To take a practical example, let us suppose that the King of Ruritania is informed by his Minister of Marine that a battleship must at once be added to its fleet because his next door neighbour is thought to be thinking of making himself stronger on the water, while his Minister of Finance protests that it is impossible, without the risk of serious trouble, to add anything further to the burdens of the taxpayers. A loan is the easy and obvious way out. London and Paris between them will find two or three millions with pleasure. That will be enough for a battleship and something over in the way of new artillery for the army which can be ordered in France so as to secure the consent of the French Government, which was wont to insist that a certain proportion of any loan raised in Paris must be spent in the country. (It need hardly be said that all these events are supposed to be happening in the years before the war.) Negotiations are entered into with a group of French banks and an English issuing house. The French banks take over their share, and sell it to their customers who are, or were, in the habit of following the lead of their bankers in investment with a blind confidence, that gave the French banks enormous power in the international money market. The English issuing house sends round a stockbroker to underwrite the loan. If the issuing house is one that is usually successful in its issues, the privilege of underwriting anything that it brings out is eagerly sought for. Banks, financial firms, insurance companies, trust companies and stockbrokers with big investment connections will take as much underwriting as they are offered, in many cases without making very searching inquiry into the terms of the security offered. The name of the issuing house and the amount of the underwriting commission —which we will suppose in this case to be 2 per cent.—is enough for them. They know that if they refuse any chance of underwriting that is offered, they are not likely to get a chance when the next loan comes out, and since underwriting is a profitable business for those who can afford to run its risks, many firms put their names down for anything that is put before them, as long as they have confidence in the firm that is handling the loan. This power in the hands of the big issuing houses, to get any loan that they choose to father underwritten in a few hours by a crowd of eager followers, gives them, of course, enormous strength and lays a heavy responsibility on them. They only preserve it by being careful in the use of it, and exercising great discrimination in the class of securities that they handle.

While the underwriting is going on the prospectus is being prepared by which the subscriptions of the public are invited, and in the meantime it will probably happen that the newspapers have had a hint that a Ruritanian loan is on the anvil, so that preliminary paragraphs may prepare an atmosphere of expectancy. News of a forthcoming new issue is always a welcome item in the dull routine of a City article, and the journalists are only serving their public and their papers in being eager to chronicle it. Lurid stories are still handed down by City tradition of how great City journalists acquired fortunes in days gone by, by being allotted blocks of new loans so that they might expand on their merits and then sell them at a big profit when they had created a public demand for them. There seems to be no doubt that this kind of thing used to happen in the dark ages when finance and City journalism did a good deal of dirty business between them. Now, the City columns of the great daily papers have for a very long time been free from any taint of this kind, and on the whole it may be said that finance is a very much cleaner affair than either law or politics. It is true that swindles still happen in the City, but their number is trivial compared with the volume of the public's money that is handled and invested. It is only in the by-ways of finance and in the gutters of City journalism that the traps are laid for the greedy and gullible public, and if the public walks in, it has itself to blame. A genuine investor who wants security and a safe return on his money can always get it. Unfortunately the investor is almost always at the same time a speculator, and is apt to forget the distinction; and those who ask for a high rate of interest, absolute safety and a big rise in the prices of securities that they buy are only inviting disaster by the greed that wants the unattainable and the gullibility that deludes them into thinking they can have it.

To return to our Ruritanian loan, which we left being underwritten. The prospectus duly comes out and is advertised in the papers and sown broadcast over the country through the post. It offers £1,500,000 (part of £3,000,000 of which half is reserved for issue in Paris), 4-1/2 per cent. bonds of the Kingdom of Ruritania, with interest payable on April 1st and October 1st, redeemable by a cumulative Sinking Fund of 1 per cent., operating by annual drawings at par, the price of issue being 97, payable as to 5 per cent. on application, 15 per cent. on allotment and the balance in instalments extending over four months. Coupons and drawn bonds are payable in sterling at the countinghouse of the issuing firm. The extent of the other information given varies considerably. Some firms rely so far on their own prestige and the credit of those on whose account they offer loans, that they state little more than the bare terms of the issue as given above. Others deign to give details concerning the financial position of the borrowing Government, such as its revenue and expenditure for a term of years, the amount of its outstanding debt, and of its assets if any. If the credit of the Kingdom of Ruritania is good, such a loan as here described would be, or would have been before the war, an attractive issue, since the investor would get a good rate of interest for his money, and would be certain of getting par or £100, some day, for each bond for which he now pays £97. This is ensured by the action of the Sinking Fund of 1 per cent. cumulative, which works as follows. Each year, as long as the loan is outstanding the Kingdom of Ruritania will have to put £165,000 in the hands of the issuing houses, to be applied to interest and Sinking Fund. In the first year interest at 4-1/2 per cent. will take £135,000 and Sinking Fund (1 per cent. of £3,000,000) £30,000; this £30,000 will be applied to the redemption of bonds to that value, which are drawn by lot; so that next year the interest charge will be less and the amount available for Sinking Fund will be greater; and each year the comfortable effect of this process continues, until at last the whole loan is redeemed and every investor will have got his money back and something over. The effect of this obligation to redeem, of course, makes the market in the loan very steady, because the chance of being drawn at par in any year, and the certainty of being drawn if the investor holds it long enough, ensures that the market price will be strengthened by this consideration.