I

UNTIL recent years the United States was, on the net balance, a borrower, not a lender to foreign countries. In 1914 American investments abroad were limited almost entirely to Canada and the Latin-American countries, and were smaller in volume than those held by the peoples of the older industrial countries of Europe in American enterprises. Our varied and extensive natural resources, our rapid and unprecedented industrial expansion, our skill in improving and utilizing machine technique afforded constant and well-rewarded opportunities for all the capital which we accumulated. In fact, it might almost be said that American capital was accumulated so rapidly because there were such urgent uses for it. Thus comparatively little of it emigrated on the promise of better returns than might be won within the country. Capital, like our young men, "went west." In addition, there remained many attractive openings in America for foreign capital. American borrowings began in the Colonial period; Colonial plantations often were in debt abroad. Old records of the London Stock Exchange show that in 1825 nine issues of United States Government bonds were quoted in that market, besides a considerable number of state and city shares. In 1836, Baring Brothers of London arranged a two-million-dollar loan for the Baltimore and Ohio, the first of the long succession of investments made in American railroads by British, Dutch, and French citizens. The sum mounted; Sir George Paish, in an investigation made for the National Monetary Commission, estimated the total of foreign capital invested in the United States in 1910 at six and one-half billion dollars. But the war and its consequences, the re-sale of American securities in this country to discharge debts, the sequestration of the property of ex-enemies, has reduced that sum by more than half.

American investments paid their foreign holders well, by and large. English financial reviews, nervously regarding some of the present ventures of British finance abroad, reminiscently contrast the old American investments with the new. But even with the old there were some disappointments. The Annual Reports of the British Council of Foreign Bondholders still record the fact that the holders of the bonds of various Southern states, to the amount of sixty million dollars principal (interest at 6 percent for some fifty to eighty years), still are waiting to be repaid. Nor did foreign capital always escape the disastrous effect of early American railroad financing.

The situation has been reversed since 1914. Even leaving out of the reckoning the more than ten billion dollars of war and post-war loans owed to the American Government by foreign governments, we have become a creditor nation. On private account we have been investing vast sums in foreign securities and properties--exactly to what extent it is impossible to determine. A host of serious difficulties plague the statistical inquirer on the subject and make anything better than rough estimates impossible. The Bureau of Foreign and Domestic Commerce has published the following estimate of the sum total and geographical distribution of American investment abroad at the end of 1924.

VALUE OF AMERICAN INVESTMENTS ABROAD

(Estimated, in Millions of Dollars, at the End of 1924)

Gov't and Gov't
Region Guaranteed All Other Total
Obligations Investments
Canada and Newfoundland 1060 1400 2460
Latin America 840 3200 4040
Europe 1500 400 1900
Asia and Oceania 440 250 690
---- ---- ----
   Total 3840 5250 9090

This table requires a brief explanation. Included under the heading "Government and Government Guaranteed Obligations" is a great volume of loan transactions entered into by industrial enterprises (government owned and otherwise) on their own account, and tabulated as they are only because a government guarantees their security. Such, for example, are the more than three hundred million dollars of securities of the Canadian Government railway system owned in this country, as also the recent issues of French railway loans. The table thus does not indicate the division of our investment between economic uses (or productive uses, as it is sometimes called) and uses of another character, usually of purely governmental character.

The grand total approximates nine billions. Canada appears as the greatest single field of our foreign investment. But taking all the Latin-American countries together we find an amount of over four billions, which is much greater than that of Canada; in Cuba alone our investments total over a billion and a quarter, and in the South American countries a similar sum--in Chile alone about four hundred millions. The whole represents a great diversity of enterprise. We already dominate many important industries in Latin American countries, as the Director of the Bureau of Foreign and Domestic Commerce pointed out in a recent issue of FOREIGN AFFAIRS,[i]--mining on the West Coast of South America and in Mexico, meat packing in the River Platte region, petroleum in Mexico, Colombia and Peru, and sugar, tobacco and railroads in Cuba. The distribution of our Canadian investment at the end of 1923 is shown by the following estimate:

AMERICAN INVESTMENTS IN CANADA

(Estimated, in Millions of Dollars, at the End of 1923)

