Full text of Current Federal Reserve Payments Mechanism Expenses
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Federal Reserve Bank of St. Louis
CURRENT FEDERAL RESERVE PAYMENTS MECHANISM EXPENSES
Prepared for
Division of Federal Reserve Bank Operations
Board of Governors of the Federal Reserve System
September 4, 1970
by
John Thomas Whetstone, III
Alfred P. Sloan School of Management
Massachusetts Institute of Technology
and
Jens Hugh Hutchens, Jr.
Laverne College, California
CURRENT FEDERAL RESERVE PAYMENTS MECHANISM EXPENSES
Abstract
The participation of the Federal Reserve in this country's
payments mechanism is here defined to include the System's operations
dealing with currency, coin, wire transfers, currency verification,
postal money orders, food stamps, the issuance of Federal Reserve
Notes, and the collection of commercial and Government checks.
Using this definition, the total net payments mechanism operating
expense for the System in 1969 is found to be $205.7 million or
74.8 per cent of its total net expense.
This represents a 29.2 per cent
increase over 1966 which can be attributed principally to volume and
price increases.
A full 30.3 per cent of 1969 total net expense is
attributable to currency, coin, and commercial check collection
operations alone.
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Federal Reserve Bank of St. Louis
ii
TABLE OF CONTENTS
page(s)
Tit le Page .............................................. .
i
Abstract ................................................ .
ii
Table of Contents ....................................... . iii-iv
List of Figures ......................................... .
V
List of Tables .......................................... .
vi
Introduction ............................................ .
1-2
Section One: A Functional Expense Definition of the
Federal Reserve's Payments Mechanism
3-13
Participation ............................. .
Section Two: Federal Reserve Payments Mechanism
Operations ................................ . 14-31
Cash . ................................................. .
15-20
Receipt of Deposits of Currency and Coin .......... .
15
Verification of Currency .......................... .
16
Cancellation of Currency .......................... .
16
Destruction of Federal Reserve Notes .............. .
17
Destruction of Treasury Currency .................. .
18
19
Issuance of Federal Reserve Notes ................. .
Coin . ............................................. .
20
Check Collection ..................................... . 21-26
Acceptance of Incoming Checks ..................... .
22
Check Processing .................................. .
22
25
City Chee ks ....................................... .
Country Checks .................................... .
25
26
Return I terns ...................................... .
26
Items Payable in Other Districts .................. .
26
Goverrunent Checks .................................... .
Transfers of Funds ................................... . 27-28
Transfers of Funds Operations at a Federal
Reserve Office .................................... .
28
Emergency Operations - Other Emergency Preparations .. .
28
29
Money Orders ......................................... .
30
Food Stamps ................................... .- ...... .
iii
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Federal Reserve Bank of St. Louis
TABLE OF CONTENTS (Continued)
page(s)
Section Three:
Determination of Federal Reserve
Payments Mechanism Expense ................. 32-58
Alloe,;ation Using Employee Ratios........................
37
Allocation of Protection and Vault Maintenance..........
47
Allocation of Assessment for Expenses of Board
of Governors...........................................
51
Allocation of the Remaining Category C Units............
55
Allocation of Nonreimbursed Category D Expenses.........
55
Overhead Allocation for the Culpeper Facility...........
56
57
A Final Note on Computational Accuracy..................
Section Four: Summary and Conclusions ..................... 59-66
Ref er enc es ................................................. 6 7-6 9
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Federal Reserve Bank of St. Louis
iv
LIST. OF FIGURES
page(s)
Figure 1:
Figure 2:
Appendix A:
Appendix B:
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Federal Reserve Bank of St. Louis
The Federal Reserve System's Participation
in the Payments Mechanism as Defined on a
Functional Expense Basis......................
4-5
Equations Used to Develop Columns (2) and
(3) of Table V................................
48
Money - Overall, Simplified, Functional
Flow Chart..................................
67-68
Federal Reserve Bank Check Processing
System - Simplified Block Diagram ...........
69-70
V
LIST OF TABLES
page(s)
Table I:
Table II:
Table III:
Table IV:
Table V:
Table VI:
Table VII:
Table VIII:
Table IX:
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Federal Reserve Bank of St. Louis
High Speed Check Sorting Equipment
Used by Federal Reserve Banks and
Branches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
Net Federal Reserve Expense Charged to
Each Maj or Category in 1969.. . . . . . . . . . . . . . . .
34
Net Federal Reserve Expenses for Payments
Mechanism Functions in 1969....... ........ ..
35
Employee Ratios for Allocation of Expenses
of Functions Assigned to Category C.........
38-39
Ratios for Allocation of the Expense of
Protection and Vault Maintenance ............
40-41
Ratios for Allocation of Assessment for
Expenses of Board of Governors..............
42
1969 Cost Statistics for Payments Mechanism
Functions...................................
61-62
Net Federal Reserve Expense for Payments
Mechanism Functions, 1966-69................
64
Volume of Operations in Principal
Departments of Federal Reserve Banks,
1966-69.....................................
65
vi
CURRENT FEDERAL RESERVE PAYMENTS MECHANISM
Introduction
The purpose of this paper is to define and expense the
participation of the Federal Reserve System in America's payments
mechanism.
This participation is to be defined on a functional
expense basis, using the functions as specified in the Accounting
Manua1l/ and expensed in the Functional Expense Report.~/
In order to fulfill its above purpose, this paper is divided
into four major parts.
The first defines the payments mechanism
and it states and supports a functional expense definition of the
Federal Reserve System's payments mechanism participation.
The
second section describes the Federal Reserve's payments mechanism
activities in some detail.
Emphasis is given to the employees and
equipment the Banks and Branches employ in payments mechanism
operations.
In the third major section of this paper, the definition
is utilized to develop a comprehensive program for determining
payments mechanism expense figures which are as current as the
l/
Accounting Manual for Use of Federal Reserve Banks in Preparing
Certain Reports to the Board of Governors, Board of Governors
of the Federal Reserve System: Division of Bank Operations,
effective January 1, 1962 (issued July 1962).
~/
Functional Expense Report: A Consolidated Statement of Expenses
and Functional Data, Board of Governors of the Federal Reserve
System (compiled quarterly).
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Federal Reserve Bank of St. Louis
1
-2latest Functional Expense Report.
This program is used to compile
expenses for 1969 (the last complete annual period at the time of
this study) in order to indicate the cost, in some detail, of the
Federal Reserve's current payments mechanism operations.
concluding section ties the first three sections together.
The
It reveals
how this definition and description of the Federal Reserve's payments
mechanism participation and figures representing the actual current
cost of this participation will provide a useful information base
for groups (such as the System Steering Corrnnittee on Improving the
Payments Mechanism) studying and proposing future changes in the
Federal Reserve's payments mechanism participation.
Improvement
in its payments mechanism operations is essential if the Federal
Reserve--faced with the fact of an ever-increasing volume of payments-is to maintain, much less improve, its current level of payments
services.
A view of the entire system of payments continuously
flowing through Federal Reserve Banks and Branches will provide the
information needed to make a series of coordinated proposals for
change.
Proper coordination would result in optimizing the net
benefits of any changes in operations involving check collection,
currency and coin, wire transfers, and/or other payments mechanism
activities.
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Federal Reserve Bank of St. Louis
-3SECTION ONE
A FUNCTIONAL EXPENSE DEFINITION OF THE
FEDERAL RESERVE'S PAYMENTS MECHANISM PARTICIPATION
The payments mechanism can be thought of as a pipeline
network interconnecting the various components of our economy-providing for flows of payments for goods, services, and financial
assets.
This view provides for a seemingly simple decision rule
for determining which functional categories belong in a functional
expense definition of the Federal Reserve System's payments mechanism participation--namely, this definition must include any Federal
Reserve expense function if and only if the function incurs most of
its expenses performing operations actually providing for or facilitating payments flows.
A functional expense definition segregating payments
mechanism and non-payments mechanism activities is indeed arrived
at by use of the above decision rule.
This resulting definition
can be outlined by splitting the headings of the Functional Expense
Report into four major categories (listed in detail in Figure 1).
Category A consists of functions included in the payments mechanism.
The functions considered external to the payments mechanism comprise
Category B.
Category C includes those non-payments mechanism
functions whose costs are distributed as burden to Categories A and
B.
Category Dis composed entirely of reimbursable Fiscal Agency
units.
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Federal Reserve Bank of St. Louis
-4FIGURE 1
The Federal Reserve System's Participation
in the Payments Mechanism
as Defined on a Functional Expense Basis
CATEGORY A:
Functions
Included in the
Payments Mechanism
Currency and Coin
Check Collection
Accounting
Transfers of Funds only
Emergency Operations
Other Preparations only
Federal Reserve Note Issues
Fiscal Agency
Treasury Department
Government Checks
Currency Verification:
Federal Reserve Currency
Post Office Department
Money Orders only
Other Government Departments
and Agencies
Food Stamp Program
Processing
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Federal Reserve Bank of St. Louis
CATEGORY B:
Functions
Excluded from the
Payments Mechanism
Discount and Credit
Safekeeping of Securities
Purchases and Sales of Securities
Noncash Collection
Bank Examination
Research, Public Information,
and Bank Relations
Monetary and Economic
Studies only
Securities Exchange
Foreign
Fiscal Agency
Treasury Department
Treasurer's General Account
Government Coupons
Miscellaneous Activities
(Non-reimbursable)
Miscellaneous Foreign
Activities
Purchases and Sales of
Securities
Government Grants and
Contributions
Other Government Departments
and Agencies
Miscellaneous Activities
F .D. I.C. - (Nonreimbursable) Maintenance of Dividend
Accounts only
Services Rendered to Others
-5FIGURE. 1 (Continued)
CATEGORY C:
Functions Whose
Costs are Distributed
As Burden to Categories
A and B
General Overhead
Provision of Space
Personnel
Furniture and Equipment
General Services
Stock of Supplies
Accounting
All except Transfers of
Funds
Data Processing
Planning
Emergency Operations
Security Files only
Legal
Auditing
Research, Public Information,
and Bank Relations
All except Monetary
and Economic Studies
!/
CATEGORY D:
Reimbursable
Fiscal Agency Units
Excluded from Net
Federal Reserve System
Expenses
Fiscal Agency (Reimbursable)
Treasury Department
Public Debt
Federal Taxes
Currency Verification:!/
Treasury Currency
Miscellaneous Activities
Currency Reports
Foreign Exchange
Gold Reserve Act
Post Office Department .
Postmasters' Deposits only
Other Government Departments and
Agencies
V-Loan Program
Connnodity Credit Corporation
Food Stamp Program
Disposing
Miscellaneous Activities
All except F.D.I.C. Maintenance of Dividend
Accounts
Reimbursable only through December 31, 1969# but included in
Category D expense totals through 1969.
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Federal Reserve Bank of St. Louis
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Category A includes the following expense functions:
Currency and Coin, Check Collection, and Federal Reserve Note Issues.
Transfers of Funds (a unit of the Accounting function), Other Emergency
Preparations (a unit of Emergency Operations), and Government Checks,
Currency Verification:
F. R. Currency, Currency Verification:
Treasury Currency, Money Orders, and the processing activities of the
Food Stamp Program (all units in the Fiscal Agency function)
all
principally serve the payments mechanism and, therefore, are also
included in Category A.
