Full text of Mimeograph Letters and Statements of the Board : Memorandum of Various Plans for the Clearing and Collection of Checks, Number 586, Volume 3, Page 878

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586

MEMORANDUM

—of—

Various
£or

Clearing

Plans
the

and

Collection

of Checks.

Submitted to the
Federal

Reserve

3O 0

Washington, D. C.
March 21,1916*




Board.




880
586

PLA N

N 0 .

1.

Plan of cneck collection and clearing recommended by
a. Comautteu of Federal Reserve Agents CMesers. Martin,
Curtiss and Jay) unaer date of October 13# 1915/ and enu
bodied in a report of the Committee# printed in full m
the Federal Reserve Bulletin for November 1915# Pages 3^9-372*

1*

That as soon as practicable., and under arrangements
w m c h will make clear and restrict its use to the purposes for
which it w&3 establisred# settlements through the gold settle­
ment fund snould be made daily*

2

That the Federal Reserve Banks should soon arrange to
undertake the collection of notes and drafts# and of items drawn
or. no^-member ba?k3 upon the most favorable terns which can be
arranged in tie respective districts.

3

That the Comptroller should be asked to endeavor to
arrive at an agreement *vith all State bank supervisors that on
and after a giver date checks m

the mail shall not be counted

2.0 reserve
That through mutual agreements# oach Federal Reserve
Bank should receive checks drawn on members of the collection
system of every other Federal Reserve Bank# deferring credit
for ther a sufficient number of days to ?llow them to reach the
Federal Reserve Bank of the district of origin# plus the number
of days# if any# allowed by such Federal Reserve Bank to reach




586

- a -

the paying tank; and further
That through nutual agreement* any Federal Reserve Bank

r
may receive lor immediate credit che.ck3 drawn on members of the
r

collection system of any other Federal Reserve Bank; and that
whenever it is froth practicable and more direct* member banks in
3uch collection systems may send direct to the Federal Reserve
Bank of the district of origin instead of to their own Federal
«

Reserve Bank.

1

That the^development of inter^distrjet collecting need
not await the'*completion of the intra-djstrict collection systems.
That' in extending the collection system both within
and across district lines uniformity need not prevail but .instead
there should be freedom and flexibility of rules and requirements
in order that each reserve bank may best meet the conditions and
\

needs of its member banks.

"

That each Federal Reserve Bank should retain the right
to change immediate credit points ’to deferred credit'points* to
assess upon members the cost of its collection service* to make
charges against its member banks for using their balances to create
exch?Jige on other districts* and generally to' make such rules and
regulations as will enable it promptly to safeguard its position
2nd protect itself against unsound development.




883
5$6 -a
•P L A N

N 0

2

Plan for Chock Collection Adopted by the Executive
Committee of Governors at a reeting on October 2 3 , 19^5*
submitting,, witn slight alterations a plan previously
adopted by the Transit Managers of the Reserve Banks*

The Fifth Conference of Governors at the morning session,
Saturday, October 23rd, 1915* considering the further development
of the collection systei , "adopted as its recommendation the sub­
stance of Vote 12, of the Transit Managers1’ Conference of October
6th and 7th, 1 9 1 5 * as representing substantially its views on this
subject, and laft to the Governors1 Executive Committee the de­
velopment of the details of the plan and its submission to the
Federal Reserve Board with power to invite the attendance at any
meetings of such of the transit men of the different banks as the
committee may select.11
In order that you may be advised of the principles adopted
as the basis upon which the plan outlined m

Vote 12, mentioned

above was drafted, I enclose copies of the minutes of the Transit
Managers1 Conference with notations" m

Ink showing such changes as

were made by the Conference of Governors, except that a typewritten
slip is attached giving the vote of the Governors Conference adopted
m

lieu of Vote S of the Transit Managers1 Conference.
RECOMMENDATIONS TO EXECUTIVE COMMITTEE
BY THE TRANSIT MANAGERS

Morning, afternoon and night sessions were held on
October 6th ana 7 th.
The deliberation of the Conference resulted in the
passage of the votes recorded below, every representative being



881

5*56 - a*

- 2 -

present when each vote was taken., except that in one or two cases
representatives absent for a fow minutes authorized the Secretary
to record their votes:
1*

Voted -

That we heartily favor every extension of the ^
operation of a check collection system consistent

Concurred in
by Governors

with sound principles and permissible under the
Federal Reserve Act.

2,

Voted -

The deliberations of this body are based on the
assumption that every member bank is required by

Concurred m
by Governors

lav/ to cover at par all checks and drafts drawn
upon it received from the Federal Reserve Bank of
which said bank is a zpember.

3*

Voted -

Immediate debit and

credit not required*
*'r. Pike of Atlanta a&ked to be reported as voting
nN o ."
•
That the Federal Reserve Bank should have the
privilege at its discretion of accepting check?

Concurred m
by Governors.

on any bank, banker or trust company.
a
Voted -

Unanimously carried.

We recou* end that the actual expense of handling
items on non-member banks shall be assessed by the

Concurred in
by Governors.

Federal Reserve Bank against the member depositing
such itens with the Federal Reserve Bank.
Unanimously carried.

5*

Voted .»

That consideration of a service charge by the Federal
Reserve Ba.nks

Concurred m
by Governors




.or collection of checks on member

bank? deposited with the Federal Reserve Banks be
deferred at this time.
Carried without a dissenting voice

_

6

.

Voted -

3

_

_

586

- a.

WHEREAS, Section l6 of the Federal Reserve Act
stipulates that Federal Reserve Banks shall accept
at par from their member banks checks and drafts on
their members, this Conference recommends to the
Governors* Conference that this provision of the

Concurred m
by Governors*

Act be developed by the several Federal Reserve
Banks on a deferred credit and deferred debit basis,
but we believe that the privilege to handle items
on an uuediate debit and credit basis, so far as expedient to do so, should be granted.
Carried.
Mr. Pike voting ’*No", explaining that the Atlanta
directors are on record as being opposed to putting
into effect any system of clearing on a par basis.

7•

Voted -

That items sent to Federal Reserve Banks should not
be counted as reserve until credited by the Federal
Reserve Bank, but in computing reserves the total

Concurred m
by Governors.

amounx of sucn items may be deducted from the member
banks' gross demand deposits.
Unanimously carried.

8.

Voted -

Substituted
by Governor*

That anjr plan for the interchange of checks between
districts should apply only to those banks vtfiich do
not impose restrictions as to endorsements.
Unanimously carried.

9-

Voted -




We recommend that the matter of transfers of funds
for member banks between the several Federal Reserve
Banks be handled on the basis outlined by the Gov­
ernors of the Federal Reserve Banks at their recent
Conference until such time as the intraudistnct

884

536

- U -

Concurred in
by Governors.

- a.

clearing facilities are developed to an extent which
'•will justify a reconsideration of this question*
Unanimously carried.

10.

Voted -

It is the sense of this meeting that transfers of
funds between any two banks in- any Federal Reserve

Concurred in
by Governors.

District should be made by means of direct order
rather than by checks and drafts.
Unanimously carried.

11.

Voted -

Concurred in
by Governors.

That the j.irec interchange of items between members..
by settlements through the Federal Reserve Banks be
encouraged.
Unanimously carried.

12.

Voted -




We recommend to the Executive Committee of the
Governors’ Conference that a system of Inter-District
Collection be inaugurated at once as follows:
Each Federal Reserve Bank will accept from any of its
member banks for deferred credit and deferred debit
a.t par, in accordance with the provisions of Section
l6 of the Federal Reserve Act, checks and drafts on
member banks in any of the other Federal Reserve
Districts.
Each Federal Reserve Bank will agree to accept at par
.from other Federal Reserve Banks checks and drafts on
its own members for credit a certain number of business
days after the receipt of such checks and drafts, said
number of days to be based upon the average length of
time necessary to obtain returns from its members. Upon

885




886
-

5

-

586 - a.

receipt of advice from the other Federal Reserve Banks
as to the number of days determined as aforesaid each
Federal Reserve Bank will prepare a schedule of deferred
credits applicable to checks on other Federal Reserve
Districts deposited by its members.
Every Federal Reserve Bank operating on a deferred debit
and deferred credit basis within the district will in*
elude In said schedule of deferred credits indication
of the number of days for which it will defer credit
to its members of checks and drafts on other members
in its district.
Each Federal Reserve Bank will, if possible, avoid
having more tnan tnree classes of deferred credit,
and will request its member banks to sort items in
accordance with the number of days for Much credit
I.* deferred, and to list in one letter all the items
for which credit will be deferred the same number of
days, furnishing th6 Federal Reserve Bank a separate
letter for each cl?ss of deferred credit, as well as
another lotter m Much will be listed all items to
be accepted for immediate credit. Debit against a
i.eirber bar^s account of checks and drafts drawn upon
it will be deferred for the same number of days for
wnich credit is deferred in accepting such items from
other members of the district.
Letters of transmittal to member banks will show plainly
the date on vdiich the items listed therein vail be

887

. 6-

536 - a.

charged to the member hank's account.

Each letter

of transmittal to a Federal Reserve Bank will show
/
"plainly the dato on which credit is expected in ac­
cordance with the schedule of deferred credits, and
„ will he charged to the Federal Reserve Bank on 3aid
date.
In order to guard against tne great congestion in­
cident to taking on at once a large increase in the
volume pf items, the plan should he developed in
progresoive stages hy beginning with checks, each one
of which anounxs to $1*Q00 or more, and gradually
reducing the limit as to the amount of each check until
the limit can he safely removed*

Changes m said

limits shoaid he identical in all districts both as
to the amount and the aatc on jhich the change is made
effective.
Nothing in the foregoing shall he construed

as

prohibiting any Federal Reserve Bank from continuing
to handle such items as it is now receiving.
In order to shov how schedules of deferred credit may
he made up in each district, there

13

herewith submitted

a tentative schedule applicable to checks deposited
(See Exhibit MAM)




in the Federal Reserve Bank of Chicago by its members.
In accepting checks from other Federal Reserve Banks,
Chicago will give immediate credit for checks on mem­
bers of the Chicago Clearing House Association, and




888
t
- 7 - "

536-a-

will defer for two days credit of checks and drafts
on other hanks in its district.
This plan contemplates that Federal Reserve Banks
particularly may. adopt short-cut methods for eliminat­
ing time in receiving credit.
For instance, if Chicago accumulated a large volume
of items on Seattle, it would expect to send such
items to Seattle for account of the Federal Reserve
Bank of San Francisco, after agreeing with San Fraacisco as to a basis of deferred credit for our Seattle
letter

889
5*6 - a.

EXHIBIT
SCHEDULE p? DEfERRED CREDITS FDR DISTRICT NO. 7.
'
Illinois

TWO DAYS.

(Except Chicago Clearing House Banks - inarmedlate credit)

Indiana
and all Federal Reserve Cities
except San Francisco.

Iowa
Michigan
Wisconsin

FOUR DAYS.
Alabama

Maine

North Dakota

West Virginia

Arkansas

Maryland

Ohio

Colorado

Massachusetts

Oklahoma

Connecticut

Minnesota

Pennsylvania

Delaware

Mississippi

Rhode Island

District of
Columbia

Missouri

Florida

Nebraska

South Carolina and San Fran~
eisco, California*
South Dakota

Georgia

New Hampshire

Tennessee

Kansas

New Jersey

Texas

Kentucky

New York

Vermont

Louisiana

North Carolina

Virginia

,

EIGHT DAYS.
Arizona

Nevada

Washington

California (except San Francisco)

New Mexico

Wyoming

Idaho

Oregon

Montana

Utah




890
-5 86-b-

P L A N

g,

A PLAN T O R CLEARING AMD COLLECTING-CHECKS
BY FEDERAL RESERVE BANKS.

(Suggested by Mr.W, S, Rowe of Cincinnati,Ohio)
Every Federal Reserve Bank would send a circular to its
members stating that it proposed establishing a Clearing House,
Department ( as required to do by the Federal Reserve Board,
acting in accordance with the terms of the Act) for its members,
accepting from its members and from any member bank in any other
district, any item on member banks in its own district, and to
charge for that service, a rate based both upon the volume in
thousands and the actual number of items handled to cover its
expenses, such rate to be determined by experience and then
fixed by rule of the Federal Reserve Board.
On the other hand, the Federal Reserve Banks would state
in the circular that they proposed paying each member bank for
the service rendered by the member bank whose items sent £o
the Reserve Bank Clearing House had been offset against items
on the member bank.

This charge also would bo determined by

experience, to be based upon ths volume in thousands, and would
then be fixed by rule by the Federal Reserve Bank.

These

rulings as to charges would undoubtedly vary from time to time,
depending upon conditions and seasons,




*




*91

l

- 2-

The circular would then recite that if any member bank
proposed sending items on member banks, bearing the endorsement
of a non-member b a n k , the service, chargg, would be at a higher rate,
as non-member banks either directly or indirectly, should not reap
benefits at the same cost as the member banks.

