All the Tsar’s Men
Why Mobilization Can’t Save Putin’s War
AFEW months ago I was reading a Chicago Tribune on the train. With some surprise I found recorded on the financial page the listed prices of 128 different issues of foreign bonds. I have a great respect for the judgment of the newspapers. They print the news that they think people are interested in. When I noticed that this great newspaper which serves the Middle West was recording daily the market transactions in 128 different issues of foreign bonds, it seemed to me a fact of some significance. I found myself speculating as to the number of issues of foreign bonds which had been quoted by the Chicago Tribune in the edition published exactly ten years before the date of the paper which I was reading. I subsequently learned from the Editor that the number was six. The comparison between the number of foreign issues quoted then and now is an interesting commentary on what has happened in the field of foreign bond investment in the past ten years.
Examining that long list of 128 foreign bonds in the Tribune, I discovered that governments, municipalities or corporations of some 30 different countries were represented -- countries scattered all over the world. The list included the countries of our own hemisphere, Canada, Cuba, Brazil, Argentine, Chile, Peru, Bolivia, Uruguay; nations abroad with whom we fought and against whom we fought, Great Britain, France, Italy, Germany, Austria, Hungary; governments in the Far East such as Japan and the Dutch East Indies; and cities as widely separated as Copenhagen and Montevideo, Tokio and Marseilles.
The contemplation of the extent and variety of America's investment in foreign bonds, gives rise to three questions: Who buys these bonds? Why do they buy them? What do they get when they have bought them?
Who buys foreign bonds? This may seem to be an easy question to answer, but it is not. When a foreign loan is offered to American investors, the managing house in New York, or Boston, or Chicago enlists the coöperation of perhaps five hundred or a thousand investment bankers scattered all over the United States. It is the function of the local investment banker to find the man or woman with savings and to show that man that it is to his interest to exchange his savings for the promise of a foreign government. It is this ultimate saver who really extends the credit to the foreign government. The managing house rarely meets the ultimate buyer of the bonds; it is to the five hundred or thousand investment houses that we must go to find his name and characteristics. These investment houses have developed their own cliéntèle of investors. That cliéntèle is changing constantly, dependent upon the character and the ability of the investment house and the record for successful judgment that it has established. Moreover, it is considered somewhat impertinent for one to ask an investment house to whom the bonds are sold, as such information is carefully guarded. The local investment bankers have tried to teach certain people to save, and they expect to attract the future savings of these people by selling them more bonds. They do not want investigators prying into that part of their business without a very good reason.
In the summer of 1924 when I was asked to speak at Williamstown at the Institute of Politics, I tried to find an answer to this question of who buys foreign bonds. Taking two recent foreign government loans, the issue of which had been managed by the firm of which I have the honor to be a member, we inquired of three investment houses doing business in different parts of the country as to the number of persons to whom they had sold these bonds. The loans were the $25,000,000 Austrian Government Guaranteed Loan and the $150,000,000 Imperial Japanese Government External Loan of 1924. The results of our inquiry showed that through these three houses 409 people participated in the Austrian Loan, the average investment of these 409 people being $2,350. Through the same three houses, 1,741 people participated in the Japanese Loan, the average investment of these 1,741 people being $3,100.
The results of the inquiry as presented to the students of international relations at Williamstown seemed to be of interest, and later in 1924, at the request of the President of the Investment Bankers Association, we extended the inquiry to 24 houses (still covering only the Austrian and Japanese loans, however). This investigation confirmed, in a general way, the results of the earlier one. For one thing, it disposed of the idea that offerings of foreign bonds are taken solely by wealthy individuals or large institutions. It showed, on the contrary, that these foreign bonds are being bought by large numbers of persons of moderate means. The 24 houses had 2,965 customers who made an average investment of $2,994 each in the Austrian bonds. The 24 houses had 8,211 customers who bought Japanese bonds, making an average investment of $3,905 each.
