Britain Is Buying Again
G. R. STEVENS
DURING 1934 the United States formally abdicated as a world investor. President Roosevelt’s ruling that no further loans would be made to nations whose indebtedness was in arrears or in default, virtually closed Wall Street to foreign borrowers and marked the end of New York’s challenge in the field of international finance.
During the same period Great Britain moved in the opposite direction. In December, 1933, the British Treasury gave cautious and partial approval to the export of British capital. Throughout the past year the trickle of British overseas investment has grown to a steady flow. London has reoccupied her position as world banker. Her rise to that eminence in the hundred years before the Great War, her eclipse for ten years afterward and her recovery of her old leadership, form three fascinating chapters in the romance of twenty thousand million dollars.
That vast sum represents the approximate value of British foreign investments at the outbreak of the Great War. In 1914 it comprised over half the foreign investments of the world. It earned twelve hundred million dollars each year for British investors. No other nation had more than a third of this amount on foreign service, and except for borrowings and lendings inspired by political motives—such as many French loans, and capital movements between contiguous countries, such as between the United States and Canada—there were few foreign loans which were not raised or underwritten in the City of London.
The basis of this vast and lucrative business was the export of men. There shouia be many statues to Captain John Hawkins in Threadneedle Street. For in the closing
years of the sixteenth century, rumors reached England that Dutch traders had returned from Prester John’s country laden with the wealth of dreams. Presently, in a Cheapside inn, a score of sober merchants, with a few gentlemen of quality and a beefy duke in the chair, decided on a venture toward Cathay. Three merchantmen were fitted out, with a victualling consort, and the four ships took the long leg south to the Cape of Good Hope—it was the Cape of Storms then—and thereafter turned northward past the Coromandel Coast, until the familiar stars began to rise before them. Three years of silence and one morning the ships were back in London Pool, stuffed with rich bales. But Captain John Hawkins had remained at Surat to trade and to assemble cargo against the next voyage. There he lived for many years, writing quaint jxjstscripts on the bottoms of his indents, and formulating a credo in foreign trade to which his countrymen have been faithful for three centuries. Captain Hawkins was the pathfinder and the first of those invisible exports by which Great Britain has always paid her way.
Thereafter a considerable number of the British had to be content with being born at home. When they passed their schooldays they took the great common road of the sea to the ends of the world, and there they sjxmt their working lives in exile. As gentlemen cadets, as adventurers, as castaways and as fugitives, they reached every port of every coast; they found their way up the rivers and across the continents; until, even a hundred years ago, there were few cities in any latitude without British traders. If they were thrust out of any country, they sat down on a mud flat, as at Shanghai, or on a bare rock, as at Hong Kong, or in a swamp, as at Singapore, and speedily made themselves a city and a great market place. If they were allowed to come in, they only asked permission to build a church and to buy a cemetery; but they speedily arranged to have their seats kept for them in some tavern, where they foregathered
daily and where much of their business was done. They seldom got into trouble, but they took a strong line when trouble came; they kept their word, and only their tempers were vile. But they remained outright Britons, even when they became foreign citizens for business purposes.
Linking the World with London
OUTSIDE of their counting houses, they quarrelled a great deal among themselves, but they underwrote each other’s ventures, and they knew more than anyone concerning the mysteries of arbitrage and compound interest. They learned to wait and to take the long view, and wherever they went they organized insurance companies and fire brigades, of which some, as in Peru, exist to this day.
When steam was first applied to machines and electricity began to draw the world together, Britain led the way with many new devices. Then these expatriated Britishers served their homeland and their adopted countries well—and did excellently for themselves also—by introducing the new machines abroad. Soon British men and money were to be found everywhere, laying cables, building ports, railways, waterworks and all manner of conveniences. Thence came British ships to bring out materials and to take home produce in payment, British banks and insurance companies to facilitate and to protect the trade, and afterward great numbers of British manufacturers seeking cheap and sure sources of raw materials for their machines.
