_Gold Shipments to Argentina_
Of the many other ways in which gold moves, one way seems to be becoming so increasingly important that it is well worthy of attention.
Reference is made to the shipment of gold from New York to the Argentine for account of English bankers who have debts to discharge there.
Owing to Argentine loans placed in the English market and to heavy exports of wheat, hides, and meat from Buenos Aires to London, there exists almost a chronic condition of indebtedness on the part of the London bankers to the bankers in the Argentine. Not offset by any corresponding imports, these conditions are putting Buenos Aires each year in a better and better condition to make heavy demands upon London for gold, demands which have recently grown to such an extent as to make serious inroads on the British banks' reserves. Unwilling to comply with this demand for gold, the powers in charge of the London market have on several occasions deliberately produced money conditions in London resulting in a shifting of the Argentine demand for gold upon New York. The means by which this has been accomplished has been the raising of the Bank of England rate to a point sufficiently high to make the dollar-exchange on New York fall. Able, then, to buy dollar-drafts on New York very cheaply, the London bankers send to New York large amounts of such drafts, with instructions that they be used to buy gold for shipment to the Argentine.
The very general confusion of mind regarding these operations in gold comes perhaps from the fact that they are constantly referred to as being a result of _high exchange on London_, at New York. Which is true, but a most misleading way of expressing the fact that _low exchange_ on _New York_, at London, is the reason of the shipments.
High sterling exchange at New York and low dollar-exchange at London are, of course, one and the same thing. But in this case, what counts is that dollar-exchange can be cheaply bought in London.
No attempt is made in this little work to cover the whole field of operations in gold, infinite in scope as they are and of every conceivable variety. But from the examples given above it ought to be possible to work out a fairly clear idea as to why gold exports and imports take place and as to what the conditions are which bring them about.
While not failing to realize the importance to the markets of the movement back and forth of great amounts of gold, it may nevertheless be said that from the standpoint of the foreign exchange business the importance of transactions in gold is very generally overestimated.
Most dealers in foreign exchange steer clear of exporting or importing gold whenever they can, the business being practically all done by half-a-dozen firms and banks. As has been seen, the profit to be made is miserably small as a rule, while the trouble and risk are very considerable. Import operations, especially, tie up large amounts of ready capital and often throw the regular working of a foreign department out of gear for days and even weeks. There is considerable newspaper advertising to be had by being always among the first to ship or bring in gold, but there are a good many houses who do not want or need that kind of advertising. Some of the best and strongest banking houses in New York, indeed, make it a rule to have nothing to do with operations in gold one way or the other. Should they need drafts on the other side at a time when there are no drafts to be had, such houses prefer to let some one else do the gold-shipping and are willing to let the shipping house make its one-sixteenth of one per cent. or one-thirty-second of one per cent. in the rate of exchange it charges for the bills drawn against the gold.
Particular attention has been paid all through the foregoing chapter to the gold movement in its relation to the New York markets, the movement between foreign points being too big a subject to describe in a work of this kind. In general, however, it can be said that of the three great gold markets abroad, London is the only one which can in any sense be called "free." In Paris, the ability of the Bank of France to pay its notes in silver instead of gold makes it possible for the Bank of France to control the gold movement absolutely, while in Germany the paternalistic attitude of the government is so insistent that gold exports are rarely undertaken by bankers except with the full sanction of the governors of the Reichsbank.
It is a question, even, whether London makes good its boast of maintaining Europe's only "free" gold market. The new gold coming from the mines does, it is true, find its way to London, for the purpose of being auctioned off to the highest bidder, but as the kind of bids which can be made are governed so largely by arbitrary action on the part of the Bank of England, it is a question whether the gold auction can be said to be "free." Suppose, for instance, that the "Old Lady of Threadneedle Street" decides that enough gold has been taken by foreign bidders and that exports had better be checked. Instantly the bank rate goes up, making it harder for the representatives of the foreign banks to bid. Should the rise in the rate not be sufficient to affect the outside exchange on London, the Bank will probably resort to the further expedient of entering the auction for its own account and outbidding all others. Not having any shipping charges to pay on this gold it buys, the Bank is usually able to secure all the gold it wants--or, rather, to keep anybody else from securing it. The auction is open to all, it is true, but being at times conducted under such circumstances, is hardly a market which can be called "free."
