case of the French indemnity to Germany, can be trans ferred from Paris to Berlin at a time without material dis turbance of the more ordinary business of exchange. The British chancellor of the exchequer could transfer three millions and a quarter from London to Washington in pay ment of the Alabama indemnity before the operation was well known in the principal marts of the two countries. When England is lending ten millions to India, fifteen millions to the Australian colonies, or twenty millions to innumerable enterprises in the United States and Canada, or so many millions to Russia, Turkey, or the River Plate republics or making several of such loans at nearly about the same time, as has sometimes happened the effect on the foreign exchanges, though considerable, is seldom thought of. A foreign loan is usually taken out a large part in goods, another part in bills, and the balance most probably in specie. But the effect of a foreign loan on the exchanges is exactly the same as if the borrowing country had exported produce to the lending country equivalent to the amount of the loan, placing it in debt to that amount. The lender has become bound by contract to pay so much to the borrower. The whole weight of a foreign loan, therefore, falls at once to what may be called the adverse exchange of the lending country or the favourable or less unfavourable exchange of the borrowing country. The reverse action comes in half-yearly or yearly rills, when the interest and redemptions of the loan, spread over a series of years, are payable. A foreign loan, if prudently and honourably conceived, may thus, as regards even the rate of exchange, be advantageous on both sides. The lending country gives a great advantage at once to the borrowing country in its exchange, which may be no evil in itself, and which the borrowing country, if the terms of the loan be fulfilled, repays in a period of years, during which its exporting and paying power may be reasonably expected to increase, which may be a common good. It may be added that foreign loans and investments of capital in foreign countries, badly as many may have been conducted, yet in their product of sound and marketable stocks and shares come to play a generally useful part in the rates of exchange. The value of commercial bills might not be so equable between such centres as London and Paris, or London and New York, without the intervention of stock- exchange securities. ite of 3. It is obvious that the number of days or months a
- eivst. bill has to run before payable imports the question of
interest as an element of valuation in the rate of exchange. The usance of foreign bills is extremely various, from short to long, from payable at sight to payable at six months after sight ; and days of grace are allowed by the law or custom of some few countries considerable enough to be taken into count. ^Yhe^e a bill is payable so many days or months after sight the time that must elapse, in the or dinary course of communication, before it can be presented for acceptance, is a further prolongation of the currency of the bill. The buyer takes it with this weight of time upon it, and, whatever the period may be, is entitled to a conces sion equivalent to the interest of the money which he pays, the converse happening in the case of stocks and shares on which dividend or interest has accrued at the period of sale, and must be accounted for to the seller in the price. But the important question in foreign bills of exchange is what rate of interest is to rule in the transaction Is it that of the country where the bill is drawn, or the country where it is payable, or a compromise between the two ? The drawer, in offering to transfer his bill to a buyer, is wholly in the domain of the rate of interest in his own market. If he sells, he gets the value of the bill in money worth so much interest ; and if he holds the bill till its maturity, or to some period nearer its maturity, he deprives himself of money 791 for that period worth the same interest. The buyer who, in the event of an exchange, pays down the value of the bill in money would seem to be under the same condition; but in reality, when closely examined, the relations of the buyer and the seller of a bill of exchange to the rate of in terest are different. The buyer has a debt to pay in the country on which the bill is drawn, which debt he is bound to pay noiv ; and for his purpose the bill is all the more valuable the less weight of interest it bsars, or, in other words, the less discount it is subject to. Supposing, therefore, the bill is drawn in a country where the rate of interest is 7 per cent, on a countr.y where the rate of interest is 3 per cent., possession of the bill will be more profitable, as regards rate of interest, to the buyer than to the seller. If the seller holds the bill, it bears 100 per cent, more weight of interest than it would bear in the hands of the buyer. If the rates of interest in the two countries be exactly reversed, the bill bears 100 per cent, more of this weight in the hands of the buyer than of the seller. Thus, after the par of the currencies has been established, which, as we have seen, is always practically established, even in the case of an inconvertible paper cur rency, by the bullion test, and must be regarded as the first condition of all foreign exchange, this question of interest is sufficiently important to modify the action of supply and demand, and of other circumstances operating either to raise the rate of exchange above or depre.-s it below the par of the currencies. It is one of those innumerable commercial relations in which there is an advantage to buyer or seller, but which cannot be realized without mutuality, and which consequently helps them to a transaction. If the advantage of rate of interest be in favour of the buyer of a bill of ex f change he will be inclined, other elements of valuation con sidered, to give a somewhat larger price for it than if this were not in the account; and if the advantage be in favour of the seller he will be less exacting. The whole advantage on either side may not be realized in the actual terms in either case; but it will have had some effect towards a mediation of the prices. The price of a bill, apart from other elements, is the sum of the bill minus the interest it bears at the rate of dis count in the country where it is payable. Yet in the practical negotiation this does not hold exact, because the value of the bill to the seller or the buyer is always modi- fied by the relation of the rate of interest where it is pay able to the rate of interest where it is drawn. Rate of interest, though in the aspect it presents to the seller and buyer of a bill thus plain enough, yet comes to play so great a part in the general course of exchange that it is worth while to pursue the subject a little further. Rate of interest regulates the supply and demand of bills, and affects the rate of exchange through that element; where the balance of indebtedness is against a country an advance of the rate of interest tends to restrain imports and to stimulate exports, by which effects the balance of debt is reduced ; and where the action of trade is not sufficient to overcome the evil, further rises of the rate of interest may be employed to attract imports of foreign capital and specie. In the case we have supposed of two countries, where the rate of interest is 100 per cent, more in the one than the other, this relation of their rates of interest may be the normal relation from the greater abundance or the greater profits of capital in the one than the other, and their exchange may be supposed to be in equilibrium, so that this normal relation is not disturbed by any changes of rate of interest to correct the supply and demand of bills, or the balance of trade. The effect, as we have seen, of difference of interest was in favour of the price of the bill drawn by the country of high interest on the country of low
interest, from the fact that the buyer was moving the bill