# [Kommentar zu George Joachim Goschen]

Unter den Gründen, die Goschen im folgenden Buch für Versendung des Goldes aus einem Land ins andre giebt, ist ein sehr wesentlicher ausgelassen.

 durchschnittliche Handelswerthverhältniß von Silber : Gold = 1 : 15,338. Gesetzliche Verhältniß in Preussen = 1 : 15,692 zu hoch Gold =  Feller/Odermann: Das Ganze der kaufmännischen Arithmetik, S. 314: 2,32%. Marx übernimmt hier den Abschreibfehler aus seinen Exzerpten aus Feller/Odermann: Das Ganze der kaufmännischen Arithmetik („Heft II. 1869“, S. 17). Schließen 2,23% Gesetzliche Verhältniß in Frankreich = 1 : 15,5. zu hoch Gold = 1,07%.

Es kann also Gold nach Frankreich verschifft werden (resp. Preussen), um dort Silber zu kaufen, mit einer Prämie von 1,07% im ersten, von 2,23% im 2. Fall. Unter welchen Umständen dieß mit Vortheil geschehn kann, hängt, selbst bei ungünstigem Wechselkurs für Frankreich mit z.B. England, Preussen davon ab daß die Differenz des Wechselkurses + Spesen der Verschiffung etc unter 1,07% in einem Fall, 2,23% im andern Fall steht. Die Verschiffung wird natürlich nur eintreten, wenn England Silber braucht, z.B. für Ostindien. Jedoch kann der Engländer bei günstigem Wechselkurs Wechsel nach Frankreich schicken, dort Silber dafür sich zahlen lassen.|

# George J. Goschen: The Theory of the Foreign Exchange. 7th edit. London 1866.

## Ch. I Definition:

Einfachster case: If the aggregate sums owing by any two country countries to each othere other were absolutely equal, that is, equal in amount, coincident as to the period fixed for settlement, and, payable too, in an equal or identical currency. (4) The fluctuations which actually take place index of the inequalities which exist in the indebtedness of different countries, inequalities either in the amount of their liabilities or in the time within which payment must be made or in the relation of the currency of one country to that of another. (4, 5) Z.B. in Exchange zwischen 2 Ländern, wo different Geld (Gold und Silber) und ausserdem all the other inequalities: »To establish the equality between the two sums, it would 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 3 months, and the amount of risk which would be run by receiving a piece of paper representing a promise to pay 3 months hence in exchange for cash paid down.[«] (8)

Relative indebtedness (of different countries) remains the first and most material element. (8) Dann »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.« (9)

## Ch. II. International Indebtedness

The exchanges are exchanges of claims or debts. (11) Die mutual indebtedness results »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 produce 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 payments (or promises to pass pay) which pass between the respective countries«, also die resp. »liability … whatever its origin may be«. [(12)] Eine Rolle bei »a great shipping nation« spielen die »freights«, zahlbar an sie durch other nation. (13)

»Foreign Loan … will tell against the balance, not of the borrowing country which receives the loan, but of the lending country which supplies it.« (13) 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. (13) In fact, the borrowing country exports its securities, which are imported by the lending capitalists, and thus, with regard to the balance of trade a foreign loan is equivalent to an increase of exportation. (13, 14) Russland has more than once »recourse to a loan« to readjust the balance. (l.c.) Andrerseits, eine reiche Nation, die die balance of trade für sich hat »often restores the equilibrium 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 [expend] on the commodities with which she supplies them, she in her turn expends on the Stock Exchanges of foreign capitals. … the balance of trade is immensely affected at such times, when any great speculative mania for foreign securities springs up.[«] (14, 15) »foreign stocks are often far more adapted for re-exportation than manufactured goods or produce, on which the charges of shipment or reshipment are infinitely heavier.« (15) Bei der »relative indebtedness or the balance of trade between two countries … 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 by a long term of years. (15) With the exception of the interest (z.B. on the American) on these securities, this consolidated indebtedness (Amerika’s gegen England z.B.) exercises hardly any influence on the floating indebtedness.« (p. 16) The balance of trade may be entirely against England, though the amount of American securities in English hands should immensely exceed that balance. (16)

The case of the coupons attached to such stock is very different. The interest which they represent is a constant and important feature in national indebtedness. It constitutes an immediate liability incurred by the borrowing country; it is expenditure in favour of a foreign creditor. … 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. (16, 17) So mit England gegenüber den andren countries. (17)

Ferner: Effect of profits and commissions on the mutual liability of nations. (17) Z.B. freights earned by the ships of various countries; the country which becomes the carrier of others, thereby establishes claims against them which it can pay for its importations for from them … An exclusively maritime country could discharge its obligations to other countries which supply it with necessities, simply by becoming their carrier without exporting any produce or manufacture to them in return. (18)

Ebenso Commissions. Früher als London »emporium of goods for Foreign markets, and English merchants supplied the greater part of the Continent (which was itself in no direct trade with India or America) with cotton, coffee, sugar, tea – in fact, with all the produce of the East and West Indies, – the commissions and profits on this intervention … important element in the income secured to the nation from foreign sources.[«] (18, 19) Aber »tendency of the age, which is constantly bringing the producer and consumer into closer and more direct connexion by eliminating middle men and intermediate profits, is likewise exhibited in the fact that the Transatlantic and Indian producer is brought more and more into immediate connexion with the continental consumer. 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 facilities. The interest and commissions … still paid by almost every country to English capitalists, … a noticeable element in the revenue by which England is enabled to discharge her enormous foreign liabilities.« (20 19)

Expenditure in travelling or residence abroad: ([19,] 20) In der Art exportirt Rußland jährlich many millions £ St. »The bills drawn by the travelling princes on their St. Petersburg bankers affect the exchanges precisely with the same force as bills drawn on St. Petersburg for the champaign sent thither from France.[«] (20)

Ferner Exchanges afficirt durch: [»] Import duties, transit dues, and the whole range of Gvt. imposts. … Expenses of armaments to distant regions, especially the regular expenditure of ships of war at foreign stations.« (20)

Imports und Exports natürlich the first and principal element. (21)

