No one who writes of the evils of international finance runs any risk of being "gravelled for lack of matter." The theme is one that has been copiously developed, in a variety of keys by all sorts and conditions of composers. Since Philip the Second of Spain published his views on "financiering and unhallowed practices with bills of exchange," and illustrated them by repudiating his debts, there has been a chorus of opinion singing the same tune with variations, and describing the financier as a bloodsucker who makes nothing, and consumes an inordinate amount of the good things that are made by other people.

It has already been shown that capital, saved by thrifty folk, is essential to industry as society is at present built and worked; and the financiers are the people who see to the management of these savings, their collection into the great reservoir of the money market, and their placing at the disposal of industry. It seems, therefore, that, though not immediately concerned with the making of anything, the financiers actually do work which is now necessary to the making of almost everything. Railway managers do not make anything that can be touched or seen, but the power to move things from the place where they are grown or made, to the place where they are eaten or otherwise consumed or enjoyed, is so important that industry could not be carried on on its present scale without them; and that is only another way of saying that, if it had not been for the railway managers, a large number of us who at present do our best to enjoy life, could never have been born. Financiers are, if possible, even more necessary, to the present structure of industry than railway men. If, then, there is this general prejudice against people who turn an all important wheel in the machinery of modern production, it must either be based on some popular delusion, or if there is any truth behind it, it must be due to the fact that the financiers do their work ill, or charge the community too much for it, or both.

Before we can examine this interesting problem on its merits, we have to get over one nasty puddle that lies at the beginning of it. Much of the prejudice against financiers is based on, or connected with, anti-Semitic feeling, that miserable relic of medieval barbarism. No candid examination of the views current about finance and financiers can shirk the fact that the common prejudice against Jews is at the back of them; and the absurdity of this prejudice is a very fair measure of the validity of other current notions on the subject of financiers. The Jews are, chiefly, and in general, what they have been made by the alleged Christianity of the so-called Christians among whom they have dwelt. An obvious example of their treatment in the good old days, is given by Antonio's behaviour to Shylock. Antonio, of whom another character in the Merchant of Venice says that—

"A kinder gentleman treads not the earth,"

not only makes no attempt to deny that he has spat on the wicked Shylock, and called him cut-throat dog, but remarks that he is quite likely to do so again. Such was the behaviour towards Jews of the princely Venetian merchant, whom Shakespeare was portraying as a model of all the virtues. Compare also, for a more modern example, Kinglake in a note to Chapter V of "Eothen."

"The Jews of Smyrna are poor, and having little merchandize of their own to dispose of, they are sadly importunate in offering their services as intermediaries; their troublesome conduct had led to the custom of beating them in the open streets. It is usual for Europeans to carry long sticks with them, for the express purpose of keeping off the chosen people. I always felt ashamed to strike the poor fellows myself, but I confess to the amusement with which I witnessed the observance of this custom by other people."

Originally, as we see from the Hebrew scriptures, a hardy race of shepherds, farmers, and warriors, they were forced into the business of finance by the canonical law which forbade Christians to lend money at interest, and also by the persecution, robbery and risk of banishment to which Christian prejudice made them always liable. For these reasons they had to have their belongings in a form in which they could at any moment be concealed from robbers, or packed up and carried off if their owners suddenly found themselves told to quit their homes. So they were practically compelled to traffic in coins and precious metals and jewellery, and in many places all other trades and professions were expressly forbidden to them. This traffic in coins and metals naturally led to the business of moneylending and finance, and the centuries of practice, imposed on them by Christianity, have given them a skill in this trade, which is now the envy of Christians who have in the meantime found out that there is nothing wicked about moneylending, when it is honestly done. At the same time these centuries of persecution have given the Jews other qualities which we have more reason to envy than their skill in finance, such as their strong family affection and the steadfastness with which they stand by one another in all countries of the world. The fact of their being scattered over the face of the earth has given them added strength since finance became international. The great Jew houses have relations and connections in every business centre, and so their power has been welded, by centuries of racial prejudice, into a weapon the strength of which it is easy for popular imagination to exaggerate. Christendom forced the money power into the hands of this persecuted race, and now feels sorry when it sees that in an ordered and civilized society, in which it is no longer possible to roast an awkward creditor alive, money power is a formidable force. That a large part of this power is in the hands of a family party, scattered over all lands in which finance is possible, is another reason why, as I have already shown, international finance works for peace. The fact of the existence of the present war, however, shows that the limits of its power are soon reached, at times when the nations believe that their honour and safety can only be assured by bloodshed.

