THE Department of State issued, on March 3, 1922, a public statement in which, after referring to the increasing number of foreign bond issues being floated in the American market, it requested that American bankers contemplating making foreign loans should inform the Department of State with reference thereto, in order that the Department might advise the bankers as to whether there was or was not objection to any particular issue. The Department of State in its statement frankly recognized that it had no legal power to require American bankers to consult it. The statement was, in form, merely a request that the bankers would "coöperate" with the Department of State in view of the bearing of their operations "upon the proper conduct of affairs" and "in view of the possible national interests involved."

While thus nominally a request, the source from which it emanated was such that the request in fact became a command. Selfish considerations alone rendered compliance virtually obligatory as no banker could afford to contract to purchase a bond issue of important size with the possibility that, before distribution could be completed, the Department of State might publicly indicate its disapproval. This would at once destroy the marketability of the issue. Bankers are but a channel for the distribution of securities and when a contract is made for the purchase of a foreign issue, it is with the expectation that the issue can promptly be distributed to investors. If, before distribution, any official expression of disapproval rendered the issue unmarketable, a substantial part of the banker's capital would be engaged in carrying indefinitely bonds acquired for prompt resale to the investing public. Any banking firm thus involved would be largely disenabled from continuing its normal activities and serious financial loss might result. Such practical considerations are, however, in most cases but secondary. There is, generally speaking, a real willingness on the part of American bankers to subordinate their interest in aid of the attainment of important national objectives in the field of international relations.

Since the issue of the State Department's circular of March 3, 1922, over $3,000,000,000 of foreign securities have been publicly issued in the American market. Many millions more have been the subject of negotiation and have been submitted to the Department of State as prospective issues. The magnitude of these operations has correspondingly increased the importance of the control thus assumed by the Department of State. It is, perhaps, inevitable that, with so many transactions, there should be some criticism. In some sections of the country there is doubtless a feeling that the Department of State has acquiesced in too many foreign loans. In other quarters it has been felt that loans have been disapproved which properly should have been allowed. Some are concerned that our officials should have asserted, extra-legally, so great a power over our national economy, fearing lest hereafter the possessors of the power may be tempted into employing it for purposes quite foreign to those which originally led to its assertion.


Before considering matters of substance, there is one aspect of the form in which the exercise of control is sought which deserves mention.

From a technical standpoint, it often proves exceedingly difficult for the bankers to comply literally with the terms of the State Department's request. Loans, foreign as well as domestic, are often concluded with great rapidity. The better the credit of the borrower, the more rapidly is his loan arrangement concluded. In cases where the loan contract can be concluded only after thorough legal accounting, and perhaps engineering investigation, there is ample time for the bankers to obtain an expression of the Department's views before they need to commit themselves to a loan. In other cases the credit of the borrower stands very high and there is no question of his ability to obtain large sums on his unsecured notes. In such cases the decision to borrow is often quickly arrived at. The borrower seeks to take advantage of some technical market situation which, if promptly availed of, will permit him to secure funds on peculiarly favorable terms. He may, by cable, invite bids from several bankers and English, Dutch or other foreign houses may be competitors for the business. Under these circumstances, an American banking firm may be seriously embarrassed. The Department of State in its circular, has stated that "offers of foreign loans should not state or imply that they are contingent upon an expression from the Department of State regarding them." Thus, unless this injunction be violated, bankers cannot make a bid expressly contingent upon the subsequent approval of the Department of State. Equally it may be impracticable to secure, with the necessary promptness, a prior expression of the Department's attitude. Experience has shown that, at a minimum, about twenty-four hours must elapse, and in some cases several weeks have elapsed, before such an expression can be obtained. This is doubtless due, in considerable part, to the fact that it is the practice of the Department of State to give no expression of its view until it has consulted the Treasury Department and the Department of Commerce. This inevitably takes time and there are doubtless occasions where it is necessary to reconcile divergent views. Even a few days' delay, however, may retard the action of the American bankers to such an extent that a prospective borrower will close with a competitor in the belief that the American bankers are not responding to its invitation for bids with that expedition which is expected. As London regains its position in the field of international finance, these considerations assume greater importance.


