic
policies

promote

conditions

favorable

Mining
Metals, engineering,
shipbuilding and
vehicles
Textiles and clothing
Construction
Transportation and
com m unications
Other

13%

United
States
3%

58
1

sustainable growth. This sector, which has been
exempt from the general limits on bank credit in

Sources: United Kingdom, Departm ent o f E m ploym ent
and P roductivity and U. S. Departm ent o f
Labor, Bureau o f Labor Statistics

the 1960's, has been comparatively insensitive to
interest rate changes and has increased appreciably
faster than total GNP. Expenditures by the public

ties borrowed funds. From August 1964 to May

sector on goods and services, fixed investment, and

1967, interest rates on loans to local authorities by

inventories absorbed 31 percent of GNP in 1967,

the Public Works Loans Board of the central

compared w ith 26 percent in 1958 and 27 percent

Government remained fixed. Consequently, such

in 1962, also years of limited economic growth.

loans were subsidized as market interest rates rose,

Higher-than-average unemployment inflated trans

although quotas were set fo r the amounts of the

fer payments for welfare purposes in all three

loans. However, in order to exercise more control

years. If such transfers are included w ithin public

over spending by local authorities, the Govern

expenditures, the total accounted for 44 percent

ment decided that, as of April 1967, interest rates

of GNP in 1967, compared w ith 35 percent in

on P.W.L.B. loans would be more closely in line

1958 and 37 percent in 1962.

with market rates. Moreover, more stringent cri

Within

the

public sector, spending by the

British local authorities

has grown the fastest,

reflecting the easier terms at which local authori-

teria would be applied in determining quotas
w ithin which the local authorities might borrow.
In view of the large and growing demands the
public sector has placed on national resources,

7 "H a lf a Step Onwards,”
1969, p. 11.

The Economist,

official policy to control overall demand has fallen
January 4,

more on the private sector. As a result, overall
economic growth has been marked by a series of
stop/go cycles, shown graphically in Chart 4. When

Ibid.,

pp. 11-12.

measured in current prices, the growth in Gross

1AY 1969
Domestic Product (at factor cost)9 fluctuated
sharply w ithin a range of 4 to 11 percent. A fter
adjustment for price changes, real growth ranged

C h o r t 4.

UNITED K IN G D O M : A N N U A L C H A N G E in
GROSS DOMESTIC PRODUCT at FACTOR COST
Percent

from

zero to an annual increase of nearly 6

percent. The swings in real growth represent a
range of fluctuation of 100 percent on either side
of the assumed equilibrium growth rate of approx
imately 3 percent. Such swings produce serious
strains on the private economy.

The devaluation of the pound in 1967 provided
the British authorities w ith an opportunity to
develop a new strategy for the economy. Although
an appreciably

larger volume of exports was

needed after devaluation to pay fo r the same

volume of imports before devaluation, the gener
ally lower prices of British exports in terms of

L a s t e n tr y :

1968

S o u rc e o f d a ta :

U n ite d K in g d o m , C e n tr a l S t a t is t ic a l O ff ic e

foreign currencies were supposed to have made
them more attractive to overseas buyers. On the

semi-manufactured goods rose after devaluation.

other hand, the higher sterling prices of imports

Finally,

into the United Kingdom should have discouraged

domestic output from leading to inflation, con

imports. A large and simultaneous transfer of

sumption and investment not directly related to

resources to production of goods for export, or for

increasing productive capacity had to be con

in order to prevent the stimulus to

import substitution, and to business investment in

trolled to contain overall economic growth w ithin

order to increase and improve productive capacity

the assumed equilibrium growth rate of about 3

was

percent a year.

required.

the

competitive

advantage

accompanying devaluation was to be prolonged,

The British Government recognized that the

domestic costs had to be held down, even though

demand fo r the United Kingdom's exports would

prices of most imported fuels, raw materials, and

respond slowly to devaluation and that an upturn

in productive investment would not occur until a
Gross Domestic Product differs fro m Gross National

Product in that it excludes net investment income from
abroad. The fa cto r cost valuation is th a t o f the cost of
factors o f production being equal either to the sum of

sustained business expansion was apparent. In
order to avoid unnecessary slack in the economy
and a politically awkward rise in unemployment,

income fro m em ploym ent, rentals, and the gross trading

measures designed to check internal demand were

p ro fits or surpluses o f corporations and pu b licly owned

fairly modest at the time of devaluation. Some

enterprises (analogous to corporate p ro fits in the United
States) less an inventory adjustm ent, or to the market

public expenditure programs were cut, while con

price valuation (as in United States statistics) less indirect

sumer taxes on tobacco, alcoholic beverages, and

taxes and plus subsidies.

petroleum were increased; it was suggested that

ECONOMIC REVIEW

corporation taxes also would be increased. A t the

ling prices fo r their products. In the first quarter

same time, credit restrictions were made more

of 1968, personal spending was strong, in antici

severe. Bank rate was raised by one and one-half

pation of restrictions and higher prices. A fter a

percentage points to 8 percent, and banks were

decline in the second quarter, personal spending

asked to hold lending to the private sector at

showed signs of a renewed uptrend in the second

existing levels. Loans to finance exports were,

half. Imports rose sharply in the first quarter of

however, exempt from the ceiling.

