The Theory of the Foreign Exchanges/Chapter IV

the preceding chapter we have been engaged in considering the indebtedness which constitutes the subject-matter, and the bills of exchange which are the instruments, of international adjustments between country and country, of reciprocal payments between importers and exporters, creditors and debtors. We proceed to the more complicated question of the differences in the value of such bills of exchange, of the causes which determine and limit the extent of these difference, of the phenomena of which they are the index, and the measures by which they may be rectified.

The primary difference of value clearly arises, as was previously pointed out, either from the aggregate amount of the claims of any given country upon others exceeding the sum of her liabilities to them, or, vice versa, falling short of that sum. In the first case, those who have bills to draw (whom for the sake of conciseness we will call the exporters, though the class embraces all those have claims of any kind on foreign countries) will not find sufficient purchasers to take all their bills; for only those will buy who have debts abroad to settle, and these debts are by our hypothesis of less amount than the claims. Accordingly the exporters, competing with each other for the sale of the bills, will take less money for them than their nominal par value; that is to say, will sell them at a discount. In the second case, the importing class, those who have incurred liabilities to foreigners, having by our hypothesis larger remittances to make than the exporters can supply them with, bid against each other for such bills as may be got, and pay a premium to secure them. In both cases, what exporters and importers are seeking to avoid is the transmission of bullion, with all the sacrifices thereby entailed, and accordingly the extent of the premium or discount which can be given is determined by the extent of these sacrifices. Let us suppose that importers foresee that the bills which they will be able to procure, will not suffice for all the payments which they have to make. They accordingly become aware that the balance will have to be remitted in bullion; and each individual, to avoid this necessity falling to his share, hastens to offer a slight premium to those who draw, in preference to running the risk of having to send bullion, on which he would have to pay freight and insurance and lose interest besides. The premium may rise to within a fraction of a bullion remittance; nay, may even reach that actual point; because though the premium paid for the bill and cost of the specie remittance were absolutely equal, it would still be more convenient to send the bill. Beyond this point the balance of trade cannot cause the premiums to rise; nor, on the other hand, can it cause the discount at which bills are sold ever to exceed the sacrifices which exporters would incur, if they found themselves obliged to instruct their foreign debtors to send them bullion, in consequence of bills upon them no longer being saleable. The time, however, when they would receive payment would, in this case, be an important consideration. As long as the exporters can find purchasers for their bills, they get payment at once; but when they cannot dispose of their bills any more, they are not reimbursed for the value of their exports, till their equivalent is returned in gold. Accordingly each individual will submit to a sacrifice in order to sell his bills before the demand for them is exhausted and a discount is established; but the discount will not be greater than the estimate which the seller makes of the sacrifices which have been pointed out. The case may be briefly stated in figures, taking an instance from two commercial centres where the premium or discount paid on bills between them is not hidden or rendered more complicated by differences of currency, and where accordingly the par value is immediately plain. Let us take New Orleans and New York; for, though in the same country, their transactions together will be governed by the same principles as determine the adjustment of indebtedness between different countries. When the bills which have to be drawn from New Orleans on New York are equal in amount to the remittances which have to be made from the former to the latter - that is to say, when their mutual indebtedness is in a state of equilibrium - the seller of a bill for one hundred dollars, payable at sight in New York (for differences in point of time, and consequently of interest, must at present be eliminated), will receive exactly one hundred dollars from the merchant who owes the amount in New York and must remit it. When, however it becomes plan that a greater sum is due to New York than can be drawn against the claims of New Orleans upon that city, those who have to remit, hasten to pay a small premium to the drawers, and give them one hundred dollars and a half, because they fear that if they defer their purchases longer, they may be obliged to send gold, which might cost them one and a half dollar for each hundred dollars in freight and insurance. Thus the more it becomes evident that the stock of bills is insufficient, and the more the supply actually diminishes, the higher the premium rises, till the sellers are able to realize almost one and a half dollar profit. At this point the premium is so high, that remitters will become indifferent whether they buy bills or send gold, and some will despatch gold and others buy the bills, while the surplus which had to be remitted is gradually diminishing, owing to the gold which is sent. The exporters, becoming aware of this by being less pressed for their bills, begin to lessen the premium in order to secure some profit before the demand is entirely satisfied; and consequently the price of bills begins to fall, the premium is reduced, and the exchange may soon be again at par, or below it. Conversely, when there are more bills than purchasers of them, the drawers, feeling that their export business may have to bear the charge of one and a half per cent for bullion shipped to them from New York as returns, begin to sell at a discount long before that point is reached; a discount which can never fall lower than one and a half per cent, provided that the charges on bullion shipments do not exceed this figure. It is clear deduction from these considerations, that the limits within which the exchanges may vary, (provided the bills are drawn at sight and in the same currency,) are, on the one extreme, the par value, plus the cost of the transmission of bullion; on the other extreme, the par value, minus this identical sum. Practically the exchanges rarely touch either extreme, but fluctuate between them, owing to the various measures and influences which are brought to bear upon the situation before the extreme case arrives and which cause a reaction in the opposite direction.

