THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES ,'5 IS :^1TCE. De^^5!55j^ The Rake's Progress in Finance The Rake's Progress in Finance BY J. W. CROSS AUTHOR OF 'GEORGE ELIOT's LIFE ' «■ o -» * c ■>o i O * V •> v WILLIAM BLACKWOOD AND SONS EDINBURGH AND LONDON MCMV A/i Rights reserved • t * i * ■ * , • < 4 >• • « • • • € , - »•• «••••• ■ * PREFACE. Eight years ago it appeared to me that we in Eng-land had abandoned the straiorht iZ way in Finance. Our recorded Exports >- for 1898, added to our estimated "invisible ac Exports," failed to pay for our Imports. ■^ During the following seven years the two sides of the account (Imports and Ex- ports), on average, balanced and no more. 5 The exchanges of the world have con- 5 - Z sequently been constantly and persistently against London ever since 1898. No country can go on truly prospering ^ on these terms ; and we ought to have o appointed a Commission of experts in ^ 1898 to examine our position, carefully and critically, from top to bottom. Instead of this inquest, the whole problem (which vi Preface, is a very complicated one) has been thrown into the arena of the party scuffle, with the result that the issue has been confused, and an immense amount of valuable time and energy has been wasted in the pur- suit of a herring drawn across the scent. I have been a Liberal all my life, but I feel bound to admit that in my humble judgment Mr Arthur Balfour has got more nearly hold of the right end of the stick than any one else. There are elements in our tariff which may well be revised. No doubt, for the moment, the stars in their courses are fighting against Mr Balfour, and the usual swing of the pendulum will bring another party into power. These changes from the white to the black factions appear to be supremely important to the professional politicians of the day, but in the long-run they are of little account — adherent rather than in- herent to the main issue — because the real trouble in this country, it seems to me, is not essentially a fiscal trouble. Preface. vii Happily there are still a considerable number of thinking people who concern themselves much more about the National than about the Party point of view. The simple truth is, that we are too ex- travagant, and that too much of our vital energy is devoted to amusements, in one form or another, and too little is now devoted to minding the shop. It is easy to speak, to a brief, of the former view of life as the more reasonable and as cer- tainly the more enjoyable one. The chief argument against it is, that no country can hold its own in the struggle for commercial existence on these terms. Naturally, the primary effect of Imperial and Municipal extravagance is to exhibit a false-seeming of prosperity. If ^300,000,000 is spent each year by the Governments, the money goes through the people's pockets, and if a very considerable portion of that ex- penditure is spent unproductively it takes many years, in a very rich country, before our sins find us out. But if the mills of viii Preface. the gods grind slow they grind exceeding fine, and ultimately all deeds bring their inevitable logical consequences. With this view in mind, I hope that it may be of some interest to the few people who now- adays concern themselves with financial problems, seriously and without party pre- judice to look back through the eyes of a casual observer, who has no pretension to scientific economical or statistical equipment it is true, but who has also no party or any other axe to grind. These little papers, contributed origin- ally to * The Nineteenth Century Review,' only pretend to be the fleeting impressions of one deeply interested in the subject, and with some acquaintance, in years gone by, of practical business both in the United States and in this country. Read in sequence they suggest, and to a certain extent embody, the development of an idea, and they may perhaps prove to be useful in quickening the apprehen- sion of other minds, more capable of deal- Preface. ix ing with the subject, as to the true relation which exists — or ought to exist — between a country's Imports and its Exports. The older economists — and one may frankly add the modern economists — do not seem adequately to have grasped the fact that Imports can be paid for by securities (by consols and exchequer bills, by rail- road stocks and shipping shares, for ex- ample) just as well, for the time being, as they can be paid for by commodities or by gold. When we thoroughly realise this fact, we may perhaps be permitted to doubt the proposition that, in all cases, the magnitude of a given country's Imports is necessarily an index of that country's prosperity. We may possibly have occa- sion before long to revise the dictum — " Always take care that your Imports in- crease, and let the Exports take care of themselves." Such aphorisms are scarcely ever more than half-truths, and they may lead to irreparable mischief when such a grave question as the delimitation of X Preface. Capital and Income is concerned. The fact is, that mere figures may mislead quite as much as they may enlighten. They re- quire careful expert analysis before we can draw any useful deductions from them. In 'Review' articles it is, of course, im- possible to touch more than the fringe of complicated problems — and no problems are more complicated than those whose fringes I have attempted to touch. My object in reprinting the papers (with all their imperfections on their poor little heads) is, if possible, to stimulate a reso- lute expert inquiry into a vital issue — and I know of no issue more vital for our country. I am indebted to my friend the Editor of 'The Nineteenth Century Review and After' for his courtesy in permitting the republication of the articles. J. W. C. Queen Anne's Mansions, \Zth October 1905. CONTENTS. BRITISH TRADE IN 1 898 . THE NEEDS OF SOUTH AFRICA THE FINANCIAL FUTURE THE BANE OF BORROWING . POOR LANCASHIRE THE PINNACLE OF PROSPERITY FINANCE AND WAR . 22 58 84 107 129 THE RAKE'S PROGRESS IN FINANCE. BRITISH TRADE IN 189S. {The Nineteenth Century Review — May 1899.) A WARNING NOTE. One reason why British external trade for the year 1898 is worth considering apart, instead of in a group of averages, is that with the exception of 1877 it is the only year in the long history of our commerce of which it can be said that our visible exports plus the latest estimated "invisible exports " have failed to pay for our im- ports. In 1898 the excess of our imports A 2 The Rakes Progress in Finance. over exports was ;^ 183,000,000,^ and Sir Robert Giffen estimated the other day the " invisible exports " at ;^ 1 78,000,000. True it is that this deficiency of ^5,000,000 is a very small matter, apparently, in dealing with totals of such magnitude ; but the noteworthy point is that there is a de- ficiency instead of the estimated yearly surplus of ^30,000,000 to ;^7o,ooo,ooo to which we have been accustomed for very many years past. Therefore 1898, like 1877, must be admitted to be an abnormal year; and most of us remember that 1877 was followed by the calamitous year 1878 — absit 07nen ! If we were to content ourselves with simply looking back over averages of three years we should never realise that there had ever been any calamitous year in our commerce since 1854; yet most of us who were in active business forty years ago have very acute, not to say painful, recol- ' Total imports, ^529,003,457 ; total exports, ^346,223,692. British Trade in \%^%. 3 lections of 1857, 1866, 1873, 1878, and 1890, not to mention other years which were not distinctly profitable. Many ex- cellent statisticians, who have never been connected with business, seem to forget that there are losses as well as profits both in trade, In agriculture, and in investments. And I do not remember that any statis- tician has ever warned us of trouble ahead or has noticed the signs that prelude trouble. But apart from any set - back in store for us In 1899 or 1900, it may be said that 1898 Is the only year In which we happen to have arrived almost exactly at a balance of our national ledger, on the as- sumption that the hypothetical data are accurate — that is to say, that there is really ^^178, 000,000 due to us for the "invisible exports." I admit that this is a very large assumption, and I confess that I have only a limited belief myself in the accuracy of what are, at the best, mere 4 The Rakes Progress in Finance. guesses as to the amount of interest, com- missions, and freights due from the outside world to this country. It is a doubtful method of statistics to formulate such guesses, and it is a thoroughly foolish attitude of mind for a practical and busi- ness-like people to accept them blindfold as if they were revelations from on high. Let us look for a moment at the way the business is working under our eyes. If the hypothetical data were indeed correct we ought not now to be subject to any call for p;old or securities in order to square our accounts with other nations, be- cause, on the hypothesis, they have already been squared by our visible exports plus our "invisible exports." How under these circumstances can there be any apprehen- sion of withdrawals of gold by the United States, or any belief that they have been taking home securities in very large amounts ? Why should we be obliged to part with either securities or gold if our British Trade in 1898. 5' imports have all been, and are all being, paid out of current revenue, so to speak ? Does any one who has been watching the conditions of the London money market for the past year really believe that we have not parted on balance largely with foreign securities, and to some small ex- tent with gold from the Bank of England ? ' The Bankers' Magazine ' is certainly not likely to be an alarmist periodical, nor is the Chairman of the Union Bank of London the sort of person who would, except under a sense of grave responsi- bility, refer to the smallness of our gold reserves compared with our tremendously increasing gold liabilities in the shape of joint-stock bank and Post Office Savings Bank deposits. The Chancellor of the Exchequer, too, only the other day him- self sfave us a word of warnino- as to the Savings Banks deposits, and the Duke of Devonshire recently remarked on the state of trade in this country, " I do say there The Rake s Progress in Finance. ^&> is not necessarily cause for alarm, but there may be cause for examination, for inquiry, and perhaps for precaution." A statesman in the Duke's position would never have spoken these wise words in that tone if he really believed that 1898 was the most prosperous year that England ever had ; why should he talk of precautio7i if it were so ? The mariner who is sailing his ship in suspected dangerous places is occupied — or ought to be occupied — with his chart and the lights and the soundings. He is not in the least likely to be concerned or interested in the meeting of a miscella- neous collection of worthy, and probably averagely intelligent, ladies and gentlemen at the Statistical Society, who assure him, in a sort of shrieking sisterhood chorus, that the average of shipwrecks at the par- ticular spot he is in is only so-and-so per annum, and that everything in regard to trade is for the best in the best of all British Trade in iSgS. 7 possible worlds. Any one who cares to refer to the Transactions of the Society and to the wrangle in the debate on the "Methods of Statistics" in 1882 can see what blunders can be made in easy figures. But fortunately these blunders are really of no account to practical men of business, because as a rule business men take no notice of the statisticians, so that nobody is a penny the better or a penny the worse for them. Academic debates are carefully eschewed. A man of business tries to watch the tendencies of affairs and to form "an in- telligent appreciation of events before they occur," and he uses figures only to confirm or to check his general conclusions. Prob- ably, as an amateur, he makes a mess of his figures, but he never relies on them exclusively, and apparently the statisticians make an equal mess. All the averages in the world will not prevent calamity if, re- turning to our metaphor, our ship is on the wrong course. 8 The Rakes Progress in Finance. Where, then, are our true chart, our lights, and our soundings ? They are to be found, for instance, last year, in our trade balances with other countries, es- pecially with the United States, and to a smaller degree with France. The trade figures of the United States are officially made up to the 30th of June, and if their exports and imports continue for the next three months on about the same scale as 1897-98 we shall find on the 30th of June 1899 that for the three years ending at that date their exports of merchandise will have exceeded their imports of mer- chandise by about ^300,000,000, or an average excess of ^100,000,000 each year, a result which has never before been arrived at by any other country in the world. It is phenomenal, and therefore it demands investigation and explanation, and we get no help to a solution if the doctor who has undertaken to diagnose the case care- lessly dismisses such figures as being "ab- British Trade 2*;^ 1898. 9 normal." Of course they are abnormal, and that is the very reason why they are interesting and instructive to all inquiring minds not bemused with averages. Unfortunately, besides the lack of a large mercantile and financial training, a good many of the pundits who have been especially great in explaining what they are pleased to call " invisible exports " (which in plain English are very well rec- ognised claims by England for interest, freights, &c.) belong to the played out school of Cobdenites. They are in sub- jection to a dogma which they call " un- compromising free trade." It is not real free trade, but a false theory of their own on the subject, a figment of their imagin- ation. They are far more Cobdenite than Cobden, and speak in sorrow not unmixed with anger of John Stuart Mill's common- sense exception in favour of protection when applied to the nascent industries of new countries. Therefore when these TO The Rakes Progress in Finance. gentlemen, or ladies, see the United States with a highly protective policy forging ahead of free -trade England, contrary to all their anticipations and theories, not only In neutral markets, but, to a certain extent, in our own home market, they resort to any subterfuge in argument rather than frankly admit that they have been egregi- ously wrong all through In their prog- nostics. These ultra - free traders have done this country incalculable, and I fear irreparable, harm by their mischievous teaching, for with undue insistence they have induced our manufacturers to believe that success in competitive business de- pends chiefly on the absence of Import duties, whereas such success really depends on character and education. Hence our present slackness compared with the Ameri- cans and the Germans. We may take Professor Thorold Rogers as a warning and example of the most ultra- British Trade in \Z<^Z. ii dogmatic of these would-be teachers, and the type abounds still. Their note is an excessive aofs^ressiveness and an inordinate self-sufficiency. They get red in the face with indignation against any one who ventures to assert that other countries, under protective policies, may possibly succeed in overtaking free-trade England, and they bluster out their antiquated dogma as if it were a divinely inspired gospel. Let us take, for instance, the following little extract from an essay of Thorold Rogers published in 1873, a little more than twenty -five years ago, and say if it would be possible to pack more misleading, mischievous nonsense into an equal number of lines. Cheap bread means dear meat, and the re- verse is equally an illustration of one economical law. The horrors which Protectionists predicted about the abandonment of land then cultivated, and the consequent diminution of rent, have 1 2 The Rakes Progress in Finance. been proved to be fallacies as gross as witch- craft and astrology were. The rent of agri- cultural land has steadily risen, and for the reason that the price of those secondary neces- saries to which allusion has been made has grown steadily. . . . The producer of the protected article, in his eagerness to grasp the home market, is debarred, or debars himself as the case may be, from entering into competition in the foreign market. At the present moment, to take an example, the United States could take the first place in the coal and iron industry of the world. As it is they have no place at all in those industries.^ Every so-called law and every prophecy here laid down has been completely and absolutely, not to say ludicrously, falsified by events. Yet there are men to-day who, in face of all the evidence under our noses, go on still preaching this discredited doctrine as if it were Holy Writ. These out-Heroders of Herod have become a public nuisance, and they ought 1 Thorold Rogers's essay on " Cobden and Modern Political Opinion," 1873. British Trade in 1898. 13 now to be restrained from spreading their false doctrines ; as our French friends say, they are trh vieux jeu. Fortunately, nowadays the congregation of uncompro- mising believers is rapidly dissolving like a snow-bank in the Alps with the May sun on it, chiefly discernible now as a rill of very muddy water. Yet the English newspaper press, from old habit of the mind, is afraid of putting into words what every one is saying and thinking of these extremists. Professor Thorold Rogers m.ight have done really useful work if he had taught the Oxford youth in 1873 that the exten- sion of railroads in America was bound as a logical consequence to diminish enor- mously the existing rents of agricultural land in England, owing to the ever-growing competition of virgin soils paying only a nominal rent ; and a man of any ordinary common - sense would have foreseen the 14 The Rakes Progress in Fiitance. result of such conditions, and would have frankly acknowledged that the county members, at the time of the abolition of the corn laws, were to a great extent justified in their contention that the state of agriculture, as it then existed in Eng- land, was likely to come " rattling about their heads," so far as their property in land was concerned. But that is an old story. What we have now to consider is the effect of the quickly growing export from the United States of manufactured com- modities as well as raw products. In truth there is not much to be done by us in England except, as Professor Marshall says, to put " more mind " into our exports ; we have now got to re- concile ourselves to the fact, however unpalatable, that we have ceased to hold the record either as the greatest manu- facturing country in the world, or as British Trade in 1898. 