Elements of Foreign
Exchange

A FOREIGN EXCHANGE PRIMER

By FRANKLIN ESCHER
Special Lecturer on Foreign Exchange at New York University

Fifth Edition

NEW YORK
THE BANKERS PUBLISHING COMPANY
1915

LONDON
EFFINGHAM WILSON, 54 THREADNEEDLE ST.

Copyright 1910
By the Bankers Publishing Co.
New York

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CONTENTS

    PAGE Chapter I. What Foreign Exchange is and What Brings it into Existence 3 The various forms of obligation between the bankers and merchants of one country and the bankers and merchants of another, which result in the drawing of bills of exchange.   Chapter II. The Demand for Bills of Exchange 15 A discussion of the six sources from which spring the demand for the various kinds of bills of exchange.   Chapter III. The Rise and Fall of Exchange Rates 25 Operation of the five main influences tending to make exchange rise as opposed to the five main influences tending to make   Chapter IV. The Various Kinds of Exchange 45 A detailed description of: Commercial "Long" Bills—‌Clean Bills—‌Commercial "Short" Bills—‌Drafts drawn against securities sold abroad—‌Bankers' demand drafts—‌Bankers' "long" drafts.   Chapter V. The Foreign Exchange Market 59 How the exchange market is constituted. The bankers, dealers and brokers who make it up. How exchange rates are established. The relative importance of different kinds of exchange.   Chapter VI. How Money Is Made in Foreign Exchange. The Operations of the Foreign Department 68 An intimate description of: Selling demand bills against remittances of demand bills—‌Selling cables against remittances of demand bills—‌Selling demand drafts against remittances of "long" exchange—‌The operation of lending foreign money here—‌The drawing of finance bills—‌Arbitraging in Foreign Exchange—‌Dealing in exchange "futures."   Chapter VII. Gold Exports and Imports 106 The primary movement of gold from the mines to the markets, and its subsequent distribution along the lines of favorable exchange rates. Description (with presentation of actual figures) of: The export of gold bars from New York to London—‌Import of gold bars from London—‌Export of gold bars to Paris under the "triangular operation." Shipments to Argentina.   London as a "free" gold market and the ability of the Central Banks in Europe to control the movement of gold.   Chapter VIII. Foreign Exchange in its Relation to International Security Trading 130 Europe's "fixed" and "floating" investment in American bonds and stocks a constant source of international security trading. Consequent foreign exchange business. Financing foreign speculation in "Americans." Description of the various kinds of bond and stock "arbitrage."   Chapter IX. The Financing of Exports and Imports 141 A complete description of the international banking system by which merchandise is imported into and exported from the United States. An actual operation followed through its successive steps.  

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PREFACE

"Where can I find a little book from which I can get a clear idea of how foreign exchange works, without going too deeply into it?"—‌that question, put to the author dozens of times and by many different kinds of people, is responsible for the existence of this little work. There are one or two well-written textbooks on foreign exchange, but never yet has the author come across a book which covered this subject in such a way that the man who knew little or nothing about it could pick up the book and within a few hours get a clear idea of how foreign exchange works,—‌the causes which bear upon its movement, its influence on the money and security markets, etc.

That is the object of this little book—‌to cover the ground of foreign exchange, but in such a way as to make the subject interesting and its treatment readable and comprehensible to the man without technical knowledge. Foreign exchange is no easy subject to understand; there are few important subjects which are. But, on the other hand, neither is it the complicated and abstruse subject which so many people seem to consider it—‌an idea only too often born of a look into some of the textbooks on exchange, with their formidable pages of tabulations, formulas, and calculations of all descriptions. For the average man there is little of interest in these intricacies of the subject. Many of the shrewdest and most successful exchange bankers in New York City, indeed, know less about them than do some of their clerks. What is needed is rather a clear and definite

knowledge of the movement of exchange—‌why it moves as it does, what can be read from its movements, what effects its movements exert on the other markets. It is in the hope that something may be added to the general understanding of these important matters that this little book is offered to the public.

