Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

[120]... It is acknowledged that commerce between gold standard countries is satisfactory to all classes 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 shipment was despatched was, we will say, 25d. 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 20d. 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 5d. in the period between shipment and arrival of the goods in Shanghai; but whatever the fall, the principle is the same, and the illustration 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 class 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—assuming 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 principal 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 assume 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 26-7/16d. per ounce standard; on the 31st December, 1914, 22-11/16d. For the sake of argument, we will imagine our investor sent the money out to the Eastern country on the 1st January, 1914, but circumstances made it advisable for him to recall his money at the end of December in the same year, when the metal had depreciated to 22-11/16d.; in converting his principal back to British currency he will find himself faced with a sharp loss. Silver, in which the investment stood, has dropped 3-3/4d. 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 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 1s. 10-3/8d. to the dollar, and Shanghai, 2s. 5-5/8d. 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: 2s. 5-5/8d. per tael, means that for every silver tael the remitter hands over to the exchange bank in Shanghai, 2s. 5-5/8d., 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....