The numerous and varied influences which enter into the determination of the rates of foreign exchange often render their interpretation in a given case very difficult. It is much easier to catalogue the various forces which operate from time to time than to identify and measure them in a particular instance. The only rule which can be safely followed as a guide in an attempt to explain a rate is to disregard theories and suppositions and to rivet the attention upon the trade, stock-exchange, and banking movements of the time. A careful analysis of these will always throw light upon the problem and usually solve it. Currency influences are more difficult to detect, because they are more indirect and subjective in their operation. It is always dangerous to draw conclusions before all the essential facts in the situation have been revealed and explained.

As international relations become more and more complex the interpretation of the exchanges becomes more difficult. It is quite unsafe to conclude that the balance of trade is against us whenever the rates of foreign exchange go above par. That was never a safe conclusion, but it was more apt to be correct a century ago than at the present day. Many people still cling to the old theory of the mercantilists that, whenever imports exceed exports, a country is in danger of losing all its treasure and with it the basis of its prosperity, and these people usually attach great importance to high exchange rates because they consider them as indicative of these undesirable conditions. A study of the facts, however, will show that in numberless cases the rates are high when the balance of trade is favourable, because international securities have changed hands or banks have manipulated the exchanges, or the bullion market has been disturbed, or some of the other influences described in the preceding sections have been operative. No careful student of facts, moreover, can be longer misled by the old fallacy that an unfavourable balance of trade is a bad sign.

References

Most of the topics treated in this chapter are discussed in Clare's The A B C of the Foreign Exchanges and A Money Market Primer and Key to the Foreign Exchanges; Goschen's The Theory of the Foreign Exchanges; Macleod's The Elements of Money and Banking, ch. vii, and The Theory and Practice of Banking, ch. vi; Loyd's Four Lectures on Bills of Exchange, introductions to Lectures I and IV; Schraut's Die Lehre von den auswartigen Wechselkursen unter besonderer Berucksichtigung der deutschen Verhaltnisse; and Lejeune's Monnaies, Poids et Mesures des principaux Pays du Monde. On the characteristics of the London, New York, and Paris money markets see especially Clare's Money Market Primer. Schaps' Zur Geschichte des Wechselindossaments treats of the development and history of the right to transfer bills by endorsement, and Hertzka's Wechselcurs und Agio treats of the relations between the rate of exchange, the value and movements of gold, the balance of trade, and prices. On the mathematics of the exchanges, and the methods and customs of the various centres, see Tate's Modern Cambist, Norman's numerous books, especially Universal Cambist and Complete Guide to the World's Twenty-nine Metallic Monetary Systems, and Haupt's Arbitrages et Parite's. On the extraordinary financial transactions described in section 4 see Say's Dictionnaire des Finances, art. Indemnites de Guerre; and Leon Say's Rapport sur le Payement de l'Indemnite de Guerre.