## Ch. III. Various Classes of Foreign Bills in which International Indebtedness is ultimately embodied.

Most international transactions are settled by a transfer of debts, through the medium of foreign bills of exchange. (23)

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. … The knowledge that there is a certain balance owing, for which credit is given, but which will be ultimately called |91 in, acts, to a certain extent, upon the exchanges – jezt aber handelts sich um the »liquidation of debts which are becoming due, – in fact, the liabilities for which the time of settlement has arrived.[«] (24)

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 by the liabilities of those countries to itself. (24, 25) 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 purchaser remitting the bill to another foreigner to whom he is himself indebted. (25)

The greater portion of bills will represent exports of produce, besonders zwischen weit entfernten Ländern. The closer the countries, the more diversified and complicated are the transactions represented by bills of exchange. Between the continent and England there is a very large proportion of bills which represent the expenditure of foreign residents, drafts on their bankers at home, and encashments of dividends or other sources of revenue. There will be found innumerable bills based on the sales or purchases of stock, and large amounts which represent the transfer of capital from one country to another by way of giving effect to a public loan or a joint-stock undertaking. (26)

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 remittances 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. (27)

Bills drawn against freights which have become payable: a large item z.B. in Norway or Sweden. When they have remittances to make, they have considerable difficulty in finding any other bills than such as are drawn against wood (their chief article of export), or against the freights earned by their ships. They are hampered in their importations by the difficulty of making remittances in „acknowledged first class bills“. (27)

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 valuable 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 10,000£, and the character of the bills is generally exceedingly good. The distance between the 2 countries, and the length of credit which the purchaser must accordingly give, make great caution necessary, and render it highly important that those on whom the bills are drawn should be persons of known Repute. (28) Dagegen zwischen Continent und England die bills of all possible amounts, oft sehr small und most mixed character. Viele transactions now in retail form. [(28)] Viele »on persons whom it is difficult to classify, and who belong to the lower strata of the mercantile community; on agents who have persuaded 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 shopkeepers and milliners, and others quite beyond the commercial circle – in fact whose business brings them in any way into connexion with foreign goods.« (29)

American Bills in some respects like the East Indian bills. Generally based on cotton, drawn in large amounts, represent considerable mercantile transactions. But the trade between the U. St. and Liverpool being much more rapidly and easily managed than between England and India, and peculiar facilities for the conducting of the operations without capital on the part of either the exporter or importer being obtainable 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. (29, 30)

The subject wird complicated, wenn es sich nicht um direct und immediate transactions handelt, sondern »that very large proportion of bills which represent indirect transactions, und others that do not represent any actual previous transaction whatever, at least in the sense of closing indebtedness.[«] (30)

Erstens: Transactions which represent a debt due to the drawer by a third party residing in a third country, of which the acceptor merely mediates the payment. F.i., teas shipped from China to New York are generally paid for by a draft of the exporter 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. (31) 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 attempted 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. (31)

Z.B. consider at any particular moment the indebtedness between England and the U. States. Z.B. Die claims of America upon England so groß (from all sources together) that we should have to remit the balance in gold. Aber: How do the U. 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? Dieß möchte change the balance. (32)

Most other countries make London still their banking centre. Der East Indian produce shipper to America draws on London and not on New York; the New Orleans cotton exporter draws on London instead of on St. Petersburg for the cotton shipped to Russia. ([32,] 33)

Secondary cause: the credit granted by London bankers und the greater reputation of London houses. (33)

Primary Reason [»]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 bankers, and English bills will be more saleable than any others. There can be no exchange on any place to which remittances have not constantly and regularly to be made. And vice versa, when remittances have regularly to be made, an exchange is soon established, and the intervention of a mutual centre is not required. F.i., England exports fabulous quantities of Manchester goods to the East, and silver into the bargain, receiving in exchange tea and silk. But the tea and silk which England requires be less in value than the merchandise exported. How can the balance be regulated? The Americans export very little to China, but require more silk and tea 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.« ([33,] 34) That the imports of England exceed their exports, does not invalidate the present proposition. (34) It is the universal diffusion of English products, which tends to bring |92 about the result described. (35) 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 C 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 C; 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. (35)

Wo regular und constant interchange of imports and exports between two countries … intervention of England nicht nöthig. Z.B. Java und Holland, New York und Bremen, Rio Janeiro und Hamburg: 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 to Bremen, by drawing for Bremen account 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 of bills drawn on Bremen direct; or, more simply, the tobacco and cotton shipped to Germany is paid for by German 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 England, but against different transactions. No regular mutual intercourse yet between Germany and Bombay. Bombay as yet takes very little from Germany, the great bulks of her dealings being still with England. Consequently, the Bombay merchants, finding few purchasers for bills on Bremen, still draw on London for German 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 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. … In these intermediate settlement London appears as the Clearing House of the world, where most international transactions are closed. (35–37)

Foreign bills which represent no settlement 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. … A portion of them approach very nearly to 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 secure the use of the money which is paid as their price, for the time during which the bills have to run. (37) The purchaser of the bills in this case takes the place of the discounter of accommodation bills, and the transaction may be perpetually renewed in the same way and with more facility than accommodation bills. (38)

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, consequently, the seasons when the imports have to be paid for will not coincide with the seasons when payment is exacted from foreign countries for exports. Z.B. in a purely corngrowing country, 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 requiring bills on foreign countries, in order to make remittances, long before the cornbills could be drawn and become available. (38) If no other device could be found, the importers would, before the harvest |93 time, be obliged to remit gold abroad in payment of their purchases; and afterwards the exporters, not being able to sell all 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 bona fide transactions can be bought, and subsequently square the liability 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 bills 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 purchasers, the importations having been previously paid for. (39)

The same object is often sought for and obtained by the exporting houses receiving permission 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 demand and when a premium is likely to be paid by the importing branch of the community, instead of waiting for a 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. (40) Great complaints have been made in the Court of Bankruptcy etc of 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. Diese blank bills brought before the public owing to some catastrophe in which the bill transactions actually were only undertaken with the intention of raising fictitious capital … during the time which the bills have to run. (40, 41)

## Ch. IV. Fluctuations in the price of foreign bills.

Abgesehn von den lezt genannten cases the purchase and sale of Foreign bills originally represent a simple transfer of debts. (43)

