H6 4538 G7 UC-NRLF -^ LO m o :'Q America's Opportunity in Foreign Investments b^ Guaranty Trust Company of New York GIFT America's Opportunity in Foreign Investments Guaranty Trust Company of New York 140 Broadway FIFTH AVENUE OFFICE MADISON AVENUE OFFICE Fifth Avenue and 43rd Street MadisonAvenueand60thStreet LONDON OFFICES LIVERPOOL OFFICE 32 Lombard Street, E. C. 27 Cotton Exrhanpe Tuildings 5 Lower Grosvenor PI., S. W. PARIS OFFICE HAVRE OFFICE BRUSSELS OFFICE 1 & 3 Rue de3 Italiens 122 Boulevard Strasbourg 158 Riie Roy ale G COPYRIGHT, 1919 GUARANTY TRUST COMPANY OF NEW YORK Gil America's Opportunity in Foreign Investments 'T^HE World War has created an oppor- tunity for America by hastening the time when America should play a more important part in world trade and world finance. It is imperative that the in- vesting public should not overlook our present opportunities. The necessity of maintaining our position in world trade, of keeping markets open for our products, emphasizes the need for financing our export trade through extension of credit abroad and purchase of foreign securities. The rapid development of the extensive new areas of the United States was made possible by the investment of capital from other countries. The continued investment of capital in combination with our nationalistic policy encouraged the development of a diversified industry which, during the period of our expansion, found the market for its products within the country. Our industries grew to such an extent that many producers became interested in foreign trade as an outlet for their products. The recent World War led to a further expansion of our industrial capacity and the establishment of com- paratively new industries. The main- tenance of an outlet for our products in other countries is essential to the well- being of American industries. The in- vestment of capital in other countries is one of the effective ways to keep world markets open for American products. This involves the purchase of foreign securities and the development of an mternational finance market in this country. The World War changed this country from a borrowing to a lending nation and set in operation forces that will make this country an increasingly important lender of capital. As we are entering this period of devel- opment it is well to consider what other countries have done, what methods they have used to obtain outlets for their surplus of capital. As their wealth in- creased and they w^ere able to lend large amounts, Amsterdam, London, Paris, Brussels, and Berlin became in their turn financial centers, to which all countries, but especially those seeking to develop new sources of wealth, looked for assist- ance through credit extensions. When the fleets of the Netherlands dominated the seas and the possession of the rich islands in the Far East gave them pre- dominance in world trade, Amsterdam was the financial center of the world. It lost its predominance to London after the Napoleonic Wars. Later, the industrial development on the continent of Europe led to the development of important financial centers at Paris, Brussels, and Berlin. We must not rest with a passive recog- nition of the opportunities of America in foreign trade and in the foreign invest- ment field. We individually must do our utmost to induce the public and our financial leaders to play the great part [31 which has been made possible. It takes vision and courage to \eiituro out into new activities v Inch vail le-id to an ex- pansion of world trade. The American public should understand the necessity of investing in foreign securities and the relation that it bears to our own industrial and economic life. Growth of Great Britain For a long as a Creditor Nation time before the war the pre-eminence of London as a financial center was everywhere recognized. The great trading routes went through English ports. In all the principal markets of the world payments for goods were made by means of drafts on London drawn in pounds sterling and traders considered them as good as gold because of the existence in London of a wide market where they could be disposed of for cash. Through W'Orld-wide trade connections the English financiers had developed an international point of view, so that men from every country going to London to seek capital for new enterprises felt sure that their plans would get a sympathetic hearing and that in all probability the money oi credit required would be forth- coming. This position in finance and trade to which London attained is indicated by the variety of the securities which are listed on the London Stock Exchange. The character and number of foreign and colonial securities listed is as follows : Colonial and Provincial Gov- ernment Securities 185 Indian and Colonial City Securities 176 Foreign Cities 76 Foreign Government Securities 210 Railways in British Colonial Possessions 110 Indian Railways 68 American Railroad Securities.... 