The subject of exchange, whether domestic or foreign, may be studied as a phase of economics, commerce, or banking, and its meaning will vary with the viewpoint from which it is being considered. In the broad sense, exchange includes commerce itself or the interchange of goods. From a more restricted standpoint, exchange is the system of settling balances arising out of these commercial transactions. The mechanism of exchange renders unnecessary the sending of currency or bullion for the full reimbursement of each transaction, and payment under normal economic conditions is made to cover only the net differences between the total debits and credits. In its narrowest meaning, exchange is simply the business of buying and selling claims for the payment of money at a particular place. These definitions apply to both domestic and foreign exchange, but the two forms differ in respect to countries, currencies, and instruments involved. Domestic exchange settles balances arising out of transactions among individuals living in the same country, and using only one form of currency, but through instruments which are orders or promises to pay money such as checks, drafts, and notes. On the other hand, foreign exchange effects settlement in the business transactions of residents of different nations, in different forms of money, and only through orders to pay, such as drafts, bills of exchange, and cable transfers.

A bill of exchange is an evidence that one party has a claim on a second, and that this debt may be transferred to a third. As an illustration, an American exporter, having shipped cotton worth $20,000 to England, draws a draft for this amount on the importer. The drawer could make the bill payable to the order of himself, but it is more likely that he will prefer to have this money at his disposal in New York in the form of dollars, and therefore he sells the bill to some one who can use this claim to discharge a debt payable in London. The drawer transfers his claim by making the bill payable not to himself, but to the purchaser.

A bill of exchange may be considered as a certificate representing a claim to a certain number of monetary units, and when a bill covers a transaction in foreign trade its value may be expressed in terms of other currencies. The common basis of measurement in comparing these currencies has been the number of grains of gold in the monetary units of the nations using this metal as a standard. Since the pound sterling contains 113 grains of fine gold, and the dollar but 23.22 grains, the relative value of one sovereign in terms of United States currency is $4,866. This is the mint value as fixed by the governments, and is known as the mint price or the par of exchange.