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Money - The Foreign Exchanges

( Originally Published 1909 )

THE foreign exchanges are really a fairly simple matter if we keep them free, as far as possible, from the technicalities which are the delight of experts in the subject, who generally expound it. They were exemplified in Chapter V by the purchase of a postal order, and they may be described as the mechanism by which money here is exchanged for money somewhere else. In the example there given the business was simplified by the existence of the machinery of the Post Office, which is prepared to undertake exchange transactions at fixed rates.

In the exchanges of the large amounts which international commerce makes payable in one place or another, the bill of exchange plays an important part. But the essential point to be grasped is the fact that fluctuations in rates of exchange are caused by variations in the relative value in the currencies of the two centres between which the exchange is quoted. ! If a large number of Londoners have payments to make in Paris, or want to send money to Paris, a large number of people will want to exchange sovereigns for francs, and the value of the sovereign will be depreciated when expressed in francs, and the Paris exchange will move "against London." The most obvious reasons which will cause this variation, or stimulate this demand in London for remittances to Paris, will be the balance of trade in its widest sense the exchange of com- modities and all kinds of services between England and France and the rate of interest ruling in the two centres. If Paris sells more goods and services to London, more people in London will have payments to make in Paris ; and if the rate of interest be 3 per cent. in Paris and 2 per cent. in London, money will tend to flow from London to Paris to earn the higher rate, and the demand for remittances to Paris will thus be further stimulated.

Since bills of exchange play an important part in this business of the exchanges, it is perhaps safer to repeat here that a bill of exchange is an order by A directing B to pay a sum of money to himself, A, or to a third party ; that the cheque with which you tell your bank to pay £2 to your butcher is, in fact, a bill of exchange ; but that the term, in its more usual meaning, implies an order on a person at some distance in space to pay a sum at some distance in time. As, for example, when a dairy fanner in New South Wales sells butter to a produce merchant in London, and draws a bill on him at sixty days' sight. When the bill is " accepted " that is, when the merchant acknowledges his liability to pay by writing his signature across the bill it becomes a negotiable instrument and can be discounted and turned into cash.

It can also, evidently, be used wherewith to pay any debts that the farmer may have to meet in London.

If he owes a similar sum to his harness dealer, he can hand the bill over to him and let him collect the money from the merchant ; and the one bill will thus have paid two debts. It has paid the farmer on behalf of the produce merchant, and the harness dealer on behalf of the farmer. Or if the farmer owes money in other parts of the world, a bill on London is always acceptable ; if he has bought hay-making machinery in America, the draft on his merchant could be used equally well to pay for it, for there would be plenty of people in the United States who have payments to make in London and will give a certain number of American dollars to the manufacturer of mechanical hay-makers for his order on the London merchant.

And here comes in the difficulty which makes the foreign exchanges apparently so obscure. When it was a matter of a payment between London and Sydney, there was no question of a difference of currency, for in both these places the sovereign is the unit in which payments are expressed. But when a draft on London has to be sold in America, the relative value of the sovereign and the dollar comes into the calculation. And the unfamiliar observer is puzzled by the fact that these relative values continually fluctuate, with the result that the table of exchange quotations constantly varies, and the exchanges are said to move in favour of or against a particular country in a manner which is very extraordinary to him, since the intrinsic value of the currencies that they represent is unaltered.

We shall arrive at a clearer understanding of the matter if we leave out for the present this question of exchange of different currencies and return to that of the exchange between London and Sydney. These two towns use the same coin of the same fineness as legal tender and as money of account, and therefore it might be supposed that any one who has to make a payment of ,62o in Sydney would have to put down in London exactly £20 plus a payment to the colonial banker who sells him the draft for his trouble and expense in sending the money.

But this is not so. Owing to the fact that Australia constantly has to remit to England in order to meet interest on debt, etc., the Australian exchange is normally in favour of England ; that is to say, a credit on London is more sought after in Sydney than a credit on Sydney is sought after in London, because the drain of money is habitually from Sydney to London.

Hence, if you go to an Australian bank's London office and buy a draft on Sydney with your cheque on the Westminster Bank, you are giving it money in London in exchange for money in Sydney, and we have seen that money in London is relatively more valuable than money in Sydney owing to the exchange being normally in favour of London.

