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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 fundo 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

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

8 Regulation L. Series of 1915.

reserve.

fers may be made among all the federal reserve banks, between any federal reserve bank and any federal reserve agent, and between any federal reserve bank or any federal reserve agent and the treasury or any sub-treasury of the United States.

By means of the gold settlement fund, and of the other transfer facilities of the federal reserve banks, these banks are now enabled to make telegraphic transfers of funds to any part of the United States for their members without any charge whatever. They have also been able to inaugurate a system of federal reserve exchange drafts, according to which a member bank may draw special drafts on its federal reserve bank for amounts not exceeding $5,000, which are receivable for immediate availability at any other federal reserve bank.

The gold settlement fund system of transfers has almost eliminated the necessity of shipping money (other than federal reserve notes) between federal reserve banks. On September 12, 1919, that fund amounted in round numbers to $538 millions, while the federal reserve agents' fund amounted to $854 millions, making a total of $1,392 millions. The combined clearings and transfers for these funds sometimes amount to over a billion dollars in a week. These opera

tions involve very small changes in the ownership of gold in the funds, sometimes less than 2 per cent of their amount.

The federal reserve clearing and collection system is therefore providing a means of eliminating the evils of the old system. Excessive collection charges are rapidly becoming things of the past. Banks are enabled to dispense with the necessity of tying up large sums in scattered deposits with correspondent banks at low rates of interest for the purpose of securing for themselves adequate facilities for the collection of checks. These deposits can now be brought home and the funds loaned out at much better interest rates. The routing of checks is being eliminated and the "float” is being greatly reduced, all of which are important gains to the public. Heavy currency shipments are avoided, and the expenses of a large part of the currency shipments that do take place are assumed by the federal reserve banks for the member banks. These economies that are being realized by the new system are an important factor in the forces that have made possible the recent great reduction in the reserve requirements of American banks, a reduction which involves a saving of many millions of dollars annually.

Foreign Exchange The federal reserve law has brought about important reforms in the matter of financing our foreign trade. The rediscount machinery created by our twelve federal reserve banks is doing much toward developing an American discount market. This development is being expedited by the heavy demands for American funds on the part of foreign nations, caused by the war and by the disruption of foreign money markets. Much of our foreign trade that was formerly financed through letters of credit, under which bills expressed in sterling were drawn, is now being financed directly by means of dollar exchange, namely, bills drawn on banks and business houses in the United States and payable in dollars. Banks are willing to buy such paper drawn in connection with our import and export trade, because there is now a ready market for its sale and rediscount—a market created largely by the federal reserve system. Furthermore, bank acceptances in connection with foreign trade are now legalized in the United States, under certain restrictions, and importers may now arrange with American banks to have their foreign exporters draw bills in dollars directly on the importer's bank on the United States; while foreign importers may open credits in

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