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Federal
Reserve
Bank of
Boston

Annual Report 1967

Electronic Money...and the Payments Mechanism













1

To The Member Banks




I am particularly pleased to provide you with this 1967 Annual
Report of the Federal Reserve Bank of Boston.
As this is being written, our New England economy continues
to expand — paralleling the nation’s longest period of economic
growth in its history.
It is not surprising — with economic growth of such long
duration and broad scope — that dislocations of resources, compli­
cations of supply, and uneveness of demand should appear with
increasing frequency. Many of the problems of economic growth
are further aggravated by the nation’s deepening commitment to
insuring opportunity for self-determination for the people of South
Viet Nam, and to the resolution of increasingly critical develop­
ments within our domestic social structure.
As a part of this report, we have included an appraisal of a
vital, but seldom-recognized, adjunct to the development of our
national economy — the payments mechanism. Subject to in­
creasing pressures and evolving public needs, the system by which
our other-than-cash transactions are completed is undergoing a
number of far-reaching changes.
Electronic M oney And The Paym ents Mechanism is an
attempt to appraise some of the variety of problems, proposed
solutions, and issues which are — or may be — involved in future
improvements in the mechanics of the nation’s payments system.
It is our hope that our review may be a helpful aid to broader
understanding — among the general public, and within the financial
community — of the public policy implications to be met by any
significant changes which may be contemplated in this basic
public service.
At the conclusion of this presentation, we have expressed,
editorially, eight convictions which we feel provide a sound basis
for further discussion of the issues.
A summary and review of the Boston Reserve Bank’s 1967
operations is included at the end of the report.
For the increasing efficiency of these operations, and for the
assistance of our officers and staff in helping to improve the Bank’s
contribution to New England’s economic progress, I extend my
own thanks and those of our directors.
Our thanks go, also, to New England’s bankers and business
leaders, for their generous and helpful co-operation.
January 15, 1968

President

2/ Electronic M oney . . . And the Payments Mechanism




The Transaction
. . 39 cents. $1.19. . . . are there three o f — oops! — I ’ll only
charge y o u 26 cents apiece for these two, M rs. Struggling, I already
rang that up as a single item . . . 26, 26 . . . that'll m ake it right
on the tape . . . ”
A nd sim ultaneously, the fingers on Sandy F risbee’s right hand
recorded the vital statistics o f Janet Struggling’s w eekly foraging
expedition.
“ F ifty-seven , eigh ty-eig h t, M rs. Struggling . . . will that be cash,
charge, or electronic m o n e y ? ” Sandy asked, smiling.
A lm ost hyn otized b y the register’s flicking paper tongue, which
now lolled lim ply on the shoulder o f the quieted m achine, Janet
Struggling, hesitated briefly, and said, “ Oh, m ake it electronic
m on ey, if y o u will, please, Sandy."
Then, suddenly aware that the pert cashier was waiting, she bent
her roller-distended, kerchief-covered head over her ou t-sized
handbag, which was balanced on the cou n ter’s edge, while she
rum m aged, two-handed, deep into the bag’s am orphous clutter.
A look o f m inor trium ph flashed in her eyes, as she drew a small
plastic card from its hiding place in one o f the lu m p y leather
p ou ch ’ s inside pockets, and handed it to the checkout girl.
Sandy turned, and inserted the card into what appeared to be
a telephone studded with push buttons, which was connected by
a m an y-w ired cable to the register. j4s she lifted the receiver — or
what looked like the receiver
her nim ble fingers did a quick
tw o-step over the keyboard.
Then she peered absently, for a second or two, at a card headed,
“ Today’s Vegetable Specials,” taped to the top o f her cash registertelephone, as though waiting for som eone — or som ething? — on
the other end o f the line to say som ething . . . apparently heard
what she was waiting for, and hung up.
“ Thanks, M rs. Struggling,” she said, dextrously am putating the
register’s paper tongue, to hand it
and the small card
to the
yo u n g housewife, w ho was still exploring the lower recesses o f her
handbag, “ Com e in again!"
“ Thank yo u , Sandy,’’ Mrs. Struggling m urm ured, som ew hat
distractedly, as she thrust register tape and card firmly into the
handbag’s innards, latched the flap, one-h andedly, and leaned into
the handle o f the heaping shopping cart which the cashier’s helper
was easing away from the checkout counter, toward the door.
W ith a rush o f air, the autom atic door swung outward — like a
fat m an, drawing in his breath to m ake extra room for the loaded
cart to pass.
Then
exhaling with a labored, asthm atic wheeze
the super­
m arket door swung shut . . ,
The Transaction was com pleted.
A nd that’s the way “ Electronic M o n e y " will work
som e say —
som eday.
You m ight substitu te an Oklahoma oil m an, taking a m od est
flier on a million dollar land option at his broker’s office — or a
bearded, baggaged, holiday-bound college boy, fueling up his
sports car at a turnpike service station
for our curler-coifed
housewife, ransoming her way past the supermarket checkout
counter. The actors and their acquisitions m a y be as varied as
yo u r imagination perm its . . .
B u t, if we're to understand
really understand
our changing
p a ym en ts m echanism , it m ay be som ew hat m ore helpful to think
a bit about an idea suggested by that old cliche: it’s not the
m on ey, but the principle o f the thing!

Electronic M oney . . . And the Payments Mechanism /3

Electronic Money — and the Payments Mechanism
Our little encounter on the preceding page is a
parable, of sorts, for, if we truly “ accept” its
implications — all of them — perhaps we can
adjust to “ electronic money.”
In some ways, money is unimportant . . . in
som e ways.
It would probably be a mistake to say, too
loudly, that most people don’t give much thought
to money — of course they do. But — aside from
the increasing awareness that, while money doesn’t
travel as far these days as it once did, it surely
goes a lot faster — few of us have taken much
time to think about how money — cash or credit—
really “ works.”
The important thing about money is what it
d o e s.

The world has seen some pretty ridiculous kinds
of money — from shells and little stones with holes
cut in them, to scraps of paper of assorted colors
and designs. But in their respective times and
places, each has done a very important job; each
has served as a more-or-less workable means of
making payment for goods and services.
At the same time, as any economist worth his
salt would be quick to point out, money has been
a measure of value. It’s also been a storehouse
of value — which, in due course, has led to its use
as a standard of deferred payment. But each of
these other virtues is rooted in money’s unique
function in the payments mechanism, that of being
the “ common denominator” of goods and services.
Some say that you can judge the sophistication
of a society’s economic development by its pay­
ments mechanism . . . and, in a very general way,
that observation seems a good one. Surely, things
are at a pretty primitive level where one “ good”
is bartered directly for another. But, perhaps
there’s more sophistication than is immediately
apparent in the culture which defines the worth
of one wife as equal to three cows, although it
would be difficult to argue that such a system of
exchange lends itself to the frequent, and complex
transactions — with infinitely graduated values that are common in more commercial economies.
The difficulties involved in barter — e.g-> the
difficulty of allowing a half-a-cow discount, for
“ cash” — led to the development of “ money” —
especially to the use of precious metals, the weight




and purity of which could be more closely tailored
to match the values of transactions. It’s at this
point in money’s evolution that man’s imagination
came to the rescue, for who’d ever have believed
that a lump of gold or silver — which could not
be eaten, worn (except for adornment), or lived
in — would be given equal value by so many
quite-different people? What, nowadays, is spoken
of as “ the intrinsic worth” of a monetary metal,
at some point in time, was the result of practically
universal agreement among large groups of people,
not that the metal, but that the concept of its
exchangeability for value, was acceptable.
Having made that quite sizable step — dis­
associating a thing’s value from the thing itself —
it now seems perfectly logical that a variety of
“ proxies” for things should develop . . . including
such relative newcomers to the scene as paper
money, notes, certificates of deposit, bonds, stock
certificates, and, of key importance, checks.
Until a few years ago, scholars of money
mechanics would have judged the check to repre­
sent about as sophisticated a payments mechanism
as modern commerce and technology might devise.
It was the ultimate key to the ultimate system
of completing the transactions required by the
ultimate in sophisticated economies.
Then came some new pieces of technology.
The electron entered banking.
As a consequence, the payments mechanism of
the United States continues to evolve
as does
that of many of the other more-advanced econo­
mies of the world. Computers, and their growing
ability to communicate — both with each other
and their masters — are suggesting that what was
“ the ultimate” is overdue for redefinition.
The possibilities that seem to be inherent in a
somehow-computerized payments mechanism have
been provocatively, but somewhat misleadingly,
labeled “ the Checkless Society.”
Bankers, continuingly harried by the pressures
of handling the flurry of paper checks which seems
noticeably to intensify with each passing day,
have been quick to accept the idea of “ fewer
checks” as a star in the East — if only as an
article of faith and hope.
Their acceptance of the idea is tempered, how­
ever, by their even keener realization of the

4 /Electronic M oney . . . And the Payments Mechanism

checking account’s importance to expanding
banking markets.
Technicians, well aware of the almost limitless
capacity and capabilities of their computers, have
already set about drafting sweeping — even
Utopian — solutions to problems . . . problems,
in some cases, not yet encountered.
It may be helpful, here, to investigate some
aspects of the payments mechanism that are surely
a part of what may evolve into a “ less-check”
society. As the name suggests, the heart of the
matter seems to lie in what might be described
as a movement toward a payments mechanism in
which money — whether it be “ cash” money, or
“ credit” money — moves between buyers and
sellers in some paperless way.
Because of the sheer size and complexity of
today’s total payments mechanism, it seems likely
that any system that may evolve must be co­
ordinated — integrated — with the existing
system.
And this fact, alone, provides some
valuable clues as to the nature and scope of a
number of problems of our payments mechanism’s
evolution.
To begin, let’s look at some of the more recent
developments.

The Mechanics O f Now
Today’s money supply, by definition, consists
of the near-$38 billion in currency and coin in
circulation and about $140 billion in demand
deposits in the nation’s commercial banks.
It’s estimated that around 40 percent of the
American people still deal almost exclusively in
cash — although, it’s also estimated, over 90 per­
cent of the total dollar volume of payments are
made by check.
Over the past 100, or so, years, Americans’ use
of checks has expanded almost continuously — to
the point where, today, there are about 67 million
checking accounts in the country’s 14,000 com­
mercial banks. Each year, about 17 billion checks
worth an estimated $3 to $4 trillion —- are
written . . . and the number of checks written has
been increasing at about a 7 percent annual rate.
It has been estimated that the cost of processing
the billions of checks that are cleared through the
banks each year amounts to over $3 billion. But,




we ought to add to this the cost of the checks
themselves — including paper, checkbooks, print­
ing, and preparation — and the costs involved in
the original mailing, plus other handlings, and
even the storage, that occur outside the banking
system . . . if we are to guess at the total expense
of operating a payments mechanism based upon
checks.
But any payments mechanism, as resilient,
flexible, and adaptable as our present system, can
be presumed to be fairly expensive, given only the
magnitude of the job it does. Perhaps, at this
stage, the “ costs” — of this system, relative to
some other — are less meaningful than the rela­
tive adaptability and usefulness of the possible
alternatives?
This thought, too, suggests that we might,
usefully, explore the working mechanism and its
parts in some detail.

