16 NOVEMBER 1861, Page 23

THE FOREIGN EXCHANGES.*

Tom little book is a model of distinct conception and clear expres- sion on a subject which it needs a man of business to treat with any effect. There are a mass of economical transactions which are ex- plicable on very simple principles so long as the transactions them- selves are realized clearly, which cannot be done by a merely theo- retical political economist,—not from any ignorance of the principles to apply, but from a very vague impression of the facts to be ex- plained. The theory of the foreign exchanges is one of the moat important of these business-branches of political economy—a depart- ment of complicated facts and simple theory—a department the elucidation of which requires a wide experience and a lucid imagina- tion, rather than any original discovery of principles. Even too many clear-headed theoretical economists speak of the theory of the foreign exchanges with almost as much confusion and obscurity as the danc- ing-master in "Dombey," who is always propounding the question, " What will you do with your raw materials when they come into your ports in exchange for your drain of gold ?" The truth is, that they have no clear vision of the facts, that they have no distinct notions of foreign or English bills at all, and what sort of dealings they actually represent ; and to such the present little treatise, which is evidently written by a man of the largest experience in such matters, through whose hands bills of all kinds have passed constantly, leav- ing behind them a distinct recollection of the economical inferences to be drawn from their ebb and flow, should be especially welcome. How far it expounds the general theoretical principles of political economy sufficiently to explode the delusions which mere men of business are apt to generate from a narrow experience, we are less competent to decide. At all events, it is the treatise of a man who grasps those principles clearly and strongly himself, and who will be readily understood by any one who has a clear outline-notion even, of the principles of international trade. How large and real is the ex- perience of bills of exchange on which this little treatise is founded, will be best understood by a short extract : " There is, indeed, generally some peculiarity about the remittances from each different country. From the East Indies and China, where the chief articles of export are of great value, and where, from the necessity of large capitals for bringing such valuable produce to market, the transactions are more than elsewhere concentrated in great houses, the bills are generally drawn in large amounts and on first-class European firms : it is very usual to see bills of ten thousand pounds, and the character of the bills is generally exceedingly good; the distance between the two countries, and the length of credit which is accordingly given by the purchaser of the bill, make great caution necessary, 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 remittances 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 and retail operations, as well as the great transactions of merchants and bankers. Any one receiving remittances from the interior of the Continent to the amount of ten or twenty thousand pounds at a time, will find the sum made up of a very considerable number of little bills. There will be bills against cattle, against eggs, against butter, drafts of travelling Englishmen on their London bankers, bills against German toys, French knick-knacks, wine, fruit, and vegetables. And as the transactions arc now much carried in a retail form, amongst bills on regular merchants and dealers, large and small, will be found also a very considerable number on persons whom it is difficult to find, and difficult to rely on for payment when found; 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 beyond the commercial circle—in fact, on every class whose business brings them in any way into connexion with the Continent." The general theory of the foreign exchanges, as it is illustrated in this little book, may (except in the case of the effects due to a de- preciated currency) be explained with equal accuracy, and perhaps a better chance of being understood by ordinary readers, if we keep to transactions between individual merchants, instead of extending our view to the great international scale on which these transactions really take place. Why a diminished scale of exactly the same opera- tions should be easier to read off clearly than one of the size of life, it is not, perhaps, very easy to explain; but the fact seems to be that to any unaccustomed mind, multiplication by a large number creates a certain degree of confusion, even when the nature of the matter in hand is left entirely unchanged. Let us suppose, then, a merchant, A, in the north, and another, B, at a seaport of England, dealing with each other, the one furnishing manufactures to his correspondent, who in return supplies him with foreign or colonial goods such as tea, coffee, and silk. So long u their accounts are of equal value, there will be no need for the trans- mission of any cash between the two ; the agencies and outlay of the one will just compensate the agencies and outlay of the other, and the only mutual exchanges are exchanges of equivalent goods and services. This is the case which, in the case of international com- merce, would generally lead to what is called the par. We say gene- rally, because currency considerations might still derange the par. But now, let A order from B a larger value of foreign goods than B.

• The Theory of the Foreign Exchanges. Effingham Wilson.

is willing to order of manufactures from A, and the equality in the exchanges no longer exists, and when settling day comes, there will be a cash balance to be remitted, in some way or other, from A to B, unless the account can be equalized by some other device. In the corresponding international case the exchanges would be said to be favourable to B, as A would have to pay something in order to remit his balance to B, and, therefore, if B draws on A for the amount, he has a convenient and inexpensive mode of paying any other creditor of his in A's locality, even though it be for a sum slightly larger than what A owes him, that is, larger only by the trifling cost of trans- mission. For as A would in any case have to increase his payment, say by the commission on a country cheque, or by paying for a bank post bill in order to settle with B, it will be worth his while to pay the same sum in addition to his debt to any other person, C, who can sell him a claim on B for the amount of his debt, so that A's claims on B may now just balance B's claims on him. This is the case of fluctuation in exchanges due to an excess of imports over exports— which is said to be unfavourable to the importer and favourable to the exporter—unfavourable to A, and favourable to B, because B discharges his debt to C at something less than its actual amount, which margin is paid by A to cover the expense of transmission. What other causes will produce the same effect ? Anything, of course, which, whether it be due to goods transmitted or not, increases the value of A's indebtedness to B, or diminishes that of B's to A. Suppose, instead of A having ordered more foreign goods from B, he had sent his son to learn B's business, and had agreed to pay B out of the common account. This would, of course, have had the same effect ; it would have increased for the time A's indebtedness to B, exactly like an increased order of commodities. This is the analogous case to the influence on the exchanges of the residence of foreigners abroad, which, by increasing the indebtedness of our country to the country in which they reside, tends to turn the exchanges favourably for that country. Thus, when England owes a large balance to the United States, if a much larger number of Ame- ricans than usual come to live in England, bringing letters of credit on London bankers, that circumstance tends to trim or equalize the exchanges. If, on the contrary, at the same moment the great number of rich Americans usually resident here all return home, that circumstance tends to diminish the indebtedness of the United States to England, and, therefore, make the exchanges still more favourable to America, and unfavourable to England. The modes of paying English debts to America, without actual cash transmissions, are dimi- nished; the ways of paying American debts to England, without such a step, are increased, because the debts themselves are dimi- nished in number, with no corresponding diminution in the facilities for paying them.

