Foreign Exchange


The business relations between banks located in different countries do

not differ in any essential respect from those between banks located

in the same country. Interchange of checks, the conduct of checking

accounts, shipments of cash, and borrowing and lending proceed in the

same manner as between domestic institutions. The chief peculiarities

of the foreign exchanges are due to the fact that different units of

value
and sometimes different standards must here be reckoned with,

and that the precious metals, chiefly gold, are used in the settlement

of balances. Drafts drawn in the United States on English points, for

example, call for the payment of pounds sterling, those on French

points for francs, and those on German points for marks, while all

must be paid for in dollars.



The translation of the language of values of one country into that of

others thus involved requires the calculation of a so-called par of

exchange. By this is meant the relation between the weights of pure

metal contained in their respective units of value, if the countries

in question have the same standard, and the relation between the

market values of the metallic content of their units, if their

standards are different. Thus the par of exchange between this country

and England is $4.8665, since our dollar contains 23.22 grains of pure

gold and the English pound sterling 4.8665 times as many grains, or

113.0016. Our par of exchange with France is 19.294 cents, the

quotient of 4.4802, the number of grains of pure gold in the French

franc, divided by 23.22. Between China and the United States the par

of exchange is the market value in our dollars of the amount of silver

contained in the tael, the Chinese unit.



Another technical term employed in connection with the foreign

exchanges is the gold points. These are the points above and below

the par of exchange fixed by the addition in the one case, and the

subtraction in the other, of the cost of shipping gold between the two

places in question. They are the points between which the rates of

exchange fluctuate, or the points at which, when the rate of exchange

reaches them, gold moves between gold standard countries. Assuming

for example, that the cost of shipping gold between New York and

London is two cents per pound sterling, the gold points are 4.8865 and

4.8465, it being profitable to ship gold from New York to London when

sterling exchange reaches the former figure and to import gold from

London when it reaches the latter figure.



In the conduct of the foreign exchanges several classes of bills are

employed upon which the quotations differ, in part on account of

differences in their quality and in part on account of the interest

element entering into the value of time bills. For example, New York

regularly quotes on London cables, demand, and sixty-day bills.

The rates on a certain date were: Cables, 4.8860; demand, 4.8790; and

sixty days, 4.8370. Inasmuch as these are all bankers' bills and

consequently of the same quality, the differences in their quotations

are due to the interest element and to the fact that in the case of

the cables the cost of the cablegram is included.



When a New York banker sells a cable on London, his balance with his

correspondent is reduced by the amount in a few hours, and the

interest he receives on such balances is proportionately diminished at

once, and he is also out the cost of the necessary cablegram. When he

sells a demand bill, his account with his London correspondent remains

undiminished during the time required for sending the bill by mail

across the Atlantic and for its presentation for payment. He draws

interest on his entire balance during this period. When he sells a

sixty-day bill, his balance does not suffer diminution on its account

for sixty days. In order to place these bills on a footing of equality

so far as he is concerned, therefore, he must quote demand and

sixty-day bills lower than cables; the former by the cost of the

cablegram plus interest on the amount of the bill, say for ten days,

at the rate he receives on his London balance, and the latter by the

amount of the cablegram plus interest on the amount for sixty days at

the same rate.



Trade, or mercantile, as well as bankers' bills are also frequently

and, in some markets, regularly quoted. Being of a quality ranked as

inferior to bankers' bills, they must be negotiated at a lower rate

and are quoted accordingly.



More

;