International Finance
Hartley Withers

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MONEY CHANGING: an Introduction to
Foreign Exchange,



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"While man cannot live by bread alone.
he cannot go on living, even a good life
if he really falls short of bread."


_First Edition_ _May_, 1916.
_Reprinted_ _June_, 1918.


Responsibility for the appearance of this book--but not for its
contents--lies with the Council for the Study of International
Relations, which asked me to write one "explaining what the City really
does, why it is the centre of the world's Money Market," etc. In trying
to do so, I had to go over a good deal of ground that I had covered in
earlier efforts to throw light on the machinery of money and the Stock
Exchange; and the task was done amid many distractions, for which
readers must make as kindly allowance as they can.


_March_, 1916.




Finance the machinery of money-dealing--Lenders and borrowers--Capital
and its claim to reward--Stored-up work--Inherited wealth--The reward of
services--Questionable services--Charles the Second's dukedoms--Modern
equivalents--Workers and Savers



Money at a bank--Bills of exchange--Finance and industry--Supremacy of
bill on London--London's freedom--The Bank of England--The great joint
stock banks--The discount market--Bills and trade



Stock Exchange securities--Government and municipal loans--Machinery of
loan issue--Underwriting--The Prospectus--Sinking fund--Bonds and
coupons--Registered stocks--Companies' securities--Stock Exchange



Why money goes abroad--Trade before finance--Prejudice in favour of home
investments--Prejudice against them--The reaction--Mexico and
Brazil--Neutral moneylenders and the war--Goods and services lent and
borrowed--The trade balance



International finance and trade--Opening up the world--Exchange of
products--Finance as peacemaker--Popular delusions concerning
financiers--Financiers and the present war--The cases of Egypt and the
Transvaal--Diplomacy and finance



Anti-Semitic prejudice--The story of the Honduras loans--The problem to
be faced by issuing houses--Their moral obligations, responsibilities,
and difficulties--Bad finance and big profits--The public's



Dangers of over-specialization--Analogy between State and
individual--Versatility of the savage--Specialization and
peace--Specialization and war--Should the export of capital be



Regulation of issues by Stock Exchange Committee--Danger arising
therefrom--Difficulty of controlling capital--Best remedy is keener
appreciation by issuing houses, borrowers, and investors of evils of bad
finance--Candour in prospectuses--War as financial schoolmaster--War as
destroyer of capital--War as stimulator of productive activity





Finance, in the sense in which it will be used in this book, means the
machinery of money dealing. That is, the machinery by which money which
you and I save is put together and lent out to people who want to borrow
it. Finance becomes international when our money is lent to borrowers in
other countries, or when people in England, who want to start an
enterprise, get some or all of the money that they need, in order to do
so, from lenders oversea. The biggest borrowers of money, in most
countries, are the Governments, and so international finance is largely
concerned with lending by the citizens of one country to the Governments
of others, for the purpose of developing their wealth, building
railways and harbours or otherwise increasing their power to produce.

Money thus saved and lent is capital. So finance is the machinery that
handles capital, collects it from those who save it and lends it to
those who want to use it and will pay a price for the loan of it. This
price is called the rate of interest, or profit. The borrower offers
this price because he hopes to be able, after paying it, to benefit
himself out of what he is going to make or grow or get with its help, or
if it is a Government because it hopes to improve the country's wealth
by its use. Sometimes borrowers want money because they have been
spending more than they have been getting, and try to tide over a
difficulty by paying one set of creditors with the help of another,
instead of cutting down their spending. This path, if followed far
enough, leads to bankruptcy for the borrower and loss to the lender.

If no price were offered for capital, we should none of us save, or if
we saved we should not risk our money by lending it, but hide it in a
hole, or lock it up in a strong room, and so there could be no new

Since capital thus seems to be the subject-matter of finance and it is
the object of this book to make plain what finance does, and how, it
will be better to begin with clear understanding of the function of
capital. All the more because capital is nowadays the object of a good
deal of abuse, which it only deserves when it is misused. When it is
misused, let us abuse it as heartily as we like, and take any possible
measures to punish it. But let us recognize that capital, when well and
fairly used, is far from being a sinister and suspicious weapon in the
hands of those who have somehow managed to seize it; but is in fact so
necessary to all kinds of industry, that those who have amassed it, and
placed it at the disposal of industry render a service to society
without which society could not be kept alive.

For capital, as has been said, is money saved and lent to, or employed
in, industry. By being lent to, or employed in, industry it earns its
rate of interest or profit. There are nowadays many wise and earnest
people who think that this interest or profit taken by capital is not
earned at all but is wrung out of the workers by a process of extortion.
If this view is correct then all finance, international and other, is
organized robbery, and instead of writing and reading books about it, we
ought to be putting financiers into prison and making a bonfire of their
bonds and shares and stock certificates. But, with all deference to
those who hold this view, it is based on a complete misapprehension of
the nature and origin of capital.

Capital has been described above as money put to certain purposes. This
was done for the sake of clearness and because this definition fits in
with the facts as they usually happen in these days. Economists define
capital as wealth reserved for production, and we must always remember
that money is only a claim for, or a right to, a certain amount of goods
or a certain amount of other people's work. Money is only a title to
wealth, because if I have a sovereign or a one-pound note in my pocket,
I thereby have the power of buying a pound's worth of goods or of
hiring a doctor to cure me or a parson to bury me or anybody else to do
anything that I want, up to the buying power of that sovereign. This is
the power that money carries with it. When the owner of this power,
instead of exercising it in providing himself with luxuries or
amusements, uses it by lending it to someone who wants to build a
factory, and employ workers, then, because the owner of the money
receives his rate of interest he is said to be exploiting labour,
because, so it is alleged, the workers work and he, the capitalist, sits
in idleness and lives on their labour.

And so, in fact, he does. But we have not yet found out how he got the
money that he lent. That money can only have been got by work done or
services rendered, for which other people were ready to pay. Capital,
looked at from this point of view, is simply stored up work, and
entitled to its reward just as much as the work done yesterday. The
capitalist lives on the work of others, but he can only do so because he
has wrought himself in days gone by or because someone else has wrought
and handed on to him the fruits of his labour. Let us take the case of
a shopkeeper who has saved a hundred pounds. This is his pay for work
done and risk taken (that the goods which he buys may not appeal to his
customers) during the years in which he has saved it. He might spend his
hundred pounds on a motor cycle and a side-car, or on furniture, or a
piano, and nobody would deny his right to do so. On the contrary he
would probably be applauded for giving employment to makers of the
articles that he bought. Instead of thus consuming the fruit of his work
on his own amusement, and the embellishment of his home, he prefers to
make provision for his old age. He invests his hundred pounds in the 5
per cent. debenture stock of a company being formed to extend a boot
factory. Thereby he gives employment to the people who build the
extension and provide the machinery, and thereafter to the men and women
who work in the factory, and moreover he is helping to supply other
people with boots. He sets people to work to supply other people's wants
instead of his own, and he receives as the price, of his service five
pounds a year. But it is his work, that he did in the years in which he
was saving, that is earning him this reward.

An interesting book has lately appeared in America, called "Income," in
which the writer, Dr. Scott Nearing, of the University of Pennsylvania,
draws a very sharp distinction between service income and property
income, implying, if I read him aright, that property income is an
unjust extortion. This is how he states his case:--[1]

"The individual whose effort creates values for which
society pays receives service income. His reward is a reward
for his personality, his time, his strength. Railroad
president and roadmender devote themselves to activities
which satisfy the wants of their fellows. Their service is
direct. In return for their hours of time and their calories
of energy, they receive a share of the product which they
have helped to produce.

"The individual who receives a return because of his
property ownership, receives a property income. This man has
a title deed to a piece of unimproved land lying in the
centre of a newly developing town. A storekeeper offers him
a thousand dollars a year for the privilege of placing a
store on the land. The owner of the land need make no
exertion. He simply holds his title. Here a man has labored
for twenty years and saved ten thousand dollars by denying
himself the necessaries of life. He invests the money in
railroad bonds, and someone insists he thereby serves
society. In one sense he does serve. In another, and a
larger sense, he expects the products of his past service
(the twenty years of labor), to yield him an income. From
the day when he makes his investment he need never lift a
finger to serve his fellows. Because he has the investment,
he has income. The same would hold true if the ten thousand
dollars had been left him by his father or given to him by
his uncle.... The fact of possession is sufficient to yield
him an income."

