New-York tribune., 1918-06-09
colossal difference be-
tween past and present in

AAA NOAOCo&A MIA u SAASS w
tween past and present in
foreign exchange is merely
in method. Measures are taken to-
day which the financiers of four
years ago-who are no other than
those of to-day-would hardly have
thought Of. We see agreements be-
tween governments on the most intri-
cate questions of finance, which
prior to the war were regarded as
being in the domain solely Of few
international exchange specialists.
We see regulations made which as
by magic change the entire relation
ship between currencies. We see the
settlement Of international balances
by gold suspended. And yet, the
basic principles of finance remain
unchanged.
Foreign exchange, in it's funda-
mentals, is the expression of a pro-
portion between two currencies, i. e.,
such proportion as reflects the ratio
between those currencies compared
with the values they represent. By
"currencies" all moneys is under
stood-credit balances, instruments
of credit. BY Values" all prop
erty, movable or immovable, mer-
chandise and plant, is covered. 1t is
frequently assumed that the rate Of
exchange expresses merely the state
of the balances of payment as be-
tween two nations. This is only
partially true. The state of the bal
ances of payment is reflected in the
exchange quotations, but these are
not the exclusive expression of the
condition of the balances of pay
ment. The data used in this discus
sion were compiled by Sigmund Metz,
Of the Foreign Department of the
Guaranty Trust Company.
The two following examples will
demonstrate the relation between
exchange and the state of the cur
rency.
The Relation Of
Money to Values
Let us consider the Hypothetical
case of a country without foreign
trade, but with an exclusively gold
currency. The unit Of such gold
currency, although it will not con-
stitute a subject for actual trans
actions abroad, will have nominal
quotation as expressed in another
currency, in proportion to its weight
and fineness. Suddenly, the same
unit is decreed by the government to
represent two units of the same
name. The new unit evidently will
not be quoted at the same nominal
value. Obviously the nominal quo
tation will be halved. Yet no BAL
ance of payment between the two
countries enters into the calculation.
What has happened is that, by de-
cree, the number of units has been
doubled. Therefore, the proportion
between values in that country to
the number of units has also been
increased. Twice the number Of new
units will be required to purchase
the same value. Therefore, the
values represented by one unit are
half what they were before, and half
the former number Of units Of the
other country will be required to
equal them. Thus the nominal rate
of exchange on the country where
this has been practised will fall.
Now let us consider another hypo-
thetical case. Take two countries
both having identical currencies. The
first is peopled with a laborious race
tilling the soil and living on it's
produce. The other has an indolent
population who prefer, when the re-
suit of their labor is inadequate for
their needs, to mortgage their land
and live on capital. Let US investi-
gate the state Of the currency Of
each of those countries. The first
will have a very moderate circula-
ton, for each one will produce in the
main what he needs and only for a
small portion of his requirements
will currency be necessary. In the
other circulation has to perform a
far wider service and it must supply
the requirements for loans to the
owners Of the land, who, in their
turn, pay lavishly for their personal
living expenditure. In the first
country small circulation will re-
cover much less valuable assets and
the result is to render the value Of
units Of the latter country low as ex-