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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:
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, 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
- See Third Annual Report of Federal Reserve Board, 1916,
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 6 See Federal Reserve Bulletin, May 1, 1918, pages 371-372.
banks and clearing member banks the right to make a charge against other banks (aside from federal reserve banks) and against their own customers for the collection of out-of-town checks and drafts received over their counters. It does require, however, that these charges shall be reasonable, the reasonableness to be determined by the federal reserve board, and that in no event shall the charge exceed one-tenth of one per cent.
Banks which formerly charged their customers excessive rates for collection are accordingly being forced by competition or by the board's regulations to reduce their charges, while an increasing number of banks appear to be giving up all collection charges on demand items. They may, as a compensation, require customers to carry larger balances, or they may find the expense a productive one as an item of advertising.
Recently the collection service has been extended to items other than checks such as promissary notes, trade bills, time drafts, coupons, acceptances and the like, an obvious need if the federal reserve banks are to serve member banks as adequate substitutes for the member banks' former reserve agents. Such items, when payable at places where the federal reserve banks have satisfactory arrangements for collecting checks