STABILITY AND DISLOCATION.

Ashburton Guardian, Volume XLII, Issue 9473, 4 March 1922, Page 6

STABILITY AND DISLOCATION.

A LUCID EXPLANATION. Some people think they. know all about the exchanges (writes Professor Edwin Canaan in the Weekly Scotsman). This article is not for them, but for those who want to he told without too much detail what “the exchanges” are, and why there is so much worry about them just now. Different countries have different currencies—we have pounds, the French have francs, the Americans dollars, and so on—and the exchanges, or, more fully, “the rates of exchange,” are the rates at which they can he exchanged for each other. When we say that the New York exchange is 3.73 and the Paris exchange 52.35, we mean at the moment £1 is worth 3dol 73c when valued in American currency and 52.35 francs when valued in French currency. When the Bombay exchange is recorded as “Is 4d,” it means that the rupee is worth l-15th of £l, or, in other words, that £1 valued in Indian curency is worth 15 rupees. Why the Exchange? “Why,” someone may ask, “do currencies require to be exchanged at these or any other rates? They are not produced in some countries and exported to others, like coal or coffee. Each of them remains in the country in which it has been produced by the Mint or the printing press. Why should we buy francs or dollars, and why should the American or Frenchman buy' pounds sterling? The people of this country have no use for francs and dollars; what they want is certain goods which Frenchmen and Americans can supply. The hrench and the Americans have no use for pounds; what they want is certain goods which we can supply. We export certain goods and receive other goods l in exchange for them; money is precisely the thing which is not exchanged. This is perfectly true of the eventual result of international trade. Broadly, goods are exchanged loi goods and not for money, and different moneys are not exchanged for each other. ■ But in detail trade between countries is not carried on by the barter of one kind of v goods for another. The persons who conduct it do not exchange cloth for bananas and Billies for typewriters, but -buy goods with money and sell them for money. Even this, it may be said, does not quite necessarily involve an exchange of one currency for another. A Typical Illustration. If a British merchant sends cloth to the Canary Islands, sells it there for the Spanish money which circulates there, and then spends all that money in buying bananas, which he imports into Great Britain and sells for British money, he need never have exchanged Spanish for British currency. But it is usual for the import and export trade to be divided between different persons, so that, for example, Smith confines himself to sending cloth to the Canaries, and Jones confines himself to bringing bananas from there. Smith will then be getting Spanish pesos for bis cloth, although what he eventually wants is British pounds, in order to buy more cloth for export and to pay his own cost of living in Great Britain, and Jones will be getting British pounds, although he eventually wants Spanish pesos in the Canaries in order to buy more bananas for export. The result is that Smith wants to exchange pesos in the Canaries for pounds in Britain, w hile Jones wants to exchange pounds in Britain for pesos in the Canaries. As there are a number of others like these two, there comes to he a market in which pesos in the Canaries and pounds in Great Britain are exchanged for each other. Why Used They to bo Stable? In recent times, before the war, there was little difficulty about the rates of exchange. They wer ® mostly “stable.” All tbe prmejF trading countries, except China, had currencies which were limited m such a way that the unit of each remained always of the same value measured m gold. y Gold coin could not be worth more than the same amount of gold bullion, because the mints were all open, and would give the owner of bullion hack as much gold m the com as he bought m bullion. It cpuld not be worth less, because the coin could always (even where relics of medieval law forbade it) be melted or exported Paper currency was kept at a level with the coin (and therefore with the bullion) it professed to : bie cause its amount was restricted to wha would circulate at that value, the res triction being effected either ky , vertibility into com on demand or by conscious regulation ol the auppiyHence the pound sterling, the Amei ican dollar, the franc, the. German mark, and the other important units of currency, were always equal m value to certain definite weights of gold. I his kept the rates of exchange close to the ratio between the gold contents ot the standard coin. A pound sterling was 113 gr. of fine gold; 113 such grams would make 4.87 American dollars, therefore the rate of exchange kept close to 4.87. The pound m London would not be sold for less than a sovereign could ho sold for m New Yoik, minus the cost of bringing it there. Why Are They Unstable Now? The situation is now uite different. The melting and export of com and even the movement of bullion are all much more interfered with; the convertibility of paper money' and other regulations which limited its amount so as to keep it equal with gold are suspended everywhere except in the United States, Mexico, and Japan. By the stress of war, or by the bad example or of the distressed belligerents, the rest of the countries have been induced to authorise the issue _ of more paper money than can possibly circulate at its original value in gold. Consequently, all the currencies, except the American, the Mexican, and the Japanese, are considerably depreciated against gold, and as they are, of course, not- all depreciated in the same degree., the old stability of the rates at which they exchange has completely disappeared* Nothing much is known about the Russian currency, hut it is said that it Ims been multiplied by about 1.300, and that the gold value of the rouble has fallen to 1-18,000 of wliat it was. German marks have, been multiplied by something like 20, and retain about a fortieth of their original gold value. Our own currency, multiplied by less tlian 2-j, retains over four-fifths of its original gold value On October 25, instead of £1 being equal to 4.87 dollars, 25.22 francs, 20.43 marks, 24.02 Aus-

trian crowns, and 9>6 roubles, as befor the war it was equal to 3.96 dollars, 53.95 francs, 6.42 marks, 7,600 crowns, and, it is* said, at least 133,000 roubles. That is what is called “the dislocation of the exchanges.” The dislocation would not matter much if it had taken place once for all. One ratio is as good as another, and it is not more difficult to convert Austrian crowns into British pounds at 7.600 than at 24.02. The trouble is that no new set of ratios establishes itself. Most of the currencies keep falling in comparison with the gold standard currencies, but you cannot depend even on this, for violent fluctuations are common, and currency which you know to be on the down grade may suddenly rise for a few weeks of months. • Why Does Instability Matter? How the fluctuations affect international trade you can see. if you imagine yourself selling something on October 25 to a German for a million marks, which h© is to pay a month later. If the exchange remains the same you will get £1557; if instead of 642 it is 333, you will get £3000; hut if it is 800 you will only get £1250. As you do not want to gamble in exchange, you will ask the. German v to undertake to pay in pounds, say, £1557. But the German is as reluctant to take the risk of paying in pounds as you are to take the risk of being paid in marks. You two".will do no business till you can find a third party willing to relieve both of you of the risk, either by taking it himself or by eliminating it by taking opposite risk at one and the same time. To* find such a person is not always possible, and when found he is expensive. Even more important are the illusions to which the changes in exchange rates give rise. Numbers of people in each country are persuaded that the change is “advantageous” to the country with which they are trading, and the. absurdest tiling is that this idea prevails on both sides; so that, for example, many Germans are convinced that Germany loses by the depreciation of the mark as compared with the dollar and the pound, and at the same time many in this country are convinced that Britain loses by it. The consequence is that the usual tendency of Governments to obstruct trade by duties and prohibitions is much strengthened. How Shall We Help To End It? The trouble will continue so long as Governments continue to depreciate their currencies. Some of them will ,he stopped by nothing except the end of their power to do so, which will come when they have reduced the value of their paper to nothing at all. 'Others will one by one join the little j h.and of countries which at present 'maintain the gold standard, and between which, therefore, the rates of exchange are stable. As this hand grows the inducement to join it will act more powerfully. The best thing we in the United Kingdom can do is to help by joining it soon.