To illustrate the financing of exports, we may take the case of a shipment of goods from the United States to South America. The financing is handled in a number of different ways, but one of them will serve for illustrative purposes. A commission house exporting goods to South America will commonly be paid in 90-day drafts on some London bank, drawn by the South American purchaser of the goods. If the commission house waits until these bills mature, it will be a long time out of its money - the time that the goods are in transit to South America, the time that is required in sending the bill of exchange to London, and ninety days thereafter. Something like six months will elapse before the maturity of the bill. But the commission house in New York wants its money at once. It may itself, therefore, draw a 90-day bill upon a London bank and get the cash by selling this bill in the New York market. This 90-day bill will be sent to London and discounted in the London market. Thus it will be seen that London really finances the shipment of goods from New York to South America. When the 90-day bill falls due the New York house must provide payment, since the South American bill is not yet due. This it can manage by discounting the South American bill in the London market. Finally, when this bill matures, means of payment will have been provided by the South American purchaser of the goods. Thus during the period of six months London has financed the transaction; first, by discounting the bill of the New York commission house, and then by discounting the bill drawn by the South American purchaser.

A considerable number of banks throughout the United States have established foreign exchange departments in recent years. They have entered into the necessary arrangements with foreign banks, establishing balances with them, and are thus able to provide their customers directly with cable transfers, sight drafts, and also letters of credit, both travelers' and commercial. A foreign exchange department of this kind does not require any considerable amount of capital. It will purchase time bills of exchange drawn against merchandise shipments, which it can secure either from New York or direct at the rate at which these bills on receipt will be discounted in London or elsewhere. It therefore incurs no risk from fluctuations in foreign rates of discount - fluctuations which the American banker would hardly be in position to forecast. Having purchased time bills at a rate which is less than the demand rate of exchange by the amount of the discount on arrival, stamp tax, and commission, the bills may be at once sent on for discount, and at the same time the foreign exchange department may sell an equivalent amount of demand exchange. Of course, if the foreign exchange manager cares to assume the risk, he need not sell demand exchange equivalent to his purchases of time bills;but if he has not very much capital to work with, and wishes to avoid practically all risk from fluctuations in exchange rates, it is ordinarily possible to do so.

The many banks scattered all over the country which have foreign exchange departments do not directly have anything to do with the determination of the sight rates of exchange. They are determined by the operations of a comparatively small number of dealers in exchange in New York City. Some of them are private banking firms, and others are the managers of foreign exchange departments of banks and trust companies. These institutions and firms necessarily incur a certain amount of risk in connection with foreign exchange dealings. They buy and sell a more or less indefinitely large amount of sight exchange. If it is believed by one of them that rates are going down, he will be likely to offer a good-sized block of sight exchangeAand if another takes the opposite view he will be prepared to buy. Dealings between the large foreign exchange houses are reflected in constant slight variations in demand rates of exchange. Sometimes the exchange market is quiet, but at times it is in a feverish condition.

Those who are engaged in the foreign exchange business in New York must take account of every influence which may increase or diminish the amount of foreign exchange material. What may be called the foreign exchange material consists in the first place of all sorts of time bills drawn against or resulting from exports and imports of merchandise. All of the commercial bills drawn against cotton shipments, grain, petroleum shipments, etc., build up balances on the other side against which exchange may be sold. Interest payments, shipping charges, tourist expenses, dealings in securities, issues of American securities marketed abroad or resold to this country, all provide foreign exchange material.

In addition to all these exchange creating factors, there are temporary loans made by one foreign market in another foreign market, by means of finance bills. These loans may be made in a variety of different ways. The foreign exchange house in New York enjoying good credit may, for example, draw bills upon a London correspondent payable in three months. These bills, on acceptance by the London correspondent, may be readily discounted, thus giving the American exchange house a balance to the amount of the bills, and enabling it to sell an equivalent amount of sight exchange in New York. This is what ordinarily happens in the case of foreign borrowing. No actual money commonly moves between the two markets. Similarly, borrowing may be arranged by an exchange dealer for one of his clients who may deposit collateral as security. Profit on these foreign loans is largely determined by the course of the sight exchange rate. Suppose, for example, that the sight rate of exchange is $4.86, and that a long bill is drawn and sold at $4.82, a difference reflecting the discount rate on London. When the long bill matures, the borrower must purchase sight exchange with which to take it up. If the sight exchange rate is then still at $4.86 he will have paid only four cents on each pound for the use of the money during the period. But in the event that the sight rate has gone up to $4.87 his loan is more costly, as he will be paying five cents for each pound.