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You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: International Finance + +Author: Hartley Withers + +Release Date: April 3, 2004 [EBook #11774] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK INTERNATIONAL FINANCE *** + + + + +Produced by papeters and the Online Distributed Proofreading Team. + + + + + +</pre> + + <h1><a name="Page_-8"></a><a name="Page_-7"></a>INTERNATIONAL + FINANCE</h1> + + <h3>BY</h3> + + <h2>HARTLEY WITHERS</h2><br> + <br> + <hr style="width: 65%;"> + <a name="Page_-6"></a> <i>BY THE SAME AUTHOR</i>.<br> + <br> + OUR MONEY AND THE STATE,<br> + SECOND IMPRESSION. 3s. net.<br> + <br> + STOCKS AND SHARES. FIFTH IMPRESSION.<br> + 6s. net.<br> + <br> + MONEY CHANGING: an Introduction to<br> + Foreign Exchange,<br> + THIRD EDITION. 6s. net.<br> + <br> + THE MEANING OF MONEY.<br> + FIFTEENTH IMPRESSION. 6s. net.<br> + <br> + POVERTY AND WASTE. 6s. net.<br> + <br> + WAR AND LOMBARD STREET.<br> + THIRD EDITION. 3s. 6d. net.<br> + <br> + INTERNATIONAL FINANCE. 6s, net.<br> + <hr style="width: 65%;"> + <a name="INTERNATIONAL_FINANCE"></a> + + <h2><a name="Page_-5"></a>INTERNATIONAL FINANCE</h2> + + <center> + BY + </center> + + <center> + HARTLEY WITHERS + </center><br> + <br> + + <div class="poem"> + <div class="stanza"> + <p class="i4">"While man cannot live by bread alone.</p> + + <p class="i4">he cannot go on living, even a good life</p> + + <p class="i4">if he really falls short of bread."</p> + </div> + + <div class="stanza"> + <p class="i8">PROF. J.L. MYERS.</p> + </div> + </div><br> + <br> + <a name="Page_-4"></a> + + <p><i>First Edition</i> <i>May</i>, 1916.<br> + <i>Reprinted</i> <i>June</i>, + 1918.</p> + <hr style="width: 65%;"> + <a name="PREFACE"></a> + + <h2><a name="Page_-3"></a>PREFACE</h2> + + <p>Responsibility for the appearance of this book—but not + for its contents—lies with the Council for the Study of + International Relations, which asked me to write one "explaining + what the City really does, why it is the centre of the world's + Money Market," etc. In trying to do so, I had to go over a good + deal of ground that I had covered in earlier efforts to throw + light on the machinery of money and the Stock Exchange; and the + task was done amid many distractions, for which readers must make + as kindly allowance as they can.</p><span style= + "margin-left: 13em;">HARTLEY WITHERS.</span><br> + <br> + <br> + <span style="margin-left: 1em;">6, LINDEN GARDENS, W.</span><br> + <span style="margin-left: 1em;"><i>March</i>, 1916.</span><br> + <hr style="width: 65%;"> + <a name="CONTENTS"></a> + + <h2><a name="Page_-2"></a><a name="Page_-1"></a>CONTENTS</h2><br> + + <p><a href="#PREFACE"><b>PREFACE</b></a></p> + + <p><a href="#CONTENTS"><b>CONTENTS</b></a></p> + + <p><a href="#CHAPTER_I"><b>CHAPTER I</b></a></p> + + <p>CAPITAL AND ITS REWARD</p> + + <p>Finance the machinery of money-dealing—Lenders and + borrowers—Capital and its claim to reward—Stored-up + work—Inherited wealth—The reward of + services—Questionable services—Charles the Second's + dukedoms—Modern equivalents—Workers and + Savers</p><br> + + <p><a href="#CHAPTER_II"><b>CHAPTER II</b></a></p> + + <p>BANKING MACHINERY</p> + + <p>Money at a bank—Bills of exchange—Finance and + industry—Supremacy of bill on London—London's + freedom—The Bank of England—The great joint stock + banks—The discount market—Bills and trade</p><br> + + <p><a href="#CHAPTER_III"><b>CHAPTER III</b></a></p> + + <p>INVESTMENTS AND SECURITIES</p> + + <p>Stock Exchange securities—Government and municipal + loans—Machinery of loan issue—Underwriting—The + Prospectus—Sinking fund—Bonds and + coupons—Registered stocks—Companies' + securities—Stock Exchange dealings</p><br> + + <p><a href="#CHAPTER_IV"><b>CHAPTER IV</b></a></p> + + <p>FINANCE AND TRADE</p> + + <p>Why money goes abroad—Trade before + finance—Prejudice in favour of home + investments—Prejudice against them—The + reaction—Mexico and Brazil—Neutral moneylenders and + the war—Goods and services lent and borrowed—The + trade balance</p><br> + + <p><a name="Page_0"></a><a href="#CHAPTER_V"><b>CHAPTER + V</b></a></p> + + <p>THE BENEFITS OF INTERNATIONAL FINANCE</p> + + <p>International finance and trade—Opening up the + world—Exchange of products—Finance as + peacemaker—Popular delusions concerning + financiers—Financiers and the present war—The cases + of Egypt and the Transvaal—Diplomacy and finance</p><br> + + <p><a href="#CHAPTER_VI"><b>CHAPTER VI</b></a></p> + + <p>THE EVILS OF INTERNATIONAL FINANCE</p> + + <p>Anti-Semitic prejudice—The story of the Honduras + loans—The problem to be faced by issuing houses—Their + moral obligations, responsibilities, and difficulties—Bad + finance and big profits—The public's responsibility</p><br> + + <p><a href="#CHAPTER_VII"><b>CHAPTER VII</b></a></p> + + <p>NATIONALISM AND FINANCE</p> + + <p>Dangers of over-specialization—Analogy between State and + individual—Versatility of the savage—Specialization + and peace—Specialization and war—Should the export of + capital be regulated?</p><br> + + <p><a href="#CHAPTER_VIII"><b>CHAPTER VIII</b></a></p> + + <p>REMEDIES AND REGULATIONS</p> + + <p>Regulation of issues by Stock Exchange Committee—Danger + arising therefrom—Difficulty of controlling + capital—Best remedy is keener appreciation by issuing + houses, borrowers, and investors of evils of bad + finance—Candour in prospectuses—War as financial + schoolmaster—War as destroyer of capital—War as + stimulator of productive activity</p> + + <p><a href="#INDEX"><b>INDEX</b></a></p> + <hr style="width: 65%;"> + + <h2><a name="Page_1"></a>INTERNATIONAL FINANCE</h2> + <hr style="width: 65%;"> + <a name="CHAPTER_I"></a> + + <h2>CHAPTER I</h2><br> + + <center> + CAPITAL AND ITS REWARD + </center> + + <p>Finance, in the sense in which it will be used in this book, + means the machinery of money dealing. That is, the machinery by + which money which you and I save is put together and lent out to + people who want to borrow it. Finance becomes international when + our money is lent to borrowers in other countries, or when people + in England, who want to start an enterprise, get some or all of + the money that they need, in order to do so, from lenders + oversea. The biggest borrowers of money, in most countries, are + the Governments, and so international finance is largely + concerned with lending by the citizens of one country to the + Governments <a name="Page_2"></a>of others, for the purpose of + developing their wealth, building railways and harbours or + otherwise increasing their power to produce.</p> + + <p>Money thus saved and lent is capital. So finance is the + machinery that handles capital, collects it from those who save + it and lends it to those who want to use it and will pay a price + for the loan of it. This price is called the rate of interest, or + profit. The borrower offers this price because he hopes to be + able, after paying it, to benefit himself out of what he is going + to make or grow or get with its help, or if it is a Government + because it hopes to improve the country's wealth by its use. + Sometimes borrowers want money because they have been spending + more than they have been getting, and try to tide over a + difficulty by paying one set of creditors with the help of + another, instead of cutting down their spending. This path, if + followed far enough, leads to bankruptcy for the borrower and + loss to the lender.</p> + + <p>If no price were offered for capital, we should none of us + save, or if we saved we should not risk our money by lending it, + but hide it in <a name="Page_3"></a>a hole, or lock it up in a + strong room, and so there could be no new industry.</p> + + <p>Since capital thus seems to be the subject-matter of finance + and it is the object of this book to make plain what finance + does, and how, it will be better to begin with clear + understanding of the function of capital. All the more because + capital is nowadays the object of a good deal of abuse, which it + only deserves when it is misused. When it is misused, let us + abuse it as heartily as we like, and take any possible measures + to punish it. But let us recognize that capital, when well and + fairly used, is far from being a sinister and suspicious weapon + in the hands of those who have somehow managed to seize it; but + is in fact so necessary to all kinds of industry, that those who + have amassed it, and placed it at the disposal of industry render + a service to society without which society could not be kept + alive.</p> + + <p>For capital, as has been said, is money saved and lent to, or + employed in, industry. By being lent to, or employed in, industry + it earns its rate of interest or profit. There are nowadays + <a name="Page_4"></a>many wise and earnest people who think that + this interest or profit taken by capital is not earned at all but + is wrung out of the workers by a process of extortion. If this + view is correct then all finance, international and other, is + organized robbery, and instead of writing and reading books about + it, we ought to be putting financiers into prison and making a + bonfire of their bonds and shares and stock certificates. But, + with all deference to those who hold this view, it is based on a + complete misapprehension of the nature and origin of capital.</p> + + <p>Capital has been described above as money put to certain + purposes. This was done for the sake of clearness and because + this definition fits in with the facts as they usually happen in + these days. Economists define capital as wealth reserved for + production, and we must always remember that money is only a + claim for, or a right to, a certain amount of goods or a certain + amount of other people's work. Money is only a title to wealth, + because if I have a sovereign or a one-pound note in my pocket, I + thereby have the power of buying a pound's <a name= + "Page_5"></a>worth of goods or of hiring a doctor to cure me or a + parson to bury me or anybody else to do anything that I want, up + to the buying power of that sovereign. This is the power that + money carries with it. When the owner of this power, instead of + exercising it in providing himself with luxuries or amusements, + uses it by lending it to someone who wants to build a factory, + and employ workers, then, because the owner of the money receives + his rate of interest he is said to be exploiting labour, because, + so it is alleged, the workers work and he, the capitalist, sits + in idleness and lives on their labour.</p> + + <p>And so, in fact, he does. But we have not yet found out how he + got the money that he lent. That money can only have been got by + work done or services rendered, for which other people were ready + to pay. Capital, looked at from this point of view, is simply + stored up work, and entitled to its reward just as much as the + work done yesterday. The capitalist lives on the work of others, + but he can only do so because he has wrought himself in days gone + by or because someone else has wrought and handed <a name= + "Page_6"></a>on to him the fruits of his labour. Let us take the + case of a shopkeeper who has saved a hundred pounds. This is his + pay for work done and risk taken (that the goods which he buys + may not appeal to his customers) during the years in which he has + saved it. He might spend his hundred pounds on a motor cycle and + a side-car, or on furniture, or a piano, and nobody would deny + his right to do so. On the contrary he would probably be + applauded for giving employment to makers of the articles that he + bought. Instead of thus consuming the fruit of his work on his + own amusement, and the embellishment of his home, he prefers to + make provision for his old age. He invests his hundred pounds in + the 5 per cent. debenture stock of a company being formed to + extend a boot factory. Thereby he gives employment to the people + who build the extension and provide the machinery, and thereafter + to the men and women who work in the factory, and moreover he is + helping to supply other people with boots. He sets people to work + to supply other people's wants instead of his own, and he + receives as the price, of his service five pounds <a name= + "Page_7"></a>a year. But it is his work, that he did in the years + in which he was saving, that is earning him this reward.</p> + + <p>An interesting book has lately appeared in America, called + "Income," in which the writer, Dr. Scott Nearing, of the + University of Pennsylvania, draws a very sharp distinction + between service income and property income, implying, if I read + him aright, that property income is an unjust extortion. This is + how he states his case:—<a name="FNanchor_1_1"></a><a href= + "#Footnote_1_1"><sup>[1]</sup></a></p> + + <div class="blkquot"> + <p>"The individual whose effort creates values for which + society pays receives service income. His reward is a reward + for his personality, his time, his strength. Railroad president + and roadmender devote themselves to activities which satisfy + the wants of their fellows. Their service is direct. In return + for their hours of time and their calories of energy, they + receive a share of the product which they have helped to + produce.</p> + + <p>"The individual who receives a return because of his + property ownership, receives a property income. This man has a + title deed to a piece of unimproved land lying in the centre of + a newly developing town. A storekeeper offers him a thousand + dollars a year for the privilege of placing a store on the + land. The <a name="Page_8"></a>owner of the land need make no + exertion. He simply holds his title. Here a man has labored for + twenty years and saved ten thousand dollars by denying himself + the necessaries of life. He invests the money in railroad + bonds, and someone insists he thereby serves society. In one + sense he does serve. In another, and a larger sense, he expects + the products of his past service (the twenty years of labor), + to yield him an income. From the day when he makes his + investment he need never lift a finger to serve his fellows. + Because he has the investment, he has income. The same would + hold true if the ten thousand dollars had been left him by his + father or given to him by his uncle.... The fact of possession + is sufficient to yield him an income."</p> + </div> + + <p>Now, in all these cases of property income which Dr. Nearing + seems to regard as examples of income received in return for no + effort, there must have been an effort once, on the part of + somebody, which put the maker of it in possession of the property + which now yields an income to himself, or those to whom he has + left or given it. First there is the case of the man who has a + title deed to a piece of land. How did he get it? Either he was a + pioneer who came and cleared it and settled on it, or he had + worked and saved and with the product of his <a name= + "Page_9"></a>work had bought this piece of land, or he had + inherited it from the man who had cleared or bought the land. The + ownership of the land implies work and saving and so is entitled + to its reward. Then there is the case of the man who has saved + ten thousand dollars by labouring for twenty years and denying + himself the necessaries of life. Dr. Nearing admits that this man + has worked in order to get his dollars; he even goes so far as to + add that he had denied himself the necessaries of life in order + to save. Incidentally one may wonder how a man who has denied + himself the necessaries of life for twenty years can be alive at + the end of them. This man has worked for his dollars, and, + instead of spending them on immediate enjoyment, lends them to + people who are building a railway, and so is quickening and + cheapening intercourse and trade. Dr. Nearing seems to admit + grudgingly that in a sense he thereby renders a service, but he + complains because his imaginary investor expects without further + exertion to get an income from the product of his past service. + If he could not get an income from it, why should he save? And if + he and <a name="Page_10"></a>millions of others did not save how + could railways or factories be built? And if there were no + railways or factories how could workers find employment?</p> + + <p>If every capitalist only got income from the product of his + own work in the past, which he had spent, as in this case, on + developing industry, his claim to a return on it would hardly + need stating. He would have saved his ten thousand dollars or two + thousand pounds, and instead of spending it on two thousand + pounds' worth of amusement or pleasure for himself he would have + preferred to put it at the disposal of those who are in need of + capital for industry and promise to pay him 5 per cent. or + £100 a year for the use of it. By so doing he increases the + demand for labour, not momentarily as he would have done if he + had spent his money on goods and services immediately consumed, + but for all time, as long as the railway that he helps to build + is running and earning an income by rendering services. He is a + benefactor to humanity as long as his capital is invested in a + really useful enterprise, and especially to the workers who + cannot get work unless the <a name="Page_11"></a>organizers of + industry are supplied with plenty of cheap capital. In fact, the + more plentiful and cheap is capital, the keener will be the + demand for the labour of the workers.</p> + + <p>But when Dr. Nearing points out that the income of the ten + thousand dollars would be equally secure if the owner of them had + them left him by his father or given him by his uncle, then at + last he smites capital on a weak point in its armour. There, is, + without question, much to be said for the view that it is unfair + that a man who has worked and saved should thereby be able to + hand over to his son or nephew, who has never worked or saved, + this right to an income which is derived from work done by + somebody else. It seems unfair to all of us, who were not blessed + with equally industrious and provident fathers and uncles, and it + is often bad for the man who gets the income as a reward for no + effort of his own, because it gives him a false start in life and + sometimes tends to make him a futile waster, who can only justify + his existence and his command over other people's work, by + pointing to the efforts of his deceased sire or uncle. Further, + <a name="Page_12"></a>unless he is very lucky, he is likely to + grow up with the notion that, just because he has been left or + given a certain income, he is somehow a superior person, and that + it is part of the scheme of the universe that others should work + for his benefit, and that any attempt on the part of other people + to get a larger share, at his expense, of the good things of the + earth is an attempt at robbery. He is, by being born to a + competence, out of touch with the law of nature, which says that + all living things must work for their living, or die, and his + whole point of view is likely to be warped and narrowed by his + unfortunate good fortune.