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International Finance by Hartley Withers

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living, that is partly because we have very considerably expanded,
during the course of the last generation or two, our notion of what we
mean by a living.

As to the sinister influence alleged to be wielded by international
finance in the councils of diplomacy, it has been shown that war on a
great scale terrifies finance and inflicts great distress on it. To
suppose, therefore, that finance is interested in the promotion of such
wars is to suppose that it is a power shortsighted to the point of
imbecility. In the case of wars which finance is believed with some
truth to have helped to instigate, we have seen that it could not have
done so if other influences had not helped it. In short, both the
occurrence of the present war, and the circumstances that led up to war
in Egypt and South Africa, have shown how little power finance wields in
the realm of foreign politics. In the City if one suggests that our
Foreign Office is swayed by financial influences one is met by
incredulous mockery, probably accompanied by assertions that the
Foreign Office is, in fact, neglectful, to a fault, of British financial
interests abroad, and that when it does, as in China, interfere with
financial matters, it is apt to tie the hands of finance, in order to
further what it believes to be the political interests of the country.
The formation of the Six Power Group in China meant that the financial
strength of England and France had to be shared, for political reasons,
with powers which had, on purely financial grounds, no claim whatever to
participate in the business of furnishing capital to China. The
introduction to the 1898 edition of "Fenn on the Funds," expresses the
view that our Government is ready to protect our traders abroad, but
only helps investors when it suits it to do so. "If," it says, "a
barbarian potentate's subjects rob a British trader we never hesitate to
insist upon the payment of liberal compensation, which we enforce if
necessary by a 'punitive expedition,' but if a civilized Government robs
a large number of British investors, the Government does not even, so
far as we know, enlist the help of its diplomatic service. Only when,
as in the case of Egypt, there are important political objects in view,
does the State protect those citizens who are creditors of foreign
nations. One or two other countries, notably Germany, set us a good
example, with the best results as far as their investors are concerned."
Germany is often thus taken as the example of the State which gives its
financiers the most efficient backing abroad; but even in Germany
finance is, like everything else, the obedient servant of the military
and political authorities. For several years before the present war, the
financiers of Berlin were forbidden to engage in moneylending operations
abroad. No doubt the Government saw that the present war was coming, and
so it preferred to keep German money at home. It is true that Germany
once shook its mailed fist with some vigour on behalf of its financial
interest when it made, with us, a demonstration against Venezuela. But
it is at least possible that it did so chiefly with a view to the
promotion of the popularity of its navy at home, and to making it easier
to get the money for its upkeep and increase from the taxpayers,
already oppressed by their military burden. In Morocco questions of
trade and finance were at the back of the quarrel, but it would not have
become acute if it had not been for the expected political consequences
that were feared from the financial penetration that was being
attempted; and as has been already pointed out, the financiers are
generally credited with having persuaded Germany to agree to a
settlement on that occasion.

In short, finance, if left to itself, is international and peace-loving.
Many financiers are at the same time ardent patriots, and see in their
efforts to enrich themselves and their own country a means for
furthering its political greatness and diplomatic prestige. Man is a
jumble of contradictory crotchets, and it would be difficult to find
anywhere a financier who lived, as they are all commonly supposed to do,
purely for the pleasure of amassing wealth. If such a being could be
discovered he would probably be a lavish subscriber to peace societies,
and would show a deep mistrust of diplomatists and politicians.


[Footnote 4: Quoted by the _Financial News_ of September 28, 1915.]



No one who writes of the evils of international finance runs any risk of
being "gravelled for lack of matter." The theme is one that has been
copiously developed, in a variety of keys by all sorts and conditions of
composers. Since Philip the Second of Spain published his views on
"financiering and unhallowed practices with bills of exchange," and
illustrated them by repudiating his debts, there has been a chorus of
opinion singing the same tune with variations, and describing the
financier as a bloodsucker who makes nothing, and consumes an inordinate
amount of the good things that are made by other people.

It has already been shown that capital, saved by thrifty folk, is
essential to industry as society is at present built and worked; and the
financiers are the people who see to the management of these savings,
their collection into the great reservoir of the money market, and their
placing at the disposal of industry. It seems, therefore, that, though
not immediately concerned with the making of anything, the financiers
actually do work which is now necessary to the making of almost
everything. Railway managers do not make anything that can be touched or
seen, but the power to move things from the place where they are grown
or made, to the place where they are eaten or otherwise consumed or
enjoyed, is so important that industry could not be carried on on its
present scale without them; and that is only another way of saying that,
if it had not been for the railway managers, a large number of us who at
present do our best to enjoy life, could never have been born.
Financiers are, if possible, even more necessary, to the present
structure of industry than railway men. If, then, there is this general
prejudice against people who turn an all important wheel in the
machinery of modern production, it must either be based on some popular
delusion, or if there is any truth behind it, it must be due to the fact
that the financiers do their work ill, or charge the community too much
for it, or both.

Before we can examine this interesting problem on its merits, we have to
get over one nasty puddle that lies at the beginning of it. Much of the
prejudice against financiers is based on, or connected with,
anti-Semitic feeling, that miserable relic of medieval barbarism. No
candid examination of the views current about finance and financiers can
shirk the fact that the common prejudice against Jews is at the back of
them; and the absurdity of this prejudice is a very fair measure of the
validity of other current notions on the subject of financiers. The Jews
are, chiefly, and in general, what they have been made by the alleged
Christianity of the so-called Christians among whom they have dwelt. An
obvious example of their treatment in the good old days, is given by
Antonio's behaviour to Shylock. Antonio, of whom another character in
the _Merchant of Venice_ says that--

"A kinder gentleman treads not the earth,"

not only makes no attempt to deny that he has spat on the wicked
Shylock, and called him cut-throat dog, but remarks that he is quite
likely to do so again. Such was the behaviour towards Jews of the
princely Venetian merchant, whom Shakespeare was portraying as a model
of all the virtues.[5] Compare also, for a more modern example, Kinglake
in a note to Chapter V of "Eothen."

"The Jews of Smyrna are poor, and having little merchandize
of their own to dispose of, they are sadly importunate in
offering their services as intermediaries; their troublesome
conduct had led to the custom of beating them in the open
streets. It is usual for Europeans to carry long sticks with
them, for the express purpose of keeping off the chosen
people. I always felt ashamed to strike the poor fellows
myself, but I confess to the amusement with which I
witnessed the observance of this custom by other people."

Originally, as we see from the Hebrew scriptures, a hardy race of
shepherds, farmers, and warriors, they were forced into the business of
finance by the canonical law which forbade Christians to lend money at
interest, and also by the persecution, robbery and risk of banishment to
which Christian prejudice made them always liable. For these reasons
they had to have their belongings in a form in which they could at any
moment be concealed from robbers, or packed up and carried off if their
owners suddenly found themselves told to quit their homes. So they were
practically compelled to traffic in coins and precious metals and
jewellery, and in many places all other trades and professions were
expressly forbidden to them. This traffic in coins and metals naturally
led to the business of moneylending and finance, and the centuries of
practice, imposed on them by Christianity, have given them a skill in
this trade, which is now the envy of Christians who have in the meantime
found out that there is nothing wicked about moneylending, when it is
honestly done. At the same time these centuries of persecution have
given the Jews other qualities which we have more reason to envy than
their skill in finance, such as their strong family affection and the
steadfastness with which they stand by one another in all countries of
the world. The fact of their being scattered over the face of the earth
has given them added strength since finance became international. The
great Jew houses have relations and connections in every business
centre, and so their power has been welded, by centuries of racial
prejudice, into a weapon the strength of which it is easy for popular
imagination to exaggerate. Christendom forced the money power into the
hands of this persecuted race, and now feels sorry when it sees that in
an ordered and civilized society, in which it is no longer possible to
roast an awkward creditor alive, money power is a formidable force. That
a large part of this power is in the hands of a family party, scattered
over all lands in which finance is possible, is another reason why, as I
have already shown, international finance works for peace. The fact of
the existence of the present war, however, shows that the limits of its
power are soon reached, at times when the nations believe that their
honour and safety can only be assured by bloodshed.

A large part of the popular prejudice against financiers may thus be
ascribed to anti-Semitic feeling. We are still like the sailor who was
found beating a Jew as a protest against the Crucifixion, and, when
told that it had happened nearly two thousand years ago, said that he
had only heard of it that morning.

