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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter LII

Commerce and Finance - Chapter LII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



A further factor, and one of considerable importance in its
effects upon trade balances, at least as far as this country is
Travelers' concerned, is the personal expenditure of travelers

Letters of abroad. It is roughly estimated that this amounts

Crcdit to something like $150,000,000 per annum. In

order to meet the needs of this class, a peculiar instrument
has been called into being the Letter of Credit, which
is addressed to a certain number of banking firms, and
sets forth that N. M. is the bearer, and is entitled to draw
upon a certain bank, generally located in London, for a specified
amount. Payments as made in different localities, are indorsed
on the Letter of Credit itself, and when exhausted it is returned
circular Note, with the last draft. A modification of this instru-
or Travelers' ment is found in the Circular Note, or Trav-
elers' Check, which calls for a specific amount
in U. S. Dollars, and is payable in various countries at
certain fixed rates. A further important instrument in con-
nection with the Foreign Exchange business, is the Commercial
Letter of Credit, used principally by importers. This is usually
addressed to a firm by a bank or banker, authorizing them to
value on its correspondent for a fixed amount, and engages that
the drafts drawn thereunder will be protected if drawn in ac-
cordance with the terms of the Letter of Credit. The terms are,
as a rule, that the draft should be accompanied by Bills of
Lading, Consular Invoices and Insurance Certificates, showing


the shipment of goods purchased. The most common instru-
ments used in foreign transactions are checks or cheques, demand
drafts and time drafts. Checks are most commonly used for pay-
ments on demand. Most countries have legislated
Drafts 8 and ^ n f avor f this method of transferring funds by
means of the entire abolition, or modification, of the
stamp tax hence demand drafts are very seldom used. In con-
tinental countries the circulation of a check is limited as to
time, particularly in France, and in order to avoid the possibility
of a change in date the law in that country requires that all
checks be dated in words, thus August fourteenth, 1903 in-
stead of Aug. 14, 1903; and in Germany a check must expressly
state that the funds transferred are derived from a balance due
the maker. A peculiar method in vogue of evading the stamp
tax in Germany when it is not possible to make the required
declaration as to funds due, is to issue what is called a delega-
tion i. e., a communication addressed to the beneficiary that a
specified sum will be held at his (the beneficiary's) disposal upon
his application to certain designated parties. This instrument
is not intended for circulation, as its very nature deprives it of
that characteristic. Demand drafts have been almost entirely
displaced by checks and delegations, hence are very rarely used.
They are subject to a tax of J per mille, (J/oo) i n most all
European countries, the same as time drafts.

Time drafts on merchants, with shipping documents attached,
enable the purchaser to dispose of the goods by sale before paying
for same, and generally contain a provision where
Time Drafts the documents are held as security for the pay-
ment of the draft that in the event of the drawee
desiring to withdraw the merchandise, he can do so upon
payment of the draft, less a rebate of interest at the
official bank rate for the unexpired time. This on the Con-
tinent. In England such a draft may be paid prior to maturity
under a rebate of interest of 4% above the advertised rate for


short deposits in the London Joint Stock Banks, which as a rule
is 1J% below the Bank of England rate. Thus should the Bank
of England rate be 3%, the rebate rate would be 2%.

The regular quotations of foreign exchange cover three dis-
tinct classes:

1. Posted rates. These are rates arbitrarily determined by
international bankers in New York for the purpose of adjusting
foreign currencies payable in the United States, and are gen-
erally somewhat higher than the actual rates.

2. Actual rates, are the rates at which bankers will sell
their own drafts, telegraphic transfers, etc.

3. Commercial rates, are the buying rates of bills of ex-
change, etc., issued by merchants in the regular course of busi-
ness. A typical quotation list would read as follows:

Sterling. Tel. Transfers. Sight. 60 days.

Posted rates 487^ 484

Actual 485% 485^ 482%

Commercial 485.40 485 483


Actual 9511-32 95^ 94%

Commercial 3 days 95^ 94)|


Actual 617*6 1-32 518^ 620%+1-16

Commercial 3 days 519% 521}

It must be noted that the quotations for French exchange
progress by f of 1%, and as the quotations are for so many Francs
and Centimes per dollar, each progression would be the equiva-
lent of -J of 1% in our money, and when it is desired to shade the
rate either up or down, this is done by quoting the rate plus
1-16%, plus 1-32%, or minus 1-16 or 1-32. It must be further
noted that as the foreign denomination in this case is the variable
quantity, the higher the quotation the lower the rate of ex-

Taking the sight draft as a basis, the following calculations
will demonstrate how the quotations for telegraphic transfers
and 60 d/s bills are arrived at; e. g. quotation for sight drafts on
England, 485J. Sight drafts or checks have an average circula-


tion of ten days, hence the interest accruing on the amount
drawn until presentation for payment is enjoyed by the seller.
With telegraphic transfers, however, which are immediately pay-
able, this benefit falls away, so interest for ten days must be
added to the quotation of sight exchange in order to arrive at
the price of a telegraphic transfer. Thus:

Sight draft or check .................................. 485 . 25

+ Int. 10 ds. 8$approx ...............................


Bankers' bills, or where documents are to be surren-
dered on acceptance.

Demand ..................... 485.25

Less stamp ................... 24

Interest 63 ds. 2% .......... 2.41 2.65


60 days bills with documents attached which
are to be surrendered on payment of the bill.

Quotation for demand ........ 485 . 25

Less stamp .................. .24

2#int.63days ............... j.68 1.92


Telegraphic Transfers.
Marks. Demand ............................. 95.25

Interest 10 days 3^# .................. 08


Bankers' bills, clean commercial bills, or such with
documents to be surrendered on acceptance.