Yes, Virginia, There Are Checks . . . .
While most everyone knows what a check is, a
real awareness of what a check does is somewhat
less common — mostly because we seldom give it
much thought.
A check is (1) a piece of paper (2) addressed to
one’s bank, (3) on which is written a (4) legal
(5) authorization to (6) withdraw a (7) specified
amount of money (8) from one’s account, and
(9) to pay that amount (10) to someone else.
Of these 10 items, only tne last nine seem to be
truly integral to the payments mechanism — and
it’s the first one — or the absence of it — that has
been the basis for most pronouncements about
“ a check-less future.”
In essence, then, a check is a piece of paper
with necessary information on it. Most people
accept a check as the equivalent of cash
and in
many respects it may be. But, as anyone who
has ever attempted to “ cash a check” (the phrase,
itself, attests to some difference) in a strange town
knows, a check (under certain circumstances, to
be sure) is not cash.
As a matter of practical reality, it is accurate
to say that, at one’s own bank, one’s check is
interchangeable with — equivalent to
cash. But
a check, in other circumstances, takes time — time
for delivery, for endorsement, for presentation

Electronic Money . . . And the Payments M ech an ism /5

to the other person’s bank, for presentation and
clearing back through the Fed (or a correspondent
bank), before its eventual payment from the
account of the check writer. Simply because the
check, sent (or handed) to a person to whom
money is owed, requires time for such things,
checks are, in legal terms, credit instruments.
Each person or institution to whom it is pre­
sented must examine the information written on
the check, and each, having satisfied himself that
the bits of information are valid, approves the
credit, and passes the check on to the next in line
between himself and the original issuer of the check.
One indication of the “ credit” nature of the
check, is the reservation by each handler in the
clearing process of the right to reclaim payment
from the person who presents the check for pay­
ment, in the event that insufficient funds exist in
the account upon which the check was drawn.
Each says, in effect, “ I will credit this amount to
your account, with the understanding that the
deal is off if I can’t collect from the next link in
the payments mechanism.”
This small, but vital, series of credit arrange­
ments actually creates a series of circular links in
the payments mechanism spiral. Because each
link in the chain is, essentially, a separate twoparty agreement for which each must extract the
information from each check, analyze it, digest it,
and act upon it — handling the piece of paper
more or less frequently in the process — the paperhandling, alone, creates a mountainous chore. The
elimination of this mountain is the target toward
which many of the advocates of the abolition of
checks are aiming.
In fairness, it should be pointed out that, while
the elimination of checks — or a reduction in their
number, or the extent of their travels — is fre­
quently characterized as a banking solution to a
banking problem, improvements in the payments
mechanism must result in broad public benefits,
if they are to be accepted, workable, and worth­
while. It is, in fact, doubtful that any of the
innovations currently contemplated will, in them­
selves, add to bank profits. It is only as these
expensive, costly-to-operate new devices permit
banks to offer broader, more useful services to
their customers, that banks may benefit.




From Houlton to Presque Isle
From Memphis to St. Joe
The physical distance between points in the
check-clearing mechanism is intimately related to
this choreographic “ stop-read-approve-pass along”
process of check handling.
To anyone familiar with the region’s geography
— or even with the geometric axiom that “ the
shortest distance between two points is a straight
line” — any process in which a check drawn on a
bank in Houlton, Maine, and received by an indi­
vidual in Presque Isle, some 39 miles away, may
be return-routed, almost 700 miles out of the way,
via a Boston, Massachusetts, bank for collection,
leaves something to be desired.
It is just such circuitous transportation of a slip
of paper as this that puts zeal in a communications
technician’s eye. Not, necessarily, that he’s pre­
pared to shorten the route, physically — but, with
gadgetry capable of gathering information at
something like a million characters a second, and
transmitting it, electronically, at a speed approach­
ing 186,000 miles per second, he’s prepared to
make the trip seem shorter . . . quite a bit shorter.

Odd Numbers
A considerable amount of progress has already
been made in shortening-up — or, at least, speed­
ing up — the processing of check-carried informa­
tion. Capitalizing on the electron’s already
demonstrated wizardry at “ reading” and “ acting”
(re-acting may be a more appropriate word?) on
what it has “ read,” the banking system developed
the MICR (Magnetic Ink Character Recognition)
program, some 12 years ago.
MICR “ code” is made up of those strange, fat­
stemmed numbers on checks, that look as though
they might have been printed with broken type,
using ink that had lumps in it.
MICR is simply a method of putting some of
the more-vital information which each check
carries — the identification of the bank upon
which it is drawn, the dollar amount involved, and
perhaps the identification of the account to which
it is to be charged — on the check, in a form which
electronic equipment can “ read.” Properly in­
structed, electronic data processing equipment
can “ digest” these kinds of information, sorting

6/ Electronic M oney

And the Paym ents Mechanism

and tabulating it at speeds upwards of 1,500
checks per minute.
So far — although there’s nc technical reason
why, having once “ read” the information on a
check, the information couldn’t be transmitted
thenceforth electronically — the use of computer’s
skills at reading and writing have been generally
limited to facilitating check sorting and book­
keeping jobs within points along the checkclearing route. This has meant that — while each
institution through which a check passes may have
done its bookkeeping chores electronically — each,
in turn, has duplicated a number of steps in the
bookkeeping process, just as it had to before the
electron joined the office staff. Worse yet, this
has meant that checks, MICR encoding and all,
continue to be the source document, the basic
carrier of information, that must be handled and
re-handled every step of the way.
Granting that the MICR-computer contribu­
tion has been substantial, in permitting the sub­
stitution of speedy and accurate reading, sorting,
and tabulating by machine for a good share of
what would otherwise be a tedious, hand opera­
tion, requiring a growing army of nimble-fingered
girls at check-sorting machines, MICR has done
nothing to stem the mounting flurry of paper,
called checks.
It wasn’t meant to.
As a matter of plain fact, MICR, perhaps more
than any other single development, has made
possible the banking system’s accommodation of
the public’s burgeoning desire to write more
checks. In that light, MICR stands as shining
evidence of the banking system’s ability to cope
with paper checks — if not in one way, then in
another — however high the mountain may grow.
Our discussions of the payments mechanism
ought, therefore, to be premised on an under­
standing that more challenging problems exist
than may be involved in handling 17 billion scraps
of paper — or 117 billion.
The principal indictment of the check is that
“ we know how to do it better.”
The availability of electronic devices for com­
puting and communication suggests, with growing
clarity, “ transmit the information, but don’t move
the paper!”




Changes already made in the payments mech­
anism represent attempts to use available new
technology in separating the flow of information
from the physical movement of the check in the
collection system — witness the manner in which
the paper flow and the information flow have been
separated during the internal processing of checks
within points along the route of the present
check-clearing process.
And there are other — perhaps even-moreintriguing — variations of the “ old” payments
mechanism that seem destined to be a part of
whatever new system is yet to come. They will
be improvements in the ease — or the efficiency,
or the economy — of the system . . . and will
appear on a variety of fronts.
Equipment — electronic and otherwise — will
surely further expedite the handling of checks.
Take that for granted. The Federal Reserve
System, correspondent bankers, and individual
bankers — all who handle checks in the payments
stream — will innovate with new procedures and
techniques toward the same end.
Expanded check clearing on a regional basis —
a natural extension of the clearing house operations
which have expedited the movement of checks,
and the payments mechanism’s operation, in most
of our major banking areas on a city-wide basis —
would seem to offer some very real advantages in
a number of circumstances in which the volume
of intra-regional checks is large and the problems
of geography are minimal . . . where the volume
of checks to be cleared is substantial enough to
more than compensate for the establishment and
operation of such an institutional exchange.
Some commercial banks have established
themselves, already, as regional clearing centers
for their correspondents, and the Fed is actively
exploring the possibility of broadening the
application of the technique to serve additional
areas.

The Shortstop
Regional clearing centers — the extension of the
city-wide clearing house benefits — are but onfe
example of a whole family of developments aimed
at expediting the operation of our payments
mechanism. The generic name for this kind of

Electronic M oney . . . And the Paym ents M ech an ism /1

“ new approach” to check handling might be
“ short-circuiting.”
The short-circuiting is obvious in the case of
the regional clearing center. Instead of moving
all the way to-and-from the Boston Fed (or a
Boston correspondent) on its journey from Houlton to Presque Isle, Maine, the check which we
mentioned earlier as a prime example of presentday around-the-barn movement in the payments
stream, might conceivably be short-stopped at a
regional clearing center located in Maine. At a
Maine center, representatives of both the bank
presenting the check for payment, and the bank
on which the check was drawn, could make the
exchange — easily saving 300 miles, or more,
compared with what might otherwise have been
a via-Boston trip — not to mention the time that
would have been required for the check to be
transported over those additional miles.
That’s one way that short-circuiting can work
— just as the intra-city clearing centers save
handling and time.

The Drop
Another variation of this same theme is the “ lock
box” technique. Here, a company, whose cus­
tomers are spread over a wide area, establishes
post office boxes — called “ lock boxes” — at major
mail distribution points throughout its marketing
area. The company’s customers are instructed to
mail their payments to the company at the speci­
fied post office address nearest to them. The
company opens an account with a bank in each
of the cities in which it maintains a lock box
address, giving the bank access to its local lock
box. The local bank collects the checks from the
lock box one or more times a day, deposits them
immediately to the company’s account, and noti­
fies the company as to who has paid, and how
much. This kind of short-circuiting shortens a
check’s journey through the payments mechanism
at least by the amount of time that it might have
taken for the check to reach the company’s home
office — rather than the regional center — via the
mails.
In many cases — where there may be a local
clearinghouse, for example — the check may be
collected on the same day that the deposit was




made, since the necessity for moving the check
from a bank in the company’s home office city
through the Fed (or clearing correspondent) in
some other city has been obviated. The net effect?
Fewer miles of traveling for the check — less time
in transit — faster clearing — quicker payment
to the company.
Originally, the bank servicing a company’s local
lock box would notify the company of its daily
deposits by mail. Now the information is more
frequently transmitted by wire — saving as much
as two or three days, in some cases. The next
step — and at least one example of this is already
in operation — is to “ computerize” the whole
operation, so that, as rapidly as customers’ checks
can be read by the electronic gear of the bank in
the lock box city, the remittance information can
be transmitted directly to the company, or its
bank, over telephone circuits. And, beyond that,
the recent inauguration of an automated network
for the transmission of remittance information —
the information on lock box checks — between
metropolitan areas in all sections of the country,
presages a giant step toward “ almost-instant
money” for a substantial number of corporate
accounts.

