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D Additional comments / Commentaires supplementaires: This Item is filmed at the reduction ratio checked below/ Ce document est filme au uux de reduction indique ci-dessous. lOX 14X 18X y Kx D Th» copy filmad h*r« hai b««n raproducad Chankt 10 Iho ganorotity of: National Library of Canada L'oxomplair* film* lut raproduit graea * la g4n«ro>iM da: Blbliotheque nationale du Canada Tha imaga* appaaring hara ara Iha bait quality posiibia conaidaring tha condition and lagibility of tha original copy and In kaaping wittt tha filming contract apacificaliona. Original copias in printad papar covara ara fllmod baginning with tha front covar and anding on tha laat paga with a printad or illuatratad Impraa- aion. or tha back covar whan appropriata. All othar original copiaa ara filmad baginning on tha firit paga with a printad or Illuatratad in-ipraa- i Dexter S. Kimball U. CoRPuaATioK Finance William H. Waiitcr 12. nud:NE88 CoBBispoNDENCE Harrison Mcjohnston 13. Adv>:btii,:xo Campaioxs Mac Martin 14. Inland Taafpic Simon J. McLean 15. FoBEioN Tb-vde and Shipping ... J. Anton de Haas 16. BANKING Principles and Practice . . E. L. Stewart Patterson 17. Domestic and Fobeion Exchange . . E. L. Stewart Patterson 18. Inscbance The Editors 19. Office Management The Editors 20. The Exchanges and Specciation . . Albert W. Atwood 21. AccoDNTiN'j Practice and AunrriNG . ,Iohn T. Madde 22. Financial and Business Statements . Leo Greendlinger 23. Investment Edward D. Jones 24. CoMMiRciAi Law Walter S. Johnson DOMESTIC AND I OREIGN EXCHANGE BY E. L. STEWART PATTERSON Hwpi linlt inif iif tif f-'tistt rn Toi'-iiyfiifi ttrancfiei/, Vnnadian Bank of Commerce MODEIiX BUS JX ESS VOLUME 17 .M-BXANDER HAMPTON INSTITUTE NEW YORK C.3. corTViOHT, 1918, 1919, bt ALEXANUEIl lIAMII/rUN INSTITUTE COFYBIGIfT IN GBKAT BBITAIX, 1918, lOl!', BlT ALEXANDER HAMILTON INSTITUTE The tille and coateoU of this volume as well aa tha baaiopsii srrowiDf out of it, are further prot^ctrd by laws relating to trade marks and unfair trade AH rights reserrpd. inrliidine translation into Hcandioavian. R'pg-»tirtd trad^ mark, Rfff. U. S! Pat, Of., Umtf Regittrada, M. d« F. Madb rH U. S. a. i PREFACE There is nothiiif.^ mysterious m- (iifliiiilt about for- eifju exchaiifie whtii it is studied in the HkIiI of domes- tie exehanfje. rtliieh is easily understood, and in tliis volume I havL- endeavored to exi)lain the essential jjrineiples of both domestie and l'()rei«n exehanfje in simple lanjiuawe, and witii suitable illustrations. In this volume praetieally every form of exehauKe has been dealt with, and it is hoped that it will prove use- ful to the exporter and imixirter, as well as to I)usi- ness men in general, who are interested in the general aspeets of the subject. The tables dealing with gold values are all original calculations, based on data obtained from the various mints, while for some of the silver values I an. in- debted to Mr. (;onzales' excellent little book "Mwl- ern Foreign Exchange," and for general matter to my own book, "Notes on Foreign Exchange." I have also to acknowledge my indebtedness to Mr. Major I?. Foster for va''iable assistance in writing the two chapters on Domestic Excliangc. particularly the second chapter dealing with the exchange situation in J the United States. E. L. Stewart Patterson. Sherbrooke, Que. i TAHLK OF CONTENTS 1. 2. !J. 4. 5. «. 7. H. !). 10. 11. 12. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. ( M.M'TEK I noMKSTrc i;x(ii.\n(;k Di-finitiim i>f Domestic »n(l Foni/fii l"A(hanj;f I'nvimnts hitwccn Dcnv. r uiiil Tuiii|m . Clii'ok on Dihtor's Hunk Cluck or Driift on Nrw York Bank Doniiind for Nch \'ork Kx. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. CHAPTER III GENERAL A.SPECTS OF FOREIGN- EXCHANGE Definition of Foreign Exchange gj How Indebtedness Between Two Countries Arises 32 Similarity Between Inland and Foreign Exchange 33 Expense of Shipping Gold 34 Training in Foreign Exchange 35 Mint Par of Exchan/re Qg Computing the Jlint Par 37 Par of Exchange ... .... 38 Gold Points 30 Significance of Gold Movements 40 Actual Gold Points 4I War and Foreign Exchange 41 The Clearing Features of Foreign Excliange . 42 Buying and Selling Exchange 43 New York Demand for Sterling Exchange . . 44 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. CHAPTER IV RATES OF EXCHANGE Bills of Exchange and Their Relation to Gold . 46 Cost of Sterling Exchange 47 Rates of Exchange 4g What Makes the Rate .... ' ! 49 Coinage Ra'io 5^ nuctuation in the Rate of Exchange . . . 5# Rates Tend to Correspond 51 Exchange Quotations gg Range of the Nine Frequent Quotations ... 53 Fixed and Movable Exchange 54 CONTENTS ix 8ICTI0N 11. Conversions •"i"; 12. Conversion for Fixed Exchange 56 13. Conversion for Movable Exchange . . . ! . 57 1-i. Simple Arithmetic Involved .... 58 15. Exchange Tables 59 CHAPTER V FOREIG.V REMITTANCES 1. Non-Commercial Exchange .... gi 2. Principles Underlying the Issuance of Drafts . 62 3. Advices -, 4. Specimen Forms and Signatures 66 5. Cost of Drafts to Purchasers . cc 6. Travelers' Checks ••...'.'.'!.' 67 7. Payment of Checks ' ^^ 8. Payment to Holders .70 9. Redemption of Checks 71 10. Letter of Indication ^a 11. Lost Travelers' Checks . ..... 73 12. Letters of Credit ■ . 74 13. Payment to the Holder ...... . . gj 14. Circular Notes 82 15. Foreign Money Orders gg 16. Payment of Orders .85 17. Mail Remittances ! 86 CHAPTER VI BILLS OF EXCHANGE 1. Bills of Exchange ... on 2. Sight Drafts ... oX 3. Cable Transfer. '.'.'.' 94 4. Unusual Rates for Cables ' . 95 5. Long Exchange og » DOMESTIC AND J-OHEIGN EXCHANGE SECTION 6. Influence of the Interest Rate ""g" 7. Comniercial Long Bills jqO 8. Bankers' Long Bills j^j 9. Bills of Exchange that Involve More or Less Risk 101 10. Letters of Credit jQg CHAPTER VII A DAY IX A.\ EXCHANGE BOX 1. Practical Exchange jOjj 2. Demand Sterling Sold Ijq 3. Sterling Purchased jjj 4. French Exchange jjo 5. (ierman p^xchange jj3 6. Sundrj' Drafts Iji 7. Travelers' Checks Ug 8. Issue of a Letter of Credit Ug 9. Payment on Letter of Credit ng 10. Payment of a Travelers' Check 117 11. Commercial Letters of Credit H7 CHAPTER VIII FOREIGN EXCHANGE AND EXPOKTS 1. Interdependence of Exports and Imports . . ISO 2. Origin and Supply of Foreign Exchange . . . 122 3. "The United States in Account with the World" 124 4. Commercial Bills of Exchange -[gg 5. Financing Exports by Means of Dollar Credits . 130 fi. Dollar Acceptances jgj 7. Export Letters of Credit I34 CHAPTER IX FOREIGN' EXCHANGE AND IMPORTS 1. Commercial Letters of Credit and Importing . 137 2. British Acceptances under Letters of Credit . . 138 CONTENTS xi •ICTION PAOl 3. History of the Draft in London 139 4. Position of the Obligants on the Bill .... 140 5. The Part London Plays 141 CHAPTER X FINANCE BILLS 1. Definition of a Finance Bill 144 2. Finance Bill for New York Account . . . .14,5 3. Method of Using Finance Bills 146 4. Loan of a Finance Bill 148 5. A Finance Bill on London Account .... 149 6. Other Uses of Finance Bills 150 7. Forward Exchange 161 CHAPTER XI ARBITRAGE 1. What Is Arbitrage? , . 155 S. When Arbitrage Is Transacted 155 3. Parity I57 4. Parity in Stocks 158 5. Claim Rule I59 6. Simple Arbitrage 160 7. Compound Arbitrage 168 8. Arbitrage in Gold 164 S. 3. 4. 5. CHAPTER XII RATES OF INTEREST Interest an Important Factor in Exchange Quo- tations 166 Long Bills 166 Bank Rate 167 Market Rate ,.,... 168 Retirement Rate 169 xii DOMESTIC AND FOREIGN EXCHANGE iionoif 6. Importance of the Bank of England Rate . . 169 7. What the Bank of England Rate EfTccts . . .171 CHAPTER XIII GOLD SHIPMEXTS 1. Gold or Specie Points -i-^^ 2. Gold Values, London nnd New York .... 175 8. Gold Shipments from New York I7g 4. Gold Shipments from New York to Ottawa . . 177 6. Shipments from Ottawa j8q 6. Gold Imports During the War jgl CHAPTER XIV STERLING EXCHANGE I. London Market Ig^ 8. Monetary System [ jgg 3. Paper Money jg~ 4. Coinage of Gold ! . 188 6. Stamps and Interest jqq 6. How London Quotes Exchange 190 7. Rates of Exchange iqj 8. Course of Exchange jgg 9. American Quotations jgg 10. Conversion -jq- 11. Profits ' ,07 12. Purchase of Bills of Exchange . ..... 198 1. 8. 3. CHAPTER XV FRENCH EXCHANGE Paris Market gOj Latin Union gn-i A'lonetary System 202 Stamp Duties and Interest gog CONTENTS xiii "*"""• . not 5. How Paris Quotes Exchange 204 6. French Exchange in New York 205 7. Fractional Quotations 206 8. Profits (jQ-f 9. Purchase of French Long Bills 209 CHAPTER XVI GEKMA.N KXCIIANGE 1. The Berlin Market 212 2. Monej 212 3. Stamp Duties 213 4. Interest Rates and Commercial Usages . . ,214 5. German Quotations 216 6. American Quotations 216 7. Conversions 217 8. Profits 019 9. Purchase of Gorman Long Bills 220 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. CHAPTER XVII EXCHANGE WITH OTHER COUNTRIES Gold Basis of Exchange 222 Dutch Exchange 222 Exchange with Other Gold Standard Countries . 224 Exchange Quotations 225 Gold Exchange Standard 227 Philippine Islands 228 I"'''* 228 Argentina ^29 Brazil 230 Silver Standard 23fK China 23S Paper Currencies 23*^ Chile 236 XXV I>OMESTIC AND FOREIGN EXCHANGE CHAPTER XVIII LONDON AND NEW YORK AS FINANCIAL CENTERS noTioii p^ju 1. New York as a Financial Center 238 2. The Reasons for London's Supremacy . 239 8. Physical Conditions Favorable to London . 240 4. Mail and Cable Facilities 241 6. Time Advantages . _ 242 6. National Characteristics . 248 7. Willingness to Seek Fortune Abroad .... 244 8. London Without Rivals at Home 244 9. Influence of Custom and Tradition .... 246 10. Economic Factors in London's Position . . 246 11. Free Gold Market 847 12. Liquid Discount Market 249 13. Mercantile Nary and Tariff 251 14. England's Foreign Trade 2.52 15. New York's Present Dominance Temporary . . 254 16. New York's Future " , . 256 CHAPTER XIX WAR AND THE EXCHANGES 1. War and Its Effect on International Exchange . 257 2. Moratoria 2,59 3. London and New York 263 4. Gold Shipments from New York 263 a. Payments Thru Ottawa 263 6. New York Loans to Great Britain 264 7. Great Britain 265 8. Dutch Exchange 268 9. Exchange in Other Countries 269 10. New York 271 11. Canada 274 CONTENTS w •tCTlON 12. (Wmany . . _ _ iMm la. 'J'lif 8cui,dinavian Union .' fl!? TABLES 1- ^'ah^^■s of Forci^ Coins ■J- Alonevs in Actual Use ^^* 4. .Moner Symbols ~''^' Index ". 992 203 xvir— 2 DOMESTIC AND FOREIGN EXCHANGE CHAPTER I DOMESTIC EXCHANGE 1. Definition of domestic and foreign exchange. — Domestic exchange is simply the term apphed to the various methods of making payments between busi- ness men in different communities located within the same country. Foreign exchange refers to all pay- ments made by the business men of one country to those of another country. An example of domestic exchange is furnished when Jones of Denver pays a debt to Smith in Toledo or to Swann in Tampa. Foreign exchange is involved when he remits to McDonald in Montreal or to Lubin in Paris. 2. Payments between Denver and Tampa. — Sup- pose Jones in Denver buys $1,000 worth of grape fruit from Swann in Tampa. He may make pay- ment in any one of various ways. He may send bills in a registered letter, gold or currency by express, an express money order, a postal money order, a check on his own bank in Denver or elsewhere or a draft dra^vn by his own bank on some other bank. To send cash by registered letter or express or to send a money DOMKSTK' AM) FOUKKiN KXfllANGE order is too expensive and 1ms other disadvantages. Swaiiri would lie perfeetly satisfied with a eheek or bank draft on his own bank or any bank in Tampa. How is Jones to ^et sueh an instrument ? He has no hanking eonnections in Florida, neither has his Den- ver bank. There are over twenty-seven thousand bankin-- institutions in the Tnited States. It is not reas(mal)le to expect any one bank to maintain rela- tions with all of" them or even with one in each city. In nearly all cases it is impossible for a debtor to remit a draft or cheek on a bank in the creditor's city. 3. Check on debtor's bank. — Jones may simply draw a check on his Denver bank and mail that to Swann. This is convenient for Jones, but how about Swann ? lie gets a right to receive $1,000 in Denver. He wants it in Tan.pa, not in Denver. He must now undergo all the trouble and expense and delay of coU lecting it. This can be shifted to the Tampa banker by depositing the check, but the bank makes a charge for this service. The amount of commission, or "ex- change," charged in such a case depends upon the size of the check and the trouble involved in collecting it. If Swann is a very important customer of the bank, he may receive full credit for the check deposited, the bank assuming the entire burden of collection. A debtor imposes an unreasonable burden upon his creditor or his creditor's bank whenever he remits a check on his own local bank. When Jones buys grape fruit he has a definite understanding that the price no.MKSTic f.xcman(;k b quoted is citlu r for "f.o.h. Tampa" or for delivery in Denver. There should he just sueli an understanding with regard to the payment. A l)uyer is ol'ten re- quested to a(hl a eertain amount to tlie priee ([uoted if he wishes to remit hy eheek on his own l)ank. Tlie lar^e numher of wholly independent hanks in the I'nited St.ites makes the eolleetion of out-of-town eheeks ofter . slow proeess. \aturally. the depositor eannot expeet to j-et the use of his funds until they have heen eolleeted hy the hank. The delay involvcil. coupled with the hif>h eolleetion charfre, usually causes a discrimination to he made ajjainst remittances in the form of h)cal checks. This discrimination may he- come so great .is to render the use of such checks pro- hihitive. When this is true, the dehtor is forced to apply to his hank for a draft which will he acceiitablo in the city where the amount is to he paid. Plainly, it would he impossihie for each hank to keep balances in every other city in the country. It would he highly desirable for every bank in the coun- try to be able to sell drafts on some one city. To do this they would be compelled either to keep funds on deposit with some bank in the central city or to keep balances with another bank that did. In either case, each of the two banks maintaining this relationshii) is called the "correspondent" of the other. If all the banks are attempting to maintain balances in some central city, it is evident that they will always be will- ing to accept on deposit drafts or checks d" -vn against the banks of that city; for thev can >,. in these 4 DOMESTIC AND FOREIGN EXCHANGE drafts and checks and deposit them with their corre- spondents for credit, thus building up their balances. 4. Cluck or draft on Xew Vork bank.— ^tw York is the city on which drafts are drawn for making pay- ments between different communities in the United States. It was not necessary that the banks of *he country should get together and arbitrarily decide to make New York a central city; it was not a matter of chanr- New York is naturally the commercial as well a he financial center of the country. Merchants in every community are constantly buying goods from New York to an extent that is greater than the pur- chases from any other city. More payments are made to New York than to any other city. Consequently, New York is the city on which all thj banks of the country usually sell drafts. Not only are payments to New York made in Xew York exchange, but payments between different cities thruout the country are made in the same way. Den- ver remits to Tampa by using a draft on some Xew \ ork bank. The Tampa bank is willing to accept the draft because it knows that it will have a call for Xew York exchange. The draft is forwarded to Xew \ ork for credit against which the Tampa bank can draw. 5. Demand for New York exchange in Denver.— New York exchange may be looked upon as a com- modity which is bought and sold like wheat or corn. It IS really the right to money in Xew York. It has a value which fluctuates from time to time just as the DOMESTIC EXCHANGE value of wheat does. To understand thflse '•hanges in value it is necessary only to examine the conditions affecting the demand for and supply of the exchanKc. Using Denver still, for example, what is it that gives rise to a demand for New York exchange in Denver? In other words, what causes business men in Denver to want a right to money in New York ! The answer is simple. VVhcever a business man there buys goods from New York, he needs New York funds for making payment. Likewise, whenever he buys go"<^«g° $0.50 per thousand dollare f,*- J^°"'s 0.60 per thousand dollars New Orleans 0.75 per thousand dollars San Francisco 1.30 per thousand dollars 10 DOMESTIC AND rOREIGN E..CHANGE Assuming' tlie cost of shipment between Denver and Xew York to be one dollar per $1,000, a Denver bank must receive at least $1,001 for a $1,000 draft, when the sale of that draft necessitates a shipment of gold to Xew York. On tlie otlier hand, it will pav not over $999 for a $1,000 draft when the i)urchase means that a superfluous balance will be built up in Xew York and that the draft must be collected by a shipment of f,'old from Xew York. On small amounts the fee may be more than one dollar each way ; but the cost of Xew York exchan|Te in Denver cannot vary far from within the limits of $999 and $1,001 because of competition between the banks. As soon as it goes beyond these limits, a profit can be made l)y shipping gold one way or the other, and it is almost certain that some bank will take advantage of the situation. If one bank lowers the exchange charge, others must follow suit or lose their customers, with some loss of good-will at the same time. Banks do not hold off from making exchange charges until the sale or purchase of further drafts means an actual shipment of gold to or from Xew York. As soon as the demand for exchange begins to exceed the supply, i.e., as soon as a tendency to ship gold to Xew York appears, the exchange diarge or price of exchange is raised. How far the price will rise depends upon the seriousness of the situation as riew^d by the various banks. If one banker thinks the increase in demand is only temporary and that actual shipment will not be necessary, ha wiil raise the DOMESTIC EXCHANGE n price only to a slight extent. Other banks must offer exchange at as low a price as he does, or they will lose business. The same principles apply when supi)ly is outrunning de.nan.l. The price is then dropped be- low par, the exact amount of the drop being regulated ■v competition between the banks. As was shown above, the price or rate of exchange can i.i no case drop tar below $999 or go far above $1,001. It should be borne in mind that the ordinary quoted rates of exchange apply only to large amounts. Tlie mdividual who goes to a bank with a small draft to sell -lay get a price below par wlien tlie (pioted rate is par <.r even above. As a matter of fact, many banks al- ways buy and sell exchange at par when dealing witii their regular customers, especially their most impor- tant customers, unless the amount involved in a single transaction is large. The rate paid by an individual on a small draft may have httle or no relation to the current movement of exchange. It is the large cfincerns and the banks wiiicii buy and sell exchange at the quoted rates. Thev de-il iii large sums. A bank in Chicago may exhaust its bal- anc^ in New York. If it is to sell more drafts it must mild up Its deposit. This is usually done in one of three ways: by shipping gold to New York; borrow- ing m New York and leaving the proceeds on deposit- or buying exchange from some other bank, 'i'he last method is generally preferred so long as exchange can be bought under $1,000..50 (fifty cents being the ship- pmg cost). It is possible sometimes to buy at as 12 DOMESTIC AND FOREIGN EXCHANGE low a rate as $999.50. In Chicago and other impor- tant inland cities there are men, called exchange brokers, who do nothing but buy and sell New York exchange for the banks. 10. Settlements thru the sub-treasuries. — The cost of shipping currency from one city to the other is fre- quently saved to the banks by the t'ederal treasury. For a good many years payments between the treas- ury at Washington and the sub-treasuries in the vari- ous large cities were all made by cash shipments. It happened very frequently that, at the same time the treasury was forwarding considerable sums of cash between two cities, the banks would be shipping cur- rency in the opposite direction. Early in the seven- ties an ingenious cashier in New Orleans suggested to Secretary of the Treasury JSIcCuIlough that a saving both to the government and to the banks might be ef- fected if the banks, when they wished to transmit money to a city in which a sub-treasury was located, would ascertain whether the government at the same time did not wish to send money in the opposite direc- tion. If this proved to be the case, it would be profit- able to the banks and to the government to allow the banks to deposit the money in the Teasury and receive an order upon the Treasury in the other city. The Treasury office in the first city would receive the cur- rency it required from the depositing bank, and tlie bank in the other city would receive the currency from the Treasury instead of from its correspondent and all cost of transporting money would be eliminated. DOMESTIC EXCHANGE is 11. Equilibrium of demand and supply. —The pre- mium or discount on domestic exchange is published in the principal dailies and is useful to the business man as indicating the volume and direction of trade at any particular time. An unusually high or an un- usually prolonged premium on Xew'Vork exchange will indicate that the purchases of local merchants have been unusually heavy in that year, if there are no extraordinary transactions to affect the price of exchange. Why does it not happen that under certain circum- stances a community may buy more goods than it sells during any particular period and thus be forced tf) part with all its currency in settling the balance? Since each trader is simply looking out for his own private profit and does not concern himself with the question of the amount of currency, there seems to be no reason why a commimity might not be drained of Its currency. This brings up the question of the balance of trade, the principles of which are the same whether the exchange of goods is between two sepa- rate nations or between two localities within the same nation. Suppose for any reason that there should be an unusually heavy purchasing of goods by the mer- chants of a western state in any particular year. The merchants would buy from the banks New York exchange with which to pay their bills. The banks, after having exhausted their credits in New York, would be obliged to ship currency in order to ii U DOMESTIC AND FOREIGN EXCHANGE cover the drafts on New York sold to the mer- chants. Despite this possibility, there is never any danger that a community will be stripped of its money or cash as a result of its purchases of goods from other communities. No matter how freely Chicago and the country tributary to it may purchase goods from the East, those purchases ran never make any serious drain upon tlie cash supply of Chicago. No matter how extravagant the people of the West may be, their purchases of eastern goods can never be greatly in ex- cess of their sales to eastern customers. Should the people of Chicago for extraordinary reasons at any time increase their purchases from New York and other eastern cities, the first effect in Chicago would be an increase in the demand for New York exchange and in bank shipments of currency from Chicago to New York. The loss of currency from Chicago, since rt would reduce the lending power of Chicago banks, would tend to cause a rise in the rate of interest and a rise in the value of money. The prices of certain com- modities would begin to decline; not of all commodi- ties, but of those which are subject to speculation, such as stocks, wheat, corn and pork. Most of the speculators in these articles are borrowers, and the in- terest they pay is an important item in the expenses of fteir business, so that when the interest rate rises they are obliged to contract their operations. Chicago would thus become a good place to lend in and also a good place in which to buy stocks and bonds, wheat DOMESTIC EXCHAMJK 15 and other speculative commodities. In other words, the value of money woulil rise in Chicajfo, and j)eople' in other parts of the country would increase their purchases in Chicajro markets, reniittiuK \cw York exchanj^e in payment, and the price of «oods would fall. The reader nuist not suppose that these chanf,'cs in price or in the rate of interest need he so ^rreat as to attract general attention. Nevertheless, it cannot i)e douhted that such chanjfes do take place, and that as a result the sales of Chicago to other parts of the country are so adjusted that in the long run they furnish a supply of Xew ^'ork exchange ccjual to the demand. Thus, it happens thruout the country that in the course of a year the dehts of every community are always practically balanced by its credits on account of sales, so that large shipments of currency are never necessary. Indeed, if our monetary and banking sys- tems were perfect, shipments of currency from one part of the country to another would seldom occur as a necessary result of trade transactions. Money or currency would be shipped to a comnumity only as a result of increasing need for it as a local medium of exchange or as a basis for the expansion of bank cred- its. In Canada, for example, on account of the elas- ticity of its bank-note circulation, seasonal variations in the demand for currency are easily provided for by the chartered banks and their branches. 12. Exchange vierted as a com mndifi/.— The easiest way to understand exchange, whether (lomestic or for- '.■!ll| 16 DOMESTIC AND FOREIGN EXCHANGE eign, is to look upon it as a commodity. Instead of thinking of the rate of exchange, think of the price of It. Remember that ercJiange on New York or on London means the right to money there. To ask What is the rate of New York exchange in Chicago^ IS the same as to ask. How much must one pay in Chicago for the right to $1,000 in New York' The rate or price of exchange, like the price of any commodity, is determined by the interaction of the demand for and the supply of exchange. To under- stand changes in the rate, it is necessary to understand the forces of demand and supply. Demand for New York exchange in Chicago originates whenever a busi- ness man m Chicago or its tributary commimities buys goods elsewhere and seeks to remit by a draft on New York. Supply originates when a business man in one community sells goods elsewhere and receives New \ ork drafts in payment. The demand, then, varies roughly with the purchases of goods in other com- munities; the supply, with the sales of goods to other communities. The rate or price of exchange tends to rise when the demand outruns the supply, and to fall when the supply outruns the demand. There are certain limits to the extreme fluctuations in the rate It cannot go higher than par by an amount greater than the cost of shipping gold to New York, nor lower than par by an amount greater than the cost of shipping gold from New York. The upper and lower points may be called the gold shipment points; that is, the points where a wider swing in the DOMKSTIC exciian(;k 17 rate of exchange makes roIcI sl.ip.nent profitable. V lewed ,n this way. as a cnm.o.iitv. exchaoKc is extremely simple. The sa.ne principles applV i„ ore.«„ exchanKe, with a few complications ,lue to the fact that payments are made aeross national honn.I- ary Imes. In foreign payments, only «.,1,1 can I.e usc.l lor setthng balances. A simple pn.blem in aritbn.etic arises because of the fact that the cinagc units of different nations sometimes vary from one another in the amounts of pure gold which thcv contain Then certain arbitrary measures are einidoyed often to in- fluence international movements of gold. These are seldom resorted to in domestic exchange. RF.VIEW In wl.at ways may payment be made f„r ^oods sold by a mer- chant in one city to a consumer in another- \\1„. , 1 1 hhow by an illustration the course of a draft M CIIAPTKR II FEDERAL KESEHVE HANK ( I.EARINT.S 1. Collection of i-ountn, c/,,r/.,.-Tl,e r„un,l almut meth<.,J.s by wind, banks i„ the lJnitc-,1 States eclleet out-o -t„wn cheeks, that is, eheeks .,„ bunks m dif- ferent e«n..n,initics. have bee.i mentioned in the pre- cedmK chapter. Few people realise the deplorable waste m tnne. money and labor which exists ur.der our collection system. The writer knows of a typical example of what ".ay J'"P!>en. A youn^ .nan drew a check on a bank '"^^P-rt. le..nessee. and deposite.l it with a bank m Ithaca. .\ew York, aski..^ the banker to r.li v hm. as soon as the funds becan.e available. inasn.,.cl, as he was «o,ng to need some money within a few dajs. After about ten days of waiti..^ with no re- port, he went to the bank to n.ake inquiry. Nothing had been heard of the check. He could wait no longer and wi,-e.l for fun.ls. Several davs later when he had almost forgotten the e.itire ..latter he was asked to con.e down to the bank and talk over hs dral . By tracmg indorsements o.. the back f It, he found that .t had been sent to Albany, fro.,, here to Xew York, thence to Xashville. ibcn to K.ioxv.lle. and f,.,ally to the drawee bank in Xew- port. The Newport bank discovered that the .8 drafl FKDKHAI. HF.SKHVK HANK CI.K.Ani.VCJS ' ]<) l.ml }nw fillcl „„t incorrectly in tlio first pin.r an.l that It c-„„l,l ,.„t |,e ,,.,i,J. \v,„,l „,,s set Imi-k ar„un.l the circuit, all the ImokkeepinK i-ntries were corrected. u„,| the /siem. -The United States does not have a system of branch banks. Their Fed- eral Reserve system, however, is to a limited extent comparable to a branch system. There are twelve re- gional banks operating under the general supervision 20 DOMESTIC AND FOREIGN EXCHANGE and control of the Federal Reserve Board at Wash- in^on. Each of the reserve banks may be expected to establish branches in time. Early in 1915, the Reserve Board announced a new plan for collecting checks within the various Federal Reserve districts. In a ruling, dated May 1, l9io, the original scheme was made much more compre- hensive, and the extended system was put into actual operation on July 1.5, of that year. 3. Federal Reserve clearing.— Tht Federal Re- serve Act of 1913 empowers the Reserve Board to re- quire each Federal Reserve bank to "exercise the function of a clearing house for its member banks." Under this authority the Board requires each of the twelve reserve banks to receive at par from its mem- ber banks, checks drawn on all member banks whether in its own district or other districts, and also checks drawn on such non-member banks as agree to remit for their checks at i)ar. Each reserve bank must also receive from other reserve banks, checks on all of its own member banks and u\mx\ non-member banks in its district whose checks it can collect at par. Banks have been accustomed to make a charge for renu'tting cash in payment of checks drawn against them and presented thru the mails. The excuse for the charge is the cost and trouble of shipping cur- rency. Country I)anks, particularly, make a consid erable revenue out of exchange charges. This is to some of them what the farmer calls his "cash crop." It furnishes ready money in the business. FEDERAL RESERVE BANK CLEARINGS 21 Member banks are not required to send in checks for clearing; they are permitted and encouraged to do so. They are requini, iiowevr, to remit at par for any checks against ilu ni whit!, the reserve l)ank may present thru the mj L- or otherwise. They bear none of the expense unless they send in checks to be cleared ; when they do send in checks they are charged pro rata by the reserve bank according to the number of items (not the amounts) presented by them for clearing. The cost for the first three months ran from one to two cents per item. Non-member banks are not permitted to clear. Checks against them are received at par and cleared only so long as they remit at par. They are almost compelled to remit at par when member bapks are doing this, because of the loss of prestige suffered if their cheeks are not worth as much in other cities as are the checks of competitive member banks. Par lists of member banks and non-member banks, or wiiich items are received, are published from time to time. 4. When proceeds arc available. — Checks are cred- ited at par immediately upon receipt, subject to final payment. The funds are not available for with- drawal or to be counted as a part of the minimum reserves with the reserve bank, however, until actu- ally paid or until sufficient time for payment has elapsed. A schedule is published by each reserve bank showing the number of days required for collect- ing on various points in the country. For example, aa DOMESTIC AND FOREIGN EXCHANGE tlie Federal Reserve Bank of Chicago issues a schedule containing four divisions: 1. Points on which check ■ are available at once. a. Points on which checks are available in two days a. I'oints on which chocks are available in four days 4. Points on whicii cliecks are available in eight da^s. A member is forbidde.. to allow its reserve on de- ])osit with the reserve bank to fall below the legal limit, under penalty of a fine equal to two per cent al)ove tlie ninety-day discount rate at the reserve bank. It is proposed that all checks and drafts received shall be forwarded for collection as rapidly as pos- sible. The saving from this direct routing should be considerable. .5. Member banks maintain balances.— There are four ways by which a member bank, say in Chicago, can build up its balance at the reserve bank. 1. Deposit Chicago exchange. 2. Deposit out-of-town items. a. Ship currency to tiie reserve bank, at the expense of the reserve bank. ■*. Rediscount, leaving proceeds on deposit for exclmn'-- -ho hold's 1 The collecting bank should be held only to a prompt and actual presentation of the check. This pre e'ta •on can be made by sending the check thru the mall as well as m any other way. 3 ^,f'l"'^''f'''°i!^'tion:~It was stated in Section 3 that the service charge made by reserve banks to member banks during the first three months oJ operation ran from one to two cents per item I„ addition the bookkeeping of member banks has"been material y s.mphfied. It is to be expected that mem" ber banks would lower their exchange charges To customers. In fact, the Federal Resfrve Bofrd is to be made by reserve banks, but also tlie exchange charge made by member banks. There is a provision that the member banks must not be forced to carry on the collecting business at a loss. Presumablv the charges will be fixed ultimately at a figure just about IL_ FEDERAL RESI.KVE BANK CLEARINGS 85 equal to the cost involved, with perhaps a small mar- gin of profit. Many banks have voluntarily lowered the charges. In the larger cities, it is customary for the clearing house banks to agree upon uniform rates. Some of the clearing houses have already reduced the rates to be charged by their members without waiting for ac- tion by the Reserve Board. 8. Itates of Xetc York Clearing House banks.— The new ruling of the New York Clearing House As- sociation may be cited as an example. This went into effect on January 1, 1917. Under the old ruling, items on certain points were made discretionary, that is, the banks were permitted to charge any or no rate as they chose. In practice, they made no charge. Items on certain other points were cliarged for at the rate of not less than one-tenth of one per cent; and on others, farther away, not less than one-fourth of one per cent. If any charge was made, it could not be less than ten cents. The ten-cent rule is abolished. The new ruling contains about the same list of dis- cretionary points, except that Boston, Providence, Albany, Troy, Bayonne, Newark, Philadelphia and Baltimore are omitted. These cities are covered in a new ruling which is quoted below. The old list of points, items on which aj e charged at rates of not less than one-tenth and one-fourth of one per cent re- spectively, is kept the same. Many items on these points, perhaps a majority of them, soon will be cov- ered in the following new ruling: «6 i>OA,KSTIC AND FOREIGN EXCHAXGK tiK- collocting bank. '""*'"'"— '^'""•^^'■"■'arv with (b) *""'• "11 items available two da vs aff,.. . • . —pursuant to said i.nHfi„„t- "".^f after receipt fortieth of one ;;.;nt>f"?7""! '?'' ''""" '">'- of the itoMKs. (Fxc " t a.f • '" ^ "^ "'^' '"""""' Sees. 4 and 5.)^ ''' "" *" "^'"^ ■'^■f'^rred to in "ni-.»eiti.^:;::;;'^:!,"::^<•";'--^°^losstha„ amount of the items ^ " ^ '" •> "^ ^'e on.'^tent'; ^f o"ne'Vc c^nt " T/'" V?^/ 1^^ *'- amount of the itenfs. ^ " ^^^> °^ ^^e Eight (Jays is sufficient time to -iJInw f on any part of the countrv Tf "^ ™"eetiou banks anLn%ll:':^^l'''''''^^ - ''«" -.nber wherever located the oir I ^' non-n,en,ber hanks. -,her hanks ^hich do nTrLT' r;:''^' ^' ""- 9- An ill'mf ration. —nevertinfT t« +v, transaction descrihed in tbl ^ . "" ^'^P^ f™'* FEDKRAL HKSKKVK HANK CLKAUINGS or to Swann in Tampa. If the Denver bank is a mem- ber o the Federal Reserve syste.n or if it i, , " . n.e„.her hank whieh has a^ree.l t., ren.it at par t. tl »• the Pederal Keserve Bank of Atlanta at par. S«ann may deposit it with his Tampa hank, which will wi's es"" ri " '''T' *" *''^' '•*^-^-'- '-^ '•'• it Th ?■ ! ^^'"''^'Vl>">-^'e to the hank will he pn.h- ahh on,. ane advantages of cheapness and conv;nience S will be gamed from the new plan. Some other wav must be found for informing our bankers about na^ tion-wide business conditions. The best means of doing this would be the establishment of a branch banking system. urancn n. Success of the stjstem.