Bills of exchange that have their origin in commercial transactions are called commercial bills of exchange. In contradistinction to these are financial or bankers' bills of exchange. These are bills drawn by a bank in one country upon a bank or a branch in another country in favor of a third party. They have their origin, not in the fact that goods have been shipped out of the country, but in the fact that there is need of foreign exchange and they are created to supply this need.

A consideration of financial or bankers' bills of exchange will help to show why the rate of exchange does not fluctuate violently between the two gold points. A New York bank, for instance, engaged in selling foreign exchange has money on deposit in London. Suppose the demand for London exchange in New York is greater than the supply. New York importers seek in vain for London commercial bills of exchange and it looks as if the price of London exchange will go to the upper gold point and that gold will have to be exported. Before this point is reached the bank will normally sell financial bills of exchange; that is, it will direct its London correspondent to pay to its customers certain funds which are on deposit in London. The customers endorse the bills of exchange and send them to their creditors in London, who present them at the bank and receive payment. Let us suppose that the banker sells the exchange at the rate of 4.876. For each one thousand pounds he now has to his credit in New York ten dollars more than he had in London.

Suppose that now after a short period of time a change takes place in the relative amounts of imports and exports and that there is an excess of London exchange in New York. The price of London exchange in New York falls - let us suppose it falls as low as 4.856. At this point the New York banker buys London Exchange in the New York market, sends it to London and increases his deposit in London. For each one thousand pounds in bills of exchange thus bought he has credited to his account in London the equivalent of twenty-dollars in gold more than he had before making the two transactions. There are a great many banks engaged in buying and selling foreign exchange and therefore competition is very keen and very small fluctuations in the rate of exchange are sufficient to induce the banks to transfer their credit from one side of the ocean to the other. This fact conduces greatly to the stability of foreign rates of exchange. 152. Three-cornered exchange. - The rate of exchange between two countries is influenced, not alone by the relative imports and exports between the two countries, but also by imports and exports between these and other countries. Thus, for example, the exports from the United States to England exceed the imports from England to the United States. Again, Brazil exports more to the United States than she receives from the United States, and England exports to Brazil more than she receives from Brazil. Under these circumstances if the only factor to be considered as influencing sterling exchange was the difference between the exports and imports between the United States and England, the rate of sterling exchange would be constantly above par, but because of transactions with other countries this influence is overcome. Thus there is a large supply of London bills of exchange in New York and the importers from England do not need all of them, but the importers from Brazil buy London exchange in New York and send it to Brazil, where it is readily accepted in payment. With this London exchange the Brazilian merchants pay their debts in London. This three-cornered exchange equalizes the supply and demand for London exchange in New York and thus keeps the rate of exchange more nearly at par than it would otherwise be. This illustration discloses the fact that whatever significance the balance may have depends, not upon the relation of exports to imports between two countries, but upon the relation which the exports to all countries bear to the imports from all countries.