View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

1

|
!

1

THE

CLEARING AND COLLECTION
OF CHECKS
By

WALTER EARL SPAHR , Ph.D.
Assistant Professor of Economics
New York University

With Introduction by

H. PARKER WILLIS , Ph . D.
Professor of Banking , Columbia University

NEW YORK
THE BANKERS PUBLISHING CO .
1926

HG2 : 06
so

1

3

JH

Copyright 1926

The Bankers Publishing Company

TE

.

PRINTED IN THE U.

THE

S, A,

BY

WARREN PUBLICATIONS PRESS
CAMBRIDGE ,

MASS .

97c

PREFACE

Among the few questions in the field of currency and banking
which have not received a thorough and systematic treatment,

there is none of greater importance than that of the clearing and
collection of checks. It seems remarkable, when one considers the

important part deposit currency plays in everyday life, that this
significant aspect of currency and banking should be neglected so
long. Checks and drafts, as evidences of deposits in the process

of transfer, are the principal connecting links between the indi
vidual and his bank. Not only the individual, but practically
every department of aa bank, comes in contact with them on every

side. Indeed, the principal function of commercial banks today is
to receive and create deposits and to provide the proper mechan

ism for their transfer and collection. But even though the ques
tions involved in the clearing and collection of checks are of such
importance to the individual and to the bank, there is probably no

subject in the field of currency and banking to which so much
vagueness attaches. This is true not only for the layman but for

the great majority of persons directly connected with banks.
Perhaps the most important controversy in the currency and

banking field at present is the par collection controversy and yet

relatively few people are in a position to pass a mature judgment
on the merits of the questions involved. It is the purpose of this
book to show not only the manner of origin and actual functioning

of our present clearing and collection system , but to examine the
merits of the various questions involved in the par collection con
troversy. As a resultthis book deals not onlywith the historical

and theoretical aspects of our clearing and collection system, but
with its practical operation as well and should meet the needs of
the instructor, student, banker, and layman. The material has

been arranged with this purpose in mind. The last chapter gives
a summarized view of theclearing and collection system as it oper

ates today and is designed primarily for those persons who have

little time or inclination to inquire into the theoretical and con
troversial aspects ofthequestion but who wish to get a picture of
the system as itis functioningatpresent. For the great majority
iii

605523

PREFACE

iv

of readers, however, the other chapters will be found necessary to
give an adequate view of the problems involved. The writer has
felt a great need for such material, not only in his university
classes, but in classes composed entirely of persons connected with
banks, and believes the book will fulfill a great need felt by in
structors and students.

In making recognition of the valuable suggestions which he has

received in the preparation of this book, the writer wishes to make
special mention of his obligations to Professor H. Parker Willis
of Columbia University ; to Professors James D. Magee and Rine
hart J. Swenson of New York University ; to Dean Chester A.
Phillips of the University of Iowa ; to Dr. W. Randolph Burgess,
Mr. Carl Snyder, Mr. Adolph J. Lins, and Miss Lucile Bagwell
of the Federal Reserve Bank of New York ; and to Mr. Clarence E.

Bacon of the New York Clearing House. While the writer's
obligations to others, especially to those bankers who have written
long and carefully-prepared letters to the writer in response to his
queries, are set forth clearly in the footnotes, he wishes to make
special acknowledgment of his indebtedness to Mr. Charles A.
Peple of the Federal Reserve Bank of Richmond ; to Mr. H. F.
Strater of the Federal Reserve Bank of Cleveland ; and to Messrs.

Walter W. Stewart , Walter L. Eddy and J. C. Noell, members of
the staff of the Federal Reserve Board. The writer is also deeply
indebted to his wife, Beulah, for her suggestions and help in read
ing proof.
W. E. S.

New York City, May, 1925.

INTRODUCTION

After more than a decade of experience in developing the Fed

eral Reserve System , American bankers are beginning to realize
that the complete reform of our banking methods cannot be at

tained without extensive readjustment of existing practices and
particularly the recognition of certain problems of a general
nature whose solution must be approached upon the lines of public
welfare rather than of individual business advantage.
Students of banking had already reached these conclusions ;
and some few of them have within the past few years given up the
older type of semi-political discussion of banking legislation and
the semi-dialectic analysis of abstract theories of prices and
values. In their place, there have begun to come forward a series

of fact-analyses designed to place current problems in their
proper historical setting, and at the same time to supply the ma
terials for a solution of doubtful or debatable questions of man
agement. A new kind of banking study and investigation is thus
being slowly developed ; and the results of it are finding their way
to the public in the form of monographs on fundamental questions
growing out of the banking inquiry and experience of the decade
past.

The Federal Reserve System has naturally attracted a large
share of the attention of men with fundamental training and
scientific outlook such as to enable them to appreciate banking

problems from a national standpoint. Several well-conceived and
thoroughly -prepared monographs dealing with varying phases of
the System have already made their appearance. Among them
may be mentioned recent inquiries into the fiscal functions of Fed
eral reserve banks, into the discount policy of the Federal Reserve
System, and into details of practice and method which have been
analyzed from a variety of standpoints. The present volume by
Dr. W. E. Spahr deals with one of the more technical and difficult
phases of Federal reserve banking and seeks to set forth the ele
ments of this branch of the problem in the detail that they deserve.
Necessarily a study of the clearance and collection system of the
Federal reserve banks must view the whole problem from a broad
V

vi

INTRODUCTION

historical standpoint, yet must be willing to take into careful
account the contemporary phases, both legal and technical, in
which the problem presents itself at the present time. Dr. Spahr
has furnished exactly this kind of background, and has provided
a wealth of material for the careful study of a branch of banking
practice which has been too much neglected . He has, moreover,

furnished the underlying basis for the analysis of a banking prob
lem which in its theoretic aspects has thus far been given scarcely
any weight save by a very few thinkers, of whom the late Professor
Dunbar of Harvard was by far the most outstanding.
When the Federal Reserve Act was first projected, it was

sought to incorporate into that measure provision for the exer

cise of clearing powers, in order that the System might become a
Reserve System in truth as well as in name. It was recognized
that, without these powers, the reserve banks would become merely
the holders of dead balances carried for the member banks with

out any service to them ; and, since the business public abhors an
idle or unnecessary institution, just as nature is traditionally
said to abhor a vacuum, it would not submit long to the needless
burden created by such emergency institutions designed to " put
out financial fire .” It was realized also that such measures as the

Aldrich bill, adopted by the National Monetary Commission but
apparently without thought on the part of its framers regarding
any system of collection and clearance, would have met only a
very small fraction of the necessities of the situation, and would
consequently have corrected but a few of the fundamental faults
to be found in Federal reserve banking. Hence the effort, early
in the history of the System, to make use of the broad clearing

authority which was finally granted by the law itself for the pur
pose of creating a unified system of remittance and credit appli
cable in every part of the United States. The undertaking seems
today to have been obviously necessary ; yet at the time those who
sought to secure success for it were obliged almost to fight for
their reputations, and could maintain themselves and their cause
only with the utmost difficulty.
It is aa great tribute to the real service of the Federal Reserve

System that it should have succeeded in some measure in over
coming this kind of hostility both from within and without its own
ranks, and should have advanced as far as it has in the task of ex

emplifying what can be done for a nation by harmonizing its

methods of collecting, clearing and remitting funds. It is not too
much to say that, during the participation of the United States in

INTRODUCTION

vii

the war, the clearing mechanism which had been provided, both in
the form of the Gold Settlement Fund and in that of local clear

ing systems in the several districts, was absolutely indispensable
to the successful functioning of Treasury finance. Without it,
undoubtedly, our system of financing the war would have broken

down, funds would have become congested in various parts of the
country and would have been correspondingly scarce elsewhere,
banking embarrassment would have been common , and the tremen

dous load of war finance, eventually borne with considerable suc
cess, and with a minimum of suffering, would have crushed the

nation's finances to the earth. And yet this conspicuous service
could not be allowed to go on undisturbed . Ingratitude, more
strong than traitors' arms, has more or less vanquished those who,

aided by the urgent necessities of the war, had attained a partial
success in installing a national system of collection and clearance.
State banks in various parts of the country, irritated and aggra

vated as they have been by tactless methods employed by unwise
Federal reserve bankers, have sought and have obtained decisions
from the courts which, while ambiguous and doubtful in their

meaning, have none the less aided in breaking up the plan that

had already been worked out. They have thus already introduced
in many parts of the country a wide diversity of practice and of
method which largely interferes with the effective application of
the System as first conceived.
It may be doubted whether we shall be willing long to submit

to this kind of backward evolution. There are many bankers who
perceive the danger of the further loss of ground, although they
hardly know how to correct the situation which has thus grown
up. A part of their embarrassment and difficulty is due to lack of

knowledge. There is a widespread propaganda against national
collection and clearance, and numerous assertions based upon per
verted or erroneous ideas of the function of collection and clear

ance have been widely disseminated. Dr. Spahr's volume traces
this lengthy and entangled history, and sets forth dispassionately
and without bias the various steps in the evolution of collection
and clearance systems during recent years. It thus renders a
decided service to the banker who is still seeking light with regard
to his own business interest in the matter of clearance, just as it
provides him with the material upon which to make up his mind

regarding the public aspects of the whole question in the abstract.
A reading of this volume should accordingly inform many pro
fessional students of factors in the clearance situation, and of

viii

INTRODUCTION

phases in the history of the development of the check as a medium
of exchange, of which they have heretofore been ignorant, or
which at all events they have ignored. The author has laboriously
and carefully followed the subject back to its historic beginnings,
just as he has painstakingly unravelled the threads of recent legis
lation and litigation which have tended to confuse the contempo
rary aspects of the whole problem.
Dr. Spahr's book may thus be recommended , without reserva
tion both to the banker who needs the information it contains for

his professional information, to the academic student of banking
and currency who has long sought for a compact body of available
data on this subject, and to the legislator who must recognize the

pressing character of the entire collection question as well as the

probability that he must before long act upon it in practice in one
way or another. It should be widely read for its own value. But
it should receive a still wider attention, and it should be still more

extensively studied, as an introduction to the practical problem
of providing and rendering permanent an effective system for the
clearance and collection of checks throughout the United States,

and hence of economizing our specie and rendering effective our
whole system of banking.
H. PARKER WILLIS.

CONTENTS

Page

CHAPTER 1–NATURE, ORIGIN , AND USE OF CHECKS
The nature of checks

1

The advantages of checks

6

Limitations of checks

6

Need for a separate legal code for checks .
The increasing use of checks
The origin of checks ...

7
8
9

The check originated in Italy and Sicily

10

The Bank of Venice

10
12

The Bank of St. George

Checks in Italy today
The check in Germany

13
14

The check in Holland

15

The Bank of Amsterdam

16

The check in England

18

Checks in France .

20

The check in Austria

22

Checks in Hungary

23

Checks in Switzerland

23

Checks in Norway, Sweden, and Denmark

24

Checks in Belgium

26

The check in Spain and Portugal

26

The check in Russia

27

Checks in the Republics of Finland and Latvia
Checks in southern European countries

28

Checks in China, Japan, and India

30

Checks in Canada
Checks in Mexico

32

The use of checks in South America

33

29

32

Notes and deposits in the leading countries of the world in
36

1913

CHAPTER 11—USE OF CHECKS IN THE

UNITED

STATES PRIOR TO 1863

The use of checks during the Colonial period ...
The development of banking during the Colonial period . ...

37

37
ix

CONTENTS
х

Page

Origin of checks, 1681 ....

38

Why deposit currency did not develop in the Colonies ..

40

Paper money and banking schemes of the Colonies .

41
43

Growth of deposit currency after the Revolution ..
The extent to which checks were used ; attempts to determine

45

importance

Deposits as an indication of the extent to which checks were
47

used

The use of checks, 1791-1811
Use of checks, 1811-1816 .
The second United States Bank and the use of checks, 1816

51
54

56
1836

The general banking and currency situation, 1816-1836 ..

58

The use of checks, 1836-1863

60

CHAPTER III

CLEARING

AND

COLLECTION

OF

CHECKS PRIOR TO 1863

XVIeaning of clearing and collection of checks .

67

The origin of the practice of clearing
YThe origin of clearing houses

70

69

Collection of checks before the days of the clearing house ...

71

The Suffolk principle of par collection

73

..

Banks must redeem their notes at once and in full when pre
sented over the counter

74

The case of the Suffolk Bank v. the Lincoln Bank, 1821 ...
The later years of the Suffolk System ..
Other methods of note collection ..
Gallatin recommended a clearing system for checks, 1841 ....

75

The New York City Clearing House, 1853
The clearing house in the panic of 1857 ..

80
82

78
78
79

CHAPTER IV–THE CLEARING AND COLLECTION SYS
TEM, 1863-1914

The growth of deposit currency

84

Inquiries to determine the importance of checks ....

87

The relation of the clearing and collection system to the
system of reserves

Practice under the National Banking System. Local ex
changes without clearing houses
Local exchanges with clearing houses
Inter-community clearing and collection

96

98

99
99

The defects of the old clearing and collection system .

101

Excessive charges
Circuitous routing of checks

102
103

xi

CONTENTS

Page

Remittance charges as a cause of circuitous routing. Legality
of such charges
Typical illustrations of circuitous routing of checks ..

103
105

108
Evil effects of circuitous routing of checks ..
The " float ” ; giving immediate credit for out-of- town checks .. 109
110
Paying interest on uncollected funds ....

The carrying of compensating balances with collecting banks

solely for the purpose of obtaining par territory ..

110

The maintenance of reserve balances with banks for the sole

purpose of getting items on which to charge exchange. . 111
Excessive gold movements

112

The absorption of collection charges by collecting banks
Who bore the cost ? ..

112
112

2.

The items of cost in collecting checks .

113

3.

Who should bear the cost ?

117

1.

Proposals for reform
Attempts at reform
The Sedalia, Missouri, plan , 1895

119
124
124 ,

The New York City plan, 1899 ..

125

The Boston country clearing house, 1899 .

126;

County clearing houses

129

CHAPTER V - SPECIAL FUNCTIONS
HOUSES PRIOR TO 1914

OF

CLEARING

special
functions of the clearing house
Extending loans to the government
Rendering assistance to members
Fixing uniform rates of interest on deposits...

131

131
132
134

Fixing uniform rates of exchange and of charges on collec
tions

Fixing reserve requirements

184

135

Examination of member banks by clearing houses .

135

Gathering credit data for members .

186

The issuing of public statements

137

Annual conferences

137

The issue of clearing house loan certificates. Their nature ..
The use of clearing house loan certificates in 1860 ....

138
140
144
145

The New York issues of 1861 , 1863, and 1864 ......

Clearing house loan certificates and the panic of 1873 .......
Clearing house loan certificates in 1879, 1884, 1890, and 1891 146
Clearing house loan certificates and the panic of 1893
147
Loan certificates in 1895 and 1896 ....

149

Loan certificates and other currency substitutes issued during
the panic of 1907 ...
Clearing house loan certificates in large denominations .

151

150

xii

CONTENTS
Page

Clearing house loan certificates in small denominations for
general circulation ..

153

Clearing house checks in convenient denominations for gen
eral circulation ....

154

Cashiers' checks issued in convenient denominations and pay

able only through the clearing house
Certificates of deposit
Drafts on reserve banks

154
155

156

156
Pay checks payable to bearer
158
Official encouragement of suspension
159
Limiting the size of checks to be paid ... ,
The practice of requiring the larger customers to mark their
checks " Payable only through the Clearing House ” ..... 159

The plan of Group No. 2 of the Ohio Bankers' Association .. 159
160
A general summary

Did the currency substitutes violate the 10 per cent. tax pro
vision of the Act of 1865 ? ..

Clearing house loan certificates in 1914 ..

161

161

CHAPTER VI-HISTORY OF THE FEDERAL RESERVE

CLEARING AND COLLECTION SYSTEM
Legal provisions
The institution of the system

164

165

Relation of the voluntary system to decentralized reserves ... 166
Initial steps preceding the voluntary system ..

167

Inter-district clearing system precedes voluntary intra -district
system ; the Gold Settlement Fund ....
The establishment of the Federal Reserve Agents ’ Fund .

169
170

The voluntary intra -district system, June, 1915-July, 1916 .. 171
The voluntary system a failure

173

Objections to the voluntary system .
The compulsory system under decentralized reserves, July,

174

1916-June 21 , 1917 ..
Checks sent direct by a Federal reserve bank to its drawee

177

member banks for collection

178

The deferred availability principle; the zone system ....

179

The nature of the time schedules

180

The deferred availability principle and the collection of intra
district cash items

185

1. Collecting intra -district cash items through the Federal
reserve bank

185

Collecting intra-district cash items through Federal re
serve bank branches

3.

186

Sending intra -district items direct to drawee banks for

187
collection ...
The collection of and settlement for inter - district cash items 189

CONTENTS

xiii

Page

1. Collecting inter-district cash items through a bank's
own Federal reserve bank or branch ...

2.

190

Member and non-member clearing banks may send
inter-district cash items direct to Federal reserve

3.

banks and branches in other districts ....
Sending items direct to member and non-member clear

ing banks in other districts
Service charges

190

191
192

193
The meaning of par collection under this system ...
The question of reserves ; the Board's proposal to concentrate . 194

The question of non-member banks ; amendment of September
7 , 1916

The concentration of reserves, June -July, 1917 .
Non -member banks admitted to the privileges of the system,
June 21 , 1917 ...

196
196

197
198

Problem of collecting checks on non -member banks .
The Hardwick Amendment, June 21 , 1917
Other attempts to develop the system ....

200

The collection of notes, drafts, and other items ...

201

200

Schedule for availability of proceeds of bankers' acceptances 205
Introduction of Federal reserve exchange and transfer drafts 206
The telegraphic transfer system

208

Service charges lowered and finally abolished July 1 , 1918 ... 211
Absorption of other costs by Federal reserve banks ....
213

Changes in the operation of the Gold Settlement and Federal
Reserve Agents’ Funds ....

214

The leased wire system, June 4, 1918

Daily gold settlement plan, July 1 , 1918 .....

214
215

Certain branches of Federal reserve banks clear directly
through the Gold Settlement Fund

216

Relation of the Gold Settlement Fund to rediscounting
between Federal reserve banks

216

The growth of membership in the Federal Reserve System ... 218

The growth of the clearing and collection system .

225

226
Opposition to the clearing and collection system ...
Success of the Federal reserve clearing and collection system . 229

CHAPTER VII—THE PAR COLLECTION CONTROVERSY
Growth of opposition to the Federal reserve par collection
system

The basis of opposition to par collection ..
Arguments for par collection

232

235
240

The growth of the par lists ...

243

The increased opposition to par collection
Common and concrete forms of opposition .

246

The Atlanta par collection case ...

256

249

CONTENTS

xiv

Page

The San Francisco par collection case .

263

The Cleveland par collection case .

266

The Richmond par collection case ...

263

The case of the Pascagoula National Bank of Moss Point,
Mississippi v. Federal Reserve Bank of Atlanta , et al ... 277
Regulation J amended as a result of the United States Su
.. 282
preme Court decisions of June 11 , 1923 .....
Federal Reserve Bank of Richmond v. Malloy et al., trading
284
as Malloy Brothers

Regulation J, Series of 1924

286

Conclusion

288

CHAPTER VIII-THE GOLD SETTLEMENT FUND
Nature of the Gold Settlement Fund .....

Inter-district clearing before the creation of the Fund .
Steps leading to the creation of the Gold Settlement Fund ...
Provisions for the Gold Settlement Fund ...

The gold in the Fund as part of legal reserve .
Provision originally made for weekly settlements .

291
291
293
294

296
297

The voluntary intra-district system and the Gold Settlement
Fund

297

Results for the year 1915
The Federal Reserve Agents ’ Fund

298
299

Discontinuance of gold order certificates, June 21 , 1917 ....
The leased wire system, June 4, 1918 .....

301
303

The telegraphic transfer system

304

>

Relation of the Gold Settlement Fund to rediscounting
between Federal reserve banks

304

Daily settlements supplant weekly settlements in the Gold
Settlement Fund

305

Certain branches of Federal reserve banks clear. directly
through the Gold Settlement Fund

307

Nature of the " cash items” cleared through the Gold Settle
ment Fund

The immediate and deferred credit system . ...

307
308

Method of making settlements through the Gold Settlement
Fund

310

Transactions which are not included in the daily settlements . 315
319
Inter-district gold movements
Gold distribution in the United States .

321

Factors affecting inter-district gold movements .

322

How clearings and transfers affect inter-district gold move
ments

Effect of the fiscal operations of the government on inter
district gold movements

322

323

XV

CONTENTS

Page

Effect of rediscount operations among Federal reserve banks
324

on inter-district gold movements

Effect of inter-district movements of Federal reserve notes .. 326

CHAPTER IX—THE COMPUTATION OF RESERVES
Reserve requirements of member banks of the Federal Re
serve System
Reserve requirements of the Federal reserve banks ...

330

Reserve requirements of Federal reserve bank branches ....
Reserve requirements of State banks , trust companies, and

332

private banks
Reserve requirements of banks outside continental United

334

331

339

States

Reserve requirements of foreign branches of member banks.. 340
Reserve requirements of banking corporations authorized to
do foreign banking business (so-called Edge Corpora
340

tions ) ...
What constitutes reserves

341

Nature of the deposits against which reserves are carried .... 343
1.

343

In member banks

Nature of deposits in Federal reserve banks ...
3. Nature of deposits in non -member State banks, trust
2.

companies, and private banks
4.

347

349

The nature of deposits in Federal foreign banking as
350

sociations

The computation of reserves.

Of member banks .

350

The analysis of reserve account by member banks....

354

1.

The method of computing semi-monthly and daily reserve
355
requirements in a country national bank..
360
The transit account of a country national bank .
Distinction between individual and bank deposits in com
... 362
puting reserves of member banks

Computation of reserves against balances held in foreign
...
banks by member banks

362

Computation of reserve against balances due from foreign
branches of domestic banks ...

363

No reserves required against balances due to foreign branches
by member banks

..

363

Question of reserves against money paid by a customer in
anticipation of acceptances

364

" Special savings deposits” are demand deposits for reserve
purposes

364

Periods over which reserves are computed by member banks.. 365
Penalties for deficiencies of member bank reserves .
2.

Computation of reserves by Federal reserve banks..

366

369

xvi

CONTENTS
Page

The question of reserve deficiencies in Federal reserve banks 371
Method of reporting the reserve condition of the Federal re
serve banks

374

3.

Computation of reserves in non -member State banks,
379
trust companies, and private banks.....
4. Computation of reserves by non-member national banks 381
5. The computation of reserves by Federal foreign bank
881
ing corporations
CHAPTER X—THE CLEARING HOUSE

Nature of clearing operations

The New York Clearing House Association .....
The administration of the clearing house association ..
The New York Clearing House committees .
Membership in the association
Certain non -member banks may clear through members ..
Expenses of the association
Clearing house departments
Items eligible for clearing
Indorsement of items for clearing
Work of assembly racks .

383
383
384
385

387
390
390
391
391

392
393

The mail teller's work

394

Forms required at the New York Clearing House .

394

Clearing house sessions

396

Force for effecting clearing
The clearing procedure

397

Settling clerk's statement
Clearing house proof

397

398
400

The settlement of balances

402

The adjustment of errors

406

The city collection departmentof the clearing house . ....

408

Other methods of collecting city items
The Federal clearing division of the Federal Reserve Bank

409

of New York ..

410

The city collection department of the Federal Reserve Bank
of New York

The country collection department
The examination department

411

411

414

Penalties for violating New York Clearing House rules, and
for errors

Special functions of clearing houses
Regulation of interest on deposits

Regulation of exchange charges on out-of- town items .
Regulation of reserves
Rendering assistance to members

415
416
416
418
421
422

xvil

CONTENTS

Page

Gathering credit data for members

423

The issue of clearing house loan certificates in times of stress . 423

Extending loans to the government ...
The issue of public statements by clearing house banks....
Participation in annual conferences. The Clearing House
Section of the American Bankers' Association ...
..

423
424

425

Clearings and balances of the New York Clearing House for
a period of seventy years

428

CHAPTER XI-BANK ORGANIZATION FOR CLEARING

AND COLLECTION

Internal organization of a bank for purposes of clearing and
collection

429

Method of handling items drawn on or payable at the bank

itself. The paying teller's department
The receiving teller's department
The mail teller's department
The check desk department

The handling of clearing house items
The city collection department of a bank .
Type of items handled by this department .
Sources of items handled by the city collection department of
a bank

429

431
433
435
437

439
439

440

Territory covered by the city collection department of аa bank . 441
Procedure in collection

442

Disposition of the receipts of the city collection department .
Settling for collections

444

Collection of notes, matured bonds, and coupons within the
city

444

The transit department of a bank

448

The night force of the transit department .
The morning and afternoon force

450
451

Letters of transmittal ...

452

The numerical transit system

458

Methods of settling for the proceeds of collections

462

463
The collection of out-of-town items
Collection number, stamps , and record files for country items . 464

Method of sending collections through Federal reserve banks . 465
Methods of securing settlements for out-of-town collection
items

465

467
Mechanism for handling telegraphic transfers
Application for and sending of telegraphic orders for transfer 467
468
Making payments under telegraphic transfers ...

The protest

469

The transit department of a Federal reserve bank .

470
471

The receipt of items by the transit department ..

xviii

CONTENTS
Page

The outgoing sections of the transit department ..

474

Principles followed in giving credit. The float.

474

The problem of handling checks on non -member par banks . . 475

CHAPTER XII -BANK CLEARINGS AS A BUSINESS
BAROMETER

What is meant by general business conditions ?
Estimate of the total volume of trade . ...

478
479

Is there a single barometer of general business conditions ?.. 480
The question of clearings versus debits to individual accounts . 483
Debits to bank accounts versus debits to individual accounts . 487

Debits to individual accounts as reported by the Federal Re
serve Board ...
The Babson Compositplot

493

The Annalist Barometer and Business Index Line ..

497

The Standard Statistics Company's Barometer

497
500

488

The Brookmire Barometers

The Harvard Index of General Business Conditions
Carl Snyder's Index of the Volume of Trade .....
The velocity of de its as a measure of business activity ...

501
504

Bank clearings as aa business barometer

510
514

Conclusion

519

CHAPTER XIII–RÉSUMÉ OF THE PRESENT SYSTEM

The meaning of clearing and collection
I.

528

The Federal reserve clearing and collection system.
A.

The intra-district system .

1.

Where banks are in

the same town or city, but have no clearing house asso
ciation

2.

529

Where banks in the same city have a clearing house asso
ciation

531

3. Where some banks in the same city are members of the
clearing house association while others are not......... 535
4.
Where banks are not in the same city but are within the
same Federal reserve district
The time schedule in intra-district collections .

537
539

Federal reserve banks present items direct to the drawee banks 541
Deferred debits and credits

542

The problem of collecting checks on non -member par banks .. 543
The Immediate Credit Symbol System in the fifth Federal re
serve district ....

Federal reserve bank branches as collecting agents . ...

545
547

Intra-district clearing and collection through Federal reserve
bank branches

550

CONTENTS

xix

Page

Direct collections within a Federal reserve bank or branch
district ...

Member banks may collect through correspondents ..
Non -member par banks collect through correspondents.

The handling of intra -district collection items
B. The inter-district clearing and collection system. 1. The
Gold Settlement Fund ....

553
554

...

555
555

556

2. The types of items and transactions for which settlement
may be made through the Gold Settlement Fund . ...... 557

( 1)

The collection of and settlement for inter-district cash
items ..

(a)

.. 558

Member and non -member clearing banks may collect
through their own Federal reserve bank or branch ...... 558

(b)

A member or non-member clearing bank in one district
may send items direct to the Federal reserve bank or
branch in another district

561

Abuses of the direct- routing system

567

( c)

Sending items direct to member and non-member clear
ing banks in other districts

(2)

568

The collection of and settlement for inter-district col
lection items

(3 )
(4 )
(5 )
(6 )

( 7)
(8)

570
571

Federal reserve transfer and exchange drafts .
Telegraphic transfers
Rediscounting between Federal reserve banks.

572
573

Special transfers by one Federal reserve bank to an
other for the account of the Treasury Department ..... 573

Settlements resulting from the redemption of Federal
reserve notes

573

Transfers from the Gold Settlement Fund to the Fed
eral Reserve Agents Fund and vice versa .

574

Gold movements

575

The advantages of the Federal reserve clearing and collec
tion system

576

Opposition to the Federal reserve clearing and collection sys
tem

576

...

II. The practices of banks not connected with the Federal
reserve clearing and collection system, directly or in
... 579
directly
A. Where banks are in the same city. 1 . Where the banks
... 579
have no clearing house association .
2 . Where the banks are members of a clearing house associa
tion

... 579

3. Where some of the banks are members of the clearing
B.

house association and others are not ...

579

Where the banks are not in the same city ...

580

TABLES

Page

I

Metallic Reserves, Total Note Circulation, and Central
Bank Deposits at the End of 1913 ...

II

Number of Colonial and State Banks, their Capital,
Circulation, Deposits, Specie, and Loans in the Years
Mentioned from 1774 to 1833 ...

III

35

49

Condensed Statement of the Condition, at Different

Intervals, of All Banks in the United States...
IV Average Amount of Notes and Deposits of the Second
Bank of the United States, 1819-1829 ....

50
57

V

Number and Condition of Banks of the United States,
January 1 , 1838 ...

VI

Number of Banks, Capital, Deposits and Circulation,

61

65

1830-1863

66
VII Condition of Banks by Sections, 1860-1861 ....
VIII Circulation and Deposits of National, State, Savings,
and Private Banks, Loan and Trust Companies... 84-85.

IX

The Use of Checks in Retail Transactions in 1895,

in

States Grouped According to the Grouping of the
Census

88

X The Percentage of Checks in 1895 to Total Receipts in
Groups of Cities According to Population ..

88

XI Money ( M ), its Velocity ( V) , Deposit Currency ( M ') ,
and its Velocity ( V' ) for the Years 1896-1909 .....
XII Annual Rate of Turnover of Bank Deposits, 1919
1923

91

93-94

XIII

Circulation of Money and Deposits, 1881-1923 .......

XIV

Issue of Loan Certificates by New York Banks, 1860
1893

95

140

XV Aggregate Issues of Clearing House Loan Certificates,
1873-1896 , Inclusive
XVI

XVII

141

Cash Restrictions and Currency Substitutes in Cities of
More than 25,000 Inhabitants in 1907 ........ 156-157

Currency Substitutes in Cities of Less than 25,000 In
habitants, 1907 ...

157-158

XVIII Clearing House Loan Certificates Issued in 1914 .... 162
XIX Growth of Voluntary Intra -District Clearing System .. 174.
XX

xxi

TABLES

Page

XX Growth of Membership in the Federal Reserve System,
218

1914-1924

XXI

Membership in the Federal Reserve System, June 30
222

and December 31 , 1923 ..

XXII Membership in the Federal Reserve Clearing and Col
lection System

225

XXIII Average Daily Number and Amount of Items Handled,
1916-1918, Inclusive

230

XXIV Operations of the Federal Reserve Clearing and Col
231

lection System for the Years 1919-1923 ...

XXV Growth of Membership in the Federal Reserve Clear
247-249
ing and Collection System ...

XXVI Operations of the Federal Reserve Agents' Fund. Sum
mary of Transactions by Years, 1915-1923 ..

302

XXVII Operations of the Gold Settlement Fund. Summary of
Transactions by Years, 1915-1923
XXVIII Average Weekly Volume of Clearings and Transfers

318

Combined for Each Year Since the Establishment of
319
the Gold Settlement Fund ..
XXIX Gold Reserves of Each Federal Reserve Bank on Octo
325
ber 29, 1920, and on March 22, 1922 ...
XXX Distribution of Total Inter-District Accommodation on
325
October 29, 1920 ....
XXXI Inter -District Movement of Federal Reserve Notes ... 327
•

.

XXXII Reserves, Note Circulation, and Discounts of Federal
Reserve Banks on Selected Dates

328-329

XXXIII Clearings and Balances of the New York Clearing
426-427
House for a Period of Seventy Years .
XXXIV Monthly Debits to Individual Accounts for Each Fed

eral Reserve District and for the United States Since

XXXV

490-491
January, 1919
Debits to Individual Accounts as Reported by Banks in

141 of the Country's Leading Clearing House Cen
Summary by Months for the Years 1919

ters .

1924

523-524

1

1

CHARTS
Page

I

Debits to Individual Accounts in 140 Cities as a Meas
ure of the Dollar Volume of Business in the United
States

II

Index of Price Level Compared with Changes in
..
Wholesale Prices and Wages, 1875-1920 .....

492

509

III Annual Rate of Turnover of Deposits for Selected
Cities, 1919-1923 ....

512

IV Velocity of Deposits in 141 Cities and in 8 Cities Com
pared with Index of Volume of Trade, 1919-1923 .. 514
V Index of the Volume of Trade Compared with Debits
Outside New York and with the Velocity of Deposits
in 141 Cities, 1919-1925 ...

516

VI Clearing's Index of Business Compared with Velocity
of Bank Deposits, 1875-1924
VII Clearing's Index of Business Compared with Pig Iron
Production, 1875-1924

xxii

517

518

FIGURES
Page

1

The Circuitous Route of a Check ( Hoboken , N. J., to Sag

Harbor, L. I ) ..
2 The Circuitous Route of a Check ( Columbus, O., to Mt.
Gilead, O.)

106

... 106

3 The Circuitous Route of a Check ( Westerly, R. I., to Ston
ington , Conn. )

106

4 The Circuitous Route of aa Check ( Birmingham, Ala., to North
Birmingham , Ala . )

107

5 Clearing and Collection within a Federal Reserve District ... 550

6 Clearing and Collection between Federal Reserve Districts .. 559

FORMS
Page
1

Form Prepared by the Federal Reserve Board for the Com
putation of Reserves to be Carried by Member Banks with
the Federal Reserve Banks

351

2 Analysis of Account with the Federal Reserve Bank of New
York Showing the Amount Available as Legal Reserve . 354-355
3 Auditor's Proof of Individual Ledgers ( For a Country Na
tional Bank) ...

357

4 Daily Statement of Required Reserve ( For a Country Bank) 359
5 Computation of Reserves in Non-Member State Banks, Trust
Companies, and Private Banks ....

380

6 Computation of Reserves of Non-Member National Banks .. 382
7

The Small Ticket

395

8

Clearing House First or Credit Ticket
The Nine O'clock Ticket ..

395

9

396

The Settling Clerk's Statement

399

11

The Clearing House Second Ticket

400

12

The Clearing House Proof
New York Clearing House Manager's Certified List of Debit

401

10

13

and Credit Balances

14 Credit Ticket in Clearing for Return Items
15

Debit Ticket in Clearing for Return Items

403
407
407

16 Transmittal Form ( Used by National City Bank of New
York) ..

453

17

Form for Direct Sending of City Items ( Used by Mechanics

18

Form for Direct Sending of Country Items ( Used by

19

Four Day Points. Report to Federal Reserve Bank of New
York of Cash Letters Sent Direct ( By a Member Bank ) .. 456

& Metals National Bank of New York ) ..

454

Mechanics & Metals National Bank of New York ) ....... 455

20 Recapitulation of Cash Letters Sent Direct ( By National
21

Bank of Commerce in New York ) .
Form of Advice for Direct Sending of Checks ( Fifth Dis

22

Statement of Cash Letters Sent Direct During a Month

trict )

( Fifth District )
xxiv

457

563

566

THE CLEARING AND COLLECTION OF
CHECKS

CHAPTER I

NATURE, ORIGIN, AND USE OF CHECKS
The nature of checks

The Negotiable Instruments Law defines a check as a "bill of

exchange drawn on a bank payable on demand .” 1 Although
checks are treated under the same law as are bills of exchange, and
are defined as a variety of bill of exchange, a marked difference
between the two instruments is seen in the following more complete
definition of the check : A check is an unconditional order in

writing addressed by a person ( the drawer) , to a bank , signed by
the drawer, requiring the bank to which it is addressed to pay a

sum certain in money on demand to a person named or to his order
or to bearer.2

A bill of exchange, on the other hand, is " an

unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer."

The Federal

Reserve Board gives the following definition of a check : “ A check
is generally defined as a draft or order upon a bank or banking
house, purporting to be drawn upon a deposit of funds, for the
payment at all events of a certain sum of money to the order of a
certain person therein named, or to him or his order, or to bearer,
and payable on demand ." 4

Considerable confusion has existed in the interpretation of the
"Joseph Doddridge Brannon, The Negotiable Instruments Law Annotated,
3rd ed . ( Cincinnati, 1919 ), Section 185.

'H. W. Magee, A Treatise on the Law of National and State Banks, 3rd ed.
( Albany, N. Y., 1921 ) , pp. 307-310. See also John E. Brady, The Law of Bank

Checks (New York, 1915 ), passim .
*Brannon, op. cit., Section 126. Italics are the author's.
'Regulation on Check Clearing and Collection, issued periodically by the
Federal Reserve Board . See Federal Reserve Bulletin , Vol. X ( 1924 ), pp.
489-491.
1

.
CLEARING AND COLLECTION OF CHECKS
bank's liabilities to the drawer and to the holder of the check.

Before the Negotiable Instruments Law, the question whether a
check is an assignment of any part of the drawer's deposit had
been considered by the courts, both with respect to the rights of
the holder against the drawee bank and against the drawer or the
latter's creditors or estate, and there had been a conflict of author

ities on both questions. Some courts held that the check is an
equitable assignment of the amount in the hands of the banker to
the payee or holder, and that there is an implied contract between
the bank and the holder, so as to render the bank liable to the

latter for its refusal to pay the check . The purpose of the
Negotiable Instruments Law was to abrogate this conflict by de
claring that a check does not operate as an assignment, and con
sequently it seems to have made clear that the bank's contract is

with the depositor only and that the holder of a check has no right
of action against the bank on which his check is drawn for refusal

to pay it, unless the bank has assumed an obligation to him by
certifying or accepting it ; his only remedy in such a case is
6
against the drawer and indorsers.
It becomes obvious, therefore, that the legal tender provisions

of the Federal Constitution apply only as between the bank and
the depositor. In other words, only the depositor can compel the
bank to pay in legal tender to himself or to the holder.

These

provisions do not apply as between the bank and the holder since
no contract exists, unless, as stated above, the bank certifies the
check, in which case the contract is transferred from the drawer
to the holder. The legal tender provisions then become effective.

North Carolina, for example, passed a law in 1921? authorizing its
banks to pay for checks by means of drafts on reserve deposits
when presented to them by the Federal reserve bank, unless the
*For a list of cases on both sides of the question, see Charles P. Norton ,
Handbook of the Law of Bills and Notes, 4th ed. ( St. Paul, 1914 ) , pp. 584-585.
'The Negotiable Instruments Law is based upon and largely copied from
the English Bills of Exchange Act, a codification of the Law of England as to
bills of exchange, promissory notes and checks, which was drawn by Judge

Chalmers and enacted by Parliament. At a meeting of the National Conference
of State Boards of Commissioners for Promoting Uniformity of Legislation in
the United States, held in August, 1895, a committee was appointed which caused

a draft of aa bill codifying the law of negotiable instruments to be prepared and
submitted to the Conference at its annual meeting in August, 1896.

This draft,

entitled “The Negotiable Instruments Law , " was discussed by the Conference
and was agreed upon for recommendation to the legislatures of the States. It
has been adopted by the District of Columbia and all the States ( Georgia
adopted it as the last State in 1924 ) , in a few cases with some modifications,
but generally in the identical form recommended .
' Public Laws of North Carolina , 1921, Chap. 20, Sec. 2. Ratified and effec
tive February 5, 1921. See pp. 252, 269-270 below .

NATURE, ORIGIN , AND USE OF CHECKS

3

depositor specifically objected, and the United States Supreme
Court upheld this law on the ground that the legal tender provi
sions of the Constitution do not apply as between the bank and the
holder. 88

The requisites of a check may be set forth as follows : ( 1 ) It
must be dated unless presented by and payable to the customer
himself.9 ( 2) It must be drawn on a bank. An instrument noti
drawn on a bank is not a check, although it may be styled so 02
its face.10 This constitutes one of the chief differences between a

check and a bill of exchange. A check is always drawn on a bank
or banker, while a bill of exchange ordinarily is drawn on some
person not a banker, although it may be drawn on a banker. On

the European continent, however, checks may be drawn on a
merchant if he is prepared to honor them.11 ( 3 ) A check must be
payable to a person named, or to his order, or to bearer.12 ( 4 ) A
check must specify a certain sum of money to be paid. In this
respect it does not differ from aа bill of exchange.13 ( 5 ) It must be
signed by the drawer. 14 ( 6 ) It purports to be drawn upon a de
posit. It is to be observed that it is not always necessary that the
drawer of the bill of exchange should have funds in the hands of

drawee, while a check drawn against a bank in which the drawer
had insufficient funds would be fraudulent.15 Technically a check
is only an order on the bank, but legally it is an implied promise
to pay on the part of the drawer of the check, and any person
giving a check upon a bank in which he has no deposit account is
liable to prosecution for obtaining money under false pretense.
( 7 ) A check is payable instantly on demand. A person deposits
money

with his bank or banker where it is subject to his order at

* Farmers and Merchants Bank of Monroe, North Carolina , et al. o. Federal

Reserve Bank of Richmond, Virginia , 262 U. S. 649 ( 1923 ) .

See pp. 76-77,

272, 274 below.

'H. W. Magee , op. cit., p. 307.
1°Champion v. Gordon , 70 Pa. State Reports 475 ( 1872 ) ; Amsinck v. Rogers,

103 App. Div. 428, especially 435 (1905), 93 N. Y. Supp. 87 ( 1905 ), affirmed
189 N. Y. 252 ( 1907 ) , 82 N. E. 134 ( 1907 ) , 12 Lawyer's Reports Annotated
( New Series ) 875 ( 1907 ) .

"C. A. Conant, “ Development of the Check," Bankers Magazine, Vola
LXXXIII ( 1911 ) , p. 580 .
" Negotiable Instruments Law of the New York Act, Section 20, Subdivision
4 ; J. W. Daniels, A Treatise on the Law of Negotiable Instruments, 6th ed.
( New York, 1913 ) , Section 1571 .
1Magee ,op. cit., p . 310 ; Daniels, op . cit., Section 1570 ; Bank of Mobile o.
Brunn , 42 Ala. 108 ( 1868 ) .
*Magee, p. 310 ; Bank v. Vogeli, 78 Kan. 264 ( 1908 ) .
Daniels, Section 1569 ; Champion v. Gordon , 70 Pa. State Reports 474.
( 1872 ) ; Newman v . Kaufman, 28 La. Ann. 865 ( 1876 ) .
>

CLEARING AND COLLECTION OF CHECKS

any time. By an order he appropriates so much of it to himself
or to another person, and the bank or banker in consideration for
the temporary use of the money, agrees to pay it in whole, or in
part, to the depositor's order when demanded.16 The fact that a
check, ordinarily, is not presented for acceptance, but for pay
ment, further differentiates it from the bill of exchange.17 How
ever, where a check is certified by a bank on which it is drawn, the
certification is equivalent to an acceptance.18 It will be seen below
that the fact that banks are required to pay in whole or in part,
to the depositor's order when demanded has great significance.19
The check as defined above is to be distinguished from the
cashier's check.

A cashier's check, whether certified or not, is

classed with bills of exchange payable on demand.20 It is an order
on a bank drawn by its own cashier and differs from a bank draft
only in the fact that it is drawn by the cashier on his own rather
than on some other bank . Thus a cashier's check is to be thought

of as a variety of draft and is distinguished readily from the

ordinary check. Like certified checks, they are commonly used by
persons whose personal checks would not be accepted so readily
as the check of some known bank . Cashier's checks may be used

also by persons not having a bank account and, therefore, unable
to draw checks of their own. Some banks prefer to use cashier's
checks instead of certified checks inasmuch as there is less oppor

AP

tunity for a banker's check to be tampered with subsequently
21

should it fall into the hands of an unscrupulous person .

med

A check, likewise, is distinguished easily from a certificate of
deposit, although a certificate of deposit issued by a bank payable

the

to the order of the payee, in legal effect, is a check when returned
properly indorsed.22

.ph

By depositing a sum of money in a bank a person may receive,
1 Daniels, Section 1572 ; Goodwin v. American National Bank, 48 Conn . 550
( 1881 ) ; especially Mt. Sterling National Bank v. Green, 99 Ky, 262 ( 1896 ) , 35

S. W.911 ( 1896 ) ; Merchants and Planters Bank v. Meyer, 56 Ark. 499 ( 1892) ,
20 S. W. 406 ( 1892 ) .
"Magee, op. cit . , p. 309.

note

s

Brannan, Section 187. When a bank certifies a check it acknowledges that
the drawer of the check has sufficient funds on deposit to pay it. Such checks

are used commonly by persons when their ordinary personal checks would not
be accepted readily .
19See pp. 75-77, 272-276 below.
20Brannan , Section 185 ; Singer Manufacturing Co. v. Summers, 143 N. C.
102 ( 1906 ) , 55 S. E. 524 ( 1906 ).
aD . R. Dewey and M. Shugrue, Banking and Credit ( New York, 1922 ) , p. 45.
Brannan, Section 185 ; State v. Garland, 65 Wash. 666 ( 1911 ) , 118 Pac. 907
( 1911 ).

inte

2

NATURE, ORIGIN, AND USE OF CHECKS

5

if he chooses, a certificate of deposit instead of a checking account.

The certificate may be either negotiable or non-negotiable and may
be made payable on demand or after a definite time. It may be
drawn payable to any person whom the depositor may name. The
demand certificate is used principally for the purpose of guaran
teeing payment to a creditor and also as an old method followed

by some banks in transferring cash to distant points.23
In analyzing the more general nature of checks, it must be
noted that they are merely a means by which a deposit or a part
of a deposit is transferred. They are evidences of deposits in the
process of transfer. Checks like bank notes are demand liabilities
of the bank . This one characteristic they have in common with
bank notes in the United States today. Yet it must be recognized

that while specie may be demanded by the presentation at the bank
of either notes or checks, in practice specie is usually secured by
the presentation of checks rather than notes. Furthermore, the

reserve back of each in the United States today, and consequently
the profit to the bank resulting from the use of each is different.
Reserves in lawful money against demand deposits vary from seven
to thirty -five per cent. for our national and Federal reserve banks,
while those against bank notes are 100 per cent. United States
bonds plus five per cent. lawful money, virtually 105 per cent. of
reserve .

As a result it is much more profitable for a bank to

create deposits and have these circulated by means of checks than
to lend the same amount of credit in the form of notes.

Indeed ,

were the reserve against bank notes converted into lawful money
and kept in the vaults of the banks as a reserve for building up

loans, which, in turn, will create deposits in excess of this reserve,
the bank would find it unprofitable to issue any notes whatever.24
If banks could supply themselves with enough gold and silver cer
tificates, United States notes, or Federal reserve notes to meet the
demands for paper money in cash payments as a substitute for
specie, it would be to the interest of the bank to have no bank

notes outstanding, except in times of depressions when they have
surplus reserves which cannot be invested otherwise . In such times

the low interest on the government bonds may yield a small profit.
Prior to the inauguration of the National Banking System
deposit currency had other characteristics in common with bank
notes wherever general asset banking existed. The reserves back
Dewey and Shugrue, op. cit., p. 53.
* This same view is held by C. F. Dunbar, “ Deposits as Currency,” Quarterly
Journal of Economics, Vol. I ( 1887 ) , pp. 414-415.

6

CLEARING AND COLLECTION OF CHECKS

of each tended to be the same ; the profit to the bank arising from

the use of each would be the same and both notes and deposit cur
rency might originate in the same manner, that is, from the redis
counting of a note. But only under the asset banking system, in
which notes are issued against the general assets of the bank, is it
immaterial to a bank whether it lends its credit in the form of

notes or deposits. Due to the desire of writers to show the simi
larity between notes and deposits, this fact has not been empha
sized sufficiently .
The advantages of checks

Checks have certain advantages over notes which make them
desirable instruments for effecting exchanges : ( 1 ) They have a
short life which means that they inject great elasticity into the
currency. They are called into existence to perform certain func
tions and they are canceled as soon as they have performed those
functions. Though the life of the check is limited it must be borne

in mind that the life of the deposit continues ; it has been trans
ferred merely from one party or bank to another. When a check
is deposited in aa bank an additional deposit is created in that bank
on which new checks may be drawn and the deposit may continue
to circulate by means of new checks being drawn to replace the
old. (2 ) Each debt is canceled by a single instrument that is
made to fit the particular amount involved. Checks can be drawn
to any amount and frequently are the most convenient means of
payment. (3 ) Transactions are effected almost entirely by book
entries with the minimum of money leaving the bank . This means
a minimum wear and tear on the metallic and paper bases and a

coincident tendency to regard them as being only theoretically
present. ( 4 ) The substitution of the check for the note lessens the

necessity of keeping vast hoards of money set aside. ( 5 ) Deposit
currency secures the maximum of safety. The risk of loss, theft

or destruction of money kept in any place outside a bank is obvi
ated .

( 6 ) Checks have the advantage of serving as receipts for

amounts paid. They constitute receipts of the best type and
facilitate the keeping of records.
Limitations of checks

While checks have distinct advantages they are not without
certain limitations which may be briefly summarized : ( 1 ) They
have a limited acceptability as compared with bank notes. This
acceptability rests upon the confidence in the integrity of the

NATURE, ORIGIN, AND USE OF CHECKS

7

drawer which tends to be restricted to a limited circle of friends

and business associates.

Bank notes, on the other hand, pass

freely and without regard to the integrity or credit standing of
the person tendering them in payment. The reliability and sta
bility of the bank are assumed with little, if any, thought ; most
persons never examine their bank notes. ( 2 ) Checks are drawn in

amounts designed to liquidate some specific obligation which makes
them poorly adapted for other transactions. (3 ) Uncertainty as
to their real value tends to hasten their deposit. A check itself
bears no evidence that the drawer has sufficient funds to cover the
amount, or, indeed, any deposit whatever. Moreover, checks must

be presented to the bank on which they are drawn in a reasonable
length of time. This objection to checks has validity only in

sparsely settled districts where people are not in close touch with
banks. In such places bank notes afford the better type of cur
rency. ( 4) Another objection to checks which also has its great
est validity in a sparsely settled country and which renders them
undesirable if not entirely useless, under such circumstances, is
that they cannot complete a transaction without reference to a

bank , while bank notes do complete a transaction without the
necessity of referring them to a bank unless it is necessary to ob
tain small change. ( 5 ) To pass a check or to secure creditable
relations with a bank, demands a degree of moral standing and

personal intelligence not possessed by all the members of a com
munity, and for those a form of currency is needed which easily
attests its own authenticity .

Need for a separate legal code for checks25
In addition to the limitations placed upon the use of checks
due to their inherent qualities, there are two other limitations of
an artificial nature : The one is the result of improper banking
practices ; the other is the legal obstacles. Only the latter will
be mentioned here ; the former is treated in some detail in
Chapter IV.

Since checks have come to occupy such a prominent place in
exchange transactions, it is urged that a uniform check law has

become a necessity. They should be separated in treatment from
bills of exchange as they are now treated under the Uniform
Negotiable Instruments Law. In this respect the United States
2See also Bills of Exchange , 63d Cong., 1st Sess., Sen. Doc. No. 162. This is
a report of the American delegate, Mr. Conant, to the International Congress
on Bills of Exchange which was held at The Hague in the summer of 1912 in

an attempt to secure uniformity of law on bills of exchange and on checks.

8

CLEARING AND COLLECTION OF CHECKS

is far behind the leading European countries which have already
taken such steps.
Among the present defects which appear and which should be

cro

corrected, the following are mentioned : ( 1 ) The permission under
the Negotiable Instruments Law to endorse checks as bills of ex
change, qualifiedly and conditionally, thus subjecting them to the

cos

complications of law, and imposing a burdensome duty on the

TE!

paying bank, should be abrogated. It is contended by some that
legal endorsements on checks should be simplified to include only

Ve

those which are necessary to complete the transactions for which
the check was issued.26 ( 2) Lack of definiteness in the prescribed
form of drawing a check is a well recognized defect. ( 3 ) There is
a lack of definiteness as to the length of time that may elapse after

13

delivery before a check is presented for payment. In Belgium ,
France, Switzerland, Germany and Japan the time limits are defi
nitely set, and range from three to ten days.27 ( 4 )) There are wide
differences among statutes and decisions regarding the relations
between banks and depositors and banks and correspondents . It
has been a common practice for banks to receive checks from de
positors and give immediate credit for them. Despite this com

Papa

..
olig

mon custom, the courts differ as to who is the real owner of the

checks in question, and what liability the banks assume in their
actions. ( 5 ) Many banks indulge in the practice of sending
checks directly to the paying bank for redemption which is a vio
lation of law.28

It is contended that a uniform statute should

relieve banks of their responsibility for such practices, as it is
considered a sound method by many leading bankers.29
TI

The increasing use of checks

With the growth in the density of population, the develop
ment of rural life, the improved means of communication, the de

*

velopment and extension of sounder money and banking systems,

and with increasing confidence being placed in checks by the
masses, deposit currency, as evidenced by checks, has assumed
first place as a medium of exchange in our currency system.

It

20R . B. Cox, “Needed Reforms in Check Collection Laws and Methods, Pro
ceedings of the American Bankers' Association ( 1913 ) , p. 564.
** Ibid ., p. 565.
38W . H. Magee, op. cit., pp. 518-521 .

* Proceedings of the American Bankers' Association ( 1909 ) , 3rd Annual Re
port of the Clearing House Section, pp. 25, 40, 42 ; op. cit . ( 1913 ) , p. 565. Reg

ulation J, issued by the Federal Reserve Board, requires all banks which use
the Federal reserve banks as collection agents to authorize them to send the
items direct to the drawee banks .

Thie

NATURE , ORIGIN , AND USE OF CHECKS

9

represents the most refined type of medium . It is the cheapest and
most convenient ; it means that we are rapidly attaining a refined
credit economy after having passed through laboriously , in suc
cession, a barter and a money economy. But with its develop
ment have come problems, not the least of which is the method

of making it work smoothly and automatically through a proper
system of clearing and collection. The nature of the problem
can be appreciated better and seen in a more accurate perspective
after understanding first the origin and use of checks and the
manner in which clearing and collection systems were introduced
and developed
The origin of checks

Not only does the origin of the term check
(English cheque )
30
seem wrapped in obscurity and uncertainty,3°
but writers are far

from agreement as to the time and place of the origin of checks.
H. D. Macleod seems to stand somewhat alone when he says the

Romans invented the check sometime shortly after 352 B. C.81
J. J. Klein, after reviewing what other writers had learned as to
the origin of checks, concludes that the check was not known
among the ancients, although they were acquainted with bills of
exchange and other forms of paper similar to our letters of
credit.32 Joseph Bachem, writing on the historical development
of checks, takes Macleod to task and insists that checks had their

origin in the Middle Ages.33 Bachem's view seems to represent
the more general one. He says that it has not been established

that the Chinese, Egyptians, Assyrians and Babylonians had
known the check and that " even the attempt of Macleod to recog

nize the check among the Romans under the designation of

attributio or prescriptio in some verse of Terenz and in the letters
of Cicero and Atticus must be considered as unsuccessful
even if it cannot be denied that the described occurrences in the
•

.

mentioned places have some relation to the check today." 34
There is general agreement, however, that bills of exchange
* See James W. Gilbart, “ A Practical Treatise on Banking, ” Part I , Section
III, Bankers Magazine, Vol. V ( 1850-1851 ) , p. 480.

" H. D. Macleod, Theory and Practice of Banking, Vol. I ( London, 1855 ) ,
pp. 350-351.

*J. J. Klein, " The Development of Mercantile Instruments, ” Journal of
Accountancy, Vol. XII ( 1911 ) , pp. 324-325 .
* Joseph Bachem , Der Deutsche Scheck, Inaugural Dissertation der juris
tischen Fakultät der Friederick Alexander Universität zu Erlanger (Borna
Leipzig , 1909 ), p. 2.
* Bachem , op . cit ., p. 2.

CLEARING AND COLLECTION OF CHECKS

10

preceded checks. Klein learns from his investigations that bills of

.

exchange, and written orders of transfer in forms other than that

of our modern check, were known as early as the ninth to seventh

centuries B. C. among the Assyrians.35 Conant says,, " Traces of
credit by compensation and by transfer orders are found in
Assyria, Phoenicia and Egypt before the system attained full de
velopment in Greece and Rome. The books of the old Sanskrit

lawgiver, Manu, are full of regulations governing credit. He
speaks of judicial proceedings in which credit instruments are
bankers, usurers , and even of
called for, of interest on loans, of
" 36

2

the renewal of commercial paper.

The check originated in Italy and Sicily
Real checks, according to Bachem, originated in Italy and
Sicily. The oldest ones came from Palermo in the year 1416 under
the appellation polizze and were orders of the Office of State on
the balances with bankers. Checks which were drawn by private
persons against their balances with the bankers and payable at

sight are found at Messina in 1543, Naples in 1573, Mailand
( Milan ) in 1593 ; those with the bearer's clause, in Bologna in
1606.37

The Bank of Venice

The Bank of Venice, which originated in 1171 , provides us
with one of the earliest experiments in the use of deposit currency,
regarding which there is reliable information . The Bank of Venice
was a public bank based upon a forced loan from some of the most
opulent citizens. The subscribers to the loan became a specially
constituted board for their own 'protection and for the manage
ment of the loan .

The book in which these loans were inscribed

was authenticated by the government, and made evidence of the
whole amount of the debt, with the proportion belonging to each
subscriber. It was an easy step to commence the transfer of the
loans in whole, or in part . Facility of transfer, coupled with the

security of the State, led to a rapid circulation of this loan. The
reimbursement of the loan ceased to be regarded as either neces
sary or desirable. Every creditor was reimbursed when he trans
ferred his claim on the books of the bank. Such claims became, by

1

* Klein , op. cit ., pp. 324-325 ; see also Macleod , op . cit . , pp. 350-351 .

*C. A. Conant, Principles of Money and Banking, Vol. II ( New York, 1905 ) ,

.

p . 168 .

37 Bachem , op. cit ., pp. 8-9.

NATURE, ORIGIN, AND USE OF CHECKS

11

a natural process, a medium of payment in transactions of com
merce. All money deposited for the purpose of obtaining a credit
in the bank was accounted an addition to the original loan, and
as such taken into the public treasury as money lent to the State.
In 1423, it was decreed that all bills of exchange payable in
Venice, whether domestic or foreign, should be paid, unless other

wise stipulated and so expressed, in the bank ; and that all pay
ments in gross, or in wholesale transactions, should be effected in
the bank also. This at once brought the mass of the payments of

that great commercial city to the bank . It also created at once a
great additional demand for the funds of the bank, and brought
large sums into the public coffers. All who had engagements to
meet, found them in the bank, and all such persons either provided
the bank with the funds necessary to meet them, or carried to the
bank that amount of coins requisite for the purpose. Bank funds
became so desirable and the premium on such funds over coins

became so high, that it was fixed finally by law at 20 per cent.
There seems to be some confusion among writers relative to the
method used to transfer accounts at the bank.

Stephen Colwell

was quite positive, after what appears to have been a careful in
vestigation , that checks were not used, and that the rules of the

bank required the presence of the party transferring, either in
person or by attorney ; and this was carried so far, that no en

dorsed bills of exchange were permitted. The payee, or his
attorney, alone could receive payment.38 The alphabet was sub
divided, and each person applied to the bookkeeper to whose sub
division the letters of his name assigned him. Every subdivision
had two clerks, by whom all transfers and entries were made. The

party making the transfer appeared before these two clerks, and
dictated the entry or transfer to be made, and both clerks wrote in

separate books from that dictation. The entry specified what was
paid, whether a bill of exchange, or a balance of account, and if
a bill, where drawn, or in some way designated the bill. This made
the entries on the books of the bank good evidence of all payments,
and safe vouchers .

This experiment in the use of deposit currency was most suc
cessful. In some respects the methods used were similar to those
adopted by the Bank of Amsterdam nearly two hundred years
later. The Venetian system required personal and oral transfers ;
* Stephen Colwell, The Ways and Means of Payment: A Full Analysis of the
Credit System , with its Various Modes of Adjustment ( Philadelphia, 1860 ) ,

Chap. XIII, but especially pp. 302-305.

12

CLEARING AND COLLECTION OF CHECKS

the Bank of Amsterdam required personal and written transfers.
The Venetian system provided an elastic deposit currency and
made the bank a great clearing house, or place of adjustment, for
merchants of many countries. Venice was for centuries the
greatest entrepôt of commerce in Europe, if not in the world, and

the chief payments or liquidations of this trade were effected at
the bank.

Payments to a great amount thus were effected at

Venice upon transactions which occurred elsewhere ; it was found
convenient and advantageous to have funds in Venice. Where
everybody wanted funds everybody sent them. The demand,

therefore, for the deposits in which the purchases of commerce
were paid was as incessent as the movement of commerce itself.
The bank deposits circulated on the books of the bank, precisely
in accordance with the movements of trade, and the customers of

the bank thus applied these credits, or the debts due them, to the
discharge of the debts they owed.39
The Bank of St. George

The Bank of St. George, commonly known as the Bank of
Genoa, had its origin , like the Bank of Venice, in an attempt to
reorganize the public finances. It originated in 1407 and was
based upon the public debt. During the 13th and 14th Centuries
the public debt had been held closely by a few powerful public

creditors, known as compere, or purchasers. They became very
powerful and saw to it that their loans were secured by the special
assignment on the part of the government, of taxes, customs, or
other revenue, sufficient to pay the interest. These public cred
itors became virtually a financial imperium in imperio and were
both respected and feared. In 1407 it was resolved to pay off this
debt. This was done by floating a new loan divided into shares,
which became the basis for the Bank of St. George. This much
the bank had in common with the Bank of Venice, but the re
mainder of its characteristics place it in striking contrast with the
Venetian bank .

The Bank of St. George was as watchful of its special interests
as were its predecessors, the compere. It hedged itself about with
detailed regulations and definite security in the form of assign
ment of taxes and dues. The currency provided by this bank con
sisted of the following : ( 1 ) The circulation of its shares, each
38Colwell, op. cit., Chap. XIII, passim. The Bank of Venice maintained a
successful existence until Napoleon invaded Italy in 1797 and overthrew the
Republic of Venice.

NATURE, ORIGIN , AND USE OF CHECKS

13

share amounting to 100 lire of the public debt, (2 ) certificates
of deposit in denominations to suit the depositor, ( 3 ) bank de
posits, like those of the Bank of Venice, and transferred in the

same manner, ( 4) deferred dividends of the bank, the par of which
was 21 lire for each share, and ( 5 ) the usual coins of gold and
silver .

The outstanding feature peculiar to the Bank of St. George,
in addition to the fact that it was one of the earliest banks which

used deposit currency, was the fact that it issued notes. They
were not issued in small amounts, nor in special denominations,
but in the handwriting of the officers of the bank, and in sums
requested by the depositors,' or persons applying. The Bank of
Venice is important as the earliest bank, of which we have records,
which developed the use of deposit currency based upon the public
debt ; the Bank of St. George not only did this, but was the first
to resort to the use of bank bills. The Bank of Genoa, by thus

fully exhibiting the advantages of bank notes, is considered by
Colwell, as the link which connected the deposit banks with those of
circulation . 40

Checks in Italy today

Although checks may have originated in Italy, the Italian
medium of exchange has been and is primarily State and bank
notes. The use of checks in Italy is limited, although it is devel
oping in northern Italy where banking institutions are more
Checks are seldom used in ordinary transactions,

numerous.

although certificates of deposit (bons de caisse) and similar credit
instruments, such as cash orders, are sometimes used.41

Very

recently the Italian government has tried to increase the use of
checks in wholesale trade in order to decrease paper currency.
In retail trade checks are not used at all. One of the reasons why
their use is so restricted in Italy is the stamp tax imposed upon

them and which very probably will be abolished .42
In February, 1924, the note circulation of the banks of issue
" Colwell, op. cit., Chap. XIV.
" Interviews on the Banking and Currency Systems of England, Scotland ,

France, Germany, Switzerland , and Italy, United States National Monetary
Commission Publications, 61st Cong., 2d Sess., Sen. Doc. No. 405, p. 528, here
after cited as Banking and Currency Systems; Carlo F. Ferrararis, Italian
Banks of Issue, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No.
575, pp . 242-248. The legal decisions concerning checks in Italy are found in
Italy's Commercial Law Manual of 1882. See Bachem , pp. 8-9.
"Letter from Mr. Romolo Angelone, Commercial Attaché, Royal Italian
Embassy, New York City, August 4, 1924.

CLEARING AND COLLECTION OF CHECKS

14

amounted to 8,852 million lire ; the note circulation for the State

was 7,749 million lire ; total deposits amounted to only 2,517 mil
lion lire. For December, 1923, the banks of issue had a note cir

culation of 9,491 million lire ; the note circulation of the State
was 7,754 million lire ; total deposits were 2,581 million lire. For

leading private banks total deposits amounted to 11,277 million
lire in December, 1923.43

The check in Germany

Bachem, in considering the origin and development of the
check, says that its forerunner in Germany was the quittanzien
( drafts ) which were used from the 13th to the 16th Century.

These quittanzien were drafts of the emperors and princes on
taxed cities ( abgaberpflichtize ), pale duties, and station duties
í stationsgelden) , drawn up in receipt form. There were others
of a similar nature, as the cessiones ( transfers ) of the imperial
revenues of the city of Lubeck to the German Emperor. After
1466 the Polish kings drew against the Prussian cities, especially

Dantzig. From that time on those cities had to pay heavy duties
semi-annually, of which the king disposed by use of the quittan
zien . With these they settled debts, and arranged for expenses in
small or large amounts.

Related to the quittanzien in certain respects were the drafts
which the city of Luneburg directed against the owners of the in
come from the salt tax.44 Inasmuch as the persons drawn upon

occupied a position subordinate to that of the drawer, and as the
drawer could press the payment of his draft with force, the quit
tanzien were accepted willingly in payment. For the same reason,
one cannot speak of this type of check in the same sense that we
attach to the word today, as its payment resulted not so much
because of a contract as because of the pressure of despots.45
With the establishment of the transfer or “ giro ” banks at Ham

burg in 1619, and at Nuremberg ( Nurnberg) in 1621, written
orders for transfers came to be used in much the same way as the
modern check . 46

Checks have had a slow growth in Germany. The striking
feature of the German system has been and is the transfer or giro

system . As a liability in 1900, bank notes stood first and trans
“ Federal Reserve Bulletin , Vol. X ( 1924 ) , pp. 432.
“ Bachem , p. 4.
"SIbid .

"J. T. Holdsworth , Money and Banking , 2d ed . ( New York, 1919 ) , p. 130.

NATURE , ORIGIN , AND USE OF CHECKS

lò

fers second. In 1908 a law was enacted establishing a legal status
for checks for the purpose of increasing their use, it being hoped
that their use would increase rapidly thereafter, although at that
time it was stated that they played a small part in the transaction
of business, it being effected almost entirely by the transfer or

giro system. The slow development of the check system has been
especially marked in small business circles.* 7
It is difficult to appraise the present situation in Germany.
Abnormality characterizes several of the important factors. It
can be said with certainty, however, that government and bank
notes are more common media of exchange than is deposit cur
rency evidenced by checks. Renten marks ( gold marks) and
checks for the same currency are becoming common media since

the extreme depreciation of government notes. Deposits become
currency principally through giro or transfer transactions,
although the use of checks is important. Checks are used quite
extensively in wholesale trade, but up to the present time have
never been used to any extent in retail transactions. Analysis of
bank statements throws no light upon the relative importance of
deposit as compared with note currency since deposits may be
withdrawn or transferred through any sort of legal business
transaction which may not involve the use of checks.48
The check in Holland

Despite the early instances of the use of checks, Bachem con

siders Holland the home of the check.49 It was first used in
Amsterdam in the 16th Century when the people learned to deposit
their cash with some third person for a small depository fee,
rather than store it in their houses. These persons who received
the deposits also assumed the duties of collection of obligations

and cancellation of debts. From this arose the position of the
so-called cashier.

These cashiers made payments by means of

kassiers-briefje, which were drawn up more in the form of receipts
than in the form of drafts. They contained the voucher of the
" The Reichsbank , 1876-1900, published by the Reichsbank , translated by Dr.
F. W. C. Lieder, U. S. Nat. Mon. Com . Pubs ., 61st Cong., 2d Sess., Sen. Doc. No.

408, pp. 68, 116 ; Banking and Currency Systems, U. S. Nat. Mon. Com . Pubs.,
61st Cong., 2d Sess., Sen. Doc. No. 405 , p. 497 ; Miscellaneous Articles on Ger
man Banking, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d . Sess., Sen. Doc. No.
508, pp. 247-271.
" Letter from the German Consul General, New York City, July 24, 1924.
See also the Federal Reserve Bulletin , Vol. X ( 1924 ) , pp . 636-637.
"See also the Bankers Magazine, Vol. XXIII , 3rd series ( 1889 ) , p. 787,
which supports this view.

CLEARING AND COLLECTION OF CHECKS

16

depositor to the effect that he had received the money from his
cashier. By a keure of 1608, the merchants were forbidden to
occupy themselves henceforth as cashiers.

After this keure the

greater part of the business of banking and dealing in money and
exchange, so far as it had developed at that time, was concen
trated by law in the hands of the Bank of Amsterdam (Amster
damsche Wisselbank ) and its agents.
The Bank of Amsterdam

The Bank of Amsterdam was created by the ordinance of Jan

uary 31 , 1609, under the guaranty of the city and the government
of its magistrates. The avowed object was to afford some relief:
against the intolerable nuisance of worn and defaced coins, which
flowed into the great commercial mart of Amsterdam from all
parts of the world. Briefly, the business of the bank was to re
ceive, to keep and to pay. It received coins at their bullion value,

that is, as valued in money of full weight and fineness; conse
quently, the credit upon its books was the same as though it were
based upon good coin. The coins and bullion thus deposited were
not reclaimable, but, according to the theory of the bank, were
locked up forever. The bank, however, did receive money for
safe -keeping, which was returned on demand, the depositor pay
ing a small fee for the service.

The chief function of the bank was to keep the deposits of coin
and bullion ( other than the special deposits of money ) and to
make payments by a transfer from the account of the payer to
the account of the payee. This was done by the party transfer
ring, in person, or by his agent specially authorized, and by his
delivering to the proper officer of the bank a written order or
check. The following is an example of an order drawn on the
bank :50
“ Folio 1609.

“ Messrs. Commissioners of the Bank-Please pay to Isaac
DeWitt the sum of One Thousand Florins, Four Sols and Six
Deniers ,

“ Amsterdam , 25th March, 1709.
“ F. 1000 4s . 6d .
“ Samuel Moses."

Colwell, op. cit., p. 176. For an account of the Bank of Amsterdam, see C.
F. Dunbar, Chapters on the Theory and History of Banking, 2nd ed. ( New
York , 1904 ), Chap. VIII ; Adam Smith , Wealth of Nations, Vol. II , 10th ed .

(London, 1802), Bk. IV , Chap. III . An excellent bibliography dealing with
sources generally unknown today, is to be found in Colwell, op. cit . , pp. 186-187.

1

NATURE, ORIGIN, AND USE OF CHECKS

17

On presentation of this paper by the drawer or his special
agent, the sum expressed was debited to the drawer, and credited
to the party to whom the payment was directed to be made. The
transfers bore some resemblance to our modern check, but they
should be called transfer orders rather than checks.

No payee

could call at the bank and demand payment ; it was necessary for
the payer or his agent to appear and effect the transfer. Never
theless, the Bank of Amsterdam took important steps towards
the creation of bank credit and deposit currency as known
today.51
Today specie and bank notes constitute the bulk of the

medium of exchange in the Netherlands. Government notes were
withdrawn several years ago. Something very similar to the
check is used to some extent in wholesale trade, although hardly
at all in retail transactions.

There seems to be no information

available as to the extent to which deposit currency is used in the
Netherlands as compared with bank notes and other forms of cur
rency. The Vice-Consul in New York City for the Netherlands
points out that the general public in that country does not keep
bank accounts. Those classes that save money invest it in stocks
and bonds, which are either kept in the home or left with the stock
brokers through which they make their purchases and sales. Nor
will an analysis of bank deposits give more than a general idea
of the importance of deposit currency as evidenced by checks, since

a bank deposit can be drawn against by means of a letter ad
dressed to the bank requesting it to pay out money.
In addition to the banks and stock brokers with whom current

accounts may be carried, there are two other institutions that
make possible the use of deposit currency, viz., the postal savings
bank, and the service of postal cheques. The first- named institu
tion works in a way similar to kindred institutions in the United
States. The second institution was established some years ago
in order to decrease the demand for currency. This made it pos

sible to have a cheque account with the post office. Cheque books
are issued as is also another type of book containing forms which
are used in demanding the post office to credit some other cheque
account with the sum filled in the blank . This latter practice is
6 In 1790 it became known that for years favored depositors had been per

mitted to overdraw their accounts and that enormous loans of specie had been
made to the city and to the Dutch East India Company. These disclosures de
stroyed confidence, the premium on bank money disappeared , and the bank be
came insolvent. It was closed by royal decree in 1819. The Bank of Hamburg,
established in 1619, was modeled after the Bank of Amsterdam and made
transfers in the same manner. See Colwell, op. cit. , pp. 181-183.

CLEARING AND COLLECTION OF CHECKS

18

in nature a “ giro ” system. The service of postal cheques has
developed rapidly following a period during which great difficulty
was experienced in attempting to popularize the idea . Indeed, the
system became so successful that the staff proved inadequate to
handle the business and some time ago the service was tempo
rarily discontinued. The Vice-Consul thinks it has been resumed
at this time.52

The check in England

Checks originated in England in the latter part of the 17th
Century when it was the practice to make deposits with gold
smiths. The credits or the deposits with the goldsmiths were
transferred by means of two forms : ( 1 ) The goldsmith gave his
customer either a written promise to pay to himself, or to his
order, or to the bearer on demand, a certain sum of money. These
notes were in simple writing, and were called goldsmiths' notes.
Out of these bank notes developed.53 ( 2 ) The customer might
write a note to his goldsmith directing him to pay a certain sum
to any person, or to his order, or to bearer, on demand. These

notes were called cash notes at first, but were checks in the modern
sense, and differed from the modern check principally in the fact
that they were less formal. English checks (cheques) originated
in the form of these cash notes.54

Although Bachem says the oldest instrument of this sort dates

from 1681 , Powell gives examples of such instruments dated 1671
and 1675.55 He says that as early as April 12, 1671 , the check
was found in the form of a letter requesting the addressee to pay
to “ Phil Marsh or bearer the sum of £489.”

In 1914 the Institute

of Bankers in England added to its collection a check dated
, 1675. A facsimile of the check was published and
August 14,
there described as the oldest check in that country . It was
worded :
5 * Letter from Mr. G. P. Luden , Vice -Consul of the Netherlands, New York
City, July 24, 1924.
**Bachem , P. 7 .

“H. D. Macleod , A History of Banking in Great Britain ( New York, 1896 ),
p. 2 ; Bachem, p. 7 ; H. D. Macleod, The Theory and Practice of Banking, 3rd
ed., Vol. I (London, 1875 ), pp. 208-210; A.M. Davis, "Currency and Banking
in the Province of Massachusetts Bay," Publications of the American Eco
nomic Association , Series 3, Vol. II ( 1901 ) , p. 34.
WE . T. Powell, The Evolution of the Money Market, 1385-1915 ( London,
1915 ) , p. 101 .

NATURE , ORIGIN, AND USE OF CHECKS

19

“ Mr. Thomas Ffowles.

“ I desire you to pay unto Mr. Samuell Howard or order upon
receipt hereof the sums of nine pounds thirteene shillings and sixe
pence and place it to the account of
14 Augt. 1675

Ye servant,

Edmond Warcupp .
£9.13.6

" For Mr. Thomas ffowles, Gouldsmith at his shop between the
two Temple gates, Fleete- streete.”

On the back appeared the following endorsement by the payee :
“ Rcd . in full of this bill the sume of nine pounds thirteen
shillings sixpence.
“ Saml. Howard ." 56

Powell points out that at this time checks were considered
simply as a means of saving a customer the trouble of personal
attendance at his bankers', but were not recognized as a facile
mode of achieving the innumerable adjustments of bank balances
which are the ultimate outcome of each day's business or as the

supremely useful form of currency, destined to predominate over
both notes and gold.57
The earliest printed checks appear to be those of Child :58
and are believed to date from 1762. Check books began to be
issued about 1781.59 During the first half of the 18th Century,
while the goldsmith -bankers of London were slowly being trans

formed into bankers only, shopkeepers in outlying towns began to
develop into bankers and by the end of the century were to be

found in almost every town. Checks were known to these bankers
as early as 1705.60

The Bank of England , as organized in 1694, was a bank of de

posit as well as a bank of issue and provided for the use of the
The bank, however, became principally a bank of issue

check.661

5Powell, op. cit., pp. 101-102.
Ibid.

48From Francis Child, credited with being the first banker, in the modern

sense, in England . He was the inheritor of a goldsmith's business which is
traced back to 1559. See Powell, p. 112.
** Powell, p. 103.

"Powell, p. 117. Country banks undoubtedly developed from other origins
also.

" W. R. Bisschop, The Rise of the London Money Market (London , 1910 ) ,
pp . 86-92.

20

CLEARING AND COLLECTION OF CHECKS

by 1800. The early monopoly of note issue given to the bank fos
tered the development of deposit banking and the use of checks by
the private banks.62 With the evolution of English banking, the
check became the recognized credit instrument in business.

As

early as 1864 Sir Lubbock, making an inquiry into the character
of receipts at his own bank, found that checks and bills of ex
change constituted 96.8 per cent. of them. The importance of
checks was evidenced by the introduction of the clearing system

in London in 1873. Another and more comprehensive inquiry
made by Pownall in 1881 , showed a lower percentage of checks in
the total amounts paid into different classes of banks. London
banks showed check payments in the proportion of 97.23 per
cent. ; in country banks in 261 places checks constituted 72.86 per
cent.68 The use of checks became so highly developed that they
were looked upon as a distinctively British institution, Lord Ave
bury dubbing them the “ Union Jack of Commerce” .64
Some idea of the importance of deposit currency in England
may be gained from the statements of the Bank of England and

the five leading joint-stock banks. The Bank of England reported
as follows for December 27, 1922 : Notes in circulation , £ 124,

878,000 ; public deposits, £13,324,000 ; other deposits, £ 119,
903,000.65 The deposits of the five leading joint-stock banks on
December 31 , 1922, amounted to £ 1,537,300,000.66

In March,

1924, the Bank of England reported bank notes in circulation

amounting to £103,000,000 ; currency notes and certificates,
£282,000,000 ; deposits, £127,000,000. Nine London clearing
banks reported total deposits of £1,603,000,000.67
Checks in France

In France the check had become of enough importance by the
middle of the 19th Century to cause the drafting of legal regula
tions. These regulations of 1865 constituted the first legal recog

nition given to the check in France.68 The check was actually
62There was in operation for many years in England an institution called
The Cheque Bank, created for the purpose of evading the bank-note law by
the issue of checks payable only over the counters of other banks with which
The Cheque Bank established relations, and which had practically the char
acter of bank notes.

* C . A. Conant, "Development of the Check," Bankers Magazine, Vol.
LXXXIII ( 1911 ) , p. 581 .
"Powell, op. cit. , 317-318.
* Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 275.
Loc. cit. , p. 333.
07Federal Reserve Bulletin , Vol. X ( 1924 ) , p. 432.
** C . A. Conant, op. cit. , pp. 581-582.

$

NATURE, ORIGIN, AND USE OF CHECKS

21

known previously under the name bon de caisse, which is referred
to by the French jurists as the chèque à l'etat embryonnaire. For
their circulation, these checks were drawn up in the form of re
ceipts called chèques reçus or chèques récépissés. The chief hin
drance to the extension of the use of the check was the tax on all

mandats de payment of one -half of 1 per cent.
To meet the general demand the law of 1865 was passed by
which the check was declared to be tax-exempt, but by a series of
regulations its universal growth and use was retarded in order to

prevent the supplanting of the highly-taxed note. By the law
of 1879 the tax-exemption of the check was recalled and on the

chèques de place à place a duty of 20 centimes,
and on the chèques
sur place a duty of 10 centimes, was placed.69
At the Bank of France, as at the Reichsbank, an enormous
volume of business is done by transfer orders, but they are usually
orders for the transfer of credit from one client of the bank to

another client. However, the proportion of checks to coin and
bank notes has steadily increased in the bank receipts since 1890.

In that year transfers and checks constituted but little more than
50 per cent. of the total receipts of the Bank of France ; in 1900 ,
they constituted 68.6 per cent., and in 1910, 80.4 per cent. These
proportions relate entirely to payments into banks and do not in
dicate the relative importance of transfer orders as compared
with checks, although Conant treats the percentages as an indica
tion of the importance of checks. The ascertainment of the pro

portion of checks figuring in outside transactions is more difficult
and has rarely been attempted. There appears to be no valuable
information available relative to the situation in France.

It is

generally believed that outside of Great Britain, the proportion
of checks used in everyday transactions in France and other coun

tries in Europe is much smaller than in the United States.70
In 1916 a step was taken which tended to give some impetus

to the use of checks. The French Minister of Finance, in that
year, announced that thereafter payment by the French govern

ment would be made largely by check and that arrangements
would be introduced whereby private establishments could make
payment to the government in the same manner.71 Further en
couragement to the use of checks was given by the passage of a
law in August, 1924. Prior to that time holders of bills had been
" Bachem , op. cit., P. 8 .
" Conant, op. cit ., pp. 581-582.
"Federal Reserve Bulletin , Vol. II ( 1916 ) , pp. 374-375.

CLEARING AND COLLECTION OF CHECKS

22

reluctant to accept checks in payment, since in the event that

checks were not honored, the holder had not only parted with the
bill but had lost the opportunity to protest non-payment, as the

law required that protest be made on the date following the due
date, and checks ordinarily required at least twenty-four hours
for clearance. The new law, among other things, extends the
period allowed for protest to from five to eight days, and compels
the debtor to restore the bill to the holder in the event of non
payment of the check.72

A general idea of the extent to which bank notes predominate
in France as a medium of exchange may be gained from recent
statements issued by the Bank of France. On December 28, 1922,

the Bank of France reported as follows : Bank notes in circulation,
36,358,387,000 francs ; government deposits, 20,482,000 francs ;
other deposits, 2,289,667,000 francs.73 In March, 1924, the
note circulation amounted to 39,950,000,000 francs, while de
posits ( total ) amounted to but 3,242,000,000 francs.74
The check in Austria

It seems that the check was known in Austria as early as the

18th Century, although it has attained importance only recently.
The Vienna Endorsement and Cashiers' Association, the Lower
Austrian Discount Association, the Austro-Hungarian Bank and
the Royal Postal Savings Bank have exerted their influence to
Nevertheless, the most common

increase the use of checks.75

medium of exchange is the bank note issued by the Austrian Na
tional Bank which was opened January 2, 1923.
The charter of the old Austro-Hungarian Bank expired on
December 31 , 1919, and thereafter the business of the bank was

carried on separately for each of the succession States. The Aus
trian section of the Austro-Hungarian Bank performed all the
functions of a central bank of issue until the new Austrian Na

tional Bank was opened. This bank took over the note circula
tion of the Austrian section as well as its claims against the Aus
trian government. The charter of the new bank differs but little
from those of other central banks of issue in Europe, but the

influence of the government on its operations is restricted
closely."76
" John P. Young, European Currency and Finance, Commission of Gold and
Silver Inquiry, United States Senate ( 1925 ), p . 311 .
73Federal Reserve Bulletin, Vol. IX ( 1923 ) , p. 275.
" Federal Reserve Bulletin , Vol. X ( 1924 ) , p. 432.
* Bachem , pp . 8-9 .
**Federal Reserve Bulletin, Vol . IX ( 1923 ) , pp. 328-330.

NATURE , ORIGIN , AND USE OF CHECKS

23

In December, 1922, the Austrian section had notes circulating
to the extent of 4,080,177,238,000 kronen. Deposits and other
demand liabilities amounted to 327,991,960,000 kronen.

De

posits of the Austrian government amounted to 528,254,403,000
kronen.77 This statement of liabilities, however, throws but little
light on the relative importance of deposit currency in Austria
today. While checks are of some importance, the bank note is the

principal medium of exchange, there being no government notes
issued. Checks are used mostly in the wholesale trade in trans
acting large business, but hardly ever in retail trade. The amount

of deposits as reported by Austrian banks is much larger than
the amount for which checks are used. These deposits are usually
drawn out by presenting the bank book, as is done in the United
States in the case of savings accounts.78
Checks in Hungary

Cash, composed largely of government notes, constitutes the
principal medium of exchange in Hungary. Government notes
were issued by the National ( government ) Bank until recently.

Bank notes are issued at present by the the National Hungarian
Bank, which was opened June 24, 1924. Checks are relatively
unimportant as compared with the government notes. They are

not used at all in retail trade and only by very large and well
known firms in wholesale transactions.
As in most countries outside of England and the United States,

an analysis of bank statements in Hungary gives no definite indi
cation of the extent to which checks are used.

There are the

following different types of deposits in Hungary : ( 1 ) There is a
monthly deposit made for business purposes. It is made at the
risk of the depositor and does not consist of a very large sum of
because withdrawals can be made by telegram or even over

money

the telephone. ( 2 ) There is the regular savings bank deposit, from
which money may be drawn only upon presentation of the
savings bank book. (3 ) Deposits are made also against which
checks can be drawn .

But the bank must be notified of each check

drawn against the account before it cashes the check.79
Checks in Switzerland

Checks are used quite often in Switzerland, but are not as

common as in England or the United States. The giro system, as
" Ibid ., P. 650.

**Letter from the Austrian Consulate General , New York City, July 22, 1924.
tºLetter from Dr. Louis Alexy, acting Consul General of Hungary, New
York City, July 23, 1924.

24

CLEARING AND COLLECTION OF CHECKS

in Germany, is probably of far more importance, its development
being encouraged by the Swiss National Bank. In the main, the
medium of exchange is composed of bank checks, bank giros,
postal checks, postal giros, and cash, the cash being composed, to
a large extent, of bank notes issued by the Swiss National Bank .

Checks are used extensively by the business world, although the
retail trade is transacted principally through the medium of bank
notes. Postal checks are used frequently , particularly for the
payment of small transactions.80 But both bank and postal giro

service are of increasing importance and popularity in Switzer
land .

It is probable that the bank statements issued in Switzerland
give but a fair picture of the general situation relative to the im
portance of deposit currency in that country. The volume of
circulating notes of the National Bank of Switzerland has in

creased considerably from 1913 to 1920 — in round numbers from
about 300,000,000 to 1,000,000,000 francs. This increase, how
ever, was moderate as compared with currency increases in other

countries. Before the war notes in circulation were based on gold
and commercial bills of exchange. With the outbreak of the war,
documentary bills of exchange largely disappeared, being sup
planted by short-term treasury notes. The increase of bank note
circulation was accompanied by an increase of the metallic reserve

held by the bank so that even at its lowest point in 1918, the ratio

of gold to notes in circulation was 40 per cent., as compared with
54 per cent. in 1913. By July, 1923, the ratio had risen to 61.15
per cent., and if silver be included, to 73 per cent . The report of
the National Bank of Switzerland for December 30, 1922, was as

follows : Notes in circulation, 976,426,000 francs ; deposits, 165,
032,000 francs . In August, 1923, the notes in circulation
amounted to 860,000,000 francs, while current accounts and de
posits totalled 106,000,000 francs.81

Checks in Norway, Sweden, and Denmark

Bank notes constitute the chief medium of exchange in all the
Scandinavian countries. Nevertheless, the acting Consul General
for Norway points out that checks are used frequently in that
country. They are used extensively in wholesale trade, although
probably very little in retail transactions. Bank notes are the
most common medium for all transactions. No government notes
BOLetter from the Consul of Switzerland, New York City, July 23, 1924.

81Federal Reserve Bulletin, Vol. X ( 1924 ) , p. 88.

NATURE, ORIGIN , AND USE OF CHECKS

25

are issued. Although deposits may be withdrawn from banks by
means other than checks, the acting Consul General thinks the
amount of deposits as reported by the banks of that country will
give some indication of the extent to which checks are used.82

The Bank of Norway reported for December 30, 1922, as
follows : Notes in circulation, 384,775, 000 kroner ; deposits, 163,

429,000 kroner.83 The 103 private banks had deposits at the end
of November, 1922, amounting to 2,887,000 kroner.84 However,
it is unsafe to assume that these figures are a true indication of
the relative importance of deposit currency as evidenced by checks,
since the deposits may be withdrawn by other means.
In Sweden an instrument possessing the more essential char
acteristics of the check was being used at the beginning of the 18th
Century.85 Nevertheless the most common medium of exchange

today is the bank note, which is the only kind of note issued in
Sweden . These are issued by the Bank of Sweden (Riksbanken) ,
which was established in 1668. It functions as a central bank and

since 1904 is the only bank which is authorized to issue bank notes.
Checks are used to some extent in wholesale trade, although drafts

are more common ; in retail trade the check is used very little. An
analysis of bank statements from Sweden, as for Norway and Den
mark, gives no real indication of the extent to which checks arc
used. In Sweden there are several types of deposits but only one
kind, the "giro-rakning,” may be drawn out by means of checks.86
In December, 1922, the Riksbank reported a note circulation
amounting to 584,000,000 kroner and total deposits of 389,
000,000 kroner.87

The same general situation obtains in Denmark. The most
common medium of exchange is the bank note issued by the

“ Nationalbanken,” which holds a government license for issuing
bank notes. Government notes are not issued. Checks, however,
are used to a great extent in wholesale trade, though seldom in

retail transactions. Wages for laborers are sometimes paid in
checks, but mostly in cash. The amount of deposits as shown by
the bank statements exceeds the amount which is drawn out by
" Letter from the acting Consul General of Norway, New York City, July
28 , 1924 .

" Federal Reserve Bulletin , Vol. IX ( 1923) , p. 406 .
* Ibid .,

p. 134 .

"A. W. Flux, The Swedish Banking System, U, S. Nat. Mon. Com . Pubs.,
61st Cong., 2d Sess., Sen. Doc. No. 576, p. 18.
sLetter from the Consul General of Sweden , New York City, July 31 , 1924.

" Federal Reserde Bulletin, Vol. IX ( 1923 ) , p. 273.

26

CLEARING AND COLLECTION OF CHECKS

check, since deposits may be drawn out by other means. For ex
ample, many deposits are made in the bank against a bank book
and are drawn out by presenting the book and having the bank

make a note therein.88 The Bank of Copenhagen, according to its
report for December 30, 1922, had notes in circulation to the ex

tent of 450,354,000 kroner ; government deposits, 2,711,000
kroner ; current account deposits, 163,557,000 kroner ; and all
other deposits and creditors, 30,218,000 kroner.89
Checks in Belgium

The situation in Belgium is not unlike that in France. Since
the organization of the National Bank of Belgium in 1850, de
posits have constituted but a small part of the liabilities as com
pared with notes.90 The Bank of Belgium reported for December
28, 1922, notes in circulation to the extent of 6,700,886,000

francs. Deposits in current account were as follows : Government
deposits, 215,902,000 francs ; other deposits, 283,010,000
francs .91

These figures will show the general situation, but nothing
more ; it is doubtless true that the amount of deposits, as shown
here exceed the amount drawn out by means of checks.
The check in Spain and Portugal

While the use of checks in all European countries is limited
as compared with England, the United States and Canada, it
seems that in the Latin countries they are limited to a much nar
rower field than in other European countries.92 In Spain the
chief medium of exchange is the bank note issued by the Banco de
España. These are the only notes issued. Checks are used to
some extent in wholesale trade, but not in retail transactions.

Deposits, as shown by bank statements for that country, are no
indication of the extent to which checks are used, since a large pro

portion of them becomes a medium of exchange through "credit
transferences ." 93

88I etter from Mr. M. J. Oluf, 1st Vice -Consul of Denmark, New York City,
July 25, 1924.

*Federal Reserve Bulletin, Vol. IX ( 1923) , p. 406.
SOC . A. Conant, The National Bank of Belgium, U. S. Nat. Mon. Com . Pubs.,

61st Cong., 2d Sess., Sen. Dóc. No. 400, passim , but especially pp. 193-195.
"Federal Reserve Bulletin, Vol. IX ( 1923 ) , p. 276.

" Letter from Mr. Romolo Angelone, Commercial Attaché, Royal Italian
Embassy, New York City, August 4, 1924.

" Letter from Mr. Alejandra Berea, Consul General for Spain, New York
City, July 25, 1924.

NATURE, ORIGIN , AND USE OF CHECKS

27

Bank notes issued only by the Bank of Portugal, a government
bank, are the chief medium of exchange in Portugal also. Checks
are used to some extent in wholesale trade, but seldom in retail
transactions. Bank deposits in Portugal are no indication of the
94

extent to which checks are used in that country.
The check in Russia

Bank notes have been and are the most important medium of

exchange in Russia. In 1910 notes were about three times as

important as checks, although checks were becoming fairly well
developed prior to the Revolution of 1917.95
The rather recent creation in Russia of industrial trusts and

commercial enterprises on a capitalistic basis has made it neces
sary to introduce some stability into the currency. The cher
vonetz is the result. It is equal to 10 pre -war gold rubles, or ap
proximately £1 . These chervontsi are issued by the new State
Bank and are supposed to have a 25 per cent. security in gold,
precious metals, or stable foreign currency, the remainder of the
security being readily marketable goods, short-term bills of ex
change, or other specified security. Although nominally redeem
able in gold chervontsi, the chervontsi notes, in practice, are re
deemed in soviet rubles at the current rate of exchange. There
are, in fact, two independent currencies in circulation today : The

State Bank notes ( chervontsi ) and the soviet ruble, of which a
new series has been issued almost yearly by the Treasury since the
beginning of the Soviet regime.
The more or less stabilized currency has acted as a stimulus
for the establishment of new banks and has encouraged the making
of deposits and the extension of loans. It should be recalled that
with the nationalization and liquidation of all banks during the
years 1917-1919, payment for commodities and services by check
or draft ceased.

From that time until the beginning of 1922,

all business transactions were carried on exclusively with the aid
of paper notes .

The State Bank was organized in November, 1921, and ab
sorbed the Peoples' Bank which had been created following the
nationalization and liquidation of all other banks. The State
Bank was not given the right of note issue until November, 1922,
at which time it was given the power to issue the new chervontsi.
"Letters from the Consul General of Portugal, New York City, July 24,
1924 .

*sProfessors Idelson and Lexis, Organization of Banking in Russia, U. S.

Nat. Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 586, passim .

CLEARING AND COLLECTION OF CHECKS

28

This bank is a bank with branches and resembles a central reserve

bank, although it also performs the functions of an ordinary com
mercial bank .

With the adoption by the Soviet government of a more toler
ant attitude towards private enterprise in business, it has become
possible once more to engage in banking operations in Russia.
During the second half of 1922 and the first half of 1923, a num
ber of public and private banks were organized. Deposits are re
turning as a medium of exchange. In some banks demand depositi,
by April, 1923, were equal to about five times their capital and
surplus. The most important banks are owned and operated by

the State or co-operative associations, the activities of the private
banks being closely restricted. Most of the banking institutions
are located in Moscow, about 80 per cent. of all banking resources
being concentrated there. The State Bank and the Industrial
Bank, the two largest banks, have a number of branches over

Russia, the State Bank alone having over 100 branches in the im
portant towns.

The Russian State Bank, according to its statement for May
1 , 1923, shows roughly the relative importance of notes and de
posits as follows : Bank notes ( chervontsi ) in circulation, 6 ,
000,000 ; current account and other deposits, 1,400,670,000 (in
soviet rubles, issue of 1923 ) , and 7,094,000 chervontsi ; transfer
operations, 17,097,000 rubles and 931,000 chervontsi.96

Checks in the Republics of Finland and Latvia
The most common medium of exchange in the Republic of Fin
land is the local currency composed principally of bank notes.
The Bank of Finland, a government institution, is the only bank
of issue. Commercial remittances are made largely by use of an

equivalent to cashier's checks in the United States. Checks are
used in the wholesale, but very little in retail trade. The Bank of
Finland reported as follows for December 30, 1923 : Notes in
circulation, 1,420,920,000 Finnish marks ; government deposits,

239,311,000 marks; current account deposits, 110,551,000
marks.97

But deposits, as shown in this statement, do not indi

cate the importance of checks, since deposits may be withdrawn by
presenting the pass book as well as by check.98
sFederal Reserve Bulletin , Vol . VIII ( 1922 ), pp. 936-942, 1200-1205 ; Vol.
IX ( 1923 ) , pp. 1114-1119.

Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 653.
" Letter from Mr. Edvin Lundstrom, Vice -Consul for Finland, New York
City, July 24, 1924 .

NATURE , ORIGIN , AND USE OF CHECKS

29

The Republic of Latvia, one of the Baltic States which became
separated from Russia after the 1917 Revolution, presents a
somewhat similar situation. The Consul for that country reports

that the use of checks in Latvia is being extended even though they
play but a minor role as yet. The principal currency is the notes
issued by the Bank of Latvia, a government institution, estab
lished November 1 , 1922, with the exclusive right of issue. Rubles,
which were issued before lats, were issued by the Treasury Depart
ment. These are being replaced by the lats, which are virtually
gold certificates in nature. Checks are favored for use by the

government and are winning popularity gradually with the
people. Their use in wholesale trade is limited as yet to persons
who are well known, cash being the customary means of settling
accounts. In retail transactions the part played by checks is
negligible. Deposits may be drawn out by various means other
than checks, such as letters of credit, special orders, or by presen
tation of the pass book.99
Checks in southern European countries
What has been said for the other European countries may be

said, in general, for the Baltic States and other southern Euro
pean countries. No effort will be made to describe in detail the
nature of the currencies in the remainder of the European coun

tries. For no country is the exact information obtainable. At
the best only estimates and general statements can be secured ,
all of which may be summarized in the general statement that local

currencies are the principal media of exchange, checks occupying
a minor place .

In Roumania, for a typical example, cash and bank notes are
the most common medium of exchange, checks being used very

little. The only notes in Roumania are those issued by the Na
tional Bank of Roumania.

These are the only legal currency

aside from gold, silver, and nickel coins minted by the State Treas
ury.

Checks are seldom used even in wholesale trade and then

only when it just happens that both parties are dealing with the
same bank. Deposits, as shown by the Roumanian banks, may be
withdrawn by other means than the check, as, for example, the

letter of credit. Mr. Drutzu , the Vice-Consul of Roumania, in
summarizing the situation in that country points out that the
conditions as described above are due to the fact that the practice
Letter from Mr. Arthur B. Lule, Consul of Latvia, New York City, July
25, 1924 .

CLEARING AND COLLECTION OF CHECKS

30

of using the check can hardly be said to have been introduced in

Roumania. This is partially responsible for the actual lack of
currency in that country. The reason for this general situation is
that the Roumanian government thus far has not passed any pro
tective laws which would guard the banks against heavy losses in
case of forgery, etc. He also points out that “ .
the matter
has lately been discussed even in France, and should it prove suc
cessful we are hopeful that in the near future the application of
the French law will be studied by the Roumanian government

with a view to introducing the practice of using checks in Rou
mania ."100

Checks in China, Japan , and India

It is difficult to generalize with respect to the media of ex
change in China. Almost anything can be found there. China
has no unified system of currency. It is approximately true to
say that she has parallel standards, silver and copper coins being
used side by side, but with no fixed legal ratio between the two
metals.

Chinese currency, in reality, is composed of a number

of systems. There is the copper cash ; the currency of silver bul
lion based on the tael unit ; silver coins, the dollars of foreign as

well as of provincial mintage ; and finally there are the minor
silver coins, fractional parts of the dollar circulating independ
ently of the mint and with no limitations upon their legal tender
quality. A large proportion of the business transacted in the
interior of China is carried on by means of silver payments ; what
little gold is used is restricted almost entirely to international com

merce. Bank notes occupy an important place in the currency,,
but the use of checks is virtually negligible. Only the merchants
in the treaty ports have any dealings with them.101

Silver is the principal medium of exchange in India. The use
of bank notes is increasing, but the use of checks is increasing at
a much greater rate. The use of checks is confined principally to
such cities as Calcutta, Bombay, Madras, Cawnpore, Rangoon,
and Karachi, and here checks are far more important than specie

and notes. Legal tender money is required only for the purpose
16Letter from Mr. S. Drutzu, Vice -Consul of Roumania, New York City ,
July 24, 1924.

inc. F. Remer, Readings in Economics for China ( Shanghi, 1922) , pp. 315
355 ; R. O. Hall, Chapters and Documents on Chinese National Banking
(Shanghi, 1920 ) , passim ; Federal Reserve Bulletin, Vol. IX ( 1923 ) , p. 1014 ;

E. T. Williams, China Yesterday and Today (New York, 1923) , pp. 195-196,
588 ; D. K. Lieu, “Gold Currency Scheme,” The Chinese Social and Political
Science Review, Vol . III (1918 ) , pp. 225-277.

NATURE, ORIGIN, AND USE OF CHECKS

31

of actual public circulation in connection with retail transactions,
the payment of wages, and for reserves held by the banks against
deposits. All the cities mentioned except Karachi have clearing
houses. European merchants and the educated classes are the
chief users of checks. A large proportion of the inland remit
tances are carried on by bills of exchange called hundis.
The average growth of the check in India from 1900 to 1919
was greater than the growth of business ; especially was this true

during the War. Its growth was more than twice as great as all
other circulation combined. Bank deposits increased 65 per cent.
from 1913 to 1917. Outside of the towns, however, checks cannot

circulate to any extent ; 94 per cent. of the population is illiterate,
which is the main key to the reasons for the absorption of the
precious metals. Were it not for the fact that stamps on checks
are required and that signatures may not be in the vernacular but
must be in English, the development of the check in India, un
102

doubtedly, would be more rapid ."
The currency situation in Japan is quite different from that
in China and India ; it is more akin to that in the United States.

While it cannot be said that the use of checks in Japan is as gen

eral or as highly developed as in the United States, checks are
probably as important a medium of exchange as notes. The
check seems to have been known in Japan as early as the 17th

Century, although modern banking in that country really dates

from about 1872.103 Banking development has been very rapid
in Japan in recent years, the development assuming the form of
larger banks with branches, rather than a mere increase in the
number of independent banks. In fact, the number of independent
banks is decreasing. 104

The Bank of Japan, which is the central bank of issue, re
ported as follows for May, 1924 : Note circulation, 1,347,000,000
:

yen ; government deposits, 511,000,000 yen ; private deposits,
46,000,000 yen. The Tokyo banks reported deposits for the
same date amounting to 1,838,000,000 yen. The combined de
posits exceed the note circulation.105
1036. Findlay Shirras, Indian Finance and Banking (London , 1920 ), pp. 9,
23, 230 , 407 ; B. Ramachandra Rau, Present- Day Banking in India (University
of Calcutta , 1922 ) , pp. 271-275 ; H. Stanley Jevons, Money, Banking and Ex
change in India (Simla , 1922 ) , pp. 86, 90, Chap. VIII ; Federal Reserve Bulletin ,
Vol. IX ( 1923 ) pp. 1011-1014.

16 Bachem , pp . 8-9; O. M. W. Sprague, The Banking System of Japan, U. S.
Nat. Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 586, Part IV,
passim .

16 Federal Reserve Bulletin, Vol. IX ( 1923 ) , pp. 804-810.
14 FederalReserve Bulletin , Vol. X ( 1924 ) , p. 432.

32

CLEARING AND COLLECTION OF CHECKS

Checks in Canada

Although checks and clearing houses developed somewhat
later in Canada than in the United States, checks were in use in
Canada by 1825. The circulation there is not unlike that in the

United States with the exception that exchange is charged uni
formly on checks, which tends to restrict their use somewhat. The

use of checks is extensive, however, and is growing more rapidly
than is the use of notes.106 In February, 1924, the bank note cir
culation amounted to $163,000,000 ; dominion note circulation
was $227,000,000 ; and individual deposits amounted to $ 2,000,
000,000.107
Checks in Mexico

It was learned in the investigations of 1910 that checks played
an important part in the medium of exchange in Mexico, this

being partly due to the extensive operations of Americans in that
country.

It was observed, also, that the use of bank notes had

developed slowly and that hard money was preferred for small
transactions.108 Today the general situation does not differ
widely. Gold and silver coin are the principal medium of exchange,
but the use of checks is quite common.

The Consul General of

Mexico in New York City insists that the use of checks in Mexico
is as common as in the United States.

During the ten years of internal struggle following 1910, the
Mexican system of banks was disrupted almost totally, and thera
developed a tendency among the people either to hoard their funds
or to deposit them in banks abroad. This situation made the
monetary system virtually metallic and very inelastic. Formerly,

banks under government concession issued notes, but the internal
struggles caused this practice to be discontinued. Consequently,
no bank notes are issued and only recently have provisions been

made for a resumption of their issue. A law authorizing a central
bank of issue, known as the Banco de Mexico, was approved by

the legislative bodies of Mexico, January 20, 1923.109 When this
bank begins to function Mexico will have bank notes once more,
100 Joseph French Johnson , The Canadian Banking System , U. S. Nat. Mon.

Com . Pubs., 61st Cong ., 2d Sess., Sen. Doc. No. 583, pp. 99-100 ; Victor Ross, A
History of the Canadian Bank of Commerce, Vol. I ( Toronto, 1920 ) , p. 60.
9

107Federal Reserve Bulletin , Vol. X ( 1924 ) , p. 432.
14C. A. Conant, The Banking System of Mexico , U. S. Nat. Mon. Com . Pubs . ,
61st Cong. , 2d Sess ., Sen. Doc. No. 493, pp. 54-57 .
10º Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 590.

NATURE, ORIGIN, AND USE OF CHECKS

33

and these may add some elasticity to the otherwise hard metallic
base. Government notes are not issued .

The Mexican Consul General reports that checks are used
in both wholesale and retail trade in that country, and that de
posits, especially current account deposits, as reported in Mexico,
indicate fairly accurately the extent to which checks are used. He

also pointed out that as in the United States, such deposits may
be withdrawn by means of checks, drafts and other commercial
documents.110
The use of checks in South America

It would carry us too far afield to examine in any detail the
monetary systems used in the various South American countries.

Only Colombia and Brazil will be examined as perhaps typical of
the countries of that continent.

Until quite recently, Colombia has been dependent upon vari
ous unsecured note currencies, both government notes and bank
notes, but mostly government notes, for its medium of exchange.

In July, 1923, a new central bank, called the Banco de la Repub
lica, was organized as the result of the work of a mission of Amer
ican financial counsellors, headed by Professor E. W. Kemmerer
of Princeton University. This new bank, with a life of twenty
years, and with one-half of the capital owned by the government,
is to enjoy the exclusive privilege of note issue. The notes may
be issued against specie, commercial paper, and for the purchase
and retirement from circulation of a certain amount of treasury

certificates. The gold reserve against the combined note and
deposit liability must not be less than 60 per cent.111 These new

notes are replacing the old and undoubtedly will be accepted as
the currency of the country.
It cannot be said that the use of checks in Colombia is

very

general. Sometimes checks appear in wholesale trade, but not fre
quently. Other documents, such as drafts, promissory notes, bills
of exchange, etc., are the more common media. The use of checks
in wholesale trade is confined principally to the large cities. In

retail trading, checks are seldom seen, it being the custom to make
settlements in cash. Deposits, as reported by banks in Colombia
give no definite idea of the extent to which checks are used . Only
the accounts current are indicative. But in addition to this type
110Letter from Mr. Alberto Mascareñas, Consul General for Mexico, New
York City , July 24, 1924.
11 Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 1123.

CLEARING AND COLLECTION OF CHECKS

34

of account, there are certain special accounts, such as the savings
accounts ( Caja de Ahorros ) , installment deposits ( A termino ),

and other special deposits, which may be withdrawn by presenting
the pass book or " title " . There are also deposits which may be
withdrawn by means of telegraphs, cables, and letters . It is
hoped and expected that the use of checks will become more gen
eral as soon as the proper protective legislation can be enacted.11 :
The monetary system of Brazil is composed principally of in
convertible paper money, the use of checks not being widespread,
although on the increase. While Brazil is nominally on a gold
basis, paper money has been issued to such an extent since 1918

by the National Treasury and the Institution for the Permanent
Protection of Coffee and Other Produce, that gold reserves against

circulation dropped to 4 per cent. in May, 1923. In the latter
part of 1922, the Banco do Brasil was transformed into a bank of

issue with the exclusive right to issue notes which are designed to
replace the government issue. These notes are issued against com
mercial credits and are redeemable in gold at a fixed rate.113

One can do no better than quote directly from a letter from
the Brazilian Consulate General relative to the use of checks in

that country, who says, " .
the use of checks has not become
widespread in Brazil, as it has in European countries and in the
United States. This is mainly due to the great distances which
separate the commercial centers of Brazil. From Rio Janeiro,
going north to Bahia, it is 750 miles ; from Bahia to Pernambuco,
fully 400, and Pernambuco to the Amazons, 1,150 miles. In going
south , Rio Grande do Sul is 875 miles. The two great centers,
Rio Janeiro and São Paulo, are linked by rail 350 miles, but com
ication between those other centers mentioned above is by sea.

Owing to these distances, each center is, to a great extent, isolated
and, therefore, banks at these outports, whether local or branches
of the great institution, have to rely mainly upon their own re
sources and retain a strong reserve of cash locked up in their
safes.

" Payment by check in Brazil is, however, coming into general
practice, and, thanks to the initiative of the Banco do Brasil,
clearing houses have been established in the two great centers, Rio
Janeiro and São Paulo. At the outports the trader still looks

with a certain amount of suspicion upon a check and looks for
payment in cash and this involves a constant strain upon the
113Letter from the Consul General of Colonibia , New York City, July 31 ,
113Federal Reserve Bulletin , Vol. IX ( 1923 ) , pp. 592-595, 706-707.

1924.

35

NATURE, ORIGIN, AND USE OF CHECKS
TABLE I

Metallic Reserves, Total Note Circulation, and Central Bank Deposits at the
End of 1913
Per cent of

metallic

[ In thousands of dollars converted at par. )
Metallic
reserves

Austria - Hungary
Belgium
Denmark

Greece

Noteg in
circulation

5,211

505.212
206,010
40,616
21,810
1,102,715
617,240
144,086
54,256

251.421

21.287

19,666
6,973
678,866
278, 453

7,394
802,388
344,339
170,245
5,746

Finland
France

Germany
Great Britain

Gold

304,410
58,941

48,062

170,245

Deposits
34,119
24,450
1,842

5,094
188,886

reserves to
total note
and de
note and

Total

deposit posit lla
liabilities bilities
639.331

66.4

230, 460

26.6 .
50.1

42 , 458
26,904

27.6

188,763

1,291,601
80-6,003

347,193
49,00-6

103,262

62.1
42.7:
34.7.
5.6 .
67.1
23.5 .