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THE ELEMENTS OF FOREIGN
EXCHANGE

 

CHAPTER I

WHAT FOREIGN EXCHANGE IS AND WHAT BRINGS IT INTO EXISTENCE

Underlying the whole business of foreign exchange is the way in which obligations between creditors in one country and debtors in another have come to be settled—‌by having the creditor draw a draft directly upon the debtor or upon some bank designated by him. A merchant in New York has sold a bill of goods to a merchant in London, having thus become his creditor, say, for $5,000. To get his money, the merchant in New York will, in the great majority of cases, draw a sterling draft upon the debtor in London for a little over £1,000. This draft his banker will readily enough convert for him into dollars. The buying and selling and discounting of countless such bills of exchange constitute the very foundation of the foreign exchange business.

Not all international obligations are settled by having the creditor draw direct on the debtor. Sometimes gold is actually sent in payment. Sometimes the debtor goes to a banker engaged in selling drafts on the city where the obligation exists, gets such a draft from him and sends that. But in the vast majority of cases payment is effected as stated—‌by a draft drawn directly on the buyer of the goods. John Smith in London owes me money. I draw on him for £100, take the draft around to my bank and sell it at, say, 4.86, getting for it a check for $486.00. I have my money, and I am out of the transaction.

Obligations continually arising in the course of trade and finance between firms in New York and firms in London, it follows that every day in New York there will be merchants with sterling drafts on London which they are anxious to sell for dollars, and vice versa. The supply of exchange, therefore, varies with the obligations of one country to another. If merchants in New York, for instance, have sold goods in quantity in London, a great many drafts on London will be drawn and offered for sale in the New York exchange market. The supply, it will of course be apparent, varies. Sometimes there are many drafts for sale; sometimes very few. When there are a great many drafts offering, their makers will naturally have to accept a lower rate of exchange than when the supply is light.

The par of exchange between any two countries is the price of the gold unit of one expressed in the money of the other. Take England and the United States. The gold unit of England is the pound sterling. What is the price of as much gold as there is in a new pound sterling, expressed in American money? $4.8665. That amount of dollars and cents at any United States assay office will buy exactly as much gold as there is contained in a new British pound sterling, or sovereign, as the actual coin itself is called. 4.8665 is the mint par of exchange between Great Britain and the United States.

The fact that the gold in a new British sovereign (or pound sterling) is worth $4.8665 in our money by no means proves, however, that drafts payable in pounds in London can always be bought or sold for $4.8665 per pound. To reduce the case to a unit basis, suppose that you owed one pound in London, and that, finding it difficult to buy a draft to send in payment, you elected to send actual gold. The amount of gold necessary to settle your debt would cost $4.8665, in addition to which you would have to pay all the expenses of remitting. It would be cheaper, therefore, to pay considerably more than $4.8665 for a one-pound draft, and you would probably bid up until somebody consented to sell you the draft you wanted.

Which goes to show that the mint par is not what governs the price at which drafts in pounds sterling can be bought, but that demand and supply are the controlling factors. There are exporters who have been shipping merchandise and selling foreign exchange against the shipments all their lives who have never even heard of a mint par of exchange. All they know is, that when exports are running large and bills in great quantity are being offered, bankers are willing to pay them only low rates—‌$4.83 or $4.84, perhaps, for the commercial bills they want to sell for dollars. Conversely, when exports are running light and bills drawn against shipments are scarce, bankers may be willing to pay 4.87 or 4.88 for them.

For a clear understanding of the mechanics of the exchange market there is necessary a clear understanding of what the various forms of obligations are which bring foreign exchange into existence. Practically all bills originate from one of the following causes:

1. Looking at these sources of supply in the order in which they are given, it is apparent, first, what a vast amount of foreign exchange originates from the direct export of merchandise from this country. Exports for the period given below have been as follows:

1913 $2,465,884,000 1912 2,204,322,000 1911 2,049,320,000 1910 1,744,984,000 1909 1,663,011,000

Not all of this merchandise is drawn against; in some cases the buyer abroad chooses rather to secure a dollar draft on some American bank and to send that in payment. But in the vast majority of cases the regular course is followed and the seller here draws on the buyer there.

There are times, therefore, when exchange originating from this source is much more plentiful than at others. During the last quarter of each year, for instance, when the cereal and cotton crop exports are at their height, exchange comes flooding into the New York market from all over the country, literally by the hundreds of millions of dollars. The natural effect is to depress rates—‌sometimes to a point where it becomes possible to use the cheaply obtainable exchange to buy gold on the other side.

