We have discussed the situation as though the rate of exchange were affected only by the balance of exports and imports. It is, however, affected by all influences which occasion international payment. For example, in Europe in normal times American tourists spend perhaps two hundred million dollars yearly. They carry with them letters of exchange which they present to European banks for payment. If these transactions were isolated and kept to themselves, they would call for the shipment of two hundred million dollars in gold to Europe but they are lumped with other international payments which, on the whole, balance all payments made in this country. In the first half of the last century when merchant vessels were constructed of wood these vessels were owned extensively by the United States, with the result that there was a large balance of payments for ocean traffic made from Europe to America. At the present time the merchant marine is owned largely in Europe and there is a considerable balance of freight charges to be paid there by this country. In other days, when Europeans were making large investments in this country, that is, when we were borrowing from Europe, there was a large demand for specie to move in this direction. As time went on our interest obligations to Europe increased until our interest payment to Europe amounted yearly to more than the yearly investment from Europe. This gave rise to the need of sending exchange in the other direction. During the last quarter of a century our foreign exchanges have been influenced by the fact that great numbers of immigrants have come to this country, have lived sparingly, and have sent their surplus earnings to their relatives in Europe, often for the purpose of inducing these to emigrate also. It was estimated some time ago that the amount of foreign payments made by these immigrants amounted to one hundred and fifty million dollars a year. These and other influences which occasion international payment must be balanced against one another in order to arrive at the rate of foreign exchange.

Questions

1. What is the origin of the expression "favorable balance of trade"?

2. How will a Chicago debtor ordinarily cancel a New York debt? How will various deposit accounts be affected thereby?

3. What is a foreign bill of exchange?

4. What is the value of an English sovereign in American money? Does this value fluctuate? Does the amount of money which a person in New York must pay to cancel a debt of one thousand pounds in London fluctuate? Normally between what points?

5. How do financial bills of exchange differ from commercial bills of exchange?

6. Illustrate the fact that the rate of exchange between two countries is affected not alone by the balance of payments between those two countries but also by the commercial relations of these countries with other countries.

7. What tendencies are at work to keep a country from having too much or too little gold?

8. Name the principal influences other than the balance of trade which affect the rate of exchange.

Supplementary Reading

Devas, Political Economy, Chap. ix. Johnson, Introductory Economics, Chap. xviii. Johnson, Money and Credit, Chap. v. Seager, Principles, Chap. xxi. Taussig, Principles, Chaps. xxxii. and xxxiii. Walker, Political Economy, Part III., Chap. ii.