rice of drafts on a given point, may,
therefore, fluctuate between a premium equal to the cost of shipping
cash to that point and a discount of the same amount. Beyond these
extremes, these fluctuations cannot ordinarily go, because customers
may demand cash of their banks in payment of checks against their own
credit balances and ship it to their out-of-town creditors at their
own expense, and would do so if the rates charged on drafts should
make such procedure profitable. The actual rate of exchange will not
ordinarily reach either of these extremes, on account of competition
either between the banks which are desirous of selling drafts on their
correspondents or between those which are forced to buy as an
alternative to cash shipments. If the aggregate balances of the banks
of a town with their out-of-town correspondents are large and
increasing, the pressure to sell drafts will be greater than that to
buy and the rate of exchange will go to a discount, the amount of
which, however, will be fixed by competition between the selling
banks. In the opposite case, the rate will go to a premium and be
fixed by competition between the buying banks.

In most towns in the United States there is little or no competition
between banks in the business of buying and selling drafts and
consequently no open market for exchange and no quotations of exchange
rates. In such cases each bank acts more or less independently;
shipments of cash to or from correspondents are the ordinary means of
regulating balances; and the cost of such shipments are charged to the
general expense account of the bank and taken out of customers either
by a fixed and more or less invariable charge on drafts sold, or in
other ways.

Since the balances of the banks of a town with their out-of-town
correspondents depend primarily upon the commercial and gift relations
of their customers with the outside world, it is pertinent to inquire
whether as a result of a long continued excess of purchases from
outsiders over sales to them and of gifts to over gifts from them, the
cash resources of a community might not be completely exhausted, and
if not, how such an outcome is prevented.

Bankers have no direct control over the purchases and sales of their
customers, but through the rate of interest they charge on loans and
discounts and their ability absolutely to discontinue such
accommodations they exert a very potent indirect influence. The rates
of interest an