In a following chapter a more detailed description of the New York exchange market is given, but in passing, it is well to note how the whole country's supply of commercial exchange, with certain exceptions, is focussed on New York. Chicago, Philadelphia, and one or two other large cities carry on a pretty large business in exchange, independent of New York, but by far the greater part of the commercial exchange originating throughout the country finds its way to the metropolis. For in New York are situated so many banks and bankers dealing in bills of exchange that a close market is always assured. The cotton exporter in Memphis can send the bills he has drawn on London or Liverpool to his broker in New York with the fullest assurance that they will be sold to the bankers at the highest possible rate of exchange anywhere obtainable.

2. The second source of supply is in the sale abroad of stocks and bonds. Here again it will be evident how the

supply of bills must vary. There are times when heavy flotations of bonds are being made here with Europe participating largely, at which times the exchange drawn against the securities placed abroad mounts up enormously in volume. Then again there are times when London and Paris and Berlin buy heavily into our listed shares and when every mail finds the stock exchange houses here drawing millions of pounds, marks, and francs upon their correspondents abroad. At such times the supply of bills is apt to become very great.

Origin of bills from this source, too, is apt to exert an important influence on rates, in that it is often sudden and often concentrated on a comparatively short period of time. The announcement of a single big bond issue, often, where it is an assured fact that a large part of it will be placed abroad, is enough to seriously depress the exchange market. Bankers know that when the shipping abroad of the bonds begins, large amounts of bills drawn against them will be offered and that rates will in all probability be driven down.

Announcements of such issues, as well as announcements that a block of this or that kind of bonds has been placed abroad with some foreign syndicate, are apt to come suddenly and often find the exchange market unprepared. For the supply of exchange originated thereby, it must be remembered, is not confined to the amount actually drawn against bonds sold but includes also all the exchange which other bankers, in their anticipation of lower rates, hasten to draw. The exchange market is, indeed, a sensitive barometer, from which those who understand it can read all sorts of coming developments. It often happens that buying or selling movements in our securities by the foreigners are so clearly forecasted by the action of the exchange market that bankers here are able to gain great advantage from what they are able to foresee.

3. The third great source of supply is in the drafts which bankers in one country draw upon bankers in another in the operation of making international loans. The mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from England to the United States, can best be effected by having the American house draw upon the English bank which wants to lend the money. In the finely adjusted state of the foreign exchanges nowadays, loans are continually being made by bankers in one country to bankers and merchants in another. Very little of the capital so transferred goes in the form of gold. A London house decides to loan, say, $100,000 in the American market. The terms having been arranged, the London house cables its New York correspondent to draw for £20,000, at 60 or 90 days' sight, as the case may be. The New York house, having drawn the draft, sells it in the exchange market, realizing on it the $100,000, which it then proceeds to loan out according to instructions.

The arranging of these loans, it will be seen, means the continuous creation of very large amounts of foreign exchange. As the financial relationships between our bankers and those of the Old World have been developed, it has come about that European money is being put out in this market in increasing volume. Conditions of money, discount, and exchange are constantly being watched for the opportunity to make loans on favorable terms, and the aggregate of foreign money loaned out here at times reaches very large figures. In 1901 Europe had big amounts of money outstanding in the New York market, and again in 1906 very large sums of English and French capital were temporarily placed at our disposal. But in the summer of 1909 all records were surpassed, American borrowings in London and Paris footing up to at least half a billion dollars. Such loans, running only a couple of months on the average and then being sometimes paid off, but more often shifted about or renewed, give rise to the drawing of immense amounts of foreign exchange.

4. Drawing of so-called "finance-bills," of which a complete description will be found in chapters IV and VI, is the fourth source whence foreign exchange originates. Whenever money rates become decidedly higher in one of the great markets than in the others, bankers at that point who have the requisite facilities and credit, arrange with bankers in other markets to allow them (the bankers at the point where money is high) to draw 60 or 90 days' sight bills. These bills can then be disposed of in the exchange market, dollars being realized on them, which can then be loaned out during the whole life of the bills. The advantages or dangers of such an operation will not be touched upon here, the purpose of this chapter being merely to set forth clearly the sources from which foreign exchange originates.

