B. Production of the precious metals. - Inasmuch as gold and silver serve in the double capacity of commodities of ordinary consumption and of money metals, their production affects the foreign exchanges in a twofold manner. In the first place, when they are shipped from country to country like ordinary commodities, they affect the bill market like other exports or imports, but they produce another indirect effect by raising prices and thus interfering with the ordinary course of international commerce. Wherever gold is the standard of value an increased output from gold-mines tends to raise all prices by lowering the value of the standard. This effect is first felt in the country in which the mines are situated, since the new metal finds its way first to the local markets. The rise of prices checks exports and stimulates imports by making the home markets relatively better than the foreign, and this speedily raises the rate of foreign exchange. If it chances to go beyond the exporting point, as is quite probable, gold will leave the country, its price on the local bullion markets will correspondingly rise, and the disturbed equilibrium of prices be thus restored.

Between countries with the gold standard the production of silver operates like that of any other commodity, but between gold-standard and silver-standard countries it also produces the twofold effect just described. The exchanges between England and India are a case in point.* When the value of silver falls in India, prices rise, and the shipment of goods between that country, and England is immediately influenced, exports to England being checked and imports from there encouraged, until the gold price of silver in both countries has been adjusted to the same level and the prices of goods modified accordingly. During this process of readjustment the rates of foreign exchange will be effected. Indeed, it is through manipulation upon the markets for bills that the necessary readjustments will be brought about.

* The recent establishment of the gold standard in India has essentially modified the situation as here described.

The foreign rates of exchange in the important centres of gold and silver production are constantly subject to influences of this character, and inasmuch as the precious metals must ultimately be distributed throughout the world in response to commercial needs, no markets are exempt from them.

C. Commercial crises. - The effects of commercial crises upon the rates of foreign exchange are so obvious that it will be unnecessary to dwell long upon them here. Inasmuch as the whole machinery of commerce is affected by them, they operate through nearly all the agencies which have been described. Occasions of this sort are characterized by the closing of factories and mines and by a general paralysis of the customary industrial agencies, and consequently both imports and exports generally decrease. The chief causes for the disturbance of the foreign exchanges, however, come from the stock markets and the banks. A general liquidation of accounts is the usual result of a crisis, and this frequently involves the transfer of large quantities of securities between international dealers with the necessary accompaniment of fluctuations in foreign rates. Bank failures often follow which involve readjustments of international accounts, and this, as we have already shown, is always accomplished through the medium of foreign bills. Not infrequently the rates advance beyond the gold-exporting point, and a considerable drain of specie results.

D. Unusual financial transactions. - Any unusual financial transaction of an international character is certain to interfere with the ordinary course of the exchanges, though by counter-manipulations it is sometimes possible to reduce such interference to a minimum. The most striking event of this character in recent times was the payment of the huge war indemnity of five milliards of francs by France to Germany in 1871-1873. The treaty of 1871 stipulated that the sum should be paid in gold or silver, in notes of the Banks of England, Prussia, the Netherlands, or Belgium, or in bills of exchange upon these places, and it was necessary for the French government to procure these forms of currency by operations upon the exchange market. Accordingly between June, 1871, and September, 1873, she purchased bills of exchange in favour of Germany to the amount of 4,248,326,374 francs. Inasmuch as the greater part of this vast sum was procured by means of loans from the French people, which involved international exchanges of securities, the aggregate of the dealings in foreign exchange occasioned by this indemnity greatly exceeded the above figure.

Transactions of such magnitude, added to those occasioned by the ordinary processes of commerce, would naturally be expected to produce great fluctuations in the rates, but on this occasion such a result was avoided, partly on account of the length of time over which the operations were spread, and partly because a syndicate involving the leading bankers in Europe cooperated with the government in reducing the disturbances to a minimum. The average rate of exchange on England during the period did not exceed 25.60, and the average premium on gold at the Paris Bourse averaged twelve francs per thousand. These figures, however, indicate that the market was influenced by events of an extraordinary character, and, had not the Bank of France managed with great skill, industry might have been seriously interrupted and much harm done.

Events of a similar character but of less magnitude were the payment of a war indemnity by China to Japan in 1895, and the payment of $20,000,000 by the United States to Spain in 1900 in consideration of the relinquishment of Spanish sovereignty over the Philippine Islands.