Demand ..................... 95.25

Stamp^ .................... 48

Int. 60 days 3^ ............. 5.12 .56

. 94.69

Commercial bills with documents to be surrendered on pay-
ment under rebate of interest at bank rate in the event of the
bill being paid prior to maturity.

Demand 95.25

Stamp^ .48

Int. 60 days 4# (Bank rate). . 6.32 .68



Demand 5.18.26

Less 10 days int. 3# _ .43

(517^-1-32 = 517.66). 5.17.82

*Telegraphic Transfers,


Bankers' Bills.

Demand 5 . 18 . 12 . 5

Plus stamp 26

int. 60 days 1.84 2.10

+ 1-16 = 520.80). 5.20.22

Commercial Bills.


Plus stamps 26

3# int. (bank rate) 60 days. . . 2.60 2.86

(Quoted rate 521&).

In determining the value of time bills, other items of cost
must be taken into consideration, such as commissions to be
paid to bankers abroad for handling the items, etc.

In discounting bills in England it must be noted that the 3
days of grace allowed by law are taken into consideration in
calculating the discount while on the continent, where grace is
also customary, only 60 days are brought into computation.

Days of grace, as applied on the continent, have
Days of Grace relation only to the notarial act of protest in the

event of non-payment i. e. if a bill matures on
Jan. 1 and is not paid, it will not be protested until three work-
ing days thereafter. On the other hand it is customary in Ger-
many, when discounting a batch of bills, to apply the bank rate
on 5 days and the current rate on the remaining days the bills
have to run.

In the foregoing only the three principal, commercial coun-
tries have been considered on account of the limited space, but
the principles as applied are the same in other countries, barring,
of course, local usances. The following calculations based on

actual transactions will demonstrate many of the
illustration principles laid down in the foregoing pages: A

batch of 90 d/s bills on London, amounting to
65,000, was bought in the New York market for remittance
to London where the money was immediately needed. The nat-
ural course would be to secure the discount by cable for bills to
arrive i. e., to go forward by first steamer. The rate received
was 3-J%, showing the following result;


Amount of bills 65,000

Less 3^# discount 93 days 587. 15

Stamps 32.10 620. 5


Simultaneously an offer was received from a Berlin bank to
buy 90 d/s bills on London at 2032, or 20 Marks 32 pfennigs
per , which, price included stamps, brokerage and discount.
However, the money was needed in London and not in Berlin, so
enquiry elicited the fact that telegraphic transfers on London
could be bought at 2048f thus:

65,000 @ 2032 = M. 1,320,080

@2048% = 64,433.10

The disposal of the exchange in Berlin being the more profit-
able by 53.15, it was sent there. Another case, where the opera-
tion is reversed

M. 1,000,000 90 days on Berlin sold in London

@ 2057 48,615 . 19

Exchange there against sold in New York

@ 485^ $235,908.88

If remitted to Berlin for discount and exchange sold there-
against in New York, the result would have been as follows:

90 iays bills Berlin M. 1,000,000

Less 3^ disc. 90 days, M. 8125.00

Stamps 500. 8,625

M. 991,375

@ 95^ -f 1-64 $235,798 . 19

By remitting Berlin exchange to London a saving of $110.69
=i Voo (per mille) was effected.

London is the only European open market for gold, hence

the fluctuation of exchange on London in New York is limited

to the actual cost of shipment of bullion and the expense for

interest while in transit, approximating f of 1 per

Fluctuations cent a b ove or below the mint parity whereas in

in Exchange

the case of Berlin or Paris exchange the fluctua-
tions have a wider scope, dependent upon the premium charged
or allowed for gold, and have been known to approach a variation
of pretty nearly one per cent, above or below the mint parity.


Foremost among the exchange centers of the world stands
London, with the Bank of England, surrounded by a most won-
derful group of Joint Stock and private Banks. The other
European centers are Paris with the Bank of France, and Berlin
with the Imperial Bank. These three institutions stand guard
over the financial destinies of the world, and their
cent^r"^ weekly statements are eagerly scanned by finan-

ciers as the true trade barometer. So sensitive,
indeed is the world of finance that when occasionally a meeting
of the Board of Directors of the Bank of England is extended a
few minutes beyond the usual time this fact immediately be-
comes a cause for apprehension, and it is said that the discussion
of an irrelative subject among the directors after the close of a
board meeting at a critical period almost caused a panic on the
Stock Exchange. These centers are engaged in a constant
warfare, one against the other, and while the hostilities are of a
peaceable nature, the methods employed are quite drastic at
times; still, when a common danger threatens, these three
great institutions are ever ready to extend to each other a
helping hand.

Owing to the peculiar features of the banking laws of the
United States, conditions in this country are somewhat different
and not so easily regulated in times of stress as they are abroad.
Our clearing houses act as a unit and are the determining
factors when decisive steps have to be taken for the protection
of the commercial community.

Gold, as has clearly been demonstrated, performs the func-
tion of settling international trade balances best, and upon refer-
ence to the financial papers of the day it will be seen that there
is constantly a movement of the metal flowing
re S ularl y through the arteries of trade, subject
to natural laws as unalterable as those in the
material world, and after having performed its duties in revivi-
fying commerce returning to the exchange centers of the world.
only to be ready at a moment's notice to again go forth on its
mission to benefit the human race, by developing the resources
of distant parts of the world, perhaps the wilds of Canada or
the rice fields of India, or to supply the sinews of great enter-
prises such as transcontinental railroad lines.

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