Historically, foreign exchange rates, international transactions

Historically--and as recently as the first part of the nineteenth century--foreign trade on a fairly large scale was carried on virtually by barter, thus circumventing the foreign exchange problem. The Yankee trader worked the quadrangle of America the West Indies, Africa, and Europe very largely on a commodity basis, although Spanish gold and Dutch bills on London played a part. A shipment of fish from New England to Spain was sold for specie, which the ship's master spent in England for a cargo of manufactured goods for carriage to America; all this required nothing more than good bargaining. Although each country had its own currency system the trader avoided that difficulty with the aid of universally acceptable specie. Certainly foreign exchange rates were of no consequence to such a trader; his problem was strictly one of commodity prices.

Even today foreign exchange rates may not always be a primary consideration in some international transactions. For example, in the South Seas trade the trader starts out with a cargo of general merchandise which he has purchased with francs, dollars, or sterling, depending on his home port. He then barters these goods for copra with the natives of the various islands on his route. Finally he sells this native produce probably for the same currency with which he bought the original cargo, thus keeping the whole trade in a single money. In this case, of course, the purpose is to obtain a raw material of commerce-copra. The cargo of merchandise is used in lieu of foreign exchange. Only infrequently, however, can such arrangements be made by exporters and importers. An American exporter may be able to utilize the sterling he receives from an English customer to purchase raw materials in England and so escape any foreign exchange transaction. A company such as Woolworth might use the profits earned by its English and German stores to buy merchandise in those countries for sale in its American stores. International Nickel may use the profits from English sales to pay dividends to English shareholders, the profits from American sales to pay dividends to American stockholders, and so on as far as such offsets can be arranged. In so doing the company would keep a large proportion of its international transactions outside of the foreign exchange market, although in its accounts these foreign-currency transactions will have to be converted to dollars.

The overwhelming majority of international transactions involving money payments must ultimately be completed by a foreign exchange conversion. Even if governments encourage barter deals and enter into clearing agreements 3 they do not avoid the problem of determining the rate of exchange on which the trade shall be based.