Federal, Provincial and Municipal Governments 701
General Industries 540
Railways 370
Forests, including pulp, paper, and saw mills 325
Mining 235
Public Utility 138
Land 50
Banking and Insurance 35
Miscellaneous 31
----
   Total 2425

Estimates as to what has occurred in the field of our foreign investments during the year 1924 have a particular interest. Those given below are revisions of the figures published by the Bureau of Domestic and Foreign Commerce. The revision was undertaken especially to distinguish the loans made to industrial enterprises from loans of other varieties--irrespective of whether the former are or are not backed by a government guarantee. But it should be noted that even here the division is somewhat faulty, because some of the loans included under the heading of government loans were for industrial purposes (securities taken at par value; only public issues included).

FOREIGN SECURITY ISSUES SOLD IN THE UNITED STATES DURING 1924

(In Millions of Dollars)

Loans Made to
Industrial Government Total
Enterprises Loans
Canada 98 34 132
Cuba 34 . . . 34
Mexico . . . . . . . . .
Central America and West Indies 4 2 6
South America 11 79 90
Europe 112 440 552
Asia and Oceania 38 76 114
--- --- ---
   Total 297 631 928

To arrive at an exact estimate of the whole net addition to American investment abroad during the year 1924, various deductions and additions to the items in this table would be necessary--deductions for bankers' commissions, for spread between par and sales price, for re-sales to foreigners of previous issues--additions for American purchases of old issues, and for unrecorded private investments of many kinds. It is reasonably certain that the totals given are not exaggerations. Of the whole sum loaned in 1924 about 68 percent went to governments. The remainder went to corporate enterprises, in some cases government controlled or guaranteed. Geographically, the total was distributed as follows: Europe 60 percent, Latin-America 14 percent, Canada 14 percent, Asia and Oceania 12 percent. These percentages represent an under-estimate of the proportion of our total investment which went to Canada and Latin-American countries, because few investments, except those made through public security issues, are included.

This outline of the extent and direction of American foreign investment raises several questions. First, will this flow of American capital continue? There are strong reasons to believe that it will. The American industrial organization will remain capable of producing as much as in 1924; as large a sum will be available for foreign investment. Our efforts to expand our export trade and the tendency to establish branch factories will continue. Many American industries may be expected to acquire foreign properties to supplement their raw material supplies. The extension of railroad systems in Asia, South America and elsewhere will offer tempting opportunities, and many other fields of future activity for American capital are to be discerned. The investing public has shown a willing disposition to take the risks involved. The bankers have shown no reluctance in sponsoring foreign loans; the commissions are probably generous. So ready has the response been that it almost looks as if the country, by a queer psychological inversion, were trying to down its uneasy remembrances of the panicky course of isolation adopted in 1920. Barring international political or economic developments ominous enough to frighten the present investors, the flow of American capital abroad will continue. There are, indeed, good reasons to believe that the limits to this movement will not be so much our capacity to lend as the capacity of other countries to return interest and principal upon their borrowings. This will almost certainly be true as regards our European loans if we and other creditor countries should insist upon full payment of war debts.

But the flow of American capital will hardly continue at the rate of 1924. Special influences were at work to swell the 1924 total. It was the year of re-born hopefulness, the year of the Dawes Plan; it followed the period of the Ruhr bitterness and restricted international borrowing. Furthermore, extremely favorable conditions in the money market made it possible during the whole year to borrow at an unusually low rate. The future movement of American capital abroad will be spasmodic, will vary greatly in accordance with the international political prospect and with the money market conditions here and abroad. There may even be perio[ILLEGIBLE WORDS]f fright and large re-sales. And before very long Great Britain, and perhaps other former creditor countries, will become more formidable competitors in the loan market; they may be able and willing to loan at lower interest rates than the United States. That is shown by the recent Swiss loan in Holland, to be used to pay off an outstanding American loan. Despite these factors, however, the volume of our new loans is sure to remain large.

