The Project Gutenberg eBook ofForeign ExchangeThis ebook is for the use of anyone anywhere in the United States and most other parts of the world at no cost and with almost no restrictions whatsoever. You may copy it, give it away or re-use it under the terms of the Project Gutenberg License included with this ebook or online atwww.gutenberg.org. If you are not located in the United States, you will have to check the laws of the country where you are located before using this eBook.Title: Foreign ExchangeAuthor: Robert L. OwenRelease date: May 7, 2020 [eBook #62050]Most recently updated: October 18, 2024Language: EnglishCredits: Produced by Paul Marshall and the Online DistributedProofreading Team at https://www.pgdp.net (This file wasproduced from images generously made available by TheInternet Archive)*** START OF THE PROJECT GUTENBERG EBOOK FOREIGN EXCHANGE ***
This ebook is for the use of anyone anywhere in the United States and most other parts of the world at no cost and with almost no restrictions whatsoever. You may copy it, give it away or re-use it under the terms of the Project Gutenberg License included with this ebook or online atwww.gutenberg.org. If you are not located in the United States, you will have to check the laws of the country where you are located before using this eBook.
Title: Foreign ExchangeAuthor: Robert L. OwenRelease date: May 7, 2020 [eBook #62050]Most recently updated: October 18, 2024Language: EnglishCredits: Produced by Paul Marshall and the Online DistributedProofreading Team at https://www.pgdp.net (This file wasproduced from images generously made available by TheInternet Archive)
Title: Foreign Exchange
Author: Robert L. Owen
Author: Robert L. Owen
Release date: May 7, 2020 [eBook #62050]Most recently updated: October 18, 2024
Language: English
Credits: Produced by Paul Marshall and the Online DistributedProofreading Team at https://www.pgdp.net (This file wasproduced from images generously made available by TheInternet Archive)
*** START OF THE PROJECT GUTENBERG EBOOK FOREIGN EXCHANGE ***
Foreign Exchange
BYHon.ROBERT L. OWEN
UNITED STATES SENATOR OF OKLAHOMACHAIRMAN OF THE UNITED STATES SENATE COMMITTEEON BANKING AND CURRENCY
NEW YORKTHE CENTURY CO.1919
Copyright, 1919, by Robert L. Owen
THE FEDERAL RESERVEFOREIGN BANK
Because of war conditions the American dollar is at a serious discount in all of the neutral countries of Europe and throughout the world, notwithstanding the fact that the United States had a favorable balance of trade of over three thousand millions last year, and ten thousand millions since the war began.
It is important that American business men, American bankers, American importers and exporters should understand this problem and the remedy for it.
The problem is not really a difficult one. It is the purpose of this little book to explain the problem; to show the factors entering into it; to show the remedy and point the path and mechanism by which to maintain the American dollar at par, and make it the medium of international exchange and of international contracts.
The American dollar should buy 5.18 pesetas, lire or francs on a gold par basis, but at present (August, 1918) will buy 8.90 Italian lire andabout 3.5 Spanish pesetas, although the gold value of the Italian lira and the Spanish peseta is identical. The reason for this is that Italy has an urgent demand for dollars in America to pay for the purchases of the Italian Government and of the Italian people, and the credits being extended to Italy for this purpose are being furnished at enormously high rates by private banks and capitalists, while Spain is selling more commodities than she is buying, is an international creditor, has no need for dollars, and pesetas in Spain are being sold at an artificial high price by private banks and capitalists. The Allies requiring Spanish pesetas are being charged enormously high rates for the pesetas required in Spain, which means that the pesetas are sellingfor 28 cents apiece instead of 19 cents and that the gold dollar measured in pesetas is at a heavy discount and only worth 67 cents.
The gold dollar in New York instead of buying 67 cents’ worth of Spanish gold currency should buy 50 per cent. more than it does, and American and Allied purchasers of Spanish goods suffer this 50 per cent. loss with the added penalty of war prices which makes the 50 per cent. loss probably 100 per cent., to which must be added the merchants’ profit.
It is obvious, therefore, that the loss to the United States and to the Allies from a condition of this character ought to be promptly met. It can be done. It is necessary to understand foreign exchange, the factors entering into it, the means by which to economically settleinternational commodity trade balances and to provide the mechanism under Government control through which the steps can be taken to obtain the desired results.
