Although the rates of foreign exchange are usually effects of which commercial events are the causes, the reversal of this relation is not uncommon. Inasmuch as these rates enter into the determination of the profits of every international enterprise, it is evident that imports and exports may be affected by them. Indeed, a very high rate always tends to check the former and to encourage the latter. An exporter of wheat who is able to net two cents per bushel upon his Liverpool sales, when English exchange is at par, enjoys a handsome increase in his profits when the rates rise to the gold-exporting point, but when they fall to the gold-importing point he must deduct from them the expenses involved in the shipment of the coin in which he will be paid. To be sure, he may be able to recoup himself by raising prices, but this procedure is apt to check his sales and may stop them altogether. Importers, on the other hand, whenever possible, take advantage of low rates by increasing their foreign purchases, and buy as little as possible when the rates are high. If the foreign exchanges were responsive to trade influences only, these counter movements would offset each other, and would not be particularly significant, but in the light of the influences exercised by the stock exchanges, the banks, and the events described in the last section, they become most important.

By way of illustration, let us note the possible effects of speculation in securities and currency changes. The sale of a large quantity of American railroad stocks or bonds for European account would increase the supply of bills on the New York market and depress the exchanges. Exporters would then realize less from the sale of their bills, and might find it unprofitable to ship new cargoes. In that case the demand for the various classes of goods which constitute our chief exports would diminish, prices would fall, and the effects would thus spread to the grain- and cattle-producers of the West and to hundreds of mines and factories throughout the country. In all probability the needs of Europeans for food, clothes, and other necessaries would soon restore commerce to its usual channels, but it is easy to imagine instances in which these needs would be supplied from other sources, in which case home producers would suffer a permanent loss.

The effect of currency changes upon international commerce has been frequently noticed of late years by the combatants in the so-called battle of the standards which has been waged in the United States. Without anticipating the discussions of subsequent chapters, it may easily be shown that the introduction of the silver standard into the United States would seriouslv affect our foreign commerce. At the present time we deal chiefly with gold-standard countries, and must continue so to do for a long time to come. The adoption of the silver standard, therefore, would introduce into most of our international transactions the disturbing influence of the fluctuating value of silver. Our merchants would be obliged to make their contracts with Englishmen, Frenchmen, Germans, and others in terms of gold, and pay and be paid in silver. Fluctuations in the price of this metal between the date on which the contracts were made and that of their satisfaction might increase their profits, annihilate them, or turn them into losses; in any case, and under the best of circumstances, the possibility of such fluctuations would render the outcome of all foreign transactions uncertain and tend to discourage them. As explained in the preceding section, the fluctuations in the value of silver and the uncertainty which would accompany them would first affect the foreign rates of exchange and through them commerce.

On account of the reactionary power of the foreign exchanges upon commerce, it is best, so far as possible, to eliminate from them all influences except those of a purely commercial character. Speculation in international securities should, therefore, be discouraged in every possible manner and currency changes introduced only when the need for them is very pressing. Unusual financial transactions cannot always be avoided, but they are rarely, if ever, favourable to the interests of producers and to men engaged in the ordinary processes of commerce.