Published by EH.NET (January 2005)

Mira Wilkins, The History of Foreign Investment in the United States, 1914-1945. Cambridge MA: Harvard University Press, 2004. xxvi + 980 pp. $95 (cloth), ISBN: 0-674-01308-5.

Reviewed for EH.NET by Michael Edelstein, Department of Economics, Queens College and the Graduate School, City University of New York.

The book jacket of this volume describes the author, Mira Wilkins of Florida International University, as “the foremost authority on foreign investment in the United States.” Book jackets are known for their hyperbole and general flimflam. However, in this case the book jacket writer is underselling the author. Mira Wilkins is the foremost authority on both foreign investment in the United States and U.S. investment abroad.

The current volume is Wilkins’s fourth on the subject of American cross-border investment flows. Previous volumes include The Emergence of Multinational Enterprise: American Business Abroad from the Colonial Era to 1914 (1970), The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970 (1974), and The History of Foreign Investment in the United States to 1914 (1989), all published by Harvard University Press. The current volume is a comprehensive history of the cross-border inflows from 1914 to 1945, covering both foreign direct investment (FDI) and foreign portfolio investment (FPI) in the United States. There are 612 pages of text and 254 pages of footnotes.

A modern capitalist economy is a highly complex phenomenon. It is arguable that one of the most insightful perches from which to observe its workings is that of a scholar of foreign investment. Scholars, of course, know that long-distance portfolio and direct investment are a central feature of the investment process in modern economic growth. Modern British historians, for example, have long debated the extent and character of inter-regional investment flows between the “provinces” and “London.” Similarly, American economic historians have worried about the size and character of inter-regional investment flows from the older regions on the East coast to the Midwest, mountain, and Pacific regions. However, very importantly, there are practically no aggregate data to track the inter-regional movement of funds and corporate competencies. Furthermore, private corporate and financial records are not organized to easily research these inter-regional phenomena. In this sense, our national political institutions and legislation offer something of a gift, at least in the U.S. case, as they provide an abundance of public and private data on cross-border movement of funds, ownership, patents, etc. So, in fact, Mira Wilkins presents us with an extremely rich business history of world and American enterprise, granted through the unique lens of what foreigners thought would enhance their net worth. Still, the breadth of foreign investment activity in the U.S., especially in the period covered by this volume, 1914-1945, means Wilkins is covering a very large chunk of American business and financial history.

In the nineteenth century foreign FDI and FPI in the U.S. was subject to slow, if any, institutional change. In general there were very few barriers to cross-border investment in the U.S. America was a world-class debtor. The immense size of its investment activities and their profits could not help but draw savings from most of the developed economies of Western Europe, although predominantly the U.K. FPI was paramount but FDI was not trivial, including FDI in the form that Wilkins may be said to have discovered, the free-standing company. The aggregates of FPI and FDI clearly had an annual ebb and flow but even these cyclical variations have a certain regularity explored by Kuznets, Abramovitz, and Williamson. The only abrupt, non-cyclical shocks to the volume and character of foreign investments were associated with the Civil War and its longer lasting greenback monetary regime.

The period with which Wilkins is here concerned, 1914-1945, is quite different. The U.S. moved from net debtor to net creditor status, the most important one in the post-World War II world. Furthermore, this movement took place in an environment with very abrupt institutional and cyclical changes that must have astounded those who could remember the quieter environment before 1914. First, World War I entailed severe restrictions by the European belligerents on all forms of current foreign investment; outstanding FPI in the U.S. was commandeered to fund munitions and other purchases. Then, with American entry to World War I, German FDI and other investments were commandeered by the U.S. government, including their patent wealth. By the end of World War I the U.S. was a net creditor. Inward flows of FDI and FPI returned in the immediate post-World War I years but were subject to radically evolving war debt repayment and currency restrictions. The mid-years of the 1920s show a high tide of foreign investment in the U.S. as some semblance of economic and financial order returned to Europe and U.S. growth was energized by electrification and the automobile. This high tide then gave way to the brutal 1929-1933 downturn, ending with the collapse of the U.S. banking system and the devaluation of the dollar. Foreign investment of both types dropped precipitously in these years. Inward foreign investment recovered, 1933-1939. The Hawley-Smoot Tariff Act probably induced some FDI trying to get behind the heightened tariff barriers but both FPI and FDI were also importantly influenced by foreigners seeking a safer haven from Europe’s autarkic and confiscatory regimes. When World War II started in 1939 the European belligerents again imposed capital restrictions and commandeered U.S. investments to fund munitions purchases. Even before 1939, the German government and German corporations, remembering U.S. actions during World War I, made it a matter of policy to sell off, abandon, or hide their U.S. investments through third-party investors in Holland, Switzerland, Panama, etc. With U.S. entry into World War II, of course, Axis investments were once again commandeered and confiscated by the U.S. government, again including German patent wealth. This then is the chapter structure of Wilkins’s book, 1914-1918, 1919-1923, 1924-1929, 1929-1933, 1933-1939, 1939-1941, and 1941-45. And, the weight of her analysis proves this chapter structure correct; each short period has very different institutional and expectational structures governing both FDI and FPI placed in the U.S.

