Shipments of currency from place to place involve expenditures for express charges and insurance and the loss of interest during the period of transit. This latter item is explained by the fact that banks are unable to count as part of their reserve, and hence to use as a basis for loans, money in the possession of an express company. On account of these expenses, a bank which is asked to sell exchange on a place in which it has no balance, or to which it cannot without expense transfer a portion of its balance in some other place, must charge a premium for such drafts, unless it can buy in the home town exchange on that place at par. Under the opposite circumstances a bank may be willing to sell drafts at a discount, since this may be the most profitable way of using a surplus balance with its correspondent. This would be the case, for example, if its reserve were low and its surplus with the correspondent large. Rather than pay the expense of a currency shipment it could afford to sell drafts at any discount less than that expense. The maximum premium it could charge in the opposite case would be the expense of sending money to cover its draft, since rather than pay a higher premium customers would ship cash for themselves. The rate of exchange on a place, as the price of drafts is technically called, may, therefore, fluctuate between a point above par, determined by adding the expenses of shipment to the face value of the draft, and a point below par, determined by subtracting that amount. The actual premium or discount is fixed by competition between the buying and selling banks of a place, those in a position to sell exchange competing with each other for the custom of those buying, in case exchange is at a discount, and, in case it is at a premium, the buying banks bidding against each other for the drafts the selling banks are willing to dispose of.

The cost per $1,000 of currency shipments between New York and Chicago is usually about 50 cents; between New York and St. Louis, 60 cents; between New York and New Orleans, 75 cents, and between New York and San Francisco, $1.50. In this country the expense of currency shipments is sometimes saved by the operation of our independent treasury system. The central government has subtreasuries in which its funds are kept in Philadelphia, New York, Boston, Baltimore, Cincinnati, St. Louis, New Orleans, Chicago, and San Francisco, and when it has occasion to make transfers for its own purposes it may sell drafts on certain subtreasuries at par, thus saving banks the expense of shipping currency on their own account.

64. EXCHANGE RATES AND MOVEMENTS OF CURRENCY TO AND FROM CHICAGO1

BY EDWIN WALTER KEMMERER

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. The average rate of exchange for each of the first four weeks (1899-1908) varied from 2.5 cents premium in the first week to 10 cents premium in the fourth week. Of the forty weekly rates appearing during the first four weeks of the ten years twenty-four were not less than 10 cents premium. Comparatively high exchange rates were accordingly fairly regular in their occurrence during this period.

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 February 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.

Reported currency shipments between Chicago and Eastern states substantiate the evidence of domestic exchange rates. The total shipments of cash from Chicago to the Eastern states in January amounted in four years to $8,088,000, while February shipments amounted to only $1,934,000. The total receipts by Chicago from the East in January for the four years was $1,751,000. There is 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 the period from late January to early March 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

Adapted from Seasonal Variations in the Relative Demand for Money and Capital in the United States, pp. 96-100. (National Monetary Commission, 1910.)

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 May 1) 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.

The average domestic exchange rate rose from 29.5 cents discount in the ninth week to 16 cents premium in the twenty-first week. In nine of the ten years the rate for the twenty-first week was higher than that for the ninth. The average rate then fell to 4 cents premium in the twenty-fourth week. These two latter movements, however, were minor ones and not regular in their occurrence, the former taking place in six and the latter in five of the ten years.

Chicago reported relatively small receipts of cash from the East during these months. The shipments east, however, were high, the totals for four years being as follows: March, $6,287,000; April, $10,936,000; May, $12,212,000; June, $12,628,000.

Money, having served its purpose in meeting the spring needs of agriculturists, flows into the reserves of the Chicago banks, and Chicago bankers, not having a great demand for it at this time, move a portion of it to New York for the purpose of obtaining the 2 per cent which New York banks pay upon bankers' balances.

