The old evil previously described (pages 21-22) of carrying the "float" as a part of a bank's legal reserve is eliminated by a provision to the effect that, although checks received by the federal reserve bank will be immediately credited (subject to final payment) to the bank sending them, the proceeds thereof "will not be counted as part of the minimum reserve, nor become available to meet checks drawn until actually collected." If the bank sending in checks is not to be permitted to draw against the credit which they create until they have been collected, obviously the checks should not be charged by the federal reserve bank against the reserve account of the bank upon which they are drawn until sufficient time has elapsed "for the checks to have reached the member bank and for returns in due course to have reached the federal reserve banks." This is the

rule now in force.

If a bank's deposit at the federal reserve bank is insufficient to cover its legal reserve requirement and in addition to meet an adverse balance, which arises against it out of clearing operations, it is authorized to ship currency or specie from its own vaults at the expense of its federal reserve bank in order to cover the deficiency. In case of

4 See Third Annual Report of Federal Reserve Board, 1916, pages 9-12.

a deficient balance at the federal reserve bank, the member bank, of course, also has the privilege of making good the deficiency by rediscounting eligible paper or by discounting with the federal reserve bank its own fifteen day notes secured by eligible collateral.

In handling items for member and clearing member banks, a federal reserve bank acts as agent only.

Under the federal reserve clearing and collection system checks are sent to federal reserve banks and to member and clearing member banks by the most direct routes, and the number of par collection points in the United States is made almost equal to the number of places of any considerable size where commercial banks are located. The result is that the new system is rapidly doing away with the old evil of routing checks.

The cost of collecting and clearing checks for member and clearing member banks is borne by the federal reserve banks. For some time service charges of so much per item were imposed. But these charges, so far as they relate to cash items, were discontinued by an order of the federal reserve board effective June 15, 1918."

The new system does not deny to member 5 See Federal Reserve Bulletin, May 1, 1918, pages 371-372.

banks and clearing member banks the righ make a charge against other banks (aside f federal reserve banks) and against their customers for the collection of out-of-t checks and drafts received over their count It does require, however, that these charges s be reasonable, the reasonableness to be dete ined by the federal reserve board, and that in event shall the charge exceed one-tenth of one cent.

Banks which formerly charged their cus mers excessive rates for collection are accordi ly being forced by competition or by the boar regulations to reduce their charges, while an creasing number of banks appear to be giving all collection charges on demand items. T may, as a compensation, require customers carry larger balances, or they may find the pense a productive one as an item of advertisi

Recently the collection service has been tended to items other than checks such as prom sary notes, trade bills, time drafts, coupons, ceptances and the like, an obvious need if the fe eral reserve banks are to serve member banks adequate substitutes for the member banks' fo mer reserve agents. Such items, when payable places where the federal reserve banks have sat factory arrangements for collecting chec

through banks, are collected by federal reserve banks for member banks without any charge other than any exchange charge that may be made by the collecting bank. Upon items returned unpaid, however, there is imposed an additional charge of 15 cents, with the object of preventing the clogging of the federal reserve collection system with dunning drafts.

The Gold Settlement Fund

One serious difficulty of the old collection system, as we have seen (pages 22-23), was the need of numerous and expensive shipments of currency back and forth over the country as the seasonal stresses in the trade demands for currency shifted from one section to another. The new system absolutely eliminates the necessity of a large proportion of these currency shipments and both reduces the expense of those shipments which do take place and lightens its burden by distributing it.

The mechanism by which the necessity of a large proportion of these currency shipments is avoided is that of the Gold Settlement Fund, and the separate but similar Federal Reserve Agents' Fund. The gold settlement fund, although planned in its essentials early in 1914, was not established until June, 1915. The order of the

federal reserve board establishing this fund requires each federal reserve bank to forward to the treasury or the nearest sub-treasury of the United States for credit to the account of the gold settlement fund $1,000,000 in gold or gold certificates, and in addition an amount at least equal to its indebtedness due to all federal reserve banks. These sums are made payable to the order of the federal reserve board. Each federal reserve bank is required to maintain a balance in the fund of not less than $1,000,000. As a matter of fact all the banks carry balances very many times as large as this minimum. Credit on the books of the gold settlement fund is counted as a part of a federal reserve bank's legal reserve. The settlement of balances between federal reserve banks is effected daily through the instrumentality of telegrams sent to the federal reserve board, by transfers of debits and credits on the books of the gold settlement fund.

A separate fund similarly constituted is the Federal Reserve Agents' Fund. Federal reserve agents, it will be recalled, have large funds in their custody, representing gold pledged with them as security for federal reserve notes.

Through the machinery of the gold settlement fund and the federal reserve agents' fund, trans• Regulation L. Series of 1915.