CHAPTER XV

THE FOREIGN EXCHANGES

TT theory of values in international trade has been
developed on the assumed basis of goods exchanged
for goods, a direct exchange instead of a double exchange
with money as an intermediary. In practice, this is something
 like what happens, for, though purchases and sales are
made in terms of money, but little money actually passes,
and that enters in as a special commodity rather than as
money. Moreover, the goods exported and those imported
are generally evaluated in terms of different money units, and
the value of the one money-unit in terms of the other is
not invariable, The problem remains of dealing with the
settlement of the relative values of these money units, or, in
other words, the determination of foreign-exchange rates and
their fluctuations,
As is explained in works on commercial arithmetic, payment
 for goods in international exchange is generally made
by a transfer of obligations. Thus an exporter X, in country
A, sells to an importer M in country B. An importer Y, in
country A, buys from an exporter N in country B. Suppose
the values dealt in are equal. Then M needs to pay the value
of his purchase to X, and Y needs to pay an equal value to
N. The transmission of precious metal would enable the
payment to be made, but the double shipment of gold is unnecessary.
 Since X has to receive as much as Y has to pay,
and M has to pay an amount equal to that which N has to
receive, by mutual arrangement Y can pay his debt to X
acting as N’s representative, and N receive his payment
from M instead of from Y. This is, in practice, the course
followed. X draws a bill of exchange on M, that is, a
re