Let us, however, now turn from this somewhat technical aspect of the problem of control and consider matters of substance. Here we shall first consider the purposes sought to be achieved by the control. These purposes, as disclosed by the precedents which have so far been established, can be grouped under one or more of the following: (1) To promote the accomplishment of some national objective in the realm of international relations; (2) to emphasize, and perhaps promote the more general acceptance of, some general humanitarian conception which we advocate; (3) to accomplish certain results which, it is considered, will operate to the economic or financial advantage of the American people.

In the field of international relations the most notable use of control of foreign loans has been to exert pressure upon nations which are considered by our government as derelict as regards their debts owing to the United States Treasury. The position of the Administration in this respect has recently been expressed in an article by Secretary Mellon as follows:

"Early in the year 1925, after much consideration, it was decided that it was contrary to the best interests of this country to permit foreign governments which refused to adjust or make a reasonable effort to adjust their debts to the United States, to finance any portion of their requirements within our borders. States, municipalities and private enterprises within the foreign country concerned were included in the prohibition, and bankers consulting the State Department were notified that this Government objected to such financing.

"While the United States is reluctant to exert pressure by this means on any foreign government to settle its indebtedness, and while this country has every desire to see its surplus resources at work in the economic reconstruction and development of foreign nations, our national interest demands that our resources be not permitted to flow into countries which do not honor their obligations to the United States and to its citizens."

The desirability of exerting pressure upon governments which ignore their debts to the United States readily suggests itself. It may indeed be surmised that the formal assertion by the State Department in 1922 of its desire to control foreign loans had its origin in the anticipation that such measures might prove useful. Without questioning the propriety of the pressure thus sought to be exercised in aid of our Treasury, the true significance of the means should not be ignored. Secretary Mellon refers to the fact that that control of foreign loans was exercised in order that "our resources be not permitted to flow" into certain countries. The "flow of resources" is, of course, nothing other than our export of raw materials and manufactured goods, for the purchase of which dollars are required. The cutting off of these resources, through the vetoing of foreign loans, is in effect the establishment of a partial embargo on our exports to the nations in question. If, in fact, the State Department's disapproval of loans in favor of certain countries has exerted any economic, as distinct from moral pressure, it is because thereby these nations have been embarrassed in buying and importing our products to the extent that they would desire.

This close relationship between exports and foreign investments is strikingly shown by the recent study of the Department of Commerce entitled "The Balance of International Payments of the United States in 1925." The report concludes by pointing out that "the merchandise-export surplus of the United States has approached $690,000,000 for the last four years, while the corresponding new foreign securities issued, after deducting refunding issues, has been $680,000,000. From this the inference may be reasonably drawn that we have been putting the money which we got from our export surplus into foreign investments." Another expression of the conclusions to be drawn from these figures is that foreigners, during the past four years, have annually had to borrow dollars (1) to refund maturing dollar obligations, and (2) to pay for the goods which they purchased from us to the extent that these goods exceeded in value the goods which they sold to us. Thus, in 1925, foreign nations purchased from us goods to the value of $4,900,000,000. In order to pay for these goods, they were required to procure this amount of dollars. $4,240,000,000 of the necessary dollars were procured as the proceeds of goods which foreign nations sold us. The balance, or $660,000,000 had to be borrowed.[i] It was also necessary to borrow several hundred million dollars in addition for "refunding" operations, i.e., payment of maturing debt previously contracted. In other words, our foreign loans primarily operate to provide payments in dollars here to our farmers and manufacturers for goods which they sell abroad, and to pay debts previously contracted for such purposes. Thus, the statement of the Department of Commerce that we have been "putting our money into foreign investments" should not be understood as implying that the dollar proceeds of these loans passed as money out of this country. Actually the dollar proceeds of foreign loans stay in the United States and are used here either to pay principal or interest maturing on dollar loans previously contracted or to pay for American goods or services. This is inevitably the case, since it is only here that dollars are legal tender. No foreigner would, of course, ever borrow dollars if it were a condition of the loan that the actual currency resulting from the loan had to be permanently taken from the United States.[ii]