Speak To M e, Only . . .
A third variation on the short-circuit theme has
been suggested — truncation. Mr. Webster, who
presumably might not have recognized a “ pay­
ments mechanism” had one seized him by the
thigh, defines truncation as: “ to shorten by — or
as if by — cutting off” . . . which is exactly what
these latest banking techniques are designed to
do to check travel.
In the so-called, “ bank of first deposit” ap­
proach, it is proposed that all checks be stopped,
read, processed, and retained by the first bank to
which they are presented for payment — only the
information which they contain would be trans­
mitted beyond that point. Given the capacity and
capability of today’s sophisticated computers to
store and retrieve information — to say nothing
of the potential for near-instantaneous communi­
cation, one computer with another — this pos­
sibility could very well go a long way toward
making the brown manila envelope, bulging with

8(/Electronic M oney

And the Payments Mechanism

cancelled checks, a household curiosity in quite a
different way than it may already be.
Considering that the person who writes a check
almost invariably has a record of his payment —
assuming that he has filled out the stub of each
check as it’s written — the only purpose served
by the return of the cancelled check is to serve as
verification that the check was “ cashed” by the
individual to whom the payment was made.
Operating on the presently-popular theory of
“ management-by-exception” — in which only
those circumstances merit attention and concern
which are exceptions to the “ normal” course of
events, it seems more than abundantly redundant
to return millions of checks to the people who
wrote them, “ just in case” they might be needed
to prove the few cases among thousands in which
payments are questioned.
The practice would seem to be increasingly
unnecessary if it were possible, as it well may be,
in the not-too-distant future, to receive verifica­
tion — even a print-out — of any transaction on
record by the simple expedient of inquiring of
one’s local computer center.
This latter variant begins to approach electronic
money — for it’s but a quavering step from the
truncation of check travel implied in the “ bank
of first deposit” approach, to the abyss that opens
under our feet when the truncation takes place
between the check stub and the check.
Let’s look at some other developments taking
place in the payments mechanism before we
plunge into that!
We’ve seen how electronic wizardry seems to
promise some measure of respite to those who
must cope with a rising tide of checks — how
“ readers” and tabulators, provided with the right
diet of MICR digits, can expedite the processing—
while not erasing the problems - of increasing
numbers of checks. We’ve seen, too, that there
are some quite-real advantages that may be had,
within the payments mechanism, via the shortcircuiting and truncation routes — at least in
those circumstances which lend themselves to
these methods.
It’s important to realize — as we’ve tried to
suggest — that, from a marketing point of view,
at least, it is likely that banks will continue to




R ecord Breaking
“ Sure,” say s o m e, “ using checks is doing it
the hard way. If we can ju s t transmit the
inform ation that checks carry, w ithout
m oving the paper, think how grand that
would b e !”
Quite so, for everyone concerned.
But there’ s one thing about checks that’s
going to take som e doing — not to elim i­
nate, bu t to replace: the endorsed check
has com e to be accepted as legal evidence
o f the com pletion o f a transaction.
A very small proportion o f transactions,
o u t o f the millions which take place, later
require evidence that the p a ym en t was
made. B ut few people who have had occa­
sion to rely upon their cancelled checks as
proof that a p a ym en t was, in fact, m ade
by som eone and to som eone, on a certain
date
would willingly subscribe to a p a y­
m en ts m echanism which could not provide
this “ insurance” feature.
Any system which stops the check at the
bank o f first deposit, and holds it there,
passing on on ly the information needed to
com plete the p a y m e n t, poses problem s such
as these: how is the writer o f the check to
know where the check is stored? How long
will the check be held as a permanen t record?
How long should it be held? W hat legally
acceptable evidence can the paying bank
provide to “ prove” that the ordered p a y­
m en t was m ade? How, am ong accum ulating
millions o f checks at m an y locations, can the
original writer recover the original record, or
a legally acceptable facsimile o f it, in a
reasonable period o f tim e?
Som e o f these problem s m a y grow even
thornier when and if, as is proposed, there
are no checks at all.
The technicians assure us that the c o m ­
p u ter’ s m em o ry and recall can provide
answers, alm ost faster than the questions
can be asked.
But to a worried taxpayer, contem plating
an impending “ review” session with an in­
terested group from the Internal Revenue
Service, there’s considerably m ore com fort
in a sheaf o f ca n celled checks, than there
is in a nearby com puter terminal.
Tim e will tell . . . but the com plete elim i­
nation o f that little paper check as a p er­
m anent record m a y be a m ore difficult idea
to sell than m any folks figure.
Especially around tax time.

Electronic M oney . . . And the Payments M echanism /9

introduce an expanding array of services designed
to make the check more useful to their customers.
And, with this, will likely come wider check usage
and an increasing volume of checks to be processed.
Such things as guaranteed check plans, check
credit, and overdraft programs, all increase the
acceptability — the desirability — of using checks
as a means of payment.
But each of these proposals for expediting check
handling — quite the reverse of extolling “ cash,”
or instant money — tends to link the customer’s
checking account to the customer’s use of credit.
And, since credit is banking’s stock in trade,
expanding bank business will almost surely mean
more checks. In other service areas — payroll
accounting, billing, and income and expense
analysis being offered to small businesses and
individuals — there’s evidence that commercial
banks recognize the check’s versatility and poten­
tial for attracting new business.
It is because of this intimate tie between checks
and banks and customers, that the most accept­
able development of a new — or, at least, a
different — payments mechanism would seem to
lie in the direction of an innovation which could
enhance the value of a checking account, while,
at the same time, reducing the number of checks
which have to be processed.
The name of this game is “ pre-authorized
payments.”

The “ Arrangement”
Strictly speaking, the ordinary, garden variety of
check is a form of a pre-authorized payment. The
payment of any check by the bank on which it is
drawn is premised on an earlier agreement, be­
tween the check writer and the bank, that certain
transactions will be completed by the bank when
specific information — in the form of a check — is
presented at the bank.
In the “ less-check” lexicon, however, “ pre­
authorization” is used to describe a considerably
broader assortment of arrangements. All of them,
by altering the terms of the general agreement
which is the basis for the normal checking account,
are aimed toward enhancing the efficiency and
usefulness of the checking account as a payment
device, without increasing the number of checks




entering the payments mechanism.
While pre-authorization, almost-by-definition,
means fewer checks, the pudding is, to date,
virtually “ unproven” — largely, as you might
guess, because it has only been nibbled at. Other
forces — particularly the continuing expansion of
those banking services which promote broader
check use — have far overshadowed the reduction
in check volume which relatively modest consumer
participation in the relatively limited number of
pre-authorized plans currently in operation has
brought about.
Pre-authorization’s potential for check-saving
becomes dramatically apparent when one con­
siders the effect which might be achieved if, for
example, all of the 23 million-plus Social Security
payments made each month were to be deposited,
without checks, by a pre-authorized deposit ar­
rangement between the Treasury Department and
each individual’s bank of account!
Pre-authorization is simply an automatic meth­
od of paying from or depositing funds to an
individual bank account, under authority granted
to the bank by the account holder.
How simple!

Pre-Pre-Authorization
It’s reported that, as early as 1916, a Boston bank
was offering to handle its customers’ bills under
what appears to have been “ pre-authorization,”
of sorts. The customer simply sent all of the bills
he wanted the bank to pay — together with one
check for the total amount owed — to the bank.
The bank would then transfer the funds from the
customer’s account, directing them appropriately
to the accounts of the respective creditors.
Perhaps the mechanics of this early experiment
in pre-authorization (which, incidentally, had only
limited — and short-lived — success) can provide
some clues as to why our present society is far
from checkless? Aside from the natural aversion
which early Bostonians might have held for ex­
posing their financial affairs, in more than modest
glimpses, to the eyes of their banker, there was
the problem that, if any of the creditors concerned
did not have checking accounts at the bank of­
fering the service -— to which the customer’s
payment might be transferred — the bank had to

10fElectronic M oney . . . And the Paym ents Mechanism

issue its own checks to those creditors. Even in
1916 — and, even in Boston — not enough of the
assorted trades-people and merchants with whom
a Bostonian might do business had more than one
bank of account . . . and so the bill-rendering
merchant’s bank was not frequently enough the
bill-paying Bostonian’s bank to make the scheme
work. The problem, then, as now, was that, to
avoid writing individual checks to each creditor —
which the customer can do as well as the bank
— the bank which completes the transaction must
hold the accounts of both parties.
To many bankers, this problem may be viewed
as an opportunity to acquire the account of that
one, or the other, or both of the parties to a pre­
authorized payment program, which it does not
currently hold.

Bill M e
Bill M y Bank
One of the more recent applications of this
technique involves the automatic payment of
customers’ monthly insurance premiums — the
regular payments of uniform dollar amounts — by
banks which have been pre-authorized to honor
payment orders on presentation by the insurance
company. Instead of billing the customer each
month, the insurance company, in effect, sends
“ the bill” to the customer’s bank for payment —
and the bank pays “ the bill” by simply trans­
ferring the specified amount from the customer’s
account to the insurance company’s account,
providing verification of the payment on the
customer’s monthly statement.

