Fluctuations in the Foreign Exchanges. 17 



rate influences them in our favour. We may divide all bills 

 roughly into two classes — Finance Bills and Commercial Bills. 

 Both of these classes are affected by the Discount Rate, but of 

 the two, Finance Bills respond more rapidly, and to a greater 

 extent, to alterations in the Eate than do Commercial Bills. If 

 we take the simple form of a Finance Bill — that made by an 

 operator abroad who wishes to raise money, and does so by 

 drawing on a correspondent here, and selling the draft so created, 

 the cash price he will get for the draft in his local market will 

 depend largely on the current rate of discount here, where the 

 bill is payable. When the London discount rate is comparatively 

 low, finance bills can be drawn on us to greater advantage, and 

 consequently will be drawn in greater volume. A rise in our 

 discount rates will limit, and may temporarily stop, the drawing 

 of such bills. The volume of commercial bills is not so readily 

 influenced, but it is influenced all the same by the discount rate. 

 Holders of Bills will wish to secure the extra margin of profit 

 aftbrded by a low discount rate, and consequently the supply 

 offered for sale increases, with the inevitable result that the 

 price falls. A rise in the discount rate results in bills being 

 held back for better teims, so that the supply on the market is 

 lessened and this moves the exchange in our favour. 



I have used the terms "in our favour" and "against us," 

 and these require explanation. The American par of exchange 

 is £1 =14-86 that is £100 = i486, so that we may take it goods 

 worth £100 are equal in value to goods worth i486. If the 

 exchange stands at 4-87 or 4-88 it is said to be in our favour. 

 But it only favours those who have to make payments in U.S.A., 

 i.e., British Importers, — as they can pay for goods worth |487 or 

 1488 instead of for goods worth $486 only, with £100. It is 

 unfavourable for those who have to receive payments, i.e., British 

 Expoi'ters — because they will receive less than £100 for i486 

 worth of goods sold. Again, when the exchange is against us, as 

 at present, importers who have bought i486 worth of goods have 

 to pay more than £100 for them, while exporters who have 

 sold goods to that amount i^eceive more than £100. Thus an 