But, when we have purged our minds of this stupid prejudice, we are
still faced by the fact that international finance is often an unclean
business, bad both for the borrower and for the lender and profitable
only to a horde of parasites in the borrowing country, and to those who
handle the loan in the lending country, and get subscriptions to it from
investors who are subsequently sorry that they put their eggs into a
basket with no bottom to it. Under ideal conditions our money is lent by
us, through a first-rate and honourable finance house, to a country
which makes honest use of it in developing its resources and increasing
its power to make and grow things. The loan is taken out from England in
the shape of goods and services required for the equipment of a young
country, and the interest comes in every year in the shape of food and
raw material that feeds us and helps our industry. Such, it may be
asserted with confidence, is the usual course of events, and must have
been so, or England could not have been so greatly enriched by her
moneylending operations abroad, and the productive power of the world
could not have grown as it has, under the top-dressing that our finance
and trade have given it. But though it is thus clear enough that the
business must have been on the whole honestly and soundly worked, there
have been some ugly stains on its past, and its recent history has not
been quite free from unsavoury features.

In 1875 public opinion was so deeply stirred by the manner in which
English investors and borrowing states had suffered from the system by
which the business of international finance was handled, that a Select
Committee of the House of Commons was "appointed to inquire into the
circumstances attending the making of contracts for Loans with certain
Foreign States and also the causes which have led to the non-payment of
the principal moneys and interest due in respect of such loans." Its
report is a very interesting document, well worth the attention of those
interested in the vagaries of human folly. It will astound the reader
by reason of the wickedness of the waste of good capital involved, and
at the same time it is a very pleasant proof of the progress that has
been made in finance during the last half century. It is almost
incredible that such things should have happened so lately. It is quite
impossible that they could happen now.

In 1867 the Republic of Honduras had been for forty years in default on
its portion, amounting to L27,200, of a loan issued in London in 1825,
for the Federal States of Central America. Nevertheless it contracted
with Messrs. B---- and G---- for a loan of L1,000,000 to be issued in
Paris and London. The loan was to be secured on a railway, to be built,
or begun, out of its proceeds, and by a first mortgage on all the
domains and forests of the State. The Government undertook to pay
L140,000 annually for fifteen years, to meet interest on and redemption
of the loan. As it had been forty years in default on a loan which only
involved a charge of L1632, it is hard to imagine how the State could
have entered into such a liability, or how any issuing house could have
had the temerity to put it before the public.

The public was the only party to the proceedings which showed any sense.
Don C---- G----, representative of the Honduras Government in London,
relates in the record of these events that he put before the Committee,
that "the First Honduras Loan in spite of all the advantages which it
offered to subscribers" [issue price, 80, interest 10 per cent., sinking
fund of 3 per cent, which would redeem the whole loan at par within 17
years] "and the high respectability of the house which managed the
operation, was received by the public with perfect indifference, with
profound contempt; and according to the deficient and vague information
which reached the Legation, there were hardly any other subscriptions
than one of about L10,000 made by the firm of B----itself," Don G----,
however, seems to have slightly exaggerated the wisdom of the public; in
any case the Committee found that by June 30, 1868, by some means
L48,000 of the loan was held by the public, and L952,000 was in
possession of the representatives of the Honduras Government. On that
day a Mr. L---- undertook to take over the Government's holding at L68
12s. per bond, and pay current interest. A market was made, brokers were
prevailed on to interest their friends in the security, and in two
years' time the bonds were disposed of. The quotation was skilfully kept
above the issue price and in November, 1868, it reached 94.

The story of this loan is complicated by the fact that half of it was at
the time alleged to have been placed in Paris, but it appears, as far as
one can disentangle fact from the twisted skein of the report, that the
Paris placing must have resulted much as did the first effort made in
London, and that practically the whole of the bonds there issued came
back into the hands of the representatives of Honduras.

At the end of the proceedings the whole amount of the loan seemed to
have been disposed of in London, L631,000 having been sold to Mr. L----
and passed on by him by the means described above, L200,000 having been
issued to railway contractors, L10,800 having been "drawn before issue
and cancelled," while L49,500 was "issued in exchange for scrip," and
L108,500 was taken on account of commission and expenses.

The actual cash received on account of this loan appears, though the
Committee's figures are difficult to follow, to have come to just over
half a million. Out of the half million L16,850 went in cash commission,
and L106,000 in interest and sinking fund, leaving about L380,000 for
the railway contractors and the Government. On this loan the Committee
observes that the commission paid, of L108,500 bonds, and L16,850 in
cash was "greatly in excess of what is usually charged by contractors
for loans."

So far it was only a case of a thoroughly speculative transaction
carried through by means of the usual accompaniments. A defaulting State
believed to be possessed of great potential wealth, thought, or was
induced to think, that by building a railway it could tap that wealth.
The whole thing was a pure possibility. If the loan had been
successfully placed at the issue price it would have sufficed to build
the first section (fifty-three miles) of railway, and to leave something
over for work in the mahogany forests. It is barely possible that in
time the railway might have enabled the Government to produce enough
stuff out of its forests to meet the charges of the loan. But the
possibility was so remote that the terms offered had to be so liberal
that they frightened the public, which happened to be in a sensible
mood, until it was induced to buy by the creation of a market on the
Stock Exchange; the employment of intermediaries on disastrous terms,
and finally default, as soon as the loan charge could no longer be paid
out of the proceeds of the loan, completed the tale.

In May, 1869, the Minister for Honduras in Paris, M. H----, "took steps"
to issue a loan for 62,250,060 francs, or L2,490,000. Out of it a small
sum (about L62,000) was paid to the railway contractors in London, but
little of it seems to have been genuinely placed, since, when the
Franco-German war broke out in July, 1870, M. H---- sent 2,500,000
francs in cash (L100,000), and 39,000,000 francs in bonds, to Messrs.
B---- and G---- in London. Messrs. B---- and others made an agreement
with Mr. C. L----, presumably the gentleman who had taken over and
dealt with the unplaced balance of the First London Loan. By its terms
the net price to be paid by him for each 300 francs (L12) bond issued
originally at 225 francs (L9), was 124 francs (not quite L5). He
succeeded in selling bonds enough to realize L408,460, and he, together
with Messrs. B---- and G----, received L51,852 in commission for so

In the spring of 1870, the Honduras Government, still hankering after
its railway and the wealth that it was to open up, determined to try
again with another loan. Something had to be done to encourage investors
to take it. A few days before the prospectus appeared a statement was
published in a London newspaper to the effect that two ships had arrived
in the West India Docks from Truxillo (Honduras) with cargoes of
mahogany and fustic consigned to Messrs. B---- and G----on account of
the Honduras Railway Loan, and that two others were loading at Truxillo
with similar cargoes on the same account. These cargoes had not been cut
by the Honduras Government. It had bought them from timber merchants,
and they were found to be of most inferior quality. In the opinion of
the Committee "the purchase of these cargoes and the announcement of
their arrival in the form above referred to, were intended to induce,
and did induce, the public to believe that the hypothecated forests were
providing means for paying the interest upon the loan."

With the help of this fraud, and with a free and extensive market made
on the Stock Exchange, the 1870 Honduras 10 per cent. loan for
L2,500,000 nominal was successfully issued at 80. It also had a sinking
fund of 3 per cent., which was to pay it off in fifteen years. Mr. L----
again handled the operation, having taken over the contract from Messrs.
B---- and G----. But the success of the issue was more than hollow. It
was empty. For Mr. L----, in the process of making the market to promote
it, had bought nearly the whole loan. Applicants had evidently sold
nearly as fast as they applied; for on the 15th December, when the last
instalment was to be paid, less than L200,000 bonds remained in the
hands of the public. Nevertheless by October, 1872, nearly the whole of
the loan had been somehow disposed of to investors or speculators. One
of the means taken to stimulate the demand for them was the announcement
of extra drawings of bonds at par, over and above the operation of the 3
per cent, sinking fund, provided by the prospectus.

There is no need to linger over the complicated details of this sordid
story. The Committee's report sums up, as follows, the net results of
the 1869 and 1870 loans of Honduras:--

"In tracing the disposal of the proceeds of the 1869 and 1870 loans, it
must be remembered that your Committee had no evidence before them
relating to the funds resulting from three-fifths of the loan of 1869;
only two-fifths of the loan was realized in this country, the remainder
was disposed of in Paris before August, 1870, and no account of the
application of the funds resulting from such portion of the loan could
be obtained.