-Tbe new clearing svs- em grew rapidly from the very beginning. The fo - lowmg figures give a comparison between the business done the tirst month with that done during the f" urth » DOMESTIC AND WKEIUN KXCllANGE a* •3 l-A * -s 5 Is tl fs II If I Bank ^" .^- Jo §^l •N'<-» York "•♦.SIO .¥:ti.i:i(i,si«) tab]i,M at Wasl„W„° s^rve bank telegraphs to Washington the amo^s o" Js .ndebtedness to each of the other reserve banks By the sunplest bookkeeping operation the«e Lolts FKDKUAL KKSKUM, HANK CI-KAUINGS .'Jl iire offset and tlie proper i)alaii(.Ts traiisl'urreil on the ai-uoiiiits of tlie (iold l""iiii(l. At the .stttkiiiunt of Noveiiiher Ki. 1!M0. over ^'^OO,- 000,000 was cleared for tlie reserve hanks with halances aff^refi:atiiijr oidy )i.'>,0()(). Kven the hahmecs were not sliij)ped; they were merely trans- ferred on the l)ooks of the l-'iind. After settienicnt on that day, there was nearly $14.0,000.000 in tiie Fund. It is apparent tiiat the o])eration of this ])lan reswlts in an enormous savinaiik. and wliy arc non-mcnilur lianks placid at a disadvaiitaac in dniiij; so ? Wlial adTantaftcs arc f;aiiicd thru incndicr hanks in(hirsinK without restriction all items wliicli are forwanhd to reserve hanks for clearing? What was tlic practice under the old clcarinjf .sys- tem ? What are the advantajres and disadvantajrcs of tlie Federal Re- serve clearing system ? What is the Gold Settlement I'und and how is it operated? CIIAPTKII III OKXKHAL ASl-KCTS OK roRKK.N- EXCHANGE 1. Definition of foreign ea-vhangr—Vomtm ex- change „,ay be t juste,! fnm. t,n.e to tin.e by the shipn.^nt of ^d or .t.s eciunalent. The foreign exehanges. therefWe operate as a clearing house between nations an.l ju t' ami set ie the hnal difference in gold, so nations offset the.r ,1c .ts aga nst one another an.l in the final a "iv n t b, overlooke,!. however, in stu.lying international -change hat there are no .IcHnite settlcn.ent .lavs " ■ the a,ljustmg of all transactions to .late. The ad iust- ment ..f mtcrnational balances is a eontinu,.us process and, nnder normal conditions, har.lly noticeable to the keenest observer, except at certain seasons of the year or when .t serves as a corrective to some large and un- expected transaction. 2. How indebtedness befrvccn two countries arises 32 GENKRAL ASPECTS an — The muttial indebtedness of two eountries arises from a eonibinution of the foUowiiifr; Exports of nierehiindise Investments abroad The purchase of foreign securities Payments of interest and dividends to foreif,'n shareholders Charges for transportation, insurance and com- mission paid to foreign corporations Tourists' exi)en(litures. etc. There are, of course, many other causes wliich affect the course of tlie exchanges, lait the above arc tlie principal factors in the Huctations. Sometimes the balance of payment, as it is called, is with one country, sometimes with another, and the rate of exchange will accordingly rise and fall within certain wclI-dcHned limits, determined by the cost of shi|)ping gold ht- tween the two countries. The rate of exchange may he '. .^,! the price of the money of one country rec I'c ' e money of any other country. The i»i incijjal operations of foreign exchange in- clude the issue of drafts and various forms of com- mercial paper, money orders, letters of credit |)ayable abroad, cable transactions and the purchase and ship- ment of bullion and of foreign coin. 3. Similaritij hctiL-ccn inland and foreign cwcliangc. — We endeavored in Chapter I to establish in the mind of the reader that the basic principles govern- ing inland and foreign exchange are the same, the operation of both being based on the weight and fine- 34 DOMESTIC AND FOREIGN EXCHANGE ness of the gold contained in the monetary unit or units of the country or countries involved. The same machinery is used in botii foreign and in- land exchange but in different degrees. In inland exchange, the transfer of funds is effected almost en- tn-ely by checks, bank drafts and shipments of cur- rency; very little gold is moved. Bills of exchange, tho extensively used, are comparatively small in amount and scattered in destination, and are, there- fore, not an important factor in inland exchange. In foreign exchange the transfer of funds between two countries is effected chiefly thru the medium of bills of exchange and the shipment of gold. Few checks aside from sight bills of exchange drawn bv banks,' are used. Currency, being redeemable in gold only m the country where it is used, is of course not ac- ceptable for remittance abroad. 4. Expense of shipping gold.— An important factor to consider in all exchange operations is the expense of transferring gold from one place to an- other. This expense includes carriage, risk and in- terest while the amount is in transit. The very gen- eral use of checks and bills of exchange in transferring funds has caused this factor of expense to be more or less lost sight of, except when conditions call for the actual shipment of currency or gold. It is, how- ever, latent in every exchange transaction, foreign and domestic. In the foreign exchange operation, these transpor- tation charges are proportionately larger than in in- GENERAL ASPECTS 3J land exchange because greater distances are involved. They are more or less concealed by the tact that the two sides of a transaction are in terms of different currencies, and are usually modified or even offset by the competition of bills of exchange, the supjily and demand of which govern the proportion of such charges which a remitter is called upon to I)ear. In inland exchange these charges are rendered more apparent by being expressed in the form of a com- mission or premium. They are also more utiiform and stable and, being governed by the conditions of the banking system of the country, they tend to dimin- ish as the system improves and better facilities obtain. 5. Training in foreign exchange. — One of the most essential features of a training in foreign excliange is a thoro knowledge of values and methods of co.i- version of the currency of different countries. All calculations by a beginner should be made independ- ent of exchange tables. In many offices, the rirst calculation is made bv one clerk, and checked by ilA training thus obtained and the facility and rapidity with which such calculations can be made, form the groundwork of a technical education in foreign ex- change, which is daily becoming more valuable as in- ternational transactions increase. In this connection, there are four things to be care- fully studied. When these are mastered, foreign ex- change will be robbed of most of its apparent in- tricacy : 36 DOMESTIC AND FOREIGN EXCHANGE 3. 4. 6. 1. Mint par 2. Gold or specie points Rates of exchange and tlie reason of their fluctu- ations Conversion. Mint par of exchange.—The mint par between any two countries is the value of the monetary unit ol one country expressed in terms of the monetary un,t of another country using the same metal as a standard of value, tho the degree of fineness of the metal need not be the same. All coins, whether of gold or silver, are made of so much pure metal and so much alloy; the latter is used to harden the coins, thus rclucmg abrasion to a minimum. The term "fine- ness expresses the number of parts of pure gold or pure silver contained in a thousand parts of the com- bination The British sovereign is 9167/3 parts fine, or 11 parts fine gold and one part alloy. The gold coins ot lurkey and Brazil are also 916% fine. Those of Country Niiinc of Unit Austria-Hun- kronen , gary Latin I'nion ... franc Canada and I'nited States. dollar Denmark kronnr Germany reich/mark Holland gulden Japan yen Mexico peto fiusia riihlen Great Britain.. pound Gross Wiifrht Grains 4.9T817 2S.8 6.91415 6.I«8S 10.37034, 12.800.'4. 12.8(iO_';J 33..'r-,S4 _ Sterlina; Pure Dollar liquiva- tiold iijuiva- lent Grains of lent in pence 4.70498 4.48o;i6 33.J3 6.22274 S..53I31 9.a3348 11.37422 11. .57421 11.94826 113.00160 .20262 .19293 1. .26799 .23821 .40195 .49505 .49845 .51456 4.86fi5« or 4.86^ .lOd 9.316 49.316 1.3.212 11.75 19.8* 24.576 24.57 23.37 TABLE OF eOLO CONTENTS AND EQUIVALENT VALUE QOLO STANDARD AND GOLD EXCI Country: Unit: Value of «1: Fineness: Value i Dollars F(.ypt iE IT Sovereign Escudo I'eso Dollar Dollar Peso Milreis Milreia Rouble Yen Florin or i Guilder J Colon Rupee Krone Mark Krone Franc i^£ 0.2023 ir 0.2273 4.U31(id /; .'J2jo 1' .9669 $ .9803 $1. P 1.0365 1$831 S»0823 J? 1.9434 y 2.0062 // 2.4878 C 2.1489 /? 3.1.1 A-/ 3.7315 il/4.1979 A> 4.9352 /^« 5. 18262 875 916% 916% 900 917 9I6V3 900 900 017 nio« 900 • 900 900 900 916% 900 900 900 900 f4.9429 Tnritpy 4.3968 4. 80631 I'nrtii|r!il TTriij^iiny 1.0805 1.0342 1.0139 ^Tnitiwl Smiss 1. Argpnfina .9647 Rrn7il .5461 Brazil (/a/"'») .3244 .5145 .Iflpnn .4984 Netherlands, The .401" .4653 .3244 Scandinavian Union *^prmany .2679 .2382 Anslriii-Hunf'jiry .2026 T.ntin ITninn .1929 STATEMENT OF EQUIVALENT VALUES OF THE M Country Great Britain North America Great Britain. Portugal Uruguay. North America- Argentina- Brazil Russia- Japan . -£1. S/g. - Esc lido - Pi-io ^Dollar - Peso - .min'is _ A'u.vi/d" _1V« Holland. Chili India (Br.)_ . Plot in . Peso _ Rupee- Scandinavi.in Union Crown Germany Mark Austria-Hung'y Crown Latin Union Fr.^nc Pounds 1. .222.019 .212,518 .205,484 !l98,243 .113,228 .105,735 .102,420. .082,596 .075 .006,666 .055,068 .048,949 .041,036 .o.'in.fiin Pence 240. 53.284,58 51.004,38 49.316,11 47.578,34 26.934,77 25.371,24 24.582,17 19.823,01 18. 16. 13.216,22 11.747,736 9.992,76 9.515,09 Dollars 4.866,563 1.080,470 1.034,233 1. .964,763 .546,166 .514,567 .498,461 .401,960 .364,992 .324,438 .267,990 .238,213 .202,626 .192,9-53 Calculations based on 15.432,35 grains to the gramme. ENT VALUES OF THE MONETARY UNITS OF THE PRINCIPAL GOLD EXCHANGE STANDARD COUNTRIES. Value in Dollars: Value in Pence: Uran mes Kemurks; Standard: ritiu: 14.9429 4.3960 4.86656 1.0805 1.0343 1.0139 1. .96476 .54010 .32444 .51457 .49846 .401 -^O .46535 .32444 .26799 .23821 .20263 .19295 243.733 216.8 240. 53.284 51.003 50. 49.316 47.58 26.935 16. 25.371 24.582 19.823 22.951 16. 13.216 11.748 9.993 9.516 8.500 7.2161 7.988055 1.80631 1.09717 1.0(i420 1.671813 1.6129 .89618 .532537 .86026 .83333 .672 .77801 ..-.32537 .448023 .398248 .3387531 .3225806 7.4375 (!.615 7.32238 1.62571 1.5.5615 1.. 52.551 1., 50463 1.451(U .82207 .48816 .774234 .7.50 .(i048 .7002 ,48816 .4032258 .:i584,'3 .301378 .290;!22« 113 -jjij ;;raMis Ni. ;.'i.l(l cniii> miutfil 23.22 ^r.iiiH 45/31 urumiuua N(. t;iilil cniri.< miuliil l/15,.i il Nu 1,'nlil coiti^ niiiiteil 1/15 of J.I 25/62 ui:iriimt.-i IOO/27'.I uraiiime.s 25/S2 ^iraiiinifs 9/31 i;raiiiini.s S OF THE MONETARY UNITS OF VARIOUS COUNTRIES. orth ilolland Scandinavian Germany Aiistria- Latin erica Union Umigary Tnion liars .6,563 30,470 54,233 Florins 12.107,110 2.688,010 2.572,990 2.487,816 Crowns 18.159,515 4.031,761 3.858,223 3.731,485 Marks 20.429,46 4.535,733 4.341, 6:U 4.197,922 Crowns 24.017,136 5.332,321 5.104,140 4.935,192 |.'raiics 25.221,51 5.599,670 5.3I»,039 5.182,621 M,762 46,166 14,567 98,461 2.400,152 1.358,760 1.280,148 1.240,079 3.600,000 2.038,010 1.918,100 1.860,000 4.050,000 2.292,762 2.160,113 2.092,500 4.761,288 2.695, 133 2. .-.39,488 2.460,000 5.000,000 2.830,571 2.666,H()6 2.583,333 01,960 W,992 24,438 1. .908,033 .807,141 1.499,904 1.361,963 1.210,634 1.687,392 l.,-,;J2,206 1.361,963 1. '.183, 7 14 1.801,306 1.601,161 2.0M3,200 1.891,616 1.681,436 67,990 38,213 02,626 92,953 .666,709 .592,630 .504,097 .480.030 1. .888,889 .756,097 .720,000 1.125,000 1. .8.)0,610 .810,000 1.322, .-.81 1.175,627 1. .952,258 I.3.S8,889 1.234,. -.68 1.050,136 1- GENERAL ASPECTS 87 nearly all other countries are on a basis of 900 fine, or 9 10 fine gold and L 10 alloy. Tlie folder opposite page 30 gives a list of the prin- cipal gold standard countries with the names, weights in grammes and values of tlieir various units. 7. Cumpiitiiif/ the mint ywr.— The mint par is ar- rived at by dividing the number of grains or grammes of fine gold in the one coin into the number contained in the other. For instance, compare tlie sovereign, the unit of Great Britain, and the gold dollar, the unit of the United States: Gross weight of sovcrcifcn 123.27447 grs. Less y,2 alloy 10.27287 grs. Fine gold in sovereign 113.001fi0 grs. Gross weight of dollar 2.5.8 grs. Less '/o allov 2..58 grs. Fine gold in dollar 23.22 grs. therefore, 1 dollar = yissii = £-205484 = 49.316 pence iianoiG _ 1 sovereign = ~5fj'yr = !r4.»oD.>o Similarly, a franc contains .290322.) grammes of fine gold, while the dollar contains 1,50403 grammes. Hence, 1 dollar = ^j^l = ■'5.18962 fcs. 1 franc = 3^35^ = 19.29.53 cents ^45 r ' 38 DOMESTIC AND FORKIGX EXCHANGE The mint i)ar between any two countries can be ar- rived at in the same way. The mint par between two countries that use the same metal as a standard is constant. It varies only when one of them alters its eomagc reffuktions l)y increasing or decreasing the quantity of pure metal in i+s monetarv unit. Between a fr„ld standard country and a silver standajd country there can exist no fixed par of ex- elianH-e. since the value of silver in relation to gold IS subject to great fluctuation. 8. P(ir of cjThanfje.—Thi, mint par is the {)ivotal point of the rates of exchange between two countries In other words, it is also the ratio at which the stand- ard com of the country will be exchanged for that of another. Theoretically, a sovereign is worth par in Aew Vork ($-t.866.-,6) , but practieallv this ratio holds good only for large amounts. If a traveler wants to change ten so^'ereigns in New York he would prob- ably receive only $48..50 or $48.fi0 for them instead of $48.(;(;-., the difference being retained bv the bank as payment for its services and to cover the interest on the amount until it had collected sufficient sovereigns, say, one thousand, to warrant the troul)le of taking them to the United States mint where thev would he exchanged for $4,866..56, less a small melting charge If the ten sovereigns are in London the traveler will realize on them by selling to a New York bank the "right," in the form of a check or order, to draw these ten sovereigns in London, and the banker would repay him according to the current rate of ex- GENERAL ASPECTS 39 change. If there is an active demand for sterling ex- change he will get a good price for his check on Lon- don, say, $48.75 (over par). If, on the other hand, there is little or no demand for sterling exchange and the supply of ciiecks and hills of exchange is plenti- ful he will get a low price, say, .$48.,50 (helow par). 9. Gold points. — Foreign exchange, thru the medium of hills of exchange and otiier credit instru- ments, enahlcs countries to regulate their nmtual in- dehtedness without the transfer of coin or hullion. A hill of exchange is a commodity like wheat and cot- ton, and, as such, it is subject to the law of supply and demand. If the purc'vise rate of exciiange reaches the point at which it is cheaper to remit gold than to pay the rate demanded for transfer by draft, gold exports usually result. The rates of exchange, produced by buying gold in one country and ship- ping it to another, are called tlie gold or specie points. The mint or theoretical par remains invariable among gold standard countries. If the exporting and im- porting of gold could be effected without expense or loss of interest, the mint par and gold points between any two countries would be practically identical, but hea\y expenses for freight, insurance, cooperage, car- tage, abrasion, interest while in transit and other charges are involved in a gold shipment. These ex- penses deducted from the mint par give the "import gold point" and added to the mint par give the "ex- port gold point"; that is to say, when it costs more to buy sterling exchange in New York than it would cost 40 DOMESTIC AND FOKKIGN EXCIIANGK to buy Kold to the same anu.unt an.l ship it to London Under normal conditions, the cost ,.f\l ;. send gold to England. ' '* " '''""P*^^ *" 10 j%«//,V«„c'^ of gold movcmcnt,.~.Thv exoort oi god from Xew York to London implies ^'"* 2 tV .^ n "/"'^ ""favorable to New Vork) 2. That bdls of exchan.rp ^n t i i '' pound st^M, ,„, „,i,„^ „ hlTtl; *.L" to Vv «„ld ,„ .N>„ York .„d „p„„ i, ,„t„*7' i.?d:rpL':'^ '"''"" '''^'•''''^■™ ^•""- ^- Ihat bills of exchange on London have been of- GENKRAL ASPKCl'S ^j a. J hat the (liscunt demanded by buyers in the or." of a ower exohauKe rate exeeeds two eent" pe POU.H, . erhnK and therefore it has becon. J^JZ I'uv Kold .„ London un.l i,„port it to New Vork . ^^^««^W.i/v»/«/*.-The extreme rani/e of the «..ld points betu-een New York an.l London and the eontmentaJ eenters is approxi,„ately as foll.";^: " New York ami London... . $ l„u « . «V:L u,, '"' ' Nrw_ Vork «n10. nt alxxit which ixiiiit it wus iiiaiiitaiiifd (luring tlie year li)l(i. During a serious war, therefore, the courses of cx- ehanj^e are no longer restricted hy the "gold points," but Huetuate widely, and at times wildly. i\inoiig the new factors which then affect the exchanges are the following: the international money markets are de- morali/.ed; sentimental, if not legal, restrictions are placed on the export of gold by every country; and in- surance, if obtainable at all is at a prohibitive rate, because of the risk attending transpoi'tation. 13. The clcarhig fcalurcH of furekpi CA'cUaiufc. — Exporters and importers of foreign goods who have foreign bills to sell and buy, respectively, occasionally transact business directly with each other, but as a general rule it is nuich more convenient and eco- nomical to pay a small conmiission to a bank for its services and obtain a remittance for the exact amount and tenor required. A bank is able to sell a bill of exchange on I^ondon for any required amount because it is also a purchaser of bills of exchange on London and other foreign cen- ters; in other words, it acts as a middleman between those customers who have debts to pay and those tf) whom debts are owing in I^ondon and thus it is able to offset sales against purchases. If a bank's sales of London exchange exceed its purchases, it goes into the exchange market and buys I^ondon fimds from other banks and vice versa. In this way the supply GKNKRAI. ASIMX'TS 48 and (lemaiul are constantly beinj^ ••roiiglit tojit'ther, first tliiii tlie needs of customers of the same liank. an?e clearing house for the whole continent, and which can he re- lied upon, under ordinary circumstances, to absorb an ahnost uidimited amount of foreign exchange. 1-t. Bulling and selling exchange. — It is difficult for the mind to grasp the process by which the multi- tudinous transactions in foreign exchange, occurring daily in thousands of banks in the United States and Canada, continuously, and apparently automatically, adjust the rate of exchange on the basis of supply and demand. New York is the recognized foreign ex- change market of the continent, and banks thruoiit the country having exchange to sell or buy do so tiiru their New York correspondents. The exchange re- (juirements of the country are therefore concentrated in New York. Some Xew York banks will have ex- change to sell, others orders to buy. and the scarcity or abundance of the bills of exchange on any country is promptly disclosed by competition, and the rates ad- just themselves accordingly. Foreign exchange brokers, as they arc called, act as intermediaries be- tween buyers and sellers in Xew York. As the factors which regulate the supply and demand are constantly changing, the brokers must keep in close touch with the market and with their clients. They call daily, sometimes hourly, on the leading bank- 44 DOMESTIC AND FOREIGN EXCHANGE ers and exchange houses to inquire if they are buyers or sellers, and at what price. A broker not only brings buyers and sellers together, but obtains in so doing an approximate knowledge of the general sup- ply and demand for bills and can advise his clients accordingly. The usual commission to a broker is about $5 per £10,000 on sterling exchange and %4 of one per cent on continental exchanges. 1.5. New York demand for sterling excliange.— London's operations in New York exchange are factors that have to be taken into consideration, tho the transactions are comparatively small compared with those originating on this side. Since the ex- change rate is, as a rule, fixed by the country which draws and negotiates the most bills, London neces- sarily adjusts its rate to tiiat fixed by Xew York. The reason for this preponderance of American trans- actions is that the American exporter, rather tlian await a remittance from London, prefers to sell his bill and obtain ready money by drawing on his cus- tomer; American banks buy these bills readily as they can discount them in the London market. The American importer, likewise, who has bought goods abroad would rather remit for them to the foreign ex- porter than allow the latter to draw against him. In the former case he can obtain as low a rate as possible from his own bank, while in the latter he would have to pay a rate fixed by a strange bank or broker who would not have the same interest in the transaction. GENERAL ASPECTS 45 REVIEW What are some of the causes of indebtedness between eoun- tries? What is the rate of exchange? What is essential in training persons in foreign exchanire busi- ness ? How is the mint par arrived at? When is it constant, and when does it vary? What are gold points ? Wliat does it imply when gold is exported from New York to London? When it is imported to New York from London? What effect has war on foreign exchange? m ciiaptp:r IV RATES OF KXCHANGE 1. Bilh of cwcluiuyc and their relation to gold ~ llie stmiKtIi and usefulness of credit rest entirely on the taet that tlie holder of a bill of exclianf,.e or o"tl.er evidence of indel)tedness has every conHdenee that tlie instrument will be absolutely and unquestionably re- deemed m «(,ld or its equivalent at maturity The payment of a del)t, tlierefore, in another part of the same country, or to a foreign country bv means of a check or bill of exchange, theoretically involves the payment of so ma.iy grammes or grains of ffold. I f JinoT'? '\'"™"*" ""■•^^ S""th in Winnipeg he pays -15100.2;, to h,s bank in Toronto in order that Smith may receive .$100 in jrold or its equivalent in Winni- peg. As a matter r,f interest, we will work out the transaction in terms of gold (the dollar contains '>3 •>2 grams of fine gold). For the bank draft of .$100 Brown pays his b..nk 2,.327.805 grains of fine gold (^,*J-2 grains + ___ ^rrains commission) in order that Smith may receive 2.322 grains of fine gold in ,, '" n?"^'' • ^r' '*' "■" *^'^'"^^ ■^••'^'■^^^ ff'-^'"^ «"'! ^.- 327 80., grams by 23.22 (the amount of fine gold in the dollar), we get our original $100 and $100.2.5 Brown could have sent the amount to Smith himself m cash ,n the form of either gold or currency (govern- 46 RATES OF EXCHANGE 'm ment and bank notes redeemable in gold on demand) but he would have had to pay as niueii or more than the 2j cents commission for express charges. 2. CoDf oftterling cu-cliaiKjc.S'mnlixrly in sterling exchange, if a draft on London costs, for instance, one cent per pound over the par of $4.8«7a, Brown would pay $4..87-'3 per pound sterling for a draft on London, or worked out in grains of gold, add one cent's worth of gold or .23-22 grain to ll.'J.OOK; grains (the weigiit of fine gold in the sovereign) and we get 113.2338 grains, which divided by 23.22 gives $4.8r«().5« per sovereign or one cent over par. If sterling exchange is low, say, $4.8.) per sovereign or about l.«.)6 cents lower than ])ar, a draft on Lon- don for £1,000 would cost lirovvn $4..8.)0; iti other words, in order that Urown's creditor may receive 113,001.60.) grains of fine gold in London he has to pay only 112,617.08 grains to his banker for the draft, the diflferenee 384..52.) grains or .38452 grain per pound sterling is the equivalent in grains of 1.6,56 cent ( .2322 X 1 .6.)6 = .384.52 grain ) . With sterling as low as $4.8,5, Brown would not think of shipping the gold himself, but, if he were asked $4.88-':! per pound, it would pay him to do it as the shipping charges would be less than two cents per pound. What form would the shipment take? It can only he fine gold 113,001.60.5 grains in weight in the form of bullion, or sovereigns (1,000 of them), or eagles to the value of $4,866.,56 weighing 123,274.47 grains (113,001.605 grains of fine gold). Brown *8 DOMESTIC AND FOREIGN EXCHA^•GE could not send currency, as he could in the case of Winnipeg as bank and government notes, tho re- deemable m gold in Canada, are not so in foreign countries It IS an important difference between foreigr, and inland exchange that apart from checks a^d bills of exchange, gold is the oidy medium of settlement between two countries, whereas within a country itself any form of currency that circulate! freely may be remitted. 3. Rates of exchange. ~B\\\s of exchange are a commodity and as such are bought and sold, and like other commodities are subject to the law of supply and demand The reader should, for the present.'^is^ miss from h.s mind the thought that he is dealing in the „,oney of foreign countries and should regard bil s ot exchange and other credit instruments, used uj transferring fun.ls, as representing a definite kind of commodity-evidences of indebtedness The rate of exchange is the price per foreign unit a nine 1 the right to collect these debts is sdd and d not refer, except indirectly, to the value of the go d iLonetaiy umt. A sovereign is alwavs worth par ... >ew lork and the gold eagle ahvaVs worth par ,,. London. When sterling is cuote,!" at. sav, *f>4.8 , ,n .N ew \ ork it does not mean that the soverei^^n has depreeiaKd I:^ cents below par: it means that the right to obf.^ , sovereign in London is worth onlv "ri'l^' t" 7 / V'" ""^"^ *''^ -^"P"'-^' "'■ these rights IS ample and the demand small, hence the RATES OF EXCHANGE 49 4. What makes the r«/f.— Tlie rates of exchariKe quoted between any two wuntries. tlieiefore, are the prices for elieeks and hills of exchange. These are the mediums by wliich del)ts are transferred from one party to another. The rate of exehanffe charged bv a bank or broker for a foreign bill of exchange includes: 1. IV. mint par or price equivalent of the foreign coin ^. 1IU.S or „„nus a prcnumn or di.sco.int on the n.int pur (greater or less conversely to the .,upplv of bills on the market as compared with the demand for tliem) m/nH^'f"' r ''^'""n'" "■; ^''-'i^-^i"" «l'i^'l' tlic hanker ,1.- mands for h.s rouble an.l for the economy and superior con- buZr " ■ "' '■'""'""■^■'' " '"' '^ -'"'tt-'- i" ^'-n or 4. Less an allowance for interest, according to the distance between the two points, and the tenor of the draft 0. 1 his the cost of shipping gold. -- The rate of exchange paid by a bank or broker for a foreign bill of exchange includes: 1. The mint ])ar. f. Plus or minus a premium or discount on the mint par •i. Less a conmnss.on covering the dealer's profit and in allowance for his risk and trouble. 4. Less a discount, according to the tenor of the draft. 5. .Almus the cost of shipj)ing gold. The mint par never varies. It is a constant factor ;n any exchange rate. The most frequent variations m the rates are found in the premium or diseomit on the mint par, the range of which is governed by the law ot supply and demand, and reflects the rela- 4 50 DOMESTIC AND FOREIGN EXCHANGE «ve position of two countries as regards indebtedness Ihe allowance or interest or discount gene al' nds to vary w.th the foreign interest rate, tho son e- imes m large transactions the domestic interest Tie becomes a factor also, in connection with the fi „dl operations necessary to complete then,. The cost o ^"PPing gold is modilied and at times offset by the mutations in the other factors. 5. Coinage ratio.~The rate of exchange, therefore /nust not be confused with the ratio at wh ch on^ country will exchange its money for the standi d coin of another country. If « man has one thousand sov SX-fi .^ ^-•^ h^ -'" receive par for them ^r $4 8fa6.ob irrespective of the rate of exchange. 6. Huctuahon in the rate of exchange.-The in- ternied,ate rates between the gold points and the mbt par. tha is, the rates at whici, business is usually done m addi ion to being affected by the supply and de mand of bills between two places, rise anS^ "sym- pathy with the influences at work on the other ex- changes. Xew York, for instance, whilst a debtor to th:?„;':r;t.a9'r9^/^;e": ::':.:'"l^„„''T„t^""«"^^r"'='«"^ «' !fr„ins (480 grains to the ounce TrovT '°:"il«"\r:"«'' '^3,547.47 *t,Sti(i.S6 as the value of i mn ^^' ^^"'""K tWs out, we get inited States Min'':„:dpT tTS M ''^ " '":"''; "' '"'' ^"^ (W.380) on delivery and the bTlanoe en H TV ■"?' "' ""* '""»""» of four oents per $100 to .over melt ^' '""-Mess a small charge ceeds would be IW,864!61 ^ "P'"'"'' """^ "« «'^"«'l P^o^ Similarly the British Mint will take gold eagles at £-!IB ,v ounce, paymg for them a fortnWhf „« j ,■ "^"e'" *^ t3:16:5i/j per The Bank of England win n«v nr ,h *" "i"^' "■"''°"' "">• "charge. .w.e Of ahout%:i - s^to^rt;;:'Sc^t r^r ji;^ RATES OF EXCHANGE 51 England, may be a creditor of (lerniany, France or another country with which Enjrlaiul has close ex- chanf,'e relations. New York drafts on tiiese places are remitted to London and improve (i. e. lower) tl»e rate of sterling exchange for the time being. If, however, the supply both of London and Continental bills falls short, the point at which New York will have to exjjort gold is soon reached. 7. liatCK tend to correspond. — The rates of ex- change between two or more places either correspond or tend to correspond. Thus, when sterling exchange is at a discount in New York, say, at $4.8,5, New York funds in London will be at a premium; in other words, you could purchase in Xew York the right to obtain a sovereign in London for $4.85, whereas for a sov- ereign in London you would only be able to obtain the right to $4.8.5 in Xew York, a dollar costing 49..50d. instead of 49.316d., the par value. Let us suppose that the rate in Xew York, in re- sponse to a demand for sterling, suddenly goes to par, and a Xew York banker, hearing from his London correspondent that Xew York funds are still at $4.8.5, cables him to sell $100,000 at that rate and as a result of this transaction the Xew York banker receives a credit in London of £20,618.5.5. At the same time he sells his own draft at par against this amount in Lon- don. In actual practice he would sell a draft of, say, <£20,000, but for the sake of showing his profit let us presume that he sold a draft for £20,018.5,5. For this he receives $100,343.64 with which lie pays the 52 DOMESTIC AND FOREKJX EXCHANGE draft of $100^000 cJrawn on ..in, i„ London, and thus ".akcs a profit of $343.«4 less cable eharges and a Mnall connnission to the London banker By sueh processes the exchanges automatically reg- ulate themselves between two or „u,re places It 1 o^-ons that under the influence of several such tran act,ons n.arK,nal differences would rapidly disappea Ihe var,at.ons in the rates of exchange in the case e.t^d are purposelj- exaggerated for thf sake of iZ will ^ "'' "J"'^' ^"^'''^ '"'^^'•^-^'^ in the whkl . "T \^''' ^^J"^"'"^' transactions, Hh,ch are con.n.only known as arbitrage transac: 8 E.vchar,ge quotations.~The newspapers gener- a ly g.ve exchange quotations in two cdumns.'' The first column (b) gives the price offered by buye -nd the other (s) gives the sellers' price onrex-' pressmg the demand and the other the supph T,^ ni::r:r''' f^ "•"'^^* luotations-T mJe; naturally offer as low a price as possible, while" the sellers try to obtain the highest price-b .t t re tl "7 r"^-'"" ■' ^^"^^''"•^ —he- between the t^u, Ihere are two classes of quotations- the posted rate, which is used principally for sma I amounts, and the actual or wl.olesale rate, u ed be ^ween hankers and brokers for large transadn . A a rule, however, the rate for very large trans- to Z^r ' Tr "' "''■"■'"^' negotiations owing to the frequent change in conditions during the da^^ Furthermore, the rates are seldom announced in time RATES OF EXCHANGE 53 to be of much use except to show the general trend of exchange. The principal exchanges quoted in the Xew York market are given below, with the equivalent Canadian quotations, after allowing Vio of one per cent discount on New York funds in Montreal. The alternate quotations for marks and francs are also shown. London : I'uhlp I>fiiiand Cumiiii-ri'iat fill daM BanktTN fiO dajH Berlin: Chock Anistfrdani: Check Hongkong: Check New York * l.'r 1 Stg. 4 H526 4 !I200 4.(1225 Canada, Less 1/18 0(1% 4.8545 4.8495 Alternate Uuotutiou Conla per 4 Marks 941V„, Cents per Klorin 40.04 Oonta per Hex. « 48170 4.8195 9404 CIS iier Mrk. 2;i65625 Ctn. per Kl'n 40.011.. .40+l,,;i- P"fi« Pes. per $ Coble 5.20 5 N Check 5.20 .1 B — l M Commercial eo days 6.24 3 '8—1/32 5.24 3,/S— 3,32 20 5 '8- 20 5/8- Cts per Fc -1/10 ii)i!i-,n 3.'32 .I'llKOn New York funds l>«ng at ..„; dis- coiint. the Cana- dian rale is ar- rived at by rfe- '/ucMn.7 l'i„ of in from the rate. .Cables are 8 days* inter. Kt more than demiiiid according to steamer sail- ings. flO days' rates are (i'l ila.xs' interest iind stamp (0024) - less than demand. iThe Cnnadian rate IS arrived at bv mlilinii Via to the New York franc rate or d^durlinfl ' 16 front the dol- lar value. The American method of quoting cents per foreign unit (fixed exchange) is so simple tliat the above table calls for no explanation, except in connection with the special quotations for francs and marks which is fully explained elsewhere. 9. Range of the nine frequent quotatiom.—FTVinc quotations range from ai)oiit .VIO to .5.,'JO, advancing by % of a centime. Mark quotations range from 92 to 98 cents per 4 marks, advancing l)v 'An of a cent Closer quotations for either the franc or the mark are m «4 DOMESTIC AND FOHEIGV EXCHANGE pound o. as it . ealled. . ;ZslJ;:::,l -"* ^- hell 't. "*' "'''' '^" '''^''- ^"""t--'- are shown below. The quotations advance by stens „f >/ •01 of a cent, thus 18.01 18 02 mnl . """ •"" 111 > -a lo.t/i, lo.u^ la.Ou and >in nn Tl. being, of cLr eTo c I'f T ''f ^"'"^'^ ""'*'* in the quotaZ . '' '" '"^'^ "'^^'""^'^ "*' '"^ -nt Ixt""""" '■ ■ • : ''"«» "3 =^ '»="•■ 4?';: South Amorio, : I Silver 1 39toll' 24.9 •• .f„»;,l„ : : . J '_'°"«r / fl"<-tu.ii„g Ui ,„ 50 „ i ^2. .. R"»«ia! ;;. ; i'"'",, .49« in.ns-i.. -' —..;;;::;;;-- ^.. |^^^ j^^;; 10. F/.rfrf an^ mot-afcZe ea-c^an^e — When fn. • chano-« „r, T J • '^^^naoRe, tor instance, ex- change on London is quoted in Xew York in ,l.n and cents per pound sterling. Theltter is th^ fi J has s. The vah.P nf fK^ , r. '^ *"^ ^^^^^ and Simplified" .,y How„rd K B ooks Chir"''" u^'!'""'"' ''■^'"'""-d cover the uhole ranp. „f ,he fo"2„ ' ^k""*™- ""J'" "' •'«-«' ''o"ks ticularly adapted for larse trlnl^^f *^ Pxohanp-.. The former i, par- tional quotations. " *'-ansactio„s requiring the use of clo.,e frac- RATES OF EXCrtAXGK 35 When the rate is quoted in f,.rci>n currency per home unit it is called movable exchange; for instance exchange on Paris is quoted in New York in francs ami centimes per dollar. The latter is the fixed basis 1 he fluctuation is expressed in the foreign currency— the higher the quotation the lower the cost of "the foreign unit. The rnite.1 States and Canada quote in fixed ex- change (dollars and cents per foreign unit) tho for large transactions with France and other menibers of the Latin Union movable exchange is used A homely illustration may make the difference between these two methods of quoting clearer. .Sugar an.l other commodities, like fixed exchange, are sold at so many cents per pound, or per hundred pounds, and the higher the price quoted the less sugar (or foreign money) you will receive for a dollar and therefore the dearer the exchange. Sugar, like movable exchange, is also sold at so many pounds for the dollar 'as is the case with French exchange) and the more sugar (or francs) (,uoted for a dollar the cheaper the exchange. Fixed exchange : cents per foreign unit. Rule, buy low, sell high, the better the bill the higher the rate. Movable exchange: francs per dollar. Rule buy high, sell low, the better the bill the lower the rate. 11. Conversiom.—Those countries which are fortu- nate enough to have a monetary unit in common, have no conversion to make and do not require any ex- change tables. Among these are the United States 56 DOMKSTIC AND FOREIGN KXCIIANGK and Canada with the dollar in common, Great Britain and her colonies with the pound sterling?, and the Latin Union with the franc. Fluctuations in ex- change rates in these eases are (luoted at either so much per cent discount or premium, or, as in the case of London and Australia, so many units for so niany units, as £98 for £100. The arithmetic of the exchange is very simple and re(iun-es only a knowledge of multiplicat'ion and divi- sion as the following rules show: 12. Convention for fuxd i\vcluincjc.— (ConvcTmm with cent quotations) . (a). Amount in foreign currency = Amount in dollars -■- Rate in cents. (b). Amount in dollars = Amount in foreign cur- rency X Rate in cents. Buy low, sell high, the lower the rate the more foreign money you receive for a dollar. To convert dollars into foreign currency we have the following rule: divide the amount in dollars by the rate in cents per foreign unit. Exnmplfs: How ninny francs ran be bought for $1,000 at lU-S cents per franc? 1,000 -~ 19.3 .'-,,1 81 ..3.5 francs. Answer. How many marks can be bouglit for $1,000 at 24 cents per mark.' 1,000 -- 24 - 4,166.67 marks. Answer. How many marks can be bought for $1,000 at 96 cents per 4 marks.' 1,000 -^ "% = 4,166.67 marks. Answer. KATKS OF KXCIIAMiK W How I.. .lij- kronen can Ik- bought for iflOOO at S6.J6 rents ]ii'r kroru'.' 900 -:- 26.48 = 3,401.36 kronin. Answer. 'J'l convert foreij^n currency into dollars, wc may .state tlic rii'e: multiply the amount in foreij^ cur- reiu y l)y tli ; rate in cents per foreign umt. Kxaniple.s: How iniicli will druft.s fn- 'li. foil 'mnj; aniounts cost.' 5,181.3.') francs at 19.30 cent.s.' i.;sl,3.