A Policy of Free Exchange: An Argument Against Socialism and Socialistic Legislation
By Thomas Mackay
Thomas Mackay (1849-1912) was a successful English wine merchant who retired early from business so he could devote himself entirely to the study of economic issues such as the Poor Laws, growing state intervention in the economy, and the rise of socialism. Mackay was asked by the individualist and laissez-faire lobby group, the Liberty and Property Defense League (founded in 1882 by the Earl of Wemyss), to put together a collection of essays by leading classical liberals to rebut the socialist ideas contained in
Fabian Essays in Socialism edited by George Bernard Shaw in 1889. The result was a volume of essays called
A Plea for Liberty: An Argument against Socialism and Socialistic Legislation which appeared in 1891, and another volume of essays
A Policy of Free Exchange: Essays by Various Writers on the Economical and Social Aspects of Free Exchange and Kindred Subjects, which appeared in 1894.Two of the guiding intellectual lights of the Liberty and Property Defense League were Herbert Spencer (1820-1903), whose
The Man versus the State had appeared in 1884, and Auberon Herbert (1838-1906), whose
The Right and Wrong of Compulsion by the State had appeared in 1885. Both Spencer and Herbert were troubled by the direction in which the British Liberal Party was heading, away from strict adherence to policies of individual liberty and non-intervention in the economy and towards a “New Liberalism” which laid the intellectual foundations for the modern welfare state. The aim of Mackay and the members of the Liberty and Property Defense League was to use the occasion of the publication of a major defense of state interventionism in the economy, the
Fabian Essays, as an opportunity to oppose all advocates of these policies whether from the “right” (the Liberal Party) or the “left” the Fabian socialists and the Labour Party. The result were the two volumes mentioned above. The strategy adopted was to argue against both the morality and the practically of socialism. The latter resulted in many essays showing how specific examples of state intervention or control, such as electrical distribution or public housing, led to unintended, harmful consequences.The ideas expressed in the two volumes,
A Plea for Liberty and
A Policy of Free Exchange, are still timely even after the passage of some 110 years. In spite of the fall of communism and the discrediting of the idea of a centrally planned economy, myriad government interventions in the operation of the economy are still with us, seemingly entrenched and impossible to remove. It is thus interesting to see the response to socialism by free market people who were present at its birth.Dr. David M. Hart
Library of Economics and Liberty
December, 2002Recommended ReadingEric Mack,
“Foreword” to Herbert Spencer,
The Man versus the State, with Six Essays on Government, Society, and Freedom (Indianapolis: LibertyClassics, 1981).Eric Mack, “Introduction” to Auberon Herbert,
The Right and Wrong of Compulsion by the State, and Other Essays (Indianapolis: LibertyClassics, 1978).Jeffrey Paul, “Foreword” to
A Plea for Liberty: An Argument against Socialism and Socialistic Legislation, consisting of an Introduction by Herbert Spencer and Essays by Various Writers, edited by Thomas Mackay (1891) (Indianapolis: Liberty Fund, 1981).Edward Bristow, “The Liberty and Property Defence League and Individualism,”
The Historical Journal, 1975, vol. XVIII, no. 4, pp. 761-789.N. Soldon, ”
Laissez-Faire as Dogma: The Liberty and Property Defence League, 1882-1914″, in
Essays in Anti-Labour History: Responses to the Rise of Labour in Britain, ed. Kenneth D. Brown (Macmillan, 1974), pp. 208-233.J. W. Mason, “Thomas Mackay: The Anti-Socialist Philosophy of the Charity Organisation Society,” in
Essays in Anti-Labour History: Responses to the Rise of Labour in Britain, ed. Kenneth D. Brown (Macmillan, 1974), pp. 290-316.J. W. Mason, “Political Economy and the Response to Socialism in Britain, 1870-1914,”
The Historical Journal, 1980, vol. XXIII, no. 3, pp. 565-587.
Thomas Mackay, ed.
First Pub. Date
New York: D. Appleton and Co.
Collected essays, various authors.
The text of this edition is in the public domain.