</p> + + <p>These evils that spring from hereditary property are obvious. + But it may be questioned whether they outweigh the advantages + that arise from it. The desire to possess is a strong stimulus to + activity in production, because possession is the mark of success + in it, and all healthy-minded men like to feel that they have + succeeded; and almost equally strong is the desire to hand on to + children or heirs the possessions that the worker's energy has + got for him. In fact it may almost be said that in <a name= + "Page_13"></a>most men's minds the motive of possession implies + that of being able to hand on; they would not feel that they + owned property which they were bound to surrender to the State at + their deaths. If and when society is ever so organized that it + can produce what it needs without spurring the citizen to work + with the inducement supplied by possession, and the power to hand + on property, then it may be possible to abolish the inequities + that hereditary property carries with it. As things are at + present arranged it seems that we are bound to put up with them + if the community is to be fed and kept alive. At least we can + console ourselves with the thought that property does not come + into existence by magic. Except in the case of the owners of land + who may be enriched without any effort by the discovery of + minerals or by the growth of a city, capital can only have been + created by services rendered; and even in the case of owners of + land, they, and those from whom they derived it, must have done + something in order to get the land.</p> + + <p>It is, of course, quite possible that the something which was + done was a service which would <a name="Page_14"></a>not now be + looked on as meriting reward. In the medieval days mailclad + robbers used to get (quite honestly and rightly according to the + notions then current) large grants of land because they had + ridden by the side of their feudal chiefs when they went on + marauding forays. In later times, as in the days of our Merry + Monarch, attractive ladies were able to found ducal families by + placing their charms at the service of a royal debauchee. But the + rewards of the freebooters have in almost all cases long ago + passed into the hands of those who purchased them with the + proceeds of effort with some approach to economic justification; + and though some of Charles the Second's dukedoms are still + extant, it will hardly be contended that it is possible to trace + the origin of everybody's property and confiscate any that cannot + show a reasonable title, granted for some true economic + service.</p> + + <p>What we can do, and ought to do, if economic progress is to + move along right lines, is to try to make sure that we are not, + in these days of alleged enlightenment, committing out of mere + stupidity and thoughtlessness, the crime which <a name= + "Page_15"></a>Charles the Second perpetrated for his own + amusement. He gave large tracts of England to his mistresses + because they pleased his roving fancy. Now the power to dispense + wealth has passed into the hands of the people, who buy the goods + and services produced, and so decide what goods and services will + find a market, and so will enrich their producers. Are we making + much better use of it? On the whole, much better; but we still + make far too many mistakes. The people to whom nowadays we give + big fortunes, though they include a large number of organizers of + useful industry, also number within their ranks a crowd of + hangers on such as bookmakers, sharepushers, and vendors of + patent pills or bad stuff to read. These folk, and others, live + on our vices and stupidities, and it is our fault that they can + do so. Because a large section of the public likes to gamble away + its money on the Stock Exchange, substantial fortunes have been + founded by those who have provided the public with this means of + amusement. Because the public likes to be persuaded by the + clamour of cheapjack advertisement that its inside wants <a name= + "Page_16"></a>certain medicines, and that these medicines are + worth buying at a price that makes the vendor a millionaire, + there he is with his million. Some people say that he has + swindled the public. The public has swindled itself by allowing + him to foist stuff down its throat on terms which give him, and + his heirs and assigns after him, all the control over the work + and wealth of the world that is implied by the possession of a + million. When we buy rubbish we do not only waste our money to + our own harm, but, under the conditions of modern society, we put + the sellers of rubbish in command of the world, as far as the + money power commands it, which is a good deal further than is + pleasing.</p> + + <p>Hence it is that when some of those who question the right of + capital to its reward, do so on the ground that capital is often + acquired by questionable means, they are barking up the wrong + tree. Capital can only be acquired by selling something to you + and me. If you and I had more sense in the matter of what we buy, + capital could not be acquired by questionable means. By our greed + and wastefulness we <a name="Page_17"></a>give fortunes to + bookmakers, market-riggers and money-lenders. By our preference + for "brilliant" investments, with a high rate of interest and bad + security, we invite the floating of rotten companies and + waterlogged loans. By our readiness to be deafened by the clamour + of the advertiser into buying things that we do not want, we hand + industry over to the hands of the loudest shouter, and by our + half-educated laziness in our selection of what we read and of + the entertainments that we frequent, we open the way to opulence + through the debauching of our taste and opinions. It is our fault + and ours only. As soon as we have learnt and resolved to buy and + enjoy only what is worth having, the sellers of rubbish may put + up their shutters and burn their wares.</p> + + <p>Capital, then, is stored up work, work that has been paid for + by society. Those who did the work and took its reward, turned + the proceeds of it into making something more instead of into + pleasure and gratification for themselves. By a striking metaphor + capital is often described as the seed corn of industry. Seed + corn is the grain that the farmer, instead of making it into + <a name="Page_18"></a>bread for his own table, or selling it to + turn it into picture-palace tickets, or beer, or other forms of + short-lived comfort, keeps to sow in the earth so that he may + reap his harvest next year. If the whole world's crop were eaten, + there would be no seed corn and no harvest. So it is with + industry. If its whole product were turned into goods for + immediate consumption, there could be no further development of + industry, and no maintenance of its existing plant, which would + soon wear out and perish. The man who spends less than he earns + and puts his margin into industry, keeps industry alive.</p> + + <p>From the point of view of the worker—by whom I mean the + man who has little or no capital of his own, and has only, or + chiefly, his skill, of head or of hand, to earn his living + with—those who are prepared to save and put capital at the + disposal of industry ought to be given every possible + encouragement to do so. For since capital is essential to + industry, all those who want to earn a living in the workshops or + in the countinghouse, or in the manager's office, will most of + all, if they are well advised, <a name="Page_19"></a>want to see + as much capital saved as possible. The more there is of it, the + more demand there will be for the brains and muscles of the + workers, and the better the bargain these latter will be able to + make for the use of their brains and muscles. If capital is so + scarce and timid that it can only be tempted by the offer of high + rates for its use, organizers of industry will think twice about + expanding works or opening new ones, and there will be a check to + the demand for workers. If so many people are saving that capital + is a drug in the market, anyone who has an enterprise in his head + will put it in hand, and workers will be wanted, first for + construction then for operation.</p> + + <p>It is to the interest of workers that there should be as many + capitalists as possible offering as much capital as possible to + industry, so that industry shall be in a state of chronic glut of + capital and scarcity of workers. Roughly, it is true that the + product of industry is divided between the workers who carry it + on, and the savers who, out of the product of past work, have + built the workshop, put in the plant and advanced the money to + pay the workers until <a name="Page_20"></a>the new product is + marketed. The workers and the savers are at once partners and + rivals. They are partners because one cannot do without the + other; rivals because they compete continually concerning their + share of the profit realized. If the workers are to succeed in + this competition and secure for themselves an ever-increasing + share of the profit of industry—and from the point of view + of humanity, civilization, nationality, and common sense it is + most desirable that this should be so—then this is most + likely to happen if the savers are so numerous that they will be + weak in bargaining and unable to stand out against the demands of + the workers. If there were innumerable millions of workers and + only one saver with money enough to start one factory, the one + saver would be able to name his own terms in arranging his wages + bill, and the salaries of his managers and clerks. If the wind + were on the other cheek, and a crowd of capitalists with + countless millions of money were eager to set the wheels of + industry going, and could not find enough workers to man and + organize and manage their workshops, then the workers <a name= + "Page_21"></a>would have the whip hand. To bring this state of + things about it would seem to be good policy not to damn the + capitalist with bell and with book and frighten him till he is so + scarce that he is master of the situation, but to give him every + encouragement to save his money and put it into industry. For the + more plentiful he is, the stronger is the position of the + workers.</p> + + <p>In fact the saver is so essential that it is nowadays + fashionable to contend that the saving business ought not to be + left to the whims of private individuals, but should be carried + out by the State in the public interest; and there are some + innocent folk who imagine that, if this were done, the fee that + is now paid to the saver for the use of the capital that he has + saved, would somehow or other be avoided. In fact the Government + would have to tax the community to produce the capital required. + Capital would be still, as before, the proceeds of work done. And + the result would be that the taxpayers as a whole would have to + pay for capital by providing it. This might be a more equitable + arrangement, but as capital can only be produced <a name= + "Page_22"></a>by work, the taxpayers would have to do a certain + amount of work with the prospect of not being allowed to keep the + proceeds, but of being forced to hand it over to Government. + Whether such a plan would be likely to be effective in keeping + industry supplied with capital is a question which need not be + debated until the possibility of such a system becomes a matter + of practical politics.</p> + + <p>For our present purpose it is enough to have shown that the + capital, which is the stock-in-trade of finance, is not a + fraudulent claim to take toll of the product of industry, but an + essential part of the foundation on which industry is built. A + man can only become a capitalist by rendering services for which + he receives payment, and spending part of his pay not on his + immediate enjoyment, but in establishing industry either on his + own account or through the agency of someone else to whom be + lends the necessary capital. Before any industry can start there + must be tools and a fund out of which the workers can be paid + until the work that they do begins to bring in its returns. The + fund to buy these tools <a name="Page_23"></a>and pay the workers + can only be found out of the proceeds of work done or services + rendered. Moreover, there is always a risk to be run. As soon as + the primitive savage left off making everything for himself and + took to doing some special work, such as arrow making, in the + hope that his skill, got from concentration on one particular + employment, would be rewarded by the rest of the tribe who took + his arrows and gave him food and clothes in return, he began to + run the risk that his customers might not want his product, if + they happened to take to fishing for their food instead of + shooting it. This risk is still present with the organizers of + industry and it falls first on the capitalist. If an industry + fails the workers cease to be employed by it; but as long as they + work for it their wages are a first charge which has to be paid + before capital gets a penny of interest or profit, and if the + failure of the industry is complete the capital sunk in it will + be gone.</p> + + <p>FOOTNOTES:</p><a name="Footnote_1_1"></a><a href= + "#FNanchor_1_1">[1]</a> + + <div class="note"> + <p>Pages 24, 25.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_II"></a> + + <h2><a name="Page_24"></a>CHAPTER II</h2><br> + + <center> + BANKING MACHINERY + </center> + + <p>Capital, then, is wealth invested in industry, finance is the + machinery by which this process of investment is carried out, and + international finance is the machinery by which the wealth of one + country is invested in another.</p> + + <p>Let us consider the case of a doctor in a provincial town who + is making an annual income of about £800 a year, living on + £600 of it and saving £200. Instead of spending this + quarter of his income on immediate enjoyments, such as wine and + cigars, and journeys to London, he invests it in different parts + of the world through the mechanism of international finance, + because he has been attracted by the advantages of a system of + investment which was fashionable some years ago, which worked by + what was called <a name="Page_25"></a>Geographical + Distribution.<a name="FNanchor_2_2"></a><a href= + "#Footnote_2_2"><sup>[2]</sup></a> This meant to say that the + investors who practised it put their money into as many different + countries as possible, so that the risk of loss owing to climatic + or other disturbances might be spread as widely as possible. So + here we have this quiet country doctor spreading all over the + world the money that he gets for dosing and poulticing and + dieting his patients, stimulating industry in many climates and + bringing some part of its proceeds to be added to his store. Let + us see how the process works. First of all he has a bank, into + which he pays day by day the fees that he receives in coin or + notes and the cheques that he gets, each half year, from those of + his patients who have an account with him. As long as his money + is in the bank, the bank has the use of it, and not much of it is + likely to go abroad. For the banks use most <a name= + "Page_26"></a>of the funds entrusted to them in investments in + home securities, or in loans and advances to home customers. Part + of them they use in buying bills of exchange drawn on London + houses by merchants and financiers all over the world, so that + even when he pays money into his bank it is possible that our + doctor is already forming part of the machinery of international + finance and involving us in the need for an explanation of one of + its mysteries.</p> + + <p>A bill of exchange is an order to pay. When a merchant in + Argentina sells wheat to an English buyer, he draws a bill on the + buyer (or some bank or firm in England whom the buyer instructs + him to draw on), saying, "Pay to me" (or anybody else whom he may + name) "the sum of so many pounds." This bill, if it is drawn on a + firm or company of well known standing, the seller of the wheat + can immediately dispose of, and so has got payment for his goods. + Usually the bill is made payable two or three, or sometimes six + months after sight, that is after it has been received by the + firm on which it is drawn, and "accepted" by it, that is signed + across the front to show that <a name="Page_27"></a>the firm + drawn on will pay the bill when it falls due. These bills of + exchange, when thus accepted, are promises to pay entered into by + firms of first-rate standing, and are held as investments by + English banks. Bills of exchange are also drawn on English houses + to finance trade transactions between foreign countries, and also + as a means of borrowing money from England. When they are drawn + on behalf of English customers, the credit given is given at + home, but as it is (almost always) given in connection with + international trade, the transaction may be considered as part of + international finance. When they are drawn on behalf of foreign + countries, trading with other foreigners, or using the credit to + lend to other foreigners, the connection with international + finance is obvious. They are readily taken all over the world, + because all over the world there are people who have payments to + make to England owing to the wide distribution of our trade, and + it has long been England's boast that bills of exchange drawn on + London firms are the currency of international commerce and + finance.</p> + + <p><a name="Page_28"></a>Some people tell us that this commanding + position of the English bill in the world's markets is in danger + of being lost owing to the present war: in the first place + because America is gaining wealth rapidly, while we are shooting + away our savings, and also because the Germans will make every + endeavour to free themselves from dependence on English credit + for the conduct of their trade. Certainly this danger is a real + one, but it does not follow that we shall not be able to meet it + and defeat it. If the war teaches us to work hard and consume + little, so that when peace comes we shall have a great volume of + goods to export, there is no reason why the bill on London should + not retain much if not all of its old prestige and supremacy in + the marts of the world. For we must always remember that finance + is only the handmaid of industry. She is often a pert handmaid + who steals her mistress's clothes and tries to flaunt before the + world as the mistress, and so she sometimes imposes on many + people who ought to know better, who think that finance is an + all-powerful influence. Finance is a mighty influence, but it is + a mere <a name="Page_29"></a>piece of machinery which assists, + quickens, and lives on production. The men who make and grow + things, and carry them from the place where they are made and + grown to the place where they are wanted, these are the men who + furnish the raw material of finance, without which it would have + to shut up its shop.