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Elements of Foreign Exchange: A Foreign Exchange Primer. Franklin Escher
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isbn 4064066191436
Автор произведения Franklin Escher
Жанр Языкознание
Издательство Bookwire
Perhaps the best illustration of how exchange can be affected by foreign selling of our securities occurred just after the beginning of the panic period in October of 1907. Under continuous withdrawals of New York capital from the foreign markets, exchange had sold down to a very low point. Suddenly came the memorable selling movement of "Americans" by English and German investors. Within two or three days perhaps a million shares of American stocks were jettisoned in this market by the foreigners, while exchange rose by leaps and bounds nearly 10 cents to the pound, to the unheard-of price of 4.91. Nobody had exchange to sell and almost overnight there had been created a demand for tens of millions of dollars' worth.
3. The coming to maturity of American bonds held abroad is another influencing factor closely kept track of by dealers in exchange. So extensive is the total foreign investment in American bonds that issues are coming due all the time. Where some especially large issue runs off without being funded with new bonds, demand for exchange often becomes very strong. Especially is this the case with the short-term issues of the railroads and most especially with New York City revenue warrants which have become so exceedingly popular a form of investment among the foreign bankers. In spite of its mammoth debt, New York City is continually putting out revenue warrants, the operation amounting, in fact, to the issue of its notes. Of late years Paris bankers, especially, have found the discounting of these "notes" a profitable operation and have at times taken them in big blocks.
Whenever one of these blocks of revenue warrants matures and has to be paid off, the exchange market is likely to be strongly affected. Accumulation of exchange in preparation is likely to be carried on for some weeks ahead, but even at that the resulting steady demand for bills often exerts a decidedly stimulating influence. Experienced exchange managers know at all times just what short-term issues are coming due, about what proportion of the bonds or notes have found their way to the other side, just how far ahead the exchange is likely to be accumulated. Repayment operations of this kind are often almost a dominant, though usually temporary, influence on the price of exchange.
4. Low money rates are the fourth great factor influencing foreign exchange upward. Whenever money is cheap at any given center, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. It has come about during the past few years that so far as the operation of loaning money is concerned, the whole financial world is one great market, New York bankers nowadays loaning out their money in London with the same facility with which they used to loan it out in Boston or Philadelphia. So close have become the financial relationships between leading banking houses in New York and London that the slightest opportunity for profitable loaning operations is immediately availed of.
Money rates in the New York market are not often less attractive than those in London, so that American floating capital is not generally employed in the English market, but it does occasionally come about that rates become abnormally low here and that bankers send away their balances to be loaned out at other points. During long periods of low money, indeed, it often happens that large lending institutions here send away a considerable part of their deposits, to be steadily employed for loaning out and discounting bills in some foreign market. Such a time was the long period of stagnant money conditions following the 1907 panic. Trust companies and banks who were paying interest on large deposits at that time sent very large amounts of money to the other side and kept big balances running with their correspondents at such points as Amsterdam, Copenhagen, St. Petersburg, etc.—anywhere, in fact, where some little demand for money actually existed. Demand for exchange with which to send this money abroad was a big factor in keeping exchange rates at their high level during all that long period.
5. High money rates at some given foreign point as a factor in elevating exchange rates on that point might almost be considered as a corollary of low money here, but special considerations often govern such a condition and make it worth while to note its effect. Suppose, for instance, that at a time when money market conditions all over the world are about normal, rates, for any given reason, begin to rise at some point, say London. Instantly a flow of capital begins in that direction. In New York, Paris, Berlin and other centers it is realized that London is bidding better rates for money than are obtainable locally, and bankers forthwith make preparations to increase the sterling balances they are employing in London. Exchange on that particular point being in such demand, rates begin to rise, and continue to rise, according to the urgency of the demand.
Particular attention will be given later on to the way in which the Bank of England and the other great foreign banks manipulate the money market and so control the course of foreign exchange upon themselves, but in passing it is well to note just why it is that when the interest rate at any given point begins to go up, foreign exchange drawn upon that point begins to go up, too. Remittances to the point where the better bid for money is being made, are the very simple explanation. Bankers want to send money there, and to do it they need bills of exchange. An urgent enough demand inevitably means a rise in the quotation at which the bills are obtainable. Which suggests very plainly why it is that when the Directors of the Bank of England want to raise the rate of exchange upon London, at New York or Paris or Berlin, they go about it by tightening up the English money market.
The foregoing are the principal causes making for high exchange. The causes which make up for low rates must necessarily be to a certain extent merely the converse, but for the sake of clearness they are set down. The division is about as follows:
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