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.

International Finance Page 38

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