Examples

Two centers may carry balances in a third

Currency movements in the case of two communities thus clearing through a third are not between the two communities directly concerned. They take place, if they develop at all, only between such communities and the common clearing center. The circumstances which give rise to them are the same as those already referred to in the cases discussed above. Currency will move from the local communities to the clearing center when the local communities wish to strengthen their balances in such centers, and when funds payable in such center are not more cheaply attainable in some other way. Currency will move from the clearing center to the local communities when cash balances at home need strengthening or when surplus balances in the clearing center cannot be more cheaply drawn down in other forms. Moreover, if a given community is dependent on a single center for all its payments and collections arising in connection with out-of-town business, it is apparent that currency shipments will not be made because of the relations obtaining between the community concerned and any other single community with which it may be clearing accounts through the common center, but only as a result of its entire position. All the community's foreign business is reflected in the movement of its balance in the clearing center, and it is, therefore, only when the totality of its foreign business requires it that the shipment of currency in either direction is undertaken.

Currency shipments in this case

The third general scheme of clearing arising under a system of local independent banks was described as one in which two local communities might depend for their clearances on two other communities which other communities in turn might depend on the intermediation of a fifth community.1

Here also the individual items involved in the clearings may be sent directly by the respective claimants or they may be sent indirectly through the reserve holding intermediaries, but the remittance would in this case be in the form of a draft on the primary center obtained by the banks in the ultimate communities concerned from their correspondents in the secondary centers. Drafts on the primary center must of course be paid for, and all such drafts drawn by banks in secondary reserve centers for, or on account of, their correspondents in outlying communities are charged against the balances of these correspondents in the secondary centers. In other words, in the case assumed, remittance is effected through a double transfer of balances, first in the secondary reserve centers, and secondly in the primary center acting as the intermediary between the secondary centers.

Suppose, for example, that a merchant in Stockton, Cal., had purchased a shipment of shoes from a manufacturer in Brockton, Mass. Suppose also that Stockton and Brockton handle all their foreign business respectively through San Francisco and through Boston, and that Boston and San Francisco clear through New York. If the Stockton merchant remits by means of a check on his local bank, the Brockton bank in which it is deposited may send it to a collecting bank in San Francisco or it may depend upon its Boston correspondent to handle the collection.

There may be secondary centers as well as a primary center

Example

1 Even more complicated arrangements are conceivable, but it is not necessary to attempt to carry the analysis beyond the actual complications of practice.

Remittance will, however, be made by means of a New York draft obtained from its San Francisco correspondent by the Stockton bank. For the draft so furnished the account of the Stockton bank in San Francisco will be debited. In other words, Stockton's balance in San Francisco and San Francisco's balance in New York will both be reduced. The Brockton bank receiving the remittance will then send it for credit to its correspondent in Boston, while the Boston bank will in turn forward the item for credit to its own correspondent in New York.1 The New York bank presumably puts the item through the clearing house for final collection. In other words this aspect of the transaction involves an increase of Brockton's balance in Boston and of Boston's balance in New York. Looking at the transaction as a whole there was thus a readjustment of balances in the secondary centers, Boston and San Francisco, and a shifting of balances in New York.

Instead of assuming that the Stockton merchant would send his own check, we might have assumed that he would at the outset obtain from his bank a New York draft drawn by his bank's San Francisco correspondent. Or we might have assumed that the initiative would be taken by the Brockton creditor through the drawing of a draft or bill on his Stockton customer. As already indicated, however, the particular form of procedure would not affect the basic facts, namely, the readjustment of balances in San Francisco and in Boston, and the shifting of balances as between San Francisco and Boston in New York.

In this rather complicated case of clearing it is also well to note that currency shipments are practically never between the ultimate communities concerned, nor yet between the secondary reserve centers. When currency shipments arise at all they are between these ultimate communities and their respective reserve centers, and between the secondary centers and the primary center. Moreover possible shipments of currency in the one case have no necessary connection with shipments in the other. In each case it is simply a question of the availability of cheaper means of strengthening balances in the respective reserve centers under one set of conditions, or of drawing down balances under opposite conditions.

Currency shipments here

1 The draft may by agreement be sent directly to New York to be credited to the account of the New York correspondent of the Boston bank concerned.