Within comparatively few years every comer of the earth was linked up, in some way or other, with the city of London. British wealth poured overseas in a flood, and at home intricate and specialized organizations were devised to guard and to control this emigration of capital. Foreign banks, underwriters, exchanges, discount houses, investment companies, bondholders’ organizations and other
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Britain Is Buying Again
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special services were created to handle the great sums which were opening up all continents and many islands of the sea. So that before other nations were really ready for foreign business, Great Britain had her men abroad and a complementary organization at home. Because of her knowledge and connections, her risks in foreign loans were less, and she could afford to charge less for the use of her money. These advantages, together with the British Navy policing the seas and keeping the more turbulent coasts in order, quickly made London the money market of the world.
Nevertheless, Britishers learned the business of foreign finance as a child learns, with clumsiness and hurt. Vast sums were thrown away in a hundred South Sea Bubbles. Loans to governments were repudiated as soon as the money had been spent. The concessions which secured these loans were often revoked or confiscated. More money was loaned to backward nations than could be repaid; railways and public works were built at costs which made recovery of the capital impossible. At one time or another, the British investor ran the gamut of every conceivable disaster. But out of his misfortunes, the specialists in London evolved methods of meeting emergencies and of dealing with overseas borrowers which were far in advance of anything devised elsewhere.
The difference between private and public borrowings was soon recognized. Governments cannot be treated as individuals. Some lenders decided to accept only public, others only private, clients. Then the difference between lending money to British citizens for use in British enterprises abroad, and the loaning of money to foreigners for use in their own undertakings, was realized. Here again London created special arrangements to meet the requirements of each type of business. There were also regional bankers who were only interested in certain territories, such as South America, the British Dominions, or the Far East. Because of the experience and efficiency of these specialists and the close liaison between them, the amount and cost of foreign loans became little more than an actuarial calculation. Both borrower and lender knew where they stood, and how much money might be
forthcoming in any given period, and how much it would cost.
Ascendancy of United States
DURING THE Great War, Great Britain sold foreign holdings to the value of four thousand million dollars in order to finance the struggle against Germany. The United States bought nearly all of these securities, and many valuable British properties passed into American control in every part of the world. The earning power of these properties surprised the Americans and whetted their appetite for more such investments. Moreover, by 1920 the Americans had covered their own continent and had money available for lending elsewhere. Instead of owing other nations five thousand million dollars, as at the beginning of the Great War, they now had a huge surplus of capital available for employment in foreign lands. The flood of United States exports was not met by any returning tide of imports and the solution seemed to be to lend the cost of the goods to the buyers in order that they might buy more goods.
So the era of Big Money in foreign finance began. In spite of the losses of the war, Great Britain had almost the same amount available for investment in 1920 as in 1914. But her three hundred million dollars j)er year was small change in comparison with the thousand millions which the United States could supply for foreign use. From 1920 onward, foreign borrowers bent their steps toward New York instead of toward London.
When they made their needs known in New York, their reception seemed incredible. In London they had been accustomed to approach their bankers, asking certain sums for certain purposes. The British banker would treat his clients to a homily upon world trade and national balances, and what might happen the year after next, and other matters which did not seem very relevant; then he would offer perhaps half the sum asked, declaring that the financial situation did not warrant a greater loan at the moment. There was nothing like this in New York. The United States banker said: “You ask for a certain sum to do certain
work. We do not believe you can do a proper job with that amount. We will therefore loan you twice the sum you ask, and moreover we shall arrange with our manufacturers and contractors to do the work. Before your loans are due, your country will have progressed sufficiently to repay us.”
I The borrowers could scarcely believe their ears. They signed papiers, and went home happy. Often representatives of the United , States bankers followed them to force more money upon them. In a single year, the United States loaned twelve hundred million dollars abroad. In 1928, the country which ;had been a debtor nation fourteen years before, owned foreign investments valued at fifteen thousand million dollars, or threequarters of the sum loaned by Great Britain in the hundred years after Waterloo.