The Overdraft
The overdraft
a written order, directed to
a bank, to pay a stated sum which is in ex­
cess o f the funds available in the account
from which the order is to be paid
has
long been a source o f consternation and
frowns am ong New England bankers. The
inadvertent overdraft has been equally dis­
com fiting and disconcerting, no doubt, to
m any creditors
and nearly as m any check
writers
whose banks have returned word
that a draft presented for p a ym en t has




qualified for the special designation, “ N ot
Sufficient F unds.”
B ut the overdraft, m ore recently, has been
found to be good b u sin ess— Just as the
British have claimed for m an y years. Not
the inadverten t overdraft, which delays p a ym en ts and embarrasses all parties concerned,
but the “ planned” overd ra ft— the “ p re­
authorized overdraft,” if y o u will.
Assum ing that a custom er of the bank is
creditw orthy — capable o f handling credit
within agreed-upon lim its — m any banks
have found that an agreem ent to honor any
check within those limits, which is presented
over the cu stom er’ s signature, regardless o f
the c u sto m er’s checking account balance,
can be good business.
Granting the line o f credit, under a pre­
authorized overdraft agreem ent, perm its the
bank to convert the pa ym en t o f a check,
which would otherwise have been dishonored
because o f insufficient funds in the account,
to an autom atic loan.
On receipt o f the overdraft, the bank s im ­
p ly enters a loan, in the a m ount o f the
overdraft, to the cu stom er’s account on its
b ooks; transfers the proceeds to the cu s­
to m er’s checking account; and honors the
p a ym en t order.
The increasing acceptability and c o n ­
venience o f this arrangement am ong bank
custom ers — and its business-building suc­
cess for the banks — harbinges its broader
use, alone, and in com bination w ith a va­
riety o f other techniques which are develop­
ing in the pa ym en ts m echanism .
One typical such “ com bination arrange­
m e n t” m ig h t solve a problem involved in
m a n y pre-authorized pa ym en ts plans
the
problem imposed, for example, by custom ers
whose checking account balances are small,
or highly variable, in relation to th e total
dollar volum e o f checks written. For such
accounts, the timing o f a pre-authorized
pa ym en t m a y be especially critical during
periods o f low balances.
The overdraft principle, by assuring that
adequate funds would be available when
needed to m eet pa ym en t orders, would avoid
the need to n otify the cu stom er in advance
o f the p a ym en t date, which would require a
m em ora ndu m billing. It would obviate the
need for the custom er to verify his account
balance at frequent intervals in order to
avoid being inadvertently overdrawn. It

Electronic M oney . . . And the Payments Mechanism /\ 1

would avoid the com plications within the
p a ym en ts m echanism which a dishonored
item would otherwise create.
And it would provide the bank with an
opportu nity to perform an additional cu s­
tom er service — for which it m ig h t earn a
profit.

What does this accomplish? Three significant
things: since the customer received no bill, he
did not have to write a check and mail it to the
insurance company; since the insurance company
maintained a checking account at the customer’s
bank, the transaction could be completed as a
book entry — no check was required; since no
check was required, the transaction could be com­
pleted almost instantly, once the bill had been
presented to the bank. The customer’s bill was
paid, the insurance company had access to the
funds practically as soon as payment was due, and
no checks entered the payments mechanism.
This sort of transaction — in which payments
are of a uniformly regular, recurring nature —
would seem to offer a tremendous advance toward
“ electronic money.”

Hop, Side-step, Side-step
Recent programs based upon pre-authorization
— the insurance company scheme for example —
leap-frog the earlier requirements that the cus­
tomer write one check for the total of the bills to
be paid. A continuing, written, pre-authorization
to withdraw the necessary funds as required,
obviated that step. The necessity for the customer
to submit the bills was also side-stepped — by
authorizing the insurance company to send — and
the bank to honor — “ bills” (orders to pay)
issued directly to the customer’s bank.
The Number One problem, however — the need
for a common bank of account — still confronts us.
And several variations of the basic technique
are currently being explored in a number of
different sections of the country. Among the
different ways of meeting the problem:
§ An agreement between an employer and
his bank to have his employees’ wages de­




posited, automatically, to each employee’s
checking account. While this ties in very
nicely with the automated payroll account­
ing services being offered by a growing
number of banks, Problem One is involved
— the technique works only if each of the
firm’s employees maintains an account at
the firm’s bank. A widely-used alternative
has been for the firm’s bank to offer checking
account privileges, with one free check each
payday, to all of the firm’s employees — so
that they may withdraw the funds, or trans­
fer them readily to the bank of their choice.
§ Another adaptation of the pre-authorization concept provides for intra-bank “ intraaccount” transfers — in which the bank may
be authorized by its customer to make
periodic automatic transfers from the cus­
tomer’s checking account to his savings
account. This kind of pre-authorized trans­
fer might be arranged in such a way as to
become operative when a pre-determined
maximum balance was attained. At some
maximum balance in one’s checking account,
surplus funds could be transferred auto­
matically to one’s savings account, in order
to minimize idle and unneeded balances. At
the present time, the possibility for the re­
verse arrangement — an automatic transfer
from one’s savings account, to one’s check­
ing account (which would, effectively, make
one’s savings account an extension of one’s
checking account) — is forestalled by regula­
tions which prohibit the payment of interest
on demand deposits.
§ A further variation of this involves a
pre-authorization for the bank to make auto­
matic intra-bank transfers from a customer’s
checking account against regularly occurring
loan payments.
The one feature of these latter pre-authorization
programs, which warrants additional comment, is
that most of the checks which each makes un­
necessary are those which would only have
required handling within the bank on which they
were drawn. The checks eliminated - unfortu­
nately - are those which currently pose the very

12/ Electronic M oney . . . And the Payments Mechanism

least strain on the present payments mechanism.
These examples do provide a certain measure
of precedent for the mechanism of pre-authorization. They prove that the concept works. But
experience with the intra-bank — the purely local
— pre-authorization plans referred to above,
would seem to indicate that, if it is to gain wide
acceptance, a pre-authorization program must
involve, and include, more than a single bank.
For example, if a utility — such as a regional
power company — seeks to gain participation in
a pre-authorized bill payment plan by a sizable
proportion of its customers, the plan might well
have to be set up in such a way that virtually
all of its customers could participate without
disturbing their existing banking relationships.
Taking a very direct approach to this problem,
the Philadelphia Electric Company’s “ PECO”
plan, for example, assures that a high percentage
of the utility’s customers will have accounts at
the same bank as the company does, by the ex­
pedient of maintaining company accounts at all
banks in its service area. For a company serving
a limited area — which PECO is not — this
arrangement may be a fine solution, but main­
taining accounts in all of the banks in the Phila­
delphia area would obviously impose a substantial
burden on any company, in both its billing pro­
cedures and in its management of funds in such
a variety of locations.
Few corporations, serving customers throughout
New England — for a somewhat larger, but still
limited example —■would relish the thought of
maintaining a separate corporate account at each
of New England’s 385 commercial banks.
The recognition of Problem One, the multi-bank
nature of any broad pre-authorization plan, has
prompted the suggestion that it might be feasible
to establish regional clearing centers, through
which inter-bank exchanges of pre-authorized
debit and credit information — perhaps recorded
on magnetic tape, or in some other electronicallydigestible form -— could take place, in much the
same manner as the city clearing house functions,
except that there’d be no checks involved. Pre­
authorized payments could be made by having
the power company, for example, submit its cus­
tomers’ bills to the clearing center on magnetic




tape. The tape would carry each customer’s
identification, the identification of the customer’s
bank, the amount of each customer’s bill, and the
identification of the power company’s account at
each bank. The clearing center would then pre­
pare the needed information for each participating
bank, listing the individual customer accounts to
be charged, and the total amount to be deposited
at that bank to the power company’s account.
The data could be presented in whatever form
would best fit the data processing techniques in
use at the individual banks — punched tape or
cards, magnetic tape, or even direct computer-tocomputer interchange.
The astute observer might well wonder why the
power company could not as well prepare these
magnetic tape “ bills,” or orders to pay, on its
own electronic equipment, and then simply send
the appropriate strips of tape, or whatever, to
the respective customers’ banks?

Words and Deeds
There are a number of reasons why the clearing
center approach has been suggested as an alter­
native: if we can assume that pre-authorized
payments provide a desirable system for a regional
power company, we could well project that pre­
authorization might also be a desirable system for
a number of other creditors. Not all creditors who
might participate are likely to have equipment
capable of producing the variety of computer
input forms required by individual banks. This
suggests that a clearing center might serve to
consolidate “ billings” for presentation to the
appropriate banks, in forms compatible with each
bank’s electronic equipment.
Going a small giant step beyond that, it’s con­
ceivable that the “ clearing center” approach
might offer a way around the “ account-at-everycustomer’s-bank” problem for creditors. In addi­
tion to simply packaging and distributing thepre-authorized payments information, the center
might serve as the vehicle for clearing the actual
paym ents. If most all of the banks in an area
were to be members of the clearing center, each
creditor’s own bank, if a member, could serve as his
agent — presenting payment orders to, and accept­
ing payments from, all other participating banks

Electronic M oney . . . And the Paym ents Mechanism / 13

with which the creditor’s customers had accounts.
Virtually all customers and creditors could par­
ticipate in pre-authorized payment plans through
their respective banks — with the banks, acting as
their agents, clearing the payments through a
common banking institution, the clearing center.
Still another hitch in the emerging pre-authorized payments systems, has been the necessity for
the power companies — or other creditors — to
maintain their direct billing routine, simply be­
cause the proportion of customers who view preauthorization as a desirable development has, so
far, been surprisingly low.
Some customers do not maintain checking ac­
counts at any bank, others prefer to see each bill
before it is paid, others prefer to determine the
paying date themselves, and, presumably, still
others have always paid their utility bill by check
directly, and are unpersuaded that pre-authorization offers them any particular advantage.

N o Deposit — N o Return
For banks, pre-authorization plans permit the
extension of additional customer services —
services which may result in new checking
accounts and a larger total of checking account
balances. On the other hand, the system appears
to result in only minimal savings in costs — largely
because, like the utilities, who must still maintain
and operate their billing departments, the banks
must still process large numbers of checks for
their other accounts.
Pre-authorization plans may result in faster
transfers of funds to corporate checking accounts
— with a corresponding reduction in the average
balances of individual accounts — and, if the
corporate customer is maintaining an account
solely in order to participate in the pre-authorization program, the chances are good that the
corporate treasurer will be inclined to maintain
the account at a minimal level, transferring any
surplus quite promptly to the company’s principal
bank of account.
Where pre-authorization plans involve auto­
matic intra-bank transfers from checking accounts
to interest-bearing savings accounts, the result is
apt to be reflected in an increase in the bank’s
cost of money.




