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 L27,200, 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 L1,000,000 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 L140,000 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 L1632, 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 L10,000 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 L48,000 of the loan was held by the public, and L952,000 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 L68 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, L631,000 having been sold to Mr. L---- and passed on by him by the means described above, L200,000 having been issued to railway contractors, L10,800 having been "drawn before issue and cancelled," while L49,500 was "issued in exchange for scrip," and L108,500 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 L16,850 went in cash commission, and L106,000 in interest and sinking fund, leaving about L380,000 for the railway contractors and the Government. On this loan the Committee observes that the commission paid, of L108,500 bonds, and L16,850 in cash was "greatly in excess of what is usually charged by contractors for loans."

International Finance Page 33

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