Finance
Foreign Investments . . • ,
THE latest issue of the _MonthlySReview, of. the :Midland Bank has an interesting article dealing with the subject of International Investments, a matter in which both - British investors and British" traders and industrialists A CHANGED POSITION.
Since the termination of the Great War, however, there has been a complete change in these conditions. Great Britain's power to lend has been greatly diminished, while many of our foreign debtors have been hit seriously by the inability or unwillingness of Great Britain to effect renewal of obligations and also by the fact that the heavy decline over many years in the value of their exportable products reduced their power to maintain the service of their external debts. A classic example is, of course, furnished by the exchange crisis of a few years ago in our Australian Dominions, a crisis which was splendidly overcome by the courage and honesty exhibited by the people of Australia. The main causes of that crisis, however, are worth recalling because they demon- strated so strikingly the difficulties experienced by Australia as a result of its very large external debt. Ordinarily, in spite of the size of the debt, Australia was well able to meet the situation by reason of her huge exports of produce and commodities, especially of wool.
COMMODITIES AND DEBTS.
During the years of crisis, however, so great was the fall in these exportable commodities that, but for Australia sending large amounts in gold it would have been impossible for her to have maintained the service of her external debt. Indeed some of the leaders of the Socialist party in Australia openly advocated default on certain obligations. That, however, was not the general attitude of the people of Australia, nor, for- tunately, of the Government in office, and by courage, determination and patriotism on the part of the whole population, Australia did not default on a single loan, and she has since met with the reward that was sure to follow—namely, such enhancement of her credit as has enabled her to convert more than 1100,000,000 of her external debt into loans bearing a much lower rate of interest, and involving a very substantial rate of saving in the National expenditure.
ENIBARGO ON FOREIGN LOANS.
For some years there has been almost a complete stoppage of our icans to foreign countries, though, as already noted, there have been loans and conversion operations in connexion with the obligations of Oversea Dominions. Indeed, the Treasury itself has practically 14.-.eed an embargo on foreign loans ; the reasons doubtless ir elude the fact that the trade statistics suggest that we have no surplus savings which it would be advisable are very directly. concerned.. -It is More or less- common knowledge that, during the, past century, ,no Small part of our trade activity and especially _that part concerned , with our export trade was stimulated by the large loans we made to foreign countries and to our Oversea Do- minions. Our surplus savings over -many- years were employed in these foreign investments,. ' and the proceeds of the loans raised here were used for opening up and developing many countries abroad. In conse- quence of these developments, the countries in question became in their turn large importers of goods from abroad and at the Same time, of course, were able to meet their own indebtedness by- the increase in their exports. Those. were the days when international trade generally was aided by a Much freer exchange of goods and services than exists today. Moreover those were • also the days when, owing to our great wealth and the perpetual balance of trade in our favour, it was possible for us to make these loans without endangering our own exchange position, and it was also possible for us to effect with ease the renewal of these foreign loans when a renewal was called for. to lend abroad having regard to the state of our trade balance. Nevertheless, and prompted, no doubt, by a desire that our_ export trade should be stimulated, there are some who consider that it Might be wise that this embargo, on foreign loans should, to some extent, be - • - • relaxed and _that wherever._ it is possible to discover credit-worthy borrowers, there 'should be some resumption of our lending abroad.- Moreover, it will be seen that the question is one not only of interest to British traders . and manufacturers, but also to British investors, for at _ least one reason for the high level of investment stocks - - - at the -present time is to be found in the cessation of the , flotation of foreign loans.
_ - A SUGGESTION. I am not Cone-ern-eel; -liOwever, in this article in determining whether there_ should or should not be an early resumption of foreign loans ; I want rather to draw attention to a central point in the article in the Midland Bank's Monthly Review to which ,I have referred. After noting thecontention that the balance of payments in favour of Great Britain is not such as to warrant -a_ free flow of- capital to other countries, the writer considers that "the stage now reached in world economic recovery, though by no means advanced, is marked by. widespread discussion of the possibility of .
development in various parts of the world and of the - practicability of securing the men and the resources to undertake it." And arising out of this main thought the writer suggests that looking at the matter, perhaps, chiefly from the point of view of the borrowing country, there is an important point calling for consideration. Briefly stated, it is suggested that assuming the resump- tion of loans to aid developments of foreign countries, it might be well that the lender should be in the position of a shareholder in the enterprises for which the money is required rather than a creditor of the Government of the borrowing country.
LENDERS AS SHAREHOLDERS.
The point is very well illustrated by contrasting the loans made to the Australian Government with the large amounts advanced by many in this country to industrial undertakings in countries overseas. It is pointed out, for example, how in the case of Australia the Government of that country stood committed to certan foreign indebtedness involving a heavy strain on tlic ex2hanges at a moment when its power to meet those obligations in goods and services was materially reduced by reason of the fall in prices of wool and other exportable commodities. The Government, having raised these loans direct, was compelled to meet its obligations in spite of the trade crisis. Contrasted with that experience was that of -the Straits Settlements and certain other countries where we had invested largely in the tin and rubber industries. Here, again, there was a collapse in prices, but the lenders were shareholders in individual enterprises and not creditors of a Government. Conse- quently, the lenders, as shareholders, had to take their part in the losses occasioned by circumstances over which the enterprises themselves had no control. Therefore, it is suggested that the point is one to be considered in future borrowings by countries overseas.
The writer of the article naturally perceives that the mode of capital provision which may best save tlic interests of the country to be developed is not necessarily the one likely to prove most attractive to the investor, but he suggests that some solution of the difficulty may, perhaps, lie in the practice of combined or institutional investment providing a means whereby funds can be spread over a broad field of investment. "The principle of diversification," says the writer, "applied to overseas investment has probably not yet attained to its full ex-
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