114}1 REPORT OF THE LOANS COMMITTEE.
WE do not quite understand this outpouring of praise on the Report of the Select Committee on Loans to Foreign States. The members of that Committee have been very in- dustrious, and very inquisitive, and very full of perfectly war- ranted indignation, but the net result of their efforts is pre- cisely what we ventured, when they were appointed, to prophesy it would be. They have produced an admirable, but useless leading article of thirty-two columns on the folly of lending money to people you know nothing about. They have gathered a quantity of information about four bad loans ; they have de- stroyed a great many reputations; they have revealed once more the financial credulity of a section of the British public, but they have suggested no practicable remedy for any of the evils they have denounced. The Report shows conclusively that States without revenue, or property, or hopes are quite as ready to borrow money as individuals or firms in the same pre- dicament, have no more hesitation in paying exorbitant com- missions to get their worthless bills cashed, and are at least as reckless in their selection of agents. There is nothing new in that, and nothing gained by its repetition on the authority of a Select Committee of the House of Commons. People who imagined, in defiance of the most patent facts, that Honduras, Costa Rica, Paraguay, and St. Domingo were States which it was safe to trust with millions, will not be convinced, because they are shown to be poor, or dishonest, or badly governed, that Abyssinia, or San Marino, or Tahiti, or Patagonia will not pay the interest on their bonds. When those " States " want money, they will get it just as speedily or as slowly as they would if other little principalities had never been exposed as defaulters. The British investor will argue, and argue justly, that Brown's failure does not prove Smith a rogue, and will study Smith's statement of his "resources" with just as much fervour and just as much ignorance as he studied Brown's. That Honduras will get any more cash is not likely, but it was not likely before the Committee began to sit. That insolvent States are less sharp than insolvent firms; that they not only condescend to swindle, but _condescend to swindle without caring to obtain the full advantage of their criminality ; that they are deceived by their own agents, bubbled by their own watchmen, despoiled by their own contractors, and are meek under it all, may be new information, but it does not benefit anybody in particular. The conduct or character of an Envoy from one State is no guide to the conduct or character of the Minister of another State. The Committee assumes that ex- perience will teach, if only a certain deceptive glamour can be driven away ; but in investments of this kind experience is not experience, and teaches nothing except what was sufficiently known before,—that one State's word is a better security for cash payment than another State's bond. It is true the world outside the Stock Exchange knows, from the Committee's Re- port, a little more of the way "rigs" are effected than it did before, but the knowledge of those methods is no protec- tion. Clergymen do not know what " buying back" is, or if they do, know also that great States do it. Paraguay, let us say, practises devices to create a delusive impression that investment in her stock is a profitable thing. The investor, knowing that, may be shocked, and decline the speculation ; but then suppose he hears that France under the Empire did precisely the same thing. He knows quite well that France was solvent, in spite of a practice which he is told to associate with insecurity. Italy is trusted, though it taxed
the creditor, and Russia can raise money if her budget is cooked. Paraguay's trickeries teach the investor nothing as to the only essential point, the willingness of Paraguayans to bear taxation rather than have their corporate credit lowered. The willingness may arise from honesty, or from calculation, or from both, but in either case it is the essential datum ; and on it the Committee can throw no light except by saying that Paraguay pays nothing, which everybody, and especially the Bondholders, knew before.
