A long line of scholarship minimizes the importance of international financial transactions for the development of the American economy. Foreign investment financed only a small share – perhaps 6 percent – of nineteenth-century U.S. capital formation. At no point in the twentieth century did international financial flows amount to more than a fraction of domestic savings. For an extended period after World War II, U.S. monetary and fiscal policies were formulated with little regard to balance-of-payments considerations. American economic history texts, adopting this perspective, consign international financial transactions to footnotes and appendixes.

The theme of this chapter is that international financial transactions and the institutions governing their conduct have in fact significantly influenced the growth and fluctuation of the American economy. Foreign investment was critical on the margin, helping to mold the pattern of economic development from the railway age of the mid-nineteenth century to the Internet age of the twentieth. Repeatedly over the course of American economic history, the business cycle was shaped and policy responses were constrained by international financial flows.

A subsidiary theme is that U.S. international financial transactions have exerted an important influence on other economies. At the beginning of the twentieth century, flows of gold and capital to and from the United States jeopardized the stability of major European currencies and occasionally threatened the entire international gold standard edifice. U.S. capital exports facilitated European reconstruction after World War I and transmitted the American depression of the 1930s to the rest of the world. After World War II even more than before, the international financial system turned on the stability of U.S. lending and the position of the dollar.