International Finance

Despite persistent efforts today and yesterday by isolationists of all complexions to reduce to the vanishing point the economic and social relations between countries, the people of the world to an amazing extent circumvent all barriers and carry on with each other a tremendous amount of business and do a vast deal of traveling back and forth over political frontiers. Almost every sort of financial transaction within a country has its counterpart in international relations. The people or institutions in one country buy goods or insurance or securities or property from those in another; or travel on their ships and railroads, patronize their hotels, and send remittances to their citizens.

Now if political frontiers were nothing more than the boundaries between national states, foreign exchange would not exist; but they are also currency or exchange frontiers. Each country has its own currency and its own banking and monetary system. There are a few places along both sides of a friendly frontier where the currencies of the two countries pass fairly freely, and there have been times when people, distrusting their own currency, have eagerly accepted and hoarded the coins and paper currency of a foreign country.

As a general rule, however, neither the currency nor "personal" checks expressed therein are accepted outside the country of issue. Normally, for example, the American who has sold goods or services to an Englishman expects ultimately to be paid in United States dollars. He may, at an intermediate stage of the process of settlement, be willing to receive some form of credit instrument--say, a bank draft expressed in pounds sterling. But he will do so only if he believes that there is a ready and dependable market in which he can convert the pounds to dollars. In fact, he may arrange to dispose of the pounds before he agrees to accept payment in that form.

International finance thus owes its existence as a field of study to the fact that financial transactions across frontiers in the vast majority of cases require the conversion of one currency into another. This process of foreign exchange depends upon a more or less orderly market in which instruments of exchange may be bought and sold at a price or rate. There are, of course, a relatively few international financial transactions in which the creditor in the one country fortuitously has need for a sum of money in the currency of his debtor in the other country. Suppose, for example, that an American tin-can manufacturer owns a branch factory in England. The profits of the branch, held in sterling deposits, might readily be utilized by the parent company to buy pig tin on the London market. In these peculiar cases there is no foreign exchange transaction.

However, most international financial transactions cannot be completed unless the creditor somehow manages to obtain his own currency in settlement. This process involves the use of foreign exchange rates or ratios to convert values expressed in one currency into their equivalence in other currencies. It provides the link between national price structures. The student should not minimize the importance of this process, for out of it grows the concept of international balance and from it spring the complexities of international financial policy.