ABC OF EXCHANGE

Otago Daily Times, Issue 18465, 28 January 1922, Page 17

ABC OF EXCHANGE

(By C. Forbes, in the Melbourne Age.) 'So great r is (he importance of foreign exchange that no business man—particularly at the present time—can afford to bo without some knowledge of its principles, nor, indeed, can any person who desires to taker an intelligent interest in the problems ot the day. Most people know that in normal times the pound sterling is worth 25,22 French francs, 4.86 United States dollars, and 20.43 German mark,' while its value to-day is 52.00 francs, 4.22 dollars, or 7iO mark, but they have littlo idea why it has that normal value, or i why . its present-day vqlue is so different. The explanation, however, 'is simple. American' gold dollar contains 1.5045 grams of fine‘gold, .and a British sovereign 7.3225 grams, or 4.86 as much. : .Similarly, the 1 franc is equivalent to .2903 grams, or one-fifth of the weight of the five-frano piece, the smallest, gold coin minted fin Franco, *>o that the sovereign is of the same value as 25.22 francs. The Geirman 10-mark piece, contains 3.584- grama of fine gold, making the sovereign equivalent to 20.43 mark, troid, however, is used only to-settle international debts in exceptional circumstances, as we shall 'explain later.’oh, the usual medium of payment being bills of exchange. These documents consequently play a -moist important part in trade, particularly in tho‘ trade between different countries, The normal rate of exchange,; called the mint part of exchange, between two .countries is based on the rojative weight of fine gold in their currencies. As, .however, settlements of debts between persons in different countries are normally made by means of bills of exchange/ it often happens'that the supply in, say, Now York, drawn oh London, exceeds thei demand. " The sellers of those bills ar& then forced to accept, ay lower price in dollars and cents than- the" . mint par for every pound sterling. , At other times the demand exceeds the supply,, and then the sellers naturally ask’ and obtain a higher price than par. Tf, however, the exchange value of. the pound sterling .drops 'below 4.83d0i it will theoretically bo cheaper to skip gold to New York, as the sum of 3.66d0l .will be sufficient to pay the freight, packing charges, and insurance on £ioo worth of sovereigns. On the-other hand; .if the exchange values ot £l-rises■ above-4.90d0l it .‘Will pay better to;Bhij> gold_ Item New.York. Tnose two; extreme points in the exchange rates with foreign countries are, known as specie points or .gold points. It'must bo borne in maid, however,. that the statement that gold must, leave one or other of the two countries involved , When tile rate of exchange passes either of those points is only correct in theory. In practice there are many influences which modify the theory. • in Br.ui.in the export Of gold is, often prevented through the Bank of England raising the bank rata When fohpigh' investors, find that tliey can obtain a-higher; rate \ol interest for their capital in Great Britain than in their own countries, they at onco desire to remit mortey to London, and the increased demand for bills on London raises the rate of exchange in the direction of par, and obviates the necessity for shipping gold. Foreign Governments often exert influences in different ways to prevent their subject* froqt exporting gold. Then, again, quite apart from the.: Tates of exchange, the prices of bilk are complicated by the terms for which, they are drawn. For instance, a cable transfer will command a higher price than a sight , draft, because the cable transfer ’ will be paid immediately by the remitting bank’s agent at its destination, while a sight draft' will not be paid until it arrives there ’ through the mail and is presented. Thfe 1 question of. interest enter into tHe transaction, and-'-the buyer -is consequently ' able ■to buy:'those bills -with-a long currency at a lower; price than those with a short,., , A, list of rates of exchange is published in the London papers daily. This list shows the prices paid in the principal foreign commercial centr.es for the -pound Sterling. , Another list., called , the course of exchange, ie publishebd in Loqdon on Wednesdays and Fridays. The course of exchange shows the amount of the currencies of various foreign countries Which the pound sterling would buy in London on' the previous Tuesday. and Thursday. The prices given in the,. list of rates of exchange are in most cases in the currencies of the respective countries named, but the Portuguese, the Oriental and spine South American exchange rales Are given in British . money, The prices in the course of exchange list are also in foreign currency, except those for bills drawn on Lisbon and Eastern’ centres. It must be understood that the terra “favourable exchange” merely- means' that a country can obtain a greater, amount, of another counter’s;,.cujrrenoy than, par , in. ox-: change for its own,shut, as a.matter of. fact. Such a rate is really unfavourable to it. ’Thus at the present time the rate of exchange between Now York and other centres is said to bo favourable to the United Stfcates, because that country now receives a larger sum in pounds, franca, or marks as the equivalent of dollars thin would be paid in normal times. Tho fact, however, that traders in other: countries have to pay a greater number of pounds;, .francs, or marks acts as a, strong deterrent; against buying .goods , 'from-(tqe TJpited Stales if they can be bought elsewhere cs done without for the present. It must not be supposed that tho economic laws governing exchange have boon destroyed bw tho European upheaval. ‘ On the contrary, the present condition of the exchanges presents an object lesson on the correctness of those laws. It is a fact, however, that the various levelling tendencies which exist normally have been temporarily upset. _ In China, where the threeor'- four principal centres have;. distinct; monetary systems, and in several countries of- minor importance, a silver standard prevails. There can, of course,' be no mint par of exchange between gold and silver countries, as ihe value of silvpr has no fixed relation to that of gold. The exchange rate of these countries is consequently dopendgnt upon the market price of silver in London. The supply and demand for bills on silver countries has an influence on the rates of exchange, but the price of silver is the main factor; '■ The Queensland GPvernmerit, in Announcing tlio details of tho loan of 12,000,00-1 dollars raised in Nbw York, emphasised the 1 advantagaous terms which they had obtained. It appears,- . however, that the terms themsdves are far from easy, as the interest and expenses will equal £7 7s 4d per cent. Mr Theodore is relying on tho probable improvement in exchange during he currency of tho loan to reduce this rate to leas than 6 per cent. The loan is rendered attractive by this probability, and it is. likely that other Governments, especially those which have difficulty in Vnaking both ends meet, will follow Queensland’s example. At the same time, it is unlikely that- there will bo any temptation for Governments to borrow in _ New York when exchange rates are again normal, as the terms obtainable in Great Britain are invariably more favourable than can be 1 obtained outside (lie Empire.