Currency and coin operations involve the receiving of
deposits from member banks and others.
In separate operations, both
currency and coin are sorted, counted, and inspected for fitness.
Any unfit or counterfeit items are removed from circulation.
In
five Districts the Federal Reserve Banks and Branches also wrap
coin, for a fee, as a service to commercial banks.
On order, pay-
out tellers ship either new or previously circulated currency and
coin to member banks and others.
The Check Collection process involves receiving cash
letter deposits of commercial checks from member banks.
Incoming
deposits are proved, and checks are sorted and listed to drawee banks.
This function is also charged for all operations needed to process
cash items returned unpaid (return items).
are prepared for delivery to drawee banks.
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Federal Reserve Bank of St. Louis
Outgoing cash letters
-7The Federal Reserve Note Issues function consists of the
receiving, storing, issue, and retirement of Federal Reserve notes
by the office of each Federal Reserve Agent.
The operations noted above for the Currency and Coin,
Check Collection, and Federal Reserve Note Issues functions are
obviously principally concerned with providing for and easing the
flows of payments in this country.
The expenses incurred performing
these operations must, therefore, be included in any payments mechanism
expense determination.
The Transfers of Funds unit is charged for the costs which
the Federal Reserve System incurs making wire and mail transfers
between and among member banks and Federal Reserve offices.
Instructions and replies between the Board and the Banks and the Banks
and their Branches are also transmitted by and expensed to this function.
The content of this latter communication does not necessarily pertain
to the payments mechanism, but, since the major portion of this unit's
expense is obviously involved in the payments process, the entire
Transfers of Funds unit of the Accounting function is included in
Category A.
The operations included under Other Emergency Preparations,
a subcategory of Emergency Operations, are principally concerned with
assuring the operation of the payments mechanism in case of a national
emergency; therefore, this unit is also in Category A.
Security
Files, the other subcategory of Emergency Operations, and all Accounting
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Federal Reserve Bank of St. Louis
-8-
units except for Transfers of Funds are not directly involved in the
payments process and, for this reason, they are included in Category C.
Nonreimbursable Fiscal Agency units which aid the Federal
Government in its payments mechanism participation also belong to
Category A~
This group consists of the following units:
Checks, Currency Verification:
cation:
Government
F. R. Currency, and Currency Verifi-
Treasury Currency for the Treasury, Money Orders for the
Post Office, and Food Stamps (processing only) for the Department of
Agriculture.
Government Check operations include the receiving of
deposits of Government checks from member banks and others.
The
checks are proved, listed, boxed, and shipped to the Treasury.
Charged to the Currency Verification:
Currency Verification:
F. R. Currency and to the
Treasury Currency units are the receiving and
canceling of unfit Federal Reserve Notes and Treasury Currency,
respectively.
Random samples of the canceled currency are hand-
counted and verified.
in incinerators.
All the canceled currency is finally destroyed
Money order operations consist of all activities in
connection with the handling of postal money orders as segregated
items in punch-card form from the point of deposit until they are
disposed of.
Processing activities for the Food Stamp Program of the
Department of Agriculture involve receiving, proving, and canceling
food stamps.
custodians.
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Federal Reserve Bank of St. Louis
Food stamps are also bundled for delivery to disposal
All the above operations are directly involved in the
-9payments mechanism and these units should, therefore, be included in
Category A.
The functions and units assigned to Category Bare those
serving purposes not directly concerned with the payments mechanism.
The functions Discount and Credit, Purchases and Sales of Securities,
Bank Examination, Securities Exchange and the expense unit Monetary
and Economic Studies of the function Research, Public Information,
and Bank Relations incur most of their expenses performing operations
devoted to regulation of the flow of credit or control of the money
supply in the United States.
Foreign also fails to meet the criterion
for inclusion in the payments mechanism as foreign operations are
mainly concerned with the international position of the dollar and the
way in which the deficit or surplus in the U.S. balance of payments
is financed.
The functions Safekeeping of Securities and Services
Rendered to Others should obviously also be included in Category B
as their operations are oriented toward providing non-payments
mechanism services to commercial banks, the Treasury, and the public.
The justification for placing Noncash Collection in
Category B rather than in Category A (payments mechanism) is not so
obvious.
A Federal Reserve Bank's Noncash Collection operations
actually complement its Check Collection activities as the Bank
collects, for member banks, payments due on various noncash items
which typically include bills of exchange, drafts, maturing bearer
bonds and coupons, trade acceptances, and outsized or non-encoded
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Federal Reserve Bank of St. Louis
-10-
checks.
However, most work assigned to the Noncash Collection function
actually involves record keeping and other services rendered for banks
and other financial institutions; time devoted to actual processing
of payments is negligible.
Therefore, the function Noncash Collec-
tion also fails to meet the criterion for inclusion in the payments
mechanism although it is expensed for many operations analogous to
those of the payments mechanism function Check Collection.
The definition of Category Bis completed by the inclusion
of the following nonreimbursable Fiscal Agency units:
Treasurer's
General Account, Government Coupons, and Miscellaneous Activities
(Miscellaneous Foreign Activities, Purchases and Sales of Securities,
and Government Grants and Contributions) for the Treasury and Miscellaneous Activities (maintenance of Dividend Accounts only) for the
Federal Deposit Insurance Corporation.
These include all the non-
reimbursable units which serve non-payments mechanism-related services
for the Federal Government.
Note that Government Coupons is included
~
in Category B rather than in Category A for reasons analogous to those
given above for Noncash Collection.
Category C consists of the functions expensed for the
indirect overhead activities required to enable the Federal Reserve
to perform its direct payments mechanism and non-payments mechanism
obligations.
Category C includes the following functions:
General
Overhead, Provision of Space, Personnel, Furniture and Equipment,
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Federal Reserve Bank of St. Louis
-11-
General Services, Stock of Supplies, Data Processing, Planning, Legal,
and Auditing.
The expense units General Books, Bank Accounts, and
Expenditures of the Accounting function; Security Files of Emergency
Operations; and Statistical Series, Reference Library, Public Information, Meetings, and Visits and Other Bank Relations of Research,
Public Information, and Bank Relations complete the definition of this
Category.
In order to develop realistic payments mechanism expenses,
one must allocate as burden the components of Category C by employing generally accepted accounting techniques.
The overhead functions
and the distribution techniques used for this study are discussed in
some detail in the third section of this paper.
Category D consists only of the Fiscal Agency units which
are reimbursable by United States Government agencies and must, therefore, be excluded from net Federal Reserve System expenses.
However,
some of these reimbursable activities -- such as the preparation of
currency reports for the Treasury, the processing of postmasters'
deposits for the Post Office, and the disposal of food stamps for the
Department of Agriculture -- are payments mechanism activities.
The
expenses charged to these operations must, therefore, be included in
any determination of cost incurred by the Executive Branch for participation in this country's payments mechanism.
Currency verification:
Treasury Currency is included in Category D for calculation of pre-1970
expenses, but -- as of January 1, 1970 -- this unit is no longer
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Federal Reserve Bank of St. Louis
-12-
reimbursable by the Treasury.
Its post-1969 expenses must be added into
payments mechanism totals as its operations are the same as those for
Currency Verification:
Federal Reserve Currency.
The definition just described provides for ease of comprehension since the Accounting Manual explicitly states the typical
operations assigned to each functional category.
Also, once ratios
for applying overhead expenses have been determined, one can easily
calculate Federal Reserve payments mechanism "operating" expenses
simply by drawing on the data readily available in the Functional
Expense Report for the period under study.
This definition also has an inherent disadvantage.
All
of the functional categories as defined in the Accounting Manual
cannot be dichotomously included or excluded from a reasonable,
consistent definition of the payments mechanism.
In some cases, a
function which includes operations in two or more of this study's
four categories can be readily split since the Functional Expense
Report provides detailed sub-functional breakdowns.
For example,
Transfers of Funds, a unit of the Accounting function, is included
in Category A (the payments mechanism) while the other three Accounting
units are included in Category C since they are not, for the most part,
directly involved in the payments process.
However, in some cases,
the statistics given in the Functional Expense Report are not detailed
enough for a completely consistent categorical breakdown.
The Other
Emergency Preparations unit of the function Emergency Operations serves
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Federal Reserve Bank of St. Louis
-13-
as an illustration of this latter circumstance.
The entire unit is
included in Category A although nonpayments operations such as those
concerned with "training personnel for emergency operations, including
foreign activities, communications, Open Market Committee activities,
and other System-wide responsibilities 11l/ are thereby included and
expensed to Category A.
One must realize that the Functional Expense Report is a
means of showing costs of the various activities at each Bank and
Branch in a way that will permit interoffice and interperiod comparisons.
This report's categorization by functions and their subdivisions
(units) are generally appropriate for the above comparisons, but are,
of course, not nearly so optimum for the purpose of this study--to
define and expense the Federal Reserve's participation in America's
payments mechanism.
However, in this study, the errors inherent in
such a categorical definition involving somewhat arbitrary choices are
statistically insignificant when viewed in a total expense perspective.
Moreover, the fact that this method provides for ease of comprehension
and simplicity of calculation is very significant.
This report's
grouping of Bank and Branch activities into payments mechanism and nonpayments me~hanism categories thus seems to be a justifiable method
for defining and expensing the Federal Reserve's participation in the
payments mechanism.
~/
Accounting Manual, p. 188.
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Federal Reserve Bank of St. Louis
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SECTION TWO
FEDERAL RESERVE PAYMENTS MECHANISM OPERATIONS
The actual operations included in the payments mechanism
are described in some detail in this section.
The reader should
keep in mind that these production operations are not performed
identically in every District nor are they always assigned to the
same department.
The flows of various payments instruments through
all the Banks and Branches in the System do, however, follow the
same general paths described below.
Throughout the System, each payments mechanism operation
is ordinarily under the general direction of a senior vice president
with over-all responsibility vested in a vice president and an
assistant vice president.
Direct responsibility for these routine
activities is vested in a manager and assistant managers who direct
the supervisors.
The manager has the role of seeing that all new
ideas of the officers are presented to, and implemented by, the employees.
The supervisor, in addition to seeing that the work is accomplished,
has the responsibility for seeing that the requests of employees
are presented to the proper officers.
Both managers and supervisors,
by serving as liaison channels between officers and employees, play
key roles in the maintenance of operations at a high rate of efficiency.
The descriptions below will generally describe the personnel involved
only up to the manager level.
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Federal Reserve Bank of St. Louis
-15CASH
This first subsection is headed "Cash" for it includes the
operations expensed under the following expense categories:
Currency
and Coin, Federal Reserve Note Issues, Currency Verification:
Reserve Currency, and Currency Verification:
Federal
Treasury Currency.
These
operations are performed by several different departments in each
Federal Reserve Office, but they are all merely components of a single
network channeling the flows of currency and coin into and out of the
Federal Reserve System.
Receipt of Deposits of Currency and Coin
All incoming deposits of currency and coin from member banks
and from nonmember banks are received and accepted by receiving
tellers.
The currency and coin is placed under joint control immed-
iately upon receipt and remains so until destroyed or reissued.l/
The receiving tellers and their immediate superior (usually holding
the title of supervisor) have the responsibility for seeing that the
number of bundles shipped were actually received.
The receiving
tellers then acknowledge receipt and prepare the currency and coin
for transfer to sorters and counters.
