DOMESTIC EXCHANGE
[96]The banker has become the bookkeeper and settling agent of the
business world. The products of a locality, let us say the State of
Georgia, move out to the markets of the world and create credits in
favor of that locality on the books of banking institutions in the
commercial centers, while at the same time a counter movement of
commodities is under way from other localities into Georgia, in like
manner creating credits for those localities which are debits against
Georgia. The practical effect is that the commodities moving between
these communities are exchanged and pay for themselves, the running
accounts being kept and settlements effected in the banks.
To illustrate the details: A dealer in cotton in Atlanta makes a sale to
a mill in Fall River and receives in payment a check or draft drawn on a
New York bank, which he deposits for the credit of his account in an
Atlanta bank, and which the latter forwards for the credit of its bank
account in New York. Meanwhile an Atlanta merchant has bought goods in
New York and in order to pay for them buys from the Atlanta bank an
order for the New York credit, and this when forwarded completes the
circle of payments for cotton and goods.
If we would extend the investigation to include the bank accounts of the
Fall River mill and the Atlanta dealer we would find, first, that the
mill account was built up constantly by deposits of checks and drafts
received in payment for goods sold in all parts of the country and
perhaps all over the world, with almost no deposits of cash, and that it
was drawn down by checks for raw cotton, and supplies and large amounts
of cash for the pay-rolls; second, that the cotton dealer's account was
built up entirely by deposits of checks or drafts received for cotton
shipments and drawn down by checks and cash payments to farmers for
cotton.
For payments at a distance bank credit in the form of a check or draft
is [commonly] used....
The foregoing illustrates the movement of the exchanges constantly
proceeding ... between ... different communities.... There is a network
of relationship between banks through which each local community and
market is connected with all other communities and markets.... No
locality is so remote as to be outside of the circle and no community's
sales and purchases are so scattered but that they can be brought
together in the settlements. Each bank is the center of a circle of
which it is the clearing agent; all payments between its own customers
may be made by a transfer of credit upon its books. If there are two
banks or more banks in a town, all payments between their customers are
resolved into offsets between these banks, and in like manner all
payments between localities are resolved into offsets between banks, and
if not settled in local centers are passed up to larger and larger
clearing centers....
But while the cross-payments of trade may be depended upon in the long
run to balance and settle themselves, it does not follow that they will
do so from day to day, or that they coincide so closely that payments in
money are never required. An individual's sales and purchases are seldom
made at the same time, and the sales and purchases of communities are
not constantly balanced. The trade of a one-crop farming district will
not be so evenly balanced as one of a district in which mixed farming
prevails, and in every industry there are periods, usually recurring
every year, when the payments exceed the current income, and
corresponding periods when income exceeds outgo....
A region like the cotton states, whose products move quickly to market,
may have large credit balances at one season and at another be wanting
to borrow....
The banker is an equalizing agency in the situation. He stands in the
breach: he must either supply the missing offsets of credit, or, as a
last resort, make the payments in money....
The entire system of settlements, with transfers and offsets and
advances and interchange of capital and credit, is exceedingly
interesting and wonderfully simple and effective, but depends for its
effectiveness upon a scrupulous observance of the principle upon which
it is based. That principle is the natural reciprocity of trade....
While there are balances from time to time in the exchanges ... between
different localities ... which cannot be settled without shipments of
money, they are usually met without inconvenience unless there is a
disturbance of credit.
EXCHANGE RELATIONS BETWEEN CHICAGO AND NEW YORK
[97]... It should always be borne in mind that the fact that New York
City is the country's dominating financial market results in making New
York funds acceptable everywhere as a means of payment, and in making a
ready market for New York exchange throughout the country for a large
part of the year.
Throughout January money in Chicago relative to that in New York City is
cheap. Exchange rates on New York are high and there is a considerable
movement of cash from Chicago to the Eastern States--particularly to New
York City....