56 Foreign Railways 276 Total 1.157 The total number of domestic securities of the United Kingdom in these same classes is as follows : British Funds 72 City and County 176 Public Bonds 34 Railways, Shares, Stocks & Debentures 361 Total 643 In addition to these there are many commercial and industrial securities which cannot be readily classified, it being mi- certain to what extent they are domestic and to what extent they are foreign, because of the overlapping of the in- terests which they represent. But the number of foreign and colonial securities is certainly greater than the number of domestic securities. Investment in foreign enterprises had begun in a small way in the sixteenth and seventeenth centuries. The industrial revolution in tlie middle of the eighteenth century created a great demand for capital with which to obtain machinery, to build new factories, and to develop coal mines. The prolonged wars of this period forced the Government to borrow heavily from the English people and also from other countries. Money rates were high and Dutch capitalists took advant- age of the situation to invest very large amounts in the bonds and notes issued by the British Government, in stock of the Bank of England, and in commercial or industrial enterprises. Amsterdam at that time was the chief financial center of the world. At the end of the century Great Britain was still a borrowing nation. During the Napoleonic Wars little progress was made by Englishmen in extending their foreign enterprises. All the capital and credit available were needed at home to finance the war, to provide subsidies amounting to $'219,- 859,000 for the country's Allies, and to keep up the development of industrial [4] enterprises. This imposed great burdens on the people for a time. Everything in the land was taxed to the limit of en- durance, but at the end of the war the industrial capacity of England had been expanded, a sizeable merchant marine had been built, and the people had learned how to save money. There began im- mediately a rapid development of British foreign investment. Carried forward by the same spirit which had enabled them to overcome Napoleon, the people of the British Isles took the utmost advantage of their expanded productive capacity and of their experience in saving and investing. Important loans were made to the con- tinental countries which had suffered the most from the long years of war and foreign holdings of British bonds and stocks were bought back from the Dutch and others. With this effort to get out of debt and to buy into foreign enterprises there went an increase in trading with foreign countries everywhere. This expansion of world trade, which became pronounced about 1820, led to important invest- ments in South American mines, and loans to the South American Govern- ments. American canal and railway bonds, as well as bonds issued by various State Governments, were readily taken by English investors. French and Bel- gian railroad securities also found a market in London. The disturbances in Europe and the growth of France and other continental countries led British investors in the latter part of the first half of the century to seek more profitable openings in America. After our Civil War investors turned their attention to the British Colonies, to South America, South Africa, and the Far East. Distribution of British Foreign Investments The foreign investments of Great Britain, as estimated by Sir George Paish in 1913, were mainly in railways and government securities, as indicated by the following table, in which the value of the pound sterling is taken as $4.8665. Railways $7,402,014,631.50 Government Securities 4,669,518,679.50 Mines 1,327,527,668.50 Finance Land & Invest 1,188,336,035.50 Municipal 718,037,475.00 Commerce and Industrial 707, 258, 1 78.00 Tramways 378,565,035.00 Banks 354,811,648.50 While there was a wide distribution of British investments throughout the world, the largest amounts were invested in the colonial possessions, in the United States and in the Argentine Republic, as shown by the following: INDIA AND COLONIES Canada and Newfoundland $2,505,614,855.00 Australia 1,616,223,048.00 New Zealand 410,411,411.00 South Africa 1,801,539,368.00 West Africa 181,544,782.50 India and Ceylon 1,843,313,404.00 Straits Settlements 132,821,384.50 Hongkong 15,105,616.00 British North Borneo 28,323,030.00 Other Colonies 127,448,768.50 Total India and Colonies $8,662,345,667.50 FOREIGN COUNTRIES United States $3,672,343,680.50 Cuba 160,959,487.50 Philippines 39,988,030.50 Argentina 1,555,163,072.50 Brazil 718,125,072.50 Mexico 481,875,963.50 Chile 297,552,409.50 Uruguay 175,797,446.00 Peru 166,302,904.50 Miscellaneous American 124,280,677.00 Russia 324,240,295.50 Egypt 218,564,248.00 Spain 92,740,890.50 Turkey 90,984,084.00 Italy 60,539,260.00 Portugal 39,593,844.00 France 39,029,330.00 Germany 30,970,406.00 [5] Miscellaneous European 265,613,570.00 Japan 305,694,064.00 China 213,556,619.50 Miscellaneous Foreign 339,180,450.50 Total Foreign $ 9.413,005,756.00 Grand Total $18,075,441,423.50 This total does not include a large amount of capital privately invested abroad and, were this added, the total British investments in the colonies and in foreign countries would amount, as esti- mated, to $19,466,000,000. Bases for The wide distribu- Wide Distribution