There are occasions, however, when the exchanges sink and rise much below the specie point; and as this is not to be accounted for by the cause which we have been engaged i analysing, viz. a balance of indebtedness either in favour of, or against any given country, we must endeavor to discover others.

The recent fluctuations in the rates of exchage in the United States, reaching far below the specie point, furnish us with a suitable instance of such investigation.

The balance of trade had been clear in favour of America; the very considerable exports of grain and flour, coupled with a reduction of imports, in consequence of political apprehensions, established a surplus of claims on foreign countries over the debts due to them. Accordingly it was natural that the exchanges should fall to specie point; but the fact was, they fell much below it. How is this to be accounted for?

The reason must be sought in the peculiarly urgent necessity under which the exporters found themselves, of selling their bills immediately, at any sacrifice. It was a question of time. Three or four per cent. were sacrificed to secure the proceeds of the bills on England at once, instead of waiting for the arrival of gold. The exporter had two courses before him, -either to sell his bills at what they would fetch, or to send them himself to Europe, with instructions to his correspondents to encash them and remit the amount in bullion. The latter course was cheaper, but as he required funds immediately, (or, under the influence of panic, believed that he would thus require them,) he adopted the former.

In ordinary times there would have existed a certain competition on the part of capitalists to buy up the drafts of urgent sellers, in order to remit them to Europe for their own account, so as to secure the profit between the low price paid for the bills and their specie value; that is to say, to buy at a heavy discount, much below specie point, in order subsequently to realize at least the specie value (which we have seen to be the par value, minus the charges on the bullion remittance). But at a time of commercial panic, such capitalists are seldom willing to launch out into a speculation which deprives them, during the weeks which must elapse before the gold arrives, of the command over their funds. They may fancy that during that interval the rate of interest ma rise to such a height as to neutralize the anticipated profit. For instance, let us suppose that they expected to gain one and a half per cent. net on the exchange: in their calculation they must have taken into account the interest they would lose from the time when they paid the drawer for his bill up to the moment when the returns in gold arrive. The amount of interest on this interval, which we will call a month, they may have calculated at six per cent. per annum, or one half per cent. for the month. Now, if the rate of interest should suddenly rise to twenty-four per cent. per annum, they would have to borrow money at the rate of two per cent. for the month, in order to replace that portion of their capital which is traveling to Europe and back; that is to say, one and a half per cent. more than they had calculated on; and accordingly, that being their estimated profit, they would gain nothing on their exchange operation. We accordingly may conclude that what is technically called a stringent money-market, acts materially upon the exchanges, inducing sellers to force sales, and creating a reluctance on the part of purchasers to buy unless absolutely compelled to remit. This cause will, however, not come forcibly into operation when the international transactions are in a state of equilibrium; for then there will be as many purchasers on compulsion as there are sellers, and the dearness of money may only operate so far so to induce purchasers to deter their remittances to the last moment, whereas sellers would wish that they should be hastened. Its full force will be felt at a time when the country where money is supposed to be dear, or where panic exists, has exported more than it has imported, and when it is accordingly certain that gold will finally have to be ordered, while no individual is himself willing to wait for its arrival. It is seldom, however, that this peculiar contingency will occur; as, generally, the money-market in such a country as has taken less from other countries than it has given to them, is particularly well supplied with surplus capital.

There are, however, further causes which determine the fluctuations in the rates of exchange. We have hitherto, in order to obtain a clear view of the first leading principles, considered all bills as drawn payable at sight; but, practically, an immense majority are drawn payable at various periods after the date of their issue or first presentation to the acceptors, giving rise respectively to the expressions, payable at so many days after day, or so many days after sight. Thus, two new elements of value are introduced which will affect the rate of exchange. In the first place, the consideration as to what deduction should be made from the price, in consequence of the bill which is bought for ready money not being itself payable till after a certain time; and, secondly, as to the security which the purchaser of the bill can feel that the drawer and acceptor of the bill continue solvent till it becomes due. Thus, the state of credit in both countries, and the rate of interest in that country whether the bill is remitted, likewise become determining elements in the rate of exchange.

