Foreign Exchange markets have become increasingly international

It is evidently to the interest of mankind that there should be the highest possible degree of interchange between nations, each of which can contribute towards general progress according to the peculiarities of its national genius and of its resources. It would be an advantage if these various contributions to progress could be pooled. To that end it is essential that international trade and travel should be facilitated. So long as we are still far removed from a World Government and so long as sovereign states continue to possess separate monetary systems, Foreign Exchange is indispensable for linking these systems to each other.

The improvement of the Foreign Exchange system through the ages has greatly reduced the extent to which national sovereignty in the monetary sphere handicaps progress towards closer economic, technological, cultural integration across national frontiers. During the Ancient and Medieval Periods, and even in much more recent centuries, national monetary systems were largely isolated from each other by the absence of an adequate market mechanism. Thanks to the progress of Foreign Exchange this is no longer so to anything like the same extent as in the old days.

The Foreign Exchange system has certainly travelled a long way since its early beginnings. Although the rudimentary methods still survive -- that eternal character, the money changer, is not an unusual sight even nowadays -- the modern Foreign Exchange market is a highly developed and sophisticated institution. In the absence of major crises leading to chaotic currency conditions, or of drastic official interference with its freedom, it now comes as near to the theoretical ideal of a perfect market as any market in existence. Its prices are extremely sensitive and flexible and respond to one-sided pressure in a matter of seconds. Conversely, supply and demand in Foreign Exchanges are very elastic and readily respond to changes in exchange rates.

The inadequacy of the Foreign Exchange system in the past was partly due to difficulties and insecurity of transport and communications, and also to lack of confidence and to differences between national institutions in the sphere of commerce and law. All these made for monetary isolation. Transfer of money from one country to another was very difficult and costly. It usually took some time before wide discrepancies between the value of money in various countries came to be reduced to reasonable proportions.

In our time, however, the Foreign Exchange markets have become increasingly international in character. Today all relatively free Foreign Exchange markets form part of one large international market. Arbitrage has been brought to a fine art and increasingly refined techniques, undreamt of even a few years ago, have developed. Apart from such exchange restrictions as still survive -- which are, at the time of writing, tolerable and are on the decline -- the existence of separate monetary systems no longer constitutes an obstacle to international or financial intercourse.

Even the fluctuation of exchange rates between national currencies is no longer a serious handicap. For a very long time the development of Forward Exchange lagged behind that of Foreign Exchange in general and has only caught up with its progress in our lifetime. But now it provides remarkably good facilities to cover and hedge against exchange risk, and such facilities are available for increasingly long periods, even if their cost is apt to be excessive at times. It has now become possible to hedge against exchange risk to an extent that until recently was considered inconceivable. This progress has greatly facilitated international investment and, for better or for worse, has encouraged the international flow of capital. It surely serves the interests of progress that the risk attached to the investment of capital in countries where it is needed has been reduced. The possibility of removing exchange risk attached to international investment, in addition to making for a more even distribution of financial resources, stimulates international division of labour and assists in the dissemination and interchange of culture and know-how.