Illustrations Of Foreign "Drains."

A few illustrations of the mode may be useful. A foreign merchant may export (or sell) goods to England: his correspondent in this country who receives the price of the goods may find that the cost of British commodities suitable at the time to be purchased with the proceeds and dispatched abroad for sale, is too high to render the transaction profitable to his chief; hence, instead of investing in British commodities with the proceeds, he obtains cash and remits. Or the foreign merchant may sell the bill of exchange which he has drawn for the goods upon the British receiving merchant to a local dealer in money; and if gold should be required at the time abroad the dealer will draw the proceeds of the bill in specie1 and dispose of the specie at a profit. Or, again, the rate of interest current in the foreign centre may exceed that obtainable elsewhere and thus favour the importation of money for advantageous utilisation in local loans rather than the receipt of exchanged material articles. A credit also from abroad may be obtained with a London banker by discounting bills or selling securities; making use of this credit by demanding the proceeds in Bank of England notes; converting the notes into gold at the issue department, and withdrawing the gold. Or bills on London firms (the evidence of indebtedness for exports to England) may be purchased in the foreign money market, remitted here for discount, and resulting, by the procedure just described, in a diminution of the Bank of England's resources.

1 Specie: Latin species, a kind subordinate to a genus or larger class: from species, a look, appearance - the ultimate verb signifying to look, to see. Specie is the ablative, and the phrase arose of in specie, in kind, so that "paid in specie" was equivalent to "paid in visible coin": coined money.

Exports Of British Bullion Not Always In Payment Of Imports

It is further to be noted that it is not necessary to suppose that bullion is exclusively exported from England in order to discharge a prior state of British indebtedness to foreign exporters of commodities to this country. For bills may be created by a foreign bank upon its London agents; and if the house be substantial and in credit the discount of these documents can be arranged, and the proceeds, as already explained, diverted from England in gold. (The bill, of course, must be satisfied or met at the date of its maturity.)

Exports Of British Bullion Frequently The Result Of Dear Money In Foreign Countries

And finally - as already hinted - if, for example, the rate of discount in London be 3 per cent, and that prevailing in Paris be 6 per cent, the meaning is that gold may be bought (that is, borrowed) for 3 per cent in London, and sold (that is, lent) at 6 per cent in Paris, or a profit earned of 3 per cent subject to the costs of transmission. For money - or rather the desires of men who possess or can command it - inevitably seeks and finds the place or business in which it can be most remuneratively employed. Hence in these circumstances, as just explained, persons in London create bills upon their correspondents in Paris for the express purpose of selling them in London for cash, when the amount is remitted to Paris, and earns, by loans and discounts, the more favourable return of 6 per cent. In the same manner merchants in Paris at once forward to England the bills which they hold upon British firms for goods supplied; and their discounted proceeds (at 3 per cent) pass to Paris for this advantageous employment in the French central money market.

We may here point out, by anticipation, that the only mode of averting this process of depletion is to attempt to equalise the rate of discount prevailing in these two financial centres. We are thus led to that form of international monetary relationship which most gravely concerns the Bank in its conservation of the National Reserve, and which is termed the Foreign Exchanges.

The Foreign Exchanges

The province of this book would be exceeded - even if the writer possessed the technical knowledge requisite for the task - if an attempt were made to explain the minutiae of the procedure which the Foreign Exchanges involve. A brief and general exposition, however, is needed before the reader can fully appreciate the influences operating upon the Reserve; the prudence and sagacity entailed upon the Bank as custodian; and the effects which the process indirectly produces upon the prices of securities.

A simple definition of the phrase "Foreign Exchanges" may be furnished. The term is usually explained as a statement of the means by which the mutual indebtedness between nations is cancelled by payment; or, again, as an exposition of the ways in which foreign bills of exchange (for the discharge of debts owing abroad) are created and used; but the reader should adopt the practical sense of "The rates of monetary exchange between different countries," - that is to say, the amount of money in the currency of the country in which a business transaction arises with a foreign country (and for the settlement of which the money is required) which, at the time of settling that transaction, can be exchanged for another amount of money in the currency of the foreign country where the debt is due.