tion of securities on the London Stock Exchange has been an outgrowth of Great Britain's extensive trade rela- tions, of British colonial expansion, of the settlement of English-speaking peo- ple in many countries, and of the estab- lishment there of institutions similar to those of England. Through the participation of the British mercantile marine in trade with all countries, Eng- land became the clearing house and trans- shipping center for world trade. Out of this trade the imposing structure of British overseas investments developed. ^\herever ships went, capital followed and was invested freely in the enterprises of every nation, thus insuring the con- tinuance of trade and its increase as these enterprises enlarged their activities. British investors, compared with in- vestors in other countries, have generally acted as pioneers in discovering and opening up new areas for development. After the enterprise became stabihzed it was possible to transfer a part of the capital to other countries, and thus British capital advanced continually into the more distant and less developed parts of the world. These new countries produced raw materials which industrial England needed. Like all new countries, they paid high rates of return on capital invested in their enterprises. They offered opportunities gradually to in- crease England's control of their trade and industry. Influence of Foreign Invest- The in- ments upon Great Britain vestment of cap- ital in other countries, the extensive trade relations of Great Britain with other countries, the reliance upon other markets for the growing output of British industry, and the dependence upon many countries for sources of raw materials, have been bound up very closely with British economic life. The influence of British institu- tions in civilized countries and the wide-spread settlement of English-speak- ing people have been in part the out- growth of Great Britain's policy of econ- omic expansion. It is impossible to pic- ture the conditions of living, the economic life of the British Isles, if business had only been national in scope and there had been no effort to expand their interests beyond their own boundaries. Foreign Capital Ever since its in the United States discovery Amer- ica has attract- ed the investment of European capital. It was because of the opportunities which they saw to develop trade — -a market for their own wares and a source of raw materials for their home industries • — that merchants of England, France, Spain, and Holland formed companies to promote colonizations in this Hemisphere. Their willingness to invest made possible the obtaining of ships to bring the colonists here and of supplies to sustain them until they had established them- selves. As the colonies grew in strength and importance more capital was im- ported for the development of tobacco and cotton plantations, and for mercantile [61 purposes. The large merchants were the investing class. The population of the American colonies was swelled by emigra- tion from the United Kingdom, which naturally brought with it considerable supplies of capital. Attracted by the opportunities for trade and industry, enterprising men came to America from all parts of Europe. The War of In- dependence for a time checked the in- vestment of British capital here, and as a result, considerable Dutch capital entered the country. In 1800 no American securities were quoted in what was -then regarded as the official list of the London Stock Exchange, but in 1825 nine issues of United States Government bonds and a number of state and city bonds were quoted in London. In 18'^0 there began a period of extensive canal and highway construction. The most im- portant of these undertakings was the Erie Canal, which in IS'io connected the Atlantic Coast with the great agri- cultural regions west of the Allegheny Mountains. This was a period of ex- tensive investment of foreign capital in America. From 1830 to 1840 the imports exceeded the exports by about $200,000,- 000, which may be taken as an indication of the amount of foreign capital invested here. In 1839 President Jackson esti- mated that the total accumulated invest- ments of European capital was about $200,000,000. A period of active railroad building in the forties and fifties brought into this country additional sums of foreign capital. The first American railway loan floated in London was that brought out by Baring Brothers in 1846, an issue of $2,000,000 of Baltimore & Ohio Railroad bonds. Considerable Dutch capital was invested in American securities during this period. The outbreak of the Civil War led many Europeans to dispose of their American securities. Because of their interest in the production of cotton in the Southern States, British and Dutch capitalists were reluctant to invest in Federal Government bonds. On the other hand, the investors of Germany took an active interest in United States bonds because there had been a large Teutonic immigra- tion to this country in the forties and fifties. In 1866 the total amount of French and British capital in this country was estimated at only $350,000,000, but by 1869 it