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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter LI

Commerce and Finance - Chapter LI

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII




International trade, or the exchange of commodities between
nations, requires a medium by means of which resulting balances
can be satisfactorily settled. The ultimate medium adopted for
this purpose is pure gold, and this metal is the basis of all cal-
culations in connection with foreign exchange. Of
value of course for practical purposes the metal must have

001(1 an alloy, and each nation has determined the

quantity of base material employed independent of other coun-
tries, but nevertheless they are all pretty nearly in unison. The
general system employed is 9-10ths pure gold and l-10th alloy,
with the exception of Great Britain, which uses 11-12 and 1-12.
A further circumstance is the legal value placed upon the metal,
thus giving assurance for all time that its value will be stable;
and it is this officially made stability which renders it possible
to determine the value of the money of one country in that of
another. The value of gold in the following countries as de-
termined by law is. respectively:

Great Britain, 1 oz., ll-12ths fine = 77/10

United States, 25 8-10ths grains, 9-10ths fine, $1.00
Germany, 122.915 grains, 9-10ths fine, M. 20
Latin Union, 99.561 grains, 9-10ths fine, F. 20

Taking these gold values as a basis we arrive at the follow-
ing interchangeable values of the various coins:



One pound sterling weighing 123 27-100 grains 11-12 fine
equals $4.8665, equals Fc 25.2215, equals Marks 20.4296. This
interchangeable ^ s wna ^ * s termed the mint parity, or the value
values at which the respective mints in London, Wash-

ington, Paris and Berlin, would accept the coins
of each of the other nations.

The following weights of the principal coins of the four
above-named nations, will enable the student to follow out the
calculation for himself:

1 Eagle or $10 = 258 grains, 9-10 or 232 grains pure gold.
Sovereign, 1, 123.270 grains, 11-12 or 113 grains pure gold.
1 Double Crown, or M. 20 = 122.915 grains, 9-10, or 110.624 grains
pure gold.

1 Napoleon or Fc. 20 = 99.661 grains, 9-10, or 89.605, grains pure gold.

The foregoing is the fundamental basis of foreign exchange,
and with these principles firmly grasped, the various ramifica-
tions of the business are readily understood.

In the early period of international commerce, when each
European principality coined its own money and falsified
and clipped it according to the needs and exigencies of its
petty sovereign, the only international medium of exchange
was the promissory notes of the great merchants of the
middle ages. These notes circulated the year around as money,
and were payable as a rule on certain days at certain cities where

the great annual fairs were held, and were redeem-
Historicai able at fixed values in silver. A striking instance

of the power wielded by these merchant princes is
to be found in the history of the steelyard in London, a settle-
ment of Hansa merchants in the city, making their own laws and
governed only by their own rules and traditions, regardless of
the laws of the land whose hospitality and protection they en-
joyed. The pound of silver was the measure of value, but the
pound of silver was an unknown quantity unless it was desig-
nated in the bond as a pound of silver of the Esterlings, or
strangers hence the origin of the term Pound Sterling, which


has subsequently been adopted as the denominational standard of
value of Great Britain. Modern legislation has remedied all the
defects of the earlier systems, but a recital of former conditions
is none the less interesting as an introduction to our present
methods, which are the fruits of evolution and have been placed
upon a scientific basis of fact.

Goods are being transported from one country to another,
and this is the natural method of liquidating an international
indebtedness. This failing, recourse is had to the transfer
of credits arising out of former transactions, and as a last
resort, refuge is had to shipping bullion or minted coin. Let us
Liquidation of f ollow a shipment of hardware from England, val-
intemationai ued at say $1,000, to South America, where for
argument's sake it has been disposed of for $2,000.
Instead of remitting the money to England and sending the ship
back empty, the agent of the English merchants purchases hides,
which are forwarded to France, as the best market, and are there
sold for $4,000. The ultimate result of this transaction is that
France owes England a debt of $4,000 which must be liquidated
in either of the foregoing methods. Now the probabilities are
that goods will be forwarded to England and there disposed of at
a profit. We have assumed that this train of transactions has
been carried on by one merchant and his agents, but this is not
the modern way, and it is here that international banking
steps in as the connecting link between each transaction, but the
ultimate liquidation has taken place by the ship-
ment of mercnandi se notwithstanding. In each
case the banker has been called upon to provide
the funds and the buying and selling of the bills of
exchange is what constitutes the liquidation. But, never-
theless, the exchange of merchandise is the essence, hence
it is clearly demonstrated that the economical method of liquidat-
ing an international trade balance is through the sale of com-


This constant interchange of commodities creates credits and
debits and foreign transactions are carried out primarily with a
view to adjusting these balances. The debits are set off against
the credits, and only the balance is left for settlement in money.
A merchant shipping goods to a foreign port desires reim-
bursement therefor immediately the goods are loaded. He
therefore draws on the purchaser, attaches to the draft
all evidences of the shipment, and negotiates the draft
through his banker. He here incurs a risk that on arrival
the purchaser may be insolvent, or for specious reasons may
refuse to accept the goods, thus entailing loss and perhaps ruin,
consequently this method is only adopted where the shipper is
well acquainted with the purchaser's financial standing. Other-
wise he requires a bank credit i. e., an undertaking on the part

of a bank that his drafts if drawn under certain
Methods conditions will be promptly paid. We will say the

above shipment was made to Germany, but the
banker negotiating the bill has no use for funds in that country,
but desires the money in London. Now any number of courses
are open to him, which will enable him to place the money to his
credit in London. He can send the bill of exchange to his Berlin
bankers for discount, if it is a time bill, and instruct them to
buy a transfer on London; or he can remit the bill direct to
London and sell it in the open market; or he can have his Berlin
bankers buy French exchange and remit this to London for sale,
or purchase therewith in Paris transfers on London. There
really is no end to the combinations that can be made, but for
all practical purposes there are very rarely more than three,
and those under very peculiar conditions; but the writer recalls
one particular transaction which required the intermediary of
four financial centers before it was brought to a satisfactory

conclusion. This method of adjusting balances
Arbitrage is called arbitrage, or arbitration, and is quite

common among foreign bankers; in fact by some is
made a special feature of the business.


