STERLING EXCHANGE 1. London will give a much clearer understanding of the operations of foreign exchange to study in some detail the principal exchange mar kets, to learn the exchange practice in each market, 'and, having reviewed the principal financial centers, to explain how exchange is effected with other parts of the world. It must already be evident to the reader that in foreign exchange the London Market is dom inant and naturally calls for first consideration. New York will not, of course, call for special treatment at this point as the body of this volume explains Ameri can exchange practice. Special note, however, must be taken of the operations of Paris, Berlin and Am sterdam, with briefer mention of other centers and countries where exchanges are less highly developed.
The insular position of Great Britain, the density of her population, the early development of manu facturing enterprises, the possession of vast coal re sources gave her at an early date a preeminent position in the world's commerce from which she cannot be easily dislodged. With her enormous commerce and her monetary system firmly and long established upon the sold basis, she has naturally come to occupy a sim ilarly prominent place in the financial adjustments which international commerce renders a necessity ; namely, in foreign exchange. Thus, the monetary system of Great Britain based upon the pound sterling is more widely known than any other.
2. Monetary understanding of the monetary system of another country is the prerequis ite of any knowledge of what exchange procedure really means. The illustrations given thruout this volume will, however, dispense with the need of any extended discussion of English money.
As already stated the monetary unit is the pound sterling represented by a coin known as the sovereign, which consists of 123.27447 grains of gold 916% fine, and is thus the equivalent of grains or 7.322385 grammes of pure gold. The gold coins of common circulation are the sovereign and the half sovereign. Silver coins of limited legal tender are in circulation in denominations of 1, 2, 2i2 and 5 shillings and sixpence and threepence or Y.2 and 1/4 of a shilling. One pound
of standard silver (925 fine) is coined into 66 shillings ; a shilling, 'therefore, weighs 87.2727 grains of standard silver or 80.7272 grains of pure silver.' Gold coins in good condition are legal tender in Great Britain to any amount, silver coins to the amount of £2, and cop pers to the amount of 1 shilling. When the sovereign falls below the weight of 122.50 grains it loses its legal tender quality. Such deterioration of the coin age thru use is, however, rare, as the Bank of Eng land under normal conditions issues no sovereigns which are below 122.976 grains in weight. This rule promotes the retirement of light weight coins.
3. Paper money.—The Bank of England issues notes in denominations of 5, 10, 20, 50, 100, 200, 500 and 1000 pounds. These notes are payable on de mand at the Bank, and elsewhere are full legal tender. In effect they are practically the equivalent of the United States gold certificates, since all but a small portion of the issue of the Bank (X18,450,000) must be covered by gold, pound for pound. Unlike the na tional banks in the United States, the Bank of Eng land and most foreign banks, can hold their gold in the form of foreign gold coins. Hence, when gold must be exported to the United States from foreign countries, there are large reserves of the coin avail able for the purpose.
In the United States, gold serves mainly the pur pose of bank reserves and very little gold coin is in circulation. In Great Britain, on the other hand, the absence of any money except gold between the denom inations of five shillings and five pounds forces the actual circulation of a considerable part of the mon etary stock. In August, 1914, when there was an un usual strain on the gold supply and great difficulty in obtaining gold coins for current use, the British Gov ernment issued Treasury notes in denominations of £1 and 10 shillings. These are also legal tender.