W.E.A.

Hawera Star, Volume XLVIII, 21 August 1924, Page 8

W.E.A.

“THE FOREIGN EXCHANGES AND THE WAR.''

At the last meeting of the Hawera W.E.A. class held in the old technical •school on Thursday evening last, the tutor, Mr. W. A. Sheat, continued the discussion of the foreign exchange question, lecturing upon “The Foreign Exchanges during»and after the "War." Up till the year 1914. said the lecturer, the rate? of exchange between most of the leading industrial and commercial countries were kept near to a fixed rate by reason of the fact that gold formed a- common element in most currency systems, even though their system of coinage might be quite distinct. A' study of the history of foreign exchange.? from about the beginning of the war, however, would show that the record was with few exceptions one of collapse so far as the leading countries of Europe were concerned. The almost gfeneral failure of the current rates of exchange to remain at or near the theoretical par of exchange had been the main problem of the exchanges in this period—a problem that was rendered more interesting on account of the fact that for the greater part of the period up till 192(1 the European Governments resorted to expedients designed to prevent these enormous falls in the international value of their currencies. For the most part those measures were unsuccessful or availed only temporarily, the most- successful being the artificial “pegging” of the London-New York rate, but even in this case the removal of artificial devices for keeping up the rate had been quickly followed by wide fluctuations. The main facts to be borne in mind with regard to the war effects on exchanges were: Firstly, that there had been on all hands a very great rise in prices, accompanied by an equally great increase in the circulation medium of exchange, mainly of inconvertible paper money, and not confined to the belligerent countries. This increase in the means ol payment had been the main cause ol the general rise in prices. Secondly, there had been a considerable. fall in the productive capacity of the belligerent countries, though this was of secondary importance compared with the increase in the volume of moneys so . far as contributing to the rise in prices. Tt was this' increase in the quantity of money and the price revoliition this . increase had brought with it, that had been the main cause of the dislocation of the exchanges. The lecturer then detailed various measures resorted to during the war to prevent exchange rates falling as they would otherwise have done. These devices aimed at regulation through : (1) Increasing the means of payment a\ ailable abroad; or (2) decreasing the necessity for payments abroad; and (3) regulating the fluctuations in value of local currency. Under this latter head fell the policy of “pegging.” The London-New York rate fvas by this means kept at 4.76 dqllars to £1 (about 2 per cent, below par) for the greater part of the war. By borrowing heavily in America and by the sale in New York of British-held American securities (which were compulsorily obtained from the British investors for this purpose) the British Government obtained control of sufficient funds in America to enable it, through its New lork agents. Messrs. J. P. Moroau and Co., to buy all bills on London offering'm New York at a fixed rate ol about 1,76 dollars to £l. This meant that the rate would not fall below this figure, as no one would sell a bill on London for less than this price when this price could always be obtained from the agents'of the British Gm eminent. By this means the London-New York rate was kept artificially higher than it would have been had free play been given to the changed currency and trade conditions between the two countries. The maintaining of the pound at an artificially high rate in terms of dollars was aii inducement to British importers to increase their imports of American goods, which meant a greater volume of payments to bo made, and so an uici eased cost of maintaining the scheme. This led to the policy of restricting imports as a counter measure. Since the removal of artificial devices oven those exchanges which bad been maintained near the pre-war liar bad dropped considerably below it in inost eases, the extent of the drop being roughly determined by the relative depreciation of the two'currencies, lie extent of the tail in the foreign, i° X i l< i riia Value of any currency tended to correspond to the fall in it's internal value, i.e., to its value in the country of issue, allowance beiim of course, made for any similar fall in the internal value of the other ourlency with which the comparison was being made. If, for instance, the depieciation of the French currency was measured by a price level index ‘figure 01 out) (in comparison with TOO before the war) and the English inflation or srnwrfl atlol V’ a ? 3 ?°’ ib was al together «up ei Annas to look for another cause to explain the normal rate of exchange between the two currencies having doubled from 25 francs to £T to 50 francs to £L In the words of Gustav Ca.sse!, the eminent Swedish' financial authority, whose writings oii the subject had attracted world-wide attention. “Our willingness' to pay acertain price for a foreign money must ultimately and essentially depend upon*' the fact that this money has a purchasing power as against commodities and services in the foreign country. On the other hand, when we offer so and so much of our own money we oiler, in fact, a purchasing power against- commodities and .services in our own country. Our valuation of a foreign money will, therefore, essentially depend on the relative purchasing power of the currencies of both countries.” The value of the money ot one country relative to the value of the money of any other oounti v would depend then on their rolati\e purchasing powers, i.e.. the rate of exchange between any two such currencies would he as the ratio of the price levels in the two countries. Before the war this adjustment waS very easy, because not only the goods, but also the money moved quite easily Irom one country to another, and theroloi e both the money and the goods Loaded to have the‘same value m all places. || any considerable dilierence arose between the price e\cls ()| two countries, converted at the inilit rate of exchange, or in other words, if the relative values of money ami goods differed considerably from country to country, goods tended to move l rom the place where their value was low- to the country where their Udue was big i The increase in the •tipple a\ tillable m the high-priced area would then tend to reduce the price level in that area, and the corresponding restriction of supply in the low-priced area would tend io raisprecs there, so that the result of tiir movement of goods from one country -o another this way would be to Hing the price levels in the two eoun-

tries to near equality. This meant that the value of the two currencies would tend to equality, or the exchange between them would be about “par.” This adjustment, 'however, was only possible where both money and goods moved freely from country to' country. Then the exchanges were kept near ‘‘par” by the tendency for the purchasing power of money to ap•proximiaite eqßaility jin all countries. Under a system of free paper currencies, such as now existed for the most part, .the purchasing power of a currency was determined almost wholly by forces working entirely within the issuing country. _ Wide differences might exist from time to time between the purchasing power of money in different countries, and the. rates of exchange tended to adjust themselves to these divergent price levels, instead of as previously the price levels adjusting themselves to the international value of gold. A rate of exchange depreciated below the pre-war par of exchange .should provide no serious obstacle to trade provided the depreciation of the exchange was merely a reflection of the depreciation of the two currencies,. and provided the anticipation of further fluctuations in the value of one or both of the currencies concerned, was not a disturbing element in fixing the current rate at anv tune.