² There is now a rich and growing literature on the subject of direct investments. The following studies might be specifically mentioned: Southard, F. A. Jr., American Industry in Europe (Boston and New York, 1931)Google Scholar; Phelps, D. M., Migration of Industry to South America (New York and London, 1936)Google Scholar; Marshall, H., Southard, F. A. Jr., and Taylor, K. W., Canadian-American Industry (New Haven and Toronto, 1937)Google Scholar; Dickens, P. D., American Direct Investments in Foreign Countries (U.S. Department of Commerce, 1938)Google Scholar; Domeratsky, L., “American Industry Abroad” (Foreign Affairs, vol. VIII, 1930)Google Scholar; Donaldson, J., “International Industrial Relations: Migrations of Enterprise and Policies Affecting It” (American Economic Review, supplement, vol. XXI, 1931)Google Scholar; Conolly, F., “Die Bedeutung der Kapitalbeteiligung an auslandischen Unterriehmungen” (Weltwirtschafiliches Archiv, 03, 1939).Google Scholar Professor Remer has been working on a general study in this field for several years.

³ The notable exceptions here are, of course, the studies of the United States Department of Commerce, and the Dominion Bureau of Statistics of Canada.

⁴ Naturally, dealings in foreign securities between nationals of a given country are excluded since they do not involve an international transfer of title.

⁵ For evidence of this, see especially Ehrenberg, R., Capital and Finance in the Age of the Renaissance (London, 1928), particularly pp. 357 ff.Google Scholar, where the rise and early development of continental stock exchanges are discussed. Here one may find stray references to international dealings in outstanding securities. See also Samuel, L., Die Effektenspekulation im 17 und 18 Jahrhundert (Berlin, 1926), pp. 29, 50–2, 95, 150 Google Scholar, etc., and Fürst, M., Die Börse, ihre Entstehungund Entwicklung (Leipzig, 1923), pp. 11–16, and passim.Google Scholar

⁶ See, e.g., Scott, W. R., The Constitution and Finance of Early English and Scottish Joint-Stock Companies (Cambridge, 1912), vol. II, p. 103.Google Scholar

⁷ Scott, for example, writes: “The intense speculation in Paris, during the closing months of the year 1719, was sufficiently striking to attract the attention of the mercantile classes in other countries. Speculators from Holland and from Great Britain arrived at an early stage of the boom, and many of these made large profits, while some had the prudence to return home with their gains. It was estimated that in a short period no less than 500 mil. livres in bullion had been carried to other countries in this way” (ibid., vol. I, pp. 404-5). For further references, see Samuel, , Die Effektenspekulation im if und, 18 Jahrhundert, p. 95 Google Scholar, who refers to Dutch, Swiss, and Italian participation, and Thiers, A., The Mississippi Bubble (New York, 1859), p. 106.Google Scholar

⁸ See Macpherson, D., Annals of Commerce (London, 1805), vol. III, p. 112.Google Scholar

⁹ Lipson, E., The Economic History of England (London, 1931), vol. III, p. 213 Google Scholar; see also Mottram, R. H., A History of Financial Speculation (Boston, 1929), pp. 27–8.Google Scholar

¹⁰ Samuel, , Die Effektenspekulalion im 17 and 18 Jahrhundert, p. 86.Google Scholar

¹¹ Jenks, L., The Migration of British Capital to 1875 (New York and London, 1927), p. 7.Google Scholar See also Hobson, C. K., The Export of Capital (New York, 1914), pp. 85 ff.Google Scholar

¹² For a full account of this early phase in the development of the House of Rothschild, see Corti, E. C., The Rise of the House of Rothschild (New York, 1928)Google Scholar, chaps, i and ii. During the Napoleonic Wars many European capitalists transferred their funds to England for safety, of which a large part was placed in British Government bonds. See Edwards, G. W., The Evolution of Finance Capitalism (London and New York, 1938), pp. 10–11.Google Scholar

¹³ Mortimer, Thomas, Every Man His Own Broker (ed. 6, London, 1765), pp. 21–33.Google Scholar

¹⁴ Jenks, , Migration of British Capital, pp. 61–2.Google Scholar

¹⁵ Tooke, Thomas, Considerations on the Currency (London, 1826), p. 111.Google Scholar

