In connection with the description of drafts it has already been remarked that business in distant places is often transacted by means of correspondents who act as agents for banks in other towns or cities. In the United States, for example, a bank usually employs a correspondent in the chief commercial city of the state in which it is located and one each in New York, Chicago, and the chief commercial centres of Europe, such as London, Paris, and Berlin. The function of the correspondent is to conduct the out-of-town exchanges for its principal, and may be illustrated in the following manner: -
The customer of a bank brings for deposit all the checks and drafts which he receives from various parts of the country as well as from business men in his own city, and, after proper endorsement, is credited with the amounts they represent. The bank then assorts these documents and sends to its various correspondents those which are payable in their respective localities. Before mailing them it stamps upon the back of each an endorsement by which it makes them payable to the correspondent, and makes an entry of the transaction on its books in the proper places. When these checks and drafts are received, the correspondent credits its principal with the amount, and sends each document to the bank upon which it is drawn, provided it is in correspondence with this bank. Otherwise, after reendorsement, they are sent to other banks to which payments are due, and by them to the bank upon which it is drawn, in each case, of course, proper entries on the books and proper adjustments between the accounts of the various banks being made.
By way of illustration, let us suppose that a bank in the city of Madison, Wisconsin, has as its New York correspondent the Corn Exchange National Bank. Suppose further that John Jones of Madison receives from Richard Dow of Ithaca, New York, a check for $100 in payment for certain goods, which check, drawn, of course, upon an Ithaca bank, he deposits to his credit in the above-mentioned institution. After crediting Jones with the amount, and making the proper entries in its account with the Corn Exchange National Bank of New York, the Madison bank sends this check to its correspondent. In case the Ithaca bank also uses the Corn Exchange National Bank as its correspondent, such check will probably be sent directly to Ithaca. In case this particular New York bank is not in correspondence with the Ithaca institution, the check will probably be transferred by endorsement to some other bank and finally to the Ithaca bank's correspondent, by which it will be returned to the place of issue, and finally to Richard Dow himself. It is not necessary that the check or draft should follow precisely this route. It may be sent to various other institutions before it reaches the correspondent of the Madison bank, and may again pass through various hands before it reaches Ithaca, but, in any case, it will be used as a means of adjusting accounts between the various banks, and thus of balancing the debts of various regions.
It is not necessary that a bank should have a correspondent in every place in which it wishes to do business. Provided a sufficient number of connections are made to enable it to dispose of all the checks and drafts received from its customers, no others need to be established. Banking connections are so thoroughly developed in all the great commercial countries of the present day that a few correspondents located in the great commercial centres are sufficient for the needs of most local institutions.