The primary difference of value clearly arises either from the aggregate amount of claims of any country 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 draw (call them 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. Daher competition for the sale of bills. They will take less money for them than their par value; i.e. sell them at a discount. In the other case competition of importers, i.e. the purchasers of foreign bills; the they pay a premium to secure them. (44) Wenn bills nicht sufficient, jeder Importer will avoid the necessity of sending bullion falling to his individual share; hastens to offer a slight premium to those who draw, 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. (45)

On the other hand, it cannot cause the discount at which bills are sold ever to exceed the sacrifices which exporters would incur, if they found themselves obliged to instruct their foreign debtors to send them bullion, in consequence of bills upon them being no longer saleable. The time, however, when they would receive payment would, in this case, be an important consideration. As long |94 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 reimbursed for the value of their exports till the equivalent for them is returned in gold. Accordingly, competition of the sellers of Foreign bills; discount derselben; aber der discount will not be greater than the estimate which the seller makes of the sacrifices pointed out. (45, 46) Z.B. New Orleans und New York, vor der secession, when their exchanges not disturbed by independent issues of inconvertible paper money. If at any time the amount of bills on New York offered for sale in New Orleans = the amount of remittances required for the payment of debts due to New York, i.e. if equilibrium of debts between the two cities, a bill for 100$payable at sight in New York, would be exactly 100$. If greater sum due to New York, vielleicht 1001/2$paid, to be not be obliged to send gold, which might cost them 11/2$ for each 100$in freight and insurance. The more the supply of bills diminished, the more the premium would rise, till the sellers might realise almost 11/2$ profit. At this point the premium clearly so high, that it would be indifferent to remitters 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 mean time 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 themselves with a smaller premium in order to secure some profit before the demand was entirely satisfied. Hence a fall in the price of bills, till the exchange once more at par, or below it. ([46,] 47, 48)

