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FOREIGN EXCHANGE AND 

FOREIGN BILLS IN THEORY 

AND IN PRACTICE 



FROM THE SAME PUBLISHERS 

BILLS, CHEQUES AND NOTES. Together with the 
Bills of Exchange Act, 1882, and the Amending Act, 
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FOREIGN EXCHANGE 
AND FOREIGN BILLS 

IN THEORY AND IN PRACTICE 



BY 

WILLIAM F. SPALDING 

CERTIFICATED ASSOCIATE OF THE INSTITUTE OF BANKERS, LONDON 

FELLOW OF THE ROYAL ECONOMIC SOCIETY ; 

LECTURER ON FOREIGN EXCHANGE TO THE CITY OF LONDON 

COLLEGE 



THIRD IMPRESSION 




London 

Sir Isaac Pitman & Sons, Ltd., 1 Amen Corner, E.G. 

Bath, New York and Melbourne 



First Imptesston, August, 1915 
Second „ October, 1915 

Third „ May, 1916 



All rights of translation and 
reproduction are reserved 



Printed by Sir Isaac Pitman 

& Sons, Ltd., London, Bath, 

New York and Melbourne 



PREFACE 

The object of this work is to present in a concise and 
simple form the theory and practice of Foreign Exchange. 
At first sight some apology may appear to be due for adding 
to the already long list of books on this branch of monetary 
science, but reference to the table of contents will show that 
special attention has been paid to that more practical 
part of the subject — foreign bills. The drawing and nego- 
tiation of foreign bills are matters which concern not only 
bankers, but all commercial men, and, bearing this in mind, 
an endeavour has been made throughout the book to 
intersperse the practical with the theoretical points. 

To explain the working of foreign exchanges in a simple 
manner is not easy, and the frequent dislocation of the 
principal exchanges during the war has not conduced to 
the simplicity of the task. The erratic movements in 
rates have, however, furnished abundant material from 
which to draw the necessary illustrations in support of the 
theories I have tried to make plain. 

Exchange with the silver-using countries of the East 
seems to be a general source of trouble to people dealing 
with those centres, and in deference to many requests, I 
have taken the opportunity to include one or two chapters 
on the Eastern exchanges, which I hope will serve to 
remove the difficulties which appear to surround this 
part of the subject. 

My thanks are due to the managers and agents of the 
various foreign and colonial banks in London for much 
valuable advice and assistance, more particularly, perhaps, 
to Mr. R. W. Jeans of the Bank of Australasia, Mr. F. S. C. 
Norman, of the Standard Bank of South Africa, and to 
my friend, Mr. H. C. Sonne of Denmark. 

Government Departments have, as usual, been ready 
to help wherever possible by facilitating reference to trade 



VI PREFACE 

Statistics, and in this respect I am specially indebted to 
the Right Hon. Sir George H. Reid, P.C., K.C., G.C.M.G. 
and Mr. G. H. Knibbs of Australia, and to His Excellency, 
Don Vicente J. Dominguez of the Argentine Republic. 

Throughout this book free use, where necessary, has 
been made of the details contained in the various articles 
and reviews I have contributed from time to time to the 
Journal of the Institute of Bankers, the Bankers' Magazine 
and the Economic Journal, and acknowledgment is hereby 
made of the courtesy of the respective editors for the 
consent to utiUze such material. 

WILLIAM F. SPALDING. 



CONTENTS 



PAGE 

Preface v 

CHAPTER I 

INTRODUCTORY AND EXPLANATORY 

Foreign exchange : exaggerated difficulties of the sub- 
ject : its neglect by the education authorities : the 
importance of a knowledge of the foreign exchanges — 
" Foreign Exchange " defined : a comparison with the 
price of wheat — Foreign exchange : the purchase and 
sale of foreign debts ...... 1 

CHAPTER II 

THE BASIS OF FOREIGN EXCHANGE 

What a banker buys when he discounts a bill — The com- 
modities bought and sold in foreign exchange — The 
purchase and sale of two debts between four traders 
in different centres — ^The point at which the real 
exchange problem arises : foreign trade : the excess 
of exports over imports — The various forms of inter- 
national currency ....... 6 

CHAPTER III 

INTERNATIONAL CURRENCY I THE PAR OF EXCHANGE 

AND THE MINT PAR OF EXCHANGE, WITH SPECIAL 

REFERENCE TO AUSTRALIA 

The banker's stock of international currency — The bill 
of exchange the ideal instrument ; but indebtedness 
can be settled by the remittance of coupons, bonds, 
etc. — ^The Mint Par of Exchange : the Ideal or Hypo- 
thetical Par — The exchange between Great Britain 
and Australia : some explanation of Australia's 
balance of trade — ^The fixed basis of exchange between 
Great Britain and other gold-using countries : Chain 
Rule as a convenient way to calculate the Mint Parity 
— The Mint Pars of Exchange between England and 
those countries whose currency is based on gold , 11 

CHAPTER IV 

THE MINT PAR AND GOLD OR SPECIE POINTS IN 
THEORY AND PRACTICE 

The Mint Par necessary as a basis upon which to calcu- 
late the worth of a foreign bill of exchange — The 



Vlll CONTENTS 

PAGE 

opposing claims of any two countries rarely balance : 
the result — Bank bills and trade paper — A divergence 
between the rules governing the purchase and sale of 
commodities, and those governing the dealings in debts 
— Specie points : the banker ultimately responsible 
for gold shipments — ^The effect of gold shipments — 
London a free gold market compared with France, 
Germany, and America ..... 24 

CHAPTER V 

" FOREIGN EXCHANGE " QUOTATIONS, AND THE 
" COURSE OF EXCHANGE " 

Foreign exchanges : The Times' table analysed and 
explained — The reason for a double quotation — Impor- 
tance of New York's quotations : a specimen table — 
Short exchange and long exchange : the place of 
Bank Rate and market rate of discount in the calcula- 
tions — " The Course of Exchange " : the quotations 
explained — ^The reason for two rates for each centre 40 

CHAPTER VI 

CONTINUES THE DISCUSSION ON LONG AND SHORT 

EXCHANGE AND SHOWS HOW TEL QUEL RATES 

ARE CALCULATED 

Long exchange : how calculated from the cheque or 
short rate — One or two of the City Editor's idiosyn- 
crasies explained — In foreign exchange : rates by 
sweet contraries go ...... 56 



CHAPTER VII 

FAVOURABLE AND UNFAVOURABLE EXCHANGE. THE 

CAUSES OF THE FLUCTUATIONS IN THE FOREIGN 

EXCHANGES ANALYSED 

When exchange is above par and when below par — 
How rates are calculated — ^The signification of the 
terms " favourable " and " unfavourable " — A rate 
favourable to the seller of a bill is unfavourable to the 
buyer — Differences between rates quoted in foreign 
currency and those quoted in sterHng — The difficulties 
put into rhyme — ^Fluctuations in the foreign exchanges : 
their causes — Arbitrage dealings — ^The Continental 
demand for bills on London .... 62 



CONTENTS IX 

PACK 

CHAPTER VIII 

BANK RATE AND MARKET RATE OF DISCOUNT IN 

CONNEXION WITH THE FLUCTUATIONS IN THE 

FOREIGN EXCHANGES 

The importance of the Bank of England Rate — The Gold 
Reserve : how it is protected — Methods by which the 
Bank of England obtains control of the market — 
Market rates — The inter-connexion of Bank Rate and 
market rate — How rates are manipulated on the 
London market when our gold reserve is threatened 
— The influence on the foreign exchanges : an Ameri- 
can view — Movements in the Bank of England's rate 
compared with those of the French and German rates 86 

CHAPTER IX 

THE MONEY MARKETS OF THE WORLD AND THE 
GREAT WAR 
The effect of war on the foreign exchanges — Gold 
movements — The monetary position of the principal 
financial centres of the world — London in the early 
days of the war : measures taken by the Government 
and the banks — A 10 per cent. Bank Rate — Suspension 
of the Bank Charter Act avoided . . . .93 

CHAPTER X 

THE FOREIGN EXCHANGES AND THE GREAT WAR 

The complete disorganization of the world's exchanges 
— Table of rates illustrating the severity of the crisis 
— French, German, and American exchanges compared 
— Germany parts with gold — Russian Exchange : 
reasons for its heavy depreciation, and measures taken 
to correct the adverse position — New York's desperate 
plight and the steps she took to rehabilitate exchanges 
with the U.S.A 101 

CHAPTER XI 

THE EVIL INFLUENCE OF PAPER CURRENCY ON THE 
FOREIGN EXCHANGES 
The evil of the invention of paper money — The effect 
of the issue of paper money : the point at which the 
currency depreciates — The foreign trade of the country 
is not affected, but the foreign exchanges are : this 
fact explained — ^The South American States and their 
excessive issues of paper — ^The issues of notes during 
the War : the systems of Great Britain and Germany 
compared . . . . . . . .119 



X CONTENTS 

PAGE 

CHAPTER XII 

THE EASTERN EXCHANGES 

The Gold Exchange Standard as in operation in India 
and other silver-using countries — Exchange remit- 
tances by means of India Council bills and telegraphic 
transfers — ^The gold price of silver as the uncertain 
factor in Eastern commerce — ^The evils of a silver 
standard — How exchange in Austria is manipulated 
— The Philippines and the Gold Exchange Standard 
— The Gold Exchange Standard in theory and in 
practice — India's currency position during the war , 124 

CHAPTER XIII 

THE EASTERN EXCHANGES (CONTINUED). CHINA AND 
THE SILVER PROBLEM 

The unsatisfactory position of Chinese currency — ^The 
Chinese tael as a standard of weight and unit of cur- 
rency — The variations in the value of silver : effect 
on exporters, capitalists, and investors — ^The exchange 
quotations on the Shanghai market — Principles which 
govern the drawing of bills : disadvantages of a depre- 
ciating silver currency — Attempts to state the ratio 
between gold and silver — ^The gold price of silver the 
fundamental basis for fixing the rate of exchange in 
the East 134 

CHAPTER XIV 

METHODS BY WHICH EXPORTERS ENDEAVOUR TO ELIMINATE 

EXCHANGE RISKS. EXCHANGE AS PER ENDORSEMENT. 

FORWARD EXCHANGE 

The effect of the clause " exchange as per endorsement " : 
how the bankers endeavour to fix the onus on the 
drawer of the bill — Forward contracts : the advantage 
to importers and exporters ; the banker's position : 
how he sets off one operation against another — Forward 
sales of telegraphic transfers . . . . .144 

CHAPTER XV 

ON CREDITS 

Travelling letters of credit — The similarity and dis- 
similarity of confirmed and unconfirmed bankers' 
credits — Irrevocable credits — Clean credits — Docu- 
mentary credits — London accepting credits and 
revolving credits — Credits without recourse : their 
effect — The benefits conferred upon the trading and 
mercantile community by the issue of commercial 
letters of credit . . . . . . .148 



CONtENtS XI 

PACK 

CHAPTER XVI 

BILLS DRAWN UNDER VARIOUS CREDITS 

Bills drawn under a confirmed banker's credit : a speci- 
men operation — ^Cases in which bills drawn on a 
London banker against unconfirmed credits might be 
refused acceptance — Bills under clean credits — Docu- 
mentary bills — Special points concerning the shipping 
documents attached to foreign bills : the bill of lading, 
insurance policies, invoice, certificates of origin, letters 
of hypothecation — ^The bills drawn under London 
acceptance credits : the question of exchange when 
proceeds are remitted to England — Currency bills . 161 

CHAPTER XVII 

METHODS BY WHICH EXPORTERS OBTAIN PAYMENT FOR 

THEIR PRODUCE I PARTIAL DELIVERIES I MARGINAL 

DEPOSIT RECEIPTS AND TRUST RECEIPTS : BILLS 

ON THE FAR EASTERN COUNTRIES 

The financial standing and responsibiHty of parties to a 
bill : Opinion Lists — Documentary bills and London 
acceptances compared — Interest bills : the relative 
economy between bankers' acceptances in London and 
interest bills drawn on places abroad — ^The usance of 
bills on the East — Bankers' advances on bills — ^Mar- 
ginal deposits : the interest allowed ; the disadvan- 
tages of the system — Bills sent for collection — Partial 
delivery of goods : the danger inherent in the practice 
— ^The banker's security — ^The Trust Receipt System : 
its merits and demerits . . . . .171 

CHAPTER XVIII 

DOCUMENTARY BILLS ON AUSTRALIA, EGYPT, SOUTH 

AFRICA, THE UNITED STATES OF AMERICA, AND 

OTHER COUNTRIES 

Australasia : usance of bills : differences in exchange, 
how settled — Documentary bills : banker's right to 
use discretion regarding the surrender of documents 
— Homeward remittances : difference of opinion as to 
the method of remitting — Egypt : bills payable at par 
— Loss on exchange — Bills at current rate of exchange 
plus interest — Exchange as per endorsement : fre- 
quently disputed by drawees — Bills for collection — 
South Africa : differences in exchange — Usance of 



Xll CONTENTS 

PAGE 

bills for which African banks quote — Bills for collec- 
tion — ^The homeward remittances — Specimen bill — 
The United States : American banks, possible com- 
petition with British institutions — ^Methods of drawing 
bills — Trust Receipt facilities — South American prac- 
tice — The custom with Argentine and Brazil : tenor 
of bills ; return remittances — Bills on the Argentine 
and Brazil made payable in the principal centres of 
South America — European countries : bills drawn — 
Documentary demand drafts on the more important 
trading centres of Spain and Italy — Scandinavia : 
rate at which bills are collected — Difficulties in pro- 
curing return sterling remittances on London during 
the Great War — ^The method adopted in Denmark to 
surmount the difficulty . . . . .185 

CHAPTER XIX 

ON FINANCE BILLS 

The various ways in which finance bills are drawn and 
paid — How they affect the Exchanges — ^The multi- 
plication of drawings — Limits beyond which bills can- 
not be drawn — How the price for finance bills is calcu- 
lated — Finance bills which are kite-flyers — An example 
of kite-flying in modern times — Accommodation paper 
— House paper — Pig on pork drawings — Bills drawn in 
connexion with crop requirements — Up-country 
advances . . . . . . . .195 

CHAPTER XX 

THE DISCOUNT MARKET. THE BILL-BROKER 

" Discounting " a bill : what it really means — The bills 
arising from inland trade which are discounted by the 
banker — Discount operations in which the banks do 
not deal direct with the sellers. Entry of the bill- 
broker — The reasons for his presence on the London 
Money Market — ^The old private bankers and the 
present day bank managers — ^The bills with which the 
bill-broker has to deal : how they arise, and their 
classes — ^The bill-broker's operations — Foreign domi- 
cile bills and foreign agencies — D.A. and D.P. bills : 
their relative merits — The capital of the bill-broker 
— ^Thc point at which bill discounters enter into com- 
petition with the banks — ^The British Government's 
measures for financing the Great War by means of 
Treasury Bills 201 

Charts ... . . het. pp. 214 and 215 

Index ... . . . . . .215 



FOREIGN EXCHANGE 
AND FOREIGN BILLS 



CHAPTER I 

INTRODUCTORY AND EXPLANATORY 

The pathway of international exchange is always a thorny 
one, and in the past writers have been apt to expound 
theories on the subject too abstruse to be intelligible to 
that illusive friend of the politicians — the man in the 
street. Technical dissertations on the exchanges may, 
and possibly do, interest bankers, money brokers and the 
like, but the general student who has to commence the 
subject from its very alphabet, so to speak, sometimes 
finds himself unable to grasp the intricacies of the problem 
set before him. Indeed, the method of controlling the 
foreign exchanges has been so little understood in these 
Islands, that when we see a person setting out to tackle 
the subject, it is difficult to know whether to pity or to 
envy him. 

He is understood to be about to dabble in a branch of 
economics, the principles of which are interesting only to 
painstaking foreigners or much-abused university pro- 
fessors, the sort of thing, in fact, immortalized by George 
Eliot in her inimitable description of the Reverend 
Casaubon's heroic, dry-as-dust researches. 

It need hardly be said that the dust surrounding the 
subject is more apparent than real, and if the reader will 
boldly cast aside this hypothetical covering, he will find 
the study of exchange in relation to monetary affairs to 
be both interesting and fascinating. 

I 



2 FOREIGN EXCHANGE AND FOREIGN BILLS 

Why the education authorities have hitherto refrained 
from including this branch of science in their curriculum 
it is hard to say : possibly it is due to that insular prejudice 
which regards anything off the beaten track as unworthy 
of attention, but the fact remains that while we have been 
content to relegate the study to the chosen few whose 
business it is to direct the banking operations of the 
country, large numbers of Continental students have been 
industriously acquiring a thorough theoretical knowledge 
of the foreign exchanges, with the not unnatural result 
that when practical problems in connexion with inter- 
national finance come to be solved, the British bank clerk 
often finds himself ousted by the foreigner. 

With the object of removing this reproach, the writer 
was requested by the Educational Adviser to the City of 
London College to deliver a series of lectures on the sub- 
ject, and early in the course it became necessary to explain 
to university students the importance of the exchanges to 
those who contemplated the adoption of a commercial career. 

" Why," it was asked, " is it necessary to acquire a 
knowledge of the principles underljdng foreign exchange ? " 
Briefly stated, the reply was, that the trend of recent 
events amply demonstrated the necessity for something 
more than a passing acquaintance with the subject. 

A person who has attained a reasonable degree of pro- 
ficiency in the study of the foreign exchanges is able to 
understand clearly why a heavy Continental demand for 
gold adversely affects the price of money on the London 
market : he is in a position to comprehend why the 
breaking off of diplomatic relations between two nations 
causes wholesale dislocation on the stock markets of other 
distant countries : without soaring to prophetic heights 
he will be able to forecast the effect of a fall in the price 
of silver in London on the operations of those whose trade 
is with the Far East, and, in addition to grasping the 
significance of these panoramic changes, he will appreciate 
the real methods of liquidating international indebtedness. 



INTRODUCTORY AND EXPLANATORY 3 

The reader must not conclude from the foregoing that 
it is an easy matter to master the intricacies of the subject, 
but it is desirable to add that the seeming difficulty of 
understanding the technicalities of foreign exchange, and 
likewise, foreign bills, is largely the result of a neglect 
to study the business in a workmanlike and systematic 
manner. Emphasis is laid on this point, because it has 
come to be considered in some circles that a thorough 
theoretical and practical knowledge of the exchanges is 
obtainable from a passing acquaintance with commerce, 
coupled with a cursory perusal of a few haphazard articles 
on this branch of monetary science : widespread confusion 
is the result. 

Most persons with commercial training are perfectly 
entitled to form and maintain opinions concerning their 
own trade and the monetary operations connected there- 
with, but in default of continuous study, or of special 
experience, no man is competent to discourse upon the 
theory and practice of foreign exchange. 

Throughout this book, then, the author imagines him- 
self in the position of the person with no previous know- 
ledge of the subject ; and while every endeavour is made 
to demonstrate the various divisions step by step in a 
manner capable of being understood by the veriest tyro, 
it is hoped that the arrangement of the work will meet 
the needs of the more mature students. 

It is the practice of many economic writers to commence 
their treatises with a definition of the particular part of 
the science with which they propose to deal, and in defer- 
ence to that useful custom, we may conclude this intro- 
ductory chapter with an explanation of the term " foreign 
exchanges." 

Meaning of Foreign Exchanges. 

As a mode of expression the words " foreign exchanges " 
form one of those meaningless phrases which have filtered 
down to us through the dust of antiquity. To the lay 



4 FOREIGN EXCHANGE AND FOREIGN BILLS 

mind the words convey nothing, and unless you are a 
diligent reader of the money article, or have connexions 
with the banking world, foreign exchange might very well 
mean the exchange of a London pig for a Chinaman's 
opium bowl. It is all very well to say : " Oh ! foreign 
exchange is merely the mechanism by which the money 
of one country is sold in another," when Tom, Dick or 
Harry is but dimly aware of the fact that money, as such, 
is ever bought and sold. 

We may get to the root of the matter if we go back to 
the old system of barter ; only, in this case we barter, not 
goods, but the value of goods, expressed in most cases by 
credit instruments — money substitutes. Consequently, the 
term signifies the practice prevailing among merchants in 
different centres or countries of regulating their mutual 
indebtedness without the transfer of metallic money from 
one country or the other. The trouble, risk, and expense 
of sending actual gold or silver from place to place are 
avoided as far as possible, by making use of a piece of 
paper, which may be in the form of a telegraphic order, or 
a bill of exchange. 

The final operations are carried out by bankers and their 
foreign agents, but special note should be taken of the fact 
that it is the transactions of merchants upon which the 
wheels of international finance principally depend for their 
motive power. 

In its simplest form, foreign exchange embraces all the 
hundred and one operations connected with the buying 
and selling of the substitutes for metallic money, and we 
shall arrive at a better understanding of the subject if we 
treat this money from the outset as a commodity, con- 
trolled by the same great laws of supply and demand 
which govern any other commodity. 

The reader is advised to dismiss from his mind for the 
moment the fact that he is dealing in the monies of foreign 
countries, and instead, to regard bills of exchange as 
representing a definite commodity — a debt. In a word, 



INTRODUCTORY AND EXPLANATORY 5 

it is debts which are bought and sold in foreign exchange, 
and the price of these follows exactly the same laws as 
any other article of commerce. 

MacLeod, in his Theory of Banking, compares them with 
corn, and although he was not propounding the theory 
of the foreign exchanges, yet his analogy is so remarkably 
applicable to the case we have before us, th^t no apology 
is needed for quoting his words — 

*' If money is scarce," he says, " and wheat very 
abundant, the price of wheat must fall : if money is 
very abundant, the price of wheat will rise. The price 
of debts obeys the same rules. If money becomes very 
scarce, the price of debts must fall. . . If specie 
becomes abundant, the price of debts will rise. . . The 
price of debts, then, must follow the same great laws of 
nature that the price of wheat does." ^ 

That, in a nutshell, is the basis of the business of foreign 
exchange, which, as we shall see, principally consists in 
the purchase and sale of foreign debts in the guise of bills 
of exchange. 

* Theory and Practice of Banking, Book II, page 278. 



-(1525) 



CHAPTER II 

THE BASIS OF FOREIGN EXCHANGE 

When a banker discounts a bill for a client he buys what 
is, in effect, a debt owing, or to become due, to that client : 
the operation may correctly be described as a transfer of 
indebtedness, but it should be borne in mind that there 
is no ground for the popular statement that the act of the 
banker is to lend money to his customer. 

Buying and Selling of Debts. 

From our standpoint the banker readly buys a definite, 
marketable commodity, and if the reader has literally 
interpreted the simple definition of monetary exchange 
adduced in the preceding chapter, he will realize that the 
commodities bought and sold in foreign exchange are 
nothing more nor less than international debts. Much 
confusion has been engendered by regarding these debts 
as being transferred from one to the other, not sold, and 
in the process people quite lose sight of the fact that each 
transfer or exchange is in itself an actual sale of a tangible 
article of commerce. It will tend to simplicity, therefore, 
if we regard foreign exchange as the buying and selling of 
debts between countries. 

In its most elementary form this buying and selling of 
foreign indebtedness is usually represented as being 
carried out by one piece of paper transferred between four 
principals, thus : A and B are two persons residing in one 
locality different from the domicile of C and D : A in 
London, we will say, sells goods to C in Antwerp, while D 
in Antwerp sells produce to B in London. To satisfy the 
four dealers engaged in these two transactions, obviously 
there must be a sale and purchase of two debts, or, to put 
it another way, one payment in Antwerp will be exchanged 
for one payment in London, and the manner in which the 

6 



THE BASIS OF FOREIGN EXCHANGE 7 

indebtedness is cancelled is almost ridiculous in its sim- 
plicity. London creditor A has a claim for Belgian francs 
and cents on C, while D has a similar claim on B for the 
sterling equivalent. If it is assumed that each transaction 
is equal in value, then A will sell C's debt to him to B : 
B, being under the necessity of remitting funds to Antwerp, 
buys this claim on C in order to send it to D, who will 
finally claim the cash from C. In this manner four parties 
are satisfied, and, to state the case stiU more explicitly, 
Antwerp's claim on London, and London's claim on 
Antwerp are both settled through the instrumentality of 
a bill of exchange, which A is assumed to have drawn on 
C; and the trouble, risk and expense of sending actual 
coin or bullion from place to place are avoided. 

If the exchange could thus be satisfactorily disposed of, 
there would be little difficulty in comprehending the 
operations which take place ; but, unfortunately, there 
are other points to consider. In our example we have 
assumed that A drew a bill on C, and that after travelling 
round its allotted sphere this piece of paper found a resting 
place in D's portfoho until the date of payment. Then 
again, we have taken it for granted that the two debts 
were of equal value. In actual practice, however, such 
conditions rarely prevail. What really happens is, that 
A will draw a bill on C, D will also draw on B, and as each 
party will require to be paid for his produce in the money 
of his own country, the exchange is effected through the 
medium of a banker. Finally, it is the banker who will 
adjust any balance which may arise owing to the different 
and varying proportion of the value of the currency of 
one country in the other. 

If, then, as in tliis hypothetical case of two debts arising 
from the transactions between four traders, the total 
claims of any two countries are neither in a state of 
equaUty nor fall due for payment at the same time, it is 
apparent that this is the point at which the real exchange 
problem arises, since owing to the lack of coincidence in 



8 FOREIGN EXCHANGE AND FOREIGN BILLS 

the total debts of the two nations there will remain a 
balance to be hquidated. 

Basis of International Indebtedness. 

The basis of this international indebtedness is foreign 
trade, and although the question naturally resolves itself 
into a consideration of the amount of exports and imports, 
it is not necessary in this book to enter into an extended 
discussion on international commerce. It will suffice if 
brief reference is made to the particular imports and exports 
which have a direct bearing on the subj ect under review. 

The payments for imports and exports are undoubtedly 
among the most important with which the writer on ex- 
change has to deal in examining international indebted- 
ness, but there are other items of national expenditure 
which have an intimate connexion with the exchanges, 
and of these we shall take due cognizance when studying 
the exact points at which they affect the various rates. 

Each trading nation has at times remittances to receive 
or to make in respect of its entire balance, and the princi- 
ples involved in the discharge of this mutual indebtedness 
in no way differ from those seen in the settlement of debts 
between two individuals. The operation is similar, 
whether it be an isolated transaction between a London 
merchant and one on the other side of the world, or whether 
it be the transfer of a huge sum exacted from a conquered 
foe as a war indemnity. In each case the ultimate settle- 
ment is made in the actual currency of the creditor country, 
but the rate at which the exchange is effected is governed 
by the relative state of indebtedness between the nations 
concerned at the time the transfer is made. That exports 
pay for imports is undoubtedly true, and it is equally 
certain that the excess of the one over the other always 
creates a claim which influences the rate at which the final 
payment is calculated ; but, having got thus far, we are 
face to face with the fact that there is no sure standard 
by which we can determine on which side the balance 



THE BASIS OF FOREIGN EXCHANGE ^ 

between any two countries lies, or, as Adam Smith shows, 
which of them exports to the greater value. 

If it were possible for a country to find out by how much 
its exports exceeded its imports, it would be a compara- 
tively easy matter to show the exact sum the importing 
country owed on balance, and when the money came to 
be sent out from the centre at which the debits exceeded 
the credits, the exchange could be calculated with some 
degree of accuracy, since the course of the exports and 
imports between two countries is considered to regulate 
the course of exchange between the two places. However, 
this course of exports and imports cannot be accurately 
gauged. For one thing, we cannot always set off goods 
against goods ; sometimes imports or exports of com- 
modities are paid for in kind ; at other times they are 
exchanged for services, or vice versa. Italy, for example, 
in exchange for the gold brought into that country by the 
tourist may be said to give him the opportunity to risk his 
life in cHmbing the Alps, or France may permit him to 
view her invaluable art treasures at the Louvre in return 
for the cash he has imported into Paris. There is a direct 
import and export in each case, but no trace of either will 
be found in the trade returns of the various countries. 

Then, again, in making remittances for shipments, 
merchants do not always send bills on the creditor country, 
but make use of other forms of remittances. For instance, 
they will pay a debt owing in France by means of bills on 
Switzerland ; or one due in Italy by a bill on Paris. All 
these operations tend to obscure the real rate of indebted- 
ness between the countries concerned, and serv^e to show 
that the foreign exchanges in practice do not always con- 
form to the principles which" in theory they are expected 
to. Consequently, although the relative indebtedness, or 
balance of trade between two countries, does exercise a 
potent influence over the exchanges, it is entirely mis- 
leading to consider the excess of exports over imports, as 
shown in trade statistics, as the one and only factor to be 



10 FOREIGN EXCHANGE AND FOREIGN BILLS 

taken into account. The components which constitute 
the final balance are much more complex, and to these we 
shall make further reference when examining the variations 
in the exchanges. For the present we must concern our- 
selves with the way in which the money of one country is 
exchanged into that of another country for the purpose 
of settling this final balance. 

The liquidation of the indebtedness arising from foreign 
trade is, as far as merchants are concerned, carried out by 
means of bills of exchange, and, in carrying through the 
operations, each party avails himself of the services of a 
banl^er, who is the connecting link between the various 
interests. The banker in fact may be regarded as the 
wholesale dealer, carrying the stock of demand drafts, 
bills and cable payments which form the international 
currency on the principal financial centres of the world ; 
and, ignoring for the moment the question of competition, 
supply and demand, etc., the prices at which he buys or 
sells his wares in the several currencies, are settled by 
certain well-defined rules, which we are now in a position 
to investigate. 



CHAPTER III 

INTERNATIONAL CURRENCY, THE PAR OF EXCHANGE 

AND THE MINT PAR OF EXCHANGE, WITH 

SPECIAL REFERENCE TO AUSTRALIA 

As we have invested the banker with the mantle of the 
wholesale dealer, let us examine the stock of international 
currency he is supposed to be carrying for the benefit of 
those wishing to deal in foreign exchange. 

The first essential in any form of international currency 
is that it shall be convertible into the money of the country 
to which we wish to send it, at the will of the holder. 

Forms of Remittance. 

The instrument above all others endowed with this 
quaHty, is the bill of exchange, under which generic term 
are included demand drafts, cheques, and bills of exchange 
payable at so many days after sight or date. Occasions 
arise, however, when these ideal instruments are not 
obtainable, and it becomes necessary for the buyer to look 
round for other forms of remittance. 

In what way will the demand be met ? 

The indebtedness can be cancelled equally well by pur- 
chasing another species of debt in the shape of coupons, 
bonds and the like. For example, if it is desired to make 
a remittance to Paris, in the absence of bills of exchange, 
coupons of the French Rentes can be dispatched to France ; 
or, should it be necessary to pay a creditor in New York, 
any of the standard securities which are due for payment 
may be sent. Warrants and coupons of the Canadian 
Pacific Railway, or of the New York Central Railway 
stocks, although not so much in evidence as the bill of 
exchange, are constantly being dispatched across the 
Atlantic in Uquidation of indebtedness. 

11 



12 FOREIGN EXCHANGE AND FOREIGN BILLS 

In making special mention of this mode of remittance, 
it may be thought that the author is going dead against 
the theories advanced by the leading economists, who have 
hitherto regarded the purchase and sale of coupons and 
other international securities as arbitrage business, pure 
and simple. This is not the case. If we bear in mind that 
the instruments bought and sold in foreign exchange are 
foreign debts, it is plain that coupons come within that 
category, and although for various reasons it is considered 
to be more simple and preferable to purchase a bill of 
exchange, yet if bills are not available, the remitter can 
pay his debt quite as well by sending coupons payable in 
the creditor country. It is true that, as a rule, commercial 
men do not resort largely to this form of finance, but there 
is no doubt that bankers frequently make use of coupons 
for the purpose of transferring the actual balance of 
indebtedness. It is within the writer's knowledge, in 
fact, that large remittances of coupons of the internal 
Japanese loans are periodically sent from London to the 
East, and the foreign banks are quite as ready to purchase 
these coupons as they are to encash bills of exchange. 

The fact remains, therefore, that coupons of the well- 
known foreign stocks and shares are really a form of 
international currency, and there is no reason to mystify 
the student by referring to the buying and selling of these 
claims to a ponion of the money of another country as 
unfathomable arbitrage operations. While it is no doubt 
the case that the bankers do most of the professional 
business of remitting funds from one country to another, 
yet it is within the power of any person who is under the 
obhgation to send a sum of money abroad, himself to remit 
by first-class coupons of the foreign country if he so 
desire. 

Having made this digression, we may return to a con- 
sideration of the rules which are said to enable us to calcu- 
late to a nicety the value in one country of the debts 
payable in others. 



INTERNATIONAL CURRENCY, ETC. 13 

In primeval days the question of barter must have 
caused much heart-burning among our ancestors. To 
settle, for instance, the number of pigs to be exchanged 
for a cow, was a problem well designed to bring out the 
qualities of a higgler until some definite standard of 
exchange could be decided upon. The incHnation to 
higgle over every exchange is irresistible even at the present 
day, and nowhere is this trait more prominent than in 
settling the terms for the transfer of indebtedness. The 
main problem, however, in foreign exchange, is to a great 
extent simplified by the fixing of a basis upon which the 
metallic money of one country can be converted into that 
of another. 

Mint Par of Exchange. 

This basis of exchange between two systems of coinage 
is known as the Mint Par of Exchange, and may be best 
described as the rate at which the standard coin of one 
country is convertible into that of another country 
according to the terms of their respective Mint laws. 
This power of exchange can be established only between 
two countries whose legal currency unit is of the same 
metal : the relationship thus expressed must be between 
the standard coins of two gold-using countries, or between 
the silver coins of two silver-using countries. Between two 
countries having legal tender coins of a different metal, 
say of gold in one country and silver in the other, there is 
no par of exchange, and the reason that a comparison 
cannot be made is, that the exchange between gold and 
silver cannot be definitely fixed. The gold price of silver, 
as we shall see when we come to discuss the Eastern 
exchanges, varies from day to day, according to market 
conditions and other fluctuating elements. 

In contradistinction to the Mint Par of Exchange, we 
may briefly refer to what is known as the Ideal or Hypo- 
thetical Par. The designation seems to have been handed 
down by writers on PoHtical Economy, who were wont to 



14 FOREIGN EXCHANGE AND FOREIGN BILLS 

use the term to describe the state of affairs which was 
supposed to exist when the opposing claims of two trading- 
countries exactly balanced. Exchange, it was argued, 
will be at par when the total payments to be made to and 
from any two countries within a specified time, exactly 
balance each other. As we have seen, however, the many 
and varied factors which have to be taken into account in 
measuring a country's foreign trade, make it impossible 
to say with any approach to accuracy, when the exports 
and imports between two countries do exactly balance : 
consequently, it is not possible to state at what precise 
moment the opposing claims, being equivalent, can be 
set off the one against the other. 

In point of fact, the Hypothetical Par is of no practical 
significance, and the only reason for mentioning it here is 
to show that people who are not well versed in the subject, 
tend to confuse it with Mint Par. Both indicate a state of 
equality, but the one is greatly different from the other. 

The Mint Par of Exchange, although it is only a nominal 
par of exchange, does enable us to get at the exact rates 
for the interchange of currency by giving us a definite 
point from which to calculate the price of debts payable 
on demand or at some determinable future time. 

The Mint Par being adduced from the metallic content 
of the respective coins as laid down by the coinage laws 
of the various countries, we are thus in a position to show 
how the relationship is established between any two of 
them whose standard is the same. Between any two such 
countries exchange would be at par, when, by paj^ng a 
certain amount of the metallic money or its equivalent in 
one country, one could purchase the right to receive an equal 
amount of the same metal in the other country, but it does 
not follow that this ideal state will often, if ever, prevail. 

Australian Exchange. 

The exchange between England and Australia is the 
much quoted example of this state of equality, and the 



INTERNATIONAL CURRENCY, ETC. 15 

apology, if any be needed, for referring to it here, is that 
an erroneous impression is created by writers who give the 
Austrahan exchange as a standard example of the transfer 
of indebtedness at equal rates. In practice, however, the 
Mint Par is one thing, the buying and selhng of these 
foreign debts another : the former is a fixed metallic basis 
on which to calculate the rates for the exchange, the latter 
is the actual operation, and it seems more correct to regard 
the Australian exchange as a simple illustration of the 
fact that the Mint Par is purely nominal. 

Cambists get out of the difficulty by stating " there is 
no exchange on London," but we must carry the discussion 
a little further by examining the present position in regard 
to Australia. 

The Australian Mints are branches of the British Royal 
Mint, and in both countries the bullion content of the 
"sovereign" is 123* 27447 grains troy of gold, eleven- 
twelfths fine, that is eleven-twelfths pure gold and one- 
twelfth alloy, and, strictly speaking, the par of exchange is 
£\ = £1, or £100 = £100. Theoretically, this par is fixed 
so long as the Mint laws of the two countries remain the 
same, but in practice we have to take cognizance of other 
factors, the principal of which, is the ratio between exports 
and imports. 

From details courteously supphed by Mr. G. H. Knibbs, 
the Commonwealth statistician, we find that prior to the 
year 1891 the balance of Australia's trade was, with few 
exceptions, on the side of imports — she had more to pay 
than to receive ; but from 1891 down to 1912, the reverse 
was the case, and Australia had more to receive than to 
pay, for the balance of trade was consistently in her favour. 
The trade returns for 1912, however, indicated a marked 
decline in the ratio of exports to imports, and in 1913 
Australia again imported more than she exported. 

There are no special features about the trade statistics 
for the earlier years which particularly concern us : the 
excess of imports was due, partly to the introduction of 



16 FOREIGN EXCHANGE AND FOREIGN BILLS 

the capital derived from the issue of Government loans, 
partly from capital sent out to Australia for financing 
private undertakings. The excess of exports for the 
twenty years, 1891-1912, arises from the interest and 
profits on the earlier investments, repayment of loans to 
foreign bond-holders, and also from payments for freight 
on cargo carried chiefly by vessels from Great Britain. 

In explanation of the alteration in the balance of trade 
from an excess of exports — which had prevailed for twenty 
years past — to an excess of imports in 1913, instructive 
tables were prepared by the Government statistician. 
They are too long to reproduce here, but there is no need 
to study statistics in order to understand the matter. 
It is in Austraha's borrowings that we have to look for 
the reason for a decline in the ratio of exports to 
imports. To make this clearer, let the reader imagine he is 
faced with the disagreeable necessity of raising a loan of 
£10 from a money-lender ; when the latter pays the £10 
it is in effect an import to the reader's income. Subse- 
quent interest payments will show very little effect on his 
outgoings if paid regularly ; it is when the loan is repaid 
to the money-lender that what we might term one's 
exports are affected. By a similar process of reasoning we 
arrive at the explanation for Australia's adverse balance. 
The vaiious states have borrowed heavily on the London 
market during recent years, and each year the total pro- 
ceeds of the loans, as paid, go to swell the import returns ; 
but, as Mr. Knibbs pointed out, as no immediate payment 
beyond the instalments of interest has to be made in return, 
the export figures are affected in a very minor degree : 
it is when the principal of the debt comes to be repaid that 
the export figures wiU show a marked increase. 

The fact that Australia constantly exports large quanti- 
ties of gold, has led many people into the error of supposing 
that such exports are entirely due to an adverse balance 
of trade. The gold shipments, however, are more attribut- 
able to the gold production of the country than to any 



INTERNATIONAL CURRENCY, ETC. 1 7 

liquidation of indebtedness, and although Austraha's 
being a gold-producing country is of considerable interest, 
we cannot dismiss the question of her exchange with Great 
Britain so simply : it is governed by many factors, of 
which gold production is only one and by no means the 
most important. Rates fluctuate considerably, according 
to circumstances ruling at the time, and exchange is not 
always at par. The payments which Australia has to 
make on account of the interest on her heavy debt to Great 
Britain may not be very visible in her export statistics, 
but they frequently cause, what we may call the " balance 
of exchange " to become adverse. 

Then, our trade with Australia is not so constant as 
with other countries with which we have intimate trade 
relations, and as a result we find the Australian exchange 
to be governed by seasonal influences, of which the principal 
are the wool and grain exports. The wool season com- 
mences in October and lasts until February ; grain exports 
also continue for about the same period, and arising from 
this activity in the export trade, there will be a heavy 
influx of money into London, represented by bills of 
exchange. In this case the Australian banks here have a 
plethora of funds, and the person who wishes to remit 
money to Sydney or Melbourne, either by means of drafts 
or cable transfers, may have to pay a small premium to 
the AustraHan bank in London, through the intermediary 
of which the operation is carried out. 

It may be rather different when there is a scarcity of 
funds in either Australia or London, and the buyer or seller 
will be charged a rate corresponding to the existing 
circumstances. 

These facts are made clearer by reference to the 
Australian exchange quotations, which are quoted at 
buying and selHng prices per £100. The list the writer 
has before him, for example, gives the buying rate for 
demand drafts, London on Australia at 97J, and the 
selling rate at par, that is, £100. On the other side, 



18 FOREIGN EXCHANGE AND FOREIGN BILLS 

Australia on London quotes £100 for buying demand, but 
sells at a premium of IJ, or, in other words, charges 
£101 J for a demand bill for £100; and while London sells 
cable transfers on Australia at par, Australia sells cable 
transfers on London at £101 1 per £100. Similar differ- 
ences may always be observed by any person who takes 
the trouble to consult the lists of rates given by the 
banks. 

As far as bills are concerned, the rate of interest for the 
time the purchasers are out of their money will also have 
to be taken into account. 

Apart from these influences, the geographical situation 
is a factor which has to be borne in mind : rates for remit- 
tances to New Zealand or to South Austraha may differ 
from those charged and paid for similar transfers to other 
parts of the Australian Continent. 

Finally, we must bear in mind that the operations in 
bills of exchange are mainly in the hands of the banks, 
and the question whether a draft can be procured at par, 
depends to a large extent not only on their local financial 
position at the time, but whether profitable operations are 
immediately available for the employment of the liquid 
funds they receive in exchange for the drafts issued. 

The statement that a sum of money can be cabled from 
London to Australia, or vice versa, at par, should also not 
be accepted without qualification. 

In buying and selling bills of exchange, other people are 
obliged to work through the intermediary of the banks, 
but in regard to telegraphic transfers the bankers them- 
selves are in an anomalous position. They base their 
operations on rates fixed in consultation with one another, 
and are often under-sold by parties outside the pale of 
their charmed circle. A merchant, for example, who 
desires to remit £20,000 by cable to Austraha, may find it 
convenient to get into touch with others having funds at 
their disposal there, and as the result of bargaining will 
get the transfer made at a lower rate than can be given by 



INTERNATIONAL CURRENCY, ETC. 19 

the bank, which has always to minister to the requirements 
of its customers, whether it can find a " set-off " or not. 

From a consideration of these facts it must be fairly- 
obvious that equality of exchange between Austraha and 
London is the exception rather than the rule ; the margin 
of profit always exacted by the person supplying the 
transfer, convincingly disproves the popular statement 
that there is often no difference between buying and selling 
rates in Australasian exchange. 

Now let us examine this fixed basis of exchange as 
established between Great Britain and other countries, 
which, while they conform to the gold standard, yet have 
a currency system different from our own. 

England and France. 

We may take the comparison between England and 
France as a commencement, and our equation will be based 
on the coinage laws of the two countries. 

Reference to the English Coinage Act of 1870 will show 
that a sovereign is ordained to weigh 123*27447 grains 
troy, or 7*98805 grammes of gold, eleven-twelfths fine. 
The French Mint Laws enact that one kilogramme (1,000 
grammes) of gold, nine-tenths fine (or, 900 parts fine gold, 
100 parts alloy), shall be coined into 3,100 francs. There 
is really no golden franc in France ; the legal tender unit 
is the silver franc, which derives its gold basis from the 
Mint Laws, while 3,100 francs is a simple way of expressing 
the equivalent of 155 twenty-franc gold pieces (or 
Napoleons). 

Chain Rule. 

Given these particulars we can get at the equation 
between the respective currencies by a simple application 
of Chain Rule, a method of reasoning with which all stu- 
dents of exchange should make themselves acquainted. 
It is rather beyond the scope of this work to explain the 
principles of Chain Rule, but it may be well to set out 
clearly the process to be employed in our first example. 



20 I?ORElGN EXCHANCiE AND FOREIGN BILLS 

Chain Rule consists of a series of equations arranged in 
two columns, each equation expressing the sequence or 
relationship between the two quantities. Starting from 
the first equation, which is a statement of the question, 
we express a definite relation between that and the second, 
the second and the third, the third and the fourth, and so 
on. There need be no difficulty in mastering the Rule if 
the student will remember to commence each equation in 
terms of the preceding quantity, and to conclude the Chain 
in terms of the answer required ; thus, if you begin the 
equation with francs on the left-hand side, the final 
quantity on the right-hand side must also be francs. The 
last point to bear in mind is, that quantities on the right- 
hand side form the numerator, and those on the left-hand 
side, the denominator ; the product of the numerator 
divided by the product of the denominator will then give 
the required answer. 

We may now apply the Rule to show the Mint Par of 
Exchange between Great Britain and France, and this is 
how the sum appears — 

How many francs ? = £^ 

If the weight of £1 = 7-98805 grammes Standard gold 

If Standard gold 12 grammes = 11 grammes fine gold 

If fine gold 900 grammes = 3,100 francs 

1 X 7-98805 X II X 3.100 
= 25-22152 francs. 



1 X 12 X 900 

Therefore £1 = Francs 25-22152, which is the rate at 
which the currency of the one country is convertible into 
that of the other, and, theoretically, is taken to indicate 
that in accordance with the existing Mint Laws of Great 
Britain and France, Francs 25-2215 contain pure gold of 
the same weight and fineness as that contained in one 
sovereign. This, of course, is only assumption, as no 
account is taken of loss of weight due to wear or other 
causes, but so long as the currency of each country is based 
on gold, and no alteration takes place in the Coinage Laws, 
it must be taken as the fixed Mint Par Exchange. 



INTERNATIONAL CURRENCY, ETC. 21 

England and Germany. 

The German standard of fineness for gold is the same ais 
the French, namely, nine-tenths fine quality, or 900 parts 
fine gold to 100 parts alloy or copper. Their Coinage Act of 
1873 ordains that the German Mint pound of gold shall be 
coined into 69| twenty-mark pieces, and, as we know the 
English basis of reckoning, we can set the problem out in the 
following way : How many marks equal one sovereign, when 
one German Mint pound of pure gold {i.e., 500 grammes) 
is coined into 69| twenty-mark pieces, nine-tenths fine ? 

Marks ? = £1 

If the weight of £1 = 7-98805 grammes Standard gold 

If Standard gold 12 grammes = 11 grammes fine gold 
If fine gold 500 grammes = 1,395 marks (69f x 20) 

1 X 7-98805 X 11 X 1.395 

= Marks 20-429 

1 X 12 X 500 

Hence the Mint Par of Exchange between Great Britain 
and Germany is £1 = Marks 20*429, or, to put it another 
way, 20-429 is the number of Marks containing exactly 
the same amount of gold as is contained in one British 
sovereign. 

England and the United States. 

To complete the trio, the method of finding the Mint 
Par with the United States of America is given. 

Here again the arithmetic is a question of the Coinage 
Laws of the two countries. The currency unit in the United 
States is the Dollar. The golden eagle = $10, is enacted 
to weigh 258 grains of gold, nine-tenths fine = 232' 2 
(258 X To) as against our sovereign, containing 123-274 
grains of gold, eleven-twelfths fine, which gives — 

Dollars ? = £1 

If the weight of £1 = 123-274 grains Standard gold 

If Standard gold 12 grains =11 grains fine gold 

If fine gold 232-2 grains = 10 dollars 

1 X 123-274 X 11 X 10 

= $4-8665 

1 X 12 X 232-2 

Consequently, the Mint Par in this case is £1 = $4-8665, 
or, as many people prefer to call it, 49T6d. = $1. 

3— (1525) 



22 



FOREIGN EXCHANGE AND FOREIGN BILLS 



The Mint Pars of Exchange between Great Britain and 
all other countries on the gold standard can be similarly 
calculated, and the following list will be useful to those 
who wish to see at a glance which nations have a Mint Par 
with this country. 

The table is based on the details given in Tate's Cambist, 
which may be taken as the standard work on what is called 
** the arithmetic of the foreign exchanges." 

The Mint Pars of Exchange between Great Britain 
AND Those Countries whose Currency is Based on Gold. 



Great Britain 
and 
Australia 



France 



Germany 



United States 
of America 



The 

Netherlands 



1 



Austria 



Belgium 



f Standard weight of gold sovereign is 123-2744 
<! grains, or 7-98805 grammes, eleven-twelfths 
. L fill® 

Par of exchange between England and Australia 
£\ = £1, subject to the limitations laid down 
in this chapter. 

155 twenty-franc gold pieces weigh 1 kilogramme : 
out of 1 kilogramme, 900 fine, 3,100 francs are 
to be coined. 
Mint Par — London-Paris : £1 = Francs 25-22152. 

f The Mark is the standard unit : Mint pound is 
equal to 500 grammes, and is coined into 
1,395 marks, 900 fine. 
Mint Par — London-Berlin : ;^1 = Marks 20-429, 
say, Marks 20-43. 

fThe standard unit is the Gold Dollar, weighing 
■\ 25-8 grains ; so that the Eagle, equal to 
t. 10 dollars, weighs 258 grains of gold, 900 fine. 
Mint Par — London-New York : ;^1 = $ 4-8665. 

•The gold coin is the 10 Florin piece, which 
weighs 6-720 grammes, 900 fine. Mint pound is 
equal to 500 grammes fine ; the relation between 
the British and Dutch weights of the precious 
metals is, therefore, similar to the relation 
between British and French. 3J per mille is 

• charged by the Dutch Mint for coinage. 
Mint Par — London- Amsterdam : £1 = Fl. 12-107. 

rUnit of value is the Krone = 100 heller. One 
, -| kilogramme of gold is coined into Kronen 3,280, 

i_ 900 fine. 
Mint Par — London-Vienna : £1 = Kr. 24-02. 

fMonetary system is similar to France. There- 

. -| fore, the Mint Par (London-Brussels) is to all 

L intents and purposes the same as London-Paris. 



INTERNATIONAL CURRENCY, ETC. 



23 



Denmark 

Sweden 
Norway 



/These three countries, forming the Scandinavian 
J Union, have a uniform gold coinage. Unit of 
j value is the Krone (crown), and 1 kilogramme of 
I fine gold is coined into 2,480 crowns, 900 fine. 
Mint Par with London is : £1 = Kroner 18-15982. 



These are the principal Mint Pars with Great Britain, 
but in practice it will be found that France, Germany, the 
United States of America, and Austria, receive most 
attention on account of their active gold markets. 



CHAPTER IV 

THE MINT PAR AND GOLD OR SPECIE POINTS IN THEORY 
AND IN PRACTICE 

As the result of the problems elucidated in the previous 
chapter, the mundane business in foreign exchange has 
perhaps been divested of half its terrors, and the pains- 
taking enquirer begins to perceive the reasons for estab- 
lishing a definite comparison between the currencies of 
those countries which adhere to the same metalHc standard. 

In point of fact, the amount of metal of the standard 
unit of one country contained in that of another country 
is of academic interest only, since the greater number of 
the operations in foreign exchange are carried out by means 
of bills of exchange, and the actual transfer of coin or 
bullion scarcely concerns the average man. The fixing 
of the Mint Par, however, is necessary as a basis upon which 
the latter can calculate the worth of the bill of exchange 
he has to buy or sell, as the case may be. If a debt equi- 
valent to £100 has to be paid by a merchant in England 
to a creditor in France, the parties to the transaction must 
have an agreed rate at which the exchange is effected, 
and the Mint Par will be the starting-point for their 
calculation. 

Let us trace the operation step by step. 