Charlie Struggling’s View of P -A
The bank customer’s benefits from pre-authoriza­
tion are essentially in convenience. He has fewer
checks to write, perhaps makes fewer deposits,
addresses fewer envelopes, and buys — and licks
— fewer stamps. Automatic pre-authorized pay­
ments may help him to avoid penalty payments —
or to gain cash discounts, if offered. At the same
time, he loses some flexibility in determining when
the bill is to be paid — and maintaining an accu­
rate, day-to-day record of his account balance
may present something of a problem. If thoroughly
systematized, however, his records could con­
ceivably be more accurate, since he should know,
well in advance, that, on a given date, his $27.13
insurance premium will be paid.
Utility bills, or others that may vary, monthto-month, would be an indeterminate deduction
(within an estimatable range) until the monthly
statement was received — unless the creditor sent
each customer an individual “ memorandum bill”
showing the amount which was to be paid, shortly
before the payment order was transmitted to the
bank. Such double billing reduces the benefit to
the creditor, but this may be a necessary “ start­
up” expense, to encourage customer acceptance
of the plan. For many customers, the opportunity
to protest a possible billing error — exercised or
not — would be a definite incentive to participate.
Many companies might value the “ customer’s
copy” as an opportunity to continue to reach each
customer, on a regular basis, with direct mail
advertising of additional services.
These two major consumer inconveniences, and
the objection raised to pre-authorized payments
by those individuals who mistrust the accuracy
of their creditors’ billings, might be successfully
met by incorporating an overdraft privilege,
coupled with a joint bank-creditor guarantee of
free, retroactive adjustment.
The commercial creditor views the pre-author­
ized payments plan as a means for obtaining a
faster collection of receivables, a reduction in
check handling volume, automatic account recon­
cilement, and an enhanced ability to predict cash
flow — with the attendant opportunity to more
effectively minimize non-earning cash assets.
On balance, it would appear that most pre­

14/ Electronic M oney . . . And the Paym ents Mechanism

authorized payments plans, initiated thus far, have
contained more elements related to a “ pre-author­
ized collection” system than one of “ payment”
looked at from the bank customer-consumer’s
point of view.
Perhaps this has been the product of necessity,
since the system, as an additional payments sys­
tem, superimposed on the existing system, is not
without added cost. It is the collecting creditor
whose immediate benefits have been more accu­
rately measureable.
This thought begets the question, “ If any
payments mechanism — pre-authorized, or some
other — simply does away with checks, what’s in
th a t for the consumer?”

The G IR O ’S Scope
One o f the paradoxical elem ents o f our
present check p a ym en ts m echanism is that
the p a ym en t inform ation, which the check
carries, actually proceeds in the opposite
direction to that o f the p a ym en t itself.
To the bank upon which a check is drawn,
the instructions are concise and explicit,
“ Pay to Williams & Plenty Co., the sum of
$29.88, (signed) Charles A. Struggling.” To
the check writer, M r. Struggling, the words
are the d ee d — having written the order (and
presum ably sent it on its way), he considers
the p a ym en t made, the chore com pleted.
However, the check, carrying Struggling’s
order to p a y Williams dr* Plenty Co., goes
first
not to Struggling's bank, which will
m ake the ultim ate p a y m e n t — but to W il­
liams & Plenty Co. The com pany, in turn,
deposits the check with its bank — thus
“ ordering” their bank to collect the m on ey.
As W illiams & P lenty's bank “ forwards”
the check through the check collection system , back to Struggling's bank, it is, in
effect, requesting each institution — corre­
spondent bank or Reserve Bank - along the
route to confirm the actual p a ym en t o f the
am ou nt o f the check, before sending the
check along to the next in line.
It is this “ confirm ation” o f the ch eck carried inform ation which spirals backward,
even as the check m oves forward — like the
shadow o f a m oth approaching a candle.
W hen M r. Struggling’ s check finally arrives
at his bank, and is paid, it “ extinguishes”




the claim it has represented against the
Struggling’s checking account. W hen p a y­
m en t is m ade, and the claim is extinguished,
the return flow o f “ confirm ations” o f the
check’ s accounting in fo rm a tio n — like the
shadow o f the m o th — stops.
In several European countries, alternative
pa ym ents m echanism s, called “ giro” sys­
tems, have been developed to sim plify the
p a ym en ts process, by m aking it m ore direct.
An essential difference between our p a y­
m ents system and the giro approach is that,
having m ade ou t his p a ym en t o r d er— his
“ check” — Charlie Struggling would not
send it to the Williams
Plenty Co., h e’d
send it directly to his local branch o f a na­
tionwide “ paying institution” . . . in which
he maintains (or now opens) an account.
The “ paying institution” m ig h t be a c o m ­
mercial bank, or, in som e countries, the
post office system . Upon receipt o f the order
to pay, this institution transm its the infor­
m ation to its branch nearest to Williams &
Plenty’ s h o m e office, and the branch notifies
Williams & Plenty that the Struggling p a y­
m en t has been credited to their account.
In som e giro system s, the p a ym en t order
— or a copy o f it — is actually sent to the
office at which the creditor finally receives
p a ym en t . . . in others, o n ly the information
is transmitted, perhaps, by wire. In either
case, howevei---- since both accounts are held
by the nationwide institution — the actual
charges and p a ym en ts to each account can
be accom plished by bookkeeping entries at
a central “ clearing” location.
The giro system — because it enables p a y­
m en ts to proceed directly from the Charlie
Strugglings to the W illiamses & Co. — elim i­
nates the necessity for the duplication o f
efforts which our “ tentative confirmation
o f anticipated p a ym e n ts” process requires.
But note that a single institution handles
the entire transaction. It m a y not be neces­
sary that both the payor and the payee (the
Charlie Strugglings and the Williamses &
Co.) maintain — or even have — “ accounts”
with the central institution. B ut the payor
m u st “ m ake the p a ym e n t” into the system
(either in cash, or as a charge to his account,
if he has one) and the payee m u st take the
p a ym en t o u t at his end, either in cash, or
as a credit to his account. The single insti­
tution acts, in effect, as the agent for both
parties to the transaction.

Electronic M oney ■ . . And the Payments Mechanism / 15

It would seem that such a question deserves a
more substantial answer than just that “ he’ll have
fewer stamps to lick!” The snail-like surge of
consumers rushing to participate in the variety
of “ pre-authorized payments plans” currently in
operation suggests that a great many consumers
may already be asking the question.

M r. Gregg’s Instant Money
At Kaiser Aluminum and Chemical Corporation,
an employee, Duncan Gregg, proposed an in­
triguing slant on pre-authorized payments. It’s
intriguing, because on first glance, it seems to be
a foolhardy way to cut down on paperwork. It’s
even more intriguing because, on reflection, it
obviously works — at least for Kaiser. The system
doesn’t cut down on checks — unfortunately —
but it obviates a considerable amount of other
paper work that’s also associated with the pay­
ments mechanism.
Whenever the company sends out a purchase
order, they enclose a signed, blank check, made
out to the supplier.
That’s right! A signed, blank check.
When the supplier ships the material ordered,
he simply fills in the amount the company owes
him, and cashes the check. Since the company
already has a record of what it ordered, and the
returned check is proof of what the materials cost,
there is no need for the supplier to make out an
invoice or mail it to the company, where it must
be read, verified, and filed. The goods were
ordered. The goods were shipped. And the
amount due was paid.
Over a five-year period, Kaiser reports that it
has sent out over 700,000 signed, blank checks —
without a single instance of misuse!
Kaiser’s experience with “ instant money”
sounds like a sparkling innovation , . . and it
obviously is, in the circumstances.
Most bankers would deny any interest in doing
such a thing — would even shudder at the thought.
But it’s noteworthy that Kaiser’s blank checks
carry the name of the firm to which the check
may be paid, and an unobtrusive statement to the
effect that the check is not valid in excess of a
stated amount. Kaiser obviously knows its sup­
pliers — and knows, too, that the supplier knows




that his continuing business with Kaiser depends
upon his honesty in handling the account. That
package sounds very much like what thousands
of bankers have offered over the years — first to
businessmen, and more recently to card-carrying
consumers.
Only bankers call it, “ A line of credit.”
We cite the example here, because it not only
demonstrates the versatility of the pre-authoriza­
tion concept, but also provides an interesting link
between pre-authorization, per se, and the credit
card. About the only real difference, between the
two, is that the credit card provides for the
repetitive use of what amounts to a signed
blank check.

The Card Carriers
Perhaps the most dramatic development in the
payments mechanism in recent years has been the
proliferation of credit cards — particularly bank
credit cards. Credit cards have been used for over
half a century. The major oil companies and large
department stores were among the first to find
them a handy and useful device for handling con­
sumer purchases on credit. After World War II,
national travel and entertainment cards were
developed by a number of non-bank institutions.
Then a few commercial banks entered the field,
pretty much as local contenders, in the 1950’s.
But it was not until late 1966 that the bank
credit card business really began to blossom.
As of October, 1967, 258 commercial banks were
carrying some $640 million in outstanding credit
under their own card plans, another 700 banks
were participating under agency arrangements in
which a correspondent held the outstanding credit,
and 136 additional banks held another $16 million
extended through their participation in the nonbank card plans of American Express, Diners
Club, and Carte Blanche.
Despite their rapid development and wide ac­
ceptance, the credit cards’ role in the development
of any new and improved payments mechanism
is, at best, uncertain.
There are those who feel that, as we become
accustomed to completing retail transactions
without the use of coins, currency, or checks, we
may be developing a healthy adaptability to

16/E lectron ic M o n ey . . . A nd th e P a ym en ts M ech a n ism

whatever payments mechanism may emerge.
While this may, in fact, be true, the continuing
annual growth in the number of checks being
written suggests that, while we may be acquiring
a new technique — to which the burgeoning of
outstanding card credit attests — we’re scarcely
allowing our check-writing facilities to atrophy,
as a result.
It seems more likely that the credit card may
serve as a useful guinea pig in the development
of a means of individual identification — and per­
haps a universal system — that will be necessary
before payments can be instantaneously completed
on a broad enough basis to form the keystone of
an improved payments mechanism.

The Cash Card?
Improvements in the present payments mecha­
nism— the design of an “ electronic money”
system, if you will — must be predicated upon an
acceleration of those payments which are currently
made by check. At least one recent speaker has
expressed the notion that, after credit cards, and
truncations, and pre-authorized payments, and
all, some financial wizard is going to come up
with a means of payment that will be instan­
taneous and universal — called “ cash.” While the
idea was meant in jest, that is the basic goal of
efforts to improve the payments mechanism —
to develop systems and instruments, other than
cash, which can perform as nearly like cash as
possible.
The bank credit card quite obviously involves
the consumer in writing but one check — to his
bank, in payment of the aggregate amount of the
charges which the bank has accumulated in his
name. Even the one check might be eliminated,
under these circumstances, by an appropriate pre­
authorization for the bank to charge the cus­
tomer’s account automatically, say, once a month.
But to the extent that bank credit card holders
use their cards - instead of paying cash — to make
purchases, the credit card defers, rather than
hastens, payment. The retailer who accepts the
credit card in lieu of cash payment is accepting a
delay in payment in the face amount of the bill,
or accepting a discount from the face amount, or,
perhaps both.