¹⁶ See Viner, Jacob, Studies in the Theory of International Trade (New York and London, 1937), pp. 270–2, 278–9, 408–9.Google Scholar Interesting was Fullarton's remark, in 1845, to the effect that “the securities themselves are in a continual course of transition from places where the rate of interest is high to where the rate of interest is low” (quoted in Viner, ibid., pp. 408-9n.). See also Wood, E., English Theories of Central Banking Control, 1819-1858 (Harvard Economic Studies, 1939), pp. 151–2CrossRefGoogle Scholar, for references to Hubbard, Weguelin, Mill, and Chapman; and Marx, Karl, Capital (Kerr, ed., Chicago, 1909), vol. III, pp. 675–6.Google Scholar The practice of using outstanding securities instead of gold as a means of settling international balances was apparently used extensively in European-American trade in the nineteenth century. See Cole, A. H., “Evolution of the Foreign-Exchange Market of the United States” (Journal of Economic and Business History, vol. I, 1929, pp. 411–12).Google Scholar

¹⁷ Einzig, P., Foreign Balanus (London, 1938), p. 15.Google Scholar Cf. also The Problem of International Investment (Royal Institute of International Affairs, London, 1937), p. 107.Google Scholar The French were among the participants in foreign speculative activities according to Feis, who writes: “… attracted by some glimpse of sudden fortune … the man of capital would reach out to purchase on a foreign stock exchange shares in a South African gold mine, or the growing Royal Dutch Petroleum Company, or the Canadian Pacific Railroad” ( Feis, Herbert, Europe the World's Banker, 1870-1914, Council on Foreign Relations, 1930, p. 38 Google Scholar). The relative share of Germany in this trade also seems to have been quite large (ibid., pp. 65-7). In fact, in the early years after the Napoleonic Wars, the German bourses, notably Berlin and Frankfurt, had already become “internationalized,” and quoted a very large list of foreign-currency securities. See Neidlinger, K., Studien zur Geschichte der deutschen Effektenspekulation (Jena, 1930), pp. 57–62.Google Scholar

¹⁸ Jenks, , Migration of British Capital, pp. 278–9Google Scholar; King, W. C. T., History of the London Discount Market (London, 1936), p. 266.Google Scholar

¹⁹ Weinstein, M., Arbitrage in Securities (New York, 1931), p. 7.Google Scholar

²⁰ von Reibnitz, K. F., Amerikas internationale Kapitalwanderungen (Sozialwissenschaftliche Forschungen, Abteilung iv, Heft III; Berlin, 1926), pp. 76–80.Google Scholar

²¹ Foreign Investments in the United States (U.S. Department of Commerce, 1937), p. 22.Google Scholar Cf. also Hobson, who writes: “Every kind of American security, national, state and corporate, was suddenly flung back for sale at almost any sacrifice; and by 1863 the United States was said to exhibit a clear national ledger with respect to foreign indebtedness” (op. cit., p. 132).

²² Taussig, F. W., International Trade (New York, 1928), p. 290 Google Scholar; Hobson, , Export of Capital, p. 150.Google Scholar

²³ Conant, C. A., The Principles of Money and Banking (New York and London, 1905), vol. II, p. 346.Google Scholar

²⁴ White, H. D., The French International Accounts, 1880-1913 (Cambridge, Mass., 1933), p. 89.CrossRefGoogle Scholar

²⁵ For a good account of this episode see Taussig, International Trade, chap. xxii.

²⁶ White, , French International Accounts, p. 89.Google Scholar

²⁷ Feis, , Europe the World's Banker, pp. 18, 54.Google Scholar

²⁸ Palgrave, R. H. I., Bank Rate and the Money Market (London, 1903), pp. 214–15.Google Scholar

²⁸ Lindahl, E., Dahlgren, E., and Kock, K., The National Income of Sweden, 1861-1930 (Stockholm Economic Studies, 5a, London, 1937), vol. I, pp. 281–4.Google Scholar

³⁰ Théry, E., “Les Valeurs Mobilières en France” (Memorandum 42, Congrès International des Valeurs Mobilières, Paris, 1900, vol. II, p. 38).Google Scholar For a similar point of view, see Reisser, J., The German Great Banks and Their Concentration (National Monetary Commission, Washington, 1911), pp. 532–5.Google Scholar

³¹ Dickens, P. D., “The Transition Period in American International Financing; 1897-1914” (unpublished doctoral dissertation, George Washington University, 1933).Google Scholar

³² Dickens, P. D., A New Estimate of American Investments Abroad (U.S. Department of Commerce, 1931), pp. 4–5.Google Scholar Dickens estimates that up to 1922 some $200 million of outstanding foreign securities had, on balance, been acquired by Americans.

³³ The term “movements” of securities which is used so frequently throughout this paper should not be interpreted too literally. To a large degree these securities may not “move” at all, but may remain domiciled in their original market of issue. One of the reasons for this is the expense involved in their physical transfer from one country to another, such as mailing charges, insurance, stamp taxes, etc. By this term, therefore, I mean international transfers of title, such as give rise to balance-of-payment entries. This fact should be kept in mind throughout the paper.