- Preface, by Thomas Mackay
- The Science of Economics and its relation to Free Exchange and Socialism, by Henry Dunning Mac Leod
- The Coming Industrial Struggle, by William Maitland
- National Workshops, by St. Loe Strachey
- State Socialism and the Collapse in Australia, by the Hon. J. W. Fortescue
- The Influence of State Borrowing on Commercial Crises, by Wynnard Hooper
- The State in Relation to Railways, by W. M. Acworth
- The Interest of the Working Class in Free Exchange, by Thomas Mackay
- The Principle of Progression in Taxation, by Bernard Mallet
- The Law of Trade Combinations, by the Hon. Alfred Lyttelton
by Wynnard Hooper
The Influence of State Borrowing on Commercial Crises
COMMERCIAL crises are primarily the consequence of the imprudence of bankers, merchants, financiers and other members of the business classes, and also of the credulity of the general public. Crises vary very much in the details of the phenomena composing them, but they all possess certain well-marked characteristics which it is necessary to describe with some minuteness, as otherwise it would not be possible to indicate the important part which the action of governments in regard to finance and commerce have had on the crises of recent years.
A commercial crisis is a state of things resulting from a period of inflation and over-speculation; its characteristics are usually a breakdown, for a short time, of the ordinary machinery of credit, followed by a period of inactivity. The violence and extent of the collapse is proportionate to the strain that has been put upon credit by the previous inflation. For inflation of prices is the concrete expression of over-production and over-speculation, and over-speculation is only possible when a great many people have trusted others too much and have been trusted too much themselves. Sooner or later the more cautious lenders begin to get anxious about the money they have lent and restrict the accommodation they afford to borrowers, who are then obliged to try and obtain what they need from less careful, or worse informed people. The latter, in their turn, eventually become uneasy, and as they are a large class, the bulk, indeed, of the business
community, their newly acquired fear of continuing loans soon produces a considerable effect on the money market, necessitates sales of stock and commodities, and causes failures. When once the process we have briefly described has commenced its effects are felt even by manufacturers and traders who have not operated beyond the extent which in ordinary times their means justify. The paralysis of credit eventually becomes acute, and even the most careful and wealthiest people have to be content to abstain from all but the most necessary transactions in which no risk is involved, until by sales of securities and commodities the embarrassed portion of the business world has either paid what it owes or made a composition with its creditors. After a certain lapse of time an approximately ‘clean slate’ is shown, creditors having taken what they can get and written off the balance of what is due to them from their books as a ‘bad debt.’
Of course the condition of affairs is never in practice so simple as this. There are no men who are creditors, or debtors, pure and simple; but there are always men who are, on balance, creditors, that is, have more owing to them than they owe. That is, or ought to be, the position of the bulk of the community, with one important exception, the bankers. A banker is a person who is at all times a debtor, on balance. He owes a great deal more than he could pay if all the people whose money is left with him asked for it at once. But he is in no danger whatever on that account provided he has observed what are known as the rules of sound banking. The normal condition of a careful trader is to be a creditor, on balance, but he can only be in this position if some one else is always a debtor, on balance, and this latter function is fulfilled by the banker.
