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IN MEMORIAM

AUBREY N. HEFLIN
1 9 1 2 -1 9 7 3

Aubrey Newbill Heflin, President of the Federal Reserve Bank of Richmond,
died in Richmond, Virginia, on January 16, 1973, in his sixty-first year. A native
of Westmoreland County, Virginia, Mr. Heflin spent most of his life in Richmond,
where he served the Federal Reserve Bank for over thirty years. A graduate of
the University of Richmond, the University of Virginia Law School, and the Stonier
Graduate School of Banking, Mr. Heflin also held an honorary Doctor of Laws
degree from Hampden-Sydney College. Before joining the Bank in 1941, Mr.
Heflin was an attorney with a Richmond law firm. At the Bank, he held the
positions of Assistant to Counsel, Counsel, and Vice President and General Counsel.
Mr. Heflin was named First Vice President in 1961 and President in 1968. Mr.
Heflin also gave generously of his time to church, educational, and civic affairs.
Both the Bank and the community are saddened by the loss of an esteemed leader
and a good friend.

TO OUR MEMBER BANKS:
W e are pleased to present the 1972 Annual
Report of the Federal Reserve Bank of
Richm ond.

The report’s feature

article

reviews the historical developm ent of the
paym ents mechanism and describes the
proposed Fifth District regional clearing
system currently being considered by the
Board o f Governors.

The report also

includes highlights of the year’s operations,
com parative financial statements, and
current lists of officers and directors of our
Richm ond, Baltimore, and Charlotte offices.

On b eh alf of our directors and staff,
we wish to thank you fo r the cooperation
and support you have extended to us
throughout the past year.

Sincerely yours,

Chairman of the Board

7
#<
First Vice President







CONTENTS
THE C H ECK PAYM EN TS SYSTEM A N D THE
FIFTH DISTRICT R EG IO N A L C LEA R IN G P L A N

4

The Paym ents Mechanism:
Problems and P rospects __________________________

4

The Check Paym ents System:
Some H istory and Some Basic P rin ciples ______

9

Federal Reserve Check Collection:
The Present System and Its Shortcom ings ______

19

The Fifth D istrict Regional Clearing P la n ________ 27
A Sum m ing U p _____________________________________
H IG H LIG H TS ____________________________________________

Sum m ary o f O perations ____________________________
C O M P A R A T IV E S T A T E M E N T ___________________________

C on dition s ___________________________________________
Earnings and Expenses _____________________________

33
35
41
42
42
43

D IR E C T O R S _____________________________________________

44

O F F IC E R S _______________________________________________

45

BRAN CH DIRECTORS

46




THE CHECK PAYMENTS SYSTEM
AND THE FIFTH DISTRICT
REGIONAL CLEARING PLAN
Throughout the United States, bankers, computer
specialists, and electronics engineers are busily planning
an overhaul of the nation’s paym ents mechanism. Small
wonder, for a general reconditioning is badly needed.
A t present, the vast m ajority of paym ents transactions
are carried out through the medium of the check. Once
they enter the payments stream, checks must be processed
and shipped; and many checks must subsequently be
reprocessed and reshipped m any times.
Because the
volume of check transactions has burgeoned during recent
years, the payments system faces the unhealthy prospect
of choking on a mass of paper.

The Payments Mechanism:
Problems and Prospects
CHECK VOLUM E: HIGH TIDE
The accompanying charts provide some indication of the dimensions
of the problem . Relatively few attem pts have been m ade to estimate
the total num ber of checks written annually throughout the country.
Chart 1 displays the results of the three most com m only-cited studies,
which developed estimates for the years 1952, 1967, and 1 97 0.
A c­
cording to these estimates, total check volume grew from approxim ately
7.8 billion items in 1952 to around 18.7 billion in 1967 and then to about
2 1.5 billion in 1970. On the basis of these figures, the average annual
rate of growth over the full 18-year period was approxim ately 6 percent.
There is every reason to believe that volume will continue to rise at a
com parable rate during the present decade. Chart 2 presents the rather
frightening implications. If volume grows at what appears to be the

4

consensus forecast of around 7 percent per year, some 42 billion checks
will be written in 1980. Even if the growth rate slows to 5 percent,
volume will increase to 35 billion items. More pessimistically, should
the rate accelerate to 10 percent, it will be necessary to cope with over
55 billion checks per year by the end of the decade.
Fifth District volume growth appears to be roughly parallel to
national trends. Although data on total District volume are unavail­
able, recent changes in the number of items processed by this Bank
provide some indication of the situation. A s illustrated by Chart 3, the
annual processing load trippled between 1960 and 1971, and currently
exceeds 700 million items.
The real costs of processing and shipping all of these checks are
very high, whether one views these costs from the standpoint o f the
banking industry or from the standpoint of society at large. A vast
array of personnel, data processing equipment, and transportation f a ­
cilities supports the check payments system. To the banking industry,
the costs of operating the system take the form of salaries, equipment
rentals, and shipping fees. (A vailab le evidence suggests that these costs,
including the Federal Reserve System ’s check operations expenditures,




Ch art 1

----------------

TOTAL CHECKS WRITTEN IN THE U .S.:
THREE HISTORICAL ESTIMATES
(B illio n s o f C h e c k s )

25

--------------------------------------------------------------------------------------------------------

2 0 ------------------------------------------------------ ------------------------

15

----------------------------------------------

—

—

10 ------------------------------------

o

---------

_ _ _ _ _ _ _ _ _ _____

^
1 9 52

So u rc e s:

-----------

1967

1970

1 9 52— S tu d y o f C heck C ollection System , R e p o rt o f the J o in t
C o m m itte e on the C h e c k C o lle c tio n S y s t e m to the A m e r ic a n
B a n k e r s A s s o c ia t io n et. al., Ju n e 1954.
1 9 67— B a n k

fo r

In stitu te, A n Electronic N e tw o rk
P a ym e n t C om m u n ica tio n s: A D e sig n Stu d y,

A d m in is t r a t io n

In te rb a n k

A p r il 1969.
1 9 7 0 — A r th u r

D.

Little,

Inc., The

C heck P a ym e n ts System :

O u tlo o k fo r the N a t io n 's
197 0 -1 9 8 0 , D e c e m b e r 19 70.

5




exceed $1 billion annually.)
The costs to the general public must be
measured in terms of the m anpower and equipment resources that could
be devoted to alternative productive activities if they were not engaged
in handling and moving checks. W h a t’s more, direct resource costs
don’t tell the whole story, for the nature of the check collection process
gives rise to a variety of indirect costs. In particular, delays in present­
ing checks to the banks on which they are drawn can a ffect bank re­
serves, thereby contributing to disconcerting day-to-day m ovem ents in
short-term interest rates.

A VISION OF THE FUTURE
It would appear that something needs to be done. The essence of
the problem is the need to reduce the number of checks required to
com plete a given volume of paym ents transactions or, as a second-best

Ch art 2

P R O JE C T E D U. S. C H E C K V O L U M E S :

-----------------------------

1 9 7 0 -1 9 8 0
(B illio n s o f C h e c k s )

<50------------------------------------------------------------------------------------------------------

5 5.8

2
0

%

0 t______ •_______!______ I_______!______ I_______1______ I_______1
______ 1
_______I

19 70

So u rc e :

1975

A rth u r

D.

Little,

Paym en ts System:

6

The O u tlook for the N a tio n 's
1970-1980, D e c e m b e r 1970.

Inc.

19 80

Check

alternative, to reduce the number of times a given check must be
handled and the distance it must travel. Some steps are already being
taken. By using credit cards, consumers are now able to write a single
check to cover several transactions. Some banks are offering consumers
preauthorized payment services whereby a bank automatically pays a
customer’s recurring bills, debiting the customer’s account accordingly.
In addition, banks are making a variety of check-reducing arrangements
available to business firms. Through automatic payroll services, for
example, a firm can issue a single check to a bank covering all salaries
due employees who maintain accounts in that bank. The bank then
credits each employee’s account.
But these developments appear relatively tame when compared to
some of the quite revolutionary innovations currently being studied.
Most specialists in the payments field consider the ulitmate goal to be a
full application of modern computer and electronic transmissions tech­
nology to the payments system. The most advanced conceptions of the
future system envision a world where virtually all payments are carried
out electronically. Account information will be stored on computers in
banks and other institutions. Regional and nationwide communications
systems will permit the instantaneous transfer of funds from accounts
in one institution to other accounts in the same or in other institutions.
Remote terminals will be located in commercial establishments where
payments are commonly initiated. Instead of presenting a check at the




C h a rt 3

-----------------------------------------------

CHECKS PROCESSED BY

FEDERAL RESERVE BANK OF RICHMOND OFFICES
A c tu a l a n d Projected
(Millions of Checks)

1,000 ------------ ---------------------------------------------------------------------

1940

Source:

1950

1960

1965

1970

1975

Federal Reserve Bank of Richmond records.

7




grocery counter, the housewife will insert a card into the store’s ter­
minal, thereby transmitting a payment message generating an auto­
matic transfer of funds from her account to the grocer’s account. In
this world, the check will be eliminated as a means of payment. This
vision may have an air of science fiction about it, but steps are already
being taken to make the vision reality. Most notably, so-called SCOPE
(Special Committee on Paperless Entries) projects, already underway
in California, Atlanta, New York, and elsewhere, will lead eventually to
the electronic transfer of debits and credits between banks in local and
regional areas.

SOME PROBLEMS
While progress is being made, there is nonetheless good reason to
believe that the paperless payments system is still at least a few years
off. While the basic technology required appears to be available, a
number of specific technical problems remain to be solved. First, some
system must be devised whereby persons originating automatic pay­
ments at remote terminals can be positively identified. Otherwise,
counterfeit payments will present serious difficulties. Second, trans­
mission facilities must be refined to a high level of efficiency. As any­
one who uses a telephone is aware, interference can occasionally distort
communications between calling parties. Such interferences are merely
vexing; distorted payments messages involving hundreds of dollars
would be intolerable. These technical problems suggest what is prob­
ably the most formidable obstacle to the transformation: public accept­
ance. The average citizen does not yet view computers and sophisti­
cated communications systems with much confidence. It will take time
and a heavy dose of persuasion to induce the public to loosen its grip on
the cancelled check as proof of payment. Beyond this, some incentive
will have to be devised to make faster payments palatable.
These considerations suggest that the demise of the check is not yet
at hand. Meanwhile, check volume continues to grow apace. It is
apparent that, pending the arrival of the checkless society, interim
measures are required to reduce the burdens of the check payments
system. Several steps have already been taken. The Magnetic Ink Char­
acter Recognition (MICR) program instituted in the late 1950’s has
transferred many routine check processing tasks such as sorting and
tabulation from people to machines, significantly reducing the time re­
quired to process a given volume of checks. Moreover, a recent change
in Federal Reserve Regulation J has reduced the time required to ac­
complish final payment in many check transactions.
One of the most promising developments in check payments is the
recent establishment by the Federal Reserve System of regional check
clearing centers in various parts of the country. The purpose of such
centers is to accelerate the clearing of checks within specifically defined

8

geographic regions where the volume of intraregional payments is
heavy. The first center opened at this Bank’s Baltimore Branch in
January 1970. More recently, this Bank developed a plan for a re­
gional clearing system to serve the entire Fifth District. This article
will describe the proposed system and indicate how it will improve
the District’s check payments mechanism. To appreciate fully what
the new system is designed to accomplish, however, one must first
understand how the current system operates, how it evolved, and why it
needs to be changed. Accordingly, the next two sections summarize the
historical development of check payments in the United States and
briefly outline current check collection arrangements, pointing out some
of their principal deficiencies. A subsequent section will then describe
the Fifth District regional clearing plan, specify as precisely as possible
how the new system will improve the collection process, and indicate
why the new system is a natural step in the evolution of the District’s
check payments mechanism.

