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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.