Foreign Exchange and Foreign Debts

Hubert C. Walter

• Éditeur: Routledge
• Année: 2018
• ISBN:
  9781351811408
• Édition: 1
• Sujet: Business
• Sous-sujet: Business General

Originally published in 1926. This book explains clearly the depreciation of the franc, the return to the gold standard and dollar parity, inflation and deflation, the stabilization of the mark and its effects; and the connexion between exchange rates and prices. It describes the transfer of money abroad, bank credits, the various methods in which documentary bills are dealt with and foreign currencies exchanged. Based on the author's practical experience of finance, it incorporates economic research and contains a concise statement of Britain's debt to America, the Dawes Reparation Plan, and the debt settlements with France and Italy.

Part I—Outlines

Chapter I
Introductory—Currency and Gold

FOREIGN EXCHANGE AND FOREIGN DEBTS

IN the spring of 1914 the present writer, who was then travelling in Germany, fonnd the cost of living there about the same as in England. In 1922 the same journey was substantially cheaper. In 1923 it was ridiculously, fantastically cheap. In 1924 Germany was the dearest country in Europe. In 1925 the comparison was about the same as it would have been in 1913.

These wide variations of prices were due entirely to the events happening at the time in the world of foreign exchange, which caused the prices at which German marks could be bought by English pounds to vary in an astonishing manner. Similar phenomena were being reproduced all over Europe.

They, and the popular interest which they aroused, were entirely a product of the war. Before 1914 the Foreign Exchanges were of interest only to a very small number of highly-specialized dealers in the principal financial centres of the world. The great English joint-stock banks themselves put their Exchange business through these dealers. The business community cared nothing for Exchange rates. There was no reason why it should do so, for the chief Foreign Exchange rates were invariably steady; they never fluctuated by more than margins which were so very small as to be of interest only to the dealers who, in a manner that no one outside their offices understood, bar two or three students, made a living out of them.

Since the war movements in these formerly so stable rates have been violent and unexpected. So vital has been the effect of these movements on the life of the peoples concerned that Foreign Exchange rates have acquired great "news value" in Fleet Street, and have in consequence found their way on to the front pages of the newspapers. The Bankers' Institute, appreciating the altered conditions with a quickness not general in the post-war world, altered the syllabus of its examinations in 1919; previously there had only been incidental questions on Foreign Exchange in the papers on the Practice and Law of Banking. In 1920 a conference of financial experts representing most of the principal nations in Europe was held at Brussels: the report issued by these experts on existing international commercial and financial conditions centred round the unsettlement of the Exchanges. So much for the changed attitude of the financial community. In the business world the use of the phrase "collapsed exchanges" as indicative of one of the causes of the present trade depression, and of "stabilizing the exchanges" as one of the remedies for that depression, have become commonplaces: before the war both phrases were unknown to the generality of business men.

It is evident that something of a radical nature happened as a result of the war which altogether altered the working of the Foreign Exchanges; and that that alteration is having very far-reaching effects on everyday business life. Perhaps the best example of what the alteration in the exchange position means in practice is this: before the war one pound, when changed into U.S. dollars, would buy 4·862/3 dollars' worth of wheat. During a great part of 1920 the pound would only buy 3·90 dollars' worth —about 20 per cent. less. That is equivalent to the imposition of a tax of 20 per cent, on wheat imported from the U.S.

The secret of the importance and of the complications of Foreign Exchange to-day is that all the economic forces operating in a country work themselves out in its rate of exchange. The Exchanges register the economic health of a country; to-day they register the extent to which the economic equilibrium of the world, of Europe especially, has been upset by the war.

Foreign Exchange has one quality about it which makes it both more interesting and more difficult than other sections of economics, in that it deals with economic conditions as they exist from day to day. This makes the subject more difficult, because it means the constant revising of explanations and theories. It also makes it more interesting, because we are enabled to apply our principles to the Exchanges as they exist, and check our theories accordingly.

To clarify our ideas at the outset, we may describe Foreign Exchange as the business of exchanging currencies, or as the study of the ways in which currencies are exchanged; the Foreign Exchanges are the markets in which this business is done; and Rates of Exchange are the prices of the various national currencies in terms of other national currencies.

The word currency is used in the same sense as the word "money" is often used. It is necessary to be clear about the meaning of these two terms. "Money" may mean a number of things, "currency" only one, There are certainly four things which the word "money" may mean:

• (1) The standard or measure of value.
• (2) Medium of exchange.
• (3) Purchasing power.
• (4) A loan of money.

The last mentioned meaning is the one in which the word is customarily used in the money articles in the newspapers. "Money was cheap to-day" or "Money was dear " obviously does not mean that twenty-one shillings could be obtained for one pound or vice versa. It simply means that if anyone wanted to borrow money, he could do so at a low or high rate of interest. There, clearly, money means "the loan of cash or credit." In the third sense of "purchasing power," an overdraft is money. In neither of these two senses is money equivalent to currency. The first two meanings quoted are in modern practice merged in each other. There is a clear enough theoretical distinction between the standard which measures value and the instrument or medium by which value is transferred from one person to another; but in the Western European industrial system the monetary system embodies both ideas. In the highly developed commercial system of ancient Babylon, the theoretical distinction was also effective in practice. In a sale of land, the price was agreed in terms of shekel-weights of silver, which were thus the standard of value, but it was paid in corn, slaves, animals, etc., which, valued on the same silver basis, served as the actual media of exchange.¹ In the Western European system to-day coins and notes serve both as standards of value and media of exchange.