Now, in all these cases of property income which Dr. Nearing seems to
regard as examples of income received in return for no effort, there
must have been an effort once, on the part of somebody, which put the
maker of it in possession of the property which now yields an income to
himself, or those to whom he has left or given it. First there is the
case of the man who has a title deed to a piece of land. How did he get
it? Either he was a pioneer who came and cleared it and settled on it,
or he had worked and saved and with the product of his work had bought
this piece of land, or he had inherited it from the man who had cleared
or bought the land. The ownership of the land implies work and saving
and so is entitled to its reward. Then there is the case of the man who
has saved ten thousand dollars by labouring for twenty years and denying
himself the necessaries of life. Dr. Nearing admits that this man has
worked in order to get his dollars; he even goes so far as to add that
he had denied himself the necessaries of life in order to save.
Incidentally one may wonder how a man who has denied himself the
necessaries of life for twenty years can be alive at the end of them.
This man has worked for his dollars, and, instead of spending them on
immediate enjoyment, lends them to people who are building a railway,
and so is quickening and cheapening intercourse and trade. Dr. Nearing
seems to admit grudgingly that in a sense he thereby renders a service,
but he complains because his imaginary investor expects without further
exertion to get an income from the product of his past service. If he
could not get an income from it, why should he save? And if he and
millions of others did not save how could railways or factories be
built? And if there were no railways or factories how could workers find

If every capitalist only got income from the product of his own work in
the past, which he had spent, as in this case, on developing industry,
his claim to a return on it would hardly need stating. He would have
saved his ten thousand dollars or two thousand pounds, and instead of
spending it on two thousand pounds' worth of amusement or pleasure for
himself he would have preferred to put it at the disposal of those who
are in need of capital for industry and promise to pay him 5 per cent.
or L100 a year for the use of it. By so doing he increases the demand
for labour, not momentarily as he would have done if he had spent his
money on goods and services immediately consumed, but for all time, as
long as the railway that he helps to build is running and earning an
income by rendering services. He is a benefactor to humanity as long as
his capital is invested in a really useful enterprise, and especially to
the workers who cannot get work unless the organizers of industry are
supplied with plenty of cheap capital. In fact, the more plentiful and
cheap is capital, the keener will be the demand for the labour of the

But when Dr. Nearing points out that the income of the ten thousand
dollars would be equally secure if the owner of them had them left him
by his father or given him by his uncle, then at last he smites capital
on a weak point in its armour. There, is, without question, much to be
said for the view that it is unfair that a man who has worked and saved
should thereby be able to hand over to his son or nephew, who has never
worked or saved, this right to an income which is derived from work done
by somebody else. It seems unfair to all of us, who were not blessed
with equally industrious and provident fathers and uncles, and it is
often bad for the man who gets the income as a reward for no effort of
his own, because it gives him a false start in life and sometimes tends
to make him a futile waster, who can only justify his existence and his
command over other people's work, by pointing to the efforts of his
deceased sire or uncle. Further, unless he is very lucky, he is likely
to grow up with the notion that, just because he has been left or given
a certain income, he is somehow a superior person, and that it is part
of the scheme of the universe that others should work for his benefit,
and that any attempt on the part of other people to get a larger share,
at his expense, of the good things of the earth is an attempt at
robbery. He is, by being born to a competence, out of touch with the law
of nature, which says that all living things must work for their living,
or die, and his whole point of view is likely to be warped and narrowed
by his unfortunate good fortune.

These evils that spring from hereditary property are obvious. But it may
be questioned whether they outweigh the advantages that arise from it.
The desire to possess is a strong stimulus to activity in production,
because possession is the mark of success in it, and all healthy-minded
men like to feel that they have succeeded; and almost equally strong is
the desire to hand on to children or heirs the possessions that the
worker's energy has got for him. In fact it may almost be said that in
most men's minds the motive of possession implies that of being able to
hand on; they would not feel that they owned property which they were
bound to surrender to the State at their deaths. If and when society is
ever so organized that it can produce what it needs without spurring the
citizen to work with the inducement supplied by possession, and the
power to hand on property, then it may be possible to abolish the
inequities that hereditary property carries with it. As things are at
present arranged it seems that we are bound to put up with them if the
community is to be fed and kept alive. At least we can console ourselves
with the thought that property does not come into existence by magic.
Except in the case of the owners of land who may be enriched without any
effort by the discovery of minerals or by the growth of a city, capital
can only have been created by services rendered; and even in the case of
owners of land, they, and those from whom they derived it, must have
done something in order to get the land.

It is, of course, quite possible that the something which was done was a
service which would not now be looked on as meriting reward. In the
medieval days mailclad robbers used to get (quite honestly and rightly
according to the notions then current) large grants of land because they
had ridden by the side of their feudal chiefs when they went on
marauding forays. In later times, as in the days of our Merry Monarch,
attractive ladies were able to found ducal families by placing their
charms at the service of a royal debauchee. But the rewards of the
freebooters have in almost all cases long ago passed into the hands of
those who purchased them with the proceeds of effort with some approach
to economic justification; and though some of Charles the Second's
dukedoms are still extant, it will hardly be contended that it is
possible to trace the origin of everybody's property and confiscate any
that cannot show a reasonable title, granted for some true economic

What we can do, and ought to do, if economic progress is to move along
right lines, is to try to make sure that we are not, in these days of
alleged enlightenment, committing out of mere stupidity and
thoughtlessness, the crime which Charles the Second perpetrated for his
own amusement. He gave large tracts of England to his mistresses because
they pleased his roving fancy. Now the power to dispense wealth has
passed into the hands of the people, who buy the goods and services
produced, and so decide what goods and services will find a market, and
so will enrich their producers. Are we making much better use of it? On
the whole, much better; but we still make far too many mistakes. The
people to whom nowadays we give big fortunes, though they include a
large number of organizers of useful industry, also number within their
ranks a crowd of hangers on such as bookmakers, sharepushers, and
vendors of patent pills or bad stuff to read. These folk, and others,
live on our vices and stupidities, and it is our fault that they can do
so. Because a large section of the public likes to gamble away its money
on the Stock Exchange, substantial fortunes have been founded by those
who have provided the public with this means of amusement. Because the
public likes to be persuaded by the clamour of cheapjack advertisement
that its inside wants certain medicines, and that these medicines are
worth buying at a price that makes the vendor a millionaire, there he is
with his million. Some people say that he has swindled the public. The
public has swindled itself by allowing him to foist stuff down its
throat on terms which give him, and his heirs and assigns after him, all
the control over the work and wealth of the world that is implied by the
possession of a million. When we buy rubbish we do not only waste our
money to our own harm, but, under the conditions of modern society, we
put the sellers of rubbish in command of the world, as far as the money
power commands it, which is a good deal further than is pleasing.

Hence it is that when some of those who question the right of capital to
its reward, do so on the ground that capital is often acquired by
questionable means, they are barking up the wrong tree. Capital can only
be acquired by selling something to you and me. If you and I had more
sense in the matter of what we buy, capital could not be acquired by
questionable means. By our greed and wastefulness we give fortunes to
bookmakers, market-riggers and money-lenders. By our preference for
"brilliant" investments, with a high rate of interest and bad security,
we invite the floating of rotten companies and waterlogged loans. By our
readiness to be deafened by the clamour of the advertiser into buying
things that we do not want, we hand industry over to the hands of the
loudest shouter, and by our half-educated laziness in our selection of
what we read and of the entertainments that we frequent, we open the way
to opulence through the debauching of our taste and opinions. It is our
fault and ours only. As soon as we have learnt and resolved to buy and
enjoy only what is worth having, the sellers of rubbish may put up their
shutters and burn their wares.

Capital, then, is stored up work, work that has been paid for by
society. Those who did the work and took its reward, turned the proceeds
of it into making something more instead of into pleasure and
gratification for themselves. By a striking metaphor capital is often
described as the seed corn of industry. Seed corn is the grain that the
farmer, instead of making it into bread for his own table, or selling
it to turn it into picture-palace tickets, or beer, or other forms of
short-lived comfort, keeps to sow in the earth so that he may reap his
harvest next year. If the whole world's crop were eaten, there would be
no seed corn and no harvest. So it is with industry. If its whole
product were turned into goods for immediate consumption, there could be
no further development of industry, and no maintenance of its existing
plant, which would soon wear out and perish. The man who spends less
than he earns and puts his margin into industry, keeps industry alive.