15 the greatest exporter of native products in the world, or as the richest country in the world. The United States have already taken the lead, both in the out- put of their manufactures, in the value of their exports of native products, and the amount of their wealth. The moral is that we Great Britons must not be too extravagant in our national expenditure, flinging about millions of pounds as if they were hundreds of thou- sands, and that we must adapt our- selves to the new conditions of business. A good deal of attention has lately been called to our shortcomings in these directions, but I am not aware that any- body has noticed the curious fact that in the City of London to-day there is not a sinole Enp;lish firm amongr what may be called the "haute finance." If a large financial operation has to be con- cluded we first go to Messrs Rothschild, 1 6 The Rakes Progress in Finance. then to Messrs Raphael, both German Jews ; then to Messrs J. S. Morgan & Co., an American house ; after that, probably to Messrs Speyer, or Messrs Seligmann, or Messrs Stern, also German Jews; then perhaps to Messrs Hambro, a Danish firm ; then to houses like Messrs Fruhling & Goschen, Messrs Huth, and so on, all foreign houses and mostly Jews ; but there is no strictly English name among them since the unlimited Barings ceased to exist in 1890. The fact is that the strength of the English character goes out much more towards colonising, the ruling of subject peoples, the sailing of ships, and the captaining of industries than to commercial or financial business. During the time that we had more or less a monopoly of the commerce of the world we rubbed along well enough and accumulated great British Trade in 1898. 17 wealth, on which to a large extent we are now living. We are constantly told that if we doubt our present prosperity in trade we should look to the income-tax returns. This is always supposed to be a final, triumphant, and unanswerable argument. But almost the biggest rise that ever took place in Schedule D was between the years 1889 and 1891. This included 1890. Is it contended that that was a profitable year? Moreover, it should be remembered that since the mania for turning old private businesses into limited companies there has been very strong reason for all firms, intending to make such joint-stock arrange- ments, showing for a period of three years before the company is brought out the ■largest amount of profits possible, and, when these are declared in the pro- spectuses, the Income Tax Commissioners will have an eye on the taxes that have been paid. It will be interesting to look at B 1 8 The Rakes Proper ess in Finance. <*> the profits — or losses — of many of these in- dustrial companies two or three years hence. Similarly with the extraordinary activity last year in the shipbuilding business, it remains to be seen how much of it is going to be really profitable. The joint- stock banks are perpetually opening fresh branches and drawing through them every pound of the savings of the people ; these deposits are used in aiding the shipbuilders, the housebuilders, and every other form of industry, and so long as money can be easily borrowed, profits may appear — whether nominal or real — wages will re- main high, and employment will be con- tinuous. Any one who wishes to realise vividly how apparent prosperity may be produced by borrowing has only to con- sider the case of our Australian colonies up to the year 1890, and then to follow what happened from 1890 to 1897. The Chairman of the Union Bank of British Trade in iSgS. 19 London mentioned at his last meeting that '•for some time past America had been financing Europe/' and with this additional borrowed money, and the money that France has left in England, there has been no difficulty so far in paying high wages in every department of trade. But signs are not wanting that the United States will very soon, and probably very suddenly, astonish us with a great demand for money. In the first two months of this year, according to ' The New York Financial Chronicle,' there had been defin- itely formed new industrial combinations having an authorised capital of ^200,000,000 of stock, and this in addition to another ;^20o,ooo,ooo reported for the calendar year 1898; and not less than 5,000 miles of new railroad will be built during this year, at a cost of ;^30,ooo,ooo. Totals of such magnitude carry their own comment, and it is unnecessary to say anything to 20 The Rakes Progress in Finance. add to their force and their significance. Germany at the same time has been undertaking stupendous financial obliga- tions. Then there are France, Russia, Japan, India, China, all at work convert- ing floating capital into fixed capital. In fact all round we see a very great strain on credit for trading purposes, and in such times it behoves us to look round carefully and see where we are oroingr. With an enormously increased Government expendi- ture in England and an enormously in- creased municipal expenditure, with the prospect of guaranteeing "wild cat" rail- road schemes from Cairo to the Cape, we shall soon be bleeding at every pore, and when the call is made on us we may find that the Bank of France is neither willing nor able again to come to the assistance of the Bank of England as in 1890. I do not wish to labour the point or to go further into details. A word is sufficient British Trade in 1898. 21 to wise men. Let me conclude by repeat- ing the Duke of Devonshire's warning, " There may be cause for examination, for inquiry, and perhaps for precaution " ; and let us bear seriously in mind the refrain of Rudyard Kipling's ' Recessional,' " Lest we forget — lest we forget." 22 THE NEEDS OF SOUTH AFRICA. CAPITAL AND POPULATION. {Nineteenth Century and After, April igo2.) At a moment when we are supposed to be entering on a great South African boom, which is not to be confined merely to raising the prices of gold-mining shares already in existence, but is to extend to the exploitation of a vast continent, it may not be amiss to take some stock of our resources, for we shall immediately be called upon for capital and population on a very large scale. As regards the export of capital to a raw country, we had an experience not long ago, on a comparatively small scale, in the Argentine previous to 1890, and The Needs of South Africa. 23 we remember the immediate consequences. The Bank of England, at any rate, is never Hkely to forget them; and in 1890 we had no war expenditure and a compara- tively small amount of Continental money at call in the London market. Also, since 1890 our whole scale of living has grown prodigiously — eating, drinking, dress and amusement. We have always been an extravagant people, but in the last ten years we have become pro- fusely extravagant, and, what with our Government's growing ordinary expendi- ture (exclusive of the special South African war expenditure), our municipal expendi- ture, our constant necessary loans to India and our various colonies, and the develop- ment of our home industries — railways, shipbuilding, house-building, electrical ap- pliances and the like — our annual savings must already be pretty well used up. The trade figures for the last four years certainly show that we have no "excess 24 The Rakes Progress in Finance. of exports " ; and therefore, as we have not a superabundance of our own capital nowadays seeking investment abroad, we may either go on borrowing from the Continent " on call," or we may go on selling our American securities. These latter are a very liquid asset now, com- pared with 1893-96, but they are always likely to be largely held in this country, even at high prices, because they provide a war-chest better than any other securities. If, for instance, we can imagine England engaged in war with any European Power, or combination of Powers, the only toler- ably free market would be in "Americans," for we could export them in order to pay for our food and our cotton. If France were engaged in such a war combination, there would be large with- drawals of Continental money from London, and no free market outside of England for South African and other colonial secur- ities — in fact they would be absolutely The Needs of Sotith Africa. 25 unsaleable, for there would be many sellers and no buyers. Therefore, although our sales of "Ameri- cans" may continue to some extent, in order to provide capital for South Africa, there must be a limit to the contributions from that quarter, conditioned by this de- sire of Englishmen to hold part of their means in the United States, as being out- side the area of European complications. But it may be said that although we have sold these securities so largely in the past few years, we still hold in England enough of them to fulfil the conditions of a war-chest, and, at the same time, have a large balance over, that may be realised at the existing temptingly high prices. It may be so, but then we shall be brought face to face with another difficulty in this displacement of capital. Supposing that English sales of Ameri- can securities are greater than the excess of exports of merchandise from the United 26 The Rakes Progress in Finance. States, then the proceeds of the sales must come back in gold. Now, it is quite true that the stock of gold in the United States has increased very greatly in the last six years — from some 600,000,000 dollars in 1896 to some 1,000,000,000 dollars to-day; and in this respect their position is now very strong. But if the level of all prices, and particularly the prices of securities, remains higher on the other side of the Atlantic than on this side, we may see a formidable drain of gold, and this gold would find its way, through Paris, to Russia, Spain, Austria, and the other countries of the world that want it for currency purposes. London is deeply in debt to Paris, and would liquidate that debt by these remittances from America on account of securities returned. We must remember, however, that the stock of gold in any country at a given moment must bear some relation not only to the claims on that country from abroad, The Needs of South Africa. 2 7 but also to the mass of credit superimposed on the gold basis at home. The United States now produce some ;^ 16,000,000 of gold per annum, and therefore they may ship that amount to Europe, and may still hold as much gold at the end of the year as they held at the beginning of the year. But if the stream of their returned securi- ties continues, and if they are going to import iron on a considerable scale from England, and steel from Germany, instead of exportmg these articles to Europe, it may require a good deal more than ;^ 1 6,000,000 per annum of gold to pay for these imports. The real fact is that, if we take into account securities as well as commodities, the United States are now exhibiting an excess of imports, as is evidenced by their rates of exchange on Europe, which have been hovering around the gold-shipping point right through the height of the present cotton- and grain- shipping season. This unusual financial 28 The Rakes Progress in Finance «b phenomenon ought to be considered in connection with the excessive increase in the creation of Industrial companies in the United States, which has been carried on for the last four years on a scale of capitalisation unparalleled in the history of the world. Then, if we look at their railroad securi- ties, we shall find that the average quota- tion of a total of stocks amounting to something like ;^ 1,000,000,000 is now in the neighbourhood of par, as compared with an average quotation of about 40 during the lowest period in 1896 and about 65 in 1898; and these differences in values mount up to very big figures indeed — ^400,000,000 or ^500,000,000. It may be doubted whether we In England have ever quite appreciated the breadth of the American boom since 1 898 ; and to sustain that boom at home, and at the same time to buy back large masses of securities from abroad, may impose a The Needs of South Africa. 29 very great strain on the delicate machinery of the internal circulation. There is, per- haps, no better way of conceiving what that strain may be than to look at the comparative bank clearings in New York. They amounted for the year 1901 to ;^ 1 6,000,000,000, against ^6,000,000,000 for the year 1896. No such sudden and violent change has ever before occurred anywhere in the records of finance, and a question may arise whether it is all quite sound. As a standard of compari- son, we may call to mind that it has taken us a quarter of a century merely to double our bankers' clearings in London. They were ;/^4, 960,000,000 in 1876, and ;^9, 600, 000, 000 in 1 90 1. And we have an idea that the British Empire has been going ahead pretty fast In these last five- and-twenty years, and that London is the financial centre and clearing-house of the world. Of course, the New York increase can 30 The Rakes P^'Ogress in Finance, be accounted for easily enough, considering that the whole mass of railroad stocks is worth nearly two and a half times more than in 1896, together with the immensely greater activity in dealing in them ; and considering, too, the rapid development of industrial companies dealt in on the New York Stock Exchange, and the astounding activity of general trade. The difficult factor to determine is, To what extent these increases in values and in quantities may be attributable to inflation of the currency. Anyhow, it is an ex- pansion which must be borne in mind if we look forward to a considerable drain of gold, because the only process whereby a country that is over-importing can check its imports, whether of securities or com- modities, is by lowering prices ; and, with the great mass of undigested securities now being carried by finance houses and trust companies in Wall Street, any sudden and violent reduction of values might have The Needs of South Africa. 31 extremely unpleasant consequences ; but it would be the only method of counter- acting a threatening drain of gold. And unpleasant consequences in Wall Street would certainly react upon Lombard Street. Therefore, when we talk of getting all the capital we shall want for the exploita- tion of South Africa from sales of our American securities, a good many things may have to be considered before the promise is translated into performance. It is a question really of prices. For instance, it may be a good thing to sell New York Central Railroad stock to-day at 170, and it may be a bad thing to sell it at 150; all will depend on the attractions of alternative investments in South Africa or elsewhere. For, whatever may be the defects in the American currency and banking systems (and they are many), portending, perhaps, imminent trouble, the great fact remains that 80,000,000 enthu- siastically industrious people in an extra- 32 The Rakes Progress in Finance. ordinarily rich country are bound to become solidly richer as the years pass on, not- withstanding the nasty jars they may re- ceive from time to time by pressing the pace and doing in five years' time what had better be done in ten years' time, and notwithstanding the pranks they play with their currency. Everything is bound to come right there in the end, because the real wealth is always growing at a pace that has never been approached elsewhere, owing to the increased production of corn, cotton, oil, coal, iron, copper, lead, silver, gold, &c., whilst the Americans, by their methods and mechanical appliances, can compete on favourable terms with any other country in almost every line of man- ufacture, so that the best of their securities are always likely to be the best in the world, and it will require a very strong inducement indeed to make us part with them permanently. Any sensible reduction in their prices will immediately check The Needs of South Africa. '^'^ English sales, and in that case we shall have to turn our attention to some other quarter for fresh capital. Practically, there are no other securities that we can sell on a large scale. It would be interesting to see the faces of our ** great sister nations" if we attempted to send back Australian bonds to Australia, or Canadian bonds to Canada for sale. The very suggestion brings up a consideration which is sure to arise sooner or later, and for which we must be prepared — namely, a profound and natural jealousy on the part of these two great sister nations if the third great sister nation is to take all the benefit in future of England's resources in capital and population. Why should South Africa be the spoilt child of the Empire, whilst Australia and Canada are both wanting the right sort of English- men — as well as English money — for their own development ? And these two sister nations want the men and the money on c 34 The Rakes Progress in Finance. a large scale. They both talk of having room for future populations of 100,000,000 apiece, and they are always wanting to place fresh loans on the London market. The truth is that our English capital is already very much locked up in these securities, in the sense that there is no market for them except in London ; so that to find fresh capital for South Africa we may be driven to the expedient of increasing our present debt to the Continent. But that is a very risky method of financing, especi- ally in view of the possibility of European war, in which England might be involved. As it is, our debt to the Continent is far too large already. It has been estimated at from ^50,000,000 up, to ;^8o,ooo,ooo, and is probably to-day about ;^6o,ooo,ooo, held by foreign banks and financial institu- tions in sterling bills, or money at call, or in "Contangoes" on the Stock Exchange, and any increase in this amount would be extremely undesirable. The Needs of South Africa. 