1968, and continued to rise after the second

Rigorous control of internal demand in the

quarter. The climb in imports was influenced by

United Kingdom did not start until the fiscal year

consumer buying as well as demand for industrial

beginning in April 1968. Widespread cuts in public

supplies that resulted from increased domestic

expenditure programs, amounting to £ 325 m illion

production.

in fiscal year 1968-1969 and £441

million in

It became apparent that further restrictions

1969-1970, had been announced in January, and

were needed to insure the success of the new

central Government grants to supplement local

economic strategy. In May 1968, export loans

taxation were to be geared to a 3 percent annual

were brought w ithin the overall ceiling on lending

rate of increase in local authorities' expenditures.

to the private sector, and in November, the ceiling

The Budget for 1968-1969 was the most defla

itself was reduced to 98 percent of the level

tionary in the post-World War II period, raising

prevailing at the time of devaluation. Also in

over £ 900 m illion, net, through new taxes (mainly

November

1968, taxes on

consumption were

indirect taxes), and was estimated to reduce

increased, and restrictions on instalment credit

demand by about £ 500 million a year. Among the

were tightened. In addition, importers were re

Budget measures, the Selective Employment Tax

quired to deposit w ith the Government (for a

was increased as of September, and the premium

period of six months) 50 percent of the value of a

added to refunds of the Tax to manufacturing

wide range of imports. Bank rate, which had been

companies was generally discontinued, except for

reduced in March and September 1968 from 8

concerns located in certain areas. The corporation

percent to 7 percent, was raised back up to 8

income tax rate was raised from 40 percent to 42

percent in February 1969 to reinforce the ceiling

1/2 percent. A t the same time, the Government

on bank lending.

announced a new price and incomes policy de

It seems, however, that the British Govern

signed to lim it increases in incomes to 3 1/2

ment's policies have not been effective enough.

percent a year and to discourage unjustified price

Using a three-month moving average, the monthly

increases.

deficits in merchandise trade declined between

A t the end of 1967, personal incomes and

April and December 1968, but in the first quarter

consumer demand had already reached a higher

of 1969 the gap widened again. The large trade

than expected level. Moreover, the succeeding rise

deficit thus continues to prevent a break-even on

in im port prices was slower and more moderate

the current account. Although a balance of pay

than had been expected at the time of devaluation,

ments surplus was recorded on the current and

as overseas suppliers absorbed the effects of the

long-term capital account in the third quarter of

devaluation in order to maintain unchanged ster

1968, that surplus must be regarded as temporary

MAY 1969
because there was an exceptional inflow of private

dollar guarantee on the proportion of their sterling

capital w ithin the period, due primarily to several

reserves that exceeds 10 percent of their total

large take-overs of British firms by foreign inter

reserves. The $2 billion Basel credit is at the

ests. In addition, the 6 1/2 percent rise in the

United Kingdom's disposal for a period of three

index of weekly wage rates in 1968 as a whole

years, to be used to offset drawings by sterling

appears to

area countries on their sterling reserves. The

have exceeded the

intent of the

Government's price and incomes policy.

United Kingdom w ill be required to repay any

STRUCTURAL CHANGES

drawings on the Basel credit w ithin ten years. The

Steps have either been taken or outlined since

net sterling liabilities owed by the United King

devaluation to deal w ith long-standing problems in

dom to central banks in the sterling area, which at

two areas— the United Kingdom's external short

the end of September 1968 amounted to nearly

term liabilities, and labor relations.