THE CHIEF borrowers had been Canada, Germany and the Latin-American states. To South America the United States supplied as much money in ten years as Great Britain had supplied in the preceding fifty years. From $170,000,000 in 1912, the Latin-American investments of the United States had risen to $2,200,000,000 in 1928. Argentine owed the United States $45,000,(XX) in 1914, and $500,000,(XX) in 1928. Brazil’s American borrowings had risen from $50,(XX),000 to $450,000,000 in the same period. Chile had only owed the United States $15,(XX),(XX) in the year of the Great War. By 1928, she had borrowed $500,000,(XX). Colombia, incensed by the rape of Panama, had refused all American loans until the days of Big Money began; thereafter she accepted $200,000,000 within ten years. Of the smaller nations, Peru borrowed $100,000,000 between the Armistice and the Wall Street crash; Venezuela, which in pre-war days had no standing at all in the New York money market, was able to obtain $170,000,000 in the same period; Bolivia pyramided her United States obligations from $10,000,000 to $110,000,000; and Uruguay, Ecuador and Paraguay during the nineteen-twenties borrowed $54,000,000 in New York as against total loans of $16,000,000 prior to 1912.
The lending in other parts of the world was only a little less feverish. Canada alone borrowed almost as much as all South America. Even Australia, most British of Dominions, deserted London for New York to the extent of $200,000,000. Germany’s currency was reconstituted on a basis of American greenbacks. The Chinese war lords bombarded each other with United States munitions paid for with United States loans. There was American money everywhere, and it talked the language of conquest; the language of the moving picture and the motor car, the language of hustle and salesmanship, and success in a hurry. It seemed as though American dollars were destined to be the dynamo which would energize the whole world.
The American Plan
TN THE PROMOTION of this great busi1 ness of foreign lending, Washington walked at New York’s shoulder. Some very curious conversations ensued between supposedly responsible statesmen and Wall Street bankers in the days when the outward : tide of gold began to flow. The bankers wished to know how much support they might expect from the United States Government, if difficulties arose over money loaned to foreign countries. The exact replies remain a secret; but the bankers were definitely assured that for loans in certain parts of the world, diplomatic support and an official benison could be anticipated. South America was indicated as one such area, and the Wall Street bankers gained the impression that they had been promised a sort of financial Monroe Doctrine. This I belief, more than any other factor, speeded up the money migration.
When New York began to take over London's function as world banker, it was evident that the United States lacked the i advantages which buttressed British over-
seas finance. New York could ship shiny ! office furniture and a few bank managers and engineers to the foreign capitals, where they opened imposing premises on the main streets and sometimes even learned the language. But the United States could not export men. Americans go abroad, but not to stay; there are too many opportunities for them at home. In every part of the world the American colony is transient, whereas the British and German colonies are permanent. Nor did New York possess the highly specialized and intricate organizations which the City of London had developed for investigating and appraising foreign borrowers, and for protecting loans after they had been made. It was therefore necessary for Wall Street to improvise some machinery to handle foreign business. A clever plan was conceived.
Those nations which wished to borrow in New York—and these comprised half the nations of the world—were encouraged to invite United States experts to examine their public finances. London had supplied any number of such experts in the past, who had gone out, had proffered good advice and had come home, leaving things neither better nor worse than before. The American experts ; did not propose to stop at advice. Instead, they wished to introduce the American financial system wherever they went, with Americans in charge of the system. If borrowers were reluctant to fall in with such plans, it might affect their borrowing powers. At a time when New York was hosing the world with streams of gold, such possibility was a
So those nations—particularly those Latin-American nations—which needed money, accepted the hint, and invited United States financial missions to advise them. A score of such missions were sent out, the majority under the leadership of E. W. Kemmerer, a gentleman who had a set plan for the reorganization of the finance of all countries. A Central Bank on the Federal Reserve model, said Mr. Kemmerer, was what was needed. Such bank would have power to issue currency and would be granted certain discount privileges. It would act as government bankers, with certain functions in connection with public finance. It would also act as the agents for foreign lenders, that is to say, for the New York bankers. It would be headed by an American, and other Americans would be employed in connection with national finance as collectors of revenue, as financial advisers and as fiscal superintendents.