Consequently, the Australian bank is prepared not indeed to give you an order for £2o and something over in Sydney in return for your London cheque for £20, but to do what comes to the same thing, namely, manage your remittance for you for nothing, making no charge for its trouble. But if the movement were reversed, and some one in Sydney were buying on London, he would have to pay £2o plus a premium, because the exchange is in favour of London ; that is, a sovereign in London normally commands more than a sovereign when compared with a sovereign in Sydney.

Here, then, we have an example of the working of the laws of exchange between two countries in which the coins into which drafts are convertible are identical, and if once we can grasp the logic of this, we have gone a long way towards simplifying the more complicated question of the exchanges between countries with different currencies.

For the broad principle is the same everywhere. Whenever, for any reason, one place, A, has to B send more money to another place, B, than B has to send to it, B's currency will be relatively more valuable, and the exchange will be in favour of B. Let us consider the matter again in the case of Sydney and London and suppose that instead of going to one bank to arrange your remittance you went into a regular market wherein were assembled representatives of many Australian banks and exchange dealers, and waving your cheque on the Westminster before them asked them how much money in Sydney they would give for it. If the pressure to remit money from Sydney to London were keen, they would all be eager to have your London cheque, because by buying it in exchange for a draft on their Sydney balance they would be increasing their London credit at the expense of their Sydney credit without incurring the cost and risk of sending coin or bullion from Australia.

Consequently competition would impel them to give you something more than £20 in Sydney, but that something more would be limited by the expense of sending coin and bullion. If we suppose, for the sake of simplicity, that expense to be covered by 6d. per pound, it would pay them if the demand were eager enough to give £20 10$. for your London cheque. Beyond that it would not pay them to go. If you tried to insist on £20 10s. Id., it would be cheaper for them to send coin from Australia. So that in this case 420 10S. (or 1 os. 6d. per pound) would represent what is called gold point, and if your London cheque really fetched that price, the exchange between London and Sydney would be said to have gone in favour of London up to gold point, and the movement of gold from Sydney to London might be expected to begin.

In the case of large amounts, and of places far distant, the element of time becomes important. If exchange between London and Sydney were at par, it might still pay an Australian banker to give more than a sovereign in Sydney for a sovereign in London because he would receive the sovereign in London at once, and his balance in Sydney would only be drawn on five weeks hence when the draft arrived. So that he would have the use of your money for five weeks, and in times when the rate of interest is high this is an important consideration.

In the example just considered, where the exchange between London and Sydney was strongly in favour of London, it was supposed that a sovereign, or a sovereign's worth of credit, in London might fetch Lx os. 6d. in Sydney. If the tendency of the balance of indebtedness were flowing in the other direction, and there were a great demand for drafts payable in Sydney, London's currency would be depreciated as compared with Sydney's, and a sovereign here might only fetch 193. 6d. on the other side. But this depreciation could only work up to the point at which it would pay those who have debts to pay in Sydney to pack sovereigns and send them rather than make use of the machinery of exchange. . If you were offered only 19s. in Sydney in exchange for your sovereign here you would obviously inform the dealers in exchange that you preferred to dispense with their services, and would ship the sovereigns to your Australian creditor.

Restating the matter yet again in the effort to be clear, we may express it by saying when the number of people who want to send money from Sydney to London is greater than the number of those who want to send money from London to Sydney, the latter will be in an advantageous position, and able to buy drafts on favourable terms but that the amount in Sydney that their sovereigns or cheques representing sovereigns in London will fetch cannot rise above the exact equivalent plus the cost of remitting coin from one centre to the other. When that point is reached the exchange is at gold point.

What is called the mint par between the two places is in this case the sovereign, and if the cost of remittance, insurance, etc., be 6d., as we have supposed for the sake of simplicity, the outside fluctuation of the exchange will be Is.; for if it cost Sydney over 20s. 6d. to buy a sovereign in London, Sydney will ship gold to London rather than buy drafts ; and if a sovereign in London fetch less than 19s. 6d. in Sydney, Sydney will import gold from London.

We can now proceed to consider the question as it appears when the balance of indebtedness is being settled between two countries which use a different currency.

In France the unit is the franc, so that when a Frenchman wants to send money to London he wants to exchange francs into sovereigns ; conversely, an Englishman who wants to send money to Paris has to exchange sovereigns for francs.