³⁴ See the eulogistic comments of Lévy, R. G., “Rôle des Valeurs Mobilières dans le Commerce International et dans les Règlements Financiers Internationaux” (Memorandum 89, Congrès International des Valeurs Mobilières, Paris, 1900, vol. III)Google Scholar; and E. Théry, “Le Change et les Valeurs Mobilières” (ibid., vol. II, Memorandum 59).

³⁵ Lewis, Cleona, America's Stake in International Investments (Brookings Institution, 1938), pp. 346–9.Google Scholar

³⁶ For useful surveys of this episode and the war-time liquidation in general, see ibid., chap, vi and appendix B; Young, R. A., The International Financial Position of the United States (New York, 1929), chap, iiiGoogle Scholar; Madden, J. and Nadler, M., America's Experience as a Creditor Nation (New York, 1937), chap. iii.Google Scholar It is interesting to note that France had some difficulty in realizing on many of her foreign securities since they were largely denominated in francs and hence not easily marketable abroad. If foreign securities are to be used for emergency purposes, it is desirable, therefore, that they should be payable in some foreign currency, and preferably quoted and actively traded in on other markets. Cf. Stern, S., Fourteen Years of European Investments, 1914-1928 (New York, 1929), pp. 21–2.Google Scholar

³⁷ See Schmidt, C. T., German Business Cycles, 1934-1933 (National Bureau of Economic Research, New York, 1934), pp. 89–90.Google Scholar

³⁸ Lindahl, , Dahlgren, , and Kock, , National Income of Sweden, p. 293.Google Scholar

³⁹ This decline in the volume of new foreign flotations should, of course, be placed in its proper setting in relation to the decline of new flotations in general. An examination of the course of new domestic and foreign flotations in the United States, Great Britain, Switzerland, and the Netherlands reveals, however, that since 1930 the decline in the volume of the latter has been much more drastic than that of the former. In the case of the United States, for example, new domestic flotations (exclusive of refunding) fell from $9.4 billion in 1929 to $1.9 billion in 1936, while during the same period new foreign issues declined from $671 million ($1.2 billion in 1928) to $23 million.

⁴⁰ Notably by Great Britain. See Stewart, R. B., “Great Britain's Foreign Loan Policy” (Economica, vol. V, n.s., 1938).Google Scholar In the case of the United States one might mention the Johnson Act, the Neutrality legislation, and the specifications of the Securities and Exchanges Commission. For a short account, see Williams, B. H., Foreign Loan Policy of the United States since 1933 (New York, 1940).Google Scholar

It is interesting to note that although direct investments have declined sharply since 1930, their volume has nevertheless been maintained much better than that of new flotations. There are many explanations for this fact, among which one might mention the sharp rise in tariffs throughout the world, the intensification of “buy-at-home” movements, the continued need for access to, and control of, sources of raw materials, the difficulties of transferring home the earnings of existing direct investments, etc.

⁴¹ Madden, J. and Nadler, M., The International Money Markets (New York, 1935), p. 81 Google Scholar; also, The Problem of International Investment, pp. 107-8.

⁴² See the annual Balances of Payments studies of the League of Nations.

⁴³ Keynes expresses the case well. In discussing the British balance of payments he wrote of these movements: “… it is so difficult to make a reasoned estimate as to the amount of the net balance that an attitude of agnosticism on the whole subject might seem attractive… it would seem that the two sides of the account of the sale and purchase of securities to and from foreign countries, other than new issues, are more likely to be nearly balanced than they are to be widely different” ( Keynes, J. M., “The British Balance of Trade, 1925-1927,” Economic Journal, vol. XXXVIII, 1927, pp. 553, 555 Google Scholar).

⁴⁴ For a discussion of the significance of these movements in the Swedish balance of payments, see Akerman, G., “The Surplus of Foreign Exchange, the Capital Market and the Rate of Interest” (Skandinaviska Kreditaktiebolaget, Jan., 1938, pp. 7–8).Google Scholar Since 1935 there has also been a considerable volume of foreign trading in Swiss securities, and at times foreign sales have exerted a depressing effect on stock prices. See the Annual Report of the Swiss National Bank for 1938 ( Federal Reserve Bulletin, 1939, p. 390 Google Scholar). It has been reported that in 1937 there was a large net inflow of foreign funds into Argentine securities. See the Annual Report of the Control Bank of the Argentine Republic for 1937 ( Federal Reserve Bulletin, 1938, p. 673 Google Scholar).

⁴⁵ The Problem of International Investment, pp. 319 ff.

⁴⁶ An interesting sidelight on this problem is afforded by the American figures, which show a heavy drop in the nominal value of American long-term portfolio investments abroad from $7,539 million at the end of 1931 to $4,048 million at the end of 1938. Part of this reduction can be explained in terms of regular sinking-fund and redemption payments which averaged about $160 million annually over the period, but the greater part must be explained in terms of the large repatriations which took place. The difference in value between the drop in portfolio investments and the annual total of the repatriations over the period is due to the fact that the securities must have been bought back at a lower price than their face values.