I desire, therefore, to explain the factors entering into foreign exchange, the steps required to bring the dollar to par, the steps required to keep the dollar at par, and the mechanism necessary to make effective the proposed policy.
Foreign exchange is a broad term referring to the business of international bills of exchange. These bills of exchange take the form of drafts representing an evidence of debt in the form of a negotiable instrument, the drawer or maker constituting the creditor, the draweethe debtor, and the title to such bill being vested in the payee. These drafts take the form of acceptances, often endorsed by acceptance banking companies. When drawn against merchandise exported they are often accompanied by documents—such as the receipt of the transportation company, or bills of lading, certificates of insurance, certificates of inspection, weight, etc. These foreign bills of exchange may be drawn against securities which are sold as merchandise. They may appear as authorized commercial or banking credits or as finance bills.
They may be drawn against actual cash funds or credits in banks, but, whatever they are, they comprise at last merely the order of the drawer or maker upon the drawee or debtor to pay to a payee a certain amount ofmoney in the currency of the country upon which they are drawn, in pounds sterling in London, in pesetas in Spain, in francs in France, in lire in Italy, in dollars in New York. The forms of these bills are well established and can be found in any of the many comprehensive works on international exchange.
These bills may be at sight, payable on presentation, or thirty, sixty, or ninety days; they may be with documents attached or without documents attached; they may be acceptance bills or payment bills. The scope of this book does not permit of an elaborate discussion of the mere forms of such bills or the mechanism employed by the banks in handling such bills or the mathematics of converting one currency into another.
When a country is shipping more goods in the form of commodities than she is receiving, it is said that thebalance of trade is favorable. The term “balance of trade” is apt to be misleading. It is a convenient phrase relating to commodity shipments alone as they appear on the record of outgoing and incoming ships, which are always subject to Government inspection and from which a definite and accurate compilation can be made and is made. If such “balance of trade” runs against a country the actual balance of commodityindebtednessmust be made up by shipments of gold, securities or transfer of credits.Outside of commodities which appear in making up the balance of trade there are a number of invisible factors, not of statistical public record, which go to determine the extent to which the citizens of one country may be indebted to those of another, and by which the international debts are actually settled. These elements are not absolutely available in the form of statistics and can be only roughly estimated. Taking the United States as an example, there are certain factors not tabulated by the Bureau of Statistics at Washington because their proportions are unknown to the officials. These are the elements which comprise the invisible factors in determining the settlement of international debts. The transfer of money or credit from the UnitedStates to other countries (outside of commodities) is accomplished in the following ways:
1st. The purchase by citizens or corporations in the United States of securities or properties of any kind (outside of commodities actually shipped, otherwise accounted for) in other countries;2nd. The payment of interest or dividends on American securities and properties owned by foreigners;3rd. The payment of loans due foreigners;4th. The payment of passenger and freight rates to foreigners owning foreign vessels;5th. Money expended by Americans touring abroad;6th. Remittances by foreigners in the United States to their friends or dependants abroad;7th. Loans by the United States to foreign countries, which during this war are reaching gigantic proportions, or loans by U. S. banks or citizens to foreigners;8th. Remittances from the United States to pay for foreign securities marketed in the United States, which have reached very large proportions during this war.
1st. The purchase by citizens or corporations in the United States of securities or properties of any kind (outside of commodities actually shipped, otherwise accounted for) in other countries;
2nd. The payment of interest or dividends on American securities and properties owned by foreigners;
3rd. The payment of loans due foreigners;
4th. The payment of passenger and freight rates to foreigners owning foreign vessels;
5th. Money expended by Americans touring abroad;
6th. Remittances by foreigners in the United States to their friends or dependants abroad;
7th. Loans by the United States to foreign countries, which during this war are reaching gigantic proportions, or loans by U. S. banks or citizens to foreigners;
8th. Remittances from the United States to pay for foreign securities marketed in the United States, which have reached very large proportions during this war.
In like manner all of these unrecorded factors or any of them may apply to any of the foreign countries and transfer money or credits to the United States. For instance:
1st. The purchase by foreign banking corporations or individuals of American securities or properties;2nd. The payment of interest or dividends on foreign securities or properties held by American capitalists;3rd. The liquidation of loans negotiated by Europe or foreign bankers in America;4th. The payment to Americans of passenger and freight service on American ships by foreigners;5th. The money expended in America by foreign persons traveling in America;6th. Remittances to persons within the United States from foreign friends or relatives;7th. The lending of money to the United States, or to citizens, bankers, or corporations of the United States by foreign Governments, bankers, or citizens who might make loans on American bonds or American evidences of debt;8th. The payment for insurance due to American Insurance companies.
