On the other hand, if exportation or any other event occasion ing withdrawals of funds from England should cause an increase in the supply of bills in New York, the exchange market would become a buyers' market and the price of bills would fall until it reached the gold import point; at this point those who had not yet found a buyer for their bills would find it more profitable to import the gold than to sell their bills.
Here, again, it is unusual for exporters, manufacturers, etc., to import gold themselves. They keep on selling their bills to bankers, whose balances in London are increasing as these bills remitted to Be are collected, and among whom competition will keep the price of bills up to the gold import point. As their funds in New York are depleted by purchases of bills and their funds in London are increased by the proceeds of such bills, their ability to keep on buying is defeated unless they import gold; and any banker who does import gold can buy longer and at better rates than his competitor who does not import. Hence competition among banks as buyers of bills will keep the price, under normal conditions, up to the gold import point.
The price of bills (the rate of exchange) will, therefore, in normal times, fluctuate between the gold points. These vary from par by the amount of the cost of shipping specie. "Par " means the mint par; it is the ratio of the amounts of pure metal in the standard coins of the two trading countries. It is vari ously quoted as $4.8665 per pound sterling, 96.25 cents per four marks, 5.1825 francs per dollar, etc. The gold points are deter mined from these par rates by adding or subtracting the cost of shipping the par weight of gold; for example: The cost of ship ping $4.8665 gold to London is in normal times about 2.5 cents. The export gold point is therefore about 4.89 and the gold import point 4.84. It is also assumed in such calculations that this par Weight of gold is a part of a large shipment; otherwise the over head expense would run much higher per unit.
Cost of Gold Shipments The expense of exporting or importing gold is made up of the several factors enumerated below: r. The Cost of the Gold. At the Treasury or the federal reserve banks of the United States, pure gold can be bought with lawful money, at constant prices, depending upon its purity, either in bars or coin. Since an ounce troy contains 48o grains, an ounce will make 20.671 gold dollars if it is pure gold, or 18.604 gold
dollars if it is .9 fine, and gold of intermediate purities will cost intermediate prices. The size and number of the bars also affect their prices slightly. (See Volume I, Chapter II.) In case the supply of gold bars is exhausted by withdrawals for shipment, the Treasury will supply gold coin, which on account of abrasion will, of course, be handled by weight rather than by count abroad. Since the United States government has free and gratuitous coinage of gold, it has in normal times a free gold market.
In London the price of gold varies. The Bank of England is required by law to buy all the gold offered at £3 17s. 9d. an ounce and it may pay as much more as it sees fit. But since one ounce, when coined, will make £3 17s. io 1/ 2d., the highest price the Bank of England would pay, under normal conditions, for pure bar gold would be this unit equivalent, £3 17s. lc) x/ 2d. The price of pure bar gold would fluctuate, therefore, between £3 17s. 9d., and £3 17s. lc) 1/2d., the highest price being paid when the bank had especial need for gold for reserve, export, or other purpose. But when the bank purchases gold with gold coins, many of them are abraded and under weight, and the bank will accordingly pay more than the mint price, £3 17s. To 1/ 2d., the coins being within the limit of tolerance in England but acceptable only by weight abroad. If a New York bank, there fore, exports gold to London, unless the price has been guar anteed by someone quoting " to arrive rates," the bank does not know what the value of the gold on arrival will be, whereas the London banker is sure of the price of gold shipped to the United States.
A large proportion of the gold product of the world is produced in the British dominions and flows in the bullion state to London, where it is auctioned each Monday morning to bidders represent ing home and foreign banks and manufacturers who may be in the market for gold. The bids are determined by the relative needs of the bidders and take into consideration the present and prospective supply on the market. Thus in normal times the gold tends to flow to the bank or cotmtry where it is most needed, and its distribution from London and subdistribution and ultimate lodgment will be determined by exchange rates.