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Debt and Investment, Foreign


DEBT AND INVESTMENT, FOREIGN. In the language of international financial balances, the net of all the claims on people or governments of foreign nations held in the United States, less the reverse claims held by foreigners, is the foreign debt owed to or by this country. Actually the obligations are of many different types—some representing borrowing, or what would domestically be regarded as debt, and some representing investments in the equity of foreign companies. The relative quantities of these various types of paper have changed greatly over the course of U.S. history.

Prior to World War I, "foreign debt" meant the amount the United States owed abroad, which had steadily increased during its national existence. Even before independence, Americans had been deeply indebted to English merchants. The Revolution forced the Continental Congress to borrow money from France and Holland to finance the war effort against the British. In the 1790s Alexander Hamilton hoped that sound government finance would attract European capital to the United States. But the long, drawn-out wars in Europe prevented this from happening to any marked degree, although a few American merchants were able to borrow from European bankers, and the Bank of the United States sold some stock abroad.

With peace in Europe, English capital gradually flowed into state bonds issued to finance canal building and, later, railroad building. After the mid-nineteenth century American railroads and other utilities were able to borrow privately in European markets, particularly in England, to market common stock. Foreign investment played a critical role in American westward expansion, especially the construction of the transcontinental railroad. In the 1870s and early 1880s, a considerable amount of European capital was invested in western mining and cattle raising. By 1914 there was $7.2 billion of foreign capital in the United States and Americans owed about $3.5 billion in foreign obligations.

World War I not only reversed these relations but made all previous balances appear small by comparison. During the period of United States neutrality from 1914 to 1917, France and Britain became profoundly dependent upon American loans to finance their war efforts. By 1920 European governments, including that of tsarist Russia, owed the U.S. government $12 billion. European investors had drawn their U.S. balances down to $3 billion, while American private interests had sent an additional $4 billion abroad. The debts of the European governments to the United States seemed too large to repay over a ten-or twenty-year period without disrupting world trade. Consequently, arrangements were negotiated in the 1920s for very gradual payment and low interest rates. In particular, the desperate economic situation in Weimar Germany spurred the United States to help the Germans finance their reparations payments to France and Britain. Under the Dawes (1924) and Young (1929) plans, the United States pumped millions of dollars in capital into Germany to keep it afloat economically. Even these transfers were, to a large extent, financed by new European borrowing from private investors in the American market. The latter, particularly during the stock market boom, absorbed a large amount of private securities from Canada and Europe. By 1930, U.S. private investment abroad totaled $17 billion, while government loans had been only slightly reduced.

The Great Depression temporarily checked American foreign investment and, together with World War II, ended the hope of collecting substantial amounts of old war debts. Financial assistance by the United States in the new war took the form of lend-lease, a euphemism for outright gifts, so that no large burden of indebtedness remained at the close of the war.

To make capital available for postwar reconstruction, the United Nations sponsored an International Monetary Fund to assist the revival of trade and an International Bank for Reconstruction and Development, with the United States as the largest subscriber to the funds of both organizations. The American government did not entirely withdraw from direct intergovernmental loans—Great Britain, for instance, received $3.75 billion in 1946—but the few billion loaned was small in comparison to the economic and military aid supplied freely under the Marshall Plan and successive laws.

Up to 1955, the European market was not attractive to American capital and the relatively small amount of private foreign investment was chiefly in Canada. In 1950 the total foreign investment for all areas was $19 billion, of which $11 billion represented direct ownership. As Europe recovered and began to prosper in the late 1950s the situation changed rapidly. By 1965 the book value of American private investment abroad was $81 billion, of which nearly $50 billion was direct ownership; and the market value of the properties and securities held by Americans was certainly over $100 billion.

These large annual capital exports of more than $5 billion a year, plus $2 billion to $3 billion in foreign aid and an unreported amount of military expenditures, were making it impossible for the United States to avoid large deficits in the balance of international payments. Consequently the federal government tried to use taxes to slow down the capital outflow. The 1969–1971 recession operated strongly in the same direction, and the rate of foreign investment was expected to remain lower in the years immediately after the downturn. Meanwhile, nearly $100 million in dollar exchange accumulated abroad, chiefly in the hands of bankers and the governments of oil exporting nations. Therefore, while the United States remained by far the leading creditor nation in the world, with foreign claims of one type or another reaching nearly $150 billion in the mid-1970s, these claims were in part balanced by expatriated currency.

