The American Investment in Latin America

THE financial difficulties of the republics of Latin America during 1930 and 1931 were of especial interest to the people of the United States because of the large and growing American investment in that part of the world. According to a careful estimate by the United States Department of Commerce, the long-term investment of American capital in Latin America at the end of 1930 was slightly larger than the American investment in all of Europe. The estimated total for Latin America was about 5,350 million dollars; that for Europe was about 4,900 millions.^[i]

While the amount of capital from the United States placed in Latin America exceeds by only a small margin the amount placed in Europe, there is a wide difference in the character of the respective investments. About two-thirds of the investment in Europe is in the form of securities. Barely one-third of the investment in Latin America is of that type; the rest is a direct investment in properties. Not only do securities form a small part of the total Latin American investment, but most of them have either been issued directly by the governments or are supported by a government guarantee. According to the Department of Commerce, 98 percent of the Latin American bonds held by investors in the United States are of this description, and only 2 percent have been issued solely on the credit of private corporations. On the other hand, 20 percent of the European securities offered for public subscription in the United States have been issued by private corporations without any government guarantee.

The flotation of Latin American securities on a large scale in the United States began in 1921 and reached its climax in 1926. There was a slight decrease in 1927 and 1928 and a sharp decline in 1929, when the boom in the American stock market destroyed the appetite of American investors for foreign bonds. In 1930 there was a temporary revival of interest in the bond market in New York, and a number of new foreign issues were floated. The total amount of Latin American issues at this time was slightly larger than in 1929, but it was still much below that of the three preceding years. With the deepening of the depression in 1931 the market for foreign bonds in the United States was still further restricted. Most of the financing by foreign governments in the United States in 1931 was merely to refund obligations maturing that year. Dr. Max Winkler's latest estimate shows that net Latin American government and corporate offerings in 1931 were about 75 percent less than they were in 1930.^[ii]

The fluctuations in the amounts of Latin American securities offered annually in the United States since 1920, with refunding issues deducted, are shown in the following table:

Owing to the extent to which conditions throughout Latin America vary, it is impossible to generalize regarding investments there. For example, while only about 32 percent of the total American investment consists of securities, 55 percent of the American investment in Argentina is in the form of bonds. Moreover, all the Argentine bonds have been issued by the national, provincial, or municipal governments. At the other extreme stands Venezuela, whose government has no external debt. American investments in Venezuela are in properties rather than in securities, and are largely concentrated in the petroleum industry.

In the case of Brazil and Peru we find another striking contrast. Sixty-two percent of the American investments in Brazil are in securities and 38 percent are direct. In Peru the figures are exactly reversed. These differences are due to the character of the leading industries in the respective countries. Argentina and Brazil, being mainly agricultural, have not attracted direct American investment as have the mineral-bearing regions of Chile, Bolivia, Peru and Venezuela. On the other hand, Cuba, which is also an agricultural country, differs from Argentina and Brazil in that it has attracted a vast amount of direct investment from the United States. Cuban securities constitute only about 15 percent of the total American investment in the island.

Cuba has absorbed over 1,000 million dollars of American capital, and now ranks first among the countries of Latin America as a field for American investment. It has not always held the lead. Before the World War the amount of American capital employed in Mexico was several times larger than that in use in Cuba. The war curtailed the production of beet sugar in Europe and gave a stimulus to the Cuban cane-sugar industry. This resulted in a heavy flow of American capital into the island. About the same time Mexico became less important as a field for American investment largely because of the exhaustion of its oil resources, and possibly to some extent because of the unsettled political conditions prevailing there.

The approximate proportions of direct investments and of security investments by Americans in the leading countries of Latin America are indicated in the following table:

During 1931 the drastic decline in the prices of principal Latin American products, along with the decrease in the export demand for these commodities, led to defaults by several Latin American governments on their external debts. The budgets of these countries were peculiarly susceptible to the effects of the world-wide economic depression, due to the fact that the governments have relied for revenue mainly on import and export duties; the sharp decline in the prices of products subject to ad valorem rates would have curtailed their income even if the volume of shipments had been maintained. After the depression began this volume of course was not maintained, and revenues were consequently reduced by the decline in both the value and the volume of imports and exports. In 1930-31 the deflation in the chief products of Latin America ranged from 50 to 75 percent. Under such conditions the treasuries faced deficits, and the unfavorable trade balances made it increasingly difficult for the governments to obtain the foreign exchange needed for maintaining service on their external debts.

Even in normal years this debt service absorbed from 20 to 40 percent of the revenues of the debtor governments. Payment on most of the foreign debts had to be made in gold, and with the depreciation in the exchanges of some of these countries, gold commanded a heavy premium. This increased still further the proportion of the government income required for service on the external debts. Furthermore, the governments and their political subdivisions in a number of cases had borrowed too freely, possibly at the urgent solicitation of foreign bankers, and the loans were not always spent productively. Given these conditions, the deepening of the economic depression inevitably brought defaults. Bolivia suspended the payments on its external debt which fell due on January 1, 1931. Peru followed in March, and Chile in July. In September the federal government of Brazil and some of the states and municipalities defaulted on most of their bonds. Several other South American municipalities were reported in default at the end of the year. The total amount of Latin American debt which went into default during 1930-31 has been estimated at approximately 1,200 million dollars. The American share has been estimated as approximately two-thirds of the total. The heavy loss from these defaults has been largely responsible for the investigation of foreign loan flotations now being made by the Senate Finance Committee.

^[i] "A New Estimate of American Investments Abroad." U. S. Department of Commerce, Trade Information Bulletin No. 767, 1931. An estimate by Dr. Max Winkler shows somewhat larger amounts for these two regions because of a different method of compiling the data; but it conforms with the computation of the Department of Commerce in giving the same relative positions to Latin America and Europe.

^[ii] "American Foreign Investments in 1931." Foreign Policy Reports, Vol. VII, No. 24.