Foreign short-time loans do not ordinarily occasion movements of money into the borrowing country, but they frequently check gold exports. They are seldom made except when rates for loans are relatively low in the lending market and the rate of exchange is high toward the export point in the borrowing market. Let us suppose, for example, that the rate in New York for three months' collateral loans is 5%, and that the discount rate in London is 3%. It may then be advantageous to borrow in London if the sight rate is at least as high as $4.87. It cannot go much above $4.88, and it may be at a much lower point three months hence, when it becomes necessary to purchase demand exchange. If the rate does go down, it reduces the cost of the loan to the borrower. If, however, he should enter upon this transaction when the sight exchange rate was $4.85, he would incur the risk of a possible advance to $4.88, making the loan an extremely costly affair. Whenever there is a large balance of payments against a country, temporary borrowing cannot prevent exchange rates in the long run from moving to the export point. But within limits it is possible to postpone gold movements if interest rates go to a much higher level than those prevailing in the foreign countries to which heavy payments are due. In such circumstances, so long as the credit of the debtor market remains good in foreign countries, very considerable temporary loans may be made, thus providing sight exchange. But if a large number of three-month bills are drawn now, at the end of that period it will be necessary to make payments or secure renewals and renewals cannot be continued indefinitely.

Within moderate limits, borrowing by means of bankers' time bills serves a useful purpose, tending to steady the sight rate of exchange. In the absence of these bills a comparatively slight excess in the demand for or supply of exchange would cause rates to move violently between the export and import points. When drawn for the purpose of steadying the exchanges they are sometimes spoken of as anticipatory bills. Bankers' bills, for example, are regularly drawn by New York in the early summer months, because it is known that in the autumn a great quantity of commercial bills will come into the market in connection with exports of cotton and grain. Anticipatory bills are in no sense different from other bankers' bills. It is simply that within limits and at certain times they really are anticipatory. The term finance bills is sometimes used in a derogatory sense, as if commercial bills were the only perfectly reputable variety of bills of exchange. Bankers' bills are, however, essential for the smooth working of the exchanges, and the danger that they may be drawn to an excessive extent and contribute to the creation of an unsound situation is not peculiar to this method of borrowing.

From the foregoing discussion it may have been observed that there are two more or less distinct groups of foreign exchange markets - borrowing markets and lending markets. The borrowing markets are numerous, while the lending markets are few, with a strong tendency for a single market to acquire nearly the entire business. In many ways it is advantageous to have one city in the world which serves as a center for international payments. London became the central money market of the world, reaping all the advantages of that position, because it has been able to absorb whatever amount of foreign bills might be sent thither for discount. This is an essential condition for the normal working of the exchanges under a system of settlements largely concentrated in a single market. The market on which bills of exchange are drawn must be prepared to discount them. In order to avoid the risk of loss from fluctuations in exchange, bankers purchasing time bills drawn on another country must be able to discount them at once in that market, so that they may be able to sell demand exchange against the proceeds.

Exchange bankers in New York and in all other exchange markets each day, and oftener if rates change, receive spot and forward delivery quotations from London correspondents. Spot quotations, as the name implies, are discount rates on bills already in London. Forward delivery quotations are the rates at which London bankers and discount houses agree to take bills arriving in the next mail from the market to which they are quoted. These arrival rates enable exchange bankers in New York and elsewhere to purchase time bills without running any risk from changes in London discount rates while the bills are in transit. When downward tendencies in London discount rates seem probable, the banker may not take advantage of the arrival rate; just as in the belief that exchange rates are to advance he may decide to hold the bills to maturity. In fact the advantages and uses of forward delivery quotations are in every way analogous to those arising from discounting bills which have already been delivered. In one case the arrangement eliminates risk during the transit period, in the other during the entire life of the bill after it reaches the country on which it is drawn.

It is evident therefore that if time bills of exchange are to be handled with a minimum of risk it must always be possible to discount them in the country on which they are drawn. This has always been possible in London, and at rates which have averaged somewhat below those prevailing in other money markets. For this reason and because it facilitates settlements and makes possible a broad exchange market in all countries, foreign bills of exchange throughout the world for many years preceding the European War had been principally drawn on London. Persistent efforts to give bills on other money centers, notably Berlin, the standing of the sterling bill, have not succeeded. In addition to its readiness to absorb the indefinitely large volume of foreign bills, London also has exercised most effectively another essential function - that of accepting bills for bariks and traders in all parts of the world. Until recently the acceptance business in London was conducted almost entirely by private banking firms known as acceptingjiouses, the value of the London acceptance being due not so much to the financial strength of the acceptors as to the knowledge of the financial standing of banks and traders throughout the world which they had acquired, and the skill and restraint which they had manifested in the conduct of this important branch of the banking business. Of late years the joint-stock banks have entered this field and in London, as elsewhere, the bulk of the accepting business will probably come to be handled by incorporated banks.