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SINCE the United States became a creditor nation Canada has been the favorite field for American foreign investment. At the beginning of 1931 the investment of capital from the United States in Canada was about 30 percent greater than the combined American investment in Great Britain, Germany, France and Italy. Considerably more American capital has been invested in Canada than in the whole of South America, and American investors have purchased nearly as large an amount of the direct and guaranteed obligations of the Dominion, provincial and municipal governments of Canada as they have of bonds issued by state governments in the United States.
Estimates of American investments in foreign countries are necessarily subject to a certain margin of error, owing to the incompleteness of the records and to the constant changes as funds flow back and forth between the borrowing and the lending countries. Both the American and the Dominion governments have recently made careful estimates of the amount of capital from the United States which has been invested in Canadian securities or placed directly in Canadian industries, and although the figures show some variation, as was to be expected, they conform closely enough to furnish a fairly accurate picture of creditor and debtor relations between the two countries.
According to the United States Department of Commerce, the total American investment in Canada at the end of 1930 was approximately $3,790,000,000; according to the Dominion Bureau of Statistics, the total as of January 1, 1931, was $4,107,803,000. Two unofficial estimates of American investments in Canada as of January 1, 1931, have also been made. That compiled by Professor Kenneth W. Taylor, of McMaster University, conforms very closely to the total reported by the Department of Commerce. The estimate by Dr. Max Winkler, however, places the total at $4,436,011,000. This larger figure is due possibly to the inclusion of short-term loans by American banks and authorized new stock issues of Canadian subsidiaries of American corporations which may not have been subscribed for wholly in the United States.[i]
Before the World War the Dominion and local governments and Canadian business corporations were occasional but not heavy borrowers in the United States. Their usual course was to obtain credits in London. Canada did not borrow any considerable sum in the United States until 1911. In that year and in the three following years Canadian securities to the amount of about $121,000,000 were offered to American investors,[ii] but in 1914 Canada held only fourth place among the borrowers from the United States. Latin America then stood first, with Cuba and Mexico predominating; next came the Far East -- mainly Japan, which had floated a war loan in the United States during the conflict with Russia -- and then came Europe.
The war brought a profound change in the financial relations of the United States with the rest of the world. In 1914 total American investments abroad were estimated in round numbers at $2,500,000,000, but the United States was also a debtor to the amount of about $5,500,000,000. When the war ended this net indebtedness of $3,000,000,000 had been wiped out, and the United States had become the world's creditor to the extent of some $10,000,000,000. Its neighbor Canada, however, remained a debtor nation, and for the bulk of its capital requirements turned from London to New York. In 1914 the Canadian issues publicly offered in the United States amounted to only $13,419,000; in 1915 they rose to $155,740,000; in 1916, to $161,801,000; and in 1917 to $212,175,000.
Most of this borrowing was on government account, but there was a substantial increase also in the flotation of issues of Canadian corporations. The amount of corporate issues rose from less than $8,000,000 in 1914 to more than $38,000,000 in 1917. After the war, except in the trying years 1932-33, Canada floated securities in the United States at a rate ranging from ten to twenty times that in the pre-war period. The trend since 1919 is shown in the following table:
|(In thousands of dollars)|
|* Including government-guaranteed.|
After the onset of the industrial depression the flow of investment funds from the United States to Canada was much better sustained than was that to other countries. Between 1927 and 1929 the total annual flotation of foreign securities in the United States was reduced by one half, but in this same period the offerings of Canadian issues actually increased by 22 percent. In the period from 1927 to 1931 the decline for all foreign issues amounted to 83 percent,[iii] while the decline in the case of Canada was only 47 percent. In 1932 the only new foreign issues publicly sold in the United States were Canadian. It is evident that Canadian credit suffered much less during the depression than did that of other borrowing countries. On the other hand, it will be noted from the foregoing table that Canadian corporate borrowing declined very sharply after 1929. In the boom years 1925-28 corporate security issues exceeded those of the government, but in 1931 they declined to the lowest point since the war, and in 1932 they were almost suspended.