Since the economic function of foreign loans is thus to provide foreigners with dollars to be spent by them in the United States it follows that when foreign borrowing is artificially checked, there is a corresponding check to foreign purchases of our goods.

There has, however, been little disposition in any responsible quarter to question the propriety of our Government's action in curtailing financing designed to create dollar purchasing power in favor of those nations regarded as derelict in their payments to our Treasury. Our bankers have readily acquiesced in this policy. This does not, however, mean that there is general acceptance of the view that our bankers and those dependent upon exports should as a matter of routine be singled out to sacrifice their interests to promote the accomplishment of every objective of our Department of State. To embargo foreign loans, and thereby partially embargo exports and embarrass the refunding of maturing debts previously created, is an unusual power which normally should be exercised only with legislative sanction. Its extra-legal adoption should obviously be rarely indulged in, and then only in cases of unusual importance and with the sanction of so strong a public opinion that in fact legislative authority could almost assuredly be obtained if sought.

This seems to have been recognized by the Department of State. The present formal control of foreign loans was established in 1922. It was not until 1925 that it was exercised to promote debt funding. Nearly seven years' time had then been afforded to the debtor nations to take some action and, rightly or wrongly, public opinion clearly favored action to induce those nations which had not funded their debts to evidence their intention to honor their obligations within the limits of their capacity. Legislative action to this end could undoubtedly have been procured. Such formal action would, however, have been obviously undesirable because of the public affront which would thereby have been involved. Under the circumstances, there was a general desire to see effective pressure exercised, but to see this done, at least in the first instance, in an informal manner. The Department's procedure was perhaps also accepted the more readily because responsible bankers generally realized that, under the surrounding credit conditions, there might be some hazard in new loans to nations which were regarded as derelict in their past obligations.


As exemplifying control exercised to promote humanitarian conceptions which as a nation we advocate, we may consider the refusal of the Department of State to approve of certain loans designed to build up armaments. The State Department's expressions on this subject, while couched in somewhat vague language, on their face seem to indicate that the rule thus established is general and based upon moral considerations and a desire to promote disarmament. Closer analysis, however, raises some doubt as to whether the rule thus established against loans for armaments is in fact as general as the State Department's expressions would indicate, and whether the rule is in reality designed to promote some basic humanitarian objective. It has to be borne in mind that, as a matter of national policy, we have consistently advocated the right to traffic in arms as being an aid to peace. The latter point became a matter of serious controversy with Germany and Austria while we were neutral during the late war. In a note to the Austro-Hungarian Government of August 12, 1915, the policy of our Government in this respect was reaffirmed in the following language:

"There is a practical and substantial reason why the Government of the United States has from the foundation of the Republic to the present time advocated and practiced unrestricted trade in arms and military supplies. It has never been the policy of this country to maintain in time of peace a large military establishment or stores of arms and ammunition sufficient to repel invasion by a well-equipped and powerful enemy. It has desired to remain at peace with all nations and to avoid any appearance of menacing such peace by the threat of its armies and navies. In consequence of this standing policy the United States would, in the event of attack by a foreign power, be at the outset of the war seriously if not fatally, embarrassed by the lack of arms and ammunition and by the means to produce them in sufficient quantities to supply the requirements of national defense. The United States has always depended upon the right and power to purchase arms and ammunition from neutral nations in case of foreign attack. This right, which it claims for itself, it can not deny to others."

