The future of international commerce continues to be a subject of absorbing interest. Most of the factors controlling such commerce have received adequate consideration in all such discussions. It is, therefore, extraordinary that so little attention should have been paid to the subject of foreign exchange. It must be admitted, however, that foreign exchange cannot be discussed with the same facility as shipping, freight, demand, supply, manufactures and kindred subjects, which are closely connected with the study of international commerce.

Foreign exchange deals with the exchange values of the monies of different countries, and arises out of trade, which is the exchange of commodities. Hence, the future of trade is intimately connected with the future of exchange. While this is true, we are likely to be led into false conclusions if we ignore the fact that there are other factors besides commerce which control exchange rates. The progress of events during the two or three decades before the war has made such a deep impress on us that we have become accustomed to thinking that trade and trade alone can bring about changes in the rates. Up to August, 1914, the only countries where rates were patently known to be affected by factors other than commerce were China, the South and Central American Republics and barbarous and semi-barbarous countries, which possessed no currency whatsoever-currency in the commonly accepted sense of the word.

The abnormal and frequent fluctuations in the rates of exchange in these countries were explained partly by the fact that they were uncivilized or semi-civilized, and partly by the fact that they were unable to maintain the gold standard. Up to 1914, the belief was prevalent among bankers and economists that, so

long as a country was able to maintain the gold standard, the only factor that could have the potency to affect exchange rates was trade--the nature and volume of it. To all appearances this statement defies contradiction. The maintenance of the gold standard is contingent upon the availability of sufficient gold to meet all demands for payment, as well as a proper currency regulation. But the assumption was undeniably caused by the belief that trade regulated itself and was not subject to artificial restrictions.

Three Dominant Factors in Foreign Exchange

The war has not created any new factors to affect or control foreign exchange; it has only brought into relief such factors as have been ignored by us in the past. The three outstanding influences, which I propose to discuss in this article, are:

1. The possible developments in the currency position in the different countries of the world. 2. The changes that are inevitable with regard to the gold standard, and

3. The future of international commerce for about two decades after the war.

The three subjects are so intimately interconnected that it is not humanly possible to discuss one without making brief references to the others. The quantity and quality of money circulating in every country have an undeniable influence on exchange. Hitherto, this factor was obscured by the fact that, except on occasions of crises, there was scarcely any variation in the quality or quantity of money in the civilized countries. There was always the assurance that the balance of trade as between the principal industrial nations would be adjusted with gold. There was also a proper mechanism to distribute gold and make it flow in any direction, as and when necessary. Half a century of

peace in Europe aided in bringing about a proper adjustment between th sum total of money needed and money in circulation—an adjustment which was never known to have existed ever before.

Quality and Quantity Variations of Money

I have referred to the quality and quantity of money. The quantity of money cannot be considered apart from the quality, because any change in the former has an undeniable effect on the latter. In the case of ordinary commodities, an increase in the quantity brings about a decrease in value, or a decrease in quantity brings about an increase in value. The inherent qualities of the commodity itself do not undergo any modification, because of increased or decreased production. Money has only one attribute, i. e., purchasing power. The amount of money in a country has to be very nicely adjusted to the needs of the people. The slightest increase or decrease makes its effect felt. Therefore, any change in the quantity is at once reflected on its ability to serve as a medium to facilitate exchanges.

As soon as the quantity of money is above or below the exact requirements of commerce, money ceases to perform its functions effectively. Extremely interesting and far-reaching developments are taking place in connection with the quantity of money in almost every country in the world. In the distant past, practically every country in the world held the precious metals as synonymous with money. There was no even distribution; when one country had a plethora of money, another had too little of it. The intimate connections between the different industrial countries in the world, as well as the nature of the manufacturing and trade activities contributed to level the differences which used to prevail in the past. The adoption of the gold standard by practically every important country helped to maintain the range of variation in exchange values within very narrow limits, except on occasions of crises. The disturbance in the monetary condition of one country brought about a dislocation in others; hence, it was to the common interest of all to come to the help of each other whenever necessary.

Every country was exerting its utmost to place its currency on the soundest possible basis. Apart from other factors, the one that helped the most was the creation and operation of the credit instruments to which the world has been accustomed for three decades prior to the war. These new credit instruments served a double purpose. They reduced the amount of currency necessary to carry on the operations of commerce, and at the same time brought about a considerable amount of elasticity. The demand for gold, on which the currency of the world

was based, was kept at the lowest possible limit; thus, the tendency was to restrict the quantity of money necessary to carry on national and international trade.

