Concealment Motivation
Concealment Motivation for the deeper causes of the War [World War I] these financial studies underpin the conclusion of Lowes Dickinson, 'that the War was caused by the system of international anarchy involved in alliances, armaments, and secret diplomacy,' and show how that system called to its aid the financial strength of the counter-intriguing nations.

The Franco-Russian connection was not more iniquitous than other such alliances, but it is more easily traced and more spectacular in the essential cultural and institutional antitheses that existed between the ramshackle autocratic government of Russia, heading blindly for the abyss, and the thrifty egalitarian close-knit French republic. The France of republicanism, liberty, and equality, was gradually harnessed to decaying Russian imperialism, oppression, and corruption; the French peasants of the blue blouse, French shopkeepers of the black coat, bowed their backs, pinched their household budgets, and hoarded their francs with the effect of enabling Russian despotism to resist the pressure of the Duma for constitutionalism and a peaceful revolution. A common hatred and fear of the common neighbor [Germany] bound these antitheses together and themselves became a factor in bringing on the cataclysm against which they were intended to protect.

This is not to blame a France which had suffered from such master-intrigue and master preparation for the war of 1870 as Bismarck's. Indeed, it was the later intrigue of Bismarck in the financial field, seeking by a refusal of credit to Russia to bring her to humiliating subservience to Germany that first threw Russia into the arms of France. The first Russian loan, 500,000,000 francs, was floated on the Paris Bourse in December, 1888, after the approval of both governments, and was quickly followed by one of 700,000,000 francs and another of 1,200,000,000. France financial help to Russia, once begun, increased rapidly as the Czardom brought its Danaïdean jar to be continually refilled at the inexhaustible French spring. In 1902 French investments in Russia were approximately 7,000,000 francs and by 1914 had become 11,300,000,000 francs, about one-quarter of the whole French foreign investment1; over 9,000,000,000 francs of French-owned Russian securities were obligations of the Russian Government. The distribution in France was extraordinary; after the war the Property Office established by the French Government 'received some 1,600,000 individual declarations from owners of Russian securities.'

The huge French investment in Russia came to be guided almost exclusively 'by the stir of political arrangement'; the weaker Russia became in her financial and domestic affairs, the higher price did she put on her military friendship, until, as may sometimes happen, the ulterior purpose of the borrowing endangered the financial interest of the lender. About 37 per cent of the Russian railways were built primarily for political and military, not economic, reasons. Isvolsky in 1911 boasted of the way in which he had forced the French Government to subordinate the financial interests of the French banks to the needs of the dynasty and the strategic requirements of the far-stretching military fronts of Russia. ...

Europe: The World's Banker: 1870-1914,
by Herbert Feis, Yale University Press,
New Haven, 1931, Pg. xi, xii

The Imperial Russian Government was so heavily into the debt of the French Government that she could actually influence to a great degree the foreign policies of the French. It was both a political and financial imperative that France maintain the welfare of the Russian Government for "fear of losing all."

The heavy accumulated investment of the French in Russian securities (they formed 25 per cent of all French foreign investments) was a direct consequence of the alliance. The continued dependence of Russia upon French finance enabled the French Government to exercise a measure of control over Russian policy - to restrain its actions in the Near East and sustain its opposition to Germany. On the other hand, once the sums loaned had grown great they strengthened the necessity of making French foreign policy conform to Russian aims, a further cause of unwillingness to risk the rupture of the alliance. Debtor and creditor were firmly bound to each other, but debtor, in this case, was the more exigent and the more aggressive in political plans.2

For a class of people whose motive was to lay by for the future, the lending of money to a reactionary and corrupt autocracy whose history was visibly written in terms of war and revolution seems to be a curious choice. But if we regard mercantilism, like diplomacy, as virtual war, the system grows more intelligible. Instead of leaving the investor to choose sound international securities, which could be realized in time of war, he was induced to hand over his money to pay for the construction of railways and munitions for an allied country by way of preparation. The investor lost his money, because when war came, the ally could not stand the strain. The strategic railways were not finished, the munitions were inadequate, the government was inefficient and corrupt. Still the investment was not wholly fruitless. Russia, at any rate, kept seventy divisions occupied for three years. And the investor might have chosen apparently much sounder investments ... with no better pecuniary result.3

R. G. Hawtrey, The Economic Problem, London, 1925, pg 282

The major French banking houses, not unreluctantly because of the huge commissions to be made on Russian government bond issues, were pressed into service to promote and distribute the bonds among their depositors.

The underwriting Paris banking houses for the 4 1/2% Russian State Loan of 1909 consisted of:4


Banque de Paris et des Pays-Bas (now BNP Paribas)
Crédit Lyonnais
Messrs Hottinguer & Cie
Comptoir National d'Escompte de Paris (now Banque National de Paris, today's BNP Paribas)
Société Générale pour favoriser le développement du commerce et de 1'industrie en France (now Société Générale)
Société Générale de Crédit industriel et commercial (now Crédit Industriel et Commercial or C.I.C.)

