Nelson Evening Mail. SATURDAY, FEBRUARY 21, 1920 RATE OF EXCHANGE

Nelson Evening Mail, Volume LIV, Issue LIV, 21 February 1920, Page 4

Nelson Evening Mail. SATURDAY, FEBRUARY 21, 1920 RATE OF EXCHANGE

FREQUENT reference has been made to the rate of exchange, and many people, as things are at present, are feeling the effects of the adverse situation. Text-books resort to an illustration to explain to the uninitiated the principle upon which exchange bills are drawn and handled, and a simple paraphrase of this may be useful. Smith, a merchant in London, has to make a remittance to Brown, a merchant in. New York. Brown, in order to save

{ Smith tin* risk and expon.so o! ! transmitting- gold, draws a dill for the amount due upon him. Brow nr sells this bill to Jones. another New York merchant, who sends it in place of cash to settle an account with Robinson, a merchant in London. Robinson takes the bill to Smith, and receives cash for it; while possession of the hill indicates Smith’s discharge from Brown’s debt. There are sometimes other transactions with a. bill of this kind, but the illustration broadly shows the principle. Foreign exchange is affected by the relative indebtedness of the two countries concerned,; and also by the rate of discount ruling in each country. In accordance with the law that when an article becomes plentiful it becomes cheap, and ‘when it becomes scarce it becomes dear, if there be in the United States a much greater amount of bills against Great Britain than the total of the bills held in Great Britain against the United States, the British bills in the United States fall in value; and the United States bills in Great Britain rise, owing to the eompetition of British merchants in buying hills to remit. The position to-day is that the United States holds a much greater amount in British bills than Great Britain holds in United States hills. This arises from the fact that British production' was greatly reduced during the. war, while United States production was greatly increased. Before President } Wilson decide(| to enter* the war the Imperial Government purchased much war material from the United States; but foreign! exchange on Europe (all the European countries j are suffering as well as Great, Britain) was kept from depreciation by a large quantity of gold sent to New York in liquidation of the adverse cash bal- | a nee. This depleted Great Britain’s stock of gold. When the United States entered the war she extended Government credits to the Allies, and drafts which otherwise would have been put on the market were funded in a consolidated credit of long period. This extension of Government credit has ceased, and the excess of Europe’s purchases from the United States

over the purchases of the United States from Europe continues. In normal times Europe bought from the United States goods nearly equal in value to the goods bought by the United States from Europe; the difference was so small that it was adjusted by shipments of gold. To-day the difference is so great that this is impossible, and in accordance with the law of supply and demand we find that British bills are at a discount in New York—in other words, the exchange value has dropped.