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 THE 
 
 THEOEY 
 
 FOREIGN EXCHANGES. 
 
 BY 
 
 c^^ y-/-<fc^Xtv'» 
 
 The Eight Hon. VISCOUNT GOSCHEN. 
 
 A 
 
 ELEVENTH THOUSAND. 
 
 LONUON : 
 — EFFINGHAM WILSON, — 
 
 54, TriREADNEEDLE StREET, 
 
 1916. 
 
 T}ie Right of Translation is reserved.
 
 J 
 
 
 PEEPACE 
 
 THIED EDITIOiJ. 
 
 ^ The few weeks which have elapsed since the 
 
 fj pubhcation of the second edition have again 
 
 I proved the rapidity with which the situation of 
 
 ''j the "Foreign Exchanges" may be reversed, and 
 
 the difficulty of selecting durable illustrations. In 
 
 7j the preface to the second edition, allusion was 
 
 \ made to the fact that the Russian Exchange, so 
 
 ^s) long an example of unlimited fluctuations, had 
 
 { been brought almost to par. Since then a severe 
 
 fall has again taken place. So, in the former 
 
 edition, the rapid fall in the price of gold in 
 
 America furnished the opportunity for comment 
 
 and examination. But there also a turn has taken 
 
 place, and to-day it would be necessary rather to 
 
 seek an explanation of the rise than of the fall. 
 
 It is scarcely the province of a theoretical treatise 
 
 4 2
 
 PREFACE TO THE THIRD EDITIOK. 
 
 to keep pace with each new combination of facta. 
 An author may be considered bound to watch the 
 progress of events, as a constant test of the 
 accuracy of his principles, but it is hardly pos- 
 sible, nor is it necessary, perpetually to adopt 
 new illustrations. It has, therefore, been deemed 
 unnecessary to make any further alterations in the 
 present edition.
 
 PEEFACE 
 
 TO THH 
 
 SECOND EDITION. 
 
 The history of the Foreign Exchanges for the 
 last two years is a history of revolutions. The 
 movements which have occurred in many quarters 
 have been almost unexampled in rapidity and 
 extent. Countries which formerly supplied illus- 
 trations of particular phenomena in the Foreign 
 Exchanges, may now be cited as instances of per- 
 fectly opposite combinations. The various causes 
 which have been stated in the following work as 
 determining the course of the Foreign Exchanges 
 have been at work with more than usual intensity, 
 and the new combinations which events have pre- 
 sented have afforded many opportunities of testing 
 the correctness and sufficiency of the principles 
 advanced. The exchanges of those countries which, 
 two years ago, were selected as exemplifying the 
 results of a depreciated currency or excessive in- 
 debtedness, might now, on the contrary, be cited as 
 instances of rapid recovery. The Austrian Ex- 
 change has recovered fully 30 per cent. The
 
 Tl PKEFACE TO THE SECOND EDITION. 
 
 Russian rouble has approached the par value of gold. 
 In America, on the other hand, the very opposite 
 has occurred. The American Exchanges, which in 
 the former edition were shown to move within cer- 
 tain hmits — determined by the cost of bullion ship- 
 ments and by the intermediate value of money — 
 have since afforded the most notorious examples in 
 recent days of unlimited and indeterminable fluc- 
 tuation. An inquiry into the theory of the Foreign 
 Exchanges can scarcely keep pace with the tide of 
 events. However interesting a review of the events 
 themselves might have been, it could not conve- 
 niently be introduced into a treatise which aimed 
 chiefly at the statement of a theory, and dealt 
 with contemporary fact only as illustrating general 
 causes. The new matter which, in this respect, has 
 been introduced into the second edition, is confined 
 to the consideration of the American Exchanges. 
 It would not have been compatible with the general 
 course of the argument to treat so complicated a 
 question exhaustively or historically. The mone- 
 tary situation of America has been so extraordinary, 
 the difficulty of acquiring accurate knowledge on it 
 is so great, the changes to which it is subject are so 
 rapid, that an exhaustive inquiry into the actual 
 facts would have assumed the proportions of a
 
 PREFACE TO THE SECOND EDITION. Vil 
 
 separate work. Thus any controversy which may 
 arise on that portion of the present treatise which 
 deals with the American Exchanges, should turn 
 rather on the correctness of the mode of inter- 
 pretation on a common ground of fact, than on the 
 absolute correctness of the facts themselves. The 
 latter have been stated as carefully as possible, and 
 every precaution against error has been taken. If, 
 nevertheless, any uncertainty should be felt with 
 regard to the description of particular circum- 
 stances, it must not be allowed to place in doubt 
 the scientific certainty of the theory itself. 
 
 The other important alterations which have been 
 made in the second edition are to be found in those 
 chapters which discuss the question of so-called 
 "Unfavourable Exchanges," and the "Adverse 
 Balance of Trade," and which examine the pos- 
 sibihty of ** correcting " such a situation by means 
 of a high rate of interest. With regard to the 
 exact force of the term " Unfavourable Exchanges" 
 and " Adverse Balance of Trade," as they are still 
 used in monetary treatises, not as characterising 
 any situation which from the general point of view 
 of the prosperity of any country is really unfavour- 
 able, but simply as denoting a certain set of circum- 
 stances which bankers and merchants persist in
 
 VIU PREFACE TO THE SECOND EDITION. 
 
 calling by that name, the original text scarcely left 
 room for much misconception. Nevertheless the 
 endeavour has now been made to limit and define 
 the sense of these terms still more rigorously, as it 
 is highly important that a real discrepancy should 
 not be supposed to exist between political econo- 
 mists and the banking world, whereas the discre- 
 pancy, if it exists at all, lies only in the nomen- 
 clature and not in the theory. With regard to 
 the power of a high rate of interest to afi"ect the 
 exchanges, the objection has been raised against 
 certain passages in the first edition, that they 
 seemed to countenance the idea that money might 
 artificially be made cheaper or dearer, and that the 
 action of banks or individuals might accomplish 
 that which must really be determined by supply 
 and demand. Possibly the expressions employed 
 may have lent a colour to this objection, and, at all 
 events, it seemed desirable to develop their meaning 
 more fully. It is hoped that the alterations intro- 
 duced will clear up any misconception in this re- 
 spect, and that it will appear from the observations 
 made as to the limits within which the influence 
 of the Bank of England in dealing with the rate of 
 discount is confined, that no exaggerated ideas of 
 its powexs were intended to be conveyed.
 
 CONTENTS. 
 
 PAQB 
 
 INTRODUCTION • • , iii 
 
 CHAPTER L 
 
 DEFINITION AND PRELIMINARY EXAMINATION OF THE 
 TRANSACTIONS WITH WHICH THE FOREIGN EX- 
 CHANGES ARE CONCERNED 1 
 
 CHAPTER II. 
 
 ANALYSIS OF INTERNATIONAL INDEBTEDNESS CON- 
 SIDERED AS THE BASIS OF THE FOREIGN EX- 
 CHANGES 11 
 
 CHAPTER III. 
 
 EXAMINATION OF THE VARIOUS CLASSES OF FOREIGN 
 BILLS IN WHICH INTERNATIONAL INDEBTEDNESS 
 18 ULTIMATELY EMBODIED 23
 
 CONTENTS 
 
 CHAPTER IV. 
 
 ENUMERATION OF THE VARIOUS ELEMENTS OF VALUE 
 WHICH DETERMINE THE FLUCTUATIONS IN THE 
 PRICES OF FOREIGN BILLS ..... 43 
 
 CHAPTER V. 
 
 REMARKS ON THE INTERPRETATION OF THE FOREIGN 
 
 EXCHANGES 84 
 
 CHAPTER VI. 
 
 REVIEW OP THE SO-CALLED CORRECTIVES OF THE 
 
 FOREIGN KXCHANGE8 . . . ,125
 
 INTEODUCTION. 
 
 The inquiry which is conducted in the following 
 pages belongs to that class of discussions for 
 which, owing to the prevalent behef that they are 
 peculiarly abstruse and technical, it is difficult, in 
 ordinary tiroes, to obtain a hearing. The moment 
 must be seized for the ventilation of such subjects, 
 when peculiar combinations of circumstances bring 
 them into prominent and exceptional notice, and 
 when they are exhibited as influencing or explain- 
 ing events which are of universal interest and 
 importance. To those who make the Foreign 
 Exchanges their constant study, and examine 
 them not only in the light in which they present 
 themselves to the pohtical economist, as an index of 
 the balance of trade between different countries, 
 but also from the point of view from which they
 
 XU INTRODUCTION. 
 
 are regarded by bankers and merchants, as a 
 reliable barometer of the state of the money-market, 
 of the soundness of credit, of the rate of interest, 
 and of the comparative position of the circulation 
 in different countries, all monetary phases and 
 mercantile incidents furnish an opportunity for 
 correcting their theories by the test of facts. But 
 comparatively few, even of leading bankers and 
 merchants, with the exception of those who are 
 exclusively or mainly engaged in international 
 transactions, are as conversant with the subject as 
 its immense importance deserves ; and it is thought 
 that the present situation of monetary affairs, in 
 which the Foreign Exchanges are exercising an 
 abnormal and extraordinary influence, affords a 
 pecuharly suitable opportunity for a discussion 
 which otherwise might be considered uninviting 
 and superfluous. The object proposed is by no 
 means to propound any dogmatic theories, but 
 rather to call attention to many facts which are 
 commonly believed to be peculiarly complicated 
 and unintelligible, which, however, if carefully 
 analyzed and illustrated, may be presented in a 
 simple form, and under such an aspect as to 
 command general assent. 
 
 If the present treatise should in any way
 
 INTRODUCTION. XIU 
 
 contribute towards producing a better and clearer 
 understanding of many principles, the true ap- 
 preciation of which is absolutely indispensable for 
 the formation of just and comprehensive views as 
 to the laws which govern our money-market and 
 our foreign commerce, it will have attained its 
 end. 
 
 In the treatment of the subject, the main 
 difficulty has been to decide what degree of ac- 
 quaintance with the matters discussed the readers 
 of the present essay might be presupposed to 
 possess ; and, further, from what point of view 
 they might have been accustomed to regard it. 
 The inquiry may be conducted on several distinct 
 principles according to the class of readers who are 
 likely to interest themselves in the investigation, 
 and thus it is not easy to adopt a mode which 
 shall be equally satisfactory to all. If addressed 
 to those who have studied the subject theoretically 
 themselves, much may be taken for granted, the 
 exposition of which would be tedious and un- 
 necessary, and would only serve to encumber the 
 examination of the more interesting problems and 
 theories ; while, on the other hand, if the general 
 public is to share in the discussion, it seems 
 necessary to adopt the opposite plan, and to
 
 XIV INTKODUCTION. 
 
 presume tliat as yet the iirst axioms and leading 
 features of the subject are but vaguely and inaccu- 
 rately understood. Under this supposition, it 
 would be desirable to proceed as systematically and 
 completely as possible, even at the risk of enume- 
 rating or illustrating much which, in the opinion 
 of some, might be passed over in silence. A third 
 and distinct course might be most suitable for 
 those who, on the one hand, have ample practical 
 acquaintance with the Foreign Exchanges, and ac- 
 cordingly may be addressed as persons conversant 
 with the subject ; but who, on the other hand, 
 have not in any way systematised their experiences 
 or drawn any conclusions from the facts which they 
 have observed. The Foreign Exchanges should 
 be an object of interest as well to the political 
 economist as to the general reader, but they will 
 mainly fix the attention of the mercantile part of the 
 community, who, consciously or unconsciously, are 
 always under their influence. It is to this class that 
 the present essay — which attempts to exhibit the 
 relations of the Foreign Exchanges to our own 
 money-market, as well as generally to international 
 transactions, and to bring into clearer relief some 
 of the hazy and indefinite notions which sm-round 
 the subject — is primarily and mainly addressed.
 
 INTRODUCTION. XV 
 
 But while in this sense the inquiry is conducted 
 from a mercantile point of view with the special 
 desire of throwing light upon mercantile questions, 
 the author has attempted to be sufficiently precise 
 in his arguments as not to offend the scientific 
 theorist, and sufficiently diffuse in his illustrations 
 and explanations, as to make himself understood 
 by the general and uninitiated reader. His only 
 qualification for the undertaking is to be found in 
 his having daily opportunities of studying many 
 various forms of international transactions, and of 
 practically feeling the effect of each different phase 
 of the Foreign Exchanges. Without such oppor- 
 tunities it is exceedingly difficult to correct and 
 test the various opinions which maybe theoretically 
 formed ; but even with their aid the author is 
 conscious that he may prove unequal to his task. 
 His motive for undertaking it is to be found in his 
 conviction that the subject urgently requires 
 ventilation, and in his hope that even an imperfect 
 attempt in this direction may lead to further and 
 more able investigation.
 
 FOREIGN EXCHANGES. 
 
 CHAPTER I. 
 
 DEFINITION AND PRELIMINARY EXAMINATION OF THE TRANS- 
 ACTIONS WITH WHICH THE FORBiaN EXCHANGES ARE 
 CONCERNED. 
 
 In order to clear the ground for the considera- 
 tion of the more interesting theories connected 
 with the Foreign Exchanges, it is desirable in 
 the j&rst instance to define as clearly as possible 
 the general meaning of the term. The phrase 
 " Foreign Exchanges " is in itself vague and am- 
 biguous, being more frequently used to express 
 the rates at which the exchanges in question are 
 effected than the exchanges themselves — the prices 
 rather than the transactions. When.it is said in 
 technical phraseology that the exchanges are rising 
 or falling, or that the exchanges are at specie 
 point, allusion is made to the fluctuations in the 
 terms on which bargains are made between buyers 
 and sellers of Foreign Bills. However, before we 
 
 B
 
 FOREIGN EXCHANGES. 
 
 treat the subject in this sense of the phrase, — 
 that is to say, as denoting the rates at which ex- 
 changes take place, — it is necessaiy to examine the 
 subject-matter of the exchange itself, and to realize 
 distinctly what it is that is bought or sold, trans- 
 ferred or given in exchange. When the transac- 
 tion takes a practical form, Foreign Bills, — that is 
 to say, bills on foreign countries, — constitute this 
 subject-matter; but a less technical explanation 
 can be given. That which forms the subject of 
 exchange is a debt owing by a foreigner and pay- 
 able in his own country, which is transferred by 
 the creditor or claimant for a certain sum of money 
 to a third person, who desires to receive money in 
 that foreign country, probably in order to assign it 
 over to a fourth person in the same place, to whom 
 he in his turn may be indebted. The operation 
 which takes place is put very clearly by Mr. Mill 
 in the following passage : — 
 
 " A merchant in England, A, has exported Eng- 
 lish commodities, consigning them to his corre- 
 spondent B in France. Another merchant inFrance, 
 C, has exported French commodities, suppose of 
 equivalent value, to a merchant D in England. It 
 is evidently unnecessary that B in France should 
 send money to A in England, and that D in England
 
 FOREIGN EXCHANGES. 9 
 
 should send an equal sum of money to C in France. 
 The one debt may be applied to the payment of the 
 other, and the double cost and risk of carriage be 
 thus saved. A draws a Bill on B for the amount 
 which B owes to him ; D, having an equal amount 
 to pay in France, buys this bill from A and sends 
 it to C, who, at the expiration of the number of 
 days which the bill has to run, presents it to B for 
 payment. Thus the debt due from France to 
 England, and the debt due from England to 
 France, are both paid without sending an ounce of 
 gold or silver from one country to the other." * 
 
 This explanation, however, involves the idea of 
 the transaction being carried out by the instrumen- 
 tality of an actual biU of exchange, which, at the 
 present stage of the inquiry, it is better to ignore 
 altogether. It will be found more convenient to treat 
 the transaction, in the first instance, as a simple ex- 
 change of debts and claims, without considering the 
 instruments by which it is accomplished. In its most 
 general form, the case may be stated as follows : — 
 
 As the result of international commerce, a certain 
 portion of the community has become indebted to 
 merchants in foreign countries ; and in order to 
 save the trouble, risk, and expense of sending coin, 
 
 • * Principles of Political Economy,' oh. xx. par. 2. 
 
 B 2
 
 4 FORBIQN BXOHANQES. 
 
 it seeks out another portion of the community to 
 whom a similar amount is owing by the identical 
 foreign countries in question, and buying up these 
 debts, assigns them over in payment to its own 
 foreign creditors. And if the aggi'egate sums owing 
 by any two countries to each other were absolutely 
 equal, — that is to say, equal in amount, coincident 
 as to the period fixed for settlement, and payable, 
 too, in an equal or identical currency, — there would 
 be no difficulty of any kind in determining the 
 equivalent which the purchasers of such claims 
 "would pay to the sellers. It would simply be a sum 
 equal to, or rather identical with, that which is 
 payable abroad under the transferred claims. The 
 amount required by the purchasers being equal to 
 the amount held by the sellers, and required, too, 
 at the same time, there would be no cause in 
 operation to vary the price, and there would be no 
 fluctuations in the rates of Foreign Exchanges. In 
 technical language they would always remain at 
 par. But, conversely, we arrive at the point which 
 forms the essence of the present discussion : the 
 fluctuations which actually take place in the 
 Foreign Exchanges are at once the necessary re- 
 sult and the certain index of the inequahties which 
 exist in the indebtedness of different countries,
 
 FO&EiaN BXOHANGBS. 5 
 
 inequalities either in the amount of their Ha- 
 bihties or in the time withui which payment must 
 be made or in the relation of the currency of one 
 country to that of another. 
 
 It might have seemed easier to have explained 
 the exchanges in question as exchanges between 
 different currencies, as of sovereigns against francs, 
 or of florins against dollars ; the more so, as prac- 
 tically this is the shape which actual transactions 
 generally assume. But if the definition had been 
 thus limited, a most important, and indeed essen- 
 tial feature, would have been overlooked ; that is 
 to say, that though one system of coinage were 
 adopted for all countries, claims on foreign coun- 
 tries would nevertheless vary in price, and would 
 still be either at a premium or at a discount, 
 according as there happened to be at any moment 
 a greater or less demand on the part of such as 
 desired to transmit funds abroad as compared with 
 the supply offered by such as had outstandings 
 abroad which they were entitled to draw in. For 
 this is the first cause of what is generally spoken 
 of as the rise and fall of Foreign Exchanges. On 
 some particular day, or through a given season, a 
 large amount is required to be sent abroad in 
 payment of debts ; England, let us say, is heavilv
 
 FOREIGN KXCHANQES. 
 
 indebted to France, and the time has arrived for 
 payment. At this time, however, it happens that 
 in the opposite branch of trade, that which results 
 in France being indebted to England, fewer trans- 
 actions have taken place, and thus there are com- 
 paratively few who have amounts standing to their 
 credit in Paris which they might transfer to those 
 who have to remit ; in other words, adopting the 
 language of merchants, there are few who have 
 bills upon France. The consequence is, that there 
 is great competition for these few bills ; those who 
 do not bid high enough for them will either have 
 to go through all the trouble of packing, insuring, 
 and despatching gold, or else will not punctually 
 meet their engagements. Thus those who have 
 the bills to sell are able to obtain more than the 
 actual par value for them. In consideration of 
 their having a given sum already at a spot where 
 it is required by another, and whither the latter 
 must convey it himself at some expense if they 
 do not cede it to him, they are able to secure for 
 themselves the whole of the benefit, which, if the 
 exchanges were at par (that is to say, if the in- 
 debtedness of the two countries were equal), would 
 be divided between the buyer and the seller. In- 
 stead of the arrangement being a mutual con-
 
 FOREIGN EXCHANGES. 7 
 
 venience, the seller is able, by the competition 
 of the buyers, to secure the whole convenience to 
 himself. 
 
 Supply and demand, in their usual form, deter- 
 mine the transaction at this stage. Bills on France, 
 in the case just put, would be at a premium. In 
 the opposite case, if there were more persons who 
 had money to claim from France than those who 
 required to send funds thither, bills on France 
 would be at a discount. These are the first and 
 most elementary instances of fluctuations in the 
 Foreign Exchanges ; and for the purpose of appre- 
 ciating clearly what is their real nature and origin. 
 it is important to discard in the first instance all 
 the accessory circumstances, and to hold fast to 
 the general principle that what is really given in 
 exchange in the natural and simple transactions 
 from which all others are derived, is a sum of 
 money at one place for an equivalent sum of money 
 at another. By way of anticipation it might, how- 
 ever, be stated here that, in contradistinction to 
 this simplest transaction, the most complicated 
 would be one in which the sum of money given 
 would be payable immediately, the equivalent 
 recoverable three months later ; the sum given 
 be in gold, the equivalent in silver ; the sum given
 
 FOKKIQN BXCHAMGEB. 
 
 be perfectly undoubted, being paid down at once, 
 the equivalent be of doubtful character, because 
 involving a lengthened credit. To establish the 
 equality between the two sums, it would accord- 
 ingly be necessary to take into account the relative 
 value at the time of gold to silver, the amount of 
 interest which would be lost by waiting three 
 months, and the amount of risk which would be 
 run by receiving a piece of paper representing a 
 promise to pay three months hence in exchange 
 for cash paid down. These are all considerations 
 which affect the exchanges, and which indeed 
 render the subject so complicated that the ground- 
 work may easily be lost sight of. Discussions are 
 sometimes held on the state of the Foreign Ex- 
 changes in which attention is paid mainly to the 
 value of money in different countries, to the amount 
 of bulhon held by each, and to the relative position 
 of their paper currency, — points, no doubt, of the 
 highest moment in influencing the fluctuations in 
 the exchanges, but nevertheless subordinate to the 
 question of relative indebtedness, which remains 
 the first and most material element, lii studying 
 the subject as a whole, it is above all things neces- 
 sary to form a clear view of what is meant by 
 international indebtedness, of the elements of
 
 FOREIQK EXOUAKOBS. 9 
 
 which it is constituted, and the various phenomena 
 which it presents. As soon as this elementary 
 question, which underlies the whole theory of the 
 Foreign Exchanges, is properly understood, and 
 an idea has been gained of the various modes in 
 which countries become indebted to one another, 
 we can proceed to consider the form which this 
 indebtedness assumes when the time of settlement 
 arrives and when the floating debt is fixed in bills 
 of exchange. The course of the discussion will then 
 naturally lead to the nature and form of these bills * 
 of exchange, to their purchase and sale, to the 
 various influences which determine their price, to 
 their frequent fluctuations, to the meaning and 
 force of the usual phrase that the Foreign Ex- 
 changes are favourable or adverse, and to the value 
 of the state of the exchanges as an index of inter- 
 national transactions. We shall first consider the 
 debts themselves, and shall find them finally re- 
 presented by, and embodied in, a constant mass of 
 bills of exchange ; it will then be necessary to 
 inquire whether these bills are payable at once, or 
 at fixed future terms, whether they represent a 
 final transaction or whether a portion only of a 
 commercial operation, and how the rate of interest, 
 the credit of the debtors, the indulgence of the
 
 10 FOREIGN BXOUANQBS. 
 
 creditors, the depreciation of the currency in which 
 the bills are payable, affect their exchangeability. 
 We shall examine what circumstances lead to a 
 demand for bills on foreign countries and how it 
 is possible to check or intensify that demand. 
 Thus, at the close of our investigation, we shall 
 light on many of the most important questions 
 which have lately been ventilated in monetary 
 circles, — as to the effect of a high rate of interest 
 in checking the efflux of gold, as to the power 
 which foreign capitalists, holders of bills of ex- 
 change on England, may exert over our money- 
 market, as to the result of these bills being all 
 forced upon the money-market for discount at 
 once, instead of being gradually encashed as they 
 mature, and other matters of this nature ; ques- 
 tions which are by no means theoretical or abstract, 
 but of vital and practical importance to every one 
 engaged in mercantile pui'suits.
 
 CHAPTER n. 
 
 ANALYSIS OF INTERNATIONAL INDEBTEDNESS CONSIDERED A8 
 THE BASIS OF THE FOREIGN EXCHANGES. 
 
 The first element which we have to consider in 
 discussing the Foreign Exchanges is to be found, 
 as has been already stated, in international in- 
 debtedness; the exchanges in question are ex- 
 changes of claims or debts, and an inquiry into 
 the origin and nature of these debts will throw 
 considerable hght upon the subject. 
 
 It is an error often committed to imagine these 
 debts to be incurred simply by the importation of 
 foreign commodities, and to look on the balance of 
 trade as a mere question of import and export, as 
 being the excess of the one over the other. It is 
 necessary to look closer into the transactions be- 
 tween two countries before an idea can be ioimed 
 of the position of their mutual indebtedness.
 
 12 FORBIQN SXCHANQBS. 
 
 It will be discovered to result not so much from 
 the exchange of their respective produce as from 
 the relative totals of all the amounts expended by 
 each upon the other, whether in payment of pro- 
 duce and manufactures, or for the purchase of 
 shares and public securities, or for the settlement 
 of profits, commissions, or tribute of any kind, or 
 for the discharge of the expenses incurred in foreign 
 residence or travel : in fact, from the entire pay- 
 ments (or promises to pay) which pass between 
 the respective countries. The idea of actual bor- 
 rowing must be lost sight of ; it is the liability 
 incurred with which we are now concerned ; and 
 this liability is identical in its effect, whatever its 
 origin may be. 
 