-) X '.!)••« ^ ■tl.OOO. 4,166.67 marks lit 34 cents.' 4,16(1 oT ■ :.!+ i«l,()00. 4,166.67 marks at 96 cents for four rii.^ik^- 4,'()(;.67 X 96 X '/i =. tl.OOO. 3,401.26 kronen at 26.46? 3,401.26 X 2(1 K; iSOOO. 13. Conversion for movable exchange. — (Conver- sion with franc quotations ) . Amount in francs = Amount in dollars Y Rate in francs. Amount in dollars = Amount in francs :- Rate in francs. Buy high, sell low, the higher the rate tiie more francs you receive for a dollar. To convert dollars into francs, the rule is: multiply amount in dollars i)y the rate in francs. How many francs can Ix? bought for $1,000 wlicn the rate is 5.181/s per dollar.' 5.18125 X 1,000 ^ 5,181.25 francs. To convert francs into dollars, the rule is- divide the amount in francs by the rate in francs. 58 DOMESTIC AND FOREIGN EXCHANGE What is the value of a draft on Paris for 5,181.25 francs when the rate is 5.18',,s francs per dollar? .5.181 M $1,000 Anv fractional quotation is applied on tho dollar value ^ ■',', u i^^*'""''■ '■"**' '""' ''"'" •'■1«'^ + %^. ll'^' «n''»cr would be $1,000.15 or $1,000 + \,;a of V/c. We have not dealt fully with the fractional quota- tions of the franc, mark and florin, because as a rule, these are only encountered in large transactions! They are explained in Chapters XV, XVI and XVII. 14. Simple arithmetic involved— U exchange is considered in its true nature, as a commoditv, foreign exchange arithmetic will assume a form elementary m its simplicity, as the following examples show: Fixed excliangc. — $10o"" '"""' "'*""'''''' "* ^^ '■''"*' '"'■'' '"'" '"' Pureliascd witli 100-^.20 ^.500 articles. How much will ,500 articles cost at 20 cents each' 500 X .20 :. $100. Movable cxchnnfre. — If one dollar «lll buy five articles, how many will $100 buy' 5 X 100 =-^ .'JOO articles. bur'.'"' '^ *''" '"'"'' "^ ^"° "'"'''''''^ ''''*'" """^ '^""'"' '*■'" 500-^,'>r=jJ;i00. In dealing with commodities any commission or per- centage on the price is reckoned" on the total dollar value. In buying and selling exchanges, the same rule is followed; fractional quotations apply only to the dollar value. RATES OF EXCHANGE 59 15. Exchange two classes of <|ii()tati(ins and Imw are they us'-d? Jbxplain the diflerence between fixed and movable exchange. w^^^'M^^SFm CHAPTER V FOREIGN REMITTAXCES 1. Non-commercial exchange. — Altho the greater portion of foreign exchange originates in coniniercial transactions, there is a constantly increasing vohinie of exchange business created by travelers and immi- gration. A steady stream of travelers and others leave the United States and Canada each year to visit Great Britain, Europe and other parts of tlie world, carrying wi*h them the necessary funds for their ex- penses in various forms, such as circular letters of credit, traveler .' checks, drafts and gold. The remittances of immigrants to their relatives and friends in their home lands amount to a surpris- ingly large figure in the course of a year. These re- mittances are generally made by means of drafts, foreign money orders, or by what are called mail re- mittances. For many years these two classes of foreign biisi ness were in the hands of foreign bankers who mad*, a speei.'ilty of the business of suj)plying banks, both in the United .States and Canada, with the necessary forms and foreign machinery for issuing circular let tens of credit and .selling travelers' checks. Ciradu^ ally the larger banks both in the United States and «i 62 DOMESTIC AND FOREIGN EXCHANGE -6 Canada felt the increasing pressure of their clients' requ.ren.ents ,n this connection, and found it adv ^ Z^: TT r'^'r^"" ''•'''''- ^' '^^^^^^^ Checks etc. Practically every important hank h.s now d:rect correspondents in the principal c.ties the world w.tl. whom they have n.ade the necesL v arrangements for the pay.nent of circ.lar ee" travelers checks and the like. ' A comparison of the different methods of remit- tance and a descr,ption of the n.a,.ner in which tTy are operated .s interesting. ^ 2 Pnndplcsundcrhiing the ksuaucc of drafts- A demand .Iraft or check is a,, unconditional order -s^ed ,y one hank on another bank or hank.wZ -k.ng the bank to whon. it is addressed to pavfc r- !rF;;:::Tr ^''''^^^''^'^™ -'-***-"•"• In the case of a bank keeping an account i,. an- renc\ ,s stea.ly an .3 MICROCOPY DESOIUTION TEST CHART (ANSI and ISO TEST CHART No. 21 1.0 !S"- ia 1^ 1^ A APPLIED IM/IGE Inc ^™-^ 165J East Uoin Street ^^S Htjchestef, New York 'teog USA "■^= (^16) 482 - 0300 - Phone ^= (716) 288- 5989 - Fo. 70 DOMESTIC AND FOREIGN EXCHANGE drafts, their greater cost, the widespread nature of the initial arrangements and the fact that the exchange cluirged by correspondents on the checks is met by tlie issuing bank, tiie slightly higher commission charge which is made by banks for travelers' checks is fidly justified. 7. Payment of checks.~The issuing bank usually holds the paying agents of their travelers' checks free from responsibility in cashing such checks, provided: (a) The holder signs them in the presence of the paying agent. (b) The signature of the holder and that of the countersigning officer agree with the signatures con- tained in the relative letter of indication. (c) The numbers of the checks are entered on the letter of indication. (d) The checks are negotiated within the period specified (usually twelve months from date of issue) . (e) The other general terms of the circular of in- structions are duly complied with.' 8. Pfii/mevt to holders.— In countries specified on the face of the check the face amount of local cur- rency is paid to the holder without deduction except for revenue stamps (if any).^ 1 This circular of instructions is generally printed in the principal com- mercial lanpiiajres for the heneflt of paying agents. = Altho a fixed amount of sterling is specified for Great Britain on the face of travelers' checks, it should lie liorne in mind that the sterling current in Australia, British South Africa. British West Indies etc IS of a quite different exchange value. A similar remark mav also lie made regarding the colonies and dependencies of other countries which use the same currency (francs, etc.) as the respective mother country. FOUKIGX RKMITTANCKS 71 In other countries tlie equivalent of the sterlinj^ amount is paid to the holder at a rate of exchan<>e whieh includes the commission and other eharjjes of the paying agent. In countries where a revenue stamp is necessary tlie cost of sucii stamp is charged to tiie iiolder of the check.' 9. Redemption of ehcekg.—Viml travelers' checks are redeemed as follows : (a) If paid in North America, they are forwarded to the New York office or correspondent of the issu- ing bank of redemption at the face amount of dollars l)lus the commission agreed uj)on.- (h) If paid outside North America, they are for- warded to the London, England, branch or corre- spondent of the issuing bank for redemption at the face amount of sterling (or its ecjuivalent) at the cur- rent rate of exchange plus commission at the rate agreed upo>i. ( In the case of countries not s])ecified In such places all travelers" checks are jiaid at the current rate fur pur- chasing exchaiifte on the capital of the respective mother country. I Hotels, steamship coinjianies, department stores, etc., usually accept travelers' checks in pmjment of enslomers' arcouiUs, but do not bind tliemsclves to cash checks fur the purpose of providing the holder with funds. - As travelers' checks paid in North America are checks on New York, banks at points where New York exchange is usually at a premium often make no C(mimission charge for cashing the checks. In the case of Canadian banks which issue travelers' cheeks, it is cus- tomary to redeem each other's checks at par when the two l)anks con- cerned are rejiresented locally. In other casts they are redeemed thru the Clearing House or otherwise by any branch "of the issuing hank whieh is convenient for the purpose, at the face amount plus the usual commission on cheeks paid and redeemed in North America, namely, 'lO "f 1 P" cent, minimum .5 cents each. 72 DOMESTIC AND FOREIGN EXCHANGE on the face of the check, the paying agent has already obtained his commission from tlie conversion of ster- ling into local currency and the checks are therefore redeemed at the face amount of sterling). (c) Banks having extensive business relations with various European countries ocTasionally appoint their chief correspondents in the respective countries as cen- tral redemption agents for their travelers' cheeks. In such cases the paid ciiecks are forwarded to tliese correspondents for redemption at the f^ce amount of local currency plus the commission agreed upon, and are debited to tlie account which the issuing banks keep with tiiese correspondents. (d) Hotels, department stores and private bankers often hand travelers' checks paid by them to a local bank for redemption, such third parties being al- lowed a commission of, say, V,o of 1 per cent, which IS added by the local bank to its own comimission when forwarding the check to a central correspondent for redemption. 10. Letter of indication. — Each purchaser of trav- elers' checks is furnished with a letter of indicatio" (P'igure 5), usually bound with the list of payu agents, specifying the numbers of the travelers' checks sold to him and signed by the purchaser and the officer who countersigned the checks. It is indispensable to the security of the holder that this letter of indication be carried separately from the travelers' checks. A few institutions do not issue a letter of indica- ticHi with their travelers' checks. In these cases tw» ;■> '\i rOREIGX REMITTANCES 7a spaces, one at the top and one at the bottom (see Figure C), are provided on the ehcciv form lor tiie signature of the holcjer. The first signature is made in the presence of tile officer wlio issues the checl" (.li.-, L. an ltJllu\k^ ; N". X h.No X .M.;,.,.... Ul lllL' ll> IlOIIHIIilMull ti[ $10. *■« A (o No A of thi* di'iioiuiiiuMoii o( $J0. ^'" I* to No H. , of the cl^Doiiiinuiioii uf $5U. ^'o- C to No C uf (111' di'uuiiiiiiatioii of $10U. ^"- ^ lo No I) iiuluMvt uf tliu dfiiuuiioutioii of $S00. We commeDtl to jour usual coiirtt-si.*. ^'"» 'i''»: lUvK liirluMvi iII<'lu^ivt . ilirlu.sjvi SIUNATIRE OF (V/mW niyriatuie mast a'/ief niHi the counltiHi'jnaturt mi (/it- cfttcJt*.) lJ/ti«( (/*• iimerlfd at the tiinf the checks ait puichaurd,) LKTTEU OF IXDICATIOX AC : OMPAXYIMJ TH \VI 1 TUS' CHECKS Fir.rBE h To Ot'R CORRKSPONDENTS: Gt'lltlelnpn, M the bcari-r of thi« 1,'ttiT. nliii«p sisnalnre is to be foiin.1 Iwlow, hn« 1 n mi]. Iilipii with our Ciroiilar Letter of Credit No an.; we commenj to your usual courtesies. Fob The bank SinNATfRE OP LETTEU OF INDICATIOV ACCOMPANYINT. IFTTlFt OF CREDIT FiornE 7 7, O 3 y. o M H H W X FOHKIGX ItEMITTANCKS rt FiocM s. Ckcuuh (Dollab) LEnra of Cbedit (F«o«^) 78 DOMI.STIC AM) FOREKIN KXCIIANGK ^?!l!)ft4finWV-J FiouaK 8ii. Circular (Dollar) I.eitek of Credit (Hack) Xo. ClEClLAK LetTEK OK CkEUIT £.... ISSUED By TI K Shj. HANK. To the Bankers '*'••■• 'lawed in o,.r Letter of Indieafwn. This letter Kill be presented to ,,o„ I,,, in ulune favor ue hare opened a eredil of fob, ... StcrliiKi e avaded of bii . , , , •' demand drafts on '^'"^ Bank; London. ■'Chich u~e request that you u-ill negotiate at the eurreut rate of the day, less your usual eharges. The drafts should bear the follouing elause — "Drawn under Credit No. .. ". ,;.., , , , , , . 'hey should be draun within one year from the date hereof, and the date and amount of eaeh draft eashed are to be entered rn the space provided on the back of this letter M provided with a copy of our Leiier oflndication. "'*^''''°" signature may be found. ^'"■7''"- Bank. CIKCULAK (STEKLIXG) I.KTTER OF CREDIT Fini'TiE 9 Avn— 7 79 ^i SPECIFICATION Ok I'avmknt.s Mauk Under This I.ittkr OK Credit Whc-n ' Paid l)v I Amount in ' l''iukT draws a "alt on the central corrfSDondciit of the issuing luiik dcMKi.nted in the letter „. credit for the ainouot of money he recpiires and presents it to one of the pav- >•>«■ arrets desip.al.d i„ the list of pavin- a^s. , ts 1 Ik paying a«ent tlu n eonipures the si-natm-e m, 'he d.-"lt with that Hiven in the relative letter of indica- tion and authenticates the signature of the olKeers appc-aririK «'M the letter of ere.lit hv means of the spec- miens he has on Hie. If the si-nalures are in order he makes payment and enters the particulars of the draft on the hack of the 'etter of credit. In accordance with le usual hanking custom the payin^r a^rent deducts his commission at the time pav- ment is made to the holder of the 'etter of credit hut should the letter of credit re.pies im to nuke 'pay- ments without deduction, his commission is added to the amount of the To meet eases where the issuing hank is aslted to specify on a foreign money orau4 1 ewi. 0O» 1.:"<1 lip l|.ppgn ;,f inxi* 0. ("■I- q mu Irt^i H— qip lilKi''' «^ "'-« »W^-*«. a '■.•«.< -tap!! ■a^vfling il J = —liinotuv uSisjoj i s QIMOlCMlXMnOS XliMAud ai»p pu« lunoui* 3i]) qjuv pvoiq* ~I6|- 33aartWOO dO MMVQ NVlOVNVa 3Hi [ 1 L 1 i ilm 1 1 £ i 111 i| 1i i! A I I: 1-5 !l I 11 i m 88 DOMESTIC AND FOREIGN EXCHANGE or tliru its agents in the town where the beneficiary resides. In order to make sure that the amount reaches its destination safely, the purchaser is furnished by his bank with two slips, one a receipt for the money he has paid and the other a notice (with translations thereof in various foreign lan|j;uayes) for transn's- sion to the beneficiary, which instructs him (the bene- ficiary) to conmmnicate with the central correspond- ent if the sum mentioned thereon is not received within the course of a fixed number of davs. ( See Figure 11.) REVIEW Describe some of the ways in which What is a demand draft.' drafts are paid. What does a letter of advice usually contain.' How are travelers' checks redeemed.' Wliat is a letter of indication? Why is it issued.' What kinds of letters of credit are issued? How does the holder secure payment? \yhen are paying agents of travelers' checks free from respon- sibility in cashing such checks.' CHAPTER VI BILLS OF EXCHANGE 1. Bills of exchange. — It has already been indicated that the fundamental purpose of a draft or bill of ex- change is to settle debts and thus avoid the necessity of shipping gold. To satisfy a debt in one country by offsetting the amount against a debt due in another country, leaving only the difference, if any, to be re- mitted in gold, is no less effective a means of payment as a double shipment of money, and is obviously far more economical. In this way, the difference or bal- ance of payments as it is called, is settled by the debtor nation siiipping gold or arranging a postponement of payment by means of finance bills or other corrective transactions. A check is merely a demand biji of exchange d.awn on a bank. Bills of exchange or drafts, as we shall now call them, assume a variety of forms and tenor, but, no matter what their currency or form, the un- derlying principle is the same, namely, that of a cred- itor drawing a draft upon an actual or constructive debtor. Bills of exchange can be broadly divided into two classes according to their currency, known as short and long exchange. 89 •iiirf 90 DOMESTIC AND FOREIGN EXCHANGE Short exchange includes cable transfers, checks, bank drafts and sight or demand drafts. Travelers' checks, money orders and other forms of non-com- mercial remittances come under this heading. Long exchange includes all drafts with a currency of eight days or over, such as thirty and sixty-day commercial bills and bankers' long bills. 2. Sight drafts.— Checks and demand or sight drafts, whether drawn on a bank or a commercial house, have no days of grace for payment and must be paid on presentation, or protested. As a rule the sale of demand exchange is confined principally to banks, commercial draf+s being usually drawn on time. The rate or price of demand or sight exchange, un- der modern conditions, may be considered as the basic rate on which all rates for time exchange are calcu- lated. The old usance or sixty-days' rate, obtaining between London and New York, on which rates used to be calculated is a relic of the days of slow-going sailing vessels. In practice, of course, given the rate of interest, the rates of exchange are quickly con- verted from one to the other. Under normalcondi- tions, a sight draft drawn in New York or London will be presented and paid six to eight days after nego- tiation in New York, and is therefore, as regards time lost in transit, on a par with a shipment of gold. The difference between the export gold point and the demand rate is represented by the freight, insurance charges, etc., on the shipment of gold. It is, of course, necessary for banks transacting a regular foreign ex- BILLS OF EXCHANGE 91 - en 1»> ^ •< < a *•' - I •i>. r= E--r, 1 = ^•1 ; I avhich thev can draw demand drafts and sell cable transfers. ' Funds for these balances are provided by remitting quantities of different kmds of exchange which have been purchased from customers and others. Demand and other short date Items are credited immediately; acceptance is ob- tained of the longer date items wliich are discounted and credited by the correspondent as occasion requires. The selling of demand exchange and cables against remittances of the same is the most elementary form of foreign exchange. A banker, for instance, pur- chases a demand draft on London for £10,000 at the current rate of exchange, say $4.8f5, and remits the bill to his London correspondent; at the same time he sells his own check or checks on London for the same amount at, say. $4.86'L.; the two transactions reach London by the same mail and offset each other Apart from the expense of conducting his business, he clears $.50 on the transaction and is not out of the use of his money for more than a few hours at the most. If the checks sold by the banker miss the mails by any chance, the banker has the use of the money in London until the mail is received; hence the importance of watching the mail service closely in exchange transactions. This illustration is, of course elementary and bankers do not often make money this way; but it shows the principle on which foreigii exchange transactions are based. Banks are con- stantly purchasing every kind of exchange and for- BILLS OP EXCHANGE 93 J" I a .5 8> ^•1. is ■£ ~ i ■^ '■«. — 3 £ "^ jiC ^ e ■y *E 1 .2 -s i .- ^ 5 1 15 3 o i ii 'o 3 <: ■•^ % o ei ■c « a .^"1 < ." 3 6 *5 ^ < -^ r- y. rtoiiaivivoo .40 (XVU XVinVXVO 3H4 !f« •s s ■? I S -3. : I- I : SNV ? .i l-L ^.- 2 •; -: .- ^ il = = £ ^ 2 " « = * •*:*» — .?• ?: :- 5 3 ; f- --. .-H y. 5I3HHKIV0.1 .40 a xviavxva ;ihx ■t i t1 3 I 9* DOMESTIC AND FOREIGN EXCHANGE warding it to their foreigi, crrespondeiits In- whom 1 IS converted into «n available balance. In any case there IS constantly accun.ulatinK t<. the cre.lit of the Aew \o,k hanker a balance against which he is able to sell exchange and cables and meet Lis maturing obligations, l/ndcr normal conditions, owing to the rclmbihty of the mail service, a banker is able to esti- mate very closely the position of his London balance and as a rule receives a cable from his correspond- ent at the end of each day. «. Cable transient.— A cable transfer or "cable " as It IS more generally called, is a transfer of funds by cable, no question of interest being involved as pay- ment IS immcliate. Ajart from this a '•cible" di..ers Iron, a check only in the fact that the banker abroad IS told by a cable, instead of l,y a written or With a demand rate of t.87 and a pri- vate disi , jnt rate in London of 31/2 per cent, a banker's clean bill is worth 4.8385 as the following calculation shows : i; i* J 1. !■• ■ ml mini New York demand rate on London less 63 days' interest at 3^% . . 2.93 Stamp duty %o 7c 24 $487. per £100 3,17 $483.83 .i i 100 DOMESTIC AND i'OREIGN EXCkANGE or the nearest commercial rate, $4.8385 per pound sterling. Elsewhere it has been shown tliat exchange rates between two countries either correspond or tend to correspond; this apphes, however, only to the de- mand rates. 7. Commercial long bills. — Commercial long -Ms are drafts drawn at thirty days or over by exporters on foreign customers, or upon banks abroad desig- nated by the latter. A bill of this kind is usually ac- companied by a bill of lading and other documents. Where a draft is drawn on a very good house abroad, or a bank, the documents are delivered upon th ac- ceptance of the draft. Such drafts are known as "acceptance bills" or D/A. Where the drawee's standing is less well-known or where the merchandise is perishable, documents are delivered only on actual payment of the drafts. These drafts are known as "payment bills" or D/P. In the case of a draft marked D/A, the drawee can obtain possession of the relative goods as soon as he, or the bank representing him, has accepted the draft. If the draft be marked D/P, the drawee must pay the draft (less a rebate for any unex- pired time it has to run to maturity) before he can obtain the merchandise. When D/JP bills are drawn against perishable goods they are invariably taken up "under rebate." Payment bills are not discount- able, even after acceptance, as they are liable to be paid any tune before maturity and must, therefore, BILLS OF EXCHANGE 101 remain in the portfolio of the banker who presented tiiein for acceptance. 'Acceptance bills," on the other hand, become clean bills after acceptance, they are discountable in the London discount market and may change half a dozen times before maturity. The purchase of documentary bills drawn by re- liable firms is a fairly safe operation, the buyer being protected by the bill of lading which is indorsed to him, but judgment should be exercised as regards the financial standing of the drawer and drawee, es- pecially in the case of "acceptance bills," and consid- eration should be given to the nature of the relative goods. 8. Bankers' long bills. —Uraihs drawn at sixty and ninety days sight, on foreign correspondents by bankers in the United States and Canada, form an important factor in international exchange opera- tions. These bills originate in the regular course of a foreign exchange business and are based on a variety of transactions. Many of them are thirty and sixty- day bills and are sold to customers of the bank, who prefer this method of remittance to that of purchas- ing demand drafts or cable transfers. Some arise from a desire to anticipate a change in the rate of exchange, while others represent purely financial transactions, such as placing a foreign loan in New York. These latter operations are explained in the rhapter on Finance Bills. 9. Bills of exchange that involve more or less risk. 102 DOMESTIC AND FOREIGN EXCHANGE -Concerning the risk incurred in the purchase of documentary exchanr A. W. Margraff in his book International Exchange" writes as follows: merchandise can be readily resold in the market w^iere con- signed m the event of forced sale by reason of non-a ceptance tiZ^l^r^'l ^/ *''' ^''^''' "^ the appertaining bill and the inability of drawers to reimburse the purchafer of the expors" ''''"""' '"' ''^'^ """'""* originall/paid them pll: fn JpH ^'^"'"^'"ff^^'i upon merchandise disposed of under forced sale would be applied on account of the amount of rennbursement demanded of drawers, and provided he ir chand.se was of the nature just referred to, would almost liquidate the purchaser's claim against the drawers and th. "l; lS"dV"!l 'r *° *^ P"-''-- may be ;e:ol red «ith httie difficulty from the drawers. If, however tliev i'creJ.-; ' '"■"^' •T"""'^' t*-^" '"^^ Purchlser would hS drawers ^" '"""^ ''"''""'^ "g-*'"^' ^^e insolv^;! th^'7' f °r'^*i^ °^ '"* * '°^^ '^ ^"y ^mote in view of the fact that the majority of drawers of bills of excZne, (exporters) have all refused bills, immediately re/erredfo their own agents abroad for protection other^t ''"f'* non-perishable merchandise includes flour and other manufactured cereals such as corn meal oat n,.,I hominy etc. ; farming implements, canned meats 'fresh ml' and other provisions, when the fresh meats Jd prov^Lns are shipped m refrigerator cars and vessels of modertZ and warehoused in cold-storage plants upon the arrhafa destination, ,f not immediately taken up by drawees BtlU mvoktng more or less rM.-Hms accompanied bv documents representing shipments of perishable merchandise, such as butter, cheese, fresh fruits, etc., that are liable to deterioration in quality, or to absolute loss, during trans t! BILLS OF EXCHANGE 103 Bills with documents shoning collateral security of live cattle, horNts or other live animals, necessitating the expense of help and feed during transit for tiie maintenance of life, as a refusal of such annexed bill would depreciate the value of the security, day by day, to the extent of such expense incurred. In addition to the liability of drawers and indorsers, if any, purchasers of documentary bills are secured bv the financial responsibility of the acceptors on and after accept- ance until actual payment of the bills. ^ The liability of drawers continues after the acceptance of bills, remains in force during the whole life of the bills and ceases only upon payment. The primary conditions of the desirability of the purchase of any bill of exchange depend upon the moral and financial standing of the parties thereto, and the liabilities just stated of the parties should be quite ample in the majority of cases. Further, these bills possess another element of protection against a possible loss in this, that they are supplemented by documents covering salable merchandise with title con- tinuing in the purchaser of the bills until payment at matu- rity, or retirement prior to maturity, of the" respective bills of exchange. APPLICATION- FOR COMMERCIAL CREDIT yew York (lUARANTT TBU3T COMPANY OF New YoRK. Dear Hirt. Credit in favor of Pleane iftstie for ovr arronnt a Documentary for £ drnflf at . against cont of thipmeiit of . from to In force until firtt day of. Insurance effected in Kindly advite the Credit by CABI.E Mail Touri truly, FioDU 14. 10* DOMESTIC AND TOREIGN EXCHANGE CniM No J^ aierlinf GlARAK'n- TRUST COMPANY OF NEW YORK Xtw York,. .1». .moy To lk§ GuAiAHTY Tivrr CoHrAXY or Nsw Yubk, 33 LoM BAftn Street, London. Otnthmun: At tht requett and for aceoant of Wf h»rtby aut\orize ' ' or an;i partitt vkutt drtifta yuu mnii be lUrevlnd bit icrittea iiidrr or by «, to aei-tpt undtr this credit, to value on you at fur nnv •mn or >um> not exceeding in all Poandt Sterling (tay £ Sterliny) to be uned at. . direct for invoice coat of to be piirehiited fur account of mnd to he ehipped to a port in the Umted Stolen The Bille muet be drawn in prior to the firtt day of and advice thereof yirrn to you in orii/innl and duplicate, Much advice to be accompanied by Bill of Lading filled up to order of the Guaranty Truet C'oKipBnj/ of Xew i'ork (with copy of invoice) for the properly thipped an above. r r j All the Bille of Lndiny iteued, except one eent to us bv the veetel carrying the cargo, and one retained by the captain of the tai'd reatel. are to he forwarded direct to yon. Copy of incoice, properh) certified by the V. .S. Contul to be forwarded to us by the vessel, also advice of each Bill drawn. And ite hereby agree with the dratrers, endorsers, and bona fide holders of Bills drown under and in compliance with this rrnlit. that the tame eball it duly honored on preaenlation al your office in London. We are, Oentlemen, y'oi,^ obedient servants, Gunranty Trust Company of Xew York I'll Manager, N.B. Bills drawn under this credit must be marked Drawn under Ouaranty Trust Company of Ifeic York Letter nf Credit .Vo dated for £ Insurance in order at FrGTRE 15, BILLS OF EXCHANGE 105 y,r York on London, existing at the FiomE 16. 106 DOMESTIC AND FOREIGN EXCHANGE limt of „tHtmtnt, a«d tknl i»l,r„l .hall he rharg,d at thf rate of Hr. Should l^antUiyal, the payment of an,/ portion of the amount pay- °'«ri.iT;; ^tita'nf'i^:' -' " "" -^ ""- "^ «'" -"^ "- -- In CH.e ^, ,hoM hereafter de.ire to have thh credit eonfirmed. al- tered or emended by cable (uh>ch will be at ^^^ erpenee and ri.k) ' »urA chanye elm I iiriae from the oeeegHit,,, ,.l ,.L rreait, ■u.-liethtr orfron. the death or .ece..ionof'::rVar;i"o:"!Zr '"""""■ It « further understood and ayreed i,. the event If anyZpen.L, or fadure, or ae.iynmeni for the benefit of creditor, oa ^^^part. or o, the nonpayment at maturity of any acceptance made by "" , or of the nonfulfillment of any obliyation under .aid credit or under any other credit ie.ued by the Guaranty Tru.t Comi«.ny of Aeu^ york on "■-" our account, or of any indebtednee, or liability „„ ^^^part to you, all obK- yation, acceptance,, indebledre., and liabilitie, u-hat.oever shall there- 'ZVe'coZyurZ ta^yaTle""'"""' """■""■ »"*""" -"""-/"^ FiniRE 16. (Continual ion) 10. Letters of credit.— There are two well-known forms of letters of credit: 1. Circular letters of credit, to be used by travelers anS tounsts. These are addressed to the foreign correspondent of the issuing bank m favor of the holder. 2. Commercial letters of credit, to be used in trade. These take the form of a letter addressed by a bank to a foreign BILLS OF EXCHANCJK 107 merchant, aullmrizing him to draw on the issuing bank's ror- ri'.-(i)oii(loiit in a tirtiiin place (ffi'mTaliy a financial center such as London or New York) for a specified amount repre- senting the cost price of certain goods ordered by the bank's customer, on whose behalf the credit is issued. The letter designates a time-limit ami specifies that all e accompanied by the relative invoice, bill of lading, insurance policy, consular certificate, etc. Before issuing a commercial letter of credit the bank requires the customer to sifpn an application form (Fig. 14 on page lO.'J) setting forth the par- ticulars and terms of the shipment and giving instruc- tion in regard to terms, insurance, etc., all of which are embodied in the letter of credit, which is issued by the bank in four parts, namely, one original and three copies (these copies however vary but slightly from the original). 1. The original is addressed to the foreign merchants in whose favor the credit is issued (Fig. 1.5). This is handed to the customer, who forwards it to his correspondent. 2. A copy is addressed to the London or New York bank on which the credit is issued, authorizing it to protect the drafts against the credit when drawn in accordance with the terms and conditions thereof. .'i. A copy of the original is delivered to the customer for his files. 4. A copy is retained by the bank issuing the credit. On the reverse side of the last two copies is a receipt, signed by the customer, incorporating an agreement regarding the basis on which the bank is to be re- iinlmrLed, and the amount of its commission (which varies according to the currency of the bill drawn). 108 DOMESTIC AND FORKICJN KXgHANGE The bank's rijyhts in case of .lefnult in payment or other difficulties is also defined (Ki^. IB). Commercial letters of credit are invalunl)le factors, and in the promotion of internutional trade and com- merce greatly facilitate the negotiation of bills of ex- change, not only in the import business of a coimtry but also in the e.ximrt business. Letters of credit, tho not themselves negotiable, ren What are the main f.ietors which determine the difference in exeha.nce rates between cable transfers and demand drafts? What conditions will tend to produce . br , -iial enl)!:- rates' Discuss. What are: (a) commercial lonpr bills; (b) documentary bills of exchange; (c) clean bills of exchange? Give an illustration of a clean bill and of a documentary bill. Describe the kind of bills of exchange which are considered safe to buy and those which involve risk. What are the primary conditions which make the purchase of a bill of exchange desira- CHAPTER VII A DAY IN AN EXCHANGF. BOX 1. Practical cjrcIiangc.—A very practical way to obtain an insight into foreign exchange is to study actual counter operations. We have already seen how the rates are obtained from New York. Therefore, in our operations, we shall use the quotations given and consider theiu as the cost price to us of the various exchanges. BulleUo! London Cable 4.9o74 Drniand 4,8S« (IO-'i5 I'nrii y.\'"'<^^ i«0%-H2 ini-iks IS.iOcU. "orlin 'J*'h« Hong Kong M> Buying: 4.810 fleUlna 4.BT9I 4.8T B.\9% lB.%)ctl. 9474 40.« In the examples which follow, the allowance made for profit is nominal and the explanations necessarily brief; hence reference should be made to the more de- tailed information given in later chapters. In practice, the conversions are, of course, arrived at by the use of exchange tables, but the act ^ i . work- 109 . n 110 DOMESTIC AND FOREIGN EXCHANGE ing of conversion will be shown 'n the examples here given. 2. Demand sterling soW.— Our first customer is Mr. Bryant, who wants to send £420 to London We quote him 4.87 and ask him to fill up and sign a requisition form. This form should he used in con- nection with the sale of every kind of draft, foreign or domestic, as it eliminates the risk of misspelling names and of making other similar errors. In filling out a sterling draft, great care should be taken to avoid wide spacing. The figures should be made very clear. The amount, conmiencing at the extreme left, should be written on a single line if possible. Shillings and pence, if there are any, should be written in full. Fractions of a penny should not be used. In England, checks are com- monly written with the shilling sign (/) ; thus 7/2 means seven shillings and two pence, but the former method is safer. By the exchange tables we find that Mr. Bryant must give us a check for $2,045.40. Conversion : 420 x 4.87 = 2,04.5.40. Mr. ]\Ieyers, a lawj'er, now makes a requisition for the equivalent of $1,000, the amount of a legacy he has to remit to England, for which we give him a draft for £205-9-7, at $4.86%. Conversion: i^ = 205.48 or in money £205.9s7d. A DAY IN AN EXCHANGE UOX m Mr. IMeyers has also to cable £l,000 to one of his clients in London, for which we require explicit in- structions on the requisition regarding the name and address of the payee, and similar items. We charge at the ';>u. vii' *4.872.5 per pound sterling and, in addi- tion, t)ie 'Mst of '(ie cable message, $2.00; the total is $4,874..>i, C'arf should be taken in coding the cable which should be checked by another officer. The message, in plain English, not in code, should be forwarded to the London correspondent. 3. Sterling purchased.— "Slr^. Ellen Smith brings in a crossed check ■ for £180, which we place to her credit at 4.82% realizing $868..50. The check is pay- able to the order of iMrs. John Smith, and as the Eng- hsh banks are very particular about the indorsement's being exactly the same as that on the face of the check, we ask lAIrs. Smith to sign it "Ellen Smith, wife of John Smith." If it is payable to Airs. Ellen Smith it should be indorsed "Ellen Smith," the "Mrs." being disregarded. Indorsements on foreign checks or 1 A check is crossed hy drawing t«o parallel transverse lines across its face. w,lh or without the words "and Co." This constitutes a ••(,'« "a crossmg and the bank on whom it is drawn must pay it onirthru another bank, or receive it on deposit direct from the payee If the name of a particular bank is written between the lines; t'he check is crossed specmliy and can only be paid thru and to that bank If the holder of a crossed check is a customer of the drawee l,ank. the latter need not pay cash, but may credit the customer's account, and the cus- tomer can withdraw the amoun, bv check if he so desires The crossed check is not used in Cana.Ia or the United States, tl,o it IS authorised „ Canada by the Bills of Exchange Act (Sec, IfiS- 75 In Englan.l liowever. where identification is not so stridlv enforced by lo^iirw^g ur "' ""^^'"'^ ^'■-''' '^ '" ---"* '-^'^ ^^'"« p"'- XVJI— 9 I .' la 118 DOIESTIC AXD FOREIGN EXCHANGE drafts should always be written, never stamped. Sangster and Company, produce dealers, offer a 60 days sight draft, with documents attached, for £2,000 against a shipment of cheese to be surrendered on payment (D/P). We place the sum of £i,000 to their credit, after seeing that all the papers are in order and properly indorsed. Since the rate given is $4.81, they realize $9,620. Attached to the draft, which is made out in dupli- cate, are: — Alarine bill of lading (in duplicate). Certificate of insurance for £2,150. Letter of hypothecation.^ Before mailing, we indorse by written signature all documents to tlie order of our London corres])ond- ent. The duplicate draft and bill of lading are sent by the next mail. ^ 4. Fremh exchange.— Tht first customer for French exchange wants a draft for fcs. 300.2.). We sell to him at .1930 and receive $57.9,5. (These rates advance by hundredths of a cent.) We are careful to write out the date in words, for J A letter of hj-polheeatlon is a certificate attached to a ilocunicntary bill ot cxcli,inge aiKl signed by the o of one per cent. German exchange is also quoted at so many cents 114 DOMESTIC AND FOREIGN EXCHANGE ta the mark, advancing by steps of .01 cent, 24.01, 24.02, etc., and a fluctuation of .01 cent means about 42 cents on $1,000. The conversion requires no ex- planation. An advance of % cent per 4 marks cor- responds roughly to '/8 of one per cent on the dollar amounts. 0. Sundry drafts.— Won Lung, who, by the way, is a very close figurer on exchange rates, wants a draft on Hongkong for $100 local currency, for which we quote him $49.20 for each Mexican or, as it is called local-currency dollar. His draft, therefore, costs him $49.20. In making out the draft on Hongkong, "One hundred dollars Local Currency" (the use of "cents" should be avoided if possible) should be writ- ten in the body of the draft. Drafts on Hongkong are generally made out to bearer; so that the remitter runs considerable risk in using them. If Won Lung had asked for the equivalent of $100 m local currency he would have received a draft for Loc. Cur. $203.2.) or -^ .4'J.'