Foreign Exchange

by Robert L. Owen

HOW TO PUT THE DOLLAR AT PAR

What are the possible remedies for this discount of the American dollar in Spain?

1st. The shipment of gold in such volume as to meet the international commodity trade balance in favor of Spain would at once put the dollar, the pound sterling and the French franc to par, but in order to safeguard the currencies of the nations during the war it is not deemed expedient to ship gold at this time. When the war closes Spain, having depleted itself in commodities and having accumulated for these commodity shipments large volumes of credits, will be in a position immediately to buy from other countries and she will become almost at once a commodity trade debtor, which will bring Spanish currency down to par and bring the currency of other countries up to par in Spain;

2nd. Cutting off purchases from Spain of commodities and expanding the shipment of commodities to Spain would be another factor of importance in bringing Spanish currency down to par and other currencies up to par, but is injurious both to Spain and to the countries driven to adopt this policy.

[This remedy is only partially available because the Allies for war purposes need available Spanish commodities and are only cutting off non-essential goods, depressing Spanish commerce engaged in what are not necessities for war and unduly stimulating Spanish business in commodities required for war. The undue stimulation of one line of commodities and the depreciation of another line of commodities is injurious to the normal business of Spain and at whatever price will be corrected with the revival of peace by an injurious reaction of the industries engaged in commodities required for war, while other industries not required for war which have been impaired must be rehabilitated.]

3rd. The remaining and most available and economical factor by which this unhealthy condition of a highly appreciated Spanish currency and severely depreciated Allied currency in Spain can be corrected, is by credits extended by Spanish banks and Spanish merchants and Spanish business people during the period of the war to the extent of their favorable trade balance. This can be accomplished in various ways:

(a) Spanish banks can leave balances in New York, London and Paris. They are doing this but not on a basis of a fair rate of interest, superficially, because these balances in New York, for example, are only paying two or three per cent. However, since the Spanish pesetas are sold for American dollars, selling on the exchange for but sixty-seven cents in New York, the Spanish banks buying such dollars will make a profit of fifty cents when the war ends and the dollar reacts to par.

The same thing is true of United States banks that buy pesetas in Spain at an acceptable rate of interest there for the period of the war. This is being done to a certain extent and American banks thus buying American dollars at sixty-seven cents, thro Spanish loans will make a profit of fifty per cent. on such dollars when the dollar reacts to par and gold can be freely shipped.

It is obvious that American commerce and Allied commerce and Spanish commerce is being subjected in this way to a serious injury with compensatory benefits to the Spanish and American bankers who are selling credits in Spain.

METHOD OF PLACING CREDITS
ABROAD

It ought to be possible for American banks, for British banks, for French banks against adequate securities to borrow in Spain at an acceptable rate of interest Spanish credits necessary to liquidate the comparatively small favorable Spanish commodity trade balance. This amount is in the neighborhood of a hundred million dollars per annum. This might be accomplished by vigorously campaigning in Spain with the consent, sympathy and assistance of the Spanish Government officials for the sale in Spain of the War Finance Corporation Bonds, payable in terms of pesetas running five years, of liberty bonds payable in pesetas, etc., etc., using every available agency to correct the condition so injurious to Spain and to the Allies.

I insisted when the War Finance Corporation Bill passed the Senate upon putting in an authority that these bonds might be issued in terms of foreign currency to accomplish this very purpose, and it became a part of the Act, and later a like provision was made a part of the Act authorizing bonds for the Third Liberty Loan. These bonds could be bought by American importers, or by British and French importers and sold in Spain if necessary at a sufficient discount to obtain Spanish credits against the necessary purchases of the Allies or of the merchants in the Allied countries. In this way the Spanish business men would have a security bearing a satisfactory rate of interest, payable in terms of their own money, and would thus be assured of receiving their own money on a gold par basis with a satisfactory rate of interest. This would suffice, if properly carried out, in bringing the American dollar to par in Spain, and to bring the British pound sterling and the French franc to par in Spain. To accomplish it, however, requires a mechanism making it somebody’s business to do this, to carry on an adequate campaign to place these securities.

As it is we have no adequate mechanism with which to handle it. American or Spanish banks who place credits in Spain and carry credits in Spain till the war ends will make fifty per cent. on every gold dollar at 67 cents they buy in the United States, into Spanish pesetas at 28.50. They have no public interest to serve in preventing such conditions. They are themselves engaged in profiteering on American commerce and on Allied commerce. We have seen men trained as American bankers deliberately advocating that it was best for the United States to have its dollar at a discount, contrary to reason, contrary to common sense, and most injurious to the United States, to Great Britain and to France, interfering with the successful prosecution of the war and actually serving the interest of Germany by indirection. I am willing to assume that these gentlemen advocating the dollar at a discount are not moved by unpatriotic purposes, but the result is injurious to America and favorable to Germany and is contrary to the public interest, while it is highly favorable to profiteering by private interests.