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301.
Anril 1, 1920
X-188'1
I have your letter of 1.1arch 31st enclosing co-oy of a letter frou
tr.e Comrrissioner of Banl-in£ of th;; State of Wisconsin..
I am rr,uch obliged
to you for qiving me an onuortuni ty of removing a mistaken impression that
the
Cornrrissioner a"l;)pears to have that banks in certain states hav-3 bezon
given special privileges ·by th9 Federal Resarve Board 'by being p13rmi tted
to continue
th~ir
exchange charges while banks in other statas are re-
mitting at :par.
I enclose for your information copy of a response made bv the Boar.:l
on January 26, 1920, to a resolution of the Senate, which explains at considerable length the ~osition that has beGn taken 'by the Federal Reserve
Board and the various Federal Reserve Baru:s in the Tatter of the country\"iide clearing of checks.
In this comrunication reference is rr..ade to the
nrovisions of Sections 13 and 16 of the Federal Reserve Act and to the
opinion of the Attorney General of the United States as to the intent of
these sections.
The Board is
char~ed
with the duty and resnonsibility of
inau,rsurating a complete check clearing system throu;hout the United States;
the Federal Reserve banlrs must receive at par from
merrb~r
banl:s checks
upon whomsoever drawn which are payable unon presentation, and the so-called
"Hardwick Amend.rr:gnt" to Section 13 authorize
lJanks to make
11
I>
both merr.'b'3r and non-rr:err.ber
r2asonabl3 charges, to be determined and regulated by the
Federal R2serv3 Board, but in no case to exce8d 10 cents per $100 or fraction
ther~of,
based on the total of checks and drafts :presented at any on8
t~e,
for collection or payment of checks and drafts and r•'3rr,ission therefor by
302
X-1631
-2-
exchange or otherwisej but nQ...such charges shall be made ar,;ainst the Feder81 Reserve Banks,
11
In view of the o~inion of the Attornev General, the Federal Reserve
Banks do not feel authorized to pay any charges to
b~-s
for remittances
for checks dra~ upon them and sent for collection by the Federal Reserve
Banks.
While banks are still authorized to charge each other for such
service, thev are prohibited from char~ing the Federal Reserve :Banks,
which are reqtlired to rGceive from 1Lember bank;::; at par all checl:s which
are payable u-:9on presentation.
Reserve Banks found
them~elves
Thus it came about that the Federal
in possession of checks dravm upon non-
~ember banks which they cculd n&t send to the banks upon which the checkz
were drawn for the reason that those banks had declined to remit at par,
and it became necezsary therefore, as the law does not provide any penalty
unon non-rr.elTber banks for refusing to remit at par, for tee Federal Reserve
Banl"s to begin a campaign of education to induce non-member banks to remit
at :oar, or failing this, to provide themselves with rsome other means of
collecting checks
dr~~ u~on
non-assenting
banks~
·Exchange charges are ba;;ed primarily upon the cost of :naking transfers of funds from one section or from one country to another.
In our
dealings with foreign countries exchange is in our favor or against us
according to the balance of trade and the flow of credits, and under
normal c _ndi ti ons the rate of exchange is governed by and a;rproximates
the co·st of transporting gold.
This coGt includes carriers 1 charges,
insurance, interest for tirr.e in transit, and less by abrasion.
So, in
our dorrestic exchanges, the charge was based originally u-pon the cost of
transferring funds from one point to another.
Sixty years ago when our
trans"!)ortatio.n facilities had not be m fully developed md exprr2ss rat2s
303
...)-
were high the average cost of our dorr.estic exchanges was about
or~l5 per $1,000.
As our transportation facilities improved, as the
country became rr.ore thickly settled and the flow of goods between the
various sections became larger and more constant, the result was that
balances could be settled through the medium of bank drafts without
involving the shipment of currency in such large amounts, and exchange
costs declined so that thirty years ago the maximum charge was generally
about $2.50 per thousand dollars.
