We are now prepared to examine the causes for fluctuations in the rates of exchange. Let us suppose that New York importers desire to buy a million dollars worth of sterling exchange with which to discharge their debts in England. Let us suppose also that exporters have sold to English merchants nine hundred thousand dollars worth of goods payable in London. Let us suppose further that there are no banks. The importers will seek for men who have debts owing to them in London, while the exporters will be on the lookout for men who are under obligation to pay debts in London. The former desire to buy credit, the latter to sell credit. Obviously, the importers could ship money to England with which to pay their debts, and the exporters could have the money owing to them in London shipped to

New York. In either case there is an expense of two cents per sterling pound - that is, the highest price importers will pay for the right to draw money in London is $4.886; the lowest price which exporters will accept for the right is $4.846. If we follow out our assumption we can conclude that the exporters sold all their rights to draw money in London at or near the upper gold point, while the balance owed by the importers, one hundred thousand dollars, was shipped.

Banks serve to facilitate matters. An exporter, like our Iowa corn-shipper, sells his foreign bill of exchange to his bank, which sends it to its correspondent bank in London. The London bank presents it to the payer, and when the bill is paid, places the amount received to the credit of the New York bank from which it had received the bill. An importer, let us say, goes to the same New York bank and desires to buy sterling exchange. The bank, having credits in its correspondent bank in London, can accommodate him. What will it charge per sterling pound ? If it has relatively large balances in London, it is likely to charge the importer between $4.846 and $4.866. If its balances are relatively small, the price is likely to be between $4.866 and $4.886. The bank cannot afford to lose more than two cents on each pound sterling, for it could ship the gold from London to New York at that expense. Nor, for the same reason, would the importer pay more than $4.886. From the foregoing we see that the rate of exchange depends on the state of foreign trade. An excess of imports tends to cause the rates of that country to be above par; while an excess of exports tends to force the rates below par.

Foreign Bill of Exchange.