It has been shown that the stringent state of the money-market in the country where the bill is drawn, affects the exchanges, since it renders the seller more eager and the purchaser more reluctant; and, as one or the other must bear the loss of interest which must ensure till the proceeds of the bills reach their hands, this loss of interest will be at the rate established in their own money-market at home. But when any bills other than such as are payable at once, form the subject of bargain, the buyer must further consider what is the rate of interest in the country on which the bills are drawn. If he owes money abroad, he will be paying interest to his foreign creditor at the foreign rate, and this interest will not cease till his remittance becomes due. Accordingly, it will make a difference to him of two months' interest at the foreign rate, whether the bill which he purchases as a remittance is drawn payable at once or sixty days after its arrival; and, as the foreign interest rises, he will insist on paying less for the sixty-day bill, whereas, if it falls, he can afford to pay more. A heavier deduction must be made from the price in the first instance than in the second. Or, in the case of the capitalists who buy up bills at a time of pressure in order to send them abroad and have them converted into gold, their foreign correspondents will have to discount the long bills for them, and the amount of discount affects their profits. If they fear the rate of interest in the country on which the bills are drawn will be high, they pay so much less for their bill; if they anticipate cheap rates, they pay so much the more. Without any doubt, the New York capitalists, who suffered the price of bills upon England to sink three and four per cent. below the specie point, were influenced by a natural anxiety as to the rate which they would have to pay in England for the discount of their sixty-day remittances.

In the rates of exchange for all bills other than bills at sight, there is no element of value so constant and so effect as the rate of interest in the country on which the bill is drawn. The fluctuations in bills at sight are limited, to a certain extent, by what we have called the specie point: they can exceed the specie limit either upwards or downwards for a time; but, be it remarked, only when the two countries are at a considerable distance from each other, so that specie cannot be rapidly sent to and fro, and when immediate returns become a matter of importance; in face, only under very extraordinary circumstances.

The fluctuations in long bills, on the other hand, are unlimited, because they are co-extensive with the fluctuations in the value of money in the accepting country, and co-extensive, too, with the apprehensions which may be felt as to the solvency of the names on the bills. The effect of the value of money, or rather of every variation in the prevailing rates of discount, upon the Foreign Exchanges, is a matter of the highest importance, and will have to be considered with some minuteness later on.

On the other hand, the extent to which the solvency and credit of the drawer, as well as of the acceptor, of a bill, affects the value of that bill, and consequently the rate of exchange at which it will sell, does not require much elucidation. Firms of first-rate standing are said, in technical language, to "make the best exchanges." The price which is paid to a merchant of undoubted position for his sixty days' sight bill on a foreign country, will be higher than that which is granted for a second-rate bill on the same place. The purchasers of bills must be induced, by a concession in price, to take an article of inferior security. They must be indemnified for the greater risk. Credit is a very important element to be considered in the rate of exchange; and so notorious is this amongst those engaged in international trade, that the price at which exporting houses can sell their foreign bills, is looked upon as an unerring test of the credit which they enjoy among their neighbours. Thus credit causes a difference in the value even of such foreign bills as are drawn on the same day, rendering it difficult to give any exact or definite quotation of the price of long-dated paper; and, further, it operates on exchanges generally in times of commercial panic or excitement, and causes the prices of all bills to fall. In the case of America, to which allusion has been made, doubtless the purchasers of bills felt bound to indemnify themselves by a large discount for the risks which they thought they ran; either the bills might not be accepted at all, in consequence of an enormous fall in the value of the goods against which they were drawn, and the drawers whom the purchaser would then have to call upon to refund the amount, might have failed in the interim; or, the bills might have been accepted, but not be paid at maturity, owing to the difficulties in which it was expected that all connected with America would be involved.

Thus, too, when a whole nation falls into discredit, it is difficult to sell bills upon it, and large concessions must be made in consequence. It is felt that little security can be placed in the acceptor. The purchaser has then only the security of the drawer, and not, as is otherwise the case, of the drawer and acceptor jointly. However, this argument cannot be pushed very far; for, generally speaking, when a whole country is in discredit, there are many other influences at work to lower the value of bills upon it, and it is not easy to separate to what extent the different causes have respectively operated; how much, for instance, is due to a so-called adverse balance of trade and excessive indebtedness, how much to loss of credit, and how much to a further element of value which we have still to examine, -the depreciation of the currency.

