Americans in the Foreign Market

THE American investor, adventuring for the first time on a large scale in the foreign bond market, is no longer a pioneer in a field of capital risks and of unknown values. He has not yet, however, advanced beyond the stage of an investing dilettante in his pursuit of safety and 7 per cent in the securities of European and South American countries.

The episodes in the chapter of American financial history that has to do with present holdings of nearly $15,000,000,000 of dollar credits of one kind or another are four in number. They cover a period of twelve years, the first dating from October 1915, when the Anglo-French 5-per-cent external loan for $500,000,000 was timidly offered in the United States. Quickly following this issue were three loans, aggregating $800,000,000, made to Great Britain and secured by collateral in the form of international investments. Within fifteen months American capital absorbed $1,300,000,000 of French and English obligations at a fair rate of interest and with prompt payment plus a small profit on the day of maturity, the last of these notes falling due in 1921.

The second of the episodes concerned Russia, in 1916 a wavering ally of France and England and in need of funds. It was brief and unpleasant. The record of it is in the files of many banks and in those of the State Department. It cost the American investor fully $100,000,000 — some say much more.

Episode number three was the strangest and most expensive of all — a study in investment, or, rather, speculative psychology. The mass of quickand-liberal-profit-requiring American investors moved on Germany and gorged themselves on German mark securities. The pre-war loans that had ranked with British consols and French rentes as premier investments, municipal obligations, and even German currency were purchased at a daily rate that determined the fluctuations of the foreign exchanges. In the debacle that came at the end of a three-year spree Americans found themselves with reams of paper and a loss of $500,000,000 to charge off in their incometax reports.

The fourth episode, and the one with which we are most concerned, occurred in the autumn of 1924. It was the sequel to the Dawes Plan, which had been promulgated a few weeks earlier. Its central feature was a loan of $110,000,000 at 7 per cent to the German Government for the purpose of stabilizing the German currency and placing Germany on a gold basis. This loan was an immediate success. Offered at 92, it was heavily oversubscribed and at once sold at a premium, although a few months later a French Government 7-per-cent issue at 94 was so poorly taken by the public that a banking syndicate was compelled for months to support it. It may not have been considered a risk to purchase the 7and 8-per-cent government and municipal obligations of Switzerland and the Scandinavian nations even while they were going through their industrial and banking crises in the deflation years from 1920 to 1922. It assuredly was an adventure in investing for the American to buy a German Government bond in 1924. And when this adventure came through profitably he looked about for new fields to explore where the yield was 7 per cent or better and safety was ‘reasonable.’

This search has taken him around the world. The penetration of American dollars into nearly every civilized portion of the globe since 1919, by means of foreign loans, is the outstanding thing in current financial history. The latest record of foreign bonds sold in the American market deals with four hundred issues in over thirty geographical divisions. These run the scale of credit from the obligations of Great Britain and Canada to those of Poland and Jugoslavia and from the city of Toronto and the Province of Ontario to little-known cities and departments in South and Central America. In numbers Great Britain has the fewest loans, 4, and Germany the most, 85. France has 15, including 5 to her railroads, and Belgium only 6 — all for the Government. The Scandinavian loans total 30, with Finland borrowing $70,000,000 hereon 6 issues. Australia and Canada combined have 31 loans. Recently the Irish Free State has been a successful applicant for funds at a slightly less favorable rate than Australia. The Dutch have been free borrowers, with 10 loans, mostly for East Indian development. Now they are financing themselves. So is Czechoslovakia. She is paying off a 7½-per-cent dollar bond issue that does not mature before 1945 from the proceeds of an internal 5-percent loan. Italy has negotiated 22 loans to further her programme of hydroelectrical expansion and for her leading cities and industries. She will borrow much more. Loans to Poland amount to $115,000,000. The daily quotation sheets include the bonds of Greece, Bulgaria, Estonia, and Jugoslavia, which, with Poland, are the centres of political fermentation in Europe. The American investor passes by this element of risk. He has not yet acquired the European habit of watching the market for signs of war. There are, of course, loans to Cuba as well as to Haiti and to the Dominican Republic. The American tourist in South America could check up 70 loans of American capital to the governments, cities, and provinces of Argentina, Brazil, and Chile, and 10 or a dozen more to Bolivia, Uruguay, and Peru. We have made 6 loans to Panama aggregating $12,000,000 and 21 to Colombia for $115,000,000. Our dollars have assisted in the rehabilitation of Costa Rica and Salvador. Japan was a preferred borrower before the war. Since then she has secured over $300,000,000 in the United States to assist her governmental policy of protecting growing industries, enlarging the scope of her great power companies, and rebuilding those communities that suffered most from the earthquake. Finally, we have investments in China and Mexico, which are unproductive, and there is a record of an American loan having been made to Iceland.

The fourth episode in this remarkable movement of American capital into the foreign field is still open. We have to-day in foreign investments fifteen times the amount of the United States debt in 1917. At the present rate of increase there will be more dollars in foreign bonds by the end of 1930 than there are outstanding of United States obligations. Only two of the 400 issues listed have defaulted— one a small industrial of Southeastern Europe and the other an insignificant province in South America. Over 85 per cent of the foreign bonds taken by American investors show them a substantial appreciation from the issue price. Investors have had good luck, though they may credit themselves with good judgment. It will require more careful investigation from now on to succeed in the international investment field. The temptations there will be greater than ever, as the prime issues are refunded at lower rates of interest, and inferior securities with high coupons are offered in exchange, in competition with domestic bonds whose yield has been falling and may decline still more in the next few years.