members deposit gold of required weight and United States gold certificates, in lieu of which are issued clearing-house gold certificates in amounts of five and ten thousand dollars. These certificates pass current among the members, the holders thereof being the owners of the gold and United States gold certificates so deposited and which count as legal reserve. In settling balances of $600,000 it is necessary to use only sixty ten-thousand-dollar gold certificates. This plan saves abrasion on the gold as well as the labor of carrying it back and forth and recounting it. It also eliminates the danger of street robberies.

The manner of settling clearing-house balances, and the forms used, vary slightly. In some cities the debtor banks pay the cash to the manager of the clearing house, and he in turn pays it to the creditor banks; while in other cities the creditor banks present the clearing-house manager's settlement checks to the debtor banks direct for payment. In some cities, in order to avoid congestion of work and to head off check kiting, informal exchanges are made by the members. Receipts are taken to cover items so exchanged and are passed through the clearing house at the next regular exchange. Trading of balances is also in vogue in some cities, and since the inauguration of the Federal Reserve system many balances are settled by checks on Federal Reserve banks. To encourage promptness, care and accuracy on the part of clerks, fines are imposed for errors in lists, wrong clearings, missing indorsements, errors in statements, misconduct, etc. These fines range from ten cents to five dollars, and are assessed against banks whose representatives are the offenders. The proceeds usually go toward defraying the general expenses of the association. To get an idea of the convenience and saving that result from the daily exchanges at the clearing house one need only to consider the number of clerks that would be required to go from bank to bank and collect and handle the actual cash represented by $10,000,000 worth of items, then compare that process with the clearing of a like amount of items and the settlement of balances resulting therefrom.

In addition to the function of city clearings there is, as has already been noted, in quite a number of clearing houses to-day, a country department whose function is essentially that of collection. In principle the work of the country department differs from that of the city chiefly in the fact that deferred rather than immediate debit and credit is given.

IV. TECHNIC OF NATIONAL CLEARING.

It is now necessary to take another step in depicting the clearing-house system of the United States. As explained elsewhere in this volume, every national bank and all of the more important state banks and trust companies are now members of the Federal Reserve system, and as such each bank maintains a specified balance on the books of the Federal Reserve bank in the district in which it is situated. In order to re-establish such a balance it may send in checks or drafts upon other banks which have agreed not to make any charge to the Federal Reserve bank for collection. These checks or drafts are credited to the account of the member bank so sending them, but only after enough time has been given to transmit them to the banks upon which they are drawn and to receive back funds as the proceeds of the item thus assumed. The member bank is supplied with a schedule showing how soon it will have credit for the items drawn on the different points, and it can thus keep very close track of the balance with the Reserve bank from day to day. It is then able to draw upon any accumulation it may have in excess of required reserve, and thus to furnish remittances to its customers. Such checks drawn upon a Reserve bank are of course acceptable remittances anywhere.

It will be noted, however, that a Reserve bank which thus accepts checks and drafts indiscriminately from its customers will probably get a good many such items drawn on banks in its own district and a good many drawn on banks outside of its district. Those drawn on banks within its own district it can largely clear upon its own books by mere bookkeeping entries, or through a local clearing house of which it is a member. Those drawn on banks in other districts it can clear by sending them to the banks in the other districts for remittances of similar kind, or by putting them through the Reserve bank of any other districts and leaving it then to make the collection. This latter process is facilitated by what is called the gold-settlement fund at Washington, which is a fund in gold deposited with the

Treasury Department by each Federal Reserve bank. Daily transfers through this fund are made by telegraph, each Reserve bank wiring the amount of its debits and credits and these being then offset on the books at Washington, so that the relative ownership of the fund varies from day to day, but without the necessity of actually shipping gold at all. Thus the transfers of the country are effected simply by an easy bookkeeping process which practically clears between clearing houses. It is still true that a good many checks go through the local clearing house and are collected by it either directly through city members or, through its country department, from out-of-town banks, but an increasing volume of checks has gone through the Reserve banks and by them has been cleared on their own books or through the gold-settlement fund. The technic of clearing, as already explained, is simple and may be summed up in the statement that it is nothing more than a bookkeeping process in which plus and minus items are canceled and the balance is paid in some form.

V. INTERNATIONAL RELATIONSHIPS AMONG BANKS.

What has been said thus far relates primarily to correspondent relationships between banks situated in the same country. The international relationship of banks which act as correspondents for one another is very similar, but is necessarily more complex and involves more responsibilities. In such international relationships, the most important functions to be performed are those of mutually acting as agents for one another in the opening of credits, thus facilitating the movement of goods from country to country, while the proceeds of collection will be carried on open account, or remitted, according as circumstances dictate. These are what are technically known as foreign-exchange transactions, and are more fully dealt with elsewhere. It is worth while to mention them at this point because they are illustrative of interbank relationships in the largest sense, and because they are precisely on a parity with domestic interbank relationships. The difference lies in the fact that in international trade there is more call for the

actual advancing of funds, while differences in currency units and values involve a greater degree of responsibility in holding such funds. But it should be borne in mind that what is called "foreign exchange" as conducted at the present time is a special phase of interbank business, in which a bank in one country acts as collecting agent for a bank in another, and frequently adds to this function that of rediscounting or purchasing paper or assuming the responsibility for credit at the request of its correspondent bank.

CHAPTER XVI

FOREIGN EXCHANGE

I. MEANING OF FOREIGN EXCHANGE.

THE subject of exchange, whether domestic or foreign, may be studied as a phase of economics, commerce, or banking, and its meaning will vary with the point of view from which it is being considered. In the broad sense, exchange includes commerce itself or the interchange of goods and services. From a more restricted standpoint, exchange is the system of settling balances arising out of these commercial transactions. The mechanism of exchange renders unnecessary the sending of currency or bullion for the full reimbursement of each transaction, and payment under normal economic conditions is made to cover only the net differences between the total debits and credits. In its narrower meaning, exchange is simply the business of buying and selling claims for the payment of money at a particular place. Exchange may be further limited to include only the instruments representing claims to payment. Finally the expression may refer simply to the price or rate at which these claims to payment are bought and sold. These definitions apply to both domestic and foreign exchange, but the two forms differ in respect to countries, currencies, and instruments involved. Domestic exchange settles balances arising out of transactions among individuals living in the same country, and using only one form of currency, but through instruments which are orders or promises to pay money such as checks, drafts, and notes. On the other hand, foreign exchange effects settlement in the business transactions of residents of different nations, in different forms of money, and only through orders to pay, such as drafts, bills of exchange, and cable transfers.

A bill of exchange is an evidence that one party has a