"The two-fifths of the 1869 loan, and the whole of the loan of 1870,
produced net L2,051,511; out of this sum only L145,254 has been paid to
the railway contractors; a sum of L923,184 would have been sufficient to
discharge the interest and sinking fund in respect of the issued bonds
of the three loans, yet the trustees ... paid to Mr. L----L1,339,752 or
L416,568 beyond the sum so required to be paid upon the issued bonds of
the loans.

"There was paid to him for commissions (apart from expenses) on the
three loans, out of the above proceeds, the sum of L216,852. He also
received out of the same proceeds L41,090, being the difference between
L370,000 cash paid to him by the trustees and L328,910 scrip returned by
him to them. This L41,090 probably represents the premiums paid on the
purchase of the scrip before or immediately after the allotment of the
loan, and was certainly a misapplication of the proceeds of the loan.

"Mr. L---- was also paid, out of these proceeds, a further sum of
L57,318, nearly the whole of which seems to be a payment in discharge of
an allowance of L8 per bond in respect of the dealings in the 1867
loan.... In addition ... it will be remembered that Mr. L---- received
L50,000 'to maintain the credit of Honduras.'

"He also on the 18th of June, 1872, obtained L173,570 by delivering to
the trustees ... 5042 bonds of the 1870 loan, at L75 Per bond and 33,000
bonds of the 1869 loan at 104 francs per bond, and retaking them at the
same time from the trustees at L50 and 104 francs per bond respectively.
Mr. L---- had contracted to pay for these bonds and they had been issued
to him at the prices of L75 and 104 francs respectively, and the
remission in the price therefore amounted to a gift to him of L173,570
... out of this portion of the loan of 1869, and the loan of 1870, Mr.
L----has received in cash, or by the remission of his contracts,

It is little wonder that Honduras has been in default on these loans
ever since. In its Report the Committee commented severely on the action
of Don C---- G----, the London representative of the Republic. "He
sanctioned," it says, "Stock Exchange dealings and speculations in the
loans which no Minister should have sanctioned. He was a party to the
purchase of the mahogany cargoes, and permitted the public to be misled
by the announcements in relation to them. By express contract he
authorized the 'additional drawings.' He assisted Mr. L---- to
appropriate to himself large sums out of the proceeds of the loans to
which he was not entitled." Very likely he had not a notion as to what
the whole thing meant, and only thought that he was doing his best to
finance his country along the road to wealth. But the fact remains that
by these actions he made his Government a party to the proceedings that
were so unfortunate for it and so ruinous to the holders of its bonds.

After its examination of these and other less sensational but equally
disastrous issues the Committee made various recommendations, chiefly in
the direction of greater publicity in prospectuses, and ended by
expressing their conviction that "the best security against the
recurrence of such evils as they have above described will be found,
not so much in legislative enactments, as in the enlightenment of the
public as to their real nature and origin."

If the scandals and losses involved by loan issues were always on this
Gargantuan scale, there would be little difficulty about disposing of
them, both on economic and moral grounds, and showing that there is, and
can be, only one side to the problem. But when it is only a question,
not of fraud on a great scale but of a certain amount of underhand
business, such as is quite usual in some latitudes, and a certain amount
of doubt as to the use that is likely to be made by the borrower of the
money placed at its disposal, it is not so easy to feel sure about the
duty of an issuing house in handling foreign loans. At a point, in fact,
the question becomes full of subtleties and casuistical difficulties.

For instance, let us suppose that an emissary of the Republic of
Barataria approaches a London issuing house and intimates that it wants
a loan for 3 millions sterling, to be spent half in increasing the
Republic's navy, and half in covering a deficit in its Budget, and that
he, the said emissary, has full power to treat for the loan, and that a
commission of 2 per cent. is to be paid to him by the issuing house,
which can have the loan at a price that will easily enable it to pay
this commission. That is to say, we will suppose that the Republic will
take 85 for the price of its bonds, which are to carry 5 per cent.
interest, to be secured by a lien on the customs receipts, and to be
redeemed in thirty years' time by a cumulative Sinking Fund working by
annual drawings at par, or by purchase in the market if the bonds can be
bought below par. If the Republic's existing 5 per cent. bonds stand,
let us say, at 98 in the market, this gives the issuing house a good
prospect of being able to sell the new ones easily at 95, and so it has
a 10 per cent. margin out of which to pay stamps, underwriting and other
expenses, and commission to the intermediary who brought the proposal,
and to keep a big profit to themselves. From the point of view of their
own immediate interest there is every reason why they should close with
the bargain, especially if we assume that the Republic is fairly rich
and prosperous, and that there is little fear that its creditors will
be left in the lurch by default.

From the point of view of national interest there is also much to be
said for concluding the transaction. We may, with very good ground,
assume that it would also be intimated to the issuing house that a group
of Continental financiers was very willing to take the business up, that
it had only been offered to it owing to old standing relations between
it and the Republic, and that, if it did not wish to do the business,
the loan would readily be raised in Paris or Berlin. By refusing, the
London firm would thus prevent all the profit made by the operation from
coming to England instead of to a foreign centre. But there is much more
behind. For we have seen that finance and trade go hand-in-hand, and
that when loan-houses in the City make advances to foreign countries,
the hives of industry in the North are likely to be busy. It has not
been usual here to make any express stipulation to the effect that the
money, or part of it, raised by a loan is to be spent in England, but it
is clear that when a nation borrows in England it is thereby
predisposed to giving orders to English industry for goods that it
proposes to buy. And even if it does not do so, the mere fact that
England promises, by making the loan, to hand over so much money, in
effect obliges her to sell goods or services valued at that amount as
was shown on an earlier page.[6] On the Continent, this stipulation is
usual. So that the issuing house would know that, if they make the loan,
it is likely that English shipbuilders will get the orders on which part
of it is to be spent, and that in any case English industry in one form
or another will be drawn on to supply goods or services to somebody;
whereas if they refuse the business it is certain that the industrial
work involved will be lost to England.

On the other side of the account there are plenty of good reasons
against the business. In the first place the terms offered are so
onerous to the borrower that it may safely be said that no respectable
issuing house in London would look at them. In effect the Republic
would be paying nearly 6 per cent, on the money, if it sold its 5 per
cent. bonds at 85, and the state of its credit, as expressed by the
price of its bonds in the market, would not justify such a rate. The
profit offered to the issuing house is too big, and the commission
demanded by the intermediary is so large that it plainly points to evil
practices in Barataria. It means that interested parties have made
underhand arrangements with the Finance Minister, and that the Republic
is going to be plundered, not in the fine full-flavoured style that
ruled in earlier generations, but to an extent that makes the business
too disreputable to handle. Any honourable English house would consider
that the terms offered to itself and the conditions proposed by the
emissary were such that the operation was suspicious, and that being
mixed up with suspicious business was a luxury that it preferred to
leave alone.

On other grounds the loan, well secured as it seems to be, is not of a
kind to be encouraged. We have supposed its purpose to be, firstly, to
meet a deficit in a Budget, and secondly, to pay for naval expansion.
Neither of these objects is going to improve the financial position of
the Republic. Covering a deficit by loan is bad finance in any case, but
especially so when the loan is raised abroad. In the latter case it is
most likely that the borrowing State is outrunning the constable, by
importing more goods than it can pay for out of current production.

If it imports for the purpose of increasing its productive power by
buying such things as railway material, then it is making a perfectly
legitimate use of its credit, as long as the money is well spent, and
the railways are honestly built, with a prospect of opening up good
country, and are not put into the wrong place for political or other
reasons. But if this were so, the money would not be wanted to balance a
Budget, but on railway capital account. When a balance has to be filled
by borrowing it can only mean that the State has spent more than its
revenue from taxes permits, and that it is afraid to cut down its
expenses by retrenchment or to increase its revenue by taxing more
highly. And so it chooses the primrose path of dalliance with a