All of whom are still in business, and with websites!

Collectively, these banks in concert with the French Government were able to influence and create a market for a bond issue if given the political necessity.

The wish to make French lending conform to and aid French political policy led to government intervention of three types. First, the government acted to prevent the arrangement or emission of loans to countries whose political actions were deemed unfriendly, or whose political alliances and interests seemed to clash with those of France. Second, admission to official listing was made conditional upon pledges, assurances, or compensations of a political order. Third, the government used its connections with financial circles, its influence over public opinion and press to facilitate the borrowing of states with which it was allied, or to arrange the sale of loans in return for which political advantages had been secured. In some instances the government itself virtually arranged the borrowing, then selected some banking group to execute it; or, in the case of business which the banks were at the moment reluctant to undertake, it called together the bank executives and secured their cooperation on ground of national welfare.5 France... there existed during the period before the war a definite bias in favor of foreign investment. This bias was created partly by political, partly by economic, and partly by psychological factors, but it was encouraged most of all by the peculiar structure of the French investment banking system. Before the nineteenth century investors in France were advised in financial matters by their notaries, in whom they had implicit confidence. But in the nineteenth century banks took over this advisory function.6 All large loans were floated by one or other of several large banks, which had practically a monopoly over the flotations of issues by virtue of their great number of branches. The close co-operation between the few large banks centralized the control over issues of securities. The large private banking firms like Rothschilds, Vernes, Mallet, had been largely superseded as leaders in the underwriting field and were forced to co-operate with the large banks, since the latter controlled most of the agencies thru [sic] which securities were sold. The placing of issues floated by their central office was a very important function of the branch banks. Indeed, it was the most important of their functions. The branches were not local banks in the sense that they attempted to satisfy local needs for means of payment. They gathered savings and in exchange distributed securities issued by their central office. The function of local banking was quite subsidiary to that of forming a channel for the distribution of their securities, and their profit was largely made by selling securities, not by conducting banking operations.7 Each branch was allotted a quota of securities to be sold, and the branch manager was interested in selling his quota. Whatever estimate was made of risk involved was made by the central office, not by the branch, and the central office was usually more concerned with profits than with educating the investor.

Far from offering sound advice to their clients on the merits of foreign issues, the banks furnished financial prospectuses of new issues which frequently grossly exaggerated the security and assets of the borrower. This was particularly true in the case of foreign issues because of the absence of any legal requirement as to published information about the financial condition of the borrower. Misrepresentation became so rife that in 1907 a law was passed holding the issuing bank responsible for the accuracy of sums stated in the prospectus. This law, however, did not apply to foreign government or municipal loans.

And not only did the banks issue grossly biased information thru the prospectus, but they also paid for newspaper support. Part of their publicity program was paid newspaper propaganda appearing in the guise of disinterested comment.8 According to Marinitsch,9 of the twenty-five independent financial journals not owned directly by banks or financial agencies,10 only two or three were thoroly [sic] honest in their comments on new issues. The financial columns of even the large dailies, Marinitsch stated, were leased to financial writers who were privileged to conduct their columns with complete liberty. Their power to influence public opinion for or against new security issues was, obviously, considerable, and rendered their support valuable to underwriters. Kaufman in describing the details of French flotation of securities wrote that the first care of a bank directing the flotation of an issue was to establish the 'budget of publicity' that is, to fix the sum to be distributed to the press not for paid advertisements, but for securing favorable comments in the financial news columns. The expense of this type of publicity was, he estimated, from 1 to 1 1/2 per cent of the nominal issue. In the decade before the war, Kaufman claimed that there spread a practice of giving newspaper editors certain subscription privileges which would increase in value in proportion to the success of the flotation.11

It was the large profits frequently available to bankers from foreign loans that led them to prefer and encourage foreign investments. In recommending French rentes or City of Paris bonds, there was little or no profit to be made, but in recommending a Bulgarian or Brazilian loan there was opportunity for big gains. The poorer the security of the borrower and the more pressing his need, the less particular is he apt to be, the less 'shopping' around he can afford to do, and the more is he willing to pay to the underwriters.12 The result was constant pressure on the French investor to buy those foreign securities which the banks were issuing. A consortium or a single bank took a foreign loan and pushed it; they were no longer impartial counselors to the investor.13

Harry D. White, The French International Accounts 1880-1913,
Harvard Univ. Press, 1933, pp 279-281.

The effectiveness of the banks' advise to their depositors may be judged from the following answers by the chief officials of the Crédit Lyonnais to the United States National Monetary Commission in 1910.14

Our information is that the Crédit Lyonnais always endeavors to have a certain class of securities which they can recommend to their depositors, and that their recommendation is practically equivalent to a sale, and that they sell an enormous amount of securities and at times undertake large issues. Can you state the largest issue that you have recently purchased?