There was a touch of Napoleonic simplicity about this scheme. By such plan, the United States bankers secured supervision, if not control, of the public finance of borrowing nations. Neither United States colonies abroad nor elaborate organizations at home were necessary when borrowers and lenders were placed on such intimate terms with each other. When a country accepted the Kemmerer plan, every public transaction came under the review of United States bankers, who virtually possessed the power of revising it to suit themselves. It was a grant of financial suzerainty. Therefore, when nation after nation accepted the Kemmerer proposals and entrusted their fiscal destinies to United States missions, small wonder that a U. S. Congressman should declare the Monroe Doctrine to have been enlarged to include the powers of veto over any transaction in Spanish-America; and a prominent U. S. publicist should write exultingly: "Why should we bother to own the world when we control it?”
The Result of Inexperience
THIS LATTER remark is illuminating.
It exhibits the ominous inexperience of the United States in the business of foreign finance. Control without ownership is a delicate undertaking, to be achieved sometimes by subtlety but never by weight of gold. As a people, the Americans are naive and not subtle. If Wall Street had possessed one-tenth of the experience of London, it never would have dreamed of the Kemmerer plan. London could have told New York ! that no nation will submit to control be-1
cause of indebtedness, and least of all the touchy Latin-American peoples, whose national pride becomes clamant on the slightest provocation.
As a matter of fact, bankers in London foretold exactly what came to pass. The South American borrowing nations dutifully set up the requisite organizations and installed the American experts, many of whom were not very expert and few of whom had any first-hand knowledge of the people whom they were to control. These experts drew thumping salaries and were honest; they scattered no largess and oiled no palms. Consequently, they were very unpopular with people who were not accustomed to transacting public business without the usual perquisites of office. Government in many parts of the world is a venal business, and authority only survives while it pays its shot and keeps the wheels greased. To such governments the Kemmerer experts not only were nuisances; they were positively dangerous.
The upshot was that no sooner were the Kemmerer institutions installed than they were ignored. They were not the channels of public finance; they were only snags in the channel. If the experts remained pleasant, they were paid their salaries, did nothing and lived like gentlemen. If they were conscientious and made a fuss, they were superseded on one pretext or another. I remember the Superintendent of Fiscal Institutions in Ecuador. Before his contract was a year old, his office had been abolished. He lived at a first-class hotel, drinking great numbers of the delicious naranjadas of the country, and composing one petition weekly to the Ecuadorian Congress concerning his salary. His jilea was always published in the morning newspapers, but nothing else happened.
The lending of two thousand million dollars in ten years to nations which had borrowed scarcely more in the preceding hundred years, could not be considered in any sense a business transaction. The borrowers could neither afford the money nor
what the money bought—the great port works, the motor roads where there were few if any motor cars, the irrigation works for the production of export commodities for which no markets existed, the great public buildings like the Capitolio at Havana—a model of the Capitol at Washington, built with borrowed funds at a cost of fourteen million dollars, with a charge of nearly one million dollars annually for interest and sinking fund, to be found by a nation of four million people relying ujx>n one depres-sed product for their livelihood. These public works increased the national revenues slightly if at all, but the spending of the loan money increased the cost of government very greatly.
Loans were so easy to obtain that no one considered it necessary to make ends meet. The borrowers were debauched with easy money. If you owe enough, your creditors must carry you. There is evidence that as early as 1925, certain South American States had decided that political motives dictated the United States lending policy. Consequently they were not averse to borrowing more and more, since when the day ; of settlement came, they could impeach the motives of the lender. They could cast Uncle Sam in whatever rôle suited them; as Machiavelli, Shylock, or just plain Mug.
