At Discount

On the other hand, it often happens that the Canadian banks find their balances in New York accumulate to unhandy proportions. This may happen through their getting payment in New York for a specially heavy export of Canadian goods, sent to Europe or the United States, at a time when New York interest rates are very low, and when, at the same time, the banks want their funds back in Canada, or it may happen through the transfer to New York of proceeds of Canadian bond and stock issues in London.

Then the shoe is on the other foot. The banks offer their New York funds in Montreal and Toronto, desiring to get "legals" in exchange. The balances in New York are then depreciated in value; New York funds are at a discount. But the discount, the same as the premium, cannot exceed a certain limit, which is the cost of bringing gold from New York to Canada, for no bank would sell its New York funds at a discount that amounted to more than the cost of bringing gold.

Effect Of The Panic

During the banking panic, which began in New York in the last half of October, 1907, quotations for New York funds were affected by the modified form of suspension of cash payments by the New York banks.

As the banks would not pay cash for large cheques, cash or currency promptly went to a premium of 3, 4 and 5 per cent. As a matter of fact it was not the cash that appreciated in value, but the balances in bank that depreciated. As the owners of the balances could not draw them on demand in cash, the balances became less valuable. The circumstance would tend to send New York funds to a discount in Montreal and Toronto.

Influence Of Sterling Market In New York

In Canada, sterling exchange, which is usually exchange on London, has a connection with New York exchange. There is no independent market for sterling in this country. We get our quotations from New York. The reason is because the market there is broad and strong. The great bulk of the exports and imports of the whole continent is settled for in New York. There are nearly always plenty of buyers and plenty of sellers. So it happens that the Canadian banks use that market for their sterling exchange. The New York quotations for sterling are fixed each day according to the demand for, and supply of, London remittance.

If New York funds are at par in Montreal and Toronto, the quotations for sterling exchange here will be the same as in New York, because the transfer of funds between Canada and New York, theoretically necessary to carry out the operation, can be made without gain or loss. And the Canadian quotations are shaded one way or the other according as New York funds are at a premium or at a discount.

Head Office Fixes Rates

But the branch offices have nothing to do with these intricate calculations. Practically every day each branch gets from the central office a quotation slip with the rates for the day on New York and sterling exchange, and they base their transactions on these rates. If the slip says New York funds are at a premium of 1/16 per cent. between banks, that means that the bank can sell its New York exchange in large blocks to other banks at that rate. The rates over the counter are not shaded so finely. The branches must bear in mind that funds in New York are more or less valuable, according to the fluctuations, and their attitude in buying and selling is regulated thereby.

The customers are not given the benefit of all the fluctuations. For example, the bank does not usually give a man a premium when it buys a New York draft from him, even if the funds are quoted at a premium; and it does not sell its drafts at a discount to customers, even when the quotation slips show a discount.