And when money is decidedly higher in New York than in London an immense volume of foreign exchange does originate from this source. A number of firms and banks, with either their own branches in London or with correspondents there to whom they stand very close, are in a position where they can draw very large amounts of finance bills whenever they deem it profitable and expedient to do so. Eventually, of course, these 60 and 90 day bills come due and have to be settled by remittances of demand exchange, but in the meantime the house which drew them will have had the unrestricted use of the money. In a market like New York this is only too often a prime consideration. With money rates soaring as they do so frequently here, a banker can pay almost any commission his correspondent abroad demands and still come out ahead on the transaction.

These are the principal sources from which foreign exchange originates—‌shipments of merchandise, sales abroad of securities, transfer of foreign banking capital to this side, sale of finance-bills. Other causes of less importance—‌interest and profits on American capital invested in Europe, for instance—‌are responsible for the existence of some quantity of exchange, but the great bulk of it originates from one of the four sources above set forth. In the next chapter effort will be made to show whence arises the demand which pretty effectually absorbs all the supply of exchange produced each year.

 

CHAPTER II

THE DEMAND FOR BILLS OF EXCHANGE

Turning now to consideration of the various sources from which springs the demand for foreign exchange, it appears that they can be divided about as follows:

1. Payment for merchandise imported constitutes probably the most important source of demand for foreign exchange. Merchandise brought into the country for the period given herewith has been valued as follows:

1913 $1,813,008,000 1912 1,653,264,000 1911 1,527,226,000 1910 1,556,947,000 1909 1,311,920,000

Practically the whole amount of these huge importations has had to be paid for with bills of exchange. Whether the merchandise in

question is cutlery manufactured in England or coffee grown in Brazil, the chances are it will be paid for (under a system to be described hereafter) by a bill of exchange drawn on London or some other great European financial center. From one year's end to the other there is constantly this demand for bills with which to pay for merchandise brought into the country. As in the case of exports, which are largest in the Fall, there is much more of a demand for exchange with which to pay for imports at certain times of the year than at others, but at all times merchandise in quantity is coming into the country and must be paid for with bills of exchange.

2. The second great source of demand originates out of the necessity of making payment for securities purchased abroad. So far as the American participation in foreign bond issues is concerned, the past few years have seen very great developments. We are not yet a people, as are the English or the French, who invest a large proportion of their accumulated savings outside of their own country, but as our investment surplus has increased in size, it has come about that American investors have been going in more and more extensively for foreign bonds. There have been times, indeed, as when the Japanese loans were being floated, when very large amounts of foreign exchange were required to pay for the bonds taken by American individuals and syndicates.

Security operations involving a demand for foreign exchange are, however, by no means confined to American participation in foreign bond issues. Accumulated during the course of the past half century, there is a perfectly immense amount of American securities held all over Europe. The greater part of this investment is in bonds and remains untouched for years at a stretch. But then there come times when, for one reason or another, waves of selling pass over the European holdings of "Americans," and we are required to take back millions of dollars' worth of our stocks and bonds. Such selling movements do not really get very far below the surface—‌they do not, for instance, disturb the great blocks of American bonds in which so large a proportion of many of the big foreign fortunes are invested, but they are apt to be, nevertheless, on a scale which requires large amounts of exchange to pay for what we have had to buy back.

The same thing is true with stocks, though in that case the selling movements are more frequent and less important. Europe is always interested heavily in American stocks, there being, as in the case of bonds, a big fixed investment of capital, beside a continually fluctuating "floating-investment." In other words, aside from their fixed investments in our stocks, the foreigners are continually speculating in them and continually changing their position as buyers and sellers. Selling movements such as these do not materially affect Europe's set position on our stocks, but they do result at times in very large amounts of our stocks being dumped back upon us—‌sometimes when we are ready for them, sometimes when the operation is decidedly painful, as in the Fall of 1907. In any case, when Europe sells, we buy. And when we buy, and at the rate of millions of dollars' worth a day, there is a big demand for exchange with which to pay for what we have bought.

