An ill.u.s.tration of this secured obligation of the British Government is the issue of $300,000,000 Five and a Half Per Cent Gold Notes dated November 1, 1916. Princ.i.p.al and interest are payable without deduction of any English tax in New York and in United States gold coin. The holder of these notes, however, has the option to get his money in London but at a fixed rate of $4.86 per pound sterling, the normal value of the pound in peace time. Since the pound sterling at the time this article is written is quoted at $4.76, this is a decided advantage.

The new English loan is secured by stocks and bonds whose total market value is not less than $360,000,000. One group of this collateral consists of stocks, bonds and other obligations of American corporations and the obligation, either as maker or guarantor, of the Government of the Dominion of Canada, the Colony of Newfoundland and Canadian Provinces and Munic.i.p.alities. The second group included obligations of Australia, Union of South Africa, New Zealand, Argentina, Chili, Cuba, j.a.pan, Egypt, India and a group of English Railway Companies. I enumerate this collateral to show the inroads upon British securities that increasing war cost is making. This collateral must always show a market value margin of twenty per cent above the amount of the loan. It means that should there be any slump the English Government must supply additional security.

This issue was brought out in two forms. Half of the loan is in Three Year Notes due November 1, 1919, which were issued at 99 and interest and yielding over 5.75 per cent: the other half is in Five Year Notes due November 1, 1921, brought out at 98 and interest and yielding about 5.85 per cent. These Notes are redeemable at the option of the Government at various interest dates between 1917 and 1920 at prices ranging from 101 to 105 and interest.

Having established the precedent of a secured loan, all succeeding English issues in this country have been backed up with ample collateral. These bonds have a ready market, an important detail that the investor must not overlook in purchasing foreign securities.

Now turn to the borrowings of France in the United States. With this great nation, whose middle name is Thrift, Uncle Sam was no respecter of past performance. For the one separate French external loan he exacted his pound of collateral. As a matter of fact it amounted to nearly a ton.

I refer to the issue of $100,000,000 Three Year Five Per Cent Gold Notes bearing the date of August 1, 1916. To float this loan the American Foreign Securities Company was formed which arranged to lend the French Government $100,000,000. As security the Company--it was merely a group of American bankers, required France to deposit stocks and bonds having a value at prevailing market and exchange rate of $120,000,000. Should the value of these securities fall below this sum they must be replenished until there is a margin of twenty per cent in excess of the princ.i.p.al of the loan.

These securities throw an interesting sidelight upon the resource of the French Republic and its ability to borrow desirable collateral from patriotic citizens. They include obligations of the Government of Argentine, Sweden, Norway, Denmark, Switzerland, Holland, Uruguay, Egypt, Brazil, Spain, and Quebec. The most picturesque parcel in the lot is $11,000,000 in Suez Ca.n.a.l shares. This stock is one of the corporate heirlooms of France and is very closely held. It not only pays a large dividend but shares in the profits of the company which in peace times are big. The fact that France should put these prize securities in "hock" is evidence of her determination to keep her credit absolutely above reproach.

The Three Year French Notes were brought out at 98 and interest and at the time of issue yielded about 5.73 per cent.

But all direct French borrowing in America has not been on the pound of flesh basis. For now we come to what might well be called The Loan of Sentiment. It is the $50,000,000 City of Paris Five Year Six Per Cent Gold Bond Issue dated October 15, 1916. It gave Americans the opportunity to pay a substantial tribute of affectionate grat.i.tude for happy hours spent in the Queen City of Europe and have the prospect of a desirable dividend at the same time. Here is a piece of foreign financing with a distinction and a background all its own. Aside from its purely sentimental phase it is perhaps the only loan floated in America since the war which is dedicated to construction instead of destruction. The proceeds are to be used to reimburse the City of Paris for expenditures in building hospitals and making other necessary humanitarian improvements and to provide a sinking fund to meet similar disburs.e.m.e.nts. Amid the incessant hate and pa.s.sion of war it is pleasant to find this back water of cooling relief.