A large part of the popular prejudice against financiers may thus be ascribed to anti-Semitic feeling. We are still like the sailor who was found beating a Jew as a protest against the Crucifixion, and, when told that it had happened nearly two thousand years ago, said that he had only heard of it that morning.

But, when we have purged our minds of this stupid prejudice, we are still faced by the fact that international finance is often an unclean business, bad both for the borrower and for the lender and profitable only to a horde of parasites in the borrowing country, and to those who handle the loan in the lending country, and get subscriptions to it from investors who are subsequently sorry that they put their eggs into a basket with no bottom to it. Under ideal conditions our money is lent by us, through a first-rate and honourable finance house, to a country which makes honest use of it in developing its resources and increasing its power to make and grow things. The loan is taken out from England in the shape of goods and services required for the equipment of a young country, and the interest comes in every year in the shape of food and raw material that feeds us and helps our industry. Such, it may be asserted with confidence, is the usual course of events, and must have been so, or England could not have been so greatly enriched by her moneylending operations abroad, and the productive power of the world could not have grown as it has, under the top-dressing that our finance and trade have given it. But though it is thus clear enough that the business must have been on the whole honestly and soundly worked, there have been some ugly stains on its past, and its recent history has not been quite free from unsavoury features.

In 1875 public opinion was so deeply stirred by the manner in which English investors and borrowing states had suffered from the system by which the business of international finance was handled, that a Select Committee of the House of Commons was "appointed to inquire into the circumstances attending the making of contracts for Loans with certain Foreign States and also the causes which have led to the non-payment of the principal moneys and interest due in respect of such loans." Its report is a very interesting document, well worth the attention of those interested in the vagaries of human folly. It will astound the reader by reason of the wickedness of the waste of good capital involved, and at the same time it is a very pleasant proof of the progress that has been made in finance during the last half century. It is almost incredible that such things should have happened so lately. It is quite impossible that they could happen now.

In 1867 the Republic of Honduras had been for forty years in default on its portion, amounting to £27,200, of a loan issued in London in 1825, for the Federal States of Central America. Nevertheless it contracted with Messrs. B---- and G---- for a loan of £1,000,000 to be issued in Paris and London. The loan was to be secured on a railway, to be built, or begun, out of its proceeds, and by a first mortgage on all the domains and forests of the State. The Government undertook to pay £140,000 annually for fifteen years, to meet interest on and redemption of the loan. As it had been forty years in default on a loan which only involved a charge of £1632, it is hard to imagine how the State could have entered into such a liability, or how any issuing house could have had the temerity to put it before the public.

The public was the only party to the proceedings which showed any sense. Don C---- G----, representative of the Honduras Government in London, relates in the record of these events that he put before the Committee, that "the First Honduras Loan in spite of all the advantages which it offered to subscribers" [issue price, 80, interest 10 per cent., sinking fund of 3 per cent, which would redeem the whole loan at par within 17 years] "and the high respectability of the house which managed the operation, was received by the public with perfect indifference, with profound contempt; and according to the deficient and vague information which reached the Legation, there were hardly any other subscriptions than one of about £10,000 made by the firm of B----itself," Don G----, however, seems to have slightly exaggerated the wisdom of the public; in any case the Committee found that by June 30, 1868, by some means £48,000 of the loan was held by the public, and £952,000 was in possession of the representatives of the Honduras Government. On that day a Mr. L---- undertook to take over the Government's holding at £68 12s. per bond, and pay current interest. A market was made, brokers were prevailed on to interest their friends in the security, and in two years' time the bonds were disposed of. The quotation was skilfully kept above the issue price and in November, 1868, it reached 94.

The story of this loan is complicated by the fact that half of it was at the time alleged to have been placed in Paris, but it appears, as far as one can disentangle fact from the twisted skein of the report, that the Paris placing must have resulted much as did the first effort made in London, and that practically the whole of the bonds there issued came back into the hands of the representatives of Honduras.

At the end of the proceedings the whole amount of the loan seemed to have been disposed of in London, £631,000 having been sold to Mr. L---- and passed on by him by the means described above, £200,000 having been issued to railway contractors, £10,800 having been "drawn before issue and cancelled," while £49,500 was "issued in exchange for scrip," and £108,500 was taken on account of commission and expenses.