Suppose Messrs. Peter Robinson & Co., London, owe 
Pierre Rocher, of Lyons, £100, for silk purchased. The 
silk merchant does not want payment in English pounds, 
shiUings or pence, as our currency will be practically useless 
to him in Lyons ; he requires a remittance to be in francs 
and centimes, the recognized medium of exchange in his 
native town. How, then, will the debt be settled ? 

Peter Robinson, in consultation with his banker or other 
financial luminary, will find out that according to the legal 
enactments laid down by the two countries, £1 in England 

24 



THE MINT PAR AND GOLD OR SPECIE POINTS 25 

is worth francs 25-2215 in France ; he can, therefore, buy 
a bill of exchange for francs 2522-15 (25-2215 x 100), 
and send it to his creditor at Lyons in settlement of the 
debt. 

These facts, baldly stated, indicate what happens, in 
theory ; in practice, the business does not work out quite 
so simply. For one thing, in saying that the sum was 
transferred from London to Lyons, we have assumed that 
the amount of indebtedness between two countries is at 
" par " — that is, equal. In other words, the one nation 
has to receive the identical amount which it has to pay to 
the other, and, consequently, the total indebtedness is 
cancelled by that simple expedient, a set-off ; in the same 
manner, in fact, as two opposing claims are sometimes 
satisfied in an inland town. Needless to say, this ideal 
parity, or point of equilibrium, in foreign exchange rarely 
exists. Rates will be governed by a variety of circum- 
stances, and in general, the price at which debts can be 
bought and sold will be largely influenced by the supply 
of, and demand for, bills of exchange, through the 
intermediary of which the transfers are usually effected. 

There is another point to bear in mind. It must be 
evident that the British debtor is under the obhgation to 
send a bill of exchange for a sufficient sum to outturn the 
exact amount of the debt which he owes to his creditor, 
neither more nor less ; and it matters not whether his bill 
is payable at sight or at some fixed or determinable future 
time, the piece of paper must give the foreign creditor a 
claim to that amount of the currency of his own country 
which wiU quite clear off the debt on the day it is received. 

As illustrating the case where the opposing claims of 
two countries are not in this state of equahty, let us take 
an operation between New York and London. We will 
suppose in this instance that an American dealer owes a 
merchant in the City of London £3,000. At the par- 
ticular time the money becomes due, exports from Great 
Britain to the United States largely exceed Great Britain's 



26 FOREIGN EXCHANGE AND FOREIGN BILLS 

American imports, consequently on this side of the Atlantic 
we shall have more money to receive than to pay ; in a 
word, New York is under the obligation to remit to London, 
and there will be more buyers of bills of exchange on the 
New York market than there are sellers. Now, if the 
reader has remembered the closing words of the first 
chapter, he will know that he is deahng in " debts." The 
bills of exchange sold on the New York market, drawn on 
England, are debts owing by some one in England ; the 
selling of them in the United States by the holders is merely 
a convenient way of collecting the amount from the 
creditor. Very well, then, if, owing to the cause indicated, 
these debts are scarce, it is obvious that they must be 
subj ect to the same rules as those governing commodities : 
they will rise in price. The exchange between the two 
countries is, therefore, no longer at par, and the debtor 
who is under the painful necessity of putting his creditor 
in funds, will, failing his being able to put off the evil day 
until a more propitious season, have to pay more for the 
claim to a few of the British sovereigns, which alone can 
satisfy the person in London. 

When this state of affairs obtains, the American is sup- 
posed to have arrived at the point at which he will have to 
send to the creditor a certain quantity of gold to cancel the 
indebtedness. But, to avoid the many troubles and 
anxieties attendant upon gold shipments, there is still 
another way open to him. We, imagining for the moment 
that we are all bankers, will manufacture a bill for him. 
This calls for explanation. 

Bank Paper. 

If the bills for sale on the New York market have been 
purchased by the fortunate few who were early in the field, 
the reader, not unnaturally, wonders whence emanates the 
supply for the late comers. Here again, the conditions 
are closely akin to those ruling in the produce markets. 
In the ordinary commercial or manufacturing centres 



The mint par and gold or specie points 27 

increased demand always results in increased supplies, 
prices and other things being equal. So it is with the bill 
markets ; when the bills on offer have been exhausted, 
there will generally be found a number of bankers and 
exchange dealers ready to " manufacture a bill " to order 
— at a price be it noted. 

In order to make such operations possible, the bankers 
arrange to have funds available in the hands of foreign 
houses or correspondents, and when it suits their purpose, 
they will be prepared to draw on the correspondent, that 
is, they will draw a bill of exchange, either on demand or 
at so many days date or sight, according to the exigencies 
of the case. As the banker has deposited the necessary 
funds at some previous date with his correspondent, these 
bills may be said to represent the whole, or part of that 
correspondent's debt to the banker drawing the bill, and 
for the purpose of remittance these bills are as good as 
any other bills, the supply of which, as we have seen, was 
insufficient to meet the demand. They are better, in fact, 
than the ordinary trade bills. In the latter case, what the 
market calls the " personal equation " enters into the 
matter, that is, we take into consideration the greater or 
less confidence which may be placed in the signature of 
the drawer. The lower price paid for the commercial 
bill involves what is in reality an allowance or compensation 
for this extra risk, however small, the buyer takes. 

The merits and demerits of the two classes of paper will 
be seen when we come to discuss the " course of exchange," 
but having taken note of the difference, we may proceed 
to examine the manner in which Penrod, the New York 
debtor, finally hquidates his debt with Jones, the London 
creditor. 

As we saw, the Mint Par, New York — London, is $4-866 
= £1, but as the demand for remittances to London has 
exceeded the supply of bills, the exchange between the 
United States of America and Great Britain will be above 
this parity : it is favourable to this country, unfavourable 



28 FOREIGN EXCHANGE AND FOREIGN BILLS 

to America, and instead of getting his bill for £3,000, 
which is the currency he must send to Jones, at the Mint 
Parity, Penrod will be obliged to pay the higher rate which 
the banker exacts for manufacturing him a bill of exchange. 
The price he will pay for this banker's bill will be com- 
mensurate with the demand for " Bank Paper," the term 
used to describe this class of remittance, and the greater 
the demand the higher will be the cost. If the exchange 
be fixed by the banker at $4-88 to £1, the draft will cost 
$14,640-00, which will be $42-00 more than the price of 
a bill at the Mint parity. In short, Penrod has paid 
$14,640-00 for the right to have paid to him, or to his 
creditor Jones, the sum of £3,000 in London, and it is 
apparent that we do not vary the price by adding to the 
amount of the bill for £3,000, but secure the difference by 
varying the rate at which the American currency is 
converted into sterling. 

Limit of Price of Bills. 

It is at this stage the rules governing the purchase and 
sale of commodities diverge from those which govern the 
dealings in debts. In ordinary trade, the production of 
goods will continue as long as there is a demand for them, 
and the price will tend to rise in proportion to the excess 
of the demand over the supply : prices will rise until a 
point is reached when, through excessive production or 
other cause, the demand is satisfied; then the reverse 
action will take place. 

The operations in bills of exchange are confined within 
much narrower limits, and to appreciate the extent of 
these Hmits it will be well to refer to the reasons for 
sending bills of exchange in settlement of international 
indebtedness. 

In inland transactions, we use, for convenience and in 
order to economize gold, cheques, which are bills of exchange 
payable on demand ; similar considerations influence the 
using of bills of exchange in foreign commerce, only the 



THE MINT PAR AND GOLD OR SPECIE POINTS 29 

saving of time, trouble, risk and expense is very much 
greater. If the debtor can procure a bill of exchange, 
neither he nor the creditor will wish to be bothered about 
getting the coin converted from the currency of one country 
into that of the other, more especially so, when by remit- 
ting a bill, both are reheved from the anxiety which the 
shipping of gold coin or bullion always entails. 

The point at which the augmentation in the price of 
commodities will stop is, to some extent, problematical, 
but it is not so with the price of bills of exchange. The 
debtor will buy them only so long as their cost does not 
exceed the cost of shipping gold, and the point at which 
it is just as cheap to send the metal to his creditor, will 
mark the limit of the premium on the bills of exchange. 
If the sellers of bills ask a price above this point, the New 
York merchant will send gold rather than pay the enhanced 
premium. 

As far as New York is concerned, the charges for shipping 
gold to London, in normal times, may be reckoned as -024 
cents, and if we add these charges to the Mint Par we shall 
get the outgoing gold point from New York. 

The Mint Par is $4-866 

Add — Freight, insurance, commission, etc., 
at 5 per mille ..... -024 



$4-890 



The $4*890 we may assume to be the Hmit beyond which the 
American debtor will not go in buying bills of exchange 
on London. 

In the case of the supply of bills on the New York 
market exceeding the demand, the opposite state of affairs 
will prevail : the price for the paper falls away until the 
limit is reached at which the holders of the bills, the 
American creditors in this case, will rather withdraw gold 
from London than sell bills at a lower discount. To find 



30 FOREIGN EXCHANGE AND iFOREIGN BlLLS 

this point, we deduct the shipping charges from the Mint 
Par, 8 per mille. 

Mint Par $4-866 

Less Shipping Charges .... -039 



$4-827 



Gold Points. 

From these calculations we gather that at $4-89 to £1, 
gold will be sent from New York to London in preference 
to sending bills of exchange, and that at $4-827 to £1, it 
will be more profitable for the New York creditor to draw 
gold from London than to sell bills in sterling. 

These rates are what are known as Gold Points, or, as 
some people prefer to call them. Specie Points, and, in 
order to impress them upon the reader's mind, we may 
repeat, that the outgoing specie point of a country is the 
rate at which gold leaves, and the incoming point is the 
rate at which the gold enters a country. 

As the result of our investigation, three facts are now 
prominently before us. First, we see that the principal, 
if not the only reason, for our using bills of exchange in 
international commerce is to save the expense, risk and 
trouble incidental to the dispatching of gold. Secondly, 
when the merchant or other debtor has arrived at the 
parting of the ways, and is forced to choose between pajdng 
a price for the bills of exchange higher than the cost of 
sending gold to his creditors, he is said to adopt the latter 
alternative. Thirdly, when the seller of bills of exchange 
finds the price offered for his paper to be lower than the 
expense of importing gold, he will elect to take the gold 
from the debtor country. We thus get two gold or specie 
points between two countries, the import specie point 
being found by deducting the shipping charges from the 
Mint Par, and the export specie point by adding the 
shipping expenses to the Mint Par. 



THE MINT VAR AND GOLD OR SPECIE POINTS ^1 

In practice the solitary debtor, or even body of debtors, 
is little concerned with these specie points, and although 
for the sake of simplicity we have assumed gold shipments 
to be carried out by debtors, yet in reahty it is the bankers 
who ultimately carry through the transactions. The 
banker serves as the connecting link between buyers and 
sellers of exchange, and in the same way acts as the neces- 
sary intermediary for buying and selling gold : but this 
does not affect the theory one whit, since the banker 
merely takes upon himself as it were, the load of debts from 
one particular centre, and forthwith proceeds to liquidate 
them in the manner most profitable to himself. We will, 
therefore, transfer our attention to the banker and endea- 
vour to trace the steps by which he arrives at the 
disagreeable necessity of shipping gold. 

We saw that in selling paper to his client, the banker 
draws the drafts on funds which he had previously 
deposited with his foreign correspondent : but it may 
happen, in view of the profitable exchange, that the banker 
has sold bills which in the aggregate far exceed the sum at 
his disposal with the correspondent, or, as not infrequently 
occurs, he has made arrangements with the latter to accept 
or pay his drawings up to a certain specified limit. In 
either case the banker will be obliged to cover his drawings, 
that is, he must see that the correspondent is put in funds 
to meet the bills in good time. In many cases this will be 
done by the banker's sending bills which he, in his turn, 
has purchased from various sellers on his own market. 
In New York, he may have bought bills drawn on London 
during the interval between the departure of one mail 
and another, and perhaps, on the very mail day the banker 
expects to remit the bills to London for encashment, a 
client is forced to buy a draft from him. The banker will 
sell this draft, usually at a fair profit, and it is not unusual 
for the customer to send it to London in settlement of some 
debt or other by the same steamer which carries the batch 
of bills previously purchased by the banker. The British 



32 FOREIGN EXCHANGE AND FOREIGN BILLS 

correspondent will in due course collect the bills sent him 
for encashment, and with the proceeds he is in a position 
to meet the bill, sold at the last moment by the New York 
banker, which bill we may suppose is for an amount equal 
to the total of the other drafts remitted to him by the 
American. The profit on such an operation is apparent. 
In any case, the banker endeavours to cover his sales by 
purchasing other bills on the cheapest market, but he 
cannot always work the exchange in such a convenient 
manner as that we have just described. If the banker is 
unable to buy bills direct on London to cover his sales of 
drafts, he will resort to purchases of bills on a third, or 
even fourth country. These bills he will dispatch to his 
accredited correspondent in each centre, with instructions 
to remit the proceeds to the credit of this account with the 
banker or other correspondent in London upon whom he 
has drawn the bills which comprised his sales in New York. 
In course of time he finds he has burnt all his bridges, 
exchange will go against him on the other markets, and in 
default of cover at reasonable rates, as a last resource he 
will be obliged to ship gold and sell it on the London 
market at the price fixed by law. 

It is also the banker who is ultimately responsible for 
the gold shipment which is drawn from a debtor country 
when the import specie point is reached in the creditor 
country. Theoretically, the ordinary seller will not dis- 
pose of his bill, but will prefer to send it direct to the 
creditor for payment, and so draw gold from the country 
the exchange is against. In practice, however, the selHng 
will still go on as in the converse case, and it is the bankers 
who will arrange the gold shipments ; they themselves 
will be the buyers of the bills from the holders at or about 
specie point, and will subsequently send the bills over to 
the country with the unfavourable exchange. 

The object of the bankers' remitting these bills to the 
debtor country is obviously to recoup themselves for their 
outlay on the purchase of gold, which must still be sent 



THE MINT PAR AND GOLD OR SPECIE POINTS 33 

to cancel the indebtedness between two centres, but it 
should be noted that the bankers' action in taking these 
surplus bills off the market, while not stopping the gold 
shipments, does serve to prevent the exchange's falling far 
below gold point. 

Finally, in each case, that of the gold coming into the 
country, and that in which it goes out, the ultimate effect 
is the same as is seen in the importation and exportation 
of any other commodity : the relative balance of indebted- 
ness between the two countries will soon be turned, and 
when once the equilibrium is restored, assuming trade 
conditions to be normal, the ordinary buying and selling 
of paper will recommence. 

We see, therefore, that in ordinary circumstances, the 
exchange student is not directly concerned with the actual 
shipping of gold, which is a business in the hands of special- 
ists, but it has been necessary to enlarge on the subject in 
order that a correct understanding be reached in regard 
to the gold points, the true significance of which we are 
now in a position to appreciate. 

In discussing the Mint Par, we ascertained that there 
were a number of countries the interchange of whose 
currency could be calculated on a fixed basis laid down by 
their own laws, and in view of the foregoing explanation, 
it is now quite easy to realize that the gold points are 
those rates of exchange which will be produced by buying 
gold in one country, and selling it in one or other of those 
countries with which we have a Mint Par. The rate at 
which these countries will exchange the gold into their 
own legal tender is definitely stated, and we have only to 
add or deduct the cost of shipping the gold in order to see 
which exchange is for us and which against us. 

In order to make this book as practical as possible, we 
will now glance at the table of Gold Points, which is pub- 
lished weekly in the Economist, and see for ourselves how 
they are actually worked out. The following table is 
t alien from the issue of 30th January, 1915. 



y 



34 FOREIGN EXCHANGE AND FOREIGN BILLS 







Gold Points. 




French — 










Francs 


25-32^ 


— 4 per 


mille for us. 




>> 


25-22^ • 


-Par. 






flfivwinit—. 


25-12^ • 


-4 per 


mille against 


us. 


Marks 


20-52 ■ 


— 5 per 


mille for us. 




»t 


20-43 


-p£. 








20-33 ■ 


— 5 per 


mille against 


us. 


United States of America— 






Dollars 


4-89 


— 5 per 


mille for us. 




^^ 


4-867 


-Par. 






„ 


4-827 ■ 


— 8 per 


mille against 


us. 



For the moment, we may assume that the countries in 
question allow their State Banks, or those acting in that 
capacity, to pay out gold for export as and when desired, 
and as we know that the gold points are the rates of 
exchange produced by buying gold in one country and 
selling it in another, we can soon see how the banker 
works out his rates. 

Let us take the case of France. The first figures in the 
table, Fes. 25 -321 — 4 per mille for us, mean that exchange 
is in our favour, and gold should commence to leave the 
French shores for London. 

The fixed Mint Par between London and Paris is Fes, 25-225 
Add A per mille for freight, packing, etc. . -100 



Fes. 25-325 



i.e., Fes. 25-32 J, which is the rate at which it will pay the 
banker to take gold from the Bank of France, ship it to 
London, and receive from the Bank of England in exchange 
British currency based on the Mint Par Fes. 25-225 = £1. 
With Germany we will take as an example the last 
figures in the table, namely, Mks. 20-33 — 5 mille against 
us, which indicate that the exchange is unfavourable to 
England, that is, we have more to pay than to receive 
from Germany. 

The fixed Mint Par with Berlin is . Marks 20-43 = £\. 
Deduct 5 per mille for freight, 
packing, etc. .... -10 

Marks 20-33 



THE MINT PAR AND GOLD OR SPECIE POINTS 35 

This will be the outgoing specie point from London, and 
it will consequently pay the banker to turn Bank of Eng- 
land notes into gold at the Bank of England, ship the gold 
to Germany, and sell it to the German Reichsbank. 

As far as the United States of America are concerned, 
we see that it costs 5 per mille to send gold from New York 
to London, but that when the exchange is against us, our 
expenses for shipment are 8 per mille. The extra 3 per 
mille are deducted from the Mint Par to make up for the 
interest the British exporter of gold loses on the shipment, 
which is easily accounted for. In New York, when a 
consignment of gold is sent out, the American shipper can 
at once recoup himself by selling his bill on London, but 
with shipments from London to New York, the banker is 
unable to do this, since bills in sufficient quantity drawn on 
America cannot be obtained on the London market; 
consequently, we have to wait for the return remittance 
from America before we are in funds again, hence the 
extra charge of 3 per mille for loss of interest. 

Our real difficulty in regard to these specie points is, 
that they do not in practice conform to the limits which, 
in theory, are assigned to them : between each centre we 
often find the rates varying, according to the distance 
from London. Unlike the Mint Par, which is invariable 
as long as the coinage laws of Great Britain and other 
gold standard countries remain the same, the specie points 
are affected by variations in the cost of freight, insurance, 
packing, and commission, and in many cases interest has 
to be taken into account. Then, as has been evident 
during the Great War, shipping risk and other circumstances 
affect the gold movements. 

Apart from these factors, the manner in which the points 
will diverge from the fixed limits in practice will often 
depend upon the peculiar advantages within reach of each 
shipper. One consignor, for instance, may have special 
facihties for packing, another may be offered concessions 
by the Mint authorities in the receiving country, while a 



36 FOREIGN EXCHANGE AND FOREIGN BILLS 

third shipper, being able to send the gold forward in 
larger quantities than the rest, gets a reduction in the 
freight, and all or any of these concessions materially 
reduce the ultimate rate. When shipping coins, too, 
there must also be considered the allowance which will 
have to be made for the gold pieces worn and under full 
weight. 

The reader will therefore perceive that it is difficult 
to fix these specie points with absolute precision, and 
although they are theoretically correct, recent events 
have demonstrated all too clearly that we must not take 
them as definitely established. 

We do not, however, need war conditions to prove that 
the limit points are only approximately correct ; reference 
to the money article of the daily newspapers, or to the 
weekly figures given in such papers as the Economist, will 
indicate that while we in Great Britain generally allow 
gold to leave our shores without let or hindrance, other 
nations act in a much more guarded way. We may 
therefore conclude this chapter with a brief summary of 
the actual conditions, as far as they are ascertainable, it 
being understood that the position of the foreign exchanges 
during the war is reserved for discussion at a later stage. 

England a Free Gold Market. 

In the first place we can still confidently assert that in 
England there is an absolutely free gold market. The 
Bank of England's efforts to retain or obtain gold are practi- 
cally confined to variations in the rate of discount, and, 
very occasionally, to outbidding other dealers for the bar 
gold which arrives week by week from South Africa and 
other parts. It is not over-stating the case to say that our 
arrangements very often appear to be in favour of the 
foreigner, since when the exchange rates are against us 
gold rarely fails to leave the country, but when they are 
in our favour great reluctance is shown by other centres 
in sending the metal to us. 



THE MINT PAR AND GOLD OR SPECIE POINTS 37 

The export gold point New York -London, is $4-89 
= £\, and as there are practically no restrictions on the 
free export of gold, the metal will, as a general rule, tend 
to leave the United States shortly after that limit is reached. 
There was a marked example of this in the period, April 
to June, 1914. The official trade statistics of the United 
States showed that during the month of April imports 
exceeded exports by some $10,000,000 (£2,000,000, taking 
$5 = £1), and as other forms of remittance were insufficient 
to satisfy America's foreign creditors, New York was 
obhged to export gold in settlement of her indebtedness. 

On turning to France, we find the outgoing gold point, 
Paris-London to be Fes. 25-321 = £1, but when exchange 
reaches that point, or lower, gold leaves France only when 
it suits the Bank of France to let it go. Gold cannot be 
procured from the State Banl<: by simply presenting notes ; 
silver is also legal tender in France, and that metal can be 
paid out if it be deemed expedient. Gold, of course, can 
be picked up in small lots from outside sources, such as 
from the railways, the tourist agencies, etc., but when it 
is a case of fulfilling large contracts, the exporters are 
dependent upon the whims of the Bank of France : if the 
Bank is satisfied with its reserves, the gold may be forth- 
coming : if demands are at all heavy, and the exporters 
press for gold, a premium is charged, which naturally 
causes a divergence in the specie point : when for political 
or other reasons, the authorities feel it incumbent upon 
them to maintain their supply, however, the gold will not 
be issued at all. It is no unusual thing for the exchange 
to be in favour of London for days without gold reaching 
this country. 

For the week ending 3rd January, 1914, French exchange 
stood at Fes. 25-30 = 3 per mille for us, 10th January 
Fes. 25 -26 J = If per mille for us, and on 17th January 
Fes. 25-25J =t \l per mille for us. In such circumstances 
one would not have expected gold to leave this country, 
since Fes. 25-12^ marks the point at which gold is said to go 

4— {1525) 



38 FOREIGN EXCHANGE AND FOREIGN BILLS 

from London to Paris, but on 12th January £100,000 was 
actually taken from the Bank of England and shipped to 
France. 

The German authorities adopt even a stronger policy in 
regard to the Reichsbank's gold reserves. Prior to the 
war, their attitude was very rigid ; what it will be in the 
future remains to be seen. It has always been argued 
that Germany's arrangements closely conformed to the 
British in so far as gold is attracted by raising the rate 
of discount, but when it came to parting with the metal, 
many obstacles were placed in the way of exporters, and 
it is not too much to say that gold could rarely be secured 
from Berlin when exchange was against that city. 

Reference to the Economist weekly tables will show that 
each week, from January to August, 1914, rates were 
favourable to London. Take a few examples — 

On 3rd January, the rate, Berhn-London, wasM. 20-5 If 
= 4| per mille lor us. 

On January 10th . . M. 20-50 = 3^- per mille for us. 

17th . . 20-50J = 3| 

24th . . 20-481 = 3i\ 

From February to April the rate varied between | to If 
per mille in favour of London, and from May onwards it 
went steadily against Berlin, but needless to say, there 
was no question of gold coming to London, and although 
the outgoing specie point, London-Berhn, was never once 
reached in the period named, yet a good deal of gold found 
its way to Berlin from our shores. Even when rates were 
actually against BerHn gold left England. On 28th and 
29th July, 1914, the quotation was 20m. 53-55pf. and 20m. 
55-70pf. respectively : in sovereigns alone £847,000 were 
taken from the Bank of England " for the Continent " 
on the dates named, and as gold coin was also withdrawn 
for other European centres on the same days and the 
destination stated, there is no doubt the portion described 
as " for the Continent " went to Germany. 

We are forced to admit that the Reichsbank gives 



THE MINT PAR AND GOLD OR SPECIE POINTS 39 

liberal facilities to gold importers. For instance, credit 
is often given in Berlin for gold that has only reached 
Hamburg, which means a gain in interest to the importer. 
Then, it is said that the German banlc agents in London 
are given several days credit to enable them to pay a higher 
price for bar gold than would be possible if the exchange 
rates were strictly followed. 

It is b}^ working on these artificial levels that Continental 
nations protect or increase their gold reserves, as the case 
may be ; as a result we are constantly puzzled to discover 
what constitutes the real specie points, and until some 
person is clever enough to devise a remedy, all we can do is 
to take the average as approximately certain and leave it 
at that. 



CHAPTER V 

" FOREIGN EXCHANGE " QUOTATIONS, AND THE 
" COURSE OF EXCHANGE " 

In this chapter we propose to explain a part— a very small 
part — of the matter dealt with by that redoubtable person, 
the City Editor. 

In the Money Article there appears daily a list headed, 
" Foreign Exchanges," and this is supplemented twice a 
week, every Wednesday and Friday, by a second table, 
called the " Course of Exchange." The quotations con- 
tained in these tables seem to be looked upon by the 
average man somewhat in the same way as the small boy 
regards the signs of the Zodiac — they are incomprehensible. 
However, there need be no mystery about the rates if the 
principles upon which they are based are systematically 
investigated ; and in the hope that the mastering of these 
exchange technicalities may lead the student henceforth 
to regard the Money Article as an attractive feature of 
his newspaper, we proceed upon another stage in our 
enquiry. 

Rates of Exchange. 

The following is a specimen of the table pubhshed daily ; 
it is taken from The Times of 17th July, 1914, and generally 
appears with two other columns giving quotations for the 
two previous days. In a general way, the extra quotations 
are considered necessary for the purpose of comparison, 
but as we are not interested just now in previous rates, 
the columns in question are replaced by one giving some 
explanation of the currency of the respective countries, 
which will perhaps be more useful to the beginner until 
he has had the opportunity to familiarize himself with the 
daily quotations. 

40 



FOREIGN EXCHANGE " QUOTATIONS, ETC. 
FOREIGN EXCHANGES. 



41 



Paris — Cheque 


25 f. I6f-I7f c. 


Francs and centimes to £1 


Bank Rate . 


3J% 




Market Discount . 


2f% 




Brussels — cheque . 


25 f. 29^301 c. 


.. 


BerUn — sight . 


20 m. 49-50 pf. 


Marks and pfennigs to ;^1 


8 days 


20 m. 46| pf. 


«> »» 


Bank Rate 


4 % 




Market Discount 


^% 




Vienna — sight 


24 kr. 16-18 h. 


Kronen and heller to ^^1 


Amsterdam — sight . 


I2fl. ll|-12^c. 


Florins and cents to £1 


Italy — sight . 


25 L. 26-8 c. 


Lire and ,, 


Switzerland — sight . 


25 f. 18i-19ic. 


Francs ,, „ ,, 


Madrid — sight 


26 p. 05-15 


Pesetas to £1 


Lisbon — sight 


4eil-46^^d. 


Pence to 1 milreis 


Petrograd — 3 months 


95 r. 10 k. 


Roubles and kopeks to ;^10 


sight . 


95 r. 75-85 k. 


►. 


Christiania 


18 kr. 23 -26 


Kroner and ore to £1 


Copenhagen . 


18 kr. 23|-26^ 


,, ,, ,, 


Stockholm 


18 kr. 23 -26 


>. .. ,, 


Bombay T.T. 


I/3i^i^. 


Shillings and pence to I rupee 


Calcutta T.T. 


1/3^^^. 


.. .. >. .. .> 


Hong-Kong T.T. . 


1/lOK 


1 dollar 


Shanghai T.T. 


2/ 51^. 


Itael 


Singapore T.T. 


2/31^^. 


1 dollar 


Yokohama T.T. 


2/Of^. 


., ., 1 yen 


Alexandria 


97fpi. 


Piastres to £1 


iRio de Janeiro, 90 days. 


15{-^d. 


Pence to 1 milreis 


I Valparaiso, 90 „ . 


9K 


1 peso 


iBuenos Aires, 90 „ . 


47Hd. 


1 peso or dollar (gold) 


^Montevideo, 90 „ . 


su^^d. 


1 dollar 


New York— Cable transfers 


$4.873^^-Hc. 


Dollars and cents to ;/;i 



^ These rates are telegraphed on the day preceding their receipt. 

The rates here given are those in force on the various 
Bourses for bills or cheques on London, and are cabled to 
London from the centres named each day. With few 
exceptions they represent the amount of foreign money 
which will be paid for one sovereign, and a useful point to 
remember in exchanging sterling is, that where prices are 
quoted in foreign money to £1, high rates are favourable 
to Great Britain, low rates are unfavourable. For example, 
take the first quotation in the table. Here we have the 
value of a sovereign in Paris in francs and centimes, and 
if we want to buy a bill in francs with our sovereign, the 



42 FOREIGN EXCHANGE AND FOREIGN BILLS 

higher the quoted rate, the cheaper will be the bill, while 
if we have a sterling bill to sell, the same rule will apply. 
All this sounds rather like a paradox, and it certainly is 
confusing at first sight, but a moment's reflection will 
make the matter quite plain. 

Let the reader imagine he is on the market with one 
sovereign in his hand, and desires to change it for francs : 
obviously the larger number of franc pieces he is able to 
obtain for his piece of gold, the better off he will be in 
France. Conversely, if he is in London and desires to 
buy French currency to send to France, the higher the rate 
quoted the more francs he will obtain for every sovereign 
he puts down. Say, in response to an apphcation the 
money changer quotes Fes. 25-16 for the sovereign, and the 
holder of the latter coin being gifted with strong persuasive 
powers, finally prevails upon him to give Fes. 25-20 for 
the possession of the coveted gold piece, it is plain the 
higher rate is the better of the two, for in receiving 25 
francs, 20 centimes, the receiver has 4 centimes more than 
if he had allowed the sovereign to change hands without 
any bargaining. There is thus no difference whether you 
are buying francs in London or seUing sterhng in Paris ; 
the higher rate is still the better. 

The reverse, of course, is true if we put ourselves in the 
shoes of the Frenchman who is exchanging francs and 
centimes for sovereigns ; in his case the fewer francs and 
centimes he pays for the pound sterling, the better will be 
the rate; if he gives only Fes. 25-16 for £1, that is a more 
favourable rate to him than Fes. 25-20. However, for 
the moment we are considering ourselves as the debtors 
buying bills in the foreign currency, and bearing in mind 
that high rates are in our favour, while low rates are in 
favour of the foreign centre, we can take the rule as 
applicable to all the rates down to and including that of 
Madrid. 

But let us beware of traps, of which this list contains a 
plentiful supply. When we look at the Lisbon quotation, 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 43 

we find the price given in pence to the Portuguese milreis, 
and to this rate the above-mentioned mnemonic cannot 
apply. We must therefore re-state the rule by reversing 
it, and this is how it appears : when rates are quoted in 
shillings and pence to the foreign units, high rates are 
unfavourable to us, low rates are favourable. This, 
again, is easily proved. The Lisbon rate before us is 
46T4d., which will be the requisite number of pence to 
buy 1 milreis : if the quotation were 45d., it would be 
more favourable, since we should then pay only 3s. 9d. 
for each milreis bought, whereas in the first case the seller 
would charge nearly 3s. lid. for the coin. 

With Petrograd we revert to the former rule, and high 
rates are in our favour, while low rates are against us ; 
but there is a peculiarity about the Russian quotation 
which calls for explanation. 

In Russian exchange, rates are always quoted so many 
roubles and kopeks to £10, so that if we wanted to exchange 
sovereigns for roubles, according to the figures in our 
table, and leaving time out of the question, the Russians 
would pay Rbls. 95-75 for £10, which, of course, is only 
another way of quoting Rbls. 9-5 for £1, 

The quotations for Christiania, Copenhagen and Stock- 
holm, present no difficulties : in each case the more of 
the foreign currency we can get for the pound sterhng, the 
better it is for us. 

When we come to the Oriental countries, India, China, 
Japan and the Straits Settlements, we find another varia- 
tion. All rates are quoted in shillings and pence, and 
indicate the price which will be charged for the local coin 
on the centres named ; consequently the fewer pence we 
pay in England for the foreign unit, the more advantageous 
it will be. Then we find Egypt following the more general 
method, and quoting piastres to one sovereign, while the 
South American centres all quote in pence. Finally, we 
get to New York with the familiar dollar and cents to the 
sterling. 



44 FOREIGN EXCHANGE AND FOREIGN BILLS 

It adds to the beginner's complexity to find that with 
most centres there is what we might term a " double- 
barrelled " quotation. Where this is the case, the price 
represents two limits — buyers and sellers. Look at the 
Paris cheque rate, which shows that you could find buyers 
on the Bourse at Fes. 25-16|, and sellers at Fes. 25-17| 
for a cheque drawn on London, payable there immediately 
the British creditor receives it from the debtor in France. 
As there is a difference of 1 centime between the two rates, 
it is apparent that the ultimate price at which deahngs 
are settled will depend upon the extent of the operations 
and the amount of bargaining that takes place : demand 
and supply, and all the factors governing other com- 
modities will come into play. In the absence of demand, or 
if there is a plentiful supply of bills, the sellers will soon 
be glad to let them go at the lower rate, while if the supply 
is less than the demand, the persons seeking to remit 
will compete to buy the bills, and the higher price will 
be paid. This bears out the contention upon which we 
have laid stress, that the price of debts is subject to 
the same influences as those governing the price of other 
commodities. 

It seems hardly necessary to add in regard to these 
rates, that if you are a buyer of sterling, naturally you 
want to give as few francs and centimes, or marks and 
pfennigs as possible for £1, and if you happen to be the 
seller of sterhng, it is to your interest to obtain as many of 
the local coin as possible for every sovereign sold. 

Some people say that the double quotation in the table 
indicates the variation in rates between bank bills and 
mercantile paper ; but this is not so, and the error arises 
from confusing the rates quoted in the " foreign exchanges' " 
table with those given in the bi-weekly " course of 
exchange." The only meaning which can be read into a 
rate, such as the Paris cheque, in the " foreign exchange " 
quotations, is, that on the day on which it was current, 
the price of a cheque in Paris, drawn on London was 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 45 

Fes. 25-16| to Fes. 25- 17}, the extent of the margin between 
the two quotations depending upon the volume of the 
operations, and whether buyers or sellers are in the 
majority. 

There is a variation in the rates quoted by Berhn. 
First we have the " sight " quotation, whieh of eourse is 
only another way of giving the " eheque " rate. To all 
intents and purposes the eheque and sight rates are the 
same : the sight draft is payable immediately at sight, 
and the cheque is payable on demand, consequently it 
makes no difference to the creditor which form of 
remittance he receives. 

Berlin also quotes an eight days' rate, which means we 
have to make an allowance for the time in the price. We 
can sell a sight draft in Berlin drawn on London for Mks. 20 
49 pf . , but an eight days' sight draft will return us only Mks.20 
461 pf., because the person to whom it is sent is under the 
necessity of presenting it for acceptance, and after the bill is 
accepted he has to wait eleven days before he can obtain his 
money, the extra three days being granted to the acceptor of 
the bill in accordance with the provisions of Section 14, sub- 
section 1 of our Bills of Exchange Act. The difference in 
the rate, 3 J pfennigs, represents the interest on the deferred 
payment, and this difference varies in accordance with the 
local rates of interest in the centre upon which the bill is 
drawn. The lower the rate of interest, the more marks 
and pfennigs will go to the pound sterling. 

Vienna, Amsterdam, Italy, Switzerland, Madrid and 
Lisbon, all quote the sight rate, but Petrograd, as if to 
relieve the monotony, has two rates, sight and three months. 
The sight quotation is Rbls. 95-75 k. to £10, but the price 
for a three months' bill is given at Rbls. 95* 10 k., or nearly 
two-thirds of a rouble less, the difference being the interest 
allowed to the buyer for the time the money is in the 
hands of the sellers before the draft is paid. 

The Scandinavian rates call for no comment : they are 
all sight rates. 



46 FOREIGN EXCHANGE AND FOREIGN BILLS 

Some difficulty may be experienced when we get to the 
Eastern rates. We have six centres all quoting T.T. 
rates, i.e., the prices for telegraphic transfers. These 
rates are cabled daily to the offices of the various Indian 
and Eastern banks, from which the Press gets the 
quotations which we see published. 

The quotations all mean the sterling seUing rates for 
rupees, dollars, taels, etc., for homeward remittances by 
wire. If a man in Yokohama, for instance, owes a debt 
to a merchant here, and the T.T. rate is 1 yen = 2s., then 
for every yen paid to the Bank in Yokohama, 2s. will be 
paid to the creditor in London as soon as the Bank's 
London branch has received and decoded the cable. 

No time is specified for piastres in Alexandria, but the 
quotation is for sight drafts. 

The four South American quotations are for bills drawn 
at ninety days' sight, and they all show the number of 
pence to be calculated as the equivalent of the respective 
currency units in the centres named when it is a question 
of sending the bills payable ninety-three days after sight, 
the additional days being the " days of grace " allowed 
by British law. 

The New York quotation is for cable transfers, which, 
as the reader will no doubt perceive, are merely the American 
equivalent for telegraphic transfers, and expresses the 
number of dollars and cents which will be charged for each 
sovereign payable in London on receipt of the cablegram 
from New York. 

As a matter of fact; New York rates are usually honoured 
with a special table to themselves. Owing to New York's 
lying so far west, there is a difference in time of about 
five hours — it is noon in London when it is 7 a.m. in New 
York ; consequently the work of the City editor of the great 
daihes is well advanced, and most of the other financial 
matter has been arranged and printed before the New 
York rates are received, which necessitates their being 
rushed into a separate page at the last available moment. 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 47 

The importance of all New York quotations renders it 
imperative to give the very latest rates, and in this respect 
they differ from the South American rates, which, although 
appearing in our list on Friday, 16th July, 1914, are really 
the prices current on the various markets on the previous 
Wednesday evening ; they are thus a day old when 
received. New York quotations are those for the previous 
evening. 

The following may be taken as a specimen table of New 
York rates — 



Exchange on London — sight 

,, cable transfers 

60 days' sight 
„ Berlin — short sight . 

Paris 



Previous 
To-day. day. 

4-88-30 4-88-20 

4-88-65 4-88-50 

4-86-10 4-86 
95 ^-3\ 95,^ 

5.15f 5-15f-^^ 



The " sight " exchange is clearly the dollars and cents 
to the pound sterling, payable at sight in London on pre- 
sentation of the bill by the receiver to the person or bank 
upon which it is drawn. The cable transfer rate, as we 
have seen, is the selling price in New York for the sterling 
equivalent to be paid in London as soon as the message 
has been flashed across the wires to the paying banker. 
The sixty-days' sight quotation indicates that the draft 
is not payable in London in sterling until sixty-three days 
after the draft has been received, presented and accepted 
for payment. 

The cable remittance commands the highest price, 
because it is for prompt payment : in the sixty days' 
sight rate we have made an allowance for interest, therefore 
it is sold at the lowest price. 

The BerHn short sight rate, and the Paris short sight 
rate, call for Httle explanation. In each case " short sight " 
means that a draft is payable eight days after sight, and 
the Berlin quotation — 95x6, shows the number of cents 
which will be given in New York for a bill for 4 marks, 
payable in Berlin. The Paris rate — 5'15|, means that 



48 FOREIGN EXCHANGE AND FOREIGN BILLS 

1 dollar in New York is exchanged for Fes. 5-15| payable 
in Paris. 

Short and Long Exchanges. 

Before leaving this table it may be well to refer to the 
three months' rate, to which we have as yet made only a 
passing reference. This brings us to a part of the list we 
have left unexplained : we refer to the bank rate and 
market rate of discount. 

Rates hke the Paris cheque and the Berhn sight, are 
called the " short exchange," while the three months' 
rate, as quoted in Petrograd, is termed the " long exchange," 
and the rates of discount enable us to trace how the quota- 
tions are arrived at. Given the short rate, we can always 
find the long rate, and vice versa. To work these out, we 
may imagine we are on the Paris market. If we have to 
remit from France to settle a debt in England, and decide 
to send a cheque, we will pay, say Fes. 25-1675 for every 
sovereign, or claim to a sovereign, the Paris banker sells : 
by remitting this cheque we place in the hands of the 
British creditor the power to obtain payment for the debt 
at once, but suppose we elect to send him a three months 
bill, what governs the price we must pay for it ? It is 
plain that the creditor will be obhged to wait three months 
before he can cash the draft ; consequently, we are bound 
to put him in such a position that he wall not lose over the 
transaction : in a word, we shall require from the Paris 
teller of exchange a draft including the additional number 
of francs that will recompense the creditor for the time he 
is out of his money. As the Paris dealer gets the money 
three months before his correspondent in London has to 
pay the bill, in purchasing three months' paper, or long 
exchange, we get it at a lower price than that paid for the 
cheque or short exchange. 

In the case of Paris, however, our table does not give the 
long rate, so, assuming we are buying bank paper, we 
calculate the rate in the following way. 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 49 

The short exchange, Paris on London for bank paper 
we see from our table is given as £1 = Frs. 25-1675. Now 
for a bill payable three months from the date of issue, 
16th July, we must pay the cheque rate, less three months' 
interest, and as we are deahng with bank paper, we take 
the market rate of discount ruling on the centre upon 
which the bill is drawn — London, which on the day in 
question was 2J per cent. Over and above this charge 
we have to make an allowance for stamp duty on the bill, 
which will usually be about half per mille, and in many 
cases we also add a small amount for contingencies — the 
compensation allowed to the buyer of a bill for the risk 
he takes on the signatures of the drawer, acceptor and 
sometimes indorsers of the bill. From these details we 
can now set out our calculation — 

Short Exchange Fes. 25-1675 

Less 3 months' interest @ 2^% per ann. • 1337 
,, allowance for contingencies . '0161 
„ French stamp duty I per mille -0125 

-1623 



Fes. 25-0052 



the long exchange, Paris on London. 

As regards the amount chargeable for contingencies, 
this usually varies (it may be one per mille, or even less) , 
as bankers will frequently cut rates if they are keen on 
doing business. 

We see, then, that when drawing from the foreign city, 
the three months' rate on London is calculated from the 
short exchange, less interest at 2J per cent, our market 
rate on the date the business is done, plus cost of the bill 
stamp and often a small consideration for contingencies. 
Similarly, if we have a three months' rate, we can always 
find the short exchange by adding instead of deducting 
three months' interest at market rate. 

Longer usance can be calculated in the same way, but 
with this difference. If it is desired to find the cost of 
a four months' or six months' bill, we calculate the interest 
for the period at a rate slightly in excess of the hank rate 



50 FOREIGN EXCHANGE AND FOREIGN BILLS 

ruling in the centre upon which the bill is drawn, and in 
all cases it will appear that the longer the period of payment 
of the bill is deferred, the cheaper will be the price to the 
person purchasing it with British sovereigns in the foreign 
market. 

Bank Rate, as is well known, is usually higher than 
market rate ; therefore if ordinary trade bills are remitted 
from Paris, to find the long exchange, interest will be 
calculated at our Bank Rate, as trade paper is not 
considered such a good security as bank bills. 

The student may all this time be wondering why we take 
the rates of discount ruling in the country upon which the 
bill is drawn, instead of the rates quoted in the country 
of origin. The reason is, that the person to whom the 
remittance is sent may desire to turn the bill into cash 
by getting it discounted, and the rate which the banker 
or broker would charge him is the one in existence on his 
own market ; consequently, if the holder of the bill sells 
it under discount he is presumed to be in exactly the same 
position as he would have been had we remitted him a 
cheque or sight draft from Paris, or whatever the foreign 
centre is. 

The reverse operation, drawing on Paris from London, 
will be shown after we have discussed the " Course of 
Exchange." 

Course of Exchange. 

The second table in which we are interested is known to 
the newspaper world as the " Course of Exchange " ; in 
banking parlance it is called the " On 'Change Table." 
This, as we mentioned earlier in the chapter, is published 
twice a week, and appears in the newspapers every Wed- 
nesday and Friday. The rates quoted are those in force 
on the preceding day in London. Every Tuesday and 
Thursday various foreign exchange dealers, bankers, 
brokers and financiers meet within the hallowed precincts 
of the Royal Exchange, and their deahngs in bills take 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 51 

place on the ground floor in the spacious hall which City 
workers have come to regard as the sacred domain of the 
five-shillings-a-week office boys, who, failing any other 
shelter, resort to the Exchange to eat the more or less 
frugal lunch which thoughtful mothers insist upon their 
carrying to the City each day. Practically the only paper 
which meets the eye of the general public is the newspaper 
wrappings of the mysterious parcels which daily emerge 
from the pockets of these diminutive City urchins. 

The On 'Change Table, to call it by its vulgar name, 
represents the prices at which bills on the various countries 
have changed hands, and immediately the bargains have 
been recorded, the list is drawn up and issued to the Press, 
who publish it the next day. 

In case the reader may wonder why the London quota- 
tions are not more frequently issued, we may at once say 
that London, being the international monetary centre of 
the world, has very many more bills drawn upon her than 
she draws on other countries ; consequently, the persons 
interested in these " wretched, crinkled, scrawled-over, 
blotchy, frowsy pieces of paper," ^ are concerned in a far 
greater degree with the rates quoted in foreign cities than 
they are with those settled in London. 

The table which follows is also taken from The Times 
of 17th July, 1914. The original list appeared with two 
additional columns of quotations, recorded at the previous 
meeting of the foreign exchange coterie, namely, Tuesday, 
14th July, 1914, the latter being given for purposes of 
comparison, as with the " Foreign Exchanges " ; but here 
again we give in substitution of the earlier rates, a brief 
note explaining the meaning of the rates quoted. 

There are one or two peculiarities about this table which 
call for attention. In the first place, we have the Dutch 
rate quoted in florins and stivers to the pound sterling, 
instead of in florins and cents, as in the " Foreign Ex- 
changes." The writer knows of no reason why we in 

* Mr. Lloyd George's name for them. 



52 



FOREIGN EXCHANGE AND FOREIGN BILLS 



Amsterdam, etc., — cheques 

„ 3 months 

Antwerp and Brussels 

Hamburg 

Berlin, etc. .... 

Paris — cheques .... 
,, 3 months ... 
Marseilles — 3 months 
Switzerland — 3 months . 
Austria ,, 

Petrograd and Moscow — 3 months 
Genoa — 3 months ... 
New York — 60 days 
Madrid — 3 months 
Lisbon ,, ... 

Oporto ,, ... 

Copenhagen — 3 months 
Christiania ,, 

Stockholm ,, 



COURSE OF EXCHANGE. 
Thursday, i6th July, 1914. 



12.2I 

12.4I 

25-50 

20.63 

20.63 

25-i7i 

25-36i 

25-36i- 

25.37i 

24.41 

24i 

25.56i 

48^^ 

45 rs 

45tlT 

45i^« 

18.48 

18.48 



12. 2| 
I2.5i 

25-55 

20.67 

20.67 

25.20 

25-41I 

25-4ii 

25-42* 

24-45 

24I 

25.6ii 

4811 

45% 

45 f^ 

45k 

18.52 

18.52 

18.52 



Florins and stivers to £1 

Francs and cents 
Marks and pfennigs 



Francs and cents 



Kronen and heller 
Pence to i rouble 
Lire and cents to £\ 
Pence to $1 

„ 5 pesetas 
,, I milreis 

Kroner and ore to £1 



London continue to quote Amsterdam in this way ; by 
quoting the fractions in stivers, we are years behind the 
times. However, apart from the awkwardness of having 
a different quotation in Holland, there is no difficulty about 
the matter ; it is simply a question of remembering that 
with the London rate on Amsterdam 20 stivers go to the 
florin, while with Amsterdam on London, 100 cents equal 
1 florin : the stiver is therefore worth 5 cents. 

The rates for Petrograd and Moscow, it will be noticed, 
are given in pence to 1 rouble, while for New York the 
quotation is in pence to one American dollar. Then we 
have the Madrid rate in pence to 5 pesetas, instead of 
pesetas to £1 sterhng as in our former list. 

With each country it will be seen we have two rates 
given, both with the quotations for cheques and those for 
three months' bills. Unlike the prices in the " Foreign 
Exchanges " list, the rates given in the " Course of 
Exchange " for the long exchange, indicate the current 
quotations for two different classes of paper. Where the 
quotations are in foreign units to the pound sterling, as 
francs to £1, the first rate will be the price of first-class 
bank paper, the second that charged for the ordinary 
trade or commercial bills. To take the first on our list — 
Amsterdam, Fl. 12.4f, is the price at which bankers' 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 53 

bills can be bought. We get only Fl. 12.4|- stivers for 
one sovereign, but if we are content with the commercial 
bill, we can procure Fl. 12. 5 J stivers for the same amount 
of British currency. As we thus get a higher rate for the 
latter class of paper, we see that it is cheaper, and the 
cheapness lies in the fact that it is inferior to the bank 
paper. 

So much for the long exchange. The reason for two 
quotations being given for the short exchange is due to the 
fact that the rates include all bills within ten days of their 
maturity, hence, drafts which have anything up to ten days 
to run are of less value than the cheque or sight bill, which 
is due on demand : the slight allowance for interest 
causes the difference between cheques and the drafts not 
quite due. 

It must not be forgotten that in the Course of Exchange 
we are operating from London, and not from the foreign 
centre, which has for effect that the rates for the long-dated 
paper are higher than those for the short exchange : that 
is to say, we obtain for each sovereign more florins and 
stivers, francs and centimes, marks and pfennigs, etc., 
when buying bills payable three months hence, than we 
do when buying cheques or short-dated paper payable 
practically on demand. 

When scanning the Course of Exchange one other point 
has to be borne in mind, that is, with rates quoted so many 
pence to the foreign currency unit, the position is reversed. 
With Petrograd, for instance, where we have pence to the 
rouble, the first quotation, 24 |d., is the lower rate and is the 
price for commercial paper, but the second rate, 24|d., is 
the higher price quoted for bank paper. From these 
explanations, it is easy to see that when London quotations 
are in the foreign currency they are cheaper when they 
rise, and dearer when they fall : but when we quote rates 
in sterling, such as pence to roubles, pence to dollars, 
pence to milreis, etc., they are cheaper to us when they fall 
and dearer when they rise. 

5— (1525) 



54 FOREIGN EXCHANGE AND FOREIGN BILLS 

In examining the " Foreign Exchange " Ust, we saw how 
to calculate the long exchange in Paris : to make the matter 
quite clear, we will work out one or two examples from the 
Course of Exchange. 

In practice, the person who receives a three months' 
bill will not keep it longer than he can help, but will get 
a banker to buy the bill, that is, discount it for him, and 
the rate at which the banker discounts the two classes of 
paper quoted in our table, accounts for the difference in 
price between a bank biU and a commercial bill. Bank 
paper is always discounted at a finer rate than trade paper ; 
in times of monetary stringency or political upheavals, 
it is obviously better to hold the former class of security. 
Most dealers in discounting a trade bill estimate the 
standing of the parties to the instrument not to be so good 
as that of a first-class banker ; consequently a price will be 
charged to cover the discounter for the increased risk. 

Let us take the Paris long exchange (three months) and 
endeavour to see how it works out. 

The rate for bank paper, London on Paris, is given as 
Fes. 25-3625, On referring back to the foreign exchange 
list we see that Paris quotes its market rate at 2| per cent. ; 
therefore we must take three months' interest at 2| per 
cent., and we get the following simple calculation. 

Long Exchange £1 = Fes. 25-3625 

Less 3 months' interest at 2| per annum . -1743 

25-1882 
Less allowance for Stamps, etc. . . . '0130 



Fes. 25-1752 



This may be taken to show that if the person to whom we 
send a three months' bank bill on Paris gets it discounted, 
he will obtain practically the same amount as if we had 
sent him a cheque or a bill with only a few days to run. 

