hant who owes money in New York goes to the very same London
banker and buys a draft on the New York bank. In this way the one
draft cancels the other, and when there is a difference at the end
of the week or month the actual gold is sent across to balance the
account.
These exchanges have a sort of commodity value, and like all
commodities, depend upon the law of supply and demand. When gold is
being shipped abroad we say that the balance of trade is against
us--that is, we are buying more from Europe than Europe is buying from
us, and the gold is shipped to pay the balance or difference.
The _par_ of the currency of any two countries means, among merchants,
the equivalency of a certain amount of the (coin) currency of the one
in the (coin) currency of the other, supposing the currencies of both
to be of the precise weight and purity fixed by the respective mints.
The par of exchange between Great Britain and the United States is
4.86-2/3; that is, L1 sterling is worth $4.86-2/3. Exchange is quoted
daily in New York and other city papers at 4.87, 4.88, 4.88-1/2, etc.,
for sight bills and at a higher rate for sixty-day bills. Business men
who are accustomed to watching fluctuations in exchange rates use the
quotations as a sort of barometer to foretell trade conditions. The
imports and exports of bullion (uncoined gold) are the real test of
exchange. If bullion is stationary, flowing neither into nor out of a
country, its exchanges may be truly said to be at par; and on the
other hand, if bullion is being exported from a country, it is a proof
that the exchange is against it; and conversely if there be large
importations.
The cost of conveying bullion from one country to another forms the
limit within which the rise and fall of the _real_ exchange between
them must be confined. If, for illustration, a New York merchant owes
a debt in London and exchange costs him, say, two per cent., and the
cost of shipping the gold is only one per cent., it will be to his
advantage to pay the debt by sending the actual coin across. A
favourable _real_ exchange operates as a duty on exportation and as a
bounty on importation.
[Illustration: A bill of exchange (private).]
It is to the interest of merchants or bankers who deal in foreign
bills to buy them where they are the cheapest and to sell them where
they are the dearest. For this reason it might often be an advantage
for a New York merchant to buy a bill on London to pay
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