The theory of the classical economists, such as Adam Smith, Ricardo, and Mill, as to international trade held that if a country's exports exceeded its imports in value, this surplus would necessitate the influx of gold to cover the difference. While it is true that over a long period of time, credits must offset debits on the international balance statement, it should be noted that merchandise and gold are not the only items which enter into the financial settlement between countries. They are only the visible items, and in addition there are several invisible factors which exert considerable influence on the rates of foreign exchange. An important item in the invisible balance is the movement of capital between countries. The investment of funds in foreign securities is a modern phenomenon in economic history, for its rapid development can be retraced only to the beginning of the nineteenth century. By this time the industrial revolution had multiplied the productive power of business, especially in England, and had resulted in the accumulation of surplus capital, which was attracted into enterprises away from home because of larger profits and higher rates of interest. Among the factors which stimulated international investment are the following: (1) growth of railways, offering opportunities for placement of capital, (2) the development of corporate organization, enabling the gathering of capital by the issue of stocks and bonds, (3) improvement in communication disseminating information concerning foreign economic conditions, and thus giving better control over distant investments.

The export and import of securities affect the rate of exchange in much the same way as the movement of goods. When American investors purchase British securities these may be paid for in sterling, and thus a demand for British exchange in New York is created, with a consequent rising tendency in the rate of sterling. On the contrary, when British capitalists subscribe to an issue of Pennsylvania Railroad stocks, these are purchased in New York, where the supply of sterling bills is increased, causing a decline in the rate of sterling. These transactions could also be settled in dollar exchange. British securities could be bought by remitting dollar drafts to London, where the supply would be increased and its value would fall in terms of sterling. Likewise the purchase of American securities could be made by British investors through buying dollar exchange in London and thus causing an appreciation in its rates as expressed in sterling.

Dividend and interest payments would naturally cause a movement in exchange opposite from the investments themselves. For example, the semiannual payment of dividends on the Pennsylvania stock mentioned above would naturally necessitate settlement by the American corporation with its creditors abroad. The American company could make this settlement by purchasing sterling bills, and this would tend to increase the demand in New York and so cause a rise in the price of sterling in terms of dollars.

Since 1914, governments have been compelled to borrow heavily and so have floated huge issues of securities both at home and abroad. These governments have also granted loans to one another, and in fact the European countries owe the United States government over $11,000,000,000. These items all vitally affect the rates of foreign exchanges.