2. A check drawn in Hoboken and payable to a Sag Harbor firm, visited New York, Boston, Tonawanda, Albany, Port Jefferson, Far Rockaway, New York again, Riverhead, and Long Island City. The journey was as shown in the diagram below:

Banks are the chief agencies for the conduct of exchanges between persons who do not reside in the same place. If a person buys goods beyond the limits of his home town he often pays for them by sending a draft purchased from a local bank and drawn either upon a bank in the place in which the goods were purchased or upon a bank in some other place which has frequent business relations with this one. In order to render this service to their customers banks are obliged to keep funds on deposit in other cities, not necessarily in every city in which the customers may desire to do business, but in certain commercial centers through the banks of which arrangements may be made for the conduct of exchanges with any place desired. The banks selected for this purpose in this country are usually called correspondents. In countries in which branch banking is practiced

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Adapted from Money and Banking, pp. 117-21. (Henry Holt & Co., 1910.)

a great deal of business of this kind is conducted between the central institution and its various branches.

By way of illustration let us consider the way in which a small city in Wisconsin conducts its exchanges with the outside world. We may assume that its banks have correspondents in Milwaukee, Chicago, and New York. Its out-of-town business results from the purchase and sale of goods and the adjustment of credit relations between its inhabitants and outsiders. Purchasers of outside goods will pay for them by sending checks on a local banker, by buying drafts on Milwaukee, Chicago, or New York, provided exchange on these places is acceptable to their customers, or, if not acceptable, on other places, such drafts being furnished by the correspondents of the local bank. These payments do not necessarily correspond in time with the purchases. Some are deferred. On a particular date the demand for exchange due to purchases comes from those made on time in the past, the payment for which falls due on that date and includes those made on a cash basis. To this demand must be added that arising from the adjustment of credit relations with outsiders. Under this head belong loans made to outsiders and investments in outside enterprises. Gifts to outsiders or transfers of property from any cause would also add to this demand.

To meet these drafts the banks have the checks, drafts, bills of exchange, etc., drawn on outside institutions and sent to the city in payment for goods sold, on account of loans, gifts, and other transfers of property to citizens and on account of investments of outsiders in local enterprises. These credit instruments are deposited with the local banks and sent by them to their correspondents for collection. Whether or not they will be sent to Milwaukee, Chicago, or New York, or distributed between the three places, will depend in part upon the location of the banks on which these instruments are drawn or at which they are payable and in part upon the condition of the local banks' accounts with their correspondents. Instruments drawn on Milwaukee or on banks in towns which do their banking business chiefly through Milwaukee will usually be sent to correspondents in that city, and the others, on the same principle, to Chicago and New York correspondents. Certain checks and drafts may be indifferently sent to either place, in which case the condition of the banks' balances in these three centers will determine the distribution.

It is obvious that on a given date the balance between the drafts made by the banks of a town on their correspondents and the credits

made in their favor through collections and deposits of checks and drafts may be in their favor or against them. In the former case their balances with their correspondents will increase and in the latter case decrease. A succession of favorable balances might result in large accumulations and a succession of unfavorable balances in the overdrawing of their accounts. The existence of such balances renders possible the movement of money from one place to another, since the creditor banks may demand from the debtor banks payment in cash. Whether or not they will do so depends upon their ability profitably to use at home more cash than they already have, and this depends upon the relative local and outside demand for loans and hand-to-hand money. When banks are loaning heavily to local customers, their deposits increase and more cash is needed in the reserves, and when there is an increased demand for hand-to-hand money, a relatively larger number of checks are presented for encashment, and they are obliged to increase the percentage of reserves to deposits unless they are able to meet this demand by increased issues of notes, a resource not open to the banks of the United States under existing conditions. If the home demand for loans and for hand-tohand money does not justify the banks in calling for shipments of currency from their correspondents, they may loan surplus funds in the cities in which their correspondents are located, or in other cities, or leave them on deposit with correspondents at such a rate of interest as may be agreed upon. In this case these funds will be loaned by the correspondents instead of by the local banks, and the rate of interest paid by them will be sufficiently below the local rate to guarantee a fair profit on the transaction. In case the home demand for loans, or cash, or both, exceeds the funds banks have at hand or on deposit with their correspondents, they may arrange with the latter for overdrawing their accounts, either by drawing drafts upon them without sending exchange or cash sufficient to pay them, or by ordering shipments of currency to them in case the need is for hand-to-hand money rather than credit. Correspondents will grant such accommodations only on condition of the payment of a rate of interest on adverse balances equal to or in excess of the local rate plus the expenses of the transaction.