Now let us calculate the rate for dealing in commercial 
paper. 



" FOREIGN EXCHANGE " QUOTATIONS, ETC. 55 

The quotation in our table for commercial bills was — 

Long Exchange £1 = Fes. 25-4125 

If our creditor in Paris sells this bill, he 
will be charged discount at the Bank Rate 
in France, viz. — 

H% per annum for 3 months . . -2223 



Fes. 25-1902 
Less Charges for Stamps, etc. . . . -0130 



Fes. 25-1772 



By comparing the outturn of these two bills, it will be seen 
that the buyer of bank paper is charged very little more 
for the extra security he obtains, although in times of 
stress the difference between the two quotations will tend 
to be greater. 



CHAPTER VI 

CONTINUES THE DISCUSSION ON LONG AND SHORT 

EXCHANGE, AND SHOWS HOW " TEL QUEL " 

RATES ARE CALCULATED 

It will be useful in this chapter if we summarize the rules 
for calculating long and short exchange. 

When dealing in London, the long exchange can always 
be calculated where the cheque rate or short exchange is 
given. To the short rate we add three months' interest 
at the discount rate ruling on the centre upon which the 
bill is drawn, i.e., the market rate or bank rate, according 
to the class of paper we are buying or selling as the case 
may be ; to this we add one-half per mille for foreign 
stamp, and, where necessary, a small amount by way of 
insurance on the joint security of the parties to the bill, 
acceptor, drawer, and endorsers, if any. 

Where the three months' rate is given in the London 
Course of Exchange, the short exchange may be found by 
deducting the above-mentioned charges from the long rate 
instead of adding. 

When we are operating from the foreign centre, Paris, 
for instance, we find the long rate by deducting from the 
sight rate the three months' interest, at London market 
rate of discount for bank paper, and at the Bank of Eng- 
land rate for commercial paper. The stamp duty and other 
small charges are, of course, also deducted. 

Conversely, if the short rate, Paris on London, were not 
quoted, it could easily be found by adding the three 
months' interest and charges to the long rate. 

Then we come to the rates which might be termed the 
" Bridge of Asses " in the foreign exchanges — the rates 
quoted in pence. These rates seem to be an everlasting 
source of trouble to people who are not accustomed to the 
mental gymnastics which are part and parcel of the 

56 



HOW " TEL QUEL " RATES ARE CALCULATED 57 

exchange dealer's training. A little explanation will 
make matters clearer. 

Suppose we are operating from Lisbon on London, and 
the short rate is 47d. to one milreis, to obtain the long 
exchange we work rather differently from the method 
shown in our other rules. Let the reader imagine he is in 
Lisbon and desires to remit to London. It is apparent that 
he will want more pence for each milreis he hands over to 
the seller when it is a question of a three months' bill, than 
if he buys a remittance payable on demand. To get the 
long rate, then, we must add the charges to the short rate 
instead of deducting them, as we did when drawing from 
Paris on London. 

The rules regarding market rate of discount and Bank 
Rate remain the same. 

Example — 

Sight Rate = 47d. 

Plus 3 months' Interest @ 3% — 

our Market Rate . . . . .= -SS 



= 47*35 pence 



which, obviously, is equivalent to stating that we pay less 
for the bill at three months. 

When drawing from London on Lisbon, as rates are 
also quoted in pence to 1 milreis, the calculation is based 
on the same argument, and the buyer in London who has 
to remit, say 100 milreis to Lisbon, will pay fewer pence 
for a three months' bill than he would were it necessary 
to send a sight bill. Thus, it is plain, that to get the sight 
rate he would add charges to the long rate, for he must 
pay more pence for a bill which enables his creditor in 
Portugal to obtain the money on arrival, than if that 
creditor had to wait three months for his money. 

Example — 

In drawing from London, we may take the 

3 months' rate on Lisbon for trade bills as = 46d. 
Add 3 months' Interest at Lisbon Bank Rate, 

say. 5% = -57 



= 46*57 pence 



58 FOREIGN EXCHANGE AND FOREIGN BILLS 

approximately 46 Jd., which will be the sight rate on Lisbon, 
showing that we pay more for this bill than for the draft 
at long exchange rate. 

Finally, with all centres there is the question of the bill 
which has less than three months to run, and the one which 
has more than three months to run. 

To take the latter case first, as the terms exceeds three 
months, it is customary for the seller of the bill to reduce 
the price by allowing the buyer a rate of interest in excess 
of the foreign Bank Rate. For example, if the short rate 
on Berhn were Mks, 20-50, the German Bank Rate 3 per 
cent., and the period for which the bill were drawn, four 
months, the seller of such a draft in London, in calculating 
long exchange, would probably take the Bank Rate at 
3iV per cent, or 3| per cent., that is to say, in adding the 
charges on to the short rate, he would calculate four 
months' interest at 3r6 per cent — 3 J per cent., instead of 
3 per cent, per annum. 

In the former case, suppose one month of the period on 
a three months' bill has already elapsed, some allowance 
for the bill, which is now due in two months' time, must 
be made to the seller, who will promptly fix the matter 
by charging the buyer interest for one month at Bank 
Rate, or thereabouts. 

The following examples will explain the method of 

reasoning — 

We have a 3 months' bill on Berhn for Mks. 1,500 : 
Bank Rate in Berlin, according to our Foreign 
Exchange list, is 4% : to the . . . M. 1,500 

One month's Interest at 4% must be added 5 



which makes the bill ..... M. 1,505 



M. 1.505 @ exchange of M. 20-63 = ;^72-952 
which would be the cost of the bill for M. 1,500 drawn on 
Berhn. 

''Tel Quel'' 

But we have another way of arriving at the same result 
for a bill such as this. There is no price quoted for a two 



HOW " TEL QUEL " RATES ARE CALCULATED 59 

months' bill, so we make what is called a tel quel, or net 
rate. How the expression has crept into our market 
j argon it is hard to say : some brokers hold that the term 
should be tale quale, a corruption of the Latin talis qualis, 
meaning unchanged, or, as we understand it, that the actual 
rate of the bill is not affected, and in view of the fact that 
the original exchange of the three months' bill is not 
altered, the hypothesis would seem to be justified. 

The tel quel quotation is adjusted in the following 
manner — 

On the basis of our previous calculation, take interest 

at 4 per cent, per annum for one month = J per cent. ; 

one-third per cent, on M. 20-63 = -06876, and the rate can 

now be shown as — 

M. 20-63 
Minus -06876 



= M. 20-5612 



which is the tel quel rate for M. 1,500, and taking M. 1,500 
at M. 20-5612 we find the answer to be £72-952, which is 
precisely the same result as for the other calculation. 

We have now investigated very thoroughly the principal 
market quotations for bills, and henceforth the student 
should have no great difficulty in regard to the actual 
rates, but before bringing this chapter to a close, it is 
fitting that we should complete our survey of the money 
article as far as it affects the foreign exchanges. 

In The Times of 17th July, 1914, the City Editor made 
a few comments on the exchanges, and it may be of 
interest to us to examine the rates to which his remarks 
applied. He says — 

" Following an advance in the Rio exchange to 

ISild., Brazilian bonds were a good market." 

Then later — 

" On 'Change the rate for bills on Germany moved 

against this country. Itahan currency improved, and 

Spanish and Portuguese depreciated slightly in value. 



60 FOREIGN EXCHANGE AND FOREIGN BILLS 

Paris cheques were dealt in at 25f. 17Jc. to 25f. 18c. ; 

and German cheques at 20m. 49pf. to 20m. 51pf." 

Now what does all this mean ? 

The first item of news refers to the fact that Rio exchange 
had advanced one-sixteenth of a penny over the quotation 
for the preceding day : in other words, the seller of milreis 
in Rio de Janeiro could get 15|d. for a ninety days' sight 
bill on the 15th July, but by waiting until the 16th he was 
able to obtain 15rf d. for each milreis ; further, the pros- 
pects of a steadier exchange encouraged deaUng on the 
stock markets in Brazilian bonds. The prospective issue 
of a loan on the British market also strengthened exchange, 
since the dealers were aware that the effect of the flotation 
of a loan on the London market would be to turn rates 
against London. 

By a reference to the Course of Exchange on page 51 
it is easy to see that the value of the mark on the London 
market had declined from 20m. 64pf. on 14th July, to 
20m. 63pf. on 16th July. This means that fewer marks 
and pfennigs were procurable for one sovereign on the 
latter date, and the rate is consequently unfavourable to 
the buyer of mark bills ; moreover, the quotation tends to 
drive home the lesson we have been trying to convey, 
that with rates quoted in the foreign currency they are 
moving against this country when they recede. 

The comments on the Italian, Spanish and Portuguese 
currency may well call forth the remark that " in foreign 
exchange rates by sweet contraries go." By saying that 
Itahan currency has improved, the writer of the Money 
Article means to convey to us that the rate has gone 
against London, for the three months' rate on Genoa has 
dropped IJ centesimi since the previous meeting of the 
exchange dealers, i.e., from 25 Lr. 57 Jc. to 25 Lr. 56 Jc. : 
on the other hand, " depreciation " in the case of the 
Spanish and Portuguese quotations is taken to indicate 
that those rates have moved in our favour — only slightly 
on this particular occasion as it happens. As we have seen, 



HOW " TEL QUEL " RATES ARE CALCULATED 61 

these rates are given in pence to the pesetas and milreis 
respectively, Madrid on the 16th July being quoted 
45TVd. for five pesetas, as against 45T6d. on the 14th July, 
and Lisbon 45TBd. for one milreis, as against 45|d. over 
the same dates, which shows that on 16th July both cur- 
rencies were cheaper to buy, the rate on Madrid marking 
a gain of Jd., and that on Lisbon, red. in favour of the 
buyer. These figures thus serve to illustrate the fact that 
when rates, as in this case, are quoted in the home currency, 
they are cheaper when they fall, or " depreciate," as the 
Editor of The Times calls it. 

The French and German cheque dealings need no 
explanation; the reference simply means that sales and 
purchases of exchange were made at prices within the 
range of the rates mentioned. 

The influences which cause the variations in the quota- 
tions have, so far, not been explained, but as that part 
of the subject is somewhat complex, and necessitates our 
investigating the connexion of Banlc Rate with the foreign 
exchanges, it may very well form the topic for our next 
chapter. 



CHAPTER VII 

FAVOURABLE AND UNFAVOURABLE EXCHANGE. THE 

CAUSES OF THE FLUCTUATIONS IN THE 

FOREIGN EXCHANGES ANALYSED 

In the course of our enquiry we have demonstrated that 
with the debts between two countries exactly balanced 
we have what is known as the par of exchange, a state 
of equivalence which rarely exists, but that all the same, 
we have fixed a point with the gold standard countries 
which is taken to record par. 

When we apply this to bills of exchange, which are the 
outward and visible sign of indebtedness between nations, 
we take it to mean that a bill for £100 on France, for 
example, would on any particular day, sell in London for 
£100, no more and no less, and that a similar state of affairs 
would exist in France. With France, the par of exchange, 
as we know, is £1 = Fes. 25. 22 J, and if the debits and 
credits between the two countries were at any time equal, 
a bill of exchange for £100 would be worth Fes. 25221 in 
either country. When, however, the balance of indebted- 
ness is against France, that is to say, she owes us more than 
we owe her, exchange will be below par, that is at a dis- 
count. Conversely, if England's debts to France are 
greater than her French credits, exchange will be above 
par, and at a premium. 

The true effect of this can easily be seen by referring 
to the settlement of debts by means of bills of exchange. 

When our exports to France exceed our imports from 
that country, bills of exchange drawn on France will be 
in excess supply here, consequently the bill for Fes. 2522J 
will fetch less than £100 — it will be at a discount.' 

On the other hand, where our French imports exceed 
British exports to France, there will be a greater demand 
for remittances to pay for the French imports, and in 

62 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 63 

consequence of the scarcity of paper, the bill for Fes. 2522J 
will be worth more than £100 on the London market, 
that is, at a premium. 

In practice, of course, it will be necessary to remember 
what we have said before, that the difference in the rate 
is not found by adding to or deducting from the bill, but 
by altering the rate at which the exchange is calculated. 
For example, in the latter case we said the rate was at a 
premium, or above par, and in paying the seller of the bill 
the proceeds in sterhng, instead of calculating the bill for 
Fes. 2522J at exchange of Fes. 25.22|-, the par of exchange 
between England and France, we would allow the seller 
the premium by charging him a lower rate, say, Fes. 25.20, 
and if the reader cares to convert the Fes. 2522 1 into ster- 
ling at ttiis rate, he will see that the British equivalent of 
the bill will be more than £100. In the former case, the 
difference would be obtained by charging a higher rate, 
say, Fes. 25.30, and the bill would outturn less than £100. 

Favourable and Unfavourable Exchange. 

This habit of quoting a rising exchange as at a " dis- 
count," and a falling exchange as at a " premium," has 
in the past made confusion worse confounded, and for the 
sake of the exchange student, we are glad to see that the 
practice has of late years fallen into desuetude. But one 
cannot say that the present-day usage of the terms 
" favourable " and " unfavourable " in regard to the 
exchanges is less misleading. 

When we find that bills of exchange drawn from London 
on foreign centres are at a premium, we say that exchange 
is against us, or unfavourable to the country. For instance, 
take the case we examined just now. Inasmuch as the par 
of exchange with France is Fes. 25.22|, if we are forced 
to pay more than £100 in London when buying a bill for 
Fes. 2522J, it is plain that £100 here are worth less than 
the fixed equivalent of French currency : hence the reason 
for saying the exchange is unfavourable to London. 



64 FOREIGN EXCHANGE AND FOREIGN BILLS 

Similarly, if it takes less than £100 in London to buy a bill 
on Paris for Fes. 2522J, French exchange is said to be 
" favourable " to England. 

The indiscriminate use of such terms is a real pitfall in 
foreign exchange, and a moment's reflection will show that 
a favourable or unfavourable exchange applied to the 
country is one thing, but when applied to individuals, it 
is another. 

Briefly, exchange is unfavourable to a country only 
when that country is obliged to send bullion in liquidation 
of its indebtedness, and favourable when bullion is received 
from a debtor country. However, lest we be charged 
with a leaning towards the fallacies of the old Mercantile 
Theory, we hasten to say that this sending or receiving 
of bullion is important only in so far as it affects the banking 
situation. It is the banks which will part with the gold, 
and with each fall in their reserves they will tend to restrict 
the credits of which gold forms the basis, or, rates for 
accommodation will become dearer, which amounts to the 
same thing ; and it is easy to comprehend that any restric- 
tion in credit facilities by this means will check commerce, 
and so ultimately prove adverse to the country. It will 
be perceived that we refer to the raising of the rate of 
discount as a means of stopping the outflow of gold. On 
the other hand, with a reasonable influx of gold, the banks' 
reserves reach that point when a low bank rate can be 
put in operation, and it follows that with cheap capital, 
there is an impetus to a country's trade and production. 

As far as individuals are concerned, we may say it is the 
debtors to whom the terms ' ' favourable ' ' and "unfavourable ' ' 
apply : they must buy the bills to send to their creditors, 
and the question of how much of the foreign currency 
units they can get in exchange for each unit of the home 
currency is of vital importance to them ; and where the 
buyer of a bill can procure Fes. 25.30 to the pound sterling, 
that rate will be more favourable to him than if the seller 
parts only with Fes. 25.20 per sovereign. But, obviously, 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 65 

what is favourable to the merchants who have to buy bills 
in London, will be unfavourable to those who have money 
to receive from France, since this second class will be the 
sellers of the bills which the former class buy, and the more 
francs and centimes surrendered by the seller for each 
sovereign received, the more unfavourable will be the rate 
of exchange. 

This, by the way, is the usual illustration of the manner 
in which two debts are cancelled : the importer pays his 
foreign creditor, and the exporter obtains payment from 
the foreign debtor. We may be pardoned for again refer- 
ring to the subject, but a little repetition will serve to fix 
the principles in the student's mind. Exporter A, we will 
suppose, has sent to France goods to the value of Fes. 1,000, 
while importer B has received from Paris produce of a 
similar value. A draws a bill for Fes. 1,000 on the merchant 
in France, and finds an easy way to obtain the equivalent 
by selling it to B, who is under the necessity of remitting 
that sum for the French imports. Thus, it is to A and B 
that the terms "favourable" or "unfavourable" will 
apply, the one being the receiver and the other the 
remitter. 

From these remarks it follows that to the buyer of the 
bill in this country, high rates are favourable, low rates 
unfavourable, when quoted in foreign units to the pound 
sterling ; but, when the rates are quoted in shillings and 
pence to the foreign units, high rates are unfavourable 
and low rates are favourable.^ For selling paper the 
maxim is the reverse : with rates quoted in foreign 
money to the pound sterhng, the seller must bear in mind 
that low rates are favourable, high rates are unfavourable ; 
and, if he is selling bills based on rates which are quoted 
in shillings and pence to the foreign units, high rates will 
be favourable, low rates unfavourable. The following 
rhyme, the product of the brains of one engaged in this 
business, is recommended as a useful mnemonic. 

^ Cf. Banking and Currency (E. Sykes), page 218. 



66 FOREIGN EXCHANGE AND FOREIGN BILLS 

Just sing this little chorus. 
And sing it every day : 
" That higher rates are for us, 
And low the other way." 

That is, when quoting units 

To every sterling pound ; 
But with pence to units foreign. 

It's the other way around. 

For then you'll sing your chorus 
Every day, until you die : 
" That the low rates will be for us — 
Those against us will be high." 

Before leaving this part of the subject, it may be well 
to refer to what is in the minds of the economists when they 
say that an unfavourable exchange is an encouragement 
to exporters and a discouragement to importers. 

It has been remarked that when the value of the imports 
from a country exceeds the value of the exports to that 
country, bills are at a premium. It follows, therefore, 
that the greater the amount of the premium, the higher 
will be the profits exacted by the exporters. They draw 
bills for the cost of their shipments to the foreign country, 
and in seUing the bills obtain the premium in the rates 
of exchange. Plainly, this indicates a diminution in 
profit to the importers, who not only have to pay the in- 
voice price of the goods, but also pay a premium for the 
remittances they require to send to the foreign exporter. 

In practice, the exporters are hardly likely to obtain the 
fuU extent of the premium quoted ; a proportion, some- 
times the whole of the premium, would go to the bankers 
who negotiate the bills. 

To complete the examination of this part of our subj ect, 
it is important to refer to the fluctuations in the rates of 
exchange. 

Fluctuations in Rates of Exchange. 

In Chapter IV we saw that a nominal par of exchange 
exists between two countries which have the same metal 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 67 

as the basis of their currency. Some reference was also 
made to the specie points, which mark the Hmits within 
which the premium on bills rises or falls. Between these 
points exchange will fluctuate, sometimes above, sometimes 
below, the par of exchange, and the best statement of the 
theory the writer remembers to have seen, is that laid down 
by Bastable in his Theory of International Trade. ^ He 
concludes that the limit of exchange fluctuations, in either 
direction, may be fixed by the cost of the passage of specie, 
and the statement is summarized as follows — 

" The upper limit of exchange fluctuations is par, 
plus the cost of transmitting specie : the lower limit 
par, minus the cost of transmitting specie," 
and twice the cost of remitting specie, as he rightly main- 
tains, is the whole space within which fluctuations can 
nominally take place. 

The movements which are incessant, are affected by a 
variety of conditions, but generally speaking, we may 
say they are governed by Supply and Demand (for bills), 
which in turn are determined by the relative indebtedness 
resulting from the course of trade between countries. 
If it were only with trade influences we had to deal, the 
problem of fluctuations would not be difficult to trace, 
but there are other elements to consider : thus we have to 
take account of the currency conditions in various coun- 
tries. Some have a debased currency, others, supposed to 
be on a gold basis, are continually in the throes of a depre- 
ciated paper currency ; and, lastly, we have those countries 
whose money is of metal different from that of others, say, 
gold in one country and silver in another, and in addition 
to the ordinary movements in exchange, it is necessary 
to say how much of the silver currency shall be paid in 
the silver-using country in order to confer the right on a 
trader to receive an agreed gold equivalent in one of the 
gold centres — a problem of no little difficulty when we 
remember that it necessitates our comparing the silver 

I Page 83. 



68 FOREIGN EXCHANGE AND FOREIGN BILLS 

price of gold and the gold price of silver at any particular 
time. 

We will leave the currency problem alone for the present, 
and discuss the causes upon which depend the demand 
for and supply of bills. 

In the first place we might emphasize the fact that the 
total indebtedness of a nation has practically no effect 
on the exchanges ; it is only when the debts come to be 
liquidated that movements are apparent, and even then it 
will be the balance of indebtedness which will influence rates. 

Trade Conditions. 

Trade conditions, of course, exercise the most potent 
influence upon the exchanges, since, as we have seen, it is 
from the exports and imports of a country, as shown by 
its trade statistics, that the supply of bills principally 
emanates. Nevertheless, in dealing with the subject 
from the British point of view, we must be careful to 
remember that we as a nation draw few bills in comparison 
with the vast number drawn on this country, and the 
reason for the excess drawings is easily shown. Merchants 
and financiers all over the world know that a bill of exchange 
on London is readily negotiable ; it is in fact the recog- 
nized international medium of exchange, and, so far, the 
bills of no other country can claim this unique quality. 
Bills on France, Germany and other European nations 
are also drawn and negotiated, and, collectively, their 
number is not small, but they principally represent remit- 
tances for direct shipments of produce and manufactures 
from foreign countries, and are consequently used only 
in connexion with the trade between those countries, 
and hitherto they have not been able to compete with the 
bill drawn on London. 

It must not be supposed, however, that bills drawn on 
London are solely on account of our own foreign trade. 
In reality, they are drawn in connexion with the trade 
and commerce of almost every civilized country in the 



FtUCTtJAtlONS In TrtE FO&ElGN EJCCliAN(iES 6§ 

world. Take, for example, the shipments of tea between 
Shanghai and New York. Payment is usually made by 
means of a bill on London, and if an importer in France 
orders coffee from Rio, or cotton from New Orleans, he 
will, in ninety-nine cases out of a hundred, make payment 
through the medium of the London money market. Many 
of the French merchants who send goods to China or Japan, 
will, in a like manner, finance their operations through 
London in preference to any other financial centre. In 
any important foreign commercial market the names of 
the London accepting bankers are as well known as in 
Great Britain, and the exporter has only to take his bills 
to a local bank to realize a better rate than for bills on, 
say, France, Holland, Germany, or the United States of 
America. 

Bills on London are drawn, not only for goods, but in 
connexion with securities also. This was evidenced in 
the late rubber " boom," when bills representing enormous 
sums came forward from foreign capitaUsts who had 
invested money in shares, the payment for which had 
eventually to be made in London. 

The fact of our being the only free market for gold has 
already been referred to, but what we might term the gold 
basis of bills on London is not the only reason why banks, 
financiers, merchants and others in the far distant parts 
of the world prefer to negotiate them : they buy the 
paper because there is everywhere a ready market for it. 
The bills can always be transferred to other buyers on 
foreign markets who want them to remit in payment of 
indebtedness to England or some other country. It does 
sound rather like a truism to say that this remarkable 
free market in bills on London exists because there is 
always a supply, still the fact cannot be explained away, 
and in the meantime the demand continues from every 
part of the world. 

After this rather long peroration, it will be quite manifest 
that it is the export and import trade of our own and other 

6— (1525) 



VO FOREIGN EXCHANGE ANt> FOREIGN BlLlS 

countries which exercises the dominating influence on the 
foreign exchanges. 

Invisible Imports and Exports. 

Closely allied to these trade conditions, we have another 
important influence which affects exchanges in a marked 
degree : we refer to what Sir Robert Giffen described as 
" Invisible Imports and Exports " — " invisible " because 
they are not shown in any of the elaborate Board of Trade 
statistics. Under this appellation are included all such 
items as freight and insurance, remittances for the pur- 
chase or sale of ships at foreign ports, the hire of vessels, 
the drawings of captains and masters of ships ; expenses 
and remittances of foreign residents (including military, 
consular and Government servants) ; bankers' commissions, 
and so on. 

Of these, doubtless the chief item is that connected with 
the shipping trade. Owing to the ramifications of its 
great mercantile fleet. Great Britain holds most of the 
world in fee for the carrying trade, and is, of course, a 
creditor for ail its maritime services, although these to a 
very slight extent may be offset by the amount for which 
she is debtor for the use by her of a proportion of the 
foreign ships. The drawings for the purchase and sale of 
ships affect the exchanges in accordance with the centre 
from which the bill is drawn, or by what means the settle- 
ment is finally made. The drawings of captains refer to 
the arrangements under which the cost of re-victualling 
or coaling vessels is carried out. In many cases a bank 
at a foreign port is authorized to negotiate the bills of the 
captain on a London house, and the total of these bills 
goes to swell the demand for or supply of paper affecting 
the exchanges. 

Foreign Residents. 

The remittances and expenses of foreign residents are, 
ordinarily, not of great importance; they influence the 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 71 

exchanges of the country of residence and also those of the 
native land when the remittances are made to and fro ; the 
balance would be sometimes in favour of one and sometimes 
in favour of the other. 

Bankers* Commissions. 

Bankers' commissions are generally regarded as a 
negligible item, but as, in the writer's opinion, that idea 
is erroneous, brief mention may be made of them. The 
more important commissions are those paid to bankers 
by foreign governments and others for carrying out what 
is termed the " service of loans," that is, the paying of 
the foreign governments' coupons on bonds for loans 
issued, and attending to the multifarious duties which 
the issue and subsequent control of the transfer of the 
funds entails. It is apparent that the sums involved 
may, in the aggregate, amount to large figures, and 
when they are remitted the exchange is influenced to that 
extent. 

More than once it has been asked how a bill can possibly 
be drawn in connexion with the service of these loans. 
A familiar example is seen in the case of international 
loans. Say three countries, England, France, and Germany, 
lend money to China, and it is arranged that the pay- 
ment of coupons belonging to certain German residents 
shall be paid in London. To do this the London bank must 
be put in funds, and Germany, if desirous of so doing, 
can remit the amount by means of a bill of exchange 
purchased on the Berlin Bourse, which of course affects 
the exchange between Berlin and London. China, on 
the other hand, may at certain periods of the year arrange 
to put the British, French and German banks in funds 
for paying the service of the loans in each country. The 
remittance may be made by means of a telegraphic transfer 
or by the sending of a demand bill, whichever may be 
cheaper or more convenient, and in any case the transfer 



72 FOREIGN EXCHANGE AND FOREIGN BILLS 

of funds from China to Europe will ultimately affect the 
exchanges between China and the countries named. 

Stock Exchange Influences. 

The mention of Chinese borrowings brings us to a very 
important influence on the exchanges, namely, foreign 
loans, but perhaps before we trace the effect of foreign 
loans on exchange, we had better deal with what are called 
the Stock Exchange influences, to which international 
borrowings properly belong. 

The accumulation of capital in England and other 
European centres renders it a matter of difficulty to invest 
surplus funds, that is, if a relatively high rate of interest 
is to be obtained, and consequently, the operations carried 
out by bankers and the Stock Exchanges combined, fre- 
quently affect foreign exchange rates when we least expect 
it. The various stocks and shares are to a large extent 
internationahzed, and the business is constantly done by 
the aid of telegram and cable : a slight variation in price 
will often mean a stream of orders to buy or sell, as the 
case may be, from one country to another, and as a result, 
the heavy demands for cheques or sight bills to pay for 
the heterogeneous mass of securities are at once reflected 
on the exchange quotations. If London has been investing 
in French Rentes, for example, the purchase of demand 
bills drawn on France to pay for the securities will depress 
exchange on Paris ; thus, the rate for cheques on Paris 
may be Fes. 25.22^, but as there are so many persons 
desiring to remit, there will be competition for the drafts, 
and the sellers, emboldened by the demand, will offer 
only Fes. 25.15 to the pound sterling, which is obviously 
an adverse rate to the remitters. 

Some idea of the magnitude of the business in this 
country alone in foreign securities may be gathered from 
the following list of British investments in foreign and 
colonial stocks and shares — 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 



73 



British Possessions ^ 



Canada and Newfoundland 






373,000,000 


Australia and New Zealand 






380,000,000 


South Africa 


. 






351,000,000 


West Africa 








29,000,000 


Straits Settlements . 






22,000,000 


India and Ceylon . 






365,000,000 


Miscellaneous 


. 






33.000.000 




Foreign Countries 


. 18.000.000 


United State 


3 . 688,000,000 


Turkey . 


Cuba . . 


. 22,000,000 


Egypt . . 


. 43,000.000 


Philippines 


. 8.000,000 


Spain 


. 18,000,000 


Argentine 


. 269.000,000 


Italy . . . 


. 11,000.000 


Mexico . 


. 87,000,000 


Portugal . 


. 8.000,000 


Brazil 


. 94,000,000 


France 


. 7,000,000 


Chile . . 


. 46,000,000 


Germany . 


. 6.000,000 


Uruguay . 


. 35,000,000 


Other European 


. 36,000,000 


Peru . . 


. 31.000.000 


Japan 


. 53,000,000 


Other Americ 


:an. 22.000,000 


China . 


. 26.000,000 


Russia . 


. 38.000,000 


Other Foreign 


. 61,000,000 



The interest on these investments has a very consider- 
able effect on the exchanges : when the pa5ni[ients are 
remitted, or coupons sent for collection, as the case may 
be, exchange will turn in our favour. On the other hand, 
as the late Viscount Goschen was careful to point out in 
his book on the Foreign Exchanges, a country which 
annually has large sums of interest to pay abroad, must 
import so much the less or export so much the more. 

The issue of a loan on the London market will turn the 
exchange of the country borrowing against this country 
at the time the money is paid over to the foreign nation. 
The immediate effect is to increase Great Britain's indebted- 
ness by the amount of the loan, but this influence may be 
neutralized where a large part of the proceeds is used for 
the purchase of British manufactures. An illustration of 
this is seen where a country is raising money abroad for 
the avowed purpose of building railways in its own terri- 
tory. The lenders will make great efforts to secure in 
the loan agreements the insertion of clauses stipulating 

^ From a paper by Sir George Paish, read before the Royal 
Statistical Society, December, 1910. 



74 FOREIGN EXCHANGE AND FOREIGN BILLS 

for the purchase of at least a part of the constructional 
materials in the country in which the loan is being floated. 
The influence on the exchange, plainly, may be offset to 
the extent of such purchases. 

The contention of the economists, with which we need 
not quarrel, is, that a loan acts in precisely the same way 
as an import to the lending country and an export to the 
borrowing country. The reverse is true when the coupons 
or interest on such loans is paid : the coupons will repre- 
sent an export from the lending country, and are always 
regarded as an immediate liability of the borrowing nation. 
As far as the exchanges with this country are concerned, 
they exercise a permanent influence in our favour. 

Most foreign government loans are repayable by means 
of sinking funds, and with each repayment of principal 
the effect on the exchanges will be the same as that occa- 
sioned by the export of the interest coupons, since the 
lending country exports the drawn bonds in exchange for 
the remittance of their value by the borrowing nation. 

Finance Bills. 

Before leaving the subject of the Stock Exchange 
influences we ought to refer briefly to one of the methods 
by which speculators raise funds to enable them to carry 
through operations which promise a profitable return. 
Here we have a case where a bill is actually drawn by a 
banker on his correspondent, who is also a banker, and the 
instrument is known as a Finance Bill. The following 
is a very simple instance of what occurs between London 
and New York. 

A broker in New York sees an opportunity of making 
money by speculating in some of the well-known stocks 
or shares. He goes to his banker and arranges to deposit 
securities against which the banker advances him 80 per 
cent, of their value, and the custom is to place these 
securities in the safe-keeping of one of the big Trust Com- 
panies, who will act for both parties. The banker himself, 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 75 

obviously, does not want to lock up his money for any 
period of time, so under arrangements previously made, 
he draws a bill, usually at sixty or ninety days' sight, on 
one of the London bankers or finance houses. He sells 
this bill on the New York market and thus recoups himself 
for the amount lent to the stockbroker. When the bill 
arrives in London it is accepted by the London banker 
or other correspondent, who has now incurred the liability 
to pay it at maturity if the American banker does not put 
him in funds in time to meet it. Needless to say, however, 
it is to the American's interest to see that his London 
correspondent is put in funds in time to meet the bill, and 
if by chance it is inconvenient for him to remit the where- 
withal to pay the bill at due date, what he does is to draw 
another bill of the same kind, and again sell this on the 
Wall Street market, and thus procure the necessary funds 
to buy a demand remittance to send to the London banker. 

As may be supposed, this business is carried on only 
between banl<:s of high standing, and in many quarters it 
is thought that the commission charged for the service 
is not commensurate with the risk involved should a mone- 
tcury crisis ensue between the date of drawing and maturity 
of the bills. 

It will be fairly plain to the student by this time that 
the effect of the drawing of any quantity of these finance 
bills on London will be to weaken American exchange 
with London. 

Letters of Credit. 

In referring to finance bills, we have almost imper- 
ceptibly touched on one of the most familiar influences 
which affect the foreign exchanges, namely, the Banking 
Influences. Under this heading are included all the 
international operations of bankers which in any way 
affect the exchanges. 

One of the results of the extension of foreign branch 
banking is the increased use of credit instruments. Bankers 



76 FOREIGN EXCHANGE AND FOREIGN BILLS 

finance foreign trade, and we may go a step further and 
say they finance the foreign traveller also. In fact, some 
of the fluctuations in the exchanges are the direct result 
of the drawing of bills under the various credits issued by 
bankers. Most of us know that when a person is about to 
take a journey abroad, he first goes to his banl<cer and pro- 
cures either a letter of credit or a quantity of circular 
notes. These latter when negotiated abroad are sent 
back to London for encashment, and there is no practical 
difference between the circular notes and bills of exchange 
drawn in the ordinary way. The same may be said about 
the drafts encashed by foreign bankers against letters of 
credit. 

Travelhng letters of credit and circular notes are, 
however, not the only form of credit which affects the 
exchanges : as we shall see when we come to deal with 
foreign bills, bankers grant letters of credit in connexion 
with the shipment of manufactured goods, produce or 
securities, and all give rise to the drawing of bills, which 
in one way or another exercise an influence on the foreign 
exchanges. Yet, taken by themselves, the sale and 
transfer of these bills drawn under credits cannot be said 
to exercise a marked effect, but with the amalgamation 
of existing banking interests, and the practice of setting 
up banks or banking agencies in the remote parts of the 
earth, the bills drawn under bankers' credits are beginning 
to constitute an item of much greater relative weight in 
the scale of the exchanges than was formerly the case. 

Arbitrage. 

Of far greater import, however, is the way the exchanges 
are manipulated by means of Arbitrage Operations. 
Arbitrage is a subject which calls for special treatment, 
and writers on exchange prefer to enlarge upon it in special 
books. We may, however, be permitted to make brief 
reference to it in so far as it affects rates. 

A simple form of arbitrage is seen when a stockbroker 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 77 

in London, by means of a liberal expenditure on telegrams, 
is able to buy Canadian Pacific Railway shares on one 
market and sell them on another : he may operate between 
London and Paris, or London and New York, or even carry 
through transactions with all three centres. If the dealing 
is between this country and America, he buys the shares 
in Throgmorton Street, London, where they are cheap, 
and sells them in Wall Street, New York, where they are 
dear. ^ 

When dealing with bills of exchange, that is what hap- 
pens in some cases, but more frequently the operation 
may be rather different. When a banker is selling bank 
paper, the price at which he is willing to sell depends on 
the price at which he can cover his operation, that is, 
provide the funds necessary to meet the bills he has 
drawn. He may do this in several ways, the only con- 
sideration being the comparative economy of the method 
employed. Suppose a London banker has sold three 
months' bills on his Paris correspondent ; to meet these 
when the date of maturity comes round, he may cause 
Dutch bills drawn on Paris to be remitted to his corre- 
spondent there ; he may even resort to Russian bills for 
cover, or, as not infrequently happens, send the Paris 
banker an assortment of paper drawn from various coun- 
tries on France. It is simply a case of purchasing cover 
in the cheapest market. 

As the effect of arbitrage is to restore the equilibrium 
of the exchanges, it partakes somewhat of the nature of a 
levelling operation. It will be apparent that bills can 
only be bought cheaply in those countries where there 
are surplus supplies of paper offering, owing to the foreign 
credits exceeding the foreign debits, and by purchasing 
the surplus bills not needed by the importers, the operators 
do much to preserve the normal ebb and flow of the 
exchange between commercial centres. To take an 
extreme case, suppose Paris exchange, after being at par, 
Fes. 25.22J, for a few days, goes up by one per mille in 



78 FOREIGN EXCHANGE AND FOREIGN BILLS 

our favour, i.e., to Fes. 25.25, Paris can soon offset this 
small balance in favour of London by remitting bills 
drawn on London or other European centres. 

Dealers in arbitrage have been described as persons 
spending their time at the telephone with the object of 
following the movements of exchange on the various 
markets, and there is an element of truth in the matter, 
judging by the way they watch the fluctuations in rates 
and take advantage of every small deviation. 

Arbitrage operations in a great measure account for the 
fact that the exchanges between the chief monetary 
centres tend to keep on a level. Short exchange on Paris, 
for example, may move from Fes. 25.16 to Fes. 25.30 to £\, 
and almost immediately the rate in Paris on London will 
move in unison. The reason is to be found in the very 
free use made of the cable. If we quote a better cheque 
rate than Paris, there will always be exchange dealers on 
the alert to take prompt advantage of the favourable 
exchange. With the longer usance paper, however, there 
is often a suspicion of speculation in the dealings ; with 
cheque rates the outcome is fairly certain, as the following 
example will show. An operator in exchange, being 
desirous of making a turn on the rates, and judging the 
present to be an opportune moment, wires to his Paris 
friend : "At what rate can you draw cheque £10,000 on 
London ? " The answer comes back : "25.20." If the 
rate in London is favourable, say, Fes. 25.16 = jfl, the 
Londoner wires the reply, " Draw," and immediately the 
Frenchman draws a cheque for £10,000 on London and sells 
it on the Paris Bourse for Fes. 252,000 (£10,000 at exchange 
25.20), At the same time the London operator himself 
draws a draft on Paris for Fes. 252,000 and sells it on the 
market here, or, as is often the ease, he has a client wishing 
to buy demand on Paris Fes. 252,000. Now the person 
buying the draft for this amount in London will have to 
pay sterling calculated at the London rate, Fes. 25.16 = £1, 
say, £10,015 18s. ; therefore when the draft for £10,000 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 79 

arrives from Paris, the London banker has £15 18s. over 
and abo\'e the amount required to meet it, and this balance, 
minus the small charge for stamp and his correspondent's 
commission, will represent his profit on the transaction. 

Similar operations will be carried out by other dealers, 
and, other things being equal, the immediate effect of the 
total drawings will be to equalize the rates between the 
two countries. 

The cases we have quoted are, it should be noted, merely 
hypothetical, but they correctly describe the principles, 
and when the operations are extended over two or three 
centres, it is easy to perceive the influence on the rates 
of exchange. 

Arbitrage is, however, a difficult business, and one which 
cannot be treated satisfactorily within the range of this 
book. The student who has mastered the fundamental 
principles of foreign exchange will be well-advised, 
therefore, to supplement his reading by reference to one 
or other of the standard works on the subject.^ In view 
of the importance of this branch of foreign exchange no 
apology is needed for quoting the following extract from 
a recent article in the New York Financier : it is a useful 
summar}^ and shows that our American friends are fully 
alive to the importance of arbitrage transactions — 

" In conducting such operations it is essential that the 
banker shall be advised, through the cable, of the varying 
conditions of the markets abroad. In such markets 
as Paris and London, where the exchange transactions 
are always large, rates often fluctuate sharply, and con- 
ditions change frequently. Therefore, though the 
situation may be favourable one day it may suddenly 
become adverse, necessitating some modification of the 
method of arbitraging. Moreover, it frequently hap- 
pens that after a successful negotiation has been effected 

^ Two useful works, in addition to Tate's Cam^M^, are : Arbitrages 
et Paritis (O. Haupt) and Bank Notes, Monnaies et Arbitrages 
(E. Kauffmann). 



80 FOREIGN EXCHANGE AND FOREIGN BILLS 

by a banker as the result of private information, his 
competitors may be advised of the favourable conditions 
prevailing and they also may draw in a similar manner. 
Hence each operator seeks to obtain for himself alone 
all possible information regarding changes which are 
likely to affect his business. Sometimes a banker may 
find, upon calculation, that it will be profitable to con- 
duct arbitraging of exchange between three or more 
points ; in such cases the conditions at each of the 
points must first be ascertained and calculations have 
to be made with the utmost c are. Occasionally in drawing 
bills the banker, in order to take advantage of arbi- 
traging operations, will transfer credits, through the 
cable, from an adverse centre to a point favourable for 
his purpose. Indeed, there are very many ways by 
which arbitraging can be profitably conducted by 
bankers having the requisite facilities and the necessary 
skill for such operations. It will be observed that 
operations in arbitraging of exchange require the services 
of men of the largest experience, and hence the business 
can be conducted to advantage only in the most tho- 
roughly equipped offices. The exchange student who 
enjoys opportunities for practice in such offices and has 
the determination to qualify himself for this branch 
of exchange work by acquiring a knowledge of all of its 
intricate details will have no difficulty after such qualifi- 
cation in securing advancement. The field for opera- 
tions in arbitraging of exchange is continually and 
rapidly broadening, and there will probably always be 
a demand for the services of men capable of taking 
positions as managers of exchange houses or 
departments." ^ 

Among the banking influences there is one other 
factor, which is perhaps the most important of all in view 
of its far-reaching effects on the principal European 

1 Quoted by F. Escher in Canadian edition of Modern Business 
(vol. viii) : " Banking Practice and Foreign Exchange." 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 81 

and American exchanges, that is, the bankers' investments 
in bills. 

Bankers' Investments in Bills. 

As far as London banks are concerned, bills of exchange 
form one of the principal items on the assets side of their 
Balance Sheets. The bills are an admirable liquid security, 
and the reason they are in favour with the bankers is, 
that they may be held in proportions to mature at certain 
fixed dates convenient for the cash requirements of the 
banks. 

An examination of the contents of a London banker's 
portfoHo would reveal two classes of bills, (a) those arising 
from the purely internal transactions, (b) those emanating 
from the foreign trade of the country. The first class is 
well known to those engaged in the home trade of the 
country. A merchant may receive from a customer in 
payment of goods an acceptance at, say, three months' 
date, and if he and the acceptor be in good repute, the 
banker will discount the bill for a small charge, place it 
in the bank's portfolio, and there it will remain until 
maturity, since it rarely, if ever, happens that a British 
banker re-discounts such paper. The second class embodies 
those bills drawn from abroad on this country and accepted 
here by London or other British firms. When completed 
the bills are sold to the bankers, who hold them in the 
same way as the other bills. 

Now while British bankers in London invest in bills 
payable in this country, they are generally averse from 
holding bills payable on other European centres : some 
even go a step further, and refuse to have anything to do 
with paper bearing the names of acceptors whose principal 
place of business is abroad, or the major part of whose 
assets are not available in Great Britain. 

The bills in which the London bankers invest, once they 
find their way into the bankers' portfolio, can have very 
little effect on the foreign exchanges, but the case is 



82 FOREIGN EXCHANGE AND FOREIGN BILLS 

different where foreign bankers are concerned. They, 
for various reasons, are content to risk funds in the pur- 
chase of what are, to them, foreign bills, and at most 
periods of the year they hold an assortment of bills on all 
the principal European centres. 

Their operations may be divided into two sections, 
(1) the investment in bills as a means of attracting gold to 
the country in which the bankers are domiciled, (2) invest- 
ments in bills for the purpose of obtaining an interest 
yield higher than can be had if bills on their own country 
are purchased. 

As regards the first class, the reader will readily under- 
stand the power conferred on the holder of bills drawn on 
one or other of the gold centres : assuming the bills to be 
payable in London, if the bankers of the foreign nation 
resolve to draw gold from us to replenish their reserves, 
nothing is more simple than to send the bills to London 
and sell them on the market in exchange for bank notes. 
These will be presented to the Bank of England and pay- 
ment made in gold, which is then packed and shipped to 
the country that formerly held the bills. As an alterna- 
tive, the bills may be sent here for encashment at maturity, 
and funds then withdrawn from London ; and, as we have 
seen, it does not always follow that the rate of exchange 
is against London when gold is withdrawn from us. 

As a matter of fact, the central banks in some countries 
are specially empowered to invest a proportion of their 
assets in foreign bills, for the express purpose of mani- 
pulating the foreign exchanges. The Austro-Hungarian 
Bank, to which we shall refer later, may be quoted as an 
example. The Austrian laws governing this bank's note 
issues, permits of its holding a part of its assets in foreign 
bills, which are utilized when occasion requires for the 
steadying of exchange with London and other centres. 
When the supply of other remittances is exhausted, it is 
really this bank which steps in and fills the breach by 
selling its foreign bills to meet the Austrian demand. 



IfLtCTtJAtlONS IN THE FOREIGN EXCHANGES 83 

Just how many foreign bills the Austro-Hungarian 
Bank held at the outbreak of the war it is impossible to 
say, but there is no doubt that many thousands of pounds 
worth were promptly realized. During the war, of course, 
there was no direct quotation with London, but some idea 
of the extent to which exchange depreciated was obtainable 
from figures given in the Economist of 6th March, 1915, 
when the rate, based on the parity of a neutral country, 
was given as Kr. 31.33, and comparing this with the Mint 
Par given on page 22, Kr. 24.02, we see that Austrian 
exchange was at that time quoted at over 30 per cent, 
discount. For the time being, therefore, Government 
control of the foreign exchanges was a negligible factor. 

The foreign investment in London bills in order to 
obtain a high rate of interest is more of a bond fide nature. 
The operations are usually seen when the rate of discount 
for first-class paper is higher in London than in the foreign 
centre. Say, the market rate of discount here is 4 per 
cent., and in Berhn or Paris 3 per cent., bankers on the 
Continental markets will at once seek to obtain the higher 
yield on their funds by making purchases of bills on the 
London market. The foreign banker in this case takes the 
place of the London banker as a discounter, but in the 
converse case British bankers show no inchnation to occupy 
the Frenchman's or German's position. It seems to be the 
golden rule in London to refrain from embarking funds in 
the purchase of Continental bills, no matter how attractive 
the rate of return. For instance, if the market quotation 
here is 2 per cent., and in Paris 3 per cent., the reader may 
look in vain for British investments in bills on France. 

Apart from the higher interest, the chance of making a 
little extra profit on the exchange is always an attraction 
for the foreign dealer. Although the bills are said to be 
for investment, yet, if the banker sees a favourable oppor- 
tunity, he is quite ready to dispose of them, and in some 
cases, notably where the rate of interest in London falls 
before the bill has matured, it may suit him to realize his 



84 FOREIGN EXCHANGE AND FOREIGN BILLS 

profit by selling the paper at once. It will be apparent 
to the reader that we are referring to the purchase of 
three months' bills, or, in the language of the market, 
long exchange. A concrete case will elucidate this matter. 

In Chapter V, we saw how the long and short rates were 
calculated, and by an apphcation of the rules there given, 
we can show how the dealer makes his profit. 

The cheque rate, Paris on London, in our table was 
quoted about Fes. 25.17; consequently, the long rate for 
bills on London will be, approximately, Fes. 24.92, since 
if we are in the foreign centre where currency is quoted 
in foreign units to the pound sterling, interest at the 
London rate is deducted from the short quotation (say, 
25.17 minus three months' interest at 4 per cent. . . 24.92), 
showing that less is paid for a three months' bill than for 
one payable on demand. At this rate a three months' 
bill for ;f 100, Paris on London, would cost Fes. 2,492, and 
if we assume that during the tenor of the bill there is no 
alteration in the cheque rate, Paris on London, at maturity 
the French banker can sell it as a cheque, or sight bill, 
at the short quotation, say, Fes. 25.17 to £1, and thus net 
twenty-five francs as his profit, or, as we prefer to call it, 
interest on his original outlay at the rate of 4 per cent, 
per annum for three months. In comparison with this, 
French bills held over the same period would show 1 per 
cent less, as the rate was only 3 per cent, per annum. 

There is, however, an element of uncertainty about 
the quotations, which to the more cautious British bankers, 
makes the operation savour of speculation. There is just 
the chance that the cheque rate may alter a point or two, 
or the rate of interest in London change. For example, 
when the bill fell due, our Paris friend might find short 
exchange quoted at Fes. 25.14, and all the bill would fetch 
on the market would be Fes. 2,514, which brings his 
interest down to 3.13 per cent. On the other hand, if 
the short rate goes up before the maturity of the bill, 
the return increases proportionately. When Continental 



FLUCTUATIONS IN THE FOREIGN EXCHANGES 85 

exchanges are low and London interest rates high, there 
is thus an inducement for the foreigners to invest in our 
bills. The prospect of higher interest, plus a chance 
profit on the exchange is obviously an incentive to those 
bankers willing to take the risk, and long years of dealing 
have demonstrated that they are fairly safe in buying 
bills under the conditions indicated. Only in exceptional 
circumstances will the quotations fall considerably ; in 
ordinary times, in fact, the chances are against rates going 
below export specie point, and, appreciating this, the 
bankers rest secure in the hope that a slight rise in the 
rates may occur, and so enhance their profits. 

This, then, is why, when our interest rates are above 
those ruling in foreign centres, and the exchanges on those 
countries are low, a heavy investment demand for bills 
sets in from the Continental banking and finance houses. 

The manner in which these operations affect the exchange 
with London is rather a long story ; therefore, it will be 
convenient to discuss the subject in the next chapter in 
connexion with Bank Rate and market rate of discount. 



7— {1525) 



CHAPTER VIII 

BANK RATE AND MARKET RATE OF DISCOUNT IN 
CONNEXION WITH THE FLUCTUATIONS IN 
THE FOREIGN EXCHANGES 

In the last chapter we laid no special emphasis on the fact 
that in the purchasing of bills on London it is the market 
rate of discount which is taken into account by the foreign 
dealers, and one imagines the student's saying, " Why is 
it that the Bank of England Rate is not of importance ? " 

Bank Rate. 

The reason is this. In most of these transactions, the 
foreign banks buy only first-class bills, and if at any time 
it becomes necessary to turn the bills into cash, they will 
be discounted on the London market at the lower rate, 
which is invariably the market rate. Bank Rate, which 
is the Bank of England's minimum rate for discounting 
bills, is usually a trifle higher than the market quotation ; 
not because the Bank declines to discount, since in practice 
bills will generally be discounted for its clients at about 
the same rates as can be procured on the open market, 
but because the Bank of England is the custodian of the 
nation's principal gold reserve, and its minimum rate is 
based on the greater or less need there is to protect this 
reserve from the inroads which may be made into it. We 
have seen how these encroachments are possible, when 
foreign bankers sell the bills they have previously pur- 
chased on the London market. On the other hand, the 
joint stock banks, the bill-brokers, and the discount houses, 
are not at present under the HabiHty to keep large tangible 
gold reserves ; consequently they are able to work on lower 
rates. Nevertheless, they are all more or less dependent 
on the Bank of England, and the premier institution is 
usually in the position to exert its influence when needful. 

86 



BANK RATE AND MARKET RATE OF DISCOUNT, ETC. 87 

How this is done is best seen by examining the effect of 
an increase in Bank Rate upon the other operators in the 
market. 

In the first place, it should be borne in mind that the 
Bank of England allows no interest on money deposited 
with it ; the joint stock banks for their part, allow interest 
at IJ per cent, per annum below Bank Rate, while the 
bill-brokers, discount houses, and the like, pay a rather 
higher rate of interest than the joint stock banks. 

