The Theory of the Foreign Exchanges/Chapter III
CHAPTER III
examination of the various classes of foreign bills in which international indebtedness is ultimately embodied
Having thus passed in review the different kinds of liabilities which nations incur towards each other, we are now led to consider the mode of adjustment of such debts and claims, and the instruments by which it is accomplished. Most international transactions are settled by a transfer of debts, through the medium of foreign bills of exchange, and for the general reader, (who has no opportunity of handling and examining the bills themselves, and of gaining, through their study, a knowledge of the various classes into which they may be divided, and the properties which attach to them,) some remarks on this portion of the subject may not be superfluous.
From the point of view of the Foreign Exchanges, it must be considered that the debts contracted between different nations are on the point of being closed. Practically, credit is given, in the vast majority of cases, previously to the drawing of the bills or the transmission of the remittances which are to settle pending accounts. With this, however, we are at present not directly concerned, though a discussion on the Foreign Exchanges would not be complete without an allusion to the fact. The knowledge that there is a certain balance owing, for which credit is given, but which will ultimately be called in, acts, to a certain extent, upon the exchanges, just as in questions of supply and demand the knowledge that the supply may be indefinitely increased acts almost with the same force as actual present supply. But what we have now to deal with is the liquidation of debts which are becoming due, -in fact, liabilities for which the time of settlement has arrived.
The debts between different countries are, when they approach the time of settlement, embodied, as far as possible, in bills of exchange; they are invariably settled by bills of exchange, so far as the indebtedness of one country to others is covered by the liabilities of those countries to itself. It is certain that as far as accounts can be settled without the risk and expense of bullion remittances, through simple transfers, through the creditors of any foreign country making a direct settlement with the debtors to that foreign country, and leaving their respective debtors and creditors to make a corresponding adjustment abroad, so far the use of bills of exchange is sure to extend. But how is the settlement to be effected when the claims on one side or the other are exhausted, -when there is a balance of debts to be paid without any equivalent of claims which might be set against them? It will subsequently be found that, by somewhat artificial arrangements, it is possible that even a portion of such a balance may be covered, at least for the time, by bills of exchange. But the consideration of this more complicated question must be deferred for the present. We have, in the first instance, to deal with such foreign bills as embody actual debts and claims, and represent an exchange - an exchange made between the drawer or seller of the bill and the purchaser of the bill; the former ceding his claim on a foreign debtor against payment on the spot, and the purchaser remitting the bill to another foreigner to whom he is himself indebted.
The majority of foreign bills of exchange carry (to an eye practiced in deciphering their history) the evidence of their origin and nature written upon them; and much may be learnt, both as regards international transactions generally, as also the peculiar features of the times, from a careful study of large miscellaneous parcels of bills. There will be found among them bills representing each of the different causes of indebtedness which have been described. The greater portion will represent exports of produce; and this will especially be found to be the case between countries which lie at great distances from each other, and whose transactions are comparatively simple; but the closer the countries, and the more they are connected in what may be called neighbourly relations, the more diversified and complicated are the transactions represented by bills of exchange. Between the Continent and England there is a very large proportion of bills which represent the expenditure of the foreign residents, drafts on their bankers at home, and encashments of dividends or other sources of revenue. There will be found innumerable bills based on the sales or purchases of stock, and large amounts which represent the transfer of capital from one country to another by way of giving effect to a public loan or a joint-stock undertaking. Such, for instance, were the drafts issued from Constantinople on Monsieur Mires against the proposed Turkish loan. Whenever the country which has secured a loan is importing more than it exports, and consequently has to make remittances to cover the balance, it will be convenient for it to draw upon the lending country for the amount of the loan thus contracted, as those who have remittances to make it will be eager purchasers of such bills: in the contrary case, where there is no balance requiring settlement, a loan would probably be taken in specie.