A second question arises as to whether the distribution which marked our investments in 1924, both geographically and as between loans to governments and to private enterprises, will hold true of our investments in future years. Europe has been borrowing a greater part of the total than she is likely to ask or receive in the future--especially Western Europe. We have been loaning to countries such as France, Germany, Belgium, Switzerland, Denmark, and Holland which before the war sent a great deal of capital abroad themselves. Their borrowing has been to meet budget deficits which must be ended, to restore liquid capital destroyed by war and inflation, and to reorganize banking and currency systems. If European economic recovery continues, these countries, with the possible exception of Germany, will be able to meet their own capital needs; indeed, if they do not do so, it will be a warning sign. As a result, a greater proportion of our foreign investments will again be in Canada, in Mexico, and Central and South America. Before very long China and Russia may become extensive fields of investment, though this does not seem in the immediate prospect. Even in the Australian and African continents we may do some venturing.

Furthermore, in the future a smaller proportion of our investments is likely to go to governments than was the case in 1924. Among the government loans of 1924 were the reconstruction loans--110 million to Germany, 100 million to France, 50 million to Belgium, and others of a similar character. The need for these, it is to be hoped, is passing. Yet the percentage of government loans will remain considerable. It is usually possible for governments to borrow in foreign markets at a lower rate than private enterprises. This may strengthen an already powerful tendency on the part of South American, Australian, and some European governments to undertake works of economic development through governmental rather than through private action.

II

We may now inquire into the chief economic and political consequences of this capital movement. Both are complex.

The position from the point of view of the private American investor is plain. There is reason to believe that the holdings of the more recent public issues are widely distributed. The National City Company is authority for the estimate, for example, that the Japanese loan of 1924, a loan of 150 millions, was sold to 44,000 different investors, and that the Austrian loan of 1923, of 25 millions, was sold to 9,000 investors. These American investors receive an interest return higher by at least 2 percent on the average than they would receive from similar government or industrial investment within the United States (slightly more than the difference of yield on British investments at home and in foreign countries before the war). It is obvious that they are taking a correspondingly greater risk. A considerable portion of this investment is in areas (as in parts of Latin-America) where political unrest is chronic and where legislation changes rapidly, or in areas in which there is a serious possibility of war or bankruptcy. The British experience of gains and losses in foreign investment is a mixed one. Up to the middle nineties of the last century frequent losses occurred through default by the Latin-American states, Turkey, Egypt, and China; Lehfeldt's estimate indicates that between 1888 and 1893 over forty percent of all British foreign investment was so affected. From the middle nineties to the outbreak of the war there were much fewer losses and much greater gains; the same study shows that less than one-half of one percent of the total bond investment met default during this period. But the French record was nowhere near as favorable. The war followed, bringing tremendous losses, especially to investors in Russia and the Balkan states--also, it should be recalled, to the holders of domestic securities in many countries.

The question regarding the national and international economic advantages and disadvantages arising from foreign investment (as distinguished from merely the advantages and disadvantages accruing to the investors) leads us into a still broader range of speculation. The results, from a purely national standpoint, are partly favorable, partly unfavorable; from an international standpoint, predominantly favorable.

Foreign investment ordinarily means the investment abroad of funds that would have been saved anyhow and invested in the home country. A little extra saving may be induced, but surely only a very small part of the total. If invested productively within this country, the exported capital would increase the effectiveness of American industry, and so add to our national income--that is, to the amount of goods and services at our command. That loss is the primary national sacrifice entailed in foreign investment.

To understand the gain secured from foreign investment requires consideration of a more extended chain of operations. When we make investments in foreign securities we do so in the first instance by giving a foreign enterprise or government command over liquid funds in the United States. The initial transfer is of liquid funds through the foreign exchange market. These funds may be spent by the foreign borrower within his own country, within the United States, or in other countries. It makes no important difference in which of these ways the funds are used so far as concerns the ultimate effect of such transactions on the economic relations between the borrowing country and the United States. For, in the final analysis, the loan is made by one or more of the following adjustments: 1. By additional exports (or lessened imports) of gold or other international money. 2. By additional exports (or lessened imports) of other securities. 3. By additional exports of goods, or additional rendering of services (such as banking, shipping, or insurance). 4. By reduction of the imports that otherwise would have been bought, or lessened utilization of foreign services. Only in these ways are the credits in the foreign exchange market, which are transferred to the borrowing country, created. These adjustments may sometimes take place before the foreign borrowing takes place, may even be a cause of the borrowing, not a consequence; but such cases do not seriously modify the general conclusions with which we are concerned.

