These shipping charges are known as "exchange" charges. They should vary somewhat with the distance and the amount shipped. If the retail customer preferred to ship currency himself to the jobber, he would have to pay these charges; if he bought a draft from the bank and sent it to the jobber, the premium which the local bank might ask him to pay should equal the exchange charges, for then the local bank instead of the retailer must ship the currency, as it would have to provide funds in the drawee city to cover the draft.
It is possible, however, that the local bank is already long on funds in the drawee city and welcomes this means of increasing its home funds and decreasing distant funds, and it may be willing, therefore, since it does not have to ship funds to cover the draft, to offer the draft at a premium less than the shipping charges, or at par, or even at a discount, depending upon how anxious it is to shift its funds homeward. Theoretically it could never get from the local retailer a higher premium than the ship ping charges, nor would it offer to sell drafts at a greater discount than the shipping charges; for in the former case it would pay the retailer to ship currency himself, and in the latter case it would pay the local bank to bear the shipping charges on currency shipped home. Within these limits domestic exchange charges fluctuate from day to day and from season to season. The pre mium or discount is usually quoted in one center on another, as so many cents per $100.
Justification of Exchange Charges The above justification of the local bank charging exchange on checks drawn on it and sent to it with a request that it remit payment assumes that the bank would have to ship currency. In practice the most common form of remittance is a draft on a bank in the jobber's city or reserve city; this would be considered as good as cash by the jobber's bank for it could be collected im mediately. But even if the retailer's bank did remit by draft, it would be under the same necessity of providing funds in the jobber's city to cover the draft. It has four ordinary ways of making such provision: I. Shipment of currency to the jobber's city.
2. Borrowing from institutions in the jobbing center.
3. Sending commercial paper for rediscount, or securities for sale.
4. Sending checks and collection items, payable in the job ber's city or vicinity, for collection and credit.
If it resorts to the second or third method, the interest (or discount) paid represents the cost of maintaining a balance in the jobbing center against which drafts can be drawn; this inter est cost should not exceed the shipping charges on an equal amount of balance, for otherwise it would be cheaper to ship cur rency than to borrow in the jobbing center.
In the long run the volume of items payable in any section of the United States equals approximately the volume of its items payable elsewhere and due to it. It happens, therefore, that the items sent to and from any banking area equalize one another, and that any bank will be able to maintain its balances with a hank in another area by simply sending items payable in that area for collection and credit; it will neither have to ship currency nor borrow. Obviously such equalization of payments nullifies the excuse for charging exchange, for it relieves the remitting bank from such shipping charges (or equivalent charges of maintaining the balances). Normally no exchange should be charged; only seasonally, when there are larger movements of funds in one direction than in another, is there excuse for exchange charges. But even this seasonal charge can be obviated if the government or central bank will stand ready to bear the cost of shipments of currency which are for the purpose of maintaining balances. This is now done by the federal reserve banks.
Profits on Collections There is another element in collection charges, namely, profits. The jobber's bank may be unwilling to undertake the collection of his check at cost, but may insist upon a net profit. And the drawee hank may he unwilling to remit at cost, but insist upon a profit. If there arc two or more banks competing for business in one town, each may be forced to forego profits for collecting items lest the customer transfer his account to the bank which charges a smaller profit or none at all. Likewise, each bank may be forced to forego profits on remittances lest the col lecting bank present the items through the bank charging a smaller profit or none. Competition is sometimes so intense that not only is no profit made, but actual losses are sustained.