We now come to a foreign drain of gold; and this depletion of the currency, we know, flows from the store at the Bank of England into the hands of the foreign creditors of the nation. We export to, and import from, other nations on a gigantic scale, and as our imports are invariably in excess of our exports, it follows that the balance of indebtedness on this score is always very considerably against us; but there are other debts due to this country which from time to time turn the balance in favour of England, and the prices quoted for bills on the various Exchanges are the indexes which tell us whether gold is likely to be either received from, or sent to, the great commercial centres of the world.
Other debts due to this country have been mentioned—debts which either tend to reduce or turn in our favour the balance we owe to foreign countries. England has immense sums invested in foreign securities, and the interest received therefrom acts in this direction. So, too, does the huge sum earned by her ships in the shape of freights. Then, again, London, still earns a large amount in the shape of commissions, even if her position as the Clearing House of the world is now less powerful than formerly, owing to large accumulations of capital in other centres.
On the other hand a considerable amount of foreign capital is invested in English securities, which, when sold on the Stock Exchange, give the foreigner a claim on our stock of gold; and though we, by similar sales of foreign securities, can prevent this temporary drain of specie, the enormous dealings in stocks and shares on the various Exchanges are most keenly watched by the directors of the Bank of England, lest huge realisations of British securities by foreigners should drain the Bank of its gold, with which international indebtedness can alone be settled.
This brings us to the markets for bills of exchange, the prices of which, like those of every other security, are settled by supply and demand. If, at a given date, this country owes a foreign nation considerably more than it has to receive, then bills on England will be plentiful in that country; and, further, they will be cheap, because, as debtors to England have less to remit than the aggregate of bills on England offered for sale, the supply will be in excess of the demand, and English bills, consequently, can be bought at a discount. Conversely, the supply of bills in London on the foreign country will be smaller than the sum English debtors owe therein, and in order to save the expense of exporting gold, such bills will be eagerly sought after, and, as the supply is smaller than the demand, buyers soon drive them to a premium, when the rate of exchange is said to be "unfavourable" to England.
As the balance of our international indebtedness must be cancelled by gold, it follows that the fewer the bills offering the higher will be the prices paid for them; and when, just towards the end, it becomes evident that the supply is limited the bidding is often spirited; but the premium paid cannot exceed for any considerable length of time the expense incurred by exporting and insuring the precious metals between any two countries, as the debtor always has the choice of despatching gold to his foreign creditor, and, naturally, he chooses the cheaper expedient.
The extreme fluctuations are called "gold points," and they mark the limit to premiums procurable on bills of exchange. The table given below will show us those points at which gold will probably either leave or reach this country:
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| Exchange. | Mint Par. of Exchange. | Gold Exports. | Gold Imports. |
| London on Paris | Francs 25·22½ | 25·12½ | 25·32½ |
| Berlin | Marks 20·43 | 20·34 | 20·52 |
| New York | Dollars 4·87 | 4·84 | 4·90 |
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When the rates are near those given in the second column, the Bank, if its reserve be low, begins to consider the advisability of raising its rate of discount, for it is evident that foreign bills are at a stiff premium, and that a demand for gold may be made upon it at any moment. Of course the difference between the "gold points" gives scope for speculation, and some cambists gamble in bills for the rise or the fall just as speculators do in securities. Then, again, the arbitrageurs largely influence prices by buying and selling securities which are dealt in on the Stock Exchanges of more than one country. Wars, revolutions, panics, and social upheavals also cause abnormal fluctuations in the rates.
Let us assume that a drain is threatened from Paris. The gold in an English sovereign is, we can see, worth about 25·22½ francs, and if only 25·12½ is being offered on 'Change, it follows that bullion will soon be exported to France. This the Bank wants to prevent. The cost of transmission of bullion between the two countries is about one half per cent.; therefore, in order to induce French capitalists to invest in English bills of three months' date, the rate of interest in London must be more than two per cent. in excess of that in Paris before it will pay them to ship bullion to this country, if it be the intention of the purchasers to withdraw their capital when the bills mature, as the gain of two per cent. per annum for three months only just balances the loss of 10s. per cent. incurred on specie shipments, while no margin is left to defray possible loss through unfavourable exchanges at the time of withdrawal. Were a purchase of six months' bills contemplated, the difference in the two rates would only have to exceed one per cent. before bullion could be exported profitably.
When, therefore, the Bank of England wishes to influence the foreign exchanges, it raises its rate by one, instead of by one half as is usual when the drain is caused by the currency requirements of this country, or by an increased demand for loanable capital when trade is active and the foreign exchanges favourable. One constantly hears the question: Why has the Bank of England raised the rate by one instead of by one half as it did last time? A glance at the foreign exchange tables will generally supply the answer. If the expenses for transporting and insuring bullion between any two countries are appreciable, then were the Bank rate raised by one half (remembering that an addition of one half per cent. per annum gives a profit of only 2s. 6d. per cent. on a transaction in three months' bills) it is evident that the inducement is not sufficient to attract gold over here for that consideration alone.