'It has been claimed that Britains financial institutions were too oriented towards overseas investment between 1870 and 1914 and that this led to the neglect of domestic industry. Discuss

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                                                      British Economic History

                                                           

                                                     

''It has been claimed that Britain’s financial institutions were too oriented towards overseas investment between 1870 and 1914 and that this led to the neglect of domestic industry.

(a) Examine whether British industry could gain sufficient funds from the financial sector.

(b) Consider whether an alternative institution, such as the investment banks found in Germany, was needed to improve British industry.''

Introduction

  Overseas investment,and most particularly,capital exports,is one of the most interesting and important historical phenomena of the period 1860-1914.Paish,in order to define the magnitude of these capital exports,estimated that the total stock of overseas British assets just before First World War,was not less than 4 billion pounds,the one third of the British wealth. Never before or since,has one nation invested so much of its national income to capital formation abroad. The reasons for this preference to foreign investments are controversial. However,in the late nineteenth and twentieth centuries there were two streams of though concerning why financial institutions and individuals had turned to overseas investment. The first one,is that foreign investments had higher returns than the domestic ones,but there is a dispute here about whether these funds were pushed out because the domestic rates of return were fading or because the rates of return abroad were higher. However,when in 1982 Edelstein examined a sample of 566 home and overseas ,first and second class,equity,preference and debenture securities,he proved that returns from foreign investment were higher. More specifically,for some sub-periods between 1870 and 1913,overseas first and second class investments yielded annually 5.72% while the equivalent percentage for domestic investments was 4.60%.The second reason for investing abroad is represented by J.A. Hobson's work and has to do with the distribution of  the national income. What Hobson supports,was that too little of Britain's national income was allocated to wage earners,who did most of the nation's consumption and most of the income was distributed to property owners. Consequently,there was too little consumption and too much savings,or in other words too much money available to be invested. Since property owners were assuming that domestic investment had lower returns,these money,in a way,had to be channeled abroad. Thus,it seems that there is a rationality in this movement of funds to foreign investments,or in other words that there are no biased markets against domestic investment. What is not clear,are the consequences to the domestic British industry of this massive transfer of funds. Some argued that if these funds had been invested domestically,they could be used to develop new technologies and new industries while others worried that these funds invested abroad contributed to making Britain's competitors more powerful. For the latter however,Keynes as a supporter of  the theory of the supplementary and not competitive markets,held the view that ''our investments have been directed towards developing the purchasing power of our principal customers,or to opening up...our main sources of food and raw materials''. On the other hand,those that disagree with Keynes support that this increasing purchasing power,eventually ended up to enhance the old traditional British Industries and the newer segments of the British Industry were inadvertently starved of demand during their first years,with consequent results on the growth rates of British per capita incomes.

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  In this context of massive capital exports,in order to see if there were sufficient funds from the financial sector for the industries,it would be better to distinguish old well established industries,from the new small and medium sized ones.

Industrial gains from the financial sector

  Throughout the period we are looking at,we are seeing greater concentration and amalgamation of the clearing banks. Since these clearing banks,after these amalgamations,had at their disposal a lot of resources that they were dispersed all over the country,one would expect that these massive branches  would diversify and would take more risks,but ...

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