And further, any

member bank, desiring the privilege of having checks of a neigh­
boring non-member bank treated as though such checks were drawn
upon it, might apply to, and this application might be granted by
its Federal Reserve Lank.' The rate of compensation to the member
bank for clearing these items and the rate to be charged for col­
lecting items on such non-member banks f or whom arrangements as
above had been made, would also be fixed by rule, but these rates
would be higher than member bank check rates, thus operating as
an additional reason why non-member banks should join the system,
as ultimately it would .cost a merchant more to collect .items on
non-member banks, than.to collect items on member banks, and more
.

,

to deposit items in a non-member bank than in a member bank, if
this plan lecomes operative in its fullest extent.
Under this plan, we for example, the First National Bank
of Cincinnati,Ohio, would arrange to have checks drawn on a given
list of non-member banks treated as though they were checks on
ourselves, and after the Cleveland Lank had completed making such
arrangements covering every non-member bank in the district, it
would mail an announcement saying that it was prepared to accept
through its clearing house department, any items on non-member
banks, as well as any items on any of its own member banks, the




i

3-

■'586“b,‘

charge* and payment to member banks to be determined later, as
outlined above, and that it v/ould credit or charge each member
bank's account at the day's clearings, with the difference be­
tween the items sent through the clearing heuse, and the items
received at the clearing house.
It is manifest that these operations of the clearing
house department would not affect in any way, the total deposits
of the Bank, as credits and debits would .equal. In the banking
department .however, a credit from the clearing house department
might be immediately withdrawn, while a debit might even overdraw
another account.

To provide for this, rules in regard to main­

taining a deposit in the Clearing House Department, to cover
items to and from'the Reserve Bank, should be promulgated,based
\

upon fairness to the member banks and safety to the Reserve Banks.
The proportionate relation between volume of items on and col­
lected for a bank, to its required reserve, should affect the
size of the clearing balance.
Inasmuch as similar notices would have now been sent
out by the other 11 Banks, we would receive one from each of the
other 11 Banks, stating that each Federal Reserve Bank would re­
ceive items in its Clearing House Department from any member
bank or any bank in the district, and atating that each Federal
Reserve Bank would take from any member bank^outside af its
district, any items on member banks or non-member banks, and
that it would remit, after deducting a fair charge, to the send­




-4

-586-b-

ing Bank's Reserve Bank for its credit.

This remittance would

then be credited to the account of the member bank by each R e ­
serve Bank when received, subject to a slight charge, and as
the settlement between the tv/elve Reserve Banks at the olose of
each day would be large, they might even be cleared as between
themselves by telegraph each afternoon, and adjustments made
through the main Clearing House of the tv/elve banks, at the
'(

office of the Federal Reserve Board, through the gold fund al­
ready created.
From a practical point of view^ we would then write a
letter to each of the tv/elve Reserve Banks, instead of writing
as we do now, more than 500 letters, and would list items very
much the way we do when sending items to Chicago, drawn on many
different places.

Chicago does not demand now that we sort

•ur items based upon4the places ef payment, and we can see no
reason v/hy the Reserve Banks should, as they should be able
to sort an immensely larger volume of items than the ones we
would send, at a lower cost, and we would be paying our pro­
portion of such cost.
Our endorsement on such items should read :
"Cleared through federal Reserve Bank of ____ _ J'
followed by our name and the date sent, as well as the date it
should fe cleared unless letters are delayed in transit, and
accordingly the actual date of clearing changed.
endorsement would fee necessary.




No additional

Our entry on our books would be

t

; 895
-5-

^

-586-b-

to charge each Reserve Bank with the total of our letter, and in
figuring reserve, our

balance at Cleveland would be counted, while

the amount of the total letter sent to the other Banks would not be
reserve.

This other total,however, v/ould undoubtedly not equal the

total of our present balances in St.Louis, Chicago,New Orleans, New
York, Albany, Boston, Baltimore, etc., even after allowing for such
balances as we would wish to continue to keep in larger cities for
exchange and other purposes.
If telegraphic remittancewas a rranged for with each of
$he other eleven banks, we could make the entry on our books covers
!
*
ing letiB rs sent today as follows:

v/e could charge Cleveland with •

the total of the letters to Richmond, St. Louis and Chicago after
one day; New York, Philadelphia, Boston, Kansas City, etc. on the
etc.,
second day, and finally San Francisco/on the fifth day. Obviously
tlie accumulation of such letters in transit before they reached
their destination would hot' bo vjry large.
Return items might be handled in two ways, either through
the Reserve Bank which had previously cleared them, or direct to the
memlber bank.
Experience would show which banks would be more usually
creditors at the daily clearing, and which banks would more usually
be debtors, and the rules suggested heretofore in regard to main­
taining of balances on the books of each Reserve Bank could only
be promulgated so as to-be fair, after experience reached through
a trial.

Banks having customers apt to check unusually heavily

should prepare themselves, and might well v/atch thejfcr larger ac-




A:

-586-bcounts; and such action would be in the interests of good banking.
This plan then contemplates,although many details are omitted

or only inferred, the establishing in each Reserve Bank of the fol­
lowing departments;
(I)

Clearing House Department, in which all items on the
district are cleared and in which department suitable
and fair excess balances must be maintained.

(II) Exchange Department. in which department the twelve
Reserve Banks would clear as between themselves, and
also clear the credit turned over from the resultant
, credit-«$f a member of another district, whose checks
on that district had been cleared in Department I.
(ill) Banking Department, in which only currencv and drafts
on itself would be accepted at par, and the resultant
credit or debit after the days clearing in Department I
would only-be credited or charged to the member banks
reserve account in this department, after deciding that
the clearing balance in Department I was satisfactory.
The Banking Department would also include the other
functions of discount, examination,etc.
Thus the charges in Department I vjould be fairly large,
based upon total in dollars and total number of items, and would
also be reciprocal to cover expense incurred in restoring balances.
J

'

.

Charges in Department II would to smaller and charges in
Department III would btr nil, in so far a 3 " cash items" are con­
cerned.

Cf course, "collections" as distinguished from "cash

items'1 could easily be handled upon a cost basis in either De­
partment I or Department III.

3/20/16




897
586 ~
P L A N

N 0.

4i

A COMPOSITE OF VARIOUS SUGGESTIONS FOR CHECK COLLECTION
AND CLEARING UNDER THE FEDERAL RESERVE ACT.

Predicated on the theory that the practical and perhaps
tho legal requirements demand that a check,, bping an order to
pay cash at the counter of the Payee Bank, must be sent to the
Payee Bank and be in the hands of that bank before it can be
charged against it and credited to the Depositor.

1.*

Under Section 16 of the Federal Reserve Act, the Federal
Reserve Board nay require each Federal Reserve Bank to act as a
Clearing House for checks drawn on banks of its District.

In vie//

of the further transfer of reserves on liay 16tb, the Board has
set June 1, 1916, as the date when these functions shall be unr
dertaken in a complete manner.
Every member bank handling many checks shall send in
twelve separate envelopes, one to each Federal Reserve Bank,
checks against banks of its respective district;

provided,

however, that a bank having less than, say fifty items for any
given district may if it prefers send those items to its own Fed­
eral Reserve Bank for sorting and transmission.
3.

Checks on banks in the same city clearing house district
shall be given one day deferred credit and debit but all. other
checks in same district shall be given two days deferred credit :
and debit, unless the one-way time shall exceed that amount, in
which case deferred credit and debit, equal to the one-way time,
shall be fixed.




898

_2
4.

5^6 - c

Checks on hanks in other districts must he given a
minimum deferred credit and dehit of two days and an increment
over this i£, and hy as much as the one-way. time from the send­
ing hank to the Federal Reserve Bank of the district on which
check is drawn, plus the time from that Federal Reserve Bank
to the payee hank, exceeds this two days.

5.

Banks sending checks to Federal Reserve Banks of
other districts shall claim credit for their own Federal Re­
serve Bank Exchange Account, sending duplicate of letter of
transmittal to their own Federal Reserve Bank.

6.

Nothing in the above shall prevent hanks in neighbor­
ing cities sending checks direct to other hanks provided that
time is saved hy so doing; thus Rochester, N. Y. and Buffalo, N. Y.;
New Haven, Conn, and Hartford, Conn, might interchange checks on
any mutually satisfactory basis if by doing so time is saved and
float diminished.

7.

The Federal Reserve Board will authorize Federal Reserve
Banks to charge their own members as follows:

per item plus

10# per thousand on all collections made for sending hanks; at
the same time, the Federal Reserve Board will authorize member
hanks to charge Federal .Reserve Banks or other member hanks, sending
checks for collection, 10# per thousand upon all items sent.
tlements to he made monthly.

Set­

These charges, subject to modifi­

cation on sixty days notice, are intended to cover approximate
average cost of remitting cash or exchange to meet halanflos or
reserve requirements.



899
- 3 -

8.

5^6 - c

Menber banks will be authorized to make collections of
State bank items m

their own town or within a convenient radius

of operation and will be authorized to charge for this service the
amounts above quoted or a3 much as the actual cost of the service
should it exceed this amount - all such rates to be approved by
the Federal Reserve Board.
3*

Under the above arrangement every Federal Reserve Bank
may be expected to receive direct from perhaps 3;000 banks bundles
of checks dravn against its members.

Those deposited by its own

members are credited to the exchange account of the District repre­
sented by the depositing banks and debited against the drawee bank,
according to the time schedule above referred to, while those sent
from banks in other districts are credited to the exchange account
of the Federal Reserve Bank of the district represented oy the send­
ing bank and debited simultaneously against the drawee bank.
10.

A Federal Resexve Bank each night will have on its books
amounts representing the aggregate of the above credited items,

a.!} of wnich have been charged against its own member banks, it
will wire the amounts of these credits to tne various Federal Re­
serve Banks and receive from these eleven Reserve Banks advice of
the credits they have to its account.

If as is assumed each Fed­

eral Reserve Bank keep3 with every other Federal Reserve Bank an
account ijor exchange purposes which may run a reasonable credit or
debit either way, it is safe to eay that m

most cases tne result­

ing debits and credits by these daily balances will only need to be
settled once or twice a week through the Gold Settlement Fund.




-

11

586 - c

k -

The above plan gi\e* deferred credit and debit to the
bank for all checks outside the home city starting with two days,
but not beyond that in exces* of the one-way time between districts,
plus the one-way time from toe Federal Reserve Bank of the drawee
bank to that drawee bank.

The time of transit i* greatly shortened

as compared with the methods commonly in vogue by reason of the
direct routing and of uaing tne twelve Federal

Reserve Banks as

clearing houses, each a focussing point for the checks of the
district.

Tnu*, the Fir*t National Bank of Columbus, Ohio, will

send' ito Cleveland District checks to the Cleveland Reserve Bank
for dopooit, tlaiiiii/ig immediate credit two days later, at the
same time it 3ends Chicago District checks to the Chicago Reserve
Bank, St. Louis District checks to the St. Louis Reserve Bank,
etc.

Theoe checks reaching these Federal Reserve Banks the

next day sent to the drawee oanks and m

most cases are charged

the following day again*t the accounts of the drawee bank and
credited to the exchange account of the Federrl Pescrve Bank oi
Cleveland

Thus the First National Bank of Columbus will c l a m

two days deferred crediT for Cleveland items and, m

mo*t case3,

two day* deferreo credit for items dravo on banks m

the Chicago,

St

Louis, Atlsuta and Ricrmond Diotncts, and proportionately

later datings for more distant'..Districts

It is safe to say

teat a very large proportion of the business of the country m
check clearing would be done on a two days deferred basis12

The obvious advantage of this method is the direct and
simple routing of all iteri3 and the consequent reauction of float,
hlhereas large city banks are now required to send checks for
collection to some 500 points, under thio




plan,

they would

901
- 5 -

5 g6 - c •

be enabled to send checks to twelve centers, and perhaps five or
six other points with which the interchange of checks i3 con­
siderable.

Generally speaking, the clearing and collecting of

checks is by thi3 plan focussed and concentrated at twelve Federal
Reserve Banks with a minimum oi delay.

At the same time small

country banks would be given the privilege of sending all their
checks regardless of the district on which drawn to their Federal
Reserve Banks, or to some correspondent bank for collection and
credit.
13.

The reason it is not necessary to defer debit and credit
beyond the one-way time may be thus illustrated:
for the sake

Let us suppose,

of an argument, that the Federal Reserve Bank of

Chicago sends to its Agent at Des Moines all the items drawn
against Des Moines Banks.

That agent presents the checks next

morning at the various banks and draws out cash or takes a credit
on the local b a n k13 books.

Having thus accumulated in the five

local banks, say $250*000 in cash or credits, he wires or tele­
phones the Federal Reserve Bank of Chicago of the fact.

The Fed*

oral Reserve Bank of Chicago replies that it has itself received
in checks sent by Des Moines banks against Chicago hanks items
aggregating $260,000 and that it is, therefore, not necessary for
the Des Moines agent to remit any cash or exchange, because the
drawings on Des Moines are more then offset by the drawings on
Chicago; in fact'that Chicago must send Des Moines $10,000 as a
balance.