35 No doubt it may be argued, and perhaps fairly argued, that the more any country borrows for reproductive purposes, the richer that country will become, because, the annual production of gold being now more than double what it was ten years ago, with the prospect of being again very greatly increased in the coming ten years when the Rand is at full work, all debt will be much more easily paid ten years hence than to-day. It is quite true that the world has produced nearly ^500,000,000 of gold since 1890; but it does not follow that a country owing a large amount of money "at call," any more than an indi- vidual carrying an undue amount of stocks on borrowed money, can be safe from the risk of inopportune demands for repayment. The depreciation of gold may be a great fact of the future, but demands for the repayment of loans may be instant. If the gold has grown in quantity, so have the liabilities founded on the gold grown 36 The Rakes Progress in Finance. a in volume, and mankind still continues to be subject to sudden gusts of feeling, which are not always governed by rati- onal or logical considerations : sometimes it is a feeling of alarm, often enough well grounded, as between creditor and debtor, when the latter shows signs of fatuous folly ; sometimes it is a feeling of ani- mosity. War may be waged through the medium of the money market. Therefore it is not a safe or desirable position, either for a country or for an individual, to owe too much payable on demand to possibly hostile creditors. The future production of gold, too, will have a double-edged action on us in Eng- land, for while on the one hand it may enable us to pay off the fifty million pounds, or eighty million pounds, or whatever it may be, now or in the future, that we owe on "current account" to the Continent, on the other hand it will enable our foreign debtors, who owe us many hundred million The Needs of So2dh Africa. 37 pounds on "capital account," to pay us off in this same coin, which may have lost some of its purchasing power. And this may be a very valid reason for not holding too large a proportion of our means in any form of securities bearing a fixed rate of interest. The " rentier " is the person who must ultimately suffer from excessive pro- duction of gold, and as Great Britain pro- duces a plentiful crop of "rentiers," the enormous increase in the development of gold mining will not by any means be an unmixed benefit to this country. The miners' gain may be the rentiers' loss, and this consideration must have its bearing on the financial outlook. Meantime a great deal must depend on South Africa ; and South Africa must de- pend, both financially and politically, on its future population. ''Put up the bars" against the foreigners, suggests Mr Green- wood in his " Violent Proposal " in the February number of this Review ; and, as 38 The Rakes Progress m Finance. he says, the "proposal may not appear so very violent after all." But is it practic- able ? We must remember that before the war it was estimated by the best authorities that the combined amount of French and German money invested in Rand mining- shares was greater than the amount of English money. To-day, perhaps, it is half Continental and half English ; and we may depend upon it that this foreign capital will make its voice heard — and it is very vocal through its command of the Press. All the capitalists of the Rand will be in favour of unlimited immigration, be- cause it will assist the boom. In fact we cannot really have a broad boom without the population. Therefore we must look where the population is most likely to come from. It is constantly assumed that only the Briton and the Boer will have to be con- sidered in the ultimate settlement of the country ; but any one who looks at the The Needs of South Africa. 39 world's emigration figures knows that this may be a delusion, and a dangerous delu- sion. As a matter of fact, the German- speaking and Slav peoples, the Italians, and the Scandinavian nations together have formed by far the greatest stream of emi- gration from Europe for the last ten years. The whole bulk of the German and Scan- dinavian stream flows at present to the United States, whilst the Italian stream is divided between the United States, Brazil, and the Argentine. But all these streams can easily be turned to any country where the attraction is supposed to be the greatest. If that country is South Africa, to South Africa the streams will flow ; and when equal political rights are granted to "all white men from the Zambesi to the Cape," we may find in the ballot-boxes a power mightier than the sword ; with the result that all the efforts and sacrifices of the war may be nullified by voting-papers. This would indeed be a cruel irony of 40 The Rakes Progress in Finance, fate, and it has to be faced by looking at the facts, and not by indulging in vain imao^ininors. We cannot even reckon on the emigra- tion from these islands as being: altop'ether friendly, because more than one-fourth of the total is Irish — a proportion less than half what it used to be some forty years ago, but still a large hostile element. If we deduct the Irish we shall find, during the last ten years, that for every English or Scottish emigrant over-seas there were three emigrants from the mixed nations above mentioned — the German-speaking and Scandinavian races, the Italians and the Irishmen — and the majority of these may be counted on to prefer a South African Republic to the British Empire ; and, broadly speaking, they are all pro- Boers. This is a consideration which is certain to have a profound effect on British in- vestors, for they will naturally ask them- The Needs of South Africa. 41 selves, Who is to be the ultimate owner of South Africa ? Reasoning by analogy, they will say Canada belongs to the Can- adians — they donate their lands to the Canadian Pacific or other railroads — and mining royalties belong to the Dominion Government, without any reference to Downing Street ; and in the same way Australia belongs to the Australians. Prac- tically both countries can do what they choose to do with themselves. Is South Africa to belong to the dwellers in South Africa, on the same terms, or is it to be held as India is held? Where will lie the rioht of " eminent domain " ? These are questions to which investors in South Africa will demand an answer. Both polit- ical parties in England are more or less pledged to lavish expenditure of English public money in repairing the devastations of the war, and we hear also of great irrigation schemes — for whose ultimate benefit ? 42 The Rakes Progress in Finance. It may be said that these are idle fears — that we have never seen any great irrup- tion of foreigners into our other great col- onies. True enoucrh. Nor have we ever really seen any great irruption of Britons. Up to this time the mighty stream both of Continental and of British emigration has flowed not to British colonies, but steadily and always increasingly to the United States. Our theory in England is that we go on painting the map red chiefly in order to have dumping-grounds for our growing population. The fact is that we have not really a quickly growing English population ; and in proportion as we in- crease our over-sea territories, in the same proportion the emigration to them of our people falls off. For instance, in the eight years 1853-60 four times as many British and Irish emicrrants went to Australasia as in the eight years 1893- 1900. And if we deduct from the emigration to Australasia the immigration back to this country from The Needs of South Africa. 43 Australasia, we get the almost ridiculous total of 38,000 in the ten years 1891-1900, or an average of 3800 a-year, which is, indeed, a very paltry contribution to our sister nation ; and in the same way our contribution to Canada has averaged only 9000 a-year, whilst for the same ten years (1891-1900) our annual average contribu- tion to the United States has been 52,000 a-year. The result is that for every Briton who has emio^rated to the two "sister o nations," four Britons have emigrated to the United States, and the moral is that the average emigfrant is four times more greatly influenced by his hopes of material benefit to himself than by the sentiment of belonging to the British Empire. All this may be changed in the future by the persuasive influence of Mr Cham- berlain and the imaginative appeals of Mr Rhodes or Lord Milner. Possibly. " Among all forms of mistake, prophecy is the most gratuitous." Golden dreams may 44 The Rakes Progress in Finance. glitter, but they are not business ; and in affairs, although imagination may sometimes be a good servant, it is invariably a bad master. In these days it is unfortunately the master. We have had bitter experi- ence in the last two years and a half of the truth that South Africa is pre-eminently the land of lies, as well as being the grave of reputations. Was it not Ancient Pistol who said, " I talk of Africa and golden joys " ? The whole place, in its booming element, the modern variant of the swash- buckler or the footpad, still smacks of the spirit of Falstaff, and the one bright re- deeming page in its late history is the record of the admirable bravery, the more admirable patience, and the most admirable humanity of our soldiers, to which have to be added the manful efforts of Lord Milner and his civilian staff to evolve order out of chaos in the Civil administration. These are fine old British qualities which will be remembered in this country with pride long The Needs of SoiUh Africa. 45 after the last stamp has dealt with the last ounce of gold in the Promoters' Land. This perhaps Is a permissible prophecy. Meantime, in discussing the future of the country, we want above all things absolute sobriety of statement, and the frankest, full- est recognition of the unprecedented diffi- culties we shall have to deal with after the "sort of war" is over. As Mr Greenwood has pointed out, the greatest danger threatens from German immigrants. To any one who knows Ger- many the pervasive, persistent spirit of the Pan -Germanic element and its growing aggressiveness is a byword — and it has expressed itself very freely indeed in sym- pathy with the Boers. South Africa may offer an inducement to these people greater than they have ever had before, because there is a nucleus in the Dutch population that may end in making them supreme. Of course in the United States they have a nucleus of their own people ; but there 46 The Rakes Progress in Finance. they can never be supreme — they are simply swallowed up in the American nationality ; and if the truth must be told, they are looked on rather as an " inferior people," "the servants," as poor Count von Biilow plaintively and indignantly ex- pressed it ; adding that the time had come when they were determined to be servants no longer. The German population is increasing very much more rapidly at home, by birth-rate, than the English population ; and owing to the universal military ser- vice they have unrivalled capability for being organised. A systematised emigra- tion movement can very easily be imagined, leading practically to a peaceable invasion, and possibly final conquest by weight of numbers at the polling booths in South Africa. In an earlier part of this little paper reasons have been given for anticipating some possible temporary set-back on the The Needs of South Africa. 47 other side of the Atlantic, owing to finan- cial considerations, and this should make us all the more watchful of the Continental emigration movement. The gold and the diamonds of South Africa appeal strongly to the imagination of the needy. But men cannot live by gold and diamonds alone. The lack of diversity in industries is a great drawback, and the problem is com- plicated by the amount of native and im- ported coloured labour competing with the white labour. So far, South Africa has been eminently the field for capitalists rather than for white labourers. Nearly everything that has come to us from that region in the shape of companies has a nasty coating of promoter's slime. But there is also a great deal of lonely veldt which no doubt is more or less the equiv- alent of the boundless prairies of the Western States in America or the pam- pas in the Argentine. My own impression is that this life on 48 The Rakes Progress in Finance. and from the soil will prove much more attractive to the Germans and Scandin- avians, or even to the Italians, who have been accustomed to the same sort of soli- tary life in agricultural regions at home, than to the Briton, who dearly loves soci- ability, the gaslights of the town, and the music halls. Johannesburg may increase and multiply through British immigration, but a great State cannot be built up on Johannesburgs. The scientific production of gold, nowadays, is very like the scientific production of steel. There is not neces- sarily any greater return on the requisite capital from the one than from the other. But the difference in the employment of labour is fundamental — when the one chiefly employs coloured labour, and the other wholly employs white labour. All these considerations are taken into account by intending emigrants. Those to the United States think they may carry in their valises a Carnegie or Rockefeller The Needs of South Africa. 49 baton; those to South Africa have read of Rhodes, Wernher, Beit, & Co. And they may be influenced by the considera- tion that the two American milHonaires can buy up the whole crowd of South African millionaires several times over. Time only can show us which country holds out the greater inducements. It is idle to predict ; but we may learn some- thing of practical importance by looking backward. There is one clear lesson, with an in- disputable conclusion, writ large in the emigration movement of the last eighty- five years, and it is this. Emigrants of all nationalities, including the British, have shown a very distinct preference (at any rate in the last sixty years) for a Republic rather than an Empire. It was not so in the beginning. In the twenty -five years from 181 5 to 1840 of the total emigra- tion from Great Britain there was a pro- portion of 56 per cent to British colonies D 50 The Rake's Progress in Finance. against 41 per cent to the United States. On the other hand, in the last twenty-five years (from 1876 to 1900) about 70 per cent went to the United States and only about 30 per cent to British colonies. Notwithstanding, therefore, all the flood of talk during this last period about "the Imperial idea," it is evident, from the practical test of the emigration figures, that there was a much greater tendency to- wards the British colonies sixty years since than in these latter days. In fact, if we look at Australasia alone, the figures have never happened to be so low as during the particular seven years of Mr Chamber- lain's tenure of the Colonial Office. The Cape and Natal have made up the de- ficiency somewhat, but the result of all the figures is 63 per cent for the United States and '^'] per cent for all the rest of the world. And this falling-off to Australia is the more remarkable because it is the most essentially British of all our colonies. A The Needs of South Africa. 5 1 vast continent without any neighbour im- pinging on it, with gold and copper in abundance, and with pearls of great price, if not diamonds. It has no difficult native question, and has for the most part a very fair climate. There is no finer wheat than the South Australian wheat, and Oueens- land revels in tropical and semi-tropical products ; whilst Victoria and New South Wales possess the finest pastoral regions in the world, bar occasional droughts. Yet Continental emigration has never been at- tracted there, and British emigration, as we have seen, has been falling off, and never at any time amounted to more than a net average of 30,000 persons a-year. It is no explanation to say that from 1892 to 1897 Australia was still feeling the result of the commercial depression follow- ing 1890, because the answer is that the United States was feeling that result still more acutely. Again, it may be said that the smaller emigration was owing to the 52 The Rakes Progress in Finance. alleged prosperous condition of our people at home ; but that argument affects emi- gration all round. And, indeed, it would be a very poor look-out if we were called on to rejoice in peopling our sister nations at the expense of the prosperity of our own hearthsides. No doubt it was this pressure of bad times at home in olden days that drove a great many of our best emigrants away. By a process of natural selection the fittest went out to work in a new world, with very little aid, except from their own strong arms, and the foundations of the British Empire over-seas were well and truly laid by these people many generations ago, as they only could be laid, by self-help. They were men who were very little conscious of a great Imperial mission. They worked hard to subdue the lands for themselves, and they talked little. Nowadays they work little and they talk hard — and tall. Self-consciousness is rampant as it never The Needs of South Africa. 53 was before among our people. The Press teems with the " Imperial instinct and the marvellous qualities of the race." In former days the quality of the race was all there, but it was quietly taken for granted, and the self- consciousness was absent. And, curiously enough, just in proportion as we have increased this un- English habit of excessive self-assertion, in the same proportion the Americans have been quietly dropping their aggres- sive "spread-eagleism," and, whilst gain- ing on us hand over hand in population, in wealth, and in manufacturing aptitude, they have become a comparatively modest and self-respecting people. Does it not show a certain want of sense of humour to go on " orating" about "these mighty commonwealths," "great sister nations," "orbs that are rising," &c., &c., when as a matter of fact the whole population of either Canada or Australia is not equal to that of Greater London, 54 1^^^ Rakes Progress in Finance. nor nearly equal to that of the State of New York or the State of Pennsylvania ; and both of these States are growing in wealth and population far more rapidly than the two " mighty commonwealths," as is evidenced by the Savings Banks returns of the State of New York, show- ing deposits on the ist of January last of ;^ 2 3 0,000,000. And this may be com- pared with the total deposits of something under ^200,000,000 in all the Savings Banks of the United Kingdom ; whilst for the last three years the New York State deposits have been increasing at the rate of about ^10,000,000 a -year against an increase of less than ^8,000,000 a-year in British Savings Bank deposits. Nor must we forget that the capital which has been developing Canada in the last four years has come a good deal more from the United States than from Great Britain. Soberly and justifiably we may claim that, notwithstanding the present unsatis- The Needs of South Africa. 