4. Check or draft on New York bank.—New York is the city on which drafts are drawn for making pay ments between different communities in the United States. It was not necessary that the banks of the country should get together and arbitrarily decide to make New York a central city; it was not a matter of chance. New York is naturally the commercial as well as the financial center of the country. Merchants in every community are constantly buying goods from New York to an extent that is greater than the pur chases from any other city. More payments are made to New York than to any other city. Consequently, New York is the city on which all the banks of the country usually sell drafts.
Not only are payments to New York made in New York exchange, but payments between different cities thruout the country are made in the same way. Den ver remits to Tampa by using a draft on some New York bank. The Tampa bank is willing to accept the draft because it knows that it will have a call for New York exchange. The draft is forwarded to New York for credit against which the Tampa bank can draw.
S. Demand for New York exchange in Denver.— New York exchange may be looked upon as a com modity which is bought and sold like wheat or corn. It is really the right to money in New York. It has a value which fluctuates from time to time just as the value of wheat does. To understand these changes in value it is necessary only to examine the conditions affecting the demand for and supply of the exchange.
Using Denver still, for example, what is it that gives rise to a demand for New York ,exchange in Denver? In other words, what causes business men in Denver to want a right to money in New York? The answer is simple. Whenever a business man there buys goods from New York, he needs New York funds for making payment. Likewise, whenever he buys goods from any city in the United States he is more than likely to remit in New York exchange, be cause he finds that to be most acceptable. Of course, the man in Denver does not carry an account with any New York bank. He gets his Denver bank to give him a draft on some New York bank in exchange for his check.
When it is taken into account that New York checks and drafts are being used in this way every day for the cancelation of debts in all parts of the United States, it will be readily understood why New York exchange is deservedly called "the business man's money." 6. Supply of New York exchange in. Denver.—We may now inquire into the way Denver banks get their power to sell drafts on New York banks. How do they establish balances in New York against which to sell exchange? Their balances are established and maintained in three ways. First, whenever a Denver
business man sells goods to someone in New York, or in any other city in the United States for that matter, he is most likely to receive a draft on New York in payment. This draft he deposits with his local bank. His bank sends it to its correspondent in New York and thus builds up its balance there. Denver's sup ply of New York exchange, or right to money in New York, is built up then when Denver sells goods to other cities and receives New York drafts in payment. The second way is to ship cash to New York. The third is to borrow there and leave the proceeds on de posit. Of course, cash or drafts must be sent finally to extinguish the debt.
It is not necessary for the Denver bank to carry a balance in New York in order that it may sell New York exchange. It may maintain a deposit with some other bank, say in Chicago, or in St. Louis, which does keep a New York balance. In such a case it uses blank New York drafts furnished by its Chicago correspondent.
7. An will suppose that the Rocky Mountain Bank of Denver has on deposit $50, 000 with the First National of Chicago. Now sup pose that a Denver house has sold ore in Baltimore and has received in payment a draft for $10,000 on the Corn Exchange Bank of New York. The Den ver house will deposit the draft in the Rocky Moun tain Bank, which will send it to its Chicago corre spondent, thereby increasing its balance to $60,000. The Chicago bank will send the draft to its corre spondent in New York, say the National City Bank, and so increase its balance by $10,000. The National City sends the draft thru the Clearing House and it is finally canceled at the Corn Exchange. The Corn Exchange debits the account of the Baltimore bank which originally drew the draft.
By an agreement with the First National Bank of Chicago, the Rocky Mountain Bank is able to sell drafts on the National City Bank of New York, us ing for the purpose blank drafts furnished by the First National. Jones comes in to get a $1,000 draft to pay Swann for his grape fruit. He draws his check for the amount, turns it over to the bank, receives a draft and sends it to Swann. Swann deposits it with his Tampa bank, which sends it to its correspondent in New York. If the correspondent is not the Na tional City Bank, it sends the check thru the Clearing House to the National City, which debits the First National of Chicago. The First National, in turn, debits the Rocky Mountain and the matter is closed.