In order properly to interpret the fluctuations in the value of foreign bills, it is necessary to note the so-called gold points, that is, the rates of foreign exchange which are likely to cause movements of gold between gold-standard countries. We might also properly speak of the silver-points if we were discussing exchanges between silver-standard countries. In this connection we need only to refer to the discussion of the value of bills of exchange in the previous chapter, and to apply the principles there laid down to the special case before us. It was there shown that in general the limits of the fluctuation of the value of bills, in accordance with the law of demand and supply, were fixed by the cost of shipping legal-tender money between the place where the bill is drawn and that in which it is payable. In the case of exchanges between gold-standard countries these limits are known as the gold points, for the reason that, if the price of foreign bills should rise above the upper limits as thus determined, it would be cheaper to export gold than to send bills for the purpose of settling international accounts, and, if it should fall below the lower limit as thus determined, it would be cheaper to import gold than to sell bills drawn upon foreign creditors.
By way of illustration, let us suppose that the demand in New York for bills upon London is so great that bankers are disposed to charge for them more than the par of exchange plus the cost of sending gold. The demand for bills would be immediately checked, and gold would be exported. For example, assuming the total expenses involved in sending the gold to be two cents per pound sterling, a charge of $4.90 per pound sterling, or even of $4.89, would probably be sufficient to start a movement of gold from New York to London, $4.86 2/3 being our par with England. On the other hand, if the supply of bills as compared to the demand were so great that bankers were unwilling to pay at least $4.84 2/3 per pound sterling for them, New York exporters or other creditors would order gold shipped from London at their expense rather than sell bills at such a sacrifice. Thus, assuming two cents per pound sterling to cover all the expenses of procuring and shipping the metal, the gold-exporting point would be reached when bills sell at $4.88 2/3, and the gold-importing point would be reached when they sell at $4.84 2/3.
The flow of the precious metals between countries of different standards is subject to the same law, though in these cases the limits themselves change with fluctuations in the value of silver or in the depreciation of government notes. Suppose, for example, that according to the price of silver in the New York market to-day, the bullion value of one hundred Mexican dollars is fifty dollars in American gold, and that the total expense involved in shipping that amount of silver from the city of Mexico to New York is ten cents. If the price of bills on Mexico City rose above $50.10 per $100 Mexican, silver would be exported, and if it fell below $49.90, silver would be imported. Suppose further that one week from this date the price of silver bullion has fallen to such an extent that one hundred Mexican dollars can be bought for forty dollars of American gold, the expense of shipping silver not having changed. The exporting point will then fall to $40.10, and the importing point to $39.90. It thus becomes evident that the rates of exchange between countries with different standards are subject to much greater fluctuations than those between countries possessing the same standard. In the latter case they are ordinarily held within the limits set by the expense of shipping coin, while in the former they are modified also by changes in the relative value of the precious metals and sometimes by fluctuations in the value of government notes.
In the determination of the gold points a very liberal interpretation must be given to the phrase expenses of transportation of coin. Ordinarily these include express or freight charges, insurance, interest, and a few minor items like charges for boxing, drayage, special fees, etc. But occasionally other items and sometimes very large ones must be added on account of a temporary and abnormal scarcity of the precious metals. The gold supply of a particular market may be temporarily cornered, or perhaps nearly or quite exhausted, and, in consequence, it may be almost impossible to get coin at any price. In this case the upper limit to the rates of foreign exchange would be temporarily removed, and they might rise to almost any height. If the gold were obtainable by payment of a high premium over its legal price, the upper limit would be raised to that extent. Indeed, under the head of expenses we must place every outlay that is necessary in order actually to put the gold into the hands of a foreign creditor, including the premium upon it, if one exists.