However, as the amount is small and the balance may

-,6 -

$S6 - c *

may be reversed the next day, it ib agreed between the agent
and principal that the brlance in favor of Des Moines shall be
allowed to stand.

It will thus be seen that thio plan of credit

and debit deferred to equal tne one-way ti„e a.&'its the principle
that the payee bank 3hall see iters drawn against it before having
these items charged against its reserves and enables it, if any
of these iters are unusually large, to nake a special arrangement
by wire or telephone to meet them.

3/20/16

✓




903
586 - d.

P L A N

N 0 .

5.

Memorandum and Plan submitted by the Governor

of the

Federal Reserve Bank of Dallas, Texas, under date of March
15, 1 9 1 6 , for the Clearing of Checks under sdiat may be des­
ignated as the Talley System of Offsets.

After careful consideration of all suggested or proposed
plans for a clearing or collection system which have come to our
notice, the officers of the Federal Reserve Bank of Dallas are
firmly convinced that none can ever be adopted vtfiich will be ac­
ceptable to the member banks or satisfactory to the Federal Re­
serve Banks unless it be based upon a system of offsets, or what
is known as the clearing principle in use by all of the local
clearing houses of this country.
The Cashier of the Federal Reserve Bank of Dallas, Mr.
Lynn P. Talley, has made a thorough study of the details of such
a plan and an outline of the fundamental details of the restiit of
his study is presented below.
with the plan of operation m

This plan is not to be confused
use by the Boston Country Clearing

House and other similar Country Clearing Houses which are nothing
more nor less than Joint Collection Agencies.
Some of its advantages are as follows:
(1)

An immediate debit and credit system would of neces­

sity, frequently impair and destroy reserves and place upon the
Federal Reserve Banks such a burden of "float" that their usefulness
would be seriously impaired.

On the other hand a deferred debit

and credit system would place upon the member banks the entire burden



> 904
_ 2 -

5*6 - d.

of "float", without offset, on which account it would he used only
to a very limited extent.

The plan proposed is, in effect, an

immediate debit and credit system to the extent of the amount of
offsets, with a minimized deferred debit and credit of only the
amount of the resultant balances, which deferred debit and credit
is equitably distributed#
(2)

This plan provides for the payment of items by the

drawee bank only at its counter and after it has inspected
(3)

the items#

The. reserve balances of a member bank with the Federal

Reserve Bank are debited only at the direction of said member bank,
which therefore has knowledge at all times of the condition of its
reserve.
(U)

The cost is minimized and is equitably distributed

among the banks receiving the benefit of the transfers of funds
necessary to complete the settlement.
(5)

•

The plan of apportioning returns to the creditor,

banks in the order of their size (Section 2 (e)) is based upon the
axiomatic principle that one day's interest on $10,000. is equal to
five days' interest on $2,000., and is the mo3t equitable manner
of facilitating settlements.
x

x

x

x

x

x

x

::

x

We were so sure of the practicability of this plan that on
Monday, December 27, 1915> we inaugurated, in the Federal Reserve Bank
of Dallas, a "Reserve City Clearing House", made up of the thirtythree member banks in the six reserve cities of this district, which
has proved the success of the plan and has been so satisfactory to
the participating baftks that it is still in operation and will be



- 3-

586 - d

continued until superseded "by some plan promulgated by the Federal
Reserve Board.
The total amount of items cleared through this Reserve
City Clearing House from December 27, 1915# to March 15/ 19^6,
was $85,6 3 7 ,6 0 2 .9U, with resultant balances amounting to $20,97*+UI8 .U2 .

Of this amount of balances $0,87*+,900. of the debits

were settled through deposits of Eastern Exchange; $3,108,000. by
deposits of currency; $7,088,518.U2, by instructed debits against
reserve balances in this bank; while $1 ,903,000. was settled by
arrangements between debtor and creditor banks in the same city.
We believe that a careful study of the following outline
will convince any one of the practicability and simplicity of the
plan.

OUTLINE OF FUNDAMENTAL PRINCIPLES
OF THE TALLEY PLAN OF CLEARINGS

The plan proposed contemplates a Federal Reserve District
Clearing House, and each Federal Reserve Bank, in handling clear­
ing items for its members through its Clearing House Department
shall act as agent only and shall not become responsible in any
manner whatever for delinquency or default of any member.
It is proposed that each Federal Reserve Bank shall in­
augurate a Clearing House Department along the following lines:
(1)

The Clearing House Department shall clear for

the member banks of its district checlcs and drafts drawn
upon




zi\r other member bank of the same district except such

905

906
506 - d.

_ U -

as are drawn by or endorsed by banks which are not members

of

the Federal Reserve System.
(2)

The total of items received from a member bank

shall be credited to 3uch member on the credit aide of the
Clearing

House balance sheet.
The total of items received against a member shall be

debited to such member on the debit side of the Clearing House
balance sheet.
Resultant balances between “Items received" and "Items
sent" fren and to a member bank will be settled from each de.y*s
settlement sheet in the following manner;
(a)

All items received through the Clearing House on

a given member will be forwarded immediately to said member,
properly listed and totaled, which list shall be made in dupli­
cate and shall show from whom received.

The duplicate list shall

be a part of the Clearing House records.
(b)

The Clearing House shall forward to each member

interested in the day's clearings a slip showing

total of items

received from thafc member, total of items sent to that member, and
the resultant credit or debit balance due to or from that member.
(c)

The Clearing House shall prepare and send to each

*
member receiving a debit balancd in the day's clearings a settle­
ment check for the amount of such debit balance, which check shall
be drawn against the reserve balance of such member in the Federal
Reserve Bank and shall be payable to the District Clearing House.




(d)

This check shall be immediately 3igned by the

907
-

5

-

5^6 - d-

proper officer of the member bank and returned to the Clearing
House to be apportioned among the creditor banks.

If the payment

of this settlement check would reduce the reserve account of the
member bank below the required amount, it shall be the bounden
duty of such member bank to accompany said settlement check with
a deposit of acceptable funds sufficient in amount to make good
the required reserve.
(e)

The amount of the first settlement checks received

from debtor banks shall be apportioned to the bank receiving the
largest credit balance in the clearings of that day, then to the
second largest, and so on down, each creditor bank receiving credit
in its reserve account for its credit balance as soon as settlement
checks sufficient in amount have been received and paid by the
Federal Reserve Bank.
(f)

Clearings 3hall be made on each business day, and

neither debit nor credit balances may become cumulative, but each
day's clearings must be settled separately.
(g)

Advices of all debit balances amounting to twenty-

five thousand dollars ($2 5 ,000) and over will be telegraphed to
the owing bank.
(h)

When, in order to meet it3 settlement check only,

it becomes necessary for a debtor bank to ship currency to the
Clearing House, said debtor bank shall be entitled to and receive
the actual minimum cost of transportation from its office to the
Federal Reserve Bank of such currency actually shipped, providing
advice of such cost accompanies the settlement check.




Such cost

SOS
_ 6 -

5S6 - d.

shall he credited to the* reserve account of the shipping member and
shall be proportionately charged to the reserve accounts of all mem­
bers clearing items on the shipping member on that day.
(i)

Debtor banks., in order to prepare their reserve ac­

counts to meet their settlement checks, may make remittances in.
New York, Chicago ar St. Louis exchange at the rate promulgated by
the Federal Reserve Bank for such exchange.
(j)

Settlement checks must be signed and returned to the

District Clearing House on the same day they are received by the
debtor bank.
(k)

In the event a member bank receiving a debit balance

in the District Clearing House fails to pay such debit balance promptly,
or fails to provide funds in its reserve account with the Federal Re­
serve Bank to meet its Clearing House settlement checks, or sus­
pends payment and is placed in the hands of a receiver, or otherwise
becomes unable to meet its obligations on demand, or is otherwise
insolvent, then the Federal Reserve Bank shall proceed as follows:
The amount of all items on such defaulting bank, which
are in the process of collection or have been sent to such drawee
or defaulting bank and for which payment has not been received by
the District Clearing House, shall be credited to the District
%

Clearing House, and the amount oi each item included in such credit
shall be charged to the reserve account of the member bank endorsing
said item to the District Clearing House Department*

(3)

Member banks may, if preferred, send their items to

any other member bank situated in the prevailing direction such items



909
- 7 -

would take m
may then* m

586 - d

their natural course of collection* and items so sent
turn, be sent to the District Clearing House Department

of tne Federal Reserve Ban!* but m
Bank receive m

no case m i l the Federal Reserve

its Clearing House Department items bearing the en­

dorsees Tt of more tnan two member banks.
(lj>)

Unpaid items received from the Clearing Hou©e shall

be returned direct by the drawee bank to the bank endorsing same to
the District Clearing House* and a debit ticket for the amount shall
be cleared on such endorser through the Clearing House* carbon dupli­
cate of such debit ticket being attached to the returned unpaid items.
These tickets will be m

certificate form and may become a part or

all of the remittance to the Federal Reserve Bank to cover a Clear­
ing House debit

(5) A

slip giving the name of the sending bank and

directing wire advice of non-payment must be attached to each item
of $1*QG0 or over at the time it is sent to the Clearing House De­
partment* which instructions must be followed by the drawee baztfc.
(6)

All items of over ten dollars ($10 ) must be sent

subject to protest if not paid.

(7)

The expense of maintenance ana operation of the

District Clearing House Department shall be borne by the member
banks by paying* on the first of each month, two cents for each
item cleared during the preceding month until it io determined by
experience what is the actual cost per item.

When this has been

determined 3uch actual cost shall be paid




(g)

The plan shall be promulgated by tne Federal Reserve

910
- S_

586 - d.

Board and shall be mandatory under the provisions of Section 16
of the Federal Reserve
(9)

Act.

Such general rules and aodifications of rules as

may be necessary m

the operation of the plan may be promulgated

by the Federal Reserve Board from time to time

V

3/20/16.




911
-586-f-

SUPPLEMENTAL TO PLAN NO* 5 SUBMITTED
BY MR. LYNN P. TALLEY,CASHIER OF FEDERAL RE­
SERVE BANK OF DALLAS.
0 O0

The fundamental principles upon which any clearing plan
which might be adopted must be based ;
First.
That the face of a check and the back.of a check
are entirely different propositions. Granting that a check is
payable at the counter of the drawee bank and that it is not
incumbent upon the drawee bank to transport the funds to the point
where the holder resideSiat an expense to the payer.
The holder
of a.check at a point different from the place of payment receives
the check for value and determines its v^lue at the time the check
is received and it is then incumbent upon him, either with or with­
out previous knowledge of conditions, to convert the check into
funds that he c m use.
Second. That the interchange of items between banks under
present methods perhaps increases the float two or three fold.
Briefly, because a bank concentrates its items with various other
banks of its own selection and the receiving bank must, of course,
stand the burden of float in conversion. A large proportion of
these checks received must be collected by sending them to banks
which will, send the last endorser a remittance drawn on still
another bank, perhaps in another city, with which it concentrates
its items for balances through its own choice. There is then a
float created in collecting returns which have been sent in for
original items.
Third. That this choice of correspondents is largely a
matter of individual right and need not be necessarily disturbed by
breaking off relations of years standing by being compelled to
collect miscellaneous items through the Federal Reserve Bank.
Therefore, the plan provides that a member bank
may sefad its items to another member bank which may, in turn, d e ­
posit them with the Federal Reserve Bank for credit in the Dis­
trict Clearing House, provided such items bear no more than two
member banks' endorsements,including its own, and the prevailing
direction of collection which the item would naturally take is
not violated.
You can readily see that this would permit
the country banks to continue to send their items to city banks
which would have facilities available for collecting them through
the Federal Reserve Bank.




~2-

Fourth.
To minimize the float referred to in (1st) by the
system of offset under the clearing principles; that is to say,
the float would be reduced to collecting the difference between
itei$s sent and received at the District Clearing House, which I
venture to Say 'would be somewhere in the neighborhood of 20 to 25/1
cf the total volume cleared*
In addition there would be a float
equal to thjg transit time between the location of the member bank
and tne Feoer^l Reserve Bunk, which would be equitably distribu­
ted between the member banks and involve only their own itemf*
This float, however, could be appreciably* reduced by member banks
sending item? received in volume on any one point direct to the
urawee member banks at that point and sending us a copy of the
letter*
Fifth.
Exchange charges have not been taken into con­
sideration in the revised plan submitted in view of the clear
intent of the Act to abolish exchange charges to the point of
only actual expense involved in the transportation of funds.
Since, technically, exchange charges axe based on shipments
of the actual amount of currency representing the difference
in the balance of trade, the cost, under the plan proposed,
would be reduced to a final minimum as remittance would in­
volve the settlement of only the difference between items sent
and received.
You can see, therefore, that I have sought
to reconcile conditions- existing heretofore with the new order
of things to the extent that I believe the plan fairly over­
comes the objection of the member banks in giving up their ex­
change charges by providing them with the most economical facili'
ties at the Federal Reserve Bank for the collection cx items
rather than issuing a mandate that member banks must clear
their items through Federal Reserve Banks*
Sixth*
It is very natural that any plan suggested
would emanate from some large Reserve or Central Reserve city
institution.;- by reason of its wide experience in receiving and
collecting miscellaneous items or by suggestion of one who
had had broad experience along this line in these larger insti­
tutions.

