Thus the Denver bank, and every other bank in the United States, has a constant demand for New York exchange and a constant supply of it.
8. Currency in the long run the business men of Denver buy from other cities about as much as they sell to them, it would be a rare coinci dence if the amounts should be exactly equal. Dur ing April, May and June almost any western city is likely to be buying more than it is selling. Moreover, the demand for circulation is low at that time in the West. Consequently, funds are freed for tern porary investment in the East. Most of the surplus funds are sent to New York and Chicago to be loaned at call. Whether funds are sent away to pay for goods or to invest, there is a demand for New York exchange. At such a time western banks may sell drafts until their New York balances are exhausted. They must then ship currency to New York if they wish to maintain their balances so as to be able to con tinue selling drafts.
From July to October the tables are turned. West erners are selling the rest of the country more than they are buying. Banks in the West have more New York drafts offered to them than they are called upon to sell. Consequently, they pile up balances in New York. At the same time, they have rather heavy de mands from depositors for cash to satisfy the needs • for circulation. They may, accordingly, call upon New York to send them cash. There is no reason for leaving surplus funds in New York unless they can be loaned there at higher rates than they will com mand in the West. The usual practice in the autumn months is to call for cash.
Any particular bank, therefore, sometimes has oc casion to purchase more New York exchange than it needs to sell, or it has a demand for more than it buys or receives on deposit from its customers. Unless the country bank wishes to shift its balance from a New York bank to some other bank, it will be necessary to make a shipment of currency when its balance piles up. When its balance is large enough.
it will accept deposits of drafts on New York only with the intention of shipping back cash. When its New York balance is depleted, it will sell drafts with the knowledge that it must ship currency to New York to cover the amount.
9. Cost of New York shipment of currency involves expense, and it is not likely that a bank will accept superfluous New York exchange un less it receives a fee which will cover the cost of collect ing the draft in cash. Neither will it sell exchange when its New York balance is depleted and when the sale means that currency must be shipped, unless it receives a fee large enough to cover the cost of ship ment. This cost depends upon three items: first, the express charge; second, insurance; and third, the loss of interest. The charge for transportation is usually combined with the charge for insurance by the express company. The moment the New York bank delivers the cash to the express company for shipment to the country bank upon its order, it ceases to pay interest on that sum. On the other hand, the country bank cannot loan against currency in transit to New York. The country bank loses interest and pays all charges on shipments both ways.
The cost of shipping gold between New York and some of the other centers is about gs follows : Assuming the cost of shipment between Denver and New York to be one dollar per $1,000, a Denver bank must receive at least $1,001 for a $1,000 draft, when the sale of that draft necessitates a shipment of gold to New York. On the other hand, it will pay not over $999 for a $1,000 draft when the purchase means that a superfluous balance will be built up in New York and that the draft must be collected by a shipment of gold from New York. On small amounts the fee may be more than one dollar each way; but the cost of New York exchange in Denver cannot vary far from within the limits of $999 and $1,001 because of competition between the banks. As soon as it goes beyond these limits, a profit can be made by shipping gold one way or the other, and it is almost certain that some bank will take advantage of the situation. If one bank lowers the exchange charge, others must follow suit or lose their customers, with some loss of good-will at the same time.