Full text of Mimeograph Letters and Statements of the Board : Letter From Secretary Hoxton re Amendments to Regulation J, Series of 1920, Number X-3762, Volume 18, Page 468

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FEDERAL RESERVE BOARD
WASHINGTON

X-3762
June 29, 1923.
SUBJECT:

Amendments to R e g u l a t i o n J , S e r i e s of 1920.

Dear S i r :
E f f e c t i v e August 15, 1923 the F e d e r a l Reserve Board h a s
amended R e g u l a t i o n J , which governs the par c l e a r a n c e system of t h e
Federal. Reserve Banks, "by i n s e r t i n g t h e s e new c o n d i t i o n s :
(6) No F e d e r a l Reserve Bank s h a l l r e c e i v e on d e p o s i t
or f o r c o l l e c t i o n any check drawn on a non-member bank
which r e f u s e s to r e m i t a t par i n a c c e p t a b l e funds#
(?) Whenever a F e d e r a l Reserve Bank r e c e i v e s on d e p o s i t
or f o r c o l l e c t i o n a check drawn b y , endorsed by or
emanating from any non-member bank which r e f u s e s t o
r e m i t a t par i n a c c e p t a b l e f u n d s , i t s h a l l make a c h a r g e ,
f o r t h e s e r v i c e of c o l l e c t i n g such check, n o t t o exceed
one t e n t h of one per c e n t .
follows:

The Board has made p u b l i c i t s r e a s o n s f o r t h i s a c t i o n as

"The p r o v i s i o n s of the Federal Reserve Act which a u t h o r i z e
t h e e s t a b l i s h m e n t of a F e d e r a l r e s e r v e c o l l e c t i o n system were designed
wholly f o r the b e n e f i t of the banking and commercial i n t e r e s t s of the
c o u n t r y . The system i s now i n o p e r a t i o n between banks which i n number
a r e about 9 - par cent of a l l banking i n s t i t u t i o n s and which have a p p r o x i mately 92 per c e n t of t h e t o t a l banking r e s o u r c e s of the c o u n t r y . The
F e d e r a l r e s e r v e c o l l e c t i o n system h a s become a n e c e s s a r y i n s t r u m e n t a l i t y
i n e f f e c t i n g t h e c o u n t r y ' s domestic exchanges, i t s o p e r a t i o n , i n c l u d i n g
f i n a l payments through the Gold S et t l em en t Fund, h a s been of i n e s t i m a b l e
v a l u e and h a s r e s u l t e d i n enormous saving to t h o s e a c t i v e l y engaged in
c a r r y i n g on the commerce of the country and t h e r e a r e no o t h e r f a c i l i t i e s
f o r o p e r a t i n g a c o l l e c t i o n system which could approximate i t i n economy
of o p e r a t i o n .
I t has e l i m i n a t e d a v e r y l a r g e p o r t i o n of the time f o r merly consumed i n t h e c o l l e c t i o n of checks and h a s cut down the c o s t of
making the country* s exchanges t o the minimum.
Even though an i n v o l u n t a r y
c o l l e c t i o n system may n o t be imposed upon the F e d e r a l Reserve Banks by
t h e F e d e r a l Reserve Act, as i n t e r p r e t e d by t h e Supreme Court of t h e United




-3762
S t a t e s m i t s r e c e n t d e c i s i o n , the system h a s f u l l y j u s t i f i e d i t s o p e r a t i o n
and i s of such v a l u e t o t h e b a n k i n g and commercial i n t e r e s t s of t h e
c o u n t r y t h a t i t s c o n t i n u a n c e as a v o l u n t a r y system i s of v i t a l i m p o r t a n c e .
C e r t a i n changes i n t h e b a s i s of the par c 3 e a r j n c e system a r e a d v i s a b l e
i n view of t h e r e c e n t d e c i s i o n of t h e Supreme Court *
"The Board b e l i e v e s t h a t p a r t i c i p a t i o n i n t h e p a r c l e a r a n c e
system should be based upon t h e p r i n c i p l e of r e c i p r o c i t y and t h a t h e r e a f t e r F e d e r a l E e s e r v e Banks should not r e c e i v e f o r c o l l e c t i o n checks on
any non-ruember bank which w i l l n o t a g r e e t o r e m i t i n a c c e p t a b l e f u n d s
w i t h o u t d e d u c t i o n . The r e c e n t o p i n i o n of t h e Supreme Court makes i t
c e r t a i n 'chat the F e d e r a l Reserve Banks a r e n o t p e r m i t t e d by law t o pay
exchange•
I t mast oe c l e a r t h a t the more i n c l u s i v e a c o l l e c t i o n system
i s the more e f f i c i e n t i t w i l l be and the g r e a t e r w i l l be t h e s e r v i c e i t
can r e n d e r a l i k e t o -the b u s i n e s s and banking community*
Therefore,
s i n c e i t i s t h e o b j e c t of t h e Federal Reserve Board t o m a i n t a i n an
e f f i c i e n t s y s t e m of p a r c o l l e c t i o n , which must a t the same time be a
v o l u n t a r y system a s f a r a s non-member banks a r e c o n c e r n e d , the c o n c e s s i o n s
i n v o l v e d and t h e r e s u l t i n g b e n e f i t s s h o u l d be made and r e c e i v e d by a l l
p a r t i c i p a t i n g banks• I t i s c l e a r t h a t t h o s e non-member banks which a r e
u n w i l l i n g t o r e m i t w i t h o u t d e d u c t i o n f o r checks drawn on .themselves
have no r i g h t t o s h a r e i n t h e a d v a n t a g e s of t h e par c o l l e c t i o n s y s t e m .
"The F e d e r a l R e s e r v e Board, t h e r e f o r e , i n t h e e x e r c i s e of i t s
l e g a l a u t h o r i t y , h a s amended R e g u l a t i o n J , S e r i e s of 1920, i n such a
way a s to p r o h i b i t a n y F e d e r a l Reserve Bank f r o m r e c e i v i n g on d e p o s i t
or f o r c o l l e c t i o n any check drawn on any non-member bank which r e f u s e s
t o r e m i t a t p a r i n a c c e p t a b l e f u n d s and t o r e q u i r e F e d e r a l Reserve
Banks t o make a c o l l e c t i o n c h a r g e f o r t h e i r s e r v i c e s i n c o l l e c t i n g
checks which b e a r t h e endorsement o f , or a r e drawn by or emanate from
any non-member b a n k which r e f u s e s to r e m i t a t p a r i n a c c e p t a b l e f u n d s ,
such c o l l e c t i o n c h a r g e to b e a t a r a t e n o t to exceed one t e n t h of
one p e r cent J •
By o r d e r of t h e F e d e r a l Reserve B o a r d .
Very t r u l y y o u r s ,

Wm, W. Hoxton,
Secretary*
TO GOVERNORS OF ALL F. R. BANKS-