new british investment in canada, 1865-1914

New British Investment in Canada, 1865-1914Author(s): Matthew SimonSource: The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 3, No. 2(May, 1970), pp. 238-254Published by: Wiley on behalf of the Canadian Economics AssociationStable URL: http://www.jstor.org/stable/133675 .

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NEW BRITISH INVESTMENT IN CANADA, 1865-1914*

MATTHEW SIMON City University of New York

Placements de portefeuille britanniques au Canada, 1865-1914. Dans le cadre d'une etude exhaustive des nouvelles emissions de titres canadiens outre-mer, que les investisseurs britanniques ont achetees entre 1865 et 1914, l'auteur procede 'a une analyse de l'inves- tissement britannique au Canada. Les donnees utilisees ne concernent que les fonds veri- tablement souscrits par des investisseurs britanniques. L'auteur en a ventile le total suivant les categories d'emprunteurs et de titres et selon l'usage qui est fait des capitaux mobilises.

Les nouvelles emissions canadiennes representent 411 millions de livres, soit dix pour cent du total des placements britanniques outre-mer durant le demi-siecle en question. Quatre-vingt pour cent de ces emissions canadiennes sont sous forme d'obligations, la plu- part gouvemementales ou garanties par le gouvernement. Plus des trois-quarts de ces fonds ont ete utilises 'a des investissements d'infrastructure: transports (le poste: chemins de fer y est le plus important), utilit's publiques et travaux publics. Par comparaison aux autres r6gions du monde, c'est au Canada que la part du capital britannique utilisee dans l'agriculture, les mines, le secteur manufacturier et la finance est la plus faible. En pratique, la totalite des emprunts publics a servi au d6veloppement de l'infrastructure.

L'examen des donnees revele l'existence de mouvements cycliques 'a long terme. I1 y en a deux et demi qui s'etendent de seize 'a vingt-quatre ans, tant dans la serie des placements outre-mer globaux que dans la serie des nouvelles emissions canadiennes. Pour des sous- periodes choisies, l'auteur fait l'examen, d'abord de l'importance croissante des titres de compagnies privees, ensuite des change-ments de la repartition par industries des nouvelles emissions.

L'auteur procede a une comparaison de la serie chronologique des nouvelles emissions canadiennes et des estimations que Penelope Hartland a faites pour le Canada eu egard aux mouvements internationaux de capital, pour la p6riode 1868-1914. I1 est en mesure de dire que les importations ont depasse les exportations de capital -chacune des annees de la periode 1868-1914. I1 compare ensuite la meme serie (des nouvelles emissions canadiennes) aux statistiques que Viner a calculees sur l'usage des placements britanniques et des autres placements 6trangers au Canada. Ce qui lui permet de deduire que le capital britannique a 'te utilise dans des industries differentes de celles oiu le reste du capital etranger a ete place.

Dans sa conclusion, l'auteur porte un jugement sur la signification de ses series eu egard a la theorie de l'equilibre de la balance des paiements.

That the influx of British capital played a significant role in affecting the course of Canadian economic development in tlhe half century before 1914 has been widely recognized. Canada's international financial experience during this period, roughly corresponding with the epoch extending from the establishment of the Dominion of C'anada to the outbreak of the first World War, has been

*This paper was prepared by the late Matthew Simon as a result of the receipt of a Ford Foundation Faculty Research fellowship in Economics for the academic year 1967-8, and the use of research funds generously extended by that organization for the preparation of a new program and the use of an electronic computer (Data Control 1604) at the New York University Engineering School during April-June 1967 to obtain a vast output of new data on pre-1914 British foreign investment. He expressed his appreciation to Emanuel Mehr of the Geophysics Laboratory of New York University for his assistance in the development of a program and to his research assistant, Donald Cooperman of Queens College, City University of New York. Professor Simon died in 1968; any inquiries concerning the data may be addressed to: Professor Irving Stone, Department of Economics, Baruch C'ollege, City University of New York. Canadian Journal of Economics/Revue canadienne d'Economique, III, no. 2 May/mai 1970. Printed in Canada/Imprime au Canada.



British Investment in Canada 239

the subject of both quantitative investigation and analysis. As part of his study of Canada, between 1900 and 1913, Jacob Viner constructed annual estimates of the individual items in the current and capital account of Canada's international balance and of the major components of long-term British investment in Canada.' His explanation of the transfer process in terms of the classical theory of international capital movements has generated over the years a lively and continuing discussion of the effects of the large scale capital imports as, part of the mechanism of balance of payments, adjustment. More recently, Penelope Hartland has prepared a comprehensive set of estimates of the principal elements in the Canadian balance of payments for the period 1868-99.2 These statistics, derived through the use of the indirect and direct methods, have been computed both on an annual basis and with five year moving averages.

This paper presents an original comprehensive set of annual data of one segment of the Canadian capital account, the new security issues that were absorbed by British investors between 1865 and 1914. The interpretation of these estimates provides new insights into the character and determinants of the flow of British capital into pre-1914 Canada. The first section describes the nature of the statistics, which are cumulated for the entire fifty-year period: an overview of the distinctive peculiarities of Canadian new issues by contrasting its half century pattern with those prevailing in the larger regions, of the world, of which Canada was a part. The following section continues the internal analysis of the data by utilizing annual time series to identify some of the major trends and fluctuations characterizing new British investment during this period. The final part examines the relationships between our new issue statistics and re- lated Canadian series. It concludes with an assessment of the implications of these statistics for further work in balance of payments adjustment theory.

