The Balance Of Foreign Trade And Its Effect On The Rate Of Exchange

Now, if English merchants have imported or bought merchandise from abroad of a larger total value than that of the goods which have been exported or sold abroad, the aggregate debts for which the English merchants are liable exceed the sums due to them by the foreign firms. The exchange dealers accordingly possess bills drawn upon foreign merchants by English creditors of a less total value than the debts due abroad by other English merchants. The latter, accordingly, rather than incur the cost of sending gold in payment compete for the purchase of the fewer bills upon foreign firms, and as a necessary result of competition the price paid for such bills increases; in other words, more sovereigns are given for a stated sum in francs than, in reversed circumstances, would be demanded.

The Bate Of Exchange And Its Effect On The Reserve

It has been mentioned that on the basis of the quantity of pure gold £1 is worth about 25.22 francs; otherwise expressed, £1 paid in England should provide 25.22 (nearly 25¼) francs in Paris; and as the consequence of this demand for the scanty number of bills on France, £1 may suffice to procure only 25.17 francs instead of the normal and exactly equivalent 25.2215; so that if a debt, in the assumed case, of 1000 francs had to be discharged in Paris the buyer of a bill, as a sum in proportion shows, would be compelled to give - not the sum of £39 13s., at the real equality of the coins (25.2215 francs per £1), but - the sum of £39 14s. 7d., at the preceding price of 25.17 francs per pound. And competition, according to the fewness of the foreign bills, may so advance that it would be as cheap (at about the exchange of £1 for 25.12½ francs, when gold would tend to leave England), to remit gold itself, notwithstanding the cost of insurance and carriage. The contrary state of trading transactions between the two countries (when £1 will purchase more than even the par value of 25.2215 francs) is here implicitly explained.

Thus the condition of the mutual commercial indebtedness between two nations may cause gold to be withdrawn from this country in settlement of the balance of debt, and, as it must be obtained ultimately from the Bank of England, the Reserve tends to become reduced below the limit which prudence and sound business principles would assign as in adequate relation to the extent of liabilities. If this outflow be not checked, merchants will grow alarmed at the diminution of cash resources upon which the validity of their documents of credit depend; general disquietude will pervade all trading operations lest debts should fail to be dischargeable in gold; and if the efflux on the preceding account prove to be continuous and increasing - especially if it concur with the abstraction of gold for the settlement of internal payments, and more particularly if, coincidently, other nations require gold for their local purposes - the mercantile misgiving may develop into a commercial panic.

England The Centre Of Monetary Transactions

The possible demand by foreign countries, apart from the fluctuations of trade indebtedness, may be enlarged upon. England is the unrivalled centre of monetary transactions, the supreme exchange at which the commercial and financial engagements of the world converge for settlement. This unique position England owes to numerous and unparalleled circumstances: her insular situation and consequent freedom from the trepidation of possible war which produces the nervous tension of continental nations whose boundaries meet; her free and elastic form of government, her vast commerce, her limitless resources, her intimate trading connections with every region of the earth, the certainty of obtaining gold in the discharge of her obligations, her vigorous and daring methods of enterprise supported by adequate pecuniary power, and, far from least, the established and renowned reputation of her merchants and financial institutions for honourable character, punctual fulfilment of commitments, and unassailable solvency. Hence bills drawn upon England form one of the favourite modes of investment of foreign banks and financial firms, since upon the permanent value of these documents rests no shade of doubt.

Financial Stress In Foreign Countries Relieved By Drafts On Bank Of England Reserve

If, then, a period of financial and commercial stress should on any occasion occur in a foreign country - an imminent war or industrial discredit and distress - a source of supply of the gold that may be rendered necessary to fortify commercial houses or secure the retrieval of mercantile confidence is readily provided by the conversion of these bills into metal. The Reserve of the Bank of England is thus the fund whence the world may draw.

The retention of the Reserve at an adequate level necessary to Britain's financial soundness.

But the maintenance of our own national financial soundness depends upon the retention of this fund upon a level proportioned to the range of our own liabilities; and this honourable duty, custom and tradition have confided to the responsibility of the Bank of England. A simple tradition of practice alone; for neither by legislative enactment, nor by formal and official recognition of the trust, has the Bank admitted or accepted the obligation. The performance of this duty thus affords a happy and memorable instance of deferring, not infrequently, the private gains of a corporation to the higher office of a public service.