220. Small Merchandise Exports

As to the influences which tend to raise foreign exchange and thus cause gold to move, there are four main points to consider. The first may be stated as small merchandise exports resulting in a scarcity of exchange. The second has to do with low money here and the remitting of balances to points at which they can be more profit-ably employed. The third consideration has to do with high money at some foreign point which draws capital there and consequently raises the rate of exchange on that point. The fourth consideration is the international selling of securities, With regard to the first question - that of exports and imports in their effect upon the gold movement - it may be considered that while the old school of economists overrated the importance of the merchandise trade balance, it is just as wrong to go to the other extreme and fail to recognize the enormously important influence which merchandise shipments do actually exert upon the movement of specie. Small exports mean small supplies of exchange. When exports are small, drawings of exchange against them are small, and, not having large balances on the other side, bankers are forced to charge a high rate of exchange for any bills which customers may want them to draw.

221. Low Money And Remitting Of Balances

The second factor making for high exchange is low money. Money and exchange rates always work counter, that is to say, when money rates rise exchange rates decline, and vice versa. The reason is that when money is cheap at any given point, lending institutions send away their loanable funds to some other point, to accomplish which end they have to buy large quantities of exchange, thereby putting up rates. During a long period of cheap money there is almost a continuous demand for exchange by bankers who want to send away their money to points where a better return can be had for its use, and this demand almost invariably results in a continuously high level of exchange rates. Everybody wants to send funds away from a point where money is in such poor demand. Frequently the only way in which it can be sent is in the form of gold.

222. High Money Rates

With regard to the third influence making for high exchange, when money is high at some foreign point, everybody in the business of lending money wants to remit to that point. Granted that the financial center in question is one of importance, a place for instance in which it is possible to carry on large loaning operations, it is almost inevitable that exchange rates on that point will rise.

Just here attention ought perhaps to be given to the question of the manipulation of the foreign money-markets in order to influence exchange rates upon them at outside points. The bank rate in a foreign market such as London or Paris, is of enormous importance in determining what the level of money there will be. The English bank rate, for instance, is of such importance that a rise in it of not more than one-half of 1 per cent is often enough to make a big difference in exchange on London all over the world. Outside exchange rates are singularly sensitive to the movement of the Bank of England rate, something which is probably accounted for by the fact that London is the financial center of the world, the point through which imports and exports all over the world are financed. London might be called the ganglion of the world's financial nerve system from which the slightest shock is reflected throughout commerce all over the earth. That being the case, the governors of the Bank of England, who have the making of the bank rate in charge, or the governors of the Bank of France, who have the power to influence their own market in like degree, are able to raise or lower most arbitrarily the level of money and thus cause a rise or fall at other cities in the foreign exchanges on London or Paris.