The relative value of the two currencies measured in the amount of gold contained in the sovereign and the 20-franc piece is 25f. 22C. to the sovereign. The normal exchange or mint par is thus ruling when the Paris cheque is quoted at 25f. 22C.

The cost of sending gold in either direction may be taken at 7c. ; so that if you ship gold each sovereign's worth of it will be worth to you in Paris 25f. 15c., having shed 7c. on the way in expenses.

Consequently, if you can buy a bill on Paris at any higher rate it will pay you to do so rather than send gold.

Whether you will be able to do so will depend on the value of money in Paris as compared with London, and on the balance of indebtedness between London and Paris. If the rate of interest is higher in Paris than in London, London will want to send money to Paris to earn the higher rate, and if Paris has been selling us more goods and securities and services than we have been selling to her, Paris will have more bills on London arising out of those sales than London has bills on Paris ; consequently, the demand in London for bills on Paris will be keener than the demand in Paris for bills on London, because London has more remittances to make.

Hence it will follow that the seller of a bill on Paris will be able to get more favourable terms, and the exchange will be, as it is called, in his favour ; in other words, his francs will be relatively more valuable than the sovereign, and the sovereign will fetch less when expressed in francs. And if the balance of indebtedness be heavy enough, and the competition of those who want to buy drafts on Paris that is, to exchange sovereigns for francs be keen enough, the value of sovereigns expressed in francs will go down to 25f. 15C., and then those who have remittances to make will begin to ship gold instead of buying drafts, the Paris exchange having gone down to gold point.

When the balance is the other way, and London has been selling more goods and securities and services to Paris than Paris has been selling to London, bills on Paris will be more plentiful than bills on London, and the French importers of goods, etc., will have to compete for drafts on London in which to make their payments. That is, they will have to pay more in francs, which will be relatively depreciated, for the sovereigns that they need for the payment of their debts, and their competition will force the exchange up towards 25f 29C., which will be the other gold point, when shipments of the metal may be expected. But it must not be foregotten that the relative value of money in the two centres is a constant influence which may increase or modify the movement of exchange due to the influence of indebtedness for goods and services.

If London has sold large amounts of goods to Paris, but money is dear in Paris, the two influences will tend to counteract one another; London will leave the proceeds of its sales in Paris to earn the higher rate of interest, and as long as it does so those sales will not affect the exchange.

It may have been noted that the French exchange is against London when it is low and in London's favour when it is high. And this is natural and inevitable when we consider that the quotation expresses the value in francs which a sovereign will fetch. When this value is low the holder of a sovereign receives less in francs, and so the exchange is very literally against him. When you want to buy francs with your sovereign, the more francs you get for it the better it is for you.

When the rates of exchange are quoted in English money, it is otherwise. The Argentine dollar is quoted in pence. When it rises from 48 1/4 to 48 1/8d. it moves against England, because it fetches more pence, and any one who wants to exchange sove- reigns for dollars will receive less of them. This is one of the small complications which make the question of the exchanges so difficult to the inexperienced. But it can always be met by considering that the ultimate fact expressed by rates of exchange is the relative value between a sovereign and a foreign currency. When the sovereign buys more of the foreign currency the exchange has moved in our favour ; when it buys less the exchange has moved against us.

It thus becomes evident that the foreign exchanges are a mechanism by which international indebtedness is settled between one country and another, and that rates of exchange are the prices at which the currencies of the various countries are expressed relatively to one another. When the balance of claims between two places does not roughly agree gold has to be shipped to settle the difference, unless it can be met by what is called arbitrage, which consists of dealings in bills on other centres. For instance, London may not have enough claims on Paris to set off the claims of Paris on it, but may be able to fill the gap with bills on Berlin, or some other centre, which Paris may happen to want.

The system on which the exchanges work is thus similar to that of the bankers' Clearing house in London. In it the claims of the clearing banks are crossed off against one another, and any balance that is due, for example, from the Westminster Bank to the County, is settled by the deduction of part of the Westminster's credit at the Bank of England and its addition to the County's. But in the case of international indebtedness, the balances have to be settled by shipments of gold. Such, at least, is the theory of the matter, though the restrictions that most of the chief Continental centres place on withdrawals of gold often prevent, or at least postpone, the working of the machinery of exchange in accordance with theory.