!/
A complete description of joint control procedures for the cancellation and destruction of currency may be found in the Federal
Reserve Currency Manual: Procedure for Cancelling, Destroying,
and Accounting for Unfit Federal Reserve Notes.
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Federal Reserve Bank of St. Louis
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Verification of Currency
Currency sorters and counters remove mutilated,l/ counterfeit,
and foreign currencies.
They verify and sort the bills on a Federal
Bill Counter into two major categories: (1) fit, and (2) unfit.
In
addition, unfit U.S. Notes and Silver Certificates above $1 are
sorted separately.
on a Tickometer.
Occasionally the smaller denominations are counted
After counting and verification have taken place,
the notes are strapped into packages of 100 which are then bundled
(10 packages to a bundle).
Unfit currency is transferred to the
Cancellation Department and the fit currency is transferred to the
currency vault for payment.
The mutilated currency is forwarded to
the Treasurer for determination of value under the provisions of
Department of the Treasury Circular No. 55.
shipped to the nearest office of the U.
s.
Counterfeit notes are
Secret Service.
Cancellation of Currency
Upon receipt of unfit currency at the Cancellation Department,
the currency is package counted to verify that all bundles are complete,
and then it is cancelled in the cancelling machine (usually Cummins).
While the notes are being cancelled, and independent observer, who
does not have custody of the notes, is always present to assure the
integrity of the cancellation.
l/
Cancelled notes are perforated with a
A note is considered mutilated when (1) 2/5 or more of the original
note is missing, (2) its condition is such that its value is
questionable or special care is required in its handling or (3) in
the case of the $5 denomination and higher, an entire serial number
is missing - regardless of how much of the original note remains.
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Federal Reserve Bank of St. Louis
-17distinctive cancellation design, which is unique to the particular
Federal Reserve Bank or Branch.
The cancelled notes are verified to
confirm proper cancellation and the bundles are checked for completeness,
The bundles are next grouped into lots for transfer to the
verification and destruction unit.
Upon receipt, this unit at random
piece counts 5 per cent of the ones, 10 per cent of the fives, 20 per
cent of the tens, and 40 per cent of the twenty dollar bills.
Notes
of any denomination greater than twenty dollars are piece counted
100 per cent.
Federal Reserve Banks are requested by the Treasury
Department to cut in half cancelled Federal Reserve Notes of the
$500 and higher denominations and to forward the lower halves to the'
Treasurer for verification and destruction,
The upper halves are
held by the verification and destruction unit in the vault until
authorization for destruction has been given by the Treasury.
Destruction of Federal Reserve Notes
Currency destruction tellers, always accompanied by a witness,
burn the cancelled currency in high-pressure incinerators or they destroy
it in som~ other manner.
Destruction is completed when the notes,
including fragments, are reduced to unrecognizable residue,
Removal
of the residue is performed by approved maintenance personnel.
Thereafter,
the incinerator is inspected and cleaned in preparation for the next lots
of currency.
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Federal Reserve Bank of St. Louis
-18Destruction of Treasury Currency
Unfit Treasury Currency, which consists of Silver Certificates
and U. S. Notes, is handled slightly differently.
U.S. Notes were
originally issued in 1862 to help pay for the War Between the States.
Congress never took the U. S. Notes out of circulation, but granted
authority to the Treasury to maintain a certain amount in circulation
at all times.
The amounts have varied over the years, but since
May 31, 1878, by law, approximately $323 million are to be kept outstanding.
U. S. Notes amount to less than one per cent of paper
money in circulation.
U. S. Notes are now issued only in $100 denominations.
Formerly, ones, twos, and fives were issued, and therefore, a count
of the amount of U.S. Notes each Federal Reserve Bank and Branch
destroys must always be maintained.
U. S. Notes of denominations
of five dollars and higher are separated during currency sorting and
verification, and are cancelled and destroyed separately from
although in the same manner as -- Federal Reserve Notes.
The $1 Silver
Certificates were also separated until recently, but now the flow is
so small that the Banks keep track of them only on a percentage basis,
and process them through with F. R Notes.l/
11
For a more detailed account of the operations involved in the
processing of currency see: Federal Reserve Currency Man11al:
Procedures for Cancelling, Destroying, and Accounting for Unfit
Federal Reserve Notes, Revised March 1969.
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Federal Reserve Bank of St. Louis
-19-
Issuance of Federal Reserve Notes
The Board of Governors of the Federal Reserve System has
established "goals" for desirable amounts of currency holdings for
each Bank and Branch,
Every week an inventory stating the amount
of currency on hand is received from each Bank and Branch by the
Board of Governors.
The amount of new currency to be shipped to
the Federal Reserve Agent is determined from this report.
The Board's Division of Federal Reserve Bank Operations
arranges for shipments of notes from the Bureau of Engraving and
Printing to Federal Reserve Agents in amounts sufficient to maintain
inventories at previously agreed upon levels ("goals").
Each Agent
is required to have on hand a one year supply of ones and a two year·
supply of all other notes.
The supply can be held partly in storage
facilities at Denver, Chicago, or Culpeper.
Upon receipt of new Federal Reserve Notes, the Federal
Reserve Agent, a representative of the Bank and an audit representative, verify the shipment.
The notes are then placed into the
Federal Reserve Agent's compartments in the vault under joint custody.
Any Federal Reserve Bank can obtain needed Federal Reserve
Notes from its Federal Reserve Agent--a representative of the Board
of Governors at the Federal Reserve Bank.
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Federal Reserve Bank of St. Louis
-20Notes are issued when an Agent receives notification requesting
additional notes from the Bank and proper collateral~/
has been
pledged)/
Coin
All circulated coin received by the receiving tellers is
transferred to counters, who verify the shipment by using coin
counting machines.
They also separate all foreign coin in order
to exchange it at commercial banks.
the Treasury,
Mutilated coin is returned to
Fit coin is transferred to the coin vault for storage
or immediate issue.
When new coin has been received from the mint, it is transferred
to the Cash Department for payment upon request from banks.
Five Banks and their Branches wrap coin as a service, for
a fee to member banks.
In these Districts, upon completion of veri-
fication, coin wrappers wrap, package, seal, and tag coin before it
is delivered to the vault.
!±_I This collateral must consist of legally specified assets, alone or
in any combination of: (1) gold certificates; (2) direct obligations
of the United States Government; (3) "eligible paper" as defined by
statute, or (4) Special Drawing Right certificates (SDR) issued by
the Secretary of the Treasury.
J/
Further information on the duties of the Federal Reserve Agent may
be obtained from: The Board of Governors of the Federal Reserve System,
The Federal Reserve System: Purposes and Functions, Fifth Edition,
Fifth Printing, October 1969, pp. 17,U8 and 179; Federal Reserve
Act (approved December 23, 1923) as amended through 1969; and Federal
~erve Loose-Leaf Service, Vol. I and II, as amended May 31, 1970.
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Federal Reserve Bank of St. Louis
-21CHECK COLLECTION
The Federal Reserve System is authorized by the Federal
Reserve Act to act as a clearinghouse for checks and drafts payable
upon presentation in the United States.
The guidelines, or general
terms and conditions for handling checks by the Federal Reserve Banks
and Branches, are set forth by the Board of Governors in Regulation J.
Acceptance of Incoming Checks
The Check Collection Department of a Bank or Branch will
generally accept incoming deposits from any of the following:
(1) member banks; (2) other Federal Reserve Banks and Branches;
(3) direct routing member and non-member clearing banks of other
·Federal Reserve territories; (4) authorized government agencies
located in the Federal Reserve District; (5) the Treasurer of the
United States; and (6) other departments of the Federal Reserve Bank
or Branch.
Incoming deposits are generally presorted by connnercial
banks into separate cash letters of innnediate and deferred credit
availability.
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Federal Reserve Bank of St. Louis
-22-
Check Processing
Incoming cash letters which are encoded for high-speed
computer processing are sent directly to the Blocking Section.
Here
they are grouped into blocks each of which usually consists of 3,000
items (although this number may vary due to special circumstances).
Incoming cash letters which are not pre-encoded are sent to the
Encoding Section where they are processed through amount inscribers.
After this extra operation, these cash letters are also sent to be
grouped into blocks.
to the computers.
Each complete block is forwarded directly
Table I gives a complete list of the high speed
check sorting equipment used by Federal Reserve Banks and Branches
as of May 31, 1970.
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Federal Reserve Bank of St. Louis
-23TABLE I
HIGH SPEED CHECK SORTING EQUIPMENT
USED BY FEDERAL RESERVE BANKS AND BRANCHES*
Federal Reserve Bank
or Branch
Boston
New York
II
Buffalo**
Philadelphia**
Cleveland
Cincinnati
Pittsburgh
Richmond
Baltimore**
Charlotte
Atlanta
Birmingham
Jacksonville
New Orleans
Nashville
Chicago
II
Detroit
St. Louis
Little Rock
Louisville
Memphis
Minneapolis
Helena
Kansas City
Denver**
Oklahoma City**
Omaha**.
Dallas
II
El Paso
Houston
Sa San Antonio
II
San Fra.ncisco
Los Angeles
Portland
Salt Lake City
Seattle
System
Burr. B-370
IBM 1979
Burr. B-263
IBM 1979
IBM 360/40
IBM 1979
Burr. B-275
Burr. B-300
Burr. B-300
IBM 360/30
IBM 1979
IBM 1979
Burr. 275
Burr. 300
IBM 1979
Burr. 124
Burr. 3500
Burr. 350
IBM 1979
IBM 1979
IBM 1979
Burr. B-300
IBM 1979
Burr. B-300
Burr. 275
IBM 1979
IBM 360/30
IBM 360/30
IBM 360/30
Burr. B-0506
Burr. B-275
Burr. 300
Burr. 275
Burr. B-275
Burr. B-300
Burr. 300
Burr. B-3500
IBM 360/30
Burr. B-300
IBM 300/30
Number
in Use
6
8
1
1
2
3
2
2
4
3
3
3
2
3
2
1
4
1
2
4
1
1
1
5
1
3
1
1
1
1
2
1
2
1
2
1
1
1
1
*Data obtained from Federal Reserve Office responses to "Committee on Federal Reserve
Bank Computers Questionnaire on Data Processing Systems." (Da-ta as of May 31, 1970)
**General data processing and check processing are done on the same computer equipment.
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Federal Reserve Bank of St. Louis
-24-
The high speed check sorting equipment performs the two
main functions of: (1) proving incoming cash letters, and (2) sorting
checks down to drawee banks and preparing outgoing cash letters.
The actual sorting consists of running the checks through computer
controlled sorter-readers which output the checks into pockets.
The
contents of each pocket are then again run through the sorter-readers
in subsequent passes until the sorting process has been completed,
and the checks are sorted down to individual drawee banks.
During
each sort pass, printers list the A.B.A. routing number and amount
for each check.
During the final pass, an outgoing cash letter for
each drawee bank is printed.
The output of each step must be
reconciled with the inputs to that stage of the operation, and any
errors must be found and corrected.
The checks which the computers are unable to process (because
they are mutilated or their magnetic ink characters are unreadable,
et cetera) are rejected into a separate pocket.
These rejects can
be placed into a carrier document upon which is encoded the appropriate
routing symbol-transit number, and the amount of the check.
This
envelope is then processed through the high speed equipment in the same
manner as is an ordinary check.
