EXCHANGE RATES

Evening Post, Volume CXIII, Issue 11, 14 January 1932, Page 14

EXCHANGE RATES

PUBLIC'S CONFUSION

A BANKER EXPLAINS

Discussions about exchange rales, while of absorbing interest and importance to farmers and the business community generally, leave the public a little bewildered. This-fact is realised by .Mr. A. C. Davidson; general manager of the Bank of Xew Sates Wales, who is at- present visiting Xcw Zealand, and in air article which he has forwarded to .■'The Post" he throws considerable light on the i>roblem.

Much confusion (he states) still exists in' the minds of v«ople on the subject of tho exchanges. With the Australian exchange rate at £130, the question was often asked: What became of the £30? Or who got the £30? '

■The confusion is due almost entirely to the use of the same word "pound" to designate different units. The AustralianLondon rate \yould be so -much easier to understand if it were quoted in some such way as 130 marks equals 100 francs. No one would dream of deducting 100 iinucs from 130 marks and then inquiring who had taken the SOwarks left over. The francs and marks would .have to be brought to some common basis or 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-j paper pounds. Dropping1 the-'.word poffucl. and giving some of the more-important of/these units' a-..(Jistinctivq. iiame, 'let-us call: The gold pound oif the British Empire, sovereign; ;the- South' African gold pouiid, ostrich; the British paper pound, sterling; the Australian paper pound, kookooburra; the New Zealand, paper pound, kiwi; the Fijian, paper pound, copra; .the Egyptian paper pound, gippie'; the Peruvian paper pound, Peru; the Jamaican paper pound, darkie. : ..-'

For purposes of illustration it is not necessary to use the. exact exchange rates. Arbitrary quotations may oven help to make the .position.clearer, taking our minds out of, the .ordinary groove.

, Suppose some of the exchange fates are: 100 sovereigns equal 123 sterlings: 100 sterlings equal 150 kookooburras; 100 kookooburras eq.ua! 90 kiwis; 100 kiwis equal SO copras. ' .

No one would fall into the error of subtracting 100 sovereigns from '123 sterlings to find where the 23 sterlings had gone. Would: any one try to take 100 kiwis from 80 copras and say that.there were 20 copras short or lost? Again, would anyone substract 100 sterlings from 150 kbokoobiu-fas and state that.-there were 50 kpokooburras loft over (6 be accounted for? Would 'anyone run the risk: of ridicule when; he- charged some exchange operator .with •'having pocketed 50 kookoobunas? Would hot the kookooburras laugh at him and tell him that he was tr'yiiig'an impossible, task-in settiug out to work Bums 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 loft? Nothing, of course. The rates given above show that 100 Sterlings are equal to 159 kookooburras.

Therefore, if we deduct 100 sterlings from 150 kookooburras there is nothing left, certainly-: not 50 kookooburras. Similarly snbtractions on the basis of the other rates give the same results—nothing.

Unfortunately -there lias grown up"1 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 exchange operator will buy,.!a'certain amount of a currency at a certain.figure and try to sell that 'amount at a figure: slightly better, giving him a small margin on the transaction. In Australia oa the rate assumed-above-anyone w.anting. to buy 100 sterlings would -have t<? pay 150% J kookooburras.; The exchange operator ■would have to pay 150 kookooburras for the 100 sterlings from someone who ha&,them/to sell. Haying bought the 100 for 150 kookooburras and sold them/f0r::.150% ■ kookooburras, his .profit<!'on 'the transaction would be the relatively- small or difference of half a kopkooburfa. In a similar deal1 in .the Dominion the .margin of profit would be half a knvi.anrl so oil in the "buying and selling-btaH-tlie other currencies.

The'first step, therefore,- in trying to jniderstandithe exchange problem o£ the present: day-is to bear contfcually in mind that no two pounds are any longer the same; -It- is unfortunate and' misleading that so niany- currency units have the same name.

The second step is to remember always that the exchanges mean dealings in different currencies. When thinking o£ these currencies: one must think of them as though one-wants to make a deal with or between a quantity of tea on the one side apd. a quantity o£ coffee on the other, or bptween wool and wheat. Be alwd'ys'bn, your guard against the confusion involved ift the common use of the word "pound" t<>. mean "entirely different units.