There would not appear to be any valid basis of distinction between permitting foreign nations to buy armament and permitting them to borrow money to pay for armament. Certainly if, during our period of neutrality, we had refused to permit the Allies to finance their purchase of war material (as by the Anglo-French loan) the principles which were then advocated would, in practice, have been largely nullified.

It is to be assumed that the present attitude of the State Department does not involve any departure from our historic policy in this matter. Probably the control was never designed to do more than to aid in maintaining close contact with policies and possible revolutionary tendencies within States, like the Caribbean States, which because of geographical proximity or other cause, were already the subject of a special diplomatic policy. If so, this rule of practice established by the Department of State really falls within the first category we have considered, namely, control exercised to promote some national policy in the field of international relations.

A second practice of the Department of State which might be mentioned as perhaps falling into the "moral" category is the control of foreign loans in aid of maintaining the "open door" policy in certain countries where heretofore foreign loans have often been utilized to secure exclusive concessions or exclusive zones of influence in favor of the nationals of one power as against the rest of the world. In the case of China, a plan was conceived for the organization of an international banking consortium, and the principal foreign nations having interests in China undertook to take steps to cause prospective foreign financing by their nationals to be offered to the consortium. It was hoped that in this way exclusive spheres of influence in China would be avoided for the future and the "open door" policy established. In view, however, of the financial and political débâcle which occurred in China immediately following the re-organization of the Chinese consortium after the war, no public Chinese financing of any kind has been practicable and the Department's policy as regards China has, through the course of events, ceased for the time being to have other than academic interest.


We now turn to cases where the control is sought to be exercised to promote what are believed to be the economic and financial interests of the American people. In this field the Department of Commerce rather than the Department of State appears to have assumed the initiative in establishing the policies to be pursued, the Department of State cooperating to carry out the economic theories of the Department of Commerce.

The most notable example of this type of control is that afforded by the refusal of the Department of State to approve of loans in favor of government-sanctioned foreign monopolies. The Secretary of Commerce, while disclaiming any desire to see retaliatory legislation adopted by the United States, has expressed the view that such foreign monopolies should not be affirmatively aided by loans obtained in the United States and the Department of State has refused to approve loans to be made directly to such monopolies.

In actual operation this action of the Administration has in fact been retaliatory, and has assumed a form closely resembling that of which we complain.

Foreign borrowers have sought to secure money in the American market primarily because, until very recently, the United States has been the only country having surplus capital which could be drawn upon. England, for example, for several years and until quite recently, did no public foreign financing as it was felt that this would militate against the restoration of the pound sterling to its gold parity. Thus, as regards free capital, we have occupied virtually a monopolistic position. Furthermore our Government, through the Department of State, has been controlling that monopoly for national purposes.

Thus, when we denied certain foreign monopolies access to our own monopoly of credit, we in effect pitted one monopoly against another. Such a combat cannot be justified on moral grounds. This is the more true since on the one hand our own legislation specifically authorizes American concerns to combine for sales abroad, and on the other hand because the foreign monopolies, generally speaking, have not been created to mulct American people, but rather because of the prevailing conception in a large part of the world that the "cartel" system, with government supervision of prices, is economically superior to our own conception of competition enforced by law. Thus the fact that, as a matter of principle, we put ourselves in opposition to all foreign government-sanctioned monopolies can be justified only on the ground that some practical gain will result thereby to our own people.

Unfortunately this does not seem likely. The combat is too unequal because our own monopoly is but an accident of the war and is gradually waning. New capital is being gradually created in England, The Netherlands and other financial centers. Long before we produce coffee and potash, London will have reproduced a reservoir of capital in which she will invite the world to participate. Our dependence on certain foreign products is virtually permanent; their dependence on our capital is but fleeting. Already foreign monopolies, denied the right to borrow money here, have obtained in London the funds which they required. Thus our control has not exerted any appreciable economic pressure upon the foreign monopoly, but has merely diverted certain advantageous financial transactions to our most formidable financial competitor.