Like most of the foreign issues made during the war it follows the highly intelligent European practice of putting out loans in small denominations so as to be within the reach of the great ma.s.s of the people. These bonds may be had in multiples of $100 and upward. The Government of France has agreed to permit the exportation of sufficient gold to permit the payment of princ.i.p.al and interest in the yellow metal in New York. The loan--the only external one of the City of Paris--was brought out at 98 and interest, which would make an investment of 6.30 per cent. In addition to this yield as an investment there is the possibility of profit in exchange in view of the option to collect princ.i.p.al and interest at the rate of 5.50 francs per dollar instead of the normal rate of exchange before the war.

This statement of possible exchange profits leads us to one of the conspicuous features of the latest National French Loan, which although internal in form has been put within the ken of the American investor.

Fully to comprehend it you must know that in ordinary times a dollar in American money is worth 5.18 francs. On account of the dislocation in foreign exchange the value of a dollar in French money has risen to approximately 5.85 francs. Therefore when you buy a French security in terms of francs for American dollars you get a great deal more for your money than you would have received before the war. Hence the possibility of profit when francs return to normal is large.

The National French Loan was sold to American investors at an exchange rate of 5.90, which means that every dollar you employ gives you a princ.i.p.al of 5.90 francs. On this basis the price for the security issued at a par of 100 would be 87, which would make the direct yield over 5.70 per cent. Should exchange return to normal, the subscription price would be equivalent to 75, which would make the direct yield over 6-5/8 per cent.

Translating this loan into terms of money, you find that for every $14.83 you invest you get 100 francs capital: for every $148.30 you get 1000 francs capital: for $741.52 you receive 5000 francs capital. If French exchange should return to normal and the securities sell at the issue price--87--the investor would receive $16.89 for every 100 francs of capital: $168.88 for every 1000 francs: $844.39 for every 5000 francs. On this basis without regard to income return the holder of 5000 francs capital would receive a profit of $103.94 or over 13.75 per cent on his investment.

Should the market price of the issue advance to 100 and exchange return to normal the investor would get $19.30 for every 100 francs capital; $193.00 for every 1000 francs capital; $965.00 for every 5000 francs capital. In this case and again without regard to income return, the holder of 5000 francs capital would receive a net profit of $223.50 or approximately 30 per cent.

This loan is issued in _Rentes_ and in denominations of 100 francs and multiples. _Rentes_ is the form in which all French Government issues are brought out at home. The word means interest or income. The French always refer to their Government Bonds in terms of interest without any mention of princ.i.p.al. This is because _rentes_ are supposed to be perpetual. The new French loan just explained is not redeemable or convertible before 1931.

Usually there is no limit to these National French loans. To be in France during the war and see the popular response to the appeal for funds is to have a thrilling experience in the practical side of patriotism.

I chanced to be in Paris when one of these loans was launched.

Throughout a day of driving rain thousands of people stood in line at the post offices and private inst.i.tutions waiting for a chance to put their money out to work for their country. The French wage worker, be he artisan or street cleaner, needed no coaching in the art of employing his funds safely and profitably. Just as saving is instinct with him, so is the putting of these savings out to work in a Government bond second nature. He is the thriftiest and most cautious investor in the world. He has established a close and confidential relation with his banker such as exists in no other nation. Therefore when the French financier offers him Government Bonds or "Loans of Victory" as the war issues are emotionally termed, he does not hesitate. He knows it is all right.

Alluring as is the possibility of profit in the new French Rente at the present abnormal exchange basis, it fades before the prospects for similar profit that lie in some of the Russian Government Bonds available in the United States. The Imperial Russian Internal Five and a Half Per Cent Loan of 1916 amounting to 2,000,000,000 roubles will ill.u.s.trate.

Ordinarily the Russian rouble is worth 51.45 cents in American money. It has gone down to 32 cents. At this rate of exchange a thousand rouble bond bearing interest at 5 per cent would only cost $320.00. Based on the normal value of the rouble this bond would be worth $514.60 or $194.60 above the present price of the bond--an increase of about 60.8 per cent on the investment. Figuring roubles at the normal rate of exchange the yearly yield would be $28.28 or 8.8 per cent on the investment.