It will be remembered that the basis of a settlement through a bill of exchange, is the payment of a sum of money in one place, in order to receive the equivalent at another. The purchase of a bill on France, consists in the payment of a certain amount in sterling money to a merchant trading with France, against his giving an assignment for the same value on a French merchant. Hitherto, all that has been said has been applicable to all countries equally. The principles which have been examined would exist, and be in constant operation, even if a universal currency had been adopted, and the perplexing calculations between francs and florins, and dollars and roubles, were no longer necessary. But now we have to deal with the actual fact, that when an exchange of a given sum in London for the same sum in Vienna or St. Petersburg has to be made, it is excessively difficult to ascertain what may be called the par value. When there is a gold currency in both countries, the calculation is comparatively easy; though, if a large paper currency exists side by side with the gold, the problem because somewhat more involved. Between two countries of which the one has a gold, and the other a silver currency, a comparison becomes still more complicated, while it is hopeless to look for any trustworthy results when either of the two countries has an unlimited or inconvertible paper currency. Given one hundred pounds sterling in London; what is the value of these hundred pounds in Vienna? What are the laws which govern the exchanges in this case? Applying experimentally the principles which we have previously examined, we discover them apparently to break down here. The fluctuations in the prices of foreign bills have been exhibited hitherto as confined within certain limits, subject indeed, within these limits to the ordinary laws of supply and demand, but unable to rise or fall beyond the indicated boundary, except under extraordinary circumstances. If the drawers were more numerous than such as had to remit - that is to say, if the creditors of any given country were more numerous than the debtors - it was shown to be difficult to sell bills on such a country, and the sellers had to make a sacrifice. On the opposite hypothesis, the buyers were mulcted in a premium. But in either case, the sacrifice could not materially extend beyond the loss which would accrue directly and indirectly in the transmission of bullion. If he who has money to claim abroad, cannot draw and sell a bill against the amount to advantage, rather than submit to a sacrifice beyond the limit indicated, he will instruct his foreign debtor to send him gold. So if he who owes moneys to merchants abroad, cannot buy a bill except at a loss greater than the expense of sending bullion in payment, he will naturally at once adopt the latter plan. But what is to be done in either case, if the country on which we suppose the bills to be drawn, has an unlimited paper currency, represented by no bullion at all? or, if bullion cannot be thence obtained except at an enormous premium? or if the export of bullion is prohibited altogether, or if it be illegal to give or take a premium on gold? It seems evident at once, that the limits previously assigned to the fluctuations of exchanges are, under most of these hypotheses, removed altogether. If the creditor of such a country loses the alternative of being able to obtain gold in payment of his claim, there is no limit to the sacrifice which he may be compelled to make, in order to sell his bill, except in the competition of those who may be obliged to purchase it. Similarly, if, as is very unlikely in the case of a country with a depreciated currency, its foreign debtors should be more numerous than its foreign creditors, so that the demand for bills upon it would exceed the supply, the debtors (being deprived of the alternative of sending a specie remittance by the fact that gold, though enhanced in value like everything else by the depreciation of the currency, still is prohibited from commanding in the country in question its legitimate premium) would have to pay the price demanded by the sellers of bills, this price being apparently only limited by the competition of sellers. However, on closer inspection, it will be found that a kind of limit, similar in nature to that which has been pointed out, is after all in operation; and it will be possible to discern it when the case of a country in which there is a depreciated currency, but in which a premium on gold is regularly established and is not restricted by artificial means, has been examined. It will appear that, in this latter case, we shall not be far wrong if we add the premium commanded by gold in the depreciated currency to the expenses which are incurred by the creditors of such a country, who have to recover their claim by sending for the gold instead of selling bills, or if, in the opposite case of the debts, we make a corresponding deduction. If the latter, rather than pay an extravagant price for the bills which they wish to purchase and remit, incur the expense of sending bullion, the premium which they will obtain on such bullion will naturally go in reduction of the expenses incurred. This will accordingly give them a great advantage over the sellers; in other words, over the creditors of the country in question.

The consideration of the various cases under examination, from the two opposite points of view of the drawers and purchasers of bills respectively, tends to embarrass the course of the argument, but cannot be avoided entirely. When in the course of the discussion the case of one class only is considered, it is highly desirable that the reader should himself clearly realize the converse proposition, and consider the results form the opposite point of view.

In propounding the fact, that the fluctuations in the prices of bills on a country, where the currency is depreciated, are governed, not only by all those elements of value previously considered, but to a much greater degree by the premium on bullion as compared with the depreciated currency, we are stating the final result rather than the process by which this position is reached - the ultimate limit, rather than the gradual development. We shall arrive at the same conclusion by the following reasoning, in which more prominence is given to the depreciation of the paper circulation than to the premium on bullion, which however, in reality, is almost the same thing. Practically, the idea of the premium on bullion, though more easily and clearly intelligible in theory, rises less to the surface than the depreciation, or smaller purchasing power, of its paper competitor.

