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.
FOOTNOTES:
[Footnote 4: Quoted by the _Financial News_ of September 28, 1915.]
CHAPTER VI
THE EVILS OF INTERNATIONAL FINANCE
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 doing.
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, L955,398.”
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 moneylender.
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.
FOOTNOTES:
[Footnote 5: _Merchant of Venice_, I, 3.]
[Footnote 6: Pages 75, 76. (NOTE: See Chapter IV, “In the beginnings of international trade…”)]
CHAPTER VII
NATIONALISM AND FINANCE
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 material?
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 spectacle.”[7]
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.
FOOTNOTES:
[Footnote 7: “England’s Foreign Trade in the Nineteenth Century,” p, 16, by Dr. A.L. Bowley.]
[Footnote 8: “Paper against Gold,” Letter III.]
CHAPTER VIII
REMEDIES AND REGULATIONS
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 City.
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 freedom.
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 witnessed.
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 seriously.
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.
FOOTNOTES:
[Footnote 9: Written on New Year’s Eve, 1915.]
INDEX
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_.
THE END