Currency exchange rate

“ The purchasing power of an inconvertible currency in a foreign country, i.e. the currency’s external purchasing power, must be the rate of exchange between the home-currency and the foreign-currency, multiplied by the foreign-currency’s purchasing power in its own country. (3) In conditions of equilibrium the internal and external purchasing powers of a currency must be the same, allowance being made for transport charges and import and export taxes; for otherwise a movement of trade would occur in order to take advantage of the inequality. ”

“ The formula finally selected is dependent on the actual value of the foreign currency in our own money. The rate for the foreign exchange with whioh the imported goods are purchased is recognized as the measure of value of the foreign currency; the use of that rate reflects values in United States currency which are deemed sufficiently accurate to serve as the measure of the valuation of the goods for purposes of the ad valorem tax. ”

“ The rate cannot be fixed at a higher value than that given to such coinage by the average of the official commercial rate of exchange during the previous six months. Each government also reserves to itself the right to alter the rate at any time within the period fixed, and to suspend it when it thinks proper.
"A treasury rate of exchange shall henceforth only be fixed for convention gold coins, and not for other kinds of coined gold. ”

“ The second practical outcome of the revolution was the development of the modern system of control of the flow of gold balances, viz. by means of the bank rate and the arbitrage transactions depending thereon, and on interest and discount rates generally.
The modern theory of international trade does not say that between two particular countries, or at any one particular point of time there is an equivalence of exchange, but that between a circle of commercially interconnected countries, and over a certain cycle of time or operations, there is an equivalence of exchange of goods and services. ”

“ If the market rates of exchange fall further than the country’s existing or impending currency policy justifies by its effect on the internal purchasing power of the country’s money, then sooner or later the exchange value is bound to recover. ”

“ If we consent to give coin in exchange for goods, it must be from choice, not necessity. We should not import more goods than we export, unless we had a redundancy of currency, which it therefore suits us to make a part of our exports. The exportation of the coin is caused by its cheapness, and is not the effect, but the cause of an unfavourable balance: we should not export it, if we did not send it to a better market, or if we had any commodity which we could export more profitably. It is a salutary remedy for a redundant currency ”

“ Approaching the subject as tenderly and in as elementary a manner as possible, I will at once simplify matters by saying that, with a few exceptions (such as regard India, Russia, China, &c.) , the foreign rates of exchange represent the amount of money in its own currency (be it paper or gold) that the specified financial centre of each country is willing to give for a pound sterling on London. ”

“ Under the most favorable state of trade between the east and west an exchange of one per cent. was demanded from drafts and bills of exchange. With a national currency, uniform and equal throughout the country, this cost for exchange would not exist or would be greatly reduced. I called attention to the then increasing volume of local currency in the United States. When the United States had issued $250,000,000 of notes, the banks had largely increased their circulation. ”

“ By enabling people to buy [pg 240] foreign goods with foreign currency obtained at a cheaper price the peg virtually raises foreign prices more to the level of the home prices, so that if the exchange is stable it is not because there is a peg, but because the price-levels in the two countries have reached a new equilibrium. Essentially the exchange is stable because it is an artificial purchasing-power parity. ”

“ It thus appears, that a depreciation of the currency does not affect the foreign trade of the country: this is carried on precisely as if the currency maintained its value. But though the trade is not affected, the exchanges are. When the imports and exports are in equilibrium, the exchange, in a metallic currency, would be at par; a bill on France for the equivalent of five sovereigns, would be worth five sovereigns. But five sovereigns, or the quantity of gold contained in them, having come to be worth in England 6l., it follows that a bill on France for 5l. ”

“ For international payments, so far as specie is concerned, France and the United States depend ultimately on the international medium of exchange, which is gold. In the last resort, it is their gold which, acting through the foreign exchanges, maintains the whole mass of their currency at its nominal value for internal purposes. ”

“ When, therefore, the real exchange is at par, there will be a nominal exchange against the country, of as much per cent as the amount of the depreciation. If the currency is depreciated 10, 15, or 20 per cent, then in whatever way the real exchange, arising from the variations of international debts and credits, may vary, the quoted exchange will always differ 10, 15, or 20 per cent from it. ”

“ They have no bank or post-office where you have a legal right to get a dollar for ten 10-cent pieces, and the result therefore of recklessly coining the base 10-cent pieces has been not only to depreciate it with regard to the dollar, but to make it an uncertain value, so that you must go to the money exchangers almost every morning and ask for the rate of exchange between the dollar and the small silver pieces. ”

“ For it must be remembered that the exported treasure will, in its turn, produce an excess of currency in the countries which receive it; and that that excess will necessarily lead to a rise in prices and a fall in the rate of interest, precisely commensurate with the amount received. It will not be necessary, therefore, that prices should fall much below the average at home, in order to stimulate an increased export of commodities to those countries in which prices have risen ”

“ Such a currency is necessarily confined to the country where it is issued: it cannot, when too abundant, diffuse itself generally amongst other countries. The level of circulation is destroyed, and the exchange will inevitably be unfavourable to the country where it is excessive in quantity: just so would be the effects of a metallic circulation, if by forcible means, by laws which could not be evaded, money should be detained in a country, when the stream of trade gave it an impetus towards other countries. ”

