Foreign Exchange

International trade and more important international money and capital movements are the basis of foreign ex­change dealings. Take a simple example: if a Swiss exporter sells a machine to a Japanese buyer, to conclude the transac­tion the yen which the Japanese businessman has available will have lo be changed into Swiss francs, the currency sought by the supplier of the machine. Or if Continental banks want to place excess funds in the Eurodollar'market ralher than in Iheir own domestic, markets, they have lo buy dollars against local currency. The observation of the French economist Gaelan Pirou, that foreign exchange deals spring from "tbe coexistence between Ihe internationalism of trade and the nationalism of currencies", thus aptly descrilxjs at least the oldest origin of this metier. Clearly, the day that sees the arrival of a single world currency will also witness the disap­pearance of foreign exchange business.

All claims to foreign currency and payable abroad, whether consisting of funds held in foreign currency with banks abroad, or bills or cheques, again in foreign currency and payable abroad, arc termed foreign exchange. All these claims play a part in Ihe relations between a bank and its customers. In the trading of foreign exchange between banks_r which is the job of the foreign exchange dealer, only foreign currency held with banks abroad is concerned.

Foreign bank notes are not foreign exchange in the nar­rower sense. They can be converted into foreign exchange, however, provided they can be placed without restriction lo the credit of an ordinary commercial account abroad. The exchange regulations of some countries do not allow this con­version of bank notes into foreign exchange, although the operation in reverse is nearly always permitted.

A currency, whether in foreign exchange or bank notes, is usually (railed eonvertible if the person holding it can con­vert it, in other words change it freely into any other cur-

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rency. A distinction needs to be made, however, between unrestricted convertibility and the various forms of partial convertibility. The Swiss franc, for example, is fully con­vertible whether the holder is resident in Switzerland or abroad and regardless of whether it is a matter of current payments or financial transactions.

Many countries, on the other hand, recognize only exter­nal or non-resident convertibility. This is for instance still the case with the United Kingdom: if a German exporter, for ',, example, has sterling funds in a British bank, he can simply -^: instruct the bank to convert his pounds into any other cur- ^ rency and remit the proceeds abroad; but a person domi- f, ciled in Britain cannot as a general rule export capital ex- ^ cepl with the consent of the Bank of England.

Exchange regulations may also draw a distinction, as far as convertibility is concerned, between funds arising from current transactions (goods and services) and those coining from purely financial operations, only the latter in general being subject in some degree to a restriction on convertibil­ity. In a few countries this distinction between commercial and financial transactions culminated in the establishment of two-tier markets, this is the case in Belgium, and it ap­plied temporarily to France and Italy in recent years.

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