Finally in the spring of 1926, we broadened the inquiry by obtaining a similar analysis of their sales of three additional foreign government loans. The results of the earlier inquiries might perhaps be subject to criticism by statisticians, because they covered so few bond issues and because, particularly as to the first inquiry, so small a "sample" of the investment houses which distributed the loans was taken. But in this latest inquiry five loans aggregating $380,000,000 were covered. Moreover, the 24 houses sold an aggregate amount of $91,031,800 of these five issues, or about 25 percent of the total amount. These 24 investment houses who courteously furnished us with the sales analysis which we sought are located in different parts of the country from Portland, Maine, to Portland, Oregon, and from Minneapolis to New Orleans. From our own knowledge of the character and distributing ability of the investment houses of the country, we feel reasonably confident that these houses selected for analysis constitute a fairly representative cross section of the entire group of investment houses throughout the country.
Our analysis of the sales of these 24 houses covered five separate foreign government loans, the issue of which was managed by J. P. Morgan & Co., alone or with associates. These loans were offered to the American public within the past three and one-half years: the $25,000,000 Austrian 7's in June, 1923, the $150,000,000 Japanese 6½'s in February, 1924, the $110,000,000 German 7's in October, 1924, the $45,000,000 Argentine 6's in June, 1925, and the $50,000,000 Belgian 7's in June, 1925. The results of this inquiry are shown in the table printed on the following page.
This table shows, first, the proportion of each issue sold by the 24 houses. Next, is shown the total number of sales and the total amount sold of each issue by the 24 houses, and the average amount of each sale made by the 24 houses. If we may assume that these houses constitute an adequate "sample," we may extend these figures to cover the entire amount of each issue and obtain the following results:
|DISTRIBUTION OF FIVE FOREIGN GOVERNMENT BOND ISSUES BY 24 REPRESENTATIVE AMERICAN BOND HOUSES|
|Government||Government||German||the Argentine||Kingdom of|
|Guaranteed Loan||External Loan||External Loan||Nation External||Belgium External|
|7% Bonds||6½% Bonds||7% Bonds||6% Bonds||Loan 7% Bonds|
|(June, 1923)||(February, 1924)||(October, 1924)||(June, 1925)||(June, 1925)|
|Proportion of Entire Issue Sold by the 24 Houses||35.5%||21.4%||22.2%||33.0%||21.3%|
|Number of Sales||2,965||8,211||7,654||3,431||2,832|
|Average Amount of each Sale||$2,994||$3,905||$3,194||$4,335||$3,808|
|Sales $100 to $5,000:|
|Number of Sales||2,671||7,265||6,952||2,724||2,453|
|Percent of Total Number||90.1%||88.4%||90.9%||79.4%||86.6%|
|Percent of Total Amount||62.9%||44.2%||53.6%||42.7%||51.4%|
|Sales $5,100 to $10,000:|
|Number of Sales||207||600||433||532||269|
|Percent of Total Number||6.9%||7.4%||5.6%||15.5%||9.5%|
|Percent of Total Amount||19.8%||16.5%||15.8%||27.8%||23.0%|
|Sales over $10,000:|
|Number of Sales||87||346||269||175||110|
|Percent of Total Number||3.0%||4.2%||3.5%||5.1%||3.9%|
|Percent of Total Amount||17.3%||39.3%||30.6%||29.5%||25.6%|
|* Part of a larger international loan.|
|Total Number||Average Amount|
|Name of Issue||of Buyers||of Each Sale|
The above figures confirm those of the earlier inquiries as to the large number of sales made and the moderate average amount of each sale.
The table opposite next shows a classification of the sales of the 24 houses into three groups according to the size of the sale made. That we are dealing with a multitude of small investors rather than with a few large investors is further demonstrated by this classification of the sales. It will be seen that from 80 to 90 percent of the number of sales in the case of each issue were made to investors whose purchases were limited to $5,000 or less. Only from 3 to 5 percent of the number of sales for each issue were made in amounts over $10,000. It is clear that in number the large investors were relatively unimportant.
But the consideration of only the number of small and large investors might present an exaggerated impression of the importance of the small investor. This is unnecessary, as he is quite important enough without any exaggerating. There is, obviously, a difference between a comparison of the number of small and large investors and a comparison of the aggregate amounts purchased by each group. The number of small investors might be very great but a few very large sales might still result in making the large investor the more important factor in disposing of an issue.