The data compiled by the Department of Commerce indicate that approximately 52 percent of the American investment in Canada has been made through acquiring direct ownership of properties, while the remaining 48 percent has been made through the purchase of securities. These direct investments, somewhat in excess of 2,000 millions, are about double the direct American investments in Cuba, which ranks next to Canada as a field for American capital, and are more than four times the amount of such investments in Great Britain. They are a third larger than total direct American investments in all of Europe, and a fourth larger than such investments in all of South America. The large amount of direct investments in Canada is due in considerable degree to the establishment of branch factories in the Dominion by American corporations desiring to overcome tariff barriers and also to obtain the advantage of preferential tariff rates accorded to the products of Canada by other members of the British Empire.[iv]
A broad classification of the total American investment based on the slightly varying estimates of the United States Department of Commerce and the Dominion Bureau of Statistics is shown in the following table:
|(In thousands of dollars)|
|Department of||Bureau of|
|Railways and public utilities||1,411,590*||1,362,868|
|Trade, finance, etc.||246,866||419,071|
|* Including $417,674,000 of government-guaranteed railway bonds.|
The upsetting of monetary standards in both Canada and the United States has produced complications in the service of that portion of the Canadian debt which is represented by securities. For the calendar year 1933 the interest charges and maturing principal of Canadian bonds payable in American dollars has been estimated at $266,124,000. Some of these bonds, however, are held by Canadians, and for this reason the total scheduled payments exceed the amount which must actually be transferred to foreign creditors. The largest single payment during the year is due in October, with the maturity of $60,000,000 in bonds of the Dominion government.[v]
These payments on American dollar obligations are due to be made in gold or its equivalent in New York funds, but since October 21, 1931, the exportation of gold from Canada has been prohibited except under government license, and the usual practice has been to make payment on the securities held outside Canada by the purchase of exchange on New York. As Canadian currency since the gold embargo of 1931 has been at a discount of from 10 to 18 percent, the resulting premium on American dollars has increased the carrying charges on the external debt. But the Canadian holders of these bonds have had to be content with payment in depreciated domestic currency, notwithstanding the gold-payment clause in the contracts. The Dominion government has never officially abandoned the gold standard, and its notes are still nominally redeemable in gold. Technically, therefore, the government does not default when it pays the bondholders with these notes instead of with the promised gold.
The Dominion government has thus made a distinction between its domestic and its foreign creditors, which in practice has been of advantage to the foreigners. This policy is the reverse of that adopted by the United States on May 1, 1933, when it refused to permit payment in gold on the portion of its maturing obligations held by foreign investors. To American bondholders this decision was of no immediate practical importance, as the domestic purchasing power of the dollar had not declined in terms of gold. Foreign holders of these bonds, however, received payment in funds which had depreciated about 15 percent below their gold parity. This gave rise to the charge that while Canada was paying its foreign creditors 100 cents on the dollar and its domestic creditors only 85 cents, the United States was doing the opposite, paying its foreign creditors 85 cents on the dollar, and its domestic creditors 100 cents.
The mathematical accuracy of this contention may be challenged, but another point has been raised which is fundamentally more important. The Canadian bonds were primarily an external issue, and the obligation to foreign holders was therefore of a peculiar character and might justify the special consideration of such creditors. The United States bonds, on the other hand, were floated in the home market, and any foreign purchases were a mere side incident. There was no appeal to outside investors to buy American securities, and so it was argued that there was no reason why they should receive favored treatment which was denied to Americans.
Soon after the United States went off the gold standard, the question of the validity of the gold-payment clauses in American bonds was brought before the courts. A New York State court ruled that payment on such bonds might be made in currency other than gold. Congress soon afterward legislated to the same effect. The issue may finally be carried to the Supreme Court of the United States, and its ruling may have an important bearing on the debtor-creditor relations between Canada and the United States.
[i] "A New Estimate of American Investments Abroad," United States Department of Commerce, Trade Information Bulletin, No. 781, 1931. "Estimated British and Foreign Investments in Canada," Department of Trade and Commerce, Dominion Bureau of Statistics. "American Foreign Investment in 1931," Foreign Policy Reports, VII, p. 429.
[ii] Ralph A. Young, Handbook on American Underwriting of Foreign Securities, 9, 21. United States Department of Commerce, Trade Promotion Series, No. 104.
[iii] The total amount of foreign issues offered in the United States, less those used for refunding loans already outstanding, declined from $1,336,760,000 in 1927 to $228,835 in 1931.
[iv] See American Branch Factories Abroad. Senate Document 258, Seventy-first Congress, Third Session.
[v] For this information I am indebted to Messrs. A. E. Ames & Co., Ltd., of Toronto, who have issued a valuable statistical compilation entitled "Canadian Bonds Outstanding and Maturities and Interest Payments in 1933."