() Belgium, Switzerland and Italy are members of the Latin Union, and their monetary system and quo- tations are similar to that of France, with the ex- ception that the franc is called the lira (plural lire) in Italy. There is very little demand for drafts on other countries of Europe, and such demand is only for small amounts for individual use. Large transactions are settled by means of drafts on the big centers— London. Paris and Berlin— and exchange A DAY I\ AX EXCHANGE BOX n.- on these points ^rtnerally commands a premium in other Euroj)ean cities. 7. Travelers' cheehn.— The next customer is Mr. Brown, who intends to visit Eurojje and who asks us to arrange his finances for the trip. He requires a letter of credit for £1,000, travelers' checks for .%500 and £10 in sovereigns. Travelers' checks, altlio sold and payable in dol- lars (in denominations of $100, $30, $20 and $10) are also payable in the principal foreign countries for the full fixed amounts in foreign currencies printed on the face of the cheeks; there is no deduction for com- mission. In those colonies which use the same cur- rency as their mother countries, the ciiecks are payable at the current rate for purchasing exciiange on the capitals of the respective mother countries. Travelers' cheeks may be cashed practically any- where. They are self-identifying and easily nego- tiated. ]\Ir. Brown pays $.502.50 ( Vj of one per cent commission) and receives: 1. A book of checks of the denominations he r<.'qiiires. 2. A list of correspondents, hotels, etc., that will cash the checks. 3. A letter of identification, whicli he signs in our pres- ence and which is used by the correspondents for comparison with the signatures on the checks when he obtains the cash. This letter also contains the numbers and amounts of the checks. Some banks do not use a letter of identification, but require a signature of the customer to be placed on each check before issue. Thus every clieck carries 116 DOMESTIC AND FOREIGN EXCHANGE its own identification but the risk is greater tlian when the letter is used. 8 Issue of a letter of credit.— \Ve now come to the cii-cular letter of credit and give Mr. Brown: 1. The letter itself for £1.000. 2. A letter of indication bearing his signature. 3. A list of correspondents from whom nioncv may be Mr. Brown signs an agreement that any check drawn by him against the credit siiall be charged to his account at the current rate of exchange of the day when presented to us for redemption, plus a commis- sion of one per cent. If the customer is of high linan- cial standing this agreement will be sufficient, since there will always be funds in his account with which to meet the withdrawals ; if he is not of high standing, financially, cash or securities to the amount of the lia- bility must be deposited. 9. Paifment on letter of credit.—Our next visitor is Mr. Jackson, from London, England, bearing a letter of credit from one of our correspondents. He presents his letter for £500 and a letter of indication, with a request for i!lO. We see that the letter is in form in regard to dates, etc., compare it witli the sample form and signatures of our correspondent on file, and add up the indorsements to see that there is a sufficient balance to meet the proposed withdrawal Eveiything being in order we — 1. Carefully indorse on the back of the letter the date and amount withdrawn and sign our own name. A DAY IN AX EXCHANGE BOX 117 2. We fill in a sterling draft, which Mr. Jackson signs, for the amount, in strict accordance with the instructions contained in the body of the letter of credit. 3. We then pay Mr. Jackson the equivalent of £10 at the rate of the day, say $48.20. Letters of credit are sometimes fraudulent and great care should be taken in comparing them v.itli the original copy and signatures. In the hands of private individuals they are intended only to pro- vide funds for use in traveling from place to jjlace, and any withdrawal of an unusual proportion of the face amount should be viewed with suspicion, unless some satisfactory explanation, such as the purchase of tickets for the homeward journey, can be given. The letter-of -credit form should be attached to the final draft when the withdrawal exhausts the credit. Our customer, ^Mr. Brown, in using his letter of credit in foreign ccimtries, will be treated as Jlr. Jackson was. 10. Payment of a travelers' check.— We next have presented to us a travelers' cheek for $100. We ask for the letter of indication and request that the check be signed in our presence by the holder. After com- parison of the signature and number of the check with the letter of indication we pay the exact amount of the check, $100. By arrangement with the issuing bank, for our trouble, we are entitled to 10 cents, which we add to the check. We then forward the item for redemption as $100.10. 11. Commercial letters of credit. —Rogers and 118 DOMESTIC AND FOREIGN EXCtlANGE Barclay, tea merchants, next apply for a commercial letter of credit on London for £10,000 in favor of Williamson Brothers, Colombo, Ceylon, tea mer- chants. The first thing to determine is Rogers aiid Barclay's financial standing and business experience. It is true that any transactions against letters of credit are protected by bills of lading and insurance, but it must be remembered that there are many risivs in the import business, especially when the distance in- volved is great, in the way of shrinkage in market value, loss in weight and depreciation. If the financial standing of Rogers and Barclay is satisfactory we ask them to sign an application for a commercial letter of credit setting forth the particu- lars and terms of the shipment and giving instruc- tions in regard to insurance, etc., all of which are em- bodied in the letter of credit addressed to Williamson Brothers. This letter, with instructions, is handed to Rogers and Barclay to be forwarded, and they in re- turn give us a receipt in which is incorporated an agreement regarding the basis on wliich the bank is to be reimbursed, tlie amount of its commission (which varies according to the currency of the bills drawn) and a statement of the bank's rights in case of default in payment or other difficulties. The letter of advice is forwarded to our London correspondents, and a copy is retained for our files. It does not necessarily follow that all the money repre- sented by the letter of credit will be used at one time. There may be one shipment or more, but no matter A DAY IN AN EXCHANGE BOX 119 how many there are they must all be made within the time limit mentioned in the letter. REVIEW If you were asked to make out a draft on London, enumerate tlie various steps you would take in so doinf;. In selling French exchange explain the various operations re- quired. How would you make out a draft on Berlin ? What .'ire the advantages of travelers' checks.' What instruments are issued with a circular letter of credit.' How would yoi: proceed in paying one.' If n business house applied to you for a commercial letter of credit, what steps would you take before issuing it.' n '4 i '11 CHAPTER VIII FOREIGN EXCHANGi; AND EXPORTS 1. Interdependence of exports and imports ~l{ merchandise were the only basis of international in- debtedness the value of the exports would have to be equal to that of the imports or else trade would i)rac- tically cease. Suppose a country which does not it- self produce Kold. has an excess of imports, for which It coul.l pay only by shipping gold. To a limited ex- tent this could be done but its supply of g„Id would soon be < .hausted and the only way to replenish it would be to reduce the amount of imports below that of Its exports. Furthermore, the loss of gold from a country mduces a fall in the price of goods and a rise m the price of money, and. owing to the depletion of the bank reserves, a rise in interest follows It would, therefore, become a good country to buy fron. and a poor country to sell to. Automatically. ;xports would be stmiulated and imports checked "until the balance was reversed. In practice, however, the ex- ports of a country are not confined to merchandise but mclude other elements known as "invisible ex- ports " which offset the imports of merchandise. \ isible exports" consist of merchandise of every description, including gold: they are so called because accurate records of all goods and specie entering or 120 FOKEKiN EXCHANGE AM) EXPORTS 181 leaving a country are kept by the customs and port autliorities. Every vessel clearing? from a port must declare its cargo before leaving, and all goods enter- ing the country are exaniine is- d.le exports; the difference is adjusted hv "invisihle- exports S.ieh excess of visible imports does not necessardy place a country at a disadvantage, for in the case of the older countries ^oods are imported in payment of services (such as freight and insurance) or for mterest on forei^m investments. In the case of a young country like Canae by the fall shipments of cotton and wheat. A study of the following average quotations for the successive months of the years 1906-10 ' shows that exchange is in favor of London during the first eight months of the year and in favor of Xew York during the last four months, and for this reason there are practically few bills of this nature outstanding at the end of the year. January ^ gyg February 4.87,) ^^^a'fh 4.'8725 ;;^P"' 4.8715 *"y 4.875 J""e 4.876 July 4.872 ^"g"«* 4.8685 September 4 ggg ti^'n^r^'"'!!'* by Mr. Lawrence M. Marks, and published in "Interna- tlonaJ Trade and Exchange" hy H. G, Brown. mierna XVIT — 10 138 DOMESTIC AND FOREIGN EXCHANGE 2"^°^:; 4.8665 November ^ ggyg "''""''^'- 4.869 4. Commercial bilh of CTchangc-While. as we have seen, the movement of merchandise is not the ex- clusne factor m the commercial relations of nations which g,ve nse to transactions in foreign exchange' the> are the dommant element. The transactions wh,ch anse from them are therefore worthy of es- pecal attention. It has already been noted that in the adjustment of commercial accounts, bills of ex- change are drawn with documents attached. The chief of these documents is, of course, the bill of la- ding, to ^v^„ch the others, consular, certificate, insur- ance certificate and letter of hypothecation a;e sub- sd.ary The nature of these documents needs no detailed explanation here, as the form and purpose o most of them have been fully explained in the Modern Business Text on "Foreign Trade and Ship- ping, while the object of the letter of hypothecation has been referred to in Chapter VII, Section 3 note Ihe method of using the commercial bill of ex- change can be most conveniently explained bv means of a concrete example. Suppose a cotton merchant in Aew Orleans sells one thousand bales of cotton to a Liverpool firm against draft with documents at- tached. The merchant draws a sixty-davs draft in duplicate for the amount of the invoiced "goods, say ilO,000, and takes it. with the relative documents FOREIGN EXCHANGE AND EXPORTS m attached, to his banker in Xew Orleans, who credits him with $48,500 at the rate of the day ( $4.8.3 ) The merchant has sold his cotton, received his money and IS ready for a new transaction. The Xew Orleans bank sends the original bill and documents to its London correspondent, the dupli- cates following by the next mail. What happens in London to the bill depends upon its nature and whether the documents aie to be surrendered on pay- ment or on acceptance. ( See Chapter VI, Section 5. ) If he documents are to be delivered on acceptance, the Ml becomes a "clean" bill and can be discounted in the London discount market and the proceeds placed to the credit of the Xew Orleans bank. If the docu- ments are deliverable on payment only, acceptance of the bill IS obtained, but the document remains attached to the bill until maturity, unless the acceptor takes up the draft under a rebate of interest for the unexpired time. In the case of an "acceptance" bill, the proceeds be- come available as soon as the bill can be accepted and discounted. In the case of a "payment" bill the American banker cannot count on having the amount available until the maturity of the bill, tho prepay- ment under rebate may place the funds to his credit long before that time. If the Xew Orleans bank has no London correspondent it would sell the draft to Its Xew York correspondent, who would remit it to London in due course. All obligants on these bills re- main liable until payment. 130 DOMESTIC AND FOREIGN EXCHANGE J. Financing exports by means of dollar credits.- Every shipment of merchandise to a foreign country involves an operation in foreign exchange, but it d^es not necessarily follow that the exporter must under- stand all about foreign exchange in order to do a successful export business. Many goods are ex- ported against dollar credits opened with some Xew York bank, and the exporter has a simple dollar trans- action on his hands. Even when the credit is opened in London in pounds sterling the transaction offers no very difficult problem in exchange. There is always a risk incurred in purchasing docu- mentary exchange, unless it is supported by satisfac- tory names, and is drawn against staple and non-per- ishable merchandise. We shall consider a case in which an American exporter, say Mr. Brown, of Bal- timore, is not satisfied with the standing of his foreign customer. He is unwilling to risk a shipment against unsupported documents and advises the purchaser to arrange a credit in New York in dollars for the amount of the invoiced goods, to be paid on delivery of the bill of lading and relative documents. The buyer, say in Paris, goes to his banker, specifies the amount and the terms of the credit required, and tlie banker writes or cables to his New York corre- spondent to open a credit for so many dollars in fa\ c-r of Brown. In this credit are set forth the terms in which Brown is to be allowed to draw the money, and the various documents which are to accompany the drafts. In due course Brown is notified that the FOREIGN EXCHANGE AND EXPORTS 131 « credit has been opened. Accordingly, he draws a draft on New York and deposits it in his local bank. The draft is paid within a few days and, as far as Brown is concerned, the transaction is closed. The New York bank having paid the draft and taken over the documents forwards them, debiting its Paris correspondent who opened the credit. If the customer of the Paris bank is of high financial stand- ing the bank will probably turn over the documents to him at once, even before full payment is made. Otherwise the goods will be stored by the bank on their arrival and released when payment is received. This is purely a matter of arrangement between the Paris bank and its customer and does not concern the American exporter or banks. The Paris bank might perhaps have been unable to arrange a dollar credit on New York and so issued instead, a credit on I>on- don in pounds sterling against either time or demand drafts with documents attached. An explanation of the procedure in this connection with a history of the bill, is given in the next chapter. 6. Dollar acceptances.— Until the establishment of the Federal Reserve banks, American foreign trade had been financed chiefly thru the medium of letters of credit issued on London banks. The reason for establishing a credit in London, and thereby provid- ing an English acceptance, was no reflection on the high standing of the New York banks; it was due to provisions of the National Bank Act, which prohibit national banks from doing an acceptance business. ISS DOMESTIC AND FOREIGN EXCHANGE I urthermore. the absence of an open discount market in x\ew York was another serious obstacle in the free movement of foreign credit. This inability to finance foreign trade, except thru London, has proved a serious handicap to the United States in its exchange relations with other countries. Spain, for instance, could never settle in dollars for imports from the Lnited States because her imports from that country were paid for by credits opened in London, and these in turn had to be utilized to pay for credits opened in -London m favor of the United States Mr. Laurence ilerton Jacobs in "Bank Accep- tances ' refers to this feature as follows: ports tluu the acceptance of time bills, American importers are, then, made dependent to a lar^e extent unon T „n^ ^C^ :,STj.' r.^z-:f .ri pomts agamst shipments of goods to the United Statfs th re are consequently in such foreign countries very fw bills which can be purchased for remittance to thrUnited S atcs in pav^ent for goods which have been bought here In other words, under our present banking system our irn^ ports do not create a suppi.v of exchang! o^n nV YorT for example, which can be sold in foreign countries To those who have payments to make in New York Thirml.lfl? ! dependent upon London. It means that when they !re ship- • Publication, of the National Monetary Commission. Document m. FOREIGN EXCHANGE AND EXPORTS \Aii ping goods to South America and to the Orient thev cannot, whtn tlay are subject to competition, advantageously bill them in United States dollars. They, naturally, do not care to value their goods in local currency — that is, in the money of the country to which the goods are going — so their only alternative is to value them in francs or marks or sterling, preferably the lulter, owing to the distribution and extent of British trade, creating thruout the world, as it does under the English banking system, a fairly constant supply of and demand for exchange on London. When we come to bill our goods in sterling, however, it is at once seen that our exporters are obliged to take a risk of exchange, which is a serious handicap when competing with British exporters. Our exporters who arc to receive payment for their goods in sterling must previously decide on what rate of exchange will make the transaction profitable. If, in an effort to safe- guard themselves against a loss in exchange, thev calculate on too low a rate for the ultimate conversion of their sterling into dollars, their prices become unfavorable compared to those made by British exporters and they lose the business. If they do not calculate on a sufficiently low rate they get the business but lose money on the transaction thru a loss in exchange. Under the Federal Reserve Act, however, national banks are now permitted to accept drafts based on the importation or exportation of merchandise and the Federal Reserve banks stand prepared to dis- count satisfactory paper created by this class of busi- ness. Under these conditions, the Paris bank, re- ferred to in the preceding section, could have issued a letter of credit instructing its New York correspond- ent to accept Brown's sixty or ninety-day bill against delivery of the documents, which bill after acceptance could be discounted by Brown's bank or its New 134 DOMESTIC AND FOREIGN EkcHAXGE York correspondent in one of the Federal Reserve banks. In other words, the procedure would have been exactly the same as in the London case, except that the New York and not the London discoujit market would have carried the bill until maturity. The Federal Reserve Act has provided the ma- chinery and it remains to be seen whether the oppor- tunity will be freely availed of by the international financial world. It is too soon to express any defi- nite opinion as to the ultimate success New York will attain as an international acceptance market. Noth- ing is more sensitive to restrictive conditions than international credit— it must ebb and flow freely or go elsewhere. Paternalistic in all things concerning banking and finance, the United States has already surrounded this concession to modem requirements with restrictions and definitions that tend to hamper that freedom of operation which is so essential in an international money market. 7. E.rport letters of credit.— In some countries where banking facilities are undeveloped, it may be difficult for the foreign customer to obtain a letter of credit on New York or London, or even to make a dollar remittance. In financing the exports to such countries, a different system is necessary in order that the Amt..can exporter can obtain his money without awaiting remittance from abroad. This system is effected thru what are known as "export letters of credit," which are issued by an American banker without the intervention of a' foreign bank. The FOKKUJN KXt JIANGE ANU KXI'OUTS 133 general nature of letters of credit has been explained in the chapter on Bills of Exchange. Their service in financing exports can be best understood by a con- crete example. Williams, of Chicago, sells a ship- ment of machinery to a firm in Honduras where there are no direct exchange facilities with \ew York and it would be very difficult for the Honduras mer- chant to purchase a draft on Xew York. Under these circumstances Williams, not wishing to wait until a remittance is forthcoming, goes to his banker with ip'oices, bills of lading and other documents and asks him for an "export letter of credit." The ship- ment, we will say, is worth $10,000 and against this the Chicago bank gives Williams a letter of credit authorizing him to draw at ninety days against its London correspondent for£l,800, or about ninety per cent of the amount of the invoice. This draft on London for £l,800 Williams sells in the exchange market in Xew York or Chicago (the letter of credit being his authorization) ; he receives dollars therefor at the current rate of exchange for ninety-days bills and obtains the bulk of his money. The documents are forwarded by the Chicago bank to its correspond- ent in Honduras which collects the whole amount, $10,000. This is then remitted in pounds sterling to London to the credit of the Chicago banker. "Before the ninety-days draft, originally drawn, matures, there will have been received in London more than sufficient funds to retire it, and neither the Chicago bank nor its London correspondent have had to dis- m. fiJ — r» 'fJI 136 DOMESTIC AND FOREIGN EXCHANGE burse any money. The difference between the amount of the draft, £l,800, and the remittance from Honduras, less any charges, is paid to Williams by the Chicago banker and the transaction is closed. As an alternative, the Chicago bank itself could have drawn the draft on its London correspondent for £1,800 and turned over to the exporter the dollar proceeds. By this method a better rate would l)e obtained for the draft and the exporter is saved the trouble of an exchange transaction. London has direct relations with almost everv part of the world and thus becomes the natural clearing house between countries whose exchange transactions with each other are limited. REVIEW What are visible exports; invisible exports? Of what does trade between two countries consist? What are the principal methods used by a country to adjust an excess of imports over exports ? \\hat is done when these methods fail > Oive an example of the way in which flie commercial bill of ex- change is used. How does an American exporter proceed when he is unwilling wJu .V ?'"'"* "^ S"*"^' "K"'"'* unsupported documents? What disadvantage has the use of letters of credit on London caused the American merchaiit engaged in foreign trnde? What provision has been made under the Federal Reserve Act as a rem- edy for this situation? I CHAPTER IX iv: i FOrF.IGX EXCHANGE AND I.\fPORTS 1. Commercial letters of credit and importing.— Altho merchants importing goods into a country can settle for them direct either by remitting or by accept- ing a (Iraft drawn by the foreign merchant, these methods are now seldom followed except in the case of minor transactions. The employment of letters of credit as a medium of settlement for imported goods offers greater advantages than any other method of pajment, to both the exporter and importer. In America, import credits are much more import- ant than export credits and are issued in much larger volume. Commercial letters of credit are of ad- vantage to the importer of merchandise because they enable him to buy goods on a cash basis in any part of the world, tho the actual payment is deferred sixty or ninety days, giving him a chance to dispose of the goods in the meanwhile. They insure for him ship- ment of goods within a stipulated time, exactly as described in the credit. He is also able to order, in advance, goods to be manufactured according to his specifications and requirements without prepayment of any sort, the letter of credit being sufficient se- curity for the exporter. The majority of the letters of credit have hitherto been issued on London, but 137 138 DOMESTIC AND FOREIGN EXCHANGE the recent war and the Federal Reserve Act have brought dollar credits issued on New York into more general use, especially for South American business. The acceptance and discounting of international bills are such new departures for the Xew York banks that It IS too early to consider them as fully estab- lished conditions. For the purposes of illustration we will therefore follow the history of a credit es- tablished in London. 2. British acceptances under letters of credit.— The enormous credits accorded by London to bankers and merchants thruout the world generally take one of two forms— acceptances granted under letters of credit, or finance bills. The following illustration will show the operation of an acceptance under a letter of credit. When a merchant in Holland, France, the United States or any other country wishes to buy goods in any other part of the globe, he generally obtains a credit thru a London banker direct or thru a banker in his own country. In the latter case, he instructs the foreign merchant from whom he purchases goods to draw on the London banker at so many months, sight. Take the case of a tea merchant in Xew York, Mr. Brown, who negotiates with Napier & Company,' tea growers in Ceylon, for a consignment of tea. Napier & Company probably know little or nothing about the financial standing of Brown, and even if it were excellent, would not be willing or able to await a remittance from New York for the shipment. Na- FOREIGN EXCILAXGE AND IMPORTS 139 pier therefore asks Brown to arrange for a credit on London in his favor for the amount of the invoice, say £1,000. Brown goes to his baniiers, the Banic of New York, and requests tiiein to open up a credit in London in favor of Napier & Company against ninety-days bills with documents attached. The Bank of New York instructs Parr's Bank, their Lon- don correspondent, accordingly, and Brown is fur- nished with a letter of advice to send to Napier & Company staling that the credit has been opened in London on the terms set forth. On receipt of the letter, Napier & Company fill the order and place the tt.i on shipboard, receiving a bill of lading there- for. Napier tben draws a draft at ninety days, sight, for £1,000 and attaching the bill of lading, insurance policy, invoice, etc., thereto, takes it to his banker, the Bank of Madras, Colombo, who purchases the bill from him at the current rate of the day on Lon- don. Thus Napier & Company obtain their money immediately. The Bank of Madras forwards the draft and documents to its correspondents in Lon- flon, the Bank of Commerce, who present it to Parr's Bank without delay. The latter accept it, but retain the bill of lading and other documents. These they iorward to the Bank of New York, which is thus en- abled to obtain possession of the tea when it arrives and either store it for their customer Brown, on ac- count, or deliver it to him on a trust receipt until he finally pays for it. 8. History of the draft in London.— To return to II m 140 DOMESTIC AXD FOREIGN EXCHANGE the draft— this is now an accepted b;U with first-class names on it and has an international currency. It is salable in any country in the world, because every country finds it necessarj- to remit constantly to Lon- don and every foreign bank has a London office or correspondent. The bill can be held until maturity and the pro- ceeds can then be placed to the credit of the Bank of Madras, but the more usual course is for the latter bank to instruct its London agent, the Bank of Com- merce, to discount the bill in the open market and place the proceeds to its credit, or the bill may be remitted by the agent to another foreign center to settle some account there. In either case, the bill re- turns to London at its maturity and is paid to the holder on that date by Parr's Bank, tho in the mean- time, it may have been bought and sold several times and have passed thru half a dozen hands. Parr's Bank depends on the Bank of Xew York to provide funds to meet the bill at maturity and would not have issued the credit imless it had had confidence in the Bank of Xew York. The Bank of New York in its turn has confidence in its customer's ability to reimburse it and of course it insures that he provides the necessary funds for transmission to Lon- don in time to discharge the obligation. 4. Pomtion of the obligants on the bill— To sum up the results of the transaction: 1. Brown, the actual debtor, had the use of £1,000 for three months and yet he himself would probably have some FOREIGN EXCHANGE AND IMPORTS 141 difficulty in naming liis actual creditor at any particular moment. 2. Napier & Company in Colombo received their money »s soon as the tea was delivered on shipboard, tho as drawers )f the bill, tlicy remain obligants until payment. 3. The Bank of Madras bought the bill from Napier & Company and were only out of its money until the bill had reached London, was accepted, discounted and i)laced to the hank's credit. It, however, remains liable as indorscr of the bill until its payment. 4. The Bank of Commerce advanced no money. They acted only as agents of the Bank of Madras in "obtainin(5 acceptance of the bill, selling it in tlie discount .iiarket and crediting the proceeds; therefore their name does net appear on the bill. For their services they receive a com- mission, 5. Parr's Bank is primarily liable on the bill as acceptor but as the Bank of New York must provide tlie funds for paj-ment it advances no money on the transaction. It merely makes a small commission for the use of its name. The above are all interested, directly or indirectly in the bill but not one of them, with the exception of the Bank of ^Madras, has advanced a single cent. The question still remains, "Who paid for the tea during the three months' currency of the billf The answer is "Those firms which discounted and purchased the bill in the open discount market of London." 5. The part London plai/s. — In much the same way, merchants in every country in the world have been accustomed to arrange credits in London for every other country in the world and for every con- ceivable class of goods. On the outbreak of war, it was estimated by Mr. Lloyd George that British i m I I 142 DOMESTIC AND FOREIGN EXCHANGE banks and accepting houses were liable for over £350,000,000 of these acceptances, the greater part of which had been discounted on the London market. Altho British signatures were primarily liable for this huge amount, it was not really for their own account, for they looked to those en whose behalf they had ac- cepted the bills, to provide the funds. The unprece- dented demand for sterling exchange at the begin- ning of the war was due to the attempt on the part of foreign obligants to provide funds for the maturing liabilities incurred by the British banks for their ac- count, and under their instructions. Exchange rates on London the world over rose far above the gold point. If Great Britain had insisted on these debts, it would have been impossible to obtain the necessary sterling funds except at a most ruinous figure. Even if the English banks could have met the acceptances as they matured out of their own funds, disgrace if not ruin would have befallen a number of the foreign banks. It was to protect this vicarious liability of the English banks that a moratorium was proclaimed and there is no doubt that this wise step saved the neutral countries, indebted to London, both financial loss and worry. Mr. Lloyd George in referring to this class of note says: There was that amount of paper out with British signa- tures at that time. Most of that had been discounted. The cash had been found by British sources, and the faihirc was not due to the fact that Great Britain had not paid her creditors abroad. It was due entirely to the fact that those FOREIGN EXCHANGE AND IMPORTS 143 ■cry abroad did not pay Great Britain. I think that it ... . important from the point of view of British credit, to h„.v: that thoroly understood, for when the "moratorium" came, and there ai)peared something liiie a failure of British credit, it was not a British failure at all. It was because we could not get remittances from other countries. We had already paid, but it was vital to the credit and good name of this country that these bits of paper, which are circulated thru- out the globe, with British names upon them, with names that have been associated with British trade and commerce it was vital to the good name and credit of this country, to its continuity of trade and its character, that they should not be dishonored. What really happened was that there was a complete cessation of credit, a breakdown of the exchanges. It was exactly as if a shell had broken an arch m an aqueduct, and there was a cessation of the flow that had been going on before, and what we had to do was tem- porarily to repair the arch so that the flow should continue. Acceptances uiwler "letters of credit" are not of course confined to London; they are drawn on other large financial centers such as Paris and Xew York, but owing to the special facilities afforded by London the bulk of these credits were, before the war, drawn in sterling. REVIEW Of what advantage to the importer are commercial letters of credit ? Give an example of how British acceptances under letters of credit operate. How did the outbreak of the war affect London credits.' 1 XVTT— 11 , IS Mi CHAPTER X FINANCE BILLS 1. Definition of a finance bill. — A long bill of ex- change drawn by a banker or financial bouse in one country on a banker in anotber against securities in the bands of the latter is generally called a "finance bill." The privilege of drawing such bills enables bankers to anticipate a change in the rate of exchange and also to tide over a period of high exchange which otherwise would necessitate a shipment of gold. When properly used it is an important factor in in- ternational exchange and serves not only as a cheap and efficient corrective to high rate, but aids in the development of the production and trade of the world by rendering credit more fluid and leveling money rates. There is a wide diversity in the definitions which are given of a finance bill. Franklin Escher defines it as "an unsecured long bill of exchange drawn by a banker in one country on a banker in another coun- try and sold for the purpose of raising money." Other authorities are inclined to include all long bills originating between bankers, whether secured or not. The latter is perhaps the more general understanding of the term and I would suggest the following defi- nition as comprehensive: 144 FINANCE BILLS 145 A finance bill is a long bill of exchange, secured or other- wise drawn by a banker in one country on a banker in another, the funds for the payment of which at nmhirity must be provided by the drawer. When a Xew York banker has a satisfaeton- draw- ing arrangement with his London correspondents he is more or less independent of market conditions, and even if there is a scarcity of commercial bills on the market, he is in a position to create a supply of bills at a stated price. He is reasonably sure that he will be able to buy exchange at a lower figure to meet his obligations before their maturity, as a high rate of exchange brings out a large supply of finance bills resulting in a lowering of the rate. Mr. Gec^rge Clare in his book on "Foreign Exchange" says, "The bidding need only be raised a centime or two to tap an almost inexhaustible source of supply— that of bankers' drafts." In other words, if the remitter cannot obtain a ready-made bill, he need only pay a little more and have one made to order. 2. Finance bill for New York account.— The most common occasion for the use of finance bills is to an- ticipate a fall in the exchange rates. For instance, under normal conditions, during the summer months, the rate of exchange for sterling is generally high in New York. It drops gradually until the fall, when large shipments of cotton and wheat result in hea\-y offerings of sterling exchange. Before draw- ing a finance bill, it is necessary for the New York banker to make arrangements with the accepting •fe-i 146 DOMESTIC AND FOREIGN EXCHANGE bank in London as to the amount, terms, etc., of the accommodations. Such arrangements are general, applying to a series of transactions, or specific, apply- ing to a single transaction only. Suppose the rate at the end of August is 4.88 for demand bills, and a banker. A, desirous of anticipating the probable drop in exchange in the fall, arranges with his London correspondent, B, against securities deposited with him, for a credit of £10,000 by way of a sixty-days draft on London. A immediately draws a draft on B at sixty days for £10,000, which he can either (1) sell in New York at the sixty-days rate for bills or else (2) send to London to be discounted and placed to his credit there, and then sell his own sight drafts against this credit. In either case, he will have the use of the proceeds in New York until the maturity of the bill, when he must be prepared to place funds with B to meet it. 3. Method of using finance bills. — It will be noticed that B does not advance any money ; he simply lends his name to A and the London discount market pro- vides the funds. The advantages and disadvantages of this procedure may be summed up in illustrations: 1. A will sell his sixty-days bill in New York if he can obtain $4.8523 per pound sterling or better. This rate is arrived at as follows: Demand rate for Rterlin^r 488. »Less, 63 days' Interest at 3% (heing the London mar- ket rate for prime bankers' bills) 2,.537 • Prior to the war, interest and stamps used to he ralriilated on the basis of $48i to the £100, hut owinjt to llie wiilt fluctuation they arc now frequently calculated on the actual rate itself. [ FINANCE BILLS 1^7 Stamps iio of 1% ^^^ ^..