 Payments which have to be made by one country 
 to another for any purpose whatsoever, have the 
 same effect as payments for direct importations. 
 Thus it is possible that the general indebtedness 
 of two countries to each other may be almost 
 balanced, though the one imports far more com- 
 modities from the other than those which it 
 supplies in return. For instance, the excess may 
 amount to three millions sterling ; but the nation 
 which, through this class of transactions, has thus 
 become a creditor for the excess of three millions,
 
 FOREIGN EXOHANQES. IS 
 
 may dispose of one million thereof in making 
 remittances to such of its body as have taken 
 up their residence in the other country, or have 
 been travelling and spending money abroad : and 
 another million may be sent to the country which 
 has imported the excess, in order to buy up 
 public securities ; and supposing this latter country 
 to be a great shipping nation, another million may 
 be due to it for freights. Thus the equilibrium 
 between the two countries would be restored, and 
 there would be no adverse balance on either side ; 
 the indebtedness would be equal. 
 
 It may not be superfluous to examine some of 
 these international transactions more in detail. 
 As an instance, we may examine the force of 
 foreign loans. Treating the subject, as is at present 
 the case, with a view to the Foreign Exchanges, a 
 foreign loan will tell against the balance, not of 
 the borrowing country which receives the loan, but 
 of the lending country which supplies it. 
 
 The loan may certainly have ultimately to be 
 repaid ; but, at the time when it is contracted, it 
 acts with the same force as an export upon the 
 country which borrows, and with that of an import 
 to the country which lends. In fact, the borrowing 
 country exports its securities, which are imported
 
 l-i FOREIGN EXCUANQES. 
 
 by the lending capitaKsts, and thus, with regard to 
 the balance of trade, to contract a foreign loan is 
 equivalent to an increase of exportation. Some- 
 times when the indebtedness of a country to others 
 becomes so great that the liabiUty cannot be liqui- 
 dated either by shipments of bullion, or by an 
 increase of exportation, recourse is had to a loan 
 in order to readjust the balance; the country 
 exports pubHc securities made for the purpose, 
 when it has no other available resources left with 
 which to satisfy its foreign creditors. Russia has 
 more than once adopted this course. 
 
 Or, again, there may be a nation, rich in capital 
 and very self-dependent, importing little, because 
 it contains within its own limits most of its require- 
 ments, but exporting very largely. The tendency 
 of such a country would be to become the creditor 
 of all her neighbours. How will the balance be 
 restored ? This case is the converse of the one 
 just now considered ; the indebtedness under the 
 present hypothesis is not excessive, but under the 
 mark; such a country often restores the equili- 
 brium by becoming the speculative purchaser and 
 importer of loans and stocks and securities of all 
 kinds; her manufactures are repaid by railway 
 debentures, and the sums which other countries
 
 VOBBiaN EXCHANGES. 15 
 
 expend on the commodities with which she sup- 
 plies them, she in her turn expends on the Stock 
 Exchanges of foreign capitals. There is no doubt 
 but what the balance of trade is immensely affected^ 
 at such times, when any great speculative mania 
 for foreign securities springs up. In the same way 
 as the monetary position of a country may be en- 
 dangered when it imports more foreign produce 
 than the amount of its exportation, so may it be 
 endangered by the undue purchase of foreign 
 stocks, with the sole distinction that the latter are 
 often far more adapted for re-exportation than 
 manufactured goods or produce, on which the 
 charges of shipment or re-shipment are infinitely 
 heavier. 
 
 It will appear from the foregoing observations 
 that, when the relative indebtedness or the balance 
 of trade between two countries is spoken of, the 
 permanent debts of one country to another do not 
 enter into consideration, — at least, not until the 
 term of payment has arrived ; the balance of trade 
 depends upon the transactions which have to be 
 settled, not upon those which by common consent 
 are held in abeyance for a long term of years. For 
 instance, there is no doubt that the United States 
 owe an enormous amount to England in the shape
 
 16 FORBIQN EXCUANQES. 
 
 of American securities in the hands of English 
 holders ; but with the exception of the interest on 
 these securities, this consohdated indebtedness, as 
 it does not require settlement, exercises hardly any 
 influence on that floating indebtedness, by the 
 balance of which the fluctuations in the exchanges 
 between the two countries are determined. 
 
 These securities are ai*ticles of commerce, im- 
 ported by England from America, which, at the 
 time of their importation, no doubt acted upon the 
 exchanges equally with the cotton which came 
 from the same quarter; and which, when they 
 come to be re-exported to America (but not till 
 then), will affect the exchanges in the contrary 
 direction ; that it to say, with the same force as 
 is exercised by cotton when it is re-exported to 
 America in the shape of Manchester goods. Other- 
 wise, involving no immediate claim, they cannot 
 be regarded as a set-off to the debts which we 
 incur to the Americans for cotton and corn, and 
 which must be settled at once. The balance of 
 trade may be entirely against England, though the 
 amount of American securities in English hands 
 should immensely exceed that balance. 
 
 The case of the coupons attached to such stock 
 is very different. The interest which they repre-
 
 FOREIGN EXCHANGES. 17 
 
 sent is a constant and important feature in national 
 indebtedness. It constitutes an immediate liability 
 incurred by the borrowing country ; it is expen- 
 diture in favour of a foreign creditor. A country 
 which has annually large sums of interest to pay 
 abroad, must import so much less or export so 
 much more. Conversely, a rich country with an 
 annual income of interest from other nations, is 
 able, as far as this income goes, to pay for an 
 equivalent excess of its imports over its exports. 
 It sets off these receipts against its excessive 
 expenditure. It may look upon them as capital 
 coming in against capital going out. 
 
 The large sums which England receives every 
 year in payment of interest from foreign countries, 
 considerably reduce the balance which, notwith- 
 standing our enormous exportation, is almost 
 always against us ; the foreign loans negotiated in 
 England increase her indebtedness at the time 
 when they are contracted ; but the annual revenue 
 subsequently derived from them contributes to 
 wards its reduction. 
 
 The effect of profits and commissions on the 
 mutual liability of nations is much the same as 
 that which we have JTist described as exercised by 
 interest. Among such profits, we may class the 
 

 
 18 FOBBiair BXOHANQES. 
 
 freights earned by the ships of various countries ; 
 the country which becomes the carrier for others, 
 thereby establishes claims against them with which 
 it can pay for its importations from them. The 
 charge of freight acts with the same force as a 
 charge for a commodity actually produced and 
 exported. An exclusively maritime country could 
 discharge its obUgations to other countries which 
 supply it with necessaries, simply by becoming 
 their carrier without exporting any produce or 
 manufacture to them in return. 
 
 Or, again, a peculiar favorable position may 
 enable one nation to make others its debtors for 
 various tributes and commissions, and thus to 
 obtuin a revenue equivalent to one consisting of 
 interest, of freights, or of the proceeds of exported 
 commodities. A country which, like England, 
 mediates the transactions of many others, and 
 through its position as a great banking and mer- 
 cantile centre, is able to secure some slight com- 
 mission or profit upon all the operations which it 
 assists in conducting, derives no inconsiderable 
 revenue from this source. Formerly, when London 
 was the great emporium of goods for foreign mar- 
 kets, and Enghsh merchants supplied the greater 
 part of the Continent (which was itself in no direct
 
 FOBEiaK EXOHAKQES. 19 
 
 trade with India or America) with cotton, cofifee, 
 sugar, tea, — in fact, with all the produce of the East 
 aud West Indies, — the commissions and profits on 
 this intervention must have been very considerable, 
 and have been an important element in the income 
 secured to the nation from foreign sources. How- 
 ever, the tendency of the age, which is constantly 
 bringing the producer and consumer into closer 
 and more direct connexion by eliminating mid- 
 dle men and intermediate profits, is likewise 
 exhibited in the fact that the Transatlantic or 
 Indian producer is brought more and more into 
 immediate connexion with the continental con- 
 sumer. At present the continental shipowners 
 and merchants make their importations from 
 most producing countries direct, thus emancipating 
 themselves from the London market, though not 
 entirely from London banking facihties. The 
 interest and commissions which are still paid by 
 almost every country to English capitalists, cer- 
 tainly form a noticeable element in the revenue 
 by which England is enabled to discharge her 
 enormous foreign habilities. 
 
 An allusion was cursorily made to the expendi- 
 ture in travelling or residence abroad. Eussia 
 BuppHes the best illustration to the force of thia 
 
 2
 
 20 rOBEIQN EXCnANQEa 
 
 expenditure. Several millions sterling are annually 
 spent by the rich Kussian nobility in travelling or 
 in foreign residence, and the capital thus taken 
 from Russia tells against the balance of her trade 
 precisely in the same manner as if it had been 
 spent in Eussia in the importation of foreign goods. 
 The bills drawn by the travelling princes on their 
 St. Petersburg bankers affect the exchanges pre- 
 cisely with the same force as bills drawn on St. 
 Petersburg for the champagne sent thither from 
 France. The liabilities incurred by foreign travel 
 are peculiarly felt by Russia, — in the first instance, 
 because they are of themselves excessive, in the 
 second, because, independently of this expenditure, 
 Russia tends to consume more than she produces. 
 There are many other international transactions 
 which, in a complete summary of the items from 
 which the so-called balance of trade is formed, 
 might weU deserve enumeration: for instance, 
 import duties, or transit dues, and the whole range 
 of Government imposts. But the consideration of 
 the force of these charges belongs to a different 
 field of inquiry to that on which we are now em- 
 ployed. The expenses of armaments to distant 
 regions, especially the regular expenditure of ships 
 of war at foreign stations, also form an item in
 
 FOREIGN EXOHANGBS. 21 
 
 international indebtedness which should not be 
 overlooked. 
 
 The preceding analysis of some of the more im- 
 portant elements may suffice to convey a general 
 and intelligible notion of the different points to 
 which attention should be directed, when a judg- 
 ment as to the relative transactions between two 
 nations, and the balance which they may ultimately 
 present, is to be formed. The first and principal 
 element no doubt is to be found in the comparative 
 imports and exports in the literal sense of the 
 term ; but the operation of these transactions is so 
 self-evident and generally understood, that it has 
 not been necessary to dilate much upon this por- 
 tion of the subject. In addition to the considera- 
 tion of the exports and imports, it has been shown 
 to be requisite to measure the further expenditure 
 of nations upon each other — including therein all 
 national extravagance exhibited in the granting of 
 foreign subsidies or loans and in keeping up costly 
 armaments abroad, as well as all individual ex- 
 travagance, as displayed in excessive foreign travel 
 or residence, or in speculations on foreign Stock 
 Exchanges. On the other hand, it will be necessary 
 to measure the force of national acquisitiveness in 
 securing tributes, voluntary or involuntary, from
 
 2t roBEiair bxohakqbs. 
 
 other countries : and of iudividual enterprise in 
 securing to itself, by superiority of position, capital, 
 or activity, the larger share of the advantages of 
 international commerce. To form a correct notion 
 of the relative indebtedness of two given countries 
 is, from the complexity of the facts, a most difficult 
 task ; but it is hoped that the principles on which 
 the balance should be struck, and the class of 
 facts which should be especially searched for and 
 examined, have become sufficiently plain to the 
 general reader in the course of the foregoing 
 observations.
 
 CHAPTER IIL 
 
 EXAMINATION OF THE VABI0U8 CLASSES OP FOREIGN BILLS 
 IN WHICH INTERNATIONAL INDEBTEDNESS IS ULTI- 
 MATELY EMBODIED. 
 
 Having thus passed in review the different kinds 
 of liabilities which nations incur towards each other, 
 we are now in a position to consider the mode of 
 adjustment of such debts and claims, and the instru- 
 ments by which it is accompHshed. Most inter- 
 national transactions are settled by a transfer of 
 debts, through the medium of foreign bills of ex- 
 change, and for the general reader (who has no 
 opportunity of handling and examining the bills 
 themselves, and of gaining, through their study, a 
 knowledge of the various classes into which they 
 may be divided, and the properties which attach to 
 them), some remarks on this portion of the subject 
 may not be superfluous.
 
 -!• POEEIQN EXCHANQES. 
 
 From the point of view of the Foreign Ex- 
 changes, it must be considered that the debts 
 contracted between different nations are on the 
 point of being closed. Practically, credit is given, 
 in the vast majority of cases, previously to the 
 drawing of the bills or the transmission of the 
 remittances which are to settle pending accounts. 
 With this, however, we are at present not directly 
 concerned, though a discussion on the Foreign 
 Exchanges would not be complete without an 
 allusion to the fact. The knowledge that there is 
 a certain balance owing, for which credit is given, 
 but which will ultimately be called in, acts, to a 
 certain extent, upon the exchanges, just as in 
 questions of supply and demand the knowledge 
 that the supply may be indefinitely increased acts 
 almost with the same force as actual present supply. 
 But what we have now to deal with is the liquida- 
 tion of debts which are becoming due, — in fact, 
 the liabiHties for which the time of settlement has 
 arrived. 
 
 The debts between different countries, when they 
 approach this time of settlement, are embodied, as 
 far as possible, in bills of exchange ; this mode of 
 adjustment being universally applied, so far as the 
 indebtedness of one country to others is covered
 
 rOREIQN EXCHANaES, 25 
 
 by the liabilities of those countries to itself. It is 
 certain that as far as accounts can be paid off with- 
 out the risk and expense of bullion remittances, 
 through simple transfers, through a direct settle- 
 ment between the creditors of any foreign country 
 and those who are in its debt, their respective 
 debtors and creditors being left to make a corre- 
 sponding adjustment abroad, so far the use of bills 
 of exchange will invariably extend. But how are 
 foreign habilities to be discharged when the claims 
 on one side or the other are exhausted, — where 
 there is a balance of debts to be paid without any 
 equivalent of claims which might be set against 
 them ? It will subsequently be found that, by 
 somewhat artificial arrangements, it is possible 
 that even a portion of such a balance may be 
 settled, at least for the time, by bills of exchange. 
 But the consideration of this more complicated 
 question must be deferred for the present. We 
 have, in the first instance, to deal with such foreign 
 bills as embody actual debts and claims, and re- 
 present an exchange — an exchange made between 
 the drawer or seller of the bill and the purchaser 
 of the bill ; the former ceding his claim on a foreign 
 debtor against payment on the spot, and the pur- 
 chaser remitting the bill to another foreigner to 
 whom he is himself indebted.
 
 26 fOBBION EXOHAMQBS. 
 
 The majority of foreign bills of exchange carry 
 (to an eye practised in deciphering their history) 
 the evidence of their origin and nature written 
 upon them ; and much may be learnt, both as to 
 international transactions generally, and as to 
 the peculiar features of the times, from a careful 
 study of large miscellaneous parcels of bills. There 
 will be found among them bills representing each 
 of the different causes of indebtedness which have 
 been described. The greater portion will represent 
 exports of produce ; and this will especially be 
 found to be the case between countries which lie 
 at great distances from each other, and whose 
 transactions are comparatively simple; but the 
 closer the countries, and the more they are con- 
 nected in what may be called neighbourly relations, 
 the more diversified and complicated are the trans- 
 actions represented by bills of exchange. Between 
 the Continent and England there is a very large 
 proportion of bills which represent the expenditure 
 of the foreign residents, drafts on their bankers at 
 home, and encashments of dividends or other 
 sources of revenue. There will be found innu- 
 merable bills based on the sales or purchases 
 of stock, and large amounts which represent the 
 transfer of capital from one country to another by
 
 FOBEIQN BXCHAKQES. 27 
 
 way of giving effect to a public loan or a joint- stock 
 undertaking. Few foreign loans are negotiated 
 which are not accompanied by a certain issue of 
 bills of exchange. "Whenever the country which 
 has secured a loan owes a balance on its general 
 mercantile transactions, and is in want of remit- 
 tances to cover it, bills may most conveniently be 
 drawn upon the lending country for the amount of 
 the loan thus contracted ; for they will at once be 
 eagerly purchased, in order to be remitted to the 
 foreign creditors. In the contrary case, where 
 there is no balance requiring settlement, a loan 
 would generally be taken in specie. 
 
 Amongst any parcel of bills there will probably 
 be some which are drawn against freights which 
 have become payable, — a large item in those coun- 
 tries which have a great shipping interest, but little 
 natural produce. Sweden or Norway, for instance, 
 when they have remittances to make, have con- 
 siderable difficulty in finding any other biUs than 
 such as are drawn either against wood (their chief 
 article of export), or against the freights earned by 
 their ships. They are hampered in their importa- 
 tions by the difficulty of making remittances in 
 what are called ** acknowledged first-class bills." 
 There is, indeed, generally some peculiarity about
 
 28 POEBIQN EXCHANGES. 
 
 the remittances from each dififerent conntry : from 
 the East Indies and China, where the chief articles 
 of export are of great value, and where, from the 
 necessity of large capital for bringing such valu- 
 able produce to market, the transactions are more 
 than elsewhere concentrated in wealthy houses, the 
 bills are to a great extent drawn in large amounts 
 and on first-class European firms : it is very usual 
 to see bills of ten thousand pounds, and the cha- 
 racter of the bills is generally exceedingly good. 
 The distance between the two countries, and the 
 length of credit which the purchaser of the bill 
 must accordingly give, make great caution neces- 
 sary, and render it highly important that those on 
 whom the bills are drawn should be persons of 
 known repute. 
 
 From the Continent, on the other hand, the re- 
 mittances received are generally of a very different 
 character : from the frequency of transactions and 
 the facility of communication, the bills are drawn 
 in the greatest variety of form and in much smaller 
 amounts. They represent daily retail operations, 
 as well as the great transactions of merchants and 
 bankers. Anyone receiving remittances from the 
 interior of the Continent to the amount of ten or 
 twenty thousand pounds at a time, will find the
 
 JOEBIGN BXOHANaSS. 29 
 
 sum made np of a very considerable numDer of 
 little bills. There will be bills against cattle, against 
 eggs, against butter, drafts of travelling English- 
 men on their London bankers, bills against German 
 toys, French nicknacks, wine, fruit, and vegetables. 
 And as the transactions are now much carried on 
 in a retail form, amongst bills on regular mer- 
 chants and importers, large and small, will be 
 found many on persons whom it is difficult to 
 classify, and who belong to the lower strata of the 
 mercantile community ; on agents who have per- 
 suaded German manufacturers to trust them with 
 the disposal of their goods, and on branches of 
 small foreign establishments who wish to try the 
 London markets ; also on shop-keepers and milh- 
 ners, and others quite beyond the commercial circle 
 — in fact, on every class whose business brings 
 them in anyway into connexion with foreign goods. 
 The American bills are hke the East Lidian bills 
 in some respects. Being generally based upon 
 cotton, of which a small quantity costs a large sum, 
 they are drawn in large amounts, and represent 
 considerable mercantile transactions. But the trade 
 between the United States and Liverpool being 
 much more rapidly and easily managed than between 
 England and Lidia, and peculiar facilities for the
 
 30 rOBBIQH EXCUANOES. 
 
 conducting of the operations without capital on the 
 part of either the exporter or importer being ob- 
 tainable in the cotton trade, amongst many first- 
 class American bills there is also to be found a 
 considerable number drawn on firms not known 
 beyond their immediate circle, and who have no 
 means of paying their acceptances except by the 
 identical produce which is consigned them against 
 such drafts. 
 
 Thus far the bills which have been taken into 
 consideration have been assumed to represent and 
 close direct and bond-fide transactions ; but a large 
 class of foreign bills perform very different func- 
 tions, which it is important properly to appreciate. 
 There is little mystery in the operations of the 
 Foreign Exchanges when confined to the direct 
 and immediate transactions of which we have been 
 treating hitherto. The subject is complicated by 
 the fact that a very large proportion of bills repre- 
 sent indirect operations which it is less easy to 
 follow, and that others do not represent any actual 
 previous transaction whatever, at least in the sense 
 of closing indebtedness, but act in a perfectly 
 different manner. 
 
 In the first instance, we should enumerate those 
 foreign bills which do not represent the usual in-
 
 FOBBiair EXCHAKQES. 31 
 
 debtedness which is assumed to exist between the 
 acceptor and drawer, but a debt due to the drawer 
 by a third party residing in a third country, of 
 which the acceptor merely mediates the payment. 
 For instance, teas shipped from China to New 
 York are generally paid for by a draft of the ex- 
 porter on a London merchant for account of the 
 American importer. The exporter in China is 
 paid by the price which is given him for his bill 
 on London ; and the acceptor looks for payment 
 to the importer in New York. 
 
 It is important to remember that this class of 
 bills does not offer the same kind of evidence as 
 others, as to the indebtedness of the country on 
 which they are drawn ; for the accepting country 
 is a creditor of a third country for exactly the same 
 amount as that which it must pay to the drawing 
 country; and any estimate which might be at- 
 tempted as to the liabilities of a country, based on 
 the bills afloat upon it, which should omit the 
 consideration of these acceptances for third 
 accounts, would not fail to be erroneous. It is 
 necessary at least to attempt to discover what pro- 
 portion of the habilities may have been incurred 
 as by principals and what as by agents or middle- 
 men. For instance, let us suppose it to be
 
 S2 FOREION EXCHANGES. 
 
 desired, at any particular moment, to consider the 
 relative indebtedness between England and the 
 United States. It might be discovered that the sum 
 total of the exports of the Americans to us, in the 
 largest sense of the word, taking into consideration 
 all the supplementary causes of indebtedness to 
 which allusion has been made, exceeded all that 
 they had taken from us, or spent on us, and that 
 accordingly we should have to remit the balance 
 in gold. But an element of importance would be 
 omitted if the question were not asked. How do 
 the United States stand as regards their imports 
 from the East ? are there not large sums running 
 upon England for American account, which they 
 have still to remit ? The answer to this question 
 might lead to a different inference as to the 
 balance. 
 
 It is especially necessary not to overlook these 
 indirect liabilities in the case of the bills upon 
 England, as they form a very large item lq the 
 total of our acceptances. 
 
 Those to whom these questions are new, may 
 not be able at first sight to discover the cause 
 which stni compels most other countries to make 
 London their banking centre : why it is that in 
 the East Indies those who ship produce to America
 
 FOREIGN EXCHANGES. 33 
 
 draw on London and not on New York ; and why 
 the New Orleans cotton exporter draws on London 
 instead of on St. Petersburg for the cotton shipped 
 to Eussia. A partial cause might be found in th^ 
 credit granted by London bankers, and also in 
 the greater reputation of the London houses, 
 which extending to all quarters of the globe, gives 
 a bill on them quite a different value to that which 
 could be assigned to bills on American and Rus- 
 sian bankers equally wealthy, but less widely known. 
 But this can only be called a secondary reason, 
 and appears on closer examination to be itself the 
 result of the primary cause which makes England 
 the great banking centre of the world. That 
 primary cause is to be found in the stupendous 
 and never-ceasing exports of England, which have 
 for effect that every country in the world, being 
 in constant receipt of English manufactures, is 
 under the necessity of making remittances to pay 
 for them, either in bullion, in produce, or in bills. 
 It may divert its produce to other countries, but 
 the bills drawn against such produce will be sure 
 to find their way to England. In other words, 
 there will be a demand for bills on London bank- 
 ers, and EngHsh bills will be more saleable than 
 any others. There can be no exchange on any
 
 34 FOREIGN EXCHANQES. 
 
 place to which remittances have not constantly 
 and regularly to be made. And vice versa, when 
 remittances have to be regularly made, an exchange 
 is soon established, and the intervention of a 
 mutual centre is not required. For instance, Eng- 
 land exports fabulous quantities of Manchester 
 goods to the East, and silver into the bargain, 
 receiving in exchange tea and silk. But suppose 
 the tea and silk which England requires to be less 
 in value than the merchandize exported. How 
 can the balance be regulated ? As follows : — The 
 Americans export very little to China, but require 
 more tea and silk from the Chinese than what they 
 give them in goods. Consequently, the Chinese 
 have a surplus claim on New York. This they 
 transfer to their English creditors, to whom they 
 are indebted for the surplus value of the goods 
 imported from England over their own produce 
 shipped to England ; in other words, they remit 
 to their English creditors the bills drawn for 
 American account, or instruct the Americans to 
 send gold to England for the amount. The 
 instance given is but an illustration ; if the par- 
 ticular case is not entirely correct, many ethers 
 might be supplied in its place. That the imports 
 of England exceed her exports, does not mvalidate
 
 POEEIQN BX0HANGB8. 86 
 
 the present proposition ; it is the universal diffusion 
 of the products of Enghsh industry, which tends 
 to bring about the result described. England buys 
 from, and sells to, almost every country in the 
 world. Of other countries, A may import from B, 
 but export to C ; and if B and C are not in constant 
 intercourse, A will not be able to pay B by giving 
 him an assignment on C. However, A, B, and 
 are all commercially connected with England, and 
 thus A can pay B by assigning to him a claim 
 against England, which he himself has received in 
 payment from ; or more simply, C draws a bill 
 on England and remits it to A in payment, and A 
 passes it on to B, who being in constant connexion 
 with England, is in his turn easily able to use it. 
 As illustrations of the converse proposition, that, 
 where there is a regular and constant interchange 
 of imports and exports between two countries, an 
 exchange is at once established by which trans- 
 actions may be settled without the intervention of 
 England, may be cited the cases of Java and Hol- 
 land, of New York and Bremen, of Kio Janeiro 
 and Hamburg. Formerly, when Germany was 
 farther behind England in her exports than she is 
 at present, the New York houses paid themselves 
 for their shipments of tobacco or other produce 
 
 D 3
 
 36 FOREIGN EXCHANQES. 
 
 to Bremen, by drawing for Bremen accomit on 
 England, and Bremen would settle the transaction 
 by buying up and remitting to England the bills 
 of the Holstein cattle-dealers or of the butter- 
 exporters of the Low Countries. But now so 
 many German manufactures are sent to the States, 
 that there are always buyers for bills drawn on 
 Bremen direct ; or, more simply, the tobacco and 
 cotton shipped to Germany is paid for by Ger- 
 man manufactures, and no further intervention is 
 required. What becomes then of the cattle and 
 butter bills, which are thus set free ? These are 
 still collected in Bremen and remitted to Eng- 
 land, but against different transactions. The regu- 
 lar mutual intercourse estabhshed between New 
 York and Germany does not yet exist between 
 Germany and Bombay. Bombay as yet takes very 
 Httle from Germany, the great bulk of her deal- 
 ings being still with England ; consequently the 
 Bombay merchants, finding few purchasers for 
 bills on Bremen, still draw on London for Ger- 
 man account, when they ship cotton direct to the 
 Continent : and a transaction takes place which in 
 fact amounts to this, that they direct their London 
 creditors to obtain payment from their German 
 debtors. Accordingly these latter are still under
 
 FOREIGN EXCHANGES. 37 
 
 the necessity of buying up bills upon England, as 
 constituting the most convenient remittance by 
 which they can effect those payments to English 
 merchants which their Bombay creditors instructed 
 them to make. A very large proportion of the 
 foreign bills afloat wiU, on a careful analysis, be 
 discovered to represent adjustments of this kind, 
 that is to say, not direct but indirect and inter- 
 mediate settlements, in which London appears as 
 the clearing-house of the world, where most inter- 
 national transactions are closed. 
 