5 5 factory state of affairs in the West Indies and Newfoundland, we have had on the whole a very fair success with our colonies, taking them all together — certainly a much greater success than any other nation has had. But the supreme success has lain with the colonies that seceded. In the view of Americans, the greatest blessing that ever happened to the United States was parting company with the British connec- tion ; and perhaps it may be added, with- out offence to the Americans, that one of the orreatest blessings to Great Britain was parting company with the American colonies. The separation allowed each people to develop on its own lines. Con- ceive what the situation would have been to-day if this ancient realm of England and its 40,000,000 people had to be steered by 80,000,000 people, 3000 miles away, and divided by something more than the mere physical division — by an impal- 56 The Rakes Progress in Finance. pable division, in new ideals, new pro- cesses, new ways of looking- at life, and not all of them by any means improve- ments. " It is the impalpable that has prevailing weight." Many individual Englishmen may look at many subjects from very different points of view, but I think all Englishmen will agree that we never want to be governed by our tail, whether that tail is on the other side of the Atlantic, or on the other side of the Pacific, or in Africa, This is a very present danger — a danger chiefly attributable to confounding" being big with being great. Tennyson would never have written "a craven fear of beino- bio-." Far from being a craven fear, it is a common- sense fear. The pre-eminent sign of true greatness in a nation is the clear recognition of the limits within which it can do its work supremely well. The sign of the limit being past is when the work ceases to The Needs of South Africa. 57 be the work of a master and becomes sloppy and inefficient. No one can read or hear the opinions of the leaders of the Imperial movement to-day without being conscious of their conviction that our efficiency has not been growing in pro- portion to the demands of the Empire. And perhaps it may be permitted to the ordinary citizen, while questioning the wisdom of a policy which in an exagger- ated shape must be fraught with peril, to establish certain facts relating to that policy — and not to be misled by dangerous de- lusions or by popular fallacies. THE FINANCIAL FUTURE. {The Nineteenth Century and After — January 1903.) In a "warning note"^ in this Review, nearly four years ago, I ventured to call attention to the general rapid conversion of floating capital into fixed capital, which first became noticeable about 1897 all over the world ; and since that time this tend- ency has become greatly intensified. For instance, in that article it was mentioned, with some apprehension, that in the four- teen months ending the 28th February 1899 there had been definitely formed in the United States new industrial combin- ations having an authorised capital of ;^ 400, 000,000, and that " totals of such magnitude carry their own comment, and 1 The Nineteenth Century, May 1899. The Financial Ftiture. 59 it is unnecessary to say anything to add to their force and their significance." Looking back now, this ;^400,ooo,ooo looks like a little cloud no bigger than a man's hand ; for in the interval the amount has grown until it is now over ;,/" 1,400,000,000, and instead of being a little cloud, it has become a threatening mass darkening the financial atmosphere. Attention was also called to Germany, "at the same time undertaking stupend- ous financial obligations," and to " Russia, France, Japan, India, China, all at work converting floating into fixed capital." The paper ended with a glance at the enormous increases in the Government and municipal expenditure of Great Britain, and at the lock-up in South Africa. If we follow the course of the subsequent years, it will be remembered that Russia, Germany, and Japan have all been passing through a long and trying process of liquida- tion ; a process which is not yet ended. 6o The Rakes Progress in Finance. because unfinished railways in Siberia, in Manchuria, and in the Euphrates valley remain a constant drain ; not to mention huge industrial plants which must be kept running, on Government or private work, even at a loss — and there are the new navies which absorb a great deal of cash. Then we have had our war in South Africa and the troubles in China, causing a considerable destruction of capital. Coming to this new year of 1903, we see before us the four continents — America, Asia, Africa, and Europe (and we may add Australia) — still competing against one another to obtain the means for their in- dustrial development ; and the available means are necessarily limited in amount. The American continent, including of course the United States, Canada, Mexico, Brazil, and the Argentine (and shall we add Venezuela !), has been the most at- tractive to capital, because it is the best equipped for the rapid and profitable ex- The Financial Future. 6 1 tension of industries, and consequently the pressure there continues to be the most powerful and the most striking. In another little paper last April/ I referred incidentally to the financial posi- tion of the United States, and endeavoured to show that the lately developed increase of their imports of commodities as well as securities, with the consequent danger of gold exports, pointed to trouble. Since April there have been magnificent harvests, showing bountiful records in the production of grain and cotton, the shipment of which will presently be felt beneficially ; but not even a succession of good harvests can sustain the ever- increasing strain that is being put on the financial resources of the country by the over- capitalisation of new companies. It is difficult to follow closely the course of transactions on the other side of the Atlantic, the pace and the constant trans- 1 The Nineteenth Century and After, April 1902. 62 The Rakes Prog7^ess in Finance. formations are so rapid and so dazzling ; but some figures have been published within the last month which are certainly very remarkable. In a paper read by Mr Ridgely, the comptroller of the currency, before the American Bankers' Association, at New Orleans, on the nth November, presum- ably a competent authority on the subject addressing a competent audience, he sub- mitted a statement showing that the in- dividual deposits in all the banks of the United States amounted in 1902 to ;f 1,800,000,000 against ^1,000,000,000 in 1897, ^^cl the loans in 1902 amounted to ;^ 1,440,000,000 against ^840,000,000 in 1897. Putting aside for the moment the question of the danger of such an un- precedentedly rapid expansion, and putting aside also the intricate question of the circulation (which consists of a mixture of gold, silver, and paper, now amounting altogether to £^ per head of population. The Financial Future. 63 or a total of nearly ^480,000,000), it will probably come as a surprise to many people in England to learn that the bank- ing resources of the United States are, broadly speaking, now about double the banking resources of the United Kingdom ; for we cannot count the ^200,000,000 British Savings Bank deposits amongst our banking resources, as the whole amount is invested in Government securities. But these increases in six years of the American banks' deposits and loans are so striking that they would almost be incredible if we had not the further light of the clearing returns, which, at the same time, illuminate and explain them. These clearings have been for the past two years at the rate of ^23,000,000,000 a -year, compared with the former maximum of ;^ 1 2,000,000,000 a -year, in the greatest previous periods of boom, ten or twelve years ago. Now, looking at the fact that the deposits have increased in six years 64 The Rakes Progress in Finance. by ^800,000,000, which is nearly the amount of the deposits in all the joint- stock banks of Great Britain, it seems to me that two propositions arise on the figures which merit very serious con- sideration. The one is that such a pace has never been approached before, and the other is that such a pace cannot possibly be maintained. It may therefore be useful for us in England to look quietly and carefully at the present posi- tion, endeavouring to foresee what the financial consequences are likely to be, not only to the United States, but also to ourselves. The feverish activity of the last six years has mainly been in the direction of industrial extension, just as the previous feverish activity before 1890 was in the direction of railway extension. We have all read a great deal lately, in the news- papers, about these frenzied over-capital- isations of new companies. There is " too The Financial Future. 65 much of water," but we must remember that the principle — or want of principle — of "water" is not new. It is familiar in South African gold - mines, and it is not unknown even in our virtuous Eng- lish industrial companies. It is objec- tionable, but, unfortunately, it is universal, and all we can say about the Ameri- cans is, that they do it, as everything else, on a bigger scale than other people. In dilating too much on "water," we must be careful not to get " water " on the brain. It would be difficult, for in- stance, to conceive of any stocks con- taining, originally, more "water" than the ^1,000,000,000 of American railroad stocks, because the railroads were prac- tically all built with the proceeds of bonds, and the stocks merely represented the possibility of future profits. But any one looking at a price list can see the value of these ordinary stocks to-day — and the value that they have maintained E 66 The Rakes Progress in Finance. for the last five years — from which it is apparent that every investor who bought previous to 1898 has had an opportunity of getting his money back with a good profit. The original "water" has consoli- dated into dividend - paying substance, owing to the wonderful growth of the country. The finance was unsound, but the land was sound ; and there seems to be no reason why the future course of the American industrial stocks should not follow the course of the railroad stocks in process of time, for, in the ultimate analysis, they both depend on the land. Let us never forget that there are 5,000,000 families occupying farms in the United States to-day, over and above the mighty army engaged in industrial occupations in the cities, and this enables us to understand the breadth of the home market and the power of consumption as well as of pro- duction. But just as, after each rapid extension of railroads, there was a set- The Financial Future. 6 7 back and long years of waiting, such as occurred between 1873 and 1879, and again between 1893 ^^^ 1^97' so there will probably be a set - back and some years of waiting after the industrial ex- tension. Speculators carrying the secur- ities on borrowed money are bound to have a hard time, because there are likely to be many sellers and few buyers ; but the point for tis to bear in mind is that the furnaces, the factories, the machinery, and the hands are all there, and the power of production remains. What that power of production is may also be gathered from Mr Ridgely's ad- dress, for he states that the value of man- ufactured products during the year 1900 was over ^^2, 600,000,000, and considering that there has been a very great increase since 1900, we may fairly assume that ^2,700,000,000 will be well under the figure for 1902. Now twenty -seven hundred million pounds' value of products cannot 68 The Rakes Proo-ress in Finance ^:> be manufactured out of water ; there must of necessity be thousands of milHons of pounds sterling value of capital in the businesses, and that is what concerns us vitally. Do we in England really appre- ciate what it means, or have we been lulled into false security by being told, consolingly, that competition with us in manufactures was practically impossible ? The suggestion of an answer to these questions was given in 1877 in an essay on " Foreign Competition," by Sir Robert Giffen.^ I make no apology for quoting his words at some length, for there is no more enlightening process than look- ing backward to learn the power of pre- diction in the so-called science of political economy. The capital sunk in producing annually ;^ 140,000,000 of value [the net income supposed to be derived from the British exports of 1877] must be immense, at least several hundred ^ Essays in Finance, ist Series. The Financial Fuhu'e. 69 millions. But even ^100,000,000 would not be easily found in the whole civilised world outside of England for the erection of new works to compete with our manufactories. . . . We see, therefore, what an effort of imagination is re- quired when the displacement of England as a manufacturer for export is talked of. . . . There is even a more serious difficulty, we believe, in the way of quickly increased foreign competition. It is the complexity, variety, and mxinute sub- division necessary in great manufacturing enter- prise which make displacement almost incon- ceivable. . . . England is one vast workshop, fitted with complete appliances of every sort, with a capability of turning on great force in any given direction unexampled, and not even approached elsewhere. We come, then, to the question of our home trade. Foreign nations, we are told, are not only going to do without us, and cease altogether to be our customers ; they are to send goods here, and cut up our own manufactories. ... If foreign nations are likely to find it difficult to procure capital which would enable them to take away a material part of our foreign export trade, how are they to find the capital to make any impression on our vast manufacturing industry for home consumers } Here, it is a question not of hundreds, but of 70 The Rakes Progress in Finance. thousands of millions of capital, and of a trans- fer of labour which fairly takes our breath away. In this respect, foreign nations would have to begin at the beginning. To-day it is curious, Interesting, and in- structive to read this view of the industrial future of the world, but Sir Robert Giffen merely represented the common opinion of the Manchester School in the 'Seventies, which was that the only reasonable division of labour was for the United States (or any other backward country) to supply the food and the raw materials, and for Great Britain to eat the food and work up the materials. Yet twenty - five years have scarcely elapsed when we see the United States with thousands of millions of pounds invested in industrial enterprise and with the best manufacturing appliances. If any doubt be entertained as to the accuracy of these United States census figures, they can be supplemented by some pieces justi- ficatives from other sources. For instance, The Financial Future. 7 1 in 1870, seven years before the date of Sir Robert Giffen's essay, Great Britain produced nearly four times as great a quantity of pig iron as the United States, whereas in 1902 the United States pro- duced nearly twice as much as Great Britain: and in 1870 Great Britain's con- sumption of cotton in the mills was more than double the consumption of the United States, whereas in 1901-2 the United States consumed one - third more than Great Britain. These are the facts in regard to the materials of our two greatest industries — on which millions of our people depend for their subsistence — and when we further look at the appliances for manufacturing these materials, we become even more con- scious of the great change that has taken place. We are indebted to ' The Times ' for a notable service in sending out a commissioner to report on the engineering workshops of the United States in 1899, 72 The Rakes Pi^ogress in Finance. and to Mr Mosely for an equally notable service in his commission. A Lancashire operative on this Mosely Commission summed up in a single sentence, cabled the other day from New York, the whole gist of one side of the matter : "In the Fall River Mills one hand attends to twenty looms instead of attending to four or six looms as in Lancashire." This is a bed-rock fact. If the unit of labour in the United States can produce more than elsewhere, either by his own handiwork or by minding machinery, the result must be inevitable in a country incomparably endowed by nature with available resources and where the in- genuity of man has developed the best machinery. This was the case with England during the long years of her industrial supremacy, and it is now the case with the United States. Nothing apparently can prevent it ; but we may still, by foresight, prepare The Financial Future. 73 to meet certain evil consequences, and my point now is that we should rouse our- selves to look a little ahead, for there is a serious problem immediately in front of us — quite independent of the question whether or not the merits of "American methods" have been exaggerated. I in- cline to think that they have been, and that we have got " Americanisation " out of perspective ; but that is a question for industrial experts, and may be left to them to decide. Let us confine ourselves here to looking at the question merely from the financial side, for it is already pretty evident that our part in the financial drama is not going to be an easy part. If the trouble in the United States comes to a head we must necessarily be affected, for in my judgment there are only two courses open to that country at the present moment. The one is, to at- tempt continued borrowing in Europe, and 74 The Rake's Progress in Finance. so to keep on a full head of steam in constructive work (which apparently aims at rebuilding all the cities of the Union in steel !), and the other is to call a halt for a breathing space. Neither of these courses will be agree- able to Europe, for, in the first case, so far as we in England are concerned, we shall have a formidable competitor in the money market for the capital we require to develop our possessions in South Africa, Canada, Australia, and elsewhere abroad, and at home — capital flitting wherever the attraction is greatest ; and in the second case, if the United States calls a halt, the European markets are certain to be flood- ed with American manufactured products. The late lock-up of millions of capital has unquestionably been carried to a wild excess (although, looking back, ten years hence, perhaps it will rather appear as an exaggerated appreciation of events before they occurred), but we may rest assured The Financial Future. 