I

The Canadian new issue statistics that are the basis of this paper comprise part of a larger study of the regional aspects of new British foreign investment in the pre-1914 epoch.3 Every new overseas issue that was placed on the capital market of the United Kingdom during the years 1865-1914 was classified by both geographic and economic attributes'. In the former category, each nation was allocated to its respective continent, political status, and climatic-ethnic group. Canada was assigned to Norti America (including, in addition the lJacob Viner, "Canada's Balance of International Indebtedness 1900-1913," Harvard Economic Studies XXVI (Cambridge, Mass., 1924). 2Penelope Hartland, "Canadian Balance of Payments Since 1868," Trends in the American Economy in the Nineteenth Century, XXIV of Studies in Income and Wealth by Conference on Research in Income and Wealth (Princeton, 1960), 717-55. 3Discussions of the methods and the findings of this continuing project can be found in Harvey H. Segal and Matthew Simon, "British Foreign Capital Issues, 1865-1894," Journal of Economic History (Dec. 1961), 567-81; Matthew Simon, "The Pattern of New British Portfolio Foreign Investment 1865-1914," in John H. Adler, ed., Capital Movements and Economic Development, Proceedings of a Conference held by the International Economic Association (New York, 1967), 33-71; Matthew Simon, "The Enterprise and Industrial Com- position of New British Portfolio Investment, 1865-1914," The Journal of Development Studies, III (Apr. 1 967), 280-99.



240 MATTHEW SIMON

United States, Newfoundland, Mexico, Central America and the Caribbean States), the British Empire (consisting of, in addition, Australasia, South Africa, India, etc.) and the Regions of Recent Settlement (comprising, in addition, the United States, Newfoundland, Argentina, Chile, Uruguay, South Africa and Australasia).

The major economic characteristics of each issue in terms of "who," "where," and "how" were then established. The borrowers were classified as either private companies, mixed enterprises (those that receive a guarantee of interest payments on bond issues by some public authority, etc.) or governmental bodies at various levels (i.e. national, provincial and municipal). Second, the means of flotation - the type of security was identified as either a debt (i.e. bonds, notes) or equity (common and preferred stock) issue. Finally, the end use of the funds mobilized was indicated through assigning each issue to ten major industry classifications, with various combinations and components. These industries include agriculture, mining, manufacturing, transportation, public utilities, finance, land and real estate, trade, defense, public works and miscel- laneous. The categories, transportation (of which railroads are the major component), public utilities and public works were combined into a social overhead capital group. Through t-he use of an electronic computer, it was possible not only to obtain annual data on the enterprise, security, and industrial distribution of these new issues for a particular geographic region, but also more detailed breakdowns in the. form of two-dimensional matrices that provided statistics for each area on the enterprise. distribution of piarticular industries, the pattern of private and government borrowing, and the security distribution of particular industries and type of enterprises.

These statistics are money call series, showing the actual funds committed by British investors to non-overseas securities. They exclude those conversion issues that did not mobilize net additional British long-term funds but include the subscriptions of British investors to securities floated simultaneously in overseas capital markets (i.e., the partials). To be sure, our figures are a measure of only one segment of the long-term capital account. They omit both direct investments that did not generate new issues and movements in outstanding securities. Nevertheless, the detailed data provided on the economic characteristics of -the process of foreign investment should enlarge our understanding of the international dimensions of pre-1914 Canadian economic development.

During. the half century preceding the outbreak of the first World War, British investors subscribed to some ?411 million of new Canadian issues or slightly more than ten per cent of the aggregate overseas securities of ?4,082 million they acquired. The security, industrial and enterprise composition of the Dominion issues the British selected reflected the primacy of conservative considerations in their calculations. Analysis of the data in Table I lends support to this contention by shedding light on the distinctive features of this trans-Atlantic flow of funds through comparison with the patterns characterizing the larger geographic regions of which Canada was a component part.

Observe that C:anada has the highest debt-equity ratio of all the enumerated geographic areas. Almost 81 per cent of the ?411 million of its new issues were




TABLE I

ANNUAL BRITISH MONEY CALLS ON TOTAL OVERSEAS AND CANADIAN

ISSUES, WITH ENTERPRISE BREAKDOWNS, 1865-1914 (?, mill.)

Canadian Total

overseas Total Private Mixed Govt. Mun. govt.

1865 42.5 0.3 0.1 0.1 0.1 1866 25.3 0.2 - 0.1 - - 1867 18.4 0.2 0.2 1868 29.1 1.1 0.2 0.9 1869 21.9 1.6 - 0.4 1.2 -

1870 44.7 0.8 - 0.7 1871 70.2 1.5 0.6 0.9 -

1872 93.9 1.6 1.1 0.4 0.1 0.1 1873 69.3 4.3 1.2 1.6 1.4 0.8 1874 74.5 9.8 0.7 1.9 7.2 0.8 1875 44.5 3.0 0.2 1.0 1.9 0.7 1876 31.9 3.9 0.4 0.6 2.9 0.2 1877 19.4 2.7 0.6 0.1 2.0 0.1 1878 31.7 1.6 0.8 0.1 0.7 0.1 1879 30.5 4.2 0.3 0.4 3.5 0.4 1880 41.7 1.5 1.1 0.2 0.2 0.2 1881 74.2 2.4 1.3 1.1 - -

1882 67.5 2.8 2.2 0.6 0.1 0.1 1883 61.2 2.7 1.4 0.5 0.8 0.3 1884 63.0 5.0 1.3 0.8 2.9 0.2 1885 55.3 9.1 2.1 2.9 4.1 1886 69.8 5.8 1.3 4.4 0.2 1887 84.4 1.0 0.5 0.1 4.3 1888 119.1 13.5 3.1 4.9 5.5 0.7 1889 122.9 4.8 2.4 1.3 1.1 1.1 1890 116.6 5.0 3.4 1.1 0.5 0.5 1891 57.6 5.4 1.7 3.0 0.7 0.5 1892 39.8 5.7 2.3 0.5 2.8 0.5 1893 32.1 4.8 2.6 2.1 1.2 1894 48.3 5.5 0.2 0.5 4.8 1.2 1895 77.7 1.9 1.1 0.7 0.3 1896 68.7 1.3 0.3 0.4 0.5 0.5 1897 78.3 3.9 2.3 1.6 1898 76.6 3.8 3.6 0.2 - -

1899 78.2 2.1 1.6 - 0.5 -

1900 49.6 4.1 3.5 0.6 - -

1901 49.5 1.9 1.9 1902 89.3 3.9 3.6 - 0.3 0.2 1903 82.9 2.1 0.9 0.8 0.3 1904 88.0 6.1 3.5 1.6 0.9 0.3 1905 128.9 14.7 5.8 8.9 1906 85.0 7.7 5.5 1.0 1.2 -

