How Investments Serve Diplomacy

SOME years ago the national advantage of citizens' investments abroad was subjected to scrutiny in a paper for the American Academy of Political and Social Science(1) by Mr. F. M. Huntington Wilson, whose analysis derives unusual interest from the fact that its author was Assistant Secretary of State under the Taft administration, and in that capacity, between 1910 and 1913, helped Secretary Knox formulate and apply the famous policy known as "dollar diplomacy." A particular foreign investment, he said, may have advantages for the nation of a political or of an economic sort. The political advantage of foreign investment includes "strengthening American influence in spheres where it ought to predominate over any other foreign influence on account of reasons of fundamental policy, like the Monroe Doctrine, or of military strategy or of neighborhood. Such a sphere is 'Latin America,' where our interest increases in intensity from a vanishing minimum at Cape Horn northward to reach its maximum in the zone of the Caribbean Sea, the neighborhood of the Panama Canal, and in Mexico. In this category falls also, for example, the discharge of our historic obligation to Liberia and the preservation of that little country as a pied-à-terre in Africa, of possible potential value to us for commerce or for the emigration of African Americans. Such political advantage ranks highest." Next comes "the maintenance of a traditional position favorable to our trade where trade may go by political favor, as in the Chinese Empire." Other instances of political advantage from investments would be "the strengthening of our friendship with other great powers, or ... with countries where it is wise to preëmpt a share in a dawning development, like Turkey, or ... with countries whose markets are especially valuable." The protection of the United States government to any particular investment of its citizens abroad, argues this paper, should be measured and meted out in proportion to the national advantages of this sort that may be expected from the investment.

During a debate in the German Reichstag in 1911 over the regulation of foreign security issues, a spokesman of the Chancellor reminded the financiers that they "administer the savings of the people, and ... in investing these savings they must give attention not merely to their own business interests but above all to general national considerations of a patriotic and economic character,"(2) and these words of a prominent writer on the development of German banks were greeted with cheers from the parties of the right and center: "International business relations and international security issues must always be merely means to the attainment of national ends and must put themselves in the service of national purposes."(3) In other words, foreign investments not only may, in some cases, serve the national advantage, but according to this doctrine they must do so in all cases and do it consciously. If those who administer investments fail to act in ways that support national political objectives---even if they merely "waste" national power through capital investments that are financially profitable but politically useless(4)---they must be subjected to state authority, or at least must not be given the whole-hearted protection of the state.(5) Similar doctrines have been asserted by statesmen and publicists in all the capital-exporting countries of the great-power class at one time or another---unless Great Britain should be counted an exception. The practice of guiding foreign investment in accordance with political interest was so decidedly followed by Tsarist Russia before the World War and by Japan and Italy both before and after that the doctrine hardly needed verbal assertion. It was voiced most vociferously in France and Germany and found occasional expression in acts of the government, accompanied by considerable quiet pressure. The same has been somewhat less true in the United States, and still less in Great Britain.

What are these aids to national policy that may be provided by capital investments abroad? The remainder of this chapter undertakes to analyze in detail just how private foreign investments may promote the "national advantage" ---that is, to be more precise, how private foreign investments may promote the objects of those who have political power and who control the foreign policy and the diplomacy of the state.



The most obvious and universal object of foreign policy among the members of the Western state system is the maintenance or increase of the state's power and prestige. Economic strength is one of the main constituents of political power, and insofar as private investments abroad are thought to contribute to economic strength---as by opening markets and sources of raw materials for national industry---statesmen will regard them as assets in foreign policy. Furthermore, insofar as private investments are effective assistants in facilitating penetration and conquest, maintaining regional dominance, cementing alliances, exerting pressure on a political adversary, or rallying domestic support to foreign policy---all topics to be considered further in this chapter---they will be regarded as contributors to national power and therefore as useful adjuncts to diplomacy. This hardly requires elaboration.

In an actual or potential measuring of armed force, private foreign investments may sustain military power by providing a reservoir of foreign exchange which can be used to finance the purchase of supplies. Thus, after a year or two in the World War the Reichsbank took a secret census of foreign securities held in Germany(6) and in England the Treasury mobilized foreign security holdings to facilitate purchases abroad, first by appeals to voluntary patriotism and later by compulsion.(7) Private investments have been important tools of military and naval strategists in seizing, consolidating, and strengthening bases for operations abroad---territorial footholds, naval coaling stations---in ways which will become fully apparent in the section on penetration and conquest. They have been used to screen secret military preparations (Yalu case, Chapter 3). The contacts and information acquired. by private investors in strategically located lands have proved valuable in military campaigns; so investment in such localities may be one aspect of military preparedness. Control of oil supplies is an important factor in modern naval preparedness in which the private investor has aided his government. In these and other ways investments abroad directly enhance military strength, hence increase the foreign power of the state and serve the "national advantage." As an offset must be reckoned the increased military vulnerability of widely scattered interests abroad.

Examples: The German naval office under von Tirpitz was most energetic about implanting private economic enterprise in the leased territory of Kiaochow and the neighboring province of Shantung after these areas had become German spheres. In fact, when selecting a location for this German base in the Far East, "my chief demand was capacity for economic development; it did not seem advisable to me to establish a purely military base."(8) Appreciative testimony has been given by British military officers concerning the value of the Imperial Bank of Persia, an English foreign investment, to British and Russian forces in the Middle East during the World War. Not only did the bank handle the large quantities of silver money necessary to operations in that region, but "the bank officials were valued advisers on political and intelligence matters, and frequently undertook the work of consuls or political officers. . . ."(9) Whether by plan or accident, the interests of American private investors have had an important part in facilitating the development of American naval strategy in the Pacific (especially Hawaii, where it was the revolt of American sugar plantation owners that offered the islands for annexation) and in the Caribbean, while German naval bases in the South Seas and numerous outposts of British naval power all over the world were pioneered by private investors.

While it is often true that private investments prepare the way for military and naval bases, in still more cases the fear that such may be the sequel to investment creates political implications around perfectly non-political private enterprise. The weaker in dependent states and powers that have interests to defend in strategic regions sometimes adopt a touchy, nervous, and irritable attitude in such matters which provokes unpleasant incidents and international discord over suspicions that may be wholly chimerical. Thus, the fact that economic enterprise can be used as a cloak for national political designs tends to prepare trouble for the enterprises themselves and for the relations between nations. Examples: The Wönckhaus firm in the Persian Gulf (Chapter 2). Also, in 1917 the United States Senate heard that Japanese subjects were about to acquire land on Magdalena Bay (Lower California, Mexican territory), and passed the Lodge resolution, declaring

"That when any harbor or other place in the American continents is so situated that the occupation thereof for naval or military purposes might threaten the communications or the safety of the United States, the Government of the United States could not see, without grave concern, the possession of such harbor or other place by any corporation or association which has such a relation to another government, not American, as to give that government practical power of control for naval or military purposes."(10)

See Chapter 14 for discussion of protective measures which a sense of insecurity leads weaker states to adopt against the political implications of investments from abroad and which themselves provoke conflict.