As to naval expenditure, here again we have bad finance writ large over
the proposal. It is not good business for countries to borrow in order
to increase their armies and navies in time of peace, and the practice
is especially objectionable when the loan is raised abroad. In time of
war, when expenditure has to be so great and so rapid, that the
taxpayers could not be expected to have it all taken out of their
pockets by the tax-gatherer, there is some excuse for borrowing for
naval and military needs; though even in time of war, if we could
imagine an ideal State, with every citizen truly patriotic, and properly
educated in economics and finance, and with wealth so fairly distributed
and taxation so fairly imposed that there would be no possibility of any
feeling of grievance and irritation among any class of taxpayers, it
would probably decide that the simplest and most honest way of financing
war is to do so wholly out of taxation. In time of peace, borrowing for
expenditure on defence simply means that the cost of a need of to-day is
met by someone who is hired to meet it, by a promise of interest and
repayment, the provision of which is passed on to the citizens of
to-morrow. It is always urged, of course, that the citizens of to-morrow
are as deeply interested in the defence of the realm that they are to
inherit as those of to-day, but that argument ignores the obvious fact
that to-morrow will bring its own problems of defence with it, which
seem likely to be at least as costly as those of the present day.
Another objection to lending economically backward countries money to be
invested in ships, is that we thereby encourage them to engage in
shipbuilding rivalry, and to join in that race for aggressive power
which has laid so sore a burden on the older peoples. The business is
also complicated by the unpleasant activities of the armament firms of
all countries, which are said to expend much ingenuity in inducing the
Governments of the backward peoples to indulge in the luxury of
battleships. Here, again, there is no need to paint too lurid a picture.
The armament firms are manufacturers with an article to sell, which is
important to the existence of any nation with a seaboard; and they are
entirely justified in legitimate endeavours to push their wares. The
fact that the armament firms of England, Germany, and France had certain
interests in common, is often used as a text for sermons on the subject
of the unpatriotic cynicism of international finance. It is easy to
paint them as a ring of cold-blooded devils trying to stimulate
bloodthirsty feeling between the nations so that there may be a good
market for weapons of destruction. From their point of view, they are
providers of engines of defence which they make, in the first place, for
the use of their own country, and are ready to supply also, in time of
peace, to other nations in order that their plant may be kept running,
and the cost of production may be kept low. This is one of the matters
on which public opinion may have something to say when the war is over.
In the meantime it may be noted that unsavoury scandals have
occasionally arisen in connection with the placing of battleship orders,
and that this is another reason why a loan to finance them is likely to
have an unpleasant flavour in the nostrils of the fastidious.

But if we admit the very worst that the most searching critic of
international finance can allege against the proposal that we imagine to
be put forward by the Republic of Barataria--if we admit that a loan to
balance a deficit and pay for ships probably implies wastefulness,
corruption, political rottenness, impecunious Chauvinism and all the
rest of it, the question still arises whether it is the business of an
issuing house to refuse the chance of doing good business for itself and
for the London money-market, because it has reason to believe that the
money lent will not be well spent. In the case supposed, we have seen
that the terms offered and the commission to be made by the intermediary
were such that the latter would have been shown the door. But if these
matters had been satisfactory, ought the proposal to have been rejected
because the loan was to be raised for unproductive purposes?

In other words, is it the business of an issuing house to take care of
the economic morals of its clients, or is it merely concerned to see
that the securities which it offers to the public are well secured? In
ordinary life, and in the relations between moneylender and borrower at
home, no such question could be asked. If I went to my banker and asked
for a loan and gave him security that he thought good enough, it would
not occur to him to ask what I was going to do with the money--whether I
was going to use it in a way that would increase my earning capacity, or
on building myself a billiard room and a conservatory, or on a visit to
Monte Carlo. He would only be concerned with making sure that any of his
depositors' money that he lent to me would be repaid in due course, and
the manner in which I used or abused the funds lent to me would be a
question in which I only was concerned. If it is the business of an
international finance house to be more careful about the use to which
money that it lends on behalf of clients is put, why should this be so?

There are several reasons. First, because if the borrower does not see
fit to pay interest on the loan or repay it when it falls due, there is
no process of law by which the lender can recover. If I borrow from my
banker and then default on my debt, he can put me in the bankruptcy
court, and sell me up. Probably he will have protected himself by
making me pledge securities that he can seize if I do not pay, a
safeguard which cannot be had in the case of international borrowing;
but if these securities are found to be of too little value to make the
debt good, everything else that I own can be attached by him. The
international moneylender, on the other hand, if his debtor defaults
may, if he is lucky, induce his Government to bring diplomatic pressure
to bear, for whatever that may be worth. If there is a political purpose
to be served, as in Egypt, he may even find himself used as an excuse
for armed intervention, in the course of which his claims will be
supported, and made good. In many cases, however, he and the bondholders
who subscribed to his issue simply have to say goodbye to their money,
with the best grace that they can muster, in the absence of any law by
which a lender can recover moneys advanced to a sovereign State. With
this essential difference in the conditions under which a banker lends
his depositors' money to a local customer, and those under which an
international house lends its clients' money to a borrowing country, it
follows that the responsible party in the latter case ought to exercise
very much more care to see that the money is well spent.

In the second place, the customers to whom bankers, in economically
civilized lands, lend the money entrusted to them, may fairly be
presumed to know something about the use and abuse of money and to be
able to take care of themselves. If they borrow money, and then waste it
or spend it in riotous living, they know that they will presently
impoverish themselves, and that they will be the sufferers. But in the
case of a young country, with all its financial experience yet unbought,
there is little or no reason for supposing that its rulers are aware
that they cannot eat their cake and have it. They probably think that by
borrowing to meet a deficit or to build a Dreadnought they are doing
something quite clever, dipping their hands into a horn of plenty that a
kindly Providence has designed for their behoof, and that the loan will
somehow, some day, get itself paid without any trouble to anybody.
Moreover, if they are troubled with any forebodings, the voice of common
sense is likely to be hushed by the reflection that they personally
will not be the sufferers, but the great body of taxpayers, or in the
case of actual default, the deluded bondholders; and that in any case,
the trouble caused by over-borrowing and bad spending is not likely to
come to a head for some years. Its first effect is a flush of fictitious
prosperity which makes everybody happy and enhances the reputation of
the ministers who have arranged it. When, years after, the evil seed
sown has brought to light its crops of tares, it is very unlikely that
the chain of cause and effect will be recognized by its victims, who are
much more likely to lay the bad harvest to the door not of the bad
financier who sowed it, but of some innocent and perhaps wholly virtuous
successor, merely because it was during his term of office that the crop
was garnered. So many are the inducements offered to young States, with
ignorant or evil (or both) rulers at their head, to abuse the facilities
given them by international finance, that there is all the more reason
why those who hold the strings of its purse should exercise very great
caution in allowing them to dip into it.

There is yet another reason why the attitude of an issuing house, to a
borrowing State, should be paternal or even grand-motherly, as compared
with the purely business-like attitude of a banker to a local borrower.
If the bank makes a bad debt, it has to make it good to its depositors
at the expense of its shareholders. It diminishes the amount that can be
paid in dividends and so the bank is actually out of pocket. The
international financier is in quite a different position. If he arranges
a loan for Barataria, he takes his profit on the transaction, sells the
bonds to investors, or to the underwriters if investors do not apply,
and is, from the purely business point of view, quit of the whole
operation. He still remains responsible for receiving from the State,
and paying to the bondholders, the sum due each half year in interest,
and for seeing to the redemption of the bonds by the operation of the
Sinking Fund, if any. But if anything goes wrong with the interest or
Sinking Fund he is not liable to the bondholders, as the bank is liable
to its depositors. They have got their bonds, and if the bonds are in
default they have made a bad debt and not the issuing house, unless, as
is unlikely, it has kept any of them in its own hands.

But this absence of any legal liability on the part of the issuing house
imposes on it a very strong moral obligation, which is fully recognized
by the best of them. Just because the bondholders have no right of
action against it, unless it can be shown that it issued a prospectus
containing incorrect statements, it is all the more bound to see that
their money shall not be imperilled by any action of its own. It knows
that a firm with a good reputation as an international finance house has
only to put its name to an issue, and a large number of investors, who
have neither the education nor the knowledge required to form a judgment
on its merits, will send in subscriptions for the bonds on the strength
of the name of the issuing house. This fact makes it an obvious duty on
the part of the latter to see that this trust is deserved. Moreover, it
would obviously be bad business on their part to neglect this duty. For
a good reputation as an issuing house takes years to build up, and is
very easily shaken by any mistake, or even by any accident, which could
not have been foreseen but yet brings a loan that it has handled into
the list of doubtful payers. Mr. Brailsford, indeed, asserts that it may
be to the advantage of bondholders to be faced by default on the part of
their debtors. It may be so in those rare cases in which they can get
reparation and increased security, as in the case of our seizure of
Egypt. But in nine cases out of ten, as is shown by the plaintive story
told by the yearly reports of the Council of Foreign Bondholders,
default means loss and a shock to confidence, even if only temporary,
and is generally followed by a composition involving a permanent
reduction in debt and interest. Investors who have suffered these
unpleasantnesses are likely to remember them for many a long year, and
to remember also the name of the issuing house which fathered the loan
that was the cause of the trouble.

