Foreign loan

“ It is easy to see how such an immense fund as the western territory may be applied to the payment of the foreign debt. Purchasers of the land would as willingly procure any kind of the produce of the United States as they would buy loan office certificates to pay for the land. The produce thus procured would easily be negotiated for the benefit of our foreign creditors. ”

“ Too great drawings of loan-bills, as the long bills drawn to make foreign loans are called, are quickly reflected in a squeamish London discount market. It needs only the refusal of the Bank of England to re-discount the paper of a few London banks suspected of having "accepted" too great a quantity of American loan-bills, to make it impossible to go on loaning profitably in the New York market. ”

“ It will be seen that when the indebtedness of a country becomes excessive and the liability cannot be liquidated either by shipments of bullion or by an increase of exportation, recourse is sometimes had to a loan in order to readjust the balance; the country exports public securities made for the purpose, when it has no other available resources left with which to satisfy its foreign creditors. ”

“ Notwithstanding the drought, the cholera, etc., etc., it is alarming that in a year of profound tranquillity at home and abroad, the Government should find itself absolutely without money. As this was the case, I suppose a new foreign loan was better than scraping together, at enormous sacrifices, enough money here to provide for the interest of the old loans next month. ”

“ The force of the axiom that, with regard to the balance of trade, to contract a foreign loan is equivalent to an increase of exportation, will subsequently be more fully felt when the correctives of an unfavorable exchange come to be discussed. ”

“ By that means the foreign country’s productive and purchasing power would be increased and she would resume her place as a supplier of the world’s necessities and as a purchaser of the world’s—and Great Britain’s—manufactured goods. The difficulty, however, of dealing with foreign loans is that the countries which chiefly require assistance are those suffering from a heavily depreciated currency, and accordingly the service of a sterling loan would place so onerous a burden on them that it would be more than doubtful whether they could bear it and meet their obligations. ”

“ In the meantime the repetition of ineffectual attempts will only debase your credit more, and especially if they are accompanied with the offer of more than ordinary interest, which ever augments the suspicion of the insecurity of the principal, and that the borrowers are themselves conscious of their insufficiency.” Since the time the above was written, the successes of the enemy against us have necessarily increased the improbability of our having credit to found a foreign loan. ”

“ The matter of collateral, risk of exchange and, indeed, all the other detail, will be fully described in the succeeding chapters on how bankers make money out of exchange. For the time being it is merely necessary to note that every time a loan of foreign capital is made here—‌and there are days when millions of pounds are so loaned out—‌bankers' long bills for the full amount of the loans are created and find their way into the exchange market. ”

“ There occasionally happens a concurrence of circumstances tending to withdraw from the loan market a considerable portion of the capital which usually supplies it. These circumstances, in the present case, were great foreign payments, (occasioned by a high price of cotton and an unprecedented importation of food,) together with the continual demands on the circulating capital of the country by railway calls and the loan transactions of railway companies, for the purpose of being converted into fixed capital and made unavailable for future lending. ”

“ To take up the actual operation of loaning foreign money in the American market, suppose conditions to be such that an English bank's managers have made up their minds to loan out £100,000 in New York—‌not on joint account with the American correspondent, as is often done, but entirely independently. ”

“ Independent of the stagnation of trade which paralyzes every branch of our commerce, we have lately had losses through foreign loans more severe than any we have experienced during the present century. ”

“ Between the Continent and England there is a very large proportion of bills which represent the expenditure of the foreign residents, drafts on their bankers at home, and encashments of dividends or other sources of revenue. There will be found innumerable bills based on the sales or purchases of stock, and large amounts which represent the transfer of capital from one country to another by way of giving effect to a public loan or a joint-stock undertaking. ”

“ In this connection, it must be pointed out that if the War should last a few months longer, in view of the low present value of our money, we shall be compelled to pay out annually, as interest on our foreign loans, the colossal sum of one and a quarter billion roubles. In order to make a more or less profitable conversion of our short-term loans abroad, we shall be compelled to seek very large long-term loans in the allied countries, viz., England, France, and Belgium, which, as is well known, are the bankers of the world. ”

“ The British, for example, always import a large excess of merchandise because they have a large credit balance abroad, from their services in ocean carriage, yielding five hundred millions annually, and even more from interest on foreign loans. ”

“ Low money rates are the fourth great factor influencing foreign exchange upward. Whenever money is cheap at any given center, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. It has come about during the past few years that so far as the operation of loaning money is concerned, the whole financial world is one great market, New York bankers nowadays loaning out their money in London with the same facility with which they used to loan it out in Boston or Philadelphia. ”

“ In the former case (and more and more this seems to be becoming the basis on which the business is done) both the American and the European bank stands to make a very fair return—‌always considering that neither is called upon to put up one real dollar or pound sterling. Take, for instance, the average sterling loan made on the basis of the borrower taking all the risk of exchange and paying a flat commission of three-eighths of one per cent. for each ninety days. That means that each bank makes three-sixteenths of one per cent. ”

