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War-Time Financial Problems - XIII


2. I

3. II

4. III

5. IV

6. V

7. VI

8. VII


10. IX

11. X

12. XI

13. XII

14. XIII

15. XIV

16. XV

17. XVI

18. XVII


20. XIX

21. XX



_September_, 1918

The Difference between Aims and Acts--Should Foreign Capital be
allowed in British Industry?--The Supremacy of London and National
Trade--No Need to fear German Capital--We shall need all we can
get--Foreign Shares in British Companies--Can and should the
Disclosure of Foreign Ownership be forced?--The Difficulties of
the Problem--Aliens and British Shipping--The Position of "Key"
Industries--Freedom to Import and Export Capital our Best Policy.

Many things that are now happening must be tickling the sardonic
humour of the Muse of History. The majority of the civilised Powers
are banded together to overthrow a menace to civilisation, carrying
on a war which, it is hoped, is to produce a state of things in which
mankind, purged of the evil spirits of militarism and aggression, is
to start on a new order of co-operation. At the same time, while
we are engaged in fighting under banners with these noble ideals
inscribed on them, a large number of citizens of this country are
airing proposals aimed at restrictions upon our intercourse with other
nations, especially in the economic sphere. In last month's issue of
this Journal a very interesting article, signed "Veritas," discussed
the question as to how far it was in the power of the Allies to make
use of the economic weapon against their enemies after the war. That
such a question should even be mooted as an end to a war undertaken
with these objects, shows what a number of queer cross-currents are
at work in the minds of many of us to-day. But some people go much
further than that, and are advocating policies by which we should
even restrict our commercial and economic intercourse with our
brothers-in-arms. If the clamour for Imperial preference is to have
any practical result, it can only tend to cultivate trade within the
British Empire, protected by an economic ring-fence at the expense
of the trade which, before the war, we carried on with our present
Allies. And a large number of people who, under the cover of Imperial
preference, are agitating also for Protection for this country, would
endeavour to make the British Isles as far as possible self-sufficient
at the expense of their trade, not only with all their present Allies,
but even with their brethren overseas.

It is fortunately probable that the very muddle-headed reasoning which
is producing such curious results as these, at a time when the world
is preparing to enter on a period of closer co-operation and improved
and extended relations between one country and another, is confined,
in fact, to a few noisy people who possess in a high degree the
faculty of successful self-advertisement. I do not believe that the
country as a whole is prepared to relinquish the economic policy which
gave it such an enormous increase in material resources during the
past century, and has enabled it to stand forward as the industrial
and financial champion of the Allied cause during the difficult early
years of the war. Our rulers seem to be sitting very carefully on the
top of the fence, waiting to see which way the cat is going to
jump. They have made brave statements about abrogating all treaties
involving the most-favoured nation clause and about adopting the
principle of Imperial preference; but when their eager followers press
them to do something besides talking about what they are going to do,
they then have a tendency to return to the domain of common-sense and
to point out that it is above all desirable that our economic policy
should be in unison with that of the United States.

Whatever may happen in the realm of trade and commercial policy, it
would seem to be self-evident that with regard to capital it would be
still more difficult and undesirable to impose restrictions than with
regard to the entry of goods; and above all, it seems to be obvious
that at any rate the free entry of capital into this country is a
matter which should be specially encouraged when the war is over. At
that difficult period we have to secure, if possible, that British
industry shall be entirely unhampered in its endeavours to carry out
the very puzzling operations involved by transferring its energies
from war activities to peace production. However well the thing may
be managed, it will be an exceedingly difficult and complicated
operation. In certain industries, especially in shipbuilding and
engineering, the building trade and all the allied enterprises, those
who are responsible for their efficient management ought to be able to
count upon a keen and widely-spread demand for their products. But in
many industries there will necessarily be a good deal of doubt as to
the kind of article which the consuming public at home and abroad is
likely to want. There will be the great difficulty of sorting out the
right kind of labour, of obtaining the necessary raw materials, and of
getting the necessary credit and capital.

