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The Golden Age of Capital Flows
Technology, it’s often said, shrinks the world. Jet industrial economy with limited natural re- population movements were possible before
planes have put most of the world’s cities within sources and a slowly growing population, of- World War I because there were few legal re-
a few hours of one another; modern telecommu- fered relatively limited opportunities for new strictions on immigration. In today’s world, by
nications transmit information instantly around investment. The zones of recent settlement, contrast, migration is limited by extensive legal
the globe. So you might think that international with rapidly growing populations and abundant barriers, as anyone considering a move to the
capital flows must now be larger than ever. natural resources, offered investors a higher re- United States or Europe can tell you.
But if capital flows are measured as a share turn and attracted capital inflows. Estimates The other factor that has changed is political
of world savings and investment, that belief suggest that over this period Britain sent about risk. Modern governments often limit foreign in-
turns out not to be true. The golden age of capi- 40% of its savings abroad, largely to finance vestment because they fear it will diminish their
tal flows actually preceded World War I—it railroads and other large projects. No country national autonomy. And due to political or secu-
lasted from 1870 to 1914. has matched that record in modern times. rity concerns, governments sometimes seize
These capital flows went mainly from Euro- Why can’t we match the capital flows of our foreign property, a risk that deters investors
pean countries, especially Britain, to what were great -great -grandfathers? Economists aren’t from sending more than a relatively modest
then known as “zones of recent settlement,” completely sure, but they have pointed to two share of their wealth abroad. In the nineteenth
countries that were attracting large numbers of causes: migration restrictions and political risks. century such actions were rare, partly because
European immigrants. Among the big recipients During the golden age of capital flows, capital some major destinations of investment were
of capital inflows were Australia, Argentina, movements were complementary to population still European colonies and partly because in
Canada, and the United States. movements: the big recipients of capital from those days governments had a habit of sending
The large capital flows reflected differences Europe were also places to which large numbers troops and gunboats to enforce the claims of
in investment opportunities. Britain, a mature of Europeans were moving. These large -scale their investors.

Module 41 AP Review
Solutions appear at the back of the book.

Check Your Understanding
1. Which of the balance of payments accounts do the following c. A Chinese company buys a used airplane from American
events affect? Airlines and ships it to China.
a. Boeing, a U.S.-based company, sells a newly built airplane d. A Chinese investor who owns property in the United
to China. States buys a corporate jet, which he will keep in the
b. Chinese investors buy stock in Boeing from Americans. United States so he can travel around America.

Tackle the Test: Multiple-Choice Questions

1. The current account includes which of the following? 2. The balance of payments on the current account plus the
I. payments for goods and services balance of payments on the financial account is equal to
II. transfer payments a. zero.
III. factor income b. one.
a. I only c. the trade balance.
b. II only d. net capital flows.
c. III only e. the size of the trade deficit.
d. I and II only
e. I, II, and III

module 41 Capital Flows and the Balance of Payments 419