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FED ER A L RESERVE B A N K OF DALLAS

DALLAS, TEXAS

75222

Circular No. 71-1^6
June 23, 1971

POLICY STATEMENT ON PAYMENTS MECHANISM

To All Banking Institutions and Others Concerned
in the Eleventh Federal Reserve District:

Enclosed is a press release dated June 17, 1971, containing
the announcement of a Policy Statement issued by the Board of Governors
of the Federal Reserve System calling for basic changes in the nation’s
system for handling money payments. The Board regards the changes sug­
gested in its Policy Statement as initial steps in a major revital­
ization of the facilities for making financial transactions through the
banking system. A high priority is placed upon providing faster, more
convenient, and more dependable check clearing services by increasing
the speed and efficiency of check handling.
Your bank may be asked in the near future to cooperate with us
in efforts to accelerate the funds transfer and check collection process.
Additional information will be furnished as more definitive plans are
developed. Until then, the current Operating Bulletins and practices of
this Bank will remain in effect.
Yours very truly,
P. E. Coldwell
President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

F E D E R A L

press

R E S E R V E

release

For release In morning papers
Friday, June 18 > 1971

June 17, 1971

The Board of Governors of the Federal Reserve System today
issued a policy statement calling for basic changes in the nation's
system for handling money payments.

These are, essentially, transi­

tional steps toward replacing the use of checks with electronic trans­
fer of funds.
The Board's Statement was directed to the Presidents of the
12 Federal Reserve Banks.

It said that modernization of the nation's

means of making financial transactions through the banking system "is
becoming a matter of urgency."
The Board's sense of urgency was based upon estimates that
check volume will at least double in the present decade.

Some 62

million checks a day--about 22 billion a year— are written in the
United States, setting in motion the transfer of more than $16 trillion
a year at the present time.

In 1970, the Federal Reserve System cleared

approximately 8 billion checks, transferring just over $3 trillion from
one account to another.
An average check passing through the clearing process is
handled 10 times under present procedures.

Despite the progress to

date in mechanization and automation, increases in productivity are
limited by the fact that the processing of checks continues to require
a substantial amount of hand labor.

This, together with mounting check

volumes, presents banks with a problem of constantly rising costs for

-2-

their check handling operations.

The Board's Policy Statement addresses

itself to this mounting problem.
The Board'8 Policy Statement placed "high priority" upon
providing the public with faster, more convenient and more dependable
check clearing services, by increasing the speed and efficiency of
check handling.

In part, the Board's plans called for this to be accom­

plished through establishment of new regional clearing centers through-"
out the country.
The Board asked for action "to achieve as soon as possible
an accelerated flow of funds along more optimal routing patterns"
across the nation, in two initial ways:
1.

Structural changes in handling and settlement of checks:

This would involve two alterations in the existing money
payments system.

First, zones of same-day settlement -- in immediately

available money - * now operating in cities with Reserve Bank offices,
*
would be expanded geographically.

Second, new regional centers would

be established,wherever warranted, for rapid check clearance in imme­
diately available funds.
In both cases, the Board has in mind clearing areas as large
as permitted by reliable arrangements for overnight presentation and
settlement of items.
2.

Operational chanties:

These would be aimed at reducing dependence upon checks by
encouraging banks and their customers to make greater use of the ex­
panded capabilities of the Federal Reserve System's communications
network.

-3-

Iinducements to begin replacement of money transfers by check
with transfers via wire would

be offered by (1) removing chargcs and

other restrictions upon the use of the Federal Reserve's wire network
by member banks for transfers of $1,000 or more for
their customers, (2) increasing the number of hours the network is
open for business daily, and (3) expanding facilities at Reserve offices,
where justified by traffic potentials, to equip them for high speed tape
transmission and computer-to-computer communications.
This would permit linkups, chiefly of commercial bank com­
puters through the use of Federal Reserve facilities, allowing virtually
instantaneous payment, without charge for the wire service, from a com­
mercial bank in one part of the nation to a commercial bank in any other
part, where both banks are Federal Reserve members and have computerized
accounting of their customers' deposit balances.
With respect to timing, the Policy Statement said:
"The first objective should be expansion of the geographic
area of existing immediate payment zones*

This should be accomplished

as soon as necessary arrangements can be made.

Meantime, studies looking

to the establishment of new clearing centers, wherever warranted, should
be undertaken promptly by each Federal Reserve Bank, and submitted to
the Board for review.