 It remains to consider those foreign bills which 
 represent no settlements of indebtedness at all, — 
 bills which are technically said to be drawn in 
 blank, by which the acceptor does not pay his 
 debt to the drawer, but by which, on the contrary, 
 the drawer incurs a debt to the acceptor. The part 
 which these bills play in all questions of the Fo« 
 reign Exchanges is very considerable, and requires 
 careful attention. A portion of them approach 
 very nearly indeed to the character of what in the 
 home trade are called accommodation bills ; they 
 may be drawn by merchants in one country on 
 merchants or bankers in another, in order to se- 
 cure the use of the money which is paid as their 
 price, for the time during which the bills have to
 
 38 FOREIGN EXCUANQES. 
 
 niu. The purchaser of the bills in this case takes 
 the place of the discounter of accommodation 
 paper, and the transactions may be perpetually 
 renewed in the same way and with more facility 
 than accommodation bills. But there is another 
 function of bills drawn in blank and representing 
 no actual transactions, which is little understood 
 by the general pubhc, but which, nevertheless, is 
 in many cases very important and expedient. 
 
 It is very possible, and indeed probable, that the 
 imports and exports of any country will not fall 
 into the same period of the year ; and that, conse- 
 quently, the seasons when the imports have to be 
 paid for will not coincide with the seasons when 
 payment is exacted from foreign countries for the 
 exports. In the case of a purely corn-growing 
 country, for instance, the revenue derived from 
 foreign countries will come in at the conclusion of 
 the harvest, when the cargoes of corn begin to be 
 despatched. There will then be bills drawn against 
 these shipments on the countries to which they 
 are directed. Meanwhile, however, the country in 
 question has been importing manufactures from its 
 neighbours all the year round, and the importers 
 have been requu'ing bills on foreign countries in 
 order to make remittances, long before the com-
 
 POREIQN EXOHANQES. 39 
 
 bills could be drawn and become available. If no 
 other device could be found, the importers would, 
 before the harvest-time, be obliged to remit gold 
 abroad in payment of their purchases ; and after- 
 wards the exporters, not being able to sell their 
 bills, which the importers would now no longer 
 want, would have to receive back the equivalent of 
 their exports in remittances of gold from abroad. 
 Thus the risk, the expense, and the reduction 
 of circulation, which are consequent on repeated 
 journeys of bullion, would be twice incurred, owing 
 to the exports and imports of the same country 
 falling into different seasons. This difficulty is 
 often avoided if the bankers in one country draw 
 upon those in another, at the time when no actual 
 commercial bills, representing bond-fide transac- 
 tions can be bought, and subsequently square the 
 HabiHty which they have incurred towards the 
 acceptors of their bills drawn in blank, by buying- 
 up and remitting the export-bills as soon as the 
 goods have been shipped and are made available 
 for drafts. Thus the importers are able to procure 
 biUs from such banking houses at a time when 
 otherwise they could buy no bills at all, and the 
 exporters sell to the same bankers later on, at a 
 time when otherwise they would find no pur-
 
 40 FOREIGN EXCHANGES. 
 
 chasers, the importations having been previously 
 paid for. The same object is often sought for and 
 attained by the exporting houses receiving per- 
 mission from those to whom they sell or consign 
 their shipments, to draw bills in anticipation of the 
 goods being actually despatched. Thus they are 
 enabled to sell the bills at a time when there is a 
 demand and when a premium is likely to be paid by 
 the importing branch of the community, instead of 
 waiting for the time when the bulk of the exports 
 are despatched, and when consequently, from the 
 number of those who have to draw bills, they would 
 have to accept a lower price. Great complaints 
 have been made in the Court of Bankruptcy, and in 
 many quarters where the force of such transactions 
 is not clearly understood, of what is called the 
 system of blank credits ; in other words, the system 
 of drawing bills from abroad not representing at 
 the time any actual settlement of indebtedness. 
 The reason may probably be that it is easy to con- 
 found such bills with accommodation paper. And 
 it is true that wherever the existence of these 
 blank credits has been brought before the public, 
 it has been owing to some catastrophe in which 
 the bill transactions actually were only under- 
 taken with the intention of raising fictitious capi
 
 FOEEIGN EXCHANQES. 41 
 
 tal. But it will have been seen that blank credits 
 may serve a legitimate and useful purpose, only- 
 requiring to be most jealously, and even suspi- 
 ciously, watched. Those who are not versed in 
 the various details of international banking trans- 
 actions will have some difficulty in understanding, 
 how foreign bills, representing mutual accommo- 
 dation, and merely intended to raise a fictitious 
 capital during the time which the bills have to 
 run, may be distinguished from bills drawn to 
 anticipate actual transactions, and to bridge over 
 the interval which exists between a season of im- 
 portation and a season of exportation. Yet to a 
 certain extent it is possible to do so, in the same 
 way as the discounting establishments at home 
 are able to distinguish between legitimate and 
 fictitious inland drafts. The system cannot be 
 condemned because it is often abused, — at all 
 events not until it becomes evident that the 
 abuses which follow in its wake are greater than 
 the advantages which it secures. 
 
 For the present, however, it is not necessary to 
 inquire into the beneficial or pernicious results of 
 these bills drawn in blank. They have simply to 
 be enumerated as constantly forming a portion of 
 the aggregate amount of foreign bills afloat, and
 
 4:'2 FOREIGN EXCHANQEB. 
 
 as playing a peculiarly important part in affecting 
 the Foreign Exchanges. The fluctuations in the 
 prices of foreign bills, which constitute the real 
 subject-matter of every treatise on the Foreign 
 Exchanges, can only then be properly understood, 
 when a tolerably accurate insight has been gained 
 into the nature and character of the bills them- 
 selves, and the various classes under which they 
 may be ranged. The foregoing chapters have 
 accordingly been devoted, in the first place, to an 
 elementary inquiry into the transactions in which 
 foreign bills have their origin ; then to a more 
 minute analysis of that international indebtedness 
 which we discover these bills to represent ; and 
 finally, to the classification and characteristics of 
 these bills when actually drawn. We have, so to 
 speak, examined the material and the machinery, 
 and are now in a position to study the operations 
 themselves.
 
 CHAPTER IV. 
 
 ENUMERATION OF THE VARIOUS ELEMENTS OF VALUE WHICH 
 DETERMINE THE FLUCTUATIONS IN THE PRICES OP 
 FOREIGN BILLS. 
 
 When the Foreign Exchanges are in actual 
 operation, and adjustments of accounts are taking 
 place between different countries, it appears at 
 once that, though the purchase and sale of foreign 
 bills originally represent a simple transfer of debts, 
 and thus, at first sight, seem to exclude the idea 
 of varying prices, the value of these bills is, never- 
 theless, in a state of constant fluctuation. The 
 enumeration of the various elements of value which 
 determine these differences in price forms the 
 next step in our inquiry, and is rendered possible 
 by the fact that, while every instance of such 
 variations admits of a special practical explanation, 
 all are, nevertheless, subject to well-defined 
 general laws, and capable of scientific analysis. 
 
 The primary difference of value clearly arises, 
 as was previously pointed out, either from the 
 aggregate amount of the claims of any given
 
 44 POREiaN BXCHANGES. 
 
 couutry upon others exceeding the sum of its 
 liabilities to them, or, vice versa, falling short of that 
 sum. In the first case, those who have bills to 
 di-aw (whom for the sake of conciseness we will 
 call the exporters, though the class embraces all 
 those who have claims of any kind on foreign 
 countries) will not find sufficient purchasers to 
 take all their bills ; for only those will buy who have 
 debts abroad to settle, and these debts are by our 
 hypothesis of less amount than the claims. Ac- 
 cordingly the exporters, competing with each other 
 for the sale of the bills, will take less money for 
 them than their nominal par value ; that is to say, 
 will sell them at a discount. In the second case, 
 the importing class, those who have incurred 
 liabihties to foreigners, having, by our hypothesis, 
 larger remittances to make than the exporters can 
 supply to them, bid against each other for such 
 biUs as may be got, and pay a premium to secure 
 them. In both cases, what exporters and import- 
 ers are seeking to avoid is the transmission of 
 bullion, with all the sacrifices thereby entailed, and 
 accordingly the extent of the premium or discount 
 which can be given is determined by the extent of 
 these sacrifices. Let us suppose that importers 
 foresee that the bills which they will be able to
 
 FOREIGN EXCHANQES. 46 
 
 procure, will not suffice for all the payments which 
 they have to make. They at once become aware 
 that the balance will have to be remitted in bullion; 
 and each individual, to avoid this necessity falling 
 to his share, hastens to offer a sHght premium to 
 those who draw, intending by this small sacrifice 
 to secure himself against the greater loss in freight, 
 insurance, and interest, which is always involved 
 in a bullion remittance. The premium may rise to 
 within a fraction of this expense or loss ; nay, may 
 even reach that actual point ; because though the 
 premium paid for the bill and the cost of the specie 
 remittance were absolutely equal, it would still be 
 more convenient to send the bill. Beyond this 
 point the balance of trade cannot cause the premium 
 to rise ; nor, on the other hand, can it cause the 
 discount at which bills are sold ever to exceed 
 the sacrifices which exporters would incur, if they 
 found themselves obUged to instruct their foreign 
 debtors to send them bullion, in consequence of 
 bills upon them no longer being saleable. The 
 time, however, when they would receive payment 
 would, in tliis case, be an important consideration. 
 As long as the exporters can find purchasers for 
 their bills, they get payment at once; but when they 
 cannot dispose of their bills any more, they are not
 
 +6 
 
 FOREIQM BXOHANQES. 
 
 reimbursed for the value of their exports till the 
 equivalent for them is returned in gold. Accord- 
 ingly each individual will submit to a sacrifice in 
 order to sell his bills before the demand for them 
 is exhausted and a discount is estabhshed ; but the 
 discount will not be greater than the estimate 
 which the seller makes of the sacrifices which have 
 been pointed out. The result becomes perfectly 
 clear when stated in actual figures, especially if an 
 illustration can be found where the par value of 
 bills drawn between two commercial centres is not 
 hidden or rendered more comphcated by differences 
 of currency. New Orleans and New York, before 
 the secession, when their respective currencies had 
 not been disturbed and divided by independent 
 issues of inconvertible paper money, supplied an 
 instance in point. Under the hypothesis of an 
 identical currency, if at any time the amount of 
 bills on New York offered for sale in New Orleans 
 equalled the amount of remittances required for 
 the payment of debts due to New York — that is to 
 say, if the indebtedness of the two cities reached the 
 point of equihbrium — the price to be paid for a bill 
 for one hundred dollars payable at sight in New York 
 (for differences in point of time, and consequently of 
 interest, should at this stage be eliminated), would
 
 FOREIGN EXOHANQES. 47 
 
 be exactly one hundred dollars. In proportion, 
 however, as it might become evident, that a greater 
 sum was due to New York than could be drawn 
 against the claims of New Orleans upon that city, 
 those who were bound to remit would hasten to 
 pay a small premium to the drawers, and give them 
 one hundred dollars and a half, under the appre- 
 hension that if they did not secure these bills, they 
 might be obliged to send gold, which might cost 
 them one and a half dollar for each hundred dollars 
 in freight and insurance. Thus the more clearly 
 it appeared that the stock of bills was growing in- 
 sufficient, and the more the supply actually di- 
 minished — the higher the premium was sure to 
 rise, till the sellers might reahze almost one and a 
 half dollar profit. At this point the premium was 
 clearly so high, that it would be indifferent to re- 
 mitters whether they bought bills or sent gold, and 
 some would despatch gold and others buy the bills, 
 the surplus excess required to be remitted being in 
 the meantime gradually lessened by this despatch 
 of gold. The exporters being less pressed for 
 their bills, soon had the opportunity of feeling 
 the change in the situation, and might content 
 themselvefl with a smaller premium in order to 
 secure some profit before the demand was entirely
 
 4S POREiaif EXCHAMQEa. 
 
 satisfied. The result would be a fall in the price 
 of bills, till the exchange stood once more at par, 
 or below it. Conversely, if at any time there were 
 more bills than purchasers for them, the drawers, 
 feeling that their export business might have to 
 bear the charge of one and a half per cent, for 
 bullion shipped to them from New York as re- 
 turns, were ready to sell at a discount long before 
 that point was reached ; a discount which would, 
 however, not exceed the charges on bullion ship- 
 ments, which, in the case in point, we have sup- 
 posed to be one and a half per cent. It is a 
 clear deduction from these considerations, that 
 the limits within which the exchanges may vary 
 (provided the bills are drawn at sight and in the 
 same currency), are, at the one extreme, the par 
 value, plus the cost of the transmission of bul- 
 lion ; at the other extreme, the par value, minus 
 this identical sum. Practically the exchanges 
 rarely touch either extreme, but fluctuate between 
 them, owing to the various measures and in- 
 fluences brought to bear upon the situation before 
 the extreme case arrives, which cause a reaction 
 in the opposite direction. 
 
 There are occasions, however, when the ex- 
 changes sink and rise much beyond the specie
 
 FOREIGN EXCHANGES. 4)9 
 
 point ; and as this is not to be accounted for by 
 the cause which we have been engaged in ana- 
 lyzing, viz., a balance of indebtedness either in 
 favour of, or against any given country, we must 
 endeavour to discover others. 
 
 Such an instance occurred in the first months 
 of 1861, when, under the growing apprehensions 
 of civil war in the United States, fluctuations 
 occurred in the American rates of exchange which 
 extended far below the specie point. 
 
 The balance of trade had been strongly in fa- 
 vour of America. Very considerable exports of 
 grain and flour, coupled with a reduction of im- 
 ports, in consequence of pohtical apprehensions, 
 had established a surplus of claims on foreign 
 countries over the debts due to them. Accord- 
 ingly it was natural that the exchanges should fall 
 to specie point ; but the fact was, they fell much 
 below it. How could this be accounted for ? 
 
 The reason must be sought in the pecuharly 
 urgent necessity under which the exporters were 
 labouring, of seUing their bills immediately, at any 
 sacrifice. It was a question of time. Three or 
 four per cent, were sacrificed to secure the pro- 
 ceeds of the bills on England at once, instead of 
 waiting for the arrival of gold. The exporter had
 
 60 rOUEIGN EXCHANGES. 
 
 two courses before him, — either to sell his bills at 
 what they would fetch, or to send them himself to 
 Europe, with instructions to his correspondents to 
 encash them and remit the amount in bullion. 
 The latter course was cheaper, but as he required 
 funds immediately (or, under the influence of 
 panic, believed that he would so require them), he 
 adopted the former. 
 
 In ordinary times, capitalists would have com- 
 peted with each other in buying up the drafts of 
 urgent sellers. They would then have remitted 
 them to Europe for their own account, so as to 
 secure the profit between the low price paid for the 
 bills and their specie value ; that is to say, they 
 would have bought at a heavy discount, much 
 below specie point, in order subsequently to realize 
 at least the specie value (which we have seen to be 
 the par value, minus the charges on the bullion 
 remittance). But at a time of commercial panic, 
 such capitalists are seldom willing to launch out 
 into a speculation which deprives them, during the 
 weeks which must elapse before the gold arrives, 
 of the command over their funds. They may fancy 
 that during that interval the rate of interest may 
 rise to such a height as to neutraUze the anti- 
 cipated profit. For instance, let us suppose that
 
 FOREIGN BXCHANGE8. 61 
 
 they expected to gain one and a half per cent, net 
 on the exchange : in their calculation they must 
 have taken into account the interest they would 
 lose from the time when they paid the drawer for 
 his bill up to the moment when the returns in 
 gold arrive. The amount of interest on this in- 
 terval, which we will call a month, they may have 
 calculated at six per cent, per annum, or one half 
 per cent for the month. Now, if the rate of in- 
 terest should suddenly rise to twenty-four per 
 cent, per annum, they would have to borrow money 
 at the rate of two per cent, for the month, in order 
 to replace that portion of their capital which is 
 travelHng to Europe and back ; that is to say, one 
 and a half per cent, more than they had calculated 
 on ; and accordingly, that being their estimated 
 profit, they would gain nothing on their ex- 
 change operation. We accordingly may conclude 
 that what is technically called a stringent money- 
 market, acts materially upon the exchanges, in- 
 ducing sellers to force sales, and creating a re- 
 luctance on the part of purchasers to buy unless 
 absolutely compelled to remit. This cause will, 
 however, not come forcibly into operation, when 
 the international transactions are in a state of 
 equihbrium ; for then there will be as many pur- 
 
 s 2
 
 52 FOKEION EXCIIANQES. 
 
 chasers on compulsion as there are sellers, and 
 the dearness of money may only operate so far 
 as to induce purchasers to defer their remittances 
 to the last moment, whereas sellers would wish 
 that they should be hastened. Its full force will 
 be felt at a time when the country where money is 
 supposed to be dear, or where panic exists, has 
 exported more than it has imported, and when it 
 is consequently certain that gold will jfinally have 
 to be ordered, while no individual is himself 
 willing to wait for its arrival. It is seldom, how- 
 ever, that this pecuUar contingency will occur ; as, 
 generally, the money-market in such a country as 
 has taken less from other countries than it has 
 given to them, is particularly well supplied with 
 surplus capital. 
 
 There are, however, further causes which deter- 
 mine the fluctuations in the rates of exchange. 
 We have hitherto, in order to obtain a clear view 
 of the first leading principles, considered all bills 
 as drawn payable at sight ; but, practically, an 
 immense majority are drawn payable at various 
 periods after the date of their issue or first pre- 
 sentation to the acceptors, giving rise respectively 
 to the expressions, payable at so many days after 
 date, or so many days after sight. Thus, two new
 
 FOBEIQN EXCHANGES. 5S 
 
 elements of value are introduced which will affect 
 the rate of exchange. In the first place, the 
 consideration as to what deduction should be 
 made from the price, in consequence of the bill 
 which is bought for ready money not being itself 
 payable till after a certain time ; and, secondly, as 
 to the security which the purchaser of the bill 
 can feel that the drawer and acceptor of the bill 
 will continue solvent till it becomes due. Thus, 
 the state of credit in both countries, and the rate 
 of interest in that country whither the bill is 
 remitted, likewise become determining elemePxts 
 in the rate of exchange. 
 
 It has been shown that the stringent state of 
 the money-market in the country where the bill is 
 drawn, affects the exchanges, since it renders the 
 seller more eager and the purchaser more reluct- 
 ant; and, as one or the other must bear the loss of 
 interest which must ensue till the proceeds of the 
 bills reach their hands, this loss of interest will be 
 at the rate established in their own money-market 
 at home. But when any bills other than such as 
 are payable at once, form the subject of bargain, 
 the buyer must further consider what is the 
 rate of interest in the country on which the bills 
 are drawn. If he owes money abroad, he will be
 
 64 FOREIQN BXCUANQKS. 
 
 paying interest to his foreign creditor at the foreign 
 rate, and this interest will not cease till his remit- 
 tance becomes due. Accordingly, it will make a 
 difference to him of two months' interest at the 
 foreign rate, whether the bill which he purchases 
 as a remittance is drawn payable at once or sixty 
 days after its arrival ; and, as the foreign interest 
 rises, he will insist on paying less for the sixty-day 
 bill, whereas, if it falls, he can afford to pay more. 
 A heavier deduction must be made from the price 
 in the first instance than in the second. Or, in 
 the case of the capitalists who buy up bills at a 
 time of pressure in order to send them abroad and 
 have them converted into gold, their foreign cor- 
 respondents will have to discount the long bills for 
 them, and the amount of discount affects their 
 profits. If they fear the rate of interest in the 
 country on which the bills are drawn wiH be high, 
 they pay so much less for the bills ; if they anti- 
 cipate cheap rates, they pay so much the more. 
 Without any doubt, the New York capitalists, who 
 suffered the price of bills upon England to sink 
 three and four per cent, below the specie point, 
 were influenced by a natural anxiety as to the rate 
 which they would have to pay in England for the 
 discount of their sixty-day remittances.
 
 FOREIGN EXCHANGES. 55 
 
 In the rates of exchange for all biUs other than 
 bills at sight, there is no element of value so con- 
 stant and so effective as the rate of interest in the 
 country on which the bill is drawn. The fluctua- 
 tions in bills at sight are limited, to a certain ex- 
 tent, by what we have called the specie point : 
 they can exceed the specie Umit either upwards or 
 downwards for a time ; but, be it remarked, only 
 when the two countries are at a considerable dis- 
 tance from each other, so that specie cannot be 
 rapidly sent to and fro, and when immediate 
 returns become a matter of importance ; in fact, 
 only under very extraordinary circumstances. 
 
 The fluctuations in long bills, on the other hand, 
 are unlimited, because they are co- extensive with 
 the fluctuations in the value of money in the accept- 
 ing country, and co-extensive, too, with the appre- 
 hensions which may be felt as to the solvency of 
 the names on the bills. The effect of the value of 
 money, or rather of every variation in the prevail- 
 ing rates of discount, upon the Foreign Exchanges, 
 is a matter of the highest importance, and will have 
 to be considered with some minuteness later on. 
 
 On the other hand, the extent to which the sol- 
 vency and credit of the drawer, as well as of the 
 acceptor, of a bill, affects the value of that bill, and
 
 56 FOREIGN EXCHANGES. 
 
 consequently the rate of exchange at which it wiU 
 sell, does not require much elucidation. Firms of 
 first-rate standing are said, in technical language, to 
 " make the best exchanges." The price which is 
 paid to a merchant of undoubted position for his 
 sixty days' sight bill on a foreign country, will be 
 higher than that which is granted for a second-rate 
 bill on the same place. The purchasers of bills 
 must be induced, by a concession in price, to take 
 an article of inferior security. They must be in- 
 demnified for the greater risk. Credit is a very 
 important element to be considered in the rate of 
 exchange ; and so notorious is this amongst those 
 engaged in international trade, that the price at 
 which exporting houses can sell their foreign bills, 
 is looked upon as an unerring test of the credit 
 which they enjoy among their neighbours. Thus 
 credit causes a difference in the value even of such 
 foreign bills as are drawn on the same day, render- 
 ing it difficult to give any exact or definite quota- 
 tion of the price of long-dated paper ; and, further, 
 it operates on exchanges generally in times of 
 commercial panic or excitement, and causes the 
 prices of all bills to fall. In the case of America, 
 to which allusion has been made, doubtless the 
 purchasers of bills ielt bound to indemnify them-
 
 FOREiaif BXCHANQBS. 57 
 
 selves by a large discount for the risks which they 
 thought they ran ; either the bills might not be 
 accepted at all, in consequence of an enormous fall 
 in the value of the goods against which they were 
 drawn, and the drawers whom the purchaser would 
 then have to call upon to refund the amount, might 
 have failed in the interim ; or, the bills might have 
 been accepted, but not be paid at maturity, owing 
 to the difficulties in which it was expected that all 
 connected with America would be involved. 
 