During the past twenty-five years ths
actual costs of making domestic exchange have
the consequence has
be~
be~n
decreasing steadily and
that there has been a fall in the average charge
made by banks, so that during the past ten years $1. per thousand dollars
has
be~n
the maxirr.um charge in many sections of the country, although in
some of the less thickly populated and more remote sections higher rates
have obtained.
Since the establishment of the Federal Reserve Barurs the cost of
transferring balances from one section of the country to another has been
almost entirely eliminated.
Each Federal Reserve Bank carries a portion
of its gold reserve in a gold settlerr.ent fund which is kept in the
Treasury at Washington, and there .is a daily telegraphic clearing conducted by the Federal Reserve Board for all twelve bariko and for their
branches.
The areount of gold in the fund is practically a stable quantity.
but its ownership varies from day to day according to the debits and credits
to the
diff~rant
banks.
Transfers are made by the Federal Reserve Batiks
,
304
X-1831
-4-
for rr.ember banl~s, and also f•r non-u.eJ,:ber banks through the medium of
member banlcs, by telegraph without any charge whatever to the
me~ber
bank or its client~ all costs being borne by the Federal Reserve Banks.
Thus, a bank in Wisconsin or California, Maine or Texas, can secure an
instantaneous transfer to any one of the twelve Federal Reserve cities or to
the twenty cities where there are branch Federal Reserve Ba!ll:s without any
eXl_:lense whatsoever, and the sum total of these transfers is settled daily
throuQh the gold settlement fund above referred to.
The Federal Reserve
Barr:s pay all costs of transporting currency to or from their member
baclrs as well as transportation charges on currency sent them by nonme-r:ber banlcs in payment of checks.
The total volume of transactions through the gold settlement fund
in the year 1919 was approxiroately $74,000,000,000, and the total cost1
•
including the exuen~e of the leased wires, was about .$250, 000. This cost
was borne by the Federal Reserve Banks and does not represent any expense
whatever to the member banks or their custon:ers.
the basic cost of mrucing domestic exchange in
tenths of· a cent for each $1,000 transferred.
th~
Thus it will be seen that
year 1919 was three-
A charge of 10¢ pgr $100
on the ar.:ount cleared through the Gold Settlerrent fund would have invr>lved
an expense of $L for each $1,000 transferred, or about $74,000,000 for the
entire amount.
The intra-district clearings made by the Federal Reserve Banks,
elirrinating duplications, amounted to about $135,000,000,000, and the
total expense of these transfers was borne by the Federal Reserve Bacl:s.
305
.X-1881
-5Had the:! Federal Reserve
Banl~s
be :;n obliged to pay for these transfers
at the rate of 10¢ per $100, it will be seen that the total expense
•
would have been $135,000,000, which aiTount is :far in excess of the
total earnings of the Federal Reserve Banks and therefore could
not have beBn absorbed by them.
have had to have
so it
1 ~ill
be
be~n
s~~n
If not absorbed, the charge would
transferred to the denositors of the checks,
that a charge of 10¢ per $100 unon the business
'
.
handled by the Federal Reserve Banks would have involved last year
a cost to the com•rerce and industry of this country of at least
•
However, the nractice of making exchange charges, which began
when there was a real justification for such
char~es
expense of transferring funds, had becOJ.c,e so
de~ly
because of the
rooted that most
of the banks very naturally looked upon the charge as a normal and
legitimate source of revenue and were reluctant to give it up.
Until
the Federal Reserve ..ll.ct was amended in June 1917 the Federal Reserve
Barurs
had no mandate for undertaking to collect checks on non-rr.ember
banks at par, and their activities with respect to clearances were
devoted rrainly· to the collection of checks on member banks.
But after
XlbSl
306
the passa~e of the "Har,..i.wici~ .Amendment" with the provu,o abov-e y_1.1oteu.
which is una.erscored, :;_ t became the dut;r of the Federal res0rv8 banKS
to undert~e to establish a cumpl8te check c1earin~ sy~tom, 1ncl1.1ain~
checJ~s
c.lrawn on nvn-member banKs as W'3ll as on members.