75 that production will go on, the products must be sold, and if the home consumption cannot be kept up on the present scale, owing to the lack of floating capital avail- able for new enterprise, then these products must be shipped abroad. We saw, only the other day, that the first effect of the German liquidation was that our markets were becoming em- barrassed with quantities of products, and it was only the American demand that liphtened the load both here and in Germany. But if later on the Americans become sellers instead of buyers, we are bound to have a period of serious difficulty. It is not quite an adequate answer to say *' and a very good thing, too, for the con- sumer," for, if we look at the effect of American railroad extension on our agri- culture, we have an object-lesson as to the probable effect of their industrial extension on our manufactures. Let us beware of the shibboleths that seduced us into be- 76 The Rakes Progress in Finance. lieving that the rents of agricultural land would not fall in England. Once bitten, twice shy. It may be asked why the United States are to be shut up within these two con- cise alternatives of borrowing money from Europe on the one hand and calling a halt on the other hand. Here again we may refer to Mr Ridgely, who faces the facts with an engaging candour, for he admits that the United States have been trying to do too much in too short a time ; and then proceeds : " It seems to be in- evitable that we should have periods of rest and recuperation. They are apt to be most severe when we have been going too fast. The pace we have travelled, for the past five or six years, has been a rapid one. The signs are not lacking that it should be moderated before we are too far spent. There is yet time, and, with prudence and care, we should be able to avoid any lasting ill effects. I do not The Financial Ftthire. jj believe that the strain is more than we can safely stand up to this point, but it is time to pause and consider. We have prices of materials of all kinds up so high that the cost of living has greatly increased. We have been consuming our available liquid capital at a very great rate, and changing it to fixed capital where it may be unproductive for a long time. Cost of production has so increased that our balance of foreign trade is fallinor off at the rate of hundreds of millions per year. Our bank reserves are low, and the loans as highly expanded as is prudent. The situation has lately been so acute as to render assistance from the Treasury De- partment necessary to give some relief." That the people of the United States are at last being wakened up by their own financial authorities to the gravity of their position is, to my mind, the most reas- suring circumstance in the existing situa- tion. It is an immense safeguard against 78 The Rakes Progress in Finance. a sudden catastrophe. To be forewarned is to be forearmed, although the warning comes a Httle late in the day ; it would have been more useful a couple of years ago, but at that time Mr Ridgely would no doubt have been pooh-poohed as a pessimist. The American people had got into a state of feverish excitement from the very exuberance of their real prosperity in 1898-9. Their temperature has now to be reduced, but there is no need for us to worry ourselves overmuch as to the future of the countr)^ We have seen that it is capable of producing over ;^ 2, 700,000,000 manufactured products in one year, and we may add that the value of farm pro- ducts in the year 1902 will probably come up to ^1,100,000,000. These two items form a visible solid asset of nearly four thousand million pounds sterling, which is a very good backbone, amongst many other assets. The prodigious power of The Financial Future. 79 the country lies in the diversity of employ- ment in agriculture and manufactures ; a country with land, improvements, and buildings, in the farming States, valued in 1900 at ^3,300,000,000 against a value of ^2,600,000,000 in 1890, or an increase of ^700,000,000 in the ten years, besides an increase in the value of live stock during the same period of over ;^ 150,000,000. It is this power of production, rather than the mere interchange of commodities, that increases most rapidly the wealth of a country. Let us dwell on these figures, particularly now, when a period of stress and strain is at hand, for we shall soon be hearing enough and to spare of the other side of the picture. And may we not also try to find some profit for ourselves, by laying to heart anything we can learn for our own ofuidance in the future? Here we see a country with more than our supposed ^15,000,000,000 of capital, with more than 8o The Rake's Progress in Finance. our supposed ^1,500,000,000 a -year of income, which finds that "it is time to pause and consider." It will be easy to lecture the United States, but perhaps it may be wiser to " reck our own rede." To say that all this over-capitalisation in America is merely money going out of one person's pocket into another person's pocket in the same country, is just about as true, or just about as unwise, as to say that our war expenditure does not really matter to us for the like reason. In both countries there has been an unhealthy in- flation — whether of currency or credit — which has upset all our normal notions of the right way and the wrong way in finance. For instance, there cannot be a doubt that if the United States had an income tax the returns for 1902 would be quite fabulous compared with any other year in its history, but big income returns do not necessarily prove real stability in financial position, as we may see by look- The Financial Futiire. 8 1 ing back at the returns immediately pre- ceding any crisis in our own country. These incomes may result, as is now ap- parent, from a vicious system of inflation — from over-borrowingr. We shall presently have our own statistics of 1902, and we shall find a record of bank clearings in London (over ^10,000,000,000) : probably also a record of excess of imports over exports (about ^180,000,000), and no doubt many other records. But surely the experience of the United States will prove to us how value- less these statistics are, except to show that we have been doing a very big business ; they do not necessarily show that we have been doing a very sound business ; and this is the point we ought to look to while there is time. It would be really useful if the Board of Trade would at- tempt a valuation of our " invisible exports," and furnish us with an official estimate of our investments abroad, as the French have F 82 The Rake's Progress in Finance. done lately with their investments abroad. We are constantly told that there is no use troubling about the present excess of imports, because such excess is nothing new. The simple answer is, that it is new. In the whole records of our trade, every five-year period up to 1898 showed a large surplus of the recorded exports, plus the " invisible exports," over our im- ports ; and it is only the five-year period 1 898- 1 902 which shows practically no ex- cess. Wherever there is anything so ab- normal as this in the trade figures there is a certain reason for investigation, and my belief is that the increased Govern- ment and municipal expenditure may throw a good deal of light on the problem. We have been too extravao^ant and have built too many houses and too many ships on borrowed money. The result is an un- profitable lock-up at home, and we are committed to a very large lock - up in South Africa. Fortunately, like the United The Financial Future. ^2) States, we are very rich, and, more for- tunately still, there has not been lately any great speculation on the Stock Exchange, and prices, generally speaking, are low. We want to eliminate the betting and the booming elements, for they eat into the vitals of the country, and no "good money" ever came from them. Solid trade is far better without booms, for they always end in crashes. The core of our people is sound, as we have seen during the late war, and in the long-run there will be plenty of room in the world for the United States, Germany, and ourselves, but we may have a difficult period to go through. In one respect we may take a more hopeful view of our prospects at the beginning of 1903 than we were fairly entitled to take at the beginning of 1899, because we have learnt a ereat deal in the interval in regard to the industrial forces outside of England, and what we really want is to face the facts. 84 THE BANE OF BORROWING. ^The Nineteenth Century and After — August 1903.) During the last twelve months there has been a depreciation in values on the London and New York stock markets amounting to hundreds of millions of pounds sterling, whilst at the same time the condition of trade, on the face of it, seems to be all for the best both in the British Empire and in the United States, if we are to judge solely by the figures of imports and exports, bank clearings, railway revenues, and income-tax returns. Last year was a record for all of them, and there is no fallino- off for the first half of this year, yet the losses to people The Bane of Borroiving. 85 carrying stocks on borrowed money have been enormous, on both sides of the Atlantic, and the question arises, To what cause are these losses attributable ? There is perhaps only one general answer, ap- plicable to both cases, and that answer is ** Over-borrowing." There has been too rapid conversion of liquid capital into fixed capital. The evidence of this is obvious and overwhelming in the United States, and a great deal of attention has lately been called to it, but we have not yet turned on the searchlight with equal in- tensity to the state of affairs at home, having been too much occupied with the " illimitable veldt." Our Government, however, has at last undertaken to make an inquiry — better late than never ; but as we shall not know the results of that inquiry for months to come, it may in the meantime be worth while to look into matters for ourselves in order to ascertain whether our business is 86 The Rakes Progress in Finance. sound as well as big, for that is the vital issue. With this object in view we must shovel away all the masses of figures and come to close grips with the bottom facts, some of which are palpable enough. We want to look at the things at our feet and immediately in front of us, rather than at the things behind us. For instance, month after month for many months past the per- centage of unemployed remains above the mean of the last decade, whilst the yearly increase in the Savings Banks deposits is now only about one -half of what it was two or three years ago. These are two pregnant facts from the workmen's point of view, and they do not indicate good times. On the other hand, when we look at the facts from the employers' point of view we find that the cotton trade, which is our largest trade, is in a thoroughly unsatisfactory state. It is true that ship- ments of cotton Q-Qods on an immense scale go to swell the figures of our exports, but manufacturers for the last year have scarcely The Bane oj Borrowing. 87 been receiving back from India and China two shillings and sixpence for every half- crown that they have spent on the raw cotton and the cost of its manufacture, so that the big exports are far from proving that the business is profitable ; neverthe- less, so long as Manchester can negotiate bills — so long as the wheel of credit can be kept turning — this possibility of losses, instead of profits, eludes the attention of statistic students for the simple reason that losses are not revealed by the figures. They can only be inferred from a con- sideration of the market reports day by day and from the published statements of the joint-stock companies engaged in the cotton trade. These evidences have cer- tainly been very unfavourable for the past twelve months, and at the present high price of raw cotton there is no probability of immediate improvement. The next most important trade — the iron trade — only spurts on a small demand from the United States, and this demand cannot 8S The Rakes Progress in Finance. possibly be maintained in the present in- flated state on the other side of the At- lantic, where, with a home production of fifteen million tons of steel in 1902, there has also been a large import of pig-iron and steel from Europe. No country can continue to do business on such a scale for its domestic needs only, because the amount of new enterprise must always be con- ditioned by the amount of available capital, and, for the time being, the United States has come to the end of its tether in this re- spect ; accordingly, at this very moment our iron and steel masters in England are look- ing with anxious eyes to the day when the United States Steel Corporation will begin to dump its surplus products on our shores. The immense increase in our mercantile marine may be a source of pride, but with freights at existing figures the ordinary shipping business cannot be carried on at a profit, which is an awkward position for the mortgagees of the ships. The Bane of Borrowing. 89 Building improvements in London, and in all the great cities of the kingdom, are no doubt desirable luxuries ; and boule- vards, with smart new houses, at Bourne- mouth, Brighton, or Blackpool — in fact at every watering-place in Great Britain — may increase the attractions of these pleasure resorts ; but this unparalleled activity in the building business, both in town and country, has been kept alive by borrowing, and mortgages on real property, however well secured, are awkward assets where- with to repay cash deposits. All this ship- building and housebuilding (not to mention railroad building and new machinery) has necessitated an immense transfer of liquid capital into fixed capital during the last few years in England, and yet the result is an increase of the unemployed and a decrease in savings. We see, then, that when we brush aside the flaming statistical figures and look the cold, hard facts in the face, there is already an unsatisfactory 90 The Rake s Progress in Finance. state of matters In the cotton trade, in the iron trade, in the shipping trade, and in the building trade, so that all the felicita- tions as to the immense volume, and the supposed profitableness, of our home trade appear upon analysis to be a little wide of the mark. The volume of this trade is to a great extent the result of borrowing, and it can only be maintained by further borrowing. Concurrently with this great lock-up at home we have enormously in- creased our lock-up in our Colonies, par- ticularly In South Africa ; yet the latest accounts from that quarter, as well as from Australasia, of the working men's condition is anything but encouraging — in the one case owing to the high cost of living and in the other case owing to lack of employ- ment. The most menacing aspect of the existing situation is that things have come to this pass during a period of complete ease in the money market, when borrowing has been a simple matter. Our trading The Bane of Borrowing. 9 1 ship has been saiHng along in perfectly calm seas, so far, and if there are signs of difficulty now, if there are signs of a water- logged condition, what is likely to happen if a squall should arise ? It is dangerous enough for any country to lock up too much of its own liquid capital in financing new enterprises, but it is doubly dangerous to lock up cash borrowed, on call, from abroad ; and any one who wishes to understand the realities of the position must take into account that every day we, in England, are opening wider and wider a very vulnerable place in our national armour by a constant in- crease of our dependence on the Contin- ental money-lenders. There is a peculiar irony in the situation when we consider that we are spending vast sums on a navy which is intended, in case of need, to over- whelm the very Powers from whose peoples we are borrowing cash, on call, to an ex- tent which enables the Continent to hold 92 The Rakes Progress in Finance. the London money market in the hollow of its hand. This is rather a humiliating position for the financial centre of the world, and it is one of the effects of a continued excess of our imports over our exports. It may be taken as a general proposi- tion that the mere fact of any country being dependent on foreign capital is an index that the borrowing country is doing too large a business — and consequently an unsound business. This is undoubtedly the case when the borrower is not a new undeveloped country but, on the contrary, is the country that for generations has been the greatest lender of capital abroad. Borrowing abroad is a new departure for Great Britain, and although we are Americanising many of our methods we oupfht to draw the line at our financial methods, for in this respect the United States is not an example to be followed but a warning to be avoided, considering The Bane of Borrowing. 93 that the loans of all the banks in that country have increased by more than _;^6oo, 000,000 in the last six years, whilst over and above this gigantic inflation of domestic loans the American financiers have been borrowing largely in every European capital during the last year or two, with consequences that are to-day very apparent. It is easy to pay high wages with borrowed money, but when the supply of borrowed money runs dry the first people to suffer will be the wage -earners. We must, however, take into account that the United States is a huge undeveloped country with plenty of elbow-room, great diversity of occupations, and an unprecedented power of rapidly increasing its capital by fresh production, so that a temporary check to its manu- facturing!" side will not fall with the same & crushinof weight as a similar check to manufacturings would fall on us here in Enoland. 