There are other rates of interest in the money market 
which bears a direct relation to Banl^ Rate, but the three 
we have enumerated are sufficient for our purpose. 

As most people are aware, the bill-brokers work on 
capital borrowed from the joint stock banks, which also 
lend large sums to the Stock Exchange on similar terms 
to those governing loans to the bill-brokers and discount 
houses, namely, at call or short notice. The amount lent 
out in this way is that obtained by the banks from cus- 
tomers' deposits, and whenever the Bank Rate is raised, 
the interest allowed by the joint stock banks also rises. 
If, then, the banks are obliged to pay more interest to their 
clients who deposit funds for varying periods, it is only 
natural that they should exact the difference from the 
dealers to whom they lend their surplus cash. The 
incidence of this charge will finally be shifted by the 
brokers on to the persons for whom they discount bills, 
much in the same way as taxation on commodities is 
shifted on to the consumer. 

In practice the process does not always work out so 
smoothly, and it is then that the Bank of England resorts 
to other expedients. 

When gold is leaving the country, and further exports 
of the metal are threatened, it sometimes happens that the 
market rate of discount does not respond to the increase 
in the Bank's ofiicial minimum : the Bank of England 
then takes steps to compel the other interests to follow 
its lead, simply by stopping, or hmiting the supplies of 



88 FOREIGN EXCHANGE AND FOREIGN BILLS 

loanable capital which are available for bill discounters, 
stockbrokers, and other borrowers on the short loan fund 
of the London money market. There are various ways 
of doing this, but in principle they all come to the same 
thing : that is, the Bank of England by deplenishing the 
amount of loanable capital on the money market, forces 
the joint stock banks to call in the loans from the brokers. 
The market is then said to be in want of money, or, to use 
a coUoquiahsm, " in the Bank.'' There will be difficulty 
in selling bills of exchange, or in borrowing on securities, 
and as at such periods most financiers consider it advisable 
to increase their stock of money, they will call in all the 
loans they conveniently can. The banks for their part, 
feel it incumbent upon them to hold less securities and more 
cash, consequently the brokers and discount houses are 
for the moment at the end of their tether. As all else has 
failed, they are practically obhged to go to the Bank of 
England for assistance. The Bank then supplies them with 
funds by discounting short bills, with not more than fifteen 
days to run, and by lending them amounts of money for 
short periods against the deposit of satisfactory security. 
In such circumstances, the Bank of England is able to 
exact suitable rates, and as the borrowers are made to 
pay a higher price for accommodation, the natural sequence 
is for the market rate of discount to go up, as the bill- 
brokers are pretty sure to recoup themselves for the 
additional cost of the funds which they employ in the 
market. There has recently been an instance of this 
manipulation of the London money market, without an 
increase in the Bank Rate. During the second week in 
March, 1915, the Bank of England's gold reserve, although 
large, was in danger of having calls made upon it owing 
to the huge purchases of war material by this country 
from neutral states, and with the low discount rates ruling 
there is no doubt gold would soon have left the country 
in large quantities. Immediate action was therefore taken 
to effect a scarcity of money here, and so by causing higher 



BANK RATE AND MARKET RATE OF DISCOUNT, ETC. 89 

interest rates, make it more profitable to leave money for 
employment in London than to draw it away to foreign 
countries. In the case under discussion the Bank of 
England and the clearing banks were jointly concerned 
in the operation of reducing the existing credits on the 
market. The Bank of England took large sums of money 
off the market, and the joint stock banks called in their 
loans to brokers. Then when the bill-brokers required 
to borrow again, higher rates were exacted for loans at 
call, and the result was seen in a sharp rise in the value 
of short money, to which discount rates quickly responded. 

The interconnexion of Bank Rate and market rate, 
now being apparent, it is easy to see how closely the Bank 
Rate is allied with the question of foreign exchange. The 
higher the interest rates ruling in London are above those 
in the foreign centre, the greater will be the investments 
in bills from Continental bankers, and, what is perhaps 
more important, the less incentive will there be for foreigners 
to send long bills to London for discounting. As every 
foreign purchase of paper means the provision of funds, 
the outflow of gold will be checked, and the exchanges 
turned in our favour. 

The Continental investment in bills on London may 
continue for some time, more or less spasmodically, it is 
true, until exchange rates rise, or until there is an influx 
of gold into London. Then we see the reverse action : with 
exchange rising and interest or discount rates low here, 
the foreign bankers generally realize their holdings of 
London bills, and almost immediately the exchange drops 
or the rise is checked, and gold imports cease. 

Movements in our Bank Rate are always closely 
noted abroad, and the following comment, brought to 
the author's notice after this chapter had been written, 
is interesting, as showing how thoroughly the Americans 
are in accord with Goschen's expression of the theory: 
" Much is said of the influence on the rate of exchange 

and on the flow of gold, of the Bank of England 



90 FOREIGN EXCHANGE AND FOREIGN BILLS 

discount rate. If the Bank of England, because of too 
rapidly expanding loans or because of depletion of 
reserves, raises its rate of discount, being followed in 
this move by the other English banks, its doing so has a 
tendency to lower the rate of exchange in England on 
the United States and other countries, and to raise the 
rate in the United States and elsewhere on England. 
It has this effect because the increased interest in Eng- 
land tempts to investment there rather than in the 
United States. English banks are more likely to invest 
current funds at home, and may even draw on debtor 
banl<:s in the United States and other countries. 
American and other banks may be tempted to make 
short term loans in England or to hold, or to have held 
until maturity, long bills which they would otherwise 
have immediately discounted. This holding of drafts 
until maturity will compel them to buy more drafts 
on England than otherwise would be necessary, in order 
to maintain their usual balances. The general result 
of a high discount rate in England is, therefore, a high 
rate of exchange on and a flow of gold to England. 
Similarly, a sharp rise in the discount rate in New York 
would tend to produce elsewhere a high rate of exchange 
on New York, and would tend to cause a flow of gold 
to New York." ^ 

From a consideration of these facts, we are able to appre- 
ciate the intimate connexion a change in the Bank Rate 
has with the movements of foreign exchange : the effect 
of raising the Rate, and the subsequent manipulation of 
the money market, is to create an artificial scarcity of 
money and at the same time cause a depreciation in the 
value of bills of exchange on the London market. A fall 
in the price of bills attracts investors from abroad, and as 
the result of their purchases of paper, an adverse exchange 
is turned into a favourable one — using the word in its 

^ International Trade and Exchange, H. G. Brown (New York), 
page 134. 



6ANK RATE AlSfD MARKET RATE OF DISCOUNT, ETC. 91 

widest sense. Indeed, the ultimate outcome of dealings 
of any magnitude, is to draw gold from the foreign centres 
to London, and without entering into the question whether 
or not the accumulation of huge gold reserves is the fetish 
that some cavillers claim it to be, we have always before 
our eyes the indisputable fact that when the Central 
Reserve is adequate the monetary position of the country 
is more satisfactory. 

We need not go further into the question here, but suffi- 
cient has been said to enable the reader to understand 
that, other things being equal, the adjustment of interest 
rates in practice aids and abets, or rather brings into being 
the compensatory influence of the investment business in 
bills of exchange, a business which is so well known to 
those who watch the monetary movements, that its 
action has come to be regarded as a sort of pendulum of 
the foreign exchanges : it steadies the fluctuations and 
exercises a most powerful effect on the import and export 
of gold. 

Apart from the benefits said to accrue from the mani- 
pulation of the Bank Rate of discount as a corrective to 
an unfavourable exchange, the economic effects of a too 
frequent alteration in rates has sometimes been called in 
question, and, although the subject is hardly one which 
concerns the student of foreign exchange, brief mention 
ought perhaps to be made of the view taken. 

Summarized, the opinions expressed amount to this, 
that if gold reserves must be maintained, then other steps 
should be taken to protect them. In this connexion we 
might refer to the French policy. The Bank of France, 
can, if thought desirable, adopt the expedient of exercising 
the right which is conferred upon it and all debtors in 
countries in the Latin Union, to make payment in silver 
in five-franc pieces, instead of paying out gold on demand. 

Whatever be the merits or demerits of the respective 
systems, it has been proved that the French bank rate 
tends to remain very steady at 3 per cent., and in this 



92 FOREIGN EXCHANGE AND FOREIGN BILLS 

respect compares favourably with other European rates. 
For instance, the Bank of France's rate from 1876 to 1909, 
with thirty alterations, averaged 3' 13 per cent. ; over the 
same period, the Reichsbank changed its rate 125 times, 
giving an average of 4*11 per cent. ; while the Bank of 
England's rate was changed 200 times, which gives an 
average of 3 '28 per cent. ; from which it follows that 
French commerce benefited to the extent of 0*98 per cent, 
over German industry, and 0*15 per cent, over British 
industry. ^ 

1 Cf. the Author's review in the Economic Journal for December, 
1913, of " Huart's Organisation du Credit en France." 



CHAPTER IX 

THE MONEY MARKETS OF THE WORLD AND THE 
GREAT WAR 

*' War is hell," wrote one of tlie active service men, 
face to face with the awful devastation wrought by the 
Germans in their advance through Belgium. The expres- 
sion is a strong one, but apphes with equal force to the 
financial havoc brought about by the war, and in no direc- 
tion is the ruin, the disgrace, the woe of war more faith- 
fully reflected than in the world's money markets and the 
foreign exchanges. So delicate, in fact, is the mechanism 
of the money markets, and so close is the relationship 
between them and the foreign exchanges, that the latter 
may always be taken as a trustworthy index to the mone- 
tary condition of the various markets. It will be inter- 
esting, therefore, if we now examine some of the effects 
of the war in the light of the monetary problems with which 
we have been dealing, and endeavour to see how far the 
results confirm the theories we have enunciated. 

One of the first signs of the imminence of a war between 
two nations having intimate commercial relations, is the 
speed with which the merchants and financiers of the 
respective countries try to realize their opposing claims. 
There is an eagerness to collect foreign debts, and to dispose 
of all tangible securities in exchange for gold, and the more 
strained the tension between the two countries becomes, 
the more pronounced will be the desire to convert foreign 
claims into cash — at a greater or less sacrifice. This 
hquidation of claims will grow in intensity until diplomatic 
relations are broken off between the respective nations : 
it will not even cease at that point, for immediately war 
is declared and hostilities commence, the claims of the 
beUigerent nations will be dumped upon neutral markets 

93 



^4 FOREIGN EXCHANGE AND FOREIGN BILLS 

for realization, until all are surfeited with the many and 
varied forms which foreign indebtedness takes. At this 
stage, having reached the Hmit of their receptive powers, 
the neutrals become involved in the financial strain which 
at first merely affected the countries which are at war. 

Gold Movements. 

The great European conflict, as it happened, came at 
an awkward moment for all the Continental centres. A 
certain amount of depression had been evident as far back 
as 1913, and even at that period the financial condition 
of the world's markets was far from satisfactory. Con- 
tinental markets were in general overloaded with securities, 
and a great many more issues had been floated on the 
London market than the British investors were able 
comfortably to absorb. During the early part of 1914, 
however, a turn for the better took place ; gold flowed 
into Paris from New York as the result of French realiza- 
tion of securities, and the Bank of England, for its part, 
was able to procure a sufficiency of the precious metal. 
Money rates dropped correspondingly and ease prevailed 
in most centres for some time. But, towards the end 
of May, the tide began to turn, the Bank of England's 
reserve fell to a lower level than was liked, and at the same 
time a great demand for gold sprang up from the Continent. 
French exchange was against England during the whole 
of May, while that of Berlin was favourable to London, 
yet, according to The Times' Financial Review of the year, 
out of the gold arrivals in London amounting to nearly 
£26,000,000 sterling, the Bank of England secured less than 
£7,000,000. The amount sent to France and Germany 
was about equal to the exports to the Continent for the 
whole of 1913, and although it was reported that Russia 
was the ultimate destination of a portion of these Contin- 
ental purchases, there is no doubt that the greater part 
found its resting-place in the vaults of the Central Banks 
of France and Germany. 



THE MONEY MARkETS AND THE GREAT WAR 9$ 

The influence of these gold shipments was soon reflected 
in the exchanges. The quotation, Berhn / London, moved 
from one per mille in our favour (M. 20.48 J) on 1st April, 
1914, to 3i per mille in our favour (M. 20.49|) on 30th May ; 
on 23rd May, it might be remarked, the quotation was 
M. 20.50|, very near the rate at which the Bank of England 
should gain gold at the expense of the Reichsbank, namely, 
M. 20.53. 

French exchange, examined over the same period, 
showed several variations, but towards the end of May 
was only slightly against this country. 

American rates were persistently in our favour the whole 
time, and as we have stated elsewhere (page 37), at one 
period New York's excess imports were being paid for by 
gold, the adverse exchange being due, partly to the failure 
of the main crop, and partly to the fact that specula- 
tion was then at a very low ebb in the United States. ^ 
There is httle doubt that the European demand for gold 
was making itself felt in the United States, for it has to 
be recorded that during the first half of the year 1914, 
the Continental demand for gold was greater than during 
any one of the three preceding years, and the intensity of 
the demand for the metal, coming at the same time as 
other adverse circumstances in the United States, caused 
rates on the three principal European centres to go against 
New York. Exchanges generally were against America, 
and the rate. New York-London, on or about 13th June 
was quoted $4. 89 J to £1, that is six per mille in our favour. ^ 

Despite this almost unprecedented ingathering of gold 
by the Continental nations, there does not appear to have 
been any actual uneasiness until the turn of the half-year. 
Then the Austro-Servian imbroglio began to take definite 
shape, and the influence of the strained relations between 
the two countries was immediately seen on the London 
market by the hardening of discount rates. 

1 Cf. Economist, 6th June, 1914. 

2 It is interesting to note that New York-London Exchange was 
quoted by the Economist at par, $4.86|, on 4th April, 1914. 



96 FOREIGN EXCHANGE AND FOREIGN BILLS 

Then, on the 18th July, the news leaked out that the 
Dresdner Bank was selling its securities and advising its 
dients to act similarly. This, as Sir Edward Holden 
remarked,^ was considered to be the first semi-official 
intimation of a probable European conflict. 

The cHmax was reached on 28th July, when the fear 
of war gave place to certainty, and discount quotations 
at once jumped to 4 per cent, for three months' bills. 

The foreign exchanges all along had indicated the drain 
of funds, and the real gravity of affairs on the Continent 
was shown by the rates current on the 28th July. Paris 
cheque, for instance, was quoted 25 f. 11-12 c, Brussels, 
25 f. 28-30; Berhn sight, 20 m. 53-55 pf. ; Vienna, sight, 
24 kr. 30-40 h. ; Amsterdam, 12 fl. 14^-15 J c. ; while New 
York wired " Cable Transfers, $4.90-4.93 c." 

Before going further, we may be permitted to make 
a digression and refer briefly to the situation in which the 
principal money markets found themselves on the outbreak 
of hostilities. 

Condition of Money Markets. 

Paris, it is evident, was caught between Scylla and 
Charybdis : she was embarrassed by her holdings of short- 
dated securities as the outcome of operations financed for 
Turkey and the Balkan States, and before she could rid 
herself of this incubus, she was caught by the serious 
effects of the monetary crisis which had spread to all 
classes of society in France. Gold disappeared as if by 
magic, and heavy calls were made on all the banks in 
France for cash. To stem the tide, on the 31st July, the 
Bank of France raised its rate from 3J per cent, to 4i per 
cent., and its rate of interest on advances from 4^ per 
cent, to 5J per cent. 

Berlin evidently anticipated the worst : there was great 
pressure everywhere for gold, the banks were literally 

1 In his speech to the shareholders of the London City and 
Midland Bank, 29th January, 1915. 



THE MONEY MARKETS AND THE GREAT WAR 97 

besieged, and what may be termed as " a great run " took 
place on the Reichsbank, which is said to have parted 
with gold to the value of Mks. 200,000,000. The exact 
figures are not forthcoming, but tantamount to admitting 
that the withdrawal of gold had been on a gigantic scale, 
is the fact that a measure was soon passed, prohibiting 
the Bank from paying any more of its gold for notes. On 
31st July the Reichsbank was forced to raise its rate of 
discount from 4 per cent, to 5 per cent., and its rate of 
interest on advances from 5 per cent, to 6 per cent. 

How far foreign exchanges went against Germany may 
be gauged from the remarks of the Economist' s Berlin 
correspondent, on 30th July, 1914. " London and Paris 
cheque rates," he says, " have risen to an almost unpre- 
cedented height, and gold could now be exported with 
profit to both England and France. Movements of 
exchange are attributed partly to the fact that England 
and France are withdrawing their balances from Germany, 
Austria and Russia, while the capitalists of these latter 
countries are sending money abroad, especially to England, 
in considerable amounts." 

As far as the BerHn Bourse was concerned, it is inter- 
esting to recall that, by order of the President, from 
31st July no prices were fixed on the bourse, and although 
it was announced that " transactions were confined to 
cash basis," there was no business at all in securities. 

Of our own position it is necessary to speak more fully. 
It goes without saying that London early became involved 
in the great financial cataclasm. Immediately after the 
outbreak of war between Austria and Servia, discount 
rates were quite nominal, ^ and owing to the great difficulty 
in placing bills, the market was temporarily paralysed 
for want of funds. Dealers on the open market were all 
the more crippled by the banks calling in their loans, and as 
a result, the bill-brokers were forced to seek accommodation 

1 Rates on 29th July were : Bank bills, 3, 4, and 6 m/s. 4J-5% ; 
fine trade bills, 3 m/s. 5%, 4 m/s. 5^%, 6 m/s. 5^%. 



98 FOREIGN EXCHANGE AND FOREIGN BILLS 

by borrowing from the Bank of England and selling 
to it "short" bills. This was on 29th July. By the 
30th July the London Stock Exchange was in the toils, 
finding itself unable to absorb the large quantities of 
securities which had been forced on the market from all 
quarters, and the severity of the strain led to the closing 
of the Exchange on the following morning, until further 
notice. 

The drain on the Bank of England's stock of gold has 
already been referred to, and on 30th July, it became neces- 
sary to take precautionary measures by raising the official 
rate from 3 per cent, to 4 per cent. The demand on the 
joint stock banks, however, continued unabated, and in 
consequence, loans were called up in all directions, which 
simply meant that the discount brokers were again obhged 
to go to the Bank of England for assistance. At the outset 
the Bank discounted their short bills at 6 per cent., but 
as the day went on, the pressure increased, and in pro- 
portion to the borrowings the Bank raised its charges, 
until 10 per cent, was charged for discounting bills with 
about fifteen days to run. On loans for a week, the rate 
was still higher, as much as lOJ per cent, being charged 
and paid. The rot had set in, and to check it drastic 
measures obviously were necessary, therefore the Bank 
took the unusual step of altering its Rate on a Friday, 
advancing it to 8 per cent. London borrowings were 
not the only reason for this action ; it was quite as 
much due to the heavy withdrawals of gold from the 
Bank for foreign account, for during the day (31st July), 
no less than £1,204,000 was taken for shipment to the 
Continent. 

As The Times remarked on the following day, 8 per 
cent, is by no means an unexampled rate in the history 
of the Bank of England, and the table, given by that 
paper, is interesting as recording the dates on which 
8 per cent, or more was fixed by the Court of 
Directors. 



THE MONEY MARKETS AND THE GREAT WAR 



99 



Period. 




Rate. 




Period. 


Rate. 


Oct. 25th, 


1847 . 


8% 


Aug. 


4th, 1864. 


8% 


„ 19th, 


1857 . 


8% 


Sept. 


8th. ., . 


9% 


Nov. 5th, 


1857 . 


9% 


Nov. 


10th, „ . 


8% 


9th, 


,. 


10% 


Jan. 


4th, 1866. 


8% 


Dec. 24th. 


,, 


8% 


May 


8th, „ . 


8% 


Feb. 14th. 


1861 . 


8% 


^^ 


11th. „ . 


9% 


Dec. 3rd, 


1863 . 


8% 


,, 


12th, .. . 


10% 


Jan. 20th. 


1864 . 


•8% 


Aug. 


16th, „ . 


8% 


May 2nd, 


.. 


8% 


Nov. 


1st. 1873. 


8% 


5th, 


>. 


9% 


^^ 


7th. .. . 


9% 


., 19th. 


.• 


8% 


,, 


20th. ,. . 


8% 



Bank Rate, during 1914, was at 3 per cent, from 29th 
January to 29th July, it was raised to 4 per cent, on 30th 
July, to 8 per cent, on 31st July, 10 per cent, on 1st August, 
6 per cent, on 6th August, and reduced to 5 per cent, 
on 8th August, at which rate it has stood up to the time 
of writing. 

Not taking into account Sunday, 2nd August, and the 
Bank Holidays from 3rd to 6th August, we may say the 
actual crisis lasted four days only. We use the word 
crisis advisedly, in preference, in fact, to the much stronger 
term " panic," which is held by some people correctly to 
describe the situation. 

Government Action. 

The consensus of opinion, outside banking circles, seems 
to be, that the action by the banks in calling up all their 
loans from the discount brokers and other similar borrowers, 
to some extent precipitated the crisis, inasmuch as that 
course of action enhanced the already heavy demands on 
the Bank of England for accommodation. The London 
banks, however, were not alone in their ultra-cautious 
policy. Practically the whole Continent, from Paris to 
Petrograd, and from Amsterdam to Vienna and Rome, 
was seeking to convert paper into cash, added to which the 
great banks in Paris and Berlin were hoarding gold against 
emergencies. 1 Fortunately, the prompt measures taken 
by the Government in consultation with the Bank of 
England authorities, were effectual in staying the timidity 
with which a large section of the community had begun 

^ Cf. Economist, 1st August, 1914. 



100 FOREIGN EXCHANGE AND FOREIGN BILLS 

to view the abnormal financial situation : that even stronger 
measures would have been taken had circumstances called 
for them, is evident by the frank way in which the Press 
were allowed to announce, on 1st August, 1914, that pro- 
posals were under consideration for obtaining the Govern- 
ment's assent to the suspension of the Bank Charter Act, 
of 1844, the effect of which would have been to enable 
the Bank of England, if necessary, to issue notes without 
holding gold against them. To paraphrase the leading 
article of The Times of 1st August, in the opinion of the 
Government that course was not then actually necessary, 
but the Chancellor of the Exchequer was understood to be 
ready to give the Bank authority to act, merely by the 
issue of an official letter from the Treasury, and the 
announcement that should the situation require, he would 
issue the necessary letter, no doubt went far to restore 
the confidence of the City and all connected with it. 

Of the American money market we need say little at 
this stage. With the outbreak of war the other centres 
turned their attention to the New York Stock Exchange 
for the realization of their securities. The increased 
business was too much, even for American ideas ; within 
a few hours the extensive liquidation completely demoral- 
ized the market, and, after holding up bravely as the world's 
dumping ground for the sale of stocks and shares, the 
Exchange bowed to the inevitable and closed its doors 
on 31st July, until further notice. 

In the New York money market proper, the position, 
although not " panicky," was uncomfortable : call money 
was unobtainable — " no quotation," the papers announced ; 
international exchange operations were at an end, and the 
discount market was in a state of paralysis. 

Having briefly considered the effect of war on the 
principal monetary centres, we may pursue the matter a 
step further, and examine the manner in which the foreign 
exchanges fluctuated owing to the economic pressure on 
the world's markets, commercial as well as financial. 



CHAPTER X 



THE FOREIGN EXCHANGES AND THE GREAT WAR 



When we realize that for a period following the outbreak 
of war the credit system of the principal markets of the 
world had broken down, it is not surprising to find that 
the foreign exchanges went literally to pieces, too. Their 
condition from the end of July to the second or third week 
in August, 1914, almost beggars description. The state 
of the money markets was chaotic, that of the principal 
foreign exchanges — if there be degrees of chaos — even 
more so, and the complete disorganization of the exchanges 
did much to intensify the shock which the credit of prac- 
tically every country in the world had sustained in the 
early days of August. 

The following table drawn up by the Economist in 
December, 1914, gives the position in a convenient form. 
We have added a column giving the actual rates in 
operation at the time this chapter was written, March, 
1915. 





Rate 


Since War. 


Rates 


Cheques : Telegraphic 


just 
prior 






Current : 


or Mail Transfers. 






19th Dec, 




to War. 


Lowest. 


Highest. 


1914. 


Paris 


25-16 


24-00 


25-50 


25-06 


Switzerland . . . . 


25-17 


24-00 


26-00 


25-50 


Brussels and Antwerp . 


25-29 


24-00 


27-50 


— 


Amsterdam . . . . 


12-15 


11-70 


12-60 


12-00 


Italy 


25-50 


24-00 


28-50 


25-57 


Madrid 


26-10 


24-45 


26-70 


25-92 


Lisbon 


46| 


35 i 


41 


mi 


Petrograd . . . . 


97-20 


110 


120 


118i 


Christiania . . . , 


18-30 


18-30 


19-20 


19-27 


Copenhagen . . . . 


18-30 


18-30 


19-20 


19-27 


Stockholm . . . . 


18-30 


18-30 


19-20 


19-27 


Berlin 


20-531 


— 


— 


— 


Vienna 


24-32 


— 


— 


— 


New York . . . . 


4-93 


4-93 


5-00 


4-88 



101 



8— (1525) 



102 



FOREIGN EXCHANGE AND FOREIGN BILLS 



Extremes quoted 

about 
1st August, 1914. 



Rates 

quoted 

19th Mar. 

1915. 



Paris 

Switzerland . 
Brussels and Antwerp 
Amsterdam . 

Italy 

Madrid .... 
Lisbon .... 
Petrograd 
Christiania . 
Copenhagen . 
Stockholm . 
Berhn .... 
Vienna .... 
New York . 



24-00-25-00 

Nominal 

24-00-26-00 

11-90-12-60 

26*00 sellers, no buyers 

24-00-25-90 

42 

125 sellers, no buyers 

about 18-50 



21*00 sellers, no buyers 
24*60 „ 

about 6*50 



25*25-25*45 
25*92-26*15 

12*08-12*13 
27*80-28*10 
24*30-24*45 
34|-35f 
113-115 
19*25-19*45 



4*79|-4*80f 



The rates shown in this table testify to the severity of 
the breakdown, and the universal way in which the foreign 
exchanges collapsed was one of the worst features of the 
problem with which the bankers and financiers have had 
to deal. 

At the commencement the stagnation in rates was to a 
very great extent the result of the wild movements in 
quotations for the various forms of capital, reference to 
which was made in the last chapter : the enormous mone- 
tary claims which had been in process of liquidation left 
exchange markets in a debilitated condition, and when 
markets did begin to recover, operations were insufficient 
to put the financial machinery in motion again. Let the 
reader just imagine the position. Business, speculation 
and investment all over the world were in a state of inani- 
tion : not only were the principal stock exchanges and 
bourses closed sine die, but the majority of the commercial 
exchanges were in a like position. In Great Britain it 
became necessary to cease deaHngs on the- London Metal 
Exchange, the Coffee Market at Mincing Lane, and the 
Seed and Oil markets on the Baltic Exchange, and most of 



THE FOREIGN EXCHANGES AND THE GREAT WAR 103 

the wheat and grain centres were similarly affected. There 
is no need to multiply instances, but an examination 
reveals the fact that markets throughout the entire world 
were in no better state. 

Such events demonstrate in a striking degree the close 
relationship between money and the exchanges : they 
show that the different forms of money in one part of the 
world are affected by occurrences on other markets, and 
the fact that there ensues a stoppage of trade and specula- 
tion in commodities such as grain, coffee, meal, oil, cotton, 
etc., may be taken as proof positive that the world's credit 
facilities are part and parcel of one great fabric — any 
weakening or dislocation at one point must, in conse- 
quence, react on other parts of the machinery. In such 
circumstances, London, as the greatest exchange centre 
in the world, is the first to feel the effects, and the more 
exchange facilities are restricted in London, the greater 
will be the loss in other centres, for, as Mr. Lloyd George 
cogently remarked, in the absence of exchange facihties, 
goods can neither be imported nor exported in any 
appreciable quantity.^ 

Apart from the interruption of communication between 
certain countries, and the subsequent cessation of arbitrage 
business with the chief centres, it is a matter of some 
difficulty to place the finger on the exact cause of the 
movements in rates ; all we can do is to examine the 
exchanges of the more important countries and endeavour 
to trace the reasons for the rise and fall, as the case may be. 

^ In its issue of 12th September, 1914, the Economist rather 
dissents from this view, preferring to take the state of the 
exchanges and the difficulties of the bill market more as a symptom 
than a cause. " The bill market cannot make trade which does 
not exist," says the editor, " and the absence of bills merely 
testifies to the absence of trade," 

In some cases, this was no doubt true ; but many instances 
came under the author's notice during the first few weeks of the 
war, when bills were offering in fair quantities, but exchange banks 
and dealers refused to take them, owing to the uncertainty of their 
being able to procure return remittances from the countries for 
which shipments were destined. 



104 FOREIGN EXCHANGE AND FOREIGN BILLS 

Effect on Foreign Exchanges. 

France. Reference to our table will show that just 
before the war Paris cheque was quoted at 25 f. 16 c. to £1, 
but immediately the fear of war became definite, France 
proceeded to replenish her exchequer by realizing securities, 
clearing out portfolios of London bills, and calling in all 
balances held in this country. As a result, remittances 
in London on Paris were rapidly exhausted, and when the 
scarcity became pronounced, those who were under the 
obligation to remit, bought gold to send to France. These, 
very briefly expressed, are the reasons for the fall to 24 f. 
to£l. 

In New York, the quotation on Paris was even worse 
than the London rate, dealers being willing to give only 
Fes. 3.25c. to the dollar. 

Germany. German exchange, from the commence- 
ment of the war to the end of the year 1914, is a complex 
subject to enlarge upon, and most people have preferred 
to study the course of the exchange with that country 
from data obtainable in New York. From the various 
rates cabled by The Times and other correspondents, it 
is possible to get some idea of the movements. 

The par of exchange. New York/Berlin, is approximately 
95J cents to 4 marks, and as we have already explained. 
New York quotes Berlin exchange in cents to 4 marks. 
At the end of August the rate was 96^, by the end of 
September it had depreciated to 94f, and continued to 
fall rapidly for the next two months. The Royal Statis- 
tical Society's correspondent gives the quotation at the 
end of November as 85| cents, or 9.7 per cent, discount 
on the gold parity. In the early days of December, there 
was rather a remarkable recovery, the rate being quoted 
on 8th December at 92| cents to 4 marks, but, as the same 
authority indicates, the upward movement did not last 
long, and towards the end of the year The Times' quotations 
on an average represented a discount of about 1\ per 
cent. 



THE FOREIGN EXCHANGES AND THE GREAT WAR 105 

It is said that earlier in the year 1914, the German 
financiers had sold a considerable part of their American 
investments, and the fund created by these sales is esti- 
mated to have provided a certain amount of credit against 
which drafts could be drawn. Certainly, the recovery 
in Berlin exchange in New York early in December may 
be attributable to credits raised by the reaHzation of 
securities on the New York market, since, " the restraints 
on German trade hindered the export of goods in quantities 
sufficient to provide the means of payment for desired 
suppHes." ^ 

By way of a further corrective to its unfavourable 
exchange with Continental countries, Germany sent gold 
to Holland and other Scandinavian countries, but the 
improvement in every direction was merely temporary ; 
exchange soon fell to its former low level, and at the time 
of writing (March, 1915), the quotation, worked through 
Holland, indicated that German exchange with London 
had depreciated to about 12 per cent. 

There is a tendency in some quarters to discredit the 
statement that Germany was compelled to part with gold 
in order to pay for imports from Holland and Scandinavia, 
but facts which have come to light go to prove that she 
certainly did export gold. Of the war indemnity 
exacted from France in 1872, £6,000,000 was allocated 
for the special war chest to be kept in the Julius Tower 
at Spandau. This reserve was known to consist of a large 
proportion of British sovereigns, and during the first 
week in March, 1915, a considerable number of these coins 
found their way back to London via Scandinavia. The 
sovereigns were those bearing the Victoria effigy and the 
" Shield " reverse, of which a large number was minted 
during the years 1838 to 1874. ^ Consequently, when 
the bankers in London, to whom the gold from Scandinavia 

^ Journal of the Royal Statistical Society, January, 1915. 

* From 1838-70. 128,208,324 " shield " sovereigns were minted ; 
from 1871-74, " shield " and " dragon " designs were used 
concurrently. 



106 FOREIGN EXCHANGE AND FOREIGN BILLS 

was consigned, found it to consist of many new sovereigns 
bearing the date 1872, it was at once apparent whence 
the shipment had originated. Further evidence of their 
having been taken from Germany's war chest was found 
in the fact that some of the coins were actually received 
in the identical bags and boxes in which they had been 
packed when leaving the Bank of England forty-three 
years previously, and no little surprise was evidenced in 
banls:ing circles when it became known that no effort had 
been made to conceal the place of origin by removal of 
the old Bank of England labels. 

The heavy increases registered in the gold reserve of 
the Netherlands' Bank from time to time during the war, 
may also be taken as indisputable evidence that Germany 
was forced to export gold to Holland in support of exchange 
and to pay for supphes. 

In the month of March, 1915, the direct rate. New York 
on Berlin, steadily depreciated : the quotation on 1st 
March was 82^ ; on 18th March, 84 ; 19th March, 83 ; 
and on 20th March, 4 marks were worth only 82| cents. 
On the last quotation, therefore, German exchange with 
New York showed a depreciation of 13 per cent. — a per- 
centage which made foreign imports very dear for Germany, 
or, conversely, depreciated the value of her exports, if 
any were possible via neutral countries. 

Spain. The other European rates all present features 
of interest, the fluctuations in most cases being directly 
traceable to increased foreign trade due to the war. Spain, 
for instance, derived considerable benefit from the com- 
merce which was diverted to that country from France ; 
in fact, during the early days of the war the Spanish 
exchange achieved a record, being equal at one time to 
about 48|d. to 5 pesetas, as against the normal quotation 
of shghtly over 45d. 

Holland. The par of Exchange, Amsterdam / London, 
is Fl. 12.107 to £1, the extremes reached on the outbreak 
of war, Fl. 11.90 to Fl. 12.60, and the quotation, 19th 



THE FOREIGN EXCHANGES AND THE GREAT WAR 107 

March, 1915, Fl. 12.08-12. 13c., from which it may be 
gathered that, although the fluctuations were fairly wide, 
the rate on London was, generally speaking, well main- 
tained. The quotations with Holland were, of course, 
affected by the exports, and a decline of nearly one florin 
from the high rate quoted at the commencement of the 
war, recorded by the Economist in October, was obviously 
due to the greatly enhanced exports. The fall, however 
was only temporary, and rates soon recovered. 

Italy. Italian exchange fluctuated widely for a time, 
and was quoted at the beginning of August, 1914, Lire 26 
to £1, on the gold parity of L. 25. 22 J = £1, approximately 
3 per cent, against Italy. This was in part due to large 
imports of coal, payment for which was rendered extremely 
difficult owing to the existing financial strain. On 19th 
December the rate had improved to L. 25.57, but by 
19th March, 1915, it was given in the foreign exchange 
quotations as L. 27.80 to L. 28.10, a quotation considerably 
in favour of England. 

Russia. Reference to the foreign exchange table 
given on page 40 will show that the Russian sight 
exchange on London was quoted on 17th July, 1914, 
Rbl. 95.75 to £10, and the extent of the depreciation of 
the rouble may be gauged from the quotation on 1st 
August, 1914 — Rbls. 125, which indicates that the rouble 
had depreciated about 32 per cent., taking the gold par 
as 94.58 to £10. 

The reason for this heavy fall in the value of the rouble, 
in the first instance was presumed to be due to the large 
purchases of gold which Russia had made just prior to the 
outbreak of war, payment for which exhausted all avail- 
able sterling remittances. Some improvement in values 
was apparent by the middle of September, when the quota- 
tion was 107^, but by the beginning of October, viewed 
from the Russian standpoint, the rate fell again to 120 ; 
nearly 27 per cent, depreciation in Russian currency. 
By the end of the year 1914, the rouble was quoted 



108 FOREIGN EXCHANGE AND FOREIGN BILLS 

117 to £10 sterling, and, as we see by our list, on 19th 
March, 1915, the Petrograd quotation came through as 
113-115. 

In common with other countries, Russian exchange is 
dependent to a great extent on her foreign trade, and at 
the time of writing she is doubly handicapped. Her 
exports of grain, provisions, sundry raw materials, and 
semi-manufactured products of Russian agriculture, etc., 
have been restricted by the closing of the Dardanelles, 
and the cessation of trade with Germany and other countries 
via the Baltic ports and the railways over the west fron- 
tier. The closing of the Dardanelles was bad enough, 
since that definitely precluded Russia from exporting 
from the ports on the Black Sea and the Sea of Azov, 
but when a considerable portion of her exports and im- 
ports ceased through the suspension of navigation in the 
Baltic, matters became serious. Then, there is another 
not unimportant factor to be remembered. Many of the 
ordinary commodities she habitually exports are consumed 
by the enormous army she is obliged to maintain in the 
field. The upkeep of this army, in fact, also entails the 
importation of a vast amount of produce and commodities 
from other foreign centres, v 

Summarized, the difficulty in principle amounts to this : 
imports in Russia's case could not be paid for by exports, 
and the importers consequently were unable to procure 
the drafts by means of which, as we have shown, foreign 
indebtedness is liquidated. The trouble was all the more 
acute because many importers had purchased commodities 
from abroad, which they were perfectly wilhng and able 
to pay for, but short of sending gold, no method of remit- 
tance was available, for no exporters' drafts were to be 
purchased. But here, again, the would-be remitter was 
estopped ; he could not send gold, because for the time 
being, under the law of 10th August, 1914, the exchange 
of bank notes for gold was suspended in order to protect 
the gold reserves of the State Baiilv of Russia. 



THE FOREIGN EXCHANGES AND THE GREAT WAR 109 

The adverse position, as Professor Migulin^ rightly 
pointed out, was due entirely to the fact that with the 
cessation of Russian export trade, the demand for Russian 
currency had been sharply curtailed, while, as the outcome 
of Russia's need for an entire series of foreign commodities, 
the demand for foreign currency had increased. As the 
result of all this, Great Britain's trade with Russia had 
almost ceased, for with such a high level of exchange, it 
was practically impossible for traders in Russia to remit 
to London except at ruinous rates. 

How, then, was the problem to be solved ? 

The first expedient Russia hit upon for assisting the 
exchange position, was the very natural one of shipping 
gold, of which £8,000,000 worth was sent to England in 
November, 1914. In order still further to ameliorate 
the adverse exchange, the British Government provided 
Russia with an additional credit of £12,000,000, proceeds 
of an issue of Treasury bills on the London market. The 
provision of this credit rehabilitated the exchange in a 
limited degree — the depreciation dropped to 14 per cent. — 
but as the credit was largely used for financing the Russian 
Government's own expenditure on war materials, the 
increase in the credit did not assist much in restoring the 
normal exchange, and the problem consequently remained 
a serious one for the commercial community. Further 
provision therefore became necessary, and as a result of 
the historic conference between the allied Finance 
Ministers in Paris, the amount to be raised in Treasury 
bills on the London market was increased by £20,000,000 
to £32,000,000, 2 and the effect of this was to bring down 
the exchange to the more workable figure of Rbl. 1 13 to £10. 

^ The Times Russian supplement, 15th January, 1915. 

^ The arrangement was announced in the following terms on 
4th December, 1914— 

" His Majesty's Government agreed with the Russian Govern- 
ment, in consideration of the shipment of ;^8,000,000 in gold from 
Russia to London, which took place a few weeks ago, to arrange 
with the Bank of England to discount, under a guarantee of His 
Majesty's Government, Russian Treasury Bills to the further 



110 FOREIGN EXCHANGE AND FOREIGN BILLS 

The interest this operation created in circles outside 
the sphere of banking is shown by the comments which the 
Spectator made on the occasion of the issue of the Treasury 
bills, and as the analogy drawn in that time-honoured 
periodical is a very excellent one, it is worth while quoting. 

" To understand how the difficulty is to be met," 
says the writer, "it is only necessary to realize that, 
though international commerce is primarily a matter 
of the exchange of goods against goods, it is secondarily 
a matter of the exchange of goods against permanent 
securities. If, for example, the Argentine railways 
want a fresh supply of rolling stock from Great Britain, 
they can obtain it by issuing new capital which will be 
taken up by British investors, whose money will go to 
pay for the rolhng stock, and who in return will acquire 
a permanent lien upon the profits of the railway. 
Exactly the same method is being employed to meet the 
temporary commercial difficulties of Russia. The 
Russian Government are now raising money upon the 
London market by means of Treasury bills. The 
money thus raised is used to pay for produce that 
Russia requires to buy, and the investors in Treasury 
bills acquire a permanent claim upon the Russian 
Government. Simultaneously, the Russian Government 

amount of ^^12, 000,000, the rate of discount to be on the basis of 
the rate at which the British Government has been from time to 
time able to borrow for its own needs. 

" By these means, the Russian Government obtains funds in 
England to the total amount of ;^20,000,000. Out of these, 
;^8,000,000 is to be applied by the Russian Government for the 
purpose of providing exchange for Anglo-Russian trade. This 
exchange will be available for new transactions, as well as for the 
discharge of existing indebtedness. 

" The balance of ^^ 12,000,000 is to be used for paying the coupons 
of the Russian external debt and the interest upon other external 
obligations of the Russian Government which are payable in London, 
and for financing Russian Government purchases in the United 
Kingdom. It will not be applied to financing purchases outside 
the United Kingdom, except after consultation with His Majesty's 
Government, in cases where the British market is unable to supply 
the article required, and orders have consequently to be placed in 
the United States or Canada," 



THE FOREIGN EXCHANGES AND THE GREAT WAR 111 

are collecting from merchants in Russia, money owed to 
England, and giving in exchange Russian Treasury 
bills, which are handed over to the persons in England 
to whom the Russians owe the money. By this means 
the Russian Government are able both to assist their 
subjects to pay debts in London and to acquire the cash 
for carrying on the war." 

The whole procedure is a striking instance of the manner 
in which Continental nations hold tight to their gold when 
the odds are overwhelmingly against them, and it seems 
to be a moot question whether Russia would not have 
done better to meet her foreign indebtedness by the 
release of gold, of which metal she is reputed to have 
immense stores. ^ 

America. The position in regard to American exchange 
was analogous with that of Russia. Following the out- 
break of war, American exchange, like that of Russia, 
became utterly disorganized, and the extent to which the 
dollar depreciated was even more pronounced than the 
depreciation of the rouble. There were two chief causes 
for this disorganization in the United States currency : 
(a) the abnormal liquidation of stocks and shares on the 
New York Stock Exchange, which commenced in July, 
1914, and grew in intensity until the commencement of 
hostilities ; (b) the almost unprecedented indebtedness of 
America to Europe, estimated at about j^ $250,000,000 
(£50,000,000, taking $5 to £1). In such^J^circumstances 
foreign exchange was reported to have disappeared, which 
is true, theoretically, since quotations were unworkable. 

A few words, taken from The Times' correspondent's 
dispatch, summarize the position. Sight exchange on 
London, normally $4.86, seldom higher than $4.89, rose 
to $5.00, to $6.00, and, finally, to $7.00— a rate never 
before witnessed. 

In the ordinary course of things. New York could have 

^ On 21st July, 1914, the Imperial Bank of Russia held gold to 
the value of ^174,509,000. 



112 FOREIGN EXCHANGE AND FOREIGN BILLS 

corrected this abnormal position by shipments of produce, 
following her usual autumnal procedure, when she exports 
enormous quantities of cotton, grain, meat, and other 
food-stuffs to Great Britain and other European countries, 
and takes back gold for any excess balance due. As she 
was estopped from making these shipments on the out- 
break of war, however, the usual means of cancelling her 
indebtedness to foreign countries was denied her, and the 
results were disastrous in the extreme. 

Gold had been leaving the States in large quantities, 
and more would have been shipped but for the suddenness 
of the crisis. It will be within the reader's recollection 
that the Kronprinzessin Cecilie had sailed from New York 
on 28th July, 1914, with a consignment of gold to Euro- 
pean banking houses, valued at about £2,000,000, but to 
avoid capture, she put back into the Bar Harbour, Maine, 
U.S.A., on the 4th August. 

In war time New York might conceivably consider it 
inexpedient, or even undesirable to ship gold ; she would 
prefer to send cotton, wheat, etc., in payment of indebted- 
ness, but with that means of settlement cut off, and pari 
passu, the bills of exchange, one's thoughts naturally 
turn to gold. Here, again, adverse factors crept into the 
calculation. In normal times it is safe to estimate the 
cost of shipping gold to London from New York in large 
quantities at about $2 per ;f 100 ; the par of exchange. 
New York / London, given in our table on page 22, is 
$4-8665 = £1, or $486.65 = £100 ; par, plus the cost of 
shipping gold would be $488.66, and whenever the exchange 
goes higher — say $489.00, gold shipments will commence. 
In the early days of the Great War, however, there arose 
exceptional circumstances, largely a matter of history 
now, but which were similar to those cases which econo- 
mists have constantly referred to in alluding to the theo- 
retical gold points. We have in mind the special circum- 
stances which cause shipping charges for gold to exceed 
the amount prescribed in calculating the gold points. 



THE FOREIGN EXCHANGES AND THE GREAT WAR 113 

In the case of the European war insurance rates from New 
York to London rose as high as 1 per cent, on 30th and 
31st July, 1914. ^ One per cent, increases shipping charges 
by approximately $5 per £100, making the outgoing gold 
point $491.65, and accounts to some extent for the 
unparalleled exchange which existed. 

In view of this remarkable situation, foreign exchange, 
if not at an end, was almost in extremis between New York 
and other monetary centres. True, towards the end of 
August, some sort of New York rate on London, as the 
Economist remarked, was re-estabhshed at a little over $5 
to {\, and quotations of a sort were also obtainable with 
Holland, France and Spain, all, however, quite nominal. ^ 

With characteristic energy. New York soon set to work 
to remedy this serious menace to her commerce. Loans 
were raised, aggregating $182,000,000 (£36,400,000), of 
which $82,000,000 was applied to meeting New York's 
European indebtedness, and $100,000,000 to assisting in 
the rehabilitation of the foreign exchanges. In each case, 
the amounts raised were in gold, which, under an arrange- 
ment with the Bank of England, was shipped to Ottawa, 
in instalments, and received by the Canadian Finance 
Minister at an agreed exchange of $4.90 to the pound 
sterhng. This, as the Americans point out, was a high 
exchange for debtors to pay, but shipping conditions 
made it cheaper than forwarding gold to London. 

The effect of this Ottawa arrangement was equivalent 
to opening a huge credit in London ; against the deposit 
of gold the bankers were placed in the position to draw 
bills on London, thus providing a means of remittance to 
those who were under the necessity to settle indebtedness. 

A similar arrangement was made by the French Govern- 
ment, which deposited $6,000,000 in New York with 
Messrs. J. P. Morgan & Co., for the purpose of re-estab- 
lishing exchange between France and the United States, 

^ Cf. International Trade and Exchange, H. G. Brown (New York), 
page 107. 

" Economist, 22nd August, 1914. 



114 FOREIGN EXCHANGE AND FOREIGN BILLS 

which, on 31st July, 1914, reached the record rate of 
fr. 3.25 to the dollar. 

We have now to examine the other side of the picture, 
the case where rates, instead of being in favour of London 
are against us. At the time of writing,^ the exchange 
New York / London, touched the lowest point on record — 
$4.79 to the pound sterling, or 5^ cents below the import 
specie point, $4.84^ : but gold did not leave England for 
America, notwithstanding the fact that the rates demon- 
strated Great Britain to be debtor to the U.S.A. The 
reason, of course, was that shipping charges, insurances, 
etc., during the war were prohibitive : but then there was 
the stock accumulated at Ottawa, which might possibly 
have been released. As a matter of fact, some of it was 
sent to New York, ^ and one of the largest banks, the 
National City Bank of New York, commenting on this 
gold held by the Bank of England in Canada, acknow- 
ledged the British right to retain the metal, even at some 
sacrifice. The Bank of England was not, as they said, 
obhged to receive gold at Ottawa during the autumn of 
1914 in lieu of payment in London, but to relieve American 
distress, it agreed to do so at the rate of $4.90, in itself a 
high rate, yet, in the light of the adverse circumstances, 
cheaper than shipping gold to London. 

In the case just described, the cause of the rate's being 
so much against Great Britain was our heavy debit balance. 
During August, 1914, there was a balance of approximately 
$19,400,396 (£3,880,079) against New York, but with the 
re-estabhshment of exchange and the enormous improve- 
ment in America's foreign trade, the monthly balances 
against London advanced by leaps and bounds, and were 
given as, September, $16,341,722 ; October, $57,305,074 ; 
November, $79,299,417; December, 1914, $131,863,077; 
January, 1915, $145,536,103. 

1 March, 1915. 

' The National City Bank, New York, say a large amount was 
released at the rate of 77s. 3d. per ounce for gold Eagles, equal to 
$4.81 to £1. 



THE FOREIGN EXCHANGES AND THE GREAT WAR 1 15 

In dealing with American exchange we have thus 
examined two extremes ; one where exchange went far 
above the outgoing specie point, and the other where 
exchange fell below the incoming specie point, and the 
question arises : how are the sellers of bills affected in such 
cases ? Briefly, with the high rate, say $6 to the pound 
sterling, the seller of sterling bills could only sell his bills 
at that price to the person who was obliged to remit to 
Great Britain, and as the latter found it impossible to 
send gold, he was faced with a heavy loss ; consequently, 
such conditions spread over a vast number of transactions 
meant ruin to a large section of the American public, 
hence the action taken to remedy the trouble. 

In the other case, it is the seller of sterling who would 
suffer. Low exchange indicates, among other things, a 
large supply of bills, and in times of crisis holders of bills 
are unduly anxious to obtain cash, even at a sacrifice, and 
there will thus be a large mass of creditors selling bills at 
the lower rates rather than wait for the gold which must 
come sooner or later. 

The same principle holds good when it is the banks 
operating : the high interest rates prevailing at such 
times, make it unprofitable for either side to be out of its 
money, even for relatively short periods, as the interest 
charges wiU speedily absorb any profit which might be 
obtainable by importing gold from abroad : the time taken 
for the gold to arrive is the adverse factor in the case. 
Some account must also be taken of the increased risk 
and other adverse factors which we have mentioned, all 
of which militate against the influx of gold. 

In this chapter, it has been possible to touch on but a 
few of the complex monetary problems arising out of the 
abnormal situation in which the world finds itself to-day, 
but sufficient has been said to indicate the force of the 
economic pressure resulting from the war upon centres 
both near to and far removed from the scenes of conflict, 
and all things considered the advantages to any particular 
country are infinitesimal. 



116 



FOREIGN EXCHANGE AND FOREIGN BILLS 



Since these remarks were written the principal rates of 
exchange between this country and foreign centres have 
fluctuated in a remarkable manner. In some cases the 
levels reached have broken all previous records, and 
although various remedies have been applied their cumu- 
lative effect has not been sufficient to counteract the 
adverse influences which have arisen since war began. 
Most of the European nations except Great Britain appear 
to have abandoned all pretence at maintaining the gold 
standard ; many have also prohibited the export of gold, 
and in default of gold shipments 'we are hardly yet in a 
position to perceive, much less discuss, the final effects of 
the other correctives which the great financiers of two 
Continents are seeking to evolve. The full story of the 
artificial attempts to bolster up the exchanges of the world 
must therefore form the theme for additional chapters in 
some future edition, but a comparison between the quota- 
tions given on page 41 and those appearing below will 
also afford an interesting sidelight into the effects of war 
on the foreign exchanges. 

FOREIGN RATES OF EXCHANGE ON LONDON. 
" Economist " Table of 29th April, 1916. 





Latest 


Rates 


Usance. 




