The Case for Private Loans

March 7, 1949

Suppose our government were to halt all its foreign lending programs and turn them back once more to private investors. We can imagine the following conversation between a government official from Ruritania and an American investment banker.

RURITANIAN OFFICIAL: As your government has stopped its giveaway program, we are forced to come to you private bankers. But of course there just aren’t enough private funds for world revival.

AMERICAN BANKER: Why not? Our government never gave you anything that it didn’t first take from private funds in taxes. Sufficient private funds certainly exist.

RO: But your investors show no desire to put them into Europe.

AB: For excellent reasons. Putting aside the Russian menace, which isn’t your fault, your governments have systematically destroyed confidence.

RO: What assurances would restore it?

AB: I’ve made up a list. In view of the past record of your government, I’m afraid it would now have to pledge itself: (1) Not to seize or nationalize the American investors’ capital or the private firms in which it was invested. (2) Not to impose crushing taxation. (3) Against price fixing, wage-increase decrees, or profit controls that would imperil our investment. (4) To impartial enforcement of contracts. (5) Against barriers to the removal of our private funds. (6) To remove exchange controls. (7) To make your currency freely convertible at its free market value. (8) To halt internal inflation by balancing your budget and stopping further expansion of money and credit.

RO: You needn’t go on. Our government will never consent to such policy reversals.

AB: Very well. Then American investors will not be interested in risking their capital in your country.

RO: This is economic imperialism! You are trying to dictate to our government! You wish to infringe the sovereignty of Ruritania! We are determined to have socialism! You are interfering in our internal affairs.

AB: Listen, who came to whom for a loan? We’re not forcing you to do anything. You can have all the socialism you want. Only you can’t expect to find American investors eager to subsidize and prolong it at their expense.

RO: This is ideological prejudice.

AB: Private investors do have a prejudice in favor of government policies that seem likely to insure production, the safety of their principal, and a sufficient profit.

RO: Ah, that’s it! Private profit! It’s insistence on that that holds up world recovery.

AB: On the contrary, it is the constant search for profit that maximizes and balances production. Profit is, in fact, the best indicator we have of how much production has actually taken place. If a firm in Ruritania manufactures something at a loss, it means that the value of the labor and raw materials put into making the product is greater than the value of the product itself. That isn’t production but sheer waste of labor and materials.

RO: Are you contending that repayable private loans help world recovery more than non-repayable government gifts?

AB: Precisely. Take another look at that list of reforms. You will find that they are not only necessary to attract foreign private capital to your country but to the revival of your domestic investment. They would probably encourage your own terrified capital to come out of hiding to such an extent as to make you soon independent of foreign capital altogether. Such assurances are essential.

RO: Why didn’t your government officials insist on these assurances?

AB: It wasn’t their money. Besides, it would have created dangerous friction between governments. But we private bankers can safely suggest them, because we are after all only middlemen telling you what conditions are necessary to make Ruritanian securities attractive to private American investors.

RO: I appreciate your friendly advice. Perhaps after all.