Evening star. [volume] (Washington, D.C.) 1854-1972, 1903-10-24
CLEAR BIC COMMERCE
How Wall Street Effects Coun
try's Exchanges.
LITTLE MONEY USED
IMMENSE BUSINESS ON NARROW
PROFITS.
How Gold Shipments by International
Bankers Affect
Stocks.
LITTLE MONEY USED

Copyright, 1908, by Joseph Il. Bowles.)
Written for The Evening Star by Serene S. Pratt,
Associate Editor Wall Street Journal.
The mechanism of foreign exchange, mys-
FERROUS as it seems in operation, is in it's
essential parts very simple The principle
of a watch is not difficult to understand,
but no one but an expert ever undertakes to
repair. much less make one. So it is with
the machinery which finances the nations
commerce with other countries. No one but
an expert undertakes to deal practically in
a large way with so intricate a construc-
ton.
Foreign exchange, however, is a legiti-
mate branch of barking, and more and
more banks establishing foreign ex-
change departments. In fact, 1t is possible
to buy bills of exchange in any town in the
| country containing a bank with the same
ease that draft on New Yori, can be pur
chased. 1t is. however. in Wall street that
the mechanism of foreign exchange centers.
It is there where the great international
banking houses which conduct the large eX-
change transactions are located. InaSmucn
as more than one-half of the commerce of
the United States passes through the port
of New York it is natural that this should
be SO. Foreign exchange, however. EN-
braces more than the facilities for payment
of merchandise passing from one country to
another. 1t includes also the payment for
securities purchased. for debts contracted,
for travelling expenses or tourists, LOT
freight charges on merchandise carried In
foreign ships, and other items in the &C
counts current of nations with nations
These payments are made by transfers or
credit for which the mechanism OF eX-
change provides. When it is necessary to
make a cash payment gold is exported, but
there is ordinarily no shipment of gold until
every other facility of the exchange market
is exhausted.
Actual Money Payments Small.
The mechanism of exchange is arranged
so that there is an exchange of American
cotton. wheat, etc, for European wines,
silkA and other products. Thus one COM
modify balances another, and no exchange
of money is required except when there is
a surplus of Indebtedness on one side or
the other. and even then there may be no
immediate payment, the balance due being
allowed to stand in the shape of loans until
it may be iquidated by sales of merchan-
disc or securities. Thus the vast commerce
of the nations is so conducted that while
each individual merchant receives his pay
for the products he has sold, the business
whole is so carried on that a transfer
of credits from the one side to the other
actually settles practically the whole leav-
ing only small balances to be liquidatca by
transfers of gold. The exchange market is
therefore like a clearing house. 1t arranges
for exchanges on such a basis as to reduce
actual payments of money to the lowest
possible amount.
How Exchanges Are Made.
All business is simply an exchange of one
commodity for another. Money is merely a
medium of exchange. Gold is a standard Of
V, ue. Most domestic exchanges are eff
fected by means of clearances requiring no
actual payment of money. For instance, A
bI,yc bal of of III
not actually give $3.50 in money but
makes payment by sending a check for the
amount. which the seller puts in the bank
to his account. This check goes through
the clearance house, but as it may be
matched by other checks against this bank
one transaction balances the other, and no
payment of cash Is required. In other
words. an exchange of commodities has
taken place by means of transfer of cred
its without an exchange of money
Now foreign exchange is the same in
principle, though much wider and r.,ore
complex in operation. The exchange of
commodities is now between different ..oun-
tries having different systems of money
Exchange esta blishes a system by which
one transaction is cleared by another and
there is the utmost economy in the use Of
money.
In no other way could the vast operati tons
OF commerce be possible except by means
OF system like this. Suppose that all for
e1gn goods had to be paid for in full on de-
livery in actual gold, commerce in the mod
ern sense of the word would be impossible
But the system of foreign exchange by
matching one transaction against another,
as Is done in a clearing house eliminates
the vast majority of the payments and re-
duces the necessary exports Of gold to
minimum. representing balances in favor of
one country or the other 1t is vast Ia bor
saving. time-saving. risk-saving mechanism
An Illustration.
A in New York sells B in London 100 bales
Of cotton at $4.500, and at the same time
buys $4,000 worth of dress goods from G in
London He could pay by sending him
draft or bill of exchange upon B and thus
two transactions between three persons and
two cities separated by 5000 miles of water
would be settled not only without anv
transfer of money from Boston to New
York. or New York to London. but
possibly without any transfers of money be-
tween and in London as e might nav
by check upon his bank this opera ton
amounting substantially to a transfer of
credits. Here we have then simple illus
tration of the supreme advantage of the
mechanism of exchange.
Influences Affecting Exchange.
Exchange involves two operations viz:
An exchange of credit and exchange of
coin. That is to say. as the basis of the
money of England is the pound sterling and
that of the money of the United States is
tie dollar, every transaction between the
two countries involves an exchange of dol
lars for pounds. or pounds for dollars and
this is effected by computing the actual
gold in the two coins An English pound is
worth $4.SGG of our money, and that is what
is called par of exchange" But the real
exchange is governed by other consdera-
tons. \ heavy demand for bills will adj
vance the rate. If the supply is larger than
the demand the rate will decline. There are
other influences controlling the rate. For
instance, the price of interest has q power
full influence on the exchange market An
advance in interest in New York weakens
the exchange rate, for money flows natural
ly to the highest market. and though there
may be balance due Europe yet If the
money rate is higher here than it is abroad
Europe will leave the balance due her in
New York in the form of loans rather than
call it home where there will be less profit
able use for the money.
Gold Shipments.
But while payment of balances may thus
he daJa a