| IVr £100 ^^~ orW.8W:tp<.i pounil sterling.' *8i.3.'9 ■I hr sixty-days bills for i: 10.000 shou Id tlierefore net him MSAn 90 * 343.t9 '^"ZXL^lwo,Sl^^"l i!^";""' ^ P"''"-"^^' » demand*"-*'" •" draft for £10,000 which he forwards to London to provide for the payment of the hill. By this time exehai" i«s fallen as he anticipated and is now at 4.8j, so that he is able to buy the covering draft for '. . . . ... . .'. .'' 4^.400 Of. ^'' Dr.°?!b/v"T„f"l'^'l 7""*^ *", "^"'"••♦^d »•» commission of " priMiably 1^ of 1%) is therefore ^ aflti 39 There is, of course, the risk that exchange might not fall at the end of October as anticipated, or that the interest rates in New York might not be maintained above 3 per cent. 2. If A sent the sixty-da.v bill to London and immedi- ately sold a demand draft against the remittance, the trans- action would work out as follows : Amount of 60-days draft £innoo(*i Less interest at 3% £., -a, ^"'•<'<»count, in which case both the ri'rlv wid tl. profit are shared. 6. Other u»e» of finance bllla. — Finance ' lU, brili secured and unsecured, may be drawn reg.iidi' ^ «i the conditions of interest or exchange, purely 'i r 11 <■ sake of raising money. As a rule, finance bills li;r. r a reasonable excuse for their existence. It may be objected that this is a way of getting money which might be easily abused, but in practice this does not happen. The London market is, at all times, uncan- nily in touch with the position of both the drawer and acceptor and any attempt on the part of either to issue this class of bill beyond what he is legitimately entitled to on the basis of his business or financial standing, is promptly nipped in the bud, first, by demanding higher rates and finally, by refusing to take the paper. Either action is, of course, detrimental to the credit of the party concerned, and bankers and others who operate in finance bills are most careful to leave a large margin for safety in their use of the very sensitive dis- count market. It is plain from the above explana- tions that when many of these finance bills are drawn on liondon they will have a tendency to lower the rate of exchange by increasing the supply of sterling bills on the market. In the above illustrations, London and New York alone have been referred to; finance bills, of course, obtain between other countries but to a much less de- gree. FrN'ANCE BILLS 151 7. Forward fJcAanflrp.— Operations in "forward ex- change" have several points in common with finance hills; both anticipate fluctuations in the rate of ex- change and lM)th involve a large clement of risk. In its simpler and more commercial form, forward ex- change or "futures," as it is sometimes called, is a term used to express the l)ii.\ itig or soiling of foreign ex- change for future df iivory. 1 or i-istance, in July, a manufacturer in Cun.ida acc'.'pt , an order for goods to he manufactured aiuJ sliipi ed i» 5 nwland before Oc- tober 13th. Knowing lif.m e.yperitnce that a change in the rate of exchange in ( Atoher might make serious inroads into his profits, he asks his bank to quote him a rate for the amount of his shipment, and contracts to deliver the bills of exchange to the bank in Octol)e.-. In this way the rate is definitely fixed, and the li .k ?•; a falling rate is eliminated. The bank can protect itself in two ways; by >.t i;in,4 its own bills to fall due in October in London, ».r hy selling London exchange for future delivery. Ac f;!i as the obligation is corcerned both cases amount to tiie same thing, except that in the latter no money trans- action is involved. The decision of the bank is gov- erned by the rate of interest obtaining in London in July. It is obvious that dealing in forward exchange is not necessarily based on an Hctual prospective trans- action. Franklin Escher, in his book, "The Elements of Foreign Exchange," in reference to the making of money in dealing in "futures," says: 158 DOMESTIC AND FOREIGN EXCHANGE I As a means of making — or of losing — ^moncy, in the foreign exchange business, dealing in contracts for the future deliv- ery of exchange has, perhaps, no equal. And yet trading in futures is by no means necessarily speculation. There are at least two broad classes of legitimate operation in which the buying and selling of contracts of exchange for future delivery plays a vital part. Take the case of a banker who lias bought and remitted to his foreign correspondent a miscellaneous lot of foreign exchange made up to the extent of one-half, perhaps, of commercial long bills with doruments deliverable only on "payment" of the draft. That means that if the whole batch of exchange amounted to £50,000, £25,000 of it might not become an available balance on the other side for a good while after it had arrived there — not until the parties on whom the "payment" bills were drawn chose to pay them off under rebate. The exchange rate, in the meantime, might do almost anything, and the remitting banker might, at the end of thirty or forty-five days, find himself with a balance abroad on which he could sell his checks only at very low rates. To protect himself in such a case the banker would, at the time he sent over the commercial exchange, sell his own demand drafts for future delivery. Suppose that he had sent over $25,000 of commercial "payment" bills. Unable to tell exactly when the proceeds would become available, the banker buying the bills would, nevertheless, presumably have had experience with bills of the same name before, and would be able to form a pretty accurate estimate as to when the drawees would be likely to "take them up" under rebate. It would be reasonably safe, for instance, for the banker to sell futures as follows; £5.000 deliverable in fif- teen days, £10,000 deliverable in thirty days, £10,000 de- liverable in forty-five to sixty days. Such drafts on bein^' presented could in all probability be taken care of out of the prepayments on the commercial bills. By figuring with judgment, foreign exchange bankers arc often able to make substantial profits on operations of this FINANCE BILLS kind. An exchange broke 153 r comes in and offers a banker here that heW,j,r-hir:«.;'S'^::.^^,^'':^'^^«nd. time the commerciai drafts are ant tn hi L / " . ^^^ at a price which means a gooVS t pr^fit"^" Th^ ■" "''.**^' ties up capital it is fr„„ k t • P^°\'^- ^"e operation Not i^r4^J;'^:i^z^^:^,^i^'^^ ^'t bought at such a price anrl h,nT ^i, *" ''* '^"n ^ them at such a pr ce thatlher " i 1 ^"»"-%-'' against be made. ' '" " 'Substantial profit to agSt^ititt!:^":"'''::^'?^ f- -' '"*"''^"' ^"*"-. not against exporters' uturesFn'T'^'T' ""'''""^^ ''"* quontly quote prices tn.,', /'"P"'"*';" "^ merchandise fre- be madeVsom"^. folowin" r;r f '''"':' f- shipment to price the exporter i^aTo^v'." T^"^^''^ ^^''^ fi^^d -:tt^\.^fz^«^oT[;--^r:^^ lard bills, 'anjVetf ihe";';;^^ Z°h*" *««^A ^^ •"' without tving UP a dnll«r / -x T',*''""' any risk and one-half centVrVoutterL:?,:'tth "T''^ ''"^ """^^ ■shipment. In Ma v thn ]»rJwu •„ ''"''^ ^"""""^ °f the 1.0 will pay forZm*'rt altfo^'4'867r;'" ^° '''"'' -'' and delivering his own draft^ainlt^S^ -" '""'"^ "'"""' t-ereTreTnt;; to°i;'"7^''^ ^^P"-" X .t^He U fo sell theh^excSgc ft ttureTr'^ *'"" s*"""^ '^'"' -"* "f the banker's "fV.tMro " \ i ''^'"ory. As to the buver 15* DOMESTIC AND FOREIGN EXCHANGE transactions. Like operations in exchange arbitrage, there is no limit to the number of kinds of business in wliich "futures" may figure. Thev are a much abused institution, but are a vital factor in modern methods of transacting foreign exchange business. HEVIEW What is a finance bill? Show, by an illustration, what arranjrements a New York banker makes with a London bank before drawing a finance bill. Give an example of how a finance bill on London account is created. How does the London market prevent either a drawer or an ac- acceptor of finance bills from issuing them beyond the amount to which they are legitimately entitled .' Describe an operation ia forward exchange. CHAPTER XI ARBITRAGE tune called, .ndirect exchange, is a term applied to .nytransaefon which takes advantage of differences of pnces for the same article in different n.arkets. Arbitrage js thus defined in the Centun- Dictionarv: The calculation of the relative value, at the same time at two or more places of stocks, bonds or funds of any sort includrng exchange, with a view to taking ad- ^antage of favorable circumstances or differences in payments or other transactions." This definition should mclude gold and, in a general sense, anv otTe^ commodity. Wheat, for example, may be sent from one place where .t is relatively cheap to another where t IS relatively dear; this is arbitraging i„ wheat. ,,'fu P'"'Vr °"" .'""'^^t '"d"'^^ ^''ipnients from narkets with low pnces and this process constantly tends to equalize prices generally. 2. When arbitrage is transacted.— ArhitTase trans- actions are confined entirely to large financial centers, such as London, Xew York and Paris. The work calls for expert knowledge and a close studv of finan- cial conditions, as it is essential that the arbitrageur l^eep in daily, if not hourly, touch with his foreign 155 'I J -tti .:::M^:^Me 156 DOMESTIC AND FOREIGN EXCHANGE correspondents, in order that thej- will be prepared to carry out a transaction without delay. A recent article in the Nexv York Financier says: In conducting such operations it is essential that the banker shall be advised, thru the cable, of the varying con- ditions of the markets abroad. In such niarketsas Paris and London, where the exchange transactions are always large, rates often fluctuate sharply and conditions change frequently. Consequently, tho the situation may be favor- able one day it may suddenly become adverse, necessitating some modification of the method of arbitraging. Moreover, it frequently happens that after a successful negotiation has been effected by a banker as the result of private infor- mation, his competitors may be advised of the favorable con- ditions prevailing and they also may draw in a similar man- ner. Hence each operator seeks to obtain for himself alone all possible information regarding changes which are likely to affect his business. Sometimes a banker may find, upon calculation, that it will be profitable to conduct'arbitraging of exchange between three or more points: in such cases the conditions at each of the points must first be ascer- tained and calculations have to be made with the utmost care. Occasionally in drawing bills the banker, in onkr to take advantage of arbitraging operations, will transfer credits, thru the cable, from an adverse center to a point favorable for his purpose. Indeed there are very manv ways by which arbitraging can be profitably conducted bV bankers having the requisite facilities and the necessary skill for such operations. It will be observed thiit operations in arbitraging of exchange require the services of men of the largest experience, and hence the business can be con- ducted to advantage only in the most thoroly equipped offices. The exchange student who enjoys opportunities for practice in such offices and has the determination to qualify himself for this branch of exchange work by acquiring "a knowledge of all of its intricate details will" have no diffi- ARBITRAGE culty after field for qualificat operations ;ion in secu I ring bitraging of IN .„,1 -'^'.7, "■" "' "^oitragmg ot exchange is '{ "^llt^'t' ^-den-ng. and there will prfbabi 137 advancement. The continu- ays I. a de„.a„d fc/r the servi^^ ;f';:„ c^^^/^^'T^;';;:^ t.ons as managers of exchange houses or departments* ^ 3 P«n7//.-A parih- is the price at which a bill hould be quoted in order to co.npare it with the quo- tations for similar bills elsewhere. To make thU com- panson it is of course necessary to express every quo- tation ,n a common form. Care must also be taken to bnnff quotations for lon^. bills to a demand basis, by allowing for stamps and interest. If the New York parity on Paris is .5.1895 as agamst the actual rate of 5.16% in New York for Paris checks, an opportunity for arbitrage profit of 2.07 centimes per dollar is offered. On $100 this amounts to 40 cents, and on $48,754.56 to $195. Bankers who engage in arbitrage transactions gen- erally construct a parity fable for ready reference be- tween the more important exchanges. The following IS an e.xample of such a tabic, showing parities in dol lars francs and sovereigns. Similar tables may be made for sterling, „,arks and dollars, for francs, marks and dollars, etc. £1 = *4.S5 4.8514 4.8Sl| 4.85% 25.-'0 $1 4.1959 5.193.' 5.1905 5.1879 2J.-JI $1 5.1979 5.1953 5.ig:?6 5.1900 25.23 *l 5.J0 5.1973 5.1947 5.19^0 25.23 *1 5.1994 5.19(i7 5.1910 25.24 «1 5.2041 5.2014 5.1988 5.i9i;i 25 25 $1 5.2063 5.2035 5 ,'008 When the New York quotation for sterling is $4 85 and the London quotation for francs 25.20, the Xew 4 r ■^-.■t^S^mMSM^^AT: ■ 158 DOMESTIC AND FOREIGN EXCHANGE York parity quotation for francs is 5.1959; if the mar- ket rate differs from this there is an opportunity for arbitrage. Conversely, given the two franc quota- tions, the table shows the parity of the pound sterling in New York, or, given the sterling and franc rate in New York, the table shows the parity quotation of francs in London. Intermediate rates can be arrived at by interpolation. For instance, in the example given in Section 6, the sterling rate is 4.8560, the nearest quotation in the table is for 4.8550— a quarter cent making a difference of .0026 centime (5.1905 — 5.1879) in the quotation. Therefore, -i|- X .0026 = .0010 centime deducted from 5.1905 = 5.1895. The table is calculated by divid- ing the value of the sovereign in francs by its value in dollars, thus ~^ = 5.1895. 4. Parity in stocks.— Parity, when applied to a stock, means the price which is its equivalent when quoted in a different market. For instance, the Lon- don price of a stock exceeds the New York price of the same stock by about 2/{> or 3 per cent, after the exchange rate and the London method of quot- ing American stocks ($5 to the pound) are taken into consideration. With a cable rate of 4.87'/i the London parity of New York stock at 68 would be 69.75. N Y naritv _ ^""'^"" P"'''ty X rate of exch. London parity New York p urifri- X i fift X i Kate uf exchange 5=68. = 69.74. A ARBITKAGE 15» In commodities, the prices at two different centers are at parity when the difference represents only the actual cost of transportation, insurance and interest 5. Chain rule.— Most of the calculations in arbi- trage transactions can be put in the form of simple wiuations, and require only correct reasoning for their solution. A quick tho mechanical method of calcu- lation IS called the chain rule. It consists of arrang- ing the terms of the exchange of the various currencies under consideration, in such a manner that the re- quired equivalent, or paritj-. is easilv obtained. A study of the following example will make the method clear: Berlin check rate on New York i, 9.5 cents per 4 marks, Ucrlin check rate on London is 20.5 Miark.s per £1, i-UKi the parity of tlie sovereign in .\ew York. How many x = b .$x = £1 '{ ^ = <; £1 = 20..5 murks and c = d Mks. 400 = $95 and d = 10 X ^ 1 X ill.-, X 9.5 ^ , "" = -^Vlm- = «4.86875 The last term is always in the same currency as the unknown quantity, or first term. It will be noted that these equations are arranged in such a manner that the -lenommations are in .sequence like the links of a chain- licnce the name. The value of the unknown quantity ( X) IS then taken as equal to a fraction, the quantities on the right-hand side forming the numerator, an IM.-'T+X 11 X 10 ^- ' 1XK'XJ 3I5 — =$4.86656 6. Simple arbitrage.— The rate of exchange be- tween two or more places corresponds or tends to cor- respond. In a preceding section it was shown how exchange rate between two places is almost auto- matically adjusted. Similar influences in the form of arbitrage are brought into operation to synchronize the exchange rates the world over. There is thus a certain sympathy or relation between all foreign ex- change (juotations. The quotations in Xew Vork for exchange on Berlin or Paris are largely influenced by the price of sterling exchange. If ihc price of marks in \ew York should fall to a point where there would be a profit in an arbitrage transaction, the de- mand for drafts on Berlin, by those who wisli to make this profit, would almo.st immediately force the mark quotation up again. Similarly New York, while a debtor to England with consequent high sterling rates, may be the creditor of France or other countries in Europe, and drafts on these countries are remitted to AHBITKAGE jgj London and thus ten,! to improve (i.e.. lower) the rate of sterhn« exchange. When only three places are involved, the transaction is called simple arbi- trage. '■ To give a concrete case of simple arbitrage: Sup- London check rate in New York. . . ..$4,8560 rxr £ Pans clieck r«tc in .\e« York Ls Tu'n.r « T-ar. check rate in London fc .5^;e^l '^ A brief calculation or a glance at his table of pari- ties shows that there i.s a„ opportunity for a profit- able arbitrage in francs between London and New .}-TL ^'^^'f^'' «-"^ « draft on Paris for Fes. 2o2,000 at .,.10'/s and with the proceeds buys a draft or £10.000 at 4.8500 per £, at the same time cabling his Lon^- 2-52.000 in Lone the elK.aptst method of innitting to London, but the dearest return (remittin^f from London to \e»- York) eon- ^erscIy the highest parity, is Uie dearest renuttanc. and tlie ' lieapest return: ^"'■•""■^ = r«lrulati<.n : 1^ |>rlc- of £| A I(iTll» rh«I< |„ NVw York. $\ - fi , i»-.k '''*''' Mk. t^fl.', cenls 1=1). \lk Berlin check in London, ♦- lli ' £I = Mk. ».5 ~ ^ '^"'i'^ = MltJ." '" "•■^""' .,.^ = T'y: k ■**•""" 30 ao o-tits per kronen *X = jtl ■"•"'!».» Vienna chc-ck rate on I.oti- fIO=r iK( |7i/, dcin, i40.1T14 kronen ,.er I = iO.io oentc. I l^ndon 6()-dH.v., draft in m.Hi plus .o...-,i '* ^ " New York, »*.M («;, .lays' interest '1-; , and stamps JKin UMIli ° ^'s, - ? '*'7t}" '■""'' SxTfl^dic^k '• — res. i.iei^ 1=252 fc'.i Paris check In London, ,, i,,). _,,' H P.rh. check in New York, s^ = f.^^iiU *^ «"* ** ^^ ecs. J.i j^i I zr >■ > f 1 L Paris cheek in London, .5 l.Sfi'i — «i' £1 = Fes. i6M X - Umr2 ,^.8872 A study of the above calculations shows that the cheape.st method of remittance would be thru Berlin- a pound sterling costing $4.8687. The transfer could MICROCOPY RES01UTK3N TEST CHART lANSI and ISO TEST CHART No. 2) _^ APPLIED INA^GE Inc ^E"- '653 East Main Street ^'.S Rochester, New York 14609 USA "-^ {"6) *e2 - 0300 - Phone ^S ^"^) ^88- 5989 - Fo. '^'pm' 161 IIU.MESTIC AND FOKKIGN EXCHANGE he made either by forwarding to London a check on IJerlin or by instructing the Berhn correspondent to (h'aw on New York in favor of London. Tlie ster- ling e(juivalent of $100,000 on this basis would be £20,539:3:0. Tiie dearest method of remittance is via Paris, the difference between the Paris and the Berlin rates be- ing 1.8,5 cents per £, or $375 on a transfer of $100,000. The sterling ecjuivalent of $100,000 on this basis would be £20,401 :0 :0. It siiould be noted that as the Paris method of remittance is the dearest, it is the cheapest return and would tlicrel'ore be selected for the trans''- fer of money from London to New York. 8. Arbitraye in gold. — Arbitrage transactions in gold and silver are of a great variety but they are all founded on the idea of sending bullion to some point wliere it can be used to buy exchange cheaply on some other point. The one best known of these is the so- called "triangular operation," in which gold is shipped to Paris or some other European market for tiie pur- pose of buying exchange on London. The process is as follows: Tl;c '^old is shipped to P uis, and exchange an I^ondon is liiere purchased with the proceeds. This exchange is remitted to London for tiie credit of the American bank shipping the gold; the balance so created offsetting a demand draft drawn by tlie lattei on I>ondoii. The following are the details of an ac- tual shipment: 43.5nn ounces hnr gnlrt flSS fine at fe0.56M ¥997.567 Fri-iL'llt, 1 's per cent SI .MT InslirillUT. tV. crnts piT $100 ♦M AUBITUAGE l(j5 Assay ofBrp charge, I cenU [kt $100. . e,,^ interest (i .l,,y, ,a J ,,rr .l-nt r'^, Ciirtafii.- iiiul paiki'iir Cum. in I'arii ''" ^JU $ 2.740 Hank of IVanri- huys pold .99,5 fine at fcs Migsi , •, *''"''"''l'' (= 10(;.:iToi ,ran<; p.r tr„v „ume) ' ''" ■"'" R-s 5,1,;n9„9 at .'.5.10 ^i.M *'"'''"' i.'Uj^JO ut i.bOIO zz ?l,onn,:u.' Profit ^ Jj^ The f,.ll«wi„cr are ecrulitions u.i.ler which there is IJi-acticaiiy no profit or loss: Xew York Exchange on London 4.8O70 1 aris Exchange on London 25.10 Money in Xew York . .., ■^ /» RKVIEW What is arbitrage, and what may it include.' WImt req.iireme..t.s are necessary in the work of an arbitraeeur' Define a parity. Give an example. ''n arouraReur . What IS meant by parity in stocks' ,.oun7I'r, ■L';;;^'"'^'^'' ''" '"«"™- ■«■'-- -pie and com- What is tlie essential idea in gold arbitrage? ■v! CHAPTER XII BATES OF INTEREST 1. Interest an important factor in exchange quota- tions. — The rate of interest at which the difference be- tween long and short bills is calculated is based on thf prevailing rate of the country on which the bill is drawn. This would not materially affect the situation if the rates of interest were uniform all over the world. but rates of interest in different financial centers vary considerably and these differences have an important bearing on exchange. Under normal conditions, in- ternational money and credit circulate most freely in the most attractive channels, and a rise in the interest rate in a foreign money market will accelerate the flow of outside capital to that point, while a fall in the rate of interest will retard it. So, while demand and sup- ply govern rates of exchange, the rates of interest at home and abroad react on these influences and affect demand and supply. Their combined effect causes the rates of exchange to fluctuate from day to day and thus the floating capital of the world is attracted from one center to another. 2. Long bills. — When we say that exchange rates between two countries usually fluctuate between the specie points, we refer only to the rate for demand or 166 KATES OF INTKRKST jg^ siffht bills. This is sometimes called the pure rate of exchange as it involves no time element except that required for the actual transmission of the draft Assuming that the rate at \ew York for a sight bill ..r check on London is 4.8725 how would the value of ;t sixty -days sight bill be ascertained? As pavment ". the atter case is deferred for sixty-three dafs (00 -ays + 3 days grace) it will be worth less ihan a e computed from the demand rate. 3. Bank rate.~In London, the bank rate is the ■n.nimum rate at which the Bank of England will dis- count prime three months' bills or advance money against approved securities. This rate has a direct 168 DOMKSTIC AM) FOUKKiN I'ACllANGK relation to the foreifjii exchanffe rate and ilie inove- nicnt off"()l(l. ^\n increase in tiie rate raises tiie value of money and attracts ^old from foreign centers; the lowerinjf of the rate tends to lower tiie value of money and causes its withdrawal. The Hanl< of KnjfJaiul sometimes insures the effectiveness of the rate l)y hor- rowin^- money ii" the open market, tiuis denudiiifj it of supplies. Tlie Bank of En<>lan(i is f>()verned in its action in raising or lowerinj^ tile rate by the relation which its reserve of gold bears to its deposits. This proportion is seldom allowed to fall below 30 jier cent, while it sometimes rises above .50 per cent, the average normal condition being about 43 per cent. The im- ' portanee of keeping the gold reserve intact is ap- preciated and it is most important to the country, as the Bank of England is primarily a bankers' bank and in a great measure controls the gold reserve of all the British banks. In Paris, the bank rate is that fixed by the Bank of France, in Berlin that of the Imperial Bank. In Xew York, the bank rate is the uniform rate of the banks as distinguished from the varying rates of the other icnders. 4>. Market rate. — The market rate of discount, also known as the open market rate or private rate, in contradistinction to the official or bank rate, is the rate charged by bankers, bill brokers and others discount- ing bills of exchange. Because of competition it is usually a little lower than the bank rate, but as a rule follows the latter very closely. R- '•:.S OF INTKKKST ic,>) Clean bills drawn up,.n bankers are discounted at t be ,,^^ ate rate, wbile tb,.se ,lra« n u,k.„ Hrn.s in .ro.xl s arubn- are generally dise,.,inted at about U per eent alKive tlie i)rivate rate. Tbe Hank of Kn-ian.i rate governs the rate of ir.- erest paid on deposits by the London joint stoek 'a.iks. h,s rate is generally ll, j,er eent l)elow the Jiank ot Kngland rate. .5. lictirvmcit ratc.~ln eases where bills have 'locuments attached, with instruetions to aeeept pav- ".ent under a rebate of !. per eer.t above the rate .".f mte est allowed on deposits by joint stoek banks," if l.e bank rate were 4 per eent the .leposit rate would be Zr, per eent and the rebate rate three per eeM lh.s ,s known as the "retiren.ent" rate, and the bill is iia.d to be taken up "under relmte" in order that the drawer n.ay obtain possession of tbe relative goods be- ore nuitunty. Sueh bills are known as D/P bills doeu. ts on payment) and are r.ot discounted oy r-nglish banks. ' 0. Importance of the Bank of England rate - Ihe movement of gold fron, one eountrv to another. ..r even the probability of sueh a n.ove.n;nt, is an im- portant laetor in detennining the rates of exchange on the countries affected. London, owing to the ex- treme sens.t.veness of the Hank of Knglarul rate'to gold movements, is particularly interested in its dis- count rate. Suppose, for instance, on account of a W sterling rate. New York commences to import gold from London. The Bank of England, seeing its ITO DOMKSTIC AND FOREIGN EXCIIANGF, stock of ^old hci'oiiiin^ too low, raises its official rate of discount, "• ' ii is tlic tcrin applied to the iniiiiiiiiiiii rate at which it will discount :ij)pro\ed hills. The London market, whose rate is usually a little lower than that of the Bank of England, will j)rol)al)ly rise in sympathy, hut if it does not do so the Hank of Enjfland, hy horrowinj^ money in the ojjcn market, will force up the rate and the effect of dear money is s(K)n apparent. The foreiher interest rate in Lon- don, will allow their l)alances to accumulate there for investment or will purchase hills on London. Brit-, ish merchants will decrease their imports and increase their exports. In this way the balance of payments gradually swings around again in favor of Great Britain. Exports of gold, therefore, cause ster- ling rates in Xew York and elsewhere to stiffen and. if the high rate is maintained sufficiently long, it will check the export and eventually induce an inflow of gold to London. Thus, the reserves of the Bank of England will again become normal and the rate Mill then be reduced. The importance of tlu Bank of England rate in controlling international exchange and gold movements cannot be overestimated, and its effects are so far reaching tha*^ monetary conditions thruout the world are directly or indirectly influenced by it. The rate is fixed by the directors of the bank on Thursday of each week and tho as few changes as possible are made, the publication of the rate is always a matter of interest to the financial world. KATi;s OF INTKHKST 17, Tl.e Bank c.f Kn^kuul is. at all times fullv .„•.■ mr^a to make advances against .atis.aX^ „ J -al. or to re.l.seouMt approved aceeptancc; at 1 -inniniun, rate of diseount. l-aeilities of thl . natiirillv f i- 1- •"-iiiiits of tins nature ti Its w itliout similar protection 7. ir/>attlu' Hank of Enyhml rate effectn -It has 'een said tliat the Kank of En^.Ian.l rate acts a '.arometer of the financial conditt.n of . Hd Tnd " the Bank of En^.land states the various resul s ^W"ch are effected as follows : 'I'lio discount rate: ovordrafK on running T l "^ '"iT"' '-''-S'^d "" '•ash , on running accounts, as debit balances are een- International Exchange" by A. W. Margraff 172 DOMESTIC AM) FOHKUiN KXCIIANC.K cralljr subject to the Bank rate, or '/:; to 1 ' ; above, acoonlinn to agreement. 5. Estiihlishes the open market diseount rate in (Ireiit Britain at wliieli jirivute hankers, London joint stock com- panies and discouTit houses will discount pap.r for loiiil or foreign account, the rate ordinarily heing from '/t to K'V" below the Hank rate. 6. Governs the "Uetirenient Kate of Discount" on docii mentary payment bills, which is the rate of interest rebatid to thi' drawee, or acceptor of a documentary payme I bill for the time from the date of retirement or prepayment to the date of maturity of the bill, this rate being W/r above the rate of interest allowed by London joint stock com- panies for short-time deposits, which rate is bastd on the Bank rate as above. 7. Affects the value of all international bills of exchangi as an advance in the Bank rate either advances the rate of exchange for a demand sterling draft in a foreign country or depreciates the worth of a long time sterling bill, as the interest rate for credit balances and the discount rate for long time paper are indirectly dependent upon the Bank rate. 8. Has the jiower of protecting the gold reserve held by the Bank of England and of checking any protracted move- ments of gold importations by foreign notions, in so much as an advance in the Bank rate adjusts the rates of foreign exchange to a point where operations of this natur " becomi unprofitable. 9. Invites and attracts the deposits of foreign banks with London correspondents as an advance in the Bank rate to a figure in excess of the earning c(i,)acity at home induces continental money lenders to seek the London market for investment of their funds. 10. Indirectly has a tendency to depress or advance the values of stocks listed on the New York Stock Exchange — an advance in the Bank rate causing a decline in stock values, and a reduction in the Bank rate usually having the opposite effect, because the values of stocks are largely UA'IKS OF I\'ii;ui;s r 173 (iopondinf upon tho niomtary comlitions ol.taininc in NW V.rk an.l ...s .V.« York Imnk.rs in ,,..ri„,|, „f .strinK.ncy no .»«vs n.s„rt ,, r.-h.v.. the .i(u..tion l.v ivM.M.^ Kin,.n.-c H. s (IraHi, upon l.nfflisl, I kiTs, tlir I},u,k of KnMan.l rate M» Mvc.lv eitl.,..- fa.il..atc. ..r i.-veludc, tL.r 7.o /tf art ion. UKVIKW Wmt effort Im, ihe int,.r..,t rat,. „„ .-xohanffe quotation,? Ulmt .s tiK- .a.>k r.f in London and «l,at r,.|.„ion l.a, it to ..■ fore.p, ex<.|,an«,. rate and .1,.. „,ov,.m,.nt of ^old? Wbat k llirl.ank rate in: I' rai.CP. Berlin, NVw Vork' » uatw n.sous., the market rate of di^^count: the retirement rate Show how the Hank of Kngland rate is an im,,ortant factor in d.termining rates of exchange. .a;lj (^ CHAI'TEU XIII i ' (lOlI) SIIIl'MKXTS 1. Gold or xprric pointM.—Thv use nf hills of cx- chaiiKC as shown in Cliapturs IV and VI eliniiiiatcs. in a Kreat nieiisurc, the expense and trouble of shipping; jjold in payment of international indebtedness. The necessity of importinjj S<>1<1 arises only when the seller of a bill of exchange finds the price offered for his bill lower than the expense entailed in purchasing,' j^old in the foreign country and importing it. Similarly, gold is usually exported when a purchaser finds it cheaper to ship gold to his foreign creditor than to pay the ex- change rate demanded. In explaining exchange fluctuations, we have, for the sake of simplicity, thus far spoken as if a solitary seller or purchaser of exchange undertook the import or export of gold respectively whenever the rate be- came unsatisfactory. In practice, however, the ship- ment of gold is confined almost entirely to bankers and other large dealers in foreign exchange who have special facilities at home and abroad for undertaking such shipments. The merchant, therefore, or even the average banker, is not ■joncemed in gold shipments, tho he is concerned in the rate of exchange which the shipments are intended to adjust. The cost of a shipment of gold between any two 174 (JOI.l) SIIII'.MKNr.-, 17.-) countries can only hv isfiniatid. as it vaiits with the si/e of tlie sliipinent and the laeilities and knowledge liossessed hy those who undertake it. Soinetinies siu- iial eonecssions are offered hy a >f()\ernnient in order to eneourage the importation of gold into a eountr> 2. (iold i-ahiiM. Landitii tinil A'.>9» is'iioiir,' Stamlard ,n>lv.r- IH.WIKm "^'"^ :t.H!m7.i IH.!)t(ll«.' The Royal mint in London j)ays the ahove i)riees a fortnight after the gold is delivered to them. The Hank of England i)ays on delivery at the rate of 77s. !><1. per oiniee standard, the difference of VA. cor- responding to about four i)er cent interest ot\ the four- teen days' delay exacted hy the Hoyal mint. The Bank of England will, as a rule, buy eagles and other coins (minted .900 fine) according "to their full weight at the rate of 70.s. 4^.(1. and sell them (if in stock) at 76s. »d. The United States mint assay office in New York pays 90 per cent of the above prices on delivery of the SVII— 13 ^•^ 176 DOMESTIC AND FOREIGN EXCHANGE gold, and the remaining 10 per cent, less a small melt- ing charge of 4 cents per $100, a tew days later when the melting and assaying have been completed. Gold sells according to weight and degree of fine- ness and it should be noted that the values of eagles and sovereigns quoted above, are .900 and .91()7:i, re- spectively, of the value of fine gold bars. Gold bars are seldom absolutely pure by a few thousandths, but their value is easily established. A gold bar, for instance, that assays .995 fine is worth -joyj-X 20.671835 or $20..>68476 per ounce. The London price of gold is always based on standard gold 91G-3 fine, at £3: 17: lO'/i per ounce (£3.89375) The ratio of the London prices to those of Xew York are as 1 : 4.80656; in other words, divide a New York price by the corresponding London price and the quotient is the mint par value of the sovereign in dollars. Reverse the calculation and you get the par value of the dollar in English money. 3. Gold shipments from New York—lhe follow- ing description of a shipment of $1,000,000 in gold from Xew York to London is taken from Dean Jo- seph French Johnson's "Monev and Currency" and will serve as an example of how a shipment of gold is made under normal conditions. During the last quarter of the nineteenth century the cost of shipping gold from New York to London fell from three to two cents per pound sterling. The charges for freight and insurance botli declined, while the increased speed of transatlantic liners reduced the loss on account of interest. GOLD SHIPMENTS 177 The following figures, showing tlic cost of shippinc $1,000,000 in gold from Now York to London, were fur- nished by the representative of one of tlie largest New York banking houses: In.ested in fine bars, JVOO.OOO gr. (4S,:i7i o^.) $1 OOOOeooo \«ay ofhce i,re,niu.n „„ bars, 4 cents ,,er *I00 4. « freight, 5^ per cent '...*. ,T!';'" Insurance, Vi6 per cent ,:,'■,„, racking and cartage ■.;:::::::::;;; Yum ™^' """"y .*l,00.',MTT5i) oJ}^^^'!^^ of England's "priec" of gold varies from 7Ts. J/i'd. to 77s. 101/i.d. per ounce, English standard, 916-' i fine. J~ ,"1T*/T^ "" ""'""' °^ «"'''' English standard, info ns. 10'/:;d.; but the Bank of England, with which it is the custom of bullion owners to deal, usuallv pavs a fraction less than this sum, thus saving itself from loss of interest while the bullion is being coined. It is assumed below that the bank pays 77s. lOd. per ounce. 48,3T5 oz. fine = jJ,77J.7 oz., 911i::i fine. 5J,77i.7 oz. (,i 77s. lOd '. * T„« ..71 Deduct sundry expenses '.'.'.'.'.'.'.'.'.'.'.'. *-"*.J7+ Xet receipts in London .. ,.|, ,,-„ Cost of sovereign ( l,00i,()J7.5O ~ J0j,-i70) *m'«'. . -Mint par in United States '■■■■■■■■'.'.'.'.'.'.'.'.'.'.'.'.'.'.'.] *S^i Cost of shipment per sovereign ~ S~lili7 The reader will notice that no loss on account of interest IS included in the foregoing. The New York banker who furnished the figures held that no such item was involved, for he sold sterling exchange as soon as he made a shipment, and so was never out of money in consequence. If ive include interest for ten days at three per cent {$8',ir,.5i), we raise the cost of the shipment to $.01i)7 per sovereign. 4. Gold shipments from Xetc York to Ottawa.— At the beginning of the war, Xew York found itself with an unprecedented floating indebtedness to Eu- rope, estimated at from $230,000,000 to $300,000,000. 