Again if, while the actual exchange of goods between A and B remains as before, B finds it convenient to undertake the whole car- rying trade between them, so that he is at the cost not only of the carriage of goods to him but also from him to A, this circumstance again would increase B's claims on A, or A's debt. to B ; and this, therefore, would tend to turn the exchange favourably to B. This is the analogous case to that of a great maritime power, which is cre- dited not only with the value of the goods it exports, but with the charges for importing and exporting a large proportion of all the goods which pass its boundaries in either direction. Thus many of the items in an international account are credits to maritime nations for services rendered as carriers merely, which tend as much to turn the exchanges favourably for the maritime nations as an actual in- crease in their own exports. Thus English debts to foreign nations are paid at a cheaper rate than they would be were there not so many debts incurred to England for the mere freight of goods to and fro. This increases the indebtedness of other nations to us, and, thus gives us greater facilities for cancelling our debts to them than we should otherwise have.

Again, if B, being indebted to A for some such cash balance— whether due for goods, or for services of whatever sort—agrees to make it a more or less permanent loan, and to take A's bond for the amount, then the bond so taken tells for tbp time on the account between them exactly as if B had increased his orders on A up to the value of A's on B ; the bond is of the nature of goods to an equivalent value, and then, until the loan is repayable, the only mode in which it affects the exchanges is with respect to the annual interest which A owes to B, and which so far increases A's indebted- ness to B, and thus is favourable to the latter. But if B lends A on A's bond more than the balance owing to himself from A, then he in fact turns the exchange against himself, and obliges himself to find

means of remitting a balance to A, so that now the latter has the advantage in paying debts in B's locality at a cost rather less than their amount, since B will now be willing to buy up any claims on A in his own neighbourhood which exceed the cash balance of the loan to be remitted by anything less than the cost of trans- mission. This is the case analogous to that in international ex- changes in which the exchanges are trimmed or even inverted by a loan for a given period negotiated between two countries, of which the effect must always be for the time favourable, as it is termed, to the rates of exchange of the borrowing, and unfavourable to that of the lending nation, the security given by the borrower being, in fact, an increase of the exports of the borrower, and thus an addition to the temporary indebtedness (odd as it sounds) of the lender. Eng- land lending to Russia really adds Russian securities to the value of the Russian tallow and other Russian goods that we import, so that our immediate claims on Russia for English goods are the same as before, while Russia's immediate claims on us for Russian goods are increased by the new claims on account of the securities trans- mitted. Such is a condensed view of some of the simplest general elements affecting the foreign exchanges explained in this treatise. The mode in which the differences of currency between different countries, dif- ferences of national credit, and different rates of interest, affect the exchanges, are explained with equal ability and simplicity. In fact, it is a treatise in which there is scarcely a word too little for lucidity, nor a word of needless repetition. As an illustration of the writer's clearness of exposition let us take his explanation of a phenomenon which has often puzzled practical men, namely, the great inequalities which may exist in the rates of interest in almost contiguous European states without attracting capital or money from the one where it is low to that where it is high,—an explanation which never- theless makes it clear that a sufficient rise in the rate of interest in any state that has respectable commercial credit will attract capital thither as certainly as the tides follow the moon :

" How, it may be asked, is it to be explained that the rate of interest can remain at 6 per cent. in London, and at 2 or 8 per cent. in Hamburg and other continental cities ? This is a mystery which has puzzled many during those months in this present year in which our rate of interest has so much exceeded that of the Continent. It is a question, however, which can be solved with the greatest facility. 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 hypothesis so much money to spare that they can only manage to obtain 2 per cent interest for it, pos- sess 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 would be to ship the silver to England, to sell it there at what it will fetch, and with the pro- ceed4to discount English bills at the high rate current in England. When these bills, however, mature, and the Hamburg banker wishes to repossess himself of his 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 reship to Hamburg. This is the com- plete theoretical process. He remits his silver, invests its equivalent for a time in bills payable in gold, and reships silver to Hamburg when the bills mature. Accordingly, when he strikes his balance at the end of his operation, be 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 difference, however, if we suppose him to have invested his money in a three months' bill, he will only have enjoyed for a quarter of a year, and thus his apparent profit will so far be 1 per cent. But out of this 1 per cent. he may, under unfavourable circumstances, have to pay the expenses of specie remittances 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 difference 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 required his capital again at home. It is easy to perceive that it is 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 accordingly it is quite clear that, under certain combinations of circumstances, it is natural, and quite intelligible, that even a difference of as much as 4 per cent. may exist be- tween our rate of discount and that in Hamburg, without their surplus capital finding its way to our money-market

Hence it is clear that when a rise in the rate of interest of one or two per cent. has no effect at all in bringing foreign capital here, an increase of another one or two per cent. may produce all the effect required. We need only add, that those who have read theoretical treatises on political economy like Mr. J. S. Mill's, will find that this book practically realises for them many things which are there but vaguely outlined, while it will lead men whose interest has been awakened on the practical side to study the whole theory of interna- tional trade.