Re-shuffling
Despite the fact that credit card arrangements
may largely do away with the checks required to
pay each individual bill, by permitting book entry
transfers between accounts at one bank, the credit
card’s use in this way introduces the retail sales
slip, or credit card voucher, into the payments
mechanism. The retailers’ “ bills” to the card
holder’s bank of account must be sorted, pack­
aged, transported, exchanged, charged, paid, and
reconciled within the clearing system — albeit
limited to the local bank — just as the checks had
to be. Having only recently obtained a degree of
uniformity in the physical design, dimensions,
and MICR encoding of checks, which facilitated
their handling on electronic equipment, banks can
scarcely view an incoming tide of individually
prepared sales slips as a welcomed alternative to
checks.
But, as with our example of intra-mural pre­
authorization plans, these local bank credit card
schemes affect only one bank and its customers.
The billings and the credits do not enter into the
regional or national workings of the payments
mechanism.

One . . . Revisited
It is when the cards “ go regional” — or wider —
that we again encounter Problem One (as with
pre-authorized payments): there must be a com­
mon institution through which the charges against,
and credits to, both parties involved in the trans­
actions may be cleared.
A significant bank credit card concept is that
the card has demonstrated an increasing awareness
among consumers as well as retailers, that there
is such a thing as the “ time value” of money —
that “ money-now” is worth more than “ moneylater” .
Homespun evidence of the growing
awareness among customers that credit — a delay
in p a y m e n t i s a “ cost” to the retailer, is pro­
vided by reports that some restaurant customers
have demanded a discount for paying cash for
their meals, instead of using their credit cards,
which would require the restaurant to accept a
similar discount from its bank.
As this basic notion is more clearly, and widely,
understood, it would seem that any efforts aimed

Electronic M oney . . . And the Paym ents Mechanismf\ 1

toward accelerating everyone’s “ money-now”
would receive more enthusiastic support.
The cards’ most significant achievement, how­
ever, so far as an improved payments mechanism
is concerned, is that use of the card has encouraged
thousands of people to accept the idea, in effect,
of telling all, or many of their creditors, “ . . . and
send the bill to my bank.”
That, it would seem, is a distinct and helpful
step along the road to whatever improvements lie
ahead — and it parallels the developments occur­
ring in other phases of the pre-authorized pay­
ments field.

Funds W ithout Paper
So far, our review of the payments mechanism
has struggled with efforts to cut down the volume
of checks or to eliminate related paper instru­
ments.
Despite the gladsome ring of “ The
Checkless Society,” the name is misleading, for
it tends to confuse means with ends. The goal,
plainly, is to speed the completion of transactions.
It just happens that the handling of the paper
required by a large portion of today’s payments
mechanism has been chosen — partly because of
the sheer size of the pile — as the symbol against
which the overall effort is being directed. But the
goal is not the elimination of checks — it is the
improvement of the payments mechanism.
With that running start, we ought, perhaps, to
look more closely at a part of the payments
mechanism which already functions quickly, effi­
ciently — and without paper.
There being very little new under the sun, it is
not surprising to find that payments have been
made electronically for many years. Assorted
arrangements for transferring money-by-wire are
in existence, and they are being used with in­
creasing frequency.
Anyone, who has been stranded away from
home and out of money, for example, must be
aware that, for a fee, Western Union will transmit
money, from most anywhere in the free world to
most anywhere else in the free world, over its
wire communication lines.
A number of commercial banks, located in
various parts of the country, jointly operate a
so-called “ bank wire network,” over which mem­




bers of the group transfer funds for their own
accounts, and those of their correspondents.
Planning for the improvement and expansion of
this system is under way.
Perhaps the largest dollar volume of “ paperless”
funds transfers is accomplished over the national
tele-typewriter communication network, linking,
and operated co-operatively by, the 12 Federal
Reserve Banks and their 24 branches — the Fed’s
leased wire system, The dollar volume which this
network transfers — last year, over five and onehalf trillion dollars — amounts to over two and
three-quarters times the dollar volume of checks
processed by the Federal Reserve System . . .
despite the fact that the Fed handles 1,200 times
more checks than wire transfers!

The 12-Ought Wire
The largest share of messages over the Fed’s
wire system are transfers of funds from one mem­
ber bank to another, operating either on their
own accounts, or for the account of a third party.
A member bank can request such a transfer simply
by telephoning its Reserve Bank or branch. A
typical transfer might be one involving Federal
Funds — in effect, transferring unneeded funds in
one member bank’s Federal Reserve account to
the Reserve account of another member bank,
located in another Federal Reserve District, per­
haps to clear an excess of charges, against the
originating bank, which the second bank accu­
mulated during the day’s operations.
The wire system also carries internal com­
munications between the Reserve Banks.
Transfers of funds in multiples of $1,000 are
handled without charge for member banks, but a
fee of $1.50 is charged for each transfer involving
odd-dollar amounts, or transfers for the account
of a party other than a member bank.
Growth in the volume of messages transmitted
over the Federal Reserve System’s 75-words-aminute leased wire network has encouraged the
System to expand and improve its capabilities.
This past fall, the System began operating a pilot
project, a separate “ bypass network” — linking
the Federal Reserve Banks in New York, Cleve­
land, Chicago, and San Francisco — which oper­
ates at speeds 16 times faster than the Reserve

18/ Electronic M oney . , . And the Payments Mechanism

Banks’ original wire transfer system.
The “ bypass network” has reduced the load on
the original wire system by about 15 percent —
releasing some capacity to handle additional
volume, while the Fed plans how best to accom-

The W i r e ’s Ends
As is true o f the giro system s discussed on
page 14, wire transfers o f funds accomplish
the m aking o f a p a ym en t “ directly.” The
order to p a y is transm itted to the institution
which is to do the paying, rather than being
first sent to the person w ho is to receive the
p a ym en t, as is the case with checks. The
p a ym en t and the information concerning
the p a ym en t then proceed, together, to the
p a ym e n t’s destination.
It is im portant to recognize, however,
that wire transfer system s require that the
institution controlling the paym ent m echa­
nism be capable o f serving as the agent o f
both parties to the transaction. It m ust
have the m eans to accept paym en t at one
en d o f the wire, and to make p a ym en t at
the other. It, in effect, m u st hold accounts
both for the person paying, and the person
being paid.
If the transactions within a wire transfer
system , designed to serve a wide portion of
the public, are to be initiated by telephone
or som e oth er electronic com m unication,
the transfer agent would appear to face two
added prob lem s: how to determ ine that his
instructions from an individual are authen­
tic; and how the instructions — and the
pay m en t — are to be recorded and confirmed.

modate future wire transfer needs. It also is
providing the System with a considerable amount
of experience with new types of equipment, new
systems, and new procedures — experience which
will be helpful in designing a new nation-wide wire
transfer operation.
A major capability of this latter system will be
the automation of data transmission between
banking centers in a way that will either minimize,
or eliminate, the need for converting information
in one form (as written on, say, a check) to
another (as it might be stored on a magnetic tape,




for example) — and back again (to, say, punch
card form) — before it can be transmitted to, or
digested by, an outside computer. Data accepted
by the Fed’s automatic equipment will be able to
flow immediately to automatic equipment at any
receiving office across the country.
It is planned that the Fed’s new communication
system will be “ modular” — composed of small,
complete, operating pieces — so that multiple
units can be installed where, and as needed, to
match each area’s growing need for service.
The Fed’s communication system, which al­
ready handles a very substantial dollar volume of
“ big ticket” funds transfers, is in the process of
being re-designed, speeded up, and expanded.
This, surely, will offer a sizable potential for
speeding the completion of transactions — and
may, just may, provide a basic capability through
which the effectiveness of other emerging com­
ponents of an improved payments mechanism can
be enhanced.

The Credit-Card-Carrying,
Short-Circuited,
Truncated,
Pre-Authorized,
World of Electronic M oney
Altogether, we’ve taken, here, an exceedingly
cursory turn among, what seemed to us to be,
some of the less-reflected-upon aspects of potential
changes in our payments “ machinery.”
The interested reader may see, among these
ideas, some pieces of an improved payments
mechanism on the verge of being ready to begin
to start falling into place.
Only alluded to, but of singular importance,
despite the lack of attention focused on it — here,
and by others — is the ultimate goal of the
efforts being, and to be, expended on the im­
provements to be made.
Critical to the design, to the implementation,
to the acceptance, and to the results of these
efforts, we submit, must be housewives, super­
market cashiers, tycoons, everyday people — for.
theirs is the last word in: “ The Electronic
Money Society.”

Electronic M oney

And the Paym ents M ech an ism / 19

Strategy For Improving the Payments Mechanism —
A n Editorial
It is clear that the en vironm en t in which banks
and their customers operate is conducive to basic
and far-reaching changes in the m ethods by
which pa ym en ts can be m ade. Advances in c o m ­
puter and com m unications technology are paving
the way for m ajor changes in banking practices —
m any o f them based upon the prem ise that
"m o n e y is inform ation .”
The preceding review has touched upon a n u m ­
ber o f areas within the p a ym en ts m echanism in
which change is already under way.
Still unanswered, however, is the m ajor qu es­
tion o f how these parts — or other developm ents,
som e, perhaps, still to be proposed — m a y be as­
sorted, com bined, synthesized, amalgamated, or
blended into an im proved pa ym en ts m echanism .
W hat is lacking is a strategy for achieving an
improved m echanism .
Quite-different viewpoints will be taken
people and institutions variously affected
changes in the p a ym en ts m echanism .

by
by

This is an a ttem p t to presen t our convictions,
in the hope that these views will contribute
toward developing a strategy for change.
§ C o n v i c t i o n N o . 1 : The payments mechanism
should be an integral part of the banking system.
There is an underlying danger in developments
that tend to move part of the payments mecha­
nism outside the sphere of commercial banking.
The public welfare is not advanced by the frag­
mentation of the payments mechanism that could
result as private interest groups tend to siphon
off the more profitable portions of the payments
process. To contend that the payments mecha­
nism should continue to be centered in the banking
system, however, is not to suggest that changes in
the mechanism should be made only for the con­
venience of commercial banks. The structure of
banking within the United States suggests that a
variety of “ pieces,” adapted to meet the varying
local and regional needs of banks and their cus­
tomers, will comprise whatever improvements in
the existing mechanism may be made. The
Federal Reserve System is responsible for inte­
grating — federating, if you will — the nation’s
thousands of privately owned, profit-oriented
banks, into a viable banking system. In addition,
it is charged with the responsibility for formulating
and implementing monetary policy. In meeting
these responsibilities, the Federal Reserve System




is committed to fostering and encouraging the
development of versatile and compatible com­
ponents of the payments mechanism. Regulation
of specific “ pieces” of the whole, however, is less
important than the Fed’s positive role in actively
participating with commercial banks in the de­
velopment of a payments mechanism capable of
meeting the needs of the public at large, banks,
and their customers. Individual bank-business in­
novations will not necessarily create the optimum
payments mechanism to serve the public’s interest.
§ C o n v i c t i o n N o . 2: Checks will continue to
play a major role in the payments process for the
foreseeable future. The check, because of its
advantages of simplicity, convenience, and the
record of transactions which it provides, is widely
accepted as a means of payment. It is highly
unlikely that any development in the payments
sphere, achievable within the next decade, will
lead to a drastic reduction in the number of checks
being written. Such changes as do occur are more
likely only to reduce the growth in check volume.
§ C o n v ic t io n N o . 3 :
Indictments directed
toward the check, are invariably aimed at the
paper upon which it is written — not at the in­
formation it carries. The check will be replaced
by a system which will transmit this information
faster, more accurately, more directly, and more
versatilely than is possible with the check. “ We
know how to do it better!”
§ C o n v i c t i o n N o . 4: The development of bank
credit cards contributes to the development of the
payments mechanism by familiarizing the public
with the completion of retail transactions without
the use of coin, currency, or checks. It also en­
courages the development and use of standardized
identification devices and procedures. On the
other hand, instant credit should not be confused
with instant money. Credit cards defer rather
than hasten payments. By converting what are,
essentially, cash transactions into credit trans­
actions, credit cards introduce an additional cost
to the payments system.
§ C o n v i c t i o n N o . 5 : The expanding capabilities
of a Federal Reserve communications system will
encourage an increasing volume of the larger pay­