There is no way of telling certainly in advance which of these adjustments will come about as the result of any single loan transaction or any given volume of loans. Within the past few months a small part of our loans have been made by the direct shipment of gold, as to Germany, and that outward flow may assume larger proportions. But such a movement would cease as soon as our present huge accumulation of gold is seriously diminished. As for the second mode of adjustment, that is still more unusual, for it means that while a country is loaning abroad it is also borrowing abroad. To a certain extent such is always the case, but rarely on a large scale; the investment in American securities which has taken place abroad since 1919 is the result of special causes. The chief methods of adjustment when foreign loans are made are the third and fourth, as the fluctuation in the American trade balance in past decades amply establishes. Our present foreign loans are being made by sending abroad more goods and rendering more services to foreigners than we otherwise would (it may be only preventing their decrease), or by receiving from abroad fewer goods and services. The interest payments to the lenders in this country and the repayment of the principal will likewise take place, in the main, through opposite movements of the same nature. Re-sales to us of American securities acquired in recent years of European fright may, however, have some importance.

This is a summary statement, more or less on traditional lines. A thorough account of the subject would pay attention to a multitude of minor but not negligible special cases and complexities. But important as are these special cases in any professional understanding of the subject, the preceding conclusions do not depart too far from the actual truth. If a doubt exists as to their adequacy, it is not because of these qualifications, but rather because the future holds a hidden possibility of another breakdown of the whole financial mechanism of foreign commerce, owing to the strain of the great volume of interest payments that will have to be made on these loans, on the interallied war loans, and under the Dawes scheme.

Studying these means of transferring our loans abroad, we can discern three possible gains. First, to the extent that the loans are made by the exportation of American goods or the use of American services (and not by the alternative ways), American export industries benefit and American shipping, banking and hotel services profit. But the national gain from these sources is probably not nearly so large as is often supposed. The same industries, or others employing the same resources and labor, would probably find occupation producing for domestic demands if the foreign ones were not made effective by our foreign loans. Still, some gain there doubtless is. But to what extent--it must be repeated--our foreign loans are made by the transfer of American goods rather than by other means is unascertainable; our high protective tariff policy, by making the terms of trade more difficult for other lands, hinders this outcome.

Secondly, the interest payments on these loans, and their repayment, will come to us in the same forms in which the loans were made, though perhaps in different proportion. Here several stages should be distinguished, though the various possible permutations cannot be traced out. For yet a while the interest payments due us may amount to less than the new loans we are making; and in this stage the interest payments, in part or whole, may be paid by merely making unnecessary the adjustments which otherwise would have followed the new loans. But the subject is too complex to permit of any short and accurate statement. That stage, however, will gradually yield to another one--in fact is almost ready to do so now (the net interest income of the United States from abroad reached 464 millions in 1924, according to the Department of Commerce calculations). Ultimately, the volume of interest payments to this country will exceed the new loans, and the movements discussed above will then be definitely reversed. We shall export fewer goods and services than if the loans had not been made, or, more likely still, the volume of our imports will swell greatly--how greatly will largely depend upon our own tariff policy. Without any further effort on our part, we shall receive from abroad a large volume of desirable goods or have desirable services performed, eat Cuban sugar, use Chilean copper, pass our summers in Swiss villas, or study art in France--not the same individuals as have made the loans, perhaps, but other Americans. And since the interest rate is higher than would have been received at home upon the invested capital, the return is greater than the loss of national income originally sustained (this conclusion is only presumptive, and depends on many things of which the safety of the foreign loans is only one and not the most important).

Thirdly, the loans we are making abroad may be used either for unproductive or for productive purposes. They may be used to prepare for or to wage war, as, for example, were many of the French loans to Russia and the Balkan States; on the other hand, they may be used to build houses, improve railroad equipment, establish new industries. The bulk of present loans are being used productively. To the extent that they are so used, other countries will benefit from our loans. That is our international service. And to the extent that the productivity of other countries is thus increased, we may receive a slight benefit through the extension of the demand for American goods.