In each period, Wilkins separately covers FDI and FPI. In the case of FPI, discussion moves country by country, sector by sector, with the greatest depth for the U.K., the most important FPI sender. There is excellent coverage of the portfolios and motivations of foreign mutual funds, mortgage, insurance, and banking enterprises which held American FPI. On trend, FPI in American railroad and land resources retreated while industrial and utility FPI increased.

FDI is analyzed sector by sector and company by company. Any reasonably sized foreign company with investment in the U.S. has a story in each of Wilkins’s chapters. There is a wonderful richness to each period’s history. One can only wonder at the presentiment of Unilever’s U.S. subsidiary, for example, which opened new factory floor space and new product lines, and started radio advertising, 1930-32. And in each year, 1930 to 1932, net profits after taxes rose, higher than ever before in the Unilever subsidiary’s history. In the same years, Royal Dutch Shell moved aggressively to acquire more oil fields and reserves, despite losses; Anglo-Persian remained aloof, too absorbed with the drop in oil prices and (unsuccessful) moves to control world prices.

A central part of the FDI story during these years is the ups and downs of German FDI in the U.S. After commandeering German property during World War I and holding it captive for some years after the war, American alien property authorities quietly relented in the mid-1920s and German owners reappeared, often from behind American and other covers. As before World War I, German FDI was particularly strong where German technology and patents were at the frontiers of industrial capabilities (e.g., chemicals), the patents often acting as a bargaining chip in secret world market sharing agreements. Indeed, these patent-sharing agreements are one of the most significant stories that Wilkins covers. That she was able to gather so much information on these matters is surely due to the radical shift in Franklin Roosevelt’s antitrust policy. By the late 1930s, the White House, Congress, and Justice Department had decided that illegal international cartel arrangements and the immense patent holdings of large domestic and foreign corporations represented a threat to an American recovery based on rapid technical change. A good deal of the energy of the 1939-1941 Temporary National Economic Committee, its hearings, and its reports were focused on these phenomena. While the Justice Department’s antitrust cases in this area were moth-balled during World War II, the antitrust division returned to the fray after 1945 and altered the terrain of corporate patent and research strategy with its court-ordered settlements requiring wider licensing of patents. The terrain was also altered by the commandeering of German patent assets during World War II, made widely available to American corporations for war and post-war production. Much is known about the U. S. government’s commandeering of German assets during both world wars. Wilkins deserves a great deal of credit for carrying her story forward into the post-World War II years, assembling the disparate threads of the post-war history of these ex-German assets.

One way to measure the course of FPI and FDI in the U.S. over these years is as a percentage of GNP (p. 565). In 1914, total foreign investment (FI = FDI + FPI) was 19.5% of GNP while FDI was 4.7%. By 1918, the total (FI) was down to 3.9% while FDI was 1.3%. The war years had dramatically reduced the investment total and its FPI-FDI distribution. The 1920s did not change these percentages very much but the 1930s raised them so that by 1939 they stood at 6.8-9.6% and 3.2%, respectively. By the end of World War II, however, they were back to where they were in 1918; total FI was 3.7% and FDI was 1.3%. What Wilkins has carefully laid out is the micro-history of these movements, who entered, who stayed out, who endured, and who failed. One acquires very clear ideas of what, why, and how capital was reallocated and expanded during the first half of the twentieth century at the level of the firm and the central role of technological knowledge. Wilkins’s rich account of foreign investment in the U.S. is also a major part of the story of the retreat from the pre-World War I high-tide of globalization. Business and economic historians of the twentieth century are surely and greatly in Mira Wilkins’s debt. Finally, it should also be said that students of the macroeconomic movements of foreign investment will ignore this micro-history and its abrupt changes at their peril.

Michael Edelstein is the author of the “International Transactions and Foreign Commerce” chapter in the Millennial Edition of Historical Statistics of the United States (Cambridge University Press, forthcoming).