investments abroad

204 Pages·2008·5.83 MB·English

INVESTMENTS
ABROAD
BY
A. EMIL DAVIES
PRESIDENT, FIRST COOPERATIVE INVESTMENT TRUST, LIMITED (LONDON)
PILLOW, ROYAL ECONOMIC SOCIETY
FORMERLY LECTURER ON BUSINESS FINANCE IN THE UNIVERSITY OF LEEDS
FINANCIAL EDITOR, "THE HEW STATESMAN" (LONDON)
CHICAGO & NEW YORK
A. W. SHAW COMPANY
LONDON, A. W. SHAW AND COMPANY, LIMITED
1927
COPYRIGHT, 1917, BY A. W. SHAW COMPANY
PRINTED IN THE UNITED STATES OF AMERICA
PREFACE
LIKE most habitual investors, the writer is an optimist by
temperament and a pessimist by experience, and if the note
of caution is sounded somewhat insistently in this book, it
is at least a fault possessing merits. Whatever the defects
of the present work, the author feels that he may claim that
it is not a mere compilation of facts, but that it contains a
considerable amount of material that could be obtained only
from actual and practical experience. For nearly a century
London has been the principal world market in foreign in­
vestments; it may be that supremacy in this respect is pass­
ing to New York, and if this be the case, American investors
and those responsible for their guidance may perhaps learn
something from these pages, which embody some of the
lessons culled from London's experience as an inter­
national market. In any case, the role of universal investor
and lender is so recent an occurrence with the United States,
that a book written from the view-point of a financial center
having a hundred years' experience of foreign investments
may prove useful.
A. EMIL DAVIES
iii
CONTENTS
PREFACE iii
I
THE GROWTH OF FOREIGN INVESTMENTS THROUGHOUT THE
WORLD 3
Stock-exchange investment. Origin of the "bourse." Develop­
ment of the London Stock Exchange. Influence of the Industrial
Revolution on English foreign investments. Early French, Belgian,
and German foreign investments. The United States as a foreign
investor. An ominous comparison. Investments in foreign mines.
Competition in the foreign investment field. Early start of En­
gland in the foreign investment field.
II
EFFECTS OF FOREIGN INVESTMENT 13
Benefits to the investing country. Revenue in the form of food­
stuffs and raw materials. Growth of leisured classes. Danger
of foreign bond investments. Deferred foreign liabilities. Foreign
creditor versus native worker. Feeling against the absentee capi­
talist.
Ill
Do CREDITOR NATIONS PAY THEIR DEBTORS' INTEREST? .. 20
How payments of interest are made. Result over period of years.
"Invisible" exports and imports. Brazilian trade figures.
IV
THE EDUCATIVE VALUE OF FOREIGN INVESTMENT 27
Investment a factor in education. How the investor adds to
his general knowledge through an interest in real facts relating
to economic life.
V
THE TREND OF INVESTMENT 34
The double trend of foreign investment. British foreign invest­
ment field. Diversification of British foreign investments. For­
eign mining undertakings. Basis of investment policy. Control
of raw-material products.
V
vi INVESTMENTS ABROAD
VI
AMERICA AS FOREIGN INVESTOR 42
Economic changes and the war. The leading role of the United
States in foreign investment. Yield variations on United States'
loans. Lack of discrimination in foreign flotations on the part
of America. Errors of American financiers. Successful American
investments in England. American investments in Cuba, Central
America, Canada, and Mexico.
VII
LONDON AS MARKET FOR FOREIGN INVESTMENTS 56
British Colonial bonds. Foreign government and municipal
bonds. Railroads. Public utilities. Breweries. Land develop­
ment countries. Iron, coal, and steel. Industrial. Mines. Oils.
Shipping. Rubber, tea, and coffee.
VIII
INTERNATIONAL MARKETS 79
Private and government stock exchanges. Forms of security.
Stock exchanges of international importance: Paris; Amster­
dam; Brussels; Berlin; Frankfort-on-Maine; Vienna; Basle,
Geneva, and Zurich.
IX
SOME INTERNATIONAL SECURITIES 93
Land mortgage bank bonds. Protective restrictions and regula­
tions.
X
FOREIGN TAXATION—SOME PRACTICAL NOTES 104
Position of American investor in relation to taxation. English
income-tax-exempt foreign securities. English income tax and
foreign security registration. French and German income tax
on securities.
XI
DOUBLE TAXATION no
Meaning of double taxation. Four ways in which double taxa­
tion is avoided. Efforts made to alleviate evils. Situation in
various countries.
XII
TAX EVASION 126
Relation of double taxation to tax evasion. Increase in taxa­
tion in the war. Various solutions. Text of resolutions sub­
mitted to Financial Committee of League of Nations.
CONTENTS vii
XIII
PROTECTIVE ASSOCIATIONS 132
A. The Corporation of Foreign Bondholders; its origin, func­
tion, and procedure. B. The English Association of American
Bond and Share Holders, Limited..
XIV
INVESTMENT TRUSTS 158
Importance of investment trusts to American public. What
investment trusts really are. Organization and functions. How
they should be run.
