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. . , Internal Memorandum Thursday May 12, 1955 . — £*k t,c K C ol I** 11 * *> W Excerpts from a letter written by Governor Strong November It 1916 in reply to the letter of October 27th from Mr., Seay "The rough edges in the new collection plan require more brushing up than almost anything else, and I gathered that many of the topics on the program (program of the meeting in Boston) for discussion seem to be impossible of solution* One of these is the question of giving immediate credit to checks drawn on Federal Reserve Banks. As you know, I have always opposed this after our early experiences which indicated not that it could not be done, but that it was just as well to go slowly and take one step at a time. It would necessitate daily settlements which would reduce the items "due to" and "due from" Reserve Banks* On the other hand, it would necessitate the adoption of very effective safeguards against kiting and against development of the float. It is hard to see just how the operation would work. I gathered that the consensus of views of those at the meeting was rather different from my own in one matter: Mr. Harding and others expressed the view that checks on Federal Reserve Banks would be drawn invariably against balances in excess of the minimum reserves and consequently the process of drawing these transfer checks would not only create no float, but would lead to member banks carrying increased balances with the Reserve Bank. This is particularly hard for me to swallow. I think ex- perience indicates that member banks will draw just as many checks for transfer purposes as they can and send them floating just as far abroad as possible, covering them as nearly on the day they are presented as can be estimated. 1 Furthermore, I am inclined to think that they are entitled to do so if we give them immediate credit. The reserve calculation for member banks is now made as shown by the books of the Reserve Bankj consequently the member bank logically is entitled to say, "If checks enroute to Reserve Banks for deposit are not to count as part of my reserve, then why, per contra, should my reserve balances be charged with checks which I have drawn on that account and which have not yet been presented?" -2- ¥e must be consistent and stick to one of two theories: namely, that the reserves of member banks are calculated on our books or on the books of the member banks• We have adopted our own books as the place for calculation. If, therefore, we permit this transfer business to develop, we will be abandoning much that we have gained in putting reserves on a good sound footing. This is about the way I viewed the discussion at Boston with i*$iich you do not seem to agree. I am glad you wrote me frankly about this view, nor need you have any fear that my sectional feeling will influence me in my views. Making checks on Federal Reserve Banks par exchange in any part of the countiy will draw a good deal of money away from $ew lorkj I have always felt, and still feel, that that kind of money held with the Mew lork banks has been a menace to their security and largely the cause of their unpopularity, both throughout the country and politically. They will do better without it. In place of balances from interior banks, the $ew lork banks are going to have huge balances from foreign banks, and they are going to be just as big and strong and prosperous as ever." MA:IB
@FedFRASER