U.S. Today Is What It Was in 19th Century: Big Magnet for Capital
Does this observation sound familiar? "All over the world it would seem that the masses have an innate desire to gamble, which has to be satisfied in some way or another." The thought came from G.M. de Clerq in the April 1908 issue of The Ticker, a short-lived American personal finance magazine, though it rings true in light of the modern stock market.
.
Mr. de Clerq was an internationalist: "The Italians have their Lotto, the Spanish their bull or cock fights, the English their betting, while the Dutch either buy their ticket for the State lottery or they try their luck on the Stock Exchange."
.
"In the train the chief topic of conversation is the American market, not only in the first-class carriages, where old and respectable businessmen discuss with each other what chances one share has above the other, but in the second and third classes the conversation will run on the same subject.
.
"Here it is mostly city clerks or humble hard-working tradespeople, many of whom will tell you with striking correctness the latest railroad earnings, the dividend chances of the little Gulfs, Kansas City Southern, a great favorite here, or when the quarterly statement of the Steel Trust can be expected," he wrote.
.
Britain and the Netherlands provided most of the financing for the fledgling rail network. In absolute terms, most of the money and technology was British, but the Dutch were more heavily invested per capita.
.
"We wouldn't have had an Industrial Revolution, at least not at that time at that speed, if it hadn't been for the rather massive participation of foreign capital," said Edward Graham, a senior fellow at the Institute for International Economics in Washington.
.
According to Augustus Veenendaal, author of "Slow Train to Paradise: How Dutch Investment Helped Build American Railroads" and a senior research scholar at the Institute of Netherlands History at the Hague, in the early 1870s, British and Dutch investors owned 75 percent of Illinois Central Railroad Co.
.
Kansas City Southern Railroad Co., Union Pacific Railroad Co., Southern Pacific Railroad Co., Great Northern Railroad Co., and the Wabash Railroad Co. also were popular among Dutch investors looking to capture the high returns promised by American securities. Mr. Veenendaal said Illinois Central offered stock with a dividend payment of 8 percent in the late 1880s, and Great Northern introduced common shares with a 7 percent dividend in 1898.
.
"That was the carrot. Capital looks for the highest return, adjusting for risk," said Richard Sylla, professor of economics at New York University. "It is the analog in terms of capital for immigration. They came here because they thought they could have a better life, more money. So did capital."
.
In the late 1990s European capital again began to migrate to America.
.
According to the International Monetary Fund, in the first quarter of last year, foreigners owned about 35 percent of the U.S. Treasury market, nearly 20 percent of American corporate bonds, and 7 percent of the stock market.
.
This time around, the influence of that capital has probably been less decisive. While the great American rail network of the 19th century would not have been built without foreign investment, the great information network of the 20th century probably would have.
.
For one thing, said Mr. Graham, the United States imported nearly all the railroad technology from Britain, while most Internet technology was homegrown. For another, the percentage of capital that was financed abroad was much higher in the 19th century than at the close of the 20th.
.
Nonetheless, the resurgence of a thriving equity culture in Europe and the large flows of foreign capital into the United States have, say some, made the world look a lot like it did a century ago.
.
"We're recreating the world as it existed before World War I," said Mr. Sylla.
.
"In 1914, we were the world's leading debtor nation. Today, we're the leading debtor nation. The United States today is what it was in the 19th century: a great magnet for capital."
.
Britain, Germany, France, and Italy led the charge into U.S. equity markets in 1997. That year, European ownership of U.S. corporate stocks increased nearly 750 percent, according to data from Salomon Smith Barney Inc., which looked at investors from Britain, France, Germany, Italy the Netherlands and Switzerland.
.
During 1997 and 1998, investors in those countries accounted for more than 10 percent of the buying and selling activity in dollar terms on the New York Stock Exchange and Nasdaq.
.
After a lull in 1999, net European investment in U.S. stocks increased by over 50 percent last year, driven mainly by buying activity in Germany and Switzerland.
.
"Foreign investment into the United States has grown quite a bit," said Leila Heckman, head of global asset allocation at Salomon Smith Barney in New York.
.
Ms. Heckman said the recent resurgence of the equity culture in Europe has been fueled by a variety of factors, including falling interest rates, the consolidation of European markets, and the emergence of a European corporate culture. "Historically the Europeans have been very interested in fixed-income markets. It is only in the latter part of the 1990s that the equity culture, both in terms of the pension funds and the individuals has really taken off," she said.
.
Even as stock markets tumbled in 2000, Europeans kept buying U.S. securities, just as, according to The Ticker, the Dutch did through the panic of 1907. There is, perhaps, a lesson to be learned from the fate of those Hollanders.
.
According to Mr. Veenendaal, the best way to make money off the American rail network was to stick around.
.
In the early 1860s, the St. Paul Pacific Railroad Co. was founded with capital that came almost exclusively from Dutch bondholders. The bonds were cheap and risky. "St. Paul Pacific was very speculative," said Mr. Veenendaal. "Nobody knew anything in Amsterdam about Minnesota. Nobody knew where St. Paul was."
.
By 1873, the railroad's bonds were essentially worthless. The company declared bankruptcy and was sold to James Hill, a one-eyed Canadian who came to the United States in 1856. Dutch bondholders got just under $5 million, a fraction of their original investments, and a stake in Mr. Hill's Great Northern Railroad Co.
.
According to Mr. Veenendaal, Great Northern, turned out to be one of the best-run railroads in the United States and a timely payer of its interest obligations and dividends on its shares.
.
Mr. Hill tried in 1893 to merge his line with the Northern Pacific Railway Co., an idea that after several false starts came to fruition in the 1970 deal that created what is now called Burlington Northern Santa Fe Corp.
.
If any heirs to those original Dutch investors held onto their shares, they made money over the past year: Burlington Northern has returned 26 percent to investors over the past 12 months and an annual 14 percent over the past decade, not far different than that of the Nasdaq composite.