Just prior to January 1 there is normally a large demand in Chicago for
New York exchange with which to meet dividend and interest payments due
in New York, and the high rates thus created continue somewhat into the
new year. The crop-moving and holiday demand, however, being over, money
becomes relatively cheap in Chicago and flows to New York City, where it
can at least earn the 2 per cent. paid by banks on bankers' balances,
and where it is absorbed somewhat in speculative activity and in the
higher security prices, which normally rule the latter part of January
and the fore part of February.
From the last of January to the fore part of March the demand for money
in Chicago relative to that in New York rapidly rises. Exchange rates on
New York fall to a low point, and shipments of cash to the Eastern
States are very small....
... There is, however, no evidence of a movement of cash from the East
to Chicago in February, although there is something of a westward
movement in March.
During this period the relative demand for money in Chicago is increased
by the anticipated opening of navigation on the Great Lakes, for the
opening of navigation gives rise to a large amount of New York exchange
received in payment of grain bills. There is also a demand on the part
of western bankers for currency to meet the spring needs of the western
farmers. The first of March in many sections of the Middle West is the
commonest time for making settlements of interest and principal on farm
mortgages. It is also a common date for paying farm rents.
This spring advance in the value of money in Chicago as compared with
New York reaches its maximum early in March. The demand then falls off
rapidly and with only temporary interruptions (the most noteworthy being
about the first of May) until it reaches the low level of the early
summer, the latter part of May. It continues at a low level until early
in July, when the crop-moving advance begins....
About the first of July the relative demand for money in Chicago and
vicinity begins to increase, advancing rapidly, with minor
interruptions, until early in September, and then maintaining a high
level until the fore part of November. During this period exchange rates
rule low and money moves in large quantities from the Eastern States to
Chicago....
The primary cause for this increasing and large demand for money in
Chicago is of course the anticipated and actual crop-moving demand,
there being no sufficiently strong Eastern demand for money at the time
to hold it back....
It has been found ... that during the last six to eight weeks of the
year, after the crop-moving demand has to a large extent subsided, the
relative demand for moneyed capital in both New York City and Chicago is
maintained until the time of January settlements at nearly the high
level of the crop-moving period. A study of domestic exchange rates and
of currency shipments shows that the relative demand for money is
stronger during this period in New York City than in Chicago, that
exchange rates in Chicago on New York rise, and that cash moves
eastward....
Money becomes relatively cheap in Chicago and vicinity during these last
six to eight weeks of the year, principally because of the return flow
of currency previously shipped to the country districts for crop-moving
purposes. There is also considerable demand at this time for New York
exchange to meet payments in certain lines of goods, such as hardware
and dry goods, that are due New York and New England houses by Western
establishments, and to make purchases for the holiday trade....
Comparatively high exchange rates... [near] the end of the year are
largely due to preparations for the January disbursements, which Western
concerns are called upon to make in New York City....[98]
EXCHANGE RELATIONS BETWEEN ST. LOUIS AND NEW YORK
[99]... General seasonal movements in the relative demand for money in
St. Louis (as compared with New York City), ... are fairly regular in
their occurrence.
From the beginning of the year until the fore part of May the demand
appears to be moderate, exchange rates rule near par, and there is a
moderate tendency for cash to move from St. Louis to the Eastern States,
with almost no tendency to move in the opposite direction....
The first eighteen weeks of the year, St. Louis bankers say, are a
period of comparative inactivity in the local money market. Concerning
this period, a prominent St. Louis banker writes: "For the first
eighteen weeks in the year... there is comparatively no New York
exchange making and also a nominal demand for it, and likewise an easy,
quiet money market."...
The second noticeable movement in the St. Louis money market is the
sharp decline in the relative demand for money from the fore part of May
to about the first of June. Exchange on New York rises rapidly at this
time, and May is the month of heaviest shipments of cash to the East....
The high exchange rates in May, and the resulting eastward movement of
money, are due largely to the fact that at about this time in St. Louis
the bills of boot, shoe, hardware, and dry goods merchants mature, and
as their paper is held largely in the East, exchange is required in
large amounts. The result is large payments to St. Louis banks, the
building up of their reserves, and resulting reduction of their credit
balances in New York City.
