Chapter XLIV: Section CLXXXVII

HISTORY OF THE RATE OF INTEREST.--EMIGRATION OF CAPITAL.

Midway between these classes of obstacles lies the very usual proceeding of highly civilized nations whose rate of interest is low, to transfer their capital into countries with a higher rate of interest, where the production of raw material is predominant.[187-1] This is most thoroughly accomplished by the emigration for good of the capitalists themselves; but also least frequently, because the natural attachment of man to his native country is usually too powerful, among the well-to-do classes, to be overcome by the attraction of a higher rate of interest. Temporary settlements in foreign countries are by far more frequent. Either the capitalist removes there himself, for a time, to return enriched, at farthest, in his old age; or he establishes a permanent branch of his business there, and superintends it through the agency of a trusted representative. The inhabitants of northern Italy, during the last centuries of the middle ages, maintained such establishments, not only for the purpose of carrying on commerce in merchandise along the shores of the Levant, but also the money trade in the principal countries of the west.[187-2] Similarly, the Hanseatic cities contemporaneously in the north and northeast of Europe; and, to-day, the English in almost all the important seaport cities in the world.[187-3] Such enterprises are always somewhat dangerous, especially in countries but little advanced in civilization.[187-4]

The best means to facilitate the migration of capital is credit. It is, indeed, true, that in international trade, ordinary private loans are seldom made. To make such loans would be to run too many risks; risks through a want of knowledge of persons or circumstances, on account of the difficulties in the way of continued supervision, and of being able to assert and defend one's rights away from home.[187-5] Loans are much more readily made to foreign states, to great corporations, or joint-stock companies, whose condition is well-known; and which, by reason of their perpetuity, have a deep and obvious interest in maintaining an honorable reputation. The issuing of certificates of stock, etc., has greatly facilitated international trade in capital.[187-6] But the mode of loaning in foreign parts preferred is to sell them commodities, and to require payment for them only after some time has elapsed, of course, with interest. Purchases, on the contrary, are paid for immediately, possibly even in advance.[187-7] The lower the rate of interest in a country is, the longer and more cheaply can it give credit to others; a new reason why the less civilized countries are particularly fond of trading with the most civilized.[187-8] [187-9]

[Footnote 187-1: _Nebenius_, Der öffentliche Credit, 83 ff.
After the end of the Napoleonic war, English capital flowed,
by way of preference, towards South America, afterwards
towards Spain and Portugal; after 1830, to North America;
after 1840, towards Germany and France, to be invested in
the construction of railways in the latter countries.]

[Footnote 187-2: The inhabitants of Asti began in 1226 to
carry on the trade in money in trans-Alpine counties. In
1256, _Louis IX_. ordered 150 Asti money-changers to be
thrown into prison, and he confiscated the money they had
loaned in France, to the amount of over 800,000 livres. They
were afterwards turned over to their enemy, the Count of
Savoy, as usurers. (_Muratori_, Scr. Rerum Ital., XI, 142
seq.) About 1268, Louis IX. banished all money-changers of
Lombard or Cahors origin: they were allowed only three
months in which to collect their debts. (_Sismondi_,
Histoire des Fr., VIII, 112.) About 1277, again all Italian
money dealers were imprisoned, and 120,000 gold guldens
extorted from them. (_Giov. Villani_, VII, 52.) After the
Lombards had lost their freedom, the business passed into
the hands of the Florentines and of the inhabitants of
Lucca. (_Sismondi_, Gesch. der ital. Republiken, IV, 602;
_Dante_, Inferno, XXI, 38.) Great part played by the
brothers Franzesi as dealers in articles of luxury, and
loaners on pledge etc., at the court of Philip IV. They seem
to have instigated the persecution of other Italian money
dealers, in 1291, from jealousy. (_Sismondi_, Histoire des
Fr., VIII, 429 seq.) Great losses of the Florentines by the
English-French war in 1337: Edward III. remained in the debt
of his bankers Peruzzi and Bardi to the amounts respectively
of 135,000 and 184,000 marks sterling; so that they and many
others failed. France imprisoned all the Italian money
dealers, and compelled them to pay a large amount of
ransom-money. (_G. Villani_, XI, 71.) In 1376, the Pope who
was engaged in a struggle with Florence, called upon all
princes to despoil all Florentine merchants within their
jurisdiction of their wealth, and to sell them as slaves;
and France and England actually did so. (_Sismondi_,
Geschichte der ital. Republiken, V, 257 seq., VII, 74.)]

