"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 L2,051,511; out of this sum only L145,254 has been paid to the railway contractors; a sum of L923,184 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----L1,339,752 or L416,568 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 L216,852. He also received out of the same proceeds L41,090, being the difference between L370,000 cash paid to him by the trustees and L328,910 scrip returned by him to them. This L41,090 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 L57,318, nearly the whole of which seems to be a payment in discharge of an allowance of L8 per bond in respect of the dealings in the 1867 loan.... In addition ... it will be remembered that Mr. L---- received L50,000 'to maintain the credit of Honduras.'

"He also on the 18th of June, 1872, obtained L173,570 by delivering to the trustees ... 5042 bonds of the 1870 loan, at L75 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 L50 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 L75 and 104 francs respectively, and the remission in the price therefore amounted to a gift to him of L173,570 ... 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, L955,398."

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.

International Finance Page 35

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