From the point of view of the worker--by whom I mean the man who has
little or no capital of his own, and has only, or chiefly, his skill, of
head or of hand, to earn his living with--those who are prepared to save
and put capital at the disposal of industry ought to be given every
possible encouragement to do so. For since capital is essential to
industry, all those who want to earn a living in the workshops or in the
countinghouse, or in the manager's office, will most of all, if they are
well advised, want to see as much capital saved as possible. The more
there is of it, the more demand there will be for the brains and muscles
of the workers, and the better the bargain these latter will be able to
make for the use of their brains and muscles. If capital is so scarce
and timid that it can only be tempted by the offer of high rates for its
use, organizers of industry will think twice about expanding works or
opening new ones, and there will be a check to the demand for workers.
If so many people are saving that capital is a drug in the market,
anyone who has an enterprise in his head will put it in hand, and
workers will be wanted, first for construction then for operation.

It is to the interest of workers that there should be as many
capitalists as possible offering as much capital as possible to
industry, so that industry shall be in a state of chronic glut of
capital and scarcity of workers. Roughly, it is true that the product of
industry is divided between the workers who carry it on, and the savers
who, out of the product of past work, have built the workshop, put in
the plant and advanced the money to pay the workers until the new
product is marketed. The workers and the savers are at once partners and
rivals. They are partners because one cannot do without the other;
rivals because they compete continually concerning their share of the
profit realized. If the workers are to succeed in this competition and
secure for themselves an ever-increasing share of the profit of
industry--and from the point of view of humanity, civilization,
nationality, and common sense it is most desirable that this should be
so--then this is most likely to happen if the savers are so numerous
that they will be weak in bargaining and unable to stand out against the
demands of the workers. If there were innumerable millions of workers
and only one saver with money enough to start one factory, the one saver
would be able to name his own terms in arranging his wages bill, and the
salaries of his managers and clerks. If the wind were on the other
cheek, and a crowd of capitalists with countless millions of money were
eager to set the wheels of industry going, and could not find enough
workers to man and organize and manage their workshops, then the workers
would have the whip hand. To bring this state of things about it would
seem to be good policy not to damn the capitalist with bell and with
book and frighten him till he is so scarce that he is master of the
situation, but to give him every encouragement to save his money and put
it into industry. For the more plentiful he is, the stronger is the
position of the workers.

In fact the saver is so essential that it is nowadays fashionable to
contend that the saving business ought not to be left to the whims of
private individuals, but should be carried out by the State in the
public interest; and there are some innocent folk who imagine that, if
this were done, the fee that is now paid to the saver for the use of the
capital that he has saved, would somehow or other be avoided. In fact
the Government would have to tax the community to produce the capital
required. Capital would be still, as before, the proceeds of work done.
And the result would be that the taxpayers as a whole would have to pay
for capital by providing it. This might be a more equitable arrangement,
but as capital can only be produced by work, the taxpayers would have
to do a certain amount of work with the prospect of not being allowed to
keep the proceeds, but of being forced to hand it over to Government.
Whether such a plan would be likely to be effective in keeping industry
supplied with capital is a question which need not be debated until the
possibility of such a system becomes a matter of practical politics.

For our present purpose it is enough to have shown that the capital,
which is the stock-in-trade of finance, is not a fraudulent claim to
take toll of the product of industry, but an essential part of the
foundation on which industry is built. A man can only become a
capitalist by rendering services for which he receives payment, and
spending part of his pay not on his immediate enjoyment, but in
establishing industry either on his own account or through the agency of
someone else to whom be lends the necessary capital. Before any industry
can start there must be tools and a fund out of which the workers can be
paid until the work that they do begins to bring in its returns. The
fund to buy these tools and pay the workers can only be found out of
the proceeds of work done or services rendered. Moreover, there is
always a risk to be run. As soon as the primitive savage left off making
everything for himself and took to doing some special work, such as
arrow making, in the hope that his skill, got from concentration on one
particular employment, would be rewarded by the rest of the tribe who
took his arrows and gave him food and clothes in return, he began to run
the risk that his customers might not want his product, if they happened
to take to fishing for their food instead of shooting it. This risk is
still present with the organizers of industry and it falls first on the
capitalist. If an industry fails the workers cease to be employed by it;
but as long as they work for it their wages are a first charge which has
to be paid before capital gets a penny of interest or profit, and if the
failure of the industry is complete the capital sunk in it will be gone.


[Footnote 1: Pages 24, 25.]



Capital, then, is wealth invested in industry, finance is the machinery
by which this process of investment is carried out, and international
finance is the machinery by which the wealth of one country is invested
in another.

Let us consider the case of a doctor in a provincial town who is making
an annual income of about L800 a year, living on L600 of it and saving
L200. Instead of spending this quarter of his income on immediate
enjoyments, such as wine and cigars, and journeys to London, he invests
it in different parts of the world through the mechanism of
international finance, because he has been attracted by the advantages
of a system of investment which was fashionable some years ago, which
worked by what was called Geographical Distribution.[2] This meant to
say that the investors who practised it put their money into as many
different countries as possible, so that the risk of loss owing to
climatic or other disturbances might be spread as widely as possible. So
here we have this quiet country doctor spreading all over the world the
money that he gets for dosing and poulticing and dieting his patients,
stimulating industry in many climates and bringing some part of its
proceeds to be added to his store. Let us see how the process works.
First of all he has a bank, into which he pays day by day the fees that
he receives in coin or notes and the cheques that he gets, each half
year, from those of his patients who have an account with him. As long
as his money is in the bank, the bank has the use of it, and not much of
it is likely to go abroad. For the banks use most of the funds
entrusted to them in investments in home securities, or in loans and
advances to home customers. Part of them they use in buying bills of
exchange drawn on London houses by merchants and financiers all over the
world, so that even when he pays money into his bank it is possible that
our doctor is already forming part of the machinery of international
finance and involving us in the need for an explanation of one of its

A bill of exchange is an order to pay. When a merchant in Argentina
sells wheat to an English buyer, he draws a bill on the buyer (or some
bank or firm in England whom the buyer instructs him to draw on),
saying, "Pay to me" (or anybody else whom he may name) "the sum of so
many pounds." This bill, if it is drawn on a firm or company of well
known standing, the seller of the wheat can immediately dispose of, and
so has got payment for his goods. Usually the bill is made payable two
or three, or sometimes six months after sight, that is after it has been
received by the firm on which it is drawn, and "accepted" by it, that is
signed across the front to show that the firm drawn on will pay the
bill when it falls due. These bills of exchange, when thus accepted, are
promises to pay entered into by firms of first-rate standing, and are
held as investments by English banks. Bills of exchange are also drawn
on English houses to finance trade transactions between foreign
countries, and also as a means of borrowing money from England. When
they are drawn on behalf of English customers, the credit given is given
at home, but as it is (almost always) given in connection with
international trade, the transaction may be considered as part of
international finance. When they are drawn on behalf of foreign
countries, trading with other foreigners, or using the credit to lend to
other foreigners, the connection with international finance is obvious.
They are readily taken all over the world, because all over the world
there are people who have payments to make to England owing to the wide
distribution of our trade, and it has long been England's boast that
bills of exchange drawn on London firms are the currency of
international commerce and finance.

Some people tell us that this commanding position of the English bill
in the world's markets is in danger of being lost owing to the present
war: in the first place because America is gaining wealth rapidly, while
we are shooting away our savings, and also because the Germans will make
every endeavour to free themselves from dependence on English credit for
the conduct of their trade. Certainly this danger is a real one, but it
does not follow that we shall not be able to meet it and defeat it. If
the war teaches us to work hard and consume little, so that when peace
comes we shall have a great volume of goods to export, there is no
reason why the bill on London should not retain much if not all of its
old prestige and supremacy in the marts of the world. For we must always
remember that finance is only the handmaid of industry. She is often a
pert handmaid who steals her mistress's clothes and tries to flaunt
before the world as the mistress, and so she sometimes imposes on many
people who ought to know better, who think that finance is an
all-powerful influence. Finance is a mighty influence, but it is a mere
piece of machinery which assists, quickens, and lives on production.
The men who make and grow things, and carry them from the place where
they are made and grown to the place where they are wanted, these are
the men who furnish the raw material of finance, without which it would
have to shut up its shop.