[Footnote 187-3: Shortly before the French Revolution, Cadiz
had over 50 wholesale merchants against 30 retail, 30
modistes and at least 100 tradesmen from France.
(_Bourgoing_, Tableau, III, 130.) Commercial colonies!]

[Footnote 187-4: Thus even the emperor Paul of Russia caused
the property of English factors to be confiscated. The
galleons which Holland and England captured in the Spanish
war of succession belonged mostly to Amsterdam houses.
(_Ranke_, Franz. Gesch., IV, 226.) Even _Galiani_, Della
Moneta, IV, 3, thinks that, on this account, such commerce
is incompatible with the warlike spirit. It is certain,
however, that a government like the English would do well
not to permit a war with such countries as Russia or the
United States to break out too suddenly, that their subjects
might have time to collect all their outstanding dues. When,
in 1855, it was reported in London that all Russian drafts
were dishonored, people looked upon that fact as the surest
sign of coming war. English merchants had called in their
advances to Russia during the preceding economic period, and
refused to make new ones.]

[Footnote 187-5: This of course disappears when the
borrowing country is dependent on the loaning country. Thus,
the Canton of Uri formerly prohibited the inhabitants of the
Livinerthal to borrow capital except from them. It is said
that, at the beginning of this century, the Uri capital then
loaned amounted to one-half a million florins, that is, an
average of 250 per householder. Now it is not over one-fifth
of that amount. (_Franscini_, Canton Tessin, 126.) Think
also of the plantation colonies! But even the East Indies
may be looked upon as a species of colony for England. Hence
_Fawcett_, Manual, 105, is rightly of the opinion that no
other country has the possibility of being as useful to the
East Indies as England. And in fact, the East Indian
railways obtained of their capital of £82,500,000, only a
very small part, £800,000, in India itself, a very small
proportion of which latter sum was subscribed by the native
population. (Ausland 24, Juli, 1869.)]

[Footnote 187-6: What England is to-day, the Italian
commercial cities were in the 16th and 17th centuries, viz.:
the chief market for foreign loans. (Compare _Mun,_
England's Treasure, 1664, ch. 4.) The Genovese loaned money
in foreign countries at 2 and 3 per cent. (_Montanari_,
Della Moneta, 1867, cap. 2.) It is said that the Dutch, in
1778 invested 1,500 millions of livres in foreign national
debts, especially those of France and England. (Richesse de
Hollande, II, 178.) According to _J. G. Forster_, Schriften,
III, 335, in 1781 alone, in Europe, 800 millions loaned
capital. The Niederl. Jaerboek of 1789, p. 729, estimates
the amount of interest coming from abroad, English and
French not included, at from 50 to 60 millions of florins.
About 1844, according to official estimates, 1,000 million
florins in foreign loans, that is one-third of whole
national income. (Allgemeine Zeitung, 1844, No. 35.) Now,
Belgium, 300 million florins, in Austrian evidences of
indebtedness. (Quarterly Review, October, 1862, 402.)
According to _Baumstark_, Staatswissensch. Versuche über
Staatscredit, etc., 1833, 77, foreign nations, between 1818
and 1825, borrowed in England £49,000,000; and, about the
same time, England participated in Russian, French and North
American loans to the extent of £55,500,000. It is said that
there were, in 1843, £25,000,000 English capital in the
canals, railroads and banks of the United States. (_Porter_,
Progress of the Nation, III, 4, 634.)]