94 The Rake's ProgTess in Finance. But it may be said that in Canada, Aus- tralasia, and South Africa, teeming with every kind of agricultural and mineral wealth, the British Empire has undeveloped re- sources even s^reater than those of the United States. This may be true enough, but the populations amount to only 11,000,000 white people compared with 70,000,000 white people in the United States, and any great increase of the colonial popula- tions by emigration of Englishmen requires time — many years, in fact — whilst the point now under consideration is a possible strain at home within the coming months. We must also bear in mind that on a moderate estimate there is British capital amounting to ^700,000,000 already invested in these Colonies, requiring an annual tribute in the shape of interest, which may be taken at about ^30,000,000. This is a first charge on their exports, and it is only after deducting this amount that we can arrive at the balance they have remaining free The Bane of Borrowing. 95 to pay for fresh imports. If they were to cease borrowing from the Mother Country, their power of purchasing imports would be Hmited to the amount of their net exports. Already their exports ought to exceed their imports by at least ^30,000,000 a-year to keep them on an even keel. They never have come within measurable distance of such a happy consummation, and the consequence is that their external debts go on increasing year by year. And it is this consideration which differentiates our trade with our Colonies from our trade with Germany and France for instance. With these Continental nations we ex- change commodities for commodities — It is a business of small profits and quick returns, with no lock up of capital — but with our Colonies we exchange our commodities to a considerable extent for paper, in the shape of Colonial Government stocks, gold- mining stocks, and the stocks of other ex- ploitation companies. The extent of this 96 The Rake's Progress in Finance. class of business must be limited by the amount of liquid capital in Great Britain, for we cannot go on indefinitely locking up our means in the Colonies whilst at the same time we are locking them up at home in house-building, ship-building, rail- road-building, and unremunerative manu- facturing — not to mention our increased un- productive expenditure on navy and army. It is well, therefore, that we are to have a national inquest ; and the most important points to ascertain are — 1. An estimate of the amount of Contin- ental money repayable by Great Britain on demand or on short notice — i.e., the amounts held by foreign institutions in the shape of loans on call in Lombard Street, or on the London Stock Exchange, or in sterling bills. 2. An estimate of the amount of British capital invested — {a) On the African continent — is it between ^200,000,000 and ^300,000,000 ? The Bane of Borroiving. 97 {b) In Australasia — is it between ;^300,ooo,ooo and ^400,000,000? ic) In Canada — is it between £ 1 00,000,000 and ^200,000,000 ? 3. An estimate of the annual value of the exports from these Colonies, after de- ductmg the amount due to the Mother Country for annual interest, so as to show the amount they have free to pay for fresh imports, irrespective of further borrowing. There are also additional subjects which require grave deliberation, and on which public attention has not yet been sufficiently concentrated — namely : 1. Who are to be the future law-grivers and law - administrators in South Africa ? The value of our British investments there will depend to a great extent on the votes of the majority, supposing that equal politi- cal rights are ultimately to be given to all white men south of the Zambesi. 2. Is it not the fact that the population G 98 The Rakes Progress in Finance. in Australia is now increasing very slowly, whereas it ought to be increasing very rapidly in proportion to the increasing debt? 3. Is the great increase now going on in the population of Canada mostly English or mostly American ? These are some of the questions which the British nation is now required to con- sider, for the populations of our self- governing Colonies are in an unprecedented position in regard to external claims for interest. It is true that we have seen a similar state of things in the United States during the forty years between 1857 and 1897, when the excess of exports from that country was scarcely ever sufficient in any year to pay the interest, freights, and other charges abroad, but then the population there was increasing all the time by leaps and bounds, and notwithstanding this in- crease in population there were the crises of 1857, 1873, and 1890. It was by no The Bane of Borroiving. 99 means all plain sailing, even in that favoured land ; for the undeveloped wealth, or the half-developed wealth, of any country, how- ever great that wealth may be, will not always suffice to pay obligations maturing in cash, and it is absolutely essential to distinguish between this immobile wealth and mobile wealth when we are attempt- ing to gauge the strength of the back for bearing a financial burden. The danger to our Colonies arises from too rapid development by borrowing from the Mother Country, combined with too slow an increase in their English popula- tions ; and the danger to the Mother Country arises from being obliged to borrow from the Continent to help this colonial development, and at the same time to maintain an extravagant home expenditure. The inquiry, then, ought to be really wider than a mere fiscal inquiry. It ought to go to the very foundations of TOO The Rakes Progress in Finance. our whole financial structure, and the key to the position will be found not in the statistical figures of imports and exports, income-tax returns, &c., but rather it will be found in the amount of borrowing. All the phenomena, both at home and in the Colonies, are masked by this "bane of borrowing," and in this respect there could not be a more valuable object-lesson than the existing position of the United States, and it is a lesson which we ought to lay to heart. For there we see 80,000,000 enthusiastically industrious people, in the richest country of the world, and in the full career of apparent prosperity, thrown back on their haunches (so to speak) by the strain of too rapid conversion of liquid capital into fixed capital. They possess a railroad mileage nearly equal in length to the railroad mileage of all the rest of the world, the value of their manufactured products is equal to the value of the manufactured products of Great Britain The Bane of Borrowing. loi and Germany combined, their agricultural production is unparalleled, and they are increasing their population by 800,000 immigrants a - year, so that they have arrived at a stage of development in- comparably beyond the present stage of development of our Colonies — yet they are in financial straits. They are making a bold bid for further European capital by putting the quotations of their best railway stocks down to figures which re- turn 5 per cent interest to investors. The rate is tempting, looking to the proba- bilities of the future on the American Continent. But the question arises. What nation in Europe has capital to spare sufficient to meet this American demand ? Great Britain certainly has not, for, as we have seen, she is already borrowing from the Continent in order to carry her existing load, and in front of her she has the increased demands for her own Govern- ment and municipal expenditure, as well I02 The Rakes Pi^ogress in Finance. as further demands from South Africa, AustraHa, Canada, India, and Ireland. France is helping to carry the English load, and is at the same time investing very largely in Russian, Egyptian, Spanish, and other Continental securities. Germany has got the Euphrates Valley railway on her shoulders, besides a heavy lock-up at home in new house- building, ship-building, canal-making, and unremun- erative manufacturing, as well as her ex- penditure on navy and army. Taking into account, then, the claims for industrial development outside of Europe — particu- larly by the American continent, by the African continent, and by Russia in Asia — it is evident that the European Powers will have to keep a sharp look-out on their bank reserves, for there is the point of danger when liquid capital is being converted too rapidly into fixed capital, as the United States is now learning to its cost. We have seen lately how the The Baiie of Borrowing. lo^ o shipment of a few million pounds of gold from New York has shaken the credit fabric there very rudely, and yet it remains perfectly true that there are half a dozen men in New York (when Mr Carnegie is there) who are worth among them certainly not less than ^250,000,000. No other country in the world can produce half a dozen men so rich, and the contrast is suggestive between this ^250,000,000 and say ;/" 1 0,000,000 of gold exported. A con- sideration of this fact ouoj^ht to lead us to think of what would happen supposing that the Bank of England were to be called on for gold during the coming autumn. There has been a good deal of congratulation lately on the increase of our exports of commodities in the last six months, because the apparent effect is that the excess of our imports is not likely to be so great this year as it has been for the last five years, and therefore the exchanges of the world ought not to I04 The Rakes Progress in Finance. be so much against us, with consequently less liability to a call for gold. But if we analyse these exports it will be seen that the increase is chiefly in goods shipped to South Africa. These goods do not go to pay for our imports. They represent for the most part capital loaned to South Africa, and a considerable part of our exports to Australasia represent in the same way capital loaned there. We take payment for these goods in Colonial stocks, but these stocks are only paper evidences of debt, and they are not available to pay for imports until they have been converted into cash, and this process of conversion entails a call upon our liquid capital. As has been said, there is a limit to the amount of this capital, and already the leading underwriting Stock Exchange firms in London have decided that they will not for some time to come underwrite any Colonial loans. The increase of our ex- ports is therefore scarcely likely to continue The Bane of Borrowing. i o 5 on the scale of the last six months, after the proceeds of the ^30,000,000 Transvaal loan have been used up. In any case, however, the whole question of our excess of imports will require to be thoroughly investigated, because we are in danger of being misled by an axiom of the economists that the bigger the imports are the better, since they show the purchasing power of the country. Must we not add that they show also the borroiving power of the country? If this latter way of putting it is correct, it follows that one of the chief points of inquiry by the national inquest must be the condition of our bank reserves, for they are the surest indication of the extent of our borrowing. The result of inquiry will be to let us know how we stand and will help us to meet any temporary difficulties. No one can doubt the existing resources and the future material prosperity of the British Empire or of the United States. A few io6 The Rakes Progress in Finance. years hence they will probably both have increased enormously in wealth, but for the last few years they have been engaged in too rapid development, with consequent strain on capital I07 POOR LANCASHIRE. {The Nineteenth Century and After — November 1903.) It is nearly forty years since we heard much of poverty in Lancashire, Certainly for the last thirty years "Manchester" has been a synonym for wealth, but to-day cir- cumstances are unpleasantly reminiscent of the years between 1861 and 1864, when North and South were at war in the United States. In those days we heard a great deal of Lancashire "clemming." There is perhaps little actual widespread "clemming" to-day, but there is very considerable poverty, especially in certain portions of the County Palatine which formerly were famed for their exceeding io8 The Rakes Progress in Finance. prosperity. Rossendale, for instance, which up to quite a recent period was famiharly known as " The Happy Valley," is now suffering greatly from real want. Guarding ourselves against taking an unduly de- pressed and depressing view of things, a visit to such typical towns as Bacup, Bury, and Rochdale, or the Burnley district in Lancashire, to Glossop in Derbyshire, and crossing the Cheshire border to Maccles- field and Congleton, is sufficient to subdue the spirits of the most rampant optimist. Those of us of Northern blood are, per- haps, the most touched sympathetically with the pathetic position of a people who hate begging even more than they hate " clemming," too proud to proclaim their suffering from the house-tops. Speaking generally, the mill-hands are bearing their trial bravely with Northern reasonableness, understanding that it is nobody's fault and everybody's fault. For the root of the existing trouble has really been want of foresight on the part of the men as well Poor Lancashire. 109 as on the part of the masters, an inability to discern the logical necessity that given causes must produce given effects. They have been too extravagant, and have not put by sufficient savings against a rainy day. Independently, moreover, of these out- lying and particularly afflicted districts which I have named, Manchester itself is anything but happy, though at a first glance after an absence of thirty years one is more than ever impressed with the crowds of well-dressed people, the lively movement in the streets, the wonderful number of electric cars, the gorgeousness of the great new Midland Hotel. These are all superficial evidences of wealth and prosperity, but after a few hours' rambling about listening to the talk of men and women, after going on 'Change or to Parker's Restaurant, one becomes aware that a very defined though subtle change has come over the spirit of the dream. The difference between the state of affairs I lo The Rakes Progress in Finance. now, compared with forty years ago, is that it was very obvious in the years 1861-64 that there was a real famine of cotton, and that the price of middHng Or- leans had risen from 2}^d. per pound in i860 up to 2s. 6d. per pound in 1864. There was no supply of American cotton for Lancashire during those three years. But, for this year just closed, there is a crop of nearly eleven million bales in the United States as compared with the five million bale crop of i860, which was then a record crop, so much so that people in those days, before the American War, began to say that cotton in the future would no longer be sold by the pound but by the hundredweight. The difficulty that is in all men's minds to-day is how to explain satisfactorily the existing state of things. There are optimists who at- tribute all the trouble to the recent Amer- ican corner in cotton, and who believe — or affect to believe — that as the new crop Poor Lancashire, 1 1 1 comes forward and the corner Is broken Lancashire will revert immediately to its former prosperity. On the other hand, many sound -judging manufacturers and merchants are doubtful whether the disease does not lie far deeper than any corner, and they dwell on the fact of the enormous increase of new machinery all over the world, and particularly in the United States and on the Continent, in the last fifteen years especially. They are well aware that whereas in i860 Great Britain was by far the greatest consumer of cotton in the mills, to - day the relations of the cotton- manufacturing countries are fundamentally altered. Even up to the latter part of the 'Seventies, Lancashire took the lion's share of the American crop; the Continent {i.e.^ Germany, France, and Switzerland) took a much smaller share ; and the United States themselves took the smallest share of all the three great consumers. In those days the whole of the United States' con- 1 1 2 The Rakes Progress in Finance. sumption was confined to the Eastern States — Rhode Island and Massachusetts particularly. There was no cotton manu- facturing to speak of in the South ; and the most remarkable development of that very remarkable country is that the con- sumption in the Southern mills has, for some years, been increasing by such leaps and bounds that for the season just closed (1902-3) it is exactly equal to the consump- tion in the Northern mills, with the result that the total consumption of the United States is now the orreatest in the world. The Continental consumption has also in- creased very much more rapidly than the British. In a word, whereas forty years asfo Great Britain was first, the Continent second, and the United States third ; now the United States is first, the Continent second, and Great Britain a bad third. The question of the future supremacy in the trade therefore resolves itself into the survival of the fittest. All the mills with Poor Lmtcashire. 113 old - fashioned machinery must go to the wall. It is the old story of stage-coaches versus railways. It is easy for economic philosophers to say that these improve- ments in the methods of production are in the lone-run all for the benefit of the world ; but it is cruelly hard upon the people, whose bread is taken out of their mouths, during the period of transition. It is to be feared that there are a great many mills in Lancashire still equipped with old- fashioned machinery, and it is difficult to see what will become of them in the future. But, over and above this difficulty with machinery, there is another more deeply- seated difficulty which is the resultant of a deteriorating tendency in the character of a considerable portion of the inhabitants. Bettine and drinking have increased to an alarming extent during the last fifteen years. Lancashire is not peculiar in this respect, for all through Great Britain, and in every section of society, from the highest in the H 1 1 4 The Rakes Progress in Finance. land down to the casual costermonger, these two vices, which are intimately and inevit- ably allied, are eating like a cancer into the heart of the body politic, among the women, now, unfortunately, as well as among the men. Under these circum- stances it seems passing strange that a distinguished English statesman should go into the witness-box, before a Parliamentary Commission on betting, and assert publicly with all the weight of his authority that in his opinion betting is really doing no harm to the English people, but is rather encouraging a manly taste for sport. A typical Lancashire woman of the lower class, in whose company I travelled the other day from Manchester to Oldham in a third-class carriage, told me, in reply to a question, that trade was very bad in her district, "partly perhaps on account of t' war, but mostly because t' women bet a shilling on nearly every race, and they take t' bread out of t' children's mouths to obtain Poor Lancashire. 