"[A]ny further inflow of foreign funds into our markets, particularly the stock market, is undoubtedly very undesirable and any repatriation of the funds already invested should be welcome."
Within two years of its founding, the SEC realized that it would have to confront multiple international issues that went well beyond dealing with defaulted sovereign debt. Although Americans, after 1929, had little interest in purchasing foreign securities, the reverse was not true. By the mid-1930s, substantial foreign funds were flowing into the U.S. markets, due to the fear of impending war in Europe, the desire to participate in the U.S. economy, and the potentially higher yields that could be obtained from U.S. securities.(10)
The SEC viewed this influx of foreign capital as especially problematic. As it articulated, "[T]he most serious aspect of this inflow of foreign funds . . . is that it constitutes a force which under our present legislation is almost entirely free from the controls we possess with regard to domestic transactions."(11) In other words, the SEC feared that foreigners could manipulate the market and that it did not have jurisdiction to bring suit against such foreign violators of U.S. securities laws.
One SEC memorandum further explained that unregulated foreigners had an advantage over regulated domestic traders, thus creating an unfair advantage. Some at the SEC believed that foreigners purchased U.S. securities only for short-term profit and feared that at any moment they would engage in a wave of selling which could seriously disrupt U.S markets.
Others at the SEC recognized that there might be good reasons to discourage foreign investments but were also concerned with "the nationalistic and isolationist implications that it might carry."(12) Proposals by senior SEC staff included placing such a high tax on transactions by foreigners that they would cease trading on U.S. markets. The author of one such proposal wrote that such a policy would "[O]bviously reduce the freedom of international capital movement, and is not entirely in accord with the enlightened international policies of the New Deal."(13) Nonetheless, he supported such a tax, arguing that if a world war were to occur, Europeans in need of cash would liquidate their U.S. securities, causing the market to experience steep price declines. SEC staff thought up dozens of ways in which foreign investments harmed the U.S. markets. Some of these were far-fetched, but no amount of research or empirical data would convince them otherwise.
As the Roosevelt administration was becoming deeply embroiled in world affairs, some at the SEC believed that they should and even could isolate U.S. capital markets from world events. Such an attitude exhibited a certain degree of xenophobia. Commissioners and staff dreamed of erecting barriers that would keep foreign funds out of the United States, while denying that the world's capital markets were already inter-connected. This stance was increasingly at odds with President Roosevelt's growing internationalism.
(10) February 17, 1938 Memo from Paul Gourrich to SEC Chairman Douglas on material on foreign transactions in American securities (courtesy of the Library of Congress)
(11) Id.
(12) December 11, 1936 Confidential memo by Paul P. Gourrich on foreign buying (courtesy of the Library of Congress)
(13) Id.