The fact that roubles are down so low is evidence that Russian credit at the moment is not as high as it might be. The princ.i.p.al equity behind this bond, as well as most other Russian securities available in America, is the fact that Russia has immense post-war possibilities. She will emerge from the conflict like a giant awakened and with the first realisation of her enormous undeveloped resources. To offset this, however, is the lack of stability of Russian Government as compared with the other Allies which makes all Russian Bonds speculative.

On account of the difficulty in shipping bonds and the preponderance of pro-Ally sentiment here, there has been a comparatively small market for German and Austrian war issues in the United States. Yet, in the face of these handicaps, a considerable market has developed. It is due to two definite reasons. One is the desire of the native born and transplanted Teuton to help his country. Many of them appear at the German banks with their savings books eager and ready to make financial sacrifice for the Fatherland. The other reason is that the German mark has so greatly depreciated (it has gone down from 23.82 cents to 17.65 cents) that should it ever come back to anything like normal and the Government does not repudiate its issues the investment will be very profitable.

Here is the way it works out: in ordinary times a 4000 mark bond which would be the equivalent of a $1000 American piece, costs about $960. At the present low rate of exchange the same German bond costs $690.00 in American money and therefore shows a profit on the exchange basis alone of $270.00 or over 28 per cent. Austrian Bonds show even a larger profit.

Summarise our war lending and you get a total of all loans to belligerent Governments since the outbreak of the war that aggregate $1,828,600,000, which is nearly one-third of the whole cost of the Civil War. Add to this our loans of $185,000,000 to Canadian Provinces and Cities and $8,200,000 to the City of Dublin and to the City of London for water works improvements, a grand total of $2,075,800,000 is rolled up. Of this sum $156,400,000 in obligations have matured and been paid off, which leaves a net debt to us of $1,919,400,000. It divides up as follows:

Great Britain $858,400,000 France 656,200,000 Russia 167,200,000 Italy 25,000,000 Dominion of Canada 120,000,000 Canadian Provinces and Munic.i.p.alities 185,000,000 Germany 20,000,000

Having taken this financial plunge into European financial waters, Uncle Sam has got the foreign lending habit and has loaned $117,000,000 to Latin-America, mainly to Argentina and Chili: $39,000,000 to neutral European nations, including Switzerland, Norway, Greece and Sweden. Not desiring to play any race favourites, he has speeded China on her way to enlightenment to the extent of $4,000,000.

In buying foreign war bonds--a procedure which in war time naturally involves sentiment--it is wise for the investor to watch his step.

Patriotism is all right in its place but unless you can afford to contribute money for purely emotional reasons, a cold business estimate of the situation is advisable. This applies especially to the man or woman with savings who cannot afford to take chances. He or she will find it a good rule to stick to external bonds except under exceptional conditions.

One objection to the average internal bond is that with the exception of England the native money has greatly depreciated in international value.

Of course, if all these countries finally get back to their old standards of wealth, these investments will yield a very large profit.

To reap this benefit, however, it will be necessary to hold the securities for a considerable period because it will take the warring countries a long time to "come back." Another fact in connection with internal bonds well worth remembering is that while belligerent countries will scrupulously respect their obligations held by a great neutral like the United States whose good will and resources will be very necessary after the close of hostilities, there is the possibility, remote though it may be, that repudiation of home issues may come in the shock of readjustment.

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

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

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

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

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

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

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

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

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

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

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

Strange as it may seem in the light of the present frightful ravage in Europe, no country has ever been completely ravaged by war. When I returned from Europe more than a year ago, I was convinced that economic exhaustion would be the determining factor: that victory would perch on the side of the biggest bank roll. After a second trip to the warring lands I am convinced that I was wrong in my first impression.

Observation again in England and France leads me to believe that man power--beef, not gold--will win. The extents to which financial credit can be extended in the countries at war seem to be almost without limit.

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

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

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

The income tax alone will serve to show the enormous increase in tribute. From .04 per cent on small incomes to 13 per cent on large ones before the war it has risen to 1 per cent on small incomes to over 41 per cent on big ones. Again, 60 per cent of all excess profits earned since the war are surrendered to the State.

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

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

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