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.
4. The necessity of remitting abroad freight and insurance money
earned here by foreign companies.
5. Money to cover American tourists' disbursements and expenses of
wealthy Americans living abroad.
6. The need for exchange with which to pay off maturing foreign
short-loans and finance-bills.
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.