£ 1 .5 billion ($3.5 billion), were greatly in excess

Sterling

Liabilities. A fter the devaluation in

of the total Basel credit facility. This situation

1967, a number of countries that normally held

emphasizes the significance of the agreements that

the bulk of their international reserves in sterling

the sterling area countries have given in return for

moved to diversify these reserves in order to

an exchange guarantee.
A t the end of September 1968, the approxi

protect themselves against potential losses that
might result from another British devaluation.

mately £ 1.5 billion owed to central banks in the

However, the action of these countries accen

sterling area represented nearly 25 percent of the

tuated the adverse reactions in foreign exchange

United Kingdom's net short-term sterling liabilities

markets toward sterling that coincided with dis

to all foreign holders. An additional 30 percent of

appointing

the net total was owed to central banks in North

m onthly

merchandise trade figures

from the United Kingdom.
In order to maintain exchange stability, the

America and Western Europe; a large portion of
this debt probably represents the counterpart of

governors of the central banks of twelve indus

short-term credits provided to the United King

trialized countries agreed at the Bank fo r Inter

dom by these institutions. Liabilities to the IMF

national Settlements in Basel, Switzerland, in July

accounted for 34 percent of the net short-term

1968, to arrange a $2 billion credit fo r the United

total. Thus, only slightly more than one-tenth of

Kingdom. The offer was made on the condition

the

that satisfactory arrangements about foreign ster

liabilities remained uncovered by definite agree

ling reserves were to be established between the

ments or specific repayment obligations.

United

Kingdom's

net short-term sterling

United Kingdom and other sterling area countries.

Although the arrangements described above

The credit was confirmed in September 1968,

appear to have reduced the probable magnitude of

reflecting the following arrangements: The sterling

sudden outflows of short-term funds, they have

area countries are to maintain specified pro

not reduced the need fo r the United Kingdom to

portions of their international reserves in pounds

achieve a substantial balance of payments surplus.

for agreed minimum periods and to use other

In fact, the exchange of contigent for specific

currencies as reserves concurrently w ith sterling. In

repayment

return, the sterling area countries have received a

achieve a surplus.

liabilities

makes

imperative

ECONOMIC REVIEW
Labor Relations. In 1968, as unofficial labor
strikes continued

disrupt British industrial

production, the Government recognized the need

C h a r t 5.

UNITED KINGDOM: REAL GROSS
DOMESTIC PRODUCT by SECTORS

to change legislation pertaining to labor disputes.
However, the Government's proposals, embodied
in an official White Paper entitled "In Place of
Strife” and published in January 1969, have been
10
criticized fo r not going far enough.
Although
the White Paper envisaged granting discretionary
powers to the Government to order "cooling o ff
periods”

and secret union ballots, it did not

prescribe fixed rules for dealing w ith wildcat
strikes that are damaging to the economy, nor did
it recommend

legal enforcement of collective

bargaining agreements. The proposed new legis
lation is expected to be introduced soon; at the
time of this writing, final details had not yet been
agreed upon. However, it remains to be seen how
much legislation w ill contribute to improved han
dling of industrial unrest, because the reaction of
the labor unions has been very hostile.

The economic forecasts to mid-1970, published
by the National Institute of Economic and Social
Research in February 1969, considered the mea
sures

taken

the

British

Government

November 1968. However, the forecasts did not
consider either the increase in Bank rate from 7
percent to 8 percent announced on February 27,
1969 or the restrictive effects of the 1969 Budget.
The forecasts suggest that real economic growth
will slow from 4 percent during 1968 to about 2
3/4 percent during 1969, w ith further slowing
NOTE:

possible during the first half of 1970 (see Chart 5).
Because the anticipated growth rates are somewhat
below the apparent annual increase in potential

D a s h e d lin e re p re s e n ts fo r e c a s t o f N a t io n a l In s titu te o f
E co n o m ic a n d S o c ia l R e s e a rc h .

L a s t e n tr y :

3 Q ’6 8 ; 2 Q ’7 0 p r o j.

S o u rc e s o f d a t a :

U n ite d K in g d o m , C e n tr a l S ta tis tic a l O ffic e a n d
N a t io n a l In s titu te o f E c o n o m ic a n d S o c ia l
R e s e a rc h (L o n d o n )

" H a lf a Step O nwards,"

op. cit.,

pp. 11-12.

AY 1969
output, the labor market may ease slightly, pos

national election w ill be held in 1970 or 1971.)

sibly relieving the sporadic labor shortages re

However,

ported recently.

soon, it is d iffic u lt to see how the United Kingdom

Exports of goods and services are expected to
be the main source of economic growth in the

unless the improvement takes place

can meet its heavy debt repayment obligations
w ithout some rescheduling.