491,279

Italy :
287,791
22,627

265,455
22,627

440,717
96,321

63,513

Treasury

504,230
96,321

Total

310,418

288,082

1600,551

61.7

64,523

1,742
3,372

127,445
32,212

50.6

29,493
812,788
230,772
28.766

60,899
12,8 446
8,760
29,242
780,902
92,489
27,372

537,038
125,703
28,840
112,372
110,239
859 , 293
371,335

63,513

Netherlands
Norway

36,823

3,258,871

issue...

of

Banks

12,846
17,692

Portugal
Rumania
Russia

Spain
Sweden

Switzerland

Total ,

Europe ...

11,667
5,793

124,039

39.9.
14.3
25.4
70.1
46.8
31.2
51.2

32,802

62,838
60,568

122,081
29,309
11,389

116,032
1,160,054
493 , 466
92,147
71,957

2,792,281

4,960,221

1,388,980

6,349,201

61.3

1,170,651

1,279,297
118,461

2.1
97.4

1,170,651

1,397,758

10.2

300,761

Canada :

27,142

27,142

108.646

Treasury

115,375

115,375

118,461

Total

142,517

142,517

227,107

227,880

229,100

105.4

1,398,531

1,626.858

23.6

349,485

89.7
30.8
39.7

Chartered banks...

United States :

Fed .

Reserve Bks.

241 , 408

204,949

1,220

Total , No. Amer.
Argentina

383,925

347 , 466
313,497
89,577

228,327

Brazil

89,577
12,499

Uruguay
Total ,

So.

Amer.

Australia
New Zealand

415,573
21,899
25,325

Total, Australasia

India
Japan :
Bank

313,497

47,224

209,093
of

Japan ...

Government

Total

Total .

Asia

South Africa
Grand

total

10,826

290,933
22,275

413,900
21,899
25,325

662,693
48,212
8,147

47,224
109,170

66,359

321,728

111,846
24,427

9,187

290.933
31,462

61.91

125,230

671,880
48,212
133,377

125,230

181,589

26.0

321,728

66.0)

40.8:

9,187

45.4
19.0 .

212,555

61,397

273,952

212,555
45,010

61,397

273,962

49.7

10,027

3,901

48,911

44.1

119,197
26,581

579,293
10.619

65,298
198.947

6:44,591

56.9

236,828

209.566

113.0

4,709,374

3,756,619

6,497,512

3,186,173

9,683,685

48.6.

136,273
21,587

Java

349.485

366,953

1

· From the Federal Reserve Bulletin, Vol. VIII ( 1922 ) , p . 758. An excel

lent table showing the amounts of notes in circulation in the principal countries.
of the world at different dates since 1913 is given in the Federal Reserve Bulle

tin, Vol. IX ( 1923 ), p . 1283. Unfortunately, the table gives no information
relative to deposits, and for that reason will be omitted here. It is unsafe to
infer from the data given in Table I that deposits serve as anything like an
exact indication of the extent to which checks are used in any country . Only in
the roughest way do they show the general tendencies.
*Date of first statement of Federal Reserve Banks, Nov. 20, 1914.

36

CLEARING AND COLLECTION OF CHECKS

banks' resources, especially during those seasons of the year when

the crops have to be moved . In any case, checks are only current
in the towns in which they are issued and the financing of the ship

ments between ports is done by means of bills of exchange, gen
erally drawn at 30, 60 and 90 days. The banker then when nego

tiating these bills during the busy crop season will find his funds
being withdrawn and accumulated at some other part of the re
public, perhaps 1,000 miles away, and these funds have to be got
back . Transfers may occasionally be arranged , but as the move
ment is generally all one way in given seasons of the year, all the
banks find themselves in the same position and the only alterna
tive left to them is to have their accumulated balances shipped
back, the cash being packed in boxes and placed on board the
ship under bill of lading. These shipments naturally incur con
siderable expense for freight and insurance, and this charge, to
gether with the delay in receiving back their funds, has to be reck
oned in the rate of discount in the negotiation of the bills. 114
Notes and deposits in the leading countries of the world in 1913

A rough picture of the general situation as it prevailed in the
principal countries of the world at the close of the year 1913 is

given in Table I. This table probably presents a

better

view of the general situation in the leading nations of the world
than do more recent data. The orgy of inflation through which
the principal countries of the world have passed in the last few
years has tended to obscure what would be the usual practices
under more normal conditions. Table I will give also some infor
mation with respect to certain countries not mentioned above.
*** Letter from Mr. J. C. Muniz, Deputy Consul for Brazil, New York City,
July 21, 1924.

CHAPTER II
USE OF CHECKS IN THE UNITED STATES PRIOR TO 1863

The use of checks during the Colonial period

In order to appreciate more fully the conditions under which
checks originated in what is now the United States, it is necessary
to survey briefly the development of banking institutions in the
American Colonies. It is here that we are to find the origin of
checks, although the banking institutions of the Colonial period

were of such a nature that bank notes as compared with checks
were by far the more common medium of exchange.
The development of banking during the Colonial period
The history of banking in the Colonies is primarily a history of
paper money issues and of the so - called land banks.

The term

“ bank” as originally used in the Colonies had a peculiar connota
tion ; the issue of paper money on the security of land or merchan

dise was spoken of as “ raising a bank. ” The term bank had ref
erence to the issue rather than to any particular institution or
building.

Being destitute of specie as a medium of exchange, and feeling
a need for a convenient and cheap medium, the Colonists resorted
to almost every known expedient to supply it. The idea of using

land and merchandise as security for paper emissions was bor
rowed from England, Scotland and France. Not only did the
scarcity of specie as a basis for the development of deposit bank
ing or the issue of notes probably furnish the prime reason for
the creation of such notoriously bad banking schemes, but there
was a general prevalence of fallacious theories advocating land
banks and other unsound schemes.

Mr. A. M. Davis finds that

the prevailing monetary theories were an echo of what the same
generation was then, or had just been, saying in the old countries .?
A. M. Davis, “Currency and Banking in the Province of Massachusetts

Bay,” Pubs. Amer. Econ. A 8800. (May , 1901 ) , p. 187. The pamphlet literature
of this time supports Mr. Davis' conclusion. Benjamin Franklin was among
the prominent persons who supported such theories.

In 1729, he contended

CLEARING AND COLLECTION OF CHECKS

38

Although almost every conceivable type of banking and paper
money scheme could be found in the Colonies, there were a few
outstanding and common ones which will be described briefly.
Mr. Davis finds that a plan for a private bank was pre
sented in 1671.

The scheme for the bank was entitled, “ A Pro

posal for erecting a Fund of Land, by Authority or Private Per
sons, in the nature of a Money-Bank ; or Merchandise Lumbera to
pass Credit upon, by Book - Entries; or Bills of Exchange, for

great Payments and Change-bills for running Cash .”

The rules

laid down relative to the methods of issuing the bills and keeping

the accounts of the depositors contemplated the establishment of
a sort of clearing house where dealings between depositors could
be adjusted by transfers of accounts. But virtually nothing is
known as to the detailed manner in which the business was carried
on .

It seems to have lasted but a few months.4

Origin of checks, 1681
In the second experiment of which we have reliable information,

is to be found the origin of the check in this country. This early
instrument was devised in New England in 1681 in connection with

a banking scheme called “ The Fund at Boston in New England ." 5
The plan stands forth among the pioneers in the financial experi
ments of the world. The purpose of this Fund was to furnish
credits similar to our modern deposit credit, which should be avail .
able for business transactions through transfers of accounts be

tween members of the Fund, and which might be accepted, ulti
mately, by the public for use.

Certain individuals (grantors ) mortgaged their lands to the
that bills issued on land would be " coined land ” and as a result of the nature of

the underlying security , would be more stable than those issued on the security
of gold and silver which he considered more likely to fluctuate in value. He

thought the value of the land would increase with the population which would
permit the issuing of more bills, thus securing stabilization . See Works of
Benjamin Franklin, Edited by John Bigelow, Vol . I ( New York, 1887 ) , pp.
374-376,

" The word “ Lumber" was a corruption of Lombard according to Davis,

op. cit., p. 10. It was frequently an adjunct of a land bank, staple merchandise
of various sorts rather than land being used as security for issues.

*Davis, op. cit. , p. 69; J. H. Trumbull, The First Essays at Banking and the
First Paper -Money in New England ( Worcester, Mass. , 1884 ) , pp. 10-11 .
'W. G. Sumner, II istory of Banking in the United States ( New York, 1896 ) ,
p. 3.

$ A . M. Davis, The Fund at Boston in New England. Reprinted from the
Proceedings of the American Antiquarian Society ( Worcester, Mass., April

29, 1903 ). Much of the vagueness attaching to this experiment has been cleared
up due to Mr. J. H. Trumbull, who found a rare pamphlet in the Watkinson
Library, entitled Severals Relating to the Fund, which was published in 1682.

CHECKS IN UNITED STATES PRIOR TO 1863

39

Fund, the mortgages including the power to sell, and received
from the Fund a credit upon the books of the company. This
credit was to be passed by book entries similar in principle to the
method employed by the Bank of Amsterdam except that the
credit in the latter rested upon coin, while the credit in the Fund

rested upon land and merchandise. Two methods of passing credit
were provided : “ Bils of Exchange for great Payments” and
“ Change- bills for running cash .” The bills of exchange are sup
posed to have been change-bills of large size. The second means
of transferring credit was provided by pass-bills. After credi!
on the books had been extended to the borrower on the basis of

his mortgaged land, he could use his credit by securing change
bills. To get these bills he made out “... the equivalent
a counter check in modern use, in the following words, Charge my
accompt, fol.—
Debtor , forChange bill now received,
Number—
" This change-bill,
which was largely in the nature
of the modern letter of credit, was circulated in a cumbersome

manner by entering the amount of the transactions on the back
of the change-bill until the credit was exhausted .
But the significant fact is that credit could be transferred in

the Fund, " either at the Office or elsewhere, without the necessity
of taking out change-bills. This was accomplished through the
medium of the pass-bill, which consisted in an order on the man
ager

of the Fund to make the necessary transfers, couched in the

to ac
following language: 'Place of my credit in Fund, fol .
the Sum of — :'.” For all practical purposes
count of
this constituted a check. Here was developed a system of credits
which was used in a limited way among persons who had confi

dence in each other and faith in the judgment of the management

of the Fund, but which did not comprehend the idea of the emis
sion of a denominational paper currency in such form as to be of
general use in trade.
This credit was made to circulate outside of the banks in the

form of change- or pass-bills, the latter in the shape of checks.

It is not known how far the business men of Boston joined in the
enterprise, but the fact that some of the mortgages were kept
alive for nearly four years shows that the acceptors found some
use for their credit and would indicate that the scheme must have

met with some support from sources not specifically set forth in
any evidence at hand. It was the prototype of the proposed Land
*Davis sets forth in detail the transactions in which change-bills were used .
See op. cit ., pp. 14-15 .

40

CLEARING AND COLLECTION OF CHECKS

Bank of 1686 ; of the similar project in 1714 ; of the Connecticut
Land Bank in 1732 ; and of the well -known experiment made in
1740. It is not known whether pass-bills or checks gave way to
denominational currency in 1686 or not, but it seemed to be the

intention to use them in payments exceeding twenty shillings.
By 1714, however, the public had become familiarized with paper
money which was used and considered more simple than the quasi
letters of credit and pass-bills or checks.7 From this time until
the last quarter of the 18th Century we learn nothing more of

checks. Paper money occupied the field for nearly a century and
brought upon the people all the ills that can result from wild
paper money schemes. Before completing the survey of the mone

tary history of the Colonial period it will be instructive to learn
why deposit currency did not develop until almost a century after
this first experiment.
Why deposit currency did not develop in the Colonies

In order to have deposit banking there must be something to
deposit that is in general demand, something that has stability of
value, is readily transferable and into which the deposit can be con
verted at will ; in other words, specie.

The Colonists had very

little specie to deposit, and land and merchandise could not meet
the above requirements. Deposit banking implies that the inhab
itants be in close touch with their banks in order to test readily

the validity of their checks. Checks cannot develop easily in a
sparsely settled country. Deposit banking implies good govern

ment, security of personal and property rights, and confidence on
the part of the people in the government as well as in the banking
institutions. It implies a high degree of activity and competition
in the pursuits of men, and of advancement in prosperity and
wealth, a country relatively exempt from invasion and free from
revolution. Where deposit banking is carried on, the banker is

largely passive ; his deposits depend largely on the favor of others.
In the issue of notes, however, the banker can do something. A
paper circulation requires little effort on the part of the public
and where the people are scattered, as is the case in most colonies,
they can exercise little concerted effort and need the aid of the
banker. Thus, as Walter Bagehot points out, paper issue is the

natural prelude to and promotes deposit banking. No nation as
'Davis, op. cit., pp.16-17.

CHECKS IN UNITED STATES PRIOR TO 1863

41

yet, he says, has arrived at a great system of deposit banking
without first going through the preliminary stage of note issue .
Paper money and banking schemes of the Colonies
Whatever the cause assigned for the issue of paper money,

whether lack of specie or some unsound monetary theory, virtually
every conceivable type was issued either by private individuals,
banks, or the Colonial governments. The first paper money ante
dates the first banking scheme according to Mr. J. H. Trumbull,
who mentions money passing current in 1652. In 1686 a Mr.
Blackwell and others proposed to issue notes and make loans on

the security of land and merchandise. Reference was made to this
scheme again in 1714.10 The first bills of public credit found in

the Colonies were issued by Massachusetts in 1690 in order to pay
the soldiers who engaged in the expedition against Port Royal
and Quebec in the French War ; they were virtually exchequer
bills in anticipation of taxes. There is evidence that there were
paper bills in circulation in 1684, but whether they were issued by
the Colony or were merely the promises of individuals to pay is
not known.11

The first issue against mortgage security was in

Massachusetts in 1711 and repeated in 1714.12
Ordinarily, such notes as those issued by the government on
mortgage security were loaned for a period of time, as five years,

at about 5 per cent. interest, one- fifth of the principal to be re
paid each year. Opportunity was given for a general subscription
by the public. Unlike the scheme of 1690, no provision had to be
made for redemption by laying taxes, and another advantage was
found in the interest which the public treasury would receive with
out any outlay of capital. Similar issues of loan bills took place
in Massachusetts in 1716, 1721 and 1728 ; these circulated side by
side with the ordinary bills of credit.13 In Rhode Island loan
*Bagehot, Lombard Street , 14th ed. ( New York, 1920 ) , pp. 82-88 ; C. A.
Conant , “ Banking and Business Assets," Sound Currency, Vol. IV, No. 23
( New York, 1897 ), pp. 4-5 .

'J. H. Trumbull, The First Essays at Banking and the First Paper-Money
in New England ( Worcester, Mass., 1884 ) , p . 7 .

WW . G. Sumner, History of Banking in the United States ( New York,
1896 ) , pp. 3-4 .
WTrumbull, op. cit., pp . 14-15 ; F. F. Macleod, “ The History of Fiat Money
and Currency Inflation in New England from 1620-1789,” Annals of the Amer
ican Academy, Vol. XII ( 1898 ), p . 233 ; A. M. Davis, “ Currency and Banking in
the Province of Massachusetts Bay ," Pub8. Amer. Econ. A 8800. ( May, 1901 ) ,
p. 61 .

" C. W. Macfarlane, “ Pennsylvania Paper Currency,” Annals of American

Academy, Vol. VIII ( 1896 ), p . 72 ; D. Ř . Dewey, Financial History of the
United States, 6th ed . ( New York, 1918 ) , p. 23.

**Dewey, op. cit., p. 23.

42

CLEARING AND COLLECTION OF CHECKS

bills, loaned out at interest to the people on mortgage security,
were designated as “ banks.”

Nine such “ banks” were issued in

Rhode Island as a Colony and another by the State of Rhode
Island, ten in all during the years 1710-1786.14
In the issue of paper currency, Massachusetts was quickly
followed by New Hampshire, Rhode Island, Connecticut, New

York, and New Jersey — all these previous to 1711. South Caro
lina followed in 1712, Pennsylvania in 1723, Maryland in 1734,
Delaware in 1739, Virginia in 1755, and Georgia in 1760. To use
the words of Professor Dewey,
.
they were monotonously
.

alike in character, in origin , and in results. Ingenuity in devising

variations of the main principle appears to have been exhausted.
There were interest-bearing notes, some of which were legal tender,
while others were not ; there were non-interest-bearing notes, some
of which were legal tender for future obligations, but not for past

debts ; some were legal tender for all purposes, and others not
legal tender between private persons, but receivable for all public
payments. In some instances funds arising from certain sources

of taxation were pledged for the redemption of the notes, in others
not . In some cases they were payable on demand ; in others at
some future time. Sometimes they were issued" by committees, and
sometimes by a specially designated official.” 15 Usually, where
the Colonial governments issued bills of credit on the security of
taxes or lands, the security was supposed to be at least double th :
amount of the issue. Such issues were ordinarily made general
legal tender. In addition to the above methods of issuing paper
money, bills were frequently issued by loan offices.
The well-known land banks were becoming common by 1737,

and Mr. Davis says accounts were opened at the land banks and
transfers of credit made upon the books of the banks.16 Perhaps
the best known land bank was that created in Massachusetts in
1740.
A rival bank known as the Silver Bank was created at
the same time . 117 The land bank of 1740 was quite similar to the

scheme of 1681 described briefly above.

All these schemes were

attempts to “ coin ” land or staples in order to get a substituto
currency for the scarce specie.

Private and public banks of every degree of insecurity were
" E. R. Potter and S. S. Rider, “ Some Account of the Bills of Credit or
Paper Money of Rhode Island from the First Issue in 1710 , to the Final Issue,

1786,” Rhode Island Historical Tracts, No. 8 ( Providence, 1880 ), p. 17.
19Dewey, op . cit . , pp. 23-24.
18A . M. Davis, op. cit . , p. 173.
17See Davis, Chap. VII.

CHECKS IN UNITED STATES PRIOR TO 1863

43

organized to emit bills of credit. Notes of every description cir
culated and these bankers were the inventors of practically every

abuse known to banking. Banks were conceived primarily as a
means of creating wealth, and the banking mania continued until
the Bubble Act of 1741 put a temporary end to the Massachusetts
Land Bank and the Silver Bank. In 1751 Parliament prohibited
any further issue of legal-tender bills of credit by the New Eng
land Colonies, and in 1764 this prohibition was extended to all the
Colonies.

The restriction, however , did not apply to treasury

notes not legal tender which were issued for very brief periods in

anticipation of taxes. During this period some of the Colonies
endeavored to redeem their notes, usually at a great discount.

But notes of loan banks which had not been suppressed , continued
to circulate along with temporary treasury notes, so that in 1774
it was estimated that $12,000,000 were in circulation.18
As a result of these earlier experiences it hardly could be ex
pected that the Colonists would turn away from paper money in
the Revolution. The Continental Currency, first issued in May,

1775, was to be surik by means of taxes, each Colony to find ways
and means to sirik its proportion of bills issued by the Congress.
These notes were made legal tender in July, 1776, as were the
notes of the several Colonies.

In addition to the notes of the

various Colonies and those of the Continental Congress, there cir
culated riotes of the Bank of North America, notes of Robert Mor

ris, and bills of exchange. The Continental Currency sank in
value till it passed at 500 to one, and, to quote Pelatiah Webster,
“ fineilly run itself out to nothing and [died ] not only without
919
aný tumult, but with the general satisfaction of the people."
Growth of deposit currency after the Revolution
At the close of the Revolution, we find checks again in use in

the large centers and from this time on their use steadily in
creased. With the assumption of the modern functions of deposit
banking as well as the functions of note issue by the Bank of North

America chartered by Congress December 21 , 1781 , and by the
State of Pennsylvania April 1 , 1782, and by the Bank of New
York started by Hamilton in 1784, it is not difficult to find evi
dence of a rather extensive use of checks .

Pelatiah Webster, writing in 1786 concerning the Bank of
18Davis, pp. 29-30 .

19Pelatiah Webster, Political Essays on the Nature and Operation of Money,
Public Finances and other Subjects (Philadelphia, 1791 ) , p . 4.

CLEARING AND COLLECTION OF CHECKS

44

North America and the advantages of banking in general, says :

“The advantages would be still greater, if, instead of bank bills,
the owner would take a bank credit, and draw checks on the bank

whenever he needed his money ; this would enable him to pay the
sum exactly, without trouble of making change; he would be able
in any future time to prove his payments, if he preserved his
checks which he received cancelled from the bank , as every man

ought to do ; this would at once free him from all danger of loss by
fire, robbers, mislaying, dropping them on the road, etc., etc. This
practice is found by experience to be so very convenient, that it is
almost universally adopted by people who keep their cash in our
present bank ." 20
In another place Webster writes: " The present funds of the

BANK of North -America, or the cash which supports it, is, 1st,
the bank -stock, or the money paid in by the stock-holders, which is
about 900,000 dollars : and, 2d . the money deposited by men of
all descriptions, who may draw it out by checks on the bank when
ever they please ." 21 In still another place he points out the ad
vantages that are experienced by the State when public payments
>

are made by checks on the bank.22

In Domett's history of the Bank of New York are found some

fac-similes of checks in use as early as 1784. Two of them read
as follows :
“ Cashier of the Bank,

“ Pay to the Bearer John Bush one Hundred and
Seventy four Dollars
“ New - York , the 24th Day of August, 1784- - “ Aaron Burrº

“ Cashier of the Bank,
“ Pay to
fourteen pounds...

.........or Bearer,
Paper.

“ New - York, the 2d Day of April, 1789.
£.14

“Gulian Verplanck :" 23

20P. Webster, op. cit., p. 434. Taken from the Essay on Credit, written in
1786 , and incorporated in the larger work of 1791 .
*Ibid., p. 440.
" Ibid ., pp. 433, 440 .

H. W. Domett, A History of the Bank of New York, 1784-1884, 3rd ed.
(Cambridge, Mass., 1884 ), p. 48. Among the rules adopted by the bank at the
time of its opening, June 9, 1784, and in Article 19 of its constitution one finds

mention of checks. See Domett, op. cit., pp. 14, 20; J. C. Hamilton, Works
of Alexander Hamilton , Vol. II ( New York 1851 ) , p. 333.

CHECKS IN UNITED STATES PRIOR TO 1863

45

We find in some old account books, dated 1790 and 1791, of
one John Stille of Philadelphia, many accounts of checks drawn
in favor of different persons. In the book recording his account
with the Bank of North America in 1790-1793, we find that

practically all of the transactions were carried on by check. The
same was true for his accounts with the Bank of the United States

in 1791 and 1792, and with the Bank of Pennsylvania in 1794.24
Hamilton , in his report on the proposed Bank of the United

States in 1790, said :: " Every loan which a bank makes, is, in the
first shape, a credit given to the borrower on its books, the amount
of which it stands ready to pay, either in its own notes, or in gold
or silver, at his option. But, in a great number of cases, no actual
payment is made in either. The borrower, frequently, by a check
or order, transfers his credit to some other person , to whom he
has a payment to make ; who, in his turn, is as often content with
a similar credit, because he is satisfied that he can, whenever he

pleases, either convert it into cash, or pass it to some other hand,
as an equivalent for it. And in this manner the credit keeps cir
culating, performing in every stage the office of money till it is ex

tinguished by some person who has a payment to make to the
bank, to an equal or greater amount. Thus large sums are lent

and paid, frequently through a variety of hands, without the in
tervention of a single piece of coin ." 25
Thus, it will be seen that the use of checks was fairly common
in the United States by the beginning of the 19th Century and
even before the creation of the first United States Bank in 1791 .

This was especially true in the cities, but to almost no degree in the
smaller towns and rural districts.

The extent to which checks were used ; attempts to determine
importance

Only general estimates have been relied upon thus far to indi
cate the relative importance of checks. It is important to learn
whether there is any method for determining the extent to which
checks are used at any particular time. This is one of the greatest
statistical problems in the field of banking and currency.
Various attempts have been made at different times to esti
mate the relative amount of checks used. The earliest inquiries
" These books are in the possession of Professor Thurman Van Metre of
Columbia University, who kindly loaned them to the author.
23“ Hamilton's Report on the National Bank, Dec. 13, 1790,” American State
Papers, Vol. VII, p. 68 ; Works of Alexander Hamilton, Vol. I ( New York ,
1810 ) , p. 62.

CLEARING AND COLLECTION OF CHECKS

46

were made in England. The first was the Babbage inquiry of
1855.

Babbage used what has been called the “ clearing house

method ,” that is, noting the volume of clearings from time to time
and their relation to the estimated volume of business. He at
tempted , among other things, to determine the proportion of pay
ments made in bank notes by the public, both in town and in the

country. In 1857 William Slater analyzed the operations of a
single banking house. The Lubbock inquiry of 1865 rested upon
the operations of a single bank. Palgrave, in 1873, relied upon
the clearing house and the operations of a few banks. The
Pownall inquiry of 1864 was based upon the investigations of
several banks, while the Martin inquiry of 1880 rested upon the
operations of one bank.26
It must be obvious, even to the casual reader, that these Eng
lish investigations are not valuable as a basis for conclusions ap
plicable to this country. The bases for the inquiries were too
narrow and in some instances not representative enough to yield
valuable conclusions even for that country. The classes of people

who used the banks in England at the times the investigations
were made were chiefly the larger merchants, the great business
firms and wealthy individuals.
The first inquiry as to the relative importance of checks in

the United States was the Garfield inquiry of 1877. Fifty-two
banks, classified into three groups, were investigated, to deter
mine the amount of transactions carried on by checks, drafts and
commercial bills.27 In 1881 , John J. Knox, Comptroller of the
Currency, made an investigation into the proportion of bank re
ceipts composed of credit paper on two dates, June 30 and Sep
tember 17, 1881.

His investigation rested on about 2,000 na

tional banks which showed for June 30 that 91.77 per cent. and
for September 17, 91.85 per cent of the national bank receipts
were in the form of checks, drafts and bills.28 A third inquiry was
made in 1890 by Comptroller E. S. Lacey ; a fourth in 1892 by
Comptroller A. B. Hepburn ; a fifth in 1894 by Comptroller
Eckels ; a sixth in 1896 by the same Comptroller ; and a seventh
in 1910 by the United States National Monetary Commission
under the editorial supervision of Dr. David Kinley. This last
inquiry was based upon the clearing house reports, deposits of
1
2*See David Kinley, The Use of Credit Instruments in Payments in the
| United States, U. S. Nat . Mon. Com . Pubs., 61 Cong., 2d Sess., Sen. Doc. No.
: 399 , pp . 12-19. See also pp . 87-95 below.
" Kinley, op . cit . , p. 20.
** Ibid ., p. 21 .

CHECKS IN UNITED STATES PRIOR TO 1863

47

checks by retailers, wholesalers and all others in the different
types of banks.

This last method has provided , doubtless, the most reliable

data that we have for any particular time. It was sound in prin
ciple and extensive in scope. Unfortunately, space does not per
mit a review at this point of the searching criticisms made by Dr.
Kinley of the earlier American inquiries, although some attention
will be given to them below.29 But regardless of their merits or
defects, it is sufficient to note that for the period we now have
under review there are no data which will show in any exact
ness the extent to which checks were used. We are compelled to

rely upon general statements of contemporary writers which, on
the whole, give a fair picture of the situation in general. In re
viewing the various writers of the period one is struck with the fre
quency with which they resort to the comparative importance of
the two items, “ circulation ” and “ deposits” in bank statements as
an indication of the extent to which checks or notes were used . 30

This raises the question whether any valuable information can be
gathered as to the relative importance of checks and bank notes
by a study of the changes in the items “ circulation " and
" deposits " during any period of time.

Deposits as an indication of the extent to which checks were used
When considering the value of the items as a rough indication

of the growth of deposit currency, it must be borne in mind that
during the period under consideration such reports were most

irregular, were lacking in uniformity, and usually were not to be
had at all . Banking at this time was largely shrouded in secrecy.

Mr. Bland, a member of Congress from Maryland, in a speech
made previous to the dissolution of the first United States Bank ,
said : “ The nature of the loans, the deposits, and all the bargains,
dealings and contrivances, between the Government and the Bank,

are wholly invisible to the public.“31 Mr. Carey, attempting to in
vestigate banking about the same time, complained of the discour
aging destitution of materials.32 “ A Friendly Monitor," 33 writing
2 " See below, pp. 87-95.

*Gallatin relied upon these items as criteria, as did such writers as Condy
Raguet, C. F. Dunbar, C. A. Conant, and others.

"W. M. Gouge, A Short History of Paper Money and Banking in the United
States ( Philadelphia, 1833 ), Part II, p. 219.
"Gouge, op. cit., p. 219.

235 A Friendly Monitor” published a pamphlet in Philadelphia in December,
1819, and was supposed to have been William Jones, the first President of the
second Bank of the United States.

CLEARING AND COLLECTION OF CHECKS

48

in 1819, and finding considerable embarrassment in obtaining in
formation relative to the second United States Bank, said :

“ If I ask a director, the seal of his finger is significantly im
impressed on his lips. There is a species of masonry in banking
which to a certain extent is highly proper and necessary. It im
plies a mutual pledge among the directors that nothing shall be
divulged which may be prejudicial to the interests of the Bank .”" 34
Mr. Niles, during the excitement of 1818-1819, attempted to col

.

lect information respecting all banks then in existence, and though
his correspondence was extensive, he apparently failed in his
object, as the tables, which he gave notice of his intention of pub
lishing, did not appear in his Register.35 Before suspension of
specie payments in 1814, no regular returns were received by the
legislature of Pennsylvania from the banks of that State and
after that time, though accounts were published annually, some
of the important banks for many years made no returns.36 In
1820, Mr. Crawford , the Secretary of the Treasury, made a re
port on the state of the currency, in which he gave incomplete
tables intended to show the amount of capital paid in, the notes
in circulation, the public and private deposits, and the specie in
the banks in 1819. In 1831 Mr. Gallatin published his Consider
ations on the Currency and Banking System of the United States

and his estimates vary widely from those of Crawford. More
over, there was ambiguity in the bank statements that rendered
them useless, not considering the fact that some of the banks were

accused of rendering false and padded statements.37 Gouge, him
self, after attempting for a period of seven years to collect the
accounts of banks, decided in 1833 that they were not worth pub
.
Gallatin, writing in 1831, said : “The mystery with
lishing:38
which it was formerly thought necessary to conceal the operations
of those institutions, has been one of the most prolific causes of

erroneous opinions on that subject and of mismanagement on
their part." 39 The following tables may serve as an illustration of
the type of data available , as well as afford some idea , though a
very incomplete one, of the banking situation during the period
covered by the tables ( Tables II and III ) .
" Gouge, pp. 219-220.
35Ibid .
301 bid.

3 Ibid ., pp. 220-222.
38 Ibid ., p. 223.

3ºAlbert Gallatin, Considerations on the Currency and Banking System of
the United States ( Philadelphia, 1831 ) , p . 70.

CHECKS IN UNITED STATES PRIOR TO 1863

49

TABLE II

Number of Colonial and State Banks, their Capital, Circulation , Deposits,
Specie, and Loans, in the Years Mentioned from 1774 to 18331
Capital
CirculaDeposits
Specie
Year
1774 ..
1784 .
1790 .
1791 .

1792 .
1793 .
1794 .
1795 .
1796 .
1797 .
1798 .
1799
1800 .
1801 .
1802 .
1803 .
1804 .
1805 .
1806 .
1807 .
1808 .
1809 .
1810 .

1811 .
1812 .
1813 .
1814 ..

.

No. of
banks
3
4

6
16
17
17
23
24
25

25
26
28

31
32
36
59

75
159
162
169
2973

2991
88
2918

1815 .

208

1816 .
1817 .
1818 .
1819 .
1820 .
1821
1822 .
1823 .
1824 .
1825 .

246

1826 .
1827 .
1828 .
1829 .
1830 .
1831
1832 .

1833 .

27
307
280

332
34 :
379
41 °
55
60 °

1089 a
329
329
91's

1722 386
1753 35

( In

tion ( In

millions )

millions )

2.1
2.5
12.9
17.1

2.0
2.5

18.0
18.0
19.0
19.2
19.2
19.2
21.2
21.3
22.4
22.6
26.0
39.5
40.4
5.4
5.5
5.9

7.2
6.6 *
42.6
7.9
65.0
80.3
82.2
89.8
90.6

11.0
10.0
11.0

16.0

9.0
10.0
10.5

14.0

2.6

35.5

37.8

17.5
2.0
1.7

2.7
2.8

.9
.7

1.0
1.2
1.6

7.0
6.8
7.4
9.7
11.1

9.6

5.3

45.5
68.0

45.7
40.6
3.0
3.1
3.1
3.8
4.0
4.5
4.9
5.6
48.2
48.4
8,8
10.2
10.2

( In

16.0

10.0

1.6
1.4
1.0
1.7
2.5
22.7
2.6
66.0

Loans

4.0
10.0
9.0
18.0
20.0
21.5
19.0
16.5
16.0
14.0
17.0
17.5
17.0
16.5

9.7

12.8
14.5
16.6
18.2
25.4
110.1
110.1
23.4

( In

millions) millions) millions)

9.0
11.5
11.0
11.6
11.0
10.5

72.3
102.1
9.8
10.8
11.6

( In

2.9
11.1
31.2
5.4
3.2
3.1

4.0
28.0

12.9
117.0

17.0
19.0

150.0

1.1
9.8

12.5

73.6

16.7

3.0
.9
1.0

13.0

14.5
15.6

5.2

1.9

17.4

2.7
2.6

1.0
1.3
1.4
1.4

21.9
23.6
24.2
34.5

14.9
14.5

159.8

2.9
3.0

40.7
39.5
4.6

4.7
5.4

1.3
1.6
1.7

38.9
53.2

57.6

" These data which are found in the Report of the Comptroller of the Cur

rency, Vol. II (1915 ) , p. 958, were compiled from data taken from the Report
of the Comptroller of the Currency for 1876 and from Sound Currency, Vol. II,
No. 13 (New York, 1895 ) . This table is in sad conflict with tables appended to
of the Treasury, March 3, 1841, which are pre
Secretary
the Report of theform
of Table III .

sented here in the

*Massachusetts.

'Rhode Island .

Capital stock of Massachusetts only.
Maine.
'New Hampshire.

CLEARING AND COLLECTION OF CHECKS

50

TABLE III

Condensed Statement of the Condition , at Different Intervals, of All Banks
in the United States
Dato
Jan. 1

No. of
banks

Loans and
discounts

Specie

Circulation

1811

89

15,400,000

1815
1816

203
246

17,000,000

45,500,000

19,000,000

1820

308
330
506

68,000,000
44,863,344
61,323,898
94,834,570

1830
1834
1835
1836
1837
1838
1839
1840

558
567
634
6-63

662
722

19,820,240

Deposits

28,100,000

35,950,470
5-5,659,928
75,666,986

200,451,214
324,119,499
316 5,163,834

22,114,917

43,937,625

103,692, 495

83,081,365

4-57,506,080

40,019,594
37.915,340
35,184,112

140,301,038
149,185,890
116,138,910

115,104,440

45,132,673

135 , 170,995

90,240,146

33,105.155

106,968,572

716,696,867

625 , 115,702
485,631,687
492,278,015
462,896,523

127,397,185
84,691,184

Capital
62,601,001
82,259,690
89,822,422
137,110,611
145,192,268
200,005,944
231,250,337
251,875,292
290,772,091
3.17,636,778
327,132,612
358,442,692

1Extract from tables appended to the " Report of the Secretary of the Treasury ,
March 3 , 1841 ;" also in J. R. Hurd, " A National Bank or No Banks" ( New York ,
1842 ) , appendix .

The number of branches is not given in this table , as it was not the practice
to enumerate them prior to 1835 . The whole number of banks and branches at
the commencement of 1840 was 901 .

Were the materials available in sufficient quantity the follow
ing considerations must be borne in mind : ( 1 ) In the reports as
given, various items are blended, vague, and confused, which make
them misleading, and errors in interpretation unavoidable. ( 2 )
The items " due from banks" and " due to banks" may also repre
sent checks, drafts and notes. ( 3 ) The term “ deposits” in differ
ent reports is found sometimes to mean demand deposits, some
times demand and time, sometimes individual, which are both

time and demand, and sometimes government deposits are included
which fluctuate widely and have little connection with business
transactions or serve in any sense as an indicator of the relative
importance of deposit currency. Moreover, some banks used
government deposits as a basis for note issue. ( 4) Deposits may
be built up by the deposit of either bank notes or checks. If such
deposits represented bank notes or cash deposited, one might say
that these deposits were subject to check and to that extent an
evidence of the use of checks. But these deposits may have been

built up largely by the deposit of checks on other banks as well as
on the same bank and these deposits are equally subject to check.
In the latter case nearly twice as many checks are used as in the

former case. In addition to the fact that these primary ( cash )

deposits may be built up in varying proportions by either notes or
checks or both, it must be borne in mind that a large or small
amount of the deposits may be derivative ( those resulting from
loans ) which may be drawn out in the form of notes or checks and

CHECKS IN UNITED STATES PRIOR TO 1863

51

which represent neither notes or checks deposited.40 ( 5 ) During
a period of expansion the ratio of loans to deposits will steadily

increase in many cases. This is especially true where banks lend
for speculative purposes, as, for example, on call with Wall Street
brokers. Loans tend to mount up, but the derivative deposits are
drawn down. Deposits are relatively small, but they are drawn
down by the use of checks, and the size of the deposits at such
times would not be an indication of the extent to which checks are

used . In 1893, for example, the ratio of loans of the New York
Clearing House banks to deposits rose to 109 per cent. and the
percentage of cash to loans fell to 13 per cent., causing call rates
.

to rise to 74 per cent. As a result of the drastic. liquidation
which followed , the ratio of loans to deposits became 80 per cent.,

and that of cash to loans, 30 per cent. Certainly the increase of
41
deposits in this case did not indicate an increased use of checks.

As a result of these observations, it is obvious that deposits,
even demand deposits, are no exact indication of the extent to
which checks are used during any period. They can serve, in con
junction with the item " circulation ," only over a long period of
time, as a rough indicator of general tendencies. For any par

ticular period we are compelled to rely upon the general state

ments, estimates, and approximations of the various contemporary
writers.

The use of checks, 1791-1811

During the period of the life of the first United States Bank
we find ample evidence of the use of checks in the larger centers.

In writing of the advantages which came to the community from
the establishment of the bank at Hartford, Connecticut, in 1792,

a Mr. P. H. Woodward says : “ Merchants and others learned to
adjust by checks, balances due on mutual accounts. A large pro

portion of domestic settlements was made by transfers of credit
on the bank ledger without the handling of a dollar. Thus the
"In 1909, for instance, Dr. David Kinley presented a diagram which showed
that the percentage of checks in aggregate deposits by States ranged from 75
to 98 per cent. But this percentage had reference, apparently, to primary de
posits - deposits in the sense of receipts — and not to derivative deposits also .
Since derivative deposits were not included Dr. Kinley's data can give but an

indefinite conclusion as to the extent to which demand deposits are repre
sented by checks. See David Kinley, The Use of Credit Instruments in Pay
ments in the United States, p. 220. Today derivative deposits are estimated

to be nine or ten times larger than primary deposits. See C. A. Phillips, Bank
Credit (New York, 1920 ), Chap. VI ; Dewey and Shugrue, Banking and Credit
( New York , 1922 ) , p. 151 .

"S. S. Huebner, The Stock Market ( New York, 1922 ) , p. 302.

52

CLEARING AND COLLECTION OF CHECKS

institution put into operation a set of appliances that manifolded
the volume and effectiveness of the funds within reach of the com

munity." 42 He also gives a fac -simile of a check drawn by Noah
Webster on the bank in 1793 as follows :
"Hartford Bank

“ Hartford , Jany. 30th , 1793
“ Pay to NW

........

20 Dollars

or Bearer,
Dollars
“ Noah Webster .'943

Another interesting check drawn in 1798 was as follows :
“Mount Vernon, May 18, 1798.
“ The Cashier of Discount and Deposit - Baltimore,
“Will please pay Robert Morris, Esq., or bearer the
sum of one thousand dollars and chg. same to my acct.
( Signed )
“George Washington .
“ 1,000 dollars. " 44

Mr. Erick Bollman, in analyzing the first six months' activities
of the first United States Bank, concluded : “ These observations

establish the important fact that six hundred and fifty thousand
dollars specie [ the first quarterly installment required ] or active
capital, were sufficient to do business to the amount of six million
dollars. And , as it would hardly have been prudent to issue notes
much beyond the means of the bank to answer them, the greatest
part by far of these six million dollars loaned by the bank must

have remained in the form of bank credits .” 45 In another place
he says : “ Banking rests on the experience that bank credits are a
more convenient circulating medium than specie, or even than
bank notes. In consequence of which banks absorb specie, giving
out some notes, but above all, much credit, portable, transferable
and divisible, in the form of checks ; and by re-employing part of
the specie absorbed, they double their profits.”46
: He thought it
"P. H. Woodward, One Hundred Years of the Hartford Bank (Hartford ,
Conn., 1892 ) , p. 80.
“Ibid., p. 49.

“ Now York Times (July 1, 1923 ), p. 1. This check is in the possession of a
Mr. Albert Bauer, Brookville, Pa.

“Erick Bollman, Paragraphs on Banks ( Philadelphia , 1810 ) , pp. 32-33.
**Ibid ., p. 34.

58

CHECKS IN UNITED STATES PRIOR TO 1863

highly improbable that the subsequent payments of the install
ments resulted in much additional specie, as they would be paid
largely in notes or checks on the bank itself. Further he says :
“ The most favorable situation of a bank, therefore, would be to be
the only one in the country, and to have for customers all the mer
chants in it, because then all payments would be made in checks
on the same bank and the call for notes would be extremely limited .
For this reason the Bank of the United States was able to do so

much business with so little specie when it was just established . As
banks increase the custom naturally divides, which tends
9747
to cause the issue of more paper.
.

Noah Webster estimated in 1801 that the gold in the vaults
of the 39 banks in the United States (including the six branches
of the United States Bank) was about 23 millions, about the
amount of their aggregate capital, and that the banks lent about
one and one-half times their capital, or something over 34 millions
in 1801. " But, ” he says, “ it must not be inferred from this fact
that bank notes to the amount of 34 millions are constantly in

circulation. So far is this from the truth, that in general the
notes in circulation do not exceed the amount of the capital stock.
To understand this, it must be considered , that in all trading

towns, the merchants deposit their money in the bank—there they
receive and make payments — and the payments are made without

ever moving a cent of money from the vaults. The money of the
merchants is lodged in the bank, and the property is transferred
by check, or draft, payable to the bearer, the amount of which is
debited to the drawer and credited to the bearer. The operation

is simply a change of credit from A to B and the money is never
touched by either party. The bank lends a thousand dollars to
A, who has credit for the amount - A draws upon the bank in
favor of B - and the amount is carried to his credit — no money
is taken from the bank ." 48

Webster estimated that about one

fourth to one-third of all the money lent by the principal banks
was never removed, either in specie or notes, but stood on the
books to the credit of the borrowers, or of those who receive it

in payments through the use of checks. The notes in circulation,
he thought, rarely exceeded the amount of the capital stock.49

Writing in 1810, Erick Bollman says : " The bank discovers
" Ibid ., p. 37.
" Noah Webster, Miscellaneous Papers on Political and Commercial Subjecte
( New York, 1802 ) , pp. 46-47.
" Ibid .

CLEARING AND COLLECTION OF CHECKS

54

that the greatest part of its actual disbursements are merely those
required for the petty cash and house expenses of its customers,
but that all the great payments are made in bank credits and are

effected by transcribing certain sums from the accounts of one
description of customers to the accounts of others." 50 In another

place he says : “Invariable experience shows that the public prefers
bank notes to specie, and bank credits to both, and must prefer
them, because they answer the same purpose with less risk and
much less trouble ." 51

The Treasury officials, during the entire time of the first
United States Bank's existence, gave out no statement of its
affairs except when Congress called for information. Only two

reports which show notes and deposits seem to be in existence ;
these were made to Congress in 1809 and 1811 by Gallatin and
'were as follows :52

Capital stock

Circulating notes outstanding
Individual deposits ..
United States deposits

January, 1809

January, 1811

. $ 10,000,000
4,500,000
8,500,000

$ 10,000,000
5,037,125
5,900,423
1,929,999

In addition to acting as a government depository the Bank
transferred government funds from place to place without charge
and gave the government immediate credit at any branch for funds

deposited at any other branch. In Philadelphia, the United States
Bank maintained close relations with the Bank of North America

and the Bank of Pennsylvania, making daily settlements and ex
change of notes. The same co - operation existed at first between
the New York branch of the United States Bank and the Bank
of New York . 53

Use of checks, 1811-1816

Soon after the expiration of the charter of the first United
States Bank, a large number of local banks sprang up under the

pecuniary exigencies produced by the withdrawal of so large an

amount of bank credit, as necessarily resulted from the winding
up of the affairs of the United States Bank-an amount falling
“ Erick Bollman, op. cit., pp. 15-17.
51 Ibid., p. 36.
6aJ. T. Holdsworth, First Bank of the United States, U. S. Nat. Mon. Com .

Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 571 , p. 112.
B3J . T. Holdsworth and D. R. Dewey, First and Second Banks of the United
States, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d Sess ., Sen. Doc. No. 571 , pp.

40, 51 , 62, 63; Henry Adams, Writings of Gallatin, Vol. I ( Philadelphia, 1879 ),
p. 171 .

CHECKS IN UNITED STATES PRIOR TO 1863

55

little short of $15,000,000. In 1811 there were 89 banks in the
United States ; in 1815 there were 208 ; and in 1816, 246.

Circu

lation increased from $28,100,000 in 1811 to $45,500,000 in
1815 , and to $68,000,000 in 1816. There are no data relative to

deposits.54 These banks, released from the salutary control which
the United States Bank had exercised over local institutions, com

menced the system of imprudent trading and excessive issues,
which speedily involved the country in all the embarrassments of
a disordered currency. The extraordinary stimulus of a heavy
war expenditure, derived principally from loans, and a corre

sponding multiplication of local banks, hastened the catastrophe
awaiting the government. “ The last year of the war presented
the singular and melancholy spectacle of a nation abounding in
resources, a people abounding in self-devoting patriotism, and a
government reduced to the very brink of avowed bankruptcy, solely
for the want of a national institution which, at the same time that

it would have facilitated the government loans and other treasury
operations, would have furnished aa circulating medium of general
credit in every part of the Union ." 55

The depreciation of the currency ranged from various low
degrees to as high as 25 per cent.56 Gouge, in writing on the con
dition of the currency and banking during the years 1814-1816,
quotes from a contemporary writer : " .
we are subject to
some inconveniences in our transactions at market, and in petty

dealings ; but as we become accustomed to the use of paper money,
the disadvantage will vanish. All large mercantile negotiations
are conducted as they have hitherto been, by bank notes, or checks
upon banks. " 57

Although checks were used during this period, especially in

the larger transactions, the period is noted primarily for the rapid
growth of weak banks and the issue of depreciated bank notes.
Note brokers sprang up and the shaving of bills began to be a
regular business. This general system of brokerage in the buying
and selling of notes flourished from 1811 on down to the '30s and
"Extract from tables appended to the Report of the Secretary of the Treas
ury, March 3, 1841 ; also in J. R. Hurd, A National Bank or No Banks ( New
York, 1842 ) , appendix.

McDuffie's Report on Bank of United States, April, 1830, ” in T. H. God
dard, A General History of the Most Prominent Banks of Europe, etc. ( New
York, 1831 ) , p. 143.
sNiles in his Weekly Register said that the rates of depreciation ranged

from 12 of 1 per cent. to 75 per cent. See Niles' Weekly Register, Vol. XIII
(Oct. 17, 1817 ), p. 97.
" Gouge, op. cit., Part II , p. 70.

56

CLEARING AND COLLECTION OF CHECKS

'40s. The merchant receiving bank notes sorted them into cur
rent and uncurrent and could tell how great the discount would

be by consulting the “ Bank Note Reporter” .58
The second United States Bank and the use of checks, 1816-1836
The second United States Bank, like the first, was a bank of

deposit, discount and issue. The note issues rested upon the gen
eral assets of the bank .

In addition to receiving general and

special deposits, it and its 19 branches acted as government depos
itories, and transferred the public funds from place to place
without charge. To individuals it furnished exchange at rates
ranging from par to 112 per cent.,, the most common being 12 of
1 per cent. This bank was responsible for restoring the State cur
rencies to their face value ; this was done by driving out of circula
tion all that could not be made payable in specie on demand. It
used its notorious branch drafts as one means of forcing State
banks to contract their currency. These drafts were exchanged
for State bank notes which were then presented to the State banks

for redemption .
It was also the practice of this bank to ex
change notes with the neighboring banks once each week, and for
the creditor bank to receive the difference in specie. This tended
to prevent State banks from enlarging their issues beyond the
limits of prudence.60

The United States Bank was the center of a “ single banking
reserve system , " due not to the fact that State banks kept their
reserves in its vaults, but to the fact that they made no particular
effort to keep an adequate reserve and trusted the United States
Bank to protect them in case of an unusual call for the precious
metals.61 However, it was the announced policy of this bank not
to furnish the State banks the facilities of exchange, the facilities
for the clearing and collection of checks and drafts, or for the
transporting of specie to liquidate balances, on the ground that
" an accommodation of this sort would enable the State banks to

extend to their customers all the facilities and advantages in ex

change which the Bank of the United States could do.

"962
.

.

SD. R. Dewey, State Banking Before the Civil War, U. S. Nat. Mon. Com .
Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 581 , pp. 107-112 .
6° R . C. H. Catterall , The Second Bank of the United States , ( Chicago , 1913 ) ,
pp . 441, 444.

do Ibid ., p. 430.

See George Tucker, The Theory of Money and Banks ( Boston, 1839 ),
p. 277 .
62President Jones of the Bank of the United States to the office at New

York , June 28 , 1817, American State Papers, Vol. LX, pp. 328-329.

CHECKS IN UNITED STATES PRIOR TO 1863

87

As a result of this policy the New York branch was instructed to
decline, in the future, to receive for collection the drafts or checks
of the banks in that city upon banks in other cities until author
ized by the board of the head office.68
Catterall, in a chart, shows deposits of the second Bank of

the United States exceeding its note issues from January, 1817, to
about June, 1830, after which date they dropped rather abruptly
while note issues continued to increase.64 He says : “ The deposits, .
which constituted by all odds the most important of these elements
[ credit instruments ] in the bank's circulation, were almost or
quite as large a part of the circulation as the note issue ." 65 But a

large part of the deposits consisted of government deposits. Bear
ing in mind the limitations to the value of any table as a true
indication of the extent to which deposit currency is used, the
following table may offer additional support to Catterall’s con
tention ( Table IV ) :
TABLE IV

Average Amount of Notes and Deposits of the Second Bank of the United
States, 1819-18291
1819 .

1820 .
1821 .

1822 .
1823 .
1824 .
1825 .
1826 .
1827
1828 .
1829 .

Deposits

Notes ( gross ) '

5,734,682
6,581,628
6,990,073
6,365,570
10,401,786
12,918,108
12,885,829
12,578,523
13,727,274
14,454,169
15,172,164

5,056,829
4,410,332
5,609,220
5,562,335
4,671,271
5,935,496
8,836,646
10,235,528
10,808,244
12,414,390
15,011,352

*This table was taken from Henry Adams, Writings of Gallatin, Vol. III
( Philadelphia, 1879 ) , p. 363.
" The actual amount of circulation is generally four -fifths of the gross

amount, the rest being notes in transitu, or accumulating in offices where they
are not payable.

The circulation of bank notes was principally in the South
and West and since the greatest business was in the East and
North it seems fair to conclude that checks played a prominent
part in those sections. The following statement shows the places
where the notes of the United States Bank in actual circulation

were payable in September, 1830 :
* Loc . cit ., p. 329 .

" Catterall, p. 427.

€ 1bid ., pp. 428-429 .
" See above, pp. 47-51 .

58

CLEARING AND COLLECTION OF CHECKS
$ 834,492
834,733
1,367,180
1,176,240
3,074,045

Payable in New England .
Payable in New York .
Payable in Philadelphia.

Payable in Baltimore and Washington .

Payable in Southern States ..
Payable in Northwestern States including Buffalo and
3,261,547
Pittsburgh
4,799,420
Payable in Southwestern States..
$ 15,347,657

The general banking and currency situation, 1816-1836
The character of the local banks during this period varied
greatly, depending upon the available amount of surplus capital
in different sections of the country and the degree of past commer

cial experience of the communities in which they were established.
Each State worked out for itself a system which presented with
some degree of accuracy the current stage of economic thought
and development .

Substantially three systems of note issues were tried in differ
ent parts of the country : ( 1 ) Issues based only upon the general
assets of a particular bank as in New England ; ( 2) issues based
upon a general safety fund, introduced in New York in 1829 to

supplement general asset banking ; and ( 3 ) issues based upon the
credit and faith of the States, as in the South and West.68

In a general way it may be said that deposits were more im
portant than notes in the larger cities while the reverse was true
for the smaller cities and country towns. The city banks de
pended upon the deposits resulting from discounts rather than

upon the circulation of notes for profit, while the reverse was true
for the country banks. The following report for the years 1820

and 1824 shows in a rough way the relative importance of deposits
and notes for a few country banks in New York :
Capital
( paid in )
$ 319,888.05
3 country banks, 1820 ...
6 country banks, 1824
642,816.05
8 New York City banks and 3 Al
11,252,160.00
bany banks, 1829 ....
11 country banks, 1829 .
2,906,413.00

Notes

$ 394,018.00

1,096,974.07
3,528,623.00
3,137,510.00

Deposits
$ 36,178,01
133,138.43
4,448,088.00

1,042,865,0070

Distinguishing the seven large cities of Boston, Salem, New
67 Adams, Writings of Gallatin, Vol . III, p. 453. See also Dewey, Financial

History of the United States, 8th ed. ( New York, 1922 ) , p. 153.
** Dewey, op. cit., pp. 154, 155.

"R. E. Chaddock, Safety - Fund Banking System in New York, U. S. Nat.
Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 581 , p. 237.
* Ibid ., pp. 239-240.

CHECKS IN UNITED STATES PRIOR TO 1863

59

York, Philadelphia , Baltimore, Charleston, and New Orleans from
the other cities, Gallatin showed the situation to be as follows in
1829 :

Seven large cities..
The U. S. Bank .

Remaining banks.

Specie
Notes
Deposits
Capital
$ 53,211,605 $ 17,144,422 $ 23,137,129 $ 7,258,025
34,996,270
56,980,663

13,148,984
31,130,492

14,778,809
17,643,990

7,175,274

7,681,61871

Eleazor Lord, writing in 1834, said : “ The notes circulated by
the banks in the principal cities probably do not amount to more
than a quarter of one per centum of the amount of deposits and
of payments received by those banks, that is, payments of notes

discounted, and notes collected by them .”" 72 In another place he
estimated the annual amount of transactions in the country to be

eight or ten billions of dollars ; the whole amount of currency in
specie and bank notes was reckoned at about one hundred millions.
This, he thought, illustrated the great extent to which credit was
used.73

From January, 1830, to January, 1837, 300 new banks were
created with a capital of 145 millions.

This increase was due

partly to the great demand for capital applicable to commercial
accommodation and other purposes and partly to the anticipa
tion of and the expiration of the charter of the United States
Bank.74 In fact, they increased their capital far beyond what
might have been wanted for useful purposes, but the proportion of
notes to deposits in 1837 was no greater, if as great, as in 1829.
The following data will show the situation at the respective dates :
1829

Capital
329 banks ascertained and estimated . . $ 110,192,268
United States Bank ..
35,000,000
Total

Notes

$ 48,274,914
13,048,984

Deposits
$ 40,781,119
14,778,809

$ 145,192,268 $ 61,323,898 $ 55,559,928 "
1837

No. of banks and branches ( 769 )
Pa. Bank of the U. S. ( 19 ) ..
Total 788

. $ 255,772,091 $137,737,922 $125,064,776
35,000,000
11,447,968
2,332,409
. $ 290,772,091

$149,185,890

$ 127,397,185 "

" Adams, Gallatin , Vol. III, p. 295 ; for additional data supporting this view,
see op. cit., pp. 280, 296.

* Eleazor Lord, Credit, Currency and Banking, 2d ed. ( New York, 1834 ),
P. 20 .

7a Ibid ., pp. 34-35 .

" Adams, Gallatin , Vol. III, pp. 386-387.
18 Ibid ., p. 296.
* Reportof the Secretary of the Treasury, January 8, 1838, 25th Cong ., 3rd

Sess ., Sen. Doc. No. 2, Vol. 1 ( 1838-1839), pp. 39-42; also in George Tucker,
The Theory of Money and Banks ( Boston, 1839 ) , p. 404. It will be noted that
the total of banks in 1837 which is given as 788, does not harmonize with data

in Table VI on p. 65 below.

60

CLEARING AND COLLECTION OF CHECKS

The use of checks, 1836-1863

In this period, distinguished for its wildcat banking, we find
the practice of using checks in cities and bank notes in rural dis
tricts continuing as in the earlier periods, with the difference that
the use of deposit currency increased to such an extent that de

posits surpassed notes before the end of the period.
The definite determination in 1837 of the right of a State to

establish under its control a bank with power of note 77
issue in the
case of Briscoe v. The Commonwealth of Kentucky,” together
with the dissolution of the second United States Bank, and the in

troduction of the free banking system, which had its origin in New
York in 1838 and was soon adopted in the West by other States,
seemed to give an impetus to wildcat banking. The number of
banks, which, in 1830, had been 330, with $145,000,000 of capital,
had increased to 829 with a capital of $317,000,000 by January 1 ,

1838. So great an increase of banks and the consequent distention
of the circulation, contributed, with other circumstances, to the

general suspension of 1837.78
Wildcat currency secured a new lease on life ; this was espe
cially true in Indiana, Illinois, and Wisconsin where notes could be

issued on the security of various types of bonds. The great weak
nesses of the banking and currency systems manifested them

selves in the panics of 1837, 1857, and 1861. The general sus
pension of specie payments in 1837 began in New York and soon
reached to the other States, the New England banks holding out
the longest. In 1838 a rather general resumption took place, but
was followed by a second suspension in 1839, which was accom
panied by many failures especially in the West and South . This
was the real collapse of the system ; 343 out of 850 banks closed
entirely, and 62 partially. This second suspension lasted in
Pennsylvania until January, 1841.79
The western free banks had a large circulation outstanding,
when most of them went down in the crash of 1857, which was due

partly to heavy railway expenditures and partly to general busi
ness expenses. Out of the 94 free banks in Indiana, 51 had sus
pended even before the panic of 1857. These banks went down
again in the crash of 1861 and their securities pressed on the
market sank to low figures, the notes falling even lower than the
securities. In writing of these banks Horace White said : " What
" 11 Pet. 257 ( 1837 ) .
18Tucker, op. cit ., p. 362.

mw . G. Sumner, History of American Currency (New York, 1884 ), p. 132.

CHECKS IN UNITED STATES PRIOR TO 1868

61

it turned
ever may have been the design of the law-makers
out to be a mere scheme to enable speculators to sell bonds to the
.

public, and continue to draw interest themselves. It was pos
sible under these laws for a man to borrow, say, $ 100,000 of state

bonds, deposit them with the auditor, receive from him circulating
notes, buy wheat with these notes, send the wheat to New York,

and sell it for money with which to buy more bonds to deposit
with the auditor ; and so round and round. This was actually
done in some cases, and it was considered an effective way of pro

curing an adequate supply of money."80 This was not the experi
ence, however, of those banks which issued notes on the basis of

the general assets of the banks, as did the New England or the
Louisiana banks, for example.81
Space will not permit even a general description of the char
acteristics of the banking institutions as found in the different
sections of the country during this period.82 Table V will give a
fair picture of the sectional differences in 1838 :
TABLE V

Number and Condition of Banks of the United States, Jan. 1 , 1838
Local Division '

Eastern States

No.
.321

Middle States

.213

Southern States
Southwestern States
Western States

Pa. Bank of U. S..
Total

89
94
92
20
.829

Capital

Notes in
Circulation

Deposits

$ 65,257,540
81,169,776
32,111,573
75,048,052
29,049,837

$ 18,307,544
29,631,248
20,156,891
25,194,559
16,080,601

$ 11,412,803

35,000,000

6,768,067

2,617,253

$ 317,636,778

$116,138,910

$ 84,691,184

31,999,806
9,707,821
18,874,996
10,078,505

" Tucker, op . cit., p. 405. From the Report of the Secretary of the Treasury

(Woodbury), June 7, 1838, 25th Cong., 20 Sess., Sen. Doc. No: 471, Vol. VÍ
( 1837-1838 ), p. 2.
'Eastern States — Maine, New Hampshire, Vermont, Massachusetts, Rhode

Island, Connecticut. Middle States—New York, Pennsylvania, New Jersey,
Delaware, Maryland, District of Columbia. Southern States— Virginia, North
Carolina, South Carolina, Georgia, Florida. Southwestern States - Alabama,
Louisiana, Mississippi, Arkansas, Tennessee. Western States — Kentucky, Mis
souri, Illinois, Indiana, Ohio, Michigan, Wisconsin .

The descriptions of the use of checks during the period, 1836
1863, are not strikingly different from those of the preceding
period . Condy Raguet, writing in 1839, said : “ So true is it, that
deposites [ sic ] constitute currency as much as bank notes, that in
" Horace White, “National and State Banks, ” Sound Currency, Vol. IV, No.
10 ( New York, 1897 ) , pp. 8-9 .

* C. A. Conant, “Banking on Business Assets," Sound Currency, Vol. IV,
No. 23 ( New York, 1897 ) , p. 15.

Such a description has been given by George Tucker, op. cit., pp. 362, 365,
366, 370-374 .

62

CLEARING AND COLLECTION OF CHECKS

all our commercial cities, no other currency is used in all extensive
transactions. In all the cities of the United States, nearly all pay

ments of money, except in very small sums in retail transactions,
are made in checks on banks, and it is very clear that if deposites
were not as much currency in the money market as bank notes, all
dealers and traders would be furnished with the latter, instead of
the former ." 83 Deposits in large commercial cities constituted

the largest portion of the currency. In the city of New York, on
the 1st of June, 1837, shortly after the stoppage of specie pay
ments, the amount of notes in circulation outstanding for all the
city banks, was $5,283,950, while the amount of deposits, public
and private, was $ 15,843,171 . By the contraction which sub

sequently took place, the notes in circulation were reduced, by the
1st of April, 1838, to $2,322,186, and the deposits to $ 11,
492,486.84 He pointed out, moreover, that a large part of these
notes were circulating at a distance from New York at all times.
Condy Raguet said, further, that on November 3, 1838, the
fifteen banks in Philadelphia, exclusive of the Pennsylvania Bank
of the United States, had notes in circulation to the amount of
$4,522,883, while the amount of the deposits was $6,813,503.

" On the 1st of November of the same year, ” said Mr. Raguet, " the
circulation of the [ Pennsylvania ] Bank of the United States
(exclusive of post notes ) was $8,499,378, and the deposites
$8,591,235, but of these notes by far the largest proportion were
circulating at a distance from Philadelphia, and, consequently,
formed no part of the currency of that city.985 The fact that
in cities a very small amount of business was done by either bank
notes or specie as compared with checks, while smaller towns used

more notes and specie, and the isolated communities still more,
was pointed out by H. C. Carey in 1840.86 Professor Dewey says
that “... after 1840 there began to be an increase in deposits
and a relative decrease in the use of bank notes. In that year de
posits, for example, in New York amounted to only $16,000,000,
but by 1860 they had increased over sevenfold, while capital

and circulation increased only threefold. Specie holdings were
about four times as much , but if the great increase in demand
obligations of depositors is considered, this increase was entirely
**Condy Raguet, A Treatise on Currency and Banking, 2nd ed. ( Philadel
phia, 1840 ), p. 185.
841bid ., p. 186.
85Ibid ., p. 187.

SºH . C. Carey, “ Medium of Exchange,” Hunt's Merchants' Magazine, Vol. III
( New York, 1840 ), p. 50.

CHECKS IN UNITED STATES PRIOR TO 1863

63

inadequate. In 1857, when the panic occurred, the specie reserve
amounted to only about 13 per cent. of the combined obligations
of depositors and note holders. It was then realized as never be
fore that deposits constituted a liability which it might be ex
tremely difficult to meet in times of a crisis."87

Writing in 1841 , Gallatin pointed out that deposits consti
tuted the principal currency in the larger cities but that country
banks could not exist unless they had the right to issue notes.88
He insisted that the excess of note issues occurred principally in
the western States and generally wherever country banks were
established ; this was explained , as in Colonial days, on the ground
of the lack of specie or capital.89
Stephen Colwell, writing in 1860, likewise pointed out tha:

deposit currency constituted the principal medium of exchange
and that after about 1835, bank notes steadily became of less im

portance in the United States as compared with deposit currency.

He said : “ . . . that the proportion of bank notes employed in
Great Britain is decreasing, and has been for fifty years. A com
parison of bank returns, in this country, for the last twenty - five
years will exhibit a similar result.

.

• That which has been

.

most extensively employed, and which, to the greatest extent, sup
planted the circulation of bank notes in Great Britain, and in
the United States, is bank credits, which operate under the name
of deposits. A very large proportion of the individual paper of
men of business, in the United States, is discounted by the banks
without taking the form of bank-notes, or being included in the

circulation of the banks. The proceeds of the discounted paper
are merely placed to the credit of the party, and take their place
as deposits." 90
In another place he says : “The deposits in the principal cities
greatly exceed in amount the circulation of the banks, and their
operation or working is far more efficient and active than that

of the bank -notes."91 He points out that the deposits consisted
in part of bank notes absorbed from the circulation, but chiefly of
credits granted upon the discount of commercial paper, and esti

mated that probably not more than one per cent. of the deposits
"D. R. Dewey, State Banking Before the Civil War, p. 215.

* Adams, Gallatin , Vol. III, pp. 374-376.
* Ibid ., p. 379.
* Stephen Colwell, Ways and Means of Payment: A Full Analysis of the

Credit System , with its Various Modes of Adjustment ( Philadelphia, 1860 ),
p. 240 .

Ibid. , p. 241 .

64

CLEARING AND COLLECTION OF CHECKS

were made in gold or silver.2 In still another place, he pointed
out that in the exercise of the agency of payment by banks, bank
notes played but a small part.83 Further on he remarks : " The
fund employed to effect payment of these great sums is mainly
that which is called deposits in the banks. For, however great
the amount of payments effected by the circulation of bank-notes
deposits are the chief agent of the bank .”' 94 Finally he
adds : “ A distinction should be made between country and

city banks. The former issue bank-notes more largely, in propor
tion to their capital and business, than the latter. The country
banks, which rely for their business and profits upon their circu
lation, have more to answer for, in reference to the over-issue of
bank-notes."95

After the establishment of the Sub-Treasury System in 1846,

the Federal government went on its way using specie in all its
transactions, and gave up all responsibility for the currency used
by the people. From this time until the Civil War, the country
depended entirely on the local banks. But banking capital
reached its lowest ebb in 1846, $196.9 millions ; bank note cur
rency was at its lowest ebb in 1843, $58.6 millions. Banks dur

ing this period had changed considerably as compared with any
thing in their previous history. They ceased almost entirely to be
political ; this was in part a consequence of their great number
and the smallness of each. Banks also had ceased to be so mys

terious. In spite of their opposition, they had been brought in
this period to submit to the visitorial powers of the State and to
make public statements of their affairs. In older parts of the
country also the accumulation of capital had now become so great
that the old banking system of paper-mongering was out of date,

though the system was not given up by the banks in the country
towns, by any means. “ The banker's art consisted still to a great
extent, in getting a 'good circulation for his notes, and when to
put them out and when to take them in ; but, at least in the large

centers, the accumulation of capital was such as to feed the de
posits and give the banks an opportunity for a higher art of bank
ing.. In such places the circulation sank in importance.
o Ibid ., p .

242.

Ibid ., p. 445.

«Ibid., p. 445 .
esIbid ., p. 479.

The

CHECKS IN UNITED STATES PRIOR TO 1863

65

check began to supersede the bank note, and the predominance of

the currency over the affairs of men began to decline."96
TABLE VI

Number of Banks, Capital, Deposits and Circulation, 1830-1863

( Capital, deposits and circulation in millions)
Year
1830 ...
1831 .
1832 ..
1833 .
1834.,

No. of
banks
394
426
448
472
506

Capital
182
186
191
198
200

1841.

784

231
251
290
317
327
358
313

1842 .
1843 .

692

260

691
696
707
707
715
751
782
824
879

228.9
210.9
206.0
196.9

750
1208

207.9
301.4
332.2

704
713
758
829

1835 .

1836 .
1837 .

1838 .
1839 .
1840 .

840
907

1844 .
1845 .
1846 .
1847 .

1848 .
1849 .
1850 .
1851 .
1852 .
1853 .
1854 .
1855 .
1856 .

1857 ..
1858 .
1859 .
1860 .

1861 .
1862 .
1863 .

1307
1398
1416

1422
1476
1562
1601

203.1
204.8
207.3
217.3
227.8

343.9

370.8
394.6
402.0
421.9
429.6

Deposits

Circu
lation

58

51

62

57

67
71

62

75
83

94
103
140

115
127
84
90
75
64
62
56.2
84.6

88.0
96.9
91.8
103.2
91.2
109.6
129.0
145.6
188.2

190.4
212.7
230.4
185.9
259.6
253.8
257.2

296.3
393.7

68

149

116
135
107
107
83.01
58.6
75.2
89.6
105.6
105.5

128.5
114.7
131.4

155.2
146.1
204.7
187.0
195.7
214.8
155

193.3
207.1
202.02
183.7
238.73

*Data for the years 1830-1842 from W. G. Sumner, A History of Banking
in the United States ( New York, 1896 ) , p. 456.
* Data for the years 1843-1861 from D. R. Dewey, Financial History of the
United States, 8th ed. ( New York, 1922 ) , p. 260.
'Data for the years 1862-1863 from W. G. Sumner, History of American

Currency (New York , 1884 ), p. 188 ; Report of the Comptroller of the Cur
rency ( 1907 ) , p. 409.

A general picture of the situation from 1830 to 1863 may
seen from Tables VI and VII.

be

Although Table VI shows that

"W. G. Sumner, History of Banking in the United States ( New York, 1896 ) ,
pp. 414-415 .

66

CLEARING AND COLLECTION OF CHECKS

while deposits exceeded notes during the four years, 1830-1833,
they did not succeed in passing them permanently until 1855.97
TABLE VII

Condition of Banks by Sections, 1860-1861'
No. of
banks and
Section
Eastern States
Middle States
Southern States
Southwestern States
Western States

Capital

branches
( paid in )
$123,706,708
..506
.488
.147
141

.319

160,085,360
56,282,622
62,941,011
26,577,012

Deposits
$ 40,822,523
156,899,656
16,480,480
30,576,820
12,450,083

Notes

$ 14,991,285
52,873,851
39,552,760
34,600,785
29,987,086

*Treasury Report of the United States on Finances for year ending 1861,
pp. 278-280 .

*Eastern States— Maine, New Hampshire, Vermont, Massachusetts, Rhode
Island, Connecticut. Middle States — New York, New Jersey, Pennsylvania,
Delaware ,Maryland. Southern States— Virginia , North and South Carolinas,

Georgia, Florida. Southwestern States - Alabama, Louisiana, Mississippi, Ten
nessee, Kentucky, Missouri. Western States — Illinois, Indiana, Ohio, Michigan,
Wisconsin, Nebraska Territory, Minnesota, Kansas .

It must not be supposed from the above discussion that all
banks of issue were bad. Among the good banks of issue may
be mentioned the Bank of Indiana, the banks of Louisiana and
the banks in the Suffolk System of New England. But with the
passing of the National Bank Act and the subsequent Act of
1865 the issues of all State banks alike were driven out.

created a different situation.

This

Left without a medium which re

sponded readily to the demands of trade, an extensive use of
checks began, obviously not new in itself, but new in the sense

that it took on an importance that has steadily increased. To the

problems of this period a separate chapter is devoted.
"Data and conclusions in Hunt's Merchants' Magazine, Vol. V ( New York,
1841 ), p. 186, do not harmonize with the data given by Sumner as set forth in

Table VI. In the Merchants' Magazine it is said that from 1830 to 1840, cir
culation exceeded every year the deposits commonly 20 per cent., and some
times more. George Tucker in an article, “ Banks or No Banks, ” Hunt's Mer
chants' Magazine, Vol. XXXVIII ( New York, 1858 ) , p. 150, says : “... from
1850 to 1856, while the circulation of all the banks in the United States had in

creased from $ 105,000,000 to $ 175,000,000 — equal to an increase of 66 2-3 per
cent., the deposits had increased in the same period from $90,000,000 to $ 240,

000,000_equal to 166 2-3 per cent., which last increase a recent English writer
(Tooke, on Prices) notices as a most remarkable result. ” Such lack of harmony
can be explained only on the ground of the inadequacy of official data.

1

CHAPTER III
CLEARING AND COLLECTION OF CHECKS PRIOR TO 1869:

Meaning of clearing and collection of checks

In order to prevent confusion of thought, it is necessary, at
the outset, to distinguish between the clearing and the collection of
checks. A check is said to be collected when it reaches the bank on

which drawn and arrangement is made to remit the proceeds.
The actual payment of the debt is designated as collection. Sup
pose there are but two banks, Bank A and Bank B, in a small town.
Bank A receives checks on Bank B drawn by Mr. X, who is a

depositor in Bank A. Bank A sends the checks by messenger to
Bank B. The messenger presents the checks over the counter and
Bank B, finding the checks valid, pays the messenger the amount
called for. The checks are now collected. Suppose Bank B had
checks on Bank A for the same amount ; Bank B would offset the

claims of Bank A by presenting to the messenger an equal amount
of claims. No money would be needed. The checks would now be
cleared, but not collected so far as Bank A is concerned , as that.
bank has had no chance to examine the checks delivered to the

messenger. The messenger returns to Bank A with his checks and

there it is learned that one is a forgery, another constitutes an

overdraft, and still another has had payment on it stopped. These
checks will not be paid, and will be returned to Bank B, either with
or without protest, according to the practice of protesting. This
should make clear the fact that clearing, which, in short , is an off

setting of claims, is quite distinct from collection.

With these

checks returned to Bank B, Bank B is now obliged to settle the
further claims of Bank A. When these claims are settled all the
>

checks are not only cleared but collected.
It has just been said that the actual payment of a check is

designated as collection. At what time in the physical handling of
the check by the drawee bank is it paid ? The check is paid at the

time it is charged to the drawer's account , and is cancelled ; there
after the fund is held for the credit of the holder, the control of
67

68

CLEARING AND COLLECTION OF CHECKS

the drawer ceases, and he has no right to stop payment, even
though actual remittance has not been made. Where a check
against sufficient funds is received by the drawee through the mail,

it is paid at the time it is charged to the drawer's account and
cancelled ; so that thereafter the drawer cannot stop payment,
nor can a receiver or assignee of the drawer claim the fund,
although remittance has not been made. Some courts hold the

check paid even before charged to account, where it has been can
celled and filed as paid. But where a check against insufficient
funds or a forged check received through the mail is marked

" paid ” by mistake and the mistake corrected before it is charged
to the account, some authorities support the conclusion that the

check is not paid finally, but that the mistake may be corrected
and the check returned.2

Clearing, on the other hand , means an offsetting of claims,
leaving only the net differences to be paid in some satisfactory
manner. Clearing houses are perhaps our best examples of the
offsetting process. All banks which are members of the clearing
house association meet together, present their claims on each other
and receive or pay favorable or unfavorable balances. Perfect
clearing means a complete offsetting of claims with no payment of
balances. If all banks in the United States could be brought into
one clearing organization the offset would tend towards perfec
tion, and all obligations resulting from the use of checks could be
liquidated without the use of a more expensive medium. This
would bring about the most effective use of deposit currency.
Collection of checks must be effected regardless of whether
there is a clearing mechanism. If there is a clearing of checks
they yet remain to be collected, that is, sent to the drawee banks
where arrangement is made for their payment. If the collection
of checks is unaccompanied by any provision for offsetting, how
ever , a great waste of time and money is involved. Under such a

system, checks would be sent in every direction ; their paths would
cross and recross one another ; messengers from one bank would
be obliged to call at every other bank with all the attendant waste
in time and energy. Consequently, it is of the utmost importance

that the clearing principle be introduced wherever practicable in
*T. B. Paton, Jr., Digest of Legal Opinions ( New York, 1922) , p. 198.
Numerous cases are cited by Paton to uphold these views.
'Ibid. See also pp . 528-529 below .

CLEARING AND COLLECTION PRIOR TO 1863

69

order to eliminate to the greatest possible extent all collections
which are not subsequent to clearings.

It has been a general practice in the past to deposit checks
for credit and collection, a practice that has given rise to one of
the most serious problems in our clearing and collection system,
of which more will be said later. These items must be distinguished
from the items usually spoken of as " collection items” or simply
“ collections" which are deposited for collection and credit, in
stead of credit and collection as is the usual case with checks.

Collection items are more often notes, time and sight drafts, etc.,
although they may consist also of checks and bank drafts.
The origin of the practice of clearing
The clearing system is a development of a principle of Roman
commercial law known as compensatio — the setting off of a debt

one owes to another by a claim against him. This system at
tained a high degree of perfection in the Middle Ages at the fairs
of Lyons. Under an ordinance of Louis XI ( March 8, 1463 )
four fairs were authorized at stated intervals in each year, each

of which was followed by a day of settlement fixed at the fair next
preceding. Every banker came to these settlements prepared
with a balance-sheet of his debts and credits. Three steps were

required in completing settlements; first, the acceptance of bills
by those upon whom drawn. This was necessary in order to de
termine what items actually could be cleared. Then came the con
parison of accounts, and finally the4 settlement in money, of which
very little was ultimately required .*
Rates of exchange for western Europe were fixed largely at
Lyons, until the end of the 16th Century and the beginning of the

17th Century, then the Genoese attained predominance in financial
matters, and the fairs of Placenzia became the clearing house of
Europe. Admission to the clearings at Lyons required a guaran
tee of 2,000 crowns, and paper to be settled there rested in a meas
'H. P. Willis, The Federal Reserve ( New York, 1915 ) , p. 223 ; J. T. Tal

bert, “ Clearing-House and Domestic -Exchange Functions of the Federal Re
serve Banks,” Proceedings of the Academy of Political Science, Vol. IV ( 1913
1914 ) , pp. 193-194 ; 0. Howard Wolfe, Practical Banking ( Chicago, 1920 ),

Chaps. V , VI, XIII ;L. H. Langston, Practical Bank Operation, Vol. 1 ( New
York , 1921 ), Chaps. IV -VII.
* C. A. Conant, Principles of Money and Banking, Vol. II ( New York,
1905 ) , Bk. V, pp. 239-240. For an excellent account of the principal Mediaeva )
fairs, see Stephen Colwell, Ways and Means of Payment: A Full Analysis of

the Credit System with its Various Modes of Adjustment ( Philadelphia, 1860 ) ,
Chap. XII .

70

CLEARING AND COLLECTION OF CHECKS

ure upon the combined credit of all the great exchange houses of
Europe. The quarterly settlements were made in a handsome
building (a loge des changes ) erected by Soufflot, and were con
tinued until the Revolution.

The last settlement was in April,

1793.5 Knowledge of the methods of clearing practiced at Lyons
was spread in the 18th Century over Europe by the translation of

the work of Savary, Le Parfait Negociant.
The origin of clearing houses

The business of the clearing house is defined to be “ the effect
ing, at one place, of the daily exchanges between several associated
banks, and the payment at the same place of balances resulting
from such exchanges." 7 To be more exact, a clearing house is an
association of banks, ordinarily voluntary, to simplify and facili
tate the exchanges of such items as notes, checks, bills and drafts,
to facilitate settlements of balances among the banks, and to
serve as a medium for united action upon all questions affecting
their common welfare. In the words of Macleod, “The Clearing
system is a device by which all the Banks which join in it are
formed, for the purpose of transferring credits from one bank to
another without the use of coin ; just in the same way as credits
8

are transferred in the same bank from one account to another,

without the use of coin .”

Clearing is, beyond all question, the

simplest, the most economical, and when applicable, the most effi
cient of all modes of paying debts.
The first modern clearing house is said to be that founded at
"C. A. Conant, “The Extension of the Clearing System,” Bankers' Maga
zine, Vol . LXX ( 1905 ) , pp. 433-441.

"C. A. Conant, Principles, etc., Vol. II, Chap. V ; Stephen Colwell, “ Principles
of Finance, " Bankers' Magazine, Vol. XIII , old series ( July, 1858 -June, 1859 ),
pp. 790-791 . H. D. McLeod takes issue with those who find in the old Mediaeval

fairs the origin of our present clearing system. He insists that the present
system has to do with bank credit and consequently could have had its origin

only after bank credit came to be used generally. This system, he says, is
not to be confused with the " set-off ” of debts which was practiced at the
great Mediaeval fairs like those at Lyons. It seems, however, that Macleod's
distinction between commercial credit set -offs and the clearing of bank

credit has little value or validity and that it can be said that the germ of the
clearing idea was to be found at the old Mediaeval fairs. See H. D. Macleod ,

The Theory and Practice of Banking, Vol. II ( London, 1876) , pp. 461-462 .
O'Brien v. Grant, 146 N. Y. 163, 166 ( 1895 ) .

*Banks are prohibited by statute in Mississippi (Code Section 3628 et seq.)

from becoming members of unincorporated clearing house associations. See
T. W. Paton, Jr., Digest of Legal Opinions ( New York, 1922 ) , p. 225.

*H . D. Macleod, The Theory of Credit, Vol. II ( London, 1890 ) , p. 380.

CLEARING AND COLLECTION PRIOR TO 1863

71

Edinburgh, Scotland, in 1760.10 The London Clearing House
was founded in 1773 ; Dublin followed in 1846 ; New York City,

1853 ; Paris, 1872 ; Vienna, 1872, although some local banks
cleared as early as 1864 ; Berlin, 1883 ; St. Petersburg in 1898.
In the United States there were but six clearing houses in existence
at the outbreak of the Civil War. They were organized in the
following order : New York City, 1853 ; Boston, 1855 ; Philadel
phia, 1858 ; Baltimore, 1858 ; Cleveland, 1858 ; and Worcester,
Massachusetts, 1861.11

Collection of checks before the days of the clearing house
Before the days of the clearing house in this county, the clear

ing or liquidation among banks of all mutual claims, except those
arising from their circulation, was accomplished mainly on their

ledgers, and by correspondence. Whatever sum was received for
the account of any bank by another, was credited accordingly ;
whatever claim was received by one bank on another, was charged.
These debtor and creditor transactions thus became items of book

account, the accounts running from year to year, being balanced

as often as necessary to make out the balance sheet. So far as
the respective charges and credits balanced each other, the mutual
indebtedness of the banks was paid, and the claims held by the cus
tomers of one bank against the customers of another were dis

charged, due solely to bookkeeping operations and correspondence
among the banks involved. The effect was much the same as if all
10C . A. Conant, “The Extension of the Clearing System,” Bankers Maga

zine, Vol. LXX ( 1905) , pp. 433-441. Mr. Conant receives no support for this
statement. William H. Howarth, Our Clearing System and Clearing Houses

House, but
( London, 1897 ) , p. 24 , does not mention the Edinburgh Clearing System
was
no doubt that the Clearing

says that there seems to be “

established before 1773, though its early days are shrouded in the darkest
of origin of the clearing house in London. W. Stanley Jevons, Money and the

and most profound mystery." The year 1775 frequently is given as the date

Mechanism of Exchange ( New York, 1876 ) , pp. 263-264, says it originated
about 1775. Mr. R. M. Holland, The London Bankers Clearing House , U. S.
Nat . Mon. Com . Pubs., 61st Cong, 2d Sess. , Sen. Doc. No. 492, pp . 268-269, says

that about the year 1770, according to tradition, the walk clerks from the city
and West End banks had made a practice of meeting at lunch time at a public

house and exchanging checks, the balances being settled in notes and cash. He
finds proof that a room was rented in 1773 for this purpose. Mr. Ralph Van

Vechten says it is not certain just when clearing houses originated, but claims
that there was one in Florence in 800 A. D., and something very similar to a

clearing house in Tokio about 2600 B. C. No authority is cited for these
statements, and the writer has been unable to find any support for them .

See his statements in Proceedings of the American Bankers' Association
( 1912 ) , p. 506 .
" D. P. Bailey, The Clearing House System ( New York, 1890 ) , pp . 4 , 36 ;

Bankers' Magazine, Vol. XLIV ( 1890-1891), pp. 606, 660, 919 ; Vol. XLV
( 1890-1891 ) , pp. 25, 28, 108, 684-685.

72

CLEARING AND COLLECTION OF CHECKS

the customers had kept their accounts with one central bank and

had all their claims offset on its books. The practice of keeping
mutual accounts ( not deposits ) was widespread, and most of the
settlements were effected in this manner, thus reducing to a mini
mum the shipments of actual money required to liquidate adverse

balances. Roughly, the result of these accounts and the corre
spondence by which they were maintained was much the same as
if they all had had a clearing office, except, of course, that the
system was much less effective and economical. At the best, there

were many shipments of money to liquidate adverse balances.
The banks also kept deposits with each other. The position
of many banks and the nature of the trade among their customers
made it necessary for such banks to keep deposits in financial cen
ters. Against these deposits the banks drew bills to meet the dis

tant obligations of their customers, or built them up by having
distant sums collected and credited to their accounts. Most banks
found it necessary to carry deposits in leading financial centers.
Some bore interest, while others did not ; various arrangements

were made, many favors and concessions were granted. Such
correspondent relations are still common among banks in this
country, despite the fact that the Federal Reserve System is at
tempting to provide a more ideal and effective system.12

During certain seasons of the year, it frequently became diffi
cult to maintain sufficient balances in the financial centers to
meet the demands of their customers for drafts on those centers.

Funds in those centers then would command a premium. At such
times, banks frequently would dispose of checks which they held
drawn on banks of such cities at a profit.13 On checks drawn on

New York funds and payable in eight or ten days, the National
Bank of Providence during the '30s frequently charged 12 of 1
per cent. premium and interest. Providence banks were known to

have taken as high as 1 per cent. on checks in addition to the time
the checks had to run, while the Newport Exchange Bank charged
14
as much as 11/2 per cent. on New York checks payable at sight.
12Colwell, op. cit ., pp. 269-272.
15J. J. Klein , “The Development of Mercantile Instruments,” Journal of
Accountancy, Vol. XII ( 1911 ), p. 537.

" Report of the Committee Appointed by the General Assembly of the
State of Rhode Island and Providence Plantations to Visit and Examine the

Banks in this State ( Newport and Providence, 1836 ) , pp. 15, 19, 22.

In connection with discounting, a practice which seemed to be common prior
to about 1820 was for banks, such as those in Baltimore, for example, which
had eastern funds in excess, to refuse to discount notes unless the owners

would take checks on Philadelphia instead of receiving credit on the banks'
books for the result of the discount. See Klein, op. cit., p. 440 .

78

CLEARING AND COLLECTION PRIOR TO 1863

Rates of exchange and discounts and premiums on checks seemed
to vary with the avarice of the dealers in exchange, the necessity
of the borrowers, the state of the money market, and the charges
of other banks .

With but few exceptions it was the general practice, prior to
the introduction of the clearing house, for banks with checks on

other banks within the same city to effect their collections by pres
entation over the counters through the agency of messengers. It
is definitely known, however, that by 1793 the United States Bank
maintained close relations with the Bank of North America and

the Bank of Pennsylvania, making daily settlements and exchang
ing notes daily. The same co-operation existed at first between
the New York branch of the United States Bank and the Bank of
New York .

It is presumed that checks were included in the

settlements.15

The Suffolk principle of par collection
One of the best-known instances in which the principle of
speedy collection was applied in this country was under the so
called Suffolk Bank System of New England where it was applied
to bank notes. This principle which has proved so important not

only in note collection but more recently in the collection of
checks, deserves a brief study.

The Suffolk Plan was inaugurated in 1819 by the Suffolk Bank
of Boston in order to force country banks to redeem at par their
notes which were circulating in Boston at a discount and against
which the notes of the Boston banks could not make headway, as
the Boston notes were speedily redeemed over the counters of the
Boston banks. In that year the Suffolk Bank announced that iſ

any bank would deposit with it $5,000 as a permanent deposit ,
with such further sums as would be sufficient from time to time to

redeem its bills taken by the Suffolk Bank, such bank should have

the privilege of receiving its own bills at the same discount at
which they were purchased. Should any bank refuse to make such
a deposit its bills were to be sent home for payment at such times
and in such manner as the Suffolk Bank might see fit.
The Suffolk Bank, competing with the New England Bank,
which since 1813 had been doing much to reduce the rate of dis
count on country bank notes by offering to send them home for
customers at cost, failed to drive country bank notes out of Bos
165. T. Holdsworth, First Bank of the United States, U. S. Nat. Mon.
Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 571 , p. 40.

CLEARING AND COLLECTION OF CHECKS

74

ton.

In 1824 the Suffolk Bank entered into an agreement with

six other Boston banks by which they were to subscribe to a fund
of $ 300,000, to be kept in the Suffolk Bank, and to be used for

the purpose of buying up country bank notes at a discount to send
home for redemption, thus creating a vacuum for the currency of
the seven Boston banks.

After a year's experience the Suffolk Bank agreed to receive
the notes of any New England bank at par provided it would carry
a minimum permanent deposit of $2,000, free of interest, the
amount depending upon the capital and business of the depositing
bank. “ In consideration of this deposit the Suffolk Bank redeemed
all the bills of that bank which might come in from any source,

charging the redeemed bills to the issuing bank once a week, or
whenever they amounted to aa certain fixed sum ; provided, the bank
kept a sufficient amount of funds to its credit, independent of the
permanent deposit, to redeem all of its bills which might come into
possession of the Suffolk Bank ; the latter charging interest when
ever the amount redeemed should exceed the funds to its credit ;

and if at any time the excess should be greater than the perma
nent deposit, the Suffolk Bank reserved the right of sending home
the bills for specie redemption. In payment the Suffolk Bank re
ceived from any of the New England banks which kept an account
with it the bills of any New England bank in good standing, at

par, placing them to the credit of the bank sending them on the
day following their receipt." 16
When any bank refused to join in the Suffolk System, the
Suffolk Bank simply presented its notes for payment at its
counter.

Most of the State banks soon gave up the struggle

against the system with the result that bank note currency was

soon circulating at par and on a sound basis throughout New
England. This established the system of par collection of notes
for New England. The United States is now endeavoring to

apply the same principle to the collection of checks.
Banks must redeem their notes at once and in full when presented
over the counter

Out of the opposition to the establishment of the system of

par collection of bank notes came another principle which has its
significance today with reference to checks, that is , that a bank
19L . Carroll Root, “ New England Bank Currency,” Sound Currency, Vol.
II , No. 13 ( New York, 1895 ) , p. 278.

CLEARING AND COLLECTION PRIOR TO 1863

75

must redeem its notes at par, to any amount, and at once when
presented over its counter if there is no statute to the contrary.
The case of the Suffolk Bank v . the Lincoln Bank, 182117
Action was taken by the Suffolk Bank in 1821 against the Lin
coln Bank at Bath, Maine, for dilatory practices which resulted
in an important decision relative to the prompt redemption of
notes. An agent from the Suffolk Bank presented at the Lincoln
Bank bills to the amount of $3,000 very soon after the commence
ment of the usual banking hours. The cashier immediately offered

to pay the amount in the bills of the banks in Boston, and among
others, partly in those of the Suffolk Bank, or by check or draft
on a bank in Boston, both of which proposals were declined by the
agent, who demanded payment in specie. The cashier then began
to count small pieces of silver change in denominations no larger
than a quarter of a dollar. At the rate of counting he could not

count more than $1,000 before closing time. The Suffolk Bank
agent offered to take the specie at the count of the bank, but the
cashier declined to deliver it. The agent left the bank with his
bills and the Suffolk Bank entered suit in the Circuit Court of the
United States at Portland.

Associate Justice Story, in summing up to the jury, said,

among other things : " The act of Massachusetts ( Stat. 1809, ch.
38) , under which this suit was brought,18 declares, that, 'if any

incorporated bank shall refuse or neglect to pay on demand any
bill or bills by such bank issued, such bank shall be liable to pay to
the holder of such bill or bills after the rate of two per cent. per

month on the amount thereof from the time of such neglect or
refusal, to be recovered as additional damages in any action
against the bank for the recovery of the said bill or bills.' It is

the duty of every bank to pay its bills in specie on demand, if such
demand is made at the bank within the usual banking hours, and

the omission to pay under such circumstances, is a neglect or
"The President, Directors, and Company of the Suffolk Bank v . The

President, Directors, and Company of the Lincoln Bank, 3 Mason 1 (1821).
See also J.
Collection,”
18It will
Bath under

D. Magee, “ Historical Analogy to the Fight Against Par Check
Journal of Political Economy, Vol. XXXI ( 1923 ), pp. 433-415.
be noticed that this suit was brought against a Maine bank at
a Massachusetts law. Maine became a State separate from Massa

chusetts in March, 1820, and apparently carried into the new State this law
until such time as it could develop its own laws. The Veazie Bank of Bangor,

which offered strenuous opposition to the Suffolk Bank System, later succeeded
in getting a law passed giving the banks of Maine a certain delay, after the
demand at their counters, in which to redeem their notes in specie. See D. R.
Whitney, The Suffolk Bank ( Cambridge, 1878 ) , p. 49.

76

CLEARING AND COLLECTION OF CHECKS

refusal within the meaning of the act. There is no pretense to
say, that a bank has a right to delay the holder of its bills, day
after day, while its officers can count out change so as to make up
the amount in the smallest species of coin in their own way. Every

bank is bound either to have its specie counted or weighed, and
ready for delivery, or to have servants sufficient to count and weigh
it, and to pay it out for all demands made during the usual bank
ing hours. I do not say, that if a very large demand be made
just before the closing of a bank , so that a reasonable time may
not exist to count, weigh, or deliver it, an omission to pay until the
next day would, under the circumstances, be unjustifiable.
But on this point, I give no opinion, as it is not necessary in the
.

present case.

.

.

“ It is said
that the cashier offered to pay the amount
in Boston bills, or by draft on Boston. But this constitutes no
legal excuse. Every bank is bound to pay specie for its bills, and
.

nothing else is of good tender. Every other arrangement is a
matter of courtesy, and not of right.
. . Now as a matter of
.

prudence it may be admitted to have been proper for the cashier
to count his specie before delivery ; but as matter of right, his con
duct cannot be justified, if his intention was thereby unreasonably
to delay payment to the agent, and thus to create an impossibility
of his receiving the amount on that day. I go farther and hold,

that if in fact, by such conduct, the payment of the amount on the
day of demand was necessarily defeated, it comes within the provi
sion of the act, whether there was wrongful intention or not. It

was a neglect to pay, and occasioned by the want of due diligence
on the part of the officers of the bank.

.. It has been inti

mated that each bank-bill should have been separately presented
for payment and separately paid. But there is no foundation in
law for that suggestion. The holder had a right to demand the
whole at once as an aggregate sum, and the bank was bound to
pay the whole.” The verdict was for the plaintiff with 2 per cent.
damages. The same principle was upheld in Massachusetts in
19
1827 in the case of the Suffolk Bank v. The Worcester Bank .

The principles set forth in the above cases are important not
only because of the clearness with which the court established the

liabilities and responsibilities of banks with respect to their note
issues, but because of the indirect bearing of these principles upon
the banks' liabilities and responsibilities with respect to deposit
1922 Mass. 106 ( 1827 ) .

CLEARING AND COLLECTION PRIOR TO 1863

77

currency as evidenced by checks. Writers in the field of banking
have emphasized continually the similarity between notes and de
posits as demand liabilities of the bank ; indeed, some of them have
entered into lengthy arguments to demonstrate the practical iden
tity of the two types of demand liabilities so far as the bank is
concerned. This view has been held generally. Consequently, the
natural conclusion has been that if the holder of bank notes has

the right to demand the whole at once as an aggregate suni, and
the bank is bound to pay the whole, the same principle applies to

checks when presented over the counter. In general, this prin
ciple has been applied to checks by various courts which have long

held that when checks are presented directly over the counters of
the drawee banks they must be paid at once and in full without de
duction. The reasoning from this analogy frequently has been
that just as bank notes are demand liabilities of the bank and

payable in lawful money to the holder upon demand, so are checks

payable in lawful money to the holder when presented directly over
the counter of the drawee bank. In fact, the definition of the
check might lead to such conclusions ; the usual definition being

something like the following : A check is an unconditional order in
writing addressed by a person ( the drawer) to a bank, signed by
the drawer, requiring the bank to which it is addressed to pay a
sum certain in money on demand to a person named or to his order
or to bearer.20 The United States Supreme Court has taken a
different position recently with respect to the drawee bank's lia
bility to any holder other than the depositor for checks presented
directly over its counter.21 It holds that the bank's liability is to
the depositor only, and not to the holder, and may pay the holder
in drafts on reserve deposits provided the depositor does not ob
ject, and he is assumed to agree unless he specifies to the con

trary on the check when he draws it on the bank. This decision is
in harmony with the majority of opinions interpreting the Nego
tiable Instruments Law with respect to the nature of checks and
makes it obviously unsafe to be insistent upon the similarity be
tween the two types of demand liabilities of banks .
20J. D. Brannan , The Negotiable Instruments Law Annotated, 3rd ed.

( Cincinnati, 1919 ) , Sections 126, 185 ; H. W. Magee, A Treatise on the Law
of National and State Banks, 3rd ed . ( Albany, N. Y., 1921 ) , p. 310. See also
pp. 1-2 above.

" Farmers and Merchants Bank of Monroe, North Carolina, et al. v. Federal
Reserve Bank of Richmond, Virginia , 262 U. S. 619 ( 1923 ). See Chapter VII ,
but especially pp. 272-274 below .

CLEARING AND COLLECTION OF CHECKS

78

The later years of the Suffolk System

The suspension of specie payments in 1837 put an end to the
coercive measures on the part of the Suffolk Bank, and conse

quently each bank was left to its own volition. Many of them con
tinued to redeem their bills at the Suffolk Bank as they had dono

in the past, with the result that these bills passed current all over
the country and in some places even commanded a premium. At
the resumption of specie payments the Suffolk Bank was able to
take its old place at the head of the redemption system which it
maintained until about 1858, when it gave way largely to the
Bank of Mutual Redemption. This bank had been organized to

take over the functions of the Suffolk Bank ; it was to be owned by
the New England banks so that they could share in the profits
which had gone exclusively to the Suffolk Bank . Although the
Bank of Mutual Redemption asumed most of the redemption func
tions of the Suffolk Bank, both banks shared the business until

the suspension of specie payments in 1861 which practically broke
down the system , although the currency was of well -recognized
soundness when the National Banking System appeared upon the
scene . 22

Other methods of note collection

No effort will be made to give an account of the methods used
in other sections of the country for the collection of bank notes
except to say that collection agencies were commonly established

for the purpose. By 1850 there were two agencies in New York
State and seventy in the western States.23 Some of the notes of
every bank were returned to it through the agency of brokers,
who, “ like separate and peculiar absorbents, soaked up, by pur
chase at a small discount, bank notes which had been casually car.
ried out of their proper sphere of action, and thereby became a

sort of merchandise more or less depreciated in value, as the notes
wandered far from home, and lost their properties as currency.24
Special arrangements were made in different localities at differ

ent times for note redemption. For example, the second United
States Bank, as a means of securing resumption of specie pay
*D. R. Whitney, op. cit., passim ; L. Carroll Root, op. cit., passim .
*Bankers' Magazine, Vol . V ( 1850-1851 ) , pp . 467, 514. See also Merchants '
Magazine , Vol . XXII ( 1850 ) , pp . 225-226 ; Vol. XXV ( 1851 ) , pp. 112-113 ;
Vol. XXXIII ( 1855 ) , pp . 475-477 ; Vol . XXXVI ( 1857 ) , pp . 727-728 ; and
Vol. XXXVIII ( 1858 ) , pp. 733-731.
**A . B. Johnson, “ A Treatise on Banking , " The Bankers' Common -Place
.

9

Book ( New York, 1857 ) , p. 23.

CLEARING AND COLLECTION PRIOR TO 1863

79

ments, made an arrangement with the State banks establishing

a rule by which they were to settle for their notes at least

а

once each week .

Gallatin recommended a clearing system for checks, 1841
Gallatin, writing in 1841 relative to the situation following
suspension of specie payments in 1837, said : “ Few regulations
would be more useful in preventing dangerous expansions of
discounts and issues on the part of the city banks than a regu
lar exchange of notes and checks, and an actual daily or semi
weekly payment of the balances." 25 After mentioning the Scotch
and English clearing systems, he continued : “ The principal diffi
culty in the way of an arrangement for that purpose is the want
of a common medium other than specie for effecting the payment
of balances. These are daily fluctuating ; and a perpetual draw
ing and redrawing of specie from and into the banks is unpopular
and inconvenient.

" In order to remedy this it has been suggested that a general

cash office might be established in which each bank should place a
sum in specie proportionate to its capital, which would be carried
to its credit in the books of the office. Each bank would be daily
debited and credited in those books for the balance of its account

with all the other banks. Each bank might at any time draw for
specie on the office for the excess of credit beyond its quota, and

each bank should be obliged to replenish its quota whenever it was
"
diminished one-half, or in any other proportion agreed on . " 26
He thought that some similar arrangement might be made in every
other county or larger convenient district of the United States,
without the necessity of establishing there a general cash office,
the balances to be paid by drafts on New York.27
In the same year a Mr. Wetmore of New York City proposed
a plan for a National Bank with branches, and among the provi
sions in the plan was one for the clearing and collection of checks
* Adams, Writings of Galatin, Vol. III, ( Philadelphia, 1879 ) , p. 424.
* Ibid ., pp. 424-425 .
** Ibid .

James G. Cannon in his Clearing Houses (New York, 1900) ,

pp. 130–131, says Gallatin recommended clearing houses in 1831. He is in
error on this point since he relies for his authority upon a pamphlet written
by Gallatin in 1841, entitled, “Suggestions on the Banks and Currency of the
several United States, in reference principally to the suspension of specie
payments.” The same article is in Adams, Writings of Gallatin , III, pp. 424
425. Cannon may have relied upon Gibbons for this information as the
quotations are identical in every respect with the exception of the date. See
J. S. Gibbons, The Banks of New York, Their Dealers, The Clearing House
and the Panic of 1857 ( New York , 1859 ) , pp . 339-340.

CLEARING AND COLLECTION OF CHECKS

80

at par.

Balances were to be settled daily by the bank and
branches, at their places of business, and weekly with those banks
at a distance.28

Although no clearing house was established before 1853, Phil

adelphia had taken steps to simplify city clearings and collections
by 1852. The clerks of the various banks met every morning at
the Philadelphia Bank to make the exchanges by reception from
each other of notes and checks received the day previous. The
cashiers met twice each week to settle balances, with the exception
of the months of July and August when they met but once each
week . At these meetings the banks were called over by the chair
man, each cashier announcing how he stood, either debit or credit ;

when all were called over by the chairman, the aggregate credits
and debits balanced. The debtor banks gave checks for the
amount of their indebtedness to the creditor banks.29

The New York City Clearing House, 1853
The banks of New York City, in 1853, organized the first
clearing house established in the United States.

According to

James C. Hallock, Jr., the plan was devised by his father, although
there are evidences of many similar, if not identical, plans sug
gested during the few years just prior to 1853.
At that time each of the fifty -two banks had daily received
over its counter, or by mail, checks on every other bank in the city .
To collect them the banks had opened deposit accounts with one
another ; each bank had become a depositor in fifty -one other
banks. The pass-books used were of the ordinary form. Each

bank, however, did not send a messenger to fifty -one banks daily ;
they had simplified that work by one-half. For many years prior
to 1853 the banks had tacitly agreed that each would send mes
sengers to the other half for six months. For example, the
Chatham Bank would have checks on the Merchant's Bank. It

would list them on a deposit slip, charge the Merchant's Bank
with the amount in its pass-book and place the checks on the book
which the messenger would carry to the Merchant's Bank and de
liver to its receiving teller. The latter would remove the checks
and, having some on the Chatham Bank with list attached, he
would credit his bank with the amount in the pass-book, place the

package in it and hand it back thus refilled to the messenger.
18W. S. Wetmore,“ Plan of a National Bank , " Merchants' Magazine, Vol.
IV ( New York, 1841 ) , pp. 531-533.
"Bankers' Magazine, Vol. VI ( 1851-1852 ) , pp. 657-658.

CLEARING AND COLLECTION PRIOR TO 1863

81

When banks exchanged checks in the above manner the
amounts were almost always unequal, leaving a balance for one to
pay and the other to receive. Had each bank settled daily there
would have been fifty -one balances to pay and receive. Instead

of attempting to settle balances daily, which would have consumed
hours and caused much annoyance, as balances were payable in
coin, the banks made weekly settlements after the exchange of
Friday morning. On settlement day the cashier of each bank
would draw drafts for every debt due him by other banks, and send
out the messengers to collect them. “ Over fifty porters were out
at once

with an aggregate of several hundred bank drafts

in their pockets, balking each other, drawing specie at some places,
and depositing it in others ; and the whole process was one of con
fusion, disputes and unavoidable blunders, of which no description
could give an exact impression." 30
The institution of the New York Clearing House in 1853
altered the entire situation. Every bank sent to the clearing
house by messenger all the checks it had on all the other member

banks and charged the whole amount against the clearing house.
Every bank received there all the checks which all the other banks

had on it, the sum representing the total of the claims which the
clearing house had against it. A balance was struck and if the

bank had a debit balance, it paid the clearing house ; if it had a
credit balance the clearing house paid the bank.
Since the original clearing house was in principle and daily
routine practically the same as the one of today, a detailed de
scription of the clearing house will be reserved until a later chap

ter in which the operations of the modern clearing house will be
studied.31

The newly -organized clearing house saved every bank in the
city, on the average, about twenty -five daily trips to exchange
checks with other banks ; it saved every bank in the association

the payment or receipt, mostly in coin, of approximately fifty
balances on settlement day ; it substituted daily for weekly set
tlements and at the same time saved the banks all the drudgery,
irritation and anxiety which had made daily settlements imprac

ticable ; it saved all the banks the trouble of keeping accounts
with one another ; it relieved them of the risk of transporting
*OJ. S. Gibbons, op. cit., pp. 293-294 ; also quoted by J. C. Hallock, Jr.,
Clearing Out-of- Town Checks ( St. Louis, 1903) , pp. 7-8 .

nSee Chapter X below . An excellent account, with cuts , of the original
clearing house, is given by J. S. Gibbons, op. cit., Chap. XVIII ; for another
account see Merchants' Magazine, Vol. XLII ( 1860 ) , pp. 213-214 .

82

CLEARING AND COLLECTION OF CHECKS

money from place to place ; it freed them from all injurious de
pendence on each other ; and finally, the books of the clearing
house afforded facility for knowing at all times the management
and standing of every bank in the association. "Regular periodic
statements as to condition were required from the associated
banks by the clearing housemat that time weekly and quarterly
statements — which tended to secure greater reliability and accu
racy than was accomplished prior to that time when the banks
“ dressed up” weekly statements before publishing them in the
newspapers, and quarterly statements before sending them to
the Bank Department at Albany. This situation was changed
because the clearing house transactions revealed their conditions
and forced the banks to liquidate among themselves..
Aside from requiring regular reports from the associated
banks the clearing house assumed few of the special functions and

practices so common with modern clearing houses. The settle
ment of balances was effected in clearing house certificates, the
gold to which the certificates constituted claims, being deposited
in one of the banks designated as a depository. But of clearing
house loan certificates as a means of meeting times of stress, the
association knew nothing .

The clearing house in the panic of 1857

The newly-organized clearing house was virtually helpless in
the panic of 1857 which was precipitated so suddenly in August
of that year by the failure of the Ohio Life Insurance & Trust
Company. Indeed, it was not only helpless, but contributed some
what to the hard times through its exactions from the struggling
member banks.

The failure of the Ohio Life Insurance & Trust Company was

followed rapidly by the failure of the Bank of Pennsylvania in
Philadelphia, which, in turn, was followed by other banks in that
city, by those in Baltimore, and by those in the southern Atlantii:

States generally. Commercial business was suspended everywhere.
The avalanche of discredit swept down merchants, bankers,

moneyed corporations, and manufacturing companies, without
Old houses, with accumulated capital which had
withstood the violence of former panics, were prostrated in a day,

distinction .

when they believed themselves safe against misfortune. The bank

suspension of New York and New England, in the middle of Octo
ber, caused primarily by the calls of interior depositing banks and

CLEARING AND COLLECTION PRIOR TO 1863

83

• the action of the home depositors, was the climax of this commer
cial hurricane 32

In the midst of this panic the New York Clearing House was
helpless. The reports of the clearing house were watched by the
community with anxiety, which had every effect other than that
of creating confidence. The clearing house daily settlements in
coin exerted a crushing influence on the commercial interests and
became a new source of terror. “ What in ordinary times was a
safeguard against the unwise expansion of bank credits, was now

a remorseless power compelling the smaller banks — the majority
of the wholeto a violent contraction of their loans to dealers ,

forcing them into the sacrifice of property, and finally into bank
ruptcy ; thus sending out through a thousand channels new
streams of misfortune. Default at the Clearing House, was the
presiding spectre at every Bank Board of the smaller institu
tions. "33

It did not occur to the managing committee of the clearing
house to relax its destructive energy while there was yet a chance
of preserving specie payments. They thought of it after it was
too late to be of any material service to the merchants. They
later admitted bank currency, representing the State debt and
the debt of the United States, as a substitute for coin in the daily
settlements, and found it of great service in preventing further

depreciation, and in repairing the mischief that had been done.
Gibbons summarized the situation by saying : “ It is often the case,

that things good in themselves become hurtful by a change of cir
cumstances which destroys their fitness. This may be said of the

clearing house, without detracting from its real value to our
financial interests ." 34

In subsequent panics, however, the clearing houses resorted to
loan certificates and similar instruments as the most effective

weapons at their command and were more successful in aiding the
member banks. An account of the use of such emergency meas

ures as well as other special functions assumed by clearing houses.
after the establishment of the National Banking System is given
in Chapter V.
" Gibbons, op. cit., Chap. XIX.
* Ibid ., p. 363.
" Ibid ., p. 364.