There are thus many good reasons why it is the business of a careful
issuing firm to see not only that any loan that it offers is well
secured, but also that it is to be spent on objects that will not
impair the productive capacity of the borrowing country by leading it
down the path of extravagance, but will improve it by developing its
resources or increasing its power to move its products. On the other
hand, the temptation to undertake bad business on behalf of an
importunate borrower is great. The profits are considerable for the
issuing house and for all their followers in the City. The indirect
advantages, in the way of trade orders, conferred on the lending
country, are also profitable, and there is always the fear that if
London firms take too austere a view of what is good business for them
and the borrowing countries, the more accommodating loan-mongers of
foreign centres may reap the benefit, and leave them with empty pockets
and the somewhat chilly comfort conferred by the consciousness of a high
ideal in finance.

One of the most unsatisfactory features about the monetary arrangements
of society, as at present constituted, is the fact that the reward of
effort is so often greater with every degree of evil involved by the
effort. And to some extent this is true in finance. Just as big
fortunes are made by the cheap-jacks who stuff the stomachs of an
ignorant public with patent medicines, while doctors slave patiently for
a pittance on the unsavoury task of keeping overfed people in health;
just as Milton got L5 for "Paradise Lost," while certain modern
novelists are rewarded with thousands of pounds for writing romances
which would never be printed in a really educated community; so in
finance the more questionable--up to a certain point--be the security to
be handled, the greater are the profits of the issuing house, the larger
the commissions of the underwriters and brokers, and the larger are the
amounts paid to the newspapers for advertising. As has already been
observed, that part of the City that lives on handling new issues has
been half starved since the war began, because its activities have been
practically confined to loans issued by the British Government. These
loans have been huge in amount but there has been no underwriting, and
brokerages are cut to the bone. Advertising for the second War Loan was
on a great scale, but in proportion to the amount subscribed the cost
of it was probably small, according to the ideals that ruled before the
war. A Colonial loan, or a first-class American railroad bond, almost
places itself, and the profits on the issue to all who handle it are
proportionately low. The more questionable the security, the more it has
to pay for its footing, and the higher are the profits of those who
father it and assist the process of delivery, as long, that is, as the
birth is successfully accomplished.

If there is failure, partial or complete, then the task of holding the
baby is longer and more uncomfortable, the more puny and unattractive it
is. If, owing to some accident in the monetary atmosphere, a Colonial
loan does not go off well, the underwriters who find themselves saddled
with it, can easily borrow on it, in normal times, and know that sooner
or later trustees and other real investors will take it off their hands.
But if it is an issue of some minor European power, or of some not too
opulent South American State, that is coldly received by the investing
public, bankers will want a big margin before they accept it as
security for an advance, and it may take years to find a home for it in
the strong boxes of real investors, and then perhaps only at a price
that will leave the underwriters, like Sir Andrew Aguecheek, "a foul way
out." There is thus a logical reason for the higher profits attached to
the more questionable issues, and this reason is found in the greater
risk attached, if failure should ensue.

Thus we arrive at the reply to those who criticize International Finance
on the ground that it puts too big profits into the pockets of those who
handle it. If the profits are big, it is only in the case of loan issues
which carry with them a considerable risk to the reputation of the
fathering firm, and to the pockets of the underwriters, and involve a
responsibility, and in the case of default, an amount of wholly unpaid
work and anxiety for which the big profits made on the opening
proceedings do not nearly compensate. As in the case of the big gains
made by patent pill merchants, and bad novelists, it is the public,
which is so fond of grumbling because other people make fortunes out of
it, that is really responsible for their doing so, by reason of its own
greed and stupidity. Because it will not take the trouble to find out
how to spend or invest its money, it asks those who are clever enough to
batten on its foibles, to sell it bad stuff and bad securities, and then
feels hurt because it has a pain in its inside, or a worthless bond at
its banker's, while the producers thereof are founding county families.
If the public would learn the A B C of investment, and also learn that
there is an essential difference between investment and speculation,
that they will not blend easily but are likely to spoil one another if
one tries to mix them, then the whole business of loan issuing and
company promotion would be on a sounder basis, with less risk to those
who handle it, and less temptation to them to try for big profits out of
bad ventures. But as long as

"the fool multitude that choose by show"

give more attention to the size of an advertisement than to the merits
of the security that it offers, the profits of those who cater for its
weaknesses will wax fat.

When all has been said that can be urged against the record of
international finance, the fact remains that from the purely material
point of view it has done a great work in increasing the wealth of
mankind. It is true that capital has often been wasted by being lent to
corrupt or improvident borrowers for purposes which were either
objectionable in themselves, or which ought to have been financed, if at
all, out of current revenue. It is true, also, that crimes have been
committed, as in the case of the Putumayo horrors, when the money of
English shareholders has been invested in the exploitation of helpless
natives, accompanied by circumstances of atrocious barbarity.
Nevertheless if we compare the record of finance with that of religion
or international politics, it stands out as by far the cleanest of the
influences that have worked upon the mutual relations of the various
groups of mankind. International Finance makes a series of bargains
between one nation and another, for the mutual benefit of each,
complicated by occasional blunders, some robbery, and, in exceptional
cases, horrible brutality. Religion has stained history with the most
ruthless massacres, and the most unspeakable ingenuity in torture, all
devised for the glory of God, and the furtherance of what its devotees
believed to be His word. International politics have plunged mankind
into a series of bloody and destructive wars, culminating in the present
cataclysm. Finance can only prosper through production; its efforts are
inevitably failures, if they do not tend to the growing and making of
things, or the production of services, that are wanted. Destruction,
reduced to a fine art and embellished by the nicest ingenuities of the
most carefully applied science, is the weapon of international politics.

_Note_.--The names of the actors in the Honduras drama were
printed in blank because it seemed unfair to do otherwise,
in revising fifty years' old scandals, as an example of what
International Finance can do at its worst.


[Footnote 5: _Merchant of Venice_, I, 3.]

[Footnote 6: Pages 75, 76. (NOTE: See Chapter IV, "In the beginnings of international trade...")]



So far we have considered the working of International Finance chiefly
from the point of view of its effects upon the prosperity and comfort of
mankind as a whole and on this country, as the greatest trader, carrier,
and financier of the world. We have seen that the benefit that it works
is wrought chiefly through specialization, that is, through the
production of the good things of the earth in the lands best fitted, by
climate or otherwise, to grow and make them. By lending money to other
lands, and the goods and service that they have bought with it, we have
helped them to produce things for us to consume, or to work up into
other things for our consumption or that of other peoples. Thereby we
have enriched ourselves and the rest of mankind. But the question still
arises whether this process is one that should be left altogether
unchecked, or whether it involves evils which go far to modify its
benefits. In other words is it a good thing for us, socially and
politically, to enrich ourselves beyond a certain point by a process
which involves our dependence on other countries for food and raw

Analogy between a State and a man is often useful, if not pushed too
far. The original man in a primitive state is always assumed to have
been bound to find or make everything that he wanted by his own
exertions. He was hut builder, hunter, cultivator, bow-maker,
arrow-maker, trapper, fisherman, boat-builder, leather-dresser, tailor,
fighter--a wonderfully versatile and self-sufficient person. As the
process grew up of specialization, and the exchange of goods and
services, all the things that were needed by man were made much better
and more cheaply, but this was only brought about at the expense of each
man's versatility. Nowadays we can all of us do something very much
better than the primitive savage, but we cannot do everything nearly as
well. We have become little insignificant wheels in a mighty great
machine that feeds us and clothes us and provides us with comforts and
luxuries of which he could never have dreamt. He was the whole of his
machine, and was thereby a far more completely developed man. The modern
millionaire, in spite of his enormous indirect power over the forces of
nature, is a puny and ineffective being by the side of his savage
ancestor, in the matter of power to take care of himself with his own
hands and feet and eyes, and with weapons made by his own ingenuity and
cunning. Moreover, though in the case of the millionaire and of all the
comparatively well-to-do classes we can point to great intellectual and
artistic advantages, and many pleasant amenities of life now enjoyed by
them, thanks to the process of specialization, these advantages can only
be enjoyed to the full by comparatively few. To the majority
specialization has brought a life of mechanical and monotonous toil,
with little or none of the pride in a job well done, such as was enjoyed
by the savage when he had made his bow or caught his fish; those who
work all day on some minute process necessary, among many others, to
the turning out of a pin, can never feel the full joy of achievement
such as is gained by a man who has made the whole of anything. Pins are
made much faster, but some of the men who make them remain machines, and
never become men at all in the real sense of the word. And when at the
same time the circumstances of their lives, apart from their work, are
all that they should not be--bad food, bad clothes, bad education, bad
houses, foul atmosphere and dingy and sordid surroundings, it is very
obvious that to a large part of working mankind, the benefits of the
much vaunted division of labour have been accompanied by very serious
drawbacks. The best that can be said is that if it had not been for the
division of labour a large number of them could never have come into
existence at all; and the question remains whether any sort of existence
is better than none.