The safety of a banker depends partly on the character of the liabilities he has assumed, but even more on due proportion being kept between the various classes of those liabilities, and above all on his preserving a proper amount of actual cash constantly in hand, or, under the London system, in the Bank of England. What the ‘proper’ amount may be each banker must judge for himself, but it is necessary to
observe that even a proportion of cash which would rightly be considered large in ordinary times may be insufficient in times of general discredit, when the banker, the universal debtor, is called upon to pay an unusual amount on demand. What he can keep in cash is a small portion, at the best, of what he owes, for cash kept as a reserve,
ex hypothesi, earns no interest, and as bankers have to pay interest on most of the money left with them, they have to use the bulk of it profitably or become bankrupt. The universal debtor, therefore, must be very careful to whom he lends and even more careful how he lends it. If a banker lends more than a small portion of his resources to even the most wealthy of his customers for a long period, he is courting danger. In technical language he has allowed his money to be ‘locked up.’ It avails him nought to be able to say, ‘So and So is a good man, the interest is fair, and the loan is secure of repayment when it is due.’ The banker can be made to pay large sums on demand under pain of commercial death, and his demand creditors will not be put off by being informed of the promise of Messrs. So and So to repay him, for they want cash at once, and must have it, under pain, perhaps, of commercial death themselves. Bankers, therefore, cannot hold a large proportion of long dated securities, no matter how good they may be, unless these securities are what is called marketable, that is, are freely dealt in at all times on the Stock Exchange. Now, the number of such securities is not great, for though under normal conditions readily marketable securities of good quality are fairly numerous, they become few during periods of commercial distrust. In the extreme case of a panic they are, to all intents and purposes, reduced to one, namely, Consols. The rest of the ‘readily marketable’ class can, indeed, sometimes be sold at such times, but only at a ruinous fall in their price. Consols on the other hand can be sold at a moderate decline, or borrowed on, even in a panic, and this is why bankers always keep a considerable quantity of Consols in spite of the low rate of interest they yield.
If all merchants were careful to remain, on balance, creditors and took care to give credit only to people who could eventually
pay, and if all bankers invariably kept the money lent them in proper proportions of cash, short loans, bills and marketable securities, there would never be a commercial crisis, though owing to failures of crops, wars and revolutions, and unavoidable accidents which can only be partly covered by policies of insurance, there would still be occasional times of comparatively dear money. But merchants, bankers, and the general public, are human beings, and are consequently liable to be led from the path of safety, from time to time, by the delusive hope of abnormally large gains. The desires of even the humblest man or woman may be said to be infinite relatively to his or her resources for gratifying them, and though most people learn at an early age that their desires can only be fulfilled to a strictly limited extent, and only by constant hard work, and though, as a rule, they also learn to act on the knowledge they have acquired, the desires never wholly become extinct, and occasionally play strange pranks with the mental equilibrium of usually staid and grave persons. This is the secret of the never-failing attraction of lotteries, and of the periodic outbursts of insane speculation in Stock Exchange securities. The class of people who live by promoting and dealing in loans and public companies have an enormous mass of latent cupidity to work upon, and from time to time this cupidity becomes ungovernable and leads large masses of people to do things which they would not, in their normal state, have dreamed of doing, and which they bitterly regret having done for the rest of their lives.
It must not be assumed that the people who promote and deal in loans and other securities of a speculative character are intentional cheats. If they were they would not be as dangerous as they are. In nineteen cases out of twenty they too are misled by their desires into greatly exaggerating the profits which can be derived from their undertakings, It is true they are usually better informed as to the risks run than they allow the public to be, but they underrate the risks, even to themselves, when under the influence of Desire the mother of Hope. That this is so is plain from history, for there have been occasions when the public even
when ‘on the feed,’ to use an expressive phrase sometimes heard on the Stock Exchange, have shrunk back in fear from some palpably dangerous undertaking which its promoters have nevertheless persisted in going on with, having rashly committed themselves to it. A striking example of this infatuation was afforded by the issue of the Buenos Ayres Drainage and Waterworks in 1888, which was conducted by Messrs. Baring Brothers, and was one of the principal causes of the destruction of that famous firm two years later. Messrs. Baring, who like most other great finance houses were ‘registered as bankers,’ had allowed themselves, under the guidance of their senior partner, to drift into the position of bankers in fact as well as in name, without at the same time taking the precautions which a banking business demands. Instead of being, on balance, creditors they gradually allowed their necessarily very large liabilities to assume enormous dimensions, by entering into engagements, chiefly in Argentina, which they could only fulfil if everything, political as well as financial, went smoothly in that country. They had undertaken to find five millions of money within a short time and another five millions subsequently for the Buenos Ayres Drainage and Waterworks, thinking that the public would gladly relieve them of a large part of the shares by which this liability was represented. But the public was scared at the magnitude of the scheme, which fairly staggered the wiser heads among them, who began to feel uneasy about other investments which they had acquired from a firm which showed so strange a want of prudence on such a huge scale. There is nothing to show that Messrs. Baring felt any misgiving at that time as to their own safety, to say nothing of other people’s, for when, after the collapse of the Comptoir d’Escompte of Paris in the spring of 1889, the Russian Government asked Messrs. Baring to take over a deposit account they had kept with that institution, Messrs. Baring did so with alacrity, thus placing themselves under a fresh liability of a very dangerous kind. It also lent the Argentine Government money, on security, of course; but though fairly good as an investment, the security was not of a kind that could be readily converted into cash in time of
financial pressure, and was, as a matter of fact, quite unsaleable for some time after Messrs. Baring’s collapse, though it was at length disposed of.