Dates. 


of Exchange. 




Paris . . . . 


Apr. 


26 


28 f. 28Jc. 


Cheques 


Amsterdam . 




26 


11 fl. 35ic. 


>> 


Berlin . . . . 


— 


26 


— 


Short 


Do 


— 


26 


— 


8 days 


Christiania . 





26 


15 kr. 65 


Short 


Frankfort . 


— 


26 


— 


if 


Vienna . . . . 


— 


26 


— 


)) 


Petrograd 


— 


26 


155|r. 


3 months 


New York . 


— 


26 


$4.7615 


Cable 


Switzerland 


— 


26 


24 f. 67J c. 


Short 


Lisbon . . . . 


— 


26 


34 fd. 


At sight 


Madrid . . . 


— 


26 


24 ps. 25 


At sight 


Rome . . . . 


— 


26 


30 Ir. 45 


,, 


Rio Janeiro 


— 


26 


llHd. 


90 dys. St. 


Valparaiso . 


— 


26 


Sfd. 


90 „ 


Buenos Ayres 


— 


26 


4%\d. 


90 „ 


Montevideo . 


— 


26 


53Jd. 


90 


Calcutta 


— 


26 


l/45^2d. 


teleg'ph 


Bombay- 


— 


26 


l/4gSd. 


transfer 


Hong Kong 


— 


26 


2/2d. 


,, 


Shanghai 
Yokohama . 


— 


26 


3/Oid. 


,, 


— 


26 


2/1 id. 


— 



THE FOREIGN EXCHANGES AND THE GREAT WAR Il7 



War Exchanges. 

The tendency of the newspapers during the war was 
to refer to the r cites between the beUigerent countries and 
neutral nations as War Exchanges. The Economist, for 
instance, on 25th March, 1916, gave some useful figures 
showing, inter alia, the value on the money markets of 
New York, Amsterdam, and Switzerland of the unit of 
exchange from Germany, Austria, Russia, France, Italy, 
and Great Britain. Such details are of unusual interest 
both for purposes of comparison and for future reference; 
consequently, we give the tables in full. The quotations 
are the sight rates which were in operation in each market 
on the dates indicated. 

NEW YORK. 





Par 


Dec. 31, 


July I, 


Dec. 31, 


Mar. 9, 






1914. 


1915. 


1915. 


1916. 


On— 












Germany . . 


95.28 cents to 4 marks 


88| 


8i| 


76i 


72^, 


Austria 


20.26 „ I crown 


17.40 


14.94 


12.95 


12.76 


Russia . . 


51-15 ,, I rouble 


41.50 


371 
5.66 


295 


fl3ij 


France . . . 


5.18; francs to i dollar 


5.16: 


5.84i 


5-9ii 


Italy . . . 


5.18; lire to I dollar 


5.31- 


6.16 


6.61 


a6.7o 


Gt. Britain 


4.8666 dollars to ii 


4.855 


4.76i 


4.73J 


4.76 



AMSTERDAM. 





Par 




Dec. 31, 


July I, 


Dec. 31, 


Mar. 9, 








1914. 


1915. 


1915. 


1916. 


On— 














Germany . . 


59.26 florins to 


100 marks 


54-30 


50.60 


42.35 


41.85 


Austria . . 


50.41 


100 crowns 


42.75 


37.56 


29.00 


29-15 


Russia . . 


128.00 „ 


100 roubles 


102.44 


93.65 


68.24 


667.00 


France . . . 


48.00 „ 


100 irancs 


47.95 


44.94 


38.75 


40.15 


Italy . . . 


48.00 


100 lire 


46.50 


41.03 


32.06 


— 


Gt. Britam 


12.10f ,, 


£1 


ii.99i 


"•93i 


10.83 


11.26 



SWITZERLAND. 





Par 


Dec. 31, 


July I, 


Dec. 31, 


Mar. 9, 






1914. 


1915. 


1915. 


1916. 


On— 












Germany . 


123.45 francs to loo marks 


114.50 


109.40 


99.70 


92.87^^ 


Austria . . 


105.01 „ 100 crowns 


91.00 


81.00 


67.11 


64.32* 


Russia . . 


266.64 » 100 roubles 


217.50 


210.00 


156.60 


164J 


France . . 


loo „ 100 francs 


101.06 


97-09 


89-67 


88.80 


Italy . . . 


100 ,, 100 lire 


98.65 


88.87 


79-75 


78.10 


Gt. Bntam 


■' '25.22 „ £1 


25.48} 


26.00 


24.89 


24.97* 



(a) March 3, 1916. 



(6) January 4, 1916. 



9— (1525) 



118 FOREIGN EXCHANGE AND FOREIGN BILLS 

Satisfactorily to explain the reasons for the striking 
movements in exchange revealed by these quotations 
would require a book by itself; but, in brief, we may say 
that in those countries with rates heavily against them- 
selves, the depreciation is due to two chief causes: first, 
failure to ship gold in support of exchange; secondly, 
excess note issues. 

Paper currency is fully discussed in the next chapter; 
but concerning gold, we may say that many nations 
appear altogether to have lost sight of the real function 
of gold reserves, which is first and foremost to support 
exchatige. Even those nations which have allowed gold 
to be shipped in support of exchange have made the 
mistake of sending it nearly all to one centre. Their 
doctrine seems to be to make a heavy shipment of gold 
to the country whose exchange is most unfavourable to 
them, and to leave it there to work out the salvation of 
all the other adverse rates through the media of arbitrage 
operations. A far better plan would be to diffuse the 
gold among the whole of the centres whose rates are 
against the country. 



CHAPTER XI 

THE EVIL INFLUENCE OF PAPER MONEY ON THE 
FOREIGN EXCHANGES 

In Chapter VII we referred to the countries having a 
debased currency — depreciated paper, etc. — and it seems 
desirable at this point to say something further about the 
matter. 

Paper Currency. 

Paper currency is one of those necessary evils which 
have been handed down to us from our forefathers : its 
origin seems wrapped in obscurity, but there have been 
plenty of writers other than economists who have viewed 
with misgiving the whole-hearted way in which impecunious 
States have adopted it. Even in the drama of Faust, 
said to have been written about the end of the sixteenth 
century, the author makes the Devil the inventor of paper 
money. The satire is perfectly applicable, but if the 
Devil had stopped with the invention of paper money 
his work would only have been half done. In the light 
of present day experience, the reader may perhaps be 
inclined to agree that in the centres where the printing 
press has taken the place of the Mint and depreciated 
currency consequently is the order of the day, the supreme 
spirit of evil seems to have gone a step further, and entered 
into the minds of those who are entrusted with the 
administration of public financial affairs. In saying this, 
we have in mind the issues of inconvertible notes, and, 
what comes to pretty much the same thing, the over issue 
of notes without the necessary metallic reserves — all in 
reality are forced issues. 

Briefly stated, the effect of such issues, or indeed of 
any emission of paper currency, is to drive gold out of 
circulation, but the currency of the country does not 

119 



120 FOREIGN EXCHANGE AND FOREIGN BILLS 

depreciate, or, to put it another way, prices of com- 
modities do not begin to rise, until the paper exceeds the 
actual quantity of the metallic currency which has been 
superseded. When we get to that stage, prices rise in 
proportion to the increased issues, so that in course of time 
more money, in terms of the paper currency, will have to 
be given for the same articles which were previously 
purchasable for a less sum of the metallic currency ; which 
is equivalent to saying that the currency of a country has 
depreciated. Curiously enough, this does not affect a 
country's foreign trade, for importers will still import 
foreign products, and although the creditor in the foreign 
centre will get no higher price for the goods, yet the im- 
porter will have to part with more of his notes to cover the 
premium upon the gold necessary for the remittance. 
Exports also will command just the same price in the foreign 
country as they did before prices rose in the exporting 
country. Thus, if in a country with a depreciated paper 
currency the price of an article had risen from £1 to £1 10s., 
and that article was exported to a foreign centre, it would 
still be worth only £\, and yet exports would continue, 
for the reason that in the foreign country the currency 
not having depreciated, the exporter will receive payment 
in gold or silver as the case may be. The metal can then 
be brought to the country with the depreciated paper 
and exchanged for notes to cover the price and the extent 
of the premium — 10 shillings — for bullion will have risen 
in the same proportion as other commodities. It is there- 
fore plain that gold, assuming it to be a gold standard 
country, is at a premium. A striking example of this 
state of affairs is to be seen in the River Plate, where 
there is a premium on gold of slightly over 127 per 
cent. 

Although the depreciation of the currency does not 
affect the foreign trade of the country, it does affect the 
foreign exchanges. To explain this action, we may take 
the exchange between two countries, one with a full 



INFLUENCE OF PAPER MONEY ON FOREIGN EXCHANGES 121 

metallic currency, and the other with a depreciated paper 
currency. Suppose Germany to be the latter country; 
exchange on London would rise in proportion to the 
premium on gold in Germany, if the premium were 2 per 
cent., and the exchange M. 20.40 to £1 ; then a bill of 
exchange drawn in Berhn on London will be worth more 
than M. 20.40, since it is payable in gold in Great Britain : 
the bill of exchange will cost the German remitter M. 20.40, 
plus the premium on gold, 2 per cent., equal to M. 20.80 
to £1, meaning that the person who has to purchase sterling 
wiU have to surrender a greater amount of the native 
currency than he would if that currency were not depre- 
ciated. It follows that the rate of exchange is always 
against that country which maintains a depreciated 
currency. 

The South American countries are the most notorious 
for the over issue of paper money, but we have other 
States nearer home in very little better position. Italy, 
for example, has always favoured paper, and although 
of late years the currency position there has improved 
vastly, there is still an enormous amount of notes in 
existence. For instance, on 30th November, 1913, the 
actual currency consisted of 499,293,525 hre of State notes, 
2,261,951,200 Hre of bank notes, and about 100,000,000 hre 
of copper and nickel coin. For this reason the Itahan 
exchange is always very sensitive, and is one of the first 
to feel the effects of any crisis. The par of exchange is 
Lire 25.22| centesimi to £1 sterling, and rates are more 
often against Italy than in her favour. The quotation 
on 19th March, 1915, was L. 27.80-28.10. 

To return to the South American states, the Argentine 
Repubhc nominally adheres to the gold standard, the 
monetary unit of the Repubhc is the gold peso (sometimes 
termed the " gold dollar "), which, divided into 100 cents, 
is the equivalent of 5 francs, but the currency or legal 
tender unit is the paper peso, and this, at present, is the 
only circulating money. By an Act passed in 1899, the 



122 FOREIGN EXCHANGE AND FOREIGN BILLS 

Argentine Government established a Conversion Office in 
Buenos Aires, and fixed the ratio at which gold coin is 
received in exchange for paper currency and vice versa. 
This ratio is 44 centavos gold to 1 peso paper, or, conversely 

227.27 pesos paper for 100 pesos gold, (^^— = 227-27) 

from which it will be seen that there is a premium on gold 
of 127.27 per cent. The paper dollar being fixed by law 
at 44 cents gold, £1 sterling is worth 11.45 dollars paper. 
One pound sterhng is also equal to 5.04 gold dollars. 

Brazil is another country which, for a number of years, 
has had a depreciated paper currency. The exchange, as 
we have shown in the list of foreign exchange rates, is 
quoted at so many pence to the milreis, and fluctuates 
in a striking manner. In 1900 the average rate was 9f jd- I 
in 1905, 15||d. ; in 1910, 16d. ; in 1911-12, le^d. On 
16th July, 1914, it was quoted at 15ii]d. to 1 milreis, and 
on 19th March, 1915, had depreciated to 13fd. per milreis, 
the par value of which is approximately 27d. 

The figures in the Statesman's Year Book for 1914, give 
some idea of the extent to which paper has been issued. 
At the end of the year 1911, the fiduciary circulation of 
Brazil was said to consist of 61*8 per cent, of inconvertible 
notes, and 38*2 per cent, of convertible notes. 

Then there is Chile, another one of those countries to 
feel the full effect of a forced paper currency. Notes, in 
fact, are the principal medium of exchange. The peso, 
nominal value Is. 6d., fluctuates considerably, and its 
relative value before the war varied between 9d. and lOd., 
but exchange quotations have since been recorded at 
7i#d. (March, 1915). 

There are, it is manifest, many evils connected with 
these over issues of paper currency, but the greatest is the 
frequency of the fluctuations ; rates oscillate so often 
and so wildly that neither producer nor exporter is able 
to judge with any degree of certainty whether his operations 
will ultimately yield a profit or a loss. 



INFLUENCE OF PAPER MONEY ON FOREIGN EXCHANGES 123 

Paper Money and the War. 

Some notice ought also to be taken of the issues of paper 
during the Great War. We have witnessed during the 
past few months vast emissions of notes by the belHgerent 
nations, and it is almost axiomatic that where, owing to the 
increasing financial embarrassment, a belligerent nation 
is compelled to have recourse to the creation of a forced 
paper currency, and that currency is not convertible in 
gold, it is sure to suffer considerable depreciation. We 
have seen in Germany's case the serious fall in the value 
of her currency, and the discount on the mark is undoubt- 
edly due to the fact that the notes issued by Germany 
are not convertible in gold. The British Government's 
notes, on the other hand, are payable in gold on demand, 
hence in Great Britain's case there is no depreciation in 
value. 

The effect on the foreign exchanges of the depreciated 
notes is easily perceived. The exchanges are already 
adversely affected by the interference with the foreign 
trade, and the advent of the inconvertible paper is merely 
a further disturbing influence. It accentuates the evils 
which already exist and its effect is that foreign creditors 
must either expressly stipulate for the settlement of their 
claims in gold, or, if payment is accepted in the depreciated 
medium, to avoid loss, traders must safeguard themselves 
by a proportionate rise in the exchange. The evil effects 
upon a country's unit of currency are clearly shown in 
the case of Germany: the Mark on 18th March, 1916, 
was quoted — 

In Amsterdam at 29*62% discount 
„ Sweden ,. 30-33% 

„ Denmark ,, 30-56% 
„ Switzerland ,, 25-23% 
., New York „ 25% 



CHAPTER XII 

EASTERN EXCHANGES. THE GOLD EXCHANGE STANDARD 

AS IN OPERATION IN INDIA AND OTHER SILVER-USING 

COUNTRIES. EXCHANGE REMITTANCES BY MEANS OF 

INDIA COUNCIL BILLS AND TELEGRAPHIC TRANSFERS 

For reasons which will manifest themselves to the reader 
who has survived the rocks and shoals of the European 
exchanges, and has the temerity to enter upon the study 
of what are known as the " Silver Exchanges," we propose 
to devote this chapter to a study of the gold exchange 
standard, leaving the fuller discussion of exchange with 
those countries in the Far East whose currency is purely 
silver, to be dealt with in the next chapter. 

Silver Exchanges. 

The uncertain factor with which all concerned in 
Eastern commerce have to deal is the gold price of silver. 
Wherever there is this fluctuating silver medium of ex- 
change, foreign trade becomes invested with a speculative 
element far beyond the ordinary chances and changes 
of the markets : besides the usual risks of trade, account 
has to be taken of the risks in exchange caused by the 
movements in the quotations for silver, and in consequence 
business operations become converted into gambhng 
transactions, wherein neither expert opinion can guide 
nor caution protect the shippers. On the one hand, we 
have the exporters to such countries who find difficulty 
in calculating the exact amount which will be realized by 
the sale of their consignments of goods ; on the other, we 
have the importing merchants of the silver-using countries, 
who are not able to estimate the cost in their local currencies 
of the remittances in gold which they may be called upon 
to make in settlement of purchases made from gold standard 
countries. The greatest uncertainty prevails among both 

124 



THE EASTERN EXCHANGES 125 

sections of the community, for every movement in the 
price of silver is at once reflected in the exchange between 
the silver-using countries and those on the gold standard. 
That is why silver has come to be regarded as a depre- 
ciated metal unduly subject to sentimental influences of 
all kinds, and as its price has fallen from eOred. in 1872 
to about 26|d. in 1914, there is good reason for the 
disesteem in which it is held as a currency standard. 

India and the Silver Problem. 

The adverse effects upon the trade and commerce of the 
Indian Empire as the result of the continued fall in the 
gold value of the rupee, due to the variations in the price 
of silver, led the Government to consider by what means 
the evil could be obviated, and much trouble was taken 
with a view to the establishment of a stable rate of exchange. 
In brief, the plan the Indian authorities followed was what 
amounts in principle to a contraction of the existing 
currency : they closed their mints to the free coinage of 
silver, and, in 1893, after a somewhat heavy coinage of 
rupees, the Government ceased to add rupees to the cir- 
culation, with the natural consequence that as soon as 
circumstances led to an increased demand for the coin, 
the exchange value of the rupee began to rise, and in the 
course of a few years it became profitable for those who had 
remittances to make to India, to take advantage of a 
standing offer made by the Government of India to give 
rupees at the Calcutta or Bombay mints, or to issue notes 
at the paper currency offices, in exchange for gold at a 
rate of exchange equivalent to 15 rupees for £1 sterling. 
Once the exchange value of the rupee had reached Is. 4d., 
the Government's aim was to maintain it at that level 
with shght variations similar to those seen in the currency 
between gold-using countries, and after many lengthy 
and solemn dehberations in Commission, the authorities 
seem to have eliminated the disturbing factors in relation 
to the exchange between London and their own country 



126 FOREIGN EXCHANGE AND FOREIGN BILLS 

by the adoption of a standard of currency closely akin to 
the gold standard. 

The system in vogue in India is one which Mr. Hartley 
Withers jokingly terms the half-way house in the matter 
of currency, since, in his opinion, India has a sort of one- 
sided convertibility in its own favour. The system, 
however, which has now been in operation, with minor 
alterations and improvements, for some twenty years, is 
better and more correctly described as the " Gold Exchange 
Standard." This standard is in successful operation in 
far more countries than many people are aware of. In 
actual practice the currency systems of Russia, Holland, 
Japan, Austria-Hungary and the Philippines, all resemble 
India's system. To conform to this standard, the pre- 
ponderant medium of exchange may be notes or token 
silver coins, and these, being permanently established, 
are kept near a fixed par in relation to gold by Government 
control of the foreign exchanges. With the gold exchange 
standard it is not really necessary for gold to be in circula- 
tion in the country at all, but what the Government must 
have is the power and ability to sell foreign exchange at 
a fixed price, and this necessitates their maintaining a 
reserve in gold, or, what comes to much the same thing, 
being in possession of resources readily convertible into 
gold. The silver currency received from the sale of 
exchange is retained by the Government, and the effect 
of its being kept out of circulation is the same as that 
produced by exporting gold. The export of gold turns 
the exchange in favour of the country exporting, and if 
the silver-using country is able to supply and maintain 
the price of bills of exchange with a gold standard country, 
this will serve the same purpose, and the approximate 
parity with gold is, ipso facto, maintained. ^ 

It has been proved by experience that gold actually in 
circulation is of very little value in maintaining exchange, 
and the internal medium of circulation, whether it be silver 

1 Cf. Purchasing Power of Money (Irving Fisher), pages 131-2. 



THE EASTERN EXCHANGES 127 

or notes, is largely dependent for its value in exchange, 
not on its bullion content, but on the possession of adequate 
gold resources. These resources need not necessarily be 
kept in the home country : the gold reserve of the Philip- 
pines, for instance, is maintained in New York, while 
Russia, Austria and Japan constantly hold a large propor- 
tion of their gold resources in London, Paris, Berhn and 
other monetary centres. India's Gold Standard Reserve, as 
is well known, is held in London at the Bank of England. 

The gold exchange standard may be better understood, 
perhaps, if reference is made to the variations of the 
standard as in operation in two or three of the countries 
named. 

In Austria, as in India, the use of notes and silver coins 
has become ingrained among all classes of the population. 
Before the war, and there is no reason to suppose that 
currency conditions will be materially altered after the 
war, the Austrian Government's irredeemable paper cur- 
rency had given place to the inconvertible bank notes of 
the Austro-Hungarian Bank, which are issued against 
cover consisting of metal, bills of exchange and loans. 
The Austrian law regulating this bank's issues, admits of 
its holding a proportion of the cover for the notes in foreign 
bills payable in gold, and the bank is also allowed to deposit 
a part of its assets abroad payable on demand. By this 
means the bank, representing the Austrian Government, 
was able to keep the Austrian currency, in the shape of 
the bank's inconvertible notes at, or near par. These 
notes are the predominant medium of exchange in Austria, 
and the bank, before the interruption of communication 
caused by the war, was able to keep them at par in relation 
to gold by selHng exchange against its foreign assets 
payable on demand, and by meeting the demand for 
remittances to other countries by selHng foreign gold 
bills, say on London, Berhn or Paris. 

The currency in the Philippines is manipulated in a 
similar way, the silver pesos or coin certificates being 



128 FOREIGN EXCHANGE AND FOREIGN BILLS 

maintained at the par of exchange within the hmits of varia- 
tion that apply in the case of the exchange between coun- 
tries whose currency is mainly gold. It is rarely possible 
to obtain gold coin for silver in the Philippines, except in 
small quantities, but as drafts on New York are always 
procurable from the Government at par, plus the usual 
charges for exchange between gold standard countries,^ 
these are equivalent to gold exports, and serve to keep 
exchange steady. 

Besides the maintenance of satisfactory resources, the 
system therefore calls for the contraction of the currency 
by the retirement of a sufficient amount of the silver 
coinage whenever it is apparent that more is in circulation 
than the demands of trade require. Expansion of the 
currency is produced by the release of this currency to 
circulation, or by the issuance of new currency whenever 
it is seen that there is a shortage of the currency medium. 

It seems to be an essential part of this system that the 
intrinsic worth of the silver coins should be fixed by law 
above the value of their silver content : without such 
proviso the power to control the circulation would exist 
in one direction only — contraction : with the margin 
between the coin value and the bullion value, the power 
exists to expand as well as to contract, and it will be seen 
that in countries where the gold exchange standard is in 
operation, care has been taken to divorce the value of the 
silver coins from their bullion content. ^ 

The limited space at our disposal precludes the multi- 
pHcation of examples, but we may conclude with a summary 
of the results seen in the case of India. 

As is well known, by reason of the enormous export 
trade from India, the balance of her international credits 
and debits is nearly always in her favour, which accounts 
to some extent for the large amount of precious metals 

^ The actual charges are three-fourths of 1% for demand drafts 
and 1^% for telegraphic transfers : the premium may be temporarily 
increased or decreased should circumstances call for the alteration. 

^ Cf. Purchasing Power of Money (Irving Fisher), page 338. 



THE EASTERN EXCHANGES 129 

annually imported into India. This was also the case 
before the adoption of the present system of currency, 
but whenever there was a falling exchange, the adverse 
effects on the silver currency made themselves felt. Events 
went to prove, in fact, that in saying that where a country 
is upon a silver standard, it is as well to maintain that 
standard if it is desired to stimulate the development of 
the country in regard to its exports, currency experts 
lost sight of one important point. Where the currency 
is depreciating as compared with gold, exports do increase, 
but the increase is partly due to the larger volume of goods 
which must be exported in order to liquidate the country's 
debts to gold-using countries. If silver is at 30d. per 
ounce and falls to 25d. per ounce, the silver currency 
unit falls with it, and the difference in value has to be 
made up by sending more goods. 

This was precisely what happened with India, and 
consequently the fluctuating value of the rupee made 
trade both uncertain and unsatisfactory. With the 
divorce of the value of the rupee from that of its silver 
content, fluctuations in exchange due to the fall in the gold 
price of silver were removed. There still remained the 
danger, however, that if ever the balance of indebtedness 
was against India, the value of the rupee would depreciate 
unless steps were taken to prevent this. It is apparent 
in seasons of ordinary prosperity that no effort is needed 
for the maintenance of the rupee at Is. 4d., since the 
favourable balance of trade would ensure a sufficiency of 
foreign bills being forthcoming for those who require to 
make remittances. When the favourable balance is 
seriously diminished, or the balance becomes temporarily 
unfavourable, it is clear that India's claims on foreign 
countries in the shape of bills of exchange will be relatively 
scarce, and those who are under the obligation to remit 
sterling to Great Britain would be forced to pay a larger 
number of rupees for each sovereign the bill of exchange 
represents. This indicates a falling exchange, and as we 



130 FOREIGN EXCHANGE AND FOREIGN BILLS 

have seen, in such circumstances exchange continues to 
fall until it reaches that point when it is more profitable 
to send gold than to remit bills to the creditor country. 
So far the procedure is simple, but the difficulty, more 
apparent than real, is that in practice no gold might be 
available for export, since, although there is a legal obliga- 
tion to issue rupees in India in exchange for sovereigns, 
there is no corresponding legal obhgation on the Govern- 
ment to give sovereigns in exchange for rupees. Conse- 
quently, if no safeguard existed, the rupee would fall till 
it was worth no more than its silver value at the rate of 
the day. To meet this contingency, there are available, 
besides the general resources and credit of the Government 
of India, the gold held in the Paper Currency Reserve, and, 
more particularly, in the Gold Standard Reserve, which 
was specially constituted for this purpose. These reserves 
are kept in London and India, and at the present time 
amount to a very substantial figure, and although 
there is no statutory obligation on the Government 
of India to take special measures to maintain the 
value of the rupee at Is. 4d., they have expressed their 
determination to support exchange up to the limit of 
their resources. 

When exchange between India and Great Britain shows 
signs of falhng below Is. 3§|d., the Indian Government 
intervenes by selling sterling bills on London at this rate. 
They took action in this way in 1907-08 and 1908-09, when 
sterling drafts on London to the extent of £8,058,000 were 
sold at Is. Srild. per rupee to assist in the balance of trade, 
and again when exchange dropped as the result of the 
financial disturbance which accompanied the outbreak of 
the recent hostilities in Europe. On the latter occasion 
the Government offered these " Reverse Councils," as 
they are called, in the shape of telegraphic transfers on 
London as an alternative to bills. This action had for 
effect the maintaining of exchange in the neighbourhood 
of the gold export point from India, and the fact that this 



THE EASTERN EXCHANGES 131 

value was maintained throughout August, 1914,^ while 
the currency of other countries more favourably situated 
abnormally depreciated, is a striking testimony to the 
efhcacy of the Indian arrangements. Moreover, it 
demonstrates the wisdom of keeping a part of the gold 
reserves in London. 

Council Bills and Telegraphic Transfers. 

This chapter would be incomplete without some explana- 
tion of the manner in which the sales of Council Bills and 
telegraphic transfers on India by the Secretary of State 
in London are carried out. These sales are considered to 
be the central feature of the machinery by which the 
Indian finance and currency system is at present managed. 
We have, so to speak, two bodies in the open market : 
on the one hand, the Indian Government requiring English 
currency for the purpose of paying for its purchases of 
bar silver, interest on loans contracted here, pensions due, 
and services rendered ; on the other, a group of bankers, 
financiers and importers of Eastern produce, desirous of 
settling their indebtedness to India in rupees. The Indian 
Government want sovereigns in London to pay their home 
charges, while the bankers and others need silver rupees or 
paper currency in India. This latter class know that there 
are only two ways of procuring rupees from the Govern- 
ment in India : a banker or merchant may present Council 
drafts, purchased in England at varying rates per rupee, 
or he may tender sovereigns in exchange for rupees at the 
fixed rate of Is. 4d. In ordinary times it suits the remitters 
to send out these bills purchased in London. 

As far as the Indian Government are concerned, they 
inherited this method of drawing funds from India from 
the old East India Company, and as the system is found to 
be a convenient one for all parties, the India office have 

^ In August, 1914, the Government announced that they were 
prepared to sell drafts on London at Is. 3||d, and telegraphic 
transfers at Is. 3ffd., to the extent of ;^ 1,000,000 weekly, in support 
of exchange until further notice. 



132 FOREIGN EXCHANGE AND FOREIGN BILLS 

continued it down to the present day. The practice in 
principle amounts to the seUing of rupees to the highest 
bidder, and the Indian authorities in London have made 
arrangements whereby would-be remitters may make 
definite offers, through the medium of the Bank of England, 
for so many lacs of rupees — a lac being equal to 100,000 
rupees. 

The plan followed is this : each Wednesday a notice is 
exhibited at the Bank of England stating the aggregate 
amount which will be allotted, and tenders are invited for 
the bills of exchange and telegraphic transfers on the 
Indian Government authorities at Calcutta, Madras and 
Bombay. There is no obligation to allot the whole amount 
stated, and as a rule, applications at prices lower than 
Is. 3|fd. per rupee for the bills and Is. Sifd. for transfers 
receive no allotment. Each applicant specifies at which 
place he desires to receive rupees, and if it is necessary 
for him to have funds immediately available at one or 
other of the centres named, the remitter will apply for 
telegraphic transfers ; but if a remittance by mail will 
suffice, he tenders for the drafts, and in the latter case, 
as the India Council has the use of his money for two or 
three weeks before rupees are paid over in India, a lower 
rate will be paid for the drafts than for the transfers, due 
allowance having to be made for the interest on the money. 
As a matter of fact, the price charged for telegraphic 
transfers is ordinarily higher by ^Vd. per rupee than that 
charged for bills, but when the Calcutta or Bombay Bank 
Rate exceeds 8 per cent., tenders for transfers rank for 
allotment with tenders for bills only if they are iVd. 
higher. Allotments, of course, are made to the highest 
bidders, the price varying in proportion to the intensity 
of the demand : the more the remittances are needed the 
higher will be the rates offered, and as in such times the 
total amount tendered for exceeds the amount offered, 
allotment is made pro rata. 

Each Wednesday, as soon as the tenders have been 



THE EASTERN EXCHANGES 133 

examined, a statement is issued giving the total applica- 
tions, the allotments, and the amount to be offered the 
following week. These particulars are available on 
Wednesday afternoons. 

Remittances can also be purchased on other days in 
the week, and the price charged is fixed by the India Office 
at not less than Ad. higher than the lowest prices at which 
allotments have been made on the preceding Wednesday. 
Bills and transfers obtained in this way are termed " Inter- 
mediates " or " Specials," and the exact rate chargeable, 
together with the maximum amount to be sold is fixed 
for the week each Wednesday. 

The primary object of this Government dealing in bills 
of exchange and telegraphic transfers was really the 
laying-down of funds in London to provide for the Secre- 
tary of State's Home Charges, but with the efflux of time 
and the necessity for maintaining the exchange value of 
the rupee, the system has been extended to meet other 
requirements. It was temporarily suspended when the 
Government decided to force the exchange value of the 
rupee up to Is. 4d., and later, in 1898, sales were resumed 
as a means of altering the location and disposition of the 
general resources of the Government of India, and thus 
provide the means in time of monetary stringency whereby 
currency could be readily and quickly expanded. Finally, 
the sales of these bills are so regulated as not only to meet 
the requirements of the Secretary of State for India, but 
also to satisfy the demands of trade up to such an amount 
as will enable the balance of trade in India's favour, over 
and above the amount of the Home Charges, to be settled 
without the export to India of more gold than is actually 
required there for absorption by the public. 



lo— (1525) 



CHAPTER XIII 

THE EASTERN EXCHANGES (CONTINUED). CHINA AND 
THE SILVER PROBLEM 

We have seen in the case of India that although the silver 
rupee is still the currency unit, yet the Government have 
formulated rules and regulations by which the exchange 
value is efficiently controlled, notwithstanding the 
fluctuations in the price of silver. 

Giirrency of China. 

With China, however, the position is not so satisfactory. 
Speaking generally, we say China is on a silver basis, but 
it is very difficult to say what exactly is the currency — 
each province seems to have its own ideas on the subject, 
and silver is legal tender for any amount and in any shape, 
national or otherwise. As far as the actual money of the 
people goes, the principal coin in daily use is the copper 
cash, worth anything from one-thousandth to an eighteen- 
hundredth of a tael. It is a very small copper coin, the 
modern replica of the li, which coin is said to have been 
in use in China for more than 3,000 years. The British 
community know the coin as " cash," but the French call 
it sapeque. 

The tael is not only the name given to a coin, but it is also 
the unit of weight which is in use all over China, and is 
taken to represent a Chinese ounce of silver, equal, 
according to the British standard, to 583 20 grains troy, 
but it varies considerably in different provinces. ^ 

The Mexican dollar also circulates in many places, 
and in the British Colony of Hong-Kong this dollar is 
widely used, but even there it is not the onlj^ currency 

^ In A.D. 1696 a tael of silver was worth 1,750 cash ; in 1889, 
it was worth 1,380 cash ; in 1905, 1,840 cash ; and in 1914, about 
1,400 cash. The value has varied between 3.000 and 9.000. 
(S. R. Wagel, Finance in China : Shanghai.) 

134 



THE EASTERN EXCHANGES (CONTINUED) 135 

unit. Indeed, as far as Hong-Kong is concerned the 
position can only be described as unique. Chopped 
Mexican dollars^ and British dollars form the circulating 
medium, but the dollar quoted in the exchange rates is 
that represented by the notes of the three British banks 
estabhshed there. The equivalent of these notes in terms 
of gold is, in fact, the basis for all foreign exchange 
settlements in the Colony of Hong-Kong. 

We have no space to go fully into the Chinese currency 
system — it would need several volumes to describe ade- 
quately the existing state of affairs, but some idea of the 
difficulties with which one has to deal may be gauged 
from the fact that not only does the tael as a weight, vary, 
but also its value as a currency medium : there are often 
wide differences between the taels of Shanghai, Peking, 
Hankow and Haikwan. Apart from these, the Chinese 
make payments by weight in silver bullion, known as 
sycee,^ i.e., fine silver, made up in the form of small ingots 
weighing approximately 50 taels. These pieces of silver 
are termed " shoes," and although they form an essential 
part of the monetary circulation in China, their issue is not 
directly under the cognizance of the Government : the 
making and assaying of the shoes is largely in the hands 
of those who cast them and of the bankers and money 
changers. 

The dollar coin, however, makes its appearance in many 
domestic and retail transactions, and as there are nearly 
a dozen kinds in circulation, the variation in value may 
better be imagined than described. The Mexican dollar 
is the one most favourably received, and there is conse- 
quently a greater number of those coins in circulation than 
of any other form of silver dollar. Various subsidiary 
silver coins, 5, 10, and 20-cent pieces, are also in circulation, 
and the existing chaos is not lessened by the fact that 

^ A " chopped " dollar is one bearing the " chop " or trade 
mark of the native dealer. 

' This term is derived from the resemblance of the metal to 
sat 5SU (fine silver). 



136 FOREIGN EXCHANGE AND FOREIGN BILLS 

some of the provincial mints are allowed to issue these 
subsidiary coins when it suits their convenience, for 
purposes of revenue. 

If there are variations in the value of the silver currency 
in the interior trade, there is very little wonder that 
difficulties are encountered when it is a question of foreign 
trade. It is acknowledged that commerce between gold 
standard countries is satisfactory to all classes of traders, 
for both importers and exporters know exactly the return 
they may expect, but in trade between a silver-using 
country and one on a gold basis, a large measure of uncer- 
tainty invariably exists. Whenever there is a fall in the 
gold value of silver, either the exporter in the gold standard 
country, or the importer in the silver country must 
suffer. 

Let us take the case of the exporter. We will suppose 
that A. Blank & Company, of Manchester, calico printers, 
send goods to Shanghai, which they hope to sell there for 
a total sum of, say, £1,000. The price of silver when the 
shipment was dispatched was, we wiU say, 25d. per 
standard ounce, and on this basis A. Blank & Company 
have calculated the selling price which is to yield them 
£1,000. By the time the calico arrives in Shanghai, the 
gold price of silver has dropped, we will suppose, to 20d. 
per standard ounce, and this obviously indicates that the 
manufacturers will receive one-fifth less for their wares, 
since they are paid in the currency of the province (taels 
in this instance), and when Blank & Company's money 
comes to be converted back into British gold pieces, 
they are face to face with the fact that the outturn is £200 
less than they had calculated : they have lost one-fifth, 
and receive £800 only. This is, of course, an extreme case, 
as in the ordinary course silver would be unlikely to drop 
5d. in the period between shipment and arrival of the goods 
in Shanghai ; but whatever the fall, the principle is the 
same, and the illustration serves to show exactly what 
happens. 



THE EASTERN EXCHANGES (CONTINUED) 137 

It is not only the British exporters who stand to lose in 
the lottery of trade with countries which have an unstable 
silver exchange ; the capitalist also, and every class of 
investor, is liable to be adversely affected in operations 
with silver standard countries. The rate of exchange 
between such countries and gold standard countries is 
plainly the exchange between gold and silver, therefore, 
if a person has invested in undertakings in the silver 
country, when he receives his dividends in the currency 
of that country, he will obtain less for his dividend warrant 
on the London market in proportion to the fall in the price 
of silver — assuming that it does fall. Conversely, he may 
reap a higher return on his investment if silver has gone 
up before the encashment of his dividend. 

Finally, the principal is affected in the same way, when 
ever it is desired to convert it back into gold. A further 
example will show how this works out in practice. 

We may assume that an investor, encouraged by the 
chance of earning 6 per cent, on his money, remits to 
China £1,000. The price of silver on the 1st January, 
1914, was 26T6d. per ounce standard; on the 31st December, 
1914, 22iid. For the sake of argument, we will imagine 
our investor sent the money out to the Eastern country 
on the 1st January, 1914, but circumstances made it 
advisable for him to recall his money at the end of December 
in the same year, when the metal had depreciated to 
22tH. ; in converting his principal back to British cur- 
rency he will find himself faced with a sharp loss. Silver, 
in which the investment stood, has dropped 3|-d. of its 
gold equivalent, roughly, one-seventh ; consequently on 
conversion the gold value of his original £1,000 has fallen 
to about £857. 

We may now leave the general question of the adverse 
effects of this depreciating silver currency medium, and 
pass on to a consideration of those exchange questions 
with which we are more particularly concerned in this 
book. 



138 FOREIGN EXCHANGE AND FOREIGN BILLS 

Exchange Rates. 

In the table given on page 40 it will be remembered 
the exchanges of these silver standard countries were 
quoted in shillings and pence to the dollar, tael, or rupee, 
as the case may be, that is, the gold value of the respective 
silver coins. Hong-Kong, for instance, is quoted Is. lOfd. 
to the dollar, and Shanghai, 2s. 5fd. to the tael. The 
rates from these centres, as was explained, indicate the 
price for telegraphic transfers on London : the unit of 
exchange in the centres named being by general consent 
the rate for telegraphic transfers on London 

Let us take the Shanghai rate as an example : 2s. 5f d. 
per tael, means that for every silver tael the remitter hands 
over to the exchange bank in Shanghai, 2s. 5|d., or, to 
give it its real significance, a little less than one-eighth of 
a sovereign in gold, will be paid to the person in whose 
favour the remittance is made, as soon as a telegram can 
reach the bank's London branch. 

Now, although the newspapers content themselves with 
giving the telegraphic transfer quotations onh^ Eastern 
bankers from whom they obtain the details, quote additional 
rates, and as the student may be called upon to carry 
through transactions, it will be well to refer to the other 
quotations. Besides the T. T. rate, as it is called for the 
sake of brevity, we have the four months' sight and six 
months' sight rates, which are the quotations for first- 
class bank bills. Both quotations are higher than for the 
telegraphic transfers, ^ that is to say, for every silver tael 
paid in Shanghai the bank will allow more shillings and 
pence where it is a question of paying the gold value in 
London four or six months hence, than it would if the 
payment is to be made on demand or by wire. The reason 

^ In addition to the T.T. rate, the banks quote a rate slightly 
higher for demand bills. The T.T. quotations given in the Press 
are what exchange dealers call the " selling rates " ; but the foreign 
banks also wire to their London agents the " 4 m/s. L/C." quotation, 
which is the " buying rate." On the day the Shanghai T.T. came 
forward as " 2/5|d.", the 4 m/s buying rate was 2/5|^d. As a rule, 
outward rernittances from London cost about ^d. over these rates. 



THE EASTERN EXCHANGES (CONTINUED) 139 

is, that if a bill drawn on London, payable four months 
after sight, is sent, the remitter is bound to place the 
receiver in such a position that if the latter chooses to turn 
the bill into cash after it has been " sighted " and accepted, 
he will not be worse off than if the money had been sent 
by cable. 

The rate for these time bills is thus in a large measure 
dependent upon the rate of discount ruHng in the centre 
upon which they are drawn. But the reader may very well 
remark that the banks in the East at times play the role of 
buyer. This is so ; there is no difference in the factors 
governing the price they will pay for merchants' bills 
drawn on London ; in this case also cognizance is taken 
of the discount rates ruling in London, or upon whatever 
centres the bills are drawn, and in each instance some 
account must be taken of the charges for stamp and other 
incidental items to which we have referred in discussing 
Continental exchanges. 

As may be gathered, therefore, the discount rates ruling 
on the London market are of great importance to the 
Eastern bankers and exchange dealers : so important are 
they in fact, that it is necessary for each side to keep in 
direct telegraphic communication regarding the existing 
discount quotations and the probable trend of the markets. 

As we saw when examining the principles which govern 
the sales of bankers' bills by the European bankers, and 
bankers in gold standard countries, it is the rate at which 
they are able to cover their drawing operations which 
governs the price at which they will sell bills. If a banker 
has funds deposited with his correspondent upon which 
he can draw, well and good : if he has no balance with 
the agent, he must either provide the wherewithal to meet 
the bills which he has drawn, or, alternatively, he can 
instruct the agent to draw on him in reimbursement. 
Finally, there comes a time, as we pointed out, when, as 
all other means of placing his correspondent in funds 
have been exhausted, the banker will be obliged to ship 



140 FOREIGN EXCHANGE AND FOREIGN BILLS 

gold in cancellation of his indebtedness. The position 
in regard to silver countries is exactly the same, the only 
difference being that the bankers will, as a last resort, 
ship silver to be sold for what it will fetch. 

With the depreciating silver standard, they have not 
the advantage of having a fixed price for the metal upon 
which operations can be based. Gold, on the other hand, 
as shown in the various illustrations we have given, has 
a fixed rate at which it is received in all the gold standard 
countries, and the mint parity forms a reliable and con- 
venient basis upon which exchange is calculated between 
the various centres. It is not so with silver ; there being 
no fixed price for silver, it is impossible to state a definite 
ratio for calculating the par of exchange between gold 
and silver using countries. All we can say is, that the 
rate of exchange depends upon the gold price of silver as 
fixed upon the London market each day ; hence it follows 
that the quotation for telegraphic transfers, upon which 
all other rates in silver countries are based, is itself governed 
by and follows the fluctuations in the price of silver. 

Experts in Eastern exchange have even attempted to 
define the specie points with these silver-using countries, 
and the following details, summarized from remarks 
made by Sir Charles Addis on the subject, ^ may perhaps 
better illustrate the course of these silver exchanges. 

The rate of exchange, it may be noted, although subject 
to the variations in the gold price of silver buUion, does 
not always respond to these changes, yet, broadly speaking, 
the gold price of silver is taken to form the limit above 
which, after adding importing charges, exchange cannot 
rise, and below which, after deducting export charges, it 
cannot fall. ^ 

^ In an address to the Shanghai Literary and Debating Society 
on " The Daily Exchange Quotations." 

* Some of the French experts prefer to use the expression 
" relative par " as more correctly describing the relation between 
gold and silver. The author of Le Porte feuille (M. P. Lepeltier), 
whose remarks we translate, says that this abstract expression is 
used to indicate that the exact ratio cannot be fixed, since in one 



THE EASTERN EXCHANGES (CONTINUED) 141 

A banker, then, in selling bills, is guided by the price 
of silver, and he will not draw and sell bills on his London 
branch over a lower silver price (or higher exchange) than 
he can purchase the same quantity of silver elsewhere, 
plus the cost of shipment to the centre in which he is 
operating. It must be remembered that the banker in 
this case is actually selling claims to gold in exchange for 
the silver he receives. The reverse operation is seen 
where the banker buys bills of exchange (claims to gold) on, 
say, London. In this instance he gives silver in exchange, 
and will not pay a higher silver price (which is a lower 
exchange) than that which would be obtained if he sold 
the silver for gold on some other centre : in this case it 
would of course be less the cost of transmission. 

In view of these factors, it necessarily follows that the 
gold price of silver is the fundamental basis for fixing the 
rate of exchange in the East, and taking Shanghai as the 
place from which we are operating, the exchange quotation 
is taken to be above the silver price when it exceeds the 
gold price at which the given quantity of silver, after adding 
the cost of importation, could be laid down in the centre 
named, and so much lower than the silver quotation when 
it is below the gold price at which the same quantity of 
silver could be sold in London, after deduction of exporting 
charges. 

It is fairly clear that the real trouble in Eastern exchange 
Hes in the fact that we have three main factors to deal with 
instead of two. In the gold exchanges we have simply 
the demand for and supply of bills and telegraphic transfers ; 
in the silver exchanges the matter is compHcated by the 
way in which we also have to depend upon the fluctuations 

of the countries gold will be merchandise, and in the other silver 
will be merchandise : consequently each will have a variable price 
like that of all other merchandise. The fluctuations in the price 
of silver in the country which considers it as a commodity will be 
in an inverse ratio to the price of gold in the other country : if the 
price of silver goes up in the first country, the quotation for gold 
will fall almost methodically and in the same proportion in the 
other country. 



142 FOREIGN EXCHANGE AND FOREIGN BILLS 

in the price of silver on the London market. We have 
seen how the alterations in the price of silver affect 
exchanges. As far as the fluctuations resulting from the 
interaction of the demand for and supply of bills are con- 
cerned, it may be said that they are exactly similar to 
those seen in drawing and remitting bills between gold 
standard countries. With a limited supply of bills and a 
keen demand, there will be competition among the banks 
for the paper, and the silver price will rise, or, stated another 
way, exchange will fall. Conversely, if there is an abund- 
ance of exports many mercantile bills will be offering, and 
merchants will take a lower silver price for them, that is, 
exchange will rise. 

For the rest, the case of China affords a useful illustra- 
tion of the point we have once or twice emphasized in this 
work, that is, it is the country drawing the bills which 
really settles the rate of exchange. We have already 
stated that where there are two countries trading together, 
one set of bills serves to Hquidate the double indebtedness 
which arises, and with the exchange business between 
China and Great Britain the same principles apply. John 
Chinaman number one draws on London for the value 
of his exports, while John Chinaman number two remits 
to London (through the intermediary of the bank) for the 
cost of the imports, and the one bill serves for the two 
transactions. That explains in one way why the rate of 
exchange is fixed in the centre drawing the bill, say, 
Shanghai : the other factors governing the case are 
explained by the banker^ we have already quoted, 
somewhat in the following terms. 

Shanghai draws on London for the cost of her exports 
and remits to London for the value of her imports, and the 
principal reason for this procedure is that the manufac- 
turer in Great Britain does not wish to be bothered with 
the variations in exchange, although, as the reader has 
seen, he may be pretty severely affected if silver has 

^ Sir Charles Addis. 



THE EASTERN EXCHANGES (CONTINUED) 143 

depreciated before his goods are sold. Leaving that out 
of the question, however, we may take it that as all his 
expenses are payable in gold, he naturally prefers to deal 
in terms of that metal. Consequently, goods shipped to 
China are nearly always paid for by remittances, or drawn 
for in sterling, which comes to the same thing. The 
Chinese producer is on rather a different footing. His 
expenses are in silver, and in silver he wishes to be paid. 
His produce, however, he has sold to Great Britain for a 
gold price, and either he cannot afford to, or does not 
want to wait until a remittance can be sent by mail from 
London. The one way open to him is to draw in sterling 
and settle the rate of exchange on the spot, which he does 
and so makes an end of the matter. 

It only remains to add that, apart from the fluctuations 
in the silver exchanges caused by the unstable condition 
of the currency, there is no difference in the causes which 
influence rates. All those factors in the fluctuations 
which fall under the heading of demand and supply of 
bills in gold countries, namely, trade conditions, Stock 
Exchange influences, and banking influences, are present 
in the silver exchanges, and if this is borne in mind there 
need be as httle difficulty in mastering the theory of 
exchange with the countries of the East as there is with 
the countries of the West. 



CHAPTER XIV 

THE METHODS BY WHICH OPERATORS ENDEAVOUR TO 

ELIMINATE EXCHANGE RISKS. EXCHANGE AS 

PER ENDORSEMENT. FORWARD EXCHANGE 

In countries where exchange is subject to sudden and 
violent fluctuations the question as to who shall bear the 
loss, if any, is one which causes all concerned in the transac- 
tion furiously to think. One more or less satisfactory 
way out of the impasse is to draw the bills with the clause 
" Exchange as per endorsement." The object of endorsing 
the rate of exchange on the bill is to transfer the liability 
for any loss in exchange on to the foreign importer, that 
is, the person on whom the bills are drawn. 

" Exchange as per endorsement/' 

The drawers of sterling bills on foreign centres usually 
insert the clause in bills before handing them to the 
bankers for sale, and hitherto it has been the practice for 
the bankers to complete the clause by endorsing on the 
bill the rate of exchange, and the drawer is then paid the 
amount of the bill less the usual commission and charges. 
This method has been found to work well so long as the 
rate of exchange was not too much against the foreign 
drawee when time for payment arrived, but at the present 
time, owing to the increasing number of cases in which 
the persons on whom bills of exchange are drawn refuse 
to pay the equivalent at the rate of exchange endorsed 
on the bills, the custom among some of the bankers is to 
quote the seller of the bill the rate and insist on his endorsing 
it on the bill himself. Under this arrangement any dis- 
pute which may subsequently arise when the bill is pre- 
sented can be referred back to the drawer for settlement 
between the drawee and himself. 

144 



ENDEAVOUR TO ELIMINATE EXCHANGE RISKS 145 

Forward Contracts. 

So far we have considered that all bills, etc., are bought 
or sold on the spot, but in countries having an unstable 
currency, there is a method by which both importers and 
exporters seek to remove some of the risks attendant 
upon the fluctuating exchange : they make forward con- 
tracts with the exchange banks for the purchase or sale 
of bills and telegraphic transfers as and when favourable 
opportunities present themselves. To the novice these 
operations may appear somewhat technical and involved, 
it will therefore be well to set out separately one or two of 
the transactions as they occur in actual practice. 

First of all take the case of the British exporter who has 
consigned goods to China. His agent there (the importer) 
has a ready market for the consignment, and is under 
agreement to put his principal in England in funds by a 
certain date ; he knows approximately the amount he 
will be obliged to remit to Great Britain, and to avoid the 
exchange risks he makes a contract with one of the exchange 
banks in China, Shanghai, for instance, for the purchase 
of a telegraphic transfer on London, deliverable on the 
date required, at an agreed rate of exchange. This is 
termed buying forward exchange, and the rate is called 
the " forward rate." When the date arrives the sum 
due is paid to the Bank in Shanghai in taels, and the remit- 
tance is forthwith sent by cable to the bank's London 
branch for payment to the British exporter, or whoever 
else is concerned, in sterling. 

Forward contracts for the purchase of bills from expor- 
ters from a foreign country to England serve a double 
purpose. They ehminate the risks of exchange both for 
the exporters who wish to have a certain fixed sum paid 
in exchange for their bills, and also for the importers who 
are under the obligation to remit by mail to the British 
or other exporters. For example, the Chinese exporters 
of the tea which arrives in England during August, know 
as far back as April or May that they will have to draw 



146 FOREIGN EXCHANGE AND FOREIGN BILLS 

sterling bills on firms in London, and if the exchange 
quotations are favourable they will endeavour to make 
forward contracts with the bankers to purchase the tea 
bills, deliverable, say, two or three months hence. So 
much for the Chinese exporter, but there is also the 
importer who desires to operate in the reverse way. In 
his case he may perhaps want to make a remittance by 
mail in payment of cotton goods he has imported from 
Manchester, and knowing the date the funds ought to 
leave China, he can contract with the bankers in advance 
for the remittances at any time the rate appears suitable. 
We are, of course, assuming in each case that the banker 
is willing to operate ; but it sometimes happens that the 
exchange dealers consider they have sufficient forward 
exchange commitments, and in that case they will refuse 
to make offers. 