United Kingdom, but private fixed investment,

In introducing the Budget for the fiscal year

especially in manufacturing capacity, is also ex

beginning in April 1969, the Chancellor of the

pected to increase, following a sluggish perfor

Exchequer reaffirmed the goal of a substantial

mance in 1968. In addition, consumer expen

balance of payments surplus, although he declined

ditures, which were only slightly higher in the

to set an exact figure. By imposing additional

fourth quarter of 1968 than a year earlier, are

taxation of £ 3 4 0 m illion (on an annual basis),

expected to resume an upward trend, as the effect

mainly on the corporate sector, the Budget is

of the 1968 restrictions wears o ff (see Chart 5).

intended to reduce real economic growth between

A rising propensity to import as well as effects

the first half of 1969 and the first half of 1970

of increases in exports and private fixed invest

from a previously projected 3 1/2 percent to

ment have been considered in projecting an up

slightly less than 3 percent. The forecasts in the

ward trend of imports of goods and services into

Budget

the United Kingdom. It is suggested that this rise

economy as more buoyant than those of the

in imports w ill be less than that fo r exports, and

National Institute of Economic and Social Re

the National Institute of Economic and Social

search, since the Budget expects that consumer

Research has accordingly forecast a wide swing of

expenditures w ill rise by 1 percent. Increases in

more than £ 500 million (in current pounds) in the

taxes on consumption were minor, while personal

message apparently

regard the British

balance of payments current account— from a

taxes on lower incomes were slightly reduced. In

deficit of over £ 4 0 0 million in 1968 (including

addition, when the Government's controls over

purchases of United States aircraft) to a surplus of

incomes and prices lapse in November 1969, there

about ,£ 130 m illion in 1969. However, a net

is to be a return to a program of voluntary

outflow of capital due to debt repayments and

restraint, although the Government powers to

other factors is expected to absorb most of the

delay the implementation of wage or price in

current account surplus. As a result, hopes of

creases fo r three months w ill be retained.

achieving the British Government's previously de

The latest British Budget has been criticized as

clared target of a continuing surplus of £ 500

lacking in new economic strategy. It is, however,

million a year on the current and long-term capital

designed to discourage personal borrowing by

account may again prove elusive.

removing tax credits fo r interest paid on loans

The British Government has revised its balance

(except home mortgage loans) and to encourage

of payments projections in a Green Paper pub

saving (and restrain consumption) by introducing a

lished in February 1969. A t present, they do not

high-yielding contractual savings plan. The Govern

expect a surplus of £ 550 m illion on the current

ment also announced its intention to enact labor

and long-term capital account until

1972. (A

legislation as quickly as possible. To some extent,

significant factor in that estimate may be that a

the Budget may expect these new measures to be

ECONOMIC REVIEW
more effective than a renewed e ffo rt to restrain

term

consumption by direct means.

largely determine the pace of recovery and, u lti

structural changes are accomplished w ill

The United Kingdom's balance of payments

mately, the extent to which existing restraints and

performance since the 1967 devaluation has been

controls may safely be relaxed. However, although

somewhat disappointing. Devaluation has had to

the United Kingdom as a whole has continued to

be reinforced by a succession of restraints and

make an effort to tackle its outstanding economic

controls which thus far have had only a limited

problems, some fairly basic obstacles, especially in

and uneven impact upon short-term prospects. It

the fields of industrial relations and management,

would seem that the success w ith which longer

seem more forbidding and stubborn than others.

MAY 1969

SOME FINANCIAL ASPECTS OF
CORPORATE MERGER ACTIVITY IN THE
FOURTH FEDERAL RESERVE DISTRICT
From 1953 through 1967, there was an increase

similar financial data over an extended period of

in corporate merger activity in both the United

time

States and the Fourth Federal Reserve District. In

characteristics of both acquiring and acquired

in the hope of discerning some unique

the District, the number of acquiring firms in

companies in the District. For example, the earlier

creased markedly in recent years. A similar pattern

article revealed that most of the acquired com

was apparent in the number of acquired companies

panies in 1967 were small privately owned firms.

(see Table I). During most of the period reviewed,

However, data fo r acquired companies located in

the number of manufacturing and mining firms

the Fourth District are so sparse that analysis of

acquired

in the

these companies fo r the period before 1967 was

Fourth District, on average, accounted fo r about

not feasible. Therefore, this article analyzes certain

10 percent of all such firms acquired in the United

financial aspects of acquiring companies located in

States.

the Fourth District, focusing on mergers reported

companies headquartered

An article in the October 1968 Economic

by the Federal Trade Commission (FTC) for which

Review 1 examined some financial aspects of selec

sufficient financial data are available.2 The finan

ted acquired and acquiring companies for 1967.

cial data are fo r the year before the mergers

The original intent of this study was to observe

occurred. Therefore, the discussion of the financial
data covers the years from 1953 through 1966.

^See "C orporate Merger A c tiv ity in the F ourth Federal
Reserve D istrict, 1950-1967,"

Economic Review,

Reserve Bank o f Cleveland, October 1968.