In the case of a nation the process of specialization has not, for
obvious reasons, gone nearly so far. Every country does a certain amount
of farming and of seafaring (if it has a seaboard), and of
manufacturing. But the tendency has been towards increasing
specialization, and the last results of specialization, if carried to
its logical end, are not nice to forecast. "It is not pleasant," wrote a
distinguished statistician, "to contemplate England as one vast factory,
an enlarged Manchester, manufacturing in semi-darkness, continual uproar
and at an intense pressure for the rest of the world. Nor would the
continent of America, divided into square, numbered fields, and
cultivated from a central station by electricity, be an ennobling

It need not be said that the horrible consequences of specialization
depicted by Dr. Bowley need not necessarily have happened, even if its
effects has been given free play. But the interesting point about his
picture, at the present moment, is the fact that it was drawn from the
purely economic and social point of view. He questioned whether it was
really to the advantage of a nation, regarding only its own comfort and
well-being, to allow specialization to go beyond a certain point. It
had already arrived at a point at which land was going out of
cultivation in England, and was being more and more regarded as a park,
pleasure ground and sporting place for people who made, or whose
forbears had made, fortunes out of commerce and finance, and less and
less as a means for supplying food for our workers, and raw material for
our industries. The country workers were going to the new countries that
our capital was opening up, or into the towns to learn industrial
crafts, or taking services as gamekeepers, grooms or chauffeurs, with
the well-to-do classes who earned their profits from industry or
business. Even before the war there was a growing scarcity of labour to
grow, and harvest, even the lessened volume of our agricultural output.
Dr. Bowley's picture was far from being realized and even if the process
of specialization had gone on, it may be hoped that we should have had
sense enough to avoid the blackest of its horrors.

Then came the war, which went far to undermine the great underlying
assumption on which the free interchange of capital among nations and
the consequent specialization that proceeded from it, was taken to be a
safe and sound policy. This assumption was in effect, that the world was
civilized to a point at which there was no need to fear that its whole
economic arrangements would be upset by war. We now know that the world
was not civilized to this point, and is a very long way from being so,
that the ultimate appeal is still to "arms and the man," and that we
have still to be careful to see that our trade and industry are carried
on in such a way as to be least likely to be hurt if ploughshares have
suddenly to be beaten into swords. At first sight, this is a somewhat
tragical discovery, but it carries with it certain consolations. If the
apparent civilization evolved by the nineteenth century had been good
and wholesome, it might have been really sad to find that it was only a
thin veneer laid over a structure that man's primitive passions might at
any moment overturn. In fact, the apparently achieved civilization was
so grossly material in its successes, so forcibly feeble in its
failures, so beset with vulgarity at its summit and undermined by
destitution at its base, that even the horrors of the present war, with
its appalling loss of the best lives of the chief nations of the earth,
may be a blessing to mankind in the long run if they purge its notions
about the things that are worth trying for.

At least the war is teaching us that the wealth of a nation is not a
pile of commodities to be frittered away in vulgar ostentation and
stupid self-indulgence, but the number of its citizens who are able and
ready to play the man as workers or fighters when a time of trial comes.
"National prosperity," says Cobbett, "shows itself ... in the plentiful
meal, the comfortable dwelling, the decent furniture and dress, the
healthy and happy countenances, and the good morals of the labouring
classes of the people." So he wrote, in Newgate gaol, in 1810.[8] Since
then many reformers have preached the same sound doctrine, but its
application has made poor progress, in relation to the growth of our
riches in the same period. If we now decide to put it into practice, we
shall not long tolerate the existence in our midst of disease and
destitution, and a system of distribution of the world's goods which
gives millions of our population no chance of full development.

We need not, then, stay to shed tears over the civilization, such as it
was, which we thought we had and had not. Its good points will endure,
for evil has a comfortable habit of killing itself and those who work
it. All that we are concerned with at this moment is the fact that its
downfall has shaken an article in our economic faith which taught us
that specialization was a cause of so much more good than evil, that its
development by the free spreading of our capital all over the world,
wherever the demand for it gave most profit to the owner, was a tendency
to be encouraged, or at least to be left free to work out its will. This
was true enough to be a platitude as long as we could rely on peace. Our
capital went forth and fertilized the world, and out of its growing
produce the world enriched us. As the world developed its productive
power, its goods poured into us, as the great free mart where all men
were welcome to sell their wares. These goods came in exchange for our
goods and services, and the more we bought the more we sold. When other
nations took to dealing direct with one another, they wanted our capital
to finance the business, and our ships to carry the goods. The world as
a whole could not grow in wealth without enriching the people that was
the greatest buyer and seller, the greatest moneylender and the greatest
carrier. It was all quite sound, apart from the danger depicted by Dr.
Bowley, as long as we had peace, or as long as the wars that happened
were sufficiently restricted in their area and effect. But now we have
seen that war may happen on such a scale as to make the interchange of
products between nations a source of grave weakness to those who
practise it, if it means that they are thereby in danger of finding
themselves at war with the providers of things that they need for
subsistence or for defence.

Another lesson that the war has taught us is that modern warfare
enormously increases the cost of carriage by sea, because it shuts up in
neutral harbours the merchant ships of the powers that are weaker on
the sea, and makes huge calls, for transport purposes, on those of the
powers which are in the ascendant on the water. This increase in the
cost of sea carriage adds to the cost of all goods that come by sea, and
is a particularly important item in the bill that we, as an island
people, have to pay for the luxury of war. It is true that much of the
high price of freight goes into the pockets of our shipowners, but they,
being busy with transport work for the Government, cannot take nearly so
much advantage of it as the shipmasters of neutral countries.

The economic argument, then, that it pays best to make and grow things
where they can best be made and grown remains just as true as ever it
was, but it has been complicated by a political objection that if one
happens to go to war with a nation that has supplied raw material, or
half-raw material, for industries that are essential to our commercial
if not to our actual existence, the good profits made in time of peace
are likely to be wiped out, or worse, by the extent of the inconvenience
and paralysis that this dependence brings with it in time of war. And
even if we are not at war with our providers, the greater danger and
cost of carriage by sea, when war is afoot, makes us question the
advantage of the process, for example, by which we have developed a
foreign dairying industry with our capital, and learnt to depend on it
for a large part of our supply of eggs and butter, while at home we have
seen a great magnate lay waste farms in order to make fruitful land into
a wilderness for himself and his deer. It may have paid us to let this
be done if we were sure of peace, but now that we have seen what modern
warfare means, when it breaks out on a big scale, we may surely begin to
think that people who make bracken grow in place of wheat, in order to
improve what auctioneers call the amenities of their rural residences,
are putting their personal gratification first in a question which is of
national importance.

We may seem to have strayed far from the problems of International
Finance and the free interchange of capital between countries, but in
fact we are in the very middle of them, because they are so complicated
and diverse that they affect nearly every aspect of our national lives.
By sending capital abroad we make other countries produce for us and so
we help a tendency by which we grow less at home, and export coupons, or
demands for interest, instead of the present produce of our brains and
muscles; and we do much more than that, for we thereby encourage the
best of our workers to leave our shores and seek their fortunes in the
new lands which our capital opens up. When we export capital it goes in
the shape of goods and services, and it is followed by an export of men,
who go to lands where land is plentiful and cheap, and men are scarce
and well paid. This process again was sound enough from the purely
economic point of view. It quickened the growth of the world's wealth by
putting men of enterprise in places where their work was most handsomely
rewarded, and their lives were unhampered by the many bars to success
that remnants of feudalism and social restrictions put in their way in
old countries; and it cleared the home labour market and so helped the
workers in their uphill struggle for better conditions and a chance of
a real life. But when the guns begin to shoot, the question must arise
whether we were wise in leaving the export of capital, which has such
great and complicated effects, entirely to the influence of the higgling
of the market, and the price offered by the highest bidder.