 Thus, too, when a whole nation falls into dis- 
 credit, it is difficult to sell bills upon it, and large 
 concessions must be made in consequence. It is 
 felt that little security can be placed in the acceptor. 
 The purchaser has then only the security of the 
 drawer, and not, as is otherwise the case, of the 
 drawer and acceptor jointly. However, this ar- 
 gument cannot be pushed very far ; for, generally 
 speaking, when a whole country is in discredit, 
 there are many other influences at work to lower 
 the value of bills upon it, and it is not easy to 
 separate to what extent the different causes have 
 respectively operated ; how much, for instance, is 
 due to a so-called adverse balance of trade and 
 excessive indebtedness, how much to loss of credit, 
 and how much to a further element of value which
 
 58 FOBEIQN EXCUANQKa 
 
 we have still to examine, — the depreciation of the 
 currency. 
 
 It will be remembered that the basis of a settle- 
 ment through a bill of exchange, is the payment of 
 a sum of money in one place, in order to receive 
 the equivalent at another. The purchase of a bill 
 on France, consists in the payment of a certain 
 amount in sterling money to a merchant trading 
 with France, against his giving an assignment for 
 the same value on a French merchant. Hitherto, 
 all that has been said has been applicable to all 
 countries equally. The principles which have 
 been examined would exist, and be in constant 
 operation, even if a universal currency had been 
 adopted, and the perplexing calculations between 
 francs and florins, and dollars and roubles, were 
 no longer necessary. But now we have to deal 
 with the actual fact, that when an exchange of a 
 given sum in London for the same sum in Vierma 
 or St. Petersburg has to be made, it is excessively 
 difficult to ascertain what may be called the par 
 value. When there is a gold currency in both 
 countries, the calculation is comparatively easy ; 
 though, if a large paper currency exists side by 
 side with the gold, the problem becomes somewhat 
 more involved. Between two countries of which
 
 FOREIGN EXCHANGES. 6H 
 
 the one has a gold, and the other a silver currency, 
 a comparison becomes still more complicated, 
 while it is hopeless to look for any trustworthy 
 results when either of the two countries has an 
 unlimited or inconvertible paper currency. Given 
 one hundred pounds sterhng in London ; what is 
 the value of these hundred pounds in Vienna ? 
 What are the laws which will govern the exchanges 
 in this case ? Applying experimentaUy the prin- 
 ciples which we have previously examined, we 
 discover them apparently to break down here. 
 The fluctuations in the prices of foreign bills have 
 been exhibited hitherto as confined within certain 
 limits, subject indeed, within these limits to the 
 ordinary laws of supply and demand, but unable to 
 rise or fall beyond the indicated boundary, except 
 under extraordinary circumstances. If the drawers 
 were more numerous than such as had to remit — 
 that is to say, if the creditors of any given country 
 were more numerous than the debtors — it was 
 shown to be difficult to sell bills on such a country, 
 and the sellers had to make a sacrifice. On the 
 opposite hypothesis, the buyers were mulcted in a 
 premium. But in either case, the sacrifice could 
 not materially extend beyond the loss which would 
 accrue directly and indirectly in the transmission
 
 60 fOREIQN BXCHANGE8. 
 
 of bullion. If he who has money to claim abroad, 
 cannot di-aw and sell a bill against the amount to 
 advantage, rather than submit to a sacrifice beyond 
 the limit indicated, he will instruct his foreign 
 debtor to send him gold. So if he who owes 
 moneys to merchants abroad, cannot buy a bill 
 except at a loss greater than the expense of sending 
 bullion in payment, he will naturally at once adopt 
 the latter plan. But what is to be done in eithei 
 case, if the country on which we suppose the bills 
 to be drawn, has an unlimited paper currency, 
 represented by no bullion at all? or, if bullion 
 cannot be thence obtained except at an enormous 
 premium ? or if the export of bullion is prohibited 
 altogether, or if it be illegal to give or take a 
 premium on gold ? It seems evident at once, that 
 the limits previously assigned to the fluctuations 
 of exchanges are, under most of these hypotheses, 
 removed altogether. If the creditor of such a 
 country loses the alternative of being able to obtain 
 gold in payment of his claim, there is no hmit to 
 the sacrifice which he may be compelled to make, 
 in order to sell his bill, except in the competition 
 of those who may be obhged to purchase it. 
 Similarly, if, as is very unhkely in the case of a 
 country with a depreciated currency, its foreign
 
 rOBKIGN EXCHANOBS. 61 
 
 debtors should be more nnmerous than its foreign 
 creditors, so that the demand for bills upon it 
 would exceed the supply, the debtors (being 
 deprived of the alternative of sending a specie re- 
 mittance by the fact that gold, though enhanced 
 in value Hke everything else by the depreciation of 
 the currency, still is prohibited from commanding 
 in the country in question its legitimate premium) 
 would have to pay the price demanded by the 
 sellers of bills, this price being apparently only 
 limited by the competition of sellers. However, 
 on closer inspection, it will be found that a kind of 
 limit, similar in nature to that which has been 
 pointed out, is after all in operation ; and it will 
 be possible to discern it when the case of a country 
 in which there is a depreciated currency, but in 
 which a premium on gold is regularly established 
 and is not restricted by artificial means, has been 
 examined. It will appear that, in this latter case, 
 we shall not be far wrong if we add the premium 
 commanded by gold in the depreciated currency to 
 the expenses which are incurred by the creditors of 
 such a country, who have to recover their claim by 
 sending for the gold instead of selHng bills, or if, in 
 the opposite case of the debtors, we make a corre- 
 sponding deduction. If the latter, rather than pay
 
 62 FOBBIQN EXOHANOBS, 
 
 an extravagant price for the bills which they wish 
 to purchase and remit, incur the expense of send- 
 ing bullion, the premium which they will obtain on 
 such bullion will naturally go in reduction of the 
 expenses incurred. This will accordingly give 
 them a great advantage over the sellers ; in other 
 words, over the creditors of the country in question. 
 
 The consideration of the various cases under exa- 
 mination, from the two opposite points of view 
 of the drawers and purchasers of bills respectively, 
 tends to embarrass the course of the argument, 
 but cannot be avoided entirely. When in the 
 course of the discussion the case of one class only 
 is considered, it is highly desirable that the reader 
 should himself clearly reaUze the converse propo- 
 sition, and consider the results from the opposite 
 point of view. 
 
 In propounding the fact, that the fluctuations in 
 the prices of bills on a country, where the currency 
 is depreciated, are governed, not only by all those 
 elements of value previously considered, but to a 
 much greater degree by the premium on bulUon 
 as compared with the depreciated currency, we are 
 stating the final result rather than the process by 
 which this position is reached — the ultimate hmit, 
 rather than the gradual development. We shall
 
 i'OBEIGDT EXCHAJ^GES. 63 
 
 arrive at the same conclusion by the following 
 reasoning, in which more prominence is given to 
 the depreciation of the paper circulation than to the 
 premium on bulhon, which however, in reality, is 
 almost the same thing. Practically, the idea of 
 the premium on bullion, though more easily and 
 clearly intelligible in theory, rises less to the sur- 
 face than the depreciation, or smaller purchasing 
 power, of its paper competitor. 
 
 For, in a country where there is a large and in- 
 convertible paper currency, the precious metals 
 tend to recede from their more important function 
 as the circulating medium, while their character 
 of ordinary merchandize comes out into stronger 
 relief. As another currency exists, with which they 
 are by no means identical, they no longer con- 
 stitute the standard, but themselves become sub- 
 ject to another standard. Accordingly, when, 
 owing to this new standard, the prices of all mer- 
 chandize begin to fluctuate, bullion is subject to 
 the same influences ; and when, through the over- 
 issue of paper money, a general rise of prices 
 ensues, the price of gold, as measured by paper 
 money, rises with the rest. Thus, supposing the 
 Austrian Government to be constantly depreciating 
 the Austrian currency by issues of paper money,
 
 64 FOaEIQN BZCUAKQBg. 
 
 the value of gold in Austria will be constantly 
 rising, and one hundred English sovereigns will 
 be worth so many more Austrian paper florins. 
 Those who purchase a bill on Vienna will, accord- 
 ingly, in such circumstances require a correspond- 
 ing exchange ; they who have bills on Vienna to 
 sell, that is to say, to whom a certain sum of florins 
 is due in Austria, will have to throw in so many 
 more florins, in order to induce the buyers to give 
 them gold for the depreciated article. And why ? 
 Because, otherwise, the buyer who is going to 
 remit would do better to send the gold itself. Just 
 as an English traveller in Austria will at such a 
 time obtain fifteen florins instead of ten for his 
 sovereign, so will those who pay sovereigns for 
 florins on the London Exchange, require the same 
 favourable terms. We have thus discovered an in- 
 fluence which apparently affects the fluctuations in 
 the Foreign Exchanges far more powerfully than 
 any previously discussed; — interest of money, a 
 balance of debts over claims, panic, distance, and 
 so forth, practically cause the exchanges to vary 
 within a few per cents. ; a variation of ten per 
 cent., owing to all these circumstances combined, 
 is considered something extraordinary, and only 
 occurs under rare combinations. But, as soon as
 
 FOREIGN EXCHANGES. 65 
 
 the element of currency is introduced, we have 
 had at once an instance before us in the Vienna 
 exchange of a variation of fifty per cent. So in 
 the Russian exchanges, owing to the enormous 
 amount of paper money afloat, which is practically 
 inconvertible, the most violent fluctuations are 
 constantly occurring.* 
 
 But in a certain sense these fluctuations are 
 apparent, and do not involve the same gain or 
 loss, the same difference in value, as those alluded 
 to above. As the depreciation in currency affects, 
 generally speaking, all prices alike, the fifteen 
 florins bought by the Englishman for his sovereign 
 are not worth more to him than the ten which he 
 bought for the same money before. When the 
 fluctuations were determined simply by the balance 
 of trade, (within the limits of the specie point upon 
 either extreme,) the purchaser when he bought 
 cheap — that is to say, when he obtained a greater 
 sum than usual in foreign coin for his own money 
 
 * This passage was written in 18G1. Great changes have 
 since then occurred in the Austrian and Russian Exchanges. 
 The former has fallen very considerably, and the florin is worth 
 much more than it was two years ago. The Russian rouble has 
 even touched its par value. But the measures taken to bring 
 the Russian currency to its specie value have broken down, and 
 the paper rouble is still, what it was when the above passage 
 was written, practically inconvertible. — December, 18G3.
 
 66 FOREIGN EXCHANGES. 
 
 — secured an actual advantage ; this greater sum 
 of foreign coin had an actual greater purchasing 
 power. But where the cheapness of the bills is 
 caused by the depreciation of the foreign currency, 
 he has no advantage ; for the purchasing power of 
 the nominally larger sum is not greater than that 
 of the smaller. 
 
 Again, while the purchaser of the bill has been 
 shown to have no advantage, so neither, after the 
 new standard of exchange is established, has the 
 seller any loss ; it is true that he will be under 
 the necessity of ceding a greater number of florins 
 for the sovereign which the buyer pays him ; but 
 the produce which he has sent abroad against 
 which he draws, will, under our present hypothe- 
 sis, have risen in value in the same proportion, 
 and therefore yield him a proportionately greater 
 number of florins for which he can draw. For 
 instance, before any great fluctuation, he exported 
 a certain quantity of sugar, and sold his drafts 
 against this sugar for a certain price : let us sup- 
 pose him to have sold the sugar for 10,000 
 florins, and to have sold these florins at the rate 
 of ten to the pound. He would thus reahze 
 ^1,000 for his sugar. A fluctuation of ten per 
 cent, now occurs, owing to an over-issue of paper
 
 rOREIQN BXCHANQES. 67 
 
 in Austria. Prices generally rise 10 per cent., and 
 the exchange rises also. The same foreign mer- 
 chant now sells his sugar for 11,000 florins, but he 
 must sell his florins at the rate of eleven to the 
 pound, thus realizing ^61,000, precisely as before. 
 It is scarcely necessary to observe that in assuming 
 a general equal rise in prices, it is not intended 
 to express an opinion that such an event could 
 actually occur. Some prices will rise much more 
 than others, according to the well-known prin- 
 ciples of pohtical economy relative to this subject. 
 In Austria the manufacturers insisted that they 
 made considerable profits by the depreciation of 
 the currency, as the cost of labour had not risen 
 in the same proportion as the manufactured goods. 
 The raw material being imported from abroad had 
 risen to the full extent at once ; and this enabled 
 the manufacturers to increase the price paid for 
 their products in the same ratio, though one 
 element of production, labour, remained compa- 
 ratively stationary. But this could only be tem- 
 porary. The adjustment must take place sooner 
 or later; and if the demand for labour had re- 
 mained the same as before, wages would have 
 risen till they commanded the same amount of the 
 labourer's necessaries as before. As far as the 
 
 V 2
 
 ij8 FOREIQN EXOHANQBS. 
 
 force of the previous argument is concerned, the 
 assumption of a general equal rise of prices is 
 admissible, and it will appear that the apparent 
 fluctuation in the exchanges extends no further 
 than the apparent increase of value which has 
 resulted from the same cause. A parcel of manu- 
 factured goods commands more florins, and an 
 Enghsh sovereign commands more florins also ; 
 but neither in the one case nor in the other has 
 any greater purchasing power been acquired. 
 
 Hitherto the comparison has been instituted be- 
 tween a transaction before any given fluctuation 
 and a transaction after it ; and it appears that the 
 difference in the exchange, when it has been caused 
 by the depreciation of the currency, does not give 
 rise to any difference of result. However, it will 
 be seen at once that the very opposite is the fact, 
 when the fluctuation is not supposed to occur 
 between two different transactions, but between 
 the beginning and the end of the same operation. 
 Suppose the exporter of sugar to have shipped his 
 sugar first, and to have sold it, as assumed before, 
 for 10,000 florins, the exchange being at the time 
 10 florins to the pound. However, he defers his 
 drafts against these 10,000 florins for some time, 
 and, in the interval, the rate of exchange changes
 
 FORBiaN EXuHANQES. 69 
 
 to 11 florins to the pound, as in the previous case. 
 Accordingly, his florins, having to be divided by 11, 
 only realize nine hundred and nine pounds odd, 
 instead of the thousand, which the former exchange 
 would have given him. In fact, a fluctuation in 
 the exchange, produced by a depreciation of the 
 currency, makes the existing claims on a countr}^ 
 in such a situation worth so much less, whereas 
 all debts due to it can be so much more advan- 
 tageously discharged ; the creditor of the country 
 loses and its debtor gains. If its imports and 
 exports were in a state of equilibrium, that is to 
 say, if it owed as much as it had to claim, there 
 would, on the aggregate of transactions, be neither 
 loss nor gain resulting from the apparent fluc- 
 tuation ; but the individual creditor of the country 
 might consider himself robbed, and the individual 
 debtor might rejoice when proceeding to dis- 
 charge his liabiUties, to find himself able, for the 
 same sovereign, which previously would buy only 
 ten florins, now to purchase eleven. 
 
 The examination of the nature and tendency of 
 the fluctuations just described, serves to lead us 
 conclusively enough to their limits, which is the 
 special object of our present investigation. The
 
 70 FOREIGN EXCHANGES. 
 
 bills on a given country fluctuate in value, in pro- 
 portion to the extent to which the prices of 
 all purchasable articles — bullion included — are 
 affected by the depreciation of the currency ; in 
 other words, in proportion to the discount of the 
 paper money, or the premium on gold. Beyond 
 that proportion, the fact of the depreciation of the 
 currency cannot cause them to deviate; otherwise, 
 if it were possible, the creditor of any sum payable 
 in the inferior money, rather than submit to a 
 further sacrifice in the exchange, would request 
 his debtor to send him gold for the amount of his 
 debt, notwithstanding the premium upon it ; for, 
 under the hypothesis, such a premium would be 
 less than the loss entailed in settling the trans- 
 action by the sale of a bill. 
 
 What, however, will be the case if the export of 
 bullion from the country, where the depreciated 
 currency exists, is prohibited ? or if it is impos- 
 sible to buy up gold, either because it is illegal to 
 pay a premium, or because all bullion has actually 
 disappeared ? — And these are the more frequent 
 cases which, in practice, arise. How is the holder 
 of a claim on such a country to encash that which 
 is due to him ? Let us suppose the case of a 
 merchant who had supplied Russia with cotton
 
 FOREIGN EXCHANGES. 71 
 
 when the export of bullion from Russia was prac- 
 tically prohibited. How was he to exact payment ? 
 When the cotton was sold, he became entitled to a 
 certain amount of roubles in St. Petersburg. 
 How could he convert those roubles into English 
 sovereigns ? Or, put the case otherwise : a Russian 
 spinner has imported the cotton, and owes the 
 amount thereof in English sovereigns to a mer- 
 chant in Liverpool. He has roubles sufficient in 
 his hands in paper money, but what steps is he to 
 take to procure sovereigns for them ? Being de- 
 barred from sending bullion, he has only two 
 courses open, — either to buy a bill on England 
 from others who happen to have sent produce 
 thither, and thus have a claim on an English 
 house, which he can buy and transfer to his Liver- 
 pool creditor ; or to send the produce, which will 
 sell for sovereigns, himself. Where there is a pause 
 in exportation, as is the case during a large portion 
 of the winter season in Russia, he would be abso- 
 lutely unable to send any remittances at all, unless 
 he could find bankers or others who might draw 
 on England, or on some other foreign banking 
 centre, in anticipation of future exports, and would 
 sell him the bills. But it will be apparent, that, as 
 to price, he is entirely in their hands. If, as is
 
 72 FORKIQN EXCHANGES. 
 
 ofteu the case, such Kussians as are indebted to 
 foreigners are bound at any cost to place funds in 
 Eughsh money into the hands of their creditors 
 by a given day, there would be no hmit to the 
 price which might be exacted from them — in other 
 words, no limit to the fluctuations in the exchange. 
 The relative value of their paper roubles to bullion 
 seems not to enter into the question at all. Supply 
 and demand alone determine the price. And if the 
 exports of such a country do not equal the imports, 
 (and this is by far the most general case,) so that 
 the demand for bills to pay for the imports ex- 
 ceeds the quantity of bills which is supplied by the 
 exports, the balance which the country has to pay 
 can only be settled by an enormous sacrifice, — in 
 Cact, cannot be settled at all except by a cessation 
 or diminution of imports, or by a foreign loan, the 
 latter being only an expedient to gain time and an 
 adjournment of the payment of the balance due. 
 
 It will be easily seen why it is possible to 
 assume that a country in which a depreciated cur- 
 rency and a prohibition to export bullion exist, is 
 likely to be importing more than it is exporting. 
 If it were otherwise — if its exports exceeded its im- 
 ports — buUion would be flowing towards it ; other 
 countries would be paying part of their debts to
 
 FOREIGN EXCHANGES. 73 
 
 it in gold, and no grounds for a prohibition of the 
 export of buUion would have existed. The currency, 
 too, would be in the course of improvement, and 
 not of depreciation. Probably there are as many 
 cases in which the depreciation of the currency is, 
 directly, or indirectly, the consequence of excessive 
 importations, as in which it is due solely to the 
 errors and bankruptcy of Governments. Often, 
 both influences are combined, taking alternately 
 the position of cause and effect. Sometimes 
 Governments, simply for their own purposes, issue 
 a quantity of paper money : the natural conse- 
 quence will be over-importation ; prices will rise 
 in consequence of the increase in circulation, 
 and accordingly attract commodities from other 
 markets, while the exports, having risen also, will 
 be less easy of sale abroad. Or, over-importation 
 takes place in the first instance, and Governments, 
 in order to remedy artificially and apparently what 
 can only actually be remedied by the cessation of 
 the real primary cause, commit the fatal error of in- 
 creasing the circulation by an issue of paper money. 
 They think thus to increase the means of paying the 
 debts which are being incurred ; but the only effect 
 is, still further to increase the evil ; for importation, 
 instead of being checked, is fostered by such a plan.
 
 74 FOREIGN EXCHANGES. 
 
 When, during a period of apprehension caused by a 
 large efflux of gold from England to America, views 
 were expressed in Manchester and Liverpool, that 
 a much larger issue of bank-notes ought to be 
 permitted, this opinion tended manifestly to a 
 depreciation of our currency. But as the con- 
 sequence of the depreciation of the currency in any 
 country is to offer inducement for further impor- 
 tation, by creating an appearance of high prices, 
 and at the same time to increase the difficulty of 
 paying for such importations, how is the final 
 balance to be paid ? The efflux of specie shows 
 that the balance of trade is against that country 
 for the time ; the equilibrium must be restored, 
 when the specie is exhausted, by slackening im- 
 portation and consumption. 
 
 We were led to these somewhat premature reflec- 
 tions regarding the result of an over-issue of paper 
 money and over-importation, by the consideration 
 of the position of such debtors to foreign countries 
 as were prohibited, either by the actual absence of 
 bullion or by legal enactments, from making specie 
 remittances, and were therefore entirely at the 
 mercy of such as had drafts on other countries to 
 sell — their only resource being, in case they were 
 met by prices too exorbitant, to buy produce and
 
 FOEEIQN EXCHANOES. 75 
 
 send it themselves. The fluctuations in the ex- 
 changes in these cases will depend entirely on 
 supply and demand ; and, if the demand for bills 
 exceeds the supply, there is theoretically no limit 
 whatever to the price of bills. 
 
 It may, however, be asked what will be the 
 general range of the exchanges in such a case, if 
 the importations and exportations are, for a time, 
 in a state of equilibrium ? What would be the 
 natural value in sterling money at such a time, of 
 a bill on St. Petersburg, payable in roubles ? The 
 natural value at such a time seems to be, not the 
 nominal par of exchange, not the value of the 
 rouble when it was convertible and was in reality a 
 silver coin, but this value minus the depreciation 
 which the rouble has suffered in Russia itself. If 
 at the time when the currency in Eussia, owing to 
 the enormous amount of paper money afloat and 
 the insufficient stock of bullion to meet it, was 
 actually — though perhaps unconsciously to the 
 Russians themselves — depreciated 5 per cent., 
 then wtj apprehend the natural value of the rouble 
 in sterling money would have been at such a time 
 6 per cent, below the nominal par of exchange ; 
 but it cannot be too often repeated that no calcu- 
 lation can be founded upon this proposition, as
 
 76 rOREION EXOHANQES. 
 
 practically, owing to the system of credit and 
 deferred payments, there is never an equality 
 between exportations and importations ; and an 
 increasing balance of debts lowers more and more, 
 at least in reference to the Foreign Exchanges, the 
 value of what, in this case, we have called the 
 rouble. 
 
 Such seem to be the general principles which 
 regulate the fluctuations of the exchanges in those 
 cases where bills are sold payable in a depreciated 
 currency. The treatment of the subject would not 
 be complete without considering the case as 
 between silver and gold. When a bill on Hamburg, 
 payable in silver, is bought in London for a certain 
 price, payable in sovereigns, what will determine 
 the value ? 
 
