that on his remarking one day to the late S. R. Gardiner that the more thoroughly British foreign policy was examined the better it came out, that great historian at once replied: 'It always does; it always does.'

The conclusion Mr Headlam draws from his careful examination of all the documents is the too familiar one that the war was the result of a 'carefully planned conspiracy against the peace and security of Europe.' This is in substance also the view derived from the papers by Mr Beck and by the author of 'J'Accuse.' It seems certain that it must be the view taken by the historian of the future. The facts cannot really be explained away. There are too many of them, all pointing in one direction. It was avowedly the theory of Treitschke, and almost avowedly that of his pupils the rulers of Prussia, that the State was bound by no treaties and that it was its duty to strike at once when the chance came. Everything, as Dr Rose insists, indicates that July 1914 had long been fixed as the moment for the blow. The Kiel Canal had been hurried on so as to be finished by then; the new army and taxation bills of 1913 had had their effect and would lose it if not acted upon; the financial situation had been got ready for the crisis. But France, Russia and Belgium were all unready, all certain to be stronger after a while; while England was not only unready but was on the edge of civil war. The hour was come.

That is the judgment on German policy uttered in the works to which we have referred. It is, we believe, the judgment of the overwhelming majority of competent persons who have examined the official documents, of whatever nationality they may be. But to have begun war with clean hands and in a noble cause is not enough. Nor will it even be enough if at the end we are able to say that we have waged it not only victoriously but with our whole national strength. We may have before long to resist the temptation put forward by people of specious virtue, to accept a peace which will in truth be no peace. High motives will be suggested for it; and they will be reinforced by weariness, impatience of losses, desire to get back, as far as may be, to our ordinary way of life. But we must sternly refuse to listen either to the high motives or to the low. We have had forced upon us

a great task, and we must not leave it half done. In order to complete that task, we need to have our eyes fixed on a victory which shall not be an end but a beginning. We should resolve to make our present loss a future gain. The fatal mood is to accept as inevitable such horrors as we have witnessed and are witnessing. Let us at least resolve that, if some of these things are to prove inevitable, it shall not be for want of human efforts to avoid them.

And how can they be avoided? Only on one principle, however it may be applied. We have to learn all of us, all the nations, to think internationally, to think of the world as a whole with parts, as a union in diversity. The utter defiance in this war of the rules made by the Hague Conference, and the failure of those who set their signatures to its treaties to do anything at all to uphold them, have made us take too despondent a view of the international position. But the truth is that a very considerable number of disputes occurring in the last twenty years, any one of which in the old days might have led to war, have actually been peacefully settled by arbitration. And it is in that direction that we must work. So think the writers of the books we have been discussing. They differ in details and in hopefulness. But most of those who discuss the future agree that the whole world, and especially the Allies, will have failed if the end of the war is not the beginning of some new system of common action among the nations in defence of law, nationality and peace. To attain that high goal, to inaugurate an international order of the world, is the supreme and ultimate task of the Allies. The first requisite for it is the strong, united and continuous will which can alone produce victory. The second is the conviction that victory if content with itself has only done half, and that the less important half, of its proper work in this war.

JOHN BAILEY.

ENGE PUBLIC LIBRARY

Art. 12.-EXCHANGE AND THE AMERICAN LOAN. EXCHANGE is simply the purchase and sale of the money of one country, payment being made in the money of another country. In practice, it amounts to buying from a banker dollars or francs or marks payable as banking credits in New York or Paris or Berlin respectively, by paying therefor to the banker English money in London. (The actual exchange of currency over the counter, as is done by travellers for pocket money, may be ignored.) The rate of exchange is the price at which at a given moment foreign money will be sold. It is obvious that if a banker has 10,000,000l. in London and $50,000,000 in New York, he can go on selling money in one or other place till he has $100,000,000 in New York and nothing in London, or 20,000,000l. in London and nothing in New York. Of course in practice he sells or buys both ways, one transaction cancelling in a measure the other, and what concerns him is the balance of exchange. At the end of a month he may have 5,000,000l. in London and $75,000,000 in New York. He will then become the more anxious to sell exchange on New York than on London, so he will offer to give, say, $4.88 for 17. instead of $4.87, in order to facilitate the equalisation of his balances in the two

countries.