The actual cash received on account of this loan appears, though the Committee's figures are difficult to follow, to have come to just over half a million. Out of the half million £16,850 went in cash commission, and £106,000 in interest and sinking fund, leaving about £380,000 for the railway contractors and the Government. On this loan the Committee observes that the commission paid, of £108,500 bonds, and £16,850 in cash was "greatly in excess of what is usually charged by contractors for loans."

So far it was only a case of a thoroughly speculative transaction carried through by means of the usual accompaniments. A defaulting State believed to be possessed of great potential wealth, thought, or was induced to think, that by building a railway it could tap that wealth. The whole thing was a pure possibility. If the loan had been successfully placed at the issue price it would have sufficed to build the first section (fifty-three miles) of railway, and to leave something over for work in the mahogany forests. It is barely possible that in time the railway might have enabled the Government to produce enough stuff out of its forests to meet the charges of the loan. But the possibility was so remote that the terms offered had to be so liberal that they frightened the public, which happened to be in a sensible mood, until it was induced to buy by the creation of a market on the Stock Exchange; the employment of intermediaries on disastrous terms, and finally default, as soon as the loan charge could no longer be paid out of the proceeds of the loan, completed the tale.

In May, 1869, the Minister for Honduras in Paris, M. H----, "took steps" to issue a loan for 62,250,060 francs, or £2,490,000. Out of it a small sum (about £62,000) was paid to the railway contractors in London, but little of it seems to have been genuinely placed, since, when the Franco-German war broke out in July, 1870, M. H---- sent 2,500,000 francs in cash (£100,000), and 39,000,000 francs in bonds, to Messrs. B---- and G---- in London. Messrs. B---- and others made an agreement with Mr. C. L----, presumably the gentleman who had taken over and dealt with the unplaced balance of the First London Loan. By its terms the net price to be paid by him for each 300 francs (£12) bond issued originally at 225 francs (£9), was 124 francs (not quite £5). He succeeded in selling bonds enough to realize £408,460, and he, together with Messrs. B---- and G----, received £51,852 in commission for so doing.

In the spring of 1870, the Honduras Government, still hankering after its railway and the wealth that it was to open up, determined to try again with another loan. Something had to be done to encourage investors to take it. A few days before the prospectus appeared a statement was published in a London newspaper to the effect that two ships had arrived in the West India Docks from Truxillo (Honduras) with cargoes of mahogany and fustic consigned to Messrs. B---- and G----on account of the Honduras Railway Loan, and that two others were loading at Truxillo with similar cargoes on the same account. These cargoes had not been cut by the Honduras Government. It had bought them from timber merchants, and they were found to be of most inferior quality. In the opinion of the Committee "the purchase of these cargoes and the announcement of their arrival in the form above referred to, were intended to induce, and did induce, the public to believe that the hypothecated forests were providing means for paying the interest upon the loan."

With the help of this fraud, and with a free and extensive market made on the Stock Exchange, the 1870 Honduras 10 per cent. loan for £2,500,000 nominal was successfully issued at 80. It also had a sinking fund of 3 per cent., which was to pay it off in fifteen years. Mr. L---- again handled the operation, having taken over the contract from Messrs. B---- and G----. But the success of the issue was more than hollow. It was empty. For Mr. L----, in the process of making the market to promote it, had bought nearly the whole loan. Applicants had evidently sold nearly as fast as they applied; for on the 15th December, when the last instalment was to be paid, less than £200,000 bonds remained in the hands of the public. Nevertheless by October, 1872, nearly the whole of the loan had been somehow disposed of to investors or speculators. One of the means taken to stimulate the demand for them was the announcement of extra drawings of bonds at par, over and above the operation of the 3 per cent, sinking fund, provided by the prospectus.

There is no need to linger over the complicated details of this sordid story. The Committee's report sums up, as follows, the net results of the 1869 and 1870 loans of Honduras:—

"In tracing the disposal of the proceeds of the 1869 and 1870 loans, it must be remembered that your Committee had no evidence before them relating to the funds resulting from three-fifths of the loan of 1869; only two-fifths of the loan was realized in this country, the remainder was disposed of in Paris before August, 1870, and no account of the application of the funds resulting from such portion of the loan could be obtained.

"The two-fifths of the 1869 loan, and the whole of the loan of 1870, produced net £2,051,511; out of this sum only £145,254 has been paid to the railway contractors; a sum of £923,184 would have been sufficient to discharge the interest and sinking fund in respect of the issued bonds of the three loans, yet the trustees ... paid to Mr. L----£1,339,752 or £416,568 beyond the sum so required to be paid upon the issued bonds of the loans.