 We shall arrive at this value by a similar process 
 of reasoning as determined the previous case. 
 Either gold or silver will be at what may be called 
 the par value between the two, or, as is more 
 generally the fact, the one will be at a premium as 
 compared with the other. With the exception of 
 France, which with its double standard, is subject 
 to somewhat different influences, gold is simply 
 merchandize in such countries as have a silver 
 currency, and silver is merchandize in such
 
 FOREIGN EXCHANQES. 77 
 
 countries as have a gold standard ; and according 
 to the price of the merchandize at a given moment, 
 so will the exchanges fluctuate. When a bill on 
 Hamburg is to be sold in London, all the previous 
 elements of value will have to be taken into con- 
 sideration — the rate of interest in the two countries, 
 the state of credit, relative indebtedness, and so 
 forth ; but the value of silver in England will enter 
 largely into consideration, or in the opposite case, 
 the value of gold in Hamburg. When there is a 
 great demand for silver in England, as is the case 
 when large shipments are to be made to the East, 
 there will be a great demand for bills upon Ham- 
 burg ; for one means of procuring silver will be to 
 buy up such bills as entitle the purchaser to a 
 certain amount of silver in Hamburg, and to send 
 these bills for encashment, with instructions that 
 the silver thus encashed is to be actually shipped 
 to England. Thus, if silver is at a premium in 
 England, those who have claims on Hamburg are 
 able to exact this premium from the purchaser of 
 their claims by raising the price of their bills ; 
 that is to say, the buyer will have to pay more 
 sterling money for the same amount of ** marks 
 banco," or, what comes to the same thing, he will 
 receive less marks for his pound sterling. If,
 
 I» FOREIGN BXCnANGES. 
 
 when silver is not afc a premium, he receives 
 thirteen marks and a quarter for his sovereign, as 
 the price of silver rises he will receive less ; for 
 instance, only thirteen marks and an eighth; and 
 the exchange on Hamburg being expressed by the 
 number of marks banco which are to be had for a 
 pound, the exchange on Hamburg will be said to 
 have fallen ; the fact, however, being clearly that 
 biUs on Hamburg have risen in price, a less amount 
 of marks commanding the same amount of gold. 
 Conversely, supposing the case of a Hamburg 
 merchant who wishes to procure gold for any 
 purpose whatever — let us say for the purpose of 
 sending it to America to buy cotton therewith, — 
 bills on London will serve his purpose, as they 
 entitle him to an amount of that metal which he 
 requires ; and if there is competition for such bills, 
 owing to a general demand for gold for the object 
 indicated, those who have bills upon London will 
 be able to exact a premium for them, and in this 
 case more marks banco will be demanded for every 
 pound which is placed in London at the disposal 
 of the purchaser of the bills; accordingly, the 
 Hamburg exchange will rise, and thirteen marks 
 and a half may be given for the pound. The hmit 
 of the fluctuation is, however, easily discernible,
 
 FOREIGN EXCUANQES. 79 
 
 and will be found to correspond exactly with that 
 which was discovered in the case of two countries, 
 one of which had a metallic currency and the 
 other a depreciated currency, with a premium per- 
 missible on gold. The limit will be the extent of 
 premium obtainable. If the holders of bills on 
 London, in the case last put, exact too many 
 marks, those who are anxious to purchase gold will 
 find their advantage in sending the silver itself 
 over to England, and selling it there for gold ; or 
 if the English merchants, who desire to ship silver 
 to the East, find that the price demanded by such 
 as have bills on Hamburg to sell, is out of pro- 
 portion to the existing premium on silver, they 
 will either pay that premium for such silver as 
 may be procurable elsewnere, or they will send 
 gold to Hamburg, sell it there at the discount at 
 which gold will stand in Hamburg, under the cir- 
 cumstances, and have the proceeds invested in 
 silver and shipped over to them. The assumption 
 necessary for the argument is, that a sale of gold 
 is always possible in Hamburg, and a sale of 
 silver possible in England ; the price may, in 
 either case, sometimes be exceedingly low, and the 
 premium on the other metal accordingly be a 
 heavy charge to the purchaser; but the sale may
 
 80 PORBIQN EXOHANQES. 
 
 generally be assumed to be possible, and thu8 
 defines the limits of the fluctuations in the rates 
 of exchange. 
 
 This result has, in the case before us, been 
 attained by the consideration of transactions which 
 arose from the fact of certain merchants being 
 obliged to possess themselves of that one of the 
 two precious metals which did not constitute the 
 currency of their own country, and endeavour- 
 ing to obtain it by the purchase of bills on 
 such countries where it formed the standard. The 
 truth of the proposition is, however, quite as self- 
 evident if we confine ourselves, as before, to the 
 case of debtors and creditors. An English mer- 
 chant owes a certain amount of Hamburg money ; 
 that is to say, an amount which he is bound 
 to pay in silver. Silver, let us suppose, is, when 
 his debt becomes dae, considerably dearer than 
 usual in England. The amount of the difi'erence 
 he will be compelled to pay either by purchasing 
 silver in the English market at the enhanced 
 price and shipping it to Hamburg, or by buying 
 a bill on Hamburg, payable in marks, at an un- 
 favourable exchange. The price of silver having 
 nsen, the price of bills payable in silver rises 
 also, and the purchaser will receive fewer marks
 
 FOEEIGN EXCHANQBS. 81 
 
 for his pound ; but if the seller of the bill were to 
 ask a greater difference of price than would be 
 warranted by the rise of silver, those who have 
 payments in silver to make will prefer to pay the 
 premium in the open market for the article itself. 
 Thus the limit of the fluctuations in the rates of 
 exchange which may result from the difference in 
 value between gold and silver is clearly and easily 
 established. 
 
 The case of transactions between two countries 
 like England and France, of which one has gold 
 currency, and the other a currency of gold and 
 silver combined, offers no difficulty whatever. The 
 fluctuations in the prices of bills of one upon the 
 other cannot, except under a most rare and almost 
 impossible combination of circumstances, exceed 
 the limits of such variations as can exist between 
 two countries having the same currency : they 
 will be determined by that which is common to 
 both of them ; that is to say, by gold. How, 
 indeed, could a bill on Paris, payable on demand, 
 be sold at a higher value than that of the gold 
 which it represents, plus the expenses and com- 
 missions incurred in sending that gold to Paris ? 
 For, if a higher price were asked, it would be 
 cheaper to send gold itself. 
 
 a
 
 82 FOREION EXCHANQES. 
 
 It is clear that, as soon as a premium is paid in 
 any comitry on gold or silver, this premium will 
 increase the value of bills which are payable in 
 that particular metal — but only if they are payable 
 in no other. If a bill on Paris is payable 
 either in napoleons or in silver five-franc pieces, 
 it will be sure to be paid in that coin which is 
 least in demand, in that which is at a discount as 
 compared with the other. Thus, the purchaser of 
 such a bin will not allow the price to be enhanced 
 by the existence of a premium on one portion of 
 the currency. The fluctuations in the rates of 
 exchange will be as strictly limited as they were 
 shown to be when the currencies of any two coun- 
 tries were practically identical. 
 
 In concluding this portion of the subject, it is 
 necessary to remark once more that no stress 
 should be laid on any of the special cases selected 
 as illustrations being correct in fact. It is rather 
 the mode in which the question should be handled 
 and the principles, which the present treatise en- 
 deavours to evolve, on which reliance should be 
 placed when any particular instance is to be ana- 
 lyzed and examined. For this purpose the dif- 
 ferent elements of value which enter into con- 
 sideration in the sale of foreign bills, have been
 
 FOEEIQN EXCHANGES. 83 
 
 dwelt npon at some length ; but the proportion 
 in which they stand to each other in any par- 
 ticular case, and the details which must be studied 
 in considering how far the currency of one country 
 coincides with or varies from the currency of an- 
 other, do not fall within the scope of this inquiry.
 
 CHAPTER V. 
 
 REMARKS ON THE INTERPRETATION OF THE FOREIGN 
 EXCHANGES. 
 
 In the preceding chapters we have been occu- 
 pied in tracing the origin and development of the 
 transactions which result in the Foreign Ex- 
 changes, from their simplest to their more com- 
 phcated forms, with the special object of discover- 
 ing the various causes which combine to produce 
 constant and important fluctuations in the prices 
 of foreign bills. Having gained a theoretical in- 
 sight into the principles of the system, we are 
 now in a position to approach the more practical 
 and interesting portion of the subject, and to 
 examine it in its direct bearing upon commerce 
 in general. Being acquainted with the influences 
 which are proved to determine the fluctuations in 
 question, we are enabled, by a reverse process, to 
 argue back from them to the existence of their 
 determining causes, and to consider the Foreign 
 Exchanges in their peculiarly valuable character
 
 FOREIGN EXCllANQES. 85 
 
 as an tmerring mercantile and monetary baro- 
 meter. But they are more than this. Not only 
 do they offer to the trading community the means 
 of ascertaining the state of the commercial atmo- 
 sphere — indicating when the air is charged with a 
 storm, or when fair weather is Hkely to set in, — 
 they so clearly point to the disturbing currents, 
 that their study and due comprehension suggest 
 the course by which danger can be avoided, and 
 moderate the precipitate action of panic. 
 
 The general feehng with regard to the function 
 of the exchanges, as giving evidence of the mer- 
 cantile (or rather monetary) situation of any 
 country, is indicated by the usual phrase of a 
 " favourable " or " unfavourable state of the ex- 
 changes," a phrase which occurs so frequently in 
 all banking discussions that it cannot be passed 
 over without remark. Of its inaccuracy, in so 
 far as it enters into the domain of poHtical eco- 
 nomy and applies to the general prosperity of 
 the country, it is not necessary to speak. It may 
 originally have implied the erroneous theory that 
 the object of commerce is to attract gold, and that 
 that country towards which the tide of buUion 
 Bets with the greatest force is ipso facto the most 
 prosperous; that, accordingly, a position of the
 
 86 FOBEIQN EXCHANGES. 
 
 exchanges which points to an influx of specie is 
 favourable, whereas, when bills become so scarce 
 that the precious metals must be exported, the 
 situation is eminently unfavourable. But the 
 phrase is accurate enough from the monetary or 
 banking point of view. Under the present state 
 of legislation all engagements involve payments 
 in gold or in paper convertible into gold, the 
 merchants engaging to pay in gold or bank-notes, 
 at their option, and the Bank of England being 
 bound by law, without option, to pay those bank- 
 notes in gold. Consequently it is of the highest 
 importance to the whole banking and mercantile 
 community, with a view to the certain fulfilment 
 of such engagements, that the aggregate stock of 
 bullion in the country should suffice to meet all 
 wants. Whether the law is wise in itself is 
 beside the argument, so long as the currency 
 laws continue as they are. Under present cir- 
 cumstances a merchant or banker will consider 
 that to be an unfavourable state of things which 
 points to a dangerous diminution of the stock of 
 gold, and he will consider that a favourable turn 
 of the exchanges which tends in the opposite 
 direction. When the stock of gold is evidently 
 adequate, it is even in a banking point of view
 
 FOEEIQN EXCHANGES. 87 
 
 erroneons to consider a further accnmulation 
 advantageous or desirable. And just fault may 
 be found with the use of the term " favourable 
 exchange " beyond the Hmits of the sufficiency 
 of the bullion for the purposes of the currency ; 
 for the temporary excess of gold at one point is 
 of no advantage whatever, but rather the reverse. 
 The limit of the phrase should be strictly kept 
 in view as legitimately applied to express the 
 anxiety or confidence of the banking world as to 
 the means of meeting their legal obhgations. 
 And accordingly there is no real discrepancy as 
 to the class of facts which, in practice, the words 
 " favourable and unfavourable " exchanges denote. 
 PoUtical economists, from their point of view, are 
 correct in their statement that, as regards the 
 country at large and the interchange of commo- 
 dities, exports and imports are always balanced, 
 and that both the words "unfavourable balance 
 of trade " and " unfavourable exchanges " involve 
 a fallacy. But merchants and bankers are influ- 
 enced by the feeling, that at any given moment 
 they may be under greater liabilities for imports 
 than they can temporarily meet, owing to the 
 system of credit which disturbs the coincidence 
 of payments for exports and imports, though their
 
 88 FORBIQN EXCHANGES. 
 
 valae may actually be equal ; and further, by the 
 anxiety as to the possibility of meeting these 
 habilities in that specific mode of payment to 
 which they are pledged, namely, in gold or con- 
 vertible notes. A proper understanding on these 
 points is absolutely necessary, as otherwise differ- 
 ences of opinion might be supposed to exist, 
 while the difference does not lie in the opinion 
 or the theory, but simply in the application of 
 a technical phrase. When, therefore, in banking 
 treatises, it is said that the exchanges are favour- 
 able to any particular country, it should be un- 
 derstood that the intention is simply to state the 
 fact that bills of that country upon foreign cities 
 are difficult of sale, whilst bills drawn upon it 
 from abroad are at a premium, indicating an 
 eventual influx of specie. So, when it is said 
 that the exchanges are unfavourable, a situation 
 is described in which foreign bills are in great de- 
 mand, and when, consequently, their value seems 
 likely to be so enhanced as to render the export of 
 bullion an unavoidable alternative. 
 
 It is necessary to call attention to another point 
 before we proceed to consider the interpretation of 
 fluctuating rates of exchange. It must be borne 
 in mind that it is the price of short bills, not of
 
 FOEEIQN EXCHANGES. 89 
 
 those which have some time to run, which deter- 
 mines the course of bullion shipments. Most of 
 the primary elements of value affect long and 
 short bills equally ; but the rate of interest and 
 the question of credit exercise an additional in- 
 fluence upon the former, and so modify the fluc- 
 tuations in their price as to render them unreliable 
 as indications of the currents of gold. If there is 
 a demand for bills upon any particular town, the 
 price of all such bills, whether short or long, will 
 rise. That is the general tendency. If, however, 
 in the city in question, the rate of interest were at 
 a very high point, it is evident that the price of 
 long bills would not rise in the same proportion 
 as that of short ; for the purchaser must bear the 
 discount, which has to be deducted from the long 
 bill before it can become equally available with 
 the short bill ; and for any increase in this dis- 
 count he requires to be compensated by a so much 
 cheaper price. He must be compensated in the 
 same manner for the risk which he will run till 
 the bill be ultimately paid. 
 
 As an index of the general position of trade, 
 the value of short bills is the more important ; 
 whereas the rates given for long paper, as com- 
 pared with those for bills on demand, point mainly
 
 90 POREIQN EXCHANGES. 
 
 to the rate of interest, and partially to the state of 
 credit. 
 
 Bearing in mind the existence of this distinction 
 in those cases where (as, for instance, between 
 London and Paris) the short exchange is the most 
 prominent, and not straining it too much where, 
 owing to various circumstances, long bills only are 
 to be obtained to any amount, as is the case in 
 St. Petersburg, we may now proceed to illustrate 
 the method to be followed when it becomes desir- 
 able to interpret the indications afforded at any 
 given moment by the Foreign Exchanges. It 
 results, from the whole tenor of the previous 
 arguments, that it is, above all, essential to re- 
 member that fluctuations can arise not only from 
 one cause but many, and that till proof is given 
 that actually no other influence is at work than the 
 one which may be selected as possible and plausible, 
 no trustworthy opinion can be formed. It is an 
 error often committed, when scientific subjects are 
 superficially or popularly treated, to consider it 
 enough to point out one cause as sufficiently ac- 
 counting for any phenomena, regardless of the 
 fact that it is far more important to prove that 
 there are no other causes which could have led to 
 the same results. But on no occasion does this
 
 FOREIGN EXCHANGES. 91 
 
 fallacy more frequently blind the judgment than 
 in questions of mercantile finance, possibly because 
 the facts with which they have to deal are so com- 
 plex and entangled that any clear and intelligible 
 solution of the difficulty is held to be sufficiently 
 satisfactory, without regard to the necessity of 
 applying further tests. Half of the benefit which 
 might be derived by a study of the exchanges is 
 lost in consequence of the tendency to be satisfied 
 with the first plausible explanation. Egregious 
 errors might be committed if an argument were 
 founded on the state of the exchanges between 
 Hamburg and London which relied on the balance 
 of trade alone, without considering the difi'erence 
 of value which would result from a premium on 
 silver, the currencies of the two countries being 
 dissimilar. So it is not sufficient to consider the 
 Russian exchanges simply as indicating the 
 enormous indebtedness to foreign creditors, to the 
 exclusion of the influence of the depreciated 
 currency. 
 
 A notable instance of the necessity of never 
 losing sight of any of the various elements of value 
 which enter into the prices paid for bills of ex- 
 change, and also a valuable illustration of the 
 question of interpretation generally, was afforded
 
 92 FOREIGN EXCHANGES. 
 
 by the extraordinary course of the American 
 exchanges at the beginning of 1861. A large 
 efflux from Europe to the United States took 
 place, and various theories were started as to its 
 cause. But strangely enough, months elapsed 
 before it was clearly acknowledged and understood 
 by the majority of the public that this efflux of bul- 
 lion was mainly the consequence of indebtedness. 
 Another explanation, grounded on the growing 
 troubles in the States (which were leading to a kind 
 of panic), and on the presumed speculations of 
 English capitalists, had been put forward as suffi- 
 ciently explaining the prevailing drain ; whereas 
 the test of indebtedness should have been applied 
 first of all. The specie shipments were hurried and 
 intensified by pecuhar modifications of that in- 
 debtedness ; for instance, by the Americans draw- 
 ing sooner than usual against their claims on 
 England, by their suspending their orders for 
 English manufactures, and by the forced and un- 
 natural increase of exportation even of articles not 
 wanted in Europe. But the primary cause of the 
 fall of the exchanges which led to the flow of 
 bullion to America lay in the immense excess of 
 their exports of wheat and flour, following too, on 
 a cotton crop of unprecedented extent. Independ-
 
 rOKEIQN EXCHANQES. 93 
 
 ently of the political crisis, Europe would have had 
 10 pay a balance to America in gold ; and this wa^ 
 surely the cardinal point to keep in view, in con- 
 sidering whether the export of bulhon would con- 
 tinue or cease. Such authorities as, at the com- 
 mencement of the efflux of bullion, insisted on 
 considering it as a simple speculation, and pointed 
 to the folly of the merchants who sent it out, pro- 
 phesying that probably it would return to them in 
 the same ships, committed the error of looking 
 principally to the stock of gold in New York, to the 
 speculations in American securities, and to the 
 operations of capitahsts, rather than to the one 
 broad fact, which was clearly discernible on closer 
 inspection, that England and Europe were simply 
 paying for their importations from America. 
 
 Stress was continually laid upon the fact that the 
 stock of gold was accumulating in New York and 
 was decreasing here, and it was argued that conse- 
 quently the gold must return. It is plain, however, 
 that for this result to take place, one of the follow- 
 ing events would have to occur ; either the bullion 
 would be returned because the Americans owed 
 money to us, and sent it to pay their debts ; or it 
 would be remitted against fresh orders for English 
 manufactures or for American stocks held in English
 
 94 FOREIGN EXCHANQES. 
 
 bauds ; or it would be sent here as a loan to 
 English capitalists, in the expectation that money 
 would, as was certainly probable, become dearer 
 here than in America. Those who maintained that 
 bullion would return, were bound to prove that one 
 of these operations would take place. The first was 
 a question of fact: Did the Americans owe much 
 to Europe ? The second was a question of pro- 
 bability : Was it likely that the Americans would 
 regain sufficient confidence to enter upon new 
 mercantile transactions ? The third was also a 
 question on which opinions might be divided: 
 "Was it probable, or the reverse, that in a time of 
 great national emergency the New York bankers 
 would remit their capital for employment to Europe, 
 because gold accumulated rapidly in their vaults ? 
 
 These were the questions upon the solution of 
 which the slow or rapid return of bullion depended, 
 and they might fairly have been made the subject 
 of discussion. But to argue that, because in 1857 
 the bullion which was exported to America was 
 immediately returned, the same result would be 
 witnessed in 1861, was to overlook the fundamental 
 and primary element of value in the Foreign Ex- 
 changes — the relative indebtedness. In 1857 the 
 Americans had incurred enormous debts to Europe;
 
 FOREIGN EXCHANQES. 96 
 
 in 1861 Europe had incurred enormous debts to 
 them. Here was the key to the whole position. 
 On the former occasion the export of specie to the 
 States was unnatural and artificial. It was lending 
 your debtor more, in the place of exacting payment. 
 On the latter occasion the export of buUion was 
 natural and inevitable, because it was made to dis- 
 charge a debt ; but the payment was somewhat 
 hurried, and the usual rules were a little set aside, 
 because the creditor (the American), finding himself 
 in the midst of a most dangerous pohtical crisis, 
 became suddenly urgent to receive all that was 
 due to him, and to forestall, rather than to delay, 
 the settlement of his claim. He drew his bills 
 and forced them on the market with the eagerness 
 of panic. Few buyers were to be found requiring 
 them as remittances in discharge of European 
 liabilities ; for, trade had been curtailed, no new 
 orders had been given, and, before the crisis com- 
 menced, the unusual prosperity of the Western 
 States, in consequence of vast crops of grain, had 
 made it possible for remittances against previous 
 transactions to be sent earUer than usual. Thus, 
 the bills were bought up in New York, not by such 
 as had liabilities to discharge, but by such as were 
 willing to advance the value of the bills till their
 
 96 FOREIGN KX0HAN0E8. 
 
 equivalent in gold could be procured from England. 
 This was the office of the New York banks, and by 
 far the greater quantity of the bullion shipments 
 consisted in what may be called the anticipated 
 proceeds of these bills. Without the influence of 
 panic, a high rate of interest on this side might 
 have delayed the export of the proceeds, at least 
 till the maturity of the bills. If these proceeds 
 had remained longer on this side, they would 
 either have constituted a loan to the banker to 
 whom they were remitted, or they would have been 
 invested in some kind of merchandize, and re- 
 turned in that form rather than in gold. What 
 other alternative was possible ? 
 
 It may be asked, Why, if the balance of trade, in 
 its simplest sense, was, to use the popular phrase, 
 in favour of America — that is to say, if they owed 
 less than they had to claim, — why, then, was there 
 any ground for panic in New York ? The answer is 
 clearly that, from a monetary point of view, not 
 only was there no reason whatever to induce a 
 panic, but, on the contrary, there were evident 
 grounds for confidence. Sellers of bills might fore- 
 see a difficulty in disposing of them above the 
 specie point, and consequently np to that point 
 press their bills upon the market ; but the only
 
 FOEBIQN EXCHANGES. 97 
 
 apprehension that could be felt was, as to whether 
 they would be able to obtain facilities till the time 
 when the equivalent of their bills, if remitted to 
 Europe to be converted into specie, would return 
 into their possession. The aggregate of a com- 
 munity cannot be alarmed at the position of its 
 money-market and of the exchanges, when the 
 whole world is indebted to itself, at least so long as 
 it has every confidence in the solvency of its debtors. 
 The panic, if it may be called so, which occurred in 
 America during that winter, was attributable solely 
 to political causes, which rendered all who had bills 
 for sale eager to underbid each other for the sake 
 of immediate payment, and to accept a price far 
 below what they would have realized if they had 
 had their bills exchanged into gold in England. It 
 was this urgency to secure themselves money at 
 any price which induced the New York merchants 
 to export every kind of produce, which normally, 
 owing to the increase of the currency, would have 
 risen in value in the States, to European markets, 
 where prices were sure to fall owing to the de- 
 creasing currency. A panic usually occurs in the 
 money-market of any country when the exchanges 
 become unfavourable to it ; but it is a rare occur- 
 rence to see alarm felt at an unusually favourable 
 situation of the exchanges.
 
 98 FOREIGN EXCHANQKS. 
 
 The ambiguity of the term " favourable ex- 
 changes," unless it be taken within the limits given 
 above, that is to say, as denoting a simple mone- 
 tary fact, and not as any judgment on the prosperity 
 of trade, can be easily appreciated in this instance. 
 The exchanges, when at such a point that the 
 necessity of specie remittances from England to 
 America was clearly indicated, were, as the phrase 
 is, highly favourable to America, and the very re- 
 verse to ourselves. The American exporters of 
 grain and cotton were, however, the very class 
 who, in the first instance, suffered most from the 
 situation, in so far as the expense of the costly 
 transmission of specie, with all the losses attached 
 to it, would fall upon them. On the other hand, 
 the English debtors may be argued with some 
 plausibility not to have suffered any loss, because 
 to them it was immaterial how they paid their bills 
 at maturity — whether by handing the amount over 
 to their neighbours, to whom the Americans would, 
 in normal times, have remitted bills upon them ; 
 or by shipping it in gold by order and for account 
 of their American creditors. But to a certain 
 extent there is a fallacy in this, as the charge on 
 the exporter so often falls on the consumer of the 
 produce exported. To this extent the interests of 
 the exporter become identical with those of the
 
 FOREIGN EXCHANGES. 90 
 
 foreign country. For, that which adds to the cost 
 of the article which he exports, must be borne 
 either by him or by the consumer of his produce ; 
 and it is their joint interest that no such addition 
 should be made. The cost of the transmission of 
 bullion is an addition of this nature ; and therefore 
 it is contrary to the interest of the exporter, and of 
 the country to which he exports, that such an 
 expense should have to be incurred. 
 
 Thus we come to the position, that a condition 
 of the exchanges which leads to the importation of 
 specie into any country favours the importers and 
 consumers of that country, but causes an additional 
 charge to the export trade. However, the extra 
 charge upon this export trade having ultimately, on 
 the above supposition, to be paid by foreign coun- 
 tries, it may be maintained that the state of the 
 exchanges indicated is, in a certain sense, favour- 
 able to the country in question, and unfavour- 
 able to the foreigners with whom it trades. A 
 clearer view may be gained of this position if it be 
 assumed for the moment (what is partially true) 
 that each country fetches from the other that which 
 it requires ; in other words, that the export trade 
 of a country is managed upon the order system. 
 Cotton and grain may be sent from the States, not 
 
 u 2
 
 100 FOREIGN EXCIIANQEa 
 
 for account of American sellers, but of English 
 buyers, who have given their orders. If the 
 article is bought by a foreign buyer in the place 
 of its production, it is plain that any sudden 
 extra charge upon exportation must be borne by 
 him; and thus a sudden fall in the exchanges, 
 which makes his bill upon his London house less 
 valuable, or causes the whole cost of the trans- 
 mission of bullion from England to pay for his 
 purchases to fall upon him, becomes unfavourable 
 to the country to which he belongs, and for which 
 he is buying, and not to that from which he 
 is buying. Conversely, the Americans who give 
 orders to English manufacturers are able, during 
 the same period of low exchanges, to buy up bills 
 on England which will pay for their goods, at a 
 cheaper rate than usual, and are able to save the 
 expense of the transmission of bullion, which, 
 during normal times, generally falls on a portion 
 of the American importers. As far as facility and 
 economy in paying for the products of other coun- 
 tries are concerned, a state of the exchanges which 
 renders it possible to purchase bills to pay for 
 them, cheaply and easily, may correctly be de- 
 signated as favourable. 
 
 lieturning from this digression, which was
 
 FOREiaN EXCHANGES. 101 
 
 prompted by the desire of throwing additional 
 Hght on the use of the words " favourable and 
 unfavourable exchanges," and resuming the con- 
 sideration of the general mode in which the 
 Foreign Exchanges are to be read and interpreted, 
 we shall find in the course of the American 
 Exchanges during 1862-3 further materials for 
 instructive analysis. In 1861 we saw an extra- 
 ordinary depression in the price of foreign bills in 
 New York. The situation was afterwards reversed. 
 After the lapse of a certain interval a rise of 
 extraordinary extent and rapidity occurred. How 
 was this change to be interpreted? To what 
 phenomena did it point ? 
 
