"future delivery." Future operations, whether in cotton or in foreign exchange, enable persons either to transfer or assume the risk arising from fluctuations in prices. Thus a New England manufacturer may protect himself against an increase in the price of cotton by purchasing it in the spring for delivery in the fall. He is thus better able to determine his cost of production and the price of the finished good without bearing the risk of an increase in his outlay for raw material. This hazard is carried by the speculator, who really sells short but agrees to deliver cotton for a fixed price at a future date, regardless of the market at that time. A similar future operation may take place in foreign exchange. Transactions in international trade, like those in domestic business, are seldom closed immediately and so a time element of varying length intervenes between the beginning of a transaction and its ultimate settlement. Consequently, the manufacturer who is selling his goods in a foreign market not only assumes the attendant risks of the trade, but also the risk of exchange. Suppose that he has agreed to manufacture a certain number of motor trucks for £10,000 and, at the time when this contract was made, sterling was quoted at $4.70, so he expected to receive $47,000. When the automobiles were delivered and payment was made, sterling had fallen to $4.60 and so he received but $46,000. This loss of $1,000 may have absorbed

a large part of the entire profit which he derived from the manufacture of the trucks. In order to protect himself from such fluctuations, a manufacturer or a merchant may sell future exchange and so shift this element of risk to a speculator.

Such a transaction in future exchange involves the following operations, which are illustrated by the above chart.

(1) Assume that the manufacturer, mentioned above, in April has agreed to sell to the British buyer the motor trucks for $47,000 at the prevailing rate of $4.70 for £10,000 to be delivered in July.

(2) The manufacturer immediately communicates with a foreign exchange broker in order to sell his claim on £10,000 in July. Through the broker this future exchange is sold to a bank engaged in foreign exchange transactions.

(3) In July the American manufacturer ships the automobiles, draws his draft on a British bank designated by the purchaser of the goods, and delivers the draft to the American bank which in April had agreed to take it.

(4) The American bank then sends the draft to its London correspondent.

(5) The London correspondent presents the draft to the drawee bank either for payment or acceptance. (6) This institution then obtains reimbursement from the importer.

DEVELOPMENT OF FUTURE TRADING

Trading in future, or "forward" exchange, as it is known in England, existed before 1914. It was possible to obtain future quotations on dollars and sterling, but these transactions were few in number since rates rarely fluctuated more than one per cent above or below the mint pars. Even these changes could to a certain extent be anticipated, since they were due to seasonable movements of goods which flowed to England in the fall of the year so increased the value of the dollar, and in the spring depressed it by a contrary movement.

Extensive transactions in future exchange before 1914 were confined largely to the Far East, where currencies had not attained stability.

Operations in future exchange did not assume general importance until 1919, which year marked the beginning of the erratic fluctuations in the European currencies. During the war they had been "pegged" or artificially maintained at a constant level, but with the unpegging or withdrawal of support these currencies, including sterling, suffered sharp declines. To protect themselves against losses arising from such changes, conservative merchants and business men who were to receive payment for the selling of goods or the performance of services, or who had to make payment for purchasing goods or obtaining services, either sold or bought future exchange and the risk was, therefore, transferred to speculators.

EXCHANGE SPECULATION

In the older and more organized markets these risks are carried by persons who make speculation their profession and are well informed on the factors influencing the trend of prices. Since 1919 speculative operations in foreign exchange have to a considerable extent been made by masses of people ignorant even of the rudimentary principles of exchange, and so their losses have been severe. It is commonly believed that speculation has been a

most potent cause for the present instability of foreign exchange. No less authority than Dr. F. Giannini, financial attaché to the Italian embassy in London and delegate to the committee of experts at the Genoa conference, in the Reconstruction Number in the Manchester Guardian (p. 25) writes as follows:

"Speculation, that is the purchase and the resale of currencies without accompanying commercial transactions, for the purpose of realizing the difference between the quotations at two different periods, adds to the momentum of supply and demand that of a considerable mass of dead bills, bills which are not the instruments of commercial transactions. They contribute largely to the fluctuation of the exchanges and as speculation concentrates particularly on those currencies with the greatest fluctuations its action makes more frequent and more acute the movement of these exchanges which are already, for other reasons, subject to special instability."

There is no doubt that the mass of uninformed speculators who blindly bought foreign currencies in 1921 and who desperately threw them on the market in 1922 forced rates to unduly high and low points. Such ill advised speculation should be discouraged, for it only accentuates price changes. On the other hand, professional speculation by individuals or banking institutions better informed on the possible future course of exchange tends to narrow the range of fluctuations. Several European governments in response to popular outcry have tried curbing professional speculation in the hope of preventing excessive fluctuations. Such policy has