CAMBIO. – By foreign exchange, or simply exchange, is meant the price in national currency at which a certain quantity of foreign currency is purchased. Exchange thus expresses the relationship between the value of two currencies. The aggregate of the variations in this relationship, that is, the various quotations over time, is called the exchange rate, or, more succinctly, exchange.
Exchange may be expressed technically in two ways. When, in a given country, the value of a fixed quantity of foreign currency is calculated against a variable quantity of national currency—as is the system adopted by Italy and most countries—the country in question is said to give the uncertain rate; conversely, when a fixed quantity of national currency is compared with a variable quantity of foreign currency, that country is said to give the certain rate for exchange. Exchange may be established either between the currencies of different countries—manual exchange—or between one currency and instruments representing the currency of other countries—draft exchange. Besides banks, the economic agents most interested in exchange transactions are importers and exporters; and since international exchanges of goods and services are essentially settled through credit instruments, such as foreign bills of exchange, cheques, telegraphic transfers, letters of credit, etc., it follows that the most significant form of exchange is draft exchange.
In the case of foreign credit instruments, exchange is at sight when the instruments themselves are payable upon presentation, whereas it is forward or for delivery when payment takes place after a predetermined period. Forward exchange rates, which are the subject of special trading and quotations, have an important economic function: through them, foreign currency, although available only in the future, acquires a price already determined at the present moment, when it may be bought or sold, thereby freeing importers and exporters from the risk of subsequent fluctuations in the exchange rate.
The exchange rate of a given currency A may be expressed in terms of all the other currencies B, C, etc., with which currency A is exchanged. Given the exchange rate of A with B and of A with C, an exchange rate between B and C will also arise. To prevent any discrepancies between the various exchange rates from arising, or to eliminate them as soon as they arise, there are arbitrage operations. If, for example, the exchange rate of A in terms of B makes it possible to obtain a greater quantity of currency B, while the exchange rate between A and C and that between B and C have remained unchanged, it will be profitable to purchase currency B with currency A, convert it in turn into currency C, and use this to repurchase currency A. The opportunities for profit offered by this manoeuvre, by increasing the demand for currency B, tend to raise its value and ultimately restore equilibrium to the exchange rate between A and B. Other, simpler or more complex, arbitrage operations are also possible.
CAMBIASO, LUCA - Deposition - Genova, church of S. Maria di Carignano.
or between paper currencies inconvertible into gold. In the first case, the exchange rate is in equilibrium when it establishes monetary parity between the currencies concerned, that is, when it causes the exchange ratio between them to coincide with the ratio between the weights of fine metal contained in each; the exchange rate is then said to be at par. Since its quotations depend on the demand for and supply of the foreign currency concerned—demand and supply in turn connected with the trend of the balance of payments—there may be divergences from parity, with the exchange rate moving above or below par. Assuming freedom of international transfers of gold, movements of the exchange rate away from parity cannot exceed the gold points—gold points—marking the limits beyond which it is advantageous to ship gold rather than make payments in foreign currency. The breadth of the two gold points, upper and lower, is determined by the transport and insurance costs of sending the metal from one country to another, as well as by the loss of interest during the period of transport. Transfers of gold, acting in a deflationary direction on the price level of the country losing it and in an inflationary direction on the price level of the country receiving it, tend to alter the trend of the trade balance and thus to remedy the causes of disequilibrium in the exchange rate.
In the case of an exchange rate between a paper currency with forced circulation and a gold currency, when gold can still be used for international payments, the equilibrium exchange rate is represented by the ratio between the metallic content of the gold currency and the old metallic parity, multiplied by the level of the agio.
In recent decades, exchange between inconvertible paper currencies has acquired importance, while the possibility of international transfers of gold has come to an end. In this case, to define the equilibrium position of the exchange rate, the principle of purchasing-power parity was formulated, according to which the exchange rate is stable only when it can guarantee each currency an equal purchasing power at home and abroad. In this case, the causes of exchange-rate variation arising from fluctuations in the balance of payments are joined by relative changes in the price levels of the countries under consideration. If the price level in one country M increases fourfold while in another country N it merely doubles, the new exchange rate of the currency of M in terms of that of N will be exactly twice the previous rate.
However, the principle of purchasing-power parity has proved to be far from acceptable, both scientifically and practically, and the problem therefore remains open.
The freedom of the foreign-exchange market, which was the typical situation until 1914, has gradually been restricted for a variety of reasons, often accompanied by the causes underlying limitations on the international movement of goods, people, and capital.
In general, there is a tendency to reduce foreign-exchange operations to those responding to the real needs of the country’s economic life. At times, this has led to the compulsory surrender of all foreign currencies obtained by exporters to a special body, which pays for them at an official exchange rate, usually rigid and rather low. At other times, the surrender requirement concerns only a given percentage of the currencies, while the remainder may be freely traded on a free market. Many countries also prohibit the export of monetary instruments and of all kinds of securities denominated in the national currency, in order to prevent potentially harmful speculation.
In such a complex and delicate field as currency matters, direct or indirect control by the organs of the State is necessary, precisely to prevent operations carried out by individuals from compromising the country’s economic life and adversely affecting the social well-being of the population. Consequently, the provisions issued in this matter by the competent authority bind in conscience, unless, in particular cases, complying with them would constitute an evident affront to justice and common sense.