Despite this possibility, there is never any danger that a community will be stripped of its money or cash as a. result of its purchases of goods from other communities. No matter how freely Chicago and the country tributary to it may purchase goods from the East, those purchases can never make any serious drain upon the cash supply of Chicago. No matter how extravagant the people of the West may be, their purchases of eastern goods can never be greatly in ex cess of their sales to eastern customers. Should the people of Chicago for extraordinary reasons at any time increase their purchases from New York and other eastern cities, the first effect in Chicago would be an increase in the demand for New York exchange and in bank shipments of currency from Chicago to New York. The loss of currency from Chicago, since it would reduce the lending power of Chicago banks, would tend to cause a rise in the rate of interest and a rise in the value of money. The prices of certain com modities would begin to decline ; not of all commodi ties, but of those which are subject to speculation, such as stocks, wheat, corn and pork. Most of the speculators in these articles are borrowers, and the in terest they pay is an important item in the expenses of their business, so that when the interest rate rises they are obliged to contract their operations. Chicago would thus become a good place to lend in and also a good place in which to buy stocks and bonds, wheat and other speculative commodities. In other words, the value of money would rise in Chicago, and people in other parts of the country would increase their purchases in Chicago markets, remitting New York exchange in payment, and the price of goods would. fall. The reader must not suppose that these changes in price or in the rate of interest need be so great as to attract general attention. Nevertheless, it cannot be doubted that such changes do take place, and that as a result the sales of Chicago to other parts of the country are so adjusted that in the long run they furnish a supply of New York exchange equal to the demand.
Thus, it happens thruout the country that in the course of a year the debts of every community are always practically balanced by its credits on account of sales, so that large shipments of currency are never necessary. Indeed, if our monetary and banking sys tems were perfect, shipments of currency from one part of the country to another would seldom occur as a necessary result of trade transactions. Money or currency would be shipped to a community only as a result of increasing need for it as a local medium of exchange or as a basis for the expansion of bank cred its. In Canada, for example, on account of the elas
ticity of its bank-note circulation, seasonal variations in the demand for currency are easily provided for by the chartered banks and their branches.
12. Exchange viewed as a C0111711 easiest way to understand exchange, whether domestic or for eign, is to 'look upon it as a commodity. Instead of thinking of the rate of exchange, think of the price of it. Remember that exchange on New York or on London means the right to money there. To ask, What is the rate of New York exchange in Chicago? is the same as to ask, How much must one pay in Chi cago for the right to $1,000 in New York? The rate or price of exchange, like the price of any commodity, is determined by the interaction of the demand for and the supply of exchange. To under stand changes in the rate, it is necessary to understand the forces of demand and supply. Demand for New York exchange in Chicago originates whenever a busi ness man in Chicago or its tributary communities buys goods elsewhere and seeks to remit by a draft on New York. Supply originates when a business man in one community sells goods elsewhere and receives New York drafts in payment. The demand, then, varies roughly with the purchases of goods in other com munities; the supply, with the sales of goods to other communities. The rate or price of exchange tends to rise when the demand outruns the supply, and to fall when the supply outruns the demand. There are certain limits to the extreme fluctuations in the rate. It cannot go higher than par by an amount greater than the cost of shipping gold to New York, nor lower than par by an amount greater than the cost of shipping gold from New York. The upper and lower points may be called the gold shipment points ; that is, the points where a wider swing in the rate of exchange makes gold shipment profitable.
Viewed in this way, as a commodity, exchange is extremely simple. The same principles apply in foreign exchange, with a few complications due to the fact that payments are made across national bound ary lines. In foreign payments, only gold can be used for settling balances. A simple problem in arithmetic arises because of the fact that the coinage units of different nations sometimes vary from one another in the amounts of pure gold which they contain. Then, certain arbitrary measures are employed often to in fluence international movements of gold. These are seldom resorted to in domestic exchange.