The Check Payments System:
Some History and Some Basic Principles1
W HAT IS A CHECK?
A check is simply a depositor’s written order to his bank to pay a
specified sum of money to a designated payee on demand. Checks are
only one of a variety of means by which individuals and business firms
can effect payment for specific obligations. By all odds, however,
checks are the most important payments instrument in the United States,
probably accounting for over 90 percent of the total dollar value of all
payments transactions.
Figure 1 depicts a typical check. The illustrated check contains
the usual information familiar to every citizen including the name of
the drawee bank, the payee, the amount to be paid, the drawer of the
check, and the drawer’s account number. One piece of information
carried on the face of the check, the meaning of which is not common
knowledge, is the so-called routing symbol number given by the numbers
in the upper right corner and repeated in a slightly different form in
magnetic ink characters in the lower left corner. This number, a rela­
tively recent innovation, is a code that assists in sorting checks according
to the geographic location of drawee banks.
1 Much of w hat follows is discussed in greater detail in W alter E arl Spahr, The Clearing and C ollection o f
C hecks (N e w Y o r k : The Bankers Publishing Co., 1926.)
Even at this late date Sp ahr’s book remains the
definitive treatise on check paym ents. See also Claude L. Guthrie, “ The Development o f the Check Collection
System D uring the Past Tw en ty-F ive Y e ars” (Unpublished thesis, The Graduate School o f B anking, R utgers
University, 1941.)




9




ORIGINS
It is not entirely clear where and when the check was invented,
although it is known that instruments similar in principle to the modern
check were used in Italy as early as the fifteenth century and in the
Netherlands during the sixteenth century. Checks first appeared in
Britain around 1675, where they evolved out of the practice of deposit­
ing specie with goldsmiths. Once such deposits had become fairly wide­
spread, they were used to make payments in two ways that served as
convenient alternatives to the direct transfer of specie by a debtor to his
creditors. First, the goldsmiths issued paper receipts called “ gold­
smiths’ notes” to their depositors promising to pay a certain sum to the
depositor or to the bearer on demand. The depositor could then use
the notes to make payments. These notes were the forerunners o f
bank-issued paper currency. Second, the depositor might issue a
written order to his goldsmith directing him to pay a certain sum to
some specified creditor. The depositor would then send the order to
the payee who would collect from the goldsmith. These orders, re­
ferred to at the time as “ cash notes,” had most of the basic character­
istics of the modern check. They also possessed some very obvious
advantages over direct specie payments. First, their use reduced the
need to maintain large specie balances, with their attendant risks, to
support current transactions. Second, they made it possible to tailor
individual payments to the exact amount required by each transaction.
Figure 1

A TYPICAL CHECK
CH ECK
NUMBER

No.

3f

PAYEE

DRAW EE
BANK

ROUTING SYM BOL
NUMBER

LAST N A TIO N A L BANK

68-788
51 4

iQ ^

Someplace, Virginia

—
Q

AM O UN T OF
CH ECK

10

ACCO UN T
NUMBER

DRAW ER'S
SIG N A TU RE

DATE

Finally, when the notes returned to the drawer carrying the goldsmith’s
statement of payment (the earliest form of the cancelled check), they
served as a convenient receipt providing proof that payment had indeed
been made.
In America, the first instrument similar to the modern check de­
veloped out of a financial experiment during the 1680’s known as “ The
Fund at Boston in New England.” Under this arrangement, certain
wealthy individuals mortgaged their land to the Fund, receiving credit
on the books of the Fund in return. Among other privileges, partici­
pants could issue “ pass-bills” to other participants ordering the Fund to
transfer money from one account to another. Because specie was scarce
and the population was scattered, however, conditions did not favor the
further development of deposit banking and the use of checks as a
means of payment during the Colonial period. Consequently, other
payments instruments such as bank-issued paper currency and bank
drafts dominated American commerce until well into the nineteenth
century. By the time of the Civil War, however, the check had become
the nation’s most common transactions medium.

CHECK COLLECTION AND CLEARING
Once the use of checks had become fairly widespread, check recip­
ients were faced with a problem : how to collect final payment with a
minimum of inconvenience. Obviously, merchants could not spend all
of their time trekking from one bank to another collecting for checks
presented to them. Sensing the opportunity to expand their operations,
banks began to collect checks for their customers. A customer would
deposit all of the checks issued to him at his bank. The bank would
then credit the customer’s account and subsequently collect payment
from each designated drawee bank. The check collection process is the
core of the check payments system and remains one of the most
important routine services provided by commercial banks. Since its
inception, virtually all efforts to improve the checking system have been
aimed at accelerating or simplifying the collection process. Regional
clearing centers, such as those envisioned in the Fifth District regional
clearing plan, are merely the latest entries in a rather venerable tradi­
tion of innovations in collection procedures. Few subjects lend them­
selves so readily to historical treatment as the chesk collection process,
for the existing mixture of arrangements is quite incomprehensible
unless one has some idea how they evolved.
EARLY COLLECTION PROCEDURES Initially, collecting banks sorted
checks by drawee banks and employed messengers to transport the
resulting bundles to drawee institutions. If a drawee was located some
distance from the collecting bank, the postal system or an express
service was employed.




11




Once the check had become a fairly
common instrument in local commerce, banks in the larger cities found
themselves collecting sizeable numbers of checks drawn on other local
banks. At first, each bank sent a messenger with a bundle of checks
to every other bank. The messenger would arrive at a bank, present the
bundle of checks drawn on that bank, receive payment in specie, and
then deliver the specie to the collecting bank. It took bankers only a
short time to recognize that this procedure was woefully inefficient.
Out of this recognition evolved the practice of clearing checks. Each
bank’s messenger would take all checks drawn on other banks to some
central gathering place, or clearinghouse, and there exchange his
bundles with all of the other messengers for items drawn on his own
bank. Many such arrangements included a manager and a central set
of accounts. Following the exchange, each bank’s net position in the
day’s clearing was calculated. Each bank’s account with the clearing­
house manager was then credited or debited accordingly. In this way,
collection was accomplished through a mutual settlement of offsetting
claims.2
Clearing checks in this manner rather than collecting directly from
each individual bank greatly increased the efficiency of the collection
THE CLEARING PRINCIPLE

2 The principle o f clearing offsettin g claims is applicable not only to check paym ents, o f course, but to
paym ents generally. The practice was well established several centuries before the use o f checks became
widespread.

Figure 2

THE CLEARING PRINCIPLE

--------------------------------------------

D IR E C T C O L L E C T IO N

Num ber of Round Trips:

12

N um ber of Paym ents Transactions:

12

C L E A R IN G

Bank
A

Bank
\

^

^
C L E A R IN G - ^
H O U SE
cx

B

Bank

Bank

C

D

N um ber of Round Trips:

4

N um ber of Paym ents Transactions:

12

4

process.3 Figure 2 illustrates the gain for a town with four banks. The
diagram at the top of the chart depicts the situation before the intro­
duction of clearing. Each U-shaped arrow represents one round trip
by a messenger between a collecting bank and another bank. Assuming
that each of the four banks has checks drawn on each of the other three,
12 round trips and 12 separate payments are required to complete intra­
town collection. The diagram at the bottom of the chart shows the con­
trasting requirements once a clearinghouse has been established in the
town. Only four round trips are necessary, one between each bank and
the clearinghouse. Hence, eight round trips are eliminated.4 Moreover,
the number of payments transactions is reduced from 12 separate pay­
ments to four entries, either net debits or net credits, on the books of the
clearinghouse. A little thought will convince the reader that as the
number of participating banks increases, the gains are magnified at an
ever increasing rate.
Anticipating some of the discussion that follows, it is important to
recognize that clearing associations are most effective where each par­
ticipating bank is collecting a fairly sizeable volume of checks drawn
on each of the other participating banks. That is, clearing areas should
correspond as closely as possible to the pattern of check payments. This
consideration is particularly important under modern conditions since
many clearing arrangements are now regional in scope, reflecting the
growth of regional commerce. Figure 3 illustrates this point. The first
diagram represents the pattern of payments between the residents of
four towns: A, B, C, and D. As indicated, the volume of transactions
between the residents of town A and the residents of town B is heavy.
In contrast, volume is light between towns A and B on the one hand and
towns C and D on the other. The three remaining diagrams illustrate
three alternative clearing arrangements. Ideally, towns A and B should
participate in one clearing association and towns C and D in another.
If, for one reason or another, separate associations are not feasible, a
second-best alternative would include all four towns in a single clearing
system. This arrangement is inferior to the preceding one. If the
clearinghouse is situated in town C, for example, the heavy volume of
town A-town B checks would have to be routed through town C. The
last diagram depicts an inefficient arrangement where town B partici­
pates in a clearing association with towns C and D but town A does not.
Here, the light volume of checks between town A on the one side and
towns C and D on the other would be cleared, but the heavy volume
between towns A and B would not be cleared.
It is impossible to overstate the significance of the role played by
the clearing principle in the development of the check collection mech­
anism. It is of course true that improved transportation facilities and
* Throughout the remainder o f this article the term “ collect” refers to sending a check to a drawee bank and
obtaining paym ent for the check without distinction as to the means employed. The term “ clear” refers to
collecting items through a mutual arrangem ent o f the sort just described.
4 The number of trips eliminated would be somewhat less if, before the introduction o f clearing, a messenger
called on m ore than one bank on a single trip.




13




the substitution of data processing equipment for manual operations
have significantly increased the efficiency of the system over the years.
But is seems fair to say that the clearing principle constitutes the only
m ajor conceptual innovation in check collection arrangements in the
entire history of check payments. In a broad way, the principle under­
lies the Federal Reserve’s present collection system. It also underlies
the regional clearing center concept and the Fifth District regional
clearing plan. As indicated below, the basic objective of the Fifth
District program is to reapply the principle in accordance with recent
changes in the pattern of check payments.
Figure 3

ALTERNATIVE CLEARING CONFIGURATIONS
1.

CHECK

PAYM EN T

PATTERNS

Town A

2.

----------------------------- ►

T H E ID E A L C L E A R IN G

Town C

ARRANGEM ENT

Town C

$ >

C

t

I

3.

A

S E C O N D -B E S T

Town A

W
Town B

4.

