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714 memorandum. WHY MEMBER BANK DRAFTS ON FEDERAL RESERVE BANKS SHOULD BE ACCEPTED BY ALL FEDERAL RESERVE BANKS FOR IMMEDIATE CREDIT AT PAR* * 1„ * * Thrtftigh t h e e s t a b l i s h m e n t of the F e d e r a l Reserve System, ( membership compulsory ) N a t i o n a l banks a r e obliged t o c a r r y t h e i r r e s e r v e s i n F e d e r a l Reserve Banks. Drafts a g a i n s t t h a t account should possess a l l the c i r c u l a t i n g value t h e i r d r a f t s had h e r e t o f o r e on any or a l l of t h e i r former r e s e r v e c o r r e s p o n d e n t s . 2« In the o p e r a t i o n of the c o l l e c t i o n system an i n - c e n t i v e to use f o r o v e r - t h e - c o u n t e r drawings, d r a f t s on Fed* eral - Roberto Banks should be o f f e r e d . These d r a f t s , c r e d i t e d on member bank books when drawn w i l l f l o a t f o r a t l e a s t one day and o f f s e t through the c l e a r i n g .of f l o a t t h e i r e q u i v a l e n t i n items charged. 3, In t h e o p e r a t i o n of the c o l l e c t i o n system the b a l a n - ces between t h e F e d e r a l Reserve Banks a r e c r e a t e d by check t r a n s a c t i o n s t h a t a r e e q u i v a l e n t of gold through the Gold S e t t l e m e n t Fund, The exceptions to t h i s a r e some payments r e - ceived through l o c a l c l e a r i n g h o u s e s , d e p o s i t s of l a w f u l money or r e d i s c o u n t s . . 1388 -7X4*»2*» 4. Clieeking i n a n t i c i p a t i o n or k i t i n g can be c o n t r o l l e d by reasbti 6f t h e s u p e r v i s o r y r e l a t i o n s h i p of F e d e r a l Reserve Banks t o t h e i r member banks. 5. Through making a low open d i s c o u n t r a t e 6n d o l l a r e x - change , very much lower ,than open r a t e s p r e v a i l i n g f o r s t e r l i n g d r a f t s on London, t h e F e d e r a l Reserve Banks a r e s e e k i n g t o popu l a r i z e a c c e p t a n c e s of American banks i n world c e n t e r s . I t i s j u s t as important t o s t i m u l a t e t h e u s e of d r a f t s on F e d e r a l Reserve Banks i n t h i s country, even t o the p o i n t of c o n c e s s i o n o r some expense in the b e g i n n i n g , 6. D r a f t s on F e d e r a l Reserve Banks w i l l be c o l l e c t e d only through o t h e r F e d e r a l Reserve Banks f o r immediate c r e d i t . I t amounts t o t h e same p r o p o s i t i o n as d r a f t on a branch p r e s e n t e d through t h e p a r e n t bank or v i c e v e r s a . 7* A s e t t l e m e n t fund c o n s i s t i n g of l a w f u l money can be c o n s t i t u t e d in Washington if e x p e r i e n c e i n immediate payments make i t n e c e s s a r y o r d e s i r a b l e . D e t a i l s , such as c h a r g i n g ! t h e member banks r e s e r v e account w i t h the d r a f t on t h e day i t r e a c h e s any F e d e r a l Reserve Bank, and bank t r a n s f e r s upon r e q u e s t only can be made p a r t of t h e p l a n . Postscript. To the above might be added t h e f o l l o w i n g , as a s u p plemental reason : —714— -3The public g e n e r a l l y have been educated by e x p e r i e n c e t o the f a c t t h a t a d r a f t on a New York bank i s given immediate c r e d i t and i s a v a i l a b l e f o r funds a t any town i n t h e United S t a t e s o r f o r t h a t m a t t e r i n