Our analysis of the sales of the 24 investment houses also covered, therefore, the aggregate amount of bonds sold to investors in each of the three groups, from which could be ascertained the ratio which the aggregate amounts sold in each of the groups bore to the total amounts of each issue sold by the 24 houses. Examining them, we see that a good deal depends upon where the line is placed between the small and the large investor. If we draw the line at $5,000 it is apparent that, while the group of large investors taking more than $5,000 each is relatively small in number, it is by no means negligible with regard to its aggregate purchases of foreign loans. Comparing the two groups, both on the basis of number of buyers and on the basis of the total amounts of the issues purchased, we have the following summary from the figures:
|Percent of the||Percent of the|
|Total Number||Total Amount of|
|of Buyers who||the Issue Purchased|
|took $5,000 or||by Buyers who took|
|Name of Issue||less||$5,000 or less|
I present all these statistics with some hesitation because they necessarily are based upon a method of sampling and I well realize how difficult it is to obtain representative samples for any statistical work, and how difficult it is to draw proper conclusions from such samples without danger of distortion. Having made such reservations, however, it would seem reasonable to draw the conclusion from the statistics presented, that more than 85 percent of the people who bought these foreign bonds purchased them in small amounts ranging from $100 to $5,000, and that approximately 50 percent of the total amount of these foreign issues was purchased by these small investors.
The investment in these foreign loans represents the savings of the person who spends less than he produces, and thus creates a fund which he is able to turn over either to a domestic or to a foreign borrower if he is satisfied with that borrower's promise. These savers live all over the United States. When we talk about the person who is investing in foreign bonds we are not talking about a great institution in New York or Chicago or Boston. We are talking about thousands of people living in all parts of the United States. We are talking about school teachers and army officers and country doctors and stenographers and clerks. The man who invests in a foreign bond may be rich or he may be poor. That is all according to our standard. Fundamentally, however, he is a person who has saved something, who is doing without something today in order that he or his children may have something tomorrow. Before he invests in the bond he has money which gives him a present command over goods and services. He is willing to transfer this present command over goods and services to the borrower, thereby giving to the borrower the right to buy goods and services. Of course, the investor resumes the command of goods and services at some future time when he is repaid his loan.
The person who invests in foreign bonds is probably the same person who invests in domestic bonds. All that the investment banker in a large city or in a small city does, all that an international banker does, is to gather up little rivulets of savings and put them at the disposition of somebody who needs the capital and is willing to make a dependable promise to pay interest upon that borrowed capital from time to time and to repay the principal at the due date. The answer to the question about who buys foreign bonds is clear. The purchasers are people all over the United States who are investing their savings. If the investment in these bonds is helping American foreign trade, it is this saver of money who should be thanked. If the investment in these bonds is helping the restoration of the rest of the world to a normal condition, it is this saver of money who is entitled to the credit.
Now, the second question, -- why did these people lend money to Austria, or Japan, or Germany, or Argentine, or Belgium? Here, statistics are of little value. Men have not yet found a method of measuring the motives of other men. In fact, it is difficult enough to know our own motives. Perhaps, however, we may be helped in answering our question if we ask another question. Why does anybody make an investment in one particular security rather than in another? The considerations in the minds of most investors are, first, the safety of the principal and, second, the size of the interest yield. It should be borne in mind that the investor is the man who has done without something. He has done without something that he might have presently enjoyed in order that, in the future, his family may have some protection when he is gone, or in order, perhaps, that a son or a daughter may go to college. This investor wants to be certain that he will continue to receive income on the bond which he buys. He wants that income as large as is consistent with safety. Above all, he wants the principal returned to him on the day of the maturity of the bond.
It cannot be asserted, however, that sentiment plays no part in our investments. It does. Many men in this country bought German bonds, after the successful launching of the Dawes Plan, not only because the interest rate was attractive and the principal seemed secure, but because they felt that they were thus associating themselves in a fine venture to help Europe back on her feet. But after all proper weight is given to such considerations as these, the question of safety of principal and of interest, and the attractiveness of the rate of interest, remain the considerations uppermost in the mind of a man who has done without the present use of his own money and is investing that money in order to protect the future of himself and of his family.