It now begins to dawn upon us how the astute banker 
can set one operation off against the other. He is under 
contract to pay the tea exporter, say, £1,000 on the 31st 
July : on the same date the Chinese importer is under 
contract to pay him £1,000 to remit to London. Further 
explanation is hardly necessary. With the funds received 
from the importer the banker pays the exporter for the 
bills the latter delivers, and, finally, the bills are sent to 
London to be turned into cash by the bank's London 
office, who will pay in good time the person to whom the 
Chinese importer has remitted. 

As regards telegraphic transfers, forward contracts must 
be covered by the bankers, and this is done by their pur- 
chasing bills of exchange drawn on the same centres as 
those upon which they have sold telegraphic transfers. 
For instance, if a banker has sold telegraphic transfers on 
London three months forward, he will endeavour to purchase 
bills of exchange to mature in London on the same date as 
that on which the telegraphic remittance will have to be paid. 
The proceeds of the bills falling due in London therefore 
form the fund out of which he pays the telegraphic transfers. 



ENDEAVOUR TO ELIMINATE EXCHANGE RISKS 147 

To avoid misconception, it should be noted that in the 
case of these telegraphic transfer contracts, no payments 
are made by the contracting parties until the date when 
the contracts are taken up. 

Once the contract for forward exchange is made, the risk 
on exchange fluctuations is transferred from the exporters 
and importers to the banker, and the margin of profit 
which the latter has made on the rates will be increased or 
diminished in proportion to the rise or fall in the exchange. 
Events sometimes favour the one class of operator, some- 
times the other, and while the traders say it is the bankers 
who always reap the gain, the banker solemnly avers that 
his margins are reduced to the narrowest possible point 
by the very good rates the traders exact when selling 
him their mercantile bills. However, like so many other 
operations we have investigated, the bankers' profits 
depend upon the rates at which they ultimately make 
purchases to cover their forward sales. 

For the rest, the speculation being transferred to the 
bankers, it is they who stand to lose should exchange go 
against them, and it is they who will have to make 
shipments of the precious metsds if for any reason there 
is a shortage of cover for the contracts they have entered 
into. 

This concludes our examination of the general theory 
and practice of Foreign Exchange. In the following 
chapters we shall discuss the various forms of credit 
instruments which represent the outward and visible 
sign of international indebtedness. 



CHAPTER XV 

ON CREDITS. TRAVELLING LETTERS OF CREDIT. THE 
SIMILARITY AND DISSIMILARITY OF CONFIRMED AND 
UNCONFIRMED CREDITS, IRREVOCABLE CREDITS, CLEAN 
CREDITS, DOCUMENTARY CREDITS, LONDON ACCEPTANCE 
CREDITS, OMNIBUS CREDITS, AND REVOLVING CREDITS 

The wisdom the reader has acquired, or which we hope he 
has acquired, from a study of the preceding pages will be 
of little avail unless the acquisition be coupled with under- 
standing. Experience and knowledge are both excellent 
qualities, but either or both are of small utility unless their 
possessor has the power of applying them critically or 
practically. The drift of this thin attempt at moralizing 
is that we shall have spent our time to little purpose unless 
we are sufficiently conversant with the instruments which 
serve as the international media of exchange to be able to 
explain their place in that great fabric, the world's credit 
system. To arrive at a correct understanding of the many 
and varied foreign bills of exchange in existence, then, 
we must start by investigating the forms of authority 
under which they are drawn. 

Travelling Letter of Credit. 

Since the ordinary travelling letter of credit is familiar 
to most people, we may take that as a starting-point. It 
may be defined as a request from a banker to his foreign 
correspondents to cash on demand the drafts of the holder 
of the letter of credit on the issuing bank, the latter 
undertaking to meet the drafts when presented. Persons 
purchasing these letters of credit from the banks usually 
pay cash down, plus a commission of about J per cent, 
on the total amount of the credit, although if the credit is 
desired by a good and influential customer of the bank, it is 
not unusual to issue it free of commission. It sometimes 

148 



ON CREDltS 14§ 

happens, too, that a bank or finance house of high 
standing purchases a letter of credit from a bank with 
foreign branches, and where the amount is paid at the time 
of issue, the credit would be granted free of charge. 

If a travelling letter of credit is granted for use on one 
centre only, the banker will immediately on issue advise 
his correspondent, and at the same time send him a specimen 
signature of the beneficiary. In most cases, however, 
travellers require money to be available in a large number 
of cities, and as it would not be possible to advise and dis- 
tribute specimen signatures ad infinitum, the credit is 
drawn up in such a form that it bears a space for the 
accredited party's signature, which can be compared by 
the banker with the signature of the person who 
subsequently presents the letter of credit. 

Each letter of credit has with it a list of the bank's 
branches or correspondents in foreign towns, and when 
the holder is abroad reference to this list will show him 
where he can obtain cash. Payments under the letter of 
credit are made in exchange for either a signed receipt or 
a draft drawn to the order of the paying banker : some 
correspondents prefer one form, some the other, although 
in practice both documents are really treated as demand 
bills. Each instrument bears, besides the usual particu- 
lars, the number of the credit and the date. It is the 
foreign correspondent who hands these bills for signature 
to the presenter of the letter of credit, and after he has 
satisfied himself that everything is in order, the corre- 
spondent enters the amount drawn on the back of the 
credit, and then pays the equivalent in local currency at 
the rate of the day for demand bills on London. The 
draft or receipt is subsequently dispatched to London 
for payment by the issuing bank, and on arrival it must 
be stamped with a penny stamp — the Inland Revenue 
duty on cheques or bills payable on demand or at sight. 

Sometimes foreign banks charge a small commission 
for encashing drafts under letters of credit, but more 

II— (1525) 



150 FOREIGN EXCHANGE AND FOREIGN BILLS 

frequently they obtain their profit in the rate of exchange 
at which the amounts drawn are converted into local 
currency. 

Confirmed Banker's Credit. 

Another form of credit often issued by home, foreign 
and colonial banks, is what is known as a confirmed banker's 
credit. 

A confirmed banker's credit may be defined as a credit 
opened by a banker, setting forth certain conditions and 
stipulations under which he agrees to accept the bills 
drawn by a foreign shipper, as and when presented to him, 
up to a certain specified sum. This document is largely 
used in financing foreign trade, which need not necessarily 
be confined to this country : although the credit may be 
opened from London, it may refer to shipments from the 
foreign country to Continental centres. 

The commission charged is usually about IJ per cent, 
per annum on the amount drawn under the credit, but 
varies, of course, in different institutions, according to the 
standing of the firms requiring the accommodation, and 
the risks involved. It should be noted that the banks do 
not like to issue these credits for more than six months ; 
they prefer to hmit their risk to that period. 

A confirmed banker's credit will be better understood 
if it is pointed out that the credit is generally opened by 
a bank or finance house on this side, at the request of an 
importer, for the purpose of enabhng a merchant or shipper 
abroad to draw bills on the bank against shipments, say, 
to London. The bank granting the confirmed credit 
undertakes to honour the shippers' bills, if drawn in accord- 
ance with the various stipulations in the credit, and the 
credit often contains a clause similar in form to the 
following : " and we hereby undertake to accept bills 
as drawn on presentation by a bond fide holder." 

In the face of this clear and unequivocal clause, it is 
plain that drafts drawn under the confirmed bank credit 



ON CREDITS 151 

must be accepted provided the provisions of the credit 
have been carried out correctly. The position, however, 
is not so clear in the case of the revocation of such a credit. 
It is a moot point whether it is politic or even admissible 
to revoke such a credit after confirmation by the drawee 
bank to the payees, the foreign exporters. Some authori- 
ties go so far as to say that confirmed bank credits cannot 
be revoked or cancelled when once the exporters have been 
notified of their issue, and in this country at least, judicial 
rulings seem to uphold the contention that even if notice 
of cancellation has been sent and received, a bank is still 
under the obligation to accept the bills drawn upon it if 
the exporter elects still to draw. 

Unconfirmed Banker's Credit. 

In contradistinction to a confirmed banker's credit, we 
have what is known as an unconfirmed banker's credit, 
a term which hardly merits the inclusion of the word 
" banker's " in it, for in many cases the banker is merely 
the intermediary through whom it is advised. In fact, 
it is often merely an authorization by the importer to 
his principal, the exporter, to draw bills on a certain 
bank, without the previous consent of that bank having 
been obtained. There are thus two cases in which these 
so-called credits are issued, and the different circumstances 
in which they may arise may be summarized as follows. 

In the first place A, the British importer, asks one of the 
London banks, say, the City and Midland, to arrange for 
the National Bank of India in Calcutta to buy the Indian 
exporter B's bills drawn on the London City and Midland 
Bank for account of A. The London City and Midland 
Bank here sends advice of this to the London office of the 
National Bank of India, at the same time asking that 
bank to advise its Calcutta office that it may negotiate 
B's bills drawn on the London City and Midland Bank, 
but it should be noted that there is no actual undertaking 



152 FOREIGN EXCHANGE AND FOREIGN BILLS 

on the part of the City and Midland to accept the bills, 
although in practice, acceptance is not generally refused. 
The following specimen will give some idea of the form of 
such a credit. 

Credit No. 69. Blanktown, 26th May, 191.. 

To A.B. 

Somewhere in the East. 

By this letter we beg to open with you an Unconfirmed 

Credit in favour of CD. & Co. for an amoufU of £ 

available by drafts drawn at months date or sight, 

against delivery of the following documents — 

Bill of Lading issued " to order " and blank endorsed. 

Policy of Insurance. 

Invoice. 

Certificates of Origin. 

[Signed) E.F. & Co. 

In the second case, the unconfirmed credit may be 
advised out without reference to the London City and 
Midland Bank at all : the importer goes direct to the 
London office of the National Bank of India, asks the 
manager there to advise the bank's Calcutta branch to 
purchase B's bills on the London City and Midland Bank, 
hoping that he may be able to make the necessary arrange- 
ments with the latter bank before the bills, which the 
National Bank of India will buy from B, arrive. If the 
London City and Midland Bank refuse to accept the bills, 
the presenting banker will inform importer A, and A then 
goes round to some of the other accepting banks and 
endeavours to arrange matters with them. 

In any case the banker negotiating the bills has the 
documents of title to the goods against which the bill is 
drawn, attached to the draft, and these he will not part 
with until the bill is either accepted or paid. 

It will be seen, therefore, that in opening unconfirmed 
credits one is given to understand that a bank may, and 
will accept the bills if in order, but at the same time no 



ON CREDITS 153 

definite undertaking to accept is given. Moreover, there 
seems to be an unwritten law that such credits may be 
cancelled by the bankers at any time it appears advisable 
so to do, which may be all right as far as the banker is 
concerned, seeing that he has never really bound himself 
to accept the bills. The view taken by the bankers seems 
to be that morally he is liable, legally he is not, but the writer 
is of opinion that by causing the credit to be advised to the 
exporter, the banker does get very near giving an implied 
warranty to accept the bills. The case of the exporter 
or manufacturer who has acted on the strength of the 
advice of the issue of the credit seems to be on a different 
plane, and there is reason to suppose that if ever cancellation 
forms the cause for legcd action, the decision will be that 
unconfirmed credits are only subject to revocation to the 
extent that they shall not have been acted upon when 
notice of revocation or cancellation is received by the 
exporter or whoever the user may be. 

It may be noted in passing that third parties, that is 
foreign banks or exchange dealers, purchase bills drawn 
under confirmed banker's credits on the security of the 
drawee bank : the credit which the exporter produces 
when offering bills for sale is proof of his right to draw, 
and is the agreement of a first-class London banker to 
accept the bills. With bills drawn on the strength of the 
issue of an unconfirmed bank credit, the foreign or Colonial 
banker relies to a certain extent upon the possibility of 
the London banker's accepting them, but knowing the 
risks attendant upon the business, he also pays special 
attention to the standing of the other parties to the 
transaction — the importer and exporter. 

Drawers of bills under these unconfirmed credits have 
constantly endeavoured to eliminate their responsibihty 
by insisting on the credits being issued " without 
recourse," the effect of which is that the drawer of the 
bill, once he has negotiated it through the London bank, 
or, if abroad, through a foreign bank, has no further 



154 FOREIGN EXCHANGE AND FOREIGN BILLS 

responsibility on it, and if anything is wrong the banker 
can only look to the drawee for repayment of his advance. 
For this reason bankers are very chary about advising 
credits " without recourse." 

Irrevocable Credit. 

Shippers sometimes protect themselves by insisting on 
what is termed an irrevocable credit. Cases have come 
under the writer's notice where a manufacturer or shipper 
has refused to take orders from abroad, unless he is quite 
sure of obtaining payment immediately the goods are 
ready for shipment. With a credit of this nature the 
exporter is perfectly sure, too, that the opener cannot 
cancel it until the contract for the sale of the goods it is 
intended to finance is completed. 

Glean Credit. 

The next instrument to be considered is what is called 
in market jargon, a clean credit. To the uninitiated 
the name is no clue to the real nature of the credit ; 
the appellation is derived from the fact that bills 
are drawn under the credit without documents in any 
shape or form being attached, in other words, absolutely 
clean. Clean credits are generally opened by firms abroad 
in favour of shippers or merchants in this country, or, 
conversely, may be opened by importers in London in 
favour of foreign exporters, and the procedure followed 
when opening the credit is this : A B goes to a bank in 
his own city and informs them of his desire to open a 
clean credit. The banker then gives him a form to fill up 
and sign : in it A B states that he wishes the credit to 
be in favour of C D, whom he thereby authorizes to draw 
bills on him to the extent of so many pounds sterling, 
at so many days' or months' date or sight, as the case may 
be, and in consideration of the bank's bu5dng (the banker 
calls it " negotiating "), C D *s drafts, A B engages to 
accept and pay them at maturity, provided they do not 



ON CREDITS 155 

exceed in the aggregate the sum named in the credit. The 
credit is available only for a certain period, usually not 
exceeding six months, and to preserve his recourse on A B, 
the drawee, the banker must not allow C D to draw bills 
after the date indicated in the credit. 

In most cases drafts drawn under clean credits represent 
bond fide shipments, the documents for which have been 
sent direct to the consignees, but in some instances it is 
quite manifest that the bills are drawn by persons or 
firms speculating in exchange, and for this reason banks 
opening the credits exercise a wide discretion in granting 
the accommodation. The risks involved are obvious ; 
if for any reason the drawee does not accept or pay the 
bills in accordance with the undertaking he has signed, 
there is no security in the shape of documents of title to 
goods for the bank to fall back upon, and the only remedy 
is to seek out the drawer of the bills and endeavour to 
obtain repayment of the amount advanced — often a diffi- 
cult and unsatisfactory task. Clean credits are, therefore, 
generally advised by the bankers only for firms of the 
highest standing, and if a banker has any doubt about the 
position of the parties to the credit, he insists upon a 
margin being deposited with him, consisting of actual 
cash or securities, and he sometimes secures protection by 
obtaining a suitable guarantee from a third party. J 

Documentary Credit. 

Another form of credit which is familiar to most persons 
dealing in foreign exchange, is that known as a documentary 
credit, which it will be seen is merely a variation of the 
unconfirmed credit previously referred to, although in 
this case it is usually a mercantile firm which accepts the 
bills ; not a bank. 

As a rule, a documentary credit is opened at the request 
of an importer, who approaches the bank, either here or 
abroad, according to which side is shipping, and having 
acquainted the bank with his desire to open the credit, 



156 FOREIGN EXCHANGE AND FOREIGN BILLS 

he is handed a form to fill up and sign. In this form he 
states that he wishes to open a documentary credit in 
favour of the foreign exporter, A B, of Blanktown, 
mentions the total sum for which the credit is to be made 
available, and states whether one or a series of drafts is 
to be drawn. He also gives a few particulars of the 
merchandise to be shipped, and agrees to effect the marine 
insurance on the goods. In consideration of the bank's 
agreeing to make advances on the bills which A B may 
draw on him up to a certain specified amount, he, the 
importer, engages to accept and pay them at maturity 
if drawn in accordance with the terms of the credit. 

This credit has the two-fold advantage of enabling the 
exporter to obtain payment for his wares immediately 
they are ready for shipment, and the foreign importer to 
obtain delivery of the goods at the port of destination on 
acceptance or payment of the bill. 

Each bill drawn under the credit is accompanied by a 
full set of shipping documents, usually invoice, bill of 
lading, and insurance policy, all duly hypothecated to 
the bank as security for the due pa5niient of the bills, and 
by examining these documents of title to the goods, the 
banker is able to see that the conditions of the credit are 
comphed with. 

Very often the exporter is allowed to draw for the full 
value of the goods as invoiced, but if shipments represent 
speculative merchandise, it is customary to permit only 
a percentage to be drawn for. 

The difference between this credit and a confirmed bank 
credit is emphasized when it is remembered that the notice 
of the opening of a documentary credit which is served on 
the exporter, often contains a clause pointing out that it 
is not to be considered as a bank credit, and does not 
relieve the exporter from the liability usually attaching 
to the drawer of a bill of exchange. Further, that although 
the credit is to be considered as open for, say, six months 
(the exact time is specified), it may be cancelled by the 



ON CREDITS 157 

bank upon giving notice to the parties concerned. The 
name " documentary credit " would therefore appear to be a 
misnomer : it is more correct to regard a documentary 
credit as an authorization by the importer to the banker 
to make certain advances to the exporter, on the joint 
responsibihty of importer and exporter. 

London Acceptance Credit. 

The exigencies of modern commerce have called into 
being still another form of credit, a variation of the con- 
firmed banker's credit, which, although not encouraged 
in some quarters, tends to become more common every 
day. Where a British exporter is held in high esteem, a 
foreign branch bank may open what is called a London 
acceptance credit, which entitles him to draw bills on 
the London branch of the bank up to a certain limit, 
previously arranged between the parties. 

A credit of this nature is more particularly used where 
exporters are consigning goods to a foreign branch of 
their own firm, although it may be, of course, utilized if 
the goods are consigned for sale to agents. 

When a London acceptance credit is opened there will 
often be no formal document exchanged ; the matter is 
often settled by the exchange of letters. However, as 
soon as the details of the transaction have been agreed to, 
the shipper prepares his bill of exchange, attaches the 
requisite shipping documents, and presents the complete 
set to the banker. The bill, it should be noted, is drawn 
at three or six months' date on the London banker, who, 
if everything is in order, detaches it from the other docu- 
ments, accepts it, and returns the bill completed to the 
drawer, the British exporter. The shipping documents 
are then forwarded by the banker to his own branch abroad 
for delivery to the consignees. A small commission is 
charged for this accommodation, and in reality the trader 
pledges his goods with the banker, for he signs a letter of 
hypothecation giving the banker a lien over the shipment. 



158 FOREIGN EXCHANGE AND FOREIGN BILLS 

and also undertakes that the proceeds of the consignment 
shall be remitted to London through the foreign branch 
bank at or before maturity of the bill, upon which the 
banker has now become liable as acceptor. The com- 
pleted bill in the hands of the drawer is now a bank 
acceptance, and as such it can be turned into cash 
immediately at the best rates on the London discount 
market. 

The shipper does not always draw for the full value of 
the shipment, as the banker will sometimes accept for 
only 75 per cent, of the invoice value, but in all cases the 
banker's accepting bills under these credits is considered 
as an advance on the security of the whole of the shipment. 
Moreover, he does not lose his recourse on the drawer by 
the mere fact of his delivering the produce to the foreign 
consignees, since in the Letter of Hypothecation the 
exporter signs in London, he specially undertakes that 
when the documents of title to the goods are delivered to 
the consignees, the latter are to hold them until realization, 
and the proceeds of sale after realization, in trust on behalf 
of the banker. A further point to be noticed is, that if 
for any reason sufficient funds should not be forthcoming 
to repay the banker for the amount of his advance, as 
represented by the bill or bills he has accepted and will 
have to pay at due date, then the exporter engages to 
make up the deficiency forthwith. 

Omnibus Credit. 

London banks and finance houses sometimes enable 
shippers to obtain prompt payment for their produce 
by issuing an instrument called, in the language of the 
Money Market, an " omnibus credit." This credit is 
generally granted to firms of high standing, who give the 
banks a general lien over their goods and, in return, are 
permitted to draw round amounts against them. 

The comparative economy of the various methods 
employed in financing foreign trade by means of the 



ON CREDITS 159 

various credits we have described, will be further explained 
when we come to examine the actual bills drawn. 

Revolving Credit. 

In conclusion, it may be stated that most of the credits 
which are opened for the purpose of enabling exporters to 
obtain payment for goods as and when ready for shipment, 
can be made into revolving credits, and in order to dispel 
the misunderstanding which often exists as to the exact 
nature of revolving credits, some explanation is necessary. 

There are really three forms of revolving credit, and 
the first and most familiar form is one which permits the 
exporter to draw drafts up to, say, £1,000 outstanding 
at any one time : the bills, of course, will be drawn at 
various intervals, as the goods become ready for ship- 
ment. In due course the £1,000 hmit is reached, but as 
soon as sufficient time has elapsed for the first bill to be 
paid, or for advice of payment to reach home, whichever 
may be arranged, the credit becomes automatically re- 
available until the actual amount outstanding again 
reaches £1,000. 

The second form of revolving credit is one which enables 
the accredited person to draw, say, £500 at any one time 
in one draft. When that bill has matured and been paid, 
he is at liberty to draw a further £500. 

In the third case, the revolving credit is opened for, say, 
£500, and as soon as that amount is drawn the credit is 
again available for the original amount. In point of fact 
this last form is practically a credit for an unlimited amount 
but with this restriction, that the sum for which the credit 
is opened must be drawn in a single bill. 

The benefits conferred upon the trading and mercantile 
community by the issue of commercial letters of credit 
will now be patent to the reader. As far as the exporters 
are concerned, as soon as their goods are ready for ship- 
ment they are given the power to draw bills for the cost of 
their commodities, and the banker pays the whole sum 



160 FOREIGN EXCHANGE AND FOREIGN BILLS 

due, or a large proportion of it, without its being incumbent 
upon the exporter to wait for the return of his money. He 
is practically saved interest on his money for the lengthy 
period which must elapse between the dispatch and receipt 
of the goods abroad, plus the time the bills drawn have 
to run after acceptance by the foreign drawee. A manu- 
facturer or merchant is thus able to turn his money over 
much quicker than would otherwise be the case, and this 
economy of time and money not only lowers the cost of 
production, but facilitates further production. 

The importers in their turn have the advantage of being 
able to deal with the goods some time before it is necessary 
to pay for them, and the period between their acceptance 
of bills and payment is in most cases sufficient for them to 
realize the merchandise and have the proceeds in hand 
ready to pay the bills at due date, without its being 
necessary for them to touch a penny of their own capital. 



CHAPTER XVI 

BILLS DRAWN UNDER VARIOUS CREDITS. SHIPPING 

DOCUMENTS ATTACHED TO FOREIGN BILLS. BANKER'S 

SECURITY WHERE DOCUMENTARY BILLS ARE 

NEGOTIATED. CURRENCY BILLS 

The demand bills to which travelling letters of credit 
give rise call for no further comment, beyond the fact 
that they are one of the constituents of that great mass 
of foreign bills which constantly exercises an influence on 
the exchanges. 

Bills drawn under Confirmed Banker's Credit. 

To arrive at a correct understanding of the bills drawn 
under the confiiTned banker's credit we will trace a sup- 
posed transaction. A in Spain is an importer of hides, 
B is the exporter in Calcutta. The operation will be 
financed in the following way : A in Spain would request 
his bankers, the Bank of Spain, to instruct their corre- 
spondents in London, say, Lloyds Bank, to issue a con- 
firmed credit in favour of B, and the credit is drawn up 
and forwarded to B. When B has the hides ready for 
shipment, he draws his draft, say, at sixty or ninety days' 
sight on Lloyds Bank, London, for the invoice cost, 
takes it, together with the complete shipping documents, 
to a local banker in Calcutta, say, the National Bank of 
India, who, after proper examination, will purchase the 
bill and endorse the amount on the letter of credit, which 
is then returned to B for future use. The bill of exchange 
and the shipping documents are then sent to London by 

161 



162 FOREIGN EXCHANGE AND FOREIGN BILLS 

the National Bank of India for presentation to Lloyds 
Bank, who in due course will accept the bill for account 
of the Spanish Bank and receive the shipping documents, 
which will subsequently be forwarded to Spain. The 
bill itself will be retained in London, and will probably 
be sold on the discount market by the National Bank. 

The Bank of Spain, or its agents, will care for the ship- 
ment when it arrives, or will arrange that A takes delivery 
of the hides under certain agreed conditions, payment 
finally being made to the bank in one or other of the 
methods described in the preceding chapter. 

We might have chosen a direct operation between Great 
Britain and India, but our object in giving this three- 
cornered transaction as an example was to emphasize the 
fact that the biUs are often drawn on London for shipments 
which do not enter this country at all. 

One other point calls for attention in regard to the bills 
drawn under confirmed bank credits ; as they are drawn 
on first-class London bankers, there is not the slightest 
difficulty in disposing of them, and immediately the letter 
of credit is produced, foreign bankers and exchange dealers 
will be glad to purchase the bills, as they know that the 
risk is practically infinitesimal. That is really the raison 
d'etre of a banker's credit. Bills drawn on foreign im- 
porters, of whom the bank to which they are offered for 
sale knows nothing, would receive scant attention, and the 
most the banker would offer to do would be to send them 
for collection ; but with the name of a first-class London 
bank or accepting house on the bills as drawee, the whole 
aspect of the transaction is altered, and the seller is able 
to exact the finest rates from bankers purchasing the 
paper. 

Bills under unconfirmed banker's credits were discussed 
at some length in the last chapter; it only remains to 
add that although readily negotiable, they do not command 
quite such good rates as those drawn against confirmed 
banker's credits. 



BILLS DRAWN UNDER CREDITS, ETC. 163 

We mentioned the case in which bills drawn on a London 
banker against unconfirmed credits without previous 
arrangement might be refused acceptance. The reasons 
for the banker's refusing to lend his name to the bills are 
diverse, but generally it will be found on investigation 
that, having already accepted other bills for the cHents, 
the banker considers the amount for which he is hable 
as acceptor is sufficient in view of the customer's financial 
responsibihty. He therefore declines to add to the risk 
until some of the bills have been provided for. In such 
circumstances it is incumbent upon the importer to get 
some other bank to accept the bills drawn, and the London 
office of the foreign or colonial bank holding the bills may 
subsequently be asked to present the bills for acceptance 
elsewhere. As an alternative, if the importer can get no 
other bank to accept for him, he will have to provide the 
necessary funds to take up the bill and so procure the 
documents for the goods he is anxious to obtain. 

We might mention here, what ought perhaps to have 
been emphasized earlier, that in most cases where a banker 
agrees to accept bills for a cHent, he obtains some satis- 
factory written undertaking from that cHent to provide 
funds to pay the bills by the time they arrive at maturity. 

Bills under Glean Credit. 

Bills drawn under clean credits are in some respects 
unsatisfactory documents to deal with, since in the event 
of anything happening to the parties operating, there is 
no collateral security upon which the banker or his agents 
can foreclose. The reason given by most exporters who 
do adopt this method of finance is, that by sending the 
shipping documents for their produce direct to the con- 
signees much time and trouble is saved, and the importer 
is often placed in the position to deal with the goods long 
before the bills arrive if passed through the bank. The 
custom in some trades of selling commodities forward is 
presumably what is referred to, as in the ordinary course, 



164 FOREIGN EXCHANGE AND FOREIGN BILLS 

bills and documents sent by mail often arrive before the 
steamer carrying the goods, in which case there would 
appear to be no obj ect in sending the documents in advance 
to the consignee. However, the point is that such bills 
are drawn, and as we mentioned, they are often taken from 
first-class firms of high financial responsibility. Where 
a clean credit is opened, all the exporter has to do is to 
present his bill to the bank, generally in duphcate, and if 
properly drawn, the banker buys the bill and sends it to 
his foreign branch, agent, or correspondent, who presents 
it for acceptance and at maturity remits the proceeds to 
the banker who had purchased it from the exporter in 
London, or abroad, as the case may be. 

Bills under Documentary Credit. 

Bills drawn under documentary credits form one of the 
principal items in a foreign exchange banker's business, 
and the paper is known by various names ; documentary 
bills, documentary paper and hypothecation paper, all 
refer to the same class of bill. These bills are drawn by 
the exporter on the importer, and it is necessary in all cases 
for the former to have the shipping documents relating 
to his goods to attach to his bills. They must be sent in 
to the banker in complete sets ; besides the bills of 
exchange in duplicate or triphcate, there will be the bills 
of lading, marine insurance pohcy, certified invoice, and in 
many cases a certificate of origin or consular certificate 
is required, also in duplicate or triplicate. With these 
documents in his possession it is then time for the exporter 
to present the bills to the bank for sale. After examination 
of all the documents, if everything is in order, the banker 
will pay the drawer the agreed amount and will then remit 
the bills and shipping documents to their destination. 

It depends on the terms of the credit whether or not the 
shipping documents are delivered to the drawee against 
acceptance or against payment. If it is intended that 
they shall be handed over on acceptance of the bill, there 



BILLS DRAWN UNDER CREDITS, ETC. 165 

will be a statement to that effect in the documentary 
credit ; in the absence of such a clause, it is always under- 
stood that the banker must hold the documents, and, 
for the time being, the goods, until the drawee pays the 
bill. As a rule, the clause, " Documents on Payment," 
does not appear in the credit. 

Now let us examine a few of the essential points in the 
documents which accompany these bills. 

The bill of lading, being the actual document of title 
to the goods, is the most important, so we will take that first. 

Most bankers negotiating documentary bills insist that 
the complete set of bills of lading which accompanies these 
drafts must be made out " to order," and blank endorsed. 
A blank endorsement, as the reader is probably aware, 
is formed by the person in whose favour the bill of lading 
is made out endorsing his name on the instrument : thus, 
if the bill of lading is to the order of John Jones, he simply 
writes on the back " John Jones." The effect of such an 
endorsement is to make the goods deliverable to the holden 
and as long as the bank or its agents retain possession of 
the bills of lading, their title to the merchandise is un- 
impeachable. It is obvious that a bill of lading to the 
order of the consignees would defeat the bank's claim to the 
goods until the consignee had endorsed the bills of lading ; 
consequently, in such a form they should not be accepted. ^ 

It is customary also to require the bills of lading to be 
marked by the shipping company " Freight Paid," other- 
wise the bank purchasing the drafts to which these are 
attached, might find itself mulcted in heavy charges, 
which would considerably detract from the Vcdue of the 
security they hold. In some cases the freight receipt is 
attached. Too much care cannot be taken in regard to 

^ " Chapter 31, Sub -section 4 of the Customs (War Powers) Act, 
1915, now makes it obligatory in certain cases for the exporters to 
insert the names of consignees in bills of lading. To meet the 
requirements of the Act, and also those of the negotiating banks, 
the bills of lading are therefore being made out in the following 
form : ' Shipped unto A B (the consignee) at the order of C D 
(the shipper).' CD endorses the bill of lading and the bank's 
security is intact," 

12— (1525) 



166 FOREIGN EXCHANGE AND FOREIGN BILLS 

bills of lading, especially where the freight is concerned. 
As is well known, the captain has a lien over all the cargo 
for his freight, and if this is not paid when the ship arrives 
at its destination, the bank negotiating the bill may be 
faced with serious loss. The goods will not be held over 
indefinitely awaiting the settlement of the dispute between 
the consignee and the bank, but will promptly be placed 
in the care of the port authorities by the captain, and 
should the banker find it necessary eventually to take 
charge of the goods, he will be saddled with other heavy 
expenses besides the freight, all of which he may have 
difficulty in recovering. Incidentally, it may be pointed 
out that care should be taken to see that all copies of the 
bill of lading come into the possession of the banker who 
purchases the bill of exchange, for the reason that as one 
copy has no priority over the other, dehvery is made to 
the person who first presents a duly authenticated copy. 

When a bill of exchange having the relative documents 
attached, is presented for acceptance, the drawee has 
no property in such documents until he either accepts or 
pays the bill, and the Sale of Goods Act specially recognizes 
the importance of the bill of lading in this connexion. 
Section 19, Sub-section 3, definitely enacts that the person 
to whom one of these bills of exchange is sent cannot retain 
the bill of lading unless he honours the bill, that is, either 
pays or accepts it on the spot. ^ 

The marine insurance policies, or certificates for insur- 
ance which accompany the draft, should be in favour of 
the bank, or if drawn out in favour of the drawers, then 
blank endorsed by them. The reason for this proviso is 
to ensure the value of the shipment being paid to the bank 
in the event of loss : the bank, or the person to whom it 

1 The following is the actual wording of the sub -section in 
question — 

" Where the seller of goods draws on the buyer for the price, 
and transmits the bill of exchange and bill of lading to the buyer 
together, to secure acceptance or payment of the bill of exchange, 
the buyer is bound to return the bill of lading if he does not honour 
the bill of exchange, and if he wrongfully retains the bill of lading 
tht^ property in the goods does not pass to him." 



BILLS DRAWN UNDER CREDITS, ETC. 167 

has transferred the policies, would claim on the insurance 
company. 

Certificates of insurance are those declarations which 
represent part only of the sum insured under a larger policy. 
Where a number of shipments are made it is usual to have 
one general policy, called an open or floating policy, 
under which declarations for the various consignments 
can be made from time to time. The insurance companies 
in such cases grant separate certificates for each shipment, 
and as the risks they purport to cover should conform to 
those set forth in the floating policy, it is wise for the 
banker to have the terms and conditions of the latter 
document (including the total amount covered) confirmed 
to him by the insurance company. 

Reference should be made to the shipper's invoice to 
see that the goods invoiced are not of a lower value than the 
amount represented by the bills of exchange. Merchandise 
of a speculative nature is generally avoided by bankers. 

Certificates of origin or consular certificates depend 
upon the Customs' regulations and requirements of the 
various ports in the countries to which the goods are 
shipped, and it is impossible to indicate any hard and fast 
rules concerning such documents : the banker negotiating 
the bills is expected to acquaint himself with the conditions 
before operating. 

There is one other document which bankers require 
persons from whom they purchase these documentary 
bills to sign ; it is called a letter of hypothecation. At 
one time it was customary to insist upon a letter of 
hypothecation's accompanying each set of bills drawn 
under a documentary credit, but in order to facilitate 
business this rule has of late years been relaxed, and it 
is now usual to obtain a general letter of hypothecation 
covering all the bills which may from time to time be 
purchased from the exporters. 

The terms of this general letter of hypothecation are 
iairly comprehensive, and give the banker full power to 



168 FOREIGN EXCHANGE AND FOREIGN BILLS 

deal with the relative collateral security at the port of 
destination. He is empowered, if circumstances render it 
necessary, to insure the goods against both fire and sea 
risk, store them, and take all such care of the goods as he 
would if they were his own property, all, be it understood, 
at the expense of the drawer of the bill. Provision is 
also made to cover cases where conditional acceptance is 
taken. Finally, if the freight remain unpaid, or if the 
acceptor of the bill default, the banker is authorized to sell 
all or such part of the goods as may be necessary to liqui- 
date the amount he has advanced, and if the proceeds of 
sale be insufficient to pay the amount of the bill or bills, 
he has the power to draw for the deficiency on the persons 
who signed the general letter of hypothecation. It will 
be reahzed, therefore, that the banker seeks to protect 
himself to the utmost ; yet in spite of all these precautions 
losses are made, especially where the parties concerned 
become insolvent and the goods do not realize the amount 
for which the bills have been drawn. 

Bills under London Acceptance Credits. 

Now we come to the bills drawn under the London 
acceptance credits. In this instance, the bill is not sent out 
of the country, but is accepted in London by the banker 
who has opened the credit : with the documentary credit 
the bill is drawn on the importer abroad and accepted by 
him when presented there by the banker, who then retains 
it until date of maturity or else gets it discounted on the 
market. The bill accepted by the banker under the 
London acceptance credit is returned to the drawer, who, 
of course, promptly turns it into cash in England. 

There is no difference in the actual shipping documents 
which form the basis for the drawing of a bill under the 
London acceptance credit ; they are similar in all respects 
to those which accompany a bill drawn under a docu- 
mentary credit, but it should be noticed that a letter of 
hypothecation is required for each shipment financed 



BILLS DRAWN UNDER CREDITS, ETC. 169 

through the bank in London : a general letter of hypo- 
thecation covering a series of shipments is not usually 
taken in the case of the London accepting credit. It 
must also be remembered that where the bills are negotiated 
under a documentary credit, the proceeds of the bills are 
under the control of and actually obtained by the banker 
or his agent ; consequently he is able to secure the exchange 
profit on the homeward remittances. It is not so with 
the London acceptances. Although the goods are more 
or less under the control of the banker, and the consignees 
are said to hold the proceeds of sales in trust on behalf 
of the banker, it by no means follows that the banker ever 
secures control of the funds, although in theory he is 
supposed to do so. All the consignee is bound to do is to 
see that the remittances are sent home to London in time 
to reimburse the banker for the amount of the bill he has 
accepted and will have to pay at due date. For this 
purpose the consignee is bound in most cases to remit the 
amount by telegraphic transfers or approved bank bills of 
exchange on London, and these he may purchase abroad 
where he likes ; the business generally goes to the exchange 
banker quoting the finest rates for making the remittance. 
Although the accepting banker in London tries to stipulate 
when making the contract that the resulting exchange 
shall be passed through his foreign branch il rates are 
equal to those quoted by his competitors, it frequently 
happens that the remittance even then is made through 
other channels. 

Sometimes, however, the banker is able to obtain control 
of the counter remittance. He gets the exporter to draw 
two bills : the first will be the bill which is drawn on and 
accepted by the banker in London ; the other is drawn by 
the exporter on the importer, and is attached to the ship- 
ping documents. It is sent out through the bank for collec- 
tion, and the proceeds are eventually used by the bank 
in retirement of the bill it has previously accepted. 

The various methods just described are those in force 



170 FOREIGN EXCHANGE AND FOREIGN BILLS 

with the foreign and Colonial branch banks in London, 
but the practice adopted by the London joint stock 
banks who accept bills in London for their clients is very 
similar. In the case of a London bank with no foreign 
branches, however, the only thing to be done is to send the 
documents to the foreign centre through one or other of 
the foreign banks established in London. If two bills are 
drawn, the procedure will be simple, for the foreign banker 
will merely collect the one attached to the documents 
for account of the London bank and remit the proceeds 
in due course. Where documents are sent forward without 
a bill, the instructions to be followed by the foreign bank 
will be embodied in a letter, and in this latter case there is 
obviously not the same control over the collateral security 
as there is where a second bill is drawn and sent for 
collection. 

A practice to be condemned is that by which some 
London banks finance their chents' foreign shipments by 
accepting bills in London, and then allowing the exporters 
themselves to send the shipping documents forward to the 
consignees. By losing control of those documents the 
banker has absolutely no security for the payment of the 
bills he has accepted, and if funds are not forthcoming 
at maturity, the banker will have to pay the bills himself. 

Currency Bills. 

All the bills we have referred to in this chapter are 
understood to be in sterling. Currency bills come under 
a different category. They are both purchased and sent 
for collection by the bankers. If sent for collection, the 
drawer awaits advice of payment from the banker, who 
will ultimately remit him the proceeds. The currency 
bills the banker purchases outright are taken on the joint 
security of the drawer, drawee, and endorsers, if any, 
and the banker will pay due regard to the financial standing 
of all parties : they are all jointly and severally liable on 
the bill until payment has been made to the banker. 



CHAPTER XVII 

METHODS BY WHICH EXPORTERS OBTAIN PAYMENT FOR 

THEIR PRODUCE. PARTIAL DELIVERIES ; MARGINAL 

DEPOSIT RECEIPTS AND TRUST RECEIPTS. BILLS 

ON THE FAR EASTERN COUNTRIES 

Riches, it is said, are like sea-water : the more you drink 
the thirstier you become. We may with reason apply 
the simile to the exporter, for the greater the credit facili- 
ties he gets from the banker, the more eager will he 
become to find a cheaper way to finance his produce : it 
matters not what credit system the banks evolve, the 
trader will always be ready to offer suggestions for a more 
economical way of carrying out the banl<:ers' proposals. 
The outcome of all this bargaining is that the large firms 
are able to get their business done at the very lowest 
rates, while the smaller houses have to be content with 
less advantageous terms : the smallness of the exchange 
banker's profit in the one case is offset by the magnitude 
of the operations he puts through, and in the other he looks 
upon the higher return as a compensation or insurance 
for the greater risks he runs. Financial standing and 
responsibility count for everything. We have seen how 
the transactions in a general way are carried out, and we 
may now proceed to examine more closely the various 
methods by which the exporters to the more important 
countries seek to obtain payment for their commodities 
at a minimum cost to themselves. 

Opinion Lists and Credit Lists. 

It is apparent that this bill finance is a business which 
requires expert and extensive knowledge, not only of 
money-changing, but also of men and things. The foreign 
banker, or for that matter, any other banker who does 
exchange business, is bound to keep at his finger-ends the 

171 



172 FOREIGN EXCHANGE AND FOREIGN BILLS 

standing and morale of every firm for whom he accepts 
bills, or to whom he makes cash advances on the security 
of bills of exchange, and this necessitates the keeping of 
special books, called " Opinion Lists," which form, so to 
speak, the financial history of his clients. In the old days 
such confidential records giving the financial position of 
the various firms were never kept in written form ; each 
exchange broker or banker preferred to rely solely upon 
such facts as he could keep in his own mind. The system 
did not exactly cause chaos, but it led to trouble when the 
man whose sound knowledge of the parties to bills of 
exchange happened to be away from the office, and in the 
event of his retirement or death, his successor usually 
experienced difficulty in picking up the threads of this 
very essential part of the business. In the course of time, 
therefore, most banks and finance houses found it expedient 
to start these special reference books, and the practice 
is now a very general one. They do not replace the well- 
known credit lists, such as " Seyd's," or " Bradstreet's 
Ratings," but are supplementary to those useful com- 
pendia of commercial information. Each banker gets to 
know what reliance may be placed on his own clients, and 
a comparison of notes between the banks enables each one 
to make a clear estimate of the amount of accommodation 
which can safely be given to exporters and importers. In 
the bankers' opinion lists each customer is accorded a 
certain classification, or credit worth, and the banker is 
guided by these details when dealing with the sellers of 
foreign bills. Naturally, the financial standing of a mer- 
chant governs to a large extent the credit facilities he 
enjoys, and when he applies to a banker to finance his 
shipments, or to buy his bills, the relative soundness of 
his position not only influences the rates of exchange at 
which his bills will be bought, but also governs the total 
amount which the banker will buy or accept. The position 
of the drawee also must be taken into account. When 
the drawers of a bill of exchange are financially strong, 



METHODS BY WHICH EXPORTERS OBTAIN PAYMENT 173 

and the drawees prompt in settling their engagements, 
the banker will pay more for the bills than he would where 
the parties are comparatively weak. 

These, then, are a few of the reasons which prompt the 
bankers to keep properly chronicled, up-to-date informa- 
tion as to all persons who may be expected to come to them 
for accommodation, and bearing these points in mind, we 
may continue our investigation into the methods of finance 
pecuhar to the different classes connected with the export 
trade. 

Financing Outward Shipments. 

London Bankers' Acceptances. There has been a 
marked tendency of late years to finance outward ship- 
ments by means of London bankers' acceptances, and the 
reasons the exporters prefer this method to the more direct 
plan of drawing bills on the importers are soon explained : 
in a word, it is cheaper. When the London banker accepts 
a bill, the merchant or exporter can sell it under discount 
forthwith and so receive his money for the shipment ; 
he wants hquid capital in his business, and consequently 
cannot afford to keep the bill until maturity, since by so 
doing he would defeat the whole object of the operation, 
which is saving of interest. If he sends a documentary 
bill for collection he must wait until the bill has arrived 
at its due date abroad before he can hope to receive the 
amount due to him, but a banker's acceptance, if he can 
get it, obviates that delay. Even where the banker makes 
an advance on documentary bills, it often suits the exporter 
better if he can prevail upon the banker to accept bills in 
London. It is, of course, the saving of interest which 
really makes the business attractive, and it follows that 
financing by means of bankers' acceptances will be resorted 
to only when money is cheap on the London market. 
For example, if a merchant can get a four months' banker's 
acceptance discounted in London for about 2 per cent., 
that will be much cheaper finance than drawing a bill on 



174 FOREIGN EXCHANGE AND FOREIGN BILLS 

the importer at three months' sight, as in the latter case 
the exporter will be out of his money during the time the 
bill is on the water, plus the period it will be running after 
acceptance, to say nothing of the exchange charged and 
the bankers' commission. These charges are also a factor 
to be reckoned with in the case of sterling bills against 
which the banker makes an advance under a documentary 
credit. 

The most striking instance of the comparative economy 
of the two methods is to be found in the case of shipments 
to India, China, and the East. Documentary bills upon 
which the bankers make advances in London contain a 
clause to the effect that they are payable at the various 
banks' buying rate for demand bills on London, plus 
interest at, say, 6 per cent, from the date of the bill until the 
approximate date of arrival of the proceeds in London. 
These are called interest bills, and the following is a 
specimen of the kind of bill drawn. 

EXCHANGE FOR £100. 

22, Anchor Street, 

London. 
10th June, 191... 

At sixty days after sight pay this first of exchange 
[second unpaid) to the order of the Indian Bank, the sum 
of £100 (one hundred pounds sterling) Payable at the 
Indian Bank's drawing rate for demand hills on London 
with interest at 6 per cent, per annum added thereto from 
the date hereof to approximate due date of arrival of the 
remittance in London — value received."^ 

A. Buggins & Co. 
To C. Dollar & Co., 
Calcutta. 

^ The interest clause sometimes reads : " Payable at drawee's 
option at the A.B. Bank's drawing rate for demand drafts on 
London or at their telegraphic transfer rate on London, witli 
interest," etc., etc. 



METHODS BY WHICH EXPORTERS OBTAIN PAYMENT 1/5 

A comparison between the charges on one of these bills 
and those on a banker's acceptance in London, shows the 
advantages of the one over the other. Take for example 
a documentary bill bearing the interest clause, drawn on 
Madras for £500 at three months' sight. The interest 
may be calculated approximately for 120 days, which 
allows for the tenor of the bill and the time taken to get 
the proceeds back to London. Assuming interest to be 
at the rate of 6 per cent. 

i s. d. i s. d. 

the 120 days at 6% on ^^500 would equal 9 17 3 
to which must be added the Indian 
stamp duty, . . . .50 

10 2 3 



A bill drawn under an acceptance credit on a London bank 

would be for the same period — 

120 days, say, 4 months' sight ; the accepting com- £ s. d. 
mission may be taken as \\% per annum — 
H% P^r annum on ;^500 for 4 months . 
Discount on ;^500 for 4 months, say, 2% 
Stamp duty ..... 



2 10 

3 6 
5 



8 



£^ 1 


8 



This shows plainly how much cheaper the business can 
be financed by taking a London banker's acceptance. 
When money is dear, however, and the rate for discounting 
a four months' sight bill is, say, 4 per cent., firms will 
revert to interest bills, as there will be no appreciable 
saving on the acceptance transaction. 

As far as the foreign banks are concerned, they, of course, 
prefer the interest bills, but although there is a higher 
yield on such paper, we have still to remember that a 
banker often advances the greater part of the amount 
represented by a documentary bill, while with an accept- 
ance he advances nothing. His only risk is that proceeds 
may not be forthcoming at maturity, and it is for this 
risk he charges the small commission of IJ per cent. The 
commission, small though it is, returns a very satisfactory 
profit if operations run into large figures, but even taking 



176 FOREIGN EXCHANGE AND FOREIGN BILLS 

that into consideration, one may still be inclined to ask 
why it is that the banker is prepared to make himself 
liable on acceptances for such a trifling commission. We 
have already shown that a bank's foreign agents are, in 
most cases, fully empowered to control the collateral 
security, and as in practice they do keep a sharp eye on the 
disposal of the merchandise the risk is reduced to a 
minimum. There is, however, a further point to be con- 
sidered, which is not present in the ordinary inland bills — 
the question of exchange. The foreign banker expects 
to make a profit on the exchange in the currency of the 
two countries when remittances are sent here to meet 
bills maturing. If, therefore, the banker does not get 
a share in the exchange business, the return on the opera- 
tion hardly seems commensurate with the risk involved, 
small though it be. 

Apart from these soi-disant London acceptances, there 
are several details which call for attention in the docu- 
mentary bill business with the East. Bills on Eastern 
countries are drawn at various usances, from one to six 
months' sight, and it never seems to be clear to some 
people why a banker should prefer bills bearing the interest 
clause to be drawn for short periods only. If, it is argued, 
a bill is drawn at six months' sight, and it bears 6 per cent, 
interest from the date of the bill until the counter remittance 
arrives in London, surely that is better for the banker than 
if the bill is running for a much shorter time, say, one 
month. Long dated paper is, however, unsuitable to 
the exchange banker. Suppose he buys a bill on Shanghai 
at one month's sight, the bill takes one month on its journey 
out, and if accepted will be paid in Shanghai two months 
after leaving London. The funds received from the 
encashment of the bill at maturity must be remitted by the 
banker to his client, and this remittance takes, say, another 
month, which will have to be added to the other period 
to be charged, thus making three months in aU as the time 
for which interest at 6 per cent, will be added to the amount 



METHODS BY WHICH EXPORTERS OBTAIN PAYMENT 177 

of the original bill drawn from London on Shanghai. The 
reason the banker would rather take these bills at short 
usance in preference to the long dated paper is now easily 
explained : the banker must keep a proportion of his 
funds liquid for the purpose of purchasing homeward 
remittances, and if his money were locked up in bills 
payable six months after sight (eight months in all), there 
would be a difficulty in meeting demands from those 
wishing to send money to England. To tie funds up in 
long usance bills would, in fact, defeat one of the first 
principles of exchange banking, which is to keep funds 
liquid. It is also manifest that the exchange profit to be 
derived from an investment in homeward remittances 
will generally be greater than the return obtainable if 
the money is left in six months' interest bills. 

Marginal Deposit Receipt. As we have said before, 
a banker is not always prepared to advance the full amount 
of the bills. It often happens that exporters to the East, 
and also the importers upon whom bills are drawn, are not 
of sufficient standing to merit extensive credit facilities, 
and although bankers are willing to negotiate a fair 
amount of the exporter's bills, in the case we are considering 
they usually endeavour to limit their risk by retaining a 
margin on each bill negotiated. Suppose the drawer 
offers a bill for £100, the banker will advance 75 per cent, 
and issue a marginal deposit receipt for the remaining 
25 per cent., and a similar deduction will be made from each 
bill passed through the bank. Interest, at an agreed rate, 
is allowed on these margins from the time the bills are 
received by the bank until the net proceeds are remitted 
from abroad, and then, if all bills running are duly honoured 
and there is no deficiency, the full amount of the margin, 
plus interest, will be paid over to the client. 

Where interest bills are drawn it is customary to allow 
interest on the marginal deposit at the same rate as that 
called for in the bills. It would obviously be unfair to 
collect and retain, say, 6 per cent, on a bill for £100 from 



178 FOREIGN EXCHANGE AND FOREIGN BILLS 

the drawee, when only £75 had been advanced to the 
drawer in London, so what the banker really does is to 
obtain the full interest on the £100 from the drawee abroad, 
and then when the proceeds are remitted to England, 
make over to the drawer the interest on the £15 which he 
holds as margin against the payment of the draft. 

It is usual to stipulate in the marginal receipts that the 
deposits are held against " bill or bills running," and in 
general the amount will not be released until all bills have 
been met. 

