The Accounts of the British Empire

Capital Flows from 1799 to 1914

Mario Tiberi

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351147989
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The fundamental role of Great Britain's economy in the international economic system in the century preceding the First World War is demonstrated by a number of variables, which have drawn the interest of many scholars. The focus here is on capital flows. The main difficulty encountered in this work arose from a shortage of documentation on economic data in the historical period under consideration, which has been tentatively reconstructed, on the basis of a number of estimates, subjected to a close comparative scrutiny. The book provides a valid guide to anyone wishing to improve their understanding of the so-called "pax britannica" which, at that time, rested on the canons of free trade and the gold standard. This historical period is considered by many to be the first experience of capitalist globalization. In this sense the book is also intended to provide useful reading for those who want to reflect on the possible future evolution of the world economy.

Chapter 1
The Prevalence of the Indirect Method

1.1 Introduction

An essential element for any qualitative valuation of the role played by Great Britain in events, economic or otherwise, in the period leading up to the First World War is the computation of the size of its foreign investments as both annual and accumulated flows, so that the total value of the stock can be calculated. Naturally there are other indicators that can help to establish the comparative positions of various countries, such as income, exports, imports, terms of trade, etc. Apart from the fact that these variables are always strictly dependent on capital movements in ways and degrees that vary according to the kind of movements in question, it can be argued that investment abroad always implies a degree of interference by one economic system in another.

The question of making an accurate measurement will always be a problem, even when there is an abundance of both official and unofficial data available, as at present. However, any attempt to trace the historical course of the internationalization of British investments is immediately complicated by a lack of information from sources of the period. In view of the remark passed by Hobson, an expert on the subject, that 'the origin of the present gigantic efflux of capital must be sought deep in the past',¹ it is, indeed, unfortunate to note how the path of knowledge meets increasingly long shadows the further we move back in time.

There have been many attempts to track the evolution of investments made abroad by residents in Great Britain. In some cases these works have been sporadic investigations, though usually they have concentrated on specific moments in recent British history, which, for various reasons, have been of particular interest to scholars wanting to further their understanding of the international accounts of the country.

Although a number of methods have been adopted for this estimate, there are basically three main approaches:² 1) the first, called the indirect or residual method,³ consists in aggregating the balances on current account, which are generally measured on a yearly basis; 2) the second is based on the accurate capitalization of the various types of income (profits, dividends, interest and rent) annually accruing to the citizens of a country from abroad; 3) finally, the third, also called the direct method,⁴ relies on the cataloguing of financial and real assets held abroad, starting with those that are most easily identified, such as securities issued on the market.

The choice of method made by scholars has been influenced by the availability of data and the objectives of the research, though in some cases the same author has applied more than one criterion to give greater reliability to his estimates.⁵

It should be pointed out, however, that no choice had been possible between the three methods of measurement until the last decades of the 19th century, when more data on international capital flows and their relative returns gradually became available. For the earlier period, the method aggregating the balances on current account was, and still is, practically the only alternative, because at least the data on the flows of goods and the volumes of shipping was kept in official sources and can be used as basic information for the construction of the current account.

It is well to remember that an increased amount of data was also to be made available by official sources over the following decades. For example, the balance on current account was first published by the Board of Trade in 1923, whilst the balance of payments, which also contained capital movements, became official only after the Second World War.⁶

The first of the three methods mentioned above to be applied to determine the annual series of Britain's foreign investments before the First World War was the so-called indirect or residual method,⁷ which consists in measuring the balances on current account. Indeed the case of Great Britain, which recorded regular surpluses in these balances and was a great national creditor towards the rest of the world in the 19th century, illustrates very clearly how the balances on current account, net of the movements of bullion (principally gold), represent the potential value that could be used to accumulate profitable assets for British residents abroad, whether they were real or other kinds of assets with different maturity dates, short term or otherwise. However, to determine the overall volume of foreign investments or, in disaggregated terms, of direct and portfolio investments, additional elements are needed in order to construct the aggregates desired. Consequently, to estimate the stock of foreign investments at any particular date, the simple sum of annual balances has to be accompanied by strong assumptions, such as the absence (or neutralization) of gains and/or losses on capital account and the insignificance of amounts of capital finally repatriated.⁸

The application of this method depends on both the reliability and the availability of data on the single items on both the credit and the debit sides of the balance on current account, which together will produce the final balance used to measure the capital owned abroad. And the further back in time the first substantial traces of this accumulation are to be found, the greater the degree of discretion needed in the estimate of certain items in the balance. Negligence or lack of attention in the reconstruction of any of these items can make the estimation of the balances on current account in the initial years of the series a very delicate question; given the length of the period examined that sometimes extends over more than a century, an error may give rise to an increasing distortion in the total sum of capital invested abroad that is calculated at annual intervals.

In order to appreciate these difficulties, we first have to bear in mind that only from 1854 onwards can the official data on the principal components of Britain's balances on current account, that is the exportation (and re-exportation) and importation of goods, be considered as fairly accurate, since prices applied to physical quantities had become more reliable.⁹

Before this year, only the figures for exports had acquired an aura of respectability, because they had been registered by law as values declared by exporters for accounting purposes from 1798, whereas imports and re-exports were measured with the so-called 'official' prices that were completely out-of-date and sometimes even held over from the previous century. As a result the trade balance was clearly distorted and almost consistently showed consecutive surpluses for the years from 1801 to 1841. From 1842 onwards, however, it was to change its plus signs into minus signs in an almost equally consistent manner with a more correct evaluation, for exports at least, thus giving rise to small trade deficits. These were due to a falling trend in the current export prices from the beginning of t...