The broad principle which has been thus set forth and exemplified is the ultimate basis of the movements in the rates of exchange between all countries, even those which have currencies based on different metals, or in the case of those in which the currency is based on nothing but the printing press. But it need hardly be said that there can be no gold point in the case of countries with a currency which consists of silver or of inconvertible paper notes. Nevertheless, even in their case, though the fluctuation of exchange is complicated by variations in the price of silver or by new issues of paper currency, yet the balance of relative indebtedness between them and other countries is still an important factor, ready to assert its complete predominance at any moment when other complicating influences cease from troubling.

Since, then, it is largely on the mutual indebtedness of various countries that rates of exchange are based though we must not forget the influence of the rate of interest in the various centres let us see how this mutual indebtedness arises.

The most obvious cause of it is the mutual exchange of natural produce and manufactured articles the balance of trade, as it is generally called. This we see chronicled in the monthly returns issued by the Board of Trade of British imports and exports. These always show that England has imported goods of much greater value than those which she has exported, and because there is no published record of her other exports-her invisible exports, as they are sometimes called —superficial observers are often very much fright-ened about the state of English trade and draw astonishing inferences, the most notable of which was propounded by a colonial premier who told an English audience that England had to export annually so many millions of golden sovereigns to pay for the balance of the cost of her imports over that of her exports.

In fact, an "unfavourable " balance of trade, which is the misleading description given to this condition of the purely commercial relations between one country and' another, is one that can only be afforded by countries of the highest economic development which are in a position to supply other countries with credit and other services, which the other countries have to pay for with their goods. And the distinction of possessing an unfavourable trade balance is shared with England by France and Germany.

At the same time, those who are alarmed by the extent of the difference between the value of our visible exports and imports are justified to this extent, if they consider that it is better for England to be a manufacturing country than a creditor and banking country. A large part of our invisible exports consists of services rendered by the clerking and financing classes, and those critics of our trade position who do not ignore them, but maintain that they would prefer to see them replaced by goods worked up by the producing and manufacturing classes, take up an attitude which is perfectly logical. The more common course, however, is to ignore these invisible exports altogether, as was done by Mr. Seddon in the speech referred to above, and to deduce the alarming conclusion that we are living on our capital, and otherwise in a terribly decadent and deplorable condition, from the commercial point of view.

This being so, though it is an oft-told tale, it is perhaps worth while to enumerate some of the invisible exports by means of which we fill the big gap between the values of our imports and exports of visible goods.

Let us consider the case as it stands between us and the United States. The United States supply us with a vast and valuable amount of food and raw material, and take from us manufactured goods, the amount of which is severely restricted by their high Protectionist tariff. On the other hand, we export to them the following " invisible " items:-

(1) Shipping freights. Our ships carry goods to and from them all over the world.

(2) Interest coupons. The American securities held by English investors yield a constant income in interest, to meet which the United States has to send goods.

(3) Insurance facilities. The English insurance companies and firms do a large business in the United States, and draw thence a regular income in premiums.

(4) Banking facilities. The large sums spent annually by Americans in Continental travel are, to a great extent, financed by drafts on London, on which London takes toll. Still greater, probably, is the profit that London regularly makes by discounting bills for America, financing its speculations by carrying over shares for it in the London market, and making advances in other forms.

(5) Pleasure, social amenities, titles, and art treasures. Americans in times of prosperity spend a constantly increasing amount in travel and enjoyment in England. Many of them, it is said, are anxious to cut a figure in what is called Society, and the lavish expenditure in which they indulge is believed to be of some assistance to this ambition.

All this expenditure here on their part has the same effect on the balance of Anglo-American in- debtedness as an English export. It is also well known that the scions of ancient English families frequently find wives among the attractive daughters of America, and the big dowries that the latter bring with them amount to a considerable annual charge on the United States. The habit of purchasing art treasures, lately rife among rich Americans, is another item in the balance. The fact that owing to American tariff regulations many of these art treasures are left here does not, of course, interfere with the effect on international indebtedness produced by their purchase.

(6) Family affection. Many of the English, and especially Irish, settlers in America regularly remit sums to their parents and families in England, taking nothing in return but affection and gratitude. Every one who has read "Some Experiences of an Irish RM." remembers the picture of McCarthy, the horse-dealing farmer who charged Mr. Bernard Shute £45 for a mare, saying, "She's too grand entirely for a poor farmer like me, and if it wasn't for the long weak family I have, I wouldn't part with her for twice the money." The long weak family was explained by Mr. Flurry Knox to be "three fine lumps of daughters in America paying his rent for him."

