The general nature of clearing was discussed in the preceding chapter, but, as was there indicated, the subject of international clearing and exchange presents so many distinctive features that it requires to be independently discussed.

International, like domestic, clearing operations, grow out of a complex variety of economic transactions between individuals. But there are some important points of distinction. International clearings are based on transactions between individuals in different countries, whereas domestic clearings grow out of purely "home" business, even though some of this "home" business may be directly or indirectly based on foreign business.

The money calculations also are not the same. In international, as in domestic, trade individuals are seeking the maximum economic advantage. This has led to the far-reaching division of labor that characterizes modern economic life with all that such division of labor implies with respect to commerce and exchange. But the economic advantage as pursued is thought of in terms of money, and the degree of success or failure that may be achieved is estimated in money sums. In domestic trade both parties to any given transaction make their calculations in terms of the same money unit, but in international trade where nationals of different countries are involved, all the parties of interest finally estimate either cost or return in terms of the money units of their own countries. Therefore international payments involve usually not only the transportation of funds from one country to another but also their transformation from one kind of monev to another.

International clearing requires independent discussion

International clearings are based on inter-lational transactions

In any kind of trade between individuals situated at a distance from each other dependence upon actual payments in money would involve the shipment of the money from the debtor to the creditor. Under such circumstance5 there would of course be numerous "cross-shipments" of money. In early times the bill of exchange was invented to prevent useless money-shipments, and it was successful in this particular because it embodied the principle of the clearing of reciprocal claims. If A in place 1 sells to his banker a bill drawn on B in place 2, and if C in 1 buys from the banker a draft on his correspondent in favor of D in 2, assuming the same amounts in both cases, the bank ers are simply the intermediaries through whom A's credit offsets C's debit. In domestic trade under the develop ment of modern banking the process of clearing has pro gressed far beyond the possibilities here exemplified, bu1 the employment of different monetary units in international trade has kept international clearing closer to the primitive type.

It is sometimes said that gold is the standard of value and the medium of exchange employed in international trade. Such a statement does not, however, square with the facts. International trade is carried on today not in terms of gold but in terms of money units. Such money units may themselves be kept at a certain gold value, but that is by no means the same as saying that gold is the actual medium. There are times when the supposed gold parities are not maintained, when gold payments are entirely suspended, and yet international trade continues to be conducted in terms of money units. Even when gold shipments are undertaken it will be seen that the occasion of the shipments is a difference in relative money values rather than any sudden development in the employment of gold itself.

The particular money unit employed by international traders depends upon agreement between them. This agreement is largely a question of the marketability of bills drawn in terms of different money units. Whatever the particular money unit that may be employed in any given transaction the debtor can ultimately pay and the creditor will be willing finally to receive only the money of his own country. This necessitates, therefore, the transformation directly or indirectly of the funds supplied by the debtor expressed in terms of his country's money into funds expressed in terms of the money of the creditor's, country.

Gold is not the medium in international exchange

There are three general possibilities of making foreign payments.

(a) The debtor may purchase in his home market the standard bullion of the creditor's country and ship that at the mint price. Thus an American having a payment to make in England could buy gold in the domestic market, ship it to England and have it there converted into English money at the established mint price of 113+ grains per pound sterling. But this would, of course, be a crude and wasteful method of payment.

The other two possibilities are based on the principle of clearing.

(b) The creditor may draw a draft or bill on the debtor or on his agent and may sell such draft to an international, banker having an office or a correspondent in the creditor's country. This draft or bill may be in terms of the standard money unit of the debtor's country or of that of some other country. This point will be discussed later. It will be sold, however, for funds expressed in terms of the money unit of the creditor's country, who (assuming the ultimate payment of the bill) is then out of the transaction. Such bills are in general known as "commercial bills of exchange" although there are of course many types of such bills.1

(c) The initiative may be taken by the debtor who purchases from his banker a draft or order payable in terms of the money of the creditor's country or of such other money as may be acceptable to the creditor. If such a draft or order is payable in the money of a country other than that of the creditor, the latter relies on his ability satisfactorily to dispose of the claim in his own market. Such bills, drafts, or orders are known as bankers' bills and of these too there are different kinds.