52

a total of $369,000,000 and the British Government utilized part of the proceeds of gold shipments and security sales to make advance payments for merchandise, totaling $570,000,000 at the end of 1940, and to expend $150,000,000 as capital outlays in the same connection." On March 15, 1941, it was announced that the Defense Plant Corporation, a subsidiary of the Reconstruction Finance Corporation, was arranging to buy several munition plants, construction of which had been financed by the British Government. With the completion of these transactions the industrial stake of the British Government in this country had been reduced by about $46,000,000.

Other European and World Holdings Increase.

Although the prosecution of the war served to decrease British investments in the United States during 1940, Treasury figures on capital movements indicate that European investments, other than British, continued to increase. As a result, investments of other European countries were increased to approximately $1,200,000,000, or 45 percent of the total. An increase of $149 000.000 in short-term balances resulted primarily from the flight of alien government funds to this country, while the restrictive effects of the executive "freezing" 53 orders and the curtailment of exports to Europe tended to limit withdrawals of existing accounts.

Except for an increase of $210,000.000 reported in the Treasury Department's Monthly Bulletin for the week ended June 19, there was little change in reported French balances in the United States during the period of French participation in the war. The extent to which France was making net payments for war supplies prior to June is obscure, but undoubtedly it was large. French dollar balances were almost entirely derived from gold shipments, a large part of which was reported as coming from Canada, and some of these imports were probably placed under earmark.

During the year Swiss short-term balances increased by $140,000,000, part of which was conceivably for non-Swiss account. This increase and the net purchases of domestic securities, as reported by the Treasury Department, were well in excess of gold exports by Switzerland to this country.54 Stocks and bonds comprise an unusually high proportion of total Swiss long-term investments in this country. Total Belgian and Netherland investments, comprised mainly of bank deposits and marketable securities, declined during the year. Gold shipments, which had served chiefly as a means of transferring funds from these countries, virtually ceased after they were invaded and occupied by Germany. Their dollar assets thereafter declined moderately as both Governments continued to meet obligations arising from previous commitments.

Largely as a result of requisition orders in previous years German and Italian investments in the United States were relatively small at the outbreak of the war. By a decree of May 1935, all foreign securities owned by Italian nationals were to be deposited with the Bank

52 These capital outlays and total earmarked gold held in this country are by virtue of their character not included as part of the estimate of foreign investments in this country. 63 See arpendix A-VI.

54 Attention is called again to the fact that gold shipments are sometimes credited in the import statistics to countries other than those in which the shipments originated and are frequently credited to countries other than those to which the proceeds accrue.

of Italy. Toward the close of the preceding year these holdings had been declared to the authorities. The bulk of the securities requisitioned is believed to have been sold in succeeding years. This, and similar action by the German Government in 1936 and 1937, had greatly reduced the investments of the respective countries in United States securities. Direct investments of both countries have been reduced only slightly by the sale of properties since September 1939. German short-term balances have declined since that date, though there was a net increase of several million dollars in Italian balances as a result of gold imports from Italy between September 1939 and that country's entry into the war on June 10, 1940.

Canadian assets in the United States at the end of 1940 were estimated to total $1,430,000,000, or 15 percent of foreign assets in this country, exclusive of gold, with direct investments comprising about one-third of total Canadian investments. During the year there was an increase of $149,000,000 in short-term balances in the United States, part of which was probably for non-Canadian accounts. A considerable portion of Canadian and British Empire resources destined to pay for commodities in the United States was represented by gold shipments, though a part of those shipments was for the credit of non-Empire accounts.

The growing volume of foreign trade between the Latin American countries and the United States, and the flight of capital to this country from Latin America and through that area from other countries, served to raise Latin American short-term balances in the United States by $91.000.000 during 1940. Total Latin American investments of $565,000,000 were slightly more than 5 percent of all foreign investments in this country at the close of 1940.

