Chapter XVIII: Foreign Exchange (3)

... The exchanges of these silver standard countries ... [are] 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 1_s._ 10-3/8_d._ to the dollar, and Shanghai, 2_s._ 5-5/8_d._ to the tael. The rates from these centres ... 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: 2_s._ 5-5/8_d._ per tael, means that for every silver tael the remitter hands over to the exchange bank in Shanghai, 2_s._ 5-5/8_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....

... 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 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....

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....

... The rate at which they are able to cover their drawing operations ... 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,... when, as all other means of placing his correspondent in funds have been exhausted, the banker will be obliged to ship ... silver to be sold for what it will fetch....

It is fairly clear that the real trouble in Eastern exchange lies 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 complicated by the way in which we also have to depend upon the fluctuations in the price of silver on the London market....

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 manufacturer 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 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....

FOOTNOTES:

[103] Hartley Withers, _Money Changing_, pp. 30-35. E. P. Dutton and Company. New York. 1914.

[104] Adapted from the Rt. Hon. Viscount Goschen, _The Theory of the Foreign Exchanges_, pp. 85-88. Effingham Wilson. London. 1913.

[105] Adapted from Franklin Escher, _The Elements of Foreign Exchange_, pp. 3-14. Bankers Publishing Company. New York. 1913.

[106] _Ibid._, pp. 15-24, 26, 31-33, 44.

[107] Adapted from Frederick I. Kent, _Financing Our Foreign Trade_, The Annals of the American Academy of Political and Social Science, Vol. XXXVI, No. 3, November, 1910, pp. 492-500.

[108] [The method explained would apply without qualification to our imports generally prior to 1914, whether coffee from Brazil, hides from the Levant or textiles from France. The recent and growing practice of drawing on New York rather than on London is discussed later in this chapter.]

[109] Adapted from Archibald J. Wolfe, _Foreign Credits_, pp. 22, 23, Special Agents Series--No. 62. Department of Commerce and Labor. Washington. 1913.

[110] George Clare, _The A B C of the Foreign Exchanges_, pp. 11-15. Macmillan and Company. London. 1911.

[111] [English bills drawn on our banks have increased in volume since 1914, through the operation of the Federal Reserve Act and the amended New York State Bank Law which make provision for the acceptance of time drafts by National and New York State banks, respectively.]

[112] John E. Rovensky, _How the War Affects Practical Operations in International Exchange_, Journal of the American Bankers Association, Vol. 7, No. 12, June, 1915, pp. 1008, 1009.

[113] Joseph T. Cosby, _The Economies and Advantages of "Dollar Credits."_ The National City Bank. New York. 1915.

[114] Harry G. Brown, _International Trade and Exchange_, pp. 65-66. The Macmillan Company. New York. 1914.

[115] Anthony W. Margraff, _International Exchange_, pp. 104-105. Fergus Printing Company. Chicago. 1903.

[116] Adapted from Franklin Escher, _Elements of Foreign Exchange_, pp. 68-101. Bankers Publishing Company. 1910.

[117] Albert Strauss, _Gold Movements and the Foreign Exchanges_, The Currency Problem and the Present Financial Situation. A Series of Addresses Delivered at Columbia University, 1907-1908, pp. 65-72. The Columbia University Press. 1908.

[118] Hartley Withers, _Money Changing_, pp. 159-164. E. P. Dutton and Company. New York. 1914.

[119] Address by H. K. Brooks. _Lectures on Commerce_, Edited by Henry Rand Hatfield, University of Chicago Publications of the College of Commerce and Administration, Vol. I., pp. 283-4. The University of Chicago Press. Chicago. 1904.

[120] William F. Spalding, _Foreign Exchange and Foreign Bills in Theory and in Practice_, pp. 133-140. Sir Isaac Pitman & Sons, Ltd., Bath, New York and Melbourne. 1915.