The Security for Allied Loans

An effort has recently been made to befog the minds of investors as to the precise meaning and value of the conditions on which the Allied Powers have raised in America  the  loans  necessary  to  keep  American  factories  busy with munition orders. It may be well, therefore, to define once more the security on which these loans rest. Great Britain has publicly offered four loans in the United States,   of which  three  have  been  "secured"  and  one  "unsecured." The    secured "loans need no lengthy reference.   American subscribers thereto have, as collateral security for repayments, bonds, mostly American, deposited with American  Trust  Companies  which  provide,  with  ample  margin,  for the repayment of the loans at their due date even if the capital cities of every one of the Allies were destroyed by a thunderbolt.    The only "unsecured" loan offered publicly by Great Britain in the United States is the issue of Anglo-French Fives, dated October 15th, 1915—the first loan, in fact, to be offered to the American investor by the English Government.     These bonds are the joint and several obligation of the British and French Governments, and their amount is 500 million dollars, the annual interest charge being, therefore, 25 million dollars.     It has been suggested that some legal quibble might enable the British and  French Governments to avoid or postpone repayment of these bonds when they fall due in 1920. One may, therefore, recall that the prospectus inviting applications for the loan, which was notified all over America, stated that "both principal and interest are payable in New York City in United States gold coin, without deduction for any present or future British or French taxes." To this prospectus were appended the names of 62 of the leading American Banks and Trust Companies—evidence enough for the plain man that this provision was, in fact, contained in the contract for the loan. This contract, as is well known, was concluded in New York with the American Banking Syndicate by the duly accredited representatives of the French and British Governments, and is, therefore, a contract made under the laws of the United States. Thus any precedents of decisions by the United States Courts allowing foreign corporations to vary contracts for repayment are irrelevant to the  case of the Anglo-French  Fives,  which,  having  been  issued under a contract made in America, are in effect American, not foreign, loans. As for the security for this loan of 500 million dollars, it can hardly be a matter for question. The French Government raised from taxation alone during 1915 some 800 million dollars, and British revenue from taxation is, at present, being collected at the rate of 2,500 million dollars a year, or, together, more than 130 times the interest required for the Anglo-French Fives. Statisticians (including Dr. Helferrich, subsequently German Finance Minister) have agreed in estimating the wealth of Great Britain and Ireland alone at anything from 75,000 to 110,000 million dollars; and that of France at 50,000 to 70,000 million dollars, or at least 250 times the amount of the principal of the Anglo-French 5% Loan. The minimum estimate of the wealth of Britain alone is equal to 75 times the total amount lent by the American investor to the British Government. Moreover, practical financiers knew that a loan obtained abroad is in reality a preferential charge on the Government which has obtained the loan. For the circumstances (inconceivable in the case of Great Britain or France) which would make default possible would make the Government all the more eager to obtain loans abroad. And if there had once been default abroad, further foreign borrowing would be a hard task. Thus it seems fair to say that the Anglo-French Fives, or, indeed, any unsecured "loans issued by the Allies in America, are, in fact, free from the possibility of legal juggling detrimental to due repayment of principal, and are secured over and over again by the solid wealth and by the proved taxable capacity of the borrowing nations.