2 0 /Electronic M oney . . . And the Payments Mechanism

ments transfers to move over that system
without the use of written payment orders. While
this will have only a limited effect upon the num­
ber of payments made by check, it will achieve a
marked reduction in the dollar volume of checks
passing through the check clearing process.
6: The most likely changes
in the payments system are those which involve
the introduction of a minimum of institutional
changes. Change, in short, will come via the
paths of least resistance and most identifiable
gains. For this reason, the area of pre-authoriza­
tion appears to offer the greatest immediate
potential for a reduction in the rate of increase
in the volume of checks. Pre-authorization has
demonstrated its feasibility in the European giro
systems. It would require only minimal equip­
ment changes on the part of commercial banks
and their customers. The major problems in­
volved are those of organization and public
acceptance — both of which are basic problems
involved in most other solutions. Failing reso­
lution of these two problems of pre-authorization,
there would seem to be little likelihood of the
adoption of more radical changes in the payments
mechanism.

§

C o n v ic t io n N

o

.

C o n v i c t i o n N o . 7 : As computers, and com­
munications between them, are more frequently
making use of the same stream of electrons, there
is increasing difficulty in drawing a line between
banking information and its transmission. As
a result, the public agencies charged with regula­
ting what were distinctive areas and endeavors are
finding that the boundaries of their responsibilities

§




grow blurred — and, on occasion, conflicting. This
suggests that continuing improvement of the
payments mechanism will ultimately require in­
stitutional changes which may extend beyond the
banking community.
C o n v i c t i o n N o . 8 : It is unlikely that private
enterprise, alone, will be able to develop and
implement a payments mechanism which will
satisfy the entire range of the public’s banking
needs. Private planning is guided by the profit
motive, and rightly so. But not all portions of a
nation-wide payments mechanism can necessarily
operate both profitably and in the public interest.
Thus, the achievement of an improved payments
mechanism will require continuing cooperation
between private enterprise and public institutions,
acting in the interests of both the public and the
banking community. The interests of banks, both
large and small, must be merged with those of
the banking public, including individuals, firms,
and the government. A crucial issue will be the
determination of the most desirable mix of public
and private equities in the payments mechanism.

§

The success o f the present check pa ym en ts
system has been the result o f a singular blend o f
public and private interests — an achievem ent in
cooperation between the American banking in­
dustry and the Federal Reserve S ystem .
The
Federal Reserve S ystem is com m itted to serving
as an active participant in developm ents, w ork­
ing toward an improved pa ym en ts system , and
it is accepting a position o f leadership where its
unique organizational structure and capabilities
indicate that it can best serve to fuse public and
private interests.

Annual Report 1967

Federal
Reserve
Bank of
Boston




22

Comparative Statement of Condition

December 31, 1967

December 31, 1966

ASSETS
$ 697,998,312.35

$ 775,433,679.75

Federal Reserve Notes of Other Federal Reserve Banks

71,070,814.00

58,371,719.00

Other Cash

23,113,133.93

9,133,494.05

Gold Certificate Reserves

2,450,000.00

500,000.00

2,512,146,000.00

2,325,959,000.00

695,001,550.73

630,085,289.47

Discounts and Advances
U.S. Government Securities — System Account
Cash Items in Process of Collection
Bank Premises
Foreign Currencies

2,756,130.85
41,961,851.06

18,050,029.39

17,730,777.60

$4,099,494,364.13

$3,861,931,941.78

$2,495,863,437.00

$2,387,404,007.00

870,185,989.84

859,163,298.98

All Other
Total Assets

2,672,523.73
76,992,000.00

LIABILITIES
Federal Reserve Notes (net)
Deposits:
Member Bank Reserve Accounts
U.S. Treasurer — Collected Funds
Foreign
Other
Total Deposits
Deferred Availability Cash Items

525,261.98

6,720,000.00

7,680,000.00

9,444,388.30

8,547,198.92

969,390,980.60

875,915,759.88

561,396,020.14

532,090,131.73

14,610,626.39

11,914,843.17

$4,041,261,064.13

$3,807,324,741.78

$

$

Other Liabilities
Total Liabilities

83,040,602.46

CAPITAL ACCOUNTS
Capital Paid In
Surplus

29,116,650.00

Total Capital Accounts

$

Total Liabilities and Capital Accounts

$4,099,494,364.13




58,233,300.00

27,303,600.00
27,303,600.00

29,116,650.00
$

54,607,200.00

$3,861,931,941.78

23

Comparative Statement of Earnings and Expenses

1966

1967
Current Earnings:
Advances to Member Banks

$

Foreign Loans on Gold
Invested Foreign Currency Balance
U.S. Government Securities — System Account
All Other
Total Current Earnings

335,764.19

$ 1,586,882.21

13,443.26

31.346.20

1,212,088.39

1,054,797.03

112,844,042.35

96,255,480.94

18,543.47

19.324.21

114,423,881.66

98.947.830.59

Net Expenses

14,013,270.10

12,190,897.99

Current Net Earnings

100,410,611.56

86.756.932.60

Additions to Current Net Earnings:
0

Profit on Sales of U. S. Government Securities (net)

39,336.10

All Other

80,862.19

63.723.42

120,198.29

63.723.42

Total Additions

Deductions from Current Net Earnings:
Loss on Sales of U.S. Government Securities (net)

0

129,795.03

All Other

13.064.36

19,382.59

Total Deductions

13.064.36

149,177.62

Net Addition or (Deduction)

107,133.93

(85,454.20)

Net Earnings before Payments to U.S. Treasury

$100,517,745.49

$86,671,478.40

Dividends Paid

$

1,680,896.99

$ 1,619,325.71

97,023,798.50

84,347,452.69

Payments to U.S. Treasury (Interest on F.R. Notes)
Transferred to Surplus




1,813,050.00

704,700.00

$100,517,745.49

$86,671,478.40

24

Volum e Figures for Years 1966 and 1967

Volume in Pieces or Units
(Daily Average)
TRANSACTION

1966

1967

Volume in Dollars
(Annual Total)
1966

1967

Discounts and Advances

$1,260,804,000
7,961,000

Daily Average Outstanding

$

4,104,361,000
35,254,750

Purchases and Sales of U.S.
9

10

340,999,400

324,157,700

Currency Sorted and Counted

1,367,754

1,391,735

2,513,871,502

2,457,556,194

Coin Counted and Wrapped

3,980,514

4,204,636

93,295,750

96,234,850

Check Collection

1,722,710

1,596,301

144,083,526,428

130,793,598,296

4,888

5,188

1,740,206,652

1,113,532,949
18,794,938,718

Securities for Member Banks

Noncash Collection:
Notes, Drafts, and Coupons
(except U.S. Government)
Safekeeping of Securities:
Pieces Received and Delivered*
Coupons Detached
Transfers of Funds

592

421

10,371,985,172

2,490

2,494

55,704,053

51,107,601

998

927

231,104,652,049

191,210,841,147

Issues, Redemptions, and Exchanges:
U.S. Securities (Direct Obligations)
U.S. Savings Bonds and Savings Notes
All Other

950

1,139

14,374,166,010

17,121,717,387

41,401

40,449

547,240,715

559,878,356

36

42

152,720,025

120,100,550

2,206

2,204

213,837,035

216,498,645

U.S. Government Coupons Paid
(Direct Obligations)
Federal Taxes: Depositary Receipts
and Direct Remittances
Currency Verified and Destroyed

4,271

3,680

3,855,952,107

3,238,609,901

466,585

245,542

384,400,000

87,162,000

694

651

12,265,573,567

11,570,585,441

Deposits and Withdrawals — Treasury
Tax and Loan Accounts

*Data here not comparable with earlier years, due to change in reporting procedure.




Summary of Principal Change s /2 5

Statement of Condition

At the end of 1967, for the first time in the Bank’s
history, Total Assets surpassed $4 billion. While
the rate of increase in total assets, at slightly
over 6 percent, was somewhat lower than the
8-percent-plus gain recorded in 1966, 1967’s in­
crease was above that of most other recent years.
Among the asset changes, Gold Certificate
Reserves, declined by $77.4 million — 10 percent.
The major factors contributing to an increase
in gold reserves, Treasury transfers — and less
significantly, clearings of the notes of other
Federal Reserve Banks, and interest on participa­
tion in the Open Market account — failed to offset
the negative influence of private commercial and
financial transactions, representing transfers to
other districts, at year’s end. The resulting decline
in the Bank’s gold reserves was, very largely, a
result of the nation’s continued loss of gold to
foreign central banks, and of activities in defense
of the dollar, in the face of heightened gold market
speculation, following Great Britain’s devaluation
of the pound in mid-November.
The $12.6 million increase in Other Cash is
largely a reflection of a build-up of the Bank’s coin
inventory — to the highest levels in its history.
Increasing supplies of the new clad coin were
received for circulation, which added to the Bank’s
accumulating inventory of mixed silver and clad
coin being held for return to the Treasury.
The near-84 percent increase in the Bank’s
Foreign Currency holdings traces, primarily, to
heightened activity under the reciprocal currency
agreements in effect between the System and
foreign central banks — activity designed to fore­
stall temporary disequilibrating gold movements.
The principal changes contributing to the $234
million increase in the Bank’s liabilities were an
increase of some $108 million in Federal Reserve
Notes in circulation, and an increase of nearly
$83 million in the U. S. Treasurer’s Collected
Funds deposit.
The Bank’s gold reserve ratio stood at 27.9
percent, compared with 32.5 percent a year earlier.
The decline
while partially attributable to the
increase in Federal Reserve notes in circulation,
against which the reserve is measured
is an
indication of the nation’s continuing balance of
payments problems.




