II. THE RATE OF EXCHANGE
Engels describes the mechanism thus.
“The rate of exchange is known to be the barometer for the international movement of money metals. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this preponderance of England's payment obligations towards Germany is not balanced again, for instance, by a preponderance of purchases by Germany in England, the sterling price of bills of exchange in marks on Germany must rise to the point where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of events.” (p 574-5)
Today, with floating exchange rates, if Britain has more payments to make to the eurozone, than the Eurozone has to make to Britain, the value of the Pound will fall relative to the Euro. As a result, Eurozone imports will become more expensive, in Pounds, and, therefore, demand for them will fall, whilst British exports become cheaper in Euros, and so demand for them will rise.
“If this export of precious metal assumes a larger scope and lasts for a longer period, then the English bank reserve is affected, and the English money-market, particularly the Bank of England, must take protective measures. These consist mainly, as we have already seen, in raising the interest rate.” (p 575)
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