TeachMeFinance.com - explain Domestic exchange
Domestic exchange -- Also called inland exchange; exchange
between two places in the same country; in other
words, drafts or orders for money drawn at one place and
payable at another place in the same country.
Drafts constitute the commonest form of domestic exchange
and are purchased for use as such by both banks and individuals.
When drawn against persons to whom merchandise
has been sold they are known as commercial bills.
Domestic exchange is calculated in only one kind of money,
whereas foreign exchange is calculated in two kinds.
Following is an illustration of the use of domestic exchange :
A merchant in Chicago who owes for goods purchased in New
York can in discharging his obligation buy of a bank or
banker in Chicago a bill of exchange, or in other words, a
draft or order for money which is payable in New York by
the correspondent (a bank or banker) of the Chicago bank or
Again, a shipper in Chicago may forward grain to New
York payment for which is due on the arrival of the grain
at destination. He draws a draft or order on the consignee
(the receiver of the grain in New York). This bill of exchange
is attached to the bill of lading (the receipt from the
railroad or other carrying company which transports the
grain) and is sold to a bank in Chicago. The Chicago bank
sends it to its correspondent bank in New York, which collects
and places to the credit of the Chicago bank the amount of the
draft (bill of exchange).
If a bank in Chicago, for instance, has an inadequate balance,
or in other words, too small an amount to its credit with
its correspondent in New York it may pay a premium, or more
than the face value of it, for a draft payable in New York to
be used in increasing its balance in New York ; likewise, in
such circumstances, if it sells a draft on New York it may
charge a premium, or more than its face value, for it. On the
other hand, if it has too large a balance in New York and
can find more profitable use for its money at home it may buy
a draft on New York only at a discount, or less than its face.
and it may sell one at little or no premium, and perhaps at a
Exchange is in favor of one point and against another point
when the necessity lor remittance from the second point to
the first point exceeds the necessity for remittance from the
first point to the second point.
Instead of saying exchange on Chicago or exchange on
Boston, etc., it is the common practise to abbreviate the expression
to Chicago exchange or Boston exchange, etc.
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