⁴⁷ Maturity is also evidenced in the repurchase by nationals of direct investments in their country owned by foreigners. This, for example, seems to be the case of Canada in recent years. Cf. Marshall, , Southard, , and Taylor, , Canadian-American Industry, pp. 255–60, 294.Google Scholar Different writers have made the repatriation of securities an integral part of their particular versions of the “stage” theory of capital borrowings originally propounded by Cairnes. See, e.g., Griffin, E. C., “The Future of Our Creditor Position” (Journal of Political Economy, vol. XXXI, 1923, p. 545).Google Scholar

⁴⁸ For example, in the United States, while the monthly average price of domestic bonds fell from 96.5 to 80.3 between 1929 and 1932, the corresponding fall in the price of foreign bonds was from 94.4 to 64.5. By 1938, while the monthly average of the former had risen to 92.1, that of the latter had fallen further to 60.5, despite a temporary recovery in 1933-6.

⁴⁹ Some light on this matter, although not entirely conclusive, was obtained by examining the year-to-year changes in the foreign holdings of large American institutional investors, such as commercial banks, mutual savings banks, life insurance companies, and investment trusts. In nearly all cases there was a conspicuous drop in holdings of foreign securities, although in certain cases, notably life insurance companies, holdings of Canadian securities increased.

⁵⁰ The Balance of International Payments of the United States in 1933 (U.S. Department of Commerce, Washington, 1934), p. 49.Google Scholar

⁵¹ Trust Companies, Nov., 1933, p. 478.Google Scholar

⁵² The Balance of International Payments of the United States in 1933, p. 48.

⁵³ For citations of actual cases, and for some details as to the procedures used, see the Securities and Exchanges Commission, Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganisation Committees, part V (Washington, 1937), pp. 494–504, 745.Google Scholar Cf. also Foreign Bondholders' Protective Council, Annual Report, 1935, p. 98.Google Scholar

⁵⁴ Clark, J. R., “Foreign Bondholdings in the United States” (American Journal of International Law, vol. XXXII, 1938, p. 444).Google Scholar

⁵⁵ For Italy, see Welk, W., Fascist Economic Policy (Harvard Economic Studies, Cambridge, 1938), pp. 174 ff.Google Scholar; for Germany and Czechoslovakia, see Eighth Annual Report of the Bank for International Settlements, 1937–1938, p. 71.Google Scholar

⁵⁶ See Foreign Investments in the United States (U.S. Department of Commerce, 1937), p. 14 Google Scholar; The Balance of International Payments of the United States in 1938, p. 55. A brief sample obtained from the Canadian statistics shows in the years 1937-8, the volume of trading by Canadians in American common and preference shares was about ten times as large as their trading in American bonds. Recent statistics suggest, however, that this 10 per cent ratio may be somewhat below the average for foreign trading as a whole. See the monthly Bulletin of the Treasury Department for April, 1940, and subsequent dates.

It is of interest to note that in the case of Canada, the relative volume of trading by foreigners in Canadian bonds, in contrast to Canadian shares, is quite high. Perhaps the chief explanation for this is that some 55 per cent of Canada's bonded indebtedness possesses an external payment feature of some sort. Cf. Hackett, W. T. G., “Canada's Optional-Payment Bonds” (Canadian Journal of Economics and Political Science, vol. I, 1935, p. 161).CrossRefGoogle Scholar This fact undoubtedly gives these bonds a particular attractiveness to foreigners.

⁵⁷ In this statistical work, I was assisted by Mr. Jack R. Green of the University of Chicago.

⁵⁸ Securities and Exchanges Commission, Selected Statistics on Securities and on Exchange Markets (Washington, 1939), part VII, pp. 92–5.Google Scholar This ratio rose steadily during 1935-6 suggesting that not only did foreigners' anticipations as to the course of stock prices over this period become progressively more favourable than those of Americans, but that their own influence on these prices became progressively more important.

It should be added that to the degree that foreign trading was concentrated on market “leaders,” their influence on prices would be more important than the ratio suggests. There is reason to believe that at times foreign influence was of considerable importance in determining the course of foreign bond prices. In the case of German bonds, for example, foreigners were often practically the only traders in the market.

⁵⁹ See Federal Resene Bulletin, July, 1936, p. 512 Google Scholar; ibid., Dec., 1936, p. 936; ibid., Feb., 1939, p. 92.