“ Loan to be opened to the full amount of the foreign debt.Sec. 2. And be it further enacted, That a loan be opened at the treasury, to the full amount of the present foreign debt, to continue open until the last day of December, in the year one thousand seven hundred and ninety-six, and that the sums, which may be subscribed to the said loan, shall be payable and receivable, by way of exchange, in equal sums of the principal of the said foreign debt ”

“ Bankers are not always right in their views, by any means, but as a general principle it can be said that when big amounts of foreign money offered in this market are all offered on the "sterling loan" basis, a rising exchange market is to be expected. ”

“ Our economic performance in the past twelve months has raised our credit rating at the International Monetary Fund and the World Bank. As a result, we have been able to ease our debt-servicing burden and to generate more development capital through foreign loans. ”

“ In its influence upon the other markets, there is perhaps no more important phase of foreign exchange than the making of foreign loans in the American market. How great is the amount of foreign capital continually loaned out in this country has been several times suggested in previous pages. ”

“ In other words, these nations are creditor, or money-lending, communities. The imports of all money-lending coun [Pg 889] tries, like France, England, Germany, the Netherlands, and others, considerably exceed the exports, while the exports of all borrowing, developing, or unequally developed countries, like Russia, the United States, Argentina, Rumania, and many others, exceed the imports, as the foreign investor must be paid his interest, and the only source of money for such payment is eventually either the product of the soil or of industry. ”

“ The country will doubtless remain a debtor under some heads (private remittance, tourists) . At the close of the war it certainly was not collecting interest and dividends in the form of an excess of imports, as the figures show. It continued to invest capital in foreign countries, particularly in Europe, in North America, and in South America; the capital value of the loans far exceeded any annual interest charge on them. ”

“ Moreover, if any of the Reserve Banks find that their resources are regularly in excess of domestic requirements, they may be used to facilitate the financing of the foreign trade of the country with domestic capital. It is also very generally believed that the power to engage in foreign exchange operations may be so used that it will be possible to rely upon securing abundant foreign funds in periods of financial strain. ”

“ Trade, whether between the people of this republic, or those of Europe and America, is, when reduced to the last analysis, nothing more than an exchange of commodities. It may happen that we sell largely to a country of which we buy but little; but the nations that purchase of our debtor pay for our products. Our exports usually exceed our imports, and for the simple reason that we owe vast sums abroad, the surplus being employed in the payment of interest and the discharge of our foreign indebtedness. ”

“ So long as a willingness of the foreign lender and a sufficient export of our productions to meet any necessary partial payments leave the flow of credit undisturbed all appears to be prosperous, but as soon as it is checked by any hesitation abroad or by an inability to make payment there in our productions the evils of the system are disclosed. The paper currency, which might serve for domestic purposes, is useless to pay the debt due in Europe. ”

“ In line with its policy of restructuring our external debt, the banks will be asked to stretch the maturity periods of their unused credit. The Central Bank, for its part, will provide commercial banks with automatic forward exchange cover of their external exposure arising from the financing of imports through acceptances.
Trade Credits from Suppliers
Second, domestic importers will be given the inducements to finance their imports from trade credits available directly from their suppliers, whether the importers are independent companies or subsidiaries of foreign corporations. ”

“ The balance of trade may be entirely against England, though the amount of American securities in English hands should immensely exceed that balance.
⁠The case of the coupons attached to such stock is very different. The interest which they bear is a constant and important feature in national indebtedness. It constitutes an immediate liability incurred by the borrowing country; it is expenditure in favour of a foreign creditor. A country which has large sums of interest pay annually abroad, must import so much less or export so much more. ”

“ The mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from England to the United States, can best be effected by having the American house draw upon the English bank which wants to lend the money. In the finely adjusted state of the foreign exchanges nowadays, loans are continually being made by bankers in one country to bankers and merchants in another. ”

“ If they make a treaty of peace with the United States of America, this is acknowledgment enough for me.
"The affair of a loan gives me much anxiety and fatigue. It is true I may open a loan for five millions, but I confess [400] I have no hopes of obtaining so much; the money is not to be had. Cash is not infinite in this country. Their profits by trade have been ruined for two or three years, and there are loans open for France, Spain, England, Russia, Sweden, Denmark, and several other powers, as well as their own national, provincial, and collegiate loans. ”

“ But when any bills other than such as are payable at once, form the subject of bargain, the buyer must further consider what is the rate of interest in the country on which the bills are drawn. If he owes money abroad, he will be paying interest to his foreign creditor at the foreign rate, and this interest will not cease till his remittance becomes due. ”

“ For instance, the annual expenditure of American tourists abroad, the remittances of emigrants in the United States to their relatives, the growing volume of investment made by our people in foreign countries, interest upon investments in the United States of private citizens of our debtor countries, and other items of so-called invisible exchange combine to furnish a large supply of our money to Europe with which they in turn can make payments of interest on debts or for the purchase of goods from us. ”

“ The last three items had an important bearing on the commercial relations of France. Loans from the Bank of France took the form of bank notes, paper money, which inflated the currency and tended to raise the rate of foreign exchange on other countries far above the normal par; the unsettled finances evidenced by the floating debt tended to cause violent fluctuations of the rate; a foreign debt would, if interest were paid on it, involve remittance at high rates and would require an increase of exports if no other resource were available. ”