The mistakes of Messrs. Baring have been dwelt on because they afforded the biggest example that was ever seen of the peculiar kind of madness which comes over the public generally at times. The breakdown of Overends in 1866 was equally striking, but it did not occur in the same way. Overends were broken because, being from the nature of their business, debtors, on balance, at any given moment, they lent the money under their control foolishly, so that they could not get enough of it back immediately when they required cash to meet payments due on demand. Barings, who ought never to have been debtors, on balance, at all, slipped into the position of being so without intending it. Now, small capitalists and manufacturers, who also ought not to be in debt, are from time to time seized with a species of madness, and commit themselves to liabilities which they cannot meet, thinking that they will never have to meet them, that ‘it is a mere form,’ or that their speculations, whether in stocks or commodities, will have turned out well by the time they have to pay calls or take up securities they have ‘underwritten,’ or to pay for materials consumed. They do this under the influence of various delusions, such as belief in the infallibility of great finance houses, in the indefinitely great riches and prosperity of foreign countries, and in the ability of foreign governments to construct an unending series of ‘productive public works,’ or works which, though not directly productive, are supposed to add to the ‘efficiency of production.’ The general public, which does not underwrite new loans or intentionally speculate, buys with its savings securities which it fondly believes to be good investments, and thus frequently becomes committed to speculations of a more or less uncertain character. The end of all this is weeping and gnashing of teeth, furious denunciation of the great finance houses, for it is on them that the ‘investing public’ relies, and equally furious denunciation of foreign governments, ending with rueful acceptance of the fact that a good deal of capital has been lost and a solemn
determination to gather up the wreckage and be content with ‘a safe Three Per Cent.’ in future. The manufacturer who has risked his capital in a struggle for a new market, and has lost it owing to the general breakdown of credit, suffers in the same way. Many have gone through this experience during the last three years, owing to events in South America, Australia, Portugal, and elsewhere, and until sounder ideas are held as to what a government can wisely do in the direction of ‘developing the resources’ of a country, similar experiences will probably be the lot of many more unwary persons.
Mistaken speculation there will always be. Railways, steamships, waterworks, gasworks, breweries, mines, and industrial undertakings generally, do not always yield the profits expected of them, and sometimes give no profit at all. These unsuccessful companies, however, are a small minority, as an inspection of that marvellous embodiment of the financial and industrial energy of this country, the
Official List of the London Stock Exchange, shows. But during the last ten years there has been a steady increase in the number of loans to governments and public bodies, which depend for their revenue in the main upon taxation, frequently excessive taxation relatively to the normal income of the people, which is a more precarious security for the payment of interest than the receipts of a well-planned railway carried out entirely by private enterprise. But governments not only raise loans, the proceeds of which may or may not be used for constructing public works; they also frequently give what are called ‘guarantees’ to railways, and sometimes to industrial undertakings, by which they undertake to pay an annual subsidy to the companies concerned. When carefully thought out and properly limited, arrangements of this kind may be beneficial. The Government aid given to the early Indian railways was wisely given, but in other countries the principle of granting guarantees has been much abused. In Argentina it was abused to such an extent that payment of the sums promised became impossible, even supposing the revenue of the State had not been unduly pledged in other ways.