 No better illustration for the examination of the 
 different influences which affect Foreign Exchanges 
 could be found. Here we have a case where the 
 effects were evidently greater than could be caused 
 solely by a change in that which we have called 
 the primary element of value — international in- 
 debtedness ; for the rise went far beyond the 
 normal specie limit. The sudden transmission of 
 capital from America to Europe, and the con- 
 tinuance of a demand for importations from abroad, 
 while the exportation of cotton was stopped by the 
 blockade of the Southern ports, might account for
 
 102 FOREIGN EXCHANGES. 
 
 the phenomenon to a certain extent, but not 
 beyond what we have so often called the specie 
 limit. We are driven to look for another element 
 of value, for one more unlimited in its operation ; 
 and that will at once be found in the depreciation 
 of the currenc}'', of which alone, among the various 
 elements of value determining the price of foreign 
 bills, it could be said, that it rendered fluctuations 
 illimitable. The passing of an act suspending 
 specie payments in the United States, and autho- 
 rising the issue of inconvertible Government paper 
 money, removed the normal specie limit, and the 
 extent to which the prices of foreign bills could 
 rise, at once became an open question. It was to 
 be anticipated that the effects of a depreciated 
 currency would be developed to their full extent, 
 and it became possible for the Foreign Exchanges 
 to rise, not a few per cents., but 50 or 100 or even 
 200 per cent. In the Southern States the exchange 
 on London actually rose to 400 per cent. 
 
 Experience was at fault as to the probable 
 practical limits, and theory could only establish, as 
 a result certain to ensue, that with every issue of 
 inconvertible paper money a progressive rise, pro- 
 portionate to the depreciation of the currency, 
 would unavoidably take place. Strangely enough,
 
 FOREIGN EXCHANGES. 103 
 
 in the Northern States the rise was actually de- 
 layed far beyond the time when it was expected to 
 occur, and the Americans began to believe that it 
 was possible to print paper money without losing 
 gold, or depreciating the remainder of the currency. 
 The causes of this delay well deserve exa- 
 mination, though, from the complexity of the 
 facts, it is difiicult to arrive at any certain results. 
 Two causes have been suggested, which are 
 sufficiently plausible : the one that, during the 
 first months of the issue of the Government paper 
 money, the private banks called in their notes to a 
 very great extent, and that thus the aggregate 
 currency was not increased as much as might have 
 been expected ; the other, that the area over which 
 the American currency extends is so vast that the 
 effects of an over-issue of paper would be less 
 rapidly felt.* It was said, too, that in the West a 
 considerable dearth of currency had previously 
 existed, and that, cousequently, there was a gap to 
 be filled up. However this might be, the satisfac- 
 tion which was felt by the Americans at the issue 
 
 • In a criticism on the second edition of this work, two 
 further causes have been suggested which no doul)t were also 
 in operation : the general contraction of credit throughout the 
 States, and the enormous war expenditure ; both of which cir- 
 eumstances would unquestionably lead to the absorption of a 
 considerable amount of currency.
 
 104 FOREIGN EXCHANGES. 
 
 of paper money without a heavy fall in its value 
 was of short duration, and the theories of political 
 economy were abundantly justified in the end. An 
 unexampled rise in the American exchanges took 
 place, the exchange advancing by degrees in little 
 more than a year from 110 to 180. In a former 
 chapter, the endeavour was made to gauge, as far 
 as possible, the probable extent of fluctuations in 
 the exchanges arising from a depreciated currency, 
 and it was shown that where a premium in gold 
 was not prohibited by law, the prices of foreign 
 bills would rise in proportion to the extent to which 
 prices of all purchasable articles, bullion included, 
 are raised by such depreciation ; in other words, 
 in proportion to the discount on the paper money, 
 or the premium on gold. Beyond that proportion, 
 the fact of the depreciation of the currency would 
 scarcely cause them to deviate. Accordingly, on 
 examining the price of foreign bills in New York 
 and the price of gold, we shall see that they 
 constantly rose and fell together. Before the 
 depreciation of the currency, the actual par of ex- 
 change for bills on England was, as will presently 
 be explained, expressed in the form of 109. When 
 gold rose, the foreign bills rose as much beyond 
 this point of 109, as gold rose above par, leaving
 
 fOREIQN EXCHANGES. 105 
 
 che same margin (and the same variations within 
 that margin), between the premium on gold and 
 the price of sterHng bills, as that which, in normal 
 times, existed between the nominal par of exchange 
 and the actual mean premium on English bills : 
 but this margin, which was 9 per cent, before, 
 having itseK to be calculated in depreciated cur- 
 rency, became apparently — but only apparently — 
 greater. 
 
 In order that this may be properly understood, 
 it may be necessary to state the mode in which the 
 value of bills on England is calculated in America. 
 The basis of the calculation is that forty dollars 
 are equal to i;'9, so that the dollar would be equal 
 to 4s. 6d. But as this assumed par of exchange 
 does not coincide with the actual value of the gold 
 in the dollar and the sovereign, the ^9 being worth 
 9 per cent, more than the forty dollars, gold for 
 gold,* (by which the value of the dollar is reduced 
 to about 4s. 1^^.,) the calculation has to be rectified, 
 when bills on England are bought, by 9 dollars 
 being added to every 100 dollars of the purchase- 
 money. It was a fact that, as long as a gold cur- 
 
 * The exact diflference between the gold contained in 9 
 sovereigns and in 40 dollars is neai-er 9 J than 9 per cent., but 
 the quotation given in the Uixi is accuruto enough for the 
 general argument.
 
 106 FOREIGN EXC1IANGE8. 
 
 rency existed on both sides of the Atlantic, the 
 actual par of exchange between New York and 
 Loudon was about 9 per cent, nominal premium, 
 or as it was technically phrased, bills on London 
 stood, when the exchanges were in a state of 
 equilibrium, at 109. This difference (or corrective 
 premium) of 9 per cent, in gold currency would be 
 modified, either upwards or downwards, by the 
 various other influences to which the Foreign Ex- 
 changes have been shown to be subject, by the 
 state of indebtedness, the rate of interest, in fact, 
 by supply and demand ; but it constituted the mean 
 specie point. After the depreciation of the cur- 
 rency, when prices of bills, as of other articles, 
 were no longer expressed in dollars having a certain 
 value in gold, but in dollars of depreciated value, 
 it was to be expected tha^ the same actual difference 
 of 9 per cent, in gold would still enter into the 
 price of foreign biUs, but that it would be expressed 
 in its equivalent of paper dollars ; in other words, 
 that these 9 per cent, would also be increased in 
 exact proportion to the premium on gold. Thus 
 we arrive at the following result : — if, before the 
 issue of paper money, the purchaser of a bill on 
 England paid 100 dollars and 9 dollars for it, he 
 would, if the premuim on gold had risen to 50 per
 
 FOREIGN EXOHANQES. 107 
 
 cent., in the first place pay 150 dollars instead of 
 the 100, and in the second 13^ dollars instead of 
 nine dollars, or half as much again as what we 
 may call the correcting premium. Thus, if the 
 price of bills, when gold stood at 150, was 163^, 
 this price would correspond to the price of 109 at 
 the time when there was no premium on gold. 
 The price might rise to 165 or fall to 161, according 
 as there was supply or demand, but the mean point 
 would be ascertained by the process which has 
 been described. 
 
 Disturbing causes were introduced by legislative 
 enactments which interfered with the free com- 
 merce in gold, and consequently tended to vary 
 occasionally the relative value between bills and 
 gold, by encumbering all operations in the latter 
 with certain charges and inconveniences. Taxes 
 on transactions in gold would have the same force 
 as increased charges on specie shipments, and 
 would thus have a tendency to widen the margin 
 between the premium on gold and the premium on 
 bills. 
 
 And, besides the taxes imposed on operations in 
 gold, there were other circumstances which induced 
 those who had occasion to buy either foreign bills 
 or gold, to give a preference to the former, so that a
 
 108 FORBIQN KXCHANQES. 
 
 somewhat artificial demand arose. For instance, 
 fears were continually entertained that the export 
 of gold might at any time be prohibited, either 
 directly or indirectly; and thus, naturally, the 
 preference was given to that species of remittance 
 of which the export could not be forbidden. Or 
 again, if gold or bills were to be purchased in order 
 to be hoarded or held some little time before being 
 used as remittances, interest would be lost upon 
 gold but earned upon bills ; for when these came 
 to be sold, they would be worth so much more, as 
 being nearer their maturity. Similarly, there were 
 charges and risks, needless to specify, incident 
 upon the holding of gold, which were not incurred 
 in the holding of bills, and thus many considera- 
 tions (but especially the constant interference of 
 the Government) would tend to widen the margin 
 between gold and bills, and create violent pertur- 
 bations at particular moments which could not be 
 accounted for simply by the depreciation of the 
 currency. 
 
 The extraordinary state of the Foreign Ex- 
 changes in America during the period with which 
 we have been dealing, is peculiarly difficult to 
 explain in a simple form, but is all the more 
 instructive because it offers the opportunity ol
 
 FOREIGN EXOHANQEa. 109 
 
 viewing the different elements of value in simulta- 
 neous and sometimes conflicting operation. The 
 depreciation of the currency by the issue of 
 *' greenbacks " exercised, it is true, so overwhelm- 
 ing an influence, as to have rendered difficult the 
 discovery of the operation of other elements of 
 value. These, however, so long as any foreign 
 trade subsists, can never be entirely absent. Ac- 
 cording as the Americans have remitted their funds 
 to this country, in order to secure a portion of 
 their fortune against the contingency of progressive 
 depreciation, so has there been a demand for bills 
 upon England. Immense sums are said to have 
 been remitted to English bankers by American 
 correspondents, because this was clearly the safest 
 course by which to secure their fortunes against 
 loss and at the same time to earn a moderate 
 interest. In America every species of banking in- 
 vestments was subject to daily depreciation, and 
 such fortunes as consisted in securities payable in 
 dollars, were rapidly melting away. Investments 
 in gold were largely resorted to, but as we have ex- 
 plained, they were dangerous, on account of the 
 action of the Government, and unremunerative, 
 owing to the loss of interest. Remittances to fo- 
 reign countries combined the advantage of security
 
 IIO FORBION EXCHANGES. 
 
 with that of remunerative employment for capital, 
 and many milhons sterling have been sent to Europe 
 for this purpose. Some surprise has been caused by 
 the fact that the gold remittances from New York 
 have not been so great as might have been expected. 
 But a portion of the capital which thus found its 
 way to England flowed through an indirect channel. 
 It was sent from the ports of California instead of 
 from the port of New York. By the adoption of 
 this course, the great risks on the transmission of 
 gold from California to New York were avoided, 
 while the object of remittances to Europe was as 
 conveniently attained. Without these bullion re- 
 mittances the demand for bills must have been 
 even greater than it was ; for the Americans 
 required funds in England, not only for the 
 purposes which have just been indicated, but also 
 for the payment of the large quantities of military 
 stores purchased in this country, and for that 
 amount of European manufactures which, however 
 much the Americans may curtail their trade, they 
 are obliged to purchase for immediate wants. No 
 cotton bills being obtainable in New York, owing to 
 the blockade, and fewer com bills existing, owing 
 to the reduction of that trade in consequence of 
 plentiful harvests in Em-ope, no doubt the demand
 
 FOREIGN KXCHANQES. Ill 
 
 for bills (notwithstanding the Californian remit- 
 tances) has been great, and this demand has in- 
 creased the premium on sterling bills. But this 
 increase of the premium, it will be remembered, can 
 never exceed the expense, the risks, and the incon- 
 veniences, in their widest sense, on bullion remit- 
 tances. For as soon as this margin between the 
 premium on gold and the premium on bills on 
 England, exceeded the 9 per cent, to which we have 
 alluded, plus the premium on these 9 per cent, and 
 plus the expenses on shipping the bullion, — those 
 who desired to remit, would, as explained before, 
 rather ship the bullion itself ; and as the export of 
 gold had not been prohibited, a remittance in gold 
 could always be made. With many apparent dis- 
 crepancies, the upward course of the American ex- 
 changes was really governed by the few simple 
 principles which have been discussed in the earlier 
 portion of this treatise. Amidst the complexity of 
 the particular combination, the effect of the few 
 leading causes which lay at the bottom of the whole, 
 stands out clearly enough, and, it may be repeated, 
 the rise in the price of foreign bills, owing to the 
 unlimited issue of greenbacks, could be predicted 
 with the most .ibsolute certainty. 
 
 It is less easy to explain the rapid fall which
 
 J 12 FOREIGN EXCHANGES. 
 
 followed on the battle of Gettysburg and the open- 
 inor np of the Mississippi. But the diflicultj^ hes 
 rather in explaining the fall in the premium on gold 
 than the fall in the prices of foreign bills, the latter 
 being simply the consequence of the former. It is 
 true, indeed, that in a question of the interpretation 
 of the Foreign Exchanges, the premium on gold is 
 only a collateral issue. But as we have followed 
 the rise in gold, it may be interesting briefly to 
 examine its fall. If a redundancy of currency 
 created the premium, it would seem natural that 
 only a diminution of the over-issue should cause 
 a corresponding fall. The conversion of some 
 portion of greenbacks into stock was a measure 
 operating in this direction, but it was accom- 
 panied by fresh issues, which neutralized its effect. 
 Besides, this conversion was in operation before 
 the fall, even at the time when the premium was 
 rising, and therefore cannot have contributed to 
 the sudden fall in any great degree. The result 
 would rather be due to the behef suddenly springing 
 up that the quantity of paper money would really 
 be reduced, either by a further more effectual con- 
 version, or by a redemption in bullion at a shorter 
 date than appeared possible durmg the darker 
 period of Northern prospects, it is scarcely pos-
 
 FORBIGir BXCHANQES. 118 
 
 sible to judge whether the fall in gold was justified 
 or not, without venturing on an opinion as to the 
 ability or the intention of the Washington Govern- 
 ment to reduce that currency which it has for its 
 own purposes created ; but the belief on the part of 
 the American community that this intention ana 
 abihty did exist, no doubt exercised some portion 
 of the influence which actual measures taken by 
 the Government would have produced. This belief 
 had the further effect of inducing persons, who had 
 hoarded gold from a fear of a further depreciation of 
 the currency, (and who had even before been some- 
 what alarmed by the measures taken against this 
 very hoarding by the Government,) to sell their 
 stock of gold as fast as possible, giving up the idea 
 of a further rise. And the Government, too, is said 
 to have contributed, by somewhat artificial means 
 to a premature decline in the premium on gold, by 
 throwing large sums on the market which it had 
 been able to accumulate, as it was thought, for this 
 very purpose. If so, a reaction is highly probable. 
 An over-issue of paper money can only be coun- 
 teracted by a subsequent contraction. It may be 
 possible, perhaps, by artificial means, to discount 
 this result, but not to produce it. And thus it is 
 to be anticipated that, unless measures are taken 
 to follow up temporary expedients by permanent
 
 114 FOREIGN EXCHANGES. 
 
 improvements, the price of gold may once more 
 advance.* On the other hand, the adoption of 
 such measures is facilitated by the fact of the 
 position of the Americans being favourable in this 
 respect — that their currency is depreciated simply 
 by internal and not by external causes. Probably 
 they owe less to Europe than they have done at 
 any other previous time in late years, and they 
 have the further advantage that the large deposits 
 which they have made in Europe, give them the 
 power, at any moment they may want it, of regain- 
 ing a great portion of the gold which they have 
 lost. As to the extent to which the revival of the 
 cotton trade may affect the exchanges, and compel 
 Europe to send buUion to America, many circum- 
 stances will have to be considered. It will be a 
 question of time, rather than of indebtedness. 
 The Americans will be in need of large quantities 
 of goods fi'om this side, and the question will be, 
 whether they can supply us faster with cotton than 
 we can supply them with goods. The probabihty is, 
 that we shall be more urgent for cotton than they 
 for manufactures ; but it is less certain that the 
 quantity of cotton required will be immediately 
 
 * The correctness of this view was practically demonstrated 
 even before the second edition was issued. An advance in gold 
 again took place, which has since, with many fluctuations, made 
 further progress. — December, 1863.
 
 FOREIQN EXCHANaES. 115 
 
 available, whereas the export of our manufactures 
 on its former scale can, if necessary, at once be 
 renewed. However, on the whole, as we may cer- 
 tainly assume that we shall immediately want the 
 cotton, and as, from the disorganization of the 
 cotton trade, credit will be less available, and cash 
 payments more imperative, the probable necessity 
 of an export of bullion on our part seems to pre- 
 ponderate, though not to the extent that is gene- 
 rally believed. A most important consideration 
 will be, whether the Americans will be anxious to 
 receive gold with a view to re-establish a metallio 
 currency, or whether, owing httle to foreign coun- 
 tries, they will be content to let their depreciated 
 currency continue in the state in which the end of 
 the war may find it, fancying, perhaps, that it may 
 right itself. What, it may be asked, will be the 
 value of gold to them, if they neither require it 
 for internal circulation, which, they may think, can 
 be managed as well by paper, nor for the payment 
 of foreign liabilities, from which, under our hypo- 
 thesis, they will be comparatively free ? 
 
 Nevertheless, gold will be the only equivalent 
 which, if they do not immediately take large quan- 
 tities of goods from Europe, we shall be able to 
 offer thom for cotton. Consequently we may expect 
 one of two things to happen. Either, though they 
 
 T 2
 
 116 FOREIGN F.XCHANQES. 
 
 may not have the immediate intention of improving 
 their currency, the premium on gold, through the 
 abundant supply which the circumstances indicated 
 will place at their disposal, will fall to such a degree 
 as to hasten their action in spite of their indif- 
 ference ; or, what is quite as probable, the tempta- 
 tion will rather be to increase their imports than to 
 improve their currency ; a great inflation of prices 
 and of trade in general will ensue ; the inducement 
 which a redundant circulation of paper money so 
 often creates, of importing to an unhmited extent, 
 will have its full effect ; and foreign liabilities will 
 thus be created which will absorb that surplus of 
 gold of which the situation described has given 
 them the command. In the former case American 
 finance may possibly issue from its ordeal without 
 a catastrophe, in the latter and more probable case, 
 a terrible collapse will, in the end, be inevitable. 
 
 The foregoing remarks upon particular instances 
 where the Foreign Exchanges offered peculiar 
 opportunities for analysis, are not intended to be 
 historical or exhaustive, but only illustrative of the 
 general question of interpretation which forms the 
 special subject of the present chapter. In the 
 description of the American exchanges in 1861, it 
 was proved that the omission of the most important 
 element of value, namely, relative indebtedness, led
 
 FOREIGN EXCHANGES. 117 
 
 in the first place to an erroneous interpretation of 
 the perfectly natural efflux of bullion, and in the 
 second to a mistalien estimate of its probable dura- 
 tion. In the course of the same exchanges during 
 the two following years, it was the depreciation of 
 the currency to which, while interpreting the re- 
 markable fluctuations which have occurred, we 
 mainly found we had to look. In both cases, in- 
 deed, it was seen, that it was indispensable not to 
 lose sight of other elements of value, while attri- 
 buting the chief influence to one ; but it is, above 
 all, important that a real and fundamental cause 
 should always be sought, and that it should not be 
 supposed, as it sometimes is, that the action of 
 speculators can more than modify, hasten, or retard 
 natural causes. For instance, when specie is being 
 exported, it is sometimes supposed to be merely 
 what is called an exchange operation, undertaken 
 by a certain class of speculators, whose business it 
 is to make a profit out of the variations in the price 
 of foreign bills at different moments, buying them 
 when they are cheap and selling them at a profit, 
 and sometimes sending bullion abroad to buy up 
 bills on their own country, if the prices should be 
 temporarily below or touching specie point. Gold 
 will of course not be exported so long as these 
 speculators in exchange, or cambists, as they are
 
 118 FOREIGN EXCHANGES. 
 
 technically called, can procure short bills. They 
 wish to place funds at a certain spot. As long as 
 they can procure short bills in the quantities they 
 desire — as long, that is to say, as there are sufficient 
 foreign debts owing to their own country, payable 
 immediately, which can be transferred to them, and 
 which they can pass on to others — they will not ex- 
 port gold. An effliux of gold accordingly proves, who- 
 ever the exporters may be, that the supply of short 
 bills on other countries is being exhausted, that 
 there is little more to claim at the moment from the 
 country to which the bullion is despatched, and that 
 the balance of indebtedness is temporarily against 
 the country from which the bullion is exported. 
 
 A fm'ther inference may be deduced from the 
 foregoing remarks. It is often supposed that gold 
 is never exported unless to give a profit to those 
 who despatch it. But this is manifestly a fallacious 
 idea. The expression which is so often made use 
 of, that the rates of exchange in any country are 
 at such a point that no profit is to be made on 
 shipments of gold to it, must be carefully guarded 
 from leading to a misconception. Such a fact is 
 valuable to know, to a certain degree ; but it does 
 not prove that the despatch of bullion may not be 
 natural and necessary nevertheless. It must be 
 sent by those who are in debt to that country, if
 
 FOREIGN EXCHANGES. 119 
 
 they cannot find bills. It is far more important 
 to inquire, Is the balance of indebtedness dis- 
 charged ? The exchanges may remain exactly at 
 specie point for a long time, offering no prospects 
 of profits to any cambists, yet compelling the con- 
 stant flow of bullion in order to discharge liabilities. 
 It is indispensable to consider what debts have to 
 be paid, before a judgment as to the drain of 
 bullion can be formed. It is not so superfluous 
 as many might believe, to dwell so frequently and 
 so strongly upon this point, because, as a matter 
 of fact, language is continually held, even among 
 men who should be well versed in questions of this 
 kind, which is practically at variance with the 
 principles here put forth, though, in theory, they 
 command immediate assent. 
 
 The question of profits on exchange operations 
 can be reduced within very narrow limits. If 
 carried beyond them, it only serves to obscure the 
 plain operation of natural causes, without being 
 essential to the real understanding of the subject. 
 Profits can habitually be realized by those who, 
 when they observe that there is a prospect of the 
 demand for bills exceeding the supply, purchase in 
 anticipation, in order to sell at a higher price when 
 the natural buyers, who require the biUs for remit- 
 tances, enter the market later on. And even when
 
 120 rOREIQN EXCHANGES. 
 
 the exchanges reach the specie point, profits, 
 though on a very Hmited scale, are made by those 
 who, by having estabhshments identical with their 
 own in foreign cities, and having a machinery 
 specially organized for the purpose, are able by 
 the avoidance of commission and the reduction of 
 charges, to make bullion shipments at a cheaper 
 cost than the actual merchants or manufacturers 
 who have the remittances to make. They despatch 
 the gold and sell the bills drawn against this gold 
 to those who require to send funds abroad, realizing 
 a fractional profit for the convenience which they 
 afford. This, however, is in reality a matter of 
 detail, and, as far as the exchanges and the prin- 
 ciples which determine them are concerned, it is 
 perfectly indifferent whether the debtors to foreign 
 countries — that is to say, importers, merchants, or 
 consumers — remit gold themselves, or pay a slight 
 profit to cambists and bullion dealers, who, ship- 
 ping it in large quantities, retail the bills drawn 
 there-against to such as require to remit. 
 
 It is only in perfectly abnormal times that large 
 profits are to be made on specie shipments, and 
 only when the countries to which the shipments 
 are made, he at a very considerable distance ; so 
 that those who have the sagacity to ship in time, 
 or before others deem it necessary, have the ad-
 
 FORBiaN EXCHANQES. 121 
 
 vantage of being able to buy up bills below the 
 specie point, owing to the urgent necessity of the 
 sellers of the bills to receive the equivalent 
 immediately ; otherwise, it has been proved to be 
 abundantly clear that the seller of such a bill, — 
 rather than allow such as have bullion on the spot 
 by having shipped it in anticipation, to make a 
 profit which would be his own loss, — would send 
 his bill to be encashed, and wait for the returns in 
 specie himself. Where there can be immediate 
 action and immediate communication, as between 
 London and Paris, there can be scarcely any further 
 profits upon shipments of gold beyond those which 
 can be effected by an economy of charges. Only 
 those who have a machinery for the purpose can 
 gain a profit which, in reality, is a kind of com- 
 mission paid by the rest of the community. At a 
 distance, there is much more margin ; as, where 
 months may elapse before bills can, by their 
 natural process, be converted into coin, those who 
 can undertake to give this coin on the spot can 
 often make their own terms. 
 