178 DOMESTIC AND FOREIGN EXCHANGE Exchange became utterly demoralized. CabLs on London rose to $3, to $6.50, and finally to $7 and re- mittances became impossible. On August 14, 1914. in order to ease the New York exchange situation, the Bank of England signified its willingness to accept payments in London on New York account against the deposit of gold in Ottawa, thus eliminating the danger and expense of ocean shipments in time of war. From $100,000,000 to $150,000,000 were sent from New York to Ottawa under this arrangement and sterling exchange was thereby stabilized until the fall shipments of wheat, cotton, etc., produced their effect. The deposits were accepted in Ottawa at the fixed price for gold bars of 77s. 6d. per ounce standard, and for eagles 76s. OYid. per ounce, equivalent to rates of $4.89 and $4,893, respectively per pound sterling. Under normal conditions the Bank of England pays in London, 77s. 9d. per ounce for standard bar gold (or at the rate of $4.8744 per £) and buys eagles ai. about 76s. iV^d. per ounce (or at the rate of $4.8719 per >£ ) , and so the difference between the Ottawa and London prices of 3d. or 4d. per ounce was most rea- sonable, considering it would barely cover the cost of shipment to London under normal conditions. No particulars are available as to the dates on which the gold was returned to New York after sterling ex- change became favorable to the latter. The greater part of the deposit, of course, was shipped on account of the Bank of England itself, tho some of it was re- GOLD SHIPMENTS 179 leased to Loncion and Xew Vork Ii.iiikers against pay- ments made in London. For instance, in the beginning of June, when cables were $4.78875, the Bank of Englan0 on the transaction. 5. Sliipments from Ottawa. — The actual returns of several shipments made to New York from Ottawa against payments in London during the summer of 1915 are of interest. 1. Purchase of eagles in London by arrangement with the Bank of England to release by cable the equivalent in Ottawa for shipment to New York: June 2, 1915.-11,666.913 ounces of eagles, purehiised at 77s. fii/Jd. per ounce ($4.7983 per £ ) delivery in Ottawa for shipment to New York £4«,233-H-n 3 days' interest at London call rate, 2%, $33.37 7-8-7 Total cost in London £43,241- 0-7 June 3, 1915. — Amount received in New Yorlt. $217,090 $017,090 (Average weight $10,000 eagles, 337.423 ounces) Less express charges at 75c $162.90 Custom fee ^l" 1** Sterling equivalent of $21(i,D2S „ ,„ „ at 4.787^ rate on June 2 in London for cable transfer. . £45.J98-18-fl Net profit on transaction £ 57-17 The Bank of England charged for the gold at the rate of $4.7985 per pound sterling, the net cost delivered in New York was $4.79487 per pound sterling, and the net amount realized by sale of a cable in London was $4.78b,o per pound sterling, yielding a net profit of .00612 per pound sterling or $61.20 per £10,000. In other words, each dollar cost the purchaser 4s. 2.053d., which he resold at 4s. 2.117d. or a profit of about one- sixteenth of a penny per dollar. 2. Purchase of bar gold in London, by arrange- GOLD SHIPMENTS igi ii.eiit witli the Bank of England to release by cable the equivalent in Ottawa for shipment to New York: Sri>teml|er J3 I913.-I0,98S.|01 ounces of standard bar gold purchased at HOs. lU,d. per ounce (*t.:3 per £) Uilivery in Ottawa for shipimnt to Xew York.. £44 0'l i ■ Interest at tl^y,, for five davs (.Sept. J.'i-JS) ' .',7 , Interest at 4it,% on fOM-ll-O (.?l,693.7j at 4 7irfor .seven days ' ' _ . Total cost in London £iiiuo i~I .Sptemher 38, 191.5.-Paid bv the I'. S. Assav »«,uw- 1-5 .1, t ','"''■'; "."n.'l'''";;'''' '.$303,500.00 'ktoher 5, 1915.— Balance. less assay charges, *"•-'' 4,693.75 Net amount from the V. S. .Assay office (being at the rate of « 18.94918.' pur bunce) .$208,193 75 Less express charges, etc 150 05 c» ,- . , •«-'0S,043.70 hterlmg equivalent at 4.71 cable rate on September 28 '"^"•'o" • £44,168-14-7 N^'P™"* £ 119-13-2 The Bank of England released the bars at the rate of $4..73, the net cost of same delivered in Xew York was $4.7228, and the net amount realized by the sale of a cable on London was $4..71 per pound sterling, yield- ing a net profit on the transaction of 1.28 cents per pound sterling. 6. Gold imports during the war.— Numerous examples of gold shipments can be found in any book of foreign exchange, but the following examples of shipments made from London during the year 191.5 are of interest. It should be noted in this connection, that, notwithstanding the abnormal conditions pro- duced by the war, the Bank of England has not ceased to redeem its notes in gold; anyone holding Bank of ■If ^ zw 1 182 DOMESTIC AND FOREIGN EXCHANGE England notes can convert them into gold, and, if willing to take the risk of shipping, pay with them a debt abroad. Great Britain has not yet found it necessary to prohibit the export of gold to neutral nations. Shipment of £100,000 in sovereigns from London to New York: .Srplenibrr i!9, 1913. — Shipped from London. y Assay Office in New York ^(''.VOOO.Oo Oiloliir IS, 1915.-1(1% piiid lpy Assiiy Office 4»,86T..5:: llepresenting 25,(il:».9ri m.. stundiird gold at iiilS.94.91SJ per ounce $485^0 ( . j.i Luis : Assay charges $ 57.04 Interest Tot 3I^% for i;l davs on $4:t5..500 . . . . S*i:.IO Interest (^ 31^7o for 19 davs on ii(t9,Sr>7 53 . . . . 90.83 Freight and insurance. ..." 6,543.83 7,203.99 *t79,163.54 Cable rate on Septeinl)er 29th, 4.7314 473,250.00 Net profit on the transaction $ 4,913.51 Delivery of the sovereigns was taken by tale and not by weight from the Bank of England, consequently, owing to the presence of light sovereigns, the ship- ment weighed only 25,613.96 ounces (instead of 2.5,682.18^ ounces had they been full weight), and netted at the assay office only $4.85367 per pound sterling instead of $4.86656, or a loss of 1.289 cents per pound sterling. Even with tiis handicap the shipment netted a handsome profit. iThe difference, or remedy as it is called, between the mint weight (123.274 grains) and the least permissible weight of the sovereign (122.50 grains) is .774 grains or roughly % per cent. Under normal conditions the Bank of England seldom pays out sovereigns averaging less than 256.20 ounces per £1.000, that is, .fi218 ounces or about Vt per cent bclmt full mint weight. (2.56.S318 — 25fi.20 = .n3IS.) The remcd; or variaticiv in weight on newly coined sovereigns permitted to the mint is .2 grains 183 GOLD SHIPMENTS septet"/ 1' i^f^ '".',??"'„f.;,r '".""T '? ^'^ ^'"'■= .Sq>.cn,b.r U. 19,5._B«lanc.e 10%' paid by -Assay offlce.- ::: .* ??.Z','2 Total amount paid liv Assnv nfHtv f..i. fi.» i i ^ .;.., «..^ o. t^e ,„;:/ :f^^z^, -- .^-:. ;.^;^,^_^^ ,^ Assay chnrprs j Freight and insiir ancr .1' [.[[[[[ *, J'' ij^ "{ol <^ ■■>!!;% f'"- 'l-'.vs on ¥89,0^' ■(Sc,,t. '"(".rt f if'^"^^ '""■ " ''■•'•"' ' ""' *' '•'""'•'s "■** i3.Hl 1,196.34 Net procfcds rrreived In \cw York ' 7 " £M,61fi-H-l at cable rate Sept. 1, m«.' .' ; .■;.■::.';.' * f -"f!.'*^ Net profit on transaction.. Z * 4,7G.'i..'i> Standard gold at 77s. lid. per ot.nce is equivalent to .>4.8b394 per pound sterling (378.98364-- 77 917) The proceeds netted $4.79148 per pound sterling which. With cable on September 1, at $4.56. showed a profit of 23.148 cents per pound sterling. As a general rule, it costs less to export gold than to import It for the reason that while in transit little or no expense for interest is involved in the former trans- action. Exports occur when rates are high and the exporter can sell his demand drafts and purchase and sli.p bis gold simultaneously, the one practically off- settmg the other on their arrival in London, or "other destination. In the case of an import of gold, how- ever, the importer has to pay for the gold seven or ten lAltho the Royal mint Is ohligrd bv law to pay £3 17s 10./,? ill 184 DOxMESTIC AND FOREIGN EXCHANGE days before he can realize on the proceeds in Xew York. He is, therefore, obliged to forego the use of the amount while gold is in transit. REVIEW When is it necessary to export gold? When is it imported? In what forms arc gold shipments made? How do the Bank of England aud the United States Mint Assay Office at New York respectively, buy coirs? Show how the Bank of England relieved the New York ex- change situation at the beginning of the European war. Why does it usually cost less to export than to import gold ? CHAPTER XIV STERLING EXCHANGE 1. London markct.-lt will give a much dearer under.standmg of the operations of forei^ exchange .. study ,n snu.e detail the principal exchange „,ar- kets to learn the exchange j,ractice in each market and havmg reviewed the principal financial centers, to explam how exchange is effected with other parts of he world. It must already be evident to the reader tl.at m foreign exchange the London market is domi- Ma.it and naturally calls for first consideration. Xew \ ork wdl not of course, call for special treatment at tins pent as the body of this volume explains Ameri- can exchange practice. Special note, however, must be taken of the operations of Paris, Berlin and Am- sterdam, with briefer mention of other centers and comitries where exchanges are less highlv developed, llie insular position of Great Britain," the density «>( her population, the early development of manu- (acturing enterprises, the possession of vast coal re- sources gave her at an early date a preeminent position i'l the worlds commerce from which she cannot be easily dislodged. With her enormous commerce and her monetary system firmly and long established upon tlie gold basis, she has naturally come to occupy a sim- 185 \-:t 186 DOMKSTIC AND FOREKJN EXCHANGE ilarly prominent place in tlie financial adjustments which international commerce renders a necessity: namely, in fnreijrn exclian^je. Thus, the monetary system of (ireat Britain l)ascd upon tlie poiuid sterhii^ is more widely known than any otiier. 2. Munctar;/ si/stcm. — An understandinjj of tin monetary system of another country is the jjrereciiii- site of any knowledjje of what exciianjre procedun really means. The illustrations ff'weu thruout this volume will, however, dispense with the need of any extended discussion of Knjilisli money. As already stated the monetary unit is the pound sterling represented hy a coin known as the sovereign, which consists of 123.27447 grains of gold 91fl7-i fine, and is thus the equivalent of 113/ii23 grains or 7.32238.') granunes of pure gold. The gold coins of common circulation are the sovereign anr' the half sovereign. Silver coins of limited legal tender are in circulation in denominations of 1, 2, 2Yi and :> shillings and sixpence and threepence or K> and /i of a shilling. One poun, of an ounce of pure r/nld $-J0.«71H3.>, and ..f an ounce of ntandard yold )til8.»45>l«2. These are also the Canadian values. The Hank of England pays immediately for gold at the rate of 77s. 9d. per ounce standard. The Koyal mint in London and its four branches in .Melbourne. Perth. Sydney and Ottawa, take anv quantity of gold for coinage, which is free, but deliver the corresponding coins— at the rate of 77s. lOKd. per .«. standard— a fortnight after the receipt of the jrold. The difference of iK-d. corresponds to about 4 per cent interest for 14 days on the ounce value. fa ,"^ ..r™"' '^°"'"*'°"s tl'^' B«nk of Kngland pavs , '^.^;''• P" °U'«-<- f">- staiulani bar gold (,„■ at tho •>+.»( ly) but tliisc prices occaMuiiallv va'v On Augvist 13 1914, tl.e an.u.u.ucnenfc was made that tl,e mk of ■ ngiand wa., willing to purchase gold at Ottawa, tl.n. the Donun.on Government, and to p,.v cash in I.on.lon ■i^amst snnie at the hxed price for gohl bars at TTs. (kI. per ■"ince stan by adding .00)26 cent to par ($4.8666) for each half penny decrease from 77s. lOM-d. +.8666+ (.0026X9) or .0234=$4.8900 For eagle or United States mint gold, divide $18.60465 by the price per ounce (£3 — 16 — O'/^) ■ '"■^^^ ■ =$4.8932 or add .0027 cent to par for each half penny decrease frotn 76s. sy.d. 4.8666 +(10 X .0027) or .027 = $4.8936. 5. Stamps and interest. — Illustrations in earliei- chapters have noted the fact that due allowance must be made for the stamp duties imposed by foreign coun- tries. The role that interest plays has been fully dis- cussed, but in the actual work of transacting foreign exchanges an exact knowledge of interest usage is of value. The English stamp tax on bills of exchange amounts to one jhilling for every £100, or nearly a quarter of a cent per pound ($0.0024) . In exchange calculations an allowance for stamps is made of M;o of 1 per cent. Checks, three-day sight bills and under, require only a penny stamp no matter what the amount. In computing interest three days of grace must be allowed, the of course such a rule does not apply to checks or sight drafts. Interest is calculated by taking the exact number of days and the year at 365 days. 6. How London quotes exchange. — Quotations STERLING EXCHANGE 191 on South America, China, India, Russia, Portuga'. and Spain are given in pence per foreign unit, while !ill other countries are quoted in foreign money per I)ound sterling. Quotations on South Africa, Aus- tralia and otiier British colonies using the pound sterling are quoted at a discount or premium on £100. Foreign exchange quotations in London are pub- lished in two forms: (a) "Foreign Exchanges" or "Rates of Ex- cliange." These rates are published daily in the London papers and give the quotations for checks and bills on London obtaining at the various foreign centers, these rates being cabled daily or oftener if clianges are frequent. (b) "Course of Exchange" or in "street" parlance On Change Table." The quotations are pub- lished every Wednesday and Friday and represent the rates which English brokers pay for drafts drawn on the various foreign centers. In other words, "Foreign Exchanges" give the rates that for- eijrii exchange brokers are paying for drafts drawn I'ti foreign centers. '. Rates of E^vchange. —The following taken from the London Times of 17th July, 1914, is a speci- men of the "Rates of F>xchange." It generally ap- pears with two other columns giving the quotations for the two previous days. These are replaced here liy explanatory remarks: XTII— 14 i 192 DOMESTIC AND FOREIGN EXCHANGE RATES PAIU HV FORKION CENTERS FOR BILLS ON LONDON CariB cliefk -^'- IbM-lT-S- c. KrHiicH au™ i"-' f- Ijcrl,,, Kiiitit 'JUui. 40-jUpf. Marks uiiii itfciiiiifh \>*T il Ii..rliii— H liaji ■JOnl. ■'•i'/J'' ■)!"''l'» "'"I l''''",i"l!« l"'r ^ Vii.iiiio iiiulit 'JJI". IC-l'-li kroiu-ii nnd Iwllir per il A..i»(i rd.-.n,— Ml!l.t l-JA- U>i-l'J'/4C. Fl.inii» i.iul <-"nt« |..T il Ihilv—hlL'lit 2&L. 26-2T Lire and ci'iils r-'T il Hwil».Tlu...l-«ight ■-■St. l-W-lU'/iC Krui>.-, uii.l J.iil» LIT il Madrid— »i|!hl 28P .or,-J'. 1 esflas to i 1 L11.I.011— sicihl 40l,y,r,-'10Vii,d. IViicc to 1 iiidreu P.-trusrad-!^a moutlis .... sr.r. 10k, Ii„„l.|™ and kop.-k« P-r ilO rc.troSr,.d-.lBl.t BSr. 7r,-Kr,k. Roul.l^ and kopi'ks pv. il" Cl.risliania l»kr. i;:i-^'»"'■■■ ""' "■■<■ I'"'' ' Copcniiuttcn l-tkr. li.lVj-SOVj kroinT and <»,■ |.vr 1 StorklioJiii IXkr. 2.1-26 Kroner and ore per 1 Bomb." T. T 1 l/.t -"-^Cd ShdliMfs and prr,,-.- ikt 1 rnp... Cal"nlla T T 1 1/3 "'-td .Sliillini-s and T"riri. p.'r 1 rn; . .. Hona Konu- T T.I l/lOJd Sl,imns» and penrr p. r I d.,1 »r SI1nneln.1T Tl a/.ltd .S)iillinB» and r'lnri- P'T 1 in; S n«npor. T T 1 2/3 l^ed Slii Minus and pMi..- ,...r 1 dnlNir Yokol'nina T. T.l 2/o!d. &liill.ngii and p-'iice per 1 ji-u Alojandria "'Ji'!"-, PniHtri* P" i 1 Rio de Janeiro. 90 dny» = . . l.ll/iod. J'enee per 1 niilrcis VnlntirniRri 10 davR - ... O'id. I'eiiee per 1 peMi i'S Aires ao'day.::. . .17*H,d. Penee per 1 peso or dollar (goM. Monlevnleo !"1 davn 2 . . .M ':;-d. Pence per 1 dollar New York— Cal.le traiisfers. l|i4.!-7Vi(t-lViG<;. Dollars and ccnln lo il 1 Teleprapliic transfer ,. , . 2 These rates are telegraphed on the day preceding their receipt. Arranged as above the table calls for little comment. The reader should con.stantly bear in mind that these rates are quoted in foreign markets for bills drawn on London and that in the case of "movable exchange," i. e., foreign money per pound sterling, high rates are favorable to Great Britain, as more foreign money is received for a sovereiLifn while low rates are unfavorable. :Movable exchange in London is of course fixed exchange in the other country, aiier £1 Hamburg 20 63-20 67 Marks and |ifenni|!s |ier 11 Berlin, etc 20 63-20 67 Marks and pfennigs per 11 Pans — checks , 25.171^25.20 Francs and cents per 11 Paris— 3 months 25 361/4-25 41V4 Francs and cents per 11 Marseilles — 3 months 25.36>4-25.41>A Francs and cents per £1 Switzerland — 3 months . . . 25.37i<>-25 42i^ Francs and cents per £1 Austria — 3 months ....... 24.41-24.45 Kronen and liellt-r Fetrofcrad and Moscow — 3 months 241^24^4 Pence to 1 rouble Oenoa — 3 months 2.5. 561^-25. 61Vi Lire and cents i>er il Kew York — 60 days ... 4i(lh6-4'">i6 Pence per »1 Madrid — 3 months 4o^^t]-4r)%e Pence per 5 pesetas LisliOD — 3 months 45^ie-45t>^« Pence per 1 milreis Oporto — 3 months 4.5»ifl-45i-'Vifl Pence per 1 milreis Copenhagen — 3 months .. . l-*.4'*-l'* 52 Kroner and ore per ll Christiania — 3 months .... 1m.4S-1.^ 52 Kroner and ore [ler 11 Stockholm — 3 months .... IM. 48-18. 52 Kroner and ore per 1.1 1 One florin ,= 20 stivers. It will be noted that these rates are closely in sym- pathy with those given in the above Foreign Ex- change Table and represent the price that London was willing to pay for bills on these centers. With one or two minor exceptions the quotations conform to those in the summarj' of Foreign Ex- changes. This table, however, is dated before tlie European war which commenced in August, 1914. Since then the discrepancies have apparently disa])- peared and the quotations in the two tables are now practically uniform. New York and Spain are now quoted in foreign units per pound sterling instead of pence per foreign unit. Russia is quoted in roubles per £W, and Holland in florins and cents instead '*' florins and stivers. STERLIXG EXCHANGE 195 Where two rates are quoted for long bills ,n the Course of Exchange the better price is for bank- ers bills and the lower price for ordinary commercial lulls. The short or check rate refers not onlv to checks and demand item, but also to bills payable at eight -lays or less. When two rates are (,uoted for checks, the better rate is for demand items and the lower rate for short date bills. .Movable exchange rate or long paper is quoted higher than short exchange- m other words, nv,re foreign monev will be received tor a sovereign it payment in the foreign country is deferred thirty or sixty days, whereas, the rev;rse is true of fixed exchange quotations, the longer the payment is deferred the less the foreign unit costs. " !). American quotations.-Sterhng rates are quoted in he United States and Canada at so many dollars and cents to the pound sterling, $4.85, $4.8«'/. and so on. There are two methods of progression; namely, advancing by eighths of a cent $4.8J, ,$4 8.Vs ' -1.80/4, and advancing by five one-hundredths of a cent per pound (.05 cent), $4.8510, $4.8515, $4.8.550 and so on. The latter is, of course, the closer .Rota- tion and IS used in market transactions. 10. Convemon.~ln actual practice conversions are generally made with the aid of exchange tables but every operator should be able to make the neces- !*ary calculations for himself. Sterling currency is non-decimal: il ■ ! i 196 DOMESTIC AND FOREIGN EXCHANGE £l = 20 shillings = 24C pence = 9fi0 farthings .05 = 1 shilling = 12 pence = 48 farth' .s ,004.'/(, = 1 pence — 4 farthings It will he found more convenient for purposes of calculation to reduce all shillings and pence to the decimal of a pound. To rccJiict; shillings and pence to the decimal of a pound, niultii)ly the siiillings by .05, and the pence by .0041^. The reason of this is apparent. £1 = 1. Is = .05 of a pound. Id = .004166 of a pound or .004%. If only an approximation to the nearest penny is desired, multiply the pence by .004, and add one to the result if over twelve, and two if over thirty-two. Example: Reduce £15. 8s. 7d. to pounds and decimal : — 15 £15.00 .05x8 40 .004'/ux7 029;,, £15.429',,; To reduce decimals of a pound to shillings and pence, divide the first two numbers by five for the shillings, and the remainder by four for the pence (to be exact, divide by .004%) or -^ The following table will be found useful: Shillings £ Shillings £ Pence £ Ponce £ 1 .0.5 II .55 1 .00410 11 .M5SS 2 .10 ij .60 a .ooKia * 12 .05000 3 .15 13 .65 3 .01J.50 1^3 .0001:1 4 .-'0 1+ .70 4 .01666 V,o .000.1(1 5 .25 li .75 5 .030S3 %., .OOOli!) 6 .30 IG .«0 fi .02500 ij' .000.53 7 .35 17 .«5 7 .fli?916 14 .00101 8 .40 18 .90 8 .03333 % .OO.'OS 9 .45 19 .95 9 .0;)750 % .0031 J 10 .50 30 1. 10 .04166 STERLING EXCHANGE 197 The niles for conversion are English money into clollars : Multiply the amount in pounds by the rate per pound. £2,500 at 4.8635 -= 2,500 X 4.8635 = $12,158.75 Dollars into English money: Divide the amount in dollars by ttie rate per pound. $2,500 at 4.8635 --. -J^^. = £514.0331 = £514. 0. 8. Since £15 is equal to $73 at par ($4.8666), sterling amounts may be converted into dollars at par bv multiplying by 'vi.-, and dollar amounts may be converted" into pounds sterling at par by multiplying by '%.,. 11. Profits.— When a profit of so much per pound IS desired, no calculation is necessarj-. A cent ad- vance per pound means one dollar per £lO() or ten dollars per £1,000; a point advance per pound (.01 cent) gives ten cents on £1,000 and five points (.05 cent) per pound means a profit of .50 cents per £1,000. One eighth of a cent advance gives 1214 cents per £lOO. When the profit is figured on the dollar value it will be, roughly, double the advance in the rate (4.87 X 2, or double the value of a pound, being nearly $10). An advance of five points means a profit of lOM cents per $1,000, and an advance of fifty points (say .$4.8.500 to $4.8.550) gives a profit of only $1 .03 per $1 ,000. One-eighth of a cent advance means a profit of 26 cents per 1,000. On ordinary transactions a profit of one-eighth to one-quarter of 1 per cent should be made, or from sixty points to a cent and a quarter a pound, accord- ing to the nature and amount of the transaction. On ■ '■'•■a ,' M Im 198 DOMESTIC AND FOREIGN EXCHANGE small transactions two or three cents per pound should be charged in order to obtain a minimum. 12. Purchase of bills of wc/tangre.— Practically all exchange business in sterling is transacted by cable or bv demand and sixty-day bills, and quota- tions are "generally furnished accordingly. Occa- sionally, however, it is necessary to make a quota- tion cm some special dating, such as 30 or 90 days, and examples are therefore given below. Making the allowances for stamps already nott.l and calculating interest at the appropriate rate the following table will be found serviceable: STERLING EXCHANGE INTEREST TABLE FOR USE IN PURCHASING BILLS OF EXCHANGE Katea Per Cent Baala- 1/16 _ l/8_ V*- l/«- 8/4- 1*- i*- 3«_ 1486. 6*- .008 .006 .010 .080 .040 .060 .180 .160 1486. .008 .017 006 .100 .864 1486. .(SI .066 .110 .819 38) .438 .8n L316 1.7S4 2.1S8 8.631 (486. .068 .106 .809 1.674 8.611 4.186 6.083 <486. .061 .un .843 .486 .788 .970 1.940 8.910 4.860 5.880 f486. .077 .164 .618 .987 .836 8.4.'8 3.707 4.943 6.179 7.416 133 Osrii (486. .108 .804 .409 3.20s; 4.90:1 8.172 9.807 - The above te»re. .re cUtutoted o a the to.!, of (M per iilllO .ua 36S 0.7. per »e.r. Stunia one MitUinK per £100 or 1/20 of 1>. STERLING EXCHANGE 199 Examples showiriK how the rates for different kinds of bills are calculated (as a matter of conven- ience the calculations are based on =£100), What price can be paid for : — (A) CommcTcial bill on London, draft drawn payable three days after sight, no docu- ments attached ("Clean Bill")? New York rate for demand check on Lon- ^''" $487.00 Stamp duty (Id.) not figured 00 Discount 6 days, 3% (private rate) 24 .24 $486.76 .Nearest commercial rate $4.8673 (B) Sixty-day sight draft on London Bank, documents against acceptance? New York rate for demand check on Lon- i°" $487.00 Discount 63 days, 3>/4% $2.93 Stamp duty, K-o^" 24 3.17 $483.83 Nearest commercial rate $4.8386 (C) Ten-days sight draft on a merchant, docu- ments deliverable against acceptance.' New York rate for demand check on Lon- i°" $487.00 Discount, 13 days, S%'/, 66 Stamp duty, K'o7' 24 .90 $486.10 Nearest commercial rate $4.8610 (0) Sixty-days sight draft drawn on a mer- chant, documents deliverable against pay- ment, covering a shipment of perishable goods.' ii 200 DOMESTIC AND FOREIGN EXCHANGE Ni'w York rale for dcinand check on Lon- don $487.00 Kcliri'incnt rate of discount at wliich drnft may be retired at option of drawee under rebate. (53 days, .'J'/ .ta.JjS Stamp duty, Vm «■* S.TC Nearest conimereial rate $-t.84y.'> In Canada the above calculations would be affected by the di-scount or premium on New York funds. In the last example if New York funds had been at '.;i of 1 per cent discount it would have been necessary to have deducted 23 cents and the Montreal rate for a sixty-day draft would have been $4.84. y32 premium would have made the rate $4.8440. REViEW How does ttie Bank of England, as well as most foreign bankii. differ from natiomil banks in tbe United States witli resptx-l to gold reserves? What advantage is gained thereby? How are exelianges quoted on London, in what forms are they published and when? What is the value of a foreign exchange table? What ruliv should be borne in mind when studying it? How are sterling rates quoted in the United States and Can- ada? What method of progression is usually followed and why; How are profits figured on the dollar value? M : ' i CHAPTKH XV FRENCH EXCHANGE 1. Paris marhcl.-^l„ rrar.ce. the financial center s I ar,.s an,l all exelmn^.e is c,,H.te,l in Paris. As a trading center I'aris is not so i„.p„rtant in c .„n,„ri" ■th Kn^.l,sh c,t,es. «ut as an investn.ent center Par.s far outstrips the other cities, an.l this gi." .ts importance in the financial world 2. Latin Union.~In many respects the French r t^r'tr '■"^'"'"" *''"* '"■ *'- ^^"ited States' l.e standard has come to be «ol,l. but in circulation tlere .s a lar^e amount of silver (five-franc ece ) jv ,ch .s accepted, under the law, as unlin.ite! e; , tender. Prance is the chief n.en.ber of the T •.tin JHi^riiini, Italy and Sw tzerhn.l rv i ,,.,,.1. f •. . ""ii/;eiian(i. irreece became a part of it two years ]»ipr im, i • , I. vears later. 1 (m known in the resnpp ^..H.nt.,es by difl^rcnt names the coins of :,nS. ul have le^.al currency thn.out the T^nion. Other '"e Latin Lnion thru any monetary treaties. 207 cox DOMESTIC AND FOREIGN EXCHANGE The orij?innl treaty of the Latin Union contem- plated a bimetallic system of currency, but sson after the Union was founded the free coinage of silver was suspended, but not before a large quantity of full legal tender five-franc pieces had been coined and put into circulation. The continued coinage of gold, how- ever, has reduced this silver money to a subordinate position. 8. Monetary syntem.—Th*: unit of the French monetary system is the franc of .3'2'i.iH grammes 0()() fine, equivalent to .290822 granmies of pure gold. In the gold coinage it is represented by its nmltiples .5, 10, 20, 50, and 100 francs, tho coins above 20 francs are rarely seen. The napoleon or twenty-franc piece may be regarded as the standard gold coin. A kilo of mint gold 900 fine is coined into 1.55 na- poleons or 20 franc pieces or 8100 francs. It follows that the value of 1 kilo of fine gold = -^ X 8100 or fcs. 8444.444, and a franc contains .290322 grammes of fine gold. France has only one mint, situated in Paris, which pays at the rate of fcs. 8437 for one kilo of fine gold for coinage, arrived at as follows: Value of ] kilo of mint gold 900 fine. Fcs. 3100. Less mint charges per kilo 6.70 The value of one kilo of fine gold ^ 3<»3.^ » » _ Ycs. 8487. The Bank of France will purchase British gold FRENCH EXCHANGE S03 ...in at tlie rate ..f 3140.0068 fcs. per kilo; and Aus- trian, Gerrimn. Russian and American coin «t Fcs a090.5504 per kilo. The silver five-franc piece weighs 25 ^ammes 900 fine and contains 22.3 Kranmies of pure silver. In addition to the five-franc piece there are silver coins of t»<, francs, one franc, and 50 centimes or one-half Iranc. with minor coins in nickel and hronze. The .Sliver coins are exact suhdivisions hv weiKht of the hve-franc jiiece !)iit as the fineness of these coins is "Illy 8.35, there is less pure silver in five one-franc pieces than in the five-franc piece. Smaller coins tlian five francs are limited in amount to 7 francs per licad of the population. Unlike the five-franc pieces, they have not unlimited legal tender. Paper money is issued only by the Bank of France ill notps of 50, 100, 500 and 1,000 francs. 4. atamp duties and interest.— Them is a lax of till centimes on checks payable in the town in which they are drawn and of twenty centimes if payable elsewhere. Bills of exchange are taxed five centimes per fcs. 100 or fraction. For quotation purposes stamp duties are reckoned as 20 centimes or !:„ of 1 in-v cent on $100 or P'cs. 520. The law requires a check to be paid within eight (lays from the date of issue; otherwise it is consid- ered as a bill of exchange. As figures can be easily changed the law requires the date to be written in Words. Quotations for time bills drawn on France are ar- i \ 204 DOMESTIC AND FOREIGN EXCHANGE rived at by adding the interest and stamps lo the de- mand rate. The interest is calculated on a basis of Fes. ">20 equals $100. There are no days of grace, and interest is computed on the basis of 300 days to the year. The following rules will be helpful in de- termining the rate of interest which is applicable: Documentary payment bills can be discounted with banks at the Bank of France rate. Documentary acceptance I'ills are usually subject to dis- count at the Bank cf France rate for the last Hve e foreign money are taken as the basis except in tlie case of the pound sterling when a single pound is used. On a sight or check basis the quotations are as follows : FRENCH EXCHANGE 205 London 25.13 francs jx-r 1 £ Germany 1^3% " " l,),) ,„arks LatmUn.on... ggl-ic " " 100 francs "°"»"'l 208!, " " ,.<, .,^,i„^ K"***"" 264'i " . ,00 ,„ubi.., ^"■'*'"" , 10^;^i« " •• -00 cro«,u New York 517 '/l- « ' ;,V) Joll.-.rs 6. French exchange in New York.~{a) Quota- tions at so many cents to the franc are used only in minor exchange operations and (h-afts drawn on small French towns. The conversions in this case resolve themselves into simple prohlems in multiplication or division. (b) PVanc quotations— So many francs to the dol- lar are the reverse of all the usual exchange quota- tions, so that a higher rate means cheaper or lower exchange; i.e., more francs are received for the dollar. Thus :— $1,000 at 5.18'/N will purchase. .. .Fes 5181 05 .'i<998.80 at .5.18';4 will purchase. .. .Fes. 5181.25 Franc quotations advance fs of a centime per dol- lar or about >,s of a cent per franc. It will also be noticed that the advance of % of a centime in the above illustration corresponds roughly to a decrease "f !s of 1 per cent in the dollar value. For an ordinary transaction this advance of Ys of a centime is sufficient, but in large transactions where tlie quotations are necessarily close, the ".shading" is yilVcted by increasing or decreasing the quotation by 'm of I per cent, etc. This plus or-nnnus fraction does not, however, apply directly to the rate, !)ut 206 DOMESTIC AND FOREIGN EXCHANGE means Vm or Vj2 of 1 per cent, etc., on the amount of dollars converted at the rate of 518/s or 520 as the case may be. Francs into Dollars rt a Fractional Rate: Fes. 1,000 at 5.18'/k equals $193.0037 Fes. 1,000 at 5.18'/8 plus \{h 193.0037 plus %4 of 17c .... .0301 equals .$193.0338 A plus fraction makes the francs cost more. A minus fraction makes the francs cosi less. Dollars into Francs at a Fractional Kate: $1,000 at 5.18% equals Fes. .5181.25 $1,000 at 5.18ys plus Vm Fes. 5181.25 less ^;4 of V'/o of itself .81 (■((uals Fes. 5180.4-t %4 of 1'/ of $1,000 is .15/N cents which at the abovf rate equals 81 centimes, to be deducted from the franc amount as above. A plus fraction decreases the number of francs received. A minus fraction increases the number of franc rcceive .19^367 520 plus y^ S19919 520 plus 1(^ .192a37 S20 4.20 ii* .192307 FRExXCH E ^20 minus S-'O minus i-'O minus Frftnos Vm i--'0081 l/4a 5.201 82 %4 S.2nj43 5.23125 k '« _ *11 1 207 520 520 minus •5211 minus 52:)U DollHrs .192277 %!• .I»2247 9i4 .11)2217 .1911589 From the above it will be noticed that %4 makes a difference of .000030 in the dollars, and .00081 in the francs column, 'xhe rate 520-%, decreases the value of the francs over the 520 rate bv .000030 to .00081 to Pes. 5.20081. The above, or any franc exchange table, will show at a glance how the dollar value decreases as the franc value increases, the franc at 520 being worth 19.2307 cents, while at 523-. it is worth only 19.1158 cents. The effect of the fractional shadings should also be studied until they are fully understood. As pointed out above the fraction refers to the dollar amount only; it can be applied to the franc quotation, however, it the sign is reversed. Thus Fes. 1000. at 5.20 = V^ = If the rate was 5.20 + %4 add''^, „f 1% „f ^jg.r^-, ^ fonn ™" ^■-0 = ^-19919 -nil proceeiii„i, ." ;ii)ovc $192,307 .030 $I!H.3;)7 3.19919 «I»2.237 8. Profits.— When the rate is quoted at so many '''""* xvlilil'"''"^' ""^ advance in the rate of one-hun- tll 208 DOMESTIC AND FOREIGN EXCHANGE dredths of a cent (.01 cent) would of course mean one cent profit on Fes. 100, or ten cents on Fes. 1,000. The rule is to buy low and sell high. Fes. 1,000 at .193 would cost $193, and if sold at .1935 would realize $193.50, a profit of 50 cents or nearly V* of 1 per cent. An advance of .01 cent in selling corresponds to a profit of about fifty cents per $1,000 or !4o of 1 per cent. $1,000 would pur- chase Fes. 5,181.35 at .193, but at .1935 $1,000 would purchase only Fes. 5,167.96, a difference of Fes. 13.3!) or $2.54, representing V* of 1 per cent profit on $1,000. When franc quotations are used, a difference in the rate of % centime (.625 centime) corresponds ap- proximately to Vh of 1 per cent on the dollar value or 12y2 cents per $100. The rule is to buy high and sell low. Fes. 1,000 purchased at 5.15^)* would cost $193.94, and if sold at 5.15 would realize $194.17, a profit of 23 cents, or Vs of 1 per cent on $193.94. 11 sold at 5.15^'s + He, $194.06 would be paid (103.94 - .12), and the profit reduced to /la of 1 per cent. $1,000 at 5.15's would purchase Fes. 5,156.25, but $1,000 would purchase only Fes. 5,150 at 5.15, a dif- ference of Fes. 6.25 or $1.25. representing a profit of '/i of 1 per cent on $1,000. If the rate was S.l.j'^ + %2, the draft would be for Fes. 5,154.63 or Fes. 1.61 (3114 cents) profit. The profit on bills of exchange is always figured on the rate, not on the amount, as illustrated in the fol- lowing example: What price should be paid for a sixty-day bill on Paris, FRENCH EXCHANGE ao9 check rate SA5-;„ discount rate 3 per cent, to realize a profit of 'A of 1 per cent? Check rate .513.625 Interest Q'/, , 60 diiys. .2.60 Stamp K'(( 26 Profit '4of I'/c 1.29 4.15 „r5iq.v.v 519.775 or 5.20 + '/e* or .^. i!;/.s-/()4. 9. Purchase of French long bills.~The sifiht rate 1.S the ba.sis from which the rates for lon^ bills are cal- culated in New York. It should be carefully noted that, as the quotation is given at so many francs to the dollar, allowances for interest, stamp duty, etc., should be added to the sight rate. When quoted rates are supplemented bv fractional quotations, it is necessary to take these fractions into consideration in calculating the rates to be paid for bills, as follows: ^w'tinT If minus, add If plus.dcluot '" "*'*^ tnun r;itt.' %4% Fes. .00081 Fes. .00081 732% " .00162 " .00162 %4 7<' " .002 1.3 " oo'Hfj Mg% " .00324 " .00324 Calculation can be simplified by the use of the fol- lowing French Exchange Interest Table: ''8 -"O^ .009 o>- 054 n«i ]i .Wl .038 .108 ..217 . « M .022 .072 .217 .4.13 .bio ^10 DOMESTIC AND FOREIGN EXCHANGE Rate 3 days' 10 days' 30 days' 60 days' 90daj, pfrc^t .ight »ight ^ sight ».gl.t s,ght •liasis Fes. WO SM ^ 4^0 iiO *-«> ;i, ():(.> .108 .:i-'j -"'O ■«" \ ()43 lU .4:w •««? 1*"' 3 '087 .289 .807 1.73:t S.IHIO , IW .433 1.300 i.600 3.9(10 I "173 .578 1.733 3.4«7 J.-'On T .117 ^■iJ ^-lu' *■*'■* ''•""' 6 "itiO .81)7 i.OOO S.JOO 7,800 Stamps .i« •-'« -'« •^'' -"' The above figures are calculated on the basis of $100 beirn; equal to SaO francs and 360 days per year. Example 1, Paris ciieck rate in New York is 5.18/s, Hank of France discount rate 3 per cent, find the rate for 60-day bills. For convenience the calculation is made on the basi, of $100. Check rate 518.125 Add ^ ■■ Stamp duty V-o of 1% 26 Interest 60 days at S^c . . . 2.60 2.86 520.985 or 5.2iy4 + %4 arrived at as follows: 520.985 = 521.25 - 00.265, but Fes. .243 is equivalent to %4, and reversing tlio minus sign the quotation reads 5.21^4 + 'Kw. Example 2, Paris check rate in New York is 5.18'/»-',i4. Bank rate 3 per cent, find tlie rate for 60-day bills. Check rate 518.125 %40fl% ^ (5.18%-%4) 518-206 Add Interest at S"/" 2.60 Stamps !-20 of i^fc 26 2.86 521.066 or 5.2l!4 + I'x:^ (521.25 - .162 or V^-^ = 521.088). FRENCH EXCHANGE an In Canada the calculations would of course be af- fected by the discount or premium on New York funds; in the above example (i>18!» — !(i4) a premium cm New York funds of /in would make the rate .?18',» and a discount of Vm would make it 518!^ — '^2. REVIEW What monetnry system was cstablislird bv tlio Latin Union? What system did the original treaty contemplate? How is exclianjje quoted in Paris? How do franc quotations advance in ordinary transactions and in large transactions? Discuss fractional quotations. How is profit on bills of exchange figured? Give an example. What is the basis from which rates for long bills are calculated in New York ? I CHAPTER XVI GERMAN EXCHANGE 1. The Berlin market. — In recent years, the ex- change market in IJerlin has become of the lii-st im- portance. This is due to tlie remari0.>.(!0. Silver coins are of 5, 2. 1 mark and 50 pfennig ('{. mark). The silver mark weighs 5.555 grammes 900 fine. Hank notes in denominations of 1,000, 100, 50. 