EH 101-Week 8 - Week 8: Account for the high level of...

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Week 8: Account for the high level of international investment in the period 1870-1914. Why was so much of the lending from Britain? -------------------------------------------------------------------------------------------- - * Kenwood and Lougheed- The Growth of the Int'l Economy 1820-1980- Ch. 2,4-5 Chapter 2: International Long-Term Capital Movements, 1820-1913 -Specialization in production along the liens of comparative advantage major feature of 19th century intl economy, and brought about partly by mobility of capital/labor from country to country. -Growth of trade and real income in the world economy that occurred at this time was determined in part by an int'l redistrubution of capital and labour on a scale unique in history. -Thus during the century ending in 1913 some 9-1000 million pounds were invested abroad and some 46 million people moved overseas. -Necessary condition for the expansion of the intl economy. **International movements of capital occur when residents of one country acquire assets in another. -EX. Resident of Britain may purchase securities in an American business or bonds of American govt. or may export goods to the US and leave proceeds on deposit in that country. -Basic distinction between different types of international capital movements is that between long and short-term transactions. *Foreign long-term capital investment consists of capital invested in the expectation that the investment will not be liquidated in the near future and that it will earn income over an appreciable period. -At beginning of 19th century total value of foreign investment small, economic impact on both borrowing and lending countries insignificant. *From end of Napoleonic Wars, however, foreign investment assumed a new character and an increasing significance. Reasons: 1) establishment and growth of specialized financial institutions in both borrowing and lending countries, such as commercial banks, investment houses, made foreign investment easier and less risky 2) accumulation of savings by a middle class willing to invest them abroad supplied the funds for an expansion of foreign lending. 3) flow of funds from savers in one country to borrowers in another facilitated by the appearance of more sophisticated financial instruments, such as credit money and bills of exchange. 4) capital markets such as the city of london became much
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more diversified in their business dealings, therby aiding the expansion of international trade and the growth of foreign investment. -By 1870 the total value of these investments had more than trebled. *But the great era of international lending occurred after 1870, with the capital outflow becoming a flood during the decade before WWI. By 1900 foreign investments totalled 4,750 million pounds, rising rapidly to 9500 million pounds in 1914. *Britain was the major source of supply of foreign capital during the 19th
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This note was uploaded on 09/04/2010 for the course GOVT 100 taught by Professor Peterenns during the Spring '08 term at Cornell University (Engineering School).

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EH 101-Week 8 - Week 8: Account for the high level of...

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