Methods

Arbitrage

As the exchanges are above or below these points, they are said to be in our favor or against us, and this is the only real indication of balance of trade conditions, as published statistics are fallacious and more or less misleading. As an instance, let us take the published Treasury statement of the U. S. for December, 1902, which shows an excess of exports over imports for the preceding fiscal year of $670,000,000, leaving the impression that the U. S. was at that time a creditor nation, while as a matter of fact the reverse obtained, as evidenced by the current quotations of foreign exchange which were all far above the respective mint parities. Trade balances are not the only factors determining the rates of exchange. Rates of interest, general economic conditions and local causes have also a great deal to do with fluctuations. When money rules high it attracts a great foreign investment, which is made use of by so-called finance bills, but at times the opposite condition prevails and advantage is taken of higher rates of interest abroad by purchase of time bills in foreign centers for temporary investment purposes.

Where one country cannot liquidate its debt to another by shipping what it produces, or returning securities which were held for investment, or selling its own securities, recourse must be had to gold shipments, which point is reached when exchange rises sufficiently above the mint parity to cover the cost of transportation, insurance and other minor expenses. An additional factor is the market price for gold at point of destination. In view of the fact that the mint price for gold at all important centers is determined by statute, this last statement might seem anomalous, but such is the case nevertheless. The quotations for foreign coins varies from day to day in accordance with the desire of the market to encourage or repel gold shipments. The mintage price for bar gold is always the same, but often a premium is paid if there is a scarcity. This applies to England; in France and Germany other methods are in vogue of a more arbitrary nature, but none the less effectual. England and America are free traders in this respect, and thus it always is, when gold is required anywhere in the world, that either of these countries is called upon to supply the needed metal. As an instance, in the year 1902, gold shipments were made from New York to Argentina, although New York owed Argentina nothing. America, however, was heavily in debt to Great Britain, and the latter country being called on for a remittance, simply turned the requisition over to the United States. The year previous a similar course was pursued when France demanded liquidation of a debt owing by England, and which England was unwilling to pay. The consequence was that the exchange on London fell to such a low point that it became profitable to ship gold from America to France wherewith to purchase English exchange, and thus was the burden of liquidating the French debt thrown upon the New York market, while at the rate of exchange prevailing between New York and London, a direct shipment of gold to the latter point would have been connected with a serious loss.

The parity of exchanges with America as the center, is as follows:

Factors Determining Rates of Exchange

Gold Shipments

It is obvious that in speaking of exchange operations between two countries, the money of one country must be taken as the standard or basis, the money of the other being considered as fluctuating or variable. It is natural and customary to regard the money of one's own nation as the standard, as a rule, with one exception, to which reference will be made later on. Thus when we read in the quotations that exchange on London is unfavorable, or against us, we mean that it is at a premium in New York - i. e., a good bill on London is worth in New York more than $4.8665 per Pound Sterling. A typical quotation list would read as follows:

Basis of Exchange

American exchange is sometimes quoted at so many pence per $. e. g., 49 13-16d. Reverting now to the quotations in New

York, everything being equal, and Sterling exchange quoted at

485}, on the basis of the mint parity exchange on Germany should be about 94 13-16c. + 1-32%, and French exchange about 520-1-16%, and the question naturally arises, why this discrepancy? It is to be found in the different interest rates prevailing in the respective centers, which again finds its expression in the exchange rates for or against. Thus in London the discount rate is 2 7/8%; in

Berlin 3 1/4%; in Paris 2 1/8% - and as expressed in exchange rates,

485 1/4, 2039 and 2515. Thus:

2039 / 48525 = 23798 X 4 = 95 3-16 approximately. 48525 / 2515 = 518 1/8 approximately.

which means that

1 Pound Sterling is worth $4.85 1/4.

4 German Marks are worth 95 3/16 cents, and (this is the exception referred to) $1 is worth 5.18 1/8 Francs.

In Germany the quotations would read:

Exchange Parity as Distinguished from Mint Parity

In France:

In the foregoing countries it will be noted that each country takes its own currency as the standard, with the single exception of the quotation for French exchange in America.

In England, on the contrary, the foreign countries are the variable quantities - e. g.: and in this way we arrive at what is called the parity of exchange as distinguished from the mint parity - i. e., prevailing conditions are taken into consideration and reconciled.