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in times of currency redundancy, needs strengthening. Upon this subject it is difficult as yet to pass a safe judgment because times have been so abnormal since the system went into operation.
There is no question but that the federal reserve system has added greatly to the elasticity of both our deposit currency and our bank-note currency.
DOMESTIC AND FOREIGN EXCHANGE UNDER THE
FEDERAL RESERVE SYSTEM We may now pass to the consideration of how the federal reserve system is meeting the difficulties of the old banking régime as regards domestic and foreign exchange. Domestic exchange will be considered first.
Domestic Exchange Under the old régime the collection and clearing of out-of-town checks for country banks was handled largely by the banks in reserve and central reserve cities, which were the depositories of the legal reserves of the country banks. The service of collecting these out-of-town checks was rendered to the country bank as a partial compensation for the use of its reserve deposits at a low rate of interest, and as a lure to secure other business from the country bank, competition having been keen among large banks in money market centers for the accounts of out-of-town banks. When Congress decided, therefore, that the sys
tem of pyramiding the legal reserves of national banks by permitting them to be deposited to a large extent in other national banks was a bad one and should be done away with, it was naturally forced to provide a machinery to take the place of the reserve and central reserve city correspondent banks for the work of collecting outof-town checks. If the country bank was no longer to be permitted to count a deposit with its city correspondent as legal reserve money, but was to be compelled to maintain its entire legal reserve on deposit with its federal reserve bank, it would naturally withdraw or at least greatly reduce its deposit balance with its correspondent banks. But under such circumstances who would collect its out-of-town checks and otherwise serve it in connection with out-of-town business? The city bank, no longer holding the country bank's reserve deposits, would no longer be disposed to perform without charge these services for the country bank; and further, having ceased to be the country bank's reserve agent, the city bank would be very likely to compete for some of the country bank's most attractive business. Obviously if the new federal reserve banks were to displace city correspondent banks as the holders of the country banks' deposited reserves, they should also perform for the country banks the
service of collecting or clearing their out-of-town checks. To this end the federal reserve act provides that the federal reserve board “may at its discretion exercise the functions of a clearing house for ... federal reserve banks, or may designate a federal reserve bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing house for its member banks” (Section 16). The same section of the law also requires federal banks to "receive on deposit at par from member banks or from federal reserve banks checks and drafts drawn upon any of its depositors, and when remitted by a federal reserve bank, checks and drafts drawn by any depositor in any other federal reserve bank or member bank upon funds to the credit of said depositor in said reserve bank or member bank.”
Member banks are permitted to make collection and exchange charges on customers sufficient to cover the actual expenses involved in the collection and remittance of funds. The federal re
1 Dr. H. Parker Willis, formerly Secretary of the Federal Reserve Board, states concisely the distinction between collecting and clearing checks, as follows: “A check is said to be collected when it is sent home to the bark on which it is drawn, and arrangement is made to remit the proceeds; it is said to be cleared when the bank receiving it offsets it against checks in favor of the institution by which it is to be paid, and then collects or remits only the balance, if any." The Federal Reserve, page 223.
serve board is authorized to fix collection charges for items handled through federal reserve banks.
The problem of establishing a satisfactory clearing and collection system was looked upon as perhaps the most difficult and complicated one confronting the federal reserve authorities in the early days of the new system. At first the federal reserve authorities moved slowly and allowed the different reserve banks a wide discretion in the matter of arrangements for the clearing and collection of checks. Moreover, in most districts the utilization of the clearing and collection system established by the federal reserve bank was optional with member banks. Some joined the system and many did not. It early became evident that to be really effective a clearing and collection system needed to be approximately uniform in its workings throughout the country and to embrace the largest possible number of banks; a system in which a moderate number of banks utilized the federal-reserve clearing and collection system and a large number handled their checks in the old way was unsatisfactory. It meant a wasteful duplication of machinery analogous to that which exists when a city has two separate telephone services. After nearly two years of experimentation, therefore, the federal reserve board promulgated a clearing and col