Expansion of Currencies Due to War

The war has brought about a radical change in the situation. While the operations of the credit instruments have been suddenly suspended, new money in the shape of currency has been created to take the place of the defunct credit instruments. The amount of gold available has not increased in any noticeable proportion. Nor has the volume of exchanges increased to any extent. The countries at war have, however, increased their currency to such an extent that the quantity of money now in circulation is five times the total that they had before the war. Practically all the new money has been turned out by the printing press. The increases in the belligerent countries have been as under:

The quantity of money has increased not only in the belligerent countries, but also in the neutrals. Up to April, 1917, the United States as a neutral had an increase of $1,200,000,000 in gold, and only $250,000,000 in paper. Now that the United States has become a belligerent and our war program must be carried through, we are almost certain to have an increase in circulation which will amount to at least 50 per cent. of the total of our internal borrowings.

Among the existing neutrals the quantity of money has increased-with this difference, however, that a comparatively larger proportion of the total is composed of gold and silver. The dependence of most countries on Europeprincipally the Allies-has brought about similar development in South American countries. The increase in circulation in Brazil during the period of the war is estimated at $150,000,000. Hitherto, Argentina has been able to maintain its paper circulation at the level that prevailed just before the war. Present developments are such as cannot but force that country to increase her paper money like the rest of the world. The nations most favorably situated in this respect are the Scandinavian countries,

Holland and Spain. The total increase in their monies may be roughly estimated at $250,000,000.

Effect of Currency Increases on Foreign Exchange and Gold Standard

If the increases in the quantities of the money in the different countries in the world had been brought about by conditions even remotely connected with commerce the future of foreign exchange would prove a. simple problem. The quantities of money circulating in the different countries are having, and will have, a direct influence on wages, prices and manufacturing enterprises, as well as the capacity to sell and purchase goods. Consequently, the increase in money will have an influence on the course of exchange rates. What the changes will be will depend on conditions in the individual countries, as well as the changes taking place from tinie to time.

The quantity of money has likewise an intimate connection with the maintenance of the gold standard. Without going into technical details, the effect of the maintenance of the gold standard on international trade is that the balances will be adjusted with gold. Excepting the five neutral countries in Europe, it may safely be stated that no country will be able to settle balances in gold, if the war continues up to 1918. The paper money issued by the different nations has the flimsiest possible foundation in metal, and no Government dares to take the risk of sending any part of its precious metal outside of the country. Whether or not it is the intention of the different European governments to adhere to the gold standard, a temporary modification of the standard is inevitable. It is not at all improbable that a concert of European nations, including possibly the United States, might agree to some notable changes in the gold standard as it prevailed before the war.

Even at present, the gold stand

ard does not prevail.

Not alone paper money, but the mounting cbligations of the different nations, both belligerent and neutral, will exercise some control over foreign exchange rates. The obligations mean taxation, as well as fundamental changes in the economic fabric of the different countries; these in their turn influence the capacity of each country for carrying on a large commerce with the rest of the world. Prior to the war. this factor was the least potent of all, because national debts, taxation and income were kept within reasonable bounds.

The most potent factor in the determination of the future of exchange rates is the course of international commerce after the war. Whatever difference of opinion there may be on incidentals, it is generally agreed that for some time

at least the volume and value of international commerce will be much less than the total that prevailed in August, 1914. The whole world must economize in order to recoup the losses brought about by this devastating struggle. There has been an all-round decrease in population; the capacity for production has been reduced; the markets that have been able to buy have not been taken care of, and far-reaching changes have taken place in the countries that used to buy their manufactured articles from Europe. People, as a rule, were taught to raise their standard of living during the three or four decades prior to the war. Since August, 1911, every effort has been directed toward making people reduce their standard of living-not only in luxuries, but also in necessaries. It is absurd to assume that, even granting that people are financially able to do so, they will go back to the standard that prevailed in 1914. The net effect of these changes will be that every nation will try to be as self-contained as possible for a while. It will certainly be a period of transition, but no one can forecast what will happen after the transition stage.

