Introduction

Foreign investment played a major role in the industrial development of Western European economies in the 18th century and foreign capital provided financing for the development of the United States economy in the 19th century. The international flow of funds shifted to the South American continent during the 19th century, and by the 20th century American investors had joined Europeans in financing the industrialization of developing countries. The process of economic development has been accompanied by international investment flows in almost all countries and, despite what would be judged today as impossible risks, private international capital flows were an integral part of this process. The lending was not without difficulty, as investment booms in Latin America, for example in the 1820s, 1850s, 1880s and 1920s, were all followed by generalized defaults and reschedulings. Table 3.1 shows conditions in 1913 which were more or less typical, with Europe providing about three-quarters of international lending and the Americas absorbing a bit less than half of that amount. After each crisis domestic growth rates fell, imports were cut back and exports were expanded to produce payments surpluses, and after about a generation lending resumed. This process continued through the interwar period, when most of the loans which failed in the Great Depression were contracted.

Although there was no intent to stem the flow of international capital for development purposes, convertibility of national currencies under the Bretton Woods agreements only applied to current account exchanges, not capital investments.