There an~
approximz,tely twenty thousand non-member ban1:s in thi& country, ar:1:.i.
at the time the Act was amcncleu, three ;aar., a 0 u, a J.ar!.>e waJun.ty of
them were firt.1ly committed to the policy of makin,; an exchan""e or
service ehar~e for rerc1i tt in,; fur' checks drawn upon them.
1t was
clearly impracticable in the absence of soue le~islation l)enalizine>
banks which woulu nut remit at par to csta1Hish a complete clearin::;
system over night.
It wal:l thercfure detcm.ned tu bei,in a pru:;.;rcSblVe
carnpai;n of education, alon 6 the line of least resistance.
A lare;,e n-.aJor'~ty of the banLs 1n N~w EagH1.rld have been for the
past twenty years remlttine,
at :par, anu J..t
~~as
t~
the ballh.s uf tne hoBton Ciearin::, House
decidecl to establ.ish in thl'.t o.istrict the fir~t
complete Federal reserve c · ecring sys tern.
' t
A fevv banks 1n Vennont
ObJected, but within a few· munths they all cruut.: 1ntu line.
was then extended to the Now York uistr1ct.
The system
In a part of that district
the opliOIIiition was r.1ure detenn:_neu and it wat. necessary for a w·hile
to maKe co'llections on some uf the ban.,;,s
throu~h e~q)ress cur.1panie~.
Then the system was extended to the Phuadelphla d.is tric t, and a.i torward
to the Chicago, Cleveland, Kansas City anti Dallas uistrlcts, as well
as to certain stateb in other uistricts.
It was deemed wise not to force matters by r.1akin6 cul.tections
throu.;h the e.r.-:resc companies or other a,;encies until th(; non-member
XlS8l
307
-7banKs had had the who1e :>ituation fully explained. to them and vvere
given an oprortunity of a 0 reein.: to ma't;;.e rem:.ttances at par.
Then
when a maJority of th~ ban:.-.s in a Federal reserve district ha.i so
agreed arran 5 ements were ma4e to collect on non-assentin~ banKs by
means of, agencies, .announcESm<:nt then
being made that the system was
operative throughout the entire district or in particular states in a
district.
There is pronounced opposition in Minne~ota, an~ the Fe~eral
Reserve :B.snk of Minneapolis does nut feel that the time
1S
opportune
for the announcement of a compiete c1earin5 systen. .;,n its Ci.istnct.
Northern Wisconsin is in the Minneapolis clistrict and southern Wisconsin
in the Chicago district, hence the apparent inconsis tencr referrecl
to by the Cmnmissioner.
Northern Louisiana is in the Dallas
southern Louisiana in the Atlanta district.
~istrict a~
The Dallas bank has per-
fected its clearins system while the Atlanta banK has nut.
In the
Atlanta'district, which embraces parts of Tennessee anu Mississippi
and all of Alabama, Georgia and Florida, there is very
6
reat opposition
to the Federal reserve clearine;, s,rstem on the part of state ban.t.s.
This opposition exists also in North and South Carolina, which are in
the Richmond uistrict.
It is not so pronounced in the State of Virginia,
and the Federal R8scrve Bank of Richmond has announced that the clearin5
system iS in effect as of April 1 throughout the State of Virginia, but
it is not
in.;
y~t
in effcdt in the
Carol~as,
except as to member anu
ass~nt
b~s.
I enclose herewith copy of a law which has recently been 8nacteu
by the Legislature of Nlississippi, from which you will see that
ban...~s
308
...... &....
in that state arc I'e;_,tuirc~ to r;ay. cheC.t"S• by whomsoever fii'tSente-...., Vvhich
come throuih another bam~ at the rate of s99.90 per $100.
of this law :i. t
1s
In view
imposs.iblc for th;; Fc'-'eral reserve bank to enforce
the will of Con0 ress in the State of IVllssissippi.
