New York And Foreign Exchange

When a customer desires to remit money to some place in the United States, the bank can meet him by giving him a draft on New York. As New York is the great settling and reserve centre of the United States, the banks in practically all the cities, towns, and villages in the States keep accounts with one or more New York banks. Thus it has become the practice for banks all over the Union to pay New York drafts at par.

So the bank must have an account with a bank in New York. In the aggregate there will be large sums passed through this account, and at times the balance may be heavy. Therefore, it is necessary to select a strong institution as banker. The account may be divided among two or more banks. The bank or banks selected are styled New York correspondents.

All the items on the United States, or the bulk of them, that are received, are sent every day at debit of the correspondents. The drafts drawn by all the branches, which are actually cheques on the accounts, are credited to the correspondents when drawn. The correspondents, on receiving the remittances, credit them to the bank's account; the cheques are charged up as they are presented for payment.

New York Funds

The New York correspondents do not handle this business for nothing. Commissions are to be paid on items drawn on many points out of New York, and, perhaps, a specified balance is to be maintained. That is the way the bank pays for its privilege of drawing on New York. The fact that the account costs something should be borne in mind when fixing the commissions in purchasing United States remittances and in selling drafts on New York.

There is another circumstance to be considered in this connection. Demand items, payable at New York, and the balances which the bank has in New York banks, are called New York funds. The rate of commission at which the banks can purchase items on the United States, as well as the rate at which it can sell drafts on New York, is governed, to a considerable extent, by the circumstance of whetherNew York funds are at a premium, at par, or at a discount in the Montreal and Toronto markets.

At Premium

As to the causes of fluctuations, it will be sufficient here to mention that, speaking generally, New York funds are at a premium in Montreal and Toronto when the demand for drafts, or exchange, on New York is greater than the supply; and conversely, they are at a discount when the supply of drafts, or exchange, is greater than the demand. When very high interest rates are ruling in New York for call and time loans, the circumstance will have a tendency to increase the demand in Montreal and Toronto for drafts on New York, and it may, very likely, result in New York funds going to a premium. Those parties in Canada who nave blocks of capital available for lending, being desirous of profiting from the high New York interest rates, send their money there to be put out. So there is a flow of money towards New York. The banks that have balances there, available for drawing, are said to have New York funds to sell. When there is no very pronounced flow of money one way or the other, these banks will likely sell their funds at par to other banks; but under circumstances like those just described their balances in New York become possessed of an additional value. For the time being it is worth more to have money in New York than to have it at home.

Therefore, they ask a premium from other banks for drafts on New York. This premium cannot get beyond a certain figure - from 5/64 to 3/32 of 1 per cent. -because that is the cost of sending gold to New York in large amounts. If more were asked, the bank wishing to purchase would refuse to pay it, and would ship gold.