Federal

^Financial

data

fo r

acquiring

companies

are

fro m

Moody's Industrial Manuals.
19

ECONOMIC REVIEW

TABLE I

in the region's economy. For example, the non

Merger A ctivity in the Fourth District
1953-1967

electrical machinery industry accounted for the

Year

A cquiring F irm s*

1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967

largest number of acquiring companies, repre

Acquired
M anufacturing
and M ining F irm st

under review. Other industries in which there was
a relatively large number of mergers included the

34
72
89
94
89
99
101
91
106
98
84
90
96e
139
165

29
51
76
85
77
79
70
77
84
83
74
84
56
96
109

senting 16 percent of all these firms in the period

chemical, primary metal, fabricated metal, elec
trical machinery, and transportation equipment
industries. In contrast, industries such as textiles,
apparel,

lumber,

leather, and

instruments ac

counted for fewer mergers in the District, prob
ably because fewer companies in these industries
are located in the area.
Although the sample of acquiring companies is
small, the data suggest that the number of indus

NOTE: Data fo r 1953-1954 are not s tric tly comparable to
1955-1967.
e Estimated by the Federal Reserve Bank o f Cleveland.
* Reported by the Federal Trade Commission,
t Based on number o f acquisitions by firm s headquar
tered in the Fourth D istrict.
Sources: Federal Trade Commission and Federal Reserve
Bank o f Cleveland

tries involved in merger activity increased some
what in recent years. Moreover, some District
industries, such as chemicals and foods, became
more active in mergers during the period. In
contrast, the

nonelectrical machinery industry

accounted for a diminishing proportion of the
merger activity in the period under review.

The FTC listings only include large mergers in
The data

Because the majority of the District acquiring

have limitations; fo r example, it is estimated that

companies that were analyzed are in manufac

the number of mergers reported by the FTC

turing, some of the financial characteristics of

account fo r less than one-half of all corporate

these companies are compared with those of all

manufacturing and mining industries.

manufacturing corporations in the United States.4

mergers.

As shown in Chart 1, from 1953 through 1966,
total assets of all manufacturing corporations in
As shown in Table II, the majority of the

the United States increased from $170 billion to

acquiring companies in the Fourth District were in

$386 billion. In general, the average asset size of

industries that are important and well represented

acquiring firms in the Fourth District also tended

^A ccording

the

Federal Trade

Commission,

large

mergers are defined as those involving acquired firm s w ith
assets o f $10 m illion or more. U. S., Federal Trade

Statistical Report Large Mergers in Manufac
turing and Mining, 1948—1967 (May 1968).
Commission,

^Data fo r all m anufacturing corporations (except news
papers) are derived fro m the Federal Trade Commission-

Quarterly Financial
Report for Manufacturing Corporations.

Securities and Exchange Commission

TABLE i!
Standard Industrial Classification Groups of Selected Acquiring Companies*
Fourth D istrict
Number o f Companies
: Group M anufacturing Companies
20
22
23

24
25
26
27
28
29
30
31
32
33
34

35
36
37
38

Food and kindred products
T e x tile m ill products
Apparel and o ther finished products
made fro m fabrics and sim ilar
materials
Lum ber and w ood products, except
fu rn itu re
F urn itu re and fixtu re s
Paper and allied products
Printing, publishing, and allied
industries
Chemicals and allied products
Petroleum refining and related
industries
Rubber and miscellaneous plastics
products
Leather and leather products
Stone, clay, and glass products
Prim ary metal industries
Fabricated metal products, except
ordnance, m achinery, and
tran sp o rta tio n equipm ent
Machinery, except electrical
Electrical m achinery, equipm ent
and supplies
T ransportation equipm ent
Professional, scientific, and con
tro llin g instrum ents; photographic
and optical goods; watches and clocks
Miscellaneous m anufacturing industries

1954 1955 1956 1957 1958 1959 1960 1961
1

1962 1963 1964 1965 1966 1967 Total

17
1

1
1
2

1
2
5

1
3

7
11
37

1
6

16
66

3
3
2
8

38
12
43
88

1
4

1
6

1
2
5

1
2
3

1
1

1
4

2
6

2
3

1
4

2
2

1
3

3
6

1
4

3
1
3
5

1
1
5
6

4
1
4
8

4
6

2
8

5
1
3
6

4
1
2
4

2
9

1
1
4
7

4
8

1
2

5
1
7
6

9
13

3
11

1
13

8
10

10
11

4
11

6
13

6
8

5
6

8
12

8
8

3
2

7
11

6
8

84
137

1
4

4
7

4
6

5
6

6
5

6
8

5
8

3
4

5
7

4
4

5
3

7
5

9
6

68
79

1
2

1
1

2
3

13
12

6
2
63

3
2
60

5
2
84

87
7
865

2
2

N onm anufacturing Companies
1

Source: Federal Trade Commission

6
60

1969

* Companies fo r w hich adequate financial data are available.