AN

- -------------------- ---------------- ►

---- ^
-- ---------------------------------►

Town C

▼
Town D

IN E F F IC IE N T A R R A N G E M E N T

Town A

14

A L T E R N A T IV E

----------------------------------------►

Town C

---------------

T O ! LECTION AND CLEARING

IN THE UNITED STATES
THE PRE-FEDERAL RESERVE PERIOD It would be a bit misleading
to refer to the hodgepodge of check collection arrangements existing
in the United States prior to 1914 as a “ system.” Basically, each bank
developed a set of collection procedures tailored to fit its particular
requirements. The rather confusing array of practices that emerged
during the period can best be treated under two headings: (1) collec­
tion of local items and (2) collection of nonlocal items.
Local collection. As one might expect, local area collection posed
fewer problems for most banks than nonlocal collection. Clearinghouse
associations were established in most major American cities during the
nineteenth century, beginning with New York in 1853. These associ­
ations operated along the lines described above. For the most part,
these arrangements were rather strictly circumscribed geographically.
That is, membership was usually confined to banks located within or in
the immediate vicinity of a given town or city. Most privately operated
clearinghouses have retained their local character to the present day.
Nonlocal collection. Procedures for collecting checks drawn on
nonlocal banks were far less uniform. Most such items were collected
through correspondents. Discerning geographic patterns in checks de­
posited by their customers, banks established correspondent relation­
ships in cities and towns where a sizeable number of items were payable.
Under more favorable conditions, these arrangements might have de­
veloped into a reasonably coherent and efficient mechanism since they
could be expected to reflect the natural flow of payments; however,
certain institutional practices common at the time supervened. In
particular, many banks follow ed the custom of exacting remittance
charges when paying for checks drawn on themselves presented through
the mail by nonlocal banks. Usually, this charge amounted to a deduc­
tion of about one-quarter of one percent from the face value of a check.
The practice was defended on the grounds that paying banks incurred
shipping charges and other expenses in the course of remitting to non­
local collectors. Such “ nonpar” remittances, as they were called, thor­
oughly disrupted the collection process. Intense competition for de­
posits induced collecting banks to credit depositors for the full face
value of a deposited check whether the check was drawn on a par bank
or on a nonpar bank. Therefore, the collecting bank was forced to
absorb the charge on nonpar items unless it could pass the check either
directly or indirectly to some intermediary bank having a par remittance
arrangement with the drawee bank. Under these circumstances, a
check often follow ed an extremely circuitous route between the bank
of first deposit and the drawee institution. A famous example, illu­
strated by Figure 4, is that of a check drawn on a North Birmingham,
Alabama, bank deposited in a Birmingham bank four miles away. To




15




avoid the North Birmingham bank’s remittance charge, the Birmingham
bank sent the check to Jacksonville, Florida. From there, the check
was shipped to Philadelphia and finally back to North Birmingham.
Because the check was dishonored, it then traveled the same circuit in
reverse before being returned to the original depositor. All told, the
check covered some 4,500 miles and consumed 14 days in transit. In
short, nonlocal collection procedures, disorganized to begin with, were
rendered almost ludicrous by nonpar remittance practices.
The Boston country clearinghouse. Prior to the establishment of
the Federal Reserve System, several efforts were made by groups of
banks to reduce the chaos associated with nonlocal collection. By far
the most successful was the so-called country clearing arrangement

Phil a d e l p h i a

N o rt h
Birm ingh am
B irm in g h am

J a c k so n v ille

First Trip
Return Trip

16

initiated at the turn of the century by the Boston Clearinghouse.
pj.cm.

J------ 1

vv a,o m u u v a i / c u

1„ . .

J-1____„ J ?

J - l- ^

ciic u c s n c

Ui

tile

ld lgc

n

_

jjudluii

The

1_______________________________

UetlllYQ uu i l l O L l t U t c

par check collection throughout New England.5 The implications of
the plan extended beyond the par collection controversy, however; and
the arrangement constituted, in effect, the nation’s first regional clear­
ing system. Under the plan, the Boston Clearinghouse undertook to
collect for its members checks drawn on outlying or “ country” banks in
New England in addition to Boston city items. Country items deposited
at the Clearinghouse were pre-sorted by state and were handled sepa­
rately from the city work. The Clearinghouse mailed the checks to the
respective drawee banks, received the remittances (usually in the form
of drafts on Boston banks), and settled with the collecting banks
through the regular city clearing. The nonpar problem was confronted
by charging back any remittance charge levied by a drawee bank to the
individual or firm depositing the check, thereby disadvantaging nonpar
bank customers. This approach was successful, and the great majority
of banks in the region were remitting at par within a few years of the
plan’s initiation. The broader significance of the arrangement, how­
ever, lay in its systematic application of the clearing principle to an
entire region. The region selected was particularly appropriate because
it constituted an integrated trade area centered on Boston. Conse­
quently, most checks deposited at area banks were drawn on other
banks in the region and could be collected through the system. The
plan fell short of a fully integrated clearing arrangement in that coun­
try banks were not Clearinghouse members. Therefore, they could not
send checks directly to the Clearinghouse but had to route the items
through one of the Boston city banks. Nonetheless, in addition to cur­
tailing remittance charges and the flagrantly circuitous routing of
checks that accompanied these charges, the Boston plan demonstrated
the distinct advantages of clearing checks through a central facility
on a regional basis. Specifically, it is estimated that the consolidated
handling and shipping of checks through the system reduced collection
costs from approximately $1.25 to about seven cents per thousand trans­
action dollars.6 The plan provided a model for the Federal Reserve
collection system set in motion 15 years later.
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM: ORIGINS
AND OPERATING PRINCIPLES A principal goal of the Federal Re­

serve Act, enacted in late 1913, was to unify the structure of the com­
mercial banking industry through the creation of a central reserve
depository. A related objective, made possible by the existence of
centralized reserves, was the creation of a comprehensive check collec­
tion system that would provide an efficient mechanism for collecting
and clearing nonlocal checks both regionally and nationally.
5 The plan was modeled on N ew England’s earlier Suffolk System for the par redemption o f bank notes.
0 See Spahr, op .cit., p. 128.




17




Legal basis. Sections 13 and 16 of the Federal Reserve A ct pro­
vide the legal foundation for the Federal Reserve collection system.
Section 13 authorizes the 12 Reserve Banks to act, in effect, as clearing­
houses for Federal Reserve member banks in their respective districts.
As originally enacted, Section 13 restricted this service to checks de­
posited by member banks that were drawn on other member banks.
Subsequent amendments in 1916 and 1917 permitted the Reserve Banks
to collect items drawn on nonmember banks and to accept items for
collection from nonmember banks if the nonmember agreed to maintain
an adequate clearing balance at the Reserve Bank. Section 16 author­
izes the Board of Governors of the Federal Reserve System to act as a
central clearinghouse for the Reserve Banks, thereby providing a mech­
anism for nationwide collection and clearing.
The deferred availability principle. On the basis of this legislation,
the Board of Governors defined the operational characteristics of its
check collection system in Federal Reserve Regulation J. It is impor­
tant to recognize that the procedures set in motion directly reflected the
Board’s objectives with respect to bank reserves. Prior to 1914, a size­
able percentage of bank reserves took the form of balances at corre­
spondent banks in the large cities and towns. When collecting an item
for an outlying respondent, the correspondent bank commonly credited
the respondent’s account upon receipt of the item even though it might
be impossible to collect the item for several days. Hence, a hefty pro­
portion of total bank reserves at any given time was in fact nothing
more than uncollected balances, or “ float.” The Board was determined,
in designing the new collection system and its accounting procedures,
to reduce float to manageable levels. Initially, the Reserve Banks,
upon receipt of an item, immediately credited the collecting bank’s
account and immediately debited the drawee bank’s account. The
drawee bank learned of its reserve loss when it received the item, several
days later in the case of outlying banks. This situation complicated the
reserve management problem for many banks, and the practice was
quickly abandoned. The alternative procedure selected was to defer
credit for items drawn on banks remote from the collecting Federal
Reserve office. Each Reserve Bank established a deferment schedule
based roughly on the average time required to collect items in particular
portions of its district and elsewhere. This deferred availability prin­
ciple is in many respects the cornerstone of the existing Federal Reserve
collection system. Many of the efforts to improve the system over the
years, including the current trend toward regional clearing centers,
have aimed at paring collection time in order to compress deferment
schedules. Conversely, the extent to which these schedules have in fact
contracted is an appropriate indicator of the substantive improvements
actually achieved.
Creation of the Federal Reserve collection system constituted an
application of the clearing principle to specific regions throughout the
nation and, as such, extended the benefits produced earlier by the

18

-Boston pian over a much broader area. Nonetheless, there is consider­
able room fur improvement. The next section describes how the system
currently operates and attempts to pinpoint the weak spots.

Federal Reserve Check Collection:
The Present System and Its Shortcomings
THE STRUCTURE OF THE SYSTEM
The structure of the Federal Reserve check collection mechanism
corresponds to the general administrative and geographic structure of
the Federal Reserve System as a whole. As is well known, there are
12 Federal Reserve Banks. Each Bank serves a geographic district.
Moreover, these districts (excepting the First and Third Districts) are
further subdivided into territories, each of which is served by a Federal
Reserve office.7 The territory is the basic structural element in the
7 Figure 5 shows Federal Reserve districts and their subordinate territories.

Figure 5

FEDERAL RESERVE DISTRICTS AND TERRITORIES

Hle a
en
MI NN EA PO L IS
D e t r o it

I

CHICAGO

c leveTa h d

P ittsb u rg h

I.
Cincinnati

D enver
K A N S A S CITY •
ST.

LOUIS

M e m p h is '

Oklahoma City;
L it tle

R o c k ; B ir m in g * 10 '11
a tla n t

DALLAS •

(”)

ALASKA & HAWAII

LEGEND




B o u n d a rie s of
Federal Reserve
Districts

Bo u n d a rie s of
Federal Reserve
Branch Territories

t

f

jacVsonv

j

New
Houston', O r le a n s

Board of
G ove rn ors

0

Federal Reserve
Bank Cities

•

Federal Reserve
Branch Cities

©

Federal Reserve
Ban k Facilities

19




collection system. The territorial Federal Reserve office— either the
head office or a branch of a Federal Reserve Bank— serves as a clear­
inghouse for nonlocal, intraterritorial checks. (Most local items con­
tinue to be collected through private clearinghouses or by direct overthe-counter presentment.) At the next level, the Federal Reserve Systm as a whole, through its Interdistrict Settlement Fund, acts as a clear­
inghouse for checks that represent transactions between parties located
in different Federal Reserve territories.
Figure 6 depicts the system in somewhat greater detail. Assume
that First National Bank, a Federal Reserve member bank located in a
particular Federal Reserve territory, receives a check from one of its
depositors drawn on First Trust Bank, another member bank. The
Figure 6 diagrams illustrate the collection process under two alternative
assumptions regarding the location of First Trust.
Figure 6

STRUCTURE OF THE FEDERAL RESERVE

------------------------

CHECK COLLECTION MECHANISM

IN T R A T E R R IT O R IA L C O L L E C T IO N

First
N atio nal

First
FED ERAL
RESERVE
O FF IC E
Receives, Sorts,
Dispatches
Credits
First N atio nal
C h a rg e s
First Trust

