The Manchester journal. [volume] (Manchester, Vt.) 1861-current, 1915-09-09
THE REAL MEANING
OF STERLING EXCHANGE
Why and How the Shrinkage Of the
British Sovereign is Affecting the
Financial World.

No phase OF finance is more difficult
TO understand or 10 explain than tha
Of foreign exchange. II is the basis oi
practically all trade and commerc'
with other countries, yet the techni
ealities involved are such as to make
ii extremely complex in its applica
tions and operations. To make its ma
ture and purpose clear to the unin'
itiated the subject must be treated In
an essentially elementary fashion, de.
nuded entirely Of those complicatine
elements which make it so intricate
and perplexing, even to those who
have studied 1t for years.
In its simplest aspect, exchange
is the adjustment Of Indebtedness be
tween two countries, or trading GEN.
ters. There are two kinds Of ex;
change: domestic and foreign. The
former relates tothe adjustment of in
debtedness which arises in the course
of trading and commerce between two
centers within a given country--for
instance, between New York and San
Francisco. Take a typical example:
A manufacturer in San Francisco sells
to a merchant in New York large bill
of goods. He does not wish to wait
until payment is received from New
York; therefore, after the goods have
been shipped he takes to a banking
house the bill of lading and other doc
uments which show that the shipment
actually has been made and discounts
them-that is, the bank advances the
amount of the bill to the manufactur-
er. Thus far the transaction is very
similar to cashing check. The San
Francisco manufacturer now has his
pay for the goods which he sold.
Collecting a Debt Through Exchange
The next step is taken by the bank,
which sends the documents it has pur-
chased to its New York branch and
notifies the New York merchant that
the goods have been shipped. Before
the latter can get his goods from the
railroad company, he must go to the
New York branch and buy the docu-
ments it has received. In this way he
pays for the goods and having received
the evidences that they belong to him,
can get them from the freight station.
The money which he has paid the
New York branch, remains with it, but
to the credit of the San Francisco
bank. This completes this operation.
The San Francisco manufacturer has
received his payment for the goods
through an advance by the bank; the
New York merchant has received his
goods and has paid the New York
branch for them; and the San Fran
cisco bank has received deposit of
money with its branch which takes the
place of the money advanced to the
San Francisco trader.
But how can the San Francisco
bank utilize these funds which have
been deposited to its credit in New
York? The important function of ex-
change transactions is that of elimin-
ating the necessity of shipping money
back and forth in payment of bills.
And this is how it is accomplished.
A merchant in San Francisco desires
to pay debt which he owes to New
York manufacturer, but he does not
wish to send currency to New York.
He goes to the San Francisco bank
and buys a draft on the New York
branch; that is, he makes a deposit Of
the amount Of his debt and in return
receives a paper ordering the New
York branch to pay this amount to
the New York manufacturer. The
money received by the San Francis
co bank is kept-not sent to New
York. The order or draft is sent by
the merchant to his New York credit
or, who presents it at the branch and
receives his payment out Of the funds
which through the first transaction,
explained above, were deposited to the
credit Of the San Francisco bank.
Through this operation the San Fran
cisco debtor has paid the New York
creditor, but no money has passed be-
tween these two cities. Thus the cycle
Of domestic exchange operation is
completed.
buying Exchange Means Blying
Credit
If we keep in mind this explanation
Of domestic exchange we shall have no
difficulty in comprehending the nature
of foreign exchange. The points
wherein they differ are these: Usually
the monetary units Of two countries
are unlike; and in foreign exchange
these must be reduced to
a common basis. For instance: the
monetary unit Of American currency
is the gold dollar, while the monetary
unit Of Great Britain is the pound
sterling. Now, let Us keep in mind