Modern Clearing Facilities in Paris

Due to the joint initiative of the Farmers Loan & Trust Company of New York and Lloyd's Bank a Clearing House has been established in Paris, France, known as the Casse de Compensation which will operate upon broader and more modern lines in facilitating interbank relations in the French capital. Both foreign and French banks will be entitled to the advantages of this auxiliary Clearing House. This organization will be especially valuable in facilitating the handling of the large volume of American financial and banking business which is now transacted in Paris. Heretofore the functions of clearing bank items was largely confined to about a dozen French banks operating through the Chambre de Compensation which has been a close corporation, excluding other French and especially foreign and American banks, requiring the latter to clear by individual messenger.

U. S. Mortgage & Trust Company of
New York

The June 30th statement of the United States Mortgage & Trust Company reveals a gain of about four and a half millions in deposits as compared with the official report of February 28, 1917, bringing total holdings up to $81,532,086. In addition to capital of $2,000,000 there is surplus of $4,000,000 and undivided profits of $351,473. Assets amount to $97,933,494.

The New Jersey Inheritance Tax Statute imposes taxes upon both resident and non-resident estates: All the property within the State of the person dying a resident of the State, but only "real property

goods, wares and merchandise *** shares of stock of corporations of this State or of National banking associations located in this State," in case the person dying is a non-resident, is subjected to tax.

The Legislature in the exercise of its wide and undoubted power to select objects of exemption as well as of taxation has deemed it wise to omit taxation of certain property of the nonresident within the jurisdiction. So the transfer of money in bank in New Jersey belonging to a non-resident is not taxed nor are bonds or credits having situs there taxable in estates of nonresidents. Thus the status of the non-resident as compared with that of the resident decedent is said to be "favored" by reason of such legislative forbearance.

The ratio provision in question reads as follows:

"A tax shall be assessed on the transfer of property made subject to tax as aforesaid, in this State of a non-resident decedent if all or any part of the estate of such decedent, wherever situated, shall pass to persons or corporations taxable under this act, which tax shall bear the same ratio to the entire tax which the said estate would have been subjected to under this act if such non-resident decedent had been a resident of this State, and all his property, real and personal, had been located within this State, as such taxable property within this State bears to the entire estate, wherever situated; provided, that nothing in this clause contained shall apply to any specific

bequest or devise of any property in this State."

It is at once apparent that this formula which by its term applies only to non-residents discriminates against non-residents owning real property lying beyond the State boundaries as compared with residents or non-residents in like case who own no such property. It likewise operates to discriminate against the non-resident owning personal property beyond the jurisdiction of New Jersey as compared with the non-resident in like case owning no such property. The greater the value of the property beyond the jurisdiction the greater the tax due New Jersey, although the value of the property transferred in New Jersey under the statute is of the same value and similarly transferred in any case.

Thus if Mr. Rockefeller or Mr. Carnegie, or any other very wealthy non-resident citizen should die leaving shares of stock in New Jersey corporations their estates would pay a much larger tax than that of the modest investor although the value of the New Jersey shares should be the same in both cases.

In the Maxwell case, supra the tax was fixed in round numbers at $29,000 whereas if there had been no real or personal property outside the State the tax would have been only $20,000.

"Favored Status" of Non-Resident

The New Jersey courts say that this selfevident discrimination is reasonable because of the "favored status" of the non-resident referred to. "Favored status" is indeed a novel as well as an imponderable element of equality. But the value of such "favored status" will be:

found upon examination to be apparent rather than real: It is a well-known fact that the bulk of invested wealth of non-residents within the taxing State is reached by a statute taxing shares of corporations organized therein, therefore, when the tax is collectible at all in the case of the non-resident it is generally collectible upon all the property within the jurisdic

tion.

No more ingenious justification of such discrimination could be devised unless the Legislature should some day decide to exempt the property of non-residents if represented by gold collar buttons or Corot landscapes in New Jersey but to tax everything else. In that case the status of the non-resident would still be "favored" but its practical value would have to be computed by very fine scales. Non-residents of New Jersey dying in Maine or California or even in New York are no more likely to leave their moneys deposited in New Jersey banks nor to have

credits with situs in New Jersey than they are to leave the suppositious collar buttons or "Corots" there.

If such "favored status" is to be henceforth a constituent or equivalent of equality under the New Jersey tax laws, it behooves non-residents generally to look well to their investments. The wise old saying that "there will never be wanting some pretence for deciding in the king's favor" is given added point when it is realized that the reported surplus of nearly $2,000,000 in the New Jersey State Treasury would lapse into a deficit of at least an equal amount without the revenue derived from non-resident estates under the operation of the ratio provision.

How the "Ratio Provision" Works Out

Following are several examples given in illustration of the peculiar results obtained by the "ratio provision":