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Some Problems of Foreign Exchange*
By H. G. P. DEANS
The subject of foreign exchange has been engrossing the time and attention of bankers, economists and business men throughout the world for the past two years. In fact, since the signing of the armistice in November, 1918, the foreign exchange situation has become one of the most difficult and serious problems that the business men not only of America but of the whole world have had to face. Business men, bankers and economists have been searching for two years for some cure for the disordered condition of the exchanges and they have not been able to find it. There is no cure but time and return to normal conditions.
The foreign exchange banker of today has to be a different man from the foreign exchange banker of ten years ago. Prior to that time the foreign exchange business of the whole country was conducted almost exclusively by and through a round half dozen private banking houses in the city of New York, one or two of them being partly English and the remainder very much German. American banks had never taken seriously the question of the profits to be made in foreign exchange and had been content to transact their business and to see the business of the country transacted through these private banking institutions.
As time passed on the business of the country grew, and word began to get abroad in banking circles that there were large profits to be made in the foreign exchange business-profits which had been overlooked by national and state banks. As a result, it became the custom, or the fashion, if you please, for large banks throughout the country, in the larger cities, at any rate, to organize foreign departments and to open direct accounts with the principal foreign countries of the world. That practice has grown now to such an extent that most of the large banks in New York, Boston, Philadelphia, Cleveland, Chicago, St. Louis and many cities west of us have foreign exchange departments in which you
An address delivered at the regional meeting of the American Institute of Accountants, Chicago, November 19, 1920.
can buy and sell on practically any banking center throughout the world.
I am going to avoid statistics as much as possible. Personally, I have always had suspicion of statistics. Years ago before I came to this country I used to be a very assiduous reader of the Illustrated London News, with which many of you are no doubt familiar. In those days James Payn, the novelist, used to conduct a more or less witty column in that paper, and I remember his writing on one occasion something which sank down into my mind so that I have never forgotten it. He said in answer to a correspondent: "There are three degrees or classes of lies; there are lies, damned lies and statistics."
Therefore, in trying to describe to you some of the problems and difficulties of the foreign exchange business, I am going to keep away as far as I can from statistics, which are sometimes made to mean anything or nothing. I am also going to avoid speaking at too great length.
Let me say to you first of all that in its simplest form the functioning of foreign exchange covers all the operations connected with the buying and selling of foreign debts—in other words, with the buying and selling of substitutes for metallic money.
Foreign exchange is a commodity, just as gold or grain or wool or corn or wheat is, and it is controlled and governed by the same laws which govern any other commodity; that is to say, it is subject to the laws of supply and demand. If there are more sellers of debts than buyers of debts, of course the price of exchange goes down, that is, the price of debts goes down. If, however, there are more buyers of debts than sellers of debts, the price of exchange, other things being equal, goes up.
In his Theory of Banking, McLeod, who is a well known authority on the subject, in comparing the foreign exchange with wheat, says among other things:
“If money is scarce and wheat very abundant, the price of wheat must fall; but if money is very abundant the price of wheat will rise. The price of debts or foreign exchange obeys the same rule. If money becomes very scarce, the price of debts must fall. If specie becomes abundant, then the price of debts
will rise. The price of debts then must follow the same great laws of nature that the price of wheat does.”
At the present time the foreign exchanges are in a deplorable condition. They are depreciated to an extent that none of us ever expected to see. There are of course many reasons why they are depreciated, but chief among these reasons is supply and demand.
As a banker, engaged in the business, I can conservatively say that there are ninety sellers of exchange for every buyer, if I except in that statement the large numbers of people who come into our banks every day to buy small personal remittances as presents to relatives or for the discharge of trifling obligations on the other side. There is today, however, no commercial buying of foreign exchange. Before the war, we owed Europe three or four billion dollars. Since that time we have paid off the three or four billion dollars we owed, and we have lent ten billion dollars in addition. The result is that there is practically no demand for remittances to Europe at the present time. We owe nothing there; we have no interest due, no obligations to pay. It is all the other way. That is one of the chief reasons why exchanges are in their present condition.
Another and almost as important a reason is the fact that the United States today is practically the only country in the world that is still on a gold basis. By that I mean that other countries, while many of them have plenty of gold, are no longer exporting gold, and consequently an American creditor can no longer command gold from his foreign debtor.
