If A, who lives in New York, owes B, who lives in London, $1,000, and if C, who lives in London, owes D, who lives in New York, $1,000, B, the resident of London, can draw on A in New York, and sell the draft to C, who resides in London, and C could pay his debt to D, who resides in New York, by forwarding B's draft to D, who resides in New York. D could then collect the draft from A. It is perfectly clear that by means of this transaction, the expense of sending $1,000 in gold from New York to London, and also the expense of sending $1,000 in gold from London to New York, has been saved.
This draft would be Foreign Exchange, because the cities are in two different countries.
MR. MERCHANT: According to your illustration, Mr. Banker, if our sales of cotton, grain and meat to Great Britain should amount to $1,000,000,000 a year, and the sales of Great Britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $1,000,000,000, we would not have to transmit a single dollar of gold either way, because the debts would just cancel each other. If the debtors in the United States could find out who the debtors in Great Britain were, then they could exchange debts with each other. The debts of the two countries would just offset each other.
MR. BANKER: That is absolutely true, and it is entirely possible that the $2,000,000,000 worth of goods in the two countries could be bought and sold without moving a single dollar's worth of gold either way across the Atlantic.
MR. MANUFACTURER: Well, that is just what we want to do and save the expense and trouble of transmitting the money, and it is up to you, Mr. Banker, to explain just how we are to accomplish this trick or feat, because it will save a tremendous expense, if this can be done.
MR. BANKER: Yes, and will bring other advantages to the business interests of the country of almost incalculable importance, as we shall soon see. Now, the question is how to gain these ends. Two things must be accomplished in this connection, if we are to profit by every advantage that can possibly be taken in our trade with each other, as well as in our trade with other countries.
_First_: The Bills of Exchange must be of such a high character as to invite those, who need them to pay debts with, to take them unhesitatingly.