Amongst any parcel of bills there will probably be some where are drawn against freight which have become payable, -a large item in those countries which have a great shipping interest, but otherwise little to export. Sweden or Norway, for instance, when they have remittances to make, have considerable difficulty in finding any other bills than such as are drawn either against wood (their chief article of export), or against the freights earned by their ships. They are hampered in their importations by the difficult of making remittances in what are called "acknowledged first class bills." There is, indeed, generally some peculiarity about the remittances from each different country: from the East Indies and China where the chief articles of export are of great value, and where, from the necessity of large capitals for bringing such valuable produce to market, the transactions are more than elsewhere concentrated in great houses, the bills are generally drawn in large amounts and on first-class European firms: it is very usual to see bills of ten thousand pounds, and the character of the bills is generally exceedingly good; the distance between the two countries, and the length of credit which is accordingly given by the purchaser of the bill, make great caution necessary, and render it highly important that those on whom the bills are drawn should be persons of known repute.
From the Continent, on the other hand, the remittances received are generally of a very different character: from the frequency of transactions and the facility of communication, the bills are drawn in the greatest variety of from an in much small amounts. They represent daily and retail operations, as well as the great transactions of merchants and bankers. Any one receiving remittances from the interior of the Continent to the mount of ten or twenty thousand pounds at a time, will find the sum made up of a very considerable number of little bills. There will be bills against cattle, against eggs, against butter, drafts of traveling Englishmen on their London bankers, bills against German toys. French nicknacks, wine, fruit, and vegetables. As as the transactions are now much carried on in a retail form, amongst bills on regular merchants and dealers, large and small, will be found also a very considerable number of person whom it is difficult to find and difficult to rely on for payment when found; on agents who have persuaded German manufacturers to trust them with the disposal of their goods, and on branches of small foreign establishments who wish to try the London markets; also on shopkeepers and milliners, and other beyond the commercial circle - in fact, on every class whose business bring them in any way into connexion with the Continent.
The American bills are like the East Indian bills in some respects. Being generally based upon cotton, of which a small quantity costs a large sum, they are drawn in large amounts, and represent considerable mercantile transactions. But the trade between the United States and Liverpool being much more rapid and easily managed than between England and Indian, and peculiar facilities for the conducting of the operations without capital on the part either of the exporter or the importer being obtainable in the cotton trade, amongst much first-class American paper there is also to be found a considerable quantity drawn on firms not known beyond their immediate circle, and who have no means to pay their acceptances except by the identical produce which is consigned them against such drafts.
Thus far the bills which have been taken into consideration have been assumed to represent and close direct and bona fide transactions; but a large class of foreign bills perform very different functions, which it is important properly to appreciate. There is little mystery in the operations of the Foreign Exchanges when confined to the direct and immediate transactions of which we have been treating hitherto. The subject is complicated by the fact, that a very large proportion of bills represent indirect operations which it is less easy to follow, and that others do not represent any actual previous transaction whatever, at least in the sense of closing indebtedness, but act in a perfectly different manner.
In the first instance, we should enumerate those foreign bills which do not represent the usual indebtedness which is assumed to exist between the acceptor and drawer, but a debt due to the drawer by a third party residing in a third country, of which the accept merely mediates the payment. For instance, teas shipped from China to New York are generally paid for by a draft of the exporter on a London merchant for account of the American importer. The exporter in China is paid by the price which is given him for the bill on London; and the acceptor looks for payment to the importer in New York.
It is important to remember that this class of bills does not offer the same kind of evidence as others, as to the indebtedness of the country on which they are drawn; for the accepting country is a creditor of a third country for exactly the same amount as that which it must pay to the drawing country; and any estimate which might be attempted as to the liabilities of a country, based on the bills afloat upon it, which should on it the consideration of these acceptances for third accounts, would not fail to be erroneous. It is necessary at least to attempt to discover what proportion of the liabilities may have been incurred as by principals and what as by agents or mediators. For instance, if it should be desired, at any particular moment, to consider the relative indebtedness between England and the United States, it might be discovered that the sum total of the exports of the Americans to us, in the largest sense of the word, taking into consideration all the supplementary causes of indebtedness to which allusion has been made, exceed all that they had taken from us, or spent on us, and that accordingly the balance must be remitted by us in gold; but an element of importance would be omitted if the question were not asked, How do the United States stand as regard their imports from the East? are there not large sums running upon England for American account, which they have still to remit? The answer to this question might considerably modify the result of the balance.