From the first of June to the first of November the demand for money in
St. Louis relative to that in New York City increases rapidly, advancing
from the cheapest money in the year (twenty-first week) to the dearest
money (forty-fourth week)....
This greatly increasing relative demand for money in St. Louis is, of
course, attributable to the crop-moving requirements.... The cashier of
a St. Louis bank writes: "New York exchange... always goes to a discount
here in the fall of the year, and this is caused by the large cotton
drafts drawn in payment of cotton shipped out from the Southwest. The
banks down there either send us drafts drawn on New England points or
New York, or else they send drafts drawn on the two large cotton buyers
here, who, in turn, draw their drafts on Eastern points. The result is a
great deal of exchange comes in, for which there is a demand for
currency." The resulting low rates of exchange continue as long as the
cotton season lasts. During this crop-moving season there are heavy
shipments of cash from St. Louis to the Southern States....
After about the first week in November the relative demand for money in
St. Louis falls off rapidly until about the first of December, and then
fluctuates at a moderate level until the end of the year....
The rise in exchange and easing up of the St. Louis money market in the
latter part of November and in December is due to the decline in the
crop-moving demand for cash, particularly in the South, and the return
movement of cash from that section,... which begins the latter part of
November. Southern banks in settling their St. Louis bills first use
their eastern exchange and then ship currency. The upward movement of
exchange is hastened shortly after the first of November by heavy
purchases, for about four weeks, of New York exchange by dry goods,
hardware, and boot-and-shoe houses for the purpose of settling their
eastern accounts....
DOMESTIC EXCHANGE IN SAN FRANCISCO ON NEW YORK CITY
[100]... Before taking up the subject of seasonal variations in San
Francisco domestic exchange rates on New York City, it may be well to
observe that in a number of respects the San Francisco domestic exchange
market is a peculiar one.
In the first place the principal kind of money in circulation is gold
coin and this fact materially influences the range of domestic exchange
fluctuations, _i. e._, the shipping points. Concerning this matter I can
do no better than quote from letters of Mr. F. L. Lipman of the Wells
Fargo Nevada National Bank. Mr. Lipman writes (under date of February 7,
1908): "In the East the medium of exchange is paper or new gold by
weight. In California it is current gold coin by tale, with a mingling
of paper and new gold. The first effect of an upward movement of
exchange, there, is that at about 40 cents per $1,000 the currency
shipping point is reached, which in due course, drains off our paper
money. At approximately $1.10 per $1,000 the gold shipping point is
reached. Of course the only gold that can be economically shipped is new
gold. Now it not infrequently happens that the demand for remittance
will be so great as to exhaust (1st) the currency and (2d) the new
gold, leaving only our current gold, for which there is practically no
shipping point, the discount on worn coin being practically
prohibitory."
A second peculiarity of the San Francisco exchange market arises from
the fact that San Francisco, being the chief port city of the Pacific
coast and the seat of one of the United States mints and subtreasury
offices, is the recipient of large quantities of gold from
gold-producing regions, _i. e._, California, Alaska, and Australia. The
United States mint will issue without any charge its transfer drafts on
the subtreasury in New York in return for deposits of gold, the new
product of mines, or for deposits of imported gold. "Frequently," writes
Mr. Lipman, "this usage is without influence on our local market, as
when large importations of Australian gold are received for New York on
London account. At other times this practice of the Treasury has a
decided effect on our exchange market as, for instance, when the early
gold shipments come down from Alaska. These shipments command the
service of the Treasury Department to the full amount thereof, while a
portion at least of the proceeds is used in payment of local bills for
supplies to Alaska from this city. This throws on the market an
additional supply of exchange when such exchange is desired. The owners
of the gold, however, have the privilege of taking gold coin instead of
eastern exchange from the Treasury, and this alternative tends to bring
exchange to about par. The Government also influences exchange from the
other side, by its willingness to transmit money by telegraph from New
York and Chicago to this city."...