3. So great is the foreign investment of capital in this country that the necessity of remitting the interest and dividends alone means another continuous demand for very large amounts of foreign exchange. Estimates of how much European money is invested here are little better than guesses. The only sure thing about it is that the figures run well up into the billions and that several hundred millions of dollars' worth of interest and dividends must be sent across the water each year. There are, in the first place, all the foreign investments in what might be called private enterprise—‌the English money, for instance, invested in fruit orchards, gold and copper mines, etc., in the western states. Profits on this money are practically all remitted back to England, but no way exists of even estimating what they amount to. Aside from that there are all the foreign holdings of bonds and stocks in our great public corporations, holdings whose ownership it is impossible to trace. Only at the interest periods at the beginning and middle of each year does it become apparent how large a proportion of our bonds are held in Europe and how great is the demand for exchange with which to make the remittances of accrued interest. At such times the incoming mails of the international banking houses bulge with great quantities of coupons sent over here for collection. For several weeks on either side of the two important interest periods, the exchange market feels the stimulus of the demand for exchange with which the proceeds of these masses of coupons are to be sent abroad.

4. Freights and insurance are responsible for a fourth important source of demand for foreign exchange. A walk along William Street in New York is all that is necessary to give a good idea of the number and importance of the foreign companies doing business in the United States. In some form or other all the premiums paid have to be sent to the other side. Times come, of course, like the year of the Baltimore fire, when losses by these foreign companies greatly outbalance premiums received, the business they do thus resulting in the actual creation of great amounts of foreign exchange, but in the long run—‌year in, year out—‌the remitting abroad of the premiums earned means a steady demand for exchange.

With freights it is the same proposition, except that the proportion of American shipping business done by foreign companies is much greater than the proportion of insurance business done by foreign companies. Since the Civil War the American mercantile marine instead of growing with the country has gone steadily backward, until now the greater part of our shipping is done in foreign bottoms. Aside from the other disadvantages of such a condition, the payment of such great sums for freight to foreign companies is a direct economic drain. An estimate that the yearly freight bill amounts to $150,000,000 is probably not too high. That means that in the course of every year there is a demand for that amount of exchange with which to remit back what has been earned from us.

5. Tourists' expenditures abroad are responsible for a further heavy demand for exchange. Whether it is because Americans are fonder of travel than the people of other countries or whether it is because of our more or less isolated position on the map, it is a fact that there are far more Americans traveling about in Europe than people belonging to any other nation. And the sums spent by American tourists in foreign lands annually aggregate a very large amount—‌possibly as much as $175,000,000—‌all of which has eventually to be covered by remittances of exchange from this side.

Then again there must be considered the expenditures of wealthy Americans who either live abroad entirely or else spend a large part of their time on the other side. During the past decade it has come about that every European city of any consequence has its "American Colony," a society no longer composed of poor art students or those whose residence abroad is not a matter of volition, but consisting now of many of the wealthiest Americans. By these expatriates money is spent extremely freely, their drafts on London and Paris requiring the frequent replenishment, by remittances of exchange from this side, of their bank balances at those points. Furthermore, there must be considered the great amounts of American capital transferred abroad by the marriage of wealthy American women with titled foreigners. Such alliances mean not only the transfer of large amounts of capital en bloc, but mean as well, usually, an annual remittance of a very large sum of money. No account of the money drained out of the country in this way is kept, of course, but it is an item which certainly runs up into

the tens of millions.

6. Lastly, there is the demand for exchange originating from the paying off of the short-term loans which European bankers so continuously make in the American market. There is never a time nowadays when London and Paris are lending American bankers less than $100,000,000 on 60 or 90 day bills, while the total frequently runs up to three or four times that amount. The sum of these floating loans is, indeed, changing all the time, a circumstance which in itself is responsible for a demand for very great amounts of foreign exchange.

Take, for instance, the amount of French and English capital employed in this market in the form of short-term loans; $250,000,000 is probably a fair estimate of the average amount, and 90 days a fair estimate of the average time the loans run before being paid off or renewed. That means that the quarter of a billion dollars of floating indebtedness is "turned over" four times a year and that means that every year the rearrangement of these loans gives rise to a demand for a billion dollars' worth of foreign exchange. These loaning operations, it must be understood, both originate exchange and create a demand for it. They are mentioned, therefore, in the preceding chapter, as one of the sources from which exchange originates, and now as one of the sources from which, during the course of every year, springs a demand for a very great quantity of exchange.