</p> + + <p>If they and their work ceased, we should all starve, and the + financiers would have nothing behind the pieces of paper that + they handle. If finance and the financiers were suddenly to + cease, there would be a very awkward jar and jolt in our + commercial machinery, but as long as the stuff and the means of + carrying it were available, we should very soon patch up some + other method for exchanging it between one nation and another and + one citizen and another. The supremacy of the London bill of + exchange was created only to a small extent by any supremacy in + London's financial machinery; it was based chiefly on the + supremacy of England's world-wide trade, and on our readiness to + take goods from all nations. The consequence of this was that + traders of all nations sold goods to us, and so had claims on + <a name="Page_30"></a>us and drew bills on us, and bought goods + from us, and so owed us money and wanted to buy bills drawn on us + to pay their debts with. So everywhere the bill on London was + known and familiar and welcome. If the Americans are able and + willing to develop such a world-wide trade as ours, then the bill + on New York will have a vogue all over the world just as is + enjoyed by the bill on London. Then London and New York will have + to fight the matter out by seeing which will provide the best and + cheapest machinery for discounting the bill, that is, turning it + into cash on arrival, so that the holder of it shall get the best + possible price at the present moment, for a bill due two or three + months hence.</p> + + <p>In this matter of machinery London has certain advantages + which ought, if well used and applied, to stand her in good stead + in any struggle that lies ahead of her. London's credit machinery + has grown up in almost complete freedom from legislation, and it + has consequently been able to grow, without let or hindrance, + along the lines that expediency and convenience have shown to be + most practical <a name="Page_31"></a>and useful. It has been too + busy to be logical or theoretical, and consequently it is full of + absurdities and anomalies, but it works with marvellous ease and + elasticity.</p> + + <p>In its centre is the Bank of England, with the prestige of + antiquity and of official dignity derived from acting as banker + to the British Government, and with still more practical strength + derived from acting as banker to all the other great banks, + several of them much bigger, in certain respects, than it. The + Bank of England is very severely and strictly restricted by law + in the matter of its note issue, but it luckily happened, when + Parliament was imposing these restrictions on the Bank's + business, that note issuing was already becoming a comparatively + unimportant part of banking, owing to the development of the use + of cheques. Nowadays, when borrowers go to the Bank of England + for loans, they do not want to take them out in notes; all they + want is a credit in the Bank's books against which they can draw + cheques. A credit in the Bank of England's books is regarded by + the financial community as "cash," and this pleasant fiction + <a name="Page_32"></a>has given the Bank the power of creating + cash by a stroke of its pen and to any extent that it pleases, + subject only to its own view as to what is prudent and sound + business. On p.<a href="#Page_33">33</a> is a specimen of a + return that is published each week by the Bank of England, + showing its position in two separate accounts with regard to its + note issuing business and its banking business: the return taken + is an old one, published before the war, so as to show how the + machine worked in normal times before war's demands had blown out + the balloon of credit to many times its former size.</p> + + <p>If the commercial and financial community is short of cash, + all that it has to do is to go to the Bank of England and borrow + a few millions, and the only effect on the Bank's position is an + addition of so many millions to its holding of securities and a + similar addition to its deposits. It may sometimes happen that + the borrowers may require the use of actual currency, and in that + case part of the advances made will be taken out in the form of + notes and gold, but as a general rule the Bank is able to perform + its function of providing emergency credit by merely making + entries in its books.</p> + + <center> + <a name="Page_33"></a>A BANK RETURN + </center> + <pre> +ISSUE DEPARTMENT. + +Notes Issued £56,908,235 Government Debt £11,015,100 + Other Securities 7,434,900 + Gold Coin and Bullion 38,458,235 + Silver Bullion --- + ----------- ----------- + £56,908,235 £56,908,235 + ----------- ----------- + +BANKING DEPARTMENT. + +Proprietors' Capital £14,553,000 Government Securities £11,005,126 +Rest 3,431,484 Other Securities 33,623,288 +Public Deposits 13,318,714 Notes 27,592,980 +Other Deposits 42,485,605 Gold and Silver Coin 1,596,419 +Seven Day and other + Bills 29,010 + ----------- ----------- + £73,817,813 £73,817,813 + ----------- ----------- +</pre> + + <p><a name="Page_34"></a>With the Bank of England thus acting as + a centre to the system, there has grown up around it a circle of + the great joint stock banks, which provide credit and currency + for commerce and finance by lending money and taking it on + deposit, or on current account. These banks work under + practically no legal restrictions of any kind with regard to the + amount of cash that they hold, or the use that they make of the + money that is entrusted to their keeping. They are not allowed, + if they have an office in London, to issue notes at all, but in + all other respects they are left free to conduct their business + along the lines that experience has shown them to be most + profitable to themselves, and most convenient for their + customers. Being joint stock companies they have to publish + periodically, for the information of their shareholders, a + balance sheet showing their position. Before the war most of them + published a monthly statement of their position, but this habit + has lately been given up. No legal regulations guide them in the + form or <a name="Page_35"></a>extent of the information that they + give in their balance sheets, and their great success and + solidity is a triumph of unfettered business freedom. This + absence of restriction gives great elasticity and adaptability to + the credit machinery of London. Here is a specimen of one of + their balance sheets, slightly simplified, and dating from the + days before the war:—</p> + <pre> +LIABILITIES. + +Capital (subscribed) £14,000,000 + ---------- +Paid up 3,500,000 +Reserve 4,000,000 +Deposits 87,000,000 +Circular Notes, etc. 3,000,000 +Acceptances 6,000,000 +Profit and loss 500,000 + ----------- + £104,000,000 + ----------- + +ASSETS + +Cash in hand and + at Bank of England £12,500,000 +Cash at call and + short notice 13,000,000 +Bills discounted 19,000,000 +Govt. Securities 5,000,000 +Other Investments 4,500,000 +Advances and loans 42,000,000 +Liability of customers + on account of + Acceptances 6,000,000 +Promises 2,000,000 + ----------- + £104,000,000 + ----------- +</pre> + + <p>On one side are the sums that the bank has received, in the + shape of capital subscribed, from its shareholders, and in the + shape of deposits from its customers, including Dr. Pillman and + thousands like him; on the other <a name="Page_36"></a>the cash + that it holds, in coin, notes and credit at the Bank of England, + its cash lent at call or short notice to bill brokers (of whom + more anon) and the Stock Exchange, the bills of exchange that it + holds, its investments in British Government and other stocks, + and the big item of loans and advances, through which it finances + industry and commerce at home. It should be noted that the entry + on the left side of the balance sheet, "Acceptances," refers to + bills of exchange which the bank has accepted for merchants and + manufacturers who are importing goods and raw material, and have + instructed the foreign exporters to draw bills on their bankers. + As these merchants and manufacturers are responsible to the bank + for meeting the bills when they fall due, the acceptance item is + balanced by an exactly equivalent entry on the other side, + showing this liability of customers as an asset in the bank's + favour.</p> + + <p>This business of acceptance is done not only by the great + banks, but also by a number of private firms with connections in + foreign countries, and at home, through which they <a name= + "Page_37"></a>place their names and credit at the disposal of + people less eminent for wealth and position, who pay them a + commission for the use of them.</p> + + <p>Other wheels in London's credit machinery are the London + offices of colonial and foreign banks, and the bill brokers or + discount houses which deal in bills of exchange and constitute + the discount market. Thus we see that there is in London a highly + specialized and elaborate machinery for making and dealing in + these bills, which are the currency of international trade. Let + us recapitulate the history of the bill and see the part + contributed to its career by each wheel in the machine. We + imagined a bill drawn by an Argentine seller against a cargo of + wheat shipped to an English merchant. The bill will be drawn on a + London accepting house, to whom the English merchant is liable + for its due payment. The Argentine merchant, having drawn the + bill, sells it to the Buenos Ayres branch of a South American + bank, formed with English capital, and having its head office in + London. It is shipped to London, to the head office of the South + American bank, which <a name="Page_38"></a>presents it for + acceptance to the accepting house on which it is drawn, and then + sells it to a bill broker at the market rate of discount. If the + bill is due three months after sight, and is for £2000, and + the market rate of discount is 4 per cent. for three months' + bills, the present value of the bill is obviously £1980. + The bill broker, either at once or later, probably sells the bill + to a bank, which holds it as an investment until its due date, by + which time the importer having sold the wheat at a profit, pays + the money required to meet the bill to his banker and the + transaction is closed. Thus by means of the bill the exporter has + received immediate payment for his wheat, the importing merchant + has been supplied with credit for three months in which to bring + home his profit, and the bank which bought the bill has provided + itself with an investment such as bankers love, because it has to + be met within a short period by a house of first-rate + standing.</p> + + <p>All this elaborate, but easily working machinery has grown up + for the service of commerce. It is true that bills of exchange + <a name="Page_39"></a>are often drawn by moneylenders abroad on + moneylenders in England merely in order to raise credit, that is + to say, to borrow money by means of the London discount market. + Sometimes these credits are used for merely speculative purposes, + but in the great majority of cases they are wanted for the + furtherance of production in the borrowing country. The + justification of the English accepting houses, and bill brokers, + and banks (in so far as they engage in this business), is the + fact that they are assisting trade, and could not live without + trade, and that trade if deprived of their services would be + gravely inconvenienced and could only resume its present activity + by making a new machinery more or less on the same lines. The + bill whose imaginary history has been traced, came into being + because the drawer had a claim on England through a trade + transaction. He was able to sell it to the South American bank + only because the bank knew that many other people in Argentina + would have to make payments to England and would come to it and + ask it for drafts on London, which, by remitting this bill to be + sold in <a name="Page_40"></a>London, it would be able to supply. + International finance is so often regarded as a machinery by + which paper wealth is manufactured out of nothing, that it is + very important to remember that all this paper wealth only + acquires value by being ultimately based on something that is + grown or made and wanted to keep people alive or comfortable, or + at least happy in the belief that they have got something that + they thought they wanted, or which habit or convention obliged + them to possess.</p> + + <p>FOOTNOTES:</p><a name="Footnote_2_2"></a><a href= + "#FNanchor_2_2">[2]</a> + + <div class="note"> + <p>All this imaginary picture is of events before the war. At + present Dr. Pillman, being a patriotic citizen, is saving much + faster than before, and putting every pound that he can save + into the hands of the British Government by subscribing to War + Loans and buying Exchequer bonds. He is too old to go and do + medical work at the front, so he does the next best thing by + cutting down his expenses and finding money for the war.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_III"></a> + + <h2><a name="Page_41"></a>CHAPTER III</h2><br> + + <center> + INVESTMENTS AND SECURITIES + </center> + + <p>So far we have only considered what happens to the money of + those who save as long as it is left in the hands of their + bankers, and we have seen that it is only likely to be employed + internationally, if invested by bankers in bills of exchange + which form a comparatively small part of their assets. It is true + that bankers also invest money in securities, and that some of + these are foreign, but here again the proportion invested abroad + is so small that we may be reasonably sure that any money left by + us in the hands of our bankers will be employed at home.</p> + + <p>But in actual practice those who save do not pile up a large + balance at their banks. They keep what is called a current + account, consisting of amounts paid in in cash or in cheques on + other banks or their own bank, <a name="Page_42"></a>and against + this account they draw what is needed for their weekly and + monthly payments; sometimes, also, they keep a certain amount on + deposit account, that is an account on which they can only draw + after giving a week's notice or more. On their deposit account + they receive interest, on their current account they may in some + parts of the country receive interest on the average balance + kept. But the deposit account is most often kept by people who + have to have a reserve of cash quickly available for business + purposes. The ordinary private investor, when he has got a + balance at his bank big enough to make him feel comfortable about + being able to meet all probable outgoings, puts any money that he + may have to spare into some security dealt in on the Stock + Exchange, and so securities and the Stock Exchange have to be + described and examined next. They are very much to the point, + because it is through them that international finance has done + most of its work.</p> + + <p>Securities, then, are the stocks, shares and bonds which are + given to those who put money <a name="Page_43"></a>into + companies, or into loans issued by Governments, municipalities + and other public bodies. Let us take the Governments and public + bodies first, because the securities issued by them are in some + ways simpler than those created by companies.</p> + + <p>When a Government wants to borrow, it does so because it needs + money. The purpose for which it needs it may be to build a + railway or canal, or make a harbour, or carry out a land + improvement or irrigation scheme, or otherwise work some + enterprise by which the power of the country to grow and make + things may be increased. Enterprises of this kind are usually + called reproductive, and in many cases the actual return from + them in cash more than suffices to meet the interest on the debt + raised to carry them out, to say nothing of the direct benefit to + the country in increasing its output of wealth. In England the + Government has practically no debt that is represented by + reproductive assets. Our Government has left the development of + the country's resources to private enterprise, and the only + assets from which it derives a revenue are the Post Office + <a name="Page_44"></a>buildings, the Crown lands and some shares + in the Suez Canal which were bought for a political purpose. + Governments also borrow money because their revenue from taxes is + less than the sums that they are spending. This happens most + often and most markedly when they are carrying on war, or when + nations are engaged in a competition in armaments, building + navies or raising armies against one another so as to be ready + for war if it happens. This kind of debt is called dead-weight + debt, because there is no direct or indirect increase, in + consequence of it, in the country's power to produce things that + are wanted. This kind of borrowing is generally excused on the + ground that provision for the national safety is a matter which + concerns posterity quite as much as the present generation, and + that it is, therefore, fair to leave posterity to pay part of the + bill.</p> + + <p>Municipalities likewise borrow both for reproductive purposes + and for objects from which no direct revenue can be expected. + They may invest money lent them in gas or electric works or water + supply or tramways, and get an income from them which will more + than pay the <a name="Page_45"></a>interest on the money + borrowed. Or they may put it into public parks and recreation + grounds or municipal buildings, or improvements in sanitation, + thereby beautifying and cleansing the town. If they do these + things in such a way as to make the town a pleasanter and + healthier place to live in, they may indirectly increase their + revenue; but if they do them extravagantly and badly, they run + the risk of putting a burden on the ratepayers that will make + people shy of living within their borders.