XV
THE WORLD'S INVESTMENT FIELDS 185
INDEX 197
INVESTMENTS ABROAD
I
THE GROWTH OF FOREIGN INVESTMENTS
THROUGHOUT THE WORLD
Stock-exchange investment. Origin of the "bourse." Development of the
London Stock Exchange. Influence of the Industrial Revolution on English
foreign investments. Early French, Belgian, and German foreign invest­
ments. The United States as a foreign investor. An ominous comparison.
Investments in foreign mines. Competition in the foreign investment field.
Early start of England in the foreign investment field.
INVESTMENT in stock-exchange securities is of modern
origin. Indeed, the very term "investment" in the sense that
we use it nowadays is modern and does not appear in Dr.
Johnson's dictionary. Until the nineteenth century, proper­
ty and trade were so insecure in even the most civilized
countries that the man who saved money had few opportuni­
ties of investing it safely, and usually hoarded it. True,
monarchs and nobles accepted what were euphemistically
termed "loans," but seldom repaid them except out of fresh
borrowings—a practice that persists to this day, although it
is usually more skilfully concealed. Commerce was riskier
than it is now, owing to the activities of pirates on the high
seas (the Barbary corsairs were eliminated only in 1830)
and at home there were highwaymen to add to the general
insecurity, not to speak of the wars which devasted Eu­
rope. If a government did meet its debt when due, it was
generally in debased coinage or worthless paper, so that
there was not much inducement to the few who possessed
means to invest them at home, let alone in foreign countries.
In 1672, King Charles II of England calmly repudiated a
debt of £1,328,526 (say $6,000,000) which he had borrowed
of the London goldsmiths, at 8%. This was a large amount
for those days, and caused wide-spread distress. Ultimately
the king entered into an arrangement, refusing to repay the
3
4 INVESTMENTS ABROAD
principal but agreeing to pay 6% out of his taxes. After six
years he again defaulted, and only in 1745, after the British
Revolution, did the government compound with the creditors
by agreeing to pay 3% interest, with the option of discharg­
ing the debt on payment of one-half of the original sum.
ORIGIN OF THE "BOURSE"
Still, this was not investment abroad, except in so far as
the money went to fight the Dutch, nor was it represented
by bonds, which were a later invention. Before foreign in­
vestment in the sense meant here—that is, negotiable se­
curities^—could take place, such an institution as the Stock
Exchange had to exist. In all save English-speaking coun­
tries that institution is known as the "Bourse," or some de­
rivative of that word, which actually comes from the name of
the family Van der Beurse, who had a house in the old Flem­
ish city of Bruges. The first big central institution which in
any way performed the functions of a bourse or exchange
was the Antwerp Bourse, which was opened in 1531—
strangely enough, as a municipal enterprise. There were
no transactions in bonds or shares, for the good reason that
these were not then invented, but there was business in one
form of negotiable security—namely, bills of exchange.
Until you had a government debt which was transferable,
or the shares of joint-stock companies, you had nothing on
which to base a stock exchange. In the early stages of joint-
stock companies their promotion was a jealously guarded
privilege. They could be formed only by royal charter, and
monarchs did not grant these for nothing. But the Dutch,
who had in the sixteenth century (and still have) a fine
colonial empire, formed a certain number of joint-stock com­
panies—the Dutch East India Company and the West India
Company, for example—and thereby created shares which
could be dealt in. Thus, in 1602, Amsterdam possessed a
bourse in full operation, with nearly all the machinery of a
modern stock exchange except for the "ticker" and tele-
GROWTH OF FOREIGN INVESTMENTS
phones. The members of this exchange invented time bar­
gains.
That stock-exchange business was in full operation in
Holland is shown by the existence of a book which was pub­
lished by Joseph de la Vega in the year 1668 in which he
referred to share-dealing as "being done by a pack of swin­
dlers." What is interesting is the way in which he divided
purchasers of shares into three classes, which three classes
hold good to the present day. The first was the better class
of solid capitalists who did not worry much as to quotations
but held for dividends; the second, merchants who bought
shares in the hope that they might later on be able to sell
them at a profit; and the third, speculators who frequently
remained in debt as regarded the purchase money, and were
compelled to continue their bargains. We do not appear to
have got much ahead after all. The author went on to give
a lot of advice which, if printed today, would seem quite
up to date and necessary. For instance, he said a prof­
it should always be taken without hesitation; and if the
price rose further, one should feel no regret. Shares should
not be held too long; one should not be wedded to them
(especially if one was a vendor!) A list of quotations on the
Amsterdam Bourse in 1747 contained 44 different securi­
ties; it now contains a thousand or two.
DEVELOPMENT OF THE LONDON STOCK EXCHANGE
It was largely the Dutch who started investment in ne­
gotiable securities in London; and there is, even at the
present day, a prominent reminder of the part played by this
nationality in the development of London as a financial
center, by the existence of a large Dutch church in Austin
Friars, a mere stone's throw from the London Stock Ex­
change. To this day the foreign element has always played
an important part in the big stock exchanges, which are
probably more international in their membership than any
other institutions. Another factor which contributed to the