Part 22

In buying foreign war bonds--a procedure which in war time naturally involves sentiment--it is wise for the investor to watch his step. Patriotism is all right in its place but unless you can afford to contribute money for purely emotional reasons, a cold business estimate of the situation is advisable. This applies especially to the man or woman with savings who cannot afford to take chances. He or she will find it a good rule to stick to external bonds except under exceptional conditions.

One objection to the average internal bond is that with the exception of England the native money has greatly depreciated in international value. Of course, if all these countries finally get back to their old standards of wealth, these investments will yield a very large profit. To reap this benefit, however, it will be necessary to hold the securities for a considerable period because it will take the warring countries a long time to "come back." Another fact in connection with internal bonds well worth remembering is that while belligerent countries will scrupulously respect their obligations held by a great neutral like the United States whose good will and resources will be very necessary after the close of hostilities, there is the possibility, remote though it may be, that repudiation of home issues may come in the shock of readjustment.

In a word, in purchasing a foreign war bond be sure to get a stable national name, accumulated wealth, habits of thrift, an ample taxing power, and a good conversion basis behind the security.

Amid all our war lending lurks a menace to future and necessary American financing. In flush times like these it is comparatively easy for us to spare large sums of money, because such capital is available and not missed at home. If there was the absolute certainty that all the foreign short term loans would be paid on maturity there would be no reason to show the red light.

But any man who knows anything about the European financial situation also knows that it will be extremely difficult, almost impossible, for the fighting nations to meet their obligations within the time specified. This does not mean that they will be unable to pay. It does mean, however, that the inroads of the war will have been so terrific that pressing needs will so continue to pile up that renewals must be sought. Thus our money will still be tied up.

What will happen at home? Simply this. American enterprise which will need capital for expansion may have to wait. In discussing this matter one of the best known American bankers said this to me the other day:

"If America had a benevolent despot I believe that he ought to set aside an arbitrary sum which would represent the limit that we as a nation could lend each year to foreign countries."

There is still another hardship in this outward flow of our capital. It lies in the fact that the very attractive terms of the war loans have made it very difficult for American railroads and corporations to finance their needs. They must pay more for their requirements than ever before.

Yet this war financing has done more for us than merely provide an opportunity for the profitable employment of hundreds of millions of dollars. It has brought back home about $1,500,000,000 of our securities, mostly in railroad, that were held abroad. This has not only meant a considerable cutting down in the sum that we formerly had to send to Europe in interest and dividends, but it has helped to make us more economically independent. There is still $1,780,000,000 of our securities held abroad, and if the war keeps on much longer a great portion of it is likely to come back.

There were two good reasons for this liquidation. One was that the holder of the American security in England is subject to a very high tax in addition to the normal income tax on large fortunes. Another was the necessity for the mobilisation of American securities to become part of the collateral offered by the British Government for the loans made in this country. In many instances the English owner of American securities has simply loaned them to his country as a patriotic act. In numerous other cases, however, he has sold them outright and put the proceeds into home war issues.

You have seen how our millions have joined that greater stream of European billions to meet the rising tide of war cost. How is this vast debt to be paid and what is the paying capacity of the nations involved?

In analysing the war debt and its costly hangover for posterity, you must remember that not all of it is in actual money. The nations at war have not only taxed their economic reserve through the destruction of productive capacity in the loss of men and material--as I have already pointed out--but have made a costly and well-nigh permanent drain upon what might be called their nervous systems.

Look for a moment at the American Civil War whose cost was a mere flea bite as compared with the stupendous price of the European Conflagration. At the end of that war only half of its reckoning was represented in the country's bonded debt. After fifty years we are still paying in some way for the other and larger outlay, the invisible strain on the country.

Strange as it may seem in the light of the present frightful ravage in Europe, no country has ever been completely ravaged by war. When I returned from Europe more than a year ago, I was convinced that economic exhaustion would be the determining factor: that victory would perch on the side of the biggest bank roll. After a second trip to the warring lands I am convinced that I was wrong in my first impression. Observation again in England and France leads me to believe that man power--beef, not gold--will win. The extents to which financial credit can be extended in the countries at war seem to be almost without limit.

This leads to the final but all essential detail: How will the European nations pay?

Since the Allies practically have a monopoly on the American money sent abroad for war purposes, let us briefly look at the equity behind the Thing known as National Honour. Its first and foremost bulwark is Wealth. Take England first. The wealth of the United Kingdom is $90,000,000,000: the annual income of the people $12,000,000,000. To this you can add the wealth, resource and income of all her far-flung colonies and the immense amount of money due to her from foreign countries. Unlike France and save for a few Zeppelin raids, the Empire is absolutely free from the ravage of war. The principal assault has been upon her income, for her great Principal is still intact.

In examining the methods adopted by England and France to meet the cost of the war, you find a sharp difference of procedure which is characteristic of the countries. Following the British tradition, England is trying to make the war "pay its way" with taxation. Out of a total expenditure of $9,500,000,000 for the current year, no less than $2,500,000,000 was raised by taxation. The rest was obtained by loans at home and abroad.

The income tax alone will serve to show the enormous increase in tribute. From .04 per cent on small incomes to 13 per cent on large ones before the war it has risen to 1 per cent on small incomes to over 411/2 per cent on big ones. Again, 60 per cent of all excess profits earned since the war are surrendered to the State.

I can give no better evidence of the result of this taxation than to repeat what Reginald McKenna, Chancellor of the British Exchequer, said to me in London last August:

"The English position is so sound," he declared, "that if the war ended at the end of the current financial year, that is, on March the 31st, 1917, our present scale of taxation would provide not only for the whole of our peace expenditures and the interest on the entire National Debt but also for a sinking fund calculated to redeem that debt in less than forty years. There would still remain a surplus sufficient to allow me to wipe out the excess profit tax and to reduce other taxes considerably."

When I asked him to make this more specific, he continued:

"The total revenue for the current year is $2,545,000,000. Our last Peace Budget was $1,000,000,000. Assuming that the war would end by next March 1st, you must add another $590,000,000 for interest and sinking fund on the war debt together with a further $100,000,000 for pensions which would make the total yearly expenditure for the first year of peace $1,690,000,000. Deducting this from the existing taxation you get a surplus of $855,000,000. Thus after withdrawing the $430,000,000 received from the excess profits tax there still remains a margin of $425,000,000."

Indeed, to analyze British war finance to-day is to find something besides debits and credits and balances. It is a great moral force that does not reckon in terms of pounds or pence. There is no thought of indemnity to soothe the scars of waste: no dream of conquest to atone for friendly land despoiled.

Money grubbing has gone, if only for the moment, along with the other baser things that have evaporated in the giant melting pot of the war. In England to-day there are only two things, Work and Fight. They are giving the nation an economic rebirth: a new idea of the dignity of toil: they have begot a spirit of denial that is rearing an impregnable rampart of resource.

Even more marvellous is the financial devotion of the French who present a spectacle of unselfish sacrifice that merely to touch, as alien, is to have a thrilling and unforgettable experience.

When you look into the French method of paying for the war you get the really picturesque and human interest details. In place of taxation you find that the war is being paid, in the main, out of the savings of the people. Instead of mortgaging the future, the Gaul is utilising his thrifty past.

Never in all history is there a more impressive or inspiring demonstration of the value of thrift as a national asset. It has reared the bulwark that will enable France to withstand whatever economic attack the war will make.

The difference between the English and French system of war financing is psychological as well as material. The average Frenchman has a great deal of the peasant in him. He is willing to give his life and his honour to the nation but he absolutely draws the line at paying taxes. This is why the French have made it a war of loans.