The six sources of demand for exchange, then, are for the payment for imports; for securities purchased abroad; for the remitting abroad of interest on foreign capital invested here and the money which foreigners in this country send home; for remitting freight and insurance profits earned by foreign companies here; for tourists' expenses abroad; and lastly, for the paying off of foreign loans. From these sources spring practically all the demand for exchange. In the last chapter there were set forth the principal sources of supply. With a clear understanding of where exchange comes from and of where it goes, it ought now to be possible for the student of the subject to grasp the causes which bear on the movement of exchange rates. That subject will accordingly be taken up in the next chapter.

 

CHAPTER III

THE RISE AND FALL OF EXCHANGE RATES

Granted that the obligations to each other of any two given countries foot up to the same amount, it is evident that the rate of exchange will remain exactly at the gold par—‌that in New York, for instance, the price of the sovereign will be simply the mint value of the gold contained in the sovereign. But between no two countries does such a condition exist—‌take any two, and the amount of the obligation of one to the other changes every day, which causes a continuous fluctuation in the exchange rate—‌sometimes up from the mint par, sometimes down.

Before going on to discuss the various causes influencing the movement of exchange rates, there is one point which should be very clearly understood. Two countries, at least, are concerned in the fluctuation of every rate. Take, for example, London and New York, and assume that, at New York, exchange on London is falling. That in itself means that, in London, exchange on New York is rising.

For the sake of clearness, in the ensuing discussion of the influences tending to raise and lower exchange rates, New York is chosen as the point at which these influences are operative. Consideration will be given first to the influences which cause exchange to go up. In a general way, it will be noticed, they conform with the sources of demand for exchange given in the previous chapter. They may be classified about as follows:

1. Heavy imports are always a potent factor in raising the level of exchange rates. Under whatever financial arrangement or from whatever point merchandise is imported into the United States, payment is almost invariably made by draft on London, Paris, or Berlin. At times when imports run especially heavy, demand from importers for exchange often outweighs every other consideration, forcing rates up to high levels. A practical illustration is to be found in the inpour of merchandise which took place just before the tariff legislation in 1909. Convinced that duties were to be raised, importers rushed millions of dollars' worth of merchandise of every description into the country. The result was that the demand for exchange became so great that in spite of the fact that it was the season when exports normally meant low exchange, rates were pushed up to the gold export point.

2. Heavy purchasing movements of our own or foreign securities, on the other side, are the second great influence making for high exchange. There come times when, for one reason or another, the movement of securities is all one way, and when it happens that for any cause we are the ones who are doing the buying, the exchange market is likely to be sharply influenced upward by the demand for bills with which to make payments. Such movements on a greater or less scale go on all the time and constitute one of the principal factors which exchange managers take into consideration in making their estimate of possible exchange market fluctuations.

It is interesting, for instance, to note the movement of foreign exchange at times when a heavy selling movement of American stocks by the foreigners is under way. Origin of security-selling on the Stock Exchange is by no means easy to trace, but there are times when the character of the brokers doing the selling and the very nature of the stocks being disposed of mean much to the experienced eye. Take, for instance, a day when half a dozen brokers usually identified with the operations of the international houses are consistently selling such stocks as Missouri, Kansas & Texas, Baltimore & Ohio, or Canadian Pacific—‌whether or not the inference that the selling is for foreign account is correct can very probably be read from the movement of the exchange market. If it is the case that the selling comes from abroad and that we are buying, large orders for foreign exchange are almost certain to make their appearance and to give the market a very strong tone if not actually to urge it sharply upward. Such orders are not likely to be handled in a way which makes them apparent to everybody, but as a rule it is impossible to execute them without creating a condition in the exchange market apparent to every shrewd observer. And, as a matter of fact, many an operation in the international stocks is based upon judgment as to what the action of the exchange market portends. Similarly—‌the other way around—‌exchange managers very frequently operate in exchange on the strength of what they judge or know is going to happen in the market for the international stocks. With the exchange market sensitive to developments, knowledge that there is to be heavy selling in some quarter of the stock market, from abroad, is almost equivalent to knowledge of a coming sharp rise in exchange on London.

