EXCHANGE 793 rate on bills recedes, till, if the inconvertibility be so great as to be incapable of valuation, or the Government in its ignorance or alarm has prohibited the export of specie, the limit is wholly lost. A Russian merchant, who has ample silver and paper roubles at command for his purposes, but has a debt to discharge in America, or needs to lift a cargo of cotton at Liverpool or of sugar at Glasgow, and finds that the remittance even of such specie as he may be able to produce is illegal, must buy a foreign bill or a banker s draft on London at any price. At this stage the rate of exchange passes out of the domain of principle, or natural action of principle, into that of purely arbitrary considera tions. When, from much less sufficient causes, general dis credit passes upon a country, the rate at which its bills or acceptances may be valued is scarcely more reducible to rule. It might even be difficult to define why in the same general circumstances there should be collaterally a higher and lower course of exchange, and the bills drawn or pay able by one firm should differ in their rate from those drawn or payable by another firm. It is only by removing abnormal conditions that one arrives at the underlying principle which governs exchange, and determines the suc cess with which it is conducted. Accordingly it is in countries where bullion, separated from its necessary export from the mines, has become money, and forms the common standard of value in their international trade, that the limitation of the rate of exchange by the cost of specie remittance is most clearly visible. Between all nations trading on a gold basis there is a well-known and definite point above and below the par of exchange where it becomes profitable to move gold from one to the other, and which marks the extreme range of variation in the price of bills. Thus in the exchange of London with Paris, New York, and Berlin respectively, 25 1 10, 4 S1, and 20 30 mark a point in the price of bills below par when it pays to send gold from London to these centres; and, on the other hand, 25 30, 4*87, 20 50, a point above par when it becomes profitable to move gold from Paris, New York, or Berlin to London. When the rate of exchange, touching, under the supply and demand of bills and other elements of valuation, these extreme points on one side or the other, and tending to exceed them, is the result of an actual over-indebtedness, a transmission of bullion is the best and most satisfactory mode of settlement. It directly reduces the balance of debt, and renders the price of bills again more equitable to the traders. All other modes of fencing it off, save an increased export of goods and produce, are more or less illusory. If, in such a juncture, an amount of foreign capital has been invested in bills on the country with the view of holding them to maturity for sake of profit in rate of interest, and now with the view of realizing the value of the bills in gold they should be pressed on the market before maturity for discount, an advance of one per cent, in the rate of dis count may be sufficient to induce the foreign capitalists to hold the bills till they mature. And another advance of one per cent, in the rate of discount may induce them to reinvest in other bills on the country. But the root of the adverse exchange will not have been removed. It will always appear when the foreign capital thus invested in bills on the country is from any cause withdrawn, and until the over-indebtedness is liquidated by remittances of specie, increased export of produce, or transfers of saleable shares and securities. If, on the other hand, the rate of exchange has been brought to the specie limit by bills, representing in actual debt, but drawn and accepted solely for the purpose of moving bullion, as may probably happen, there is no remedy for what may prove an inordinate demand for specie by irregular means but the detection of the bills, and either refusing them discount or discounting them under excep tionally high rates of interest. 5. An exposition, however brief, of the causes operating Cor on the rate of exchange would scarce be complete without jadi including the effect of opinion or estimate, correct or ei erroneous, of the probable course of the market ; and there- si ^ e fore it may be observed that a judgment has to be formed p aT1 in every new phase of the numerous fluctuations. The seller of bills finds that within a few days the market has taken an unfavourable turn. If he judges that this has arisen from merely accidental or temporary causes he will be inclined to hold his bills for what he deems their true value; or if, on the contrary, he judges that the causes operating are more deeply seated, and likely to become stronger for a time, he will sell with the least possible delay. Should his judg ment be justified by the event he will have done what is right for him, if otherwise he will have done what is wrong ; but in either case, his abstention or action will have affected the supply and demand of bills in the mean while. In all the great marts of exchange, and in London probably more than in others, there are frequent wave- currents so to speak, which cannot be rightly interpreted either as the sign of a protracted state of exchange between the points of the compass in which they flow, or of the general foreign indebtedness of the centre upon which they are directed. When New- York balances its debts to China and Ind^ia by bills on London, the bills affect the course of Eastern exchange ; but they lose much of the significance they might otherwise bear when it is considered that New York is in course of compensating London in other direc tions. These operations come to be understood and sys tematized by dealers and agents in bills with much accuracy; but in addition to the judgment that may be formed by a thorough analysis of the substance of the various cur rents of exchange, there is the effect of opinion on external events, which, though of almost daily occurrence in one quarter or another, are wholly of future account, and which impress, not only the connoisseurs of exchange, but the whole body of drawers and remitters, from whom the original impulse on the action of exchange in all cases comes. The examples that might be adduced of the great effect of passing events on exchange are innumerable. In the beginning of 1SG1, when the disastrous rupture between North and South had occurred, and war was imminent, the United States had a most favourable balance of trade with England and Europe. Their exports of wheat and flour and cotton in the previous year had at once reached a maximum in quantity and a rise in value. The drawer of a bill on London was in so good a position that he had only to wait for the buyer to get the value of his bill up to the specie point. But so eager were the drawers, in view of the pending outbreak of civil war, to realize what was owing to them abroad, that they threw their bills on the market in an abundance which reduced their price to the other end of the scale. Tins, of course, had its converse effect at London, and bills on New York were there selling at such a premium that it seemed as if the United States would have to remit bullion to Europe. The volume of bills, however, told its own tale after a while. England had to remit bullion in large quantity to the United States, and then people began to awake to the perception that, in the exchange transactions, the one element most important of all had been left out namely, the relative indebtedness. It must have been a time of much profit to those on both sides of the Atlantic who knew the actual state of affairs, and of much loss to those who did not know, of whom there can be little doubt that the latter were much the greater number, but the balance of value between the two countries, as expressed on the face of the bills, had to be rendered all the same.
VIII. 100