Uncle Sam became a war banker. This loan, however, was nothing more or
less than the setting up of a credit of half a billion dollars for
England and France in the United States. To put it in another way, it is
just as if the two Allies had deposited this sum in an American bank and
then drew checks against it for goods and raw materials made or mined in
America. In a word, we lent to ourselves.
Put out at a time when money was scarce, the loan would have been
unpatriotic and uneconomic. But our banks were filled with idle cash:
everywhere capital sought safe and profitable employment. Now you begin
to see why these allied loans are really good business in more ways than
one.
What is our financial stake in the cost of the war: what does it yield:
how is it safeguarded?
Clearly to understand this whole situation you must know just how these
foreign bonds are put out. There are two kinds. One is the internal loan
issued in the money of the country whose name it bears. This means that
if it is a French bond it is in terms of francs: if English it calls for
payment in pounds sterling: if Russian, in roubles: if German, in
marks. An external loan, on the other hand, is issued in the money of
the country in which it is floated. The Anglo-French loan is an example
of this kind because both principal and interest are to be paid in
United States gold coin. These internal and external loans may be direct
obligations of the issuing governments or may be secured by collateral.
There is still a third medium for the employment of American money in
the war. Technically it is known as bank credit. Through this agency,
foreign firms make deposits of money or collateral in the national banks
of their respective countries and purchase goods in America through
credits thus established for them in a group of New York banks or trust
companies. The acceptances for the goods thus bought become negotiable
documents and are bought and sold by institutions and investors at a
discount.
This evidence of debt is not the kind of foreign investment suitable for
the man or woman with savings to employ because it is more or less a
banking transaction. These credits usually net about 6½ per cent.
With the exception of a comparatively small amount of German and
Austrian Bonds bought in the main by natives of these two countries for
purely sentimental and patriotic reasons, the entire bulk of European
loans placed in America is for the Allied countries, principally England
and France who are our heaviest customers in trade.
The largest foreign loan brought out here so far is the Anglo-French 5
per cent External Loan which was negotiated through J. P. Morgan &
Company--Fiscal Agents for the Allies over here--by the Commission
headed by Lord Reading and Sir Edward Holden. It is the Joint and
Several Obligation of the Governments of the United Kingdom of Great
Britain and Ireland and the French Republic, is dated October 15, 1915,
and is due five years after that date. It ranks first amongst the
foreign war obligations of these countries.
This was the first big credit arranged by England or France in the
United States and the proceeds were used, in the manner that I have
already described, for the purchase of American goods and to stabilize
the foreign exchange. These bonds which have had a very wide sale in
America were brought out at 98 and interest and at the time of issue
represented an investment that paid nearly 5½ per cent.
These bonds, I might add, are convertible at the option of the holder on
any date not later than April 15, 1920, or provided that notice is given
not later than this date, par for par, into 15-25 Year Joint and Several
4½ per cent bonds of the Governments of the United Kingdom of Great
Britain and Ireland and the French Republic. Such 4½ per cent bonds,
payable, principal and interest, in United States gold coin, in New York
City, and free from deduction for any present or future British or
French taxes, will mature October 15, 1940, but will be redeemable, at
par and accrued interest, in whole or in part, on any interest date not
earlier than October 15, 1930, upon three months' notice.
The equity behind these bonds is the good name, wealth and taxing power
of the issuing countries. The interest on this loan equals only
one-fifth of one per cent of the total estimated income of the British
people in 1914. It is slightly more than one-third of one per cent of
the French Republic in 1914.
Between this loan and the next large borrowing by England or France in
the United States occurred an event of significance to the American
investor interested in the securities of foreign nations. The
Anglo-French loan, as you know, was simply the promise to pay of two
great countries whose Government Bonds at home represented the last word
in unshakable security.
But when England and France stepped up to our money counters again,
Uncle Sam put sentiment aside and became a pawn broker. "I think you are
all right," he said, "but you are in a war that may last a very long
time and I must have collateral."
To English pride this was a terrific jolt. I happened to be in England
at the time and I recall the astonishment of no less a distinguished
individual than the Chancellor of the British Exchequer. It was
unbelievable that any nation could demand greater security than the
good name of the Empire. "If the elder J. P. Morgan were alive this would
never have happened," said the London bankers. They knew that the
Grizzled Old Lion of American Finance always held that character was the
best collateral. In the war emergency, however, many American bankers
thought to the contrary and the net result was that with all external
loans thereafter England and France have been forced to dig into their
strong boxes and do what any individual does when he borrows money--put
up a good margin of security.
An illustration of this secured obligation of the British Government is
the issue of $300,000,000 Five and a Half Per Cent Gold Notes dated
November 1, 1916. Principal and interest are payable without deduction
of any English tax in New York and in United States gold coin. The
holder of these notes, however, has the option to get his money in
London but at a fixed rate of $4.86 per pound sterling, the normal value
of the pound in peace time. Since the pound sterling at the time this
article is written is quoted at $4.76, this is a decided advantage.