The above list might be continued, but sufficient examples have been given to show that there are many more exports in heaven and earth than are dreamt of by the philosophy of the Board of Trade returns; It must not be supposed that the movement of these items is all in one direction. American ships carry English goods, American insurance offices do business in England, and Englishmen spend money on travel and sport in America. It is only claimed that on the above counts America normally owes more to England than England owes to America, and that credits under these heads go far to neutralize the so-called "unfavourable" balance of trade.

It need not, of course, be supposed that the final balance, after allowing for all exports and imports, visible and invisible, must be exactly equal between any two countries. It is perfectly possible for one country to be normally indebted to another year in, year out, on this balance of trade in its widest sense, and yet to be in a perfectly wholesome economic condition, being kept so by being in a contrary relation with some other country. It will thus be able to meet the bills drawn on it by its creditor with those that it draws on its debtor, and thus the sum of mutual indebtedness is crossed off and cancelled all over the world, or met, when at any time the supply of bills is inadequate, by movements of bullion to settle the balances.

This case arises, for example, when the chief agricultural countries are reaping and moving their crops. They hold, for the time being, the manufacturing countries in fee, and they need gold for the actual circulation of currency in the producing districts. And, consequently, gold moves normally to the United States, Egypt, and Argentina in their harvesting seasons.

It is in these cases that the utility arises of the practice, referred to in earlier chapters, of drawing bills in anticipation of crop movements. Without this arrangement, countries whose staple export is harvested at a certain season would take payment in gold for it at that season, and would, during the rest of the year, have to remit in gold for the goods and services that it buys from other countries. But the dealers in exchange, and the more legitimate class of finance bill, provide the means by which, at times when such a country has nothing to export, the exchange dealers will make good profits by creating bills against nothing, but in anticipation of the crop that is in the ground, with the result that the country-exports less gold in its off seasons, and imports less when its crop is ready. Its imports of machinery in July are paid for by semi-fictitious remittances, created by exchange dealers who draw finance bills and so raise credits, and these bills are met later by the shipment of the country's crops in September, and by the bills genuinely drawn against them. And so the clumsy necessity for sending gold backwards and forwards across the oceans is reduced, though not extinguished.

It need not be said that it is quite impossible to gauge the amount and value of the invisible commodities, which, as above enumerated, have so important an effect on the balance of international indebtedness, and so on the foreign exchanges. And one of the most elusive of the influences which thus complicate the question is that of the purchase and sale of securities between one country and another.

But it has to be considered now because it is closely connected with the main question dealt with in this inquiry.

When one country raises a public loan in another, everybody is well aware of the transaction, and there is no difficulty about the matter. For example, Brazil borrows three millions in the London market by an issue of 5 per cent. bonds. The issue is advertised and subscribed, there is an open mar let in the bonds, and it is all clear and above-board.

Brazil has exported to England three millions' worth of its promises to pay; England has returned to Brazil three millions' worth of money or credit, or the right to draw on London, either by taking gold or by using its credits here to cancel debt elsewhere, or to make any purchases required. The immediate effect of the transaction will be to turn the exchange in favour of Brazil, though it must always be remembered that the overt working of this effect may be veiled by other influences. During the currency of the loan the effect of its existence will be to turn the exchange in favour of London, because Brazil will be obliged to remit periodically to meet the quarterly or half-yearly interest payments or the service of the sinking fund established to extinguish the loan gradually by purchase or drawings of the bonds.

Hence it is that no debtor country that is, no country which has borrowed extensively from the investors and money-lenders of other countries can afford the luxury of what is called an unfavourable trade balance. In order to meet its interest payments and its sinking fund arrangements, it must habitually ship more goods than it receives, since the lenders are continually sending it interest coupons and drawn bonds, the payment of which it has to provide for either with goods or with fresh borrowing.

In other words, what is usually called a favourable trade balance may generally be taken as a sign of the economic dependence of the country which possesses it.

The same effect on the exchanges is produced when the borrowing is done, not by the Government of the borrowing country, but by companies as, for example, when the Pennsylvania Railroad sells £4,000,000 bonds here, the operation for the moment turns the exchange in favour of the United States, but during the currency of the bonds produces a periodical claim by London on New York for interest payments.