</p> + + <p>Whatever be the object for which the loan is issued, the + procedure is the same by which the money is raised. The + Government or municipality invites subscriptions through a bank + or through some great financial house, which publishes what is + called a prospectus by circular, and in the papers, giving the + terms and details of the loan. People who have money to spare, or + are able to borrow money from their bankers, and are attracted by + the terms of the loan, sign an application form which is issued + with the prospectus, and send a cheque for the sum, usually 5 per + cent. of the amount that they apply for, which is payable on + application. If <a name="Page_46"></a>the loan is + over-subscribed, the applicants will only receive part of the + sums for which they apply. If it is not fully subscribed, they + will get all that they have asked for, and the balance left over + will be taken up in most cases by a syndicate formed by the bank + or firm that issued the loan, to "underwrite" it. Underwriting + means guaranteeing the success of a loan, and those who do so + receive a commission of anything from 1 to 3 per cent.; if the + loan is popular and goes well the underwriters take their + commission and are quit; if the loan is what the City genially + describes as a "frost," the underwriters may find themselves + saddled with the greater part of it, and will have the pleasure + of nursing it until such time as the investing public will take + it off their hands. Underwriting is thus a profitable business + when times are good, and the public is feeding freely, but it can + only be indulged in by folk with plenty of capital or credit, and + so able to carry large blocks of stock if they find themselves + left with them.</p> + + <p>To take a practical example, let us suppose that the King of + Ruritania is informed by his <a name="Page_47"></a>Minister of + Marine that a battleship must at once be added to its fleet + because his next door neighbour is thought to be thinking of + making himself stronger on the water, while his Minister of + Finance protests that it is impossible, without the risk of + serious trouble, to add anything further to the burdens of the + taxpayers. A loan is the easy and obvious way out. London and + Paris between them will find two or three millions with pleasure. + That will be enough for a battleship and something over in the + way of new artillery for the army which can be ordered in France + so as to secure the consent of the French Government, which was + wont to insist that a certain proportion of any loan raised in + Paris must be spent in the country. (It need hardly be said that + all these events are supposed to be happening in the years before + the war.) Negotiations are entered into with a group of French + banks and an English issuing house. The French banks take over + their share, and sell it to their customers who are, or were, in + the habit of following the lead of their bankers in investment + with a blind confidence, that gave the French banks enormous + <a name="Page_48"></a>power in the international money market. + The English issuing house sends round a stockbroker to underwrite + the loan. If the issuing house is one that is usually successful + in its issues, the privilege of underwriting anything that it + brings out is eagerly sought for. Banks, financial firms, + insurance companies, trust companies and stockbrokers with big + investment connections will take as much underwriting as they are + offered, in many cases without making very searching inquiry into + the terms of the security offered. The name of the issuing house + and the amount of the underwriting commission —which we + will suppose in this case to be 2 per cent.—is enough for + them. They know that if they refuse any chance of underwriting + that is offered, they are not likely to get a chance when the + next loan comes out, and since underwriting is a profitable + business for those who can afford to run its risks, many firms + put their names down for anything that is put before them, as + long as they have confidence in the firm that is handling the + loan. This power in the hands of the big issuing houses, to get + any loan that they choose to father underwritten <a name= + "Page_49"></a>in a few hours by a crowd of eager followers, gives + them, of course, enormous strength and lays a heavy + responsibility on them. They only preserve it by being careful in + the use of it, and exercising great discrimination in the class + of securities that they handle.</p> + + <p>While the underwriting is going on the prospectus is being + prepared by which the subscriptions of the public are invited, + and in the meantime it will probably happen that the newspapers + have had a hint that a Ruritanian loan is on the anvil, so that + preliminary paragraphs may prepare an atmosphere of expectancy. + News of a forthcoming new issue is always a welcome item in the + dull routine of a City article, and the journalists are only + serving their public and their papers in being eager to chronicle + it. Lurid stories are still handed down by City tradition of how + great City journalists acquired fortunes in days gone by, by + being allotted blocks of new loans so that they might expand on + their merits and then sell them at a big profit when they had + created a public demand for them. There seems to be no doubt that + this kind of thing used to happen in the <a name= + "Page_50"></a>dark ages when finance and City journalism did a + good deal of dirty business between them. Now, the City columns + of the great daily papers have for a very long time been free + from any taint of this kind, and on the whole it may be said that + finance is a very much cleaner affair than either law or + politics. It is true that swindles still happen in the City, but + their number is trivial compared with the volume of the public's + money that is handled and invested. It is only in the by-ways of + finance and in the gutters of City journalism that the traps are + laid for the greedy and gullible public, and if the public walks + in, it has itself to blame. A genuine investor who wants security + and a safe return on his money can always get it. Unfortunately + the investor is almost always at the same time a speculator, and + is apt to forget the distinction; and those who ask for a high + rate of interest, absolute safety and a big rise in the prices of + securities that they buy are only inviting disaster by the greed + that wants the unattainable and the gullibility that deludes them + into thinking they can have it.</p> + + <p>To return to our Ruritanian loan, which we <a name= + "Page_51"></a>left being underwritten. The prospectus duly comes + out and is advertised in the papers and sown broadcast over the + country through the post. It offers £1,500,000 (part of + £3,000,000 of which half is reserved for issue in Paris), + 4-1/2 per cent. bonds of the Kingdom of Ruritania, with interest + payable on April 1st and October 1st, redeemable by a cumulative + Sinking Fund of 1 per cent., operating by annual drawings at par, + the price of issue being 97, payable as to 5 per cent. on + application, 15 per cent. on allotment and the balance in + instalments extending over four months. Coupons and drawn bonds + are payable in sterling at the countinghouse of the issuing firm. + The extent of the other information given varies considerably. + Some firms rely so far on their own prestige and the credit of + those on whose account they offer loans, that they state little + more than the bare terms of the issue as given above. Others + deign to give details concerning the financial position of the + borrowing Government, such as its revenue and expenditure for a + term of years, the amount of its outstanding debt, and of its + assets if any. If the credit of the <a name="Page_52"></a>Kingdom + of Ruritania is good, such a loan as here described would be, or + would have been before the war, an attractive issue, since the + investor would get a good rate of interest for his money, and + would be certain of getting par or £100, some day, for each + bond for which he now pays £97. This is ensured by the + action of the Sinking Fund of 1 per cent. cumulative, which works + as follows. Each year, as long as the loan is outstanding the + Kingdom of Ruritania will have to put £165,000 in the hands + of the issuing houses, to be applied to interest and Sinking + Fund. In the first year interest at 4-1/2 per cent. will take + £135,000 and Sinking Fund (1 per cent. of £3,000,000) + £30,000; this £30,000 will be applied to the + redemption of bonds to that value, which are drawn by lot; so + that next year the interest charge will be less and the amount + available for Sinking Fund will be greater; and each year the + comfortable effect of this process continues, until at last the + whole loan is redeemed and every investor will have got his money + back and something over. The effect of this obligation to redeem, + of course, makes the market in the loan very steady, <a name= + "Page_53"></a>because the chance of being drawn at par in any + year, and the certainty of being drawn if the investor holds it + long enough, ensures that the market price will be strengthened + by this consideration.</p> + + <p>Such being the terms of the loan we may be justified in + supposing—if Ruritania has a clean record in its treatment + of its creditors, and if the issuing firm is one that can be + relied on to do all that can be done to safeguard their + interests, that the loan is a complete success and is fully + subscribed for by the public. The underwriters will consequently + be relieved of all liability and will pocket their 2 per cent., + which they have earned by guaranteeing the success of the issue. + If some financial or political shock had occurred which made + investors reluctant to put money into anything at the time when + the prospectus appeared or suggested the likelihood that + Ruritania might be involved in war, then the underwriters would + have had to take up the greater part of the loan and pay for it + out of their own pockets; and this is the risk for which they are + given their commission. Ruritania will have got its money less + the cost <a name="Page_54"></a>of underwriting, advertising, + commissions, 1 per cent. stamp payable to the British Government, + and the profit of the issuing firm. Some shipyard in the north + will lay down a battleship and English shareholders and workmen + will benefit by the contract, and the investors will have got + well secured bonds paying them a good rate of interest and likely + to be easily saleable in the market if the holders want to turn + them into cash. The bonds will be large pieces of paper stating + that they are 4-1/2 per cent, bonds of the Kingdom of Ruritania + for £20, £100, £500 or £1000 as the case + may be, and they will each have a sheet of coupons attached, that + is, small pieces to be cut off and presented at the date of each + interest payment; each one states the amount due each half year + and the date when it will have to be met.</p> + + <p>Bonds are called bearer securities, that is to say, possession + of them entitles the bearer to receive payment of them when drawn + and to collect the coupons at their several dates. They are the + usual form for the debts of foreign Governments and + municipalities, and of foreign railway and industrial + companies.</p> + + <p><a name="Page_55"></a>In England we chiefly affect what are + called registered and inscribed stocks—that is, if our + Government or one of our municipalities issues a loan, the + subscribers have their names registered in a book by the debtor, + or its banker, and merely hold a certificate which is a receipt, + but the possession of which is not in itself evidence of + ownership. There are no coupons, and the half-yearly interest is + posted to stockholders, or to their bankers or to any one else to + whom they may direct it to be sent. Consequently when the holder + sells it is not enough for him to hand over his certificate, as + is the case with a bearer security, but the stock has to be + transferred into the name of the buyer in the register kept by + the debtor, or by the bank which manages the business for it.</p> + + <p>When the securities offered are not loans by public bodies, + but represent an interest in a company formed to build a railway + or carry on any industrial or agricultural or mining enterprise, + the procedure will be on the same lines, except that the whole + affair will be on a less exalted plane. Such an issue would not, + save in exceptional circumstances, as when <a name= + "Page_56"></a>a great railway is offering bonds or debenture + stock, be fathered by one of the leading financial firms. + Industrial ventures are associated with so many risks that they + are usually left to the smaller fry, and those who underwrite + them expect higher rates of commission, while subscribers can + only be tempted by anticipations of more mouth-filling rates of + interest or profit. This distinction between interest and profit + brings us to a further difference between the securities of + companies and public bodies. Public bodies do not offer profit, + but interest, and the distinction is very important. A Government + asks for your money and promises to pay a rate for it, whether + the object on which the money is spent be profit-earning or no, + and, if it is, whether a profit be earned or no. A company asks + subscribers to buy it up and become owners of it, taking its + profits, that it expects to earn, and getting no return at all on + their money if its business is unfortunate and the profits never + make their appearance. Consequently the shareholders in a company + run all the risks that industrial enterprise is heir to, and the + return, if any, that comes into <a name="Page_57"></a>their + pockets depends on the ability of the enterprise to earn profits + over and above all that it has to pay for raw material, wages and + other working expenses, all of which have to be met before the + shareholder gets a penny.</p> + + <p>In order to meet the objections of steady-going investors to + the risks involved by thus becoming industrial adventurers, a + system has grown up by which the capital of companies is + subdivided into securities that rank ahead of one another. + Companies issue debts, like public bodies, in the shape of bonds + or debenture stocks, which entitle the holders of them to a + stated rate of interest, and no more, and are often repayable at + a due date, by drawings or otherwise. These are the first charge + on the concern after wages and other working expenses have been + paid, and the shareholders do not get any profit until the + interest on the company's debt has been met. Further, the actual + capital held by the shareholders is generally divided into two + classes, preference and ordinary, of which the preference take a + fixed rate before the ordinary shareholders get anything, and the + ordinary shareholders take the whole of any <a name= + "Page_58"></a>balance left over. Sometimes, the preference + holders have a right to further participation after the ordinary + have received a certain amount of dividend, or share of profit, + and there are almost endless variations of the manner in which + the different classes of holders may claim to divide the profits, + by means of preference, preferred, ordinary, preferred ordinary, + deferred ordinary, founders' shares, management shares, etc., + etc.</p> + + <p>All these variations in the position of the shareholder, + however, do not alter the great essential difference between him + and the creditor, the man who lends money to a Government or + enterprise with a fixed rate of interest, and, in most cases, a + claim for repayment sooner or later. The shareholder, whether + preference or ordinary, puts his money into a venture with no + claim for repayment, unless the company is wound up, in which + case his claim ranks, of course, after that of every creditor. If + he wants to get his money out again he can only do so by selling + his stock or shares at any price that they will fetch in the + stock market.</p> + + <p><a name="Page_59"></a>Thus, if we take as an example a Brewery + company with a total debt and capital of three millions, we may + suppose that it will have a million 4-1/2 per cent, debenture + stock, entitling the creditors who own it to interest at that + rate, and repayment in 1935, a million of 6 per cent. cumulative + preference stock, giving holders a fixed dividend, if earned, of + 6 per cent, which dividend and all arrears have to be paid before + the ordinary shareholders get anything, and a million in ordinary + shares of £10 each, whose holders take any balance that may + be left. This is the total of the money that has been received + from the public when the company was floated and put into the + brewery plant, tied houses, or other assets out of which the + company makes its revenue.</p> + + <p>These bonds and stocks and shares are the machinery of + international finance, by which moneylenders of one nation + provide borrowers in others with the wherewithal to carry out + enterprises, or make payments for which they have not cash + available at home. It was shown in a previous chapter that bills + of exchange are a means by which the movements of commodities + <a name="Page_60"></a>from market to market are financed, and the + gap in time is bridged between production and consumption. Stock + Exchange securities are more permanent investments, put into + industry for longer periods or for all time. Midway between them + are securities such as Treasury bills with which Governments + raise the wind for a time, pending the collection of revenue, and + the one or two years' notes with which American railroads lately + financed themselves for short periods, in the hope that the + conditions for an issue of bonds with longer periods to run, + might become more favourable.</p> + + <p>So far we have only considered the machinery by which these + securities are created and issued to the public, but it must not + be supposed that investment is only possible when new securities + are being offered. Many investors have a prejudice against ever + buying a new security, preferring those which have a record and a + history behind them, and buying them in the market whenever they + have money to invest. This market is the Stock Exchange in which + securities of all kinds and of all countries are dealt in. + Following the history of the Ruritanian <a name= + "Page_61"></a>loan, we may suppose that it will be dealt in + regularly in that section of the Stock Exchange in which the + loans of Foreign Governments are marketed. Any original + subscriber who wants to turn his bonds into money can do so by + instructing his broker to sell them; anyone who wants to do so + can acquire a holding in them by a purchase. The terms on which + they will be bought or sold will depend on the variations in the + demand for, and supply of, them. If a number of holders want to + sell, either because they want cash for other purposes, or + because they are nervous about the political outlook, or because + they think that money is going to be scarce and so there will be + better opportunities for investment later on, then the price will + droop. But if the political sky is serene and people are saving + money fast and investing it in Stock Exchange securities, then + the price will go up and those who want to buy it will pay more. + The price of all securities, as of everything else, depends on + the extent to which people who have not got them demand them, in + relation to the extent to which those who have got them are ready + to part with them. Price <a name="Page_62"></a>is ultimately a + question of what people think about things, and this is why the + fluctuations in the price of Stock Exchange securities are so + incalculable and often so irrational. If a sufficient number of + misguided people with money in their pockets think that a bad + security is worth buying they will put the price of it up in the + face of the logic of facts and all the arguments of reason. These + wild fluctuations, of course, take place chiefly in the more + speculative securities. Shares in a gold mine can go to any price + that the credulity of buyers dictates, since there is no limit to + the amount of gold that people can imagine to be under the ground + in its territory.