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year”-that is, a corporation must pay a tax on its capital stock for the preceding year in order to do business for the coming year.

In the light of the foregoing, it is clear that the interpretation of the act by the commissioner of internal revenue, with the approval of the secretary of the treasury, providing for payments in advance, was right. If another interpretation might have been put upon the act, it would have to be shown that the interpretation was clearly erroneous-Moore's case (95 U. S., 760); Tanner v. United States (25 Ct. Cls., 68). This does not appear.

The petition is dismissed, and it is so ordered.

Hay, judge; Downey, judge; Booth, judge; and CAMPBELL, chief justice, concur.

Pennsylvania Institute of Certified Public Accountants At the annual meeting of the Pennsylvania Institute of Certified Public Accountants the following officers and directors were elected: President, Horace P. Griffith; vice-president, D. Vincent Johnson; secretary, Robert J. Bennett; treasurer, Charles S. Rockey. The following directors were elected for a term of two years: William J. Wilson, George Wilkinson, Joseph M. Pugh. The following directors were elected a year ago and their terms expire in 1922: James J. Burns, John R. Lynn.

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New York State Society of Certified Public Accountants At the annual meeting of the New York State Society of Certified Public Accountants held May 9, 1921, the following officers were elected for the ensuing year: Howard B. Cook, president; Robert H. Montgomery, first vice-president; Willis S. Whittlesey, second vicepresident; James F. Farrell, secretary; James F. Hughes, treasurer.

Gray, Scheiber & Co. announce the removal of their offices to Guaranty Trust building, Fifth avenue and 44th street, New York,

Ernst & Ernst announce the removal of their Fort Worth office to Farmers and Mechanics' National Bank building.

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Oscar Moss announces the opening of an office at 227 H. W. Hellman building, Los Angeles, California.

J. C. Baker & Co. announce the removal of their offices to 5 North La Salle street, Chicago.

Gustave A. Wuerfel announces the removal of his offices to 220 Broadway, New York.

F. A. Morrison & Co. announce the removal of their offices to 76 William street, New York.

Nathaniel Pomerance announces the removal of his office to 320 Broadway, New York.

Students' Department

EDITED BY H. A. FINNEY

FOREIGN EXCHANGE As one of the results of the world war, the foreign trade of the United States has been greatly stimulated, while the foreign exchange situation has been greatly disturbed. When exchange is restored to something like a normal condition and when European countries adjust their domestic and international affairs so that they can come again into the markets of the world on something like a pre-war basis, American foreign trade will unquestionably be greatly in excess of what it was before the war. It will then be necessary for all those who are engaged in producing anything which is in demand in foreign countries to understand the methods employed to settle accounts with their customers in those countries. This knowledge is equally essential to those who import foreign goods or who own enterprises conducting branches in foreign countries. Accountants will have to understand the principles involved in the accounting for foreign commerce and the conversion of foreign balances.

If all countries used the same form of coinage, were all on a gold basis and if all kept their circulating medium at par with gold, the problems connected with international finance would be comparatively simple and would not differ much from those connected with domestic exchange.

Domestic exchange forms the medium for the settlement of accounts within the boundaries of a single country or of a section of that country. For this purpose each of the large cities of the United States acts as a clearing house for the territory tributary to it, and New York is used as the clearing house for the whole nation.

If a cotton factor in Arkansas sells a lot of cotton in St. Louis, he could require the purchaser to send him the proceeds in actual currency by express. Not only would this be expensive; it would also be useless, because the factor has paid for the cotton by a cheque on his local bank and does not need the cash. When he shipped the cotton he probably drew on the purchaser with bill of lading attached, and sold the draft to his local bank as St. Louis exchange. If this were all, the local bank would have a credit with the St. Louis bank to which it sent the cotton draft, and this credit would be useless to it, unless it requested the St. Louis bank to ship currency, which is open to the same objection as in the case of the factor.