Professor Carl C. Plehn of the University of California, suggests three
other characteristics of the San Francisco domestic exchange market, _i.
e._, (1) the close exchange relations with the Orient, (2) the fact that
in San Francisco, New York bills very frequently represent merely steps
in a general arbitrage transaction, and (3) the appreciable interest
element involved in demand transactions because of the distance between
San Francisco and New York....
From the beginning of January to about the first of March there is a
rapid decline in the relative demand for money in San Francisco,
resulting in the lowest level of the year during February.
The average rate of exchange rose from 30 cents discount in the first
week to $1.05 premium in the seventh....
... Among the principal factors cheapening money in San Francisco at
this time and forcing up exchange may be mentioned: (1) the fact that
advances which have been made for the movement of general crops up and
down the Pacific coast are being repaid very rapidly; (2) the demand for
eastern exchange with which to pay bills incurred for holiday purchases;
and, finally (3), the latter part of February, the desire of taxpayers
to discharge eastern obligations and get movable funds out of the State
before the tax returns of the first Monday in March are made to the
assessor.
From the fore part of March to the fore part of June the demand for
money in San Francisco relative to New York City tends to increase....
Among the causes at work in reducing exchange rates at this time may be
mentioned: (1) the readjustment after the heavy demands for exchange
which were made anticipatory of assessment day: (2) preparation for the
second installment of taxes which become delinquent the last Monday in
April; (3) demand for funds by the large fruit canneries with which to
buy sugar and tin in preparation for the annual fruit pack which begins
in May; (4) by May the shipping trade in green fruits has begun, giving
rise to many eastern bills; (5) demand for funds for equipping fishing
companies going on long trips....
From about the 1st of July to the fore part of September there is an
almost continuous increase in the relative demand for money in San
Francisco....
... During August and September, particularly the latter month,
substantial transfers of cash [are made] to San Francisco by the United
States subtreasury at New York.
This decline in exchange is principally due to the large amount of
eastern credits available locally at this time from the shipment of
California products, especially green fruits, to eastern points; the
returns for such shipments being usually available in either Chicago or
New York exchange.... The California hay and grain harvests cause
considerable demand for funds by the middle of July, while the ships
returning from the fisheries in August and September require large sums
with which to pay their crews.
From about the middle of September (thirty-fourth week) to the latter
part of October (thirty-ninth week) New York exchange tends to rule at
near par....
During these weeks the outward movements of grain, green fruit, and fish
tend to force exchange down, while the fact that this is the quarter of
large receipts of gold ... from Alaska, making it a period of large
receipts of gold bullion at the Mint, and that the San Francisco Mint
makes returns for this gold in gold coin or New York exchange, at the
option of the owner of the bullion, tends to keep New York exchange at
par.
The demand for money in San Francisco relative to New York City
increases rapidly from the latter part of October to about the 1st of
December when it reaches its highest point in the year.... November and
December are the months of largest transfers of cash to San Francisco by
the United States subtreasury in New York. The fall in exchange during
this period appears to be due primarily to the outward movement of dried
fruits, such as raisins, prunes, and apricots. The banks pay out large
amounts of actual coin which goes to the country, and receive in return
drafts on eastern points which build up their eastern balances. This
also represents the most active part of the northern grain season. The
low point of the year for exchange is about the last week in November
when the tax collector for the city and county of San Francisco
withdraws large sums of actual coin from circulation and locks much of
it up in the vaults of the city hall.
December is a month in which the relative demand for money in San
Francisco lightens considerably as the result of the rapid falling off
of the crop-moving demand.... The demand for remittances to the East for
January 1st settlements tends to force up exchange rates at the end of
the year....