If they and their work ceased, we should all starve, and the financiers
would have nothing behind the pieces of paper that they handle. If
finance and the financiers were suddenly to cease, there would be a very
awkward jar and jolt in our commercial machinery, but as long as the
stuff and the means of carrying it were available, we should very soon
patch up some other method for exchanging it between one nation and
another and one citizen and another. The supremacy of the London bill of
exchange was created only to a small extent by any supremacy in London's
financial machinery; it was based chiefly on the supremacy of England's
world-wide trade, and on our readiness to take goods from all nations.
The consequence of this was that traders of all nations sold goods to
us, and so had claims on us and drew bills on us, and bought goods from
us, and so owed us money and wanted to buy bills drawn on us to pay
their debts with. So everywhere the bill on London was known and
familiar and welcome. If the Americans are able and willing to develop
such a world-wide trade as ours, then the bill on New York will have a
vogue all over the world just as is enjoyed by the bill on London. Then
London and New York will have to fight the matter out by seeing which
will provide the best and cheapest machinery for discounting the bill,
that is, turning it into cash on arrival, so that the holder of it shall
get the best possible price at the present moment, for a bill due two or
three months hence.

In this matter of machinery London has certain advantages which ought,
if well used and applied, to stand her in good stead in any struggle
that lies ahead of her. London's credit machinery has grown up in almost
complete freedom from legislation, and it has consequently been able to
grow, without let or hindrance, along the lines that expediency and
convenience have shown to be most practical and useful. It has been too
busy to be logical or theoretical, and consequently it is full of
absurdities and anomalies, but it works with marvellous ease and

In its centre is the Bank of England, with the prestige of antiquity and
of official dignity derived from acting as banker to the British
Government, and with still more practical strength derived from acting
as banker to all the other great banks, several of them much bigger, in
certain respects, than it. The Bank of England is very severely and
strictly restricted by law in the matter of its note issue, but it
luckily happened, when Parliament was imposing these restrictions on the
Bank's business, that note issuing was already becoming a comparatively
unimportant part of banking, owing to the development of the use of
cheques. Nowadays, when borrowers go to the Bank of England for loans,
they do not want to take them out in notes; all they want is a credit in
the Bank's books against which they can draw cheques. A credit in the
Bank of England's books is regarded by the financial community as
"cash," and this pleasant fiction has given the Bank the power of
creating cash by a stroke of its pen and to any extent that it pleases,
subject only to its own view as to what is prudent and sound business.
On p.33 ("A BANK RETURN", below) is a specimen of a return that is published each week
by the Bank of England, showing its position in two separate accounts
with regard to its note issuing business and its banking business: the
return taken is an old one, published before the war, so as to show how
the machine worked in normal times before war's demands had blown out
the balloon of credit to many times its former size.

If the commercial and financial community is short of cash, all that it
has to do is to go to the Bank of England and borrow a few millions, and
the only effect on the Bank's position is an addition of so many
millions to its holding of securities and a similar addition to its
deposits. It may sometimes happen that the borrowers may require the use
of actual currency, and in that case part of the advances made will be
taken out in the form of notes and gold, but as a general rule the Bank
is able to perform its function of providing emergency credit by merely
making entries in its books.



Notes Issued L56,908,235 Government Debt L11,015,100
Other Securities 7,434,900
Gold Coin and Bullion 38,458,235
Silver Bullion ---
----------- -----------
L56,908,235 L56,908,235
----------- -----------


Proprietors' Capital L14,553,000 Government Securities L11,005,126
Rest 3,431,484 Other Securities 33,623,288
Public Deposits 13,318,714 Notes 27,592,980
Other Deposits 42,485,605 Gold and Silver Coin 1,596,419
Seven Day and other
Bills 29,010
----------- -----------
L73,817,813 L73,817,813
----------- -----------

With the Bank of England thus acting as a centre to the system, there
has grown up around it a circle of the great joint stock banks, which
provide credit and currency for commerce and finance by lending money
and taking it on deposit, or on current account. These banks work under
practically no legal restrictions of any kind with regard to the amount
of cash that they hold, or the use that they make of the money that is
entrusted to their keeping. They are not allowed, if they have an office
in London, to issue notes at all, but in all other respects they are
left free to conduct their business along the lines that experience has
shown them to be most profitable to themselves, and most convenient for
their customers. Being joint stock companies they have to publish
periodically, for the information of their shareholders, a balance sheet
showing their position. Before the war most of them published a monthly
statement of their position, but this habit has lately been given up. No
legal regulations guide them in the form or extent of the information
that they give in their balance sheets, and their great success and
solidity is a triumph of unfettered business freedom. This absence of
restriction gives great elasticity and adaptability to the credit
machinery of London. Here is a specimen of one of their balance sheets,
slightly simplified, and dating from the days before the war:--


Capital (subscribed) L14,000,000
Paid up 3,500,000
Reserve 4,000,000
Deposits 87,000,000
Circular Notes, etc. 3,000,000
Acceptances 6,000,000
Profit and loss 500,000


Cash in hand and
at Bank of England L12,500,000
Cash at call and
short notice 13,000,000
Bills discounted 19,000,000
Govt. Securities 5,000,000
Other Investments 4,500,000
Advances and loans 42,000,000
Liability of customers
on account of
Acceptances 6,000,000
Promises 2,000,000

On one side are the sums that the bank has received, in the shape of
capital subscribed, from its shareholders, and in the shape of deposits
from its customers, including Dr. Pillman and thousands like him; on the
other the cash that it holds, in coin, notes and credit at the Bank of
England, its cash lent at call or short notice to bill brokers (of whom
more anon) and the Stock Exchange, the bills of exchange that it holds,
its investments in British Government and other stocks, and the big item
of loans and advances, through which it finances industry and commerce
at home. It should be noted that the entry on the left side of the
balance sheet, "Acceptances," refers to bills of exchange which the bank
has accepted for merchants and manufacturers who are importing goods and
raw material, and have instructed the foreign exporters to draw bills on
their bankers. As these merchants and manufacturers are responsible to
the bank for meeting the bills when they fall due, the acceptance item
is balanced by an exactly equivalent entry on the other side, showing
this liability of customers as an asset in the bank's favour.

This business of acceptance is done not only by the great banks, but
also by a number of private firms with connections in foreign countries,
and at home, through which they place their names and credit at the
disposal of people less eminent for wealth and position, who pay them a
commission for the use of them.

Other wheels in London's credit machinery are the London offices of
colonial and foreign banks, and the bill brokers or discount houses
which deal in bills of exchange and constitute the discount market. Thus
we see that there is in London a highly specialized and elaborate
machinery for making and dealing in these bills, which are the currency
of international trade. Let us recapitulate the history of the bill and
see the part contributed to its career by each wheel in the machine. We
imagined a bill drawn by an Argentine seller against a cargo of wheat
shipped to an English merchant. The bill will be drawn on a London
accepting house, to whom the English merchant is liable for its due
payment. The Argentine merchant, having drawn the bill, sells it to the
Buenos Ayres branch of a South American bank, formed with English
capital, and having its head office in London. It is shipped to London,
to the head office of the South American bank, which presents it for
acceptance to the accepting house on which it is drawn, and then sells
it to a bill broker at the market rate of discount. If the bill is due
three months after sight, and is for L2000, and the market rate of
discount is 4 per cent. for three months' bills, the present value of
the bill is obviously L1980. The bill broker, either at once or later,
probably sells the bill to a bank, which holds it as an investment until
its due date, by which time the importer having sold the wheat at a
profit, pays the money required to meet the bill to his banker and the
transaction is closed. Thus by means of the bill the exporter has
received immediate payment for his wheat, the importing merchant has
been supplied with credit for three months in which to bring home his
profit, and the bank which bought the bill has provided itself with an
investment such as bankers love, because it has to be met within a short
period by a house of first-rate standing.

All this elaborate, but easily working machinery has grown up for the
service of commerce. It is true that bills of exchange are often drawn
by moneylenders abroad on moneylenders in England merely in order to
raise credit, that is to say, to borrow money by means of the London
discount market. Sometimes these credits are used for merely speculative
purposes, but in the great majority of cases they are wanted for the
furtherance of production in the borrowing country. The justification of
the English accepting houses, and bill brokers, and banks (in so far as
they engage in this business), is the fact that they are assisting
trade, and could not live without trade, and that trade if deprived of
their services would be gravely inconvenienced and could only resume its
present activity by making a new machinery more or less on the same
lines. The bill whose imaginary history has been traced, came into being
because the drawer had a claim on England through a trade transaction.
He was able to sell it to the South American bank only because the bank
knew that many other people in Argentina would have to make payments to
England and would come to it and ask it for drafts on London, which, by
remitting this bill to be sold in London, it would be able to supply.
International finance is so often regarded as a machinery by which paper
wealth is manufactured out of nothing, that it is very important to
remember that all this paper wealth only acquires value by being
ultimately based on something that is grown or made and wanted to keep
people alive or comfortable, or at least happy in the belief that they
have got something that they thought they wanted, or which habit or
convention obliged them to possess.