1907 116.3 6.6 3.5 1.7 1.4 0.6 1908 147.2 23.9 10.3 3.8 9.8 4.0 1909 175.7 24.1 6.9 5.7 11.5 2.9 1910 198.1 33.8 15.8 6.4 11.7 3.6 1911 169.2 29.6 20.1 3.3 6.2 4.4 1912 200.7 36.0 27.3 2.5 6.2 5.0 1913 217.5 49.2 25.9 6.0 17.3 12.3 1914 203.0 43.0 13.2 8.8 20.9 9.1



242 MATTHEW SIMON

bonds, most of which were either government or government-guaranteed obligations. In turn, common stock subscriptions comprised only fourteen per cent - the lowest proportion for any region - of the new additions to the Canadian portfolios of British investors.

Their caution is also demonstrated in the industrial composition of their Canadian selections. A strong preference for the financing of the social overhead capital requirements of the Dominion combined with a basic reluctance to commit huge sums to the issues of the primary, secondary and tertiary sectors of the expanding Canadian economy were its central features. Almost ?330 million or more than 80 per cent (a percentage exceeded only in Latin America) of aggregate Canadian issues were investments in social overhead capital. Foremost were the funds mobilized to finance the construction of transportation facilities and of public works to supply the underlying needs of a vast territory. Railroad securities totalling ?195 million or 47 per cent of all issues dominated the former category. They supplied a large poirtion of the capital required to extend the Canadian rail net from 2,240 miles in 1865 to 30,795 miles in 1914, or an ?6,821 per mile.4 In relative te-ms, this commit- ment was larger than the British role in financing th.e expansion of the railways of the United States. In that country, ?519.2 million or 62.1 per cent of a total of I836.0 million new capital issues offered in London were provided to help extend the rail net by 223,661 miles between 1865 and 1914, or an aver- age expenditure of ?2,321 per mile.5 Equally impressive was the 25 per cent proportion (an amount exceeded only in the remainder of the British Empire) that was committed to public works. The ?104 million raised for this sector comprised 14 per cent of the total overseas public works issues. As in other sections of the Regions of Recent Settlement, it was substantially affected by the growth of towns and cities, since municipal authorities borrowed 38 per cent of the total.

By contrast, the proportion of British capital invested in the securities of the Canadian primary (agriculture and mining) industries was only 8.0 per cent (or the lowest per cent for any of the regions identified in Table III) of the total. Despite the vast mining activity in pre-1914 Canada, new mining issues comprised slightly more than 5 per cent of the aggregate mining issues. Simi- larly, only ?48.8 million (?18.9 million in manufacturing, ?24.9 million in finance, land and real estate and ?3.3 million in trade) or less than 12 per cent, once again the lowest for any region, was subscribed to the securities of the secondary and tertiary industries.

The enterprise distribution of the British investor's selections illustrate the character of new Canadian issues they absorbed. Extensive study of our data for various regions shows that a relationship exists between the industrial pattern of a nation's borrowing and its enterprise distribution. For example, new securities originating in the following sectors, agriculture, mining, manufacturing, public utilities, finance, land and real estate and trade were either entirely

4M. C. Urquhart and K. C. Buckley, Historical Statistics of Canada (New York, 1963), 528, 532. 5US Bureau of the Census, Historical Statistics of the United States Colonial Times to 1957 (Washington, 1960), 427, 429.




TABLE II

LONG SWING DATING AND LEVELS FOR TURNING POINTS IN TOTAL OVERSEAS AND

CANADIAN NEW ISSUES AND MAJOR COMPONENTS, 1865-1914 (? mill. in money calls)

First First Second Second Third Series peak trough peak trough peak

Grand total Total overseas 93.9 19.4 122.7 49.5 217.5

1872 1877 1889 1901 1913 Canada 9.8 1.4 13.5 1.9 49.2

1874 1880 1888 1901 1913 Social overhead capital

Total overseas 66.2 15.2 90.5 31.9 176.2 1872 1877 1888 1900 1914

Canada 9.1 1.0 12.1 1.4 41.4 1874 1880 1888 1901 1913

Private Total overseas 41.4 4.4 86.6 16.2 152.4

1872 1877 1890 1900 1912 Canada 1.2 0.2 3.4 0.9 27.3

1873 1875 1890 1903 1912 Government

Total overseas 49.3 13.2 53.5 14.1 96.5 1871 1877 1888 1901 1914

Canada 7.2 - 5.5 20.4 1874 1881 1888 1901 1914

Railroads Total overseas 34.2 7.1 57.6 14.9 88.6

1872 1877 1890 1900 1913 Canada 4.3 0.5 6.6 - 20.2

1874 1877 1888 1899 1913

or largely issued by private business units. Similarly, the overwhelmng proportion of public works and defense issues were government obligations.

It is, however, impossible to generalize about the strategic sector, transportation, and especially its railroad component. We, therefore, present data in Table II on the regional variation in the enterprise distribution of new British overseas investment in railroads, transportation, and social overhead capital. The international experielnce of the half century prior to 1914 shows that a variety of relationships existed between government and railroads in forging the construction of a vast world network. In the case of Canada, governments performed a variety of functions in promoting railroad building. Approximately twenty per cent of all new Canadian securities issued in the British capital market were floated by mixed enterprises. This proportion was substantially higher than that prevailing in the rest of North America, the British Empire, the Re- gions of Recent Settlement and the World. Virtually all of the ?82 million of the new securities of mixed enterprises were issued by Canadian railroad companies. They obtained by this method 42 per cent of the aggregate funds supplied to them by British investors. The public authorities supplemented this financial support to the transpoltation network in various ways. Between 1867 and 1917 the federal govemment provided $754.5 million ( 154.9 million) of cash and subsidies to railways. In conjunction with provincial governments, the federal government turned over 47,291,000 acres in land grants to them.



