TRANSACTIONS OF SECTION F. 615 



The remarkable jump in the American exchange was due firstly to the general 

 causes already mentioned, and secondly, as Mr. Davies points out, to the fact 

 that the city of New York found itself obliged to pay off 13,500,000?. sterling 

 shott notos maturing in this country at that time. There is no doubt that it 

 would have been a very profitable transaction for English bankers to have 

 renewed those notes, and to have thus kept a certain control over the exchange, 

 but, owing to the manner in which the renewal at that time was proposed, 

 the operation did not meet with general approbation. It would have relieved 

 the situation if the notes had been renewed here, and it would have been a 

 very remunerative investment for anyone foresighted enough to purchase the 

 issue of yearly dollar bills with the exchange round about six to six and a-half 

 dollars and the return that the interest gave them in New York. The action 

 of the Government in stepping in and adjusting the rate of exchange was no 

 doubt good at the time, because it had the effect of restoring normality, although 

 everyone should have known that this country and her Allies would have 

 to buy enormously in the United States of America, which would quickly 

 r'xiucethe exchange rate to its normal level. 



Before turning to the second of the periods into which our subject is divided 

 a few words of explanation are needed. Mr. Metz^'' divides the influences 

 which determine the level of exchange rates into four heads, as follows : 



(a) Trade balance, including trade in securities. 



(6) Service balance, including interest as remuneration for the service 

 of lending money; in other words, interest on foreign debt held. 



(c) Gold shipments. 



(d) Credits abroad. 



A fifth may be added in some cases, viz., the depreciation of the internal 

 cui'rency of a country, which is reflected in exchange rates between that 

 country and others; and (6) should be interpreted to include the services of our 

 shipping, in which the rise of freights balances, to some extent, the diversion of 

 mercnant ships to war purposes. 



Tn normal times (a) and (b) are of primary importance, and (c) and (d) are 

 chiefly used to redress temporary fluctuations in the volume of (a) and (h). In, 

 times of peace (a) and (b) tend to an equilibrium or are brought to an equilibrium 

 by the operation of a steady accumulation of foreign investments or foreign 

 indebtedness, according as the nation is an investing counti-y such as the 

 United Kingdom, or a spending country such as our Dominions and Colonies, 

 which are yet in process of development. 



The effect of a war such as the present is, however, to disorganise the 

 normal balance of trade and service. Every combatant is compelled to import 

 enormous quantities of war material and food, whilst its own power of produc- 

 tion is necessarily seriously impaired by the withdrawal of masses of men from 

 productive enterprise for military purposes. This process is in operation in 

 the case of all the nations now at war, though in the case of some of them 

 it is modified or complicated by the military and naval operations of their 

 opponents which have restricted foreign trade to its narrowest limits. The 

 result is that the belligerents' imports overshadow their exports, and the rate 

 of exchange tends more and more against such countries and in favour of 

 the principal neutral nations. 



Thus in Germany the premium on dollars had risen in July 1915 to about 

 174 per cent., the Amsterdam rate showing a similar percentage against Germany. 

 In England exchange rates with neutral countries were irregular, but in no 

 case was the premium more than 3 per cent. In France at the same date Dutch 

 currency stood at about 8^ per cent, premium. In Russia sterling exchange 

 had reached a premium of 54^ per cent., and the Dutch exchange a premium 

 of 58J per cent. In Amsterdam the Austrian currency stood at a depreciation of 

 25 per cent., and the Italian of nearly 18 per cent. 



What is the eignificance of these" figures ? To what extent do they denote 



'*Mr. S. Metz, who writes from Amsterdam, the chief neutral financial 

 centre, has furnished the Conference with most useful information on the 

 exchanges. 



