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Home -> Hartley Withers -> International Finance -> Charter 1

International Finance - Charter 1

1. Preface

2. Charter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8



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
of others, for the purpose of developing their wealth, building
railways and harbours or otherwise increasing their power to produce.

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.

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
hole, or lock it up in a strong room, and so there could be no new

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.

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 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.

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 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.

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 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 year. But it is his work, that he did in the years in which he
was saving, that is earning him this reward.

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:--[1]

"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.

"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 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."

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 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
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

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 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

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, 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.

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
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.

It is, of course, quite possible that the something which was done was a
service which would 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

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 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 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.

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 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.

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 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.

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, 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.

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 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
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.

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 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.

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 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.

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