There are two kinds of such operations; first, when the Crédit Lyonnais is alone interested in the operation; and second, when others of the Paris bankers are interested with us. The largest recent issue, in connection with other bankers, was the 5 per cent Russian loan of 1906 of 1,200,000,000 francs ($240,000,000)
[the 1909 - 4 1/2 per cent Russian loan was for 1,400,000,000 francs, $271,000,000]. What is very important in our way of floating a loan is that the sales are made in small quantities; the transaction is completed in a very few days, and each of our customers buys only the number of bonds corresponding to his investment requirement.

As a matter of fact, anything you recommend they will buy?

Yes, and even with a very large issue; the bonds do not remain long in the market, because in our country savings are very extended. Everyone saves his money. The small savings of France are the wealth of the country. By examining the balances of the accounts of our customers we can know whether they want to invest or not, and then we endeavor to have stocks and bonds to offer to them as they require them, but this is variable, and sometimes we might have a large issue, 40 to 50 millions of francs, taken by the public in four or five days.

The 1909 long term loan - amortized over fifty (50) years with the final payment due January 15, 1959 - was designed to primarily re-finance the higher interest 1904, 5% $160,000,000 loan which was scheduled to be redeemed on May 14, 1909. The 1904 bonds were held by the French banks and financiers themselves. If the public had not subscribed to the 1909 loan, the banks and financiers could not have redeemed their 1904 bonds and/or the inability of the Imperial Russian Government to make payment may have pushed it into default - in either or both cases, with severe political and world-wide financial-market repercussions.

In other words, without additional funds, the Russian Government was not in the position to pay out gold to the banks and financiers who held Russia's 1904 bonds. And, the financiers and banks who held those bonds could not chance a default. Therefore, until at least the privately held 1904 bonds had been redeemed with the proceeds of the public 1909 bond issue, Russia and her bankers had to assure the integrity of Russia's façade of financial strength.

The French Government, as well as - although to a lesser extent - the British Government, had both the political and economic necessity of assuring the survival of the Imperial Russian Government. Arising from these necessities, and with the assistance and self-interest of the bankers and financiers who held 1904 Russian bonds, the parties fostered the public's belief that the 1909 Russian bonds were secure investments.


1Of the direct Russian government debt owned abroad in 1914, 80 per cent was held in France, 14 per cent in Great Britain, H. Feis, Europe: The World's Banker: 1870-1914, (Yale University Press, New Haven, 1931), pg 211.
2Herbert Feis, Europe: The World's Banker: 1870-1914 (Yale University Press, New Haven, 1931) Pg. 228.
3R. G. Hawtrey, The Economic Problem (London, 1925), pg 282.
4Derived from an actual 4 1/2% 1909 Russian Bond.
5Herbert Feis, Europe: The World's Banker: 1870-1914 (Yale University Press, New Haven, 1931) Pg. 184.
6"J. Montety, Les banques et la politique de placement à l'étranger de l'épargne (Paris, 1923). Also D. Yovovitch, Les valeurs mobiliéres étrangères à la Bourse de Paris (Paris, 1910)."
7"Domergue in La question des sociétés de crédit (Paris, 1910) describes the functioning of the hundreds of branch banks as follows: 'The clients, wholly impressed by the vastness of the banks, followed their advice assiduously. The central agency fixed in advance the amount of securities that each branch ought to place, and the manager of the branch, whose word was law with his client, went over his client's portfolio and made room for the new issue. During the period of flotation the central office issued daily lists to all branches stating the percentage of its quota reached by each branch. Every attempt was made by the managers to reach and pass their quota.' Under such conditions it would be most surprising if the advise to investors would be unbiased."
8"Kaufman, Banques en France, Chap. 3, Sec. 3."
9"La Bourse théorique et pratique, (Paris, 1892), pg 294."
10"There were in Paris in the 1890's 186 financial sheets."
11"The probability of co-operation between the issuing banks and the press at the expense of the investor is indicated by the following incident... About the 20th of December, 1911, the important dailies contained lengthy, laudatory articles on the wealth and prosperity of and opportunity for investment in Paraguay. The following week a foreign loan of that country was issued on the Paris and other markets. Later one learned that the country was engaged in civil war and that during the course of the year there had been no less than four revolutions, and further, that the interest payment on previous loans had not been paid for 10 years."
12"The answer by the officials of the Crédit Lyonnais to the United States Monetary Commission in 1910 on this subject of underwriters' profits is significant. The question was: 'Have you a fixed percentage of profit, or do you buy them as you can and sell them at a price satisfactory to yourselves?' The answer was: 'Naturally the commission varies.' Interviews on the Banking and Currency Systems, United States Monetary Commission, 1910, Senate Document No. 405, pg 234."
13Harry D. White, The French International Accounts 1880-1913, (Harvard University Press, 1933), pg 279 - 281.
14Interviews on the Banking and Currency Systems, 61st Congress, 2nd Session, Senate Document No. 405, 1910, p. 214.