Under this head we shall consider the effect upon the foreign exchanges of currency changes, the production of the precious metals, commercial crises, and unusual commercial transactions.

A. Currency changes. - The effect of these is most apparent in a country whose government has suspended specie payments and made its own notes legal-tender. Under such circumstances the rates of foreign exchange rise to unusual and sometimes to extraordinary heights and are unstable and irregular in their fluctuations. The former effect is due to the depreciation of the notes, and the latter to the unsteadiness of their value. As explained in a previous chapter, gold is always at a premium in a country with an inconvertible currency, and since international values are usually reckoned on a gold basis, bills of exchange are necessarily also at a premium. For example, the par of exchange between Italy and England is 25.225 lire per pound sterling, but when Italian notes are at a discount of ten per cent and bills on London at par it is necessary to pay twenty-seven lire of these notes in order to purchase a sovereign in London. Since inconvertible government notes are subject to violent and irregular fluctuations in value, the rates of foreign exchange must necessarily oscillate in response to these as well as to the influences ordinarily operative. In addition to these effects, inconvertible notes render all values more or less unstable and calculations regarding the future uncertain. Speculation thus becomes an element of unusual importance in mercantile affairs, and affects the value of foreign bills as well as of other classes of securities. When exporters are obliged to exchange their bills for a currency of uncertain and fluctuating value, they are certain, so far as possible, to protect themselves against the risk assumed by charging higher rates. Bankers and other dealers in bills are also willing to pay higher prices in such currency, because they are buying the right to receive a definite amount of gold, the value of which is certain.

Foreign rates of exchange are also influenced by changes in the standard of value. The readjustments of values which accompany changes of this character interrupt the ordinary course of commercial affairs, and thus indirectly affect the market for bills, but direct effects may also follow. It very rarely happens that the new standard is the exact equivalent of the old in value, and, hence, a readjustment of prices becomes necessary, which affects the value of bills as well as of everything else. The exchange of the old currency for the new sometimes involves international movements of the precious metals which always affect the rates of exchange.

When Germany substituted the gold for the silver standard in the early seventies, large quantities of gold were drawn from England and the surrounding continental countries, and the silver market was considerably depressed by sales of bullion, most of which went out of the country. These movements, like the importation and exportation of ordinary commodities, were accomplished by the negotiation of foreign bills, with the usual effect upon the rates.

The permanent effect of changes of this character depends upon the relation of the new standard to those of other commercial nations. If it brings the country into harmony with its neighbours by giving it the same standard that they possess, in the long run the rates of exchange will be more stable and more responsive to purely commercial influences; but if the new standard is different from that of neighbouring countries, the exchanges will be subject to extra-commercial influences of a disturbing character. The reason for this was explained in the section on the par of exchange. It was there shown that between countries possessing different standards no par exists, and that in the calculation of the rates the value of silver in terms of gold or of gold in terms of silver must be reckoned with as well as the quantities of metal in the standard coins and the demand and supply of bills. Thus if the nations with which a country transacts most of its business have the gold standard, and it adopts silver, it thereby introduces into its foreign exchanges a new and disturbing element, namely, the fluctuations in the value of silver. A merchant or investor who pays silver for a gold bill or gold for a silver bill is liable to gain or lose on account of fluctuations in the value of these metals, to say nothing of the ordinary circumstances affecting the value of bills. From the standpoint of the foreign exchanges, therefore, it is a great advantage to have a common standard throughout the commercial world.

Other currency changes of a less radical character than those already mentioned also affect the market for bills. A good illustration is furnished by our experience in 1894 with the greenbacks and Sherman notes. As we have already explained, the obligation of the government to redeem these in gold on demand, combined with other circumstances which raised the foreign rates to the gold-exporting point, forced the sale of government bonds to maintain the gold reserve and finally a contract with a syndicate of foreign bankers to prevent the operation of the "endless chain." Some of the bonds went into foreign hands, thus increasing the supply of bills and tending to depress the rates, and the bankers with whom this contract was made used the influence which their relations with foreign firms put into their hands to manipulate the bill market in such a way as to depress the rate below the gold-exporting point. On many other occasions in our history actual or prospective currency changes have produced marked effects upon the foreign exchanges. This was notably the case in 1875, when the Resumption Act was passed; in 1878, on the occasion of the passage of the Bland Act; and in 1893, when the "silver purchase" clause of the Sherman Act was repealed. The explanation of these effects is, however, too obvious to require further illustration. When we remember that currency changes affect the basis of all values, that the markets for international securities are as sensitive to such changes as a barometer to the pressure of the atmosphere, and that the rates of foreign exchange are as responsive to dealings in stocks and bonds as to exports and imports, the necessary connection between currency changes and the bill market becomes clear.