Expansion of facilities at Federal Reserve offices

for increased access to the Reserve System's wire network should be con­
cluded at the earliest practicable time..."
The Board's Policy Statement was prepared in collaboration
with the Federal Reserve System Steering Committee on Improving the

4-

Fayments Mechanism, headed by Reserve Board Governor George W. Mitchell.
Other members are Governors Sherman J. Maisel and William W. Sherrill,
Reserve Bank Presidents George H. Clay of Kansas City, Aubrey N. Heflin
of Richmond, and Eliot J. Swan of San Francisco, and the First Vice
Presidents of the Chicago and the New York Reserve Banks, Ernest T.
Baughman and William F. Treiber.

The Steering Committee was assisted

by the Committee and Subcommittee on Collections of the Conference of
First Vice Presidents of the Reserve Banks.

Preparation of the state-

mert involved extensive consultation among Reserve Banks and with com­
mercial banks.
The Policy Statement confirmed the Federal Reserve System's
commitment to a nationwide direct, fast and economical system for the
transfer of funds and settlement of balances.

The immediate aim is a

reduction, across the nation, of the volume of items now being handled,
speeding settlement by minimizing handling of checks, and reduction of
commercial bank and Federal Reserve float resulting from delays in
settlements.
Expansion of areas of fast clearing and settlement in imme­
diately available funds is appropriate, in the Board's opinion, due to
increasing urbanization and improvement of highway systems surrounding
major cities, and the growing utilization, even in small banks, of
centralized electronic accounting for demand deposits.
During the past year zones of immediate payment surrounding
the Kansas City, the Minneapolis and the Denver Federal Reserve offices

-5-

have been expanded.

The first -- experimental -- new regional clearing

center was established for the Washington-Baltimore area, and is now
in its second year of successful operation.

The second such regional

clearing center will become operational in Miami, Florida, this year.
Looking to the future, the Reserve System has three projects
in being for further improvement of the payments mechanism:
1.

Construction of a payments mechanism simulation model for

the System, to be used both to understand better the present payments
system and to indicate in what ways it can and should be improved.
2.

An in-depth study of exactly how payments are effected

in Florida and Georgia, being done by the Georgia Institute of Tech­
nology for the Federal Reserve Bank of Atlanta.
3.

The cooperative participation, in California, of the

Federal Reserve Bank of San Francisco and its Branch at Los Angeles
with a Special Committee on Paperless Entry (SCOPE) through which com­
mercial bank groups are attempting to reduce check volume by substi­
tuting electronic means of transferring money.
Meantime, the Reserve System's wire network is being both ex­
panded and converted to higher speed operation.

It includes a communi­

cations center at Culpeper, Virginia linking the Board and all Reserve
offices, and is capable of extension to commercial banks.
A copy of the Board's Policy Statement is attached.
-0 -

STATEMENT OF POLICY ON
THE PAYMENTS MECHANISM

Increasing the speed and efficiency with which the rapidly
mounting volume of checks is handled is becoming a matter of urgency.
Until electronic facilities begin to replace check transfer in substan­
tial volume, the present system is vulnerable to serious transportation
delays and manpower shortages.

Structural changes in the present check

clearing system can effect significant savings in manpower and unneces­
sary handling of checks.

These changes will result in faster, more

convenient, and more economical banking services for the public.
will reduce the cost of operations.

They

The Federal Reserve Board therefore

states as a matter of policy that it places high priority upon efforts
by the Federal Reserve System to improve the nation's means of making
payments, initially along the following lines:
1.

Extending present clearing arrangements, in cities

with Federal Reserve offices, into larger zones of
immediate payment, consistent with transportation possi­
bilities, check volumes, and the location of check
processing centers.
2.

Establishing other regional clearing facilities, in

which settlements are made in immediately available funds,
located wherever warranted by the need for more expeditious
and economical check handling, or other operating and
financial conditions.

-2­
3.

(a)

Encouraging banks and their customers to

make greater use of the expanded capabilities
of the Federal Reserve wire transfer system.
(b)

Removing restrictions on third party transfers of

demand deposits, and extending the time period in which
the wire transfer system can be used.
(c)

Expanding facilities at Reserve Bank offices,

where justified by traffic potentials, to include
high speed tape transmission, and computer-to»computer
communicat ions.
Plans for making these basic changes in the present money
transfer system should be pursued actively, to achieve as soon as pos­
sible an accelerated flow of funds along more optimal routing patterns.
These initiatives are generally intended to supplement those efficient
direct check exchange programs that are now in existence.
The first objective should be expansion of the geographic
area of existing immediate payment zones.

This should be accomplished

as soon as necessary arrangements can be made.

Meantime, studies look­

ing to the establishment of new clearing centers, wherever warranted,
should be undertaken promptly by each Federal Reserve Bank, and sub­
mitted to the Board for review.

Expansion of facilities at Federal

Reserve offices for increased access to the Reserve System1s wire net­
work should be concluded at the earliest practicable time, generally
during the next 12 to 18 months.

-0June 1971


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102