The world is at present suffering almost everywhere from
excessive government interference with industry and commerce. It has always suffered in this way, sometimes to a formidable extent, and probably always will in some degree, owing to the exigencies of political parties. As this is not an essay on politics, the ways in which the working of the party system tends in all countries to the establishment of bad financial and economic arrangements intended to place patronage in the hands of party managers can only be touched on incidentally. Politicians will always find suitable excuses for any line of action they may wish to take, and their line of action in regard to finance and commerce is almost always the same, namely, an extension of the sphere of State Action, on pleas which vary much at different times and places. The course of events in the United Kingdom after the great war must be considered as an episode. Owing to a series of fortunate accidents this country got rid, during the fifty years ending with 1870, of an enormous mass of mischievous laws tending to restrict trade and enable the State to control it. We are still enjoying some of the benefit of the supremacy of the philosophic theories which dominated politics during those years, but for some time past legislation has shown a tendency to resume its normal direction, the sphere of State control being extended in several directions.
Laisser fuire is no longer the economic maxim of either of the great parties of the United Kingdom. On the contrary, both of them have of late made tentative advances towards socialism, and seem likely to move still further in the same direction. So far, however, these advances have not taken the form of open encroachment by the State on the sphere of private enterprise; but if the outcry for the management of railways and other public works by the State becomes sufficiently powerful to make it worth attending to, the politicians will not be long in finding pretexts for accepting that policy. Already some progress has been made in this direction in the sphere of Local Government, gasworks, waterworks, and tramways having in many cases become the property of municipalities. Local bodies, however, provided they are controlled by the ratepayers of the area they administer, are less unfitted than
the national government to manage undertakings of this kind, though even in their case abuses of patronage and other forms of corruption are sure to become prevalent sooner or later. We must look abroad, to our own colonies and to foreign countries, for full-blown examples of administrative control of public works, and of interference with trade generally. In Australia practically all the railways are owned by the State, with very unsatisfactory results from a financial view alone, and almost equally bad consequences politically. In all the Australasian colonies there are strong parties in favour of extending the principle of State ownership still further, but recent events have checked their influence for the time.
We are not now concerned, however, with the mode in which the extension of State ownership of public works and the general spread of socialistic theories affect the finances and political stability of countries, but with the effect of these tendencies on the markets for money, securities and commodities, throughout the world, more particularly in London, the centre through which a large proportion of the world’s transactions are ‘cleared,’ and where considerable quantities of money are lent to states, municipal and other semi-public corporations, and joint-stock companies. The means whereby these various bodies obtain money to carry out their objects are the issues of loans, bonds and shares, or stock. The issues of governments or municipalities are made through finance houses, but the larger public companies sometimes do the work themselves, or employ a bank merely to receive subscriptions. An issue backed by a house of good repute is sure of success in ordinary times, for ‘good repute’ means that the firm in question is believed to look carefully into any issue they allow their name to be connected with. Sometimes this belief turns out to have been mistaken, and the repute of the firm becomes less ‘good’ in consequence.