It is especially necessary not to overlook these indirect liabilities in the case of the bills upon England, as they form a very large item in the total of our acceptances.
Those to whom these questions are new may not be able at first sight to discover that which still compels all other countries to make London their banking centre; -why it is that in the East Indies those who ship produce to America draw on London and not on New York; and why the New Orleans cotton exporter draws on London instead of on St. Petersburg for the cotton shipped to Russia. A partial cause might be found in the credit granted by London bankers, and also in the greater reputation of the London houses, which, extending to all quarters of the globe, gives a bill on them quite a different value to that which could be assigned to bills on American and Russian bankers equally wealthy, but less widely known. But this can only be called a secondary reason, which appears on closer examination to be itself the result of the primary cause which makes England the great banking centre of the world. This primary cause is to be found in the stupendous and never-ceasing exports of England, which have for effect that every country in the world, being in constant receipt of English manufactures, is under the necessity of making remittances to pay for them either in produce, in bullion, or in bills, and therefore, if it diverts its produce to other countries, its bill drawn against such produce will be sure to find their way to England. In other words, there will be a demand for bills on London bankers, and English bills will be more saleable than any others. There can be no exchange on any place to which remittances have no constantly and regularly to be made. And vice versa, when remittances have to be regularly made, an exchange is soon established, and the mediation of a mutual centre is not required. For instance, England exports fabulous quantities of Manchester goods to the East, and silver into the bargain, receiving in exchange tea and silk. But suppose the tea and silk which England requires to be less in value than the merchandize exported. How can the balance be regulated? As follows: -The Americans export very little to China, but require more tea and silk from them than what they give them in goods; consequently, the Chinese have a surplus claim on New York. This they transfer to their English creditors, to whom they are indebted for the surplus value of the manufactured goods imported over their own produce shipped to England; in other words, they remit to their English creditors the bills drawn for American account, or instruct the Americans to send gold to England for the amount. The instance given is but an illustration; if the particular case is not entirely correct, many others might be supplied in its place. That the imports of England exceed her exports, does not invalidate the present proposition; it is the universal diffusion of the products of English industry, which tends to produce the result described. England busy from, and sells to, almost every country in the world. Of other countries, A may import from B, but export to C; and if B and C are not in constant intercourse, A will not be able to pay B by giving him an assignment on C. However, A,B, and C are all commercially connected with England, and thus A can pay B by assigning to him a claim against England and remits it to A in payment, and A passes it on to B, who being in constant connexion with England, is in his turn easily able to use it.
As illustrations of the converse proposition, that, where between two countries a regular and constant interchange of imports and exports exists, an exchange is at once established, enabling transactions to be settled without the mediation of England, may be cited the case of Java and Holland, of New York and Bremen, of Rio Janeiro and Hamburg. Formerly, when Germany was farther behind England in her exports than she is at present, the New York houses paid themselves for their shipments of tobacco or other produce to Bremen, by drawing for Bremen account on England, and Bremen would settle the transaction by buying up and remitting to England the bills of the Holstein cattle-dealers or of the butter exporters of the Low Countries. But now so many German manufactures are sent to the States that there are always buyers for bills drawn on Bremen direct; or more simply, the tobacco and cotton shipped to Germany is paid for by German manufactures, and no further intervention is required. What becomes then of the cattle and butter bills, which are thus set free? These are still collected in Bremen and remitted to England, but against different transactions. The regular mutual intercourse established between New York and Germany does not yet exist between Germany and Bombay. Bombay as yet takes very little from Germany, the great bulk of her dealings being still with England; consequently the Bombay merchants, finding few purchasers for bills on Bremen, still draw on London for German account, when they ship cotton direct to the Continent, and a transaction takes place which in face amounts to this, that they direct their London creditors to obtain payment from their German debtors. Accordingly these latter have still to buy up all the bills upon England which they can find, as they require them in order to effect the payment they are instructed to make by their Bombay creditors to whom they are indebted for cotton. A very large proportion of the foreign bills afloat will, on a careful analysis, be discovered to represent adjustments of this kind; that is to say, not direct but indirect and intermediate settlements, in which London appears as the clearinghouse of the world, where most international transactions are closed.
