THE FOREIGN EXCHANGES 237

dear. The to-and-fro movement of gold at such times may
be reduced in volume, or rendered unnecessary, if it be
sufficiently profitable to effect an operation by which the
supplies of trade bills may be anticipated, so that the time
of plenty may assist the time of scarcity. Bankers and
others may draw on correspondents against an established
credit when trade bills are scarce, with the purpose of
sending the means of covering the drafts when trade bills
are plentiful. If a profit can be made by thus using their
credit, that is, if the price of bills is high enough at the time
of scarcity to make it worth while taking the risk of being
able to cover at a cheaper rate later on, bills will be offered
by such bankers and merchants as have credit facilities
which can be used for the purpose.
It will be clear that not only the price of the bills but the
=xpense of borrowing is involved, that is, the rate of interest
as well as the rate of exchange affects this question of the
supply of exchange. This is very clearly seen in considering
 the supply of bills drawn at sight as related to that of
bills drawn at a long currency. The difference in the rates
for sight bills and for three months’ bills corresponds closely
to the discount for three months in the market on which the
bills are drawn.
Consider the position of a drawer who has an established
credit against which he can draw. If he draw, and sell, three
months’ bills, he saves the interest for that period on funds at
his disposal in the place on which he draws, as compared with
the position created if he sell sight drafts. On the other hand,
take the case of a merchant remitting to cover an advance. If
he buy sight drafts, he likewise saves three months’ interest
as compared with a remittance of three months’ paper.
Hence, if three months’ bills be cheap as compared with
sight drafts, the former gains by selling sight drafts, the
latter by buying three months’ bills, and vice versd, The
supply of sight drafts, and demand for three months’ paper,
are affected in a sense which tends to destroy the advantage
of using the one rather than the other. Relative cheapness
is seen, moreover, to consist in a difference in price which is
greater or less than three months’ interest on the amount