55. THE CONCENTRATION OF MONEY IN GREAT

FINANCIAL CENTERS

It has been the theory of our national banking system to permit a depositing of reserves by the banks of smaller cities in the banks of

larger cities. For instance, country banks have been allowed to keep three-fifths of their required reserve in correspondent banks in the financial centers. The practice is quite general for these banks to loan this reserve at a small rate of interest (2 per cent) to the larger city banks, particularly in New York, where they are used in the making of call loans to stock-exchange speculators.

In addition to loaning their legal reserves the outlying banks also loan additional funds to New York and other city banks during periods of slack business in the country. Otherwise idle funds are thereby given temporary employment while remaining subject to call for more remunerative investment as soon as occasion offers. Sometimes instead of redepositing these funds in banks in the money centers they are simply sent to brokers, who offer them as loans at the best rates obtainable.

56. EXAMPLES OF RAPID CONCENTRATION OF FUNDS1 BY FRED M. TAYLOR

The experience of the country as a whole with reference to currency movements is duplicated on a small scale between every trading center and the territory immediately dependent upon it. For example, some years ago in a certain Michigan village which had a factory with a pay roll of $2,000 per week, it proved necessary for the local bank to bring out the $2,000 in cash from Detroit practically every week in the year. That is, the $2,000, having been paid to the workmen, instead of remaining in the village ready for use the next week, before the time was up found its way into Detroit, from which it had to be taken back by the banker.

Another rather striking illustration of this principle comes from the copper country of Michigan. There the banks are every month called upon by a great mining company to furnish many thousands of dollars in fifty-dollar bills, and these bills have to be shipped in from Chicago or New York, not once, but every time. This seems very strange. One would suppose that those bills which were shipped in and used in January would drift back to the banks and be ready for a second job in February. But not so; when February comes around the bills have all disappeared, and the operation of shipping in has to be repeated. And this goes on indefinitely.

Adapted from Some Chapters on Money, pp. 139-40. (Copyright by the author, 1906.)

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57. NEW YORK, THE GREAT FINANCIAL CENTER'

BY O. M. W. SPRAGUE

The significance of the New York money market in our banking system is not fully recognized. It is indeed generally understood that the practice of depositing reserves with agents in the money centers places a severe strain upon them in emergencies, and it is well known that the New York banks have acquired a large share of such deposits. The enormous responsibilities resting upon the New York banks on this account may be seen from the following statistics: On September 1, 1909, the New York banks held more than 43 per cent of the net bankers' deposits of the country. Compared with the banks of Chicago and St. Louis their obligations to bankers were almost three times as great.

Large New York balances are necessary because New York is the clearing-house of the country. In this connection certain statistics gathered by the Comptroller of the Currency nearly twenty years ago have great significance. From information provided by 3,329 of the 3,438 national banks it was found that in 1890 all but three drew drafts upon New York, and that the total amount of such drafts was 61.31 per cent of all the drafts drawn upon all the banks of the country. In the case of the Chicago banks the amount drawn was but 9.82 per cent of the total. The Chicago banks drew upon New York for $222,000,000 and were drawn upon in return for but $82,000. These figures show very clearly how indispensable is the maintenance of payments by the New York banks if the dislocation of the domestic exchanges is to be avoided.

58. PAYING INTEREST ON DEPOSITS AND BANK

COMPETITION2

BY GEORGE S. COE

The payment of interest on deposits of money payable on demand is open to the gravest objections. This subject has upon several occasions in years past been under consideration, and its total abolition has been almost unanimously agreed to among our banks by written contract. Yet by the refusal of one or more members it has failed to become a binding obligation. Like some other great reforms, this Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV (1909–10), 219–20.

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2

Adapted from an address before the New York Clearing-House Association, June 4, 1884 (Bankers' Magazine, New York, LVI [1884], PP. 44-51).