New-York tribune., 1920-02-01
Foreign Erchange-What
1t Is and H0au IT Works
Mechanism by Which International Trade Obi
cations Are Settled Without Shipment of Money
By Henry Hazlitt
(In the NJ. and NJ. JournaD

deal these days about foreign
exchange rates. They are told that
sterling has dropped to s365, that
francs have been 20 11.37. that lire
are down to 1882, and that marks,
normally worth 23.S cents apiece,
could recently be bought below two
cents
Yet what do all these figures mean ?
Why is there such a hubbub about
them? Why are a lot OF people run
ming about and shouting that some
thing just be done about them? Why
90 they say we must grant credits to
Europe? What have credits got to do
with these figures? These are ques-
tons that run through the mind Of
the average man, even the average
Wall Street man or the bank clerk
who does not happen to work in the
foreign exchange department? He
vaguely realizes that when rates 90 up
or down somebody has an opportunity
to make profit or q loss; but isn't
1t something that concerns only bank
crs, and why should they try to in
terest everybody else in it? What has
the exchange rate to do with you and
nc and other honest folk that 60
about their business?
They Understand in London
They understand these things better
tn London, because London has been
for centuries the financial center of the
world. 1t has been the clearing house
Of international trade. Before the war
q merchant in Uruguay who had sold
some goods to a merchant in Chile
would get his payment by bill drawn
on LONDON. Foreign exchange rates
are going to mean more and more to US
in New York, and il behooves not only
every one in the banking business, but
every one who Is interested in business
con nditions in general to know what
they mean. in order that he may not
be ignorant of SO fundamental phe-
nomenon and that he be able to inter
Moreover, as we shall presently show,
our very prosperity at the present time
may deIend on whether our people as q
whole understand the significance of
these exchange rates and the means
required to stabilize them.
The so-called mysteries of foreign
exchange repel and awe the seeker
after knowledge at the very beginning
He has first to learn the names o. the
foreign coins, then exactly how much
they equal, and then the method of
their quotation, which, for no logical
reason whatsoever, except that foreign
exchange just grew and that 1t was
nobody's particular business to sec
that It grey consistently, differs for
almost every coin there is In some
cases as in pounds, the quotation is in
dollars per poupnd; but in francs it is
IN francs per dollar, so that when
francs are lilo on Monday and SO
TO lt20 on Tuesday the newspaper
headlines talk Of decline" in franc
exchange. This is too much for the
seeker after knowledge, so he turns to
the sporting page.
However, we shall overlook for the
present the coins and their quote
tions. which after all concern only
those. who are in the business Of for
cisn exchange, and come Immediately
TO The principles involved, which con-
Germ everybody and are not difficult
30 grasp.
Trade Is Barter
The first thing to plant in mind is
that foreign trade Is normally and al
~ays ultimately an affair OF barter.
The goods that we send 10 Europe are
paid for by the goods Europe sends to
us. We send England wheat, say, and
take linen In exchange. AS we grow
wheat to greater advantage than Eng
land and as England can manufacture
linen to greater advantage than we, the
obvious that we cannot keep on selling
goods 10 the outside world without
buying any goods IN return. We have
got to get paid for our goods somehow.
In money. you say. Bat in whose
money? English currency cannot cir
culate here. In gold, you say. Very
well, that is exactly what is used when
a country hasn't enough merchandise
to offset the merchandise you send to
i,aYr dc 10 {
making up the difference between pur-
chases and sales when absolutely y
nothing else Will do. Between nations
payment in gold is not the first
thought, but the last resort
Harmfulness Of Gold
It is not difficult 20 see why this
should be so. When We send beef, cot
ton, copper, wheat and coal to the
outside world, we deprive ourselves
of those commodities as consumers
and their prices are higher in this
country than they otherwise would be
If We take other merchandise and
goods in return, we more than make
up for this loss. But if we take gold
We cannot eat the gold and we can
wear it only for ostentation and not
for comfort. Its sole real use is to
buy things. AS individuals it is profit
able for you or me to get more gold,
because then we can command more
goods from somebody else, but as d
nation this would not profit u.s. If
the supply of gold were increased in
this country. and nothing else were
added, the only effect would be so raise
prices all over the country. Every
body having more gold would offer
1t in exchange for goods, and the
competition among the gold holders
would cause them to offer more. There
might be redistribution of wealth.
depending on the persons to whom
the god happened to 60 and what
ratio different persons held of goods
that were gradually going up in price
and of gold that was gradually going
down IN purchasing power. The coun-
try as a whole, having no more neces-
stiles or comforts than before, would
be no better off. 1t would be worse Off
for it would be minus the goods that
IT had sent abroad.
All this Is not a lurid picture OF an
imaginary country in an imaginary
world. We ourselves tried the expert
ment OF taking in gold large part of
payment for our goods sold to the out
side world during 1915 and 1916.
Europe, mainly England. sent US more
than thousand million dollars OF the
metal, so that we now hold about one
third OF tho worlds gold supply That
IS all very nice for us as "a nation to
brag about, but 1t Is also one Of the
leading reasons why most of us are
growing about the high cost of living
and the so-called 50-cent dollar.
But this question of gold can be dis
pensed with even more easily, There
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