uations in price, all are included in the general name
_exchange_.
[Illustration: Foreign exchange.]
To illustrate the principles of exchange let us suppose that the
following transactions have occurred:
1. C of Boston has sold goods, L2000, to H of Hamburg.
2. D of Chicago has sold goods, L5000, to F of Glasgow.
3. M of Chicago has sold goods, L3000, to K of London.
4. E of Philadelphia has sold goods, L6000, to R of Paris.
5. P of New York has sold goods, L1000, to G of Paris.
C draws on H for L2000, sells the draft to a banking-house in Boston;
they send to Bank A of New York, and the New York bank to their
London correspondent, say Bank B, with instructions to collect from
Hamburg.
D draws in a similar way on F. E draws on R, and P on G. Suppose that
M instead of drawing on K receives a draft drawn by Bank B of London
on Bank A of New York, payable to M's order.
AMERICA has sold goods worth L17,000 to EUROPE.
EUROPE . . . . . . owes L17,000 to . . . . . . AMERICA
But B has paid A L3000.
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B . . . . . . therefore owes L14,000 to . . . . . . A
Now it will cost B a considerable sum of money to ship L14,000 in gold
to A, for all exchanges between Europe and America are payable in
gold. Suppose that S of New York owes T of London L14,000, and T draws
on S and takes the draft to Bank B in London and offers it for sale.
Will B offer more or less than L14,000 for the bill of exchange or
draft? He will offer more. It will be cheaper for him to pay a premium
for the draft than to ship gold, for he can send this draft to Bank A
to pay his indebtedness, and A can collect from S.
In the money market in New York there is a constant supply of
exchanges (drafts) on London, and in London a constant supply of
exchanges on New York.
Experience has shown that at all times the number of persons in Europe
indebted to American business houses is about (though of course not
actually) the same as the number of persons in America indebted to
European houses. Hence when A of New York wishes to make a payment
to B of London he does not send the actual money, but goes into the
market--that is, to a banker doing a foreign business--and buys a
draft, called a bill of exchange, which is in reality the banker's
order on his London correspondent, asking the latter to pay the money
to the person named. It may be that about the same time some London
merc
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