There are certain technical terms used in connection with the foreign exchanges which must be clearly understood before it is possible to follow the various fluctuations in exchange rates, and the effect on our monetary position which such fluctuations produce.
We will consider one or two transactions between London and Paris as a practical illustration of these terms. Suppose a London merchant, A, owes to a Paris merchant, B, 25,000 francs. How can he pay that debt, and how much will it cost him to do so? He may either buy a draft on Paris and remit it to B, or instruct B to draw on him, or he may actually send gold. For the moment we will assume that he decides to send gold. How many sovereigns will A have to send so that B may receive the equivalent of the 25,000 francs due to him?
There are two ways of looking at a sovereign: one is that a sovereign is a sovereign, a coin of the realm, which everybody is pleased to possess; the other is as a piece of the precious metal which, by our English law, contains 7·988 grammes of standard gold—standard gold, by our law, consisting of eleven parts pure gold and one part alloy. A franc, or rather a twenty-franc piece, can be looked at in the same two ways. According to French law, a kilo of gold, containing nine parts pure gold and one part alloy, is coined into 155 twenty-franc pieces. From these two sets of figures, by a simple calculation, we find that the pure gold in one sovereign is equal to the pure gold contained in 25·2215 francs; that is, that as regards intrinsic worth, one sovereign is equal to 25·2215 francs, and this exchange of 25·2215 (usually regarded as 25·22) is what is known as the “Mint Par” between England and France. A Mint Par represents the fixed intrinsic value of the currency unit of one country, expressed in terms of another country, which uses the same metal as a standard of value.
Thus when A sends gold to Paris to liquidate the debt, he must, on this basis, send sovereigns containing in the aggregate just the quantity of pure gold contained in 25,000 francs. This at the Mint Par of 25·22 is about £991 5s. 6d. But A must also pay for carriage and insurance of the parcel of coins, and these charges, we may assume, will amount together to 10 centimes per £, which, on the remittance in question, would amount to £3 18s. 7d. The total cost will therefore be £995 4s. 1d., which represents an exchange at the rate of about 25·12½.
Therefore if A liquidates his debt to B by sending gold, for each sovereign expended he only obtains the right to 25·12½ francs in Paris. This rate is called the “Export Specie Point,” or “Export Gold Point,” between England and France, and when the Paris exchange falls to this figure, we may expect gold to leave us for Paris, as gold is then as cheap a mode of remittance as bills.
Let us now reverse the position and assume that B in Paris owes A in London £1,000, and that he decides to send gold to pay his debt. What rate of exchange will result from this transaction?
To pay in gold he will have to send such a number of twenty-franc pieces that the gold in them shall be equal to the gold in 1,000 sovereigns; that is, as we have seen, 25,220 francs. But B will have to pay for carriage and insurance at, say, an average rate of 10 centimes per £1—that is 100 francs—making a total cost of 25,320 francs. This is an exchange of 25·32, and is called the “Import Specie Point” from France to England. When the exchange reaches this figure, gold should leave Paris for London. As a matter of fact, gold does not always come to us when the exchange is at this figure, as the Bank of France interposes difficulties in the way of the export of gold. This has the effect of preventing gold coming in any large quantities unless the exchange rises above the Import Specie Point of 25·32. So we see that the Mint Par of London with Paris is 25·22 nominally—the Import Specie Point (gold to us) about 25·32, and the Export Specie Point (gold from us) about 25·12½.
In the same way the Mint Par and the gold points can be calculated with any foreign centre which has gold as the basis of its currency. With silver using countries these points cannot be fixed. Gold is with them a commodity only, and its value is measured in silver prices. With us and other gold using countries the reverse is the case as regards silver. Hence with silver using countries no common measure exists for determining the rates.
It is important for those concerned with this business to have firmly fixed in mind the Mint Par and Gold Points of London with Paris, Berlin, and New York; as of all exchanges these three are by far the most important, and have the greatest effect on our Money Market.
The figures relating to Paris have already been given. Those of Berlin are:—