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Home -> Hartley Withers -> International Finance -> Chapter 8

International Finance - Chapter 8

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



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

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

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

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

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

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

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

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

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

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

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


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

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