A few years before 1914 oil investments suddenly acquired an immense political interest, because oil fuel had recently become fundamental to sea power. If it seemed that petroleum companies were the special pets of aggressive diplomacy just after the war, the explanation was that their product ranked as a direct constituent of national power, like that of armament makers. Let one who doubts this read the memoirs of Lord John Fisher and Winston Churchill, who as Commander of the Fleet and First Lord of the Admiralty, respectively, directed the crucial shift of Britain's naval fuel supply from good English coal to oil that had to be secured abroad. "The fateful plunge was taken," says Churchill ". . . the supreme ships of the navy on which our life depended, were fed by oil and could only be fed by oil.... A decision like this involved our national safety as much as a battle at sea. It was as anxious and as harassing as any hazard in war. It was war in a certain sense raging under the surface of unbroken peace." Thus the passionate quest of the navy for secure sources of oil impelled Great Britain to its famous purchase of control over the Anglo-Persian Oil Company in 1913.(11)

Not only actual power when it comes to a contest of force, but a reputation for power and a psychological hold on the respect or admiration of the world are important to a State and are usually among the primary objects of its foreign policy. If the relative strength of two contending parties is already known, a trial of strength is unnecessary; the weaker will yield to the stronger without going through a hopeless conflict. Thus, a reputation for power---in a word, prestige---means that a state can win many diplomatic victories without having to go to war, and this same prestige is its first line of defense against the diplomatic demands or the aggressions of other states.(12) Now, economic power is one of the main components of national prestige in the modern world, and perhaps no advertisement of national economic power is more efficacious than large and widespread foreign investments. Witness the tremendous prestige which accrued to the United States by reason of its change from a "debtor" to a "creditor" country during the war---dramatized as it has been in the writings of publicists. Private investments of citizens have been regarded as such important elements in the prestige of countries hoping to trade or colonize in a particular region of the earth that governments have intervened to prevent their passing into foreign hands. This was one of the considerations which led Bismarck to sponsor a subsidy bill before the Reichstag in 1880 when the interests of the famous Hamburg firm of Godeffroy---the "South Sea King"---threatened to pass into the control of Baring Brothers. English acquisition of the foundering firm, Bismarck thought , would not only rob Germany of its position in Samoa and elsewhere, but would injure the dignity of the Reich as a whole.(13)

The spread of a nation's particular culture outside its boundaries---its language and literature, its art, a knowledge of its institutions---may also be a considerable factor in prestige, and in political power and influence. This reason, as well as the messianic phase of nationalism which leads every nation to believe that its civilization is manifestly superior to all others and should be carried to the rest of the world, accounts for the fact that the foreign offices of some governments have special divisions whose duty it is to promote the national culture abroad.(14) This purpose of foreign policy may also be advanced by private investments, especially direct investments, which carry with them innumerable contacts of a not purely economic sort.

Admiral Alfred von Tirpitz, under whose leadership the German navy made such spectacular and fateful growth before 1914, was indefatigable in attempting to plant German business men and German enterprises in the Far East, not only to sustain the military and naval interests which he was eager to have there, but also because be wished to spread the German language. He relates in his memoirs how he worked to diffuse German in China---a difficult task, as he remarks (strange admission for a nationalist!) because English is in many respects better suited as a commercial language. It always made him sad to see Germans in foreign countries falling away from the Fatherland, becoming American citizens or losing their national consciousness. "The future of Germany overseas, and our whole artificial and yet so indispensable position in the world, depended upon whether people could remain proud of the fact that they were Germans."(15) A former foreign minister relates in his memoirs that at the navy was so eager to extend " das Deutschtum" abroad---that is, to extend German speech, customs, manners, loyalties, influence---that it wished to accord special exemptions from compulsory military service to young men engaged in German enterprises in foreign parts.(16)

Finally, a state's power and prestige is enhanced when it gains the right to be included in diplomatic conversations or international conferences on various "questions" of interest to a group of powers, such as the Turkish Question, the Far Eastern Question, the Moroccan Question, and the like. It may even find opportunities to drive political bargains, trading its support to more vitally interested powers for favors elsewhere. Private investments of citizens in the region under discussion are one of the well-recognized interests which entitle a state to such consideration, and thus indirectly they add to political power.

The Italian ambassador to Turkey was eager to bring about some sort of participation by Italian capital in the German projects for the early sections of the Bagdad Railway, mainly as a check on French influence. But he was unable to find Italian bankers who could be interested, and it was only after a great deal of trouble that be succeeded, at least nominally, in having some Italian capital included. Then "it was mainly Greek capital that went in under the Italian flag."(17)

Crispi relates in his memoirs that he planned to establish Italian interests in Morocco in order to use them as a bargaining tool with France.(18)

Between 1906 and 1910 the German government fostered German enterprise in Persia, gaining thereby a chance to thrust sticks into the wheels of Anglo-Russian understanding on the Persian question and a bargaining device which enabled it to combat Russian diplomatic resistance to the Bagdad Railway plans. It induced the Deutsche Orient Bank to obtain a banking concession, and there were negotiations regarding mining rights, the construction of waterworks, and railway concessions. The bank was not enthusiastic about these opportunities and did not develop them. In 1910 negotiations took place with Russia. "The German Government had continued to maintain a stubborn front against the Anglo-Russian assertion of dominance in Persia. It did not recognize the Anglo-Russian agreement, and tried to insist upon the open door for German commerce and finance. When it was proposed that French financial advisers be appointed in Persia, German objections were vigorously heard. To show that it was a factor to be reckoned with, the German Government gave support to an expedition sent by the Deutsche Bank to study railroad possibilities. The expedition was designed in part to make 'Isvolski amenable to our desires in the Bagdad question.'" Finally, Berlin warned Russia that its support of German private enterprise in Persia would take a more vigorous form, and German policy gained its end. In November, 1910, Russia promised to put no future obstacles in the way of the Bagdad Railway. "In return Germany renounced all claim to railway and public works concessions in the Russian zone of influence in Persia. German enterprise had shown little eagerness to enter it."(19)



Private investments of citizens and agreements concerning them have been recognized diplomatic means of marking out spheres of economic interest and of political influence. They have also been used to earmark particular sections of tottering empires, serving notice that should a general breakup lead to a scramble for annexations the earmarked portions were reserved for a particular power. Of the many examples that might be given, a few are selected for presentation here, and numbers of others appear throughout the book.