244 MATTHEW SIMON

Provincial and municipal governments, moreover, provided cash subsidies of $46 million and subscribed to $49 million of railway shares.6 Part of this assistance, which facilitated the

successful,flotation in London of new securities

aggregating more than ?16.6 million by Canadian private and mixed rail enterprises, was in turn made possible by direct loans offered by Dominion and Pro- vincial authorities in the British capital market. These government issues totalled almost 15 per cent of the rail borrowing in ILondon.

The direct participation by the public bodies in financing the expansion of transport. facilities, to be sure, was not peculiar to Canada. It, however, reflected a distinctive pattern of public borrowing in Great Britain in which more than 98 per cent of the loans were ostensibly floated for the purpose of enlarg- ing the social overhead capital of Canada. Only in pre-war Australasia was this percentage exceeded. The complete absence of defence loans as: a result' of Canada's geographic position and its status within the British Empire was par- tially responsible. In more positive terms', the huge capital requirements for public works necessitated vast expenditures. Approximately 75 per cent of all Canadian governments' obligations offered to Great Britain were for financing these needs. British investors thus exhibited their confidence in the fiscal policies, and programs of various Canadian governments. To co-nclude, the enterprise distribution of Canadian new issues in the pre-1914 era, with its emphasis on the mixed form and large government loans thus underscored their persistent quest for relatively safe Canadian securities.

II

The main contours of new British investments in Canada, described in the preceding section, provide us with a view -of the over-all experience of a half century. The use of annual time series, as in, Table I, enable us to identify major fluctuations and trends that characterized the-pre-1914 influx of British capital into Canada.

In this paper we avoid the question of detenniing the logical basis for the existence of Kuznets cycles or long swings. Interpretation of these-series, however, provides empincal support for the prevalence of two and a half long swings ranging from sixteen to twenty-four years in duration in both the aggregate overseas and Canadian new issues series. Table'II assembles the dates of the long swing -turning points and the magnitude of the money calls in those years for ten world and Canadian series.

We assume that the first long swing began in 1862, a trough in Imlah's series on net international capital movements of the United Kingdom.7 Both the expansion and contraction phases in all series exhibit substantial amplitude in their patterns of fluctuations. Observ-e the clustering of turming points in the five total overseas series around the following dates: 1872, 1877, 1889, 1901 and 1913. The timing of the peaks and final trough of the first long swing for Canada, thus, diverged substantially from those of the total overseas series. The latter attain their highs in 1872 (a reference cycle peak for Great Britain)

WKenneth Buckley, Capital Formation in Canada 1896-1930 (Toronto, 1955), 70-1; Viner, "Canada's Balance of International Indebtedness 1900-1913," 304. 7Albert Imlah, Economic Elements in the Pax Britannica (Cambridge, Mass.; 1958), 72-5.




which antedate the worldwide economic crisis of 1873. On the other hand, the Canadian series reaches its upper turning point in 1874 as a result of increased government borrowing for railroad and public works. Similarly, 1877 miarks the termination of the long swing contraction for the world series. It thus precedes by two years the general revival of 1879. On the other hand, the trough on the Canadian series, largely as a result of sharply reduced borrowing both by mixed enterprises and the public authorities in the late 1870s, occurs only in 1880. The distinctive cyclical rhythm of Canadian new flotations in Great Britain was, thus, most manifest in the first long swing. A closer correspondence in the timing of the world and Canadian peaks and troughs develop in the second and third pre-1914 long-swings. It is reasonable to attribute this greater congruence of new issue patterns in large measure to the expansion of Cana- dian private borrowing in the British capital market and to a parallel feature, -the close integration of Canada into the Atlantic economy.

The growing importance of the securities of private companies, especially in the period, 1895-1914, constituted a significant trend in the enterprise distribution of new Canadian issues. Among the underlying forces producing this development were the expansion of major industries operating in the Canadian private sector and of private railroad corporations and the increasingly favourable appraisal by British investors of their prospects.8 First, it made possible absolute and relative advances in the successful flotations of the new London issues of the primary, secondary and tertiary industries and of public utilities. Observe in Table III how these securities rose from much lower levels before 1890 to comprise 38 per cent in 1894-1901 and 32 per cent in 1909-13 of the aggregate new Canadian stocks and bonds absorbed by British subscribers. Especially in the last five pre-war years did the latter express a strong vote of confidence in the private sector of the economy. Of equal significance was; the augmented borrowing of private railroad corporations. Table IV shows that from less than 20 per cent between 1865 and 1890 the private share of total railroad issues in London rose to a level exceeding 50 per cent in the succeeding quarter of a century (1890-1914).

Accompanying these changes was the relative decline in importance of government borrowing for railroads and public works loans. Within the latter sector a striking feature was the altered distribution of public works loans that emerged among and between the national, provincial and municipal authorities. The Dominion of Canada was subjected to the relentless pressure of urbanization that affected especially the increasingly commercialized and indus- trialized segments of Europe, Asia and the Regions of Recent Settlements. The growth of cities in the newly settled regions of Western Canada combined with the farm to town movement in Ontario and other Eastern provinces to produce a rapid surge in the expenditures of the Canadian municipal authorities in the generation before 1914.9 These expanding requirements, in turn, generated an almost persistent increase in the amount of municipal public works loans offered in London. The share of total public work issues, as shown in Table V, represented by these urban obligations, rose to more than 50 per cent in the early twentieth century. The dynamic forces of Canadian economic growth - the

8The Statist (Dec. 16, 1905), 1088-91. 9Buckley, Capital Formation in Canada, 1896-1930, 54.



