The varying balances between credit and debit accounts due to the payments and collections constantly going on between different cities and sections of the country, and the offsetting of these accounts through the agency of the banks gives rise to the shipment of currency and to what is known as "rates of exchange." Thus, exchange on New York in Chicago or in Pittsburgh may be at par to-day, but a month hence it may be at a discount, and in three months the merchant who wishes to remit to New York or some other city may have to pay a premium for it.

The variation in the rates of exchange and the seasonal movements of currency to and from "the interior" can best be understood by noting exchange operations during the crop-moving season. In the late summer and autumn when the great grain crops of the West and the cotton of the South are being gathered and shipped to the East those sections must have large supplies of funds. Harvest hands and farmers must be paid and as consignments of grain and cotton are made to dealers in New York and other-Eastern points heavy drafts are made on New York. New York exchange may become so plentiful that it will fall to a discount. The Western or Southern banker sends the drafts bought from shippers to New York and after a while he finds that he has a big credit balance there while his actual cash on hand is being exhausted, and he will be less and less inclined to buy more New York exchange. If he continues to buy it he must have some of the money, which has been piling up to his credit in New York, shipped to him in the form of actual currency. Naturally the banker will add to the regular exchange charge the cost of transporting the currency. This includes express charges and insurance and of course varies with the distance. The approximate cost of shipping $1,000 in currency from New Fork to Chicago is 50 cents, to New Orleans 75 cents, and to San Francisco $1.50.

The shipment of currency is arranged between the banks concerned, the customer ordinarily having nothing to do with it. He simply buys the exchange he needs at the ruling rate as determined by the action of the banks. Large business concerns, however, which must make heavy purchases of exchange frequently get quotations from several banks to take advantage of the fraction of a point which a particular bank may be able to offer because of its more favorable balance in New York or elsewhere. As indicated above, money is generally sent from one bank to another by express. Sometimes, however, the shipment of currency is avoided by cooperation with the United States Treasury. Thus a bank in New York wishing to transfer $1,000,000 to a bank in Chicago may deposit it in the sub-treasury in New York, which will telegraph the sub-treasury in Chicago to deliver that amount in currency to the Chicago bank. This has the advantage of promptness and safety, and also eliminates the cost of shipping the money.

It will be understood that the accumulation of credits in New York during the crop-moving season will be offset to some extent by debit obligations incurred in the West and South through the purchase of manufactured goods and all kinds of merchandise from Eastern dealers. In the winter and spring months the agricultural districts are buying largely from Eastern cities and selling little. As a result the demand in the interior for drafts on New York becomes so heavy that the country banks will charge a premium for New York exchange and generally will have to ship back to New York some of the currency they received a few months before to cover their drafts.

There is another reason, aside from the normal operations of exchange, for this seasonal movement of currency between New York and the country districts. In the harvesting and crop-moving months the West and South must have large amounts of actual cash with which to pay harvest hands and farmers, cotton pickers and planters. To meet this demand the country banks, in the absence of a rediscount market, must order the cash shipped to them from New York and other reserve centers. Then in the winter and spring cash flows back into the country banks, and as there is comparatively little local demand for it during those months, they ship it back again to build up their balances in New York. They get a low rate of interest on these balances, but frequently they instruct their New York correspondents to lend a part of their balance when the money market is favorable.

This alternating ebb and flow of money with its resulting scarcity of funds at one season and abundance at another, due to defects in our banking system in the past, caused great disturbance of the money market, notably in the Eastern centers. When the banks of the interior began to draw down their New York balances in the autumn, the New York banks were compelled to curtail their loans. This affected not only stock exchange operations but also loans to business concerns, which at that season require not less but more loan accommodations. On the other hand, the flow of money back to New York at the beginning of the year caused large surplus reserves, low rates for money, and an expansion of loans for speculative purposes.