The Anglo-Russian agreement of 1907 concerning Persia delimited the special sphere of each power mainly in terms of the support which would or would not be given to the private economic enterprises of its citizens. Article I: "Great Britain agrees not to seek for itself and not to support in favor of British subjects, as well as in favor of subjects of third powers, any concessions of a political or commercial nature, such as concessions for railroads, banks, telegraphs, roads, transportation, insurance, etc. beyond a line going from ... to ... and not to oppose, directly or indirectly, the applications for similar concessions in this region supported by the Russian Government." In Article II Russia made an identical pledge respecting the British sphere.(20)

Large German investments in the Caroline Islands, as well as old claims, were cited by Germany after the Spanish American War in support of of the contention that if the group ceased to be Spanish they should become German.(21)

The use of investments and investment agreements to earmark territories in an empire thought to be tottering has been most conspicuous in China. The frame of mind of many European men was well indicated by von Bülow, Secretary for Foreign Affairs, in a speech before the Reichstag on April 27, 1898. Defending the military and naval occupation of Kiaochow, he said:

"Mention has been made of the partition of China. Such a partition will not be brought about by us, at any rate. All we have done is to provide that, come what may, we ourselves shall not go empty-handed. It is not always the wish of the traveller that determines when a train starts, but he can make sure not to miss the connection. The devil takes the hindmost!"(22)

Tsarist Russia, Japan, England, Germany, and France prepared themselves against the eventuality of a partition of China by staking out spheres of interest or influence. "The first step was to secure a base, from which to radiate their forces of influence. After this, the railroad was usually employed to extend from the base to the interior, thus dominating the economic life of the sphere. To finance the railway, mining, and other forms of economic exploitation, foreign banks were usually established. Thus came into existence what was commonly called the policy of conquest by railroad and bank. And in order to avoid conflicts among themselves, the powers made agreements that they would respect each other's spheres of influence."(23)

It is interesting to note that a division of territorial spheres between Great Britain and Germany in China took place in 1898 in the form of an agreement between British and German bankers, the governments considering that a mutual official declaration would not be opportune. A German banking syndicate, represented by A. von Hansemann, and representatives of the British and Chinese Corporation and the Hongkong and Shanghai Banking Corporation agreed that "the British and German spheres of interest for applications for Railway Concessions in China" would be the Yangtze Valley and certain provinces on the one hand and Shantung and the Hoangho valley on the other. Certain connecting lines were to be built and operated jointly by an Anglo-German syndicate. The negotiations for this agreement, needless to say, were carried on under the eyes of the respective foreign offices and the results approved by them.(24)

The examples given so far have dealt with the mere marking out of areas for exploitation or annexation. How do private foreign investments figure as aids to diplomacy in the more dynamic aspects of penetration and conquest? The utility of private foreign investments to aggressive diplomacy appears to be based upon four main characteristics: 1) Private investments can sometimes be made to carry with them certain specific, contractual rights of a political sort. 2) Private investments of citizens, under the existing system of national diplomatic protection, provide a state with a basis for asserting a general political interest in foreign territory where the investments are placed. 3) Private investments of some kinds necessitate the presence of citizens of the penetrating state in the territory being penetrated, perhaps in key positions, and this may be a factor of great strategic importance in diplomatic or military action. 4) Private investments provide, or can be made to provide, an abundance of excellent pretexts for aggressive diplomacy or military conquest. A succession of examples from actual cases where investments have assisted diplomacy will illustrate each of these points.

1. Specific, contractual rights of a political sort may be attached to private investments.

The concession for the Chinese Eastern Railway, running through northern Manchuria, was a contract between the Chinese Empire and the Russo-Chinese Bank signed in 1896. It stipulated that "The Company shall have the right unconditionally and exclusively to administer its lands," meaning a zone of territory on each side of the line. This clause was used by the Russian tsarist government---acting through the railway company, which was private in form but controlled absolutely by the government---to justify its exercise of police authority over all persons living in the railway zone. In the face of contentions by the Chinese government, supported by the United States, that the French expression "aura le droit absolu et exclusif de l'administration de ses terrains" in the concession contract did not imply the surrender of any rights of sovereignty or political jurisdiction to the railway company, Russia sent in armed forces termed "railway guards" or "frontier guards," established police regulations, and Russian government officials exercised judicial functions.(25)

Similarly, when Japan took over the South Manchurian Railway from Russia after the Russo-Japanese War it organized a company private in form but dominated by government influence and used it to create an imperium in imperio along the strip of Manchuria traversed by the railway. The Treaty of Portsmouth permitted fifteen railway guards per kilometer, so the seven hundred miles of the South Manchurian system, together with other substantial railway concessions obtained by Japan, made it possible to keep a formidable army in the region.(26)

Control of the Chinese Eastern Railway also enabled Russia to manipulate freight rates in a way designed to promote a Russian "colonial" development in Manchuria. Manufactured goods in through traffic between Russia and China, when imported into Manchuria, were subject to a tariff seven or eight times lower than the local tariffs applied to goods produced in Manchuria or to goods imported via ocean ports. Thus, the cost of transport from Moscow to Harbin, a distance of 4694 miles, was practically equal to that from Dairen to Harbin, 592 miles. After the Japanese obtained the Southern Railway through the Treaty of Portsmouth, practically prohibitive tariffs were established on the Russian section south from Harbin connecting with the Japanese section, in order to force traffic through the Russian port at Vladivostok. These rates were so high that both import and export cargoes actually moved alongside the railway on native carts.(27) Needless to say, the finances of the railway suffered severely from such a policy, but profit-making never had been an object of this political venture.

France, too, took full advantage of rate-making on a railway built by French capital in southern China to give preference to French commerce. The railway policy of France in China, like that of Russia and Japan, and to some extent that of Germany, "has been a means to an end, an incident in a larger policy, which can only be described as in intention a policy of colonization."(28)

2. Private investments provide a basis for asserting a general political interest.

Russia around 1900 was "determined to have Russian economic interests in the Persian Gulf" and was willing to pay for them, in order to establish a political stake in the region. (Wönckhaus case, Chapter 2.) Recall also the Yalu and Tripoli episodes (Chapter 3) and the discussion earlier in this chapter of the way in which political interests acquired by investment have been used for bargaining purposes.

3. Private investments may necessitate the presence of citizens in key positions in the penetrated territory.

In addition to political advantages that may be afforded by guards, police, or the setting of transportation rates, capital investments in railways usually involved the presence in the exploited country of construction engineers, managers, telegraphers, and other technical employees from outside. This is deemed an advantage by statesmen pursuing an aggressive policy of penetration, and one which they wish to withhold from rival nations. One of the important points of disagreement between France and Germany which led to the breakdown of attempts at joint bi-national economic undertakings in Morocco just before the 1911 (Agadir) crisis was German insistence that the personnel of the railway lines to be constructed by French and German capital should be of both nationalities in the same ratio as the capital invested. "We don't want German station masters in Morocco," exclaimed a member of the French cabinet.(29)

When Chinese and Japanese representatives at the Washington Conference (1922) negotiated for the return of Shantung to China, the Japanese at first refused to consider cash payment by China for the Shantung Railway. They preferred to have a long-term loan floated by Japanese capitalists, with a proviso that during the life of the loan a Japanese chief engineer, a Japanese traffic manager, and a Japanese chief accountant should be employed on the railway.(30)

One reason why the British government did not confine its telegraphic communication with India exclusively to under sea cables was the political advantage which a land line would offer in the Anglo-Russian struggle over Persia. The first connection was established between the Indian and Persian coasts in 1864 and brought with it telegraph offices in the principal Persian ports, staffed with British personnel and equipped with their own means of defense. The lines subsequently operated by the Indo-European Telegraph Company to Teheran and across Persia greatly strengthened British influence, for they allowed Great Britain to keep a staff of officers and engineers constantly in the land. The telegraph offices even became places of refuge, like the foreign legations and consulate themselves, for Persian political protesters and malcontents.(31)

It should be mentioned that one of the politically useful aspects of the presence of private investments of citizens in the form of banking institutions where diplomatic battles are being waged is the availability of the bank for arranging loans to a government over which influence is sought. The methods of gaining and maintaining control over weaker states by advancing loans to them, by tying up their finances, by financial advisers, customs receiverships, pledged revenues, and the like are beyond the scope of this book, which does not deal with loans to governments.