The new English loan is secured by stocks and bonds whose total market
value is not less than $360,000,000. One group of this collateral
consists of stocks, bonds and other obligations of American corporations
and the obligation, either as maker or guarantor, of the Government of
the Dominion of Canada, the Colony of Newfoundland and Canadian
Provinces and Municipalities. The second group included obligations of
Australia, Union of South Africa, New Zealand, Argentina, Chili, Cuba,
Japan, Egypt, India and a group of English Railway Companies. I
enumerate this collateral to show the inroads upon British securities
that increasing war cost is making. This collateral must always show a
market value margin of twenty per cent above the amount of the loan. It
means that should there be any slump the English Government must supply
additional security.
This issue was brought out in two forms. Half of the loan is in Three
Year Notes due November 1, 1919, which were issued at 99¼ and interest
and yielding over 5.75 per cent: the other half is in Five¼ Year Notes
due November 1, 1921, brought out at 98½ and interest and yielding about
5.85 per cent. These Notes are redeemable at the option of the
Government at various interest dates between 1917 and 1920 at prices
ranging from 101 to 105 and interest.
Having established the precedent of a secured loan, all succeeding
English issues in this country have been backed up with ample
collateral. These bonds have a ready market, an important detail that
the investor must not overlook in purchasing foreign securities.
Now turn to the borrowings of France in the United States. With this
great nation, whose middle name is Thrift, Uncle Sam was no respecter of
past performance. For the one separate French external loan he exacted
his pound of collateral. As a matter of fact it amounted to nearly a
ton.
I refer to the issue of $100,000,000 Three Year Five Per Cent Gold Notes
bearing the date of August 1, 1916. To float this loan the American
Foreign Securities Company was formed which arranged to lend the French
Government $100,000,000. As security the Company--it was merely a group
of American bankers, required France to deposit stocks and bonds having
a value at prevailing market and exchange rate of $120,000,000. Should
the value of these securities fall below this sum they must be
replenished until there is a margin of twenty per cent in excess of the
principal of the loan.
These securities throw an interesting sidelight upon the resource of the
French Republic and its ability to borrow desirable collateral from
patriotic citizens. They include obligations of the Government of
Argentine, Sweden, Norway, Denmark, Switzerland, Holland, Uruguay,
Egypt, Brazil, Spain, and Quebec. The most picturesque parcel in the lot
is $11,000,000 in Suez Canal shares. This stock is one of the corporate
heirlooms of France and is very closely held. It not only pays a large
dividend but shares in the profits of the company which in peace times
are big. The fact that France should put these prize securities in
"hock" is evidence of her determination to keep her credit absolutely
above reproach.
The Three Year French Notes were brought out at 98 and interest and at
the time of issue yielded about 5.73 per cent.
But all direct French borrowing in America has not been on the pound of
flesh basis. For now we come to what might well be called The Loan of
Sentiment. It is the $50,000,000 City of Paris Five Year Six Per Cent
Gold Bond Issue dated October 15, 1916. It gave Americans the
opportunity to pay a substantial tribute of affectionate gratitude for
happy hours spent in the Queen City of Europe and have the prospect of a
desirable dividend at the same time. Here is a piece of foreign
financing with a distinction and a background all its own. Aside from
its purely sentimental phase it is perhaps the only loan floated in
America since the war which is dedicated to construction instead of
destruction. The proceeds are to be used to reimburse the City of Paris
for expenditures in building hospitals and making other necessary
humanitarian improvements and to provide a sinking fund to meet similar
disbursements. Amid the incessant hate and passion of war it is
pleasant to find this back water of cooling relief.
Like most of the foreign issues made during the war it follows the
highly intelligent European practice of putting out loans in small
denominations so as to be within the reach of the great mass of the
people. These bonds may be had in multiples of $100 and upward. The
Government of France has agreed to permit the exportation of sufficient
gold to permit the payment of principal and interest in the yellow metal
in New York. The loan--the only external one of the City of Paris--was
brought out at 98¾ and interest, which would make an investment of
6.30 per cent. In addition to this yield as an investment there is the
possibility of profit in exchange in view of the option to collect
principal and interest at the rate of 5.50 francs per dollar instead of
the normal rate of exchange before the war.
This statement of possible exchange profits leads us to one of the
conspicuous features of the latest National French Loan, which although
internal in form has been put within the ken of the American investor.
Fully to comprehend it you must know that in ordinary times a dollar in
American money is worth 5.18 francs. On account of the dislocation in
foreign exchange the value of a dollar in French money has risen to
approximately 5.85 francs. Therefore when you buy a French security in
terms of francs for American dollars you get a great deal more for your
money than you would have received before the war. Hence the possibility
of profit when francs return to normal is large.
