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.

International Finance Page 17

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