5
1
60

MAY

A ll o ther m ajor groups
N ot available
T otal

ECONOMIC REVIEW

growth of

Cable.7 The impact of this case on the average

business concerns in an expanding economy. For

increase, reflecting the general

asset size of acquiring firms in the Fourth District

example, an increasing number of acquiring com

was fe lt in 1964, when the average asset size

panies were reported to have assets in excess of $1

declined more than 50 percent from the previous

billion (see Table III). The data in Table III may

year's level. The influence of the Alcoa-Rome

be inflated somewhat because several large com

Cable case was short lived, however, fo r in 1966,

panies made a number of acquisitions during the

the average asset size of acquiring firms reached a

period.

near record level in the District.

Nevertheless, the increased merger activ

ity by large firms is apparent, particularly in 1967.
A ntitrust enforcement evidently had a marked,
but transitory, influence on the average asset size

FINANCIAL RATIOS
Another method of comparing District acquir

of acquiring firms, as reflected in the sharp

ing firms with all manufacturing corporations in

declines in average asset size in 1958 and 1964 (see

the United States, in order to determine any

Chart 1). In 1958, the Federal courts enjoined the

special characteristics of the District companies,

merger between Bethlehem Steel, the nation's

involves the analysis of similar financial ratios.

second largest steel producer, and Youngstown

Three of the four ratios

Sheet and Tube, the sixth largest steel producer.

for District acquiring companies w ith data fo r all

Although the size of the individual firms was not

manufacturing companies during the 1953-1966

the central issue in the case, the fact that two large

period. The fourth ratio compares data fo r acquir

companies were prevented from merging evidently

ing companies w ith

restrained merger activity by other large firms.

common stocks.

used here compare data

data fo r tw o groups of

Perhaps as a result of this court decision, the

Liquidity. The quick ratio test fo r liquidity,

average asset size of acquiring firms in the District

measured by the ratio of cash and U. S. Govern

declined sharply in 1958 and did not rebound

ment securities to current liabilities, is one mea

until 1960.

sure of a company's ability to meet its current

Corporate size was an issue in 1964 in the

obligations. During the

1953-1966 period, the

antitrust case involving the merger of the A lum i

dollar value of current liabilities of all manufac

num

turing corporations in the United States increased

Company

America and

Rome Cable

Corporation. The court viewed Alcoa as a giant
and Rome Cable as a prototype of the small

^U n ite d States v. A lu m in um Company o f America, 337

independent firm that Congress intended to pre

U. S. 271, 180 (1964).

serve; Alcoa was ordered to divest itself of Rome

O
°See Appendix A fo r fo rm ulations o f the ratios. O nly the
means o f

the

financial

ratios fo r all

m anufacturing

^F o r testing, acquiring companies were only counted

companies and fo r the Standard & Poor's ratios are

once in any year in which they had more than one

available;

merger.

companies is restricted to a discussion o f the means of

therefore,

the

analysis

the

acquiring

those ratios. Moreover, a discussion o f the medians and
modes w ould

add

little

to the analysis. The means,

^U n ite d States v. Bethlehem Steel C orporation, 168 F.

medians, and modes o f the acquiring companies are listed

Supp. 576 (1958).

in Appendix B.

MAY 1969

C h a rt 1.

ASSET G RO W T H

UNI TED
STATES

FOURTH
D I S T RI CT

1 9 5 3 — 19 6 6

B i l l i o n s of d o l l a r s
400

T O T A L A S S E T S , A L L M A N U F A C T U R IN G

C O R P O R A T IO N S

(United States)

M illio n s o f d o lla r s

M O D A L ASSET SIZE o f A C Q U IR IN G C O M P A N IE S

1953
Last e nt r y :

1966

Sources of data:

Federal Tr ade Commission; Securities and
Ex ch an ge C o m m i s s i o n ; F e d e r a l Reserve Bank
of Cleveland

nearly two and one-half times, while the value of

increased, prim arily to finance inventories and

liquid assets barely increased. As a result, the

receivables, while cash and securities were in

liquidity ratio for all manufacturing corporations

creased by a lesser amount. Thus, liqu id ity ratios

declined from 64 percent in 1953 to 31 percent in

were reduced. As shown in Chart 2, both liquidity

1966. As shown in Chart 2, the liquidity ratio for

ratios tended to decline during periods of eco

acquiring companies in the Fourth District flu ctu

nomic expansion. In contrast, when economic

ated more and was higher than the ratio fo r all

activity contracted, current liabilities were gener

manufacturing companies; this may reflect pecu

ally reduced more than cash and securities, result

liarities in the sample of acquiring firms. Neverthe

ing in increased liquidity ratios in both the United

less, the liquidity ratio fo r acquiring companies

States and the District.