246 MATTHEW SIMON

TABLE III

NEW CANADIAN ISSUES OF ALL AND OF "PRIVATE" INDUSTRIES ABSORBED IN THE BRITISH

CAPITAL MARKET FOR SELECTED SUB-PERIODS OF 1865-1914 (money calls in thousands of ? and per cent of total)

Per cent Ag. Public Total of

Sub-period Min.* Mfg.t FiRet Trade utility private total? Total

(1) (2) (3) (4) (5) (6) (7) (8) 1865-72 0.9 0.2 0.1 - - 1.2 16.6 7.4 1873-7 0.4 0.2 0.8 0.1 0.8 2.3 9.5 23.7 1878-89 3.1 0.8 4.4 0.1 0.5 8.9 16.4 54.4 1890-3 0.5 0.7 1.2 0.6 3.1 14.8 20.9 1894-1901 7.0 0.7 0.2 0.5 1.0 9.4 38.3 24.4 1902-8 2.0 2.7 1.2 1.0 2.8 9.7 15.0 64.9 1909-13 17.6 12.4 15.3 1.6 8.0 54.8 31.7 172.7 1914 0.9 1.4 1.4 - 3.5 7.2 16.9 43.0 1865-1914 32.3 18.7 24.9 3.3 17.1 96.3 23.4 411.4

*Agriculture and mining. tManufacturing. IFinance, land and real estate. ?Per cent of total represented by private, computed from unrounded data.

TABLE IV

ENTERPRISE DISTRIBUTION OF BRITISH MONEY CALLS FOR NEW CANADIAN RAILROAD

ISSUES FOR SELECTED SUB-PERIODS, 1865-1914

(Millions of ?) (Per cent of total)*

Period Total Private Mixed Govt. Private Mixed Govt.

1865-72 5.6 0.9 2.4 2.3 16.4 42.2 41.4 1873-7 12.1 1.7 5.2 5.1 14.2 43.3 42.6 1878-89 36.7 8.6 17.0 11.1 23.3 46.5 30.2 1890-3 11.8 7.2 4.6 - 60.7 39.3 1894-1901 8.4 4.3 1.7 2.4 50.8 20.8 28.4 1902-8 44.3 21.9 17.9 4.5 49.4 40.3 10.3 1909-13 60.1 34.2 23.9 2.0 56.9 39.8 3.3 1914 16.0 6.1 8.8 1.2 37.8 55.0 7.2 1865-1914 195.0 84.8 81.6 28.6 43.5 41.8 14.7

*Computed from unrounded data.

expanding frontier, growing population, industrialization and urbanization - thus combined to alter significantly the enterprise and industrial composition of new Canadian issues on the British capital market.

III

The funds absorbed from the flotation of new Canadian issues in Great Britain, as has been noted, comprised only one element, albeit a significant part of the nation's capital imports. Using five year moving averages for the years 1868- 1903 and calendar year data for 1900-13 we have assembled in Table VI Penelope Hartland's estimates of Canada's international capital movements in




TABLE V DISTRIBUTION OF BRITISH MONEY CALLS FOR NEW CANADIAN PUBLIC WORKS ISSUES, BY

LEVEL OF GOVERNMENT FOR SELECTED SUB-PERIODS, 1865-1914

(Millions of ?) (Per cent of total)*

Total Natl. Prov. Mun. Natl. Prov. Mun. Sub-period govt. govt. govt. govt. govt. govt. govt.

1865-72 0.2 0.1 0.1 58.3 - 41.7 1873-7 9.4 6.1 1.3 2.0 65.3 13.7 21.0 1878-89 8.4 3.8 1.8 2.8 45.3 21.4 33.3 1890-3 5.6 2.9 0.5 2.2 51.9 9.2 38.9 1894-1901 4.8 1.3 1.7 1.9 26.0 34.3 39.6 1902-8 9.0 3.4 0.6 5.0 37.4 7.0 55.6 1909-13 49.2 14.1 7.4 27.6 28.7 15.1 56.2 1914 17.4 3.8 5.7 8.0 21.5 32.8 45.7 1865-1914 104.1 35.5 19.0 49.6 34.1 18.3 47.6

*Computed from unrounded data.

order to compare them with our money call series. Her measure of the import of foreign capital into Canada was derived by adding a set of direct estimates of the export of Canadian capital to a seiies on the net importation of foreign capital. Calculated as a residual element in the over-all balance of payments the export of Canadian capital series measures the difference between Cana- dian acquisitions and dispositions of foreign assets. On the other hand, the import of foreign capital represents the difference between foreign purchases and sales of Canadian assets. Besides British subscriptions to new Canadian issues, the acquisition part of the latter series includes other foreign (i.e. US) purchases of new securities and British and other foreign acquisitions of outstanding securities, direct investments, bank balances and other short-term assets. In turn, British and other foreign disinvestment in Canada would result from security redemptions and the repatriation by Canada of foreign-held outstanding securities, direct investments, bank balances, etc. The complexity of the capital account, reflected in the variety of components of fluctuating importance, makes it difficult to analyse the relationship between movements in new issues and the importation of foreign capital.

During certain years of the pre-1914 epoch, Canada disinvested on a net basis in foreign assets. Of greater significance was the fact that Canadian capital imports exceeded capital exports in every year between 1868 and 1914. This continuous net influx of foreign capital stands in marked contrast to the international financial experience of the United States, another debtor nation, in the comparable period. Examination of the data in Table VI on, the share of Canadian capital imports represented by British money calls on new issues, however, shows no persistent trends. The ratio tends to rise or to be higher at or near the successive long swing peaks (1874, 1888, and 1913). These relatively prosperous periods in Canada generated both an increased demand for British capital and a corresponding willingness on the part of British investors to commit more new long-term funds to Canadian activities. On the other hand, the proportion tends to decline during the depression decade of the 1890s and the Boer War.



