THE FOREIGN EXCHANGES.

II.

LAST month a brief account of the working of the foreign exchanges was furnished in these pages, in which it was remarked how much more rapidly a rise or fall in the value of money at corresponding centres influenced the current rates of exchange than a turn in the "balance of trade" was able to do, and that the three main influences at work in regulating the demand in the market for foreign bills were the value of money, the tide of trade, and, finally, credit. The consideration of the last and most involved of these influences was reserved until the present number.

It stands to reason, if credit in a community is bad, that it would be useless to endeavour to attract foreign money even by high rates paid for the discounting of bills. There are many countries where rates of interest rule almost permanently higher than they do here, yet money does not flow from us to them. In St. Petersburg the average market rate for bills has for years been over 6 per cent., while here it has mostly been 3, or under; yet money flows from St. Petersburg to London: not from London to St. Petersburg. But amongst countries where wealth is greater and yields evidences of accumulation, there is now a substitute provided in times of crisis for mercantile credit -a substitute which for years has been growing more and more powerful, and which, when affected by dear money at a given centre, now exerts an almost magical influence over the exchanges. This substitute, or rather these substitutes, may be likened to warrants holding a recognised value in all monetary centres; and being current in all, their tendency is generally to flow where money is cheapest: where they may, in short, be held to the best advantage. The generic name coined for them is that of "international securities." In London and Paris these securities are held to an enormous extent, and their movement during the late financial crisis in Paris was a remarkable illustration in point. For six weeks before the crisis French bills were practically unsaleable here, and about Christmas time the exchange was in our favour. Yet though this virtual prohibition continued up to the end of January, the exchange fell from 25f. 19c. down to 25f. 11c. in two days, and gold went to Paris to the extent of millions sterling. Our money market would not absorb French bills, but was quite ready to absorb "international securities" at a moderate abatement of price. Thus the rise in money in Paris caused borrowers to

realise these securities, which came to us in large quantities; and Paris in this way got the gold she required. As soon as the crisis was over, Paris had more money than she required, and it became cheap at that centre as compared with London. The exchanges almost at once rose above 25f. 30c., and gold came back to us. There can be no doubt that these international substitutes are destined to play a yet more important part in the future; and that the respective markets are thereby drawn, and will be drawn, more and more closely together. The result will be that a crisis in any international market will, as time goes on, more rapidly affect corresponding international markets, but that the more rapidly such markets sympathise the less severe will be the crisis at the originating centre.

But the question of credit extends in various directions, and in many well-known instances it is the credit of an entire circulating medium which is at stake. Where the credit of a silver basis is placed in relation with that of a gold basis, the fluctuations in the exchanges are due largely to the credit in which gold and silver stand for the time being; and such fluctuations can be measured with comparative ease, and can be eliminated from the fluctuations traceable to the value of money or the tide of trade. Thus it is common to read in money articles of the present day that silver is d. ord. per ounce above the Indian price-that is, above the point at which the exchanges would make it profitable to ship silver to India; or, that the India Council drawings being offered above the relative price of silver were not disposed of, and so forth. On the other hand, when an inconvertible paper currency basis is placed in relation with a gold or silver basis, we have a condition of affairs which is far more difficult to measure. The only means of arriving at any approximation of the condition of the exchange between the two countries is to ascertain the premium on gold or silver in the country possessing the depreciated currency, and measuring it against the rate of exchange. This is, at the best, an uncertain process. For instance, on the 10th March the premium on gold in Florence was 78 centissimi per 20 liresay 39 per cent. The London three months' exchange on Florence was 261. 45c. per £1, from which, deducting three months' interest at 4 per cent., the short rate is reduced roughly to 261. 19c. The par value being 251. 22c., there is a difference of 97c.-say, 3.87 per cent. on every 100 lire-which is only 3c. (= per mille) different from the 3.9 per cent. quoted in Florence as the premium on gold-a sum far too small to cover brokerages or cost of transmitting gold. Similar calculations

can be made if silver is quoted at 34 per cent. premium in St. Petersburg, and the London exchange on that city is 241d. per rouble; only in this case the ratio of silver to gold adds a further uncertainty to the calculation. But as a rule, where a paper currency is alone in circulation, taking the place of the precious metals, the exchanges are seldom at a gold-moving point in favour of that country, though they are oftentimes sufficiently against it to keep it drained of gold as far as possible. The gold is only of value for hoarding purposes, and its premium is less than the movement in the exchange, the tendency being for gold to quit the country where its main functions are in abeyance. Thus, the Government which decrees a return to specie payments must lock up its gold for some time, and take care so to stimulate the demand for coin within the country for a time, that it may at length attain its due appreciation at the hands of the people.

