TO CONTROL THE EXCHANGE RATE

Dominion, Volume 11, Issue 49, 21 November 1917, Page 6

TO CONTROL THE EXCHANGE RATE

INGENIOUS MEANS SUGGESTED. Some ingenious means for establishing governmental crodite in neutral countries for the use of the Allies, and the support of their exchange rates, are being suggested (says the Washington correspondent of the New York "Evening Post"), and these suggestions aro particularly interesting at this time, because they are in the nature of experiments which should determine tho workability of the plan which has been most earnestly advocated by those' ■who are in favour of permanent Government control of tho foreign exchanges. It has been proposed, for instance, that England pay for what she wishes to purchase in Spain out of. her American credits with a. letter of credit issued by a national bank, where part of her credit is on deposit, such letter of credit being guaranteed or endorsed by the Federal Reserve Bank, of whioh that nationnl bank is a member. An acceptance endowed in this manner undoubtedly would be negotiable, pending maturity, in any country on the face of the earth, and at maturity it probably could be paid with a United States Treasury certificate of indebtedness.

The only legal question which would arise in this scheme is the power of the regional Federal Reserve Bank to endorsa or guarantee the acceptance. Tho need for such an endorsement by sonie acknowledged financial heavyweight is quite generally conceded as necessary to establish in a foreign country the credit of any ordinary size national bank. In fact, the absence of any such endorsement or guarantee is believed to be.one of the strongest reasons wliy American notional banks have not gone, more heavily into the foreign business. Tn this proposed experimental use of tlio American acceptance under Government supervision and aid is seen a possible nucleus of the plan proposed by conservative advocates of permanent Government control of tne . exchange! , , through tbe establishment of a foreign department in tho Federal Eescrve system. The idai is to use the Government guarantee of letter,? of credit issued by national banks to for those banks foreign connections whieh they would ordinarily require years of effort and exnense to establish' on their own initiative. At the some time, it is held that the passage of these acceptances through the regional Reserve Banks—even without the rediscount of many of thornwould automatically place the Government in a very strong position in the foreign exchange market.