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.