International Finance

INTERNATIONAL FINANCE

BY

HARTLEY WITHERS


CAPITAL AND ITS REWARD

Finance, in the sense in which it will be used in this book, means the
machinery of money dealing. That is, the machinery by which money which
you and I save is put together and lent out to people who want to borrow
it. Finance becomes international when our money is lent to borrowers in
other countries, or when people in England, who want to start an
enterprise, get some or all of the money that they need, in order to do
so, from lenders oversea. The biggest borrowers of money, in most
countries, are the Governments, and so international finance is largely
concerned with lending by the citizens of one country to the Governments
of others, for the purpose of developing their wealth, building
railways and harbours or otherwise increasing their power to produce.

Money thus saved and lent is capital. So finance is the machinery that
handles capital, collects it from those who save it and lends it to
those who want to use it and will pay a price for the loan of it. This
price is called the rate of interest, or profit. The borrower offers
this price because he hopes to be able, after paying it, to benefit
himself out of what he is going to make or grow or get with its help, or
if it is a Government because it hopes to improve the country's wealth
by its use. Sometimes borrowers want money because they have been
spending more than they have been getting, and try to tide over a
difficulty by paying one set of creditors with the help of another,
instead of cutting down their spending. This path, if followed far
enough, leads to bankruptcy for the borrower and loss to the lender.

If no price were offered for capital, we should none of us save, or if
we saved we should not risk our money by lending it, but hide it in a
hole, or lock it up in a strong room, and so there could be no new
industry.

Since capital thus seems to be the subject-matter of finance and it is
the object of this book to make plain what finance does, and how, it
will be better to begin with clear understanding of the function of
capital. All the more because capital is nowadays the object of a good
deal of abuse, which it only deserves when it is misused. When it is
misused, let us abuse it as heartily as we like, and take any possible
measures to punish it. But let us recognize that capital, when well and
fairly used, is far from being a sinister and suspicious weapon in the
hands of those who have somehow managed to seize it; but is in fact so
necessary to all kinds of industry, that those who have amassed it, and
placed it at the disposal of industry render a service to society
without which society could not be kept alive.

For capital, as has been said, is money saved and lent to, or employed
in, industry. By being lent to, or employed in, industry it earns its
rate of interest or profit. There are nowadays many wise and earnest
people who think that this interest or profit taken by capital is not
earned at all but is wrung out of the workers by a process of extortion.
If this view is correct then all finance, international and other, is
organized robbery, and instead of writing and reading books about it, we
ought to be putting financiers into prison and making a bonfire of their
bonds and shares and stock certificates. But, with all deference to
those who hold this view, it is based on a complete misapprehension of
the nature and origin of capital.

Capital has been described above as money put to certain purposes. This
was done for the sake of clearness and because this definition fits in
with the facts as they usually happen in these days. Economists define
capital as wealth reserved for production, and we must always remember
that money is only a claim for, or a right to, a certain amount of goods
or a certain amount of other people's work. Money is only a title to
wealth, because if I have a sovereign or a one-pound note in my pocket,
I thereby have the power of buying a pound's worth of goods or of
hiring a doctor to cure me or a parson to bury me or anybody else to do
anything that I want, up to the buying power of that sovereign. This is
the power that money carries with it. When the owner of this power,
instead of exercising it in providing himself with luxuries or
amusements, uses it by lending it to someone who wants to build a
factory, and employ workers, then, because the owner of the money
receives his rate of interest he is said to be exploiting labour,
because, so it is alleged, the workers work and he, the capitalist, sits
in idleness and lives on their labour.

And so, in fact, he does. But we have not yet found out how he got the
money that he lent. That money can only have been got by work done or
services rendered, for which other people were ready to pay. Capital,
looked at from this point of view, is simply stored up work, and
entitled to its reward just as much as the work done yesterday. The
capitalist lives on the work of others, but he can only do so because he
has wrought himself in days gone by or because someone else has wrought
and handed on to him the fruits of his labour. Let us take the case of
a shopkeeper who has saved a hundred pounds. This is his pay for work
done and risk taken (that the goods which he buys may not appeal to his
customers) during the years in which he has saved it. He might spend his
hundred pounds on a motor cycle and a side-car, or on furniture, or a
piano, and nobody would deny his right to do so. On the contrary he
would probably be applauded for giving employment to makers of the
articles that he bought. Instead of thus consuming the fruit of his work
on his own amusement, and the embellishment of his home, he prefers to
make provision for his old age. He invests his hundred pounds in the 5
per cent. debenture stock of a company being formed to extend a boot
factory. Thereby he gives employment to the people who build the
extension and provide the machinery, and thereafter to the men and women
who work in the factory, and moreover he is helping to supply other
people with boots. He sets people to work to supply other people's wants
instead of his own, and he receives as the price, of his service five
pounds a year. But it is his work, that he did in the years in which he
was saving, that is earning him this reward...

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