International Finance Part 2

CHAPTER IV.

FINANCE AND TRADE

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 acc.u.mulated 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 amus.e.m.e.nt but put a large part of them into railways and factories, and s.h.i.+pbuilding 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 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 cla.s.ses 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 s.h.i.+p 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 s.h.i.+p 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 s.h.i.+ps 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 cla.s.ses that had acc.u.mulated 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-fas.h.i.+oned 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 l.u.s.tily 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 cla.s.ses, 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-fas.h.i.+oned 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 embarra.s.sments 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 compet.i.tion 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 cash.

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," a.s.sisted 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 j.a.pan, 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 j.a.pan 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 j.a.pan 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 s.h.i.+powners 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 amus.e.m.e.nts, 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 s.h.i.+pped 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 cla.s.ses 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 s.h.i.+pping 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 s.h.i.+pping 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. .h.i.therto 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.

FOOTNOTES:

[Footnote 3: "United Netherlands," chap. x.x.xii.]

CHAPTER V

THE BENEFITS OF INTERNATIONAL FINANCE

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 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.

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 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 compet.i.tors 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 s.h.i.+pbuilders 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 l.u.s.ty 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 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.

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 s.h.i.+ps 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 pa.s.sed 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 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 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.

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 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 sh.o.r.es, and if international finance had not quickened and cheapened their growth and transport and marketing. International trade and finance, 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.

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 ent.i.tled 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 interests of militarists and financiers,"[4] 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 embarra.s.sment and the chance of ruin. War has benefited the working cla.s.ses, 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 s.h.i.+powners, 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 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 inst.i.tutions, this shrivelling process in the price of their securities and other a.s.sets, brings serious embarra.s.sment, 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. 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 _Nineteenth Century_ of September, 1915, ent.i.tled "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, 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.

Perhaps I have a weakness for financiers, but if so it is ent.i.tled 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 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. n.o.body 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 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.

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 b.u.t.ter. It is clear that a purely 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 astonis.h.i.+ngly 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.

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 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.

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 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 champions.h.i.+p 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 sh.e.l.led Rio de Janeiro. The bondholders would have been reminded of the sound doctrine, _caveat emptor_, 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 Ca.n.a.l was built, prophesied that Egypt would some day be ours.

In Chapter XX. of "Eothen," comes this well known pa.s.sage on the Sphynx (he spelt it thus):--

"And we, we shall die, and Islam will wither away, and the Englishman, leaning far over to 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."

After the building of the Ca.n.a.l, the command of this short cut to India made Egypt still more important. England bought shares in the Ca.n.a.l, 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 policy, and not finance, ruled the whole transaction.

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 circ.u.mstances 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 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 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.

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 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.

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 circ.u.mstances 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 mockery, probably accompanied by a.s.sertions 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 partic.i.p.ate in the business of furnis.h.i.+ng 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 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, 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.

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 ama.s.sing 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.

FOOTNOTES:

[Footnote 4: Quoted by the _Financial News_ of September 28, 1915.]

CHAPTER VI