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British Direct and Portfolio Investment in Latin America Before 1914

Published online by Cambridge University Press:  11 May 2010

Irving Stone
Irving Stone
Affiliation:
Baruch College, C.U.N.Y.
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Abstract

This article aims to determine what changes occurred in Britain's control over its Latin American investments between 1865 and 1913. This is done by examining trends in the direct-portfolio composition of total investment and of private investment, as well as that of each industrial grouping. A major finding is the rise of British private portfolio investment. Differences in the capital market instruments used in each type of investment are analyzed as is the nationality of those controlling private portfolio investment. Finally, there is an assessment of major factors associated with the rise of the private portfolio component of investment.

Type
Articles
Information
The Journal of Economic History , Volume 37 , Issue 3 , September 1977 , pp. 690 - 722
Copyright
Copyright © The Economic History Association 1977

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References

1 A notable exception is Lewis, Cleona' America's Stake in International Investments (Washington, D.C., 1938)Google Scholar which provides data on U.S. direct and portfolio investment going back to 1897.

2 Dunning, John H., Studies in International Investment (London, 1970), p. 2Google Scholar.

3 Attributed to Paish by Cottrell, P. L., British Overseas Investment in the Nineteenth Century (London, 1975), p. 11CrossRefGoogle Scholar.

4 Colebrook, Philip, Going International (New York, 1972), pp. 22–23Google Scholar.

5 The earliest comprehensive tabulation of British holdings in South America appears in Mulhall's, Michael G.The English in South America (Buenos Aires, 1878)Google Scholar. Computations of British investment in eight South American countries appeared in The Economist, Jan. 23, 1886, p. 105. Sir George Paish's three articles on British overseas investments include data on Latin American holdings: “Great Britain's Capital Investments in Other Lands,” Journal of the Royal Statistical Society, 72 (Sept. 1909); “Great Britain's Capital Investments in Individual Colonial and Foreign Countries,” ibid., 74, pt. 2(Jan. 1911); and “The Export of Capital and the Cost of Living,” Statist Supplement, Feb. 14, 1914. Beginning with the Jan. 7, 1914 issue the South American Journal published the first of a series of detailed annual estimates of British investment in Latin America. Rippy, J. Fred, British Investments in Latin America (Minneapolis, 1959)Google Scholar, contains original estimates of British capital in Latin America by country and by industry for 1880 and 1890; subsequent data was compiled from the South American Journal. Articles by Rippy in Inter-American Economic Affairs in 1948 and 1950 contain original estimates for 1900. Irving Stone's “British Long-Term Investment in Latin America, 1865–1913,” Business History Review, 42 (Autumn 1968) presents the industrial and geographical composition of British capital in Latin America at ten-year intervals beginning with 1865, as well as selected data from 1825 to 1865. A note appended to the article explains the derivation, coverage, and comparability of each estimate enumerated above.

6 Portfolio holdings may, of course, serve as footholds for subsequent attempts at control.

7 Neither nominal (authorized) nor market values were used. No other balance sheet assets were included. Assets not in the form of securities (real estate, ranches, etc.) were not considered. Aside from the lack of a comprehensive time series covering such assets, it is doubtful whether assets other than securities have any significance in analyzing the British market for foreign issues during this period. Securities subscribed to by Latin American governments or nationals, securities of subsidiary companies held by parent companies, or securities for any other reason not available to the British investing public were excluded from the tabulations of this study. The system of industrial classification follows that of the Stock Exchange Official Intelligence for 1914. For a further discussion of the method employed, sources, and qualifications, see Stone, “British Investment in Latin America.” I recognize, of course, that by not taking into account unpublicized transactions between British and foreign investors the data are not precise. I do feel, however, that the data collected along with supporting information are sufficient for the accurate determination of long-term trends.

8 In addition to companies grouped under various subdivisions of raw materials were others engaged in the production of foodstuffs and raw materials. But, following the practice of the Stock Exchange Official Intelligence, the latter have been classified as commercial and industrial companies, a component of industrial and miscellaneous. Their inclusion under raw materials would not have materially affected its relative share of total British Latin American investment.

9 See also Stone's, Irving “The Geographical Distribution of British Investment in Latin America, 1825–1913,” Storia Contemporia, 3 (1971)Google Scholar and “British Long-Term Investment.”