That this huge problem can be solved, and solved so well that the
country can go ahead to a great period of increased productivity and
prosperity, I fully believe; but this can only be done if it is able
to command the most efficient co-operation of all the various factors
in production--if employers put their best brains and if workers put
their best energy into the business, and if everything is done to make
the whole machinery work with the utmost possible smoothness. One
element in the machinery, and a highly important one, is the question
of capital. During the war the citizens of this country have been
trained to save and to put their money at the disposal of the
Government with a success which could hardly have been expected
when the war began. Whether they will continue to exercise the same
self-denial when the war is over Is a very open question. At any rate,
there can be no doubt that there will be a tendency among a very large
number of people who have answered the appeal to save money for the
war to listen with considerable indifference to any appeals that
may be made to them to save money in order to provide industry with
capital. All the capital that industry can get, it will certainly
want. If, besides what it can get at home, it can also get a
considerable amount from foreign countries, then its ability to resume
work on a prosperous and profitable basis when the war is over will be
very greatly helped. This would seem to be so obvious that one might
have thought that even a Government which is believed to be flirting
with what is called Tariff Reform would think twice before it imposed
any restrictions on the free flow of foreign capital into British
industry. In so far as foreigners lend to us we shall be able to
import raw materials, to be worked up to the profit of British
industry, in return for promises to pay--very timely convenience at a
critical moment.

Nevertheless, it would appear that obviousness of the desirability of
foreign capital, from whatever source it comes, is by no means evident
to those who are now in charge of the nation's destinies. At any rate,
the Company Law Amendment Committee, which was appointed last February
"to inquire what amendments are expedient in the Companies Acts, 1908
to 1917, particularly having regard to circumstances arising out of
the war and of the developments likely to arise on its conclusion,"
seems to have thought it necessary to provide the Government with
schemes by which alien capital could, if the Government thought
necessary, be kept out of the country. It was a powerful and
representative Committee, and it is very satisfactory to note that its
own view concerning the policy to be pursued was strongly in favour of
freedom. It points out in its Report that the question which lay in
the forefront of its investigations was that of the employment of
foreign capital in British industries. On the preliminary question
of whether it was desirable that foreign capital should be freely
attracted to this country, there was little, if any, difference of
opinion. For this very sensible conclusion the Committee gives rather
a curious reason. It states that the maintenance of London as the
financial centre of the world is of the first importance for the
well-being of the Empire, and that anything which could impede or
restrict the free flow of capital to the United Kingdom would, in
itself, be prejudicial to Imperial interests.

Now, of course, if is entirely true that the maintenance of London
as a financial centre is very important, but I venture to think that
those who are most jealous concerning the prestige of London and the
importance of its financial operations would say that it ranks only
second to the industrial efficiency of the country as a whole and
cannot, in fact, be long maintained unless there is that industrial
efficiency behind it, providing a surplus out of which London may be
able to finance the world and so, incidentally, and as a side issue,
be to a great extent helped by foreign capital to do so. It is surely
evident that a financial supremacy which was based merely on a jobbing
business, gathering in capital from one nation and lending it to
another, would be an extremely precarious and artificial structure,
the continuance of which could not be relied on for many decades.
Finance can only flourish healthily and wholesomely in a country which
produces a considerable surplus of goods and services which it
is prepared to place at the disposal of the world. Owing to the
possession of this surplus it becomes a market in capital, and so gets
a considerable jobbing business, but the backbone and foundation of
its position must be, in the end, industrial activity in the widest
sense of the word. It therefore seems that the Committee's argument
that the free flow of capital is essential to the maintenance of
London's finance might have been reinforced by the very much stronger
one that it is essential to the recuperative power of British
industry, which will need every assistance it can get in order to
re-establish itself after the war.

The Committee points out that "any legislation which would tend
to impede or restrict the free flow of capital here by imposing
restrictions or creating impediments ought to be jealously watched,
lest in the endeavour to prevent what has come to be called 'peaceful
penetration' the normal course of commercial development should be
arrested," and it goes on to observe that at the end of the war, "if
it should be concluded upon such terms as we hope and anticipate,"
it is not likely that our present enemies will be in possession of
capital looking for employment abroad. This is certainly very true. By
the time the Germans have made the reparations, which will involve so
much rebuilding in Belgium and in the parts of France that they
have overrun and swept clean of industrial plant, and have in other
respects made good the damage which their ruthless and uncivilised
methods of warfare have inflicted, not only on their enemies, but on
neutrals, it does not seem likely that they will have much to spare
for capital expansion in foreign countries, especially when we
consider how many problems of reconstruction they will themselves have
to face at home. "To impose restrictions upon the influx of capital,"
the Report continues, "aimed at our present enemies, with the result
of deterring the flow of capital from (say) America, would be a policy
highly injurious to the economic recovery and renewed prosperity of
this country after the war. For these reasons we are of opinion
that in all amendments of the law falling within the scope of our
reference, the expediency of the attraction of foreign capital should
be steadily borne in mind." The Committee thus seems to have thought
it necessary to administer comfort to anybody who might fear that the
unrestricted flow of capital from abroad might involve this country in
the terrible danger of being assisted in its industrial recovery by
capital from Germany.

