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.