4. Private investments provide pretexts for aggressivediplomacy or military action.

That the African colonies of Portugal might some day fall into the hands of more powerful European states seemed a not unreasonable expectation between 1898 and 1914, especially in view of the Portuguese reputation for colonial misgovernment. The German government was particularly eager to realize colonial ambitions of its own at the expense of Portugal, and joined in negotiations with Great Britain looking to that end. In 1898 each government agreed to seek new concessions for its citizens only in specified sections of the Portuguese colonies, and secret provisions dealt with the private rights of citizens of the two powers "in case Portugal renounces her sovereign rights . . . or loses these territories in any other manner." In 1914 a secret draft treaty was initialed between Germany and Great Britain which set forth conditions under which each power might intervene to assert control of its earmarked portion of the Portuguese possessions. The conditions were so elastic that almost any difficulty might have been taken to justify intervention, and it is clear that German officials had been taking steps even before the negotiation of the treaty to see that such difficulties should arise. Private investments of citizens were among the most important means relied upon for this purpose. Railway, mining, and development enterprises in Portuguese territory had been encouraged by the German, British, and even the French governments with evident political motives, and in January, 1913, the German ambassador to London, Prince Lichnowsky, had told Berlin, "If we could gain influence over the administration of substantial areas in Angola through the establishment of a Chartered Company or in Mozambique by acquiring the majority of the Nyassa Company, it might perhaps be possible to apply the paragraph about colonies or portions thereof becoming independent." The British-French chartered company In Mozambique, the Nyassa Company, whose territories were in the sphere assigned to Germany by the secret agreement, passed under the control of German banks in 1914. A German-Portuguese group, backed by the large German banks and shipping companies, and possessing official consent, began the execution of a plan to join the German colonial railroads in southern Africa to the small railroad running to the Portuguese port of Mossamedes in Angola, and Lichnowsky expressed the judgment that "it might also become easy to give practical application to the paragraph about the endangering of important interests through maladministration once we have proceeded with energy to the creation of economic interests. . . ."(32)

In August, 1901, the French government broke off diplomatic relations with Turkey and recalled its ambassador. Certain claims arising out of loans to the Sultan and out of a dock concession which had been granted to a French company and then withdrawn on account of the opposition of Turkish laborers and merchants were the grounds alleged for this drastic action. France used the occasion, however, to demand satisfaction some political issues relating to the rights of French schools, hospitals, and missions, and to stage a naval demonstration likely to impress the Near East with French power. The calculations of the government in this episode plainly passed beyond the simple intention of assuring just consideration to French investors. The claims of the dock company simply happened to be among the "dossiers" on top of the pile.(33)

In 1911 the government of Russia was determined to oust the American financial adviser, Morgan W. Shuster, whom Persia had called to its aid in an effort to escape Anglo-Russian dominance. A pretext was needed, and the investments of a Russian enterprise, the Discount Bank of Persia (really a political tool supported by the Russian treasury) supplied one which sufficed. The Persian government had decided to confiscate the estate of a certain rebel prince, and Mr. Shuster directed his treasury gendarmes to take possession. The Russian consul-general sent two secretaries and ten Cossacks to interfere, and later justified his action on the ground that the prince owed money to the Russian bank. Soon Russia claimed that the consul-general had been insulted. An ultimatum demanded of the Persian government, first, an apology, and when this was agreed to, the dismissal of Shuster.(34)

The anomalous situation in Manchuria before the Japanese occupation in 1931 was such as to provide plenty of convenient pretexts on the ground that China was not providing proper protection to foreign interests. While Manchuria theoretically remained a part of China and foreign control was limited to a narrow strip on each side of the railways, this railway zone was really the center of activities in the whole province. Even a strong government could hardly have governed satisfactorily under such a handicap. Thus the political privilege attached to the important Japanese railway enterprise automatically created the conditions which invited further extension of Japan's political control.



Closely akin to the advantages of private investments for purposes of penetration and conquest are their services to a diplomacy which is concerned with maintaining a political dominance already acquired over a weaker country or region. For such purposes it is important to forestall the assertion of political interest by other powers, and diplomacy may seek to do this 1) by preventing the development of important investment interests by citizens of other powers in the region where dominance is to be maintained, especially investments of a politically strategic sort, and by crowding out those that already exist; 2) by stabilizing and ordering the political situation in the region dominated so that other powers will not be given occasions for interference to protect the interests of their citizens. Private foreign investments can assist diplomacy in both of these tactics. In the actual process of exercising political control over the dominated countries investment interests are also useful, particularly because they provide plenty of occasions and convenient pretexts for the exercise of the more subtle forms of pressure sometimes known as "moral influence "---aptly characterized by Lord Salisbury as "a combination of menace, objurgation, and worry."(35)

As a part of the United States policy of maintaining a special interest in the Central American and Caribbean countries near the Panama Canal the State Department has at times consciously and avowedly sought to encourage the investment of American private capital in the region. Thus, at the direct request of Secretary of State Knox, American bankers in 1910-11 acquired an interest in the National Bank of Haiti, partially replacing French capital.(36) The same administration encouraged American business men to "crowd out" other European capital interests in the Caribbean region where these were regarded as uncomfortably predominant. The object of the policy was to avoid possible complications under the Monroe Doctrine in case investment interests in the region should be troubled by defaults or other difficulties which might bring a demand for intervention by outside governments. It was also thought desirable to increase American influence in the region, and it was hoped that by developing these countries economically something might be accomplished toward giving the populations a vested interest in political stability, thus tending to overcome the chronic state of revolution so bothersome to American political and economic interests.(37)

The widespread developments of the United Fruit Company may be cited as an example of private economic enterprise which definitely exercises a stabilizing effect on the internal political conditions of many countries where it operates. Whether desirable or not from other standpoints, this influence does help to maintain order and to facilitate the United States policy of forestalling interference by other powers. The company has been led in the interest of its own exploitations to build railroads, establish communications systems, develop important research laboratories and hospitals for the study and treatment of tropical diseases, carry out great sanitation projects, construct settlements, and to perform many other functions ordinarily associated with government. It also wields, of course, an unofficial but nonetheless real influence over the politics and politicians of many of these countries. In Colombia, where the laboring population is more enterprising and intelligent, the United Fruit Company has encouraged the tendency of its laborers to acquire small plantations of their own. The company thus hoped to reduce its costs of supervision and administration, and sought at the same time to create a group of native citizens that would have an interest in resisting political unrest and attacks on property rights.(38) Of course, the social and political effects of such a dominating enterprise as this great fruit company in the countries where it operates are not by any means wholly in the direction of stability. The importation of foreign labor supplies and the tendency for the economic life of a whole country to become dependent on one product marketed abroad by a foreign monopoly do not work in that direction. Increased revenues to the government, which in some instances make possible the maintenance of public order with the aid of improved roads and better policing, may in other instances promote disturbances by enlarging the booty of successful revolution.