 The limits are, therefore, clear enough within 
 which the natural action of the exchanges may be 
 checked or intensified by the operations of cambists. 
 In the case of a gradual fall in the exchanges in a 
 distant country, where, if left to themselves, they
 
 122 FOREIGN EXOHANQES. 
 
 miglit recede below specie point, because the un- 
 fortunate drawers of bills, being unable to wait the 
 arrival of specie for their own account, might 
 require their equivalent immediately, it might 
 modify the position very much if speculators in 
 foreign bills had foreseen the occurrence, and sent 
 out specie to anticipate their wants, securing to 
 themselves a moderate profit, but saving the 
 drawers from a much heavier sacrifice. These are 
 points which it is necessary to understand and 
 appreciate, and which come into consideration in 
 interpreting the exchanges of a given country at 
 any given moment, but they can never impair the 
 correctness of those elements of value which in 
 principle determine the price of bills. 
 
 Of these it has repeatedly been pointed out, that 
 the balance of indebtedness, in its widest sense, is 
 the most fundamental, entering in a greater or less 
 degree into almost every case in which Foreign 
 Exchanges are concerned. But the interpreter of 
 the fluctuations in Foreign Exchanges will bear in 
 mind that there are hmits to the variations pro- 
 duced by this one particular cause. He will re- 
 member the peculiar features in the rates of 
 exchange which would point to differences in cur- 
 rency, as distinguished from other disturbing 
 causes. These will be remarkable for extending
 
 FOEEIQN EXCHANGES. 123 
 
 far beyond the limits within which such fluctuations 
 as are caused by excessive imports or exports, are 
 ordinarily confined, and for being far more arbitrary 
 and eccentric in their movements. So, too, he will 
 not forget the influence of credit or discredit, and 
 at anytime of panic or other temporary derangement 
 of confidence, the discount at which bills are sold 
 will not be mistaken for the result of an adverse 
 balance of trade or a depreciated currency. And, 
 again, it will be borne in mind that sudden move- 
 ments in the exchanges, either upwards or down- 
 wards, may reflect the position of the rate of interest 
 in different countries, not only in the case of long 
 dated bills, the variations in the prices of which, 
 when they differ from the variations of bills payable 
 on demand, are regulated exclusively by the value 
 of money and by credit ; but also in the case of 
 these bills on demand themselves, as indicating that 
 a high or low rate of interest is causing certain 
 movements of capital from one country to another. 
 The most general fact of which the exchanges are 
 the sign, is the degree of intensity to which the 
 demand for bills on a foreign country exists, for 
 whatever purpose this demand may arise ; and it 
 is clear that such a demand may be caused as much 
 by a desire to remit a certain amount of capital to 
 that country for the sake of employing it at a high
 
 124 FOREiaN EXCHANQES. 
 
 rate of interest, as for the purpose of paying a debt. 
 A high rate of interest attracts capital from abroad, 
 and the effect of this attraction is immediately 
 perceptible in the exchanges. By recalling the 
 most elementary view of the transactions with 
 which the exchanges are concerned, and by realiz- 
 ing the fact that foreign bills, to the prices of which 
 so much importance is attached, are but the instru- 
 ments by which payments are effected between 
 different countries, it becomes clear at once that 
 in the prices paid for such bills we may discern 
 the strength of the current in which capital is 
 setting towards one point or another, and that the 
 effect of every influence which may be brought to 
 bear, to arrest or to hasten the force of this tide, 
 will be registered with unerring certainty in the 
 variations of the so-called " rates of exchange." 
 Hence arises that intimate connection between the 
 variations in the rate of interest, and the fluctua- 
 tions in the Foreign Exchanges, which has long 
 been recognised as one of the first principles to be 
 kept in view in the study of monetary questions.
 
 CHAPTER VI. 
 
 REVIEW OF THE SO-CALLED CORRECTIVES OP THE FOREIGN 
 EXCHANGES. 
 
 In the last chapter we have been engaged in 
 considering the subject of the interpretation of 
 the Foreign Exchanges. The question now arises, 
 how far the results obtained by such a study can 
 be turned to practical account. In the same way 
 as the phrase has become usual that the Foreign 
 Exchanges are " favourable " or "unfavourable," 
 so it has been the custom to say that the Foreign 
 Exchanges might be " corrected." The accuracy 
 of this phrase is just as open to question, inas- 
 much as it depends upon the view which is taken, 
 whether what is termed correction is desirable or 
 not. At all events, it must be borne in mind that 
 that which is really to be corrected is not the 
 actual position of the exchanges, but that state of 
 things which has brought it about. 
 
 We have seen that it was a certain course of 
 trade, or certain arrangements for payment, which 
 caused the situation that was considered unfavour- 
 able /ro?/i a monetary point of view. A modification 
 of that course, or dili'erent arrangements for pay-
 
 126 FOREIGN EXCHANGES. 
 
 meDt, might naturally be expected to operate in 
 the contrary direction, and therefore it would seem 
 as if it were possible, as soon as a correct idea has 
 been gained of the causes which have led to what 
 is termed an unfavourable situation, to meet it 
 either directly or indirectly, by a remedy, if a 
 remedy is desired ; in other words, to check the 
 export of gold. This export of gold would, as we 
 have seen, be the result either of the settlement of 
 indebtedness, or of difierences in the value of 
 money, or of differences in currency. When it is 
 attributable to this latter cause, the question of 
 the correction of the Foreign Exchanges, unfa- 
 vourable in this respect, namely, owing to a depre- 
 ciated currency, widens into the consideration of 
 the means by which a currency once depreciated 
 can be improved, and the equilibrium restored. In 
 the last chapter, the close connection of this subject 
 with the Foreign Exchanges was illustrated at some 
 length in the case of America ; but we should travel 
 beyond the scope of the present treatise, if, while 
 discussing the so-called correctives of the Foreign 
 Exchanges, we were to enter on the whole question 
 of currency. It must suffice if we simply enumerate 
 the restoration of a depreciated currency amongst 
 such correctives, without entering further into the 
 inquiry as to how this restoration can be effected.
 
 FOREIGN EXCHANGES. 127 
 
 We shall confine ourselves to the discussion of those 
 cases where the "unfavourable" situation is caused 
 by circumstances connected with the mutual in- 
 debtedness of two countries, or with the relative 
 value of money in each, in other words, where 
 fluctuations have been caused by some disturbance 
 in the ordinary balance of trade, or by a rise or 
 fall in the rate of interest. 
 
 These two influences will be generally found to 
 be operating simultaneously in opposite directions. 
 Money will be dear and scarce in the country 
 which owes much to foreign creditors, and plentiful 
 in that which has exported much ; and, high in- 
 terest will be attracting money to that quarter 
 whence specie is flowing out in payment of foreign 
 debts. 
 
 The adverse balance of trade will, as far as its 
 power extends, render the bills on the country which 
 is most in debt difficult of sale, and tend to compel 
 it to export specie ; whereas the high rate of inte- 
 rest, which is generally contemporaneous with a 
 drain, or the prospect of a drain, of specie, will re- 
 vive a demand for bills on this same coimtry, and 
 enhance their value in other quarters ; for there 
 will be a general desire to procure the means of 
 remitting capital to that market where it commands 
 the highest value. For instance, when in 1801 the
 
 128 FOREiaif EXOHANQES. 
 
 excessive indebtedness of England to America (the 
 result of her importations of cotton and corn) 
 lowered the price of English bills in New York, and 
 rendered specie remittances to the States inevitable, 
 the high rate of interest in England which this 
 situation had brought about, was so attractive to 
 continental bankers, that they drove up the price 
 of bills upon this country to specie point, and were 
 finally induced even to resort to bullion remittances. 
 
 From the foregoing, it seems to be evident that 
 when the exchanges are manifestly against any 
 country, and it is perceived that a balance of in- 
 debtedness is the cause, the equilibrium can be 
 restored only in two ways : the one being the in- 
 crease of exports and diminution of imports ; the 
 other, an advance in the rate of interest. 
 
 When the payments for imports continue for any 
 length of time in excess of the receipts for exports, 
 the redress of the balance can clearly only take 
 place by ceasing to incur liabilities ; that is to say, 
 by a change in the course of trade. If a nation, 
 taking advantage of unhmited credit, is importing 
 and consuming more than it is exporting and earn- 
 ing, and accordingly runs into debt, it can escape 
 from this position only by consuming less or pro- 
 ducing more. If, however, the derangement is but 
 temporary, and while it consumes more than it pro-
 
 FOREIGN EXCHANGES. 129 
 
 duces in the first six months of the year, it exports 
 moro than it imports in the second six months, it 
 can, like an individual with a prospective income, 
 raise money to carry it over the interval. By offer- 
 ing a very high rate of interest, it will either be 
 able to procure a prolongation of credit from its 
 creditors, till in the natural course of things, by the 
 subsequent increase of exports, the balance is paid 
 off, or, it may induce third parties to make it a 
 loan. Even in the case supposed above, where a 
 country is actually spending beyond its means, and 
 where, by borrowing, it can only increase the evil, 
 as being thus enabled to keep the real danger out 
 of sight for a time, a very high value of money is, 
 in a certain sense, most aesirable ; as, by the action 
 of the value of money on prices generally (accord- 
 ing to the well-known principles which determine 
 the relation between the two), a diminution of im- 
 ports, and, consequently, of indebtedness, is likely 
 to ensue. But what we are at present most con- 
 cerned to examine, is the operation of a high rate 
 of interest in those more usual cases whete we have 
 to deal with temporary fluctuations and sudden 
 emergencies, such as may be caused by the loss of 
 a harvest, or by a period of general national extra- 
 vagance, ending in a critical inflation of prices, or 
 by excessive warlike expenditure. In such times.
 
 ISO FOREIQN EXCHANGES. 
 
 when the resources of a country are crippled for 
 the moment, and its debts increased, it is most 
 desirable — and indeed, absolutely indispensable — 
 that not only bankers and merchants, but also the 
 public at large, should clearly understand how 
 quick and effectual a reUef may be afforded by a 
 high rate of interest, which is indeed the natural 
 result of such a state of things. Those who imagine 
 that what they call an oppressive rate, adds to the 
 losses and difficulties against which the trading 
 part of the community have, at such periods, to 
 contend, seem very much in error. For it is obvious 
 enough in theory (and events have strikingly con- 
 firmed the theory in practice), that if apprehension 
 is felt, that the export of gold, which is resulting 
 from any of the temporary emergencies just alluded 
 to, is exceeding the amount which may conveniently 
 be spared, and that the withdrawal of capital or cur- 
 rency which is taking place is likely to produce a 
 scarcity which may render it difficult to conduct the 
 business of the country on the ordinary footing, 
 there can be no more effectual a remedy than to 
 offer an inducement to foreign countries to replace 
 that which is being lost. An influx of capital is 
 desired to take the place of that of which the 
 country, owing to its exigences in another quarter, 
 is likely to be deprived for a time ; and this influx
 
 JOBEIQN EXCHANGES. 131 
 
 of capital is only to be procured by offering it the 
 advantages of a high rate of interest — a rate, that 
 is to say, higher than it can make at home, and 
 sufficient to indemnify the capitalist for all the 
 expenses involved in the transmission of his capital 
 from one country to another. 
 
 Whether the inducement is powerful enough to 
 effect its object, will at once be apparent from the 
 symptoms exhibited by the Foreign Exchanges. If 
 the bills on the country where interest is high are 
 in increased demand at advancing prices, an indi- 
 cation will be afforded that the attraction of the 
 high rate is working its effect. When the English 
 public was anxiously watching the weekly shipments 
 of gold to America, and was taught to look for con- 
 solation to the continental exchanges, which, let 
 us suppose, were said to be taking a favourable 
 turn, it was meant that the Continent sought with 
 greater eagerness for English bills, — a symptom 
 that they were preparing remittances for the pur- 
 pose of sending over funds to England, and that 
 capital was passing from the Continent to us. The 
 more the price of bills advances, the nearer is the 
 specie limit approached, till finally the remittances 
 are made, not in bills, but in gold. Practically the 
 effect of the purchase of bills for the purpose of 
 placing funds in England, is identical in its effect 
 
 K 2
 
 132 FOREIGN EXOnANQES. 
 
 "with a shipment of gold ; for every English bill 
 held by continental capitalists gives to its possessor 
 the power of drawing gold from us. 
 
 It may be said that an advance in the rate of in- 
 terest has been spoken of as if money could artifi- 
 cially be made dear. But the fact is, as has already 
 been pointed out, that, where a considerable efflux 
 of specie is taking place, the rate of interest will 
 rise in the natural course of things. The abstrac- 
 tion caused by the bullion shipments will of itself 
 tend to raise that rate ; and banking establishments 
 will in their own interest (which will be identical 
 with the interest of the public) accelerate this result 
 as far as lies in their power. It would encumber 
 the course of the argument to enter at this stage 
 on the discussion as to whether it is capital or 
 money which is rendered scarce by the exportation 
 of bullion, and which can be attracted by a high 
 rate of interest. Whichever be the case, the oppor- 
 tunity given by higher rates of interest for advan- 
 tageous employment will be seized. A country 
 which is paying off its debts, is sending away a 
 portion of its capital when it exports specie ; and 
 the foreign bankers who send over gold in order to 
 buy up English bills, are supplying us with capital 
 for a time, to take its place. At the same time, 
 the actual export of bulhon is a loss to the money
 
 FOREIGN EXCHANQE8. 133 
 
 of the conntry, and the import of gold from abroad 
 replaces that which has thus been lost. In both 
 cases, that which will eflfectually bring the gold 
 from abroad, in the most general and practical 
 sense, will be the opportmaities offered by a high 
 rate of interest, to effect profitable and attractive 
 investments. 
 
 The efficacy of that corrective of so-called un- 
 favourable exchanges, on which we have been di- 
 lating, has been most thoroughly tested since the 
 Bank of England has adopted the system of 
 varying its minimum rate of discount more rapidly 
 and more extensively than was its practice in 
 former years. Not that it is to be supposed that 
 the Bank of England itself can make money dear 
 or cheap. Before the Act of 1844 was passed, 
 when the Bank had the privilege of an unlimited 
 issue, its influence over the money-market was 
 certainly very great. But now that its resources 
 are as strictly Hmited as those of any other estab- 
 lishment, its power to make money dear or cheap 
 does not extend beyond its own stock of notes ; 
 and by lending them to the public at a cheaper 
 rate than the demand for discount warranted, it 
 could only keep down the price of money for a few 
 days or weeks. 
 
 The real importance of a variation in the
 
 134 FOREIGN EXCHANGES. 
 
 minimum rate of the Bank does not consist in 
 the power exercised over, but in the indications 
 afforded of, the money-market. The fixity of the 
 minimum rate has this effect, that practically it 
 becomes a maximum to the public. Persons in 
 good credit are almost always able to procure 
 money a fraction under the Bank rate, and con- 
 sequently the Bank of England is generally the 
 last to feel the pressure of a rising demand. Thus, 
 an advance in the Bank rate generally means, that 
 a previous pressure has been put on all other 
 sources where discount is obtainable, and that the 
 demand has reached the last reserve. Sometimes 
 the Bank may raise its rate from internal causes, 
 or from apprehension, but the general inference 
 from such an advance is that which we have 
 sketched. For this reason foreign capitalists 
 rightly attach great importance to the variations of 
 the Bank of England minimum, regarding them 
 correctly rather as indications of the changing value 
 of money than as the results of an attempt to 
 control its price. 
 
 The fact has been that almost every advance in 
 the Bank rate of discount is followed by a turn of 
 the exchanges in favour of England; and, vice 
 versa, as soon as the rate of interest is lowered, the 
 exchanges become less favourable ; — that is to say,
 
 FOREIGN BXCHANQES. 135 
 
 in the first case, there is an indication of a demand 
 for bills on England, as a means of placing capital 
 here, to take advantage of the ruling rate ; in the 
 second case, there comes the reaction, that is to 
 say, there is a demand here for bills drawn upon 
 foreign cities, in order to send this money back : 
 or, what comes to the same, in the first instance 
 there are few buyers here for bills on foreign 
 capitals, because foreign creditors give their Eng- 
 lish debtors a respite, and prefer to wait longer for 
 remittances, gaining interest meanwhile at the pro- 
 fitable English rate ; in the second, when this rate 
 is lowered, the foreign creditors find that they have 
 no longer any advantage in leaving their claims 
 upon us open, and require pending accounts to be 
 closed. 
 
 The general effect of a high rate of interest in at- 
 tracting capital, and its consequent action upon 
 the Foreign Exchanges, may easily be understood 
 and appreciated, even by those who are not con- 
 versant with the details of banking business ; but 
 a further effect of the same cause is of a more 
 technical nature. 
 
 It will be remembered, that of the aggregate in- 
 debtedness of any country, a large portion is 
 generally embodied in bills of exchange which have 
 Bome time to run. Now, these bills seldom re-
 
 186 FOREION EXCHANGES. 
 
 main in the hands of the drawers, but are partly 
 used as immediate remittances to the country 
 where the bills are payable, and partly are bought 
 by bankers or capitalists who desire them as an in- 
 vestment of money, yielding a certain interest 
 during the interval between the date of their issue 
 and the date when they fall due. This interest 
 lies in the cheaper price of the bills. A bill drawn 
 payable three months after date is bought by a 
 banker at a price which is equal to a bill payable 
 on demand less three months' interest, and this in- 
 terest will not be that of the country where the 
 bill is drawn, but that of the place where the bill 
 is payable : for the purchaser will have to discount 
 the bill in the foreign country at the rate there 
 ruling, before he can make it equally available with 
 a draft on demand ; and the drawer can suffer this 
 deduction from the price of the bill at the same 
 rate without loss, as, giving the foreign acceptor 
 three months' grace before payment, he will receive 
 from him the same amount of interest until the 
 debt is discharged by the actual payment of the 
 bill, as he loses in the price of the bill itself. 
 Accordingly, when foreign bills are bought as an 
 investment, it is with the view of earning the 
 higher rate of a foreign country, in the place 
 of the lower rate ruling at home; a circum-
 
 FOBEIGN EXCHANGES. 137 
 
 stance, which it is most important constantly 
 to remember, as the tendency described may be 
 rehed on as always in operation when the rate of 
 interest is peculiarly high in any country, the cre- 
 dit of which is unimpeached. As a matter of fact, 
 the interest which can be secured by what we may 
 call the speculative purchasers of bills, generally 
 lies between the rate of the country where the bill is 
 purchased, and the rate of that on which it is drawn, 
 as competition enables the seller to secure a portion 
 of this species of profit. If the rate in Germany 
 is 3 per cent., and the rate in England is 5 per 
 cent., those who have three months' bills on Eng- 
 land will not be obliged to submit to a discount 
 of 6 per cent., which, according to first principles, 
 should be deducted. Many will be found, who, in 
 order themselves to make 1 per cent, more than the 
 highest rate which they can secure at home, will 
 not claim to deduct more than 4 per cent, from the 
 price which they would pay for a bill on demand, 
 instead of the 5 per cent, which would seem the 
 natural rate. It should be observed that these 
 greater or lesser deductions are generally expressed, 
 not in the rate of interest, which is to be deducted, 
 but in the price of the bill — the bill is so much 
 cheaper or dearer : but it is expedient to consider 
 the case in what we may call its original form, in
 
 138 POREIQN EXCHANQBS. 
 
 order the more clearly to discern the force of the 
 rate of interest. 
 
 We now come to the fact, which it is also very 
 important clearly to appreciate, that at any moment 
 there is in the hands of bankers and exchange- 
 dealers a large amount of bills on various countries, 
 held partly for the purpose of speculating on a rise 
 or fall in the price of bills, but, to a very large ex- 
 tent, solely for the sake of the interest which is to 
 be made on them. Bills on England, owing to the 
 high rate of interest which they often bear, as com- 
 pared with continental rates, are a favourite invest- 
 ment abroad. In Paris, Berlin, Frankfort, Ham- 
 burg, and other continental cities, the bills on 
 England held by the bankers and joint-stock com- 
 panies often amount to many millions sterling ; 
 and a very large sum remains in their hands for 
 several months, — in fact, from the time when the 
 bills are drawn to the time when they fall due. The 
 immense importance of this circumstance cannot 
 be overlooked. If at any time the rate of interest 
 here falls below that which rules on the Continent, 
 it is inevitable that the whole mass of these bills 
 will at once be sent to London, and be discounted 
 there at the cheaper rate, so that the proceeds 
 may be remitted in gold to tiie Continent to 
 be invested there in local securities at the supposed
 
 FOREIGN EXCHANGES. 139 
 
 higher rate. On the other hand, so long as the dis- 
 count in London is higher than that which can be 
 obtained abroad, so long the foreign bankers will be 
 induced to hold their bills till they become due. 
 The debt, it will be remembered, which is embodied 
 in the bills in question, and without which they 
 could not exist, must be paid sooner or later ; but 
 the time when it must be liquidated will, within 
 certain limits, depend upon the rate of interest. If 
 it be high, the bills will be allowed to run off abroad, 
 and the gold will not be exported till the last mo- 
 ment ; if it be low, there is the possibility of the 
 whole mass of bills being sent to England for dis- 
 count as soon as they are drawn, and the gold being 
 exported at once instead of three months afterwards. 
 Accordingly, if, to take a practical instance, specie 
 is being exported from England to America, an ad- 
 vance in the rate of discount is an inducement to 
 foreign capitalists to hold back their bills upon 
 England to the last moment, as well as to make 
 remittances hither to invest the proceeds at the high 
 rate : both circumstances cause a demand for these 
 bills abroad, and their price must rise. At the same 
 time, a proportionate fall in the price of foreign 
 bills will occur. For, a convenient mode of placing 
 funds in England being to instruct English firms 
 to draw on foreign bankers, these bills are hkely to
 
 140 FOREIGN EXCHANGES. 
 
 be pressed on the market ; whereas, owing to the 
 assumed desire rather to leave capital in England 
 than to call it in, there will be few purchasers for 
 them, and their price must decline. (The rise of 
 bills on England abroad is always identical with 
 the fall of the prices of foreign bills in England ; 
 for there are two ways of settling every interna- 
 tional transaction : either the creditor draws a bill 
 on the debtor, or the debtor remits a bill to the 
 creditor ; and accordingly, the same circumstances 
 which make it difficult to the creditor to sell his 
 bill to advantage, will make it difficult for the debtor 
 to purchase the necessary remittance to advantage. 
 When bills on England decrease in value abroad, 
 bills on the Continent increase in value on the 
 London exchange ; and when, as in the case where 
 a high interest is setting the current of capital to- 
 wards England, there is a great demand, at high 
 prices, for bills upon London, there is a corre- 
 sponding absence of demand and low prices in 
 England for bills on foreign cities.) 
 
 After the preceding observations, it may well be 
 inquired, — How is it possible that, in spite of the 
 rapid flow of capital from one country to another to 
 fill up any gaps that may have been left, such a 
 difference in the rates of interest can exist between 
 two countries as has occasionally been witnessed for
 
 POREION EXCHANGES. 141 
 
 some time in the case of England and the Conti- 
 nent ? How, it may be asked, is it to be explained 
 that the rate of interest could at one time remain 
 at 6 per cent, in London, and at 2 or 3 per cent, in 
 Hamburg and other continental cities ? This is a 
 mystery which has puzzled many during several 
 periods when our rate of interest has so much ex- 
 ceeded that of the Continent. It is a question, 
 however, which can be solved with the greatest ease. 
 In the case of Hamburg, we have to deal with 
 the fact that there exists a difference of currency. 
 The capitalists of Hamburg, who have, by the hy- 
 pothesis, so much money to spare that they can 
 only manage to obtain 2 per cent, interest for it, 
 possess this money in silver, and accordingly, the 
 possibility of their sending this surplus money over 
 to England will depend upon the probability of the 
 silver being sold to advantage. The natural process 
 will be to ship the silver to England, to sell it 
 there at what it will fetch, and with the proceeds to 
 discount bills at the high rate current in England. 
 When these bills, however, mature, and the Ham- 
 burg banker wishes to re-possess himself of the 
 money, he will have to change the sovereigns, in 
 which the English bill is paid, back again into 
 silver, possibly paying a premium for it ; and this 
 silver he will have to re-ship to Hamburg. This
 
 14*2 FOREIGN EXOUANOES. 
 
 is the complete theoretical process. He remits his 
 silver, invests its equivalent for a time in bills pay- 
 able in gold, and re-ships silver to Hamburg when 
 the bills mature. Accordingly, when he strikes his 
 balance at the end of his operation, he will find, in 
 the first place, in his favour, the difference between 
 the Hamburg and the English rate, which we have 
 supposed to be as great as 4 per cent. This differ- 
 ence, however, if we suppose him to have invested 
 his money in three months' bills, he will only have 
 enjoyed for a quarter of a year, and thus his ap- 
 parent profit will so far be 1 per cent. But out of 
 this 1 per cent, he may, under favourable circum- 
 stances, have to pay the expense of specie remit- 
 tances to and fro : first on sending his silver to 
 England, and then on its return ; and further, he 
 may lose, and have to sacrifice, a difi'erence between 
 the price at which he sold his silver on its arrival 
 in England, and that at which he bought back a 
 similar quantity of the same metal when he re- 
 quired his capital again at home. It is easy to 
 perceive that it in exceedingly possible that these 
 expenses on the transmission of bullion and the 
 loss on the silver may far exceed the 1 per cent, 
 which he is supposed to have gained ; and ac- 
 cordingly it is quite natural and intelligible that, 
 under certain combinations of circumstances, even
 
 rOKEIGN EXCUAJJGES. 143 
 
 a difference of as much as 4 per cent, may exist 
 between our rate of discount and that in Hamburg, 
 without their surplus capital finding its way to our 
 money-market. At the same time, it will readily 
 be conceded that there is a point at which the 
 difference becomes so great that the chances of 
 loss and expense are more than covered by the in- 
 crease of the interest, particularly if the high rate 
 can be secured for six-month instead of three- 
 month bills. During most periods of high discount 
 on this side of the Channel, there have been large 
 orders here to take six-month bills for foreign 
 bankers ; and clearly the preference is given to the 
 longer paper, because the attractive rate being 
 secured for so much longer a time, while the pro- 
 bable cost of bullion remittances and risk of loss 
 upon silver remain the same, the chances of profit 
 are almost doubled, or at least a larger margin is 
 at once secured for provision against the risks 
 which are run. 
 