3/a/i6




913
5S6 - e.
P L A IT

P 0 . 6^

A PLAN FOB CHECK COLLECTIONS BY FEDERAL RESERVE BANKS.
(Submitted by Mr. Ray M- Gidney of the Staff
of the Federal Reserve Board)

Preliminary Statement

In the consideration by those connected with the Federal
Reserve Banks of the problems connected with the establishment of
check collection service by Federal Reserve Banks, there has been
substantial agreement that the greatest difficulty to be met is
that involved in carrying "float" represented by checks in process
of collection, which might have to be assumed by the Federal Re­
serve Banks.

"Float" in this sense may be defined as the exten-

tion of credit which takes place when credit is given for a check
in advance of its actual payment by the bank upon which it is drawn.
Its magnitude is measured by the amount of checks in transit at any
one time, and the "float" for a single item is its amount multiplied
by the number of days which must elapse before it i§ collected.
The question of who should carry the "float" must be con­
sidered and dealt with before any plan of check collection can safely
be put in operation.

Three parties may be recognized in this trans­

action; the payer of the check, the payee, and the agency through
which the payee attempts -to collect the item.
sented by the bank

The payer is repre­

upon which the check is drawn, the payee by the

bank which receives the check on deposit in first instance, and the
collecting agency by the bank which is used as an intermediary in
the collection of the check, in the present situation the Federal
Reserve Bank.




One of these parties must carry the float.

The

general practice now is that parties receiving the check in first
instance carry the float.

A firm or individual receiving a check

and depositing it in a bank is required to keep a balance which will
justify the bank in handling and collecting the check , and as a rule
is not allowed to withdraw the funds in advance of collection by the
bank.

The bank which thus receives an out of town check must in

turn carry the "float" whether it sends the check direct to the pay­
ing bank or sends it through.a collecting bank.
it is not permitted

In the first case

to charge the bank upon which the check is

drawn until the latter has received the check and given authority
for the charge.

Even if the check is collected through such an
* J
institution as the Boston Country Clearing House, the bank does not

get its money until two days have elapsed.

If the bank attempts

to collect the check through another bank it does not receive real
credit until the check is collected, although it gets an immediate
credit in appearance, but must keep a "reasonable" minimum balance
on deposit with the correspondent and rhust not draw against items
until they are collected.
The Executive Committee of the Conference of Governors
has recommended that a Federal Reserve Bank, if it is to act as a
collecting agent for it3 member banks, shall not carry the float.
The reasons urged are that to the extent that a Reserve Bank does
so, it impairs its power to meet the requirements of its members for re
discount facilities, and that the amount of the aggregate float of
the country is so large as to absorb
power of the Federal Reserve Banks.




almost the Entire loaning
The Governors also point out

5S6 - e

-3-

the difficulties to be encountered if it is sought to have the
paying banks carry the burden.

Member banks upon which checks

are handled are required to maintain excess reserves equal to the
amount of checks in transit to them from the Federal Reserve Bank
during two or more days' business;

they have no very exact means

of estimating the amount of checks which are thus in transit and
overdrafts are likely to occur with possibility of loss to the.
Federal Reserve Bank.

The Governors do not,however,, except in

connection with their proposed plan for deferred debit and deferred
credit, appear to consider the possibility of leaving the burden ox
carrying the float where it is;

namely with the bank which has re­

ceived a check on deposit in first instance and therefore has it to
collect as best it can.
If a method can be found whereby the Federal Reserve Banks
can successfully perform the check collection functions clearly con­
templated by the Federal Reserve Act, without carrying the float in­
volved, it is obvious that they should not carry the said float. There
is doubt as tc whether they are able to assume the burden of the
float without seriously impairing their loaning power and even if
they are able to do so they should not grant the credit extension
involved without proper remuneration.

They are corporations deal­

ing in credit and should not give ax,-ay in any form the goods which
it is their business to sell.

At the same time it should not be

the problem of the Ftoderal Reserve Banks to determine whether the
float shall be borne by the banks upon which checks are drawn or
by the banks which have received the checks upon deposit.




This is

916
-4-

586 - ©•

a matter of general business arrangement with which the Federal Re­
serve Banks are not directly concerned.

The purposes of the Act

will be carried out and the usefulness of the Federal Reserve Banks
greatly increased if they are able to provide prompt collection at
par of checks drawn on member banks and prompt collection, with a
moderate exchange charge of checks drawn on non-member banks in
cities where there are also member banks*

To this end the following

plan, combining features of both the immediate credit and debit and
the deferred credit and debit plans, and based upon the assumption
that member banks can be required to remit promptly at par for checks
on themselves sent to them by the Federal Reserve Banks, is submitted:

Details of Proposed Plan.
Each member bank will carry

‘'clearings account1

.1

the

books of its Federal Reserve Bank, in addition to its reserve account.
All deposits of checks drawn on member banks will be credited to the
depositing banks in their clearings accounts and charged to the
member banks upon which the checks are drawn, in their clearings
accounts.

The depositing banks will be permitted to draw against

the balances resulting from deposits of checks on other member banks
only after a suitable time has elapsed to permit collection of offset
of the items.

The length of time which it will be necessary to

delay such withdrawals will vary in the different districts, reaching,
a maximum in the San Francisco District, and can be finally determined
only after some months of experience in the operation of the planTo start with sufficient time should be allowed for the checks to
reach the paying banks and a remittance in payment to be received in



»

-5-

return.

586

— 9•

The immediate result of this operation will be that the

depositing banks will have credit balances and the paying banks
overdraft balances, and as the overdraft balances will just off­
set the credit balances „

it v/ill not be necessary to maintain

a reserve against the latter.

In the case of a district in which

practically all banking points can be reached by mail in one day
the banks which acquire credit balances m i l be permitted to with­
draw any portion of such balances representing deposits made two
days or more previously .

In this way, even assuming that the pay­

ing banks have not themselves made deposits of checks on Other member
banks and thus become creditors as well as debtors, they will re­
mit funds in time to.meet the withdrawals permitted so that over­
draft accounts will not exceed the credit balance accounts.
If, however, the banks which we have been considering as
the paying banks are constantly mailing checks to the Federal Reserve
Bank for deposit, their remittances will arrive in such manner as
to offset the checks against them and thus reduce the time of float
by one-half.

To what extent this will occur can of course only be

determined from the actual operations of the clearings system, but
it is certain that the offset principle will be operative to a very
large extent as operations become general.

Through this reduction

in the time of float the average time which must elapse before a
member bank can draw on a deposit will be proportionately shortened.
This matter of offset is of greatest importance and in it lies the
superiority of the plan which is given here over the plan under which
the Boston Country Clearing House is now operating and over the plan



_6

5S6 - e.

of deferred credit and deferred debit proposed by the Governors of
the Federal Reserve Banks.

It is much as though the New England

Country Banks instead of awaiting receipt of their checks from the
Boston Country Clearing House and then drawing a draft on a Boston
correspondent bank in favor of the Clearing House

for the amount

of the remittance, were to send daily to the clearing house all
checks on Boston which they might receive in the course of business
instead of sending them to Boston correspondents against whom they
later issue a draft in payment.for the checks received through the
clearing house.

It is clear that if this were done the effect

would be to shorten by one-half

time required for the collection

of checks sent out by the Boston Country Clearing House.
The following example will illustrate the ..operation

of

offset, the first column showing a case in which offset is effective
and the second column a case where it does not operate and in which,
as with the Boston Country Clearing House and the Governors' plan
of deferred credit and debit, a return remittance must be awaited.
A member bank in Philadelphia deposits vsith the Federal
Reserve Bank of Philadelphia on a certain day for credit in its
clearings account, checks.aggregating $?5.*000 on a member bank in
Harrisburg, Pa.
action:




The following will be the course of the trans­

919
5 S6

-7-

With offset*
On the same day the Harrisburg member
bank mails to the Federal Reserve Bank
of Philadelphia for deposit in its
clearings account, checks on the Phila­
delphia member bank amounting to
$25,000.00. Entries will be as follows:
Day of remittance:

- a.

Without offset.
'On the following day and upon re­
ceipt of the remittance the Harris­
burg member bank issues and forwards
to the Federal Reserve Bank of Phila­
delphia, its draft on the Philadelphia
member bank, for $25,000-00. Entries
will be as follows:
Dav of remittance:

Philadelphia member bank charges
Federal Reserve Bank of Philadelphia,
$2 5 ,0 0 0 .

Philadelphia member bank-charges
Federal Reserve Bank of Philadelphia
$2 5 ,0 0 0 .

Federal Reserve Bank of Philadelphia
credits Philadelphia member bank,
$2 5 ,0 0 0 .

Federal Reserve Bank, Philadelphia
credits Philadelphia member bank,
$2 5 ,0 0 0 .

Federal Reserve Bank of Philadelphia
. Charges Harrisburg member bank $25,000

Federal Reserve Bank of Phila.
charges Harrisburg member bank
$2 5 ,0 0 0 .

Harrisburg member bank charges Federal
Reserve Bank of Philadelphia $25,000.
First dav following:
Harrisburg member bank receives
remittance from Federal Reserve Bank
and credits account of the latter
$2 5 ,0 0 0 .

First dav following:
Harrisburg member bank receives
remittance from Federal Reserve
Bank and sends in return draft on
Philadelphia member bank $25,000.

Federal Reserve Bank receives re­
mittance from the Harrisburg member
bank and credits account of the
latter,$2 5 ,0 0 0 .
Federal Reserve Bank charges Phila­
delphia member bank $2 5 , 0 0 0 and
delivers by messenger the drafts,
etc., received from the Harrisbutg
member bank.
Philadelphia member bank credits
Federal Reserve Bank $25,000 for
items thus received.
Transaction closed.




■,

Co1le ct ion example, continued •

_____________ Without offset.
Second dav following:
Federal Reserve Bank of Phila­
delphia receives remittance from
Harrisburg member bank and credits
account of the latter, $25 >000 .
Federal Reserve Bank charges Phil
member bank
and delivers
messenger the? draft received from
the Harrisburg member bank.
Philadelphia member bank credits
Federal Reserve Bank $25>000 for
draft thus received.
Transaction closed.

Reserve status of clearings accounts.
Such portion of the balance of each member bank in its clear­
ings account es is available for withdrawal may be counted as reserve,
for it can at any time be withdrawn or transferred to the regular reserve
account, but such portion as is not available for withdrawal

should not

be so counted as it represents uncollected items.

Neither should the

Federal Reserve Bank to required to hold reserve

against the portion of

the clearings accounts representing uncollected items,but it should be
required to hold reserve against that portion which represents items
which have been collected and are therefore subject to withdrawal at
any time.
It will be objected by seme that the credit given to member
banks which deposit items in the clearings account will not be "immediate
credit".

This is true, but the credit given is certain to be more

nearly immediate than would be give?i under the deferred debit and credit
plan proposed by the Governors, which Joes not contemplate offset, of




5S6 - e.

- s -

of items but apparently treats each remittance as a unit
for separately*

to be settled

It will also be more nearly "immediate credit" than

is given to banks which collect through the Boston Country Clearing
House and than that given by check collecting banks which do not per­
mit withdrawals until the item is collected and which dp not _uti1ize
the practice of offsetting; items*

It would be well to provide that

the credit may be made immediate

in fact as well as in name by per­

mitting a member bank which wishes to withdraw a balance created by
deposit of items on other member banks or to count such balance as

reserve, before the items have been collected or offset, to do so by
paying interest thereon at the rate in force for discount of short­
term pa,per*

In such case the Federal Reserve Bank would assume float

to the amount involved but would be properly reimbursed for so doing*
Prompt remittances at par are essential to the successful
operation of this plan*

Where a bank does not remit' promptly an

interest charge at the rate current for short-term paper should be
assessed against it for the time of such withholding on the amount
of items upon which prompt remittance is withheld*

Chocks on non-member banks*
It is quite generally agreed that checks on non-member banks
must be handled by the Federal Reserve Banks in order to make the check
collection system completely successful*

This step should be taken at

once in connection with the £ian here submitted and with the cooperation




_ 10 -

of member 'banks.

5^6 - . e.

Arrangements can doubtless be entered into with

most member banks under which they will handle checks on non-member
banks in their respective cities and towns at a charge of five or
ten centa per hundred dollars, such charge to be computed on the
total amount of such checks sdnt in a remittance letter.

Checks

on non-member batiks in cities where there are also member banks, may
then be received by the Federal Reserve Banks just as checks on member
banks will be, but subject to a collection charge of five or ten cents
per hundred dollars.

This plan will doubtless prove sufficiently

remunerative to the member banks handling the checks and will result
in many State banks entering the system.

The facilities which the

Federal Reserve Banks will thus be able to offer will greatly exceed
those offered by any country clearing house.

Inter-district clearings.
Inter-district clearings should be undertaken very soon after
the inauguration of the plan herein outlined.