Conversely, when more bills than purchasers for them, the drawers feeling that their export business might have to bear the charge of 11/2 P.Ct. for bullion shipped to them from New York as returns, were ready to sell at a discount long before that point was reached; a discount which would, however, not exceed 11/2$P.Ct., the charges on bullion shipment. Wenn also bills at sight und in the same currency, the limits within which the exchanges may vary are, at the one extreme, the par value, plus the cost of the transmission of bullion; at the other extreme, the par value, minus the identical sum. Practically the exchanges rarely touch either extreme, but fluctuate between them, owing to the various measures and influences brought to bear upon the situation before the extreme case arrives, which cause a reaction in the opposite direction. (48) There are occasions, however, when the exchanges sink and rise much above or below the specie point. (48[, 49]) Z.B. in the first months of 1861, under the growing apprehension of the civil war in the U. St., fluctuations in the American rates of exchange much below the specie point. The balance of trade was much in favour of America. Very considerable exports of grain and flour, coupled with a reduction of imports, in consequence of political apprehensions. Hence natural that exchanges should fall to specie point. But they fell much below it. Reason: the peculiarly urgent necessity der exporters, of selling their bills immediately, at any sacrifice. It was a question of time. Three or 4 P.Ct. were sacrificed to secure the proceeds of the bills on England at once, instead of waiting for the arrival of gold. The exporter either might sell his bills at what they would fetch, or send them himself to Europe, with instructions to his correspondent 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. ([49,] 50) In ordinary times, capitalists would have competed with each other in buying up the drafts of urgent sellers. They would then have remitted |95 them to Europe on their own account, so as to secure the profit between the low price paid for the bills and their specie value. They would have bought at a heavy discount, in order subsequently to realise at least the specie value. 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. Interest may rise during the interval – they may anticipate. (50) Z.B. They expected to gain 11/2 P.Ct. net on the exchange. In their calculation the interest taken into account 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 interval sei a month, interest calculated on it at 6% p.a., or 1/2 P.Ct. for the month. If it rise suddenly to 24 P.Ct. p.a., they would have to borrow money at the rate of 2% for the month, in order to replace that portion of their capital which is travelling to Europe and back; also 11/2% more than they calculated. Thus they would gain nothing on their exchange operation. Also stringent moneymarket acts materially upon the exchanges, inducing sellers to force sales, and creating a reluctance on the part of purchasers to buy unless absolutely compelled to remit. This cause will not come forcibly into operation, when the international transactions are in a state of equilibrium; for there will be then as many purchasers 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 finally have to be ordered, while no individual is himself willing to wait for its arrival. This peculiar contingency will seldom 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. (51, 52) Aber ferner: Practically, an immense majority of bills are drawn payable at various periods after the date of their issue or first presentation to the acceptors – so many days after date, or so many days after sight. (52) Also 1) deduction to be made from the price which is bought for ready money not being itself payable till after a certain time; 2) 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 elements in the rate of exchange. (53) The state of the moneymarket where the bill is drawn, affects the exchanges, since it makes the seller more eager and the purchaser more reluctant; and, as one or the other must bear the loss of interest which must ensue till the proceeds of the bill reach their hands, this loss of interest will be at the rate established in their own money market at home. But when bills not 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 paying interest to his foreign creditor at the foreign rate, and this interest will not cease till his remittances become due. Difference to him of 2 months’ interest at the foreign rate, whether the bill he purchases is payable at once or 60 days after its arrival. As the foreign interest rises, he will insist on paying less for the 60 day bill, whereas, if it falls, he can afford to pay more. Im ersten case heavier deduction als im zweiten. 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 correspondents will have to discount the long bills for them, and the amount of discount affects their profits. |96 If they fear the rate of interest in the country on which the bills are drawn will be high, they pay so much less for the bills; if they anticipate cheap rates, they pay so much the more. The New York capitalists, who suffered the price of bills upon England to sink 3 or 4 P.Ct. below the specie point, felt anxious as to the rate to be paid in England for the discount of their 60 day remittances. ([53,] 54) In den Bills nicht at sight, no element of value so constant and so effective as the rate of interest in the country on which the bill is drawn. The fluctuations in long bills daher, verglichen mit short ones, illimited. (55) Extent to which solvency and credit of the drawer as well as of the acceptor, of a bill, affects the value of that bill: Firms of first rate standing „make the best exchanges“. Price paid to a merchant of undoubted position for his 60 days’ sight bill on a foreign country, higher than that granted for a second-rate bill on the same place. Concession in price must be made to purchaser, to take an article of inferior security. They must be indemnified for greater risk. … Amongst those engaged in international trade, 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, rendering it difficult to give any exact or definite quotation of the price of long-dated paper. Ausserdem, Credit operates on exchanges generally in times of commercial panic or excitement, and causes the prices of all bills to fall. ([55,] 56) In the case of America (1861) purchasers made 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. (57) Depreciated Currency: The basis of a settlement through a bill of exchange, 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. (58) Schwierigkeit d’abord, wenn doppelte currency, Gold in einem Land, Silber in dem andern. What is value of £100 in Vienna? (59) Suppose 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. Add the premium commanded by gold in the depreciated currency to the expenses incurred by the creditors of such a country, who have to recover their claim by sending for the gold instead of selling bills, or, in the opposite case of the debtors, make a corresponding deduction. (61) If these debtors, instead of paying an extradordinary price for the bills which they wish to purchase and remit, incur the expense of sending 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. (62) The depreciation of the paper circulation und the premium on bullion is almost the same thing. (63) Wo large and inconvertible paper currency »the precious metals … no longer constitute the standard, but themselves become subject to another standard[«]. Den Preisfluctuationen der andern Waaren entspricht der des Goldes. Steigen sie, so auch price of gold, as measured by paper money. (63) So wenn östreichisch Papiergeld fällt, Gold steigt in Oestreich und English £ worth so many more Austrian paper florins. … An English traveller in Austria obtains at such a time f.i. 15 florins instead of 10 for £1. Thus those who pay sovereigns for florins on the London Exchange, require the same favourable terms. Alle andren Ursachen, die influence die Fluctuations of Foreign Exchanges produciren selten combined a variation of 10%. Anders mit den effects of variations produced etc durch die currency. (64) diese fluctuations, in a certain sense, apparent, die 15 depreciirten florins nicht mehr werth als vorher die 10fl. (65) The purchasing power of the nominally larger sum |97 is not greater than that of the smaller. (66) Ebenso, after the new standard of exchange is established, seller has no loss. Z.B. seller, drawing for export of sugar to Vienna, sold his sugar for 10,000 florins, 10fl. = 1£, also = £1000 for his sugar. A fluctuation of 10% now occurs, owing to an over issue of paper in Austria. Prices generally rise 10%, and the exchange rises also. He sells now his sugar for 11,000 florins, and sells his florins at the rate of 11fl. = 1£, thus realising £1000, precisely as before. (66, 67) Der rise der Prices ist nicht sofort general. 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 comparatively stationary. (67) The apparent fluctuation in the exchanges extends no further than the apparent increase of value which has resulted from the same cause. (68) A parcel of manufactured goods commands more florins, and an English sovereign commands more florins also. (l.c.) Anders verhält es sich, when the fluctuation (in the value of currency) occurs between the beginning and end of the same (mercantile) operation. Z.B. der shipper of sugar shipped his sugar before the depreciation, sold it at 10,000fl., 10fl. = 1£. Defers his drafts against these florins for some time. In the interval, the rate of exchange changes to 11fl. = 1£. He gets now only 909£ instead of 1000£, 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 country in such a situation worth so much less, whereas all debts due to it can be so much more advantageously discharged; the creditor of the country loses and its debtor gains. Wären its imports und exports in equilibrium, there would, on the aggregate of transactions, be neither loss nor gain. Der individual creditor of the country would lose, the individual debtor gain. (68, 69) The bills on a given country fluctuate in value to the extent worin die prices of all purchaseable articles – bullion included – are affected by the depreciation of currency; in other words, in proportion to the discount of the paper money, or the premium on gold. Beyond this proportion, the fact of the depreciation of the currency cannot cause them to depreciate. Sonst the creditor of any sum payable in the inferior money 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 transaction by the sale of a bill. (70) Aber if the Export of bullion, from the country, where the depreciated currency exists, is prohibited? or if it is impossible to buy up gold, either because it is illegal to pay a premium, or because all bullion has actually disappeared? (70) How is the holder of a claim on such a country to encash that which is due to him? (70) Z.B. A merchant has supplied Russia with cotton when the export of bullion from Russia was practically prohibited. How was he to exact payment? He is entitled so many roubles in St. Petersburg. How could he convert those roubles into English sovereigns? Oder: A Russian spinner has imported cotton from Liverpool. How shall he pay? He must either buy a bill on England from others who happen to have sent produce thither, and thus have claim on an English house, which he can buy and transfer to his Liverpool creditor; or he must send the produce, which will sell for sovereigns, himself. Aber in Russia pause in exportation during a large portion of the winter season. He would be 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 as to price, he is entirely in their hands. ([70,] 71) Muß er das Geld an |98 bestimmtem Tag in England zahlen, dann no limit to the price exacted from him – in other words no limit to the fluctuations in the exchange. If the exports of such a country do not equal the imports (by far the most general case) the balance which the country has to pay can only be settled by an enormous sacrifice, – in fact, 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. (72) Wären die imports dieser country > exports, bullion would be flowing to it, and no grounds for the prohibition of its export would have existed. (73) The consequence of the depreciation of currency in any country is to offer inducement for further importation, by creating an appearance of high prices. (74) Für den debtor to Foreign Country in such case , if the demand for bills exceeds the supply, there is theoretically no limit whatever to the price of bills. (75) In case of equilibrium of exports and imports the natural value would 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. (75) Practically, owing to the system of credit and deferred payments, there is never an equality between exports and imports; 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. (76) Case of different standard of value (gold and silver), as between Hamburg and London: Either gold or silver will be at a premium. Except France, with its double standard, gold is simply merchandise in countries of silver currency, and silver merchandise is in countries which have a gold standard. According to the price of the merchandise at a given moment, the exchanges fluctuate. When a bill on Hamburg is to be sold in London, the value of silver in England will enter largely into consideration, or, in the opposite case, the value of gold in Hamburg. When great demand for silver in England, as in case when large shipments are to be made to the East, there will be a great demand of bills upon Hamburg; for one means of procuring silver … buying up bills on Hamburg, send this these bills for encashment, send instructions that the silver thus encashed is to be actually shipped to England. If silver at premium in Hamburg England, the sellers of bills on Hamburg exact premium from the purchaser by raising the price of their bills; the buyer will have to pay more £ for marks banko, or, what comes to the same, will receive less marks for 1£ St. (78 76, 77) When silver not a premium 1£ = 131/4 marks; wenn silver rises, vielleicht nur 131/8 marks. The exchange on Hamburg being expressed by the number of marks banco, which are to be had for 1£, the exchange on Hamburg will be said to have fallen. But in fact bills on Hamburg have then risen in price, a less amount of marks commanding the same amount of gold. Umgekehrt. Hamburg merchant wants gold, z.B. to buy cotton with it in America. Bills on London serve the purpose. Competition for such bills. Premium on them, they rise in price. More bancos demanded for every £ which is placed in London at the disposal of the purchaser of the bills. Hamburg exchange will rise; z.B. 131/2 marks given for 1£. Limit of this fluctuation will be the extent of premium of premium obtainable. Silver may be sent to London, and sold there for gold; oder im umgekehrten Fall Gold may be sent to Hamburg, sold there at the discount at which gold will stand in Hamburg, under the circumstances, the proceeds invested in silver and shipped over to England. 