Some incidental consequences of the economic strengthening of other countries, especially of countries still largely undeveloped, such as Canada and Argentine, require notice. American loans abroad may well be the means of working up hitherto untouched natural resources--fuel, such as oil; minerals, such as lead and copper; and other raw materials, such as pulp-wood. Some benefit would accrue to us from the greater and therefore cheaper supply, and we should be able more readily to conserve our own supply of valuable natural resources. On the other hand, this industrial growth in other countries may occasionally injure American industries by creating newly strong competition. There are already numerous instances of this kind to record. British capital figured in the erection of American cotton mills which have long competed with those of Great Britain. Argentine cattle, American owned, compete with our domestic steers. We may expect the list to grow. Yet there is little ground for grave apprehension. We have reached the stage of enormous variety in both our domestic and export industries. A few, an important few perhaps, may be seriously affected by this new competition. That will not be wholly unhealthy. Some may actually lose out and have to suspend operations; some costly and unwelcome adjustment of men and resources to other fields of activity may be compelled. But normally, the loss will be taken up in the expansion of the other industries. These imports will be procured more cheaply than they could be produced at home. And it is always likely that if American capital does not aid in developing foreign resources and industry, capital from other sources will--with no pleasanter results. Today the vigilance of enterprising capital is too great to leave unexploited any great economic opportunity anywhere in the world.

Such are some of the varied economic effects to be anticipated from the continuing flow of American capital to other lands--leaving out of account certain of the obscure and very indirect gains and losses that could only be disclosed by an intricate course of speculation. It is plain that the movement has not been the result of a cautious analysis of all its good and bad promise for national and international welfare. It has been rather an inevitable shift in our destiny. At the moment when other countries hold a fresh importance in our thoughts, and when our relationship and duty towards them is most unsettled, we possess huge amounts of capital available for investment abroad. Offers of high returns do the rest. A new economic interest has become firmly established in the community, that of the investors in foreign securities and the banking houses engaged in the distribution of these securities; simultaneously our export and import industries have assumed a greater importance in economic life. These new factors will play a part in the settlement of other international economic problems, such as the inter-allied debt problem. New differences of interest as regards the tariff are also forecast.

III

The preceding economic analysis suggests that an increased interchange of goods and services with other lands will be a permanent characteristic of our economic life. Even though we do not permit ourselves to become vitally dependent upon the trade or supplies of other countries, it is to be anticipated that our prosperity will be seriously a ected by economic and political events abroad. Owners and workers in industries engaged in export trade, or dependent on imports for supplies, in larger numbers than before, will feel the results of foreign happenings. Changes in foreign tariffs, in land and currency legislation and the like, will touch us more keenly because we have been loaning abroad. Our banking system, engaged now in a multitude of new transactions and relationships of recent growth (as, for example, the handling of foreign deposits), must watch with a new concern these same events. The holders of foreign securities, individuals as well as banking institutions, cannot now turn their eyes away from the affairs of the lands in which they have invested. A lender is always bound, though it be but lightly, to his borrowers. The ideal of isolation in thought certainly, in action probably, will become even more impracticable than at present--even if desirable. It is difficult to avoid that conclusion. The British people endeavored to avoid it during the nineteenth century; hence the epigram about an empire acquired in a fit of absent-mindedness.

The increase in our investments in Canada is not likely to produce any change in our political relations with that country, unless it be through tariff matters. American investments there have raised no serious political difficulties in the past; there seems no reason, in view of the excellent state of our relations with Canada, why they should in the future. Most of our investments in Western European countries, such an imposing element in the current movement, are, with the exception of Italy, probably only temporary. While they continue they will tend to make for a conciliatory and internationally-minded foreign policy. We are likely to watch the recovery of these industrial countries of Europe with more enthusiasm, and their difficulties with more sympathy and knowledge, because we have invested in them. Our investments in Austria and Hungary, in Poland and Czechoslovakia, are apt to remain and may even mount if the economic convalescence of that part of the world continues. And the security of these loans--of all our European loans in the final analysis--depends upon the success of the League of Nations in its task of maintaining international peace. We said we believed President Harding's assertion that the League was a dying institution; yet we make loans to countries which will be mutilated or extinguished if the promises of peace embodied in the Covenant of the League are not kept.

