goods are shipped, the shipper immediately requires his money; he draws a bill against the goods, and it is the function of a banker to help, as a sort of debt-collecting agency, by buying these drafts; and the bank, being a mart for all forms of remittance, gets an immense variety of demand for cable payments, cheques and bills on all centres. This does not affect the theory, for it must be remembered that the banker is a necessary link between the buyer and seller of exchange, because the seller can only sell what he has and the buyer must have exactly what he wants.
To return to the question of limit points: if a universal currency system existed, with the same monetary standard that is used in England, and the coinage kept in a proper condition of weight and fineness, and the coin readily supplied to meet every reasonable claim—if, in fact, the pound sterling were the prevalent coin and the English banking system obtained everywhere, then we should find all exchange quotations as simple as our case of London and Edinburgh, that is to say, all exchanges would be quoted at par or a premium or a discount. The limit points in any place of the exchange on London would represent simply and obviously the cost of the transmission of the coin. These limit points would vary at each place according to the distance from London, the cost of freight, the risk involved in the transmission and the local rate of interest. On the continent of Europe some advance has been made in the direction of a universal coinage. Countries subscribing to the Latin Union have agreed on the franc as a common unit, and Belgium, Switzerland, France and Italy quote exchange between themselves at a premium or discount. Greece, Spain and other countries are also parties to the arrangement, but their currencies are in a bad state, and the exchange quotations involve a considerable element of speculation. We have, however, to deal with another factor in international finance, namely, the enormous variety of currency systems; and we have then to discover, in each case, the exchange which represents par and corresponds to our £100 for £100 in the London-Edinburgh example. The United States furnishes perhaps the easiest problem, and we must find out how many dollars in gold contain exactly the same amount of the precious metal as is contained in one hundred sovereigns. The answer is 48658, and the arithmetic is a question of the mint laws of the two countries. Gold coin in the United States contains one-tenth alloy and in England one-twelfth alloy. Ten dollars contain 258 grains of gold, nine-tenths fine. One pound contains 123.274 grains of gold, eleven-twelfths fine, consequently £100 is worth $48658, or, to be exact, $48623, and when cable payments between London and New York are quoted at 4.8658 for the £1 sterling, exchange is about par. As a cable payment is an immediate transfer from one city to another, no question of interest or other charge is involved. Owing to the cost of sending gold as detailed above, the New York cable exchange varies from about 4.84 to 4.8912; at the former point gold leaves London for New York, and at the latter point gold comes to England. Besides insurance, freight, packing, commission and interest, there must also be considered the circumstance that coin taken in bulk is always a little worn and under full weight, and in the process of turning sovereigns into dollars, the result would not bear out the calculation based on the mint regulations: consequently, when taking gold from London, the demand would first fall on the raw metal as received from South Africa or Australia to be minted in the United States, then on any stock of American coin the Bank of England might have and be willing to sell by weight (which would be accounted by tale in New York), and lastly the demand would be satisfied by sovereigns taken by tale from the Bank of England and converted by weight in America.
The instance of the American quotation may be further taken to explain some of the numerous points which the study of the exchange involves. In the first place, it will be noted that we have quoted the price in dollars. In London, business in bills, &c. , on New York is quoted either in pence or in dollars, that is to say, payments are negotiated for so many dollars either at 49316 pence per dollar, or at the equivalent rate $4.88 for the pound. In practice it is much more convenient to quote in London in the money of the foreign country, as it makes comparison with the foreign rate on London very simple. Some foreign countries quote exchange on London in pence, and then, of course, in relation to those countries the same practice will obtain in England, but the majority of the exchange quotations on London are in francs, marks, gulden, lire, kronen or other foreign money. Another point which must be explained is the reason why exchange varies between what we have called the limit points; why there is sometimes so much demand for bills on London and why at other times so many bills are being offered. Similar causes operate on other exchanges, and if we develop the New York case we shall provide explanations for exchange movements in other countries.
At one time the financial relations between England and America were as follows. England was the principal creditor of the United States, and the latter country had to remit continually very large amounts in payment of interest on English money and profits on English investments, in payment for shipping freights, for banking commissions, insurance premiums and an immense variety of services, besides paying for the large imports which crossed the Atlantic from English ports. In the fall of the year these payments would be more than offset by the enormous exports of food-stuffs, cotton, tobacco, &c. , so that during the first half of the year exchange would be at or about the limit of 4.8912 and gold would have to be sent from New York to supplement the deficient quantity of bills. In the autumn the produce bills would flood the exchange market and gold would be sent from London as exchange got to the other limit point of 4.84. These conditions are still very potent, but latterly another element has entered into the position, and the new development is so powerful as to reverse sometimes what we may call the natural and legitimate movement in the exchange. This new element is the more intimate banking and financial relationship which has been established between the two countries. As American conditions have become more stable, with better security for capital and an assured feeling about the currency of the United States, bankers in London have gladly allowed their banking friends in New York and other large cities to draw bills on London whenever there was a good demand for sterling remittances. We have, therefore, to consider a fresh type of bill of which the drawer has no claim on the drawee, but, on the other hand, incurs a debt to the drawee. To take a very usual method, a banker in Wall Street, New York, will advance money to stockbrokers, investors and speculators against bonds and shares with a 20% margin. He deposits this security with a trust company in New York which acts both for the American and English banker. The Wall Street banker then draws a bill at 60 days’ sight or 90 days’ sight on the banker in Lombard Street and sells this draft to supply the money he lends the stockbroker. Two or three months hence the New York banker must send money to London with which to meet the bill, so that, whereas, in the case of a commercial bill, the produce is despatched and in due course the consignee must find the money for the bill, in the case of a finance bill, as it is called, the bill is drawn and in due course the drawer must send the value with which it is to be honoured. In any event the acceptor, the London banker, has to pay the bill, so that it will be easily understood that relations of the greatest confidence are necessary between the drawer and drawee before finance bills of this class can be created.
The profit arising from the transaction we have sketched is realized by the separate parties in this way. The New York banker lends money for three months, say, at 5% per annum, he pays a commission of 132% to the trust company which has custody of the security, a charge equivalent to 18% interest per annum. He draws on London at 90 days’ sight and sells the bill at 4.8358, the cable rate being 4.8734, the buyer of a three months’ bill making the allowance for the English bill stamp of 12 per mille and the London discount rate of 3%. The drawer of the bill must also pay a commission of 316% to the London banker who accepts the draft; this is equivalent to another 34% per annum in the rate of discount, so that money raised in this way costs 18% for the trust company, 3% the London discount rate,