20 and 5 marks, are issued by the Heiclisbank. The Reichsbank is authorized to issue notes in any amount provided the issue is covered by metal (which includes gold and silver) treasury notes and the notes of other banks. It may issue notes also if M is covered bv metal, and the balance secured by bills, but the total issue must not exceed 541,000,000 marks. Xotes of four other banks, one each in Raden, Havaria, Saxony and AVuerttemberg, in dcnonnna- tions of 100 marks are also in circulation. There are also g'overnmental treasury notes, the amount of which is said to have been increased rnormously after August, 1914. 3. Stamp duties.— Chec]is are subject to a tax f)f 10 pfennige each, irrespective of amount, and bills of exchange must pay 50 pfennige for each 1,000 marks or fraction. The stamp tax can be avoided on checks by writing after the name of the drawee bank "Pay against this check from our credit balance." For quotation purposes the stamp duty is reckoned at Kn of 1 per cent or .05 cent per 400 marks. Drafts 214 DOMESTIC AND FOREIGN EXCHANGE drawn in dollars are stamped on the basis of 4.25 marks per dollar. In order to avoid German stamp duty, Ameriean exporters, instead of drawing sight drafts on their German customers, instruct the latter by formal letter to pay the amount of the purchases to the American bank's German correspondent. These are called Letters of Delegaticm and are sold quite extensively. They are usually accompanied by bills of lading only, to be delivered on payment of the amount involved. Sometimes, however, the other shipping documents are attached as in the case ol documentary drafts. The Imperial Reichsbank of Germany transfers money from one branch to another ; i .e of charge for cUents who carry satisfactory balances. These are known as Giro conto transfers. Outside of conven- ience to the customers the practice evades the stamp duty on checks. As money can be transferred by the Giro conto sys- tem to any city in Germany where a branch of the Reichsbank is located, premium or discount on ex- change between different German cities (as in the case- between New York and Chicago or between Canada and the United States) is unknown. 4. Interest rates and commercial usages. — Interest is calculated on a basis of four marks to 95 cents, and 860 days to the year and 80 to the month. There are no days of grace. Documentary acceptance bills are generally dis- GERMAX EXCHAN(JE 215 toiiiited at the open market (private discount) rate imd douiiiiieiitary pai/ment l)ilis at tlie Reiclisbank o of 1% —.05 GERMAN EXCHANGE agi 60 days at a% .... — .48 .53 ,, .. VT ir , ^^-^^ "^ ^^ — '^32 per 4 marks If the New York rate is supplemented by a fractional quo- tation, the following decimals should be added or deducted as the case may be, to the rate in calculating the value of the bills: %4 .015 Vs., .00030 %, .0004.'5 Fmd the price of a thirty-day sight draft, interest SVc, check rate 95VL> plus %^. Cheque rate 95 50 plus %4 of 17c _Q4.5 95 545 less Stamps %o of 1 % — .05 30 days at 3% — .24 .29 95.255 or 95% In Canada the above calculations would be affected by the discount or premium on New York funds; in German exchange the premium is added or deducted as the case may be. REVIEW What has made the Berlin exchange market important' Ucscribe the German monetary system. How do American exporters avoid German stamp duty' How IS mterest calculated in Germany.' What is tlie German com„H..rcial u.sage regarding drafts against importations and what practice should American banks follow in forwarding such biUs tor acceptance and collection .' How are German quotations made.' What kind of quotations are used in minor exchange operations and what kind in large transactions .' " What is the basis from which rates for bills are calculated' vv Hat ^governs the interest on the diiferent classes of bills in Ger- 1] CHAPTER XVII EXCHANGE WITH OTHER COUNTRIES 1. Gold bads of exchange. — The facility with which exchanges are effected is due to the fact that, witii few exceptions, the monetary systems of the world are on a gold basis, or at least a gold exchange basis. Where the contrary is the case the exchange situa- tion causes much difficulty locally and hampers tiie growth of international relations. Whatever may be the local circulation iold has come to be the interna- tional money; and >•< ations of all nations with tlie great financial centers are based upon gold even tho they have not the gold standard. It is natural therefore that the nations which early adopted the gold standard should have an ascendancy in foreign trade. We have already spoken of three principal centers, and it remains only to consider Am- sterdam, which ranks among the chief exchange marts. 2. Dutch exchange. — The monetary unit of the Netherlands, is the florin (guilder or gulden) 100 Dutch cents (40.2 cents) weighing .6048 grammes of fine gold. Quotations on Holland are stated in cents per guilder or florin (the par value being 40.20 cents) advancing by .01 cent as in the other exchanges 40.20, EXCHANGE WITH OTHEll COUNTRIES 223 40.21, 40.22 cents, etc. The rate is also expressed 40M6, iOVn cents, etc., and for large transactions the rates are sui)pleinented by fractions as in German quotations. Tile conversion i.s simple arithmetic. To convert dollars into florins, divide the dollars by the rate per florin. To convert florins into dollars, nmltiply the amount in florins by the rate per florin. The bill stamp is /iii of 1 per cent or two cents per i?40. Interest on Dutch long bills is based on $40 per 100 guilders or florins.' There are no days of graci; and interest is reckoned by taking the exact number of days and the year at 360 days. When fractional rates are used they should be dealt with in a manner similar to the method used in (ierman calculations, and added to or deducted from tile dollar value when converting florins into dollars, hut when dollars are converted into florins, the equiv- alent of the fraction converted into florins must be added if minus, and deducted if plus. Thedifl'erencesmadeby: (1) a fractional advance ; (2) one-hundredth of a cent advance; (3) iio of a cent advance, are illustrated below: Kiorins 2.,500390 a.50 lintr 40- 40 Dftllars .3999375 .40 1 The Intereit is easily reckoned on a basis of $40 per 100 florins, or Ihc constant ii^oo niultiplied liy the r.ite and time will give the interest •n .*tO. 60 days at *% = '/{«« X 60 x ♦ = ■'/is of ^0% cents. XVII — 16 ,j . 224 DOMESTIC AND FOREIGN EXCHANGE Florins Rat"" Dollars 2.49!)()()!) 40 — y«4 .4000625 .mmr, 40.01 .4001 2.4i)60!)!) 40 y, a .400625 An advance of .01 cent in rate represents a profit of 25 cents per !i!l,O0O. An advance of Yio cent (or .06'/4 cent) represents a profit of $1.56 on $1,000. When quoted rates are supplemented by fractional quotations it is necessary to take these fractions into consideration in calculating the rates to be paid for bills as follows: %4 .0062 ] Add for a plus percentage. Yin .0250 J Deduct for a minus percentage. Example. — Find the value of a 60 day bill on Amsterdam, discount rate S'/c , demand rate -iOV^n — V32 40'/r(; = 40.0625 less ',30 of l'> 0125 40.0500 Less Interest 60 days at S5'/' ; 20 Stamps yld standard without the burden of maintaining large gold reserves is offered by the gold exchange standard. The local currency may be either silver. [)aper, or both, but the government or bankers of these countries by the sale of exchange or other means. !irc able to settle all international transactions on a gold basis. The government of a gold exchange standard country will take gold in exchange for local currency liut does not undertake to give gold for internal use in exchange for local currency, tho it does provide gold in (ither countries; that is, it will sell bills on these coun- tries or even ship gold if necessary. The bills are sold at a price a little below the normal "export point" ; in other words, the buyer has to pay a little less than the actual cost of shipping gold itself providing he was able to obtain it. It is essential, however, that tile local currency received for the bills must not be put back into general circulation. The reason for this precaution is apparent when it is pointed out that, 111 a gold standard country, when exchange l)ecomes unfavorable, the corrective exjwrt of gold contracts tlie currency and thus tends to raise the rate of dis- lount and lower prices, which checks the outflow of 928 DOMESTIC AND FOREIGN EXCHANGE ff(A(]. In a ^old exchaiifje stnndnrd country the sale 'i)f hills is equivalent to an outflow of j^old and should, therefore, have the same effect of contracting the cur- rency. This it will not do unless the paper or silver money so received is withheld hy the Government from circulation until a demand for more currency is manifested by the puhlic offering? f^old for it. 0. Philipj/ine Islands. — The Philippines may hv taken as a concrete example of the operation of a pfold exchanf^c standard. The currency consists of silver pesos issued by the United States (iovernmcnt at a. guaranteed or fixed value of fifty cents gold, the seigniorage or profits from which are deposited in New Vork as a reserve. When exchange becomes unfavorable, drafts on New York are sold by thu Philippine Treasury and the silver pesos received in j)ayment are withdrawn from circulation until the ex- change once more becomes favorable and gold is of- fered in exchange for currency. 7. India. — A somewhat similar system prevails in India. The currency consists of silver rupees issued by tile Government out of the i)rofits of which a "Gold Standard Reserve" has been accumulated in London and invested in gold and short date and cash loans. AVlien the exchange value "f the rupee falls below 10 pence gold, the parity is niaintained by the sale of bills drawn on I,ondon. These bills are met from the funds of the "Gold Standard Reserve" and the rupees received in payment are kept out of cir> culation. EXCHANGE WITH OTHrR COUNTIIIES 2«9 8. Argentina. — The Argentina currency is on the model of that of France, and the peso is ccinivalcnt to the tive-franc gold piece. It weighs I.4.>1(!40 grammes of fine goM equivalent to $.9047") or 47..5H pence. Argentina introduced the gold standard in 1881 but maintained it for only five years when a ,iaper currency took its place. CJold commanded a premium subject to enormous fluctuations. In 1890 the Government fixed the premium in gold at 1-27.2727 per cent; that is to say, it fixed the value of the dollar in paper at ii cents gold or $100 paper e(iual $44 gold or . """;/""' ^^ 227.27 paper dollars e(|ual $100 gold. The value of the currency or theo- retical dollar in United States money is therefore *.90475 X .44 == $.42449, and in English money 47.- .)8d X .44 = 20.93.5 pence. The Government main- tains this parity thru the medium of the "Caja de Con- version" which exchanges notes (curso legal) for gold coins and gold coins for notes on a basis of 44 gold leiitavos per paper dollar. The following foreign coins are legal tender at a fixed rate: SoTcreign, for gold $.5.04 20 franc piccev, for gold 4.00 Eaglos, for gold 10..'J64 20 mark p'wn; for gold 4.9(5 Peru, 5 soles, for gold 5.00 Spain, 25 pesetas, for gold 3.00 Rilk of exchange on foreign countries are quoted both in gold and paper and rates fluctuate according to «J0 DOMESTIC AND FOHKKJN EXCHANGK the usual course of supply and (leniutid, the rate for a UO-day hill on London varyin>{ from 47 H to 4i)'i jHjnce per j^old peso. To convert a gohl cpiotation to a paper basis, multiply the j?old rate by 44 eentavos; I'or example, 48'/i!d X .44 - 21.34 pence or vice versa; ti» convert a paper rate to gold divide by .44. ~ 1--48'. pence. The value of a sovereign is $.5.04.5 gold. = $11,459 paper pesos. Quotation^ therefore '■■045 .U in New York vary from 4I'-,' cents to 43/i! cents per paper peso (94.32 cents to 98.8t! cents per gold peso) . 9. Urazil. — The unit is the milreis divided intd 1,000 reis. The milreis weighs .82207 gr. of fine gold equivalent to $.54034. The circulating medium is composed of convertible and inconvertible (iovernment notes, both classes of notes having leg.il tender (jualities and the same pur- chasing power in the country. In 190() the HraKiliaii Government established the "Caixa do Conversao ' on the model of the Argentina "Caja de Conversion " and fixed the value of the paper currency at 15 pence per milreis or 10 milreis to the pound sterling and is- .sued on that basis 320,000,000 milreis. In January, 1911, tlie (iovernment increased the amount of con- vertible notes and increased the value of the pa|)er milreis to 10 pence or 15 milreis to the pound sterling. This overvaluation was unwise as it precipitated ;i financial crisis from which Brazil is still suffering'. At 15 pence per paper milreis, gold was at a premium of 79.63 per cent, or 1 milreis in gold equalled 1.79<>;5 EXCHANGK WITH UTHKR COLNTUIES Ml ])»per luilreis. In fixing the value of the niiireis at It) pence instead of 1j pence tlie Government lowered the premium on gold to 08.40 per cent, or 1 milreis j^i)ld — 1.084 paper mih'eis. As u sovereign eonttiiiis 7.;W238 gr. of fine gold the present theoretical unit, like that of India, weighs '/ir. of 7.!}il'ja8 or .48810 Hi: of fine gold; ecjuivalent to 'ij would have to pivc 400 (300 plus 100) i)ai)er (liillars. In this connection the following problems will he found interesting: (1) The premium on gold is 3007o ; at what % discount is paper money? , 300 X 100 30,000 "*'*'''■" -"jooTuinoo 40<]~^^ '''•'*% discount (2) Paper currency is at a discount of 75% as com- pared witli gold; what is the premium on tfold? . lr, X 100 7,500 ' , ^"''''''-''^'■mr=TT—~jr =300'/^ premium. The modern exponents of paper money currency liave been chiefly the South and Central American re- publics, the majority of which, tho they are theoret- ically on a gold basis, are embarrassed by large quan- tities of inconvertible paper money. There has been a strong effort of late years on the part of the more progressive governments to put their currency and finances on a sounder basis. Among these may be mentioned Venezuela, Uruguay, Peru, Ecuador, t'osta Rica, Salvador, Honduras, Haiti and Bolivia. The following countries are still on an inconvertible jiaper basis with a more or less fixed premium on K<'Id : Premium on gold Value $100 gold Honduras . . 140.00% 240. paper Guatemala . . 1,500.00% 1,600. pap^r Chili 84.6 % 184.30 paper Colombia . . . 9,900.00% 10,000. paper Paraguay . . 1,400.00% 1,500. paper ill S36 DOMESTIC AND FOREIGN EXCHANGE Inconvertible paper money has no intrinsic value and its gold value depends entirely upon what the people of the country are willing to accejit it for in exchange for gf)ld, and therefore the rate of ex- change between a country on an inconvertible paper basis and one on a metallic basis can only be arrived at by ascertaining at the moment the amount of gold that the public of the former country is willing to give for its paper unit. 13. Chile. — Of the paper standard countries Chile is commercially the most important. The monetary system of Chile is tiieoretically on a gold basis, but the gold standard was abandoned and was replaced by a paper currency. The theo- retical unit is the peso divicled into 100 centavos. It should be the equivalent of 18 pence or % H«™ " Ho" L" t''""i ''^''V ^<>^ ^r:':^o.s ":ir "'"'■ When *w„ T'"' '."" "' ""'"""^^ ''^'"'='^" ^<""'t"'=» obtained > Uquoted? """■'" ''"" "" '''•^"''^■'■' ''>'"^- "^ -^"-Se, how U sS:L'i:I^J.fX:'J::7 "^-^ -"■ -'"-- *" e«hange ciyp^'civraTeXle"^ ''""' '^^^"""'^ ''-'"' "^" *° » Wh"areffecTha",Ti 'T^^V" T"*"*^" '*'"' " ""^^ "'""•""d? »nat effect has this standard on business in those countries = ren"r "*" "■"* ""= disadvantages of pa,,;; eur- CHAPTER XVIII LONDON AND NEW YORK AS FINANCIAL CENTERS ' 1. New York as a /inaiidal center. — Since the be- ginning of the present European war there lias been a great deal of discussion in the financial papers and elsewhere as to the effect of the war on London's po- sition as the financial center of the world and the probability of New York succeeding in assuming and keeping the position. It is, of course, natural that the serious interruption in shipping, commerce and exchange thruout the world would minimize, for the time being, London's supremacy, especially when the stupendous task of financing not oidy Great Hritains munition requirements hut those of her allies has devolved upon her to so large an extent. There is no question that at the end of the war. New York's position as an exchange and financial center will be vastly enhanced, but not necessarily at the expense of London. Sovereigns and dollars are the only two important mediums of exchange that have been at all reliable since the war commenced, and this will no doubt put both of these exchanges immeasurably ahead of the exchange of any other country at the end of the war. • This chapter was oripinnlly puMished as an article in tlie Annalf til thf Amrrirnn Arnihmy of Political and Social ticitnce, Nov., 1!)I«, and i reproduced in this volume with permission of the pulilishers. 238 FINAXCIAL CENTERS asii i 2. The reasons for London's supremacy.— Ten- don has been for centuries the conmiercial clearing house of the world. This is due not only to its cen- tral situation, its immense foreign trade and its large mercantile navy, but also because, thru its highly per- fected banking system, it provides facilities of such magnitude and of such entire efficiency for the final settlement of exchange operations, that drawers or negotiators of bills in every quarter of the globe gave preference to sterling over any other form of ex- change. It has been estimated that nearly ninety per cent of all letters of credit issued thruout the world were, prior to the war, drawn in English money. Lloyd George, in commenting on the unique and commanding position of Great Britain in interna- tional trade and the consequent serious responsibility placed upon her at the outbreak of the war, said in Xovember, 1914: We had not merely our own business to run ; we were an .•ssential part of the machinery that ran the whole interna- tional trade of the world. We provided the capital to raise the produce; we carried half the produce, not merely of our own country, but of the whole world. More, we provided also the capital that moved that produce from one part of the world to another, not merely for ourselves, but for other countries. I ask anyone to pick up just one little bit of paper, one I'll! of exchange, to find out what we are doing. Take the ™tton trade of the world. The cotton is moved first of all fvom the plantations, say, to the Mississippi, then it is moved dow. to New Orleans; then it is moved from there ' xvu-Tir""*"^ "'■ """* ^'■'''''" °'" ^■'sowl'C'-e. Every 240 DOMESTIC AND FOREIGX EXCHANGE movcmtnt thiro is represented by a paper signed either here in London or Manchester or Liverpool ; one signature prac- tically is responsible for the whole of those transactions Not merely that, but when the United States of America bought silk or tea in China the payment was made thru London. By means of these documents accepted in London New York paid for the tea that was bought from China. We were transacting far more than the whole of our own business ; we were transacting half the business of the world as well by means of these paper transactions. What is also important to establish is this: that the paper which was issued from London has become part of the currency of commerce thruout the world. In considering the possibility of New York being a successful rival for supremacy as the exchange and financial center of the world, we can do no better than review some of the principal reasons why Lon- don has hitherto held that position and, it will be re- alized, that Xew York must duplicate these conditions in great part if not in entirety before London can be detiironed. These reasons and conditions can be tabulated briefly under three headings; physical, psychological and economic. Those coming under the first heading are of course unalterable ; those under tlie second heading can be remedied in time thru educa- tion and training; and those under the third heading are matters of legislation and custom. 3. Phymcal conditions favorable to London.— London is situated on the thre ;':old of Europe in the heart of the world's commercial activities, directly opposite the estuary of the Scheldt and nearly o])- posite that of the Rhine, and is within a short distance FINANCIAL CENTERS ui of every important exchange center in the world with the exception of New York. This may be considered as an almost insuperable obstacle to Xtw York's am- bition. London has the advantage of water lanes free from ice and fog to every large port in tlie ^v,irld witli the exception of Xew York; the climate is equable and liquids and perishable goods run little or no danger of freezing in winter. The restricted insular area of (Jreat Britain, a little larger than the State of Minnesota, is also an import- ant factor, as it not only affords an immense sealioard con.pare.1 with its size, but concentrates the po,,ula- tion. A frequent and rapid transit service makes Cxreat Britain practically one large city with London as the business center. Every bank in the country has a branch or correspondent in London, carries its reserves there and clears direct with every part of the country thru its London agent. The economy ot resources effected by this natural concentration of funds is seldom realized and is worthy of study The I'lsular position of London renders "it comparatively .ee from the danger of invasion and seizure by a lioshle power and this immunity has been a facto^ in making London a world depository. 4. Mail and cable facilities.~The geographical sit- uation of Great Britain, coupled with her willingness o invest money in international utilities, has placed I'cr m a unKjue position as regards mail and cable fa- cilities. Thru her immense mercantile navy, London 242 DOMESTIC AND FOREIGN EXCHANGE has direct communication by fast steamers with everv important port in the world and consequently acts as a foreign mail clearing house for all other countries. If f'rench, German or Dutch steamers afford a faster service to any point they can be utilized with little or no loss of time. As Great Britain owns and operates two-thirds of the submarine cable mileage of the world, it is natural that I.,ondon should be a great cable center with prac- tically direct communication the world over. This service is now supplemented by a far flung system of wireless stations. Furthermore, under normal conditions, every main railroad on the continent of Europe gives its best service and equipment to its London mail train. The Trans-Siberian Railway already gives access by rail to the Pacific and it is only a. question of time before thru connections with India, China and South Africa will be estab- lished. 5. Time advantages. — In dealing in foreign ex- change and stocks London is the center of the world as regards time. She knows the conditions in eastern markets before they close and is open long enough to operate in New York before her own markets close. Her position is therefore pivotal as regards time and distance. Time is the essence of an exchange trans- action; a day's delay may turn a profit into a loss and, granting that New York has the means and enter- prise to create an efficient steamship and cable service in due course, how can she eliminate the more serious FINANCIAL CENTEKS JW handicap of distance by water from all other financial centers? 6. National cliaraitcmticii.—iireut Britain is a land of slowly accjuired fortunes and the banker and merchant there are content with small profits and slow returns. They have long realized the fact that trade follows the loan and have, therefore, been willing to invest money in foreign countries with no prosj)ect «{ recovering inmiediate returns or large profits. 'J'he financing of these loans abroad has been an im- portant factor in making the London money market so supreme. It is doubtful if the American is adapted temperamentally for operations of this kind or for the small profits of the exchange operations connected therewith. The United .States has still a vast area in proportion to its population, its natural resources are not yet fully develojjed and it is a coun- try of large and rapidly acquired fortunes. It will, therefore, be many years bei'ore the investors anu en- trepreneurs are forced to direct their attention to for- eign fields. Great Britain, before the war, invested over a billion dollars annually in foreign enterprises iiiid at the beginning of the war had between twenty and thirty billions so invested. The United States at that time was a debtor nation for over six billion dollars, and allowing that some two billions of this amount were paid off or absorbed in the past two years of the war, she had to invest nearly twenty-five billions before she could be on an equal footing with fireat Britain in this connection. S44 DOMESTIC AND FOREIGN EXCHANGE 7. WilUngncas to seek fortune abroad. — The a.-er- uge family of Greut lirituin is lur^e compared vvitli that of the United States and there iit httlc room and few opportunities at home for the younger sons. This class of men finds its way into the army, the navy and the mercantile marine and go ahroud as clerks, etc., to foreign and colonial banks and commercial houses. The more venturesome, as soon as they ac- quire experience, carry British trade and prestige t(t new and undeveloped countries — British suhjects are found everywhere, no matter how remote the place. The young American, on the other hand, has so many opportunities at liome that there is little in- ducement to venture abroad excej)t for pleasure. He is probably the only son of the family and takes up his father's business or is assisted in setting up in business for himself. If he goes al>road, he is not content with a subordinate position, I)ut wants to be his own master and strike out for himself. Prefer- ablj' he goes back to his home to do tiiis. We might instance the experience of the International Uankinir Corporation, a state bank, chartered in Connecticut with foreign branches chiefly in the Orient. This bank, tho an American institution, is manned prin- cijjally by Englishmen. It will be interesting to watch the personnel of the staff of foreign branches of national banks established under the Federal Keservt- Act. 8. London tciihotit rixmls at home, — To be a world center of finance it is essential that a citj' must, in the FINANCIAL CKNTKRS S45 first place, he the tinijuestioncd finiincial center of its nun contit-'v T^ondon is indisputahly recoj^nized iis the fi. iMKi: i .♦ r not only of (ireat Britain hut of the ( . lish r.i-iiiiii, . \() {(K-al jealousy is evinced hy Hirn )'i 111, I i\^i jXhi], (ijas^ow or other laTj^e cities > '• ! . rd,' • > supremacy in this rejfard. \e\v Vork IN • . -Mr pal financial center of the I'liited States, hi ' ,i ;- .lot the only financial center. ( !.i- ca^o. '*»'• Louis, San Francisco and other iniooiKint centers are strong « inpetitors with \ew .'firk I, r domestic, and to a certain extent for fon i/n. hijsi- iiess. Aside from sectional jealnusy, tin vast ari-t of the United States makes this compeliti.n in- evitable. Will these cities abandon selfish moli\is and aid Xew York in her ambition? Will not tlie expansion of the country's forei^ trade accentuate rather than diminish this competition? Chicago and Minneapolis will share in the development of the Kreat Canadian West; San Francisco will become more important with the extension of business with tlie Orient, and Xew Orleans will benefit hy the open- in^r of the Panama Canal and the expansion of trade with South America. The United States is not a country but a collection of countries or common- wealths of which Xew York State is only one. The tendency is to minimize Xew York's financial su- premacy rather than to assist it. A study of th- discussions on this feature, preceding the passing of the present Inderal Reserve Act, will bear out this statement. 246 DOMESTIC AND FOREIGN EXCHANGE London's supremacy is the cumulative result of nu- merous forces, political as well as economic, spread over a long series of years dui'ing which time the world has learned to think in terms of British money and the bills of exchange on London have been raised almost to the dignity of an international currency, while the safety of the Bank of England and the value attached to the word "sterling" have become pro- verbial. Sovereigns, and to a great extent Bank of England notes, are current the world ovor without recourse to money changers. The dollar and the dol- lar bill must be made equally well-known and ac- ceptable. 9. Influence of custom and tradition. — It must not be overlooked that, when an international busi- ness is so long established and well centralized as the money market of London, the world will con- tinue to use it as a matter of convenience irrespecii^ j of the possibly superior facilities of New York. The financial roads to London are well defined by mucli travel, and business tradition will favor the old stand, for such is human nature. One of the main foundations upon which London's position rests is the world's estimation of its credit. This credit is tried and sound, backed by great re- sources, and has been reared upon the trust and con- fidence in the honorable tradition of British business ethics. It is unlikely that the world will have cause to revise its opinion after the war is over. 10. Economic factors in London's imsition, — The FIXANCIAL CENTERS 217 principal economic factors wiiich tend to enhance London's position as a financial center may be con- sidered under the following heads: Frie Gold Market Liquid Discount Market Stability of Monej Hates Immense Mercantile Navy Great Foreign Export and Import Trade Tariff Excellent Banking Systems at Home and Abroad The Numerous Branches of Foreign and Colonial Banks Established in London Freedom from I'nnics and Financial Disturbance Free Navigation Laws Marine Insurance, etc., and reliable Ship Kegistration 11. Free gold market.— Oi the four great ex- change centers of the world, London, New York, Paris and Berlin, London is the only one that can al- ways be depended upon to meet every legitimate trade demand for gold, which means that there is no delay or premium entailed in realizing gold on a bill expressed in English money. It i:j payable in pounds sterling which represent a definite and immutable weight of fine gold. Great Britain adopted the gold standard unequivocally in 1816, over one hundred \ears ago, and has not departed from it since, even to the extent of charging a fractional premium on H;nld or by restricting its export by legal or senti- mental embargoes. Even war conditions did not de- prive the Englishman of the privilege of converting Hank of England notes into gold. 248 DOMESTIC AND FOREIGN EXCHANGE The Bank of France always reserves the right to pay in either gold or silver in order that in times of stress it could charge a premium on gold. The Im- perial Bank of Germany, tho theoretically obliged to pay gold, makes it very uncomfortable for any bank or customer who has the temerity to demand gold for export purposes. Both France and Germany, since the war, have abandoned any attemjit to maintain a gold basis. New York, tho generally willing to part with gold for export purposes, was— at least up to the estab- lishment of the Federal Reserve system— handi- capped by the lack of machinery for tlie efficient and economical mobilization and control of tlie gold re- serves of the country. England is not only committed to an undeviating policy to maintain a free gold market but enjoys peculiar advantages in this connection. Great Brit- ain is not only the largest creditor nation of the world but also controls and supplies, within the Brit- ish J^mpire, nearly two-thirds of the raw gold out- put of the world and has the control automatically, independent of any exchange movements, of over $350,000,000 wortli of newly mined gold each year. Owing to this gold income Great Britain has been able to maintain her position as a free gold market during the whole period of the war and its bank and treasury notes have been, and still are, redeemable in gold at the Bank of P^ngland on presentation. It is true, that since the war, London's activities as FINANCIAL CENTERS 219 an international gold market have heen curtailed ow- ing to the disturbances in trade routes and the difficul- ties and risks of ocean transportation, but, so impor- tant IS the certaint>' of the English monetary standard and financial policy to the merchants and brokers of the world, that it is unlikely that the war will cause more than a temporary recourse to other methods of settling international obligations. 12. Liquid discount market— The natural com- plement of a free gold market is a liquid monev mar- ket capable of absorbing bills of exchange to an al- most unlimited amount. This unique feature of the London market makes a first-class bill of exchange on London as acceptable as gold. The strength and broadness of the London market, apart from the nat- ural resources of the ronntry, lie in the ebb and flow of foreign capital thru the machinery of the branches <.f foreign and coloi. al banks established there. Altho London do-^s not particularly encourage the establishment of foreign banks, it, on the other hand i"cs iiotliing to restrict the movement and allows free- dom m banking privileges to all comers of good stand- ing. This broadminded policy, tho it perhaps alTects to a certain extent the individual interests of some of lie British banks, is recognized as of great importance to London and the country in general, and therefore inondon drawn vu II ^^'W^ L'^BLjaiiKii •.^f m a\mt\ny\\Mi FLVANCIAL CENTERS c,,-,3 any place in the world, no matter how remote For the year ending December 31, 1913, the imports of lllfJot'^ ""■' ^''^''^''^^' «^«'"n.st exports of i634.820,326 representmg shipments from and to every country of the world. At the end of 1915 ex- cuding certain goods belonging to the British 'and allied governments, the figures for which are not avail- o1 J'sf/rXo' T" f ^«^'***'*^'» «^'-'nst imports of £853,756,279 a shrinkage of about 23 per cent It the bulk of her export trade notwithstanding war con- ditions and the shortage of bottoms Great Britain has a fully developed banking sys- tem, eminently adapted to the requirements of her in- ternational trade and finance, which has been ably and successfully conducted thru a long series of years by Jnghly trained bankers, i„ whose judgment and con- erv-atism the British public have every confidence, t onsequently the country is practically immune from panics and other financial disturbances. The bank- ing laws are simple and impose no unwise restrictions as to legal reserves, etc., leaving such .piestions to the individual judgment of the banks themselves Kx,,e r-ence has shown that good hanking is obtained not «. much by good laws as by good bunkers. to^^w .r? "T '■"""';' '"■"'"•^' *'"^ ''■•'"^•'p«' '•^«^""« »_iicli London owes her financial supremacy, and tlio he events of the past few years have brought Xew \ ork into a position of financial eminence and power it remains to be seen how much of this power has been 854 DOMESTIC AND FOREIGN EXCHANGE thrust upon her temporarily and how much she lias acquired permanently, at the expense of London. 15. New York'n prsent dominance temporary.— Since the war commenced the United States has grad- ually changed from a debtor to a creditor nation, prin- cipally owing to the fact that vast exports of muni- tions, etc., have been made ia belligerent countries, thus creating an abnormal trade ' ■ lance in her favor. With this shifting of internn i tial balances, large amounts of gold have been received from debtor na- tions, a considerable volume of American securities held abroad have been absorbed by the New York market and large loans made to the belligerent na- tions, as well as to Canada and other countries of tin- American continents. Owing to the position the United States then had as a wealthy neutral nation, far removed from the scene of conflict, a wide demand also developerl for dollar exchange and dollar credits, not only in the United States but in foreign countries. In other words, tlit abnormal conditions induced by the war called upon New York to take the position of international bank- ers heretofore played almost exclusively by London. This role was assumed by New York, not so much by her own volition as by force of circumstances. Will these war time opportunities, when peace is declared, be sufficient to retain for New York the position which London with all her advantages took centuries to ac- quire:' liefoie New York can do this to any gi-eat extent the United States must learn to think interna- FINANCIAL CENTERS ir>s tionally and not provincially. It must increase its foreign trade tremendously and revise its navif,'ation and alien labor laws and its tariff, all with a due re- gard to the comity of nations; sound permanent l)aMk- ing and currency system, removed from legislative tinkering must also be established, and finally foreign banks should be encouraged to establish branches in Xew York and other centers without unnecessary re- strictions as to the business they may undertake. On good authority the opinion is often given that the financial center of the world will always remain in Europe, if only for geographical and national reasons, l)ut there is need and room for another strong financial center in addition to London and it would always be desirable that such an alternative should not be lo- cated in Europe, as the recent European crisis has amply demonstrated. 16. New York's future.