"There was paid to him for commissions (apart from expenses) on the three loans, out of the above proceeds, the sum of £216,852. He also received out of the same proceeds £41,090, being the difference between £370,000 cash paid to him by the trustees and £328,910 scrip returned by him to them. This £41,090 probably represents the premiums paid on the purchase of the scrip before or immediately after the allotment of the loan, and was certainly a misapplication of the proceeds of the loan.

"Mr. L---- was also paid, out of these proceeds, a further sum of £57,318, nearly the whole of which seems to be a payment in discharge of an allowance of £8 per bond in respect of the dealings in the 1867 loan.... In addition ... it will be remembered that Mr. L---- received £50,000 'to maintain the credit of Honduras.'

"He also on the 18th of June, 1872, obtained £173,570 by delivering to the trustees ... 5042 bonds of the 1870 loan, at £75 Per bond and 33,000 bonds of the 1869 loan at 104 francs per bond, and retaking them at the same time from the trustees at £50 and 104 francs per bond respectively. Mr. L---- had contracted to pay for these bonds and they had been issued to him at the prices of £75 and 104 francs respectively, and the remission in the price therefore amounted to a gift to him of £173,570 ... out of this portion of the loan of 1869, and the loan of 1870, Mr. L----has received in cash, or by the remission of his contracts, £955,398."

It is little wonder that Honduras has been in default on these loans ever since. In its Report the Committee commented severely on the action of Don C---- G----, the London representative of the Republic. "He sanctioned," it says, "Stock Exchange dealings and speculations in the loans which no Minister should have sanctioned. He was a party to the purchase of the mahogany cargoes, and permitted the public to be misled by the announcements in relation to them. By express contract he authorized the 'additional drawings.' He assisted Mr. L---- to appropriate to himself large sums out of the proceeds of the loans to which he was not entitled." Very likely he had not a notion as to what the whole thing meant, and only thought that he was doing his best to finance his country along the road to wealth. But the fact remains that by these actions he made his Government a party to the proceedings that were so unfortunate for it and so ruinous to the holders of its bonds.

After its examination of these and other less sensational but equally disastrous issues the Committee made various recommendations, chiefly in the direction of greater publicity in prospectuses, and ended by expressing their conviction that "the best security against the recurrence of such evils as they have above described will be found, not so much in legislative enactments, as in the enlightenment of the public as to their real nature and origin."

If the scandals and losses involved by loan issues were always on this Gargantuan scale, there would be little difficulty about disposing of them, both on economic and moral grounds, and showing that there is, and can be, only one side to the problem. But when it is only a question, not of fraud on a great scale but of a certain amount of underhand business, such as is quite usual in some latitudes, and a certain amount of doubt as to the use that is likely to be made by the borrower of the money placed at its disposal, it is not so easy to feel sure about the duty of an issuing house in handling foreign loans. At a point, in fact, the question becomes full of subtleties and casuistical difficulties.

For instance, let us suppose that an emissary of the Republic of Barataria approaches a London issuing house and intimates that it wants a loan for 3 millions sterling, to be spent half in increasing the Republic's navy, and half in covering a deficit in its Budget, and that he, the said emissary, has full power to treat for the loan, and that a commission of 2 per cent. is to be paid to him by the issuing house, which can have the loan at a price that will easily enable it to pay this commission. That is to say, we will suppose that the Republic will take 85 for the price of its bonds, which are to carry 5 per cent. interest, to be secured by a lien on the customs receipts, and to be redeemed in thirty years' time by a cumulative Sinking Fund working by annual drawings at par, or by purchase in the market if the bonds can be bought below par. If the Republic's existing 5 per cent. bonds stand, let us say, at 98 in the market, this gives the issuing house a good prospect of being able to sell the new ones easily at 95, and so it has a 10 per cent. margin out of which to pay stamps, underwriting and other expenses, and commission to the intermediary who brought the proposal, and to keep a big profit to themselves. From the point of view of their own immediate interest there is every reason why they should close with the bargain, especially if we assume that the Republic is fairly rich and prosperous, and that there is little fear that its creditors will be left in the lurch by default.

