Gertrud Lovasy: Zur Entwicklung des zwischenstaatlichen Kapitalverkehrs in den letzten zehn Jahren (1937)

Gertrud Lovasy examines international capital movements during 1927–1936, combining an economic account of capital allocation and transfer with a statistical survey of the principal creditor countries. Her central distinction is between durable, return-oriented foreign investment and cross-border movements motivated by the protection of wealth. The collapse of new foreign securities issues provides strong evidence of declining international investment, but continued trading in existing securities complicates the picture: assets formally classified as long-term may serve as temporary refuges for flight capital.

Lovasy begins with a theoretical benchmark. Capital, understood as funds intended for investment, is economically allocated when successive investments seek the highest available returns and ultimately equalize marginal yields. An international interest-rate differential should therefore induce capital exports toward the country offering more profitable opportunities until the differential disappears.

Erfolgt die Investition des Kapitals nach diesem Gesichtspunkte (Rentabilitätsprinzip), so ist damit dessen räumliche Verteilung innerhalb der Gesamtwirtschaft eindeutig bestimmt.

English translation: If the investment of capital takes place according to this criterion (the principle of profitability), then its spatial distribution within the economy as a whole is thereby unambiguously determined.

This principle applies across the world economy as well as within a closed national economy. Its operation, however, depends on conditions that the preceding decade had severely disturbed. Lovasy distinguishes factors that discourage owners from undertaking foreign investment from obstacles to completing an intended transfer.

Following Ragnar Nurkse’s explanation, she treats international capital transfer as ultimately a movement of goods rather than simply money. Under a gold standard, lending abroad can generate gold exports, monetary contraction and falling prices in the lending country, and corresponding monetary expansion and rising prices in the borrowing country. The resulting relative-price changes encourage goods to move toward the capital importer. Under paper currencies, exchange-rate changes perform a comparable function by altering relative prices. Yet those changes can impose exchange losses on lenders or borrowers even under otherwise stable monetary conditions and freely determined rates.

This mechanism explains why monetary and commercial policies matter. Depreciation in a capital-exporting country can immediately facilitate transfer, whereas depreciation in the importing country can impede it. Artificially maintained exchange rates may obstruct the necessary price adjustment. Import restrictions in the borrowing country likewise prevent the goods inflow through which capital transfer delivers its real benefits. Thus policies intended to regulate trade or currencies can frustrate an otherwise intended international investment.

For Lovasy, currency uncertainty was the decade’s foremost influence on investment decisions:

Während der letzten zehn Jahre ist zweifellos die Unsicherheit der Währungsverhältnisse derjenige Faktor gewesen, der in erster Linie die Entwicklung der Kapitalbewegungen beeinflußt hat.

English translation: During the last ten years the uncertainty of monetary conditions has undoubtedly been the factor which has influenced the development of capital movements in the first place.

Its effects are two-sided. It discourages foreign investments even when the underlying projects appear profitable and specific risks seem adequately compensated by interest-rate premiums. At the same time, it encourages capital flight, often through transferring hoards rather than financing investment abroad. Exchange controls may intensify the distrust they seek to contain, stimulating flight while deterring incoming capital. Fears of confiscation, expropriation, blocked funds, and other restrictions on disposal further weaken investment incentives. Similar fears concerning domestic assets can prompt outward flight, although Lovasy judges their overall effect more likely to inhibit international movements. Autarkic resistance to foreign ownership adds another impediment. These disturbances can increase some financial flows while reducing genuine return-oriented investment.

The empirical analysis distinguishes new securities issues, purchases of existing foreign securities, and direct investment in property or enterprises. Purchases of existing securities change ownership rather than necessarily creating additional investment. Amortization payments release and return previously invested capital and therefore fall outside her immediate inquiry. Lovasy prefers direct transaction statistics to indirect estimates derived from trade-balance residuals, since net balances conceal opposing flows. She excludes conversion issues because refinancing existing loans does not itself initiate a capital movement. New-issue statistics offer the strongest evidence; international securities trading is incompletely recorded, and direct investment is especially difficult to measure.

