The balance of foreign exchanges is of essentially the same nature as the domestic cancelation of indebtedness.  It is going on constantly between the two merchants in the same town, between two banks in the same town who represent groups of merchants, between men in neighboring towns, and between distant states like New York and California.[8] The price of exchange to the individual is reduced by the specializing of the business in the hands of a few dealers, permitting the cancelation of indebtedness or offsetting of exchange, and greatly reducing the amount of bullion to be transported in making the payments.  The cost to the bank of providing this exchange for its customers varies as conditions change, but in any case is not great, so that in domestic business when any charge is made it is usually at a fixed rate, and is mainly for the service.

Sec. 9. #Par of exchange.# Foreign exchange from America to Europe is, however, in two features different from domestic exchange:  (a) the cost of shipment of gold is greater; (b) the monetary units of the two countries usually differ in name, weight, and fineness, and sometimes in materials.  We may define foreign exchange as the purchase and sale of the right to receive a given kind and weight of metal or its monetary equivalent in current funds at a specified time and place. Par of exchange between two countries using the same metal as a standard is the number of units of the standard coin of the one country that contains the same amount of fine metal as the standard coin of the other country.  There is no fixed par of exchange between gold-using and silver-using countries:  par of exchange between them fluctuates with changes in the comparative values of the two metals.  The gold shipping points for importing or exporting gold are respectively par of exchange plus or minus the cost of moving the actual metal.  These points vary with means of transportation and communication.  The par of exchange between New York and London being nearly $4.866 and the cost of expressing and insuring a gold pound between New York and London being approximately $.02,[9] the shipping point for the export of gold from New York is $4.886 and for the import of gold to New York is $4.846.  At these upper and lower limits, there is a motive for shipping gold as a commodity.

When large sales have been made to Europe and credits are accumulating in New York and the importation of gold is imminent or already begun, the claims are bought by bankers in New York at less than par.  At such a time one needing to remit a sum to London can buy exchange for less than par, for every such draft remitted reduces London’s indebtedness and, by so much, the need of shipping gold to this country.  As a rule then, accumulating credits here mean a low rate of exchange, accumulating debits a high rate of exchange from this to the foreign country.

These are the merest rudiments of the subject.  The many problems arising, such as the adjustment of foreign credits to changing needs, and such as arbitrage (the readjustment of the rates of exchange prevailing among different financial centers) make foreign exchange both a complex science and a difficult art.