From the point of view of national interest there is also much to be said for concluding the transaction. We may, with very good ground, assume that it would also be intimated to the issuing house that a group of Continental financiers was very willing to take the business up, that it had only been offered to it owing to old standing relations between it and the Republic, and that, if it did not wish to do the business, the loan would readily be raised in Paris or Berlin. By refusing, the London firm would thus prevent all the profit made by the operation from coming to England instead of to a foreign centre. But there is much more behind. For we have seen that finance and trade go hand-in-hand, and that when loan-houses in the City make advances to foreign countries, the hives of industry in the North are likely to be busy. It has not been usual here to make any express stipulation to the effect that the money, or part of it, raised by a loan is to be spent in England, but it is clear that when a nation borrows in England it is thereby predisposed to giving orders to English industry for goods that it proposes to buy. And even if it does not do so, the mere fact that England promises, by making the loan, to hand over so much money, in effect obliges her to sell goods or services valued at that amount as was shown on an earlier page. On the Continent, this stipulation is usual. So that the issuing house would know that, if they make the loan, it is likely that English shipbuilders will get the orders on which part of it is to be spent, and that in any case English industry in one form or another will be drawn on to supply goods or services to somebody; whereas if they refuse the business it is certain that the industrial work involved will be lost to England.

On the other side of the account there are plenty of good reasons against the business. In the first place the terms offered are so onerous to the borrower that it may safely be said that no respectable issuing house in London would look at them. In effect the Republic would be paying nearly 6 per cent, on the money, if it sold its 5 per cent. bonds at 85, and the state of its credit, as expressed by the price of its bonds in the market, would not justify such a rate. The profit offered to the issuing house is too big, and the commission demanded by the intermediary is so large that it plainly points to evil practices in Barataria. It means that interested parties have made underhand arrangements with the Finance Minister, and that the Republic is going to be plundered, not in the fine full-flavoured style that ruled in earlier generations, but to an extent that makes the business too disreputable to handle. Any honourable English house would consider that the terms offered to itself and the conditions proposed by the emissary were such that the operation was suspicious, and that being mixed up with suspicious business was a luxury that it preferred to leave alone.

On other grounds the loan, well secured as it seems to be, is not of a kind to be encouraged. We have supposed its purpose to be, firstly, to meet a deficit in a Budget, and secondly, to pay for naval expansion. Neither of these objects is going to improve the financial position of the Republic. Covering a deficit by loan is bad finance in any case, but especially so when the loan is raised abroad. In the latter case it is most likely that the borrowing State is outrunning the constable, by importing more goods than it can pay for out of current production.

If it imports for the purpose of increasing its productive power by buying such things as railway material, then it is making a perfectly legitimate use of its credit, as long as the money is well spent, and the railways are honestly built, with a prospect of opening up good country, and are not put into the wrong place for political or other reasons. But if this were so, the money would not be wanted to balance a Budget, but on railway capital account. When a balance has to be filled by borrowing it can only mean that the State has spent more than its revenue from taxes permits, and that it is afraid to cut down its expenses by retrenchment or to increase its revenue by taxing more highly. And so it chooses the primrose path of dalliance with a moneylender.

As to naval expenditure, here again we have bad finance writ large over the proposal. It is not good business for countries to borrow in order to increase their armies and navies in time of peace, and the practice is especially objectionable when the loan is raised abroad. In time of war, when expenditure has to be so great and so rapid, that the taxpayers could not be expected to have it all taken out of their pockets by the tax-gatherer, there is some excuse for borrowing for naval and military needs; though even in time of war, if we could imagine an ideal State, with every citizen truly patriotic, and properly educated in economics and finance, and with wealth so fairly distributed and taxation so fairly imposed that there would be no possibility of any feeling of grievance and irritation among any class of taxpayers, it would probably decide that the simplest and most honest way of financing war is to do so wholly out of taxation. In time of peace, borrowing for expenditure on defence simply means that the cost of a need of to-day is met by someone who is hired to meet it, by a promise of interest and repayment, the provision of which is passed on to the citizens of to-morrow. It is always urged, of course, that the citizens of to-morrow are as deeply interested in the defence of the realm that they are to inherit as those of to-day, but that argument ignores the obvious fact that to-morrow will bring its own problems of defence with it, which seem likely to be at least as costly as those of the present day. Another objection to lending economically backward countries money to be invested in ships, is that we thereby encourage them to engage in shipbuilding rivalry, and to join in that race for aggressive power which has laid so sore a burden on the older peoples. The business is also complicated by the unpleasant activities of the armament firms of all countries, which are said to expend much ingenuity in inducing the Governments of the backward peoples to indulge in the luxury of battleships. Here, again, there is no need to paint too lurid a picture. The armament firms are manufacturers with an article to sell, which is important to the existence of any nation with a seaboard; and they are entirely justified in legitimate endeavours to push their wares. The fact that the armament firms of England, Germany, and France had certain interests in common, is often used as a text for sermons on the subject of the unpatriotic cynicism of international finance. It is easy to paint them as a ring of cold-blooded devils trying to stimulate bloodthirsty feeling between the nations so that there may be a good market for weapons of destruction. From their point of view, they are providers of engines of defence which they make, in the first place, for the use of their own country, and are ready to supply also, in time of peace, to other nations in order that their plant may be kept running, and the cost of production may be kept low. This is one of the matters on which public opinion may have something to say when the war is over. In the meantime it may be noted that unsavoury scandals have occasionally arisen in connection with the placing of battleship orders, and that this is another reason why a loan to finance them is likely to have an unpleasant flavour in the nostrils of the fastidious.

