I desire, therefore, to explain the factors entering into foreign exchange, the steps required to bring the dollar to par, the steps required to keep the dollar at par, and the mechanism necessary to make effective the proposed policy.
FOREIGN EXCHANGE DEFINED
Foreign exchange is a broad term referring to the business of international bills of exchange. These bills of exchange take the form of drafts representing an evidence of debt in the form of a negotiable instrument, the drawer or maker constituting the creditor, the drawee the debtor, and the title to such bill being vested in the payee. These drafts take the form of acceptances, often endorsed by acceptance banking companies. When drawn against merchandise exported they are often accompanied by documents—such as the receipt of the transportation company, or bills of lading, certificates of insurance, certificates of inspection, weight, etc. These foreign bills of exchange may be drawn against securities which are sold as merchandise. They may appear as authorized commercial or banking credits or as finance bills.
They may be drawn against actual cash funds or credits in banks, but, whatever they are, they comprise at last merely the order of the drawer or maker upon the drawee or debtor to pay to a payee a certain amount of money in the currency of the country upon which they are drawn, in pounds sterling in London, in pesetas in Spain, in francs in France, in lire in Italy, in dollars in New York. The forms of these bills are well established and can be found in any of the many comprehensive works on international exchange.
These bills may be at sight, payable on presentation, or thirty, sixty, or ninety days; they may be with documents attached or without documents attached; they may be acceptance bills or payment bills. The scope of this book does not permit of an elaborate discussion of the mere forms of such bills or the mechanism employed by the banks in handling such bills or the mathematics of converting one currency into another.
BALANCE OF TRADE
When a country is shipping more goods in the form of commodities than she is receiving, it is said that the balance of trade is favorable. The term “balance of trade” is apt to be misleading. It is a convenient phrase relating to commodity shipments alone as they appear on the record of outgoing and incoming ships, which are always subject to Government inspection and from which a definite and accurate compilation can be made and is made. If such “balance of trade” runs against a country the actual balance of commodity indebtedness must be made up by shipments of gold, securities or transfer of credits. Outside of commodities which appear in making up the balance of trade there are a number of invisible factors, not of statistical public record, which go to determine the extent to which the citizens of one country may be indebted to those of another, and by which the international debts are actually settled. These elements are not absolutely available in the form of statistics and can be only roughly estimated. Taking the United States as an example, there are certain factors not tabulated by the Bureau of Statistics at Washington because their proportions are unknown to the officials. These are the elements which comprise the invisible factors in determining the settlement of international debts. The transfer of money or credit from the United States to other countries (outside of commodities) is accomplished in the following ways:
FACTORS AFFECTING INTERNATIONAL EXCHANGE
1st. The purchase by citizens or corporations in the United States of securities or properties of any kind (outside of commodities actually shipped, otherwise accounted for) in other countries;
2nd. The payment of interest or dividends on American securities and properties owned by foreigners;