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·128 F..b;DERAL Mernorandu.m for the Board RESERVE BOARD X..-1813 January 27,19201 Subject: Protest of Fort ibrth Banks against discontinuance of Dallas District Clearing House plan. As directed by the Federal Reserve Board on January 17, I have conferred with Mr. Paddock relative to the District Clearing House plan which has been for SOllie time in operation at the Dallas Bank, and which is soon to be discontinued, in accordance with the recor..m1endation of the Federal Reserve Board on December 9, 1919, and in accordance with the action of the Board of Directors of the Dallas Bank shortly thereafter. The delay in this report has bea:i caused first by !VIr. Paddock 1 s absence from the city and then by my own. Investigation shows that the Dallas Bank is the only Federal Reserve Jank using the District Clearing House and that the ;_;lan has been criticized re11eatedly by Mr. llroderick and by Mr. Willa as well as by certain officers of the Dallas Federal Reserve Bank itself. Briefly, the District Clearing House '..>rovides that items received by the Reserve Bank from a mexnber bank for the latter's credit shall offset items which the Reserve Bank receives from all sources that are drawn upon the said ~ember bank. For instance, a bank at Fort Worth sends to the Federal Reserve Bank checks drawn upon banks on the par list aggregating $1,000. Let us assutlle that upon the day these checks are received by the Federal Reserve Bank it also receives from other member banks checks ag~egating $1,000 drawn U"J?On the said member bank at Fort Worth. In this case, no balance results. The inec;1uali ty lies in the fact that the Fort Worth Ba~ may 'Q.se a cb,ec'k which it actually t~es the Federal Reserve Bank three days to collect to offset a check for a like amount, drawn upon itself, which it can, by charge to its customer's account, realize upon in two days. · It might appear U'l?On. first thought that the principles governing the clearance of local checks in a city clearing house can be ap"J;llied satisfactorily in the clearance of checks for a larger territory such as a w11ole Federal Reserve District. However, experience has demonstrated that any plan for the intra-district clearance (irrruediate debit or credit) of items fDom a large Federal Reserve District operates inequitably, owing to the ele~~nt of time required for the collection of the items, and generally results favorably for banks near Federal Reserve cities and to the detriment of more remote banks of the district4 \ A local or city clearing house is composed of banks within a certain limited territory 1 and cheCks cleared in the morning will be collected (charged to the depositor 1 s account u'9on which they are drawn) on tne same day. The items cleared are of similar character, all having the quality of immediate availability. 1.29 X-1813 -2- However, the Dallas District Clearing House has member banks indifferent cities in the terri"l;ory covered by the Eleventh Federal Reserve District, and these u1ember banks include in their cash letters sent to the District Clearing House, checks u?on bariks in their own district and u~on batiks in other sections of the United States. The clearance (offsetting) of a men~er barik 1 s cash letters, sent to Dallas, containing iteu.s which will require an avera~ of three days for collection, against the cash letters sent fro~ the District Clearing House to the rr.er;:.ber benk, .wade tl.p of i teu.s which rcey become available to the n.eiiJber ba~k in frox;.1 two to six dccy's, according to the distance of the u.e11.ber bank from Dallas, is manifestly unfair, and bound to resUlt in injustice to individual remote ba.n:ks and advanta;e to the banks within a two day radius of Dallas. It seeu:s clear that it is a :practical impossibility to offset in a. clearance time i tel;is which have different .:.aturi ties and still deal justly with all concerned. This injustice is clearly shown to be the case by Exa.:uiner Will 1 s analysis of incoming and outgoing cash letters in his re~;ort of exauJ.nation of the Federal Reserve ~ank of Dallas, as of the close of business NovffiLber 15, 1919, and Fort Worth is one of the ::>oints shown by IV.~r. mn1 to be a beneficiar)' under the District Clearing House plan. w.w. \ \ HOXTON
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