EXCHANGE 



3040 



EXCHANGE 



At a post office I buy a Glasgow 

 claim for 15s., paying the post- 

 master-general an extra l|d. be- 

 yond the 15s. for the convenience 

 he has afforded me. This claim on 

 the postmaster-general's Glasgow 

 balances, called a postal order, I 

 send to my creditor. In due course 

 he cashes it and is perfectly satis- 

 fied. This was an exchange trans- 

 action, a transformation of London 

 money into money somewhere else. 

 What I bought was, in fact, a bill 

 of exchange drawn by the post- 

 master-general upon his balances 

 in Glasgow. 



In ordinary circumstances the 

 postmaster-general's balances at 

 Glasgow are sufficient to meet all 

 demands. But suppose that cir- 

 cumstances create an abnormal 

 number of remittances to Glasgow, 

 so that the postmaster-general has 

 to make special arrangements in- 

 volving extra expense and labour 

 for dealing with them. It is con- 

 ceivable that he must then raise 

 the price which he charges for the 

 means of making remittances to 

 the north. Instead of selling a 15s. 

 bill or order for 15s. ld., he must 

 demand 15s. 3d. or 15s. 6d. In the 

 language of the foreign exchanges 

 we should say that the London- 

 Glasgow exchange was moving 

 against London, because a given 

 amount in "the metropolis was 

 exchangeable for a less in Glasgow. 

 A Hypothetical Example 



In the supposed instance why 

 should the London-Glasgow ex- 

 change move against London ? 

 Simply because so many London 

 people were anxious to acquire 

 claims to Glasgow money in order 

 to meet their obligations there. 

 Finding such a strong demand for 

 Glasgow money, the postmaster- 

 general put up the price at which 

 he was willing to sell his Glasgow 

 balances. For some commercial 

 reason everybody was desirous of 

 providing funds in Glasgow to pay 

 for goods bought there; conse- 

 quently people like the postmaster- 

 general with money in Glasgow 

 were besieged by London buyers 

 of their Glasgow funds. Bills on 

 Glasgow were eagerly snapped up ; 

 people were bidding for them 

 against one another. The result 

 was that the price of Glasgow 

 money went up; the London- 

 Glasgow exchange moved against 

 London. Let us turn from this 

 simple illustration of the principle, 

 to its working throughout the 

 business world. 



If English exporters, at a given 

 time, had sent so large a quantity 

 of commodities to Krance as to 

 create the necessity for unusually 

 extensive remittances to London 

 in payment thereof there will arise 



an insistent French demand to 

 exchange francs in Paris for sove- 

 reigns in London. The price of the 

 sovereign, as expressed in francs, 

 will advance. Now the Paris ex- 

 change, as quoted, expresses the 

 price of the sovereign in francs ; 

 therefore the higher it goes the 

 cheaper do the francs become, 

 since the sovereign will buy more of 

 them at the higher quotation than 

 at the lower. This is what is meant 

 when the Paris exchange is said 

 to move in favour of London. 

 Exchange Quotations 



At the same time it must be 

 remembered that some of the ex- 

 changes the Portuguese, for ex- 

 ample are quoted the other way 

 round. While the Paris exchange 

 is francs to the sovereign, the 

 Portuguese exchange is pence to 

 the milreis. This reversal turns the 

 whole process upside down, with 

 the result that the lower the quo- 

 tation the better for the English 

 buyer of Portuguese currency, 

 since it increases the amount which 

 he can purchase in Lisbon for a 

 given sum in London. The varying 

 methods of quoting the exchanges 

 are at first sight perplexing. The 

 inquirer will discover, however, 

 that in the quotations of the 

 foreign exchanges in the daily news- 

 papers the exact significance of the 

 figures is indicated. He is in- 

 formed, for instance, that the 

 Amsterdam exchange is quoted 

 florins to the ; that of Hong Kong 

 is the value of the dollar in shillings 

 and pence. In theory, of course, 

 these transactions are exchanges 

 of money for money ; but the 

 buyer of London sovereigns in 

 Paris will get a draft or bill of 

 exchange on a London firm or 

 bank. Hence the French exchange 

 quotation is for Paris cheques. 

 This represents the money, and is 

 in due course transformable there- 

 into. The element of time, as well 

 as of an alien currency, has to be 

 taken into consideration. Some of 

 the exchange quotations in the 

 current lists are for so many days' 

 sight. They represent the price 

 asked on a given date for English 

 pounds payable in London after 

 the expiration of 90 days, plus the 

 days of grace. 



As the speed of modern business 

 tends ever to accelerate, there has 

 arisen a need for a quicker remit- 

 tance from distant points, than is 

 represented by a draft payable at 

 60 or 90 days. Hence the " T.T." 

 quotations in the published lists of 

 exchange rates, i.e. the prices of 

 telegraphic transfers. They stand 

 for the terms upon which the ex- 

 change dealer in Shanghai, for 

 instance, will buy or sell sovereigns 

 in London, the money to be pay- 



able as soon as the cable can carry 

 instructions to the London agent. 



This element of time is impor- 

 tant. Obviously a Rome draft on 

 London, payable eight days after 

 sight, or really 11 when the days 

 of grace are added, will not be 

 worth so much in the Italian 

 capital as a sight draft on the same 

 place. In the one case the re- 

 cipient of the draft can get his 

 money at once across the London 

 counter. But with the draft at 

 eight days' sight he must wait 11 

 days before he handles the coin. 

 Similar principles operate between 

 countries employing the same cur- 

 rencies. The price of the English 

 sovereign, as expressed in terms of 

 its Australian brother, undergoes 

 a constant fluctuation. So again, 

 large remittances from New York 

 to Chicago will send up the price 

 of the Chicago dollar as expressed 

 in the New York dollar. 

 The Gold Point 



In our preliminary illustration 

 the postmaster-general gradually 

 raised his London price for Glas- 

 gow money. But he could not go 

 on doing this indefinitely. If he 

 advanced his charges beyond a 

 certain rate, it would pay better 

 to send coin or notes to Glasgow 

 by registered letter, or by train, 

 than to buy his Glasgow bills. The 

 cost of remitting coin is easily cal- 

 culable. It is the value of the 

 coin, plus freight, insurance, and 

 the expense, in large remittances, 

 of packing and unpacking. Unless 

 the postmaster-general keeps his 

 charges below the aggregate of 

 these expenses, people will send 

 coin and notes to Glasgow in pre- 

 ference to buying postal remit- 

 tances. If 150 in notes or gold 

 can be sent to Glasgow for 1 in 

 freight, insurance, and expenses, 

 nobody will pay a commission of 

 1 10s. to the postmaster-general. 



The same principle holds good 

 in international exchange. If the 

 Paris price of English money rises 

 above a certain point, the exchange 

 dealers will ship gold to London. 

 They can then sell, in Paris, the 

 English money obtained for their 

 gold. With the rate at its sup- 

 posed high figure, they would 

 make a profit, since they would 

 get more for their English coin 

 than it had cost them in shipping, 

 insurance, and expenses. The rate 

 of exchange which tends to en- 

 courage the transit of bullion, in 

 preference to the purchase of bills, 

 is called the gold, or specie, point 



Bullion, however, is not in- 

 variably remitted whenever this 

 point is passed. Other factors in 

 the international monetary situa- 

 tion may prevent this. Certain 

 governments, e.g., place obstacles 



