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 lection system, which was put into operation July 5, 1916, in all federal reserve districts—a system whose privileges under certain limitations were extended by an amendatory act of June 21, 1917, to qualifying banks which are not regular members of the federal reserve system. Present Clearing and Collection System Briefly summarized, the main features of the new plan, as revised to date (November 1, 1918) are as follows:2 Each federal reserve bank exercises the functions of a clearing house in its district for member banks and for qualified non-member banks, known as "clearing member banks." From such banks in its district the federal reserve bank will receive at par "checks drawn on all member and clearing member banks and on all other nonmember banks, which agree to remit at par through the federal reserve bank of their district." Clearing and collection services for member and clearing member banks and for other federal reserve banks are also rendered by each federal reserve bank in the case of checks received from outside the district, which are drawn upon 2 The Federal Reserve Board's revised regulations concerning the clearing and collection of checks constitute “Regulation J, Series of 1917," and are published in the Federal Reserve Bulletin of July 1, 1917, pages 549-550. member and clearing member banks of its district and upon all other non-member banks of its district, whose checks can be collected at par by the federal reserve bank. These two provisions make the field of the par clearing and collection system coextensive with the United States and provide a machinery for the handling of checks received from practically all important points without the district as well as from within the district. All banks belonging to the clearing system are required to pay without deduction checks drawn upon themselves, when presented at their own counters. On January 15, 1920, there belonged to the federal reserve clearing system 9,089 member banks and 16,986 clearing member banks,3 together representing over seven eighths of the incorporated banks of the country in number, exclusive of mutual savings banks, but representing almost all the commercial banking power of the country, since the commercial banks remaining outside the system are for the most part small ones. At that time the federal reserve clearing system was handling about 1,328,000 checks daily (exclusive of those forwarded to federal reserve banks, and their branches, representing approximately $567,000,000), or a sum equal to about two-fifths of the total clearings of all the clearing houses of the country. 8 Federal Reserve Bulletin, February, 1920, page 194. 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, 1918.5 The new system does not deny to member |