To a large extent the progress of the Foreign Exchange system serves highly constructive purposes. Its covering and hedging facilities relieve producers, merchants and investors of exchange risk which is now assumed by those who are in a better position to cover it or, if needs be, to take it. As a result of the internationalisation of money markets, it is now easier to finance trade in the cheapest market where money is the most plentiful. The most recent step in that direction has been the use of Eurodollars and other foreign currency deposits. Their unexpected appearance and their growing importance shows that the Foreign Exchange system is still in the course of evolution, and this conveys the feeling that there must be still scope for further essential improvement.
It is extremely difficult to answer the question whether progress in the Foreign Exchange system has been accompanied by progress towards stability or whether the improvement of the system has been achieved at the cost of increasing instability. Beyond doubt the system has greatly facilitated operations of a disturbing character. We know that since 1914 exchange rates in general have been much less stable than they had been in the 19th century or during the greater part of the 18th century. On the other hand, we also know that the period that followed the second World War was less chaotic than the one that followed the first World War and that the wholesale devaluations of 1949 took place in a less disorderly manner than the large-scale depreciations of the early 'thirties. On the face of these facts we might be inclined to conclude that the worst period of exchange instability is over and that we are progressing towards more stable conditions.
The Foreign Exchange system would have to progress a great deal further before it could claim to have helped towards international stability as well as towards international integration. Nor does its progress depend wholly or even mainly on its own institutional improvement. Political stability, general economic stability, sound budgetary policies and national income policies, matter a great deal more from the point of view of exchange stability than the exact nature of the system of Foreign Exchange.
The question whether that system itself could be improved, or whether it could be applied in a way so as to minimise its disturbing influence and increase its constructive influence, has occupied the minds of many a generation of theoretical economists and practical specialists. In order to get the best out of Foreign Exchange it is important to arrive at a better understanding of the broad rules that determine its operation. From this point of view progress over the ages has indeed been remarkable. Nevertheless, there is still much left to be accomplished, especially in respect of establishing an adequate connecting link between static and dynamic Foreign Exchange theory. But by and large policy makers and bankers are now reasonably well provided with theoretical background for their practical requirements.
A study of the history of Foreign Exchange theory discloses a remarkable degree of similarity of ideas during various periods, notwithstanding the institutional changes. For instance, it was during periods of inflationary currency depreciations that the influence of changes in relative price levels on exchange rate was discovered and rediscovered. It seems, none the less, that Foreign Exchange theory is strongly conditioned by the background against which the Foreign Exchange system operates.
Unfortunately, the high technical character of the subject deterred many theoretical economists from taking an active interest, and those who were prepared to brave the technicalities were apt to be caught in the pitfalls that threaten anyone writing on the subject without adequate practical experience. This is particularly true in respect of Forward Exchange, which explains the fact that nine out of ten economists who write on Foreign Exchange theory confine their analysis to spot transactions.
No comments:
Post a Comment