FOREIGN EXCHANGE

Taranaki Daily News, 26 February 1920, Page 2

FOREIGN EXCHANGE

'AN AMERICAN EXPLANATION. A COMPLICATED PROBLEM. Foreign exchange is a commodity, and present demoralised depreciation in rates for sterling and other European exchanges is a normal expression of the lnjiv of supply and demand, according to Jiimes S. Alexander, President of the National Bank of Commerce of New York, In a statement on the situation made in response to a request by the Associated Press for an-explanation, in plain terms, of this highly complicated international business problem, he said that restoration of an approximate equilibrium of tho imports and exports between the United States and Europe, and a return of the currencies of Europe to a gold basis, are the fundamental factors which will restore the normal demand for foreign exchange in this country, and bring it back to normal levels. Mr. Alexander has taken a leading part in considering the foreign trade situation, having been chairman of the Committee on Credit and Finance at the Atlantic City International Trade Conference, held with unofficial representatives from Europe, under the auspices of the Chamber of Commerce of the United States, and being now chairman of the Executive Committee of the" National Committee on European Finance. His statement in full is as follows: . .

"Depreciation of the foreign exchanges is primarily only a reflection of deeper problems in the relation of exports and imports between America and Europe. The problem may be simply stated as follows:

"When exporters sell to foreign buyers they draw cheques, drafts, etc., on those foreign consignees or their banks for the amounts due. These bills are drawn in foreign money, chiefly pounds sterling—that is, on houses in London, long the wprld's international clearing house. Americans drawing these bills sv'll them in the foreign exchange marKet for what they will bring, which under normal conditions fluctuates within narrow limits of face value.

"The total volume of such cheques and drafts coming into the foreign exchange market constitutes the supply of foreign exchange in existence at that time. The foreign exchange market consists of foreign exchange houses whoso function is to buy exchange, say in New York, on London, and send it there for collection or the establishment of balances. "Ordinarily, at the same time Americans are selling goods to foreigners, foreigners are selling goods to Americans, who therefore have remittances to make abroad. They therefore buy from the foreign exchange dealers drafts or checks against the balancer, those dealers have established abroad through the purchase of foreign exchange. Thus, while American exporters sell foreign exchange, American importers buy foreign exchange. The one' creates the supply, the other creates the demand.

"Normally, this supply and demand were about equal, because the total volume of goods and services sold to Europe about equalled the total volume of goods and services bought from Europe. In pre-war times the difference in the two volumes fluctuated between narrow limits, and the excess one way or the other was settled by shipments of gold. "The foregoing states in general terms what normally took place in the foreign exchange market, ignoring many technical details, which, however, do not alter the main thought, "The war, however, has materially changed the situation. In the first prace, while there have been huge increases in our exports to Europe, there have been great decreases in our imports from Europe. There has, therefore, come into the foreign exchange market a greater volume of cheques and drafts cr. Europe than European drafts on America, resulting in a far greater supply of foreign exchange in this market than there is a demand for on the part of Americans having remittances to make abroad. "As always happens in the case of any commodity when supply exceeds demand prices of the foreign bxclianges fell. The depreciation of foreign exchange in this market, therefore, is merely a normal expression of the law of supply and demand. "During Europe's war purchases from us before America's entry into the war. foreign exchange on Europe was kept from depreciation to present levels by the great volume of gold she sent us in cash liquidation of her adverse balance, until she sent about all the gold she could spare. At this point America entered the war and Government credits were extended to our Allies, serving to keep a large volume of foreign exchange for Europe's purchases out of the mar-, ket. Drafts and cheques which would have otherwise come into the market during this period were, in effect, funded jn a consolidated long-time credit. This postponed the depreciation. "The extension of Government credit, however, has ceased, and there is nothing now to prevent foreign exchange from coming into the market in greater supply than there is demand for, due

to the continuing excess of Europe's purchases from us over her sales to us. "In addition to this, exchange on Europe is further depreciated by the fact that foreign currencies are depreciated because of the abandonment of gold redemption made necessary by great Issues of paper money, and the reduction of the gold basis through shipments of gold to America. Foreign exchange calls for payment in foreign moneys, and, naturally, since these foreign moneys are below face value, foreign exchange bills themselves will be correspondingly below face value. "The question as to what will corireot the situation can be answered on general principles, without any attqtopt Wfffc phecy- Foreign back to parity'until of of the gold standard in ' jfiteope*. "fiqjrsct the depreciation of Europistn-currencies, and until the restoration of approximate equilibrium between our exports and our imports in regpect. .tQ Europe again makes the demand fof rorefgn exchange aproximate the supply."