⁶⁰ This fact is evidenced by a remarkably high inverse correlation, even on a weekly basis, between net foreign purchases and sales of American (and foreign) securities in the United States, and net changes in foreign deposits in American banks. This not only implies that when foreigners bought fewer securities from Americans they put more into bank deposits, and vice versa, but also that net purchases of securities from Americans were partly financed from existing foreign deposits and net foreign sales had the effect of building up foreign deposits. In the case of countries from which much flight capital has come, this correlation is largely a reflection of the fact that securities and deposits offered alternative methods of disposition of hot money. In the case of Canada and the United States the inverse correlation is remarkably high, but here the explanation lies chiefly in the fact that funds are being continually shifted over from one category into the other.

⁶¹ For a survey of various terminological approaches to international short-term capital movements in general, see Kindleberger, C. P., International Short-Term Capital Movements (New York, 1937), chap. i.Google Scholar

⁶² White has pointed out, however, that the relationship between discount rates and long-term interest rates need not at all be close, and that the correlation is much closer between discount rates and stock prices (French International Accounts, p. 215).

⁶³ For a technical description of these operations, see Weinstein, Arbitrage in Securities; for certain economic implications, see Taussig, , International Trade, pp. 215–20Google Scholar; Van Zeeland, Paul, “Certain Aspects of the Importance of International Securities in the Movement of Capital” (in Brochure No. 11, Washington Congress, Intero national Chamber of Commerce, 1931, pp. 29–31)Google Scholar; Nurkse, R., Internationale Kapitalbewegungen (Vienna, 1935), pp. 223–5.CrossRefGoogle Scholar

⁶⁴ The Balance of International Payments of the United States in 1929 (Washington, 1930), p. 53.Google Scholar

⁶⁵ Grebier, L. T., “Changing Conditions in World Capital Markets” (Harvard Business Review, vol. XV, 1936–1937, p. 199)Google Scholar; Schacher, G., “Internationale Effekten-Arbitrage” (Die Bank, vol. XXIV, 1931, pp. 39–40).Google Scholar

⁶⁶ In actual practice security arbitrage is usually concentrated on a relatively small number of international issues actively traded in on the different markets. With respect to arbitrage between New York and other markets only about 25 securities are actively bought and sold by arbitrageurs. For a list of these see “Arbitrage” (Fortune, 06, 1934, p. 94).Google Scholar However, the number of issues potentially capable of being arbitraged is considerably larger than this. According to the Economist Department of the New York Stock Exchange, the number of securities mutually listed on the New York and London Stock Exchanges on March 1, 1939, was 132, while the corresponding figure for New York and Amsterdam was 388. A comparison of these figures with those obtained by the present writer for January 2, 1932, in a rough compilation from the New York Stock Exchange listings, the Stock Exchange Daily List of Officially Quoted Securities (London) and Prijscourant (Amsterdam), revealed that during the seven-year period the number of mutually listed securities in each case had declined by approximately 10 per cent. It should be added that although the number of international securities may have declined, the number of securities capable of being internationally traded may actually have increased. This latter contention has been made by Ohlin, B., “Mechanism and Objectives of Exchange Control” (American Economic Review, supplement, vol. XXVII, 1937, p. 148).Google Scholar

⁶⁷ This is what essentially seems to be in the minds of Angell, J. W., The Theory of International Prioes (Cambridge, Mass., 1926), pp. 405–6CrossRefGoogle Scholar; White, , French International Accounts, pp. 5–6, 9, 214–15Google Scholar; Ohlin, B., Interregional and International Trade (Cambridge, Mass., 1933), p. 388 Google Scholar; Haberler, G., The Theory of International Trade (London, 1936), p. 50 Google Scholar; Fanno, M., Normal and Abnormal International Capital Transfers (Minneapolis, 1939), p. 11 Google Scholar; and Laughlin, J. L., The Principles of Money (London, 1903), pp. 382–3.Google Scholar

⁶⁸ See Hackett, , “Canada's Optional-Payment Bonds,” pp. 165–6Google Scholar, and Parkinson, J. F., “The Foreign Exchange Rate and the Mechanism of International Adjustment” (Canadian Investment and Foreign Exchange Problems, Toronto, 1940, pp. 76–7, 83–4).Google Scholar In another study of the Canadian situation, while this fact is not necessarily denied, it is stated, however, that “…a study of the transactions so far recorded indicates that variations in foreign exchange rates must be quite pronounced before their effects upon the broad course of trade are apparent… whatever influence exchange rates may exert has been obscured on many occasions by other factors, especially those associated with market psychology” ( The Canadian Balance of International Payments: A Study of Methods and Results, Ottawa, 1939, pp. 133–4).Google Scholar

⁶⁹ See the interesting comments on this procedure in the case of Canada, by Viner, Jacob, Canada's Balance of International Indebtedness, 1900-1913 (Cambridge, Mass., 1924), pp. 183–4.Google Scholar

⁷⁰ Evidence of the scope of American dealings in British securities in 1933 can be obtained by scanning the financial columns of the London Economist and the Statist for May to August, 1933, in particular.