</p> + + <p>All the Stock Exchanges of the world are in communication with + one another by telegraph, or telephone, and so their feelings + about prices react on one another's nerves and imaginations, and + the Stock Exchange price list may be said to be the language of + international finance, as the bill of exchange is its + currency.</p> + <hr style="width: 65%;"> + <a name="CHAPTER_IV"></a> + + <h2><a name="Page_63"></a>CHAPTER IV</h2><br> + + <center> + FINANCE AND TRADE + </center> + + <p>We have seen that finance becomes international when capital + goes abroad, by being lent by investors in one country to + borrowers in another, or by being invested in enterprises formed + to carry on some kind of business abroad. We have next to + consider why capital goes abroad and whether it is a good or a + bad thing, for it to do so.</p> + + <p>Capital goes abroad because it is more wanted in other + countries than in the country of its origin, and consequently + those who invest abroad are able to do so to greater advantage. + In countries like England and France, where there have been for + many centuries thrifty folk who have saved part of their income, + and placed their savings at the disposal of industry, it is clear + that industry is likely to be better <a name= + "Page_64"></a>supplied with capital than in the new countries + which have been more lately peopled, and in which the store of + accumulated goods is less adequate to the industrial needs of the + community. For we must always remember that though we usually + speak and think of capital as so much money it is really goods + and property. In England money consists chiefly of credit in the + books of banks, which can only be created because there is + property on which the banks can make advances, or because there + is property expressed in securities in which the banks can invest + or against which they can lend. Because our forefathers did not + spend all their incomes on their own personal comfort and + amusement but put a large part of them into railways and + factories, and shipbuilding yards, our country is now reasonably + well supplied with the machinery of production and the means of + transport. Whether it might not be much better so equipped is a + question with which we are not at present concerned. At least it + may be said that it is more fully provided in these respects than + new countries like our colonies, America and Argentina, or old + countries like <a name="Page_65"></a>Russia and China in which + industrial development is a comparatively late growth, so that + there has been less time for the storing up, by saving, of the + necessary machinery.</p> + + <p>So it comes about that new countries are in greater need of + capital than old ones and consequently are ready to pay a higher + rate of interest for it to lenders or to tempt shareholders with + a higher rate of profit. And so the opportunity is given to + investors in England to develop the agricultural or industrial + resources of all the countries under the sun to their own profit + and to that of the countries that it supplies. When, for example, + the Government of one of the Australian colonies came to London + to borrow money for a railway, it said in effect to English + investors, "Your railways at home have covered your country with + such a network that there are no more profitable lines to be + built. The return that you get from investing in them is not too + attractive in view of all the trade risks to which they are + subject. Do not put your money into them, but lend it to us. We + will take it and build a railway in a country which wants them, + and, whether the railway <a name="Page_66"></a>pays or no, you + will be creditors of a Colonial Government with the whole wealth + of the colony pledged to pay you interest and pay back your money + when the loan falls due for repayment." For in Australia the + railways have all been built by the Colonial Governments, partly + because they wished, by pledging their collective credit, to get + the money as cheaply as possible, and keep the profits from them + in their own hands, and partly probably because they did not wish + the management of their railways to be in the hands of London + boards. In Argentina, on the other hand, the chief railways have + been built, not by the Government but by English companies, + shareholders in which have taken all the risks of the enterprise, + and have thereby secured handsome profits to themselves, tempered + with periods of bad traffic and poor returns.</p> + + <p>For many years there was a good deal of prejudice in England + against investing abroad, especially among the more sleepy + classes of investors who had made their money in home trade, and + liked to keep it there when they invested it. As traders, we + learnt a world-wide <a name="Page_67"></a>outlook many centuries + before we did so as investors. To send a ship with a cargo of + English goods to a far off country to be exchanged into its + products was a risk that our enterprising forefathers took + readily. The ship took in its return cargo and came home, + bringing its sheaves with it in a reasonable time, though the + Antonios of the period sometimes had awkward moments if their + ships were delayed by bad weather, and they were liable on a bond + to Shylock. But it was quite another matter to lend money in a + distant country when communication was slow and difficult, and + social and political conditions had not gained the stability that + is needed before contracts can be entered into extending over + many years. International moneylending took place, of course, in + the middle ages, and everybody knows Motley's great description + of the consternation that shook Europe when Philip the Second + repudiated his debts "to put an end to such financiering and + unhallowed practices with bills of exchange."<a name= + "FNanchor_3_3"></a><a href="#Footnote_3_3"><sup>[3]</sup></a> But + though there were moneylenders in those days who obliged foreign + potentates with loans, <a name="Page_68"></a>the business was in + the hands of expert professional specialists, and there was no + medieval counterpart of the country doctor whom we have imagined + to be developing industry all over the world by placing his + savings in foreign countries. There could be no investing public + until there were large classes that had accumulated wealth by + saving, and until the discovery of the principle of limited + liability enabled adventurers to put their savings into industry + without running the risk of losing not only what they put in, but + all else that they possessed. By means of this system, the risk + of a shareholder in a company is limited to a definite amount, + usually the amount that has been paid up on his shares or stock, + though in some cases, such as bank and insurance shares, there is + a further reserve liability which is left for the protection of + the companies' customers.</p> + + <p>In the eighteenth century a great outburst of gambling in the + East Indian and South Sea companies, and a horde of less + notorious concerns was a short-lived episode which must have + helped for a very long time to strengthen <a name= + "Page_69"></a>the natural prejudice that investors feel in favour + of putting their money into enterprise at home; and it was still + further strengthened by the disastrous results of another great + plague of bad foreign securities that smote London just after the + war that ended at Waterloo. This prejudice survived up to within + living memory, and I have heard myself old-fashioned stockbrokers + maintain that, after all, there was no investment like Home + Rails, because investors could always go and look at their + property, which could not run away. Gradually, however, the habit + of foreign investment grew, under the influence of the higher + rates of interest and profit offered by new countries, the + greater political stability that was developed in them, and + political apprehensions at home. In fact it grew so fast and so + lustily that there came a time, not many years ago, when + investments at home were under a cloud, and many clients, when + asking their brokers where and how to place their savings, + stipulated that they must be put somewhere abroad.</p> + + <p>This was at a time when Mr. Lloyd George's <a name= + "Page_70"></a>financial measures were arousing resentment and + fear among the investing classes, and when preachers of the + Tariff Reform creed were laying so much stress on our "dying + industries" that they were frightening those who trusted them + into the belief that the sun was setting on our industrial + greatness. The effect of this belief was to bring down the prices + of home securities, and to raise those of other countries, as + investors changed from the former into the latter.</p> + + <p>So the theory that we were industrially and financially doomed + got another argument from its own effects, and its missionaries + were able to point to the fall in Consols and the relative + steadiness of foreign and colonial securities which their own + preaching had brought about, as fresh evidence of its truth. At + the same time fear of Socialistic legislation at home had the + humorous result of making British investors fear to touch + Consols, but rush eagerly to buy the securities of Colonial + Governments which had gone much further in the direction of + Socialism than we had. Those were great days for all who handled + the machinery of oversea investment and in the last <a name= + "Page_71"></a>few years before the war it is estimated that + England was placing some 200 millions a year in her colonies and + dependencies and in foreign countries. Old-fashioned folk who + still believed in the industrial strength and financial stability + of their native land waited for the reaction which was bound to + follow when some of the countries into which we poured capital so + freely, began to find a difficulty in paying the interest; and + just before the war this reaction began to happen, in consequence + of the default in Mexico and the financial embarrassments of + Brazil. Mexico had shown that the political stability which + investors had believed it to have achieved was a very thin veneer + and a series of revolutions had plunged that hapless land into + anarchy. Brazil was suffering from a heavy fall in the price of + one of her chief staple products, rubber, owing to the + competition of plantations in Ceylon, Straits Settlements and + elsewhere, and was finding difficulty in meeting the interest on + the big load of debt that the free facilities given by English + and French investors had encouraged her to pile up. She had + promised retrenchment <a name="Page_72"></a>at home, and another + big loan was being hatched to tide her over her + difficulties—or perhaps increase them—when the war + cloud began to gather and she has had to resort for the second + time in her history to the indignity of a funding scheme. By this + "new way of paying old debts" she does not pay interest to her + bondholders in cash, but gives them promises to pay instead, and + so increases the burden of her debt, which she hopes some day to + be able to shoulder again, by resuming payments in cash.</p> + + <p>Mexico and Brazil were not the only countries that were + showing signs, in 1914, of having indulged too freely in the + opportunities given them by the eagerness of English and French + investors to place money abroad. It looked as if in many parts of + the earth a time of financial disillusionment was dawning, the + probable result of which would have been a strong reaction in + favour of investment at home. Then came the war with a short + sharp spell of financial chaos followed by a halcyon period for + young countries, which enabled them to sell their products at + greatly increased prices to the <a name="Page_73"></a>warring + powers and so to meet their debt charges with an ease that they + had never dreamt of, and even to find themselves lending, out of + the abundance of their war profits, money to their creditors. + America has led the way with a loan of £100 millions to + France and England, and Canada has placed 10 millions of credit + at the disposal of the Mother Country. There can be little doubt + that if the war goes on, and the neutral countries continue to + pile up profits by selling food and war materials to the + belligerents, many of them will find it convenient to lend some + of their gains to their customers. America has also been taking + the place of France and England as international moneylenders by + financing Argentina; and a great company has been formed in New + York to promote international activity, on the part of Americans, + in foreign countries. "And thus the whirligig of time," assisted + by the eclipse of civilization in Europe, "brings in his + revenges" and turns debtors into creditors. In the meantime it + need hardly be said that investment at home has become for the + time being a matter of patriotic duty for every Englishman, since + the <a name="Page_74"></a>financing of the war has the first and + last claim on his savings.</p> + + <p>Our present concern, however, is not with the war problems of + to-day, but with the processes of international finance in the + past, and perhaps, before we get to the end, with some attempt to + hazard a glimpse into its arrangements in the future. What was + the effect on England, and on the countries to whom she lent, of + her moneylending activity in the past? As soon as we begin to + look into this question we see once more how close is the + connection between finance and trade, and that finance is + powerless unless it is supported and in fact made possible by + industrial or commercial activity behind it. England's + international trade made her international finance possible and + necessary. A country can only lend money to others if it has + goods and services to supply, for in fact it lends not money but + goods and services.</p> + + <p>In the beginnings of international trade the older countries + exchange their products for the raw materials and food produced + by the new ones. Then, as emigrants from the old countries + <a name="Page_75"></a>go out into the new ones, they want to be + supplied with the comforts and appliances of the older + civilizations, such as, to take an obvious example, railways. But + as the productions of the new countries, at their early stage of + development, do not suffice to pay for all the material and + machinery needed for building railways, they borrow, in effect, + these materials, in the expectation that the railways will open + out their resources, enable them to put more land under the + plough and bring more stuff to the seaboard, to be exchanged for + the products of Europe. The new country, New Zealand or Japan, or + whichever it may be, raises a loan in England for the purpose of + building a railway, but it does not take the money raised by the + loan in the form of money, but in the form of goods needed for + the railway, and sometimes in the form of the services of those + who plan and build it. It does not follow that all the stuff and + services needed for the enterprise are necessarily bought in the + country that lends the money; for instance, if Japan borrows + money from us for a railway, she may buy some of the steel rails + and <a name="Page_76"></a>locomotives in Belgium, and instruct us + to pay Belgium for her purchases. If so, instead of sending goods + to Japan we shall have to send goods or services to Belgium, or + pay Belgium with the claim on some other country that we have + established by sending goods or services to it. But, however long + the chain may be, the practical fact is that when we lend money + we lend somebody the right to claim goods or services from us, + whether they are taken from us by the borrower, or by somebody to + whom the borrower gives a claim on us.</p> + + <p>If, whenever we made a loan, we had to send the money to the + borrower in the form of gold, our gold store would soon be used + up, and we should have to leave off lending. In other words, our + financiers would have to retire from business very quickly if it + were not that our manufacturers and shipowners and all the rest + of our industrial army produced the goods and services to meet + the claims on our industry given, or rather lent, to other + countries by the machinery of finance.</p> + + <p>This obvious truism is often forgotten by those who look on + finance as an independent <a name="Page_77"></a>influence that + can make money power out of nothing; and those who forget it are + very likely to find themselves entangled in a maze of error. We + can make the matter a little clearer if we go back to the + original saver, whose money, or claims on industry, is handled by + the professional financier. Those who save do so by going without + things. Instead of spending their earnings on immediate enjoyment + they spend part of them in providing somebody else with goods + that they need, and taking from that somebody else an annual + payment for the use of these goods for a certain period, after + which, if it is a case of a loan, the transaction is closed by + repayment of the advance, which again is effected by a transfer + of goods. When our country doctor subscribes to an Australian + loan raised by a colony for building a railway, he hands over to + the colony money which a less thrifty citizen would have spent on + pleasures and amusements, and the colony uses it to buy railway + material. Thus in effect the doctor is spending his money in + making a railway in Australia. He is induced to do so by the + promise of the colony to give <a name="Page_78"></a>him £4 + every year for each £100 that he lends. If there were not + enough people like him to put money into industry instead of + spending it on themselves, there could be no railway building or + any other form of industrial growth. It is often contended that a + reconstruction of society on a Socialistic basis would abolish + the capitalist; but in fact it would make everybody a capitalist + because the State would have to make the citizens as a whole go + without certain immediate enjoyments and work on the production + of the machinery of industry. Instead of saving being left to the + individual and rewarded by a rate of interest, it would be + imposed on all and rewarded by a greater productive power, and + consequent increase in commodities, enjoyed by the community and + distributed among all its members. The advantages, on paper, of + such an arrangement over the present system are obvious. Whether + they would be equally obvious in practice would depend on the + discretion with which the Government handled the enormous + responsibility placed in its hands. But the essential fact that + capital can only be got by being saved, and <a name= + "Page_79"></a>earns the reward that it gets, would remain as + strongly in force as ever, and will do so until we have learnt to + make goods out of nothing and without effort.