If that be true, how is the investor to form an intelligent judgment as to the safety of his investment? How does the man in the Middle West, who responds to an invitation from his investment banker to buy an Austrian or a Japanese bond, know that his investment is safe? If he should be asked this question, I think that he would put in the very forefront of his reasons for making the investment the fact that he had confidence in the banker who offered him the investment. After all, the people who buy bonds must rely largely upon the judgment of the offering houses. They must believe that their investment banker would not offer them the bonds unless the banker believed them to be safe. This throws a heavy responsibility upon the banker. He may and does make mistakes. There is no way that he can avoid making mistakes because he is human and because in this world things are only relatively secure. There is no such thing as absolute security. But while the banker may make mistakes, he must never make the mistake of offering investments to his clients which he does not believe to be good. Moreover, when a banker directs savings into an investment he should believe that the borrowed money is to be put to a constructive use. To the cynic that may sound somewhat idealistic. It is, however, just plain common sense. No banker who wants to stay in business throughout the years wants to lend money to people who are not going to use it for a constructive purpose. The use to which the money is put is a very important factor in determining the ability of the borrower to pay his interest promptly and to return, at maturity, the principal.
An attempt has been made to answer the first two questions -- who buys these foreign bonds and why do they buy them? There remains what is perhaps the most interesting question: what does an investor get when he buys a foreign bond? In 1924, 40 persons in a Western city put $100 apiece into a Japanese bond maturing in 1954. What did those people get for their money? They got a promise. And mark you, that promise was the promise of a group of people associated together on the other side of the earth. Moreover, so far as the promise relates to the payment of the principal of the bond, the promise does not mature in time to be kept by the particular members of the group who originally made it. It is a promise designed to be kept by the children of men now living. Yet somehow or other the banker who offers that bond and the investor who buys that bond rely upon the people of Japan taxing themselves a generation from now in order to pay back the principal of that loan to the children of the person who invests in the bonds today. At first blush it is a startling idea. It is particularly startling at this time when so many people are saying that the various nations of the earth have lost faith in each other. Here we have printed in a Middle Western newspaper the record of the day's dealings in 128 foreign bond issues. Individuals in America are taking their own money, with its present command over goods and services, and surrendering that command to nations on the other side of the earth, and they receive in exchange for it a promise. The question may be asked: nothing more than a promise? To which answer may be made: nothing less than a promise.
I remember reading some years ago a letter of Thomas Bailey Aldrich written to William Dean Howells. Aldrich is writing of a friend who has just died, and whose body is resting in "a dismal London burying ground." He says to Howells that it is not worth three pins to be a great novelist, or a great general or a great anything else. Then he winds up his letter with this whimsical expression: "Yet with a sort of hopeful vivacity I have just bought two 5 percent railway bonds that expire in 1967. Who will be cutting off the coupons long before that? Not I." There was Aldrich, despondent because of the transitoriness of life, taking his savings and putting them in railway bonds that matured long after his life would end. Every day investors are buying bonds, domestic and foreign, although they have every reason to wonder who will collect the coupons. Human lives stop. Promises go on. The civilized world today is run on the basis of a belief in promises. Whatever our doubts about the meaning of modern civilization, we may at least take some comfort in the trust which men show in each other's promises.
It was not always so. Early trading began with physical things. The man who had something to sell kept a tight hold with one hand upon the thing he was giving up until he got a tight hold with the other hand upon the thing he was getting in exchange for it. Little by little men learned to trust one another. Markets were developed in which men sold by samples. In such a sale the seller must produce a sample of the thing which he is contracting to sell; the quantity agreed to be sold is later delivered and the buyer makes payment therefor. Mutual promises had to be kept to make such a trade effective. Finally, we have reached the stage of civilization when we buy and sell promises. No man can play an important part in modern commercial civilization unless he respects his promises in letter and in spirit. That is true in all of our day to day transactions. We want no commercial dealings with people who cannot or will not keep their promises. The keeping of the promise is the fundamental virtue of commercial life. Therefore, when one says that the purchaser of a foreign bond has nothing more than a promise, the answer can be made in all seriousness that he has nothing less than a promise.
It is apparently believed by some that loans to foreign governments made by our citizens throw upon our own Government the responsibility of using the armed forces of our Government for the purpose of collecting the debts. From leading government officials of both Great Britain and the United States we have had in recent years quite clear pronouncements upon this question. In a debate in the British Parliament in December, 1902, during the controversy with Venezuela, Mr. Balfour, the Prime Minister at the time, said:
"I do not deny, in fact I freely admit, that bondholders may occupy an international position which may require international action; but I look upon such action with the gravest doubt and suspicion, and I doubt whether we have in the past ever gone to war for the bondholders, for those of our countrymen who have lent money to a foreign government; and I confess that I should be very sorry to see that made a practice in this country."
