2. With regard to the second influence making for low exchange, sale of American bonds or stocks abroad, no season can be set when the influence is more likely to be operative than at any other, unless, possibly, it be the Spring, when money rates are more apt to be low and bond issues larger than at any other time of the year. No time, however, can be definitely set—there are years when the bulk of the new issues are brought out in the Spring and other years when the Fall season sees most of the new financing. But whatever the time of the year, one thing is certain—the issue of any amount of American bonds with Europe participating largely means a full supply of foreign exchange not only during the time the issues are actually being brought out, but for long afterward.
There used to be a saying among exchange dealers that cotton exports make exchange faster than anything, but nowadays bond sales abroad have come to take first place. For foreign participation in syndicates formed to underwrite new issues almost invariably means the drawing of bills representing the full amount of the foreign participation. A syndicate is formed, for instance, to take off the hands of the X Y Z railroad $30,000,000 of new bonds, the arrangement being that the railroad is to receive its money at once and that the syndicate is to take its own time about working off the bonds. Half the amount, say, has been allotted to foreign houses. Immediately, the drawing of £3,000,000, or francs 75,000,000, as the case may be, begins. The foreign houses have to raise the money, and in nine cases out of ten, their way of doing it is to arrange with some representative abroad to let them draw long drafts, against the deposit of securities on this side. These drafts, in pounds or francs, at sixty to ninety days' sight, they can sell in the exchange market for dollars, thus securing the money they have agreed to turn over to the railroad. In the meantime, during the life of the drafts they have set afloat and before they come due and have to be paid off, the bankers here can go about selling the bonds and getting back their money. Perhaps before the sixty or ninety days, as the case may be, are over, the syndicate may have sold out all its bonds and its foreign members have been put in a position where they can pay off all the drafts they set afloat originally in order to raise the money.
Very often, however, it will happen that on account of one reason or another, sixty days pass or ninety days pass without the syndicate having been able to dispose of its bonds. In that case the long bills drawn on the foreign bankers have to be "renewed"—that being a process for which ample provision has, of course, been made. In a succeeding chapter, full description of how long bills of exchange coming due are renewed will be made. Just here it is only necessary to say that most or all of the money necessary to pay off the maturing bills is raised by selling another batch of "sixties" or "nineties," an operation which throws the maturity two or three months further ahead.
From this outline of the way foreign participation in American bond issues is financed, it can be seen that every time a big issue of bonds of a railroad or industrial in which European investors are actively interested, is brought out, it means a large supply of foreign exchange created and suddenly thrown on the exchange market for sale. Not any more suddenly or publicly than the bankers concerned can help, but still necessarily so to a great degree, because big bond issues can only be made with the full knowledge and coöperation of a large part of the public. Bankers who know in advance of large issues likely to be made and in which they know they will be asked to participate, often sell "futures" covering the exchange they foresee their participation will bring into existence, but as a general rule it may be set down that heavy issues, involving the sale abroad of large amounts of bonds, are a most depressing factor on the foreign exchange market. Especially so, as the participants who have agreed to turn over the money to the railroad, must sell bills to raise it, even if the horde of speculators and "trailers" who are always on the lookout for such opportunities, make every effort to sell the market out from under their feet.
3. Uneasiness with regard to the stability of the financial situation at some point abroad where American bankers usually carry large balances is another circumstance which often depresses the exchange market sharply. "Trouble in the Balkans" and "trouble over the Moroccan situation" are two bugbears which have for years back furnished the keynote for many swoops downward in the exchange market, and for years after this book is published will probably continue to do so. Money on deposit at a point several thousand miles away is naturally very sensitive, and the least suspicion of financial trouble is sufficient to cause its withdrawal. Withdrawal of bankers' balances from a foreign city means offerings of exchange drawn on that point with resultant decline in rates.
In the everyday life of the exchange market, political developments of an unfavorable character and war rumors are about the most frequent and potent influences toward the condition of uneasiness above referred to. Few war rumors ever come to anything, but there are times when they circulate with astonishing frequency and persistence and cause decided uneasiness concerning financial conditions at important points. At such times bankers having money on deposit at those points are apt to become influenced by the drift of sentiment and to draw down their balances. Here, again, operators in exchange, keenly on the alert for such chances, will very likely begin to sell the exchange market short and often succeed in breaking it to a degree entirely unwarranted by the known facts.
4. But of all the sure depressing influences on exchange, none is more sure than a rise in the money market. More gradual usually than a decline caused by such an influence as the sale of American bonds abroad, the influence of a rising level of money rates is nevertheless far more certain.
The theory of this "counter" movement in money rates and exchange is simply that when money rates rise, say at a point like New York, American bankers find it profitable to draw in their deposits from all over Europe for the purpose of using the money in New York. Such a process means a wholesale drawing of bills of exchange on all the leading European cities, with consequent offering of the bills and price-depression in the leading American exchange markets.
The number of banks scattered all over the United States which keep running deposit accounts in the leading European cities has become surprisingly great during the past ten years, and a movement to bring home this capital has to go only a little way before it reaches very large proportions. That is exactly what happens when money rates at a point like New York become decidedly more attractive than they are over on the other side. Arrangements with foreign correspondents usually call for a minimum balance of considerable size, which must be left intact, but under ordinary circumstances there is considerable leeway, and when the better opportunity for loaning presents itself here, drafts on balances abroad, in large aggregate amount, are apt to be drawn and sold in this market. Especially is this the case when the cause of the higher money level appears to be deep-rooted and the outlook is for a continuance of the condition for some time to come.
5. Lastly, as a depressing factor, there is to be considered the condition which arises when money at some important foreign center, such as London or Paris, begins to ease decidedly. Large receipts of gold from the mines, a bettering political outlook—these or many other causes may bring it about that money in London, for instance, after a period of high rates, may ease off faster than in Berlin or Hamburg. As a result, American bankers having large balances in London and finding it difficult to employ them profitably there, any longer, either withdraw them entirely or have the money transferred to some other point. In either case the operation will result in depressing the rate of exchange on London, for the American banker will either draw on London himself or, if he wants to transfer the money to Berlin or Hamburg, will instruct the German bankers by cable to draw for his account on London. In whatever way it is accomplished, the withdrawal of capital from any banking point tends to lower the rate of foreign exchange on that point.