If there is any "free" gold market in the world, indeed, it is to be found in the United States. All anybody who wants gold, in this country, has to do, is to go around to the nearest sub-treasury and get it. If the supply of bars is exhausted, the buyer may be disappointed, but that has nothing to do with any restriction on the market. The market for gold bars in the United States is at the Treasury and the various sub-treasuries, and as long as the prospective buyer has the legal tender to offer, he can buy the gold bars which may be on hand.
And at a fixed price, regardless of how urgent the demand may be, who he is, or who else may be bidding. First come first served is the rule, and a rule which is observed as long as the bars hold out. After that, whoever still wants gold can take it in the form of coin.
How such conditions have worked out, so far as our gaining or losing gold is concerned, can be seen from the following table, introduced here for the purpose of giving a clear idea as to just where the United States has stood in the international movement of gold during the five-year period given below:
Exports of Excess of Gold from U.S. Imports Imports
1913 $77,762,622 $69,194,025 [1]$8,568,597 1912 57,328,348 48,936,500 [1]8,391,848 1911 22,509,653 73,607,013 51,097,360 1910 118,563,215 43,339,905 [1]75,223,310 1909 91,531,818 44,003,989 [1]47,527,829
[1] Excess of exports
In conclusion, it may be said that the prediction that as international financial relationships between banks are drawn closer, gold movements will tend to decrease, seem hardly to be borne out by the figures of the table given above. Banks here and banks abroad are working together in a way unknown ten or even five years ago, but as yet there are no signs of any lessening in the inward or outward movement of specie.
More liberal granting of international credits, increased international loaning operations, far from putting an end to the physical movement of gold in large quantities,--these are influences tending to make gold move more freely than ever. The day of the treasure galleons is over, but in their place we have swift-moving steamers by which gold can be shifted from one point to another with safety and ease. Gold movements seem as though they were to play an important part in the markets for a good many years to come.
CHAPTER VIII
FOREIGN EXCHANGE IN ITS RELATION TO INTERNATIONAL SECURITY TRADING
On account of the huge fixed investment of foreign money in the United States, on account of Europe's continuous speculative interest in our markets, and the activity of the "arbitrageurs" in both bonds and shares, dealings in securities between ourselves and the Old World are always on a very great scale. Not infrequently, indeed, Europe's position on American securities is an influence of dominating importance.
From the maturities, refunding operations, and interest remittances alone, growing out of the permanent investment of foreign money in our securities, there results a very great amount of international security and exchange business. Whether Europe's investment here amounts to three billions or four billions or five billions, it is impossible to say; the fact remains that it is so large that every year a very great amount of foreign-held bonds come due and have to be paid off or refunded, and, further, that the remitting abroad of coupon and dividend money each year calls for upward of $150,000,000.
This matter of maturing investments, alone, calls for continuous international security trading and on a large scale. Each year there comes due in this country an amount of railroad and other bonds running well up into the hundreds of millions, of which a large proportion are held on the other side. Some of these maturities are paid off in cash--more often, refunding bonds are offered in exchange; seldom, indeed, are the maturing investments allowed to remain unreplaced.
European investors, especially, have consistently done well with money placed in this country, and the running off to maturity of a foreign-held American bond is nearly sure to be followed up by replacement with some other American security.
Bond houses doing an international business are therefore keenly watchful of the maturity of issues largely held abroad, and are ever ready with offers of new and attractive investments. Knowledge of the location of American investments in Europe is thus a business asset of the greatest importance, and records are carefully kept. The fact that a dealer here knows that some bank in London has a wealthy client who holds a big block of certain bonds about to mature, may very possibly mean that the house here may be able to make a very profitable trade.
Information of this character is carefully gathered wherever possible and as carefully guarded. The longer a house has been in business, naturally, and the closer its financial relationship with investment interests abroad, the more of this sort of information it is bound to possess.
