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The Secret Doctrine, Volume II Anthropogenesis

H. P. Blavatsky


Tao Te Ching

Lao Tzu, James Legge (trans.)


The Worm Ouroboros

E. R. Eddison


Theory of Colours

Johann Wolfgang von Goethe


Foreign exchange

by Thomas York

Excerpt:

Analysis of a Foreign Exchange Transaction.—Having established the fact that bank deposits in a gold-standard country are equivalent to gold, we are prepared to resume our discussion of foreign exchange. It is to be observed in the first place that international settlements are usually effected by means of bank deposits. Whether payment is made against the purchase of merchandise, services, or securities, or by way of advancing or liquidating a loan, or paying interest thereon, or on any other account, the payer in the one country transfers to the payee in v, the other the stipulated amount of bank deposits in a particular city. A check is drawn on the bank, or a cablegram is sent directing the bank to make the transfer. As a general rule the banks whose obligations are thus employed in making international payments are the larger institutions located in the financial center of the one or the other country. Between the United States and England, for instance, settlement is usually made by the transfer of a deposit in either a London or a New York bank.

Taking the example of a payment from the United States to England, it makes a difference to the American payer and to the British payee whether the payment is to be made in London or in New York, and they accordingly settle the point in their contract. The American payer has his bank deposit, let us say, in New York. If he contracts to pay in London, he must secure the required amount of deposits in a London bank. To all intents and purposes, then, he owns a stock of gold warehoused in a New York bank, but has agreed to deliver a certain amount in London. As has already been learned he has two methods available for making the transfer. He can withdraw the necessary quantity of gold from his New York bank and ship it to London; or he can exchange a portion of his New York deposit, which we may refer to as "New York gold," for the needed amount of London deposits, which we may call "London gold," with one who desires to make the reverse exchange. (Usually only foreign exchange bankers ship the metal. But for our present purposes we shall assume that our American payer is in a position to make consignments.)

As noted in the next chapter, the rate at which the American payer can effect the exchange is not a fixed and unchanging proportion, but varies with the state of competition prevailing among all performing similar exchanges. He may surrender a greater or less amount of his New York gold than he will obtain of London gold. But even though he should suffer a loss on the exchange, it will still advantage him to resort to exchange rather than shipment, if the loss should be less than the cost of shipping the metal, as it usually is. Thus in contracting to make payment in London he must take into account the current rate of exchange, or the expense of transporting gold, if shipment happens to be cheaper than exchange, in order to learn what the payment will amount to in terms of New York gold.

On the other hand, if payment in New York is agreed on, it will devolve upon the British payee, who naturally wants his money at home, say, in London, either to ship gold or exchange the New York gold he receives for London gold, with one who is willing to make the opposite exchange. Here again, he will have recourse to shipment only in the event that it is cheaper than exchange. As he will compute his receipts by the amount he will net in London, he must take into consideration, when agreeing upon the conditions of payment, the rate at which he can accomplish the exchange, or, if shipment is cheaper, the cost of transporting gold to London.

An Illustrative Transaction.—As a concrete illustration of the way in which a foreign exchange transaction is executed, let us take the case of a New York merchant who contracts to purchase a bill of goods from a Sheffield manufacturer for £i,ooo,or 113,001 grains (1,000 X 113.001) of gold delivered in London. It is evident that in consequence of the terms of payment he is required either to ship the above amount of gold to London, or to secure by exchange that amount of London deposits.

Suppose a foreign exchange banker agrees to make the exchange with him at the rate of $4.87 per £1, or 113.0814 grains (4.87 X 23.22) of New York deposits for 113.001 grains of London deposits. On this basis the New York merchant will part with a total of 113,081.4 grains of his New York deposit, and receive a total of 113,001 grains of London deposits. He will, accordingly, suffer a loss of 80.4 grains on the exchange. But if this loss is less than it would cost him to ship 113,001 grains of gold to London, he will consent to make the exchange, which will be executed as follows: He will turn over to the foreign exchange banker a check on his bank for $4,870, or 113,081.4 grains, and receive from him a check on his London correspondent bank for £1,000, or 113,001 grains, which he will forward to the Sheffield manufacturer.

Naturally the New York merchant reckons the cost of his merchandise purchase, not at the invoice amount of 113,001 grains of London gold, but at the 113,0814 grains of New York gold he gives up on the exchange. In negotiating the purchase, therefore, he has regard to the prevailing rate of exchange.


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