Another way to deal with rejects is
to process them on low speed proof equipment, consisting of IBM 803
multipocket sorting and proving machines.
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Federal Reserve Bank of St. Louis
-25City checks and Country checks are all received and processed
through computers in the manner described above.
However, the
methods used for handling the checks before and after computer
processing may differ.
City Checks
Cash items which the Reserve Banks can collect for innnediate,
same-day credit are termed City checks.
These generally include cash
items drawn on or payable through connnercial banks located in the
same city as, or nearby area to, the Federal Reserve Bank or Branch
and are usually collected through a local clearing house or by special
clearing arrangements.
City checks must be received prior to an early
morning cut-off time in order to receive innnediate payment, because
they must be processed in time to be presented through the clearing
house exchange which usually takes place in mid-morning.
Country Checks
If a Federal Reserve Bank cannot collect a cash item for
immediate payment, and it therefore passes credit on a deferred basis,
then the item is termed a Country check.
These items are generally
(but not always) drawn on banks outside the city where the Federal
Reserve Bank or Branch is located.
After processing and verification
as described above, the checks are dispatched to the proper banks.
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Federal Reserve Bank of St. Louis
-26-
Return Items
Return items are classified as all unpaid cash items returned.
Each item is examined by clerks to verify that a reason for return
has been specified and that the correct A.B.A. number of the
depositing bank is visible on the back of each item.
The checks
are then proved on proof machines and returned to the depositing
banks.
Items Payable in Other Districts
All cash items, collectible at par, which are payable outside the territory of deposit in conjunction with the handling of
country checks, are sorted by Federal Reserve Office.
The checks are
routed and delivered to the other territories according to normal
procedures.
GOVERNMENT CHECKS
Government checks--checks drawn on the Treasurer of the
United States--are received from cormnercial banks along with a cash
letter and sent to the Government Check Processing Section.
After
proving the checks to the cash letter, they are then sent to the
Blocking Section for preparation for high speed processing.
As the
checks are run through a card reader, a tape is generated for shipment
to the Treasury.
No sorting is necessary as all the checks are
returned to one payor--the Treasury.
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Federal Reserve Bank of St. Louis
Since the high volume of checks
-27-·
received during the early part of the month cannot be processed all
at once, these checks are grouped in a queue into manageable numbers
for processing during slack time in order to smooth production.
After having been computer processed, a settlement~/ of
Government checks is returned to the Government Check Section where
the blocks are identified as to the content and prepared for shipment
to the Treasury Department.
Upon completion of processing, a charge
is made to the Treasurer's General Account.
After the Federal Reserve
has processed the checks, they are packaged and shipped to the Treasury
Department in Washington, D. C.
The Treasury runs the checks through
a card-to-tape converter, and then transfers the checks to the
Federal Records Center in Mechanicsburg, Pennsylvania, for storage.
The checks remain in storage at Mechanicsburg for seven years, unless,
because of some question, they are recalled by the Treasury.
After
seven years, the checks are sold to paper companies for recycling.
MONEY ORDERS
Approximately 90 per cent of all postal money orders are
cashed at commercial banks.
The other 10 per cent eventually find
· their way to commercial banks, via postmasters' deposits.
All money
orders are then deposited at Federal Reserve Offices for processing.
A settlement, specifically designed for computer processing, is
limited to 28,000 checks. It contains 14 boxes, each of which
contains two blocks of 1,000 items apiece.
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Federal Reserve Bank of St. Louis
-28Regulation J of the Board of Governors and an agreement between the
Federal Reserve Banks and the Postmaster General currently govern the
collection and processing of postal money orders.
The actual procedures for processing postal money orders
are simil~r to those previously described for Government checks.
In
order to facilitate computer processing, money orders are grouped
into blocks of approximately 1,000 items each.
After processing and
settlement on high speed equipment, money orders are charged to the
Treasurer's General Account.
They are then shipped to the Postmaster,
Washington, D. C. in "registers" which consist of 28 blocks or about
28,000 items.
After the money orders have been verified by the
Postmaster General's Office, they are stored at the Federal Records
Center in Suitland, Maryland for two years before being sold for
recycling.
TRANSFERS OF FUNDS
The functions of the Federal Reserve's wire transfer system
are to process requests by member banks in one territory to transfer
funds to member banks and non-member clearing banks in other territories
to transfer funds between member banks located within a territory and
to credit member banks for funds transferred from other territories
by telegraph, telephone, et cetera.
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Federal Reserve Bank of St. Louis
-29-
The Richmond Bank formerly acted as the switching
center for wire transfers between Distiicts (System 81-D-l).
The
computerized switching center at Culpeper has now assumed this
function,
Transfers of Funds Operations .at a Federal Reserve Office
A letter of authorization or a telephone call is received
by the receiving requests chief, the supervisor, or a transfer clerk.
Upon receipt, it is transferred to the teletype expediter who verifies
authenticity and then forwards the request to the teletype clerk who
is responsible for receiving and transmitting.
The teletype clerk,
usually using Western Union TWX equipment, transfers the funds to the
proper Federal Reserve Bank or Branch.
Control clerks keep a constant
·watch on operations to see that all transfers of funds requests have
been completed.
Proof clerks prepare statements and maintain records
of all transactions,
EMERGENCY OPERATIONS - orHER EMERGENCY PREPARATIONS
The primary functions of the Federal Reserve Banks during
a national emergency are: (1) to provide the Treasury with adequate
funds to meet current obligations and to finance emergency needs;
(2) to supply the banking system with adequate liquidity, credit, and
reserves; to make currency available according to need; and to assist
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Federal Reserve Bank of St. Louis
-30-
in the collection of checks - all so that the banking system may be
in a position to meet the demands upon it for services essential to
a national emergency, survival operations, and the rehabilitation of
the economy; (3) to speak for the System in the areas which it serves,
to contribute leadership to the financial corrnnunity, and to provide
information, counsel, and support to the banks of their Districts;
(4) to advise as to, and to administer, credit and credit control
programs appropriate under the circumstances; and (S) to serve as
Fiscal Agent of the Government.
Of course, the above activities are not performed until an
actual emergency occurs.
The preparation and maintenance of instruc-
tion manuals covering performance of Agent banks and arrangement
for the storage of cash (pre-emergency) with Agent banks are among
the current contributors to current payments mechanism expense. The
Agent banks are chosen with many factors considered.
Storage facilities
should be adequate so that new alarms, expansion of vault, et cetera,
will not be too costly to the Federal Reserve System.
FOOD STAMPS
Food stamp coupons are issued by the U. S. Department of
Agriculture in twenty-five cent, fifty cent, and two dollar denominations.
Food stamp coupons, separately strapped and packaged, are
received along with the regular shipment of checks from commercial
banks.
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Federal Reserve Bank of St. Louis
Each strap contains the amount of food stamps, the name and
-31-
location of the depositing ba~k and the date.
verified on Tickometers.
The stamps are
The total number of stamps redeemed
in one day is recorded on Treasury Department Form 834.
Processed
coupons are then packaged into bundles of ten straps each, and
transferred for storage under dual control in the vault.
A report
of any counterfeit coupons is sent to the U.S.D.A., to the Treasury
Department, and to the local office of the United States Secret
Service.
Whenever necessary, the coupons are delivered under dual
control to the Verification and Destruction Unit for incineration.
Destruction, being a reimbursable activity, is, of course, not included
in the functional expense definition of the Federal Reserve's payments
mechanism participation.
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Federal Reserve Bank of St. Louis
-32SECTION THREE
DETERMINATlON OF FEDERAL RESERVE PAYMENTS MECHANISM EXPENSE
The purpose of this section is to develop a comprehensive
program for determining payments mechanism expense figures which are
as current as the latest Functional Expense Report.
The following
discussion will actually relate to expenses compiled for the calendar
year 1969 (the last complete annual period at the time of this
study).
However, the description of the process actually used for
1969 data is sufficiently detailed to allow its adaptation and use
as a program for generating up-to-date payments mechanism expense
figures in future years as well.
The functional definition of the Federal Reserve's payments
mechanism participation (outlined in Figure 1 on pages 4 and 5) must,
of course, serve as the kernel of any program for expense determination.
Therefore, the first step in arriving at total net payments
mechanism expense is the calculation of the total net expense charged
to each function and unit included in the four major functional categories.
Net Federal Reserve Expense for a function is defined to be
the difference between the two items:
Total Expense (Undistributed)
and Memorandum - Reimbursements and Recoveries as expensed in the
Functional Expense Report.
This statistic thus represents the true
(net) functional operating expense to the Federal Reserve since it
excludes any reimbursements received for services originally expensed
to that function.
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Federal Reserve Bank of St. Louis
Net Federal Reserve Expense charged to each
-33functional category is the sum of the Net Federal Reserve Expense
statistics as determined for each function and unit included in that
category.
Table II lists these total figures for the Federal Reserve
System in 1969.
One should note, however, that the Functional Expense Report
does not break down the Miscellaneous Activities expense units of the
Fiscal Agency function as does the definition of Figure 1.
The non-
reimbursable miscellaneous activities the Federal Reserve performs
for the Treasury and for the Federal Deposit Insurance Corporation
are included in Category B.
On the other hand, all reimbursable
miscellaneous activities the System conducts for the Treasury and for
other Federal Government departments and agencies are included in
Category D.
Therefore, a special approach must be taken in order to
expense as accurately as possible the reimbursable and nonreimbursable
components of the Miscellaneous Activities units.
charged for the amount listed under Deduct:
Category Bis
Nonreimbursable Expense
for both the Treasury and Other Government Departments and Agencies'
Miscellaneous Activities.
Category Dis charged for the amount listed
in the Adjusted Total Expense column minus Memorandum-Reimbursements
and Recoveries.
The rationale for this approach is obviously based
upon the assumption that reimbursements and recoveries are made only
for reimbursable activities.
Table III lists Net Federal Reserve Expenses for each
function and unit included in the payments mechanism.
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Federal Reserve Bank of St. Louis
The reader
-34TABLE II
NET FEDERAL RESERVE EXPENSE_!/
CHARGED TO EACH MAJOR EXPENSE CATEGORY IN 1969
All 'Figures are System Totals
Category A:
Functions Included in the Payments Mechanism
$111,168,777
Category B:
Functions Excluded from the Payments Mechanism
26,669,777
Category C:
Functions Distributed as Burden to A and B
136,903,121
Category D:
Reimbursable Fiscal Agency Units
Total All Functions
213,924
$274,973,608
1/ Net Federal Reserve Expense=
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Federal Reserve Bank of St. Louis
Total Expense (Undistributed) minus Memorandum-Reimbursements
and Recoveries for each function and unit listed in the
Functional Expense Report.
-35TABLE III
NET FEDERAL RESERVE EXPENSES l_/
FOR PAYMENTS MECHANISM FUNCTIONS IN 1969
All Figures are System Totals
Currency and Coin
Check Collection
Accounting
Transfers of Funds only
Emergency Operations
Other Preparations only
Federal Reserve Note Issues
Fiscal Agency
Treasury Department
Government Checks
Currency Verification:
F.R. Currency
Post Office Department
Money Orders only
Other Govt. Depts. and Agencies
Food Stamp Program Processing
Total:
Before Burden Allocation
(Direct Cost)
$30,751,536
52,602,342
1,995,899
238,611
22,374,943
1,515,582
746,317
540,147
403,400
111,168,777
Category C Expenses Distributed as
Burden to Category A:
Protection and Vault Maintenance
Assessment for Board of Governors
Other Category C Expenses
Distributed as Burden to
Category A
83,185,346
Total Category C Expenses
Distributed as Burden to
Category A (Indirect Cost)
94,343,238
Nonreimbursable Category D Expenses
Distributed as Burden to Category A
Total:
1,/
After Burden Allocation
(Total Cost)
10,118,234
1,039,658
196,467
205,708,482
Net Federal Reserve Expense= Total Expense (undistributed) minus
Memorandum--Reimbursements and Recoveries for each function and unit
listed in the Functional Expense Report. All figures are System totals.