10 Investments in private industry have been classified as “portfolio” when there has been found a specific statement on non-British control in the Stock Exchange Official Intelligence, other stock exchange publications, the South American Journal, etc., or when only non-voting securities have been quoted. As for the years before 1865, since government loans composed so large a share of British capital in Latin America in 1825 and 1840, we may safely assume that from 75 to 80 percent of the total was portfolio investment. The only information gathered about portfolio holdings in private industry prior to 1865 refers to the debentures of three Cuban-owned railroads. The Cuban historian, Portell Vilá, said of these companies: “The Spaniards were not the ones to build railroads in Cuba. They were built by enterprising Cubans, who created a line in 1837, … before Spain had any. Cubans built railroads before there were industries and population to serve them. Later Spain opposed railways in Cuba for fear that they would promote Cuban national integration.” Gauld, Charles A., The Last Titan: Percival Farquhar, American Entrepreneur in Latin America (Stanford, 1964), p. 49Google Scholar.

11 The Official List of the London Stock Exchange reported 24 railways in Brazil in 1895, of which 10 represented minority holdings; by 1905 the respective numbers were 11 and 3. Concerning the decline in the Mexican portfolio holdings, there is considerable uncertainty as to the actual amount of British capital involved in the Mexican National Railways. Despite its quotation in the Official List, the company was controlled by American interests and did not issue its securities in sterling. The Mexican Central Railway Company and the Mexican International Railroad Company were also American-controlled.

12 Canadian-U.S. capital controlled the Havana Electric Company, Brazilian-Canadian interests controlled the Rio de Janeiro Tramway, and the Sāo Paulo Tramway was in Canadian hands.

13 The classification “Commercial and Industrial” of the Stock Exchange Official Intelligence included enterprises such as livestock farming companies, meat processing plants, privately-owned municipal public utilities, markets, manufacturing firms, retail stores, warehouses, and construction companies.

14 This was also true of Ecuador where total British holdings were relatively small.

15 Cottrell, British Overseas Investment, p. 44.

16 If we add government loans (debentures) to the debentures of direct and private portfolio holdings, we obtain the security composition of all British investment.

17 In certain cases after 1900, precise identification of the controlling nationality was difficult to determine, especially where the enterprises were of multinational ownership. For example, the promoters may have been American by birth, the controlling interest in the voting stock may have been held by Canadians, and the bulk of the capital raised in England. For the larger enterprises, these details are reported in this study.

18 Brazilians invested extensively in neighboring countries and possibly abroad. Viscount Mauá, admittedly atypical of the Brazilian businessmen of his day (1850–1875), established branches of his bank in Uruguay and Buenos Aires, as well as Brazil and England. By 1861 Mauá was the greatest landowner, banker, and industrialist in Uruguay. Brazilians as a group were estimated in 1864 to own one fourth of the land in Uruguay. One consequence of the success of the Botanical Gardens Railway Company of Rio de Janeiro, formed about 1860, was to encourage Brazilians with capital to invest in city transport companies in foreign cities. The South American Journal reported in 1877 the purchase of the state railway of Paraguay by a wealthy Brazilian landowner.

As to Latin Americans other than Brazilians, the South American Journal reported in 1902 that groups of Cubans had gone to Mexico to establish sugar plantations and, in 1903, noted the departure of a leading capitalist of Quito, Ecuador, for Mexico to invest in Mexican enterprises. Max Winkler states that in 1918 Chilean interests had a considerable mining stake in Bolivia and that the bulk of foreign investments in Paraguay before World War I was owned by Argentine interests. See Marchant, Anyda, Viscount Mauá and the Empire of Brazil (Berkeley and Los Angeles, 1965), pp. 59, 130, 153, 155, 229Google Scholar; South American Journal, 23 May 1877, p. 2; 18 Oct. 1902, p. 427; and 21 March 1903, p. 278; Winkler, Max, Investments of United States Capital in Latin America (Boston, 1929), pp. 77 and 139Google Scholar.

19 A much higher proportion of U.S. investment in Latin America was direct investment than was true of British investment. In 1897 all of U.S. investment in Latin America was direct; by 1914 this proportion had declined to 78 percent. In 1895 and 1913 considerably less than half of British holdings in Latin America consisted of direct investment. Lewis, America's Stake in International Investments, pp. 605–06; and Table 3 of this study.

20 These German concerns originally controlled the Mexican Electric Works which supplied a great part of the lighting for Mexico City on the basis of relatively expensive coal. Realizing that the Canadian company would produce electricity from the cheaper hydro-electric power, the Germans amalgamated with the new company. South American Journal, 6 May 1905, p. 505.

21 Pearson and Van Horne were Americans by birth. F. S. Pearson had been a transit engineer in New York and Canada; Van Horne was retired head of the Canadian Pacific Railway. Another important Canadian figure in these promotions was George Cox, who owned large holdings of stock in the Canadian Bank of Commerce and controlled Canada Life and the Dominion Securities Corporation.

22 South American Journal, 12 Sept. 1908, p. 188. The Brazilian Traction, Light and Power Company, Ltd. continued to operate well after World War II, but “the extent to which its assets are owned in Canada is uncertain.” Alexander, Robert J. and Singer, William, “Canadian Investments in Latin America,” Inter-American Economic Affairs, 4 (1951), 73–82Google Scholar. The authors also mention the Mexican Light and Power Company, Ltd. and the Monterey Railway, Light and Power Company as continuing to be Canadian enterprises.