On the face of it this system appears to afford sufficient, 
if not ample security to the bankers who advance against 
the bills of exchange, but where unscrupulous persons are 
concerned it is open to abuse. Once an exporter knows 
the amount which will be advanced against his paper, there 
is nothing to prevent his invoicing the produce at a price 
to cover the 25 per cent, margin, and then drawing his 
bill of exchange in conformity. Unless the banker has 
an expert knowledge of the commodities shipped, he cannot 
tell the exact price, and although he advances what pur- 
ports to be 75 per cent, of the invoice value, it is plain that 
he is actually paying the exporter the full amount of the 
bill, as the goods are invoiced at 25 per cent, in excess of 
their real value. For the successful operation of this 
malpractice, some collusion between importer and ex- 
porter is probably necessary, though it by no means follows 
that the importer is always a party to the deception, which 
sooner or later is bound to come to light. 

Bills for Collection. In the case of bills, documentary 
or clean, sent for collection, there is no risk to the banker. 
He merely sends the paper forward to his Eastern branches 
and follows the instructions given in the letter which 
accompanies the documents when delivered to him in 
London by the drawer ; if the documents are to be handed 
over to the Eastern importer against acceptance, he will 
pass them on to the drawee when the bill is completed, 
but if his instructions are, JXoX to part with them until 



METHODS BY WHICH EXPORTERS OBTAIN PAYMENT 179 

payment is made, the bill is simply presented for acceptance; 
and if not then paid, is held attached to the documents 
until it suits the importer to take them up. In the mean- 
time the goods will be warehoused, and when the importer 
eventually retires the bill and takes delivery, the proceeds 
will be remitted to London, either by mail or by telegraphic 
transfer, at the option of the drawer of the bill, and finally 
paid to him less the banker's commission and charges. If 
the exporter's instructions are, " all charges to be paid by 
the drawee," the banker will collect them at the time the 
bill is paid in the East, and in that case the exporter will 
receive the net amount for which his bill is drawn. 

In connexion with the documentary bills drawn under 
the various forms of credit we have previously discussed, 
there are one or two customs which seem to be entirely 
for the benefit of the importer, and it is as well to mention 
them here. 

Documents on Payment. We will take first the case 
of a bill drawn on an importer for, say, £300, at three 
months' date, marked " documents on payment." If on 
presentation the importer is not in a position to pay the 
bill, he merely accepts it and returns it to the banker. 
What the banker then does is to warehouse the goods 
either in his own warehouse, or in some neutral storage 
place, and here they are supposed to remain until the bill 
is paid. In the East, however, and often elsewhere, it is 
customary to allow the importer to take delivery of a 
portion of the goods against part payment of the bill : 
these partial deliveries continue until he has sold the whole 
shipment, and when the last portion is taken away the 
banker is supposed to have received the total amount 
due on the biU. 

This practice might be very simple and satisfactory if 
only one bill were drawn, but where, as is frequently the 
case, a number of drafts are running and a large amount 
of produce is in the hands of the banker, the danger is 
that the acceptor of the bills may pay for and take delivery 



180 FOREIGN EXCHANGE AND FOREIGN BILLS 

of those goods which command a ready market. If allowed 
to do this, he sometimes retires the bill drawn against the 
particular consignment of which he wishes to obtain 
possession ; at other times the proceeds of sales will be 
placed against the first bill maturing, and as a result the 
banker may finally find himself left with a depreciated 
and inadequate security, which by no means represents 
the value of the bills of exchange he has still on his hands. 
The confusion becomes worse confounded if the respective 
shipments are not kept strictly separate, as there will be 
a tendency for partial dehveries to be taken of a number of 
consignments, and no matter whether the first or last bill 
be retired, the bank will eventually be left with a 
conglomeration of merchandise of doubtful marketable 
value. 

No matter how careful the banker or his agents are, 
they cannot always tell whether the importer is taking 
out goods in proportion to the payment he makes. For 
example, a bill might be drawn for £500 against 100 cases 
of goods ; if the banker is asked to deliver fifty cases and 
receives payment of half the amount of the bill, £250, 
it is possible for the importer to take cases, the contents 
of which are worth £350, and leave the banker with the 
remaining fifty cases, which, although they are supposed 
to be security for the balance of the bill, are in reality 
worth only £150. 

There is then the case where the banker dehvers the 
complete set of shipping documents on acceptance of the 
bill by the importer : here he undoubtedly parts with 
the whole of his collateral security, and, apart from the 
safeguard which the several letters of hypothecation 
we have mentioned are to him, the banker's only means 
of protection is to obtain from the importer a trust 
receipt. The mere mention of this document is a reminder 
that it is one of the instruments used in foreign exchange 
banking which ought to be thoroughly explained to 
the reader. 



METHODS BY WHICH EXPORTERS OBtAW PAYMENT 18 1 

Trust Receipts. Shorn of all its technicalities, the 
trust receipt is simply an undertaking which the acceptor 
of a " Documents on Payment " bill in a foreign port 
signs in order to obtain delivery of the goods before he has 
paid the bill. He recognizes the bank's lien on the mer- 
chandise, and undertakes to sell it and to pay the proceeds 
into the bank as soon as received. 

In many cases the drawees are permitted to store the 
collateral security in their own warehouses, but in some 
places the banks have their own storage accommodation 
(go-downs, they are called in the East), which enables them 
to exercise some sort of a check on the deliveries. 

The custom of delivering goods under trust receipt 
seems to have originated in America, where the law 
recognizes to a far greater extent than elsewhere the 
bank's property in the goods after they are given up 
to the acceptor of a bill. As a matter of fact, a drawer 
of a bill from this side will rarely authorize delivery under 
trust receipt, and the banks abroad more often than 
not take the responsibihty themselves, which means in 
effect that they part with the goods contrary to the instruc- 
tions of the drawer, to whom they are then, of course, 
responsible for the ultimate payment of the bill representing 
the value of the shipment. The whole thing in principle 
amounts to this : the difference between having a five- 
pound note in your pocket and another man's owing it to 
you ; and although the system is good enough where the 
acceptor is perfectly trustworthy, yet, so long as human 
nature is what it is, difficulties will always arise, and from 
the standpoint of British banking we have no hesitation 
in saying that trust receipt facilities are open to grave 
objection. 

The fact remains, however, that with bankers abroad 
the trust receipt is a pis aller. It frequently happens at 
a foreign port that there is no public storage accommoda- 
tion, and if the bank does not possess its own warehouses 
it is practically obliged to deliver the merchandise to the 

I3--(T'i25) 



182 FOREIGN EXCHANGE AND FOREIGN BILLS 

acceptor of the bill against his signature to a trust receipt. 
Even where public warehouses or go-downs do exist, the 
system of storing the collateral security in them is not 
liked, since in many places there is nothing to prevent 
one dealer's inspecting the other person's property and so 
getting a clue to the quality of produce shipped and the 
source of supply. However, as we have pointed out, the 
banks do sometimes surmount this difficulty by building 
or leasing their own warehouses, and if they desire to 
avoid the disputes which occasionally arise when trust 
receipt facilities are given, the remedy is obvious. 

There is this much to be said for the system, it enables 
the importers to deal with merchandise immediately it 
arrives ; sometimes, too, the bank does not run great 
risk, as the importer has frequently sold the goods against 
payment on delivery. In this case he will give the bank 
details of his sale and will sign a trust receipt agreeing to 
collect the proceeds from his buyer and pay them over 
to the bank immediately. But if the merchandise is not 
sold and the banker allows it to be stored in the importer's 
own warehouse in exchange for a signed trust receipt, he 
is in a similar position to a person walking through a great 
wood : the walker cannot see the leaves of the trees, and 
the banker cannot see the goods over which he ought to 
have control, consequently the importer is at liberty to 
deliver how, when and where he likes. To guard against 
this contingency some bankers only deliver the relative 
documents against trust receipts to enable the importer 
to store the commodities in a neutral warehouse in the 
bank's name. The receipt, which the owners of the store 
issue, is held by the bankers, and subsequent deliveries 
can then only be made under the cognizance of the bank. 

The financial responsibihty of the importer is the factor 
which counts in all trust receipt facilities, and unless the 
banker has confidence in the position of the importer the 
accommodation cannot safely be given. 

The several practices we have just enunciated are in 



METHODS BY WHICH IMPORTERS OBTAIN PAYMENT 183 

operation in many countries besides those Eastern centres 
we have indicated. The trust receipt system, for example, 
is said to have been evolved in the United States, but some- 
thing akin to it is seen in the cotton and woollen manu- 
facturing districts of England, where it is no uncommon 
thing for the raw material to be dehvered on the signature 
of a trust document before the bills of exchange are paid. 
As one of the bankers remarked to the writer, it would be 
a clever banker who could pick out his own security once 
the shipment had reached the mills of the manufacturers. 

Needless to say, there is always a vast quantity of mer- 
chandise also stored in the London dock warehouses, and 
the same difficulties which arise abroad occasionally present 
themselves here. Bills of exchange drawn on London 
importers are constantly arriving from foreign countries, 
and if the banker is instructed not to deliver documents 
except on payment, he will have to take dehvery of the 
goods and warehouse them until the drawee is in a position 
to pay the accepted bill. If the importer who has accepted 
a " documents on payment " bill, desires to obtain pos- 
session of the merchandise before maturity of the instru- 
ment, he can, of course, do so by paying the bill, and in 
that case the banker will allow him lebate on the amount 
of the bill for the unexpired period at J per cent, above 
the London joint stock banks' rate of interest for short 
deposits. 

Partial Deliveries. Partial deliveries, except in rare 
instances, are not made in London, but some bankers do 
permit the importer to have the documents of title to the 
goods on the deposit of satisfactory security or against 
the guarantee of other parties of repute. However con- 
venient this system may be to the importer, it cannot be 
regarded as suitable to the exchange banker, who, by his 
own act, ties up funds which could have been utilized to 
better advantage in financing any outward business 
offering. It is plain that as long as the banker holds the 
accepted bill with documents attached, there is some 



184 FOREIGN EXCHANGE AND FOREIGN BILLS 

incentive for the importer to make early payment in order 
to be able to deal with the shipment, but once you let him 
obtain possession of the documents against the deposit of 
security, the incentive to take up his bill is gone, and the 
chances are that he will make no effort to pay it until the 
date of maturity ; the banker will thus be out of his money 
during the whole time the bill is running, for, as we shall 
see later on, these " Documents on Payment " bills are not 
usually discountable. 



CHAPTER XVIII 

DOCUMENTARY BILLS ON AUSTRALIA, EGYPT, SOUTH AFRICA, 

THE UNITED STATES OF AMERICA, AND OTHER 

COUNTRIES 

Within the limits of this volume it is obviously 
impossible to describe the bills drawn on every country, 
but it will be sufficient for all practical purposes if we 
confine our attention to the paper current between London 
and some of the more important foreign and colonial 
centres. We have seen how business is transacted with 
the East ; let us here extend our operations to the 
Australian continent. 

Australasia. 

The customary usance for bills between Great Britain and 
Australasia is sixty days' sight, but the currency of the 
numerous drafts drawn varies from sight up to 120 days' 
sight. 

Bills are not drawn payable with interest, as is the case 
with drafts on the Far East. When there is any difference 
in exchange, it is, by arrangement between the shippers 
and importers, sometimes borne by the one, sometimes by 
the other. In practice the cost of exchange is usually 
included in the exporter's invoice, and the draft is then 
drawn for an amount which will yield, after the deduction 
of the exchange and commission charged by the bank 
negotiating the bill, the net amount of the attached 
invoice. Frequently, however, bills are drawn for the 
amount of the invoice, with the clause added, " payable 
with exchange per endorsement," the effect of which 
is, as we mentioned earher in our investigation, to 
transfer the onus of fixing the rate of exchange on to the 
banker. 

185 



186 FOREIGN EXCHANGE AND FOREIGN BILLS 

Bills are drawn both " documents on payment " and 
" documents on acceptance," according to the arrange- 
ments between the parties to the transaction, but it is the 
general practice for banks who negotiate bills bearing the 
latter clause, to retain the right to use their own discretion 
regarding the surrender of documents : if, on arrival of 
the goods, the position of the drawee is such that the 
bank considers it unsafe to deliver the bills of lading, it 
will safeguard the position of the drawer by insisting on 
payment before parting with the security. 

The principles in regard to homeward remittances for 
bills drawn under the various credits do not differ materially 
from those we have described in other cases, but there 
seems to be some difference of opinion as to the correct 
procedure to be followed when making counter remittances 
for bills which the exporters have sent to Australia for 
collection through the banks. In some instances, if 
drafts are sent for collection, and no definite instructions 
are given in regard to the ultimate payment to be made 
by the banker to the exporter, it is held that the collecting 
bank's duty is to remit proceeds by drafts at " usance," 
say, at sixty days' sight, and we believe it was at one time 
customary to make the remittances in this way. Of late 
years, however, we understand it has been the practice for 
some banks to remit proceeds of bills for collection at 
" sight," charging, of course, the higher rate of exchange 
always ruling for sight or demand bills. In the absence 
of unanimity among bankers, there is little use our dis- 
cussing the rights and wrongs of the matter ; competition 
will finally decide which procedure is to be followed. 
But it seems a Httle inequitable if the exporter is to 
receive less by sight draft than he would if he had 
received and discounted a sixty days' sight bill sent by 
the collecting banker. 

Egypt. 

Bills on Egypt are usually drawn in sterling, and the 



DOCUMENTARY BILLS ON AUSTRALIA, ETC. 187 

following details may be taken as typical of the general 
transactions which take place. 

First we get bills drawn " payable at par," that is, the 
par rate is specified in the body of the bill : if no rate at 
all is mentioned, then the draft is still understood to be 
payable at par. Such paper is payable in Egypt at 
Piastres 97 J per £1, and the Egyptian banks buy, or advance 
on the bills at 1 per cent, over Bank Rate, with a minimum 
of 5 per cent. When the proceeds are transferred to 
London, the loss on exchange, if any, is borne by the 
drawer, unless otherwise arranged. 

Bills are also drawn payable at current rate of exchange, 
plus interest at a specified rate. Here, as in the East, 
drawees pay the amount of the bill, plus interest at the 
rate mentioned from date of negotiation to approximate 
date of arrival of proceeds in London. If exchange is 
above par the drawee bears the loss, but if it is below par he 
receives the benefit. The proceeds of such bills are, however, 
usually remitted to London at par, plus interest collected. 

Egypt is also one of those countries upon which bills 
are drawn bearing the clause " exchange as per endorse- 
ment." Drawees, as in the preceding case, are expected 
to pay interest, exchange, and other charges, but in view 
of the exchange clause, they frequently contest their 
liability for additional interest charged on the bill, and if 
the banker is unsuccessful in collecting the interest, he 
eventually claims it from the drawer in England. 

Where bills are sent for collection, the drawees, of course, 
do not pay interest, and any gain or loss in exchange is a 
matter which concerns the parties to the bill : the banker 
collects the bill for an agreed commission, and leaves all other 
questions to be settled between the drawer and the drawee. 

South Africa. 

Our survey would not be complete without some refer- 
ence to South African banking procedure. The exchange 
with the countries within the Union of South Africa and 



188 FOREIGN EXCHANGE AND FOREIGN BILLS 

Rhodesia is on a sterling basis, but as with Austraha there 
are certain differences in exchange which have to be taken 
into account. The price fluctuates and is rarely above 
par, but it is sometimes at a discount per £100. Banks 
quote for bills at sight, thirty days, sixty days and ninety 
days, but exporters draw at all usances, from demand to 
120 days' sight. There appears to be a preference for 
ninety days' sight bills, which is the most convenient usance 
for the South African traders, and occasionally even a 
six months' bill makes its appearance. 

The method of quoting exchange on the basis of 
" discount " or " premium " is a httle puzzling at first 
sight. For instance, sight drafts (London on South 
Africa) may be quoted at J per cent, discount, thirty 
days* sight bills at IJ per cent, discount, and so on. 
In practice, this means that if the exporter draws for 
even amounts of, say, £100 on South Africa, he will 
receive £100 less 10s. Id. (if it is a sight bill) = £99 9s. lid. 
The shipper who wishes to realize the exact amount of 
£100 must therefore either increase his invoice and draw 
accordingly, or else simply draw the bill plus the 10s. id. 
discount. 

Drafts from Great Britain are seldom drawn with the 
interest clause, although we believe it is the custom to 
draw such bills from New York on South Africa. 

The South African banks negotiate exporters' bills 
drawn under the various credits we have previously enu- 
merated : they also purchase bills offered purely on the 
standing of the names appearing on the paper, each bill 
being judged entirely on its merits. If staple articles of 
merchandise are shipped, and the drawer and drawee are 
first-class people, the banker will advance the whole 
amount of the bill, but if he considers their financial 
responsibility does not warrant the full extent of the 
accommodation, or goods of a perishable or speculative 
nature are being exported, only about 75 per cent, of the 
amount for which the bill is drawn will be advanced. 



DOCUMENTARY BILLS ON AUSTRALIA. ETC. 189 

It should also be noted in the case of these African bills, 
that it is the custom for the exporter to include the exchange 
in his invoice for the shipment, and then draw his bill for 
the full amount of the invoice. 

When bills are sent for collection through the South 
African banks, sometimes the drawee pays the extra 
exchange and charges, and on other occasions they are borne 
by the drawer ; it is generally a question which is settled 
by the importers and exporters themselves, and the banker 
either collects the amount of his commission, etc., from the 
drawee, or else deducts it from the remittance which is 
made to the exporter in final settlement of the bills at 
maturity. 

In each class of bill documents are given up on acceptance 
or payment on the usual conditions. 

The proceeds of bills negotiated, or, as some banks call 
them, bills remitted, are utilized by the banks for the 
purchase of paper and telegraphic transfers offering in 
South Africa drawn on London. 

As regards bills for collection, the proceeds are remitted 
home at the current rate for demand bills and/or tele- 
graphic transfers on London, according to the arrangements 
made between the various operators. 

The following details give in a convenient way some idea 
of the form homeward bills take. 

No Pretoria, 1st May, 191... 

EXCHANGE FOR £200. 

Three months after sight of this first of exchange (second 
of the same tenor and date being unpaid) pay to the order 
of the A.B. Bank the sum of £200 (two hundred pounds 
sterling) value received, and place the same to account of 
thirty boxes of ostrich feathers shipped per s.s. " Union 
Castle " to London. 

To Messrs. Blank & Co., J . C. Kruger & Co. 

Nile Street, 
London. 



190 FOREIGN EXCHANGE AND FOREIGN BILLS 

U.S.A. 

We now come to the American Continent, and as con- 
ditions with the United vStates are so well-known, little 
need be said about the practice there. American banks 
until quite recently were precluded from opening branches 
in other countries, and in consequence the bill business 
was almost entirely in the hands of the British and Colonial 
banks and finance houses. This restriction has, however, 
now been removed, and we may shortly expect to see 
American banks in active competition with our 
institutions in London. 

The most common usance for bills drawn from Great 
Britain is sixty days' sight, although ninety days' sight 
bills are also constantly seen. The principal centre upon 
which the bills are drawn is New York, and documents are 
given up both on acceptance and on payment, subject to 
the conditions we have mentioned with other centres. 
There is, however, a very large number of bills drawn and 
negotiated under the several credits mentioned, which 
never reach the United States : arrangements are made 
for the issue of the commercial credits from London, and 
when shipments are sent to the United States from many 
foreign countries, the relative bills are drawn on and 
accepted in London by London banks and accepting 
houses. To these institutions the drafts with shipping 
documents attached are sent, and if everything is in order, 
the bills are accepted and retained in London, while the 
documents are at once sent forward to New York to reliable 
agents of the London banks. It is then a question whether 
to deliver them to the American importers on or before 
payment. Generally speaking, if the bank's correspond- 
ents are satisfied as to the financial responsibihty of the 
importers, the documents will be handed over on an 
undertaking to pay to the bank the proceeds of sales as soon 
as received. Trust receipt facilities in the United States, 
we need hardly say, are the rule rather than the exception, 
and as the trust deliveries are extensively practised, it is 



DOCUMENTARY BILLS ON AUSTRALIA, ETC. 191 

often found difficult to discriminate between particular 
firms. 

Bills are, of course, drawn direct, and not infrequently 
bear the clause " documents on payment," and if a client's 
instructions to this effect are ignored and documents are 
delivered on acceptance, the banker practically takes the 
responsibility on his own shoulders. As a matter of fact, 
trust receipt facilities have become so much a part and 
parcel of the American system that it is doubtful whether 
the practice will ever be eradicated. The custom doubtless 
originated when few bills were drawn on New York : the 
majority of the drafts for American shipments from all 
over the world were drawn on London first, owing to 
the fact that no discount market existed in New York, 
and, secondly, because the names of American drawees were 
so httle known abroad that even where bills were drawn 
direct they were hard to negotiate. In these circumstances, 
the banking authorities in the United States seem to have 
instituted the trust receipt system to save themselves 
the trouble of carrying the heterogeneous collection of 
bills of lading and other documents which were constantly 
arriving from other centres without bills in any shape or 
form being attached. At the present time, however, 
New York is making a most determined attempt to create 
a discount market there, and has even gone to the length 
of issuing dollar credits throughout the world in the hope 
that exporters from other countries may be induced to 
draw bills in dollars, and so help New York in the course 
of time to take its place among the other nations as one 
of the great monetary centres. 

The counter remittances to Great Britain are often 
made by means of sixty days' sight bills, but both demand 
and telegraphic transfer remittances are largely in 
evidence. 

South America. 

Exporters to South American countries dispose of their 



192 FOREIGN EXCHANGE AND FOREIGN BILLS 

bills drawn under credits opened with the London agencies 
of the various banks on terms similar to those we have 
discussed as regards other countries. The usance of the 
drafts varies, but as a rule, they are drawn on the Argentine 
and Brazil at ninety days' sight, and on Mexico at sixty 
days' sight. With the latter country three days' sight bills 
are frequently drawn, too. We may add that thirty days' 
sight bills are often used with Columbia, and, while the 
Northern countries of South America draw at the same 
usance as Mexico. Chile, Peru and Bolivia follow the 
practice of Argentina and Brazil. In all these countries 
documents are delivered on acceptance or on payment, 
according to the instructions given by the drawers of 
the bills, and the comparative financial strength of those 
whose names are on the bills. 

As with the other countries we have examined, the 
adjustment of any gain or loss in exchange is a matter 
of arrangement between the exporters and importers. 
Many merchants, however, when drawing sterHng bills on 
firms in the Argentine and Brazil carefully make the bills 
payable in one of the well-known centres, and by this 
means safeguard themselves from the loss in exchange 
which may be incurred where it is left to the choice of the 
acceptor to pay a bill in some local town where he is domi- 
ciled. This is an important point, especially where both 
the State and the Capital bear the same name. For 
instance, it is preferable for bills on places in the State of 
Buenos Aires to be drawn payable in Buenos Aires, the 
capital of the Argentine Republic, if it is desired to avoid 
the wide differences sometimes existing in exchange. 
Bills on the State of Rio Grande do Sul, Brazil, are best 
drawn payable at the capital. Port Alegre. 

Interest bills are not used in the South American trade. 

Return remittances are made by long exchange, that is, 
ninety days' sight bills on London, or by telegraphic 
transfer. Mexico also makes homeward remittances by 
means of drafts at three days' sight. 



DOCUMENTARY BILLS ON AUSTRALIA, ETC. 193 

Spain, Italy, France, etc. 

The bills described in this chapter by no means represent 
the whole of the foreign paper seen on the London market, 
neither do they account for all the return remittances in 
the shape of foreign drafts which circulate on the London 
market ; Spain, Italy, France and other European coun- 
tries all utihze London for financing their import trade, 
and the credits they open from time to time give rise to a 
good many of the bills found in the portfolios of London 
bankers. At the time of writing, however, owing to the 
disorganization caused by the war and the subsequent 
difficulty of obtaining reimbursement credits in London, 
documentary demand drafts on rather a large scale are 
being drawn on the more important trading centres of 
Italy, Spain and contiguous countries. 

Scandinavian Union. 

Countries in the Scandinavian Union, despite their 
favourable position in regard to trade with the belligerent 
nations, were also faced with abnormal conditions, and in 
many cases sterling exchange was either difficult or impos- 
sible to obtain. We have not space to describe the state 
of affairs in each country, but Denmark may be taken as 
representative of the general conditions prevaihng for some 
months during the war. 

In accordance with the Danish law governing bills of 
exchange, bills drawn in sterling or in other foreign cur- 
rencies have to be collected at the official rate for the 
centre concerned, that is at the quotation ruling on the 
exchange at Copenhagen. The selling rate is the one taken 
in normal times, but during the Great War the difficulty 
of obtaining sterling remittance became more and more 
marked, until the time came when there were no sellers of 
cheques on London except at a ridiculously high premium. 
Even where buyers were willing to pay the enhanced 
prices, drafts for moderate amounts only were obtainable. 
These conditions were due to the fact that Denmark had 



194 FOREIGN EXCHANGE AND FOREIGN BILLS 

many obligations to fulfil in England, partly for fresh 
imports, and partly for maturing credits and financial 
drafts, and in spite of the ever increasing exports to Great 
Britain, sufficient sterling to meet trade requirements was 
not forthcoming. 

In view of the impossibility of sending counter remit- 
tances to London in payment of sterling bills collected in 
Denmark, various measures were advocated, but the system 
adopted by some of the larger Danish banks was, for the 
proceeds of bills collected to be placed to the credit of an 
account kept in kroner in Denmark, in the name of the 
bank which had sent the paper for collection. The credit 
balances were then at the free disposal of the bank or firm 
which had sent the bills from London, and the most suitable 
way for the funds to be utihzed was for the creditor to sell 
in England to banks and others under the obligation to 
make payments in Denmark, bills drawn in kroner. 

The proviso that bills on Denmark cannot be collected 
at an exchange higher than the official quotation does not 
prevent bills being drawn with protecting clauses, such as, 
" payable with cheque on London," " payable at the rate 
of exchange as per endorsement," etc., and where these 
or similar clauses are embodied in the bill, the collecting 
bank can insist on the conditions being fulfilled, independ- 
ently of the official rates. In such cases, however, persons 
sending bills containing these conditional clauses would be 
well-advised to have a previous understanding with the 
drawees in Denmark, otherwise disputes are sure to arise. 

With documentary bills the collecting banker is naturally 
in the better position, as he can refuse to dehver documents 
unless payment is made by cheque on London at the 
agreed rate, but in the absence of special instructions 
documentary bills, like all other drafts, are always collected 
at the official rate. 



CHAPTER XIX 

ON FINANCE BILLS 

In Chapter VII we discussed one of the most potent 
influences on the exchanges — finance bills. But, although 
it was shown that such paper is largely drawn in connexion 
with arbitrage operations in international stocks and 
shares, we must not lose sight of the fact that this accom- 
modation paper is constantly in evidence in other transac- 
tions. Some confusion seems to exist on the market as 
to what really constitutes finance paper, but among 
exchange writers there is a consensus of opinion that the 
term should be restricted to all long bills drawn by the 
banks and accepting houses of one country on those of 
another, bills, that is to say, which are " manufactured " 
for the express purpose of raising money at an opportune 
moment. There is no particular magic in the process ; all 
that happens is for the recognized accepting houses of one 
centre to grant facilities to foreign operators to draw bills 
on them whenever it is apparent that ready money can 
be profitably employed on the foreign market. The long, 
or three months' bill is sometimes drawn against a standing 
balance with the correspondent, but more often than not 
the banker abroad is allowed to draw bills on the under- 
standing that he shall put the acceptors in funds before 
maturity. These bills, bearing the names of first-class 
banks or finance houses, are readily saleable at the best 
rates, and immediately they are offered the banker receives 
funds to indulge in what other operations he likes. In 
due course the bill arrives, say, in London, is accepted, 
and then sold under discount on the open market, upon 
which it will circulate until the date of maturity, and, as 
we have seen, neither the drawer nor the acceptor need 
put down a single penny until the time for payment 
arrives. When the bill does fall due to be paid, the drawer 

195 



196 FOREIGN EXCHANGE AND FOREIGN BILLS 

must see that funds are in the hands of his friend the 
acceptor, and it is customary to remit the amount of the 
bill so that it shall be in the hands of the London acceptor 
at least one day before the presentation of the finance 
bill. A sight draft is generally purchased on the foreign 
market and sent forward for this purpose, and the effect 
of this sight draft on the exchange between two countries 
is the reverse to that occasioned by the drawing of the 
finance bill : the latter would tend to depress the exchange, 
but the former would elevate it, if one may use such an 
expression. It is not that the first drawing of these finance 
bills, or even of the remittance of the sight drafts, has 
a marked influence on the exchange at once, but it seems 
inseparable from such accommodation that there should be 
a constant renewal of the facihties. If the three months' 
bills were merely renewed at maturity, the influence would 
not be great, but when we see that further bills are drawn 
the final effect becomes more plain. 

This is how the matter works in practice. 

We may presume the A B Bank in New York has drawn 
a ninety days' sight bill on the Blank accepting house in 
London ; towards the end of the period in question the 
A B Bank perceives that it will be inconvenient to find 
the wherewithal to purchase the remittance which must 
shortly be sent forward to London to meet Blank's accept- 
ance, so what it does is to draw yet another bill of the same 
tenor and sell it on the New York market, and by this 
means procure sufficient funds to remit in cover of the 
previous bill drawn. 

It may appear at first sight that the creation of these 
finance bills can go on indefinitely, but that is not so. 
The amount of paper running on the market for any one 
bank, finance house or individual, can generally be pretty 
well gauged, and if at any time the market deems the sum 
total to be sufficient, there will be a tendency to discriminate 
against the bills. Takers of bills do not exactly decHne 
to receive more of the paper of the firm in question, but 



higher rates will be charged as an insurance against the 
extra risk : it is as if the buyers say, " We do not refuse to 
take more of A B's bills, but we would rather not be 
asked to receive more," and a continuance of this state of 
affairs soon causes trouble in the quarters concerned. 
Consequently, further bills will not be drawn as a rule 
until a portion of those circulating has run off. In practice 
operators do not usually go to the extent of drawing more 
than the foreign discount market will readily absorb 
without comment — they know that once discounters eye 
their paper suspiciously, they become, what is termed 
" talked about," and, as we all know, nothing is more 
damaging to a financial firm's credit than to be in such a 
position. 

As we have referred to the discount market in passing, 
it may be well to give the student some idea of the way in 
which the price of these " long " finance bills is calculated. 
Briefly stated, it is the market rate of discount ruling in 
the city upon which the bill is drawn that governs the 
price. If the reader will refer to Chapter V, he will see 
that the rate at which bank paper is discounted is con- 
siderably less than that charged for trade bills, from which 
it follows that as these finance bills come under the cate- 
gory of bankers' bills, they can be sold, as soon as drawn, 
subject to the lower charge, namely, the market rate of 
discount. It is this rate of discount, then, which princi- 
pally affects the drawing of finance bills ; the higher the 
market discount quotation in London, and the lower the 
price of money on the foreign market, the fewer such bills 
will be drawn, and vice versa. 

An additional point to be borne in mind is, that there 
are certain seasons which favour the drawing of these 
finance bills, as they affect the supply of exchange upon 
which the drawer is dependent for covering his operations. 
In the United States, for instance, the exports of cotton, 
wheat and other grain, are principally made during the 
autumn, and bills drawn against the cargoes will be offering 

U— (1525) 



198 FOREIGN EXCHANGE AND FOREIGN BILLS 

in large quantities at that period of the year ; consequently 
exchange will be low. The drawers of finance bills on 
Great Britain know this, and if they were selling such paper, 
say, in May or June, the possibility of their being able to 
buy demand exchange at low rates for remittance to 
London to meet maturing finance bills, will to some extent 
influence their drawings. 



'* Kite-Flyers." 

As against the foregoing, which may be called the more 
legitimate form of finance bills, we get another variety, 
dignified by the name of finance bills, it is true, but referred 
to on the market as " kite-flyers." Kite-flying operations 
are seen where a firm, not necessarily a financial house, 
trades on its reputation and induces other people to accept 
bills, the sale of which is a means of furnishing the drawers 
with funds. Such bills are accommodation paper, pure 
and simple, but no one ever realizes that fact until the 
drawing house signifies its inability to provide the acceptors 
with the money to meet the bills at maturity. 

It is never easy to tell when kite-flying operations are 
in progress ; the bills are often drawn by reputable trading 
concerns, public companies, and even by foreign banks on 
banks and finance houses in London, and when a series 
of renewal bills is drawn the practice may continue 
unchecked for a long period. 

Probably the worst instance of kite-flying in recent years 
was that which came to light upon the failure of the Bank 
of Egypt. The investigation undertaken by the liquidator 
proved conclusively that the bank had been obtaining 
extensive credits on the London money market simply 
on its name : it had in fact been living entirely on its 
credit for a considerable time, and the moment the bank's 
bills became unsaleable it failed. Whenever liabihties 
seemed to be pressing, funds were raised by drawing and sell- 
ing three months' bills against cash in Egypt, and when these 



ON FINANCE BILLS 199 

bills matured, the money to meet them was obtained from 
further sales of drafts. 

** House Paper." 

There is yet another variety of finance bill, which comes 
under the category of " House Paper." House paper, so 
called, comprises all those bills drawn by the foreign branch 
of a firm on its London house, or vice versa, that is, bills 
bearing identical names as drawers and drawees. Here 
we must, as it were, separate the dross from the fine paper : 
we cannot rightly describe a firm's documentary house 
paper as finance bills, for, although the exchange dealer 
does not really get the security of two names to his bills, 
he still has the documents for the merchandise they repre- 
sent. The risk comes in where a firm draws these bills 
clean, that is without documents in any shape or form 
attached : such are finance bills of doubtful value, and 
when the paper makes its appearance firms are said to be 
drawing " pig on pork." There would not be much trouble 
if the circumstances were known to the market, but as it 
often happens that the two branches of a firm work under 
different names, it is sometimes extremely difficult to 
discern which bills come under this appellation. However, 
the bankers do scrutinize very carefully any paper which is 
suspected to be pig on pork, and the discovery that a 
trader is indulging in this method of finance is the signal 
for the banker to go carefully with him. 

Advances for Crop Requirements. 

Finally, we get those bills which are loosely described 
as finance paper, but which the bankers know all the time 
to be nothing of the sort : we refer to the bills drawn in 
connexion with crop requirements. The transactions 
from which they arise are somewhat involved, but may be 
roughly divided into two classes. First, there are the 
bills resulting from " up-country advances." In this case 
the bankers abroad, having satisfied themselves of the 



200 FOREIGN EXCHANGE AND FOREIGN BILLS 

respectability, position, etc., of certain merchants, make 
them advances in order to enable them to purchase crops 
up country : with these funds the merchants buy the pro- 
duce from the agriculturalists, and when the arrangements 
are completed for export they deliver the bills drawn 
against the shipments to the banker. In the second case, 
advances are made direct to the farmers for the purpose 
of moving the crops, and when the grain, or whatever it be, 
is ready for shipment, the bills naturally go through the 
banker who has given the accommodation. 



CHAPTER XX 

THE DISCOUNT MARKET. THE BILL-BROKER 

We now arrive at the final stage of our enquiry, and having 
considered the circumstances under which the various 
bills are brought into being and how they are bought and 
sold, we may proceed to an examination of the way in 
which they are discounted. The discount market, we 
need hardly say, is one of the most interesting and at the 
same time one of the most important from the exchange 
banker's point of view : he is bound to watch its move- 
ments, and must also be careful to keep himself au fait 
with all the little changes constantly occurring. 

Bill Discounting. 

Let us be sure before we go further that we really know 
what discounting a bill actually means. Merchants, 
bankers, commercial men, and even some of the text-books 
have got into a slovenly and ambiguous way in their 
employment of the terms " discounting " and *' dis- 
counted." Some years ago the writer happened to be 
present at a law lecture given by Sir John Paget, K.C., 
when attention was called to this very point. The word 
" discounting," as this eminent legal luminary remarked, is 
used indiscriminately to describe either the position of 
the person negotiating a bill for value prior to maturity, 
the amount the seller of the bill receives being less than the 
value in proportion to the unexpired term of the bill ; or, 
to designate the position of the party who takes over 
the bill giving such reduced value to the transferor. In 
view of this existing ambiguity, it will be well to bear 
in mind that to discount a bill is to buy it, or, as Sir John 
Paget says, to become the transferee of it by having 
it endorsed or transferred by delivery by the holder, 
for a price settled either by agreement or by the current 

201 



202 FOREIGN EXCHANGE AND FOREIGN BILLS 

market rate of discount. The discounter, obviously, is 
the person who buys the bill, while the one who gets the 
bill discounted, that is, sells it, is the transferor. 

Now let us examine the practice on the London market. 

In the first place we may say that there is a good deal 
of discounting done first hand by the joint stock banks, 
the country banks, and the private banking and financial 
houses. The gentlemen connected with these concerns 
are always willing to obhge a good customer by finding 
him cash when he wants it — at a price. A banker, we have 
seen it stated, is a man who takes care of other people's 
money and lets them have it as and when required, that is, 
if there is no obstacle {e.g., a moratorium) in the way. 
That, however, is only one side of the picture : the banker 
is really a distributing agent ; he receives a flow of money 
from the quarters where it cannot be usefully employed, 
and forthwith proceeds to direct it into other and more 
profitable channels. It is in this bill finance, or, as some 
prefer to call it, advances on bills, that part of the capital 
for which the banker is the custodian, is invested. In 
fact, it is an important part of the banker's business to lend 
money in such a manner and on such securities as will 
enable him promptly to keep the implied promise he has 
made when receiving the cash, to repay it whenever called 
upon to do so. These bills which he buys or discounts 
for his ordinary customers arise more often than not out 
of the genuine trade transactions, although, of course, it is 
no uncommon thing for accommodation paper to find its 
way into the bank's hands. Take the case of the merchant 
engaged in the internal trade of our country — a timber 
merchant, for instance, who sells a parcel of timber to his 
customer in Shoreditch. As the cabinet-maker there 
who buys the wood cannot get a return on it until he has 
manufactured various articles of domestic furniture, he 
will pay the timber merchant with, say, a three or six 
months' sight acceptance. That is to say, the timber 
merchant draws a bill on the cabinet-maker, who accepts 



THE DISCOUNT MARKET 203 

it. At the end of the period the latter expects to have 
sold his furniture and have the cash in hand to pay the 
bill. The timber merchant in his turn cannot afford to 
wait until the maturity of the bill for payment, so he takes 
it to his banker, say, the London and South Western Bank, 
and if the acceptor be in good repute, the banker will 
discount the bill for a small charge, or, in other words, 
he buys the bill from the timber merchant and keeps it 
until maturity, when it will be presented to the acceptor 
for payment. In this case there is no need for the inter- 
vention of a bill-broker ; the parties concerned carry out 
their own transaction and no middleman is necessary. 
As we have mentioned earlier in this book a banker seldom 
re-discounts these bills : they invariably remain in his 
portfoHo until maturity. He has the drawer's and accep- 
tor's names on the bill, and as long as a watchful eye is 
kept on the course of the various trades and the standing 
of the parties concerned, the risk on such paper is more 
or less nominal. The reason the bankers do not re-discount 
these bills is, that were they found to be doing so the market 
would look askance at the operation, and jump to the con- 
clusion that something was wrong with the bank, which 
would be presumed to be short of funds and not able to 
pay its way easily. The amount of such paper offering, 
however, is negligible as compared with other bills. In 
fact, it represents but a small proportion of the huge 
volume of bills circulating on the London market. What 
interest the bankers most of all are the bills which arise 
from the exporting and importing operations. 

The Bill-broker. 

When it comes to discount operations the London 
banks, as a rule, do not deal direct with the sellers. In the 
banking world, as in every other progressive commercial 
community, there exists a class whose function it is to 
act as middlemen between the producer and the consumer, 
and the growth of this class has sometimes led critics to 



204 FOREIGN EXCHANGE AND FOREIGN BILLS 

consider that the profit made by the middleman is an 
unnecessary charge upon the commodity. The inter- 
mediary who has caused all the heart-burning and dis- 
cussion among bankers is the bill-broker. His operations 
are constantly under observation, and the system which 
permits of this middleman's deriving a profit from business 
which in other countries is in the hands of the banker, 
has been widely criticized. Bankers and financiers tacitly 
acquiesce in the presence of the bill-broker on their markets, 
but when under modern conditions he succeeds in attracting 
funds which ought to have come their way, they are apt 
to disclaim against their folly in permitting the birth of a 
competitor whose like does not exist on the Continental 
money markets. At first sight it does seem strange that 
bankers should have allowed this business to pass out 
of their hands, but we believe that at the outset the profes- 
sion of bill-broking, if we may use such an ugly word, was 
brought into being by the failure of the old private bankers 
to encourage the discount operations of their clients. 
There was no eagerness to afford cheap credit facilities, 
and unless the customer was of the highest standing, high 
rates were exacted. It has been said that the idea of the 
old private ban]<:er was, that if a man had a bill to dis- 
count, he should adopt a sufficiently humble demeanour 
and approach his banker, and the man of pounds, shillings 
and pence would then be pleased to discount it. The 
idea that a banker should run about after a man who had 
a bill, or, as one of the bankers put it, that a large body of 
accomplished gentlemen should run all over London to 
find a man who had got a bill in order to compete for the 
honour of discounting it, never entered into their heads in 
that charming, good old-fashioned time. Now, it is mani- 
fest that that blissful state of affairs is altered, and we find 
the man with bills of exchange compared with Penelope, 
pestered with many suitors, while the bill-brokers are the 
men who run the streets to ferret out the possessors of 
drafts. It seems, then, that owing to the sins of the 



THE DISCOUNT MARKET 205 

bankers of bygone days, the commercial men began to 
look elsewhere for accommodation, and almost impercep- 
tibly there sprang into existence a number of dealers, 
who were willing to undertake the business at very fine 
rates. No discount transaction was considered too small, 
no trouble too great, and these bill-brokers were always 
ready to avail themselves of a slight profit, either by dis- 
counting the bills themselves, or by finding discounters 
for the paper of respectable merchants and traders. 

It is not, however, wise to lay too much stress on the 
shortcomings of the older generation of bankers ; due 
regard must be paid to the nature and complexity of our 
present-day finance. If we remember to what a fine art 
the financing of commercial operations has been reduced, 
the extent to which our joint stock system has grown, 
and the conditions under which the modern bank manager 
in Great Britain works, we shall better understand the need 
for an individual with specialized skill in the particular 
branch of finance with which we are dealing. Not the 
least important of the operations with which the banker 
is concerned is the acceptance, collection and discounting 
of bills of exchange, and although the banker exercises a 
careful control over the main part of the business, yet his 
multitudinous duties neither allow time for personal 
visits to the dealers in bills, nor for his attendance on the 
open market ; therefore, the major portion of the discount 
business has found its way into the hands of the bill 
specialists. 

The bills with which the bill-broker has to deal emanate 
from various sources ; chiefly they are those which enter 
Great Britain from other countries. At every foreign 
centre there are always merchants ready to export their 
wares, and it naturally follows that the funds the bankers 
receive abroad by the encashment of the drafts sent from 
London will be utihzed for purchasing bills offered by 
exporters at the foreign cities. The exporters obtain 
payment for their produce by drawing on London in the 



206 FOREIGN EXCHANGE AND FOREIGN BILLS 

same way as the shippers here draw on foreign countries, 
and the net result of the two operations is the influx of 
bills into England for ultimate circulation on the London 
discount market. 

Documentary bills are not the only ones received from 
abroad. In any financial centre there will always be a 
certain number of people desiring to draw bills for services 
rendered or debts due, and others equally desirous of 
settling indebtedness to England ; consequently many 
clean bills will also be drawn and sent to London for 
collection. 

To the total of the documentary and other foreign bills 
seen on our markets has to be added a large number of 
bills accepted by the finance houses and the London 
branches of foreign and colonial banks under London 
accepting credits, and then we have the principal paper 
with which the bill-broker is concerned in his efforts to 
meet the investment demand, always in evidence, for this 
form of bank security. For discount purposes bills may 
be divided into two great classes — ^bank paper and trade 
paper. Bank paper comprises all those bills drawn on 
and accepted by the great London banks and finance 
houses. Trade or " white " paper, includes all bills drawn 
on ordinary merchants and traders, accompanied by docu- 
ments to be delivered on payment or acceptance. Clean 
bills are also included in this category, the general criterion 
being, that the bills should bear on their face a statement 
that they are drawn against specific shipments. Bills 
without any such statement, are not undiscountable, but 
the market exercises a wide discretion, will only take them 
on certain well-known names, and tends to regard the 
bills as finance paper of the pig on pork variety. 

Bank bills are always discountable at the best rates, 
but the rate for trade paper is, generally speaking, about 
J per cent, higher than that charged for bank bills of 
similar usance. If bank paper is discountable at 3 per 
cent, for a three months' bill, the merchant selling trade 



THE DISCOUNT MARKET 207 

bills would be charged 3 J per cent. ; consequently, if the 
bill were for £100, the banker would pay £100 less 3J per 
cent, per annum for three months. However, at the time 
of writing, owing to the many adverse circumstances there 
is a difference of about 1 per cent, between the rates 
charged for discounting bank paper and those exacted for 
fine trade bills. There is no definite ratio for longer dated 
paper ; with four and six months' bills, the question of 
credit enters into the calculation, and the rates paid will 
depend largely on the probable trend of the market and 
the standing of the persons whose names appear on the 
bills. 

To return to the bill-broker. In order to be in a position 
to make or invite definite offers for any of these bills, it is 
necessary for him to visit daily the offices of those deahng 
in such paper. At the London offices of the foreign 
branch banks, for instance, he walks in about eleven o'clock, 
reports on the likely trend of the discount market, and if 
there is any business doing, he will procure lists from the 
foreign bank which give the class, amount and maturities 
of the bills, and with these in his hands the bill-broker 
proceeds to the offices of his other clients, the London 
joint stock banks, finance houses, and Continental bankers, 
and endeavours to negotiate business. Every discounter, 
of course, stipulates for an assortment of acceptances, 
that is to say, a proportion maturing at three, four and six 
months' date, as it may be necessary to purchase bills 
which fall due at precisely the time the buyer requires to 
replenish his treasury in readiness for cash demands. All 
London bankers have come to know by experience the 
dates at which calls will be made on their cash balances, 
and unless anything untoward happens, they can so 
arrange that payments are made in accordance with their 
requirements : they simply let their portfolios automati- 
cally run out, and then when there is a surplus of cash 
again, further investments in bills may be made. 

Theoretically, a bill-broker is supposed to take all good 



208 FOREIGN EXCHANGE AND FOREIGN BILLS 

bills offered to him, or, what amounts to the same thing, 
find purchasers for them, and in practice he rarely declines 
to do business for his clients. 

Just at this point we can see more clearly another reason 
for the banker's preferring to work through the inter- 
mediary of the bill-broker. Owing to his intimate know- 
ledge of the parties to a bill, the broker is able to guarantee 
the genuineness of all acceptances discounted, and although 
his own name does not appear on the bills, yet it is his 
business to see that all acceptances passing through his 
hands bear the endorsement of the bankers disposing of 
them, and that they are otherwise in order. A discounter 
will seldom take these bills without a bank endorsement, 
and it is the practice of the Bank of England to stipulate 
for the names of two British firms, one of which must be the 
acceptor's, on all paper it discounts. When deahng 
through the bill-broker, too, it is easy for the banks to 
refuse bills bearing the names of firms which they do not 
like, or of whose bills they consider they have a sufficient 
amount in portfolio. 

When a purchase has been satisfactorily arranged, the 
holder of the acceptance simply transfers his title by 
endorsement, and hands the bills over to the bill-broker 
against payment of the agreed price. These bills bearing 
the banker's endorsement are discounted at moderate 
rates, as the buyer has recourse on the banker in the event of 
non-payment at maturity. 

The major portion of the bills discounted on the London 
market are, as we have seen, those which have been drawn 
by foreign exporters on and accepted by British importers, 
or by the banks who have arranged to accept for them in 
London, and so it is comparatively easy to get at the 
respective parties to the bills if anything is wrong, such as 
refusal to pay at maturity, or anything of that sort. How- 
ever, the trouble is that among each lot of bills received 
in London from abroad, there are a number of what are 
called " foreign domiciles." A foreign domicile bill arises 



THE DISCOUNT MARKET 209 

in the following manner. Out abroad there will perhaps 
be a French or Italian shipper who draws for his produce 
under arrangement with the bank that the bills shall be 
made payable in London. On arrival in London the bills 
will be sent for acceptance, say, to Paris ; they will be 
accepted in that city, but made payable in London, and 
will be sent here to the agency of the bank which negotiated 
them abroad. These bills, being the acceptances of 
Continental firms and others, are not liked on the London 
market, and neither the joint stock banks nor the finance 
houses care to carry them in their portfolios in ordinary 
times. In recent months foreign domiciles have become 
undiscountable on the London market, so the foreign and 
Colonial banks who have received them, are practically 
obhged to retain them until maturity, which naturally 
means a bad lock up of funds. Prior to the war a certain 
proportion was taken in parcels of bills discounted by some 
of the finance houses ; the rest the brokers and discount 
firms used to take, and in all cases the person disposing of 
them had to pay a higher rate to those discounters who 
were agreeable to have them. The Bank of England has 
consistently refused to receive such paper, and never would 
discount foreign domiciles in any shape or form, not even 
when the bills were endorsed by first-class Continental 
banks. 

The determination of the banks to discourage the cir- 
culation of foreign domiciles on the London market, led 
dealers to extend the ban to bills which are termed 
" Foreign Agencies." Under this heading fall all bills 
accepted by the London branches and agencies of Con- 
tinental or other firms estabhshed in London, but having 
the greater part of their assets in foreign centres. The 
assets, presumably, cannot be considered available in the 
event of bills being dishonoured ; consequently, there is a 
marked tendency to discriminate against the paper. 
These foreign agency bills are discountable to a limited 
extent only, and those selling the paper are penalized in the 



210 FOREIGN EXCHANGE AND FOREIGN BILLS 

rates charged, which are usually tV per cent, to J per cent, 
higher than those for which first-class English domicile 
bills can be sold. 

Before we leave this subject of discounting there is one 
question to which special reference ought to be made. 
When discussing documentary bills, we saw that two kinds 
were drawn — the one is called a " D/A " bill, the other 
a " D/P " bill — and in either case, whether the bills are 
drawn from London on a foreign port, or from the foreign 
centre on London, the D/A bill, bearing the clause " docu- 
ments on acceptance," is much more useful to the banker ; 
in each discount market the buyers of bills under discount 
know that the parties to the instrument must be of fair 
financial standing, and consequently, the banker has no 
difficulty in getting the bill discounted through the broker 
at a good rate. The D/P bill, which either contains the 
clause " documents on payment," or has a slip attached 
bearing those words, is obviously not good for discount 
purposes, and the banker is generally compelled to hold it 
until maturity, or until the acceptor retires it under rebate. 
It is not exactly a matter of caprice whether the drawee 
pays the draft one day after acceptance, or whether he 
lets the bill run its full term ; it all depends on whether 
he can sell the relative goods promptly. If a quick sale 
is made, the acceptor will be only too glad to take up the 
bill under the usual rebate. There are times, however, 
when these D/P bills can be sold under discount, and in 
such cases they are discounted as clean bills, and the bank 
selling the paper transfers the bills to the buyers and 
retains the documents. But it not infrequently happens 
when a bank has parted with the D/P bills in this way, 
that the acceptor comes along and wishes to exercise his 
right to take up his bill before maturity. What can the 
banker then do ? He might as well hunt for the proverbial 
needle in a haystack as to try to trace the bill on the market, 
so to get out of the difficulty he receives the amount of 
the draft, less rebate for the unexpired time, from the 



THE DISCOUNT MARKET 211 

acceptor, hands him the documents of title to the goods, 
and at the same time gives him a guarantee that the bank 
will produce the discharged bill to him at maturity. In a 
word, the banker receives the cash and undertakes to pay 
the bill himself at due date. 

