New-York tribune., 1918-06-09

pOItlOIl WHICH Lne SXcnange repre-
sents.
In the past this was done only on
a small scale, and usually action was
Of temporary nature. At present
such measures are farreaching and
of much wider import. Under normal
conditions the relations between the
currencies of two countries are af-
fected by their balance Of trade, their
mutual financial relations. the posi-
ton of their shipping, their insurance
activities, their banking services; in
short, all items that go to make up
the balance of payment, by internal
causes affecting the state Of the cur
rency. Before the war such pay
ment was as rule adjusted by gold
shipments or loans.
How the Balance of
Trade Affects Exchange
The main factors at present domi-
mating foreign exchange are whole
sale destruction and the use of credit
in international interchange Of mer-
chandise. 1t is clear that, properly
speaking, credit should merely be of
a passing nature. In normal times
commercial transactions, ultimately,
are liquidated either by gold or by
merchandise, and only exceptionally
and chiefly, as regards new coun-
tries, by means of more or less long
period loans. But at present credit
is availed of on a scale altogether
unprecedented.
Wholesale destruction is equiva-
lent to reduction of values as COM
pared with currency; or, in other
words, prices rise or the currency
depreciates. On the use of credit,
however, few more words may not
be amiss. Huge exports are at pres
ent being made from the United
States to satisfy the requirements of
materials destined to destruction in
other countries. The latter coun-
tries, not being in a condition to
supply an equivalent quantity Of
merchandise in exchange, nor to al
low the export of gold-the basis of
their currency system-will not sue
ceed in finding sufficient owners Of
credit balances in the exporting
country, or in other countries, which
could be easily transferred to the
United States.
There are, therefore, but two al
ternatives: To allow the price of
United States currency, as expressed
in units Of the other currency, to
rise to such level lin other words,
to allow the value of its own cur
rency to fall in the United States to
such level) that capitalists in the
United States would find it profita-
bic to acquire credit balances in the
other country-would be prepared to
give dollars, credit balances in their
own country, in exchange for credit
balances in the other country. But
the importing country, jealous of its
exchange position, does not wish to
see it's own units thus discredited by
exchange quotations. 1t will, there
fore, endeavor to acquire credit in
the United States. In other words,
it will seek to defer the fulfilment of
it's obligations. The immediate re-
suit is that the necessity for acquir-
ing remittances on the United States
has ceased for the moment, or,
rather, that the demand for such
credit balances can now be supplied.
This is the case between Great Brit
ain and the United States.
Credit Hurts
Exchange Rates
Exchange ostensibly, therefore,
should remain unaltered. But we
must also consider the position in the
exporting country, in this case the
United States. Here a credit bal
ance has been created and applied to
the payment of goods that have left
the country. Therefore, values have
diminished as compared with cur
rency. An element has, therefore,
been introduced tending to turn the
exchange against the United States,
the proportion between currency and
values having been distributed so as
to render less values equal to the
same amount Of currency. This is
tantamount to a decline in the value
OF money or rise in prices. Higher
prices stimulate imports and dis
courage exports. Hence they tend
to turn the commercial balance
against the country, which in its
turn would react unfavorably on ex-
change, inasmuch as more imports
require greater remittances to for
eign countries. The country which
gives credit is thus introducing an