These two indispensable foreign exchange functions were developed during a long period in which peace had become the normal condition of the world. It is, therefore, no more than was to have been expected that with the approach of the European War the entire mechanism of foreign exchanges should be so seriously dislocated as to come almost to a standstill. On Saturday, July 25, 1914, foreign exchange operations were still being conducted in normal fashion throughout the world. Demand exchange in New York was quoted at $4.8830. Gold exports in considerable quantities seemed imminent, but nothing more serious seems to have been expected. Over Sunday the outbreak of a general European war, which had been commonly regarded as a vague possibility, became alarmingly probable. On Monday demand exchange opened at $4.92 and the foreign exchange market was completely disorganized. This condition was in no way peculiar to New York. Foreign exchange dealings between all of the money markets of the world were in a similar abnormal state. In no other business was the effect of the approach of the war felt so immediately, generally, and severely. The complicated and delicately balanced mechanism of the foreign exchanges, developed during long years of peaceful intercourse, collapsed like a house of cards.

Two operations essential for the working of the foreign exchanges had been instantly interrupted and, indeed, practically discontinued, the business of accepting and that of discounting foreign bills of exchange in London. When London ceased to perform these two functions, the mechanism of the foreign exchanges throughout the world inevitably and at once became completely disorganized. Acceptors in London were under heavy obligations on bills of exchange drawn by banks and merchants throughout the world, who in turn were under obligation to remit funds to them before the maturity of the bills. Among these bills accepted in the ordinary course of business were a large number, amounting in the aggregate to many millions of pounds, for banks and merchants in the countries which were rapidly drifting toward war. Remittances could not be expected from hostile countries until after the restoration of peace. It was also certain that remittances would be delayed in many instances in the case of bills accepted for clients in allied and also in neutral countries, owing to the disturbances occasioned by the outbreak of the war. In these circumstances acceptors in London were in no position to make new acceptances, and the value of the acceptance itself was impaired. It should further be noted that exchange banks in New York and in all other markets were under heavy contingent liabilities on account of endorsements of bills drawn on London acceptors. In the event of the failure of London accepting houses, these bankers would have to supply funds to take up the bills and in the disturbed conditions prevailing might incur serious loss through the failure of drawers, to whom they would have recourse. Uncertainty regarding the value of the London acceptance completely transformed the character of the business of buying commercial bills of exchange. A business which normally is highly secure and even routine in character was in a moment changed to one surrounded with uncertainties of a most unfamiliar and incalculable nature. At the same time shipping hazards, and uncertainty as to market conditions in foreign countries, were taking away much of the value of the security which the bill of lading ordinarily gives in the case of bills drawn against exports. Both exporters and those who might purchase their bills would therefore be embarking upon venturesome transactions, utterly lacking the highly developed safeguards which normally protect international dealings, both in commodities and in bills of exchange.

The consequences of the uncertain position in which London acceptors were placed by the approach of the war do not seem to have been at once fully realized even in foreign exchange circles. They were perhaps overshadowed by the presence of another disorganizing influence, the full force of which was immediate and obvious. From Monday, July 27th, to the middle of August, the business of discounting foreign bills in London was almost entirely suspended. With the approach of the war it might well have been presumed that London would decline to quote forward delivery rates before the discounting of bills already in London was discontinued. As it happened, both spot and forward delivery quotations were discontinued at the same time, on Monday, July 27th, striking evidence of the great change for the worse which affairs had taken over Sunday.

This discontinuance of discount quotations by London was the most important single factor in the exchange market in New York and elsewhere throughout the world on Monday, July 27th. It involved a complete transformation, not only of the business of buying commercial bills, but also of conditions in the demand exchange market as well. On Saturday the exchange banker purchasing commercial bills could arrange discount terms at once in London and sell demand exchange against the proceeds. On Monday the purchase of such bills involved the investment of capital until the date of maturity in a far from satisfactory security, owing to the position of London acceptors. On Saturday every commercial bill offered in the market provided the means for an immediate sale of demand exchange. On Monday the immediate supply of demand exchange could no longer be enlarged to the slightest extent by this means. The principal source of an immediate supply of a demand exchange was entirely cut off. Demand exchange could still be sold against foreignbalances, but these were not large. The exportation of gold was a further source of supply of demand exchange, but could not go on indefinitely without endangering the foundation of the domestic credit structure. In these circumstances, although exchange transactions were not entirely suspended, there was a complete cessation of certain exchange operations, in the absence of which there can be no broad exchange market. Each dealer made every effort to provide the exchange urgently needed by regular customers, but transactions between dealers were almost altogether discontinued. In normal times, by offering to buy exchange at higher prices, a dealer can secure whatever amount he may require. At such times changes in rates serve to adjust supply and demand in the exchange market; Beginning with Monday, July 27th, rates merely reflected the urgent and even frantic efforts of particular purchasers to secure exchange. 'Rates fluctuated widely, but as each transaction stood by itself they had no general market signifi-cance.