Not only do we thus diminish our banking prestige, but our consuming public is more apt to be injured than helped. It is well known that industries desire and need to create a good will where they expect to borrow their money. If any foreign monopoly desires to do its financing in the United States and becomes accustomed to looking to the American market for such financing, it is almost inevitable that it should seek to conduct its relations with the American consuming public in a manner such that good-will will result. If, on the contrary, it is prohibited from coming into the American market for its financing, it is thereby deprived of all financial incentive to moderate its exactions from the American consumer. Its only interest is to obtain the highest price for its goods.

There may, of course, be cases where the conduct of some particular foreign monopoly involves such a threat to our people that governmental aid is required to free us from a dependence which should not be tolerated. Even retaliatory legislation might be warranted. Such unusual cases should be dealt with on their own facts. But the continental conception of economic stabilization by agreement is not, in itself, so inherently and so universally vicious that our economic resources should be marshaled against it wherever found, particularly if it is probable that the net result will bring us loss rather than gain.

We should perhaps here allude to the possible exercise of control over foreign loans so as to insure that they will operate to stimulate American industry and not aid foreign competitors. There are those who would advocate a requirement that the proceeds of every foreign loan should be specifically earmarked for expenditure in the United States.

The State Department has refrained from adopting any such general policy, which could not but defeat its own purpose. As we have seen, the proceeds of our loans are dollars, which must inevitably be employed in the United States. To require specific earmarking at the time of borrowing would not only be unnecessary, but would probably diminish foreign purchases of American goods. A large part of our exports go to small consumers who have not themselves the credit position to permit their doing independent dollar financing on their own behalf. They obtain their dollars, by banking transactions, from others who have the credit position to do dollar financing and who do not, themselves, need dollars to buy American goods. For example, the German municipalities which have borrowed here have not, in general, needed any American goods. They sought funds to finance the development of public utilities and municipal improvements which require German, not American, goods and labor. Thus the municipality does not come into our market because it wants dollars, i.e., purchasing power in America, but because American investors put a high value on municipal credit and, in the face of prohibitive domestic money rates in Germany, it has been advantageous to the German municipalities to borrow here. When, however, the dollars are obtained the municipalities in due course exchange them for marks. This they can readily do through the banks because there are many Germans who have marks and who are glad to exchange them for the dollars needed to pay for American products which they require. Thus, even when the borrower himself does not need foreign funds, the existence of such a need in the borrowing country is a prerequisite to the foreign loan, and the dollar proceeds are as surely spent here as though it were the actual consumer of American goods which had become the public borrower.

There has, however, recently been indicated a tendency on the part of our officials to look with disfavor upon loans to foreign manufacturers who are directly competing with our manufacturers for the business of a third country. Here the third country was Russia and the Government's attitude might, perhaps, be explained on the ground that the loan was regarded as, indirectly, a loan in aid of a country (Russia) the government of which we do not recognize and which has failed to seek to fund its debts to our Treasury.

It appears, however, that our Government was also influenced by economic considerations. If so, it would indicate a somewhat questionable judgment on the economic operation of loans to foreign manufacturers. Such a loan would inevitably benefit American producers for, as pointed out, the dollar proceeds would have had to be spent in the United States. Probably the transaction would work somewhat after this fashion: In reliance on the American credit, the foreign banks would finance the purchase by Russia of their domestic manufactured products. This would create greater local industrial activity and the importation from the United States of more raw material, such as cotton and copper. The dollar proceeds of the loan would thus be spent for American goods which would proceed to Russia via a third country. Such a loan cannot, thus, properly be disapproved on the ground that it operates to benefit foreign manufacturers to the exclusion of American producers.

