Readings in Money and Banking Part 34

It has often happened to me, when I was a financial journalist and had to try to find out the how and why of gold movements, to ask several of the most experienced and well-informed cambists in the city whether a gold s.h.i.+pment which had taken place had been made as a genuine exchange transaction or was done for some other reason, and to hear from one that there was a reasonable exchange profit on it, from another that there might be just a shade of a turn to be got out of it if you sc.r.a.ped it very hard with a knife, and from another that you could not find a particle of profit in it if you put it under a microscope for a week. So many complications have to be considered that the most eminent doctors may be pardoned for disagreeing.

It may be objected that dealers in exchange, and the comparatively few firms that make a special study of gold s.h.i.+pping, are not in the business for their health, and that s.h.i.+pments would not happen if there were not some profit in them. This is perfectly true, but the profit need not be got from the exchange. As an exchange transaction it only pays to s.h.i.+p gold to America when bills on London can only be sold in New York at a lower price than gold would fetch if brought from London and exchanged into dollars in New York. If bills on London are selling at 4.83-3/4, and gold can be bought and s.h.i.+pped and turned into dollars at the rate of 4.83-7/8, after allowing for all charges and commissions and the loss of interest during transit, then the operation pays as an exchange transaction. If the dollars realized by the gold were at the rate of only 4.83-3/4 the importer would be no better off than if he had sold a bill; if they were at the rate of 4.83-5/8 he would be out of pocket on the business, viewed strictly as an exchange transaction. But this is by no means the only consideration. Gold has such a magical fascination for moneyed mankind, and its movements are so eagerly discussed in their markets and newspapers, that it is often handled and s.h.i.+pped at a loss, especially in America, for the sake of the advertis.e.m.e.nt that the importing firm thereby gains for itself.

Moreover, imports of gold have a very stimulating effect on speculative stock markets, because an increase in the amount of gold available means a roughly corresponding increase in the amount of credit that bankers can give, so that when gold is known to be coming speculators know that credit will be cheaper for carrying their commitments, and will come in and buy, with a light heart, stock that they could not possibly pay for, but hope to p.a.w.n with their bankers until they can sell it at a higher price. And so unless the loss on the exchange side of the business is too great, it often pays the leaders of a bull campaign to import gold, having first laid in a line of stock, and make their profit by unloading during the fit of exhilaration produced by the news that the gold is on the way.

Or, again, quite apart from any speculative and spectacular motives behind gold s.h.i.+pments, it may pay bankers, in a country where rates for money are ruling high, to import gold at an apparent loss, because of the high rates that they get for the credit that they are thereby enabled to give. They thus, in effect, borrow gold, and recoup themselves by being able to lend, on profitable terms, larger amounts than they borrow, since they can always create credit to larger amounts than that of the gold in their vaults. Sometimes, in fact, in times of pressure banks find themselves obliged to import gold so as to strengthen their position, whatever the loss on exchange may be.

For instance, last September, when the Berlin exchange was at the point at which, if theory ruled in these matters, Berlin ought to have been thinking of packing up some gold to send to London, Berlin was buying gold in London and s.h.i.+pping it to the Fatherland, because there is always great pressure for currency in Germany at the end of September when the interest on mortgages falls due and has to be paid in cash, with the result that the Reichsbank's note circulation expands very rapidly and the backing of gold behind it has to be increased.

Sometimes, again, in order to attract gold, a central bank will give importers credit for gold that is on the way, so that they may be saved from loss of interest while the metal is afloat. Thus the actual importer may make a profit on the s.h.i.+pment, not as a genuine exchange transaction, but at the expense of the central bank.

In these cases two of the many functions performed by gold have to be considered. As a means of international remittance, it may not be as cheap as a bill, but it may have to be sent, not as a means of remittance, but because it is urgently wanted in the importing country as a make-weight for the balloon of credit.

So we see that the grumbling bill broker who ... [said] that these confounded exchanges only work one way, was actually understating his case. Not only do we [Englishmen] always lose gold when the exchanges go against us, and often get none when they go in our favour, but we also often lose gold long before the exchanges are sufficiently against us to justify its going, and sometimes even when they are strongly in our favour.

The effect on the exchange of an import or export of gold is, of course, just the same as that of the import or export of any other commodity--an import turns the exchange against us and an export turns it in our favour. If we send gold, for example, to Germany we thereby meet a German claim on us or create a claim for ourselves on Germany; in the former case the bills drawn on us will be less by the amount of the gold s.h.i.+pped, and the supply in Berlin of bills on London will be less in relation to the demand, so that the tendency will be for the price of sovereigns, as expressed in marks, to rise. In the latter case some one in Berlin will have a claim to meet in London and will have to bid there for a bill on London, and his bidding will have the same beneficent effect on the exchange. When we import gold, whether brought out of bankers' vaults, or dug out of the bowels of the earth, the country that sends it to us meets claims of ours on it or establishes claims on us.

In either case the tendency is for the exchange to move against us.

THE HANDLING OF GOLD s.h.i.+PMENTS

[119]Whether in coined pieces or bars (bullion), the gold is packed in strong kegs or boxes, securely strapped with hoop iron, and carefully sealed with private seals; the latter to discover if tampered with en route. s.p.a.ce is chartered from the steams.h.i.+p company, as in the case of merchandise, although nearly all large fast steamers have rooms especially constructed for such valuable cargo.... As an extra safeguard in case of large s.h.i.+pments, the steams.h.i.+p company details special armed men to guard the room day and night, and sometimes the s.h.i.+pper employs special detectives in citizens' clothes to watch the pa.s.sengers on the trip, since it is generally known several days in advance when large s.h.i.+pments of gold are to be made.

THE SILVER EXCHANGES

[120]... It is acknowledged that commerce between gold standard countries is satisfactory to all cla.s.ses 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 uncertainty 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 s.h.i.+pment was despatched was, we will say, 25_d._ 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 20_d._ 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 5_d._ in the period between s.h.i.+pment and arrival of the goods in Shanghai; but whatever the fall, the principle is the same, and the ill.u.s.tration serves to show exactly what happens.

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 cla.s.s 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--a.s.suming 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 princ.i.p.al is affected in the same way, whenever it is desired to convert it back into gold. A further example will show how this works out in practice.

We may a.s.sume 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 26-7/16_d._ per ounce standard; on the 31st December, 1914, 22-11/16_d._ For the sake of argument, we will imagine our investor sent the money out to the Eastern country on the 1st January, 1914, but circ.u.mstances made it advisable for him to recall his money at the end of December in the same year, when the metal had depreciated to 22-11/16_d._; in converting his princ.i.p.al back to British currency he will find himself faced with a sharp loss. Silver, in which the investment stood, has dropped 3-3/4_d._ of its gold equivalent, roughly, one-seventh; consequently on conversion the gold value of his original 1,000 has fallen to about 857....

... The exchanges of these silver standard countries ... [are] quoted in s.h.i.+llings 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-cla.s.s 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 s.h.i.+llings 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 reimburs.e.m.e.nt. 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 s.h.i.+p ...

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 princ.i.p.al 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 s.h.i.+pped 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 Publis.h.i.+ng 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.

x.x.xVI, 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.

Was.h.i.+ngton. 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 a.s.sociation, 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 Publis.h.i.+ng 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.

CHAPTER XIX

CLEARING HOUSES