But we may be told gain must arise from the exposure of the men who manage these "rigs," the agents, contractors, promoters, and all the rest of the " sharks " who have been so carefully shown- up. Well, we suppose all punishment has its effect in deterring men from imitating criminals, but the effect will in this case be very slight, and it is purchased at a most injurious price. The effect is slight, because the Report which contains the exposure of the jobs contains also evidence of the incredible gains made by the jobbers, and diffuses the impression that they are wholly beyond the law. There is one case in the Report in which, unless we misread the facts, one man has made nearly half a mil- lion at a stroke, without ever coming within reach of a Red Judge, a fact which will have at least as much "influence" as the caustic remark that blame is a kind of original sin which reaches everybody concerned" in Honduras Loans. Moreover, the method of punishment revolts the natural sense of justice. The Committee have been wonderfully patient, painstaking, and reticent, but still they toss out into the world in their Report, and the evidence accompanying it, a mass of charges such as were never perhaps published before, without any of those guarantees for their authenticity which a Court of Justice would demand and obtain. Very likely they may be right all through, for they are able men, and they obtained an unexpected quantity of evidence ; but the next Committee may be composed of impulsive men, and witnesses may be more reticent, and then half the City or the chiefs of some particular trade may find some morning that their characters have been swept away in a torrent of gossip. Suppose this M. Lefevre happened, which is at all events possible, to be the brother of that other. The precedent is a bad one, so bad that even if the whole investing public could read the Report between the lines, and understand clearly who are the guilty, their con- sequent distrust of particular firms would be no compensation for the injury done to the popular belief as to what evidence should be required before a verdict of guilty is pronounced. As to the positive suggestions of the Report, they are, where not trivial, positively childish. The Committee advise that the Stock. Exchange should publish not only the total nominal amount of any loan, but also the amount of it actually taken up, as thereby the public would be able to see if enough had been paid to complete the railway or other work which is often the real security. That seems sound, but its only result would be that once a quarter somebody in Paris would buy from the contractors half-a-million of bonds and resell them to the contractors next day, a transaction which would make the Returns indefinitely more deceptive than they are now. The Committee would prohibit contractors from " buying back" scrip, and suggest as the guarantee a declaration carrying penal consequences that they have not bought back; but the declara- tion would be made at once—the person declaring remaining ignorant of what his confederates are doing—while if he happened to be a recognised agent even from Tierra del Fuego the consequences could not be enforced. They would prohibit " drawings" for eighteen months, because that would put a check on gambling in scrip, but what is the difference in that respect between a loan with drawings or a loan like Napoleon's Italian loan, purposely issued below its value, so that the applications for it might be needlessly large ? He wanted to pamper gambling, but the Committee's rule does not touch him. And finally, they suggest that the promoters ought to state in their prospectus asking for money a list of particulars,—(1), the authority from the borrowing State; (2), the public debt of the State ; (3), the revenue of the State for the preceding three years; (4), if there be any special hypothecation, the particulars of the property hypothecated ; and (5), the funds out of which the interest is to be met for the next five years. It is suffi- cient, to show the nullity of these provisoes, to apply the questions to Great Britain, and answer them truthfully. To the first question the answer would be of course " an Act of Parliament," which answer would also be given by any other State except Russia, or for the moment Spain. The second answer would show that Great Britain was the most indebted State but one in the world. The fourth, if truthful, would be that the thing hypothecated was the industry of the British people ; " and the fifth would be, if also truthful, "Whatever the British Treasury can get." Peru would, on paper and in figures, make a better show than Great Britain, and sensible men of business would of course consider so concrete a thing as a million tons of pigeons'-dung better security than so abstract a thing as the possible willingness of the British people to con- tinue being taxed. That, and nothing better, is the British fundholder's "security," a security which on paper would be ridiculous, but which in fact is worth all the guano ever deposited in pawn. The more rotten the security of any Government, the more it parades its accounts after the fashion desired by the Committee, and the more its accounts are paraded the less ought the public to believe. Nobody can make out the Swedish budget. Anybody can understand the Turkish one ; but compare the credit of Sweden as it ought to be with that of Turkey even as it is. Visible re- sources are no guarantees compared with invisible. Holland is a mud-bank, and Turkey holds endless treasures ; but who trusts the Turk or does not trust the Dutchman? Yet he has no reason to do so expressible in figures. Mr. Lowe under- stands finance, but will he just draw up a schedule of the resources of Holland, or state any decent reason why, within the Committee's limits of evidence, anybody should lend money to Holland at three per cent.? The evidence required is worthless, even if it were obtainable, which, as regards the fourth and fifth questions, it is not.
One little bit of good the Report may incidentally do. It may warn impoverished little States anxious to borrow money that the British market is just as full of rogues as any other, that men who will rob the public with equanimity will rob little States with pleasure, and that if their credit is bad, it is safer to accept the fact and offer their six per cents. low enough to attract purchasers, than bribe anybody to try any " dodges," however clever. There are just two ways of raising a State Loan without waste, and there are only two. One is to invite tenders and accept the highest. if those who tender seem able to fulfil their engagement. The other is, to open offices every- where, with a pledge that anybody who pays in any sum shall receive a bond promising so much per cent. The first is the British way, the second was till lately the Indian way, and in neither is there any loss, or any possibility of being swindled by an individual. Every other scheme involves payments to somebody, and will usually he found to involve a loss much greater than any incurred through a want of credit.. Individuals are fools, but the general market will always give a State within a small fraction of the terms which its promise is fairly worth, and the effort to exact more always ends in the employment of agents, who keep the difference. It is the old truth, which nobody will learn. A contractor does not do business for his health. He does it for profit, and if the price is too low for profit, he extracts it by reducing the quality of the article supplied. Whether it was worth while to appoint a grand Committee to teach a pack of half-caste Republics that bit of political economy, we must leave to Sir Henry James to decide.
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