If there were, in fact, any possibility of this assistance being
given, it would seem to be extremely short-sighted not to allow
British industry to make use of it. In the matter of "peaceful
penetration," we have ourselves in the past done perhaps as much as
all the rest of the countries of the world put together, with the
result that we have greatly stimulated the development of economic
prosperity all over the world; in fact, it may be argued that the
great progress made in the last century in man's power over the forces
of Nature has been to a great extent due to the freedom with which we
invested capital abroad and opened a free market to the products
of all other countries. At a time when, owing to exceptional
circumstances, we ourselves happen to be in need of capital, it would
appear to be an extremely short-sighted policy to refuse to admit it,
wherever it came from. We have excellent reason to known that, when
capital is once invested in a foreign country, it is largely in the
power of the inhabitants and Government of that country to control its
working. Any foreigner, even an enemy, who set up a factory in England
after the war would be doing just the very thing which we most of
all want to be done, namely, setting the wheels of industry going,
relieving the labour market from a possible glut after demobilisation,
and helping that difficult stage of transition from war work to peace

The Committee, however, considers that "at the root of the whole
matter lies a question which is not one of Company Law amendment at
all, but one of high political and economic policy." It does not fall
within its province "to inquire whether the traditional policy of
this country to admit and welcome all who seek our shores and submit
themselves loyally to our laws ought, in the case of some and what
aliens, to be revised"; or whether discrimination ought to be made
between an alien of one nationality and an alien of another. "As
regards aliens who are now our enemies, it may be that the British
Empire may adopt the policy that a special stigma ought to be attached
to the German, and that neither as an individual nor as a firm, nor
as a corporation, ought he, for a time at any rate, to be admitted to
commercial fellowship or to any fellowship with the civilised nations
of the world." It need not be said that any attempt to apply this
stigma in practice would be extremely difficult to carry out, would
involve all kinds of difficulties and complications in trade and in
finance, and that the threat of it is more likely than anything else
to stiffen the resistance of the Germans and to force them to rely on
their militarist leaders as their only hope of salvation. However,
the Committee points out that recent legislation shows a desire to
ascertain and record the extent to which aliens are active in
commerce here, and thinks it necessary to make provision to meet the
requirements of the Government in case our rulers should decide to
impose the restrictions which its own common-sense shows it are so

If, it says, foreign capital is to be attracted here, it must be
represented either by shares or by debentures. "The question,
therefore, is whether restrictions ought to be imposed upon the extent
to which the control of the company shall be allowed to reside in
aliens, either by reason of their holding a majority of the shares, or
of the debentures, or by reason of their obtaining a majority upon
the Board of Directors; and, if so, how disclosure of their alien
character is to be enforced." It goes on to point out the great
difficulties which present themselves in the way of securing
disclosure of nationality and ensuring that aliens shall not command
the control. "The law of trusts," it says, "is firmly established in
this country. If A, be the registered holder of a share, he is not
necessarily the beneficial owner. He may be a trustee for B. To enact
that the registered holder must be a British subject effects nothing,
for B. may be an alien and an enemy. Suppose, however, that you enact
that A., when his share is allotted or transferred to him, shall make
a declaration that he holds in his own right, or that he holds in
trust for B., and that both A. and B. are British subjects. There is
nothing to prevent the creation of a new trust the next day, under
which C., an alien enemy, will be the person beneficially entitled.
Further, at the earlier date (the date of allotment or transfer) the
facts may be that A. (a British subject) is trustee for B. (a British
subject), but that B. (unknown to A.) is a trustee for C., an alien
enemy. The fact that B. is trustee for C. would be purposely withheld
from A., and A.'s declaration that he was simply trustee for B. would
be perfectly true. To require that A. should make a declaration at
short intervals (say once a month), or that A., B., C., and so on,
should all make declarations would be, of course, so harassing and so
detrimental as to be, as a matter of business, impossible. The only
effectual way of dealing with the matter would be by a provision that
the share might be forfeited, or might be sold and the proceeds paid
to the owner, if an alien should be, or become beneficially entitled
to or interested in the share. Such a provision does not in the
general case commend itself to us as practical or desirable." Any
endeavour to control the nationality of the Board of Directors
produces similar difficulties. It is easy to ensure that they shall be
all, or a majority of them, British subjects, but there is no means of
ensuring that their actions shall not be controlled by aliens whose
nationality is not disclosed.