had increased to $1,000,000,000. The total amount of all foreign capital invested in the United States was esti mated by Mr. Wells in 1869 to be $1,465,- 000,000. The greatest share belonged to British investors, but substantial amounts were held by Holland and Germany. In the early seventies extensive railway con- struction made possible still larger invest- ments of foreign capital in this country, rt is estimated that these increased from $243,000,000 in 1869 to $345,000,000 in 1876. In the eighties and nineties foreign capital became interested in a variety of enterprises other than railways, particu- larly in mining, agriculture, manufactur- ing plants, and public utilities. The development of industrial combinations and the formation of large corporations, made attractive conditions for foreign capital seeking to enter the general in- dustrial field. In a report made to the United States Monetary Commission in 1910 Sir George Paish estimated that the total amount of foreign capital, including bank loans, in- vested in the United States was approxi- mately six and one half billion dollars. Domestic capital, meanwhile, had been accumulating and while we continued to borrow, our capitalists were able, on the other hand, to make advances for the development of neighboring countries, especially Canada, Cuba, Mexico, and some of the South American countries. At the time Paish estimated that the [71 total investment of American capital in foreign countries amounted to about one and one-half billion dollars, leaving America a debtor nation to the extent of about five billion dollars. The capital which America obtained from abroad was used chiefly in extending and improving the railroads of the country. No one can survey the remark- able growth in the population, wealth, and productiveness of the United States without being impressed by the great part which the railroads have played. They made possible the cultivation of vast tracts of agricultural land, the produce of which before the war was valued at more than eight billion dollars. They made possible the opening up of our immense stores of minerals. In other directions the investment of foreign capital here was invaluable. It enabled the American peopje to devote their own savings to the building and furnishing of homes, to the equipment of their manu- factories, and to fitting out retail estab- lishments; and in this way accelerated the growth of population and wealth. Sir George Paish estimates that the in- crease in the annual production of wealth in the United States made possible by the investment of foreign capital here has been at least twenty times greater than the sum paid for interest. The interest paid to foreign capitalists by the United States has been of less importance to those capitalists than the increase in the wealth of this country which their in- j vestments made possible. Such increase I in our wealth has meant increased buying j power, and demand for the products of the lending country so that the returns from the foreign investment have been in- definitely larger than the mere interest payment. In the same way every invest- ment now made by us in other countries means an increase in their wealth and, consequently, in their ability to purchase our products. The war has reversed the position of America and instead of other countries increasing their sales here through increases of wealth brought about by investments in American enterprises, we are now able to increase our sales abroad upon the same principle. World Need All the world needs cap- for Capital ital today as a result of the war. For four years and a half the normal life of mankind has been upset. An unparalleled destruction of the things which men need for food, shelter, and clothing has taken place and the processes by which those goods are pro- duced and placed in the hands of those who use them have been disorganized. At the same time the nations which have been at war have been increasing their industrial capacity by the adoption of more efficient methods of production. While Europe needs foodstuffs, raw materials, and machinery for the period during which she will be adjusting her industries to a peace basis, it is becoming increasingly evident that this industrial capacity built up during the war will be a very important factor in the rehabilita- tion of devastated areas. But the fact remains that new sources of food and raw materials must be found and they can be found only through the investment of capital in those enormous areas of the earth's surface which are still undeveloped. A survey of railway con- struction during 1914 and of the programs then contemplated leads to the conclusion that the world then was getting ready for an era of world-wide expansion of trade and industry. It is believed now that the war will be found to have accelerated that movement. Bases upon which America may be a Lender of Capital In view of the pres- ent world demand for capital, a survey of the bases upon which America may become a [81 lender of capital makes evident the opportunity which our industrial and financial leaders have of directing capital into the