Regular and occasional customers, from time to time during the day, ask for drafts on other points in the country, or on points in the United States, Europe, or elsewhere. When the bank receives the money from one of these customers and gives him its draft on the point desired, it is said to have sold him exchange. If the draft is on some point in Canada, it is called inland exchange; if on New York or some other United States point, it is called New York, United States, or foreign exchange; if on London and drawn in sterling, sterling exchange. The word exchange is here used in its broader sense. In practice it is coming to have the same meaning as commission, and is applied to the tolls or charges which bankers make when they issue drafts or buy remittances.

Inland Or Domestic Exchange

This function of the banks - the buying and selling of exchange-is important; and it is worth while for young bankers to aim at understanding it. The business in inland exchange is the most important; and bulks the largest. People in all the villages, towns, and cities are all the time sending money to other places in Canada. It may be for purchases of goods, for presents, or contributions to friends or relatives, payment of debts, or for other purposes. The bank stands ready to receive the money at its branches, and to issue in exchange a draft, or order, good for the required amount at the point to which the remittance is to be sent. It does not matter how small or how large is the transaction. It can quote a rate of commission for which it will undertake the operation.

It will be interesting to trace the working of this part of the banking machinery. There are various kinds of drafts. The simplest of all is that wherein the bank draws on one of its branches. Even in these the profit made is not by any means uniform. There are a number of things that enter into the calculations.

How The Profits Vary

The extent of the actual profit made by the bank, apart from the commission charged, depends, first, on the nature or consideration given by the purchaser for the draft. He may give a cheque on a standing deposit of his, in which case the effect of the draft is to redeem a deposit liability. He may give a cheque on, or notes of, another bank in town, in which case the bank is put to no expense in collecting them. He may give the bank's own notes, his payment saving it to that extent from the expense of bringing in its notes for counter purposes, in which case there is a collateral profit to be added to the commission charged on the draft. He may give sundry bank notes, in which case there is an expense involved in shipping them away, and the actual profit is reduced by that extent. He may give a cheque on an outside point, itself subject to a commission charge, in which case it sometimes happens that double commission is received and no actual transfer of funds takes place. He may discount a note, in which case the draft is the form in which the bank makes the advance.

Then the profits are affected by the manner in which payment is made by the branch at the other end. Does the payee deposit the amount to his credit? Then the bank holds the funds. The transaction as a whole results in no loss of deposits, but, perhaps, a gain. It may result in the bank's lending money at 7 per cent., the proceeds going on deposit at 3 per cent. Does the payee present the draft at the counter, demanding cash? Then the bank gains in circulation, for it pays out its own notes. This circulation will be bad, indifferent, or good, according to the length of time the notes remain outstanding. Does the draft come in through another bank? Then it has to be settled for in legals or hard cash.

Another factor affecting the profits is found in whether the general trend of currency is towards or away from the drawer branch. Usually the transaction is most profitable when the transfer is made in the direction contrary to the trend of currency; and least profitable when made in the same direction as the trend.

To illustrate: Take two branches, A and B. A uses more currency than it receives, and is constantly shipping it in. B receives more than it uses, and is constantly shipping out. If A were to issue a draft on B, the transfer would be made contrary to the general trend. A would probably receive currency from the purchaser of the draft, lessening the amount it would require to ship in. B would pay out currency, lessening the amount it would require to ship away. Expenses might be reduced at both ends. On the contrary, if B were to draw on A, the expenses might be increased at both ends.