Our objective is to describe a multi-layer model of C3-canopy processes that effectively simulates hourly CO2 and latent energy (LE) fluxes in a mixed deciduous Quercus-Acer (oak–maple) stand in central Massachusetts, USA. The key hypothesis governing the biological component of the model is that stomatal conductance (gs) is varied so that daily carbon uptake per unit of foliar nitrogen is maximized within the limitations of canopy water availability. The hydraulic system is modelled as an analogue to simple electrical circuits in parallel, including a separate soil hydraulic resistance, plant resistance and plant capacitance for each canopy layer. Stomatal opening is initially controlled to conserve plant water stores and delay the onset of water stress. Stomatal closure at a threshold minimum leaf water potential prevents xylem cavitation and controls the maximum rate of water flux through the hydraulic system. We show a strong correlation between predicted hourly CO2 exchange rate (r2= 0.86) and LE (r2= 0.87) with independent whole-forest measurements made by the eddy correlation method during the summer of 1992. Our theoretical derivation shows that observed relationships between CO2 assimilation and LE flux can be explained on the basis of stomatal behaviour optimizing carbon gain, and provides an explicit link between canopy structure, soil properties, atmospheric conditions and stomatal conductance.