Banks do not hold off from making exchange charges until the sale or purchase of further drafts means an actual shipment of gold to or from New York. As soon as the demand for exchange begins to exceed the supply, i.e., as soon as a tendency to ship gold to New York appears, the exchange charge or price of exchange is raised. How far the price will rise depends upon the seriousness of the situation as viewed by the various banks. If one banker thinks the increase in demand is only temporary and that actual shipment will not be necessary, he will raise the price only to a slight extent. Other banks must offer exchange at as low a price as he does, or they will lose business. The same principles apply when supply is outrunning demand. The price is then dropped be low par, the exact amount of the drop being regulated by competition between the banks. As was shown above, the price or rate of exchange can in no case drop far below $999 or go far above $1,001.
It should be borne in mind that the ordinary quoted rates of exchange apply only to large amounts. The individual who goes to a bank with a small draft to sell may get a price below par when the quoted rate is par or -even above. As a matter of fact, many banks al ways buy and sell exchange at par when dealing with their regular customers, especially their most impor tant customers, unless the amount involved in a single transaction is large. The rate paid by an individual on a small draft may have little or no relation to the current movement of exchange.
It is the large concerns and the banks which buy and sell exchange at the quoted rates. They deal in large sums. A bank in Chicago may exhaust its bal ance in New York. If it is to sell more drafts it must build up its deposit. This is usually done in one of three ways : by shipping gold to New York; borrow ing in New York and leaving the proceeds on deposit; or buying exchange from some other bank. The last method is generally preferred so long as exchange can be bought under $1,000.50 ( fifty cents being the ship ping cost) . It is impossible sometimes to buy at as low a rate as $999.50. In Chicago and other impor tant inland cities there are men, called exchange brokers, who do nothing but buy and sell New York exchange for the banks.
10. Settlements thrit, the sub-treasuries.—The cost of shipping currency from one city to the other is fre quently saved to the banks by the Federal treasury. For a good many years payments between the treas ury at Washington and the sub-treasuries in the vari ous large cities were all made by cash shipments. It
happened very frequently that, at the same time the treasury was forwarding considerable sums of cash between two cities, the banks would be shipping cur rency in the opposite direction. Early in the seven ties an ingenious cashier in New Orleans suggested to Secretary of the Treasury McCullough that a saving both to the government and to the banks might be ef fected if the banks, when they wished to transmit money to a city in which a sub-treasury was located, would ascertain whether the government at the same time did not wish to send money in the opposite direc tion. If this proved to be the case, it would be profit able to the banks and to the government to allow the banks to deposit the money in the Treasury and receive an order upon the Treasury in the other city. The Treasury office in the first city would receive the cur rency it required from the depositing bank, and the bank in the other city would receive the currency from the Treasury instead of from its correspondent and all cost of transporting money would he eliminated.
Y1. Equilibrium of demand and.supply.—The pre mium or discount on domestic exchange is published in the principal dailies and is useful to the business man as indicating the volume and direction of trade at any particular time. An unusually high or an un usually prolonged premium on New York exchange will indicate that the purchases of local merchants have been unusually heavy in that year, if there are no extraordinary transactions to affect the price of exchange.
Why does it not happen that under certain circum stances a community may buy more goods than it sells during any particular period and thus be forced to part with all its currency in settling the balance? Since- each trader is simply looking out for his own private profit and does not concern himself with the question of the amount of currency, there seems to be no reason why a community might not be drained of its currency. This brings up the question of the balance of trade, the principles of which are the same whether the exchange of goods is between two separate nations or between two localities within the same na tion.
Suppose for any reason that there should be an unusually heavy purchasing of goods by the mer chants of a western state in any particular year. The merchants would buy from the banks New York exchange with which to pay their bills. The banks, after having exhausted their credits in New York, would be obliged to ship currency in order to cover the drafts on New York sold to the mer chants.