Under this head may also be included payments of interest and dividends to foreigners, since these are based upon the transactions which we have just described. To the extent that foreigners hold American industrial or public securities, they are entitled to receive the interest and dividends due upon them, and the payment of these increases the demand for foreign bills in the New York market and thus raises the rate of exchange. On the other hand, payments to our people on account of interest or dividends due on foreign securities would increase the supply of bills and lower the rate of foreign exchange on the markets from which the payments were due.

The aggregate of these various influences may entirely obscure the normal effects of imports and exports. When, considering the latter alone, we should expect the rate on a particular market to be low, it may be high, and vice versa; or it may be much higher or lower than we would expect from an observation of the trade influences alone. On some occasions the influence of dealings in securities may dominate a market, and on others they may be insignificant. In no case, however, can they be disregarded with safety.

C. Bank influences. - Under this head belong a number of bank transactions by which the foreign exchanges are sometimes profoundly affected. Among these, we shall consider the accumulation of credit or debit balances, arbitrage transactions, purchases for investment, and travellers' checks.

International bankers frequently permit their correspondents to accumulate large balances to their credit, upon which a small rate of interest is paid, or to run up debit balances, upon which interest is charged. In the one case the process consists in the purchase of bills and their sale to the foreign correspondent on account, and in the other in the drawing of bills against the foreign correspondent in excess of the balance due. New York bankers regularly indulge in these practices. During the fall and early winter, when exports are heavy and the supply of London bills is large, they buy freely and send to their London correspondents, thus accumulating large credit balances. In the winter and spring, when the supply of trade bills is short and the rates correspondingly high, they sell drafts upon their London correspondents sometimes greatly in excess of the amounts due them, thus overdrawing their accounts. It is evident that these transactions have an influence upon the rate of exchange, the demand for bills being increased when the debit balances are being covered and credit accumulated, and the supply being increased when accounts are being overdrawn. The effect upon the New York market is to check the tendency of the rate on London to rise during one period of the year and to fall during the other.

It is not necessary, however, that influences of this sort should be exerted periodically or regularly. They may appear at any time and may be a disturbing as well as a regulative force. In case an unexpected demand for foreign bills sends up the rates to the gold-exporting point or beyond, the banks may employ this resource as a means of restoring normal conditions. Sometimes, however, the settlement of balances may be unexpectedly called for, in which case the purchase of trade bills on the open market or the shipment of gold are the only alternatives. The rates may then be forced up to abnormal heights and even the exportation of metal be rendered necessary.

Arbitrage transactions are those undertaken for the purpose of realizing profits from the difference in the rates of foreign exchange on different markets at the same time. For example, the Berlin rate on London may be low at the same time that the Paris rate on that market is high; and the difference may be great enough to enable the French bankers to earn a handsome profit by selling Paris bills on London and covering their accounts by means of German bills purchased by their Berlin agents and sent to their London correspondents. The success of such a transaction depends also upon the rate between Paris and Berlin, or upon the ability of the Paris bankers to make suitable arrangements in the German capital for the purchase of London bills. Opportunities of this sort are frequently created by fluctuations in international commerce, especially by those which cannot be foreseen. An unexpected demand for London exchange in Paris may create them, and this might be caused by unusual importations of English goods, by transfers of English securities to French investors, or by speculation on the stock market. Unexpected news, such as the outbreak of a war, or the death of a ruler, or even an unfounded rumor, may so affect a particular market as to create an opportunity for arbitrage transactions. The ordinary vicissitudes of commerce, such as are created by fluctuations in the output of the productive agencies of the world, are, however, the most potent influences in this direction. The American wheat crop may prove to be much greater than the estimates, and accordingly the unexpected increase of exports may temporarily depress the New York rate on London and make it profitable for foreign bankers to purchase a portion of this surplus supply of bills as a means of covering debit balances created by the sale of bills in their own markets at higher rates. The temporary stoppage of a stream of commerce by means of a great strike may also create a similar condition.

The general tendency of transactions of this kind is to equalize the rates between the different markets, and to establish a sort of equilibrium, which, however, is being constantly disturbed by the recurrence of such events as have been mentioned.

The bills of exchange which a banker holds as an investment need not necessarily originate in the home market. If the local supply is inadequate, he may make purchases on another market, even in a foreign country. London bills are frequently purchased by Continental bankers for this purpose. If domestic trade is slack and an unnecessarily large cash reserve accumulates, the surplus may profitably be invested in this way. In case of need these securities can easily be disposed of, and otherwise the bank draws interest on them until the date of maturity. Whenever bills are purchased for this purpose, the rates of exchange are affected quite as much as by a purchase of the same magnitude for the payment of foreign debts or for any other purpose. In the nature of the case this investment demand for bills is irregular and difficult to estimate. If the banking capital of a country is properly distributed and not too large, local paper ought to suffice, except under unusual and extraordinary circumstances.

The influence of travellers' checks upon the exchanges is quite as direct as that of imports. They are used in the payment of hotel bills, railway and steamboat fares, purchases of souvenirs, etc., and, so far as their effect upon the exchanges is concerned, are essentially equivalent to the purchase and consumption of imported goods at home. They figure on the demand side of the account in the home market, and tend to raise the foreign rates. We may illustrate their effect in the common case of an American travelling with a circular letter of credit purchased of his home banker. Suppose a hundred pounds be drawn on such a letter in the city of London. The banker who pays the check will debit the amount on the account of the American bank which issued the letter, and the latter will probably settle it in the ordinary way by buying a trade bill and sending it to its London correspondent. If the equivalent of fifty pounds is drawn in French money from a Paris banker, the latter will debit the London correspondent named in the letter, and he, as before, the American bank. The settlement in this case will require a transfer of credits from London to Paris as well as from New York to London. Bills of exchange will be the instrumentalities employed, and the effect will be to raise the New York rate on London and the London rate on Paris.

This influence is especially strong in the spring and summer months, when the largest amount of travel for pleasure takes place, and is most marked on the New York-London rate. Americans travel very extensively and are reputed to spend more money abroad than the people of any other nationality. The ultimate settlement of the largest volume of travellers' accounts, therefore, falls upon the American and finally upon the New York banks. Within Europe this influence is very strongly felt in Switzerland, the Swiss rates of exchange upon London and Paris, during the summer months in particular, being largely determined by the enormous mass of travellers' checks cashed by the banks in the principal tourist centres.