also declined over the period by slightly more than

Debt to Equity. The debt-to-equity ratio, mea

the decrease in the United States (from 77 percent

sured by the ratio of total liabilities to stock

to 41 percent). The net decline in both liquidity

holders' equity, provides a measure of a company's

ratios suggests that, in the District as in the nation,

capital structure. As shown in Chart 2, from 1953

corporate treasurers used their liquid assets more

through

1964, the debt-to-equity ratio fo r all

intensively, reflecting greater sophistication in

manufacturing companies averaged 53 percent;

handling financial resources.

th e n

Fluctuations

in the

th e

ratio

increased

noticeably.

The

liquidity ratios in the

debt-to-equity ratio fo r acquiring companies in the

United States and the District tended to vary

Fourth District fluctuated somewhat more than

inversely w ith business conditions. When economic

the ratio fo r all manufacturing companies in the

activity was expanding, current liabilities were

United States but averaged 50 percent during the

ECONOMIC REVIEW
percent

TABLE III

shown

Acquiring Companies with Assets of
$1 Billion and Over
Fourth District
1954-1967
Year

Number

1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967

1
2
1
1
1
1
3
3
3
2
2
4
5
10

Source: Federal Trade Commission

fo r
in

D istrict acquiring companies.
Appendix

B, however, the

modal

debt-to-equity ratio fo r acquiring companies in the
Fourth

District

was

line w ith

the

debt-to-equity ratio fo r all manufacturing com
panies.
Return on Equity. The rate of return on equity
measures how profitably stockholders' funds are
invested. During the 1953-1966 period, the aver
age rate of return on equity fo r acquiring com
panies in the D istrict and fo r all manufacturing
companies in the United States averaged nearly 11
percent. As shown in Chart 2, the rates of return
generally declined during contractions in economic
activity and increased during expansions. By 1966,
the average rate of return on equity fo r acquiring
companies had increased to nearly 15 percent,
while the comparable ratio fo r all manufacturing

1953-1964 period. The District ratio then in

companies was 13 percent. This was a departure

creased at a faster rate than the United States

from the situation in most of the period under

ratio, exceeding 90 percent in 1966.

review, when the rate of return was lower for

Some of the fluctuations in both debt-to-equity

District firms than fo r the average firm in the

ratios appear to be related to business conditions.

United States. Nevertheless, there was only a

In 1954, a recession year, large-scale liquidation of

negligible difference between the average rate of

inventories, as well as reduced outlays for plant

return on equity fo r acquiring companies in the

and equipment, contributed to lower levels of

District and fo r all manufacturing companies in

liabilities of manufacturing corporations and thus

the United States.

lower debt-to-equity

ratios. For the same

Price Earnings Ratios. Price-earnings ratios are

reason, both debt-to-equity ratios declined during

capitalization rates and indicate the stock market's

the 1957-1958 recession. (In contrast, during the

valuation of companies. As shown in Chart 2, the

mild recession in 1960-1961, both debt-to-equity

contour of the price-earnings ratios fo r District

ratios increased.) In 1955-1956 and 1965-1966,

acquiring companies is similar to the contour of

years in which economic activity accelerated,

the price-earnings ratios fo r securities included in

manufacturing corporations stepped up borrow

the Standard

ings sharply in order to finance inventories and

which consists of the stocks of a wide variety of

Poor's machinery composite,

plant and equipment. As a result, liabilities in

nonagricultural machinery companies. In general,

creased at a faster pace than stockholders' equity;

the price-earnings ratios fo r acquiring companies

by 1966, the mean debt-to-equity ratio was 68

and fo r machinery companies were lower than the

percent fo r all manufacturing companies and 91

price-earnings ratios fo r Standard & Poor's group

MAY 1969

C h a r t 2.

SELECTED FI NA NC IAL RATIOS
1 9 5 3 — 1966

30
N

P e rc e n t

100
90
80
70
60
50
40

T im e s

20
15

10
5

0
^Average

of a n n u a l high and low price e a r n i n g s

ratios.