23 Canadian overseas investment amounted to $100 million in 1900 and $200 million in 1914. During the same period, British capital in Canada rose by more than $2 billion and American holdings in Canada increased by $750 million. Woodruff, William, Impact of Western Man (New York, 1967), pp. 150, 152, and 154Google Scholar.

24 In 1870 the Bank of Montreal established an office in London; it was joined by the Canadian Bank of Commerce in 1901. Before 1914 Canadian banks were significant purchasers of bills on the London market. By 1914, the larger Canadian banks were able to operate in New York without the intervention of correspondents. Canadian life insurance companies, notably Sun Life, derived a substantial portion of their premium income from foreign operations. See Drummond, Ian M., “Capital Markets in Australia and Canada, 1895–1914,” (Ph.D. diss., Yale University, 1959), pp. 17–20Google Scholar.

25 Ibid., p. 222.

26 Viner, Jacob, Canada's Balance of International Indebtedness, 1900–1913 (Cambridge, 1924), p. 89Google Scholar. Viner's information was based upon the Annual Reviews of the Bond Market in Canada by E. R. Wood, who was himself a member of the Canadian group active in Latin American public utilities.

27 South American Journal, 29 June 1913, pp. 757–58.

28 Gauld, The Last Titan, p. 82.

29 During his career in Latin America, 1898–1931, Farquhar was the prime mover in the establishment of the Havana Electric Railway Company, the Cuba Railroad Company, the Rio de Janeiro Electric Light and Power Company, the Bahia Tramway, Light and Power Company, Ltd., the Port of Pará, the Brazil Railway Company, the Madeira-Mamoré Railway, the Guatemala Railway, and finally the unsuccessful attempt to exploit the Itabira iron ore deposits in Brazil. The Brazil Railway Company, the holding company designed to be the core of the economic empire Farquhar had planned in Brazil, was incorporated in Maine and capitalized at $50 million. It was the largest U.S. holding company before the establishment of companies such as the Electric Bond and Share Company in the late 1920s. This account of Farquhar's operations is largely based on Gauld's biography of Farquhar.

30 The bank of Scotland, through Robert Fleming, became the London bankers for the Brazil Railway Company. When Farquhar found that the New York capital market was not interested in the Brazil Railway Company, he went to London to obtain funds through Robert Fleming, J. Henry Schroeder, Sir Edgar Speyer, and the Rothschilds, who were Brazil's official bankers. The panic of 1907 halted this move and Farquhar turned to Paris. He made Paris his chief source of capital from 1907 through 1912 largely because Paris specialized in financing projects backed by government guarantees of interest. (This was common in Latin American railroad issues.) Farquhar claimed that he, together with his Paris banking associate, Hector Legru, introduced Brazilian securities to the Paris bourse.

31 Critics of Farquhar declared that by his threatening to establish a rival Amazon river shipping line, Farquhar depressed the shares of the British-owned Amazon River Steam Shipping Company, dominant on the river since 1872 when it succeeded Mauá's company. He acquired its entire share capital and formed a new company in 1911.

32 By the end of 1914 and early 1915, Farquhar's elaborate structure collapsed as he was unable to meet interest payments on the debentures with which he financed his enterprises. Cheap Asian rubber, which ruined his Amazonia rubber plan, Brazilian exchange instability, the inability of the Brazilian government to pay Farquhar $10 million due him for construction of the Madeira-Mamoré Railway, and the drying up of the European capital market at the onset of World War I were all factors in his downfall.

33 Simon, Matthew, “The Pattern of New British Portfolio Investment, 1865–1914,” in Capital Movements and Economic Development, ed. Adler, J. H. (New York, 1967)Google Scholar, and unpublished data furnished by the late Prof. Simon.

34 British investment in enterprises controlled by foreigners was opposed by some in Britain. See the comments of Edgar Crammond on Paish's, paper, “Great Britain's Capital Investment in Other Lands,” Journal of the Royal Statistical Society, 72 (Sept. 1909), 482–83CrossRefGoogle Scholar.

35 Lewis, America's Stake in International Investments, pp. 605–06. Rippy, J. Fred, Latin America: A Modern History (Ann Arbor, 1958), pp. 565–66Google Scholar.

36 Hobson, C. K., The Export of Capital (London, 1914), p. 138Google Scholar.

37 Statistics of new flotations on German and French bourses from the late 1890s through 1912 confirm the growing role of new foreign issues as opposed to issues for domestic companies. Ibid., pp. 245–46.

38 Based upon Simon's unpublished data.