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Federal Reserve Bank of St. Louis
-36should note that the figure denoted Total:
Before Burden Allocation
in Table III is the same as the Net Federal Reserve Expense figure
for Category A in Table II.
Both statistics, of course, must be
identical as they both represent total net Category A expense for the
Federal Reserve System.
To develop realistic total payments mechanism expenses for
the System, an appropriate portion of net overhead (nonreimbursed
expenses of Category C and of Category D) must be added to the direct
Total:
Before Burden Allocation figure listed in Table III.
The
"appropriate portion" is determined by multiplying each functional
component of burden expense by an appropriate distribution ratio.
Table III lists these portions of burden actually distributed to the
payments mechanism.
Total:
These portions (Indirect Costs) are added to
Before Burden Allocation (Direct Cost) to produce Total:
After Burden Allocation (Total Cost) which represents the realistic
total payments mechanism operating expense for the Federal Reserve in
1969.
This figure ($205,708,482) represents the approximate amount
the Federal Reserve System, as a whole, would not have spent (neglecting any savings arising from elimination of Federal Reserve Check Float)
if it could have eliminated all its payments mechanism operations and
the essential overhead support for the entire year of 1969.
Following reasoning analogous to that given above, one can
develop realistic total expense figures for Category B functions by
adding the complement of each "appropriate portion" of overhead to the
Category B expense given in Table II.
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Federal Reserve Bank of St. Louis
These complementary burden
-37portions (totaling $42,705,450) are added to System Category B expense
($26,669,777) to arrive at the realistic total operating expense for
the non-payments mechanism activities of the Federal Reserve in 1969.
This final figure ($69,375,227) could be thought of as representing
the total expenses of the Federal Reserve System if its payments
mechanism operations and their overhead support had been completely
eliminated for the entire year of 1969.
The ratios actually used to develop the 1969 burden figures
for nonreimbursed Category D expense and the expenses of all Category C
functions and units except for Protection and Vault Maintenance (a unit
of the General Services function) and Assessment for Expenses of Board
of Governors (a major component of the General Overhead function) are.
the employee ratios of Table IV.
The ratios of Table V are used to
allocate Protection and Vault Maintenance; and the ratios of Table VI
are used for distribution of Assessment for Expenses of Board of Governors.
The derivation and application of each of these ratios are discussed in
some detail below.
ALLOCATION USING EMPLOYEE RATIOS
The employee ratios of Table IV give the fraction of employees
;in each of Category A and B to the total number in functions included
in Categories A and B combined.
Multiplying these ratios by the
expense charged to an overhead function, such as Personnel, one can
split the function's expense into two components:
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Federal Reserve Bank of St. Louis
one for addition
-38TABLE IV
EMPLOYEE RATIOS FOR ALLOCATION OF EXPENSES OF
FUNCTIONS ASSIGNED TO CATEGORY C
[To Category A: Col.(4); to Category B: Col.(5)]
(2)
(3)
(4)
(5)
Federal Reserve
Bank or Branch
a*
(employees)
b**
(employees)
a
a+b
b
a+b
Boston
New York
Philadelphia
Cleveland
494.68
1,340.42
350.85
202.84
143.33
789.24
123.00
113. 62
. 775
.629
. 740
. 641
.225
.371
.260
.359
Richmond
Atlanta
Chicago
St. Louis
257.93
131.82
1,033.32
197.40
83.57
73.52
177.88
90.17
. 775
.642
.853
.686
.245
.358
.147
. 314
Minneapolis
Kansas City
Dallas
San Francisco
268.38
173 .32
159.95
198.86
79.02
68.36
59.38
106.43
. 773
. 717
. 729
.651
.227
.283
.271
.349
Buffalo
Cincinnati
Pittsburgh
Baltimore
100.89
134. 81
133. 81
149.57
6.39
15.24
18 .39
13.52
.940
.898
.879
. 917
.060
.102
.121
.083
Charlotte
Birmingham
Jacksonville
Nashville
150.07
65.27
150.05
61.33
12.16
8.37
8. 72
6.06
.925
.886
.945
.910
.075
.114
New Orleans
Detroit
Little Rock
Louisville
96.66
218.78
46.44
67.17
11. 99
28.14
9.36
4. 93
.890
.886
.832
.932
.168
.068
Memphis
Helena
Denver
Oklahoma City
48.85
24.52
83.06
69.74
8.85
2.97
12.63
9.90
.847
.892
.868
.876
.153
.108
.132
.124
0'11B.ha
El Paso
Houston
San Antonio
59.63
31.35
88.55
75.88
8.93
2.81
10.46
6.35
.870
.918
.894
.923
.130
.082
.106
.077
Los Angeles
Portland
Salt Lake City
Seattle
318 .so
83.96
59.87
122.44
18.73
5.78
5.06
3.87
.944
.936
.922
.969
.056
.064
.078
.031
SYSTEM TOTALS+
7,256.52
2,147.13
. 772
.228
( 1)
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Federal Reserve Bank of St. Louis
.055
.090
.110
.114
-39NOTES EXPLAINING THE STATISTICS OF TABLE IV
*a
= Total
average number of employees in the functions and units
included in Category A (payments mechanism).
**b _ Total average number of employees in the functions and units
included in Category B (those excluded from the payments mechanism).
The average number of employees in each function and unit is
reported in the Functional Expense Report as directed by the Accounting
Manual which states on page 104:
This statistic is intended to show the number of employees
(except those on leave without pay) assigned to the work
of a particular function and unit, whether present or not,
during the report period averaged to reflect a result in
terms of full-time assignments. Except in cases of continuing
full-time assignments to one unit, this figure should be
obtained by dividing the sum of the regular work hours
prorated to a given unit during the report period by the
number of regular hours one employee who was assigned full
time to the unit would have worked during the whole report
period. Where the resulting figure is not a whole number,
the fraction should be expressed as a two-place decimal.
+ Columns may not add to exact system totals due to rounding.
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Federal Reserve Bank of St. Louis
-40TABLE V
RATIOS FOR ALLOCATION OF THE EXPENSE OF PRCYrECTION All(J) VAULT MAINTENANCE
[to Category A: Col. (4); to Category B: Col. (5)]
(1)
Federal Reserve
Bank or Branch
(2)
% of Total Vault
Space Devoted to
Storage of Currency
& Coin (Jan 31, 1967)
(3)
(4)
(5)
% of Total Vault
Space Devoted to
Storage of Securities
(June 1, 1967)
(2)
(2)+(3)
(3)
(2)+(3)
Boston
New York
Philadelphia
Cleveland
26.23
17.66
15.30
10.88
2.45
8.63
4.03
o. 70
.91
. 67
.79
. 94
.09
. 33
.21
.06
Richmond
Atlanta
Chicago
St. Louis
29.03
,6. 79
10.79
10.42
1.93
1. 28
1.29
1.31
. 94
. 84
. 89
. 89
.06
.16
. 11
Minneapolis*
Kansas Cityi\'
Dallas
San Francisco
8.98
21. 87
10.62
12.84
2.04
5.06
1.80
0.62
. 81
. 81
. 85
. 95
.19
. 19
.. 15
Buffalo
Cincinnati*
Pittsburg
Baltimore
32. 71
16. 91
15.36
9.17
0.01
2.15
3. 82
0.97
. 996
. 89
. 80
. 90
Charlotte
Birmingham
Jacksonville
Nashville
32.38
13. 78
17.63
28.15
1.00
1. 54
1.50
3.18
. 97
.90
. 92
.90
. 03
. 10
.08
. 10
New Orleans
Detroit
Little Rock
Louisville
16.25
14. 79
10.84
22.61
1.06
2. 71
1.57
o. 51
. 94
. 84
. 87
.98
. 06
.16
. 13
. 02
Memphis*
Helena
Denver*
Oklahoma City
19.78
59.17
37. 65
9.54
1.45
0.01
2.34
. 93
. 999
. 83
. 80
. 07
. 001
. 17
.20
Omaha
El Paso
Houston
San Antonio
15.06
10.37
18.64
7. g5
3.40
o. 74
1. 85
8.01
. 82
. 93
.91
. 49
.18
. 07
. 09
. 51
Los Angeles
Portland
Salt Lake City
Seattle
11. 65
o. 79
SYSTEM TOTAL
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Federal Reserve Bank of St. Louis
7. 72
. 11
.OS
. 004
. 11
.20
.10
16. 78
11. 95
0.60
0.45
0.48
. 94
.94
. 97
. 06
. 06
. 03
. 96
. 04
14.50
2.21
. 87
. 13
9.94
-41NOTES ON TABLE V
* Vault space at the Kansas City Bank has been expanded from 23,806
to 88,512 cubic feet since the vault study of 1967.
In addition,
a new 252,504 cubic foot vault has replaced Denver's old vault of
10,183 cubic feet.
However, since three-fourths of this new vault
space is used for national defense purposes, only about one-fourth
is available for general branch use.
Because of lack of current
data on vault space utilization, this current study assumes that the
percentages of total vault space devoted to currency and coin and to
securities for this Bank and Branch are the same as indicated by the
1967 study.
**Minneapolis, Cincinnati, and Memphis currently have new vaults
under construction.
The new vault being constructed at the Miami
Branch will, of course, increase the total vault space of the Sixth
District.
A vault available for Federal Reserve use is also being
constructed in San Juan, P.R.
Vaults are in various stages of
planning in Boston, Richmond, Pittsburgh, and Houston.
Future cost
studies should note the effects of these changes in order to appropriately allocate Protection and Vault Maintenance.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-42TABLE VI
RATIOS FOR ALLOCATION OF
ASSESSMENT FOR EXPENSES OF BOARD
OF GOVERNORS
Fraction of expense distributed to:
Category A
.0690
Category B
. 9310
1.0000
NOTE:
Assessment For Expenses of Board
of Governors is an expense item
included in the Category C function
General Overhead in the Functional
Expense Report.
-43to Category A and the other for addition to Category B expenses.
These
ratios thus enable one to allocate a fraction of overhead expenses to
Category A equal to the ratio of the number of employees in Category A
to the total number in Categories A and B (Col. 4 of Table IV).
Similarly, the second expense component is the same fraction of total
function expense as the fraction of employees assigned to Category B
functions is to the total number in Categories A and B together (Col. 5
of Table IV).
The employee ratios derived from employee data in the 1969
Annual Report edition of the Functional Expense Report are the ones
listed in Table IV.
The ratios could be easily rederived for future
studies using the average employee data from future Functional Expense.
Reports, but, for at least several years, would not differ greatly
from the 1969 ratios unless radical changes in the personnel structure
of the Federal Reserve were to occur.