For, in a country where there is a large and incovertible paper currency, the precious metals tend to recede from their more important function as the circulating medium, while their character of ordinary merchandize comes out into stronger relief. As another currency exists, with which they are by no means identical, they no longer constitute the standard, but themselves become subject to another standard. Accordingly, when, owing to this new standard, the prices of all merchandize begin to fluctuate, bullion is subject to the same influences; and when, through the over-issue of paper money, a general rise of prices ensues, the price of gold, as measured by paper money, rises with the rest. Thus, supposing the Austrian Government to be constantly depreciating the Austrian currency by issues of paper money, the value of gold in Austria will be constantly rising, and one hundred English sovereigns will be worth so many more Austrian paper florins. Those who purchase a bill on Vienna will, accordingly, in such circumstances require a corresponding exchange; they who have bills on Vienna to sell, that is to say, to whom a certain sum of florins is due in Austria, will have to throw in so many more florins, in order to induce the buyers to give them gold for the depreciated article. And why? Because, otherwise, the buyer who is going to remit would do better to send the gold itself. Just as an English traveller in Austria will at such a time obtain fifteen florins instead of ten for his sovereign, so will those who pay sovereigns for florins on the London Exchange, require the same favourable terms. We have thus discovered an influence which apparently affects the fluctuation in the Foreign Exchanges far more powerfully than any previously discussed; -interest of money, a balance of debts over claims, panic, distance, and so forth, practically cause the exchanges to vary within a few per cents.; a variation of ten per cent., owing to all these circumstances combined is considered something extraordinary, and only occurs under rare combination. But, as soon as the element of currency is introduced, we have had at once an instance before us in the Vienna exchange of a variation of fifty per cent. So in the Russian exchanges, owing to the enormous amount of paper afloat, which is practically inconvertible, the most violent fluctuations are constantly occurring.*

But in a certain sense these fluctuations are apparent, and do not involve the same gain or loss, the same difference in value, as those alluded to above. As the depreciation in currency affects, generally speaking, all prices alike, the fifteen florins bought by the Englishman for his sovereign are not worth more to him than the ten which he bought for the same money before. When the fluctuations were determined simply by the balance of trade, (within the limits of the specie point upon either extreme,) the purchaser when he bought cheap - that is to say, when he obtained a greater sum than usual in foreign coin for his own money


 * This passager was written in 1861. Great changes have since then occurred in the Austrian and Russian Exchanges. The former has fallen very considerably, and the florin is worth much more than it was two years ago.  The Russian rouble has even touched its par value.  But the measurestaken to bring the Russian currency to its specie value have broken down, and the paper rouble is still, what it was when the above passage was written, practically incovertible - December, 1863.

- secured an actual advantage; this greater sum of foreign coin had an actual greater purchasing power. But where the cheapness of the bills is caused by the depreciation of the foreign currency, he has no advantage; for the purchasing power of the nominally larger sum is not greater than that of the smaller.

Again, while the purchaser of the bill has been shown to have no advantage, so neither, after the new standard of exchange is established, has the seller any loss; it is true that he will be under the necessity of ceding a greater number of florins for the sovereign which the buyer pays him; but the produce which he has sent abroad against which he draws, will, under our present hypothesis, have risen in value in the same proportion, and therefore yield him a proportionately greater number of florins for which he can draw. For instance, before any great fluctuation, he exported a certain quantity of sugar, and sold his drafts against this sugar for a certain price: let us suppose him to have sold the sugar for 10,000 florins, and to have sold these florins at the rate of ten to the pound. He would thus realize £1,000 for his sugar. A fluctuation of ten per cent. now occurs, owing to an over-issue of paper in Austria. Prices generally rise 10 per cent., and the exchange rises also. The same foreign merchant now sells his sugar for 11,000 florins, but he must sell his florins at the rate of eleven to the pound, thus realizing £1,000, precisely as before. It is scarcely necessary to observe that in assuming a general equal rise in prices, it is not intended to express an opinion that such an event could actually occur. Some prices will rise much more than others, according to the well-known principles of political economy relative to this subject. In Austria the manufacturers insisted that they made considerable profits by the depreciation of the currency, as the cost of labour had not risen in the same proportion as the manufactured goods. The raw material being imported from abroad had risen to the full extent at once; and this enabled the manufacturers to increase the price paid for their products in the same ratio, though one element of production, labour, remained comparatively stationary. But this could only be temporary. The adjustment must take place sooner or later; and if the demand for labour had remained the same as before, wages would have risen till they commanded the same amount of the labourer's necessaries as before. As far as the force of the previous argument in concerned, the assumption of a general equal rise of prices is admissible, and it will appear that the apparent fluctuation in the exchanges extends no further than the apparent increase of value which has resulted from the same cause. A parcel of manufactured goods commands more florins, and an English sovereign commands more florins also; but neither in teh one case nor in the other has any greater purchasing power been acquired.