Our even more extended investment in Central American countries means that we shall become increasingly concerned with the life of these countries, and they with our policy. Already these investments have influenced American opinion and possibly the American Government in its foreign policy (as in Mexico), though perhaps not in a determining way. Already we have had a hand of one kind or another in the financial administration of Cuba, San Domingo, Haiti, Nicaragua and other Central American states, mainly because of events connected with foreign loans entered into by these countries. Our government has also helped these countries to secure loans, and determined in part the loan conditions. We are in a position approaching financial guardianship to these countries, in some instances by virtue of treaty arrangements, in others merely because of previous assumption of responsibility. In the event of serious financial difficulty touching the foreign debt, American intervention, invited or otherwise, is likely to occur; political consequences for which we are not prepared, which we may not desire, may follow in its train. Propinquity is certain to give us a position of economic dominance in every Central American country except, perhaps, Mexico, and to lead us to limit in some way their independence in international affairs. Whether this process will result in hatred or in friendship will largely depend on whether we define clearly by treaty (as we have in some cases), or otherwise, our financial relations with these countries, and act justly and with restraint in all of these relations.

The situation as regards the larger and stronger states of South America will be somewhat different, for these countries have access to the European capital markets, and European capital in a volume exceeding the volume of American capital is already invested there. Nevertheless, as American investment will certainly grow, the people of these countries will become increasingly conscious of the American hand in their affairs. We may expect to see the question of policy towards American interests and the United States become one of the central issues in their political life. Likewise, our growing investment in South America and our growing use of South American raw materials may determine our foreign policy, not only towards these nations but towards the rest of the world. The economic development of these regions for mutual benefit is all we now desire, but the fulfilment of that desire may often give rise to conflict, with or without any fault on our part. The long record of political instability, of dictatorship and of anarchy in many of these countries, suggests that their action towards foreign investors may be vacillating and sometimes unfair. On the other hand, American interests may in the future seek special advantages. In short, our foreign relations with these lands are likely to become more complicated than in the peaceful past. Here, too, it is urgent that a definite policy be formulated to govern our action in episodes arising out of our investments. As the stronger state--as the creditor state--we must be prepared to be suspected and hated in many South American circles even if we behave well. If we behave unfairly, these feelings, finding justification, will strengthen and spread.

There remain the still more troubled and largely undeveloped areas of the world, China, Russia, Turkey, Mesopotamia and the Balkan States. Before the war European countries were increasing their loans in these regions; large and unforseeable risks --big rewards to boldness, skill, unscrupulousness--finance often calling upon governments for aid, and governments using finance as means of forwarding political purposes--secret agreements and double design--these figured in many a deal. The situation in many of these regions does not seem to have changed essentially since 1914, despite all that has taken place, though there are some hopeful signs such as the nine-power agreement reached at the Washington Conference. Space does not permit even an aeroplane survey of the situation Our economic interests in these countries are only of secondary importance, but we are not likely to forego them. Furthermore, our political interests in some of them are primary. American capital will probably enter all these countries whenever it gets a favorable opportunity, may even enter with government support. We shall want to operate factories and sell machinery in Russia, build railroads in China, hunt for oil in Turkey and Mesopotamia. Nationalistic rivalry will lead to an exaggerated view of economic gains. It is impossible to catalogue the problems that will be presented to the State Department.

One main conclusion stands out from all these observations. There is every prospect that events arising out of our growing foreign investment will present us in the future with decisions involving war and peace, will bring us, whether we like it or not, to concern ourselves with distant causes.