But this is not all. Several merchants in that section are obliged to pay for goods which they have purchased in St. Louis. They could go to the trouble and expense of sending money by express, but it is easier and cheaper to go to the local bank and buy drafts on St. Louis payable to their creditors in that city. In this way the proceeds of the cotton factor's draft are made to pay the bills of the local merchants. The bank acts as the intermediary in this exchange of credits, perhaps charging a small commission which is called exchange. This creates confusion in some minds, since the drafts and the bank's charges are each called by one name : exchange.

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An element enters into the transactions of this character which is known as “the balance of trade.” When shipments to St. Louis are steadily larger in value than the remittances of local merchants to their St. Louis creditors, the local bank's balance in St. Louis becomes too large and the balance of trade is against St. Louis. The local bank may be obliged to protect itself against the accumulation of a large balance in St. Louis of which it is unable to dispose, and as a means of protection it may charge the factor a commission, or exchange, on his draft on St. Louis. It is then said that St. Louis exchange is at a discount.

On the other hand when shipments to St. Louis are largely reduced, while the local merchants are still buying drafts, the balance of trade is in favor of St. Louis, and the local bank may be obliged to ship currency to St. Louis to keep its credit good or deposit in St. Louis cheques and drafts on other cities. It now protects itself by charging exchange on the drafts it sells, and St. Louis exchange is said to be at a premium. Of course, the extreme rates of discount and premium are governed by the cost of shipping currency.

As St. Louis and other large cities act as the settling agents for their respective sections, so New York has acted in the same capacity for the whole country. The larger territory covered allows more extensive transfers of credit than is possible in a single restricted section, because when the balance of trade is against one part of the country it is virtually sure to be against New York in another part. St. Louis may have too large a balance in New York when Chicago's balance is too small. St. Louis can then sell Chicago exchange on New York. If any settlement is then necessary between Chicago and St. Louis it can be made by a shipment of currency for the short distance between these two cities. Otherwise Chicago would have to ship currency to New York and New York would have to send an equivalent amount of currency to St. Louis. The short and inexpensive transfer along the base of the triangle saves both time and expense as compared with the transfer over the two long sides.

The movements of foreign exchange are governed by the same principles as are those of domestic exchange. The proceeds of the exports made by the United States to Europe are used to pay for imports from Europe and for the expenditures in normal times of the large number of American tourists abroad. When this country ships more than it receives in goods or spends abroad, the balance of trade is in our favor. This balance must be settled in gold. As it is very expensive to ship gold and as foreign banks do not wish to deplete their stock of the precious metal beyond a certain point, the expedient of raising the rate of interest allowed to American banks on their deposits is often adopted. If there is a prospect of a reversal of the balance of trade later, the American banks can afford to carry heavy balances in Europe, because they not only receive a good interest on their money but also make a profit by buying drafts on Europe at a low rate when they are plentiful and selling their own drafts at a high rate when European drafts are scarce.

When the balance of trade is against this country, the reverse action takes place and we have to ship gold to establish the equilibrium. But since it often happens that the balance of trade may be against us in one

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country and in our favor in another, settlement may be made by a transfer of funds from the debtor to the creditor country.

London has been the clearing house for the world because the British banking system has branches in all commercial countries. In many places the only way to make a payment in any other country is by means of a draft on London. Until Germany committed financial as well as military suicide, she was attempting to make Berlin a secondary clearing house at least, by the establishment of German banks in important commercial cities throughout the world.

Until the passage of the federal reserve bank law, no banks in the United States could have a branch in a foreign country. Hence this country was almost entirely dependent upon British banks in its commerce with countries with which it did not have direct connection. This worked against the American merchant in more ways than one. The British branch bank in Buenos Aires, for instance, would always discriminate in favor of British merchants in the extent of its accommodations, if not in the rate of exchange, and the American merchant would receive his pay in a draft on London, which he would have to sell. He would thus pay exchange twice-once when his agent bought the draft in Buenos Aires, and again when he sold it in New York. In addition, he never knew how much he was to receive as his final proceeds until he received and sold the draft on London.

Banks in the United States are now authorized to establish branches in foreign countries and they have already done so in some of the principal cities of South America. Transactions between Argentina and the United States can now be settled in terms of dollars directly with New York instead of in sterling through London.

