During the nineteenth century Great Britain was one the major foreign lenders of capital to countries in Europe, Asia, and Americas. While in the late 1820s most of the British investments were concentrated in the North America, in 1860-1870 Empire countries became the major recipient of British capital. India was the most absorbing region of British funds, there Britain invested 95m. in railways between 1845 and 1875. After 1870 about one half of British investments concentrated in Empire countries. However, the United States also kept on receiving British capital outward flow, which was mostly invested in railroad companies. Why did the British lend so much money abroad during the period of 1870-1914?
First of all, it was unprofitable for Britain to invest money at home for the British economy was depressed at that period of time; that’s why Britain kept earning a higher rate of return by investing the capital in foreign countries. Various foreign transportation and industrial investment projects with high rates of return were another reason for Britain to allocate its funds abroad. A demand for foodstuffs and raw material increased significantly due to the Europe’s industrialisation and the growth of its population, which led to an increase of British investments to Europe: Britain became a supplier of raw material and foodstuffs to Europe. Since European countries as well as Empire countries were very important markets for manufactured goods, they became a region to which Britain directed its foreign investments. After having found gold discoveries in Australia, British investments increased even more. The reason why Britain heavily invested in railroad companies in Canada, India, and Australia; in railroads and canals in the United States; in mining and manufacturing in Latin America and Australasia is because the profitability of investing abroad significantly depended on where the funds were invested. If invested in economically useful and desirable fields, such as in overhead capital or in industrial enterprises located in the growth sectors of the borrowing economy, the likelihood of default was diminished, for such investments favourably affected growth rates, and at the same time trended to expand exports, so that the means for paying income to foreign investors was provided by the use of the funds (Kenwood & Lougheed, 38). Much of the capital that was invested in uneconomic fields, such as wars, was lost. However, some of the investment income from abroad was used productively, which made new loans for foreign borrowers available. Lending capital to foreign countries was very profitable for Britain since the countries- borrowers used the money to accelerate the international specialisation of production and development of the Great Plains region, to set up railways (which dramatically expanded the land borders), which enabled to get a cheaper way of supplying the country (Britain) with foodstuffs and raw material.
All in all, while some economists argue that Britain tended to invest a lot of capital everywhere but at home due to its weakened economy and the slowdown in its productivity growth, others say that British distribution of income and wealth led to tendencies to oversave, with the excess carried off abroad. Institutional factors are also said to have influenced the capital export (Michael Edelstein, 173).
It is quite difficult to give a straightforward answer to the question whether Britain s export of capital caused problems (economic slowdown) for British economy. While some economists believe that Britain s excessive investment in foreign countries affected British economy tremendously by limiting the availability of capital funds to domestic industry and thus preventing Britain from exploiting new at that time techniques, many economists argue that it was not restrictions or overseas capital embargoes that were the prevailing method for encouraging domestic, scientifically based industry; but it was tariffs and publicly supported general and technical education (Michael Edelstein, 196).
R. Floud and D. McCloskey, Econimic History of Britain Since 1700, chapter 7, pp173-196 (Michael Edelstein)
A.G. Kenwood and A.L. Lougheed, The Growth of the International Economy 1920-1990, chapter 2, pp25-38.