There exist in writings on international law many attempts to classify the controversies which arise in this particular field of international affairs. Authorities differ greatly, however. For the sake of brevity and simplicity we may leave the legal classifications aside and take notice of three types of situations which arise with particular frequency. All three usually have complicated antecedents, and disputes over facts are usual when they arise; all three frequently bring up, besides, basic questions of political principle and behavior. Firstly, there is the possibility of default on either interest or principal by foreign governments. Sometimes there may be ample excuse for the defaults. At other times they may seem, and even be, wilful, caused by extravagance and mismanagement (as were the early Egyptian defaults) and by cold indifference to a solemnly assumed obligation; sometimes, also, the default represents a violation of a pledge given when the loan was made, as to the use to which the loan was to be put, or regarding the guarantee given for its security. There are instances, too, in which the original auspices of the loan were dishonest; others in which the terms of the loan were so unjustly drawn as to invite disrespect for the obligation, or the interest burden so heavy as to provoke default; still others in which the loan terms really represented a political design on the part of the lending power, and default has been welcomed rather than otherwise.

Then there is the possibility of some action on the part of foreign governments which might lessen or destroy the value of private investments abroad. Of such action, usually called "hostile legislation," we have had experience. It may involve the breaking of contractual obligations towards the investor, as in Venezuela, and even unfair discrimination in favor of citizens of the borrowing country. We have a recent instance of such legislation in the controversy between the Mexican Government and American owners of oil lands in that country over the application of Article 27 of the new (1917) Mexican constitution. The treatment of the Russian Government of foreign property may be considered merely as an extreme example of this type. Many of these disputes are not different, of course, from those which arise within this country when any powerful economic interest is adversely affected by governmental action. We know what genuine animosities may be stirred up in these domestic controversies. They are apt to become still more intense when the difference is between enterprises and governments of different nationalities. On the one hand, hostility to foreign corporations sometimes offers a tempting road to political success, or has seemed an easy way to enrich the treasury. And on the other hand, foreign corporations, existing on the scene of their operations solely for gain, have sometimes misused property and life. In particular instances, as in South Africa before the Boer War, they have shown a will to dominate political or fiscal affairs in the land of their domicile--usually to insure their own financial position.

A third type of situation, quick to stir national animosities, has recently received more public discussion than the two foregoing--namely, that of international conflicts arising out of the competitive search by private capital for concessions or other valuable economic advantages. The revelations of pre-war diplomacy, and recent controversies such as those over oil exploration rights in Mesopotamia, the Dutch East Indies, Albania and elsewhere, make further elaboration unnecessary. In such situations it sometimes happens that governments push their interference very far, especially if it is believed that control of some strategic area or a supply of some vital raw material is at stake. It is for dealing with these situations that we have formulated our policy of the "open door,"--a doctrine which, difficult to interpret in practice, has still to win its way completely even in the mandated territories of the League of Nations.

IV

Here are entanglements and enough. We shall not be able to ignore them, for they are within the field of national policy and diplomacy to stay.

The traditional American policy in regard to disputes between American citizens and foreign governments arising out of foreign investments has been, in general, one of non-intervention. There have been exceptions to that rule, however, and utterances of our State Department on various occasions indicate an effort to differentiate one case from the rest on the basis of some doctrine of international law. For example, we have taken action more readily in support of tortious claims arising out of indirect injuries committed by foreign governments against the persons and property of our citizens, than in support of claims arising out of broken contracts. These we ordinarily have been willing to submit to adjudication. We have been still more loath to act in cases of default on government loans than in cases of other broken contractual promises. It is well established, however, that (to adopt some phrases of Mr. Borchard) "intervention or the use of arms to collect public loans is a question of power and politics rather than a rule of law" is an observation that applies to the whole range of situations.

Opinion, both popular and professional, remains deeply divided on the issue of whether governmental aid or intervention should be undertaken in the types of situation which have been discussed. Questions of justice, of economic policy, of political wisdom, are all involved in the decision. On the one extreme, there is much support, though seldom outspoken, for the view that the question of intervention should be decided entirely on the basis of whether any important national political or economic end is to be served by such action. Governments have often acted on this policy and have sometimes pushed intervention much further than necessary to compensate the investor. On the other extreme, there is the view that national diplomacy or force should never be exercised in support of foreign investments, that all financial adventures in foreign lands and in foreign securities should be entirely at the adventurer's risk. A variety of positions exist between these extremes, which would distinguish between different cases chiefly on the basis of the justice or injustice of the treatment accorded the investor.