We will suppose that a foreign or colonial government raises a loan in London to provide for some ‘productive public work.’ Either it has already begun the process of construction, borrowing the money from a bank or finance house in order to pay the
contractor such portion of the contract money as becomes due to him from time to time, or it commences operations after raising the loan. In the former case orders for materials have already been placed by the contractor, or whoever is in charge of the work. In the latter they are still to be placed. Either way, the effect of the government’s use of its credit is to create a demand for certain commodities. If the government has entered on an extensive scheme of railway-making, which will require many thousands of tons of rails, chairs, fishing plates, &c., as well as girders and other ‘heavy structural ironwork’ for bridges and stations, there is a considerable addition to the previously existing demand for all these commodities. If several governments are committed to large operations of this kind at the same time, which is not unlikely to be the case, a perceptible rise in the prices of such commodities is probable, the makers of the articles wanted will extend their works, and new men will put capital into the iron and steel trade, probably raising wages by doing so. So long as the works undertaken by the various governments go on uninterruptedly, the iron and steel trade is prosperous; but eventually one of two things happens—either the works contemplated are all completed and the governments cease for a while from stimulating the iron market or, which is only too likely in the case of the governments of the rash and impulsive peoples of young countries, they find they have undertaken too much, and that they cannot meet the interest on what they have borrowed. Sometimes their creditors come to the same conclusion before the actual breakdown arrives, and refuse to lend them any more. In either case there are no more orders for rails, girders, &c., from this source, and the makers of these articles suffer severely in consequence. When a trade has been stimulated by two or three years of extra demand, which looks as if it would last for as many years more, it is a serious thing when the demand suddenly stops. And the demand artificially created by the government of a young country whose people are full of extravagant ideas of what it needs, and still more extravagant notions of what is necessary to its future development, is liable to stop with great suddenness. The Argentine
Republic was kept well supplied with money up to 1890 by the issue of national and provincial loans for all sorts of purposes, in addition to the considerable sums raised by companies. In that year, although the country’s credit was distinctly on the wane, it imported 274,000 tons of iron and steel rails. In the following year, after the complete collapse of Argentine credit, these imports only amounted to 88,000 tons, and in 1892 they were barely 13,000 tons. This enormous falling off in the purchases of rails was only typical of what took place in regard to all our exports to Argentina after the great collapse of 1890, the total of these exports falling from £8,416,000 in that year to £4,241,000 in 1891, and a similar reduction took place in the exports to most countries which depend for the capital required to develop them on the issue of loans here.
Now, it is quite natural that new countries should be indebted to this country for the means of developing their natural resources. Simply stated, and ignoring for the moment the financial and commercial machinery by which the end is accomplished, Great Britain hands over to her Colonies and to foreign countries a certain amount of plant, machinery and materials every year, and takes in return a percentage of the profits they yield. That is the transaction in its essence, though it is obscured somewhat by the form it takes in practice. The question that arises is, Are there not serious drawbacks to the carrying out of this useful and, indeed, necessary transfer through the medium of extensive loans contracted by governments? There unquestionably are. First, public works carried out by governments are sometimes badly done, and are always extravagantly done. Secondly, the power of raising money for productive public works is sure to be employed sooner or later for non-productive works whose usefulness can be plausibly maintained. Thirdly, the public never troubles its head, when it is ‘in a buying mood,’ about works of any kind, but insists on regarding the loans as the obligations of a ‘rich and progressive young country,’ New Gerolstein, let us say, vouched for by that ’eminent house’ X, Y, Z & Co. There is not much, therefore,
to prevent the Government of New Gerolstein, with the aid of Messrs. X, Y, Z & Co., raising loans for any purpose it may think fit, including the reimbursement of Messrs. X for advances previously made, perhaps to provide interest on loans for ‘productive public works’ which have, quite unaccountably of course, failed to yield profits. To sum up, the process of equipping a new country with the appliances of a modern commercial and industrial community by lending largely to its government, involves waste of money and bad work from the commencement, and bad and, very possibly, corrupt finance eventually. It is almost an infallible way of producing a breakdown of the credit of the country concerned, unless it is conducted with more prudence on all sides than can reasonably be expected of human nature. And, as has been shown, the consequences of the breakdown in the credit of a country which has been a large customer for commodities is a sudden stoppage of demand for them, and a violent fall in their price, followed, of course, by forced restriction of production, loss of capital, eventual reduction of wages, and all that results therefrom.
It may be said that in a new country the only way in which development is possible is through the credit of the government; or, if the absurdity of this contention is demonstrated, it will certainly be alleged that the development will be ‘too slow for the modern spirit’ unless government loans are raised. As we have shown, however, more haste may be worse speed in this matter. Rapid development attained in this manner is often over-development, involving either a heavy burden to be borne by the taxpayer (or by one set of taxpayers for the benefit of another) or an injury to the State’s credit, and possibly actual default. Moreover, talk of this kind about the requirements of ‘the modern spirit’ is not sincere, being merely part of the stock-in-trade of corrupt politicians and officials leagued with contractors and financiers in want of a
job, in both senses of the word. There is not the slightest fear of a country which is really worth developing not being developed quite as fast as is good for it by private enterprise, provided it affords reasonable security for life and property.
