This chapter represents an extension of the causal processes generating long swings. Since all the countries under consideration were open economies, an international perspective is essential for understanding long swings.

A major problem in much of the existing literature is a failure to distinguish between descriptive models of international capital flows and causal models. Thomas (1954) has emphasised the inversity between home and overseas investment in the British economy within a causal perspective. At the other extreme Lewis and O'Leary (1955) argue that the inversity of British home and overseas investment was a coincidence and was not observed for the other major capital exporters. The present chapter argues that an inverse pattern between home and overseas investment is observed for all the major capital exporters but the causal processes generating such a pattern are not easy to determine. By providing more evidence on the French and German cases it is possible to break away from the Anglo-American centred explanations that have been postulated so far.

Long swings in overseas investment

Major long-swing downswings in the domestic economy will generate an inverse overseas investment path as long as two conditions are satisfied:

1. (i) free international capital movement, and

2. (ii) non-synchronisation in the profitability potential of different regions of the world economy.

Both conditions were satisfied in the pre-1913 era. Similarly, a causal mechanism running from the pull of overseas profitability conditions on a fixed domestic savings ratio will also give rise to an inversity between home and overseas investment.