About July 1 the relative demand for money in Chicago 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 average exchange rate fell abruptly from 11.5 cents premium in the twenty-sixth week to 16.5 cents discount in the twenty-seventh week, a decline taking place in every one of the ten years. After a minor reaction to the twenty-ninth week, which took place in seven years, there was a continuous decline until the thirty-fifth week, when the lowest point of the year was reached. The average rate fell from 11.5 cents premium in the twenty-sixth week to 37.5 cents discount in the thirty-fifth, a very substantial decline taking place in

every year. Exchange then continued at a low level until about the forty-fourth week (fore part of November), the average rate for this week being 29 cents discount.

The primary cause for this is of course the anticipated and actual crop-moving demand. For the twenty-seventh week (about July 1) the striking fall in exchange may be due in part to the efforts of western banks to maintain their reserves (or strengthen them) in preparation for their half-yearly statements, which are generally published. The receipts of cash by Chicago banks from eastern banks from 、 June to October were as follows: June, $2,500,000; July, $2,704,000; August, $17,910,000; September, $11,789,000; October, $21,843,000. Shipments by Chicago to the East were very low in all these months.

During the last six to eight months of the year, the demand for money being stronger in New York than in Chicago, the average exchange rate rose from 29 cents discount to 13 cents premium in the forty-seventh week; it then declined to 11.5 cents discount in the forty-ninth week. The rate for the forty-seventh week was higher than that for the forty-fourth in every one of the ten years, that for the forty-ninth week was lower than that for the forty-seventh in eight years and the same as the forty-seventh in the other two years, while that for the fifty-second week was higher than that for the fortyninth in six years and the same as that for the forty-ninth in two years. The general upward tendency in rates at this time, as well as the two lesser movements noted, appear, therefore, to be fairly regular in their occurrence.

Reported receipts of cash by Chicago from the Eastern states fell off in November and December from their maximum figure for the year in October. On the other hand, shipments to the Eastern states reported by Chicago rose from $2,134,000 for October to $3,213,000 for November, then fell to $3,021,000 for December.

Money becomes relatively cheap in Chicago and vicinity during these last six weeks of the year, principally because of the return flow of currency previously shipped to the country districts for cropmoving 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.

The decline in exchange rate from the forty-seventh to the fortyninth week may perhaps be attributed to the fact that by this time

foreign exchange made by cotton and grain shipments to Europe has been sold in New York in considerable quantities. The advance from the forty-ninth to the fiftieth week and the comparatively high exchange rates until 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.

65. INTEREST ON DEPOSITS AND SEASONAL DISTURBANCES1 BY WILLIAM A. RICHARDSON

The practice of paying interest on deposits is pernicious and fraught with danger and embarrassment to borrower and lender as well as to the general business interests. If deposit accounts are employed as temporary investments, the interest attracts a large amount of money to those cities where such interest is paid, and where speculation is most active, at seasons when as much profit thereon cannot be secured in legitimate business, these temporary investments are called in and jeopardize in their sudden withdrawal the whole business of the banks, both affecting the legitimate depositors on the one hand by excitement and distrust, and on the other creating a condition of things in which the borrowers on call are also unable to respond. The banks have borrowed their money of depositors on call. They have loaned it on call to speculators, who by its use have contributed to inflate prices of the stocks or merchandise which have been the subject of their speculations. The speculator wants it till he can dispose of them without a loss. This he is unable to do in a stringent money market. The banks, their depositors, and the borrowers all want it at the same time, and of course a stringency is developed which spreads distress throughout the country.

The system creates an immense amount of debts payable on demand, all of which thus suddenly and unexpectedly mature at the first shock of financial or commercial embarrassment in the country and at the very time when most needed by debtors and when they are least able to respond.

Without attributing the stringency in the money market which is experienced every autumn and occasionally at other seasons of the year solely to this practice of paying interest upon deposits in the large cities, it is evident that when money is less needed in legitimate business the practice encourages overtrading and speculation, always

Adapted from Finance Report, 1873, pp. xv-xvi.