But if we admit the very worst that the most searching critic of international finance can allege against the proposal that we imagine to be put forward by the Republic of Barataria—if we admit that a loan to balance a deficit and pay for ships probably implies wastefulness, corruption, political rottenness, impecunious Chauvinism and all the rest of it, the question still arises whether it is the business of an issuing house to refuse the chance of doing good business for itself and for the London money-market, because it has reason to believe that the money lent will not be well spent. In the case supposed, we have seen that the terms offered and the commission to be made by the intermediary were such that the latter would have been shown the door. But if these matters had been satisfactory, ought the proposal to have been rejected because the loan was to be raised for unproductive purposes?

In other words, is it the business of an issuing house to take care of the economic morals of its clients, or is it merely concerned to see that the securities which it offers to the public are well secured? In ordinary life, and in the relations between moneylender and borrower at home, no such question could be asked. If I went to my banker and asked for a loan and gave him security that he thought good enough, it would not occur to him to ask what I was going to do with the money—whether I was going to use it in a way that would increase my earning capacity, or on building myself a billiard room and a conservatory, or on a visit to Monte Carlo. He would only be concerned with making sure that any of his depositors' money that he lent to me would be repaid in due course, and the manner in which I used or abused the funds lent to me would be a question in which I only was concerned. If it is the business of an international finance house to be more careful about the use to which money that it lends on behalf of clients is put, why should this be so?

There are several reasons. First, because if the borrower does not see fit to pay interest on the loan or repay it when it falls due, there is no process of law by which the lender can recover. If I borrow from my banker and then default on my debt, he can put me in the bankruptcy court, and sell me up. Probably he will have protected himself by making me pledge securities that he can seize if I do not pay, a safeguard which cannot be had in the case of international borrowing; but if these securities are found to be of too little value to make the debt good, everything else that I own can be attached by him. The international moneylender, on the other hand, if his debtor defaults may, if he is lucky, induce his Government to bring diplomatic pressure to bear, for whatever that may be worth. If there is a political purpose to be served, as in Egypt, he may even find himself used as an excuse for armed intervention, in the course of which his claims will be supported, and made good. In many cases, however, he and the bondholders who subscribed to his issue simply have to say goodbye to their money, with the best grace that they can muster, in the absence of any law by which a lender can recover moneys advanced to a sovereign State. With this essential difference in the conditions under which a banker lends his depositors' money to a local customer, and those under which an international house lends its clients' money to a borrowing country, it follows that the responsible party in the latter case ought to exercise very much more care to see that the money is well spent.

In the second place, the customers to whom bankers, in economically civilized lands, lend the money entrusted to them, may fairly be presumed to know something about the use and abuse of money and to be able to take care of themselves. If they borrow money, and then waste it or spend it in riotous living, they know that they will presently impoverish themselves, and that they will be the sufferers. But in the case of a young country, with all its financial experience yet unbought, there is little or no reason for supposing that its rulers are aware that they cannot eat their cake and have it. They probably think that by borrowing to meet a deficit or to build a Dreadnought they are doing something quite clever, dipping their hands into a horn of plenty that a kindly Providence has designed for their behoof, and that the loan will somehow, some day, get itself paid without any trouble to anybody. Moreover, if they are troubled with any forebodings, the voice of common sense is likely to be hushed by the reflection that they personally will not be the sufferers, but the great body of taxpayers, or in the case of actual default, the deluded bondholders; and that in any case, the trouble caused by over-borrowing and bad spending is not likely to come to a head for some years. Its first effect is a flush of fictitious prosperity which makes everybody happy and enhances the reputation of the ministers who have arranged it. When, years after, the evil seed sown has brought to light its crops of tares, it is very unlikely that the chain of cause and effect will be recognized by its victims, who are much more likely to lay the bad harvest to the door not of the bad financier who sowed it, but of some innocent and perhaps wholly virtuous successor, merely because it was during his term of office that the crop was garnered. So many are the inducements offered to young States, with ignorant or evil (or both) rulers at their head, to abuse the facilities given them by international finance, that there is all the more reason why those who hold the strings of its purse should exercise very great caution in allowing them to dip into it.