In Albania, a little country on the east coast of the Adriatic whose strategic location gives it the same importance in the eyes of Italy that the Caribbean region possesses for the United States, internal improvements (roads, bridges, agricultural enterprises) carried out by an Italian development company known as the S.V.E.A., and a currency and credit system installed by the Italian-controlled National Bank of Albania, have been used to unify Albania and to promote its political stability under a government favorable to Italy. These enterprises, it must be remarked, are "private investments" in name only; from the start in 1925 they were carefully fostered by Italian diplomacy and bound up with loans to the Albanian state---loans which were first made by a syndicate of Italian banks under the guidance of their government and subsequently guaranteed by the Italian treasury, only to be superseded in 1931 by a direct advance from the Italian state to the Albanian state.(39)



Thus far we have been dealing mainly with services of private investment to diplomacy which can best be rendered in relatively weak and unstable countries. We shall now see that the political usefulness of investments extends to the relations of strong, modernly organized states among themselves. In the first place, foreign investments have been used in support of foreign policy where one power desires to win the political friendship of another power less well supplied with capital funds. The two classic examples are the building of the Franco-Russian alliance before the World War with the aid of French capital advances to Russia, and Italy's adherence to the Triple Alliance, which led to the withdrawal of French capital from Italy and the investment of German capital. In both of these cases private investments, as defined in this study, played a part, though a relatively minor one. Loans to governments have the major rôle in most such politico-financial affairs.(40)

Financial flotations in Paris helped the French foreign office to bring Russia into alliance with France, gave France a measure of control over Russian policy, and enabled France as the price of subsequent advances from its financial market to specify that Russia should increase its military forces and build certain strategic railway lines toward the German frontier. They also had the ultimate effect of binding lender to borrower---perhaps more firmly than borrower was bound to lender---so that French foreign policy had to conform to Russian aims. French investors before the war had put well over two billion dollars into Russian securities--one-fourth of all French foreign investments. Only some three to four hundred million dollars of this represented investment in other forms than loans to the Russian government, however. These private investments were in insurance companies, banks, public utilities, naval constructions, but above all in mines, textiles, and metallurgical works. They were a minor part of the underpinning to the Franco-Russian alliance, and except for the armament enterprises there is no evidence that they had more than a very indirect connection with politics. The French government did encourage its bankers to supply capital for metallurgical factories in Russia, particularly in order to prevent German firms from increasing their interests in the Russian munitions industry.(41)

In 1882, after the French occupation of Tunis, Italy joined Germany and Austria in the Triple Alliance. Italy had depended on the French market for loans, and it was now necessary for Germany to show that financial aid would be forthcoming from Its new allies. A large bond issue for the city of Rome, undertaken by the Deutsche Bank in spite of unfavorable money markets, served this purpose immediately. Coöperation between leading German banks and the Italian government continued to develop, fostered by the German foreign office, and in a few years it suddenly became essential to the new alignment. The Triple Alliance was to end or to be renewed in 1887, and until that year France, apparently hopeful that Italy might withdraw or fearful that open hostility might drive it into renewal, continued to countenance financial relations between French bankers and the neighbor to the south. When the alliance was secretly renewed in March, 1897, and an Italian ministry unfriendly to France came into power, Franco-Italian relations grew rapidly worse and a tariff war broke out. Violent attacks on Italian securities appeared in the French press, probably with the approval of the government, though it was denied that they were inspired. This led French investors to dispose of their Italian holdings, while French bankers refused new credits and insisted on payment of their outstanding commercial loans. All this, coupled with a bad harvest, contributed in Italy to the collapse of a wild real estate boom which had been financed largely with borrowed French capital.(42) It has been estimated that in less than a year $135,000,000 in French capital was withdrawn from Italian urban real estate.(43) Italy entered upon a severe commercial and financial depression.

In this emergency Francesco Crispi, Italian premier, appealed to Bismarck for aid, and Bismarck promised to use his influence with the big German banks. They attempted to check the fall in prices of government bonds by granting advances to Italy, by making large purchases on the Paris stock exchange, and by facilitating collateral loans on Italian securities. In 1890 important banking houses in Germany were brought into a syndicate for the support of Italian credit and the management of financial transactions with Italy. The German ambassador in Rome told Crispi that the German government had used "strong pressure" on Bleichröder, head of an important banking house and close to Bismarck, to persuade him to organize this syndicate.(44)

These measures related mainly to Italian state credit. As early as 1887-8, however, German banks had bought an interest in Italian institutions making mortgage and industrial loans, and this had been encouraged as part of the plan for cementing the Triple Alliance. In 1893 the whole business structure of Italy was severely strained by the failure of several important banks. The Italian government wanted the German bankers to take over the bankrupt institutions. This they refused to do, but in 1894 the Bleichröder syndicate, with Austrian, Swiss, and Italian aid, and under the urging of the German government, founded the Banca Commerciale Italiana in Milan. At times, says an anniversary publication of the Disconto-Gesellschaft, the whole plan for the establishment of a German bank in Italy came near falling through, but "consideration for the important matters at stake, touching as they did German political interests, nevertheless predominated."(45) The Banca Commerciale rendered valuable aid in the financial difficulties through which Italy was passing and later became a center about which many enterprises under German ownership or management found their way into the country, especially In the chemical, textile, electrical, and marine industries. German minority interests remained powerful in the Banca Commerciale down to the World War, but as the capital was enlarged French participation gradually outgrew the German. By 1896-7 a political reconciliation and renewed economic collaboration had begun between Italy and France, while Italy and Germany gradually drifted apart.(46)

Scraps of information and apparently well-founded rumors led to the supposition that in the alliance systems of the present day not only state loans, but in certain instances private investments as well, continue to play their part as in the Franco-Russian and Triple Alliances. It would be interesting to study, for example, the political influences surrounding the activities of French banks in Poland and the countries of the Little Entente, or of Italian construction firms in Bulgaria and other Balkan countries.