Now, although one naturally thinks and speaks of a deposit in bank as money, what one has in reality is not money but a banking credit. In normal times, such banking credit in London and New York is readily convertible into either notes or gold, but it is important to seize the distinction. The bank owes the depositor not specific money but a bankable credit. So it is that our international banker, whose operations we have been following, in reality sells banking credits in London in exchange for banking credits in New York, or vice versa. Many considerations may therefore enter into his calculations beside the simple one of the relative size of his balances. It may be well to indicate a few:

1. Interest for time and at call may be higher or lower in London than in New York. The banker, other things being equal, will be anxious to have his larger

balance where the interest is higher. Therefore whatever affects the rate of interest affects exchange.

2. The probable future course of exchange due to the approach of a season of the year when heavy exports may be expected (as, for example, the export of cotton from the States to England), will lead the banker to incur liabilities in London, relying upon future remittances in payment for such exports cancelling his obligations. He will thus sell freely in New York in June, July and August, even borrowing freely in London, while counting upon the autumnal crop to equalise the situation. If one knows a dividend is to be paid on Jan. 1, one often anticipates it by a Christmas purchase. As the size of the expected dividend often determines the cost of the Christmas gift, so the banker anxiously studies the crop reports in an endeavour to anticipate the probable amount of the payments that will result from the export of the crop, or, as he expresses it, what volume of exchange will be created.

3. The probable future course of exchange, due to the export or import of manufactured goods, is also of great interest to our international banker. The import of an excessive amount of luxuries may counterbalance a large portion of the cotton exports. And it matters vastly whether the States are exporting or importing steel. The whole problem of the future business activity of a country concerns exchange vitally, in addition to the indirect effect on the rate of interest.

4. The investment market in bonds and stocks may also play an important part. A nation may be buying or selling on balance a large amount on Wall Street. If all England is selling her securities, every pound sterling of value is so many dollars available in New York.

5. If under abnormal conditions a question arises as to the solvency of a country's business or financial life, the banker will hesitate to accumulate credits in that country. Exchange will rapidly move against it, and by the very fact tend to create the condition it fears. Such a movement of exchange, if persisted in, means a violent attack on the resources of the country affected, and at the best is a heavy tax upon its wealth. In the Civil War in the States, the nation was forced from a gold basis. It recovered because of its vast natural resources,

but it was only in 1879 that specie payments were resumed, although the war ended in 1865.

6. Speculation plays a part, and at times like the present a most significant part. When the banking world foresees a great movement in exchange it acts precisely as when it anticipates a great rise or fall in stocks. It buys and sells with a view to profit from the transaction itself, and not in the course of normal business. The result is inevitably the acceleration, often violent, of the movement of exchange in the direction it would otherwise have taken more slowly.

7. Sentiment and psychology have their influence as in all subjects wherein the human will operates. It is a source of strength to Great Britain that the mind of the world has been taught that English finance is as stable as her sea-power.

8. The movement of exchange does not depend wholly on the relations of two countries, say those of England and the States, as we have hitherto for simplicity's sake stated it. If France owes the States on balance, and the States owe England, and England owes France, the transfer of banking credits becomes a matter of mere bookkeeping. So at the present moment it is the indebtedness of the Allies to the States on joint balance which must be reckoned with, and not the indebtedness of Great Britain alone. In settling the joint balance, London must pay the penalty of being the clearing-house of the world.

In normal times the fluctuation of exchange between gold-standard countries is at once checked by the export and import of gold so soon as such fluctuation becomes excessive. The sovereign is worth $4.8665 and is always worth that in American gold. But, since the sovereign is in London, it is easier to buy exchange at 4.84, let us say, than to export gold and pay freight and insurance. At 4.82, approximately, gold will flow out. Similarly, when exchange rises to about 4.90, the States will ship gold to London. It therefore follows that if exchange falls to 4.80, and yet no gold leaves London, an abnormal condition exists. There must be a financial crisis which leads the Englishman to pay a big price to keep the gold at home. If the fall is still greater and persists, then it becomes difficult to avoid the conclusion that it is because