W.E.A.

Hawera Star, Volume XLVIII, 6 August 1924, Page 7

W.E.A.

“THE FOREIGN EXCHANGES.” At the last meeting of the W.E.A. Class, held in the Old Technical School on Thursday evening last, the tutor, Mr W. A. Sheat, 8.A., LL.B., delivered the first of a series of lectures upon ‘‘The Foreign Exchanges,” taking as his subject ‘‘The Foreign Exchanges Before the War.”

Prior to the war, said the lecturer, the currency systems of the main industrial countries, though based on different systems of coinage, were definitely related in that gold formed the basis of each, and therefore a connecting link tending to keei) the rates of exchange from fluctuating widely. Nowj however, the currency systems of the world were free paper currencies for the most part, i.e., currencies unrelated to one another hr a common element such as gold. It was still customary to regard the pre-war basis as “normal,” though, in fact, it was highly questionable whether exchanges wtfuld ever come to be adjusted on the old basis again. It was quite conceivable that the exchanges of the world might reach a basis that could be regarded as “normal,” but' which would not necessarily lie the 1914 basis. In a later lecture he hoped to deal with the new “normal” point of equilibrium in the exchanges. Dealing with the pre-war position, the first point to he noted was that gold had been more of a regulating element than a general medium of exchange in international dealings. In the long run every country exported just as much as was required to pay for its imports, and imported iust as much as it could pay for with its exports. It was obvious that this must be so, for if any country were importing persistently more than it exported it would have to export gold to pay for the excess of imports, and its gold would he speedily and seriously depleted. This would lead to a fall in the general level of prices in the country concerned, as always followed where the quantity of money in circulation was reduced. This would have two effects. It would make the country concerned a bad country to- sell in, so that imports would he checked. The low level of prices would make the country a good one for foreigners to buy in, so that exports would tend to he increased. This "tendency for a reduction of imports and a stimulation of exports would redress the previously “unfavourable” balance of trade, until the excess of imports over exports, which was the beginning of the trouble, was wiped out and equilibrium restored. It was therefore impossible for any country to be always importing more ‘than it exported and paying for the balance in gold (except in the- case of a gold-producing country), and the same process reversed would apply in the case of a persistent excess of exports. There was thus between two countries on a gold standard an automatic check tending to prevent any considerable departure from a true balance between imports and exports. The fact of aii excess either way would tend to check itself and, like ,the swing of a pendulum, every swing to one extreme set in operaiton forces tending to bring the pendulum back to the point of equilibrium again. In practice the balance of trade was not, however, maintained by the operation of this slow and iiiconvenient~process. The same result was attained by a more delicate and rapid process known as the variation of the rate of exchange. Just as in inland trade all merchants settled their accounts through the hank instead of with each other direct, so in foreign trade each merchant, instead of settling with his own creditors in various foreign countries, settled with his creditors’ creditors in his own country, thus saving the passing of coin with all its necessary risk and expense. The lecturer illustrated by blackboard diagrams how in practice payments were thus settled through the medium of bills of exchange without the passing of money. Every shipment of goods from one country to another created in the second country a credit in favour of the first. This credit was bought and sold on the exchange market, the price paid being the rate ’of exchange prevailing for the time being. In the case of two countries on a gold standard the rate of exchange tended to oscillate about a point of equilibrium known as the “mint par of exchange.” The “mint par of exchange” was simply an expression of the relative gold content of the two currencies. For instance, when it was said that the “mint part of exchange” between London and Paris was 25.22 francs to £l, this simply meant that one golden sovereign contained as much gold as 25.22 golden francs (or the twentieth part of a gold Napoleon, the gold franc not being coined). This was a fixed rate between the two currencies, only to be altered by a change in the currency regulations ,of one or other country. In normal pre-war times the current rate of exchange would not vary much above or below this mint par of exchange. It would not exceed or fall short of this rate hv an amount greater than tra cost of exportiiyj or importing gold, as otherwise gold could be used for the payments concerned more cheaply than bills of exchange. For instance, if a person in Paris had to make a payment in London of £IOO, and the cost of sending this amount in‘gold was 10 francs, the Parisian would not pay for a bill on London more than 2532 francs, since for that amount he could buy the, equivalent of j 100 sovereigns in gold in Paris (for 2522 francs), and ship it to London (lor the remaining I<J francs). The limits within which the exchanges could fluctuate about the mint par of exchange were known as the “gold points” or “specie points.” Between two countries, however, either or both oi which were not on a gold’ standard, there was no mint par, and the rate of exchange tended to oscillate round a new parity determined by the relative purchasing power of the two currencies in their own countries. The “gold parity” was replaced by a “purchasing power parity,” but as the purchasing power of the currencies was not stable, but in some countries fluctuated widelv in comparatively short periods, it followed that there was no fixed point round which exchanges tended to fluctuate, but that they fluctuated round a point which was itself liable to be violently disturbed. This matter would be more fully elaborated in future lectures.