We should not leave the subject of control for economic and financial purposes without referring to the possibility of the State Department's control of foreign loans being utilized to protect the investing public from offers of securities believed to be unsound and the due payments on which the borrower would be financially unable to maintain. The Department of State has expressly and repeatedly disclaimed any intention to pass upon loans as business propositions, and has pointed out that its approval or disapproval was not to be considered as reflecting upon the merit of the loan as such. In the main the action of the Department of State with reference to loans has been entirely consistent with its policy as thus expressed. In certain instances, however, the Department of State has so far considered the merits of loans as to point out to the bankers certain considerations which might affect the ability of the borrower to repay. On occasions the State Department has suggested to bankers that prospective loans might not be "productive." In other cases it has pointed out that the foreign borrower might have difficulty in hereafter obtaining the foreign exchange (i.e. dollars) necessary to pay interest on the loans. On occasions it has pointed to certain pre-existing debts which might be or become prior charges upon the resources of the prospective borrower.

It may be questioned whether it is sound for the Department of State to go even so far in making suggestions which relate primarily to the merits of loans as business propositions. It is of the utmost importance, as the Department of State itself is the first to recognize, that there should be no popular impression that the State Department, by permitting a foreign loan, assumes any responsibility for its merits as a business proposition. It is the function of the bankers to pass upon these matters and it is they who should be held primarily and exclusively responsible. It could not but be unfortunate if any impression were given that the Department of State, even remotely, was assuming responsibility for investigating the merits of loans or guiding the bankers in such respects.


Having thus analyzed, in the light of available precedents, the purposes which are sought to be achieved by the control exercised by the Department of State, let us turn in conclusion to certain considerations of a general order.

Control over foreign loans implies, as we have seen, control of the foreign commerce of the United States. Foreign loans are primarily the medium whereby foreigners obtain the dollars requisite to pay for American goods and services to the extent that their value exceeds that of the goods and services which foreigners supply to the United States. Foreign loans are also the medium whereby dollars are procured to repay maturing debts previously created to pay for goods and services.

Thus control of foreign loans involves a vast power over our national economy. A sudden and rigid restriction of foreign loans could not but reflect itself promptly in a curtailment of our export trade and many existing foreign issues might go ìnto default through inability of the debtors to conduct refunding operations. Any body which possesses such power could, by the mere threat of its drastic usage, impose its will to accomplish purposes quite foreign to those which led to the original assertion of the power. It is, therefore, of the utmost importance, particularly during these formative years when our nation first occupies a creditor position, that power to control foreign loans should be exercised only with the utmost conservatism and in such a manner as to establish a strong precedent against the use of this power to carry out disputable and individual economic or political theories. It would obviously be unfortunate if established precedent warranted the use of control over foreign loans as a medium for carrying into effect any economic or financial policies which might happen at the moment to be those of the heads of our executive departments.

Such considerations suggest that control over foreign loans should be limited to cases where such control is necessary to accomplish some objective of the Department of State within the field of public international relations, which is of major importance and which clearly has sufficient popular support so that Congress, if asked, would give legislative approval to the employment of economic pressure to accomplish such objective.

It would appear to be a doubtful wisdom to exercise control for the purpose of carrying into effect the economic theories of a particular Administration as to what is best for the American people. The economic views of the present Administration may be entirely sound. It is almost certain, however, that in the course of time different economic views will be held by succeeding Administrations. Some of these views, though sincere, may actually be unsound. Our foreign commerce and foreign financing should not be continuously subjected to official interference in aid of all such disputable and variable economic theories.

Even if, however, the actual prohibition of foreign loans were to be resorted to only in the very limited class of cases suggested above, there is of course no objection, but on the contrary a distinct advantage, in the Department of State being kept fully and promptly informed with respect to all foreign loans.

