Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

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....