For this reason and for simplicity,
any cost projections niade in the near future could justifiably utilize
the 1969 employee ratios for burden allocation instead of ratios based
upon predictions of future personnel data.
The 1969 ratios are also
used in the compilation of Federal Reserve payments mechanism expense
figures for• 1966, 1967, and 1968 which are presented in the next section.
The functions allocated according to employee ratios are
General Overhead (all except Assessment for Expenses of Board of
Governors), Provision of Space, Personnel, Furniture and Equipment,
General Services (all except Protection and Vault Maintenance),
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Federal Reserve Bank of St. Louis
-44Stock of Supplies, Accounting (all except Transfers of Funds), Planning,
Emergency Operations (Security Files only), Legal, Auditing, and Research,
Public Information, and Bank Relations (all except Monetary and Economic
Studies).
Moreover, in the future, Data Processing (treated as a separate
function in the Functional Expense Report for the first time in 1970) and
the proposed new function Data Systems Support should also be distributed
according to employee ratios.
Employee ratios are generally appropriate means for allocation of Category C functions for two important reasons.
First, employee
ratios are easy to derive because no complicated numerical relationships are involved, and because the total average number of employees
assigned to each function and unit is listed in the Functional Expense
Report.
In addition, since this report is compiled each calendar
quarter, reasonably current employee statistics are available at all
times.
Therefore, up-to-date employee ratios could always be easily
compiled and used for allocation of overhead expense if this proves
necessary in future years.
The specific rationale for allocation of each of the above
overhead functions by employee ratios is stated below.
Justification
for the special treatment given Assessment for Expenses of Board of
Governors and Protection and Vault Maintenance is also presented in
some detail.
The function Personnel is normally distributed to direct
expense totals using employee ratios.
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Federal Reserve Bank of St. Louis
The justification for this
-45practice rests on the assumption that expenses incurred performing
personnel services are, on the average, equal for every employee
regardless of his particular job function.
This assumption should
apply to the personnel activities of the Federal Reserve as well as
to those of completely private organizations.
Therefore, Personnel
expenses are distributed to payments mechanism and to non-payments
mechanism expense totals by applying the employee ratios of Table IV.
Of course, the amount of expense incurred by the Federal
Reserve in performing a particular function might be totally independent
of any employee relationship.
For example, none of the three expense
units of Provision of Space (Housekeeping, Maintenance and Operation,
and Administration and Other) can be very successfully correlated with
an average number of employees statistic.
Allocation according to
ratios computed from the actual floor space used performing the various
functions would seem to be a more appropriate method for these expense
units.
However, information on how much Bank floor space is currently
devoted to each function and unit is not now available.
In any case,
the error resulting from distribution of Provision of Space according
to employee ratios could not possibly be greater than 10 per cent (and
is probably less than 1 per cent) of total expense simply because of
the relative size of the figures being allocated as compared to total
functional expense in 1969.
For these reasons, Provision of Space is
distributed according to the employee ratios of Table IV.
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Federal Reserve Bank of St. Louis
-46A significant portion of the total expenses of several
Category C functions (such as Stock of Supplies and Data Processing
in 1970), are distributed elsewhere by the Functional Expense Report.
These distributions are accepted as given for the purposes of this
study.
Expenses of other functions could be likewise distributed on
the basis of the actual aid they perform for other functional areas.
For example, the expenses of the Legal function could be expensed to
the functions whose operations are the subject of legal questions and
controversy.
Similar direct distribution programs could be developed
for the functions Planning; Auditing; Furniture and Equipment; General
Service; Research, Public Information, and Bank Relations; Data Processing; and Stock of Supplies.
However, such methods require detailed
information which is not now available on a uniform basis (except for
the Protection and Vault Maintenance unit of General Services which is
indeed treated separately).
Moreover, the time and money devoted to
each functional area can vary greatly from year to year - thus distorting current cost figures and interbank comparisons.
For instance, the
legal staff of one Bank might spend six to eight months on a complex
issue concerning check clearing while another Bank's Legal Department
might very well devote almost no time to this area.
Distribution of
these overhead expenses according to relatively stable employee ratios
may be less elegant than more direct methods, but this procedure does
provide for cross-District comparisons and time series analyses.
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Federal Reserve Bank of St. Louis
-47Therefore, perhaps the gross approximation implying a direct correlation between total function expense and the relative number of payments
mechanism employees which is inherent when one uses employee ratios
for cost distribution is indeed defensible.
As noted above, this study does develop special ratios for
allocating the expense of Protection and Vault Maintenance and Assessment for Expenses of Board of Governors.
Discussion of the derivation
of those ratios and justification for their use follow.
ALLOCATION OF PROTECTION AND VAULT MAINTENANCE
The expenses of Protection and Vault Maintenance are allocated as burden to Categories A and Bon the basis of actual space
devoted to currency and coin and to securities, as reported in the
"Report of Study of Vault Space at Federal Reserve Banks and Branches"
by the Division of Bank Operations (June 1, 1967).
Allocation .to Category A (payments mechanism functions)
and to Category B (functions excluded from the payments mechanism) is
accomplished by means of the ratios in Table V.
Column (4) in this
table consists of the ratios for distribution to Category A and
Column (5) _consists of the ratios for distribution to Category B.
Columns (2) and (3) are calculated using the equations of Figure 2
which draw on information from Tables II and III of the 1967 Vault
Study.
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Federal Reserve Bank of St. Louis
holdings of coin (Jan. 31, 1967)
maximum space available
under desirable conditions
(for coin)
(2)
maximum space available
un<ler desirable conditions
(for coin)
•
total vault space
maximum space available
under desirable conditions
(for currency)
holdings of currency (Jan. 31, 1967)
maximum space available
under desirable conditions
(for currency)
total vault space
I
= holdings of coin (Jan. 31, 1967)
and currency
+"
00
-
(2)
I
total vault space
maximum space available
under desirable conditions
(for securities)
oldings of securities as stated
in the Vault Study dated
June 1 1967
maximum space available
under desirable conditions
(for securities)
(3)
total vault space
= holdings of securities as stated
in the Vault Study dated
June 1 1967
-
(3)
total vault space
FIGURE 2:
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Federal Reserve Bank of St. Louis
+
Equations used to develop Columns (2) and (3) of Table V
-49Table III in the vault study report shows actual holdings
as a percentage of maximum holdings under "desirable conditions."
These capacities are determined by "trading-off" the relative
benefits of the effective use of vault space against the constraints
of operating efficiencies and security requirements.
The method described above for allocating the expenses of
Protection and Vault Maintenance, although certainly not perfect,
appears to be the most optimum for the purposes of this study.
This
method is tractable and based on reasonably current figures giving
the actual utilization of vault space at the Banks and Branches.
One must note, however, that for the Federal Reserve System
as a whole, only about one-fourth of total vault space is available
for actual storage (and only about 17 per cent is actually used).
The other 75 per cent is devoted to aisles, working areas, and volume
lost within actual storage areas due to non-Inca-vault stacking procedures and other limitations.
Moreover, space assigned to the
storage of securities accounts for only 13 per cent of total vault
space available for storage under "desirable conditions," but space
needed for handling securities within the vaults accounts for a much
larger percentage of total vault space.
This is true because relatively
large working areas within a vault are generally required for cutting
coupons and other servicing of the securities without removing them
from the vault.
For the above reason, the ratios based upon actual space
utilized for storage of currency and coin and of securities are
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Federal Reserve Bank of St. Louis
-50biased toward currency and coin.
expenses will be overstated.
It appears that final Category A
However, considering Federal Reserve
Note Issues as the principal Category A function requiring the services
of a vault and of a security department, and, similarly, considering
Safekeeping of Securities as the principal Category B function requiring these services, one can justify somewhat allocation by the
vault utilization ratios of Table V.
In 1969, for the Federal
Reserve System as a whole, the total expenses charged to Safekeeping
of Securities was $2,896,150, or 12.9 per cent of the $22,422,359
charged to Federal Reserve Note Issues.
Likewise, in 1968, the total
expense charged to Storage of Securities was $2,657,254, or only
12.8 per cent of the $20,722,855 charged to Federal Reserve Note Issues.
These average figures compare very favorably with the previously
mentioned vault utilization percentages which show that, on the average,
space required for securities storage amounts to only 13.3 per cent
of total vault space used.
Therefore, in this case, the vault
utilization ratios seem to be more accurate for allocation of expenses
than simple employee ratios.
This can be readily seen since more than
ten times as many employees were assigned to the less costly Storage
of Securities than were assigned to Federal Reserve Note Issues in
1968 and in 1969.
Of course, most of the expense of the Federal
Reserve Note Issues function was and is incurred purchasing the
Federal Reserve Notes from the Treasury.
However, one must still
feel that if he used the employee ratios, he would understate the true
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Federal Reserve Bank of St. Louis
-51cost of the payments mechanism to the Federal Reserve.
The additional
computation described above is justified therefore if it will contribute
to more accurate final expense figures.
ALLOCATION OF ASSESSMENT FOR EXPENSES OF BOARD OF GOVERNORS
The twelve Districts are charged for the expenses incurred
by the Board of Governors of the Federal Reserve System.
According to
the "Statement of Assessments and Expenses for the Year Ended
December 31, 1969,"* the Banks were assessed a total of $15,067,500
that year.
This report also stated that 1969 expenses for the Board
were $14.947 million.
Budgeted expenses for the Division of Federal
Reserve Bank Operations were $1.032 million in 1969 or 6.90 per cent
of total Board expenses.
For the purposesof this study, the activities of the Division
of Federal Reserve Bank Operations are assigned to Category A and all
the activities of the remaining divisions of the Board are included in
Category B.
Thus, for each Bank and Branch, 6.90 per cent of its
Assessment for Expenses of Board of Governors (an expense item included
in the function General Overhead in the Functional Expense Report)
is distri~uted to Category A.
The remaining 93.10 per cent of this
Category C item is distributed as burden to Category B.
(See Table VI.)
*"Statement of Assessments and Expenses for the Year Ended
December 31, 1969," 56th Annual Report, Board of Governors of the Federal
Reserve System, released May 7, 1970, p 323.
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Federal Reserve Bank of St. Louis
-52The justification for use of these ratios is obviously founded
on two rather coarse assumptions:
that the Division of Federal Reserve
Bank Operations is on°Iy concerned with payments mechanism operations
and that no other divisions of the Board are in any way involved in
this area.
Of course, neither of these assumptions is completely
valid.
The first assumption disregards the fact that the Examination
and Audit of Federal Reserve Banks (Field Examinations and Reports
Review Sections) of the Division of Federal Reserve Bank Operations is
not concerned with and should not theoretically be expensed to the
payments mechanism.
Also, all sections of this division concerned with
commercial paper, discount rates, and regulation thereof (note the
Discount Operations Section) should also be expensed as a part of
Category B.
The Cash and General Books, Special Studies, and Operations
Analysis Sections, however, are all greatly concerned with the Federal
Reserve's role in the payments mechanism.
One must also note that other divisions do perform some
payments mechanism-related functions.
For example, legal problems
arising from the application of Regulation J (dealing with clearing
and collection of checks by Federal Reserve Banks) are handled by and
thus contribute to the expenses of the Board's Legal Division.
Other
divisions (such as Administrative Services, Personnel Administration,
Data Processing, Office of the Secretary, and Office of the Controller)
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Federal Reserve Bank of St. Louis
-53as well as the Governors, themselves, also serve in overhead capacities,
and perhaps their expenses should be distributed as burden to Categories
A and B.