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. (78, 79) The sale is generally possible, and thus defines the limits of the fluctuations in the rates of exchange. ([79,] 80) Wenn es sich nicht, wie unterstellt um merchants handelt, die want to possess themselves of gold or silver, sondern um creditors und debtors, the case is the same. An English merchant owes a certain amount of Hamburg money. He is bound to pay in silver. When debt becomes due, silver be dearer than usually in England. Er muß buy silver at the enhanced price in the English market and ship it to Hamburg, oder buy bill on Hamburg, payable in marks, at an unfavourable exchange. The price of silver having risen, the price of bills payable in silver rises also, and the purchaser will receive fewer marks for his £. Aber limit the premium he has to pay for silver itself in the open market. (80, 81)| 99 Mit France, wo double standard, no difficulty at all. (81) A bill in Paris will be paid in that coin which is least in demand, which is at a discount as compared with the other. The purchaser of such a bill will not allow the price to be enhanced by the existence of a premium on one portion of the currency. (82) ## Ch. V. Interpretation of the Foreign Exchanges. Foreign Exchanges an unerring mercantile and monetary barometer. Auch, they clearly point to the disturbing currents. (85) „Favourable“ or „unfavourable states of the exchanges“. , ihre original basis the theory that the object of commerce is to attract gold. (85) The phrase accurate enough from the monetary or banking point of view. All engagement involve payments in gold or in paper convertible in gold. (86) When the stock of gold is evidently adequate, it is even in a banking point of view erroneous to consider a further accumulation advantageous or desirable. (86, 87) Nach Goschen »the phrase legitimately« expresses »the anxiety or confidence of the banking world as to the means of meeting their legal obligations«. (87) Nach demselben Herrn: [»]Political economists … are correct in their statement that, as regards the country at large and the interchange of commodities, exports and imports are always balanced … . But merchants and bankers are influenced 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 value may be actually equal; and further, by the anxiety as to the possibility of meeting these liabilities in that specific mode of payment to which they are pledged, namely, in gold or convertible notes.« ([87,] 88) Exchanges favourable to any particular country … mean … 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. Exchanges unfavourable … when foreign bills are in great demand, and when, consequently, their value seems likely to be so enhanced as to render the export of bullion an unavoidable alternative. (88) It is the price of short bills, not of those which have some time to run, which determines the course of bullion shipments. Bei long bills die rate of interest und question of credit exercise an additional influence. If there is a demand for bills upon any particular town, the price of all such bills, whether short or long, will rise. Wenn aber rate of interest at a very high point in such town, price of long bills would not rise in 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 discount he requires to be compensated by a so much cheaper price. Ditto for risk which he will run until the bill be ultimately paid. ([88,] 89) 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 compared with those for bills on demand, point mainly to the rate of interest, and partially to the state of credit. (89, 90) Natürlich anders wo long bills only are to be obtained to any amount. (90) Bei dem state of exchanges between Hamburg und London, f.i., neben der balance of trade, nie to forget the difference of value which would result from a premium on silver, the currencies of the 2 countries being dissimilar. So bei Russian exchanges … indicate not only the enormous indebtedness to foreign creditors, sondern auch depreciated currency. (91) Extraordinary course of the American exchanges at the beginning of 1861. A large efflux of bullion from Europe to U. States took place, and various theories were started. Hauptgrund war indebtedness of Europe to U. St. Wurde als Grund angegeben growing troubles in the States (which were leading to a panic) and the presumed speculations of English capitalists. The specie shipments were hurried and intensified by the Americans drawing sooner than usual against their claims on England, by suspending their orders for English manufactures, by the forced and unnatural 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 |100 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. (92) Die falschen Deuter des Efflux looked principally to the stock of gold in New York, the speculations in American securities, and the operations of capitalists. (93) 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 consequently the gold must return. To bring about this result, one of the following events would have to occur. It would return for payment of debt, aber die Yankees waren die creditors. Oder it would be remitted against fresh orders for English manufactures or for American stocks held in English hands. Diesem entsprach nicht der state of mercantile confidence in America (nämlich dem entering upon new mercantile transactions.) Oder gold would be sent as a loan to English capitalists, in the expectation that money would, as was certainly probable, become dearer here than in America. (93, 94) Falsches Argument von vorn herein that, because in 1857 the bullion exported to America was immediately returned, the same result would be witnessed in 1861. In 1857 the Americans had incurred enormous debts to Europe; in Europe had incurred enormous debts to her. On the former occasion the export of specie to the States was unnatural and artificial. In latter case the export of bullion was unavoidable. It was only hurried, because the American creditor, finding himself in the midst of a most dangerous political 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 commenced, 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 earlier 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 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 have been invested in some kind of merchandise, and returned in that form rather than in that of gold. (94–96) There was no monetary ground of panic, 1861, in the U. St. Quite the contrary. Sellers of bills might foresee a difficulty in disposing of them above the specie point and consequently up to that point press their bills upon the market. (96) The panic in America during the winter 1861 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 realised if they had had their bills exchanged into gold in England. … It is a rare occurrence to see alarm felt at an unusually favourable situation of the exchanges. (97) »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 decreasing currency.« (97) The American exporters of grain and cotton were the very class who (1861), 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. The English debtors may be argued not to have suffered any loss, because to them it was immaterial how they paid their bills at maturity – whether by handing their 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 … the charge on the exporter often falls on the consumer of the product exported|101 To the extent the interests of the exporter become identical with those of the 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 the country to which he exports, that such an expense should have to be incurred. (98, 99) A condition of the exchanges which leads to the importation of specie in 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 countries, it may be maintained that the state of the exchanges indicated is, in a certain sense, favourable to the country in question, and unfavourable to the foreigners with which it trades. (99) Assume (what is partially true) that each country fetches from the other what 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 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, any sudden extra charge upon exportation must be borne by him. Thus a sudden fall in the exchanges, which makes his bill upon his London house less valuable, or causes the whole cost of the transmission 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 countries are concerned, a state of the exchanges which renders it possible to purchase bills to pay for them, cheaply and easily, may correctly be designated as favourable. (99, 100) Rise of bills of extraordinary extent and rapidity in America 1862–63. Unfavourable Exchange: Dieser Fall nicht zu erklären aus den normal elements der fluctuation of Exchanges. The sudden transmission of capital from America to Europe, and the continuance of a demand for importations from abroad, while the cotton export was stopped by the blocked blockade of the southern ports, accounts only bis zum Fall to the specie limit, but not beyond. Die Ursache darüber hinaus die depreciation of currency in America. Act suspending specie payment in the U. St., and authorising the issue of inconvertible Gvt paper money. Thus it became possible for the Foreign Exchanges to rise, not a few percents, but 50 or 100 or even 200 P.Ct. In the Southern States the exchange on London actually rose to 400 P.Ct. (101, 102) In the Northern states the rise actually delayed far beyond the time when it was expected to occur. Ursachen: During the first months of the issue of the Gvt. paper, the private banks called in their notes to a very great extent, daher die aggregate currency nicht so much increased as expected. 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. The general contraction of credit lead to the absorption of a considerable amount of currency, ditto the enormous war expenditure. In the West a considerable dearth of currency had previously existed, and there was, consequently, a gap to be filled up. (103) Aber bald, in little more than a year, the exchange advanced from 110 to 180. … The price of foreign bills in New York, and the price of gold, constantly rose and fell together. Before the depreciation of the currency, the actual par of exchange for bills of exchange on England was 109. When gold rose, the foreign bills rose as much beyond 109, as gold rose above par, leaving the same margin (and the same variations within that margin), between the premium on gold and the price of sterling bills, as that which, in normal times, existed between the nominal par of exchange and the actual mean premium on |102 English bills. But this margin, which was 9 P.Ct. before, having itself to be calculated in depreciated currency, become apparently, but only apparently, greater. (104, 105) The basis of the calculation – before the depreciation – 40$ = £9, so that 1$= 4s. 6d. But as this assumed par of exchange does not coincide with the actual value of the gold in the$ and the £, the £9 being worth 9 P.Ct. more than 40$, gold for gold (by which the value of the$ is reduced to about 4s. 11/2d.) the calculation has to be rectified, when bills on England are bought, by 9$being added to every 100$ of the purchase money. (105. ) , wenn equilibrium of exchanges between U. St. und England, bills on London stood at 109. This was the mean specie point, modified, either upwards or down wards, by the state of indebtedness, rate of interest, in fact, supply and demand. Nach der depreciation, diese 9% Premium in gold, would also be increased in exact proportion to the premium on gold. If, before the issue of paper money, the purchaser of a bill on England paid 100$+ 9$ for it, he would, if the premium on gold had risen to 50 P.C., have to pay 150 (instead of 100) + 131/2\$ (instead of 9), or 1/2 as much again as what we may call the correcting premium. Thus, if the price of bills, when gold stood at 150, was 1631/2, this price would correspond to 109 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 described. (106, 107)