248 MATTHEW SIMON

TABLE VI

CANADA'S INTERNATIONAL CAPITAL MOVEMENTS AND NEW CANADIAN ISSUES IN

GREAT BRITAIN, 1868-72-1913 (FIVE-YEAR MOVING AVERAGES OR CALENDAR YEARS)

($ mill. and per cent)

New Canadian

Net import Export of Import of issues in of foreign Canadian foreign Great

Period capital capital capital Britain* Per cent:

(1) (2) (3) = (2) + (1) (4) (5) = (4)/(3)

1868-72 16.5 -0.1 16.4 6.5 39.7 1869-73 21.7 -0.3 21.4 8.2 38.3 1870-4 29.8 1.1 30.8 17.6 57.0 1871-5 34.3 -0.6 33.7 19.8 58.7 1872-6 34.2 0.9 35.1 22.1 62.9 1873-7 32.0 0.0 32.0 23.1 72.2 1874-8 29.0 0.6 29.6 20.5 69.3 1875-9 22.7 -0.2 22.5 15.1 66.9 1876-80 18.2 1.0 19.2 13.6 70.7 1877-81 17.5 1.3 18.8 12.1 64.3 1878-82 19.6 1.8 21.4 12.2 57.0 1879-83 23.4 2.5 25.9 13.3 51.2 1880-4 28.4 1.1 29.5 14.0 47.4 1881-5 33.7 0.7- 34.5 21.4 62.0 1882-6 37.9 0.8 38.7 24.8 64.0 1883-7 39.4 2.7 42.1 23.0 54.6 1884-8 40.0 3.9 43.7 33.5 76.2 1885-9 42.6 4.8 47.4 33.3 70.3 1886-90 45.2 5.2 50.4 27.4 54.3 1887-91 46.3 6.4 52.8 28.9 54.8 1888-92 46.6 6.5 53.1 33.5 63.0 1889-93 45.3 6.0 51.3 25.0 48.8 1890-4 42.3 7.1 49.4 25.7 52.1 1891-5 38.0 7.8 45.8 22.7 49.5 1892-6 33.0 8.3 41.3 18.7 45.2 1893-7 26.7 7.6 34.3 17.0 49.4 1894-8 23.7 6.8 30.5 16.0 52.3 1895-9 22.7 8.0 30.7 12.6 41.0 1896-1900 24.1 6.3 30.4 14.7 48.4 1897-1901 23.7 9.8 33.4 11.4 34.0 1898-1902 27.0 9.1 36.0 15.3 42.5 1900 35.8 -2.9 32.9 15.3 46.5 1901 19.2 28.9 47.9 9.2 19.2 1902 26.4 3.3 29.7 18.9 63.6 1903 69.2 -16.7 52.4 10.1 19.3 1904 90.2 21.2 111.3 29.5 26.5 1905 81.8 15.8 97.6 71.6 73.4 1906 109.4 -12.5 96.9 37.5 38.7 1907 183.0 -21.8 161.2 33.1 19.9 1908 122.5 92.5 215.0 116.2 56.1 1909 147.7 33.6 181.3 117.3 64.6 1910 234.4 -25.9 208.5 164.8 79.0 1911 337.9 3.4 341.3 143.9 42.2 1912 418.7 -0.2 418.6 175.1 41.8 1913 400.4 18.8 419.2 239.8 57.2

*Converted at an exchange rate of ?1 = $4.87 from pounds to dollars. tComputed from unrounded data. SOURCE: Columns 1,2, and 3: Penelope Hartland, "Canadian Balance of Payments since 1868," "Trends in the Nineteenth Century, XXIV of Studies in Income and Wealth by Conference on Research in Income and Wealth (Princeton, 1960), 748.




TABLE VII

INDUSTRIAL AND ENTERPRISE PATTERN OF NEW ISSUES AND TOTAL INVESTMENT OF

GREAT BRITAIN AND TOTAL INVESTMENT OF ALL FOREIGN NATIONS IN CANADA, 1900-13 ($ mill. and per cent)

Per cent Total Per

of of British Per cent foreign cent New of British total invest- of invest- of issues total inv. inv. ment$ total ment total

Dominion and 163 13.7 93.1 91.1 175 10.0 179 7.0 provincial govt.

Municipal 162 13.7 81.0 62.3 200 11.4 260 10.2 Railroads* 494 41.7 73.7 64.4 670 38.2 767 30.1 Industry* 73 6.2 17.4 11.6 420 24.0 630 24.7 Mining* 53 4.5 81.5 42.4 65 3.7 125 4.9 Othert 240 20.2 107.6 41.0 223 12.7 585 23.0

Total 1186 100.0 466 100.0 2546 100.0

*Refers to private and mixed enterprises. tIncludes transportation other than railroad, finance, land and real estate, public utilities, trade and agriculture. IJacob Viner, "Canada's Balance of International Indebtedness 1900-1913," Harvard Economic Studies XXVI (Cambridge, Mass., 1924), 303.

We can, however, examine the enterprise and industrial distribution of British new issues in comparative terms for the period 1900-13. It is possible to rearrange these data as in Table VII in a way to facilitate complarison with Viner's figures on end use for total British and foreign investment in Canada. Railroad and government securities absorbed 69 per cent of the money calls on new issues, 60 per cent of total British investment and only about 47 per cent of foreign investment. More than 90 per cent of the dominion and provincial govemment obligations, and more than 60 per cent of the railroad and municipal securities sold outside of Canada were new issues floated in Great Britain. By contrast, British new issues comprised a very small proportion of the aggregate foreign long-term funds that were invested in Canadian industrial stocks and bonds that were marketed beyond the border and overseas. In this sector, British and especially American direct investment played a com- manding role. Finally, although new mining issues comprised the overwhelming bulk of total United Kingdom in this sector, they constituted less than half of the foreign funds committed to Canadian mining.

A substantial measure of segmentation thus characterized the pre-1914 Cana- dian international capital market. On the one hand, cautious British investors, reinforcing the conclusions derived from Part I, both committed the bulk of their money to the new issues of public authorities and of mixed and private railroad corporations and provided most of the aggregrate British and other foreign funds for these purposes. On the other hand, more adventurous British and especially American business groups used the method of direct investment to acquire without security issues a sizeable stake in Canadian industry and mining.



250 MATTHEW SIMON

A similar segmentation applies to the contribution of British new issues to Canadian capital formation during the years 1900-13. Although our figures are not strictly comparable with a set of sectoral distribution data of new investment prepared by Stovel for the years 1900-13, certain conclusions can be drawn.10 Almost 45 per cent of new railroad investment and an even greater share of public works were financed from the money calls on the London capital market. In contrast, only 5 per cent of the funds for manufacturing, agri- cultural, building, capital and livestock and new building (almost 63 per cent of new Canadian investment) was derived from this source.

