GREAT BRITAIN’S LENDING POLICY

Press, Volume LXXV, Issue 22767, 20 July 1939, Page 10

GREAT BRITAIN’S LENDING POLICY

Why Mr Nash is in Difficulties SHORTAGE OF CAPITAL IMPENDING

[By H. V. HODSON. Editor of "The Round Table.”]

Mr Hodson maintains that anti-Socialist prejudice among big investors has nothing to do with the New Zealand Government's seeming inability to borrow as much as it needs in London.

Correspondents of “The Times” have recently drawn, attention to the vivid contrast between the fate of Britain’s investments in the Empire and her investments in foreign countries. On the one hand, stability and a steady income; on the other, almost universal depreciation or loss. The warning that in future we should “cultivate our garden” instead of investing in mushroombeds abroad was almost too obvious to be uttered. The moment was opportune for such a comment. A successful South African loan had been followed by a relatively unsuccessful Australian one, of which a large portion was left with the underwriters: and the New Zealand Minister for Finance, Mr Walter Nash, was in London to negotiate the conversion of £17,000,000 of debt which falls due later in the year. David Low, the famous cartoonist, drew a harassed Sir John Simon as an infant’s nurse, feeding Turkey, Rumania, and Poland from well-filled bottles, while Mother Montagu Norman fobbed off the New Zealand baby with a homily on slimming. A Misleading Contrast Yet the contrast is too sharp to be sound, and needs to be moderated before it can serve as a firm basis of policy. In the first place, much more British money x has gone into private enterprise, financed by equity capital, in the Empire than in similar enterprise in foreign countries. Much of this capital—in mines, plantations, transport undertakings, and other commercial and industrial concerns —has been lost or has yielded a poor return over its whole life. This fact must qualify figures based on fixed-interest borrowings alone. In the second place, as a further correspondent of “The Times” pointed out, the inability of foreign countries to pay their debts is partly our own fault. Protection and preference combined have made it extremely difficult for those countries to export enough to the United Kingdom both to pay for their essential imports and to service their debts. In order to give due weight to this argument, let us imagine what might have happened if, through some .eccentricity of British policy, the Ottawa agreements had been reversed, and instead we had signed pacts with foreign countries giving them preferences over Empire countries in the United Kingdom market What might then have happened to the vaunted record of those Empire countries, that with the exception of Newfoundland they have paid every penny of their public sterling debt, through thick and thin of economic life.

fears in New Zealand. In the import restrictions he rightly sees reflected the fact that New Zealand has been living beyond her means. She has set herself a standard of consumption which she can keep up only by maintaining a correspondingly high level of production. And until the investor perceives that balance in practice he is bound to say to himself: this thing will snap, and it will snap at the weakest point, which is the payments account with other countries; the New < Zealand Government may be religiously determined to pay its debts, but the money simply will not be in the bank in London. No Political Motive Anti-Socialist prejudice has nothing - to do with this argument. No one would deny that the big investors of London have a down on Socialism, but then. Socialism also has a down them. Sweden has a Socialist government, but her credit is high. Spain has an anti-Socialist government, but her credit is virtually zero in London, It is a matter, not of social but of economic arithmetic. New Zealand, there is little doubt; will get the conversion money she wants, at a price. Her refunding transaction may well be the inaugural signal for a period of high interest rates all round. But this is not a constructive effort in the international use of capital; it is only a patch on the existing structure. Before we can proceed to a phase of creative activity, two conditions must be satisfied: The fear of general war must shrink into the background, and rearmament must slacken, to* release , lendable money for other purposes. * If we can imagine those two conditions fulfilled, where and how, in that v. blissful day. should the international flow of capital be directed? " One general answer at least may be vea- - tured. Capital should only go where trade can make it fructify and enable its service to be paid. To lend in terms of money when one is not prepared to take service of the debt in terms of goods is to ask for trouble. It is equally foolish to lend to countries or areas whose waterway of external trade is not deep enough at low water to float the vessel of international debt. In other words, it is no use lending to economically nationalist countries. Nor is it any use lending at all if we are to pursue economic nationalism ourselves.

Self-Sufficiency and Borrowing That applies to Empire and foreign countries alike. On the whole, the Empire survives ■ the test the more satisfactorily. But the effort to make everything at home will always defeat the hope of borrowing abroad (or, for the lender, of being naid his due), in the Empire as elsewhere. Perhaps the most likely area for international capital development, in a more stable future than we can foresee at this moment, is the British dependent Empire, particularly Africa, the West Indies. and the oceanic territories. If Great Britain, and the Dominions, in so far as they are themselves colonial and mandatory Powers, are to justify their imperialism to the world, they must be active trustees economically as well as politically. The class of capital that is most needed is “social capital”: investment in means of transport, development works, social services. This is the best form of capital because the asset it creates is higher standard of life, and its service is paid from a larger humsn welfare. But here a difficulty arises. Social capital must needs be borrowed at fixed interest. Economic factors, on the other hand, indicate a need for investment in equity form — shares, not bonds—so that when times are hard the debtor country need pay only a low dividend. A fresh form of colonial investment is needed to surmount this difficulty, a form in which, in effect, the governing Power takes the equity while undertaking to /pay the fixed -interest. It is not beyond the compass of man's brain to invent such a scheme, and so to irrigate the economic desert with, welfare and enterprise.

Little Money for Lending The fact is that international lending as a whole has received a shock from which it will probably never recover. To-day, the international loan market is dominated by two factors: the shortage of money to lend, and the lack of political stability. In a year in which English people find it difficult to lay plans for their summer holidays because they fear that there may be world war before September is out, what an act. of faith is needed to lend any money abroad, except merely in search of refuge from Europe! But even if political nervousness could be overcome (and it will certainly fade in the later months of the year if that general war does not occur by October) there remains the other obstructive factor, the shortage of lendable money. This does not apply to the United States, which could lend on a very large scale if she were willing. But the sun does not rise in the west. In London, the demand fdr loan money is bound to exceed the supply as armaments come to be paid for. A capital shortage is on the way, so it is now-or-never for those Dominion governments which want a cut at the capital cake. Mr Nash has not arrived too soon. His is not an enviable position. Earlier indiscretions by Mr Savage and others had frightened the London market. But it is not deliberate default that the British investor now most