IN T E R T E R R IT O R IA L C O L L E C T IO N

C h a rg e s
Reserve O ffice
No. 2

20

Trust

IN i k A
■pi 0*1 1 V A

j-x^dxv^

i lk k ! i
r l A f i r t w V\

UKlAL COLLECTION

u v / o v / i i uv / o

4-V»

tuv^ p i u w ^ o o

vvncic

The diagram at the top of the
■ «<4« -.
,*

r iioi

HP^ - A-

n uot

*^

10

^^4*11 r> 4-a / I

isituaucu

^

ill

4-1% /%

tuc

a n yyt n

ociiii t;

territory as First National. First National sends the check to the check
collection department at its territorial Federal Reserve office. The
office groups the item with other checks drawn on First Trust and, since
First Trust is within its territory, dispatches all of the items directly to
First Trust. Since both banks are member banks, each has a reserve
account at the Federal Reserve office. The accounting department at
the office credits the item to First National’s account and charges the
item to First Trust’s account.
INTERTERRITORIAL COLLECTION The diagram at the bottom of
the figure illustrates the procedure where First Trust is located in a
different territory, either within the same Federal Reserve district or
in a different district. First National sends the check to its Federal
Reserve office. This office sorts the check with other items drawn on
banks located in First Trust’s territory and dispatches the item to the
Federal Reserve office serving that territory. The latter office then
sorts the check with other First Trust items and dispatches the resulting
bundle to First Trust. Under current operating rules, collecting banks
sometimes send checks directly to the Federal Reserve office serving
the drawee bank’s territory, bypassing the sending bank’s Reserve office
and reducing collection time. This variation is depicted by the dashed
arrow in the diagram.
If First National and First Trust are located in different territories,
reserves must be transferred from First Trust’s account at its Reserve
office to First National’s account at its Reserve office. To accomplish
such transfers, each territorial Reserve office maintains an account with
the System’s Interdistrict Settlement Fund, which serves as a clearing­
house for the 36 Reserve offices throughout the nation. In the present
case, First National’s Reserve office is credited, and First Trust’s Re­
serve office is charged on the Fund’s books. The office serving First
National then credits First National’s reserve account, and the office
serving First Trust charges First Trust’s account.

The above illustration considered one
check traveling in one direction between two banks and therefore con­
stitutes a description of the procedure by which an individual check is
collected. Suppose that both First National and First Trust are re­
ceiving checks drawn on the other bank on a daily basis, and both are
collecting these checks through the Federal Reserve. With both institu­
tions maintaining Federal Reserve accounts, the Federal Reserve would
then be clearing checks between the two banks.
COLLECTION VS. CLEARING

SOME OPERATIONAL PRACTICES
ELIGIBLE W ORK As indicated above, the Federal Reserve accepts
checks for collection from all member banks and from nonmember
banks that maintain clearing balances at a Federal Reserve Bank.




21




Checks are accepted without regard to drawee institution except that
items drawn on the few remaining nonpar banks are not accepted unless
they are being collected on behalf of a Government agency. In addition
to ordinary checks, the Reserve Banks accept and collect U. S. Govern­
ment checks, postal money orders, food coupons, and food certificates.
Strictly speaking, the Federal Reserve System functions as a clear­
inghouse only for banks that maintain Federal Reserve accounts. In
reality, however, the System clears checks indirectly for nonmember
banks not holding accounts because the larger correspondent banks,
most of which are member banks, use the System’s facilities to collect
items for their nonmember respondents. To illustrate, suppose that
nonmember bank A sends checks drawn on nonmember bank B to its
member correspondent and that the correspondent collects the items
through the Federal Reserve. Assume further that bank B sends checks
drawn on bank A to a different member correspondent and that the
latter correspondent also collects through the Federal Reserve. In
essence, the Federal Reserve has cleared the items for banks A and B
even though the clearing has been carried out indirectly through the
reserve accounts of the two correspondent banks.
It is generally believed that the Federal Reserve receives, either
directly or indirectly, about one-third of all checks written on commer­
cial banks, amounting to about eight billion items per year at current
volume levels.
Each territorial Federal
Reserve office establishes its own credit deferment time schedule for
work presented to it for collection. Because technological advances in
check processing and transportation improvements have reduced the
time required to collect many checks, these deferment periods have been
progressively shortened. At present, credit is never deferred more than
two business days following the receipt of an item. Each item is classi­
fied in one of three credit availability categories: immediate (same
day) credit, one-day credit, or two-day credit.
The time schedule of this Bank’s Head Office provides a represen­
tative example. Immediate credit is given for all checks drawn on
Richmond city banks that are deposited by 9:00 a.m. Monday through
Friday. Same day credit is also extended for U. S. Government checks
and postal money orders received by 4:00 p.m. Monday-Friday. Credit
is deferred one business day for items payable in the Richmond Office
territory and for items payable in 17 cities where Federal Reserve
offices are located, including points as distant as New Orleans, Buffalo,
and Chicago. Credit is deferred two business days for all other items.
The closing hour or “ cutoff” for all deferred work is 4 :00 p.m. MondayFriday and 11:00 a.m. Saturday.8 Items received after this deadline
are considered received on the following business day for purposes of
credit deferment computation.
CREDIT DEFERMENT TIME SCHEDULES

8 The deadline for work that is not amount encoded is 1 :3 0 p .m . M onday-Friday.

22

CHECK SHIPMENTS A i present, collecting banks arrange and pay
for item sliipments from tlicii* i*0spcctivo offices to the Fcciei*s.l R€S6rvG.
The Federal Reserve arranges and pays for the shipment of items be­
tween Federal Reserve offices and from Federal Reserve offices to
drawee banks.

W H A T ’S WRONG WITH THE SYSTEM?
Most knowledgeable observers believe that the Federal Reserve
collection and clearing system functions reasonably well in view of the
billions of checks that flow through its channels annually. But a
number of fairly obvious flaws hamper the system’s performance. Some
of these shortcomings are structural in nature; others are operational.
As pointed out above, each Fed­
eral Reserve office acts as a clearinghouse for nonlocal, intraterritorial
collections within the territory it serves. The reader will recall the
illustration given in the preceding section of this article emphasizing
the need for congruence between clearing areas and commercial trade
areas. At present, Federal Reserve territorial boundaries do not gen­
erally coincide with trade area patterns due in part to shifts in regional
economic configurations since the territories were drawn. In particular,
many Federal Reserve territorial boundaries cut through trade areas.
The Fifth District provides a good example. Figure 7 displays Fifth
District territorial boundaries. Anyone familiar with the region will
immediately recognize that the three territories only partially resemble
regional trade areas within the District.
The most glaring mismatch is in the northern part of the District in
the vicinity of Washington and Baltimore. These two major metro­
politan areas, which are located within 40 miles of each other, form a
highly integrated urban-commercial com plex reflected in the pattern
of area payments flows. For example, it is quite common for residents
of Baltimore and Maryland suburban areas to shop in Washington or
Washington’s northern Virginia suburbs and conversely. Yet W ash­
ington and its northern Virginia suburbs are part of the Head O ffice
Territory while Baltimore, its suburbs, and the Maryland suburbs of
Washington are part of the Baltimore Branch Territory. As a result,
Federal Reserve collection and clearing service to the area was, until
quite recently, grossly inefficient. Checks drawn on Maryland banks
deposited in Washington or northern Virginia banks were often sent to
Richmond and then to Baltimore before being returned to drawee banks
even though only a few miles (or, in some cases, a few blocks) sepa­
rated the collecting and drawee institutions. Similarly, checks drawn
on Washington or northern Virginia banks deposited in Maryland banks
were sent to Baltimore and then to Richmond before returning to
drawees. Obviously, these procedures wasted time and generated
unnecessary shipments and handling. This situation has been corrected
THE CLEARING AREA PROBLEM




23




by the Washington-Baltimore Clearing Center, which serves the green
shaded area shown on the Figure 7 map. As one can see, this service
area covers the entire Washington-Baltimore complex. Intraregional
items now travel from collecting banks to the Center in Baltimore and
then directly to drawee banks, bypassing Richmond.
To date, improvements such as those in the Washington-Baltimore
area remain the exception rather than the rule. Many Federal Reserve
territories throughout the nation include only part of a trade area or
cover two or more separate trade areas. There are several instances in
the Fifth District. Central West Virginia constitutes a distinct economic
region centered on Charleston. As indicated by the Figure 7 map, this
area is part of the Head Office Territory along with most of Virginia
and eastern North Carolina. Therefore, intra-Charleston area checks
cleared through the Federal Reserve must travel to and from Richmond.
Further, several o f the northern West Virginia counties in the Fifth
District are linked economically to Pittsburgh. When residents of this
area shop in Pittsburgh, however, their checks, if collected through the
Federal Reserve, often flow back to the towns where they are payable
by way of Baltimore. Most of the available evidence suggests that
eastern North Carolina now has stronger commercial ties with western
North Carolina than with Virginia. Hence, eastern North Carolina
banks are most likely to receive a check drawn on, say, Charlotte than
a check drawn on Richmond. If cleared through the Federal Reserve,
however, the Charlotte item usually returns to Charlotte by way o f
Richmond. Finally, there is considerable evidence that, because of its
rapid recent growth, the city of Columbia, South Carolina, has emerged
as the nucleus of a trade region linking much of central South Carolina.
Yet the growing volume of intraregional checks within this area is
collected through Charlotte. In view of these conditions, it is evident
that clearing areas should be redesigned.
DAILY OPERATING SCHEDULES A principal reason why existing
clearing areas pose a problem is that poorly delineated clearing bound­
aries retard Federal Reserve collection of many items. Collection delays
are also caused by some of the operational practices that characterize
the present system. One difficulty is the daily operating schedule.
Most Federal Reserve offices receive and process the majority of their
work during the day and deliver to drawee banks at night. Conse­
quently, the cutoff for deferred items is commonly some late afternoon
hour such as 4:00 p.m. Unfortunately, this schedule and commercial
bank schedules are no longer synchronized. Many banks, particularly
in urban areas, remain open later than in the past. Coupled with rising
volume, the trend toward later closing hours prevents banks from
depositing many of the items they receive on a given day prior to that
day’s cutoff at the Federal Reserve, thereby delaying collection one
day. Later cutoffs would significantly reduce the volume of such work.
In order to achieve later deadlines, it will be necessary for Federal
Reserve collection departments to compress processing schedules as

24

much as possible and to shift the bulk of processing operations from
the daytime to the night hours.
NONMEMBER BANKS Clearing arrangements can serve a given clear­
ing area with maximum efficiency only when most banks in the area
participate. A majority of the nation’s banks are not Federal Reserve
members. Most nonmember banks take part in the territorial clearing
of their respective Federal Reserve offices only indirectly through corre­
spondent member banks. Nonmember work collected in this manner
must be sent to a correspondent and handled by the correspondent
before it reaches a Federal Reserve office. While there are reasons
for withholding direct Federal Reserve collection services from non­
member banks, the practice is inefficient from the standpoint of the
collection and clearing mechanism.

As stated earlier, Federal Reserve
offices ship processed checks to drawee banks; incoming transportation
is the responsibility of sending banks. Consequently, a mishmash of in-

TRANSPORTATION FACILITIES




Figure 7

FIFTH DISTRICT TERRITORIES

A rea served by
W a shing ton-Balti more
Clearing Center

25




corning shipment arrangements has developed over the years. Correc n ---* ---- ------------ *~ r» a vH t>11\ r -filla r l +-V o -\7/-»irl V117
i
ov*in* nnnc<r>lirl o t c r l
"l*n n rl* n t V»sinV<2
*p
^
^
* ■»
* rr
shipments to banks in certain areas. Nonetheless, the system is inade­
quate, particularly for transporting work from rural banks located some
distance from a Federal Reserve office. Unnecessary delays are the
result.
The shortcomings of present Federal Reserve collection
practices have this in com mon: they all tend to delay collection and to
waste resources.