There is yet another reason why the attitude of an issuing house, to a borrowing State, should be paternal or even grand-motherly, as compared with the purely business-like attitude of a banker to a local borrower. If the bank makes a bad debt, it has to make it good to its depositors at the expense of its shareholders. It diminishes the amount that can be paid in dividends and so the bank is actually out of pocket. The international financier is in quite a different position. If he arranges a loan for Barataria, he takes his profit on the transaction, sells the bonds to investors, or to the underwriters if investors do not apply, and is, from the purely business point of view, quit of the whole operation. He still remains responsible for receiving from the State, and paying to the bondholders, the sum due each half year in interest, and for seeing to the redemption of the bonds by the operation of the Sinking Fund, if any. But if anything goes wrong with the interest or Sinking Fund he is not liable to the bondholders, as the bank is liable to its depositors. They have got their bonds, and if the bonds are in default they have made a bad debt and not the issuing house, unless, as is unlikely, it has kept any of them in its own hands.

But this absence of any legal liability on the part of the issuing house imposes on it a very strong moral obligation, which is fully recognized by the best of them. Just because the bondholders have no right of action against it, unless it can be shown that it issued a prospectus containing incorrect statements, it is all the more bound to see that their money shall not be imperilled by any action of its own. It knows that a firm with a good reputation as an international finance house has only to put its name to an issue, and a large number of investors, who have neither the education nor the knowledge required to form a judgment on its merits, will send in subscriptions for the bonds on the strength of the name of the issuing house. This fact makes it an obvious duty on the part of the latter to see that this trust is deserved. Moreover, it would obviously be bad business on their part to neglect this duty. For a good reputation as an issuing house takes years to build up, and is very easily shaken by any mistake, or even by any accident, which could not have been foreseen but yet brings a loan that it has handled into the list of doubtful payers. Mr. Brailsford, indeed, asserts that it may be to the advantage of bondholders to be faced by default on the part of their debtors. It may be so in those rare cases in which they can get reparation and increased security, as in the case of our seizure of Egypt. But in nine cases out of ten, as is shown by the plaintive story told by the yearly reports of the Council of Foreign Bondholders, default means loss and a shock to confidence, even if only temporary, and is generally followed by a composition involving a permanent reduction in debt and interest. Investors who have suffered these unpleasantnesses are likely to remember them for many a long year, and to remember also the name of the issuing house which fathered the loan that was the cause of the trouble.

There are thus many good reasons why it is the business of a careful issuing firm to see not only that any loan that it offers is well secured, but also that it is to be spent on objects that will not impair the productive capacity of the borrowing country by leading it down the path of extravagance, but will improve it by developing its resources or increasing its power to move its products. On the other hand, the temptation to undertake bad business on behalf of an importunate borrower is great. The profits are considerable for the issuing house and for all their followers in the City. The indirect advantages, in the way of trade orders, conferred on the lending country, are also profitable, and there is always the fear that if London firms take too austere a view of what is good business for them and the borrowing countries, the more accommodating loan-mongers of foreign centres may reap the benefit, and leave them with empty pockets and the somewhat chilly comfort conferred by the consciousness of a high ideal in finance.

