When American firms import goods from abroad, they may make payment through buying bills of exchange drawn on foreign countries. This demand tends to raise the value of the foreign currency as expressed in terms of United States money. On the other hand, when American traders export goods, they may draw drafts on British buyers or their banks. Thus a supply of sterling bills is created in the New York market and its rate is inclined to fall. Before 1914 these fluctuations occurred seasonally, for in May, when British exports to the United States were at their height, sterling often rose to about $4.88, while in October, when American grain and other shipments to England were heaviest, the sovereign fell to $4.84.

In the prewar period the rate of sterling seldom fluctuated beyond these two limits, which were known as the gold points. A bill of exchange affords a claim upon a certain amount of gold, and it is generally more convenient and less costly to use this instrument than to ship bullion itself. However, if the price of the bill rises to an amount which exceeds the value of the gold plus the cost of its shipment, an American debtor who wishes to discharge an obligation in London would prefer to export the gold itself.

The expense of transporting gold bullion between New York and London before the war was estimated at two cents per sovereign, and this amount included such items as abrasion, freight, insurance and brokerage charges, and loss of interest. Adding this sum to the par of exchange, the gold-export point was $4,886. Conversely, the gold-import point on London was the par of exchange, $4,866 minus $.02, the cost of shipping gold equaling $4,846. When sterling bills fell below this rate, an American creditor who held claims on London did not wish to draw a draft and sell it at so low a quotation in New York, but preferred to have the gold itself shipped. Gold import and export points also operated in other countries with the gold standard, and so to some extent the rates on bills of exchange for francs and marks moved within quite a narrow range. The international flow of currency and bullion was not entirely free even before 1914, for government control in most countries frequently restrained the export of gold. Due to the exigencies of the war, belligerent countries allowed the exchange rate of their currency to depreciate rather than permit the free movement of gold.