184. Banker's London Balance

In order to be able to sell cable transfers, the banker, clearly, must carry an adequate balance in London and must be constantly replenishing it with deposits of exchange. Sometimes when his balance has run down and he finds he can sell a cable very advantageously he will go ahead and do it, making good the deficit by buying a cable himself at a lower rate. But this selling of cables against cables is unusual and takes place only under exceptional conditions. Bankers who make a practice of selling cables usually see to it that their balances are kept up by continuous remittances of exchange. They have bills arriving in London by every mail for credit of their account, and are almost invariably in a position to wire their correspondent to pay out large sums to whomsoever may be designated in the cable. The cable, incidentally, involving as it does the payment of large sums of cash, is the product of an elaborate cipher code, and is arranged with check-words and key-words which prevent any possibility of fraud.

185. Interest On Cable Transfers

Cable transfers, being immediate, command a higher rate of interest than even the primest of demand drafts, which must necessarily lie on board ship for a week before they become of any practical use to the purchaser. The purchaser of a cable transfer. in fact, loses no interest at all. He makes payment here and simultaneously the money is paid over to the credit of his account abroad. In the case of a demand draft he makes payment when he buys the draft and for a whole week is out of the use of his money. The interest rate, therefore, is one of the prime factors in determining the difference in the rate of exchange between cables and demand bills. When money is high the buyer of demand bills loses a good deal of interest and the quotations tend to diverge. When money is cheap the quotations come very near together. During the long 1908-09 period of cheap money, cable transfers and demand bills of exchange continually sold less than one-half cent per pound sterling apart.

Under such conditions there is but little money to be made out of cable transfers against remittances of demand exchange, but the business is clean and safe and the small margin of profit amounts to a good deal of money where the sum turned over is large. There are some financial institutions in the larger cities whose policy it is to keep large sums on deposit in London and Paris and who make a specialty of selling cable transfers against these deposits, replenishing them continually with remittances of prime bankers' bills. Fifteen points (that is to say 15/100 of a cent per pound sterling) is considered a fair profit on business of this kind. In the course of a day's business, for instance, if one of these banks sold £50,000 of cables the net profit would probably figure out to be between $75 and $100. Not a very large amount on a transaction involving a quarter of a million dollars, but enough to make a good many banks engage in the business and on a large scale.