Since the above divisions are totally expensed to Category B,
(as are Research and Statistics, International Finance, and Supervision
and Regulation) there seems to be a definite bias understating the FRS's
cost for participating in the payments mechanism.
However, this bias
is somewhat counterbalanced by the addition of the Division of Federal
Reserve Bank Operations' total expenses to Category A - tending to
exaggerate payments mechanism costs.
Because of the small relative size
of this division (with respect to budget), the inclusion of all its
sections - whether or not directly concerned with the payments mechanism may not completely counterbalance the lack of the also small overhead
which would otherwise be credited to Category A.
However, in order to
allocate by any significantly more accurate method, the entire cost
structure of the Board of Governors would have to be closely analyzed
with emphasis on areas dealing with the payments mechanism.
Thus,
allocation of 6.90 per cent of the assessments for Expenses of Board of
Governors to Category A expenses and 93.10 per cent to Category B expenses
does seem·to be a reasonable method for distributing this element of
burden.
However, a detailed analysis of payments mechanism - related
activities and expenses of the Board of Governors would be an interesting
and important topic for more detailed investigation.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-54TABLE VI
RATIOS FOR ALLOCATION OF
ASSESSMENT FOR EXPENSES OF BOARD
OF GOVERNORS
Fraction of expense distributed to:
Category A
.0690
Category B
. 9310
1.0000
NOTE:
Assessment for Expenses of Board
of Governors is an expense item
included in the Category C function
General Overhead in the Functional
Expense Report.
-55ALLOCATION OF THE REMAINING CATEGORY C UNITS
The remaining Category C expense units -- General Overhead;
the General Books, Bank Accounts, and Expenditures units of Accounting;
and the Security Files unit of Emergency Operations -- are considered
as indirect overhead costs and therefore should be distributed according to some generally accepted accounting technique.
For this reason,
these remaining Category C units are also allocated to payments
mechanism and to non-payments mechanism expenses according to employee
ratios.
ALLOCATION OF NONREIMBURSED CATEGORY D EXPENSES
Category D consists only of the Fiscal Agency units which
are reimbursable by the U. S. Treasury and which must, therefore,
be excluded from any calculation of net Federal Reserve System
expenses.
(The reimbursements must, of course, be included in any
determination of the Executive Branch's payments mechanism participation expense.)
However, all the expenses charged to these reimbursable
units are not recovered.
For the entire Federal Reserve System in
1969, $231,924 or 1.2 per cent of the $19,243,312 expensed to these
Treasury reimbursable Fiscal Agency units were not recovered.
This
discrepency occurs simply because (as is noted on page 208 of the
Accounting Manual) expenses charged to reimbursable units need not
necessarily be confined to amounts reimbursable.
Nonreimbursable
expense includes charges for sick leave beyond 90 days, for extra
audits beyond those approved or specified by the reimbursing agency,
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Federal Reserve Bank of St. Louis
-56and for use of .Bank-owned or rented computers and related equipment
for purposes such as program testing.
This $231,924 not recovered nrust indeed be included in net
Federal Reserve System expenses for 1969.
The surplus or deficiency
in reimbursements and recoverie~ for Category D expenses for each
Bank and Branch is therefore distributed to Category A {payments
mechanism) and to Category B (direct functions not included in the
payments mechanism).
The employee ratios of Table IV are once more
used for this purpose because of the ease of derivation of these
statistics and the ease of implementation of this generally accepted
technique.
OVERHEAD ALLOCATION FOR THE CULPEPER FACILITY
Note that in 1969, Culpeper, involved in start-up operations,
was not charged for any function included in either Category B or D.
The only payments mechanism functions charged were Federal Reserve
Note Issues ($5,023) and Emergency Operations - Other Emergency
Preparations ($29,357).
Culpeper will be payments mechanism-oriented
in the future, as well, since future operations will center around the
wire connnunications center and the large amounts of currency to be
stored there in case of national emergency.
Category C expenses for Culpeper in 1969 were mainly for
General Overhead ($79,578), Provision of Space ($130,533), Furniture
and Equipment ($176,277), and Protection and Vault Maintenance
($123,215) which together accounted for $509,603 or 80.6 per cent of
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Federal Reserve Bank of St. Louis
-57the expenses credited to this category.
These expenses were incurred
mainly in the start-up activities required to establish Culpeper as
an operating component aiding the Fifth District in its future payments
mechanism participation.
For this reason, all of Culpeper's 1969
overhead or Category C expenses are allocated to the payments mechanism
and none to
Category B.
A FINAL NOTE ON COMPUTATIONAL ACCURACY
Before proceeding to the concluding section, the reader
should note that the expenses for each of the four major definitional
categories represent direct totals of data in the Functional Expense
Report.
Therefore, the Total:
Before Burden Allocation figure of
Table III and the analogous figure for Category B expenses are as
accurate as the constraints (discussed in Section One) imposed by
the functional definition allow.
The same cannot be said for the Total:
Allocation figures.
After Burden
Theoretically, the sum of the Total:
After
Burden Allocation payments mechanism expense figure for the entire
System given in Table III and Total:
After Burden Allocation for
Category B expenses should equal the Total All Functions figure in
Table II; in other words, they both represent the entire net expense
to the Federal Reserve System for all its 1969 activities.
of the System-wide payments mechanism Total:
and the System-wide Category B Total:
After Burden Allocation
After Burden Allocation figures
for 1969 is $275,083,709 ($205,708,482 + $69,375,227).
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Federal Reserve Bank of St. Louis
The sum
However, Net
-58-
Federal Reserve System Expense as listed for Total All Functions in
Table II is only $274,973,608 or $110,101 less than the sum of
System-wide Category A and Category B expenses.
This statistically insignificant discrepency (four hundredths
of one pe:· cent) simply results from the rounding process used in
developing the employee and vault utilization ratios used for burden
distribution.
As explained in the foregoing text, these ratios are
derived from data accurate to only three significant figures.
this reason, the Total:
For
After Burden Allocation figures are only
accurate to three significant figures as well.
This situation is not
really too bad considering the somewhat coarse assumptions made in
order to use the employee ratios for allocation of several of the
overhead components and in order to employ the vault utilization
ratios for allocation of Protection and Vault Maintenance.
For the above reason, the program presented in this section
does not generate totals "accurate to the dollar".
However, accuracy
to a minimum of three significant figures obviously does provide for
meaningful comparisons of gross payments mechanism and non-payments
mechanism expenses.
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Federal Reserve Bank of St. Louis
-59SECTION FOUR
SUMMARY AND CONCLUSIONS
By studying Tables III and IV, (the figures developed in
the preceding section in a manner consistent with the definition in
the first section,) one can gain a proper perspective of the current
cost to the Federal Reserve for its participation in America's payments
mechanism,
These tables graphically show the relative importance
of the various payments mechanism activities depicted in the second
major section of this paper.
In 1969, the total net payments mechanism
operation expense ($205,708,482) was 74.8 per cent of the total net
expense ($274,973,608) of the Federal Reserve System.
In other words,
payments mechanism expense was three times as large as non-payments
mechanism expense.
Neglecting burden, the $111,168,777 payments
mechanism (Category A) expense was more than four times as great as
was the $26,669,777 non-payments mechanism (Category B) expense in
1969.
Ore should also note that, for the System in 1969, the two
functions Currency and Coin and Check Collection alone
cost $83,353,878
(7 5. O per 'cent of Category A expense and 30. 3 per cent of total net
expense for all functions).
For the 24 Branches as a group, Currency
and Coin and Check Collection were even relatively more important
as these functions accounted for $28,467,344 or 44.6 per cent of the
$63,770,370 total net expense incurred for all functions.
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Federal Reserve Bank of St. Louis
-60The statistics of Table VII also serve to indicate this
importance of the Currency and Coin and Check Collection units relative to those of other payments mechanism functions.
The volume of
checks processed in 1969 was tremendously large--1.369 billion City
checks, 5.132 billion Country checks, and 64.98 million Return Items.
In addition, 5.720 billion pieces of currency were sorted and counted
as were 12.421 billion of coin.
The System volume totals for the
remaining payments mechanism components are not so impressive.
More-
over, the average number of employees assigned to all Check Collection
and Currency and Coin expense units together, except for the completely
reimbursed Wrapping Coin unit, was 6,495.43 or 89.5 per cent of the
total number assigned to all payments mechanism operations.
Thus, the
fact that salary cost as a percentage of total cost for the high
man-hour currency, coin, and check operations was generally lower than
for the other payments mechanism functions (the notable exception being
Federal Reserve Note Issues) gives added weight and meaning to the
above volume figures.
Therefore, any significant improvement in the
efficiency of Currency and Coin or Check Collection operations will
also have a significant effect upon the future level of total Federal
Reserve expenses.
Any operational efficiencies in the other payments
mechanism functional areas (Transfers of Funds, Other Emergency Preparations,
Federal Reserve Note Issues, Government Checks, Currency Verification: F. R.
Currency, Currency Verification: Treasury Currency, Money Orders, and
Food Stamp Program Processing) will tend to have much less overall effect.
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Federal Reserve Bank of St. Louis
-61TABLE
VII
1969 COST STATISTICS FOR PAYMENTS MECHANISM FUNCTIONS
All Figures are System Totals
F unction or Unit as
Expensed in the
Functional Exeense
Reeort
Volume
(millions
of items)
Currency Sorting
and Counting
5,720.
12,421.
Coin Sorting
and Counting
Wrapping Coin
All Other (Currency
and Coin)
Average
Number
of
Employees
1.009
(rolls)
-
Total
(undistributed)
Expense
Net Expense
to
F.R.
918. 40
$6,379,448
$6,379,448
120.76
1,061,603
1,061,603
63.32
807,823
983.70
23,967,921
23,453,279
(142, 792)
City Checks
1,369.
605.41
6,295,769
6,295,769
Country Checks
5,132.
3,675.50
44,639,387
44,639,387
191. 66
1,667,186
1,667,186
253. 73
1,995,899
1,995,899
Return Items
64.98
Accounting:
Transfers of Funds
only
6,661
Emergency Operations:
Other Preparations
only
-
14.47
238,611
238,611
Federal Reserve
Note Issues
-
27.37
22,374,943
22,374,943
Government Checks
575.1
183.73
1,515,582
1,515,582
Currency Verification:
F.R. Currency
863.2
87.98
746,317
746,317
Money Orders
187.1
68.63
540,147
540,147
Food Stamp Program-Processing only
519.4
62.05
404,530
403,400
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Federal Reserve Bank of St. Louis
i
-62TABLE VII
1969 COST STATISTICS FOR PAYMENTS MECHANISM FUNCTIONS
(continued)
All Figures are System Totals
Function or Unit as
Expensed in the
Functional ExEense
ReEort
Currency Sorting
and Counting
Coin Sorting
and Counting
Salary Cost
Per 1000 Items
$
Salary Cost as
a Per Cent
of Total Cost
Total Cost
Per 1000 Items
o. 92
$
0.058
1.12
0.085
82.1%
!
68.2
I
Wrapping Coin
0.003
0.008
!
