Table Of ContentA DYNAMIC THEORY
OF FORWARD EXCHANGE
By the same author
*
THE CASE AGAINST FLOATING EXCHANGES
THE CASE AGAINST JOINING THE COMMON MARKET
THE DESTINY OF THE DOLLAR
THE DESTINY OF GOLD
THE EURO-BOND MARKET
THE EURO-DOLLAR SYSTEM
FOREIGN EXCHANGE CRISES
LEADS AND LAGS
PARALLEL MONEY MARKETS
(two volumes)
ROLL-OVER CREDITS
THE HISTORY OF FOREIGN EXCHANGE
A TEXTBOOK ON FOREIGN EXCHANGE
A TEXTBOOK ON MONETARY POLICY
A DYNAMIC THEORY
OF
FORWARD EXCHANGE
BY
PAUL EINZIG
SECOND EDITION
© Paul Einzig 1961, 1967
Softcover reprint of the hardcover 2nd edition 1967
First Edition 1961
Reprinted 1962
Second Edition 196 7
Reprinted 1968, 1975
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission.
Published by
THE MACMILLAN PRESS LTD
London and Basingstoke
Associated companies in New York
Dublin Melbourne Johannesburg and Madras
SBN 333 01368 9
ISBN 978-1-349-00101-9 ISBN 978-1-349-00099-9 (eBook)
DOI 10.1007/978-1-349-00099-9
PREFACE TO THE SECOND EDITION
DRAMATIC developments in the sphere of Forward Exchange
during the last few years have made a large and increasing
number of people realise that they can no longer afford to leave
the subject to the expert. The disturbing effect of Forward
Exchange movements on the economies of several countries, and
the drastic action taken by their authorities to resist that effect,
have compelled the attention of politicians, administrators,
financial editors, students of economics and intelligent readers
of newspapers. While in the late 'fifties when I was working on
the revision of my pre-War book, articles dealing with Forward
Exchange were few and far between even in the financial Press,
today the subject is covered much more extensively in City
pages and it finds its way from time to time to the news pages.
For this reason alone I would feel justified in bringing my
book up to date to cover the recent eventful years. The extent
to which Forward Exchange has assumed economic and even
political influence, and to which it is apt to affect everyday life,
has made it essential that this book-it is still the only one of
substantial length that attempts to cover the subject in all its
manifold aspects - should be up to date. But in any case the
history of the last six years is of considerable interest to students
of Forward Exchange.
That period witnessed repeated attacks on sterling, the dollar
and other important currencies, and the Forward Exchange market
played a prominent part in these attacks. At long last the
monetary authorities of a number of countries have come to
realise the full disturbing effect of Forward Exchange influences
and the necessity for resisting them by means of intervening in
the Forward Exchange market. Until the end of the 'fifties such
intervention was, genflrally speaking, exceptional. During the
'sixties it has become an integral part of the armoury of Central
Banks having to defend their exchanges against an unwanted
depreciation or having to defend their economies against un
wanted imported inflation. Close co-operation has been estab
lished between Central Banks, both in the technical sphere to
make intervention more efficient and in the sense of mutual assist
ance on an unprecedented scale.
D.T.F.E. A* V
vi Preface to the Second Edition
Those of us who have been agitating for many years in favour
of official intervention in Forward Exchanges have good reason
to be pleased with these developments. But, speaking for myself,
the satisfaction I have derived from the change has been marred
to a large degree by the fact that the pendulum has now swung
in the opposite direction. While until recently Central Banks
were open to criticism for their reluctance to depart from con
ventional tactics by taking a hand in Forward Exchanges, during
1964-66 intervention became distinctly excessive, at; any rate as
far as sterling was concerned. Forward Exchange tactics are
now being misused for bolstering up sterling by a technical device
instead of defending it by increasing its inherent strength.
While the experience of the .last six years confirmed the case
for intervention, it provided a striking example of how not to
intervene. Had it not been for the misuse of that device, the
measures that had to be adopted eventually for the defence of
sterling would have had to be adopted at the end of 1964 or the
.beginning of 1965, instead of allowing the situation to deteriorate
'Under the cover of defensive forward operations. Unlimited
defensive intervention by the British authorities during 1964-66
is the subject of heated controversy which is discussed in a new
chapter. Another new chapter deals with intervention by the
U.S. authorities, which initiated it after the publication of the
first edition of this book. The chapters giving an account of
intervention by other countries have been brought up to date.
Other chapters, dealing with :Forward Exchange policy in a
general way have been revised in the light of recent experience.
It was also necessary to make alterations and additions through
out the chapters on practical and theoretical aspects of Forward
Exchange, to incorporate not only the increased experience in
intervention but also the institutional change resulting from the
expansion of the Euro-currency markets which were at an early
stage of their evolution during the late 'fifties when I was working
on the first edition. Finally, literature on Forward Exchange
has made considerable progress during the 'sixties, especially in
respect of Forward Exchange policy, and I have brought the
Bibliography up to date.
P. E.
120, CLIFFORDS INN,
LONDON, E.C.4
September 1966.