 The instance of Hamburg, with its silver currency, 
 offers a peculiarly convincing illustration of the 
 difficulties attending the transmission of capital 
 from one country to another ; and, at the same 
 time, of the advantage of a rate of interest suffi- 
 ciently high to overcome these difficulties, whenever 
 it becomes desirable that foreign bankers should
 
 144 PORFTaN EXCMANaES. 
 
 come to the relief of our money-market. However^ 
 even when they hoth have an identical currency, 
 it is easy to explain the possibility of two very 
 different rates of interest existing simultaneously 
 in two countries. The point to be looked to is the 
 cost of the transmission of bullion to and fro ; and, 
 according to the distance of the two countries, so 
 "will it be possible for differences in the rate of in- 
 terest to exist in a greater or less degree. Between 
 the rates in London and Paris, the expense of 
 sending gold to and fro having been reduced to a 
 minimum between the two cities, the difference 
 can never be very great ; but it must not be for 
 gotten that, — the interest being taken at a per- 
 centage calculated per annum, and the probable 
 profit having, when an operation in three-month 
 bills is contemplated, to be divided by four, wherea* 
 the per-centage of expense has to be wholly borne 
 by the one transaction, — a very slight expense be- 
 comes a great impediment. If the cost is only ^ 
 per cent., there must be a profit of 2 per cent, per 
 annum in the rate of interest, or ^ per cent, on 
 three months, before any advantage commences ; 
 and thus, supposing that Paris capitalists calculate 
 that they may send their gold over to England for 
 ^ per cent, expense, and chance their being so 
 favoured by the exchanges as to be able to draw it
 
 FOREIGN EXCHANGES. 145 
 
 back without any cost at all, there must neverthe- 
 less be an excess of more than 2 per cent, m the 
 London rate of interest over that in Paris, before 
 the operation of sending gold over from France, 
 merely for the sake of the higher interest, will pay. 
 This is the simple explanation why a slight in- 
 crease in the rate of discount is, under some cir- 
 cumstances, — that is to say, when there is not a 
 great supply of bills upon England, — not sufficient 
 to bring over gold from the Continent. It must 
 reach a somewhat high point before the certain ad- 
 vantage begins ; and hence it becomes clear that it 
 is an error to allege that, if 6 per cent, will not bring 
 over gold, neither will 7 or 8 per cent., a mere frac- 
 tional increase in an annual rate, have that effect. 
 Yet on one occasion, when the Bank rate of discount 
 was advanced to 8 per cent., the question was fre- 
 quently asked, — Is it likely that, if 7 per cent, failed 
 to bring over the gold, such a result will be attained 
 by charging 1 per cent, more ? The preceding 
 observations place the matter, it is hoped, in a suffi- 
 ciently intelligible light. The first few per cents, do 
 little more than cover the possible expenses of the 
 transmission of the bullion itself, a difference of 4 
 per cent, per annum on three-month biUs being 
 necessary to cover 1 per cent, expense : but as soon 
 as the charges (or the risk of charges), which are 
 
 h
 
 146 FOREIGN EXOHANQES. 
 
 really almost identical with what is nsually called 
 the loss in exchange, are covered, then every addi- 
 tional per cent, which is granted as discount be- 
 comes an actual and certain profit ; and, accord- 
 ingly, if gold is required, the rate of discount must 
 be advanced till that point is reached. To stop short 
 of it may, under some circumstances, be nugatory. 
 In practice — owing to the fact that the supply of 
 bills uponEngland seemsto be almost inexhaustible 
 ■ — the operations will take a somewhat different form 
 from that which we have just examined, but the ten- 
 dency will be admitted to be identical. When the 
 English rate of interest advances, there will be a 
 general desire on the Continent to take advantage of 
 this circumstance, and to remit capital to England 
 for temporary advantageous investment ; but how 
 is the transmission to England to be effected ? Of 
 course in bills, so long as they can be procured ; 
 and consequently those who are holders of bills on 
 England, and are willing to sell them, find them- 
 selves in possession of an article which is suddenly 
 in great demand, and are thus enabled to make a 
 higher price. Competition raises this price, till 
 remittances by means of bills become almost as 
 expensive as a shipment of bullion itself ; and thus 
 the profit, which would be made by those who could 
 buy bills at the usual exchange to remit to England
 
 FOREIGN EXCHANGES. 147 
 
 for investment at the higher rate, is divided be- 
 tween those who sell the bill and those who buy 
 and remit it. To the latter, when the demand is 
 strong, the bill may finally become as expensive as 
 bullion shipments themselves ; and as the supply 
 of bills tends to become insufficient, gold is actually 
 sent. This is the technical explanation of the 
 rapid rise of the price of bills on any country as 
 soon as any advance in the general rate of interest 
 obtainable there takes place. 
 
 It is a rise caused by the competition for the most 
 ready and most convenient vehicle for the trans- 
 mission of capital, the competition itself being tlit; 
 result of a high rate of interest. A fall of the ratti 
 will cause a corresponding fall in the prices of bills ; 
 and, acting as it does with invariable force, and 
 being succeeded by invariable results, it is clear that 
 there is no corrective of a drain of gold, and all its 
 attendant consequences, more powerful and effectual 
 than a rapid advance in the rates of discount. It is 
 the only mode by which that which is on the point 
 of being lost may be retained, or that which is 
 actually gone may be replaced; and its natural effect 
 is, not to produce a scarcity of money, of which it 
 can never be the cause, though often the conse- 
 quence, but to remedy and correct this scarcity 
 by offering a premium to the rest of the world 
 
 L 2
 
 148 FOREIGN FXCHANGES. 
 
 to send their capital or money to the dearest 
 market. 
 
 We should here allude once more to the function 
 of those peculiar foreign bills of which mention has 
 previously been made, which, not representing any 
 actual indebtedness, do not become amenable to the 
 laws which regulate that indebtedness, but on the 
 contrary, rather influence the exchanges in an oppo- 
 site direction. "When the indebtedness of one 
 country to another is almost settled — that is to say, 
 when almost all the bills between them are drawn, 
 remitted and paid, — it is the natural result of this 
 situation that the price of the few remaining bills 
 should become exceedingly high. On the other 
 hand, the issue of bills representing no transaction 
 in goods, but simply based upon credit, and conse- 
 quently (but for the knowledge that they must sub- 
 sequently be provided for), illimitable, operates in 
 the contrary direction ; that is to say, tends to de- 
 press the price of bills. Thus there are times when, 
 for the period during which the bills have to run 
 (for, as soon as they have to be covered, their pre- 
 vious effect is neutralized at once), their issue may 
 have amaterial effect upon the export of gold. Those 
 who draw bills in this manner on credit, may be 
 actuated by two different motives : either they may 
 wish to secure the use of the money paid as the
 
 PORKIQN EXCHANaES. 149 
 
 price of the bills, for legitimate or illegitimate pur- 
 poses, during the two months which the bill has to 
 run, that is to say, till the time when they must 
 again part with the money in order to buy remit- 
 tances, — or they believe that when their drafts come 
 to maturity there will be a larger supply of bills on 
 the market, and that then they will be able to 
 make a profit by buying their remittances at a 
 cheaper price than they obtained for their drafts. 
 The issue of drafts drawn upon credit, and not 
 against any debt — that is to say, drafts by which 
 the drawer incurs a debt, instead of securing to him- 
 self the payment of a debt of another — is a measure 
 by which the merchants of the country in which 
 they are drawn may be temporarily relieved of the 
 necessity of making bullion remittances, if they are 
 in debt, or be enabled to make cheaper remittances 
 if they want to give orders. And they are useful 
 enough when they bridge over an interval which 
 may exist between the seasons of exports and im- 
 ports, as in that case they may save the double 
 transmission of bullion. But in other cases the 
 issue of such bills is likely to be attended with dan- 
 gerous consequences, as, though giving relief for 
 the moment, by supplying that which is in great 
 demand, and which cannot otherwise be got — at the 
 expiration of a certain time it will add to the difli-
 
 160 FORKIQN EXOHANQES. 
 
 culty, as an equal amount must again be with- 
 drawn. 
 
 On the Continent, this species of bills is often 
 used as an engine for drawing gold from England ; 
 in fact, as a mode of borrowing in the London 
 market. Drafts are issued, payable three months 
 after date ; these are remitted to London, and there 
 discounted, the proceeds being invested in gold, 
 and shipped abroad. "When the exchanges are un- 
 favourable to the Continent, — that is to say, when 
 a bill on England commands a larger number of 
 dollars or florins than usual, — such bills create an 
 artificial supply, and may prevent the price from 
 running up to specie point. 
 
 It is scarcely desirable to enter into further 
 details as to the various artificial means and bank- 
 ing manoeuvres by which those who speculate in 
 the exchanges — that is to say, on the rise and fall 
 of the prices for foreign bills — manage to influence 
 or counteract what may be called the natural fluc- 
 tuations. It is only necessary to point to the exist- 
 ence of such speculations and their attendant cir- 
 cumstances, as otherwise errors might be com- 
 mitted through the confusion of temporary and 
 artificial fluctuations with the natural and inevit- 
 able consequences of regular and definable laws. 
 
 The object of the present treatise has been to un-
 
 FOREIGN EXCHANGES. 151 
 
 ravel a few of the most important first principles at 
 which we may arrive in the study of the Foreign 
 Exchanges ; and especially to exhibit, as clearly as 
 possible, the origin andnatural explanation of trans- 
 actions which, in their more complicated form, ap- 
 pear too technical and confused to be easily appre- 
 ciatedby the general public. In these first principles 
 there is, in reality, nothing difficult or abtruse. The 
 difficulty lies, not in the apprehension of them, when 
 they are plainly and popularly stated (they then seem 
 almost a matter of course), but in the stating of these 
 principles in sufficiently plain and popular language. 
 Thus, if the perusal of the preceding pages leaves 
 the reader more confused as to the Foreign Ex- 
 changes than he was before, he must by no means 
 believe that he has been engaged upon a subject 
 which is too technical or too difficult, too little 
 amenable to the usual method of scientific inquiry, 
 or too complicated by a perpetually shifting mass of 
 practical details, for any satisfactory result to be ob- 
 tained. He must rather believe that the author is in 
 fault through his inability to convey clearly to the 
 reader's mind that which to himself seems patent 
 enough, and through his not possessing sufficient 
 mastery of language to be able to dispense entirely 
 with the jargon of the money-market and the 
 exchange.
 
 152 FOREIGN EXCHANGES. 
 
 The Foreign Exchanges are pre-eminently a sub- 
 ject which requires less controversial discussion than 
 a careful and thorough analysis. The main prin- 
 ciples which have been advanced as to the origin of 
 exchange operations, as to the groundwork of inter- 
 national indebtedness, as to the various classes of 
 foreign bills, as to the different causes which regu- 
 late the fluctuations in their price, and as to the 
 conclusions which may be drawn from these fluctu- 
 ations, are rather statements of self-evident though 
 somewhat complex truths, than matters for contro- 
 versy, while only that branch of the inquiry which 
 treats of the correctives of unfavourable exchanges 
 can legitimately form a battle-field for discussion. 
 For any subject to be satisfactorily argued, and for 
 the value which attaches to conflicting theories upon 
 it to be fairly appreciated, it is above all things 
 necessary that it should be clearly understood ; and 
 the object of the present essay will have been fully 
 attained if it proves in any way instrumental in 
 promoting clearer and more positive ideas as to 
 the most general principles and rudimentary facts 
 which present themselves in any inquiry into the 
 laws of the " Foreign Exchanges." 
 
 EFFINGHAM WILSON, PRINTEE, 54, THREADNBEDLE 8TBBET, E.G.
 
 PREMIER CODE USED— see back. 
 
 Telegrams "EFFINGERE, LONDON". OCTOBER, 1915. 
 
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 can be sent by One \\'ord. Price 305. net. 
 
 Hartfield's Ten Figure Code. Ten Thousand Million Words 
 
 numbered 0,000,000,000 to 9,999,999,999 with a Check on each Half 
 Word of Five Letters. Price per copy lOs. net, per pair 205. net. 
 
 The Merchant's Code. 15,000 Words. This work is suitable 
 
 for Bankers, Manufacturers, etc., who desire to insert their own 
 Phrases. Price 3 5. net. 
 
 " Lisbonian " Selection of Roots and Terminals, containing 
 
 21,323 five letter words equal to 454,670,329 ten letter words. In strict 
 accordance with the decision of the Lisbon Telegraph Conference, 
 1908. Price £5 net.
 
 54 Threadxeedle Street, London, E.G. 29 
 
 A G E RS TELEGRAM CODES. 
 The Simplex Standard Telegram Code. Consisting of 205,500 
 
 Code Words. Price £5 5s. 
 
 The Duplex Combination Standard Code. Consisting of 
 
 150,000 Words. With a Double Sec of Figures for every Word. 
 Price £4 45, 
 
 The Complete Duplex Code, of 195,000 Words in Alphabetical 
 
 and Double Numerical Order. Price £5 5s. 
 
 Ager's Standard Telegram Code of 100,000 Words. Compiled 
 
 from the Languages sanctioned at the Berlin Telegraph Convention. 
 Price £3 3s. 
 
 Ager's Telegram Code. 56,000 good Telegraphic Words, 45,000 
 of which do not exceed eight letters. Third Edition. Price £2 2s. 
 
 Ager's Alphabetical Telegram Code. Price 255. 
 Ager's Telegraphic Primer. With Appendix. ( 
 
 about 19,000 good English and Dutch Words. Price 1 
 
 -Ager's General and Social Code. Price IO5. 6rf 
 
 TELEGRAPH CODES. 
 OFFICIAL VOCABULARY, BERNE, 1894. A few copies of 
 
 the Original Edition. Price on application. 
 
 A. B. C. Universal Commercial Electric Telegraphic Code. 
 
 By W. Clal'SO.n-Thue. Fi th Edition. Price 20s. net ; post free 
 (inland), 20s. 6d. 
 
 A-Z. 
 
 Code Telegraphique Franc^ais. Price £4 net. 
 
 Beith's lO-Letter Combinations (8 Figures). Price £3 3s. net. 
 Bentley's Complete Phrase Code. Price £4 45. net. 
 
 (Nearly lODO Million Combinations.) 
 
 Bishop's Travellers' Telegraph Code. Specially for the Use of 
 
 Tourists. Compact and bound conveniently for the Pocket. Weight 
 only 2 oz. Price Is. net. 
 
 Broomhall's Imperial Combination Code for Mining, Company 
 Promoting, and Stock Exchange Purposes. 
 
 Price 50s. net. 
 
 Broomhall's Comprehensive Cipher Code. Mining, Banking, 
 
 Arbitrage, Mercantile, etc. Arranged for nearly 170,000 Phrases. 
 Price £3 13s. Hd. Cloth. Limp leather. Price £4 4s.
 
 30 Effingham Wilson, 
 
 TELEGRAPH COY^'ES—coritinued. 
 Broomhall's " The Standard " Shipping Code, For Chartering, 
 
 Insurance and General Shipping. Price 60j. net. 
 
 E.G. Code Condenser, by Arthur Hebden, F.C.I. S. Price 
 
 65. net. 
 
 Excelsior Code System and Pan-Card Supplement. A Com- 
 prehensive, Complete, Practical, Safe and Secret Means of Telegraphic 
 Correspondence. Price £10 net. 
 
 Figure Code for Stocks and Shares. 
 
 To be used with the " Official Vocabulary," or any similar list of 
 numbered Words. Price 42s. 
 
 Hawke's Premier Cypher Telegraphic Code. 
 
 100,000 Word Supplement to the Premier Code. Price 10s. Gd, net. 
 (See back page of this Catalogue.) 
 
 Hawke's Systematic Telegraph Code, including a Key of One 
 
 Hundred Million Cypher Words numbered. All easily pronounceable 
 and specially arranged to fulfil the conditions of the latest International 
 Telegraph Regulations. Price 425. net. 
 
 "Ironscrap' Telegraph Code. 
 
 Adapted for the special use of the Old Iron and Metal Trades. By 
 George Cohen, Sons & Co. Revised Edition, 1903. Price 425. net. 
 
 Kolkenbeck's Ideal Code Condenser, being a twelve or thirteen- 
 
 figure Code. With full instructions in English, French and German. 
 Second Edition. Price 2l5. net. Leather 255. net. 
 
 McNeill's Mining and General Telegraph Code. 
 
 Arranged to meet the requirements of Mining, Metallurgical and Civil 
 Engineers, Directors of Mining and Smelting Companies, Bankers, 
 Brokers, Solicitors and others. Price 2l5. net. 
 
 McNicol's Nine Figure Code, or 1,100 Millions Pronounceable 
 Words. 
 
 Price £10 net per copy (for not less than two copies). 
 
 Moreing and McCutcheon's Telegram Codes. 
 
 Code I. "The General, Commercial and Mining Telegram Code," 
 
 containing 274,000 Phrases and Sentences. Price £5 Ss. net. 
 
 Code II. "The Multiform Combination Telegram Code," with 206,460 
 
 Cypher Words, with 960,045 Groups of Numbers. £8 85. net. 
 
 Code III. "The Catalogue Combination Telegram Code," consisting of 
 
 274,979 separate References to Catalogue Numbers. Prices, etc. 
 
 Price £7 75. net. 
 
 Moreing and Neal's General and Mining Code. 
 
 For the Use of Mining Companies, .Mining Engineers, Stockbrokers, 
 Financial Agents, and Trust and Finance Companies. Price 2I5.
 
 54 Threadnbedle Street, London, E.G. 31 
 
 TELEGRAPH CODES— continued. 
 Montgomery Code (Fifth). 
 
 Especially adapted for use in Banking and Investment Business. Price 
 20s. net. 
 
 Ofi9cial Vocabulary in Terminational Order. 
 
 Price 405. net. 
 
 Pieron's Code Condenser, 50 °/„ Economy without changing 
 Codes. 
 
 Can be had in English, French, Spanish or German. Price 305. each net. 
 
 Scott's Shipowners' Telegraphic Code. 
 
 New Edition. 1906. Price 525. 6d. 
 
 Stockbrokers' Telegraph Code. Price 5s. net. 
 The Tenmil Code. 
 
 Can be used as a 6, 7, 8, 9, or 10-flgure Code (or more). Adaptable to 
 any size of Telegraphic Code, on any subject and in any language. By 
 Arthur Tracey. Price, with patent binder, £3 135. 6d. net. 
 
 Yollers' 9-Figure System. 
 
 1,000 Millions Pronounceable Words of ten letters. Price £2 net. 
 
 Watkins' Ship-broker's Telegraph Code. 
 
 Price £7 75. net. Six copies, £42 net. 
 
 Western Union Telegraph Code. 
 
 Price 655 net. 
 
 Whitelaw's Telegraph Cyphers. 
 
 400,000 Cyphers in one continuous Alphabetical order. Price £12 IO5. 
 200,000 words, French, Spanish, Portuguese, Italian 
 
 and Latin. Price ..... 1505. each net. 
 
 53,000 English words 50s. „ 
 
 42,600 German „ SOs. „ 
 
 40,000 Dutch „...:... SOs. „ 
 
 338,200 in all. 
 
 68,400 Latin, etc., etc. (Original Edition), included 
 
 in the above 202,600 60s. „ 
 
 25,000 English (Original Edition), included in the 
 
 above 53,000 40s 
 
 22,500 of the English words, arranged 25 to the 
 page, with the full width of the quarto page 
 for filling in phrases ..... 60s. ,, ,, 
 
 401 Millif)ns of Pronounceable Words, all of 
 Ten letters, representing 4 complete sets 
 of 8 figure groups. Also an additional 
 134^ millions, representing 12 complete 
 sets of 7, 6 and 5 figure groups, and all 
 numbers thereunder ..... Price l.SOs. 
 
 AGENT FOR ALL HARTFIELD'S CODES.
 
 Medium 4to, 500 pp. Cloth, price lOs. 6d. net, 
 THE 
 
 PREMIER 
 
 CYPHER TELEGRAPHIC 
 
 CODE 
 
 Containing close upon 120,000 Words (from A to M, 
 
 specially selected from the Berne Official 
 
 Vocabulary) and Phrases. 
 
 THE MOST COMPLETE AND MOST USEFUL GENERAL CODE YET PUBLISHED. 
 
 COMPILED BY 
 
 WILLIAM H. HAWKE. 
 
 SOME OPINIONS OF THE PRESS. 
 
 " It is calculated to save expense by making one word do the duty of two to five 
 words as compared with other codes, without trouble or loss of time. This result 
 has been obtained by introducing novel and simple methods of tabulation. The 
 scope of the code is a very wide one, and makes it suitable to the traveller as well as 
 to the commercial man." — Telegraph. 
 
 " Is distinguished among books of its kind by the unusual width of its range. 
 For the rest it is a careful work, which keeps constantly in view the practical needs of 
 men of business." — Scotsman. 
 
 " The code is certainly a marvel of comprehensiveness, and at least the translation 
 of messages would appear to be easy, owing to the system of initial words and cross 
 references embodied in it, and the conspicuous headings." — Manchester Guardian. 
 
 " An extremely valuable cypher telegraphic code. The saving of expense is, of 
 course, the primary object of a code ; but another consideration with Mr. Hawke has 
 been to arrange a code so that what is required to be transmitted can be sent with 
 the least possible trouble and waste of time." — Financia/ News. 
 
 " This compilation is excellent in choice of messages and simplicity of arrangement. 
 Those who have had to deal with other codes will appreciate this point. Particularly 
 admirable are the joint tables for market reports, which can give quotations and tone 
 in one word. What with careful indexing to the matter and ingenious simplicity this code 
 is certainly one of the best we have yet seen." — Shipping Telegraph, Liverpool. 
 
 " An Vollstandigkeit diirfte es von anderen Werke gleicher Art kaum ijbertroffen 
 werden. " — Frankfurter Zeitung, 
 
 "The systems of tabulation are simple, and the general appearance of the 
 volume seems to confirm the claim that this is by far the most complete code ever 
 issued. " — Tribu?ie, Chicago. 
 
 " Mr. Hawke's long experience as an expert in telegraphic code systems is a full 
 guarantee of the excellence of the ' Premier Code'." — Liverpool Courier. 
 
 Now Ready. Medium 4to. Cloth, price los. 6d. net. 
 
 100,000 WORD SUPPLEMENT TO THE PREMIER CODE. 
 
 Words specially selected from the Berne Official Vocabulary, remainder of 
 alphabet from M to Z. 
 
 COMPILED BY WILLIAM H. HAWKE. 
 
 For special Tables for Offers, Buying, Selling, etc., the Five Figure 
 System, worked in conjunction with Keys of Words, numbered from 00,000 
 to 99,999, and 2440 Reserve Words for Indicating or Catch Words or Special 
 or Temporary Tables, does not clash with the Pnviier Code. 
 
 These two volumes contain between them all the telegraphically good 
 words of the Berne Official Vocabulary, as they have been selected with 
 the greatest care. 
 
 LONDON : EFFINGHAM WILSON, 
 
 54 THREADNEEDLE STREET, E.G.
 
 UNIVERSITY OF CALIFORNIA LIBRARY 
 
 Los Angeles 
 This book is DUE on the last date stamped below. 
 
 J UN 2 1983 
 
 ♦J luce ,. ^L'-'J,U 
 
 JUN 7 B^
 
 •'J'^J-n.o. »^ML.I»-. 
 
 3 1158 00848 
 
 UC SOUTHERN REGIONAL LIBRARY F 
 
 AA 001 145 978
 
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