— 'Sew York is already the financial center of the new world; she should strengtlien and broaden her claim to this position and, .IS a coadjutor, relieve and assist London in her great responsibility as the world center. In the reconstruc- tion that must follow the close of the war, (Jicat Hrit- ain and the United States will undoubtedly piny a filial jiart and London and Xew 'N'ork will find it more and more necessary to cooperate in tlie perform- ance of their several functions. Xew York will doubtless benefit permanently from tlie advantages and experience gained during the war. Cireat Britain will profit also from the intimate inter- xvir 18 256 DOMESTIC AND FOREIGN EXCHANGE course with France, Italy and Russia, likely to result from the war which will undoubtedly tend to reestab- lish, if not strengthen, London in her former position. Great Britain has financed her allies generously tlu"u the war and will not only have these large amounts re- funded to her in due course but will receive collateral advantages which should more than offset the business lost to New York. REVIEW What has made London the commercial clearing house of the world ? Discuss some of the conditions favorable to London's position as a financial center? What are the principal economic factors which help to enhance London's position as a financial center? What chanf^s must the United States make in order that New York may hold the financial position gained as a result of the European war? CHAPTER XIX WAR AMI) THE EXCHANGES 1. Wcr and Us effect on international exchange- Exchange operations in the preceding pages have been considered almost entirely fV-.n. the viewpoint of normal conditions, a^ it is safe to assume that, with the return of peace, international exchange will re- sume Its onlinary channels. A hriof review, however, <>t the manner in which the war has affected the ex- changes may be interesting as well as instructive A prominent Xew York banker, Mr. Albert Strauss, once referred to foreign exchange as "an economic mechanism automatically making .lelicate mternational adjustments." The full significance of this terse definition has never been more fully realized than in those fateful days of early August 1»U when the mailed fist of war fell and completely par- al.\zed the credit machinery of the world. The very perfection of the international credit machinen- with •ts vast network of telegraphic nerves radiating fn,m London, Xew York, Paris, Berlin and other financial Sangha was a factor in its own undoing. Cable com- numication was practically cut off by the destruction ot some of the cables and by the establishment of cen- sorships, and the little news that did succeed in filter- 2.-.7 MIOOCOPY RESOLUTION TEST CHART (ANSI ond ISO TEST CHART No. 2| iriii IIIIIM ta li^ nil 2.2 _^ APPLIED INA^GE Inc ^5^ 1653 East Moin Street STA Rochester. He* Yorli U609 USA r.^S (716) 482 - 0300 - Phone ^^ (716) 288 - 59S9 - Fa. 258 DOMESTIC AND FOREIGN EXCHANGE in^' thru was abiiost unbelievable, so terrific was its sifrnificance. Events followed each other in rapid succession. Austria declared war on Servia, July 28, and Kus- sia. Germany and France began to mobilize. On July 30, the Eank of England rate was raised to four per cent, and on July 31, to eight per cent. On the same day, unable to withstand the flood of conti- nental liquidation, the London Stock Exchange closed, and a like course was soon followed by the New York Stock Exchange and by every bourse in the wo "Id. On August 1, Germany declared war on Russia and the Bank of EnglandVate was raised to ten per cent. On August 3, Germanv declared war on France. This was followed by a run on the Hank of England, and on August 5, England de- clared war on Germany. Europe was panic-stricken, specie i)ayments were suspended and moratoria were being declared everj'where. I or a time all was con- fusion until the energetic and courageous action of the British government, assisted by the remedial meas- ures resorted to at other exchange centers, brought some order out of chaos and, to a certain degree, re- stored confidence. During the first week of August the world's finan- ciers laced conditions that were absolutely unprece- dented and to which the generally accepted remedies or economic theories were inapplicable. Friends of peace, who scoffed at the jrossibility of a great Euro- pean war and the necessity of preparedness, received y Ti 75 J £ S?iSri:SH = fi'i»-'Sl^-Mli;iS-» r -. - : : ! ! : 1 ; . . : :_i-..il i 1 i ! 1 _ .._l_Ui!f:!U^. ■ t - I t i 1 1 , 1 i ' ! J i A\X. 1 , : .- • . 1 .1 i- ^._.._| -i 1 1 ! -i -U ! 1 1 ■ ! 1 ! : i 1 1 i ■ 1 1 1 1 . ! t 1 : 1 1 i 1 Mil' ! 1 1 1 1 ! "T ! -1 — 1 ' I I ! i i 1 1 1 1 1 - 1 — \ 1 — -1-1 1 ■ 1 ' I 1 — t — ! i i 1 i 1 i I 1 1 s "7" i i 1 1 J \ , 1 ■ i 1 i 1 i i 1 < ! i » 1 - 1 1 i 1 1 1 ■, 1 1 1 -J_i— U^ ' 1 i 1 ^ j""\ \ i ?^— 1 1 * "^__ 1 ' i i - t^^s -^ . 1 ?-!-- <■ " i CT-.'*' 1 :::^ ?3 ■ ^M- ,, _^ -- ;> 1 _^ ^■s f 1 i 1 — - "r 5 •" 1 1 1 j j f^' '"" i "- — — t- " . = s ? M r s M = s f^ r ■, ■;- ; _='■ >• Di-^.'-imil ^■' I'ltiiiiuni n — — — — r: ~ - S '^ ■* -' '^' *•"' *" " '• \ " - - ^ •J -r id > - 1 ' \ - S. > - ^ ilU 1 .- , 1 1 1 1 1 1 * -rr\ r^. o y\p i 1 •■" *^ ! 1 i 1 i- 1 1 j 1 -l-f - 1 1 1 1 f . ^-:-' ; i ■ J ! X:-! : -: ! -j l'\ '.- i 1 j i 1 ^M 1 1 1 , 1 1 ' \A' iW i ^^^ i ! ! ! 1 M ri' — H . . .! 1 LI. 1 ! 1 1 ! CJ^ /i i 1 i i M ^ L fS = j 1 \ : i ! 1 ! 111 -"i T -'^. 1 --* 1 ii.i-/' i< 1 i l_l = o \ "i \l>'n 1 ! ' /J' >« J _[ I ' \ 1 ^ 1 > !^ n'3 1 -^^X -J 1 1 j "^ ■ \ 1 5^5 ~^ 1 1 y' ry-^. i n \ s 1 2ii __ ' 1^'' A 1 i .^ 1 eg i i ^v'J 1 ■ — ■ ~-~. r i 1 > I f * r ^^ s 1 1 f ri \ \ 1 ' I 1 ] \ ' •q 1 i \ LL 1 j i r« \ -3 ( ' 1 ' 1 r® 1 i \ ' > 1 1 1 1 ■ td 1 1 O 1 1 1 ! 1 - ?s >; L : 1 1. - 1. I. :. J. „ ° r r r r r r f r ° - i U f + t '^ 7 ' - _ ' T f a ■ ^ V, Discount ? Premium o 1 1 1 i '% i« s i o V. * r I uniloD ■3 ~ g s ■g ?•■■*• f s e £ ■i ? * fe S I aril a — 1 1 — k s Is ia 1e Is |s s s i|s|s % s s " ^ _ I hirUo WAR AND Tin; EX('iiA\(;i:s .,.j.) a rude awakininfr. as the very inter-iational. financial and eoininereial interests <,ii whieii tliev relied s., lully to avert this war were the very first to fall vi.li.ns to Its destrnetive ii.iliienee. The first weeiv of .Vu-ust, 1!)14. found the world's "msiness e()nii)letelv [.araly/ccl and It will he interesting to study the various expedi- ents used in the endeavor to repair and sui)p.Mt the inaehinery of credit. The wliole suh.jeet of forei«-n exeiian^re siiuv the l«cKin',,nA'of the war is most complex and, in this hrief leview, we have referred oidy to the more outstanding- and evident effects, without attempting to exj)Iain all tile causes. To do so would rcpiire an exi.anstive study of the internal conditions of each country largely a matter of conjecture at the present time.' It IS hoped, however, that sufficient has heen said to make the accomi)anying chart intelligihle and iussist the reader in realizing the existence of the many mystenou.s and undisclosed influences proceeding from the economic pressure exerted hv the war upon the financial centers of the world. 2. .l/ora^om.— Moi-atorium is a Latin word signi- fying delay. It is an extension of time for tlie pay- ment of dehts allowed, under exceptional cireun"i- stances, by the government of a countrv; in other words, it is an extension of the days of grace. Dur- ing the Franco-German war of 1870. a French mora- tory law was passed extending the maturity of bills for three months. At the beginning of the war, the majority of the 260 DOMESTIC AND FORKIGN EXCHANGK coiiiitiifs of tlie world found themselves with a large amount of rioating and maturing indebtedness to pro- vide for in London, and without any maehinery for accomplishing it, except at an almost prohibitive loss. So dependent had the world become on the facilities offered by London and other large European centers for the adjustment of their trade balances between one another, that the complete breakdown in tlie ex- changes left them with no chaimels whereby they could offset these balances except by direct settlement, either by gold shipments or the purchase of exchange in a debtor country for remittance to a creditor nation, both costly methods. Conditions were {"urther com- plicated by the uncertainty of comnmnication and the almost complete cessation of merchant shipping thru- out the world owing to internment or commandeering. For these and other reasons, one country after another declared a moratorium of a more or less general na- ture. Among these may be mentioned: C'oiinlry Date Argentina August 12 Belgium " 6 Brazil « 16 Bulgaria " 7 Denmark " 21 Ecuador " 7 Egypt " 9 Grocce July 26 — August 4 Italy August 4 Norway " 6 Paraguay " 14 Portugaf " 24 WAK AND THK EX( IIANCiKS «6i ^"*"';" • 'iil.v yo - -August 9 South Africa SptrmlHT 15 T't'\-, '^"«"^' ' hwitzcrlnrid » j- Tiirkoy .i .1 Uni^imv i. jij Great lirit.-iin declared a nioratnriiim for liills of exchange on August 2, 1914, in order to pn.ttit the credit of the acce.iting liouses until thev were aidr to secure rennttances from abroad from tlic i)riniary ohiigants. As this limited moratorium was found to affect adversely the position of domestic bills, the mor- atorium was made general on August 7 and this action, by affording temporary protection to the com- munity at large, allayed any feeling of panic and possibly prevented runs on the banks. The mora- torium was only tempf)rary and was removed before the end of the year. It should be noted that, at no time since the beginning of the war, has the Bank of England ceased to redeem its notes in gold. Germany declared no moratorium in name, but coolly stopped payment, as far as her foreign debts were concerned, and paid her domestic debts with copi- ous additions to her paper money. Immediately on the declaration of hostilities Germany suspended the gold redemption of the Reichsbank's "notes and, a few months later, made it a penal offense to buy or sell gold at a premium. These exactions are far more restrictive than a temporary moratorium on private bills, and reflect more seriously on the financial condi- tion of a country. 86i! DOMKSTIC AND FOKKUiN KXCIlANGi; 3. London and Sevc Vor' — I'lider tiurniul condi- tions certain of the exchanges tend to fluctuate in j^roups, but since tl.^ war economic conditions liave been so altered that these j^roups have broken up and rearranged tlieniselves into three entirely new | ■;< — S 1 Low 25.08 24.80 25.87 23.90 n. 10. Ifi.fiO 4.50 J a: ■fl •^ Hi; 9) -fl s^ Ho. '" |»SSgS2 ^i Q^-* f" SSS§S"3S2'* S-.K s "^ tK P^ r g . . .as ss 6. -5 o !X •g,S .Sgg S = 3 < = «ss;?a«£» 5S b-' >rl -f, »- ® « '0 r;» o «? I^" u>< _>. ;; « ^ ot o 1-. S ':» X gd -5 2SS«?5i2;g£-*' -<:-» S n» -^ 2* i^i o cs CD S" o Gj e» rM oj ^ cs i: i X tfi «3 u^ o n't ^ ac hI I- e* o* 0( o» ^ 5 " ^ fc'fe3£:Ea:^<5 . c E ^ cu X « S < a. X >: «68 DOMESTIC AND FOREIGN EXCHANGE expenditures on the British and Canadian troops en- trenched in France and Flanders. 8. Dutch exchange. — No specific particulars re- garding the excliange or financial operations of neu- tral countries with the belligerents are obtainable, nor will they be until after the war for obvious rea- sons. It is therefore idle to attempt to explain the position of the foreign exchanges except in general terms, as the several rates do not by any means repre- sent either the financial positions of the countries in question or their true relation to each other. Take, for instance, the case of Holland, which appears for the time to have taken London's place as the interna- tional clearing house. According to the Economist, the Amsterdam exchanges stood as follows in No- vember, 1915: Prdtiium on Kate Par Dutch Currency Berlin IS.OJl^ S!).26 19 Vienna :H.0fii4 50.41 3J1A Copenliagen CtXCti 66.(57 ^it London 11.23 ij.n 71? New York 7J9.65 J48.8 3.)? It will be noticed that even the dollar was at a dis- count; Dutch currency has apparently become the standard of value for tiiese centers, and the exchange markets of Holland and Scandinavia have become of importance as international clearing houses and for the time being, are taking the position generally oc- cupied by London. The par rate between Amsterdam and London is Fl. 12.107 to the pound sterling, and the rate obtain- WAR AND THE EXCHANGES 369 ing just before the war was a little in favor of Lon- don Fl. 12.14. During the first week of August, the quotations were most irregular, ranging as thev (hd from F . 11.90 to Fl. 12.60. hut after the steadying of the exchanges by the remedial measures ab^ve re- ferre< to. the rate on London was fairlv well main- tamed around normal, until 191.3. when payments for freight and large purchases by the British goyernment of sugar and other supplies, together with the sale of securities in New York and London, presumably for Uerman account, combined to lower the rate of the pound to Fl. 10.85, the quotation on the 1.5th of Janu- y'^'^'t, ^" ^^^ **'' °^ •^"""^'•y' ^917. the rate stood at H. 11.69. 9. Exchange in other countries.— Since the begin- ning of the war. the Italian exchange has been fayor- abJe to London and during the summer and fall of 1915 stood at about lire 26. The rate rose a little m December but dropped again on the prospect of Italy s participation in the war and stood at about lire 28 until June. 1915. from which time it has been gradually rising, and on the 15th of January 1916 reached lire 32.35. On the 4th of January, ig'l? the rate was lire 32.78. ' The Russian rate of exchange before the war stood at about 94 roubles per £lO. Since then the rate has gone steadily against Russia, reaching as low as 163 roubles per £lO. This is due to the almost complete blockade of Russian exports, both from the Black Sea and the Baltic, and to a large increase in the value of !>70 DOMESTIC AND FOREIGN EXCHANGE imports, tho a certain amount of this depreciation is (iue to the expansion of the paper currency. The rate on the 4th of January, 1917. was 1«3 roubles per £lO. Spain was favorably affected by the war as far as exchange conditions were concerned. Sterling ex- change is almost invariably at a premium in Spain. Just before the war it stood at 26.10 pesetas per pound sterling ( par 2.5.'22) and during the first part of Aug- ust fluctuated between pesetas 23.8.5 and pesetas 26.60 per pound, the higher quotation being of course in favor of Great Britain. Heavy purchases by France and England of war munitions and provisions turned the exchange in favor of Spain, where it has remained ever since, and England has even fonnd it necessary to ship gold to Spain from time to time in order to keep the rate adjusted. The rate on the 4th of Janu- ary, 1917, was 22.30 pesetas per £. The position of the Scandinavian nations— Norway, Denmark and Sweden— was very similar to that of Holland, being adjacent to both Great Britain and German . Under normal conditions the Scandma- vian nations are generally indebted to Great Britain rtnd at times lean heavily on London for financial as- sistance. At the beginning of the war exchange was in favor of London, standing at K. 18.25 as against the par of K. 18.16, and remained favorable well mto 191.5, when it fell as low as K. 16.60. The fall was due to a number of causes. England's exports to these countries had practically ceased while her im- ports from them had increased. Russian purchases WAR AND THE EXCHANGES a7i in these countries were paid by draft on London and large amounts were also due from Great Britain for freight and the like. 10. New Fo/-A'.— Owing to abnormal conditions in- duce'' "^- lar in both S /^" J"r ^'''" °" P"^^ ^71 the dol- H 1? ^ r!.'" ""'^ ^P^'" ''''''^' ^^^" this rate. on^h Ten ' ^r'""'" ^"' Switzerland, borders Wth both ir rT'^' ^"^' ^^"'^^ «" ''-'"-s H .th both. It ,s not only a great maritime power but LTk.r ^f^'.'-"*''^'- t''^" «f « protectionist nature! l^.ke Great Britain, these two features make her ports il'i DOMESTIC AND FOUEKJN EXCHANGE vast clearing houses for cargoes from all over the world, especially lor goods from the East Indies, such as sugar, spices, coffee and tobacco. In addition many of Germany's direct imports are routed thru the wonderful Dutch canal system. During the first part of the war Holland uncjuestionably exported a vast quantity of both home and foreign goods into Germany, especially from the United States. Her imports from that country for the year ending June, 1915, showed an increase in value of over $13,000,000 over the corresponding period of last year. The Brit- ish blockade in this connection, however, was so thoro that Holland found her own recjuirements jeopard- ized, and the Netherlands Overseas Trust was incor- porated. The guarantee of this company as to the destination of any cargo was accepted by the liritisli Government. Holland, however, continued to export large quantities of her own products into Germany and apparently received payment in American securi- ties, judging from the large number of these securities disposed of by Dutcli interests in New York, tlius creating a large balance in favor of Holland. These were supplemented of course by gold shipments from (Jermany, the latter being reflected by the large in- crease in gold holdings of the Netherlands banks. Notwithstanding these correctives the German mark in Holland continued for some time at a discount of about thirty two per cent. 11. Canada. — As New York is the exchange cetitt i of this continent, foreign exchange conditions in Can- WAR AND Tin: KXCHANGKS t-r. mla since the beginning of the war Imve been a reflec- tion of those experienced i.i the United States The quotations f„r sterling, francs, etc., differ fn.n. tlu.se m New York only by the discount or preiniun, „b- taining on New York funr Is. IVA. Both London and Copenhagen (piote on a basis of kroner per pound sterling (par K 18.l(i per pourid). Any increase in the rate would lie in favor of England as she woultl receive more kroner per ie78 DOMESTIC AND FOREIGN EXCHANGE pound. This would, therefore, operate against the Union. In Copetiiiaj^en, just before the wur, the quo- tati(»n stood at K. 18.30, rising; on i\ugust 1 to K 18..50 and subsequently reaching as high as K. 19.70. In Norway and Sweden the rates run practicallv con- currently with Denmark. In view of the difficulty of remitting to London under these circumstances, even f«)r indebtedness incurred since the war com- menced, various expedients were adopted by some of the banks. The most general nietho.000, as against oidy $0.- 7(M),000 tl)e previous year. SweId payments was the re- appearance in London of a lar«e number of the sover- fifrvs known to have formed part of the German war chest -it Spandau and which were allocated for that purpose out of the French war indemnity of 1872. These sovereigns were not only identifieil by their date and design (Victoria effigy "shield reverse*!") hut some of the coins were received in London from Scandinavia in the identical labeled bags in which they had been dispatched from the Bank nf England to Germany for P'rench p x-ount forty-three years ago. nEVIEW What has been the effect of war on international e«han«? countries'?* ' "°"*°"""' """^ «'''>' ''«' >' l^en applied by most What tendency toward fluctuation do exchanges show under 280 DOMESTIC AND FOREIGN EXCHANGE Discuss the exchange relations between London and New York as a result of tlie war and describe the corrective measures which were introduced. What effect has tlie war had on commercial exchange in neu- tral and in belligerent countries? Discuss foreign exchange conditions in Canada since the begin- ning of the war. ^11 « w «- rk 8 a| Bc r. 4 3) S > ^ :h f':^! g-^ = •Sl-o' = 1^ 3 u- ri.^s 2 a .^ •2 pJ^ m c> e -S rt " ® bi-'S I e*ij Q- Secreta les of p t of the United to reliq d showii t the di u 3 q 3^ ^ 'Ml -1 O ' S| " o . = £.* CC y. .--•s°^l £--S Hi "' ° £-i! i « 1* o o a o &s X o c ^ £ -5 Jo ^ o Q . a 2 . o c ■•n f ri . 3 £. u =-1 g 2 If- £ S'l o 2 ^ o ■- - ► o ^ w = £ o ■S '5-1 £•£ = E< ^5 =1 c -u s a) c^ •- C a P P •- ua .5 ^ -d M) : 3 - C S J - £ ib ^ >- _g X a 0.1 _) 4il "3 : - :3 3 g b-.s . - o = = o 0,0 J «te-J5„«30.^ o w 3 .^ *J to o a s2 ■"5^ o ^- s o .- n|" 3 (S CB — ..I .2 ^ S «^ k.'3 — 1 '■ S ii« ^ 3 ii s -- o 2:z 5- r - B «- s 4. r; u B «■ J 3 e CJ H C g Is lis >« iH « -o := a< S C. C .. -1? :: c * 9 = = 1- |8^ . t"'-:^ a b K lo a- — k«feC _ = .s ^1^* £j:'e R iS •j .. S t «s ;.. « ■i' ti.a (, p C. I. ^ - ~i c; SB5g ^ — ^3 fc. =— 1. u aj ° »-c ? c c sa « I- 3 O - i 4 3 Ctfc ££: .;.r = = " 005 -Sj-s OCO ceo ■ ■ ■ B ; ^:; I-- ■I 1- i -^-s » 0^ u 283 E?35 •- s a a (^ 0, iCVtcnrco ■'xoatavo^o^a ■o a o ~ 5 • 2 J >; ■ ■= 2 a K ?• c • Si 5*2 "m •• - ■ 3 s *'2 =o ^ o c - too : ^rSa -~ = rc -^ ffl o fci 3>, c ©2 05 ft- = ^ a c q Sa:QCba4 s^^Kbso.ss.o.^aicc-Q:'^ CHC-u.^&. -e^K, SJ^'^S £"^---'E = a e i o o •4.j=fci5e-?.i«s 2c^^ c 7— = 5 t: 3 c o c ,- i 5 i " ^^•4;<-< •<<^o& pS ?HSsSiiC-^g >- E? b c: -^•^ M R o S . c S a O ■-? *C.O to « " B'-.t V I C-^— r .-■=" — ^-® ^ si SOS J -5— Ci-Ca'"" .jl|?S|.S|fg|5i ■ =a— ; ."g o ■ :'?fc « -^w . : =;^« I- o Bi.'i;i,i,6;i;^ osSBSQ^^^c "i « a a £ «^* > HZ^ ''■''x:^i£ S(2 ass a a n (C >n If) n PI iT « w ifj » o X CI in ifl « -5 o 1-) 2 «9W II ' c > ioa>o ON -f * 3J-H I- ri f «?n--Hi-.ejct(c;o t nto " ?i «' O (3 r. 31 oi d r-; a CO o o es 3 2 = m "^ 2 « ** a: : : :ao^ : :-5 : • • .ssi ■ •; • : ■ = = 2 . :-! • _i = c = . . i : A a." - - occ . > . — ^-t a az> eg . ■JJ=..---~S • •o ^-^"^a *. -''2 5 "5 c 2 1- o"'': "^""g r. uS^t~°o" I. O h 5 Si; O J 2 5 * -33 'ga ■ ■.■S~Sa-z~ S^S A*^^5.5 A-5.9 "S 3 » » 3 =.a £ - =- 5.5.53- -§a£J.= _; b 9 l: c L. « B «.ilsil- >-.- J ■! c s ■ > :; U3 ~ a «•£ A fe = Si c £» J- 2 « 1^ 3 O jl 11 25 1 g 3 B ^ a oij « o ft. a t: « S-3 |a o. « E'o .si a ^^ « °' Oi ■c o Is M-5 go ft. „ o O S^l tl .2 .-:5 <5.£ 1? C a 1 ■ao> la - S- F-S .= 5 — C. ^S-f. a* » '"■ — nana*; ^y o o " o o = « « s.a 5 a3 3 » » 3 = a 1. J 6 1^ Eh O <: i C^ ft. -^ ,« Sir — uifirj oo-N«oooS?S b s S ^ 1. U ^ I. a. toe. I. a £«> o = S >• s'H- a C-o fc *5 J; ar 3' ■ a i » -^ a ^ o o c $.2 £■'2 j_^ a o o « = J*;*. S "o 3j lis" "I" g|»".-=S.-g >Ji tn a S K S •-4 (S U u oj oj •I; cr « "^ 5 is V) dj ^ p-> St: s ||f&S|-i i£ 5 J 287 »«ff-io-f«i»o.':ooein«» niAmnnoo« Sflk«»tetitAxu mo ift****'*Mnc>f^ooopio oi-fn otteaAotinnCTu) ia J>000000OO = 000?l 090dqeooooos=>C'Cor 1 •» F* ^ r^ M ^ »0 g -•^oooooc 0S90000C 3«« 3f *« s = ,1 -2 " c'' ^ I in ■52 OOOC'^OOOO eeeoe£.o$eoeoeeoooc^£s £ 3: j:^*:****^:-- JS;r_-J3:i-ti _------- j^jjsS 000 Ok V OC C O O _ic 285! t-StKj .^^S^-_WW,.^WN->-.>_^— www ■ O O O eoeooooooooeooo 'asa O O O V V fti^ ► k>'(-i»>&-t»'>>'t't*>'ti>t»-a!D!«wBBBaaS RSn — uu ..- a a a'a'aaaGeaaae:'caaae:aaccaaaaa2aBsleBu^.oooBaaa^•^ 288 •na^SSs SISSSS xSS3 i J-i s; « « i'2'H-a t. o o o c-o-D ^^ 6- « 5 w . . -JSJ* * "^ I =1 J - = si 15= Fii S % S S=2^ fv. 1 1 1 ^ f c g s g s S a ===oaBH«fci:EE:£i5rSo^ j;Jj j55 eJo £ s £ £ e g H3 2- - j:,^ p^ « -4 .- fh M s -5^ . ,00000,! Q o 3 o Q ..COOOOOOOOOOOC C o = s^ 6»; kg S5 o t2Sb ..Ss £*S 3 , p. ^•;j . s---- A u oeooooeoooe Oi & Oi 04 CU &• ftt B« flk P^ At P^ Cl, s*l»_ INDEX Unarm of ir«4U is Loa4oa, 13il- aV, 143; Dr«ri In Undon. Uu. In Ufrmtay, :U-tS •Vr* kIm> boUar AcceutftncM AtUttt|>, Uraiiilion of. 155; TraoMclion rx- pUinod, 135-57; P.rilic., labl. for, I57-5H; Riork p.rllj, I5H. Ctiain rul« calculatioo, 159-00; Bxampla of fimplc, 100-63 ; Com pound arbilrago prublpm, 162- 64; Gold ihipnarnta, triangular oprrallon for, 164-65 AtiaoUaa, Currfocr and fold ataDdard. 23«; Lagal If odor, 230; Quotatiooa. 230 Bukan' iMt BUIa, form of draft. 01, »7, 101; nalaa of intarnl. 166-67 Stf alio Long Exchange Bank of *«*glani1 MmIU, Importance of. 1611-70; Mluimum diicountt. 171 ; MargraS on. 171- Bank of England flxei, le7-«8 . In N«w York. 168 BUla of Bxctaaf a, Gold rrdrniplion for. illuitralod. 46- 47; Short and long rxrhang«. 89- 00; Sight drafta, 90-93; Purcbaa- ing damand drafu. 91-94. Ca- bloa. abnormal ratea for. 04-96; long lime drafU. 96-106. Api>U' cation of intereat rate. 9rt-l00; Commerrial long billa. 100-01 ■ Bankera* long billa. 101; Pur', chaae riaki, 102-03; Commercial credit application illuatrated. 103- 06; Letters of credit, fii:u;- of 106-08; Ooir • -cial biUa of ai' change. 12, ; ; Purchase of. 198-200; Sterling exchange ubie. 198: Examplea of rate calcula lion. ln'<0-32; Export and import, 231-'.^ 283 Oablaa. I.l.ulity to chacka, 04; Ratea >inca the v«ar. 95; Summary of condi tiou* b) Uargrair. 95 00 Ohaln Rula BzchaDga Calculation 150-60 OhUa. r«|»r .landarj. ■.•:|(I ; K„i,., i„u,4 against gold, 230-:i7 Oblna, Nil'er alandard. 233 . Value of taela, 233-34 Circular Motae. Porm of remittance. it2. 83 Clara, Oaorga, Author of Foreign Ex rbangi',' 145 Oolaaga RaUa, Oistinguiahiug exchange ratea. 60; •'rice of soviTi'igim at U S. mini. 50: Uold eagles in England. 60; »alue of gold in Great Britjin. ia«. laO; In United Slates. 189, 100; Uint par calculation. 324-2u; Value of foreign coins, 281-86; Moneya in use. 387- 01 Coamarclal Lattan of Credit, Form of, 105, 106-07; Bank ia- auaoce, 107; Importance, 108; Method illuatrated, 118; Adsao- Uge to Importer. 137; Foreign ex- change and importa, 137-43; Granting acoeptancea, 138-39 Comnarclal Loof Billa, On foreign debtors, 07. lOO-Ol- Payment billa. 100; Acceptance bills. 101; Commercial bilU of exchange, 128-39 Stt also Lung Exchange OonTaralon, When necessary. 55-56; Rule for Jxed exchange, 56; Dollara into foreign currency. 56; Foreign currency into dollara. 57; Rule for moTable exchange. 67; Dol- lars into franca. 57; France into dollars. 67; Exchange tables. 69; Demand sterling sold. 110: Sterling rxrhange. 195-97: Franca into dollars. 206. 207; Frac- tional qunlstion. =06-07- Oorman rulea. 217-18; Dutch exohance 223 ' 894 INDEX Country Obedn, Collection methods, lH-19; branch t>anki> needed, 19 ; Federal He- »ervt) system, 19-31 Courso of Exchange, London qiiolatioii!.. 191. 194; Royal Kxrhange nu'Uiods, 193; When two rates are quoted. 195 Crossed CbecJc. itankiDt; practice lor, 111 Currency Shipments, Denver to New York. 7-11: Main taining balances, 8-9, 17; liu^iea of coat, 9; Gold shipnaents. 9-10, 16; Sub treasury setlleraeiits. 12. Siip|ily and demand, 14-15; Gold Kettlementfl and Federal Reserve bankn, 30-31; Expense of, S4~ 35 Demand and Supply, Shipping currency, 7-«, 10-11; Kx change adjuntments. 13-15; Af- fects rates, 16 Documontary BiUa. Protection of buyer. 101. 102-06 Dollar Acceptances, National Hank Act prohibits. 131- nS; Jacobs on. 132-33; Federal Reserve Act provides for, 133- 34 Dollar Credita, Finnijcing exports, 130-31; Imports, 138 Domestic Exchange, Definition of. 1 ; Illustration, 1-2 ; Banks in U. S.. 2 ; Chock on debtor's bank. 2-3 ; Collecting out of town checks, 3 ; Correspond- ents. 3-4 ; New York the finan- cial center, 4; NY. exchange in Denver, 4-8 ; "Business man's money," 5 ; N. Y. exchange il- lustrated, 6-7; Currency ship ments, 7-15; Rates, basis of ohnrges, O-l'J. 16; Cost of ship- ping gold. 9-12 ; Quoted rates, 11 , MelhodR of increasing de- nOHits, 11; Settlements thru sub- treasuries, 12; Demand and sup- ply, 13-16 ; When interest rates rise. 14-15; Commodity view- poini of. 15-17; Determining rates. 16 See also Federal Reserve Bank elearings. Draft iBsaes, Prnrtic*' fur. 62-6"; Demand drafts, 02. 90-93; SterUng drafts, 64; Letter of advice. 64-66; Speci- Draft Issues — continued men forms S"'*. -M;5*»ture8. Dftermining fOhJ. rb 67 ; S' practice for lit; IIi.s*ory . Loudon, 14f r.ianfe h li^ 50; German., V 15-1(1 Dutch Exchange, Florin the monetary irDit. Z'.' ' , version. 223-24; Long bills. Fractional rates, 224 ; KiTe war on. 268-69. a^4 66: IT) dry Con- 22;t; ■ct of Bscher, Franklin, Defint'S finance bills, Vf 4 ; On Dfal- in^ in futures. 153-54 Exchange Quotations, Sterling exchange •nJversal. 225- 26: Unilt'd Spates Kui>plyiug cap- ital. 226; War affects, 258-79 Sfc also Quotations Federal Reserve Act, Provides for bank aeteptasees. 133- 34; Imports, and dollar credits. 13H ; InternatioHal Banking Cor- ]>oration, 244 Federal Reserve Bank Clearings, Country checks, 18-24; Bram'h banks needed, 19; Federal Re- serve syHtera, 19-20; Act of 1913, 20-21; Checks for tollection. 21- 32 ; Chicago bank schedule. 22 ; Member banks matntain balances, 22-23; Indorsement and presenta- tion. 23-24; Presentation of check thru mail, 23-24; Colbc- tion charges, 24-21; N. Y. Clear- ing House rates, 25-26; New ruling of Clearing House Asso- ciation, 20; Collection illustrated, 26-27; Summary of advantages, 28; Objections to lew plan. 28- 29 ; Success of system, 29-30 ; Gold Settlement Fund, 30-31 Finance Bills, Definitions of, varitms, 144-45 ; When exchange rates decline, 145-48; Use of illustrated, 146- 49; Loaning. 148-49; London ac count, 149; Other ases, 150; Re- lation to forward exchange. 151- 54; Kscher on fatures, 152-54 Fixed Exchange, Meaning of. 54; Basis ef, 55; Con- version for. 56 ; Arithmetic in- volved, C8 ; Sterling exchange, 192. 193 Foreign Exchange aad Experts, Definition of, 32 ; Xnteaaational bal- INDEX 295 Foreign Ezckuigt — continued anc.», :)i-33; Origin of foreign indoldcdoeg.s, 33; Principal „■- prations, 33 ; Inland exchange aim liar to. 33-34; Gold shipment cwjta, 34-35; Essential points to stud), 35-36; Mint par, how com puted, 36-3S; Par of exchange. 3H-39; Imiiort and export gold I.,ints. 39-41; War fluctuations. 41-4'J; Clearing house transac- tions, 42-43; Buying and selling 43-44; Sterling exchange in New York, 44; Bills of exchange, 46; Sterling exchange rates. 47; Quo- tations .'>2-54; Contersions. rules for. 55-58; Exports and importa interdeiiendent. 120-22 ; Visible and invisible exports. 120-26; Origin and supply. 122-23 ; U. s'. in account with the world, 124- 27; Exjiort and import, 12'>-26- Quotations by Marks. 127-28- Commercial bills of exchange,' 128-29; Dollar credit Snancing, 130-31; Acceptances, and the banks, 131-33; Federal Reserve Act alfects. 133-34; Letters of credit, 134-36 Poreign Exchange »nd Imports, Commercial letters oi credit, 137- 39; British acceptance illustrated, 138-39; London credits, 140-43- Lloyd George on British accep- tances, 142-43 Fonlgn Honey Ordera, Method of remittance. 82; Speci- men of sterling order, 84; Pay- ments, 85-86; Redemption, 86 Foreign Semittuces, Tra»el, and immigrants' remit- tances home, 61-62, 86: Draft is- sues. ,-iJvices (or, 62-60; Draft costs estimated, 66-67; Travelers' cheeks. 67-74; Letters of credit. 74-82 ; Circular notes. 82, 83 ;' Money orders. 82, 84-86; Mail remittances, 86-88 Forward Exchange, Relation Is finance bills. 151: Bank methods to protect, 151; Esch-r on trading in futures. 152-54 French Exchange, Example of. 112-13; Paris mar- ket, 201; Latin Union, 201-02- Monetary system, 202-03; Stamp duty, 203-04; Rultj f„r deter- jninins rnte of interest. 204- Paris tjuolBtions. 204-0.-.; Conyer- sion in New York. 20,-»-fifi : Frae- *'">"' ii'l 't'e dolhir amount. 206- French Exching^-continued 07; Franc exchange table. 206- 07; I rofils, methole of export letters of credit, 134-36 ; Im ports, 137 et aeq, Se«' also Commercial Letters of Credit London jmd New York as Financial Centers, Relative supremacy. 238; Reasonn for London's position. 239; Lloyd George's statement, 239-40; Lon- don's economic advantages, 240- 41; Mail and cable service, 241- 42; Time advantages, 242; In vestment operations, 243; Seek- ing fortunes abroad, 244; Finan- cial center of British empire, 245; London's credit, 246; Eco- nomic factors in London's posi- tion, 247; Free gold market, 247- 46. Liquid discounting. 249; Foreign bank policy, 24tf-50; in London and New York — continued vetttmenttt adjust baluuci-n. -50 ; TarilT policifs, 251: Mercantile nuvy, 251-52 ; British foreign iraiie. 252-53; New York's ti- uuneial power, 354 ; Future re- sponKiliilities, 255-56 Long Exchange, Bunkers' long bills, 96, 101; Com merciul long bills, 97. 100; Do.ii mi-niary bills. 97, 102-06; Clt-an bills of exchange, 97. 101; Fi- nance bills, 144-50; Lo^ig bills, interest rale for. 166-67; Wier- liug rates, 195; French long bills, li(l9-J0; German interent table, 1-20; Dutch long bills, 223 Mall Remittances, Transactions for. Hfi S8 Margraff. A. W., •Summary of cable rates, by. 95-96; On Bills of exchange, 102-03 ; Hank of England rate stated, 171-73 Market Bate, Discounting methods. l(>H-09 Mint Par, Monetary unit values. 36-37; How roniputed. 37; Between two couo- trieH. 38; Ratio of exchange, 38- 39; Function in exchange rates, 49; How determined, 224-'2h; Metallic currency values, 281-9- Monetary System, Sovereign the unit, 186; QuotationK for silver. 166; Deterioration. 187 ; French exchange. 202-03 ; Germany. 212-13 ; Netherlands, 222; Mint par calculation, 224- 25; Phillipines, 328; India. 228; Argentina, 229; Brazil, 230-32; China. 233-34 ; Great Britain. 247-49 ; Value of foreign coins. 281-86; Equivalents and money values, 287-91; Symbols. 292 Money. Value of foreign coins. 281-H6 ; Monevs and equivalents, 287-91 ; Symbols, 292 Moratorium, British credits and the war, 142 ; Definition of, 259 ; Countries de daring. 260-61, 277 ; Germany'is attitude. 261 Movable Exchange. When implied, 54; Basis of. 55; Conversion for. 57; Arithmetic in- volved. 56 ; Sterling exchange rates, 192, 193 INDEX 29T N«w York s FInuctal 0«at«r, Pusition after the w»r. 238, 256- PrMent dominmco. 254: Future rMponiibility. 255; Kxchmnge with London, 262-65. 271 ; Ca nadian exchange, 274-75; {] g loan to Canada, 275 Now Totk Oloartoj Hona. Aasoclatlon. Bank rate ruling, 25-26; Charges illustrated, 26-27 New York Ezchango in Dflnrer Demand and supply. 4-7; flluatra i'°o' o?"^' '^"""■'^y shipment., 7-9; Shipment costs, 10 Paper Currencies, Value, and depreciation, 234- In- teresting problems, 235; Coun- tries on inronvcrtihl" paper basis 235-36; Chile. 236 Paper Money, Bank of England notes, 187, 188 ■ Gold reserve in U S 187 Parity. Quotations for, and arbitrage, 157- 58; Stock prices. 158; Commodi- ties. 159; Chain rule calculation 159 '""228"°' ^'"'"''" Prae'ices of. Quotatlona. Newspaper announcements, 52; Ex- change quoted in N. Y. market 53; Range of units, 53-54; Doyis and Brooks on, 54; Fixed and moveable exchange, 54-55 ; Ex- change tables, 59, 127 ' 192 Parity tables, 157. 158; Foreign exchange in London, forms of, 191, 192; Course of exchange, 194; American, 195; French ex change, 204-05; Francs con verted, 206, 207; Fractional. 206- 07, German, 216; American 216- 17; Holland, 222-2:1 See also Exchange (Juotations Bates of Exchange, Currency shipments, 9-10; When demand exceeds supply, 10-11 Quoted rates, 11; How deter- mined, 16; Federal reserve col lections. 24; New York Clearing House, 25-26; DeBnition of 33- Mint par, pivotal point of, 38- 38, Gold points, 30-40; Gold re demption for bilb of exchange B«tea of Eichange— continued I7 tl' .,?.',"""« "xchange cost 4'-4«: What IS meant by 48 Transfer mediums, 49, Coinage ratio, 50; nuctuatioris, 50-5'>- Rates correspond, 51-52 News' paper quotations, 52; Kxehsnge '*'"', ^■'- R»"8«- of quotation", oj-84: Table shows profit 54- Jixed and moveable, con.-ersions for, 54-58; ,\nlhn,el,c elemen Bn'^'n 'i^ . °'"'"''"« '"''l''»' 59- 00. Oold shipments. 174-83; I.on don quotations, 191-93 .Mov able, 192, 193; Fixed exchange. 192. 193: War affects. 258-59' London and New York ''6'>-r.-)- France. 266; Dutch.' 26K-69' Italy. 269; Russia. 269-70- Spain. 270; Scandinavia. 270' New Vork. 271-72; Canada. 273; Germany. 276-77, 279 Bates of Interest, Exchange fiucluationa. 166 Com puting long bills. 166-67; Hank "'"• J«'-6«: Market rale, 168- 69, Retirement rate, 169; Hank of England rate, 169-73; Mar graff on discount rule fluctuation 171-73; French long bills, 209- 10; German.v, 214-16, Cerman table of, 220; Dulrh exchange, ^n^~^*' ^*''** Shipments, 265- Bellrement Bate, Discounling bills. 169 Scandinavian Union, Monetary .s,^»lem. 277: Trade re lations. 27H-79; Germany's trade with. 278-79 Sight Drafts, Demand exchange. 90-94- .S|.eci- men demand drafts. 91. 93; Hank transactions, 92, 94; German practice for, 215 Silver Standard. Exponents of, decreasing, 232- China's .nonetary s.islem. 233- 34; Relative value of coini. 281- Sterllng Exchange. New York demand. 44; Cost of 4 1-48; Demand sterling, ex •mple of selling, 110-11; ster- ling purchased, ln-12; War causes demand for. 142; London market. 185-86; Monetary sys- tem. 186-87; Paiier money. 187- 88; Gold coinage. 188-90; 29« INDEX starling Eiciaine— ron"""'* Stimpt.. .nd inl"™t, 190; Lod dm, quotatioDB, how publlshiii 1111-93; B»tes of exihange, tabk for 191-93; "Course of tn .liange." table o( rales. 193-95 Amencan quotations. 19o; tal rulatinj conversions. 195-» / Fisuring pro6t, 197-98; Special dale purchases, table for. 19»; Rate calculation, eiamples of 199-200; Adjuatments thru. 226 Gold standard. 227-2«; I""liP jimcs, 228; India. 22H ; A^rgcn.ina 229- tireat britain. 247-52 Suh-Troasury SetUamenta, Currency shipment facilitated. 12 Tr»Tel«'» Checks, Convenience of, 67; Specimens. 68. 69; Terms of compliance, 70; Payment methods. 70-71 ; Re- iemption, 71-72; Letter of in- dication. 72-73; LosH risks. 73- 74; Negotiability. 74; Method il- lustrated. 115-16. 117 Ulltad SUtes in Account with the Foreign exchange statement, 1|!4- 26; ExiKirts and imports, lia~ 27 ; Quotations, 127 Vlslhle Trade, Eiports, 120, 125, 126; Uisparity Tltlhle Trade — continued between importe aid experts. 121. 125 War and the Exclungel, Loudon credits, and imports. 141- 43; Gold imports, and Bank of England; lal-83; Capital su].- plied by United Slates, 226-27; International exchange, how af_ fpcted, 238. 257-59; Course of events 258-59; Business |iara- Ivzed 259; Moratoria. covintries declaring. 259-61. 277; Exchange groups, 262; London and New York operations, 262; Gold ship ments from New York, 263; Pay ments thru Ottawa. 263-64; Anglo French loan. 264; -New York loans to Great Britain. -65 ; Sterling exchange at I'remmm. '>65-66- French securities. ~6li. Table of pound sterling values. 267- Dutch eichaage. 268-09; Bates in Italy. 269; Russian rate. 269-70; Sterling exchange in Spain. 270; Scandinavian ex- change. 270; New York s rate with different nations. 271; New York and Paris. 272 ; Export and imiwrt needs. 272-74; American dollar, appreciation ef. 2"-.H°': land's maritime trade, 2""" ■ Canada's foreign exchange. 274- 75 Germany's credit decline. 276-77: Scandinavian Union. 277-79: German trade with Scan- dinavia. 278-79 TBE-PtmPT o N-pa ass JB W OOD-U A S S'l