Last e n t r y : 1966
So urce s of d a t a :

Federal Trade Commission; Securities and
Ex ch an ge C o mm i s si o n; S t a n d a r d & Poor' s
C o r p o r a t i o n ; F e d e ra l Reserve Bank of C l e v e l a n d

ECONOMIC REVIEW

500 common

stocks, which

is a broadly

representative group of securities. To illustrate, in
1966, the average price-earnings ratio was 14.9
times earnings fo r the Standard & Poor's 500, 11.7
times earnings fo r the machinery companies, and
10.9 times earnings for acquiring companies in the
District. These results are somewhat surprising,
because it is generally assumed that companies
acquiring other firms through mergers have "high”

APPEN DIX A
Formulations of Financial Ratios

price-earnings multiples. Although this assumption
may be true fo r selected companies, it does not

7r = N e t income o r loss (a fte r taxes)

hold true, on average, in the Fourth District.

T = Income ta x ra te
A = Total assets

CONCLUDING COMMENTS
To

a large extent, the

ratios fo r

L = Total liabilities

District

acquiring companies corresponded fairly closely to

E = Stockholders’ equity
PBT = P rofit b e fo re taxes

comparable ratios fo r all manufacturing corpora
tions (or to the Standard & Poor's machinery
composite). In addition, the contours of both sets
of ratios were strongly influenced by business
cycle conditions.

I = Interest paym ents
Profits in any perio d
7T =

(1—

T) [ r + ( r —

i) y ]

w here:
PBT+I

In summary, there was no

important difference between the characteristics
L

of acquiring firms in the Fourth District and all

manufacturing firms in the United States.

~~
— =
7T

Income Tax
PBT
d e b t-to -e q u ity ra tio

L
= (1 — T) [ r -J- (i— i) — ] =

ra te o f return on equity

This com plex method o f deriving —
the equation fo r

was used because

is an id e n tity and served to v e rify the d a ta .

O the r Formulations

Liquidity ra tio =

Cash + G overnm ent
and m a rketab le securities a t cost

Price-earnings ra tio =

C urrent liab ilitie s
Price (balance sheet date)
Earnings p e r share

APPENDIX B
Selected Averages fo r
Fourth District
1953-1966

;quiring Companies

1953
Asset Size
(thous. o f $)
Mean
Median
M ode*

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

112,166 69,337 114,602 121,170 118,770 86,968 79,479 127,062 105,733 127,635 129,494 71,943 92,022 156,700
37,839 27,186 34,515 31,558
19,614 39,830 19.393 21,504 23,657 32,806 46,812 35,083 33,914 60,939
39,618 59,208 66,826 25,676 28,093 51,723 55,862 78,296 53,439 22,510 65,301
73,187
39,976 31,351

Rate o f R eturn on E q u ity
(percent)
Mean
Median
M ode*

12.16
11.24
9.95

10.35
9.89
7.88

10.16
11.93
13.53

12.27
13.38
15.76

10.38
11.29
11.21

7.64
7.90
7.68

9.69
8.95
7.24

9.17
8.88
10.36

7.63
8.09
5.93

7.22
8.50
9.25

10.87
10.05
7.85

10.82
9.53
7.96

12.47
12.31
9.74

14.68
13.94
14.02

D e b t-to -E q u ity R atio
(percent)
Mean
Median
M ode*

61.77
48.46
49.75

49.28
49.18
56.19

55.20
46.26
44.50

60.27
55.07
57.18

52.25
44.88
30.98

50.71
42.28
51.26

53.31
44.40
37.55

57.42
49.41
38.87

61.55
54.23
19.31

47.44
43.18
54.62

59.76
49.95
40.25

65.59
49.36
60.64

80.86
64.73
20.51

91.36
75.63
69.66

L iq u id ity Ratio
(percent)
Mean
Median
M ode*

77.34
64.36
50.87

94.08
85.23
94.33

75.66
64.01
37.65

63.85
47.80
21.84

76.70 106.02
60.94 86.66
48.41
59.47

79.71
47.78
20.92

68.75
56.37
23.95

71.05
54.93
21.36

85.60
60.60
63.91

76.40
54.87
22.59

69.94
52.51
24.48

59.94
34.04
16.46

40.55
28.97
16.16

6.73
6.29
5.45

11.16
10.14
11.15

10.55
9.20
9.49

10.81
9.48
8.14

11.54
8.56
6.59

17.70
14.21
12.47

16.49
13.22
11.56

19.73
17.06
16.94

14.87
12.52
9.31

14.51
13.21
12.89

13.55
13.09
13.50

12.66
11.76
11.12

10.85
9.80
7.65

Price-Earnings R atio
(times)
Mean
Median
M ode*

16.76
15.47
13.82

* Mode is the m id p o in t o f th e modal class.

1969

ro
*<4

MAY

Source: Federal Trade Commission and Federal Reserve Bank o f Cleveland