To simplify matters let us confine our attention in this discussion to trade between the United States and England. Let us also assume that all sales are made with the agreement that debts are to be paid in London in sterling exchange.

It is first necessary to determine the par of exchange between these two countries. This, however, is a simple matter. It is done by dividing the weight of the fine gold in a dollar into the weight of the fine gold contained in an English pound. The result of the division is 4.866. Translated into terms of dollars the par of exchange is $4,866.

A second preliminary notion is the gold points, called by some authorities the gold exporting points. Under normal conditions the expense involved - interest, insurance, and freight charges - in shipping $4.866 in gold from the United States to England is about two cents. Consequently, we say that the upper gold limit is $4.886 and the lower limit, $4.846. This two-cent margin above and below par is much less than it was a century ago; and we may expect it to decline still more in the future with a decline in the risks involved in transportation, with quicker transportation, and with a reduction in the normal interest rate.