On a few occasions attempts have been made to work out a political rapprochment between rival powers on the basis of encouraging joint coöperation of their citizens in investment undertakings abroad. The outstanding instance is the Franco-German accord of February 8, 1909, which recognized the paramount political interests of France in Morocco and provided that the two governments would "endeavor to associate their nationals" in joint economic enterprise there. These attempts failed, because political rivalry was too intense. Similar plans for Franco-German coöperation on railway undertakings in tropical Africa (Congo-Cameroon Railway) also collapsed.(47)

Before the Russo-Japanese War, while Russia and Japan were jockeying for position, both made bids for American sympathy and encouraged the investment of American capital in Korea. Each power was obviously seeking to commit American interests in such a way that when the crisis came the United States would turn to its side.(48)



If foreign short-term funds on deposit in the financial institutions of a country are suddenly withdrawn in large amounts the effect may be a severe shock to the credit system of the country and perhaps a panic. A government which wished to exert pressure on the statesmen of a foreign country in time of political crisis might conceivably induce its banks to act concertedly in this way. A search for actual cases has revealed one instance in which such withdrawals were hinted at as a political threat(49) and three instances in which, allegedly, a government has actually provoked withdrawals for political ends. All three of the latter instances involved the relations of France and Germany. French withdrawals from Germany were alleged to have been stimulated for political purposes in 1911 at the time of the Morocco crisis, in 1929 during the Young Plan discussions on the reparations question, and in 1931 during the political tension over the projected Austro-German customs union. Careful investigation of the 1911 instance shows that, while funds were withdrawn, the movement was not in response to deliberate political instigation. There is substantial reason to believe that the withdrawals during the Young Plan negotiations were politically engineered and motivated. It seems very doubtful that a plan to exert political pressure was the effective cause back of the 1931 withdrawals.(50)

Long-term private investments are not ordinarily susceptible to use as instruments of pressure in this same way. Of course, an inspired attack on the credit of a foreign country through the press might instigate sales of its government bonds and perhaps also sales of industrial issues. This apparently occurred in the case recounted under the preceding topic, when Italy turned from France to the Triple Alliance and French long-term investments were withdrawn. Very special circumstances would seem to be necessary, however, to make such pressure practicable through long-term security sales, and direct investors are obviously not in a favorable position to make sudden withdrawals of their properties abroad. A means of pressure more often used in the case of long-term investments lies in the control over foreign security flotations---that is, the power of a government to deny access to its capital market except on terms which may involve political concessions. This will be discussed in Chapter 10.



One of the political advantages of private investments abroad to those who control government policies arises out of the fruitfulness of foreign investment interests as sources of "good reasons"---arguments that can be advanced to justify policies which are desired for whatever "real reasons." Sometimes vigorous support of imperiled citizens or their interests abroad can be used to arouse a thrill of patriotic fervor which strengthens those in power domestically. President Theodore Roosevelt employed such technique in 1904 when a lukewarm convention of his party was meeting in Chicago and the opposition party was exulting in new-found unity. He stirred his followers to enthusiasm by ordering Secretary Hay to send a message to the American consul-general at Tangier: "Perdicaris alive or Raisuli dead." Perdicaris had been captured by Moroccan brigands in a quarrel with the Sultan, but recent research reveals that at the time this inspiriting message was sent and trumpeted in the American press arrangements had already been made for his release. Not only that, but the State Department had already discovered that it was doubtful whether Perdicaris was really an American citizen and entitled to the protection of the United States. Roosevelt, informed of this fact, had suppressed the information and sent the telegram.(51)

"Our investments abroad," when they exist, or the need for finding investment opportunities, when they do not yet exist, have often furnished useful rationalizations on which propaganda designed to rally support to a particular foreign policy has been based, either by government officials themselves or by political pressure groups with a definite program to promote. The policies which private investments have most often served in this way are aggressive colonial expansion and the building of bigger navies.

Jules Ferry, who may be called the founder of modern French colonialism, argued in favor of his expansionist policy that it was well adapted to the situation of France, a country with great capital resources which needed opportunities abroad in colonies and territories under French rule.(52) A careful reading of French colonial literature reveals that it was not the spokesmen of business and banking who used arguments like this, but rather political leaders of the Ferry type, colonial governors and officials, publicists fired with a patriotic zeal for glorious expansion, military men---the types that predominated in the Comité de l'Afrique Française. The talk about investment opportunities was to win support for a program which these groups desired mainly for other reasons. Presumably it helped to enlist business men and investors in the cause.

Similarly in Germany the cry of new markets for German capital was used along with many other appeals by the missionaries, romantic geographers, traders, adventurers, and noblemen who led the colonial societies. "The steadily diminishing yield of capital investments within our present economic area" is one reason among several pages of reasons for colonial expansion in a propaganda booklet called "Why World Power? The Significance of our Colonial Policy."(53) Once Bismarck had taken an open stand in favor of colonization, he, too, used this reason. "Colonies would mean the winning of new markets for German industries, the expansion of trade, and a new field for German activity, civilization and capital."(54) Bismarck also employed existing German private investments abroad for internal political purposes when he made their vigorous support, notably in the proposed state guarantee of the Godeffroy interests in Samoa, into an issue which he could use as a trial balloon to gauge whether or not public opinion was ready for an official colonial policy.(55)

But perhaps that group in the internal politics of nations which finds private investments abroad most serviceable for propaganda purposes is the bigger-navy group. Every naval power has such a group, centering about a self-perpetuating professional clique allied with powerful industrial interests which build ships and provide armaments. The propaganda technique of this group places considerable emphasis on the need for protection of overseas capital placements. A pamphlet published by the United States Navy Department in 1923 under the title The United States Navy as an Industrial .Asset contains interesting examples of such propaganda. Secretary of the Navy Wilbur spoke in a similar vein before the Connecticut Chamber of Commerce in 1925: ". . . We have loans and property abroad, exclusive of government loans, of over ten billions of dollars.... These vast interests must be considered when we talk of defending the flag.... To defend America we must be prepared to defend its interests and our flag in every corner of the globe."(56)

Nowhere have overseas investments been invoked as a justification for naval expansion more elaborately and more successfully than in the Germany of William II. Admiral Alfred von Tirpitz, the presiding genius of the fleet, was not merely a naval technician, but an astute organizer of public opinion. The Kaiser relates in his memoirs how Tirpitz decided that the entire procedure of the Imperial Marine Office must be changed if the opposition to a big navy was to be overcome in the Reichstag. The mass of the people must be persuaded. An extensive propaganda program must be planned by the naval staff and carried through with the aid of the press and of important men in the universities and technical schools. Scientists must lend their pens to prove that a bigger navy was an economic and political necessity to Germany.(57)

The chief of Tirpitz's scientific agitation was a former Privatdozent at the University of Berlin who had changed his original name of Levy---doubtless not the most suitable for his purpose---sto Ernst von Halle. He was engaged in the summer of 1897 on the recommendation of Professor Schmoller as a scientific aid in the news service bureau of the Imperial Marine Office and served until his death in 1908. It was he who produced the elaborate memoranda on "German Sea Interests." The first of these was prepared on the occasion of the first navy bill introduced into the Reichstag in 1897. In 1905 a still more elaborate effort along the same lines brought the data and the arguments up to date.(58) These publications contained short chapters on Germans dwelling abroad, foreign trade, shipping, deep-sea fishing, German colonies, and German overseas investments. They compared the war fleets of the various powers and argued that although German sea interests had been developing very rapidly the navy had been allowed to lag behind. "If Tirpitz was the creator of the theories of sea interests and of the productivity of armament expenses, then it was Halle who successfully spread them."(59)

It is significant that the first serious attempt to reckon the amount and geographical distribution of German foreign investments---indeed, the only attempt before the war to gather first-hand data---was that undertaken by von Halle and published in these big-navy broadsides. Incidentally, the propagandists of the Imperial Marine Office secured estimates of German overseas interests from the Chambers of Commerce in Hamburg and Bremen and, when the figures seemed to them too small, increased them according to need, causing some annoyance to those who furnished the original data.(60)