37.5
I
All Other (Currency
I
--
--
City Checks
3.32
4.60
Country Checks
4.49
8.62
52.1
18. 92
25.66
73.7
234.00
300.00
78.0
and Coin)
Return Items
Accounting:
Transfers of Funds
only
29.9
i
I
I
72.2
Emergency Operations:
Other Preparations
only
--
--
54.7
Federal Reserve
Note Issues
--
--
11.1
Government Checks
1. 89
2.64
71. 6
Currency Verification:
F.R. Currency
0.26
0.35
74.3
-
I
Money Orders
2.08
I
I
i'
I
2.89
Source:
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Federal Reserve Bank of St. Louis
i
I
80.0
i
I
0.625
I
I
I
Food Stamp Program-Processing only
I
0. 778
Functional ExEense ReEort (Annual 1969)
Board of Governors of the Federal Reserve System
I
I
I
80.3
-63One should also note that the expense figures of Table III
actually understate the true c'ost to the Federal Reserve System for
its Check Collection activities and therefore for its payments
mechanism participation.
To these "handling" or "operating" expenses,
one must add a major economic opportunity cost which results from
the existence of Federal Reserve Float.
This non-interest-bearing
net asset (Cash Items in Process of Collection minus Deferred Availability Cash Items) of the Federal Reserve System had an average
daily value of $2,577 million in 1969.
Policy changes directed toward
the elimination of Federal Reserve Float therefore would tend to
reduce the true cost of the payments mechanism to the System.
The fact that there really is a pressing need to reevaluate
current payments mechanism operations and to institute procedural and
policy changes is evident upon examination of Tables VIII and IX.
The annual net expense of all payments mechanism functions increased
27.2 per cent between 1966 and 1969.
Percentage increases in the
volume of operations were almost as great.
In fact, when one adjusts
for inflation (the Consumer Price Index rose 16.2 per cent and the
Wholesale Price Index rose 10.2 per cent between 1966 and 1969), the
percentage volume increases become greater than the adjusted percentage
expense increases over this three year period.
Therefore, for the
System as a whole, rather large expense increases for payments mechanism
operations cannot be attributed to wide-spread lapses in the management
or conduct of operations at the Banks and Branches.
In fact, overall
unit costs in real (1958) dollars decreased in the late sixties in
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Federal Reserve Bank of St. Louis
-64TABLE VIII
NET FEDERAL RESERVE EXPENSE* FOR
PAYMENTS MECHANISM FUNCTIONS, 1966-69
Function
1966
1967
1968
1969
$25,108,843 $26,673,281 $28,676,739 $30,751,536
·currency and Coin
38,205,099 45,926,182 46,511,667 52,602,342
Check Collection
Accounting
1,995,899
~
Transfers of Funds only
1,460,210
1,728,354
1,317,447
Emergency Operations
238,611
Other Preparations only
189,986
193,448
206,785
Federal Reserve Note Issues
20,365,467 19,023,925 20,722,855 22,374,943
Fiscal Agency
Treasury Department
1,293,282
1,515,582
Government Checks
1,206,767
1,397,070
Currency Verification:
522,911
652,849
746,317
F.R. Currency
271,588
Post Office Department
540,147
Money Orders only
564,099
523,774
533,764
Other Govt. Depts.and Agencies
Food Stamp Program Pro·cessing
231,173
312,188
403,400
148,754
Total: Before Burden Allocation
(Direct cost)
87,378.oso
95,858,176 100.132 1 281 111.168.777
Category C Expenses Distributed as
Burden to Category A:
Protection and Vault Maintenance
7,317,997
Assessment for Board of Governors
622,490
Other Category C Expenses
Distributed as Burden to
Category A
63,863,573
8,223,582
743,102
9,112,387
979,676
10,118,234
1,039,658
63,736,036
71,735,478
83,185,346
Total Category C Expenses
Distributed as Burden to
Category A (Indirect cost)
71,804,060
72,702,720
81,827,541
94,343,238
34,200
41,369
313,673
196,467
Nonreimbursable Category D Expenses
Distributed as Burden to
Category A
Total: After Burden Allocation
(Total cost)
Percentage
increase
(decrease)
1966 - 69
22.4%
37.7
51.5
25.6
9. 9
25.6
174.8
(4. 2)
171. 2
27.2
159.216.310 168.602.265 182.873.495 205.708.482
* Net Federal Reserve Expense= Total Expense (undistributed) minus Memorandum--Reimburse• ments and Recoveries for each function and unit listed in the Functional Expense Report.
All figures are System totals.
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Federal Reserve Bank of St. Louis
-65TABLE IX
VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERAL
RESERVE BANKS, 1966~69
(Number in thousands; amounts in thousands of dollars)
Operation
1966
1967
1968
1969
Percentage
Increase
(Decrease)
1966-69
NUMBER OF PIECES
HANDLED!/
Currency received
and counted
Coin rec,}ved and
countedChecks handled:
u. s. Govt. checks
Postal money orders
All o therJ/
Transfers of funds
Food stamps redeemed
5,232,806
5,338,781
5,561,500
5,720,491
9,304,120
10,958,606
10,957,259
12,931,413
39.0
504,049
217,473
5,021,454
4,832
166,615
540,065
205,343
5,419,583
5,444
273,983
554,813
195,871
5,904,929
r5,894
384,763
575,118
187,123
6,504,161
6,660
519,393
14.1
(14. 0)
29.5
36.6
211. 7
37,001,390
38,410,969
40,585,320
43,273,577
17.0
957,282
1,184,616
1,173,761
1,441,123
50.5
160,014,331
175,068,179
4,626,573
4,860,925
1,893,974;522 2,043,772,112
5,555,075,862 6,565,594,328
226,508
368,569
190,653,523
4,640,992
2,350,761,951
q,727,430,321
513,618
208,155,031
4,603,938
2,791,831,294
9,800,324,538
694,394
9.3%
AMOUNTS HANDLED
Currency received
and counted
Coin received and
counted
Checks handled:
u. s. Govt. checks
Postal money orders
All otherl/
Transfers of funds
Food stamps redeemed
30.1
(O. 5)
47.4
76.4
206.6
r
Revised.
!/ Packaged items handled as a single item are counted as one piece.
'l:.I Ex eludes coins handled in separating operation.
~-3/ Exclusive of checks drawn on the Federal Reserve Banks.
Source:
Board of Governors of the Federal Reserve System, 56th Annual Report, released
May 7, 1970, p. 340.
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Federal Reserve Bank of St. Louis
-66-
almost all functional areas.
This fact implies the presence of economies
of scale which have been at least partially realized.
For instance,
installation of the third generation computer equipment listed in
Table I has aided in the large-scale production operations involved in
proving, s~rting, and reconciling checks.
However, there is no indica-
tion that the upward trend in the volume of payments will level off in
America's expanding (if cyclic) economy.
Further improvement in its
payments mechanism operations will, therefore, be absolutely essential
if the Federal Reserve is to maintain its present level of payments
services.
Introduction of fourth generation computer systems will
certainly provide for even greater efficiencies in the high-leverage
Check Collection function, but policy changes may be required to meet
the demands of greater payments volume and are certainly essential
in order to improve on services now offered to member banks.
In any case, all proposals for change must be offered with
a view of the entire system of payments continuously flowing through
the Federal Reserve System.
Proper coordination will optimize the
net benefits of specific changes in operations involving currency,
coin, wire transfers, currency verification, postal money orders,
food stamps, the issuance of Federal Reserve Notes, and the collection
of commercial and Government checks.
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Federal Reserve Bank of St. Louis
-:67-
APPENDIX A
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Federal Reserve Bank of St. Louis
-67REFERENCES
I.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Board of Governors of the Federal Reserve System, Accounting
Manual for Use of Federal Reserve Banks in Preparing
Certain Reports to the Board of Governors,
Washington, D. C., January 1, 1962 (issued July 1962).
_____ Functional Expense Reports of the Federal Reserve
Banks and Branches, Washington, D. C., 1966 - 1969.
_____ The Federal Reserve System: Purposes and Functions
(Fifth Edition), Washington, D. C., 1963.
_____ 56th Annual Report, Washington, D. C., released
May 7, 1970.
Federal Reserve Act (approved December 23, 1913),
- - - - - as Amended Through 1969, compiled under the direction
of the Board of Governors of the Federal Reserve
System in its Legal Division.
_____ Report of Study of Vault Space at Federal Reserve
Banks and Branches, Division of Federal Reserve Bank
Operations, Washington, D. C., June 1, 1967.
Federal Reserve Bulletin, Volume
----- Washington,
D. C., July 1970.
56, Number 7,
_____ Current Developments in Federal Reserve System Check
Float, Washington, D. C., June 1970.
U.S. Currency (Second Printing), Washington, D. C.,
- - - - updated March 1970.
_____ Emergency Plan for!!!!. Attack Situation, as amended
July 1970.
Jones, W., Federal Reserve Bank Function No. 9, entitled Money
(Based on a functional breakdown of the Federal
Reserve Banks organization into twenty-eight functions.),
in process of being compiled, Board of Governors of
the Federal Reserve System.
Minutes of the Conference of Presidents and Conference of First
Vice Presidents, 1970.
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Federal Reserve Bank of St. Louis
-68-
IV.
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Federal Reserve Bank of St. Louis
BOOKS (Continued)
Long, Robert H., "A Marketing Approach to Electronic Payment
Systems", The Magazine of Bank Administration-,
Volume XLV, Number 3, Park Ridge, Ill., March 1969.
Midwest Research Institute, Guidelines for Storage and Movement
of Currency and Securities for the Federal Reserve
System, Kansas City, Missouri, June 17, 1969.
_____ !!_ Study of the Storage and Movement of Coin for the
Federal Reserve System, Kansas City, Missouri,
May 20, 1968.
Sherwood, J. I., and Chase, Franklin T., Principles of Cost
Accounting (Second Edition), Cincinnati, 1947.
-69II.
GOVERNMENT DOCUMENTS
Bureau of Engraving and Printing, Legislative abstract~
Paper Money.!...!..!..~ related to the mission of~• issued by
Management Analysis Branch, Office of the Controller,
Washington, D. C., December 1962.
III.
MEMBERS OF THE STAFF OF THE FEDERAL RESERVE BANKS
Members of the Staff of the Federal Reserve Bank of Boston,
"Trustee of the Nation's Money", September 1969.
"Electronic Money ... and the Payments Mechanism",
April 1968.
Operations Manual, revised March 1970.
French, Martin, Let's Have a Look at Postal Money Orders,
Federal Reserve Bank of New York, June 1966.
Members of the Staff of the Federal Reserve Bank of Philadelphia,
"The Four Hats of the Federal Reserve".
Members of the Staff of the Federal Reserve Bank of Richmond,
The Federal Reserve at Work, Fourth Edition, 1969.
Members of the Staff of the Federal Reserve Bank of St. Louis,
"Your Money Supply".
Members of the Staff of the Federal Reserve Bank of Minneapolis,
"Your Money and the Federal Reserve System", revised
1969.
Staff Lectures on Federal Reserve Operations - 1936, Federal
Reserve Bank of Minneapolis.
IV.
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Federal Reserve Bank of St. Louis
BOOKS
Chandler, Lester, The Economics of Money and Banking (Fourth
Edition), New York, 1969.
Cox, B.; Dana, A.W.; and Feidler, H.M.; A Techno-Economic
Study of Methods of Improving the Payments Mechanism,
Stanford Research Institute, Menlo Park, California,
December 1966.
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