It is free in the sense that the auctions of new gold are open to all reliable bidders, but the conditions are such that the Bank of England can normally outbid all others if it needs the gold. It also regulates the export of gold by raising its discount rate. In Germany the Imperial Bank resorts to a somewhat similar method to protect her gold supply, and in France the Bank of France protects the gold reserve by paying its notes in silver instead of gold, or by charging a premium for gold. The only actual free gold market in the world is the United States, where anybody who wants gold can get it at the nearest sub-treasury. In the past this was the only important country in the world that lacked the banking machinery necessary to control international gold movements by changes in the discount rate or otherwise. Under our decentralized and independent system of banking it was impossible to secure that unity of policy in matters affecting international exchange which European countries exercise through their central banks.. It is believed, however, that the Federal reserve system will provide a centralized, coöperative agency with the power and the responsibility of regulating the export and the import of gold. 117. Varieties of foreign exchange. There are three principal forms of foreign exchange the commercial bill of exchange, the banker's or finance bill, and the letter of credit. Commercial long bills are drafts drawn by shippers of merchandise upon the foreign buyers or their banking representatives at thirty days' sight or more. If they are accompanied by bills of lading and other shipping papers they are known as "documented" bills; otherwise they are called "clean" bills. Drafts of the former kind drawn against shipments of cotton and grain make up the bulk of the commercial foreign exchange handled in the New York market. Documented bills are accompanied by the bill of lading, the invoice of the goods, and usually an insurance certificate. Sometimes there is attached to the draft with these papers a "hypothecation slip" which formally conveys to the banker buying the draft the right to the goods. In the case of meats and a few other exports "certificates of inspection" accompany the bill. When a New Orleans factor sells one hundred bales of cotton to a Liverpool cotton firm with the understanding that the latter is to be drawn upon at sixty days' sight, he draws the draft, attaches the bill of lading and insurance papers, and either takes the papers to his local banker or sends them to New York to be sold at the current rate of exchange. The New Orleans shipper gets his check or New York draft for the amount of the draft and has no more interest in the transaction. The banker who has bought the draft sends it to his foreign correspondent in London or Liverpool with instructions to present it to the drawee for acceptance. If the drawee is a firm of recognized standing the bill of lading will be delivered to him as soon as he accepts the draft and he will be able to get possession of the cotton at once. Where the drawee's standing is not so well known, or where the merchandise is perishable, the documents will be surrendered only on actual payment of the draft under a discount or rebate arrangement. Bills of the former class are known as acceptance" bills; the latter are called "payment" bills. Payment bills drawn against perishable goods like grain command a higher rate of exchange than acceptance bills. The consignee in order to get possession of the grain and to prevent it from spoiling must pay the draft under rebate. In the London market the rate for loans rules lower than the discount rate; consequently less pounds sterling will be taken off the face of the grain bill in the process of rebating than off the cotton bill in discounting. Clean commercial bills are drafts, unaccompanied by shipping documents, drawn by commercial houses in one country on houses in other countries. Sometimes where there exists an old and intimate relationship between an exporting house in one country and an importing house in another, chandise is shipped and the drawing against it is by agree mer ment postponed for some time. When the shipper finally draws, the draft will be clean, that is, it will have no documents attached to it, for these went forward at the time the merchandise was shipped. A banker buying a bill of this kind has no security whatever except the standing of the firms concerned. In the case of a documented bill the banker holds the bill of lading until the draft is accepted or paid, and if necessary to protect his own interest he can seize and sell the goods. Clean bills have no such security and bankers generally refuse to handle them except when drawn by the very best houses. Clean bills may arise also from the transfer of capital from one country to another. While the great bulk of documentary commercial bills are drawn at thirty days or longer, a good many small bills are drawn at less than thirty days. Generally these "short" sight bills are subject to the rule of payment rather than acceptance. International dealings in stocks and bonds give rise to a large volume of foreign exchange. A banker in New York sells a block of securities to a London banker and draws for the amount of the purchase at the prevailing rate of exchange. The securities are attached to the draft, which is then sold in the open market. Exchange of this kind is of the highest class, since the buyer gets the securities as collateral and does not give them up until the draft is presented and paid in London. Bankers frequently buy foreign exchange as an investment.1 It sometimes happens that discounts rise in Europe, forcing down the rate of exchange on commercial long bills. If at such times money is easy in our markets bankers buy heavily of long exchange, not to have it discounted and placed to their credit as in the ordinary transaction, but to hold it as an investment. Instead of indorsing the firsts of bills of exchange and remitting them to his foreign correspondent for discount, the banker writes across the face of the bills the words "For acceptance only, " and instructs the correspondent to obtain acceptance and to hold the bills subject to the call of the indorsed seconds. Of course the documents are delivered to the drawee when he accepts the bill, so that he can get the goods. The seconds of exchange remain in the possession of the banker with interest accruing until maturity. At any time before maturity these seconds can be indorsed and remitted for collection and credit to any banker who, by presenting them, obtains possession of the firsts; the two parts, that is, the accepted firsts and the indorsed seconds, constituting the completed bills. The profit on this kind of transaction arises from the fact that the 1 See Margraff: International Exchange, pp. 61-65. banker is able to buy ninety-day bills in this country at a low rate as compared with sight bills because the discount is based on the rate of interest in the foreign country. Moreover, these bills can be sold by the banker at any time before maturity, thus giving him the high rate of interest of the time loan and the instant convertibility of the call loan. Bankers' long bills also are purchased for investment, but they do not have any documents attached. 118. Bankers' bills.-Foreign exchange bankers keep balances in several financial centers against which they or draw and sell demand drafts or "checks, as they are commonly called. As the name indicates, they are payable on presentation and demand. "Cable exchange, "Cables," differs from sight drafts only in that the foreign banker who is to pay out the money is instructed to do so by cablegram instead of by letter. Generally, foreign exchange bankers who sell cables carry large balances on the other side. These balances may be accumulated by remittance of all kinds of bills, both time and demand. Time drafts sell at a lower rate than sight bills because of the loss of interest on the amount to be paid. Cables cost more than the ordinary sight bill by at least the cost of the cablegram. "Posted rates" are the bankers' public |