This section is from the "Practical Banking" book, by Albert S. Bolles.
St. Louis. 50c. per $ 1,000 premium. Chicago, 75c. per $ 1,000 premium. Boston, par@5c. per $ 1,000 discount.
When a Charleston bank, for example, buys exchange on New York, it expects to sell it again to persons who have payments to make in the latter city. It does not sell the same bills that it buys; it could do so, however, if any persons desired them. What the bank actually does is to forward the bills purchased to the bank with which it corresponds in New York for collection; that bank presents them to the drawee at the proper time and they are paid, and the amount is credited to the Charleston Bank. When a man enters the Charleston Bank desirous of buying a bill of exchange on New York, it simply draws a bill on its corresponding bank in that city and sells it to the party desiring the same, charging him therefor whatever the prevailing rate may be at that time. Just now, as will be seen from the above quotation from the newspaper, the rate is one-quarter of one per cent.
Banks do not always charge their customers for a bill of exchange, either when selling or collecting it. The custom, however, of charging generally prevails among banks; nevertheless, the fact that exceptions are sometimes made is worth noting. In the exceptional cases the dealer's account may be a very profitable one, and this favor is shown to him as a kind of reward or gratuity or premium to make him feel better satisfied with the bank. But a gratuity of this kind granted to a dealer is rather an outside matter, and does not pertain strictly to the banking business.
It may be stated in this connection that some depositors, instead of going to their bank and buying a bill of exchange when they wish to pay a debt due in another city, send their check to the person whom they owe; he receives it and deposits it in his bank which afterwards sends it for collection to the bank on which it is drawn. It will be seen that the depositor by doing this cuts off his bank from selling him a bill of exchange, and his real object of doing this is to save money by the operation. This has become a subject of considerable complaint among bankers. The question has been raised whether some method cannot be devised for collecting these checks, and thereby effecting a considerable saving among all the parties concerned. In that part of this work relating to the Clearing-house, a chapter will be found pertaining to this subject.
In regard to foreign bills, what we have already said applies in most respects to them. The rate of exchange does not exceed the cost of shipping gold from the debtor to the creditor. As between Great Britain and our own country this cost does not exceed two cents to the pound sterling.
There are occasions though when the exchanges sink and rise much below the specie point, which is not accounted for by the single fact of a balance of indebtedness, either for or against a given country.
The sum paid for a time-bill, therefore, will depend on the length of time it has to run and the rate of interest in the country where the bill is payable. A bill drawn payable in London three months after date is bought by a banker at a price which is equal to a bill payable on demand, less three months' interest at the rate at that time prevailing in London, for the purchaser must discount the bill there at the ruling rate before he can make it equally available with a draft on demand. It may be added, that when foreign bills are bought as an investment, a thing often done, it is for the purpose of earning the higher rate of a foreign country, in the place of the lower rate ruling at home.
It may be well to note that when bills are quoted at $4.84 the quotation does not mean that they are two per cent. less than par, but simply that they can be bought for two cents and 65/100 less than the regular value of a pound sterling. If, for example, a bill of exchange were drawn for £1,000, the amount would be equivalent to $4,866.50; if it were quoted at $4.85, this quotation would mean that the bill could be bought for $4,850.00, or $16.50 less than the par of exchange.
Within a few years the practice has arisen of transferring money by telegraph, or, as it is termed by the newspapers, "cable transfer." By this method a merchant who desires to ship wheat to London can complete the transaction in a few hours. He can ship the wheat, telegraph the fact to the consignee at London, obtain particulars concerning the conditions of the market, and, if he think best, have the wheat sold at once, "to arrive," and to remit the proceeds through a London banker. A bill does not appear at all in the transaction. The amount of business done in this manner has materially reduced the volume of bills in some places. In the Eastern trade with London, in which competition is exceedingly keen and the margin of profit consequently small, the telegraphic transfer system has been in use for several years. The amount of cable transfers between this country and European countries is constantly increasing.