Practically every bank in the United States keeps part of its funds in banks in New York City, the money center of the country. All National Banks are allowed to keep part of their reserve in the National Banks of New York, Chicago and St. Louis, the three Central Reserve Cities. For these reasons checks drawn on banks in these three cities are generally accepted at par, that is, collected without cost to the depositor.
In this connection, the word "exchange" comes from the fact that you exchange your personal check for the bank's check on another bank, located in some other city.
In remitting for collections, or for balances due, the banks outside of the three Central Reserve Cities, generally send their checks on one of these cities, according to their location.
Under certain conditions you will notice your local newspapers quoting New York Exchange at so much premium or so much discount. These rates are generally in use only between the different banks in your city. The banks do not charge a depositor any premium for its checks on other cities, unless the amount of the checks called for is large.
The proper way to draw your check when you want New York Exchange, is to make it read "Pay to the order of New York Exchange." The bank then makes out its check on a New York bank payable to your order. Then you should endorse the bank's check to the order of the party to whom you are remitting.
Banks do not like to sell their checks on other banks to strangers. Some expert at raising checks may buy New York Exchange for ten dollars and raise it to ten thousand. Also he might buy the bank's check with the idea of obtaining the Cashier's signature for the purpose of forgery.
XIV
THE METHOD OF ISSUING NATIONAL BANK NOTES
Many people have the idea that a National Bank, having a capital of, say one hundred thousand dollars, can call on the United States Treasury Department for an equal amount of National Bank Notes, without expense to the bank; and thus have double the amount of its capital to lend at the start.
The National Bank Act does say that each National Bank must issue currency equal to a certain per cent. of its capital; and further, that each National Bank can issue currency equal to the full amount of its capital. But the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows.
These circulating notes must be issued under certain expensive conditions. First—the bank must purchase and deposit with the Treasurer of the United States an amount of registered United States Bonds, equal at their par value, to the amount of the circulating notes called for. Second—dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. Third—the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. Also, when any of its worn-out or mutilated notes are sent to the Treasury Department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. The signature of the President and Cashier of the bank must be affixed.