Foreign exchange growing out of these renewals and refundings is on a very large scale. Sometimes the placing of a new issue abroad means such immediate drawing of drafts on foreign buyers of the securities as to depress the exchange market sharply. Sometimes, as in the case of new issues of railroad stock, where payments are usually made in instalments covering a year or more, the drawing of exchange is distributed in such a way that its influence, if felt at all, is felt merely as an underlying element of weakness.
Of a somewhat different character are the foreign exchange transactions originating from what might be called Europe's "floating" investment in American securities and from the out-and-out speculations carried on in this market by the foreigners.
There is never a time, probably, when the floating foreign investment in American stocks and bonds does not run up with the hundreds of millions of dollars. "Speculation," such operations would probably be called by many people, but whether speculation or not, a form of activity which is continually giving rise to big dealings in foreign exchange. For this "floating" investment is very largely for account of bankers whose international connections and credit make it possible for them to carry stocks and bonds through the agency of the exchange market, and without having to put up any actual money. The ingenious method by which this is accomplished is about as follows:
A banker here, for instance, decides that a certain low-priced bond is cheap and that if purchased it will show a substantial profit within six months or a year. Not wanting to buy the bonds and borrow on them here, he invites his foreign correspondent into the deal on joint account, arranging to raise the money with which to buy the bonds by drawing a ninety-day sight draft on the foreign correspondent. This he does, drawing, say, a 50,000 draft at ninety days' sight, and selling it in the exchange market at, let us say, $4.83.
The $241,500 received from the sale of the draft, the American banker uses to buy the bonds. Ninety days later the draft will come due in London, and have to be covered (or renewed) from this side, but in the meantime, a profitable chance to sell the bonds may present itself. If not, the draft can be "renewed" at the end of the ninety days, and again and again if necessary, until the bankers are willing to close out the bonds.
This operation of "renewing" long drafts drawn for the purpose of carrying securities is one of the most interesting phases of foreign exchange business in connection with international security dealings.
The draft has been drawn, say, for 50,000. The end of the ninety-day period comes, the draft is due, is presented, and has to be paid. But the bankers do not choose to sell out the bonds and close the deal.
They arrange instead to renew the maturing draft. This they do by paying the original ninety-day draft out of the proceeds of a new ninety-day draft.
The original draft for 50,000 comes due let us say on October 19, so that about October 10th the New York banker will be under the necessity of sending over to London a demand draft for 50,000. The rate realizable for ninety-day drafts being always considerably lower than the price of demand drafts, it follows that if the banker proposes to buy 50,000 of demand out of the proceeds of a fresh ninety-day bill he will have to draw his fresh bill for more than 50,000. If the demand rate happened to be 4.86, the 50,000 he needs would cost him $243,000.
In order to raise $243,000 by selling a ninety-days' sight draft (say at 4.83) he would have to make the new draft for 50,310. The extra 310 would constitute the interest. Each time he renewed the draft he would have to draw for more and more.
Requiring the tying up of no actual capital, this form of financing "floating investments" has become exceedingly popular and is carried on on a large scale. Where the relationships between the foreign and the American houses are close, there is almost no limit to the number of times an original bill may be renewed. As for the constantly increasing amount of the drafts which have to be drawn, that is taken care of by the interest on the investment carried.
Not all the floating investment in American securities is carried in this way, but in whatever form the financing is done it is bound to involve foreign exchange operations and to necessitate the drawing of drafts by banking houses in this country on their correspondents abroad. Quiet conditions may result in long periods when investments of this kind are left undisturbed, but even then, the constant remitting and renewing of drafts originates a good deal of exchange market activity. And with considerable frequency occur periods when the floating investment is strongly affected by immediate conditions, and when purchases, sales, and transfers of securities stir the exchange market to a high pitch of excitement.
Speculative operations in this market for foreign account, are, however, the cause of the greatest amount of exchange market activity caused by international security transactions. There are times, as has been said, when individuals and banking houses abroad speculate heavily and continuously in this market, at which times the exchange market is strongly affected by the buying and selling of exchange which necessarily takes place. Such periods may last for weeks or even months, and during all of the time, London's immediate attitude toward the market is apt to be the controlling influence on the movement of exchange rates.
