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. The need for exchange with which to pay for imports of merchandise.
2. The need for exchange with which to pay for securities (American or foreign) purchased by us in Europe.
3. The necessity of remitting abroad the interest and dividends on the huge sums of foreign capital invested here, and the money which foreigners domiciled in this country are continually sending home.