In GJurb::..a a numlJer
of non--rr:;ember banKs instituted proceec.l.in,:s n.e,mnst t.L1e Federal res.::;rve
ban.J.;;. and secured a temporary inJunction res trainint.J the bank frorr> collectins checks by makirt6 presentation throu 6 h an abent for payment
over the counter, anu. as uno.er the tenr.s of the "Har'-'~vich. Amenclmcntn
the Fcneral· reserve bank cannot pay exchane;e to the banks upon which
checks arc d.rawn, it has no rec oursc e..<cept to ciec line to tat;:.e such
checks at all.
In .Alabama wherd th..; F8c~Grel reserve bDW~ at tcr.1pteJ. to
appoint agents to collect checlcs, it found in many cases that it was
impossible to bet anyone tu accept the asency, anci in one cas..; where a
reputable 7'!;erchant was induced to accept the agency he J,aVo it up after
a fe>.t J.ays because the local banks had c onvinceci him that his business
would suffer i f he continued. to act for the Federal reserve
baru~.
The Boarcl is J.oinc; everythint,; in its power to have the clearing
system apply equally to all sections anu. to all bam..s.
lncluuint:S member
baru:s there are about thirty thousand. ban;...s in the Unite-.1 States and
twenty-seven thousand of them are
DO'V.
remi-ttin:, at par.
The three
thousand which decline to remit are rna-Kin.; a ae ten11ined E;;ffort to o.efeat
the purposes uf the Fede·ral Reserve Act with respect to a country-wiue
checK clearine, system, and unless Cone;,ress should be willin,, to enact
some law makin; it decidedly to the interest of banKs to rc:mlt at par,
just as in 1365, by the exercise of its tax.ins power, Con;_;ress mooe it
XlSBl.
309
to the interest of the state ban:.s to retire th0ir state bank notes,
it is uifficul t to sec how 1t is possible to accelerate! the present
rate of pro6ress in the uevelopment of a compl0te nat~on-wiue check
clearin6 system through the Fe'.iertcl Reserve Bal!i:ks.
In the fore~oing I havo JndeavoreJ to show (l) that there is no
lon.s0r a basic cost to th8 brnLs of the country :..n makin:::, <iomestic
exchanges, (2) that Consress has forbii~en both member
anu
non-member
banks to make exchange or service chare;es again&t the Feu.eral reserve
ban~~s. and.
(3) that the Attorney General of the United St2tcs he,s held
that Feaeral reserve baru:s are not pennitted to pay such charges.
I may acid. that the Feaeral reserve batlli.S
0
ive non-member banKs which
a11ree to rGmi t at par the option of payin~S by check un surne convenient
bankint;; center or by shipm<:;nt of currency at the e;~pense of the Fea.eral
reserve bank.
Stamped envelopes are always sent a non-member banK for
use in makine;; remittances.
Non-member
baru~s
any collection service; they are merely
as~ed
arc not asKed to l_:lerfonn
to waive pcrsunal presenta-
tion of checks drawn upon thGmselves by their own ueposi tors anu. to pay
them throu6h the mails without maKin 0 any charge,
an~
the law appears
clearly to direct them to d.o this.
Some of the baiLS, member ban.rs as well as non-members, are asking
their a.epositors to use a check which has imprinted upon its face some
restrictive clause,
~uch
as "Payable only in exchane;e at current rates",
or "Not payable in cash if ;presented for account of a Federal Reserve ball.K".
I enclose for your further infonnation fonns of nutices which are being
~10
-10-
used by
manufactur~rs
X-113;:,1
and jobbers in various centers in returning
checks to their custoru:~rs which cannot be collected through a
Federal Reserve Bm~ 1 and also copy of a letter ,.vhich I am inf orrr;ed
a well knovm sho~~ manufacturing concern is sending to its customers.
The l~gal ptocesdings against the Federal Reserve Bank of
'
Atlanta, to which referenc!3 is mad~ above, •vere brought in a State
court.