⁷¹ Cf. Einzig, P., The Theory of Forward Exchange (London, 1937), pp. 118–23.Google Scholar

⁷² It should be added that repatriations may often not be “wilfully” or “voluntarily” undertaken by a country, but may be “forced” upon it, owing to the sudden liquidation on its markets of its securities by the foreign creditor nation desirous of obtaining needed foreign exchange for an emergency, or apprehensive of the value of these securities. Examples of this are cited in section I above. Repatriations may also be directly related to exchange-rate fluctuations. If, e.g., nationals of a country believe that their currency is going to depreciate substantially, they may re-purchase from foreigners domestic securities held abroad, provided that these securities are denominated in a foreign currency. This type of movement falls under the category of “abnormal disequilibrating” movements of outstanding securities noted above. There is reason to believe that a large part of the repatriations of recent years may have been of this character. An interesting example of this, noted by Sayers, R. S. (“Japan's Balance of Trade,” Economica, 1935, pp. 53–4)Google Scholar, is provided by the Japanese repatriations of their sterling obligations in 1931-2.

⁷³ It should be emphasized that though these movements occur “autonomously,” they may, however, at times perform an “equilibrating” role in the balance of payments. Suppose a boom flares up in a country. Ceteris paribus, this is likely to lead to a weakening of its balance-of-payments position. The boom may, however, attract foreign funds into the stock market, and this movement will tend to offset the adverse balance even though it is not directly nor indirectly related to it. Examples such as this, and the other exceptions listed above, suggest that a more exact classification of outstanding security movements would probably be to distinguish “equilibrating” and “disequilibrating” movements, and then to divide each class into “induced” and “autonomous” categories (i.e., those related and those unrelated to the balance-of-payments position).

⁷⁴ See the emphatic testimony of Dr. W. A. Beenhouwer of Amsterdam, speaking for foreign stock exchange interests, to the effect that these movements are overwhelmingly for investment purposes. See Hearings before the Committee on Ways and Means, Revenue Act of 1936, Washington, pp. 167–8.Google Scholar

⁷⁵ See Whittlesey, C. R., International Monetary Issues (New York and London, 1937), pp. 123–5Google Scholar, and Lovasy, G., “Zur Entwicklung des zwischenstaatlichen Kapital, Verkehrs in den letzten zehn Jahren” (Oesterreichische Zeitschrift für Bankwesen, vol. XIX, 1937, pp. 215–18).Google Scholar Kindersley writes: “It is not surprising that the foreign investor should be displaying a radical change in his attitude toward bond investments. This change… is not merely confined to a trend away from fixed interest to variable dividend securities, but is also apparent in the character of new equity investments … new investment abroad is now … of a short-term character in respect of which income is of minor importance as compared with the expectation of a rapid appreciation of capital.” See “British Oversea Investments 1937” (Economic Journal, vol. XLVIII, 1938, p. 633).Google Scholar

⁷⁶ See Machlup, F., The Stock Market, Credit and Capital Formation (London, 1940), pp. 159–60Google Scholar; Lewin, L., Ueberfremdung: Eine Untersuchung über das Auslandskapital (Berlin, 1937), p. 46 Google Scholar; Eccles, M. S., “Controlling Booms and Depressions” (Fortune, 04, 1937, p. 178).Google Scholar

⁷⁷ I suspect that this fact may have been of some importance with respect to foreign holdings of American securities following the disastrous price declines of late 1937 and thereafter, although there are other factors to be considered.

⁷⁸ See table I. The weekly figures on security trading between Americans and foreigners are very illuminating in this respect.

⁷⁸ Several recent writers seem to have failed to recognize the growing relative importance of equities in the international movement of capital. Nurkse, for example, states that stocks constitute a “relativ unwichtigen Form … für den internationalen Kapitalverkehr” (Internationale Kapitalbewegungen, p. 222), while as late as 1937, Werhahn, P. wrote that stocks “eine nur untergeordnete Rolle spielt” (Kapitalexport und Schuldentransfer im Konjunkturverlauf, Jena, 1937, p. 28).Google Scholar

⁸⁰ Of course, there is an offsetting compensation in the fact that the countries which have to pay the dividends to the foreign holders of their securities are now in a stronger position internationally in that in time of depression there will be a corresponding diminution of pressure on their balances of payments. In fact, it has been suggested that such a change in the character of international investments (as well as the shift from portfolio to direct investments) is highly desirable. Cf. Loveday, A., “Financial Organization and the Price Level” (Economic Essays in Honour of Gustav Cassel, London, 1933, pp. 417–18)Google Scholar, and The Future of Monetary Policy (Royal Institute of International Affairs, 1935), pp. 165–6.Google Scholar