These loans have two aspects, on the one hand the dollars which are thereby made available to foreigners to buy our goods and to pay their debts here, and on the other hand the foreign securities which are received by American investors in exchange for their dollars. The latter involve the acquisition by tens of thousands of individual American investors of interests in foreign enterprises. As these investments grow, in the aggregate, into many billions of dollars, a situation is created which cannot but influence our foreign policy. No foreign policy could be intelligently conceived and carried out by a Department of State which was ignorant of or indifferent to the past and current acquisitions by Americans of interests in foreign lands. It might well be that such a movement with respect to some particular country might attain proportions such that it would tend to deprive our Government of its freedom of action in dealing with certain foreign problems and in carrying out some foreign policy which, from other aspects, would be of major national importance. The Department of State should have such information as would enable it to protect against such a development. Accordingly, it is most appropriate that the Department of State should be fully and promptly informed as to what is going on with reference to foreign loans. This result is substantially achieved by so much of the present practice as requires the bankers to inform the Department of State promptly with respect to all prospective public issues of foreign loans. It may be noted, however, that the State Department now requires no information with reference to bank credits extended to foreigners, or with reference to foreign stock issues, so that, from the standpoint of securing information, more comprehensive data might well be sought.

Is it, however, necessary to perpetuate indefinitely the present requirement that the bankers, after informing the Department of State of a prospective loan, must take no definitive action until the proposed loan has been formally passed upon by the Department of State? We have already alluded to the practical difficulties which this practice throws in the way of the American bankers and to the disadvantage to which they are thus put in competition with foreign bankers. Obviously, the American bankers should be free from such disadvantage whenever possible. Furthermore, from the standpoint of the Department of State, it would seem desirable to avoid formal action on prospective loans in so far as this is practicable consistently with the accomplishment of the legitimate purposes of control. The reduction to a minimum of formal aquiescence or disapproval would correspondingly diminish the responsibilities of the Department of State and the possibility of misunderstanding with reference thereto.

Avoidance of formal measures of control would appear to be entirely feasible if, as a matter of principle, disapproval of foreign loans were to be limited to situations involving some major policy in the field of international relations. Any such policy, if sufficiently important to warrant resort to economic and financial pressure, will certainly be known to all responsible bankers. If it is not known, and cannot be made known, that in itself should be evidence that the situation is not of a character to warrant so unusual a step as the cutting off of private sources of credit and the imposition of economic pressure incident thereto.

Responsible bankers will always be glad to coöperate with the Department of State in the attainment of major objectives in the field of international relations. Formal control is quite unnecessary to secure this result. With respect to debt funding, this is so nearly attained and our government's policies are so well known that banking compliance therewith can be assumed. The same can equally be said with reference to our national policy toward those countries over which we exercise a special influence which is accentuated by the political implications imputed to the Monroe Doctrine. If new major policies are evolved in consequence of new situations, it would seem that the bankers can readily be advised in an informal manner. If such informal procedure proved in fact to be ineffective, the present system could at any time be reëstablished either generally or with reference to certain areas. The fact that bankers continued to inform the Government of prospective loans would at all times afford the Department of State an opportunity of promptly intervening in the event of a tendency in foreign loans which ran counter to any major diplomatic objective. If it happened that some banking commitment were made before the State Department could indicate its objection, the harm from such an isolated transaction would scarcely be comparable to the benefit which would result from minimizing formal government participation in matters of private finance.

[i] Certain "invisible" items of debit and credit which substantially balance each other are ignored for purposes of simplicity.

[ii] The only apparent exception to this general statement is in the case when gold bullion is shipped. Public loans are seldom contracted for such a purpose as it is not an advantageous procedure to incur an interest-bearing debt for the purpose of securing and shipping gold. Gold itself is not productive and is expensive to insure and to ship and such a transaction is indulged in only rarely as when some bank of issue requires gold as a metallic reserve for its currency issue. For example, the proceeds of the German Reparation Loan were primarily used to recreate a gold reserve for the German Reichsbank, as reorganized under the Dawes Plan. Such an operation is, however, quite exceptional and, broadly speaking, it is correct to state, as we have done, that the dollar proceeds of foreign bond issues are employed exclusively in this country to pay dollar debts or to pay for American goods or services supplied to foreigners.

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