These public issues of loans are potent and obvious influences on the exchange. But an equally important effect, which is difficult to trace, is produced by the purchases of securities made by the investors of one country in the Bourses of another.

It is the natural tendency for a debtor country, as it makes economic progress, to buy up gradually the securities on which it has borrowed from others, and so to reduce or extinguish the amount that it has to provide abroad for interest payments. For example, Italian Rentes, the public debt of Italy, were formerly largely in the hands of foreign holders in France, Germany, and England. Italy's economic progress has been remarkable ever since her ambitions in the direction of colonial expansion and world-politics received a timely check on the Red Sea. Since then she has developed her internal resources with great success, and she has been assisted by the possession of an inexhaustible asset which she exports continually, or rather lets other people come and enjoy. For Italy holds the world in fee as an exporter of Beauty, beauty in scenery, beauty in atmosphere, beauty in buildings, sunshine, association, and a hundred other things, besides her art treasures, which it would be absurd to call priceless, because to think of price in connection with them would be a vulgar irrelevance.

Every year an increasing number of travellers from all lands pours into Italy to see these things, bringing circular notes and other forms of drafts where with to pay their way ; and, in order to meet these drafts and to feed the balances with their Italian agents on which they are drawn, the other countries have to send Italy goods, or services, or securities.

Thus Italy has been enabled to buy up a large proportion of her own securities which were formerly held by foreign investors. Consequently, she has largely relieved herself of the drain against coupons, and her exchange has moved rapidly in her favour.

So much so that travellers in Italy who have not been there for some years are astonished to find how much less valuable the English sovereign has become when measured by its exchange price in Italian currency.

These purchases of securities by the investors of one nation in the Stock Exchanges of others are a constantly fluctuating element, which has a marked effect on the balance of national indebtedness, and is extremely difficult to trace or gauge. Equally so is the perhaps still more important element provided by the shifting from one centre to another of the more highly specialized forms of securities, chief among which is the bill of exchange. And when we arrive at the ebb and flow of this restless ocean we come to the point at which the foreign exchanges most obviously affect the main subject of our inquiry, and it begins to be clear that this attempt to explain them was by no means an irrelevant infliction. For the movements of bills of exchange from one centre to another depend to a great extent on the rates of discount respectively current in them.

If the rate of discount be relatively low in London, bills will be poured in from abroad to be discounted and turned into cash here, and foreigners will use their credits here, and draw bills on London and discount them ; and so our imports of securities will be increased, and the exchanges will be turned against us. And if the exchanges are against us, and gold is being taken from London, this state of affairs is remedied by a rise in the rate of discount here, which checks this import of bills and impels foreigners to remit funds to London to be employed in the purchase of bills ; and if the process is continued, we begin to export securities, and thus turn the exchanges in our favour. And so we begin to see the great importance of the market rate of discount, owing to its effect on the foreign exchanges, and through them on the ease or difficulty, with which our supply of gold is maintained.

We have thus arrived, through the thorny labyrinth penetrated in this chapter, at a result which may be summarized thus :--

The foreign exchanges are the expression of international indebtedness.

International indebtedness is the balance arising from the exchange between countries of goods, services, and securities. The movement of securities, especially of bills of exchange, depends largely on the discount rates current in the chief financial centres.

The discount rate has thus an important bearing on the foreign exchanges.

It has also been shown that when the foreign exchanges go to a certain point, gold will be taken from London, because, for example, it will pay better to send gold to Paris than to take only 25 fr. 15 C. for one's sovereign on 'change.

And gold is the basis of our credit system, since the notes and cheques which we use in commercial and financial transactions are all convertible on demand into gold, and cannot safely be multiplied beyond a certain point unless the stock of gold ready to meet them if asked for be increased also.

So that we are now beginning to see more clearly the importance of the market rate of discount, and the need for its sagacious regulation.

The market rate of discount depends, on the one hand, on the supply of money, and, on the other, on the supply of bills of exchange which come forward to be turned into money. We have already examined the chief parts of the machinery which creates and handles money and bills of exchange the banks, bill-brokers, and accepting houses-and we found that in normal times the supply of money and the level of discount rates are regulated by the banks. We are now in a position to try to understand the functions of the institution which takes control of the machinery when times are not quite normal, and regulates the supply of money and the market discount rate in order to affect the foreign exchanges when this intervention is considered necessary.

This institution is the Bank of England.

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