ABSTRACT
The First World War had a marked effect on the pattern and character of international lending and foreign investments. For one thing it created a whole series of new international debts in the form of reparations and Allied war loans. International lending was curtailed sharply once the post-war boom broke. The United States cut back its aid programme to Europe very abruptly, while the deterioration of the current account balance checked the outflow of private funds. The setback in overseas lending occurred at a most inopportune time for debtor countries and it was a foretaste of what was to come later in the decade. The short-term liquidity flows were in no way the initiator of the great depression. The regional convergence model may be extended to a global situation wherein capital flows from rich to poor countries and labour resources flow in the reverse direction so that factor returns are equalised under conditions of perfect factor mobility.