Mr. Root, then Secretary of State, speaking in Buenos Aires in 1906, made the following statement:
"The United States of America has never deemed it to be suitable that she should use her army and navy for the collection of ordinary contract debts of foreign governments to her citizens. For more than a century the State Department, the Department of Foreign Relations of the United States of America, has refused to take such action, and that has become the settled policy of our country. We deem it to be inconsistent with that respect for the sovereignty of weaker powers which is essential to their protection against the aggression of the strong. We deem the use of force for the collection of ordinary contract debts to be an invitation to abuses in their necessary resuits far worse, far more baneful to humanity than that the debts contracted by any nation should go unpaid."
The foregoing expressions of Mr. Balfour and Mr. Root are important not only because of the high official positions that these eminent statesmen held at the time but also because of the great weight which properly attaches to their personal opinions upon a question of this kind. But however valuable such expressions may be, either as a statement of the national thought at the time or as a means of influencing the public thought of the peoples to whom they are addressed, such expressions do not necessarily constitute international law or even a binding rule of conduct. The declarations of statesmen are perhaps more likely to express the ideals than the practices of nations. International law, however, is a gradual growth, based upon custom and conduct. When customs become so well settled that their violation excites the general disapproval of civilized men, we have a real basis for international law. Now, he who seeks to know the custom of nations with respect to the enforcement of contract debts against another government enters a most difficult field. It is hardly surprising that the causes of war are never fully known to the actors. But the long, painstaking work that must be done by unbiased historians before an approximation of the truth can be ascertained must make any candid person almost despair of a complete conviction as to causes. I have not been able to find a clear case of a nation going to war for bondholders. It is only fair to say, however, that contract claims against a foreign government have often been joined with claims for other injuries, or with larger questions of political policy, and that so joined they have been made the basis of armed intervention. I have immediately in mind the military operations against Mexico in 1861, against Egypt in 1880, and against Venezuela in 1902.[i]
I have neither the competence nor the desire, however, to discuss from the point of view of the international lawyer or the historian this alleged practice of using armed force to collect contract debts. A difference will readily be noted in the treatment of claims arising out of injuries inflicted upon persons or upon their physical properties and claims growing out of contracts. Where the wrongful act of a foreign government inflicts injury upon a person or upon his physical property, the law of nations seems to recognize the propriety of a demand for reparation. Contract claims, however, have not been treated in the same way, though nations have on occasion made official and unofficial representations regarding violations of contracts and failure or refusal to pay bonded indebtedness. They have also broken off diplomatic relations with the delinquent country as a means of enforcing payment. Nations have also repeatedly submitted bond claims to arbitration. They have also, in rare cases, used measures of force short of war, such as reprisals and that curious procedure known as pacific blockade. President Jackson, in 1834, in connection with certain damage claims not related to bond obligations, actually recommended reprisals. And in 1902 Great Britain, Germany and Italy enforced certain demands against Venezuela, which included the payment of bond obligations, by a pacific blockade. The advancing interest of civilized governments in this whole question is evidenced by the action taken at the Second Hague Peace Conference in 1907. That conference adopted a Convention respecting the limitation of the employment of force in the recovery of contract debts the pertinent part of which reads as follows:
"The Contracting Powers agree not to have recourse to armed force for the recovery of contract debts claimed from the Government of one country by the Government of another country as being due its nationals.
"This undertaking is, however, not applicable when the debtor State refuses or neglects to reply to an offer of arbitration, or after accepting the offer prevents any 'compromis' from being agreed on, or, after the arbitration, fails to submit to the award."
