Foreign Exchange is the business which is concerned with buying and selling in one country of rights to the payment of money in other countries either immediately or in the near future. Payments and collections between different parts of single countries, especially those of large area, give rise to dealings which in some respects are similar to those which appear in the conduct of the foreign exchanges. Thus, in the United States domestic exchange rates rise and fall within limits set by the costs of shipping currency between different parts of the country. Charges on currency shipments of $1 ,000 are taken as the basis for quotations. If, therefore, it costs fifty cents to ship currency between two cities, domestic exchange rates between them will range from a premium of fifty cents to a discount of a similar amount.

Demand rates of foreign exchange similarly fluctuate between limits set by the costs of shipping, not currency, but gold. Since, for example, it costs in the neighborhood of four dollars to ship $1,000 in gold between New York and London, four dollars sets the limits to the normal variation in the rate of sight exchange between England and the United States. Quotations might be expressed as in domestic exchange dealings but in practice a different method is used. Changes in foreign exchange rates are quoted in slight fractional or decimal variations from the pars of exchange. Between most countries the par of exchange itself, instead of being quoted in a large monetary unit as in American domestic exchange, is expressed by taking the specie value of the gold or silver coin commonly used as a measure of value in each country in a similar coin in other countries.

Thus, the par of exchange between England and the United States is $4.8665, the exact amount of dollars which can be coined from the gold in the pound sterling. As the cost of shipment of gold between the two countries is in the neighborhood of two cents per pound, exchange rates may normally rise to about $4.88, the gold exportpoint, and fall to about $4.84 1/2, the gold import point.

Exchange between the United States and Germany, like that with England, is quoted in the money of the United States, but instead of using the mark, four marks are made the basis of the quotation. The gold in four marks has a value of 95 3/16 cents, consequently German exchange may rise above and fall below this point by the amount that it costs to send gold to Berlin. In the case of France the quotation is not expressed in United States money but in francs - in the number of francs which the gold in the dollar will make, 5 francs 18 1/8 centimes.

When exchange is expressed in United States currency, a rising quotation indicates an approach toward the export point. When, however, quotations are expressed in the currency of a foreign country, the opposite is true. A fall in the quotations then indicates an approach to the export point. For example, a payment of one thousand pounds is to be made in London. If exchange is near the export point more will be paid than if it is near the import point, since at the export point the gold value of the sovereign plus the cost of shipping will be paid. If the rate were $4.88, more would be paid to remit one thousand pounds to London than if the rate were $4.86. But suppose it is desired to pay one thousand francs in Paris. Clearly more will be paid if only 5 francs 16 centimes are obtainable for a dollar than if 5 francs 18 centimes for a dollar were obtainable.

The expenses incurred in shipping gold determine the export and import points, the gold or specie points as they are commonly designated. The obvious expenses are freight, insurance, commission, and the cost of packing the gold. All these elements of expense are somewhat variable. Freight charges may not be uniform, and it makes a difference as to the kind of gold available for shipment. The most inexpensive form for the purpose is gold in bars. Bars can be packed more handily, are of full weight, and there is less loss from abrasion than in the case of shipments of coin.

The great European central banks have a sliding scale of rates for gold, buying bars and foreign coin at coinage value as a maximum price and at that price less the loss of interest during the period required for coinage as a minimum price. In selling gold they impose rates which offset in varying degree the advantage of shipping bars or foreign coin rather than more or less worn domestic coin. By these means the importation of gold is at times stimulated, or its exportation obstructed, but the influence is slight and temporary. In the long run they have no appreciable influence upon the distribution of the precious metal throughout the world.

Another element of expense in gold shipments is time. If a fast express steamer is sailing the specie points are somewhat nearer par than during a week when only the slower boats are available. It should also be noted that foreign central banks frequently allow immediate credit for gold while in transit. This, of course, brings the import point still nearer the par of exchange. Improvements in means of communication have reduced the normal range of demand exchange fluctuations. Twenty or thirty years ago the export point to London was above $4.89. It is now normally in the neighborhood of $4.88. The import point was then in the vicinity of $4.83. It is now normally above $4 84.

But from what has been said it will be seen that the exact point at which it is possible to export or import gold at a profit is subject to much variation even within short periods of time.

The cable transfer rate is always above the demand rate. It gives the purchaser the amount of his purchase immediately, whereas in the case of demand exchange the proceeds will not be placed to his credit until the steamer arrives on the other side six to ten days later. The seller of cable transfers loses interest on the amount of his sales at once, since his balances in the foreign banks, which uniformly draw interest, are at once reduced. The interest rate on these balances is not, however, constant. There is, therefore, a varying spread between the cable transfer rate and the demand rate. If, for instance, a foreign exchange dealer is getting 1 1/2% upon his balance in London at one time, and at another time is getting 2%, he will naturally charge more for a cable transfer in the second case than he would in the first. There are also special causes of fluctua-tion in cable transfers. It sometimes happens that many persons defer making necessary remittances in expectation that rates will go down at the last moment. They must meet their engagements on the other side, and the demand at such times for cable transfers may cause the rate to move abnormally far from the demand rate.