Many of the United States loans were earmarked for sjiecific purposes. United States construction companies scoured South ! America, persuading governments that great public works were necessary. These contractors all had banking connections eager to finance them. When the governments accepted their offers, the U. S. contractors were usually paid by the bankers direct, out of the proceeds of bond issues. The work was excellently done but at enormous expanse. Cost plus contracts were popular, since they protected the contractor. The governments concerned had little idea of what such construction should cost, so the overhead expenses were often out of all reason. In 1929, port work was proceeding at Callao in Peru and at Guayaquil in Ecuador. The contractors at Callao were American, the contractors at Guayaquil English. On the Callao job some forty American engineers were employed; at Guayaquil two English engineers and one accountant completed the foreign staff.
Diversion of Borrowed Funds
DUT THE FATAL feature of this business was that the borrower never saw his money, and consequently he could not lubricate the machinery of government with the perquisites which are a fundamental feature of Latin-American official transactions. (I once arranged with a South American ministry for the painting of its President by a young English artist. The artist’s price was £200, but before the way had been cleared for the confirmation of the commission, the price had to be £800.)
These American loans, therefore, were not always the good things that they should have been for the governing personnel, and it was usually necessary to make some arrangement for the comfort of those who stood behind the throne. Thus, Juan Leguia, son of the dictator of Peru, was paid $400,000 for his assistance in connection with one loan; and the brother of President Machado of Cuba received $150,000 for similar services. Nothing is more characteristic of the naivete of the United States foreign bankers than that these transactions should be shown in the bookkeeping. This circumstance will cost the lenders hundreds of millions. Government in South America is a very personal matter, and when a man goes out of office he often goes to gaol. His successor asks nothing better than the opportunity of denying responsibility for the sins of those whom he has overthrown. A sure proof of purity of purpose is proof of the impurity of opponents.
So that, without effective supervision and in defiance of all reasonable caution, the stream of United States gold continued to pour on to the jiarched and often sterile soil of South America. Occasionally American officials of long experience sounded wam-
ings, but the State Department spoke to such pessimists severely. In important instances the United States Department of State was very badly served. Certain ministers to South American countries were not careerists, but ex-Big Business men. They liked to feel that they held the whip and leash. They played at being hard-boiled, but the Latin-Americans, very sensitive to social shortcomings, marked them down as rude and silly old men. The Spanish vernacular press, with its gift of vital, impertinent caricature, found unending pleasure in them. Spanish argot has a vast capacity for ribaldry, and it is probably just as well that no one cared to translate to these headstrong old gentlemen the exact implications of the epithets which were applied to them.
In any case, their attempts at control were ludicrous. In Bolivia, a United States loan of $25,000,000 was obtained in 1928 for the purpose of road construction. A fiscal supervisor came with the loan, and presently U. S. contractors arrived to build the roads. But trouble with Paraguay over the Gran Chaco was imminent, and on the alio above La Paz, a Vickers air mission showed the latest styles in fighting planes. The fiscal adviser and the American Minister were very indignant. The loan had been granted for roads, and in any case, United States planes must be bought with United States money. But the Vickers goods had taken the eye; so the Bolivian Government decided that if roads must be built, they would be built in the Gran Chaco province. The Gran Chaco was under martial law, and, as supreme commander in this territory, the Bolivian general in charge received the money for the roads. A few days afterward, Vickers obtained an order for planes and field guns valued at ten million dollars.
Yet the United States bankers refused to face the plain fact that it took new loans to keep the old loans going. Instead, they intensified the selling of foreign bonds in the United States. Sleek young men roamed the small towns and even the countryside, dragging the savings of the small investor from him. Their carefully conned salestalk emphasized the safety of bonds and the paramount influence of the United States in South America. Seven per cent government bonds at ninety seemed such a good buy to the doctors, the clergymen and the careful family men. Their hundreds rolled into millions, which went to swell the unwieldy indebtedness of foreign nations who realized what the bankers refused to admit—that the end was near.
