The profit arising from the transaction we have sketched is realized by the separate parties in this way. The New York banker lends money for three months, say, at 5% per annum, he pays a commission of 1/32% to the trust company which has custody of the security, a charge equivalent to 1/8% interest per annum. He draws on London at 90 days' sight and sells the bill at 4.83-5/8, the cable rate being 4.87¾, the buyer of a three months' bill making the allowance for the English bill stamp of ½ per mille and the London discount rate of 3%. The drawer of the bill must also pay a commission of 3/16% to the London banker who accepts the draft; this is equivalent to another ¾% per annum in the rate of discount, so that money raised in this way costs 1/8% for the trust company, 3% the London discount rate, about ¼% for bill stamps, and ¾% for London commission--altogether, 4-1/8%; and, as the money is loaned at 5%, there appears to be 7/8% profit to the drawer of the bill. This, however, is on the assumption that the cable rate is still 4.87¾ when the bill falls due for payment and that the drawer would have to pay that price to telegraph the money to meet the draft. But exchange on London can go up or down between 4.84 and 4.89½, and if at the end of the three months the cable rate is 4.84 the New York banker will be able to cover his bill at almost the same rate at which he sold it and will only be out of pocket to the extent of the commissions and stamps, so that the accommodation will only cost him 1½% and his profit will be 3½%. If he has to pay more than 4.87¾ for his cable at the maturity of the bill his profit will be less than 7/8%, and he may even be a loser on the transaction.
It is obvious, then, that a high rate of interest in New York, with a high rate of exchange on London and a low rate of discount in England, would induce the creation of these finance bills. The supply of these bills would prevent New York exchange reaching the limit point at which gold leaves the United States, and the maturity of these bills in the autumn would ensure a demand for the produce bills and possibly prevent exchange from falling to the other limit point at which London has to send gold to New York.