Much will evidently depend on the way in which the present war ends. If
it should prove to be, as so many hoped at its beginning, a "war to end
war," and should be followed by a peace so well and truly founded that
we need have no fear for its destruction, then there will be much to be
said for leaving economic forces to work themselves out by economic
means, subject to any checks that their social effects may make
necessary. But if, as seems to be probable, the war ends in a way that
makes other such wars quite possible, when we have all recovered from
the exhaustion and disgust produced by the present one, then political
expediency may overrule economic advantage, and we may find it necessary
to consider the policy of restricting the export of British capital to
countries with which there is no chance of our ever being at war, and
especially to our own Dominions oversea, not necessarily by prohibitions
and hard and fast rules, but rather by seeing that the countries to
which it is desirable for our capital to go may have some advantage when
they appeal for it.

This advantage our own colonial Dominions already possess, both from the
sentiment of investors, which is a strong influence in their favour, and
will be stronger than ever after the war, and from legal enactment which
allows trustees to invest trust funds in their loans. Probably the
safest course would be to leave sentiment to settle the matter, and pray
to Providence to give us sensible sentiments. Actual restraints on the
export of capital would be very difficult to enforce, for capital is an
elusive commodity that cannot be stopped at the Customs houses. If we
lent money to a friendly nation, and our friend was thereby enabled to
lend to a likely foe, we should not have mended matters. The time is not
yet ripe for a full discussion of this difficult and complicated
question, and it is above all important that we should not jump to
hasty conclusions about it while under the influence of the feverish
state of mind produced by war. The war has shown us that our wealth was
a sure and trusty weapon, and much of the strength of this weapon we owe
to our activity in International Finance.


[Footnote 7: "England's Foreign Trade in the Nineteenth Century," p, 16,
by Dr. A.L. Bowley.]

[Footnote 8: "Paper against Gold," Letter III.]



Apart from the political measures which may be found necessary for the
regulation, after the war, of International Finance, it remains to
consider what can be done to amend the evils from which it suffers, and
likewise what, if anything, can be done to strengthen our financial
weapon, and sharpen its edge to help us in the difficult fight that will
follow the present war, however it may end.

It has been shown in a previous chapter that the real weaknesses in the
system of International Finance arise from the bad use made of its
facilities by improvident and corrupt borrowers, and from the bigger
profits attached, in the case of success, to the more questionable kinds
of issues. With regard to the latter point it was also shown that these
bigger profits may be, to a great extent, justified by the fact that
the risk involved is much greater; since in the case of failure a weak
security is much more difficult to finance and find a home for than a
good one. It may further be asked why weak securities should be brought
out at all and whether it is not the business of financial experts to
see that nothing but the most water-tight issues are offered to the
public. Such a question evidently answers itself, for if only those
borrowers were allowed to come into the market whose credit was beyond
doubt, the growth of young communities and of budding enterprises would
be strangled and the forward movement of material progress would be
seriously checked.

It is sometimes contended that much more might be done by the Stock
Exchange Committee in taking measures to see that the securities to
which it grants quotations and settlements are soundly based. If this
view is to prevail, its victory has been greatly helped by the events of
the war, during which the Stock Exchange has seen itself regulated and
controlled by outside authority to such an extent that it would be much
readier than it was two years ago to submit to regulations imposed on
it by its own Committee at the bidding of the Government. Nevertheless,
there is this great difficulty, that as soon as the Stock Exchange
begins to impose other than merely formal rules upon the issue of
securities under its authority, the public very naturally comes to the
conclusion that all securities brought out under its sanction may be
relied on as absolutely secure; and since it is wholly impossible that
the Committee's regulations could be so strict as to ensure this result
without imposing limits that would have the effect of smothering
enterprise, the effect of any such attempt would be to encourage the
public to pursue a happy-go-lucky system of investing, and then to blame
the Stock Exchange if ever it found that it had made a mistake and had
indulged in speculation when it flattered itself that it was investing.
The whole question bristles with difficulties, but it seems hardly
likely that after the war the Stock Exchange and the business of dealing
in securities will ever be quite on the old basis again.

In any attempt that is made to regulate them, however, it will be very
necessary to remember that capital is an extremely elusive thing, and
that if too strict rules are laid down for it, it very easily evades
them by transferring itself to other centres. If the authorities decide
that only such and such issues are to be made, or such and such
securities are to be dealt in in London, they will be inviting those who
consider such regulations unfair or unwise to buy a draft on Paris or
New York, and invest their money in a foreign centre. Capital is easily
scared, and is very difficult to bottle up and control, and if any
guidance of it in a certain direction is needed, the object would
probably be much more easily achieved by suggestion than by any attempt
at hard and fast restriction, such as worked well enough under the
stress of war.

Any real improvement to be achieved in the system by which we have
hitherto supplied other nations with capital will ultimately have to be
brought about by a keener appreciation, both by issuing houses and
investors, of the kind of business that is truly legitimate and
profitable. It does not pay in the long run to supply young communities
with opportunities for outrunning the constable, and it is possible that
when this wholesome platitude is more clearly grasped by the public, no
issuing house will be found to bring out a loan that is not going to be
used for some definite reproductive purpose, or to float a company, even
of the semi-speculative kind, the prospects of which have not been so
well tested that the shareholders are at least bound to have a fair
chance of success. The ideals of the issuing houses have so far advanced
since the days of the Honduras scandal, that in the time of the late war
in the Balkans none could be found to father any financial operation in
London on behalf of any of the warring peoples. It only remains for the
education of the investor to continue the progress that it has lately
made, for the waste of capital by bad investment to be greatly
curtailed. Probably there will always, as long as the present financial
basis of society lasts, be outbursts of speculation in which a greedy
public will rush madly after certain classes of stocks and shares, with
the result that a few cool-headed or lucky gamblers will be able to
live happily ever after as country gentlemen, and transmit comfortable
fortunes to their descendants for all time. This is the debt that
society pays for its occasional lapses in finance, just as its lapses in
matters of taste are paid for by the enriching of those who provide it
with rubbishy stuff to read, or rubbishy shows in picture palaces. The
education of the individual in the matter of spending or investing his
or her money is one of the most pressing needs of the future, and only
by its progress can the evils which are usually laid to the door of
finance be cured by being attacked in their real home. In the meantime
much might be done by more candid publicity and clearer statements in
prospectuses of the objects for which money lent is to be used and of
the terms on which loan issues have been arranged. Any reasonable
attempts that may be made to improve the working of International
Finance are certain to have the support of the best elements in the

At the same time we may hope that as economic progress goes slowly ahead
over the stepping stones of uncomfortable experience, borrowing
countries will see that it really pays them to pay their yearly bills
out of yearly taxes, and that they are only hurting themselves when they
mortgage their future revenue for loans, the spending of which is not
going to help them to produce more goods and so raise more revenue
without effort. War is the only possible excuse for asking foreign
nations to find money for other than reproductive purposes. In time of
war it can be justified, even as an individual can be justified for
drawing on his capital in order to pay for an operation that will save
his life. But in both cases it leaves both the nation and the individual
permanently poorer and with a continuous burden to meet in the shape of
interest and sinking fund, until the loan has been redeemed. Loans
raised at home have an essentially different effect. The interest on
them is raised from the taxpayers and paid back to the taxpayers, and
the nation, as a whole, is none the poorer. But when one nation borrows
from another it takes the loan in the form of goods or services, and
unless these goods and services are used in such a way as to enrich it
and help it to produce goods and services itself, it is bound to be a
loser by the bargain; because it has to pay interest on the loan in
goods and services and to redeem the loan by the same process, and if
the loan has not been used to increase its power of turning out goods
and services, it is inevitably in the same position as a spendthrift
individual who has pledged his income for an advance and spent it on
riotous living.