CHAPTER IV

THE CLEARING AND COLLECTION SYSTEM, 1863-1914

The growth of deposit currency

As we have seen , deposits definitely passed bank note cur
rency in 1855 and according to the data given in Table VIII
below, have maintained that supremacy and steadily increased in
importance since that time. By taxing State bank notes out of
existence in 1865, a vacuum was created which gave an added im
petus to the use of deposit currency. Other factors which were
responsible for the increasing use of deposit currency , and con
sequently, checks, were the inelastic note currency, better means
of communication, the cheap and uniform postage rates, and the
denser population.
TABLE VIII

Circulation and Deposits of National, State, Savings, and Private Banks,
Loan and Trust Companies

[ Amounts in millions )
Year
1855
1856
1857
1858
1859
1860
1861
1862
1863
1864
1865
1866
1867
1868
1869
1870

Circu
lation

U.S.

Individual

Total

deposits

deposits

deposits

186.9
195.7
214.8
155.2
193.3
207.1
202.0

190.4
212.7

230.4
185.9
259.6
253.8
257.2
296.3
293.7

183.8

1871

238.7
163.4
131.5
267.8
291.8
294.9
292.7
291.8
315.5

1872

327.1

1873
1874

338.7

310.2

355.7

355.7

58.0

640.0

39.1

815.8
876.6
968.6

698.0
854.9

33.3
28.3

12.8
13.2
11.1
12.4
15.1
10.6

909.9
996.9

1,032.2

1,034.8

1,051.3

1,064.5
1,262.7

1,251.6
1,353.8
1,421.2
1,526.5

1,366.2
1,436.3
1,537.1

With the establishment of the penny postage in London in 1840, country
checks began to stream into London. J. C. Hallock, Jr., Clearing Out-of- Town
Checks ( St. Louis, 1903 ) , p. 28.
84

86

CLEARING AND COLLECTION, 1863-1914
TABLE VIII- ( Continued )
Year
1875
1876
1877
1878
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903

1904
1905
1906
1907

1908
1909
1910
1911
1912 *

1913
1914)
1915
1916
1917
1918
1919
1920
1921
19221
1929 °
1924

Circu
lation
318.8
294.8
290.4
300.4
307.7
318.4
312.5
309.2
312.2
295.3
269.2
238.0
166.8
155.5
129.0
126.5
124.0
141.2

155.1
171.8
178.8
199.2
196.6
189.9
199.4
265.3
319.0
309.4
359.2
399.6
445.5
510.9
547.9
613.7
636.3
675.6
681.7
745.1
759.2
750.7
867.1 °
902.5 °

1,256.00
2,430.8 °
3,307.59
4,017.0 "
3,558.8°
2,938.34
2,966.4 °
2,587.0°

U.S.

Individual

Total

deposits

deposits

deposits
1,797.2
1,789.7

10.2

1,787,0

11.1

1,778.6

10.9

1,813.6
1,717.4
1,694.2
1,951.6
2,296.8
2,460.1
2,568.4
2,566.4
2,734.3
2,812.0

1,743.0
1,946.3
1,962.3
2,309.0
2,472.7
2,582.3
2,580.6
2,748.3
2,829.1

3,308,2

3,331.4

3,422.7
3,778.1
4,062.5
4,196.8
4,664.9
4,627.3
4,651.2
4,921.3

3,481.1
3,824.8
4,093,1
4,222.7
4,679.1
4,641.0
4,665.3
4,934.5
4,960.5
6,111.1
5,741.1
6,845.0
7,337.8
8,559.7
9,228.7
9,700.9
10,110.8
11,426.0
12,305.7
13,280.3
12,914.8

25.6
252.1
10.7
12.2

12.6
13.9

14.2
14.0
17.1
23.2
58.4
26.7
30.6
25.9
14.2

13,7
14.1
13.2

15.4
16.4
52.9
76.3
98.9
99.1
124.0
147.3

110.3
75.3
89.9
180.7
130.3
70.4
54.5
48.5
58.18
49.3
65.8%
49.09
39.5
133.0

1,037.8
566.8
175.8
390.2

128.9
238.4

4,945.1

5,094.7
5,688,2
6,768.7
7,238.9
8,460.6
9,104.7
9,553.6
10,000.5
11,350.7

12,215.8

1,824.5

13,099.6
12,784.5
14,035.5
15,283.4
15,906.3
17,024.0
17,475.8
18,517.7
19,135.4
22,873,5

19,184.4
22,913.0

26,396.2

26,529.2

27,956.4
33,211.6
37,830.0
35,459.2
37,194.3
40,034.2

28,994.2
33,778.4
38,005.8
35,849.4

14,105.9
15,337.9
15,954.8
17,082.1
17,525.1

18,583.5

37,323.2

40,272.6

*Data for the years 1855-1864 are found in the Report of the Comptrolhør

of the Currency ( 1907 ), pp. 150, 409. These data do not harmonize with data
given on pp. 412-413 of the same report, and can serve only as a rough indica
tion of general conditions. Data for the years 1864-1907 were compiled from the
same report, p. 413, and from the Report of the Comptroller of the Currency
( 1911 ) , pp. 804-805. The years 1864-1911 include State bank circulation. The
term “ circulation” is consistently smaller than theamount of “ national bank

notes outstanding ” as given in other tables. Furthermore, there are glaring.

CLEARING AND COLLECTION OF CHECKS

86

discrepancies between this table and the table given on p . 150 of the 1907
report. Items of circulation, in the table given here (Table VIII ) , appear to
be net rather than gross; this seems to be the only grounds on which to explain
the discrepancies. This table is virtually the same as that given by Mr. A. P.
Andrew ,
stics of the United States, 1867-1909, U. S. Nat . Mon. Com.

Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 570, p. 42. Further discrepancies
are to be seen in the Report of the Comptroller of the Currency ( 1911 ) ,
pp. 111-114, and Vol. II (1920 ) , pp. 55, 151. Months are not indicated for
the years 1855-1911 .

It must be borne in mind, also, that all individual deposits are not sub
ject to check . Some of them represent deposits in savings banks and others
deposits not subject to check. On the other hand, government deposits would
be represented by checks in many cases. This table should be compared with

a table constructed by Professor Irving Fisher for the period 1896-1909, in
which he estimated the individual deposits subject to check.

See his Pur

chasing Power of Money ( New York, 1911 ), p. 281. Prior to 1915, the reports
for nation

banks did not segregate deposits subject to check from time

deposits. On this point see Holbrook Working, “ Circulating Medium, 1890
1921," Quarterly Journal of Economics, Vol. XXXVII (Feb., 1923 ) , p. 255.
Individual deposits are considerably larger than demand deposits. The re
search staff at the Federal Reserve Bank of New York estimated that total

individual deposits in all national banks in the United States amounted to

about 140 per cent. of demand deposits in 1910 and about 170 per cent . in 1923.
For demand deposits subject to check , 1890-1911 , see Wesley C. Mitchell,

Business Cycles ( University of California, 1913 ), p. 302. These data do not
agree with those given by W. I. King in Table XIII, p. 95 below.
'Report of the Comptroller of the Currency, Vol. II ( 1914) , p . 36. Circula

tion
is national bank circulation outstanding as of June 30. ` All dates for
1912-1922 are for June 30 unless otherwise indicated ,
*Report of the Comptroller of the Currency ( 1912 ) , p. 46. As of June 14 ;
in United States only, does not include Alaska and island possessions.

*Report of the Comptroller of the Currency ( 1913 ) , p. 50. As of June 4 ;
in United States only .
'Report of the Comptroller of the Currency , Vol. II (1914 ) , p. 751. In
United States only.
Treasury Department Circulation Statements (July 1 ) . Includes na
tional bank notes, Federal reserve bank notes, and Federal reserve notes.

'Report of the Comptroller of the Currency ( 1922 ) , p. 18.
* June 23.

*For June 30. Report of the Comptroller of the Currency ( 1923 ) , pp.
122-123.

Brief mention has been made elsewhere of the various investi

gations that have been made in the United States in an effort to
determine with some exactness the relative importance of checks

as a part of the currency. The question of the proper method
of computing the relative importance of checks and notes has
been and is a difficult one.

The usual methods have included the

analysis of the clearing house returns, of aggregate receipts by
banks and of particular receipts of banks, such as wholesale, retail,
and all others. No one method has been satisfactory and all have
been criticised freely. Most of the comparisons have been between
checks and money rather than between checks and notes. Space

precludes any careful and detailed criticism of the methods and
data used in the various surveys. The reader will find those else

CLEARING AND COLLECTION, 1863-1914

87

where. It will be sufficient for our purposes to bear in mind that
the data presented are rough and only approximate, although
they will serve, safely enough, to show general tendencies, the end
desired here.

Inquiries to determine the importance of checks

The first inquiry into the importance of checks in this period
was the Garfield inquiry of 1877 which was based upon 52 banks,
classified in three groups : ( 1 ) City banks, ( 2 ) those in cities the
size of Toledo and Dayton in Ohio, and ( 3 ) the " countriest” banks

—the smallest that could be found, at points removed from rail

roads and telegraph. In this inquiry it was thought that 88 per
cent. of business was transacted in checks, drafts and commercial
bills. This left undetermined, however, the exact importance of
checks.3

Comptroller Knox made a more extensive inquiry in 1881 ; it
rested upon the returns received from 1,966 banks for June 30
and from 2,132 banks for September 17, the latter number being
all the national banks in operation at that date. For June 30 he

found that the proportion of checks and drafts in the receipts of
the 1,966 banks was 91.77 per cent ., or 95.1 per cent. including
clearing house certificates ; on September 17 for the 2,132 banks
it was 91.85 per cent., or 94.1 per cent. including clearing house
certificates.4

In 1890 Comptroller Lacey made an investigation of the re
ceipts of 3,438 national banks ; 3,364 reported, showing their re
ceipts for July 1 and September 17. For July 1 , 92.50 per cent.
of the receipts of 3,364 banks consisted of checks, drafts, bills of
exchange, etc., in which were included exchanges for the clearing
*See H. P. Willis, “ Credit Devices and the Quantity Theory , ” Journal of
Political Economy, Vol. IV ( 1895-1896 ) , pp. 281-308 ; David Kinley, “Credit

Instruments in Business Transactions,” Journal of Political Economy, Vol. V
( 1896-1897 ) , pp. 157-174 ; E. W. Kemmerer, Money and Credit Instruments in

Their Relation to General Prices (New York, 1907 ), Chaps. II-IV ; Irving

Fisher, Purchasing Power of Money (New York, 1911) , passim ; B. M.Ander
son, Jr., Value of Money ( New York , 1917 ) , Chap XIX ; W. Randolph Burgess,
"Velocity of Bank Deposits,” Journal of the American Statistical Association,

Vol. XVIII (June, 1923 ), pp. 727-740 ; W. I. King, “ Is Our Currency Elastic ?"
Bankers Statistics Corporation, Special Service , Vol. II, No. 23 ° (Sept. 21 ,

1920 ) ; Holbrook Working,“ Prices and the Quantity of Circulating Medium ,
1890-1921," The Quarterly Journal of Economics, Vol. XXXVII ( Feb., 1923 ) ,
pp. 228-256. Some careful studies in this field have been made by the Reports
Department of the Federal Reserve Bank of New York under the direction
of Mr. Carl Snyder.

*Report of Comptroller of the Currency ( 1881 ) , pp. 14-15.
' Loc. cit., pp. 15-19 ; Bankers' Magazine, Vol. XXXVIII ( 1884 ) , pp. 485-486 .

88

CLEARING AND COLLECTION OF CHECKS

houses, clear house certificates, and miscellaneous items.

Of the

receipts of the 3,474 national banks reporting for September
17, 91.04 per cent. were in checks, drafts and other substitutes
5

for money. Comptroller Hepburn made a similar survey in
1892 and reported that 90.61 per cent. of the receipts of 3,473
banks as reported for September 15, 1892, were composed of
checks, drafts, exchanges and other substitutes for money.

“ Checks etc., " apparently meaning checks and drafts, constituted
46.79 per cent., as compared with national bank notes which con
stituted apparently 1.04 per cent.
Comptroller Eckels, at the suggestion and with the aid of Dr.
David Kinley, made a survey of the national banks in 1895 in an
effort to learn the proportion of credit instruments used in retail
transactions. On the basis of replies received from 2,465 banks,

with the amount of retail transactions aggregating approximately
$6,000,000, it was found that 58.9 per cent. were in checks and
store orders and 41.1 per cent, in various kinds of money. In this
report, it appears that the use of checks in retail transactions did
not necessarily increase as population increased, but on the con

trary decreased relatively after a certain density of population
was reached. This conclusion cannot be accepted as a definite
fact, however, as it rests upon but one investigation which was
very defective. The following tables will show something of the
results of the survey :
TABLE IX

The Use of Checks in Retail Transactions in 1895, in States Grouped According
to the Grouping of the Census
Division
North Atlantic
South Atlantic

Per Cent.
56.1
62.3

North Central

54.3

South Central

65.6

Western

59.7

Population
17,400,000
8,900,000
22,400,000
11,000,000
3,000,000

TABLE X

The Percentage of Checks in 1895 to Total Receipts in Groups of Cities Ac
cording to Population
In cities of
500,000 and over
200,000 and over

100,000 and over
50,000 and over

25,000 and over
10,000 and over
Below 10,000

Number of cities

Per cent.

4
11

55.9
65.3

10
25
41

70.9
53.8

59
309

53.0
66.1
55.6

'Report of the Comptroller of the Currency ( 1890 ) , pp. 22-32 ; Bankers'
Magazine, Vol. XXV, 3rd series ( 1891 ) , p. 519.
'Report of the Comptroller of the Currency ( 1892 ) , p. 32.

89

CLEARING AND COLLECTION , 1863-1914

The discrepancy between the results of this report and the
previous reports is to be explained partially on the ground that
the earlier reports had to do with the use of checks in general,
while this report covered the use of checks in retail transactions

only. In large cities many banks had no depositors in retail
business. In New York, for example, 24 banks reported that they
had no such deposits or only an exceedingly small amount of them.
With these facts in mind, it was concluded that this report was, on

the whole, in line with previous reports as to the importance of
credit instruments in payments and exchanges generally and that
credit instruments comprised between 90 and 92 per cent. of the
exchange media when wholesale as well as retail transactions were
included.?

In 1896, Comptroller Eckels, again with the aid of Dr. Kinley,
made a more extensive investigation in which 5,530 banks re
ported , among other things, the amount and character of deposits
made in the bank ( 1 ) by retail dealers, ( 2 ) by wholesale dealers,
and ( 3 ) by all other depositors. This report called for deposits
rather than receipts. Deposits, obviously, would be less than re
ceipts ; but it was thought that deposits would represent more
accurately the real business transactions of the country.8 For
July 1 , 1896, 3,474 banks reported that checks constituted 67.9

per cent. of their retail deposits, 95.6 per cent. of their wholesale
deposits, 95.8 per cent. of all other deposits, and for all deposits
combined in the 3,474 national banks, checks constituted 93.4

per cent. Combining the national bank reports with the State
bank reports, 5,530 banks reported that their deposits were as
follows :
Retail

deposits
Per cent. of gold ....

2.4

Per cent. of silver

3.2

Percent . of currency ...

26.7

Per cent. of checks .....

67.4

Grand total
Wholesale
0.3
0.4
4.0
95.3

All other
0.4
0.2
4.1
95.1

of deposits
0.6
0.5
6.3
92.5

After a careful analysis of the data gathered, Dr. Kinley con

cluded relative to the per cent. of retail trade transacted by the
use of credit instruments , that 40 per cent. was as low as in reason

could be claimed to be correct and that 55 per cent. rather than
67.4 per cent. was probably about correct, all things considered.
'Report of the Comptroller of the Currency ( 1894 ) , pp. 17-24. For an
additional answer to this apparent discrepancy, see H. P. Willis, op . cit . ,
pp. 299-301 .

*Receipts include checks presented for collection and not credited until the
collection is made.

90

CLEARING AND COLLECTION OF CHECKS

He thought 95 per cent. for the wholesale deposits about correct
and that combining retail and wholesale with proper weights, 75
per cent. represented the best conclusion as to the relative impor
tance of credit instruments in both kinds of deposits, and com

bined with all other deposits, properly weighted and discounted,
thought 80 per cent. was a reasonable estimate for all data pre

sented, although in a later review of the work he settled finally
upon 75 per cent . as a safe minimum.

This made check transac

tions at least three times as important as money transactions.9
The National Monetary Commission, in 1909, made another
investigation along lines similar to those followed in 1896.10
Banks reported for March 16, 1909, the per cent. of checks,
drafts, etc., in the deposits made by retail dealers, wholesale

dealers, and all other depositors, the estimated amount of checks
used in pay rolls, and other relevant facts. Of the retail deposits,
73.2 per cent. were in checks as against 67.4 per cent . in 1896. The
largest volume of deposits was in the returns of the national
banks, and the percentage of checks in those deposits was 74.6 per
cent., the highest shown in any class of banks. In representative
reserve cities 80.0 per cent . of the retail deposits were in checks ;
for the rest of the country 68.7 per cent. were in checks. Of the
aggregate wholesale deposits of all banks, 96.4 were checks. In
44 States the percentage of checks in wholesale deposits for na
tional banks was over 90 ; in 24 States it was over 95. For

repre

sentative reserve cities checks constituted 97.4 per cent . of the
wholesale deposits of all banks ; for the rest of the country ap

proximtely 94 per cent . Of all other deposits, Dr. Kinley found
that 95.9 per cent. were in checks; of all the deposits combined,
checks constituted 94.1 per cent.

In his final conclụsions, Dr. Kinley estimated that the per
centage of checks in the retail payments was about 60 and the
percentage for wholesale about 95 which , with his weighting, gave
86 per cent. as an average, and combining the results with " all
others" he reached the final conclusion that the average per

centage for all payments was from 80 to 85 per cent.11
'Report of the Comptroller of the Currency ( 1896 ) , pp. 57-90 ; Bankers'
Magazine, Vol. LIII ( 1896 ) , p. 704.
10 The results of this investigation were compiled by Dr. David Kinley and
constitute the most careful and extensive study of the subject made up to

date. See Kinley, The Use of Credit Instruments in Payments in the United
States, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d sess., Sen. Doc. No. 399,
passim .
11
" About 70 per cent . of weekly pay rolls were in checks. See Kinley, op.
cit . , passim . See also the Report of the Comptroller of the Currency ( 1912) ,

91

CLEARING AND COLLECTION, 1863-1914

As we have already seen, Dr. Kinley estimated in 1896 that
check transactions were at least three times as important as
money transactions. Using these data, Professor Kemmerer went

a step further in 1906 and computed the velocity or rapidity of
turnover of money, but was satisfied to consider the total amount
of check deposits equal to the total amount of transactions effected
by means of checks.12 He accepted the same conclusion that check

transactions were approximately three times money transac
tions . 13

It was left for Professor Fisher in 1911 to make the greatest

step forward in this direction working upon the material pro
vided by Dr. Kinley in 1896 and 1909. Professor Fisher com
puted the importance not only of money (M ) and its velocity ( V )
for the years 1896-1909, but also deposit currency ( M ) and its
velocity ( V' ) . The following table will show the results :
TABLE XI

M

M'

in bil

in bil
liong

V

2

3

Ilong

V"

Year

1

1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909

.88
.90
.97
1.03
1.18
1.22

1.25
1.39
1.36

18.8

2.71

19.9

2.86

20.2
21.5
20.4

3.22
2.88

21.8
21.6

5.13

20.9

20.4

1.45

21.6

1.58
1.63

21.5

21.3

1.62

19.7

1.61

21.1

4.24

MV
M'V '
In billions

M'V '

M'

MV

M

8

9

10

11

6.2

3.1
3.2

.20

.20

13.0
14.0

3.3

.19

16.9

3.8
3.6
4.2
4.3
3.4
5.7
4.5
4.3
4.4
4.0
4.1

.20
.26
.32

19.4
16.3
16.0

.31
.36

13.1

5

6

36.6
39.4

16
18

40.6
42.0
40.1
40.6

2022
24
27

40.5

27

39.7

29
28

228

7.8
8.2

31+

279+

9.0

34
25

315
323

9.3
9.2

32

294

34

353

9.2
10.4

5.40
4.73
7.77

39.6

6.54
6.81

42.7
46.3

7.1
6.54
6.68

45

45.0
52.8

7
99
112
131

163
170
208

219
227

Note
M
circu
lation
Note
in bil . circui .
lions lation

6.2
6.5

7.4
7.1

7.4
8.1

.40
.44
.51
.55
.61
.64

17.4

19.4

14.9
13.3
13.0

10.7
10.4

Columns 1-7 from Fisher, op. cit ., p. 304 ; columns 8, 9 computed from
columns 1-7 ; column 10 from Table XIII , p. 95 ; column 11 computed
Cf. W. C. Mitchell, op. cit ., pp. 321-322.
It will be noticed in the above table that the ratio between

money ( M ) and deposit currency ( M ) is much smaller than the
ratio between money transactions ( MV ) and total transactions
p. 124 for a table combining all these reports. The table is given in sub
sequent reports also. B. M. Anderson, Jr., op. cit. , Chap. XIX , should be con
sulted for a careful analysis of the data on this point. Other authorities which
should be consulted in this connection are E. W. Kemmerer, op. cit., Bk. II ,

Chap. III, and Irving Fisher, op. cit., Chap. XII.
**Professor Kemmerer estimated the velocity of money to be 47, an esti
mate criticized later by Professor Fisher who thought 18 or 20 nearer the
truth. See Fisher, p. 277.
13E . W. Kemmerer, op. cit ., Chaps. III - V .

92

CLEARING AND COLLECTION OF CHECKS

effected by means of checks (M'V ). There seems to be little

doubt but that MV gives a more accurate picture of the relative
importance of checks as compared with money, assuming the accu
racy of the velocities. Total transactions in deposit currency as
against total transactions in notes present a more accurate pic
ture of the importance of each. However, with the present un
certainty attaching to the velocities, V and V', the other compari
sons may present a picture almost as accurate.
Thus we see that in 1909 the business carried on by deposit
credit was approximately ten times that carried on by means of
>

money, that is, coin, bank, notes, certificates, etc.

At the same

date the demand deposits—not the transactions effected with de
posit currency ( M'V' ) —seemed to be about ten times the note
circulation, although in 1899 and 1904 they were almost twenty

times as great. For more recent years according to Holbrook

Working,14 Professor Fisher's estimates assign progressively in
creasing importance to deposit credit. This conclusion is sup
ported by Dr. W. I. King, who insists that the ratio of deposit
currency to money in actual circulation has been steadily increas
ing for the last 40 years.15 The Reports Department of the Fed
eral Reserve Bank of New York has been engaged for some time
in a careful study of the velocity of deposits, and has estimated
that the velocity of deposit currency for the country as a whole in
1920 and 1921 ranged from 25 to 35 times a year, which is con
siderably below Professor Fisher's estimate. This would reduce
the relative importance of deposit currency somewhat if Profes

sor Fisher's velocity is demonstrated to be too high.14
The Federal Reserve Bank of New York also found the widest

variations in the velocities of deposits in different sections of the
country. The velocity for 39 banks in New York City was found
to be considerably above that for banks in other cities, the velocity

for the New York City banks ranging from 91.3 in November,
1919, to 58.7 in August, 1921. The velocity for groups of banks
"Holbrook Working, op. cit., p. 234.
1W. I. King, op. cit., p. 4.
10The work done by the Reports Department of the Federal Reserve Bank
of New York relative to the velocity of deposit currency is reported by W.

Randolph Burgess, “ Velocity of Bank Deposits,” Journal of the American
Statistical Association , Vol. XVIII ( June, 1923 ) , pp. 727-740 ; Federal Reserve
Bulletin, Vol. IX ( 1923 ), pp. 562-566. Summary results of this study have

been reported currently in the Monthly Review of the Federal Reserve Bank
of New York . The Reports Department of the Federal Reserve Bank of New
York was aided by the statistical offices of the Federal reserve banks of

Boston, Chicago, and San Francisco, as well as by Professor Irving Fisher,
Professor E. W. Kemmerer, Mr. J. H. Riddle, and Mr. Clark A. Warburton.

CLEARING AND COLLECTION, 1863-1914

93

in 8 cities, for each month since January, 1919, ranged from a
minimum of seven times a year for Syracuse, N. Y., to about

ninety times a year in New York City. The following table gives

a summarized view of the velocity of deposits as computed by the
Federal Reserve Bank of New York :
TABLE XII

Annual Rate of Turnover of Bank Deposits
Total 4 up
Syra-

San
Fran

banks

Boston

banks

Chicago cisco

14

11
banks

State
cities

banks

cu se

6

3

39

banks

Rochester

banks

10
banks

banks

bank,

Year

Buffalo

Albany

22

New
York

City

1919

January ..64.7

.

18.8

18.6

31.7
30.5
31.4
31.2
34.2
37.3
38.2

16.6

33.8

16.8

35.4
42.9

August
September 74.5

39.0
29.1
27.4
34.2
40.6
49.0
43.1
28.9
30.3

16.5
17.0
17.8
18.8
18.4
19.4
17.9
17.5

October ... 85.4

35.0

20.6

November .91.3

33.8
39.2

18.4
19.0
19.7

9.7
10.2
9.9
10.4
11.5

19.6

12.2

18.7
18.8

20.4

12.1

19.7

21.0
19.4
18.6

20.0
19.6

11.6
10.8

19.2

10.0

17.4

18.8
19.9

20.9
20.5
20.6
20.4
19.8
21.4
21.9
21.9

11.7
11.4
11.7
12.8

11.6

18.9
19.5
19.2
21.0
19.0
19.9
21.2
20.5

22.5

11.5

21.3

20.9
19.2
16.9
18.2
18.0

21.7
20.3
19.3
21.5
19.8

10.1
9.2

8.6

16.7

9.1
8.9

17.9

18.6

February .63.6
March

April
May .
June .

July

.62.1
.63.7
72.4
.81.2
.81.3
..72.6

December .89.5

16.5

16.7
17.0
16.7
18.4
17.5
18.9
18.5
17.7
19.2

15.3
11.4
9.0
9.8
8.6

17.1
16.0
18.2
18.0
19.8

35.5
39.6
89.0

34.0
38.0

45.1
47.6

47.8
50.2
44.3
46.4
47.0
46.5
51.3

38.5
41.9
43.1
44.2
42.8
42.5
44.9

18.9

42.5

50.0

18.5

37.4
38.0

44.1

40.9
42.6
43.1
40.3
40.7
39.4
38.5
35.4
41.6
41.6
40.2
41.8

1920

January ..83.1
February ..77.0

28.7

March

25.7

April
May
June

..76.6
.77.3
.70.6
.68.7
.67.1

July
August ... 62.7
September 66.0

October ... 77.5

November .79.1
December .83.8

24.6

32.2
34.6
32.9

35.0
32.1

31.8
32.6
31.8
35.9

19.4
22.3
19.9
21.1
22.8
22.2
23.1

11.4

11.6
13.2

45.3

38.0
36.1

46.3
47.0
49.7

36.2

48.2

39.4

30.8

46.3

34.4
37.0
38.0
39.0

51.5

19.1

33.5

46.4

17.8

30.9

42.4

30.0
30.0
31.1
30.4

41.3
42.7

50.8
46.9
49.4

1921

January ..76.3
February .68.0
March

April
May
June

.64.1
.62.9
..68.7
... 66.2

26.4
24.8
27.0
27.4
36.8
30.5

18.3

21.4

8.6

18.0

66.2
... 58.7

28.1
22.5

19.2

8.8
7.0

September 65.7

24.4
26.0

16.1
17.8
19.9

19.6
18.3
21.4

27.7
30.5

20.2

17.8
14.9
16.7
18.1
18.5
18.8

July
August

October ... 70.4

November .75.7
December .77.1

19.9

8.1

29.3

25.9
28.2

40.2

42.0

42.3

43.6
41.5

36.7

44.1
46.6

33.6
32.8

47.4
48.4
47.3
49.7
49.3
47.1

22.0
21.8
21.7

8.3

18.6

18.9

17.3
16.4

32.4
29.6
32.7

18.6

33.6

42.4

43.3

32.2

9.0
9.8
9.1

21.8

39.4
37.7
42.8

38.9
38.6
42.2
37.4
42.8

1922

January ..74.2

28.5

February .75.2

25.4

March

... 75.4

April ..... 79.9

22.4

20.1
18.9
18.0

19.2

8.2
8.1

29.4

19.5

19.9

9.2

* From the Federal Reserve Bulletin , Vol IX ( 1923 ) , p. 566.

43.9
37.7
41.2
39.4

CLEARING AND COLLECTION OF CHECKS

94

TABLE XII-(Continued )
Total 4 up

8.4

22.0

July
.74.2
August ... 65.2
September 68.6

24.3
22.1
21.6

21.9
18.3
20.4

19.7
17.8

October ... 86.3

24.0

November .77.4
December .79.9
1923

25.8
31.4

22.6
23.0

21.1
23.6
22.3

8.5
8.8
7.3
8.4

24.5

22.7

9.6

January ..79.9
February .82.3

23.5

24.6
25.1

21.4
21.4

24.2

21.4

8.7
8.6
9.7

3

9

19.1

20.2

6

19.7

26.2

Fran
cisco

banks

28.6

75.7

Chicago

14

.77.8

June

San

Boston

banks

May

Year

22

Albany

10

City

Stato
cities

11

11sa

banks

Syra .

egter

banks

Rooh

banks

banks

banks

39
banks

Buffalo

banks

New
York

1922

March .... 84.0

26.0
23.9

8.8
9.7

44.5
45.6

37.3

41.7
38.4

37.1
34.4
40.7

18.1
18.3
18.7
15.9
17.5

24.7
28.6

19.3

34.3

43.7

19.6
21.0

32.5
35.4

41.4

45.9

37.4
39.7
39.9

19.2

34.7
35.7
38.0

47.0
50.3
46.4

39.7
42.6

20.0

19.8

31.4

33.4
32.3

41.9

37.6

39.0

There proved to be a close relationship or correlation between
the size of the city and the velocity of deposits, but a still closer
relationship between the amount of bank deposits in the city and

the velocity.17 For 282 clearing house centers the average veloc
ity for December, 1921, was estimated at 36 times a year. The
final tentative estimate, as pointed out above, places the velocity
of bank deposits in the United States as a whole between 25 and
35 times a year. Among other interesting conclusions of Dr.
Burgess we find that seasonal changes in bank clearings are largely
accounted for by large seasonal variations in the velocity of de
posits.

Dr. King compiled a table covering the period 1880-1920,
with results for the years 1896-1909 quite similar to those already
given above in Table XI. Table XIII was compiled from the one

developed by Dr. King. 18
This table will show in a rough . way the steady growth of

deposits subject to check as compared with note and money cir
culation for the years 1881-1923, although these tables are
obviously subject to correction in many respects due to the
present uncertainty attaching to some of the principal.magni
tudes .
For seven cities of New York , the highest coefficient of correlation was

that between the logarithm of velocity and the logarithm of bank deposits,
amounting, by the Pearson method, to 0.94. See Burgess, “Velocity of Bank
Deposits,” Journal of the American Statistical Association, Vol. XVIII (June,
1923 ), p. 733.
18W . I. King, op. cit . , p . 9.

CLEARING AND COLLECTION , 1863-1914

95

TABLE XIII

Circulation

ion
Circulat
Note

to
Deposits
Demand
All

Ratio of

Spending
for'
Available
Money

Demand
Deposits

Year)(
June

Demand
Deposits
......
M)('

( In millions)

Individual

All Money and
Deposits Available
for Spending
Money

Circulation
Money

for Private Use
in millions )

Deposits
Money
to
Demand
Circulation
Private
Use
for

Medium Available

M'

in()
billions

Corporation
and
M'
M

1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895

1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907

1908
1909
1910

1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922

656.3
730.0
738.4

742.0
653.8
650.0
773.4
809.3
785.8
8 49.9
957.3

898.4
1,018.9
845.6

801.7
873.6
877.6
969.6
1,032.1
1,165.8

1,809.5
2.010.5

2,302.9
2,002.8
1,945.1

2,214.0
1,947.2

2,019.6
2,168.0
2,338.3
357.6
2,587.7

2,505.3
2,599.8
2,719.5
2,22.6
2,820.6
3,433.4
4,089.4
4,490.4

1,231.4

5,321.6

1,260.0
1,38 2.5

5,872.5

1,368.8
1,456.7

5.7 49.9
6.087.5
6,56 0.9

1,58 9.0
1,619.6
1,623.4
1,622.0

6.717.8
7,092.6
6,506.2

1,639.6
1,614.1

6,873.2
7,782.1
7,794.4
7,720.5

6.704.1

891.7
965.1
980.6

1,821.7
2.023.2

985.3

2,017.0
1,939.1

898.7
858.7

1,970.5

989.9
1,019.1

2,613.9
2,729.7

1.167.0

2.738.0
2,837.0
3,486.3

1,143.4

1,205.3
1,318.1
1,450.3

2,519.0

4,165.7

4,589.3

6,197.8

2,629.3
3,810.3

18.933.9
21.081.33

4,270.3
4,770.2

3,557.9

2 , 368.9
2,383.5
2,601.9

1,653.2
1,751.9
1.922.3
1,962.2
1,96 4.1
1,922.1
1,356.8
1,956 1
2,042.0
2,1 26.9
2.06 9.1
2,117.0
2,388.4

16,78 4.5

1923 ( Jan . ) .... 3,749.0

2,214.7

5. 420.7
5.873.9
6.019.6

2,36 0.9
3,450.0

3,686.0
4,331.39
3,911.1

2,078.0

1,539.2
1.5 73.3
1,699.5

8,963.7
11,198.1
14,186.2

2,230.5

1,089.3
1,128.6
1,06 4.1
1,105.8
1,1377
1,049.3
1,161.0

1,677.6
1,770.6
1,732.5
1,771.6
2,090.2

8,880.0

2,316.8

19.620.4
20,6 26.9
21.491.0

6,636.2

6,807.7
7,273.3
6,636.5
6,778.6

6,927.7
7.730.6
7.85 3.3

7,770.2
8,946.7
9,012.7

11,388.7
14,815.0
16,906.8
19,574.3
21,071.1

2.76
2.75
3.12
2.70
2.98
3.41
2.52
2.50
2.76
2.75
2.46
2.88
2.46
3.08
3.39
3.12
3.21
3.54
3.96
3.85
4.32
4.56
4.25
2.45
4.50
4.23
4.38
4.01
4.13
4.19
4.82
4.65

2.04

.31

2.10
2.36

.31

2.05
2.18
2.33
1.81
1.84

.17

11.5

2.14
2.09
2.48
2.17
2.64
2.68

.16
.13
.13
.12
.14
.15
.17
.18

2.35

.20

2.48
2.89
3.16
3.16
3.52
3.73
3.54
3.75
3.79
3.54
3.70
3.38
3.53

.20
.19
.20
.26
.32
.31
.36
.40

12.6
16.8
18.0
19.7
18.5
16.7
16.3
15.1
13.6
14.1
18.0

2.08

3.54
4.00
3.84

4.36

3.65

5.12
5.06

4.32
4.26

5.36

4.75
5.64
4.44

6.01
4.58
5.15
4.878

5.8
6.5
7.4
7.0
7.2
9.2

21
.29
.27
.24

4.58
4.42

.51
.55

.61
.64
.68
.68
.74
.76
.75
.87
.90
1.26
2.43
3.31
4.02

5.02

3.56

5.80
5.73

2.94
3.12

20.4
17.3
16.3
18.b
16.3
15 2
14.9
13 2
12.9
10 7
10.5
101
11.3
10

10.2
11 8
10.3
12 4
11.3
65
5.7
5.2
5.5
7.0
6.9

'Government supply of ready cash and deinand deposits included , as well

as

amounts available for use of individuals.

*Corrected by Miss Bagwell of the Federal Reserve Bank of New York.
King's figures were 4,337.4.
*Corrected by Miss Bagwell ; Dr. King's figures were 20.941.2.
Miss Bagwell's figures ; Dr. King's were 5.14 .
Miss Bagwell's ; Dr. King's were 1.83 .
" Miss Bagweil developed the table for the years 1921 to January, 1923 .

Dr.

CLEARING AND COLLECTION OF CHECKS

96

The relation of the clearing and collection system to the system of
reserves

Any system of clearing and collection of checks tends to re

flect the system of reserves which obtains among the banks in
volved .

If the reserves are decentralized as was the case under

the National Banking System prior to 1913, or partially cen
tralized as during the first three years of our Federal Reserve Sys
tem, the system of clearing and collection will be decentralized or

partially centralized accordingly. With the centralization of re
serves which was effected by the amendment of June 21 , 1917, to
the Federal Reserve Act, the clearing and collection system has

tended to become highly centralized.
The concentration of reserves and the centralization of the

clearing system are necessary prerequisites to the most effective
use of deposit currency ; and deposit currency is the most econom

ical, speedy and desirable currency that the world has been able to
devise thus far. It behooves any nation, therefore, to see to it
that it is providing the proper mechanism for the most complete
and economical use of its best medium of exchange.
A concentration of reserves is one of the first and most neces

sary steps in the proper direction. Concentration of reserves
minimizes the necessity for such large reserves because it renders
them more mobile and more effective. At the same time it enables

the same amount of reserves to support, with no greater strain
on the specie base, a much larger superstructure of credit which,
in turn, permits the price level to rise higher than would be pos
sible were the reserves scattered. But, above all, a greater degree
of elasticity is injected into the currency system .

If a centralized clearing system accompanies the concentration of reserves — and this is the tendency — even greater effective
ness is given to the use of deposit currency. To the extent that
all banks participate in a centralized clearing, all debits and
credits will tend to equalize and offset each other. This fact fur
ther minimizes the necessity for reserves. Were reserves not neces
sary to meet other obligations such as the demands for cash and
to meet adverse trade balances, a perfect clearing or offset system

would require no reserves. And to the extent that deposit cur
rency is not covered by reserves or does not call out cash finally to

liquidate it, it acts as a potent factor in maintaining or raising
prices . On the other hand, to the extent that there is not a per
fect offset in clearing, there is a necessity for reserves to liquidate
the adverse balances.

Thus a concentration of reserves accom

CLEARING AND COLLECTION, 1863-1914

97

panied by a perfectly centralized clearing system will permit a
maximum expansion of purchasing power on the basis of the avail
able reserves. Such a system brings not only a greater degree
but also a greater ease in the expansion of the purchasing power,
and this fact implies at the same time both a greater danger and a

greater advantage to the nation. The danger is increased be
cause the price level can rise to greater heights without any
greater strain on the reserve base ; the greater advantage lies in
the increased elasticity of the system. Whether such a system be
comes a blessing or a cause of injury to a nation depends upon the

soundness of the banking administration. Under sound banking

methods the elasticity in the system can be used as an important
foctor in stabilizing the price level. Under unsound methods infla
tion can creep in, and the price level can rise to dizzy heights with
all the attendant evils which accompany that well-known financial
disease. The extent to which our present credit system permits
prices to rise and fall has been seen in the phenomenal rise from
1913 to 1920 and in the unprecedented fall which followed . In

flation may be followed in turn by deflation, thereby doubling all
the injustice that is experienced during the period of inflation.
Deposit currency by its very nature makes inflation easy.

To

the extent that credit is advanced by banks without being cov
ered by reserves or commodities and services equal in value to the
credit advanced, inflation exists. This depends, of course, upon
the wisdom of the individual bankers. The mere placing in their
hands of a good mechanism with which to work does not insure its

But no nation can expect to accomplish much
towards a stabilization of prices until the proper mechanism is

proper use .

provided. Success in its use can be attained as time brings home
new lessons.

A proper mechanism is provided through concentrating the
reserves and centralizing the clearing system. But a more perfect
functioning of the clearing system involves, not only absolute
centralization with all banks participating, but remittance at par
by all the banks. Par remittance is a technique in clearance and

collection which permits deposit currency to circulate at its face
value, on an equal plane with notes, facilitates its circulation, and
equalizes and minimizes the burdens resting upon business activi
ties as a result of using deposit currency. Thus the ideal mech
anism will be provided, the best use of deposit currency secured,

and the maximum benefits secured to a nation through the use of
deposit currency only when these three conditions are met, namely,

98

CLEARING AND COLLECTION OF CHECKS

concentration of reserves, centralization of clearing with all

banks participating, and par remittance.
But the transition to concentration of reserves, to the cen

tralization of clearing, and to par remittance, has not been taking
place without serious opposition on the part of banks which think
they found the old system profitable.

In order to understand

better the system under which the United States is now working,
the problems that have arisen in connection with its development,

and the causes for the opposition to the new system, a survey will
be made of the clearing and collection practices that existed just
prior to the introduction of the Federal Reserve System.
Practice under the National Banking System .

Local exchanges

without clearing houses

For convenience and simplicity of treatment the practice of
clearing and collection may be treated according to whether it is
( 1 ) local, or ( 2 ) inter-community. Local exchanges, in turn ,
may be divided into two classes according to whether the commu
nity is small and without a clearing house, or larger and with a
clearing house .

In aa small community with but a few banks, checks and drafts,
drawn upon one local institution and deposited with another in the
same locality were and are collected by the direct presentation of

the paper to the bank on which it is drawn, which bank pays in
current funds the amount due. Where the banks were located in
different towns or villages, but within traveling distance of an
hour or so, checks might be presented over the counter by mes

senger, daily, two or three times per week , or at given times agreed
upon, and the messenger may have traveled the distance in any one
of several ways-train, trolley, carriage, boat, or auto. This
practice was used where it was found to be more profitable than
to use the mails which required more time, or for other reasons

that might be peculiar to the communities concerned. It has also
been a common practice to use the express companies for collec
tion purposes. But, in general, unless unique conditions existed,
the mails were the common means of collection. Indeed, it is diffi
cult to generalize. Peculiar practices have been indulged in by
banks, and the reasons lying behind such practices have been

equally peculiar.

Arrangements, understandings, discrimina

tions, all inspired by the desire for profit, were the order of the

day. This profit was to a large extent determined by the ability
of the bank to collect exchange and at the same time avoid paying
such charges to other banks remitting to it .

As a result there

CLEARING AND COLLECTION, 1863-1914

99

were no uniform practices that could be dignified by the name
" system . ”
Local exchanges with clearing houses

In large cities, the method of procedure just described ,
although practiced in the early days of banking, is dangerous and
expensive, and the clearing house has been devised to take its
place. These early clearing houses accepted only local checks
and other items on the members. Checks and drafts on out-of-town
banks had to be collected in other ways. The process of clearing

treated fully in another chapter requires no explanation here fur
ther than to say that in principle it brings the reciprocal claim
ants together. Each bank presents its claims to the other clearing
member banks and, in turn, receives claims from them. Each bank
then totals its debits and credits on a balance sheet and deter

mines the amount due by or to itself, as the case may be. These
balance sheets are then sent up to the central desk, where the
manager of the clearing house presides, and accounts between the

various banks are settled there in a manner which simplifies set

tlements. It has been and is yet a common practice for those
from whom payments are due to pay the amount in one form or
another to the manager of the clearing house, and for those to
whom sums are due to receive the amounts from him.

Balances are paid in various ways. In some clearing houses
banks are required to pay in specie ; in others by means of clear
ing house certificates which represent either gold or some other
accepted medium ; in others they are permitted to carry accounts
with the clearing house ; in others debtor members are permitted
to borrow from other members to effect settlements ; in others the

balances are paid in drafts on some large institution which has
extensive connections with all the other banks in question ; and in
still others, balances are settled through the Federal reserve banks ,
in which the member banks of the clearing house association carry

reserve deposits. There is an increasing tendency to settle through
the Federal reserve banks. Arrangements are often made by

banks which are members of the clearing house association to clear
for other non-member banks in the community provided they keep
accounts with the clearing banks.
Inter-community clearing and collection

The great variety of economic transactions arising between in
dividuals in different communities gives rise to inter-community

100

CLEARING AND COLLECTION OF CHECKS

claims.

Banks are the chief agencies for the conduct of these

inter - community exchanges, usually called out -of -town exchanges,

and must offer facilities to their customers either in remitting to
or in collecting on other centers. This means that banks have
been obliged to keep funds on deposit in other cities, not neces

sarily in every city in which customers may desire to do business,
but in certain commercial centers through the banks of which
arrangements may be made for the conduct of exchanges with

any place desired . The burden of collection has been almost en

tirely on the reserve and central reserve city banker. In selecting
the reserve city in which he purposed to carry the reserve funds of
his bank, the country banker naturally selected the one to which
his section was tributary. Thus the banks of New England, with
few exceptions, selected Boston and New York as their reserve
cities.

Those in the middle States selected New York and Phil

adelphia ; the south Atlantic States selected Baltimore and New
Orleans; the middle West was divided among Cincinnati, Cleve
land and Chicago, although Chicago exchange occupied the im
portant place. All Michigan drew on Detroit. St. Louis was

the center for the southern Mississippi valley and the Southwest ;
San Francisco for the Pacific Coast.

But few were the banks

that did not have at least one New York correspondent, New York
exchange being in the greatest demand, as New York was and is
the commercial and financial center of the country. Besides cor
responding with the central reserve and reserve city banks, each
bank corresponded with from three to a dozen banks in neighbor
ing counties, among which the checks of each circulated freely
and with which settlements were made weekly or semi-weekly, as

the case supposedly required.
The existence of such balances with correspondent banks ren
dered necessary the movement of money from one place to another,

since creditor banks might demand from the debtor banks pay
ment in cash. Whether they did exact such payments depended
upon the relative demand for money at home as compared with
that in the community of their correspondents. If the home de
mand for loans and for hand - to -hand money did not justify the
banks in calling for shipments of currency from their correspond
ents, they probably loaned surplus funds in the cities in which

their correspondents were located, or in other cities, or perhaps
left them on deposit with their correspondents at a rate of inter

est agreed upon, in which case the funds were loaned ordinarily
by the correspondent at rates sufficiently high, supposedly, to as
sure a fair profit.

CLEARING AND COLLECTION , 1863-1914

101

Almost every type of reciprocal arrangement was made. A
large volume of checks was handled by many banks and trust com

panies in reserve cities and smaller places through special recipro
cal arrangements, consisting of the mutual exchange of checks
within certain territory or of checks drawn on certain specified
points and handled at par. Some banks would agree to collect for

others at par not to get the same favors but primarily to induce
country banks to carry deposits with them for the sake of the
profit which was supposed to result from the lending of such re

serve deposits on call. Competition for such deposits became so
keen that banks, such as those in New York City, made a practice
of paying interest of about 2 per cent. on the deposits. Some of

these city banks even went so far as to agree to pay collection
charges to these same country banks. The practice of entering
into such arrangements was widespread. Chicago at one time of
fered to collect at par in 29 entire States.19 In some instances
two banks would make arrangements to carry balances with each
other free of interest, the so - called “ double-headed” accounts, in
order to have their items collected at par in the respective dis
tricts, the remittance of accumulated balances being made at par

in exchange on central points at stated intervals. Other schemes
were employed, involving an evasion of direct charges and outlays
in the form of exchange paid, but entailing, nevertheless, cost in
some form .

As has been indicated in another connection, the clearing and
collection system is determined largely by the system of re

serves underlying. The decentralized system of reserves which
existed under the National Banking System gave rise to certain
practices which made obvious the great defects of the old systein
of clearing and collection.
The defects of the old clearing and collection system

The defects of the former clearing and collection system,
which were associated almost entirely with inter-community settle
ments, and which gave rise to the Federal reserve system of clear
ing and collection, may be classified as follows: ( 1 ) Excessive
charges, ( 2 ) indirect routing of checks to avoid remittance

charges, (3 ) giving immediate credit for uncollected funds, (4 )
paying interest on uncollected funds, 45 ) the carrying of com
pensating balances with collecting banks solely for the purpose
of obtaining par territory, ( 6 ) the maintenance of reserve bal
" Hallock, op. cit., p. 25.

102

CLEARING AND COLLECTION OF CHECKS

ances with banks for the sole purpose of getting items on which
to charge exchange, ( 7 ) excessive gold movements, and (8 ) the
absorption of collection charges by collecting banks. Each of these
defects or, perhaps one should say, malpractices, will now be re
viewed briefly .
Excessive charges

The question of excessive charges has reference not only to
charges exacted for drafts, designated as exchange, but to deduc
tions or charges made by banks in remitting funds in payment of

checks presented by other banks, commonly called exchange
charges, although when considered from the point of view of the
remitting bank they were, in nature, remittance charges. Such

charges rested upon the theory that banks might find it necessary
to ship funds to meet adverse claims as well as upon the fact that
other expenses were incurred in meeting the customer's distant

obligations.
It has been noticed already that in the thirties, charges on
checks and drafts ranged from zero to 112 per cent.20

Comp

troller Knox later estimated that the average cost of southern
and western exchange upon New York in 1859 " was not less than
from 1 to 112 per cent.” Although the higher rates were charged
by western and southern banks the average rate in 1890 was
about 12 of 1 per cent.21 Since 1890 the charges have not varied
widely from 1/10 to 14 of 1 per cent.
Such charges are claimed to be in part a survival of the stage
coach days when drafts on New York City were the safest and
most convenient means of carrying funds and for the conversion
of which the early banker charged roundly.22 One of the principal
causes of excessive charges has been the wastefulness of the inde
pendent system of collections. For example, a small bank at Clay
ton, Mo. , just outside of St. Louis, received one day twelve letters,
inclosing checks, from St. Louis banks . Remittance was made to

each of twelve banks by draft on its St. Louis correspondent.
Twenty-four letters were written and postage paid on them,
whereas a central agency could have handled all the business with
one letter each way.23 What was true of the Clayton bank was
true in almost every section of the United States.
20See Chap. III , p. 72.

" Report of the Comptroller of the Currency ( 1890 ) , pp. 14-22 ; H. H.
Preston, “ The Federal Reserve Banks' System of Par Collection,” Journal of

Political Economy, Vol. XXVIII, No. 7 ( July 1 , 1920 ) , p. 566.
" Preston, op. cit ., pp. 565-566.
#Hallock, op . cit . , p. 14.

CLEARING AND COLLECTION, 1863-1914

103

The rate of exchange on drafts and the remittance charges

made by the remitting banks for checks received were arbitrary,
as a rule, depending more upon the value of the purchaser as a
patron of the bank along some other line than on the actual ele
ments of cost. As the banks grew in numbers and the use of checks

in payment of foreign ( out-of-town) bills became more general ,
the banker found he could charge the collecting bank a maximum
rate with less compunction than he could charge his depositor a
minimum rate on drafts, and so he encouraged the use of the check.
This, in turn, caused more trouble for other banks who had to col
lect the checks . From the increased use of checks for meeting

out-of-town obligations many of the evils associated with the old
clearing and collection system developed.
Circuitous routing of checks

Doubtless, the greatest evil in connection with the collection of
out-of-town checks was the practice of sending them on long,
devious and circuitous routes in order to avoid remittance

charges. This practice in itself increased the delay and waste in
the system. It was possible to find routes open in which there

were no remittance charges because of the reciprocal arrange
ments which were made between correspondent banks to pay
checks at par for each other.
Remittance charges as a cause of circuitous routing. Legality of
such charges

At this point it becomes necessary to understand what banks
could charge for remittances . Under the common law, as ordi
narily interpreted , no bank legally could make charges for pay
ment when checks were presented at its counter .
was to pay

Its obligation

the holder at once and in full.24 If checks are mailed to

" In re Brown, 2 Story, 502, 517 ( 1843 ) ; Story on Promissory Notes, Section
489; Boehm v . Sterling, 7 Term Rep. 429 , The English Reports, Vol. CI ( 1797 ) ;
3 Kent's Commentaries, 104, note c ; Senter v. Continental Bank, 7 Mo. App. 532

( 1879 ) ; Fogarties and Stillman v. The State Bank--David A. Ambler v. the
Same, 12 Richardson ( S. Car. L. Rep . ) , 518 ( 1859 ) .
The Negotiable Instruments Law has now superseded the common law

in all the States with respect to checks and according to this law a bank's
liability to pay cash without deduction applies to the depositor ( drawer ) only.
Therefore any other holder who presents a check at the bank's counter for
payment may be compelled to accept a draft and suffer a deduction in the
form of an exchange charge. Eight States since 1920 have passed laws limiting
the freedom of certain holders of checks in this manner . The United States
Supreme Court, in the case of Farmers and Merchants Bank of Monroe, North
Carolina, et al. v. Federal Reserve Bank of Richmond , l'irginia , 262 U. S. 649
( 1923 ), upheld such a law passed in North Carolina. See pp. 1-3, 76-77

above, and pp. 269-276 below .

104

CLEARING AND COLLECTION OF CHECKS

the bank on which drawn the bank then becomes its own agent for

collection and may deduct charges for remittance. However, it is
considered negligence on the part of a bank to send a check di
rectly to the bank on which drawn. In the case of Merchants'
National Bank of Philadelphia v. Goodman et al.,25 the Supreme
Court of Pennsylvania said : “ We think that the principle may be
stated as a true one

that no firm , bank, corporation , or

individual can be deemed a suitable agent, in contemplation of
law, to enforce in behalf of another a claim against itself.
We interpret the cases to which we have referred as establishing
the rule of transmission to a suitable correspondent or agent to
mean that such suitable agent must, from the nature of the case,

be some other than the person who is to make the payment. By
no other rule can the rights of endorsers be protected if it is the
interest of the party who is to make the payment to hindei , post
pone, or defeat payment." 26 In the case of Drovers' National
Bank v. Anglo -American Packing and Provision Company,27 the
Supreme Court of Illinois said that if the collecting bank has no
proper agent at the place through which to make the collection
it should so inform the customer and act on his instructions . But

if it takes the check without special stipulation, the customer is
authorized to assume that it has a suitable agent to whom the
paper may be transmitted , and that it will make the collection

through such agent.28 Every State except New York has upheld
this ruling.29 Thus, since banks could not legally send checks di
rect to the banks on which drawn without assuming the liabilities

attached they would send them to agents for collection. Often
they had no correspondent agents in the towns on which they had
checks and consequently would be subjected to remittance charges
by the collecting agents. Thus it will be observed that it was the

final collecting banks ( or the drawee banks, if collecting on
themselves) which made the charges for remittance and which

pocketed the profits resulting from such transactions, as the
banks on which the checks were drawn could not make such

charges if the checks were presented over the counter or through
25109 Pa. St. 428 ( 1885 ) .

2 Also in the Bankers' Magazine, Vol. LVI ( 1898 ) , p. 727.
27117, Ill . 107, 108 ( 1886 ).
28
38 Bankers' Magazine, Vol . LVI ( 1898 ) , p. 728.
2See also German National Bank of Denver v. Burns, 12 Colo. 539 ( 1889 ) ;
Lowenstein and Brothers v . Bresler, 109 Ala. 326 ( 1895 ) ; Anderson v. Rodgers ,
53 Kans. 542 ( 1894 ) ; First National Bank of Chicago v. Citizens Savings Bank
of Detroit , 123 Mich . 336 ( 1900 ). For a further list of cases see W. H. Kniffin ,
The Practical Work of a Bank ( New York, 1919 ) , p. 173.

CLEARING AND COLLECTION , 1863-1914

105

the local clearing house which, of course, was the same as direct
presentation over the counter. The last collecting banks, then,
which charged for remitting, were the ones responsible for the
circuitous routing of checks.
This legal aspect of collection had its weaknesses, however.
In cases where there were but two banks in a town, one strong and

one weak, the collecting banks would be obliged to send all the
checks on the strong bank to the weak one for collection in order
to protect themselves from liability. At the same time it was for

the interests of the depositors to have their checks sent to the

strong bank rather than to the weak bank which might collapse
and deprive them of their funds. In New England some of the
weaknesses of the small out-of-town banks were exposed by having
the check collection business taken from them after the creation

of the country collection system in 1899. This was done when

they proved slow in making remittances or offered insufficient ex
cuses for the delays. With the introduction of the country col
lection system some of them went into bankruptcy.30
Some collecting banks, however, rather than risk the weak
banks as agencies, often sent items direct and themselves assumed

the liabilities. This was a practice which steadily developed. It
was indulged in by most banks in large cities as well as by those

clearing houses which had country clearing departments, such as
Boston, Atlanta, and Kansas City, Mo. Obviously, however, it
was a practice that could not be supported in law.31
Typical illustrations of circuitous routing of checks

It is possible to give several peculiar and interesting examples
of the indirect routing of checks. Hallock gives an example,
probably the best known and most widely quoted, of a check
drawn on a bank in Sag Harbor, N. Y. , and deposited in a bank

at Hoboken, N. J., which passed through eleven banks, traveled
about 1,500 miles, and was in transit about eleven days, due to

the effort of the Hoboken bank to avoid paying remittance
charges in collecting on the bank about 100 miles distant.32
30Proceedings of the New York State Bankers' Association ( 1912 ) , pp . 70-71 .
a Proceedings of the American Bankers' Association (1909 ), Third Annual
Report of the Clearing House Section, pp . 25, 40, 42.

* Hallock, op. cit. , pp. 19-22 ; J. G. Cannon, Clearing Houses, U. S. Nat.
Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 491, Chap. IX ; J. D.
Magee, Materials for the Study of Banking ( New York, 1923 ) , pp. 233-239.

106

CLEARING AND COLLECTION OF CHECKS

3

N.H.

VT.

MASS.

N. Y.

CONN

R. 1.

PA .

N.J.

FIGURE 1 .

The accompanying diagram shows how a check was pushed along from
place to place in its erratic course. The check was drawn on a bank in Sag
Harbor, L. I. ( 1 ) and deposited in a bank in Hoboken, N. J. (2) . The
Hoboken bank sent it to a bank in New York City ( 3 ) , which had no cor

respondent in the neighborhood of the drawee, consequently, the New York
bank sent it along with some other checks to its correspondent in Boston (4) .
This bank, in turn, sent it to its correspondent at Tonawanda, N. Y. (5 ) ,

which sent it in a homeward direction by sending it to a bank in Albany ( 6 ) .
The Albany bank sent it to its correspondent at Port Jefferson, L. I. ( 7),
which diverted it from its course by sending it to its correspondent at Far
Rockaway (8) , from which point it was sent back to a New YorkCity bank,
then to Riverhead, L. I. (9 ) , then back to Brooklyn ( 10) , and finally home to
Sag Harbor.

This practice was not peculiar to any section of the country, nor is the
above case a particularly unique one, as the following examples will show .

MASS

NY .

CONN

OHIO

'NJ
LI

Mela
Mig . 2 .

Fig.3
FIGURE 2 .

Figure 2 shows a check drawn on Mt. Gilead, Ohio ( 1 ) , and deposited in
a Columbus bank (2 ) , from which it was sent in the opposite direction to Cin
cinnati (3 ) , then to Cleveland ( 4 ) , to Uhrichsville (5), to Coshocton ( 6 ), to
Newark ( 7 ), and back to Columbus again, from which it was sent to Card

ington (8), and finally to Mt. Gilead . The check traveled about 650 miles

CLEARING AND COLLECTION , 1863-1914

107

instead of the necessary 60, and was gone about eight days. As the check
was not paid, “it had to be sent back through the same hands again , and

during 23 days this worthless check stood on the books of the bank to the
credit of the depositor, and the bank was actually taxed two cents on it which

looks like adding insult to injury. " Bankers' Magazine, Vol. XVII, 3rd series,
( 1882 ), pp. 466-467.
FIGURE 3 .

Figure 3 shows a check for less than $ 50 drawn on a Stonington , Conn.

bank ( 1) and deposited at Westerly, R. I. (2 ) , six miles from Stonington,
which it reached after many days and a thousand miles of travel over the
following route : Westerly ( 2 ) to Providence (3) , Providence to Boston (4),
Boston to New York City (5), New York City to Boston again (6 ) , Boston
to New York City again (7 ), New York City to New Haven (8) , New Haven
to Saybrook ( 9 ), Saybrook to New London ( 10) , and New London to Stoning
ton ( 11 ). Hallock , " The Practicability of a Clearing House for Country
Items,” Bankers' Magazine, Vol. LVII, (1898 ), p. 69 ; also in his Clearing Out
of - Town Checks, p. 72.
MICH.

PA .
ILL .

OHIO

IND.

N.J.
MD.

W.VA

KY.

TENN .

N.C.

S.C.

MISS.

ALA .

GA

FLA

FIGURE 4.

Figure 4 shows a check on a North Birmingham bank ( 1 ) and deposited
in a Birmingham bank (2 ) , 4 miles distant. In order to avoid remittance
charges the check was sent to Jacksonville, Florida (3) , 488 miles; then to
Philadelphia (4 ) 817 miles ; then back to Birmingham ( 5 ) , 941 miles ; and
finally to North Birmingham ( 6 ) , 4 miles. As the check was not paid it was

returned to the Birmingham bank (7 ), 4 miles ; then to Philadelphia (8 ) ,
941 miles ; then Jacksonville ( 9 ) , 817 miles ; and then back to the Birming

ham bank ( 10 ) , 488 miles, which returned the check to the depositor. The
check had traveled 4,500 miles and had been 14 days in transit. From a pam

phlet called - of service to banks and business, Federal Reserve System , ex
hibit at annual convention of American Bankers' Association ( Atlantic City,

Sept. 24-27, 1923) , p. 12. See Bankers' Magazine, Vol. XXXVII ( 1882 ) , pp.
466-468, and Vol. LIV ( 1896 ) , pp. 237-239, for other illustrations.
The practice of sending such items through the same city more than once

became so pronounced that Cincinnati sent à circular letter to the banks in
Ohio, Indiana, Kentucky and other States announcing that it would refuse to
receive any items that had been in Cincinnati before.

108

CLEARING AND COLLECTION OF CHECKS

Evil effects of circuitous routing of checks

The evils resulting from the circuitous routing of checks may
be summarized as follows: ( 1 ) It caused an immense amount of
trouble to banks in the form of much unnecessary correspondence,
the requirement of additional clerks, excessive postal charges,
complicated bookkeeping, and redundant book entries, many of
them in banks not really concerned . (2 ) Many country mer
chants, depending on checks being out a week or more, paid bills
with them, trusting to luck to be able to deposit the money before
their presentation. (3 ) Banks had to pay a tax of 1/24 per
cent. a month on deposits which were not real deposits, but simply
items in process of collection. ( 4) In the case of Gifford v.
Hardell33 the Supreme Court of Wisconsin decided that the in
dorser of a check is absolutely discharged if presentment be not
made in a reasonable time, and in the same year the Supreme
Court of Nebraska decided in the case of First National Bank of

Nymore v. Miller34 that the forwarding of checks by circuitous
route would operate to discharge the indorser .35 (5 ) Reserve
balances were often diverted from their natural channel and the

amount due from reserve agents, which should have been immedi
ately available as cash, was made up largely of items in transit.
This fact was brought forcibly to our attention in the panic of
1907.36 ( 6) Circuitous routing of checks, combined with the prac
tice of giving immediate credit for checks deposited, made pos
sible an evil known as check kiting. As an example, suppose Mr.

A deposits $5,000 in a bank in New York City. He draws a
check on his New York account and deposits it in a bank at Eliza
beth, Pa.; he now has two deposits, each of $5,000 to his credit
and even though the check deposited at Elizabeth should be sent
direct to New York it would be about two days before it would
arrive and be charged to his account. If the check were sent
indirectly Mr. A would have the use of the deposits that much
longer. But Mr. A goes still further and opens an account at
Columbia, S. C., by depositing a check drawn on the Elizabeth
bank for $ 5,000. He now has $15,000 at his command if he is

given immediate credit, although he has rightful claim to but
$5,000. He could now draw checks for, say, $4,000 on each of the
banks and meet obligations amounting to $12,000 and still have at
2398 Wis. 538 ( 1895 ) .
3443 Neb. 794 ( 1895 ) .

asBanker's Magazine, Vol. LIV ( 1896 ) , pp. 237-238 ; Rhodes' Journal of
Banking ( Jan., 1895 ) , p. 35, and ( April, 1895 ) , p. 435 .

38Proceedings of the American Bankers' Association ( 1911 ) , p. 713.

CLEARING AND COLLECTION, 1863-1914
his command in the banks $ 3,000 .

109

His balance in each bank

could be maintained as long as he would continue to draw a check
on one bank in favor of another and as long as each bank con

tinued to give him immediate credit upon receipt of the checks.
The more deposits he created and the more indirectly the checks
were routed the easier it would be for Mr. A to continue the prac

tice. It is obvious that Mr. A is getting loans from the banks
without being required to pay interest. Indeed, banks were fortu
nate if they were not finally defrauded of the funds entirely.
The “ float' ' ; giving immediate credit for out-of-town checks
Another practice, excused on the ground of convenience, in
which many commercial banks indulged, was to credit the re
serve account of the correspondent bank and itself carry the so
called “ float” ; that is, the reserve bank would not debit the reserve

of the country bank to which checks were being sent for collection
until the country bank remitted, and checks sent to the reserve
bank by the country bank for collection were counted as available
reserve by the country bank as soon as put into the mail. A
country bank in this way knew how its reserve account stood, and
herein lay the convenience, but a fictitious reserve was created and
the correspondent reserve bank carried the “ float” . Checks in the
mail for several days might be returned later for want of funds
while the various banks that had handled them during this time
would count as reserve these unavailable funds. Moreover, the

deposited reserve of the country bank was built up in the city to a
large extent by the deposit of checks and drafts with a very small
percentage of cash . The items so forwarded were immediately
counted by the country bank as reserve, when mailed to the city

reserve agent, although they were not received and collected by
the city bank until several days later. This condition created a
paper reserve, or a reserve, a large part of which consisted of
uncollected checks in transit .

Such a reserve, obviously repre

sented an unhealthy, if not a dangerous situation, as was appar
ent in the panic of 1907 when banks endeavored to realize on their
paper reserves .

A further result of giving immediate credit was that banks
became accustomed to allow customers the right to draw checks
against uncollected funds . This practice was thoroughly devel
oped by 1885 and was frequently condemned . Twenty -five years
earlier such practice was uncommon , the banks accepting checks
for collection only . Banks brought the evil on themselves. Com

110

CLEARING AND COLLECTION OF CHECKS

petition among themselves for business brought about bargains on
their part with dealers to receive checks drawn upon distant

banks, at first for a smaller charge than the usual one, later on, a
nominal charge, ending with the general practice of making no
charge for collection and for giving immediate credit. This com
petition for customers on the part of the banks and for trade on
the part of the banks' customers, encouraged the use of checks for
out-of-town remittances which, in turn, confronted the banks

with one of their chief problems.37
Paying interest on uncollected funds

Some banks practiced the payment of interest on current bal
ances, a practice opposed by many conservative bankers.

But

in addition to paying interest on current balances banks would
receive at par items on outside points, and make collections with
out charge to an extent which, when computed, would show that
they were suffering a loss which amounted to a much greater rate
of interest than any bank in the country could be induced to pay
on daily balances. Competition for business and lack of co-opera
tion among the banks were again responsible for this loss to banks.
An actual calculation in some instances showed that by doing this

work gratuitously the banks were paying for the account at the
rate of 6 or 8 per cent., as shown by the daily balance - sheet.
.

This computation was on the basis of absolute cost of handling,
without taking into consideration the labor and risk involved.38

The carrying of compensating balances with collecting banks solely
for the purpose of obtaining par territory
After New York began to charge in 1899 for collecting out

of-town checks, Philadelphia and Baltimore became the dumping
ground of western banks for the eastern exchange. As these
cities, as well as Chicago, offered tempting par lists many bal
ances went to these cities. Some of the depositing banks and other
concerns would thus get their checks collected at par, then carry
the proceeds or at least part of the proceeds in New York banks.

Very often the Philadelphia and Baltimore banks would be
charged by the remitting banks.39
But if these country banks frequently profited at the expenso
*For a typical protest against the practice, see A. W. Blye, " Collection of

Country Checks,” Bankers' Magazine, Vol. XX, 3rd series ( 1885 ) , pp. 278-284.
* Bankers' Magazine, Vol. LV ( 1897 ) , p. 579.
**Bankers' Magazine, Vol. LXVII ( 1903 ), pp. 996-998 .

111

CLEARING AND COLLECTION, 1863-1914

of the city banks, they also frequently lost. By maintaining large

fixed compensating balances in return for par territory a large
proportion of a bank's working capital was tied up and could not

be converted into New York exchange or currency when most
needed to supply demands from the bank's customers.

If such

funds were not needed for working capital they should have been
used for loaning purposes instead of earning only 2 or 3 per
cent. interest. Par facilities for compensating balances did not
mean that the items were really cleared without cost ; the expense
merely came out of the interest account where it was not noticed.40
Furthermore, the balances held by banks in reserve cities for the
purpose of compensating the reserve banks for the collection of

the depositing banks' checks were frequently meant to serve as re
serve balances, thus confusing the subject of reserves with that
of compensation for other services.

The maintenance of reserve balances with banks for the sole pur
pose of getting items on which to charge exchange
It has been pointed out above that after New York City began
to make charges for collection of country checks many bank bal
ances were moved elsewhere. Other cities competed for these re
serve balances and as a result of this competition some flagrant
abuses developed. One was the practice of country banks divid
ing a reserve account of ( say ) $25,000 among six or eight corre
spondents, ostensibly for the purpose of greater safety, but really
for the purpose of corralling most of the exchange drawn on itself.
The collecting banks expected a balance, the income of which
would be sufficient to cover the expenses of collecting the checks

sent in by the country bank, for on these banks fell the burden
of collection for the country bank. Often these banks suffered
losses because of the divided accounts.

Then these banks were

obliged to pay perhaps the same collection charges to this country
bank when collecting on it as to a bank which carried a large re
serve balance. This practice of divided reserve accounts was prev
alent only in a town where there were two or more banks, because
the one-bank-town banker was certain to get all checks drawn on
his bank and at his own terms .

Where there were two or more

banks in the town the checks would come to the other bank or

banks and be presented over the counter, for which payment it
par would have to be made. Some country banks, favoring their
correspondent-collecting bank or banks with an agreement to re
“ Proceedings of the American Bankers' Association ( 1911 ) , p. 714.

CLEARING AND COLLECTION OF CHECKS

112

mit at par, would connect with reserve banks having a small
country business so there would be few checks to collect, but at
the same time would let the reserve correspondents collect their
items as well as they could. On the other hand, not having recip

rocal relations with a reserve bank with a large country business,
the country bank could make a profit by charging a certain rate of
exchange. As a result of this extensive division of reserves among
so many banks it was frequently true that no balance was large
enough to warrant the reserve agent in extending credit when the
time came to borrow.41

Excessive gold movements

With reserves scattered over the entire country rather than
held in some central agency, there was no convenient method by
which banks with surplus funds could lend to banks in need with
out actual shipments of currency. Had there been a centralized

reserve system much could have been accomplished by means of

simple transfers on the books of the central reserve agency and
the actual shipments of currency would have been reduced to a
minimum. Instead, the various sectional and seasonal demands
caused the constant shipping back and forth of specie at a heavy
expense in insurance, loss of interest and express charges, and
with a constant abrasion of the specie. 42
The absorption of collection charges by collecting banks

At this point it is important to learn who really bore the cost
of collecting these out-of-town checks. Equally important is it
to know what items entered into the expense, and finally, who

should have borne the cost. These latter questions will be dis
cussed after the first has been disposed of.
1.

Who bore the cost ?

It has been contended that where charges were levied on de

positors of out-of-town checks the expense seemed to fall on the
merchants and business men whose accounts with their customers

were settled with such checks . It is admitted that they could
reimburse themselves by charging more for their goods or services,
or refuse to receive such checks. But it seems clear that compe
411bid.

42For an account of cash movements during the years, 1905-1908, see Ivan
Wright, Bank Credit and Agriculture ( New York , 1922 ) , Chap. VII. On the
economy in transfers through the agency of the Gold Settlement Fund, see
Wright, op. cit ., Chap. XVI.

CLEARING AND COLLECTION , 1863-1914

113

tition prevented them from trying to shift the burden to their

customers. There is rather general agreement that the cost is
not often shifted backwards to the drawer of the check .

Others have insisted that the competition among the banks
for business has forced them to absorb the costs. This point of
view has been well supported. Except where clearing house rules
require the member banks to charge for collecting such checks, it
probably has been true in the great majority of cases that the
collecting banks have absorbed the collection charges. Even clear
ing house banks have been known to violate secretly the clearing
house rules in order to favor customers and thus absorb the
charges.

It has been pointed out frequently that the city banker who
absorbs the costs of out -of -town collections has brought the so
called evil of which he complains upon himself. He solicited
country accounts by offering frequently to pay exchange to the
country banker, and, in addition, agreed to take all items within
a large territory, sometimes the entire United States, at par. The
country bank was thus encouraged to charge exchange, but did
not have to pay it, while the city banker absorbed all the
exchange charges, both coming and going, as a premium on get
ting the business, besides paying the
country banker a liberal rate
43
of interest on his average balance.4

2. The items of cost in collecting checks
( 1 ) Every bank which collected out-of-town checks for its

depositors was and is confronted with additional expenses in the
form of bookkeeping, postage, stationery, etc. This general ex
pense has been estimated at 34 of 1 per cent.44 In this connec
tion might be mentioned the cost involved in making the proper
45

presentation ."

( 2 ) It was the general practice of banks to give immediate
credit for out-of-town checks when deposited. As national banks
were taxed on their deposits at the rate of 12 of 1 per cent . per
year, they were paying taxes to this extent on items in the process

of collection and which were in no sense deposits.46
* Proceedings of the American Bankers' Association ( 1911 ) , p. 713 .
“B. J. Shreve, “Country Checks and Country Bank Accounts , " Bankers'

Magazine, Vol. LVI ( 1898) , pp. 221-223.

" See R. D.Kent, “ The Elements of Cost in Collecting Out-of-Town Checks,”
Bankers' Magazine, Vol. LXI ( 1900 ) , pp . 738-739.
“ United States Revised Statutes, Section 5214. This section was repealed
in 1883 but was reenacted in 1908.

114

CLEARING AND COLLECTION OF CHECKS

(3 ) The time element was an important item of cost in the
form of loss of interest. In addition to the fact that great dis
tances often had to be covered, few country banks remitted at
once .

The nearest thing to immediate remittance was semi

weekly. But there was no uniformity of practice. There were
weekly remittances, three times per month, semi-monthly, and
monthly. Mr. Shreve computed the cash cost for semi-weekly
remittances, at a distance of one day's time, at 75 cents per
$1,000, and for weekly remittances $1 per $1,000.47
( 4 ) Collection charges, when absorbed by the collecting bank,
whether for the correspondent bank or the individual depositor

constituted an additional expense ranging from 1/40 of 1 per
cent. to 12 of 1 per cent. Rates were often fixed by agreements

among banks and often varied widely. From 10 to 25 cents was a
common charge for small items ranging from $5 to $100 ; 1/10 of
1 per cent. to 1/4 of 1 per cent. for items ranging from $100 to
$1,000 ; and ordinarily 1/20 to 1/10 of 1 per cent. on items over
$1,000. It is obvious that the smaller banks were forced to pay
more in proportion than the larger ones for their collections.48

It was estimated that 1/8 of 1 per cent. was a fair average cost to
the New York banks for the general run of country checks.
( 5 ) Where banks, like the New York banks, indulged in the

practice of paying 2 per cent. interest per annum on the deposits
carried by other banks in addition to giving credit at par on re
ceipt for a daily amount of country checks equal to, say, 5 per
cent. of the balance, another expense item of some consequence

was added. This expense item has reference, however, only to the

expenses involved in collections for correspondent banks, and not
to the expenses resulting from collections for the ordinary indi
vidual depositor .
In 1898 it was estimated that some banks which were paying

2 per cent. interest on deposits of correspondent banks as well as
extending the usual favors of par collections were actually paying
4.65 per cent. on the available deposits . Another account was
costing the bank 4.37 per cent . per annum . One illustration may

be apropos : An out-of-town bank kept an average balance of

$200,000 with its New York correspondent on which it received 2
per cent. interest per annum and in addition received credit at
par on receipt for a daily amount of country checks equal to 5
per cent. of the balance. Putting the cost of the country checks
* B . J. Shreve, op. cit. , pp.
* Loc. cit ., pp. 222-223.

221-222 .

CLEARING AND COLLECTION, 1863-1914

115

at the low estimate of four days average time and 50 cents per
$ 1,000 exchange, the loanable funds of that account cost as
follows :
Average balance

- $ 200,000

Four days' time on $ 10,000 in country checks absorbed .... 40,000
Balance less country checks

. $ 160,000

This balance, less the 25 per cent. required for reserves, would
serve as a basis of loans to the extent of $141,177 as explained
below. The cost for the amount loaned would be as follows :
. $ 4,000.00
2 per cent. interest paid on $ 200,000
$10,000 in country checks at 50 cents per $ 1,000 ( 300 days) 1,500.00
General expense of handling the business, estimated to be
1,058.82

three- fourths of 1 per cent. ...
Total expense

. $6,558.82

This expense amounts to 4.65 per cent. on the amount
loaned .49

Suppose the bank loaned the available reserve deposit at 6
per cent. interest, what would be its profit ? After deducting
country checks outstanding, there remains a balance of $ 160,000
against which a reserve of 25 per cent. was required. If it is
assumed that 20 per cent. of the deposits resulting from the loans

remain in the bank as derivative deposits (represented by K) , the
bank will lend as follows, if the Phillips formula for loan expan
sion is used as a basis for computation :50
C ( 1 -r)

$ 160,000 ( .75 )

$ 120,000

X

= $141,177 loaned
Kr+ 1 -K

.20 X.25 + .80

Interest at 6 per cent.
Cost

Net profit

.85

. $ 8,470.62
6,558.82

$ 1,961.80

The net profit amounts to 1.4 per cent. on the basis of the loan.

If the bank could lend the funds at but 4 or even 41/2 per cent. it
would suffer a net loss.

Thus, whether the banks made any profit depended upon the
rate of interest at which they could lend their available cash de
" This expense has been computed from data given by Mr. Shreve, op. cit.,
p. 225, but the method of computation varies from his. He thinks that but
$120,000 is available for lending by the reserve bank and computes the cost as
4.58 per cent. His method seems inaccurate.

sFor an explanation of this theory of credit expansion, see C. A. Phillips ..
Bank Credit ( New York, 1920 ) , Chap. III .

116

CLEARING AND COLLECTION OF CHECKS

posits. By taking the average of all the loans of a bank as the
basis, Mr. Shreve thought it possible to compute a profit, but in
sisted that this method was unfair, as city deposits carried with

them less expense than the deposits of correspondents. He in
sisted that it would require an average loan of at least 4 per cent.
to secure any profit, and some 5 and 6 per cent. loans would be

necessary. It was estimated that the demand for 6 per cent.
loans which came from the city customers hardly absorbed their
own cash deposits and that the country bank deposits had to be

loaned on call at rates ranging from 1 to 5 per cent ., ordinarily
2 to 3 per cent., with a resultant loss . Thus, while the banks may

have made profits if computed on the basis of their loans as a
whole, the carrying of country bank deposits when taken alone
was unprofitable. Mr. Shreve concludes : " A careful investiga
tion of the statements of the New York banks shows that some of

the banks without country bank accounts make a net profit of
over 1 per cent. per annum on their deposits ; while the large
banks with a liberal supply of country bank accounts show a
profit of less than 12 of 1 per cent. on their total deposits, and in
some cases it is less than 1/4 of 1 per cent. on their deposits." 51
The costs to the banks for collecting the checks of correspond
ents were summarized by Mr. Shreve as follows : ( 1 ) Interest
paid on balances available for loans, 2 2/3 per cent. per annum.
That is, 2 per cent. was commonly paid on deposits of which 14
had to be kept as reserve, leaving but 34 available. The 2 per
cent. on the whole would amount to 2 2/3 per cent . on the amount

available ; ( 2) the cost of collection of checks which was estimated
to be 12 of 1 per cent. of the available funds on deposit ; ( 3 ) the
expense of handling the business of the bank , estimated at 34 of 1
per cent. of the available funds. Thus, according to this esti
mate the average cost of country bank balances was at the rate
of 3.91 per cent. per annum, and it was estimated further that

the loanable funds of fully 60 per cent . of all the country balances
kept in New York cost the New York banks at the rate of 4 per
52
cent. per annum .

In attempting to compute the costs of collecting out-of-town
checks for customers, not correspondent banks, so many variables
are present that any safe generalization is rendered virtually im
possible. The question of distance, times of remittance, whether

remittance is at par or at any one of many rates of discount ,
51Shreve, op. cit . , p. 231 .
52 Ibid .

CLEARING AND COLLECTION, 1863-1914

117

whether immediate credit is given, apportionment of general over
head expenses, all combined in various ways, preclude computa
tion .

3.

Who should bear the cost ?

Any one of four parties might bear the cost of collecting out
of-town checks : The drawer of the check, the payee, the bank in

which the payee deposits the check, or the drawer's bank. Argu
ments have been presented in favor of each of the parties.
( 1 ) Should the drawer pay ? It is contended that the
drawer of the check is the one who receives the chief benefit from
its use .

Whereas in earlier times he would have been compelled

to go to his bank and purchase a draft for remittance, he could
now save himself the time and expense by remitting his check. It
has the added advantage of serving as a better receipt for him.
than does the bank draft which is not readily accessible and fre
quently becomes lost in the bank files. The check is the substi

tute for the actual money which the purchaser wishes to have
transmitted — he is the one seeking the favor and should bear the
expense. The banks provide the facilitiesfor such transfer accom
modations and should receive remuneration for their services.53

( 2 ) Should the payee bear the expense ? It has been urged
that merchants who deposit out -of-town checks should pay the
cost of collection. If they received remittances in the form of
checks it was because they were driven to it by competition
or because they were satisfield with such payments. If they

wished to have the checks converted into money they should
pay the bank for the expense involved or refuse to accept such
instruments in payment. The collecting bank should not be com
pelled to bear the expense, as it provides the necessary facilities
for collection and every branch of the banking business should be
made self-sustaining. To have the collecting bank absorb the cost
rather than the depositor means that those who borrow money

from the bank are forced indirectly to pay for free collection
for others in the form of higher interest charges.54

( 3 ) Should the collecting bank bear the expense ? In favor

of the collecting bank bearing the expense it is urged that the
increase in the deposits as a result of accommodating customers

more than recompenses the banks for their expense in collecting
checks. Further, it is argued that there is no more reason for
5*See A. W. Blye, op. cit ., pp. 278-279.

" Bankers' Magazine, Vol. XXXVII ( 1882 ) , p. 468.

118

CLEARING AND COLLECTION OF CHECKS

complaining of the expense of collection as a result of the greater
use of checks than there is of complaining of the expense of

printing bank notes and that it is as logical to suppress the use
of bank notes as checks. Nor is it any more reasonable, it is in
sisted, to charge for collections than it is for the check books, de

posit books and other miscellaneous books and papers, or for

counsel, advice and other services freely given.55 The fact that
competition among banks has forced them to collect at par seems
to show, it is claimed, that the practice is in harmony with good
business principles. Also despite the expenses of collection the
banks pay large dividends which are proof of the fact that they
could absorb the charges, thus relieving business of the charge.
( 4 ) Should the drawer's bank bear the expense ? Since these
banks are the ones that receive the benefit of the delay in the pres

entation of the checks for payment it is claimed that they can
well afford to bear the expense of remittance and the depositors
in such banks should require their banks to keep sufficient funds
at money centers to cause checks drawn upon them to be at par in
those centers, by refusing to deposit money in any bank that will
not agree to make its checks equal to par at any of the money
centers. If collection charges are made and are high enough to

yield a profit they belong to the bank of the payee. The country
banker should recognize the advantages of having his customers'
checks circulate at par at the collecting centers and over a wide
field and to keep them at par implies that he will remit for them
without charging the collecting centers.56
Although there is a degree of validity in each of these conten
tions, it seems fairly clear that the burden should not rest upon
the banks if, indeed , they do not get their compensation indirectly .
They offer facilities for effecting exchanges for which they have a

legitimate right to receive compensation. No agency should be
expected to offer its services without a return sufficient to justify
the expense

involved.

If the services cannot exact a return suffi

cient to cover costs the services are not needed by the business

community. As between the drawer and payee it would seem
that the burden should fall upon the drawer.

He is the one to

whom falls the greatest advantages. The drawer could be com

pelled to pay the costs by having prices raised by the amount of
the collection charges. But this is seldom done. Competition
among sellers has forced them to absorb the charges in most cases
65Bankers' Magazine, Vol. LXVII ( 1903 ) , p. 167.
5*Proceedings of the American Bankers' Association ( 1911), p. 715 ; Bankers'
Magazine, Vol. LVIII ( 1898 ) , p. 165 ; Vol. LXXXV ( 1912 ) , p. 136.

CLEARING AND COLLECTION , 1863-1914

119

if they could not shift the burden to their collecting bank. Conse
quently , the question has resolved itself into whether there might
not be some way to relieve the payee and his bank from the burden.

In many instances the burden rests upon the payee and it is rather
generally agreed that the collecting bank should not be compelled
to bear the burden.

It seems true, however, that all parties secure some advantages
from the wide circulation of the check . It is clear that the drawer

gains ; the payee apparently feels recompensed to a degree, at
least, else he would not let competition force him to accept them

in payment ; the banks gain something indirectly in the form of
increased deposits and increased business. As a result, it has
been urged that since all gain all should bear the burden. How
can all be made to share the burden ? In answer it may be pointed

out that just as the Federal government was finally responsible
for making bank notes circulate everywhere at par so the govern
ment again could make checks circulate at par and place the ex
pense so that it will fall lightly, but nevertheless indirectly, on all.
All banks, business, and customers, would then be placed on a more
even plane of competition.

Before reaching the ultimate solution, a brief survey will be
made of the proposals for reform which have been offered and the
actual attempts which have been made to correct the recognized
evils of the old system .

Proposals for reform

Since numberless proposals for reform were made, only a few
of the typical and more outstanding ones will be mentioned. They

are valuable only because they show the halting steps that were
made toward the ultimate solution which can be better understood

and seen in clearer perspective.

1. State clearing houses. In 1885 Mr. A. W. Blye submitted
a plan to the American Bankers' Association which provided for
a central concern in each State to act as a State clearing house.

This central agency was to be either a large bank with a separate
department devoted to the work , or some central office under the
control of all the banks to be located in the commercial center of
each State . Each central concern was to undertake all the clear

ing and collection of the items within a given distance of twelve or

twenty hours from the clearing center ; interstate exchanges were
to be effected by the correspondence of one center with another.
In addition to the reduction of expenses, additional advantages

CLEARING AND COLLECTION OF CHECKS

120

were to be secured by having monthly records of the full ex
changes of the entire country reported as well as the dissemination
of other information vital to business interests.57

2.

Out-of-town collection agencies. At the annual meeting of

the American Bankers' Association in 1890 another plan for

handling out-of-town checks was submitted by a Mr. C. W. Ham
mond. The purposes of this plan were similar to the one pre
sented by Mr. Blye, although the plan itself was quite different.
It provided for stock companies in centers with ten or more banks
which would handle all out-of-town items. Each collecting
agency was to divide the country into collection districts on the
basis of time involved in receiving returns, furnish each of its

contributing banks a schedule showing the charges for the collec .
tion of items in each district, the charges to be graded on the
basis of the time required to receive items by the most direct
route. Upon receipt of items, the agency was to issue certificates
payable in cash or New York exchange at the end of the time
allowed for returns from the district involved less the schedule

charge for collection, or the agency would cash the certificates
for an additional charge. The plan in general had a decidedly
modern flavor. It was claimed that expenses of banks would be
reduced , due to the saving of clerk hire and stationery, that the
danger of competition to the detriment of profit would be re
moved, and that much time and risk would be saved by routing the
checks directly.58
3.

A national clearing agency. A national or Federal clear

ing house was also proposed at various times. It was suggested
that it be a chartered corporation with capital subscribed by the
local member clearing houses which were also to be corporations.50
4. Country checks to be sent through the clearing house to
correspondent banks. In 1899 it was proposed that all country
checks be sent through the clearing houses to the city correspond

ents of the drawee banks and by them charged immediately to the
account of the drawee. This plan, apparently so simple, had
$7A. W. Blye, op . cit., pp. 282–284 .
** C . W. Hammond, " Clearings and Country Collections, " Bankers' Magazine,

Vol. XXV, 3rd series ( 1890 ), pp. 292-296.
BOJ. M.Elliott, “ A National Clearing House as a Safeguard Against Panics,"
Annals of the American Academy of Political and Social Science, Vol. XXXI

( 1908 ), pp. 460-462; see also Bankers' Magazine, Vol. LXVII ( 1903 ), pp.
980-982. A plan for Federal clearing houses was also developed by Theodore
Gilman, but his plan had reference more particularly to the securing of elas
ticity in note currency rather than to solving the question of the collection of
country checks. See Theodore Gilman , Ferieral Cearing Houses ( New York ,
1899 ) .

CLEARING AND COLLECTION, 1863-1914

121

obvious objections. For example, John Smith, a Chicago mer
chant, owes John Jones, in New York, $1,000. Mr. Smith draws
his check on the First National Bank, Chicago, to the order of
Mr. Jones and sends it to him in New York . Mr. Jones deposits

this check in his bank, which presents it through the clearing house
to the National City Bank, the correspondent of the First Na
tional Bank of Chicago. Of course the National City Bank does
not know whether the check represents a deposit in the Chicago
bank, but nevertheless charges the amount to the account of that
bank. The Chicago bank is placed in the unfortunate position
of never knowing how its account stands at any particular time
and of having checks charged against it before it can see and
verify them.60

5. Place the burden upon the drawer. Another plan which
had for its purpose the placing of the burden on the drawer of the

check provided that checks be used by customers in making remit
tances with such wording as : “ The Nineteenth National Bank,
New York, will cash this check at par as the agent solely of the
endorsers. Exchange hereon will be paid to said bank by the
maker. " 61

6. Uniform exchange charges. In 1905 and 1911 proposals
were made for universal exchange charges.

In 1905 the Coni

mittee on Conference of Clearing Houses of the United States an

nounced itself in favor of charging exchange for the handling of
out-of-town items and recommended that the clearing house asso
ciations of the country establish rules for their members regula

ting the collection charges.62 When a universal exchange charge

was proposed in 1911 opposition speedily developed. The oppo
nents contended that such a plan would only add to the cost of

collecting by increasing the rates charged by the banks upon which
the checks were drawn ; that banks at par points would begin to
charge and the banks at charge points would increase their rates .
Furthermore, the plan was not considered practical, as it seemed

impossible to obtain concerted action by the banks in all the
collecting centers.63

7.

Universal par system.64 At various times a universal par

« However this plan was tried with some degree of success in Sedalia,
Missouri, and other places . See below , pp. 124-125.
« Bankers ' Magazine, Vol . LVIII ( 1899 ) , p . 870.

* Proceedings of the American Bankers' Association ( 1906 ), pp. 103-104.
*Ibid. ( 1911 ) , p. 714.

" The par system recommended here refers not only to remittances at par
but to collections without charge. The same point of view is represented by
the arguments presented for and against the plan.

122

CLEARING AND COLLECTION OF CHECKS

system was proposed and just as frequently opposed. The advo
cates of the system offered the following arguments in its support :
( 1 ) It would eliminate the circuitous routing of checks. ( 2 ) The
increased use of checks would increase the deposits, thus increas
ing the banks' returns to an extent that would more than offset

the expense involved. (3) Each bank collecting and remitting at
par would receive equal favors which would tend to compensate it
for any expenses incurred . ( 4 ) It would encourage the use of
checks, thus giving more elasticity to the currency and thereby
benefit not only the entire country but every banker as well.
( 5 ) Checks, or rather deposits, are the most common medium of

exchange and for that reason everything possible should be done
to cause them to circulate at par. Bank notes play a relatively
small part in business transactions and yet their parity is in
violable. ( 6) Collection charges make the creditor receive less
than the amount for which he sold his goods or the debtor pay

more than the amount upon which he agreed. ( 7 ) The acceptance
of checks at par is in direct accordance with the rigid policy of
maintaining the parity of the medium of exchange.

The opponents of the par system presented the following argu
ments in support of their position : ( 1 ) Checks when deposited
with a bank are not cash, and the bank must wait for some time

before it can get its cash. Checks are often returned for want
of funds also. Banks are not always able to tell the genuineness
of checks presented. (2 ) Giving credit for uncollected checks
means lending money without interest. Sometimes such checks will

exceed in amount the customer's balance. ( 3 ) In addition to the
time element involved the bank has certain expenses to meet,

like

postage, clerical help, bookkeeping, telegrams, protest fees, etc.
( 4 ) Often the exchange received is not suited to the needs of the
bank and makes necessary a great deal of transfering to other
parts of the country, sometimes at a large expense, for which the
bank cannot be reimbursed. ( 5 ) To remit for checks at par forces
the bank to carry deposits in leading banking centers, which is ex
pensive. ( 6 ) The cost of par collections and remittances must be

made up in the form of higher interest rates which places the
burden on the borrowers in favor of the large depositor who does
not borrow. It also means less borrowing and less total profits
for a bank .

8. Par points and charge points with country clearing
houses. Considering both uniform charges and a universal par
system impracticable, it was proposed that the country checks be

CLEARING AND COLLECTION, 1863-1914

123

divided into two classes, those that could be collected at their face

value and those that could be collected only at a discount. Each
bank would classify itself, and banks could then recognize the two
classes and act accordingly. Co-operation with the country
bankers on the part of the collecting centers was to be secured by
providing country clearing houses through which the checks
could be collected, and by furnishing correspondents with lists of
the clearing house par points.65 Country clearing houses, usually
in the form of a separate department within the city clearing
house, were frequently proposed, and as it will be seen below, were
successfully established in several important centers.66 .
The general tone of the discussion was one of despair of any
effectual remedy. Plan after plan fell by the wayside. But the
bankers in their discussions of the evils of local checks lost sight

of the fact that their use gave a general impetus to banking and
that if their use by any means were repressed there would be a
great falling off of deposits and loanable funds. The convenience
in business of the use of local checks was doubtless one reason for

the establishment of banks in all parts of the country ; every little

business community found a bank necessary to its prosperity. If
it had been possible for the bankers of the country to restrict or
abolish the use of local checks it is a question whether, from the

broadest standpoint of banking welfare, they would not have
injured themselves.

Repressive measures were beside the point, for with the
improved means of communication which tended to eliminate

distance, the use of local checks steadily increased. Their use
should have been looked upon as a token of advancing business
methods. The main defect was not from their increased use but

from the inequality of the benefits which accrued to certain mem
bers of the community from their use. The large dealer whose
account was sought by the banks had no difficulty in using his
bank as an agent to collect at par the out-of-town checks which
he accepted in payment. On the other hand, the holder of the
less desirable account was more likely to be charged something.
In the agitation for country clearing houses or some similar plan,
the large city banks, however, were found frequently to oppose
such reform because of the effect that it might produce upon the

country bank balances they had secured as a result of offering
certain collection facilities .

& Proceedings of the American Bankers' Association ( 1911 ) , pp. 714, 715.
" Bankers' Magazine, Vol. LXII ( 1901 ) , p. 108.

124

CLEARING AND COLLECTION OF CHECKS

Attempts at reform

Some obscurity is attached to the first attempts to regulate the
collection of country checks. Mr. F. E. Farnsworth, in his report
to the American Bankers' Association in 1906, pointed out that
the regulation of the country check was undertaken first by west
ern clearing houses and also that St. Joseph, Mo., claimed to have
been the first association to take such action.67 Hallock says
that as early as 1875 Pittsburgh had made arrangements to clear
out-of-town checks by exchanging the checks on their correspond
ents and then forwarding them in their own letters. This prac
tice seems to have lasted about ten years, when competition be
tween the banks broke up the scheme of mutual accommodation.68
The Sedalia, Missouri, plan, 1895

A similar plan was instituted by Sedalia, Mo., in 1895. Hal
lock lays great stress upon this plan of country clearing and
insists that great credit is due Sedalia as the pioneer in estab
lishing sound methods of country clearing. He also insists that
it was a modification of the London plan of country clearing
established in 1858, but entirely independent in the sense that the

originators of the Sedalia plan knew nothing of the English

practice.88
Soon after establishing a clearing house in 1893, the Sedalia
banks turned their attention to the possible handling of the out-of
town checks . It was observed that a country bank some distance
out would have reciprocal accounts with all of the five banks in

Sedalia and received checks from all, which it required five letters
The Sedalia banks altogether would have more
checks on this bank than it would have on them and consequently
it would be constantly in their debt. The Sedalia bankers finally
to forward .

proposed that the bank should keep a balance with some one of
them on which interest would be paid and against which any checks
drawn on the bank could be charged . At the same time any checks
forwarded to Sedalia by the bank for collection would be credited
to its account at par and with interest allowed on the resulting

balance. Gradually such arrangements were made with the sur
rounding banks and completed about 1895. The plan compre
hended some 22 banks at fifteen points, 13 of the points lying in a
07 Proceedings of the American Bankers' Association ( 1906) , p. 104.
& Hallock , op. cit., p. 47.

See Hallock, op. cit., Chap. III for a description of the London plan.

CLEARING AND COLLECTION, 1863-1914

125

circle with a radius of some thirty miles ; two of the points lay
farther away, one as far as 102 miles.
When a check on one of the out-of-town banks was received

by its Sedalia correspondent the account of the out-of-town bank
was charged and the check mailed to the bank in the afternoon of
the same day. If the check were received by another Sedalia bank
in the morning mail it was presented to the country bank's corre

spondent at the clearing house and paid there as if it were the
correspondent's own check. The correspondent charged it against
the country bank's account and forwarded it in the afternoon . If

the other Sedalia bank did not receive it in the morning, but later
in the day, it was held over and presented at the clearing house on
the following day. If for any reason the out-of-town bank de
clined to pay a check it returned it to its correspondent who duly
credited it, and if the check were cleared, at once collected the

amount upon delivery at the counter of the Sedalia bank that put
the check through the clearing.

The advantages of the plan were soon apparent. Sedalia was
able to forward the checks to each out-of-town bank in a single

letter. Payment was obtained , as a rule, at once in Sedalia before
mailing the checks. The out-of-town banks, instead of being in
debt to Sedalia as formerly now kept from $150,000 to $200,000
on deposit there. Each out-of-town bank was, in effect, a branch,

not only of its correspondent, but also of every bank in Sedalia.
The advantage was mutual . Checks on the out-of-town banks
were the same as Sedalia funds and were received at par from

depositors ; the benefits being enjoyed by the members of the clear
ing house, customers and correspondents.To
The New York City plan , 1899

New York City adopted a repressive policy during the nine
ties and attempted unsuccessfully to exclude out-of-town checks ,
or at least penalize them, a policy contrary to business growth
and quite the reserve of that adopted in other sections of the
United States and some of the continental countries, particularly
Belgium, who in 1901 made arrangements for free checks, appar
ently regarding it as the true banking policy to foster the use of
banking instruments for transmitting funds, and thus bring into
the banks a large amount of money that would otherwise go into
other channels. 71

" Hallock , op. cit ., Chap. IV.
" Bankers' Magazine, Vol . LV ( 1897 ) , p. 579 ; Vol . LXVI ( 1903 ), pp . 10-11 .

126

CLEARING AND COLLECTION OF CHECKS

In 1899 the member banks of the New York City Clearing
House entered into an agreement to levy uniform charges for
collection of out-of-town checks, a practice they have followed
since that time. This charge with few exceptions was to be 1/10
or 14 of 1 per cent. of the amount of the items collected , according
to the distance. No charge was to be less than 10 cents. There

were certain points on which the charge was discretionary. A

penalty of $5,000 for violation of the rules was attached, with
the possibility of expulsion from the clearing house association for
a second violation.72

Other cities had tried the same plan but

failed, but the New York banks were more firmly united than were
banks elsewhere, and succeeded in eliminating this burdensome

form of competition from among themselves.73 This plan ,
although relaxed somewhat at a later date, threw the burden upon
the holder and much friction resulted.74 Some critics of the plan

carry balances with
claimed it was done to force country banks to
75
them so that their checks would pass at par."

A similar plan had been in operation in St. Louis since 1894 ;
Chicago followed in 1905 , and soon many other cities had adopted
it. But once it became general the advantages to any group of
banks tended to be neutralized. Philadelphia did not follow the

New York idea and as a result secured a large number of New
York's reserve deposits. The New York plan did not put the
country check out of circulation nor decrease its volume appre
ciably, but simply shifted, to some extent, the burden of collecting
from New York to other eastern collecting centers which did the

work, even though not as favorably situated as New York to col
76
lect in the East, particularly in New York State and New Jersey.
The Boston country clearing house, 1899

In 1899, Boston banks undertook to solve the problem of coun
try check collection. At that time they estimated that their cost
of collecting New England checks was not less than $700,000 per
52J . G. Cannon, Clearing Houses and the Currency, Columbia University
Press ( 1908 ) , p. 100.
** Bankers ' Magazine, Vol. LVIII ( 1899 ) , pp. 518-519, 811 .
“ In 1913 the New York Clearing House relaxed the rules to the extent
that the banks were permitted to accept for free collection checks on such

banks and trust companies in the States of New York, New Jersey, Massachu
setts , Connecticut, and Rhode Island , as remitted at par and on the day of
receipt of the checks drawn on them . Bankers' Magazine, Vol LXXXVI
( 1913 ) , pp. 134-135.
** Ibid ., Vol . LXVII ( 1903 ), p. 712.

* Proceedings of the American Bankers' Association ( 1911 ) , p. 713.

CLEARING AND COLLECTION, 1863-1914

year.77

127

Rather than adopt the repressive policies applied by New

York City, Boston sought a more scientific solution , one in har

mony with business growth and one that would encourage rather
than hamper the growth of deposit currency . The solution was

found in the establishment of a country clearing department in
the Boston Clearing House, commonly called the country clearing
house. The Boston plan was the most successful attempt to solve
the problem of country check collection prior to the establishment
of the Federal Reserve System . The system adopted was modeled
after the old Suffolk System for the redemption of bank notes and
brought distinction to the New England banks with respect to

deposit currency just as the earlier system had distinguished them
with respect to bank note currency . It caused checks to circulate
at par just as the earlier system forced bank notes to circulate
at par.

The plan provided for the clearing of country checks with
practically the same machinery that was used to clear Boston
checks. Boston checks were cleared in the morning, country or

New England checks in the afternoon in the same room and at
the same desks. Both clearings were under the same management.

The plan centered around the manager of the clearing house who
acted as agent for the banks in clearing country checks.
Country checks deposited in Boston banks were taken to the

clearing house in packages, sorted by States and alphabetically

by towns. Slips were attached showing totals, name and location
of bank , the accompanying slips varying in color according to the
State to which the checks were directed . Each slip had attached
to it a coupon or stub which was detached and retained at the

clearing house as a record of the packages forwarded to their
destination. There were two deliveries daily ; those checks going
some distance had to be in the clearing house before one o'clock,
others not later than three o'clock. It was the duty of the man

ager to mail them direct to the country banks drawn on, collect
or return them , and account for the proceeds to the Boston banks
to whom they belonged. As it took but two nights to obtain most

of the remittances, the manager settled with the city banks on the
second morning, when he distributed the proceeds through the reg
ular city clearing. Remittances were made in either New York
exchange, Boston exchange, or currency, at the expense of the
" Proceedings of the New York State Bankers' Association ( 1912) , pp. 66-74.

128

CLEARING AND COLLECTION OF CHECKS

clearing house. Almost 90 per cent. of the remittances were in
drafts on Boston.78

It was the aim of the plan to place all banks in New England
on the par plan and this was all but successful. As a result, New

England checks were more widely received throughout the coun

try than checks on any other section. In 1900, Boston banks put
into effect a plan to charge exchange on all checks deposited which
were drawn on banks not remitting at par. It was expected that
by thus putting the customers of such banks at a disadvantage the
banks would be brought into line.

For a few months in 1901

efforts were made to force all banks to remit at par by sending
checks to them by express. These banks retaliated by having
silver coin transported to them at the expense of the government
79
which was then sent to the clearing house at the latter's expense .
Although the Boston banks were never able to force all banks into
the system, approximately 97 per cent. of the checks in New Eng .
land were collected at par.80 In 1912, 560 out of 642 banks out
side of Boston which paid their checks through the clearing house.

remitted at par. The Boston banks charged the depositors of

these non-par checks the same rates that they themselves were
charged . 81
The Boston plan was highly successful. Costs were reduced
from an amount ranging from $ 1.00 to $1.50 per thousand dollars
to a charge varying from six to seven cents per thousand dollars.
The time factor was reduced also by an amount varying from two
to four days in the middle and southern Atlantic States. In 1912
the Boston Clearing House was collecting New England checks to
the amount of $600,000,000 or $700,000,000 a year at this small

expense of time and money . 82
In 1905, the Kansas City, Mo. , Clearing House organized a
country clearing house or collection department. This plan was
similar in principle to the Boston plan. At first it covered about
300 of the most expensive points, then was extended to the States
of Oklahoma , Kansas, Colorado, New Mexico, Texas, Nebraska,

and Missouri, the idea being to increase gradually. the territory of
78Bankers' Magazine, Vol. LXVII ( 1903 ) , p. 992.
**From August 27, to November 8, 1901 , checks amounting to $ 3,544,813
were thus presented to non-par banks. In retaliation 58 of them had $ 2,316,250
in silver coin transported from the sub - treasuries at a cost to the government
of $ 2,700 and to the Boston clearing house of $ 8,500. Hallock , op . cit ., p. 64.
RO Ibid ., p. 61 .
*

** Proceedings of the New York State Bankers' Association ( 1912 ) , pp. 69-72.

" Bankers' Magazine, Vol. LXVII ( 1903 ) , p. 992 ; Vol. LXXII (1905 ) , p. 94;
Proceedings of the New York State Bankers' Association (1912 ), pp. 69-72.

CLEARING AND COLLECTION, 1863-1914

129

the country clearing house until it covered all the territory trib
utary or accessible to Kansas City. The country clearing depart
ment was a member of the clearing house to all intents and pur
poses except in the matter of government. All members of the
clearing house were obliged to send to this department all country

items on points in the country clearing house territory where a
cost of 10 cents or more per hundred would be charged if sent

direct. A great saving in postage, stationery, and labor was
effected and the plan was considered of great value.83 It was

claimed in 1912 that a saving of over 50 per cent. in the gross ex
pense in the handling of the items was effected and the time re

quired in securing returns was reduced about 25 per cent.84
The banks of Atlanta, in 1908, copying the Boston plan,
organized the Georgia collection department-a department of
the clearing house - grouping all items received by the six Atlanta
banks and sending out under one cover all items on a town or bank
where more than one bank existed. After six months Florida and
Alabama were added to the list. The plan resulted in a saving in
exchange, in postage and clerical force.86 The country clearing
house plan gradually spread until 14 cities, by 1916, had country
clearing houses or departments.86
In 1911 , the Reserve City Bankers' Association started a
movement to establish country clearing houses in the various re
serve cities to facilitate the collection of country items, both in

relation to cost and to the direct handling. The movement was
started in twenty - five reserve cities, but stopped short with the
passage of the Federal Reserve Act which seemed to obviate the
necessity of country.clearing houses.

County clearing houses
In 1906, the ten banks and trust companies of Lancaster, Pa.,
undertook to simplify the problem of collecting checks on the 40

banks within the county by establishing a county clearing house.
There are at present about six such clearing house associations.87

* Proceedings of the American Bankers' Association ( 1909 ), Third Annual
Report of the Clearing House Section, pp. 41-44.
*Ibid. ( 1912 ) , p. 513.
*sIbid . ( 1909 ) , pp. 24-25 ; ( 1910 ) , pp. 715-725.
*Ibid. ( 1916 ) , pp. 468-469. At the present time there are but two, located
at St. Louis, Mo., and Nashville, Tenn . Detroit has such a department in a

limited degree, the department of the clearing house collecting all checks on
Highland Park, a city within the corporate limits of Detroit.

Information

secured from the Clearing House Section of the American Bankers' Association.

** There are county clearing houses in the Pennsylvania Counties of Lancaster,
Lebanon , and Beaver ; four towns in Connecticut - Shelton, Ansonia, Derby, and

Seymour, in Fairfield and New Haven Counties — have a similar association ;

130

CLEARING AND COLLECTION OF CHECKS

The ten city banks in Lancaster were either chosen or assigned as
correspondents of the outside county banks. Instead of one out
of-town bank now having ten correspondents in Lancaster City
and several more in the county, it now had but one correspondent

and received all checks coming to it in the course of business and
drawn on any one of the fifty banks of Lancaster County. This
meant that with but a single letter to a correspondent in Lan

caster, the out-of-town bank was able to send through the clearing
house on the following day, all checks received on any or all of the
fifty banks constituting the association and have them at their

destination on the second day, thus obviating the necessity of
starting checks on an unchartered sea without the possibility of
knowing their whereabouts or when they would reach their desti
nation. At the same time, the representative in Lancaster honors
and forwards all the checks drawn on the out-of-town bank that

may be presented at the clearing house by the other nine members,
including all checks received from their correspondents in Lan

caster County. At the end of the day, any amount in excess of
$1,000 owing to the county bank's city correspondent or owing to
the county bank, is paid by draft. That is, should the county
bank's books show that it owed $2,600, the county bank encloses
with its remittance a draft for $2,000. Should the city corre
spondent's books show them in debt , the plan is the same. They
send their check for $2,000 with their remittance letter. Settle
ments are made in full once a week to verify all accounts.88
There were other plans tried but they were of no particular

significance. It was felt rather generally among bankers that
nothing of great importance could be accomplished without con
certed action, which seemed quite improbable.

It was seen that

a concerted action which would result perhaps in par collection
throughout the country would also result in a shifting of reserves
to natural centers of exchange. Philadelphia would lose her coun
try balances to New York City as would Baltimore. Boston
would gain also. Naturally such cities as Philadelphia and Balti
more would oppose such concerted action and it seemed that it

could be accomplished only by bringing all banks of deposit finally
under Federal control. How this was brought about, and the
extent to which it had been accomplished , is told in Chapter VI.
another is to be found in the Northern New Jersey Clearing House Associa
tion which includes the banks in Hudson County ; and a tri-city association in

Illinois may be counted as a sixth . Information secured from the Clearing
House Section of the American Bankers' Association.
A8 Information furnished by the Clearing House Section of the American
Bankers' Association.

CHAPTER V

SPECIAL FUNCTIONS OF CLEARING HOUSES PRIOR TO
1914

Special functions of the clearing house
In its primary and simplest form a clearing house is merely a
conveniently located place where checks, drafts, bills, notes, or
other kinds of credit instruments coming into the possession of the
banks are brought to be exchanged for their equivalent in other
credit instruments or for cash. Probably no clearing house exists
in this simple form today. As necessity has arisen new functions
have been assumed until the special functions of clearing house
associations have become a subject of importance.