THE COSTS

Commercial bank float. Commercial banks normally credit a cus­
tomer’s account immediately when the customer deposits a check drawn
on another bank. So-called commercial bank float arises whenever a
depositing customer’s account is credited for a check before the item is
collected. During the collection period, the collecting bank cannot
employ the funds represented by the deposit. The longer the delay,
the greater the resulting loss.
Federal Reserve float. Federal Reserve float arises whenever a
sending bank’s reserve account is credited for an item before the drawee
bank’s reserve account is charged. Such float develops because, as
noted above, reserve credit to sending banks is currently deferred no
more than two business days after receipt of an item at a Federal Re­
serve office, even though many items require three or more days to
collect. Federal Reserve float represents, in effect, an interest free
Federal Reserve loan to commercial banks. Moreover, its existence
makes it more difficult for the Federal Reserve to manage the collective
reserve position of the banking system.
Circuitous routing. Several of the collection system deficiencies
outlined above cause checks to be routed between the collecting bank
and the drawee bank in a highly indirect fashion. When a check travels
from Bluefield, West Virginia, to Huntington, West Virginia, by way of
Richmond, basic economic resources are obviously wasted.

Clearly, many of the problems associated with check
payments will be overcome when checks are eliminated as a means of
payment. In the meantime, the Federal Reserve has developed a tw o­
pronged, near-term strategy designed to improve the check payments
mechanism. The first element of this program has already been put
into effect. In the past, many banks located outside of Federal Reserve
office cities did not ordinarily remit for items presented to them for
payment until one or two days after receipt. On November 9, 1972,
Federal Reserve Regulation J was amended to require banks to remit
on the day of receipt in immediately available funds.
The second element of the program, already in progress, is the
creation of regional clearing centers similar to the pilot WashingtonBaltimore Center both at existing Federal Reserve offices and, where
necessary, at new facilities. The purpose of the Regulation J amend­
A W A Y OUT

26

ments is to eliminate remittance delays after items have reached drawee
banks. The principal goal of regional clearing centers is to accelerate
presentment; that is, to reduce the time consumed between the dispatch
of an item to the Federal Reserve and its delivery to a drawee bank.
The final section of this article describes the Fifth District regional
clearing program and indicates how the program deals with the defects
of the existing system.

The Fifth District
Regional Clearing Plan
AN OVERVIEW
This Bank’s regional clearing plan is essentially an effort to apply
the clearing principle to Fifth District collections more effectively than
under current arrangements. The program’s basic operational goal is
to provide facilities permitting the overnight settlement of most de­
ferred credit items drawn on Fifth District banks.9 The program con­
sists of two stages, hereinafter referred to as Phase 1 and Phase 2.
The following paragraphs describe the more important features of the
proposed system. As indicated, the existing Washington-Baltimore
Regional Clearing Center is an integral part of the system.
During the first phase of the program, the District will
be partitioned into clearing regions, clearing centers will be established
in each region, and overnight settlement will be provided within
each region. These regions have been drawn to coincide with the
current geographic pattern of check payments. The delineation of the
regions is such that one clearing center would be situated in each Fifth
District state. In addition to the centers themselves, the plan calls for
the establishment of relay stations to facilitate the shipment of incoming
work from collecting banks to the centers. Each region is to be served by
a transportation system that will (1) transport incoming checks from
the relay stations to the center by air or nonstop ground means and (2)
deliver processed items to drawee banks. Evening cutoff hours are to be
put into effect both at the processing centers and at the relays. Within
each region, cutoffs at the relays will be identical to deadlines at the
center. Items will be processed during the night hours and delivered
Phase 1.

» Overnight settlement means that a bank that presents a check for collection prior to the cu to ff on one
business day will receive credit for the item no later than the next business day.




27




to drawee banks the following morning. Sending banks are to receive
PQ pjl

fn v oil W Qvlr Hor\QC!if£irl pv»i AV f a fVi n ^ n f A'f'f

An v ^i^.0
»

before. Drawee banks will be charged each day for items presented
to them for payment that day. By the completion of Phase 1 implemen­
tation, all centers would be accepting items drawn on banks in their re­
spective regions from (1) any par bank in their region, (2) any directsending member bank, and (3) other Federal Reserve offices.
Phase 2. The second phase of the program would extend overnight
settlement between regions throughout the Fifth District by means of a
rapid transit network linking the five regional centers. Following the
completion of this phase of the program, the District regional clearing
system would be considered fully operational. Inter-District volume
might justify further extensions of overnight settlement thereafter
between Fifth District regions and clearing regions in other Federal
Reserve districts. Such arrangements would be planned and imple­
mented jointly with other Reserve Banks.

THE CLEARING REGIONS
AND FACILITY LOCATIONS
Figure 8 shows the geographic boundaries of the proposed clearing
regions.1 In order to overcome the clearing area problem that arises
0
out of the present three-territory configuration, the new regions have
been drawn to conform to regional check flow patterns within the Dis­
trict, insofar as these patterns are known. Several detailed studies of
regional trade areas were employed in delineating the new regions.
In particular, extensive use was made of recent surveys conducted by
the O ffice of Business Economics of the Department of Commerce and
by the Rand McNally Company.1 Using commutation statistics, retail
1
market area surveys, and other data, these studies have defined geo­
graphic regions of substantial economic and commercial intercourse
throughout the United States. Wherever possible, the information pro­
vided by these studies was supplemented by additional information from
other sources such as banks familiar with particular local areas.
The Washington-Baltimore region. The region presently served by
the Washington-Baltimore Center will be expanded by the addition of
several counties on the Maryland Eastern Shore, in western Maryland,
in northern Virginia, and in eastern West Virginia. The Center will
continue to operate at the Baltimore Branch, and a relay station will
remain in operation in Washington.
10 The W ashington-Baltim ore region is an extension o f the area presently served by the W ashin gtonBaltim ore Center.
Small changes in the boundaries shown on the map m ay be made prior to program
im plem entation.
11 The results o f these studies are summarized by the follow ing: (1 ) O ffice o f Business Econom ics, U . S.
D epartm ent of Commerce, “ O BE Economic A reas,” map dated September 29, 1967: and (2 ) “ Trading
A rea s” in Comm ercial A tlas and M arketing Guide (N e w Y o rk : Rand M cN ally & Com pany, 1 9 7 2 ), pp. 64-65.

28

The Charleston, West Virginia, region. This region includes central
and southern West Virginia. The processing center for the region would
be located in the vicinity of Charleston. Relay locations have not yet
been determined. Through an arrangement with the Federal Reserve
Bank of Cleveland, seven Fifth District counties in northern West Vir­
ginia will become part of the clearing region to be served by the Cleve­
land Bank’s Pittsburgh Branch. The counties are : Monongalia, Marion,
Preston, Doddridge, Harrison, Taylor, and Barbour. Both regional
studies cited above indicate that area check flows are oriented toward
Pittsburgh rather than Charleston. In this instance, the program goes
beyond territorial boundaries within the District in dealing with the
clearing area problem.
The Richmond region. This region encompasses all of Virginia
except for the northern Virginia counties included in the WashingtonBaltimore region. The processing center would be located at the Rich-




Figure 8

29




mond Head Office, with relay stations in or near Koanoke, CharlottesTTl 11 A

T J n w i v \ 4- f \

VAllO, XXtViiip

n v\ r 1

"\T

v>4-’ n l l r

J.A C 11V i W l l U i l V .
,
C
A

The Charlotte region. This region coincides with the state of
North Carolina. The processing center will be operated at the Char­
lotte Branch. Relay stations will be located in or near Asheville,
Greensboro-Winston-Salem, Raleigh, and Lumberton, and at least one
additional site in the eastern part of the state.
The Columbia region. This region includes all of South Carolina.
The processing center will be established in the vicinity of Columbia.
Relay stations would be established in or near Greenville, Florence, and
Charleston.

OPERATING CHARACTERISTICS
OF THE NEW SYSTEM
In addition to surmounting the clearing area problem, the program
is designed to eliminate some of the operational deficiencies associated
with the present system.
Operating schedules. The work schedule of each center is to be
built around a night processing operation, enabling the centers to offer
evening cutoff hours for checks drawn on banks in their respective
regions.1 The evening cutoffs will apply to work that must be fully
2
processed by the centers. To accelerate collection as much as possible,
each center will accept work that is presorted by individual drawee
banks up to some early morning hour. The centers will dispatch
processed checks to drawee banks around 7 :00 a.m. The delivery
system has been designed so that the vast majority of items will be in
the hands of drawees no later than 11:00 a.m.
Eligible work. Both member and nonmember banks will be per­
mitted to send checks drawn on banks in the same region directly to
the centers. Nonmember banks will continue to settle through a mem­
ber bank’s reserve account; however, nonmembers will no longer have
to route checks through a member bank’s transit department.
Transportation. Each center will operate a regional transporta­
tion system that will transport incoming work from strategically-located relays to the center and deliver processed work to drawee banks.
Under the plan, the Federal Reserve will absorb all costs of operating
these systems. Sending banks will provide for the shipment of incom­
ing work from their respective offices to the point of deposit at a relay
station or a center. These transportation networks should significantly
improve incoming shipment arrangements and reduce the cost of these
12 A ll o f the centers will operate Sunday-Thursday.

30

shipments to outlying banks. Outgoing delivery will also be carried
out more efficiently than at present since delivery routes will cover
more compact areas.1
3
Phase 2. Phase 2 of the program would extend many of the fea­
tures of the intraregional clearing system to the District as a whole.
Specifically, a member bank situated in one region would be able to
collect checks drawn on banks in the other four regions overnight
through its own center. Evening cutoffs for such work are to be in effect
at all centers. An air transit network has been planned to support the
interregional clearing operation. The network’s design, shown by Fig­
ure 9, resembles a hub. Aircraft would fly from the various centers to
some central point, possibly Richmond, with packages of checks drawn
on banks in the other regions. There, the packages would be exchanged,
and the aircraft would return to their respective centers with checks
18 All delivery route systems have been restructured with the aid o f a computer simulation model.




Figure 9

--------------------------------------------------------------------

THE PHASE 2

INTERREGIONAL TRANSPORTATION NETWORK

%
i

31




drawn on that center’s regional banks. Hence, the system would clear
items between the five centers in the same manner that a local clearing­
house clears items among its participants.
Implementation schedule.
To facilitate an orderly transition,
Phase 1 of the program is to be implemented in a series of steps over a
two-year period. The Phase 2 interregional clearing network would be
set in motion as soon as possible thereafter.