The National French Loan was sold to American investors at an exchange
rate of 5.90, which means that every dollar you employ gives you a
principal of 5.90 francs. On this basis the price for the security
issued at a par of 100 would be 87½, which would make the direct
yield over 5.70 per cent. Should exchange return to normal, the
subscription price would be equivalent to 75½, which would make the
direct yield over 6-5/8 per cent.
Translating this loan into terms of money, you find that for every
$14.83 you invest you get 100 francs capital: for every $148.30 you get
1000 francs capital: for $741.52 you receive 5000 francs capital. If
French exchange should return to normal and the securities sell at the
issue price--87½--the investor would receive $16.89 for every 100 francs
of capital: $168.88 for every 1000 francs: $844.39 for every 5000
francs. On this basis without regard to income return the holder of 5000
francs capital would receive a profit of $103.94 or over 13.75 per cent
on his investment.
Should the market price of the issue advance to 100 and exchange return
to normal the investor would get $19.30 for every 100 francs capital;
$193.00 for every 1000 francs capital; $965.00 for every 5000 francs
capital. In this case and again without regard to income return, the
holder of 5000 francs capital would receive a net profit of $223.50 or
approximately 30 per cent.
This loan is issued in _Rentes_ and in denominations of 100 francs and
multiples. _Rentes_ is the form in which all French Government issues
are brought out at home. The word means interest or income. The French
always refer to their Government Bonds in terms of interest without any
mention of principal. This is because _rentes_ are supposed to be
perpetual. The new French loan just explained is not redeemable or
convertible before 1931.
Usually there is no limit to these National French loans. To be in
France during the war and see the popular response to the appeal for
funds is to have a thrilling experience in the practical side of
patriotism.
I chanced to be in Paris when one of these loans was launched.
Throughout a day of driving rain thousands of people stood in line at
the post offices and private institutions waiting for a chance to put
their money out to work for their country. The French wage worker, be he
artisan or street cleaner, needed no coaching in the art of employing
his funds safely and profitably. Just as saving is instinct with him, so
is the putting of these savings out to work in a Government bond second
nature. He is the thriftiest and most cautious investor in the world. He
has established a close and confidential relation with his banker such
as exists in no other nation. Therefore when the French financier offers
him Government Bonds or "Loans of Victory" as the war issues are
emotionally termed, he does not hesitate. He knows it is all right.
Alluring as is the possibility of profit in the new French Rente at the
present abnormal exchange basis, it fades before the prospects for
similar profit that lie in some of the Russian Government Bonds
available in the United States. The Imperial Russian Internal Five and a
Half Per Cent Loan of 1916 amounting to 2,000,000,000 roubles will
illustrate.
Ordinarily the Russian rouble is worth 51.45 cents in American money. It
has gone down to 32 cents. At this rate of exchange a thousand rouble
bond bearing interest at 5½ per cent would only cost $320.00. Based on
the normal value of the rouble this bond would be worth $514.60 or
$194.60 above the present price of the bond--an increase of about 60.8
per cent on the investment. Figuring roubles at the normal rate of
exchange the yearly yield would be $28.28 or 8.8 per cent on the
investment.
The fact that roubles are down so low is evidence that Russian credit at
the moment is not as high as it might be. The principal equity behind
this bond, as well as most other Russian securities available in
America, is the fact that Russia has immense post-war possibilities. She
will emerge from the conflict like a giant awakened and with the first
realisation of her enormous undeveloped resources. To offset this,
however, is the lack of stability of Russian Government as compared with
the other Allies which makes all Russian Bonds speculative.
On account of the difficulty in shipping bonds and the preponderance of
pro-Ally sentiment here, there has been a comparatively small market for
German and Austrian war issues in the United States. Yet, in the face of
these handicaps, a considerable market has developed. It is due to two
definite reasons. One is the desire of the native born and transplanted
Teuton to help his country. Many of them appear at the German banks with
their savings books eager and ready to make financial sacrifice for the
Fatherland. The other reason is that the German mark has so greatly
depreciated (it has gone down from 23.82 cents to 17.65 cents) that
should it ever come back to anything like normal and the Government
does not repudiate its issues the investment will be very profitable.
Here is the way it works out: in ordinary times a 4000 mark bond which
would be the equivalent of a $1000 American piece, costs about $960. At
the present low rate of exchange the same German bond costs $690.00 in
American money and therefore shows a profit on the exchange basis alone
of $270.00 or over 28 per cent. Austrian Bonds show even a larger
profit.
