Knowledge that Transforms

FOREIGN banking agencies in the United States have been growing rapidly as depositories of international balances and as a source of domestic money market funds. Much of the growth reflects further expansion of their traditional role in the foreign exchange market, but they have made dramatic inroads in financing brokers and dealers in securities and in the Federal funds market. It appears that their transactions in the American money market have about doubled in the last five or six years. This impressive gain has been registered despite the restrictive banking law in New York State (where 25 of the 28 foreign agencies are located 1) whichuntil the law was amended in the spring of I960prevented foreign banks from accepting deposits of domestic firms or individuals. This inability to accept deposits is the chief distinction between a banking agency and a regular branch. However, the agencies have had the right to deal in foreign exchange and to make certain types of loans to borrowers in the United States. The extent and variety of these financial transactions cannot be traced readily because of a lack of published information. The 25 agencies in New York submit each week a detailed report to the State Banking Department showing their assets and liabilities, but this report is not open to the public. The Federal Reserve System also receives statistics on the agencies' liabilities to foreigners and the foreign assets they hold. These figures are combined with those from other sources and published in summary form in the Federal Reserve Bulletin in the monthly survey of short-term liabilities to and claims on foreigners reported by banks in the United States. However, through personal interviews with New York State banking officials and with persons working in the New York financial district as well as from miscellaneous published sources, it has been possible to sketch the role of foreign banking agencies in the money market. Section I discusses the growth of short-term dollar balances owned abroad but held by United States banks and by foreign banking agencies located in this country. An indication of the extent of the agencies' financing of domestic securities dealers is shown in Section II where their part in the Federal funds market is also outlined. In Section III, the position of foreign banks in the United States is compared with that in other countries, and the prospect of foreign banks establishing branches in New York as provided in legislation adopted in the spring of I960 is appraised.

(3) Only one quarter of the estimates of al among 40 commodities and services, however, are significantly different from unity, which means that the tendency to commodity price equalization may be dominant. (4) Also, the possibility that price differences among countries may be explained by factors other than wages (such as prices of raw materials) appears to be high. If this possibility is sufficiently high, the tendency of commodity price equalization with respect to price of labor input will be strengthened, that is, estimates of al will approach unity under proper adjustments of raw material prices. This conjecture was tested for only two commodities, cotton shirts and blankets. In these cases, cost components of raw materials, namely raw cotton and raw wool, were taken out using the United States cost structure. After this adjustment, the following estimates were obtained: Before Adjustment After Adjustment Cotton shirts .9II -.936 Blankets -1I.I20 -.95o In conclusion, it should be mentioned that more proper selection of wage data (in this case the average wage in the manufacturing industry was used in every regression), addition of raw material prices, and of capital cost, would provide further interpretations.

Tig HE appearance of Business Cycle Indicators pTovides a good opportunity to review some of the National Bureau's recent work on business cycles and forecasting.' It is more than a decade since the Bureau published Moore's Statistical Indicators of Cylical Revivals and Recessions, a paper which attained a degree of popularity unusual for National Bureau publications. 2 Since then, Moore's list of indicators has been kept up to date and widely used. The papers brought together in the present volume represent a comprehensive report on the recent work of Moore and his colleagues on cyclical indicators.3 Business Cycle Indicators consists of two volumes, the second of which is an appendix which describes and gives the monthly or quarterly data for a long list of series. Volume I is in three parts. The first and most important includes excerpts from annual reports of the National Bureau by Fabricant and Burns, Moore's earlier Occasional Papers on statistical indicators and several other papers by Moore, the original paper by Mitchell and Burns on indicators published in I938, a paper by Frank Morris on the predictive value of the leading series, and one by W. A. Beckett reporting on a set of indicators for Canada. Moore's revised list of 26 series is presented in Chapter 3. Part II contains six papers, some previously unpublished, on individual leading indicators -profits, business failures, new incorporations and new business firms, manufacturers' new orders, hours worked, and other labor-market series. Of these, the paper by Zarnowitz on new orders will probably be of greatest interest. None of these chapters is likely to excite the reader; they are all essentially descriptive; and some are outright stodgy in their style and treatment of their subject matter. Part III is concerned with methods of using the individual indicators and diffusion indices on a current basis. Two papers by Shiskin report on the work he has done with the indicators at the Census Bureau. Two others are by Moore. One describes an amplitude adjustment for the leading indicators, and the other deals with the average duration of run as a way of summarizing the current behavior of a group of series. I shall make no attempt to review each of these papers. Instead, in the rest of this article, I shall (i) compare the National Bureau's approach to business-cycle research with that which rests on the use of aggregative models and (2) attempt a general evaluation of the usefulness of economic indicators in short-run forecasting.