THE BENEFITS
The regional clearing system will significantly improve check col­
lection in the Fifth District, to the benefit of banks and the general
public.
The program’s redefi­
nition of clearing area boundaries will sharply diminish the circuitous
routing of checks between collecting banks and drawee banks, thereby
saving time and reducing shipment costs. While this improvement will
benefit banks throughout the District, its impact should be particularly
great in the regions to be served by the new facilities planned for Co­
lumbia, South Carolina, and Charleston, West Virginia.
CURTAILMENT OF CIRCUITOUS ROUTING

FASTER COLLECTION By providing later cutoffs, improving trans­
portation, and reducing circuitous routing, the regional clearing system,
in conjunction with the Regulation J revision, will accelerate the col­
lection of many items.

Many intraregional checks will be
collected one day earlier than in the past. As an illustration, assume
that a Fredericksburg, Virginia, bank sends a check drawn on a Norfolk
bank to the Richmond Office prior to the Monday closing hour. For­
merly, the check reached the Norfolk bank on Tuesday and was col­
lected on Wednesday. As a result of the Regulation J revision, the
check would now be collected on Tuesday. The regional clearing sys­
tem will speed up the collection process even further by providing
later closing hours for intraregional work. Consequently, the Freder­
icksburg bank would be able to enter for collection a greater portion of
the checks it receives on a given day drawn on Norfolk and other Rich­
mond region points.
Collection within a region.

Collection between regions. With the implementation of Phase 2 of
the program, many interregional items would be collected two busi­
ness days earlier. For example, suppose that the Fredericksburg bank
of the preceding illustration enters a check drawn on an Asheville,
North Carolina, bank at Richmond prior to the Monday closing hour.
In the past, the check was delivered to the Charlotte Branch on Tuesday,
reached Asheville on Wednesday, and was collected on Thursday. The
Regulation J revision has accelerated collection to Wednesday. Under

32

Phase 2 of the regional clearing program, the check would be dis­
patched to Charlotte by air Monday evening, delivered to the Asheville
bank on Tuesday, and collected on Tuesday. Moreover, interregional
collection, like intraregional collection, would be facilitated by the pro­
posed later closing hours.
Effects of faster collection. Because it will hasten collection, the
new system will reduce the volume of checks in the process of being
collected at any given time, thereby reducing commercial bank float
and giving collecting banks earlier access to the funds represented
by deposited checks. In conjunction with the Regulation J revision, the
system should also reduce Federal Reserve float arising in the Fifth
District. Finally, faster collection should reduce the incidence of check
kiting schemes.

A Summing Up
The payments mechanism is to a modern economy what the blood­
stream is to the human body. If the mechanism does not function effi­
ciently, the economy it supports cannot operate at full efficiency. For
the moment, at least, this nation’s payments mechanism is largely a
check payments system. Consequently, any evaluation of the perfor­
mance of the system as a whole is essentially an evaluation of the effi­
ciency with which check transactions are carried out. Moreover, any
short-run effort to improve the mechanism must focus its principal atten­
tion on check payments.
As indicated by the estimates presented in the first section of this
article, the current volume of check payments is, by any standard,
staggering. Moreover, volume is certain to increase rapidly during the
present decade. Since the era of fully automated payments is not yet
at hand, the check payments system must be rejuvenated before it is
engulfed.
The existing mechanism comprises a mixture of elements— local
clearinghouses, collection through correspondent banks, and collection
through the Federal Reserve— -that have evolved from a long and tortu­
ous history. The system’s principal deficiency is that its structure reflects
past rather than present structural conditions in the economy it serves.
As a result of improvements in transportation and communications
during the past half century, much of the nation’s commerce is now
regional in character and a pattern of fairly well-defined trade areas
has arisen. The collection system needs to be reoriented to fit this
pattern.
This Bank’s regional clearing program will restructure Federal
Reserve collection and clearing services within its jurisdiction. The basic




33




idea underlying the new system is a simple but powerful on e: to apply
the clearing principle to the regional economic configuration that has
emerged in the Fifth District while taking advantage of better trans­
portation facilities and a more realistic operating schedule. The re­
sulting increase in efficiency will enable the new system to handle the
estimated four to six million items it would be receiving daily at the time
the five centers become operational and to accomodate subsequent
volume increases without disruption.
Because the ultimate objective of payments mechanism improve­
ments is to eliminate transactions by check, one might be tempted to
regard regional check clearing facilities as nothing more than tem­
porary measures designed to patch up an old machine before it is
replaced. This is not the case. No matter how sophisticated its tech­
nological characteristics, the payments system of the future will also be
a clearing mechanism, and the conditions for efficient clearing will be
at least as relevant to it as to checks. By reshaping clearing areas so
that they conform more closely to the form of transactions flows, re­
gional check clearing arrangements such as the system that has been
designed by this Bank provide an appropriate structural foundation on
which the future system can be built.

34

HIGHLIGHTS
EARNINGS AND CAPITAL ACCOUNTS
Net earnings before payments to the United States Treasury de­
creased $4,071,915.71 to $243,900,073.47 in 1972. Six percent statu­
tory dividends totaling $2,419,254.13 were paid to Fifth District member
banks, and $238,204,519.34 was paid to the Treasury as interest on
Federal Reserve notes.
Capital stock rose $3,276,300.00 to $41,564,950.00 as member
banks increased their stockholdings in this Bank, as required by law,
to reflect the rise in their capital stock and surplus accounts. The Bank’s
surplus account increased $3,276,300.00 to a total of $41,564,950.00.

NEW BANK BUILDINGS
Plans for the construction of a new building to house the Richmond
O ffice have progressed satisfactorily. The general program was com­
pleted and approved by the Board of Governors in June. Both the
building scheme and the preliminary sketches, developed by the inter­
nationally famous architectural firm of Minoru Yamasaki & Associates,
Troy, Michigan, were approved in October. By year end, the design
development phase was well under way.
The building, containing 1,160,000 square feet of floor space will
include 29 stories above grade, three levels below grade, and an under­
ground garage. The lower levels will be designed to accommodate
security functions, which include vaults, money and securities oper­
ations, and delivery courts. The tower section will rise 461 feet above
grade and will be approximately 150 feet square. The tower, which is
designed with a center service core, will provide more than 16,000
square feet of column-free office and work space on each floor.
Among the many factors considered in the selection of the sevenacre site on the James River were size, proximity to the financial area,
convenient access to city streets and major highways leading into and
out of Richmond, and potential contribution to the future development
of the city. The new Manchester Bridge and the proposed Richmond
Metropolitan Expressway will provide easy ingress and egress for the
Bank’s more than 1,000 employees as well as for the heavy volume of
trucks carrying currency, coin, and checks, which require quick con­
nections with major highways.
The new building will be the third location for the Federal Reserve
Bank of Richmond. Following its organization on May 18, 1914, the
Bank’s first office was opened at 1109 East Main Street in November of
that year. In 1921, the Bank moved to its present location at Ninth and




35




Franklin Streets, where it has made several additions over the years.
The new building should be ready for occupancy in late spring or early
summer of 1976.
Preliminary studies and space planning for the new Baltimore
Branch building were begun early in the year by the architectural firm
of Hellmuth, Obata & Kassabaum of St. Louis, Missouri. A long-range
space needs plan was substantially completed by year end, and negoti­
ations for the acquisition of a 91,366 square foot site along the water­
front within Baltimore’s Inner Harbor Redevelopment Area were in
process.

CHECK COLLECTION
On November 9, Regulation J, “ Collection of Checks and Other
Items by Federal Reserve Banks,” of the Board of Governors of the
Federal Reserve System was revised as part of a major program to
modernize the nation’s payments mechanism. This change, one of the
most significant in the area of check collection in recent years, provides
for faster payment of checks when they are presented to the bank on
which they are drawn. The amended Regulation J requires all banks
served by the Federal Reserve check collection system to pay for checks
in immediately available funds the same day the checks are presented
for payment by the Federal Reserve.
As of January 1, the Washington-Baltimore Regional Clearing
Center was serving 117 banks in the metropolitan areas of Washington,
D. C. and Baltimore, Maryland. Since January 1, 1972, 20 banks in
Maryland and eight in West Virginia have been added, bringing the
total to 145 banks. Originally, the Washington-Baltimore Regional
Clearing Center encompassed the area within a 40-mile radius of
Washington, D. C. The Regional Clearing Center now extends to
additional banks in Maryland and also includes banks in the area of
Martinsburg, West Virginia. Further expansion is planned for the
future.
The Federal Reserve Bank of Richmond is in the process of de­
veloping a regional check clearing system that will facilitate the clear­
ing of checks throughout the Fifth District. The existing WashingtonBaltimore Regional Clearing Center will be an integral part of the new
System which is described in some detail in the feature article of this
Annual Report.

RESERVES OF MEMBER BANKS
Regulation D, “ Reserves of Member Banks,” has been revised to
restructure member bank reserve requirements, making like percentage
requirements applicable to member banks of comparable size, regard­

36

less of location. The date of implementation was timed to phase in
with seasonal reserve needs and to give commercial banks time to
make necessary adjustments to the revised regulation. This revision of
Regulation D was also implemented simultaneously with the changed
Regulation J.

PLANNING
The Planning Department increased its utilization of computer
modeling techniques in the fields of transportation and check collection.
This change enabled the Department to design more effective pick-up
and delivery routes for checks. Additionally, a computer model was
utilized to forecast check volumes and flows in preparation for the
establishment of regional clearing centers in the Fifth District.

DISCOUNT RATE
The discount rate was lowered to
it remained throughout 1972.

41/2

percent late in 1971, where

CHANGES IN DISCOUNT PROCEDURES
On September 14, the Board of Governors acted to make possible
the extension of Federal Reserve credit to nonmember commercial
banks to mitigate any possible hardships that might temporarily be
placed on these banks or their communities by the implementation of
changes in Regulation J, “ Collection of Checks and Other Items by
Federal Reserve Banks.” Under this program, member banks are per­
mitted to act as the medium or agent of a nonmember commercial bank
applying for or receiving credit from this Bank.

ADVANCES AND DISCOUNTS BY
FEDERAL RESERVE BANKS
In November, the Board of Governors published a proposed revision
of its Regulation A, “ Advances and Discounts by Federal Reserve
Banks.” The revised Regulation would permit banks with significant
seasonal needs to have access to Federal Reserve credit on a longerterm basis and with greater assurance than heretofore. Although there
would be no other substantial change from the present rules for bor­
rowing at the discount window, the proposed revision would simplify
and modernize the Regulation. The Board invited comments on the
contemplated changes through February 28, 1973.




37




CULPEPER FACILITY
During 1972, a 20 percent increase in average daily traffic was
experienced by the Federal Reserve Communications System, centered
at the Communications and Records Center in Culpeper, Virginia.
In order to keep pace with rapidly increasing transactions, the
Switching Center continues to expand its computer-to-computer links
with Federal Reserve Banks. During 1972, the Federal Reserve Banks
of New York, Kansas City, and Cleveland activated computer links with
Culpeper. These offices, plus Chicago and San Francisco, which were
connected via computer in 1971, account for approximately 30 percent
of the Communications System’s traffic.

MONEY
In August, armored car service for currency and coin was expanded
to include one-third of the local branches of member banks where this
was possible. This service is in addition to that provided to the member
banks’ main locations in each town or city. Additional expansion of
this service is planned for the future.