Were those who had a direct interest in foreign investment among the primary moving forces behind the big-navy agitation? The answer is no; at least, their importance was relatively small. Then who provided the money and who helped to build up the propaganda organizations, including the great Flottenverein or Navy League and the various colonial societies, that "sold" the idea of naval expansion to the German people? First and foremost the agitation was instigated by government officials, from the Kaiser down, and especially by the professional navy clique under Tirpitz. Most of the Navy League's money came from heavy industry---from armament makers, like Krupp---and from business men who hoped to profit on naval contracts. Large amounts were contributed by persons who saw that this was a short-cut to official favor and honor. "If a future historian of our recent past draws up a list of those business men who contributed handsome sums to the Navy League and further ascertains how many of these gentlemen were shortly thereafter signaled out for orders or titles, the result will be interesting, though not very complimentary to the German business class," wrote a banker close to official circles.(61) The Hamburg Chamber of Commerce and others with overseas trading interests worked for an increase in the fleet, but they were interested not so much in the protection of investments as in the defense of North Sea trade against blockade in case of war.(62) The great popular support worked up by the Navy League came from the mass of small people---petty merchants and barbers' assistants who felt themselves big in the glory of the Fatherland, the same types who composed the rank and file of the Pan German League, or the postwar National Socialist movement. These were the groups that devoured von Halle's statistics on German investments overseas and clamored for increased naval "insurance" to protect these investments. Thus, it was not overseas investors so much as capitalistic interests of other sorts---mainly the metallurgical industry---that combined with the official military cast and the nationalistic sentiments of the lower middle class to put through the German navy program.

One might expect bankers doing an international business to be among the first to concern themselves for the safety of capital abroad but, if my impression is correct, the "international bankers" as a class are rarely in favor of big naval programs. They know that, convenient as gunboats may be now and then against weak countries, naval competition among the powers imperils foreign investments by making war more probable. It is navy men and nationalistic patriots, aided by propaganda funds from armor-plate makers, who are most vocal about the need for naval protection to overseas placements. Indeed, the conclusion of the matter seems to be that private foreign investments have been considerably more useful as an aid and protection to navies than navies have been as an aid and protection to foreign investments.



In what ways have private foreign investments contributed to the "national advantage" in the field of economic foreign policy? It should be remarked that here, as elsewhere in this chapter, the "national advantage" means the purposes of those who wield effective political power and control the foreign policy and diplomacy of the state. These purposes may at times be based on the interests of only a small class in the general population of the nation, or they may be based on false notions of interest arising out of economic delusions of the mercantilest type, which lead statesmen to regard exports as good and imports as bad. They are often rationalizations of sentimental and patriotic considerations, rather than the hard-headed pursuit of material interest that they claim to be. Furthermore, it is impossible to distinguish sharply between the economic and the political purposes of modern governments which find expression in their foreign policies. It is perhaps inevitable under the existing world system of sovereign national states that the fundamental aim of foreign economic policy should really be attainment of the essentially political desiderata of power and prestige. It seems to be true in fact that when it comes to a conflict of purposes states direct their policy in the way which promises power and prestige rather than in the way which promises a "mere" increase in economic well-being, though a policy which incidentally promotes economic welfare or appears to do so while also increasing economic power is all the more laudable in the eyes of statesmen. However, it is not our present purpose to appraise the foreign economic policies which investments may be found to serve, any more than we undertook to sit in judgment on the political policies which they serve. Instead of questioning whether particular economic foreign policies of states are good or bad, sane or insane, we shall take them as data and inquire how the private investments of citizens abroad have helped to promote them.

Private investments abroad have been regarded as useful to economic foreign policy: 1) in the promotion of export trade; 2) in tapping new sources of raw materials, especially of those regarded as having a strategic industrial or military value; 3) in breaking price-fixing monopolies abroad which might enable foreigners to exploit domestic consumers; 4) in executing emergency measures designed to stem an international financial panic.

For the first purpose, the specific types of private investment abroad regarded most highly by those in charge of governmental promotion of the export trade have been banks, trading and plantation enterprises, and railways or other types of transportation. Enterprises of this sort are prized as focal points about which the nation's economic activities in given regions can be organized. They are pathbreakers to further trading and investment opportunities. Much of the encouragement which governments have given in innumerable instances to railroad construction outside their own boundaries has had its roots in economic as well as political foreign policy. Governments seek trade penetration as avidly as they seek political penetration at times.

The Deutsch-Asiatische Bank, to select one instance, was founded on the joint initiative of bankers and government officials for the encouragement of German economic and political influence in the Far East.(63) Other German overseas banks successfully performed similar functions in many parts of the world. They have been particularly conspicuous as focal points for diverse types of enterprise, from constructing and running street car systems to mining, agriculture, and commerce---in large part, no doubt, due to the traditionally close relation which has existed in Germany between banking and industry. The activities of the German banks before and during the war were much written about in other countries, sometimes as proof of a dastardly Teutonic imperialism, sometimes as examples of national trade promotion which the banks of other countries should copy. Ownership of large interests in Russian banks was believed by the London Times to account for much of the German success in Russian industry and trade before 1914. Great Britain would have been better off had its citizens followed the German example instead of investing in speculative oil and gold enterprises, said this same authority. "By acquiring interests in Russian companies and banks British trade will obtain a much firmer footing in Russia. It is a singular and striking fact that we have invested vastly more capital in Russian enterprises than have the Germans; yet they have been able to exercise far greater influence on Russian industry.... It brings us back once more to the incalculable advantages that the Germans have derived from their interest in the great Russian commercial banks."(64)

A sober student of German banking has warned that the part played by overseas banks in encouraging national exports can be overemphasized. Despite the propaganda put out by such banks for home consumption, the investment of capital is their main business abroad. As a director of a German bank organized for operations in Brazil put it: "To be sure, a German overseas bank is the crystallization point for business relations with Germany, but this circumstance sinks to the level of an accompanying phenomenon, as does the circumstance that the original capital, the central control, and the higher officials belong to the German mother country. Without exception the thing which comes to overshadow everything else in importance is the activity carried on within the overseas economic territory itself, without regard to nationality---a root-taking in the foreign land."(65)

Governments have attempted to use capital investment as an instrument of export trade promotion through encouragement of so-called tied loans---that is, by having provisions inserted in loan agreements whereby the borrower agrees to spend the proceeds of the loan, or a specified portion of it, in the country from which the loan comes. A recent careful study of this phenomenon showed that tied loan contracts are found, in general, only where there is a considerable difference in political power between the lending and the borrowing countries and where the borrowing country is relatively undeveloped capitalistically but is in process of becoming industrialized. Not over ten per cent of all long-term international capital investments involve tied contracts. It is usually the political authorities of the capital-lending country that exert their influence, on grounds of national economic policy, in favor of tying exports to loans, and their wishes frequently meet with resistance from bankers---greater resistance in a country like the United States, where the relatively loose connection between banks and industry means that the banker's interest in commissions and the purely financial aspects of the loan transaction overshadow his interest in throwing business to American concerns, and less resistance in countries where, as in Germany, banks have been very directly interested in the profits of particular industrial enterprises. In general, furthermore, tied contracts are an issue mainly in connection with loans to foreign governments, though they do figure sometimes in private industrial loans.(66)

