If dollars one month forward are quoted cheaper than spot dollars to a London buyer in terms of sterling, this indicates a preference by the market, on balance, in favour of holding funds in New York during the month in question rather than in London,--a preference the degree of which is measured by the discount on forward dollars. For if spot dollars are worth $4.40 to the pound and dollars one month forward $4.40½ to the pound, then the owner of $4.40 can, by selling the dollars spot and buying them back one month forward, find himself at the end of the month with $4.40½, merely by being during the month the owner of £1 in London instead of $4.40 in New York. That he should require and can obtain half a cent, which, earned in one month, is equal to about 1½ per cent per annum, to induce him to do the transaction, shows, and is, under conditions of competition, a measure of, the market’s preference for holding funds during the month in question in New York rather than in London. Conversely, if francs, lire, and marks one month forward are quoted dearer than the spot rates to a London buyer, this indicates a preference for holding funds in London rather than in Paris, Rome, or Berlin. The difference between the spot and forward rates is, therefore, precisely and exactly the measure of the preference of the money and exchange market for holding funds in one international centre rather than in another, _the exchange risk apart_, that is to say under conditions in which the exchange risk is covered. What is it that determines these preferences? 1. The most fundamental cause is to be found in the interest rates obtainable on “short” money--that is to say, on money lent or deposited for short periods of time in the money markets of the two centres under comparison. If by lending dollars in New York for one month the lender could earn interest at the rate of 5½ per cent per annum, whereas by lending sterling in London for one month he could only earn interest at the rate of 4 per cent, then the preference observed above for holding funds in New York rather than in London is wholly explained. That is to say, forward quotations for the purchase of the currency of the dearer money market tend to be cheaper than spot quotations by a percentage per month equal to the excess of the interest which can be earned in a month in the dearer market over what can be earned in the cheaper. It must be noticed that the governing factor is the rate of interest obtainable for short periods, so that a country where, owing to the absence or ill-development of an organised money market, it is difficult to lend money satisfactorily at call or for very short periods, may, for the purposes of this calculation, reckon as a low interest-earning market, even though the prevailing rate of interest for longer periods is not low at all. This consideration generally tends to make London and New York more attractive markets for short money than any Continental centres.