⁸¹ See the remarks of A. Aftalion who refers to these movements as those which occur “à contresens de ce qu'exigeait le bon ordre économique” ( L'Équilibre dans les Kdations Économiques Internationales, Paris, 1937, pp. 311 Google Scholar); Madden, and Nadler, , International Money Markets, p. 67.Google Scholar

⁸³ Cf. The Problem of International Investment, p. 108, where it is stated that “the rapidly growing traffic in international securities is fraught with serious dangers,” and Henderson, H. D., “Memorandum on New Technical Arguments for Postponing Stabilization” (The Problems of Monetary Stabilization, International Chamber of Commerce, 1937, p. 164).Google Scholar This pessimistic tone is in sharp contrast to the earlier optimistic expectations of Simmons, E. H. H., Financing American Industry and Other Addresses (New York, 1930), p. 100 Google Scholar, and Meeker, J. E., The Work of the Stock Exchange (New York, 1930), p. 508 Google Scholar, and many of the pre-War writers mentioned above. The difference in the two sets of attitudes arises from the fact that the former relates to what I have called “disequilibrating,” and the latter to “equilibrating” movements.

⁸³ I use the apt phrase of Paish, F. W., “Banking Policy and the Balance of International Payments” (Economica, n.s., vol. III, 1936, pp. 414 ff.).Google Scholar This term should not be identified, as has been done by Plumptre, A. F. W. (“The Distribution of Outlay and the Multiplier in the British Dominions,” Canadian Journal of Economics and Political Science, vol. VI, 1939, p. 363 n.)CrossRefGoogle Scholar with the concept of an “income-elasticity of demand” for imports (or with Kindleberger's, “flexibility of demand,” Quarterly Journal of Economics, vol. LI, 1937, pp. 354–61Google Scholar). Mathematically, the former is equivalent to , and the latter to , where Y = income and M = imports. A similar concept, which he calls “Wegverlust” or “Wegdifferenz,” has recently been developed by Maier, K. F., Goldwanderungen (Jena, 1935), p. 36.Google Scholar

⁸⁴ White, , French International Accounts, pp. 20–1, 146.Google Scholar Canada in the period 1900-13 provided a notable example of the close relationship between borrowings and real capital needs, as has been recently emphasized in a re-interpretation of the Canadian experience by Cairncross, A. K., “Die Kapitaleinfuhr in Kanada” (Weltwirtschaftliches Archiv, vol. XLVI, 1937, pp. 593–633).Google Scholar

⁸⁵ These interrelationships are best described by Tacke, G., Kapitalausfuhr und Warenausfuhr (Jena, 1933).Google Scholar

⁸⁶ Cf. Palyi, M., “Foreign Investment” (Encyclopedia of the Social Sciences, vol. VI, 1931, pp. 365–6).Google Scholar

⁸⁷ Cf. Remer, C. F., “Investment in Kind” (Explorations in Economies, New York, 1936, pp. 97–101).Google Scholar

⁸⁸ Ohlin's terminology (Interregional and International Trade, pp. 411–13).

⁸⁹ This is, of course, equally true of most international short-term capital movements, except those arising out of the financing of foreign trade.

⁹⁰ I.e., the “final purchases velocity,” of these funds is very low or even zero. Cf. Viner's terminology (Studies, p. 367). Theoretically, as an offset to this, and as a stimulus to the adjustment process, is the “primary” deflation of purchasing power in the country losing the funds. But actually the major part of the adjustment is likely to be thrown on to the receiving country, since in the losing country the money is likely to come from idle hoards, and thus not involve a primary deflation at all, i.e. the “final purchases velocity” of this money is also zero. On this latter point see Bresciani-Turoni, C., Inductive Verification of the Theory of International Payments (Cairo, n.d.), pp. 22–3, 80, 94 Google Scholar, and Hawtrey, R. G., The Art of Central Banking (London, 1932), p. 182.Google Scholar

⁹¹ In recent years even the possibilities of secondary expansions are to a large degree ruled out, since under depression conditions the acquisition of additional reserves is not likely to cause a substantial expansion of credit; moreover, in various countries, the authorities have deliberately offset the effects of gold inflows upon the credit structure by sterilization procedures. But this fact is, of course, true irrespective of the nature of the inflow of funds, and thus cannot be cited as an obstacle to the adjustment process specifically associated with movements of outstanding securities.