The case was transferred to a Federal court and was heard
on its msrits a few days ago, but up to this tirr:e no decision has
been hand·"d down.
In ·any event, an ap:oeal will nrobably be taken
to a higher court - possibly to the Su~r~me Court of the United
States - and it is nrobable that several rr:;onths will elapse before
a corrmlete clearing syst<:m can be 0stablished in the Atlanta district~
Very truly yours,
(Signed)
W.P. G. Harding.
Governor.·
311
HOUSE BILL !{0.. 651
(As annroved by the Governor TYiarch 6,1920)
AN ACT TO PREVENT THE :FEDERAL RESERVE SYSTEM FROM FORCING THE
BANKS OF THIS STATE INTO WHAT IS KNOWN AS THE P.ARRING
OF CHECKS, DRAFTS, BILLS, ETC:(co:vDVIONLY KNOWN PS
"CASH ITEiVJS"); AND FOR THAT PURPOSE IV!AKING IT
IVIANDATORY ON TBE BANKS OF THIS STATE TO
CH/IRGE EXCH 1 NGE ON SUCH 11 CASH ITEMS"i .AN:
FIX!NG 'tlHE RATES OF SUCH EXCHANGE ..
Section 1. Be it enacted by the Legis1ature of the State of
Mississi1Jni:
That for the nurpose of ~roviding for the ~olvency 7 nrotection 3nd
safety of the baruring institutions of Mississip1Ji. th3 established custom
op the part of the banks of this state to charge a service fee (corrrronly called "exchange") for collecting and remitting, by, exchange ot
otherwise the "Droce"Jds of checks, drafts, bills, etc., (commonly knovm
arr.ong banks as "cash i terns 11 ) is hereby declared to be the law of this
state; and the baru:s of this state, both state and national, shall continue to make such charge as fixed by custom when such "cash i terns" ·
are presented to the payer bank for payment through or by any baclc, barucer,
trust co~any, Federal R~serve Baruc, postoffice, express company, or any
collection agency, or hy any other agency whatsoever; and the amount of
such charge is hereby fix~d at one-tenth of one per centum of-the total
amount of such "cash itemsn so presented and paid at any one time, and
not less than ten cents on any one such transaction; provided, however~
no such charge shall be made on checks or drafts ~iven or drawn in settlement of obligations· due the State of Mississip1)i or any subdivision thereof, or of the United States. And that no such char~e can be made by banks
for the collection of checks de1JOsi t·3d with said barnes, where the check
is drawn on any other bank in the same municipality, city, town or village,
this being the long established custom of such baru~s. And, provided that
nothing in this act shall be deemed to be wandatory U1JOn the banks to
charge exchange on checks or drafts payable to a person in this state,
and drawn on a barn', trust corr;pany or person within or •vi thout this sta:te,
but it shall be optional with such banks wh3ther they shall charge exchan,;;e
on checl':'s or drafts "Oayable to a person within this state, and drawn on a
banl-, trust corrpany or person within or 1Nithout this state.
312
X-18elA
Section 2. That no offic8r in this stc.te shall protest for nonpayrrent any such "cash i tenj", whetl. such non--payrr.ent is solely on a.acount
of th~ failure or refusal of any of said a£encies to pay such excha~ge;
and th':!re shall be no ri;;ht of actiont either at 1e:"' or in equity, against
any bank in this state for a r:~fusal to pay such cash i tern, when such
refusal is based alone on th~ ground of the non-pay:.r.ent of such exehilnge.
Section 3. That if for any reason the courts should hold that
the national barll:s in this state are not required to char,~e ana collect
such exchange, still this act shall remain in full force and effect as to
all other banks in this state, and in the event of such holding by the
courts, or the refusal of any national bank in this state to co~ply ~~ith
this act, then it shall be optional with state banks located in the sa~e
munici-pality with a national bank or state banl~s which are members of the
Federal Reserve System as to whether such charge shall be made.
Section 4. That this act sh~ll take effect and ~e in force from
and after its nassage.
@FedFRASER