Exchange Fluctuations and the Present Financial Position with special reference to Indian Finance

Extract

Exchange is, in effect, a system of perfected barter, not of goods but of their equivalent in currency, payments in one place being exchanged for payments in another. Since, however, in actual practice the total payments in the two places do not exactly balance, there arises the complication of exchange, which has been described as the price of monetary claims on distant creditors. The balance of indebtedness is either retained, at interest, to meet future liabilities, or remitted in coin, the choice of alternatives being determined by the rate of interest ruling, and the cost of remitting coin. Other things being equal, credits will be retained where the rate of interest is highest, but, where one or other of the currencies is in an unsatisfactory condition, a considerable element of speculation is introduced, while, in ordinary circumstances, exchange will only fluctuate between fixed limits, viz., those at which it becomes profitable to transmit coin, or bullion, in either direction. Apart from the differences between the respective currencies involved, these limits vary according to the distance between the respective countries, the cost of freight, commission, packing, and insurance against the risks incurred in the transmission, and the local rates of interest.