The parity of exchanges with America as the center, is as

Sterling 486.65

Germany &5.20

France and Latin Union 518 %

As the exchanges are above or below these points, they are
said to be in our favor or against us, and this is the only real
indication of balance of trade conditions, as published statistics
are fallacious and more or less misleading. As an instance, let
us take the published Treasury statement of the U. S. for Decem-
ber, 1902, which shows an excess of exports over imports for
the preceding fiscal year of $670,000,000, leaving the impression
that the U. S. was at that time a creditor nation, while as a mat-
ter of fact the reverse obtained, as evidenced by the current
quotations of foreign exchange which were all far above the re-
Factors spective mint parities. Trade balances are not the
Determining only factors determining the rates of exchange.
inge Rates of interest, general economic conditions and
local causes have also a great deal to do with fluctuations. When
money rules high it attracts a great foreign investment, which
is made use of by so-called finance bills, but at times the opposite
condition prevails and advantage is taken of higher rates of
interest abroad by purchase of time bills in foreign centers for
temporary investment purposes.

Where one country cannot liquidate its debt to another by
shipping what it produces, or returning securities which were
held for investment, or selling its own securities, recourse must
be had to gold shipments, which point is reached when exchange
rises sufficiently above the mint parity to cover the cost of
transportation, insurance and other minor ex-
Gold penses. An additional factor is the market price


for gold at point of destination. In view of the
fact that the mint price for gold at all important centers is deter-
mined by statute, this last statement might seem anomalous, but
such is the case nevertheless. The quotations for foreign coins


varies from day to day in accordance with the desire of the
market to encourage or repel gold shipments. The mintage
price for bar gold is always the same, but often a premium is
paid if there is a scarcity. This applies to England; in France
and Germany other methods are in vogue of a more arbitrary
nature, but none the less effectual. England and America are
free traders in this respect, and thus it always is, when gold is
required anywhere in the world, that either of these countries
is called upon to supply the needed metal. As an instance, in
the year 1902, gold shipments were made from New York to
Argentina, although New York owed Argentina nothing. Amer-
ica, however, was heavily in debt to Great Britain, and the latter
country being called on for a remittance, simply turned the
requisition over to the United States. The year previous a
similar course was pursued when France demanded liquidation
of a debt owing by England, and which England was unwilling
to pay. The consequence was that the exchange on London fell
to such a low point that it became profitable to ship gold from
America to France wherewith to purchase English exchange,
and thus was the burden of liquidating the French debt thrown
upon the New York market, while at the rate of exchange pre-
vailing between New York and London, a direct shipment of
gold to the latter point would have been connected with a
serious loss.

It is obvious that in speaking of exchange operations between
two countries, the money of one country must be taken as the
standard or basis, the money of the other being considered as
fluctuating or variable. It is natural and customary to regard the
money of one's own nation as the standard, as a
rule, with one exception, to which reference will

be made later on. Thus when we read in the quo-
tations that exchange on London is unfavorable, or against us, we
mean that it is at a premium in New York i. e., a good bill on
London is worth in New York more than $4.8665 per Pound
Sterling. A typical quotation list would read as follows:


Sterling, demand 485^ 60 days, 482^ 90 days,

German Marks, demand, 95 & 60 days, 94% 90 days, 94^
Francs, demand 518^ 60 days, 522% 90 days, 523^

which means that

1 Pound Sterling is worth $4.85}.

4 German Marks are worth 95^ cents, and (this is the exception
referred to) $1 is worth 5.18% Francs.

In Germany the quotations would read:

Sterling demand 20.39 (Marks for 1 Sterling).

U. S. Dollars 4.17 (Marks for $1.00).

Francs 81. 10 (Marks for F. 100).

In France:

Sterling demand 25. 15 (Francs for 1 Sterling).

U. S. Dollars 5.18 (Francs for $1.00).

German Marks 123.25 (Francs for M. 100).

In the foregoing countries it will be noted that each country
takes its own currency as the standard, with the single exception
of the quotation for French exchange in America.

In England, on the contrary, the foreign countries are the
variable quantities e. g.:

United States 4.87

Germany 20.39

France 25.15

American exchange is sometimes quoted at so many pence per
$. e. g., 49 13-16d. Eeverting now to the quotations in New
York, everything being equal, and Sterling exchange quoted at
485J, on the basis of the mint parity exchange on Germany
Exchange should be about 94 13-16c. + 1-32%, and French

Distinguished exchange about 520 1-16%, and the question
Parity naturally arises, why this discrepancy? It is to be

found in the different interest rates prevailing in the respective
centers, which again finds its expression in the exchange rates
for or against. Thus in London the discount rate is 2f-%; in
Berlin 3J%; in Paris 2-|% and as expressed in exchange rates,
485J, 2039 and 2515. Thus:

2039 -f- 48525 = 23798 X 4 = 95 3-16 approximately.
48525 -*- 2515 = 518^ approximately.
and in this way we arrive at what is called the parity of exchange
as distinguished from the mint parity i. e., prevailing condi-
tions are taken into consideration and reconciled.

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