Having pointed out these difficulties, which seem in effect to reduce
the whole question to the domain of farce, the Committee goes on to
inquire whether it is desirable to legislate in the direction of
forbidding the employment of foreign capital here in Joint Stock
Companies, unless:--

(1) There is disclosure of the alien character of the foreign
owner; (2) Not more than a certain proportion of the Company's
shares are held by aliens; (3) The Board, or a certain proportion
of the Board, shall not be alien;

and, further, whether it is desirable to discriminate between one
alien and another, and to legislate in that direction in the case of
certain aliens and not of others.

In answering these questions, the Committee decided that it was
necessary to discriminate between certain classes of companies--Class
A being companies in general, Class B being companies owning British
shipping, and Class C companies engaged in "key" industries. With
regard to companies in Class A, they recommend that no restrictions
at all be imposed, but, nevertheless, they elaborate a scheme of
enforcing disclosure of alien ownership if that policy seems to
the legislature to be right. This scheme, the Committee admits, is
necessarily detailed and laborious; it puts difficulties in the way of
investment in English securities, whether by British subject or alien.
It would supply, no doubt, to the Board of Trade useful information
as to the extent of foreign investment in English industries, but the
price paid for this advantage would, in the Committee's opinion, be
too great. If adopted, the scheme could be evaded. And, with regard to
companies in general, the Committee's recommendations go the length
of allowing complete freedom as to the nationality both of the
corporators and of the Board. They would allow, for instance, American
capitalists to come here and establish themselves as a British
corporation in which all the corporators and all the directors were
American, and so with every other nationality. They would make no
discrimination between aliens of different nationality, for, if
there is to be such discrimination, there must be the machinery of
disclosure, involving a deterrent effect and acting prejudicially
in the case of all investors. But, if any such discrimination were
adopted, the Committee thinks that at any rate it should be limited to
some short period, say, three or five years after the end of the war.

If, however, the legislature should decide upon the necessity of
disclosure of alien ownership, the Committee draws up the following
scheme for securing it in Paragraph 15 of its Report:

15. For reasons already given, it is not possible efficiently to
ensure full disclosure, but the following suggestions would, in
the absence of deliberate and intentional evasion (which would be
quite possible), meet the point and in the large majority of cases
would disclose the extent of alien interests and control:--

(a) Every allottee of shares upon allotment and every transferee
upon transfer should be required to make a declaration disclosing
his nationality and whether he is the beneficial owner of the
shares, and, if not, for whom he is trustee, and what is the
nationality of the beneficial owner, and should undertake within
a limited time, after any change in the beneficial ownership, to
communicate the new facts to the company. In default of compliance
with the above, the shares should, at the option of the company,
either (1) be liable to sale by the company and the holder be
entitled only to the proceeds; or (2) be liable to forfeiture and
the holder be entitled to receive payment from the company of 10
per cent. less than the market value of the share, or if there be
no market value, then 10 per cent. less than the value at which
the share would be taken for _ad valorem_ stamp duty if it were
the subject of transfer. In case the company made default in
exercising its power, the Board of Trade should be authorised to
require the above sale to be made.

(b) Every director, upon coming into office, should be required to
make a declaration disclosing his nationality and stating whether
in his office he is wholly free from the control or influence of
any alien, and if he is not so free, stating by whose directions
or under whose control or influence he is to act and what is the
nationality of that person, and should undertake within a limited
time after any change in that state of things to communicate the
facts to the Board and procure a statement of the facts to be
entered in the Board minutes. Any breach of these obligations to
be visited with a penalty which should be severe.