If all the commercial nations of the world were using gold as the standard of value instead of silver or an inflated paper currency, the problems of foreign exchange would be only those arising from the varying balance of trade and the cost of shipping gold from one country to another. When one country is on a gold and another on a silver basis, another complication is added : the variations in the relative values of the two standards. These variations depend on the price of silver bullion in the world market.

If a silver country owes a gold country $1,000 in the currency of the silver country, it must buy a draft on the gold country payable in gold of the value equivalent to 1,000 silver dollars. In addition to the other variations, there is also a question as to the equivalent values of gold and silver. If the price of silver bullion is such as to make a silver dollar equal to fifty cents in gold, a draft for $500 gold will pay the debt of $1,000 silver. If silver has risen so that a silver dollar is worth sixty cents in gold, the draft must be for $600. It makes no difference to the man in the silver country, for he pays $1,000 in his own currency in either case, but the man in the gold country makes or loses with the rise or fall in the price of silver.

On the other hand, if the debt is for $1,000 in gold, the man in the silver country must pay $2,000 in silver currency for it when the silver dollar is worth fifty cents, but only $1,666.67 when his dollar is worth sixty cents. In this case the man in the gold country is not affected, for

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he receives $1,000 in gold in either event, but the man in the silver country saves money when silver rises and loses it when it falls.

If a concern whose main office is in a gold country invests in a branch in a silver country, such as a coffee plantation, the accounts in the home office will be in gold values and those at the plantation will be in silver. When a statement of the operations and condition of the whole concern is made by the home office, the values must be in gold. The process by which the one value is changed into the other is called the conversion of values.

There are no complications when a merchant in America sells goods to a merchant in a silver country such as China, at once draws a draft for the agreed price, attaches the bill of lading for the goods and sells the draft at once to an American bank. The American merchant treats the proceeds of the draft as the selling price of the goods and entirely ignores the fact that the draft was drawn in a foreign currency. In the same way if he imports goods from China the cost of the goods is the amount of the draft drawn on him. The same would be true in the case of goods shipped to or received from a gold country. The only complication would arise in case we were obliged to quote a price in the currency of the foreign country some time before he would be able to make the shipment. If exchange took a sharp turn against him, his profit would be reduced, while on the other hand a favorable turn would increase his profit.

The par of exchange is the value of one currency expressed in terms of another currency, based on the bullion value of each. Thus the par of the British pound sterling is $4.8665, which means that one pound sterling is the equivalent in weight and fineness of $4.8665. However, exchange is not quoted at a premium above or a discount below par. Exchange on London, Denmark, Holland, Norway, Sweden and Spain is usually quoted at the value of the foreign standard coin in the United States money. Exchange on France, Belgium, Italy and Switzerland is usually quoted at the value of a dollar in the foreign coinage. Thus, if it is desired to remit $1,000 to London when exchange is 4.891/2, it is necessary to find how many pounds sterling at 4.891/2 will be equal to $1,000, which is done by dividing 1,000 by 4.895, obtaining the quotient 204.29, or £204.29. To reduce the decimal .29, multiply by 20, the number of shillings in the pound. This gives 5.8 shillings. To reduce the decimal .8, multiply by 12, the number of pence in a shilling. This gives 9.6 pence, the nearest coin value of which is 972 pence. The value of $1,000 in sterling at 4.8972 is £204 5s. 91/2d.

The reverse process will reduce sterling to dollars. If it is desired to know how many dollars are needed to buy £204. 5s. 9/2d. at 4.8912, reduce the shillings and pence to decimals of a pound.

91/2 • 12 (number of pence in a shilling) = .8 shilling
5.8 + 20 (number of shillings in a pound) = .29 pound.
Replacing 5s. 91/2d. by the equivalent decimal of a pound,

£204.29 X 4.895 $999.9995, or $1,000.
Converting values when the basis is the number of foreign coins to
the dollar requires an exactly opposite procedure. The process is not as
complicated as in the case of sterling because all the countries involved

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