Productive efficiency

Power to lend

Development of adequate machinery

Stability and security of money and credit system

The reciprocal claims between individuals in different nations arise in the same way that domestic claims arise. Every textbook on foreign exchange sets forth their origin in more or less complete detail. It would therefore constitute a work of supererogation to attempt to discuss the subject fully here. For our purposes it will probably suffice to summarize as follows the transactions giving rise to these claims: a. The purchase and sale of commodities.

b. The purchase and sale of securities.

c. Services of various kinds rendered for compensation.

d. Borrowing and lending.

According to the nature of the transaction the result, as in domestic exchange, is a "credit" or a "debit." All payments which have to be made to the foreigner are "debits" and underlie the demand for foreign exchange. Conversely all sums owing by the foreigner are "credits" and add to the "supply" of exchange.

The rate of "foreign exchange" in any market depends upon the relation between the demand for and the supply of such exchange in the market concerned. The exigencies of the domestic exchange situation usually lead to the establishment in a country, and normally at the country's financial center, of a single exchange market. It is at the financial center that the biggest banks with important for eign connections are likely to be established, and in that center, in consequence, the best market for bills is likely to be found. The volume of transactions in such a market is usually so large that the rates there determined control similar rates all over the country. In the United States, for example, the rates for foreign exchange, determined by the competitive forces playing in the New York market, practically fix the rate quoted in every other city in the land.

The rate for foreign exchange fluctuates about a point which is designated the "mint par." With money systems based upon a single metal like gold, and with freedom of coinage, the standard money units bear a relation to each other that is determined by the relation of their bullion contents. Thus because the English pound sterling contains 113+ grains of gold and because in like manner the American dollar contains 23.22 grains of gold, the pound sterling is said to be equivalent to $4.8665. The money equivalents of the bullion contents of either of the standard units thus express the "mint par" of the units concerned.

Basis of reciprocal claims in international trade like that of claims in domestic trade

Rate of foreign exchange usually fixed in country's financial market

The market rate of exchange fluctuates above and below the mint par according to the action of demand and of supply. As demand increases the exchange rate rises and if "demand" exceeds "supply" the rate advances above par. Conversely a falling off of demand or an increase in supply tends to depress the exchange rate and may force it below par. But while the exchange rate fluctuates about the "mint par" it must not be assumed that "mint par" constitutes in any sense a "norm" to which competitive forces are tending to force the rate.

As with domestic exchange rates, so in the field of foreign exchange the fluctuations in the rates are normally limited by the cost of shipping acceptable currency or bullion. In domestic transactions various kinds of money are made available for reserve purposes, and hence it was necessary to speak broadly of currency shipments rather than more narrowly of shipments of standard bullion or even of standard coin. But in international transactions where different kinds of money are involved, owing to the difficulty of obtaining in one country any large supply of the money or currency of another country, the only certain method of creating or strengthening a balance in a given country is by shipping thither the standard bullion of its money system. This bullion can then be presented at the mint or other agency and actual money, or a credit advance at the mint price, can be obtained. Where the standard money of one country happens to be sent in shipments to another country it is regarded merely as so much bullion. As most of the countries of the world are today on a gold standard the bullion involved in international exchange is gold. The possession of gold bullion anywhere is, allowing for costs of shipment and assuming freedom of movement, a potential claim to the money at the established mint prices of every gold standard country. If a silver standard country were involved, the bullion shipped would be silver, but there could not be an established "mint par" between the unit of a gold standard country and that of a silver standard country owing to the fluctuation in the relative value of the metals themselves.

Explanation of "mint par"

Fluctuations in rate are due to changes in relation between demand and supply

Cost of shipping bullion limits fluctuation in exchange rates

In no case is there, however, any mystery about bullion shipments in international exchange. Such shipments are always and only for the purpose of obtaining the money, or of establishing balances in terms of the money, of the country to which the shipments are consigned. Individuals never ask for nor undertake to make shipments of bullion for the sake of the bullion. Their calculations are wholly in terms of money. Bullion shipments are undertaken by the bankers long before it would pay the individual debtor or creditor even to think of them.

Moreover, it must be borne in mind that shipments of bullion to a country are not undertaken if money-funds in such a country can be more economically obtained in other ways. Transfers of funds may be made through arbitrage operations, or loans through other countries may be arranged. All such relief expedients exert their influence, however, on the supply side of the market, and they check gold exports only when they succeed in holding the exchange rate below the gold export point.