all the documents necessary to give the purchaser of the bill full title to the goods until the bill is accepted or paid. They are accordingly referred to as "documentary bills" or "commercial bills," to distinguish them from "bankers' bills" and other instruments of international credit described hereafter. Documentary bills are freely negotiable, passing from hand to hand by indorsement, and gathering strength with each new indorsement. It is important, also, to note the difference between "sight bills" and "long bills," the former calling for payment upon presentation, the latter for immediate "acceptance" by the drawee and payment after thirty, sixty, or ninety days. The price of ninety-day bills, for instance, is fixed by the price of sight bills and the discount rate in London.

We may now enlarge our simplified illustration to something like life-size. Documentary bills drawn by exporters or creditors all over the country are sold by the drawers to bankers, usually New York bankers, who may be called the "wholesalers of exchange." The sale may be either direct or through exchange brokers, "the jobbers of exchange." These documentary bills are sent by the New York banks to their foreign correspondents for collection (in the case of sight bills) or acceptance (in the case of long bills). The balances thus built up abroad by the New York banks constitute the fund against which they draw their own bills. These are sold directly or through smaller banks -the "retailers of exchange"-located in all parts of the country. Foreign exchange is sold in a great variety of forms -bankers' drafts, travelers' checks, travelers' letters of credit, commercial letters of credit, cable transfers, and the likedescriptions of which may be found in the references cited at the end of the chapter.

The illustrations used above, while typical of a large part of the foreign exchange of this country, fail to represent adequately the complexity which marks some of the interactions of international credit. An illustration of the more complex class is found in the "three-cornered" or "triangular exchange." We import from, very much more than we export to, South America. A part of the debit balance though possibly not the larger part at the

present time is settled by the transmission of London drafts to our South American creditors, who can use them advantageously in the settlement of their debts in Europe. London thus "clears" for the world as New York "clears" for America and Paris for France. Just as the net balance of our foreign trade is struck in New York, so final international balances are cleared or settled in London, although London's preeminence in international exchange is now not so striking as it has been in the past.

The question next arises how the price or rate of exchange is determined. The factors controlling the price or rate of exchange are as numerous and as difficult to trace as the influences which affect the price of any economic good of world-wide bargain and sale. However, to facilitate discussion, we may classify them as: (a) the amount of pure gold in the monetary units which are to be exchanged, (b) the cost of shipping gold, and (c) "general credit conditions."

An English pound sterling contains as much fine gold as 4.866 American dollars, and when exactly this amount must be paid in New York for a draft or order for one pound payable in London, exchange is said to be at par. Sterling exchange and German exchange are usually quoted in dollars and cents, i.e. the amount of American money required to buy one pound or four marks respectively. Consequently, they rise or become dear when exchange mounts above par. French exchange, on the contrary, is usually quoted in francs, the number of francs purchasable with one dollar; and it is consequently cheap when above par and dear when below par. Exchange between the United States and countries with silver or paper standards lack the steadying influence of a par determined by the actual mass of fine gold in the respective standards of value, and hence fluctuates much more than exchange between countries on a gold basis. In order to be as brief and clear as possible, the following discussion will be confined to exchange between countries on a gold basis.

Fluctuations in the rate of exchange depend upon the "general credit conditions" mentioned above, but it is plain that upper and lower limits to these variations are established by the actual cost of shipping gold. Suppose, for a moment, that it costs three cents

to transport $4.866 worth of gold bullion between New York and London. Except under unusual circumstances, then, sterling exchange cannot rise above $4.896, nor fall below $4.836. These limits are frequently spoken of as the "gold points," "specie points," "shipping points," or "export and import points"; and it is necessary to mention them because of their frequent employment in discussions of foreign exchange. But they are usually defined in much too definite terms. The cost of shipping gold varies with the size of the shipment, with freight, insurance, and interest rates, and in some degree with the steamer and the season of the year. Furthermore, gold is so important as the basis of bank credit in all parts of the world, that it is frequently imported regardless of the rate of exchange. During the war between Russia and Japan, for instance, the Bank of France imported large quantities of American gold in this semiarbitrary way in order to protect reserves. The "gold points," then, while in one sense very real, represent extreme limits and are in themselves variable.

