Thus there is a wide fluctuation in the interest that may be earned on a foreign bill. When the French exchange is low, and the rate of interest ruling in London is above that ruling in Paris, there is consequently an incentive for a French banker to invest in English bills; for not only is the rate of interest greater than would be obtained in Paris, but the chances are in favour of a rise taking place in the rate of exchange, which will, of course, be to his advantage.
From this it follows that when our interest is above that ruling at foreign centres, and the exchanges on us are low, a heavy investment demand from continental bankers sets in, in order to take advantage, not only of the higher interest obtainable in London, but also of the possible profit on the exchange. This demand will not only have the effect of stopping a further fall in exchange rates, but will often send them in the opposite direction. If, from some cause or other, the rate remains low, the continental holders of our bills will keep them until they become due and so earn the higher interest. If the rate rises to any extent, certain holders will at once begin to sell, as they will have earned their interest for the time they have held the bills, and seeing their way to secure a certain profit on the exchange, they think it well to take this, and employ their money in some other centre which promises more profit.
We can now appreciate the value and importance of this investment business. When our interest is high and exchanges low, it indicates that we are having more or less of a money squeeze at home, and the low exchanges threaten an export of gold, which would make matters worse. The continental banker then steps in for his own profit, and benefits us at the same time, as, by his action, he tends to support or raise the exchange, and thus to stop the outflow of gold. He also places some of his capital at our disposal, as continental bankers, when investing in foreign paper, usually only buy first-class bills. There is only a limited amount of these bills for sale on the Continent, and so the continental bankers adopt the course of instructing their London representatives to buy what they require, and remit funds to cover the purchase.
When exchange rates rise and point to a possible inflow of gold to London, continental bankers cease their investments and realise their holdings, thus stopping the rise of rates and, for the time at any rate, the possible inflow of gold.
Thus the investment business in foreign bills acts really as a pendulum to the exchanges, steadying the fluctuations and having a most important influence on the export and import of gold.
We are now in a position to understand how it is that a change in our Bank Rate is so clearly allied with the question of foreign exchange. If we find that exports of gold threaten us, which may reduce our “Reserve” below the figure at which it is desired to maintain it, the Bank of England will increase its official rate. If this increase in rate is then followed by the Market, or, if the Market lags behind, steps be taken to compel it to follow suit, we hold out the advantage to the continental bankers of an increased interest over what they can earn at home, and a prospective profit through a possible rise in exchange. Then, in all probability, their purchases of London bills will gradually have the effect of raising the rate and stopping the outflow of gold.
CHAPTER XIII
THE MONEY ARTICLE OF THE PRESS
the Money Article of the daily Press is regarded so much as a part of the usual information provided for the public, that few readers pause to consider the large amount and far-reaching character of the information which is supplied therein: information gathered from all quarters of the globe—sifted, summarised, and placed before the public in a concise form. The amount of practical and useful knowledge derived from a perusal of Money Articles depends entirely upon the reader. Without some knowledge of the Money Market and financial matters generally, the articles resolve themselves into a mere record of the rise and fall in price of various commodities—money, bills, stocks, and shares. With knowledge, however, these articles may be said to represent to the reader a mirror, in which the affairs of the whole world are pictured, though in a somewhat mercenary manner.