Some of the

special functions as exercised in the past have been of prime im
portance ; this has been particularly true of clearing houses in
times of stress when they supplied an element of elasticity to the
currency in the form of clearing house loan certificates. Because
of the importance of the special functions exercised by clearing
houses in the past, as well as in the present, it will be appropriate
to make a general study of them at this time, reserving to a later
chapter the study of clearing houses as clearing centers, their
main function as found today.

The most common of the special functions may be summarized

as follows : ( 1 ) Extending loans to the government, ( 2 ) render
ing assistance to members, ( 3 ) fixing uniform rates of inter
est on deposits, ( 4 ) fixing uniform rates of exchange and of
charges on collections, ( 5 ) fixing reserve requirements, ( 6 ) exam

ining member banks, ( 7 ) gathering credit data for members,
( 8 ) publishing statements relative to clearings and condition of

member banks, ( 9 ) participating in annual conferences, and ( 10 ),
issuing clearing house loan certificates in times of stress.

Extending loans to the government
During the Civil War the clearing house associations of New
York, Philadelphia, and Boston responded with practical unanim
ity on the part of the member banks to the call of the government
131.

132

CLEARING AND COLLECTION OF CHECKS

'for loans. In 1861 the New York banks by combination and

equalization of their resources were enabled, through the facilities
afforded by the clearing house, to unite in advancing to the
United States government $150,000,000, which at once restored
its declining credit and enabled it to equip and arm its newly
formed military forces and provide for its immediate require
'ments. As the Spanish-American War gave rise to no serious
monetary problems, no such action was taken by the clearing
houses during that war.

At the outbreak of the recent European War, the Federal
Reserve Board called representatives of the clearing houses of the
reserve cities in conference, September 4, 1914, to consider ways
and means of meeting the adverse balance due to Europe. It was
estimated that the United States had approximately $500,000,000
in obligations to meet. To experience such a large drain of gold
at that particular time with foreign exchange markets disrupted
'was considered dangerous for our banking structure. Out of the

conference came a plan for the creation of a gold exchange fund
of $100,000,000 to meet the first instalments due. On September
21, 1914, letters were sent to the presidents of the clearing house
associations throughout the country asking that their associa
tions subscribe for the allotted amount.

The associations re

sponded quickly and oversubscribed the fund. Although but a
small percentage of the amount subscribed was actually called for,

their action saved the situation and by the time of the opening of
the Federal reserve banks, the premium had disappeared on gold
and the danger of immediate gold exports had been removed.2
During the various loan drives on the part of the government to
finance the War many associations volunteered their services,
organized the work in their own districts, and secured the desired
results in the most effective manner and in the shortest possible

time. This is the last important move made by the clearing house
associations to aid the government directly. The organization
and development of the Federal Reserve System has obviated the
necessity.
Rendering assistance to members
In times of stress it has been common practice for weak banks
to go to other members of the association for aid. The appeals
W. A. Camp, “ The New York Clearing House ," North American Review ,
Vol. CLIV ( 1892 ) , pp. 685-686.
' First Annual Report of the Federal Reserve Board ( 1914 ) , pp. 12-13.

CLEARING HOUSES PRIOR TO 1914

and the aid extended have taken various forms.

133

For instance,

during the period just preceding the panic of 1907, the Mercan
tile National Bank in New York reached a situation where it did

not see its way clear to meet its obligations and pay cash balances.
debited to it after the daily clearings at the clearing house. It
appealed to the associated banks for assistance. The clearing
house committee had it examined, decided it was solvent and
should be assisted. The committee thereupon assessed a certain
number of banks in the clearing house membership amounts suffi
cient to meet the daily balances against the Mercantile so long as

such aid should be imperative. Before granting this assistance,
however, the committee stipulated that the entire board of direc
tors, not only of the Mercantile, but of several affiliated institu
tions, should resign, that its president should retire, and that

certain officers prominently identified with its management should
virtually withdraw from the banking field in New York City. The
Mercantile consented, as it was the price of solvency.:
Any question of common interest is likely to be discussed at the

regular meetings of a clearing house association. In some asso
ciations it is customary to discuss the question of loans to individ
uals who go from bank to bank seeking accommodations. “Good
customers ” of one bank are frequently discovered to be " good cus
tomers ” of other banks and knowledge of this fact serves as a
protection to the banks.

An undesirable customer is also less

liable to force a concession from one bank under threat of going to

the bank across the street. Instead of playing one bank against
another without profit to either, the customer and the bank usually
get together, but upon terms more favorable to the bank and less
favorable to the customer. Other questions that arise are those

connected with the deposit of public funds frequently not pro
rated among the banks, the charges for handling accounts where
the average balance falls below a certain amount, opening and
closing hours, the policy to be adopted in answering inquiries in
order to protect banks from the abuse of this courtesy which they

generally extend, the question of the policy to be adopted in
connection with the safekeeping of securities and the rental to be
charged for safety deposit boxes, fixing a minimum per trans

action and per thousand dollars for handling matters in escrow,
arranging for all requests for donations of certain amounts to be
referred to a special committee, submitting to a committee period
ically a list of all past due paper and overdrafts, not to mention

'A. D. Noyes, “The Clearing House Committee,” Independent, Vol. LXIII
( 1907 ) , pp . 1029-1030 .

CLEARING AND COLLECTION OF CHECKS

134

many other problems that arise from time to time.4 Extending aid
to members often has assumed its most important form in the issu
ance of clearing house loan certificates described below , as well as

in other ways discussed in the following pages.

Fixing uniform rates of interest on deposits
Some clearing house associations have not hesitated to fis

uniform rates of interest on deposits. Others have regarded the
legality of such action as a moot question and have been reluctant
to enforce such a rule. The purpose of such regulation, of course,

has been to regulate competition among the member banks.
As early as 1881 , the association in Buffalo agreed upon rates
of interest which were observed practically without violation for
some nine years thereafter and they were broken at last only be
cause of their non-observance by new banks which at the outset
refused to become members of the clearing house association.”
The practice of regulating interest rates to be paid on deposits is

quite common today in clearing house associations.
Fixing uniform rates of exchange and of charges on collections
In 1881 , also in Buffalo , a prominent banker in that city suc
ceeded in uniting the banks on rates to be charged on drafts and

for collecting out-of-town checks. The promoter of the enter
prise was well known for rate cutting and had been able to meet
competition successfully. Consequently when he proposed the
reform the other banks were only too glad to consider the propo
sition. The rates were not high, but were arranged to do justice
to both the banks and the depositors. The plan was so satisfac

tory that it remained in continuous operation for nearly ninc
years. The non-observance of the collection exchange rules by
the new banks made its continuance an injustice to the member
banks .

In 1899, the banks in the New York Clearing House Associa
tion entered into an agreement to levy uniform charges for the
“Raymond F. McNally, Clearing House Organizations from the Standpoint
of a Country Banker, a pamphlet published by the Clearing House Section of
the American Bankers' Association ( Sept. 7, 1915 ) ; Wayne Hummer, Clear

ing Houses in Smaller Communities, à pamphlet also published by the Clearing
House Section of the American Bankers' Association , published sometime after
1918 ; The Clearing House, etc. , a pamphlet published in the same manner in
1923. Clearing house associations assume prominent parts in civic movements.

Many respond to the call of charity whether local, national, or foreign.
'J. G. Cannon, Clearing Houses and the Currency ( Columbia University
Press, 1908 ) , p . 99 .

135

CLEARING HOUSES PRIOR TO 1914

collection of out-of-town checks, based upon a zoning system,

and have continued to regulate the charges since that time. A
similar plan had been in operation in St. Louis for some time.
Chicago adopted a similar plan in 1905. In 1899, Boston adopted
a par system for country checks in New England, but the next
year provided for uniform charges on all checks drawn on banks

which would not remit at par. At present it is the uniform prac
tice of clearing house associations to regulate such charges.
Fixing reserve requirements

Clearing house associations in the interest of increased safety
may require a higher per cent. of reserves than that required by
law. For example, the Clearing House Association in New York
City adopted an amendment to its constitution in January, 1908,
requiring all member banks thereafter to maintain in their vaults
a cash reserve of 25 per cent. against deposits, although it had
been the general practice of the member banks to keep a 25 per
cent . reserve.6

This regulation was made a condition of admis

sion and was applied to trust companies which were admitted to
membership.?
Examination of member banks by clearing houses
The New York Clearing House adopted an amendment to its
constitution in June, 1884, which authorized the clearing house

committee to examine any bank in the association. The experi
ences of May, 1884, had justified this step. The committee was

authorized to examine any bank in the association whenever it
considered such examination to be for the interest of the asso

ciated banks in general, and to require from such bank the sur

render of its securities for purposes of protection.

In June,

1906, an examinations department was added to the Chicago
Clearing House. The object of this movement was to detect in
stances of unsound banking in any direction among the members
of the clearing house association. It was expected that such ex

aminations would enable the clearing house to take preventive
rather than remedial measures by applying an earlier remedy than
was possible for national or State officials, and by such early
action to remove unwholesome conditions from any bank in the as
•For the law regulating reserve requirements in New York State see pp .
334-339 below.

'J. G. Cannon , Clearing Houses and the Currency, p. 106.
*A. D. Noyes, op. cit., p. 1033 .

CLEARING AND COLLECTION OF CHECKS

136

sociation. As the system has developed it has become possible for
the clearing house as a body to exercise such supervision over any
weak bank as to amount to a virtual taking over of its manage

ment until it regains a sound condition. This has proved val
uable during times of stress when the announcement of clearing
house support to a weak bank has been sufficient to avert a run
on the bank .

The Clearing House Section of the American Bankers’ Asso
ciation has used its best efforts to secure such examiners and

claims the following advantages for the system : ( 1 ) Such exam
iners have the assistance of the clearing house committee who are
better judges of local credits than any bureau at Washington

possibly could be. This so fortifies the judgment of the examiner
that it is as nearly correct as human imperfections permit. Cer
tainly his judgment is more likely to be superior to the very best
examiner sent from the office of the Comptroller of the Currency.

( 2 ) The slightest expression of a wish from the clearing house

committee to a bank under its jurisdiction must have prompt at
tention. A delinquent bank may argue for months and even years
with the department of the Comptroller of the Currency, but it
dare not dally with the clearing house committee. 10
Gathering credit data for members

For some years it has been common practice for a few clear
ing house associations to gather valuable credit data for members.
Large borrowers are indexed and observed, and facts as to their
'Stanley Young, “ Enlargement of Clearing House Functions,” Annals of
the American Academy of Political and Social Science, Vol. XXXVI ( 1910 ) ,
P. 608 .

10Proceedings of the American Bankers' Association ( 1909 ) , pp. 7-8, 15.

Following is a list of cities where the Clearing House System of Examination
was in successful operation in 1921 :

Boston, Mass., Chicago , Ill., Cleveland ,

Ohio, Columbus, Ohio , Denver, Colo., Detroit, Mich., Hutchinson, Kan., Indian

apolis, Ind ., Kansas City, Kan., Kansas City , Mo., La Crosse, Wis., Los Angeles,
Calif., Louisville, Ky ., Milwaukee, Wisc ., Minneapolis, Minn ., Montgomery,
Ala., Nashville, Tenn ., Newark, N. J., New Haven, Conn., New Orleans, La.,
New York City, Northern Anthracite Bankers' Association ( Scranton, Pittston

and Forest City, Pa .), Ogden, Utah, Oklahoma City, Okla ., Omaha, Neb.,
Pasadena, Calif. , Philadelphia , Pa ., Portland, Ore . , St. Louis, Mo., St. Paul,
Minn . Salt Lake City , Utah, Seattle, Wash ., Sioux City, Ia., Tulsa, Okla.,

Wichita, Kan. The Clearing House Idea and the Examiner System , a pam
phlet published by the Clearing House Section of the American Bankers' Asso
ciation ( 1921 ) .

For an account of the efforts of the Clearing House Section of the Ameri
can Bankers' Association in behalf of the clearing house examiner system , see
American Bankers' Association Journal, Vol . XVII ( Oct., 1924 ) , p. 261. This

Section is also encouraging Bank Auditors Conferences looking forward to a
national organization , and is trying to educate the banks on the value of the
analysis of accounts.

CLEARING HOUSES PRIOR TO 1914

137

total local obligations are made available quickly upon request
for any interested member of the association. It may be easily
learned whether there are duplications of borrowings by the same

client from different banks.11

It is a common practice to ex

change credit information on all customers who patronize two or

more banks or who seek to change their connections. Another

practice is to require annual statements from all customers having
a line of ( say ) $1,000 or more, and to encourage the procuring of
statements from all borrowers. 12

The issuing of public statements
It has been and is the practice of a few clearing house associa

tions to require periodic statements from members showing their
condition, although very few associations publish such statements.
Nearly all clearing house associations, however, give the totals of
monthly clearings to the financial press and some also give daily
and weekly clearings. Not only does such information give the
public some idea of the condition of member banks, but it serves,
in a general way, as a basis for judging the general tendencies in
business. Such information, combined with the knowledge secured

through clearing house bank examinations, also places the clear
ing house in possession of valuable information so that it is able to
detect weaknesses and unwise tendencies before it is too late.13
Annual conferences

The annual conferences held by representatives of clearing
houses date from 1899, being the outcome of resolutions passed by
the Michigan Bankers’ Association, which, in that year, recom
mended such conferences to consider the unsatisfactory and con

fused conditions pertaining to collection and exchange charges.
The first conference was held in Cleveland in 1899 with the conven

tion of the American Bankers' Association, and effected a formal

organization. In 1905 the organization, which had met annually
since 1899, was formally recognized by the American Bankers'
" Stanley Young, op. cit. , pp. 130-132.
12 The Clearing House, etc., a pamphlet published by the Clearing House
Section of the American Bankers' Association ( 1923 ).

Bureaus of Credit have been installed in five clearing house associations:

Indianapolis, Chattanooga, Mobile, Allentown, Pa ., and Camden , N. J. One
county association, the Jasper County Bankers' Association of Missouri, also
has such a bureau . See American Bankers' Association Journal, Vol. XVII

( Oct., 1924 ) , p. 261 .
The results of clearing house examinations are not put in possession of
other members of the association.

138

CLEARING AND COLLECTION OF CHECKS

Association in the appointment of a special committee, to which
was intrusted the future work of the Clearing House Conferences.
In 1906 the Clearing House Section of the American Bankers'

Association was organized and this gave the section representa
tion on the executive council of the association . Annual reports
as part of the Proceedings of the American Bankers' Association

have been made since that time. These cover the general activities
of the section. For example, in 1907, plans were formulated to
reduce to a minimum certain lines of clerical work in clearing

house banks by the use of certain forms of remittance sheets, and
the adoption of a system of letters and numbers for cities and

clearing house banks. Among other things, the section also has
been instrumental in creating sentiment in favor of the appoint
ment of clearing house examiners, the suppression of note kiting,
the publication of clearing house totals, the country clearing
house, the no-protest symbol plan, and uniform counter checks.
The issue of clearing house loan certificates. Their nature
Clearing house loan certificates must be distinguished from
clearing house certificates. The latter are merely substitutes for
specie or currency, and are used by member banks of a clearing
house association for the settlement of balances.

These certifi

cates constitute claims to currency and obviate the necessity of
counting and recounting it. They are issued upon the deposit of
currency and are used in ordinary times, solely as a method of
economizing time and labor and reducing risk in handling large
sums of currency . Clearing house loan certificates, on the other

hand, are issued in times of stress upon the deposit of collateral
securities . Although both are intended for use in the settlement of
balances at the clearing house, the circumstances that call them
forth, the results effected by their use, and the parts they have

played in banking economy are quite different. Under Section
5192 of the Revised Statutes, clearing house certificates for pur
poses of reserve are deemed to be lawful money in the possession of
any association belonging to the clearing house issuing the certifi
cates. 14 Clearing house loan certificates are negotiable, as a rule,

only among the members of the association, and originally were
not regarded as currency. Ordinarily, they did not pass from
bank to bank except in payment of clearing house balances and
* Report of the Comptroller of the Currency ( 1907 ) , p. 64 ; C. F. Dunbar,
Chapters on Theory and History of Banking, 2nd ed. ( New York, 1904 ) , pp.
43-44 , 175.

CLEARING HOUSES PRIOR TO 1914

139

were not seen by the business community. While this has been
true in general, it will be seen that there have been important
exceptions to the rule.

Clearing house loan certificates have been resorted to as a
means of injecting some elasticity into the currency which was not
only not elastic, but perversely inelastic. Taking the place of
money in settlements at the clearing house, they saved the use of so
much cash, which enabled the banks to meet their balances, to
make additional loans and discounts, and to meet other obliga
tions, and thus to that extent expand the volume of currency.

Although originally designed for use in settlements at the clear
ing houses only, they were put into actual circulation in some cases
after 1893, thus assuming an additional function which at times
became quite important.
When the stringency in the money market seemed sufficient,

the clearing house association would meet and appoint a so-called
loan committee, which, in New York City, usually consisted of five
bank officers, to act in concurrence with the president of the

clearing house association, who served as ex -officio member. The
clearing house loan certificates would be taken out by the clearing
house members through this committee. It was the duty of the

committee to meet each morning at the clearing house and ex
amine the collateral offered as security by the banks and issue the

loan certificates thereon in such denominations and proportions
as were agreed upon. Cannon says the denominations have varied
from 25 cents to $20,000 in the different associations, and in pro
portions of 50 to 100 per cent. of collateral deposited.15 Interest
rates varied from 6 to 9 per cent. per annum, payable by the banks
to which they were issued, to the banks receiving the certificates
in settlement of daily balances. As a result the interest charged
against certain banks should exactly equal that credited to cer
tain other banks. The aim was to fix the rate sufficiently high to
insure the retirement of the certificates as soon as the emergency
which called them forth had passed.

It was not the general practice for all the members to take out
loan certificates when such issues were arranged. Some were in
such condition that they could weather the storm without them

while others were weak and in need of relief. Some banks regarded
their use as a reflection upon their standing and refused to apply

for them unless driven to it by sheer necessity, while others re
garded it as in no way prejudicial to their interests, but , on the
uJ. G. Cannon, Clearing Houses ( New York, 1900 ), p . 82.

CLEARING AND COLLECTION OF CHECKS

140

contrary, as a proper movement in which all the banks should en
gage for the general welfare of the community as a whole. It
has been the general policy of the members of the New York Clear

ing House to take out loan certificates regardless of their
strength. They have distinguished themselves in this respect and
in one instance, when a member bank refused to share the bur

dens of the associated banks, it was suspended from the privi

TABLE XIV

Issue of Loan Certificate by New York Banks, 1860-18931
Loan
mittee
of

1860
1861
1863

1864
1873
1884

1890
1893

Date of

Date of
first
issue

com

Nov. 23 , 1860
Sept. 19, 1861
Nov. 6 , 1863
Mar.
7, 1864
Sept.
May
Nov.
June

22 ,
16,
12 ,
21 ,

1873
1884
1890
1893

last
issue

Feb. 27 , 1861
Feb.

17 , 1862

Jan.

9 , 1864

April 26 , 1864
Nov. 20, 1873
June

6 , 1884

Dec. 22 , 1890
Sept. 6 , 1893

Date of
Anal
cancellation
Mar.

April
Jan.
June
Jan.

9 , 1361
28 , 1862

Aggregate
issue

$ 7,375,000
22,686,000

Maximum
amount

outstanding
$ 6,860,000
21,960.000
9,608,000
16,418,000

Rate
or

interest
7
6
6

30 , 1864

11,471,000

13 , 1864
14 , 1874

Sept. 23 , 1886

17,728,000
26,565,000
24,915,000

Feb.

7 , 1891

16,645,000

15,205,000

6

Nov.

1 , 1893

41,490,000

38,280,000

6

6

22,410,000

7

21,885,000

6

Report of the Comptroller of the currency ( 1907 ) , p. 66 ; W. W. Swanson , "The
Crisis of 1860 and the First Issue of Clearing -House

Certificates, "

Journal of Po

litical Economy , Vol . XVI ( 1908 ) , p. 221 .
Nature of collaterals :

1860-U . S. stocks, Treasury notes, stocks of State of New York .

1861 — Temporary receipts of the U. S. for purchase of governmont bonds.
1863—U. S. or New York State bonds, etc. , or temporary receipts as in 1861.
1864 - Same as in 1863 .

1873 --- Bills receivable , stocks, bonds, and other securities.
1884

Same as in 1873.

1890 - Do .
1893-Do.

leges of the clearing house for more than three months.

The

total amount of balances is not always paid in clearing house
loan certificates by a bank to which such certificates have been

issued ; a bank may pay all or only part in such certificates with

the balance in gold or gold certificates. Clearing house loan cer
tificates have been issued repeatedly in this country as Tables,
XIV and XV will show .

The use of clearing house loan certificates in 1860
The crisis of 1860 was brought on by the rupture of business
relations between the North and South and aggravated by the sus

pension of normal trade relations between the East and West. To

141

CLEARING HOUSES PRIOR TO 1914

appreciate this condition it must be borne in mind that business

had been expanding by leaps and bounds during 1859 and never
TABLE XV

Aggregate Issues of Clearing House Loan Certificates, 1873-1896, Inclusive
Aggregate

Aggregate
Year

Association

New York

Philadelphia
Boston

1873

Baltimore
St. Louis
New Orleans
Cincinnati

Amount

26,565,000
6,785,000
4,800,000
1,326,000
1,472,5003
1,067,0003
515,0000

Year

1893

Association

Amount

New York

41,490,000

New Orleans
Boston

11,445,000 ?

Philadelphia

10,965,000 $

998,000®

Baltimore
Buffalo

1,475,000
985,00010
987,000
360,000 "
127,000 "

Pittsburgh
Detroit

1879

New Orleans

Atlanta

54,000 *

13

Birmingham
1884

1890

New York .......
New York
Boston

Philadelphia

24,915,000
16,645,000
5,065,000
9,655,000

1891 Louisville, Ky... Amt. unknown

1895

Cincinnati

10

Chattanooga

10

Boston

235,000 "

Philadelphia
1896

New Orleans

8,220,000 "
•

•

•

399,0004

* Report of the Comptroller of the Currency ( 1907 ), p. 66, for the years
1873-1893.

'Approximate maximum outstanding at any one time. Cannon, Clearing
Houses, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d Sess., Sen. Doc. No. 491,
P. 86 .

' Cannon , op cit., p. 89 .
' Ibid ., p. 90 .
' Ibid ., p . 95.
*Maximum , Cannon , p. 105 . A. P. Andrew , “ Substitutes for Cash in the
Panic of 1907,” Quarterly Journal of Economics, Vol. XXII ( 1908 ) , pp.
506-507 , gives $ 1,029,000 .

'Cannon says this represents the maximum amount, and that the aggregate
was $ 11,645,000. Loc. cit., p. 98.
'Cannon again says this is the maximum amount and that the aggregate
was $ 11,470,000. Ibid.
'Maximum according to Cannon, p. 98.

10 Aggregate. Cannon, p. 105. The maximum was $ 925,000.
Maximum. Cannon , p. 107. A. P. Andrew , op. cit ., gives $ 500,000.
" Maximum . Cannon, p. 109. Had general circulation.
"Amount not known. Had general circulation.
* Amount not known.

" Cannon , pp . 112-113.
10Maximum amount. Cannon, p. 113.

in the history of the country had the outlook been more encour
aging than in the first few months of the disastrous year 1860.
During the fiscal year which ended June 30, 1860, foreign trade
>

142

CLEARING AND COLLECTION OF CHECKS

reached the highest mark yet attained.18 New York City banks
had expanded their loans liberally at the beginning of the year,
but by October and especially in November after the election of
Lincoln, hostility in the South accompanied by fear and distrust

in almost every section of the country, disrupted the banking sys
tem and threatened a panic. The banks, in general, hesitated to
advance loans and obtained from their customers as rapidly as
possible the payment of obligations. Call loans commanded 7
per cent., and the paper of some of the best houses went begging

at 24 per cent. The banks in the New York Clearing House, on
the other hand, wished to extend their loans liberally to check the

incipient panic. In order to effect this end and to facilitate the
settlement of exchanges among the banks themselves, it was de
cided by an agreement of November 21 , 1860, that any bank in
the clearing house association might deposit at its option with a
select committee of five members chosen by the association, any
amount it desired of its bills receivable, United States stocks,
Treasury notes, or approved stocks of the State of New York,
and receive in return certificates of deposit, on which it would be

required to pay interest at 7 per cent. per annum. These certifi
cates were to be in denominations of five and ten thousand dollars,

were to be issued up to 75 per cent. of the value of the securities
pledged, and could be used to settle balances at the clearing house
only for a period of thirty days from the date of issue.
A creditor bank was obliged to accept each day from the
clearing house by this agreement, such a proportion of the certifi
cates offered as its own balance bore to the total amount settled.

Under such an arrangement some banks would be unable to main
tain their reserves, if certificates of deposit were used to any

considerable extent by debtor banks in settling balances. The
banks receiving these certificates were themselves obliged to pay
out gold on demand to depositors, thus depleting their own re
serves and introducing a new kind of paper into their assets. To
obviate this difficulty, the specie of the associated banks was
pooled and treated as a common fund for their common benefit and

protection. The clearing house committee was given power to
equalize this common reserve by assessment or otherwise. For
this purpose banks were required to make statements each morn
ing before commencement of business to the committee on the
following items: ( 1 ) Loans and discounts, ( 2 ) deposits, ( 3 ) loan
10W . W. Swanson, “ The Crisis of 1860 and the First Issue of Clearing -House
Certificates, ” Journal of Political Economy, Vol. XVI ( 1908 ) , passim .

]

CLEARING HOUSES PRIOR TO 1914

certificates, and ( 4 ) specie.

143

These data enabled the committee

to determine daily which banks were carrying a disproportionate
amount of specie in comparison with other banks in the clearing
house association. The common specie reserve was then, accord
ing to agreement, equalized among the banks by assessment.

It

was also provided that interest which might accrue upon these
certificates, at the expiration of the thirty days, should be appor
tioned among the banks which had held them during that time.
The committee was authorized to exchange any portion of the
securities for an equal amount of others, to be approved by them
at the request of the depositing bank, and had power to demand
additional security either by exchange or by an increased amount .
The amount of certificates which the committee might issue was
not to exceed five million dollars. On December 3, 1860, it was
voted to increase the limit to ten millions, and something over

seven millions were issued. After February 1 , 1861 , every bank in
the clearing house association was to have on hand at all times, in
specie, an amount equal to one- quarter of its net liabilities, and
any bank whose specie fell below that proportion, was not to
make loans or discounts until its position was re-established. The
banks also agreed not to exchange with any bank which showed by
two successive weekly statements that it had violated the agree
ment . 17

This meant the virtual fusion of the banks of New York18 into
one central bank and the issue of the certificates marked the turn

ing-point in the panic and postponed the suspension of specie
payments which came thirteen months later. The banks extended

their loans freely, but the customers usually placed them as de
posits on the books of the bank and very little specie was with

drawn. Deposits increased and commercial paper,, which formerly
could not be sold at 20 per cent. discount, was now marketed
freely at 7 to 8 per cent. Although it may be said that there was
a suspension of specie payments among the banks since they settled
among themselves by the pledge of securities, there was no sus
pension so far as the public was concerned. The aggregate issue
was $7,375,000 ; the last certificate was cancelled March 9,
1'Hunt's Merchants' Magazine, Vol. XLIV ( 1861 ) , pp. 91-92 ; W. W. Swan
son , op. cit., pp. 219-220.
18All the New York banks entered into this combination, except the Chemical
Bank, an institution with remarkably large and steady deposits and small cir
culation, which preferred to leave the clearing house rather than throw its
large specie into the common stock . C. F. Dunbar, op. cit ., p. 82 ; Hunt's

Merchants' Magazine, Vol. XLIV ( 1861 ) , p. 77.

CLEARING AND COLLECTION OF CHECKS

144

1861 , and the total period from the date of first issue was 106
days.19

Although there were four other clearing houses established

prior to 1860 — at Boston, Philadelphia, Baltimore, and Cleve
land—they did not resort to clearing house loan certificates. On
November 24, the Boston banks followed the example of those of
New York in so far as to agree among themselves to discount
freely. Banks owing balances at the clearing house were per
mitted to settle in their own notes up to 50 per cent . of the bal
ances due, in amounts ranging from $10,000 to $100,000, ac
cording to the capital of the bank tendering them.20 But they
did not make a common fund of their specie, however, as did the
banks of New York City. As the banks refrained from mutual
demands for specie, they were able to weather the storm.21 The

Baltimore and Philadelphia banks suspended specie payments on
November 22 ; other banks followed in rapid succession especially
throughout the South.22
The New York issues of 1861, 1863, and 1864

The relief afforded by the certificates in 1860 was but tempo
rary for the country soon was plunged into the Civil War, which

paralyzed trade and industry and caused great distrust and un
certainty in business in general. As a result, the New York
Clearing House Association authorized another issue of loan cer
tificates September 19, 1861 . The aggregate issue was $ 22,
585,000. The last certificates were called April 28, 1862, more
than seven months after the date of their first issue. The nature
of the collateral, the rate of interest , the maximum amount out

standing at any one time, are set forth in the table above, p. 140.
The third and fourth issues of 1863 and 1864, respectively, are
also set forth in the same table .

These issues were the result of

the prolongation of the war, with the consequent unrest in busi
ness circles. No more loan certificates were issued until the panic
of 1873 .

1"Dunbar says $ 10,000,000 of such certificates were issued under this agree
ment, all to be redeemed by February 1 , 1861. He is incorrect in this state

ment according to the Report of the Comptroller of the Currency ( 1907 ) , p. 66.
sºHunt's Merchants' Magazine, Vol. XLIV ( 1861 ) , p. 77.
W. W. Swanson, op. cit ., p . 222.

* According to D. P. Bailey, The Clearing House System ( New York, 1890 ) ,
p. 22, there are no records of the Cleveland Clearing House prior to 1877.

CLEARING HOUSES PRIOR TO 1914

145

Clearing house loan certificates and the panic of 1873
It was not until the panic of 1873 that other clearing house
associations followed the practice of New York and issued loan
certificates. New York followed the precedent established in 1860

and was joined by the clearing house associations of Boston,

Philadelphia, Baltimore, Cincinnati, St. Louis, and New Orleans.
The severe panic of 1873 affected every operation of finance
and commerce. The result of inflation , an enormous railway ex
pansion in anticipation of demand, and the burden of heavy for
eign indebtedness largely in the form of interest charges on bor

rowed money, the panic of 1873 plunged the United States into
disaster with little preparation or anticipation by financial inter
ests.. When Congress met in December, 1873, demands for gov
ernment action took every form known to finance. The panic
reached its climax in September and was so severe that the New
York Stock Exchange closed its doors on September 20 for an
indefinite time, although it reopened them ten days later.
The usual resolutions were passed by the New York Clearing
House, authorizing the issue of loan certificates, and the first
issue was made September 22, 1873.23 Although the amount was
fixed at the outset at $10,000,000, more than $26,500,000 were
issued in less than four months.

But the announcement that the

ten millions would be issued, coupled with the announcement that
the government would purchase the same amount of bonds, caused
a rapid subsidence of the panic and in about three days its most
acute stages were over.24
Cannon points out that attempts on the part of the business
community were made in vain to discover what banks had taken
out certificates, but the information was withheld. For more than

two months, covering the worst period of the panic, no weekly
statements of their condition were made to the clearing house by
the banks, the object being to prevent a general knowledge of the
weak condition of some of the members, which , if disclosed might
have invited runs upon them .

The Boston Clearing House Association on September 27,
1873, voted to suspend currency payments and to appoint a loan
committee, with power to issue loan certificates to the amount of

$10,000,000 upon substantially the same basis as at New York .
On October 20, the amount outstanding reached its maximum of
23See table above, p. 140 .

" Cannon , Clearing Houses, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d
Sess., Sen. Doc. No. 491 ( 1910 ) , p. 85. Hereafter cited as Cannon, I.

146

CLEARING AND COLLECTION OF CHECKS

approximately $4,800,000. Similarly, the Philadelphia Associa
tion adopted for the first time the plan of issuing loan certificates
by a resolution of September 24, 1873, amended October 18, 1873,
with provisions quite similar to those adopted by the New York
Clearing House Association in 1860 as set forth above. The max

imum amount outstanding at any one time was $6,285,000,
reached on December 1 , 1873 ; the aggregate amount was $ 6 ,
785,000. Baltimore began to issue similar certificates on Septem
ber 24, which amounted in the aggregate to $1,326,000. The last
of these was retired January 2, 1874, one hundred days after the
date of the first issue.

The St. Louis Association issued its cer

tificates on September 25, and retired them forty-six days later,
the aggregate amount having been $1,472,500. At New Orleans

the maximum amount outstanding was $1,067,000, reached
October 10, 1873.

The Cincinnati Clearing House Association

issued loan certificates during a period of only fourteen days and
to the amount of $515,400, the last of which were cancelled six

weeks after the date of the first issue. Among the resolutions
issued by the association on September 25 was one that they would
follow the plan adopted by New York City, namely, they would
not pay out currency on checks, except for small sums, to be
optional with the banks and bankers on whom they were drawn ;

but they would certify checks drawn on balances in their hands,
payable through the clearing house only. When such checks were
drawn in payment of notes or drafts, the bank holding them was
not required to deliver the paper until after the check in payment
had been paid to the clearing house.25
Clearing house loan certificates in 1879, 1884, 1890, and 1891
The next issue of clearing house loan certificates was in 1879,
when the New Orleans Association alone issued a small amount

only $ 54,000 — to satisfy conditions of a purely local character.26

The year 1884 marked the next issue of such certificates.
Although a commercial and financial crisis occurred in that year,

resulting largely from an excessive construction of railways, the
New York Clearing House Association was the only one which
issued loan certificates.

The amount taken out was almost as

large as that of 1873 ; the issue beginning early in the year to

prevent a widespread panic. The first issue was on May 15, and
**Cannon , I , p . 89.
* 7bid ., p. 90.

CLEARING HOUSES PRIOR TO 1914

147

reached the maximum of $21,885,00027 on May 24. The last cer
tificates were issued June 6, and the last were retired September
23. The aggregate amount was $24,915,000.
The next six years were free from unusual financial disturb
ances and as a result no more loan certificates appeared until 1890.

Up to midsummer of that year the country had experienced un
usual prosperity. But there was an unwholesome tendency to
overtrading and expansion which required the extension of large
sums of money upon security. Early in the year the deposits in

the banks of New York City began to fall off, and by May 17,
the shrinkage had amounted to more than $44,831,000, of which
over $13,500,000 consisted of balances drawn out by banks in
the interior and in other reserve cities. Boston, New York , and

Philadelphia were the cities subjected to the heavy drains, and to
protect themselves they issued loan certificates.

New York City

took the first action on November 11 , 1890. Next day she issued
the first certificates and the last issue was December 22 .

The

maximum amount outstanding at any one time was $15,205,000 ;
the aggregate amount was $16,645,000.28
November 19 with loan certificates.

Boston followed on

The last were issued Decem

ber 6, and the last issue was cancelled January 6, 1891. The
amount issued totaled $5,065,000. On November 19, Philadel

phia also made her first issue, on practically the same plan as
followed in 1873. The issue ceased May 22, 1891 , the total issue
being $9,655,000, with the maximum of $8,870,000, which was

reached on January 9, 1891. The certificates were all retired,
excepting $170,000 issued to the Keystone and Spring Garden
National Banks, institutions which were carried down in the
panic. 29

Louisville, Ky., has the distinction of being the only city in
which aa clearing house association issued loan certificates in 1891
and peculiarly enough this was the only time the association ever
issued loan certificates.

The issue was small, the exact amount.

not being known .

Clearing house loan certificates and the panic of 1893
Late in 1891 the United States entered again into a period of
expansion which resulted in the panic of 1893. Bad harvests in
Europe and abundant harvests in the United States stimulated
"Cannon says $ 21,881,000. Op. cit., p. 90.
** See table above, p. 140.
> Cannon , I, p. 94.

148

CLEARING AND COLLECTION OF CHECKS

the farmers and the railways to buying with freedom which was
the beginning of a general stimulation in almost all lines of busi
ness .
In 1892 the situation was different. Crops were poor,
prices low and gold exports heavy. These facts, combined with

the lowering of the tariff which reduced the revenues of the Treas
ury, the increased appropriations of Congress, the drainage of
the gold reserve to meet not only foreign obligations but to redeem
the United States and Sherman notes — the " endless chain " —the

collapse of banks in Australia, the failure of the Philadelphia &
Reading Railway and the National Cordage Company, destroyed
confidence and plunged the country headlong into a panic .30 By

May, bank deposits began to shrink rapidly, by June and July,
the mortality among banks was alarming, and by August, a panic
of great severity held the country in its grip .
There was no way in which banks could expand their currency.
The situation in the reserve and central reserve cities was aggra

vated by the call of interior banks for their reserves which had
been deposited in those cities. The interior banks got into trouble
first and sporadic failures, multiplying here and there, gradually

forced other banks, and finally the New York banks, to a tempo
rary restriction of payments.81 Thus was manifested one of the
outstanding defects of the old National Banking System, the
pyramiding of reserves. Clearing house loan certificates were
again resorted to as the best means of staying the force of the
panic. Eight cities were reported to have employed loan cer
tificates of large denominations for use in settling clearing house
balances,32

New York began to issue the certificates June 21 , 1893 ; the
last issue was September 6 ; the date of final cancellation, Novem
ber 1 ; and the aggregate issue, $41,490,000, an issue of unprece
dented size.

New Orleans followed New York on June 22, under

joint agreement and responsibility as contrasted with the usual
individual responsibility. The largest amount outstanding at any
one time was $998,000.

Boston began to issue loan certificates

June 27, bearing 7.3 per cent. interest. The aggregate issue was
$11,645,000 and the maximum at any time $11,445,000. They

were cancelled by October 21. Philadelphia issued an aggregate
amount of $11,470,000, the largest amount outstanding at any
so See W. C. Mitchell, Busine88 Cycles ( University of California, 1903) ,
pp . 51-58 .

*A . P. Andrew, “ Substitutes for Cash in the Panic of 1907,” Quarterly
Journal of Economics, Vol. XXII ( 1908 ) , p. 513.
87See Table XV above, p. 141 .
9

CLEARING HOUSES PRIOR TO 1914

149

time being $10,965,000. The maximum amount outstanding at
any time in Baltimore was $1,475,000. Buffalo banks issued an

aggregate of $ 985,000. Pittsburgh issued $987,000 in the aggre
gate. The first was issued on August 11 , and the last retired on

September 15. Detroit had a maximum outstanding of $ 360,000 ;
Atlanta a maximum of $127,000. Atlanta's certificates were dis
tinguished from those mentioned above in the fact that they cir
culated outside of the banks and were received on deposit or in
payment of debts due any bank in the clearing house. This was
the first time that clearing house loan certificates in currency
denominations, to be used by banks in paying their customers,

were ever issued.33 Birmingham also issued loan certificates for
general circulation in denominations as small as $2, $1 , 50 cents,
and 25 cents. No other association in the United States had pre
viously made issues which compared with the one at Birmingham ,
in the comprehensiveness of its currency system and the extent to.
which it was developed on this occasion. Cincinnati and Chatta
nooga also resorted to loan certificates, but the amount issued is
not known.

In cities in which there were no clearing houses an emergency

currency, under the name of " clearing -house certificates,” was
issued by banks associated together. These certificates were tempo
rary loans made by the banks associated together and pledged
for their redemption. They were in small denominations and pecu
liar to the Southeast. The denominations and cities were : Albany,

Ga., $10, $5, and $1 ; Chester, S. C., $10, $5, and $1 ; Columbia,
S. C. , $50, $20, $10, $5, $2, and $1 ; Newman, Ga., $ 10, $5, and
$1 ; and Rock Hill, S. C., $5, $2, and $ 1 . They afforded relief to
the public and accomplished results similar to those accomplished

by actual clearing house loan certificates in larger cities.34
Loan certificates in 1895 and 1896

Certain localities experienced a depression in 1895.

Boston

felt such pressure that the clearing house association issued loan,
certificates to the amount of $235,000, the last of which were re
tired March 12, 1896. In a similar manner Philadelphia made an

issuing aggregating $8,220,000.35 In 1896 , New Orleans issued
clearing house loan certificates.

The largest amount outstand

* A . P. Andrew , op. cit . , p . 507 ; John DeWitt Warner, “ The Currency
Famine of 1893 ,” Sound Currency, Vol . II, No.:6 ( New York, 1895 ), p. 6..
“ Cannon , I , p. 112.
38Ibid ., p. 113.

150

CLEARING AND COLLECTION OF CHECKS

ing at any time being $ 399,000. Cannon says the excitement due
to the presidential contest in that year was the disturbing factor
which occasioned the issue. This seems to have been the last issue

until the panic of 1907.
Loan certificates and other currency substitutes issued during the
panic of 1907

The panic of 1907 was a violent manifestation of an interna
tional crisis which terminated the period of business expansion in
Europe and America in 1905-1906 . The defective currency sys
tem was undoubtedly the chief contributing factor. Business was
being done by the modern system of bank credits with inadequate
machinery for readily converting bank credits into cash. The
crisis antedated the panic by several months. While the panic
came in March with a second crash in August, 1907 , a recession

in the prices of raw materials began in the spring and early sum
mer of the preceding year. Unsold stocks accumulated and forced
large industrial enterprises into the hands of receivers in June,
August, and October. The investment market for loans became
more and more stringent . Prices fell rapidly on the Stock Ex
«change and acute trouble began when suspicion was directed
against certain New York banks , controlled by a group of finan
ciers who were believed to have suffered heavy losses through the
decline in the prices of copper stocks. The run on the Knicker
ibocker Trust Company , October 22, precipitated the panic which
-carried down with it other financial houses with the usual attend

ing phenomena . From New York as a center the panic spread
rapidly over the country. The banks of the country, it seems, had
never suspended payments with quite the same simultaneity as in
1907.

Clearing house loan certificates were again resorted to, but, in
addition, several other expedients were adopted.36 It had been
hoped and expected in New York that the fact that the New York
Clearing House had announced its intention to support the asso
ciated banks, would be sufficient to tide the banks over the crisis.

Several of the banks applied for and received assistance through
the joint action of many of the banks, which advanced cash , re .
ceiving therefor participating certificates, for which the clearing
house held the collateral security. The drain upon all the banks
was exceedingly severe, and it became apparent that aid would be
solicited soon by other members of the association. For this rea
30For other remedies adopted, see Mitchell, Business Cycles, p. 78.

CLEARING HOUSES PRIOR TO 1914

151

son the loan certificates were issued. The first issue was on Octo

ber 26, 1907. Most of the clearing house associations of the
country met about the same time and made provision for the issue
of some form of instrument that would aid in relieving the exist
ing conditions, and in the majority of cases certificates were issued
varying in rates of interest from 5 to 10 per cent., and were issued
for from 50 to 80 per cent. of the collateral deposited to secure
them. Although Cannon thought it impossible to estimate the
amount of these instruments outstanding at any one time, he
thought it safe to assert that more than $250,000,000 were issued

during the panic in addition to which some of the railroads and
larger industrial concerns issued checks of various denominations
to pay wages of employees, all of which, he concluded, served well

the purpose for which they were issued.37
The variations in the types of issues almost defy classification.
Table XVI below classifies the issues of 1907 under five main

heads. However, there were other variations that should be men

tioned and a more complete classification would be as follows :
( 1 ) Clearing house loan certificates in large denominations for the
settlement of bank balances, (2 ) clearing house loan certificates in
small denominations for general circulation, ( 3 ) clearing house
checks in convenient denominations for general circulation, ( 4)

cashiers' checks in convenient denominations payable only
through the clearing house, ( 5 ) certificates of deposit in conven
ient denominations, ( 6) drafts on reserve banks, and (7 ) pay

checks payable to bearer. In addition, other expedients were re
sorted to as ( 1 ) official encouragement of suspension, ( 2 ) limit
ing the size of checks to be paid, ( 3 ) the practice of requiring the
larger customers of the banks to mark their checks " payable only
through the clearing house, " and ( 4 ) the plan of group No. 2 of
the Ohio Bankers' Association.

Clearing house loan certificates in large denominations
It would be unprofitable to make a detailed study of the par
ticular issues of clearing house loan certificates in large denomina
. tions further than to mention briefly some of the most typical and
outstanding cases. Mr. A. P. Andrew says that in 1900 there

were 147 cities with populations of 25,000 or over and that out
of 145 of these which reported to him in 1908, 42 issued clearing

house loan certificates in large denominations to settle bank bal
37J. G. Cannon , Clearing Houses and the Currency ( Columbia University
Press, 1908 ) , pp. 112-113. Hereafter cited as Cannon, Ii .

152

CLEARING AND COLLECTION OF CHECKS

ances at the clearing houses ; 22 of the 145 issued loan certificates

of small denominations for general circulation ; and 51 issued
either or both.38

On October 26, the New York Clearing House Committee first
issued $ 11,235,000 of loan certificates to take care of the partici
pating receipts given for loans advanced the preceding week . The
final issue was on January 30, 1908 ; while final cancellation was
on March 28, 1908. The aggregate issue was $101,060,000 and

the maximum amount outstanding at any one time was $88,
420,000. During this period $453,000,000 of collateral passed
through the hands of the committee, of which $330,000,000, or

72.92 per cent., consisted of commercial paper,, and $ 123,000,000,
or 27.08 per cent., of stocks, bonds, and short-time railroad and

other similar notes . The smallest amount issued to any bank was
$250,000 ; the largest amount, $17,000,000, an amount of certifi
cates greater than the aggregate issue of any individual clearing
house in the United States with the exception of Chicago.39 The
issues of clearing house loan certificates in New York also pro

vided credit with which the banks were enabled to buy and pay for
large amounts of the Panama bonds and United States certifi
cates of indebtedness which were issued by the government as a

measure of relief. The bonds and certificates so purchased were
then placed on deposit in Washington, as security for new na
tional bank note circulation. In this manner the issue of clearing
house loan certificates made it possible to secure more circulation.
Aid was extended also to the trust companies of the city by
permitting them to borrow from clearing house banks with which
they did business, on their own notes secured by collateral which
they permitted the clearing house banks to hypothecate with the
New York Clearing House Association and for which they re
ceived clearing house loan certificates in return. This relieved
the trust companies of great embarrassment.40
Chicago followed New York on October 28 or 29 with its first

issue of clearing house loan certificates. They differed from those
issued by New York as the agreement under which Chicago's cer
tificates were issued was amended on November 6, and again on .

November 9, authorizing the substitution of checks in denomina
tions of $ 1 , $2, $5, and $ 10, as desired .

These were designed to

circulate to the extent of $7,500,000 and were secured by clearing
38 A. P. Andrew , op cit., p. 501 .
3*See Table XVI below, pp. 156-157.

"Cannon, II, pp. 112-113.

CLEARING HOUSES PRIOR TO 1914

153

house loan certificates which, in turn, were secured by 133 per

cent. of good collateral.41 Boston issued only long-time certifi
cates. For the period beginning October 28 and ending January

24, she issued $ 12,595,000. According to Cannon, Philadelphia
began to issue such certificates as early as September 24, and

issued an aggregate amount of $13,695,000. Other types also ap
peared there. The table should be consulted for a further list of
the cities which made such issues.

Clearing house loan certificates in small denominations for general
circulation

Mr. A. P. Andrew estimated that out of 145 cities with a pop
ulation of 25,000 or over, at least 22 issued loan certificates in

small denominations for general circulation. Table XVI, however,
lists 26 cities with a population of 25,000 or over, and Table XVII
lists 34 more with a population of less than 25,000 that made such
issues. It is obvious that this information must be very uncer
tain and incomplete .
The Los Angeles Association issued not only clearing house
loan certificates in large denominations, but also a peculiar issue
designed for general circulation and called “ clearing house circu

lating certificates or scrip.” Their purpose was identical with
that of the clearing house checks issued by other associations and

closely resembled them except that they were more elaborate in
form. Both types of issues were directly secured by collateral, the
former to the extent of 133 per cent. , and the latter by securities
valued at 200 per cent. of the amount issued. This was unlike
the practice followed by most clearing house associations which
issued both types.

The usual practice was to secure the checks

by the deposit of loan certificates, which were secured by collat
eral. The Kansas City, Missouri, Association, like that of Los
Angeles, issued both types, each directly secured by collateral.
The Fargo, North Dakota, Clearing House Association issued
loan certificates in denominations of $5, $10, $20, $100, and

$500, payable on or before three months after date and only up
to 50 per cent. of the deposited collateral . The Harrisburg,
Pennsylvania, Association issued what it called “Certificates of
Indebtedness” stating that the association was indebted to the

bearer to the sum of $1 , the payment being guaranteed by mem
bers of the Harrisburg and Steelton Associations, but payable

only through the Harrisburg Clearing House. On the reverse
"Cannon, I, pp. 121-123. Cannon's data do not harmonize with Table XVI .

154

CLEARING AND COLLECTION OF CHECKS

side were found the following words printed in English , Polish,
Hungarian, and Italian : “ This check may be deposited but will

not be paid in cash .” 42 Examples will not be multiplied. Regard
ing both types of loan certificates, Mr. Andrew pointed out that
upon no previous occasion had banks of so many cities resorted
to clearing house loan certificates for the settlement of their
mutual obligations ; never before had they issued them in such
large amounts, nor for such long periods of time, and never had
these certificates been so extensively issued in small denominations
43

to meet ordinary bank obligations in lieu of cash.*
Clearing house checks in convenient denominations for general
circulation

Like the loan certificates of general circulation, clearing house
checks were issued by the associations to member banks upon the

deposit of approved securities and were accepted for deposit in
any of the banks, but were payable only through the clearing
house. They were in currency denominations and were often very
elaborately engraved in order to resemble currency. However,
they were unlike the loan certificates in the fact that instead of

merely certifying indebtedness on the part of the clearing house

association, they took the form of checks drawn upon particular
banks, and were signed by the manager of the clearing house. In
Chicago a bank desiring such checks, deposited with the clearing
house a corresponding amount of the ordinary loan certificates of
large denominations, and received the checks in currency denomi
nations in exchange.. They were also issued in Cleveland,, Mil
waukee, and some smaller cities.44

Cashiers ' checks issued in convenient denominations and payable
only through the clearing house
National banks and State banks, despite the 10 per cent. tax

law, issued these checks in convenient denominations, which circu
lated virtually as bank notes. Such checks usually purported to
be “ payable to bearer, ” but they were “ payable only through the
clearing house,” or in " clearing house funds” . Sometimes they
were secured by the deposit of approved collateral with a com
mittee of the clearing house, but in the small towns of the middle
“ Cannon , Clearing House Loan Certificates and Substitutes for Money
Used During the Panic of 1907. Address delivered before the Finance Forum ,
New York City ( March 30, 1910 ) , p. 13.

"A. P. Andrew , op. cit., p. 501 .
“ Ibid ., p. 510.

CLEARING HOUSES PRIOR TO 1914

155

West they were commonly issued directly by the individual banks.
Occasionally an apparent effort was made to circumvent their

illegality by making them payable to a supposed person. In St.
Louis, Mo., and Muskogee, Okla., they were payable to “ John
Smith, or bearer” ; in Memphis, Tenn., to “ Richard Roe, or
bearer. " 45

The Cincinnati Clearing House issued similar checks begin
ning October 28, 1907, to the extent of about $ 2,000,000. They

were in denominations of $2, $5, $10, and $20 and were issued to
each of the fourteen clearing house banks on the security of high
class collateral which exceeded the amount of the checks issued by
more than 20 per cent.

Over three hundred merchants whose

names were published in the papers indicated their willingness to
cash such checks and in some instances a premium as high as 5
per cent. was allowed for cash purchases made and settled by these
checks. As soon as the currency situation became normal again
they practically retired themselves.46

At Canton, Ohio, a manufacturing center, which required
large amounts of cash for payrolls, an agreement was made be
tween the bankers and their manufacturing clients by which pay
checks were to be used. The banks supplied their customers with

these in a general form in denominations of $5, $10, and $20, made
payable to the bearer through the clearing house. In using them
for purchases with the trades people, they were found to be an
easy means of exhausting the supply of cash which the stores
were obliged to give in change when small purchases were made.
As a result, clearing house checks, or cashier's checks payable to
bearer through the clearing house only, were issued to the extent
of about $200,000 in denominations of $1 , $2, $5, and $10. These
checks had no collateral security back of them and were accepted

purely on the responsibility of the issuing bank. Similar checks
were issued by Council Bluffs, Ia., Denver, Colo., and other cities,
as indicated in Table XVI.

Certificates of deposit

In a few instances the banks issued currency in the form of

negotiable certificates of deposit in convenient denominations.
Sometimes the certificates asserted that a particular person or
company had a deposit and sometimes the assertion was in general
terms, as “ This is to certify that there has been deposited with the
"A. P. Andrew , p. 510.
" Cannon , I , p. 127.

156

CLEARING AND COLLECTION OF CHECKS

First National Bank of Berkeley, Cal., 5 dollars ” .47 In some cases
they were interest bearing and payable after the expiration of a

certain period ; in others they were immediately acceptable by the
issuing bank through the clearing house and bore no interest.
They seem to have been found only in a few cities and those with

population of 25,000 or less.48
Drafts on reserve banks

The banks of Birmingham , Ala ., issued drafts on New York
City in denominations of $1 and upward, which were used for pay
rolls and general circulation in that locality. They were drawn
against actual balances held by particular New York corre
spondents and were payable through the New York Clearing
House. Such a practice seems to have been peculiar to Birming
ham. They were not unlike cashiers' checks "payable in ex

change" .49
Pay checks payable to bearer
These checks were drawn by such bank customers as railways,

mining companies, manufacturers, storekeepers, etc., upon their
banks in currency denominations and used in all parts of the coun
tries in payment of wages and in settlement of other commercial

obligations. They were generally “ Payable only through the
Clearing House," but differed from cashiers' checks and clearing
house checks in the fact that, unlike the latter, they were not a

liability of the clearing house association but of the firm or corpo
ration for whose benefit they were drawn.

The pay check reached its largest development in Pittsburgh,
$ 47,000,000.being issued there during the panic of 1907. Many
of them were in denominations of $1 and $2. Their issue involved

much labor to the clearing house, to the banks, and to corpora
tions using them. They came to banks by the basketfuls, requir
ing many extra clerks working far into the night to assort them.
Where concerns issued them it was found that clerks could not
sign over 400 to 500 checks in eight hours ; since 30,000 to 40,000

checks were issued semi-monthly, the tremendous amount of labor
can be appreciated.

It is surprising that such checks were so

readily accepted in lieu of cash by shops, stores, places of amuse
"Andrew, p. 511.
** See Table XVII.

“Andrew, p . 511 .

{

D
B
А
A

B
D

SA

D
B

I
B
SA

A

B

B
,A

.*Circulation

DWil
,. el mingtonD
A
(
OYou
, hiongstow
Bn

K
,. an ita
Wich

.Top
K, aneka
.W, . eling
Va
Whe

W
,. ash
oma
Tac
.M
, ass
nton
Tau

W,. is rior
Supe

WSpo
,. ash
kane

I,. nd dh
Ben
Sout

.., a x
ISiou
City

IB

D
A
.San
al isco
C
,Franc
B

..
T
, ex io
Anton
San

.G
, a nnah
Sava
.W
, ashle
Seatt

Total

17UT
an

',807 ,000
Nov.
1,150

07
',29
Oct.
00
12,339,0
07
',4Nov.
0
7,390,00
'265,0
,407 00
Nov.
'1,700
,407 ,000
Nov.

'344,000
1, 07
Nov.

obtai
not nable
nt
Amou
07
',264,500
20
Nov.

.
omic
Econ
of
al s
Journ
erly
Quart
The

3$30,066,223

276,500

43,000

07 000
',28
Oct.
245,
inable
obta
not
Amount
07
',10
Nov.
120,000
07 .000
',1Nov
669,
1,407,000
inable
obta
not unt
Amo
0
7, 7 00
Nov.
500,0
obtai
not nable
nt
Amou
07
',14
Nov.
40,000
07
'Nov.
,8
195,000
',8 07
Nov.
173,000

251,500

453,650

h,thro
-. ouse
the
ugh
only
nd ing
aclear
rle
beare
to
payab
inations
denom

08
',23
Jan.

08
'31
,Dec.
08
',3Jan.
'21
, 08
Jan.

',1 08
Jan.

'7,08
Jan.

', 08
10
Jan.

08
',13
Jan.
',1308
Jan.

', 08
10
Jan.

'1, 08
Mar.

,'1508
Jan.

-10,000

07
',12
538,000 Dec.

07
Nov.
45,000 ',29
07
',Nov.
211,000 28

22,500

490,000

'1, 07
2,076,000Nov.

120,000

', 07 .
Nov
245,000 20

'1, 07
321,000 Dec.
07
Nov.
172,963 ',20
07
',Dec.
24
12,339,000
07
6
7,390,000,'1Dec
, 07
Nov.
265,000 '15

1ec
122
.-D
Nov.

2savings
,$5
accounts
Only

Discretionary

custo
per
$50 mer

Discretionary

cust
per
1$00 omer
per
00 omer
1$cust
cust
per
1$ 00 omer

0
$ 5hen
,10
Dec.
to
2t5
$

unts
acco
savi
Onlyngs

custo
1per
$00 mer
discr
with
1$00 etion

Discretionary

day
per
$50

esy
Court
908
ug.
XIIomic
XA1of
.V,(,5p.) 02.
ol
al s
Journ
erly
Quart
he
TEcon
,S”of
1907
of
Panic
the
in
Cash
for
tutes
ubsti
. ews
P“,Andr
.*A

de
small
in
certificates

ouseen
hof
ng
leari
Cloan
-B.balan
ces
bank
conv
ement
settl
hecks
the
cgener
'C-for
for
rs
ashie
ons
D.in
inati
denom
latio
large
in
circu
al
icates
certif
loan
York
ouse
h
inati
ew
ng n ons
N
denom
E
leari
C
.
nient
A
house
conve
in
ing
steral
clear
the
ouse
with
g
arin
_Cle
colla
Ccheck
of
.-hdepos
it
n
latio
circu
the
al
by
nient
gener
ed
for
conve
secur
ly
in
s
usual
ation
hecks
nd
c
aclear
nomin
PG. ay ble
,house
ing
on
inatisons
the
denom
gh
nient
throu
conve
only
it
paya
depos
of
inati
icate
denom
Cfor
ient
-Fin
.ertif
n
latio
circu
gener
inati
denom
nient
conve
in al
nge on
excha

157

CLEARING HOUSES PRIOR TO 1914

But this was done despite their variety, liability to
counterfeit, and their general lack of security.50
The Philadelphia Clearing House Association, in addition to

ment , etc.

issuing the loan certificates, also made special arrangements to
care for checks which were being used by employers in making
payments to employees. On account of the temporary scarcity
of currency, employers found it necessary to make payments of
wages in pay checks, payable through the clearing house rather
than in cash. The clearing house association thought such checks
should be rendered as readily available as possible, and conse
quently, by a resolution on November 16, recommended that such

payroll checks made payable through the clearing house should
be certified before issue by the banks upon which they might be
drawn ; that no such checks should be certified by any member of
the association unless furnished by the American Banknote Com

pany in the form approved by the clearing house association ; that
they should be furnished only to members of the association upon

application to the clearing house association ; that members of the

association, before certifying such checks, should open a payroll
account for the depositor to whom such checks were to be issued
and to which account the checks were to be charged when paid ;
and finally, that returns of the amount of checks issued and out
standing, as shown by the balance to the credit of payroll account,
should be made daily to the clearing house committee by the banks
which had accepted and certified them.51 The amount issued in

Philadelphia is not known. Duluth and New York seem to have

been the only other cities in which they were issued .
TABLE XVII

Currency Substitutes in Cities of Less than 25,000 Inhabitants, 1907
Total
Cities

Atchison , Kan.

Kind of

Amount

Device
D

Issued

Bainbridge, Ga.
Berlin, N. H..

Berkeley, Cal.
Bishop , Ga .
Blakely, Ga.
Brunswick, Ga.
Columbia, S. C.

.B
D
F

В
B
B
B

40.000

125,000

Date of
First Issue

Date of
Retirement

Nov. 1, '07
Nov. 6, '07

Jan. 1 , '08
Mar. 1 , '08

Amount not obtainable.

34,000
Nov. 5, '07
Amount not obtainable.
Amount not obtainable .

109,000
250,000

Nov.
Oct.
Nov.
Oct.

6,
24,
1,
30,

'07
'07
'07
'07

B

320,000
617,200
45,000

B

50,000

Nov. 1 , '07

B

33,500

Oct. 29, '07

Columbus, Ga.

B

Danville, Va.
Dawson, Ga.
Douglas, Ga.

B

Fargo, N. D ..
BO

Andrew , pp. 512-513.
" Cannon , I, pp. 124–125.

Jan. 10, '08
Mar.
Mar.
Jan.
Jan.

28 ,
1,
22,
9,

'08
'08
'08
'08

Mar. 1 , '08
Jan. 18, '08

158

CLEARING AND COLLECTION OF CHECKS
TABLE XVII- (Continued )
Kind of
Device
B

Cities

Gadsden, Ala .
Gaffney, S. C.

B

Greensboro, N. C ...

B
B
F
SB

Greenwood, s . C ..
Guthrie, Okla.

Hastings, Neb .
Hattiesburg, Miss.

F

D
с
.D

Henderson, Ky.
Iron River, Mich .

B
B

Jackson, Ga.
Key West, Fla ..
Kalamazoo, Mich .

Total
Amount
Issued

8,000
20,000
39,100

Date of
Retirement
Jan. 1, '08
Jan. 1 , '08
Jan. 25, '08

Date of
First Issue

Nov. 15, '07
Nov. 11 , '07
Nov. 4 , '07

Amount not obtainable .

Amount not obtainable .
Oct. 28, '07
7,713

Dec. 20 , '07

Amount not obtainable.

40,000
Oct. 1 , '07
89,000
Oct. 30 , '07
24,000
Nov. 12, '07
Amount not obtainable .
Amount not obtainable.

Dec. 15, '07
Jan. 9, '08
Dec. 24 , '07

Customers asked to make checks payable in
exchange.
B
B
B
B

Las Vegas, N. M.
Lynchburg, Va.
Macon, Ga.

Milledgeville, Ga.
Muskogee, Okla .
Newman, Ga.
New Carlisle, Ind .
Oklahoma, Okla..

Ogden , Utah
Rome, Ga.

Sedalia, Mo.
South Boston, Va .

30,000

381,000
325,000

Amount not obtainable.
Amount not obtainable.

D

Amount not obtainable .

.A, B
200,000
.D circ. 275,000
.B
120,000
D
100,000
100,000
.B

Thomaston , Ga.
Thomasville, Ga.
Tifton, Ga.
Valdosta, Ga.

1,
1,
1,
15,
5,

B

Amount not obtainable .

Nov. 22,
Oct. 28,
Nov. 1 ,
Nov. 6,
Nov. 1 ,
Nov. 23,
200,000
Nov. 10,
Amount not obtainable.

B

B
D
B

Willacoochee , Ga.
Winston-Salem, N. C ..

B
F

Total ....

Nov.
Nov.
Nov.
Nov.
Nov.

.B
.B
.B
.B

Vicksburg, Miss.
Virginia, Minn .
Waycross, Ga.

Dec. 31 , '07
Jan. 13, '08
Jan. 31, '08

Amount not obtainable .

.B

.D

Sylvester, Ga.
Tampa, Fla .

Nov. 1 , '07
Nov. 18, '07
Nov. 4, '07

125,000
10,000
40,000
50,000
100,000
170,000

'07
'07
'07
'07
'07

Jan.
Dec.
Jan.
Jan.

1,
31 ,
10,
15,

'08
'08
'08
'08

'07
'07
'07
'07
'07
'07
'07

Feb.
Mar.
Jan.
Feb.
circ.Feb.

1,
1,
1,
15,
1,

'08
'08
'08
'08
'08

Apr. 25, '08
Dec. 20, '07

Amount not obtainable .

350,000

Nov. 1, '07

circ.Jan.

1,

'08

4,420,513

A - Clearing - house loan certificates in large denominations
ment of bank balances. B-Clearing-house loan certificates in
nations for general circulatoin. C - Clearing -house checks
denominations for general circulation. D - Cashiers' checks in

for the settle
small denomi
in convenient
convenient de

nominations payable only through the clearing house, and usually secured by
the deposit of collateral with the clearing house. F - Certificates of deposit in
convenient denominations.

'A. P. Andrew , op. cit., p. 505. Courtesy of The Quarterly Journal of
Economics. This information is known to be very fragmentary. Some towns

were known to have issued emergency currency from which no information
could be elicited and many more undoubtedly employed emergency currency.
As a result this table probably represents but a small fraction of what actually
existed in the smaller localities of the country during the panic.

Official encouragement of suspension
Official encouragement of suspension was an expedient re
sorted to in several States in order to meet the panic conditions.

CLEARING HOUSES PRIOR TO 1914

159

Legal holidays were declared by governors, especially in the west
ern States, which were intended to authorize banks, as well as
other firms and individuals, to decline payment when unduly
pressed or whenever they saw fit. The governor of Nevada was
the first to resort to this measure on October 24, and he was fol

lowed quickly by the governors of Oregon and California .
Limiting the size of checks to be paid
In some States, banks limited the size of the checks to be paid
at any particular time. The limitations varied from $10 to $300.
This practice was common in Indiana where only partial payments
were made to depositors. The attorney-general ruled that the
practice was not a violation of the law. Banks in Iowa, Okla
homa, and Wisconsin did likewise. In 53 cities, with a population

of 25,000 or over, depositors were not subjected to restrictions of
payments and no resort was made to emergency devices.52
The practice of requiring the larger customers to mark their
checks “ Payable only through the Clearing House”
This was another expedient resorted to by banks in several
cities in order to protect themselves from loss of cash especially
where the checks were sent out of town and might be presentd for
collection through the agency of express companies.

In the following cities of 25,000 or more inhabitants such re
strictions were practiced :
Allentown, Pa.

Mobile, Ala.

Bay City, Mich.
Binghamton , N. Y.S
Dayton, Ohio ( one trust company )

Oshkosh, Wis.
Pawtucket, R. I.

Erie, Pa .

Evansville, Ind ."
Fall River, Mass.53
Gloucester, Mass.

Hartford, Conn.
McKeesport, Pa .

New Haven, Conn.
Reading, Pa.
Saginaw, Mich.
Springfield , Mass .
Syracuse, N. Y.53
Woonsocket, R. I.
York, Pa.

The plan of Group No. 2 of the Ohio Bankers ' Association
In an effort to overcome the disastrous consequences resulting

from false rumors in times of stress and to prevent runs on banks
“ Andrew , p. 503. Andrew also states that there were only six States in
which there were no restrictions or substitutes for cash, but his own tables
disprove the statement as some of the States named as being immune were in
cluded in his tables. The fact that so few escaped, however, shows how wide
spread was the panic.
In these cities customers sending checks out of town were asked to make
their checks payable only through the clearing house in order to prevent their
collection by express. Andrew, p . 502.

CLEARING AND COLLECTION OF CHECKS

160

worthy of assistance, a plan was adopted for the mutual protec
tion of the associated banks of Group No. 2 of the Ohio Bankers'
Association .

This group included the banks in the following Ohio counties :

Allen, Anglaize, Darke, Hancock, Harden, Logan, Mercer, Miami ,
Paulding, Putnam, Shelby, and Van Wert. This plan is worthy of
notice since it offers the first concrete example of banks uniting in
any particular section of any State in an effort to overcome panic
conditions.

The agreement provided for three trustees who were to enforce
the provisions. This board of trustees was given authority to
grant relief to any member bank or banker if satisfactory assets
were turned over to the board. The amount to be advanced could

not exceed 60 per cent. of the cash value of the assets ; all ad

vances were to be repaid within sixty -five days, and were to bear
8 per cent. interest. Such advances could take the form of gold,
silver, currency, or checks, if so determined by the executive com
mittee of the group. When relief was granted to any bank the
burden was to be apportioned among the member banks according
to resources. Failure to assume its share of burden resulted in the

forefeiture of the member bank's rights under the agreement ;

failure to repay the amount received by the relieved bank made it
liable to suit by the board of trustees. No bank securing such
relief could make any loans or discounts until the relief had been
repaid.54

A general summary
Surveying the record as a whole, Mr. Andrew offers the follow
ing definite data for $334,000,000 of emergency currency issued
during the panic of 1907, classified as follows :
Clearing house certificates ( large )
Clearing house certificates (small )
Clearing house checks
Cashiers' checks

Manufacturers' pay checks
Total

$ 238,000,000
23,000,000
12,000,000
14,000,000
47,000,000

$ 334,000,000

He thinks the estimate of the total issue of substitutes for

cash issued during the panic may be placed safely above $ 500 ,
000,000.55

" Cannon, I , pp. 131-135.
55Andrew , op . cit., p. 515.

CLEARING HOUSES PRIOR TO 1914

161

Did the currency substitutes violate the 10 per cent. tax provision
of the Act of 1865 ?

Clearing house loan certificates have been criticized on the
ground that they were issued in violation of the 10 per cent. tax

on banknote currency other than national banknote currency, and
the provision of the National Bank Act which states that no

national banking association shall issue “ any other note to circu
late as money than such as are authorized by the provisions of
this title. ” 56 This criticism becomes pertinent when such loan cer
tificates find their way into general circulation as was the case in
the southeastern part of the United States in 1893, and in other
parts of the United States in 1907. But since they were looked

upon as strictly emergency currency and retired as soon as pos

sible they escaped taxation, although technically subject to the
tax. Most of the substitutes for cash which were issued during
the panic of 1907 and which for two months or more furnished the
principal means of payment for the greater part of the country,
were illegal and subject to the 10 per cent. tax. But no one
thought of prosecuting or collecting the tax. As most of it bore

the words “ Payable only through the Clearing House,” its holders
could not demand payment for it in cash. In nature it was incon
vertible paper issued without the sanction of law.

Where the certificates did not circulate outside the clearing
house associations, they were essentially loans made by the banks,
banded together as a clearing house association, to members of the
association, for the purpose of settling balances due to each other.
In nature they were due-bills.
Clearing house loan certificates in 1914
With the outbreak of the War in 1914, this country experi
enced another strain on its financial machinery which called forth

loan certificates once more. The Federal Reserve System was too
young and unorganized to meet the sudden stress. Nor did the
emergency currency under the Aldrich - Vreeland Act meet the im
mediate needs of the banks .

Inquiries were sent to one hundred clearing houses by the
Comptroller of the Currency and as a result he learned that cer
tificates were issued by the twelve clearing houses listed in the
following table :
Section 5183 as amended 1875 ; Act, June 3, 1864, c. 106, sec. 23 ; 13 Stat.

L., 106 ; Act, Feb. 18, 1875, c. 80 ; 18 Stat . L. 320.

Total

Moines
Des

Detroit
Louisville

Minneapolis

Boston
Louis
St.
Baltimore
Orleans
New
Paul
St.

Philadelphia

Chicago

York
New

Houses

Clearing

8
Sept.

2Sept.
15
Sept.
5Aug.
18
Aug.
29
Aug.
13
Aug.
5
Aug.
15
Aug.

5
Aug.
5Aug.
6Aug.

4Aug.
5
Aug.
6
Aug.

7
Oct.

5
Oct.

7
Nov.

15
Aug.

1Currency
.),pI(Vof
02-103
p
ol
Comptroller
the
'R915
eport

9Nov.
1
Dec.

7Nov.
Nov.
5

28
Nov.
14
Dec.
28
Nov.
16
Oct.
24
Nov.
Dec.
10
9
Dec.
23
Oct.

cancellation

Final

Oct.
8
1
Dec.

29
Aug.
30
Sept.

23 g.
Au

13
Aug.

2
Oct.

4
Aug.
5
Aug.
4
Aug.

26
Aug.

First

Oct.
15
14
Oct.
2
Oct.

issue

Last

3
Aug.
4
Aug.
3
Aug.

First
issue

XVIII
TABLE

1,200,000
159,000
$195,754,000

1,200,000

$211,778,000

168,000

15
Aug.

1,350,000

1,350,000

1,915,000

2,040,000

2,150,000

11,385,000
10,805,000
2,350,000

11,530,000

7.- ct
O
13
Aug.
.15-Dec
Aug.

S29
-.29ept
Aug.

25
1$09,185,000 Sept.
41,890,000 Oct.
14
2-16
11,530,000 Oct.
11,385,000 Oct.
5-6
10,725,000 2-7
Sept.
Aug.
2,225,000 15-26
5-23
2,150,000 Aug.
2,040,000 18-29
Aug.
1,915,000

issue

1$ 24,695,000
42,190,000

of
Date

.
amt
maximum
outstanding

.
amt
Maximum

CLEARING AND COLLECTION OF CHECKS

outstanding

Aggregate

162

CLEARING HOUSES PRIOR TO 1914

163

In New York City the certificates were first issued August 3,
1914 ; the last issue was October 15 ; and the aggregate amount
authorized was $124,695,000. The last cancellation was Novem
ber 28, 1914 ; the largest amount outstanding at any one time was

$109,185,000 which was on September 25. Certificates were issued
to 44 of the 61 members of the association, who paid 6 per cent.
interest, amounting to $1,497,534.16, which was disbursed to the
members holding the certificates.57

The issue of loan certificates in 1914 marks the last issue up
to date. It is expected that the necessity for them has been re
moved since the Federal Reserve System is able to supply a more
elastic deposit and note currency due to the fact that it has con
centrated and rendered mobile a large proportion of the banking
reserves of the country, provided rediscount facilities for member
banks, created a more effective clearing and collection system, and

introduced a new form of note currency. If enough elasticity has
been secured to obviate the necessity of any future issues of clear

ing house loan certificates, then one of the important functions
exercised by the clearing house associations in the past will have
passed away. Elasticity is one of the most desirable attributes
of a currency system, and while our currency prior to the inaugu
ration of the Federal Reserve System was notoriously inelastic,
conditions would have been much worse had it not been for clear

ing house loan certificates. With the exception of the provision
for the Aldrich - Vreeland notes ( 1908-1915 ) , these clearing house

loan certificates provided the only means of injecting any elas
ticity into the old currency system.
57For additional data on the issue in New York City, see the Report of the

Comptroller of the Currency, Vol. I ( 1915 ) , p. 103.

CHAPTER VI
HISTORY OF THE FEDERAL RESERVE CLEARING AND
COLLECTION SYSTEM

Legal provisions

Incorporated in the Federal Reserve Act were provisions,
which when put into effect, would create a new system for clearing
and collection of checks. These provisions were found in Sections

13 and 16 of the Act. Both Sections were originally distinguished

for their want of clearness which was partially responsible for the
difficulties experienced in inaugurating the system . Section 13
seemed to be permissive while Section 16 was both permissive and
mandatory.

Section 16 provided for two types of clearing : ( 1 ) An intra
district clearing system among member banks by authorizing the
Federal Reserve Board to require each Federal reserve bank to
act as a clearing house for its member banks, and (2) an inter
district clearing system by authorizing the Federal Reserve Board
itself to act as a clearing house for the Federal reserve banks or
to designate one of the Federal reserve banks to exercise such

functions. This Section as affecting clearings and collections
read as follows: “ Every Federal reserve bank shall receive on de
posit at par from member banks or from Federal reserve banks

checks and drafts drawn upon any of its depositors, and when
remitted by a Federal reserve bank, checks and drafts drawn by
any depositor in any other Federal reserve bank or member bank

upon funds to the credit of said depositor in said reserve bank or
member bank. Nothing herein contained shall be construed as
prohibiting a member bank from charging its actual expense in
curred in collecting and remitting funds or for exchange sold to
its patrons. The Federal Reserve Board shall , by rule, fix the
charges to be collected by the member banks from its patrons
whose checks are cleared through the Federal reserve bank and

the charge which may be imposed for the service of clearing or col
lection rendered by the Federal reserve bank.

“ The Federal Reserve Board shall make and promulgate from
164

!

FEDERAL RESERVE CLEARING AND COLLECTION 165

time to time regulations governing the transfer of funds and
charges therefor among Federal reserve banks and their branches,

and mayat its discretion exercise the functions of a clearing house
for such Federal reserve banks or may designate a Federal reserve
bank to exercise such functions, and may also require each such

bank to exercise the functions of a clearing house for its member
banks.") 1
It will be noted that in this Section member banks were per

mitted to charge for their actual expenses in collecting and re
mitting and also that charges might be imposed for the service of
clearing or collection rendered by the Federal reserve bank, the
Federal Reserve Board to fix the charges by rule.

Section 13 prescribed in a general way the character of the
items that might be received on deposit by Federal reserve banks
and seemed to contemplate the performance of a certain clearing,
function by such banks for their members . The portion applying
to clearings and collections read : “ Any Federal reserve bank may
receive from any of its member banks, and from the United States,

deposits of current funds in lawful money, national bank notes,
Federal reserve notes, or checks and drafts upon solvent member
banks, payable upon presentation ; or, solely for exchange pur
poses, may receive from other Federal reserve banks deposits of
current funds in lawful money, national bank notes, or checks and
drafts upon

solvent member or other Federal reserve banks, pay

able upon presentation .”
The institution of the system

From the beginning, the Federal Reserve Board looked upon
the organization and institution of a new clearing and collection
system as one of the most novel as well as one of the most difficult

and intricate problems with which it was faced under the Act..
Despite the fact that it believed substantial benefits would accrue

from a well organized system of clearings national in scope, the
Board considered it the better part of wisdom to proceed cau
tiously lest the innovations dislocate to too great an extent the

established commercial and banking practices. As a result of this
belief on the part of the Board, the history of the Federal reserve
clearing and collection system naturally divides itself into two
parts : ( 1 ) The voluntary system which obtained from June, 1915 ,
to July, 1916, and ( 2 ) the compulsory system which has existed
since that time. However, before beginning a study of these sys
' See First Annual Report of the Federal Reserve Board ( 1914 ) , p. 38.

166

CLEARING AND COLLECTION OF CHECKS

tems it will be well to review briefly the nature of the system of
reserves which existed at this time, since a vital connection exists

between the type of reserve structure which happens to obtain at
any particular time and the clearing and collection system also
existing at the same time.
Relation of the voluntary system to decentralized reserves

The necessity for attempting a voluntary rather than a com
pulsory system at the beginning can be understood better in the

light of the system of reserves which existed during the first three
years of the Federal Reserve System . Section 19 of the original
Act fixed a period of three years after the establishment of the
system by official announcement, within which there was to be a
gradual transfer of a part of the required reserves from approved
reserve agents to the Federal reserve banks.

Member banks in

central reserve cities were required to keep reserves of 18 per
cent. against demand deposits and 5 per cent. against time de
posits ; 6/18 of the required reserve was to be kept in their own

vaults, 7/18 in the Federal reserve bank, and 5/18 could be held
in either place. The 7/18 was to be transferred to the Federal
reserve bank at once .
T

Member banks in reserve cities were required to maintain re
serves of 15 per cent. against demand deposits and 5 per cent.
against time deposits . Of this amount, 6/15 was to be held in their

own vaults for three years after which time 5/15 was required ;
3/15 was to be deposited at once in the Federal reserve bank for
the first year and for each additional six months an additional
1/15 was to be added until 6/15 was deposited in the Federal re
serve bank. For the three- year period the balance could be held in
either place, or in national banks in reserve or central reserve
cities?, but after the three years the balance was to be held either
in the member banks' vaults or in the vaults of the Federal reserve
bank .

Country banks were required to hold reserves of 12 per cent.

against demand deposits and 5 per cent. against time deposits.
For the first three years they were to hold 5/12 of the reserve, and

thereafter 4/12. In the Federal reserve bank they were to hold
2/12 for the first year, and for each succeeding six months an ad
ditional 1/12, until 5/12 was deposited, which was to be required
permanently thereafter . For the first three years the balance
could be held in their own vaults, with Federal reserve banks, or in
' Italics are the author's.

FEDERAL RESERVE CLEARING AND COLLECTION 167

national banks in reserve or central reserve cities ", after which
time the balance was to be held in their own vaults or those of the

Federal reserve banks, or both4.

It will be seen from the above that the reserves would be scat-7
tered widely for three years. To force a compulsory clearing and
collection system upon the member banks under such circum

stances especially since the reserve and clearing systems are so in
extricably bound up with each other, seemed highly unwise to the
Federal Reserve Board which hoped to bring the member banks
to recognize of their own free will the advantages of a general and
nation-wide clearing system-"advantages which would inure not
only to the direct benefit of the public at large, but ultimately to
the direct benefit of "the
member banks themselves from the purely
5
business standpoint."

Initial steps preceding the voluntary system

Before the formal institution of the voluntary system in June,
1915 , a few halting steps were taken towards the establishment of
clearing and collection machinery in certain sections of the United

States in conformity with tentative suggestions made by the Fed
eral Reserve Board. On October 17, 1914, the Board issued a
circular to the Federal reserve banks with tentative suggestions

for organization in order to promote a desirable uniformity.
Included in the suggestions for organization were two plans for a
uniform clearing system, the regulations defining ( 1 ) the relations
between the Federal reserve banks and the member banks in the
same city, ( 2 ) the relations between the Federal reserve banks and

their members outside the city, and (3 ) the relations between the
Federal reserve banks themselves . This circular laid down regu

lations applying to procedure, forms, advices, accounting systems,

and organization of departments conforming to the rules applied
by all well-known clearing house associations. It was suggested
that every Federal reserve bank should inaugurate the clearing
system at the earliest possible moment consistent with success,
beginning with a partial system and subsequently extending it as
rapidly as they found themselves able to do so. Inasmuch as the
plans suggested were tentative and, in fact, not approved finally
'Italics are the author's.

* Federal Reserve Act , Section 19. First Annual Report of the Federal Re
serve Board ( 1914 ) , p. 40 .

Second Annual Report of the Federal Reserve Board ( 1915 ) , p. 15.
• Circular No. 8, Exhibit E, First Annual Report of the Federal Reseroe
Board ( 1914 ) , p . 119ff.

168

CLEARING AND COLLECTION OF CHECKS

by the Federal Reserve Board, no effort will be made to analyze
at this point the clearing organizations which were suggested.
Three Federal reserve banks, however, made a beginning before the
inauguration of the voluntary system in June, 1915.
Early in December , 1914, two districts, No. 8 ( St. Louis ) and
No. 10 ( Kansas City ) , obtained permission to apply to their

members a complete system of compulsory clearing, which worked
with such success that, when, upon inauguration by the Federal
Reserve Board of the voluntary clearing system, St. Louis offered

to her member banks the option of withdrawing, comparatively
few retired , about 80 per cent . of all continuing their membership.7
The Federal Reserve Bank of Kansas City continued its compul

sory system after the introduction of the voluntary system with
out giving its member banks the option of withdrawing.
With the country clearing system of New England as a basis
8

on which to build , the Federal Reserve Bank of Boston took early

steps to establish a clearing and collection system. It announced
that it would receive on deposit for immediate credit checks drawn

on any Federal reserve bank and checks drawn by member banks
on member banks in Boston only. On November 13, 1914, the
Federal Reserve Bank of Boston was elected a limited member of

the Boston Clearing House Association, and on November 18
began to clear Boston checks. Beginning with that date the
Boston banks made clearing house settlements by checks drawn
on the Federal reserve bank, a policy which still continues, and

which has done away with the payment of money in clearing house
transactions and the necessity of carrying large sums of money
through the streets to and from the clearing house. Under the
new plan, Boston banks having debit balances against the clearing
house each day drew their check in favor of the clearing house

manager, who, in turn , opened a temporary account in the Fed
eral reserve bank. He deposited these checks each day and drew
his checks in favor of banks having a credit balance. This system
continued , in general , until the institution of the voluntary system
by the Federal Reserve Board, at which time the Boston bank also

established the system which was adopted generally by the Fed
eral reserve banks. '

On July 15, 1916, with the institution of the compulsory sys
tem, the Federal Reserve Bank of Boston took over the Clearing
House of Boston and assumed the task of collecting all the checks
'Second Annual Report of the Federal Reserve Board ( 1915 ) , p. 16.
*See above, pp . 126-128.

Second Annual Report of the Federal Reserve Board ( 1915 ) , p. 132.

FEDERAL RESERVE CLEARING AND COLLECTION 169

on New England. The old Boston Clearing House became a part
of the Federal reserve bank, but as a department in the bank, in

which capacity it continued to clear Boston checks.10 In line with
the usual progressive banking ideas for which New England has
been distinguished, the Federal Reserve Bank of Boston was soon
able to collect checks at par on all the banks in New England. It
was the first Federal reserve bank to bring all the banks of its dis
trict into the system.11

Inter -district clearing system precedes voluntary intra -district sys
tem ; the Gold Settlement Fund

Before beginning our study of the voluntary intra -district
clearing and collection system it is necessary, in the interest of
good chronology, to point out briefly that the Federal Reserve
Board was able to establish the mechanism for inter-district clear-

ings and collections about a month before it was able to install the
voluntary intra-district system. This inter-district mechanism
took the form of the well-known Gold Settlement Fund, described

briefly elsewhere in this chapter and more fully in a separate

chapter. It is analogous toa clearing house and stands at the 7
peak of the system.

While the Federal reserve banks serve as

clearing houses for their respective districts, the Federal Reserve
Board, through the Gold Settlement Fund, serves as a clearing
center for the Federal reserve banks and their direct-settling
branches.12 This Fund, which is controlled by the Federal Re
serve Board and to which each Federal reserve bank was compelled
to contribute funds, provides the mechanism by which all cash
items throughout the country may be cleared by means of book

transfers. The ideal clearing system is one of complete offsets ,
but to attain this perfection all banks must enter the system .
Only then can all debits and credits balance and be liquidated by
book transfers rather than by the actual transfer of funds. To

the extent that banks do not enter the system, the mechanism must
function imperfectly. Theoretically then, the Gold Settlement
Fund is virtually perfect in conception . It makes possible the
maximum use of credit with the minimum of friction and expense .

It makes the medium of exchange the most efficient and economical
ever conceived .
Federal Reserve Bulletin, Vol. II ( 1916 ) , p. 317.
uSee Federal Reserve Bulletin , Vol. III ( 1917 ) , pp. 162-164.

" For a discussion of the two types of Federal reserve bank branches see
pp . 186-187, 216 , 547-550 below.

170

CLEARING AND COLLECTION OF CHECKS

The Gold Settlement Fund was established in May, 1915, in
order to meet pressing demands for some means of clearing and
collecting inter-district checks which were multiplying rapidly in

numbers as a result of the organization and rapid development of
the Federal reserve banks. The only mechanism in existence for
the clearing and collection of such items prior to this time was re
ciprocal accounts carried by the Federal reserve banks with each
other. This method was too cumbersome and the Gold Settlement

Fund was devised as an effective medium for the expeditious and
economical transfer of credits from one section of the country
to another. 13

According to the plan as originally instituted, each Federal
reserve bank was required to contribute at least $1,000,000 in
gold or its equivalent plus what it owed to all other Federal reserve
banks at that time. Each Federal reserve bank by May 27, 1915,
had deposited the required amount with the nearest sub-treasury,

the amount being determined by means of аa preliminary settlement
made on May 20.

The Assistant Treasurers forwarded tele

graphic advices of the deposits to the Treasurer of the United
States, who, in turn, issued gold order certificates of $ 10,000

denominations payable to the Federal Reserve Board. This Fund
was kept in a safe in the Treasury vaults set aside for the exclu

sive use of the Board. A settling agent and a deputy settling agent were appointed by the Board to keep all necessary records
and accounts.

The equity of each Federal reserve bank in the

Fund counts as part of its legal reserve. It must keep at all times
at least $1,000,000 in the Fund, but may draw out the surplus at
will.

The first regular inter-district settlement was made on

May 27, 1915, with approximately $18,450,000 in the Fund, below
which amount it has never fallen. Settlements through the Fund
were originally made at the close of business each Wednesday, but
since July 1 , 1918, they have been made each day. Other changes

in the method of operating the Fund are described briefly else
where in this chapter and at greater length in Chapter VIII .
The establishment of the Federal Reserve Agents ' Fund
After the establishment of the Gold Settlement Fund it seemed

advantageous to apply the same principle to the reserve funds
which Federal reserve agents were required to maintain as secu
1 * See Collection of Checks, Letter No. 5, Federal Reserve Bank of Rich

mond (March, 1922). Hereafter cited as Letter No. 5.

FEDERAL RESERVE CLEARING AND COLLECTION 171

rity against Federal reserve notes. These reserves, which the
agents held apart from the reserves of the Federal reserve
banks against other obligations, had been increasing steadily. The
increasing issues and retirements of the notes rendered more fre
quent the payment of large sums from banks to their agents and
vice versa. This necessitated much counting and recounting on the
part of the banks and the representatives of the Federal reserve
agents which it was desirable to eliminate.

On September 8, 1915 , the settling agent and deputy settling
agent of the Federal Reserve Board opened on their books a dis

tinct and separate account for each Federal reserve agent and re
ceived from them deposits of gold certificates held subject to the
agents' order. As in the case of the Gold Settlement Fund, the
Federal Reserve Agents' Fund was evidenced by gold order certifi
cates in denominations of $ 10,000. These were held in the vaults

of the United States Treasury, but separated from those certifi
cates representing the Gold Settlement Fund. Their removal, or
transfer upon the order of the agents, was governed by the same

regulations applying to the Gold Settlement Fund.

The first

transfer under this system was made by the Federal Reserve Bank

of Atlanta, September 8, 1915, when it transferred part of its
holdings in the Gold Settlement Fund to the credit of the Federal
reserve agent at Atlanta . 14

Changes in the method of operating this Fund parallel those
affecting the operation of the Gold Settlement Fund and will be
noted in that connection. For example, the Federal Reserve

Agents’ Fund was affected in the same manner as was the Gold
Settlement Fund by the abolition of the gold order certificates,
June 21 , 1917 ; the introduction of the leased wire system, June

4, 1918 ; the introduction of telegraphic transfers, June 10, 1918 ;
the introduction of the system of daily settlements, July 1 , 1918 ;
and other changes that will be mentioned more at length elsewhere,
especially in Chapter VIII, devoted to the Gold Settlement Fund.
The voluntary intra -district system , June, 1915-July, 1916
On March 4, 1915, the Federal Reserve Board announced that

it had determined to direct the introduction of a voluntary recip

rocal plan for clearance at all Federal reserve banks where a
clearing plan was not already in operation. The Board did not
attempt to prescribe details, since it had been found that in dis
See Second Annual Report of the Federal Reserve Board ( 1915 ) , p. 82.

CLEARING AND COLLECTION OF CHECKS

172

tricts where clearing was being practiced the best results were ob
tained by leaving the control with the bank officers. It merely re
quired that the Federal reserve banks make such a system effective
by June, 1915. Letters were sent to Federal reserve agents direct

ing that they take up this question with their boards of directors
at once .

Circulars were issued by the Federal reserve banks to

their member banks outlining plans and inviting them to partici
pate.

Using the plan adopted by the Federal Reserve Bank of Chi
cago as a typical illustration, we find that these first efforts to

establish a voluntary intra-district clearing and collection system

provided, in general , for the following arrangements: Membership
in the system was voluntary and items were received at par by the
Federal reserve bank only from and upon those banks of its dis
trict which joined. The items were to be immediately credited and

debited to the accounts of the sending and paying banks, subject
to final payment ; a practice, it will be noticed , which did not rec
ognize the factor of time in the collection of checks . This system
of immediate debit and credit resulted in the Federal reserve banks

carrying a float which has been estimated to equal half of the
deposits. The practice resulted in many overdrafts and meant a

great and unreasonable burden on the Federal reserve banks,
especially in case of any financial stringency when some of these
banks might have become bankrupt.15 Fortunately this practice
was abandoned with the introduction of the compulsory system in
July, 1916. There was no intention of superseding or supplant
ing local clearing houses or the exchange of checks between near
by towns or cities, or of handling checks drawn on banks in other
districts. Each member bank was required to keep sufficient
funds with the Federal reserve bank to offset the items charged
against its account without impairing the reserve required to be

kept in the Federal reserve bank. The Federal reserve bank acted
only as the collecting agent of the member banks and received
authority from them to send items direct to the banks on which
drawn if it so desired. Member banks under the Chicago plan
could come in at any subsequent time or withdraw after thirty
days' notice, while the Federal reserve bank could withdraw the

privilege of membership from any member not observing the rules.
The Federal reserve bank was to make no charge nor pay any

charge in operating the system, although the Federal Reserve
18 E. W. Kemmerer, Six Lectures on the Federal Reserve System, given at the
Federal Reserve Bank of Philadelphia ( 1920 ) , pp. 52-53.

FEDERAL RESERVE CLEARING AND COLLECTION 173

Act permitted
it to levy charges on the member banks to cover
18
cost.

Similar plans were inaugurated in the other Federal reserve

districts with varying degrees of success, but it was felt that all
these plans were largely experimental and that no satisfactory
basis of clearing could be reached until some plan was evolved by
which all member banks, and possibly a considerable number of
non -member banks, could be induced or required to co -operate.
The voluntary system a failure

It was hoped that a large number of the member banks would
promptly affiliate themselves with the new system of clearing and
that the natural force of economic competition would attract ulti
mately to it those who at first might hesitate. But the results
were disappointing. At the end of the year 1915, less than 25
per cent. of the institutions eligible for membership had joined the
system. In addition to the 950 banks which were compelled to
join in the Kansas City district and the 365 in the St. Louis dis
trict which remained in the system , only about 1,150 banks of
their own free will assented to the voluntary clearing plan, making
a total of 2,465 which had joined in 1915.18
This small proportion of membership proved a severe disap
pointment to those who had confidently expected that the fore
sight and enlightened self-interest of the member banks would
speedily accomplish the desired result. Some progress was made
through the action of the banks, both member and non-member,
in improving exchange conditions and in providing for the clear
ance of country checks at points where this practice had never pre
vailed before, but in the main, comparatively small advance was

made in rendering effective the provisions of the law which pro
vided for the standardization of exchange and clearance prac

tices.19 The following table will present a summarized view of the
growth , or rather lack of growth, of the voluntary system :
19Federal Reserve Bulletin , Vol. I ( 1915 ) , pp. 6-9.
11Dallas, in December, 1915, established a system somewhat different from

the others when she established the Reserve City Clearing House Association
of Texas. It was operated for the convenience of the reserve city banks
and at their expense. With the inauguration of the compulsory system it was
carried on as an adjunct to the new system . In 1916, its operations extended

to twenty -seven banks in the cities of Fort Worth, Waco, Houston, Galveston ,
San Antonio and Dallas.

See Third Annual Report of the Federal Reserve

Board ( 1916) , pp. 432-435. Fourth Annual Report of the Federal Reseroo
Broad ( 1917 ), p. 552. See especially p. 188 below.
" Second Annual Report of the Federal Reserve Board ( 1915 ) , p. 16.
9

" Ibid .

CLEARING AND COLLECTION OF CHECKS

174

TABLE XIX

GROWTH OF THE VOLUNTARY

INTRA -DISTRICT CLEARING

50

Boston

New York

115

Philadelphia

125
126
89

Cleveland

Richmond

49
116

49

124

125
120

127

126

89

Atlanta

71

88
81

Chicago

111
366

121
368

83
121
364

166
951
93

182
951.

186
951

92
209

105
217

St. Louis

Minneapolis
Kansas City

..

Dallas
San Francisco . 110

Totals

50
126
120
123
91

74
116
365

184
951
96
160

50
129
119
118

50

50

50

129
117
118

129

130
115

90
74

90

114
116
90

74

74

71

114

114
362

113
363

113
362

187

187

951

362
187
951

83
161

79
162

951
72
161

951
70
157

50
128

119
123

90
74
116
363
184

187
951
162

110
87

47
134

109
114
82
72
113
359

187
951
67

157

June

May

April

March

February

,1916
January

December

November

October

ug
A.,1July
- 915

September

SYSTEM

47
134
109
114

81
71
115
359

187
951
67
157

... 2,373 2,508 2,536 2,456 2,442 2,436 2,428 2,420 2,403 2,392 2,393

‘Compiled from the Federal Reserve Bulletins.

At this point it will be worth while to inquire into the reasons
why eligible banks did not join the system .
Objections to the voluntary system

The common grounds for opposition to the system were : ( 1 )
Loss of exchange charges. Under the old system it was the gen
eral practice of banks to charge in remitting for items sent for
collection. Under the new system, although the Act authorized
them to make charges for remittance and collection, they were not
given the opportunity to exact remittance charges, since the items

were charged directly against the accounts of the paying banks.
Consequently, only those banks joined which were ready to forego
this charge. Usually the city banks which had been bearing the
brunt of the exchange charges entered ; the smaller exchange

charging banks held aloof.20

( 2 ) Membership obliged many banks to carry larger reserves.
It had been the practice of the Comptroller's office to permit banks
to compute the reserves from their own books, that is, as soon as
checks were mailed out by banks they were counted as reserves,
and checks sent to them by collecting banks were not deducted
* G . B. Anderson, " Some Phases of the New Check Collection System , ”
Annals of the American Academy of Political and Social Science, Vol. LXVIII
( 1916 ) , pp. 122-131.

FEDERAL RESERVE CLEARING AND COLLECTION 175

until received , leaving the correspondent reserve banks to carry

the float. Under the new system the reserves were to be computed
from the books of the Federal reserve bank, which would require
larger and real reserves from the member banks.

( 3 ) The fact that the system was voluntary and not all the
banks, indeed but few of them, were coming in, was considered a

hardship on those that did enter. The Federal reserve bank
would receive at par all checks on the members of its collecting
system whereas it could send as an offset only checks on the few
banks in the district which had joined.

( 4 ) Some banks maintained that there was no power to com
pel aа member bank not located in a Federal reserve city to pay or
have charged to its account at the Federal reserve bank of its dis

trict a check which it had not seen and approved prior to the time
of presentation at its own counter. This principle of immediate
debit and credit was one of the most distinguishing characteristics
of the voluntary system , but was destined to give way to the de
ferred debit and credit principle, as it did not stand the tests of
practical banking experience. While it is a sound principle, in
general, to substitute clearing for collection so far as possible,
practical limits to the application of this principle are sometimes
reached in banking. The practice of making immediate debits and

credits represents an offsetting or clearing principle and may be
supposed to be desirable, but any gains that may have resulted
under the voluntary system were more than overbalanced by the

following disadvantages: ( a ) Charging items to the accounts of
the member banks before they could be advised of the amounts
charged or see the items, not only constantly impaired their re

serve balance, but almost daily created overdrafts in the accounts
of the several banks. ( b ) The member banks could not control
their reserves and the Federal reserve banks not only had less in
deposits than the law contemplated but daily had to assume either
the responsibility of permitting the overdraft of accounts or de

cline to accept checks drawn upon them . ( c ) The system gave the
member banks no chance to maintain their reserves by remitting

or rediscounting. A system which defers both debit and credit
gives the banks time to do this.21 For these reasons, therefore, it
has not seemed desirable to carry the clearing principle so far as
to include out-of-town banks, as considerable time must elapse

before the items can be converted into reserve funds . The prin
* Pierre Jay, The Country Banker and the Federal Reserve System, 64th
Cong ., 1st Sess ., Sen. Doc. No. 458 (April 17, 1916 ) .

176

CLEARING AND COLLECTION OF CHECKS

ciple of immediate debits and credits forced the Federal reserva

banks to absorb a very heavy float, made a large proportion of
the member banks' reserves mere paper rather than collected
funds, and thus continued one of the worst evils that characterized

the clearing and collection system under the old National Banking
System.22

Another difficulty facing the Board was the fact that the
Federal Reserve Act granted a period of three years to all banks,
except those within central reserve cities, within which to effect
the final transfer of reserves to the Federal reserve banks, balances

with correspondents counting as reserves in the meantime. The
fact that these reserve balances in some reserve cities were used

for the purpose of providing for exchange and collection opera
tions together with the fact that they would continue, in all prob
ability, the functions for some time in the future, pending the time
when State banks would enter the system in large numbers, seemed

to indicate that it might be necessary for some member banks to
collect and clear through their correspondents in reserve cities.
In the last analysis, the question of reserves was vital. To this
problem the Board turned its attention. But the fact that re
serves were yet decentralized was one of the principal conditions
that caused the Board to ease the difficulties of the banks by in

stituting first the voluntary system.
The voluntary system had demonstrated that the plan was not
sufficiently comprehensive, the number of members had not in
creased appreciably, the objections raised indicated that the sys
tem in that form worked a hardship on certain classes of banks,
and it seemed most unlikely that the system could ever attain any

great degree of efficiency for the entire country. Consequently, in

April, 1916, the Board decided to establish a more comprehensive
system which became operative on July 15, 1916, as a compulsory
system . The history of the compulsory system may be divided
into two periods. The first period, extending from July, 1916, to
June 21 , 1917, was one in which the reserves were decentralized, a
situation which gave rise to consequences different from what

might have been expected had the reserves been concentrated .
12When banks, such as the Federal reserve banks, give immediate credit for

uncollected items, they are virtually making an investment in uncollected
checks. There is a theory that if such investments are practically equal
throughout the country no harm is done through giving immediate credit. But
at least two objections to this theory present themselves: First, that such in
vestments are not equal at all times and may result in adverse currents of ex
change involving even actual transfers of funds ; second , a considerable float is
almost certain to be present and this, of course, means paper reserves. In times
of extreme expansion fictitious reserves are dangerous.

FEDERAL RESERVE CLEARING AND COLLECTION 177

The second period is one in which the reserves are concentrated in
the Federal reserve banks and covers the period since June 21 ,
1917. It will be convenient to survey the development of the
clearing and collection system under these two heads.
The compulsory system under decentralized reserves, July, 1916
June 21, 1917

All member banks were automatically brought into this system
under the conditions laid down by the Federal Reserve Board in

Regulation J, Series of 1916, which required all Federal reserve
banks to exercise the functions of a clearing house for their mem
ber banks . The detailed working out of the system was left, how
ever, to each Federal reserve bank. Consequently , there were some
variations as to details although, in the main, the banks followed
rather uniform practices . 23

Each Federal reserve bank was required to receive at par from
its member banks, checks drawn on all member banks, whether in its

own district or other districts, and checks drawn upon non-member
banks when such checks could be collected by the Federal reserve

banks at par. Each Federal reserve bank was required to receive
at par from other Federal reserve banks all checks drawn upon
all member banks of its district and upon all non-member banks

of its district whose checks could be collected at par by the Fed
eral reserve bank . According to the requirements the Federal
reserve banks prepared par lists of all non -member banks which
were revised from time to time and furnished all member banks. In

selecting collecting agents for handling checks on non-member
banks, member banks were to be given preference.
The new system did not mean that member banks were not free

to continue to carry accounts with their correspondents and with
other banks to which they might send items for collection and
from which they might receive for similar purposes checks drawn
upon themselves or upon other banks. A member bank could send
items for collection through the Federal reserve bank regularly,

occasionally, or not at all ; or it might collect them through its
regular correspondents or in any other manner considered advan
tageous.24 It did mean , however , that all Federal reserve banks
were to install the system and that all member banks were required

to pay without deduction checks drawn upon themselves and pre
sented by their Federal reserve banks at their own counters.
See Federal Reserve Bulletin , Vol . II ( 1916 ) , pp. 312-315.
2 * Ibid .

178

CLEARING AND COLLECTION OF CHECKS

Herein lay the compulsion in the system. Remittance of such
checks by the Federal reserve bank of their own district through
themail was construed as presentation at their own counters and
bankers were required to settle with the Federal reserve bank for
such checks in acceptable funds. Remittance of lawful money or
Federal reserve notes could be made at the expense of the Federal
reserve bank in case they were unable to send in offsetting checks

on other banks. In this manner the most severe aspects of the
compulsion were mitigated. It also indicated a recognition of the

fact that checks are not payable at par except at the counter of
the drawee bank . In making payment elsewhere banks had become
accustomed to charging exchange in making remittances on the
ground that an expense was involved , especially since they might
be called upon to ship currency . The charges were always pred
icated on the fact that they might be compelled to ship currency
even though they did not do so. Now the expense was to be as

sumed by the Federal reserve banks and these banks were deprived
of their chief reason for exacting charges in making remittances.
Any impairment of reserves was to be subjected to a penalty of
2 per cent. per annum on the amount of the deficiency above the
ninety-day discount rate of the Federal reserve bank of the dis
trict in which the member bank was located. A progressive pen

alty also became effective under certain conditions.25 The
Board reserved the right to increase the penalty whenever condi
tions required .

Checks sent direct by a Federal reserve bank to its drawee mem
ber banks for collection

In handling items for member banks a Federal reserve bank
acted as agent only. The Board required each member bank to
authorize its Federal reserve bank to send checks for collection

direct to the banks on which they were drawn, and, except for
negligence, the Federal reserve banks were to assume no liability.

This was a practice which was considered illegal under the old
National Banking System , although it was indulged in frequently.
A bank was not considered a good agent , in the eyes of the law.
to collect on itself. In some instances, however, there would be but
one bank in a town ; in other instances, it would be necessary to

use a weak or otherwise undesirable bank as a collecting agent if
an effort were made to conform to the letter of the law. Prior to
the time under consideration many banks had learned that it was
25See pp . 330-331, 366-367.

FEDERAL RESERVE CLEARING AND COLLECTION 179

better to send their checks direct to the bank on which they were
drawn in case they were compelled to use an undesirable bank as a

collecting agent, or some other agent in cases where but one bank
existed in the town. Although legally unsound the practice soon
became rather widespread. Consequently, the Federal reserve
banks introduced no innovation in this respect.26
The deferred availability principle ; the zone system
It will be recalled that the Federal reserve banks under the

voluntary system did not recognize the time factor in collecting
checks but resorted to the practice of making immediate debits

and giving immediate credits for checks sent to them for collec
tion.

Under the compulsory system the time factor was recog

nized. The system of immediate debits and credits, as pointed out
above, had been unsatisfactory to both the member banks and the
Federal reserve banks. The member banks, having items charged
to their accounts before the items could reach them, were always
uncertain how their reserve accounts with the Federal reserve

bank stood until some time later. This uncertainty required them
either to keep large excess balances with the Federal reserve bank
or expose their reserve accounts to impairment, even to being over
drawn. Usually a large percentage of the accounts of the coun

try members of the collection system was impaired , many of them
to such an extent that they were actually overdrawn. The Fed
eral reserve banks would find their resources reduced by the im
pairment of these reserve balances and themselves compelled,
against their express determination to the contrary, to purchase
from their member banks their out- of- town checks, commonly
called " float." 27

Under the new regulation it was provided that checks received

by a Federal reserve bank on its member banks were to be for
warded direct to the member banks but were not to be charged to
their accounts until advice of payment had been received or until
sufficient time had elapsed within which to receive advice of pay
ment. Upon receipt of items from its member banks for collec
tion immediate credit entry upon the books of the Federal re
serve bank at full face value was to be made subject to final pay

ment but the proceeds were not to be counted as part of the
minimum reserve nor become available to meet checks drawn until
For a discussion of this question, see Proceedings of Departmental Con
ferences held at Baltimore Convention of the American Institute of Banking
(July, 1924 ) , pp. 323-341 .
* Third Annual Report of the Federal Reserve Board ( 1916 ) , p. 231 .

180

CLEARING AND COLLECTION OF CHECKS

actually collected. Under this system each Federal reserve bank
determines by analysis the amount of uncollected funds appear
ing on its books to the credit of each member bank and furnishes

to each member bank a schedule of the time required within which
to collect checks, in order to enable it to determine the time at

which any item sent to its Federal reserve bank may be counted
as reserve and become available to meet any checks drawn.
The nature of the time schedules

Each Federal reserve bank developed its own time schedule
showing the number of days which must elapse before the proceeds
of items deposited with it would become available as reserve to be
drawn against . Each of these schedules covers the entire country

and is based upon the average time required for the Federal re
serve bank to send items to its member banks and receive remit
tances from them plus the one-way mail time between Federal re
serve banks and their branches. For certain items received from
3

member banks immediate credit is given ; for others, deferred
credit, as, for example, for one day, two days, three days, or any
number of days up to nine days.28 Supplementing, or rather
serving as a common basis for the schedules of the Federal re

serve banks, is an inter-district time schedule, approved by the
Federal Reserve Board in 1920, which shows the collection time

for cash items between all Federal reserve banks and branch
banks.29 This schedule is based upon the one-way mail time
between the Federal reserve banks and their branches and con
stitutes the common frame-work on which each Federal reserve

bank builds its schedule, adding to this time the average time re

quired for each Federal reserve bank to send items to its mem
ber banks and receive remittances from them . Average time has
been used since it is impossible to calculate the exact time with

respect to each point. As a result of the average time basis, the
Federal reserve banks are carrying, without doubt , a “ float ” to
some extent, although perhaps inconsiderable under the system of

daily settlements, as compared with the weekly settlements through
the Gold Settlement Fund .

As an example of the manner in which the time is computed on
an inter-district check by using the inter-district time schedule
28 See the Time Schedule of the Federal Reserve Bank of New York, p. 184 .
From the Portland and Seattle branches of the Federal Reserve Bank of
San Francisco to some of the eastern States, such as Alabama or Florida, the
time is nine days.

2" See Inter-district Time Schedule, pp. 182-183.

FEDERAL RESERVE CLEARING AND COLLECTION 181

as a basis and adding to it the collection time indicated by the
time schedule of another Federal reserve district, let us suppose
that a check drawn on a bank in Rochester, New York , is sent to
the Federal Reserve Bank of Richmond by one of its member

banks. Credit would be given three days after receipt. One of
the days would be consumed in sending the item from Richmond to
the Federal Reserve Bank of New York, one in forwarding the
item from the Federal Reserve Bank of New York to the bank in

Rochester, and the third day in the sending of returns by the
Rochester bank to the Federal Reserve Bank of New York. Upon
receipt of the returns settlement would be made between the
Federal Reserve Bank of New York and the Federal Reserve Bank

of Richmond without further delay, that is, through the Gold
Settlement Fund .

It is to be observed that the time schedule just described is a
published time schedule for the benefit of collecting banks, and
indicates when the items sent to the Federal reserve bank or

branch will be available as reserve deposits. In other words, it is
the basis by which the payee banks determine the amount of their
deferred credits which become available on certain days. Theo
retically all deferred credits (uncollected items ) , should equal all
deferred debits ( the same uncollected items ) . As a matter of
fact all deferred credits do not equal, necessarily, all deferred
debits. This is due partly to the fact that drawee banks do not

have their accounts debited until sufficient time has elapsed for the
collecting Federal reserve bank or branch to have heard from
them, regardless of the published time schedule. There is thus an
unpublished time schedule for the drawee banks based upon actual
collection time, rather than upon the average time as indicated
in the published schedule. The latter schedule was devised in the

interest of simplicity ; consequently, some banks may be placed in
a two-day zone which cannot be reached and heard from in less
than three days, others in the same zone may be heard from in two.
days or perhaps in one day. The average time is two days, how
ever , and checks sent to the three-day banks in the two-day
average zone, become available funds to the payee banks in two
days, but the drawee banks will not have their accounts debited
until three days have elapsed . The Federal reserve bank, in this
instance carries a float.30 The combined statement of all Federal
reserve banks for June 11 , 1924, showed that the amount of float
* For a further treatment of the nature of the time schedule, see pp. 539–
541 , 551 , below.