CHANGES IN DIRECTORS
Early in the fall, Fifth District member banks elected one Class A
and one Class B Director to three-year terms on the Richmond Board of
Directors. John H. Lumpkin, Chairman of the Board and Chief Exec­
utive Officer, The South Carolina National Bank, Columbia, South
Carolina, was elected a Class A Director to succeed Hugh A. Curry,
President, The Kanawha Valley Bank, Charleston, West Virginia, whose
term expired December 31. Osby L. Weir, General Manager, Metro­
politan Washington-Baltimore Area, Sears, Roebuck and Co., Bethesda,
Maryland, was elected a Class B Director to succeed Robert S. Small,
President and Chief Executive Officer, Dan River, Inc., Greenville,
South Carolina, whose term also expired December 31.
The Richmond Board of Directors appointed William W. Bruner,
Chairman of the Board and President, First National Bank of South
Carolina, and President, First Bankshares Corporation of South Caro­
lina, Columbia, South Carolina, to a three-year term as a Director at
the Charlotte Branch. He succeeded J. Willis Cantey, Chairman of the
Board, The Citizens & Southern National Bank of South Carolina, Co­
lumbia, South Carolina, whose term expired December 31.
The Richmond Board reappointed James R. Chaffinch, Jr., Presi­
dent, The Denton National Bank, Denton, Maryland, to a three-year
term on the Baltimore Branch Board of Directors.
The Board of Governors reappointed Robert W. Lawson, Jr.,
Managing Partner, Charleston Office, Steptoe & Johnson, Charleston,

38

West Virginia, to a three-year term as a Class C Director and redesig­
nated him Chairman of the Board of Directors and Federal Reserve
Agent for 1973. Renamed as Deputy Chairman of the Board of Direc­
tors for 1973 was Stuart Shumate, President, Richmond, Fredericksburg
and Potomac Railroad Company, Richmond, Virginia.
The Board of Governors appointed David W. Barton, Jr., Presi­
dent, The Barton-Gillet Company, Baltimore, Maryland, to a three-year
term as a Director at the Baltimore Branch. Mr. Barton succeeded
Arnold J. Kleff, Jr., Retired Manager, Baltimore Refinery, American
Smelting and Refining Company, Baltimore, Maryland, whose term
expired December 31. Robert C. Edwards, President, Clemson Uni­
versity, Clemson, South Carolina, was reappointed by the Board of
Governors to a three-year term on the Charlotte Board of Directors.

FEDERAL ADVISORY COUNCIL
The Board of Directors selected Thomas I. Storrs, President,
NCNB Corporation and North Carolina National Bank, Charlotte, North
Carolina, to serve a one-year term as the Fifth Federal Reserve District
representative on the Federal Advisory Council for 1973. The Council,
which consists of a representative from each of the 12 Federal Reserve
Districts, meets quarterly with the Board of Governors in Washington,
D. C., to discuss business conditions and Federal Reserve affairs.

NEW MEMBER BANKS
First Virginia Bank of Orange, Orange, Virginia, opened for busi­
ness in January. During the same month, First Virginia Bank, Annandale, Virginia, became a state member bank; and Union Trust and
Deposit Company, Parkersburg, West Virginia, converted from a state
member bank into a nationally chartered bank under the title of Union
Trust National Bank. First & Merchants National Bank of the Penin­
sula, Williamsburg, Virginia, was established in July. The Raleigh
County Bank, Beckley, West Virginia, was converted from a state
member bank into a nationally chartered bank in August. The Bank
of Buckingham, Dillwyn, Virginia, started operations in October. Old
Colony Bank & Trust Company of Williamsburg, Williamsburg, Vir­
ginia, opened in November; in December, the First Virginia Bank of
Roanoke Valley, Roanoke, Virginia, began serving the public.

CHANGES IN OFFICIAL STAFF
The following changes in the official staff of the Bank occurred
during 1972.




39




G. Harold Snead, Senior Adviser in the Auditing Department, re­
tired April 1 after 31 years of distinguished service. He joined the
Bank staff as an Examiner on March 1, 1941.
In July, J. Alfred Broaddus, Jr. and Clyde H. Farnsworth, Jr., both
members of the Research Department, were named to the position of
Assistant Vice President.
In November, Andrew L. Tilton was promoted to Vice President
in charge of the Check Collection Department. Also promoted at this
time was H. Lewis Garrett, who was elevated to the position of Auditing
Officer in the Auditing Department. Joseph C. Ramage, Assistant
Vice President, was transferred to the Check Collection Department
from the Discount and Credit Department; and John C. Horigan was
named Assistant Vice President in charge of the Discount and Credit
Department. At our Baltimore Branch, Gerald L. Wilson was pro­
moted to Vice President with general administrative responsibilities
and direct supervision of the Planning Department and New Building
Program. William E. Pascoe, III, was named Assistant Vice President
in charge of the Money, Accounting, and Personnel Departments.
Clifford B. Beavers, Vice President, who joined the Bank on
September 1, 1926, retired December 1 after more than 46 years of
distinguished service. Immediately prior to his retirement, Mr. Beavers
supervised the Check Collection Department.
The following promotions and changes were effective January 1,
1973. William H. Wallace was promoted to Vice President in charge
of the Planning Department. Elevated to the position of Assistant Vice
President were Hobert D. Pierce of our Building and Equipment De­
partment and Barthonhue W. Reese, Training & Staff Section of the
Personnel Department. James R. Slate was named Assistant Counsel
in the Legal Department. At the Culpeper Facility, Charles H. Imel
was promoted to Assistant Vice President and Dale M. Cunningham
was elected Assistant Cashier. Ronald B. Duncan was named Assistant
Cashier at the Baltimore Branch with responsibilities in the Personnel
and Protection Departments. A. A. Stewart, Jr., Vice President of the
Baltimore Branch of the Federal Reserve Bank of Richmond, retired
January 1 after 30 years of distinguished service. Mr. Stewart joined
the Bank’s staff on November 1, 1942.

40

Summary of Operations
CHECK CLEARING & COLLECTION

1972

1971

Dollar amount
Commercial bank checks1 _____________________________________________
Government checks2 ___________________________________________________
Return items ___________________________________________________________

245,977,101,000
20,677,704,000
2,101,786,000

218,118,784,000
18,416,145,000
2,167,970,000

Number of items
Commercial bank checks1 _____________________________________________
Government checks2 ___________________________________________________
Return items ___________________________________________________________

772,507,000
71,386,000
8,272,000

708,860,900
71,728,000
7,753,000

4,085,751,200
181,897,550
1,046,249,600

3,625,049,840
170,541,920
1,091,826,100

CURRENCY & COIN
Currency disbursed— Dollar amount ____________________________________
Coin disbursed— Dollar amount -------------------------------------------------------------Dollar amount of currency destroyed____________________________________
Daily average of currency destroyed
Dollar amount _________________________________________________________
Number ________________________________________________________________

4,151,784
807,585

4,298,528
793,837

DISCOUNT & CREDIT
Dollar amount
Total loans made during year _________________________________________
Daily average loans outstanding --------------------------------------------------------Number of banks borrowing during the year ------------------------------------------

2,246,741,000
12,046,191
67

3,450,100,000
19,924,479
67

FISCAL AGENCY ACTIVITIES
Marketable securities delivered or redeemed
Dollar amount __________________________________________________________
Number _________________________________________________________________

25,193,356,872
154,412

20,518,332,102
202,519

Coupons redeemed
Dollar amount _________________________________________________________
Number _________________________________________________________________

110,934,583
324,027

103,284,799
335,884

Savings bond and savings note issues
Dollar amount __________________________________________________________
Number _________________________________________________________________

467,752,563
10,549,691

413,299,400
9,667,352

Savings bond and savings note redemptions
Dollar amount _________________________________________________________
Number _________________________________________________________________

480,893,174
11,078,409

478,247,164
11,297,295

Depositary receipts for withheld taxes
Dollar amount
__________________________________________________
N umber _________________________________________________________________

11,815,820,483
2,725,952

9,903,179,888
2,508,511

588,289,391,128
576,707

453,010,466,662
491,238

TRANSFERS OF FUNDS
Dollar amount
Number _______

-

_____

I _____________________________________________________
I

1 Excluding checks on this Bank.
2 Including postal money orders.




41

COMPARATIVE STATEMENTS
Condition
ASSETS:

Dec. 31, 1972

Dec. 31, 1971

$1,013,447,540.79
36,000,000.00
120,854,413.00
35,597,950.72

$ 893,888,219.95
36,000,000.00
99.994.310.00
37.588.915.00

52,150,000.00
97,975,000.00

2,950,000.00
36,286,000.00

2,216,307,000.00

2,256,080,000.00

2,740,543,000.00
258,681,000.00

2.659.964.000.00
245,866,000.00

5,215,531,000.00

5.161.910.000.00

___________________________________

5,365,656,000.00

5.201.146.000.00

Cash items in process of collection ___________________________________
Bank premises --------------------------------------------------------------------------------------Other assets ------------------------------------------------------------------------------------------

965,382,347.55
13,200,002.95
80,609,222.97

1,087,551,283.61
13,065,841.52
54,806,430.19

$7,630,747,477.98

$7,424,041,000.27

$5,315,476,419.00

$4,802,937,861.00

Member bank reserves _____________________________________________
U. S. Treasurer— general account_________________________________
Foreign ---------------------------------------------------------------------------------------------Other --------------------------------------------------------------------------------------------------

1,247,850,926.16
164,018,215.05
15,080,000.00
30,656,816.19

1,514,666,753.97
98,035,104.43
14,280,000.00
41,252,085.39

TO T AL D E P O S IT S ---------------------------------------------------------------------------

1,457,605,957.40

1,668,233,943.79

Deferred availability cash items _____________________________________
Other liabilities -------------------------------------------------------------------------------------

734,371,794.22
40,163,407.36

833,605,551.88
42,686,343.60

7,547,617,577.98

7,347,463,700.27

Capital paid in ------------------------------------------------------------------------------------Surplus --------------------------------------------------------------------------------------------------

41,564,950.00
41,564,950.00

38.288.650.00
38.288.650.00

TO T A L L IA B IL IT IE S AN D CAPITAL A C C O U N TS _____

$7,630,747,477.98

$7,424,041,000.27

Gold certificate account _____________________________________________
Special Drawing Rights certificate account _________________________
Federal Reserve notes of other Federal Reserve Banks ____________
Other cash -------------------------------------------------------------------------------------------L O A N S A N D S E C U R IT IE S :

Loans to member banks ___________________________________________
Federal agency obligations -------------------------------------------------------------U. S. Government securities:
Bills -----------------------------------------------------------------------------------------------Certificates _______________________________________________________
Notes ---------------------------------------------------------------------------------------------Bonds ---------------------------------------------------------------------------------------------TO TAL U .

s.

