But what is the position now? As always, the balance of payments must balance every day. As before, the balance of trade is spread unevenly through the year. Formerly the daily balance was adjusted by the movement of bankers’ funds, as described above. But now it is no longer a purely bankers’ business, suitably and sufficiently rewarded by an arbitrage profit. If a banker moves credits temporarily from one country to another, he cannot be certain at what rate of exchange he will be able to bring them back again later on. Even though he may have a strong opinion as to the probable course of exchange, his profit is no longer definitely calculable beforehand, as it used to be; he has learnt by experience that unforeseen movements of the exchange may involve him in heavy loss; and his prospective profit must be commensurate with the risk he runs. Even if he thinks that the risk is covered actuarially by the prospective profit, a banker cannot afford to run such risks on a large scale. In fact, the seasonal adjustment of credit requirements has ceased to be arbitrage banking business, and demands the services of speculative finance.
Under present conditions, therefore, a large fluctuation of the exchange may be necessary before the daily account can be balanced, even though the annual account is level. Where in the old days a banker would have readily remitted millions to and from New York, hundreds of thousands are now as much as the biggest institutions will risk. The exchange must fall (or rise, as the case may be) until either the speculative financier feels sufficiently confident of a large profit to step in, or the merchant, appalled by the rate of exchange quoted to him for the transaction, decides to forgo the convenience of purchasing at that particular season of the year, and postpones a part of his purchases.
The services of the professional exchange speculator, being discouraged by official and banking influences, are generally in short supply, so that a heavy price has to be paid for them, and trade is handicapped by a corresponding expense, in so far as it continues to purchase its materials at the most convenient season of the year.
The extent to which the exchange fluctuations which have troubled trade during the past three years have been seasonal, and therefore due, not to a continuing or increasing disequilibrium, but merely to the absence of a fixed exchange, is not, I think, fully appreciated.
During 1919 there was a heavy fall of the chief European exchanges due to the termination of the inter-Allied arrangements which had existed during the war. During 1922 there was a rise of the sterling exchange, which was independent of seasonal influences. During 1923 there has been a further non-seasonal collapse of the franc exchange due to certain persisting features of France’s internal finances and external policy. But the following table shows how largely recurrent the fluctuations have been during the four years since the autumn of 1919:—
Percentage of Dollar Parity
| August–July. | Sterling. | Francs. | Lire. | |||
| Lowest. | Highest. | Lowest. | Highest. | Lowest. | Highest. | |
| 1919–1920 | 69 | 88 | 31 | 66 | 22 | 56 |
| 1920–1921 | 69 | 82 | 30 | 45 | 18 | 29 |
| 1921–1922 | 73 | 92 | 37 | 48 | 20 | 28 |
| 1922–1923 | 90 | 97 | 29 | 41 | 20 | 27 |
On the experience of the past three years, francs and lire are at their best in April and May and at their worst between October and December. Sterling is not quite so punctual in its movements, the best point of the year falling somewhere between March and June and the worst between August and November.
The comparative stability of the highest and lowest quotations respectively in each year, especially in the case of Italy, is very striking, and indicates that a policy of stabilisation at some mean figure might have been practicable; whilst, on the other hand, the wide divergences between the highest and lowest are a measure of the expense and interference that trade has suffered.
These results correspond so closely to the facts of seasonal trade (see above, [p. 108]) that we may safely attribute most of the major fluctuations of the exchanges from month to month to the actual pressure of trade remittances, and not to speculation. Speculators, indeed, by anticipating the movements tend to make them occur a little earlier than they would occur otherwise, but by thus spreading the pressure more evenly through the year their influence is to diminish the absolute amount of the fluctuation. General opinion greatly overestimates the influence of exchange-speculators acting under the stimulus of merely political and sentimental considerations. Except for brief periods the influence of the speculator is washed out; and political events can only exert a lasting influence on the exchanges, in so far as they modify the internal price level, the volume of trade, or the ability of a country to borrow on foreign markets. A political event, which does not materially affect any of these facts, cannot exert a lasting effect on the exchanges merely by its influence on sentiment. The only important exception to this statement is where there exists on a large scale a long-period speculative investment in a country’s currency on the part of foreigners, as in the case of German marks. But such investments are comparable to borrowing abroad and exercise a different kind of influence altogether from a speculative transaction proper, which is opened with the intention of its being closed again within a short period. And even speculative investment in a currency, since it is bound to diminish sooner or later, cannot permanently prevent the exchanges from reaching the equilibrium justified by conditions of trading and relative price levels.