Granted that the obligations to each other of any two given countries foot up to the same amount, it is evident that the rate of exchange will remain exactly at the gold par—‌that in New York, for instance, the price of the sovereign will be simply the mint value of the gold contained in the sovereign. But between no two countries does such a condition exist—‌take any two, and the amount of the obligation of one to the other changes every day, which causes a continuous fluctuation in the exchange rate—‌sometimes up from the mint par, sometimes down.

Before going on to discuss the various causes influencing the movement of exchange rates, there is one point which should be very clearly understood. Two countries, at least, are concerned in the fluctuation of every rate. Take, for example, London and New York, and assume that, at New York, exchange on London is falling. That in itself means that, in London, exchange on New York is rising.

For the sake of clearness, in the ensuing discussion of the influences tending to raise and lower exchange rates, New York is chosen as the point at which these influences are operative. Consideration will be given first to the influences which cause exchange to go up. In a general way, it will be noticed, they conform with the sources of demand for exchange given in the previous chapter. They may be classified about as follows:

1. Large imports, calling for large amounts of exchange with which to make the necessary payments.

2. Large purchases of foreign securities by us, or repurchase of our own securities abroad, calling for large amounts of exchange with which to make payment.

3. Coming to maturity of issues of American bonds held abroad.

4. Low money rates here, which result in a demand for exchange with which to send banking capital out of the country.

5. High money rates at some foreign centre which create a great demand for exchange drawn on that centre.

1. Heavy imports are always a potent factor in raising the level of exchange rates. Under whatever financial arrangement or from whatever point merchandise is imported into the United States, payment is almost invariably made by draft on London, Paris, or Berlin. At times when imports run especially heavy, demand from importers for exchange often outweighs every other consideration, forcing rates up to high levels. A practical illustration is to be found in the inpour of merchandise which took place just before the tariff legislation in 1909. Convinced that duties were to be raised, importers rushed millions of dollars' worth of merchandise of every description into the country. The result was that the demand for exchange became so great that in spite of the fact that it was the season when exports normally meant low exchange, rates were pushed up to the gold export point.

2. Heavy purchasing movements of our own or foreign securities, on the other side, are the second great influence making for high exchange. There come times when, for one reason or another, the movement of securities is all one way, and when it happens that for any cause we are the ones who are doing the buying, the exchange market is likely to be sharply influenced upward by the demand for bills with which to make payments. Such movements on a greater or less scale go on all the time and constitute one of the principal factors which exchange managers take into consideration in making their estimate of possible exchange market fluctuations.

It is interesting, for instance, to note the movement of foreign exchange at times when a heavy selling movement of American stocks by the foreigners is under way. Origin of security-selling on the Stock Exchange is by no means easy to trace, but there are times when the character of the brokers doing the selling and the very nature of the stocks being disposed of mean much to the experienced eye. Take, for instance, a day when half a dozen brokers usually identified with the operations of the international houses are consistently selling such stocks as Missouri, Kansas & Texas, Baltimore & Ohio, or Canadian Pacific—‌whether or not the inference that the selling is for foreign account is correct can very probably be read from the movement of the exchange market. If it is the case that the selling comes from abroad and that we are buying, large orders for foreign exchange are almost certain to make their appearance and to give the market a very strong tone if not actually to urge it sharply upward. Such orders are not likely to be handled in a way which makes them apparent to everybody, but as a rule it is impossible to execute them without creating a condition in the exchange market apparent to every shrewd observer. And, as a matter of fact, many an operation in the international stocks is based upon judgment as to what the action of the exchange market portends. Similarly—‌the other way around—‌exchange managers very frequently operate in exchange on the strength of what they judge or know is going to happen in the market for the international stocks. With the exchange market sensitive to developments, knowledge that there is to be heavy selling in some quarter of the stock market, from abroad, is almost equivalent to knowledge of a coming sharp rise in exchange on London.