[Footnote 2: All this imaginary picture is of events before the war. At
present Dr. Pillman, being a patriotic citizen, is saving much faster
than before, and putting every pound that he can save into the hands of
the British Government by subscribing to War Loans and buying Exchequer
bonds. He is too old to go and do medical work at the front, so he does
the next best thing by cutting down his expenses and finding money for
the war.]



So far we have only considered what happens to the money of those who
save as long as it is left in the hands of their bankers, and we have
seen that it is only likely to be employed internationally, if invested
by bankers in bills of exchange which form a comparatively small part of
their assets. It is true that bankers also invest money in securities,
and that some of these are foreign, but here again the proportion
invested abroad is so small that we may be reasonably sure that any
money left by us in the hands of our bankers will be employed at home.

But in actual practice those who save do not pile up a large balance at
their banks. They keep what is called a current account, consisting of
amounts paid in in cash or in cheques on other banks or their own bank,
and against this account they draw what is needed for their weekly and
monthly payments; sometimes, also, they keep a certain amount on deposit
account, that is an account on which they can only draw after giving a
week's notice or more. On their deposit account they receive interest,
on their current account they may in some parts of the country receive
interest on the average balance kept. But the deposit account is most
often kept by people who have to have a reserve of cash quickly
available for business purposes. The ordinary private investor, when he
has got a balance at his bank big enough to make him feel comfortable
about being able to meet all probable outgoings, puts any money that he
may have to spare into some security dealt in on the Stock Exchange, and
so securities and the Stock Exchange have to be described and examined
next. They are very much to the point, because it is through them that
international finance has done most of its work.

Securities, then, are the stocks, shares and bonds which are given to
those who put money into companies, or into loans issued by
Governments, municipalities and other public bodies. Let us take the
Governments and public bodies first, because the securities issued by
them are in some ways simpler than those created by companies.

When a Government wants to borrow, it does so because it needs money.
The purpose for which it needs it may be to build a railway or canal, or
make a harbour, or carry out a land improvement or irrigation scheme, or
otherwise work some enterprise by which the power of the country to grow
and make things may be increased. Enterprises of this kind are usually
called reproductive, and in many cases the actual return from them in
cash more than suffices to meet the interest on the debt raised to carry
them out, to say nothing of the direct benefit to the country in
increasing its output of wealth. In England the Government has
practically no debt that is represented by reproductive assets. Our
Government has left the development of the country's resources to
private enterprise, and the only assets from which it derives a revenue
are the Post Office buildings, the Crown lands and some shares in the
Suez Canal which were bought for a political purpose. Governments also
borrow money because their revenue from taxes is less than the sums that
they are spending. This happens most often and most markedly when they
are carrying on war, or when nations are engaged in a competition in
armaments, building navies or raising armies against one another so as
to be ready for war if it happens. This kind of debt is called
dead-weight debt, because there is no direct or indirect increase, in
consequence of it, in the country's power to produce things that are
wanted. This kind of borrowing is generally excused on the ground that
provision for the national safety is a matter which concerns posterity
quite as much as the present generation, and that it is, therefore, fair
to leave posterity to pay part of the bill.

Municipalities likewise borrow both for reproductive purposes and for
objects from which no direct revenue can be expected. They may invest
money lent them in gas or electric works or water supply or tramways,
and get an income from them which will more than pay the interest on
the money borrowed. Or they may put it into public parks and recreation
grounds or municipal buildings, or improvements in sanitation, thereby
beautifying and cleansing the town. If they do these things in such a
way as to make the town a pleasanter and healthier place to live in,
they may indirectly increase their revenue; but if they do them
extravagantly and badly, they run the risk of putting a burden on the
ratepayers that will make people shy of living within their borders.

Whatever be the object for which the loan is issued, the procedure is
the same by which the money is raised. The Government or municipality
invites subscriptions through a bank or through some great financial
house, which publishes what is called a prospectus by circular, and in
the papers, giving the terms and details of the loan. People who have
money to spare, or are able to borrow money from their bankers, and are
attracted by the terms of the loan, sign an application form which is
issued with the prospectus, and send a cheque for the sum, usually 5 per
cent. of the amount that they apply for, which is payable on
application. If the loan is over-subscribed, the applicants will only
receive part of the sums for which they apply. If it is not fully
subscribed, they will get all that they have asked for, and the balance
left over will be taken up in most cases by a syndicate formed by the
bank or firm that issued the loan, to "underwrite" it. Underwriting
means guaranteeing the success of a loan, and those who do so receive a
commission of anything from 1 to 3 per cent.; if the loan is popular and
goes well the underwriters take their commission and are quit; if the
loan is what the City genially describes as a "frost," the underwriters
may find themselves saddled with the greater part of it, and will have
the pleasure of nursing it until such time as the investing public will
take it off their hands. Underwriting is thus a profitable business when
times are good, and the public is feeding freely, but it can only be
indulged in by folk with plenty of capital or credit, and so able to
carry large blocks of stock if they find themselves left with them.

To take a practical example, let us suppose that the King of Ruritania
is informed by his Minister of Marine that a battleship must at once be
added to its fleet because his next door neighbour is thought to be
thinking of making himself stronger on the water, while his Minister of
Finance protests that it is impossible, without the risk of serious
trouble, to add anything further to the burdens of the taxpayers. A loan
is the easy and obvious way out. London and Paris between them will find
two or three millions with pleasure. That will be enough for a
battleship and something over in the way of new artillery for the army
which can be ordered in France so as to secure the consent of the French
Government, which was wont to insist that a certain proportion of any
loan raised in Paris must be spent in the country. (It need hardly be
said that all these events are supposed to be happening in the years
before the war.) Negotiations are entered into with a group of French
banks and an English issuing house. The French banks take over their
share, and sell it to their customers who are, or were, in the habit of
following the lead of their bankers in investment with a blind
confidence, that gave the French banks enormous power in the
international money market. The English issuing house sends round a
stockbroker to underwrite the loan. If the issuing house is one that is
usually successful in its issues, the privilege of underwriting anything
that it brings out is eagerly sought for. Banks, financial firms,
insurance companies, trust companies and stockbrokers with big
investment connections will take as much underwriting as they are
offered, in many cases without making very searching inquiry into the
terms of the security offered. The name of the issuing house and the
amount of the underwriting commission --which we will suppose in this
case to be 2 per cent.--is enough for them. They know that if they
refuse any chance of underwriting that is offered, they are not likely
to get a chance when the next loan comes out, and since underwriting is
a profitable business for those who can afford to run its risks, many
firms put their names down for anything that is put before them, as long
as they have confidence in the firm that is handling the loan. This
power in the hands of the big issuing houses, to get any loan that they
choose to father underwritten in a few hours by a crowd of eager
followers, gives them, of course, enormous strength and lays a heavy
responsibility on them. They only preserve it by being careful in the
use of it, and exercising great discrimination in the class of
securities that they handle.

While the underwriting is going on the prospectus is being prepared by
which the subscriptions of the public are invited, and in the meantime
it will probably happen that the newspapers have had a hint that a
Ruritanian loan is on the anvil, so that preliminary paragraphs may
prepare an atmosphere of expectancy. News of a forthcoming new issue is
always a welcome item in the dull routine of a City article, and the
journalists are only serving their public and their papers in being
eager to chronicle it. Lurid stories are still handed down by City
tradition of how great City journalists acquired fortunes in days gone
by, by being allotted blocks of new loans so that they might expand on
their merits and then sell them at a big profit when they had created a
public demand for them. There seems to be no doubt that this kind of
thing used to happen in the dark ages when finance and City journalism
did a good deal of dirty business between them. Now, the City columns of
the great daily papers have for a very long time been free from any
taint of this kind, and on the whole it may be said that finance is a
very much cleaner affair than either law or politics. It is true that
swindles still happen in the City, but their number is trivial compared
with the volume of the public's money that is handled and invested. It
is only in the by-ways of finance and in the gutters of City journalism
that the traps are laid for the greedy and gullible public, and if the
public walks in, it has itself to blame. A genuine investor who wants
security and a safe return on his money can always get it. Unfortunately
the investor is almost always at the same time a speculator, and is apt
to forget the distinction; and those who ask for a high rate of
interest, absolute safety and a big rise in the prices of securities
that they buy are only inviting disaster by the greed that wants the
unattainable and the gullibility that deludes them into thinking they
can have it.