CO CO CO

CO

DOO

From

w OT CO CO CO OWOCO CO CO CO CO No 0000
4. 100 లు 10101010101010010.1010-

OOOOO

Boston
New York
Buffalo

Philadelphia
COOCOOOOOOOOOOOOOOO !

Cleveland

Pittsburgh

QUOUIQOT QYQP QUE

00

Cincinnati

OPQUTQQ OYOY I 1 -

O QU QU OP OVQ
OOOO

do + 0 0
৩

O W 0201

৩৩৩৩৩৩৩৩৩০৩৩

। ৩০৩–৩

Richmond
Baltimore

1 O QUQPQPOR CU O QUE QU QUO

New Orleans

০০ ০৩ ৩৩ ৩৩ ৩ ৩ ৩ ৩। ৩৩৩৩

Atlanta

৪ ৫ ৩ ৩ ৩ ৩ ৩ ৩ ৩ --- ৩। ৩ ৩ ৩ ৩ ৩ ৩ ৩ ০ ০৩
-

Birmingham
Co to

OP CYCP QUO 1 QUOQQUOQOOP

100 WOWOCO O COCO

Co er CO WOOCO CO CO 101 100
O O
O

O

O

O OU

O O OUT

00

Chicago
Detroit

৩০৩৩৩৩৩০৩৩৩ ৩ ৩

St. Louis

Louisville

– ৩ -- ৩ ৩ ৩ ৩ ৩ ৩ ৩ ৩

Memphis

10 10 1000

POLOTOOOOO

৩ - ৩।

Jacksonville
Nashville

O

000 0

O

O

no 0 0 0 1

O

O O O O

O

Op

O

৩–

O O

GP GP GP Q

৩ ৩৩৩৩৩৩৩৩ ৩৩৩৩৩০৩

Little Rock

Minneapolis
ORQUO QUO O O

O

O O

O

O

O O O O O O OY

O

I

Helena

Kansas City
--- 1010101010-0లలలలలలు 9 10 100 1000
O

O O

O

O

O O

O QUOI

10 10 190 లలు నిలు 100

O O

లలలు ,

Omaha
Denver

Oklahoma City
O

O O O O O O O O

Dallas

to v CO CO CO CO COCO

Go to co
GO

El Paso
Houston

O O O GOVOR

O

O

San Francisco

O
O

O O O O O O O O

OT O O

O

Spokane
or Or Or Or

or

Portland
or or on

o en Or Or Or Or a

or

Seattle
O O O O

O O O ON

Salt Lake City
Los Angeles

OP

12
3
4

3542

5432

3°:01*250~*^0
4059,23 63

SCHEDULE
TIME
-D
INTER
APPROVED
THE
RESERVE
FEDERAL
S
,BY
BOARD
HOWING
: ISTRICT
COLLEC

FOR
TIME
TION
BETWEEN
ITEMS
CASH
FEDERAL
R
ESERVE
'ALL
BRANCH
AND
BANKS

&ğ$į*.§&

87+95a§1[

ğő
&Š7ğ$ő⢧&i
El
IOo798%5y.!3&
III

Or Or Or Oro

182

CLEARING AND COLLECTION OF CHECKS

Oklahoma
City

2
3
3
4
4
4
Salt
Lake
City

Los
Angeles

Seattle

Portland

Spokane

Dallas
Paso
El
Houston
Francisco
San

Omaha
Denver

From

Louisville

.eschedules
constructed
were
time
the
which
on
principles
general

87
.9),p
920
1V
I
(.,two
ol
Bulletin
Reserve
Federal
ee
Sdays

Detroit
St. Louis

-Το

34

Denver
-

-

Portland
Seattle

San Francisco

Spokane

Houston

Dallas

El Paso

Oklahoma City

Omaha

Kansas City

Helena

Little Rock

COLLEC
HOWING
S
,BOARD
RESERVE
FEDERAL
THE
BY
APPROVED
SCHEDULE
TIME
- ISTRICT
D
INTER

3
2
4
15
6
4

Salt Lake City
Los Angeles

the
showing
from
aside
value
little
has
nd
,aibeen
today
accurate
not
she
revised
schedule
TYork
above
.New

nd
,aFortland
PS.example
pokane
above
or
given
one
the
and
banks
reserve
Federal
of
schedules
time
individual
the
of
Bank
Reserve
Federal
the
zone
ay
-din
four
the
re
now
aFrancisco
,San
of
Bank
Reserve
Federal
the
branches
Seattle

in
differences
considerable
to
found
be
will
tCBoard
,.of
onsequently
Reserve
Federal
consent
the
with
so
dohere
may

deposited
items
cash
for
bank
ember
m
ais
to
given
credit
final
before
time
elapsed
the
shows
schedule
TExplanation
: his
deposit
,am.F
example
or
cities
bank
branch
and
Federal
other
upon
drawn
reserve
itsember
with
a(upon
shown
Omaha
rawn
)dcolumn
vertical
the
in
Cleveland
of
Bank
Reserve
Federal
in
cin
asheck
ing
of
expiration
at
Cleveland
of
Bank
Reserve
Federal
books
the
upon
credit
given
be
wcolumn
) ould
horizontal
schedule
dthe
-in
given
that
below
time
collection
reduce
can
it
finds
bank
Reserve
ederal
F,iinter
,aIf
owever
htistrict

34
2
4
2
13
2
3
2
2
3
4
4
3
4
2
13
3
4
2
13
2
5
4
4
1
32
4
3
4
2
2
3
4
45
14
4
5
6
4
3
2
1
2
4
3
3
4
5
612
5
5
2
3
6
5
14
15
5
5
4
3
12
4
6
5
56
4
15
3
6
5
2
5
5
6

BANKS
BRANCH
AND
RESERVE
FEDERAL
ALL
BETWEEN
ITEMS
CASH
FOR
TIME
TION

FEDERAL RESERVE CLEARING AND COLLECTION 183

CLEARING AND COLLECTION OF CHECKS

184

was about 10 per cent. of the amount of uncollected items on
hand. Much of this is due, so it is alleged , to the fact that New

York and Philadelphia have placed their most remote banks on a
two -day basis although the items on many of these banks cannot
be collected in less than three days.31
FEDERAL RESERVE BANK OF NEW YORK

Schedule Showing When the Proceeds of Items Will Become
Available 1

Effective January 2, 1923 ( Superseding Schedule Issued August 1, 1922)
IMMEDIATE CREDIT

When received by 9 a. m.

New York Clearing House banks ( Reference to List A, page 4)
Other New York City banks ( Reference to List B, page 6)
Northern New Jersey Clearing House banks (Reference to List C , page 7 )
Checks and warrantson Treasurer of the United States, Washington, D. C.
Brooklyn banks and bankers- Also Bank of Coney Island and Branch
When received by 3 p . m . ( Saturdays 1 p. m. )
Checks on Federal Reserve Bank of New York and Buffalo Branch
Officers' checks of other Federal Reserve Banks

Federal Reserve Exchange Drafts
Federal Reserve Transfer Drafts
ONE DAY AFTER RECEIPT

New York City – Balance of Manhattan, when received by 9 a. m.
No.
Boston

Richmond
Baltimore

District
District
3
District
5
Branch of 5

Pittsburgh

Branch of 4

Buffalo

Branch of 2

Philadelphia

TWO DAYS AFTER RECEIPT
District
4
Cleveland

Banks in

Connecticut

** New Jersey

4

Delaware

Chicago

Branch of
District

7

Dist. of Columbia * Pennsylvania

Detroit

Branch of

7

Atlanta

District
6
Branch of 6
Branch of 6

Cincinnati

Birmingham
Jacksonville
Nashville

Branch of

6

Minneapolis

District

9

St. Paul

In District 9
8
District
Branch of 8

St. Louis
Louisville

Maine

* Maryland
* Massachusetts

* New York
Rhode Island
Vermont

* Virginia

New Hampshire

THREE DAYS AFTER RECEIPT
New Orleans

Memphis

Branch of
Branch of

Little Rock

Branch of 8

Kansas City, Mo.
Kansas City, Kans.

District

Omaha

6
8
10

In District 10
Branch of 10
Branch of 10
District
11

Oklahoma City
Dallas
The time schedule also includes instructions to member banks for the
sorting and forwarding of items. See below, p. 471 .

*Proceedings of Departmental Conferences held at Baltimore Convention
of the American Institute of Banking ( July, 1924 ), p. 379.

FEDERAL RESERVE CLEARING AND COLLECTION 185
FOUR DAYS AFTER RECEIPT
Helena

El Paso
Houston

Denver

No.
Branch of 9
Branch of 11
Branch of 11

Branch of 10
Branch of 12

Banks in

* Alabama
* Arkansas

*Minnesota

* Florida

* Missouri

Mississippi

*Georgia

North Carolina
* Ohio
South Carolina
* Tennessee

Portland, Ore.

Branch of 12
Branch of 12

* Illinois
Indiana
Iowa

Seattle

Branch of 12

* Kansas

West Virginia

* Kentucky
*Michigan

Wisconsin

Spokane
Salt Lake City

FIVE DAYS AFTER RECEIPT

San Francisco

Los Angeles

No.
District
12
Branch of 12

EIGHT DAYS AFTER RECEIPT
Arizona

Banks in
North Dakota

* California
* Colorado
Idaho
* Louisiana
*Montana
* Nebraska
Nevada
New Mexico

* Oklahoma
* Oregon
South Dakota
* Texas

* Utah

* Washington
Wyoming

* Except banks in cities referred to in the first column.
**Except banks in Northern New Jersey Clearing House Association referred
to on Page 7. [ Page 7 omitted here)

The deferred availability principle and the collection of intra
district cash items

It must not be inferred that a member bank will send all of

its intra -district transit items through its Federal reserve bank
for collection. Quite often much time can be saved by sending

such items by more direct routes. It has been pointed out else
where that cash items may be collected either through the mechan
ism provided by the Federal Reserve System or in any other
manner that a bank sees fit to use. If the Federal reserve mechan

ism is used intra -district cash items may be collected in three

ways : ( 1 ) By sending the items to the Federal reserve bank as
agent for collection, ( 2) by sending them direct to a branch of
the Federal reserve bank when the branch is nearer the drawee

bank, and (3) by sending the items direct to the drawee bank.
1. Collecting intra - district cash items through the Federal reserve
bank

The method of collecting intra-district cash items through the
parent Federal reserve bank has been explained sufficiently in the
discussion of the nature of the time schedules and the deferred

availability principle immediately above and need not be ampli

186

CLEARING AND COLLECTION OF CHECKS

fied here.32 Our attention will be confined to the second and third

possibilities which offer more speedy results. It is obvious that it
would require more time in many instances to send items through
the parent Federal reserve bank than to send them by more
direct routes which may be through branches of the Federal re
serve bank or in some cases direct to the drawee banks.

2. Collecting intra - district cash items through Federal reserve
bank branches

A Federal reserve district may be so large that it is advisable
to establish branches of the Federal reserve bank. These branches,

of which there are now twenty-three, are of two types. One type,
which we will designate for convenience as Class I, has its capital,
territory, member banks and reserves allotted to it , and performs
most of the functions performed by a Federal reserve bank. Intra

district clearings and collections in its district are handled
through it just as they would be handled through a Federal re
serve bank . It has its own time schedule for the banks in its
district and for inter-district collections worked out on exactly
the same principles as that of the parent Federal reserve bank.
It settles directly through the Gold Settlement Fund for its inter

district items in a manner quite similar to that of the parent bank .

For this reason this type of branch , of which there are sixteen,
is known as a direct- settling branch .

If a bank in the northern part of the district occupied by the
Federal Reserve Bank of San Francisco has a check on a member
bank near the Portland branch of the Federal Reserve Bank of

San Francisco, it obviously would involve a loss of time to send
the item to San Francisco for collection from which place it would
then be sent to the Portland branch to be forwarded to the drawee

bank. Instead, the payee bank would send the item to the Port
land branch for collection, using the time schedule of the Port
land branch . All banks in the twelfth district are provided with

the schedules of33 these branches and may remit their items direct
in this manner.

When intra - district items are sent direct to the

branches, settlements are made by telegraph between the parent
bank and the branches. The Federal Reserve Bank of San Fran
cisco maintains a Branch Clearing Settlement to facilitate the

daily settlement of balances resulting from transactions between
**A thorough discussion of clearing and collecting intra -district items through
the Federal Reserve bank will also be found below, pp. 537-554.
33 All branches in the twelfth district are Class I or direct-settling branches.

They are Spokane, Seattle, Portland, Salt Lake City, and Los Angeles.

FEDERAL RESERVE CLEARING AND COLLECTION 187

the head office and its branches . Unlike the Gold Settlement Fund,

which is not used to make settlements between a parent Federal
reserve bank and its branches, there is no actual money carried in

the Branch Clearing. The entire process is carried out through a
system of bookkeeping at the head office and amounts due to and
due by the head office and branches are accounted for over the
leased wire maintained between the head office and the branches.34

The second type of branch, which we will designate as Class
II, and of which there are seven, does not have any definite capital,

territory, member banks, or reserves allotted to it, nor does such
a branch settle through the Gold Settlement Fund for its inter
district items. One of its main functions is to act as a clearing

and collection agent and, as a result, has a collection zone as
signed to it. All member and properly qualified non -member
clearing banks and trust companies within this zone may be col
lected upon through this branch. The resulting credit, inter
district as well as intra -district, is reported by this branch daily
to the Federal reserve bank of that district.

3. Sending intra -district items direct to drawee banks for col
lection

Member banks, ordinarily, may not send items direct to drawee
banks for remittance to the Federal reserve bank or branch for

credit to the account of the payee bank . There are two important
exceptions to the general principle, however, when intra -district
items are involved . One is the system of county collections found
in the second and third Federal reserve districts ; the other is the
so - called Reserve City Clearing House Association in Texas, in

which direct sendings go beyond county lines.
(a)

County clearing of checks. In the second , and to a less

degree in the third, Federal reserve districts , banks in certain
counties, whose business is essentially local , are permitted to send
checks direct to drawee banks in the same county. This system as
used in the second district has been described as follows : “ A bank
in Newark has $ 10,000 worth of checks drawn on a bank in

Orange which it receives in the ordinary course of business . The
bank in Newark will send such checks direct to the bank in Orange

and at the same time mail an advice to the Federal Reserve Bank
of New York, showing the total of such checks sent. The advice
A more detailed treatment of the two types of branches, the nature of
their time schedules, and the methods of clearing and collecting intra- and inter
district items is given below, pp. 547-553 .

CLEARING AND COLLECTION OF CHECKS

188

will be received by the Federal Reserve Bank at the same time that
On receipt
the checks are received by the bank in Orange.
of the advice, the Federal reserve bank will credit the account of
the bank in Newark with the total amount of such checks which it

sent to the bank in Orange and charge the account of the bank in
Orange on its books ; thus, instead of the usual three days for the
collection of such checks, the bank in Newark will receive credit

in its reserve account in one day, saving the two days' time. ” 35
When banks wish to send items direct to drawee banks in

order to save time they must make suitable arrangements not only
with the Federal reserve bank but with the member banks on which

they wish to collect direct. Otherwise they make themselves liable
for remittance charges . In April, 1920, the question was asked
the Federal Reserve Board whether a member bank , either State

or national, could be required under the terms of the Federal Re
serve Act, to remit at par for checks drawn upon it and received
from another bank, other than a Federal reserve bank, with direc
tions to remit in payment direct to the Federal reserve bank for

the account of the bank owning the items. The Board ruled that
the remitting banks could not be required to remit at par as Sec
tion 13 of the Federal Reserve Act prohibited member banks from

charging the Federal reserve banks only , when remitting, and did
not prohibit one member bank from charging another. In a case
like the one submitted to the Board in this instance, the Board

held that the charge is made against the bank for whose account
remission is made and not against the Federal reserve bank which,
in the circumstances, is merely a depository of the proceeds of the
checks, less the amount of the exchange charge.36 Consequently,
for direct sendings to be successful, suitable arrangements must
be made in advance.

(b)

The Reserve City Clearing House Association of Texas.

The so-called Reserve City Clearing House Association of Texas

includes the following six principal cities in Texas : San Antonio,
Dallas, Houston, Ft. Worth , Galveston, and Waco. One of the
purposes of the association is to enable its members to obtain set
tlement on the books of the Federal Reserve Bank of Dallas in one
35A . J. Lins, “ County Clearing of Checks, ” Bulletin of New Jersey Bank

ers Association (December, 1922 ), pp. 8-9 . See also Eighth Annual Report
of the Federal Reserve Board ( 1922 ), p. 512. Among the counties in New
York and New Jersey in which this system is operating successfully, are to
be mentioned the following: (1 ) In New York—Broome, Tioga, Tompkins,
Chemung, Delaware, Herkimer, Nassau, Otsego, Saratoga, Warren, Washing
ton, Steuben, Sullivan, and Westchester ; (2 ) in New Jersey - Bergen, Middle
sex, and Monmouth counties.
30Federal Reserve Bulletin , Vol. VI ( 1920 ) , p. 494 .

FEDERAL RESERVE CLEARING AND COLLECTION 189

day for checks and drafts drawn on each other. For example,
Ft. Worth will send all of its Waco checks and drafts to a par

ticular bank in Waco, drew a draft on this bank for the amount
and send it to the Federal Reserve Bank of Dallas which effects a

clearing of all those reserve city items in its own office by charging
the reserve account of the Waco bank and crediting the account
of the Ft . Worth bank .

Considerable time is saved in this

manner.37

Another purpose of the association is to enable country bank
correspondents of members of the association to make their drafts

on reserve city clearing house banks immediately available for
credit upon receipt by the Federal Reserve Bank of Dallas, which
arrangement places the banks that are members of the Reser

City Clearing House Association on an equal footing with banks
located in Dallas in so far as concerns the exchange facilities that
38
they can offer to their country correspondents.
The collection of and settlement for inter -district cash items

Inasmuch as a complete and detailed discussion of the present
methods used in making inter -district collections of cash items is
given below in Chapter VIII which deals with the nature and
operation of the Gold Settlement Fund and especially on pp.
558-569, no attempt will be made at this time to give more than a

general outline of the mechanism used. This will suffice to give
the reader enough knowledge of the system to understand the

significance of the later topics treated in this chapter.
Inter -district cash items , like intra-district cash items, may be

collected through the Federal reserve clearing and collection sys
tem or in any other manner that the member or non-member
clearing banks may choose. If they use the Federal reserve
mechanism these items may be collected in any one of three ways.
( 1 ) A member or non-member clearing bank may send its items to
its own Federal reserve bank or branch of the Federal reserve

bank ( if it is assigned to that branch ) which will send them to the
Federal reserve bank or branch to which the drawee bank belongs ;
( 2 ) a member or non -member clearing bank in one district may
send the items direct to the Federal reserve bank or branch in the

district to which the drawee banks belong ; and ( 3 ) in certain
*Proceedings of Departmental Conference held at Baltimore Convention of
the American Institute of Banking (July, 1924) , p. 378.
Letter from Mr. W. 0. Ford , Assistant Cashier, Federal Reserve Bank of
Dallas, March 5, 1925.

190

CLEARING AND COLLECTION OF CHECKS

instances items may be sent direct to the drawee member and non

member clearing banks in another district.
1. Collecting inter - district cash items through a bank's own
Federal reserve bank or branch

Banks using this medium of collection are required to sort
their items into classes according to their availability as shown in
the published time schedules . The cash letters including these
items are then sent to the Federal reserve or branch banks which

give the payee banks a deferred credit and send the items on to the
proper Federal reserve banks or branches, which in turn send them

to the drawee banks . After sufficient time has elapsed for the
Federal reserve banks or branches, to which the drawee banks be

long, to hear from the drawee banks, settlement is made through
the Gold Settlement Fund.

The Class I branches settle directly

through the Fund in the same manner as do the parent Federal
reserve banks except that the final debit and credit adjustments
are made on the books of the Federal reserve banks since the Class

I branches do not carry funds in the Gold Settlement Fund. Class
II branches telegraph to their parent Federal reserve banks the
amounts due to other Federal reserve banks and branches which

are then included in the telegram sent by the parent bank to the
Gold Settlement Fund. Adjustments between the Class II branches
and their parent Federal reserve banks are then made on their
books .

2. Member and non -member clearing banks may send inter
district cash items direct to Federal reserve banks and
branches in other districts

Banks are encouraged to send inter-district cash items direct
to the Federal reserve banks or branches to which the drawee

banks belong if time can be saved through such procedure. In
order to do this the sending bank must secure the permission of
its Federal reserve bank or branch which will give it a new time
schedule for these direct sendings. Ordinarily the sending bank

will save at least the time required to send the items to its own
Federal reserve bank or branch .

When the payee banks send out these items they notify their
own Federal reserve bank or branch of the amount of the items
sent and indicate when each batch should become funds.

This is

done on forms which are provided and which show the totals avail
able in one, two, three, four, or more days.

( See Forms 19,

FEDERAL RESERVE CLEARING AND COLLECTION 191

20 and 21 on pp. 456, 457 and 563 , respectively . ) These items,,
properly sorted , are sent direct to the other Federal reserve banks

or branches for the credit of the Federal reserve banks or
branches to which the payee banks belong. After the expiration

of the proper amount of time the Federal reserve banks, direct
settling branches, and the Class II branches through their parent
Federal reserve banks, make the proper settlements through the
Gold Settlement Fund and then the Federal reserve banks or
branches receiving the credits check them against the advices of
direct sendings.
The Federal Reserve Banks of Boston and San Francisco led

the way in 1916 by permitting their member banks to make ar
rangements to send items direct to other Federal reserve banks or
branches for the credit, respectively, of the Federal Reserve
Banks of San Francisco and Boston.39 By 1919 the volume of
such checks had increased to such an extent that the practice of
direct routing had become common .
In 1916 the Federal Reserve Bank of New York took a step,

later followed by other Federal reserve banks, which was destined
to insure the presentation of checks by direct routing to the
proper banks. In that year the Federal Reserve Bank of New
York announced that it would not accept any item drawn on a
bank located outside its district when such item bore the endorse

ment of a bank located outside of its district . This restriction

prevented banks outside of the second district from sending items
drawn upon banks in other districts to New York City for the
40
purpose of making New York exchange.10

3. Sending items direct to member and non -member clearing
banks in other districts

Theoretically member and non-member clearing banks in one
district may not send inter-district cash items direct to the drawee
banks in another district if they wish to use the Federal reserve
clearing and collection mechanism . As a matter of fact member
and non -member clearing banks do send items direct to drawee

banks in other districts and request them to deposit the proceeds
with their Federal reserve bank or branch for the credit of the
payee banks. Thus, while it may be said that the Federal re

serve clearing and collection system is not being used, the payee
banks can build up their reserve balances in this manner just as
**Third Annual Report of the Federal Reserve Board ( 1916 ) , pp. 207, 459.
**Loc. cit . , p. 232.

192

CLEARING AND COLLECTION OF CHECKS

though they had used the Federal reserve clearing and collection
system. Banks often are able to save time by doing this. But it
should be noticed that the Federal reserve banks have no control

over such transactions.

Another type of direct sendings is authorized in exceptional
cases, however, which does involve the use of the Federal reserve

mechanism. Certain important centers may be in different Fed
eral districts but very near to each other as in the case of Detroit,
Michigan, in the Chicago district , and Toledo, Ohio, in the Cleve
land district . Ordinarily, if the regular collection procedure were
followed , checks on Toledo which are deposited in Detroit banks
would be sent to the Federal Reserve Bank of Cleveland, thence to
Toledo for collection which would involve a great waste of time.

By special arrangement the Detroit branch of the Federal Re
serve Bank of Chicago forwards checks on Toledo banks direct
to the drawee banks which in turn remit for them to the Federal

Reserve Bank of Cleveland for the Detroit branch of the Federal

Reserve Bank of Chicago. The same arrangement is made for
Indianapolis , Indiana, and Cincinnati, Ohio . Checks on Indian
apolis are forwarded by the Cincinnati branch to Indianapolis
and remitted for by the Indianapolis banks to the Federal Reserve
Bank of Chicago for the credit of the Federal Reserve Bank of
Cleveland.41

The amount of items sent direct to drawee banks in

this manner is relatively small. In 1923, only 190,000 items
amounting to $ 85,996,000 were sent in this manner.42
Service charges

At the time the compulsory system was introduced it was de
cided that the cost of collecting and clearing checks should be

borne by the banks receiving the benefit and in proportion to the
service rendered . The Federal Reserve System was comparatively

young and few , if any, of the Federal reserve banks were earning
their required dividends and current expenses. The compulsory
plan provided that a charge not exceeding 2 cents per item might
be made at stated intervals against such banks as sent to the
Federal reserve banks checks or drafts on other banks for collec

tion and credit , such a charge, of course, not applying to banks
which had not availed themselves of the privileges offered . Mem

ber banks were not deprived of any income which they had been
4 The writer is indebted to : Mr. H. F. Strater, Assistant Cashier , Federal
Reserve Bank of Cleveland, for this information.

"Tenth Annual Report of the Federal Reserve Board ( 1923 ) , p. 161 .

FEDERAL RESERVE CLEARING AND COLLECTION 193

receiving from the collection of drafts43 or from the purchase or
discount of commercial bills of exchange. The Federal Reserve
Board ruled that an account should be kept by each Federal re
serve bank of the cost of performing this service and the Board
then, by rule, was to fix the charge, at so much per item which
was to be imposed . For the period of July 15 to December 31 ,

1916, the service charge per item ranged from .9 of one cent for
Boston to 2.0 cents for San Francisco, 1.5 cents being the most

commor charge. The cost of transporting currency, however,
was to be borne by each Federal reserve bank.44 As pointed out
below, service charges were gradually lowered and finally abolished
on July 1 , 1918 .

The meaning of par collection under this system 45
The expression "collectible at par through the Federal re
serve bank” as used by the Board in Circular No. 1 and Regula
tion J, Series of 1916, merely meant that checks were collectible
at full face value through the Federal reserve bank , that is, that

remitting banks would remit without deductions when remitting
to Federal reserve banks . It did not mean that banks sending
checks for collection to their Federal reserve banks could not

charge their customers for the expense involved. Indeed, the
Federal Reserve Board expected the collecting banks to charge
enough to cover costs . Items sent through the Federal reserve
banks for collection by member banks were not available until
actually collected which meant that the funds would not be avail

able for the depositors of the member banks until actually col
lected . Consequently, if member banks gave their customers im
mediate credit for checks deposited they were carrying the float

for their depositors and were entitled to interest on the funds ad
vanced in this manner. The Federal Reserve Board specifically
stated that it did not expect member banks to collect checks at a
loss, but on the contrary, expected them to charge not only
enough to cover the charges levied on them by the Federal re

serve bank, but enough to cover interest on the advances made by

giving immediate credit.46 On the other hand, the Federal Re
Other than bank drafts.

“Third Annual Report of the Federal Reserve Board ( 1916 ) , pp. 9-11 . At no
time did the Federal Reserve Board fix the charges to be levied by member
banks. See below pp. 211-213.

*A fuller explanation of the meaning of this term will be found on p. 232,
note 1 .

*Federal Reserve Bulletin , Vol. II ( 1916 ) , pp . 263-264, 310-311 .

194

CLEARING AND COLLECTION OF CHECKS

serve Board thought that if they could reduce the charges by
having a well organized system, these benefits should be passed

on by the member banks to their depositors. Some banks charged,
while others accepted items at par for collection, bearing the ex
pense themselves. In other instances clearing houses required
their member banks to make uniform charges. Thus, it will be
seen, that no uniformity of practice relative to charges for col
lection, existed among the various banks. Where clearing houses
established uniform collection charges on items received from de

positors, there was not, ordinarily, a proper differential es
tablished between items on member banks of the Federal Reserve

System which cleared at par, and items on State banks which de
clined to remit at par. In such cases the depositor was not get
ting the benefit of the Federal reserve par system.47 In addition
to these charges it will be recalled that the Federal Reserve Act
permitted members to charge for making remittances also, pro
vided the charges were not levied against a Federal reserve bank .
As a result, it was to the interest of the member banks to have

their checks collected through the Federal reserve banks in order
to avoid being charged by remitting banks.
The question of reserves ; the Board's proposal to concentrate

It was estimated by the Board that as soon as the new clearing
system could be put into operation checks upon about 15,000
national banks, State banks, and trust companies could be col
lected by the Federal reserve banks at par, subject to the small
service charge referred to above. As any bank would be likely to
lose desirable business when checks drawn upon it were at a dis
count, while checks drawn upon a nearby competitor circulated

at par, it was believed that in a short time checks upon practically
all banks in the United States could be collected at par by Federal
reserve banks .

On the other hand , many banks had found it

necessary to maintain balances with a number of correspondent
banks for exchange purposes thus compelling them to keep an
undue proportion of the funds away from home. This was a
defect that required correction. Despite this burden, the number
of banks upon which par collections were made under this new
plan had exceeded 15,000 by December 15, 1916, and the total

daily clearance at all Federal reserve banks aggregated at that
date over $125,000,000.48
“ Third Annual Report of the Federal Reserve Board ( 1916 ) , p. 305.
*Ibid., pp. 10-11 .

FEDERAL RESERVE CLEARING AND COLLECTION 195

In order to make the system effective, the Board found it
necessary to solve the question of reserves, that is, to permit no
bank balances to be available as reserves for national banks, except
balances in Federal reserve banks. This would check the carry

ing of balances with correspondents, as the maintenance of such
non - reserve balances would then mean a real hardship to banks:
practicing it. Such a concentration of reserves would naturally
carry with it the clearing and collection functions which the

Board was anxious to accomplish.
The desire to solve this problem, combined with the desire to
meet the war emergency, caused the Board to propose an amend
ment to Section 19, which provided that all reserves of member
banks should be maintained with Federal reserve banks on the

basis of 7, 10, and 13 per cent, against demand deposits, plus
3 per cent. against time deposits, for country banks, reserve city
and central reserve city banks, respectively. The Board pro
posed an amendment, also, to the Act to permit non-member
State banks and trust companies, even though too small to be
eligible for membership in the Federal reserve banks, to avail
themselves of the clearing and collection facilities of the Federal
reserve banks, provided they would cover at par checks on them

selves sent for collection by the Federal reserve bank and pro
vided further that they keep compensating balances with the
Federal reserve bank in amounts to be prescribed by the Federal
Reserve Board.49 The purpose was to make the plan compre
hensive enough to include all checks. At the time this amend

ment was proposed, the par lists of the Federal reserve banks
included the names of banks, checks on which could be collected

in any circumstances at a minimum of time and expense, but did
not embrace a large number of towns in every State where there
were no member banks ; and in order to make collections on such

points many banks were obliged to maintain accounts in addition
to their reserve accounts with the Federal reserve banks. A neces

sary factor in any successful clearing plan is the offset whereby
only balances, instead of the total volume of transactions, require
settlement. So long as the clearing system does not embrace all
of the banks this offset is lost in a corresponding degree and

the value of the system diminished in proportion.

Hence the

justification of the proposals of the Federal Reserve Board.
" Ibid ., pp . 11 , 28.

CLEARING AND COLLECTION OF CHECKS

196

The question of non -member banks; amendment of September
7, 1916

Section 13 as originally passed did not specifically allow
Federal reserve banks to receive from their member banks, or

from other Federal reserve banks, checks drawn upon non-member
banks although many were remitting at par. In order to develop
the par collection plan this Section was amended September 7,
1916, to make this possible . The significant part of Section 13
as originally enacted read :

“ Any Federal reserve bank may receive from any of its mem
ber banks . . . checks and drafts upon solvent member banks,
payable upon presentation ; or solely for exchange purposes, may
.

.

receive from other Federal reserve banks ... checks and drafts
» This
upon solvent member or other Federal reserve banks.
.

clause as amended read : “ Any Federal reserve bank may receive
from any of itsmember banks ... checks, and drafts , payable

upon presentation ... ; or solely for purposes of exchange or of
collection , may receive from other Federal reserve banks ..
checks upon other Federal reserve banks, and checks and drafts

payable upon presentation within its district. . . .9950
The natural inference flowing from this amendment was that
the Federal reserve banks were not only to accept checks on
non -member banks from their member banks and other Federal

reserve banks, but were to exercise the power necessary to collect
them.51

The concentration of reserves, June-July, 1917

In harmony with the recommendations made by the Federal
Reserve Board in 1916 , Section 19 of the Federal Reserve Act

was amended June 21 , 1917 , repealing the original reserve re
quirements and substituting new requirements which reduced the
amounts required and concentrated them entirely in the Federal

reserve banks. Against demand deposits, member banks in cen
tral reserve cities were required to keep 13 per cent . ; those in re
serve cities 10 per cent . ; and those members designated as country
banks, 7 per cent . Against time deposits all member banks were
required to keep 3 per cent . reserve.

Member banks in central

reserve cities were required to move the remainder of their reserves

by June 27 ; other member banks were given to July, 1917, to
make the change.52
50Ibid ., p . 134.
5 Letter No. 5, p . 8.
32

52Federal Reserve Bulletin, Vol. III ( 1917 ) , p. 508 .

FEDERAL RESERVE CLEARING AND COLLECTION 197

This amendment effected a concentration of reserves which,
doubtless, did more than anything else to make effective a central
ized clearing and collection system, as banks were now deprived
of one of their chief incentives for having their checks collected

through other channels. The concentration combined with the
slight reduction, also contributed substantially to the elasticity of

deposit currency. While the reserve requirements were decreased
the real decrease was not as great as might appear, since all

member banks must necessarily carry a certain amount of cash
in their own vaults to meet current needs. These reserves, more
over, with the Federal reserve banks had to consist of realized
balances made real through the operation of the zoning system.

With the concentration of all reserves in the member banks,
the next important problem facing the Board in its efforts to
develop a centralized clearing and collection system was the
bringing of non-member banks into the system.
Non -member banks admitted to the privileges of the system , June
21 , 1917

From the beginning of the collection system non -member

banks could obtain the benefits of the system through their mem
ber bank correspondents since Federal reserve banks, under the
law, were required to receive certain items sent to them by their
member banks and no discrimination could be made in the case of
items bearing the endorsement of a non- member bank ahead of

the endorsement of the member bank by which they were offered .

By the amendment of September 7 , 1916, express permission had
been given the Federal reserve banks to accept from their member
banks and other Federal reserve banks checks drawn upon certain
non -member banks. Non -member banks could be collected upon
by Federal reserve banks but could not use the Federal reserve

banks directly as collecting agents. It was felt that justice
required that the non-member banks co-operating in the collection
system should be safeguarded in their right to use the system
and not be left wholly at the mercy of the member banks.

Conse

quently , the Federal Reserve Board proposed that Section 13 be
amended so that non -member banks could be admitted to the

privileges of the system and use the Federal reserve banks as
collecting agents.

Acting upon the suggestion of the Federal

Reserve Board , Congress amended Section 13 in order to permit

non -member banks and trust companies to become clearing mem

bers in the system. This amendment permitted Federal reserve

CLEARING AND COLLECTION OF CHECKS

198

banks to receive accounts for collection and exchange purposes

from such non -member banks and trust companies as might agree
to remit to the Federal reserve banks at par for checks drawn
upon themselves and which, in addition, would maintain balances
with the Federal reserve bank sufficient to offset items in transit
held for their account by the Federal reserve bank.53

At the outset several large non-member banks opened clear
ing accounts, but as most of these later became members of the

Federal Reserve System, the number of non-member clearing ac
counts did not become large.54 Non -member banks found it more
convenient to use the Federal reserve collection system through
their member bank correspondents. Free use of the system was
made through member bank correspondents not only by all the
non-member banks that from time to time agreed to co-operate

by remitting at par for checks drawn upon themselves, but also
by the non -member banks that maintained what they called their
“ right to charge exchange.” Even during the time they were
seeking by means of injunctions and suits, to prevent the Federal
reserve banks from presenting and collecting at par checks drawn
upon them, they unhesitatingly made free use of the Federal
reserve collection system through member bank correspondents
for the collection of checks deposited with them and drawn upon

member banks or non-member banks whose names appeared upon
the par list of the Federal Reserve System . This amendment
consequently was rather unsuccessful and the Federal reserve
banks found themselves unable to collect checks drawn on many
non -member banks except at heavy expense.
Problem of collecting checks on non -member banks
The Federal Reserve Board had interpreted Sections 13 and 16
to mean that the Federal reserve banks were required to accept

at par all checks payable upon presentation when deposited with
them by member banks . It is evident, that aa Federal reserve bank
receiving checks on non-member banks for deposit would proceed
to collect those checks, and that if the banks upon which they
were drawn would not remit at par the Federal reserve bank was
obliged to provide itself with some other means of making the
collection.

Various means were resorted to where there were no

* Fourth Annual Report of the Federal Reserve Board ( 1917 ) , pp. 12-13,
23-24.

5*Governor W. P. G. Harding's Report to the Senate, 66th Cong., Ad Sess.,
Sen. Doc. No. 184 , p. 3.

65Letter No. 5, p. 10.

FEDERAL RESERVE CLEARING AND COLLECTION 199

member banks in the same town through which the collections
could be made over the counter. Express companies and other
agencies were used , depending upon the circumstances. But in
order to simplify the problem the Federal reserve banks called the
attention of the non-member banks to the provisions of the law

and stated that stamped envelopes would be sent in each case to
the remitting bank, in order that there might be no actual expense
incurred by the drawee bank in making the remittance and that
if it were more convenient, remittance might be made in currency

at the expense of the Federal reserve bank.
As the opposition to the provisions of the Act increased on
the part of the non -member banks which were anxious to maintain

this old source of profit due to charging exchange for remittance,
the issue was raised as to whether Congress had a right to legis

late in any way that would diminish the profits of the non-member
banks . The Board, in answer to this issue, pointed out that
Congress clearly has the power to legislate in matters relating to
the manner in which the Federal reserve banks should operate.

The Board further pointed out that it was its view that Congress
( 1 ) had directed all banks, non-members as well as members, not
to make exchange charges against Federal reserve banks ; ( 2 ) had
directed the Federal reserve banks to receive on deposit at par

any checks and drafts which were payable on presentation ; and
(3 ) had directed the Federal reserve banks not to pay any ex
change charges to banks in making these collections.
The Federal Reserve Board then suggested that if it were

desired to question the constitutional right of Congress to enact
a law prohibiting a Federal reserve bank from paying exchange
to a non-member bank on checks drawn upon a non-member bank

by its own depositors, the banks which questioned its validity
should initiate the proceedings rather than the Federal Reserve
Board ; that should they concede the right but believe the law
oppressive, unjust or unwise, they should appeal to Congress with
the view of having the objectionable features stricken out or

modified ; that if banks doubting the validity of the law felt that
the length of time necessarily involved in obtaining a judicial and
final interpretation made it undesirable to litigate they should
appeal directly to Congress ; that the banks should not obstruct
the law as it then stood pending a final determination of policy
by Congress ; and finally, that if non -member banks should be

required to remit at par no longer, member banks should also
be relieved from such an obligation, for the member banks were

200

CLEARING AND COLLECTION OF CHECKS

supporting the Federal Reserve System and it would be unfair to

deprive them of opportunities for profit given to non -members.56
The Hardwick Amendment, June 21, 1917

During 1917 a determined effort was made by some of the
exchange-charging member and non -member banks to amend the
Federal Reserve Act in order to provide for a standardized

exchange charge not to exceed 1/10 of 1 per cent. to be made by
member banks against the Federal reserve banks for checks sent
for collection .

The fight resulted in the so -called Hardwick

Amendment which provided “ that nothing in this or any other
section of this act shall be construed as prohibiting a member or
non-member bank from making reasonable charges, to be deter
mined and regulated by the Federal Reserve Board, but in no
case to exceed 10 cents per $100 or fraction thereof, based on

the total of checks and drafts presented at any one time, for
collection or payment of checks and drafts and remission therefor
by exchange or otherwise ; but no such charges shall be made
against the Federal Reserve Banks. " 57 The Attorney General
• was requested to give his opinion as to whether this proviso
applied to non-member banks. He held that it did not apply to
State banks not connected with the Federal Reserve System

and that the provisions prohibited the Federal reserve banks
from paying exchange charges to member or non -member banks.58
It was thought that had he given an affirmative opinion it
would have made much easier the establishment of a universal

par collection system. The adverse opinion holding that the
proviso applied to member banks only, meant that the further
development of the collection system would necessarily be re
tarded and in the absence of further legislation would depend
upon voluntary action of many small banks.59
Other attempts to develop the system

In addition to the attempts already made by the Federal
Reserve Board to enlarge the scope of the clearing and collec
09Federal Reserve Bulletin, Vol. VI ( 1920 ) , p . 489 .
"Italics are the author's ; Fourth Annual Report of the Federal Reserve

Board ( 1917 ) , p . 23 ; Seventh Annual Report of the Federal Reserve Board
( 1920 ), p. 64.
88For this opinion see Federal Reserve Bulletin, Vol. IV ( 1918 ) , pp . 367
371. See also Fourth Annual Report of the Federal Reserve Board ( 1917 ) ,

pp. 23-24 ; Seventh Annual Report of the Federal Reserve Board ( 1920) , p. 64.
« Fifth Annual Report of the Federal Reserve Board ( 1918 ) , p. 76 ; Seventh
Annual Report of the Federal Reserve Board ( 1920 ) , p. 64.

FEDERAL RESERVE CLEARING AND COLLECTION 201

tion system , the Board consciously and persistently made ar
rangements and innovations that were designed to make the
system more advantageous and attractive to the non -member

banks. The scope of the system was enlarged through ( 1 ) pro
visions for the collection of notes, drafts, and other items, ( 2 )
provision for exchange and transfer drafts, ( 3 ) the development

of the telegraphic transfer system, and ( 4 ) the elimination of
service charges and the absorption of other costs by the Federal
reserve banks .

The collection of notes, drafts, and other items

The Federal Reserve Act as originally passed did not include
provisions for the collection of notes, drafts and other maturing
items. By an amendment to Section 13, approved September 7,
1916, the Federal reserve banks were given authority to " receive
from any of [ their] member banks, and from the United States
... for collection, maturing bills ; or solely for purposes . . . of
collection, may receive from other Federal reserve banks
maturing bills payable within [ their districts.” ]" This Section
was further amended on June 21 , 1917, so as to make it possible
.

.

>

for Federal reserve banks to receive for collection such maturing

notes and bills from any non -member bank or trust company,
provided such banks, or trust companies maintained with their
Federal reserve bank a balance sufficient to offset the items.

The

Act does not authorize аa Federal reserve bank to collect maturing
notes and bills payable within its own district which are for
warded to it for collection by any member bank located outside
of its own district. Section 16, however, authorizes a Federal

reserve bank to receive from any member bank, regardless of its
location, checks and drafts drawn upon a member bank of its
district . This, it will be noted , is the only collection service
which a Federal reserve bank may perform directly according
to the provisions of the Federal Reserve Act for any member
bank located outside of its own district .

Until 1920 the collec

tion service of maturing notes and bills was limited to items
sent to a Federal reserve bank by its own member banks or by
In that year, however, an ar

61
other Federal reserve banks.

rangement was made by the Board whereby a member bank might
send maturing notes and bills direct to a Federal reserve bank
of another district for collection and credit to the account of
*Third Annual Report of the Federal Reserve Board ( 1916 ) , p. 134.
Federal Reserve Bulletin , Vol. V ( 1919 ) , p . 467.

202

CLEARING AND COLLECTION OF CHECKS

the Federal reserve bank of the district in which the sending bank
was located , although there was no provision of law which au
thorized a Federal reserve bank to receive such items from a
62
member bank located outside of its own district.

On August 11 , 1917, the Board requested the Federal reserve
banks to establish general collection departments in order to
receive such maturing paper for collection. The paper was to
consist of maturing notes, bills and miscellaneous drafts made

by or drawn upon individuals, firms, or corporations other than
banks, and was to be subject to a moderate collection charge.63
As a result, member banks which were obliged to rely upon other
banks for service of this sort could now obtain it from the

Federal reserve banks .

Such a move on the part of the Board

and banks seemed necessary, since reserves were now concentrated,
if banks were not to experience the hardships of being compelled
to carry additional deposits with banks other than the Federal

reserve banks for purposes of collecting such items.64
The handling of items of this kind presented problems quite
different from those involved in the handling of checks . The
Federal Reserve Board clearly distinguished between checks and
drafts on banks and maturing notes and bills of exchange sent
through the banks for collection. There were no provisions in
the law requiring Federal reserve banks to receive bills and notes
at par as in the case of checks and drafts on banks. Obviously,
such items could not be received at par for the reason that no
bank could properly be forced to credit at par an unmatured or
uncollected note or bill .

Neither did the Hardwick Amendment

to Section 13 prohibit member banks charging the Federal re
serve banks for collecting such items nor give the Board any

authority to regulate such charges.65 In 1917, the Federal
Reserve Bank of New York, for example, made a service charge
of 10 cents per item , in addition to such collection charges as
might be imposed by the collecting bank, and in case a collection
item was returned unpaid , a charge of 10 cents was imposed,
to be paid by the bank presenting the item for payment. No
charge was made, however, for the collection of coupons other
than the charge made by the collecting bank plus mail or ex
02

o Federal Reserve Bulletin , Vol. VI ( 1920 ) pp. 276, 949.
62 As early as October, 1915, the Board had ruled that the Federal reserve
banks might and should make such collections but the matter did not become
urgent until 1917 .

“ Fourth Annual Report of the Federal Reserve Board ( 1917 ) , pp. 12, 23,
9

181 ; Federal Reserve Bulletin, Vol. III ( 1917 ) , p . 656.

esFederal Reserve Bulletin, Vol. III ( 1917 ) , pp. 662-663.

FEDERAL RESERVE CLEARING AND COLLECTION 203

press charges . So far as possible, items were sent direct to
their place of payment and when payable outside of the district,
the collecting bank was permitted to make remittance either
direct to the Federal Reserve Bank of New York in New York

exchange, or, if more convenient, in available exchange to any

other nearby Federal reserve bank for the credit of the Federal
Reserve Bank of New York.66 In April, 1918, the Board ap
proved certain recommendations that the 10 cents charge on
collection items between Federal reserve banks and their member

banks be eliminated until further notice, but that a charge of
15 cents per item be made on all such items returned unpaid in

order to prevent the sending of dunning items through the Federal
reserve banks. This rule became effective June 15, 1918.67 At
the same time the Federal Reserve Board recommended that while

trade acceptances should be treated as collection items, bankers'
acceptances should be treated as cash items. Early in 1920,
the question was presented to the Federal Reserve Board as to
whether a member bank might make an exchange charge lawfully
on one of its own acceptances presented to it for collection by
the Federal reserve bank of its district.

The Board ruled that

a banker's acceptance was a draft within the meaning of that
part of Section 13 which prohibited member banks making any
charge against the Federal reserve banks for collection or pay
ment of checks and drafts presented to them by the Federal

reserve banks.68 It was pointed out, however, that Section 13
did not prohibit a member bank from charging the Federal
reserve bank for the service of collecting maturing notes and bills
of exchange drawn upon individuals, firms or corporations other
than banks .

The fact that such a note or bill of exchange not

drawn on a bank might be made payable at that bank did not
bring it within the restrictions of Section 13 and did not pre
clude the member bank from making a charge against the Fed
eral reserve bank for effecting its collection and remitting there
for by exchange or otherwise . In April, 1918, the Board ruled ,

also, that bill -of-lading drafts could be received by the Federal
reserve banks only as collection items, and not as cash items for
which immediate credit could be given even though drawn pay

able at sight.70
* Fourth Annual Report of the Federal Reserve Board ( 1917 ) , p. 269 ; Fed
eral Reserve Bulletin , Vol. III ( 1917 ), pp. 743-744 .
" Federal Reserve Bulletin , Vol. IV ( 1918 ), p. 371 .

€ Federal Reserve Bulletin , Vol. VI ( 1920 ), p . 162.
Ibid. , p. 699.

**Ibid., pp. 372, 436 .

204

CLEARING AND COLLECTION OF CHECKS

In August, 1918, the New York City Clearing House took a

forward step with reference to the collection of acceptances
through the clearing house which did much to eliminate at least

one day's float. The clearing house agreed to pass acceptances
through the clearings and charge them to the accounts of their
acceptors at the banks at which they were payable upon the

date of their maturity precisely as if they were checks, and
established regular methods for the reimbursement of accept
ances by those in whose favor they were made.

This practice

supplanted the long established custom of presenting such items
at maturity and receiving either certification thereof or checks,
final payment thus being delayed for one day after maturity.71
In 1920 the question was raised as to whether a non-member

bank which was not even a clearing member, but a correspondent
of a member bank, could send bill-of-lading drafts direct to the
Federal reserve bank for collection and credit to the member

bank's account when so authorized by the member bank. The
Federal Reserve Board ruled that this could be done if the

Federal reserve bank had received specific notice from the mem
ber bank that it had authorized the sending bank to act as agent

of the member bank in forwarding the items for the member
bank's account. The Federal Reserve Board, however, reserved
to each Federal reserve bank the right to decline to receive such
items at its discretion.72

The question was raised , also, as to whether a Federal reserve

bank might collect maturing notes and bills drawn upon firms,
individuals, or corporations which were located within its district
but which were not member banks, when such notes and bills were
forwarded to it for collection by a member bank of another
district for the account of the Federal reserve bank of that other

district . On this point the Board ruled that such a service might

be performed by a Federal reserve bank at its own option when
ever it had received satisfactory advice that the Federal reserve
bank for whose account the collection was being made had au

thorized its member bank to act as its agent in forwarding
maturing items of this character for collection and credit to its
account. It was considered , by the Board , to be immaterial

whether the authority to act as agent was specific as to the
particular member bank or whether it was general as to all
71See Federal Reserve Bulletin , Vol. IV ( 1918 ) , pp . 806, 819-821 .

7 FederalReserve Bulletin, Vol. VI ( 1920) , pp. 918-919.

FEDERAL RESERVE CLEARING AND COLLECTION 205

member banks of the Federal reserve bank for whose account the

collection was being made.T3
Schedule for availability of proceeds of bankers' acceptances

The following schedule became effective on and after March
1 , 1919, indicating when the proceeds of bankers' acceptances
received by Federal reserve banks for collection from or for the

account of other Federal reserve banks, and subject to final
payment, would be available :
SCHEDULE FOR AVAILABILITY OF PROCEEDS OF BANKERS'
ACCEPTANCES
Credit for items payable
Credit available at
maturity for items
elsewhere in district avail

District

payable in
Boston ...
New York .

Philadelphia .

Cleveland ......

.Boston, Mass ...
New York , N. Y ..
Buffalo, N. Y.

able

. 1 day after maturity
Do
Do
Do
Do
Do
Do

Philadelphia, Pa .
. Cleveland, O ..

Cincinnati, O.
Richmond ....

Pittsburgh, Pa ....
.Richmond, Va..

.2 days after maturity for Mary
land , District of Columbia ,

and Virginia ; 3 days after
maturity for West Virginia,
North Carolina and South
Carolina

Atlanta .....

Baltimore, Md .....
.Atlanta, Ga .....

Do

.1 day after maturity for ac
ceptances of member banks

only ;

acceptances of

non

member banks when collected
New Orleans, La ...

Chicago ...
St. Louis ....

Jacksonville , Fla .
Birmingham, Ala ...
Chicago, ni..
Detroit, Mich .
St. Louis, Mo.
Louisville, Ky ..

Memphis, Tenn ..

Do
Do
Do

1 day after maturity
Do
Do
Do
Do

Little Rock , Ark ..

Do

Minneapolis ....

.Minneapolis, Minn ..

Kansas City ...

... Kansas City, Mo ...

Do
Do
Do
Do
Do

St. Paul , Minn ..

Dallas...
San Francisco ..

Omaha, Neb .
Denver, Colo .
.Dallas, Tex .
El Paso , Tex .

.San Francisco, Cal.
Spokane, Wash .
Portland, Ore . ...
Seattle, Wash ...

Do

Do
Do
Do
Do
Do
Do

Salt Lake City, Utah ....
From Federal Reserve Bulletin , Vol. V ( 1919 ) , pp . 245-246 .

* Ibid ., pp. 276, 949 .

206

CLEARING AND COLLECTION OF CHECKS

Anto

Introduction of Federal reserve exchange and transfer drafts
With the concentration of reserves it was felt that some ma

chinery should be provided for the transfer of funds for banks
which had been in the habit of using drafts on central reserve
city banks. The provision for such a mechanism would serve as
an additional inducement to non -member banks to enter the

system. While it is true that member banks could draw drafts
upon their own Federal reserve banks, and indeed , did so from

the beginning of the Federal Reserve System, such drafts , after
July 15, 1916, were acceptable for immediate credit only at
the Federal reserve bank of the district in which the drafts

originated . This ordinary type of bank draft, when sent into
other Federal reserve districts, was acceptable only on a deferred
credit basis, that is, in accordance with the published time
schedules .

To meet the needs of the large number of banks which had
obligations to meet outside their own district, two types of Fed

eral reserve drafts were created, the Federal reserve exchange
draft and the Federal reserve transfer draft. These drafts, which

were officially introduced on June 1 , 1917, provided all member
banks in the several districts with a means of remittance which

was acceptable for immediate credit at any one of the Federal
reserve banks or branches.

They were designed to supplement

not only the ordinary bank draft , but also telegraphic transfers,
and to facilitate payments that did not need to be made by tele

graph, thus giving bank exchange a wider currency and usefulness.
A Federal reserve exchange draft is one drawn by a member
bank upon its own Federal reserve bank and made receivable at
pa
for immediate availability at any Federal reserve bank,
although actually payable only at the drawee Federal reserve
bank . Such drafts were originally drawn in amounts not to ex

ceed $250, but on September 3, 1918, the maximum was increased
to $5,000. The bank drawing such drafts is required to give
advice by mail to its Federal reserve bank of the total amount of
drafts drawn each day. This amount is charged to the member

bank's account and the funds placed in a special account against
which the drafts will be charged when presented for payment.
Special forms for the drafts and advices are provided.74
**Federal Reserve Bulletin , Vol. III ( 1917), pp . 348-319; Fourth Annual
Report of the Federal Reserve Board (1917 ), pp. 23-24 ; Federal Reserve
Bulletin , Vol. IV ( 1918 ) , p . 819. When member banks' reserve accounts are

kept with Federal reserve bank branches, such drafts are drawn on and
payable at the branch.
branches.

In such cases the daily advices are mailed to the

FEDERAL RESERVE CLEARING AND COLLECTION 207

Each member bank must apply for and receive permission
from its Federal reserve bank before drawing Federal reserve ex
change drafts, and the Federal reserve bank reserves the right to
withdraw this privilege from the member bank should it violate
the prescribed regulations. No draft can be drawn except against
an available balance in excess of the required reserve of the bank.
It is to be observed that although the Federal reserve bank, to
which such exchange drafts are sent by one of its own member

banks, gives immediate credit for the draft ( subject to final pay
ment ) , it really advances no funds of its own, due to the fact
that it is permitted to deduct the total amount of these drafts
from what it owes the drawee Federal reserve bank when it makes

its daily settlement through the Gold Settlement Fund. Nor is
the drawee Federal reserve bank out of the funds, since it imme

diately charges the account of the member bank drawing the draft
upon receipt of the daily advices.
Up to the present time comparatively little use has been mada
of the Federal reserve exchange draft. This has been due to in

ertia in adopting new methods, to the fact that many banks for
various reasons cling to their old correspondents, to the fact that
many banks have found that the ordinary bank draft drawn on
their own Federal reserve banks has met most of their demands,
to the increased efficiency in the check clearing and collection
system which lessens the demand for drafts, and to the fact that
banks can transfer balances between their correspondents without

expense and without loss of time by using the telegraphic transfer
system. These drafts did not attain any importance whatever
until their maximum was raised from $250 to $5,000.75
The Federal reserve transfer draft is a draft drawn by a

member bank upon its own Federal reserve bank and made payable
at any Federal reserve bank specified in the draft . The minimum
for these drafts was fixed at $250, the maximum originally placed
on the Federal reserve exchange drafts . While this minimum re

quirement has never been changed, it is generally understood that
no transfer drafts will be drawn for amounts under $5,000, since
that amount now constitutes the maximum for the exchange
drafts. The drawing bank is required to give advice by mail to its
Federal reserve bank of the numbers, amounts, and total made

payable at each Federal reserve bank of drafts drawn each day .
It also sends a duplicate of this advice to the specified Federal
* Federal Reserve Exchange, Letter No. 17, Federal Reserve Bank of Rich
mond ( September, 1924 ) , pp. 9-10. Hereafter cited as Letter No. 17.

208

CLEARING AND COLLECTION OF CHECKS

reserve bank at which the drafts are made payable. The drawee
Federal reserve bank, upon receipt of this advice, charges the
total amount of the drafts to the account of the member bank and

makes provision for payment at the Federal reserve bank or
branches specified. At the same time it telegraphs the Federal
reserve banks at which the drafts are payable, confirming the
advice sent by the drawing bank. These drafts will not be paid
unless the paying Federal reserve bank has the duplicate advice of
the drawing bank and the confirmation of the drawee Federal re
serve bank . Due to the cumbersome nature of the transfer drafts,
their use has not become common.76

JThe telegraphic transfer system
Soon after the establishment of the Gold Settlement Fund a

system of telegraphic transfers was established .

The Federal

Reserve Bank of New York inaugurated a transfer system as

early as May 26, 1915, by which it undertook to transfer funds
for any member bank to any other member bank in that district
and to any other Federal reserve bank for account of any of its
member banks . When the transfers were advised by mail no

charge was made ; when advised by telegram a slight charge was
made, but after December 30, 1916, the bank reduced the charges
for telegraphic transfers to the cost of the telegram .77 Appar
ently these transfers were largely, if not entirely, among member
banks within the Federal reserve bank's own district, for when the
question came before the Federal Reserve Board in March, 1917,

as to the wisdom of permitting the use of the Gold Settlement
Fund for the purpose of making transfers between distant member
banks, the Board declined to sanction such practice.78 During
the last six months of 1917, however, the Federal Reserve Bank of
New York made many transfers, probably mostly intra-district,
and at the close of that year reported that telegraphic transfers
had been made for member banks without limit as to amount and

without charge other than the cost of the telegram.79 The Fed

eral Reserve Bank of San Francisco reported in 1917, however,

that it performed for its member banks a service that involved
76Letter No. 17, pp . 4-5.

* Third Annual Report of the Federal Reserve Board ( 1916 ) , pp. 234-235 .
78Federal Reserve Bulletin , Vol. III ( 1917 ) , p . 238 ; The Gold Settlement

Fund , Letter No. 7, Federal Reserve Bank of Richmond ( September, 1922) ,
p . 1. Hereafter cited as Letter No. %.

"Fourth Annual Report of the Federal Reserve Board ( 1917 ) , p. 270.

FEDERAL RESERVE CLEARING AND COLLECTION 209

inter-district transfers for member banks through the Gold Settle
ment Fund.80

Nevertheless, it was not until after the installation of the
leased wire system in June, 1918, that the present highly developed
system of telegraphic transfers had its most rapid growth , that is,
a system by means of which a Federal reserve bank could make

through the Gold Settlement Fund telegraphic transfers of funds
for member banks, or for individuals and non- member banks

through the medium of the member banks. On June 10, 1918, the
Federal Reserve Bank of Richmond announced to its member

banks that it was ready to make such transfers for them without
charge. Similar announcements were made by all other Federal
reserve banks to members in their respective districts.81

Prior to the introduction of the Federal reserve clearing and
collection system and of wire transfers, distant payments were
made by check or draft, which naturally consumed much time in
effecting a settlement . For example, suppose a merchant in New
York deposited in his bank a check for $50,000, drawn upon a
bank in San Francisco.

The check would travel to San Fran

cisco, where on arrival it would be charged to the account of the
man who drew it, and his bank would mail the New York bank a

New York check in payment. The $50,000 would not be avail
able to the merchant at his New York bank until the check arrived,

at least ten and probably twelve days after the merchant depos
ited the original check.82 The new Federal reserve clearing and
collection system cut the time at least in half through the use of
the Gold Settlement Fund. Instead of mail remittance, the San
Francisco bank upon which the check is drawn makes payment at
the Federal Reserve Bank of San Francisco. The same day the
funds are transferred through the Gold Settlement Fund to the
Federal Reserve Bank of New York which , in turn , settles imme

diately with the bank that had presented the check for collection.
But the system of transfers by wire virtually eliminates the
time element. Suppose that the $ 50,000 payment due from the
man in San Francisco to the New York merchant could not wait

for a check to be transmitted through the mail. The payer's
bank would charge his account, and at the same time instruct the
Federal Reserve Bank of San Francisco to telegraph the Federal

Reserve Bank of New York, asking it to place $ 50,000 to the
80 Ibid ., p. 598.
* Letter No.7, p. 11 .

*2Some banks give immediate credit but deduct interest.

210

CLEARING AND COLLECTION OF CHECKS

credit of the New York merchant in his own bank. The San
Francisco member bank is charged $50,000 on the books of the

Federal reserve bank, and $50,000 in the Gold Settlement Fund
passes from the ownership of the Federal Reserve Bank of San
Francisco to that of New York.

Since the introduction of daily

settlements these transactions are settled daily through the Gold

Settlement Fund as are those growing out of the clearing and
collection of checks .

Such transfers are usually for large sums ; to make a large

number of small transfers which might have been made by check
equally well would clog unduly the private wire system of the

Federal reserve banks and hamper the efficiency of the service.83
When the Federal reserve banks first undertook to make transfers

of funds for their member banks, there were numerous instances in
which member banks, with the best of intentions, started to make

use of the facilities for practically all transfer operations for
their customers, both small and large. The transfer facilities are

intended primarily for the adjustment of balances between banks,
and it was soon found necessary to set limits as to the size of
transfers that would be accepted in order to avoid congestion of
the wires with a multitude of small and relatively unimportant
transactions which would tend to lessen the efficiency of the trans

fer system. As soon as the member banks understood the situa
tion, they responded willingly and gave their full measure of
co-operation toward making the transfer facilities effective.
Originally there were no limits set on the size of the transfers
which would be accepted from member banks, the matter being
left entirely to the member banks. If a member bank appeared to
be making use of the transfer facilities for unimportant items to
such an extent that the service was retarded, the fact was pointed
out to that bank that while the Federal reserve transfer system

was open to them for such use they might desire to make of it, yet
a situation might arise in which a very important large transfer
would be seriously delayed by reason of a multitude of smaller and
less important transactions taking precedence over it. By this

method a most effective co -operation between the Federal reserve
banks on the one hand, and their member banks on the other, was
secured.84
82“ Transferring Funds Under the Federal Reserve System ,” Monthly Re
view, Federal Reserve Bank of New York ( June 1 , 1921 ) .

$*Frederick Greenwood, “Relations Between · Federal Reserve Banks and
Member Banks, ” Bulletin of the American Institute of Banking, Vol . V, No. 1
( January , 1923 ) , pp . 36-37. Federal reserve banks now make transfers over

FEDERAL RESERVE CLEARING AND COLLECTION 211

With the installation of the leased wire system no charges
whatever were made for these transfers, which included not only

transactions between banks but also payments through member
banks to individuals. This was in harmony with recommenda
tions made by the Federal Reserve Board in May, 1918, that tele
graphic transfers be bought and sold at par, each Federal reserve
bank absorbing the telegraphic expense.86
With such facilities available, mail transfers were greatly
reduced , as was the buying and selling of domestic exchange, since

funds actually available could be transferred at par by telegraph.
With reference to mail transfers, the Board recommended in 1918
that the discount rate on mail transfers be based upon the fifteen
day rate, but, because it was thought desirable that the rate for

such transfers should remain as nearly uniform as possible and
not vary too frequently, it suggested that for the time being and
until further notice a charge of 10 cents per day per thousand
dollars, or, at the rate of 3.65 per cent., be fixed as the rate for all
transfers.86 Rates seemed to have varied from this recommended

rate, however.

In 1919 the Federal Reserve Bank of Chicago,

for example, reported that their policy of promoting mail trans
fers as well as telegraphic transfers was being continued and that
uniform charges were maintained " of 15 cents discount per day

per thousand—say 512 per cent. per annum—for mail purchases
» 87

and 71/2 cents discount per thousand for mail sales."
Service charges lowered and finally abolished July 1, 1918
It has been pointed out already that with the inauguration of
the compulsory clearing system on July 15, 1916, service charges
were exacted by the Federal reserve banks to cover costs of col
lection. These charges during the remainder of the year 1916 .
ranged from .9 of 1 cent to 2.0 cents per item. After 1916 they
ranged from .9 of 1 cent to 1.5 cents per item, although some of
the Federal reserve banks in 1917, with the authority of the Fed
eral Reserve Board, began exempting a certain number of items,
usually five hundred per month, for each member bank. This was
a part of the general movement on the part of the Federal reserve
banks designed to encourage the use of the par collection facilities
the Federal reserve private wire system free of charge only when such
transfers are accepted from and payable to member banks, are limited to
bank balances, and are in multiples of $ 100.

88Federal Reserve Bulletin , Vol. 1V ( 1918 ) , p. 371 .
86 Ibid .

57 Sixth Annual Report of the Federal Reserve Board ( 1919 ) , p. 412.

212

CLEARING AND COLLECTION OF CHECKS

of the system. For example, in September, 1917, the Federal
Reserve Bank of Atlanta put into effect a rule whereby member

banks were permitted to clear through the Federal reserve bank
without any charge whatever checks to the number of five hundred

per month, the number above five hundred being charged at the
rate of 11/2 cents per item . It also permitted State banks to remit
to it in eastern exchange, since some of the banks which agreed to

remit to it at par had no Atlanta account.88 The Federal Reserve
Bank of Kansas City in the same year exempted from the service

charge a maximum of five hundred items per month received from
any one bank, besides making provisions for the reduction of the
service charges on items exceeding the five hundred limit. The
Federal Reserve Banks of San Francisco and Kansas City also

provision to supply banks which remitted at par with return
postage. 89 On July 1 , 1918, the service charge was abrogated
made

entirely and the Federal reserve banks began to collect without
charge all checks and drafts on member and other banks on the

par list.9: This move was justified because of the increased earn
ings of the Federal Reserve System and the desire of the Board to
extend the benefits of the system in every way possible.
As an illustration of the extent to which business was relieved

of the burden of exchange charges the situation as reported by the
Board for the year 1919 is interesting and instructive. The total
volume of transactions through the Gold Settlement Fund in the

year 1919 was approximately $74,000,000,000 and the total cost,
including the expense of the leased wires, was about $250,000.
This cost was borne by the Federal reserve banks and did not rep
resent any expense whatever to the member banks or their cus
tomers. The basic cost of making domestic exchange in that year
was 0.3 of a cent for each $1,000 transferred. A charge of 10

cents per $100 on the amount cleared through the Gold Settlement

Fund would have involved an expense of $1 for each $1,000
transferred, or about $74,000,000 for the entire amount.
The intra - district clearings made by Federal reserve banks in
1919, eliminating duplications, amounted to about $ 135,000,

000,000 and the total expense of these transfers was borne by the
Federal reserve banks.

Had the Federal reserve banks been

obliged to pay for these transfers at the rate of 10 cents per $100

the total expense would have been $ 135,000,000, which amount
88Fourth Annual Report of the Federal Reserve Board ( 1917 ) , p. 418.
8ºIbid ., pp . 520, 597.

soFifth Annual Report of the Federal Reserve Board ( 1918) , pp. 76-77.

FEDERAL RESERVE CLEARING AND COLLECTION 213

was far in excess of the total earnings of the Federal reserve banks
and, therefore, could not have been absorbed by them.

If not

absorbed, it would have been necessary to transfer the charge to
the depositors of the checks, so that a charge of 10 cents per $100

upon the business handled by the Federal reserve banks would
have involved a cost to commerce and industry of this country of
at least $135,000,000.91
Absorption of other costs by Federal reserve banks

In October, 1918, new inducements were extended, in the form
of additional facilities , to member banks and their customers

through the absorption by the Federal reserve banks of all cost of
postage, expressage, insurance, etc. , incident to shipments of cur.
rency to and from member banks, not including silver and silver

coin, also of the cost of telegrams between the Federal reserve
banks and member banks in connection with currency, exchange
transfers and deposit transactions. Under a similar arrangement
for non-member banks maintaining clearing accounts, the Federal
reserve banks absorbed the cost of postage, insurance and ex
pressage in connection with shipments of currency in settlement of

clearing balances, and a further saving of expense to non-member

banks on the par list was provided by inclosing stamped envelopes
with collection letters for return remittances. All expenses inci
dent to shipments of currency made in payment of items sent for
collection were to be borne by the Federal reserve banks.92 This
step removed one of the strongest arguments against the Federal
reserve clearing and collection system presented by the non
member banks, especially those country banks which came in
direct contact with the farmers and furnished them with the

necessary financial resources during crop moving seasons.

The

cost of securing the necessary funds with all the attending risks

involved had been borne by these outlying banks and for the
assumption of these heavy burdens these banks had been justified
in exacting payment.93
These inducements combined with those made in 1917 in the

inauguration of the system of transfer drafts and the collection of
maturing notes, bills, etc., impresses one as being sufficient to
bring most of the non - clearing banks into the system. But they
" Seventh Annual Report of the Federal Reserve Board ( 1920 ) , pp. 67-68.
" Fifth Annual Report of the Federal Reserve Board ( 1918 ) , p. 77.
* The problem of these banks is set forth well by Mr. Joseph T. Talbert,
Proceedings of the Academy of Political Science, Vol. IV ( 1913-1914 ), pp.
197-198.

214

CLEARING AND COLLECTION OF CHECKS

failed to accomplish the desired result and opposition became
more pronounced. The nature and growth of this opposition will
be reviewed briefly after mentioning some of the more important

changes made in the operation of the Gold Settlement Fund.
Changes in the operation of the Gold Settlement and Federal Re
serve Agents' Funds

Since Chapter VIII gives a full account of the history and
nature of the Gold Settlement Fund, it will be necessary to survey

but briefly the principal changes that were made relative to its
operation. Details relative to the increased use of the Fund can
be found in Table XXVII , p. 318.

The first important change affecting the Gold Settlement
Fund after its creation on May 24, 1915, was the result of the

amendment of June 21 , 1917. Regulations in harmony with this
amendment, which applied to the Federal Reserve Agents' Fund
also, abolished the use of gold certificates as evidences of deposits
made by the Federal reserve banks with the United States Treas
ury, as they had grown in such amounts as to be aа burden. Under

the old system these certificates in denominations of $10,000 were
constantly being transferred from the Treasury to the Federal
Reserve Board and back again, according to whether Federal re
serve banks were building up their deposits with the Board or

withdrawing them. This amendment reduced the transactions to
merely bookkeeping operations. The Treasurer of the United
States simply opened an account with the Federal Reserve Board,
giving credit to the Board for the sum of the deposits of the Fed
eral reserve banks, the individual accounts being kept as before
by the Federal reserve banks. When a Federal reserve bank
wished to build up its deposit in the Gold Settlement Fund it de
posited gold with the nearest sub-treasury. The Assistant Treas
urer gave a receipt to the Federal reserve bank , wired the Treas
urer of the United States, who issued a duplicate receipt to the

Federal Reserve Board, and credit was given to the Federal re
serve bank upon the books of the Gold Settlement Fund. Pay
ment out of the fund was made by the Federal Reserve Board
drawing a check upon the Treasurer of the United States, who
now held the gold ."94
The leased wire system , June 4, 1918
On June 4, 1918, the Federal reserve banks began operating a

special leased wire system by which all Federal reserve banks and
"Federal Reserve Bulletin , Vol. III ( 1917 ) , p. 521 .

FEDERAL RESERVE CLEARING AND COLLECTION 215

branches, the Federal Reserve Board, and the Treasury Depart
ment at Washington, were kept in communication with each other.
Prior to this time the Federal reserve banks had used the commer
cial wires. Good service had been given, but the volume of busi
ness was increasing to such an extent that it seemed the better

part of wisdom for the Federal reserve banks to control their own
wires. The installment and operation of this system, which has
been used continuously since, has facilitated not only settlements
through the Gold Settlement Fund but has greatly facilitated
many other operations of the Federal reserve banks and rendered
possible services to member banks which could not have been under

taken without this facility. Under this system Washington and
Chicago were made relay points for the East and West, respec

tively. The Federal Reserve Bank of Chicago was given charge
of the operations of the system, and the chief telegraph operator
is stationed at the Chicago office, with a supervising operator at
Washington as an assistant. In 1918 there were twenty-nine
operators, including the chief, employed in the main line offices,
and about 20,000 messages carried monthly over the system,
while 65 per cent. of this number were relay.95 The leased wire
system made possible the daily settlements which were provided
for about one month later.

Daily gold settlement plan , July 1, 1918
Daily settlements through the Gold Settlement Fund were

substituted for the weekly settlements on July 1 , 1918. This ren
dered the transfers and clearings through the Fund much more

effective and much better organized. It brought about the proper
adjustments in the holdings of gold to the credit of each Federal
reserve bank in 'the Gold Settlement Fund in as nearly automatic

a manner as possible. Under the weekly settlement system many
credit transfers were being made by the Federal reserve banks

between settlement periods and the practice was on the increase,
although it covered but a small proportion of the credits. Daily
settlements meant a better organized and a more effective system
in every respect.96
Under the system of daily settlements as originally devised,
the settling agent made his settlements on the morning following
the wiring of the credits by the Federal reserve banks to the Fed
eral Reserve Board . The Federal reserve banks, upon receipt of
* Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 558-559 .
* Federal Reserve Bulletin, Vol. IV ( 1918 ) , p. 591 .

CLEARING AND COLLECTION OF CHECKS

216

these advices would make the appropriate entries as of the day on

which they received the advices. Thus, the payments through the
Gold Settlement Fund were always at least one day late. In order
to eliminate any inter-Federal reserve bank float that might be
carried by the Federal reserve banks, a system of evening settle
ments was provided for on March 1 , 1920.

According to this

plan each Federal reserve bank and direct - settling branch tele
graphs the Board its credits before the final closing of its books
for the day . The settling agent makes settlements the same day
and telegraphs to the Federal reserve banks and settling branches
in time for the telegram to reach them before the opening for

business on the following day when the necessary entries are made
and their books finally closed as for the preceding day .
Certain branches of Federal reserve banks clear directly through
the Gold Settlement Fund97

In order to eliminate unnecessary work between the Federal
reserve banks and their branches and other Federal reserve banks,

and delays in reconciling differences due to the distances between
the parent bank and branches, a plan was instituted by which cer
tain branches were authorized to make settlements through the
Gold Settlement Fund in the same manner as the Federal reserve

banks, except that the net debit or credit balance of each branch
in the Fund is adjusted through the Gold Settlement Fund ac
count of the parent Federal reserve bank, as the branches do not
maintain accounts with the Fund. On December 2, 1918, the first

move in this direction was made, when the four branches of the

Federal Reserve Bank of San Francisco98 were authorized to
make settlements directly through the Gold Settlement Fund.
Relation of the Gold Settlement Fund to rediscounting between
Federal reserve banks

Rediscounting between Federal reserve banks was not resorted
to until June, 1918, although rediscounting by Federal reserve
banks for their own member banks began in November, 1914,
soon after the Federal reserve banks opened for business.
"See pp. 186-187 above.

" Located at Seattle, Spokane, Portland, and Salt Lake City. Fifth Annual
Report of the Federal Reserve Board ( 1918 ), pp. 32-35. Los Angeles now
constitutes a fifth branch. Of the 23 branches of Federal reserve banks in
existence today all but the following seven are direct -settling branches : Pitts

burgh , Buffalo , Cincinnati, Birmingham , Jacksonville, Nashville, and Okla
homa City

FEDERAL RESERVE CLEARING AND COLLECTION 217

The process of rediscounting between Federal reserve banks
and its relation to the Gold Settlement Fund may be described

briefly as follows : The Federal reserve bank requiring the redis
count for the purpose of increasing its reserve against deposits or
Federal reserve notes wires the Federal Reserve Board, stating
the amount needed99 and the character and maturities of the paper
offered . The Board, which is at all times advised of the reserve

position of each Federal reserve bank , designates the bank to

which the rediscount is to be assigned.100 Upon receipt of this ad
vice, the second Federal reserve bank transfers the gross amount
to the other Federal reserve bank through the Gold Settlement

Fund, although this transfer is not included in the regular settle
ment growing out of the clearing and collection of checks. The
discount is calculated by the bank requesting the discount and

later is verified by the other Federal reserve bank, to be handled
as an ordinary credit and cleared through the Gold Settlement

Fund on the next settlement day. Maturing discounts are paid in
like manner by means of transfers through the Gold Settlement
Fund, made independently of the regular settlement.101 It should
be observed that these rediscount transactions between the Fed

eral reserve banks are not included in the settlements growing out
of the clearing and collection of checks and drafts, which are
effected daily, but are carried on independently.102 They are
settled directly at any time and the transactions are consummated
in a very few minutes, depending upon the details to be adjusted
between the Federal reserve banks.103 Settlements growing out of
the exchange of Federal reserve notes between Federal reserve
banks, transfers from the Gold Settlement Fund of a Federal re
serve bank to the gold fund of its Federal reserve agent, and vice

versa, and transfers to the redemption funds, are also settled in
dependently of the daily settlements which result from the clear
ing and collection of checks. 104
" Usually $ 5,000,000 or some multiple thereof.
100 The transactions through the Fund have an important bearing upon the

reserve position of the banks, and as all entries affecting the Fund are made
on the books of the Board and all the banks simultaneously, the Board is
informed at once as to the effect of the day's transactions upon the reserves
of each bank.

101Letter No. 7, pp. 11-12.

102Practical Operation of the Gold Settlement Fund, Letter No. 8, Federal
Reserve Bank of Richmond (October, 1922 ) , p. 4. Hereafter cited as Letter
No. 8.

163Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 33-35 .

104See pp. 315-319 below.

CLEARING AND COLLECTION OF CHECKS

218

The growth of membership in the Federal Reserve System
Before reviewing the growth of membership in the clearing and

collection system additional light will be thrown on that partic
ular problem by reviewing first the growth of membership in the

Federal Reserve System . Obviously, the growth of membership in
the Federal Reserve System is to be separated from the question
of the growth of membership in the clearing and collection system ;
the latter includes the former and involves problems different from
those connected with the former.

The provision of the Federal Reserve Act, making membership
compulsory for national banks, brought all of them at once into

the system as the price of retaining their charters. By the end
of 1914, ninety-three State banks and trust companies had been
converted into national banks. During the same year nine State
banks and four trust companies were admitted to the system as
members. 105 The following table shows the growth of membership
in the system :
TABLE XX

GROWTH OF MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM,
1914-19241

Member banks
End of
year
1914 .
1915 .
1916 .
1917 .
1918 .
1919 .

1920 .
1921 .
1922 .
1923 .
1924 .

Total
7,582

National

Non
national
8

9,066
9,606

7,574
7,600
7,577
7,657
7,762
7,885
8,125

9,779

8,165

9,859

8,220

1,614
1,639

9,774
9,587

8,179

1,595

8,043

1,544

7,631
7,614

7,907
8,692

31
37

250
930

1,181
1,481

Federal Reserve Bulletin, Vol. IX (1923 ), p . 1175 ; Tenth Annual Report of
the Federal Reserve Board ( 1923 ) , p. 47 ; Federal Reserve Bulletin , Vol. XI
( 1925 ) , p. 219.

State institutions entered slowly. The above table shows that
there were but 31 non-national member banks at the close of the
105First Annual Report of the Federal Reserve Board ( 1914 ) , p. 20. Unfortu

nately the data given here do not agree with those given in Table XX ,
which were taken from the Federal Reserve Bulletin, Vol. IX ( 1923 ), p . 1175.
Nor do they agree with data given by Mr. Pierre Jay in " The Federal Reserve
System , State Banks and Par Collections,” Annals of the American Academy

of Politicaland Social Science, Vol. XCIX ( January, 1922), p. 79. He says:
" The provision of the Act making membership compulsory for national banks,
brought at once into the System about 7,600 national banks with capital and
surplus of $ 1,788,000,000 and total resources of $ 11,492,000,000, thus giving a

membership at the outset comprising 42.6 per cent of the total resources of the
country .” He does not state whether any State institutions entered the system
during the years 1914 or 1915.

FEDERAL RESERVE CLEARING AND COLLECTION 219

year 1915, that is, that but 23 had entered during the year
1915.106 The year 1916 witnessed a slight decrease in the total
membership of the system . The number of national banks declined
from 7,600 to 7,577 and the number of non -national banks in

creased from 31 to 27 if the data in the table given above may be
taken as authoritative. Mr. Pierre Jay107 pointed out that most of
the State institutions were either passive or opposed to the plan of
the Federal Reserve System . The number of such members at the
close of 1916 was 37, of which only seven had a capital and sur

plus of over $1,000,000. Membership on the part of the State
banks increased in 1917 as a result of two things : ( 1 ) The amend
ment of the Act108 in that year which permitted State banks to

carry on their banking business in substantially the same manner
as they had done previously, with the right to withdraw from the
system upon six months' notice. ( 2 ) The entrance of the United
States into the World War gave a new and strong impetus toward

membership. The necessity of strengthening the banking system of
the country to the maximum degree possible, in order to meet the
strain of war financing, led President Wilson in the autumn of 1917
to make a strong appeal to State banking institutions to join the
Federal Reserve System. The officers of Federal reserve banks
carried the appeal to the individual institutions. Many of the
more important ones responded and during the fall of 1917 and
the first half of 1918, a considerable number of State institutions

throughout the country became members. The movement was
particularly noteworthy with respect to the aggregate resources
which thus augmented the strength of the system. The major
portion of the large institutions in New York City entered the
system promptly, and the close of the year 1917 found the system
with a State bank and trust company membership of 250, having
aggregate capital and surplus of $520,000,000 and aggregate
resources of about $ 5,000,000,000. This represented 2.9 per
cent . of the number and 37.3 per cent . of the resources of the

State institutions eligible for membership.109 The Federal Reserve
Board estimated that the total membership of the Federal Reserve
104Again one finds a lack of agreement in data presented by the Federal Re

serve Board. The Second Annual Report of the Federal Reserve Board ( 1915 ) ,
p. 13, says: “ While the attitude of State banks and trust companies has been

such that but 32 have been admitted to membership, 84 others have become
members by conversion or by organization as national banks during 1915. ”
101 Op. cit. , pp. 79-80.
108Amendment to Section 9 of the Federal Reserve Act, approved June 21 ,
1917 .

10®Fifth Annual Report of the Federal Reserve Board ( 1918 ) , p. 27.

220

CLEARING AND COLLECTION OF CHECKS

System at the close of the year 1917 represented about 75 per
cent. of the total commercial banking assets of the country.110
From the year 1917 to the end of the year 1922 there was a

steady annual increase in both national and non-national banks.
The year 1918 witnessed a large increase in the number of non

national banks admitted to membership—930 as against 250 at
the end of 1917.111 These 930 non-national banks had total re
sources of over $7,000,000,000.112 The Federal Reserve Board
estimated that the membership of the State banks and trust com
panies represented at that time 54.5 per cent . of the total banking

assets of all State banking institutions eligible for membership in
the Federal Reserve System, although but 11 per cent. of the
number eligible for membership.

With the end of the War there came a slowing down of the
efforts of the Federal reserve banks to convince institutions of the
importance of becoming members of the Federal Reserve System,
although there was a substantial movement of State institutions
into the system. The laws of many States contained provisions
concerning reserves, character of investments or other vita!

matters which hindered or prevented institutions in those States
from taking membership in the system . As these obstacles from
time to time were removed, more and more State institutions took
advantage of the opportunity to join. Many States, for example,
have passed laws providing that a State institution, becoming a
member of the Federal Reserve System , need keep only the legal
reserves required by the Federal Reserve Act.

The influence of

this factor is strikingly illustrated in California where 61 institu
tions with total resources of $1,110,000,000 became members in

the eighteen months following the amendment of the State law in
respect to reserves to be carried by member banks. 113 With the

end of the War it was expected that some of the State banks
would withdraw , as some of them had entered the system with that
intention, but their experience as members was such that but few
withdrew. In 1919 the membership of non-national banks in
creased from 930 to 1,181 , representing a total capital and sur
plus of over $891,200,000, and total resources of about $ 9,913 ,

700,000. In 1920 the non-national bank membership increased
110Fourth Annual Report of the Federal Reserve Board ( 1917 ) , p. 14.
111At this time the American Bankers' Association was conducting an active
campaign for membership .

112Pierre Jay, op. cit., p. 80. The Fifth Annual Report of the Federal Reserve
Board ( 1918 ), pp . 25, 27 , says there were 936 such institutions on January 1,
1918, having aggregate resources of about $ 7,339,000,000 .
112Pierre Jay , op. cit. p . 80.

FEDERAL RESERVE CLEARING AND COLLECTION 221

from 1,181 to 1,481 , representing capital and surplus of $ 1,035 ,
023,000 and total resources of $9,826,794,000. In 1921 the
number had increased to 1,614, with capital and surplus of
$1,110,663,000 and total resources of $9,904,860,000.114 In
1922 the number reached 1,639 with an aggregate capital and
surplus of approximately $ 1,175,000,000 and total resources of
$ 11,917,000,000. According to the Annual Report of the Fed
eral Reserve Board for that year,,115 there were, on June 30,
1922, 30,325 banks in the United States116 with an aggregate cap
ital and surplus of $5,599,134,000 and resources of $ 50,147,
513,000. Of these institutions 9,892 were members of the Federal

Reserve System, with a capital and surplus of $3,496,319,000
117 The resources of member
and resources of $ 31,723,950,000.11

banks of the Federal Reserve System therefore constituted about
63 per cent . of the total banking resources of the country. There
were 9,678 State banks and trust companies with capital stock
sufficient to enable them to become members which were not mem

bers at the end of June, 1922, their aggregate capital and surplus
being $ 1,209,115,000 and their resources $8,983,580,000. If the
mutual savings and private banks which are not eligible for mem
bership are excluded, it is found that at the end of June, 1922, the
national banks and State banks and trust company members rep

resented about 78 per cent. of the banking power of all banks
eligible for membership.118
On June 30, 1923, the total had dropped to 9,856, of which
8,236 were national banks and 1,620 State banks and trust com

panies. Approximately 33 per cent . of all the banks, represent
ing over 70 per cent . of the total banking resources of the coun

try, were members of the system. By the end of the year 1923
the total had dropped to 9,774, of which 8,179 were national and
1,595 were non-national.

The reduction of 85 in Federal reserve

membership for the year 1923 was the net result of the addition
of 210 member banks and the loss of 295.

Of the banks added to

the membership, two were banks previously closed which resumed
11*Eighth Annual Report of the Federal Reserve Board ( 1921 ), p . 60. On p .
59 of the Eighth Annual Report of the Federal Reserve Board , the number

is given as 1,621 . Such repeated inconsistencies in data are unfortunate.
115Ninth Annual Report of the Federal Reserve Board ( 1922 ) , p. 29.
110Including national and State commercial banks, mutual and stock savings
banks, private banks, and loan and trust companies.

117If this statement is correct it seems that the total membership in the Fed
eral Reserve System reached its peak about June 30, 1922, since the total mem

bership at the end of the year was but 9,859 and has declined since that time.
118 Vinth Annual Report of the Federal Reserve Board ( 1922 ) , p. 29.

.
Francisco
San

Total
December
..
31

Dallas

Kansas
City

Minneapolis

.
Louis
St.

Chicago

Atlanta

Cleveland
Richmond

Philadelphia

Boston
York
New

Reserve
District

Federal

banks

802

9,774

9,856

849

1,122

940

624

803

857

1,145

989

1,427

8,236

602

658

1,106

868

497

1,062

8,179

659
607

1,086

831

497

1,058

561
385

561
389

627

525

629

530
1,434
621

759

764

877

660

680

835

30
June
390

722

Bulletin
'F19
ederal
ol
923
X
176
3VReserve
(1;I
924
.),pX

1,620

201

199

39

122

124

372

141

68

116

1,595

190
195

36

127
109

369

66
140

118

1,637
21,502
22,395

2,940

33,796
35,239

864

978

1,013
1,376

912

1,443
1,133
1,542

2,813

768

1,743
5,193
1,881
2,027
1,275

30
June

National
banks

banks, and 121 were formerly non-members which joined the
activities during the year, 89 were newly organized national
12,843

12,294

1,303

114

166

120

531

2,135

423

206

1,322

520

4,689

Non
national
banks
30
June
765

millions
(In
dollars
)of

Resources

FEDERAL
THE
IN
MEMBERSHIP
J
SYSTEM
UNE
31
DECEMBER
AND
,1RESERVE
"30
923.

1,191
4,948

1,481

3,349

Non
Non
national AU
National national
banks
banks
banks
banks
June
June
30
30
31
Dec.
31
Dec.
37
36
2,508
388
692
9,882
143
141
66
656
60
2,401

National

429

All
banks
31
Dec.

880

720

All
banks
June
30
427
821

Number

XXI
TABLE

222

CLEARING AND COLLECTION OF CHECKS

system. Of the losses in membership, mergers accounted for 87,

of which the largest number were in the San Francisco district ,

FEDERAL RESERVE CLEARING AND COLLECTION 223

voluntary liquidation accounted for 31 , absorption by non-member
banks for 48, voluntary withdrawal of State banks and trust
119

companies for 29, and insolvencies or suspensions for 102.1

A survey of the distribution of membership by Federal reserve
districts shows that the largest number of member banks is in the
four middle western districts, which have nearly half the member
banks, while the larger proportion of member bank resources, as

is to be expected, is in the eastern districts, nearly a third of the
total resources being in the New York district alone. The non
national banks, which constitute less than one- sixth of the number

of member banks, represent more than one-third of the resources.
This reflects the much larger average size of State bank and trust
company members than of national banks.

In fact, the total

resources of the more than 8,000 national banks are about $ 22,
000,000,000, or an average of about $2,500,000, while the total

for the 1,600 State bank and trust company members is about
$ 12,000,000,000, or an average of about $7,500,000.120 Table
XXI shows the situation.

For the country as a whole, two-thirds of all the banks, both
eligible and ineligible, are still outside the system, although they
represent less than one-third of the total banking resources. The
geographic distribution of non -member banks is far from uniform.

The largest number of such banks is concentrated in the agricul
tural districts, while in the eastern financial and industrial dis

tricts the proportion of the non -membership is low . The follow

ing table shows the percentages of non-member banks by dis
tricts : 121
Boston

New York

Philadelphia
Cleveland
Richmond

Atlanta

Per cent.
35
30
41
55
71
74

Per cent.

Chicago

75

St. Louis

81

Minneapolis
Kansas City .

73
73
55
54

Dallas

San Francisco ..

The Agricultural Credits Act of 1923, passed on March 3 of
that year, provided for a committee to inquire into the reasons
that have actuated eligible non-member banks in remaining out
side of the Federal Reserve System. This committee, consisting
11ºTenth Annual Report of the Federal Reserve Board ( 1923 ) , p. 48 ; for a
discussion of the changes during the year 1924, see Federal Reserve Bulletin ,

Vol. XI ( 1925 ) , pp . 218-219. Although the total membership has declined since
1922, the resources of the members have increased from $33,883,000,000 at the
end of 1922 to $ 38,987,000,000 at the end of 1924.

120Federal Reserve Bulletin, Vol. IX ( 1923 ) , p. 1176.
121 ]bid .

224

CLEARING AND COLLECTION OF CHECKS

of three members of the Banking and Currency Committee of the

Senate and five members of the corresponding committee of the
House of Representatives, has been conducting hearings and has
heard the views of the Governor of the Federal Reserve Board,

the Comptroller of the Currency, other members of the Federal Re
serve Board, members of the Federal Advisory Council, the Direc
tor of the War Finance Corporation , members of the Farm Loan

Board, and representatives of banking and farm organizations.122
This committee has learned that capital requirements have not

been the chief impediment to increased membership. Since the
Agricultural Credits Act of 1923 reduced the capital require
ments, making about 4,200 more State banks and trust compa
nies eligible for membership , but one application for membership

from the new group made eligible was received up to the end of
November, 1923. It appears that the reserve requirements of the
Federal Reserve System can offer little, if any, inducement,

although the total required balances that must be carried with the
Federal reserve banks plus the till money now carried by member
banks is somewhat less than the cash they formerly carried in
their vaults. Many of the States subsequently enacted legisla
tion reducing the reserve requirements, so that at present,

although there is no uniformity in the State requirements, in gen
eral the reserves required of non-member banks are lower than
they were prior to the establishment of the Federal Reserve Sys
tem . In 30 States member banks are controlled by the require
ments of the Federal Reserve Act, while in 18 States banks must
conform to both Federal and State law.123

The fact that the

Federal reserve banks do not pay interest on deposits seems to act
as a deterrent. The committee thinks that the addition to mem

bership of the smaller rural banks would add little to the reserves
of the system, while it would increase its responsibilities . The
desirability of their admission rests not upon their contribution
to the strength of the system , but upon the fact that through their
admission the benefits of the reserve system would be more widely

distributed, especially to the communities which these non
Mr. Pierre Jay125 points out also that
many of these banks have learned that they can enjoy many of
member banks serve. 124

the advantages of the system, such as the avoidance of the old
122 1bid ., p. 1175.
123 Ibid ., p . 1178.
124Ibid ., pp . 1178-1179.

1250p. cit., p. 81 .

FEDERAL RESERVE CLEARING AND COLLECTION 225

fashioned money panic and the stabilization of banking conditions,

without assuming any burdens of membership. Finally, and
above all, there is the opposition to the plan of par check collec
tion, the subject with which we are primarily interested, and to
which we now will turn our attention, although a separate chap
ter is devoted to this problem .
The growth of the clearing and collection system

Since a detailed account of the growth and opposition to the
Federal reserve clearing and collection system is given in Chapter
VII, a brief resume will suffice at this time.

Although the original provisions of the Federal Reserve Act
did not authorize Federal reserve banks to collect checks on non
TABLE XXII

MEMBERSHIP IN THE FEDERAL RESERVE CLEARING AND
COLLECTION SYSTEM

Total

non -member
banks,
Non-

member computed
banks

Non -member
Member

banks on
par list

Date

banks

Aug. 15, 1916

7,624
7,622
7,9094

7,032
8,130

8,692
9,089

Jan. 15, 1917
Jan. 15, 1918

9,268

Jan. 15, 1924

9,875

10,595
16,9864
19,101
18,066
17,777
16,484

May 31 , 1924

9,785

15,981

Jan. 15, 1919

Jan.
Jan.
Jan.
Jan.

15,
15,
15,
15,

1920
1921
1922
1923

9,637
9,847
9,911

Total on

not on

par list

par list

14,656
15,752
17,177
19,287

10,336
9,923

26,075

28,738
27,913

27,688
26,359
25,766

from
columns
3 and 5

3,566
1,7056

20,604
20,518
20,552
20,806

2,350
2,289
3,013
3,240

20,416
20,066
19,497
19,221

"Compiled from Federal Reserve Bulletins and Annual Reports of the Fed
eral Reserve Board.

" This item as given in the Federal Reserve Bulletin , Vol. V (1919 ) , p. 775,
does not harmonize with data given on p. 181 of the same volume.
' In some places this item is given as 16,985 , in others as 16,986.

* This month also marks the peak for the number of non -member banks on the
par list.

member banks, as many as 7,032 such banks had agreed to remit
at par by August 15, 1916, making a total of 14,656 member and
non-member banks on which the Federal reserve banks could col

lect checks at par on that date. On September 7, 1916, Section
13 was amended so as to authorize the Federal reserve banks to

receive for collection from any member bank or other Federal re
serve banks checks drawn upon non-member banks and trust com

panies within their respective districts and payable upon pres

226

CLEARING AND COLLECTION OF CHECKS

entation.126 By December 15, 1916, only 37 of approximately
20,000 State banks had become members of the Federal Reserve

System and about 8,065 of the non -member State banks had
agreed to remit at par.127 An amendment of June 21 , 1917, made

it possible for the Federal reserve banks to act as collecting agents
for non -member banks provided they carried sufficient deposits
with the Federal reserve banks to offset the cash items being col
lected. The concentration of reserves, the development of a col

lection system for maturing notes, bills and drafts, the introduc
tion of a system of transfer and exchange drafts and of wire
transfers, the assumption by the Federal reserve banks of the
expenses of currency shipments and remittances, combined with

campaigns for increased membership, resulted in a steady increase
in membership until January, 1921 , after which time there came
a gradual decrease . The table on page 225 will give a summarized
picture of the situation.

Opposition to the clearing and collection system

Strenuous opposition to the clearing and collection system
developed from member as well as non-member banks, the princi
pal opposition coming, however, from the non -member exchange
charging banks. These banks opposed the extension of the par
clearing and collection system on the ground that they were de

prived unjustly of a source of income since there was a real expense
involved in paying checks at places other than at their own
counters . This objection, which was the chief one, was bolstered
up by various minor ones, such as their contentions that Congress
had never intended that they should not charge for remitting,
that holders of checks have no unlimited right to collect them in
cash or in unlimited amounts, that the methods used by the Fed
eral reserve banks to collect checks on them were oppressive and

consequently illegal , that the principle of par remittance cannot
be justified on any ground other than that remission by the bank
is a service to the drawer of the check which these banks con

tended it was not, and finally, that the holder of a check has no
right to demand payment of a check except at the bank on which
drawn.

Opposition on the part of these banks assumed various forms.
They resorted to dilatory tactics in tendering payments ; they
stamped various kinds of legends on their checks in order to pre
120 Third Annual Report of the Federal Reserve Board ( 1916 ) , p. 134.
17 Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 790.

FEDERAL RESERVE CLEARING AND COLLECTION 227

vent the Federal reserve banks from presenting them for pay

ment ; they organized the National and State Bankers' Protec
tive Association in order to present a unified front in opposing
the system ; they succeeded in persuading various State legisla
tures to pass acts designed to protect them in the practice of
charging exchange ; they petitioned Congress for hearings and
amendatory legislation ; and finally, they resorted to suits and
injunctions in an effort to protect themselves in what they con
ceived to be their rights. A more complete treatment of this op
position is deferred until Chapter VII is reached. At this time it ,

will be sufficient to point out the consequences that have resulted
from the opposition. Certain important principles have been,
established as a result of various court decisions, which on the
whole, have been favorable to the opposing banks.
The most outstanding principles of the clearing and collection
system which may be said to obtain today as a result of the court
decisions may be summarized as follows :
The Federal reserve banks, as collecting agents, have the right
to present checks directly to the drawee banks for payment with
out deduction ( assuming there are no State laws to the contrary ) ,
even though such a procedure may inconvenience the drawee banks
somewhat, provided the Federal reserve banks do not abuse their
power by accumulating checks with the intention of embarrassing
and coercing banks.128 In the same case the United States
Supreme Court upheld the lower courts which had ruled that the

Federal reserve banks, in publishing the names of the banks on
their par lists, that is, the names of the banks on which they would
attempt to collect checks at par, could not include the names of
banks which had not given their consent. It had been the practice
of the Federal reserve banks in making up their par lists to include
any banks on which they would undertake to collect checks at par
by direct presentation over the counter regardless of whether the
banks consented or were aware that their names were to be pub
lished .
The so-called San Francisco par collection case defi
nitely established the principle that a Federal reserve bank cannot.
use the check collection system to coerce non -member banks to
128 A merican Bank and Trust Company et al. v. Federal Reserve Bank of At
lanta et al., 284 Fed . 424 ( 1922 ) . An appeal was taken from this decision ,
which was rendered in the United States Circuit Court of Appeals, to the
United States Supreme Court, which upheld the lower court . See American
Bank and Trust Co. et al. v. Federal Reserve Bank of Atlanta et al., 262 U. S.

643 ( 1923 ). . These cases are discussed at some length in Chapter VII; see es
pecially pp . 260-263 below .

CLEARING AND COLLECTION OF CHECKS

228

remit at par.129 The same principle was declared in the Cleveland
In the Richmond
.
par collection case decided in the same year 130

par collection case the United States Supreme Court upheld an
act passed by the legislature of North Carolina which had for its

purpose the protection of the non -member State banks in their
attempts to make exchange charges for remittances.131

In this

case the United States Supreme Court held that non-member
banks could discharge their obligations lawfully by means of a
draft when checks were presented for payment unless the bank's

depositors, that is, the drawers of the checks, stipulated other
wise, as the bank's obligation, according to the Court, is to the
depositor and not to the holder of the check ; that the payment of
the Federal reserve bank by drafts on reserve deposits did not
deprive the Federal reserve bank of any legal right protected by
due process of law132 ; that the State had a right to direct such an
act against the Federal reserve bank if it considered it an instru
ment oppressing State banks ; that the Federal Reserve Act is
permissive only and does not place any obligation upon the Fed
eral reserve banks to collect on non -member banks which do not

wish to remit at par ; and finally, that Congress did not confer
upon the Federal Reserve Board or Federal reserve banks a duty
to establish universal par clearance and collection of checks.
As aa result of and in conformity with the rulings of the courts,

the Federal Reserve Board made new rulings to the effect ( 1 ) that
no Federal reserve bank shall receive on deposit or for collection
any check drawn on a non -member bank which refuses to remit
at par in acceptable funds, and ( 2 ) whenever a Federal reserve

bank receives on deposit for collection a check drawn by, en
dorsed by, or emanating from any non -member bank which re
fuses to remit at par in acceptable funds, it shall make a charge

for the service of collecting such check of 1/10 of 1 per cent. , the
120Brookings State Bank v . Federal Reserve Bank of San Francisco, 281 Fed.
222 ( 1922 ) . See pp . 263-266 below.

150Farmers and Merchants Bank of Catlettsburg, Ky . v. Federal Reserve
Bank of Cleveland, Ohio, and Mary B. McCall, 286 Fed. 610 ( 1922 ) . See pp.
266-269 below.

131Farmers and Merchants Bank of Monroe, North Carolina, et al. v. Federal

Reserve Bank of Richmond, Virginia , 262 U. S. 649 ( 1923 ) . See pp. 269-276
below .

152 In the case of Federal Reserve Bank of Richmond v. Malloy et al., Trad
ing as Malloy Brothers, 44 Sup . Ct. 296 ( 1924 ) , the same Court held that

that the Federal reserve banks acting as collecting agents could not accept such
drafts without assuming liability to the payee banks for any losses that might
result from the acceptance of drafts instead of cash. See pp. 284-286.

FEDERAL RESERVE CLEARING AND COLLECTION 229

minimum charge to be 10 cents for each item.133 Regulation J,
Series of 1923, which embodied these two rulings was to have been

effective August 15, 1923, but was postponed and finally sus

pended , Regulation J, Series of 1920, again becoming effective.
In November, 1923, the Board also directed the Federal reserve

banks to discontinue the use of agents other than banks for the
purpose of making collections at par upon non -member banks in
any district in which such practice still existed.134 On May 9,
1924, the Board issued Regulation J, Series of 1924, which super

seded the regulation of 1920 and which includes the following
ruling: “ No Federal reserve bank shall receive on deposit or for
collection any check drawn on any non -member bank which can
not be collected at par in funds acceptable to the Federal reserve
bank of the district in which such non -member bank is located .”

In addition, the Federal reserve banks, under authority of this
regulation, require all banks which use them as collecting agents
to enter into an agreement releasing them from any liability for
losses incurred in accepting drafts in payment for items sent for
collection. 135
Success of the Federal reserve clearing and collection system

Despite the fact that the Federal reserve clearing and collec
tion system is far from universal in its application, is bitterly
opposed by certain interests, and is impeded somewhat by adverse
State legislation and court decisions, it must be conceded that the
system is highly successful in the main, and marks a distinct

achievement in banking progress. It has reduced the time factor
and facilitated the use of deposit currency, the most efficient,
economical and elastic sort of currency ; it has reduced the cus
tomary float to a negligible factor and thereby increased the
solidity and reality of the reserves which support the superstruc
ture of credit, a fact appreciated by bankers and economists,
especially since witnessing the disastrous effects of the tremendous
float that had been present prior to and had been one of the im

portant factors contributing to the panic of 1907. It has relieved
business of a burden in the form of exchange charges, reduced the
charges to a small per cent . of what they were formerly and has
distributed the expense which is now almost negligible in a more
133Regulation J, Series of 1923, Federal Reserve Bulletin, Vol. IX ( 1923 ) ,
pp . 903-904.

13*Federal Reserve Bulletin , Vol. IX ( 1923 ) , p . 1194.

120Federal Reserve Bulletin , Vol. X ( 1924 ), p. 489. A fuller discussion of
this subject is given on pp . 282-288 below .

230

CLEARING AND COLLECTION OF CHECKS

equitable manner. It has made it much easier to transfer funds

and mobilize reserves where most needed with little, if any, physi
cal movements of gold, and with little, if any, discrepancies in
discount rates between different sections of the country.136

Cer

TABLE XXIII

AVERAGE DAILY NUMBER AND AMOUNT OF ITEMS HANDLED,
1916-1918 , INCLUSIVE ."
Average
Average
Average
Average
daily
daily
daily
number
amount
daily
For month
ending
15th of
1916

August
September

number

amount

of items

of items

of items
handled
drawn

of items
handled

handled

handled

drawn

drawn
on banks

on U. S.

drawn
on U. S.

government

government

on banks
133,113
177,397
204,891
227,489
236,038

$ 59,301,696
78,559,704

March

241,933
220,421
234,475

April

231,777

May
June

238,288

October
November
December
1917

January
February

97,666,107
115,061,224

125,603,732

November

251,061
293,742
325,690

December

343,787

121,814,589
110,188,028
116,404,430
127,648,503
160,680,956
174,236,737
197,489,674
176,410,219
182,303,483
220,732,251
283,938,810
314,623,152

359,067

292,585,856

38,130

325,301
369,898
388,058
399,812
407,866

282,785,363

48,224

321,805,317
319,977,817

58,991
59,228

366,126,872

60,771
77,750

July
August
September
October

250,241
255,039
243,625

12,582
15,925

16,344
19,100
19,533
23,492

$ 2,643,408
3,597,865
4,414,508
11,637,899
9,701,569
11,006,515

26,797

13,518,566

30,426

17,496,974
27,179,053

33,806

1918

January
February
March

April
May
June

July
August

September
October
November
December

588,710
649,827

346,005,014
427,741,091
373,404,503
397,327,936
448,657,299

717,714

490,142,831

106,539
98,168

764,185

452,935,793

135,173

538,984
546,358

82,536
81,323
87,213

21,116,293
21,316,033
25,827,757
31,563,675
30,928,185
39,054,003

47,181,467
41,063,646
45,695,643
51,048,149
52,790,232
60,766,938

* Federal Reserve Bulletin , Vol. V ( 1919 ) , p. 775.

tainly no one who has the interests of the country at heart could
advocate a return to a system similar to the one that existed
prior to the establishment of the present one. It seems equally
certain that advocates of measures which hamper the further de

velopment of the present system to its logical conclusion must
124See pp. 319-326 on inter-district gold movements.

1921

No.
Year

bank
city

Federal
reserve
branch
cities

Federal
reserve

.years
method
data
reporting
of
in
change
the
to
due
1914-1918

cities

in
banks
on
drawn
Items

1919-1923

TABLE XXIV

districts
reserve

Other
Items
Federal
outside
District
drawn
on

(Nmounts
.A
in
umbers
)thousands
dollars
of

bear the burden of proof and must present grounds of justifica
tion which cannot be understood now to be in the interest of the

country at large or in the interest of sound banking.
Reports
Annual
from
.*Ctompiled
Board
Reserve
Federal
of
Iis
this
develop
impossible
the
cover
to
table

42,804
108,479,604
94,643
465,736
34,612,128
48,146,789
35,803
85,996
190
639,176
4,511,735
195,836,252
.
1923

17,320,887
39,54
87,698,642
162
40,082,121
413,670
48,641
5,014,383
33,980
584,873
150,164,674
.
1922
97,517

33,142
58,365,284
377,845
16,297,746
104
38,509,597
22,017
33,200
5,649,747
522,665
118,844,391
78,374

43
305,159
14,518,471
32,900
37,240
46,340,904
214,177
13,115,715
14,832
62,481,093
136,493,423
43,206
.
1919
23,593
75
57,083,187
337,628
20,228,821
23,447
72,494,620
6,679,043
27,367
156,509,264
452,116
61920
. 3,599

.N. o.
Amt

Tof
) reasurer
bank
drawee
to
duplications

Total
items
Federal
freserve
branch
and
bank
orwarded
ehandled
(direct
States
United
xclusive

AND
YEARS
FOR
SYSTEM
COLLECTION
CLEARING
RESERVE
FEDERAL
THE
OF
OPERATIONS

FEDERAL RESERVE CLEARING AND COLLECTION 231

CHAPTER VII

THE PAR COLLECTION CONTROVERSY

Growth of opposition to the Federal reserve par collection system 1

In the development of the Federal Reserve System in general,
opposition to some aspects of it has been in evidence almost con

tinuously, but it is probably true that in no particular line of de
velopment has there been more constant or bitter opposition than

in the attempt to establish a uniform Federal clearing and collec

tion system based upon the principle of par remittance.
It has been pointed out elsewhere that the Federal Reserve
Board in taking its first steps towards establishing a clearing and
collection system in the United States instituted , first of all, a
voluntary system which was in existence from June, 1915, to July,
1916. During this period the opposition on the part of the mem
ber banks was so pronounced that the Federal Reserve Board
found it necessary to make the system compulsory. The opposi
tion during the voluntary period was due not only to the loss of
exchange by the banks but also to the reserve situation, which
involved additional burdens to the banks that were compelled to
carry reserves not only with the Federal reserve banks, but with
other banks for clearing and collection purposes.
" The term " par collection ” as used in this chapter is synonymous with
par remittance. The former term is used because it is the one in popular
use .

One frequently meets the expression “ par clearance” which also refers

to par remittance, but the writer believes it is less common than " par collec

tion.” The controversy is over the question of par remittance and regardless
of what term is used the meaning should be clear from the context.

