Dear Comrades,
Re answer to Mr. Hart concerning rate of exchange in, I think, the November issue, would you be good enough to make it clear how the total figures are arrived at of the prices of goods exchanged between two countries; also to whom is the gold settlement made, to balance any difference there may be? The principal difficulty to me is the fact that it is individuals who trade and not countries. Also, would your explanation cover the fall of the mark in Germany?
Yours fraternally,
Enquirer.
Answer to Enquirer.
When using the terms “two countries enter into commercial relations,” we were using the terms in common use. Actually, of course, it is the private merchants, or firms, who enter into these relations and carry through the exchange of goods.
The difference between what is bought and what is sold is shown by the demand for Bills of Exchange in the market of the country under consideration. If the demand in England for Bills on French mediants was greater than the demand in France for Bills on English merchants, this would show, under normal conditions, that more goods had been sold to English merchants, than had been bought from them. From this it is easy to see that the total figures are not of prime importance. It is the difference between the two sets of accounts that matters.
The gold balances are paid, usually, through the Banks holding the Bills mentioned. If the Bills have been bought by the Banks, the gold is placed to their own reserves. If the Bills are ‘merely held for customers the amount of the gold is credited to those customers’ accounts.
The goods passing into or out of two countries have to pass through the customs departments of those countries. The quantities, weights, and values, of the articles have to be declared on forms drawn up for that purpose. These “returns” give the total figures of the trade between those countries.
All these factors apply to trade under normal conditions. At present Germany is not under such conditions. The fall of the paper mark is due to loss of credit of Germany.
So long as people believe that the paper will be “honoured”—that is, exchanged for gold upon demand, or at a specific date —the paper will circulate at approximately its face value. If this belief begins to decline, the exchange value of the paper will begin to fall at a similar rate. This process may continue until, as in Austria, the paper falls to its value as actual paper, or waste paper. The German mark is nearing the same position, owing to the great uncertainty of the future.
It must, of course, be understood that we have only dealt with the main points of the question. To cover the details of the matter, particularly in the present exceedingly complicated circumstances, would take a huge volume. If, however, Enquirer wishes to raise any other detail question we shall be pleased to deal with it.
Editorial Committee