lute tying up of that amount of money, as bills of exchange can be used as collateral.

Exchange between cities in the same country is governed by the same principles, and needs no further explanation than to say that the forms of the bills are not usually the same as those used in foreign exchange, often being simply a cashier's check on his bank, payable at some correspondent institution, or a letter introducing a depositor to a correspondent and certifying to the amount of his balance, drafts against which such correspondent pays and charges against the writer of such letter.

While these are the principles upon which exchange is based, the complexity of our relations is such that commercial usage has so far outgrown these primitive principles as to almost entirely obscure them; in fact, they are rarely remembered, and to-day in the money centres a man can buy a bill of exchange from dealers payable in almost any city in the world, however remote, despite the absence of credits as offsets to such bill; but if that city has no commercial relations with the city of issue, or with another city having relations with the first city, which is a very rare thing, it is not in any sense a matter of exchange, but simply the transmission of so much money, of which the bill of exchange is simply a forerunner, the banker in the city of presentation paying the same, and in due course receiving the amount of the bill plus his charges in coin or bullion.

This naturally leads to a discussion and explanation of what for a better name might be called "complex exchange," as contradistinguished from simple exchangethat is, an exchange which is not effected between city and city, but between one place and another through the intervention of one or more other places. Take, for instance, New York, which effects most of her exchange on Rio Janeiro through London, which is accomplished in the following way:

A in New York owing B in Rio Janeiro $1000, buys a bill via London; C in Rio Janeiro, owing D in New York $100, buys a bill on New York via London; while E in Rio Janeiro, owing F $900 in London, buys a bill on London; and G in London, owing H in New York $900, buys a bill on New York. Upon the London house paying F in London $900, the Rio Janeiro house paying B in Rio Janeiro $1000, the New York house paying to D $100 and $900 to H, the debts of all these persons to each other have been paid. In other words, Rio Janeiro uses the $1000 to her credit in London, payable from New York, in payment of her debt of $100 to New York and $900 to London, while London uses the $1000 so paid by Rio Janeiro in payment of Rio Janeiro's $100 debt to New York, which she has purchased, and her own $900.

The same laws that govern simple or direct exchange also apply to complex exchange, and need not be repeated, except to say that our credits in London are applied against our indebtedness to Rio Janeiro, and her debits to London are settled by her claims against us.

Domestic exchange is figured in one currency, and is consequently simpler than foreign exchange, which has to be calculated in two currencies, that of the country of the purchaser and that of the country of the purchasee, and in the case of complex exchange in three currencies, first the currency of the place of purchase, which must be converted into the currency of the place where such exchange is payable. All foreign exchange is calculated on a gold bullion basis, i. e., that an ounce or a part thereof of gold of a given fineness possesses exactly the same value in all parts of the world.

The relative value of the currency of each country to such gold bullion must be first ascertained before such conversion from one currency to another can be made, and this is rendered doubly necessary from the fact that

the bullion value of coin is generally less than its face value. Thus in remitting $1000 United States money by means of exchange to Mexico, assuming the transaction to be one in simple foreign exchange between this country and Mexico, Mexico's currency being on a silver basis and ours on a gold basis, it would be necessary first to determine the relative value of the Mexican silver dollar to our gold coin; how many Mexican dollars are the equivalent in value of a thousand dollars United States money. This having been determined, the "par of exchange" between the two countries has been ascertained. Next is calculated the exchange premium or discount, as the case may be, existing in favor of the one or the other country, which, in the case of a discount, would be subtracted from the cost of such exchange, and in the case of a premium added, and vice versa in the case of Mexico remitting to the United States. Should, however, this transaction be effected by way of London, it would be necessary first, on the same gold bullion basis, to convert $1000 United States money into pounds, shillings, and pence, adding the premium or subtracting the discount, then to convert the pounds, shillings, and pence into Mexican money with the discount from London to Mexico subtracted, or the premium added, the invariable rule being that the purchaser receives the benefit of the discount when the exchange is favorable to him, and pays the premium when it is against him.

Owing to causes and conditions too numerous to detail, the relative value of one currency to another is constantly changing, and obviously it would result in great confusion and wrong to allow this relative value to be fixed by a few dealers in exchange. To avoid this confusion, lack of uniformity, and possible wrong, as well as to protect both the buyer and the purchaser, houses known as "arbitrage houses," which are the principal banking houses doing an international business, daily agree upon

such relative values, and the values set by them are accepted by both purchasers and sellers.

Foreign exchange is calculated and sold in the currency of the country where purchased and paid in that of the country in which it is payable.

The same rule applies in the case of all foreign exchange. It is calculated in the unit of value of the country where purchased, and remitted in the unit of value of the country where payable. In Germany it is calculated in marks, in France and Antwerp in francs, in Amsterdam in guilders. The relative value of the coins of the principal commercial countries will be found in table"Relative Values of Moneys."

The premium on, or discount off, foreign exchange is not, as in the case of domestic exchange, stated in per cent., but in an addition, in the case of a premium to, and a subtraction, in the case of a discount from, the relative value of the respective currencies, viz.: $4.863 being the par of sterling exchange, when exchange sells at $4.85 it is at a discount, and in like manner when it sells at $4.88, it is at a premium.

Selling Exchange.-So far only the buying of exchange by persons wishing to remit in discharge of obligations has been treated of, but clearly if banks will purchase or advance money on drafts, why should not dealers in exchange purchase the claims of persons holding demands against others residing elsewhere, instead of waiting for these persons to remit? They do, and this is termed Selling Exchange.

The volume of business done in this way is probably greater than that done in the buying of exchange, as comparatively few creditors now wait for their debtors to remit, but instead, by the selling of their demands in the shape of exchange, payable, as the case may be, on presentation, or at thirty, sixty, or ninety days, they realize the amount owing by such debtor at once instead of having it tied up in the shape of bills receivable.

Necessarily the same system of offsets of credits against debits and debits against credits above explained in regard to buying, applies in regard to selling, the only difference being that the dealer purchasing the exchange occupies the position of the person from whom it was purchased, and presents the same through his London agents, when due, for payment to the person against whom it is drawn.

Foreign exchange, payable at a future date, can only be sold to a dealer at a discount, as such dealer must obviously receive interest on the amount of the transaction from the date of purchase to the date of payment, else he is deprived of the use of that amount of money and the same is used by another without any compensation; he has also incurred the risk of being unable to collect his bill of exchange when presented for payment, which risk ought not to be assumed without his receiving therefor a premium sufficient, considering the financial standing of the payee, to compensate him. It is true that he is usually protected by the bills of lading of the goods against which such exchange is drawn, and of which bills he becomes the owner, but in the case of a thirty- or sixty-days bill of exchange this cannot apply, as the goods may have been delivered and used before the exchange is presented for payment.

Further, there must be taken into account the probable condition of the exchange market at the time such bill becomes due, which, owing to the general uniformity of balances for or against certain countries at a given period of the year, can generally be closely approximated. If at the time of the maturity of such bill it is probable that exchange against such country will be at a premium, then clearly the amount of this probable premium must make such exchange still more valuable and necessitate a still further premium, but should it be probable that exchange at said time will be at a discount, then the amount of such discount should subtract that much from the price of said bill.