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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.





Next: The Supply Of Cash

Previous: Domestic Exchange



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