PEGGING THE EXCHANGE. The phrase and practice of "pegging the exchange" finds its origin in the World War. It may be defined as consisting of continued governmental or official action to maintain the foreign exchange value of a country's currency against the principal gold currencies at par or at any fixed point. Thus, during the World War, the Allied Governments pegged their respective rates of exchange upon New York at a point slightly below parity, while from 1926 to 1928 the French Government maintained the "de facto" stabili zation of the franc, virtually another name for pegging the franc at a rate which quickly settled down at 124 francs to the pound sterling.
As shown in the article upon foreign exchange (q.v.), a rate of exchange is the price of one currency in terms of another, and this price depends upon supply and demand. Hence, when a Gov ernment decides to peg the rate, it must adopt one of two alter natives. The first, which evasion rapidly renders impracticable, is to fix the rate by law. This, when tried, has nearly always failed. The second is for the Government, directly or through its agents, to buy and sell on the world's exchange markets its own and foreign currencies in such a way and in such quantities as to counteract immediately any attempt of the rate to go beyond the limits within which the rate is pegged.
During the World War the Allies were largely dependent upon the United States for food-stuffs and munitions. The purchase of these involved a steady demand for dollars, and as there was no counteracting supply of dollars at the disposal of the Allies —for export trade to the States was perforce curtailed by the concentration of the Allies' productive energies upon the war— the allied currencies showed a steady tendency to depreciate against the dollar. To consider England alone: as early as 1915, the British Government took steps to "maintain" the exchange, though no definite peg was inserted. These steps consisted of the acquisition of dollars by the British Government and their sale in New York by Messrs. Pierpont Morgan, who were agents to the British Government, in such quantities as to balance the day to day demand for dollars arising from the Allies' purchases of Ameri can commodities. So long as the supply was equal to the demand, the exchange was automatically maintained.
The problem before the British Government was how to acquire dollars in sufficient quantity to meet the abnormal war demand.
To solve this, they depended partly upon dollar loans in America, and partly on the large volume of sound American securities held by British nationals as a result of the heavy pre-war investments made by Great Britain in America. These last were acquired by the British Treasury, transferred to their New York agents, and their sale provided the necessary supply of dollars.
Various methods were adopted whereby the Treasury gained control of American securities. Originally, the British Govern ment contented themselves with an appeal to holders of eligible stocks, the appeal being based partly upon patriotism, and partly on the fact that a highly attractive price was offered by the Treas ury. This met with a certain degree of response. Later on, peaceful methods of persuasion were reinforced by a special two shillings in the pound income tax imposed upon dividends accru ing from such American securities as were required by the Treas ury and which the holders declined to surrender. Finally, the power of the Defence of the Realm Act was invoked, and these securities were forcibly requisitioned, the original holder receiving a fair price as fixed by the Treasury.
When the United States entered the World War these expe dients were no longer necessary, as the United States Government could borrow dollars from its own nationals, and lend them to the Allied Governments in such quantities as proved necessary. This kept the peg firmly in place, while the question of repayment was left over till after the war. It will be seen that the debt to America took two forms. One consisted of the loans raised by the Allies on Wall street, due directly to the American investor. The other was debt due to the American government.
The war furnished the outstanding example of pegging. As a rule the method is for a Government to open credits in London and New York, which may be drawn upon at need and the result ing sterling or dollars sold in amounts sufficient to keep the peg in place. Most recent stabilizing efforts, including those of the United States, have been downward rather than upward; and they have been complicated by the fact that the pound is no longer anchored to gold. (See EXCHANGE, FOREIGN.) (N. E. C.)