The mone; unit of a third coun try may to employed

British "pound sterling" has been the chief international uni

Explanation of this

British commerce

Of equal importance, however, is the fact that England has for more than a century been the great creditor nation of the world. Not only new countries like North and South America, Africa, and Australia, but also the countries of the European continent depended on England for the marketing of stocks and bonds and for the making of loans. With her enormous productive power based on machine industry England was in a position to meet the needs of less developed countries, and she met these needs by opening credits in London against which the borrowers sold sterling bills in their own markets.

The sterling bill has been, moreover, always as "good as gold." England led the way in the formal adoption of the gold standard in 1816. Excepting the highly abnormal period of the Great War there never has been a time within almost the whole of the past century when the holder of a sterling credit could not feel sure that if he so desired he could obtain gold at par. Few, of course, would actually want the gold, but the certain possibility of redemption in gold gave a feeling of comfortable security to the holder of a sterling bill and consequently widened the market for it.

The widespread use of sterling exchange in international trade explains the statement that London was the "clearing house of the world." It has already been set forth what the process of clearing involves. Through the maintenance of balances in London, bankers have been able to buy and to sell sterling bills, and the employment of these bills in trade all over the world has permitted a setting off of reciprocal liabilities through transfers on the books of London banks. In other words London has been a sort of "central reserve agent" and adjuster of reciprocal liabilities for almost all the nations of the world.

Britain a creditor nation

The sterling bill has been as "good as gold"

London, the world's clearing house

It must be observed, however, that the Great War has temporarily injured the prestige of the pound sterling in international trade, and has, consequently, diminished the serviceability of London as the world's clearing house. The Teutonic belligerents and their Allies, in such foreign trade as they have preserved, would of course not find much usefulness in a sterling bill. Their London balances were pretty summarily smothered at the outbreak of the war. The war also narrowed the scope even though it did not in like degree diminish the volume of British commerce. Similarly the exigencies of belligerency, and the dependence upon England for a part of the sinews of war on the part of the other Entente Allies, greatly reduced England's ability to lend to the rest of the world. The favorable position of the United States in this particular greatly stimulated the employment of the American dollar as an international medium. Finally it must also be whispered that the certainty of redemption in gold has not been constantly maintained. Freedom of export of gold when the exchange situation required it was through a gold "embargo" practically suspended, and the government allowed the exportation only of so much gold as it deemed desirable.

The attempts made during the progress of the Great War to stimulate the use of "dollar exchange" in international transactions make it of interest and of importance to the American student to consider more generally upon what the employment of any country's "exchange" in the world's market really depends.

"It depends in first instance upon a country's productive efficiency.1 Bills drawn in terms of the money unit of a given country and made payable in its financial markets can be employed only when there is a demand for them. Such demand can arise only when the country concerned can supply to the outside world economic goods that are needed.

War has reduced dependence on London

Dollar exchange

What is necessary for the employment of a country's "exchange "

1 Cf. Hartley Withers, International Finance, pp. 28 et seq.

In addition to the creation of needed utilities the country must be able to lend abroad widely and cheaply. This involves the creation of an adequate surplus at home. A large part of foreign trade today, especially that with new countries, depends upon the lending to the newer countries by the older and established nations. The lending and investing of "money" and the sale of goods go on hand in hand, and wherever goods are sold there is a basis for the demand for bills of exchange. Then in connection with bills in general trade the demand will, other things being equal, favor the market where the rates of discount rule at the lowest level.

The necessities of the foreign exchange business require also the preparation of adequate maehinery to handle it. Direct banking connections of some kind are imperative. It is the bankers who purchase bills of exchange in first instance, and, in the financing of foreign trade through the extension of commercial credits, etc., it is essential for them to have trustworthy representatives on the ground to judge of the character of risks, to analyze the possibilities of the market and to solve similar problems. Moreover, such banking connections must be sufficiently widespread to permit broad arbitrage operations, otherwise discrepancies in the rates in different markets will tend to develop which must of necessity react unfavorably on the employment of the country's exchange.

Lastly may be mentioned the importance of stability of the country's money and credit system. The money system is, of course, at the basis of the credit system, and the money in which the credit claims represented by bills of exchange are ultimately redeemable is a matter of vital moment to him who is expected to purchase a bill of exchange or to accept it in settlement of an obligation. Then the credit system must be so constructed that there are positive safeguards against anything like serious collapse, otherwise the holder of a bill can never be sure of its standing.