C draws on H for £2000, 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 £17,000 to EUROPE.
EUROPE . . . . . . owes £17,000 to . . . . . . AMERICA
But B has paid A £3000.
---------------
B . . . . . . therefore owes £14,000 to . . . . . . A
Now it will cost B a considerable sum of money to ship £14,000 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 £14,000, 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 £14,000 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
merchant 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, £1 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 a debt in
Paris.
[Illustration: A bill of exchange (banker's).]
Two illustrations of bills of exchange are given in this lesson. Each
is drawn in duplicate. The original is sold or sent abroad, while the
duplicate is preserved as a safeguard against the loss of the
original. When one is paid the other is of no value. Notice the
similarity between bills of exchange as shown here and commercial
drafts as shown in our last lesson.
The first form shows a draft made by a coal company upon a steamship
company to pay for coal supplied to a particular steamer. Suppose that
the steamship company has a contract with Robert Hare Powel & Co. of
Philadelphia to supply coal to their steamers. The steamer _Cardiff_,
when in port at Philadelphia, is supplied; the bill is certified to by
the engineer; the master (captain) of the vessel signs Powel & Co.'s
draft (and in doing this really makes it the captain's draft); the
bill is receipted. Now Powel & Co. sell this exchange (draft) on
London to a broker or banker doing a foreign business. It is forwarded
to London and presented in due time at the office of the Wales
Navigation Company for payment.
The second form shows a bill of exchange drawn by a Philadelphia
banking house upon a London banking house and payable to the order of
the firm buying the draft. C. H. Bannerman & Co. will send this bill
(the original) to pay an account in Europe. The first form bears the
same relation to a commercial draft that the second does to a
cashier's cheque.
[Illustration: First page of a letter of credit.]