Checks and drafts on

member banks in other Federal Reserve Districts should be taken on the
basis of the transit time between the Federal Reserve Cities plus the
average transit time between the Federal Reserve Bank of the paying
district and the member banks upon whom the checks are drawn.

Drafts

on Federal Reserve Banks should be credited immediately at par. This
may appear to be a disregard of the problem of float, but when it is
considered that each Federal Reserve Bank has a heavy deposit in the
Gold Settlement Fund and that the acquisition by one Federal Reserve
Bank of a draft on another Federal Reserve Bank gives control of a




933
n

«,

5^6

©*

corresponding portion of the Gold Settlement Fund, it is apparent that
drafts should he regarded as cash by all Federal Reserve Banks.

In

order to -make this as apparent as possible daily settlements should be
at once adopted on the basis suggested in the report of the Preliminary
Organization Committee and more lately by Mr. W* E. Cadwallader. The
credit
effect of making such drafts acceptable for ipmediate/at par by all
Federal Reserve Banks will be to give them currency and make them the
preferred form of remittance within the United States.

Thio will of

course be of advantage to the Federal Reserve Banks in many ways, one
of which will be that there will at all times be a large credit float
in the form of drafts outstanding on Federal Reserve Bankj, which will
be more than sufficient to offset any possible burden of float which
might fall upon the Federal Reserve Banks by reason of cashing or
crediting immediately drafts drawn on each other.

The amount of

such drafts in transit from the drawing banks and not yet presented
to a Federal Reserve Bank would be always greater than the amount in
transit between the Federal Reserve Banks for the reason that the
time of such float would be at most the mailing time between the
Federal Reserve Cities concerned and would be further shortened by
offset, while the time required for drafts to reach Federal Reserve
Banks other than that upon which drawn v\rould be at least the mailing
time between the districts involved and usually longer.

3/21/16.




924
5bo -f
PLAN

N 0 . I

MEMORANDUM AND SUGGESTIONS ON THE SUBJECT OF BANK RESERVES
AND THEIR RELATION TO THE SUBJECT OF THE
CLEARING AND COLLECTION OF CHECKS
(Submitted by Mr. Frederic H. Curtiss, of Boston)
Under date of March 2S, 19It *

The reserve of a "bank is that percentage of its deposits that
it should carry uninvested to meet the demands of its depositors.
There axe tiro kinds of reserve; nornan reserve, and excess or in­
surance reserve.

The normal reserve of a bank should be based on

the maximum demand of its depositors in normal times.

An excess or

insurance reserve is the reserve set aside tc meet abnormal or un­
usual demands; that is a sort of insurance fund.
Reserves should bo real; that is, cash in a bank’s own vaults
or a deposit in a Federal Reserve Bank.

The character of the de­

posits of a bank varies the percentage of reserve needed.

The

character of a. bank’s deposits are as follows:
Savings accounts; - require small reserve,
Individual or personal accounts; - require a higher reserve than
the preceding,
Commercial accounts; - require a higher reserve than the preceding
Bank accounts; »
”
"
!>
”
11
■ ’’
There are two kinds of normal reserve:
1.
2.

To meet ordinary counter demands,
Reserves tc be carried at an exchange center to furnish
exchange to its depositors, either in the form of checks
drawn by the bank on that center, or by exchange created
by customers sending their own checks afar.




As icr the reserve for counter purposes,, a bank can gauge its
own counter demands and can be trusted to keep cash on hand to meet
them.
The reserve to be kept elsewhere must be proportionate to its
exchange transactions; that is, either the demand of its customers
for checks on an exchange center (e.g. Federal Reserve city) to be
used in paying bills elsewhere, or exchange created by its customers
through paying bills elsewhere with their own checks.

This outside

reserve, therefore, pertains chiefly to two kinds of bank deposits;
viz., commercial and bank.

The excess reserve, that is, the reserve

for insurance purposes should be held in a Federal Reserve Bank and
should be based on all the demand deposits of a bank and the per­
centage, therefore, should be based somewhat upon the character of
the city or town in which the bank is located.
In connection with the composite plan of clearing (i.e. Plan 4)
the following problems arise.
1.
2.
3.
4.
1.

The figuring of reserves,
Those arising from deferred credit and debit,
Charges for service and exchange,
The handling of checks on non-member banks.

The figurine of reserve.
Although this plan by direct routing of checks originating

^putbic^a of the district, will materially reduce the float on those
bhe country bank will never be satisfied to maintain its re­
serve on a deferred basis plan, and besides, the bookkeeping called
for is too intricate for the country bank; hence we roust make up out




926
-586-f-

- 3 our minds to allow country bank3 to figure their reserve as they do
now, from their o-wn books.

By so doing, the reserve bank will re­

ceive additional balances from the outstanding checks drawn by the
country bank on it, and by time items which it has collected and
\

credited, and which the country bank will not debit on its books
until advice is received.

It will be the duty of the Comptroller

of the Currency to see that every member bank maintains its re­
serves by its own books up to the ‘
requirements of the legal min­
imum*
On the other hand, the member bank, both in the Federal
Reserve city and elsewhere in the district, must carry its ''excess?
legal reserve with the Federal Reserve Bank of its district, this
reserve account being figured from the books of the Federal Reserve
Bank, the member banks being obliged each week to send in a state­
ment of their net liabilities so that each Federal Reserve Bank can
see that the proportion of reserve is maintained.

In other words,

this is, as we have said, in the nature of an insurance fund and
this reserve the Federal Reserve Bank must 3ee is maintained.

2.

Those arising from deferred credit
and debit.
In the case of immediate credit and immediate debit: we

are troubled with:




a.
b.

The question of overdrafts,
The question of float.

In this connection it is to be noted that the overdraft
and float are analogous when taken as a whole and not as they per­
tain to the individual bank.

On the other hand deferred debits and

credits involve complications distasteful to small banks.
It has been customary,, under the note circulating system
to require a redemption fund at some central point to take care of
notes circulating throughout the country, as, for instance, under
the National Bank Act the 5fo redemption fund in Washington.

The

circulating of bank notes is similar to that of bank checks except
the latter circulate faster, and, therefore, requirs a larger re­
demption fund.
If w 3 f'an cause each bank outside of a reserve city to
maintain a redemption fund proportionate to what is ascertained to
be its normal clearings, we shall have solved the problem.
of these funds will readily take care of the float.
plish our purpose if we allow member banks

The total

We can accom­

interest on excess

balances> a rat? lower than the going rate allowed on bank balances,
and which would, therefore, induce the country banks to transfer
their surplus balances to the city banks, at the same,'time charging
2$ interest on current overdrafts, current overdrafts being for the
day's business, and charging one-half of cno per cent above the cur­
rent bank rate or. overdrafts that a bank has had time to cover. This
excess reserve which serves as a x-edemption fund, will only pertain
to banks outside the Federal Reserve cities, and would be for clear-




i-

c;$7„
ing purposes, v.- 11.. banks ir- the Federal Reserve cities would be
enabled to make good their clearings by cash in their own vault?
or by buying ana selling exchange, or by rediscounts with the Fed­
eral Reserve Bank.

3.

Charges for service and exchange.
It is proposed that Federal Reserve Banks, shall handle all

member checks at par, each member bank being charged a rate per item
based on the cost of the collection department of each Federal Reserve
Bank, but on some general rule to be promulgated by the Federal Reserve
Board.

Under the Federal Reserve System the cost of exchange is re­

duced to a minimum; members of a Federal Reserve Bank are able to
create exchange by rediscounts with its own Federal Reserve Bank and
such exchange will to current throughout the United States.

In this

connection it may be necessary to differentiate between drafts on
a Federal Reserve Bank and exchange transactions.

That certain small

country banks are living off the exchange charged on their own checks
does not appear fair.

An exchange charge, if one is made should be

t

assessed against the drawer; nor maker of the check and not the receiver
and depositor of a check.

Furthermore, it should be against public

policy to allow a collection charge to be made by a member bank against
its own checks,

4.

The handling of checks drawn on
non-member banks.
There is no reason why the Federal Reserve Banks should not




agree at the outset to accept non-member checks on all Federal Re­
serve cities on terms similar to checks on member banks in Federal
Reserve cities, for those checks can be presented at the counter.
Checks within the district on non-member banks remitting at par to
the Federal Reserve Bank should be handled on a deferred basis sim­
ilarly to member checks on other districts and here again a member
bank might send those checks to the Federal Reserve Bank of its own
district,,giving immediate credit on its own books and count then
as reserve, the Federal Reserve Bank handling this item similarly
to items on other districts.
Checks on non-member banks in other districts, .outside of
Federal Reserve cities should be forwarded through the Federal Re­
serve Bank of the District of origin only as collection itetw for
deferred credit.
In connection with the handling of non-member checks within
the district on certain specifiedypoints, arrangements might be made,
•where the trend of exchange warrants it, that non-member checks might
be cleared through specified member banks; that is, charged to the
account of a member bank and forwarded for presentation and collec­
tion by the member bank.




B00KKEEPIH3 UDDER THE COMPOSITE P L M .

(PlInT)
1. Record books of member banks,
2. Record books of Federal Reserve Banks.
It is proposed that each member bank shall keep only one

account on its ‘books with the Federal Reserve Bank, as it does now
with it3 city correspondent, debiting at once to that account all
cash items that it sends for collection whether to its own or to
other Federal Reserve Banks, and debiting time items only when ad­
vised of their payment by its Federal Reserve Bank.

The member

bank will figure its reserves, therefore, from its own books on
the basis of this account.
On the other hand, the Federal Reserve Bank shaj.1 main­
tain two accounts with each member bank, the reserve account and
the exchange redemption account.

The reserve account will be

comparatively inactive and will be adjusted either weekly or monthly
as a member bank's net deposits increase or decrease, the account
to be based on the average for the preceding period.
The exchange or redemption account will be maintained
only by banks outside of Federal Reserve cities, (banks in the Fed­
eral Reserve cities being able to redeem or settle for their checks
by cash from their own vaults or through the sale of exchange or the
making of rediscounts.)

This exchange or redemption account will be

the active account which the member bank outside of the reserve city
will draw against; to which cash items within the district will be
credited upon receipt; and cash items drawn on other districts and
time items will be credited when paid.

This account will be credited

with interest on balances and charged interest on overdrafts irre­
spective of the reserve account.
be sent daily to the member bank.




A statement of this account will

931
-53 6-;..

S U P P L E M E N T

ARY

An arrangement might be made with non-member banks along
the following linos:
1.

Non-ipember banks might be permitted to have their checks

redeemed or settled for by a member bank in a Federal Reserve
city, on a plan similar to that of member banks ir. Federal
Reserve cities.
2.

We might allow such non-member banks to print some

statement or announcement that their checks were handled
with Federal Reserve Banks without charge for exchange.
3.

We might restrict member banks ir. the Federal Reserve

cities

.handling of non-member bank checks through the

Federal Reserve Banks only to the check of banks which have
agreed to this redemption plain,, endorsing or stamping on
the checks some device stating that fact.




932
5 S6

PLAN

NO.

- g

8

SUGGESTIONS SUBMITTED BY THE GOVERNOR OF THE FEDERAL RESERVE
BANK OF ATLANTA, UNDER DATE OF MARCH 2k, 1916,
FOR THE CLEARING AND COLLECTION OF CHECKS-

FIRST:
I would suggest that the officers of the Federal. Reserve Banks
he authorized to inaugurate a clearing house, which I believe they have
a right to do on the approval of your Board, as set forth in Section l6
of the Federal Reserve Act.

I also note that the cost of operating a

clearing house under these conditions, can be charged into expenses
against the banks using the clearing house.

SECOND:
I suggest that credits be deferred for two days within each
of the Federal Reserve districts for checks collectible in the district
and deposited by the member banks; and that from four to six days be
allowed as deferred payment for chocks payable in the other Federal Re­
serve Bank districts, according to distance.

THIRD:
That an Inter-District system be created between the Federal
Reserve Banks similar to the clearings now taking place in the gold fund.

FOURTH:
That the Federal Reserve Bank be permitted to receive on the
endorsement of the member banks, checks on State banks, private banks,
savings banks and trust companies, as ,/ell as on their member banks,
which I think is covered by open market transactions, as set forth in
Section lU.




933

■' L

-

2

536

-

FIFTH:
That the Federal Reserve Board establish a zone system as to
the allowance for exchanges, and for the experimental stage, would
suggest the following:
On checks drawn on hanks in towns or cities up to 3,000 in­
habitants, according to the last census of the United States, and to
be changed at each census period, that the bank to viiom these checks
are sent for collection be permitted to charge l/S of 1$ for the re­
mittance of such items.