The fluctuations in silver and paper are often so considerable that the following table may be found acceptable in considering

these matters :

The credit of a paper currency depends upon various forcesfirst, upon its prospects of convertibility; secondly, upon its suitability; thirdly, upon its scarcity, or otherwise. In almost every country with an inconvertible paper currency there are sections of the people who advocate fresh issues with the view of making money cheaper; and the result of such fresh issues is almost invariably to depreciate the credit of the currency. If more gold is coined than a country requires, the coin is exported. But there is no such safety-valve when the printing press is set to work; and the manipulation of a paper currency requires the greatest care and scientific knowledge. Hence it is that the exchangeable value of paper currencies is so often subjected to violent fluctuations, and we see rates on countries possessing them moving in this market far more quickly than would be possible either with a gold or silver basis at the corresponding centre.

Thus we have seen that the exchanges are affected not only by mercantile credit, but by the credit of silver in relation to

gold, and by the credit of the at present inconvertible paper currencies. But, after all, the most important to us is the credit which the silver currencies of the East enjoy; and in conclusion we will show the corresponding "pars" between Indian rupees and Chinese taels and silver, a noticeable variation from which causes a demand for silver for the East :—

THE SPANISH DEBT PROPOSALS.

NOTWITHSTANDING the opposition of the English bondholders, Señor Camacho is persevering with his scheme for the conversion of the Spanish debt, and appears to be of opinion that he will succeed in carrying it through. For the attainment of his object he appears to rely mainly upon two circumstances: in the first place he has succeeded in inducing the internal bondholders to agree to his terms; and if the agreement with them is ratified by the Cortes, and no similar agreement is arrived at with the holders of the external debt, then the position will be, that while the internal bondholders will, after the beginning of July next, receive interest at the rate of 1 per cent. upon their holdings, the external bondholders will in all probability continue to receive only 1 per cent. In those circumstances the internal debt would doubtless stand at a higher price in all markets in which it is dealt in than the external debt. The holders of the external debt, however, are at liberty if they choose to exchange their bonds for internal debt bonds, and Señor Camacho evidently believes that the temptation for them

to make the exchange will be too great to resist. He doubtless expects that the higher prices of the internal bonds-supposing the difference in the rate of interest payable upon them to exist -will cause all those who wish to realise profits by the sale of bonds to rush to convert them, and he thus apparently hopes to overcome the external bondholders in detail, if he cannot win them over in a body. And he is the more strengthened in this expectation because of the acceptance which his scheme has met with on the part of foreign capitalists. French and other foreign financiers, holding considerable amounts of the debt, are, it appears, ready to agree to the conversion and to aid in carrying it through. Their assistance, it is needless to say, is very far indeed from being disinterested. What they anticipate is that the carrying out of a conversion scheme will give them large opportunities for market operations in Spanish bonds. They think they see their way to make a great deal of money out of the fluctuations in the market quotations of the stock which are certain to attend the carrying out of any scheme, and they are quite ready, therefore, to support proposals which promise to enable them to realise this gain without perhaps inquiring too closely as to their equity.

Whether the indirect pressure which may thus be brought to bear upon the English bondholders will prove effectual for its purpose remains to be seen. Much will depend upon whether or not they are united in bearing up against it. If they stand firm as a body, although they may not prevent Señor Camacho from going on with his scheme, they can make it very much less to his interest to do so. There can be no doubt that it is with a view to the issue of a fresh loan that the conversion scheme is being prosecuted. But it may be doubted whether if the majority of English bondholders continue to reject the offer now made to them, any new issue of bonds would be admitted to a quotation on our stock exchanges; and such an exclusion of Spain from the chief money market of the world would not only deprive her of one of the chief advantages she expects to derive from the proposed new conversion, but would also be very prejudicial to her in other ways. The bondholders are thus not altogether at the mercy of their debtor; and there is the further inducement to them to hold to the existing arrangement in preference to converting on the terms proposed, that, if once they exchange their external for internal bonds, they cannot reexchange. This is one obvious disadvantage, and may prove a course of ultimate loss to those who may now be tempted to exchange, and on the whole, therefore, it seems doubtful