[Footnote 187-7: It is evident, from many of Demosthenes'
orations on private matters, that Athens was in the habit of
advancing the commercial capital needed by a great part of
the inhabitants of the Mediterranean coast. Many colonial
cities, Phaselis, for instance, had the very worst
reputation in this respect. They were virtually pirates as
regards Athens. (Adv. Lacrit., 931.) Here also it seems that
the goods taken for the loan had to be brought to Athens.
(941.) On the regular advances of Prussian merchants to
their Lithuanian and Polish vendors, in the 15th century,
while the former were forbidden even to buy on credit, see
_Hirsch_, Geschichte des Danziger Handels, 167, 177. In
Colbert's time, the Dutch gave 12 months credit in Europe.
(_J. De Wit_, Mémoires, 184.) In England, _Child_ perceives
a great advance in this: that in 1650, in all business in
the interior, there was a credit of 3 to 18 months given;
and in 1669, everything was paid for in cash. (Discourse on
Trade, 45.) Concerning previous times, see _W. Raleigh_,
Observations touching Trade and Commerce with the Hollander
and other nations, 1603. (Works, VIII, 951 ff.) In North
America, merchants in the interior frequently purchase their
goods of importers on 6 months credit. (_Tellkampf_,
Beiträge, I, 52.) In the West Indies, about the end of the
last century, the English gave a credit, generally, of from
12 to 16 months. (_B. Edwards_, History of the British West
Indies, II, 383.) In Brazil, in the case of imports, 4, 8
and even 12 months credit; payment in monthly installments,
and frequently even longer delay, without interest. In the
case of exports, when cash payments are not made, 1 per
cent. a month, (_v. Reden_, Garn und Leinenhandel, 332.)
Recently only about 40 per cent. of foreign advances are
made at 12 to 20 months, 60 per cent. at from 50 to 70 days.
(Tübing. Zeitschr., 1864, 517.)

In Buenos Ayres, the producer or collector of export
articles required the price to be paid usually a long time
in advance (_habilitacion_), a very bold but necessary
procedure, on account of his poverty. (_Robertson_, Letters
on S. America, I, 174 ff.) In the corn trade in South
Russia, at least one-half of the purchase money was required
to be paid in advance, and even before shipment, the other
half as soon as the corn arrived in the harbor, and, hence,
sometimes, long before it was put on board. (_W. Jacob_, On
the Corn Trade of the Black Sea, 23.) Compare _Tooke_, View
of the Russian Empire, I, 339, Richesse de Hollande, II, 43,
_Storch_, Handbuch, II, 61 seq. Russia was, about 1770, a
credit-giving nation to the still poorer Persians.
(_Gmelin_, Reise, III, 413.) The Spaniards also, in their
American colonies, had always an expedition ready and
waiting, the payment for which was made on the arrival of
the second. (_Depons_, Voyage dans la Terre Firme, II, 368.)
Moreover, active commerce simply, especially when
circuitous, may be considered as in some way an
international loan; and thus it is that the favorable
"balance," by means of which claim-rights are obtained in
foreign countries, is secured.]

[Footnote 187-8: Notwithstanding the gratitude of the United
States towards France, and spite of all the French
ambassador could do, the English immediately after the
conclusion of peace, attracted the greatest part of American
trade to themselves. (_Chaptal_, de l'Industrie Fr., I,
103.) Countries with a low rate of interest have an
advantage in this respect, which grows after the manner of
compound interest, when the duration of the advance of
capital is prolonged. (_Senior_, Outlines, 195.)]

[Footnote 187-9: How capitalists may, by the giving of
international credit, fall into an injurious habit, is shown
by the late and troublesome building up of the Dutch railway
system, while so many foreign railway enterprises were
provided with Dutch capital.]