North America. So t r u e i s t h i s t h a t a c a r e f u l study of bank s t a t i s t i c s shows t h a t t h e r e are very few banks i n the United S t a t e s , National or S t a t e , t h a t do not keep accounts in New York, the reason being t h a t in no o t h e r way can they meet the wants of t h e i r customers i n making payments a t d i s t a n t p o i n t s . The q u e s t i o n i s whether t h i s requirement w i l l s t i l l be made, or whether a d r a f t drawn by a member bank on i t s own Federal Reserve Bank can be made ( by reason of the Gold Settlement Fund and t e l e g r a p h i c t r a n s f e r ) immediately a v a i l a b l e . Many member banks m a i n t a i n t h a t r e s e r v e s in Fede r a l Reserve Banks w i l l be worth l i t t l e if t h i s i s not done. Furthermore, if i t i s not done, i t i s argued w i t h some f o r c e t h a t t h e Federal Reserve System, i n s t e a d of d e c e n t r a l i z i n g r e s e r v e s , w i l l tend t o c e n t r a l i z e them more than e v e r i n New York C i t y , Is i t not d e s i r a b l e t h a t a d r a f t on a F e d e r a l Res e r v e Bank should be p o p u l a r i z e d i n every p o s s i b l e way, and t h a t a member bank be j u s t i f i e d in charging a moderate f e e t o i t s customer f o r such a d r a f t ? - 714 "-4~ So f a r as s a f e g u a r d s are concerned., t h e r e i s no o b j e c t i o n t o s u r r o u n d i n g them w i t h a l l p o s s i b l e s a f e g u a r d s . For example, a member bank might be r e q u i r e d t o s e n d , a t t h e end of each day, by m a i l , t o i t s F e d e r a l Reserve Bank a l i s t of a l l d r a f t s drawn a g a i n s t i t , showing to what p o i n t s they have been s e n t , if i t i s known. This would do away w i t h "check k i t i n g " . 6/27/16 . 1391 C H A R L E S S . H A M L I N , SflVBRNOR EX-OFFICIO MEMBERS F R E D E R I C A. D E L A N O / p t j / f OlflgHOR PAUL M.WARBURG W. P . G . H A R D I N G ADOLPH C.MILLER WILLIAM G . McADOO SECRETARY OF THE TREASURY CHAIRMAN JOHN SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD WASHINGTON H . P A R K E R W I L L I S . SECRETARY S H E R M A N P . A L L E N . ASST. SECRETARY ADDRESS REPLY TO FEDERAL RESERVE BOARD June 29, 1 9 l 6 . Dear S i r : In response t o my t e l e g r a m of June 21, t o each F e d e r a l Reserve Bank a s k i n g f o r views i n r e s p e c t t o g i v i n g immediate c r e d i t a t par f o r d r a f t s drawn a g a i n s t F e d e r a l Reserve Banks, we have r e ceived r e p l i e s from each "bank, f i v e of vtfiich, are f a v o r a b l e , namely: Cleveland, Richmond, M i n n e a p o l i s , D a l l a s and San F r a n c i s c o ; and seven a r e opposed, namely: Boston, New York, P h i l a d e l p h i a , A t l a n t a , Chicago, S t . Louis and Kansas C i t y . In view of t h i s marked d i f f e r - ence of o p i n i o n , t h e Board i s undisposed t o p r e s s t h e m a t t e r unduly a t t h i s t i m e , but proposes t o l e t t h e m a t t e f run along f o r f u r t h e r consideration. The s u g g e s t i o n has been made by one of t h e Reserve Banks t h a t t h i s p r i v i l e g e should not be g r a n t e d u n l e s s each F e d e r a l r e s e r v e bank' m a i n t a i n s a s u b s t a n t i a l b a l a n c e w i t h every o t h e r Reserve Bank whereon i t s members nay d e s i r e f u n d s j t