(My conclusions for this arbitrary stand, is

that the National Bank Act permits banks to be organized in places of
this size with a capital of $2 5 ,0 0 0 , and this size bank is dependent
largely upon collection charges on checks to sustain their expense
account.)* m
On all towns or cities, subject to the same rule of the
census, of 3,000 up to 10,000 inhabitants, the banks be permitted to
charge l/lO of 1^ for remittances and collections.
That banks in all towns or cities of 10,000 up to 25,000
inhabitants be permitted te charge

50#

per $1,000 on all collections a

and remittances.
That all towns or cities above 25,000 inhabitants collect
checks at par.
That the Reserve Bank be authorized to charge the depositing
bank the cost of exchange as above referred.
That in the event no member bank is located in a town or city,
then the Reserve Bank may choose a State bank, trust company, savings
bank or private bank, located in that town, to whom it may send the items




- g.

934
- 3 -

586 - g.

drawn on that town,, provided said "bank will agree to collect at the
said rate.

In the event no bank not a member, be willing to collect

at these rates, then the postmaster in that town be authorised to col­
lect these checks, deducting as remuneration the same fee as would be
allowed to the member bank thus located.

SIXTH:
That the overhead cost of collecting these items be deter■J
mined by two units;

one unit to be the aggregation of the total face

value of the items handled, and the other unit to be for the number of
items handled.

An equalization between these two should determine the

charges .to be made for this service.

SEVENTH: *
That the Federal Reserve Bank should determine when the item
had reached its maturity of deferred payment, and immediately credit
the same into the reserve account of the member bank thus producing
the credit, and correspondingly charge transit account with the same.

EIGHTH:
That the Federal Reserve Bank shall not be responsible for the
loss arising from any item, and shall not be held responsible until it
has received ultimate final payment for said item.

U/6/16




935
536 - h.

PLA N

N 0 .

.2

PLAN SUBMITTED BY MR. GEORGE 0. BQRDWELL, CASHIER OF THE
FEDERAL RESERVE BANK OF SAN FRANCISCO, UNDER DATE
OF MARCH 2U, 1$ l6,
for the
CLEARING AND COLLECTION OF CHECKS, WITH IMMEDIATE
CREDIT AND DEFERRED DEBIT PROTECTED BY
INTEREST CHARGE ON FLOAT.

Federal Reserve Bank to receive, for immediate credit and deferred deb.it checks and drafts upon any member bank or non-member bank
(Federal Reserve Bank carries member banks’ Transit
Account but is protected by deposit of optional
reserves)
Interest charge at higher than 30-day discount rate to be made
to depositing banks on amount of outstanding items minus
excess of reserve deposits over required reserve deposits
(Member bank carrying with Federal Reserve Bank
excess deposits equal to full amount of float
pays no interest)
Time schedule for interest charge to cover average time by States,
"San Francisco, immediate, California three days, Oregon
five days, . . . .

etc........

(Great advantage to San Francisco Banks)
Exchange paid by Federal Reserve Bank to be debited back to
depositing banks.
Transportation charges to be paid by Federal Reserve Bank on
shipments to cover excess collections forwarded by Federal
Reserve Bank to banks which remit at par.
Service charge
on interdistrict cash items

say £0^ per $1,000

on intradistrict. .c&sh items

rate based on actual cost in-




936
_ 2 -

5^6 - h.

eluding transportation charges,
not retroactive.
say \§<? per item

on collections - - —

(Reduction of cost to member banks in operation of
their Transit departments should largely offset
total service charges)
Transfer drafts and special items

received for deferred credit.

The plan suggested will:
make it advantageous for member banks now collecting own out-of-town
items to deposit them with Federal Reserve Bank

(see illustration)

make it practicable for all member banks to route items through
Federal Reserve Bank
permit banks to control their balances
give incentive to carry excess balances with Federal Reserve Bank,
at least to the extent of optional reserves which in amount ap­
proximate estimated float
protect Federal Reserve Bank from extensive involuntary loans
through check collections.

ILLUSTRATION:
(applicable November 191? to member banks now collecting
own items)
A member bank now handles $'4,030,000 cut-of-town items in one month;
California $3*000,000;

Oregon $500,000;

Washington $450,000;

outstanding 3.» 5 and 7 days respectively
Average items outstanding - - —
- - Reserve requirements now reduced by
deducting float from-bank deposits - - - - $75,000
Required reserve deposits - - - - -




$505*000

600,000

- 3-

586 - h.

Optional reserve deposits - - - - - - - —
Reserve requirements to cover $LOO,O0O increase
in net bank deposits would be increased - - -

boo,ooo
6 0 ,0 0 0

Total unproductive funds, member bank collecting
own items - —

1 ,5 0 5 ,0 0 0

9 0 -day discount rate - - - - - - - —
- Rate of interest charge on collections---- 6 fp

WITH FEDERAL RESERVE BANK COLLECTING ALL ITEMS:
Unproductive funds reduced to —

—

- - - —

If only minimum balance maintained,
interest charge - - - —
- - - - —
If balance increased by deposit of
optional reserves
interest charge ~
■
—
- - —

—

1 ,0 6 0 , 0 0 0

-

-

- -

If additional deposit maintained of $105,000
interest charge - .—
- - - —
- - —
- unproductive funds - - - - - - - - —
- -

2,735

569

none

Gain in loanable funds through Federal Reserve Bank
collecting items - - - - - - - - - - - - - -

165*090
3U0,000

RESULTS:
Member bank, by routing items through Federal Reserve Bankj.
increases loanable funds $3 ^0 , 0 0 0
at same time, avoids interest charge of $2 ,1 6 6 by depositing
with Federal' Reserve Bank optional reserves otherwise unpro­
ductive,
at same time, avoids interest charge of $569 through excess
deposit of $1 0 5 ,0 0 0 to cover remaining items,
(this deposit only necessary when float exceeds optional reserve)
is encouraged by lower discount rate to borrow by rediscounting
rather than through failure to maintain latter deposit.




938
- u-

586 - h.

DEFINITION;
Plan I

"

w

"

"

*'

”

2

2a

3

3a

3b

U

Proposed by Federal Reserve
Agents
Optional

Proposed "by Governors
Mandatory

Deterred credit and deferred debit

Now partially operated in
District 12
Optional

Deferred credit and deferred debit

Proposed by Messrs.
Rowe & Davis
Mandatory

Immediate credit and immediate debit

Now partially operated in
District 10
Mandatory

Immediate credit and immediate debit

Now partially operated in
Districts
Optional

$

Composite of suggestions

Mandatory

"

"

*

5

$

7

Deferred credit and deferred debit
with option of immediate credit
and immediate debit.

Now partially operated in
District 11

Proposed by Ray H. Gidney
Mandatory

Proposed by Geo. 0. Bordwell

4/7/16




Immediate credit and immediate debit
Deferred credit and deferred debit
limited to one-way time for
points more than one day distant

Immediate offset for each bank’s
incoming and outgoing items with
deferred credit and deferred debife
for resultant balances

Deferred credit and deferred debit
with float pro-rated and loans
authorized at current discount
rate
Immediate credit and deferred debit
protected by interest charge.

-

5

-

5S6 - h,

ITEMS HANDLED:
1 proposes to handle a p o rtio n of items on member banks and a l l
on S ta te hanks;
2 , 3 a, U & 5 p rovid e fo r h a n d lin g item s on a l l member banks;
2a & 3b p rovide f o r h a n d lin g a p o rtio n of the member bank item s;
3

.’proposes to handle a l l member bank and some S ta te bank item s;
but to make d isc r im in a to ry charges a g a in s t S ta te bank checks>
6 proposes to handle a l l member bank and some S ta te bank item s;
7 proposes to handle a l l item s.

THE FLOAT:
1

2 & 2a

3,

3a & 3b

le av e s burden w ith d e p o sitin g banks* except when immediate
c r e d it and debit a v a ile d of;
leave

burden w ith d e p o sitin g banks;

attempt to pass burden to drawee banks;
a c tu a l r e s u lt s :
O ve rd ra fts and depleted b a lan ce s a t
Federal Reserve Banks;

1+ le a v e s burden w ith d e p o sitin g banks fo r one day item s and
w ith Federal Reserve Bank or drawee banks fo r retu rn
t r i p on more d is ta n t item s; "
5

d is t r ib u t e s burden in u n c e rta in and c o n sta n tly v a ry in g pro­
p o rtio n s between endorser banks, drawee banks and other
banks which are n e ith e r endorsers nor drawees;

6

attem pts tc p ro -ra te to d e p o sitin g and drawee banks with
perm it to withdraw p ro -ra te d average o u tsta n d in g funds
a t current d iscou nt ra te s;

7

p la c e s r e s p o n s ib ilit y d ire c t upon F e d e ral Reserve Bank but
o ffe r s d e p o sitin g banks e ffe c t iv e inducement to ca rry
excess d e n o sits to cover.

CONTROL OF BALANCES;
.1, 2, 2a & 7 perm it member bank3 to c o n tr o l t h e ir balances;
3; 3®1 & 3b do n o t g iv e member banks c o n tr o l of t h e ir balances;

k, $ & 6


http://fraser.stlouisfed.org/
r
Federal Reserve Bank of St. Louis

g iv e member banks o n ly p a r t i a l c o n tro l of t h e ir balances;

840
-

’
h

6

-

5 S6

- h

EXCHANGE CHARGES:

'i

on member bank:iw;less to discuss pending legal'decision or
checks :
legislation either requiring drawees to cover
at par or authorizing exchange debited back
to depositing banks1 accounts;
8n State bank
plans 3 and S propose flat rate to be paid all
checks :
drawee banks to debit of depositing banks’
accounts




plan 7 leaves open question of paying exchange
but provides for debit to depositing banks1
accounts for such exchange as may be paid-

941
586 - i

A

M E M O R A N D U M

TO THE GOVERNORS OF THE FEDERAL RESERVE BANKS
by F. A. Delano.
W ashington,. A p r il

7,

1916.

A ge n e ral statement of the reasons why the time has ccrae
fo r the F e d e ra l Reserve Board to put in to e ffe c t a check
c le a r in g system which, even i f not complete to s t a r t w ith
s h a l l be the foundation of a stru c tu re which may be com­
pleted w ith reasonable d isp a tch and which, w hile not re­
q u ir in g member banks to a v a i l themselves of the new f a c i l ­
i t i e s , w i l l g iv e the p r iv ile g e to every member bank th a t
w ishes to make use of them.
F IR S T :
I t i s very evident th at the F ederal Reserve Law, w hile not ab­
s o lu t e ly mandatory, or e n t ir e ly s p e c if ic in i t s requirem ents about
c le a r in g , c e r t a in ly contemplates th a t the Board s h a ll e s t a b lis h a
check c le a r in g and c o lle c t io n system, which s h a l l include i n i t s ad­
herents a l l member banks, and fu r n is h an e ffe c t iv e c o lle c t io n agency
fo r checks drawn on member banks in a l l d i s t r i c t s .
SECOND:
The s h i f t i n g of reserves from banks in reserve and c e n tr a l re­
serve c i t i e s to F ederal Reserve Banks would, i n e ffe c t , deprive many
banks in the country of o p p o rtu n itie s fo r check c le a r in g and c o lle c t io n
which they have h eretofore enjoyed.

The fram ers of the F e d e ra l Reserve

Act, h av in g t h i s in mind, saw th a t they must create a machinery to per­
form the fu n c tio n s which correspondent banks had p re v io u s ly performed
in retu rn f o r bank balances.




THIRD:
The criticism is made that, whereas, hanks in central reserve
and reserve cities have in the past carried the reserve balances of
their client banks, have paid interest on those balances, and rend­
ered important services in the matter of check collection and clear­
ing, and in other ways as well, it is strange that the Federal Re­
serve Banks, which pay no interest on reserve deposits, hesitate to
perform this service cn the score cf expense-

Hesitation to assume

clearing and check collection functions is the more strange because
of the fact that the strategic position of the Federal Reserve Banks
is such as to make it possible for them to handle this business at
a much lower cost than it can be handled under present conditions and
.with present methods.

The additional expense which such operations

will entail to the Federal Reserve Banks has doubtless been over­
estimated and it may well be pointed out that as the overhead ex­
pense is already largely provided, the additional expense will be
mainly mechanical and clerical, and therefore moderate and propor­
tional to the volume of the checks handledFOURTH:
With each successive transfer of reserves (the complete transfer
having already been made in central reserve cities and the final pay­
ments -as to reserve cities being due in May, 1J17, and in non-reserve

cities in November, 1917), there is increase-, necessity and demand
for a complete and satisfactory clearing system.




ip./ % f?
536

- 3 FIFTH;
In discussing the clearing system, reference has been made
frequently to various evils in banking practice which have grown
up in the past fifty or more years; for example, the common prac­
tice by banks in central reserve and reserve cities allowing im­
mediate credit and deferred debit on country bank items; or the
practice whereby exchange charges are assessed against the depos­
itor or indorser of the check, rather than the drawer or maker.
These and other practices which might be mentioned, all more or
less vicious in character, should be corrected, and doubtless will
be corrected or modified in future years; but it certainly woul^
be unwise

to undertake too many reforms simultaneously or impose

upon any proposed check clearing plan the burden of all the de­
sirable reforms.

Doubtless we can check some of these evil

practices now, can reduce "float" by more direct routing of items,
and build up a machine which will be able gradually to effect other
reforms, but we must not attempt to do it all at onco.
SIXTH;
An important feature in the development of American banking in
the last two generations has been the development of book credits in
the form of deposits, rather than note issues.