G O V ER N M E N T SECURITIES

TO T AL L O A N S A N D SECURITIES

__________________________

TO T A L A S S E T S _____________________________________________

L IA B IL IT IE S ;
Federal Reserve notes ------------------------------------------------------------------------d e p o s it s :

TO TAL L IA B IL IT IE S _______________________________________

C A P IT A L

ACCOUN TS:

Contingent liability on acceptances purchased for
foreign correspondents ----------------------------------------------------------------------

42




$

9,308,000.00

$

12,999,900.00

Earnings and Expenses
1972

E A R N IN G S :
Loans to member banks __________________________________________________
Interest on U. S. Government securities ________________________________
Foreign currencies _______________________________________________________
Other earnings ___________________________________________________________

538,548.45
279,471,257.95
57,654.65
33,324.64

$

968,532.33
270,720,509.91
135,076.52
34,681.04

280,100,785.69

271,858,799.80

28,999,822.45
1,821,100.00
3,015,016.90

27,284,368.86
1,674,400.00
2,203,948.20

___________________________________________________________________________

33,835,939.35

31,162,717.06

C URRENT N E T E A R N IN G S _____________________________________

246,264,846.34

240,696,082.74

213,655.97
128,737.23

7,629,141.53
117,201.74

________________________________________________________________________

342,393.20

7,746,343.27

D ED UCTIO NS FROM C UR RE N T N E T E A R N IN G S _____________________________________________

2,707,166.07

470,436.83

TOTAL CURRENT

e a r n in g s

___________________________________________

$

1971

EXPENSES:
Operating expenses (including depreciation on bank premises) after
deducting reimbursements received for certain Fiscal Agency and
other expenses _________________________________________________________
Assessment for expenses of Board of Governors _______________________
Cost of Federal Reserve currency _______________________________________
NET

EXPENSES

A D D ITIO N S TO C URRENT N E T E A R N IN G S :

Profit on sales of U. S. Government securities (net) _________________
All other __________________________________________________________________
TO TAL

AD D ITION S

N E T A D D ITIO N S OR D ED UCTIO NS ___________________________

- 2,364,772.87

N E T E A R N IN G S BEFORE P A Y M E N T S TO U. S. TR EA SU R Y

$243,900,073.47

$247,971,989.18

Dividends paid ___________________________________________________________
Payments to U. S. Treasury (interest on Federal Reserve notes) ____
Transferred to surplus __________________________________________________

$ 2,419,254.13
238,204,519.34
3,276,300.00

$

$243,900,073.47

$247,971,989.18

$ 38,288,650.00
3,276,300.00

$ 35,700,550.00
2,588,100.00

$ 41,564,950.00

$ 38,288,650.00

(Representing amount paid in, which is 50% of amount subscribed)
Balance at close of previous year ______________________________________
Issued during the year __________________________________________________

$ 38,288,650.00
3,333,550.00

$ 35,700,550.00
2,737,100.00

Cancelled during the year ______________________________________________

41,622,200.00
57,250.00

38,437,650.00
149,000.00

BAL A N C E A T CLOSE OF CU RRENT Y E A R ________________

.$ 41,564,950.00

$ 38,288,650.00

TOTAL

_____________________________________________________________

+

7,275,906.44

2,261,033.34
243,122,855.84
2,588,100.00

SURPLU S A C C O U N T
Balance at close of previous year _____________________________ ...-------------Addition account of profits for year ____________________________________
B AL A N C E A T CLOSE OF CU RRENT Y E A R _________________

C A P IT A L




STOCK

ACCOUNT

43

DIRECTORS

(December 31, 1972)

Robert W . Lawson, Jr.

Chairman o f the Board and Federal R eserve A g en t

Stuart Shumate

D eputy Chairman o f the Board

CLASS A
Hugh A . Curry

President, The Kanawha Valley Bank
Charleston, W e st Virginia
(T erm expired D ecem ber 31, 1972)
Succeeded b y :

John H. Lumpkin
Chairman of the Board and C h ief E xecu tive O fficer
The South Carolina National Bank
Columbia, South Carolina
(T erm expires D ecem ber 31, 1975)

Edward N. Evans

President, The F arm ers and M erchants National Bank
Cambridge, M aryland
(T erm expires D ecem ber 31, 197U)

Thomas P. McLachlen

President, M cLachlen National Bank
Washington, D . C.
(T erm expires D ecem ber 31, 1973)

CLASS B
Henry Clay Hofheimer, II

Chairman o f the Board, Virginia Real E state Investm ent Trust
N orfolk, Virginia
(T erm expires D ecem ber 31, 197A)

H. Dail Holderness

President, Carolina Telephone and Telegraph Company
Tarboro, N orth Carolina
(T erm expires D ecem ber 31, 1973)

Robert S. Small

President and C hief E xecu tive O fficer, Dan R iver, Inc.
Greenville, South Carolina
(T erm expired D ecem ber 31, 1972)
Succeeded b y :

Osby L. Weir
General Manager, M etropolitan W ashingtonBaltimore A rea , Sears, Roebuck and Co.
Bethesda, M aryland
(T erm expires D ecem ber 31, 1975)

CLASS C
Robert W . Lawson, Jr.

Managing Partner, Charleston O ffice, Steptoe & Johnson
Charleston, W e st Virginia
(T erm expires D ecem ber 31, 1975)

Stuart Shumate

President, Richmond, Fredericksburg and Potom ac Railroad Company
Richmond, Virginia
(T erm expires D ecem ber 31, 1973)

E. Craig Wall, Sr.

Chairman o f the Board, Canal Industries, Inc.
Conway, South Carolina
(T erm expires D ecem ber 31, 197A)

MEMBER FEDERAL ADVISORY COUNCIL
Joseph W . Barr

President, Am erican Security and Trust Company
Washington, D . C.
(T erm expired D ecem ber 31, 1972)
Succeeded b y :

Thomas I. Storrs
President, N C N B Corporation and N orth Carolina
National Bank
Charlotte, N orth Carolina
(T erm expires D ecem ber 31, 1973)

44




OFFICERS
Richmond
Aubrey N. Heflin

President

Welford S. Farmer

Senior Vice President and
Special Legal A dviser

James Parthemos

Senior Vice President and
D irector o f Research

Robert P. Black

F irst Vice President

William C. Glover

Vice President

Arthur V. Myers, Jr.

Vice President

John L. Nosker

Vice President

John F. Rand

Senior Vice President

Chester D. Porter, Jr.

Vice President

Raymond E. Sanders, Jr.

Senior Vice President

Aubrey N. Snellings

Vice President

Lloyd W . Bostian, Jr.

Vice President

Andrew L. Tilton

Vice President

W . Thomas Cunningham, Jr.

Vice President

Albert D. Tinkelenberg

Vice President

John G. Deitrick

Vice President

J. Gordon Dickerson, Jr.

Vice President

H. Ernest Ford

Vice President

William F. Upshaw

Vice President and
General Counsel

William H. Wallace

Vice President

Assistant Vice President

Charles H. Imel

Elizabeth W . Angle

Assistant Vice President

William D. Martin, III

Fred L. Bagwell

A ssistant Vice President

J. Lander Allin, Jr.

A ssistant Vice President
A ssistant General Counsel

J. Alfred Broaddus, Jr.
W yatt F. Davis

A ssistant Vice President
Chief Exam iner

William E. McLean

A ssista nt Vice President

Robert D. McTeer, Jr.

A ssista nt Vice President

Hobert D. Pierce

A ssista n t Vice President

Joseph C. Ramage

A ssistan t Vice President

George B. Evans

A ssistant Vice President

Barthonhue W . Reese

A ssistan t Vice President

Clyde H. Farnsworth, Jr.

A ssistant Vice President

Frank D. Stinnett, Jr.

Assistayit Vice President

William C. Fitzgerald

A ssistant Vice President

John G. Stoides

A ssistan t Vice President

John E. Friend

A ssistant Vice President

Wilbur C. Wilson

A ssistan t Vice President

A ssistant Vice President

Jack H. W yatt

A ssistant Vice President

John C. Horigan

Jackson L. Blanton
James R. Slate

Joseph F. Viverette

Examining O fficer

General A uditor

Baltimore Branch
H. Lee Boatwright, III
Gerald L. Wilson
B.

Dale M. Cunningham

A ssistan t Cashier

A ssistant Counsel

Senior Vice President
Vice President

F. Armstrong, Sr. A ssistant Vice President

H. Lewis Garrett

Auditing O fficer

Charlotte Branch
Jimmie R. Monhollon
Stuart P. Fishburne

Senior Vice President
Vice President

Boyd Z. Eubanks

Assistan t Vice President

E. Riggs Jones, Jr.

A ssistant Vice President

Winfred W . Keller

A ssista n t Vice President

Charles P. Kahler

A ssistant Vice President

Fred C. Krueger, Jr.

A ssista nt Vice Preside?it

A ssistant Vice President

O. Louis Martin, Jr.

A ssista n t Vice President

William E. Pascoe, III
Ronald B. Duncan




A ssistant Cashier

45

BRANCH DIRECTORS
Raltimom

* /u.1 Ul I I w I
—

James R. Chaffinch, Jr.

President, The D enton National Bank
Denton, M aryland
(T erm expires D ecem ber 31, 1975)

Tilton H. Dobbin

President and Chairman of Executive Committee, Maryland
National Bank
Baltimore, Maryland
(Term expires December 31, 197U)

*John H. Fetting, Jr.

President, A . H . F ettin g Com pany
Baltimore, M aryland
(T erm expires D ecem ber 31, 1973)

James G. Harlow

President, W est Virginia University
Morgantown, W est Virginia
(Term expires December 31, 197U)

Arnold J. Kleff, Jr.

Retired Manager, Baltimore R efin ery, A m erican Smelting and
R efining Company
Baltimore, M aryland
(T erm expired D ecem ber 31, 1972)
Succeeded b y :
David W . Barton, Jr.
President, The Barton-Gillet Company
Baltimore, M aryland
(T erm expires D ecem ber 31, 1975)
Chairman o f the Board and C h ief E xecu tive O fficer, Union Trust
Company o f M aryland
Baltimore, M aryland
(T erm expires D ecem ber 31, 1973)
E xecu tive Vice President, Bank o f R ipley
Ripley, W e st Virginia
(T erm expires D ecem ber 31, 1973)

J. Stevenson Peck

James J. Robinson

Charlotte
Charles F. Benbow

Vice President, R. J. Reynolds Industries, Inc.

Winston-Salem, North Carolina
(Term expires December 31, 197U)
H. Phelps Brooks, Jr.
C. C. Cameron

J. Willis Cantey

L. D. Coltrane, III

President and Trust O fficer, The Peoples National Bank
Chester, South Carolina
(T erm expires D ecem ber 31, 1973)
Chairman o f the Board and President, F ir st Union National Bank of
N orth Carolina
Charlotte, N orth Carolina
(T erm expires D ecem ber 31, 1973)
Chairman o f the Board, The Citizens & Southern National Bank of
South Carolina
Columbia, South Carolina
(T erm expired D ecem ber 31, 1972)
Succeeded b y :
William W . Bi’uner
Chairman o f the Board and President, F irst National
Bank o f South Carolina, and President, F ir st
Bankshares Corporation o f South Carolina
Columbia, South Carolina
(T erm expires D ecem ber 31, 1975)
President and Trust O fficer, The Concord National Bank
Concord, N orth Carolina

(Term expires December 31, 197U)
*Charles W . DeBell

Robert C. Edwards
^Branch Board Chairman

46




General M anager, N orth Carolina W ork s, W estern E lectric
Company, Inc.
W inston-Salem , N orth Carolina
(T erm expires D ecem ber 31, 1973)
President, Clemson U n iversity
Clemson, South Carolina
(T erm expires D ecem ber 31, 1975)