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 Five 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.