115 the shillings, and that was a thing un- knownst in Lancashire fifteen years ago, as it was also for women to be seen drink- ing in the public-houses " ; and half a dozen fellow-travellers in the same carriage all confirmed her statement. There are very many causes at work differentiating the place that Great Britain holds to-day in the world's productive capacity compared with the position she held less than half a century ago, but certainly not the least important causes are betting, drinking, and the exaggerated importance attached to sports, particularly when the term sport is enlarged to connote all the loafers who eo to look on at foot- ball or cricket matches, taking no part themselves in the games. The hearts and minds of the British people, unhappily, are no longer in their business, but are rather in aimless amusements ; and as the hearts and minds of the people of the United States are very much in their business, 1 1 6 The Rake's Progress in Finance s the result may be predicted with consider- able accuracy, unless we speedily and determinedly reform our bad habits and put away childish things. The other day it was said by a speaker at the British Association at Southport that we need have no anxiety as to any decrease in our export trade, and, with special reference to the cotton-manufactur- ing export trade to India and China, it was asserted that, even if this export trade were to fall off, Manchester could do still better by increasing her output of electrical appliances or some other form of industry. Now it is obvious that a considerable sum of American money has been expended in the plant of such a concern as the Westing- house Company, and it is also evident that there has been an enormous expenditure of English money on municipal enterprise, and on the Manchester Ship Canal for instance, all which outlay for the time being conduces to the apparent prosperity Poor Lancashire. 1 1 7 of Manchester and the districts around. It increases the demand for labour and keeps up the rate of wages. But we have to consider that the only way in which we can ultimately pay for our gigantic imports of food is by our exports of commodities, and it is therefore idle — nay, worse than idle, it is mischievous — to assert that it is a matter of comparatively small moment whether or not the export of manufactured goods from Lancashire (which form our largest item of exports) goes on increas- ing or remains stationary. And the most important point of all is that the export trade shall be profitable, which it certainly has not been for the last twelve months in Lancashire's speciality of cotton manu- factures ; indeed, I am informed by a very high authority amongst the manufacturers that as a matter of fact there has been no really profitable margin between the cost of the raw material and the finished article for the last fifteen years, with the exception 1 1 8 The Rakes Progress in Finance. of the five years 1 897-1 901, which, curi- ously enough, included the three years' war. The position, as I understand it, has been that profits have too frequently been declared by many mill-owners which were not real profits at all, because the revenue accounts were not debited with the due amount for depreciation in value of machinery, buildings, &c. Besides which, many of the mills with old-fashioned machinery have actually been making losses instead of profits for years past, but they have been carried along — are now being carried along — on borrowed money. Of course, with the violent fluctuations of late years in the price of raw cotton, a few mill-owners have made great profits by laying in large stocks of cotton at the beginning of a season when it may have been selling at 3}^d. per lb. for example, and selling their yarn or cloth later on in the year, when the price of raw cotton may have advanced to say 4j^d. per lb., Poor Lancashire. 119 and the prices of yarn and cloth would then of course be considerably higher than when the raw cotton was at 3/^d. But in reality such a profit is not a genuine manufacturing profit, but is rather a profit on a speculation in cotton, for which it is not necessary to run a mill. Such a speculation can be made on the Liverpool "flags" without even the expense of a clerk or a desk. In a gambling transaction of this sort, however, as in all gambling transactions, it must ever be borne in mind that there are sure to be losses as well as profits, and in the long-run most people find that there are more losses than profits. It is not business. Then, in regard to any future exporta- tion of electrical apparatus, how do we stand in competition with the United States and Germany ? I am afraid the answer must be, " Very far behind." Surely, then, the profitable export of cotton manufactures is absolutely essential to the 1 20 The Rakes Progress in Finance. prosperity of this country as a whole, and in order to export profitably, not only the skill of the manufacturer but also the intelligence of the merchant is necessary. As regards skill, Lancashire will always be hard to beat, for there is the hereditary adaptability of the workman, during many generations, and the climate is particularly favourable ; but the trade suffers somewhat perhaps from harassing Governmental in- terference in the matter of inspection of the machinery, &c., in the mills; unfortun- ately, too, the general intelligence of the British merchant is a memory of the past. Of late years they seem to be very often either too late, or premature, in their pur- chases of raw cotton, and whichever way they time them they generally turn out to be mistaken. Nor have they their eyes half open to what is taking place in the general trade of the world outside Lanca- shire. Many of the old firms have been going for generations. The grandfathers Poor Lancashire. 121 and fathers made the money, and the sons are now chiefly occupied in spending it on Scottish moors or playing polo. A con- siderable number have converted their businesses into limited companies, very rightly and sensibly from many points of view, but unfortunately a salary- managed concern is seldom good enough to win in a fierce competitive struggle. This general slackness of directors and managers in at- tention to business — making it a secondary rather than a primary consideration and matter of interest — is one of the danger- signals up against us, and, in my view, another danger-signal is the growing ex- cess of our general imports over our exports. For what is the position ? Takins: Sir Robert Giffen's estimate of ;^ 1 78,000,000 per annum as the amount of our "invisible exports," and adding this amount to the visible exports during the five years 1898-1902, we have just been able to pay for our imports — i.e., during 12 2 The Rakes Progress in Finance. these last five years the two sides of the account are balanced and no more, whereas previous to 1898 there was always a surplus of exports over imports, amounting from ;^ 30,000,000 up to ;^ 70,000,000 each year. And this brings us to the question whether Mr Chamberlain's reliance on the consuming power of our self-governing Colonies has a solid basis in fact. What has really happened, and what is really happening, is that these eleven millions of people borrow money in London in order to pay for a considerable proportion of their imports every year, and these imports go to help the unemployed in Melbourne and Sydney. The urban labour parties in the Colonies vote for whatever Government borrows the most money from Mr Bull- Cohen. Great Britain has done her level best to spoil her children by this prodigality in lending, and any one who has an ear to hear must be well aware that there are already mutterings from the British public Poor L ancaskire. 123 foretelling the knell of British lending, out- side our own island, except on a much smaller scale than heretofore. Perhaps some day we shall learn to apply an ancient Scottish adage which is very much to the point, though a little coarse or homely in expression : " Keep your ain fish-guts for your ain sea -maws." There are unem- ployed In Manchester and London, as well as in Sydney, Melbourne, or Johannesburg. What if we were to curtail our loans to our Colonies ? Then, at any rate, we should be in a position to ascertain accurately the amount of British commodities that can be profitably exchanged for Colonial com- modities. That is the basis of sound trade — commodities exchanged for com- modities, rather than commodities ex- changed for paper promises to pay. It is quite true that it Is one of the functions of an old and rich country to develop the resources of the new, poorer countries. We have done this for the last century 1 24 The Rakes Progress in Finance. or more, particularly in the case of the United States, in the case of Canada, in the case of Australasia, and, last but not least, in the case of South Africa. But est modus in rebus. Our lending abroad ought always to be conditioned by the growth of the loyal white population amongst the borrowers, and it must also be conditioned by the amount of available liquid capital in Great Britain. It will be fatal for us to go on relying on cash borrowed on call from the Continent. And if we look at things as they are to-day, and as they are likely to be, casting a glance always a little ahead, so far as may be, we shall find that there is a great danger lurking in the " Shylock " part. " The present by the future, what is that ? " We must not lose the " art of production " of commodities, whilst we make ourselves more and more dependent for our incomes on our loans abroad. One of the great triumvirate of world-poets warned us more than 600 years ago against the danger Poor Lancashire. 125 of "sudden gains," i subiti guadagni^ and in a memorable passage Dante, who was a great political economist as well as a supreme poet, has told us how " Your art is, as it were, God's grandchild, and it be- hoves mankind to gain their life and to advance, but since the usurer takes another way, Nature herself and in her follower disdains he, for elsewhere he puts his hope." ^ It is always dangerous for any one who is not a Dantist to quote the great Florentine. It is so easy to misinterpret him, and readers put into his verses many meanings which he himself would never have imagined; but "Art" in this passage certainly carries a wider signification than Dante's own art of poetry, or the art of painting (we know that " Dante once pre- pared to paint an angel"), or the art of music, which is so frequently referred to in the ' Divine Comedy.' " Art " in this widest sense may be taken to include the " art of * Inferno xi. 105 et seq. 126 The Rake's Progress in Finance. production," whether of cotton manufactures or steel manufactures or anything else to which human labour, intelligence, and skill are applied, as opposed to the mechanical operation without labour, intelligence, or skill of the coupon-cutter. Florence had not yet invented coupons, but the City of Flowers was then the financial centre of the world and the great lender of cash to poorer countries abroad, particularly to the England of those days ; and this excess of lending presaged the decadence of the famous city on the Arno 600 years ago, just as a like excess may presage the de- cadence hereafter of a still more famous city on the Thames unless we have a care, and from the same causes, as all will remember who call to mind the famous passage where Cacciaguida de- scribes Florence in the olden time when she "abode in quiet, temperate and chaste." History repeats itself sometimes, though always with a difference ; and another in- Poor Lancashire. 127 teresting parallel may be found in Bruges and Ghent. But if we sound to the depths the heart of the great English people it is right enough yet. The chief trouble is that we have been too rich and are too luxurious, and the remedy for our ills — prospective ills rather than present ills — is simple to a fault. It can be summed up in the one little word "economy," not only the economy that prevents waste of money and substance by our Imperial Government, by our municipalities, and by private in- dividuals, but also economy of time, too much of which is dissipated by a business people in racing, betting, polo, golf, bridge, &c., instead of " minding the shop " ; for, however grandiloquently we may talk of our Imperial mission, our Imperial great- ness, and our great organising qualities, we are ati fond, and must always remain, to our great honour, a nation of shop- keepers. The danger of the immediate future is that we may be inveigled into 128 The Rake s Prop^ress in Finance. ^ too great reliance on " The Government," instead of the old-fashioned reliance of the individual on himself, and it is difficult to foresee what the answer is to be if a "clemming" Lancashire comes to demand help from the Government, considering that this same Government is prodigally lending hundreds of millions of pounds to South Africa and Ireland. What Lancashire is thinking to-day all Enofland will be thinkinor to-morrow. The problem in front of us is not really, or principally, a fiscal problem. **The world in every part is pregnant with the new creed," and the serious question is how to steer warily, for we have already pointed the nose of our ship towards State Social- ism, and it may be difficult now to alter the course. 129 THE PINNACLE OF PROSPERITY. {The Nineteenth Century and After — September 1904.) A NOTE OF INTERROGATION. '* Great Britain is standing on the top- most pinnacle of prosperity," was a phrase very current amongst a set of writers on the fiscal question about this time last year. It is not so current this year, though there are still congratulations, in a subdued key now, over each monthly statement of the increase of our imports. The object of the present little paper is to question whether the phrase ever really embodied the true interpretation of the facts of the case. To this end let us crlance for a moment at a few of the most salient facts, I 1 30 The Rakes Progress in Finance. known to everybody in a vague kind of way, but probably not yet grasped in all their bearings by anybody, for they con- stitute a problem of the utmost complexity, the solution of which would tax the capa- cities of a Commission of Experts. But there are certain points which any one, without claiming to be an expert, can ap- preciate directly. For instance, there is no difficulty in ascertaining that during the last five years there has been an increase on average of nearly 100 millions sterling a-year in our combined Imperial and Local Government expenditures compared with the average expenditures from the same sources during the five preceding years, — and be it remembered that those five pre- ceding years were considered profusely and dangerously extravagant by economists. Massing the figures, we find that the ex- penditure from these two sources in the last five years has been 141 2 millions, against 933 millions in the previous five years, and 780 millions in the five years The Pmnacle of Prosperity. 1 3 1 before that. This increase is altogether abnormal, partly owing to the South Afri- can war, and we ought always to be on guard in presence of abnormal symptoms. The bulk of this vast excess of expendi- ture has gone through the pockets of British workmen, British contractors, and British employes. It has necessarily come out of one set of pockets and gone into another set, but the transfer created great activity in trade, and some of the contrib- uting pockets have been foreign pockets. A Government, especially in war-time, is a prodigious spendthrift, and municipalities are always liberal paymasters, with their borrowed funds and with the ratepayers' money, so that the wages and profits earned have been much above the average. No wonder that the eating, the drinking, the dress, and the amusement in every section of our people, from Belgravia and Ty- burnia to the Whitechapel Road, are all on an unprecedented scale. No wonder that the income-tax returns have gone up 132 The Rakes Progress in Finance. by leaps and bounds. There is one little item in these returns that throws a flood of lig-ht on the oreneral situation. The salaries of Government, corporation, and public company officials brought under the review of the Inland Revenue Department for the purposes of the income-tax have in- creased from 60 millions up to 80 millions in the last five years (a much greater ratio of increase than is to be found in the in- comes from business concerns, professions, and employment under Schedule D), and this is an exceedingly instructive and char- acteristic instance of what is going on generally in this country. Personal ser- vices are in the ascendant. Then the war expenditure, of course, stimulated enor- mously the trade in warlike materials at all the producing centres, such as Shef- field, Birmingham, the Clyde, and the Tees. This was the case, too, in the clothing departments, so that the textile manufac- tories benefited also. The coal trade was working at full pressure. Government The Pi?inacle of Prosperity. 