Perhaps the best illustration of how exchange can be affected by foreign selling of our securities occurred just after the beginning of the panic period in October of 1907. Under continuous withdrawals of New York capital from the foreign markets, exchange had sold down to a very low point. Suddenly came the memorable selling movement of

"Americans" by English and German investors. Within two or three days perhaps a million shares of American stocks were jettisoned in this market by the foreigners, while exchange rose by leaps and bounds nearly 10 cents to the pound, to the unheard-of price of 4.91. Nobody had exchange to sell and almost overnight there had been created a demand for tens of millions of dollars' worth.

3. The coming to maturity of American bonds held abroad is another influencing factor closely kept track of by dealers in exchange. So extensive is the total foreign investment in American bonds that issues are coming due all the time. Where some especially large issue runs off without being funded with new bonds, demand for exchange often becomes very strong. Especially is this the case with the short-term issues of the railroads and most especially with New York City revenue warrants which have become so exceedingly popular a form of investment among the foreign bankers. In spite of its mammoth debt, New York City is continually putting out revenue warrants, the operation amounting, in fact, to the issue of its notes. Of late years Paris bankers, especially, have found the discounting of these "notes" a profitable operation and have at times taken them in big blocks.

Whenever one of these blocks of revenue warrants matures and has to be paid off, the exchange market is likely to be strongly affected. Accumulation of exchange in preparation is likely to be carried on for some weeks ahead, but even at that the resulting steady demand for bills often exerts a decidedly stimulating influence. Experienced exchange managers know at all times just what short-term issues are coming due, about what proportion of the bonds or notes have found their way to the other side, just how far ahead the exchange is likely to be accumulated. Repayment operations of this kind are often almost a dominant, though usually temporary, influence on the price of exchange.

4. Low money rates are the fourth great factor influencing foreign exchange upward. Whenever money is cheap at any given center, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. It has come about during the past few years that so far as the operation of loaning money is concerned, the whole financial world is one great market, New York bankers nowadays loaning out their money in London with the same facility with which they used to loan it out in Boston or Philadelphia. So close have become the financial relationships between leading banking houses in New York and London that the slightest opportunity for profitable loaning operations is immediately availed of.

Money rates in the New York market are not often less attractive than those in London, so that American floating capital is not generally employed in the English market, but it does occasionally come about that rates become abnormally low here and that bankers send away their balances to be loaned out at other points. During long periods of low money, indeed, it often happens that large lending institutions here send away a considerable part of their deposits, to be steadily employed for loaning out and discounting bills in some foreign market. Such a time was the long period of stagnant money conditions following the 1907 panic. Trust companies and banks who were paying interest on large deposits at that time sent very large amounts of money to the other side and kept big balances running with their correspondents at such points as Amsterdam, Copenhagen, St. Petersburg, etc.,—‌anywhere, in fact, where some little demand for money actually existed. Demand for exchange with which to send this money abroad was a big factor in keeping exchange rates at their high level during all that long period.

5. High money rates at some given foreign point as a factor in elevating exchange rates on that point might almost be considered as a corollary of low money here, but special considerations often govern such a condition and make it worth while to note its effect. Suppose, for instance, that at a time when money market conditions all over the world are about normal, rates, for any given reason, begin to rise at some point, say London. Instantly a flow of capital begins in that direction. In New York, Paris, Berlin and other centers it is realized that London is bidding better rates for money than are obtainable locally, and bankers forthwith make preparations to increase the sterling balances they are employing in London. Exchange on that particular point being in such demand, rates begin to rise, and continue to rise, according to the urgency of the demand.

Particular attention will be given later on to the way in which the Bank of England and the other great foreign banks manipulate the money market and so control the course of foreign exchange upon themselves, but in passing it is well to note just why it is that when the interest rate at any given point begins to go up, foreign exchange drawn upon that point begins to go up, too. Remittances to the point where the better bid for money is being made, are the very simple explanation. Bankers want to send money there, and to do it they need bills of exchange. An urgent enough demand inevitably means a rise in the quotation at which the bills are obtainable. Which suggests very plainly why it is that when the Directors of the Bank of England want to raise the rate of exchange upon London, at New York or Paris or Berlin, they go about it by tightening up the English money market.

The foregoing are the principal causes making for high exchange. The causes which make up for low rates must necessarily be to a certain extent merely the converse, but for the sake of clearness they are set down. The division is about as follows: