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62. SEASONAL VARIATIONS IN OTHER CENTERS1

BY EDWIN WALTER KEMMERER

Chicago, as might be expected, shows a striking similarity to New York. There are the same five principal seasonal movements taking place at approximately the same times of the year and influenced largely by the same causes.

The St. Louis seasonal swing differs from those of New York and Chicago principally in the fact that it exhibits a sharp decline in November, followed by a reaction extending until the latter part of December. There are considerable differences, moreover, in the times at which the different seasonal movements begin and end. Being in the midst of the great agricultural section which creates the "cropmoving demand for money," St. Louis naturally relaxes from the crop-moving strain earlier than do the cities farther east.

The movements in New Orleans differ from those of New York and Chicago even more than do those of St. Louis. The January decline is of such short duration as to be almost negligible. Bank reserves decline rapidly from early in January until the beginning of May, but this is apparently not due so much to a demand for funds at home as to the transfer of money for deposit and investment to other markets during the slack season in the region contributory to New Orleans. The New Orleans market, like those of other cities studied, is weak during the hot summer months of June and July, but begins to grow stronger by August and reaches its strongest point of the year during the crop-moving months of September, October, and early November. The last period of the year in the New Orleans money market is one of readjustment and liquidation, following the heavy demands of the crop-moving period. It extends from the fore part of November to the end of the year, and is a period of comparatively strong though gradually weakening market, and seems to resemble more closely the markets of New York and Chicago, for this period than that of St. Louis.

The San Francisco market is probably more largely influenced by purely local conditions than any of the other money markets studied. It exhibits seven fairly pronounced seasonal movements, as follows: (1) The usual January decline. (2) A progressive "hardening" from about the first of February until nearly the middle of

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Adapted from Seasonal Variations in the Relative Demand for Money and Capital in the United States, pp. 224-25. (National Monetary Commission, 1910.)

March. In addition to the forces bringing about this spring revival in other cities, such as the natural reaction and readjustment after the January decline and the spring demands of agriculturists, the local tax situation in California is an important factor. (3) The third period is one of an easier money market. It begins about the middle of March, and continues until the last of April, being temporarily interrupted at the time of quarterly disbursements, about the first week in April. This movement, like the former, is largely the result of the local tax system. (4) From the last of April until the latter part of June the San Francisco market is comparatively strong, under the influence of the demands for the annual fruit-packing business and of fishing companies preparing for long fishing trips. (5) The fifth period extends from the last of June to about the last of September. Like the summer months in the other cities studied, it is a period of comparatively small demand for loanable capital. (6) The sixth seasonal period is the crop-moving period, extending from about the last of September until the latter part of November. It is a period of rapidly increasing or large relative demand for moneyed capital. The demand comes largely from the need of funds for moving dried fruits and canned fruits and for financing the hay and grain crops. An important factor in the market at this time is the local tax situation. (7) The seventh and last seasonal movement in the San Francisco market covers the last few weeks in the year and begins anywhere from the latter part of November to the middle of December, according to the lateness of the season. It is a period of reaction and decline after the strong market of the preceding period.

63. THE THEORY OF DOMESTIC EXCHANGE1

BY WILLIAM A. SCOTT

Commercial relations between communities are revealed most clearly by what is called the balance of trade, by which is meant the difference between the totals of the sales to and the purchases from outsiders. When the total of sales exceeds the total of purchases, the balance of trade is said to be favorable, and in the opposite case unfavorable. Credit relations are revealed by balancing mutual loans and investments, and gift relations by balancing gifts and other transfers of property for which no return is expected. A combina

'Adapted from Money and Banking, pp. 121–25. (Henry Holt & Co., 1910.)

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tion of these balances results in making a given community either a debtor of or a creditor to other communities. It is for the adjustment of these debit and credit balances that shipments of money from place to place are made.

At this point the queries naturally arise whether the money funds. of a community may not be completely exhausted by the payment of adverse balances and how much is required for this purpose. An examination of the various elements which determine the balance of indebtedness will show that there is no danger either of the exhaustion of money funds or of their reduction below minimum requirements. The balance of trade, the balance of loans, and the balance of investments are all three adjustable. Long before a community could be deprived of the minimum amount of cash needed for bank reserves and hand-to-hand money, prices, interest rates, and opportunities for profitable investments would have so changed as to annihilate the unfavorable balance. The first effect of shipments of currency to other centers is the decline in the reserves of banks, which, if continued, will result in a rise of interest rates and a contraction of bank loans. The withdrawal from business men of the loan accommodations to which they have been accustomed will force them to diminish their purchases and will stimulate their efforts to sell. If this is not sufficient to redress the unfavorable balance, loans from outsiders may be increased or the fall in local values due to the increased anxiety to sell property may induce outsiders to increase their investments in the town. The proper adjustment will ultimately be brought about by a change of prices. If those of the place at which the balance of indebtedness is adverse are sufficiently reduced, increased sales to and increased investments by outsiders will remedy the difficulty, and such a reduction will result from the pressure to meet obligations caused by the currency drain.

The influence of currency movements on relative prices must not be confused with the fundamental causes of price changes. We are here concerned with the adjustment of the relations between the demand and the supply of the same goods in different places. Movements of currency from place to place are but one phase of the operation of the general principle that people sell in the dearest and buy in the cheapest market, the result of which is a tendency toward the equalization of the prices of the same commodity in different markets.

Shipments of currency from place to place involve expenditures for express charges and insurance and the loss of interest during the period of transit. This latter item is explained by the fact that banks are unable to count as part of their reserve, and hence to use as a basis for loans, money in the possession of an express company. On account of these expenses, a bank which is asked to sell exchange on a place in which it has no balance, or to which it cannot without expense transfer a portion of its balance in some other place, must charge a premium for such drafts, unless it can buy in the home town exchange on that place at par. Under the opposite circumstances a bank may be willing to sell drafts at a discount, since this may be the most profitable way of using a surplus balance with its correspondent. This would be the case, for example, if its reserve were low and its surplus with the correspondent large. Rather than pay the expense of a currency shipment it could afford to sell drafts at any discount less than that expense. The maximum premium it could charge in the opposite case would be the expense of sending money to cover its draft, since rather than pay a higher premium customers would ship cash for themselves. The rate of exchange on a place, as the price of drafts is technically called, may, therefore, fluctuate between a point above par, determined by adding the expenses of shipment to the face value of the draft, and a point below par, determined by subtracting that amount. The actual premium or discount is fixed by competition between the buying and selling banks of a place, those in a position to sell exchange competing with each other for the custom of those buying, in case exchange is at a discount, and, in case it is at a premium, the buying banks bidding against each other for the drafts the selling banks are willing to dispose of.

The cost per $1,000 of currency shipments between New York and Chicago is usually about 50 cents; between New York and St. Louis, 60 cents; between New York and New Orleans, 75 cents, and between New York and San Francisco, $1.50. In this country the expense of currency shipments is sometimes saved by the operation of our independent treasury system. The central government has subtreasuries in which its funds are kept in Philadelphia, New York, Boston, Baltimore, Cincinnati, St. Louis, New Orleans, Chicago, and San Francisco, and when it has occasion to make transfers for its own purposes it may sell drafts on certain subtreasuries at par, thus saving banks the expense of shipping currency on their own account.

64. EXCHANGE RATES AND MOVEMENTS OF CURRENCY TO AND FROM CHICAGO1

BY EDWIN WALTER KEMMERER

Throughout January money in Chicago relative to that in New York City is cheap. Exchange rates on New York are high and there is a considerable movement of cash from Chicago to the Eastern states-particularly to New York City. The average rate of exchange for each of the first four weeks (1899-1908) varied from 2.5 cents premium in the first week to 10 cents premium in the fourth week. Of the forty weekly rates appearing during the first four weeks of the ten years twenty-four were not less than 10 cents premium. Comparatively high exchange rates were accordingly fairly regular in their occurrence during this period.

Just prior to January 1 there is normally a large demand in Chicago for New York exchange with which to meet dividend and interest payments due in New York, and the high rates thus created continue somewhat into the new year. The crop-moving and holiday demand, however, being over, money becomes relatively cheap in Chicago and flows to New York City, where it can at least earn the 2 per cent paid by banks on bankers' balances, and where it is absorbed somewhat in speculative activity and in the higher security prices, which normally rule the latter part of January and the fore part of February.

From the last of February to the fore part of March the demand for money in Chicago relative to that in New York rapidly rises. Exchange rates on New York fall to a low point.

Reported currency shipments between Chicago and Eastern states substantiate the evidence of domestic exchange rates. The total shipments of cash from Chicago to the Eastern states in January amounted in four years to $8,088,000, while February shipments amounted to only $1,934,000. The total receipts by Chicago from the East in January for the four years was $1,751,000. There is no evidence of a movement of cash from the East to Chicago in February, although there is something of a westward movement in March.

During the period from late January to early March the relative demand for money in Chicago is increased by the anticipated opening of navigation on the Great Lakes, for the opening of navigation gives rise to a large amount of New York exchange received in payment of

Adapted from Seasonal Variations in the Relative Demand for Money and Capital in the United States, pp. 96-100. (National Monetary Commission, 1910.)

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