In each country there is some one city which serves as the chief agent in the conduct of foreign exchanges. In England it is London; in the United States, New York; in France, Paris; in Germany, Berlin; and in Austria-Hungary, Vienna. Each of these centres has its own peculiarities, some of which are worth noting on account of the light they shed on modern commercial processes and methods.

A. London. - This city enjoys the distinction of being the chief centre of the world's exchanges. It not only is to the British Isles what New York is to the United States, Paris to France, Berlin to Germany, and Vienna to Austria-Hungary, but these other centres are grouped about London in such a way as to render her the head and centre of the entire system. The foreign banks in each of these cities have London correspondents through whom they transact most of their foreign business.

The explanation of this interesting situation must be sought in the commercial history of the last two centuries. During all of that period English merchants have been the leaders in foreign trade, and English ships have dominated the seas. Many agencies cooperated with their own genius for commerce in giving them this position. Among these the colonial system, the policy of free trade, the early establishment of and persistent adherence to the gold standard, and great wealth are most important. By spreading English political influence all over the world, the colonial system has removed many obstacles to commerce in the form of unfavourable tariffs, hostile treaties and bad laws, and has given English merchants many advantages over their competitors. By the free-trade policy English markets have been opened to all the world, and by inviting importation has extended exportation and made it more profitable. The establishment of the gold standard in 1816, and its steady and unswerving maintenance for a century, gave England a stable currency, while many of her rivals were wallowing in the slough of inconvertible government notes or fighting the bogy of bimetallism. During all this period bills payable in England have been absolutely certain in value, and there have been times when they were the only ones of which this could be said. Her great wealth has made her people the world's creditors, and as stockholders and bondholders has given them an interest in the industries of every nation.

The combined result of these various influences has been the establishment of trade relations with every part of the world, including connections between English banks and those of every other country. Wherever banks have not existed with which connections could be formed, Englishmen have established them, either in the form of independent institutions or branches of those at home. Thus it happens that in no city in the world can drafts upon so many foreign places be purchased as in London, and through no other centre can foreign exchanges with every part of the world be so easily and economically conducted. The use of London by other cities as an intermediary in many of their foreign transactions is thus in some cases a matter of necessity and in others a matter of economy.

One of the peculiarities of the London market is the fact that many bills are paid there, but few drawn. English exporters generally receive their pay in the form of London exchange and rarely draw on their creditors in foreign cities, and English importers usually permit their foreign creditors to draw on them instead of sending New York or Paris or Berlin exchange, as might be done in many cases. Custom is partly responsible for this, but in the main it is due to the fact that London exchange is easily and usually advantageously negotiated in every part of the world, and English merchants prefer to deal in this way because it makes them independent of fluctuations in the rates. Under this system their contracts are drawn in pounds sterling and are payable in London, and they need not trouble themselves about the ex-changes. They are, of course, obliged to pay for this privilege in the form of higher purchase and lower selling prices, but they are thereby relieved of much anxiety and the English markets of one element of uncertainty which often disturbs those of other countries. One of the results of this practice is that London settles the accounts of Englishmen with all the world, and is thus almost constantly in a position to demand cash from many quarters of the globe as well as subject to drafts from many places.

This latter fact combined with the peculiarities of the English banking system gives to the Bank of England its dominant position in the field of international finance and to the English bank rate a world-wide significance. Holding as it does the reserves of the other banks and being the centre of the London clearing system, it is able to exert an influence upon the international flow of the precious metals which no other institution possesses. The work of settling the balances which result from the exchanges of England with every part of the world falls to this bank, and it is thus usually able to start the flow of a stream of gold towards England, when desirable, or to facilitate exportation. In the former case the bank raises its rate of discount and thus discourages the accumulation of credit balances, and in the latter case it encourages that practice by lowering the rate of discount. When the foreign bankers of London find it unprofitable to extend their credit with the Bank of England, they are obliged to curtail the credit balances of their foreign debtors, and this usually means the liquidation of a portion of them by means of shipments of gold. Under the opposite circumstances they grant credit freely, even to the extent at times of buying accommodation bills with gold.

In quoting the rates of foreign exchange London has the peculiar habit of sometimes stating the price of a unit of the foreign currency in terms of English money, and sometimes of giving the equivalence of a pound sterling in foreign currency. As an illustration of her methods may be taken the following course of exchange for December 8, 1891: -