THE EXCHANGES

Otago Daily Times, Issue 21542, 14 January 1932, Page 12

THE EXCHANGES

HOW TO REGARD THEM By A. C. Davidson, General Manager, Bank of New South Wales. Much confusion still exists in the minds of people on the subject of the exchanges. With the Australian exchange rate at £l3O the question was often asked: What became t-f the £3O? Or. who got the £3O? The confusion is due almost entirely to the use of the same word “ pound ” to designate different units. The AustralianLondon rate would be so much easier to understand if it were quoted in some such way as 130 marks = 100 francs. No one would dream of deducting 100 francs from 130 marks and then inquiring who had taken the 30 marks 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 paper pounds. Dropping the word pound and giving some of the more important of those units. a distinctive name, let us call: The gold pound of the British Empire —Sovereign. The South African gold pound— 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 Jamiacan paper pound—Darkle. For purposes of illustration it is not necessary to use the exact exchange rates. Arbitrary quotations may even help to make the position clearer, taking onr minds out of the ordinary groove. Suppose some of the exchange rates are:

100 Sovereigns = 120 Sterlings. 100 Sterlings = 150 Kookooburras. 100 Kookooburras = 00 Kiwis. 100‘Kiwis = 80 Copras. No one would fall into the error of subtracting 100 sovereigns from 125 sterlings to find where the 25 sterlings had gone. Would anyone try to take 100 kiwis from 80 copras and say that there were 20 copras short or lost? Again, would anyone subtract 100 sterlings from 150 kookooburras and state that there were 500 kookooburras left over to be accounted for? Would anyone run the risk of ridicule when he charged some exchange operator with havimr pocketed the 60 Kookooburras? Would not the Kookooburras laugh at him and tell him that he was trying an impossible task in setting out

to work sums 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 left? Nothing of course. The rates given above show that, 100 sterlings are equal to 150 Kookoohurras. Therefore if we deduct 100 sterlings from 150 Kookooburras there is nothing left, certainly not 50 Kookooburras. Similarly subtractions on the basis of the other rates give the same results—nothing. Unfortunately there has grown up 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 on the rate assumed above anyone wanting to buy 100 sterlings would have to pay 150 J kookooburras. The exchange operator would have to pay 150 kookooburras ■for the 100 sterlings from someone who had them to sell. Having bought the 100 sterlings for 150 kookooburras and sold them for 150 J kookooburras, his profit on the transaction would l 'e the relatively sma M margin or difference of half a kookooburra. In a similar deal in the Dominion the margin of profit would be half a kiwi and so on in the buying and selling of all the other currencies. The first stei) therefore in trying to understand the exchange problem of the present day is to bear continually in mind that no two pounds are any longer the same. It is unfortunate and misleading that so many currency units have the same name. The second step is to remember always that the exchanges mean dealings in different currencies. When thinking of 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 and a quantity of coffee on the other, or between wool and wheat. Be always on your guard against the confusion involved in the common use of the word “ pound ” to meart entirely different units.