The new issue series as a set of capital flow statistics also has implications for balance of payments adjustment theory. In his work, Jacob Viner, as did con- temporary British financial journalists, stressed the significance of a large autonomous capital inflow from Great Britain, its impact on the Canadian economy and the processes by which a real capital transfer was effectuated. The core of his explanation is a specie-price flow analysis, in which the accumulation of bank balances in New York (rather than gold inflows) and the ensuing larger rises in export prices than in import prices constitute strategic links in producing large import-induced trade deficits for Canada. This classical version of the operation of the transfer mechanism for pre-1914 Canada has been challenged by a number of authors for its inadequate treatment of "income" and "capacity" effects in the adjustment process.

For our purposes, it has also been contended that the capital imports that generated these repercussions were not essentially autonomous flows but were induced by a complex set of external (i.e., to the balance of payments) economic variables that were simultaneously operating or both the current and capital account components of Canada's international transactions. This type of analysis, suggested by Knapp, Stovel and especially by Bloomfield, would thus focus on the "causes" rather than the effects of international capital movements in a broad secular and cyclical context."' Such an approach would require the examination of the relevant economic conditions prevailing both in the borrowing and the lending nations. In this vein, G. Meier challenged the hypothesis that foreign borrowing sparked the Canadian expansion between 1895 and 1913. He asserts: "It is significant that the volatile acceleration of growth in the Cana- dian economy after 1895 did not initially depend on the inflow of foreign capital. Not until 1905 did foreign borrowings reach significant proportions."'2

He, therefore, contends that the capital inflow intensified and lengthened the boom, but that the expanding range of domestic investment opportunities was the major force producing the cyclical upswing and the influx of foreign capital. Stovel moreover observed that large Canadian capital imports did not occur "until 1905, with the commencement of an unprecedented outflow of

'OJohn A. Stovel, "Canada in the World Economy," Harvard Economic Studies CVIII (Cam- bridge, Mass., 1959), 107. 1lJ. Knapp, "The Theory of International Capital Movements," The Review of Economic Studies (summer 1943), 119; Stovel, 68-84, 127-55; Arthur I. Bloomfield, Capital Imports and the American Balance of Payments, 1934-1939 (Chicago, 1949), 264. 12G. M. Meier, "Economic Development and the Transfer Mechanism: Canada 1895-1913," Canadian Journal of Economics and Political Science, XIX, no. 1 (Feb. 1953), 3.




capital from Great Britain."'3 Conditions in the capital market of the United Kingdom were thus propitious at this stage for promoting capital exports to Canada as well as to the rest of the world.

In turn, for the analysis of short-term cyclical expansions and contractions in international capital movements, Bloomfield has stressed the importance among other factors of "the different patterns of business fluctuations, existing in capital-exporting and capital-importing nations.'4 Concretely, the reality of this international imperfect conformity of economic fluctuations is manifest in variations in the amplitude and timing of business cycles among and between nations.

It is appropriate to examine its implications in more detail for an understanding of short-term fluctuations in aggregate overseas and Canadian new issues in Great Britain. Assume first the complete absence of leads and lags or diffe- rences in the timing of peaks and troughs and that, therefore, variations in the intensity and direction constitute the sole source of imperfect conformity between Canada, the rest of the overseas world (which will be treated as a homogeneous unit) and Great Britain. The money call times selies are a set of ex post equilibrium values. They are a measure of that segment of the overseas and Canadian demand for British funds in the form of new issues to which British investors responded sympathetically with subscriptions. In this sense, by refleecing conditions both in the United Kingdom and the entire international borrowing community, the calls data are an appropriate point of depar- ture for the study of international imperfect conformity. Let us distinguish between and explain four major possible combinations of movements in new issues.

A. EXPANSION OF BOTH THE REST OF WORLD AND CANADIAN ISSUES

This condition can be the result of two variants of positive (i.e. movements in the same direction) conformity: a more intense boom or a less severe contraction in Canada and the rest of the world than in Great Britain. The former variant usually produced the most vigorous outflows of capital from the United Kingdom. This situation can also occur when the whole overseas borrowing community is experiencing an expansion, while a contraction, characterized by an absence of liquidity pressures, is affecting Great Britain.

B. CONTRACTION OF THE REST OF THE WORLD AND CANADIAN ISSUES

This state of affairs may result from two other variants of positive conformity: a less intense expansion or a more severe contraction in C'anada and otfier overseas areas than in the United Kingdom. It also may figure as one of the major repercussions of severe liquidity panics in the creditor nation (i.e. the Over- end Gurney Panic of 1866 and the Baring Panic of 1890 in England).

C. EXPANSION IN THE REST OF THE WORLD ISSUES AND A CONThACTION IN

CANADIAN ISSUES

This third possibility, a variant of inverse conformity, may result from a less vigorous expansion or more intense depression in Canada than those prevailing

13Stovel, "Canada in the World Economy," p. 109. 14Bloomfield, Capital Imports and the American Balance of Payments, 1934-1939, p. 264.



252 MATTHEW SIMON

in England and the remainder of the world. It also might be a product of a downswing in Canada co-existing with prosperity elsewhere.

D. EXPANSION IN CANADIAN ISSUES AND CONTRACTION IN THE REST OF WORLD ISSUES

A more intense boom or less severe depression in Canada than in the rest of the world and in England, where an absence of liquidity pressures prevails, would produce this result.