Within these extreme limits set by the cost of shipping gold, the rate of exchange varies according to general credit conditions, i.e. with the supply of and demand for bills of exchange, with interest rates here and abroad, and the innumerable forces which influence interest rates. Suppose, for instance, that our imports of merchandise in a given season greatly exceed our exports of merchandise. The demand for bills on London would greatly exceed the supply of bills against London, and the price of sterling exchange would rise very high if no other factors were involved. But it may happen at the same time that interest rates in New York are higher than in London, and under these circumstances our foreign creditors may prefer to lend their balances in New York in order to earn the high rate of interest obtaining there. The placing of these loans in New York will in turn reduce the demand for foreign exchange, and thus moderate both the interest rate and the rate of exchange.

This interaction of the domestic and the international money markets gives rise to a number of complex transactions which can only be suggested here. In discussing the sale of foreign exchange

on page 293 above, American bankers were described as drawing against credit balances which they had built up abroad. Some bankers' bills, however, the so-called "finance bills," are drawn in excess of the foreign balances, and thus represent borrowings abroad. Finance bills are used (a) to tide over the time before a plentiful supply of documentary bills is available; and, (b) to take advantage of low discount rates abroad, e.g. in London, by borrowing in London and lending the proceeds in New York. Under the latter circumstances, finance bills payable in London at sixty or ninety days are sold in large quantities in New York, the sellers commonly covering their risk by the purchase of future drafts calling for the payment of the same amounts in London at the dates when the bills mature. The finance bill is thus one of many credit instruments used to bring the loanable funds of the world to the market where they will command the highest rate of interest; and it is hardly necessary to add that it assumes at times a highly speculative character. "Bankers sometimes purchase outright entire new issues of securities from corporations with proceeds obtained by the issue of finance bills, sell the securities to investors during the currency of the finance bills, and apply the proceeds realized through the sale of the securities to the payment of the bills at maturity."

" 1

Regulation of the Gold Supply. We may now return to the general topic of trade regulation, from which we digressed in order to consider the fundamental principles of foreign exchange. Historically, it will be remembered, many of the most important restrictions of trade have had as their object the regulation of the gold supply. And the movement of gold is still of great interest to the world of high finance because of the dependence of the volume of bank credits upon the gold reserves of the banks. But the preceding discussion would seem to make it clear that, ordinarily, there is little that the government can do, or needs to do, in the way of regulating the supply of gold. Through international trade and foreign exchange, the gold supply of the world is automatically distributed among the countries which need gold, in accordance with the intensity of their respective demands.

1 Margraff, International Exchange, p. 41.

In ordinary or normal times, the interest rate is the most powerful of the many influences which control the distribution of the gold supply. International banking houses keep funds in both the United States and Europe, and they are constantly shifting their money to the market in which it will earn the highest rate of interest. The means employed to move their funds may vary, as has been explained, all the way from the simple sale of foreign exchange to the actual importation of gold. So great is the influence exercised by the rate of interest over the gold supply that the Bank of England usually finds it necessary to do nothing more than raise its discount rate when it desires to attract gold to England or discourage its exportation.

The ordinary price level, that is, of merchandise, also exercises a great influence upon the rate of exchange and the movement of gold. When prices abroad are high compared with American prices, foreign countries increase their purchases, the supply of American bills increases, sterling exchange falls, and if it goes low enough, may cause the shipment of gold to this country. Such a condition of affairs, for instance, is likely to occur in the autumn months, when large exportations of American cotton, wheat, and agricultural products create a plethora of bills on London, and, other things being equal, depress the price of sterling exchange.

There can be no doubt, then, that the price level does influence the movement of gold. Whether the gold movement influences prices, however, is disputed. Some opponents of the so-called "quantity theory" of money hold that it does not, maintaining that before a drain of gold, for instance, could raise prices, it would so elevate the interest rate that the drain would be checked and gold be brought back. In their view, the interest rate acts as a safety valve, through whose variations any protracted gold movement which threatens to disturb the price level is checked and reversed before it acquires the momentum requisite to accomplish the larger task. Without attempting to decide the question, we may be sure at least of this relevant conclusion: that if the movement of gold continued indefinitely, prices would unquestionably be affected.

The gold supply thus adjusts itself automatically to the respec