The subject of the Foreign Exchanges is to the average man a complex one, and it is one which cannot be adequately treated within the limits at the author's disposal, but this chapter will help the student to understand the frequent allusions to the subject which constantly occur in most treatises on banking. The subject of the foreign exchanges treats of the international value of money, the value in one country of a debt payable in another, and the means of transmitting and settling such debts. It is obvious that to a man living in London ten sovereigns in India will not be worth so much as ten sovereigns in London. The cost of sending the sovereigns from India to London will detract from their value. Or, supposing a man living in New York owes a man living in London £100, and that by the terms of the contract the debt is payable in New York. In whatever way the debt is collected, the sum realised in England will be somewhat less than £100. In fixing a rate of exchange, besides the question of the cost of transmission, there is also the question of an equation between the two systems of coinage which are in use in the two countries, unless the systems happen to be the same, as, for instance, in England and Australia. But in most cases a relation has to be established between the amount of pure metal contained in the standard coins of the various countries. This relation is called the Mint Par of Exchange. When we say that the Mint Par of Exchange between London and Paris is 25.2215, we mean that the value of the metal in one full-weight sovereign equals that in 25.2215 golden francs, apart from any idea of distance and supposing the coins to be in the same place. Of course, the golden franc is not coined in France, but for exchange purposes the twentieth part of a Napoleon or twenty-franc piece is the unit of exchange.

The following are a few of the principal Mint Pars with London:

It follows that there can only be a Mint Par of Exchange between countries which use the same metal as their standard of value. There is no Mint Par between a gold-using country and one in which silver is the standard of value, because the exchange value of silver to gold is constantly changing. The Mint Par between two gold-using countries or two silver-using countries is a fixed quantity, and can only be varied by an alteration in the coinage regulations of either country.

The Mint Par of Exchange is a merely nominal rate of Exchange. Owing to the various influences which affect the current rates, the Mint Par is never the existing rate, or, if it is so, it is merely a coincidence. But from the Mint Par what are called the Specie Points are deduced, and these form the limits beyond which the rate of exchange between any two countries does not often vary, if their currencies are in a healthy condition. The Specie Points are determined by the cost of transmitting gold between the two countries, supposing they are both gold-using countries. Speaking generally, a debtor will not remit gold if he can settle the debt in any other way; it is the most expensive way. But if other methods fail or become too expensive, gold can in most cases be obtained, and therefore the cost of shipping and insuring gold determines the limits outside which the rates of exchange seldom vary.

Take, for an instance, the Paris rate: at the Mint Par £100 = 2522 1/2 francs. The cost of sending this amount of gold between London and Paris is, roughly, 10 francs. It will therefore cost a Parisian 2532 1/2 francs to send £100 in gold to London, which gives a rate of 25.32 1/2. This is one of the Specie Points. The other is the rate at which it will pay to send gold the reverse way, from London to Paris, and is about 25.12 1/2.

The Berlin Specie Points are 20.52 and 20.33, while those between London and New York are 4.89 and 4.82. In theory the exchange rates cannot vary outside the Specie Points either way, because no one will pay more for a bill than it would cost to send gold, and directly the exchanges touch either of these limits, a movement of gold between the two countries should follow. In practice, however, this is not always the case, and the rate sometimes does rise or fall beyond the usually accepted Specie Points.

There are two reasons for this: First, the published Specie Points are not exact, because the cost of shipping varies from time to time. Secondly, although gold can always be readily obtained in London for export, yet in other financial centres this is by no means always the case. The Bank of France, for instance, exact a premium on gold required for export if circumstances render an export of gold undesirable, and the Imperial Bank of Germany bring pressure to bear where possible, if they wish to discourage the shipment of gold.

International debts are not settled by the export ' and import of gold; it is only the balance of indebtedness which may be settled in this way. Bills and cheques are the chief medium by which international payments are made, more especially the former.

Let us consider a very simple example of payment by bills or cheques. A London draper buys goods from a Parisian costumier, and in payment he sends a bill for £100 accepted payable in London. But the Parisian costumier owes 100 to a Bradford woollen merchant. It is obviously not worth his while to collect the bill on London, have the proceeds remitted to Paris, and then send them back to Bradford. He sends the London bill to his Bradford creditor, and the latter presents it through the Clearing House in the ordinary way through his banker. The whole transaction is settled without any movement of gold. Of course this is an illustration which would seldom occur in practice. Very probably the Parisian would sell the bill, and it would perhaps find its way to Berlin or New York before being presented for payment in London.

Bills drawn upon London, that is, bills which are payable in London, are accepted all the world over; they are an international currency. It is obviously advantageous to the commercial world that some centre should be chosen by mutual consent where bills can be made payable, and where debts can be settled. In mediaeval times, bills were exchanged at certain of the great annual fairs. In modern times London has been chosen as this centre, and "sterling bills," that is, bills drawn in sterling on London, find a ready market in all parts of the globe. This is the meaning of the phrase that London is the financial centre of the world. It is the world's clearing house where international debts are settled. The reason why London has come to occupy this position is twofold. First, it has been for some time the most important commercial capital and distributing centre, and banking tends to follow commerce; and, secondly, it is a free gold market, and the foreigner knows that he can always obtain payment in gold for a sterling bill if necessary.