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Should Investment Be Regulated?

SENATOR CARTER GLASS'S outcry against the censorship by the Department of State of private foreign loans seems to rest insecurely on three legs. One is legalistic—that the Constitution gives the President no such power. One is an objection to the policy—or lack of policy—which has been revealed in the specific approvals or disapprovals of foreign loans. The third is the general doctrine that the political government should not interfere in such economic matters. Senator Glass does not himself distinguish sharply these separate grounds of objection, but for the sake of clarity it is well to remember them.  

The first objection does not worry us much. It may be true that, if the executive were to have the legal power to forbid bankers from underwriting specific loans, it could gain that power only from Congress. But no such absolute power is claimed. If a banker were to issue a loan disapproved by the State Department, he could not be fined or sent to jail. He would merely run the risk of losing money and prestige, since, if the administration  made a statement saying that the loan in question was contrary to public policy, investors might not be eager to take it up, and the financiers who floated it might suffer from criticism. Surely the executive has a right to issue such statements. And if, in an effort to cooperate with the State Department, as well as to avoid censure, bankers are willing to submit their proposed issues for approval, nobody can say they are violating the Constitution.  

The practice of this censorship may well, however, be subjected to careful scrutiny. Its purposes were understood to be closely allied with the major diplomatic and commercial aims of the administration. Loans to nations which did not acknowledge, or make steps to pay, their indebtedness to this government, were to be barred. Loans were to be denied to foreign monopolies, which could exploit the American market by screwing up prices. And loans were to be discouraged which were to be used for non-productive purposes—and especially for military ones. It was felt that such loans would hinder, rather than help, European nations to discharge their obligations to us. Published disapproval of specific loans has been infrequent since the practice was adopted. A proposed loan to facilitate trade between Germany and Russia was disallowed, technically because Russia had not recognized the Kerensky government's debt to this country. The recent Prussian loan was approved only after assurances had been given that it would be used for "productive" purposes. One or two minor proposals have been frowned upon. In the main, however, the effect of the policy can be guessed only on the basis of its announced aims.  For loans which are sure to be denounced are not likely to be proposed—at least publicly. The embargo on loans to France until she settles the debt controversy must constitute, for instance, a Aveapon  in the hands of the State Department. (The recent  refunding loan Avas permitted because it obviously  did not enlarge France's commitments to this country.)  

The reason for the importance of these specific applications of the loan censorship, the reason why they should be investigated and discussed, is precisely the same as the reason for examining and criticizing the diplomatic aims which they reinforce. We sincerely hope that Senator Glass and others will look into the implications of our official policy in trying to extract such large and long-continued payments of the war debt from France; that they will examine the inter-relations of our tariff, the efforts of Europe to pay her debts to us, and her tendency to form monopolies and exploit us commercially in every way she can. We hope these critics will question the wisdom of requiring Russia to recognize the Kerensky debt before having any relationships with her or letting her have the capital she  needs. And we hope they will go further into the question of which loans are "productive," and how productive they are, and how money loaned to a  country for productive purposes can fail to release funds for non-productive purposes. But it must be admitted that these are all matters of major administration policy, not matters of loan censorship primarily. If Senator Glass approves the policy,  he surely would not want the bankers, acting independently, to undermine it. If he disapproves the policy, he should not be side-tracked into fulminations against the censorship of loans.  

He should not, that is, unless he is a blind adherent of laissez-faire doctrine, believing that individuals free to seek their own interest will somehow, some time, bring about results that are in the best interests of all. Here are bankers, whose business is primarily to earn profits by underwriting and floating loans. In order to conduct this business with success, they must maintain a certain amount of confidence by not offering issues which  involve too much risk. And they must offer a high enough return to induce purchasers to buy the loans. As intermediaries between borrower and investor, they succeed by bringing them together. But is it necessarily true that every bringing together of borrower and lender, with a profit to the banker, is in the general interest? By no  means. Even if the banker is sufficiently careful of  all the complex elements—including political ones  —that affect safety, he may be furthering a development which is not best suited to the public interest. In this respect, there is no great distinction between international and domestic loans. The investment of capital determines the allocation of  manpower, the use of available materials, and has much to do with the distribution of wealth. In a planned economy, it would be the master key in the hands of the board of industrial and social strategy. We do not know enough yet to operate a fully planned economy, and so we put up with a largely haphazard one. But we do know enough to be aware that it is not the best of all possible orders simply because it is haphazard.  

The censorship of loans is, therefore, not an unwarranted political intrusion into a sacred realm of economic activity, where government does not belong. It is a significant step in the direction of more social control of the economic order. Blunderingly or unintelligently as it may be exercised, the  proper complaint is against the purposes or knowledge which inform its use, rather than against the fact that it is exercised at all. An expert and progressive administration, with a department of internal welfare which was as zealous for the interests of our population at home as the Department of State is for our supposed interests abroad, could doubtless exert a regulatory influence over investments which would be most salutary. To argue that the organized public has no concern with how our surplus is used, whether at home or abroad, is to be more reactionary and conservative than the administration itself.