133 charters kept the shipping profitably em- ployed. Every artisan's and every shop- keeper's craft, from the highest to the low- est, was bound to receive an impetus from this rushing stream of payments, and we have seen the effects in the extraordinary expansion of our home trade and in the great increase in our imports of food and commodities. These imports for the last five years have averaged 520 millions a- year, against a yearly average of 438 mil- lions in the five preceding years, and this increase is proclaimed as one of the princi- pal evidences of our unparalleled prosperity. Now if there be a direct relation of cause and effect between this excess of expenditure (by our Imperial and Local Governments) and the increase of our im- ports, and if the increase of our imports is to be taken as the sure criterion of prosperity, then it would seem to follow as a logical consequence that the greater the Government's expenditures are the more prosperous we must be. 134 ^^^^ Rakes Progress in Finance. But if we look into the items of these expenditures it is impossible to maintain that the bigger they are the better, for the reason that a very large portion of them constitutes a great lock-up of capital ; and no country, however rich, can continue to lavish money in this way without be- coming seriously pinched and ultimately gravely embarrassed. The truth is that these imposing figures of imports, exports, railway revenues, in- come-tax returns, Post Office earnings, bank clearings. Excise and Customs duties, tell us really very little as to our pros- perity, because we first require to ascer- tain the origin of the motive power that has set all the wheels of trade rollincr at this accelerated pace. If the proceeds of loans, taxes, and rates have been lavished on unproductive expenditure, then the figures rather point to future adversity (although at first sight they may appear to indicate present prosperity), because there is a point in this sort of expendi- The Pinnacle of Prosperity. 1 3 5 ture at which the delicate sensitive ma- chinery of the financial engine will be so severely strained that it will be thrown out of gear. Already there are ominous signs of creakinof in the little wheel of credit which keeps all the big wheels of production and transportation turning. Discount rates vary from day to day in a feverish way. Lom- bard Street has given notice to the muni- cipalities that they are no longer welcome borrowers. The Colonies, too, are warned off. Any money that we are now finding for our colonies or for Japan and China is not actually our own money, but Con- tinental money. And here we put our finger on the really dangerous spot. Great Britain for the first time in recent history has become, during the last six or seven years, a nation borrowing on a considerable scale from other countries, as well as being a nation lending to other countries. This is a fateful sign of our excessive extravagance. Our own liquid capital has 1^6 The Rakes Prop'ress in Finance s been too much locked up in armaments and over-building; of all sorts at home and in our colonies ; it has been consumed in eating, drinking, dress, and amusements ; whilst with the exception of coal it is difficult to point to any great article the production of which has grown in the last five years in anything like the same ratio as our expenditure has grown. For in- stance, there has not been any increase in our agricultural production or in the production of our textile and iron industries (our three greatest industries), sufficient to account for "phenomenal prosperity." Hence this note of interrogation, What part has borrowing played in producing a simulated prosperity ? And here we may learn something from the experience of our neighbours if we look at Germany slowly recovering, by liquidation, from an over-borrowed position, or if we look across the Atlantic ; and in both these instances extraordinary pros- perity was proclaimed three or four years The Pinnacle of Prosperity. 137 ago, and the claim seemed to be fully- warranted by the figures. To-day we know how much of it was simulated pros- perity due to over-borrowing. In two articles in this Review (January and August) last year I drew attention to the increase of borrowing all over the world, and particularly in the United States. During the last seven years the banks there have increased their loans by nearly 700 million pounds sterling, or at the rate of 100 millions per year. This excessive borrowingr has thrown the financial machinery so much out of gear that the condition of trade at the present moment is very unsatisfactory after the great boom three or four years ago. But, notwith- standing the monstrous over-capitalisation of new companies, the expenditure of the borrowed money has mainly been of a reproductive character — as it was also in Germany. There has consequently been a gigantic increase in the production of iron, steel, cotton manufactures, and all 138 The Rakes Progress in Finance. other kinds of manufactures, whilst the development of an exceedingly rich new country has been going on apace with immense additions to real wealth in the increased cotton, corn, and other crops, and in the output of minerals. The trade accounts to the 30th of June show a very larore increase durinof the last twelve months in the exports of manufactures, as was naturally to be anticipated, and the total volume of trade is a record notwithstanding a great decrease in the exports of grain. The financial position is still radically un- sound, and the cure will be difficult ; but time, the land, and the quickly growing population by immigration may enable the difficulties to be surmounted. But Germany and Great Britain are not in the position of the United States as wealth producers, and consequently they cannot run riot in borrowing, in a like degree, with equal impunity. There is no reason, however, why normal prosperity should not be re- gained, in our own case, as it has been The Pin7iacle of Prosperity, 139 regained to a certain extent in Germany by liquidating an over -borrowed position, although it is to be feared that there must be a good deal of suffering in the process. The reaction from profuse expenditure is always trying, but in these islands we have extraordinary advantages in the soil, in mineral wealth, and in our unique geo- graphical position for trade, and the British workman, with his inherited capacities, is still the best workman in the world when he chooses to put out his full strength and when he ceases to ca' canny. We have seen also, in the White Star steam- ship accounts, published the other day, what British captains of industry can do when they put their whole minds and energies into their business, and when they refrain from borrowing. There is no reason, therefore, why we should not have a reasonable measure of prosperity in the future, under rational conditions of ex- penditure. Our danger at the moment lies in deceiving ourselves by not analysing 140 The Rakes Progress in Finance. our position. We do not quite know where we are in the matter of our reserves, and the true significance of the relations between our imports and our exports re- quires elucidation. We trust too much to a hasty glance at bare figures, which are sometimes very deceptive. Reasons have been given above for doubting whether the large imports really testify to the legitimate spending powers of our people, and in regard to exports we have to dis- tinguish between goods sold for cash to France or Germany, for instance, and goods sold on credit to South Africa and Australia. We also want to know whether our cotton manufactures (made from the American staple) have left anything but losses for the past three years. Then our banking reserve is the most important consideration of all. Events are moving very rapidly in the Far East, and we cannot evade the neces- sity of taking account of certain eventu- alities that may arise. It is the part of The Pinnacle of Prosperity. 1 4 1 every self- respecting nation always to maintain itself in such a position as to be able to view the prospects of war with- out dismay, and to that end every nation ought to consider carefully where it stands. We have a strong and, let us hope, a very efficient Navy, and we may count upon the moral support of the United States in the Far East. But how shall we stand finan- cially ? Where would our money market be to-day if large amounts of Continental funds were to be suddenly withdrawn from London ? No navy and no army could help us in this case. Twenty-four hours might work immense mischief, for we live and move and have our being in an edifice of credit— a vast superstructure poised on a very narrow basis, like a pyramid stand- ing on its apex. It is quite true that in a week's time we can always replenish our stock of gold by sales in New York of our American securities — but time may be of the essence of the contract, and the Bank of England's stock of gold is too small. 142 The Rakes Progress in Finance. The stability of our money market ought, therefore, to be our pre-eminent care. Yet scarcely any one in England now gives a serious thought to finance. The House of Commons, which ought to guard the purse, has abnegated its functions. Outside ex- perts sound notes of warning from time to time, but no real attention is paid to them. Mr Inglis Palgrave has written weightily on the subject, and Mr Rozenraad, for in- stance, told the Institute of Bankers last April that this question of England's indebtedness to France, Austria, and other countries ought to be brought constantly before the minds of the EngHsh bank- ing world. Every English acceptance discounted outside the country created a liability for Great Britain, a claim on Great Britain, which might have to be liquidated at a time when markets were under the influence of political complica- tions or of unexpected events. Since these words were spoken England's indebtedness to the Continent has increased rather than diminished, if we may judge The Pinnacle of Prosperity. 143 by the accounts in the daily papers of the renewal of English bills by France and the investment of Continental money in our Exchequer bills. How is it, and why is it, that we have created this unpleasant liability for ourselves ? The only answer is, by an extravagant expenditure and by our unwillingness to look facts in the face. We cannot permanently increase our reserves so long as our imports con- tinue to exceed our exports on the exist- ing scale — although, of course, if the rate of interest is higher in London than in the other great centres more money will be sent here on temporary loan if political conditions remain normal. But what we want is not to borrow more, but to convert ourselves again into being a creditor nation on current account as well as on capital account. For the last seven years (1898- 1904) the average excess of our imports over our exports has been something over 178 millions a-year (compared with 140 millions, the average of the seven preced- 144 ^-^^ Rakes Progress in Finance. ing years), and if we assume that the in- visible exports are 178 millions a-year, there has obviously been no opportunity for increasing our reserves. We had high hopes a year ago that a National Inquest would enlio^hten our understandinof of these complex questions, but as a matter of fact we know to-day very little more on the subject than we knew before. We are still groping in the dark at a time when we ouaht to have all the liQ^ht that the ripest financial experience can throw on the great problems that are immediately in front of us. Is there any more practicable means to that end than the appointment of a Royal Commission to inquire into all the ramifica- tions of the position } 145 FINANCE AND WAR. TO THE EDITOR OF 'THE TIMES.' November 22, 1904. Sir, — To-day, when the majority of the world have put on their rose-coloured spectacles again, it may be worth while to take a look at things, not through blue glasses, but with the naked eye. The public mind is happily, for the moment, tranquillised after a rude shock ; but do not let us forget that events are passing in the Far East fraught with tremendous contingencies impossible to foresee. We keep our Navy prepared. Is our finance equally prepared ? Your alert and well-informed Military Correspondent some K 146 The Rake s Progress in Finance. weeks ago dwelt, in a few lines, on " finance as an integral part of any scheme of imperial defence," Is finance ade- quately represented on the Committee of Imperial Defence, and if not, why not ? It is vital. Some of the salient facts are well enough known. In this country there are to-day deposits on call (including the Savings Banks) of about ^1,000,000,000, with a reserve of ^24,000,000, less than 2^ per cent. That is a fantastically in- sufficient reserve, if there were no possi- bility of war. No one can call it a prudent or decent banking position, even in times of absolutely assured peace. Included in our liabilities there is more Continental money in England than there has ever been before, and a very large amount of it French, subject to instantaneous with- drawal. In normal conditions it will pro- bably never be withdrawn ; but, in case of a war in which France were to be im- plicated, it would of course be withdrawn. Finance and War. 147 as one of the principal objects of an enemy's strategy would be the wrecking of our credit edifice. War is not made with kid gloves, and we must bear in mind that Germany will not be benevolently neutral to uswards. If the probability of war be a mere chimera, then we are a very foolish people to be spending ^87,000,000 a-year on the up- keep of our Army and Navy. All that prudent people can say is that to-day the contingency is "on the cards." Our handiest war-chest is our holding of American securities. There is no free market outside of London and Paris for South Africans and Argentines, and no other country has ever hankered after our Colonial stocks ; but there is always an independent market in New York for our American securities, and they happen to be a very liquid asset at present. Here again, however, we must take care not to count our chickens before they are hatched. 148 The Rakes Progress in Finance. Any one who keeps a watchful eye on events in the United States must be aware that at this very moment, and for years past, the banks and trust companies have been increasing their loans at a most alarming- and dangerous rate. Their de- posits now amount to ^2,000,000,000 — just double our British deposits ; and, although the United States stock of gold is very much larger than ours, any future sudden withdrawals of gold on a large scale might produce chaos there in the present most inflated financial condition. It is, of course, quite true that there is an unthinkable amount of gold, below the surface, in South Africa ; but it takes time to get it out, and the North Sea " incident " has warned us that world-changing events may take place in the twinkling of an eye. Therefore, we must not be caught napping. We ought to try to explain to ourselves why it is that, notwithstanding an increase of the world's gold production in the last Finmice mid War. 149 ten years of over ^500,000,000, the Bank of England, the financial centre of the world, holds less gold to-day than it held ten years ago, whilst the gold holding" of every other country has enormously in- creased. If I may venture to give my own explan- ation, it is that the Bank of England has been for the last seven or eight years merely a sieve through which the gold runs out as fast as it comes in, owing to the constantly increasing excess of our imports over our recorded and invisible exports, and the consequently persistent adverse foreign ex- changes. This must necessarily be the effect of unbridled national extravagance. In an article in the ' Nineteenth Century Review' of September last, I called atten- tion to our Imperial and Local expenditure as having averaged over ^280,000,000 a- year during the last five years, I knew that I was under the mark ; and Mr Gibson Bowles makes the expenditure for last year 1 50 The Rakes Progress in Finance. (1903-4) ^324,000,000, with an estimate of a good deal more for 1904-5, including a Local Government expenditure of over ;^ 1 60, 000, 000! I do not know how he arrived at his estimated figures, but there they are. But, allowing for errors and omissions, if we take the expenditure now at ;^300,ooo,ooo, there must be an enormous lock-up of liquid capital in unproductive investment. We have seen the effects of such lock-ups before in this country and elsewhere, especially in the United States and in Germany. Therefore, it is high time for us to set to work resolutely and persistently to find out, in the first place, where we really stand financially. For the last seven years I have been pleading for a Royal Commission to '• inquire." But I believe ' The Times ' can act more effectively than any Commission, because it can act more quickly ; and the first thine wanted is to arouse the whole English people to a living interest in the Finance and War. 1 5 1 subject, and to an abiding sense of its vital importance. Do not let us deceive ourselves. Do not let us drift ; and let us always remember that more is known in Paris, in Berlin, in Frankfurt, in Hamburg, and in New York — or even in St Petersburg — as to our Bank reserves and liabilities, and as to the true relation between our imports and our exports, than is known by the average Englishman. In this connection a few words of a not unfriendly German critic may be worth quoting. Professor Schmoller said, in an article from which you gave an extract on September 7 last — "The food supply of the country (England) is not so well assured that reform is not desirable, and that an imperilled situation in the future, and even, in certain circumstances, catastrophes, might not be possible." The policy of the ostrich is always foolish. We are strong enough to take our heads 152 The Rake s Progress in Finance. out of the sand. The light of the world plays round our financial position. Every- thing is known — the weak points as well as the strong points. As business men we ought surely to satisfy ourselves and our neighbours — friendly and otherwise — that we are ever watchful over our high credit, which is a national asset of incomparable value. I am, Sir, your obedient servant, J. W, Cross. Queen Anne's Mansions, St James's Park. THE END. PRINTBD BY WILLIAM BLACKWOOD AND SONS. UC SOUTHERN REGIONAL LIBRARY FACILITY AA 000 561 500 UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. 1! 3rm L9-25m-8,'46(9852)444 256 Cross- CeSr The r a ke' f^ P^'^g -H ress in finance HC 256 C88r •W* \ •:j> V 1 ' . •■>>. ■ \*