Earnings and Expenses
Total Current Earnings of the Bank rose $15.5
million — by more than 15 percent — somewhat
below 1966’s near-$19 million increase. Higher
earnings, attributable to the Bank’s participation
in the System’s U. S. Securities, and Invested
Foreign Currency accounts, were reduced by
somewhat lower earnings from other functions —
particularly from Advances to M em ber Banks,
which were at the lowest level since 1963.
More than half of the near-15 percent increase
in Net Expenses stemmed from the increased
cost of people — as the Bank revised the structure
of its salaries, retirement program, and other
benefits, in order to align the Bank’s compensation
scales more competitively with those of other
employers in the area. Increased costs for many
items — from armored car services, to the printing
of Federal Reserve Notes — contributed to the
balance of the additional expenses.
Net Earnings, after adjustments, totaled $100.5
million — $13.8 million higher than in 1966. Of
these earnings, almost $1.7 million was paid to
member banks as their statutory 6 percent divi­
dend on Federal Reserve Bank stock. Just over
$1.8 million was transferred to Surplus, to equal
Paid In Capital. All of the balance, more than
$97 million, was paid to the Treasury as an interest
charge, levied by the Board of Governors, on
Federal Reserve Notes, under Section 16 of the
Federal Reserve Act.

Volume of Operations
During 1967, an average of more than 1.7 million
checks a day were processed by the Bank’s check
collection department — over 125,000-a-day more
than in 1966
representing a near-8 percent
increase in the number of checks handled. This
year’s dollar volume amounted to over $144 billion
a 10 percent increase over the level of 1966.
Advances to member banks, at the end of 1967,
were at the lowest levels since 1963. Daily bor­
rowings
a more meaningful measure of discount
window activity than any single day’s figure —
averaged $7.9 million in 1967, compared with
$35.3 million, in 1966. There were, in fact, five
days during the year, on which no banks were
borrowers from the Fed.

26/ Summary of Principal Changes

A variety of influences contributed to 1967’s
relative inactivity at the discount window. The
Fed’s policy of monetary ease throughout almost
the entire year provided higher levels of reserves,

Float
Float, the difference between Cash Items
in the Process of Collection and Deferred
Availability Cash Items — at $134 million
was considerably higher on the last day
of 1967, than it had been at the close of
business a year earlier. But, the figure for
any one day’s float is less-than-meaningful,
because of the influences of transportation
delays and similar happenstance. It should
be noted that 1967’s float, on a daily basis,
averaged $20.7 million
down sharply from
the $34 million averages of both 1965 and
1966. Part of this achievement must be
credited, obviously, to a somewhat more
fortuitous combination of weather and trans­
portation circumstances during the year
but a significant factor was the addition of
a fifth high-speed processing unit, which
enabled the check collection department to
handle a growing volume of checks with
increasing efficiency and dispatch.

relative to banks’ needs; higher levels of savings,
and increased trading in Federal Funds provided
alternative sources of funds; and loan demands
were more moderate, as many corporate borrowers
sought to acquire needed funds directly from the
money market.
The increase, approaching 8 percent, in the
number of funds transfers transmitted by the
wire transfer department was accompanied by a
21 percent increase in the total dollar volume of
those transfers - an indication that more, largerdollar transfers are making use of this service.
While the table indicates a modest decline in
the processing of wrapped coin, this was more
than offset by the increased distribution of loose
coin in mint-sealed bags.
Currency verification and destruction opera­
tions averaged some 90 percent higher in the




volume of pieces handled — and almost three-anda-half times higher in the dollar volume of work
processed. This marked increase in the dollar
volume is traceable, in part, to the permission,
granted by the Treasury in mid-1966, allowing
the Bank to destroy whole unfit notes of its own
issue — but, even more significantly, to a very
noticeable increase in the public’s use of notes of
the $5 and $10 denominations.

The Fed Goes “ Pre-Authorized”
In November, the Bank announced the
availability of a new procedure which banks
in the First District might use in making
payment to the Fed for checks drawn on
them. Called, “ Gross Payment —- Automatic
Charge,” the system is, essentially, one of
pre-authorized payment.
Previously, following the receipt of the
Fed’s “ cash letter” — the “ bill” covering all
checks being presented to a bank by the
Fed, for payment
a member bank was
required to send an individual authorization,
requesting the Fed to deduct the net amount
due from the bank’s Reserve Account . . . in
effect, a “ check” to cover “ the bill.”
Obviously, a nonmember bank, which had
no Reserve Account, could not authorize a
deduction from its Reserve Account to pay
such a “ bill” — and, therefore, would have
to write an actual “ check” to cover the
payment.
The Gross Payment — Automatic Charge
plan involves a pre-authorization, by a par­
ticipating commercial bank, which enables
the Fed, automatically, to deduct the gross
amount of each day’s bundle of checks being
charged to that bank, when due, from the
bank’s Reserve Account. A nonmember bank
may grant a pre-authorization to charge the
amount due, to the Reserve Account of its
participating correspondent bank, if the cor­
respondent agrees.
A measure of the merit of the plan is the
fact that 93 percent of all commercial banks
in the First District are participating.

Elections and Appointm ents/ 27

DIRECTORS

OFFICERS

In the annual election of the Directors of the
Bank, William R. Kennedy, President of the
Merrimack Valley National Bank, Haverhill,
Massachusetts, was elected a Class A director for
a three-year term ending December 31, 1970. He
succeeds William I. Tucker, Chairman of the
Board of Vermont National Bank, Brattleboro,
Vermont, who served as a director from 1965
through 1967.
In the same election James R. Carter, President
of Nashua Corporation, Nashua, New Hampshire,
was re-elected for a three-year term ending
December 31, 1970.
Howard W. Johnson, President of Massachu­
setts Institute of Technology, Cambridge, Massa­
chusetts, was designated Chairman of the Board
of Directors of the Bank and Federal Reserve
Agent for 1968. He succeeded Erwin D. Canham,
Editor in Chief of the Christian Science M oni­
tor, who completed nine years of service on our
board.
Charles W. Cole, President Emeritus of Amherst
College, Amherst, Massachusetts, was redesig­
nated Deputy Chairman of the Board of Directors
for the year 1968.

Charles E. Turner, formerly Vice President, was
appointed Special Adviser to the Bank, effective
February 1, 1967, and served in that capacity
until his retirement on July 31, 1967.
Wallace Dickson, former Assistant Vice Presi­
dent, until his appointment as Special Adviser to
the Bank, effective February 1, 1967, retired on
April 30, 1967.
Daniel Aquilino, formerly Assistant Vice Presi­
dent, was appointed Vice President, effective
February 1, 1967.
Harry R. Mitiguy, formerly Assistant Vice
President, was appointed Vice President, effective
February 1, 1967.
Laurence H. Stone, formerly General Counsel
of the Bank, was appointed Vice President and
General Counsel, effective January 1, 1968.
John J. Arena, Monetary Economist, resigned
from the Bank effective June 23, 1967.
John A. Hayes, formerly Assistant Cashier, was
appointed Assistant Vice President of the Bank,
effective January 1, 1968.
Robert M. Scanlan, formerly Assistant Cashier,
was appointed Assistant Vice President, effective
January 1, 1968.
Donald A. Pelletier, formerly Assistant General
Auditor, was appointed Assistant Cashier, effec­
tive February 1, 1967.
Robert V. Clapp, formerly acting assistant
general auditor, was appointed Assistant General
Auditor, effective January 1, 1968.
Jared E. Hazleton, who served as an economist
in the research department, was appointed Bank­
ing Services Officer, effective February 1, 1967.
James T. Timberlake, formerly public services
administrator, was appointed Public Information
Officer, effective January 1, 1968.

FEDERAL ADVISORY COUNCIL
John Simmen, President, Industrial National
Bank of Rhode Island, Providence, Rhode Island,
was reappointed by the Board of Directors to serve
for a third year as the member of the Federal
Advisory Council representing the First Federal
Reserve District for 1968.




28

Directors, January 1, 1968

HOWARD W. JOHNSON
Chairman of the Board and Federal Reserve Agent
President, Massachusetts Institute of Technology
Cambridge, Massachusetts
CHARLES W. COLE
Deputy Chairman of the Board; President Emeritus,
Amherst College, Amherst, Massachusetts
CHARLES A. BEAUJON, JR.
President, The Canaan National Bank
Canaan, Connecticut
JAMES R. CARTER
President, Nashua Corporation
Nashua, New Hampshire
WILLIAM R. KENNEDY
President, Merrimack Valley National Bank
Haverhill, Massachusetts
F. RAY KEYSER, JR.
Counsel and Personnel Director,
Vermont Marble Company, Proctor, Vermont
LAWRENCE H. MARTIN
President, The National Shawmut Bank of Boston
Boston, Massachusetts
W. GORDON ROBERTSON
President, Bangor Punta Coloration
Bangor, Maine

M E M B E R OF F E D E R A L A D V IS O R Y C O U N C IL
JOHN SIMMEN




President, Industrial National Bank of Rhode Island
Providence, Rhode Island




29

Officers, January 1, 1968

GEORGE H. ELLIS, President
EARLE O. LATHAM, First Vice President
D. HARRY ANGNEY, Vice President
DANIEL AQUILINO, Vice President
ANSGAR R. BERGE, Vice President
ROBERT W . EISENMENGER, Vice President and Director of Research
LUTHER M. HOYLE, JR., Vice President
STANLEY B. LACKS, General Auditor
HARRY R. MITIGUY, Vice President
LAURENCE H. STONE, Vice President and General Counsel
JARVIS M. THAYER, JR., Cashier
G. GORDON WATTS, Vice President
PARKER B. WILLIS, Vice President and Economic Adviser
PAUL S. ANDERSON, Financial Economist
LEE J. AUBREY, Assistant Vice President
CHARLES H. BRADY, Assistant Vice President
JOHN A. HAYES, Assistant Vice President
LORING C. NYE, Assistant Vice President
ROBERT M. SCANLAN, Assistant Vice President
RICHARD A. WALKER, Assistant Vice President
JOHN J. BARRETT, Assistant Cashier
ROBERT V. CLAPP, Assistant General Auditor
JARED E. HAZLETON, Banking Services Officer
RIPLEY M. KEATING, Assistant Cashier
DONALD A. PELLETIER, Assistant Cashier
RICHARD H. RADFORD, Assistant Cashier
PHILIP A. SHAVER, Secretary and Assistant Counsel
JAMES T. TIMBERLAKE, Public Information Officer







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