FOREIGN EXCHANGE AND EXPORTS 1. Interdependence of exports and imports.—If merchandise were the only basis of international in debtedness the value of the exports would have to be equal to that of the imports or else trade would prac tically cease. Suppose a country which does not it self produce gold, has an excess of imports, for which it could pay only by shipping gold. To a limited ex tent this could be done, but its supply of gold would soon be exhausted and the only way to replenish it would be to reduce the amount of imports below that of its exports. Furthermore, the loss of gold from a country induces a fall in the price of goods and a rise in the price of money, and, owing to the depletion of the bank reserves, a rise in interest follows. It would, therefore, become a good country to buy from, and a poor country to sell to. Automatically, exports would be stimulated and imports checked until the balance was reversed. In practice, however, the ex ports of a country are not confined to merchandise but include other elements known as "invisible ex ports," which offset the imports of merchandise. "Visible exports" consist of merchandise of every description, including gold ; they are so called because accurate records of all goods and specie entering or leaving a country are kept by the customs and port authorities. Every vessel clearing from a port must declare its cargo before leaving, and all goods enter ing the country are examined and valued at the custom house. This system affords a fairly accurate record of the visible exports and imports of a coun try. A country's "invisible" foreign trade is so called because no such record is available owing to its nature. It consists of the import and export of services, of bonds, shares and other evidences of indebtedness and, not being the subject of government supervision, there is no certain method of ascertaining the amount and volume of these transactions. For that reason they can only be roughly estimated.
The disparity between the visible exports and the visible imports of the principal countries of the world for the year ending December 31, 1913, which repre sents normal trade conditions, will demonstrate the importance played by the invisible exports and the in visible imports in adjusting the balances of payments among the countries of the world.
Imports Exports (Last six ciphers omitted) Netherlands 144 188 Norway 141 87 It will be noted that the imports of the above countries, with the exception of those of the United States, Russia and the Netherlands, exceed the "vis ible" exports; the difference is adjusted by "invisible" exports. Such excess of visible imports does not
necessarily place a country at a disadvantage, for in the case of the older countries goods are imported in payment of services (such as freight and insurance) or for interest on foreign investments. In the case of a young country like Canada, however, the excess of imports consists of goods purchased with money borrowed abroad for capital expenditure, such as ma terial for railways, factories and public works.
2. Origin and supply of foreign exchange.—Altho the export and import of merchandise are the basic factors of international indebtedness, there are other elements to be taken into consideration which have a precisely similar effect on the balances of indebted ness, and which can therefore be expressed in terms of exports and imports. Briefly speaking, trade be tween two countries consists of mutual exchanges of : 1. Merchandise 2. Gold 3. Services 4. Evidences 01 indebtedness.
For the sake of simplicity we generally consider that one country, say, the United States, trades with other country, England, just as if a statement of ac count were made out daily and the relative balance arrived at and settled. Such, of course, is not the case; the transactions occur among a multitude of independent merchants and bankers, whose bills of exchange on one another furnish the supply of, and govern the demand for, foreign exchange, and thus affect the price of exchange between the two coun tries in question. Bankers and exchange brokers in New York and London encourage the public to util ize their services for paying debts abroad, and in order that they may do this, also encourage those who have claims against persons abroad to sell these claims to the banks in the form of bills of exchange, thus enabling the banks to offset sales against pur chases. In other words, the banks are both buyers and sellers of foreign exchange. A continuous process of assembling and distributing exchange is thus ef fected thru the agencies of banks, which act as clear ing houses, and eventually make a settlement between the financial centers of the two countries. Should New York banks, for instance, be called upon for more ex change on London than they are able to buy, they must provide funds to meet their withdrawals by ex porting gold or by some other means. As a rule, gold shipments are avoided as much as possible and the required balance in London is often created by: 1. Buying exchange on other centers and sending to Lon don for credit.