Most of the European countries-and many of the others for that matter, although the European countries are the principal offenders—have so increased and distended their paper issues that today they have become unwieldy and no longer bear any relation to the gold reserves of the issuing countries. As a matter of fact, the paper issues of such countries as Germany and Austria bear absolutely no relation to the gold of those countries.
Before the war it was universally accepted that paper currency should have behind it a substantial gold or silver reserve, the purpose of such reserve being to enable each country to redeem its notes promptly on demand. But unfortunately, as the war ran on, many countries and particularly the enemy countries, adopted the plan of financing the war through the issue of paper
money. Germany issued paper money as fast as her printing presses could turn it out, asserting, whether she believed it or not, that the indemnities she would subsequently collect from the allies would redeem that excess paper.
The result has been, however, not only with Germany but with France, Austria and Italy, as well as most of the smaller European countries, that their paper issues today are unredeemable. They have not enough gold to redeem them and are not likely to have for many a long day to come. Consequently in terms of United States currency, this country still being on a gold basis, the paper issues of these various foreign countries are much depreciated because at present unconvertible.
Britain and the United States are on a better basis. The expansion in our country is trifling compared to that which has taken place in other countries; and this, of course, is one of the reasons why today the American dollar is selling at so high a premium over the currencies of other countries.
Another reason why the foreign exchanges have depreciated is that five years of destructive warfare have so depleted all European stocks of raw and manufactured materials that many countries have little they can now export in exchange for those things which, even at the present ruinous rates of exchange, they must have.
During the war and for some time after it our government continued to make loans to Europe out of the ten billion dollars which was voted by congress for that purpose. When that ten billion dollar allocation was exhausted, the loans stopped; and with the stopping of the loans the exchanges began to fall.
These in a general way are the reasons which are at the bottom of the present depreciated state of the exchanges as a whole. I might perhaps add, however, that in one or two instances there are also special reasons why the exchanges are as low as they are today. For example, the French franc is adversely affected by the extent to which Russia is indebted to France. Russia owes France a large sum of money. The prospect of collecting it at the present time is far from good. The French need the money badly, worse than they ever did before, but the likelihood of being able to get it for some time is remote.
That is also true in a lesser degree of Great Britain, because the Russian debt to Great Britain is by no means inconsiderable;
but it has not had as great an influence on British finances, which are more stable and extensive than French finances. In addition, however, to the Russian debt with which England has to contend, she has other troubles. There are the disturbances in Ireland, for example. There are the troubles in India, the unrest in Mesopotamia and in other parts of the empire which may or may not be serious, but nevertheless are expensive for the British taxpayer and are cumulative in their effect in delaying or deferring the return to normal of the British pound sterling.
Another important factor has been the breaking up, as a result of the peace conference, into various units of such countries as Austria and parts of Russia and dividing them into smaller nations. It is a question whether this plan of self-determination for small peoples is altogether a good thing. As a result of it, some countries have become economically crippled. One large industrial country, Austria, for instance, has been split up into three or four small units, all of which are feeling their new nationalism. Their manufactures have become disordered, their finances have been upset; their position is as yet and will be for some time to come by no means clear, particularly in regard to the proportion of the debts of the old countries for which they are to be responsible; and their exchanges have fallen so low that trading is almost impossible.
The Polish mark can be bought now in Chicago for 25 cents a hundred. You can buy the German mark today, which before the war sold for 24 cents, for $1.25 a hundred. You can buy the French franc, which before the war was valued at 20 cents, for 534 cents. The Austrian crown you can buy at 30 cents a hundred; the Italian lira for three cents, and so on down the line. Mind you, we buy the franc from the Italian and the lira from the Frenchman, which shows that the opinion they have of one another's currency is not by any means flattering.
At present we are in the midst of our export season. Under normal conditions exchange falls in the autumn.
This year it fell, but it was so low when it began to fall that the price at which foreign exchanges are selling today on the Chicago market is something of a tragedy.
Imagine, if you can, the state of mind, to say nothing of the state of pocketbook, of a German who has to find seventy-five marks with which to buy one dollar's worth of cotton, when for