Disturbing causes were introduced by legislative enactments which interfered with the free commerce of 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. (107)

Besides the taxes imposed on operations in gold, other circumstances induced those who had occasion to buy either foreign bills or gold, to give a preference to the former, so that a somewhat artificial demand arose. Z.B. fears were continually entertained that the export of gold might at any time be prohibited directly or indirectly; preference therefore given to bills 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, so would be worth so much more, as being nearer their maturity. Former charges and risks incident upon the holding of gold, not of bills. Thus many considerations would tend to widen the margin between gold and bills, and create violent perturbations at particular moments which could not be accounted for simply by the depreciation of the currency. (107, 108)

According 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 investment 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 were dangerous, on account of the Government action, and unremunerative, owing to the loss of interest. Remittances to foreign countries combined the advantage of security with that of remunerative employment for capital, and many Mill. £. St. have been sent to Europe for this purpose. Gewisser Theil davon direkt über Kalifornien. Dadurch the great risks on the transmission of gold from California to New York avoided. Without these bullion remittances the demand for bills must have been even greater than it was; for the Americans required funds in England, not only for the purposes mentioned, but also for the payment of the large quantities of military stores purchased in this country, and for European manufactures. No cotton bills obtainable in New York, owing to the blockade, and fewer cornbills existing, owing to the reduction of that trade |103 in consequence of plentiful harvests in Europe, no doubt the demand for bills, notwithstanding the Californian remittances, has been great, and this demand has increased the premium on sterling bills. (109–111)

Rapid fall of bills (Foreign) following on the battle of Gettysburg and the opening up of the Mississippi: Premium on gold fell rapidly. Nicht von contraction of greenbacks. The conversion of some portion of greenbacks was a measure operating in that direction, but it was accompanied by fresh issues which neutralised that effect. Besides, this conversion was in operation before the fall, even at the time when the premium was rising. (112) Goschen erklärts aus »the belief suddenly springing up that the quantity of paper money would really be reduced, either by a further more effectual conversion, or by a redemption in bullion at a shorter date than appeared possible during the darker period of Northern prospects.[«] (113 112)