An increase in short-term balances held in this country was also reported for Asia, and for world areas not previously referred to. Asiatic and other balances rose by $180,000,000 and raised estimated investments in the United States of this wide area to almost 10 percent of the total at the end of 1940. Sales of Australian holdings of United States securities probably totaled several million dollars during 1940, following the announcement of that government in April 1940 that holders of certain United States securities might have 6 months in which to sell them and turn the proceeds over to the Commonwealth Bank. By the order of May 29, 1941, all persons in Australia holding any foreign securities were requested to offer to sell such securities to the Commonwealth Bank or its agents within 30 days. In March 1941, the Indian Government issued a vesting order calling for the acquisition by the Government of a specific list of United States securities held by residents in British India.

Chronological Trends in Movement of Foreign Capital.

Foreign capital movements during the first 5 months of 1940, as reported by the Treasury Department, were unimportant in net volume. The relatively minor inflow during those months was primarily from southeastern Europe, Latin America, and Switzerland and was partially offset by an outflow of British capital. In a sense, however, the reported data do not reflect the real situation inasmuch as there was, in fact, a large turn-over of foreign capital. From January through May gold imports averaged more than $300,000,000 a month. Some of this was placed under earmark and thus

did not involve any change of title to dollar funds nor add to our gold stock. A large part of the net gold inflow was for British and French accounts and provided the funds needed currently for payments for war materials. The proceeds of the sale of gold scarcely entered the deposit accounts before they were paid out for merchandise. German military successes in Belgium, France, and the Netherlands caused heavy shipments of gold to this country, exceeding $1,150,000,C00 in June alone. The net addition to the gold stock of the United States was considerably less than that because more than $435,000,000 was earmarked for foreign account that month. Notwithstanding the net inflow of more than $700,000,000 of gold in June, foreign deposits in United States banks rose by only $275,000,000. Of this amount, $185,000,000 was deposited to the account of France and was subsequently blocked along with other French assets.

The rate of inflow of foreign capital, and of gold, declined notably during the last half of the year, partly because the freezing orders and German military occupation effectively stopped the flight of capital from most of Europe. Furthermore, a large part of the gold reserves of foreign central banks was already in this country. There was no net capital inflow from October 9 to December 31-small increases and decreases occurred in the balances of various countries, but the totals remained virtually unchanged. Gold imports fell to a low of $137,000,000 in December and for the period as a whole probably served only to balance the expenditures of dollar funds created thereby. Inasmuch as dollar expenditures by the British remained at a high level during these months, they were forced to sell United States securities to obtain the necessary additional funds in order to avoid seriously depleting their bank balances.

Foreign Direct Investments in the United States.

Foreign direct investments in the United States at the end of 1940 were estimated to have reached $2,000,000,000. (See table XII.) The increase of $22,000,000 over the revised estimate for the end of 1939 involved only a few transactions and an estimate to allow for reinvested earnings. Official British transactions through July 1941 involving the outright sale of direct investments have reduced the total in this category. Income paid to foreigners on direct investments in the United States declined by $20,000,000 to a total of $50,000,000 for the year, a drop of 28 percent. The decline was not related to the net earnings of the enterprises, which undoubtedly increased. The majority of the direct investments in this country are controlled by foreign corporations, and, because of this control, consideration was no doubt given to the war-torn condition of Europe before it was decided whether the United States companies represented by the investments would pay dividends or would permit earnings to remain in surplus. Inasmuch as 71 percent of total direct investments were controlled from Europe, it is very likely that the decline in dividend payments resulted partly from the decision not to pay dividends and partly from the "freezing" orders which affected 17 percent (of the value) of the foreign direct investments in this country.5

55

55 It is anticipated that a current study of direct investments in the United States during 1940 will disclose in detail what this experience has been.

421602-41- -5

Foreign-Held Common and Preferred Shares.

A decline of 9 percent in the number of foreign-held common shares and a general recession of 16 percent in their average market price lowered the value of all foreign holdings of United States common shares by $546,000,000, to $1,947,000,000 at the close of 1940.56 Shares held under foreign addresses declined almost 15 percent 57 but this trend was partially offset by an increase in shares held through domestic nominees.

