FOREIGN EXCHANGES. The enormous trade carried on between this and other countries necessitates a very active business in the settlement of the balances of indebted ness. These balances are constantly vary ing not only in amount but also in direction ; that is to say, a certain country may at some time be in debt to this country, and shortly afterwards the position may be reversed.
If England is owing a balance to another country, arising, say, through that country having sent here a greater value of goods than this country has exported, there are three ways open in which the liability may be discharged : 1. Coin or gold bars may be sent. This method is expensive owing to charges for freight and insurance.
2. A hatch of " international " securities could be sent, i.e. certain well-known govern ment bonds, dealt in on all the principal markets of the world. This method is not much cheaper than No. 1, owing to charges for brokerage and loss of the margin between the buying and the selling price.
3. A remittance of bills may be made. This is by far the easiest, cheapest and so most frequently adopted method. The bills need not necessarily be drawn upon the country to which they are remitted, provided they are the acceptances of another country than this. The bills used are, of course, any first-class ones that are offering in the bill market and may be of various currencies ; at three months' date, is a frequent quotation in the bill brokers' bi weekly Course of Exchange, or list of bill prices.
There are two main factors which affect the foreign exchanges and the price at which bills for settlement of a balance, as men tioned, can be bought. One is the relative indebtedness of the two countries ; if this country is in debt to the other, the price of bills on th it country naturally tends to rise in the market because the merchants compete with one another in their endeavours to buy bills to remit, whilst in the other country's market the price of bills on this country tends to fall owing to want of demand. The
other disturbing factor is the value or price of money in the two countries, that is the rate of discount ruling in each. Though in the case mentioned England owes the other country a balance, yet the exchanges may be turned in favour of this country by a high rate of interest here, for this will tempt capi talists in the foreign country to invest money in bills on this country. " As the rate rises, the demand will increase, until at last the price reaches the specie point, and gold begins to flow in " (Macleod).
The foreign exchange is said to be turning in favour of a country when gold may shortly have to be sent to it by the foreigner, and to be adverse when, before long, it may be necessary to export gold to the foreigner.
Where the exchange rates are quoted in foreign money (e.g. with France and Ger many at so many francs or marks to the pound), the higher the quotation the more favourable the exchange is to England, because the amount of francs or marks which are to be received for one pound is greater. On the other hand, where rates are quoted in sterling money (e.g. with Russia and India, at so many pence to a rouble or rupee) the lower the quotation the more favourable it is to England, because fewer pence are to be given for a rouble or rupee. (Sec CHEQUE RATE, COURSE OF EXCHANGE, LONG RATE, SHORT RATE, SPECIE POINTS, PAR OF EXCHANGE.)