The quotations for exchange are the prices at which the right to receive money in a foreign country is bought and sold in another country and vary according to supply and demand. Distinction must be made between the "mint" par of exchange and the "commercial' par of exchange. .Mint par of exchange between the United States and another country is the actual value in our money of the pure metal contained in the coins representing the units of money in the other country. Thus the mint par of exchange of the English pound sterling in our money is $4.8665, of the French franc 19.3 cents and of the German mark 23.8 cents. The mint par of exchange between any two countries is determined by dividing the weight of pure gold in the standard coin of the one by the weight of pure gold in the standard coin of the other. The English sovereign or pound sterling contains about 11.3 grains of pure gold and our dollar contains 23.22 grains of pure gold. Dividing we have 4.8665, which means that the pound sterling is worth 4.8665 times as much as our gold dollar. In the same way the mint par between the dollar and the mark, franc, or guilder is determined. While our transactions with Germany, France and Holland give rise to a large amount of bills drawn in the currency of those countries, yet the great bulk of our dealings is in sterling exchange. For the sake of clearness, therefore, we shall confine our attention largely to the operations of sterling.

If the volume of exports and imports and the items involved in the invisible trade were to balance exactly there would be a commercial par of exchange also, and sterling bills would be bought and sold for $4.86 in American money. This equilibrium in international business rarely occurs, however, and the price of sterling seldom corresponds to the mint par, but varies with the demand for, and the supply of, bills. How widely may the rates of exchange vary from the mint par? This brings up the question of the so-called "gold points.' At certain seasons of the year when imports into the United States are greatly in excess of exports, there is such a demand for drafts on London that bankers are able to charge a premium on them. Now the American importer having to make remittances abroad has two alternatives; he may either send a draft on London or have the gold shipped. The cost of shipping gold between London and New York is about two cents to the pound sterling. As long as the price of sight exchange on London is less than $4,886, that is, the par of exchange plus the cost of shipping gold, it will pay the importer to buy a bill rather than to ship the gold. When exchange rises above that point, known as the "gold export point," gold will probably be shipped. On the other hand, when exports exceed imports New York bankers buy more sterling than their customers need and after a while they will be willing to buy bills only at a discount. But again the American exporter has two methods of receiving funds from abroad: he can draw a bill on his foreign debtor and sell it in New York or he can order the gold shipped to him. As it costs two cents to ship the gold he will not be willing to sell his draft for much less than $4,846 ($4,866 less .02), for if it falls below that point, called the "gold import point," it will be more profitable for him to have the gold shipped from abroad.

It will be understood, of course, that individual traders do not export and import gold; this business is handled, like exchange itself, by the bankers, and is largely concentrated in the hands of a few international banking houses. In general then it may be said that when, as a result of heavy demand, drafts on London are selling at $4,886 in New York, American bankers may find it equally or more profitable to meet their foreign obligations by shipping gold instead of remitting in sterling exchange. On the other hand, when exchange has fallen to $4,846 and remittances are to be made from London to American bankers, they may find it more profitable to have the gold shipped to them from London than to sell drafts on London at the low rate of exchange. Theoretically, therefore, the price of sterling bills cannot under normal conditions rise much above $4.88, nor fall much below $4.84. It must be understood that these "gold points" are not fixed, but that they vary from time to time with the rate of interest and other influencing factors.