“ On the contrary, it is too commonly a token of want of commercial confidence, and all indisposition to receive that far larger but uncalculated species of currency, by means of which the great transactions of the country are carried on, and to which the whole coinage and bank paper of the realm bears a mere fractional proportion—we mean the commercial bills of exchange. ”

“ So enormous did the evil grow, and so pervasive were its effects, that it absorbed all attention to the exclusion of everything else. What fixity of value between the different units of its currency is to the internal transactions of a country, a par of exchange is to its external transactions. A par of exchange between any two countries expresses the relative exchange values of their respective currencies in terms of each other. ”

“ A great country like the United States will have no trouble in buying the money of any other country at equitable rates—at rates regulated by the purchasing powers of the moneys of the two countries, respectively.
No country in the history of the world, having a money local to itself, has ever found the slightest difficulty in buying, upon ratios determined by the relative purchasing powers of the two kinds of money, a sufficient amount of foreign exchange (which simply means the money of another country) to meet all adverse balances of trade. ”

“ This kind of variation is sure to correct itself, since the country which receives the larger proportion of money will return it for other commodities when it becomes a superfluity; and the country which receives the smaller proportion of money will gladly import more as it becomes deficient.
The real variation from par can never therefore exceed a certain limit.
This limit is determined by the cost of substituting for each other metal money and one of its representatives,--viz., that species of paper currency which is called Bills of Exchange. ”

“ Particular attention will be given later on to the way in which the Bank of England and the other great foreign banks manipulate the money market and so control the course of foreign exchange upon themselves, but in passing it is well to note just why it is that when the interest rate at any given point begins to go up, foreign exchange drawn upon that point begins to go up, too. Remittances to the point where the better bid for money is being made, are the very simple explanation. Bankers want to send money there, and to do it they need bills of exchange. ”

“ It is true that there is no country in which such a condition of things actually exists. But those countries, and there are many of them, in which an inconvertible paper currency exists or has existed, give proof that the far greater anomaly of a currency devoid of any intrinsic value whatever is capable of performing the work of a metallic currency satisfactorily, and of maintaining its local exchange value, so long as an excessive issue is only guarded against. ”

“ Just as unusually large imports of commodities mean a sharp demand for exchange with which to pay for them, unusually large exports mean a big supply of bills. In a previous chapter it has been explained how, when merchandise is shipped out of the country, the shipper draws his draft upon the buyer, in the currency of the country to which the merchandise goes. When exports are heavy, therefore, a great volume of bills of exchange drawn in various kinds of currency comes on the market for sale, naturally depressing rates. ”

“ Checks are orders upon these individual accounts or deposits, and by their means exchanges are made with great ease and little risk between individuals in the same neighborhood or even in distant cities or distant countries. The cost of storing, handling or transferring any form of currency is reduced to a minimum. So far-reaching is this comparatively modern machine of exchange that it is properly assumed to be the means of settling 90 per cent of all exchanges, domestic and foreign, with almost no use of money in any of its numerous forms. ”

“ In speaking of the exchange and the comparative value of money in different countries, we must not in the least refer to the value of money estimated in commodities, in either country. The exchange is never ascertained by estimating the comparative value of money in corn, cloth, or any commodity whatever, but by estimating the value of the currency of one country, in the currency of another. ”

“ Where it is recognized as necessary for maintaining stability in the foreign exchange market and soundness of foreign exchange agencies, the Minister of Strategy and Finance may impose necessary restrictions on the raising and operation of foreign currency, such as determining the asset-liability ratio of foreign currency of foreign exchange agencies. ”

“ Moreover, even if the official exchange rate is market-determined, market exchange rates are frequently established by a relatively small set of goods and services (the ones the country trades) and may not capture the value of the larger set of goods the country produces. ”

“ The international money markets are a most decidedly complex proposition, and there is literally never a time when several influences tending to put exchange rates up are not conflicting with several influences tending to put rates down. The actual movement of the rate represents the relative strength of the two sets of influences. ”

“ To return to the question of limit points: if a universal currency system existed, with the same monetary standard that is used in England, and the coinage kept in a proper condition of weight and fineness, and the coin readily supplied to meet every reasonable claim—if, in fact, the pound sterling were the prevalent coin and the English banking system obtained everywhere, then we should find all exchange quotations as simple as our case of London and Edinburgh, that is to say, all exchanges would be quoted at par or a premium or a discount. ”

“ From these figures it is evident that in Switzerland on that date a dollar would purchase 16.05 crowns, so that the exchange value of the crown may be estimated at 6.22 cents in United States currency.
Depreciating currency ordinarily hampers importation and stimulates exportation, the latter in turn contributing to improve the exchange. It can hardly be expected, however, that the new countries will soon be able to resume exportation on a scale large enough to effect an improvement of exchange. ”

“ The contraction of the currency is secured by selling foreign bills of exchange and locking up the currency received therefor, while the expansion of the currency is secured by releasing this currency to circulation, or, if necessary, by coining more currency. ”