European baulks, and

especially those of continental Europe., give credit tc a borrower in
the form of bank notes.

In the United States the extension of credits,

has taken the form chiefly of book ere fits.




The immense system of

526 - i .

4 -

State banks and trust companies which has developed so phenominally
in late years has long been denied note issuing powers, and even
the national banks use the note issuing power tc only a relatively
small extent.
Hence, it is a mistake to assume that the chief function of the
Federal Reserve Banks is to be that of note issuing.

On the con­

trary, it is but fair to expect that as the years roll by their more
important functions will be the extension of book credits to their
members and currency only In crop moving seasons or in times of
stress.

But member banks will net go to the Federal Reserve Balks

for book credits or balances in excess of legal minimums unless
these balances can be ci some service to them.

If there is no check

clearing system - if there is no system by which they can issue
drafts drawn on Federal Reserve Banks, or send them to their cor­
respondents, they will not cars to avail themselves of these credits.
This character of service m i l bring the member banks and the Reserve
Banks in daily contact, whereas, the note issuing feature vail only
bring that contact at rare intervals.
Hence, it may be fairly said that the success and development
of the Federal Reserve System depends quite as much an a good system
of check clearing as on any other single feature.

4/7/15.




O/J
m3L5

586 - j.
P L A II

HO.

1 0 .

A CLEARING AND COLLECTION PLAN
Being an Evolution of the plan aubmitted by Mr. Lyman H. Talley
(Proposed by Mr. 1,1. 1. Fleming., Assistant Cashier, Federal
Reserve Bank of Cleveland, under date of April 7, 1916)

For the utmost possible development of the check as a medium of
exchange, it is obviously essential to cure the serious evils which
have grown into the present methods of check collection.

Four pur­

poses must be sought:
1:

Minimize the life of the check;

2:

Minimise the volume of "float” carried by the banks,
especially that large part which is now fallaciously
and dangerously counted as reserves;

3:

Minimize the cost of collection, and eliminate exchange
charges;

4:

Place the cost of the service where it belongs.

The plan of deferring debits and credits by schedules will
shorten the life of the average chock, and will greatly reduce the
float, byt will leave a, considerable volume of float to be carried
by the Federal Reserve Banks.

Its principal objection, however,

is that it would be a radical reform, strange and novel, necessarily
compulsory, and therefore unwelcome, and so it might drive member
banks out of the system.
It will be acknowledged that the application of the clearing
house principle would be the ideal solution cf the problem if it is
practicable and that clearing house operations could accomplish all




Q/'ifR
%U} '■
586

- 2 -

the purposes above named.

]•

The Act recognises the clearing house

principle in terns; and a country-wide clearing house being obvi­
ously impracticable provides that the Federal Reserve Board "may
require each Federal reserve bank to exercise the functions of a
Clearing House for its member banks."
The plan herein proposed is an evolution of the "Reserve City
Clearing House" as now operated in the Dallas district.
all of. thfe "Outline of Fundamental Principles"

Practically

submitted by Governor

Van Zandt is applicable tc this plan which therefore has the merits so
well urged therein for Mr. Talley's plan; so it is unnecessary to re­
peat herein the fundamental principles of that plan, which are (without
leave) "hereby made a part of this report."

The features now proposed

to supplement or modify the Talley Plan are a3 follows:
1.

All Clearing House membership being essentially voluntary,

member banks should be given the option of joining the Federal Reserve
Bank Clearing Houses or accepting deferred credit and debit.
2.

The Clearing House Departments of Federal Reserve Banks

should be entirely independent of the Reserve Banks themselves; that
is, the reserve accounts of member banks should be kept- entirely dis­
tinct from the Clearing House accounts.

Credit, balances in the

Clearing House when collected from debtor banks should however be
deposited to the credit of the member bank la reserve account in the
Federal Reserve Bank.

Debtor banks should settle for debit balances

by drafts on the Federal Reserve Ban> to the order of the Clearing
House department or manager, ah provided in the Talley Plan.




586 -

3

A debtor bank obliged to ship currency tc meet its settlement
draft should be credited with the actual minimum cost of such ship­
ment, as in the Dallas system; but it is believed that such cost
should be charged to the general operating expense, rather than to
attempt to charge it against the banks clearing itoms on the ship­
ping bank, which would involve much clerical work.
3:

Each 'Federal Reserve District should be divided into a

suitable number of sub-districts for clearing house purposes only;
each such sub-district to contain a Clearing House Agency of the Fed­
eral Reserve Bank.

Each such Clearing House Agency should be a member

cf each other Clearing House Agency in the sam® Federal Reserve Dis­
trict*

Each member bank should send all itarns on other member banks

located within its oub-distriat to the Clearing House Agency thereof,
and should send all items on member banks of other sub-districts within
the same Federal Reserve District, direct to the Clearing House Agency
of the sub-district in which the payer bank is located, with a du­
plicate letter to its own Clearing House Agency.

This Agency

being a member of all other Clearing House Agencies in the Federal
Reserve District, receives credit on the clearing sheet of the payer
bank’s Clearing House Agency, and its balances will be offset in the
same manner as balances between other members of that Clearing House
Agency.

All balances, however, should bo settled on the books of

the Central Clearing House at the Federal Reserve Bank; and there the
offsets will probably be -such as to coviaio the necessity of appor­
tioning credits as in the Talley Flan.




Resultant balances between

j.

948
- 4 -

586 -

the several agencies would also he settled through the Central Clearing
House Department at the Federal Reserve Bank.
4:

Items of non-member banks may be cleared through member banks,

as is now the custom in some, local Clearing Houses*

For the service

of clearing or collecting items presented by member banks, but bear­
ing the indorsement of non-member banks, an additional discriminatory
charge should be made.

.INTER-DISTRICT OPERATIONS

5:

The handling of checks payable outside of the Federal Re­

serve District of the depositing bank, although involving deferred
settlements, can be conducted in a similar manner.

Member banks

having items payable outside of their own Federal Reserve District
could send all such items direct to the Clearing House Department
of the Federal Reserve Bank of the district in which the payer bank
is located, or to its sub-district Clearing House Agency; or to the
payer bank direct if located in a center, but in each case for credit
of the Clearing House Department of their own Federal Reserve Bank;
at the same time sending duplicates of such letters to the Clearing
House Department of their own Federal Reserve Bank.

The payer

bank’s Federal Reserve Bank will then advise the depositing bank’s
Federal Reserve Bank.

A bank having a small number of items pay­

able in other Federal Reserve Districts might be permitted to send
all such items to its own Federal Reserve Bank for sorting and trans­
mission, although each member bank should be urged to send items




j.

r5-

{ 949
-586 - j-

direct to the district where payable whenever possible to avoid delay
in transit-

Resultant debit or credit balances in the Inter-district

system should be settled in the same manner as those in the Intra­
district Clearing House with the exception that they would be cleared
through the Gold Settlement Fund.

EXPENSE OF OPERATION.

6:

The expense of maintenance and operation may be provided

for as suggested in the Talley Plan as far as Intra-district clear­
ings.are concerned.

In Inter-district operations a Federal Reserve

Bank Clearing House receiving items from banks in other Federal Re­
serve districts direct should not enter any item charges upon its
books, but the Federal Reserve Bank of the District where such items
originate should make an item charge from the duplicate letter of
advice received by it from its member bank which has sent the items
to the other Federal Reserve District.
The item charge for both Intra and Inter-district
items should, of course, be sufficient to cover all incidental ex­
penses, including any necessary remittances of funds.

U/7/lS




950
586 - k.

PLAN

II 0 .

1 1 ■

FEDERAL RESERVE BARK OF ST. LOUIS.
PLAN FOR THE COLLECTION OF CHECKS IS INTENDED TO SHOW:

THE FOLLOWING

WHAT WE BELIEVE SHOULD BE DONE;
THE REASONS WHY WE BELIEVE SC;
AND THE METHODS PROPOSED TO ACCOMPLISH IT.

FUNDAMENTALS:

REASONS:

METHODS:

1 - All member banks
should receive at par
checks drawn on them,
which have been deposited in the Federal
Reserve Banks.
This
should be mandatory.

This is based upon the last two para­
graphs in Sec. 16 of the Federal Re­
serve Act.

It should be put in­
to effect by orders
issued by the Fed­
eral Reserve Board.

2 - The Inter-Dis­
trict exchange of
checks should be put
into,effect simulta­
neously with the man­
datory collection of
checks on members.

Any practical method of collecting
checks must include means for the
passing of a check from the Dis­
trict where it is negotiated to the
District where it is payable.

Federal Reserve Banks
shall receive for
credit from other
Federal Reserve Banks
checks drawn on
points in the form­
er Banks' Districts
Further details are
given under Sec; 6 .

3 - Federal Reserve
Banks should receive
from Member Banks,
and other Federal Re­
serve Banks checks
drawn on Non-member
banks, on the basis
of the exchange cost
on such checks.




Recognition must be given to con­
ditions actually existing.
The
National Banks are now handling
75$; to 80$ of the country checks in
circulation, consisting of checks
on Members and on Non-member banks.
The checks on Members will be turned
into the Federal Reserve Banks, who
will therefore accumulate 75 to 80)6
of the checks drawn on their members;
and the members will have to provide
payment for them to the Federal Re­
serve Banks.
Some assistance should
be given to the Country Member to
restore its reserve balances thus
depleted by the Federal Reserve Bank.
i

A start can be made
by collecting checks
on non-members lo­
cated in the same
place as a member at par if possible,
at a slight service
cost if necessary.
The Federal Reserve
Bank will then begin
negotiations with
non-members located
in places where
there are no members
for the collection
of checks on such

o f-i-f
- 2

FUNDAMENTALS-:

REASONS:

3 - (Continued)

Owing to the greater number of State
Banks, the outside chocks received by
a country member are mostly drawn on
State Banks in the- vicinity.
Some
are drawn on National Banks, which
can of course be sent to the Federal
Reserve Bank, but these do not by any
means provide a fair offset to the
payments the country member has to
make to the Federal Reserve Bank. To
say to the country member bank that
it can restore its depleted balance
by sending a check on its City cor­
respondent is to say: "We leave you
whore we found you, and you must find
the means to offset a situation cre­
ated by the Federal Reserve Bank."
The equitable way is for the Federal
Reserve Bank to provide the member
bank with the means to convert all
of its outside checks into a credit
balance in the Federal Reserve Bank,
at a minimum expense to all concerned.
The collection of country checks will
not in practice prove to be such a
tremendous country-wide affair as
first appears.
The outside checks
received by a country bank are largely drawn on banks in its vicinity
and by far the larger part of them
would not go outside of the Reserve
District in which Vie Member is lo­
cated if the Federal Reserve Bank
undertakes their collection, ai.d
declines to receive from
another Federal Reserve Bank checks
already endorsed by a bank located
in the district of the receiving
Federal Reserve Bank.
The collec­
tion of country checks will resolve
itself into a local proposition.

4 - The Federal Re­
serve Banks should
differentiate between
Non-member banks who
remit at par for
checks sent thorn by
Federal Reserve Banks
and those who charge.

Under any comprehensive plan of col­
lecting country checks a Non-member
can receive by virtue ox a. connection
with its City correspondent all of
tfce' advantages of the collection fa­
cilities of the twelve Federal Re­
serve Banks.
Unless some' distinc­
tion is drawn between the Non-member




586 - k.

METHODS:
banks, on as favorable
terms as possible, in
exchange which is con­
venient tc the remit­
ting bank and convert­
ible by the Federal
Reserve Bank4
Since
the twelve Federal
Reserve Banks will be­
come the largest col­
lectors of country
checks, they will se­
cure the lowest rates
from the banks who
charge exchange. They
will be X+l pc3 ition
to offer certain ad­
vantages tc non-mem­
bers who retait at par,
as will be explained
in Section 4 4
The
manner of giving
credit to the sending
member bank for checks
on Non-members will
be explained further
on.

The differential
charge shall be the
same rate of exchange
which is charged by
the endorsing bank on
items sent it by the
Federal Reserve Bank.
The rate will be as-

- 3 -

FUNDAMENTALS;
REASONS:
4 - (Continued)
This should os a
who remits at par for the Federal
charge made on account Reserve Bank, and the one which will
of the endorsement cf
not, the latter bank receives an
a Non-member tank
undue advantage over the former and
which does net remit
al30 over Member Banks. A 'way
at par for the Fed­
should oe found to equalize this
eral Reserve Bank.The
discrimination and offset the un­
due advantage given the Ion-member
enforcement of the
who seeks to enjoy the facilities
differential charge
will be voluntary on
cf the federal Reserve Banks and
make
a profit from them at ens and
the part of the
the same time.
It is proposed
drawee bank, as ex­
that the Federal Reserve Bank
plained in the reason
for levying the charge charge exchange cn any check, which
reaches it, that io endorsed,by a
Mon-Bomber who charges for remit­
ting to the Federal Reserve Bank.
This differential charge shall be
at the same rate ci exchange as the
Non-member charges the Federal Reservo Bank. The exact amount of
this charge is to be paid to the
Bank cn which the check is drawn,
if the drawee bank remits at par
for checks sent it by the Federal
Reserve Bank.
It is apparent
that the Federal Reserve Banks can
by this means have a definite ad­
vantage tc hold out ic the bank
who will remit to it at par.
It is true Member banks have been
urged to join the clearing system,
mow in use on the ground that they
can have their customers' checks
collected at par through the Fed­
eral Reserve Bank.
This differ­
ential charge will effect this to
a certain extent; but it will re­
turn the Member Bank the exact
amount of the charge levied on its
cue tome rc* checks, putting it in
position to return it to the cus­
tomer; OR,IF DESIRED BY THE MEMBER
BANK, nc differential will be im­
posed on its customers' checks on
account of endorsemert, if it pre­
fers this to being paid exchange on
them.