Un

fortunately , also the term "exchange charges” is used in a variety of senses.
Sometimes it refers to remittance charges, sometimes to charges for drafts

on distant centers, and sometimes to the charges made by banks for collecting
out-of- town items. Again the context must be relied upon for clarity. When
banks make charges for collecting out-of- town checks, the charges are properly

called collection charges. Obviously, the par collection controversy does not
refer to these charges. Bankers today prefer to call collection charges " in
terest charges” because, in the main , they represent the loss of interest ex

perienced by the bank as a result of giving the depositor immediate credit for
out-of-town items deposited . The par collection controversy might be extended
easily to include the question of interest charges for collection, thus raising
the question of the advisability of forcing banks to absorb this expense as a
part of the general expense incidental to the banking business.
232

THE PAR COLLECTION CONTROVERSY

233

The same opposition continued during the compulsory system
which was instituted in July, 1916. The member banks chafed

because all banks were not in the system ; they felt that this fact
forced additional burdens on them .

It will be recalled that the

first step in the campaign of compulsion was taken in the summer
of 1916, when the Federal Reserve Board issued a regulation re
quiring every drawee bank which was a member of the Federal
Reserve System to remit at par for all checks upon it presented
through the mail by the Federal reserve bank of the district. The
operation of this requirement was at first limited in scope by the
provisions of Section 13 which, at that time, authorized the re
serve banks to collect only those checks which were drawn on mem

ber banks and which were deposited by a member bank or an
other reserve bank. Under this system but few of the non -member

banks chose to become members. On September 7, 1916, Section
13 was amended so as to authorize a Federal reserve bank to re

ceive for collection from any member bank or other reserve bank
checks drawn upon non-member banks and trust companies within
its district. Regulation J then issued by the Board provided
that the Federal reserve banks would receive from member banks

at par, checks only on those of the non -member banks which
would remit to the Federal reserve bank at par. It was

recognized that non -member banks were left free to refuse

assent to the par collection system , although it was hoped and
expected that the Federal Reserve Board would be enabled , by this
amendment , to extend par clearance to a large proportion of all
checks issued in the United States . By December 15, 1916 , how
ever , only 37 of approximately 20,000 State banks within the
United States had become members of the Federal Reserve Sys
tem , and only 8,065 of the non -member State banks had assented
to par clearance.3

Federal reserve banks, according to the law as it then existed,
could not make collections for non -member banks. It was be
lieved that if Congress would grant the Federal reserve banks

permission to make collections for non -members also, the Board
could offer to all banks inducements adequate to secure their con

sent to par clearance. Consequently a further amendment to Sec
tion 13 on June 21 , 1917, provided that the Federal reserve banks
might receive from non -member banks checks payable upon pres
entation if the non -member banks maintained sufficient bal
* Third Annual Report of the Federal Reserve Board ( 1916 ) , p . 131.
Federal Reserve Bulletin , Vol. IX ( 1923 ), p. 790.

23+

CLEARING AND COLLECTION OF CHECKS

ances with the Federal reserve banks to offset the items in transit .
To this amendment, which had been recommended by the Board,

was added a proviso, known as the Hardwick Amendment, which
provided that nothing in the Act “ shall be construed as prohibit
ing a member or non-member bank from making reasonable
charges, to be determined and regulated by the Federal Reserve
Board, but in no case to exceed 10 cents per $ 100 or fraction
thereof ... but no such charges shall be made against the
Federal reserve banks.”

From this time on the Federal reserve

banks considered it their duty to collect any check on any bank.

Strenuous efforts were made to induce non-member banks to
agree to remit at par, even though the law did not compel them
to do so. Many refused and continued to make remittance
charges. With the concentration of reserves in the Federal re
serve banks, which was ordered by the Federal Reserve Board im
mediately after the amendment of the law in June, 1917, which

provided for concentration, one big barrier to the unified clearing
and collection system was removed.

Other steps taken by the

Federal Reserve Board to encourage non-member banks to enter
the system have been reviewed . Among other things, the Board

developed a collection system for maturing notes, bills and drafts
at a small charge, a system of transfer and exchange drafts, a
system of wire transfers, and assumed the costs of currency ship
ments and remittances. In fact, they left the opposing banks with
little real ground on which to rest their opposition.

On March 21 , 1918, Attorney-General Gregory ruled that
“ the Federal Reserve Act, however, does not command or compel

these State banks to forego any right they may have under the
State laws to make charges in connection with the payment of
checks drawn upon them. The Act merely offers the clearing and

collection facilities of the Federal reserve banks upon specified
conditions. If the State banks refuse to comply with the condi
tions by insisting upon making charges against the Federal re
serve banks, the result will simply be, so far as the Federal Reserve

Act is concerned, that since the Federal reserve banks cannot pay
these charges they cannot clear or collect checks on banks de
manding such payment from them .” 4 This opinion restricted the
operations of the Federal reserve banks to checks which could be

collected without the payment of exchange to the bank as col
lecting agent.
*31 Opinions of the Attorneys General, pp. 245, 251 ; Federal Reserve Bulle
tin, Vol. IX ( 1923 ), p. 790.

THE PAR COLLECTION CONTROVERSY

235

In accordance with this ruling the Federal reserve banks were

compelled either to refuse checks on banks which would not remit
at par or make plans to collect on the opposing banks in such a
manner as to give them no legal grounds for exacting a charge,
that is, by presenting the checks over the counter. The Federal
Reserve Board interpreted the Federal Reserve Act as imposing a

duty upon it to establish a universal par clearance and collection
system. This interpretation of the Act, combined with the fact
that the legality of the Board's actions was well established by
previous court decisions as well as by general practice, that is ,

that checks were demand obligations payable upon demand and
without deduction when presented over the counter, placed the
opposing banks in a weak position. Justification of the Board's
position did not convert the non-par banks ; it merely established
the basis for a prolonged fight. At this point it will be well to
examine the grounds of opposition.
The basis of opposition to par collection
The grounds on which the opposing banks have attacked the
par collection system which the Federal Reserve Board has en
deavored to develop, have been set forth many times in various

forms and places, and have occupied a predominant place in the
literature circulated by Mr. L. R. Adams, General Secretary of
the National and State Bankers' Protective Association. They
may be summarized briefly as follows:
1. The nature of checks and the obligations of a bank
toward its depositors and other persons are governed by the laws
of the States, not by Federal enactment. Under State law a bank
5

becomes a debtor when it receives an ordinary deposit and the

terms of the debt are that the bank will repay on demand at its
place of business to the depositor or to his order. The bank con
tracts with the depositor to pay at its place of business and no
where else. It has not undertaken to pay in another city or coun

try. Consequently, when a depositor sends his check to a person
in another place and the recipient of the check accepts it in pay
ment, the recipient becomes only the transferee of the depositor's
right, that is, his right to have the money paid on demand over
the bank's counter or the credit transferred to him upon the

bank's books. But such recipients ordinarily do not wish to be
" See especially L. R. Adams, The Case Against Enforced Par Clearance ,
a pamphlet issued by Mr. Adams as General Secretary for the National and

State Bankers' Protective Association ( Atlanta, Ga ., no date ).

236

CLEARING AND COLLECTION OF CHECKS

come depositors in the drawee banks, and ask for a transfer of the

credit from the place where it exists to the place where they de
sire it. This request is beyond the conditions of the credit as it
was originally created by the bank . As a result, par clearance in
reality amounts to a change in contract without the consent of

one of the parties, and to making the check payable anywhere in
the United States at the option of the holder, instead of at the
one known place provided for in the original contract. To comply

with such a request involves the bank in an expense for which it is
entitled to make a charge. This charge is for a banking service
over and above the service which the bank contracted with its

depositor to render to him or to any person he might designate in .
his check . This service would differ only in degree if the request

were that the credit should be made available in another country.
Banks have in general, it is alleged, but two sources of income
-interest and exchange. State banks have the right to these
sources of income by virtue of State authority, and the Federal
Reserve Board has no right or power to deprive them of one of the
sources. The Board has no rights not conferred upon it by act
of Congress, and Congress has no power of jurisdiction over such
Referendum No. 39 on the Report of the Committee on Par Remittance
for Checks, Chamber of Commerce of the United States of America (Washing

ton, D. C., Aug. 30, 1922 ), pp. 5, 7. Hereafter cited as Referendum No. 39.
It is interesting and instructive to note that while the non -par banks have

put forth the argument of expense as one of the chief justifications for mak
ing remittance charges, they continued to fight the Federal reserve banks
when the latter met that argument by presenting the checks at the counters
of the drawee banks for payment without deduction. It becomes obvious that
the non -par banks wish to exact tribute regardless of the soundness of any
principle or the reality of the expense involved. They have even gone to the

State legislatures and secured laws authorizing them to make payment, when
such checks are presented over the counter , in drafts with the regular charge
for remittance deducted from the face and forbidding notaries or others to

protest checks for non - payment when such payment is refused. It is thus
reasonable to conclude that the argument of expense so boldly urged by the
non-par banks cannot be taken too seriously. These banks have placed them
selves in the position of showing bad faith regarding the real merits of the
controversy. That their sole purpose is to exact charges regardless of any
justification is seen in the following statement made by one of their number:
“ Even though the country perish, we must keep our collection charges.”

See

Hearings before the Committee on Banking and Currency, United States
Senate, 63d Cong., 1st Sess., Vol. XV , pp . 192-196, 202, 206 ; Vol. XVI. pp.
1517, 1519, 1618 .

'It was pointed out in the hearings before the Senate Committee on Bank
ing and Currency in 1913 that about 63 per cent of the national banks at that
time operated with capital under $ 100,000 and over 2,000 with $ 25,000 capital,

that a large part of their revenue was derived from exchange charges, and if
deprived of the opportunity to make such charges they would not enter the
Federal Reserve System . It was estimated that the profit from exchange
charges in a southern bank with a capital of $ 75,000 was from 35 to 50 per
cent. Heavier charges were made in the South than in the North and West.

THE PAR COLLECTION CONTROVERSY

237

matters as relate to non-member State banks, a contention upheld
by the Attorney-General of the United States.

2.

The clearing function performed by a reserve bank for its

member banks necessarily differs from the function of a clearing

house organized by banks located in one community, by reason of
the distance and time involved. In a clearing house the claims of
the member banks are offset, each bank being credited with the
checks it holds and debited with those drawn upon it, the debit

and credit balances being paid or received at once. But the banks
in the Federal reserve districts are not all in one place and the
Federal reserve banks are not willing to undertake a system of in
8

stantaneous settlements. S At best the system is one of deferred
clearance and, in fact, does not differ essentially from mere collec
tion. There may be a question as to whether these activities
amount to the function which the Federal Reserve Act contem

plates. The Federal Reserve Board, according to the Act, may
and does act as a clearing house for the Federal reserve banks
through the Gold Settlement Fund. The law also says that each
Federal reserve bank may be required by the Board to exercise the
functions of a clearing house for its member banks, but the reserve

banks are not really performing this function. Moreover, there
may be a question as to whether the reserve banks are complying
with the law requiring their acceptance at par of checks deposited
by their member institutions when they defer the credit for a
certain length of time.'

With par clearance resulting from voluntary agreements
among banks, the opposing banks have no quarrel, on the grounds
that such banks are usually justified by circumstances and com
pensated by benefits received. It is with enforced universal par
clearance that they take issue, because of the fact that the Fed

eral reserve banks will not give immediate credit for checks in
process of collection if they are out-of-town checks. They insist
that the Federal reserve banks should give immediate credit and

absorb the float on items deposited with them , while they ( the non
par banks ) absorb the float on items deposited with them as they
do now and have always done. 10
This was practiced by the Federal reserve banks only during the period
of the so -called voluntary system which prevailed from June, 1915 to July,
1916.

' Referendum No. 39, p. 7.

1 °It was estimated in 1916 that the float would probably equal or exceed the
aggregate resources of the Federal reserve banks, that their reserves would
be afloat constantly in the mails instead of in their vaults, and that their

CLEARING AND COLLECTION OF CHECKS

238

3. Congress never intended that non-member banks should
not charge exchange, and nothing in the Act gives the Federal
Reserve Board authority to force State banks to remit at par.

On the contrary, the Federal Reserve Act specifically recognizes
exchange charges in the so-called Hardwick Amendment . Nothing

in the Federal Reserve Act requires Federal reserve banks to re
ceive and attempt to collect checks at par on the opposing banks.
The Act clearly recognizes that the check may be presented
through other banking channels which exist and that it is entirely
proper for the drawee bank to withhold from its remittance such a

charge as the law describes. Reserve banks, however, in many
cases have ignored the fact that checks they receive are drawn
upon

banks which desire to assert their right to make remittance

charges and, instead of returning such checks to depositing banks
in order that they might be collected through other channels and
the charges paid which are contemplated by law, have taken un
usual and sometimes expensive courses in order to make collection
without paying the drawee banks' charges.
4.

Holders of checks have no unlimited right to present an

accumulation of checks and demand payment in cash . The con
ditions on which a bank holds the deposits of its customers and
the conditions under which it is obligated to pay them out again
are all contractual, for the most part the result of an implied
contract, implied from the customs of trade, and in the absence

of a specific contract to the contrary, this implied contract is that
the deposit is to be received and is to be paid out on the order of

the depositor in the regular course of business and according to
the customs of banking. The obligation to observe these condi
tions descends to all holders of checks. Custom is the contract,
and where checks are presented in a manner contrary to custom,

that is, in large quantities and for cash, it violates the contract
between the bank and the drawer, and the bank should not be re

quired to make payment in such a manner. The right to payment
of checks in cash is a relative and not an absolute right.
5 . Acts lawful in themselves may be committed for unlawful

and vicious purposes and are then unlawful . The methods em
ployed by the Federal reserve banks to enforce par clearance,

while " embarrassing, annoying and expensive" to the bank against
which they are directed, may be legal in themselves when employed
in the regular course of business for a usual and lawful purpose,
value as reserve agents would be completely nullified . Pierre Jay, The Country
Banker and the Federal Reserve System , 64th Cong., 1st Sess., Sen. Doc. No.
458, pp. 7-8.

THE PAR COLLECTION CONTROVERSY

239

but are clearly illegal when used as oppressive and coercive
measures .

6. Genuine par clearance does not exist in the Federal Re
serve System.

The rules of clearing houses even show that there

are few par points on them and that most items are subject to

deferred credit or straight-out collection charges.
It is only on the theory that the remission for checks is a

service to the drawer of a check, that the advocates of par

clear

ance can even attempt to justify it ; and this contention is not

sound, since the act of remitting is done for the benefit of the holder
of the check and at his request, which fact carries with it the
obligation on the part of the holder to pay a reasonable compen
sation for the service, which is a valuable service to him and which

involves the bank in some expense. The advocates of remittance
charges also reason that the telegraph companies charge for re
mittance, the express company will not send funds for nothing,
and the United States government makes the largest charge of all
for its post office money orders.11

8. The country banker feels that he is an important element
in the financial system of the nation, that he should not be legis
lated out of business, and that the government should feel some
obligation when making laws to so frame them as to give him equal
service with the national banks of the country . There are approx

imately 22,000 State banks as against approximately 8,000 na
tional banks.

The resources of the State banks exceed the re

sources of the national banks, " and the country banker feels that
no law affecting any banks of the country should be made which
ignores the existence of the majority of the financial institutions
of the country . » 12
9. Any intimation that because in many cases competition
forces banks to omit their charges, all banks should remit at par,

is not sound. No such principle is applied in any other field of

business activity. If it is in the public interest that remittances
should be made upon all checks at par, the public should pay the
cost, either by direct appropriation from the public Treasury or
by foregoing some of the earnings of the Federal reserve banks
that now go into the United States Treasury.13
" Hearings before the Committee on Banking and Currency, United States .
Senate, 63d Cong., 1st Sess., Vol. XVII , p. 2291 .
" George H. Bell in Bulletin on Par Clearance, National and State Bankers'
Protective Association ( Atlanta, Ga., Sept. 28, 1920 ) , p. 24.
1aThe non -par banks urge that if a charge were universally made for re
mittance, the aggregate amount would not be as large as sometimes estimated,
for several reasons. In the first place, almost half the total amount of checks.

CLEARING AND COLLECTION OF CHECKS

240

10.

Charges for remittance are not a toll levied upon

commerce. They are compensation for a definite service, which is

just as real, though different in degree, as compensation for the
physical transportation of merchandise. Goods have to be ti ns
ported at the buyer's cost from the place where they lie to the
place the purchaser wishes them, and similarly, the seller who ac
cepts payment in a credit at the buyer's bank should transfer it at
his own cost to the place where he wants it.
Arguments for par collection

The important arguments for par collections may be sum
marized as follows :

1. Par collection would tend to relieve trade generally, and
individuals in particular, of the burden of paying for the use of
credit which is a trade facility and a trade necessity. It is to the
public's interest to reduce costs to the lowest levels and these
costs should be borne by some central agency which would reduce
them to the minimum.

Under the Federal Reserve System the

costs would fall upon the Federal reserve banks and reduce to that
extent the earnings which go to the government . The cost in the
end is borne by the public.

2. If some checks circulate at par, all should circulate at
par. Banks have been in the habit of favoring large customers
by collecting their checks at par. This discriminates against the
smaller customer and places him in a position of even greater dis
advantage as compared with his more powerful competitor.14
3. Checks, like bank notes, are a substitute for money and
perform their function most perfectly when their circulation is as
free as possible and their redemption is easily and promptly ac
passing through the Federal reserve clearing system in 1920 and again in

1921 , represented checks drawn on banks in the same city as the main office of
the reserve bank ; obviously, there would be no remittance charge on such
checks. Something like twelve per cent. were drawn on banks in cities where

the reserve bank had a branch , with which it was in telegraphic communica
tion. Some billions of dollars in checks were drawn upon the United States

Treasurer, and would under no circumstances be subject to charges. Only
about one-third of the total, or $ 57,000,000,000 in 1920, were drawn on banks

outside the cities of reserve banks and their branches.

Referendum No.

39, p. 13 .

**Various important associations have come out in favor of par remittance
such as the National Association of Credit Men , certain manufacturers and
jobbers associations, and the United States Chamber of Commerce. The
latter conducted an investigation on the merits of the question in August ,
1922, submitting the question to its members through a referendum known as

Referendum No. 39. The vote of the members stood 1759. in favor of making
par remittance in payment of checks universal throughout the United States,
with but 72 } opposed .

THE PAR COLLECTION CONTROVERSY

241

complished . Par remittance would benefit all those engaged in
commerce by the elimination of the expense and unnecessary de
lays which are due often to roundabout routing of checks.15 It
would secure for business interests of the country a much
prompter collection of checks than formerly , reducing the risk of
loss through bad checks and the amount of credit that sellers of
goods formerly had to extend involuntarily during the very sub
stantial time required to collect checks.
4.

Par collection under the Federal Reserve System accom

plishes direct and speedy collection of checks, the reduction of
the labor caused by handling checks many times oftener than
necessary and eliminates false balances.

5. Although in their origin exchange charges were justified
on account of the necessity for and the high cost of actually trans
porting currency, under the Federal Reserve System such charges

can be justified upon no scientific or economic principle. The cen
tralization of reserves reduces to a minimum the actual shipment
of cash and the payment of checks at places other than where the
drawee banks are located involves little expense and that is borne
by the Federal reserve banks.16 The movements of specie are fur
ther reduced since the Federal Reserve System, through its leased
wires connecting. all Federal reserve banks and branches, and

through its Gold Settlement Fund at Washington, offers facili
ties for the instantaneous transfer of available funds by mere

book entry. The Federal Reserve System pays the entire cost of
maintaining these leased wires and the Gold Settlement Fund, and
the Federal reserve banks pay the cost of transporting currency
from member and non-member banks in their districts if such
banks wish to make remittances for their checks in this manner.

Consequently the justification for exchange charges has ceased to
exist.

6. Taking the country as a whole, checks and drafts offset
one another to a large extent, and if a plan of general balancing
can be developed , the result is to eliminate a large proportion of
the cost of collection . As the number of banks which are members

of the Federal reserve clearing system increases, the advantage

and economy to those already included in the system will corre
spondingly increase. 17
14See W. M. VanDeusen , “ The Clearing of Checks at Par," Proceedings of
the Academy of Political Science, Vol. IV ( 1913-1914 ), pp. 184-186.
14Seventh Annual Report of the Federal Reserve Board ( 1920 ) , p. 67.
17H . P. Willis, The Federal Reserve ( New York , 1915 ) , p. 235 ; Seventh An
nual Report of the Federal Reserve Board ( 1920 ) , pp. 67-68.

CLEARING AND COLLECTION OF CHECKS

242

7.

Many banks which decline to remit at par to the Federal

reserve banks receive the benefits of the Federal reserve check

clearing facilities by having the checks which they receive col
lected through a correspondent bank which is a member of the
Federal Reserve System, although they contribute nothing to the

strength of the system. To the extent that the practice of charg
ing exchange is continued under the operation of the Federal Re
serve System, it is an anomaly to permit the charging banks to

impose a charge upon commerce and industry after they have
ceased to perform the service which in former times justified such
a charge. For example, banks that will not remit at par throw a
double burden upon the people of their community. In the first
place, the expense of the Federal Reserve System is borne by the
taxpayers and these communities bear their share. But their

banks add to the burden and expense of the Federal Reserve Sys
tem by not remitting at par, and that means an increased expense
for these same people. Then, in the second place, they charge on
their own checks and drafts, which is an additional expense to
these communities.

8. Under a centralized clearing and collection system , like
that which should obtain under the Federal Reserve System, banks
would be called upon to do most of their remitting to a single
center and this remittance would be made by means of a single
draft in one letter.

These remittances, which would be large in

comparison with the usual amounts paid over the counter for the
checks presented, would involve an effort and expense much less

than that involved in paying a corresponding amount over the
counter of the bank. Moreover, the actual expenses, like postage,

stationery and cash shipments, are borne by the Federal Reserve
System. Consequently the opposing banks have no real reason
for making charges for remittance.
9 . If the non -member par banks would keep a deposit in the
Federal reserve bank for clearing and collection purposes they

could call home all the deposits scattered abroad for collection

purposes, and the required centralized deposit for collection pur
poses would be considerably smaller than the combined deposits
scattered among other banks. To bring such funds home and
to use them as a basis for building up loans at the prevailing rate
of interest, would probably be as profitable, if not more profit
able, than receiving 2 per cent . or 3 per cent . interest on the scat
tered funds. In addition to this, the advertising value which
comes to a bank as a result of being able to tell its customers, both

present and prospective, that their checks will circulate at par

THE PAR COLLECTION CONTROVERSY

243

anywhere must have in it an element of reality, if indeed it does not
bring a marked increase in deposits and profits.
10 . Since such a large percentage of business , perhaps 90
per cent., is consummated by means of checks, there is all the more
reason why checks as compared with bank notes should be made
to circulate at par. It hardly seems logical to penalize about 90

per cent. of the business because of the use of checks, while the

remaining 10 per cent . is not subjected to such a burden.
The remainder of this chapter will show the relative validity
of the arguments advanced by both the friends and the foes of

par remittance. In the main, one is compelled to look to the
court decisions for final judgment on the merits of the questions
involved , but, in addition, there are certain theoretical and prac
tical tests that also may be applied, not only to those questions
not definitely settled in the courts, but to a less extent, to those

that have been passed upon by the various courts.
The growth of the par lists

It will be recalled that the amendment of September 7, 1916,
permitted the Federal reserve banks to receive from their member
banks or from other Federal reserve banks checks drawn upon
non-member
banks.18
-

The number of non-member banks which

agreed to remit at par after this amendment increased but slowly.

This was true also following the amendment of June 21 , 1917, in
which non-member banks were given the privilege of becoming

clearing members.19 Many reasoned as did the opposing member
banks, that if they entered the system they would be obliged to
assume additional burdens unless all non -member banks would
enter. Many also refused to enter the system as clearing members
because they were able to have their out-of-town checks credited
at par by some city correspondent.
The year 1918 saw banks avail themselves more and more of
the clearing and collection facilities afforded by the Federal Re

serve System.

On December 15, 1918, the number of member

banks was 8,612, and the number of non -inember banks on the

par list was 10,409, a total of 19,021 , showing an increase for
the twelve months of 1,985 in the number of banks remitting at
par. There were something over 10,000 banks which were not

remitting at par.20
18 See p. 196 above.
" See p. 197 above.

*Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 74-75.

244

CLEARING AND COLLECTION OF CHECKS

Although checks on two-thirds of the banks, representing
perhaps 90 per cent. of the bank resources of the country, could
be collected at par, the number of banks which would not remit

at par, including some of substantial size located in important

cities, was sufficiently large to make many banks hesitate to use
the Federal reserve collection system because of the large number
of items which could not be handled by the Federal reserve banks.
At a meeting of the Federal reserve agents in December, 1918,
the conclusion was reached that every effort should be made to
increase the number of banks on the par list, on the grounds that
the banks and the public needed a system able to collect all items,
and that it was not a local or selfish undertaking for the benefit
of member banks but a national enterprise for the convenience of
the public and the promotion of commerce.

Continuous effort

was to be made through correspondence and personal solicitation
to add to the number of banks on the par list.

The year 1919 witnessed rapid progress in the development of
the clearing and collection system.

Of the 29,586 banks and

bankers in the country at the close of the year 1919, 25,571 were

on the par list. Checks drawn on all banks and bankers situated
in 31 States were collectible at par, as compared with 17 States a
year previous. All banks in six Federal reserve districts were on
the par list, which meant that items drawn on over 86 per cent .
of the total number of banks and bankers throughout the country

could be received for collection and credit by the Federal reserve
banks. During that year 6,581 banks were added to the par list,,
leaving only 4,015 , or 14 per cent. of the whole, whose checks
could not be collected at par.21

Despite the increase of banks on the par list during 1919, pro
nounced opposition began to manifest itself, especially in districts
6, 9, and 10.22 Prior to this time it had been the general policy of
the Federal reserve banks to decline to receive from member banks,

for credit or for collection, checks drawn upon non-member banks
which had not agreed to remit for them at par. But many non
member banks continued to avail themselves of the facilities of the

system to collect their own items without expense through some

correspondent bank, without showing any inclination to render a
like service or give up exchange charges as a source of profit.
Persistent efforts to induce these parasitical non -member banks
to become clearing members resulted in little success. In 1919
* Sixth Annual Report of the Federal Reserve Board ( 1919 ) , p. 374.
-32Atlanta , Minneapolis, and Kansas City.

THE PAR COLLECTION CONTROVERSY

245

more active steps were taken ; the mere attempt to persuade was
superseded by more effective measures.
With the approval of the Federal Reserve Board, several

of the Federal reserve banks early in 1919 undertook to collect at
par on all banks in their respective districts.

The Federal Re

serve Bank of Boston had been collecting at par on all banks in
its district for more than three years, and other Federal reserve
banks felt that in justice to their member banks and to the pub
lic no further discrimination should be made.

Recourse was had

in many cases to means of collection other than through banks,
but, to use the words of the Federal Reserve Board, “ as a rule

such steps were not necessary for any length of time," and of
29,561 banks in the country, 25,565 were remitting on December
31 to the Federal reserve banks at par, while 3,996 still declined
to do so.23 These extraordinary means of collection resorted to
by the Federal reserve banks, with the approval of the Federal
Reserve Board, created a storm of protest and an organized op .
position among these independent banks which resulted, among
other things, in court proceedings.
The nature of the par lists was now changed. Prior to this

time the par lists included only the names of those banks which
had agreed to remit at par ; now the par lists included not only
those banks which had agreed to remit at par but also those on
which the Federal reserve banks had decided to collect at par by
direct presentation over the counter through some agent. Many

banks thus had their names placed upon the par lists of the Fed
eral reserve banks without their consent, and much to their indig

nation, as it would give the impression that they had given their
sanction to the system. It became the practice of the Federal
reserve banks to add entire States or districts to the par lists.

when a sufficient number of banks had agreed to remit at par tu
make it possible to collect directly from the few who would not

agree to remit at par without involving too much expense. In
August, 1919, a special map of the United States was published
and circulated, showing the progress of the campaign for par

points. Several of these maps were issued from time to time, and
on September 1 , 1919, the Federal Reserve Board began the regu

lar publication of maps, one map appearing in each issue of the
Federal Reserve Bulletin . This practice on the part of the Fed

eral reserve banks contributed to the animosity of the exchange

charging banks toward the Federal reserve banks. These maps
*Sixth Annual Report of the Federal Reserve Board ( 1919 ) , pp. 40-44 .

CLEARING AND COLLECTION OF CHECKS

246

were widely circulated by the Federal reserve banks, particularly
in those districts in which the campaign for par collections was
being actively carried on, that is to say, in the districts in which
there were one or more States that were not all-par.24

The increased opposition to par collection

Despite the opposition, the Federal Reserve Board announced
in 1919 its intention to continue its efforts to establish a universal

par remittance system until all banks were on the par list, and in
answer to the protests of the opposing banks, made a formal reply

defining its attitude on the question.25 It based its contention on
the grounds, ( 1 ) that the Federal reserve banks have the right to
receive on deposit from any of their member banks any checks or
drafts upon whomsoever drawn, provided they are payable upon
presentation, ( 2 ) that the whole purpose of the Act demands that
in justice to member banks they should exercise that right, (3 )

that the Federal reserve banks, according to the opinion of the
Attorney-General, cannot legally pay any fee to any member or
non-member bank for collection and remittance, ( 4) if the Fed
eral reserve banks are to give the service required of them under
the provisions of Section 13 they must use some other means of
collection, no matter how expensive, in cases where banks refuse

to remit for their checks at par, and ( 5 ) it is the Board's duty to
see that the law is administered fairly and without discrimination
and that it applies to all sections alike, and the Board, therefore,
should take any and all steps necessary to carry out the intent
of the law as construed by the highest legal authority of the ad
ministrative branch of the government.26
During the year 1920, eleven States were added to the number
of States in which all banks were on the par lists of the Federal
reserve banks. On January 1 , 1921 , checks on all but 1,755 of
the 30,523 banks in the United States could be collected at par,
as compared with 3,996 out of 29,557 on January 1 , 1920. These

1,755 banks were all located in the following seven States of the
Southeast : Tennessee, South Carolina, Louisiana, Mississippi,
Alabama, Georgia, and Florida . Consequently every bank in nine
of the twelve Federal reserve districts was on the par lists, the
three districts in which there remained any non - par banks were
2*TheDevelopment of Par Collections by Federal Reserve Banks, Letter
No. 6, Federal Reserve Bank of Richmond (May, 1922 ) , p. 3.

Hereafter

cited as Letter No. 6.

25Sixth Annual Report of the Federal Reserve Board ( 1919 ) , pp. 40–44.
20Ibid .

THE PAR COLLECTION CONTROVERSY

247

Richmond ( No. 5 ) , Atlanta ( No. 6 ) , and St. Louis (No. 8 ) . But

this development in the check clearing and collection system was
accomplished in the face of continuous opposition on the part of
some member and non-member banks.

While fewer banks were

participating in the opposition, they were well organized and the
opposition was none the less vigorous. But little or no systematic
and concentrated action in opposition appeared until the latter
part of 1920.27

Beginning with the year 1921 , however, the numbers of the

opposing non-member banks began to increase rather than de
crease. They became better organized and their resistance more
effective. The following table will show the situation for the
years 1916 to 1924 :28
TABLE XXV

GROWTH OF MEMBERSHIP IN THE FEDERAL RESERVE CLEAR
ING AND COLLECTION SYSTEM
Non -member
banks not
Number of
member banks

Non

Date

in the

member
banks on

1916

system

the par list

Aug. 15
Sept. 15

7,524

Oct. 15
Nov. 15
Dec. 15
1917
Jan. 15
Feb. 15
Mar. 15

7,618
7,618
7,623
7,627
7,622
7,630
7,630

7,625
7,651
8,666

8,789

7,683
7,718
7,747

8,837

Aug. 15

Sept. 15
Oct. 15
Nov. 15
Dec. 15
19189
Jan. 15
Feb. 15
Mar. 15

Apr. 15
May 15

7,826
7,823
7,909

7,972
8,013
8,059

than mutual

8,805
8,934
9,052
9,210
9,321

9,268
9,319
9,425
9,450

8,113

9,475

9,710

July 15

8,165
8,212

Aug. 15

8,294

Sept. 15

8,428

10,206
10,549

June 15

savings banks )

8,130
8,086
8,007
8,607
8,926

June 15

July 15

banks other

7,032
7,449
7,459
8,059
8,065

Apr. 15
May 15

7,634

on the par list
(incorporated

11,336

9,761

*Seventh Annual Report of the Federal Reserve Board ( 1920 ) , pp. 63-69.
2*For an additional discussion of this subject, see Charles S. Tippetts, "State
Bank Withdrawals from the Federal Reserve System ,” The American Economic
Review , Vol. XIII , No. 3 ( September, 1923 ) , pp . 401-410 .

CLEARING AND COLLECTION OF CHECKS

248

TABLE XXV— (Continued )
Non -member

Number of
Date
1918
Oct. 15

member banks
in the

system
8,510

Nov. 15

8,584

Dec. 15
1919
Jan. 15
Feb. 15
Mar. 15

8,612

Apr. 15
May 15
June 15

July 15
Aug. 15 .
Sept. 15
Oct.

15

Nov. 15
Dec. 15
1920
Jan. 15
Feb. 15
Mar. 15

Apr. 15
May 15
June 15

July 15
Aug. 15
Sept. 15
Oct. 15
Nov. 15
Dec. 15
1921
Jan. 15
Feb. 15
Mar. 15

8,692
8,717
8,7298

8,765
8,788
8,820
8,848
8,894
8,920
8,955
9,008
9,055
9,089
9,140
9,196
9,246

9,303
9,366
9,421
9,472
9,506
9,544

9,574
9,612

9,637
9,668

9,696

Non
member

banks not
on the par list
(incorporated
banks other

banks on

than mutual

the par list
10,318

savings banks )

10,219
10,409

10,392

10,595
10,622
10,885
11,060
11,261

9,923
9,726

11,801
12,071
12,578
12,962
13,852
14,860
15,851
16,987
17,429
18,308
18,492
18,502
18,614
18,605
18,605
18,620
18,675
19,188
19,172

19,101
19,023
18,804

Apr. 15

9,726

May 15

9,747

June 15

July 15

9,775
9,769

Aug. 15
Sept. 15

9,791
9,794

Oct. 15
Nov. 15
Dec. 15

9,803
9,805

18,599
18,551
18,504
18,388
18,319

9,827

18,217

9,847

18,066

9,853

18,053

9,873
9,904
9,909
9,925
9,930

17,976
17,943
17,918
17,889

18,792
18,781
18,716

10,198

9,543

9,003
8,762
8,309
8,167
7,621
7,178
6,457
5,515
4,609
3,566
3,148
2,274
2,157

2,180
2,119
2,136
2,138

2,160
2,180
1,727
1,732
1,705
1,744
1,893
1,932
1,837
1,965
2,040

2,078
2,121
2,200
2,218
2,263

1922

Jan. 15
Feb. 15
Mar. 31

Apr. 30
May 31
June 30

July 31
Aug. 31

Sept. 30
Oct. 31
Nov. 30
Dec. 31

9,919
9,917
9,918

9,916
9,913

17,884
17,865

17,863
17,851
17,836
17,822

2,350
2,327
2,301
2,293
2,279

2,275
2,285
2,281

2,276
2,281
2,286
2,288

THE PAR COLLECTION CONTROVERSY

249

TABLE XXV— (Continued )
Non -member
banks not

Date
1923
Jan. 31
Feb. 28
Mar. 31

Number of
member banks
in the
system

Non
member

than mutual

the par list

savings banks )

9,911

17,777
17,724
17,692
17,663
17,643

July 31
Aug. 31
Sept. 30

9,916

17,565

Oct. 31
Nov. 30
Dec. 31

9,898

June 30

banks other

banks on

9,917
9,922
9,923
9,927
9,933

Apr. 30
May 31

on the par list
( incorporated

9,905
9,906
9,869
9,896

2,289
2,282
2,285
2,280

17,255
17,114
16,919
16,725

2,279
2,310
2,324
2,489
2,580
2,672
2,791
2,896

16,484
16,337
16,246
16,119
15,981

3,013
3,084
3,142
3,185
3,240 •

17,589

17,381

1924

Jan. 31
Feb. 29
Mar. 31

Apr. 30
May 31

9,875

9,857
9,819
9,806
9,785

Complied from the Federal Reserve Bulletins.
*The data for the year 1918 as compiled from the Federal Reserve Bulle
tins differ from data given in the Fifth Annual Report of the Federal Re
serve Board ( 1918 ) , p . 206 .

*Given in Federal Reserve Bulletin, Vol. V (1919 ), p. 405, as 8,782 and
10,905 respectively. The above data were given on p. 511 of the same bulletin.
There are so many variations similar to those indicated that no further effort
will be made to point them ouf. The writer, in many cases, was compelled to

choose arbitrarily ; in some instances he was able to choose those figures that
appeared most frequently.

'With these data for May which are reported in the Federal Reserve Bulletin
for July, 1924, the Federal Reserve Board discontinued further monthly re
ports on the membership .

Common and concrete forms of opposition

The opposition on the part of these opposing State banks has
manifested itself in various ways, the chief of which are, ( 1 ) dila
tory practices in tendering payments, ( 2 ) stamping legends on
their blank checks, ( 3 ) organization of the National and State
Bankers' Protective Association , ( 4 ) State legislation hostile to
the par

collection system, ( 5 ) petitions to Congress for hearings
and amendatory legislation, and ( 6 ) injunctions and suits in the

courts .

Obstructive and dilatory tactics in tendering payments have
seriously embarrassed the Federal reserve banks at times. Since

Federal reserve banks cannot pay exchange charges, they have no
choice, if they are to collect the checks drawn on these non-member

250

CLEARING AND COLLECTION OF CHECKS

banks which refuse to remit at par, but to make presentation of
such checks at the counters through selected agents. These
agents may be employees of the Federal reserve banks or may be
banks, express companies, or any other suitable agents located in
the town of the drawee bank. The employees and agents of the
Federal reserve banks have encountered various obstacles in mak

ing presentation of checks, such as tender of payment in a man
ner calculated to take as much time as possible, the refusal of
payment in reliance on the inability of the agent to find a notary
public willing to make protest, or by offering in payment drafts
rather than legal tender. Payments were sometimes made in
silver and other coins which would be difficult to transport, some

times bills were wadded and mixed up with other currency. Such
tactics made it difficult at times for the Federal reserve banks to

secure agents willing to act for them . In one instance the Amer
ican Express Company refused to act as agent, after serving for a
short time, because of the trouble involved in making collections.

In another instance an agent, within a few days after his appoint
ment, gave notice to the Federal reserve bank that he would no
longer act as agent for fear of injury to his business. Local
agents were reluctant to incur the disapproval of their own com
munity in attempting to act for the Federal reserve bank against
their local bank .

Some opposing banks, including some member banks, resorted
to the device of stamping legends on their blank checks to the
effect that the check was not valid if presentation were made
through the Federal reserve banks. At one time in 1920 over
three hundred banks were indulging in this practice in the ninth
district.29 Another legend read , " Payable in cash or exchange
draft at the option of...................Bank of.....

»

In cases

like the latter , the Federal reserve bank involved frequently would
refuse to accept such checks and would return them to the banks

from which they came and add to the discomfort of the opposing
bank by writing to the payees of the checks stating that it could
not accept them , since such checks, by reason of the indorsement ,
were non - negotiable and as a medium of payment the usefulness
of such checks was impaired.30
In 1920 the opposing banks organized the National and
2 Report of General Secretary, a pamphlet published by the National and
State Bankers' Protective Association (Atlanta, Ga., 1920 ).
30Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 1411 .

THE PAR COLLECTION CONTROVERSY

251

State Bankers' Protective Association31 in order to secure con

certed action in carrying on the fight against the enforced par
remittance system . The first steps were taken towards its organ
ization by calling a conference of the affected banks in the sixth

district to meet in New Orleans in February, 1920. The invita
tion was later extended to include the interested banks in other

districts . Delegates from eight of the twelve districts were pres
ent. Out of this New Orleans meeting grew the National and
State Bankers' Protective Association, permanent organization
being effected at a conference in Washington, D. C., in May, 1920.
The objects of the association have been endorsed by the Bankers'
Associations of a number of States at their annual conventions,

including Alabama, Arkansas, Florida, Georgia, Idaho, Louisiana,

Minnesota, Mississippi, South Carolina, Texas, Wisconsin and
others, and by the National Association of State Bank Super
visors in their annual conference at Seattle, Washington, in
July, 1920.32
It was maintained by this association that most of the banks

objected to par remittance, but were forced into the system by
the Federal reserve banks because of the absence of organized re
sistance. The association with headquarters and staff at Atlanta,

planned to extend its organization to each State and endeavored
to have the State legislatures pass laws protecting the State banks
in the right to charge exchange and against the coercive methods
of the Federal reserve banks. It planned to carry the fight to
Congress, and to persuade members of the association to bring the
matter to the attention of their Congressmen and Senators. The
association has been effective in its methods, in organizing the op
position and in carrying the fight into the State legislatures,
Congress and the courts .

In 1920 the legislatures of various States, chiefly in the South,
began to legislate in favor of the exchange-charging State banks.
Mississippi passed a law, approved March 6, 1920, with the ex
" This organization is virtually an offshoot from the American Bankers'
Association representing to a large extent the country bankers, and in their
opinion, threatening to split the American Bankers' Association into two fac

tions . In 1920 they claimed a membership of 15,000 of the 21,000 in the Ameri
can Bankers' Association .

A Committee of Five in the American Bankers'

Association , appointed under resolutions adopted in Kansas City in 1916 to

secure the so -called rights of banks to make exchange charges, was continued
by the Association in October, 1921. The State Bank Section of the Associa
tion adopted strong resolutions against the position of the Federal Reserve
Board on this question and appointed a Committee of Seven to work in favor

of exchange charges and to place the matter before Congress.
32Bulletin on Par Clearance, the National and State Bankers' Protective As
sociation ( Atlanta, Ga., September 28, 1920 ) , passim .

252

CLEARING AND COLLECTION OF CHECKS

press purpose of preventing the Federal reserve banks from col

lecting at par, checks drawn on the banks located in that State 33
Seven other States followed rapidly in the order mentioned :
Louisiana ,34 South Dakota, 35 Georgia 36
,36 Alabama,37 North
Carolina,38, Tennessee ,39 and Florida.40 The Mississippi law,
which is an excellent sample of these laws, reads in part as follows :
“ For the purpose of providing for the solvency, protection and
safety, of the banking institutions of Mississippi, the established
custom on the part of the banks of this State to charge a service
fee ( commonly called 'exchange' ) for collecting and remitting, by
exchange or otherwise, the proceeds of checks, drafts, bills, etc.
( commonly known among banks as 'cash items' ) , is hereby de
clared to be the law of this State, and the banks of this State,
both State and national, shall continue to make such charge as
fixed by custom when such 'cash items' are presented to the payer

bank for payment through or by any bank, banker, trust com
pany, Federal reserve bank, post office, express company, or any
collection agency, or by any other agency whatsoever ; and the
amount of such charge is hereby fixed at one-tenth of one per
centum of the total amount of such 'cash items' so presented and
paid at any one time, and not less than ten cents on any one such
transaction .. . " 41 This law provides further that banks are
not to charge for checks or drafts drawn to settle obligations with

the United States government or the government of the State of
Mississippi, or for checks on banks in the same city or town. It
is optional with banks whether they charge exchange on checks
or drafts payable to a person within that State, and drawn on a
bank, trust company or person within or without that State.

No

officer of the State is permitted to protest for non -payment any
such “ cash items” when such non-payment is solely on account of
33

*Mississippi Laws, 1920, Chap. 183. Effective March 6, 1920.
* Acts of the State of Louisiana, 1920, No. 23. Approved and effective June
25, 1920.
38

3 Laws of South Dakota, 1920, Chap. 31.

Approved and effective July

3, 1920.

30Georgia Laws, 1920 , Part I, Title VI, p. 107. Approved and effective
August 14, 1920.
87 General and Local Laws of Alabama, 1920, No. 35. Approved Septem

ber 30, 1920, effective thirty days later.
28Public Laws of North Carolina, 1921, Chap. 20, Sec. 2.
effective February 5, 1921 .

Ratified and

** Public Acts of Tennessee, 1921, Chap. 37. Passed and effective March
17, 1921 .

**Laws of Florida , 1921 , Chap. 8532. Approved and effective April 29, 1921 ,

« Mississippi Laws, 1920, Chap. 183. Effective March 6, 1920.

THE PAR COLLECTION CONTROVERSY

253

the failure or refusal of any of the banks to pay exchange, nor is
there any right of action against any bank in the State for refusal
to pay such “ cash items,” when the refusal is based on the ground
of the non-payment of such exchange.
The Act finally provides that should any court hold that the
national banks in the State are not required to charge and collect
exchange, the Act is to remain in force as to all the other banks in
the State, and in case of such a decision by the courts or the re

fusal of any national bank in the State to comply with the Act,
then it is to be optional with State banks located in the same mu
nicipality with a national bank or State bank which are members

of the Federal Reserve System as to whether the charge should
be made.

The title of the Tennessee Act reads as follows : “ An Act to

prevent the Federal Reserve System from forcing the banks of
this State into what is known as the passing [ sic ; should read
parring) of checks, drafts, bills, etc. ( commonly known as 'cash
items' ) and for that purpose making it optional on the banks of
this State to charge exchange on such 'cash items' and fixing the
rate of exchange." 42 The Louisiana law differs sufficiently from

the others to require brief mention. The law in that State pro
vides that any bank has the option to claim three days' grace in
which to pay in cash or by a draft on correspondent, and presen
tation of more than three drafts or bills of exchange over five days
after their receipt by the bank presenting them shall constitute
prima facie proof that the checks have been withheld from presen
tation in order to injure the drawee bank.43
Relative to making exchange charges, the laws of Mississippi
and Florida are mandatory. The wording of the Alabama law is
both mandatory and optional ; it provides that a bank shall charge
exchange, but may remit in money or exchange drawn on reserve

agents on which it may charge exchange, provided the minimum
may be ten cents.44 The laws of Tennessee, South Dakota,
Georgia and North Carolina are optional. The following States
have included provisions in their laws prohibiting any officer from
protesting any check for non-payment, when such non -payment
is on account of the refusal of any bank to pay exchange : Florida,
" Tennessee, South Dakota , Mississippi, Alabama and North Caro
lina ; Louisiana and Georgia have no such provisions. Tennessee
Public Acts of Tennessee, 1921, Chap. 37.
* Acts of the State of Louisiana , 1920, No. 23.

"General and Local Laws of Alabama, 1920, No. 35. Italics are the author's.

254

CLEARING AND COLLECTION OF CHECKS

and North Carolina have included provisions also which prohibit
legal action against any officer for refusal to protest such items ;
South Dakota and Mississippi prohibit legal action against the
bank ; the remaining States have neither provision.
The Federal Reserve Board took the position that these laws

were clearly unconstitutional in so far as they purported to re
quire national banks and State banks which had joined the Fed
eral Reserve System to make exchange charges against Federal
reserve banks, and the Board, therefore, continued to collect on
of the banks in these States in the usual manner. Prior to
the enactment of the South Dakota and Louisiana laws all banks
many

in South Dakota, and in that part of Louisiana which is located
in the eleventh Federal reserve district (Dallas ) , had been placed
upon the Federal reserve bank par lists, and the Federal Reserve
Banks of Minneapolis and Dallas, after the enactment of those
laws continued to receive for collection at par all checks drawn
>

on those banks .45

In 1920 petitions and protests were sent to the Federal Re

serve Board and to Congress by organizations representing the
opposing banks. In February of that year charges were made
by State bankers of Nebraska that employees of the Omaha
branch of the Federal Reserve Bank of Kansas City had used op
pressive methods in the presentation of checks on non -member
banks. The Federal Reserve Board held hearings to inquire into
these alleged acts and methods with the result that the Federal
reserve bank officials and employees involved denied, under oath,
the charges in every particular. The hearings were attended by a
delegation of Congressmen from Nebraska, and the State bankers
making the charges, as well as their witnesses, were also invited to
be present. For the convenience of the latter the Board offered

to have a committee of its members hold a hearing in Nebraska.
No witnesses on behalf of the State bankers were produced, how

ever, and the only evidence submitted in support of the charges
consisted of a series of affidavits. In the Board's opinion, there

was no instance in which any specific charge of improper conduct
on the part of an employee of the Omaha branch was substan

tiated. In May, 1920, the Congressional Committee on Rules
gave a hearing to representatives of the National and State
Bankers' Protective Association.

This committee had before it

the King Resolution No. 476 calling for an investigation of the
administration of the Federal Reserve Act. . It embodied practi
* Seventh Annual Report of the Federal Reserve Board ( 1920) , pp. 65-66.

THE PAR COLLECTION CONTROVERSY

255

cally the resolutions adopted by the National and State Bankers'
Protective Association at New Orleans on February 6, 1920. At

the same time the House Committee on Banking and Currency
gave a hearing to representatives of the association. This com
mittee had before it at this time House Bill No. 12,646, known as

the McFadden Bill, and House Bill No. 12,376, the Steagall Bill,
both bills having for their purpose the amendment of the Federal
Reserve Act so as to give both member and non-member banks
the right to charge exchange on remittances, not to exceed 10

cents on $100. Both of these bills were supported by the National
and State Bankers' Protective Association.

The contentions of

the country banks were forcibly impressed upon the Congressional
Committees as well

as

upon

the Federal Reserve Board. Governor

Harding of the Federal Reserve Board promised the neutrality
of the Board in the fight before Congress for an amendment to
the Act and freely admitted that par collection was not a neces
sary function of the system.
In view of all the circumstances, the Board decided to lay the
facts before Congress for such action as it might care to take.
Accordingly, the Board addressed a letter in May, 1920, to
Edmund Platt, Chairman of the House Committee on Banking

and Currency, calling attention to the opposition to par collec
tion and to the obstacles which the Federal reserve banks were

encountering, and suggested that after a hearing the committee
adopt one of two definite courses : " ( 1 ) that it report a bill

authorizing both member and non-member banks to make charges
against the Federal reserve bank as well as against each other for
remitting for checks, not to exceed ten cents per one hundred

dollars, with the provision that the Federal reserve banks be
authorized to charge to sending banks any exchange charges paid
in collecting checks for them, or ( 2 ) that it report a bill clearly

and definitely establishing the universality of the par remittance
system by imposing such conditions or penalties as will insure

compliance with the law by all banks of deposit, non -member State
banks and private bankers as well as member banks. " 46
Congress, however, did nothing in this matter. This inac
tivity, combined with the fact that the United States Circuit
Court of Appeals, in reviewing the case of the American Bant:

and Trust Company et al. v. Federal Reserve Bank of Atlanta et
* Extract from a letter of Governor W. P. G. Harding to Hon . Edmund
Platt, Chairman , Committee on Banking and Currency, House of Representa
tives, in Bulletin on Par Clearance, p . 14.

256

CLEARING AND COLLECTION OF CHECKS

al.,47 supported the Board in its position, caused it to go forward
with its announced policy of attempting to establish universal par
collection. From this time on, the opposition manifested itself
largely in litigation which will now be reviewed .
The Atlanta par collection case
The legal battle was started in the sixth district on December
23, 1919, by the Governor of the Federal Reserve Bank of At

lanta mailing a letter to each of the non-member banks of the
district, saying the time had come to put universal par remittance
into effect in the district and inviting the banks to agree to the
procedure. Among other things, the letter stated that " while, as
stated, the Federal Reserve Act does not permit us to pay ex

change for the remittance of bank checks and drafts payable upon
presentation, we can incur any cost that is necessary in order to
carry out the purpose of the Act, and we would very much regret
to be forced to adopt methods of collection that would prove
"

embarrassing, annoying and expensive to you ." 48
The Georgia banks affected by the proposed action banded
together in their own defense through the medium of the Country
Bankers' Association of Georgia, raised a fund, employed coun
sel, and filed a petition to enjoin the officials of the Federal Reserve
Bank of Atlanta from carrying the above threat into effect. The
grounds on which the opposing banks sought an injunction
against the Federal Reserve Bank of Atlanta were set forth at

great length in a petition presented to the Superior Court of
Fulton County, Georgia, in January, 1920, by counsel for the
petitioning banks and may be summarized briefly as follows :49
( 1 ) That the purpose of the Federal reserve bank was to collect
checks in large numbers drawn on them and present them over
the counter for payment rather than through the customary

channels of correspondent banks or clearing houses and that this
course was intended to coerce State banks into becoming members
of the Federal Reserve System, ( 2 ) that the action of the Federal

reserve bank was ultra vires, and ( 3 ) that they were depriving the
petitioning banks and others in like position of the customary
$ 7280 Fed . 940 ( 1922 ) .
* Bulletin on Par Clearance, p. 2.

“ From a pamphlet entitled The American Bank and Trust Company et al.
08. The Federal Reserve Bank of Atianta et al., No. 44,323, Superior Court of

Fulton County , Georgia (1920 ), distributed by the Georgia Country Bankers'
Association. This pamphlet does not include the case as its title might sug
gest ; nor is this case reported officially. See also the Federal Reserve Bulle
tin, Vol. VI ( 1920 ), p . 196 .

THE PAR COLLECTION CONTROVERSY

257

compensation for collection and remittance when checks reached

them under the present method of doing business. Their prin
cipal prayer was to restrain the defendants from the adoption of
any method of collecting checks drawn against the petitioners
except through the usual and ordinary channel of collecting
checks through correspondent banks or clearing houses.
On January 15, 1920, Judge W. D. Ellis in the Fulton County

Superior Court issued a temporary order restraining the Federal
reserve bank from employing and putting into effect any method
of collecting checks drawn against the opposing non-member
banks " that would prove embarrassing, annoying or expensive to
such banks ; and from collecting such checks in any manner except
in the usual and orderly way now employed among corresponding

banks and clearing houses ; and from interfering with any such
bank in charging, collecting or retaining the usual customary rate
of exchange charges now in effect between corresponding banks
and clearing houses. " 50

This temporary restraining order held matters in status quo
pending a hearing on the merits of the case. The Federal reserve
bank filed an application to remove the case to the United States
District Court for the Northern District of Georgia , on the
ground that the Federal Reserve Bank of Atlanta was a Federal

corporation and that the plaintiffs cause of action arose under
the Constitution and laws of the United States. The application
was granted and the State banks of Georgia then moved to have
the case remanded to the State court while the Federal reserve
bank moved to have the case dismissed.

On April 5, 1920, United States District Judge Beverly D.
Evans dismissed the case on its merits in favor of the Federal
Reserve Bank of Atlanta . He held that Federal reserve banks are

not national banking associations within the scope and meaning
of the Acts of Congress of July 12, 1882, August 13, 1888, and
the Judicial Code, Section 11 , which place national banking asso
ciations, for the purpose of action by and against them , upon the
footing of other citizens, which means that they can sue and be
sued in State courts ; they are Federal corporations and come
under the jurisdiction of the Federal courts. After establishing
the jurisdiction of the United States District Court, Judge Evans

ruled, in brief, “ that this method of collection of checks will deprive
the drawee banks of the revenue previously enjoyed where checks
* Par Points , a pamphlet, National and State Bankers' Protective Associa

tion ( Atlanta, 1920) , pp. 5-6.

258

CLEARING AND COLLECTION OF CHECKS

on them came through the mails from correspondent banks, but
does not make the transaction unlawful. It is the duty of the
drawee bank to pay a check of the drawer, if it holds sufficient
funds of the drawer to pay it. It is no less the duty of the drawee

bank to pay several checks than it is to pay a single check, when
presented over the counter within banking hours. The policy of
the Reserve Bank of Atlanta, as outlined in the petition, is neither
ultra vires nor unlawful. It is not to be presumed that the agency

employed by the Federal reserve bank will act otherwise than
may be lawful and proper in the presentation of the checks for
payment. The allegations of conspiracy are lacking in essential
features to charge an actionable wrong."51
On appeal, the United States Circuit Court of Appeals for the
Fifth Circuit, in an opinion filed November 19, 1920, upheld the
District Court.52 The Circuit Court held that Federal reserve

banks have the right to collect checks, drawn on non -member
banks which refuse to remit at par, by having such checks pre
sented at the counters of the drawee banks, and that the case was

one in which the United States District Court had jurisdiction.
In these lower courts the defendant Federal reserve bank inerely

demurred to the bill of the plaintiff and no evidence was taken
either to establish or to disprove the allegation that the Federal

Reserve Bank of Atlanta proposed to use embarrassing and op
pressive methods in forcing non-member banks to remit at par,
although, as pointed out elsewhere, representations had been made
to the Federal Reserve Board and to committees of Congress that

improper methods had been and were being used by the Federal
reserve banks, particularly in the West and Northwest .
The case then was appealed to the United States Supreme
Court and a decision was rendered May 16, 1921 , Mr. Justice

Holmes delivering the opinion of the Court.53 The plaintiffs had
filed a motion to remand the case to the State court, and the de

fendants moved to dismiss the complaint for lack of equity. This
latter motion was in the nature of a demurrer and the issue before

the Supreme Court upon this motion was merely whether, as a
matter of pleading, the plaintiffs' bill of complaint stated a cause
"See Federal Reserve Bulletin, Vol. VI ( 1920 ) , pp. 496-497. Case not re
ported.
62 American Bank and Trust Co. et al. v. Federal Reserve Bank of Atlanta,
Ga. , et al., 269 Fed . 4 ( 1920 ) . The opinion is given also in the Seventh An

nual Report of the Federal Reserve Board ( 1920 ), pp. 330-334, and the
Federal Reserve Bulletin , Vol. VI ( 1920 ), p. 1303 ff.
53American Bank and Trust Company et al. v. Federal Reserve Bank of
Atlanta , Georgia, et al., 256 U. S. 350 ( 1921 ).

THE PAR COLLECTION CONTROVERSY

for action.

259

The Supreme Court held, purely as a matter of

pleading, that the allegations of the complaint stated a cause for
action and, if sustained by the evidence, would entitle the plain
tiffs to the injunction sought. The Court said , “ On the merits
we are of opinion that the courts below went too far. The
question at this stage is not what the plaintiffs may be able to

prove, or what may be the reasonable interpretation of the defend
ants' acts, but whether the plaintiffs have shown a ground for re
lief if they can prove what they allege. We lay on one side as not

necessary to our decision the question of the defendants' powers,
and assuming that they act within them consider only whether

the use that according to the bill they intend to make of them will
54
infringe the plaintiffs' rights.'

The Court further stated certain principles which had an omi
nous sound and which proved to be indicative of what the Court
would do once a case reached it on its merits and it was demon

strated that the Federal reserve banks were using oppressive
methods in collecting on non-par banks. It said : " If without a
word of falsehood but acting from what we have called disinter

ested malevolence a man by persuasion should organize and carry
into effect a run upon a bank and ruin it, we cannot doubt that an
action would lie. A similar result even if less complete in its effect
is to be expected from the course that the defendants are alleged

to intend, and to determine whether they are authorized to follow
that course it is not enough to refer to the general right of a
holder of checks to present them but it is necessary to consider
whether the collection of checks and presenting them in a body
for the purpose of breaking down the petitioner's business as now

conducted is justified by the ulterior purpose in view.
“... The policy of the Federal reserve banks is governed
by the policy of the United States with regard to them and to
these relatively feeble competitors. We do not need aid from the
debates upon the statute under which the reserve banks exist to
assume that the United States did not intend by that statute to
sanction this sort of warfare upon legitimate creations of the

States . ” 55 The Supreme Court, therefore, remanded the case to the
District Court of the United States for the Northern District of

Georgia for trial upon its merits. This decision, in addition to
those of the District and Circuit courts mentioned above, estab
** Loc. cit . , p. 357.

* Ibid ., pp. 358-359 .

See also comments of C. T. Murchison, “ Par Clear

ance of Checks ,” The North Carolina Law Review , Vol. I , No. 3 ( January ..
1923 ) , pp. 146-147 .

260

CLEARING AND COLLECTION OF CHECKS

lished the jurisdiction of the Federal courts over any suit brought
by or against any Federal reserve bank, provided it involved the
necessary jurisdictional amount of money, namely, $ 3,000.56
In the District court Judge Beverly D. Evans, on March 11,
1922, decided that a Federal reserve bank may employ any
proper means or agency to collect at par checks drawn on non

par banks. The opinion may be summarized briefly as follows :57
Under the Federal Reserve Act the Federal reserve banks are em

powered to accept any and all checks payable on presentation,
when deposited with them for collection, and checks thus received
must be collected at par, since the Federal reserve banks are not

permitted to accept in payment of checks deposited with them
for collection an amount less than the full face value of the checks.

In the discharge of its duties with respect to the collection of
checks deposited with them , and with respect to performing the
functions of a clearing house, the several Federal reserve banks
are empowered to adopt any reasonable measure designed to
accomplish these purposes. To that end a Federal reserve bank
may send checks to the drawee bank directly, for remittance
through the mails, without cost of exchange. If the drawee bank
refuses to remit without deduction of the cost of exchange, it is in

the power of the several Federal reserve banks to employ any
proper instrumentality or agency to collect the checks from the
drawee bank , and it may legitimately pay the necessary cost of
this service. The process of the daily collection of checks, in the
exercise of the clearing house functions, is not rendered unlawful
because of the fact that of the checks handled two or more of
them may be drawn on the same bank . The Federal reserve bank

may also publish a par list as a legitimate feature of its clearing
house function , and while it should not include on that list the
name of any bank that has not agreed to remit at par or has not
authorized the use of its name, it may indicate, through the par

list, its ability to collect checks upon all banks located in a par
ticular place.

The Court also found from the facts that the

Federal Reserve Bank of Atlanta had not used or proposed to
use improper or illegal methods for the purpose of coercing the
non -member banks, but that the plaintiff banks were entitled to
the writ of injunction against the inclusion of their names on the
boSee also Federal Reserve Bulletin , Vol. VII ( 1921 ) , pp. 700-701 .
57American Bank and Trust Co. et al. v. Federal Reserve Bank of Atlanta

87

et al., 280 Fed . 940 ( 1922 ) .

THE PAR COLLECTION CONTROVERSY

261

par list without their consent, but for no other matter complained
of against the Federal reserve bank.58

Appeal from this decision was taken by the plaintiff banks to
the United States Circuit Court of Appeals from which a decision
was handed down on November 2, 1922.59 This court affirmed
in toto the decision of the District Court, and added, “We are not
of opinion that a bank , in receipt for collection of checks on other

banks, is guilty of an abuse of its right as such holder when, in due
course, with reasonable promptness, without designed delay or
accumulation, and in proper manner, it presents, or causes to be
presented, those checks to the drawees for payment in cash. In
so doing the collecting bank would be exercising its rights as the
holder of checks received by it for collection, and would not be

guilty of an abuse of that right for an unlawful purpose. If the
holder of the checks is guilty of no wrong, the fact that the payee
[sic ; drawee ? ] is inconvenienced by having to pay in cash would

not give the latter a valid ground of complaint. Inconvenience
resulting to one party from another's exercise of a right in a law

ful way does not give the former a right of action . ” 60
When the case finally reached the United States Supreme
Court for the second time, the rulings of the lower courts were

upheld in an opinion delivered by Mr. Justice Brandeis on June
11 , 1923.61 The Court found no adequate reason for not accept
ing the concurrent findings of fact made by the two lower courts
and considered as the main question whether, on the undisputed
facts, the plaintiffs were entitled to additional relief. In deciding

this question the Court considered the course of business formerly

prevailing and the changes wrought by the attempt to introduce
universal par clearance and collection of checks through the Fed
eral reserve banks. As a result of these considerations, the Court
found that although there was no intentional accumulation or

holding of checks in order to embarrass, the advantages offered by
the Federal reserve banks have created a steady flow in increased
volume of checks on country banks so routed . It seemed clear
that the action contemplated by the Federal reserve banks would

subject the country banks to certain losses and " in order to

ro

tect them from such losses it would be necessary to prevent the
5*See also Federal Reserve Bulletin , Vol. IX ( 1922 ) , pp . 258-259 .
S® American Bank and Trust Co. et al. v. Federal Reserve Bank of Atlanta
et al., 284 Fed . 424 ( 1922 ) .

"Loc. cit., p. 425 ; Federal Reserve Bulletin, Vol. VIII ( 1922) , pp. 1408
1409 .
61

" American Bank and Trust Company et al. v. Federal Reserve Bank of At
lanta et al., 262 U. S. 643 ( 1923 ) .

262

CLEARING AND COLLECTION OF CHECKS

Federal reserve banks from accepting the checks for collection.
For these banks cannot be compelled to pay exchange charges or

to abandon superior facilities. ” 62
After reviewing the provisions of the Federal Reserve Act re

lating to the powers of the Federal reserve banks in collecting
checks, the Court held that wherever collection can be made by
the Federal reserve bank, without paying exchange, neither the
common law nor the Federal Reserve Act precludes their under
taking it, if it can be done consistently with the rights of the
country bank already determined in the case of the American

Bank and Trust Company et al. v. Federal Reserve Bank of At
lanta, Georgia, et al., 256 U. S. 350 ( 1921 ) .

Federal reserve

banks are authorized by Congress to collect for other reserve
banks, for members, and for affiliated non-members, checks on any

bank within their respective districts, if the check is payable on
presentation and can in fact be collected consistently with the
legal rights of the drawee without paying an exchange charge,
and within these limits Federal reserve banks have ordinarily the
same right to present a check to the drawee bank for payment
over the counter, as any other bank, State or national, would

have. The Court further held that the findings of fact negatived
the charges of wrongful intent and of coercion. The Federal re
serve bank had strengthened its case in this respect since the case
has been tried in the United States District Court by filing an

amended answer to the charges and disclaiming any intention of
demanding payment in cash , when presenting checks at banks,
and averred its willingness to accept payment in drafts, either on
the drawees’ Atlanta correspondents or on any other solvent bank,
if collectible at par. " Country banks, " the Court said, "are not
entitled to protection against legitimate competition. Their loss
here shown is of the kind to which business concerns are commonly
subjected when improved facilities are introduced by others, or
a more efficient competitor enters the field . " 63 The Court held

that the course of action contemplated by the Federal reserve
bank was not ultra vires.64

This decision thus establishes the principle that Federal re
serve banks may collect checks at par on banks which refuse to
remit at par by presenting the checks directly over the counter,
provided they do not accumulate checks with the intention of em
barrassing or coercing such banks and if the checks in fact can
62Loc. cit., p. 646.

631bid., p. 648.
" Ibid . See also the Federal Reserve Bulletin , Vol. IX ( 1923 ) , pp. 788-789.

THE PAR COLLECTION CONTROVERSY

263

be collected consistently with the legal rights of the drawee with

out paying exchange charges. To the italicized portion of the
paragraph the Court has permitted some vagueness to attach
itself.

Before studying another case of equal, if not greater signifi
cance, decided by the United States Supreme Court on the same
date and adverse to the interests of the Federal reserve banks in

their attempt to establish a universal par collection system, a
brief review will be made of two other cases which in the meantime
attracted attention.

The San Francisco par collection case

In 1921 a case arose in Oregon in which the United States
District Court for the District of Oregon ruled that a Federal
reserve bank may not use the check collection system to coerce
non-member banks to remit at par .

The facts may be sum

marized briefly. The Brookings State Bank , a small corpora
tion in southern Oregon, with correspondents in Portland and
San Francisco, refused to remit at par for checks sent it by the
Federal Reserve Bank of San Francisco or its branch at Port

land. The Federal reserve bank established an agent in Brook
ings who collected checks over the counter to the extent of
$102,850.33 at an expense of $1,915.32 during the space of about

a year. This method caused the Brookings bank much annoyance
and required it to maintain a materially larger reserve than ordi

narily would have been necessary in the usual conduct of its busi
ness.. The agent was finally withdrawn and the Brookings bank
notified that thereafter checks would be forwarded for collection

by mail direct to the bank, with a request that they be paid at par
and the proceeds remitted by exchange on Portland or San Fran
cisco. Checks were then forwarded , indorsed “ Pay to Brookings
State Bank for collection only and remittance in full without de
duction for exchange or collection charges. Portland Branch,
Federal Reserve Bank of San Francisco, Frederick Greenwood,
Manager.” These were returned by the Brookings bank without

payment on the ground that the bank was not called upon to act
as agent for the Federal reserve bank to make collections under

the terms imposed. The Federal reserve bank , upon the return of
the checks, returned them to its correspondents, advising them, in
* Brookings State Bank v . Federal Reserve Bank of San Francisco , 277
Fed . 430 ( 1921 ) ; Ninth Annual Report of the Federal Reserve Board ( 1922 ) ,

pp. 271-274 . See also Murchison , op. cit., pp. 148-149.

26+

CLEARING AND COLLECTION OF CHECKS

effect, that the Brookings bank refused to pay and had not pro
tested the paper, and that they must look to the Brookings bank
for their protection. Suit was brought September 29, 1921, in
the United States District Court for the District of Oregon to

enjoin the Federal Reserve Bank of San Francisco from indulging

in certain alleged practices supposedly injurious to the plaintiff's
business .

Judge Wolverton rendered his decision December 19, 1921 .
He held, in the first place, that the State bank, if it so desired,
had the right to charge a reasonable rate of exchange for its re

mittances even though there may exist a custom by which banks
make remittances without the exaction of exchange. In the
second place, he ruled that while the Federal reserve bank was
acting within its authority in maintaining an agent at Brookings
for the purpose of making collections over the counter of the

plaintiff and in paying the expenses entailed thereby, it was at

fault in two particulars : “ First, in attempting to impose the con
dition that the plaintiff bank pay without its charge for exchange;
and, second, in attempting to hold the plaintiff bank responsible
for not having its own paper protested for non -payment." 66
The judge held, further, that the method employed by the Fed
eral reserve bank was extraordinary, extravagant and unbusiness
like and indicated most convincingly that it was for the purpose
of coercing the State bank into adopting the policy of remitting
at par .

A preliminary injunction was issued restraining the Federal
reserve bank from sending letters to its clients, advising them
that they must look to the plaintiff bank for their protection
through failure to protest such paper. This preliminary injunc
tion was made permanent on June 26, 1922, Judge Wolverton
again rendering the decision.97 At this time he held that two
questions were presented : ( 1 ) Whether the reserve bank has the

authority to make collections from non -member banks ; and ( 2 )
whether it can coerce such banks to remit at par.
On the first question he ruled that the wording of the Federal
Reserve Act in this respect is optional— “ that the Federal reserve
bank may at its option receive paper against such banks for col
lection. Having that power, it may collect it , if it can find a
way of doing so without the payment of exchange which it is pro

hibited from paying by the act. It is a banking custom, as well
66277 Fed. 432 ( 1921 ) .

6 Brookings State Bank v. Federal Reserve Bank of San Francisco, 281
Fed. 222 ( 1922 ) .

THE PAR COLLECTION CONTROVERSY

265

as a legal right, which a holder of a check has at all times, to pre
sent paper at the counter of the drawee bank and demand pay

ment, and, if denied, the paper is subject to dishonor. Paper so
presented and paid over the counter is not subject to exchange.
It is also a custom among banks, in making collections from other
banks, where there is not more than one bank in a place, to send
checks to the drawee bank with request for remittance, and the
request is honored unless there is some special reason why the

bank should not pay. These banking rules are conceded . ” 68 In
answer to the Federal reserve bank's insistence that it was its

duty, imposed upon it by the Federal Reserve Act, to collect such

checks, Judge Wolverton pointed out that the Federal reserve
bank itself had recognized the optional character of its function
in this regard, by notifying its correspondents that it would
accept no more paper on the Brookings State Bank for collection.

As to the second question, Judge Wolverton ruled that the
non-member banks being without the pale of the Federal Reserve
Act, have the right, if they see fit, to charge reasonable exchange
on remittances ; that it is a right the bank may relinquish at its
option, but ought not to be coerced into doing so and any strategy
which has for its purpose the coercion of such non-member bank
to yield its legal right in this respect is unlawful, and will not be
approved by the courts ; that the testimony impelled him to the

conclusion that the Federal reserve bank had gone to the length
of endeavoring to coerce the Brookings bank to accede to its
demand that the latter bank agree to remit at par. In harmony
with the opinion rendered at the preliminary hearing, he held that
the return by the Brookings bank without payment of checks sent
to it indorsed “ Pay to Brookings State Bank, for collection only
and remittance in full without deduction for exchange or collec
tion charges ” was not tantamount to dishonor ; that while the

defendant bank , under the prevailing custom , could rightfully
remit its checks and drafts against the plaintiff bank direct to the
latter for collection and could thereby exact payment of them ,
it could not impose conditions upon which such payment should
be made, much less could it make the plaintiff bank its agent for
causing protest to be made for non -payment and that the idea of

requiring that a maker or drawer shall have protested his own
paper is so inconsistent with the functions of an agent that it
can hardly receive the sanction of law.
While the permanent injunction enjoined the Federal reserve
** Ibid., p. 226. Italics are the author's.

CLEARING AND COLLECTION OF CHECKS

266

bank from advising its clients that they must look to the Brook
ings bank for their protection through failure to protest such
paper, it did not apply respecting the maintenance of an agent at

Brookings as he had been withdrawn practically at the time of the
institution of the suit, and there appeared to be no intention upon
the part of the Federal reserve bank to replace him . It is unfor
tunate in the interest of clearness that the agent was not present

in order to determine definitely whether the injunction would have
been used to exclude him from Brookings. In the light of the
Cleveland par collection decision, next to be reviewed,, there seems
to be but little doubt that the injunction would be extended to
the agent also if he uses oppressive methods.69
The Cleveland par collection case o

This case, like the San Francisco case, established the prin

ciple that a Federal reserve bank, may not use oppressive or coer
cive methods in its efforts to collect checks at par. In these two
cases the Federal Reserve Banks of San Francisco and Cleveland

were guilty of oppressive methods and objectionable motives not
proved in the Atlanta case and which , in line with the opinion of
the United States Supreme Court delivered by Justice Holmes,
were subject to condemnation. The decision in the so-called Cleve
land par

collection case was rendered by the United States Dis
trict Court for the Eastern District of Kentucky on October 14,

1922, and was in accordance with the reasoning of the United
States Supreme Court in its decision of May 16, 1921 , when it
remanded the Atlanta case to the lower court for retrial on its
merits to determine whether the plaintiff banks had grounds for
relief. The facts in the Cleveland par collection case will be sum

marized briefly .
The plaintiff bank, the Farmers and Merchants Bank of Cat
lettsburg, Kentucky, was unwilling to remit at par to the Fed
eral Reserve Bank of Cleveland, or more accurately, to the branch
at Cincinnati. From January, 1918, to December, 1919, the
Federal reserve bank had attempted to persuade the Catletts

burg bank to enter into an agreement to remit at par,, but was
unsuccessful . Consequently , the Federal reserve bank resorted to
other methods for collecting the checks than sending them
through the mails.

It sent its traveling representative, H. A.

**See Ninth Annual Report of the Federal Reserve Board ( 1922 ) , pp. 271
274 ; Murchison, op. cit ., pp. 148-149.
TºFarmers and Merchants Bank of Catlettsburg, Ky . v. Federal Reserve
Bank of Cleveland, Ohio, 286 Fed. 610 ( 1922 ) .

THE PAR COLLECTION CONTROVERSY

267

Magee, to Catlettsburg to interview the bank officials. Failing to

persuade them, he insisted and demanded that they agree, and
finally threatened to use the American Express Company as a col
lecting agent. He anticipated that this would be very embar
rassing to the Farmers and Merchants Bank , and, according to
affidavits filed by that bank , he said that the bank “ .
would

be mighty glad to sign up before long, as no bank could exist that
did not ; that the Federal Reserve System was like aa mighty battle
ship coming up as it were from a smooth sea, and all banks that
did not affiliate with it could not stand its swells and must get in

its wake for safety, and that in the next five years there would be
no small banks." 71 From January 6, 1920, to February 26, 1920,

the American Express Company was employed to collect the
checks, during which time the local bank countered by furnishing
checks to its depositors endorsed with the words : “ Payable in cash
or exchange draft at the option of the Farmers and Merchants
Bank of Catlettsburg, Ky." When checks so endorsed were pre

sented for payment the bank would offer drafts but no cash
When drafts would not be received, no payments would be made

The express company finally refused to act as collecting agent
because of the trouble involved .

Local individuals then were em

ployed as agents, although Magee was frequently on the ground
doing what he could, according to the affidavits, to bring the bank
into line by driving away depositors, creating scenes, and acting
in a boisterous, domineering, dictatorial and quarrelsome manner,

and doing many other things designed to bring discredit upon the
local bank . With few exceptions, the court found little evidence
to disprove the charges made in the affidavits.
Suit was brought in the State court on July 15, 1921 , by the

Farmers and Merchants Bank of Catlettsburg against the Fed

eral Reserve Bank of Cleveland, from which court the case was re
moved to the United States District Court, Eastern District of

Kentucky, upon the joint petition of the two defendants, on the
ground that it arose under the Constitution and laws of the United
States. A temporary restraining order was granted by the clerk
of the State court and continued in force until the case was tried

in the District court where a preliminary injunction was granted.
In bringing suit, the local bank claimed that the method adopted
by the Federal reserve bank , of advertising that it would collect
all checks on the local bank free of charge, resulted in a large
number of checks being presented through that channel in order
* Loc. cit . , p. 612.

268

CLEARING AND COLLECTION OF CHECKS

to avoid remittance charges, with the result that they were pre
sented in great numbers at once by the Federal reserve bank with
resulting embarrassment to the local bank.

The bank insisted

that this practice was injurious to it in that it deprived it of such
charges, required it to keep a greater reserve in cash than it would
have had to do otherwise, scandalized it, affected its credit, and
humiliated it .

The United States District Court held that the law in the case

had been settled by the Supreme Court in the Atlanta case, and

that it all depended on the purpose of the Federal reserve bank in
adopting “... this unusual and heretofore unheard of pro
cedure of seeking out plaintiff's checks for collection and pre
senting them in a body for payment over the counter." 72 If the
purpose were to break down the plaintiff's business as then con
ducted, it was unlawful and subject to be restrained by a court of
equity. “ It does not follow that because the holder of a check
has a right to present it to the bank upon which it is drawn for
payment over the counter, one has the right to seek to become the

holder of all the checks drawn on a bank as they are drawn and
then present them in a body for payment in cash over the counter.
If such was the defendant bank's immediate purpose in so doing, it
was not justified by the ulterior purpose which it has in view, to
wit, of freeing commerce from the burden of such charges.
Such a course of procedure is a kind of refined holdup. It is one
of the inalienable rights of a person to be unprogressive, selfish
and even mean . This is said without intending to so characterize
plaintiff's position. No other person has the right to coerce him
.

into being otherwise.
“ What then was the defendant bank's purpose in initiating
.

this movement against the plaintiff and keeping it up for over a
year and a half — that is, until stopped from further doing so by
the temporary restraining order ? There is but one answer to this
question, and that is that it was to break down plaintiff's business.
as it was being conducted, not to put it out of business, but to
compel it to do business in this particular as it would have it do,
and not as plaintiff desired. ... It desired to impose its will
on plaintiff. That such was defendant bank's purpose is the

meaning of the course of procedure adopted. It can be accounted
for on no other basis . Such a purpose was avowed by those acting
on its behalf.

973
.

721bid., p. 618.
* Ibid ., pp . 618-619 .

THE PAR COLLECTION CONTROVERSY

269

The court was somewhat at a loss to know why the plaintiff
delayed so long in asserting its rights, but could see in the delay
no reason why the defendant Federal reserve bank should be per
mitted to continue to make collections in this unlawful manner

and as a result granted a preliminary injunction restraining the
defendants from continuing to make such collections of checks on

the plaintiff bank , from advertising that it would collect such
checks free of charge, and from doing anything else for the pur
pose of coercing the plaintiff to remit at par.74
The Richmond par collection case
The case which originated in the district of the Federal Re

serve Bank of Richmond is of the utmost importance, since it re
sulted in the United States Supreme Court upholding the legality
of the legislation in North Carolina which was designed to protect
State banks in their practice of making charges for remittance.
It constitutes a severe set -back to the attempt on the part of the

Federal reserve banks to establish a universal par collection sys
tem, and may have far- reaching consequences for the clearing and
collection system in this country. The United States Supreme

Court in its decision on June 11 , 1923 — the same day on which it
rendered its opinion in the Atlanta par collection case-reversed
the Supreme Court of North Carolina which had declared the

State statute unconstitutional.75 These two decisions are worthy

of careful review because of the different lines of reasoning fol
lowed and the important consequences involved . The Atlanta case
has been summarized above ;76 we will turn our attention now to
the Richmond case .

It will be recalled that North Carolina was one of the States

which attempted to preserve exchange charges for its State banks
by passing an Act , ratified February 5, 1921." This Act author
ized State banks in North Carolina to charge a fee not in excess
of 18 of 1 per cent. on remittances covering checks, or a minimum
fee of 10 cents, and provided that in the event a Federal reserve

bank , post office or express company should present checks at the
counters of the drawee bank and demand payment in cash , such
drawee bank should be permitted to pay by means of a draft
drawn upon its exchange deposit, excepting, however, checks pay
" See also the Federal Reserve Bulletin , Vol . VIII ( 1922 ) , pp. 1409-1413 .
* Farmers and Merchants Bank of Monroe, North Carolina, et al. v. Federal

Reserve Bank of Richmond , Virginia, 262 U. S. 649 ( 1923) .
* See pp. 261-263 above.

**Public Laws of North Carolina, 1921, Chap. 20, Sec. 2. See p. 252 above.

270

CLEARING AND COLLECTION OF CHECKS

able to the State or to the Federal government and checks upon
which the drawer had expressly designated to the contrary. The
Federal Reserve Bank of Richmond , being advised that the statute
was

unconstitutional, presented checks at the counter of the

drawee bank, demanding the full amount due and returned the
checks as dishonored when payment in cash was refused. In re
turning checks which had been so presented, the Federal Reserve
Bank of Richmond was careful to state that the check had been
duly presented and that payment in money at its face amount had
been demanded, but had been refused , since the drawee bank

claimed the right to discharge its obligations by its own draft.
The return of the dishonored checks to the depositors created
great dissatisfaction among them and the State banks found diffi

culty in explaining satisfactorily to their customers why the
checks were not honored. Some depositors transferred their ac
counts to member banks, in order to make sure that their checks
would circulate at par.

Relying upon the Act of February 5, 1921 , the Farmers and
Merchants Bank of Monroe and twelve other banks and trust

companies in North Carolina brought action in the Superior
Court of Union County, North Carolina, against the Federal Re

serve Bank of Richmond to enjoin that bank from refusing to ac
cept drafts drawn by plaintiff banks on their reserve deposits in
payment of checks presented for collection and from returning
such checks to the drawers as dishonored when plaintiffs refused
to pay them in cash .
The Superior Court granted a temporary restraining order

in February, 1921 , which prevented the Federal reserve bank from
refusing to accept exchange drafts drawn by the plaintiffs on their
reserve deposits in accordance with the Act of February 5, 1921 ;

it was enjoined from returning as dishonored any check, payment
for which had been tendered by plaintiff banks in exchange drafts
under the provisions of the Act and had been refused by the Fed
eral reserve bank ; it was enjoined from protesting such checks
for non -payment; and it was also enjoined from publication or
authorizing the publication of the name of any of the plaintiff
banks, literally or by inclusion, in any list or other publication
designed for circulation. The restraining order provided that all
such institutions as the original thirteen might become plaintiffs

in the action and have the benefit of the restraining order, and as
a result, some 265 State banks and trust companies became par
ties plaintiff.
The suit was removed to the United States District Court for

THE PAR COLLECTION CONTROVERSY

271

the Western District of North Carolina at the instance of the

Federal reserve bank , but, in turn, was remanded to the Superior

Court of Union County for trial on its merits because the juris
dictional amount of $3,000 was not involved, the minimum that
must be involved before a Federal court obtains jurisdiction.

Argument was heard in the State court from February 27 to
March 3, 1922. No evidence substantiating the allegations of
oppressive and unreasonable methods employed by the Federal
reserve bank was offered. On the contrary, it appeared from the
evidence that the Federal Reserve Bank of Richmond throughout
the whole of the par point campaign in North Carolina had prac-.
ticed the utmost consideration for the non-member banks that was
consistent with what it believed to be the duties imposed upon it
by the Federal Reserve Act.78 Although finding the motive to

harm on the part of the Federal reserve bank lacking, Judge
James L. Webb, on March 29, 1922, entered the final order mak

ing the injunction permanent and sustaining the State statute as
constitutional.79

The case was appealed then to the Supreme Court of North
Carolina, and Mr. Chief Justice Clarke gave the opinion rendered
by the court on May 24, 1922, the outstanding features of which
may be summarized as follows : 80 The court held that it did not
need to consider the allegations of the plaintiff banks as it had
found them untrue. These allegations were to the effect that the

Federal Reserve Act which prohibited Federal reserve banks from
paying exchange would cause all collections to be made through
the Federal reserve banks which thus can collect without charge.
and also that the Federal Reserve Bank of Richmond was under

taking to coerce the non-member banks to abandon their right to
charge by saving up checks until they reached a large amount and
then demanding payment for them at the counter, with the prob
able effect of driving the bank into liquidation. The court added
the following significant statement : " It would be unnecessary to

notice this proposition but that such conduct was condemned by
Mr. Justice Holmes in the case of the American Bank and Trust

Company v. Federal Reserve Bank of Atlanta, opinion filed May
16, 1921. That decision was rendered upon a demurrer on which ,
** Letter No. 6, pp. 8-10.
** Ibid .

* Farmers and Merchants Bank et al. v . Federal Reserve Bank of Rich
mond , Va., 183 N. C. 546 ( 1922 ) ; 112 S. E. 252 ( 1922 ) ; Federal Reserve

Bulletin, Vol. VIII ( 1922 ), pp . 701-703; Ninth Annual Report of the Federal
Reserve Board ( 1922 ) , pp . 261-265.

272

CLEARING AND COLLECTION OF CHECKS

of course, the court assumed that all the allegations of the bill and
all reasonable inferences from them were true.

The finding of

fact on the trial in the present case eliminated this question en
tirely from our consideration ." 81

It was held that a Federal reserve bank under the provisions
of the Federal Reserve Act has the right to receive for collection a

check drawn upon a non-member bank or upon any other person
within its district. The real question, then, according to Mr.
Chief Justice Clarke, was whether the Legislature of North Caro
line, by such an act as the one mentioned above, could interfere
“... with this provision or regulation of the Federal corpora
tion by a valid act of Congress by providing that a State bank

need not pay its obligations in lawful money when checks, which
upon their face are unconditional orders for the payment of
money, are presented by Federal reserve banks." 82

The statute

of North Carolina was intended for the benefit of the State banks
.. but that policy, however desirable for such banks, is
clearly in conflict with the valid constitutional provision of the
Federal statute .

No act of this State can authorize the drawee

bank to pay less than the face amount of the check drawn upon

it

by its depositor or to remit its check in payment or pay it other

wise than in legal-tender money. Nor can it require that the
Federal Reserve Bank shall pay a fee, or that the bank here may
remit less than the face value of the check when the Federal stat

ute forbids such charge. It is true that the Federal Reserve
Bank, as holder of the check , has no contract rights with the
drawee bank until the check is presented, but as holder it can
require payment of the face amount on the check in legal tender,
and under the act of Congress it cannot pay a deduction from
1

that face value by accepting a remittance to the Reserve Bank of
a lesser amount.

" The Federal statute, being a regulation of the Federal Cor

poration by Congress , the act of this State authorizing the payee
bank here to exact exchange is in direct conflict with the duty im
$ 1183 N. C. 551 ( 1922 ) .

82Ibid . This decision is in harmony with the legal definition of the check
as generally accepted in this country, and with the general literature dealing
with the nature of deposit currency evidenced by checks, as a demand liability
( See pp . 1, 76-77 above ). It is to be noted also, that the

of the bank .

United States Supreme Court in the case of Federal Reserve Bank of Rich
mond v. Malloy et al., Trading as Malfoy Brothers, 44 Sup. Ct. 296 (1924 ),
asserted again and again that a check on a bank or banker is payable in money
and in nothing else, and held that acceptance by the collecting agent of any
thing else rendered it liable to the holder as though it had collected the cash.
( See pp. 284-286 below ).

THE PAR COLLECTION CONTROVERSY

273

posed upon the Federal Reserve Bank by the act of Congress and
the Reserve Bank acts within its duty to observe the provision of
the Federal act and refuse to receive a check for less than the

face amount of the check sent by it for collection.
“ The United States Constitution, Article VI ( Sec . 2 ) , pro
vides that the Constitution of the United States, and the laws
.

made in pursuance thereof, 'shall be the supreme law of the land ;
and the judges in every State shall be bound thereby, anything in

the Constitution or laws of any State to the contrary notwith
standing . In the matter before us the act of Congress which
provides that no exchange shall be allowed by the Reserve Bank
for remitting for the collection of any check by any bank is in
direct conflict with the statute of this State authorizing the
payee bank to remit a lesser amount than the face amount of any

check paid by it if presented by the Federal Reserve Bank. In
this conflict of authority the Federal law is supreme. The in
junction, therefore, was improvidently granted and the judgment
must be reversed . " 83 The court dismissed the injunction issued
by the lower court against the Federal Reserve Bank of Richmond .
The plaintiff banks petitioned for a rehearing of the case
before the Supreme Court of North Carolina , but the court dis
missed the petition on December 13, 1922, reaffirmed its former

decision by a mere memorandum decision, and did not modify or
supplement its former opinion.84

On a writ of certiorari the case was taken to the United States
Supreme Court, from which an opinion was handed down June . 11 ,
1923, reversing the decision of the Supreme Court of North Caro
lina and deciding in favor of the non-par State banks.85 Mr.
Justice Brandeis delivered the opinion of the Court which holds
that the State statute in question does not obstruct the perform

ance of any duty imposed upon the Federal Reserve Board and the
Federal reserve banks, that it does not interfere with the exercise

of any power conferred upon either, and that it is consistent with
the Federal Reserve Act and with the Federal Constitution. From

this opinion Mr. Justice Van Devanter and Mr. Justice Suther
land dissented.

The Court after reviewing the State law bearing upon the
question, insisted that the issue was whether this statute conflicted
with the Federal Reserve Act or otherwise with the Federal Con
83183 X. C. 552-553 ( 1922 ) .

**Federal Reserve Bulletin, Vol. IX ( 1923 ) , p . 20.

«Farmers and Merchants Bank of Monroe, North Carolina, et al. v. Fed
eral Reserve Bank of Richmond , Virginia, 262 U. S. 619 ( 1923 ) .

274

CLEARING AND COLLECTION OF CHECKS

stitution. The Court reviewed the development of the Federal
reserve clearing and collection system , and pointed out the circum
stances which gave rise to the North Carolina statute, stating

that the attempt of the Federal reserve banks to establish univer
sal par collection would cause the exchange-charging State banks
to suffer a loss if not render them insolvent, and that the Act was
passed to protect the State banks from threatened loss which
might disable them . It observed that the Federal reserve banks

insisted that no alternative was left open to them , since they had
to collect the checks and were forbidden to pay exchange charges,
while the State banks, on the other hand, denied that the Federal

reserve banks were obliged to accept these checks for collection
and insisted that Federal reserve banks should refrain from ac
cepting for collection checks on banks which did not assent to

par remittance. Finally, the Court pointed out that the statute

merely sought to remove ( when the drawer acquiesced ) the abso
lute requirement of the common law that a check presented at the

bank's counter must be paid in cash , thus giving the drawee bank
the option to pay by exchange only in certain cases, namely, when
the check was presented by or through any Federal reserve bank,
post office, or express company, or any respective agents thereof.se
The Court said that the North Carolina statute “ made no at

tempt to compel the Federal reserve bank to pay an exchange

charge. It made no attempt to compel a depositor to accept
something other than cash in payment of a check drawn by him.
It merely provided that, unless the drawer indicated by a notation
on the face of the check that he required payment in cash, the
drawee bank was at liberty to pay the check by exchange drawn
on its reserve deposits.

Thus the statute merely sought to re

move ( when the drawer acquiesced ) the absolute requirement of
the common law that aa check presented at the bank's counter must
be paid in cash .” The question, said the Court, was " whether this
legislative modification of the common law rule which 2requires

payment in cash violates the Federal Constitution.

That

it did was asserted by the Federal reserve bank on five grounds.
The first contention disposed of by the Court was that in

authorizing payment of checks by draft on reserve deposits, Sec
tion 2 of the State law violates the provision of Article I, Section
10, clause 1 , of the Federal Constitution , which prohibits a State
from making anything except gold and silver coin a tender in pay
ment of debts. The Court held that this claim was clearly un
**Loc. cit. , pp . 649-659.

THE PAR COLLECTION CONTROVERSY

275

founded, since the debt of the bank is solely to the depositor and

the statute does not authorize the bank to discharge its obligation
to its depositor by an exchange draft but merely provides that,
unless the depositor in drawing the check specifies on its face to the
contrary, he shall be deemed to have assented to payment by such
draft. Further, the Court held that there is nothing in the Fed
eral Constitution which prohibits a depositor from consenting,
when he draws a check, that payment may be made by draft, and,
as the statute is prospective in its operation, there is no constitu
tional obstacle to a State's providing that in the absence of dis
sent, consent shall be presumed.
The second contention was that Section 2 violates the due

process of law clause since it deprives the Federal reserve bank of
the right to do business common to all banking institutions, which

is a valuable property right, and that to compel it to accept in
payment of checks exchange drafts on reserve deposits, whether
good or bad, deprives it of liberty of contract , and in effect of an
important branch of its business, since that of collecting checks
cannot be conducted under such limitations.

To this argument

the Court replied that it was the purpose of the statute to pro
mote the solvency of State banks and that so construed it is

merely an exercise of the police power, by which the banking busi
ness is regulated for the purpose of protecting the public, and
promoting the general welfare and that the regulation here at
tempted is not so extreme as inherently to deny rights protected
by due process of law.

It was contended, in the third place, that the statute is ob

noxious to the equal protection clause since the Federal Reserve
Bank of Richmond is obliged to accept payment in exchange
drafts, whereas other banks with whom it might conceivably com
pete may demand cash, except in those cases where they present
the check through an express company. Relative to this argu
• ment the Court ruled that it is well settled that the legislature of
a State, in the absence of controlling provisions, may direct its
police regulations against what it deems an existing evil, without

covering the whole field of possible abuses ; that if the legislature
finds that a particular instrument of trade war is being used

against a policy which it deems wise to adopt, it may direct its
legislation specifically and solely against that instrument ; and
finally that the facts disclosed ample ground for the classification
made by the legislature.
The fourth contention was that Section 2 conflicts with the

276

CLEARING AND COLLECTION OF CHECKS

Federal Reserve Act because it prevents the Federal reserve banks
from collecting checks on such State banks as do not acquiesce in

the plan of par collection, the contention resting upon the assump
tion that the Federal Reserve Act is mandatory in requiring the
Federal reserve banks to receive such checks and make such col

lections. On this point the Court ruled that the law was permis
sive only, that neither Section 13 nor any other provision of the
Federal Reserve Act imposes any obligation to receive checks for
collection, and that the word "may" in this connection was used
87
advisedly.
The Court insisted that no duty or right of the Federal reserve

bank to collect checks is obstructed by the North Carolina statute,

which merely gives to the drawee bank the right to pay in the cus
tomary exchange draft, where its depositor has, by the form used
in drawing the check, consented that this be done.
The fifth contention was that Section 2 conflicts with the Fed

eral Reserve Act because it interferes with the duty of the Federal
Reserve Board to establish in the United States aa universal system
of par clearance and collection of checks. In reply to this the
Court held that Congress did not confer in terms upon the Federal

Reserve Board or the Federal reserve banks a duty to establish
universal par clearance and collection of checks, and that there
is nothing in the original Act or in any amendment from which
such duty to compel its adoption may be inferred. In neither
Section 13 nor Section 16 is there any suggestion that the Federal
Reserve Board and the Federal reserve banks shall become an
agency for universal clearance.

It seems apparent that under this decision a State may pass
valid laws taking away from the Federal reserve banks the right

to collect checks over the counter in cash and at par, which is the
only weapon they have had to prevent non-member banks from
deducting a remittance charge. It is possible that such action
may be forestalled by amending the Federal Reserve Act so as to
make par remittance mandatory. Such an amendment, presum
ably, would nullify the North Carolina law or any similar one and
would settle a serious controversy . 88
87On this point, see Murchison, op. cit. , pp. 149-150, who insists that although
the term “ may ” is used, the content and purpose of the Act makes it man
datory in nature and that any other interpretation weakens the Federal re

serve banks in their attempt to function as they were intended to function .
68 Federal Reserve Bulletin , Vol. IX ( 1923 ), pp. 789-793 ; see also J. T.

Holdsworth, Money and Banking, 4th ed. ( 1923), p . 446, who agrees with this
point of view .

THE PAR COLLECTION CONTROVERSY

277

The case of the Pascagoula National Bank of Moss Point, Missis

sippi v. Federal Reserve Bank of Atlanta , et al.89
The first litigation involving the rights of the member banks.
in the Federal reserve clearing and collection system was started
by the Pascagoula National Bank of Moss Point, Mississippi, on :

August 9, 1924, when it filed suit against the Federal Reserve
Bank of Atlanta, its Federal reserve agent, and the Federal Re
serve Board to recover alleged damages of $12,750 suffered for

the last six years as a result of the fact that the Federal reserve
bank accepted checks for deferred rather than immediate credit.

It also sought an injunction to prevent the Federal reserve bank
from receiving for collection any check drawn upon and payable
by any bank outside the home district of the Federal reserve bank ;,
it sought to compel the Federal reserve bank to give immediate

credit at face value on deposit of checks payable within the dis
trict ; it sought to establish the right of the member banks to
charge exchange on checks drawn on them and presented by or
through the Federal reserve bank ; it sought to enjoin the Federal
reserve bank and the Federal Reserve Board from operating a
clearing and collection system except within very narrow limits
alleged to have been established by the United States Supreme
Court, and prayed that they be stopped permanently from seek
ing to be an universal agency for the clearance of checks. Judge
Samuel H. Sibley of the United States Court for the Northern

District of Georgia , on October 3, 1924, refused to issue an inter
locutory injunction, reassigned the case for hearing on its merits,
and ruled that the Federal Reserve Board could not be held liable
to the District court.90

883 Fed. (2nd Series ) 465 ( 1924 ) ; Federal Reserve Bulletin , Vol. XI ( 1925 ) ,
pp. 100-102,

"See Federal Reserve Bulletin , Vol. X ( 1924 ), p. 866 ; Commercial and
Financial Chronicle, Vol. CXIX, No. 3100 ( New York , November 22, 1924 ) ,

p. 2367; Wall Street Journal, Vol. LXXXIV, Nos. 84 and 85 (October 8 and
9, 1924 ) .

This suit is in harmony with the Claiborne-Adams Check Collection Plar.
advocated by the opponents of par remittance . Mr. Charles DeB. Claiborne,
Vice - President of the Whitney -Central National Bank of New Orleans, and
Chairman of the Committee of Five on Exchange of the American Bankers'

Association, and Mr. L. R. Adams, General Secretary of the National and
State Bankers' Protective Association, were the sponsors of this plan. It
provided that each Federal reserve bank was to receive on deposit at par from
member and non -member clearing banks in that district for immediate credit
and availability, checks which were payable in that district and which were

drawn upon any bank which agreed to remit at par in funds acceptable to the
Federal reserve bank .

Checks drawn upon non-par banks and upon those

outside of the district were to be received by the Federal reserve banks as
forwarding agents only and for deferred rather than immediate credit. When
such checks were sent to the drawee bank, the bank might remit to the Federal

278

CLEARING AND COLLECTION OF CHECKS

When the case came to trial before the same court on Decem

ber 15, Judge Sibley, who rendered his decision on December 29,
reviewed the following four contentions of the complainant : First,
that by the provisions of Section 16 of the Federal Reserve Act,
it is entitled to immediate credit at par for checks drawn on any

of the depositors of the Federal Reserve Bank of Atlanta, no
matter at what distance from Atlanta the drawee may be. Second,
that under the Hardwick Amendment of Section 13, it has the

right to make a charge for remitting payment to the Federal Re
serve Bank of Atlanta for checks drawn on itself when these are

not the property of the Federal reserve bank, but are handled for
collection .

Third, that under Section 13 the Federal Reserve

Bank of Atlanta has no right to have or to collect any checks
drawn on the complainant which come to the Federal reserve bank

from a source outside the sixth district. Fourth, that if the Act

authorizes this deprivation of complainant's right to charge for
remittance, it takes its property without due process of law, con
trary to the Constitution.

Considering the first contention, Judge Sibley analyzed that
provision of Section 16 of the Act which, according to the com
reserve bank in an exchange draft and make a deduction of not over ten
cents for each $ 100 of checks, but in no case to be less than ten cents for any

one remittance, the avowed purpose being to pass the charges back through
the Federal reserve banks to the depositing banks. All member banks were

to be permitted to make such deductions on checks returned from a bank in
-another district, if they so desired .
This plan was rejected on August 1 , 1923, by an advisory committee of

governors of the Federal reserve banks to which it had been referred by the
Federal Reserve Board, on the grounds that a return to the immediate credit

principle for a large proportion of the checks would revive one of the worst
faults of the old system , would result in the building up of fictitious reserves,

a large float, and the imposition of a large amount of exchange charges on the
business of the country . The Federal Advisory Council concurred with this re
port and advised the Federal Reserve Board that it considered the plan un
sound. The attitude of the Board is reflected in the provisions of Regulation
J , Series of 1924. See Federal Reserve Bulletin , Vol. IX ( 1923 ) , pp. 1089,

1194; Tenth Annual Report of the Federal Reserve Board ( 1923) , p . 466 ; C.
S. Tippetts, “ The Par Remittance Controversy,” The American Economic Re
view, Vol. XIV ( December, 1924 ) , pp. 641-646. Dr. Tippetts does not favor

forcing the non -par banks to remit at par through legislative complusion. The
into the system, and it does not seem to do it while the non-par banks can still
writer does not agree with this view. If competition does not force the banks

collect through member banks, then there remains but one effective remedy,
and that is to amend the Federal Reserve Act and force the non-par banks to
remit at par. This measure would be no more drastic than was the measure

taxing State bank notes out of existence in 1865. Our clearing and collection
system would then approach the ideal. In a large sense the nation would then
be clearing all its checks and drafts, although it is of course true that so long
as the deferred credit and debit principle is used, perfect clearing or offsetting

cannot take place. The nature of checks, however, makes it unwise to use any

but the deferred availability principle, and consequently the perfection of the
universal clearing plan would
lie in the perfect offsetting which would then

take place through the Gold Settlement Fund .

THE PAR COLLECTION CONTROVERSY

279

plainant, required the Federal reserve bank to give immediate
credit for checks received. It reads : " Every Federal reserve bank

shall receive on deposit at par from member banks or from Federal
reserve banks, checks and drafts drawn upon any of its depos

itors.” The pertinent question was whether the Federal reserve
bank was really receiving items on deposit at par when, in con
formity with Regulation J, it gave credit only according to the
time schedule and acted only as an agent in collection. The court
held that " a check so received and handled is really received for

collection and not on deposit in the common sense of the word,
meaning general deposit in which arises the relation of debtor and
.. Usually the de
creditor, not that of principal and agent.

positor may check immediately, but this is not of the essence of a
general deposit. The parties may agree otherwise ; and it is not
uncommon in banking practice, where large checks, payable at a
distance, are taken at par, to delay availability on the checking
account so that the banker may not, by honoring checks in ad
vance of collection, be lending his money without interest. The
inclusion of the time schedule only in the terms upon which the

reserve bank will receive deposits would be ordinary prudent bank
ing, considering the enormous volume of the aggregate reserve bank
' float,' as the mass of checks in transit is called. It may be noted
that, by Section 13, non-member clearing banks are required to

protect their deposited checks in transit by maintaining a balance
sufficient to offset them , which is another way of saying that the
checks are not available credits while in transit .

It must be re

membered also that these deposit accounts of the member banks
in the reserve bank , though subject to check, constitute their re
serve required under Section 19. By amendment of this Section
this reserve must be an 'actual net balance. '

Net' means that all

proper charges and deductions have been made from the account ;
“actual excludes what is merely fictitious or supposed .

Uncol

lected checks, though supposed to be drawn against actual, avail

deposits, may not be, and if so they may nevertheless be defeated
of payment by many circumstances, such as the death or counter
mand of the drawer, or offset by the banker upon the drawer's
insolvency. An immediate credit of them must be largely on the
faith of the depositor's indorsement, but the mere obligation of the
member bank is not the actual reserve intended by the law. More
over, the requirement that the reserve bank itself maintain a re

serve in gold or lawful currency of 35 per cent. of its deposits is
involved if the 'float is to be counted as present deposits. The
time schedule by which credit is deferred until checks would ordi

280

CLEARING AND COLLECTION OF CHECKS

narily be collected minimizes the chance of accumulated disap
pointments in collection, and the amount of merely supposed bal
ance in the reserve of members, and seems a very reasonable recon
ciliation of the requirement of Section 16, that the checks be re
ceived on deposit in the reserve account, with that of Section 19,
that the reserves be actual net balances.

“ The additional stipulation that the reserve bank will act only
as agent makes greater difficulty. It probably means that the
checks are at first received only for collection ; Ward v. Smith, 7
Wall. 447. 'Deposits for collection' are spoken of in Section 13.

but 'on deposit in Section 16 does not mean for mere collection.
Since, however, credit is to be given at the expiration of the

period fixed by the time schedule, whether returns from the check
have actually been received or not, at that time certainly the
agency is to cease and the check is to become and does become the
property of the reserve bank and the transaction ripens into a

general deposit. The check is then “received on deposit at par,' as
required by Section 16.”
Considering the second contention of the plaintiff bank, Judge
Sibley first reviewed that part of Section 16 which provides that
“ Nothing herein contained shall be construed as prohibiting a
member bank from charging actual expenses incurred in collecting
and remitting funds or for exchange sold to its patrons. The
Federal Reserve Board shall, by rule, fix the charges to be collected

by the member banks from its patrons whose checks are cleared
through the Federal reserve bank and the charge which may be
imposed for the service of clearing or collection rendered by the
Federal reserve bank ."" 91 The court held that “ whether the right
established in the first clause quoted, of a member bank to charge
actual expenses for collecting and remitting, would include a re
mittance in payment of checks drawn on it and presented by the
reserve bank ; or whether the term 'its patrons' in the second sen
tence refers to those sending checks to the reserve bank and im

plies that all expense of clearance of their checks is to be charged
back to them
were questions that did not require a deci
sion since “... the later legislation, known as the 'Hardwick

Amendment of Section 13 is directly applicable and controls. It
provides that ‘nothing in this or any other section of this Act
shall be construed as prohibiting a member or non-member bank
from making reasonable charges, to be determined and regulated
by the Federal Reserve Board, but in no case to exceed ten cents
"Quotation is from the court's decision, not trom the Act.

THE PAR COLLECTION CONTROVERSY

281

per $100 or fraction thereof, based on the total of checks and

drafts presented at any one time for collection or payment and

remission therefor by exchange or otherwise; but no such charges
shall be made against the Federal reserve banks.' The complain
ant argues that the last clause is in the nature of a proviso or

exception wholly repugnant to the main enactment preceding it,
and therefore void, leaving the grant of the right to make reason
able charges unrestrained by the exception. Or, if the last clause
is to be treated as a part of the main enactment equally with what
precedes, that the two parts are so inconsistent as to render the
whole legislation abortive, and leave Section 16 to control.”
It was held that there is no such repugnance in the Hard
wick Amendment as to cause either consequence, and that the
right to make the charge is established as to checks sent for col
lection or payment by other member banks or non-member banks,
but it cannot be made against reserve banks. The court then con

sidered the contention of the plaintiff that the charge is not made
against a reserve bank unless such bank is the lawful owner of the
checks dealt with, and that if it is handling them only as the
agent of another, for collection, the charge is against the true
owner and is to be passed back by the reserve bank to that owner.
It was held that the proceedings of Congress in adopting the
amendment show that par clearance through the reserve banks
was the issue dealt with and that the Hardwick Amendment was

made with the intent, and has the effect, to firmly establish it and
give to the Federal Reserve System and to the public whatever

advantage in clearing and collecting checks may flow therefrom,

as well as to save the reserve banks from an expense in collecting
their own checks. “ To forbid remittance charges against reserve
banks means no more than that remittances to them shall not be

diminished by such charges, without any inquiry, if that would
be practicable, into the real ownership of the items remitted for.
The reserve banks cannot recognize as proper such charges made
against them, and in this sense are forbidden to pay them .”
The third contention of the plaintiff that the Federal Reserve
Bank of Atlanta cannot handle checks coming to it from sources
outside the sixth district was held to be erroneous, since Section

13 of the Act specifically authorizes such procedure.
Considering the contention that if the Act authorizes the
deprivation of the complainant's right to charge for remittance,
it takes its property without due process of law, contrary to the

Constitution, the court ruled that " this takes none of the prop

282

CLEARING AND COLLECTION OF CHECKS

erty or property rights of complainant without due process of
law. Complainant may refuse to pay otherwise than in cash over
its counter, according to the common law, as on the other hand,
the reserve bank may insist on that sort of payment. What is
lost is the right to agree on a compensation for a more convenient
payment by draft on more accessible reserves when both parties
are willing so to agree . That the State, having power over the
State banker and his business, may regulate his method of receiv
ing and paying out his deposits, was ruled in Farmers and Mer
chants Bank of Monroe v. Reserve Bank of Richmond, 262 U. S.

649. A similar power must be recognized in the United States to
regulate banking in the Federal Reserve System. Complainant
being a National bank, chartered to do its business under Federal

laws, cannot complain that those laws are not , or do not remain,
such as it would prefer. It is not compelled to do anything with
out compensation. It is simply told that if it does the thing in
question it must be done without compensation. Noble State
Bank v. Haskell , 219 U. S. 575."

Nothing unlawful appearing in any of the acts of the defend
ants complained of, a decree was taken dismissing the bill.

While this decision is no more than could be expected with
confidence, it undoubtedly will go far towards settling some
aspects of the par collection controversy concerning which some
doubt apparently existed.

Regulation J amended as a result of the United States Supreme
Court decisions of June 11 , 1923
In conformity with the United States Supreme Court's deci

sion in the Richmond par collection case the Federal Reserve
Board on June 29 amended Regulation J which governs the par

collection system of the Federal reserve banks by inserting two
new provisions in the regulation.92 This Regulation J, Series of
1923 , was to have been effective August 15, 1923, but on July 25

was postponed until further notice. It was finally suspended in
definitely, Regulation J, Series of 1920, remaining in effect until
Regulation J , Series of 1924, became effective on May 9, 1924.
The new conditions inserted in Regulation J, Series of 1923, were :
“ ( c) No Federal reserve bank shall receive on deposit for collec- .
tion any check drawn on a non -member bank which refuses to
remit at par in acceptable funds. ( d ) Whenever a Federal re
Regulation J, Series of 1923, Federal Reserve Bulletin, Vol. 1X ( 1923 ) ,
pp . 903-905.