To return to our Ruritanian loan, which we left being underwritten. The
prospectus duly comes out and is advertised in the papers and sown
broadcast over the country through the post. It offers L1,500,000 (part
of L3,000,000 of which half is reserved for issue in Paris), 4-1/2 per
cent. bonds of the Kingdom of Ruritania, with interest payable on April
1st and October 1st, redeemable by a cumulative Sinking Fund of 1 per
cent., operating by annual drawings at par, the price of issue being 97,
payable as to 5 per cent. on application, 15 per cent. on allotment and
the balance in instalments extending over four months. Coupons and drawn
bonds are payable in sterling at the countinghouse of the issuing firm.
The extent of the other information given varies considerably. Some
firms rely so far on their own prestige and the credit of those on whose
account they offer loans, that they state little more than the bare
terms of the issue as given above. Others deign to give details
concerning the financial position of the borrowing Government, such as
its revenue and expenditure for a term of years, the amount of its
outstanding debt, and of its assets if any. If the credit of the
Kingdom of Ruritania is good, such a loan as here described would be,
or would have been before the war, an attractive issue, since the
investor would get a good rate of interest for his money, and would be
certain of getting par or L100, some day, for each bond for which he now
pays L97. This is ensured by the action of the Sinking Fund of 1 per
cent. cumulative, which works as follows. Each year, as long as the loan
is outstanding the Kingdom of Ruritania will have to put L165,000 in the
hands of the issuing houses, to be applied to interest and Sinking Fund.
In the first year interest at 4-1/2 per cent. will take L135,000 and
Sinking Fund (1 per cent. of L3,000,000) L30,000; this L30,000 will be
applied to the redemption of bonds to that value, which are drawn by
lot; so that next year the interest charge will be less and the amount
available for Sinking Fund will be greater; and each year the
comfortable effect of this process continues, until at last the whole
loan is redeemed and every investor will have got his money back and
something over. The effect of this obligation to redeem, of course,
makes the market in the loan very steady, because the chance of being
drawn at par in any year, and the certainty of being drawn if the
investor holds it long enough, ensures that the market price will be
strengthened by this consideration.

Such being the terms of the loan we may be justified in supposing--if
Ruritania has a clean record in its treatment of its creditors, and if
the issuing firm is one that can be relied on to do all that can be done
to safeguard their interests, that the loan is a complete success and is
fully subscribed for by the public. The underwriters will consequently
be relieved of all liability and will pocket their 2 per cent., which
they have earned by guaranteeing the success of the issue. If some
financial or political shock had occurred which made investors reluctant
to put money into anything at the time when the prospectus appeared or
suggested the likelihood that Ruritania might be involved in war, then
the underwriters would have had to take up the greater part of the loan
and pay for it out of their own pockets; and this is the risk for which
they are given their commission. Ruritania will have got its money less
the cost of underwriting, advertising, commissions, 1 per cent. stamp
payable to the British Government, and the profit of the issuing firm.
Some shipyard in the north will lay down a battleship and English
shareholders and workmen will benefit by the contract, and the investors
will have got well secured bonds paying them a good rate of interest and
likely to be easily saleable in the market if the holders want to turn
them into cash. The bonds will be large pieces of paper stating that
they are 4-1/2 per cent, bonds of the Kingdom of Ruritania for L20,
L100, L500 or L1000 as the case may be, and they will each have a sheet
of coupons attached, that is, small pieces to be cut off and presented
at the date of each interest payment; each one states the amount due
each half year and the date when it will have to be met.

Bonds are called bearer securities, that is to say, possession of them
entitles the bearer to receive payment of them when drawn and to collect
the coupons at their several dates. They are the usual form for the
debts of foreign Governments and municipalities, and of foreign railway
and industrial companies.

In England we chiefly affect what are called registered and inscribed
stocks--that is, if our Government or one of our municipalities issues a
loan, the subscribers have their names registered in a book by the
debtor, or its banker, and merely hold a certificate which is a receipt,
but the possession of which is not in itself evidence of ownership.
There are no coupons, and the half-yearly interest is posted to
stockholders, or to their bankers or to any one else to whom they may
direct it to be sent. Consequently when the holder sells it is not
enough for him to hand over his certificate, as is the case with a
bearer security, but the stock has to be transferred into the name of
the buyer in the register kept by the debtor, or by the bank which
manages the business for it.

When the securities offered are not loans by public bodies, but
represent an interest in a company formed to build a railway or carry on
any industrial or agricultural or mining enterprise, the procedure will
be on the same lines, except that the whole affair will be on a less
exalted plane. Such an issue would not, save in exceptional
circumstances, as when a great railway is offering bonds or debenture
stock, be fathered by one of the leading financial firms. Industrial
ventures are associated with so many risks that they are usually left to
the smaller fry, and those who underwrite them expect higher rates of
commission, while subscribers can only be tempted by anticipations of
more mouth-filling rates of interest or profit. This distinction between
interest and profit brings us to a further difference between the
securities of companies and public bodies. Public bodies do not offer
profit, but interest, and the distinction is very important. A
Government asks for your money and promises to pay a rate for it,
whether the object on which the money is spent be profit-earning or no,
and, if it is, whether a profit be earned or no. A company asks
subscribers to buy it up and become owners of it, taking its profits,
that it expects to earn, and getting no return at all on their money if
its business is unfortunate and the profits never make their appearance.
Consequently the shareholders in a company run all the risks that
industrial enterprise is heir to, and the return, if any, that comes
into their pockets depends on the ability of the enterprise to earn
profits over and above all that it has to pay for raw material, wages
and other working expenses, all of which have to be met before the
shareholder gets a penny.

In order to meet the objections of steady-going investors to the risks
involved by thus becoming industrial adventurers, a system has grown up
by which the capital of companies is subdivided into securities that
rank ahead of one another. Companies issue debts, like public bodies, in
the shape of bonds or debenture stocks, which entitle the holders of
them to a stated rate of interest, and no more, and are often repayable
at a due date, by drawings or otherwise. These are the first charge on
the concern after wages and other working expenses have been paid, and
the shareholders do not get any profit until the interest on the
company's debt has been met. Further, the actual capital held by the
shareholders is generally divided into two classes, preference and
ordinary, of which the preference take a fixed rate before the ordinary
shareholders get anything, and the ordinary shareholders take the whole
of any balance left over. Sometimes, the preference holders have a
right to further participation after the ordinary have received a
certain amount of dividend, or share of profit, and there are almost
endless variations of the manner in which the different classes of
holders may claim to divide the profits, by means of preference,
preferred, ordinary, preferred ordinary, deferred ordinary, founders'
shares, management shares, etc., etc.

All these variations in the position of the shareholder, however, do not
alter the great essential difference between him and the creditor, the
man who lends money to a Government or enterprise with a fixed rate of
interest, and, in most cases, a claim for repayment sooner or later. The
shareholder, whether preference or ordinary, puts his money into a
venture with no claim for repayment, unless the company is wound up, in
which case his claim ranks, of course, after that of every creditor. If
he wants to get his money out again he can only do so by selling his
stock or shares at any price that they will fetch in the stock market.

Thus, if we take as an example a Brewery company with a total debt and
capital of three millions, we may suppose that it will have a million
4-1/2 per cent, debenture stock, entitling the creditors who own it to
interest at that rate, and repayment in 1935, a million of 6 per cent.
cumulative preference stock, giving holders a fixed dividend, if earned,
of 6 per cent, which dividend and all arrears have to be paid before the
ordinary shareholders get anything, and a million in ordinary shares of
L10 each, whose holders take any balance that may be left. This is the
total of the money that has been received from the public when the
company was floated and put into the brewery plant, tied houses, or
other assets out of which the company makes its revenue.

These bonds and stocks and shares are the machinery of international
finance, by which moneylenders of one nation provide borrowers in others
with the wherewithal to carry out enterprises, or make payments for
which they have not cash available at home. It was shown in a previous
chapter that bills of exchange are a means by which the movements of
commodities from market to market are financed, and the gap in time is
bridged between production and consumption. Stock Exchange securities
are more permanent investments, put into industry for longer periods or
for all time. Midway between them are securities such as Treasury bills
with which Governments raise the wind for a time, pending the collection
of revenue, and the one or two years' notes with which American
railroads lately financed themselves for short periods, in the hope that
the conditions for an issue of bonds with longer periods to run, might
become more favourable.