CURRENCY MOVEMENTS BETWEEN NEW ENGLAND AND THE EASTERN STATES
[101]... The distance between New York City and the principal New
England cities is very small, and there is a great community of
financial interest among these cities and New York. Between New York
City and Boston the currency shipping points are only about 25 cents
premium and 25 cents discount. Single financial deals between New York
City and Boston are frequently of sufficient moment to lead to
considerable shipments of currency, although exchange rates previously
were only moderate. The relations among the clearing-house banks of
Boston and among those of other New England cities are close, so that
when one bank is in need of New York funds it is liable to obtain them
from another which may have more than it needs. For this reason, it is
said, much less money is now received from New York City and shipped
there than was the case a few years ago....
THE DOMESTIC EXCHANGES DURING THE CRISIS OF 1907[102]
There is no part of our banking machinery which has received so little
elucidation as that of the domestic exchanges. Even for normal times the
subject is obscure, and the writer therefore ventures upon an
explanation of its course during a period of crisis with hesitation, and
he is by no means confident that important considerations may not have
been overlooked.
As in the case of foreign exchange, domestic exchange rates fluctuate
within limits fixed by the cost of shipping money, and also, in the case
of cities distant from New York, by the loss of interest while currency
is in transit. The quoted rates apply principally to business between
banks, the rates being determined by demand and supply. A Boston bank,
for example, receives from its customers New York drafts and also checks
drawn on banks in New York and its vicinity. All these items will serve
to build up its balances in that city. On the other hand, its depositors
have been sending out checks, many of which will in the course of time
reach New York and reduce its balances there. The Boston bank will also
have received from banks of New York and from banks elsewhere items for
collection in its vicinity, and remittance in ordinary course will be
made by it in New York funds. Similarly it has sent away items for
collection to banks in other cities upon which it expects a like
remittance. As a result of all these various influences the balances of
the Boston bank may either increase or decrease. If they increase it may
be ready to sell exchange to other Boston banks whose balances are
running low. It may also happen that the bank is desirous of reducing
its New York balances, and in that case it will also appear as a seller
of exchange in the market.
Now, if in the course of a crisis clearing-house loan certificates
become the principal or sole medium of payment between banks, it may
well happen that a bank will be unwilling to sell exchange unless it is
unusually well supplied with New York funds. By the sale of exchange it
can at best only secure a favorable clearing-house balance, which will
be settled in loan certificates, and if this balance should be
unfavorable it can meet it by taking out certificates on its own
account. Each bank, therefore, to a greater extent than in normal times,
is obliged to rely upon itself for means of payment in New York. The
loan certificate does indeed yield a return or involve an expense of 6
or 7 per cent., while the return on New York balances is only 2 per
cent. This advantage does not, however, seem to have induced the banks
to sell exchange as freely as in normal times.
This is, however, not the only disturbing influence. The Boston bank may
have remitted to New York upon items collected by it for other
banks--let us say those of Philadelphia--but it may happen that the
Philadelphia banks delay or even discontinue remitting to New York upon
items sent to them for collection by banks of Boston and other cities.
The Boston bank can then no longer rely upon what would normally serve
to build up its own New York balances. It will be simply acquiring a
mass of unavailable credits at scattered points throughout the country.
The supply of New York exchange which it might have been willing to sell
is consequently diminished, and the premium on exchange must rise to a
point at which it will tempt some of the banks to sell exchange, even
though it intrenches upon their balances with agents which are available
for reserve.
The premium would naturally be especially high in those cities where the
banks were most unwilling to reduce their New York balances.
Philadelphia seems a case in point, as its deposits with reserve agents,
which were $30,995,000 on August 22, were reduced to only $29,389,000 on
December 3. At that time the premium on currency in Philadelphia ranged
from $1.50 to $3 per $1,000. It is, therefore, a reasonable conclusion
that the banks were strongly disinclined to make use of their New York
balances. In a few cities it is probable that the premium reached a high
level because the banks had exhausted their New York balances. St. Louis
may be mentioned as a probable example. Being a central reserve city,
its banks would naturally have only such balances in New York as normal
business requirements made necessary. The dislocation of exchange
elsewhere or the course of payments between New York and St. Louis may
have combined to produce such a balance of payments as would have
required currency shipments if the St. Louis banks had remitted promptly
to New York.