</p> + + <p>Going back to our doctor, who lends railway material to an + Australian colony, we see that every year for each £100 + lent the colony has to send him £4. This it can only do if + its mines and fields and factories can turn out metals or wheat + or wool, or other goods which can be shipped to England or + elsewhere and be sold, so that the doctor's £4 is provided. + And so though on both sides the transaction is expressed in money + it is in fact carried out in goods, both when the loan is made + and the interest is paid. And finally when the loan is paid back + again, the colony must have sold goods to provide repayment, + unless it meets its debts by raising another. But when a loan is + well spent on a railway that is needed for the development of a + fertile or productive district, it justifies itself by cheapening + transport and quickening the output of wealth in such a manner, + that the increased volume of goods that it has helped to create + easily meets the interest due to lenders, <a name= + "Page_80"></a>provides a fund for its redemption at maturity, and + leaves the borrower better off, with a more fully equipped + productive system.</p> + + <p>Since, then, there is this close and obvious connection + between finance and trade, it is inevitable that all who partake + in the activities of international finance should find their + trade quickened by it. England has lent money abroad because she + is a great producer, and certain classes of Englishmen are + savers, so that there was a balance of goods available for + export, to be lent to other countries. In the early years of the + nineteenth century, when our industrial power was first beginning + to gather strength, we used regularly to export goods to a + greater value than we imported. These were the goods that we were + lending abroad, clearly showing themselves in our trade ledger. + Since then the account has been complicated by the growth of the + amount that our debtors owe us every year for interest, and by + the huge earnings of our merchant navy, which other countries pay + by shipping goods to us, so that, by the growth of these items, + the trade balance sheet has been turned in <a name= + "Page_81"></a>the other direction, and in spite of our lending + larger and larger amounts all over the world we now have a + balance of goods coming in. Interest due to us and shipping + freights and the commissions earned by our bankers and insurance + companies were estimated before the war to amount to something + like 350 millions a year, so that we were able to lend other + countries some 200 millions or more in a year and still take from + them a very large balance in goods. After the war this + comfortable state of affairs will have been modified by the sales + that we are making now in New York of the American Railroad bonds + and shares that represented the savings that we had put into + America in former years, and by the extent of our war borrowings + in America, and elsewhere, if we widen the circle of our + creditors. The effect of this will be that we shall owe America + for interest on the money that it is lending us, and that it will + owe us less interest, owing to the blocks of its securities that + it is buying back. Against this we shall be able to set debts due + to us from our Allies, but if our borrowings and sales of + securities <a name="Page_82"></a>exceed our lendings as the war + goes on, we shall thereby be poorer. Our power as a creditor + country will be less, until by hard work and strict saving we + have restored it. This we can very quickly do, if we remember and + apply the lessons that war is teaching us about the number of + people able to work, whose capacity was hitherto left fallow, + that this country contained, and also about the ease with which + we can dispense, when a great crisis makes us sensible, with many + of the absurdities and futilities on which much of our money, and + productive capacity, used to be wasted.</p> + + <p>FOOTNOTES:</p><a name="Footnote_3_3"></a><a href= + "#FNanchor_3_3">[3]</a> + + <div class="note"> + <p>"United Netherlands," chap. xxxii.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_V"></a> + + <h2><a name="Page_83"></a>CHAPTER V</h2><br> + + <center> + THE BENEFITS OF INTERNATIONAL FINANCE + </center> + + <p>When once we have recognized how close is the connection + between finance and trade, we have gone a long way towards seeing + the greatness of the service that finance renders to mankind, + whether it works at home or abroad. At home we owe our factories + and our railways and all the marvellous equipment of our power to + make things that are wanted, to the quiet, prosaic, and often + rather mean and timorous people who have saved money for a rainy + day, and put it into industry instead of into satisfying their + immediate wants and cravings for comfort and enjoyment It is + equally, perhaps still more, true, that we owe them to the brains + and energy of those who have planned and organized the equipment + of industry, and the thews and sinews of those who have done the + heavy <a name="Page_84"></a>work. But brain and muscle would have + been alike powerless if there had not been saving folk who lent + them raw material, and provided them with the means of livelihood + in the interval between the beginning of an industry and the day + when its product is sold and paid for.</p> + + <p>Abroad, the work of finance has been even more advantageous to + mankind, for since it has been shown that international finance + is a necessary part of the machinery of international trade, it + follows that all the benefits, economic and other, which + international trade has wrought for us, are inseparably and + inevitably bound up with the progress of international finance. + If we had never fertilized the uttermost parts of the earth by + lending them money and sending them goods in payment of the sums + lent, we never could have enjoyed the stream that pours in from + them of raw material and cheap food which has sustained our + industry, fed our population, and given us a standard of general + comfort such as our forefathers could never have imagined. It is + true that at the same time we have benefited others, besides our + own <a name="Page_85"></a>customers and debtors. We have opened + up the world to trade and other countries reap an advantage by + being able to use the openings that we have made. It is sometimes + argued that we have in fact merely made the paths of our + competitors straight, and that by covering Argentina with a + network of railways and so enormously increasing its power to + grow things and so to buy things, we have been making an + opportunity for German shipbuilders to send liners to the Plate + and for German manufacturers to undersell ours with cheap + hardware and cotton goods. This is, undoubtedly, true. The great + industrial expansion of Germany between 1871 and 1914, has + certainly been helped by the paths opened for it all over the + world by English trade and finance; and America, our lusty young + rival, that is gaining so much strength from the war in which + Europe is weakening itself industrially and financially, will owe + much of the ease of her prospective expansion to spade-work done + by the sleepy Britishers. It may almost be said that we and + France as the great providers of capital to other countries have + made a <a name="Page_86"></a>world-wide trade possible on its + present scale. The work we have done for our own benefit has + certainly helped others, but it does not, therefore, follow that + it has damaged us.</p> + + <p>Looking at the matter from a purely business point of view, we + see that the great forward movement in trade and finance that we + have led and fostered, has helped us even by helping our rivals. + In the first place, it gives us a direct benefit as the owners of + the mightiest fleet of merchant ships that the world has seen. We + do nearly half the world's carrying trade, and so have reason to + rejoice when other nations send goods to the ports that we have + opened. By our eminence in finance and the prestige of a bill of + exchange drawn on London, we have also supplied the credit by + which goods have been paid for in the country of their origin, + and nursed until they have come to the land in which they are + wanted, and even until the day when they have been turned into a + finished product and passed into the hands of the final consumer. + But there is also the indirect advantage that we gain, as a + nation of producers and financiers, from the growing <a name= + "Page_87"></a>wealth of other nations. The more wealthy they + grow, the more goods they produce want to sell to us, and they + cannot sell to us unless they likewise buy from us. If we helped + Germany to grow rich, we also helped her to become one of our + best customers and so to help us to grow rich. Trade is nothing + but an exchange of goods and services. Other countries are not so + philanthropic as to kill our trade by making us presents of their + products and from the strictly economic point of view, it pays us + to see all the world, which is our market, a thriving hive of + industry eager to sell us as as it can. It may be that as other + countries, with the help of our capital and example, develop + industries in which we have been pre-eminent, they may force us + to supply them with services of which we are less proud to be the + producers. If, for example, the Americans were to drive us out of + the neutral markets with their cotton goods, and then spent their + profits by revelling in our hotels and thronging out theatres and + shooting in Highland deer forests, and buying positions in + English society for their daughters we should <a name= + "Page_88"></a>feel that the course of industry might still be + profitable to us, but that it was less satisfactory. On the other + hand, it would be absurd for us to expect the rest of the world + to stand still industrially in order that we may make profits + from producing things for it that it is quite able to make for + itself.</p> + + <p>For the present we are concerned with the benefits of + international finance, which have been shown to begin with its + enormous importance as the handmaid of international trade. Trade + between nations is desirable for exactly the same reason as trade + between one man and another, namely, that each is, naturally or + otherwise, better fitted to grow or make certain things, and so + an exchange is to their mutual advantage. If this is so, as it + clearly is, in the case of two men living in the same street, it + is evidently very much more so in the case of two peoples living + in different climates and on different soils, and so each of + them, by the nature of their surroundings, able to make and grow + things that are impossible to the other. English investors, by + developing the resources of other countries, through the + machinery of <a name="Page_89"></a>international finance, enable + us to sit at home in this inclement isle, and enjoy the fruits of + tropical skies and soils. It may be true that if they had not + done so we should have developed the resources of our own country + more thoroughly, using it less as a pleasure ground, and more as + a farm and kitchen garden, and that we should have had a larger + number of our own folk working for us under our own sky. Instead + of thriving on the produce of foreign climes and foreign labour + that comes to us to pay interest, we should have lived more on + home-made stuff and had more healthy citizens at work on our + soil. On the other hand, we should have been hit hard by bad + seasons and we should have enjoyed a much less diversified diet. + As it is, we take our tea and tobacco and coffee and sugar and + wine and oranges and bananas and cheap bread and meat, all as a + matter of course, but we could never have enjoyed them if + international trade had not brought them to our shores, and if + international finance had not quickened and cheapened their + growth and transport and marketing. International trade and + finance, <a name="Page_90"></a>if given a free hand, may be + trusted to bring about, between them, the utmost possible + development of the power of the world to grow and make things in + the places where they can be grown and made most cheaply and + abundantly, in other words, to secure for human effort, working + on the available raw material, the greatest possible harvest as + the reward of its exertions.</p> + + <p>All this is very obvious and very material, but international + finance does much more, for it is a great educator and a mighty + missionary of peace and goodwill between nations. This also is + obvious on a moment's reflection, but it will be rejected as a + flat mis-statement by many whose opinion is entitled to respect, + and who regard international finance as a bloated spider which + sits in the middle of a web of intrigue and chicanery, enticing + hapless mankind into its toils and battening on bloodshed and + war. So clear-headed a thinker as Mr. Philip Snowden publicly + expressed the view not long ago that "the war was the result of + secret diplomacy carried on by diplomatists who had conducted + foreign policy in the <a name="Page_91"></a>interests of + militarists and financiers,"<a name="FNanchor_4_4"></a><a href= + "#Footnote_4_4"><sup>[4]</sup></a> Now Mr. Snowden may possibly + be right in his view that the war was produced by diplomacy of + the kind that he describes, but with all deference I submit that + he is wholly wrong if he thinks that the financiers, as + financiers, wanted war either here or in Germany or anywhere + else. If they wanted war it was because they believed, rightly or + wrongly, that their country had to fight for its existence, or + for something equally well worth fighting for, and so as + patriotic citizens, they accepted or even welcomed a calamity + that could only cause them, as financiers, the greatest + embarrassment and the chance of ruin. War has benefited the + working classes, and enabled them to take a long stride forward, + which we must all hope they will maintain, towards the + improvement in their lot which is so long overdue. It has helped + the farmers, put fortunes in the pockets of the shipowners, and + swollen the profits of any manufacturers who have been able to + turn out stuff wanted for war or for the indirect needs of war. + The industrial centres are <a name="Page_92"></a>bursting with + money, and the greater spending power that has been diffused by + war expenditure has made the cheap jewellery trade a thriving + industry and increased the consumption of beer and spirits in + spite of restrictions and the absence of men at the front. + Picture palaces are crammed nightly, furs and finery have had a + wonderful season, any one who has a motor car to sell finds + plenty of ready buyers, and second-hand pianos are an article + that can almost be "sold on a Sunday." But in the midst of this + roar of humming trade, finance, and especially international + finance, lies stricken and still gasping from the shock of war. + When war comes, the price of all property shrivels. This was well + known to Falstaff, who, when he brought the news of Hotspur's + rebellion, said "You may buy land now as cheap as stinking + mackerel," To most financial institutions, this shrivelling + process in the price of their securities and other assets, brings + serious embarrassment, for there is no corresponding decline in + their liabilities, and if they have not founded themselves on the + rock of severest prudence in the past, their solvency is likely + to be imperilled. <a name="Page_93"></a>Finance knew that it must + suffer. The story has often been told, and though never + officially confirmed, it has at least the merit of great + probability, that in 1911 when the Morocco crisis made a European + war probable, the German Government was held back by the warning + of its financiers that war would mean Germany's ruin. It is more + than likely that a similar warning was given in July, 1914, but + that the war party brushed it aside. And now that war is upon us, + we are being warned that high finance is intriguing for peace. + Mr. Edgar Crammond, a distinguished economist and statistician, + published an article in the <i>Nineteenth Century</i> of + September, 1915, entitled "High Finance and a Premature Peace," + calling attention to this danger and urging the need for guarding + against it. First too bellicose and now too pacific, High Finance + is buffeted and spat upon by men of peace and men of war with a + unanimity that must puzzle it. It can hardly err on both sides, + but of the two accusers I think that Mr. Crammond is much more + likely to be right. But my own personal opinion is that both + these accusers are mistaken, <a name="Page_94"></a>that the + financiers never wanted war, that if (which I beg to doubt) + diplomacy conducted in their interests produced the war, that was + because diplomacy misunderstood and bungled their interests, and + that now that the war is upon us, the financiers, though all + their interests urge them to want peace, would never be parties + to intrigues for a peace that was premature or ill-judged.