Opinion will remain hopelessly divided, and policy will remain opportunistic, as long as the question is one of power and politics, not of law. And as long as present conditions continue it is almost certain, in view of our national strength and economic enterprise, that there will be an extension of our governmental obligations to private capital and frequent engagements in the same sort of semi-political, semi-financial negotiations as occupied the European nations before the war. That way lies an American Empire of subordinate states.

Acceptance of the policy of non-intervention under all circumstances, since it would retard American lending and make it more difficult for other countries to borrow, and since it runs contrary to strongly held conceptions of justice, is hardly a possibility, unless, indeed, other lending countries should agree to the same policy. Such agreement seems at present unattainable, but it may not always be so; an international agreement through the League of Nations suggests itself.

In several present tendencies there are perhaps the clues to satisfactory alternatives in internationally advantageous and peaceful policies. First, there is the recently initiated policy of the State Department of requesting that American financial interests should inform it of proposed transactions, "to the end that there may be opportunity to consider, in the light of public policy, the possible national interest that may be involved." The main object of this policy, according to the official statement on the subject, is to give the Department an opportunity to object to arrangements which seem likely to cause conflicts or lead to government entanglements, and it is understood that objections on this score have been made to the terms of several proposed loans. The official declaration also states that the Department "will not pass upon the merits of foreign loans as business propositions, nor assume any responsibility whatsoever in connection with loan transactions." Despite this statement, however, it seems clear that the results of the arrangement will be determined entirely by the way in which it is used. It is possible that it may be used in such a way as really to safeguard the country against future misunderstandings and political controversies. But it may be used in a way to produce far different results. Some manner must be found of controlling this practise so as to make it impossible for any governmental department to commit us morally, even if not officially, to the support of foreign ventures or arrangements without legislative consent. Such was the intent of a bill introduced into the Senate last session. Furthermore, at present the State Department has a virtually unchecked power to encourage or discourage foreign loans, if it chooses to exert it, by means of its advice and its influence over public opinion.

Further suggestions may be made looking to the establishment of a policy that is sound and advantageous from the international as well as the national point of view. In the first place, the terms of loans and other financial arrangements should include a provision for some form of arbitral or judicial settlement in case of controversy. Several American loans made to Central American states contain such provisions; the Czechoslovak loan of 1922 is another important precedent. Secondly, a way forward is pointed by the convention adopted at the Second Hague Conference which limited the recourse to arms "for the recovery of contract debts claimed from the government of one country by the government of another country as being due to its nationals,"--the famous Porter proposal, brought forward under the instruction of Elihu Root, then Secretary of State. This doctrine might be extended to all pecuniary controversies of the type under consideration, instead of being limited only to contract debts, and it should be supplemented by definite arrangements for arbitral or judicial settlement. The results might not always be as favorable to powerful creditor states as those that might have been obtained by the use of force; but that risk can rightly be thrown on private capital. Nor is there any good reason why this procedure should be limited to disputes between states on the American continent. The time is ripe, and more than ripe, for a series of general international conventions in this field, providing for international conciliation or adjudication. The Permanent Court of International Justice is an instrument suited to passing on such disputes. It has just heard its first case of the kind, in which the Greek Government brought suit against the British Government as mandatory for Palestine in order to establish the validity of a concession granted by Turkey in 1914 to a Greek subject. Finally, consortium arrangements, preferably of a nature to provide also for international adjudication, and treaties similar to the nine-power agreement of the Washington Conference, greatly lessen the chances of international strife in regions like China.

It is in these directions that we must move. And by so doing we shall also secure a broader platform on which to base those other principles of the "open door" and "equal access to commercial opportunity" for which we have been contending. Our national prestige and financial power are an ample guarantee that we shall not suffer in the outcome, and that our just aims will be sufficiently recognized.

[i] "Economic Rivalries in Latin America," by Julius Klein: FOREIGN AFFAIRS, Vol. 3, No. 2.

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