New-York tribune., 1920-02-01


and the bank gives me the cash. And
l keep on doing that year in and year
out, and every other exporter is doing
the same thing" That is all very we'll,
but the person that is paying you the
cash Is not the customer to whom you
sold the goods. Neither is it, ultimate
ly, the bank. 1t is some other Amer-
can, somewhere. who has bought goods
from Europe. He doesn't pay the per-
son from whom he buys the goods. He
pays you. And he is probably as un-
aware that he is paying you as you are
that you are being paid by him. The
wondrous mechanism of foreign ex-
change bills, as simple as it is deceiv-
ing, has created an illusion for both
Of you
Having our common sense affronted
! by process by which the buyer does
not pay for goods and you are paid by
/ somebody who owes you nothing, let us
see what really happens.
The first thing to get out of our
, heads is the conception Of bankers as
people who use their own money. They
do sometimes. but not normally. Ordi
narlly they are merely go-betweens,
agents, and the commission they re-
ceive is due to their service in bring
ing two persons, neither Of whom
knows the other, to perform services
/ Tor each Other.
Wheat ard Linen
Say that one Of US is an American
exporter, that he sells $1,000 worth
OF wheat to a merchant in Liverpool,
and that the Arrangement provides for
the American getting his payment in
dollars in New York. The English
merchant will send him note, which
says that he owes the American $1,000
for the wheat. The American takes
the "bill" to his bank and gets $1,000
for It. Naturally he imagines that the
Englishman has paid him the 81 600.
But how is the bank able to pay him
this $1,000? Where does it get the
money from? 1t does not get it from
the English buyer, and it does not get
the money from it's deposits. If it held
any way. Somewhere else Will be an
American importer who has bought
linen rom an English merchant, say
also TO the value of 81 900, and the
arrangement provides that he shall
make payment for 1t in London in
pounds sterling. In order to make that
payment ne will want to buy q credit
in London. He will go, say, to the
same bank and offer to pay it $1,000
for such credit. Now the bank has
already bought q bill for $1,000, and
on London for an equivaleH. amount
IN pounds 1t bought the bill precisely
| in order that it might sell it Cor what
is the same thing, another bill against
the credit which it represents) to just
some such importer who might come
| along. Therefore it gets the American
| linen buyers 81 900, which offsets the
money that it had to pay for the credit
Now look at what has happened In
[ ka ,tAo !,
sold his claim on London to the
American linen buyer. The bank has
merely been an agent in between. Of
! course, the bank is not in business for
! its health either, and it gets a slight
commission for service from both the
exporter and the importer
Across the Atlantic
On .he other side of the Atlantic a
similar drama is being enacted. The
/ English wheat buyer who sent his bill
/ Of exchange to America had to bay it
from bank. TIe has paid for it, say,
a206 (the equivalent, in gold weight
of $4,000 and the bank could sell
it to him because it expected some
goods to the United States and would
have an American credit for $1,000, or
the equivalent of 9206, that he wanted
to turn into cash in England. And
sure enough, along comes the English
man who has sold linen to America
and wants to know whether the bank
Will buy his claim on America. The
bank is only too glad to buy the
claim, for it has already sold one that
it did not have. The bank has al
ready ehtained from the English wheat
buyer thA money to buy The claim.
Foreign exchange is in essence and
purpose "a process of settling inter
national claims on your own side of
the water, The only things that have
crossed the Atlantic in this four-oor-
nered transaction (if we leave the
banks out of IT'D ere bills Of exchange.
No money has crossed. Money has
changed hands only within both Amer
ica and E&gland.
OF course it is not likely that the
transactions OF one individual and the
transactions of another will equal each
other so exactly, nor Is it likely that
these persons viii go to the same
bank. But as sales do normally equal
purchases over the long run, and as
banks can utilize their own funds for
certain periods, and as they do not
have to sell the same bill that they
buy, because it represents credit
choose, these things all cancel and
balance each other within the respec-
| tive countries.
What Causes a Discount
An this is what happens when every
thing is going normally, as it should be
going. But that is not so to-day Eng
land and all the other leading European
countries want a lot of our goods, and
can spare few goods to sell us in re-
turn. What is the result? American
merchants who have sold goods abroad
keep coming to our banks 10 sell their
claims on London. They want the
hanks to give cash for them and what
they offer in exchange for this cash is
what they call a bill of exchange, which
IS credit on some center in Europe,
say London. Now, the only reason that
banks ever want to buy credits on Lon
don (unless London offers a higher in
terest rate than New York; is so that
they themselves Viii be able to sell
bills Of exchange against the credits.
But few people are asking for credits in
London, because few people have bought
goods from England. and consequently
there are few payments to be made in
England. The result is that the credits
held by Americans in foreign centers
keep plling up. Banks become reluc-
tant TO buy any more credits on Lon
don. The only way merchants can in
duce thsm TO buy the credits is by
offering them below their ordinary ex-
change value,
But SIS the credits in London keep
on plling up, and as the banks are
asked to part with more Of their own
cash to buy something that they do