It remains to consider those foreign bills which represent no settlements of indebtedness at all, -bills which are technically said to be drawn in blank, by which the acceptor does not pay his debt to the drawer, but whereby, on the contrary, the drawer incurs a debt to the acceptor. The part which these bills play in all questions of the Foreign Exchanges is very considerable, and requires careful attention. A portion of them approach very nearly indeed to the character of what in the home trade are called accommodation bills; they may be drawn by merchants in one country on merchants or bankers in another, in order to secure the use of the money which is paid as their price, for the time during which the bills have to run. The purchaser of the bills in this case takes the place of the discounter of accommodation paper, and the transactions may be perpetually renewed in the same way and with more facility than accommodation bills. But there is another function of bills drawn in blank and representing no actual transactions, which is little understood by the general public, but which, nevertheless, is in many cases very important and expedient.
It is very possible, and indeed probably, that the imports and exports of any country will not fall into the same period of the year; and that, consequently, the seasons when the imports have to be paid for will not coincide with the seasons when payment is exacted from foreign countries for the exports. In the case of a purely corn-growing country, for instance, the revenue derived from foreign countries will come in at the conclusion of the harvest, when the cargoes of corn begin to be despatched. There will then be bills drawn against these shipments on the countries to which they are directed. Meanwhile, however, the country in question has been importing manufactures from its neighbours all the year round, and the importers have been requiring bills on foreign countries in order to make remittances, long before the corn-bills could be drawn and become available. If not other device could be found, the importers would, before the harvest-time, have to remit gold abroad in payment of their purchases; and afterwards the exporters, not being able to sell their bills, which the importers would now no longer want, would have to receive back the equivalent of their exports in remittances of gold from abroad. Thus the risk, the expense, and the reduction of circulation, which are consequent on repeated journeys of bullion, would be twice incurred, owing to the different seasons of the exports and imports of the same country. This difficulty is often avoided if the bankers in one country draw upon those in another, at the time when no actual commercial bills representing bona fide transactions can be bought, and subsequently square the liability which they have incurred towards the acceptors of their bills drawn in blank, by buying up and remitting the export-bills as soon as the goods have been shipped and are made available for drafts. Thus the importers, are able to procure bills from such banking houses at a time when otherwise they could buy no bills at all, and the exporters sell to the same bankers later on, at a time when otherwise they would find no purchasers, the importations having been previously paid for. The same object is often sought for an attained by the exporting houses receiving permission from those to whom they sell or consign their shipments, to draw bills in anticipation of the goods being actually despatched; in other words, to sell the bills at a time when there is a demand for them and when a premium may be given for them by the importing branch of the community, instead of waiting for the time when the bulk of the exports are despatched, and when consequently, from the number of those who have to draw bill, they only can be sold at a discount. Great complaints have been made in the Court of Bankruptcy, and in many quarters where the force of such transactions is not clearly understood, of what is called the system of blank credits; in other words, the system of drawing bills from abroad not representing at the time any actual settlement of indebtedness; and evidently for the reason that it is easy to confound such bills with accommodation paper. And it is true, that wherever the existence of these blank credits has been brought before the public, it has generally been owing to some catastrophe where the bill-transactions actually were only undertaken with the intention of raising fictitious capital. But it will have been seen that blank credits may serve a legitimate and useful purpose, only requiring to be most jealously, and even suspiciously, watched. Those who are not versed in the various details of international banking transactions will have some difficulty in understanding, how foreign bills, representing mutual accommodation, and merely intended to raise a fictitious capital during the time which the bills have to run, may be distinguished from bills drawn to anticipate actual transactions, and to bridge over the interval which exists between a season of importation and a season of exportation; yet to a certain extent it is feasible, and quite as practicable, as t is to the discounting establishments at home to distinguish between legitimate and fictitious inland drafts. The system cannot be condemned because it is often abused, -certainly not, until it becomes evident that the abuses which follow in its wake are greater than the advantages which it secures.
For the present, however, it is not necessary to inquire into the beneficial or pernicious results of these bills drawn in blank. They have simply to be enumerated as constantly forming a portion of the aggregate amount of foreign bills afloat, and as playing a peculiarly important part in affecting the Foreign Exchanges.