Summarise our war lending and you get a total of all loans to
belligerent Governments since the outbreak of the war that aggregate
$1,828,600,000, which is nearly one-third of the whole cost of the Civil
War. Add to this our loans of $185,000,000 to Canadian Provinces and
Cities and $8,200,000 to the City of Dublin and to the City of London
for water works improvements, a grand total of $2,075,800,000 is rolled
up. Of this sum $156,400,000 in obligations have matured and been paid
off, which leaves a net debt to us of $1,919,400,000. It divides up as
follows:
Great Britain $858,400,000
France 656,200,000
Russia 167,200,000
Italy 25,000,000
Dominion of Canada 120,000,000
Canadian Provinces and Municipalities 185,000,000
Germany 20,000,000
Having taken this financial plunge into European financial waters, Uncle
Sam has got the foreign lending habit and has loaned $117,000,000 to
Latin-America, mainly to Argentina and Chili: $39,000,000 to neutral
European nations, including Switzerland, Norway, Greece and Sweden. Not
desiring to play any race favourites, he has speeded China on her way to
enlightenment to the extent of $4,000,000.
In buying foreign war bonds--a procedure which in war time naturally
involves sentiment--it is wise for the investor to watch his step.
Patriotism is all right in its place but unless you can afford to
contribute money for purely emotional reasons, a cold business estimate
of the situation is advisable. This applies especially to the man or
woman with savings who cannot afford to take chances. He or she will
find it a good rule to stick to external bonds except under exceptional
conditions.
One objection to the average internal bond is that with the exception of
England the native money has greatly depreciated in international value.
Of course, if all these countries finally get back to their old
standards of wealth, these investments will yield a very large profit.
To reap this benefit, however, it will be necessary to hold the
securities for a considerable period because it will take the warring
countries a long time to "come back." Another fact in connection with
internal bonds well worth remembering is that while belligerent
countries will scrupulously respect their obligations held by a great
neutral like the United States whose good will and resources will be
very necessary after the close of hostilities, there is the possibility,
remote though it may be, that repudiation of home issues may come in the
shock of readjustment.
In a word, in purchasing a foreign war bond be sure to get a stable
national name, accumulated wealth, habits of thrift, an ample taxing
power, and a good conversion basis behind the security.
Amid all our war lending lurks a menace to future and necessary American
financing. In flush times like these it is comparatively easy for us to
spare large sums of money, because such capital is available and not
missed at home. If there was the absolute certainty that all the foreign
short term loans would be paid on maturity there would be no reason to
show the red light.
But any man who knows anything about the European financial situation
also knows that it will be extremely difficult, almost impossible, for
the fighting nations to meet their obligations within the time
specified. This does not mean that they will be unable to pay. It does
mean, however, that the inroads of the war will have been so terrific
that pressing needs will so continue to pile up that renewals must be
sought. Thus our money will still be tied up.
What will happen at home? Simply this. American enterprise which will
need capital for expansion may have to wait. In discussing this matter
one of the best known American bankers said this to me the other day:
"If America had a benevolent despot I believe that he ought to set
aside an arbitrary sum which would represent the limit that we as a
nation could lend each year to foreign countries."
There is still another hardship in this outward flow of our capital. It
lies in the fact that the very attractive terms of the war loans have
made it very difficult for American railroads and corporations to
finance their needs. They must pay more for their requirements than ever
before.
Yet this war financing has done more for us than merely provide an
opportunity for the profitable employment of hundreds of millions of
dollars. It has brought back home about $1,500,000,000 of our
securities, mostly in railroad, that were held abroad. This has not only
meant a considerable cutting down in the sum that we formerly had to
send to Europe in interest and dividends, but it has helped to make us
more economically independent. There is still $1,780,000,000 of our
securities held abroad, and if the war keeps on much longer a great
portion of it is likely to come back.
There were two good reasons for this liquidation. One was that the
holder of the American security in England is subject to a very high
tax in addition to the normal income tax on large fortunes. Another was
the necessity for the mobilisation of American securities to become part
of the collateral offered by the British Government for the loans made
in this country. In many instances the English owner of American
securities has simply loaned them to his country as a patriotic act. In
numerous other cases, however, he has sold them outright and put the
proceeds into home war issues.
You have seen how our millions have joined that greater stream of
European billions to meet the rising tide of war cost. How is this vast
debt to be paid and what is the paying capacity of the nations involved?
In analysing the war debt and its costly hangover for posterity, you
must remember that not all of it is in actual money. The nations at war
have not only taxed their economic reserve through the destruction of
productive capacity in the loss of men and material--as I have already
pointed out--but have made a costly and well-nigh permanent drain upon
what might be called their nervous systems.
Look for a moment at the American Civil War whose cost was a mere flea
bite as compared with the stupendous price of the European
Conflagration. At the end of that war only half of its reckoning was
represented in the country's bonded debt. After fifty years we are still
paying in some way for the other and larger outlay, the invisible strain
on the country.