Of course private enterprise, conducted by independent companies, is not likely to make railways merely to help the election of supporters of the government—a motive for railway construction not wholly unknown either in our Colonies or in foreign countries. But all really useful lines or other works are sure of support in London, except in times when a series of commercial and financial collapses has temporarily destroyed confidence, as has been the case for the last three years.
There is one argument, however, against leaving the making of public works, such as railways, to private enterprise which is advanced frequently in perfect good faith and deserves consideration from the economist. It is the well-known socialistic plea that governments ought, as a matter of principle, to possess control of all instruments of production, and consequently of the means of communication which subserve production. To combat this notion, however, which is based on a profoundly mistaken view of the functions of government, would open up a discussion of greater extent than is contemplated in this essay, in which it is merely intended to show that the construction of public works by means of State loans necessarily aggravates commercial crises. If young countries insist upon disregarding the experience of past ages, and imagine that because they are new they require new principles for their guidance, they will probably involve themselves in considerable trouble, but they will be useful to the rest of the world as ‘object lessons,’ to use the slang of the New Journalism. The United States, a young and vigorous, but overweening community, has lately performed a series of most interesting experiments on itself—first, by deliberately adopting Protection in its most extreme form; and, second, by converting its Treasury into a Pig Silver Warrant Store, in the mistaken hope of keeping silver at the old American ratio to gold of sixteen to one. Although it is easy to extract amusement from the spectacle thus afforded, the results of this latter freak on the part of our lively cousins are by no means wholly comical, or entirely confined to their affairs; and everybody is heartily glad that this attempt to perform the impossible has been abandoned, for it had caused
temporary paralysis in most of the great markets of the world by disturbing confidence in American securities.
The commercial and financial relations between countries are now so close that no country can arouse distrust in its own ability to fulfil its obligations without causing general uneasiness. The principal creditors of the world are capitalists in Great Britain, and if one of the debtor countries gets into difficulties of any kind the capitalists become not only less able to lend money elsewhere, but, for the time, less willing to do so. This is why the breakdown in Argentina produced such serious effects, even in quarters quite unconnected with that country. After the great collapse of November, 1890, there was hardly a country which depends on the London Money Market for aid in developing its resources which did not find its supplies of capital curtailed. All second-rate investments are liable to risks, which are, more or less, recognized by those who engage in them; but, as a rule, the perception of these risks is dormant. Where, however, some one of this class of investments, to which the securities of most new countries belong, ceases to yield interest the whole class becomes temporarily discredited, because it is impossible for even the dullest not to perceive that what has happened in one case may happen in others. All the weak points of securities of this class are suddenly brought home to those who have been in the habit of holding them, and, for a time at any rate, are probably as much exaggerated as they had previously been underrated. As we have shown, government borrowings are much more likely to lead a country into financial trouble than the borrowings of companies conducted by private enterprise—first, because the governments are pretty sure to obtain more money than they can productively employ (which is not so much the case with companies); and, secondly, because even what they employ productively would have gone further in the same direction if managed by companies controlled by private individuals. Moreover, if a private enterprise is found to be hopelessly unremunerative, the company carrying it on will, indeed must, go into liquidation, while a government which can draw
on the revenue of its subjects by taxation, is very likely to go on throwing good money after bad, long after an undertaking it has committed itself to is proved a failure. The facilities for borrowing enjoyed by governments have been too great for many years past. There is something dangerously seductive both to lender and borrower in the power possessed by governments of mortgaging the future revenue of the countries they administer. The government of a new country is especially prone to take a sanguine view of its prospects; the people are at least equally certain of their capacity to provide the interest required; the finance houses, which stand as sponsors for the loans, may be credited with a belief that at any rate their particular issues are safe, and the public here too often blindly follow the finance houses. In the majority of cases all the parties concerned are actuated by perfect good faith, and the evils which follow from excessive issues are the results of being oversanguine, and sometimes, as regards the finance houses, of neglect to look sufficiently carefully into all matters connected with such issues, especially the amounts of those already in existence.