The largest single factor in the decrease in the estimated number of common shares held abroad was the sales of British holdings during the year. Another factor of considerable importance and one that has made it difficult to estimate investments in equities (since the problem of refugee funds was accentuated during 1938) was the concealment of foreign ownership effected by the transfer of foreign accounts registered in this country under foreign addresses to accounts registered with domestic addresses. Changes in address without any change in the domicile of the owner do not alter the fact that these investments are foreign, they merely add to the problem of estimating total foreign investments.

Similar factors were probably involved in the decline in the par value of preferred shares, though to a lesser extent. A decrease of 10 percent in share holdings lowered the par value of foreign-held preferred shares to $450,000,000 at the close of 1940 from $499,000,000 at the previous year-end. (On a market value basis they declined to $304,000,000 from $352,000,000.) Although British sales were the major factor in the decline in value of preferred and common shares, the amount of liquidation in the preferred share category was limited by the relatively small volume held in British portfolios.

Dividend payments to foreigners were maintained on a relatively high level as the average rate of dividends paid on their common share holdings rose from $1.11 per share for 1939 to $1.23 in 1940. Dividends paid to foreigners on their holdings of preferred shares were unchanged.58 During the second half of 1940 dividends received by foreigners on both common and preferred shares were affected by an increase to 162 percent from 10 percent in the rate of tax withheld at source on dividends paid to foreigners not resident in Canada or Sweden.

Foreign-Held Bonds and Miscellaneous Investments.

Little or no net change is estimated to have occurred in the par value of domestic bonds held by foreigners during 1940, although the capital movement data, as reported to the Treasury Department, indicate large net sales for the year. The net effect of these transactions has been excluded from estimated foreign holdings inasmuch as net sales of $55,000,000 of bonds for Far Eastern account during the year represented holdings-probably United States Government bonds, foreign ownership of which had not been previously disclosed-that had been acquired over a period of several years.59" Recorded small net purchases of bonds by all countries, excluding Japan, are assumed to have been offset by unreported bond sales.

56 The estimated decline is based on reports received from several hundred domestic corporations and also on reports covering income paid to foreigners on securities held by them through domestic nominees. See table XII and appendix A-VII.

57 Appendix A-VII.

58 See appendix A-VII, table 6.

59 The estimates for earlier years have not been revised to include these holdings.

Table XIII.—Geographic Distribution of Outstanding Short-Term Foreign Liabilities and Assets of the United States, Dec. 31, 1940

Source: Bulletin of the Treasury Department, March 1941 (Treasury Department, Office of the Secretary), pp. 45-48 and p. 50. These data have been adjusted to include certain deposit accounts of the Philippine Government with the Treasury of the United States. The distribution by countries of the ownership of these foreign liabilities and assets is based on the registered address of the account rather than on the citizenship or residence of the owner.

Interest payments are estimated to have declined from $22,000,000 in 1939 to $13,000,000 in 1940. The decrease is attributed principally to the fact that a large number of coupons attached to bonds held in foreign countries-especially those invaded by Germany-were not sent to this county for payment as interest fell due, probably a result of foreign fund control regulations in this country.

Miscellaneous foreign investments in the United States comprise several types of investments-trust funds and estates in the process of settlement, interest-bearing obligations not elsewhere specified, real estate, real estate mortgages, oil and gas royalties, and annuities. Data concerning changes in the value of these investments are meager and their value has been carried at $750,000,000 for several years. Income paid on these investments is estimated to have declined by $2,000,000 to $18,000,000.

Foreign Short-Term Investments.

Foreign short-term funds in the United States, as reported by banks and brokers to the Treasury, amounted to $3,978,000,000 at the end of 1940,60 an increase of $682,000,000 during the year. Most of these additional funds came from France, Sweden, and Switzerland, in the European area, and Canada, Asia, and Latin America, and primarily represented, in the case of Europe and Canada, the proceeds of gold shipments on official account to the United States. Part of the increases in Latin American accounts probably represented Euro

60 See table XIII and appendix A-VIII, table 7.