FOREIGN EXCHANGES

Dominion, Volume 27, Issue 190, 10 May 1934, Page 6

FOREIGN EXCHANGES

Their Significance Traced by Economist NEED FOR STABILISATION Some aspects of the significance of the foreign exchanges are traced by Dr. J. B. Condliffie, in. the current numl>er of the “New Zealand Traveller.” Dr. Condi iff© said that there was no economic problem more technical in practice and more difficult for the layman to follow than the working of the foreign exchanges, and in none was the gap between the technical practice and ultimate causes wider and more difficult to bridge. The professional operator and the theoretical economist seemed almost to speak two different languages on the (subject, yet each had a vitally important contribution to make to an explanation of the whole problem. Dr. Condliffe said that as long as the principal industrial and financial countries of the world .remained on the international gold standard, the technicalities of the exchange rates could safely Jie left to the professional operators and their theoretical explanation to the economists. The average business man had no need to worry about them. He knew that he could conduct his business with another country and rely upon the exchange remaining reasonably stable within narrow limits. xt could not in any case vary beyond the gold points, or in other words, one country’s currency did not vary in terms of other currencies beyond the cost of shipping gold between the centres concerned —a very small cost In most cases. The actual trader, indeed, could and did protect himself against even the slight variations within the gold points by turning over to a professional operator the risks ot fluctuation. He sold or bought his exchange from this professional for a firm price, the professional taking all the risks of fluctuation before payments fell one. Thus a Lancashire cotton exporter who sold to a French client and thus acquired a right to receive francs in say three months’ time, discounted his bill at the. bank, which in turn sold the forward francs to an exchange dealer, who promptly hedged by buying an equal amount. The whole complicated system worked smoothly and very cheaply in expert hands. The business man got the flrm basis he needed for a contract, fluctuations were smoothed out and rates were relatively stable. Automatic Reactions of Gold. Suppose credit had been granted • rather too liberally In France, so that business was good and prices relatively high, Dr. Condliffe said, France would then have been a good market to sell in but a poor market to buy from. Exports would be weak but imports strong. This means that French merchants would have to get hold of more foreign exchange to pay for their imports and there would be less demand on the part of foreigners for francs with which to pay for French exports. Therefore French merchants would bring bank notes to the banks and exchange them there for sterling and other currencies. In order to get sufficient notes they would probably have to force sales a little by cutting prices, which is obviously corrective of the state of relatively high prices that originally induced the imports. Moreover, the sales of francs and purchases of sterling would put down the price of francs and put up the price of sterling, and this again would discourage imports, and, on the other hand, encourage exports. If the demand continued because the original credit expansion had been a very large one, the exchange rate might pass the export gold point. So many French importers would buy sterling that its price would go beyond the point where it was cheaper to buy and ship gold in payment for tbeir purchases. Before this happened the Central Bank would almost certainly take steps to protect its reserves from too great a drain, by putting up its discount rate and even selling securities on the market so as to make local credit scarcer aiid dearer. It must take these measures and force a local credit contrac- . tioa accompanied by a fall in prices if it is not to be driven off the gold standard. ' “Once the gold standard is abandoned by a country there is no longer a fixed average value of its currency in terms of gold and of other currencies,’’ Dr'. ; Condliffe continued. “No one to-day ! knows what fl is worth outside Great. 1 Britain. And most of the important currencies of the world are in this position. Exchange operations to-day (and therefore much foreign trade) are like nothing so much as the punishment reserved by Gilbert for billiard sharps, who were forced to play their interminable matches ‘on a cloth untrue, with a ' twisted cue, and elliptical billiard balls.’ As a result of these uncertainties exchange dealings are now much more difficult, and dealings are very restricted. Stability Necessary. “Everyone recognises that the restoration of orderly exchange relations is necessary if trade is to be restored. but the task of finding proper ratios between the. currencies is terribly difficult. lii the days of the gold standard the whole price system of a country was .kept in equilibrium with that of every other country. It was as if the various sorts of prices were kept in leash and not allowed to stray too far apart from each other, so that they moved parallel with their op-, posite numbers in other countries. “Now the elements of the price system have flown apart in most countries. Haw materials and finished products, wholesale and retail prices, import and export prices, wages and interest rates have moved at different pace. No level of exchange which can be chosen will be right for all these different, sorts of prices in any country. Even if it were a simple problem of fixing a ratio between two currencies only—as it practically is between New Zealand and London—even then adjustments would be necessary, wages must go down or up, retail prices, wholesale prices, export prices must be adjusted to the new equilibrium. “But it is more difficult than that because hard as it may prove to find a workable ratio between, say, the dollar and sterling, so that the necessary adjustments afterward won’t be intolerable on either, side, it is still harder to find such a ratio which will also be workable with the franc, the mark, and. one must not forget, the yen. It. doesn’t need much reflection to conclude that exchange stabilisation is a conundrum not likely to find an easy solution.”