Lovasy situates the decade within the transformation produced by the First World War. Britain had been the leading prewar capital exporter, alongside important French and German lending and the older creditor traditions of the Netherlands and Switzerland. The war elevated the United States to the foremost creditor position, while Germany became a substantial borrower from nearly all major capital-exporting countries. British issues shifted markedly toward domestic requirements: the domestic share rose from approximately 19 percent in 1908–1913 to 67 percent in 1920–1927. Russia ceased to receive long-term investment, while Germany, Canada, Australia, Latin America, and Japan became important borrowers. The estimated annual volume of long-term international capital movements also declined, from roughly $2–2.5 billion immediately before the war to $1.5 billion in 1924–1930.

The country evidence for 1927–1936 reveals a sharper contraction in foreign than domestic issues and little participation by foreign lending in the subsequent recovery. American foreign issues fell from $1.337 billion in 1927 to $29 million in 1932 and remained negligible thereafter, despite renewed domestic issuance. Britain experienced a less pronounced overall decline, with colonies and dominions initially more resilient than other foreign borrowers. Nevertheless, issues for countries outside the empire dwindled, and deliberate restrictions on overseas borrowing protected domestic capital supply. In 1935–1936, imperial issues also lagged while domestic issuance rose strongly.

Dutch foreign issues contracted drastically in 1931 and subsequently almost disappeared. Swiss foreign issuance continued through 1932 but effectively ceased thereafter. Germany had accounted for a substantial share of both countries’ foreign lending. Lovasy notes important comparability limits: the Dutch domestic series includes colonial issues, while French statistics cover only foreign government loans rather than all foreign issuance. No new foreign government loans were issued in France after 1933. These differences notwithstanding, the evidence consistently indicates a retreat of new foreign investment without a recovery comparable to that visible in some domestic markets.

Lovasy nevertheless rejects the inference that declining issuance proves the disappearance of all long-term international capital movements. Purchases of foreign securities had persisted and, in some cases, increased. Their economic interpretation cannot simply follow their accounting classification:

Der Umstand, daß diese Wertpapiertransaktionen in den Bilanzen formal als langfristige Kapitalbewegungen aufscheinen, kann für die Beurteilung, ob es sich dabei tatsächlich um solche handelt, nicht maßgebend sein.

English translation: The circumstance that these securities transactions formally appear in the balance sheets as long-term capital movements cannot be decisive for judging whether they in fact are such.

American data make the problem particularly clear. Securities transactions generated net capital inflows throughout 1925–1935. Once American foreign issuance collapsed, recorded long-term capital movements showed an import surplus from 1931; short-term movements also showed an import surplus from 1934, when the United States again became a capital-importing country. Net foreign purchases of American securities rose from $316.7 million in 1935 to $600.5 million in 1936, principally involving Britain, France, the Netherlands, and Switzerland.

Although securities purchases can constitute genuine long-term investment, Lovasy considers it more probable under contemporary conditions that much of this European buying represented temporary placement of flight funds. The contractual maturity of a security therefore does not establish the intended duration of its owner’s commitment. Such funds could be repatriated at any moment, exposing American capital markets to potentially disruptive securities sales. This remains a qualified interpretation of the available evidence, not a demonstration that all foreign purchases were flight capital.

The limited direct-investment figures reinforce the picture of contraction: reported American direct investment abroad averaged $240 million annually in 1926–1929, compared with $48 million in 1934 and $25 million in 1935. Comparable information is absent for most countries, however, and miscellaneous long-term capital accounts cannot safely substitute for it. Lovasy consequently concludes that the evidence establishes neither the absolute scale of international capital movements nor an unequivocal account of their overall development. She closes by welcoming the League of Nations’ efforts to improve financial statistics. Her substantive finding—a severe retreat of new foreign investment—is inseparable from her methodological caution: financial flows must be distinguished by their economic purpose, and incomplete records cannot support a comprehensive verdict.