ng Smith & Jones to send in a _demand_ draft
for L100,000, plus three-eighths per cent. commission, making L375
additional. This L100,375, less its commission for having handled the
loan, the New York Bank will send to London, where it will arrive a
couple of days before the L100,000 of ninety days' sight bills
originally drawn on the London Bank, Ltd., mature.

What each of the bankers concerned makes out of the transaction is
plain enough. As to what Smith & Jones' ninety-day loan cost them, in
addition to the flat three-eighths per cent. they had to pay, that
depends upon what they realize from the sale of the ninety days' sight
bills in the first place and secondly on what rate they had to pay for
the demand bill for L100,000. Exchange may have gone up during the life
of the loan, making the loan expensive, or it may have gone down,
making the cost very little. Plainly stated, unless they secured
themselves by buying a "future" for the delivery of a L100,000 demand
bill in ninety days at a fixed rate, Messrs. Smith & Jones have been
making a mild speculation in foreign exchange.

If the same loan had been made on the other basis, the New York Bank
would have turned over to Smith & Jones not a _sterling bill_ for
L100,000, but the _dollar proceeds_ of such a bill, say a check for
$484,000. At the end of ninety days Smith & Jones would have had to pay
back $484,000, plus ninety days' interest at six per cent, $7,260, all
of which cash, less commission, the New York Bank would have invested
in a demand bill of exchange and sent over to the London Bank, Ltd.
Whatever more than the L100,000 needed to pay off the maturing nineties
such a demand draft amounted to, would be the London Bank, Ltd.'s,
profit.

From all of which it is plainly to be seen that when the London bankers
are willing to lend money here and figure that the exchange market is
on the down track, they will insist upon doing their lending on the
"currency loan" basis--taking the risk of exchange themselves.
Conversely, when loaning operations seem profitable but rates seem to
be on the upturn, lenders will do their best to put their money out in
the form of "sterling loans." Bankers are not always right in their
views, by any means, but as a general principle it can be said that
when big amounts of foreign money offered in this market are all
offered on the "sterling loan" basis, a rising exchange market is to be
expected.

As to the collateral on the