</p> + + <p>Perhaps I have a weakness for financiers, but if so it is + entitled to some respect, because it is based on closer knowledge + of them than is owned by most of their critics. For years it was + my business as a City journalist, to see them day by day; and + this daily intercourse with financiers has taught me that the + popular delusion that depicts them as hard, cruel, ruthless men, + living on the blood and sweat of humanity, and engulfed to their + eyebrows in their own sordid interests, is about as absurd a + hallucination as the stage Irishman. Financiers are quite + human—quiet, mild, good-natured people as a rule, many of + them spending much time and trouble on good works in their + leisure hours. What they want as financiers is <a name= + "Page_95"></a>plenty of good business and as little as possible + disturbance in the orderly course of affairs. Such a cataclysm as + the present war could only terrify them, especially those with + interests in every country of the world. When war comes, + especially such a war as this, financing in its ordinary and most + profitable sense has to put up its shutters. Nobody can come to + London now for loans except the British, or French, Governments, + or, occasionally, one of our colonies. Any other borrower is + warned off the field by a ruthless Committee whose leave has to + be granted before dealings in new securities are allowed on the + Stock Exchange. But when the British Government borrows, there + are no profits for the rank and file of financiers. No + underwriting is necessary, and the business is carried out by the + Bank of England. The commissions earned by brokers are smaller, + and the whole City feels that this is no time for profit-making, + but for hard and ill-paid work, with depleted staffs, to help the + great task of financing a great war. The Stock Exchange is half + empty and nearly idle. It is tied and bound by all sorts of + regulations in its <a name="Page_96"></a>dealings, and its + members have probably suffered as severely from the war as any + section of the community. The first interest of the City is + unquestionably peace; and the fact that the City is nevertheless + full of fine, full-flavoured patriotic fervour only shows that it + is ready and eager to sink its interests in favour of those of + its country.</p> + + <p>Every knot that international finance ties between one country + and another makes people in those two countries interested in + their mutual good relations. The thing is so obvious, that, when + one considers the number of these knots that have been tied since + international finance first began to gather capital from one + country's investors and place it at the disposal of others for + the development of their resources, one can only marvel that the + course of international goodwill has not made further progress. + The fact that it is still a remarkably tender plant, likely to be + crushed and withered by any breath of popular prejudice, is + rather a comforting evidence of the slight importance that + mankind attaches to the question of its bread and butter. It is + clear that a purely <a name="Page_97"></a>material consideration, + such as the interests of international finance, and the desire of + those who have invested abroad to receive their dividends, weighs + very little in the balance when the nations think that their + honour or their national interests are at stake. Since the gilded + cords of trade and finance have knit all the world into one great + market, the proposition that war does not pay has become + self-evident to any one who will give the question a few minutes' + thought. International finance is a peacemaker every time it + sends a British pound into a foreign country. But its influence + as a peacemaker is astonishingly feeble just for this reason, + that its appeal is to an interest which mankind very rightly + disregards whenever it feels that more weighty matters are in + question. The fact that war does not pay is an argument that is + listened to as little by a nation when its blood is up, as the + fact that being in love does not pay would be heeded by an + amorous undergraduate.</p> + + <p>If, then, the voice of international finance is so feeble when + it is raised against the terrible scourge of war, can it have + much force on the <a name="Page_98"></a>rare occasions when it + speaks in its favour? For there is no inconsistency with the view + that finance is a peacemaker, if we now acknowledge that finance + may sometimes ask for the exertion of force on its behalf. As + private citizens we all of us want to live at peace with our + neighbours, but if one of them steals our property or makes a + public nuisance of himself, we sometimes want to invoke the aid + of the strong arm of the law in dealing with him. Consequently, + although it cannot be true that finance wanted war such as this + one, it cannot be denied that wars have happened in the past, + which have been furthered by financiers who believed that they + suffered wrongs which only war could put right. The Egyptian war + of 1882 is a case in point, and the South African war of 1899 is + another.</p> + + <p>In Egypt international finance had lent money to a potentate + ruling an economically backward people, without taking much + trouble to consider how the money was to be spent, or whether the + country could stand the charge on its revenues that the loans + would involve. The fact that it did so was from one point of + <a name="Page_99"></a>view a blunder and from another a crime, + but this habit of committing blunders and crimes, which is + sometimes indulged in by finance as by all other forms of human + activity, will have to be dealt with in our next chapter, when we + deal with the evils of international finance. The consequence of + this blunder was that Egypt went into default, and England's + might was used on behalf of the bondholders who had made a bad + investment. This fact has been put forward by Mr. Brailsford, in + his very interesting book on "The War of Steel and Gold," and by + other writers, to show that our diplomacy is the tool of + international finance, and that the forces created by British + taxpayers for the defence of their country's honour, are used for + the sordid purpose of wringing interest for a set of + money-grubbers in the City, out of a poor and down-trodden + peasantry overburdened by the exactions and extortions of their + rulers. Mr. Brailsford, of course, puts his case much better than + I can, in any brief summary of his views. He has earned and won + the highest respect by his power as a brilliant writer, and by + his disinterested and consistent championship <a name= + "Page_100"></a>of the cause of honesty and justice, wherever and + whenever he thinks it to be in danger. Nevertheless, in this + matter of the Egyptian war I venture to think that he is + mistaking the tail for the dog. Diplomacy, I fancy, was not + wagged by finance, but used finance as a very opportune pretext. + If Egypt had been Brazil, it is not very likely that the British + fleet would have shelled Rio de Janeiro. The bondholders would + have been reminded of the sound doctrine, <i>caveat emptor</i>, + which signifies that those who make a bad bargain have only + themselves to blame, and must pocket their loss with the best + grace that they can muster. As it was, Egypt had long ago been + marked out as a place that England wanted, because of its vitally + important position on the way to India. Kinglake, the historian, + writing some three-quarters of a century ago, long before the + Suez Canal was built, prophesied that Egypt would some day be + ours. In Chapter XX. of "Eothen," comes this well known passage + on the Sphynx (he spelt it thus):—</p> + + <div class="blkquot"> + <p>"And we, we shall die, and Islam will wither away, and the + Englishman, leaning far over to <a name="Page_101"></a>hold his + loved India, will plant a firm foot on the banks of the Nile, + and sit in the seats of the Faithful, and still that sleepless + rock will lie watching, and watching the works of the new, busy + race, with those same sad, earnest eyes, and the same tranquil + mien everlasting."</p> + </div> + + <p>After the building of the Canal, the command of this short cut + to India made Egypt still more important. England bought shares + in the Canal, so using finance as a means to a political object; + and it did so still more effectively when it used the Egyptian + default and the claims of English bondholders as an excuse for + taking its seat in Egypt and sitting there ever since. The + bondholders were certainly benefited, but it is my belief that + they might have whistled for their money until the crack of doom + if it had not been that their claims chimed in with Imperial + policy. It may have been wicked of us to take Egypt, but if so + let us lay the blame on the right doorstep and not abuse the poor + bondholder and financier who only wanted their money and were + used as a stalking horse by the Machiavellis of Downing Street. + Mr Brailsford's own account of the matter, indeed, shows very + clearly that <a name="Page_102"></a>policy, and not finance, + ruled the whole transaction.</p> + + <p>In South Africa there was no question of default, or of + suffering bondholders. There was a highly prosperous mining + industry in a country that had formerly belonged to us, and had + been given back to its Dutch inhabitants under circumstances + which the majority of people in this country regarded as + humiliating. On this occasion even the pretext was political. It + may have been that the English mine-owners thought they could + earn better profits under the British flag than under the rule of + Mr. Kruger, though I am inclined to believe that even in their + case their incentive was chiefly a patriotic desire to repaint in + red that part of the map in which they carried on their business. + Certainly their grievance, as it was put before us at home, was + frankly and purely political. They said they wanted a vote and + that Mr. Kruger would not give them one. That acute political + thinker, Mr. Dooley of Chicago, pointed out at the time that if + Mr. Kruger "had spint his life in a rale raypublic where they + burn gas," he would have given them the votes, but <a name= + "Page_103"></a>done the counting himself. But Mr. Kruger did not + adopt this cynical expedient, and public opinion here, though a + considerable minority detested the war, endorsed the + determination of the Government to restore the disputed British + suzerainty over the Transvaal into actual sovereignty. Subsequent + events, largely owing to the ample self-government given to the + Transvaal immediately after its conquest, have shown that the war + did more good than harm; and the splendid defeat of the Germans + by the South African forces under General Botha—our most + skilful opponent fifteen years ago—has, we may hope, wiped + out all traces of the former conflict. But what we are now + concerned with is the fact, which will be endorsed by all whose + memory goes back to those days, that the South African war, + though instigated and furthered by financial interests, would + never have happened if public opinion had not been in favour of + it on grounds which were quite other than financial—the + desire to bring back the Transvaal into the British Empire and to + wipe out the memory of the surrender after Majuba, and + humanitarian <a name="Page_104"></a>feeling which believed, + rightly or wrongly, that the natives would be treated better + under our rule. These may or may not have been good reasons for + going to war, but at least they were not financial.</p> + + <p>Summing up the results of this rather discursive chapter we + see that the chief benefit conferred on mankind by international + finance is a quickening of the pace at which the wealth of the + world is increased and multiplied, by using the capital saved by + old countries for fostering the productive power of new ones. + This is surely something solid on the credit side of the balance + sheet, though it would be a good deal more so if mankind had made + better progress with the much more difficult problem of using and + distributing its wealth. If the rapid increase of wealth merely + means that honest citizens, who find it as hard as ever to earn a + living, are to be splashed with more mud from more motor-cars + full of more road hogs, then there is little wonder if the + results of international finance produce a feeling of + disillusionment. But at least it must be admitted that the stuff + has to be grown and made before <a name="Page_105"></a>it can be + shared, and that a great advance has been made even in the + general distribution of comfort. If we still find it hard to make + a 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.</p> + + <p>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 <a name= + "Page_106"></a>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 <a name= + "Page_107"></a>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, <a name="Page_108"></a>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.</p> + + <p>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.</p> + + <p>FOOTNOTES:</p><a name="Footnote_4_4"></a><a href= + "#FNanchor_4_4">[4]</a> + + <div class="note"> + <p>Quoted by the <i>Financial News</i> of September 28, + 1915.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_VI"></a> + + <h2><a name="Page_109"></a>CHAPTER VI</h2><br> + + <center> + THE EVILS OF INTERNATIONAL FINANCE + </center> + + <p>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.</p> + + <p>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 <a name= + "Page_110"></a>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 <a name="Page_111"></a>financiers do + their work ill, or charge the community too much for it, or + both.</p> + + <p>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 <i>Merchant of Venice</i> says + that—</p><span style="margin-left: 1em;">"A kinder + gentleman treads not the earth,"</span><br> + + <p>not only makes no attempt to deny that he has spat on the + wicked Shylock, and called him <a name="Page_112"></a>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.<a name="FNanchor_5_5"></a><a href= + "#Footnote_5_5"><sup>[5]</sup></a> Compare also, for a more + modern example, Kinglake in a note to Chapter V of "Eothen."</p> + + <div class="blkquot"> + <p>"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."</p> + </div> + + <p>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 + <a name="Page_113"></a>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 + <a name="Page_114"></a>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.</p> + + <p>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 <a name="Page_115"></a>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.</p> + + <p>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 + <a name="Page_116"></a>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.</p> + + <p>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 <a name="Page_117"></a>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.</p> + + <p>In 1867 the Republic of Honduras had been for forty years in + default on its portion, amounting to £27,200, 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 £1,000,000 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 + £140,000 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 £1632, it is hard + to imagine how the State could have entered into such a + liability, or how any issuing house could <a name= + "Page_118"></a>have had the temerity to put it before the + public.</p> + + <p>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 £10,000 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 £48,000 of the + loan was held by the public, and £952,000 was in possession + of the representatives of the <a name="Page_119"></a>Honduras + Government. On that day a Mr. L---- undertook to take over the + Government's holding at £68 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.</p> + + <p>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.</p> + + <p>At the end of the proceedings the whole amount of the loan + seemed to have been disposed of in London, £631,000 having + been sold to Mr. L---- and passed on by him by the means + described above, £200,000 having been issued to railway + contractors, £10,800 having been "drawn before issue and + cancelled," while <a name="Page_120"></a>£49,500 was + "issued in exchange for scrip," and £108,500 was taken on + account of commission and expenses.</p> + + <p>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 + £16,850 went in cash commission, and £106,000 in + interest and sinking fund, leaving about £380,000 for the + railway contractors and the Government. On this loan the + Committee observes that the commission paid, of £108,500 + bonds, and £16,850 in cash was "greatly in excess of what + is usually charged by contractors for loans."</p> + + <p>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 <a name="Page_121"></a>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.</p> + + <p>In May, 1869, the Minister for Honduras in Paris, M. H----, + "took steps" to issue a loan for 62,250,060 francs, or + £2,490,000. Out of it a small sum (about £62,000) 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 + (£100,000), 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 <a name= + "Page_122"></a>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 (£12) bond + issued originally at 225 francs (£9), was 124 francs (not + quite £5). He succeeded in selling bonds enough to realize + £408,460, and he, together with Messrs. B---- and G----, + received £51,852 in commission for so doing.</p> + + <p>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 <a name="Page_123"></a>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."</p> + + <p>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 £2,500,000 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 £200,000 + bonds remained <a name="Page_124"></a>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.</p> + + <p>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:—</p> + + <p>"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.</p> + + <p>"The two-fifths of the 1869 loan, and the whole of the loan of + 1870, produced net <a name="Page_125"></a>£2,051,511; out + of this sum only £145,254 has been paid to the railway + contractors; a sum of £923,184 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----£1,339,752 or £416,568 beyond the sum so + required to be paid upon the issued bonds of the loans.</p> + + <p>"There was paid to him for commissions (apart from expenses) + on the three loans, out of the above proceeds, the sum of + £216,852. He also received out of the same proceeds + £41,090, being the difference between £370,000 cash + paid to him by the trustees and £328,910 scrip returned by + him to them. This £41,090 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.</p> + + <p>"Mr. L---- was also paid, out of these proceeds, a further sum + of £57,318, nearly the whole of which seems to be a payment + in discharge of an allowance of £8 per bond in <a name= + "Page_126"></a>respect of the dealings in the 1867 loan.... In + addition ... it will be remembered that Mr. L---- received + £50,000 'to maintain the credit of Honduras.'</p> + + <p>"He also on the 18th of June, 1872, obtained £173,570 by + delivering to the trustees ... 