Demand exchange is that which is to be paid upon its arrival by mail in the foreign country. In the case of cables the order is cabled and it is paid immediately, which will be a few days or many days earlier than a demand bill can be paid. The difference in price is due to the loss of interest on the money in the foreign bank. The buyer of cables pays for the cost of the cable charges in addition to the rate quoted (see 138).

169. Fluctuations in rates. - The prices of demand and time bills are continually fluctuating due to the neverending changes in commercial and monetary conditions. If the bills drawn exceed the payments to be made, they will sell at a discount, and the excess will be bought by those who wish to build up a bank balance abroad, against which future sales of bills may be made. If the payments to be made exceed the bills drawn, the price rises. Those who have foreign balances are enabled to sell exchange and make a profit. The purpose of using bills is to avoid gold shipments. In the U. S. gold dollar there are 23.22 grains of pure gold. In the pound sterling there are 113 grains of pure gold. It takes 4.8665 U. S. gold dollars free from abrasion to make a pound sterling. This is called the "mint par of exchange" between the United States and England. To ship gold there must be added the cost of packing, insurance, freight, loss of interest, and for export, four cents for each $100 worth of fine gold bars bought from the Treasury of the United States. Evidently bills may rise to such a point that it will pay someone to ship gold and sell bills. That point is the "gold export point." Exchange may also become so low that it is more profitable to bring over gold than to sell bills. Such a point is the "gold import point." If gold is not available for sufficiently large shipments as in 1914–1923, the exchange price rises or falls to points beyond the gold points. If a nation clings to

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its gold it must pay for the privilege. Suppose England does not ship gold. It is desired to buy wheat. If a Western grain dealer is willing to take $10,000 for wheat and exchange has fallen to $4.75 the English buyer has to part with about £2105 while if it was $4.85, he would pay only about £2062. To prevent exchange from falling below a certain price, a government may supply a banker with funds to continually buy it if it falls to that price. This is called "pegging." 1

If a country's currency is depreciated below its nominal equivalence in gold, it affects the exchange rate. The price of that currency in gold will be low. The price of gold in that currency will be high. The Chinese might have to pay 1000 taels for 700 U. S. dollars, but if the tael is worth only 60 cents, they would pay over 1160 taels. If the seller quoted 1000 taels, he would get $700 in the first place and $600 in the second.

170. The spread between rates. The rates for all other bills are based on the rate for bankers' sight bills. For cables there is the banker's loss of interest for the time it would take mail to go, to be considered. A banker's time bill is always an equal purchase with a demand bill. On time bills the bank must pay the costs of acceptance, revenue tax, and the discount for the life of the bill. If the charges and an allowance for credit amount to 42 cents a pound on a ninety-day bill it is quoted at that much less. The spread varies in amount as the discount rate changes. Trade bills bring prices which vary from these according to the higher interest rates charged on trade than on bankers' bills and the standing of the parties. Competition to get them is also a great deal less. 171. The supply and demand of bills. Some one in the United States is in a position to draw a bill and

1 For an illustration see Dewey and Shugrue, Banking and Credit, p. 380. (Ronald Press Co., New York, 1922.)

offer it for sale whenever there occurs from this country to another (1) a shipment of gold or goods, (2) a performance of service for which payment is exacted, (3) a sale of bonds, stock certificates, or evidences of value, (4) a collection of a debt, or a withdrawal of a bank balance, and (5) an arrangement for a loan to invest at higher rates here. The supply of bills thrown on the market is greatly increased if exports of goods or sales of securities are unusually great, or if some fear or a change in interest rates causes depositors to withdraw their foreign balances.

Somebody in the United States wants a bill payable in some other part of the world (1) to pay for foreign bonds or stocks, or for U. S. bonds or stocks owned abroad and resold in the United States, (2) to pay for goods that have been imported, (3) to pay charges for services rendered by foreign companies or brokers in transportation, insurance, selling, and banking, (4) to pay interest and dividends to foreigners upon the securities of American corporations which they own, (5) to produce a balance against which letters of credit and travelers' checks upon which to secure funds abroad may be sold, (6) to make a donation to foreign relatives or pay any debt due a foreigner for maturing bonds, short-term loans, or finance bills, (7) to send funds abroad for short-term or longterm investment when rates are low here or high there, and (8) to hold it as an investment until it matures. Unusual conditions, or the hope or fear of an unusual condition may greatly expand or contract the demand for bills, as heavy or small imports, great or little confidence in American investments, or changes in the interest rates.

Prices tend to fall with an increase in supply or a decrease in demand, or rise with an increase in demand or a decrease in supply, but while one factor pulls one

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way, another pushes another way. The general expectation of a change in rate tends to produce the change. There is a continual tug of forces and the result is the day's rate.

172. Interest, taxes, and collection charges. - Interest is an item to be reckoned from the date of sale to the receipt of payment. Both countries may require the payment of a tax on the draft. One or more banks must be paid commissions varying from 1% to 2%. Postage, which mounts up on valuable documents, must be paid. There may be additional charges if settlement is made in a time bill. Practice varies as to whether interest and collection charges are added to the invoice, included in the price, or collected in addition to the face of the bill. Buyers in the Far East generally pay the interest and collection charges in addition to the face of the bill. In such cases the drawer stamps the face of the bill " Charges for collection to be added" and "With interest at -% per annum to be added thereto from the date hereof to the approximate due date of the arrival of funds in

." In most countries the buyers prefer the interest and all charges either to be added to the invoice so they can see how the cost is reached, and especially if there is no ad valorem duty, included in the price at which the goods are quoted. Ordinarily if a sight bill is sent the seller must pay the charges; if a time bill is sent the buyer expects them to be added to the invoice and included in the face of the bill. If these charges amounting in a given case to $100 fall on the seller he must pay them either by getting about $100 less for his bill if he sells it, or in receiving $100 less proceeds if he sends it for collection.

173. Methods and costs of financing a sale by a bill. — How the terms of payment affect the seller's net return may be seen from the consideration of a sale amounting

to $4850 from New York to Buenos Aires. A ninety-day bill drawn in dollars is paid at the rate of New York sight; one drawn in sterling is paid at the rate of a ninety-day sight bill on London (this gives the buyer a lower rate of interest if he has to borrow). It takes about 150 days to receive from Argentina payment on a dollar bill 30 days down (the time of a steamer is 18 to 22 days), 90 days to maturity, and 30 days back. It requires about 240 days to realize on a sterling bill in London - 30 days down, 90 days to maturity, 30 days to London, 90 days to maturity. Disregarding days of grace and charges for postage and revenue stamps, assume the worth of money to the seller to be 6 per cent and the following factors of exchange cost to remain constant

If the goods are sold in dollars and the bill for $4850 is deposited with a New York bank for collection, after 150 days the proceeds $4837.87 ($4850 less $12.13, 14% commission) are received. This amount if received five months earlier at the time of sale would at 6% interest have been worth but $4719.87.

If the sale is in pounds sterling a bill for £1000 (4850 4.85) is sent for collection, and the proceeds after 150 days is a ninety-day sight bill on London for 997 pounds, 10 shillings (4% commission is 2 pounds, 10