[Volume XXV
THE CHICAGO BANKER
22
40 cents. If interest on money is worth 12^ cents a day per thousand dollars, it would cost 75 cents expressage and 25 cents interest to move one thousand dollars from New York to Minneapolis, a total of $1.00 per thousand ; while the cost to move the same amount from Chicago to Minneapolis would be only 523/2 cents. As a corollary it follows that in Minneapolis Chicago exchange is at proportionately less discount than New York exchange when the movement of money is towards the Northwest, and also for the same reason New York exchange commands a higher premium than Chicago exchange when the movement of money is from Minneapolis Eastward. It costs more to transport the funds to or from New York. It is this fact which has made Chicago the distributing point for currency used in a wide area of surrounding country.
The mainspring of trade is profit and the secret of profitable trade is to buy commodities where they are cheap and sell them where they are dear. Applying this axiom to exchange transactions we may perceive readily how trade balances are settled by means of the clearing system. Suppose in Louisville, New York exchange is at a premium, say of 50 cents per $1,000, while Chicago exchange at the same time is at a discount in Louisville of
houses, we must pass to that phase of the clearing system which relates to domestic exchanges, by means of which the balances resulting from trade between our numerous cities and between one section of the country and another are settled. The seasonal requirements of the agricultural sections of the United States afford an excellent opportunity to illustrate this subject, because of the regular and normal annual flow of funds and credits from East to West in the autumn and from West to East again in the winter and spring. This results in periodical fluctuations of domestic exchange between banks, with which all bankers are perfectly familiar. So regular and even is this movement forth and back that in ordinary times the average rates of New York exchange between banks in Chicago throughout the year is nearly par. Rarely would the average rate either of premium or discount for a year exceed a fair rate of interest on the funds while in the course of transmission.
Taking Chicago as a representative Western commercial center we find that New York exchange in that market usually commands a premium from January to June. This is because the funds brought out from the East during the autumn have finished their work and no longer are required in the West. The flow then naturally is Eastward, not only for the purpose of investment in securities, or commercial paper and to pay bills and accounts, but also to be placed upon deposit in banks at interest during the idle period. It is always safer and more convenient to make such remittances by bank drafts and also less expensive when exchange is at par, or even at a small premium, than to transmit money by express. When this Eastward movement begins, the rate of exchange gradually rises as the demand increases until the premium reaches a point where it becomes cheaper to ship coin or currency than to buy exchange. Under such conditions the movement continues until the excess supply of money on hand is exhausted, when equilibrium is established. During the midsummer months exchange rates remain practically stationary at par. There is no appreciable movement in either direction, because of the lack of profit to be made out of it. Later, when harvest is under way and the season for marketing crops begins, the accumulated credit balances in the East are drawn upon; Eastern exchange becomes slightly less desirable in the West than cash, and we see exchange quotations begin slowly to decline. The fall, while occasionally sudden, generally is gradual until the “shipping point” again is reached. This means that exchange is at a discount equal to the cost of transporting money by express, plus interest upon it while in transit. This condition prevails and money continues to move Westward until the required amount has been shifted from the East, when equilibrium again is restored. In all these operations exchange and money are dealt in as other commodities. The current quotations are determined by the law of supply and demand. So we may safely deduce the general principle that when exchange on a given city/ is at a premium the tendency is for money to flow toward that city, because the balance of trade is in its favor. When exchange on a city is at a discount it indicates that trade balances are against that city and money likely to be withdrawn from it.
So closely are banks obliged to calculate the cost of transporting funds that a very slight difference in the rates of exchange, or express tariffs, favorable to a given city as compared with others, will stimulate the movement as to that city, and retard it or prevent it altogether as to other cities. For instance: the express rate on currency from New York to Minneapolis is 75 cents per thousand dollars, while the rate from Chicago to Minneapolis is
a further step incidental to such arrangement the form and manner of issuing clearing house certificates should be previously determined and agreed upon. Certificates should be made identical in every city/ and ail necessary steps for the issuance of loan certificates should be fully understood and made in advance. But these ideas are perhaps matters for future consideration, rather than for the present.
The articles of association of one of the leading clearing houses of this country provide, among other things, the following:
“The objects of the association are the effecting at one place of the daily exchanges between the several associated banks, and the payment at the same place of the balances resulting from such exchanges, and to establish rules and regulations in matters of common interest arising from, or affecting relations with banks in other localities and the fostering of sound and conservative methods of banking.”
It will be seen that ample provision is made in this constitution for other functions to be assumed by the clearing house when occasion arises. Certain of the more progressive organizations, including the clearing house association of my own city, have established a bureau for making thorough and exhaustive examinations into the affairs of members and of all banks clearing through members. This is a great and a very important step. It is a courageous one and it sets a splendid example to the whole country. It entitles the banks in those cities where it is in practice to public confidence and esteem. It is a declaration by these banks to the public that they not only discountenance bad banking and propose to stamp it out and prevent it among themselves, but also it is an evidence of good faith that each member is ready and willing not only to show' clean hands to the other members, but to the whole world as well. In the development of the clearing system, and as a means for the promotion of sound banking, and for the elevation of the business itself to a high plane, nothing more important has been done within a century. The example should be and it is hoped soon will be followed by banks in every important city in the United States. Among the special functions which have occasionally been exercised by clearing houses, and for which we may say there is now sufficiently well established precedent to be followed in future should occasion require, are the granting of loans to the government, and the liquidation of insolvent members without delay, inconvenience or loss to their creditors. Fortunately occasion seldom arises for the exercise of either of these powers, and each particular instance stands upon its own merits.
A further possible and greatly needed extension of the usefulness of clearing houses would be the adoption in five or six of the leading cities of some uniform and practical system of dealing with abuses incident to the present method of handling commercial paper by note brokers. This is a matter of importance which has been repeatedly demonstrated since the panic and one which should receive the serious and immediate attention of clearinghouse officers and committees. It would seem at least practicable that the members of clearing houses by agreement should require standard forms of sworn statements to be made by borrowers; the registration of all notes sold through note brokers; and the procuring at least of annual audits by public accountants of the books of all concerns selling their notes through brokers in the public markets. It is to be hoped that co-operation to this end eventually may be secured. Certainly it would do much to offset the danger of the present wide open method of granting credits.
While we have not by any means fully discussed the business and functions of clearing