America's status as the world's leading creditor nation came to an end in the 1980s. In 1981 President Ronald Reagan implemented a policy of supply-side economics, whereby the administration dramatically cut tax rates while simultaneously increasing defense spending. "Reaganomics," as this policy came to be known, had a profound impact on America's status in the international economy and on its foreign debt. By the late 1980s, the United States had amassed annual budget deficits unprecedented in its history and the national debt consequently ballooned. To service the debt, the American government relied heavily upon loans from Germany, Japan, and other major industrial nations. Moreover, the policy of deep tax cuts spurred consumer spending, further eroding savings and investment rates. In 1989, for example, the United States trade deficit had reached $115 billion, with Japan alone accounting for $50 billion of the total. That same year, America's total foreign debt reached $500 billion, a figure that dwarfed all previous foreign debts in the nation's history.

By the early 1990s, Japan seemed on the verge of eclipsing the United States as the world's economic superpower. Massive Japanese investment in the United States even created fears that America's national sovereignty had been compromised by the national debt. In 1990, for example, Japanese investors owned nearly half of downtown Los Angeles.

As a result, the explosive growth of the national debt emerged as a major political issue in the early 1990s. H. Ross Perot, a Texas billionaire, made the national debt the primary focus of his independent campaign for president in 1992. Perot won only 19 percent of the vote, but the national debt remained a defining issue in American politics. The new president, Bill Clinton, pledged to focus on the economy "like a laser beam," and restoring America's international competitiveness became a rallying cry for both Republicans and Democrats.

To the surprise of many observers, the mid-1990s witnessed a reversal of the trends begun in the 1980s. Several factors contributed to the decline in the growth of the national debt and to America's reemergence as a dominant global economic force. First, the size of the American defense budget fell substantially with the end of the Cold War, which drove down federal spending rates. Second, the 1990s saw the most sustained period of economic growth in a half-century, which led to massive budget surpluses in Washington by the end of the decade. Third, the political gridlock created by a Democratic-controlled White House (after 1992) and a Republican-controlled Congress (after 1994) eliminated the possibility for expensive new domestic programs. Fourth, major recessions in Germany and Japan shook investor confidence in those nations and reduced the rate at which they invested abroad, including in the United States. By the end of the 1990s, politicians in both parties claimed that the national debt would be eliminated within two decades.

Despite the economic prosperity of the 1990s and the elimination of the federal budget deficit, however, the United States still possessed a huge national debt at the end of the decade. The country also maintained an unfavorable balance of trade, with imports far exceeding exports. And, although American capital investment remained a vital part of the world economy, it represented a far smaller percentage of international investment than it had in the 1940s and 1950s.


James, Harold. International Monetary Cooperation since Bretton Woods. Washington, D.C.: International Monetary Fund; New York: Oxford University Press, 1996.

Kunz, Diane B. Butter and Guns: America's Cold War Economic Diplomacy. New York: Free Press, 1997.

Thomas C.Cochran/a. g.

See alsoBalanced Budget Amendment ; Dawes Plan ; Debt, Public ; Hamilton's Economic Policies ; Trade, Foreign ; Young Plan .

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Production Sharing Agreement


A Production Sharing Agreement is made between two or more independent enterprises and/or government agencies that specifies the way in which and for what period of time the signatories will share in the output of a particular commodity.

The production sharing agreement (PSA) offers an alternative to the joint venture as a way for two or more economic entities to collaborate on the development and production of a commodity. Russian officials and business entrepreneurs have been reluctant to allow foreign firms to acquire direct ownership and managerial control over domestic resources and firms. The Russian government has also been reluctant to privatize valuable domestic resources completely, especially with respect to oil and gas reserves and companies. The PSA is the principal way for foreign firms to invest in Russia and for the Russian government to maintain a degree of control over valuable resources. Under a standard form of PSA, the entity that invests in a development project is the first to capture the investment from revenues generated by the forthcoming output.

The Russian Duma has been reluctant to condone foreign ownership, or, in some cases, even foreign participation in the economy. Legislation governing PSAs was not passed in the Duma until late 1998 under the government of Yevgeny Primakov. In certain fields PSAs must be approved by the Duma. In the oil and gas industries, the PSA is the single most important form of collaboration between the government and the oil companies and with foreign oil and gas companies as well.

See also: foreign trade; primakov, yevgeny maxi movich


Gregory, Paul R., and Stuart, Robert C. (2001). Russian and Soviet Economic Performance and Structure. New York: Addison-Wesley.

James R. Millar

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