This Convention seems to assume that there was a right to use armed force to collect contract debts before the adoption of the Convention. Certainly, if Mr. Root is correct, no such right was ever exercised by the United States. What is perhaps more important, the second paragraph seems to imply that a formerly existing right to use force to collect contract debts is still to survive if and when the specified conditions are applicable. It is not surprising, therefore, that very generally the Latin-American countries in adhering to the Convention made reservations which negatived their consent to the use of armed force against them even though the conditions of the second paragraph had come into existence. Although some critics of this Convention have questioned whether the subject was left in an entirely satisfactory situation, there can be no doubt that the delegates to the Convention were earnestly seeking to put some limitation upon the use of armed force which had not been accepted by all nations theretofore.
I am writing, however, from the point of view of the investor. Investors, as much as any group of people in the community, are interested in seeing the policy announced by Mr. Root in 1906 scrupulously carried on. Investors who buy foreign loans are in a position to appreciate what a fruitless remedy for breach of contract war is. The establishment of the principle that nations are justified in going to war where the sole issue is the collection of a debt would be not only most hurtful to the nation at large, but, in the long run, would prove injurious to the property interests of the bankers who sell and the investors who buy foreign government loans. Is there any one who thinks that if a man owes him money and cannot pay it, there is profit in going out and killing the debtor? Entirely apart from the immorality of putting human lives to the hazard of modern war where the sole issue is a pecuniary claim, there is a conclusive practical reason against such a source in that war in the great majority of cases does not, and cannot, accomplish the desired result.
Loans are made to foreign governments in reliance upon the capacity and the good faith of those governments. The intelligent investor recognizes that in the long run a government which defaults upon its obligations hurts itself even more than it hurts its creditors. Even in cases where specific taxes or customs are allocated for the service of a loan, the main reliance of the creditor must be upon the desire of the debtor government to maintain the particular revenues and keep them available. Even when a foreign expert is placed in charge of revenues, the arrangement is helpful only when made with the hearty concurrence of the debtor government, and with the belief and expectation on the part of the debtor government that the fiscal arrangement will redound to its own advantage.
If the foregoing be true, how safe are these investments? To my mind that inquiry is much the same as an inquiry as to the safety of a domestic bond. Some domestic bonds turn out to be good and some turn out to be worthless. There is no reason to expect that it will be otherwise with foreign bonds. Those nations who are borrowing in America because they actually need the money for a constructive purpose; who have a solidarity of national feeling and a sense of the meaning and the value of national credit; who are not incurring obligations beyond what may fairly be considered their capacity to handle; -- all those nations may be expected to pay their debts. Here again the responsibility rests heavily upon the investment banker in recommending investments. The banker must never be lured, either by the desire for profit or by the desire for reputation, to recommend an investment which he does not believe to be good. But, fundamentally, the reliance of bankers and investors is upon the capacity and, above all, upon the good faith of the foreign government. The foreign government must be able to pay, and it must want to pay.
If it is true that it is upon good faith that lenders to foreign governments primarily rely, it is no less true that it is upon good faith that lenders rely in almost all of their domestic dealings. Of course, there is a sanction ultimately applicable to domestic contracts. The proper legal steps may be taken; the breach of the contract may be proved; and execution may be issued through the sheriff. But we do not in practice put much reliance upon the help of a sheriff in enforcing contracts. We do not willingly deal with one upon whose property we expect to levy execution. When we need the sheriff to help collect a loan, we recognize that our venture has turned out a failure. We are then simply trying to save some planks from a shipwreck. In the overwhelming majority of business transactions, we rely upon the ability and the willingness of the debtor to pay. On no other principle could modern business be conducted.
There is no international sheriff. But there still remains our reliance upon good faith, our reliance upon that law which is older than statute law -- the acknowledged custom of mankind. The credit of governments is not easily built up. It may easily be shattered. And it must never be forgotten that there are rules of conduct accepted by the silent approval of civilized man, the breach of which hurts the one committing the breach much more than the one against whom it is committed. If good faith cannot be relied upon it is better that the loan be not made. The words with which Hugo Grotius closed his great book more than three hundred years ago are true: "Not only is each commonwealth kept together by good faith, but that greater society of which nations are the members. If faith be taken away the intercourse of men is abolished."
[i] Mr. Hartley Withers, formerly Editor of the London Economist, apparently believes that the default in the Egyptian bonds was used for a political purpose. He states that "the bondholders were certainly benefited, but it is my belief that they might have whistled for their money until the crack of doom if it had not been that their claims chimed in with Imperial policy." International Finance (1916), p. 104.