Now, this too ready belief on the part of the borrower in his future ability to pay, and the tendency on the part of issuing houses to shirk examining carefully the troublesome details of a loan operation, are examples of ordinary failings of human nature, which must be reckoned with at all times. They are constant elements in the situation, and their effects are certain to make their appearance sooner or later in cases where governments habitually raise loans outside their own country. Of course it is true that any country may without danger have a small foreign debt; but the interpretation of the word
small must be strict—that is, the debt incurred must be compared with the right quantities, and not with quantities whose relative dimensions have no real bearing on the question at issue. Occasionally, it is to be regretted, figures are introduced into prospectuses of loans which suggest quite irrelevant comparisons, of course tending to show that the proposed issue is ‘small’ and the resources available for
meeting it ‘great,’ whereas comparison with the proper quantities would have brought out a very different result. These are matters in which finance houses allow themselves to be ‘caught napping’ more often than is good for their reputations or for the pockets of those who place confidence in their judgement. But it is necessary to emphasize the fact that the investing public, in demanding infallibility from finance houses, as they practically do, are asking for too much. Every investor will admit this obvious truth individually, and yet readily forms one of a drove of similar persons who collectively act as if Messrs. X, Y, Z & Co. were both omniscient and exempt from all human failings, whether moral or mental. Is it surprising under these conditions that the said public sometimes finds that its money is lost, in whole or in part? If all finance houses had taken as much trouble as they ought, the number of foreign government loans would be about half what it is; but the same result would have been attained if the public had not foolishly accepted the belief that the promise of a government is always a good guarantee for payment.
The economic objections to the principle of allowing governments to raise big loans abroad for public works are equally strong as regards similar loans made at home. It is interesting to observe, however, that, except in the case of naval and military expenditure, where it can be defended on other than economic grounds, few countries ever attempt to raise money for public works except abroad. In most countries there is none to be got; and in those where it has been tried the plan has by no means proved to be a success economically. Even in France it broke down. The gigantic railway scheme elaborated by M. de Freycinet in 1879 could not be carried out, the State having, some years later, to beg the great railway companies to take over the lines it had partly constructed and was unable to complete, and to transfer to them most of the remainder of the mileage originally intended to be built as part of the addition to the
État. Whether the possession of the Prussian railway system by the State will eventually turn out well remains to be seen; but
it can be plausibly justified by considerations connected with the military safety of the country. It is doubtful if the Belgian railways are as efficient as they would have been if made by private enterprise. The acquisition of the telegraph system of the United Kingdom by the State is defended, even by those who are no friends to State Socialism, as a necessary corollary of the administration of the Post Office by a Government department. It can also be justified, with some plausibility, on political-military grounds. But, although it has long been an accomplished fact, and must be tolerated, it is economically bad—first, because the actual service rendered is less good than would have been furnished by private enterprise; and, secondly, because the ordinary defects of a bureaucracy, namely, morbid hostility to change and dislike of criticism, are formidable obstacles to the adoption of improved methods in a business which depends largely on adequate recognition of the progress of science. The delay in the extension of the telephone system in this country was entirely due to the fact that the Telegraphs are managed by one of the Revenue departments of the United Kingdom, and that the Treasury is an octopus, which insists that there shall be surplus revenues for it to throw its tentacles around—in the interest of economy, no doubt, but in disregard of efficiency.
In conclusion, the opinion of the present writer is that, to employ a well-known formula, the sphere of action of governments in matters affecting trade and commerce ‘has increased, is increasing, and ought to be diminished.’ The more strongly the current of general opinion, which necessarily means ill-instructed opinion, runs in favour of more government interference, the stronger should be the efforts of those who see the evils it produces to make them plain. And if we cannot easily begin ‘at home’ in this case, it is comparatively easy to begin abroad. For the evil results of entrusting large amounts of money to foreign governments, ostensibly for the construction of productive works, can be made patent to every one.