When a bank needs to replenish its credit balances with its correspondents, it may ship cash or purchase drafts from other home banks, which it can send to its correspondents for collection like checks deposited in the ordinary course of business. The latter resource will of course be available only when these other banks' balances with their correspondents are not exhausted. Should the balances of all the banks of a town with their out-of-town correspondents be nearly or quite exhausted, shipments of cash to correspondents could not be avoided. If a bank wishes to withdraw funds from its correspondents for home use, it may order cash shipped or it may, perhaps, be able to sell drafts for cash to other home banks. The expenses involved in shipments of cash, loans, or purchases or sales of drafts for the purpose of replenishing balances with or withdrawing them from out-of-town correspondents, give rise to what is called the _rate of exchange_. If, in order to make out-of-town payments for its customers, a bank is obliged to pay the expense of shipping cash to its correspondents or to pay a premium on drafts purchased from other banks, the natural method of reimbursement will be a premium charge on drafts sold equal to the amount of the expense incurred. If it wishes to withdraw a balance with its correspondent, since to order cash shipped will involve expense, it will be glad to sell drafts for cash at a discount not to exceed such expense. The rate of exchange, or the price of drafts on a given point, may, therefore, fluctuate between a premium equal to the cost of shipping cash to that point and a discount of the same amount. Beyond these extremes, these fluctuations cannot ordinarily go, because customers may demand cash of their banks in payment of checks against their own credit balances and ship it to their out-of-town creditors at their own expense, and would do so if the rates charged on drafts should make such procedure profitable. The actual rate of exchange will not ordinarily reach either of these extremes, on account of competition either between the banks which are desirous of selling drafts on their correspondents or between those which are forced to buy as an alternative to cash shipments. If the aggregate balances of the banks of a town with their out-of-town correspondents are large and increasing, the pressure to sell drafts will be greater than that to buy and the rate of exchange will go to a discount, the amount of which, however, will be fixed by competition between the selling banks. In the opposite case, the rate will go to a premium and be fixed by competition between the buying banks.