One of the great benefits that the present war is working is that it is
teaching young countries to do without continual drafts of fresh capital
from the older ones. Instead of being able to finance themselves by
fresh borrowing, they have had to close their capital accounts for the
time being, and develop themselves out of their own resources. It is a
very useful experience for them, and is teaching them lessons that will
stand them in good stead for some time to come. For the old countries,
when the war is over, will have problems of their own to face at home,
and will not be able at once to go back to the old system of placing
money abroad, even if they should decide that the experiences of war
have raised no objections to their doing so with the old indiscriminate

It is easy, however, to exaggerate the effect of the war on our power to
finance other peoples. Pessimistic observers, with a pacifist turn of
mind, who regard all war as a hideous barbarism and refuse to see that
anything good can come out of it, are apt in these days to make our
flesh creep by telling us that war will inevitably leave Europe so
exhausted and impoverished that its financial future is a prospect of
unmitigated gloom. They talk of the whole cost of the war as so much
destruction of capital, and maintain that by this destruction we shall
be for some generations in a state of comparative destitution. These
gloomy forecasts may be right, but I hope and believe that they will be
found to have been nightmares, evolved by depressed and prejudiced
imaginations. War destroys capital when and where actual destruction of
property takes place, as now in Belgium, Northern France, and other
scenes of actual warfare, and on the sea, where a large number of
ships, though small in relation to the total tale of the merchant navies
of the world, have been sunk and destroyed. Destruction in this sense
has only been wrought, so far, in limited areas. In so far as
agricultural land has been wasted, kindly nature, aided by industry and
science, will soon restore its productive power. In so far as factories,
railways, houses and ships have been shattered, man's power to make,
increased to a marvellous extent by modern mechanical skill, will repair
the damage with an ease and rapidity such as no previous age has

In another sense it may be argued that war destroys capital in that it
prevents its being accumulated, but this is a distortion of the meaning
of the word destroy. If it had not been for the war, we in England
should have been saving our usual three to four hundred millions a year
and putting the money to productive uses, in so far as we did not lend
it to spendthrift nations or throw it away on unprofitable ventures. If
we had invested it well, it would have made us and the rest of the world
richer. Instead of doing so we are spending our savings on war and
consequently we are not growing richer. But when the war is over our
material productive power will be as great as ever, except for the small
number of our ships that have been sunk or the small amount of damage
done to us by enemy aircraft. Our railways and factories may be somewhat
behindhand in upkeep, but that will soon be made good, and against that
item on the debit side, we may set the great new organization for
munition works, part of which, we may hope, will be available for
peaceful production when the time for peace is ripe.

It is a complete mistake to suppose that war can be carried on out of
accumulated capital, which is thereby destroyed. All the things and
services needed for war have to be produced as the war goes on. The
warring nations start with a stock of ships and guns and military and
naval stores, but the wastage of them can only be made good by the
production of new stuff and new clothes and food for the soldiers and
new services rendered as the war goes on. This new production may be
done either by the warring powers or by neutrals, and if it is done by
neutrals, the warring powers can pay for it out of capital by selling
their securities or by pledging their wealth. In so far as this is done
the warring powers impoverish themselves and the neutrals are enriched,
but the world's capital as a whole is not impaired. If we sell our
Pennsylvania Railroad bonds to Americans, and buy shells with the
proceeds, we are thereby poorer and Americans are richer, but the
earning power of the Pennsylvania Railroad is not altered. It may be, if
we conduct the war wastefully, and refuse to meet its cost by our own
self-denial--going without things ourselves so that we can save, money
to lend to the Government for the war--that we shall pledge our property
and sell what of it we can sell to neutrals, to such an extent that we
shall be seriously poorer at the end of it. At present[9] we are not
selling and pledging our capital wealth any faster than we are lending
to our Allies; and if we pull ourselves up short, and exercise the
necessary self-denial, seeing that we must pay for the war in the long
run out of our own pockets, and that far the cheapest and cleanest
policy is to do so now, and if the war does not last too long, there is
no reason why it should impoverish us to an extent that will cripple us

It is true that we shall have lost an appalling number of the best of
our manhood, and this is a loss that is irreparable in many of its
aspects. But from the purely material point of view we may set against
it the great increase in the productive power of those that are left
behind, through the lessons that the war has taught us in using the
store of available energy that was idle among us before. We shall have
learnt to work as we never worked before, and we shall have learnt that
many of the things on which we used to waste our money and energy were
unworthy of us at all times and especially at a time of national crisis.
If we can only recognize that the national crisis will go on after the
war, and will go on until we have made this old country civilized in the
real sense of the word, that is, free from destitution and the vice and
dirt and degradation and disease that go with it, then our power of
recovery after the war will be illimitable, and we shall go forward to
a new standard of wealth and national duty that will leave the dingy
ideals of the nineteenth century behind us like a bad dream. This may
seem somewhat irrelevant to the question of International Finance, but
it is not so. We led the way in spreading our capital over the world,
with little or no regard for the consequences of this policy on the
condition of our population at home. We have now, in the great
regeneration that this war has brought, and will bring in still greater
measure, to show that we can still make and save capital faster than
ever, by working harder and spending our money on improving our
heritage, instead of on frivolity and self-indulgence. Then we shall
still be free to lend money to borrowers who will use it well, and at
the same time have plenty to spare for wise use at home in clearing the
blots off our civilization.


[Footnote 9: Written on New Year's Eve, 1915.]


ACCEPTANCES, of banks and firms. 26, 36
America, as international financier, 73;
trade expansion of, helped by England, 85
Armament firms and bad finance, 135, 136

BANK OF ENGLAND, position of, 31. 32;
weekly return of, 33
Banks, bills of exchange held by, 26 _seq_.;
functions of, 35 _seq_.;
money deposited with, 25 _seq_.;
specimen balance sheet of, 35
Bearer securities, 54
Bill-brokers, 37, 38
Bills of exchange, meaning of, 26 _seq_.;
on London, popularity of, 29, 30;
uses of, 39, 40
Bonds, description of, 54
Bowley, Dr., on specialization, 156
Brailsford, Mr., on Egypt and finance, 99
Brazil, financial embarrassments of. 71;
funding scheme for, 72

CANADA lends to England, 73
Capital, bad effects of export of, 164;
difficulty of controlling, 166, 171;
definition of, 4, 17;
function of, 3 _seq_.;
how acquired, 16;
plenty of, advantageous to workers, 19, 20;
reward of, 2 _seq_.
Charles II, dukedoms founded by. 14,15
China and international finance, 106
Cobbett on national prosperity, 159
Colonial investments, advantages possessed by, 166
Companies' securities, classes of, 57; issue of, 55
Coupons, description of, 54
Crammond, Mr., on financiers and peace, 93
Cumulative, preference, 59;
sinking fund, 52

DEBENTURE stocks, 57
Discount, market rate of, 38

EGYPT and finance, 98 _seq_.

"FENN on the Funds," on diplomacy and finance, 106
Finance and industry, 75, 76, 131;
as peace-missionary, 90 _seq_.;
benefits of, 83 _seq_.;
defined, 1;
dependent on industry, 28, 29, 40;
effects of war on, 92, 93
Foreign Office and finance, 105, _seq_.
France, loan issuing in, 47
Freights, effect of war on, 162

GEOGRAPHICAL distribution, investment by, 24, 25
German finance and diplomacy, 107
German industry helped by English finance, 85
Governments, borrowing by, 43 _seq_.

HONDURAS loans, Select Committee's report on, 116 _seq_.

"INCOME," Dr. Nearing on, 7
Industry the foundation of finance, 28, 29
Inherited wealth, 11 _seq_.
Interest, the price of capital, 2, 3
Interest claims, as article of export, 80, 81
Issuing houses, responsibilities of, 137 _seq_.

JEWS and finance, 111 _seq_.
Journalism in the City, 49, 50

KINGLAKE on Egypt, 100;
on Jews of Smyrna, 112

LIMITED liability, system of, 68
Loans, issue of, 45 _seq_.
London, strength of, in credit matters, 30

MEXICO, revolution and default in, 71
Morocco crisis and financiers, 93
Municipalities, borrowing by, 45

NEARING, DR., on capital's reward, 7, 8
New York as financial centre, 30

PHILIP II repudiates debts, 67
Preference securities, 57, 59
Profit, distinguished from interest, 56;
the reward of capital, 2, 3
Prospectuses, fuller statement desirable in, 173;
terms of, 49 _seq_., 51
Public, the, the modern dispenser of wealth, 15 _seq_.

REGISTERED stocks, 55
Risk, inseparable from industry, 23

SINKING Fund, working of, 52
Snowden, Mr. Philip, on finance and diplomacy, 90, 91
South African War and finance, 102, 103
Specialization, dangers and evils of, 153 _seq_.
State, as saver of capital, 21
Stock Exchange, as regulator of new issues, 169, 170;
effect of war on, 95;
securities dealt in on, 42 _seq_.
Stock markets, fluctuations of, 61, 62;
international relations of, 62

TRADE balance, 80, 81

UNDERWRITING of loans, 46, 48;
risk involved by, 53

VENEZUELA and German diplomacy, 107

WAR, effects of, on finance, 92, 93;
lessons taught by, 161 _seq_., 175 _seq_.


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