So far we have only considered the machinery by which these securities
are created and issued to the public, but it must not be supposed that
investment is only possible when new securities are being offered. Many
investors have a prejudice against ever buying a new security,
preferring those which have a record and a history behind them, and
buying them in the market whenever they have money to invest. This
market is the Stock Exchange in which securities of all kinds and of all
countries are dealt in. Following the history of the Ruritanian loan,
we may suppose that it will be dealt in regularly in that section of the
Stock Exchange in which the loans of Foreign Governments are marketed.
Any original subscriber who wants to turn his bonds into money can do so
by instructing his broker to sell them; anyone who wants to do so can
acquire a holding in them by a purchase. The terms on which they will be
bought or sold will depend on the variations in the demand for, and
supply of, them. If a number of holders want to sell, either because
they want cash for other purposes, or because they are nervous about the
political outlook, or because they think that money is going to be
scarce and so there will be better opportunities for investment later
on, then the price will droop. But if the political sky is serene and
people are saving money fast and investing it in Stock Exchange
securities, then the price will go up and those who want to buy it will
pay more. The price of all securities, as of everything else, depends on
the extent to which people who have not got them demand them, in
relation to the extent to which those who have got them are ready to
part with them. Price is ultimately a question of what people think
about things, and this is why the fluctuations in the price of Stock
Exchange securities are so incalculable and often so irrational. If a
sufficient number of misguided people with money in their pockets think
that a bad security is worth buying they will put the price of it up in
the face of the logic of facts and all the arguments of reason. These
wild fluctuations, of course, take place chiefly in the more speculative
securities. Shares in a gold mine can go to any price that the credulity
of buyers dictates, since there is no limit to the amount of gold that
people can imagine to be under the ground in its territory.

All the Stock Exchanges of the world are in communication with one
another by telegraph, or telephone, and so their feelings about prices
react on one another's nerves and imaginations, and the Stock Exchange
price list may be said to be the language of international finance, as
the bill of exchange is its currency.



We have seen that finance becomes international when capital goes
abroad, by being lent by investors in one country to borrowers in
another, or by being invested in enterprises formed to carry on some
kind of business abroad. We have next to consider why capital goes
abroad and whether it is a good or a bad thing, for it to do so.

Capital goes abroad because it is more wanted in other countries than in
the country of its origin, and consequently those who invest abroad are
able to do so to greater advantage. In countries like England and
France, where there have been for many centuries thrifty folk who have
saved part of their income, and placed their savings at the disposal of
industry, it is clear that industry is likely to be better supplied
with capital than in the new countries which have been more lately
peopled, and in which the store of accumulated goods is less adequate to
the industrial needs of the community. For we must always remember that
though we usually speak and think of capital as so much money it is
really goods and property. In England money consists chiefly of credit
in the books of banks, which can only be created because there is
property on which the banks can make advances, or because there is
property expressed in securities in which the banks can invest or
against which they can lend. Because our forefathers did not spend all
their incomes on their own personal comfort and amusement but put a
large part of them into railways and factories, and shipbuilding yards,
our country is now reasonably well supplied with the machinery of
production and the means of transport. Whether it might not be much
better so equipped is a question with which we are not at present
concerned. At least it may be said that it is more fully provided in
these respects than new countries like our colonies, America and
Argentina, or old countries like Russia and China in which industrial
development is a comparatively late growth, so that there has been less
time for the storing up, by saving, of the necessary machinery.

So it comes about that new countries are in greater need of capital than
old ones and consequently are ready to pay a higher rate of interest for
it to lenders or to tempt shareholders with a higher rate of profit. And
so the opportunity is given to investors in England to develop the
agricultural or industrial resources of all the countries under the sun
to their own profit and to that of the countries that it supplies. When,
for example, the Government of one of the Australian colonies came to
London to borrow money for a railway, it said in effect to English
investors, "Your railways at home have covered your country with such a
network that there are no more profitable lines to be built. The return
that you get from investing in them is not too attractive in view of all
the trade risks to which they are subject. Do not put your money into
them, but lend it to us. We will take it and build a railway in a
country which wants them, and, whether the railway pays or no, you will
be creditors of a Colonial Government with the whole wealth of the
colony pledged to pay you interest and pay back your money when the loan
falls due for repayment." For in Australia the railways have all been
built by the Colonial Governments, partly because they wished, by
pledging their collective credit, to get the money as cheaply as
possible, and keep the profits from them in their own hands, and partly
probably because they did not wish the management of their railways to
be in the hands of London boards. In Argentina, on the other hand, the
chief railways have been built, not by the Government but by English
companies, shareholders in which have taken all the risks of the
enterprise, and have thereby secured handsome profits to themselves,
tempered with periods of bad traffic and poor returns.

For many years there was a good deal of prejudice in England against
investing abroad, especially among the more sleepy classes of investors
who had made their money in home trade, and liked to keep it there when
they invested it. As traders, we learnt a world-wide outlook many
centuries before we did so as investors. To send a ship with a cargo of
English goods to a far off country to be exchanged into its products was
a risk that our enterprising forefathers took readily. The ship took in
its return cargo and came home, bringing its sheaves with it in a
reasonable time, though the Antonios of the period sometimes had awkward
moments if their ships were delayed by bad weather, and they were liable
on a bond to Shylock. But it was quite another matter to lend money in a
distant country when communication was slow and difficult, and social
and political conditions had not gained the stability that is needed
before contracts can be entered into extending over many years.
International moneylending took place, of course, in the middle ages,
and everybody knows Motley's great description of the consternation that
shook Europe when Philip the Second repudiated his debts "to put an end
to such financiering and unhallowed practices with bills of
exchange."[3] But though there were moneylenders in those days who
obliged foreign potentates with loans, the business was in the hands of
expert professional specialists, and there was no medieval counterpart
of the country doctor whom we have imagined to be developing industry
all over the world by placing his savings in foreign countries. There
could be no investing public until there were large classes that had
accumulated wealth by saving, and until the discovery of the principle
of limited liability enabled adventurers to put their savings into
industry without running the risk of losing not only what they put in,
but all else that they possessed. By means of this system, the risk of a
shareholder in a company is limited to a definite amount, usually the
amount that has been paid up on his shares or stock, though in some
cases, such as bank and insurance shares, there is a further reserve
liability which is left for the protection of the companies' customers.

In the eighteenth century a great outburst of gambling in the East
Indian and South Sea companies, and a horde of less notorious concerns
was a short-lived episode which must have helped for a very long time to
strengthen the natural prejudice that investors feel in favour of
putting their money into enterprise at home; and it was still further
strengthened by the disastrous results of another great plague of bad
foreign securities that smote London just after the war that ended at
Waterloo. This prejudice survived up to within living memory, and I have
heard myself old-fashioned stockbrokers maintain that, after all, there
was no investment like Home Rails, because investors could always go and
look at their property, which could not run away. Gradually, however,
the habit of foreign investment grew, under the influence of the higher
rates of interest and profit offered by new countries, the greater
political stability that was developed in them, and political
apprehensions at home. In fact it grew so fast and so lustily that there
came a time, not many years ago, when investments at home were under a
cloud, and many clients, when asking their brokers where and how to
place their savings, stipulated that they must be put somewhere abroad.

This was at a time when Mr. Lloyd George's financial measures were
arousing resentment and fear among the investing classes, and when
preachers of the Tariff Reform creed were laying so much stress on our
"dying industries" that they were frightening those who trusted them
into the belief that the sun was setting on our industrial greatness.
The effect of this belief was to bring down the prices of home
securities, and to raise those of other countries, as investors changed
from the former into the latter.