This belief induced persons, who had hoarded gold from a fear of a further depreciation of the currency (und had been before somewhat alarmed by the measures taken against this very hoarding by the Government) to sell their stock of gold as far fast as possible, giving up the idea of a further rise. The Gvt. too 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 und zuvor accumulated for this very purpose. (113) [»]An advance in gold again took place, which has since, with many fluctuations, made further progress.« (114. Note geschrieben December, 1863) They owe less to Europe than at any other previous time in late years, and the large deposits they have made in Europe, give them the power of regaining a great portion of the gold they have lost. (114)

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 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 export gold. An efflux of gold accordingly proves, whoever the exporters may be, that the supply of short bills on other countries is being exhausted … that the balance of indebtedness is temporarily against the country in question. (117, 118)

It is often supposed that gold is never exported unless to give a profit to those who despatch it. Fallacy. The expression so often used , 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, … do not prove that the despatch of bullion may not be natural and necessary. It must be sent by those who are in debt to that country, if they cannot find bills. … The exchanges may remain exactly at specie point for a long time, offering no prospects of profits to any cambists, yet compelling the constant flow of bullion in order to discharge liabilities. (118, 119)

Profits on Exchange operations: They can habitually be realised 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 bills for remittance, enter the market later on. Even when the exchanges reach the specie point, profits, though on a very limited scale, are made by those who, by having establishments identical with their own in foreign cities, and having a machinery, specially organised 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. … As far as the exchanges and the |104 principles which determine them, are concerned, it is perfectly indifferent whether the debtors to foreign countries – importers, merchants, or consumers – remit gold themselves, or pay a slight profit to cambists and money dealers, who, shipping it in large quantities, retail the bills drawn there against to such as require to remit. (119, 120)

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 to be made, lie at a very considerable distance; so that those who have the sagacity to ship in time, or before others deem it necessary, have the advantage 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 … Where there can be immediate action and reaction 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 commission 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. (120, 121)

The limits, therefore, clear 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 might recede below specie point, because the unfortunate drawers bills, being unable to wait the arrival of specie for their own account, might require the 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 loss. (121, 122)

The influence of credit or discredit – at any time of panic or other temporary derangement of confidence – the discount at which bills are then sold will not be mistaken for the result of an adverse balance of trade or a depreciated currency. (123) Sudden movements in exchanges, either upwards or downwards, may reflect the position of the rate of interest in different countries, not only in the case of long bills – but also in the case of 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 of bills on a foreign country exists, for whatever purpose this demand may arise. It is clear that such a demand may be caused as much by a desire to remit to that country for the sake of employing it at a high rate of interest, as for the purpose of paying a debt. [(123, 124)]

## Ch. VI. Socalled Correctives of the Foreign Exchanges.

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. (125)

Unfavourable exchanges – und daher export of bullion – the result either of the settlement of indebtedness, or of differences in the value of money, or of differences in currency. (126)

The mutual indebtedness of two countries, und the relative value of money, or rate of interest, in each, – these 2 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 interest will be attracting money to that quarter whence specie is flowing out in payment of foreign debts. (127)

The adverse balance of trade will, as far as its power extends, render the bills on the country which is most in debt difficult to sale, and tend to compel it to export specie; whereas the high rate of interest, which is generally cotemporaneous with a drain, or the prospect of a drain, of specie, will revive a demand for bills on this same country; 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. (127)

In 1861, when the excessive indebtedness of England to America, for corn and cotton, 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. [(127, 128)]|

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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 … If however, the derangement is but temporary, and while it consumes more in the first 6 months of the year, it exports more than it imports in the second 6 months, it can, like an individual with a prospective income, raise money to carry it over the interval. By offering a high rate of interest, it will be either able to procure a prolongation of credit from its creditors, till … the balance is paid off, or, it may induce third parties to make it a loan. Even … where a country is actually spending beyond its means, and where, by borrowing, it can only increase the evil …, a very high value of money is … most desirable ; as, by the action of the value of money on prices generally, a diminution of imports, and, consequently, of indebtedness is likely to ensue. (128, 129)

Aber hier to examine: the operation of a high rate of interest in those more usual cases where 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 extravagance, ending in a critical inflation of prices, or by excessive warlike expenditure. (129)

In such times influx of capital is only to be procured by offering it the advantages of a high rate of interest – a rate, higher than it can make at home, and sufficient to indemnify the capitalist for the expenses of transmission of his capital from one country to another. (131)

The Foreign Exchanges zeigen sofort, ob the inducement is powerful enough. So, wenn die Engländer shipped weekly (1861) gold for America, the Continental exchanges took a favourable turn; i.e. the Continent sought with greater eagerness for English bills, – a symptom that they were preparing remittances for the purpose 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 with a shipment of gold; for every English bill held by continental capitalists gives to its possessor the power of drawing gold from us. (131, 132)

Where a considerable efflux of specie is taking place, the rate of interest will rise in the natural course of things. The abstraction caused by the bullion shipments will of itself tend to rise 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. … 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 [.] At the same time, the actual export of bullion is a loss to the money of the country, and the import of gold from abroad replaces that which has thus been lost. (132, 133)|

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The real importance of a variation in the minimum rate of the Bank does consist in the indications afforded to the money market. The fixity of the minimum rate has this effect, that practically it becomes a maximum rate to the public. Persons in good credit are always almost able to procure money a fraction under the Bank rate, and consequently the Bank o. England is generally the last to feel the pressure of a rising demand. Thus, an advance in the Bankrate 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. (133, 134)

The fact has been that almost every advance in the Bankrate of discount is followed by a turn of the exchange in favour of England; and, vice versa, as soon as the rate of interest is lowered, the exchanges become less favourable. (134. ) In the first instance there are few buyers here for bills on foreign capitals, because foreign creditors give their English debtors a respite, and prefer to wait longer for remittances, gaining interest meanwhile at the profitable English rate. (135)

