Foreign Investment in the U.S. Economy before 1914

Abstract

The United States was the world's largest debtor nation in 1914. From independence to the mid-1870s, American federal, state, and local government securities had represented the greatest single attraction for foreign investors, yet by 1914 foreign investment in sovereign debt was small. By the mid-1870s, the private sector had become the major recipient of foreign investment, with huge sums going into financing the vast national railroad system. Then, large American industrial, public utility, and retail corporations looked to foreign as well as domestic sources of finance. Because Americans could obtain funds from abroad, American growth was never retarded by the absence of capital. Especially in the late nineteenth and early twentieth century, foreign direct investment—carrying with it technology, know-how, and management—went into U.S. agriculture, manufacturing, and services. Foreign capital played a substantial and beneficial role in U.S. economic development from independence to 1914.

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References

1. Mira Wilkins , The History of Foreign Investment in the United States to 1914 (Cambridge, MA: Harvard University Press, 1989), p. 145. The research done for and the documentation in this 1055-page book provide the basis for much of the evidence and generalizations in the present article. For amplification, the reader is referred to this volume.

2. While there is dispute as to whether the official figures of the 1980s reflected reality, without doubt America was a debtor in world accounts before 1914. Yet, for the pre-1914 years, the paucity of good comparative data makes it unclear precisely when America became the world's largest debtor nation; it was certainly in that position by the 1870s and probably much earlier.

Cleona Lewis , America's Stake in International Investments (Washington, DC: Brookings Institution, 1938).

B. U. Ratchford , American State Debts (Durham, NC: Duke University Press, 1941).

5. The best single work on British investments in American railroads to 1900 is Dorothy Adler , British Investment in American Railways (Charlottesville: University of Virginia Press, 1970). Augustus J. Veenendaal is writing a book on Dutch investment in American railroads. No single volume exists on the large German stakes in U.S. railroads.

6. Mira Wilkins , “The Free-Standing Company, 1870-1914: An Important Type of British Foreign Direct Investment,” Economic History Review, 2d ser. 41(2):259-282 (May 1988).

7. Draft report by I. G. Farben on safeguarding foreign assets, 26 Sept. 1940, record group 238, microfilm set T301, reel 20, NI-2746, National Archives. The reference was to the pre-World War I German direct investments, particularly in the United States.

idem , “Foreign Banks and Foreign Investment in the United States,” in International Banking, ed. Rondo Cameron and V. I. Bovykin (New York: Oxford University Press, forthcoming).

9. Most American economic history textbooks, in my view, have not paid adequate attention to the sizable foreign investments in the United States in the late nineteenth and early twentieth century. In arguing that the impact is of great significance, I am departing, as I did in The History of Foreign Investment in the United States to 1914, from what in the past had been the standard view of most, albeit not all, American economic historians.

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10. About a quarter of a century ago, American economic historians were deeply involved in a controversy over how important railroads were to U.S. economic development. I believe that debate is now past history and share with most economic historians a strongly held view that railroads had a vital role in shaping America's growth. See, for example, Alfred D. Chandler , The Visible Hand (Cambridge, MA: Harvard University Press, 1977).

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11. Gavin Wright , “The Origins of American Industrial Success, 1879-1940,” American Economic Review, 80(4):651-668 (Sept. 1990), stresses the importance of America's mineral resource development for the nation's industrial success. Foreign investors were active in contributing to this development—directly, in their investments in mining, and, indirectly, in their investments in the railroads that opened up the mineral resources.

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12. Wilkins , Emergence of Multinational Enterprise, passim.

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13. W. Arthur Lewis , Growth and Fluctuations, 1870-1913 (London: George Allen & Unwin, 1978), p. 177.

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14. Because of space limitations, I have not discussed many of the alleged costs identified by contemporaries—for example, whether foreign investors were more fickle than domestic ones, or whether foreign investors were responsible for U.S. adherence to the gold standard and thus for declining prices in the late nineteenth century. Numerous economic and political costs were enumerated by contemporaries, some of which may have been legitimate concerns.