h e s u p p o s i t i o n b e i n g , however, t h a t t h e b a l a n c e s would be m a i n t a i n e d l a r g e l y i n New York. The F e d e r a l Reserve Board w i l l , of c o u r s e , have no o b j e c t i o n t o t h i s , because t h e law p e r m i t s t h e v a r i o u s F e d e r a l Reserve Banks t o keep b a l a n c e s w i t h each o t h e r f o r exchange p u r p o s e s , b u t i t may be p o i n t e d out a t t h i s time t h a t the o b j e c t of t h e Gold S e t t l e m e n t Fund was t o keep a j o i n t fund i n Washington which could be c l a s s e d a s r e s e r v e I. • 1392 714 a» - 2 and which would operate with g r o a t a r smoothness and f a c i l i t y t h a n f o r each t a n k t o keep "balances w i t h e l e v e n o t h e r "banks. It has been s t a t e d t h a t t h e r e i s no n e c e s s i t y f o r h a s t e i n t h i s n a t t e r , t u t i t would appear t h a t t h i s i s one of t h e problems which should have t h o u g h t f u l c o n s i d e r a t i o n of t h e Executive o f f i c e r s and t h e Reserve Agents of each "bank and "be s e t t l e d i n t h e n e a r future* An important f e a t u r e of t h e problem, i s t h a t a f t e r . November, 1917* d e p o s i t s i n banks o t h e r t h a n a F e d e r a l Reserve Bank a r e not r e s e r v e s # These d e p o s i t s , while drawing i n t e r e s t , must be c o n t i n u e d if a t a l l , as e x c e s s d e p o s i t s # The s u g g e s t i o n h a s been made by Mr* H a r d i n g , of t h e Board*s Committee, t h a t i n s t e a d of i n s i s t i n g on any g e n e r a l r u l i n g , each F e d e r a l Reserve Bank make i t s own arrangements so t h a t d r a f t s drawn a g a i n s t them woiild be g i v e n immediate c r e d i t a t such Reserve Banks as t h e y thought d e s i r a b l e « I f , f o r example, t h e San F r a n c i s c o Bank d e s i r e d t o h a v s i t s d r a f t s immediately a v a i l a b l e a t par i n Chicago and Hew Yo:C%, i t could make arrangements with t h e Chicago and New York Reserve Banks t o e f f e c t t h i s < This would be a p a r t i a l i f not complete s o l u t i o n of t h e problem which would p e r haps answer t h e purpose f o r t h e p r e s e n t and t i l l a more comprehensive plan i s devised. A f a c t not t o be overlooked i s ths.t t h e p u b l i c g e n e r a l l y have been eduofLted by e x p e r i e n c e t o t h e f a c t t h a t a d r a f t on a New York Bank i s given immediate c r e d i t and i s a v a i l a b l e f o r f u n d s . 1 3 9 5 71^ a . a t any town i n t h e United S t a t e s or f o r t h a t n a t t e r i n North America. So t r u e i s t h i s t h a t a c a r e f u l study of bank s t a t i s t i c s shows t h a t t h e r e are very few banks i n t h e United States,, N a t i o n a l or S t a t e , t h a t do not keep accounts i n New York., t h e r e a s o n being t h a t i n no o t h e r way can they meet t h e wants of t h e i r customers i n making payments a t d i s t a n t p o i n t s * The q u e s t i o n i s vdnether t h i s requirement w i l l s t i l l be made, or A e t h e r a d r a f t drawn by a member bank on i t s own F e d e r a l Reserve Bank can be made (by r e a s o n of t h e Gold S e t t l e m e n t Fund and t e l e g r a p h i c t r a n s f e r ) immediately a v a i l a b l e # Many member banks m a i n t a i n t h a t r e s e r v e s in F