THE PAR COLLECTION CONTROVERSY

283

serve bank receives on deposit for collection a check drawn bys
indorsed by, or emanating from any non-member bank which re
fuses to remit at par in acceptable funds, it shall make a charge
for the service of collecting such check of 1/10 of 1 per cent., the
minimum charge to be 10 cents for each item ."

The reasons for this action as made public by the Board
were, ( 1 ) that even though the recent court decision made the
clearing and collection system voluntary so far as non-member
banks are concerned, the system has fully justified its operation

and is of such value to the banking and commercial interests of the
country that its continuance as a voluntary system is of vital im
portance ; ( 2 ) that since the system was designed wholly for the
benefit of the banking and commercial interests of the country
and is now ( July, 1923 ) so comprehensive in scope that it in
cludes about 92 per cent . of all banking institutions and ap
proximately 98 per cent . of the total banking resources of the

country, and having shown its merits and inestimable value by its
enormous saving to those actively engaged in carrying on the
commerce of the country, by having eliminated a very large por

tion of the time formerly consumed in the collection of checks, and
by having cut down the cost of making the country's exchanges to

the minimum , it should be supported by all who share in its ad
vantages . The Board pointed out further that the more inclu
sive a collection system is, the more efficient it will be, and the
greater will be the service it can render alike to the business and

banking community. Consequently the Board felt that non.
member banks which are unwilling to remit without deduction for
checks drawn on themselves have no right to share in the advan
tages of the par collection system..
In November, 1923, the Federal Reserve Board made one

other interesting ruling in order to conform to the fullest possible
extent to the spirit as well as to the letter of the recent court deci
sions . The Board directed the Federal reserve banks to discon
tinue the use of agents other than banks for the purpose of mak

ing collections at par of checks upon non -member remitting banks
in any district in which such practice still existed.93
But as mentioned above, Regulation J, Series of 1923 , never
became effective. Instead , it was replaced by Regulation J, Series
of 1924. The reasons for this can be appreciated more fully only
after reviewing briefly the so -called Malloy case.
" Federal Reserve Bulletin , Vol. IX ( 1923 ) , pp. 773-774, 1194.

284

CLEARING AND COLLECTION OF CHECKS

Federal Reserve Bank of Richmond v. Malloy et al., trading as
Malloy Brothers94

The Malloy case is significant, not because of any very direct
bearing upon the par collection controversy, but for two other
important reasons which have but an indirect bearing upon the
controversy. ( 1 ) It throws light upon the additional burdens
placed upon the Federal reserve banks as a result of the decision

in this case ; ( 2 ) it affords an explanation for some of the recent
provisions incorporated in Regulation J, Series of 1924 .
The facts in the case are briefly as follows : Malloy Brothers
received a check for $9,000 drawn upon the Bank of Lumber
Bridge, North Carolina, which they properly indorsed and depos
ited with the Perry Banking Company of Perry, Florida, for col
lection and credit. A credit card was delivered to the Malloys
upon which was printed the following : “ Checks, drafts, etc., re
ceived for collection or deposit, are taken at the risk of the en
dorser until actual payment is received . " This provision was
authorized by Florida law. The Perry Banking Company in
dorsed and transmitted the check through two banks to the Fed
eral Reserve Bank of Richmond, which sent it to the Lumber

Bridge bank for collection and return. That bank stamped the
check “Paid ,” charged the account of the drawer, and remitted to
the Federal Reserve Bank of Richmond with a draft on the At

lantic Banking and Trust Company, of Greensboro, North Caro
lina , which returned the draft to the Federal reserve bank because
of lack of funds .

The Federal reserve bank then tried to collect

on the Lumber Bridge bank, but that bank failed and did not pay
the draft . The check was then charged back through the proper
channels to the Malloys, who brought suit against the Federal
Reserve Bank of Richmond for recovery .

The Court deemed it necessary to consider two questions :
( 1 ) Could the action be maintained by the plaintiffs against the
Federal Reserve Bank of Richmond ? and ( 2 ) If so, did the failure

of the Richmond bank to require payment of the Malloy check in
money, and its acceptance of what turned out to be a worthless

draft in lieu thereof, create a liability against it in favor of the
Malloy Brothers for the amount of the loss ?
Regarding the first question the Court found the State deci

sions in hopeless conflict . A number of States followed the so
called “ New York Rule” and held that the initial bank alone is

responsible to the owner.

An equal number of States, on the

*4 Sup. Ct . 296 ( 1924 ) ; 264 U. S. 160 ( 1924 ) .

THE PAR COLLECTION CONTROVERSY

285

other hand, followed the “ Massachusetts Rule” which holds that

the initial bank is authorized to employ sub-agents who become
directly responsible to the payee.

The Court held that the

Florida statute had the effect of importing the “ Massachusetts
Rule" and decided that the Federal Reserve Bank of Richmond
was liable.

Relative to the second question the Court ruled that “ It is
settled law that a collecting agent is without authority to accept
for the debt of his principal anything but that which the law de

clares to be legal tender, or which is by common consent considered

and treated as money, and passes as such at par' :95 Ward v. Smith,
7 Wall . 447, 452 ( 19 L. Ed. 207 ) . The rule applies to aa bank re
ceiving commercial paper for collection, and if such bank accepts
the check of the party bound to make payment and surrenders the
paper, it is responsible to the owner for any resulting loss.
It is unnecessary to cite other decisions since they are all practi
cally uniform. Anderson v. Gill, supra , [ 79 Md. 312, 317 ] pre
sented a situation practically the same as that we are here deal
ing with, and the Supreme Court of Maryland, in disposing of it,
said : ' Now a check on a bank or banker is payable in money, and

in nothing else. Morse Banks & Banking ( 2d edition ), p . 268. The
drawer having funds to his credit with the drawee has a right to

assume that the payee will, upon presentation, exact in payment
precisely what the check was given for, and that he will not
accept, in lieu thereof, something for which it had not been drawn.
It is certainly not within his contemplation that the payee should
upon presentation, instead of requiring the cash to be paid, ac
cept at the drawer's risk a check of the drawee upon some other
banker.

When

the collecting bank being the
did make demand it was only author
ized to receive money ( Ward v. Smith, 7 Wall . 451 ) ; and the ac
.

agent of the holder

.

.

ceptance by the collecting agent of anything else rendered it liable
to the holder as though it had collected the cash .' ”

Following

the above reasoning, the Court held that the plaintiffs were en
titled to recover from the Federal Reserve Bank of Richmond, and

that there was nothing in Regulation J , Series of 1920, which
authorized the Federal reserve banks to accept drafts instead of
money as required by law. Even though it was customary to use
drafts in making remittances, the Court held that a settled rule

of law, rather than custom, established the principles to be fol
lowed in this case.
* Italics are the author's.

286

CLEARING AND COLLECTION OF CHECKS

This decision placed the Federal reserve banks in a peculiar

position. The Richmond par collection case established the prin
ciple that drawee banks, under authority of a State statute, may
remit to the Federal reserve banks by means of drafts if the de

positor does not specifically object, since the bank's liability is to
the depositor only and not to the holder of the check. The Malloy
decision now holds that the Federal reserve banks cannot accept
legally anything but money in remittance without assuming liabil

ity to the payee, or unless specifically authorized to do so by the
payee. The result of this decision is that the Federal reserve
banks may no longer collect on such banks as those in North Caro

lina, or elsewhere for that matter, without assuming great risk.
Regulation J, Series of 1924
In order to remove the Federal reserve banks from this pre
dicament , the Federal Reserve Board, on May 9, 1924, issued the

new Regulation J, Series of 1924, which includes, among other
things, the following provisions :
“ Section III. (3 ) No Federal reserve bank shall receive on

deposit or for collection any check drawn on any non -member
bank which cannot be collected at par in funds acceptable to the
Federal reserve bank of the district in which such non-member
bank is located .”

“ Section V.

Terms of collection

“ The Federal Reserve Board hereby authorizes the Federal

reserve banks to handle such checks subject to the following terms
and conditions ; and each member and non -member clearing bank

which sends checks to any Federal reserve bank for deposit or
collection shall by such action be deemed ( a ) to authorize the Fed
eral reserve banks to handle such checks subject to the following
terms and conditions, (b) to warrant its own authority to give the
Federal reserve banks such authority, and ( c ) to agree to indem
nify any Federal reserve bank for any loss resulting from the
failure of such sending bank to have such authority .
“ ( 1 ) A Federal reserve bank will act only as agent of the
bank from which it receives such checks and will assume no lia

bility except for its own negligence and its guaranty of prior
indorsements.

“ ( 2 ) A Federal reserve bank may present such checks for
payment or send such checks for collection direct to the bank on
which they are drawn or at which they are payable, or in its dis

cretion may forward them to another agent with authority to pre

THE PAR COLLECTION CONTROVERSY

287

sent them for payment or send them for collection direct to the

bank on which they are drawn or at which they are payable.
“ ( 3 ) A Federal reserve bank may in its discretion and at its
option, either directly or through an agent, accept either cash or
bank drafts in payment of or in remittance for such checks and
shall not be held liable for any loss resulting from the acceptance
of bank drafts in lieu of cash , nor for the failure of the drawee
bank or any agent to remit for such checks, nor for the non
payment of any bank draft accepted in payment or as a remit
tance from the drawee bank or any agent.

“ ( 4 ) Checks received by a Federal reserve bank on its mem
ber or non-member clearing banks will ordinarily be forwarded or
presented direct to such banks, and such banks will be required to
remit or pay therefor at par in cash or bank draft acceptable to
the collecting Federal reserve bank , or at the option of such Fed
eral reserve bank to authorize such Federal reserve bank to charge

their reserve accounts or clearing accounts ; provided, however,
that any Federal reserve bank may reserve the right in its check
collection circular to charge such items to the reserve account or
clearing account of any such bank at any time when in any par
ticular case the Federal reserve bank deems it necessary to do so.

“ (5 ) Checks received by a Federal reserve bank payable in
other districts will be forwarded for collection upon the terms and
conditions herein provided to the Federal reserve bank of the dis
trict in which such checks are payable.

“ (6 ) The amount of any check for which payment in actually
and finally collected funds is not received shall be charged back to
the forwarding bank , regardless of whether or not the check itself
can be returned ." 96

It should be noticed, however, that the provisions do not pro
tect the banks and trust companies of the country against the pos
sibility of loss under the law established by the Malloy case, for
the reason that under the provisions of Regulation J, Series of
1924, each member and non -member clearing bank which sends

checks to any Federal reserve bank for collection authorizes the
Federal reserve bank to handle such checks according to the pro
visions of the Regulation, warrants its own power to give such
authority to the Federal reserve banks, and agrees to indemnify
any Federal reserve bank for any loss resulting from the failure
of the sending bank to have such authority. But this leaves the
member and non -member clearing banks open to great risk unless
* Federal Reserve Bulletin, Vol . X ( 1924 ) , pp. 489-490 .

CLEARING AND COLLECTION OF CHECKS

288

they can enter into agreement with their depositors by which the

depositors agree to permit them to make collections according to
the terms outlined in Regulation J. The National Bank Division
of the American Bankers' Association in June, 1924, recom

mended a form of contract which appears to cover all these points.

Various clearing house associations and many banks individually
have adopted other forms of contract which are similar in most

respects. Such contracts should be printed upon deposit slips,
credit advices and pass books of the bank in order that there may
be no question that the depositors are bound by the terms of the
contract.97
Conclusion

Certain definite principles may be said to have been estab
lished relative to the operation of the Federal reserve clearing

and collection system as a result of these court decisions.
1.

The Federal Reserve Act so far as it affects the clearing

and collection system is not mandatory in nature and does not
compel the Federal Reserve Board or Federal reserve banks to
make the system universal .

2. Federal reserve banks are not obliged to receive and attempt to collect checks drawn on banks which will not remit at
par .

Federal reserve banks may receive and attempt to collect
3.
checks on banks which will not remit at par by presenting the
checks directly over the counters of such banks through the use of
collecting agents, provided the Federal reserve banks do not use

this method to oppress or coerce, by collecting an unusual amount
of checks for presentation or by indulging in any other practice
not consistent with customary banking methods.98
4.
So far as the non -member banks are concerned the Federal
reserve clearing and collection system is entirely voluntary.
5.

Federal reserve banks may not include on their

par lists

the names of non -member banks which do not agree voluntarily
to remit at par and do not sanction the publication of their

names. All member banks, obviously, are par banks.
6
6.

Federal reserve banks cannot lawfully demand payment in

For an additional discussion of this subject, see H. F. Strater, “ Develop
ment and Functions of Federal Reserve Collection System ," Proceedings of

Departmental Conferences held at Baltimore Convention of the American In
stitute of Banking ( July, 1924 ) , pp. 367-369 .
It is to be borne in mind, however, that Section III of Regulation J, Series

of 1924, provides that no Federal reserve bank shall receive such checks on de
posit or for collection.

THE PAR COLLECTION CONTROVERSY

289

legal tender if a State law, which supersedes the common law, per
mits the non-member banks to make arrangements with their de
positors to remit in some other form, since the debt of the bank has

been held to be solely to the depositor of the bank and not to the
holder of the check, and if the depositor and drawer of the check
consents to have the bank pay the holders of his checks by some

means other than legal tender, the legal tender provisions of the
Constitution which prohibit a State from making anything but
gold and silver coin аa tender in payments, are not violated .
7. If aa State statute authorizes the non-member banks to pay
by some means other than legal tender, the Federal reserve banks,

as collecting agents, become liable to the payee banks for
accepting anything other than legal tender unless they have an
agreement with the payee banks by which they are relieved of the

liability. In the latter case the payee banks become liable to the
depositors unless they, too, have a similar agreement with the
depositors.99
It is, of course, hazardous to guess as to the results which
finally will flow from such decisions as those rendered in the Rich

mond par collection and Malloy cases. There is a rather general
feeling among competent judges, however, that the system of par
collections can never be a success and be incomplete, and that it
must go either forward or backward . Many non-member banks
joined the system expecting that the remaining banks would enter
in due time. Encouraged by these court decisions, the recalcitrant

banks will not only not enter the system but will be the cause,
doubtless, of others dropping out and much ground that has been
gained so laboriously will be lost. It seems unfortunate that the

new Regulation J does not embody a provision similar to that
inserted in the Regulation J, Series of 1923, to the effect that a

Federal reserve bank may not receive on deposit for collection a
check drawn by, indorsed by, or emanating from any non-member
bank which refuses to remit at par in acceptable funds. This
would prevent the non-par banks from securing the benefits of the
Federal reserve clearing and collection system while at the same
time exacting charges for making remittances.

Depriving them

of the gains which result from their parasitic relations with the
system , might drive them into the system , which , undoubtedly,
It seems that it might have simplified matters if the liabilities of the Fed

eral reserve banks as collecting agents were determined in conformity with
the various State laws, that is, that the Federal reserve banks were to incur no

liability for accepting in remittance that which a State has decided is legal .
Thus, in some States the Federal reserve banks would be required to accept

cash only, in others, such as North Carolina, drafts would be acceptable.
v

290

CLEARING AND COLLECTION OF CHECKS

would be to their advantage ultimately . If they are shut out of
the system in this manner, competition would be more effective in
forcing them into the system, since the tendency would be for de
positors to move their deposits to par banks. The insistence by
these recalcitrant banks upon their so-called right to charge ex

change may cost them dearly in the end. They have placed them
selves directly across the path of banking progress and are at
tempting to levy a tribute upon business, while progressive ten
dencies in business and banking indicate that such charges should
be eliminated and that a more equitable method can be found for
distributing the burden .

The par collection principle is not an arbitrary plan devised
by Congress and imposed upon the banks of the country. It has

been developing gradually as the wisdom of it became more evi
dent . Many banks remitted at par prior to the establishment of
the Federal Reserve System. Country clearing houses were being
established in many parts of the United States for the purpose

of reducing or eliminating exchange charges. It is the result of
changing and progressive banking methods, based upon sound

principles, and it is unfortunate that it is not permitted to de
velop to its logical conclusion. Consequently, it would seem alto
gether wise - assuming that such a measure would be constitu
tional—if the Federal Reserve Act could be amended so as to

make par remittances mandatory and thereby nullify the obstruc
tive State laws which are arresting the logical development of an
efficient system .

CHAPTER VIII

THE GOLD SETTLEMENT FUND
Nature of the Gold Settlement Fund

At the apex of the clearing and collection system is the Gold
Settlement Fund established in May, 1915. It acts, as it were,
as the keystone binding together the Federal reserve banks and

their branches into an unified inter-district clearing system ; these
banks, in turn, act as clearing centers for their member and non

member clearing banks. The Fund is one owned by the Federal
reserve banks and held by the Treasurer of the United States in
the name of the Federal Reserve Board . Closely connected with
the Gold Settlement Fund, but to be distinguished from it, is the

Federal Reserve Agents' Fund. It is held in the same manner
by the Treasurer of the United States to the credit of the Federal
Reserve Board, but is controlled by the Federal reserve agents.

The Gold Settlement Fund proper is the fund through which the
inter-district clearing of checks and drafts is effected and is the
fund to be associated primarily with this and other closely allied
functions, such as telegraphic transfers, growing out of any inter
district transfer of funds. The Federal Reserve Agents’ Fund
was designed to facilitate transfers between the Federal reserve

banks and their own Federal reserve agents necessitated by the
issue of Federal reserve notes .

Ownership in these funds is represented by entries on books
maintained by the Federal Reserve Board with corresponding en

tries on books kept by the Federal reserve banks and Federal re

serve agents, respectively. Ownership is transferred by book en
tries from one bank to another, from an agent to his bank, or from
a bank to its agent with a minimum movement of gold or gold
certificates.

Transfers of claims are effected speedily by tele

gram with the minimum of friction and expense. The system rep
resents the utmost refinement in clearing.
Inter - district clearing before the creation of the Fund

Although the Federal reserve banks began to operate in 1914,
many of the functions later assumed were developed only grad
291

292

CLEARING AND COLLECTION OF CHECKS

ually. This was the case with the inter-district clearing and col
lection system. The legal provisions contemplated only in a gen
eral way the final organization of the system. Section 16 of the
Federal Reserve Act provided for inter-district clearing of unde
fined extent and authorized the Federal Reserve Board itself to

act as a clearing house for the several Federal reserve banks or to
designate one of the Federal reserve banks to perform the service. '
It has been pointed out elsewhere that the Board believed it
the part of wisdom to proceed cautiously in order not to disturb

unduly the established practices and consequently permitted the
Federal reserve banks to free themselves from any obligations rel
ative to clearing and collections while they devoted themselves to

the collection of installments of subscriptions to capital stock and
effected a more complete organization in other respects. Member
banks were expected and advised to use the old and customary
methods for clearings and collections, although some checks were
collected through the newly -organized Federal reserve banks.

With the payments of capital subscriptions and the required re
serves , many checks were received on certain designated cities. It
was found expedient to accept such checks in order not to create
undue disturbance, although subscriptions to stock were to be

made in gold or gold certificates and reserve-deposit payments
were to be made in gold or lawful money, except that the Federal
reserve banks were authorized to receive from member banks not

exceeding one-half of each installment in eligible paper as de
scribed in Section 14 of the Act, properly indorsed and accept
able to the Federal reserve banks.

Notwithstanding the restricted nature of the business con
ducted at that time, balances in excess of the required reserves

were created, and checks against these balances found their way

into other districts. No special machinery had been set up to
effect settlements between the Federal reserve banks other than

the fact that they carried reciprocal accounts with each other
and it was generally understood that any Federal reserve bank
had the right to require a remittance in gold of any other Federal
reserve bank if such a payment were needed to settle accounts
between the two banks.
See First Annual Report of the Federal Reserve Board ( 1914 ) , pp. 19-38.
'See The Collection of Checks by the Federal Reserve Banks, Letter No. 3,
Federal Reserve Bank of Richmond ( February , 1922 ) , pp . 1-2, hereafter cited
as Letter No. 3 ; and The Gold Settlement Fund, Letter No. 7, Federal Re

serve Bank of Richmond ( September, 1922 ) , p. 2, hereafter cited as Letter
No. 7. The author of these excellent letters is Mr. Charles A. Peple, senior
Deputy Governor of the Federal Reserve Bank of Richmond. The letters

THE GOLD SETTLEMENT FUND

293

During this time when the Federal reserve banks maintained
reciprocal accounts with each other, each bank gave careful atten
tion at all times to the state of the accounts between it and other

Federal reserve banks . By shifting debits and credits all balances.

were kept within reasonable limits. The competent writer of the
series of letters on the Federal Reserve System for the Federal

Reserve Bank of Richmond gives an example of the equalization
of balances by the shifting of credits as follows : “ If the
Federal Reserve Bank of Richmond owed the Federal Reserve

Bank of New York one million dollars and, at the same time, the
Federal Reserve Bank of Cleveland
Bank of Richmond a million dollars,
send the New York Bank a draft on
New York Bank would then forward

owed the Federal Reserve
the Richmond Bank could
the Cleveland Bank . The
the draft to the Cleveland

Bank, charging the account of the Cleveland Bank. If this cre

ated an undesirably large balance against Cleveland and in favor
of New York, Cleveland could correct the situation by trans

ferring its claim on some other Federal reserve bank ." 3 Although
the creditor bank had the right to require the debtor bank to ship
gold at any time to cover the debt, but few, if any, such shipments
were actually made.
Steps leading to the creation of the Gold Settlement Fund

Prior to the organization of the Federal reserve banks a re

port was made to the Reserve Bank Organization Committee, pro
vided for by the Act, by the Preliminary Committee on Organiza
tion. This committee suggested, among other things, that a Fed
eral Reserve Clearing House be established and that each Federal

reserve bank deposit a certain amount of gold with the Federal
Reserve Board or with a Federal reserve bank, to be designated
by the Board to act as a clearing agent, and to settle balances
arising from time to time between Federal reserve banks by means
of book balances on books to be kept by the settling agent or by
actual certificates of ownership in the special gold fund, the cer
tificates to be issued by the settling agent. It also suggested that
settlements be effected weekly."
During the preliminary period of organization the Federal
are subjected to the criticism of the various officers of the bank and submitted

to the Governor for his approval, after which they are issued in the name of
the Federal Reserve Bank.
'Letter No. 7, p. 3.
' Ibid .
'Ibid.

294

CLEARING AND COLLECTION OF CHECKS

Reserve Board and officers of the Federal reserve banks were

studying a number of plans for effecting settlement between the
Federal reserve banks. At the first conference of Governors held
in Washington, December 10-12, 1914, a special committee was

appointed to study the subject and report to the next conference.
At the second conference the report of the committee was re

ceived, discussed by the conference, and with several amendments
was submitted to the Federal Reserve Board. This plan was sub
stantially that outlined in the report of the Preliminary Commit
tee on Organization, though many details had been considered
and conclusions with reference to such details were submitted by
the conference.

The Board took the matter under advisement,

but did not effect final arrangements until April, 1915, when it
was announced that the plan had been completed and was expected
to become effective about the middle of May of that year.
Provisions for the Gold Settlement Fund

Tentative suggestions had been made by the Federal Reserve

Board in Circular No. 8, issued October 17, 1914, looking for
ward to the establishment of a central clearing house at Wash

ington in order to make the facilities for the collection of checks
nation-wide, yet definite steps towards its creation were not taken
until May, 1915.

As a result of the conferences, mentioned

above, and careful study on the part of the Board, a definite
plan was submitted to the Federal reserve banks on May 8, 1915.
On that date the Board issued a circular of regulations for the8
establishment and operation of the Gold Settlement Fund .

According to the provisions of this circular each Federal reserve
bank was required to forward, not later than May 24, 1915, to
the Treasury or the nearest sub-treasury, for credit to the ac
count of the Gold Settlement Fund, $ 1,000,000 in gold, gold cer
tificates, or gold order certificates, and, in addition, an amount

at least equal to its net indebtedness due to all Federal reserve
banks. Upon the receipt of these funds the United States Treas
urer was to issue to the Federal Reserve Board gold order certifi
cates in denominations of $ 10,000, made payable to the order of

the Federal Reserve Board, covering the sum so deposited. Each
Federal reserve bank was required to maintain a balance in the
Gold Settlement Fund of not less than $1,000,000, and excess bal
°Held in Washington , January 20-23, 1915.
' Letter No. 7, p. 3.

'Regulation L , Circular No. 13, Series of 1915. See Second Annual Report
of the Federal Reserve Board ( 1915) , Exhibit E , pp. 77-79.

THE GOLD SETTLEMENT FUND

295

ances, at the convenience of each Federal reserve bank might re

main deposited with the Gold Settlement Fund or be withdrawn at
will . Should the debit balance of any Federal reserve bank be in
excess of its credit in the Gold Settlement Fund this deficit was to

be covered immediately by the deposit of gold, gold certificates,
or gold order certificates in the Treasury or nearest sub -treasury,
or by credit operations with other Federal reserve banks which
might have an excess balance with the Gold Settlement Fund . At
all times each Federal reserve bank was required to have a balance
of $1,000,000, and any delay beyond a week of grace in restoring
the balance was to be subject to such charge as the Federal Re
serve Board might impose. On the other hand, any excess balance,
on request of any Federal reserve bank , would be refunded in any
one of three ways: ( 1 ) By return to the Federal reserve bank of
gold order certificates properly indorsed, ( 2 ) by the indorsement
and delivery to the United States Treasurer of a like amount of
such certificates for which he would give in exchange bearer gold
certificates which the Federal Reserve Board would send to the

Federal reserve bank by registered mail, or ( 3 ) the Treasurer, by

wire or mail , might direct that payment be made by a sub-treasury
office through the medium of the general account , provided funds
were held in such office available for the purpose. Gold order cer
tificates, when presented to the Treasury or any sub-treasury and
bearing the signature of the duly authorized officers of the Fed
eral reserve bank , were payable in gold or gold certificates. Any
expense incurred by the Treasurer in shipping funds for such set
tlement purposes from one section of the country to another was
to be refunded by the Federal Reserve Board.

The Board then

apportioned, semi-annually, the expenses of currency shipments
as well as the general cost of operation of the Fund among the
Federal reserve banks .

At least once in each three months an

audit was to be made of the Gold Settlement Fund by a represen
tative of the Federal Reserve Board and a representative ap

pointed by the Federal reserve banks. The total amount of the
Fund at any one time consisting of gold order certificates was to
be kept in a safe in the Treasury vault, set apart for the exclu
sive use of the Federal Reserve Board , and to be opened only in
the presence of two persons designated by the Secretary of the

Treasury and two persons designated by the Board . A proper
vault memorandum was to be maintained . A settling agent and

a deputy settling agent were appointed by the Board to keep all
the necessary records and accounts.
To ascertain the amount which each Federal reserve bank

296

CLEARING AND COLLECTION OF CHECKS

should deposit, a preliminary settlement or clearing was made on
Thursday, May 20, 1915, on the basis of figures reported by the
Federal reserve banks at the close of business on the preceding
day. On the evening of the 19th each Federal reserve bank ad
vised the Federal Reserve Board by wire of the amounts, in even

thousands, due by it to every other Federal reserve bank as of that
date. On the next day the settling agent telegraphed to each Fed
eral reserve bank the amount of credits to its settling account,

giving the name of each bank from which such credits were re
ceived , also the net debit or credit balance in the settlement.

Con

firmations of these telegrams were sent by mail after the receipt
of these advices ; and not later than May 24, each Federal reserve
bank remitted gold or gold certificates to the Board, directly or
through the nearest sub-treasury, in an amount sufficient to cover

its debit balance, if any, and to establish a credit balance of at
The Federal reserve banks made their
deposits with the nearest sub-treasury, after which the assistant
treasurers forwarded telegraphic advices of the deposits to the

least one million dollars.

Treasurer of the United States, who, in turn, issued gold order
certificates of $ 10,000 denominations, payable to the Federal Re
serve Board. The total amount remitted at that time was $ 18,

450,000. The first regular settlement was made on Thursday,
May 27, 1915.9
Each Federal reserve bank in its relations with other Fed

eral reserve banks was required to keep an account showing bal
ances " due to” other Federal reserve banks representing the pro
ceeds of items which it actually had collected , and payments and
transfers which had been made to it for the account of such other

Federal reserve banks ; and an account showing balances “ due
from ” other Federal reserve banks representing the proceeds of
items which it had sent to such other Federal reserve banks, and
payments and transfers which had been made to such other Fed
eral reserve banks for its account.

The gold in the Fund as part of legal reserve

At the time the announcement of the plan was made, the Board
also communicated to the Federal reserve banks an opinion pre
pared by the counsel of the Board, to the effect that, under the

law, gold held in the Gold Settlement Fund for the account of a
Federal reserve bank could be counted by that bank as a part of
its required reserve. 10
' Federal Reserde Bulletin, Vol . I ( 1915 ) , p. 82.
Ibid., pp . 9-11 .

THE GOLD SETTLEMENT FUND

297

Provision originally made for weekly settlements

The original system provided for weekly settlements through

the Gold Settlement Fund, a method employed until July 1 , 1918,
when daily settlements were instituted. At the close of business
each Wednesday night, each Federal reserve bank was required

to telegraph to the Federal Reserve Board the amounts in even
thousands due to each other Federal reserve bank as of that date.

The telegram was confirmed by mail. If Wednesday happened to

be a holiday, the telegram was to be telegraphed at the close of
business on Tuesday.

The settling agent, on each Thursday,

made the proper debits and credits in the accounts of the Fed
eral reserve banks with the Fund and telegraphed each bank the

amount, in even thousands, of credits to its settlement account,
giving the name of each Federal reserve bank from which each of
its credits was received and also its net debit or credit balance in

the weekly statement . Upon receipt of the telegram from the
settling agent each Federal reserve bank charged its appropriate
deferred credit account and credited the Gold Settlement Fund

with the amount reported by it to the settling agent ; it also
charged its Gold Settlement Fund account by the total amount of
the credit received , in accordance with the telegram from the

settling agent, and credited this amount to its deferred debit
account .

The difference between the total debits and credits

should equal the net debit or credit to the Gold Settlement Fund as

advised in the telegram from the settling agent . The same general
principles obtain today except that settlements are made on a
daily rather than weekly basis.

The voluntary intra -district system and the Gold Settlement Fund

It has been pointed out already that the Federal reserve banks
at the request of the Federal Reserve Board introduced the volun
tary intra-district clearing and collection system in June, 1915,

and that it functioned in a half -hearted manner until July, 1916.
While the operation of this plan did not primarily involve rela
tions between Federal reserve banks, such relations were indi

rectly involved. Clearings under the plan depleted the reserve
accounts of some member banks and resulted in excess balances in

the reserve accounts of other member banks. Adjustments be
tween such banks had to be made by remitting in the one case or
by checking against the excess reserves in the other.

Checks on

one Federal reserve bank were received for credit by other Fed
eral reserve banks. Also, under a special arrangement , Federal

CLEARING AND COLLECTION OF CHECKS

298

reserve banks continued to accept exchange on certain designated
reserve cities. These transactions, in so far as they affected ac
counts between Federal reserve banks, tended to increase the
volume of the weekly settlements through the Gold Settlement
Fund .

In addition , Federal reserve banks had the privilege of mak

ing special transfers to other banks of balances in excess of the
required million and these transfers were effected by book entries
upon telegraphic or mail requests from the Federal reserve bank
making the transfer. In such cases the two Federal reserve banks

affected by the transfer were allowed to make their respective
debits and credits only upon receipt of specific authority to do so,
which authority was sent by wire by the settling agent of the
Federal Reserve Board. During the week ending June 25, 1915,
the Federal Reserve Bank of San Francisco transferred in this

way to the Federal Reserve Bank of Boston $200,000. During
the week ending July 1, 1915, this same bank made two transfers,
$ 450,000 to the Federal Reserve Bank of New York and $30,000

to the Federal Reserve Bank of Chicago. After that time trans
fers between Federal reserve banks became more frquent. During

the period when settlements were made weekly, a Federal reserve
bank had the right to require a remittance or a transfer between
settlement dates to cover any large balance due to it by some
other Federal reserve bank.11
The first withdrawal from the Gold Settlement Fund was

made on July 14, 1915 , by the Federal Reserve Bank of Chicago.
Its telegram requesting the payment was received by the Federal
Reserve Board at 10:30 A. M. and at 2 P. M. on the same day

the Assistant Treasurer of the United States at Chicago advised
the bank of his readiness to make the payment. Although in a
number of cases thereafter such withdrawals occurred from time
to time, the convenience and usefulness of the Gold Settlement

Fund became more and more apparent as time went on, and there
developed a tendency to allow credit balances to accumulate, so
that the Fund passed the one hundred million dollar mark on
November 18 , 1915.12

Results for the year 1915

Through the procedure thus provided, the Federal Reserve
Board, up to the close of the year 1915, settled through the Gold
"Letter No. 7 , p. 6.
" Ibid .

299

THE GOLD SETTLEMENT FUND

Settlement Fund for the Federal reserve banks an indebtedness

aggregating $1,052,649,000 with a net change of only $ 85,
697,000 in ownership of the gold 13held in the Fund, or 8.14 per
cent . of the total amount cleared .

The total amount of intra

district clearings amounted to $5,442,123,252.14

The direct ex

pense incidental to the administration of the Gold Settlement

Fund in handling its transactions was approximately $1,150,
principally for equipment and telegraph service. Another fea
ture noteworthy from the very beginning of the operation of the
system has been the general avoidance of the necessity for the
shipment of funds. The growth of the transactions through the
Gold Settlement Fund as well as the changes in ownership , cost
of operating, etc. , are set forth in the table on page 318 below .
The Federal Reserve Agents' Fund
It will be recalled that Federal reserve notes were originally

secured by 100 per cent. commercial paper and at least 40 per
cent. gold and at present are secured by at least 40 per cent . gold
combined with at least enough commercial paper to make 100 per
cent.. security. This means that from the beginning of the issue

of Federal reserve notes each Federal reserve agent had the cus
today of more or less gold held as part security for the notes, since

he must hold at least 35 per cent . in gold against the outstanding
notes, the remaining 5 per cent. being deposited with the Treas
urer of the United States as a redemption fund . As the issues of
these notes increased, аa considerable amount of gold found its way

into the hands of the Federal reserve agents. The transactions
involving the issue and retirement of Federal reserve notes neces
sitated frequent payments in large sums from the bank to the
agent and from the agent to the bank . When these payments
were made in gold or gold certificates much counting and recount

ing was necessary on the part of the employees of the bank and
representatives of the Federal reserve agents. After the estab
lishment of the Gold Settlement Fund it became obvious that it

would be advantageous to apply the same principle to the Federal
reserve agents' reserve funds in order to eliminate much of the

counting and recounting of gold and gold certificates.
In September, 1915, as a result of a resolution by the Federal
Reserve Board , a gold fund called the Federal Reserve Agents'
Fund was established , in close co -operation with but not a part of
" Second Annual Report of the Federal Reserve Board ( 1915 ) , pp. 79, 80 .
"Ibid., p. 82.

CLEARING AND COLLECTION OF CHECKS

300

the Gold Settlement Fund.15

The settling agent and deputy

settling agent of the Federal Reserve Board were authorized and

directed to open and maintain on their books and records a dis
tinct and separate account for each Federal reserve agent, and
to receive from the Federal reserve agents or from the Federal
reserve banks for the accounts of the agents, deposits of gold cer
tificates to be held subject to the order of the Federal reserve

agent for whom such deposit had been made. The safe keeping of
all deposits so received and the withdrawal or transfer of them to

the account of the Federal reserve bank or to the redemption fund
account held by the Treasurer of the United States, upon the
order of the Federal reserve agent, and all indorsements of gold
order certificates incidental to the transfers of such funds, were

subject to the same regulations as those which applied to the oper
ation of the Gold Settlement Fund .

The accounts and records of this Fund were to be kept sepa
rate at all times from the records and accounts of the Gold Set

tlement Fund. The gold order certificates, representing the Fed
eral Reserve Agents' Fund, which was held by the Federal Reserve

Board, were separated from those representing the Gold Settle
ment Fund which was held also by the Federal Reserve Board.

Consequently when transfers were made from an agent to his bank
or from a bank to its agent, it was necessary for the representa
tives of the Board to make an actual shift of gold order certifi
cates from one safe to another, or from one compartment in a
safe to another compartment. This practice involved much

counting and handling and proved a great burden. Whenever a
transfer was made it was necessary for the two representatives of
the Federal Reserve Board and the representatives of the Treas
ury Department to be present at the opening of the safe. Such
payments were made from one fund to the other as well as from
either fund to the Treasurer of the United States and with the

increase of these transactions the burdens increased until a change

in method became imperative .
The Federal Reserve Bank of Atlanta was the first to make

such a transfer under this old system .

On September 8, 1915,

the day on which the books were opened for business, $2,500,000
18The balances in the Gold Settlement Fund of the Federal reserve banks
and in the Gold Fund of the Federal reserve agents, which are held at present
by the United States Treasurer in trust for the Federal reserve banks and
agents, are combined and shown as one figure in the daily statement of the
United States Treasury, but the two funds are separate and distinct, and are
so treated by the Federal Reserve Board and the Federal reserve banks and
agents.

THE GOLD SETTLEMENT FUND

301

were passed from the account of the Gold Settlement Fund to the

credit of the Federal reserve agent of the Atlanta bank. Simul
taneously, the Federal reserve agent of the Atlanta bank released
to that bank the same amount in gold or gold certificates held by

him at Atlanta. The second bank to make use of this facility was
the Federal Reserve Bank of Richmond, the amount of the trans
fer being $2,600,000 from the account of the bank to the account
of the agent.16

Discontinuance of gold order certificates, June 21, 1917
On June 21 , 1917, Congress, upon the recommendation of the
Federal Reserve Board, amended Section 16 of the Federal Reserve

Act for the purpose of simplifying the operations of the Fund,
which had grown to such proportions as to make the handling of
gold certificates evidencing deposits of Federal reserve banks and
Federal reserve agents a heavy responsibility.
According to the new plan, the Treasurer of the United States
opened an account with the Federal Reserve Board, giving credit
to the Board for the sum of the deposits of Federal reserve banks

and Federal reserve agents. The accounts of the two funds were
kept separate as formerly by the Federal Reserve Board. When
a Federal reserve bank or Federal reserve agent desired to make a

deposit for credit in the Gold Settlement Fund, the gold was de
livered to the nearest sub-treasury.

The Assistant Treasurer

gave a receipt, the form of which was prescribed, and advised
the Treasurer of the United States by wire. The Treasurer then

issued a duplicate receipt to the Federal Reserve Board, and
credit was given on the books of the Gold Settlement Fund to the
Federal reserve bank or Federal reserve agent who had made the
deposit. Payment out of the Fund was to be directed by the Fed
eral Reserve Board and was in the form of checks drawn by the
Treasurer of the United States and endorsed by officials of the
Federal Reserve Board. 17

The Treasurer of the United States

who had formerly received the gold and issued gold certificates in
denominations of $10,000 each against it, still received and re
tained the gold , but instead of issuing certificates in large num
bers one receipt was given for the lump sum .
The advantages of the new method soon became manifest. The
Federal Reserve Board was not only relieved of a considerable
10George J. Seay , “ The Evolution and Practical Operation of the Gold
Settlement Fund,” The Annals of the American Academy of Political and
Social Science, Vol. XCIX ( January, 1922 ) , pp. 100-101 ; Letter No. 7, p. 7 .
17Fourth Annual Report of the Federal Reserve Board ( 1917 ) , p . 24.

Year

1,589,500

924,000

755,000

1921

1922

1923

Dec.
30
.

D
.' ecember
31

December
30
.

D
.‘ ecember
28
.'December
29

675,440

1918

565,704

609,502

498,585
487,372

1,060,700

1920

165,000
451,350
1,023,854
492,900
148,500

1,011,370

1919

1917

1916

21,480
411,087
1,011,831

D8-(S).3ept.
1ec

4,400

27,320

1915

Gold

Reserve
.
Board
Federal
of
Reports
Annual
the
from
Compiled

1,651,210
1,326,816
1,140,000

1,479,640
1,118,300

94,520
852,881
1,512,297

52,460

Total

1,559,285
2,176,872
1,533,502
1,320,704

1,686,810

48,800

with

1,288,500

1,819,716

1,644,640
1,569,650
2,675,064

Total

Percentage

urer of the United States and the Federal Reserve Board ; bal

funds no longer existed . Accounts were kept between the Treas
56,860
28.89

withdra
deposit
bank
bank
to
from
31
Dec.
from
notes swals
serve

busines
rs
Federal
Transfesrs
transfe
re
Gold

at
includi
against
held
of
close
ng

of
balance
Balance
deposits
to
total
gold
drawals

Pon
of
in
Reserve
’F' ercentage
Agents
total
to
und
held
gold
Federal
against
notes
Dec.
.reserve
29

Pheld
of
in
Reserve
Agents
’F'onercentage
Dec.
und
gold
total
to
31
against
Federal
notes
reserve

102,580 36.3
489,9494 62.7
*
%
960,031
74.56
886,327 71.6
892,6926 69.99
*
74.8
"
1,381,524
1,712,0998 77.85
?
1,648,894
78.33

AGENTS
RESERVE
FEDERAL
THE
OF
OPERATIONS
1'FUND

SUMMARY
TRANSACTIONS
OF
BY
,1915-1923
YEARS

dollars
[In
of
)thousands

TABLE
XXVI
302

CLEARING AND COLLECTION OF CHECKS

amount of detail, but the necessity for periodic audits of the

THE GOLD SETTLEMENT FUND

303

ances could be verified and certified to in detail if necessary . The
Federal Reserve Board gives an idea of the size of the two funds

at the time the transfer was made in 1917 in the following descrip
tion of the transaction : " Some idea of the magnitude of the fund
may be formed from the fact that a truckload of gold certificates
was transferred from the Federal Reserve Board to the Treasury

of the United States. It took three men over two days to place
a stamped endorsement upon the certificates. Had the amount
represented been in the form of gold it would have weighed
963 short tons. " 18

Although the balances of the Federal reserve banks for clear
ing and collection purposes and of the Federal reserve agents for

security against Federal reserve notes were and are kept sepa
rately on the books of the settling agent in charge of the funds,
common terminology is inclined to include both in the term “ Gold

Settlement Fund.” The two funds should be distinguished clearly
in the reader's mind.

The leased wire system , June 4 , 1918
All communications between the Federal reserve banks by

means of telegrams prior to June, 1918, were sent over the com
mercial wires ; and practically all communications between the
Board and the banks were by telegram. While the service, on the
whole, was very prompt and efficient, delays had occurred fre
quently, and as the number of transactions increased it became

apparent that some better arrangement was necessary. After a
study of the situation, a plan was perfected by which all the Fed
eral reserve banks and branches and the Federal Reserve Board

were put into instant communication with each other by means of
a leased wire system to be used exclusively by the Federal Reserve
Board, the Federal reserve banks, and the Treasury Department.
The system was opened on June 4, 1918. Each bank and
branch as well as the Federal Reserve Board has its own

telegraph operators.19 As indicated in Chapter VI, Wash
ington and Chicago were made relay points for the East and
West respectively. The Federal Reserve Bank of Chicago was
given charge of the operations of the system, and the chief tele
graph operator is stationed at the Chicago office, with a super
vising operator at Washington as an assistant.20
18Federal Reserve Bulletin , Vol . III ( 1917 ) , p . 521 ; Letter No. 7, pp. 10-11 ;

George J. Seay, op . cit., p. 102.
" Letter No. 7, p. 11 .

* Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 558-559 .

304

CLEARING AND COLLECTION OF CHECKS

The telegraphic transfer system

It has been pointed out in a previous chapter21 that while
telegraphic transfers of funds for member banks had been made as
early as 1915, the Gold Settlement Fund as a central medium

through which Federal reserve banks could transfer funds for
their member banks did not become of prime importance until
1917 and especially after the introduction of the leased wire
system in June, 1918. By June 10, 1918, or shortly thereafter, the
Federal reserve banks advised their member banks of their readi

ness to render them such a service free of charge. The system of
telegraphic transfers was designed primarily to effect the speedy
transfer of large funds between Federal reserve banks, member
banks, or individuals. It virtually eliminates the time element
and constitutes the highest achievement in the method of settling

distant claims. The table on page 318 will give a condensed idea
of the growth of the transfers effected through the Gold Settle
ment Fund. Such transfers are included in the daily settlements
made through the Gold Settlement Fund.
Relation of the Gold Settlement Fund to rediscounting between
Federal reserve banks

Rediscount transactions carried on between Federal reserve
banks are effected through the Gold Settlement Fund, but en

tirely independent of the settlements made through the Fund as a
result of the clearing and collection of checks. A brief account
of rediscount transactions by which reserves may be equalized
between Federal reserve banks has been given above on pages
216-217 . The Federal reserve bank requiring the rediscount wires

the Federal Reserve Board, stating the amount needed and the
character of the paper offered . The Board assigns the redis
count to some other Federal reserve bank which the Board knows

has a surplus reserve. This assignment is in the nature of a re
quest rather than a requisition, although the Board has the power
to require one Federal reserve bank to rediscount for another.

Upon receipt of this advice, the second Federal reserve bank
transfers the gross amount through the Gold Settlement Fund to

the credit of the Federal reserve bank requiring the rediscount.
This transfer is made at any time and is not included in the regu
lar daily settlements growing out of the clearing and collection of

checks. The discount is calculated by the bank requesting the
rediscount and later is verified by the other Federal reserve bank,
21See Chapter VI , pp. 208-211 .

THE GOLD SETTLEMENT FUND

305

to be handled as an ordinary credit and to be cleared through the

Gold Settlement Fund on the next settlement day. Maturing dis
counts are paid, in like manner, through the Gold Settlement Fund,
also independently of the regular settlements.2
In their Annual Report for 1919 the Federal Reserve Board
pointed out that it “ has carried out its policy of equalizing as

far as practicable the reserve position of the several Federal re
serve banks. All rediscount transactions and sales between Fed

eral reserve banks have been arranged by the Board under author
ity of Section 11 of the Federal Reserve Act, which provides that

a Federal reserve bank may be permitted or, upon the affirmative
vote of at least five members of the Federal Reserve Board, re

quired to rediscount the discounted paper of another Federal
reserve bank at rates of interest fixed by the Federal Reserve
Board. There has, however, been such a spontaneous spirit of
co-operation between the Federal reserve banks that all trans
actions suggested by the Federal Reserve Board have been made

voluntarily, and in no case has the Board found it necessary to
exercise its statutory power to require such operations. By
means of the Federal reserve leased-wire system rediscount trans

actions have been consummated almost instantaneously. All pay
ments have been made on the day the transactions were com
pleted by direct transfers through the Gold Settlement Fund,
through book entries at the banks and at the office of the Board,
without involving any physical transfer of gold ." 23 Rediscount
transactions between the Federal reserve banks, as a rule, have

not been negotiated by the banks themselves, but through the
medium of the Federal Reserve Board, instructions being given
by telegraph , and transfers incident to the operations have
been effected in the same manner .?24 The statements made by the

Board in 1918 and 1919 are equally true today.
Daily settlements supplant weekly settlements in the Gold Settle
ment Fund

The next step in the evolution of the gold funds was the insti

tution of daily instead of weekly settlements. The daily settle
ment plan was put into effect on July 1 , 1918. Transactions had
22 Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 33-35 ;
Letter No. 7, pp. 11-12 ; Practical Operation of the Gold Settlement Fund ,
Letter No. 8, Federal Reserve Bank of Richmond (October, 1922 ) , p. 4, here
after cited as Letter No. 8.

* Sixth Annual Report of the Federal Reserve Board ( 1919 ) , pp . 5-6.
2 Fifth Annual Report of the Federal Reserve Board ( 1918 ) , p. 3.

CLEARING AND COLLECTION OF CHECKS

306

been increasing at such a rapid rate that the change became im
perative. In addition to the weekly settlements, the Federal re

serve banks had the privilege of demanding transfers at any time
upon the net debit balance as shown in accounts with other Fed
eral reserve banks, and these steadily increased. War financing
caused a large increase in the volume of business between the Fed
eral reserve banks .

The sale of certificates of indebtedness and

Liberty bonds, and subsequent redistribution of these funds
among various centers in payment for munitions and supplies for
the account of the United States and the allied governments,

necessitated a large transfer of funds. Furthermore, the institu
tion of the compulsory clearing and collection system combined
with other measures to extend its scope had resulted in a larger

use of the clearing, collection and transfer facilities.”25
It was a part of the plan of July, 1918, that the Board should

receive figures from each bank and settling branch as soon as
possible after the close of the day's business. Obviously, due to
the differences in time between the eastern and western banks the

reports received by the Board would be some hours apart. The
Board, after receiving all the reports, would make the general
settlement and send out wire advices to all the Federal reserve

banks as soon as possible on the morning of the next day. Upon
receipt of these advices appropriate entries were made by each
Federal reserve bank as of that day. In other words, charges and

payments through the Gold Settlement Fund were always one day
late, and more than one day if Sunday or a legal holiday inter
vened .

As a result some Federal reserve banks carried an inter

Federal reserve bank float on account of payments received by
the correspondent Federal reserve bank one day in advance of
payment through the Gold Settlement Fund . In order to elim
inate this float a plan of evening settlements was installed on
March 1 , 1920. The new arrangement, which is the present one,

provided that each Federal reserve bank and direct settling
branch should telegraph the Board the gross amount collected for
the account of each other Federal reserve bank and direct

settling branch before the final closing of the books for the day.
The Board then makes the settlement the same day and dispatches
telegrams to each bank and settling branch so as to reach them

before the opening for business the following morning, when the
necessary entries are made and their books finally closed as of the
close of the preceding day.26
* Ibid ., pp. 32-35 .
20 Seventh Annual Report of the Federal Reserve Board ( 1920 ), p. 70.

THE GOLD SETTLEMENT FUND

307

Certain branches of Federal reserve banks clear directly through
the Gold Settlement Fund

Since December 2, 1918, certain branches ( Class I ) 27 of Fed
eral reserve banks have been authorized to make settlements di-.

rectly through the Gold Settlement Fund in the same manner as
the Federal reserve banks except that the net debit or credit bal
ance of each such branch in the Fund is adjusted through the Gold
Settlement Fund account of the parent Federal reserve bank, since
the branches do not maintain accounts with the Fund.

These

branches participate in the Gold Settlement Fund by wiring
credit figures to the Board each day in time for the settlement,
although settlements with the branches are not made by the
Board. After the settlement has been made by the Board, the

branches are notified of the amounts credited to them by each
other ,Federal reserve bank and direct -settling branch, although
the net debit and credit of each branch is settled through the

balance maintained by the parent bank . This method of clear
ing was made in order to eliminate unnecessary work between the
Federal reserve banks and their branches, and other Federal re

serve banks, and delays in reconciling differences due to the dis
28

tances between the parent bank and its branches.?
Nature of the " cash items" cleared through the Gold Settlement
Fund

The so-called “ cash items, ” composed chiefly of checks and
drafts drawn upon banks, which are received by a Federal re
serve bank as a collecting agent come from the following sources :

( 1 ) From member banks in its own district, ( 2 ) from non -member
clearing banks in its own district which will remit at par, (3 )
from the Treasurer of the United States and collectors of internal

revenue in its own district. These items may consist of checks
drawn upon ( a ) the Federal reserve bank itself, (b ) upon members
and non-members on the par list, ( c ) upon other Federal reserve

banks, ( d ) upon member and non -member par banks in other
Federal reserve districts, and ( e ) upon the Treasurer of the
United States . A Federal reserve bank may also receive items
( 4 ) from other Federal reserve banks, and ( 5 ) from member
banks, and non -member clearing banks, in other Federal reserve
districts,29 and these items can consist only of checks drawn upon
* See pp . 186 and 216 above, and pp. 547-550 below.
28Fifth Annual Report of the Federal Reserve Board ( 1918 ) , p. 33 ; Seventh

Annual Report of the Federal Reserve Board ( 1920 ) , p. 92.
* Direct routing items.

CLEARING AND COLLECTION OF CHECKS

308

the Federal reserve bank itself or upon member and non-member
banks which will remit at par, in its own Federal reserve dis
trict.30

The immediate and deferred credit system

The cash items received by a Federal reserve bank for collec
tion from its own member, non -member clearing banks, or from
collectors of internal revenue are received for immediate credit if
drawn upon the Federal reserve bank itself, the Treasurer of the

United States, or upon member banks and non-member par banks,
located in the same city and received in time to be cleared on the
day of receipt.

Such items do not affect settlements between

Federal reserve banks since they neither come from nor go outside
of the district . The inter-district clearing and collection system
and the Gold Settlement Fund are concerned primarily with those

items for which the Federal reserve bank will give only deferred
credit.31

The items which are subject to deferred credit are those re

ceived by a Federal reserve bank from its member or non-member
clearing banks or from collectors of internal revenue, drawn upon
the member, non -member clearing or par banks in its own or other
districts but not drawn upon the Federal reserve bank itself, the
Treasurer of the United States, or member and non -member par
banks in the same city. Checks received from member or non
member clearing banks, or collectors of internal revenue for the

credit of the Treasurer's account , and payable in other districts
are received for deferred credit of one or more days. Such items

are forwarded immediately to the proper Federal reserve banks
or branches and are charged to special deferred debit accounts.

"They enter into settlements between Federal reserve banks only
when collected. Each lot of checks so forwarded is represented
a Cf. Letter No. 8, p. 1. Non -member clearing banks should not be con
fused with non -member par banks. The former are those non -members which
carry sufficient deposits with the Federal reserve banks to off-set the items
which they collect through the Federal reserve banks or branches; they use the

Federal reserve banks and branches as collecting agents. Non -member par
banks merely agree to remit at par for items sent to them by the Federal re
serve banks or branches, but do not carry deposits with the Federal reserve
banks and may not use them as collecting agents. Consequently, when items are

presented by the collecting Federal reserve banks or branches it is necessary
for them to remit in acceptable funds, since they cannot authorize the Federal
reserve banks or branches to debit their accounts, which may be the practice of

many of the non -member clearing banks. See pp. 543-547 below.
31A Federal reserve bank will give immediate credit for certain items drawn
upon a Federal reserve bank or branch in another district, as, for example, ex
change and transfer drafts or telegraphic transfers. See pp. 206-211 above.

THE GOLD SETTLEMENT FUND

309

by a deferred debit ticket, the maturity of which is noted on the
ticket, and the ticket is filed according to the due date, to be
cleared out as will be explained below.
Items received from other Federal reserve banks, or from

member banks or non-member clearing banks in other Federal re
serve districts for the credit of their Federal reserve banks,

whether accepted for immediate or deferred credit, are credited,
in like manner, to a deferred credit account, in accordance with

the published time schedule. Immediate credit items which are
placed in the deferred credit account are taken out on the same
day. Each batch of items of the same maturity received at any
one time is represented by a deferred credit ticket, which ticket
shows the date of maturity of the items.32

It has been pointed out already in a preceding chapter that .
out-of-town and inter-district items are placed upon a deferred
availability basis until they can reach the bank upon which
drawn, or, as in the case of the Federal Reserve Bank of San

Francisco, until they can reach the Federal reserve bank or
branch of the district upon which drawn. The length of time for
which such items are unavailable as reserves to the depositing
bank depends upon the time schedules as worked out by each
Federal reserve bank.33

In the weekly consolidated statements of the Federal reserve
banks it will be noticed that under “ Resources” there is an item
listed as " Uncollected Items." 34

Under " Liabilities" there is an

item listed as " Deferred Availability Items."”

The term “Uncol

lected Items” includes such items as :

(1)

Due from banks, at present a small item.

( 2 ) National bank notes which are not lawful money for re
serve purposes and consequently will be sent home for collection.
( 3 ) Federal reserve notes of other Federal reserve banks.
which cannot be paid out under 10 per cent. penalty.
( 4 ) Unassorted money.
5
( 5 ) Transit items ( checks and drafts ) .

The fifth item is the largest single item in the list of " Uncol
lected Items” and is the one with which we are concerned

primarily .
“ Deferred Availability Items” correspond to “ Uncollected
Items" under Resources .

To revert to our previous illustra

32Letter No. 8, pp . 1-2 .
23 See pp. 180-185 above.
**For a consolidated statement, see p. 368 below.

310

CLEARING AND COLLECTION OF CHECKS

tion ,35 if a check drawn on a bank in Rochester, New York, were
sent to the Federal Reserve Bank of Richmond by one of its mem

ber banks, credit would be given three days after receipt. One
of the days would be consumed in sending the item from Rich
mond to the Federal Reserve Bank of New York , one in forward

ing the item from New York to Rochester, and the third day in
sending the returns from the Rochester bank to the Federal Re
serve Bank of New York . This check will appear once as a

“ Deferred Availability Item ,” that is, a deferred liability of the
Federal Reserve Bank of Richmond, since, in three days, it will
owe that amount to the bank sending in the check.

This same

check will appear once as an “ Uncollected Item ,” that is, as a
deferred asset, because at the end of three days the Federal Re
serve Bank of Richmond will have a claim on the Rochester bank .

" The two deferred items should be approximately the same.336 With
these facts in mind it will be practicable at this point to follow a
transaction through the Gold Settlement Fund.

Method of making settlements through the Gold Settlement Fund
At the close of business each day the Federal reserve bank
assembles all tickets representing all the items due to other Fed
eral reserve banks or clearing branches on that day. These
tickets are assorted according to the banks and branches to
which the amounts are due ; they are footed up in each case, and
from the totals so obtained a telegram is made up and sent to the
Federal Reserve Board advising the total amount due by the Fed
eral reserve bank or branch sending the telegram to each other
Federal reserve bank or clearing branch named in the telegram ,
the total of all the amounts being the last item in the telegram .
The writer of Letter No. 8 for the Federal Reserve Bank of Rich

mond on the Practical Operation of the Gold Settlement Fund

gives the following skeleton copy of such a telegram as would be
sent by the Federal Reserve Bank of Richmond in which the
amounts are omitted.37

It will be observed that the name of each

Federal reserve bank is designated by its assigned letter : (A )
Boston , ( B ) New York , ( C ) Philadelphia , ( D ) Cleveland , etc.
3sSee pp. 180-184 above.

** They are not always the same, since the time for collection does not coin
cide, necessarily, with the published time schedule. Other items in these ac
counts are also partly responsible for the inequality. See pp. 181-184 above, and
pp . 512-513 below .
** Letter No. 8, p . 2 ,

THE GOLD SETTLEMENT FUND

311

Each clearing branch is designated by the letter of the parent
bank together with the letter A, B, C, D, or E, these second letters

being assigned in the order in which the branches were opened for
business by the parent bank .

Upon receipt of such a telegram from each Federal reserve
bank and clearing branch, the settling agent makes up a settling
sheet, arranged like a checkerboard, the names of the Federal
OUTGOING GOLD SETTLEMENT FUND CLEARING
TELEGRAM

AVALEC

FEDERAL RESERVE BANK OF RICHMOND
The Federal Reserve Board,

Washington , D. C.

Code word (indicating Gold Settlement Fund clearing telegram ).
A

ΕΑ

( Boston )
. ( New York )
( Philadelphia )

( Amount )
66

( Cleveland )
Baltimore)

66

( Atlanta )
FA

( New Orleans)

G

( Chicago )

GA
H
HA
HB
HC

( Detroit )

I

IA
J
JA
JB
K
KA
KB
L
LA
LB
LC
LD
LE

66

( St. Louis )
( Little Rock )

(

( Louisville )
(Memphis )
( Minneapolis)
· ( Helena )
(Kansas City )
60

( Denver )
(Omaha )
(Dallas )
( El Paso )
( Houston )

( San Francisco )
( Seattle )

66

( Spokane)

( Portland )
(Salt Lake )
· (Los Angeles )

66

Total

reserve banks and settling branches appearing in regular order
at the head of the vertical columns and in the same order at the

left-hand side of the horizontal columns. For example, the
amounts reported as due by the Federal Reserve Bank of Boston
are entered in the first horizontal column, each respective amount

being placed in the column headed with the name of the Federal
reserve bank to which the reported amount is due, and in the last
column to the right the total amount due by the Federal Reserve

312

CLEARING AND COLLECTION OF CHECKS

Bank of Boston is entered . The amounts reported by each Fed

eral reserve bank and settling branch are entered in like manner
on the line opposite the name of that Federal reserve bank. The
totals obtained by adding each column vertically will indicate the
total amount due to the Federal reserve bank or branch whose

name appears at the head of the column. Adding this total line
across will give the same grand total as by adding the last column
INCOMING GOLD SETTLEMENT FUND CLEARING
TELEGRAM

TO THE FEDERAL RESERVE BANK OF RICHMOND

Code word ( indicating “ your balance in fund at close of operations of
previous day " ).
Code word ( indicating " Incoming Clearing Telegram " ) .
А
( Amount )
( Boston )
66

B
C
D

( New York )
( Philadelphia )
( Cleveland )

EA

(Baltimore)

F
FA
G
GA
H
HA
HB
HC

( Atlanta )
( New Orleans )

66

66

66

( Chicago )
(Detroit)

66
66

( St. Louis )
(Little Rock )
( Louisville )
(Memphis )
( Minneapolis)

I

6

IA
J
JA
Јв
K
KA
KB
L

( Helena )
66

(Kansas City )
( Denver )

( Omaha )
( Dallas)
(San Francisco )
(Seattle )
( Spokane )
( Portland )
( Salt Lake )
( Los Angeles )

LA

LB
LC
LD
LE

66

( El Paso )
( Houston )
66
6
66

.

66

Total Gain or Loss

vertically. The total payments taken from the last vertical
column on the right are then entered on a horizontal line directly
under the total amounts due each Federal reserve bank , and in the
two horizontal lines below this line the gain or loss for each Fed

eral reserve bank is calculated . The total gain for all banks, of
course, balances the total loss for all banks.38

Upon completing the settlement, the settling agent dispatches
a8Ibid. , pp . 2-3 .

THE GOLD SETTLEMENT FUND

313

to each Federal reserve bank and settling branch a telegram ad
vising the Federal reserve bank or branch of the result of the set

tlement. In these telegrams, as in the telegrams already de
scribed, the name of the paying Federal reserve bank or branch
is indicated by one letter in the case of a Federal reserve bank or
by two letters in the case of a branch . The incoming telegram
from the settling agent is shown on the opposite page.39
It has been pointed out already that in the books of the Fed

eral Reserve Board covering the operation of the Gold Settlement
Fund, there is an account kept for each Federal reserve bank, but

no accounts are kept for the settling branches. The amounts re
ported by the branches as due to other Federal reserve banks and

branches are charged to the Gold Settlement Fund account of the
parent bank , and the amounts due to the settling branches are, in

like manner, credited to the account of the parent bank .
Upon receipt of the telegram showing the result of the day's
clearings, the Federal reserve bank charges its appropriate de
ferred credit account and credits the Gold Settlement Fund with

the amounts reported by it to the Board in the telegram of the
previous day, and takes out of the current file the credit tickets
from which the figures in the telegram dispatched by it have been
made up . It also charges its Gold Settlement Fund account by
the total amount of credit received, in accordance with the tele
gram from the Board, and credits this amount to its deferred
debit account .

The tickets representing the indicated debits

cleared are not removed from the current file, however, until mail
advices are received from the other Federal reserve banks and

clearing branches, giving in each case a complete list of the items
covered by the day's payments reported by these banks and
branches to the Federal reserve bank by wire. Such advices are
forwarded by each Federal reserve bank and settling branch to

every other Federal reserve bank and settling branch at the time

the telegram is made up and dispatched to the Federal Reserve
Board , for the purpose of effecting settlement.
The books of the Federal reserve bank , which have been com

pleted in all other respects at the close of the day, are kept open
for the closing entries involved in the daily settlement. Upon re
ceipt of advice from the Federal Reserve Board early the fol
lowing morning, the necessary entries , as just explained above, are
made as of the day before and the books are promptly closed. This
29Ibid .

314

CLEARING AND COLLECTION OF CHECKS

practice tends to eliminate the necessity for the creditor banks
carrying a float. 40
It will be observed, also, that settlements are not made between

Federal reserve banks and settling branches upon net balances due
by one Federal reserve bank or settling branch to another, but
upon the basis of all matured credits. Therefore, if there has
been a delay in the mails affecting any particular letter sent by
one Federal reserve bank to another, it will mean that the send

ing bank will get payment later than it expected, but no confusion
will result in the actual settlement.

In like manner, while each

Federal reserve bank receives payment each day for all items due
to it on that day by other Federal reserve banks or settling
branches, it is frequently necessary for the bank receiving the
credit to wait several days for the detailed list of the items mak
ing up the credit and dispatched by a Federal reserve bank or
branch making the payment before it is able to match up the
credit received against the exact items held by it in its deferred
debit account.

However, so far as actual collections are con

cerned and so far as its own reserve position is concerned, it is
just as well off as though it had received full information by
wire. 41

In making payments through the Gold Settlement Fund of all
amounts due to other Federal reserve banks, it has been the uni
form practice to make certain deductions. For example, the

Federal Reserve Bank of New York in reporting the amount due
by it to the Federal Reserve Bank of Richmond will ascertain the
amount by adding together all immediate credit items received

that day and all deferred credit items that have matured that day,
and then will deduct the amount of Federal reserve exchange
drafts drawn by member banks in the Fifth District on the Fed

eral Reserve Bank of Richmond and presented to and paid by the
Federal Reserve Bank of New York.

It will also deduct returned

items,42 officers' checks drawn by the Federal Reserve Bank of

Richmond, or transfer drafts, if any, drawn on the Federal Reserve
Bank of New York by the Federal Reserve Bank of Richmond,

thus obtaining, in effect, immediate payment for these items. The
report dispatched by mail by the Federal Reserve Bank of New
York will indicate all items so deducted , the items themselves

being sent with the report or mailed separately at the same time.
“See pp. 215-216 above.
" Letter No. 8, pp . 3-4 .
41

“ For an account of the procedure followed in returning items, see pp. 553
and 559 below .

THE GOLD SETTLEMENT FUND

315

Transactions which are not included in the daily settlements

Since the inauguration of daily settlements on July 1 , 1918,
and particularly since the adoption of the plan by which the re
sult of the daily settlement is included by each Federal reserve
bank in the statement of the same day, all transactions between
Federal reserve banks are included in the settlement except the

following : ( 1 ) Rediscount transactions between Federal reserve
banks, (2 ) special transfers by one Federal reserve bank to an
other for the account of the Treasury Department , ( 3 ) settle
ments between Federal reserve banks for Federal reserve notes
paid by one bank and forwarded to the Federal reserve bank
through which such notes were originally issued, if fit for circu
lation, or to the Treasury Department for redemption if unfit,
( 4 ) transfers from the Gold Settlement Fund to the Federal Re
serve Agents’ Fund and vice versa, and ( 5 ) transfers to the re
demption funds .

An account of the rediscount operations between Federal re
serve banks has been given above and will not be repeated here
except to recall to the reader's mind that settlements between

Federal reserve banks growing out of these transactions are made
as quickly as possible and entirely independent of the daily settle
ments resulting from the clearing and collection of checks. The
discount , however, exacted as the price for rediscounting, is
settled through the Gold Settlement Fund on the following settle

ment day. Maturing discounts are also paid through the Gold
Settlement Fund independently of the regular settlements.43
Special transfers by one Federal reserve bank to another for
the account of the Treasurer of the United States are effected

by special telegrams between Federal reserve banks and between
the banks and the Federal Reserve Board. No Federal reserve
bank can make an entry on its books affecting the Gold Settlement
Fund without receiving directions to do so from the settling agent
acting for the Federal Reserve Board, a regulation quite neces
sary, since the accounts on the books of the Federal reserve banks
must be always in exact agreement with the accounts kept by the
Federal Reserve Board on the Gold Settlement Fund books in

Washington.14
The present method of making adjustments between Federal
reserve banks as a result of Federal reserve note transactions has
" Fifth Annual Report of the Federal Reserve Board ( 1918 ), pp. 33-35 ;
Letter No. 7, pp. 11-12 ; Letter No. 8, p. 4.
“Fifth Annual Report of the Federal Reserve Board ( 1918 ) , pp. 33-35 ;
Letter No. 8, pp. 4-5 .

316

CLEARING AND COLLECTION OF CHECKS

changed somewhat from the original. The Federal Reserve Act re

quires the Federal reserve banks to redeem upon presentation, not
only the Federal reserve notes issued through them, but all other
Federal reserve notes issued through the other Federal reserve
banks, and no Federal reserve bank is permitted to pay out the
Federal reserve notes issued by another Federal reserve bank ex
cept under a 10 per cent . tax penalty. The Federal reserve notes

issued by a Federal reserve bank sometimes would drift into other
Federal reserve districts, and finally into other Federal reserve
banks, since no member bank has ever been required in shipping
Federal reserve notes to its Federal reserve bank to assort the

notes with reference to Federal reserve districts. Federal reserve

notes so received were forwarded originally by the receiving Federal
reserve bank to the various Federal reserve banks through which
they were issued, and at first no distinction was made between
notes fit for further circulation and unfit notes .

When such a

shipment was made by one Federal reserve bank to another, the
notes comprising the shipment remained the property of the ship
ping bank until they were received by the bank to which they were
shipped. Upon receipt, immediate credit was given by the re
ceiving bank to the shipping bank, which credit was advised in
some cases by wire and in other cases by mail . Settlements for
these shipments were made in whatever manner settlements for
other items were made at the time.
With the increase in note transactions, arrangements were

made in 1921 by which Federal reserve notes were separated into
two classes, ( a ) those fit for circulation, and ( b ) those unfit for
further circulation .45

Those fit for circulation were forwarded

direct to the bank of issue and credited by that bank to the send

ing bank upon receipt; those unfit for circulation were forwarded
to the Treasurer of the United States for redemption, not for the
account of the sending bank , but for the account of the bank
through which the notes originally had been issued . At the same
time, the sending bank dispatched advices of the shipments to the
other Federal reserve bank , and received credit upon receipt of

'the fit notes, or upon receipt of advice of shipment of the unfit
notes to the Treasurer of the United States . Under this arrange

ment , notes in transit remained the property of the shipping bank
until they reached their destination.

Under present arrangements each Federal reserve bank or
branch daily ships directly to the Federal reserve banks through
45 Vinth Annual Report of the Federal Reserve Board ( 1922 ) , p . 28.

THE GOLD SETTLEMENT FUND

317

which they were originally issued all fit notes which have been re
ceived by it, assorted and properly packed for shipment. At the

same time, each Federal reserve bank or branch ships to the
Treasurer of the United States for the account of the Federal re

serve banks through which they were originally issued, all unfit
Federal reserve notes which it has received, assorted and properly

packed for shipment. Instead of advising, as before, the Federal
reserve banks to which shipments of fit notes have been made, or
for which shipments of unfit notes have been made to the Treas
urer of the United States, each Federal reserve bank or branch
advises the Federal Reserve Board by wire of all such shipments,

using forms similar to those already described in connection th
the regular Gold Settlement Fund, describing separately each
shipment to each Federal reserve bank and each shipment to the
Treasurer of the United States for each Federal reserve bank.
As some of the Federal reserve banks and branches are located

in the far West, it is quite late in the day before all such tele
grams are received. On the morning of the following business
day, therefore, the settling agent of the Federal Reserve Board
makes up a special settlement of Federal reserve notes in transit,
and advises each Federal reserve bank by wire of the amounts of

fit Federal reserve notes shipped to it by other Federal reserve
banks and branches, and the amount of unfit notes shipped by
them to the Treasurer of the United States for its account .

Ad

vice by wire is always given of the receipt of the previous day's
telegrams. Each Federal reserve bank is then charged with the
total of all Federal reserve notes shipped to it by other Federal
reserve banks and branches, or shipped for it to the Treasurer of

the United States ; and, at the same time, each Federal reserve
bank is credited in its Gold Settlement Fund account by the total

of all shipments made by it or its branches as advised in the tele
.
gram of the afternoon before. It is obvious that the total of
all the debits in this settlement equals all the credits, but no en
tries, either debit or credit, are made by the recipient banks until

the morning telegram authorizing these entries is received from
the settling agent. This settlement is made independently of the
regular daily settlement resulting from the clearing and collection
of checks. The plan for the separate daily settlement for Federal
reserve notes was inaugurated February 1 , 1922.46 Both settle
ments, however , although arranged independently are handled

simultaneously by the settling agent of the Federal Reserve
** I bid .

318

CLEARING AND COLLECTION OF CHECKS

Board, and each Federal reserve bank makes the proper entries
on its books as of the close of business of the previous day, upon

the figures advised or confirmed by the settling agent of the Fed
eral Reserve Board with respect to both settlements.47
TABLE XXVII
OPERATIONS OF THE GOLD SETTLEMENT FUND

SUMMARY OF TRANSACTIONS BY YEARS, 1915-1923
{ In thousands of dollars ]
Net

Total

clearings
Year
1915

(May 19
Dec. 31 )
1916
1917
1918
1919
1920
1921
1922

1923

Total

Total

and

clearings

transfers

transfers

35,476
150,045
2,643,846
4,812,105
7,930,859
7,551,585
3,289,081
1,153,975
1,039,150

1,052,649
5,533,966
26,962,906
50,251,592
73,984,252

1,028,173
5,383,966
.24,319,060
,45,439,487
.66,053,393
..85,074,220
.64,934,801
.75,335,987
.89,614,733

92,625,805
68,223,882
76,489,962
90,653,883

changes in
ownership Per
of gold centage of
through change to
transfers tot. clear- Gold
and
ings and with
clearings transfers drawals:

85,697
223,870
272,033
238,314
281,385
471,555
391,922

312,258
173,899

8.14

4.03
1.01

78,040
136,550
482,858

0.47

102,433

0.38
0.51

392,293
539,684
652,011
466,218
624,344

0.57
0.41

0.19

Balance
in Gold

Year
1915

Transfers
to

Transfers

Gold

Agents'

Agents'

deposits

Fund

Fund

(May 19
155,800
Dec. 31 ) . 301,570
1916
1917
1918
1919
1920

1921
1922
1923

966,556
693,181
1,124,304
.1,186,940
.1,880,634

..1,215,832
..1,215,366

from

Settlement
Fund at
close of
business
Dec. 31

52,460
94,520
852,881

21,480
411,087

1,512,297
2,479,640
1,118,300
1,651,210
1,326,816
1,140,000

1,011,831

77,760
169,740
311,643

401,926

675,440
498,585
587,372
609,502

329,737
357,278
522,063

565,362

554,363

Cost of

operation
( Actual;

Cost

not in

per

thousands)

1,150.00
1,343.37
3,539.79

$ 1,000

$ 0.0011
0.0002
0.0001

6,023.82

0.0001

250,000.00
370,000.00
485,000.00
500,000.00

0.0034

0.0039
0.0071
0.0065

'Compiled from the Annual Reports of the Federal Reserve Board and
the Federal Reserve Bulletins.

Transfers from the Gold Settlement Fund of a Federal reserve
bank to the gold fund of its Federal reserve agent, and vice versa,

also are settled independently of the daily settlements which re

sult from the clearing and collection of checks. Such transfers.
" Letter Vo. 8, pp . 5-6 .

THE GOLD SETTLEMENT FUND

319

are effected by the Board upon advice wired by the bank or the
agent, as the case may be, and the entries are made by the bank

on its books and by the Federal reserve agent on his books upon
receipt of wired advice from the Board.

Such transfers do not

affect the gold fund of any other bank or agent and, therefore, are
made independently and not as a part of the regular daily Gold
Fund Settlement participated in by all Federal reserve banks.48
Prior to June 1 , 1922, Federal reserve banks made payments

through the Gold Settlement Fund to the Treasurer of the United
States for the account of member national banks for credit to
their 5 per cent. redemption fund against national bank notes.
TABLE XXVIII

AVERAGE WEEKLY VOLUME OF CLEARINGS AND TRANSFERS
COMBINED FOR EACH YEAR SINCE THE ESTABLISH

MENT OF THE GOLD SETTLEMENT FUND
$31,898,000
106,422,000
522,206,000

1915
1916
1917
1918

966,377,000

1919
1920
1921
1922

$ 1,422,744,000
1,781,265,000
1,311,998,000

1,470,960,000

'Ninth Annual Report of the Federal Reserve Board ( 1922) , p. 28.

These were also independent of regular settlements. Until April
10, 1920, such transfers were made in even dollars ; after that
date they were made in any amount.49 On June 1 , 1922, the

method of handling transfers for national banks to their 5 per
cent. redemption funds against national bank notes was simplified
by the adoption of the plan of making such transfers from the
gold redemption funds of the Federal reserve banks against Fed

eral reserve notes, instead of from the Gold Settlement Fund,
thereby reducing these transactions to simple transfers by the
Treasury between these two funds in its custody.50
Inter -district gold movements

The analysis of inter-district gold movements is so involved
and detailed in nature that only a general and summarized view
will be attempted here. A detailed study of inter-district move
ments would carry the subject beyond the space that can be
allotted to it in this book .

It must be observed at the outset that the net changes in own
* Ibid., p.

"Seventh Annual Report of the Federal Reserve Board ( 1921 ) , p. 70.

“ Ninth Annual Report of the Federal Reserve Board ( 1922 ), p. 28.

320

CLEARING AND COLLECTION OF CHECKS

ership in the Gold Settlement Fund through transfers and clear
ings as shown in the table on page 318 refers only to a shifting of
claims between the Federal reserve banks and does not refer to

actual gold shipments among the Federal reserve banks in the set
tlement of obligations. It is quite customary to make general
and sweeping statements to the effect that with the concentra
tion of reserves and the organization of the Gold Settlement Fund
the shipment of gold has been entirely eliminated . Although the
Gold Settlement Fund has reduced the shifting of funds, that is, the
claims to the funds, to a very small percentage of the total trans
actions settled through the Fund, as is shown by the percentage

of net transfers given in Table XXVII on page 318, and has re
duced the physical shipments of gold to a minimum, presumably,
it must be observed that physical shipments do take place. The
Annual Reports of the Federal Reserve Board give evidence of
that fact in listing the expense that is incurred by the Board in

paying for gold shipments under authority of Section 16 of the
Act.

Consequently, the question of the physical movement of

gold from one geographical district to another must not be con
fused with the transfer of net balances through the Gold Settle
ment Fund. On this subject Mr. W. W. Stewart says : “ The

extent to which specie or gold is shipped at present about this
country to meet adverse balances is extremely small ; inter -bank
settlements being made normally through the Gold Settlement

Fund of the Federal Reserve Board . Figures showing expense of
coin and currency shipments refer to shipments between the Fed
eral Reserve Board and the Federal reserve banks, and to ship
ments between the latter and their branches, and between Federal
reserve banks or branches and their member banks." 52

In another letter to the writer, he says “ that the ship
ment of gold in settlement of inter-district balances has practi
cally ceased as the result of the operation of the Gold Settlement
51See Federal Reserve Bulletin , Vol . VIII ( 1922 ) , p . 400 ; Ivan Wright,

Bank Credit and Agriculture (New York, 1922 ) , pp . 206-207. As an example,
Wright says, in speaking of the advantages of the Gold Settlement Fund :

" The savings on clearings and transfers, while large, is, perhaps , the smallest
advantage derived from this service. The fundamental benefits are : the
elimination of the risks of the actual transfers of gold , and the time saved by
wire transfers and clearings, as against the physical exchange of gold. Under
the old national banking system , currency was transferred from one section

of the country to another, and from one bank to another, and exchange rates
registered the relative demand for moneyed capital in the various sections of
the country. Under the Federal Reserve System this is all consummated by

wire transfers and moneyed capital flows freely to the section where needed,
almost without any cost of transfer. "
62W . W. Stewart, Director of the Division of Research and Statistics, Fed
eral Reserve Board , in a letter to the writer, March 5, 19:24.

THE GOLD SETTLEMENT FUND

321

Fund. Gold coin and certificates, particularly the latter, are
shipped between the Treasury and the Federal reserve banks, also
between Federal reserve banks and member and non-member banks.

The expense of gold shipments between Treasury offices and Fed
eral reserve banks, under the provisions of Section 16 of the Fed
eral Reserve Act, amounted in 1922 to $6,231.60, and in 1923
to $3,254.11 .

“ Upon the abolishment of the sub-treasuries in 1920 and 1921,
the Federal reserve banks took over the work formerly done by

the sub-treasuries in connection with the receipt of gold, silver

and minor coin for exchange and redemption. During the calen
dar year 1923 the Federal reserve banks received and counted
2,076,000,000 pieces of coin of all classes and denominat
having an aggregate face value of $308,000,000. Relatively
little of this coin consisted of gold. Shipping charges (postage,
expressage and insurance) paid by the Federal reserve banks on
coin shipped to member banks and received from member and
non-member banks during 1923 amounted to approximately
$ 177,000 ." 53
Gold distribution in the United States
The Federal Reserve Board estimated that on January 1,

1922, the total gold stock in the United States was $ 3,657,
000,000. Of this amount, $380,000,000 were held in the Treasury

as assets of the United States government, $2,641,000,000 were
held by the Federal Reserve System,54 and $636,000,000 were held

outside. Most of the gold held outside of the Treasury and the
Federal Reserve System-conceded to be a rough estimate

is in small hoards in the hands of the general public, although
some gold is in the vaults of member and non-member banks. Thus

the gold in actual circulation is negligible. With nearly all the
gold of the country held in central reservoirs and practically no

gold in actual circulation , the Board points outs that changes
in the gold reserves of the different Federal reserve banks can
occur only in one of three ways : ( 1 ) Through imports from or
exports to foreign countries, ( 2 ) through transfer from or to

other reserve banks, or ( 3 ) through transfer from or to the
United States government.

Imports of gold are made chiefly

through the port of New York, the gold being turned over to
Letter to the author, March 17, 1924.

**Exclusive of redemption funds with the Treasurer of the United States.
55Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 400.

322

CLEARING AND COLLECTION OF CHECKS

the Federal Reserve Bank of New York . Changes in the gold
reserves of other banks are traceable almost entirely to the oper
ations of the Gold Settlement Fund, through which gold payments

between reserve banks and between these banks and the govern
ment are effected .

Factors affecting inter - district gold movements

Some of the most important factors affecting the gold move
ment between reserve districts have been classed by the Federal
Reserve Board under the following heads: ( 1 ) Settlement of inter
district balances on account of checks and drafts cleared or col

lected through the Federal Reserve System, also transfers be
tween Federal reserve banks for account of member and non

member banks ; ( 2 ) government obligations and transferring
funds in connection with tax collections, payments on contracts,
etc.; ( 3 ) inter-district accommodation
; and ( 4) inter-district
56
movement of reserve notes."

How clearings and transfers affect inter -district gold movements
The principal element in the origin of inter -district balances
are checks drawn in one district and sent in payment for goods

purchased in another district. Another important factor affect
ing the balances has been the large importation of gold during
the recent period , the title to which has been shifted to the inte
rior banks to pay for the exported goods which originated there.
One way in which the imported gold is transferred to the interior
banks is through the repayment by member banks of their borrow
ings from reserve banks by draft on New York correspondents.
A member bank may have borrowed from a reserve bank in order

to finance a customer's exports. When the exports are paid for
in gold it is received in New York and credited by the New York
correspondent to the member's account. In paying off its debt
this bank draws on its New York balance and thus adds to its re
serve bank's credit in the Settlement Fund .

The seasonal movement of funds from financial districts to

country districts and vice versa is another important element in
the movement of gold through the Gold Settlement Fund.

Dur

ing periods of heavy demand for funds in agricultural districts,
balances of the country banks with their eastern correspondents,
especially their New York correspondents, are greatly reduced by
the country banks in order to meet local requirements. After
88 Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 400.

THE GOLD SETTLEMENT FUND

323

these obligations have been met, the opposite condition soon pre
sents itself. There is little demand for the funds of the country
bank and they tend to transfer them to eastern centers for de

posit and investment. The large banks in New York , Boston, and
Chicago also make loans to these country banks. In 1920 and
1921 , when the demand for funds in country districts was very
heavy, these large banks extended large loans to country corre
spondents. When the contraction of credit got under way in
1921 and a large portion of the funds loaned by the city banks

was returned, a movement of gold—not necessarily a physical
movement—to the financial centers resulted . Each year has been
marked by certain distinguishing characteristics in business con
ditions which would be reflected in the gold movements and a fuller
treatment of the subject would show these variations. Space pre
cludes any such survey here.57
Effect of the fiscal operations of the government on inter -district
gold movements

The principal fiscal operations of the United States govern
ment which resulted in inter-district gold movements are the issue

and redemption of Treasury certificates and notes, the payment
of interest on outstanding obligations, the collection of income
and excess profits taxes, and the payment on government con
tracts .

As a result of a study of the allotments of tax certificates, of
their redemptions, and of income tax deposits at each quarterly
income tax date in 1921 at each Federal reserve bank, the Fed
eral Reserve Board learned that in New York redemptions far

exceed allotments, especially since conditions in the money market
have favored active trading in Treasury certificates. The Board
goes on to say : “Certificates issued in other districts drift to New
57Professor Ivan Wright, op. cit., Chapters VII, VIII, and XVI, has made
such a study. His analysis in Chapters VII and VIII is based upon currency

movements between geographical districts for the years 1905-1908, the data
being based upon the currency receipts and shipments for those years as

gathered by the National Monetary Commission through the sending of cir
cular inquiries to the managers of the clearing houses through the office of the

Comptroller of the Currency. His Chapter XVI is a brief survey of seasonal
variation in transactions through the Gold Settlement Fund .

He sees a re

markable correlation between the total transfers through the funds and the
seasonal demands of agriculture, although in another place ( p . 214 ), he points
out that the seasonal variations have almost been submerged due to two facts :

( 1 ) that the Gold Settlement Fund has been steadily increasing due to its
popularity and convenience of service, and the increase in the number of mem
ber banks, and ( 2) the enormous fiscal operations of the government in con
nection with war finance, and the taking over of the work of the sub-treasuries
by the Federal reserve banks.

324

CLEARING AND COLLECTION OF CHECKS

York, the financial center of the country, and must be redeemed

there at maturity. None of the other districts show a material
excess of redemptions over allotments and most of them show
larger allotments than redemptions. Tax collections in New

York fall relatively far below the proportion of certificate allot
ments and redemptions. This is due chiefly to the fact that New
York possesses a much larger proportion of the country's bank
ing resources, which form the basis of certificate allotments, than
of its income. Nearly half of the tax certificates maturing in
1921 were redeemed in New York, but only about 27 per cent. of
income and excess profits taxes were collected in that district. On
the other hand, in the Boston, Richmond, and Atlanta districts

tax receipts constitute materially larger proportions of the total
for the country than do certificate redemptions. In the other
districts the differences are less pronounced. As a consequence,
on income tax dates and for a few days following, the government
has not sufficient funds in New York to pay for maturing certifi
cates and consequently issues to the Federal Reserve Bank of
New York special certificates of large amounts. As income tax
funds are collected in New York and in other districts the gov
ernment finds itself with excess funds in other districts and trans

fers them to New York, where they are used to retire the special
Transfers of gold to New York on government
account during the ten days following income-tax dates are ex
certificates.

ceedingly heavy and come from nearly every other district. On
the other hand, it is in New York that most of the payments on
government contracts are made, and the funds thus made avail
able in New York become distributed throughout the country,

when the headquarters of corporations send out dividend and in
terest checks or supply working funds for plants and branches in
other parts of the country. This is reflected statistically in the

fact that New York gains through transfers and loses through
clearings. In 1921 , for instance, the New York bank had a net
credit through transfers of $745,000,000, and a net debit through
clearings of $ 1,043,000,000.58

Effect of rediscount operations among Federal reserve banks on
inter -district gold movements

Inter -district accommodation in the form of rediscounting by
one Federal reserve bank for another is reflected in the movement

of gold reserves. The accommodated bank receives the proceeds
68Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 401.

THE GOLD SETTLEMENT FUND

325

as a credit in the Gold Settlement Fund and when the rediscount

is liquidated the reserves move in the opposite direction.
Gold reserves of the Federal reserve banks on October 29,
1920, for instance, were affected by the fact that there was a
total of inter-district accomodation amounting to $ 260,440,000 .
TABLE XXIX

GOLD RESERVES OF EACH FEDERAL RESERVE BANK ON
OCTOBER 29, 1920, and ON MARCH 22, 1929
( Amounts in thousands of dollars)
Federal

Amount
Mar. 22,
Oct. 29,
1920
1922

Reserve
Bank of

Boston
New York

Philadelphia
Cleveland

Richmond
Atlanta

Chicago
St. Louis

Minneapolis
Kansas City
Dallas
San Francisco

194,571
476,694
190,427
252,340
88,296
88,103
308,067

178,278
1,083,872
212,900
256,451
72,961
115,458

Per cent. of total

Oct. 29 , Mar. 22,
1922

1920
9.7
23.8
9.5
12.6

In
crease

6.0

36.4
7.1
8.6
2.5

4.4

3.9
16.0

3.6

16,293
607,178
22,473
4,111
15,335
27,355

73,053
49,350

97,202
71,864

4.4
15.4
3.6
2.5

72,317
46,557

163,545

80,340
43,019
287,809

2.3
8.2

2.7
1.4
9.7

124,264

2,003,320

2,976,703

100.0

100.0

973,383

476,549

3.3

2.4

De
crease

168,482

24,149
22,514
8,023
3,538

35,166

*Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 400 .

The total inter-district accommodation of $ 260,440,000 was

distributed on October 29, 1920, as shown in the following table :
TABLE XXX

Grantor Banks
Boston

Philadelphia
Cleveland
San Francisco

Grantee Banks

$ 84,396,000

New York

37,201,000

Richmond
Atlanta

.138,750,000
93,000

Chicago
St. Louis

Minneapolis
Kansas City
Dallas

Total ...

. $ 260,440,000

Total

.. $61,362,000
14,275,000

36,122,000
7,050,000
37,305,000
26,603,000
44,895,000

32,828,000
. $ 260,440,000

*Federal Reserve Bulletin , Vol . VIII ( 1922 ) , p. 400.

On March 22, 1922, there was no inter-district accommoda

tion outstanding, so that the changes in gold reserve shown

in Table XXIX above reflect in part the transfer of $ 260,
440,000 of gold from the eight banks accommodated to the four
banks which had extended the accommodation .

Thus, Cleveland

gained $139,000,000 from this source, and the fact that this total

gain is much smaller indicates that gold moved from Cleveland as

CLEARING AND COLLECTION OF CHECKS

326

the result of other transactions, mainly in connection with the
inter-district movement of reserve notes discussed below.

On the

other hand, New York shows a gain in gold reserves, largely
through imports from abroad, of $607,000,000 over and above
the liquidation of $61,000,000 of rediscounts with other Federal
reserve banks.59
Effect of inter -district movements of Federal reserve notes

The inter -district movement of Federal reserve notes is an
other important factor responsible for the inter - district move
ment of reserves .

The Federal reserve notes of one district will

find themselves in other districts, although some districts are af

fected quite differently from others. For example, the New York
district is characterized by the fact that the notes of other dis
tricts seem to float towards New York .

Many people who come

to New York for business or pleasure spend money chiefly in the
form of Federal reserve notes of their home districts. These
notes are deposited by the store or hotel keepers in their banks

which, in turn , deposit them with the Federal Reserve Bank of
New York .

The Federal Reserve Bank of New York sends these

notes to the parent bank if fit for further circulation , or to the
Treasury if unfit . On the other hand, the notes of the Federal
Reserve Bank of New York do not go out of District No. 2 to the

same extent as the notes of other banks, and consequently the
Federal Reserve Bank of New York continuously returns more
notes to other districts than it receives from them . Notes finding
their way to Cuba and other islands in the West Indies, to Can

ada , Mexico, and to other foreign countries are also a factor.

These notes originate in various parts of the United States, but
when deposited with banks in foreign countries they are likely to

be brought back by returning tourists or to be shipped to New
York correspondents, thus increasing the amount of “ foreign”
reserve notes in the hands of the Federal Reserve Bank of New
York .

During the War another element entered into the inter -district

movement of notes. The United States Treasury had to pay the
soldiers, and for this purpose used whatever Federal reserve
notes it happened to have on hand in Washington. These notes
which found their way to the various camps throughout the coun

try were returned in most cases to New York correspondents,
which turned them into the Federal Reserve Bank of New York ,
5*Ibid., p. 402.

THE GOLD SETTLEMENT FUND

327

which , in turn, sent them either to the issuing banks or to Wash
ington. The Boston bank , for example, as a result of these
notes paid to soldiers, had a constant excess of notes received
from New York .

During the two or three years preceding March , 1922, the
Federal Reserve Board reports that the Boston and Cleveland
banks had been losing gold as a result of excess receipts over
shipments of Federal reserve notes. The reason for this develop
ment appears to be that these banks had a supply of new notes on
TABLE XXXI
INTER -DISTRICT MOVEMENT OF FEDERAL RESERVE NOTES

( Excess of Notes received is indicated by a plus ( + ) sign ; excess of notes
returned by a minus (- ) sign ] '
Federal
Reserve
Bank of
Boston
New York

Philadelphia
Cleveland
Richmond
Atlanta

1917

1918

-7,734 -16,272
--579
+5,197
-6,894 -22,824
+2,642 +19,117
+4,370 +4,511
+669
+1,561

1919

1920

1921

1922

1923

+8,708 +40,941 +1,971 +14,339
–27,572
-46,675 -126,713 —223,370 -79,731 -77,454
+6,767 +42,872 +25,872 +36,728
--16,225
+32,111 +58,387 +36,295 +10,563 +18,020
+1,459 +27,010 +12,656 -3,528
–2,105
+3,776 +6,378 +19,174 +3,296 -11,260

-10,139 -1,748 +20,372 +58,310

+86,475 + 49,564 +43,141

-4,653 --22,538 --25,089 -36,076
+4,187 +5,181 +9,903 +13,511
Kansas City
+5,178
+6,664 +27,283 +11,805
-771
+6,651 +11,422
+2,258
Dallas
San Francisco . +2,513 +10,488 +7,124 -6,965

-17,902 -16,468 -21,756

Chicago
St. Louis

Minneapolis

-863

-34

+6,372 -4,057
+1,974 -5,996
+3,992 +5,773

-1,915

+44

-7,975
+1,705

Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 403 ; Ninth Annual Report

of the Federal Reserve Board (1922 ), pp . 110-111 ; Tenth Annual Report of
the Federal Reserve Board ( 1923 ), pp . 129-130.

hand when other Federal reserve banks were short of fresh cur
rency, and many banks in other districts applied to their corre

spondents in the Boston or Cleveland districts for currency.
When prices began to fall and currency needs of the people de

clined, the notes of the Cleveland or the Boston bank were depos
ited with the member banks in other districts ; these banks sent

them to their Federal reserve banks, which returned them to the
Boston or Cleveland bank and thereby gained gold from these
banks . 60

The Cleveland bank reported for a number of years excess
receipts of Federal reserve notes over shipments, but this excess

became very much more pronounced in the two years preceding
March, 1922. In the case of Boston the movement was in the
opposite direction during the years 1917-1919, inclusively. This
Ibid .

CLEARING AND COLLECTION OF CHECKS

328

is accounted for by the Federal Reserve Board on the ground
that residents of the Boston district traveling in the much larger
districts of the West spent Boston Federal reserve notes there.
These notes would stay out in circulation for a considerable
period of time, while notes of other banks spent in the much more
compact Boston district would find their way into the Federal
reserve bank more promptly. As a result of this and the fact that
more notes are brought to New England by residents of other
districts than are spent by New Englanders outside of their own
district, the Boston bank had more notes to return to other dis
tricts than it received from them .

Table XXXI shows the
excess of Federal reserve notes received over those returned to

other districts or vice versa for the years 1917-1923 .

The table below shows gold and total reserves, Federal reserve
note circulation , total discounts, and inter-district accommoda
tion for each Federal reserve bank for four selected dates : May
29, 1919, just before the gold embargo was removed ; March 26,

1920, about which time the outward movement of gold from the
United States came to an end ; October 29, 1920, after the peak
of credit expansion was reached and the recent gold movement
into the United States started ; and March 1 , 1922 :
TABLE XXXII

RESERVES, NOTE CIRCULATION, AND DISCOUNTS OF FEDERAL
RESERVE BANKS ON SELECTED DATES

[ In thousands of dollars)

reserve

for own

Inter -district
accommodation
( net )

note circulation

member
banks

Ex
tended

Total

Federal discounts
Gold

Total

reserves

reserves

Re
ceived

All F. R. Banks :

May 29, 1919

.2,187,743 2,255,106 2,519,292 1,989,392 139,294 139,294

Mar. 26, 1920
Oct. 29 , 1920
Mar. 1 , 1922

.1,934,755

2,057,155

3,048,039

2,449,230

96,480

96,480

.2,003,320 2,168,038 3,351,303 2,801,297 260,440 260,4-10
..2,951,434

3,080,793 2,196,983

707,551

Boston :

May
Mar.
Oct.
Mar.

29,
26 ,
29 ,
1,

1919
1920
1920
1922

192,771
165,752
194,571

203,175

179,171
261,697
296,168

170,359

192,682

155,898

May 29, 1919

751,488
504,689
476,694

802,172
611,462

742,390
831,188
876,706

847,649

25,571
31,096

985,223

61,362

626,673

90,323

130,127

168,014

151,679
172,466
109,918
47,749

858

20,414
84,396

New York :

Mar. 26 , 1920

Oct. 29, 1920
Mar. 1 , 1922

729,929

..1,087,314

606,610
1,192,445

127,340
140,539
190,427

127,613
141,295
191,144

205,734

232,122

244,579
273,266

242,255
148,560

210,637

219,224

188,463

74,958

Philadelphia :
May
Mar.
Oct.
Mar.

29,
26,
29 ,
1,

1919
1920
1920
1922

35,533
35,555

37,201

329

THE GOLD SETTLEMENT FUND

TABLE XXXII— ( Continued )
Total

Federal discounts

Inter-district
accommodation
( net )

culation

for own
member
banks

tended

205,826

223,599

102,656

35,533

195,055
254,320
254,758

296,044
352,123
195,931

143,328
82,433
66,308

138,750

68,914

69,313

75,990

76,442
88,793

115,484
126,312

reserve

Gold

Total

note cir-

reserves

reserves

May 29, 1919

204,821

Mar. 26, 1920
Oct. 29, 1920
Mar. 1 , 1922

194,015
252,340
246,729

May 29, 1919
Mar. 26, 1920
Oct. 29 , 1920
Mar. 1 , 1922

Ex

Re

ceived

Cleveland :
38,304

Richmond :

45,000
15,000
14,275

80,988

94,544

139,097
116,813
126,810
73,679

74,861
96,641

113,350
145,779

85,209
95,526

554,186
109,277

470,887

107,331

316,442
111,915

1919
1920
19:20
1922

401,006

404,934

422,327

314,510

316,835
316,442
479,536

194,412
396,545
470,887
99,833

52,332
7,605

554,186

May 29 , 1919
Mar. 26, 1920
Oct. 29, 1920

93,173
71,907
73,053
102,673

59,973
119,686

10,000

76,882
80,362
116,825

75,632
62,274

62,314

49,350
69,272

49,438
69,842

81,827
82,670

101,613

72,317

82,019
83,532
74,235

86,106

91,763

61,881

33,055
61,013
46,557
38,190

35,191
61,669
49,734

41,235

77,367
91,071
29,387

151,558

151,800
166,954
161,066
296,580

194,310
222,455
251,746
228,435

88,296
74,897

146,116

Atlanta :

May 29,
Mar. 26,
Oct. 29,
Mar. 1 ,
Chicago :
May 29,
Mar. 26,
Oct. 29 ,
Mar. 1 ,

1919
1920
1920
1922

73,158

94,816
308,067

308,067
466,489

520,065
369,180

3,351
7.050

51,490

7,050

St. Louis :

Mar. 1 , 1922

95,482

104,180
136,004
137,898

85,180

157,959
33,300

83,894
81,906

35,545
55,353

82,714

111,273

52,134

31,078

95,585

89,310
104,542

11,829
37,305

Minneapolis :
May 29, 1919
Mar. 26, 1920
Oct. 29, 1920
Mar. 1 , 1922

Kansas City :
May 29, 1919
Mar. 26, 1920
Oct. 29 , 1920
Mar. 1 , 1922

75,738

111,575

15,000

10,029
26,603

1,871

44,895

160,672
37,748

Dallas :

May 29, 1919
Mar. 26 , 1920
Oct. 29, 1920
Mar. 1 , 1922
San Francisco :

May 29 , 1919
Mar. 26, 1920
Oct. 29 , 1920

Mar. 1 , 1922

166,580
163,545
291,437

46,268

85,146
48,189
110,466

32,332
7,825
32,828

37,945

84,286
106,878

26,429
7,081

160,301

93

60,140

Federal Reserve Bulletin , Vol. VIII ( 1922 ) , p. 403.

CHAPTER IX
THE COMPUTATION OF RESERVES

An important question inseparable from the problem of clear
ing and collection of checks, is that of computing reserves. Items
in the process of being collected will become demand deposits in
time, against which lawful reserves must be held. As a result, the
banks have found it necessary to devise a definite system for the
computation of reserves. This computation involves, not only the
question of computing reserves against items in the process of col
lection, but against many other types of demand and time obliga
tions, and in order to secure clarity and completeness of treat

ment, it is necessary to extend the scope of the subject to cover
other aspects of the question of reserve computation than simply
that of computing reserves against obligations resulting from the
clearing and collection of checks.
Reserve requirements of member banks of the Federal Reserve
System
Section 19 of the Federal Reserve Act provides that the three
classes of member banks in the Federal Reserve System shall main

tain the following reserves in lawful money against demand de
posits : Country banks, 7 per cent . ; reserve city banks, 10 per
cent .; and central reserve city banks, 13 per cent . Against time
deposits, each class of banks is required to maintain 3 per cent.
and all of the reserves are to be held in the Federal reservė banks.

According to Section 19 demand deposits comprise all those pay
able within thirty days, while time deposits comprise all deposits
payable after thirty days, all savings accounts and certificates of
deposit which are subject to not less than thirty days' notice be

fore payment, and all postal savings deposits.
If a reserve city bank is located in the outlying districts of a
reserve city or in territory added to such a city by the extension
of its corporate charter, it may maintain, upon the affirmative
vote of five members of the Federal Reserve Board, the reserve

balances required of country banks. Central reserve city banks
330

THE COMPUTATION OF RESERVES

331

similarly situated, in like manner may be reduced to the status of

reserve city banks so far as reserve requirements are concerned.
The required balance carried by a member bank with a Federal
reserve bank , under regulations and subject to penalties pre
scribed by the Federal Reserve Board, may be checked against

and withdrawn by the member bank for the purpose of meeting ex
isting liabilities provided the bank does not make any new loans or
pay any dividends until the total balance required by law is re
stored fully .

Against national bank notes, national banks are required to
maintain in the United States Treasury a 5 per cent. redemption
fund in lawful money, in addition to the 100 per cent. bond secu

rity. This redemption fund is not a part of a national bank’s

legal reserve as was the case prior to the passage of the Federal
Reserve Act.

Penalties for reserve deficiencies are prescribed by

Regulation J , Series of 1924, given below , pp. 366-367.
Reserve requirements of the Federal reserve banks

Against demand deposits, each Federal reserve bank is re
quired, according to Section 16 of the Federal Reserve Act , to
maintain reserves in gold or lawful money of not less than 35 per
cent . Federal reserve banks have no time deposits. Government

deposits are not exempt from the reserve requirements. Author
ity is given the Federal Reserve Board to suspend for a period of
thirty days, and to renew the suspension for fifteen -day periods,
any reserve requirement specified in the Act , provided that it
establishes a graduated tax upon the deficiency in the reserves. "
Gold deposits standing to the credit of any Federal reserve bank
with the Federal Reserve Board shall be counted, at the option of
the bank , as part of the lawful reserve which it is required to main

tain against outstanding Federal reserve notes, or as part of the
reserve it is required to maintain against deposits.
Federal reserve banks are required to keep against Federal
reserve notes in actual circulation a reserve in gold of not less

than forty per cent ., in addition to the other collateral required
to make up the 100 per cent. security. When the Federal reserve
agent holds gold or gold certificates as collateral for Federal re
serve notes issued to the bank , such gold or gold certificates are

counted as part of the gold reserve. The Act also requires that
*See Federal Reserve Act , Section 20.

Federal Reserve Act, Section 11, paragraph ( C ) . In 1920, eight of the
Federal reserve banks paid penalties for deficient reserves.
nual Report of the Federal Reserve Board ( 1920 ) , pp . 46-47.

See Seventh An

332

CLEARING AND COLLECTION OF CHECKS

each Federal reserve bank maintain a redemption fund in the
Treasury for the purpose of redeeming the notes. This fund is a
sum in gold sufficient in the judgment of the Secretary of the
Treasury for the redemption of the notes issued to each Federal

reserve bank , but in no event less than five per cent. of the total
amount of notes issued, from which is deducted the amount of gold
or gold certificates held by the Federal reserve agent as collateral
security in order to determine the net liability against which the
fund must be held. This redemption fund of gold is counted as
part of the forty per cent . reserve that must be held against the
Federal reserve notes . Should the gold reserve held against Fed
eral reserve notes fall below the forty per cent. requirement, the
Federal Reserve Board , according to the requirements of the Fed

eral Reserve Act, is required to levy a graduated tax. This tax
is paid by the reserve bank, but it adds an amount equal to the
tax to the rates of interest and discount fixed by the Federal
Reserve Board . 3

Against Federal reserve bank notes which are issued up to the
par value of the underlying bonds, the Federal reserve banks must
also maintain in the Treasury a redemption fund in lawful money

to the extent of five per cent. As in the case of national banks,
this does not count as part of the legal reserve.
Reserve requirements of Federal reserve bank branches
It will be unnecessary to consider the branches of the Federal

reserve banks separately from the parent banks in this discussion,
because no branch of a Federal reserve bank has a separate cor

porate entity distinct from that of the parent bank . Its opera
tions are in effect the operations of the parent bank . It is pointed
out elsewhere that there are two classes of branches in the United

States. One type, designated as Class I for convenience of treat
ment, renders practically the same services and has the same direct
relations with the member banks as does the parent bank. Such a
branch has certain territory and capital assigned to it ; it carries
the reserves of the member and non -member banks assigned to it
by the parent bank ; the correspondence of the member banks is
with this branch rather than with the parent bank ; and it redis
counts for the member banks of its assigned district, although it
may not engage in open market transactions except under orders
from and for the account of the head office. Thus everything
' Federal Reserve Act, Section 11 , paragraph (C ) . Penalties for reserve
deficiencies are discussed below, pp. 371-374.

THE COMPUTATION OF RESERVES

333

that may be said relative to the computation of reserves in Fed
eral reserve banks is applicable, in general, to these branches, and
need not be repeated in a separate treatment.

Reserve deposits

carried by member banks upon the books of the branch are techni
cally actual reserve carried with the parent bank, and where de
posits are made in a branch by an agent of the government and
are charged to that branch on the books of the Treasurer of the
United States, the Board understands that this is done merely as
a matter of bookkeeping convenience. The deposit liability rests

with the parent bank.4 This type of branch clears and collects
checks and other items for its member and non-member clearing
banks in the same manner as does the parent bank, and partici
pates in the daily clearings through the Gold Settlement Fund,

although the final settlements are made on the books of the parent
bank, as no branch carries separate deposits in the Gold Settle
ment Fund .

The second type of branch, designated as Class II, is really a
branch office maintained by the parent bank for the convenience
of such member and non -member clearing banks as may desire to

use it. Consequently, none of its functions can be considered in
any sense as separate from those of the parent bank . No distinct
capital or reserves are assigned to it, no member bank in any
specific territory is required to deal with it, and no specific terri
tory is assigned to it except for collection purposes. The princi
pal operations of this type of branch are confined to the clearing
and collection of checks, and to supplying currency, both paper
and coin, to member banks within the collection zone assigned to
it. The balance appearing to the credit of a member bank on the
books of the head office constitutes its reserve, but member banks

depositing with the branch may charge the parent bank with all
items on the day of deposit unless drawn against banks for which
allowance is provided in the time schedules, in which case such
banks may obtain credit only at the expiration of the time indi
cated .

This type of branch makes daily reports to the head office
showing the amounts received on deposit for credit with the head
office, checks paid for the head office, discounts recommended ( as
this type of branch may not rediscount for member banks ), and
items received for collection and forwarded , and for which credit

should be given by the head office at the expiration of the timo
‘Federal Reserve Bulletin, Vol . IV ( 1918 ) , p. 256 ; Eighth Annual Report of
the Federal Reserve Board , ( 1921) p . 80. See also pp . 517-550 below .

CLEARING AND COLLECTION OF CHECKS

334

stipulated in the time schedule. This type of branch does not
clear through the Gold Settlement Fund, but reports directly to
the parent bank each day the credits resulting from the items re
ceived for collection within its collection zone.5

Reserve requirements of State banks, trust companies, and private
banks

State banks, trust companies, and private banks keep the re
serves required by the various State laws or clearing house asso
ciations in case the requirements of the clearing houses are higher
than those of the State laws. In the State of New York, for

example, the law requires that State commercial banks shall main
tain reserves against aggregate demand deposits as follows :
( 1 ) If the bank has an office in a borough having a popula
tion of two millions or more, 18 per cent . , and at least 12 per
cent. , must be maintained as reserves on hand.

( 2 ) In a borough with a population of one million and less
than two millions, 15 per cent. , and at least 10 per cent . must be
maintained as reserves on hand.

(3 )

When located elsewhere in the State, 12 per cent ., and

at least 4 per cent . must be maintained as reserves on hand.

Any part of the reserves on hand in excess of 4 per cent . of
such deposits may be deposited , subject to call , with a Federal
reserve bank in the district in which such bank is located, and the
reserves on hand not so deposited shall consist of gold, gold bul
lion, gold coin, United States gold certificates, United States notes,

or any form of currency authorized by the laws of the United
States. Any bank which is a member of the Federal Reserve
System of course maintains the reserves required by the Federal
Reserve Act.

Every trust company in the State of New York is required
to maintain reserves against aggregate demand deposits as
follows :

(1)

If the trust company has an office in a borough having

"The by-laws of this type of branch may be consulted in the Federal Reserve

Bulletin, Vol. III ( 1917 ), pp. 935-936. See p. 923 in the same bulletin for a
discussion of this type of branch.

A further description is given in pp. 547

550 below .

See the accompanying list of reserve requirements for State banks. From a
pamphlet with the unusual title — of service to banks and business — Federal Re
serve System , exhibit at annual convention of American Bankers' Association

( Atlantic City, Sept. 24-27, 1923 ) , pp. 24-27 .
' It will be observed that there are no reserve requirements for time deposits
in New York .

* State Banking Law , Section 112, amended by Chap. 579, Law of 1917 ; Chap.
92, Law of 1918 ; and Chap. 35, Law of 1919.

