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173 . CONFIDENTIAL - For Members Only* Circular. No. _• Series 1915* F E D E R A L R E S E R V E B O A R D . Washington, February 15, 1915* Check’ Clear ings • Section Thirteen of the Federal Reserve Act provides in part: "Any Federal reserve bank "nay receive from any of its member banks, and from the United States, deposits of current funds in lawful money, national-bank notes,-Federal reserve notes, or checks, and drafts upon solvent member banks, pay able upon presentation; or, solely for exchange purposes, may receive from other Federal reserve banks deposits of current funds, in lawful money, national-bank notes, or checks and drafts upon solvent member or other Federal reserve banks, payable upon presentation". The receiving on deposit of checks and drafts of other banks necessarily involves the collection of such items and since Federal reserve banks, are authorized to accept (a) checks on their own member banks, (b) checks on other Federal reserve banks, and (c) when remitted by other Federal Reserve Banks checks on banks which are members of other Federal reserve banks, it will become necessary, when a general exchange business is undertalien, to.deal with the problem of (l) intra^district clearing of checks, (2) ad justment of balances‘as between Federal reserve banks, end (3) inter district clearing of checks. The Board has determined that the purposes Of the Act can be best attained with the minimum disturbance of existing conditions by providing, first for intra-district clearing; and when this phase of the problem has been properly disposed of the systematic adjust ment of Federal reserve bank balances and inter-district clearings can be provided for as a natural and logical development. Section Sixteen of the Federal Reserve Act imposes the obligation upon the Federal Reserve Board to prescribe charges to be made for tne service of clearing checks wnen tne Federal reserve banks undertake to exercise this power vested in them under Section Thirteen. In order that these charges may be based upon the re sults of actual experience and may not be merely estimated, the Board has determined, after due consideration, to recommend to the several Federal reserve' banks the following plan of procedure as a means to this end: 260 261 No- 2. Reciprocal'Privileges. It is sugge3ted that each Federal reserve bank offer to each of its^ members the reciprocal privilege of Having all checks and drafts on O'cher solvent member banks in its district entering into such by other member banks in its district, or by the United States Government. That to avoid depletion of reserve accounts each member bank availing itself of this reciprocal privilege shall agree to- maintain on deposit with the Federal roserve bank a sum sufficient to protoct, on a» certain average, any net debit balance created by charging up checks and drafts drawn against it by other depositors. In order to determine the sum necessary to be maintained in addition to its legal-reserve, it is suggested that for the first sixty days after such arrangement goes into effect each bank entering into such arrangement shall maintain an additional sum oquivalont to per cent of its legal reserve and after the expiration of sixty dayo shall maints.in guv1 additional sum on deposit equal to the average daily debit balance shown on its reserve discount during .that period. Alvef a canvass has been made by circular letter sent to all member banks, each Federal reserve bank should publish a list of those member banks which halve agreed to the arrangement suggested and should thereafter agree to receive on deposit at par from all of such banks checks oi* drafts- drawn against any banks shown on such list. YfheneVer additional member banks agree to this arrangement the list should be revised so afe to include in the par list all banks . entering into this agreement. Checks or drafts deposited b y member banks not on the par list should be received for collection and deferred credit only and should not be credited to the depositing bank nor charged to the mem ber banks against which such checks or drafts are drawn until the collection lias been actually made. Pending the establishment in the foregoing manner of a sys tem of intra-district clearing, Federal reserve banks should not be re quired to handle checks on banks which are member banks of other Federal reserve banks and checks on one Federal reserve bank should not be-re ceived by other Federal reserve banks except for collection and credit. As stated, the subject of adjustment of balances as between Federal.reserve banks and inter-district clearing will be considered by the Board at-a later date.