Hitherto the comparison has been instituted between a transaction before any given fluctuation and a transaction after it; and it appears that the difference in the exchange, when it has been caused by the depreciation of the currency, does not give rise to any difference of result. However, it will be seen at once that the very opposite is the fact, when the fluctuation is not supposed to occur between two different transactions, but between the beginning and the end of the same operation. Suppose the exporter of sugar to have shipped his sugar first, and to have sold it, as assumed before, for 10,000 florins, the exchange being at the time 10 florins to the pound. However, he defers his drafts against these 10,000 florins for some time, and, in the interval, the rate of exchange changes to 11 florins to the pound, as in the previous case. Accordingly, his florins, having to be divided by 11, only realize nine hundred and nine pounds odd, instead of the thousand, which the former exchange would have given him. In fact, a fluctuation in the exchange, produced by a depreciation of the currency, makes the existing claims on a country in such a situation worth so much less, whereas all debts due to it can be so much more advantageously discharged; the creditor of the country loses and its debtor gains. If its imports and exports were in a state of equilibrium, that is to say, if it owed as much as it had to claim, there would, on the aggregate of transactions, be neither loss nor gain resulting from the apparent fluctuation; but the individual creditor of the country might consider himself robbed, and the individual debtor might rejoice when proceeding to discharge his liabilities, to find himself able, for the same sovereign, which previously would buy only ten florins, now to purchase eleven.

The examination of the nature and tendency of the fluctuations just described, serves to lead us conclusively enough to their limits, which is the special object of our present investigation. The bills on a given country fluctuate in value, in proportion to the extent to which the prices of all purchasable articles - bullion included - are affected by the depreciation of the currency; in other words, in proportion to the discount of the paper money, or the premium on gold. Beyond that proportion, the fact of the depreciation of teh currency cannot cause them to deviate; otherwise, if it were possible, the creditor of any sum payable in the inferior money, rather than submit to a further sacrifice in the exchange, would request his debtor to send him gold for the amount of his debt, notwithstanding the premium upon it; for, under the hypothesis, such a premium would be less than the loss entailed in settling the transaction by the sale of a bill.

What, however, will be the case if the export of bullion from the country, where the depreciated currency exists, is prohibited? or if it is impossible to buy up gold, either because it is illegal to pay a premium, or because all bullion has actually disappeared? -And these are the more frequent cases which, in practice, arise. How is the holder of a claim on such a country to encash that which is due to whim? Let us suppose the case of merchant who had supplied Russia with cotton when the export of bullion from Russia was practically prohibited. How as he to exact payment? when the cotton was sold, he became entitled to a certain amount of roubles in St. Petersburg. how could he convert those roubles in English sovereigns? Or, put the case otherwise: a Russian spinner has imported the cotton, and owes the amount thereof in English sovereigns to a merchant in Liverpool. He has roubles sufficient in his hands in paper money, but what steps is he to take to procure sovereigns for them? Being debarred from sending bullion, he has only two courses open, -either to buy a bill on England from others who happen to have sent produce thither, and thus have a claim on an English house, which he can buy and transfer to his Liverpool creditor; or to send the produce, which will sell for sovereigns, himself. Where there is a pause in exploration, as in the case during a large portion of the winter season in Russia, he would be absolutely unable to send any remittances at all, unless he could find bankers or others who might draw on England, or on some other foreign banking centre, in anticipation of future exports, and would sell him the bills. But it will be apparent, that, as to price, he is entirely in their hands. If, as is often the case, such Russian as are indebted to foreigners are bound at any cost to place funds in English money into the hands of their creditors by a given day, there would be no limit to the price which might be exacted from them - in other words, no limit to the fluctuations in the exchange. The relative value of their paper roubles to bullion seems not to enter into the question at all. Supply and demand alone determine the price. And if the exports of such a country do not equal the imports, (and this is by far the most general case,) so that the demand for bills to pay for the imports exceeds the quantity of bills which is supplied by the exports, the balance which the country has to pay can only be settled by an enormous sacrifice, -in fact, cannot be settled at all except by a cessation or diminution of imports, or by a foreign loan, the latter being only an expedient to gain time and an adjournment of the payment of the balance due.