e d e r a l Res e r v e Banks w i l l be worth l i t t l e i f t h i s i s not dene. Furthermore, i f i t i s n o t done, i t i s argued with some f o r c e t h a t t h e F e d e r a l Reserve System, i n s t e a d of d e c e n t r a l i z i n g r e s e r v e s , w i l l t e n d t o c e n t r a l i z e t h e n more than ever in New York C i t y . I t / i s not d e s i r a b l e t h a t a d r a f t on a F e d e r a l Reserve Bank should be p o p u l a r i z e d i n every p o s s i b l e way, and t h a t a member bank be j u s t i f i e d i n c h a r g i n g a moderate f e e t o i t s customer f o r such a d r a f t ? So f a r a s s a f e g u a r d s are concerned, t h e r e i s no o b j e c t i o n t o s u r r o u n d i n g t h e s e o p e r a t i o n s with a l l p o s s i b l e s a f e g u a r d s # For example, a member bank might be r e q u i r e d t o send, a t t h e end of each day> by mail,* t o i t s F e d e r a l Reserve Bank a l i s t of a l l d r a f t s drawn a g a i n s t i t , showing t o what p o i n t s t h e y have been s e n t , or made p a y a b l e , ~ which would be a s a f e g u a r d a g a i n s t "check 71- 4 - kiting". F u r t h e r m o r e , s p e c i a l s a f e g u a r d s might be r e q u i r e d on t r a n s f e r s of f u n d s or t h e making of d r a f t s f o r l a r g e amounts say over t e n thousand .-or t w e n t y - f i v e thousand d o l l a r s . Yours t r u l y , Chairman., Committee on C l e a r i n g . Statement e n c l o s e d 1395 711' Ve - 2 - . . : S t a t e Banks and Trust Cos. : n o t i n c l u d i n g Savings :Banks and P r i v a t e Banks. : : Nizaber . :Number : l i s t i n g New : l i s t i n g New Total : York c o r r e - : :York correNumber : :spondent : spondent. N a t i o n a l Banks STATE Oklahoma Oregon Pennsylvania Rhode I s l a n d South C a r o l i n a ! South Dakota Tennessee Texas Utah Vermont Virginia Washington West V i r g i n i a Wisconsin Wyoming TOTAL 6/29/16 Total Nmber 351 89 837, 18 71 112 117 536 23 Us 137 80 117 138 33 7,627 251 86 750 17 71 7% 116 518 23 4l 125 78 113 112 30 6,690 556 154 44g 28 319 494 396 890 87 35 282 282 190 680 72 16,955 ' 134 111 397 28 283 77 245 621 7U 28 179 227 171 213 38 9,799 1396 714 t, NUMBER OF BAMS LISTING CORRESPONDENT TS NEW YORK CITY AS SHOOT BY BANKERS' DIRECTORY. : S t a t e Banks and Trust Cos. : n o t i n c l u d i n g Savings :Banks and P r i v a t e ' Banks. Number : : Number l i s t i n g New : T o t a l : l i s t i n g New York c o r r e - : Number. : York c o r r e spondent. : : spondent. N a t i o n a l Banks STATE Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware D i s t r i c t of Columbia Florida Georgia Hawaiian I s l a n d s Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusette Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New J e r s e y New Mexico New York North C a r o l i n a North Dakota Ohio Total Number 92 3 : : : • 169 106 280 36 92 3 13 51 252 115 72 11 14 54 111 5 53 351 226 248 21J 133 38 36 79 122 101. 223 36 197 11 56 204 37 479 80 152 377 61 169 11 30 195 34 478 79 115 366 f 26l 120 72 24 14 55 112 5 58 472 257 348 219 140 £ P . 258 12 66 395 354 179 68 24 12 198 654 17 121 807 575 456 959 439 232 67 108 85 319 993 268 1,293 217 815 18 13 137 44 325 402 64l 480 254 11 62 121 304 101 66 12 12 186 639 8 64 320 285 201 556 197 175 40 60 75 259 449 226 295 109 506 17 2 123 31 323 299 199 417
@FedFRASER