EXCHANGE PROBLEM

Ashburton Guardian, Volume 52, Issue 81, 15 January 1932, Page 7

EXCHANGE PROBLEM

A SIMPLE EXPLANATION. BANKER’S NOVEL ILLUSTRATION A novel means of explaining the exchange situation has been adopted by Mr A. C. Davidson (general manager of the Bank of New South Wales) in an effort to eliminate much of the confusion that exists concerning the subject. By dropping the term “pound,” and. giving it a distinctive name, such as ostrich, kiwi or kookaburra, ho elucidates the currency problem with such simplicity that everyone might understand it. “\Vith the Australian exchange rate at £l3O, the question is often, asked: ‘What becomes of the £3o?’ or, ‘Who gets the £3o?’ ” states Mr Davidson. Reason for confusion. “The confusion is due almost entirely to the use. of the same word ‘pound’ to designate different units. The Australian-London rate would be so much easier to* understand if it were quoted in some such way as 130 marks equal 100 francs. No one would dream of deducting 100 francs from 130 marks and then inquiring who had taken the thirty marks left over. The francs and marks would have to be brought to some common basis of denomination before the one could be subtracted from the other. _ The great difficulty is that there are to-day at. least nine different pounds in existence, most of them being paper pounds. Dropping the word pound, and giving some of the more important of these units a distinctive name, let u's call: The gold pound of the British Empire, sovereign; the South African gold pound, ostrich; the British paper pound, sterling; the Australian paper pound, kookaburra; the New Zealand paper pound, kiwi; the Fijian paper pound, copra; the Egyptian paper pound, gippie; the Peruvian paper pound, Peru; and the Jamaican paper pound, darkie. _ . “For purposes of .illustration it is not necessary to use the exact exchange rates. Arbitrary quotations may even help to make the position clearer, taking our minds out of the ordinary groove. Suppose some of the exchange rates are: 100 soyereigns equal 125 sterlings; 100 sterlings equal 150 kookaburras; 100 kookaburras equal 50 kiwis; 100 kiwis equal 80 copras. “A Laugh for the Kookaburras.” “No one would jfall into the error of subtracting 100 sovereigns from 125 sterlings to find where the 2o sterlings had gone. Would anyone try to take 100 kiwis from 80 copras and say that there were 20 copras short or 1 lost? Again wpuld anyone subtract 100 sterlings from 150 kookaburras and state that there were 50 kookaburras left over to be accounted for? Would anyone run the risk of ridicule when he charged some exchange operator with having pocketed the 50 kookaburras? Would not the kookaburras laugh at him and tell him that he was trying an impossible task in setting out to work sums with units of currency so different? He would be told that he must first find out a means of relating the items to one another before he can bring them together in any calculation. This is just where the exchange rate comes in. It relates the two units, enabling us to convert one money into terms of another. If we take, an equal from an equal, what have we got left; Nothing, of course. The rates given above show that 100 sterlings are equal to 150 kookaburras,” adds Mr Davidson. “Therefore if we deduct 100 sterlings from 150 kookaburras there is nothing left, certainly not 50 kookaburras. Similarly, subtractions on the basis of the other rates, give the same results—nothing. /

Difference Between Pounds. “Unfortunately there lias grown up in the. minds of people in Australia and New Zealand the idea that exchange means a deduction by way of commission or brokerage. Dealing in exchanges is dealing in currencies. Each currency is bought and sold just as though it were wool- or wheat or tin. The average operator will buy a certain amount of a currency at a ceitain figure, and try to sell that amount at a figure slightly better, giving him a small margin on the transaction. In Australia, on the rate assumed above, anyone wanting to buy 100 steilings would have to pay 150} kookaburras. The. exchange operator would have to pay 150 kookaburras for the 100 sterlings from someone who had them to sell. Having bought the 100 sterlings for 150 kookaburras and sold them for 150 J kookaburras his profit on, the transaction would be the relatively small margin or difference of halt a kookaburra. In a similar deal m the Dominion the margin of profit would be half a, kiwi and so on in the buying and selling of all the other cuiiencies. The first step, therefore, in trying to understand the exchange problem of the present day is to bear continually in mind that no two pounds are any longer the same. It is unfortunate and misleading that so many currency units have the same name. • second step is to remember always that the exchanges mean dealings in different currencies. When thinking of. these currencies one must think or them as though one wants to make a deal with or between a quantity of tea on the one side, and a quantity ol coffee on the other, or between wool and wheat. Be always on your guard against the confusion involved in the common use of the world ‘pound to mean entirely different units.