One of the most unsatisfactory features about the monetary arrangements of society, as at present constituted, is the fact that the reward of effort is so often greater with every degree of evil involved by the effort. And to some extent this is true in finance. Just as big fortunes are made by the cheap-jacks who stuff the stomachs of an ignorant public with patent medicines, while doctors slave patiently for a pittance on the unsavoury task of keeping overfed people in health; just as Milton got £5 for "Paradise Lost," while certain modern novelists are rewarded with thousands of pounds for writing romances which would never be printed in a really educated community; so in finance the more questionable—up to a certain point—be the security to be handled, the greater are the profits of the issuing house, the larger the commissions of the underwriters and brokers, and the larger are the amounts paid to the newspapers for advertising. As has already been observed, that part of the City that lives on handling new issues has been half starved since the war began, because its activities have been practically confined to loans issued by the British Government. These loans have been huge in amount but there has been no underwriting, and brokerages are cut to the bone. Advertising for the second War Loan was on a great scale, but in proportion to the amount subscribed the cost of it was probably small, according to the ideals that ruled before the war. A Colonial loan, or a first-class American railroad bond, almost places itself, and the profits on the issue to all who handle it are proportionately low. The more questionable the security, the more it has to pay for its footing, and the higher are the profits of those who father it and assist the process of delivery, as long, that is, as the birth is successfully accomplished.

If there is failure, partial or complete, then the task of holding the baby is longer and more uncomfortable, the more puny and unattractive it is. If, owing to some accident in the monetary atmosphere, a Colonial loan does not go off well, the underwriters who find themselves saddled with it, can easily borrow on it, in normal times, and know that sooner or later trustees and other real investors will take it off their hands. But if it is an issue of some minor European power, or of some not too opulent South American State, that is coldly received by the investing public, bankers will want a big margin before they accept it as security for an advance, and it may take years to find a home for it in the strong boxes of real investors, and then perhaps only at a price that will leave the underwriters, like Sir Andrew Aguecheek, "a foul way out." There is thus a logical reason for the higher profits attached to the more questionable issues, and this reason is found in the greater risk attached, if failure should ensue.

Thus we arrive at the reply to those who criticize International Finance on the ground that it puts too big profits into the pockets of those who handle it. If the profits are big, it is only in the case of loan issues which carry with them a considerable risk to the reputation of the fathering firm, and to the pockets of the underwriters, and involve a responsibility, and in the case of default, an amount of wholly unpaid work and anxiety for which the big profits made on the opening proceedings do not nearly compensate. As in the case of the big gains made by patent pill merchants, and bad novelists, it is the public, which is so fond of grumbling because other people make fortunes out of it, that is really responsible for their doing so, by reason of its own greed and stupidity. Because it will not take the trouble to find out how to spend or invest its money, it asks those who are clever enough to batten on its foibles, to sell it bad stuff and bad securities, and then feels hurt because it has a pain in its inside, or a worthless bond at its banker's, while the producers thereof are founding county families. If the public would learn the A B C of investment, and also learn that there is an essential difference between investment and speculation, that they will not blend easily but are likely to spoil one another if one tries to mix them, then the whole business of loan issuing and company promotion would be on a sounder basis, with less risk to those who handle it, and less temptation to them to try for big profits out of bad ventures. But as long as

"the fool multitude that choose by show"

give more attention to the size of an advertisement than to the merits of the security that it offers, the profits of those who cater for its weaknesses will wax fat.

When all has been said that can be urged against the record of international finance, the fact remains that from the purely material point of view it has done a great work in increasing the wealth of mankind. It is true that capital has often been wasted by being lent to corrupt or improvident borrowers for purposes which were either objectionable in themselves, or which ought to have been financed, if at all, out of current revenue. It is true, also, that crimes have been committed, as in the case of the Putumayo horrors, when the money of English shareholders has been invested in the exploitation of helpless natives, accompanied by circumstances of atrocious barbarity. Nevertheless if we compare the record of finance with that of religion or international politics, it stands out as by far the cleanest of the influences that have worked upon the mutual relations of the various groups of mankind. International Finance makes a series of bargains between one nation and another, for the mutual benefit of each, complicated by occasional blunders, some robbery, and, in exceptional cases, horrible brutality. Religion has stained history with the most ruthless massacres, and the most unspeakable ingenuity in torture, all devised for the glory of God, and the furtherance of what its devotees believed to be His word. International politics have plunged mankind into a series of bloody and destructive wars, culminating in the present cataclysm. Finance can only prosper through production; its efforts are inevitably failures, if they do not tend to the growing and making of things, or the production of services, that are wanted. Destruction, reduced to a fine art and embellished by the nicest ingenuities of the most carefully applied science, is the weapon of international politics.

Note.—The names of the actors in the Honduras drama were printed in blank because it seemed unfair to do otherwise, in revising fifty years' old scandals, as an example of what International Finance can do at its worst.