2. The second source of supply is in the sale abroad of stocks and bonds. Here again it will be evident how the supply of bills must vary. There are times when heavy flotations of bonds are being made here with Europe participating largely, at which times the exchange drawn against the securities placed abroad mounts up enormously in volume. Then again there are times when London and Paris and Berlin buy heavily into our listed shares and when every mail finds the stock exchange houses here drawing millions of pounds, marks, and francs upon their correspondents abroad. At such times the supply of bills is apt to become very great.
Origin of bills from this source, too, is apt to exert an important influence on rates, in that it is often sudden and often concentrated on a comparatively short period of time. The announcement of a single big bond issue, often, where it is an assured fact that a large part of it will be placed abroad, is enough to seriously depress the exchange market. Bankers know that when the shipping abroad of the bonds begins, large amounts of bills drawn against them will be offered and that rates will in all probability be driven down.
Announcements of such issues, as well as announcements that a block of this or that kind of bonds has been placed abroad with some foreign syndicate, are apt to come suddenly and often find the exchange market unprepared. For the supply of exchange originated thereby, it must be remembered, is not confined to the amount actually drawn against bonds sold but includes also all the exchange which other bankers, in their anticipation of lower rates, hasten to draw. The exchange market is, indeed, a sensitive barometer, from which those who understand it can read all sorts of coming developments. It often happens that buying or selling movements in our securities by the foreigners are so clearly forecasted by the action of the exchange market that bankers here are able to gain great advantage from what they are able to foresee.
3. The third great source of supply is in the drafts which bankers in one country draw upon bankers in another in the operation of making international loans. The mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from England to the United States, can best be effected by having the American house draw upon the English bank which wants to lend the money. In the finely adjusted state of the foreign exchanges nowadays, loans are continually being made by bankers in one country to bankers and merchants in another. Very little of the capital so transferred goes in the form of gold. A London house decides to loan, say, $100,000 in the American market. The terms having been arranged, the London house cables its New York correspondent to draw for £20,000, at 60 or 90 days' sight, as the case may be. The New York house, having drawn the draft, sells it in the exchange market, realizing on it the $100,000, which it then proceeds to loan out according to instructions.