586 - k.

METHODS:
certained from the
negotiations to be
carried cn as ex­
plained under Sec.3.
The charge is to be
levied against the
depositing member
bank.
The chatge
is to be levied by
the Federal Reserve
Bank in which the
item is first de­
posited. The Fed­
eral Reserve Bank
of the District will
know what banks in
its District are
charging exchange.
It is apparent that
the bulk of the out­
side items endorsed
by these charge-banks
will be offered to
the Federal Reserve
Bank located in it3
District. (See last
paragraph in "Raisons"
Sec. 3). The amount
of the charge will be
noted on the letter
of transmittal carry­
ing the item, from the
Federal Reserve Bank
tc the Member Bank
or another Federal
Reserve Bank. The
check charged on
will be indicated
by a symbol opposite
the check. A coupon
at the foot of the
letter will name the
amount cf the check
on which the’i n f e r ­
ential has been
levied, amount ox the
charge and contain
a request to deduct

- 4 FUNDAMENTALS:
4 - (Continued)




REASONS:

The bulk of the exchange charges on
checks is levied by country banks in
the smaller towns and cities. It is
no secret that the evil of exorbitant
exchange charges is rooted in the
competition of reserve city banks
for accounts of country banks. Ex­
perience of the past twelve months
has demonstrated that little assist­
ance can be expected from interests
outside of the banks in the solution
of this exchange problem. The first
step towards a solution must be
reached in the relations between a
country bank and its reserve city
correspondent. By imposing a dif­
ferential charge on the checks,
which can be deposited in a Federal
Reserve Bank, the Reserve City bank
will soon have two plans which it
can extend to the country bank for
the handling of its items.
One
plan to the bank which remits at
par for the Federal Reserve Bank
(Whose items can be deposited
through a Member at par in the Fed­
eral Reserve Bank) and a second
plan for the bank which charges the
Federal Reserve Bank and 'whose items
are therefore subject to a charge
if deposited in the Federal Reserve
Bank. The profits to the reserve
city bank will be quite different
on the first class from the profits
on the second class of accounts.
This wide difference in profits will
soon effect the basis upon which
the reserve city bank can receive
the country account.
Country banks will, by their own
volition, divide themselves into
two classes. Those banks, having
a large volume of outside checks
to collect, will manifestly find it
to their interest to par for the
Federal Reserve Bank, while those
having only a small volume of out-

586 - k.

METHODS:
the amount of it
from next remittance,
if the check is drawn
on a non-member who
pars; or if drawn
on a member the cou­
pon will be an ad­
vice o£ credit. If
the letter of trans­
mittal is to another
Federal Reserve Bank,
the notation will be
an advice of credit
for the knount of
the differential.If
the check is drawn
on a Non-member who
charges the Federal
Reserve Bank, the
amount of the dif­
ferential will be
retained by the Fed­
eral Reserve Bank,
and used to reduce
the cost of check
collection.
Member banks will
be furnished with a
list of the banks
who charge the Fed­
eral Reserve Bank,
so that they can
arrange accordingly
for handling items
with charge bank
endorsements. Federal
Reserve Banks will
not receive from
other Federal Re­
serve Banks items
bearing the endorse­
ment of member or
non-member banks, lo­
cated in the second
Federal Reserve Banks'
District. All Fed­
eral Reserve Banks

954
- 5 FUNDAMENTALS ♦

4 - (Continued)

REASONS:

586 k.
METHODS:

•side checks may prefer to charge tne
|Federal Reserve Bank and pay the
|same rate on the outside items £t
may receive from its customers.
'Eventually the number of banks
icharging exchange will be reduced
!to a minimum .

will exchange with
each other lists show­
ing rates of exchange
paid to the various
non-member banks.

5 - The twelve Federal; This is following long osteblishod
Reserve Districts
|lines of practice in the collection
should be sub-divided ;of country checks. The commercial
and Sub-Agencios os- ibanks of tho country have found it
tablished for the col-jnecessary to distribute country
ion of checks in
checks through 50 to 60 centers*
the immediate v ic in it y ! Experience has developed tho neces­
o f the Sub-Agency.
sity for thi3.
The Sub-Agencies
The d is t r ib u t io n o f
! should be so located that a majority
Sub-Agencie's should
j of the banking towns in the subbe so arranged th a t
district are within one day's time
the m a jo rity of bank­ from the Sub-Agency. This will en­
in g p o in ts in the
able a remittance containing checks
Reserve D i s t r i c t are
on members to be credited the next
w it h in one day’ s time business day after receipt at the
from a Sub-Agency.
Sub-Agency, and enable remittances
of checks on Non-members to bs
credited two days after receipt at
the Sub-Agency.
The principal ar­
gument advanced against the parring
of checks has been the coat to the
paying banks to make the exchange
in which it is required to remit.
If Sub-Agencies are properly lo­
cated, banks remitting to them will
remit in exchange which they make
readily and which costs nothing.

Location of Sub*
Agencies shall be
designated by the Fed­
eral Reservo Bank.
Tho Sub-Agencies may
bs Member Banks, but
the men handling the
items should be em­
ployes of the Federal
Reserve Bank, under
proper bond. A list
of Sub-Agencies shall
be furnished member
banks in the district
with instructions to
send items in the SubDistrict to the SubAgency. Receipts at
each Sub-Agency may
be telegraphed if
necessary to the Fed­
eral Reserve Bank,
and confirmed by mail.
The manner of entry
on the books of the
Member Bank of remit­
tances sent to the
Sub-Agency is taken
up further on.

6 - Checks on Member
It is the purpose of this method to
Banks or Federal Re­
enable X Bank to realize on a check
serve Banks should be drawn on Y Bank within the same
credited to tho send­ period that Y Bank can realize on
ing bank on the day
a check drawn on X Bank. It is in­
the checks should
tended that a check drawn on a Mem­
roach the drawee bank. ber Bank shall become reserve for
the sending bank on the day the
Checks on Non-Member
check reaches the drawee bank. The
banks should be
lending bank will accordingly charge
credited on the day
!the Federal Reserve Bank with re­
returns for same
should reach the Fed- mittances sent it on the day such

Member Banks will be
furnished with forms
of remittance letters
which will show that
the letter is ad­
dressed to a SubAgency, the Federal
Reserve Bank of its
district, or a Fed­
eral Reserve Bank or
Sub-Agency outside of
it3 District.




f

FUNDAMENTALS:
6

-

6

t*

REASONS:

586 - k.

-

METHODS:

(C on tin ued)

era! Reserve Bank
collecting same.




remittances should, reach the drawee
hanks.
Its hooks will therefore
correspond with the hooks of the
Federal Reserve Bank .
■What is visually termed in transit
; matters "the float" is the volume
of checks which have been credited
to depositors* accounts and are in
process of collection.
It grows out
of the long established practice of
giving credit on receipt to a de­
positor of checks on outside points.
Manifestly the crediting hank re­
ceives some advantage in this manner
of handling outside items. It is
also plain that the drawee hank re­
ceives some advantage from the cir­
culation of its customers checks
drawn on it.
The above plan divides the burden
of this "float" equally between
the reoaiving bank and the drawee
bank.
It is proposed as being an
equitable division.
It is based on
the belief that a Federal Reserve
Bank can define when a Member Bank
may count as reserve any checks de­
posited in the Federal Reserve Bank.

The form will show
when the Member Bank
is tc charge the re­
mittance to the Fed­
eral Reserve Bank.
It may charge checks
on the same city in
which.a Sub-Agency
of Federal Reserve
Bank is located to
its reserve account
one day after trans­
mittal . Checkfe on
other members in the
District shall be
charged two days af­
ter transmittal;
Checks on Non-Members
in the District may
be charged three
days after transmit­
tal.
This will take Care
of the bulk of the
outside checks re­
ceived by the aver­
age country member.
Shere will remain
a small volume of
checks cn points
outside of the Dis­
trict, which may be
sent to the Federal
Reserve Bank of the
member’s district
or by arrangement
to a Federal Reserve
Bank located in the
district where the
checks are payable.
It will not be dif­
ficult to arrange
with the large col­
lecting banks a
practical convenient
method for the hand­
ling of chacks on
points outside of
their Vein—

Pare- —

7

FUNDAMENTALS:
6 - (Continued)




REASONS:

586 -

k

METHODS
a matter which must
be left to the dis­
cretion of the Federal
Reserve Bank concerned.
Remittances containing
checks on non-members
shall be separated
from those containing
only checks on Members.
The exchange charges
if any on checks on
Non-Members will be
assessed the deposit*
ing bank on receipt
of the check, if with­
in the District. If
the check is drawn on
a point Outside of
the district, the ex­
change will ba as­
sessed on receipt of
advice of the col­
lecting Federal Re­
serve Bank.
Exchange charges on
non-member checks
received from other
Federal Reserve Baucks
will be assessed on
receipt of the check,
from the known sche­
dules of charges which
the Federal Reserve
Bank will have on
file from non-members
in its District.
Lists showing time in
transit will be fur­
nished Members and
Federal Reserve Banks.
It is recommended
that the question be
taken up later for
adjustment, ae to
when drafts drawn by
a member bank on its
Federal Reserve Bank
shall be deducted
from the drawers bal­
ance on its books.

si
- 8 -

FUNDAMENTALS:
7 - Currency or coin
shipments made by a
Member to a Federal
Reserve Bank shall
be at the expense of
the shipping bank,
but shall be counted
as reaerve on the
date the shipment is
made by the Member
Bank.
8 - Checks represent­
ing transfers of fur.cfe
shall be received on
a basis to be fixed
by the Federal Reserve
Bank concerned.
5 - Reserves of Mem­
ber Banks shill be
computed from the
books of the Federal
Reserve Bank.

10 - Settlements be­
tween the Federal Re­
serve Banks in the
Gold Fund should con­
tinue as heretofore
until experience de­
velops the necessity
for more frequent



REASONS:

jThe establishment of Sub-Agancies
will largely offset the need for
icurrency shipments for purposes of
|making exchange. They will thereifore be made principally as a mat!ter of convenience to the shipping
jbank. They should be counted as re­
serve while in transit, 3 ince the
currency would probably be reserve,
had it remained in the pember's
vault,
This is to permit Federal Reserve
Banks to engage in the purchase or
sale of domestic exchange in ac­
cordance with conditions existing
at the time of the transaction.

536 - k.
METHODS:
No details are needed.
The shipments will
simply be counted and
credited on receipt.

The manner of entry
of such transfer
checks is to be left
to the discretion of
the Federal Reserve
Bank concerned.

By direction of the
The carrying out of Section 6 will
enable the Member Banks to have their Federal Reserve
books agree with the Federal Reserve Board Member Banks
shall make a period­
Bank.
The equitable division of
ical report of their
the burden of uncollected checks is
jexplained in the same Section; as is j re serve re quirenent s.
jalso set out the jurisdiction cf the A comparison wall
then be available with
[Bank in the calculation of reserves
the reserves actually
jcarried with it.
'carried. If any pen-,
alty be necessary on
account of deficiency
maintained over a
given period it can
then be fined as may
be directed by the
Federal Reserve Board
as provided in Sec­
tion 15 of the Act.
The present method to
continue' until, ex­
perience develops the
necessity for change.
This recommendation carries its own
reason.

The present -method
to continue until ex­
perience develops the
Inecessity for change.

-

9

-

FUNDAMENTALS

REASONS:

11 - That unifora
me theis should he
followed “by Federal
Reserve Banks in the
handling of InterDistrict remittances.

Federal Reserve Banks should be en­
abled to have their books agree with
every other Federal Reserve Bank at
the close of business each day.

1Z - The expense of
operation should be
left as a matter to
be taken up later
after experience has
developed the approx
inate cost psritem.

After a few months1 operation, some
definite figures will be obtained
and from then cn an equitable assess­
ment of expense can be levied.

4/10/16.




5 S6 - 3c.
METHODS:
Uniform types of re­
mittance letters
should be adopted,
showing when each re­
mittance will be
charged by the send­
ing bank. Advices
of credit by the
receiving bank should
show when the out- '
side checks will be
available for the
sending bank. They
should be held in a
Transit account un­
til the date the
funds become avail­
able «