PREFACE TO THE FIRST EDITION
PosT-wAR books or articles on international monetary subject1
which make no reference to Forward Exchange are like Hamle
without the Prince and the gravedigger. Yet the overwhelmin1
majority of post-war books and arti()les on those subjects ar4
guilty of this omission. In spite of the increased influence o
Forward Exchange on international movements of funds, interes
rates, etc., most writers make no reference at all to that aspec
of their chosen subject. No economist or financial writer o
standing, writing about inflation, would think nowadays solei:
in terms of the volume of the note issue without dealing also wit]
the volume of bank money. Yet day after day we encounter i1
financial columns comments referring to changes in money rate
or bill rates without referring to the influence of forward margin
on those changes. And it would be possible to quote scores c
post-war books dealing with Foreign Exchange problems whic
have nothing, or next to nothing, to say about Forward Exchang{
For this reason I feel that the publication of a full-sized treatis
devoted entirely to Forward Exchange in the post-war wod
calls for no apology.
This book was originally planned as a revised edition of my pre
war book, The Theory of Forward Exchange. The importan
changes that have taken place since that book appeared in 193
made the publication of a thoroughly revised edition justified an1
necessary - all the more so because it was still the only book t,
treat the subject in full detail. In the late 'fifties my Publisher
and I derived much encouragement for the idea of such a majo
undertaking from the fact that its material, although writte1
nearly a quarter of a century ~go, was still quoted fairly frequently
During recent years I came across a number of references to tha
book in books or articles appearing in this country, in the Unitec
States or on the Continent, describing it as the 'standard work
or 'fundamental work' on Forward Exchange. Even the flatter
ing term 'classic' was applied to it recently by an academi'
economist specialising in Forward Exchange theory.
Precisely because many people in the academic world an<
vii
viii Preface to the First Edition
among bankers continued to accept the facts and views contained
in that book I felt I owed it to my readers who relied on my book
to bring the material up to date. Kvery now and again The
Theory of Forward Exchange was quoted by experts as the
authoritative source for facts and views which, while they were
correct when my book was published, have long since ceased to
be correct. This was somewhat disconcerting, especially as
some economists based elaborate arguments and far-reaching
conclusions on such obsolete material.
I felt that unless I revised my book on the basis of recent
developments I would be morally responsible for confusing a new
generation of students and their teachers as well as practical
bankers. Even though the latter were aware of the changes in
practices and techniques, they frequently encountered factual
statements and arguments based on pre-war experience. This
was clearly detrimental to the establishment of close relations
between theory and practice, because it tended to discredit theory
in the eyes of practical specialists.
My difficulty in carrying out a revision was that, while
before the war I was for sixteen years in close daily contact with
the Foreign Exchange market, I left the City at the outbreak of
the second World War and lost contact with banking circles
almost completely for something like twenty years. An intricate
and ever-changing subject such as Forward Exchange calls for a
constant attention by means of keeping in direct contact with
those engaged in Foreign Exchange dealings. With my attention
focused in other directions during and after the war I could not
help forgetting a great deal of what I had learnt before the war.
On repeated occasions during the war and the early post-war
years I found myself in a somewhat embarrassing position when
ever students or their Profe~:~sors asked me to explain some point
in my book. Since they had read it recently they knew a great
deal more about it than I did. Fortunately for me there were not
many inquiries of that kind because, owing to the complete
suspension of Forward Exchange operations in London and
most other markets in 1939, interest in the subject declined
considerably.
After the resumption of Forward Exchange dealings in 1951
I was asked to write articles on the subject for the Financial
Times and for the Banker. In order to be able to do so I had first
to study my own book with a wet towel round my head. But it
Preface to the First Edition ix
was not until the early part of 1959 that, having definitely decided
to produce a new edition of The Theory of Forward Exchange, I
plunged myself wholeheartedly into the task of recapturing my
lost knowledge by repeatedly re-reading my book and by studying
the more recent literature on the subject.
It was not easy at first to put myself once more into the
picture. Having gone through the files of the financial Press, I
found that articles on current developments in respect of Forward
Exchange were remarkably few and far between. In order to
familiarise myself with post-war practice I decided to return to
my happy hunting ground of pre-war days. I paid visits to scores
of bankers to collect information and to recapture that atmosphere
of the Foreign Exchange market without which it was impossible
to write on Forward Exchange with any degree of realism. I am
indeed grateful to those old friends and acquaintances who were
still active in Foreign Exchange departments and welcomed me
after an absence of twenty years. They were very generous in
placing their practical experience at my disposal. I am equally
grateful to Foreign Exchange dealers of the new generation whose
acquaintance I made during my visits to the City in 1959. But
it was mainly pre-war dealers who were able to put me wise about
the changes that have taken place compared with pre-war days,
since they were in a position to make comparisons. I did not
confine my field research to the London banking community but
paid visits also to Ziirich and Amsterdam.
Like Rip van Winkle after his long sleep, I looked round and
noted a great many changes. Indeed, I discovered changes that
had completely escaped the attention of those whose job it had
been to follow closely current developments in the Foreign Ex
change market. An outstanding instance was my discovery of
the market in European dollar deposits in London, which assumed
considerable importance during the late 'fifties, but which insti
tutional change of far-reaching implications was completely ignored
by the financial Press until the publication of my article on the
subject in the January 1960 issue of the Banker. In saying this I
do not mean to criticise those who have failed to perceive this
and other changes dealt with in the present book. It was easier
for me after a long absence to discover changes which had come
about so gradually and imperceptibly as to escape the attention
of those in daily touch with the market.
In addition to forward operations arising from the extensive