TABLE VIII REFERENCE CYCLE PEAKS AND TROUGHS FOR CANADA, THE UNITED STATES

AND UNITED KINGDOM, AND LEADS (-) AND LAGS (+), 1873-1914

Lead (-) or lag (+) of Canada

United United Canada* Statest Kingdomt US UK

Peak 11-1873 10-1873 9-1872 + 1 +15 Trough 5-1879 3-1879 6-1879 + 2 - 1 Peak 7-1882 3-1882 12-1882 + 4 - 5 Trough 3-1885 5-1885 6-1886 - 2 -16 Peak 2-1887 3-1887 - - 1 Trough 2-1888 4-1888 - - 2 Peak 7-1890 7-1890 9-1890 0 - 2 Trough 3-1891 5-1891 - - 2 Peak 3-1893 1-1893 - + 1 Trough 4-1894 6-1894 2-1895 - 3 -12 Peak 8-1895 12-1895 - - 4 Trough 8-1896 6-1897 - -11 Peak 4-1900 6-1899 6-1900 +10 - 2 Trough 2-1901 12-1900 9-1901 + 2 - 7 Peak 12-1902 9-1902 6-1903 + 3 - 6 Trough 6-1904 8-1904 11-1904 - 2 - 5 Peak 12-1906 5-1907 6-1907 - 5 - 6 Trough 7-1908 6-1908 11-1908 + 1 - 4 Peak 3-1910 1-1910 - + 2 Trough 7-1911 1-1912 - 6 Peak 11-1912 1-1913 12-1912 - 2 - 1 Trough 1-1915 12-1914 9-1914 + 1 + 4

*1865-99: Edward L. Chambers, "Late Nineteenth Century Business Cycles in Canada," Canadian Journal of Economics and Political Science, XXX, no. 3 (Aug. 1964), 406. 1900-14: Keith A. J. Hay, "Money and Cycles in Post-Confederation Canada," Journal of Political Economy (June 1967), 266. tArthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles (New York, 1947), 79-80.

The above classification schema is helpful in sorting out some of the rami- fications of international imperfect conformity in affecting the movement of securities in between nations. The problem is further complicated by the existence of leads and lags in the peaks and troughs of the business cycles of the borrowing and lending countries. In Table VIII, we have assembled the dates of reference cycle peaks and troughs for Canada, England and the United States for the years 1873-1914. Observe that the timing points for Canada more closely correspond with the United States than with England for the entire




period.'5 The cycles of the two rapidly developing North American countries, sometimes, are of shorter duration than those of the more "mature" England. Furthermore, after 1900, there is a significant shortening of the lags and leads between Canadian, British and American turning points.

A significant consequence of this greater post-1900 congruence of Canadian, British and American business cycles is the greater parallelism in the movements of the aggregate overseas and the Canadian new issue series. A simple correlation coefficient of 0.88 is obtained between the two series for the entire fifty-year period from 1865-1914. However, during the first thirty-five years (1865-99), the corresponding value is only 0.41. In contrast, for the remaining fifteen years (1900-14), which included 49 per cent of the aggregate overseas and 69 per cent of the Canadian new issues floated in the British capital market for the half century, the coefficient rises to 0.96. In the earlier period, moreover, only sixteen of the possible thirty-four annual changes are in the same direction for both series, whereas for the latter period, we observed thirteen out of fifteen cases.

This increased parallelism in the annual movements of the aggregate overseas series with the Canadian issues during the early twentieth century were manifestations of the greater imperfect positive conformity of business cycles. First the closer synchronization of Canadian business cycles with British. and American cycles reduced the extent of imperfect inverse conformity. Second, the movements of the two new issues series in the same direction were due to the particular patterns of business fluctuations prevailing in the overseas world that we have described above in cases A and B. The most prominent type was the existence of more vigorous expansions in Canada and the rest of the world than in England. These cyclical changes, in turn, reflected the rapid development of Canada along capitalist lines with an increased emphasis on the private sector and the closer integration of Canada in the world economy.

These observations concerning the implications of the new issues for balance of payments adjustment theory are preliminary and suggestive. Analysis of cyclical fluctuations in the international capital movements, as for other economic variables, requires the use of quarterly or possibly monthly series to identify turning points. Further, disaggregation of aggregate data, by type of enterprise, industry or security should shed additional light on the process. Certainly, the motivation for borrowing by public authorities or, even, of mixed enterprises in the debtor nation would complicate an analysis that was based on the assumption that private borrowers and private lenders, both animated by the desire to maximize returns, constitute the sole participants in the international capital markets. Ultimately, the investigation of the determinants of cyclical fluctuations in the international movements of new securities would have to focus on a study of international variations in stock prices, the marginal effi- ciency of investnent (profit rates) and effective interest rates on bonds and other debt obligations.

In the case of Canada, moreover, the operation of the Colonial Stocks Acts of Great Britain encouraged investrnent by British trust bodies and institutions. This legislation required the Colonial and Dominion governments to pursue pru-

15Edward J. Chambers, "Late Nineteenth Century Business Cycles in Canada," Canadian Journal of Economics and Political Science, XXX, no. 3 (Aug. 1964), 407.



254 MATTHEW SIMON

dent financial policies in order to minimize the risk taken by the investors of the United Kingdom.16 It was one factor that produced a situation in which yields on colonial fixed interest securities were consistently below comparable yields on foreign bond and preferred stock issues.17 Along these lines, The Statist wrote in 1905:

Compared with any other British colony, Canada can now raise capital in Great Britain on favourable terms, while compared with any foreign country she can secure capital on much more advantageous conditions to herself. We are not exaggerating the preference shown by British investors towards Canada when we state that we supply Canada with all the capital she needs at a rate of interest 1 per cent lower than we charge to any foreign country. This means that Canada can raise in the British market about 25 per cent more capital for a given annual interest payment than any foreign country can do.18

To be sure, in the face of subsequent events in Canada and Great Britain in the following decade, nevertheless, it underscores the importance of intema- tional yield differentials and their variations as a crucial factor affecting the directions of capital flows.'9 Especially for Canada, with 80 per cent of its new issues in the British capital market floated as bonds in the half century prior to 1914, additional detailed empirical studies of the effective yields on both new and outstanding issues, disaggregated by enterprise and industry, should stand high on the agenda for the further study of the nature of British investment.

16Herbert Feis, Europe the World's Banker 1870-1914 (New York, 1965), 93. 17R. A. Lehfeldt, "The Rate of Interest on British and Foreign Investments," Journal of the Royal Statistical Society (Jan. 1913), 197-207, esp. 201. l8The Statist (Dec. 16, 1905), 1088-9. 19G. M. Meier, "Economic Development and the Transfer Mechanism," 7. "In general, Canada's willingness to float new issues in London and the willingness of British investors to subscribe to these issues depended on interest rate differentials."



new british investment in canada, 1865-1914

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