AN EXPLANATION OF EXCHANGE POSITION

Rotorua Morning Post, Volume 1, Issue 63, 5 November 1931, Page 4

AN EXPLANATION OF EXCHANGE POSITION

FINANCIAL WRITER EXPOUNDS SOME PROBLEMS QF INTEREST. FOR THE MAN IN THE STREET. I The Alpha and Omega of foreign exchange is'the settlement of debts of one country due to another without the necessity of sending gold, and. that is the problem With which Britain is faced to-day if it is to maip.tain the gold standafd. It is, of course, convenient to say that exports are paid for by imports, but the point for consideration is hoW each of the parties gets his money, writes W. F. Spalding in "The Tinies." It is simple to remark that Brazil ships coffee to France, and that France pays by shippiug wine to Brazil, or that Bradford sends woollen goods to China for which China pays by sending silk to London, but the uninformed wonders how the respeetive traders ge t payment. The French vintner requires francs and centimes for his wines, and the Bradford manuf acturer will want pounds, shillings, and pence, and neither will wish to barter his wares for tea or coffee, as the- case" may be. The explanation is this: on the one hand, there is a British merchant who has sold merehandise to "France; thus there is one British seller and one French buyer. On the other hand, a French dealer has sold merehandise to Great Britain. There are in Great Britain, then, a British buyer and a British seller; in France, a French buyer and a French seller. Avoiding Money Transfers. When each has received the goods the position is: the French buyer must remit sterling to the British seller and the British buyer will have to remit French francs to the French seller. How is the transference of metallic money across the Channel and back again to cancel this double indebtedness to be avoided? Theoretically, the French buyer is supposed to seek out in France the seller of French goods, and is supposed to buy from him the debt owing by the British citizen. This debt will be represented by a bill of exchange drawn on the buyer of, say, French wine in London. In other words, the French importer will buy this bill from the French exporter and will send it to the seller of British produce. The latter, in his turn, when he receives the bill, will present it to the buyer of French produce, who will pay it. There has thus Deen a settlement of commercial operations between four people by the simple exchange of a piece of paper without an ounce of gold having been sent from either country. Not Quite so Simple. In practice, the operation will not be quite so simple, sinee neither the buyer in London nor the buyer in Paris will bother about searching for the respective sellers in their own country. The operations will be earried out by a banker, who is the connecting link between the various interests. It is the banker who is the wholesale dealer in international money — he carries the stock. The banker buys foreign debts represented by bills of exchange from those to whom the money is due, and he it is who makes the saies to those who are under the painful necessity to pay debts to foreign creditors. It is clear that the business of foreign exchange is closely connected with that of foreign trade, and in addition to enabling exporters and importers to receiye payment for their wares, the reader will perceive that the bills of exchange of merchants have another function. " They enable funds to be transferred from one country to another without the risk and expense "of sending the precious metals. • How the Bank Operates. A banker in this country, for instance, may be called upon to make funds available on the other side of the world. He buys bills of exchange in connection with the export of produce to that country, sends them to his agent there, and in due course the bills are presented for payment, and with the money so received he has the wherewithal to meet the payment he is called upon to make for his client. Or, again, the reader may have sold shares in New York; he wants his banker to get the money to London for him. "The banker's correspondent in the United States in turn buys bills drawn in connection with shipments to London. When these arrive the bills are presented for acceptance to the person upon whom they are drawn, and when completed by acceptance the banker sells them under discount on the London money market, and so has the funds to pay his clients for the shares previously sold in New York. "With the trade of the world in a state of suspended animation, it would seem that a further problem has emerged, illustrating the old axiom, £The nation that does not buy, neither shall it' sell.' With fewer bills of exchange being drawn in connection with imports and exports, the means of transferring funds in settlement of foreign indebtedness for interest payments, services rendered, war debts, reparations, and the like have diminished alarmingly. Why the Exchanges Move. "It is the balanee of indebtedness, the excess of what a nation owes one country over that which it is owed, that causes exchanges to move against the debtor country, and resort then has to be made to gold shipments to cancel that excess. But the movement of gold cannot go on indefinitely if the monetary standard of the country, based on gold, is to be preserved intact, and other means of payment have to be found. "It is when that point has been reaqhed that credits, like the great Franco-American credit, about which so much is heard to-day, have to be arranged. The effect of such a credit may be better understood if again reference is made to the exchange banker's business. "Great Britain's power to draw on funds abroad has suffered a severe diminution, and she has to find a way to replenish them. Hence the arrangement of credits. The position. then, with this Franco-American credit is that it gives Great Britain power to sell the right td dollars»or francs as the case "may be, and sc save the shipment of gold."