In the beginnings of international trade the older countries exchange their products for the raw materials and food produced by the new ones. Then, as emigrants from the old countries go out into the new ones, they want to be supplied with the comforts and appliances of the older civilizations, such as, to take an obvious example, railways. But as the productions of the new countries, at their early stage of development, do not suffice to pay for all the material and machinery needed for building railways, they borrow, in effect, these materials, in the expectation that the railways will open out their resources, enable them to put more land under the plough and bring more stuff to the seaboard, to be exchanged for the products of Europe. The new country, New Zealand or Japan, or whichever it may be, raises a loan in England for the purpose of building a railway, but it does not take the money raised by the loan in the form of money, but in the form of goods needed for the railway, and sometimes in the form of the services of those who plan and build it. It does not follow that all the stuff and services needed for the enterprise are necessarily bought in the country that lends the money; for instance, if Japan borrows money from us for a railway, she may buy some of the steel rails and locomotives in Belgium, and instruct us to pay Belgium for her purchases. If so, instead of sending goods to Japan we shall have to send goods or services to Belgium, or pay Belgium with the claim on some other country that we have established by sending goods or services to it. But, however long the chain may be, the practical fact is that when we lend money we lend somebody the right to claim goods or services from us, whether they are taken from us by the borrower, or by somebody to whom the borrower gives a claim on us.
If, whenever we made a loan, we had to send the money to the borrower in the form of gold, our gold store would soon be used up, and we should have to leave off lending. In other words, our financiers would have to retire from business very quickly if it were not that our manufacturers and shipowners and all the rest of our industrial army produced the goods and services to meet the claims on our industry given, or rather lent, to other countries by the machinery of finance.
This obvious truism is often forgotten by those who look on finance as an independent influence that can make money power out of nothing; and those who forget it are very likely to find themselves entangled in a maze of error. We can make the matter a little clearer if we go back to the original saver, whose money, or claims on industry, is handled by the professional financier. Those who save do so by going without things. Instead of spending their earnings on immediate enjoyment they spend part of them in providing somebody else with goods that they need, and taking from that somebody else an annual payment for the use of these goods for a certain period, after which, if it is a case of a loan, the transaction is closed by repayment of the advance, which again is effected by a transfer of goods. When our country doctor subscribes to an Australian loan raised by a colony for building a railway, he hands over to the colony money which a less thrifty citizen would have spent on pleasures and amusements, and the colony uses it to buy railway material. Thus in effect the doctor is spending his money in making a railway in Australia. He is induced to do so by the promise of the colony to give him £4 every year for each £100 that he lends. If there were not enough people like him to put money into industry instead of spending it on themselves, there could be no railway building or any other form of industrial growth. It is often contended that a reconstruction of society on a Socialistic basis would abolish the capitalist; but in fact it would make everybody a capitalist because the State would have to make the citizens as a whole go without certain immediate enjoyments and work on the production of the machinery of industry. Instead of saving being left to the individual and rewarded by a rate of interest, it would be imposed on all and rewarded by a greater productive power, and consequent increase in commodities, enjoyed by the community and distributed among all its members. The advantages, on paper, of such an arrangement over the present system are obvious. Whether they would be equally obvious in practice would depend on the discretion with which the Government handled the enormous responsibility placed in its hands. But the essential fact that capital can only be got by being saved, and earns the reward that it gets, would remain as strongly in force as ever, and will do so until we have learnt to make goods out of nothing and without effort.
Going back to our doctor, who lends railway material to an Australian colony, we see that every year for each £100 lent the colony has to send him £4. This it can only do if its mines and fields and factories can turn out metals or wheat or wool, or other goods which can be shipped to England or elsewhere and be sold, so that the doctor's £4 is provided. And so though on both sides the transaction is expressed in money it is in fact carried out in goods, both when the loan is made and the interest is paid. And finally when the loan is paid back again, the colony must have sold goods to provide repayment, unless it meets its debts by raising another. But when a loan is well spent on a railway that is needed for the development of a fertile or productive district, it justifies itself by cheapening transport and quickening the output of wealth in such a manner, that the increased volume of goods that it has helped to create easily meets the interest due to lenders, provides a fund for its redemption at maturity, and leaves the borrower better off, with a more fully equipped productive system.
Since, then, there is this close and obvious connection between finance and trade, it is inevitable that all who partake in the activities of international finance should find their trade quickened by it. England has lent money abroad because she is a great producer, and certain classes of Englishmen are savers, so that there was a balance of goods available for export, to be lent to other countries. In the early years of the nineteenth century, when our industrial power was first beginning to gather strength, we used regularly to export goods to a greater value than we imported. These were the goods that we were lending abroad, clearly showing themselves in our trade ledger. Since then the account has been complicated by the growth of the amount that our debtors owe us every year for interest, and by the huge earnings of our merchant navy, which other countries pay by shipping goods to us, so that, by the growth of these items, the trade balance sheet has been turned in the other direction, and in spite of our lending larger and larger amounts all over the world we now have a balance of goods coming in. Interest due to us and shipping freights and the commissions earned by our bankers and insurance companies were estimated before the war to amount to something like 350 millions a year, so that we were able to lend other countries some 200 millions or more in a year and still take from them a very large balance in goods. After the war this comfortable state of affairs will have been modified by the sales that we are making now in New York of the American Railroad bonds and shares that represented the savings that we had put into America in former years, and by the extent of our war borrowings in America, and elsewhere, if we widen the circle of our creditors. The effect of this will be that we shall owe America for interest on the money that it is lending us, and that it will owe us less interest, owing to the blocks of its securities that it is buying back. Against this we shall be able to set debts due to us from our Allies, but if our borrowings and sales of securities exceed our lendings as the war goes on, we shall thereby be poorer. Our power as a creditor country will be less, until by hard work and strict saving we have restored it. This we can very quickly do, if we remember and apply the lessons that war is teaching us about the number of people able to work, whose capacity was hitherto left fallow, that this country contained, and also about the ease with which we can dispense, when a great crisis makes us sensible, with many of the absurdities and futilities on which much of our money, and productive capacity, used to be wasted.
FOOTNOTES:
"United Netherlands," chap. xxxii.