IN recent years, surveys of capital expenditure plans have occupied a prominent place in forecasting economic activity, and considerable effort has been devoted to establishing the sources of discrepancies between plans and realized expenditures. This paper deals with systematic errors that arise from the planning process itself. Such errors may be distinguished from discrepancies between plans and realizations that result from changes in the economic environment or from shifts in business expectations about earnings, sales, or other economic variables. More specifically, the discussion focuses on the reasons for consistent tendencies to underor over-estimate plant and equipment outlays and, in particular, on the alleged relation between size of firm and such tendencies. suggested hypotheses are tested against data for the electric utility industry. While discussion of consistent biases in investment forecasts is scattered through a large number of sources, the most detailed studies of the problem were carried out by Friend and Bronfenbrenner I and by Foss and Natrella.2 In both, data from S.E.C. -Department of Commerce surveys of capital expenditure plans were used. Both pairs of authors found the accuracy of forecasts to be positively correlated with the asset size of firms and with the scale of investment programs.3 (Scale was measured by the volume of planned investment relative to fixed assets.) Except for firms in the top size class (those with total assets of more than $50 million), Friend and Bronfenbrenner found a tendency to understate planned relative to realized investment. Foss and Natrella found that large firms overestimated their future investment expenditures, though large firms with plans for only small outlays generally underestimated their outlays. Small and mediumsized firms underestimated their future expenditures when their prospective investment programs were small or moderate-sized but showed no consistent tendency to underor overestimate when these programs were large. Friend and Bronfenbrenner regard the tendency to underestimate expenditures as a consequence of omissions from capital budgets of small or contingent items.4 They explain the more accurate predictions of large firms in terms of three factors. First, large firms have many projects with the result that positive errors for some projects cancel out the negative errors on others. Second, large firms are able to allow in their budgets, on the basis of average experience, for such contingent expenditures as those occasioned by breakage. Third, capital budgeting procedures of small and large firms differ: the latter plan further in advance and their budgeting procedures are more formalized and less flexible hence, deviations from plans are less likely. Foss and Natrella agree that variations in capital budgeting procedures have probably contributed to differences in the forecasting performance of large and small firms. However, they conclude that a positive association (present in the period covered by their study) between firm size and size of investment program was a strategic factor in producing these differences. They also suggest that supply shortages which characterized the post-war economy may have been a central factor in explaining ' Irwin Friend and Jean Bronfenbrenner, Plant and Equipment Programs and their Realization, Conference on Research in Income and Wealth, Studies in Income and Wealth, XVII (Princeton University Press, I955). Also, Investment Programs and their Realization, Survey of Current Business, XXX (December I950). 2Murray F. Foss and Vito Natrella, The Structure and Realization of Business Investment Anticipations, Conference of the Universities National Bureau Committee on Economic Research, Quality and Economic Significance of Anticipations Data (Princeton University Press, I960). 'On the other hand, Eisner working with data from the McGraw-Hill surveys, found no clear relation between scale of investment plans and accuracy of forecasts. However, he did find a distinct relation between accuracy of forecasts and size of firm. Robert Eisner, Plans, and Capital Expenditures: A Synthesis of Ex Post and Ex Ante Data, in Mary Jean Bowman, Expectations, Uncertainty, and Business Behavior (Social Science Research Council,

T HE data currently available on commercial bank business loan rates' show that the interest rates paid on commercial bank business loans are higher for smaller than for larger loans and for smaller than for larger size business borrowers. Table i shows the survey results for I955 and I957. As was also shown in the earlier surveys, interest rates vary inversely with size of borrower and there is a close positive relationship between size of loan and size of borrower. For these later surveys, further cross-classification was not shown. The I946 survey, however, did provide further classification; this survey showed that when size of borrower is held constant the interest rate declines steadily with increasing size of loan. This may be attributable to costs which are fixed per loan and do not, therefore, vary with size of loan. If this is so, then the cost per dollar of loan decreases as the size of loan increases and must be reflected in higher interest charges for smaller loans. The 1946 survey also shows that when size of loan is held constant interest rates decline with increased size of borrower. This may be due to greater cost of investigation and administration or greater risk associated with lending to borrowers, or it may be due to price discrimination by size of borrower. Such discussion of the observed rate differentials as has taken place has noted that large borrowers pay lower rates than small borrowers and has inferred from this that borrowers are discriminated against in the business loan market.2 If a firm charges different prices to two buyers (or groups of buyers) for units of a product which is physically homogeneous, this may be because: a) price discrimination is being practiced, that is, there is no cost justification for the difference; or b) there is a difference in the cost of servicing the two buyers (or groups of buyers). This might, for instance, take the form of a difference in transport cost because of the different distances of the two buyers from the source of supply. For price discrimination to be practiced several conditions must be met: 3 aq) The seller must hnTss?ess market tnowr. Tin TABLE I. INTEREST RATES ON AND AVERAGE LOAN SIZES OF MEMBER BANK LOANS TO BUSINESS I955 AND I957, BY SIZE OF BORROWER