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Home -> Hartley Withers -> International Finance -> Chapter 4

International Finance - Chapter 4

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



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.

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 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 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.

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 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 payday 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.

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 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."[3] But though there were moneylenders in those days who
obliged foreign potentates with loans, 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.

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 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.

This was at a time when Mr. Lloyd George's 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.

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 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
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

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 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 financing of
the war has the first and last claim on his savings.

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.

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 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 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.

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.

This obvious truism is often forgotten by those who look on finance as
an independent 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 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 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.

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, provides a
fund for its redemption at maturity, and leaves the borrower better off,
with a more fully equipped productive system.

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 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 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.


[Footnote 3: "United Netherlands," chap. xxxii.]

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