The American dollar should buy 5.18 pesetas, lire or francs on a gold par basis, but at present (August, 1918) will buy 8.90 Italian lire and about 3.5 Spanish pesetas, although the gold value of the Italian lira and the Spanish peseta is identical. The reason for this is that Italy has an urgent demand for dollars in America to pay for the purchases of the Italian Government and of the Italian people, and the credits being extended to Italy for this purpose are being furnished at enormously high rates by private banks and capitalists, while Spain is selling more commodities than she is buying, is an international creditor, has no need for dollars, and pesetas in Spain are being sold at an artificial high price by private banks and capitalists. The Allies requiring Spanish pesetas are being charged enormously high rates for the pesetas required in Spain, which means that the pesetas are selling for 28 cents apiece instead of 19 cents and that the gold dollar measured in pesetas is at a heavy discount and only worth 67 cents.
The gold dollar in New York instead of buying 67 cents’ worth of Spanish gold currency should buy 50 per cent. more than it does, and American and Allied purchasers of Spanish goods suffer this 50 per cent. loss with the added penalty of war prices which makes the 50 per cent. loss probably 100 per cent., to which must be added the merchants’ profit.
It is obvious, therefore, that the loss to the United States and to the Allies from a condition of this character ought to be promptly met. It can be done. It is necessary to understand foreign exchange, the factors entering into it, the means by which to economically settle international commodity trade balances and to provide the mechanism under Government control through which the steps can be taken to obtain the desired results.
I desire, therefore, to explain the factors entering into foreign exchange, the steps required to bring the dollar to par, the steps required to keep the dollar at par, and the mechanism necessary to make effective the proposed policy.