Bills which have some time to run seldom remain 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 investment 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 payable 3 months after date is bought by a banker at a price which is equal to a bill payable on demand less 3 months’ interest, and this interest 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 3 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. … this tendency always in operation when the rate of interest is peculiarly high in any country, the creditor of which is unimpeached. ([135,] 136, 137) As a matter of fact, the interest which can be secured by 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 P.Ct., and in England 5%, those who have 3 months’ bills on England will not be obliged to submit to a discount of 5% … Many will be found, who, in order themselves to make 1% more than the highest rate which they can secure at home, will not claim to deduct more than 4% from the price which they would pay for a bill on demand, instead of 5%. … These greater or less 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. (137)

At any moment there is in the hands of bankers and exchange dealers a large amount of bills on various countries, held partly for speculating on a rise or fall in the price of bills, but, to a very large extent, 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 compared with continental rates, are a favourite investment abroad. In Paris, Berlin, Frankfurt, Hamburg etc, the bills on England held by the bankers and joint stock Cos. often amount to many millions £. St.; 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 are due … 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 those bills will be at once sent to London, |107 and be discounted there at the cheaper rate, so that the proceeds may be remitted in gold to the Continent to be invested there in local securities at the supposed higher rate. On the other hand, so long as the discount in London is higher than abroad, so long the foreign bankers will be induced to hold their bills till they become due. The debt, embodied in the bills in question, must bee 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 moment; umgekehrt im andren Fall. (138, 139)

Accordingly, if, f.i., specie is exported from England to America, an advance 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 likely to 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 2 ways of settling every international 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 remittances 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 rate of interest is setting the current of capital towards England, there is a great demand, at high prices, for bills upon London, there is a corresponding absence of demand and low prices in England for bills on foreign cities. (139, 140)

Woher aber, 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 rate of interest between two countries as has occasionally been witnessed for some time in the case of England and the Continent? (140, 141)

Z.B. 6% rate in London, and 2 or 3% in Hamburg, or other continental cities? (141)

In the case of Hamburg there exists a difference of currency. The Hamburg capitalists possess this money in silver. He must ship his silver to England, sell it there, and with the proceeds discount bills at the high rate current in England. When these bills, however, mature, and the Hamburg banker wishes to repossess himself of the money, he must rechange sovereigns into silver, perhaps paying a premium for it; and this silver, he will have to reship to Hamburg. Die difference between interest in England und Hamburg sei = 6% – 2% = 4%. If his money invested in 3 months’ bills, his apparent profit for 1/4 year, = 4/4 = 1%. Nun aber Kost of shipment of specie remittance to and fro. He may lose by difference on price at which he sold his silver in England, and that at which he bought it back for home remittance. The costs of transport and the loss on the silver may far exceed the profit of 1%, . Unter gewisser combination of circumstances die difference of 4% in rate of interest kann daher existiren ohne the Hamburg surplus capital finding its way to our money market. Dieß verschwindet wenn die difference noch grösser, particularly if the high rate can be secured for 6 months instead of 3. During most periods of high discount in England, there have been large orders here to take 6 months bills for foreign bankers. The preference is given to the longer paper, because the high rate secured for a so much longer time, while the probable cost of bullion remittance and risk of loss upon silver remain the same. (141–143) Hamburg shows the difficulties attending the transmission of capital from one country to another. (143)|

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When the currency is identical, still possibility for differences in the rate of interest to exist in a greater or less degree. Z.B. cost of transmission of gold to and fro, between Paris and London, reduced to a minimum. The difference can never be very great. Aber: interest calculated by a percentage per annum. The probable profit, when operation in 3 months bill contemplated, to be divided by 4, whereas the percentage of expense has to be wholly borne by one transmission. So a very slight expense becomes a great impediment. If the cost is only 1/2%, there must be a profit of 2% p.a. in the rate of interest, or 1/2% on 3 months, before any advantage commences. If 1/2% the cost of sending money to England, and exchanges so favourable as to be able to draw it back without any cost at all, there must nevertheless be an excess of more than 2% in 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. (144, 145)

Hence a slight increase in the rate of discount is, under some circumstances, – that is, when there is not a great supply of bills upon England – not sufficient to bring over gold from the Continent … if 6% will not do, 7 or 8% will. … The first few per cents. do little more than cover the possible expenses of the transmission of the bullion itself, a difference of 4% p.a. on 3 months bills being necessary to cover 1% expense; but as soon as the charges (or the risk of charges) – the loss in exchange (as they are usually called) – are covered, then every additional per cent. which is granted as discount becomes an actual and certain profit … the rate of discount must be advanced till that point is reached. (145, 146)

Fact jedoch that stets grosse supply of English bills auf dem Continent. When the English rate of interest advances, desire to take advantage of it, and remit capital to England for temporary investment. The transmission to England effected in bills, so long as they can be procured. Sellers of English bills (on Continent) enabled to make a higher price. Competition raises it, till remittances by means of bills become almost as expensive as a shipment of bullion itself. Thus the profit, which would be made by those who could buy bills at the usual exchange to remit to England for investment at the higher rate, is divided between those who sell the bill and those who buy and remit it. … As the supply of bills tends to become insufficient, gold is actually sent. (146, 147)

The Peculiar Foreign Billsnot representing any actual indebtednessrather influence the exchanges in an opposite direction. … The issue of bills representing no transaction in goods, but simply based upon credit, and consequently … illimitable … tends to depress the price of bills. … For the period during which they have to run (for, as soon as they have to be covered, their previous effect is neutralised at once), their issue may have a material 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 use the secure the use of the money paid as the price of these bills, for legitimate or illegitimate purposes, during the 2 months which the bill has to run, that is till the time when they must part with the money to pay remittances, – 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 – drafts by which the drawer incurs a debt, instead of securing himself 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 making bullion remittances, if they are in debt, or make cheaper remittances if they want to give orders. (148, 149) In other cases – at the expiration of a certain time this will add to the difficulty, as an equal amount must again be withdrawn. (149, 150)

On the continent, this species of bills is often used as an engine for drawing gold from England, |109 in fact, as a mode of borrowing in the London market. Drafts are issued, payable 3 months after date; these are remitted to London, and there discounted, the proceeds being invested in gold, and shipped abroad. When the Exchanges are unfavourable to the Continent – i.e., 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. duo duo. due. due.(?)