DOMESTIC EXCHANGE 1. Definition of domestic and foreign exchange.- Domestic exchange is simply the term applied to the various methods of making payments between busi ness men in different communities located within the same country. Foreign exchange refers to all pay ments made by the business men of one country to those of another country. An example of domestic exchange is furnished when Jones of Denver pays a debt to Smith in Toledo or to Swann in Tampa. Foreign exchange is involved when he remits to McDonald in Montreal or to Lubin in Paris.
2. Payments between Denver and Tampa.—Sup pose Jones in Denver buys $1,000 worth of grape fruit from Swann in Tampa. He may make pay ment in any one of various ways. He may send bills in a registered letter, gold or currency by express, express money order, a postal money order, a check on his own bank in Denver or elsewhere or a draft drawn by his own bank on some other bank. To send cash by registered letter or express or to send a money order is too expensive and has other disadvantages.
Swann would be perfectly satisfied with a check or bank draft on his own bank or any bank in Tampa. How is Jones to get such an instrument? He has no banking connections in Florida, neither has his Den ver bank. There are over twenty-seven thousand banking institutions in the United States. It is not reasonable to expect any one bank to maintain rela tions with all of them or even with one in each city. In nearly all cases it is impossible for a debtor to remit a draft or check on a bank in the creditor's city.
3. Check on debtor's may simply draw a check on his Denver bank and mail that to Swann. This is convenient for Jones, but how about Swann? He gets a right to receive $1,000 in Denver. He wants it in Tampa, not in Denver. He must now undergo all the trouble and expense and delay of col lecting it. This can be shifted to the Tampa banker by depositing the check, but the bank makes a charge for this service. The amount of commission, or "ex change," charged in such a case depends upon the size of the check and the trouble involved in collecting it.
If Swann is a very important customer of the bank, he may receive full credit for the check deposited, the bank assuming the entire burden of collection.
A debtor imposes an unreasonable burden upon his creditor or his creditor's bank whenever he remits a check on his own local bank. When Jones buys grape fruit he has a definite understanding that the price quoted is either for "f.o.b. Tampa" or for delivery in Denver. There should be just such an understanding with regard to the payment. A buyer is often re quested to add a certain amount to the price quoted if he wishes to remit by check on his own bank.
The large number of wholly independent banks in the United States makes the collection of out-of-town checks often a slow process. Naturally, the depositor cannot expect to get the use of his funds until they have been collected by the bank. The delay involved, coupled with the high collection charge, usually causes a discrimination to be made against remittances in the form of local checks. This discrimination may be coMe so great as to render the use of such checks pro hibitive. When this is true, the debtor is forced to apply to his bank for a draft which will be acceptable in the city where the amount is to be paid.
Plainly, it would be impossible for each bank to keep balances in every other city in the country. It would be highly desirable for every bank in the coun try to be able to sell drafts on some one city. To do this they would be compelled either to keep funds on deposit with some bank in the central city or to keep balances with another bank that did. In either case, each of the two banks maintaining this relationship is called the "correspondent" of the other. If all the banks are attempting to maintain balances in some central city, it is evident that they will always be will ing to accept on deposit drafts or checks drawn against the banks of that city; for they can send in these drafts and checks and deposit them with their spondents for credit, thus building up their balances.