5042 bonds of the 1870 loan, at + £75 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 £50 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 £75 and 104 francs + respectively, and the remission in the price therefore amounted + to a gift to him of £173,570 ... 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, £955,398."</p> + + <p>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 <a name="Page_127"></a>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.</p> + + <p>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 <a name="Page_128"></a>described will be found, not so much + in legislative enactments, as in the enlightenment of the public + as to their real nature and origin."</p> + + <p>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.</p> + + <p>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 <a name="Page_129"></a>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 <a name= + "Page_130"></a>and prosperous, and that there is little fear that + its creditors will be left in the lurch by default.</p> + + <p>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 <a name= + "Page_131"></a>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.<a name= + "FNanchor_6_6"></a><a href="#Footnote_6_6"><sup>[6]</sup></a> 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.</p> + + <p>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 <a name= + "Page_132"></a>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.</p> + + <p>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 + <a name="Page_133"></a>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.</p> + + <p>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.</p> + + <p><a name="Page_134"></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 <a name="Page_135"></a>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 <a name="Page_136"></a>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.</p> + + <p>But if we admit the very worst that the <a name= + "Page_137"></a>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?</p> + + <p>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 <a name="Page_138"></a>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?</p> + + <p>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 <a name= + "Page_139"></a>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 + <a name="Page_140"></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.</p> + + <p>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 <a name= + "Page_141"></a>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.</p> + + <p><a name="Page_142"></a>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 <a name="Page_143"></a>debt and not the issuing house, + unless, as is unlikely, it has kept any of them in its own + hands.</p> + + <p>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 <a name="Page_144"></a>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.</p> + + <p>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 <a name= + "Page_145"></a>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.</p> + + <p>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 <a name= + "Page_146"></a>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 £5 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 + <a name="Page_147"></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.</p> + + <p>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 <a name="Page_148"></a>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.</p> + + <p>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 <a name= + "Page_149"></a>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</p><span style= + "margin-left: 1em;">"the fool multitude that choose by + show"</span><br> + + <p>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.</p> + + <p><a name="Page_150"></a>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. <a name= + "Page_151"></a>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.</p> + + <div class="blkquot"> + <p><i>Note</i>.—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.</p> + </div> + + <p>FOOTNOTES:</p><a name="Footnote_5_5"></a><a href= + "#FNanchor_5_5">[5]</a> + + <div class="note"> + <p><i>Merchant of Venice</i>, I, 3.</p> + </div><a name="Footnote_6_6"></a><a href="#FNanchor_6_6">[6]</a> + + <div class="note"> + <p>Pages <a href="#Page_75">75</a>, <a href= + "#Page_76">76</a>.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_VII"></a> + + <h2><a name="Page_152"></a>CHAPTER VII</h2><br> + + <center> + NATIONALISM AND FINANCE + </center> + + <p>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 <a name= + "Page_153"></a>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?</p> + + <p>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 <a name="Page_154"></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 <a name= + "Page_155"></a>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.</p> + + <p>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. <a name="Page_156"></a>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."<a name="FNanchor_7_7"></a><a href= + "#Footnote_7_7"><sup>[7]</sup></a></p> + + <p>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. + <a name="Page_157"></a>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.</p> + + <p>Then came the war, which went far to undermine the great + underlying assumption on which the free interchange of capital + among nations <a name="Page_158"></a>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 <a name="Page_159"></a>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.</p> + + <p>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.<a name= + "FNanchor_8_8"></a><a href="#Footnote_8_8"><sup>[8]</sup></a> + 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 + <a name="Page_160"></a>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.</p> + + <p>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. + <a name="Page_161"></a>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.</p> + + <p>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 <a name= + "Page_162"></a>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.</p> + + <p>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 <a name="Page_163"></a>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.</p> + + <p>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 <a name="Page_164"></a>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 name="Page_165"></a>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.</p> + + <p>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 <a name= + "Page_166"></a>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.</p> + + <p>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 + <a name="Page_167"></a>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.</p> + + <p>FOOTNOTES:</p><a name="Footnote_7_7"></a><a href= + "#FNanchor_7_7">[7]</a> + + <div class="note"> + <p>"England's Foreign Trade in the Nineteenth Century," p, 16, + by Dr. A.L. Bowley.</p> + </div><a name="Footnote_8_8"></a><a href="#FNanchor_8_8">[8]</a> + + <div class="note"> + <p>"Paper against Gold," Letter III.</p> + </div> + <hr style="width: 65%;"> + <a name="CHAPTER_VIII"></a> + + <h2><a name="Page_168"></a>CHAPTER VIII</h2><br> + + <center> + REMEDIES AND REGULATIONS + </center> + + <p>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.</p> + + <p>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 <a name="Page_169"></a>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.</p> + + <p>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 + <a name="Page_170"></a>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.</p> + + <p>In any attempt that is made to regulate <a name= + "Page_171"></a>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.</p> + + <p>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 <a name="Page_172"></a>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 <a name="Page_173"></a>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.</p> + + <p>At the same time we may hope that as economic progress goes + slowly ahead over the stepping stones of uncomfortable + experience, <a name="Page_174"></a>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 <a name="Page_175"></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.</p> + + <p>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 <a name= + "Page_176"></a>decide that the experiences of war have raised no + objections to their doing so with the old indiscriminate + freedom.</p> + + <p>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 <a name="Page_177"></a>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.</p> + + <p>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 <a name= + "Page_178"></a>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.</p> + + <p>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, <a name="Page_179"></a>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<a name="FNanchor_9_9"></a><a href= + "#Footnote_9_9"><sup>[9]</sup></a> 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, <a name="Page_180"></a>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.</p> + + <p>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 <a name= + "Page_181"></a>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.</p> + + <p>FOOTNOTES:</p><a name="Footnote_9_9"></a><a href= + "#FNanchor_9_9">[9]</a> + + <div class="note"> + <p>Written on New Year's Eve, 1915.</p> + </div> + <hr style="width: 65%;"> + <a name="INDEX"></a> + + <h2><a name="Page_182"></a>INDEX</h2>ACCEPTANCES, of banks and + firms. <a href="#Page_26">26</a>, <a href="#Page_36">36</a><br> + America, as international financier, <a href= + "#Page_73">73</a>;<br> + <span style="margin-left: 1em;">trade expansion of, helped by + England, <a href="#Page_85">85</a></span><br> + Armament firms and bad finance, <a href="#Page_135">135</a>, + <a href="#Page_136">136</a><br> + <br> + <br> + BANK OF ENGLAND, position of, <a href="#Page_31">31</a>. <a href= + "#Page_32">32</a>;<br> + <span style="margin-left: 1em;">weekly return of, <a href= + "#Page_33">33</a></span><br> + Banks, bills of exchange held by, <a href="#Page_26">26</a> + <i>seq</i>.;<br> + <span style="margin-left: 1em;">functions of, <a href= + "#Page_35">35</a> <i>seq</i>.;</span><br> + <span style="margin-left: 1em;">money deposited with, <a href= + "#Page_25">25</a> <i>seq</i>.;</span><br> + <span style="margin-left: 1em;">specimen balance sheet of, + <a href="#Page_35">35</a></span><br> + Bearer securities, <a href="#Page_54">54</a><br> + Bill-brokers, <a href="#Page_37">37</a>, <a href= + "#Page_38">38</a><br> + Bills of exchange, meaning of, <a href="#Page_26">26</a> + <i>seq</i>.;<br> + <span style="margin-left: 1em;">on London, popularity of, + <a href="#Page_29">29</a>, <a href="#Page_30">30</a>;</span><br> + <span style="margin-left: 1em;">uses of, <a href= + "#Page_39">39</a>, <a href="#Page_40">40</a></span><br> + Bonds, description of, <a href="#Page_54">54</a><br> + Bowley, Dr., on specialization, <a href="#Page_156">156</a><br> + Brailsford, Mr., on Egypt and finance, <a href= + "#Page_99">99</a><br> + Brazil, financial embarrassments of, <a href= + "#Page_71">71</a>;<br> + <span style="margin-left: 1em;">funding scheme for, <a href= + "#Page_72">72</a></span><br> + <br> + <br> + CANADA lends to England, <a href="#Page_73">73</a><br> + Capital, bad effects of export of, <a href= + "#Page_164">164</a>;<br> + <span style="margin-left: 1em;">difficulty of controlling, + <a href="#Page_166">166</a>, <a href= + "#Page_171">171</a>;</span><br> + <span style="margin-left: 1em;">definition of, <a href= + "#Page_4">4</a>, <a href="#Page_17">17</a>;</span><br> + <span style="margin-left: 1em;">function of, <a href= + "#Page_3">3</a> <i>seq</i>.;</span><br> + <span style="margin-left: 1em;">how acquired, <a href= + "#Page_16">16</a>;</span><br> + <span style="margin-left: 1em;">plenty of, advantageous to + workers, <a href="#Page_19">19</a>, <a href= + "#Page_20">20</a>;</span><br> + <span style="margin-left: 1em;">reward of, <a href= + "#Page_2">2</a> <i>seq</i>.</span><br> + Charles II, dukedoms founded by. <a href= + "#Page_14">14</a>,<a href="#Page_15">15</a><br> + China and international finance, <a href="#Page_106">106</a><br> + Cobbett on national prosperity, <a href="#Page_159">159</a><br> + Colonial investments, advantages possessed by, <a href= + "#Page_166">166</a><br> + Companies' securities, classes of, <a href="#Page_57">57</a>;<br> + <span style="margin-left: 1em;">issue of, <a href= + "#Page_55">55</a></span><br> + Coupons, description of, <a href="#Page_54">54</a><br> + Crammond, Mr., on financiers and peace, <a href= + "#Page_93">93</a><br> + Cumulative, preference, <a href="#Page_59">59</a>;<br> + <span style="margin-left: 1em;">sinking fund, <a href= + "#Page_52">52</a></span><br> + <br> + <br> + DEBENTURE stocks, <a href="#Page_57">57</a><br> + Discount, market rate of, <a href="#Page_38">38</a><br> + <br> + <br> + EGYPT and finance, <a href="#Page_98">98</a> <i>seq</i>.<br> + <br> + <br> + "FENN on the Funds," on diplomacy and finance, <a href= + "#Page_106">106</a><br> + Finance and industry, <a href="#Page_75">75</a>, <a href= + "#Page_76">76</a>, <a href="#Page_131">131</a>;<br> + <span style="margin-left: 1em;">as peace-missionary, <a href= + "#Page_90">90</a> <i>seq</i>.;</span><br> + <span style="margin-left: 1em;">benefits of, <a href= + "#Page_83">83</a> <i>seq</i>.;</span><br> + <span style="margin-left: 1em;">defined, <a href= + "#Page_1">1</a>;</span><br> + <span style="margin-left: 1em;">dependent on industry, <a href= + "#Page_28">28</a>, <a href="#Page_29">29</a>, <a href= + "#Page_40">40</a>;</span><br> + <span style="margin-left: 1em;">effects of war on, <a href= + "#Page_92">92</a>, <a href="#Page_93">93</a></span><br> + Foreign Office and finance, <a href="#Page_105">105</a>, + <i>seq</i>.<br> + France, loan issuing in, <a href="#Page_47">47</a><br> + Freights, effect of war on, <a href="#Page_162">162</a><br> + <br> + <br> + GEOGRAPHICAL distribution, investment by, <a href= + "#Page_24">24</a>, <a href="#Page_25">25</a><br> + German finance and diplomacy, <a href="#Page_107">107</a><br> + German industry helped by English finance, <a href= + "#Page_85">85</a><br> + Governments, borrowing by, <a href="#Page_43">43</a> + <i>seq</i>.<br> + <a name="Page_183"></a><br> + <br> + HONDURAS loans, Select Committee's report on, <a href= + "#Page_116">116</a> <i>seq</i>.<br> + <br> + <br> + "INCOME," Dr. Nearing on, <a href="#Page_7">7</a><br> + Industry the foundation of finance, <a href="#Page_28">28</a>, + <a href="#Page_29">29</a><br> + Inherited wealth, <a href="#Page_11">11</a> <i>seq</i>.<br> + Interest, the price of capital, <a href="#Page_2">2</a>, <a href= + "#Page_3">3</a><br> + Interest claims, as article of export, <a href="#Page_80">80</a>, + <a href="#Page_81">81</a><br> + Issuing houses, responsibilities of, <a href="#Page_137">137</a> + <i>seq</i>.<br> + <br> + <br> + JEWS and finance, <a href="#Page_111">111</a> <i>seq</i>.<br> + Journalism in the City, <a href="#Page_49">49</a>, <a href= + "#Page_50">50</a><br> + <br> + <br> + KINGLAKE on Egypt, <a href="#Page_100">100</a>;<br> + <span style="margin-left: 1em;">on Jews of Smyrna, <a href= + "#Page_112">112</a></span><br> + <br> + <br> + LIMITED liability, system of, <a href="#Page_68">68</a><br> + Loans, issue of, <a href="#Page_45">45</a> <i>seq</i>.<br> + London, strength of, in credit matters, <a href= + "#Page_30">30</a><br> + <br> + <br> + MEXICO, revolution and default in, <a href="#Page_71">71</a><br> + Morocco crisis and financiers, <a href="#Page_93">93</a><br> + Municipalities, borrowing by, <a href="#Page_45">45</a><br> + <br> + <br> + NEARING, DR., on capital's reward, <a href="#Page_7">7</a>, + <a href="#Page_8">8</a><br> + New York as financial centre, <a href="#Page_30">30</a><br> + <br> + <br> + PHILIP II repudiates debts, <a href="#Page_67">67</a><br> + Preference securities, <a href="#Page_57">57</a>, <a href= + "#Page_59">59</a><br> + Profit, distinguished from interest, <a href= + "#Page_56">56</a>;<br> + <span style="margin-left: 1em;">the reward of capital, <a href= + "#Page_2">2</a>, <a href="#Page_3">3</a></span><br> + Prospectuses, fuller statement desirable in, <a href= + "#Page_173">173</a>;<br> + <span style="margin-left: 1em;">terms of, <a href= + "#Page_49">49</a> <i>seq</i>., <a href= + "#Page_51">51</a></span><br> + Public, the, the modern dispenser of wealth, <a href= + "#Page_15">15</a> <i>seq</i>.<br> + <br> + <br> + REGISTERED stocks, <a href="#Page_55">55</a><br> + Risk, inseparable from industry, <a href="#Page_23">23</a><br> + <br> + <br> + SINKING Fund, working of, <a href="#Page_52">52</a><br> + Snowden, Mr. Philip, on finance and diplomacy, <a href= + "#Page_90">90</a>, <a href="#Page_91">91</a><br> + South African War and finance, <a href="#Page_102">102</a>, + <a href="#Page_103">103</a><br> + Specialization, dangers and evils of, <a href="#Page_153">153</a> + <i>seq</i>.<br> + State, as saver of capital, <a href="#Page_21">21</a><br> + Stock Exchange, as regulator of new issues, <a href= + "#Page_169">169</a>, <a href="#Page_170">170</a>;<br> + <span style="margin-left: 1em;">effect of war on, <a href= + "#Page_95">95</a>;</span><br> + <span style="margin-left: 1em;">securities dealt in on, <a href= + "#Page_42">42</a> <i>seq</i>.</span><br> + Stock markets, fluctuations of, <a href="#Page_61">61</a>, + <a href="#Page_62">62</a>;<br> + <span style="margin-left: 1em;">international relations of, + <a href="#Page_62">62</a></span><br> + <br> + <br> + TRADE balance, <a href="#Page_80">80</a>, <a href= + "#Page_81">81</a><br> + <br> + <br> + UNDERWRITING of loans, <a href="#Page_46">46</a>, <a href= + "#Page_48">48</a>;<br> + <span style="margin-left: 1em;">risk involved by, <a href= + "#Page_53">53</a></span><br> + <br> + <br> + VENEZUELA and German diplomacy, <a href="#Page_107">107</a><br> + <br> + <br> + WAR, effects of, on finance, <a href="#Page_92">92</a>, <a href= + "#Page_93">93</a>;<br> + <span style="margin-left: 1em;">lessons taught by, <a href= + "#Page_161">161</a> <i>seq</i>., <a href="#Page_175">175</a> + <i>seq</i>.</span><br> + <br> + <br> + + <p>THE END</p> + + + + + + + +<pre> + + + + + +End of Project Gutenberg's International Finance, by Hartley Withers + +*** END OF THIS PROJECT GUTENBERG EBOOK INTERNATIONAL FINANCE *** + +***** This file should be named 11774-h.htm or 11774-h.zip ***** +This and all associated files of various formats will be found in: + https://www.gutenberg.org/1/1/7/7/11774/ + +Produced by papeters and the Online Distributed Proofreading Team. + +Updated editions will replace the previous one--the old editions +will be renamed. + +Creating the works from public domain print editions means that no +one owns a United States copyright in these works, so the Foundation +(and you!) can copy and distribute it in the United States without +permission and 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