London Salves the Wreckage
"VT’ET THE BOTTOM did not go out of the foreign investment business with the Wall Street crash. The first effect of the slump was to drive a volume of speculative funds into the comparative safety of bonds. This support did not deceive the bankers. In the autumn of 1929, Wall Street representatives scurried to every comer of the world, to implore, to threaten, to deny with one breath that any crisis existed, and with the next to announce that no more loans would be forthcoming under any circumstances. Thus they wrote doom to their carnival. In June, 1930, an army marched on San Domingo City from the north, and overthrew the Dominican Government. In July, President Siles of Bolivia was chased out. In August, Leguia, dictator of Peru for eleven years, fell. In September, after a week’s street fighting in Buenos Aires, President Irigoyen was overthrown. In December, revolution dethroned Washington Luis in Brazil. In Panama, Colombia, Ecuador and Cuba, the storm broke later.
These revolutions placed in power highminded men of great integrity, who nevertheless were human enough to be interested in the failings of their predecessors. Such failings are a shield and a buckler to any new administration. The inner political history of the past ten years had revolved around the American loans. A smelling out began.
I One State discovered that the loans were I not properly legalized; another, that the ! lenders had attempted to secure political I control on the strength of their loans; a I third, that as borrowers they were not re-
sponsible for moneys passed over by United States bankers to United States contractors; a fourth, that any perquisites or commissions must be subtracted from the total indebtedness. These arguments ran around South America like wildfire; each nation added its neighbor’s to its own. From 1930 onward, a continuous series of defaults began.
Today, service is suspended on most of the South American loans floated during the past fifteen years. Moreover, the wretched small investors, who had been hypnotized by the sleek young men, became panicky and threw their bonds on the market for what they would bring. South American government issues fell faster than common stocks. Today it seems improbable that American lenders will ever retrieve more than a small portion of the money which they supplied less than fifteen years ago.
It is not the United States way to read history, or their bankers would not have made such a mess of foreign business. In the seventies and eighties of. the last century, the flash British capitalists threw their money about in much the same manner as the United States bankers during the post-war boom. They took their losses but not so greatly, because the British Navy was then the world’s policeman and was wholesomely respected. But any suggestion of summary action by the United States today would set Latin-America aflame.
For ten years, therefore, London left the field to New York. Then for four years the pipes of international finance were frozen. Now comes the thaw. New York is selling and London is buying again. The British are buying back their old holdings with a portion of what they received for them a few years ago. They sold at the top, and they are now buying at the bottom. They have done extremely well on both transactions.
With its unique knowledge and organization, the City of Ixmdon is in a position to sort out the wreckage of the South American collapse and to decide what is worth salving. Later, when revaluation is complete, Great Britain will commence lending money to South America once more. But she will lend it in her own fashion. She will seek no control, but will only lend amounts which can be repaid, for employment in enterprises which will produce something. There is no other basis for sound business.
A few weeks ago, the head of a London financial group with South American holdings valued at three hundred million dollars, passed through Montreal. Over coffee he was questioned concerning his investment policy. He winked at me and asked me to translate a well-known but rather ungallant Spanish proverb, to the effect that an intelligent man who has a necklace for his beloved, gives it to her one pearl at a time. Certainly, this gentleman observed, you are asking for trouble if you chuck all the jewellery into her lap at once.
To be Concluded
4* 4* If
Music to Test Dams
WHEN the great Dnieprostroy Dam was built in Soviet Russia piano wires were buried in the concrete. The object was to make it possible to test stress and load, according to Engineer N. Davidenkov in an address delivered to the American Society of Testing Materials. As the stress and load change the tension, the wires change too and hence their pitch. Listening at a central electrical switchboard an engineer hears a musical note from this string and that. The pitch provides the basis of mathematical calculations that tell him just how much strain the dam is standing.
Seven years of experimenting in Germany lie behind what is technically known as teletensometry. Fressures on rock strata in tunnels and mines were measured by the musical pitch method long before it was applied in the big dam. Mining engineers found the rock strata measurements useful in designing lining and props to offset the stresses.—New York Times.