FOREIGN EXCHANGE A clearing system is only possible where the debts to be cleared are expressed in the same monetary unit. Otherwise they cannot be set off against one another. The need for clearing is felt in international transactions where this condition is not fulfilled. The requisite facilities are created through the instrumentality of the foreign exchange market. At any centre where a foreign exchange market exists, the dealers who constitute this market offer to buy and sell bank credits in foreign countries. They quote prices for the currencies of these foreign countries in terms of the currency of the place where they are dealing. These prices permit of the set-off of debts expressed in the currencies and they form the basis of what is in effect a system of clearing. The dealers are for the most part banks. In order that a bank at any centre (A) may deal in foreign exchange between that and an other centre (B) , it must have some sort of establishment at the foreign centre (B), either a branch or a correspondent bank. In either case it will have a supply of liquid assets localized in (B) and expressed in its currency. If it has a branch, the assets will be in the form of bills, marketable securities, advances and cash; if it has a correspondent, it will maintain a deposit with the correspondent. In the course of business the bank's customers in will want to buy and sell credits at (B). Some will have acquired pecuniary rights there and will bring the cheques, bills or other credit instruments, by means of which such rights are assigned to be bought by the bank, and others, seeking to acquire similar rights, will want the bank to sell them the appropriate credit instruments. The bank will draw upon its resources at (B) to sell to the latter, and will replenish them with the credits bought from the former. Its purchases and sales will not exactly balance ; there will be excess of one or the other. But mean while the other banks at (A) will be dealing in exchange upon (B), and it is probable that some will have an excess of pur chases and others an excess of sales. All will want to avoid any greater disturbance of the amount of liquid assets held at (B) than is necessary. Through the channel of the foreign exchange market those whose holdings at (B) have increased can sell the sur plus and those whose holdings have been reduced can buy enough to make up the deficiency. This is a process analogous to clearing, but in general it will leave a residue, an increase or decrease in the aggregate holdings at (B) of all the banks at (A). But other foreign centres will have been dealing in exchange on (B) , and the banks at each centre will have a residual balance, an increase or decrease in the aggregate holdings of its banks at (B) . At any centre where the holdings have increased, the foreign ex change market will tend to quote a lower price for the currency of (B), and at any centre where the holdings have decreased, the market will tend to quote a higher price. But these diver gencies of price will quickly lead to those centres which have an excess of liquid assets at (B) selling them to those which have a deficiency. Here we have a further stage in the process of clearing, but there will still be a residual balance, and an excess or deficiency of liquid assets in (B) held among the banks deal ing in foreign exchange all over the world. The existence of this residual balance will affect the quotations of the currency of (B) in the foreign exchange market in terms of all other currencies; an excess will lower the value of the currency, and a deficiency will raise it.