⁹² This effect of rising stock prices has been pointed out by Harrod, R. F., The Trade Cycle (London, 1938), pp. 207 ff.Google Scholar; Robinson, Joan, An Introduction to the Theory of Employment (London, 1938), pp. 42–3Google Scholar; Kindleberger, , International Short-Term Capital Movements, p. 29 Google Scholar, and especially by Henderson, H. D. “The Significance of the Rate of Interest” (Oxford Economic Papers, vol. I, 1938, pp. 7–8).Google Scholar See also the brief comments of Whale, P. B., “International Short-Term Capital Movements” (Economica, vol. VI, 1939, p. 39).Google Scholar

⁹³ The above propositions are not merely hypothetical. The American case is illuminating. Since 1934 the huge capital inflow into the United States (in the form of net security purchases and net building-up of deposits) has constituted a major disturbing force in that country's balance of payments to which some adjustment had to be made. Actually, the mechanism of adjustment did not “work” in any significant sense of the term—the capital inflow entered in the form of gold. The reasons are simple—the “final purchases velocity” of the inflowing funds was very low, and the accompanying gold inflow led to no corresponding credit expansion. In fact, such expansion of incomes as there was to a large degree was independently and artificially induced by government spending, although this was, of course, indirectly related to the heavy gold inflow which made feasible such a huge programme of financing.

⁹⁴ Cf. Dacey, W. M., “The Technique of Insulation” (The Banker, London, Oct., 1938, pp. 15–24).Google Scholar

⁹⁵ “The central difficulty is, of course, that the Exchange Account is not in a position to put additional supplies of Old Consols or Kaffirs into circulation” (ibid., p. 23); see also Sayers, R. S., Modern Banking (London, 1938), p. 207 Google Scholar; Einzig, , Foreign Balances (London, 1938), p. 157 Google Scholar; Kindleberger, , International Short-Term Capital Movements, p. 214.Google Scholar

⁹⁶ If control of capital imports were introduced, there would be only few precedents for it; Viner refers to the cases of Spain and Roumania after the Great War, “Political Aspects of International Finance” (Journal of Business, 1928, pp. 151–2)Google Scholar; Einzig refers to the post-war examples of Germany and Italy ( Exchange Control, London, 1934, p. 182)Google Scholar; and Staley mentions Czechoslovakia ( War and the Private Investor, Garden City, N.Y., 1935, p. 408).Google Scholar In most of such cases, however, as Viner has pointed out, “the interference is, as a rule, non-economic in its motives and indirect and administrative rather than statutory in its methods. It has for its aim, not the protection of domestic capital, but the accomplishment of military or political objectives of national policy…” (see “International Free Trade in Capital,” Scientia, vol. XXXIX, 1926, p. 39).Google Scholar

⁹⁷ The British have used this weapon with great effectiveness, with the result that foreign purchases of British securities have been very limited. Cf. Kindersley, , “British Oversea Investments 1937” (Economic Journal, vol. XLVIII, 1938, p. 617).Google Scholar

⁹⁸ In addition to the difficulties of estimating the amount of capital gains with respect to foreigners, there is the indisputable fact as proved in 1934-5, that such a tax would have the effect of inducing foreigners to trade in American securities on foreign markets, notably London, where they would not be subject to the tax, rather than to cause them necessarily to diminish the volume of such trading. Cf. the testimony of Beenhouwer, , Hearings before the Committee on Ways and Means, pp. 162 ff.Google Scholar; and Angell, M. B., “The Non-Resident Alien: A Problem in Federal Taxation of Income” (Columbia Law Review, vol. XXXVI, 1936).Google Scholar It should be added, however, that the volume of trading thus diverted could not have been very large.

⁹⁹ Such a proposal has been suggested by Einzig, P., Foreign Balances, pp. 147–8.Google Scholar The American Administration has, however, come out unambiguously against such a measure. See, e.g., the remarks of Secretary Morgenthau, New York Times, Feb. 16, 1937, p. 31.Google Scholar

¹⁰⁰ In view of the growing interest in the problem of the international propagation of the business cycle, and the cyclical behaviour of the different items in the balance of payments, a few words as to the cyclical pattern of outstanding securities movements as a whole, or of the different constituents thereof, would be of interest. While there are, a priori, several conceivable patterns, yet in view of the complexity of these movements, and the differing and often conflicting motives involved, I cannot find any one pattern which would seem to be the most likely. Fragmentary, and inconclusive, incursions into this field have been made by Liefmann, R., “Ueber den Einfluss des internationalen Kapitalienverkehrs auf die Krisen” (Jahrbücher für Nationalökonomie und Statistik, III Folge, Band XXVII, 1904, pp. 174–7)Google Scholar; Angell, , The Theory 0} International Prices, pp. 527–8Google Scholar; Beach, W. E., British International Gold Movements and Banking Policy, 1881-1913 (Harvard Economic Studies, Cambridge, 1935), pp. 178–9.CrossRefGoogle Scholar