Concerning arbitraging in stocks, operations of this kind will be found to divide themselves readily into two classes--trades which are closed off at both ends at once, and trades which are allowed to run over night or even for a day or two. The former is a class of business out of which a dozen or twenty well-equipped houses in New York are making a great deal of money. With an expert "at the rail" on the floor of the New York Stock Exchange, and continuous quotations as to prices on the various stock exchanges in Europe coming in, these houses are in a position to take advantage of the slightest disparity in prices. The chance to buy a hundred shares of some stock, in London, for instance, and to sell it out at the same time in New York, at one-eighth or one-quarter more, is what the arbitrageurs are constantly on the lookout for. With the proper facilities, an expert, in the course of the hour during which the London and New York Stock Exchanges are simultaneously in session, is often able to put through a number of profitable trades.
Such operations are possible, primarily, because of the fact that the same influences affect different markets in different ways. A piece of news which might cause a little selling of some stock in London, for instance, might have exactly the opposite effect in New York. With the wires continually hot between the two markets and a number of experts on the watch for the chance to make a fraction, quotations here and abroad can hardly get very far apart, at least in the active issues, but occasionally, it does happen that the arbitrageur is able to take advantage of a substantial difference. Always without risk, the bid in one market being in hand before the stock is bought in the other market.
But not so in the case of the other kind of arbitrage, where stocks bought in one market are carried over night for the sake of selling them out in some other market the next morning. There a decided risk is taken, the success of the operation depending absolutely upon the judgment of the operator. Under the stimulus of some favorable development, for instance, which becomes known here only after the Stock Exchanges abroad are closed for the day, the New York market closes buoyant. The chances are that the receipt of the news abroad over night will make the London market open up strong in the morning.
To buy stock right at the closing of the market here for the purpose of selling it out next morning in London at the opening is an operation not without risk, but one which is likely to make money. A lower opening abroad would, of course, spoil the whole plan, and force a loss, but just there comes in the ability and judgment of the man who is handling the business. His judgment need by no means be infallible for the house to make a great deal of money.
Concerning arbitraging in bonds, practically everything depends not only on the judgment and skill, but on the facilities and connections of the man in charge. In the great "open" market in New York and in the great "open" market in London, American bonds are being continually bid for and offered in a way which gives an expert in touch with both markets a chance to buy here and sell there, or vice versa, at a profit. Such men are employed by bond houses with international connections, and spend their time doing practically nothing else but keeping in close touch with open market bids and offers for stocks and bonds and trying to buy in one market and sell in another. Such trades are frequently put through on a very profitable basis, profits of a clear point or more being not at all uncommon.
As for the degree of risk to be taken in business of this kind, that is entirely at the discretion of the arbitrageur. Where a firm bid of ninety-nine, good for the day, for instance, is given, there is no risk in cabling a bid of ninety-eight to London, but where the bid is not firm at all, or where it is only firm for five minutes, or in many other cases, the man who cables his own bid of ninety-eight is taking a certain amount of risk. Often enough he gets the bonds in London at ninety-eight, only to find that the ninety-nine bid in New York has been withdrawn.
Knowledge of what risks to take and of what risks to leave alone constitutes expertness in this line of business. Seldom can the transaction be absolutely closed at both ends and any substantial profit be made. Most of the time the correctness of the bond expert's judgment as to how he can sell somewhere else what he has bought, is what determines the amount of money he will make or lose.
CHAPTER IX
THE FINANCING OF EXPORTS AND IMPORTS
Interesting as the movement of gold and the international money markets may be, it is in its application to the every-day importing and exporting of merchandise that foreign exchange has its greatest interest for the greatest number of people. Every bale of cotton exported from the country, every pound of coffee brought in, is the basis of an operation in foreign exchange, such operations involving usually the issue of what is known as "commercial credits."
Broadly speaking, commercial credits are of two classes, those issued to facilitate the import of merchandise and those issued to facilitate its export. Considering the question from the standpoint of New York, import credits are so much more important than export credits and issued in so much larger volume, they will be taken up first.