In all this bill business the services of the broker are in 
constant request, and the fact that he is at the beck and 
call of nearly every bank in the kingdom is perhaps re- 
sponsible for his being dubbed the Jackal attendant upon 
the King of Beasts, the King of Beasts, according to the 
broker, being the banker. We have also seen the bill- 
broker described as the dog which ate of the crumbs, while 
in other quarters he is styled the aristocrat of the money 
market. When we find aU these epithets levelled at the 
head of the inoffensive broker, we might expect him to be 
exacting a large tribute for his services ; but that is not 
the case. For his extensive knowledge and responsible 
work the bill-broker receives but a trifling commission ; 
why, then, is he prepared to act as an intermediary in this 
business, and is it worth his while ? The answer is a 
simple one. The smallness of the broker's commission is 
no criterion of his profit : rapidity of turnover is one 
prominent factor ; the total amount of each parcel of bills 
is another. A 3V per cent, or even tV per cent, added 
by the broker to the rate charged for discounting a single 
bill is infinitesimal, but when reckoned on a large number 
of acceptances the commission is not inconsiderable. 

Then as to his capital. It has been cynically remarked 
that all the bill-broker's capital consists of, is a pair of 
boots and a bill case. He does not need a large initial 
capital, it is true, but his position is not quite so bad as 
that. There is no doubt, however, that every bill-broker 
is indebted to the bankers for a large proportion of the 
capital used in his business, and as such funds are loaned 
out to him by the bankers very cheaply, we see how it is 
he is able to work at very low rates. The money is lent 
to the bill-broker at " call " — sometimes merely over- night, 



212 FOREIGN EXCHANGE AND FOREIGN BILLS 

and it is his practice to find out each morning which 
banks are lenders and which are hkely to call in funds ; 
he is then in a position to base his operations on the 
amount of money available in the market. Where the 
broker is able to borrow easily, he offers a low rate of 
interest, but if the banks are not well suppHed with cash 
he has to pay more for the accommodation, and in case of 
need he may be forced to resort to the Bank of England, 
who will supply funds by discounting the cream of the bills 
for him. 

As security for " call " loans the bill-broker deposits 
with the banks bearer stocks of the " floater " or " terminal " 
type, such as consols, exchequer bonds, Treasury bills, 
and the better class Indian Railway stocks ; or he may, 
in some cases, deposit batches of first-class acceptances. 

In view of the fact that the bill-broker is a constant 
user of surplus funds held by the banks, it is safe to assume 
that he contributes largely to the profits made by the 
bankers, and, for the rest, those who are inclined to gird 
against the profits the bill-broker in his turn makes on 
discount transactions, have but to make a cursory examina- 
tion of his operations on the London money market to be 
convinced that the intricacies of the business are ample 
justification for his presence in their midst. 

At the present day centralization of interests is no less 
apparent in bill-broking than in banking. There is an 
increasing tendency to divert business from the bill- 
broker, who works solely on commission, to the dealer who 
buys bills outright and sells them on his own account : 
it is the latter class, in fact, that is mainly responsible for 
borrowing " call " money from the banks. To carry the 
competition still further, companies have been formed to 
deal exclusively with this discount business, and, to judge 
by the dividends paid, they have found a profitable field 
for their operations. Unlike the ordinary brokers, how- 
ever, the discount companies are not wholly reliant on 
funds borrowed from the banlcs ; they receive money on 



THE DISCOUNT MARKET 213 

deposit from outside sources, and as, by offering higher 
rates of interest, they sometimes obtain cash which, but 
for their existence, would have gone into the banks' coffers, 
it is they rather than the " running " broker, who must be 
looked upon as active competitors in the banking world. 

Treasury Bills. 

In conclusion, we may refer briefly to the Government 
measures for financing the Great War by means of Treasury 
bills. Formerly Treasury Bills were issued by tender. 
A certain specified amount was announced as being for 
sale, and the bills were allotted to those charging the lowest 
rate of discount. This was the practice in vogue until the 
14th April, 1915, when the British Government suddenly 
announced in the London Gazette its intention to issue three, 
six and nine months' Treasury bills until further notice 
at fixed rates of discount. In the first instance, the rates 
published by the Treasury were : for three months' bills, 
2f per cent. ; six months' bills, 3| per cent., and nine 
months' bills, 3f per cent. Subsequently, twelve months' 
bills were announced to be available at the same rate as 
for nine months' paper. The Government, however, 
reserved to itself the right to vary these rates whenever 
considered advisable so to do, without previous notice 
to the market. As a matter of fact, the " price " held 
good until 9th August, 1915, when the discount was 
suddenly put up to 4 J per cent, for all usances. On 
27th October, 1915, rates were again raised to 4| per cent, 
for three months' paper, 4 J per cent, for six months', and 
5 per cent, for nine and twelve months' bills. Then, on 
12th November, 1915, the rate was again changed to 
5 per cent, for all classes of Treasury bills. This 5 per 
cent, level for all maturities was maintained until 
4th March, 1916, when the rate for three months' bills 
was lowered to 4 J per cent., and the rates for six and 
nine months' to 4| per cent. The discount on the twelve 
months' bills was left unchanged at 5 per cent. 

15— <i525) 



214 FOREIGN EXCHANGE AND FOREIGN BILLS 

The presence of these Treasury bills on the market must 
necessarily affect the price of all other bills sold under 
discount ; the purchase of the Treasury paper tends to 
absorb the excess supply of floating money on the short 
loan fund of the London money market, and consequently 
helps to keep up the bankers' rates for money at call and 
short notice, which in turn affect the discount rates for 
both trade and bank bills. The reader has only to refer to 
the various illustrations we have given throughout this book 
to see how the various influences react the one on the other. 

Finally, the market finds itself committed to rates for 
bank paper from which it is practically impossible to depart 
as long as the Treasury bills are on offer at fixed prices ; 
by force of the Government competition it is bound to 
work at practically the same rates of discount for three, 
four and six months' bank bills as those charged by the 
Treasury for its paper, as obviously no buyer is likely to 
pay a higher price for a bank acceptance than that at 
which he can get a Treasury bill issued on Government 
security. At the time of writing, the market is thus, to 
all intents and purposes, under the direct control of the 
Government, and as long as the sales of Treasury bills are 
continued, the free play of the usual factors is restrained. 

It seems a curious termination to this book to have to 
admit this fact in face of the theories we have expounded, 
but there it is, and all we can do is to recommend the 
reader to continue to examine for himself the varying 
effects of the British Treasury's experiment with the 
London discount market : the study should prove an 
interesting one, and to enable the reader better to follow 
the movements in money and discount rates, both before 
and after the advent of war, we attach three extremely 
useful charts, illustrating the course of money and dis- 
count during each of the three years: 1913, 1914, and 1915. 
The charts were prepared by Messrs. Page & Gwyther, 
the well-known discount brokers, to whom the author is 
much indebted for permission to reproduce them. 



CHART OF MONEY AND DISCOUNT RATES in LONDON during the year 1913. 









jBcai/c 


of En^l<:aid(piublislud) Rate (Crunsmvj 


67nonth^ Fvm remUted BWs (Raplo) 




3 months Fwe 


renuUed Bills (Gi -eav) 




Morte^ ai/ OMfOrcmgi 


'y) 














JANUARY 

3 /O 17 24- 3/ 


FEBRUARY 

7 /■* 2/ 2S 


MARCH 

7 /4 2/ 2S 


APRIL 


2 9 16 23 30 


JUNE 

e /3 20 27 


J ULY 

4. II J8 25 


AUGUST 

1 8 IS 22 29 


SEPTEMBER 

S 12 19 26 


OCTOBER 

3 10 17 24- 31 


NOVEMBER 

7 14- 21 2t 


DECEMBER 

S 12 19 26 






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CHART OF MONEY AND DISCOUNT RATES in LONDON during the year 19H. 

ofU7iff6^m^(y)icdi0k^J Rate ( Cr-imsorv) 6?nontfis Fui^ retnMedy Bills /'Pu/pley) 3 months Fine rarvUtedBUls (Greav) Money at/ Ccdl(Oranqe) 












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6 13 ZQ 21 


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ft /J 20 Zl 


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3 10 n- Z4 


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a 15 22 29 


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5 /2 « 26 


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JULY IjvUGUST 

3 10 n 2'^ Jfl V 14-21 28 


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f tl 18 25 


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2 9 16 23 3(. 


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6 13 20 27 


DECEMBER 

4 // /« 25 




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LLt\jV V***^* 




CHART OP MONEY AND DISCOUNT RATES in LONDON during the year 1915 

Bank of Enqlanxl(pwbljish^) Ji^^ ( Crumsmv) 6 monih^ Fm^ renwO^BiZh (Purple ) 3 ?nonths Fuvc ramMedBUlf (Greerv ) Morvey a& Call (Orange) 



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SEPTEMBER 

3 10 n 24 


OCTOBER 


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I 



INDEX 



Acceptance Credits, see 

" Credits " 
Acceptances, see "Bills" 
Advances, Bankers' on bills, 199 

up-country, 199 

America, United States of. Bills 

on, 190 

, Exchange Rates, 47 

, Foreign Exchanges 

during Great War, HI 

, Gold Points, 29. 112 

, Gold policy, 37 

, Gold shipments, 

cost of, 115 

— , Mint Par, 21, 22 

, Monetary position 

on outbreak of War, 100 

, Trade balance, 114 

Arbitrage operations, 76-80 
Argentine Republic, Bills on, 

191, 192 
, Gold, premium on, 

121 

Note issues, 122 

Australia, Bills on, 17, 185 
, Exchange between and 

England, 14, 185 

Grain exports, 17 

Mint Par, 15, 22 

, Telegraphic Transfers on, 

17 

Trade Balance, 15, 16 

Wool exports, 17 

Austria, Mint Par, 22 

, see "Gold Exchange 

Standard " 

Austro-Hungarian Bank, invest- 
ment of its assets, 83 

, cover for notes, 127 

Bank Charter Act, Suspension of 

avoided, 102 
Bankf paper, 26, 54, 77 

of Egypt, 198 

of England, Gold Reserve, 

88, 91 

, Its position during 

Great War, 98-100 
Rate, increases in, 

87, 92. 98-9 

of France, Rate, 92 



Bank Rate, 64, 86 

, Increase in, effect on 

exchanges, 89-91 
, effect on mar- 
ket, 87-9 
and Market Rate of 

discount, their inter-connexion, 

88, 89 
Banker, Connecting link between 

exchange dealers, 10 
, his stock of international 

currency, 10 
Bankers' Commissions, Influence 

on the exchanges. 71 

Credits, see " Credits " 

Investments in Bills, 81 

Barter, 4 

Belgium, Mint Par. 22 

Berlin, Its money market on 

outbreak of Great War, 97 
Bill, Discounting a, 6, 201 
Bill-broker, The, 204 

, his capital, 87, 211 

, Position on Discount 

Market, 204 
, on Money Market, 

211 
Bill of Exchange, what it 

includes, 11 
Bill of Lading, Attached to Bill 

of Exchange, 165 
, conditions to be ob- 
served, 165 
marked " freight 

paid," 165 

. property in, 165-6 

" to order," 165 

under Customs (War 

Powers) Act, 1915, 165 
Bills, Acceptance by banks, 156, 

168, 173 
, Accommodation, 198 

as a means of attracting 

gold. 82, 89 

, Bank, 26. See also 

" Finance Bills " 

, cover for, 31, 77, 139 

. Bankers' investments in,81 

. Clean, 163, 206 

, Continental investments 

in. 82. 89 



215 



216 



INDEX 



Bills, cost of, accepted by 
bankers compared with ex- 
porters' drawings, 175 

, country drawing settles 

rates, 142 

, crop requirement draw- 
ings, 199-200 

, currency, 170 

, demand, 193 

, difference in rates, how 

calculated, 63 

, Documentary, bankers' 

security, 164 

, demand, 193 

, the documents des- 
cribed, 165 

, Documents on acceptance, 

164, 210 

, on payment, 165, 

179, 210 

, Exchange dealers' profit 

on, 31, 32 

, Finance, Influence on 

Exchanges, 74 

, price, 197 

, renewal of, 75, 196 

, varieties of, 196 et 

seq. 

for collection, 178 

, Foreign Agencies, 209 

, domiciles, 208 

, investment in, 82-9 

, , proceeds of, how 

remitted home, 173, 176, 179, 

186 
, Forms of, drawn under 

credits, IQ\ et seq. 

, Gold basis, 69 

, House paper, 199 

Interest, 174 

, specimen, 174 

V. bankers' accep- 
tances, 175 

, Kite-flyers, 198 

, Margin on, 177 

of Exchange Act, 45 

on Argentina, 192 

on Australia, 17, 185 

on Denmark, 193 

on Denmark, return re- 
mittances, 193 

on Egypt, 187 

on London, 68 

on Scandinavian countries, 

193 



Bills on South Africa, 187 
American States, 191 

on The Far East, 174 

on United States of 

America, 190 

paid under rebate, 183 

, Partial deUveries of goods 

against, 183 

, Pig on pork drawings, 199 

, Price of, 28 

, Standing and responsibil- 
ity of parties to, see 
" Opinion Lists " 

, Trade, 54, 206 

under London Acceptance 

credits, 168 

Bolivia, Bills on, 192 
Brazil, Bills on, 192 
, Paper currency, 122 

Call Loans, 212 

Chain Rule, 19 

Cheque Rate, see " Exchange, 

short " 
Chile, Bills on. 192 

, Paper currency, 122 

China, Currency of, 134 

, Exports to, how affected 

by price of silver, 136 
, Investors in affected by 

fall in price of silver, 137 
Clean Credit, see " Credits " 
Columbia, Bills on, 192 
Commercial Paper, 55 
Confirmed credits, see " Credits " 
Consular certificates, 167 
Council Bills, India, 131 
, Reverse, 130 

Telegraphic Transfers, 131 

Bills and Telegraphic 

Transfer, method of issue, 131 

Counter remittances, 169 
Coupons, a means of remittance, 

11 
Course of Exchange, quotations, 

50, 51, 52 
Credit Lists, see " Opinion List " 
Credits, Bills drawn under, 161 
et seq., 168 

, Cancellation of, 150, 151 

, Clean, 154 

, Confirmed Banker's, 151 

, Documentary, 155 

, and Confirmed, dif- 
ference between, 156 



INDEX 



217 



Credits, Irrevocable, 154 

,London acceptance, 157 

, Omnibus, 158 

, Revocation of, 150-1 

, Revolving, 159 

, Travelling Letters of, 148 

, Unconfirmed banker's, 

151 

, cancellation of, 153 

, specimen of, 152 

Without Recourse, 153 

Customs, War Powers Act, 165 

Debts, between two countries, 

how collected, 6, 7, 8 
, purchase and sale of 

foreign, 4, 5, 6 
Denmark, Bills on, 193 

, Mint Par, 22 

Discount market. The, 86 et seq. 

rate, raising of, see " Bank 

of England " 

Discounting a bill, 6, 201 

class of bills, 201 et seq. 

, Private bankers and, 204 

Documentary Bills, see "Bills" 

Credit, see " Credits " 

Documents on acceptance, see 

"Bills" 

on payment, see "Bills " 

on payment bills, how dis- 
counted, 210 

Dollars, chopped, 135 

Dutch Exchange, see " Holland " 

Eastern countries. Bills on, 138, 
139, 141 

Exchanges, The, 124 

, rates with Shanghai, 

13 > 
Economist's rates, 33, 3S 
Egypt, Bills on, 187 
Exchange, Arbitrage operations, 

their effect on, 75 

as per endorsement, 144 

, Bankers' Commissions, 

their effect on, 72 

r. Banking influences, 75 

, Course of, see " Course of 

Exchange " 

, Favourable, 63 

, Finance Bills, influence 

on, 74 

, Forward contracts, 145 

, Fluctuations, Causes and 

effects, 62 et seq. 



Exchange Fluctuations, 66 

, Limits of, 67 

, Influence of Trade con- 
ditions on, 67, 68 
, Long, 48, 49, 56 

Quotations, see " Foreign 

Exchange " 

, Rates of, see " Rates " 

Remittances from Foreign 

Residents, 70 

Risks, elimination of, 145 

, Short, 48, 49 

, Stock Exchange influ- 
ences, 72 

, Unfavourable, 63, 64, 115 

, encouragement to 

exporters, discouragement to 
importers, 66 

, When at a discount, 63 

, premium, 63 

Exchanges, Effect of War on, 101 
, Silver, see " Eastern Ex- 
changes " 

, Tables of rates during 

War, 101, 102 
Exports, 9 

, Invisible, 9, 70 

Exporters, how they obtain 
payment for their produce, 171 

Finance Bills, Effect on ex- 
changes, see " Bills " 

, Varieties of, see 

" Bills " 

Floaters, 213 

Foreign Agency Bills, see 
" Bills " 

Domicile Bills, see " Bills" 

Foreign Exchange, Definition of, 

3 
, Nature of the com- 
modities bought and sold in, 
4, 6 [101 

Quotations, 40, 41 

, Quoting at discount, 

188 

, at premium, 188 

. See also "Exchange " 

, Study of, what it 

enables the student to do, 2 
Foreign Exchanges, INIeaning of, 
3 

Securities, British invest- 

ments in, 72-3 

, Income from, 73 



218 



INDEX 



Foreign Trade, see " Trade " 
France, Foreign Exchanges dur- 
ing Great War, 104 

, Gold Policy, 37 

. Mint Par, 19, 20, 22 

Freight, 165 

Germany, Foreign exchanges 
during Great War, 104 

, Gold Policy, 38 

, Mint Par, 21, 22 

Go-down, 181 

Gold, American shipments, cost, 
29, 112 

, Deposits in New York by 

France, 113 

, Deposits in Ottawa ac- 
count Great Britain, 113 

, French shipments, cost, 34 

from Germany during War, 

105 

, German shipments, cost, 

34 

movements, effect on ex- 
changes, 95 

Points, 24, 29, 30, 34, 35 

, " Economist's," 33, 

34 

Reserves, 33-9, 91 

, Exchange Standard, ex- 
plained, 124 et seq. 

, in Austria, 

125 

, in India, 123, 

127 

, in PhiUppines, 

125, 126 

Great Britain, Free Gold Market, 
36 

Holland, Exchange, 106 

, Mint Par, 22 

Hong-Kong, Currency of, 135 
House-paper, 199 
Hypothecation, Letter of, 167 
Hypothetical Par, 13 

Ideal or Hjrpothetical Par, 13 
Imports, 9 

, Invisible, 9, 70 

India, Currency position, 126 

and the Silver Problem, 

125 

, Trade of, 128 

Indian Exchange during Great 
War, 130 



Indian Exchange, How main- 
tained by Government, 129 

. See also " Gold Ex- 
change Standard " 

Insurance, Certificates of, 166 

PoUcies, 166 

Interest Bills, see " Bills " 
International Currency, 10, 11 

Indebtedness, basis of, 8, 9 

Irrevocable Credits, see 

" Credits " 
Italian Exchange, 107, 121 
Italy's Note issues, 121 

Kite-flying, 198 
Knibbs, G. H., 15 

Letter of Hypothecation, see 
" Hypothecation " 

Letters of Credit, influence on 
Exchanges, 75 

Loans, tlieir effect on the 
Exchanges, 73, 74 

Long Exchange, see " Exchange" 

London Acceptance credits, see 
" Credits " 

, Money market on out- 
break of War, 97 [of, 88 

, , manipulation 

Stock Exchange closed, 98 

MacLeod, H. D., 5 

Marginal Deposit Receipts, 177 

Mark, Discount on during war, 

123 
Market Rate, 87 
Markets, Produce, War's effect 

on, 102 
Mercantile Theory, 64 
Mexico, Bills on, 191 
Mexican Dollars, 134 
Mint Par of Exchange, 13, 15, 

19, 20, 21, 22, 23, 24 
Money Article, The, 40 [93 

Markets, War's effect on, 

, Price of compared with 

wheat, 5 

New York, Berlin, Par of 
exchange, 104 [47, 48 

, Exchange quotations, 46, 

Norway, Mint Par, 22 

Omnibus Credit, 158 

" On 'Change " Table, see 

" Course of Exchange " 
Opinion Lists, 171 



INDEX 



219 



Outward shipments. Financing, 
173 

Paper Money, Effect on ex- 
changes, 1X9 et seq. 

, Inventor of, 119 

, Issue of, drives gold 

out of circulation, 119 

Issues during Great War, 

123 

, effect on trade, 120 

Par, see "Ideal Par" 

, see "Mint Par" 

, relative, 140 

Paris, Its money market on 
outbreak of Great War, 94, 
95, 96 

Partial deliveries, 179, 183 

Peru, bills on, 192 

Philippines, see ' ' Gold Exchange 
Standard " 

Rates of Exchange, for and 
against London, 42, 114 

, High, 42 

in foreign units, 42, 

43, 47 

in pence, 56, 65 

in Silver Standard 

countries, 138 

Low, 42, see also 
Exchange " 

" Tel Quel," 58 
Re-discounting, 203 
Reichsbank Rate, 92 
Reichsmark. See Mark 

, Gold Policy, 38, 39 

Remittance, forms of, 11 
Revolving Credits, see " Credits" 
Rouble, Depreciation in value, 

reasons for, 107 
Royal Exchange, 50 
Rupee, How its parity is main- 
tained, 127 [129 
Rupees, How procured in India, 
Russian Exchange, British Gov- 
ernment's action, 109, 110 
Russia's Exchanges during 

Great War, 107 
Russia, Imperial Bank of, its 
Gold Reserve, 111 

Sale of Goods Act, 166 
Scandinavian Union, 193 
Shanghai, exchange quotations, 

138 
, bills on, 142 



Short Exchange, see "Exchange" 

Rate, see " Exchange " 

Sight Rate, see " Exchange, 

short" [124 
Silver, Depreciation in price of, 
, , its effect on 

trade, 137 

Exchanges, see " Eastern 

Exchanges " 

, "China" 

, Fluctuations in price of, 

125, 136 

Problem, India and, 125 

Standard Countries, Specie 

Points, 141 

, Trade of, 137 

Specie Points, see " Gold 
Points " 

, see " Silver Stan- 
dard countries " 

South Africa, bills on, 187 

America, bills on, 191 

, Paper issues, 121 

Sovereigns, Shield, 105 

, shipments to India, 131 

Spectator, The, 110 

Stock Exchanges, Closing of, 98 
Sweden, Mint Par, 22 
Sycee, 135 

Tael, a standard of weight, 134 

, Unit of currency, 134 

Tale Quale, see " Tel Quel " 
Tel Quel Rates, 58 
Telegraphic Transfers, 47 
Terminals, 212 
Times, The, 40, 51, 59 
Trade, Foreign, 8, 9 
Travelling Letters of Credit, 

see " Credits " 
Treasury Bills, Russian issue in 

London, 109 
, War financed by, 

109, 213 
Trust Receipts, 180 
, system in America, 

181 

War Exchanges, 117 

, Its effect on World's 

Foreign Exchanges, 97, 101 

et seq. 
, London Banks' action at 

commencement of, 99 

Powers Act, see " Cus- 
toms " 



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Students and Practitioners. By F. R. M. de Paula {of the firm of De 
Paula, Turner, Lake & Co.) ; Fellow of the Institute of Chartered Account- 
ants ; Lecturer to the Chartered Accountant Students' Society of London. 
In demy 8vo, cloth gilt, 224 pp., 5s. net. 

ACCOUNTANCY. By F. W. Pixley, F.C.A., of the Middle Temple, Barrister- 
at-Law, Ex- President of the Institute of Chartered Accountants. In 
demy 8vo, cloth gilt, 318 pp., 5s. net. 

COST ACCOUNTS in Principle and Practice. By A. Clifford Ridgway, 
A.C.A. In demy 8vo, cloth gilt, with 40 specially prepared forms, 3s. 6d. 
net. 

COMPANY ACCOUNTS. By Arthur Coles, F.C.I.S. With a Preface by 
Charles Comins, F.C.A. In demy 8vo, cloth gilt, 320 pp., 5s. net. 

MANUFACTURING BOOK-KEEPING AND COSTS. By George Johnson 
F.C.I.S. In demy 8vo, cloth gilt, 120 pp., 3s. 6d. net. 

GOLD MINE ACCOUNTS AND COSTING. A Practical Manual for Officials, 
Accountants, Book-keepers, etc. By G. W. Tait {of the South African 
staff of a leading group of mines). In demy 8vo, cloth gilt, 93 pp., 5s. net. 

THE ACCOUNTS OF EXECUTORS, ADMINISTRATORS AND TRUSTEES. 
With a Summary of the Law in so far as it relates to Accounts. By 
William B. Phillips, A.C.A. (Hons. Inter, and Final), A.C.I.S. In demy 
8vo, cloth gilt, 150 pp„ 38, 6(1, net, 
G R— 7 



PITMAN'S BUSINESS HANDBOOKS 



RAILWAY ACCOUNTS AND FINANCE. Railway Companies (Accounts and 
Returns) Act, 1911. By Allen E. Newhook, A.K.C, Chief Accountant 
to the London and South-Western Railway Company. In demy 8vo, cloth 
gilt, 148 pp., 5s. net. 

PERSONAL ACCOUNTS. By W. G. Dowsley, B.A., Lecturer in Book- 
keeping on the Modern Side, St. Andrew's College, Grahamstown. Size 
15| in. by 9| in., half leather, 106 pp., with interleaved blotting-paper, 
6s. 6d. net. 

FARM ACCOUNTS. By the same Author. Size 15^ in. by 9^ in., half 
leather, 106 pp., interleaved blotting-paper, 6s. 6d. net. 



BUSINESS TRAINING 

LECTURES ON BRITISH COMMERCE, including Finance, Insurance, Business 
and Industry. By the Rt. Hon. Frederick Huth Jackson, G. 
Armitage-Smith, M.A., D.Lit., Robert Bruce, C.B., Sir Douglas 
Owen, W. E. Barling, J. J. Bisgood, B.A., Allan Greenwell, F.G.S., 
James Graham. With a Preface by the Hon. W. Pember Reeves. In 
demy Svo, cloth gilt, 295 pp., 7s. 6d. net. 

THE THEORY AND PRACTICE OF C0M3IERCE. Being a Complete Guide 
to Methods and Machinery of Business. Edited by F. Heelis, F.C.I.S., 
Examiner in Business Training to the Lancashire and Cheshire Union of 
Institutes, etc., etc. Assisted by Specialist Contributors. In demy Svo, 
cloth gilt, 620 pp., with many facsimile forms, 4s. 6d. net. Also in 2 vols., 
each price 2s. 6d. net. 

THE PRINCIPLES AND PRACTICE OF COMMERCE. By James Stephen- 
son, M.A., M.Com., B.Sc, Head of the Higher Commercial Department, 
Regent Street Polytechnic, London ; Examiner in Commercial English 
and Business Methods to the Union of Lancashire and Cheshire Institutes. 
In demy Svo, cloth gilt, 650 pp., with many facsimile forms, 5s. net. 



I NSURANCE 

INSURANCE. A Practical Exposition for the Student and Business Man. 
By T. E. Young, B.A., F.R.A.S., ex-President of the Institute of Actuaries. 
With a Practical Section on Workmen's Compensation Insurance, by W 
R. Strong, F.I. A. ; and the National Insurance Scheme, by Vyvyan 
Marr, F.F.A., F.I. A. Third Edition, Revised and Enlarged. In demy 
Svo, cloth gilt. 423 pp.. 7s. 6d. net. 

INSURANCE OFFICE ORGANISATION, MANAGEMENT, AND ACCOUNTS. 
By T. E. Young. B.A., F.R.A.S., and Richard Masters, A.C.A. Second 
Edition, Revised. In demy Svo, cloth gilt, 150 pp., 3s. 6d, net. 



ORGANISATION AND MANAGEMENT 

OFFICE ORGANISATION AND MANAGEMENT. Including Secretarial 
Work. By Lawrence R. Dicksee, M.Com., F.C.A., and H. E. Blain, 
Late Tramways Manager, County Borough of W^st H<^m, In demy Svo, 
cloth gilt, 306 pp., 5s. net. 



PITMAN'S BUSINESS HANDBOOKS 



COUNTING HOUSE AND FACTORY ORGANISATION. A Practical Manual 
of Modern Methods applied to the Counting House and Factory. By 
J. GiLMOUR Williamson. In demy 8vo, cloth gilt, 182 pp., 5s. net. 

THE PSYCHOLOGY OF MANAGEMENT. The Function of the Mind in 
Determining, Teaching, and Installing Methods of Least Waste. By 
L. M. GiLBRETH. In demy Svo, cloth gilt, 354 pp., 78. 6(1. net. 

INDUSTRIAL TRAFFIC MANAGEMENT. By Geo. B. Lissenden, Author 
of " Railway {Rebates) Case Law," etc., etc. With a Foreword by Charles 
E. MusGRAVE, Secretary, London Chamber o/ Commerce. In demy Svo, 
cloth gilt, 260 pp., 78. 6(1. net. 

SYSTEMATIC INDEXING. By J. Kaiser. In royal Svo, cloth gilt, with 
32 illustrations and 12 coloured plates, 12s. 6(1. net. 

MUNICIPAL OFFICE ORGANISATION AND MANAGEMENT. A Compre 
hensive Manual of Information and Direction on matters connected with 
the work of Officials of Municipalities. Edited by William Bateson, 
A.C.A., F.S.A.A., Borough Treasurer for the County Borough of Blackpool. 
With contributions by eminent authorities on Municipal Work and 
Practice. In crown 4to, half-leather gilt, with about 250 diagrams and 
forms, 503 pp., 25s. net. 

CLUBS AND THEIR MANAGEMENT. By Francis W. Pixley, F.C.A., 
of the Middle Temple, Barrister- at- Law. In demy Svo, cloth gilt, 240 pp., 
7s. 6d. net. 

SHIPPING OFFICE ORGANISATION, MANAGEMENT, AND ACCOUNTS. 
A comprehensive Guide to the innumerable details connected with the 
Shipping Trade. By Alfred Calvert. In demy Svo, cloth gilt, 203 pp., 
with numerous forms, 6s. net. 

SOLICITOR'S OFFICE ORGANISATION, MANAGEMENT, AND ACCOUNTS. 
By E. A. Cope and H. W. H. Robins. In demy Svo, cloth gilt, 176 pp., 
with numerous forms, 5s. net. 

COLLIERY OFFICE ORGANISATION AND ACCOUNTS. By J. W. Innes, 
F.C.A. (Swithinbank Innes & Co., Chartered Accountants), and T. Colin 
Campbell, F.C.I. In demy Svo, cloth gilt, 140 pp., 6s. net. 

GROCERY BUSINESS ORGANISATION AND M.ANAGEMENT. By C. L. T. 
Beeching, Organising Secretary of the Institute of Certificated Grocers. 
With Chapters on Buying a Business, Grocers' Office Work and Book- 
keeping, and a Model set of Grocers' Accounts. By J. Arthur Smart. 
In demy Svo, cloth gilt, about 160 pp., with illustrations, 5s. net. 

DRAPERY BUSINESS ORGANISATION AND MANAGEMENT. By J 
Ernest Bayley. In demy Svo, cloth gilt, 300 pp., 6s. net. 

STOCKBROKER'S OFFICE ORGANISATION, MANAGEMENT AND 
ACCOUNTS {see below). 

BANK ORGANISATION, MANAGE3IENT AND ACCOUNTS (p. 4). 

INSURANCE OFFICE ORGANISATION (p. 2). 

STOCK EXCHANGE 

STOCKBROKER'S OFFICE ORGANISATION, MANAGEMENT AND 

ACCOUNTS. By Julius E. Day, Manager to an inside Firm of Stock- 
brokers on the London Stock Exchange. In demy Svo, cloth gilt, 243 pp., 
7s. 6d. net. 
THE HISTORY, LAW, AND PRACTICE OF THE STOCK EXCHANGE. By 

A. P. Foley, B.A., of the Inner Temple and Midland Circuit, Barrister- 
at-Law ; and F. H. Carruthers Gould, of the Stock Exchange. Second 
Edition revised and brought up to date. In demy Svo, cloth gilt, 34S pp., 
OS. net. 



PITMAN *S BUSINESS HANDBOOKS 



BANKING AND EXCHANGE 

MONEY, EXCHANGE AND BANKING, in their Practical. Theoretical, and 
Legal Aspects. A complete Manual for Bank Officials, Business Men, 
and Students of Commerce. By H. T. Easton. Associate of the Institute 
of Bankers. Second Edition, Revised. In demy 8vo. cloth gilt, 312 pp.. 
6s. net. 

FOREIGN EXCHANGE AND FOREIGN BILLS IN THEORY AND IN 
PRACTICE. By W. F. Spalding. Certificated Associate, Institute of 
Bankers ; Fellow of the Royal Economic Society ; Lecturer on Foreign 
Exchange at the City of London College ; Author of " Foreign and Colonial 
Banking Appointments." In demy 8vo, cloth gilt, 227 pp., 6s. net. 

PRACTICAL BANKING. By J. F. G. Bagshaw, Member of the Institute of 
Bankers. With chapters on " The Principles of Currency," by C. F. 
Hannaford, Associate of the Institute of Bankers, and " Bank Book- 
keeping," by W. H. Peard, Member of the Institute of Bankers in Ireland. 
In demy 8vo, cloth gilt, 400 pp., 58. net. 

BANK ORGANISATION, MANAGEMENT, AND ACCOUNTS. By J. F. 
Davis, D.Lit.. M.A., LL.B. (Lond.), Lecturer on Banking and Finance at 
the City of London College. In demy 8vo, cloth gilt, 165 pp., 5s. net. 

BILLS, CHEQUES, AND NOTES. A Handbook for Business Men and 
Lawyers. Together with the Bills of Exchange Act, 1882, and the Amend- 
ing Act, Bills of Exchange (Crossed Cheques) Act, 1906. By J. A. Slater, 
B.A.. LL.B. (Lond.), of the Middle Temple, and the North Eastern Circuit, 
Barrister-at-Law ; author of "Mercantile Law," etc. Second Edition, 
revised and enlarged. In demy 8vo, cloth gilt, 214 pp., 5s. net. 

DICTIONARY OF BANKING. A Complete Encyclopaedia of Banking Law 
and Practice. By W. Thomson, Bank Inspector. With a section on 
the Irish Land Laws in their relation to Banking. By Lloyd Christian. 
Secretary to the Institute of Bankers in Ireland. Thoroughly Revised up 
to September, 1915. In crown 4to. half-leather gilt, 618 pp., 21s. net. 

SECRETARIAL WORK 

THE COMPANY SECRETARY'S VADE MECUM. Edited by Philip Tovey, 
F.C.I.S. Second Edition, enlarged and revised. In foolscap 8vo, cloth, 
247 pp., 2s. net. 

SECRETARY'S HANDBOOK. A Practical Guide to the Work and Duties 
in connection with the Position of Secretary to a Member of Parliament, 
a Country Gentleman with a landed estate, a Charitable Institution, with 
a section devoted to the work of a Lady Secretary and a chapter dealing 
. with Secretarial work in general. Edited by H. E. Blain. In demy 8vo, 
cloth gilt, 168 pp.. 3s. Gd. net. 

GUIDE FOR THE COMPANY SECRETARY. A Practical Manual and Work 
of Reference for the Company Secretary. By Arthur Coles, F.C.I.S. 
Second Edition. Enlarged and thoroughly Revised. In demy 8vo, cloth 
gilt. 432 pp.. with 75 facsimile forms, and the full text of the Companies 
Acts, 1908 and 1913, and the Companies Clauses Act. 1845, 5s. net. 

COMPANY ACCOUNTS. By the same Author. (See p. 1.) 

DICTIONARY OF SECRETARIAL LAW AND PRACTICE. A Compre 
hensive Encyclopaedia of Information and Direction on all matters 
connected with the work of a Company Secretary. Fully illustrated with 
the necessary forms and documents. With Sections on special branches of 
Secretarial Work. Edited by Philip Tovey, F.C.I.S. With contributions 



PITMAN'S BUSINESS HANDBOOKS 



by nearly 40 eminent authorities on Company Law and Secretarial 
Practice, including : The Kt. Hon. G. N. Baxnes, M.P. ; F. Gore-Browne, 
K.C., M.A. ; A. Crew, F.CT.S. ; J. P. Earnshaw, F.CT.S. ; M. Webster 
Jenkinson, F.C.A. ; F. W. Pixley, P\C.A. Second Edition, enlarged 
and revised. In one handsome volume, half leather gilt, gilt top, 
940 pp., aOs. net. 

THE TRANSFER OF STOCKS, SHARES, AND OTHER MARKETABLE 
SECURITIES. A Manual of the Law and Practice. By F. D. Head, 
B.A. (Oxon.), Late Classical Exhibitioner of Queen's College, of Lincoln's 
Inn, Barrister-at-Law. Second Edition, Revised and Enlarged. In 
demy 8vo, cloth gilt, 220 pp., dS. net. 

THE CHAIRMAN'S 3IANUAL. Being a guide to the management of meet- 
ings in general, and of meetings of local authorities, with separate and 
complete treatment of the meetings of pubhc companies. By Gurdon 
Palin, of Gray's Inn, Barrister-at-Law, and Ernest Martin, F.C.I.S. 
In crown 8vo, cloth gilt, 192 pp., 2s. 6d. net. 

HOW TO TAKE MINUTES. A Gmde for Secretaries and others to the correct 
method of taking and recording the Minutes of Meetings of Directors, 
Shareholders, etc., etc., including Chapters on Voting and the Drafting 
of Resolutions ; with the addition of the First Schedule of the Companies 
(Consohdation) Act, 1908, known as Table " A." Revised and Enlarged 
Edition. Edited by Ernest Martin, F.C.I.S., Author of " Secretarial 
Work " ; Joint Author of " The, Chairman's Manual," etc. In demy 
8vo, cloth gilt, 130 pp., 2s. net. 

WHAT IS THE VALUE OF A SHARE J Tables for readily and correctly 
ascertaining (1) the present value of shares ; and (2) what dividends should 
be paid annually to justify the purchase or market price of shares. By 
D. VV. Rossiter, Head of the Intelligence Department of the Consolidated 
Gold Fields of South Africa, Ltd. In demy 8vo, limp cloth. 20 pp., 
2s. 6(1. net. 

ECONOMICS 

ECONOMIC GEOGRAPHY. By J. McFarlane, M.A., M.Com., Lecturer in 
Geography in the University of Manchester. In demy 8vo, cloth gilt, 
568 pp., with 18 illustrations, 7s. 6d. net. 

OUTLINES OF THE ECONOMIC HISTORY OF ENGLAND. A Study in 
Social Development. By H. O. Meredith, M.A., M Com., Fellow of 
King's College, Cambridge ; Professor of Economics , Queen's University, 
Belfast. In demy 8vo, cloth gilt, 376 pp., 5s. net. 

THE HISTORY AND ECONOMICS OF TRANSPORT. By Adam W. 
KiRKALDY, M.A., B.Litt., Oxford ; M.Com., Birmingham ; Professor of 
Finance in the University of Birmingham ; and Alfred Dudley Evans, 
Secretary of the Birmingham Exchange. In demy 8vo, cloth gilt, 348 pp., 
78. 6d. net. 

THE ECONOMICS OF TELEGRAPHS AND TELEPHONES. By John Lee. 
M.A., Traffic Manager, Post Office Telegraphs. In crown 8vo, cloth gilt, 
92 pp., 2S. 6d. net. 

CREDIT, INDUSTRY AND THE WAR. Being Reports and other matter 
presented to the Economic Science and Statistics Section of the British 
Association for the Advancement of Science meeting at Manchester, 1915. 
Edited by Adam W. Kirkaldy, M.A., B.Lit., Oxford, M.Com., Bir- 
mingham, Professor of Finance in the University of Birmingham, Recorder 
of the Section. With a Preface by W. R. Scott, M.A., D.Phil.. Litt.D., 
F.B.A., Adam Smith Professor of Political Economy in the University of 
Glasgow, President of the Section ; and contributions by other eminent 
authorities. In demy 8vo, qr. cloth, 278 pp., 2s. 6d. net. 



PITMAN'S BUSINESS HANDBOOKS 



ADVERTISING AND SALESMANSHIP 

THE THEORY AND PRACTICE OF ADVERTISING. By Walter Dill 

Scott, Ph.D. In large crown 8vo, cloth, with 61 illustrations, 240 pp., 

6s. net. 
THE PSICHOLOGY OF ADVERTISING. A Simple Exposition of the Principles 

of Psychology and their Relation to Successful Advertising. By the same 

Author. In large crown 8vo, cloth, with 67 illustrations, 282 pp., 6s. net. 
THE PRINCIPLES OF PRACTICAL PUBLICITY. ' The Art of Advertising.' 

By Truman A. de Weese. In large crown 8vo, cloth, with 43 full-page 

illustrations, 266 pp., 78. 6d. net. 
ADVERTISING AS A BUSINESS FORCE. A Compilation of Experience 

Records. By P. T. Cherington, Instructor in Commercial Organisation 

in the Graduate School of Business Administration, Harvard University. 

In demy 8vo, cloth gilt, 586 pp., 7s. 6(1. net. 
THE PRINCIPLES OF ADVERTISING ARRANGEMENT. By F. A. 

Parsons, President of the New York School of Fine and Applied Art. 

Size 7 in. by 10^ in., cloth, 128 pp., with many illustrations, 6s. net. 
ADS AND SALES. A study of Advertising and Selling from the standpoint 

of the new principles of Scientific Management. By Herbert N. Casson. 

In demy 8vo, cloth, 167 pp., Gs. net. 
PRACTICAL SALESMANSHIP. A treatise on the Art of SeUing Goods. 

By N. C. Fowler, Jnr. Assisted by twenty-nine Expert Salesmen, Sales 

Managers, and prominent business men. In crown 8vo, cloth, 337 pp., 

3s. 6(1. net. 
COMMERCIAL TRAVELLING. A Guide to the Profession for present and 

Prospective Salesmen " on the road." By Albert E. Bull. In crown 

8vo, cloth gilt, 174 pp., 2s. 6d. net. 

LAW 

MERCANTILE LAW. By J. A. Slater, B.A.. LL.B. A practical exposition 
for Law Students, Business Men, and Advanced Classes in Commercial 
Colleges and Schools. Third Edition, Revised. In demy 8vo, cloth 
gilt, 464 pp., 5s. net. 

COMPANIES AND COMPANY LAW. Together with the Companies (Con- 
sohdation) Act, 1908, and the Act of 1913. By A. C. Connell, LL.B. 
(Lond.), of the Middle Temple, Barrister-at-Law. Second Edition, 
Revised. In demy 8vo, cloth gilt, 348 pp., 5s. net, 

COMPANY CASE LAW. By F. D. Head, B.A. (Oxon.), Late Classical 
Exhibitioner of Queen's College ; of Lincoln's Inn, Barrister-at-Law. In 
demy 8vo, cloth gilt, 314 pp., 7s. 6d. net. 

THE LAW OF CARRIAGE. By J. E. R. Stephens, B.A., of the Middle 
Temple, Barrister-at-Law. In demy 8vo, cloth gilt, 324 pp., 5s. net. 

THE LAW RELATING TO THE CARRIAGE BY LAND OF PASSENGERS, 
ANIMALS, AND GOODS. By S. W. Clarke, of the Middle Temple and 
the North Eastern Circuit, Barrister-at-Law. In demy 8vo, cloth gilt, 
350 pp., 7s. 6d. net. 

INCOME TAX, SUPER-TAX, AND INHABITED HOUSE DUTY LAW AND 
CASES. A Practical Exposition of the Law, for the use of Income Tax 
Officials, Solicitors, Accountants, etc. With an Analysis of the Schedules, 
Guide to Income Tax Law, and Notes on Land Tax. Including a Supple- 
ment dealing with the Finance Act, 1915, and the Finance No, 2 Act, 
1915. By W. E. Snelling, of the Inland Revenue Department. New 
Edition, Enlargeu and thoroughly Revised. In demy 8vo, cloth gilt, 
432 pp., lOs. 6d. net. 



PITMAN'S BUSINESS HANDBOOKS 



THE LAW RELATING TO SECRET COMMISSIONS AND BRIBES (CHRIST- 
MAS BOXES, GRATUITIES, TIPS, ETC.) THE PREVENTION OF 
CORRUPTION ACT, 1906. By Albert Crew, of Gray's Inn, and the 
South Eastern Circuit, Barrister-at-Law ; Lee Prizeman of Gray's Inn : 
author of " A Synopsis of Mercantile Law," " Company Law," etc. In 
demy 8vo, cloth gilt, 198 pp., 5s. net. 

BANKRUPTCY, DEEDS OF ARRANGEMENT, AND BILLS OF SALE. By 
W. Valentine Ball, M.A., and G. Mills, B.A., both of Lincoln's Inn, 
Barristers-at-Law. In demy Svo, cloth gilt, 364 pp., 5s. net. Third 
Edition, Enlarged and Revised in accordance with the Bankruptcy Act, 
1914, and the Deeds of Arrangement Act, 1914. 

PRINCIPLES OF MARINE LAW. By Lawrence Duckworth, of the 
Middle Temple, Barrister-at-Law. Third Edition, Revised. In demy 
Svo, cloth gilt, about 400 pp., 7s. 6d. net. 

HANDBOOK OF LOCAL GOVERNMENT LAW. Specially designed for all 
engaged in the offices of Local Authorities in England and Wales, and for 
Public Men. By J. Wells Thatcher, of the Middle Temple, Barrister- 
at-Law. In crown Svo, cloth gilt, 250 pp., 3s. 6d. net. 

GUIDE TO THE LAW OF LICENSING. The Handbook for all Licence- 
holders. By J. Wells Thatcher, Barrister-at-Law. In demy Svo, 
cloth gilt, 200 pp., 5s. net. 

RAILWAY (REBATES) CASE LAW. By Geo. B. Lissenden. Author of 
" Railway Trader's Guide," etc., etc. In demy Svo, cloth gilt, 450 pp., 
lOs. 6d. net. 

THE LAW RELATING TO THE CHILD : Its Protection, Education, and 
Employment. With Introduction on the Laws of Spain, Germany, 
France, and Italy ; and Bibliography. By Robert W. Holland, M.A., 
M.Sc, LL.D., of the Middle Temple, Barrister-at-Law. In demy Svo, 
cloth gilt, 166 pp.. 5s. net. 

HOUSEHOLD LAW. By J. A. Slater, B.A., LL.B. (Lond.). In demy Svo, 
cloth gilt, 316 pp., 5s. net. 

THE LAW OF REPAIRS AND DILAPIDATIONS. By T. Cato Worsfold, 
M.A., LL.D. In crown Svo, cloth gilt, 3s. 6d. net. 

THE LAW OF EVIDENCE. By W. Nembhard Hibbert, LL.D. (Lond.), 
Barrister-at-Law of the Middle Temple. Second Edition Revised. In 
crown Svo, cloth gilt, 126 pp., 3s. 6d. net. 

THE LAW OF PROCEDURE. By the same Author. In demy Svo, cloth 
gilt, 122 pp., 5s. net. 

BILLS, CHEQUES, AND NOTES. (See page 4.) 

THE HISTORY, LAW, AND PRACTICE OF THE STOCK EXCHANGE. 
(See page 3.) 

B USINESS REFERENCE BOOKS AND CiUlDES 

COMMERCIAL ENCYCLOPAEDIA AND DICTIONARY OF BUSINESS. A 

reliable and comprehensive work of reference on all commercial subjects, 
specially designed and written for the busy merchant, the commercial 
student, and the modern man of affairs. Edited by J. A. Slater, B.A., 
LL.B. (Lond.), of the Middle Temple and North- Eastern Circuit, Barrister- 
at-Law. Assisted by upwards of 50 specialists as contributors. With 
numerous maps, illustrations, facsimile business forms and legal docu- 
ments, diagrams, etc. In 4 vols., large crown 4to (each 450 pp.), cloth 
gilt, £1 lOs. net. Half-leather gilt, £2 2s. net. 
BUSINESS MAN'S GUIDE. Sixth Revised Edition. With French, German, 
and Spanish eqaivalents for the Commercial Words and Terms. Edited 



PITMAN'S BUSINESS HANDBOOKS 



by J. A. Slater, B.A., LL.B. (Lond.). This is a volume of handy size, 
designed to be of permanent usefulness in the office of the merchant, the 
banker, the broker, and the trader, and to all members of the staff The 
work includes over 2,000 articles. In crown 8vo, cloth gilt, 520 pp., 
3s. 6d. net. 
PUBLIC MAN'S GUIDE. A Handbook for all who take an interest in ques- 
tions of the day. Edited by J. A. Slater, B.A., LL.B. (Lond.). The 
object of this book is to enable its readers to find within a comparatively 
compact compass information on all subjects which can possibly bear 
upon matters political, diplomatic, municipal, or imperial. In crown 8vo, 
cloth gilt, 444 pp., 3s. 6d. net. 
INCOME TAX AND SUPER-TAX PRACTICE. Including a Dictionary of 
Income Tax, Specimen Returns, and a Supplement dealing with the 
Finance Act, 1915, and the Finance No. 2 Act, 1915. By W. E. Snelling, 
of the Inland Revenue Department. In demy 8vo, cloth gilt, 450 pp., 
lOs. 6d. net. 
INCOME TAX TABLES, and Guide to the Deduction of Tax from Dividends, 
Interest, Ground Eents, etc. For the use of Secretaries, Accountants, 
Commercial Houses, and all Payers of Income Tax and Super-Tax. 
Compiled by W. E. Snelling. of the Inland Revenue Department In 
demv 8vo cloth gilt, 185 vv 5s. net. 
THE WORLD'S COMMERCIAL PRODUCTS. A descriptive account of the 
Economic Plants of the world and of their Commercial Uses. By W. G. 
Freeman, B.Sc, F.L.S., Superintendent, Colonial Economic Collections, 
Imperial Institute, London, and S. E. Chandler, D.Sc, F.L.S., Assistant, 
Colonial Economic Collections, Imperial Institute, London. With 
contributions by many Specialists. In demy 4to, cloth gilt, 400 pp., 
420 illustrations from photographs and 12 coloured plates and maps, 
' lOs. ed. net. 
DICTIONARY OF THE WORLD'S COMMERCIAL PRODUCTS. With 
Equivalents in French, German, and Spanish. Second Edition, Revised. 
In demy 8vo, cloth gilt, 164 pp., 2s. 6d. 
TELEGRAPH CIPHERS. By A. W. E. Crosfield, Assoc. Municipal School 

of Commerce, Manchester. Size, 12 in. by 12 in., cloth, 21s. net. 
CONSULAR REQUIREMENTS FOR EXPORTERS AND SHIPPERS TO ALL 
PARTS OF THE WORLD. By J. S. Nowery. In crown 8vo, cloth. 
With exact copies of all forms of Consular Invoices, 2s. 6d. net. 
DICTIONARY OF COMMERCIAL CORRESPONDENCE IN ENGLISH, 
FRENCH, GERMAN, SPANISH, AND ITALIAN. Second Revised and 
Cheaper Edition. In demv 8vo, cloth, 502 pp., 6s. net. 
SPANISH-ENGLISH AND ENGLISH-SPANISH COMMERCIAL DICTIONARY 
of the words and terms used in commercial correspondence which are not 
given in the dictionaries in ordinary use ; compound phrases, idiomatic 
and technical expressions, etc. By G. R. Macdonald, Society of Arts' 
First Prizeman and Silver Medallist for Spanish, etc. ; Lecturer in Spanish 
at the Municipal School of Commerce, Manchester. In crown 8vo, cloth 
gilt, 652 pp.. 7s. 6d. net. 



COMPLETE LIST POST FREE ON APPLICATION 

Sir Isaac Pitman & Sons, Ltd.; 1 Amen Corner, London, EX. 

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