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x-477 F E D E R A L Sll S E R V E WASHINGTON In re - Interest charge* B O A R D Transfer Drafts Bought cind Sold* Reserve banks receive from member banks for deferred credit bank (transfer) drafts, at face value. If immediate availability is desired the drafts are purchased at tne so-called market rate; and credit is given upon the books of tne reserve bank. If purcnased from a nonmember bank which does not ni i itA l i a clearing account with. th&a x v, i reserve bank payment is made by cashiers cneck. In the purcnase of transfer drafts, the reserve bank is investing a portion of its available funas, the discount is the interest return upon the funds so invested- As a general rule the so-called market rate is based upon the 2$ interest received on daily balance maintained by the drawing bank with its out of town bank correspondent. A second element is the cost of snipping currency which acts as an automatic check upon the discount or premium on transfer drafts- In Dallas for instance at certain periods of the year, a premium is paid for transfer drafts on hew York mid Chicago, tne demand apparently being greater than tne supply. Transfer draft transactions nave been a source of considerable profit to a number of the reserve banks, but an analysis will show that the rate of return upon tne average sum invested has been extremely low* For instance in San Francisco, prior to the adoption of the new schedule of charges, a large amount was invested in transfer drafts at 20 cents ' discount. As it takes at least 5 days to collect hew York items, this figure was equivalent to an interest charge of about l-f$ per annum. It was more profitable for a bank to sell drafts against its uncollected items in transit at this rate and so replenish its reserves rather than to discount its promissory note. It was preferabld for a member bank to sell part of its float rather than a telegraphic transfer. Under the new schedule, the rate for tne present will be 10 cents per day per $1,000, equivalent to 3~5/8$£ per annum. This rate will be raised if the volyme offered seriously affects available funds necessary to meet the discount demands of member banksGeneral Comment In tne opinion of the undersi0ned tne reserve bank must be prepared at all times to purcnase both telegraphic and mail transfers and transfer drafts from its members, as this is one of tne principal means a bank nas of replenishing its reserve with the Federal reserve bank. However, the rate of interest charged on mail transfers and transfer drafts should be sufficiently hi^n to encourage tne use of discount facilities.. Tne purcnase of a transfer draft is an extension of credit witnout security and for tnat reason, it would be w&ll to adopt tne X-4-77 principle of limiting the purchases from any one bank to a sum equal to the collected or reserve balances carried by such bank vdth the Federal reserve bank. In the past heavy purchases were m ade of non-member banks. In the future it would be well to m ake no purchases from any non-member bank unless such bank carries a clearing account with the reserve bank, the outstanding uncollected drafts so purchased not to exceed at any one time the collected or reserve balance Garried with the reserve bank. J. A. BRODERICK. November 1, 1917 X-477 -3:- October 31, 1917. AVERAGE AMOUNT OF TRANSFERS HELD BY THE FEDERAL RESERVE BANKS; EARNINGS AND RATE OF EARNINGS THEREON FOR THE MONTH OF SEPTEMBER, 1917, . M I N N E A P O L I S Earnings for : Annual rate the month : of earnings Daily average holdings for the month Total of daily holdings for the month, as shown on Form 34 4 ♦ $109,719,624,26_______ $3,657,320.81 D A L L A S 13.6(533,47 2.74 : $7,1.39*00______ 2.27 I ’ 4,551,115.76 : 2,453.05 : .658^ : 12,969.55 : 1.48% : 3,782.27 : 2.94$ C H I C A G O 320,591,833.75 : _ T. S 46,868,543.41 : 10,686,394.46 L O U I S 1,562,251.45 KANSAS, 114,779,474.88 206,535,000.00 CITY. (only) 3,825,982.50 : : 1,637.03 : .521% 6,884.500.00 : 6.877.00 : 1.22;,,
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