It will be easily seen why it is possible to assume that a country in which a depreciated currency and a prohibition to export bullion exist, is likely to be importing more than it is exporting. If it were otherwise - if its exports exceeded its imports - bullion would be flowing towards it; other countries would be paying part of their debts to it in gold, and no grounds for a prohibition of the export of bullion would have existed. The currency, too, would be in the course of improvement, and not of depreciation. Probably there are as many cases in which the depreciation of the currency is, directly, or indirectly, the consequence of excessive importations, as in which it is due solely to the errors and bankruptcy of Governments. Often, both influences are combined, taking alternately the position of cause and effect. Sometimes Governments, simply for their own purpose, issue a quantity of paper money: the natural consequence of the increase in circulation, and accordingly attract commodities from other markets, while the exports, having risen also, will be less easy of sale abroad. Or, over-importation takes place in the first instance, and Governments, in order to remedy artificially and apparently what can only actually be remedied by the cessation of the real primary cause, commit the fatal error of increasing the circulation by an issue of paper money. They think thus to increase the means of paying the debts which are being incurred; but the only effect is, still further to increase the evil; for importation, instead of being checked, is fostered by such a plan. When, during a period of apprehension caused by a large efflux of gold from England to America, views were expressed in Manchester and Liverpool, that a much larger issue of bank-notes ought to be permitted, this opinion tended manifestly to a depreciation of our currency. But as the consequence of the depreciation of the currency in any country is to off inducement for further importation, by creating an appearance of high prices, and at the same time to increase the difficulty of paying for such importations, how is the final balance to be paid? The efflux of specie shows that the balance of trade is against that country for the time; the equilibrium must be restored, when the specie is exhausted, by slackening importation and consumption.

We were led to these somewhat premature reflections regarding the result of an over-issue of paper money and over-importation, by the consideration of the position of such debtors to foreign countries as were prohibited, either by the actual absence of bullion or by legal enactments, from making specie remittances, and were therefore entirely at the mercy of such as had drafts on other countries to sell - their only resource being, in case they were met by prices too exorbitant, to buy produce and send it themselves. The fluctuations in the exchanges in these cases will depend entirely on supply and demand; and, if the demand for bills exceeds the supply, there is theoretically no limit whatever to the price of bills.

It may, however, be asked what will be the general range of the exchanges in such a case, if the importations and exportations are, for a time, in a state of equilibrium? What would be the natural value in sterling money at such a time, of a bill on St. Petersburg, payable in roubles? The natural value at such a time seems to be, not the nominal par of exchange, not the value of the rouble when it was convertible and was in reality a silver coin, but this value minus the depreciation which the rouble has suffered in Russia itself. If at the time when the currency in Russia, owing to the enormous paper money afloat and the insufficient stock of bullion to meet it, was actually - though perhaps unconsciously to the Russians themselves - depreciated 5 per cent., then we apprehend the natural value of the rouble in sterling money would have been at such at time 5 per cent. below the nominal par of exchange; but it cannot be too often repeated that no calculation can be founded upon this proposition, as practically, owing to the system of credit and deferred payments, there is never an equality between exportations and importations; and an increasing balance of debts lowers more and more, at least in reference to the Foreign Exchanges, the value of what, in this case, we have called rouble.

Such seem to be the general principles which regulate the fluctuations of the exchanges in those cases where bills are sold payable in a depreciated currency. The treatment of the subject would not be complete without considering the case as between silver and gold. When a bill on Hamburg, payable in silver, is bought in London for a certain price, payable in sovereigns, what will determine the value?