THE COMPUTATION OF RESERVES

335

RESERVE REQUIREMENTS UNDER STATE LAWS
States marked ( * ) do not permit State memberReserve
banks Act
to substitute reserve requirements of Federal
Distribution

Figures in parentheses refer to footnote's

of reserves

None

10 %
20 %

None

20 %
16 %

None
100.000 or over
Under 50,000

18 %
15 %
12 %

None
None

20 % ( 2 )
25 % .

None

20 %

60,000-99,999
COLORADO :
Savings banks

Reserve agents ( 35 )
Other banks

.

Illi

CALIFORNIA :
Savings banks
Commercial banks

positaries

2/5

3/5

1/3

-

None

Other banks

Balances

6%

15 %

with de

Cash in
vault

1/4
1/3

16 %

Il Illl

ARKANSAS :
Reserve agents ( 35 )

None
60,000 or over
under 60,000

111

banks

15 %

Ill

ARIZONA :
Savings bank ,
Other

Reserves required to be held upon
Savings
Time
Demand
deposits
deposits deposits

Aggregate
deposits

|||

Population
Restrictions
ALABAMA :
All banks

3/4
2/3
2/3

2/5

3/5

( 38 )

( 38 )

1/2
1/2
1/2

1/2 ( 1 )

1/2

1/2

1/5
1/5
1/5

4/5 ( 3 )
4/5 ( 4 )
4/5 ( 3 )

1/3

2/3 ( 5 )

1/2
1/2

• CONNECTICUT :
Nono

companies

-

State banks and trust

6%

12 %

DELAWARE :
Banks
and
companies

trust

Savings banks
FLORIDA :
All banking
nies

None
None

1/3
( 38 )

2/3 ( 39 )

6 %.

None

20 %

2/5

3/5 ( 6 )

5% (7)

( 38 )

( 38 )

(8 )

1/5
1/5

4/5
4/5

( 38 )

( 38 )

( 38 )
( 38 )

( 38 )

10 %

6 % ( 38 )

5 % ( 38 )

( 39 )

compa

GEORGIA :

15 %

None

All banks

6% (7)

IDAHO :

15 %
15 %

1

None

None

11

State banks

Trust companies
• ILLINOIS :

-

None

-

bank

( 38 )

8%
8 %.

8%
8%

3/20
3/20

17/20
17/20

8%

3/20

17/20

.

126 % ( 10 )

1

ing companies

-

INDIANA :
All banks and

25 % ( 9 )
15 % ( 9 )

il

Elsewhere

11

Chicago

panies

11

Banks and trust com

IOWA :

State banks,

( 12 )

Under

Trust companies
• KENTUCKY :
State banks and trust
companies

Central reserve
cities ( 15 )
Reserve

13 %

cities ( 15 )
Elsewhere

3%
3%
10 %

1/3
1/3

2/3

1/3
1/3

2/3
2/3 ( 13 )

1/3 ( 14 )

2/3 ( 14 )

2/3

1/3

2/3

1/3
1/3

2/3

1/5 ( 16 )

4/5

1

Under 1.000
None

7%
25 %

IIlll

10 %
10 %
7%

10 %
7%

3%
3%

20 %

-

00

.

50.000

15 %
owwwes

50.000 or over
Under 50.000

( 11 )

.

None

2007

1

10

or over

Under 3,000

-

Other savings banks
KANSAS :
State banks

3.000

III Illll

trust
companies , and
banks
savings
doing
commer
cial business

2/3

.LOUISIANA :
State banks

None

1

CLEARING AND COLLECTION OF CHECKS

336

RESERVE REQUIREMENTS UNDER STATE LAWS- (Continued )
Distribution
of reserves

- Reserves required to be held upon Population
Restrictions
MAINE :
and
Trust

Aggregate
deposits

Demand

deposits

Time

deposits

Savings
deposits

Cash in
vault

Balances
with de.

positaries

banking

15 % ( 17 )

None

companies

All ( 18 )

MARYLAND :
None
None

15 %
15 %

=

-

State banks

Trust companies

1/3

=

2/3

All ( 19 )

20 %

111

00

11

.

In Boston
within 3
miles of
State House
Eise where

Il

Trust companies

III

MASSACHUSETTS :

2/5 ( 20 )

3/5 ( 20 )

2/5 ( 20 )

3/5 ( 20 )

( 38 )
( 38 )
( 38 )

( 38 )

1/4

1/4

3/4
3/4

10 %

( 38 )

( 38 )

7%

( 38 )

( 38 )

7/18
2/5
( 38 )

11/18
3/5

( 21 )

( 21 )

( 21 )
( 21 )

2/5
1/3
( 38 )

3/5
2/3
( 38 )

1/3

1/3

2/3
2/3

1/2

1/2

1/3

2/3

2/5
1/5

3/5
4/5

AII

1/3

2/3 ( 24 )

1/3

1/3 ( 24 )

2/3

2/3 ( 24 )

1/3

13

8/13 ( 24 )

5/13

100 %
10

2/5 ( 24 )
3/10 ( 24 )

7/10

15 %

MICHIGAN :

Under 100.000
None

cities

( 35 )

Elsewhere

15 %
12 %

5%
5%

25 %
15 %

10 %
7%

18 %
15 %
15 %

-

Res.

20 %
12 %
12 %

E

* MINNESOTA :
State banks

100,000 or over

111

Commercial banks
Savings banks

( 38 )
( 38 )

MISSISSIPPI:
Elsewhere

Il

Over 50,000

State banks

MISSOURI :

200.000 or over
25.000 to 199.999
Under 25,000

III

ill

State banks and trust
companies 06

( 38 )

MONTANA :

15 %

NEBRASKA :
25,000

Elsewhere
None

20 %
15 %

E

Over

State banks
Savings banks

| |

10 %

11

Res. cities ( 35 )
Elsewhere

111 | |

State banks

5%

NEVADA :

None

10 %

None

15 % ( 37 )

こ

-

1

25 %
15 %

-

1

-

not doing general
banking business

None
None

11

Reserve agents ( 35 )
Other banks
Savings
banks and
trust
companies

-

NEW HAMPSHIRE :
All banks
NEW JERSEY :

-

( 26 )

18 %

-

NEW MEXICO :
All banka

-

Trust companies

2/3 ( 24 )

15 %
12 %

=

12 %

None

1

15 % ( 22 )
15 %

None
None

State banks

NEW YORK :
State banks

Boroughs of
2.000.000
or

over

or

-

Elsewhere
Boroughs of
2.000.000

1

00

Trust companies

-

Boroughs of
1.000.000
to 1.999.999 ( 23 )

15

over

Boroughs of
1.000.000

to 1.999,999 ( 23 )

:

Elsewhere

11

2nd

11

and

class cities
under
1.000.000

11

1st

d .

3/5

THE COMPUTATION OF RESERVES

337

RESERVE REQUIREMENTS UNDER STATE LAWS (Continued )
Distribution
of reserves

Population
Restrictions

Reserves required to be held upon Savings
Time

Aggregate Demand
deposits deposits

deposits

deposits

Balances

Cash in with de
vault positaries

NEW YORK- ( Continued )

Private bankers

Cities of 1st class

-

Elsewhere

15 %
10 %

=

1/10
1/10

9/10
9/10

( 25 )

( 38 )

2/5
2/5

3/5

4/15
demand

11/15
demand

2/15

13/15

NORTH CAROLINA :
Banks and trust com
None

15 %

Savings banks

None

State banks

None

11

panies

20 %
10 %

None

15 %

6%

• NORTH DAKOTA :
8 % ( 26 )
7%

6 % ( 27 )

OHIO :
Commercial banks

time

4/15

11/16

demand

time

demand
8/10
time

1/3
1/3
1/3

2/3
2/3

-

None

time

E

Savings banks and
trust companies

1/2

1/2 ( 6 )

10 %

15 %

3/6

2/10

Over 2.500
Under 2.500
None

20 %
16 %
30 %

None

20 %

111

State banks

Reserve banks
Savings
banks

111

• OKLAHOMA : ( 28 )
2/3

not

ness

-

doing general busi

1

OREGON :

State banks and trust
companies

15 %

None

10 %

10 %

PENNSYLVAVNIA :
All

banks

None

15 % ( 22 )

1/4

3/4

1/3 demand

2/3 de

3/6
( 38 )

mand ( 29 )
time ( 30 ) time ( 30 )

74 %

• RHODE ISLAND :
15 %

2/5

3%

-

None

-

companies

-

State banks and trust

( 38 )

SOUTH CAROLINA :
All banks

None

7%
20 %

174 %

10 %

-

None

11

TENNESSEE :
State banks and trust
panies

None
None

15 %
20 %

=

11

Reserve banks ( 35 )
Other banks

11

• SOUTH DAKOTA :
( 38 )

( 38 )

( 38 )

( 38 )

( 38 )

( 38 )

( 38 )

( 38 )

( 38 )
( 38 )

1/8
1/8
1/4

7/8
3/4

1/5 ( 31 )

4/5 ( 29 )

TEXAS :
None
None

=

5

Banks - capital
$ 25,000 or over
Other banks

=

Savings banks

50,000 or over
Under 50,000
None

20 %

15 %
10 %

111

Commercial banks

111

UTAH :
7/8

VERMONT :
None

15 % ( 10 )

None

10 %

-

All banks

3%

• VIRGINIA :
3%

-

State banks ( 32 )

( 38 )

( 38 )

( 38 )

( 38 )

2/5
AII ( 34 )

3/5

WASHINGTON :
State banks and trust
None

15 % ( 33 )

1

panies

None
None

15 %

11

State banks and trust
companies

Savings banks

11

WEST VIRGINIA :
5 % ( 34 )

338

CLEARING AND COLLECTION OF CHECKS

RESERVE REQUIREMENTS UNDER STATE LAWS- (Continued )
Distribution
of reserves

Population
Restrictions

- Reserves required to be held upon
Savings
Demand
Time

Aggregate
deposits

deposits

deposits

deposits

Cash in
vault

Balances
with de

positaries

• WISCONSIN :

Reserve banks

Nono

20 %

( 38 )

( 38 )

Other
state
banks
and trust companies

None

12 %

( 38 )

( 38 )
( 38 )

Mutual savings banks
• WYOMING :
Commercial bank ,

None

and trust companies

None
None

Savings banks

-

20 % ( 36 )

-

=

6%

( 38 )

10 %

( 38 )
( 38 )

10 %

( 38 )

( 38 )

( 1 ) Or in U. S. bonds.
( 2 ) Deposits other than savings.
( 3 ) 6 % deposits may be in Liberty bonds .

( 4 ) 74 % deposits may be in Liberty bonds .
( 6 ) 1/4 of balances may be in approved bonds.
( 6 ) Or approved bonds.

( 7 ) Reserve against time and savings deposits may be in unpledged U. S. or Georgla bonds.
( 8 ) Not less than 5 % as cash in vault .

( 9 ) Ruling of auditor - not state law.
( 10 ) Commercial deposits payable on demand and subject to check.
( 11 ) Banks having 20 % or more of deposits due to banks.
( 12 ) Banks having less than 20 % of deposits due to banks.

( 13 )
( 14 )
( 15 )
( 16 )
( 17 )
( 18 )
( 19 )
( 20 )
( 21 )

1/4 of reserves as cash with approval of banking commissioner .
U. S. bonds and demand loans secured by U. S. or municipal bonds accepted 28 reserve.
As designated by Federal Reserve Act .
Member banks' balances with Federal reserve bank accepted as cash in vault.
Including deposits subject to notice within 10 days .
1/3 may be in U. S. or Maine bonds .
1/3 may be in bonds.
1/2 of cash and 1/3 of balances, or in all 2/5 of total reserve , may be in approved bonds.
Such portion of reserve as directors may determine may be on deposit with approved reserve
agents, balance in cash .

( 22 ) All items or claims payable on demand .
( 23 ) Il bank does not have office in borough of preceding class.

( 24 ) Prescribed percentage may be on deposit with Federal reserve bank .
( 25 ) No requirements as to cash in vault ; all may be carried with reserve agents.
( 26 ) Total deposits on time certificates.

( 27 ) Deposits subject to notice as provided by law.
( 28 ) No specific law exists permitting state member banks to substitute Federal reserve in lieu of
( 29 )
( 30 )
( 31 )
( 32 )

state requirements, but state authorities do not criticize such substitution,
1/2 of balances may be in approved bonds.
1/3 in approved bonds, 2/3 in cash or balances .
1/2 of cash may be deposited in bank in same town or county.
State law by implication permits state member banks to comply with reserve requirements of
Federal Reserve Act .

( 33 ) Reserve of 100 % required against uninvested trust funds.
( 34 ) Set aside from profits and held as cash.
( 35 ) Ag defined by state law .

( 36 ) Liability to depositors other than savings.

( 37 ) Deposits in banking or commercial department .
( 38 ) Reserves
consist of cash in vault and balance with approved reserve agents, no provision being
made for definite distribution between the two .
( 39 ) Upon approval of banking commissioner one- half of reserves may be in bonds or other obliga .
tions of the United States .

THE COMPUTATION OF RESERVES

339

a population of two millions or more, 15 per cent ., and at least 10
per cent. must be maintained as reserves on hand.
( 2 ) In a borough with a population of one million and less
than two millions, 13 per cent . , and at least 8 per cent. must be
maintained as reserves on hand.

( 3)

When located elsewhere in the State, 10 per cent. Trust

companies located in cities of the first and second class, but not
falling within Sections ( 1 ) and ( 2 ) above, must maintain at least

4 per cent. of such deposits as reserves on hand ; trust com
panies located in cities of the third class and in incorporated and
unincorporated villages, must maintain at least 3 per cent. of such

deposits as reserves on hand.
Any part of the reserves on hand in excess of 3 per cent. of
such deposits may be deposited , subject to call, with a Federal re
serve bank in the district in which the trust company is located
and the reserves on hand not so deposited must consist of gold,
gold bullion, gold coin, United States gold certificates, United
States notes, or any form of currency authorized by the laws of
the United States. If the trust company is a member of the Fed
eral Reserve System, it maintains the reserves required by that
system.'

Every private banker is required to maintain total reserves
against his aggregate demand deposits as follows :
( 1 ) If in a city of the first class, 15 per cent. ( 2 ) If in any
other city, 10 per cent . At least one-tenth of such reserves must

be kept on hand and the remainder may be redeposited subject
to call in any State bank , national bank, or trust company .'10
Reserve requirements of banks outside continental United States
National banks, or banks organized under local laws, located

in Alaska or in a dependency or insular possession or any part of
the United States outside the continental United States may re

main non-member banks, and in that event , shall maintain reserves
and comply with all the conditions now provided by law regulating
them ; or such banks , with the consent of the Federal Reserve

Board, may become member banks of any one of the Federal re
serve districts, and in that event shall take stock , maintain re

serves, and be subject to all the other provisions of the National
Bank Act as amended.11

State Banking Law , Section 197, amended by Chap. 579, Law of 1917 ; Chap.
92, Law of 1918 ; and Chap. 35, Law of 1919.
1°State Banking Law , Section 166.
" Federal Reserve Act , Section 19 .

340

CLEARING AND COLLECTION OF CHECKS

Reserve requirements of foreign branches of member banks
Where national banks have established foreign branches the

reserve requirements are regulated by the Federal Reserve Board.
The Federal Act, itself, merely provides that every national bank
ing association which establishes such branches shall conduct the
accounts of the foreign branch independently of the accounts of
other foreign branches established by it and of its home office, and

shall at the end of each fiscal period transfer to its general ledger
the profit or loss accrued at each branch as a separate item.12

Power is given to the Federal Reserve Board to prescribe the re
serve requirements of foreign branches, but the Board has never
stipulated definite requirements for such banks. As a result these
branches maintain reserves in accordance with the general bank
ing policy or needs of the country in which they are located, the

parent bank not being required to carry any lawful reserve against
such deposit liability. For example, in Cuba the branches of the
National City Bank of New York are required, according to local
regulations, to carry a reserve of 25 per cent . ; in Spain the
branches generally carried reserves varying from 30 to 50 per
cent ., due to unsettled political conditions. It has been held by
counsel for the Federal Reserve Board that Section 19 of the

Federal Reserve Act, which prescribes the reserve requirements of

member banks, does not apply to their foreign branches.13
Reserve requirements of banking corporations authorized to do

foreign banking business ( so -called Edge Corporations ) 14

Banking corporations organized under authority of Section
25 ( a ) of the Federal Reserve Act for the purpose of engaging in

international or foreign banking and financial operations are re
quired by the Act to carry such reserves as the Federal Reserve
Board may prescribe, but in no event to be less than 10 per cent.
per annum , against deposits received in the United States.

Such

banking institutions, commonly known as Federal foreign banking
associations, may receive only such deposits within the United

States as may be incidental to or for the purpose of carrying out
12Federal Reserve Act, Section 25 ; Federal Reserve Bulletin, Vol. IV
( 1918 ) , pp. 1123-1124 .
" Federal Reserve Bulletin, Vol. IV ( 1918 ) , pp. 1123-1124. Cf. F. H. Curtis,
" Bank Reserves under the Federal Reserve System ,” Harvard Business Re
view , Vol. I ( October, 1922 ) , p. 46.

**In April, 1924 ( date of writing) , there were but two such corporations, one
at New York City and one at New Orleans. In the middle of April the New

York Corporation, known as the First Federal Banking Association , was ab
sorbed by the Bank of Manhattan Company.

THE COMPUTATION OF RESERVES

341

transactions in foreign countries or dependencies or insular pos
sessions of the United States .

The Federal Reserve Board has ruled that "Against all de

posits received in the United States a reserve of not less than 13
per cent. must be maintained. This reserve may consist of cash
in vault, a balance with the Federal reserve bank of the district

in which the head office of the corporation is located, or a balance
with any member bank. Against all deposits received abroad the

corporation shall maintain such reserves as may be required by
local laws and by the dictates of sound business judgment and
banking principles." 15
The Board has also ruled that against all acceptances out .

standing which mature in thirty days or less, a reserve of at least.
15 per cent. shall be maintained, and against all acceptances out
standing which mature in more than thirty days a reserve of at
least 3 per cent . shall be maintained.

Reserves against accept

ances must be in liquid assets of any or all of the following kinds :
( 1 ) Cash ; ( 2 ) balances with other banks ; ( 3 ) bankers' accept
ances ; and ( 4 ) such securities as the Federal Reserve Board, from

time to time, may permit. 16
What constitutes reserves

So far as member banks in the Federal Reserve System are
concerned, reserves are composed of lawful money deposited with
the Federal reserve banks. Lawful money consists of gold and
silver, gold certificates, silver certificates, and United States notes.

Clearing house certificates of any clearing house association, rep

resenting specie or lawful money specially deposited for the pur
pose, are also deemed to be lawful money in the possession of
any association belonging to such clearing house, holding or own
ing such certificate.

Since the legal reserves of member banks are in the Federal

reserve banks the lawful money has assumed the form of reserve
deposits-balances due from approved Federal reserve agents. To
keep lawful money in its own vaults to meet demands made at the
bank is expensive, and , as a result, bank notes or Federal reserve
notes should be used whenever possible as till money. The bal
ances with the Federal reserve banks are available to meet those

liabilities which can be discharged by checks or drafts drawn
Regulation K , Series of 1923, Federal Reserve Bulletin, Vol. IX ( 1923) ,
pp . 907-908 .

" Regulation K , loc. cit .

342

CLEARING AND COLLECTION OF CHECKS

against them . Although clearing house deposits, usually in gold,
are available to meet demands presented through the clearing
house, and the 5 per cent. redemption fund, in lawful money, is
available to redeem national bank notes, neither fund counts as

part of the legal reserve. It means that in actual practice, the
member banks are carrying as reserve much more than the legal
reserve required.
The reserves of member banks in the Federal reserve banks

may be built up by the presentation of checks and drafts on other

banks for collection and credit to these reserve deposits. But
such items cannot be counted as part of the reserve until sufficient
time has elapsed for the collection of the items. A violation of

this regulation subjects the member bank to certain penalties. 17
The reserves of the Federal reserve banks against deposits are
composed of gold or lawful money .

The 40 per cent . re

serve required against Federal reserve notes is composed of
gold and includes the five per cent. redemption fund held at
Washington. The five per cent. redemption fund held against

Federal reserve bank notes is composed of lawful money and is
!

not counted as part of the required reserve. This fund is also
held at Washington, although the law does not require it. The re

serves are computed against deposits and Federal reserve notes
combined, and, as listed in the weekly consolidated statements of

the Federal reserve banks, include the following items: ( 1 ) Gold
and gold certificates, ( 2 ) Gold Settlement Fund, with the Federal
Reserve Board, ( 3 ) gold with foreign agencies, ( 4 ) gold with Fed
eral reserve agents, ( 5 ) gold redemption fund against Federal
reserve notes , and ( 6 ) United States notes , silver, etc. The Fed

eral Reserve Act does not state except by implication, where these
reserves are to be carried. With the approval of its counsel the
Federal Reserve Board has permitted or required the Federal
réserve banks to keep portions of their reserves in various places.

The gold coin, gold certificates, United States notes, silver,
etc., are the till money held in the vaults of the Federal reserve
banks ; the Gold Settlement Fund is held at Washington ; gold
with foreign agencies is held by agencies abroad, such as the Bank
of England ; gold with the Federal reserve agents is held by the
Federal reserve agents as security against Federal reserve notes

partly at Washington and partly in the vaults of the Federal
reserve banks ; the gold redemption fund against the Federal re
11See Regulation J , Series of 1924, Federal Reserve Bulletin, Vol. X ( 1924 ) ,
pp . 489-491 .

THE COMPUTATION OF RESERVES

343

serve notes is held at Washington. According to Westerfield's
this allocation of parts of the reserve to different places and uses
does not mean that it is any less a reserve, but rather that it is a

more efficient reserve, for it is placed where payments are most
conveniently and frequently made:

The nature of the reserves of the State banks, trust compa
nies, and private banks in the State of New York , as well as the
requirements as to where they shall be carried, have been pointed
out at sufficient length above.19

Banks outside the continental

United States, such as national banks or banks organized under
local laws such as those in Alaska or Hawaii maintain reserves in

lawful money as defined above. Edge corporations are required
to maintain reserves in cash against deposits. The reserves
against acceptances may be in cash, balances with other banks,
bankers' acceptances, or such securities as the Federal Reserve
Board may permit .
Nature of the deposits against which reserves are carried

Before becoming involved in the more technical subject of
computing reserves, it may simplify the problem to examine first
of all the nature of the deposits against which the reserves are
held.
1.

In member banks

Member banks may receive, as indicated above, demand or
time deposits . Demand deposits comprise all cash deposits and
deposits resulting from loans ( derivative deposits ) payable
within thirty days. Cash (primary ) deposits include deposits
of specie, bank notes, government paper money, and checks and
drafts payable upon presentation. The checks and drafts may be
deferred liabilities, however, depending upon the time required to
convert them into cash . This will be true unless the bank indulges
in the common practice of giving immediate credit for such de

posit items even though some time must elapse before the bank
can convert them into cash . Maturing notes and bills become
effective deposits only when actually collected . Certified and
cashier's checks are treated as demand deposits.

Certificates of

deposit may be either time or demand ; if demand , the full reserve
must be carried against them .
* R . B. Westerfield , Banking Principles and Practice, Vol. II ( New York ,
1921 ) , p. 277 .
"See pp. 331-339.

344

CLEARING AND COLLECTION OF CHECKS

Demand deposits, in turn, may be composed of individual or
ordinary deposits, bank deposits, or government deposits. Gov
ernment deposits other than postal savings deposits, which are time
deposits, are exempt, with certain exceptions, from reserve

requirements, but are usually secured by the deposit of gov
ernment securities. Government deposits include the general
and current funds of the government.

Other

funds

that

may be deposited with member banks are reserve funds of
the War Finance Corporation ; securities and current funds,
subject to check and for interest payments, of the Federal
land banks; current funds, subject to check, of national agricul
tural credit corporations. In addition, member banks may re
ceive deposits from virtually any other type of bank, such as
private, State bank or trust company, Edge corporations, foreign
banks, and other member banks. These deposits appear in the
item “ Due to banks” . It will be unnecessary to enter into a dis

cussion of bank note liabilities beyond that given above.
(1 ) Government deposits in member banks against which re
serves must be held .

In addition to the fact that reserves must

be held against postal savings deposits, the Federal Reserve
Board, in May, 1923, ruled that certain other government de

posits are not exempt from the reserve requirements set forth in
Section 19 of the Federal Reserve Act. These deposits are classed
as follows :

( a ) Deposits of Philippine funds made by the Philippine
government and carried under the title “ Treasurer of the Philip
pine Islands currency reserve fund account.”
( b ) Deposits of Porto Rican funds made by the Porto Rican
>

government.

( c ) Deposits of Indian funds under the control of the De
partment of the Interior.

( d ) Deposits of States, counties or municipalities,
( e ) Deposits of the United States Shipping Board and de
posits of the Emergency Fleet Corporation.
In the same connection, however, it should be noted that the
Board has held that deposits made by United States postmasters

of government funds, other than postal savings deposits, col
lected by them or which have come into their possession by virtue
of their official position , should be deemed to constitute " deposits

of public moneys by the United States,” and, when made in desig

THE COMPUTATION OF RESERVES

345

nated depositaries, such deposits are exempt from the reserve re
quirements specified in Section 19 of the Federal Reserve Act.20
(2) Time deposits. The Federal Reserve Act defines time
deposits as all those payable after 30 days, all savings accounts
and certificates of deposit which are subject to not less than 30
days' notice before payment, and all postal savings deposits.
The term “ time deposits, open accounts, ” is held to include all
accounts, not evidenced by certificates of deposit or savings pass
books, in respect to which a written contract is entered into with
the depositor at the time the deposit is made that neither the whole
nor any part of such deposit may be withdrawn by check or other
wise, except on a given date or on written notice which must be
given by the depositor a certain specified number of days in ad

vance, in no case less than 30 days.
The term "savings accounts” is held to include those accounts
of the bank in respect to which, by its printed regulations, ac
cepted by the depositor at the time the account is opened, ( a ) the

pass book, certificate, or other similar form of receipt must be
presented to the bank whenever a deposit or withdrawal is made,
and ( b ) the depositor may at any time be required by the bank
to give notice of an intended withdrawal not less than 30 days
before a withdrawal is made.

A “ time certificate of deposit ” is defined as an instrument
evidencing the deposit with a bank, either with or without inter
est, of a certain sum specified on the face of the certificate pay
able in whole or in part to the depositor or on his order
( a ) On a certain date, specified on the certificate, not less
than 30 days after the date of the deposit, or

( b ) After the lapse of a certain specified time subsequent to
the date of the certificate, in no case less than 30 days, or

( c ) Upon written notice, which the bank may at its option
require to be given a certain specified number of days, not less
than 30 days, before the date of repayment , and
(d ) In all cases only upon presentation of the certificate at
each withdrawal for proper indorsement or surrender.21
(3)

Reserves against trust funds.

A national bank or other

member bank exercising fiduciary powers need not carry reserves
against trust funds, which it keeps segregated and apart from its
general assets. This is true, also , if the trust funds are deposited
with another bank to the credit of its trust department. When,
* Federal Reserve Bulletin , Vol . V ( 1919 ) , p. 1054 ; Vol. IX ( 1923 ) , p. 559.

*Regulation D , Series of 1923, Federal Reserve Bulletin, Vol. IX ( 1923) ,
pp. 896-897 .

316

CLEARING AND COLLECTION OF CHECKS

however, a national bank deposits trust funds in its commercial
department or mingles them with its general funds, a deposit lia
bility is created against which reserves must be carried in the
Federal reserve bank . But trust funds cannot be deposited in
the bank's commercial department unless the bank deposits proper
collateral in its trust department as security to the trust estate

for the funds thus used. This security must consist of United
States bonds or other readily marketable securities owned by the
bank , and which shall at all times be equal in market value to the
amount of the funds so deposited.

If the national bank receiving funds in its fiduciary capacity
deposits those funds in another institution, the liability of that
other institution is a deposit liability against which it must carry
a reserve balance with its Federal reserve bank , if it is a member

bank.

Such a deposit should be designated in some way as a

deposit for account of the national bank as fiduciary and the

depositary bank must treat it as an individual deposit rather than
a bank deposit ; that is, in computing its required reserve, the de
positary bank may not include its liability to the national bank as
fiduciary among the amounts due to other banks from which the
amounts due from other banks may be deducted. This necessarily
results from the fact that the transfer of trust funds to the de

positary bank constitutes a deposit by the national bank as fidu
ciary and not a deposit by such bank in its own right, and conse
quently the deposit is not an item due to banks generally, but is an
item due to the national bank as fiduciary and so analogous to
an individual deposit .
Whether or not funds deposited by a corporate debtor to meet

maturing obligations are trust funds depends upon the terms of
the agreement, expressed or implied. If the bank is acting as
trustee under a deed of trust for the holders of the obligations
which are to be paid, the presumption would be, in the absence of
evidence to the contrary, that it was the intention of the parties
that the funds received should be held as trust funds subject to
the terms of the deed of trust. On the other hand, if the bank has

no duty to the holders of the obligations, and there is no special
agreement setting forth the bank's duties in regard to handling
the funds, the bank being authorized merely to pay the obliga

tions when and as presented, the presumption would be that the
transaction was intended to give rise to an ordinary deposit lia
bility, the bank having authority to mingle the funds with its gen

THE COMPUTATION OF RESERVES

317

eral assets and acting merely as the agent of the corporate debtor
in paying the obligations.22
2. Nature of deposits in Federal reserve banks
The usual distinction between demand and time deposits loses

its importance when one considers the nature of deposits in the
Federal reserve banks. The weekly Federal reserve statements list
but three kinds of deposits under the general term “ Deposits" :
( 1 ) Government, ( 2 ) member banks-- Reserve account, and ( 3 )
all other .

( 1 ) Government deposits. Section 15 of the Federal Re
serve Act provides for the deposit, subject to the discretion of
the Secretary of the Treasury, in Federal reserve banks of the

general and current funds of the government, except the funds for
the redemption of national bank notes and Federal reserve notes.
The revenues of the government, or any part of them, may be

deposited in the Federal reserve banks, and disbursements may be
made by checks drawn against such deposits. Against govern
ment deposits the Federal reserve banks are required to keep the
usual reserves of 35 per cent.23 If any moneys or bullion, con

stituting trust funds or other special funds required by law prior
to 1920 to be kept in Treasury offices are deposited in any Federal
reserve bank , such funds must be kept separate from the assets,
funds and securities of the Federal reserve bank and held in the

joint custody of the Federal reserve agent and the Federal re
serve bank.24
The general and current funds of the government are carried
in an account called “ Treasurer United States General Account,

which is built up chiefly through deposits of tax collections by col
lectors of internal revenue and other revenue collecting bureaus,

deposits resulting from the sale of government securities, and
transfers of funds from other depositaries. It represents a credit
available for the general purposes of the government. The
principal charges to this account are for the redemption of gov
ernment securities, the payment of interest on the public debt ,
transfers to other depositaries, and the payment of checks and
warrants of the United States Treasurer.

This account is under

"Federal Reserve Bulletin , Vol. VIII ( 1922 ) , pp. 572-573.
» Federal land banks and joint stock land banks, when serving as govern
ment depositaries, are required to deposit the proper collateral security in the
form of United States bonds or otherwise. Section 6 of the Farm Loan Act ,
approved July 17, 1916 .

* Appropriation Act, approved May 29, 1920.

CLEARING AND COLLECTION OF CHECKS

348

the control of the Treasurer of the United States and entries may
be made only after authorization by the Treasury Department.
(2 )

Reserve deposits of member banks.

The reserve of a

member bank consists of the deposit rights against the Federal
reserve bank . This reserve balance of a member bank is divided
into account current" and " reserve account ” , and transfers from
one account to the other can be made at the member's direction.

In addition to their reserves, member banks may deposit current
funds in lawful money, national bank notes, Federal reserve notes,
checks and drafts payable upon presentation, and for collection,
maturing notes and bills.

Collection items become demand de

posits against which reserve must be kept only when actually col
lected. Checks and drafts, likewise, are available as reserve de
posits according to the time schedules .
(3) All other deposits. In addition to government and
member bank deposits , a Federal reserve bank may receive de

posits from various sources . Section 13 of the Act provides that

a Federal reserve bank , “ solely for purposes of exchange or of
collection ,” may receive from other Federal reserve banks deposits
of current funds in lawful money, national bank notes, or checks

upon other Federal reserve banks, checks and drafts, payable
upon presentation within its district , and maturing notes and

bills payable within its district . Because of the operation of
daily settlements through the Gold Settlement Fund the neces
sity of an account for exchange purposes no longer exists, and
for the same reason the credits created in the name of another

reserve bank for collections made for its account are paid to it at
the close of business each day in gold, so that in actual practice a
reserve bank does not carry the deposits of another reserve bank,
although it does maintain on its books two very active accounts
with each of the other reserve banks : ( 1 ) The debit or Due from

account , and ( 2 ) the credit or Due to account. These items do
not appear in the statements issued by the Federal reserve banks.
A non-member bank or trust company may carry with the
Federal reserve bank of its district a balance sufficient to offset

items sent to the Federal reserve bank for collection and may make
deposits, “ solely for the purpose of exchange or of collection , " of
such items as those enumerated for member banks.

It is entirely

optional with a Federal reserve bank whether it will or will not
receive deposits from non -member banks. The Act, itself, men
tions but one condition to such deposits, and that is that a non
member bank shall maintain a balance sufficient to offset the

THE COMPUTATION OF RESERVES

349

items in transit. The Federal reserve bank accepting such de
posits may make such conditions as may be desirable concerning
the balance to be maintained, the service to be rendered , etc.
Funds of the Philippine Islands and a certain part of the
net earnings of the War Finance Corporation, which are accumu
lated as a reserve fund may be deposited in Federal reserve banks.
The latter is deposited in the Federal reserve banks upon the
direction of the Board of Directors of the War Finance Corpo
ration and with the approval of the Secretary of the Treasury.
Federal reserve banks act as depositaries for and fiscal agents of
national agricultural credit corporations and Federal interme

diate credit banks.. Banking corporations doing foreign banking
business25 may carry their reserves with the Federal reserve banks.
The Federal Reserve Act does not state specifically that the

farm loan banks either may or shall deposit in the Federal reserve
banks. The deposits of the farm loan banks, therefore, are re
ceived under a special arrangement and for a single purpose ,
which is the payment of interest on the farm loan bonds. The
Federal Reserve Bank of New York pays all this interest and
in 1921 was the only reserve bank having any account with the
farm loan banks.26 The accounts with a few of the foreign gov .

ernments and with foreign banks are all carried under special
arrangements for mutual convenience in the transaction of busi
ness .

3. Nature of deposits in non -member State banks, trust com
panies, and private banks

State banks, not members of the Federal Reserve System, re
ceive all deposits authorized by the State law ; in general, those

common to all commercial banks. According to the provisions of
the Federal Reserve Act, no bank not a member of the Federal

Reserve System may act as a government depositary. Nor may
any member bank keep on deposit with any State bank or trust
company which is not a member bank a sum in excess of ten

per cent. of its own paid -up capital and surplus. During the
early years of the War, however, public funds were deposited in
non -member banks. This was due partly to steps taken by the
Secretary of the Treasury in his effort to keep government funds
widely scattered and partly to a series of war acts more or less
* Edge Corporations.
* L . R. Rounds, “ Deposits and Reserves of the Federal Reserve Banks, ”
Lecture No. 6, Federal Reserve Act Course, Federal Reserve Club Magazine
( February, 1921 ) , p . 666 .

CLEARING AND COLLECTION OF CHECKS

350

amendatory in nature. Under authority of acts passed in 1917
and 1918, the proceeds of the sale of Liberty bonds of the first,
second, and third issues could be deposited in non -member banks.27
The Act of May 18, 1916, amending the Postal Savings Act,
authorized the deposit of postal savings funds in non-member
banks.28

What has been observed relative to non -member State banks

is applicable in general to non -member trust companies. Wide
variations in the types of private banks make generalization more
difficult. They may be classified as either investment banks or
small country banks.

Both types are too diversified in nature

to make any sort of generalization safe. Data on the latter type
are very incomplete. Some are entirely outside corporation law.
4. The nature of deposits in Federal foreign banking associations
Federal foreign banking associations receive only such de
posits within the United States as may be incidental to or for the

purpose of carrying on their foreign business ; that is, they do
not have ordinary deposit accounts. Their liabilities take the
form, rather, of acceptances.

They make advances on export

drafts through acceptance credits, accept drafts drawn on
themselves by responsible exporters, and sell them to banks

throughout the country. It is primarily against acceptances that
their reserve is held.

The computation of reserves .

1. Of member banks

The fundamental purpose underlying the present plan of
reserves
is to compel member banks to com
pute real reserves against real deposits. It eliminates the prac
tice indulged in prior to the establishment of the Federal Re
serve System and the organization of the present clearing and
collection system , of counting as reserve, checks in the mail before

computing

they reach the drawee bank .

The statute provisions regulating

the computation of reserves are brief. First of all, demand de
posits are distinguished from time deposits. Section 19 of the
Federal Reserve Act provides, in part : “ Demand deposits within
" Section 7 of the First Liberty Bond Act, approved April 24 , 1917; Section

8 of the Second Liberty Bond Act, approved September 24, 1917, and amend
ing Section 15 of the Federal Reserve Act relating to government deposits,
and Section 19 which prescribes reserve requirements of member banks; and
Section 8 of the Third Liberty Bond Act, approved April 4, 1918 ; and also
amending Sections 15 and 19 of the Federal Reserve Act .
" Section 2 of the Postal Savings Act, approved June 25, 1910, as amended

by the Act approved May 18, 1916.

THE COMPUTATION OF RESERVES

351

the meaning of this act shall comprise all deposits payable within
30 days, and time deposits shall comprise all deposits payable
after 30 days, all savings accounts and certificates of deposit
which are subject to not less than 30 days' notice before payment ,
FORM PREPARED BY THE FEDERAL RESERVE BOARD
FOR THE COMPUTATION OF RESERVES TO BE
CARRIED BY MEMBER BANKS WITH
FEDERAL RESERVE BANKS

Date

NET DEMAND DEPOSITS
1. Deposits payable within thirty days not
including U. S. Government Deposits
and Items 2 , 3, 4 and 5

7. Balance due to Banks other than Pedera !
Reserve Bank (include Foreign Banks) $.
3.

Amount due to Federal Reserve Bank
$
Deferred Credits

4. Cashier's checks outstanding
S

S

Certified checks outstanding

Total due to banks ( Items 2 , 3, 4 and 5)
Less

Deductions of the following items are
permitted only from the total of Items

2, 3, 4 and 5. Should the total of Items
6, 7 , 8 and 9 exceed the total of Items

2, 3, 4 and 5 , both groups must be
omitted from the calculation
6. Balances due from banks other than
Federal Reserve Bank and Foreign
banks
7.

Items with Federal Reserve Bank in
process of collection

8. Exchanges for Clearing House
9.

Checks on other banks in the same place

$.

Total deduction (Items 6, 7 , 8 and 9)

10

Net Balance due to banks

11 .

Total Net Demand Deposits ( Items 1 and 10)

TIME DEPOSITS
12.

Savings accounts ( subject to not less

than thirty days' notice before pay .
ment)
13

Certificates of deposit ( subject to not less
than thirty days' notice before pay
ment)

$

Other deposits payable only after thirty
days
15

Postal Savings Deposits

16

Total Time Deposits (Items 12 , 13 , 14 and 15 )

FORM 1

and all postal savings deposits.”

It further provides that “ In

estimating the balances required by this Act, the net difference of
amounts due to and from banks shall be taken as the basis for

ascertaining the deposits against which required balances with the
Federal reserve bank shall be determined .”

Demand deposits for reserve calculations consist of : ( 1 ) De

posits ( including dividends unpaid ) other than United States

352

CLEARING AND COLLECTION OF CHECKS

government deposits, payable within thirty days ( Item 1 ) ,29 and
( 2 ) the net balances due to banks. The reserve required against
these demand deposits is 7, 10, or 13 per cent. of the sum of these
two items, according to the location of the bank . The net balance

due to banks is ascertained in the following manner : First, are
added together these items : ( a ) The balances due to all banks
( including foreign banks ) other than the Federal reserve bank
( Item 2 ) , ( b ) amount due to Federal reserve bank deferred credits

( Item 3 ) , ( c ) outstanding cashier's, secretary's or treasurer's
checks on own bank ( Item 4 ) , and ( d ) certified checks outstand
ing ( Item 5 ) . From the total of these items is deducted the fol
lowing : ( a ) Balances due from banks other than Federal reserve
.

bank and foreign banks ( Item 6 ) , ( b ) items with the Federal re
serve bank in process of collection ( Item 7 ) , ( c ) exchanges for
the clearing house ( Item 8 ) , and ( d ) checks on other banks in the
same place ( Item 9 ) .

Member banks are permitted to treat checks on other banks
in the same place and exchanges for clearing houses as balances
due from other banks, and to deduct the aggregate of such items
from the aggregate balance due to other banks in order that
items payable in the same city in which the member bank is located
may be placed on a parity with items payable elsewhere.30 How

ever, in the same year, the Board ruled that member banks cannot
deduct cash on hand from liabilities against which reserves must
be held . The Board took the position that since cash in the
vaults of member banks cannot be counted as reserve there were

no grounds on which it could be deducted.

To permit such a

deduction would amount to a reduction of the reserve require
ments. These can be suspended only upon the affirmative vote of
five members of the Board , in which case a tax must be imposed
upon any impairment.31
If the aggregate " Due from Banks" exceeds the aggregata
“ Due to Banks , " both amounts are omitted from the calculation.

Member banks are not permitted to deduct checks on the same
place, or exchanges for the clearing house directly from gross de
mand deposits, but in deducting balances “ Due from Banks ” from
“ Due to Banks, ” these items may be included in “ Due from
Banks. " This procedure does not permit reductions to the ex
2"See Form I.

3°From a ruling of the Federal Reserve Board, rendered July 19, 1917. See
Federal Reserve Bulletin , Vol. III ( 1917 ) , pp. 692-693.
* Federal Reserne Bulletin, Vol. III ( 1917 ) , p . 614.

THE COMPUTATION OF RESERVES

353

tent that would be possible if member banks were permitted to
deduct checks and exchanges for the clearing house from gross

demand deposits. Adding such items to “ Due from Banks” may
cause the total of “ Due from Banks” to equal or exceed “ Due to
Banks” in which case both items are ignored . If checks and ex

changes for the clearing house on other banks in the same place
were deducted from gross demand deposits, there would be no
instance in which they would be ignored . Thus, under this
method of computation, a higher percentage of reserve is re
quired. See Form 1 on page 351 .
The account “ Due to Federal Reserve Bank Deferred Credits"

( Item 3 ) is the one to which items received from the Federal re
serve bank are credited on the day of receipt if they are to be

paid by a charge against the bank's reserve account ; and the
account, “ Due to Federal Reserve Bank Deferred Credits, ” will
be debited , and the account, " Due from the Federal Reserve Bank ,

Reserve Account,” will be credited on the day when these items

become a charge against the bank's reserve account on the books .
of the Federal reserve bank .

As to the wisdom of deducting items with the Federal reserve
bank in process of collection some question arises . On this sub
ject Mr. F. H. Curtis says :

“ Recent court decision have tended to establish the right of
a depositor to draw against checks credited to his account, even
though uncollected , thus raising a question of the bank's liability
for uncollected funds, and therefore it would appear that if a bank
does create a deposit liability through such a credit, reserves

should be carried on the aggregate deposit liability and there
should be no deductions as at present.'" 32
The process of computing reserves against time deposits is
simple. It has been pointed out elsewhere that time deposits, for
purposes of reserve calculations, consist of the sum of the follow

ing items: ( 1 ) Savings accounts subject to not less than thirty
days' notice before payment, ( 2 ) certificates of deposit subject to
not less than thirty days' notice before payment, ( 3 ) other de
posits payable only after thirty days, and ( 4 ) postal savings de
posits. The reserve required against the time deposits is 3 per
cent. for all member banks regardless of their location. See Form
1 , p . 351 .
“F. H. Curtis, “ Bank Reserves under the Federal Reserve System ,” Har
vard Business Review, Vol . I (October, 1922 ) , p. 46 .

CLEARING AND COLLECTION OF CHECKS

354

The analysis of reserve account by member banks
It is important for a member bank to know not only each
week or each two weeks how its reserve account stands, but on

1

each day. To accomplish this end the Federal reserve banks pro
vide their member banks with forms in accordance with which they
analyze their reserve accounts. The Form 2 below , which

H

ANALYSIS OF ACCOUNT WITH
FEDERAL RESERVE BANK OF NEW YORK

SHOWING AMOUNT AVAILABLE AS LEGAL RESERVE
ITEMS AVAILABLE July 16 and before
DATE
SENT

DEBIT

11

14
14
14

000

000
000
000
3.50
3 1000

20
8
16

15
15
15
16

25 000

TOTAL

83

350

DATE
SENT

14
14
14

15
15
15
15
16
16

TOTAL

5 000
600
16 500
10 000
6

000

200
1000
12 000

DATE
SENT

14
14
15
16

16
17

DEBIT

2 300
1400
2 100
12 500

DATE
SENT

16
16
16

16

75 300

TOTAL

84

250

Dedact

26

300

Available

Available
Reserve

92 365

Time
Deposita

92 365

Today

79 865

Required

Net Demand

Deposito

To date

985 000

Net Demand
Deposits

987 000

17
17

9 500
400

TOTAL

38 800

Average

TOTAL

DATE
SENT

CREDIT

1

17
17

000

12 500

15

300

Deposits
Total Required
Reserve
84

Required
To date

84 395

Average
Required
To date

Deduct
Today's Credits

Average
Available
To date

86 115

Available
Reserve
Today

515 000
Reserve

Average
Available
To date

Reqaired

Reserve at 7 % 69 090

Net Demand
Deposits

Reserve at 75

Required
Time
Deposits

Reserve at 3 %

Total Required

Total Required
250

TOTAL

RESERVE POSITION

Available Res .

Required
Reserve at 3 % 16 450

Time
Reserve at 3 $

000

500
000

Required

Reserve at 7 % 68 950

Required

510 000

5

11
25

38 800

Available

Today

000

Add yesterday's
92 365
118 665

Deduct
Today's Credits

To lay's Credits 75 300
Reserve

6

1

15
16

RESERVE POSITION

Add yesterday
Available kes

Average
To date

DEBIT

800
500

6 000

Required
167 665

DATE
SENT

9000
15 000

Add yesterday's
84 315

CREDIT

2 000

AESCRVE POSITION

Available Res .

ITEMS AVAILABLE July 18

ITEMS AVAILABLE July 17

CREDIT

84 540

Reserve

In the illi xtration above it is aaruined that the analysis www startel on July 16 and that the debit balance as shown by the statement on July 13 was all available by Jets
16
Itu prible to trace by the entri a padle on the Analysis sheet froin the arcount It will be noted that all iteras suable on or belore Joly 16 have been entered under
that date shile the available later have tm * n entered under the proper subquest datra By the ua of this analysis the available reserve balanke for each day can be de
' s available balance the the items of the current day and delueting irun thewalthe credit itens of the current itay .

wrininart by aver to the previo

scartint and as the basia of making
Meinbar the
trakeinana
ninga collection scount with the Federal Reserve Bankwilland this forn ofuseas an analysis of the collection
rolletion to the marre account ,

transfer from

The land also provide for sh wing the actual required prve each day which 6 cam should be arrived at from Ure form on which net.lemand and time deposits are close

late ! lails. (Fora & B 14) . It will be found desirable also to ahow the arerage rejoire reserve to date for either Use weekly or scuni-monthls feriad, N the detay be, and
the average available nerve for the same period.

FORM 2

is prescribed by the Federal Reserve Bank of New York for

member banks, will repay careful study. Items sent by a member
bank to its Federal reserve bank for collection and credit will

become available at certain dates according to the time schedule
provided by its Federal reserve bank . For example, it will be
noticed that on July 14 items amounting to $11,000 were sent
to the Federal reserve bank which were available in one day as

reserve, although on the accompanying form, all items available
as reserve on the 14th and 15th are listed on the 16th.

A more

355

THE COMPUTATION OF RESERVES

simple illustration is to be found in the one-day items amounting
to $12,500 which were sent to the Federal reserve bank on July
16. This item will be found under the day July 17 as available
reserve . In like manner, the two-day items amounting to $5,000
are found available under the date July 18. All items are listed

in this manner when sent out for collection, and a bank, at all

KR . 21-2-20

ANALYSIS OF RESERVE ACCOUNT

It is of value and importance to a memberbank to know each day the amount of its available reserve. By the use of a form ,similar
To use this form it will not be necesary for the member bank to make any change whatever in its present method of keeping its account with the Feleral Reserve

to that shown on the lower ball
of this sheet, it is a very easymatter to analyze the account DUE FROŃ FEDERAL RESERVE BANK and arnveat the amount of grailable
reærre.

Bank . It will only be necessarytoenter each item whether debit or creditgoing intotheaccount under the date on which it I figured the corresponding entry will be
made on the books of the Federal Reserve Bank .

Member banks maintaining but one account with the Federal Reserve Bank can readily prove this analysis to their ledger account by adding to the current day's
Available reserve all of the debit items and subtracting all credit itens appearing under bent dates
The figures showa in the analysis are taken fron the specimen statement of account appearing immediately below .
MONTHLY STATEMENT OF RESERVE ACCOUNT
ACCOUNT OF THE

MONTH OF

July 1919

X NATIONAL BANK
DUE FROM FEDERAL RESERVE BANK

DATE

DEBITS

AMOUNT

DATE

AMOUNT

CREDITS

DATE

DEBIT BALANCE

BALANCE

14

15

CL

Re Disc
Currency
CL

10 .
3 D
3D

ID
2 D
3D

11,006
2.300
1.400
20.000 +
8.000 +
16.000
2.100
6.000

14

5,000
600
16,500

+
+
+

10,000 t
15

6.000

+

200
1.000

Dit

13

84,315

14

94.915

15

103,165

16

84,865

17

87,265

For CL
Wire Transfer
Note
Dit
.
.

Con Letter
Currency
16

CL

12,000

350
1D

2D
Re Disc

Currency

3.000
12.500
5.000
25.000
2.000

16

9.000
800
1,500

11.500
15.000
25.000

17

CL
Con Letter
Re Disc

1D

9.500

400
6,000

17

1.000
12,500

For CL
Note
Dit

For CL
Wire Transfer
Dit
..

For CL

• Dele , in-licates the namber of daya that should elap between the late items are for arded and the date it is expected they will be available on the booke of the
FejeraiRene Batik . This intonation wile ruil , letenoined by referring to the time schedule issued by the Federal Hrve Bank
# Lebits and creliu entering into analysis on July 1tar July 15 are in this illustration all entered mader date of July 16.

FORM 2— (Continued )

times, is able to determine the size of its reserve with its Federal
reserve bank .

The method of computing semi-monthly and daily reserve require
ments in a country national bank
Since approximately 9,000 of the 9,928 banks which were
members of the Federal Reserve System at the close of June, 1922,

HECKS

CLEARING AND COLLECTION OF CHECKS

356

constitute country banks, it seems quite proper to show the
method of computing reserves in one of these banks.33
Accounting procedure in country banks, as a rule, is not car
ried to the extent found in the reserve city, and central reserve

city banks, and as a result Mr. Smelser undertakes to point out
how , with two very simple forms, country banks may obtain a

daily proof of their individual ledgers, obtain the necessary in
formation with which to compute their reserve requirements, and
at the same time provide a record which, from day to day, is inval
uable in determining the average daily excess or deficiency in
reserve.

The first form to be described is the Auditor's Proof of Indi

vidual Ledgers, Form 3. This form is executed daily by the
individual books department after the control figures for individ
ual deposits have been assembled and the customers' accounts in

each ledger are listed and balanced . According to this form
the twenty -five ledger divisions are divided among ten bookkeepers.

Each bookkeeper is required to sign his name opposite his divi
sion of accounts and certify that the balance appearing on this
report is correct as reflected by the trial balance taken off the

ledgers.34 As soon as each bookkeeper has listed all accounts in
his division and balanced the total amount to the daily control fig
ures, the total amount of the net balances together with the
amount of all overdrafts, is entered in the space provided . The
five bookkeepers who handle public funds and government deposit
accounts are required to enter in the lower left space, “ Deduc
tions from deposits,” the balance appearing on the accounts as
designated. When this form is completed by the bookkeepers, the
manager of the department enters the total balance of " Inactive "
accounts, verifies the balances of public funds and government

deposit accounts with the ledger accounts, as entered on the form,
initials the report and sends it to the auditing department. Mr.
Smelser points out parenthetically that all individual ledgers are
posted each day before the bookkeepers leave the bank . No
checks or deposit tickets are ever held over for posting the fol
lowing morning. The work of the statement clerks and the pro
" The method outlined here is that followed by the First - Second National
Bank of Akron, Ohio.

This method was described by Mr. C. R. Smelser, the

auditor of this bank, in The Burroughs Clearing Å ouse (November, 1922 ) ,
pp . 8-9, 48-49. Of the 9,000 country member banks, over 7,000 are national ;
consequently this method as described here should serve as a typical example,
although methods vary from bank to bank . The Burroughs Clearing House
and Mr. Smelser have kindly permitted the writer to use this material.

" The signatures of the bookkeepers bave been omitted purposely in the ac
companying form .

THE COMPUTATION OF RESERVES

357

cedure necessary in checking the statement and account balances

is performed the morning following the day's postings.
When this form, the Auditor's Proof of Individual Ledgers, is
received in the auditing department the figures are supplied with

which to complete the report. The total general ledger balance of
AUDITORS PRCCF CF INDIVIDUAL L DGERS

Dato

UWN

Ledger
Division

Net Balanceel Overdrafts
47
29
82
68
66
02
16
55
54

E0734
588 56
24905
64 36
380
244 14
947 76
60 79
79 24

Totals

33 212 64
7 1054 896 48

326958

Gen. Led .
Balance

7 054 896 48

638 054
1497 344
1326 500
343 919
410753
803 506
1997 535
815 70
1404 106

1

2

.
co

3
4
5
6
7

8
9

Inactive

Overdrafts

192_2

8/7

Signature of Bookkeeper

Remarks

3 269 58
7 058 166 06

Deductions from Deposits

City Depository
Trustees of Sinking Fund

12 006 58
101749 33
10302 94
1 50 000
503 48672

Demand
Individuals

State , County -Municipal
Dividende Unpaid

Total Domend ( Subject to reserve )

61320 935
686 ) 545

.

Board Education Akron
Board Education Macedonia
Board Education Suffield

This Spece for Use of Auditing Department

514151
7012 899

Time

Poetmaster's Acct .
Money Order Acct .
Postal Savings

686 545

--

Total

20 000
10 1000 20 686 --

Certificates of Deposit
Postal Savings
Savings

1586 487 ..
20 686
9825 430

Total Timo ( Subject to reserve)

11 532 603

Total Deductions from
737231 -

--

Demand Deposite

Reserve Required
4901 902 345 978

836 880

--

7% Total Net Demand
3% Total Net Time
Total Reserve to be Maintained
with Federal Reserve Bank

FORM 3

individual deposits amounted to $7,054,896.48 on August 7, 1922,
the date of this report, and agrees with the total amount reflected
by the control department, the figures of which , shown opposite
the word " Totals,” is $7,054,896.48. Overdrafts amounted to
$3,269.58, making the total demand deposits $7,058,166.06 .

358

CLEARING AND COLLECTION OF CHECKS

State, county, and other municipal deposits amounted to
$686,545.00 and United States deposits amounted to $50,686.00,
making a total of $737,231.00, which is deducted from demand
deposits of $7,058,166.00, and leaving $6,320,935.00 as “ Indi
vidual deposits ," which is entered in the lower right -hand section

under “ Demand ” . Next is entered the amount of State, county,
and other municipal deposits, being brought over on the amount
of $686,545.00. The amount of dividends unpaid, which is
entered next, is obtained from the general ledger account and is
shown to be $5,415.00. Adding the individual, State, county, and
other municipal deposits and dividends unpaid, the amount of
demand deposits subject to reserve is found to be $7,012,895.00,

which is entered opposite " Total demand ( Subject to reserve).”
In the “ Time deposits " section of this report is entered the
amount of certificates of deposit, $1,586,487.00 ; postal savings

deposits, as shown by the opposite total, $20,686.00 ; and savings
deposits amounting to $9,925,430.00, making a total of $ 11 ,
532,603.00, which is subject to 3 per cent. reserve. The section
“ Reserve required ” is too obvious to require explanation.
It will be noticed that the items “ Due to ” and “ Due from "

banks are omitted. Banks having bank deposits would change
the form to include that form of the reserve computation which
deals with such items,

With the average country banks the

amount " Due from the banks " greatly exceeds, at all times, the
amount “ Due to banks" and as a result both items would be

omitted from the computation. In like manner, this form is
adaptable to the peculiar needs of different types of banks. If
demand certificates of deposit are issued , or if by the wording on

time certificates, thirty days before maturity they become demand
certificates, this form may be so changed as to take care of the
situation.
The chief value of this form seems to be due to the fact that

along with the outline for computing the required reserve, the

auditor or other supervising officer has a definite report each
day on what is accomplished in the individual books department

in the way of keeping the accounts in balance, reporting over
drafts, etc.
The second form to be described is the Daily Statement of
Required Reserve, Form 4 , and is used only in the auditing de

partment. The reserve requirements for each day of each period
are entered in Column A and are those amounts which were com
puted daily according to Form 3. In Form 4 it will be ob

THE COMPUTATION OF RESERVES

359

served that the total reserve required for August 7, as shown by
Form 3 ( $836,880 ) , is entered on Form 4 ( Column A ) oppo
site August 7. Column B provides for accumulating the total
requirements from the first day of the period to its close, so
that on any given date the average for the period may be deter
mined . In averaging the reserve over the semi-monthly period
the calculation becomes very simple. On each day the excess or

DAILY STATEMENT OF REQUIRED RESERVE
Period

Ending
Vonth

с

Aug.

A

B

Date

Daily

Totale

‫ه‬
‫لمبهانهی‬
‫ه‬
‫و‬
‫هم‬

3

4
5
6

8
10
11
12
13
14
15

192

2

713
786
771
764
764
764
836
779
782
785
782
793
793
802
798

221
082
961
042
520
520
880
744
061
050
703
787
787

789
846

713
1499
2271
3035
3799
4564
5401
6180
6963
7748

8530
9324
10118
10921
11719

D

Daily Balance

7-31
8-1
2

Auz . 15

Requirements

221
303
264
306
826
346

226
970
031
081
764
571
358
147
995

614
713
683
772
764
614
614
524
780
782
785
782
794
794

000
350
800
300
890
700

225
175
900
010
010

802

870

798

910

700

260
600

Adjustments

103

000

150
150
313

000
GOO
000

Totals

713 350
1500 150
2272 450
3037
340
3802 040
4566 740
5404 000
6184 600
825
6966
7752 000
8534 900
9328 910
10122 920
10925 790
11724 700

Average
Daily R'P'H'TS

Average

Daily Reserve
4781,64600

$ 781,33300

$ 31300

Averego

Daily Exc088

FORK 4

deficiency of the reserve to date can be determined almost immedi
ately.

In Column C is entered the amount of reserve with the

Federal reserve bank as shown by the daily transcript of the
Akron bank's account which is received each day from the Fed
eral Reserve Bank of Cleveland. Column D takes care of any
adjustments to be made between the reserve balance of the Akron
bank and the balance shown on the books of the Federal reserve

bank . These result from mail delays and correction entries cov
ering items charged or credited in error to the account of the

Akron bank . Column E shows the accumulating totals of the

360

CLEARING AND COLLECTION OF CHECKS

reserves ; its purpose corresponds to that of Column B.

From

this form the bank is in a position to determine at any time the
amount required as reserve at the Federal reserve bank.

The transit account of a country national bank
Of prime importance in the subject of clearing and collec
tion of checks is the question of handling the transit account ,
otherwise known as " Items with Federal reserve bank in process
of collection - not available as reserve " and the “ Deferred

credits” account. Mr. Smelser gives an informing although con
cise explanation of how the transit account is handled in his bank.
In arriving at the general cash balance each day, the transit
department of the Akron bank furnishes the general bookkeeper
with copies of all cash letters to the Federal Reserve Bank of
Cleveland, to its branches, and to other Federal reserve banks and
their branches. Cash letters to the Federal Reserve Bank of

Cleveland and its branches contain only items drawn on the vari
ous Cleveland, Cincinnati, and Pittsburgh banks. Letters sent to
any other Federal reserve bank or branch are sent out on letter

forms for two, three, four, five, six, or eight-day points. All such
letters are charged first through the transit account . Later as
the letters become available as reserve the transit account is cred

ited and the account " Federal Reserve Bank of Cleveland

Reserve Account” is charged . In other words, a cash letter sent
to the Federal Reserve Bank of Cleveland on the night of Septem
ber 1 would be available as reserve September 2 and accordingly
the transit account would be charged with the amount of the letter

and on the morning of September 2 the entry would be reversed
with aа charge to the reserve account .
When the Akron bank has cash letters for other Federal re

serve banks or branches, they are prepared in strict accordance
with the direct sending advices furnished for the purpose.

In

making up these advices the transit department uses the current
month's " Schedule of availability dates for cash letters sent direct
to other Federal reserve banks and branches” which are furnished

by the Federal Reserve Bank of Cleveland. For example, on Sep
tember 2, the Akron bank sent out the following letters direct to
other Federal reserve banks and branches : A three -day country, a

four-day city, a five-day city, a five-day country, and an eight-day
country . According to the schedule of availability dates, these
letters would become available as reserve, in the order named
above, on September 7, 6, 7 , 8, and 11 .

THE COMPUTATION OF RESERVES

361

On September 2 the general bookkeeper would post the five
letters separately to the transit account and at the same time

journalize them on the dates of availability by crediting the tran
sit account and charging the reserve account. In this way the
necessary and proper entries to take care of these reserve credits

automatically appear on the proper dates and are taken into the
respective accounts .

The account “ Federal Reserve Bank - Deferred Credits” op
erates so that all cash letters from the Federal reserve bank are

credited to this account on the day received . On the day follow
ing, this account is charged and the reserve account of the Akron
bank is credited. This brings the credit of the Akron bank to its

reserve account on to the account the same day it appears on its
account of the books of the Federal Reserve Bank in Cleveland.

Collections sent to the Federal reserve bank, when paid, are
charged on the books of the Akron bank to its reserve account on
the date the advice of payment is received by the Akron bank.
Such items have not proved of sufficient amount in the experience

of the Akron bank to make any appreciable difference in its re
serve account. Should unusually large items be sent out for col
lection telegraphic advice of payment would be requested so that
the proper charge could be made by the Akron bank to its reserve
account which would be made on the same date it was credited by
the Federal reserve bank .

The Akron bank finds it the exceptional procedure to have
drafts drawn against the reserve balance. When such remittances

of an unusual amount are made, they are handled through the de
ferred credits account of the Akron bank .

Ordinary drafts are

credited to its reserve account on its own books on the day issued,
inasmuch as the balance of the Akron bank would exceed the bal

ance shown by its own reserve account until the drafts are paid.
The auditor of the Akron bank insists that the system of oper
ating their Reserve Transit and Deferred Credits accounts, as
just outlined, is highly successful. He says : " It does not require,

at the most , over thirty minutes' time each day, to make the en
tries necessary, compute the requirements and determine the aver
age daily excess or deficiency to date, and in addition we are
always assured that our periodical reports of reserve required are
rendered correctly, and all danger of being penalized for deficiency
in reserve is eliminated.”» 35
" Loc . cit ., p. 49.

362

CLEARING AND COLLECTION OF CHECKS

Distinction between individual and bank deposits in computing
reserves of member banks

For many years the Comptroller of the Currency without any
express provision of law had made a distinction between ( a ) indi
vidual or ordinary deposits and ( b ) bank deposits. In the case
of the latter, depositary banks were permitted to deduct “ Due
from Banks" from “ Due to Banks" and were required to maintain
a reserve only against the difference. This was not the case, how

ever, with ordinary deposits.

If a concern had a deposit of

$10,000 with a bank and this bank at the same time held a $5,000

demand note of this corporation, the bank was never permitted to
deduct the demand note from the deposit liability in computing its
reserve . This practice and this distinction between the two types
of deposits was incorporated in the Federal Reserve Act. The
language of the statute is as follows: " In estimating the balances

required by this act the net difference of amounts due to and from
other banks shall be taken as the basis for ascertaining the de
posits against which required balances with the Federal reserve
banks shall be determined ." 36

Computation of reserves against balances held in foreign banks by
member banks

The Federal Reserve Board has ruled that balances due from

foreign banks cannot be deducted from balances due to banks on
the ground that from a practical standpoint foreign currency bal

ances due from foreign banks are not quickly available to meet
demand liabilities.

Such balances would require selling in the

market like any other investment and the proceeds of the sale de
posited with the Federal reserve bank in order to become a part of
the member bank's reserve . “ Dollar balances,” due to foreign
banks, on the other hand, have been held by the Federal Reserve

Board to be individual deposits and not bank deposits, and there
fore do not fall within the meaning of balances due to other
banks . 37

The Federal Advisory Council took issue with the Federal Re
serve Board on these points and insisted that the banks princi
pally affected by these rulings are those located in the central

reserve cities and the reserve cities, especially the former. Banks
30Federal Reserve Act , Section 19 ; Federal Reserve Bulletin, Vol . V ( 1919 ) ,
p . 963 .

" Federal Reserve Bulletin, Vol. V ( 1919 ) , pp. 963-964 ; Vol. III ( 1917 ) , pp.
692-693 .

363

THE COMPUTATION OF RESERVES

in these cities are required to carry reserves of 13 per cent. and 10
per cent. respectively, against their demand deposits, while banks
in other localities are required to carry only 7 per cent. against
such deposits. The effect of the ruling is, therefore, to penalize
still further the banks located in central reserve and reserve cities

in regard to the amount of reserves they are to carry. Funds on
deposit with a foreign correspondent, insists the Council, may be
converted into reserve funds through sales of checks or of cable
transfers just as quickly as the funds on deposit with a domestic
bank may be realized upon through drafts or telegraphic trans
fers. Foreign banks should be encouraged to keep balances with
their correspondent banks in this country and if banks doing a
foreign exchange business are not allowed to deduct balances due

them by foreign banks from the amount of their balances “ due to
banks, " the volume of their foreign exchange business might have
to be undesirably and unnecessarily curtailed .38
Computation of reserve against balances due from foreign branches
of domestic banks

The Federal Reserve Board, in July, 1925, ruled that balances
payable in foreign currency due from a foreign branch of any
domestic bank may not be deducted from balances due to other
banks by a member bank in computing its reserve. If, however,

the balances due from a foreign branch of any domestic bank are
payable in dollars instead of in foreign currency, they may be de
ducted from balances due to other banks by a member bank in
computing its reserve.

The Board believes that the phrase " the

net difference of amounts due to and from other banks" contained

in Section 19 of the Act has reference only to balances payable
in foreign currency.

Another question, closely related to the preceding ones, is
whether a member bank , in calculating its reserve requirements,
may deduct balances due from its own foreign branch .

On this

point the Board has ruled ( July, 1925 ) that balances payable
either in dollars or in foreign currency due to a member bank from
its own foreign branch may not be deducted from balances due to
other banks by a member bank in computing its reserve.

No reserves required against balances due to foreign branches by
member banks

No reserve is required against balances due to foreign
branches, in the opinion of the Federal Reserve Board , on the
" Sixth Annual Report of the Federal Reserve Board ( 1919 ) , p. 531 .

CLEARING AND COLLECTION OF CHECKS

364

ground that branch banks have no separate existence distinct
from the parent bank, and a balance due to a foreign branch of a

member bank from its parent bank, although shown as a liability
on the books of the parent bank , does not constitute, within the
meaning of Section 19, a deposit liability against which reserves
must be maintained.39

Question of reserves against money paid by a customer in anticipa
tion of acceptances
Whether a bank is required to keep a reserve against money
paid by a customer in anticipation of acceptances is held by the

Federal Reserve Board to depend upon the relation between the
bank and the customer . If, upon receipt of the money the mem
ber bank credits it to the customer's general deposit account sub

ject to check , or if the customer is permitted to withdraw such
money either by check or after a certain length of time, that is,
if the deposit is treated as a demand or time deposit , it is held

that the money deposited constitutes a deposit liability against
which the member bank is required to maintain reserves , in ac
cordance with the provisions of Section 19 of the Federal Reserve
Act .

If this deposit, on the other hand, is not subject to withdrawal
by check or otherwise, but is received in full or part payment of
the customer's obligation to put the bank in funds at the matu

rity of the acceptance, or if the money is received as a special
deposit for the purpose of meeting the acceptance when it matures
and the customer cannot demand the return of the money but can
require only that the bank apply the money in payment of the
acceptance at maturity, it is held that the deposit does not con
stitute a deposit liability within the provisions of Section 19.40
“ Special savings deposits ” are demand deposits for reserve pur
poses

In June, 1923, the Federal Reserve Board ruled that certain

deposits labeled as “ special savings deposits” in some of the State
member banks in California could not be classified properly as

savings accounts for reserve purposes. These accounts were seg
regated in separate savings departments, the assets of which con
stituted trust funds for the protection of savings depositors; they
could be invested only in a restricted manner ; and were subject to
Federal Reserve Bulletin, Vol. VII ( 1921 ) , p. 815.
* Ibid .

THE COMPUTATION OF RESERVES

365

many other special safeguards not applicable to ordinary commer
cial deposits. They were represented by pass books, and the
banks reserved the right to require the presentation of the pass
books at each withdrawal, but in practice they were subject to
withdrawal by check without the presentation of the pass books,
and an unlimited number of checks could be drawn against them
and collected through the clearing houses. Under the provisions
of the California law and under the specific rules printed in the
pass books, the banks reserved the right to require thirty days'
notice before the withdrawal of such accounts, but in practice
they did not exercise this right.

The Federal Reserve Board,

after analyzing these
deposits, held that they were not “ payable
9
after thirty days,” because not payable on a definite date, nor a

specified number of days after date, nor only after thirty days'
notice which actually is required. The Federal Reserve Board
also held that although they were subject to thirty days' notice
they could not be classified as " savings accounts” or “certificates
of deposit." 41

Periods over which reserves are computed by member banks
Member banks are required to maintain the legal reserve under
the regulations and subject to such penalties as may be prescribed
by the Federal Reserve Board.. The present regulations of the
Board provide that reserve balances may be averaged over a
weekly period by banks in central reserve and reserve cities, and
over a semi-monthly period by banks in all other places. From
these figures there is computed the average net deposits of the

period, and the required reserve which is then compared with the
actual reserve as shown by the reserve bank's account with the
member . This permits of some fluctuation in the reserve account
as it is possible for the member bank to reduce its balance below
the average required on some days provided the average for the
period is maintained . In the event that the average balance is
not equal to the required reserve, the penalties prescribed by the
Federal Reserve Board become effective .

Some objection has been raised by the central reserve city

bankers in New York against the system of having their reserves
computed on the basis of weekly averages on the ground that they
are discriminated against as compared with the banks surround
ing New York , whose reserves are computed on a semi-monthly
"See Federal Reserve Bulletin , Vol. IX ( 1923 ) , p. 677. For a further dis
cussion of this subject, see the Magazine of Wall Street , Vol. XXXII ( May ,
1923 ) , pp. 54-55.

366

CLEARING AND COLLECTION OF CHECKS

basis. It is contended in support of this objection, that the
country banks are not only permitted to carry a smaller reserve,
but that their reserves are not subject to such radical fluctuations

in cash and deposits . Many of the Manhattan banks may main
tain their average for the week up to Friday and then may receive
telegraphic instructions from correspondents to transfer funds to
the Federal reserve bank for credit to another Federal reserve

bank, and if these transfers cause a shortage in their own reserves
with the Federal Reserve Bank of New York , they will be penalized
by a charge of interest on the shortage for the two days, Satur
day and Sunday. Interest for two days must be paid on this
shortage, although the two-day items in the deferred credit ac
counts of the banks, credited to the reserve accounts upon pay

ment after that elapsed time, may put the reserves over the re
quirements. While it is true that if a bank is short on its seven
day average reserve it may borrow from some other member
which has excess reserve that week , nevertheless, interest must be

paid on the amount borrowed, usually at a rate a fraction of
one per cent. below the ruling rate for street money. In fact , quite
a business in one-day funds is done by one bank which is a large
purchaser of such funds in the early days of the week and a heavy
seller at the close of the week . These makeshifts, however, are

looked upon as just so much expense that should not have to be
borne by member banks, which through force of circumstances
over which they have no control are frequently short on their
seven-day average, but have ample reserves over a fourteen -day

period . At least it would be but fair, they insist, in enforcing the
seven-day period, to compute the average from Wednesday to
Wednesday rather than from Friday to Friday.42
Penalties for deficiencies of member bank reserves

Regulation J, Series of 1924, provides that items cannot be
counted as part of the minimum reserve balance to be carried by a
member bank with its Federal reserve bank until such time as may

be specified in the appropriate time schedule. If a member bank
draws against items before such time the draft will be charged
against its reserve balance if such balance be sufficient in amount

to pay it ; but any resulting impairment of reserve balances will
be subject to all the penalties provided by the Act . On this point
Section 19 of the Federal Reserve Act provides, in part, as fol
" The Financial Age, Vol. XLVI, No. 14 ( September 23, 1922 ) , p. 437; Vol.
XLVII, No. 3 ( January 20, 1923 ) , p. 96.

THE COMPUTATION OF RESERVES

367

lows : “ The required balance carried by a member bank with a
Federal reserve bank may, under the regulations and subject to
such penalties as may be prescribed by the Federal Reserve Board,
be checked against and withdrawn by such member bank for the
purpose of meeting existing liabilities : Provided, however, That no
bank shall at any time make new loans or shall pay any dividends

unless and until the total balance required by law is fully re
stored.”

Regulation J provides for penalties as follows : " (c ) Basic
penalty.-Inasmuch as it is essential that the law in respect to
the maintenance by member banks of the required minimum re
serve balance shall be strictly complied with, the Federal Reserve
Board, under authority vested in it by Section 19 of the Federal
Reserve Act, hereby prescribes a basic penalty for deficiencies in
reserves according to the following rules :

“ ( 1 ) Deficiencies in reserve balances of member banks in

central reserve and reserve cities will be computed on the basis of
average daily net deposit balances covering a weekly period of
seven days.

Deficiencies in reserve balances of other member

banks will be computed on the basis of average daily net deposit
balances covering a semi-monthly period.
“ ( 2 ) Penalties for deficiencies in reserves will be assessed

monthly on the basis of average daily deficiencies during each of

the reserve computation periods ending in the preceding month.
“ ( 3 ) A basic rate of 2 per cent. per annum above the Federal
reserve bank discount rate on 90-day commercial paper will be
assessed as a penalty on deficiencies in reserves of member banks.
“ ( d ) Progressive penalty.—The Federal Reserve Board will
also prescribe for any Federal reserve district, upon the applica
tion of the Federal reserve bank of that district, an additional
progressive penalty for continued deficiencies in reserves, in ac
cordance with the following rules :
“ ( 1) When a member bank in a central reserve or reserve

city has had an average deficiency in reserve for six consecutive

weekly periods, a progressive penalty, increasing at the rate of
one-fourth of 1 per cent. for each week thereafter during which
the average reserve balance is deficient, will be assessed on weekly

deficiencies until the required reserve has been restored and main
tained for four consecutive weekly periods, provided that the max
imum penalty charged will not exceed 10 per cent.
“ ( 2 ) When a member bank outside of a central reserve or
reserve city has had an average deficiency in reserves for three

368

CLEARING AND COLLECTION OF CHECKS
NEW YORK FEDERAL RESERVE BANK

Comparative statement of condition at the close of business :
RESOURCES

Gold with Federal Reserve agent

Gold redemption fund with U. S.
Treasury
Gold

held exclusively

Mar. 12, 1924
$582,984,000

Mar. 5, 1924
$ 583,041,000

Mar. 14, 1923
$ 609,402,000

9,236,000

5,877,000

9,486,000

$592,220,000

$ 588,918,000

$618,888,000

168,477,000

150,581,000

286,331,000

185,322,000

147,669,000

against

F. R. notes

Gold settlement fund with F. R.
Board

Gold and gold certificates held by
bank

187,544,000

Total gold reserves
Reserves other than gold

$ 948,241,000
30,620,000

$ 924,821,000 $1,052,891,000
29,654,000

17,043,000

Total reserves
Non-reserve cash
Bills discounted :

$ 978,861,000

$954,475,000

11,251,000

11,047,000

$ 1,069,934,000
8,366,000

72,762,000
24,164,000

59,601,000
21,059,000

176,173,000
33,309,000

$ 96,926,000
44,284,000

$ 80,660,000

56,862,000

$209,182,000
35,264,000

1,202,000
28,971,000
9,933,000

1,202,000
20,940,000
8,313,000

1,149,000
13,278,000
10,000,000

$ 10,106,000
100,000

$ 30,455,000

$ 24,427,000

$181,416,000
140,409,000
13,987,000
4,491,000

$ 168,077,000

Secured by U. S. Government
obligations
Other bills discounted
Total bills discounted

Bills bought in open market
U. S. Government securities :
Bonds

Treasury notes
Certificates of indebtedness
Total U. S. Govt . securities

All other earning assets
Total earning assets
Uncollected items

Bank premises
All other resources
Total resources

100,000
125,643,000
13,982,000
3,367,000

$ 269,173,000
152,414,000
10,872,000
1,896,000

. $ 1,330,418,000 $ 1,276,591,000 $ 1,512,655,000
LIABILITIES

Federal Reserve
circulation

notes

in

actual

$ 371,197,000

$ 372,537,000

$ 567,168,000

740,888,000
6,405,000
10,779,000

697,335,000

724,458,000

Deposits :
Member bank- reserve account
Government

Other deposits
Total deposits
Deferred availability items
Capital paid in
Surplus

$ 758,072,000

109,190,000

All other liabilities

29,728,000
59,929,000
2,302,000

Total liabilities

$ 1,330,418,000

8,456,000

480,000

10,074,000
$715,865,000

9,815,000

96,445,000
29,728,000
59,929,000

2,087,000

$ 734,753,000
119,055,000
28,888,000
59,800,000
2,991,000

$1,276,591,000 $1,512,655,000

Ratio of total reserves to deposit
and

Federal

Reserve

note

liabilities combined

86.7 %

87.7 %

82.2 %

$ 2,185,000

$ 3,120,000

$ 13,857,000

Contingent liability on bills pur
chased

for

spondents

foreign

corre

THE COMPUTATION OF RESERVES

369

consecutive semi-monthly periods, a progressive penalty, increas
ing at the rate of one -half of 1 per cent. for each half month
thereafter during which the average reserve balance is deficient,
will be assessed on semi-monthly deficiencies until the required re
serve has been restored and maintained for two consecutive semi

monthly periods, provided that the maximum penalty charged
will not exceed 10 per cent.”:43
2. Computation of reserves by Federal reserve banks

There are no definite or prescribed forms for computing re
serves in the Federal reserve banks. The Federal Reserve Act
and the regulations of the Federal Reserve Board prescribe defi

nitely what the reserve shall be, its composition and minimum
amount, and the liabilities against which the reserve shall be com
puted . With these few requirements in mind, the reserve depart
ment readily computes the reserves. These are reported each
week and are consolidated into what is known as the Consolidated
Statement of the Federal reserve banks .

Using the statement of the Federal Reserve Bank of New
York for March 12, 1924, as an example, the method of computa
tion is readily comprehended.

In a Federal reserve bank the reserve against deposits must
consist of gold or lawful money and must equal at least 35 per
cent . of the deposits. Against Federal reserve notes the bank
must keep a reserve in gold of not less than 40 per cent . ,
the remainder to be covered by eligible commercial paper.
Referring to the above statement it will be noticed that
the Federal reserve bank totals the following items: ( 1 ) Gold with

the Federal reserve agent, ( 2 ) gold redemption fund in the United
States Treasury which must be equal to at least five per cent. of
the Federal reserve notes in actual circulation and which counts as

part of the 40 per cent . reserve. These two items combined indi
cate the total amount of gold held against the Federal reserve
notes . Next are added ( 3 ) the gold and gold certificates in the
Gold Settlement Fund to the credit of the Federal reserve bank ,

and ( 4 ) the gold and gold certificates held by the bank , the total
representing the total gold reserves.

The reserves other than

gold , which are composed of silver, silver certificates, and United
States notes, are next added, the total giving the total reserves
against notes and deposits.

The liabilities against which these reserves are held are divided
« Federal Reserve Bulletin , Vol. X ( 1924 ) , pp . 490-491 .

370

CLEARING AND COLLECTION OF CHECKS

into two main classes : ( 1 ) Federal reserve notes in actual circu

lation and ( 2 ) deposits. Consulting the statement of the Fed
eral reserve bank given above, it will be noticed that the first item
listed under liabilities is that indicating the amount of Federal re
serve notes in actual circulation.

This amount is determined

daily. Every day each Federal reserve bank is shipping its own
unfit notes and those of other Federal reserve banks to the Treas

ury Department and is also shipping fit notes redeemed by it to
the other Federal reserve banks through which such notes were
originally issued. All such shipments are reported daily by wire
to the Federal Reserve Board at Washington, the accounts are

cleared daily by the Board, and wire advices of the results are sent
daily to all Federal reserve banks, thus enabling them to know the
amount of their notes in actual circulation against which reserves

are computed.

The second item listed under liabilities is deposits. It is
divided into three classes as follows : ( 1 ) The reserve deposits of
member banks, ( 2) government deposits, and ( 3 ) other deposits.
The nature of these deposits has been explained above. The Fed
eral reserve banks compute the required reserve against only real
reserve deposits to the credit of member banks . Such deposits,
when built up as a result of sending collection items through the
Federal reserve banks for collection or direct to other banks for
credit to their reserve accounts, become effective as reserve de

posits only according to the published time schedules. The same
principle applies to checks and drafts on all other deposits, but
not to checks and warrants on the government deposits ; for the
latter immediate credit is given.
Reference was made above to the fact that each Federal re

serve bank maintains on its books two active accounts with each
of the other Federal reserve banks, although these accounts do
not appear in the published statement.. One of these is the debit
or Due from Account representing all items forwarded for collec
tion and amounts due for transfer of funds .

A settlement is re

ceived at the close of business each day for the amount due as
shown by the books of the other reserve bank . This account is, in

fact, a remittance account and any unpaid balance after the daily
settlement would not be represented by a corresponding credit on
the books of the other bank, but rather by items in transit or not
yet collected.
The other item is the credit or Due to Account . This account

is the exact opposite of the Due from Account and represents the
credits due another reserve bank for items collected and for

THE COMPUTATION OF RESERVES

371

transfers of funds during the day. The total of the account is
paid through the Gold Settlement Fund, so the account shows a
zero balance at the close of business ; the only exception being on
local holidays when through the closing of a part of the reserve
banks it is not possible to settle with them. In all such cases the
account is paid at the close of the following business day.
Even though a reserve bank does not maintain a balance with

another reserve bank, it nevertheless may draw its drafts on an
other reserve bank. Such drafts are charged by the paying bank
to its Due to Account, thereby effecting an immediate collection
of the draft by reducing the amount to be paid the other reserve
bank at the close of business that day.44
Deferred availability items on the liability side and uncol

lected items on the asset side of the bank statement are ignored
in computing reserves. Prior to March 18, 1921 , “ net deposits "
were used in calculating the reserve ratio, while since that date
“ total deposits” have been used. According to the earlier prac
tice, “ net deposits” were ascertained by taking the sum of gov

ernment deposits, member banks' reserve deposits, other deposits,
and deferred availability items and subtracting from the total the
asset item, " uncollected items and other deductions from gross
deposits," composed chiefly of clearing house exchanges, transit
items, Federal reserve notes of other Federal reserve banks, un

assorted currency, and domestic transfers. Since the change, total
deposits include government, member bank, and other deposits,
without reference to deferred availability or uncollected items.
This action tended to apply a more severe standard of compu
tation. 45

The question of reserve deficiencies in Federal reserve banks
The question arises as to whether a Federal reserve bank

whose total reserves against the aggregate of note and deposit
liabilities is below the minimum requirements, may allocate its gold

assets in such a manner that its reserves against notes are main
tained at 40 per cent , while its reserves against deposits fall below

35 per cent. If, in determining whether a deficiency of reserve
exists, a Federal reserve bank subtracts 35 per cent. of the de
posits and finds the remaining reserve does not equal 40 per cent.
“L. R. Rounds, op. cit., pp. 665-66 .

"Eighth Annual Report of the Federal Reserve Board ( 1921 ) , p. 27. This
plan was first provided for as early as December 19, 1919 in accordance with
an opinion of counsel for the Federal Reserve Board , and was to have been

effective February 12, 1920 , but was postponed until March 18, 1921. See
Federal Reserve Bulletin , Vol. VI ( 1920 ) , p. 3.

372

CLEARING AND COLLECTION OF CHECKS

of the Federal reserve notes outstanding, it becomes liable for a
tax on the reserve deficiency as prescribed by the Act and as set
forth below. Some of the Federal reserve banks in order to evade

this tax, changed their method of computing the reserve by sub

tracting the 40 per cent. reserve against Federal reserve notes
from the total reserve so that the deficiency or excess of reserve
would be shown with respect to deposits, as no penalties for de

ficiencies of reserve against deposits had been prescribed by the
Federal Reserve Board .

In February, 1920, the Board faced this problem and ruled
that Section 16 of the Federal Reserve Act implied that a
Federal reserve bank may maintain its 40 per cent. reserve
against Federal reserve notes even though the reserve against

deposits, as a result , may fall below the 35 per cent. limit . Para
graph 3 of Section 16, which fixes the minimum reserve require
ments against both note and deposit liabilities, provides that when
the Federal reserve agent holds gold or gold certificates as col
lateral for Federal reserve notes issued to the bank, such gold
or gold certificates shall be counted as part of the gold reserve
which such bank is required to maintain against its Federal reserve
notes in actual circulation. Under the terms of this paragraph
all gold or gold certificates held by the Federal reserve agent as
collateral for outstanding notes must necessarily be counted as
reserve against those outstanding notes and cannot lawfully be
considered as part of the reserve against deposits.
So, also, Section 16 provides that gold deposits standing to the
credit of any Federal reserve bank with the Federal Reserve Board

shall be counted, at the option of said bank, as part of the lawful
reserve which it is required to maintain against outstanding Fed
eral reserve notes, or as part of the reserve it is required to main

tain against deposits. Although there is no express provision in
the law itself conferring upon the bank the right to allocate the
free gold held by it46 as a part of its reserve against Federal re
serve notes instead of as a part of its reserve against deposits,

the Board held that such option exists. In other words, inasmuch
as the bank is authorized to procure Federal reserve notes from
the Federal reserve agent upon the deposit of as much as 100 per

cent . gold, and inasmuch as all deposits with the Federal reserve
agent must necessarily count as part of the reserve to be main

tained against notes outstanding, the Federal reserve bank may
“ That is, gold not with the Federal reserve agent and not with the Gold
Settlement Fund.

THE COMPUTATION OF RESERVES

373

always maintain its reserve against notes at the expense of its

deposit reserve account by transfering free gold to the Federal
reserve agent as collateral for outstanding notes . The banks may
also accomplish this same purpose by depositing free gold in the
Gold Settlement Fund since credits in the Gold Settlement Fund ,

by law may be counted, at the option of the bank, either as re
serve against notes or as reserve against deposits. Thus in view
of these facts the Board held that the Federal reserve banks had

a right to consider free gold in its vaults as reserve against notes
even though to do so results in a deficiency in the reserve against
deposits. In a summarized sentence it may be said that the Board
established the principle that an excess of reserve in the posses
sion of the Federal reserve agents against Federal reserve notes
may not count automatically as reserve against deposits, although
an excess of reserve against deposits may count as reserve against
the notes .

At the same time the Board prescribed the penalty to be ap
plied to the Federal reserve banks for deficiencies in reserves
against their deposits. It held that paragraph ( c ) , Section 11 of

the Federal Reserve Act, required it to establish a graduated tax
on such deficiencies. This regulation, retroactive in nature, pre
scribed a tax of 1 per cent. per annum on the first 5 per cent.
deficiency below 35 per cent., the tax increasing 1 per cent. on
each additional 5 per cent. the reserve falls. This means that in
case the reserve falls to 25 per cent . the tax will be 1 per cent . per
annum on the first 5 per cent., and 2 per cent . per annum for the
second 5 per cent., but not 2 per cent . on the entire 10 per cent.
deficiency. The following table will illustrate the manner in which
the graduated tax applies :
When the reserves against

The tax rate upon each 5 per

deposits are :

cent. deficiency is :

Below 35 to 30 per cent.

Below 10 to 5 per cent .

1
2
3
4
5
6

Below 5 to

7 per cent.

Below 30 to 25 per cent .

Below 25 to 20 per cent.
Below 20 to 15 per cent .
Below 15 to 10 per cent.

0 per cent .

per
per
per
per
per
per

cent.
cent.
cent .
cent.
cent.
cent.

As pointed out above, eight Federal reserve banks paid taxes on
such deficiencies in 1920.
There is nothing in the law specifying to whom such a tax
must be paid, but the Board held that there is no one to whom the

tax could reasonably be paid except to the government even
though, as a matter of fact , it amounts to a tax upon the gov

374

CLEARING AND COLLECTION OF CHECKS

ernment's own equity in the Federal reserve bank's surplus. It
seemed to be the only way to give effect to the provision of the law
imposing the tax upon reserve deficiencies against deposits.
The penalties for deficiencies of reserves against Federal re
serve notes are prescribed in paragraph ( c ) , Section 11 of the
Federal Reserve Act . When the reserve falls below 40 per cent.,
a tax of 1 per cent . is levied upon this deficiency until the reserve
falls to 32.5 per cent . after which the rate increases by 1.5 per
cent . upon each 2.5 per cent . or fraction thereof that the reserve

falls below 32.5 per cent. The following table will show the man
ner in which the graduated tax applies :
When the reserves against

The tax rate upon the deficiency

Federal reserve notes are :

is :

Below 40.0 to 32.5 per cent.

1.0 per cent.

Below 32.5 to 30.0 per cent.

2.5 per cent.
4.0 per cent.
5.5 per cent.

Below 30.0 to 27.5 per cent.
Below 27.5 to 25.0 per cent.
Below 25.0 to 22.5 per cent.
Below 22.5 to 20.0 per cent.

Below
Below
Below
Below
i

20.0
17.5
15.0
12.5

to
to
to
to

17.5
15.0
12.5
10.0

per
per
per
per

cent.
cent.
cent.
cent.

Below 10.0 to 7.5 per cent.
Below 7.5 to 5.0 per cent.

7.0 per cent.
8.5 per cent.
10.0 per cent.

11.5 per cent.
13.0 per cent.

14.5 per cent.
16.0 per cent.

Below 5.0 to 2.5 per cent.

17.5 per cent.
19.0 per cent.

Below 2.5 to 0.0 per cent.

20.5 per cent.

To obviate deficiencies of reserves the Federal Reserve Board

may cause any Federal reserve bank to rediscount paper for an
other, thus making it possible for the Board to shift reserve bal
ances at will. Or one Federal reserve bank may borrow from an
other to " adjust" its reserves. As a result of such an operation

two technical expressions have arisen : “ Unadjusted reserves” sig
nifying the reserves the bank would have if it had not borrowed

from other Federal reserve banks, and “ adjusted reserves,” sig
nifying the reserves after the money borrowed has been added or

money loaned has been subtracted . Such methods undoubtedly
secure more elasticity in our credit structure than could be ob
tained otherwise.47

Method of reporting the reserve condition of the Federal reserve
banks

Each week a consolidated statement is published in the public

press showing the condition of the twelve Federal reserve banks.
+7See Westerfield, op. cit . , II , p. 361 .

THE COMPUTATION OF RESERVES

375

On January 11 , 1924, the consolidated statement appeared in a
revised form which has raised some doubt and uncertainty in the
public mind. The old and new methods of presenting the state
ments may be contrasted most effectively by placing them side by
side. Fortunately for our purpose, the weekly comparative state
ment of the twelve Federal reserve banks as of January 9, 1924,
was released by the Federal Reserve Bank of New York on Jan
uary 11 , according to the old method, while the Federal Reserve

Board released the statement from Washington for the same
period according to the new method.
The differences in the statements were explained in the report

given out from Washington as follows : “ Beginning with this week
a number of changes have been made in the arrangement of the
items in the Board's statement showing condition of Federal re
serve banks. The principal changes include the substitution of a

sub-total representing 'Gold held exclusively against Federal re
serve notes for the sub -total heretofore carried representing
"Total gold held by banks,' the substitution of a sub-total of
"Total bills discounted ' for "Total bills on hand ,' the addition of

a sub-total of United States government securities, and the
placing of the liabilities to the public and to the banks for Federal
reserve notes and deposits at the beginning of the liability state
ment."

One of the critics of this change, Mr. Theodore H. Price,48

objects to the term " rearrangement ” and insists that the change
amounts to something more than that. He thinks that in setting
aside $2,158,153,000 and describing it as " held exclusively
against Federal Reserve Notes ” there is created aa special reserve of
more than 100 per cent. of the Federal reserve notes in circulation,
which leaves but $972,389,000 of gold to be considered as a re .

serve against $1,983,755,000. This amounts to less than 50 per
cent. of the deposits. Mr. Price anticipates that the Board will
order another rearrangement of the statement which will show the
ratio of reserves to deposits, and after setting aside a 100 per
cent. gold reserve for Federal reserve notes outstanding, will have

the effect of deceiving the public as to the true ratio of gold re
defeat the purpose of the Federal
Reserve Act, which was to provide the nation with abundant credit
serves to liabilities and “ .
.

.

facilities at a reasonable cost rather than to create a quasi

governmental agency that could be used to sustain or advance
"See Theodore H. Price, " Juggling the Federal Reserve Statement,” Com
merce and Finance , Vol . XIII , No. 4 ( January 23, 1921 ), pp. 211-212.

CLEARING AND COLLECTION OF CHECKS

376

>

interest rates whenever they threaten to decline.” Even though
the Board does not rearrange the method of publishing the reserve
against deposits, anyone attempting to compute the reserve against
STATEMENT OF TWELVE FEDERAL RESERVE BANKS COMBINED
January 9, 1924
As issued in New York
RESOURCES
$ 389,867,000
582,522,000

Gold and gold certificates
Gold settlement fund , Fed. Res. Board

$ 972,389,000

Total gold held by banks
Gold with Federal Reserve agents

2,106,705,000

Gold redemption fund

51,448,000

Total gold reserves

3,130,543,000
106,965,000

Reserves other than gold
Total reserves
Non- reserve cash
Bills discounted :

3,237,507,000

67,756,000

Secured by U. S. Government obligations

306,373,000
300,548,000
319,166,000

Other bills discounted

Bills bought in open market
Total bills on hand

$926,087,000
81,992,000
18,366,000
51,000

United States bonds and notes

U. S. certificates of indebtedness

Municipal warrants
Total earning assets
Bank premises

. $1,926,496,000
54,006,000

Five per cent. redemption fund against Federal Reserve Bank
28,000
606,178,000
15,576,000

notes
Uncollected items

All other resources
Total

resources

. $5,007,547,000
LIABILITIES

Capital paid in
Surplus
Deposits:
Government

$ 110,506,000
220,915,000
19,343,000
1,941,006,000
23,406,000

Member bank - Reserve account

Other deposits

Total deposits
Federal Reserve notes in actual circulation

. $ 1,983,755,000
2,147,064,000

Federal Reserve Bank notes in circulation - net liabilities
Deferred availability items
All other liabilities

456,000

532,205,000
12,646,000

Total liabilities
. $ 5,007,547,000
Ratio of total reserves to deposit and Federal Reserve not lia
bilities combined

Contingent liability on bills purchased for foreign correspondents

78.4 %

$18,175,000

THE COMPUTATION OF RESERVES

377

deposits after deducting the gold reserve against Federal reserve
notes will arrive at the same conclusion. This change in method

is in harmony with a demand made in certain quarters for a plan
STATEMENT OF TWELVE FEDERAL RESERVE BANKS COMBINED

January 9, 1924
As issued in Washington
RESOURCES
Gold with Federal Reserve agents ..

Gold redemption fund with U. S. Treasury

Goldheld exclusively against F. R. notes

. $ 2,106,705,000
51,448,000
. $ 2,158,153,000

Gold settlement fund with F. R. Board

582,522,000

Gold and gold certificates held by banks

389,867,000

Total gold reserves
Reserves other than gold

$ 3,130,542,000
106,965,000

Total reserves

$ 3,237,507,000
67,756,000

Non -reserve cash

Bills discounted :

Secured by U. S. Government obligations
Other bills discounted
Total bills discounted

306,373,000
300,548,000
$ 606,921,000
319,166,000

Bills bought in the open market
U. S. Government securities :
Bonds

19,903,000

62,089,000
18,366,000

Treasury notes
Certificates of indebtedness

Total U. S. Government securities
All other earning assets

Total earning assets
Five per cent. redemption fund- Federal Reserve bank notes
Uncollected items

Bank premises

$100,358,000
51,000

. $ 1,026,496,000
28,000
606,178,000

54,006,000
15,576,000

All other resources

Total resources

$ 5,007,547,000
LIABILITIES

Federal reserve notes in actual circulation

Federal Reserve Bank notes in circulation-net
Deposits :
Member bank - reserve account
Government

Other deposits

Total deposits

Deferred availability items

. $ 2,147,064,000
456,000
1,941,006,000
19,343,000
23,406,000
. $ 1,983,755,000

532,205,000

Capital paid in

110,506,000

Surplus

220,915,000
12,646,000

All other liabilities

Total liabilities
.. $ 5,007,547,000
Ratio of total reserves to deposit and F. R. note liabilities
combined

78.4 %

Contingent liability on bills purchased for foreign correspondents $ 18,175,000

CLEARING AND COLLECTION OF CHECKS

378

to establish a " super- reserve " by segregating a part of this gold
and so making the ratio appear smaller. " "
Mr. Price insists that while the power of the government is

being exerted in nearly every other direction to reduce the cost of
living the Pederal Reserve Board is now working in the opposite
direction by maintaining high interest rates. He continues : “We
subrnit that the Federal reserve officials are presuming upon their
power ; that the Federal Reserve Act does not warrant them in

setting aside any part of the gold or other assets in their posses
sion as held 'exclusively against Federal Reserve Notes' and that
in “rearranging the weekly statement, as they have, they have
disregarded the amendment to the Federal Reserve Act passed
June 21 , 1917, and are attempting to read into the law an author

ity that it does not give them and create an impression that is at
variance with the facts. "

Thomas F. Woodlock , in his column, “ By Way of Comment,”
in the New York Herald , says : " If this represents a change of
policy - and if it does the Board should so state it in a definite
and formal way -- then the gold securing the note circulation is
stripped of reserve functions and returns to a mere circulatory
status. The effect of this is to abolish at one stroke note issuing
powers to an amount of over $3,000,000,000, or, if member bank

deposits with the system be considered, to obliterate aa reserve
which would support not far from $4,000,000,000 additional re
serve deposits. Putting it another way, it strips $1,300,000,000
of gold of reserve powers and makes it mere currency." 50
If these criticisms may be taken as typical of those who op

pose the new plan, it may be anticipated that they will be answered
by a large number of persons who will see in this practice a well
advised move on the part of the Board to prevent an undue ex
pansion of credit made possible by the great influx of gold as a
result of foreign trade conditions growing out of the late War.
It has not been long since the Board was severely criticised for

not preventing credit expansion following the armistice by means
of a sharp raise in the rediscount rates, which , combined with the
stress generally found in banking literature on the wisdom of a
policy which would prevent expansion to get beyond the control

of the Board, would seem to indicate that the policy of the Board
" Cf. the Magazine of Wall Street, Vol. XXXI, No. 12 ( April 14, 1923) ,
p . 1065.

Quoted by Price, op . cit ., p . 212. For similar criticisms see the Commercial
and I'nancial Chronicle, Vol. CXVIII ( January 12, 1921 ), p. 1 ; Commerce

and Finance , Vol. XII , No. 49 (December 5, 1913), p. 2236 .

THE COMPUTATION OF RESERVES

879

is in harmony with what a large percentage of the writers and
thinkers in banking would advocate.
3. Computation of reserves in non -member State banks, trust
companies, and private banks
In general, the method of computing reserves in non -member
State banks, trust companies, and private banks, does not vary
widely from that employed by banks in the Federal Reserve Sys
tem. In New York State — and this discussion will be confined to

that State - reserves are required against aggregate demand de
posits only. That term as used in the New York law means the
deposits against which reserves must be maintained, by banks,
trust companies, and private and individual bankers, and includes
total deposits, all amounts due to banks, bankers, trust companies,
and savings banks, the amounts due on certified and cashiers'

checks, and for unpaid dividends, less the following items :
( 1 ) Total time deposits,
( 2 ) Deposits secured by the deposit of outstanding un
matured stocks, bonds, or other obligations of the State or City of
New York ,

( 3 ) Deposits to an amount not exceeding either the market
or par value of outstanding unmatured stocks, bonds, or other
obligations of the State or City of New York owned and held by
such corporation or banker,

( 4 ) Deposits due to the United States of America, represent
ing the proceeds of the sale of bonds or certificates of the said
United States, known as the war loan of nineteen hundred and

seventeen, or the proceeds of any other bonds or certificates of the
United States hereafter issued for war purposes ,
(5 )

The amount due it on demand from banks, bankers, and

trust companies other than its reserve depositaries, including for
eign exchange balances credited to it and subject to draft ,
( 6 ) The excess due it from reserve depositaries over the
amount required to maintain its total reserves,
( 7 ) The amount due for exchanges and checks on other
banks and trust companies in the same city to be presented for

collection the following day,
(8 )

Cash items.

380

CLEARING AND COLLECTION OF CHECKS
RESERVE AND METHOD OF COMPUTATION
TRUST COMPANIES

In Manhattan or Brooklyn Boroughs ..

BANKS

Total

Reserves on
hand

Depositaries

Total

Reserves on
hand

15

10

5

18

12

10

4

6

10

3

7

Depositaries
6

In the Boroughs of The Bronx, Queens and Richmond ,
and in the Cities of Buffalo , Rochester, Syracuse,

Albany, Yonkers, Troy, Utica and Schenectady ....

Elsewhere

ADD

12

8

To ascertain amount of aggregate deposits upon which reserve is to be computed :
1. Amount due banks, bankers and trust companies ...
2. Amount due New York State savings banks and savings and loan associations..
3. Amount due other depositors .
4. Amount due on certificates of deposit..
5. Amount due on certified and cashier's checks....
6. Amount due on unpaid dividends .
Total

DEDUCT 1. Amount due ( subject to call) from banks, bankers and trust companies not reserve

depositaries, including foreign exchange balances credited to it and subject to $

draft ..

2. Amount due for exchanges and checks on other banks and trust companies in your
city to be presented for collection the following day ......
3. Amount due on deposits the payment of which cannot legally be required within
thirty days .,
4. Amount of deposits secured by outstanding unmatured bonds of the State of New
York and of the City of New York ....

5. Ainount of New York State and New York City bonds owned and held at market

value
but not exceeding par value, exclusive of amount necessary to cover item
No. 4 ...
6. Deposits due to the United States of America, representing the proceeds of the
sale of bonds or certificates of the said United States known as the war loan

of nineteen hundred and seventæn , or the proceeds of any other bonds or
certificates of the United States hereafter issued for war purposes ...

7."Amount of cash items.....
8. Amount due from reserve depositaries , excess over amount required to maintain
its total reserve .
Total

Balance upon which reserve is to be computed ..

NOTE---In case reciprocal accounts are kept with reserve depositaries, only the excess due to the institution under examination
can be counted as reserve .

FORM 5

THE COMPUTATION OF RESERVES

381

The accompanying form ( Form 5 ) shows the method by which
the reserves are computed and, in the main, is self-explanatory.
Reports are made weekly to the Superintendent of Banks.
4. Computation of reserves by non -member national banks

The only exception to the general rule that all national banks
must become members of the Federal Reserve System as the price
of retaining their charters is to be found in the national banks of

Alaska and Hawaii . Such banks may remain non -member banks,
complying with the law applicable to them ,51 or, with the consent
of the Federal Reserve Board, may become member banks of any
one of the reserve districts, in which case they are subject to all
the Provisions of the Federal Reserve Act . Section 5192, United

States Revised Statutes, provided that three- fifths of the reserve
of 15 per cent. required to be kept by country banks might consist

of balances due to such associations from associations approved
by the Comptroller of the Currency in one of the reserve or central
reserve cities .

These sections govern the reserve to be held by

national banks in Hawaii and Alaska.552

Form 6 on the following page, for the computation of reserves
as prescribed by the Comptroller of the Currency, is largely self
explanatory.
No attempt will be made to consider the methods by which re
serves are computed in foreign branches since they are not re

quired to maintain a specific amount of reserve or report regularly
to State or national authority in respect to their reserves.
5. The computation of reserves by Federal foreign banking cor
porations

There is no prescribed form to be followed by Federal foreign
banking corporations in computing reserves, nor are there any
regulations requiring that such reports shall be made at stated
intervals to the Federal Reserve Board. The reserves are com

puted daily and can be reported to the Board at any time. There
are no penalties for deficiencies ; it is presumed that the Board
will prescribe such penalties as it sees fit if tlie occasion ever
arises .
61Which is the National Banking Act as amended .
b2Instructions of the Comptroller of the Currency Relative to the Organiza

tion and Powers of National Banks Together with the Regulations of the
Federal Reserve Board Relating to Nalional Banks ( Washington, 1923 ) ,
pp. 78-79 .

382

CLEARING AND COLLECTION OF CHECKS

COMPUTATION OF RESERVE OF NON -MEMBER NATIONAL BANKS
No. of blanks

STATEMENT showing the Net Deposits, Reserve required, and Amounts
composing the Reserve held by non-member National Banks located in the
terriory of

19

at close of business on

ITEMS ON WHICH RESERVE IS TO BE COMPUTED
Due to Banks and Bankers
- Less

Due from National Banks

Not reserve Agents
Due from other Banks
Net amount due to Banks
Demand Deposits
Time Deposits
Total Gross Deposits
DEDUCTIONS ALLOWED

Exchange for Clearing House
Checks on other banks in same place
Notes of other National Banks...
Due from U. S. Treasurer

( 1 ) Net Deposits
( 2 ) Reserve required is 15 % of above ..
RESERVE AND PER CENT HELD

( 3 ) Cash in vault ( less National Bank notes )
( 4 ) Reserve with Reserve Agents
( 5 ) Total Reserve held
•

•

( 6 ) Ratio of Reserve held ( No. 5) to Deposits (No. 1 ) ..

per cent

RECLASSIFICATION
Reserve

Required

ID Vault

Reserve Agents
Total
FORM 6

Held

Excess

CHAPTER X
THE CLEARING HOUSE

Nature of clearing operations

A clearing house has been defined in an earlier chapter as a

voluntary association of banks to simplify and facilitate the ex
changes of such items as checks, drafts, bills and notes, to facili

tate settlements of balances among the banks, and to serve as a
medium of united action upon all questions affecting their common
welfare.

For the purpose of carrying on these operations, banks asso
ciate themselves into clearing house associations, commonly called
"clearing houses" .

A brief account of the origin of clearing

houses has been given in Chapter III. At present there are 362
clearing house associations in the United States. Most of them
are unincorporated , co-operative associations and derive their
authority over their members through their written assent to their
respective constitutions.2
While most, if not all, clearing house associations exercise cer

tain special functions in addition to that of clearing, this chapter
is concerned principally with clearing, the primary function of
clearing house associations. In principle, clearing houses do not
vary widely ; consequently their nature, functions, and operations
can be understood by the study of a clearing house association
like that in New York City, the oldest if not the largest.
The New York Clearing House Association
The New York Clearing House Association was founded in
1853. At present it consists of forty member and six non -member
clearing banks located in Greater New York, one of the forty
being the Federal Reserve Bank of New York. In smaller cities

or towns the clearing house facilities will be found to differ widely.
'Data from Clearing House Section of the American Bankers' Association.
'In Mississippi banks are prohibited by statute (Code Sec. 3628 et seq. )
from becoming members of unincorporated clearing house associations.

See

Thomas B. Paton, Jr., Digest of Legal Opinions ( New York, 1922 ) , p. 225.
383

CLEARING AND COLLECTION OF CHECKS

384

Some will have separate buildings, while others may use a single
room in a rented building or in one of the banks. Outside of New

York City, it seems that most, if not all, of the permanent quar
ters are rented.

In New York the association began in the

early seventies to accumulate a building fund and in 1875 pur
chased and equipped its first building which was formerly the
National Bank of the Commonwealth Building, on the corner of
Nassau and Pine Streets. Proving inadequate, this property
was sold in 1894 and a new property located at 79 to 83 Cedar

Street was purchased, title to it being held by a separate and
newly organized corporation, called the “ New York Clearing

House Building Corporation ”. This company drew upon the
members of the clearing house association in proportion to their
respective capital and surplus for funds sufficient to build and
equip their present beautiful home. Altogether the New York
Clearing House Association has occupied five different locations
in its history.3
The administration of the clearing house association

The constitution of the clearing house provides for the regu
lation of the association and the guidance of its members. Ad
ministration of the affairs of the association is vested in five

officers and five standing committees. The officers are the presi
dent, secretary, manager, assistant manager, and the examiner.

The president, the secretary, and the five committees are chosen at
annual meetings by ballot, from officers of members, to serve for
one year or until successors are elected . The president and
secretary are eligible for office for two successive years and after

an interval of one year are again eligible in like manner.

The

president presides at the meetings of the association, is an

ex -officio member of all committees except the nominating com
mittee, and performs such other duties as may be incident to the
office. He serves without compensation, this being generally true
of clearing house presidents.
The secretary exercises the powers usually vested in such

He attends the meetings of the association, keeps a
record of the proceedings, and performs such other duties as are
officers.

incidental to the office.

The manager of the association is an important official. He
is appointed by the clearing house committee and by custom the
'J.G. Cannon, Clearing Houses, U. S. Nat. Mon. Com . Pubs., 61st Cong., 2d
Sess., Sen. Doc. No. 491 , pp. 155-159

THE CLEARING HOUSE

385

same manager has been retained from year to year. In fact , there
have been but four incumbents of this office since 1853.

The

manager has full charge of the clearing operations. He controls
the clerks and employees of the association as well as the em

ployees of member banks during the work of clearing. As super
intendent of the clearing house session he is responsible for main
taining discipline on the exchange floor, adjusting balances, im
posing fines for violation of the rules of procedure, keeping
records of the operations of the association, etc.* Unlike the
president, the manager commands a salary. T