This book presents an in-depth discussion of the three methods that have been used to analyze capital flows and the stock of foreign investment for Britain between 1799 and 1914. They are: the indirect method, the direct method, and the capitalization of annual income flow. Chapter 1 is devoted to a chronological review of the major research using the indirect method, which entails calculating the current account balance and inferring net capital flow as the negative of that balance. Of course, negative capital flow signifies positive investment abroad or lending. The current account is the sum of the trade balance for goods and services, net income flows, and net unilateral transfers. The last were likely small or negligible in the nineteenth century. While this approach provides a measure of the net flow of capital investment, it does not produce a measure of the stock of foreign assets owned by British residents, unless an assumption is made regarding the existing stock of such foreign investment at some point in time. With such an assumption, adding the cumulative sum of net foreign capital outflows to the assumed initial stock produces an estimate of the total stock of British-owned foreign assets at another date. If one wishes to extend the measurements backward in time, the net capital flows would be subtracted from the assumed initial stock. Two issues arise: first, one has to determine some reasonable value for the initial or benchmark stock of British-owned foreign assets; and second, one must have adequate data to calculate the current account balance. Both of these are problematic for nineteenth-century Britain. Data derived by a host of researchers are provided in this chapter, which concludes with a discussion of the work of A. H. Imlah (Economic Elements in the “Pax Britannica”: Studies in British Foreign Trade in the Nineteenth Century. Cambridge, MA: Harvard University Press, 1958, reprinted by Russell & Russell, New York, 1969). The author argues that, taking into account the slight modifications made by C. H. Feinstein, Imlah's estimates of capital flows and of the stock of British-owned foreign assets in 1913 represent the best of those that used the indirect method.

Chapter 2 is devoted to a review of results generated by the direct method and by the capitalization of income flows to measure the stock of foreign assets owned by British residents. It involves identifying the relevant assets in the foreign countries. The direct approach was most recently employed by L. E. Davis and R. A. Huttenback (Mammon and the Pursuit of Empire: The Political Economy of British Imperialism, 1860–1912. Cambridge, MA: Cambridge University Press, 1988). It suffers from obvious shortcomings related to data availability for early periods. Record keeping being what it was, there is no systematic source for data on ownership of capital and financial assets abroad. Davis and Huttenback's use of the direct method is credited with enlightening us regarding the behavior of British portfolio investment, but the present author indicates that little new information is provided regarding the stock of foreign wealth owned by British residents. Attempting to estimate the stock of British-owned foreign capital by capitalizing income flows relies on the accuracy of recorded income flows and on the assumption that income was repatriated and not reinvested in the foreign country. Although such reinvestment would likely emerge eventually as larger future income flows, estimates of the stock of British owned foreign capital would understate the actual stock. This may be one reason why most of those who employed the capitalization method provided estimates at ten-year intervals. Another major issue with this method is the choice of the rate of discount to use in capitalizing the income flows. There is little discussion of comparisons between home and foreign rates of return.

Chapter 3 is devoted to critiques of the methods used by one or more the researchers discussed in chapters 1 and 2. The reader is made aware of the weaknesses inherent in each method. Chapter 4 summarizes the various estimations in a useful table identifying the source of each. This table will be of use to anyone who wishes to employ data on British foreign investment in their research. However, users should take note of the discussions in the earlier chapters for potential pitfalls inherent in each of the data series.

At several points the author makes an issue of estimates differing by less than 100 million pounds. Given the quality of the data used to make these estimates, and the magnitude of the stock of British-owned foreign assets in 1913 or 1914, a difference of less than 100 million pounds is hardly significant. Indeed, if one calculates the standard deviation for the estimates of the stock of British-owned foreign assets in either 1913 or 1914, all the estimates reported in Table 4.1 are well within two standard deviations of the mean value. One finds that this statistical relationship is also true for the amounts of British foreign investments estimated by various authors and presented in Table 3.3. It is heartening to learn that the estimating the stock of British-owned foreign assets using such a variety of approaches yields generally consistent results. As Robert E. Gallman frequently said of his estimates of nineteenth-century United States GNP, they were to be viewed as indicators of general trends and not as data for business cycle analysis. Similarly, the limited precision of the estimates discussed in this book indicate that one can do no more than infer the general trend of British-owned foreign assets during the period 1799 to 1914.

The author has provided an excellent review of the process by which estimates of British foreign investment in the nineteenth century were generated. As such, he has provided a service to the profession.