So the theory that we were industrially and financially doomed got
another argument from its own effects, and its missionaries were able to
point to the fall in Consols and the relative steadiness of foreign and
colonial securities which their own preaching had brought about, as
fresh evidence of its truth. At the same time fear of Socialistic
legislation at home had the humorous result of making British investors
fear to touch Consols, but rush eagerly to buy the securities of
Colonial Governments which had gone much further in the direction of
Socialism than we had. Those were great days for all who handled the
machinery of oversea investment and in the last few years before the
war it is estimated that England was placing some 200 millions a year in
her colonies and dependencies and in foreign countries. Old-fashioned
folk who still believed in the industrial strength and financial
stability of their native land waited for the reaction which was bound
to follow when some of the countries into which we poured capital so
freely, began to find a difficulty in paying the interest; and just
before the war this reaction began to happen, in consequence of the
default in Mexico and the financial embarrassments of Brazil. Mexico had
shown that the political stability which investors had believed it to
have achieved was a very thin veneer and a series of revolutions had
plunged that hapless land into anarchy. Brazil was suffering from a
heavy fall in the price of one of her chief staple products, rubber,
owing to the competition of plantations in Ceylon, Straits Settlements
and elsewhere, and was finding difficulty in meeting the interest on the
big load of debt that the free facilities given by English and French
investors had encouraged her to pile up. She had promised retrenchment
at home, and another big loan was being hatched to tide her over her
difficulties--or perhaps increase them--when the war cloud began to
gather and she has had to resort for the second time in her history to
the indignity of a funding scheme. By this "new way of paying old debts"
she does not pay interest to her bondholders in cash, but gives them
promises to pay instead, and so increases the burden of her debt, which
she hopes some day to be able to shoulder again, by resuming payments in

Mexico and Brazil were not the only countries that were showing signs,
in 1914, of having indulged too freely in the opportunities given them
by the eagerness of English and French investors to place money abroad.
It looked as if in many parts of the earth a time of financial
disillusionment was dawning, the probable result of which would have
been a strong reaction in favour of investment at home. Then came the
war with a short sharp spell of financial chaos followed by a halcyon
period for young countries, which enabled them to sell their products at
greatly increased prices to the warring powers and so to meet their
debt charges with an ease that they had never dreamt of, and even to
find themselves lending, out of the abundance of their war profits,
money to their creditors. America has led the way with a loan of L100
millions to France and England, and Canada has placed 10 millions of
credit at the disposal of the Mother Country. There can be little doubt
that if the war goes on, and the neutral countries continue to pile up
profits by selling food and war materials to the belligerents, many of
them will find it convenient to lend some of their gains to their
customers. America has also been taking the place of France and England
as international moneylenders by financing Argentina; and a great
company has been formed in New York to promote international activity,
on the part of Americans, in foreign countries. "And thus the whirligig
of time," assisted by the eclipse of civilization in Europe, "brings in
his revenges" and turns debtors into creditors. In the meantime it need
hardly be said that investment at home has become for the time being a
matter of patriotic duty for every Englishman, since the financing of
the war has the first and last claim on his savings.

Our present concern, however, is not with the war problems of to-day,
but with the processes of international finance in the past, and
perhaps, before we get to the end, with some attempt to hazard a glimpse
into its arrangements in the future. What was the effect on England, and
on the countries to whom she lent, of her moneylending activity in the
past? As soon as we begin to look into this question we see once more
how close is the connection between finance and trade, and that finance
is powerless unless it is supported and in fact made possible by
industrial or commercial activity behind it. England's international
trade made her international finance possible and necessary. A country
can only lend money to others if it has goods and services to supply,
for in fact it lends not money but goods and services.

In the beginnings of international trade the older countries exchange
their products for the raw materials and food produced by the new ones.
Then, as emigrants from the old countries go out into the new ones,
they want to be supplied with the comforts and appliances of the older
civilizations, such as, to take an obvious example, railways. But as the
productions of the new countries, at their early stage of development,
do not suffice to pay for all the material and machinery needed for
building railways, they borrow, in effect, these materials, in the
expectation that the railways will open out their resources, enable them
to put more land under the plough and bring more stuff to the seaboard,
to be exchanged for the products of Europe. The new country, New Zealand
or Japan, or whichever it may be, raises a loan in England for the
purpose of building a railway, but it does not take the money raised by
the loan in the form of money, but in the form of goods needed for the
railway, and sometimes in the form of the services of those who plan and
build it. It does not follow that all the stuff and services needed for
the enterprise are necessarily bought in the country that lends the
money; for instance, if Japan borrows money from us for a railway, she
may buy some of the steel rails and locomotives in Belgium, and
instruct us to pay Belgium for her purchases. If so, instead of sending
goods to Japan we shall have to send goods or services to Belgium, or
pay Belgium with the claim on some other country that we have
established by sending goods or services to it. But, however long the
chain may be, the practical fact is that when we lend money we lend
somebody the right to claim goods or services from us, whether they are
taken from us by the borrower, or by somebody to whom the borrower gives
a claim on us.

If, whenever we made a loan, we had to send the money to the borrower in
the form of gold, our gold store would soon be used up, and we should
have to leave off lending. In other words, our financiers would have to
retire from business very quickly if it were not that our manufacturers
and shipowners and all the rest of our industrial army produced the
goods and services to meet the claims on our industry given, or rather
lent, to other countries by the machinery of finance.

This obvious truism is often forgotten by those who look on finance as
an independent influence that can make money power out of nothing; and
those who forget it are very likely to find themselves entangled in a
maze of error. We can make the matter a little clearer if we go back to
the original saver, whose money, or claims on industry, is handled by
the professional financier. Those who save do so by going without
things. Instead of spending their earnings on immediate enjoyment they
spend part of them in providing somebody else with goods that they need,
and taking from that somebody else an annual payment for the use of
these goods for a certain period, after which, if it is a case of a
loan, the transaction is closed by repayment of the advance, which again
is effected by a transfer of goods. When our country doctor subscribes
to an Australian loan raised by a colony for building a railway, he
hands over to the colony money which a less thrifty citizen would have
spent on pleasures and amusements, and the colony uses it to buy railway
material. Thus in effect the doctor is spending his money in making a
railway in Australia. He is induced to do so by the promise of the
colony to give him L4 every year for each L100 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 L100 lent the colony has to send
him L4. This it can only do if its mines and fields and factories can
turn out metals or wheat or wool, or other goods which can be shipped to
England or elsewhere and be sold, so that the doctor's L4 is provided.
And so though on both sides the transaction is expressed in money it is
in fact carried out in goods, both when the loan is made and the
interest is paid. And finally when the loan is paid back again, the
colony must have sold goods to provide repayment, unless it meets its
debts by raising another. But when a loan is well spent on a railway
that is needed for the development of a fertile or productive district,
it justifies itself by cheapening transport and quickening the output of
wealth in such a manner, that the increased volume of goods that it has
helped to create easily meets the interest due to lenders, provides a
fund for its redemption at maturity, and leaves the borrower better off,
with a more fully equipped productive system.

Since, then, there is this close and obvious connection between finance
and trade, it is inevitable that all who partake in the activities of
international finance should find their trade quickened by it. England
has lent money abroad because she is a great producer, and certain
classes of Englishmen are savers, so that there was a balance of goods
available for export, to be lent to other countries. In the early years
of the nineteenth century, when our industrial power was first beginning
to gather strength, we used regularly to export goods to a greater value
than we imported. These were the goods that we were lending abroad,
clearly showing themselves in our trade ledger. Since then the account
has been complicated by the growth of the amount that our debtors owe us
every year for interest, and by the huge earnings of our merchant navy,
which other countries pay by shipping goods to us, so that, by the
growth of these items, the trade balance sheet has been turned in the
other direction, and in spite of our lending larger and larger amounts
all over the world we now have a balance of goods coming in. Interest
due to us and shipping freights and the commissions earned by our
bankers and insurance companies were estimated before the war to amount
to something like 350 millions a year, so that we were able to lend
other countries some 200 millions or more in a year and still take from
them a very large balance in goods. After the war this comfortable state
of affairs will have been modified by the sales that we are making now
in New York of the American Railroad bonds and shares that represented
the savings that we had put into America in former years, and by the
extent of our war borrowings in America, and elsewhere, if we widen the
circle of our creditors. The effect of this will be that we shall owe
America for interest on the money that it is lending us, and that it
will owe us less interest, owing to the blocks of its securities that it
is buying back. Against this we shall be able to set debts due to us
from our Allies, but if our borrowings and sales of securities exceed
our lendings as the war goes on, we shall thereby be poorer. Our power
as a creditor country will be less, until by hard work and strict saving
we have restored it. This we can very quickly do, if we remember and
apply the lessons that war is teaching us about the number of people
able to work, whose capacity was hitherto left fallow, that this country
contained, and also about the ease with which we can dispense, when a
great crisis makes us sensible, with many of the absurdities and
futilities on which much of our money, and productive capacity, used to
be wasted.


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



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
competitors 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 shipbuilders
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 lusty 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 ships 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 passed 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 shores, 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 entitled 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 embarrassment and the chance of ruin. War has benefited the
working classes, 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 shipowners, 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
institutions, this shrivelling process in the price of their securities
and other assets, brings serious embarrassment, 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, entitled "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 entitled 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. Nobody 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 butter. 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 astonishingly 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 championship 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 shelled 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 Canal was built, prophesied that Egypt would some day be ours.
In Chapter XX. of "Eothen," comes this well known passage 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 Canal, the command of this short cut to India
made Egypt still more important. England bought shares in the Canal, 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 circumstances 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

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


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