The extent to which banks in different cities delayed or refused to
remit to New York on items collected by them for other banks cannot be
determined. Banks in one city, very naturally and honestly, were
inclined to lay the blame upon banks elsewhere. The banks in other
places, however, may not have been able to secure payment of the items
sent to them for collection from other banks in their locality with the
usual promptness. When every allowance has been made, however, there can
be no question that banks in certain cities, in these as well as in
other matters, adopted a policy wholly designed to strengthen themselves
regardless of consequences.
The general prevalence of the premium on New York exchange is, as we
have seen, accounted for in part by the use of clearing-house loan
certificates in settling balances between banks and by the delay in
remitting in New York funds upon items collected for other banks. It
seems probable, however, that, taking the country as a whole, the course
of payments was favorable to the New York banks. At the beginning of
November withdrawals for crop-moving purposes have in recent years begun
to diminish, except to the South, and movements of money from eastern
centers are distinctly in favor of New York at that season of the year.
If this were indeed the case in 1907, it affords still another reason
for thinking that the New York banks might have met the crisis
successfully without restricting payments. They would probably have been
obliged to meet only withdrawals arising from lack of confidence and not
real needs for crop-moving purposes, such as would have increased the
difficulties of the situation had the crisis begun at the beginning of
September.
Finally, it should be noted that the restriction of cash payments to
depositors and the currency premium seem to have increased the demand
for New York exchange. Only in that city was it possible to buy any
considerable quantity of money. Many banks in various parts of the
country purchased gold and currency at a premium in New York and,
instead of drawing on their own balances, then entered their home market
as purchasers of exchange which was remitted in payment.
In the few instances where exchange was below par the currency premium
was a more direct influence; but exchange could not have dropped to the
low figures recorded in 1893 in the case of Chicago [$30 discount per
$1,000], because the Chicago banks in 1907 did not maintain payments
among themselves as they had done on previous occasions. Exchange was at
a discount only in those cities where the course of payments was so
strongly against New York that practically all the banks found their
balances in that city increasing. Chicago might have been expected to
belong to this group, but its banks made extensive use of bills derived
from grain exports to secure gold which was shipped directly to them. In
general, exchange was at a discount, or at par only, in the Southern
States, the banks of which, by means of cotton sales, are normally in
position to draw money from the northeastern part of the country during
the late autumn.
In conclusion, it should perhaps be pointed out that the quoted rates of
exchange were often without much significance. The ordinary course of
dealings was so completely disorganized in many places that the rates
were purely nominal, representing little or no actual transactions.
FOOTNOTES:
[96] Frank A. Vanderlip, _Modern Banking_, Three Addresses delivered at
Chautauqua, New York, August, 1911, pp. 17-29. The National City Bank.
New York. 1911 [?].
[97] E. W. Kemmerer, _Seasonal Variations in the Relative Demand for
Money and Capital in the United States_. Publication of the National
Monetary Commission, Senate Document No. 588, 61st Congress, _2d
Session_, pp. 96-100.
[98] [Owing to the growth of deposit banking among the farming classes,
the increasing diversification of industry in the agricultural States,
_Sub-treasury operations_, and the offer of remunerative rates of
interest on loans in New York during the fall, the net autumnal currency
movement since 1907 has frequently been to New York. See E. M.
Patterson, _Certain Changes in New York's Position as a Financial
Center_, _Journal of Political Economy_. Vol. XXI, June, 1913, pp.
523-539.]
[99] E. W. Kemmerer, _op. cit._, pp. 101-105.
[100] _Ibid._, pp. 118-121.
[101] _Ibid._, 54. 55.
[102] O. M. W. Sprague, _History of Crises under the National Banking
System_, Publications of the National Monetary Commission, Senate
Document No. 538, 61st Congress, _2d Session_, pp. 293-297.