The establishment of this gold settlement fund has rendered the volume of money that needs to be shipped from one section of the country to another almost negligible in quantity. The system of intra- and inter-district clearings has, moreover, practically eliminated the "float." This result is regarded by many as the greatest achievement of the system. The cost of collecting checks was originally borne by the banks which were receiving the benefit. Each Federal Reserve bank kept a record of the cost of performing the service and charged the amount to the bank for which the service was rendered, the usual charge being one and one-half cents per item. But in 1918, in order to popularize the system with the banks, all service charges were abolished. This move rather effectively silenced the opposition except, as we shall see, on the part of certain state institutions. As a means of extending this collection system to include state institutions, the Federal Reserve banks undertook-at the time the compulsory feature for member banks was introduced to collect for member banks, and for such state banks as had voluntarily joined the clearing system, checks drawn on any state bank which would agree to remit its items at par. This many state banks agreed to do. All banks, whether member or non-member, which remitted checks for collection at par were henceforth known as "par" banks; and in order to facilitate the collection of checks, the Federal Reserve Board issued a monthly supplement to the Federal Reserve Bulletin, its official publication, giving a list-with map of the par institutions. At the present time1 the par banks number nearly 28,000 out of a total of 29,768 commercial banks in the entire country. The final step in the effort to universalize this collection system was inaugurated early in 1919. Every effort was made by Federal Reserve officials to persuade the state banks voluntarily to agree to remit their checks for collection at par; and during the year about 6,000 banks fell into line. (These are included in the present total as given in the preceding para1 August, 1920. graph.) The Federal Reserve banks, moreover, resorted to other means than peaceful persuasion; for as soon as the nonpar banks of any district became few in number, the Federal Reserve bank of the district undertook to collect at par checks drawn on all the banks of the district, whether they all agreed to remit at par or not. This was to be accomplished through the instrumentality of a local agent—a bank, an express company, or a suitable person or corporation. This attempt to coerce state banks into having their checks collected at par has met with stout opposition. In the South and West numerous state banks have steadfastly refused to remit at par, and resort has been had to the courts to test the legality of the Federal Reserve procedure. The basis of the opposition is primarily a pecuniary one, for-temporarily at least the remission of items at par entails a loss to the particular bank. To some extent, also, the opposition is a reflection of the principle of state rights and of the ancient doctrine that federal interference with local affairs is as objectionable as it is unwarranted. With reference to the question of the losses incurred by local banks, it should be understood that no bank is denied the right to make a "service" charge against the customers for whom the checks are being collected. Many banks, in fact, levy such charges; while others prefer to assume the loss as an incidental expense, believing that this method has compensations in promoting the good will of customers. All that is necessarily lost is the fee formerly charged for remitting checks for collection. The ultimate outcome will undoubtedly be a universal free collection system. The statement of the Federal Reserve Board that "the par collection system is not a local or selfish undertaking for the benefit of member banks, but is a national enterprise for the convenience of the public and the promotion of commerce" unquestionably enunciates a sound principle, and the temporary pecuniary interests of local bankers can in the end hardly stand against it. VII. RELATION OF THE TREASURY TO THE FEDERAL RESERVE SYSTEM In our analysis of the operation of the national banking system in a preceding chapter, attention was called to the relation of the federal Treasury to the banking and credit system. The establishment of a series of government banks under the Federal Reserve law has made it possible for the banking system to assist the Treasury in its fiscal operations and in general for the Treasury Department to work in harmony with the banking and currency requirements of the country. The Federal Reserve Act provides that money held in the general fund of the Treasury, except the 5 per centum fund for the redemption of outstanding bank notes, and the funds provided in this Act for the redemption of Federal Reserve notes, may, upon the recommendation of the Secretary of the Treasury, be deposited in Federal Reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the government or any part thereof may be deposited in such banks, and the disbursements may be made by checks drawn against such deposits. The Act did not, however, deny to the Secretary of the Treasury the right still to use member banks as depositaries for public funds. The Federal Reserve banks have in fact performed a very important service in connection with the fiscal operations of the government. Co-operating with the federal Treasury in every way, they largely assumed the burden of managing the huge financial operations that were imposed upon the government during the Great War. As yet, however, the Treasury Department has not been. completely divorced from the member banks. It was the belief at first that the Federal Reserve institutions would rapidly displace the national banks and the sub-treasuries as depositaries of government funds; but war conditions served to prevent the withdrawal of government funds from individual banks for subsequent deposit in the Federal Reserve institutions. The heavy financial requirements of the war, even before our entrance into it, made it seem unwise to withdraw from the banks the lending power which was given to them by virtue of the deposit of government money. It was felt that a minimum disturbance to the money market would be secured if the government's funds were allowed to remain widely scattered and kept as far as possible in the banks of the communities where the government received its funds. In consequence the amount of government deposits has increased rather than decreased since the inauguration of the Federal Reserve System. It is of interest, also, that the law authorized the deposit of the funds derived from the sale of the Liberty Bonds and certificates of indebtedness issued during the war, in classified state banks and trust companies as well as in national institutions. The way has been opened by a recent act of Congress for enlarging the responsibility of the Federal Reserve banks in connection with the fiscal operations of the government. The sub-treasury system, composed of nine sub-treasuries located in different parts of the country, is to be abandoned on July 21, 1921, and its work will be taken over by the Federal Reserve banks, which it is hoped by that time will have buildings of their own and vaults adequate for the purpose. While this act does away with the sub-treasury, it does not insure that all government funds shall be kept with Federal Reserve rather than with member banks. Is the Federal Reserve Board under the domination of the Treasury Department? The association of the Federal Reserve Board with the Treasury Department has given rise to some criticism. It is asserted that Treasury fiscal requirements have dominated the policy of the Federal Reserve Board at times when banking requirements were paramount and did not run parallel with Treasury requirements. Concretely, it is urged that the desire of the Treasury Department to make a record in floating huge Liberty Loans at very low rates of interest was responsible for the policy inaugurated by the Federal Reserve Board during the war and maintained until after the Victory Loan was completed, of keeping discount rates at a very low level and hence stimulating speculation and inflation of the currency. It has accordingly been vigorously urged that the Federal Reserve Board should be cut loose from the Treasury Department in order that it may exercise its great responsibilities unhampered by the views of the Treasury or by considerations of political expediency for the party in power. It is unnecessary to enter upon a discussion of the merits of the contention that the Federal Reserve policy of maintaining low discount rates was opposed to public interest; it is enough to point out the possibility of making the Federal Reserve Board subservient to the Treasury. VIII. FEDERAL RESERVE BANK STATEMENTS The following combined statement of condition of the Federal Reserve banks on February 4, 1916, and March 26, 1920, indicates at once the nature of the Federal Reserve banks' operations and the development of the Federal Reserve System that occurred during the war period. RESOURCES AND LIABILITIES OF THE FEDERAL |