Nearly all the foreign loan contracts made with the Chinese government for the financing of railway construction were found upon investigation to contain clauses regarding the national origin of materials and equipment. A study of actual locomotive purchases showed that before the war 72% and after the war 56% of the locomotives in China had the same national origin as the capital which financed the line where they operated, and that neither before nor after the war was there a single English or French locomotive on a line not built with capital of the same nationality. American locomotives, on the other hand, were the most widely used on Chinese railways after the war. They appeared on lines financed by English, French, German, Belgian, Japanese, and Russian capital; American financing was a very minor factor in their finding a market.(67)

Governments of capital-exporting countries have also used the privilege of admission to their capital market as a bargaining device in pursuit of ends set by commercial policy. France, for example, threatened to veto the listing of Danish securities on the Paris Bourse in retaliation for an increase in Danish customs duties on French wines (1907), and obtained some concessions. Similar pressure was used against Sweden about the same time, and wine duties were lowered. The government's veto power over securities listings was often used to obtain contracts for French firms, particularly in the munitions industry, and in 1909 listing of United States steel securities was vetoed following a protest by the Fédération des Industriels et Commerçants Français that listing would result in French capital aiding foreign rivals to compete with the French metallurgical industry.(68) The device of listing vetoes is treated more fully in Chapter 10. The French government also sought to bring about French representation on boards of directors where loans were made to foreign industries, endeavoring thereby to foster orders to French enterprises.(69)

In the case of direct investments, such devices as tied contracts and veto of listing privileges are less applicable or not applicable at all, but, nevertheless, direct investments have been regarded as important promoters of export trade, mainly through their service as focal points of national enterprise abroad. Of late, however, the development of what has been called "the new export technique" or "the branch factory movement" has given statesmen with mercantilist inclinations some qualms regarding the beneficence of this type of foreign placement.(70)

The way in which an important capital placement can become the center for national economic expansion of many kinds is well illustrated by the Bagdad Railway. The following is summarized from a section of E. M. Earle's history of the railway(71) which he heads, "The Traders Follow the Investors": The construction of the Anatolian Railways by German capitalists was accompanied by a considerable expansion of other German economic interests in the Near East. In 1888, the year of the original railway concession to the Deutsche Bank, exports from Germany to Turkey were valued at 11,700,000 marks; by 1893, when the line was completed to Angora, they had mounted to a valuation of 40,900,000 marks, an increase of about 350%. Imports into Germany from Turkey rose during the same period from 2,300,000 marks to 16,500,000 marks, an increase of over 700%. A large proportion of the increased German exports to Turkey can be attributed to the use of German materials on the Ismid-Angora railway. The Deutsche Bank, sponsor of the Anatolian Railways, had been notably active from its founding in the promotion of German foreign commerce. Its charter announced the object "of fostering and facilitating commercial relations between Germany, other European countries, and oversea markets." By establishing foreign branches, liberally financing import and export shipments, introducing German bills of exchange in the four corners of the earth, and by similar methods, the Deutsche Bank had helped to emancipate German traders from dependence upon British banking facilities. It pursued the same policy in Turkey. The London Times noted in 1898 that, whereas ten years before the finance and trade of Turkey had been practically monopolized by France and Great Britain, the Germans were now by far the most active group in Constantinople and in Asia Minor. Hundreds of German salesmen were traveling in Turkey. The Krupp-owned Germania Shipbuilding Company was furnishing torpedoes to the Turkish navy, and Krupp was sharing with Armstrong the orders for artillery. German bicycles were replacing American-made machines. A group of Hamburg entrepreneurs had established the German Levant Line, which provided direct steamship service to Constantinople. In 1899 a group of German financiers founded the Deutsche Palästina Bank, which proceeded to establish branches at Beirut, Damascus, Gaza, Haifa, Jaffa, Jerusalem, Nablus, Nazareth, and Tripoli-in-Syria. "Promoters, bankers, traders, engineers, munitions manufacturers, ship-owners, and railway builders all were playing their parts in laying a substantial foundation for a further expansion of German economic interests in the Ottoman Empire."

The second service of private investments abroad to national economic policy---that is the tapping of new raw material supplies---derives its importance mainly from the strategic interest which control of certain substances acquires in time of war, although statesmen sometimes regard it as a worthwhile object in itself to free national industries from dependence on foreign-controlled sources of supply even in peacetime. The international political aspects of the "struggle for oil" which received so much publicity in post-war years, and in which the active intervention of governments in the competition of private or semi-private companies was often seen, is explainable only in part on the basis of the political influence wielded by owners of oil companies in the interest of their own profit. Far more important in accounting for the strenuous diplomatic support of oil enterprises was the great significance attached to oil as a factor in naval power.

Some examples of investment aid to foreign economic policy on raw materials: An Italian oil company, the Azienda Generale Petroli, in which the Italian government held a large share of control, was introduced into Rumania in 1926 under the auspices of the two governments in connection with a small loan to Rumania and settlement of the Rumanian-Italian war debt. This move was said to be part of the Italian policy of making Italy independent of British and American-controlled companies for oil supplies.(72) Britain's official entrance into oil production as part owner of the Anglo-Persian Oil Company has already been mentioned.

One of the compelling reasons given by Japanese statesmen for penetration in Manchuria and other parts of China was their desire to bring raw material resources needed by an industrialized Japan under Japanese control. Various aspects of investment penetration technique used in Manchuria are discussed elsewhere in this book. Japan's use of private loans to obtain control of the native Hangyehping iron and steel works in the Yangtse valley, which had been fostered by the Chinese government, is a striking example of the advantages afforded by investment operations to this phase of foreign economic policy.(73)

The Mannesmann Brothers, whose mining claims in Morocco the German government was not inclined to support vigorously enough against France, attempted to arouse public opinion and to force the hand of the Foreign Office by talk of "the age of iron." Germany must be freed from dependence on foreign nations for this strategic raw material, they argued, and they refused to compromise with French rival concessionaires on the ground that the patriotic objective of a German-controlled iron supply could never be attained in that way.(74)

Thirdly, governments have occasionally found it desirable to aid domestic interests in attacking foreign price-fixing plans which threatened to affect them adversely, and private foreign investments have served as instruments of this policy. The most conspicuous example of this sort was the plan of Mr. Harvey Firestone for establishing rubber plantations in Liberia, undertaken in connection with the campaign of Secretary of Commerce Herbert Hoover against the Stevenson Plan, in which British producers sought to "valorize" rubber.(75) The United States State Department has also objected to loan flotations in the American market destined to assist foreign valorization schemes on potash and coffee.(76)

Finally, private investments abroad have been a factor in governmental efforts to combat the spread of financial panic during the world economic depression. The coöperation of private banking interests and governments in arranging the so-called "standstill" agreements when sudden withdrawal of funds from Germany threatened widespread disaster is well known. These arrangements related to investments which were of the short-term variety in intention, though the emergency necessitated their prolongation.

Chapter Five

Table of Contents