most profitable channels. A century and a half ago Amsterdam was the money center, partly because it was a large trading center. England, following the Napoleonic Wars, became a large lending nation because it had be- come a large industrial country as well as a trading center. English capital was put into French industrial enterprises, and in turn the French gradually developed an industrial capacity that gave them lend- ing power, and Paris became a growing financial center. More recently we have seen the same development in Belgium, making Brussels a growing financial center. Following the Franco-Prussian War, Germany started an industrial develop- \y ment which in time made possible the investment of German capital in other countries, and Berlin became a growing financial center. The United States, through its whole history, with a large undeveloped area, ./ has, generally speaking, been absorbing ' foreign capital as well as the growing accumulations of domestic capital. To- ward the end of the nineteenth century however, it had reached such an industrial development that American capital began to seek an outlet in other countries, and there was increasing interest in world trade and the development of a merchant marine. ~ The United States is now in an un- usually favorable situation for making foreign loans. There are available for export vast supplies of food stuffs and raw materials. According to the industrial census for 1914, the industrial plant of the United States had a total capital of $22,791,000,000, wliile the value of output was $24,246,000,000. The war resulted in additions to our industrial plant. This is indicated by the pig iron production, which is about forty -five per cent, larger than before the war; the establishment of important chemicals and dyestuffs indus- tries ; and the great expansion of our ship- building industry. Our diversifed pro- duction and our natural resources will enable us to supply the materials which will form the material bases of loans to other countries. A As a further basis for foreign loans, this country has large absorbing power for investments. The annual savings, which amounted to $6,000,000,000 before the war, reached a total of at least $15,000,- 000,000 during the war. The annual in- come from the balance of foreign loans, which will be due this country as a creditor nation, will probably be largely absorbed in new investments. The de- velopment of a strong and growing merchant marine will further add to our ability to invest capital in other countries. The extraordinarily large gold supply of the country, in combination with a free gold market, will give bills drawn in American dollars a world-wide reputation as synonomous with gold, and funds can be loaned payable in gold. This gold reserve is a sound basis for our credit structure — an essential requirement in an expansion program. Nature of Foreign Investments Credit is the key- note of business. To eliminate credit from business would hamper and restrict its opportunities. The invest- ment of capital in domestic as well as foreign enterprises is a way of granting long term credit. There is no mystery about foreign investments. The in- vestment of capital in other countries is really only a means of financing our export trade. The purchase of bonds of a new railroad in South America by the American investors results in all proba- bility in the purchase in the American market of the materials and rolling stock [9] with which that raihoad is to be built and equipped. Thus, the investment of capital in other countries leads to the exportation, in the main, not of capital, but of products of American labor and capital. The proceeds of the loans will be expended for the purchase of products in this country. By financing our export /trade we are, in effect, providing business jfor our domestic industries and in that way employment for labor. Benefits from Foreign Investments A loan of capital means that the lending country transfers a portion of its purchasing power to the borrowing country, and that the latter's purchasing or consum- ing power is increased to a correspond- ing extent. Loans of capital from one country to another frequently result in world-wide expansion of trade in operations, and to exercise our influences in establishing stabilized conditions in other countries so that the world's pro- ducing capacity may be utilized to the greatest advantage. The investment of capital in new countries will result in an increase of production of raw materials and food- stuffs, and will create new markets for the industries of established countries. Investment of capital in foreign coun- tries, leading to the development of their resources, to expansion of world trade, results in a better distribution of all kinds of products to the principal markets of the world. The use of capital for the develop- ment of the tropical and sub-tropical areas has enabled people in temperate regions to obtain the products characteristic of tropical regions. The opening up of the great wheat belts of the United States and Argentina have made available a greater consequence of giving su^ an increase