We shall arrive at this value by a similar process of reasoning as determined the previous case. Either gold or silver will be at what may be called the par value between the two, or, as is more generally the fact, the one will be at a premium as compared with the other. With the exception of France, which with its double standard, is subject to somewhat different influences, gold is simply merchandize in such countries as have a silver currency, and silver is merchandize in such countries as have a gold standard; and according to the price of the merchandize at a given moment, so will the exchanges fluctuate. When a bill on Hamburg is to be sold in London, all the previous elements of value will have to be taken into consideration - the rate of interest in the two countries, the state of credit, relative indebtedness, and so forth; but the value of silver in England will enter largely into consideration, or in the opposite case, the value of gold in Hamburg. When there is a great demand for silver in England, as is the case when large shipments are to be made to the East, there will be a great demand for bills upon Hamburg; for one means of procuring silver will be to buy up such bills as entitle the purchaser to certain amount of silver in Hamburg, and to send these bills for encashment, with instructions that the silver thus encashed is to be actually shipped to England. Thus, if silver is at a premium in England, those who have claims on Hamburg are able to exact this premium from the purchaser of their claims by raising the price of their bills; that is to say, the buyer will have to pay more sterling money for the same amount of "marks banco," or, what comes to the same thing, he will receive less marks for his pound sterling. If, when silver is not at a premium, he receives thirteen marks and a quarter for his sovereign, as the price of silver rises he will receive less; for instance, only thirteen marks and an either; and the exchange on Hamburg being expressed by the number of marks banco which are to be had for a pound, the exchange on Hamburg will be said to have fallen; the fact, however, being clearly that bills on Hamburg have risen in price, a less amount of marks commanding the same amount of gold. Conversely, supposing the case of a Hamburg merchant who wishes to procure gold for any purpose whatever - let us say for the purpose of sending it to America to buy cotton therewith, - bills on London will serve his purpose, as they entitle him to an amount of that metal which he requires; and if there is competition for such bills, owing to a general demand for gold for the object indicated, those who have bills upon London will be able to exact a premium for them, and in this case more marks banco will be demanded for every pound which is placed in London at the disposal of the purchaser of the bills; accordingly, the Hamburg exchange will rise, and thirteen marks and a half may be given for the pound. The limit of the fluctuation is, however, easily discernible, and will be found to correspond exactly with that which was discovered in the case of two countries, one of which had a metallic currency and the other a depreciated currency, with a premium permissible on gold. The limit will be the extent o premium obtainable. If the holders of bills on London, in the case last put, exact too many marks, those who are anxious to purchase gold will find their advantage in sending the silver itself over to England, and selling it there for gold; or if the English merchants, who desire to ship silver to the East, find that the price demanded by such as have bills on Hamburg to sell, is out of proportion to the existing premium on silver, they will either pay that premium for such silver as may be procurable elsewhere, or they will send gold to Hamburg, sell it there at a discount at which gold will stand in Hamburg, under the circumstances, and have the proceeds invested in silver and shipped over to them. The assumption necessary for the argument is, that a sale of gold is always possible in Hamburg, and a sale of silver possible in England; the price may, in either case, sometimes be exceedingly low, and the premium on the other metal accordingly be a heavy charge to the purchaser; but the sale may generally be assumed to be possible, and thus defines the limits of the fluctuations in the rates of exchange.

This result has, in the case before us, been attained by the consideration of transactions which arose from the fact of certain merchants being obliged to possess themselves of that one of the two precious metals which did not constitute the currency of their own country, and endeavoring to obtain it by the purchase of bills on such countries where it formed the standard. The truth of the proposition is, however, quite as self-evident if we confine ourselves, as before, to the case of debtors and creditors. An English merchant owes a certain amount of Hamburg money; that is to say, an amount which he is bound to pay in silver. Silver, let us suppose, is, when his debt becomes due, considerably dearer than usual in England. The amount of the difference he will be compelled to pay either by purchasing silver in the English market at the enhanced price and shipping it to Hamburg, or by buying a bill on Hamburg, payable in marks, an unfavourable exchange. The price of silver having risen, the price of bills payable in silver rises also, and the purchaser will receive fewer marks for his pound; but if the seller of the bill were to ask a greater difference of price than would be warranted by the rise of silver, those who have payments in silver to make will prefer to pay the premium in the open market for the article itself. Thus the limit of the fluctuations in the rates of exchange which may result from the difference in value between gold and silver is clearly and easily established.

The case of transactions between two countries like England and France, of which one has gold currency, and the other a currency of gold and silver combined, offers no difficulty whatever. The fluctuations in the prices of bills of one upon the other cannot, except under a most rare and almost impossible combination of circumstances, exceed the limits of such variations as can exist between two countries having the same currency: they will be determined by that which is common to both of them; that is to say, by gold. How, indeed, could a bill on Paris, payable on demand, be sold at a higher value than that of the gold which it represents, plus the expenses and commissions incurred in sending that gold to Paris? For, if a higher price were asked, it would be cheaper to send gold itself.

It is clear that, as soon as a premium is paid in any country on gold or silver, this premium will increase the value of bills which are payable in that particular metal - but only if they are payable in no other. If a bill on Paris is payable either in napoleons or in silver five-franc pieces, it will be sure to be paid in that coin which is least in demand, in that which is at a discount as compared with the other. Thus, the purchaser of such a bill will not allow the price to be enhanced by the existence of a premium on one portion of the currency. The fluctuations in the rates of exchange will be as strictly limited as they were shown to be when the currencies of any two countries were practically identical.

In concluding this portion of the subject, it is necessary to remark once more than no stress should be laid on any of the special cases selected as illustrations being correct in fact. It is rather the mode in which the question should be handled and the principles, which the present treatise endeavours to evolve, on which reliance should be placed when any particular instance is to be analyzed and examined. For this purpose the different elements of value which enter into consideration in the sale of foreign bills, have been dwelt upon at some length; but the proportion in which they stand to each other in any particular case, and the details which must be studied in considering how far the currency of one country coincides with or varies from the currency of another, do not fall within the scope of this inquiry.