Of these four meanings of the word "money," currency " is equivalent to the second only, viz. a medium of exchange. Currency means this and only this. It has thus a much more circumscribed meaning than "money," which may have any of the other three meanings indicated. It has, however, a wider meaning than the term "Legal tender," which is that portion of the medium of exchange which a debtor can legally compel his creditor to accept in satisfaction of his debt. Thus an overdraft is money in the sense of purchasing power, but it is not currency. A cheque is currency, but not legal tender, A Treasury note is all three.

The currency of England consists of the following:

• (1) Coins.
• (2) Treasury notes.
• (3) Bank-notes.
• (4) Cheques, which are orders to bankers to pay.
• (5) Bills of exchange, which are orders to pay.
• (6) Interest coupons.

Of the six, the last three are what bankers call "Instruments of Credit," i.e. instruments by which credits, that is to say, book-debts, are recorded and transferred from one person to another. Such is our currency to-day. Before the war there were no Treasury notes.

The business of exchanging currencies became a necessary part of international trade as soon as international trade developed beyond the stage of barter. When we buy materials abroad, our currency has to be exchanged for the currency of the country in which the seller wishes to be paid, which is generally that of ^fhe country in which he is resident. Foreign Exchange is concerned with the quantity of our own currency which we give up in exchange for that of the seller. Assume that "A," a merchant, is trying to sell some mineral that is mined in the United States to a Dutchman. "A" knows he can get £33 per ton c.i.f. Amsterdam for the material. The price we will say is $105 per ton at the American mine. Let us call rail freight $5 per ton and ocean freight $30 per ton. That gives a total cost to "A" of $140. Pre-war, when the average rate of exchange with the United States was $4-86 to the pound, $140 would represent to "A" in sterling £(140 ÷ 4·86) = £28 16s., i.e. that is the sum which "A" would have had to expend in order to buy $140 to remit to the exporter. Assuming "A's" gross profit to be 10 per cent., he would require to sell at the price of £31 13s. 7d. In pre-war days Dutch florins could usually be bought at the rate of 12·1 florins to the pound sterling, so that the price of £31 13s. 7d., or, bringing the shillings and pence to decimals of a pound, £31·6794, would represent to prospective Dutch buyers 31·6794 × 12·1 = 383·32 florins. But if the American exchange is what it was frequently during 1919-20—$3·50 to the pound—then the amount in sterling "A" has to expend in order to purchase $140 is £(140 ÷3·50) = £40, Assuming the same gross profit as before (10 per cent.), "A" will now require to sell at the price of £44. Had the florin been at its usual pre-war rate of 12·1 florins to the pound sterling, this price would have represented to prospective Dutch buyers (44 × 12·1), or 532-4 florins. But at its 1920 figure of, say, 11·4 florins to the pound, £44 represents only (44 × 11·4), or 501·4 florins. Even supposing, therefore, that the mineral has remained at exactly the same price as in 1914, the price which "A" can quote to Dutch buyers has been raised from 383·32 to 501·4 florins, solely by the operation of exchange rates. Whether this increase will preclude "A" from continuing to do the business depends, inter alia, on whether the florin has become less valuable in terms of the dollar than it was in 1914 to the extent represented by the ratio 501·4: 383·32. If the florin compared with the dollar has not lost in value to that extent, it will now be more advantageous to the Dutch purchaser to buy direct from New York. It is evident that fluctuations in exchange rates may, quite apart from factors of price, transport, etc., divert the currents of trade or dam them up altogether.

In the example given it will have been noticed that, at different stages of the transaction, "A" had to remit dollars to New York and the Dutch buyer had to remit sterling to London. How can remittances in foreign currency be made? In pre-war days there would have been five ways:

(1) By sending gold.

(2) By paying out of a foreign currency account.

(3) By sending interest coupons, payable in the foreign currency in question.

(4) By buying from a British bank and sending to the foreign creditor a draft in foreign currency. This draft is drawn by the British bank on a foreign bank situated in the centre in which the creditor resides—Paris, New York, Frankfort, as the case may be—and is for so many francs, dollars, or marks. A variation of this method occurs where the British bank, in return for the payment by the British debtor to it of a sum in sterling or for the authority to debit his account, instructs a bank abroad to pay to the foreign creditor a quantity of foreign currency; such instruction may be by letter (mail transfer), by telegram (telegraphic transfer), or by cable (cable transfer).

(5) By sending the foreign creditor a sterling draft, i.e. a draft entitling him to so many pounds, which he can exchange with his bank for an amount of his own currency.

No. 1 is now often impracticable, because prohibited by law; and pre-war, when it was generally permitted, it was not for obvious reasons resorted to in the ordinary way between merchants. Such sending of gold abroad as occurred was a specialized business in the hands of bullion...

Table des matières

• Cover
• Half Title
• Title
• Copyright
• Original Title
• Original Copyright
• Contents
• PART I—OUTLINES
• PART II—TECHNIQUE
• PART III—EXCHANGE, TRADE, PRICES
• PART IV—THE NEW EQUILIBRIUM
• BIBLIOGRAPHY
• INDEX