for the lesser-known capacity of the latter. The party who undertakes the obligation to pay the claim is thus acting both as guarantor for the original debtor, and as insurer against loss by the creditor. A party who performs these services is known in business as a banker. In addition he may also perform the function of dealer as described above.

DIFFERENCES BETWEEN DOMESTIC AND

FOREIGN

EXCHANGE. RESTRICTIONS ON FLOW OF

LABOR AND CAPITAL

Up to this point no distinction has been drawn between domestic and foreign exchange, as both are governed by the same principles. Since the time of Adam Smith, economists have recognized that exchange, in the broad sense of trade, is governed by the same general influences, whether for dealings between individuals of the same nation or between persons of different nations. As mentioned in the previous chapter, a distinction between national and international trade arises when greater mobility in the movement of labor and capital is permitted within a country than between countries. While the international flow of these agents of production has always been impeded by numerous obstacles, these have been further increased since 1914 by the public policies of most nations. The movement of population has been restricted by war-bled countries unwilling to lose their able-bodied citizens, while

other nations anticipating a surplusage of labor have restricted the immigration of foreigners. The movement of capital has also been subjected to limitations of various kinds. Most of the former belligerent countries, needing all their resources for the difficult task of reconstruction, have sought to check the exportation of capital, while others, fearing their economic conquest by alien interests, have tried to prevent the importation of foreign capital. Also tariff policies and embargoes to obstruct or prevent the entrance of foreign goods have been adopted quite generally even by countries which had long abandoned the protection system.

DIFFERENCES IN LAW

-The operation of international business is rendered generally more difficult than domestic trade by sharp differences in law. True, state laws vary considerably within our country, but nevertheless interstate commerce is governed by general federal legislation. Business between nations is not subject to a similar supreme law and the commercial codes of countries present wide variations. In recent years there has been a growing movement toward uniformity in international legislation affecting commercial transactions. The adaptation of the AngloAmerican system of law on bills and notes by a number of large countries, the acceptance of the York-Antwerp Rules on marine insurance and the

Hague Rules on bills of lading, have to a certain extent removed many of the legal obstacles which had hitherto impeded international trade. However, even greater progress is still needed to free foreign business of the burdensome restrictions from which domestic commerce has long been liberated.

DIFFERENCES IN CURRENCY

International business has always been more complicated than domestic in that the former involves payment in different kinds of money, while transactions within the United States are settled in dollars. In foreign trade this money must be converted into sterling, francs, marks or other currencies. These transformations were relatively simple before 1914 when most currency values were expressed in gold which served as a convenient common denominator. With the outbreak of the war, most countries abandoned the gold for the irredeemable paper standard and as a result their currency values lost stability, and conversion from one to the other became a difficult and highly speculative venture, with the possibilities of big profits or crushing losses. Under these conditions conservative business has hesitated to enter into foreign dealings.

DIFFERENCES IN CREDIT EXTENSION

In general, the element of risk has always been a greater factor in foreign than in domestic business,

due to the difficulty of obtaining reliable information on the paying ability of the debtors abroad. In the United States, banks and business houses extending short-term or commercial credit, have developed an efficient system of gathering and analyzing data concerning borrowers. They are expected to furnish detailed statements of their financial condition, which can be further verified by referring to various indirect sources well organized and capable of supplying valuable supplementary data. In foreign business, financial statements are rarely given and the other sources do not usually produce adequate credit data.

The weakness of the system of commercial credit information affects directly the class of short-term loans granted in foreign trade. The proportion of loans based on tangible security is greater in foreign than in domestic trade where the relative amount of pure credit or extensions of unsecured accommodation is considerable. Foreign loans may be collateraled by documents such as bills of lading giving the holder title over certain goods or securities evidencing ownership in certain properties. As a result, credit in foreign trade is extended to finance a particular transaction independently of all other dealings between the debtor and the creditor, while in domestic trade the latter usually gives the former a general line or maximum amount of credit of which he avails himself as needs arise.

Credit extensions in foreign and domestic trade differ not alone as to security but also as to maturity. The life of a loan is determined largely by the amount of time required for the completion of the underlying transaction so that the proceeds derived from the marketing of the goods can be applied to the payment of the loan. Foreign trade usually necessitates the movement of goods to distant points and so the period of marketing is generally longer than in domestic trade. Consequently, loans for the purpose of financing these transactions must be granted for a longer maturity.

The extension of credit in foreign and in domestic trade differs also as to the source from which it emanates. Credit according to its source may be grouped as either business or banking credit, depending upon whether it is extended by an individual or a firm on the one hand or a financial institution on the other. In domestic trade, a large proportion of business dealings are financed by business credit but it is a negligible factor in foreign trade. The dominant position of bank credit in foreign financing is due to the influence of some of the factors described above. In the first place, owing to the lack of credit information, business houses are unwilling to make advances to firms abroad and so there is need for the introduction of a foreign bank whose standing can be more readily ascertained. Also, the longer maturity of loans in foreign trade renders