d discount charged are an important element in the cost
of doing business and, if loaning and discounting is discontinued,
sales of property to meet maturing obligations are forced, with the
result of price readjustments between the town in question and the
outside world which speedily change the relations between purchases
and sales.

When the cash resources of the banks of a town approach the limit of
safety and their balances with their correspondents fall to an
ominously low point, the normal method of procedure is to raise the
rates on loans and discounts, and if conditions grow worse, to raise
them higher still and as a last resort to cease temporarily to make
them at any price. By increasing the cost of doing business this rise
in the rates will check purchases by diminishing or annihilating the
profits resulting, and will stimulate sales by rendering it more
profitable for some customers to secure funds by sales to outsiders at
lower prices than were formerly asked rather than by borrowing from
banks. Under ordinary circumstances this procedure will be sufficient
to change an unfavorable into a favorable balance of indebtedness with
the outside world, with the result that more checks on outside
institutions will be deposited with the banks and a smaller amount of
drafts purchased. Bankers' balances with their correspondents will,
therefore, increase, and with them their ability to command cash in
case of need. The demands made upon them for cash will also decrease,
since the volume of loans and of business transacted will fall.

If the banks stop discounting, a more or less violent readjustment
with the outside world results. Business men who have obligations to
meet, and most of them will belong to this class, are obliged to sell
their goods and property at whatever prices are necessary and to stop
purchasing entirely. The outcome, so far as the banks are concerned,
is as above indicated. If conditions are such that sales at any price
cannot be forced, a crisis ensues; that is, business operations are
temporarily suspended and transfers of property in settlement of
obligations are made through bankruptcy and other court proceedings.

_7. Foreign Exchange_

The business relations between banks located in different countries do
not differ in any essential respect from those between banks located
in the same country. Interchange of checks, the conduct of checking
accounts, shipments of cash, and borrowing an