1st. The purchase by foreign banking corporations or individuals of American securities or properties;
2nd. The payment of interest or dividends on foreign securities or properties held by American capitalists;
3rd. The liquidation of loans negotiated by Europe or foreign bankers in America;
4th. The payment to Americans of passenger and freight service on American ships by foreigners;
5th. The money expended in America by foreign persons traveling in America;
6th. Remittances to persons within the United States from foreign friends or relatives;
7th. The lending of money to the United States, or to citizens, bankers, or corporations of the United States by foreign Governments, bankers, or citizens who might make loans on American bonds or American evidences of debt;
8th. The payment for insurance due to American Insurance companies.
The “balance of trade” relates only to commodity shipments. When a country ships less commodities than it receives it must make up the difference by shipping gold, shipping securities, transferring bank credits, or rendering service, such as insurances, passenger and freight, wharfage and dockage, or entertaining travelers.
If the term “commodities” were broad enough to cover all of these factors, then it might be properly said that the debts of the citizens of one nation to the citizens of another nation were all covered by exchange of commodities.
This is so far recognized that it is a common expression to say thatall imports are paid for by exports, because no nation can except for a limited time pay its commodity trade balance in gold without exhausting the gold upon which the credit of its currency is based.
The reason of the gold embargo in Great Britain and in France, in the United States and in Germany at this time is that it is of recognized importance that there should be available a sufficient supply of gold to safeguard the paper money issued by these nations. For unless the paper currency is always freely exchangeable for gold the people would be unwilling to receive the paper money on a par with gold. When the paper money is not on a par with gold the people immediately would paytheir debts in terms of the cheaper currency, and every contract in the country would be disturbed by the standard measure of value of contracts being thus suddenly impaired. People in the United States, for example, enter into millions of contracts measured in terms of dollars and they do not say a gold dollar, unless it be in some formal important contract, so that if the dollar in paper money should not be equal in value to a dollar in gold, all those owing dollars in such current business would meet their debts in the paper dollar. All business people recognize the importance of maintaining the American dollar at par in domestic transactions. It was a day of triumph after the Civil War when the United States reached a point at which“resumption of specie payment” occurred; a never-to-be-forgotten day in America’s financial history. The American people would not submit for a moment to have their paper money worth ninety-nine cents on the dollar; they demand it shall be worth a hundred cents on the dollar, yet we are faced with the astonishing condition that an American gold dollar in New York, under embargo, is worth only 67 cents in Spain at 28.50 cents per peseta normally 19.30 cents.
In other words, a gold dollar in New York worth sixty-seven cents in Spain must have fifty per cent. added to it to buy one hundred cents’ worth of Spanish oil in Barcelona. It takes three such gold dollars in New York to be worth two gold dollars by weight in Spain.
The effect is that we pay three dollars in gold in New York and get two dollars of gold credit in Spain. Our money buys fifty per cent. less than it ought to. The same thing is true, of course, of a British pound sterling and of the French franc. It is perfectly obvious that this rate of exchange is imposing a ruinous cost upon the United States and the Allies—just to the extent that they are compelled to buy pesetas at this rate for the purpose of making purchases in Spain. It must be remembered also that the prices in Spain are on a war basis—in otherwords, that commodities have nearly doubled in price, even in terms of Spanish money so that the fifty per cent. extra which we pay in gold for Spanish currency is in reality doubled, and this exchange is thus actually costing us nearly one hundred per cent. In the meantime to correct this our country has adopted the questionable policy of imposing an embargo on the shipment of Spanish goods to the United States, or the buying of Spanish goods by American merchants. The effect of this is that olive oil has gone from two and a fraction dollars a gallon to eight and ten dollars a gallon, as every American business man should know. The commodity embargo policy is undesirable, for there is a much better policy available which I wish to point out.
The imports and exports from the United States in 1917 amounted to over nine billion dollars. The exports amounted to six billion, two hundred and thirty-one million; the imports to two billion, nine hundred and fifty-two million, with a favorable balance of trade to the United States of approximately three billion, one hundred and eighty million. I submit on the following pages a table of these imports and exports: