The Manchester journal. [volume] (Manchester, Vt.) 1861-current, 1915-09-09

ing contains S4.S665 of gold according
to the American standard. Hence, for
every pound Of credit which we wish
TO obtain in London, a deposit Of
S4.S6e5 must be made here.
Once more take hypothetical case.
A Bostonion wishes TO pay bill in
London, but it is inconvenient to ship
American gold pieces, nor could they
be used conveniently by the London
creditor. He would prefer to have his
debt paid in English money. The Bos-
tonian accomplishes this by depositing
with his banker $4.S665 in American
money for every pound which he owes
in London. In return for this, as in
the domestic exchange transaction
outlined above, he receives an order on
bank in London for an amount Of
English money equivalent to his debt.
This draft he sends to the London
creditor who presents it at the London
bank and receives his money in
English sovereigns.
If the situation be reversed and the
Londoner desired to pay debt in
America, he would have to deposit in
London one pound for every S4.S665
which he owed. The order on the
New York bank which he receives he
sends to his creditor, who thus OBJ
tains his payment. These can be con-
sidered typical foreign exchange
transactions stripped of all compli-
eating factors. Seldom, if ever, are
exchange dealings as simple as these.
The Law of Demand and Supply
This is because foreign exchange"
all other commodities, is subject to the
law of supply and demand. That is,
a great demand for it will cause an
advance in the cost of obtaining it,
whereas an overabundant supply will
induce a decline. Perhaps the opera
ton of this law on this particular
commodity can better be understood
of we employ concrete illustrations
drawn from the present conditions eX-
isting in the exchange market. Great
Britain has been buying enormous
quantities of war munitions and other
commodities from US, while we have
been purchasing from her consider
ably less than usual. If England's
purchases from us were fairly equal
to our purchases from England, the
debts she owed us would be offset by
those we owed her. This would result
in a normal exchange situation--in
other words, the purchase at London
of credit in New York to pay debts
owed to Americans would equal the
purchase at New York of credit in
London to pay debts owed to English
men; therefore one would cancel the
other.
The consequence Of our heavy sales
to England is to bring many traders
to the banks, or in the parlance Of the
street, to the exchange market, with
bills Of exchange-that is with docu-
ments showing that goods have been
shipped to England, evidences of debts
owed them. The aggregate of these
bills which are sent to England for
collection is enormous. When they
are paid, the funds remain on deposit
in London to the credit Of the Ameri
can bankers who discounted them
here. AS explained above, the normal
way to use these funds is in the pay
ment of debts which Americans owe
to Englishmen. But these debts are
so small that at present the payment
of them has consumed only very
meagre amount of the balance in
London. The money, therefore, lies
in the banks unemployed.
Why Exchange Declines in Value
1t is natural, then, that when
American bankers are offered evil
dences of indebtedness owed by Lon
doners, they will be unwilling to ad-
vance as much on them as previously
that is, they have so many pounds
of English money to their credit in
London which they cannot use, that to
pay out money here for more credit
there, would be like buying potatoes
when all the bins are full. They might
be willing to advance something on
such bills, but not SO much as
the normal value, which is s4.S665 for
every pound. The greater the amount
Of the bills offered to the bankers at
such time, the less they will be will
ing to pay for them. And SO great
is the amount now being offered for
sale, and so large is the balance Of un-
money in London, that
bankers to-day will not pay more than,
say. s4.60 for each pound Of the debt.
This rate will be used arbitrarily
throughout the article merely for pur-
poses Of illustration.) The meaning
Of this situation is that the English
q i