(c) The company should be required to enter in the register
of members, against the name of every registered member, his
nationality as disclosed by the declaration. In the case where the
registered member is not the beneficial owner, the company should
be required to record, not in the register, but in another book,
the nationality of the beneficial owner as disclosed by the
declaration, and, as regards the latter book, to record the
nationality of any new beneficial owner when and as disclosed by
the registered member. These particulars should be required to be
included in the annual list under Section 26 of the Act of 1908.
That list would thus become not a list of members only, but a list
of members with the addition of beneficial owners. The company
should, further, be required to add to the annual list a summary
of the result as regards nationality showing (1) as regards
registered members, how many are British subjects and how many
shares they hold, and how many are aliens and how many shares they
hold, subdividing the number of the aliens and their holdings
under their respective nationalities; and (2) as regards the
registered members who are British subjects; (a) how many of them
are the beneficial owners and how many shares they hold, and (b)
as regards the rest, what are the nationalities and holdings of
the beneficial owners.

With regard to companies owning British shipping, the Committee is
satisfied that the total exclusion of aliens from ownership of British
ships is not essential for national safety and is not expedient. It
therefore considers that in these companies it will be sufficient to
ensure that not more than 20 per cent. of the power of control should
be in alien hands. It thinks that there should be this, limit of 20
per cent., that not more than 20 per cent. of the share capital should
be held by aliens, and that those shares should carry no more than 20
per cent. of the voting power. Alternatively, it considers that the
alien holdings should carry no vote at all, but that is a point of
detail deserving further consideration. It follows that in this
class there must, in the opinion of the Committee, be disclosure of
nationality, which should be enforced in the manner detailed above,
which, on its own admission, is not proof against deliberate evasion.

With regard to companies carrying on "key" industries, a very
complicated system is recommended. In the first place, the question
whether a company is one to carry on a "key" industry would seldom or
never arise at the time of its registration. The modern Memorandum of
Association includes so many things that a "key" industry might be
within the powers of almost any company. The question would thus arise
when the company has got to work. And so the Committee thinks that
the Board of Trade should be empowered at any time to make an inquiry
whether any company is carrying on a "key" industry and, if it finds
that it is, then the company shall, at the direction of the Board of
Trade, require every registered member to make a declaration such as,
under the disclosure procedure already described, he would have had
to make if he were at the date of the notice about to receive an
allotment or become a transferee. Further, the holders of share
warrants to bearer would be required to surrender their warrants for
cancellation and have their names entered in the register, and
all subsequent allottees and transferees would be subject to the
obligation of disclosure, as already described, and the limits of 20
per cent. recommended in the case of merchant shipping would then be
made applicable. Under the system of disclosure it follows that bearer
shares are impossible, but, if disclosure be negatived, the opinion of
the Committee is in favour of the maintenance of the bearer share.

It should be mentioned that one member of the Committee produced a
reservation strongly combating even the very moderate views expressed
by the Committee on the subject of British shipping and "key"
industries. It should be noted, however, that he attended very few
meetings of the Committee. He points out that, with regard to the
registration of ships as British when they are owned by a company
which has alien shareholders, "it is not usually a question of
permitting a ship which would in any case be British to be under the
control of aliens; the question is whether, if a number of persons,
some or all of whom are aliens, own a ship, they should be permitted
to register it as a British ship by forming themselves into a British
company and establishing an office in the British Dominions. If," he
observes, "they were not allowed to do so they would still own the
ship, but register it as a foreign ship in some other country. It
appears that a number of ships were registered here before the war by
companies with alien shareholders (some even with enemy shareholders).
They were managed in this country; the profits earned by them
were subject to our taxation; they were obliged to conform to the
regulations of our Merchant Shipping Acts; they carried officers and
men who were members of the Royal Naval Reserve; on the outbreak of
war our Government was able to requisition the ships owing to their
British registration and without regard to the nationality of the
shareholders in the companies owning them." It appears to this
recalcitrant member--and there is much to be said for his view--that
all these consequences have been highly advantageous to this country.
On the subject of "key" industries he is equally unconvinced. It
appears to him that "the important thing is to get the industries
established in this country, and that the question of their ownership
is of secondary consequence."

It is very satisfactory to note, in view of wild talk that has lately
been current with regard to restrictions on our power to export
capital, that the Committee has not a word to say for any continuance,
after the war, of the supervision now exercised over new issues. The
restrictions which it did recommend, while admitting their futility,
on imports of capital into our shipping and "key" industries were
evidently based on fears of possible war in future. The moral is that
this war has to be brought to such an end that war and its barbarisms
shall be "spurlos versenkt," and that humanity shall be able to
go about its business unimpeded by all the stupid bothers and
complications that arise from its possibility.

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