9. Gold exchange, thru the medium of bills of exchange and other credit instru ments, enables countries to regulate their mutual in debtedness without the transfer of coin or bullion. A bill of exchange is a commodity like wheat and cot ton, and, as such, it is subject to the law of supply and demand. If the purchase rate of exchange reaches the point at which it is cheaper to remit gold than to pay the rate demanded for transfer by draft, gold exports usually result. The rates of ex change, produced by buying gold in one country and shipping it to another, are called the gold or specie points. The mint or theoretical par remains invariable among gold standard countries. If the exporting and importing of gold could be effected without expense or loss of interest, the mint par and gold points between any two countries would be practically identical, but heavy expenses for freight, insurance, cooperage, car tage, abrasion, interest while in transit and other charges are involved in a gold shipment. These ex penses deducted from the mint par give the "import gold point" and added to the mint par give the "export gold point"; that is to say, when it costs more to buy sterling exchange in New York than it would cost to buy gold to the same amount and ship it to London, the remitter naturally takes the cheaper method and exports gold. On the other hand, when bills of ex change are so freely offered in New York that the rate becomes abnormally low, a seller may find it cheaper to transfer his London balance by importing the gold.
Under normal conditions, the cost of shipping sovereigns between London and New York is about two cents per sovereign, and the mint par of the pound sterling is Therefore, when a lower price than is offered for a bill of exchange it is cheaper to import the gold from England, and when a higher price than $4.88% is asked, it is cheaper to send gold to England.
10. Significance of gold inovements.—The export of gold from New York to London implies: 1. That New York owes London (exchange is fa vorable to London and unfavorable to New York).
2. That bills of exchange on London have been eagerly sought for in New York in order to liquidate this indebtedness.
3. That the premium demanded by sellers in the form of a higher exchange rate exceeds two cents per pound sterling and therefore it has become cheaper to buy gold in New York and export it to London.
Conversely, the import of gold to New York from London implies: 1. That London owes New York (exchange is fa vorable to New York and unfavorable to London) .
2. That bills of exchange on London have been of fered freely in New York to absorb this balance.
3. That the discount demanded by buyers in the form of a lower exchange rate exceeds two cents per pound sterling and therefore it has become cheaper to buy gold in London and import it to New York.
11. Actual gold points.—The extreme range of the gold points between New York and London, and the continental centers is approximately as follows : Imports Par Exports New York and London $ 4.841A $ 4.86% $4.88 per £1.
New York and Paris 5.23 5.1,9% 5.16 fcs per $1.
New York and Berlin 9-4.50 9:51g 96.25 cents per 4 marks London and Paris 25.32% 25.22 95.121/2 fcs per £1.
London and Berlin 20.53 20.43 20.34 mks per £1.
London and Amsterdam 12.15 12.10 12.04 florins per £1.
12. War and foreign exchange.—Un der normal conditions, margins between the two shipping points are thus sufficiently large to allow considerable play to the numerous factors affecting international finance and trade, and the rates fluctuate more or less regu larly between the two points. Wars and rumors of wars, and other startling political events frequently disturb the delicate working of the exchanges and cause the rates to go beyond normal limits. For in stance, in the first week of August, 1914, demand sterling was quoted in New York at $6 and cables at $7 per It soon declined from these figures, however, and continued dropping until the middle of February, 1915, when "demand" was quoted $4.79, and on September 1, 1915, at gradually re covering until it reached in January, 1916, at about which point it was maintained during the year 1916.
During a serious war, therefore, the courses of ex change are no longer restricted by the "gold points," but fluctuate widely, and at times wildly. Among the new factors which then affect the exchanges are the following: the international money markets are de moralized; sentimental, if not legal, restrictions are placed on the export of gold by every country; and in surance, if obtainable at all is at a prohibitive rate, because of the risk attending transportation.
13. The clearing features of foreign exchange.— Exporters and importers of foreign goods who have foreign bills to sell and buy, respectively, occasionally transact business directly with each other, but as a general rule it is much more convenient and eco nomical to pay a small commission to a bank for its services and obtain a remittance for the exact amount and tenor required.
A bank is able to sell a bill of exchange on London for any required amount because it is also a purchaser of bills of exchange on London and other foreign cen ters ; in other words, it acts as a middleman between those customers who have debts to pay and those to whom debts are owing in London and thus it is able to offset sales against purchases. If a bank's sales of London exchange exceed its purchases, it goes into the exchange market and buys London funds from other banks and vice versa. In this way the supply and demand are constantly being brought together, first thru the needs of customers of the same bank, and secondly by transactions between the banks them selves, principally thru the New York exchange market which acts as a foreign exchange clearing house for the whole continent, and which can be re lied upon, under ordinary circumstances, to absorb an almost unlimited amount of foreign exchange.