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FORM M I S C L . 1 4. 6-17-1014-853 FEDERAL RESERVE BANK OF D A LLA S May 1 , 1915 Number 15-A TO THE MEMBER BAM. ADDRESSED: S in ce is s u in g our c i r c u l a r No* 15, w ith the accompanying r u le s and requirem ents govern in g the o p e ra tio n of the c o l l e c t i o n system to be inaugurat ed bjr th is bank, many in q u ir ie s have been r e c e iv e d from our member banks, and we f e e l th a t i t may be a d v is a b le to supplement our p rev iou s l e t t e r with, a c le a r e r e x p o s it io n o f the system.* The system o u tlin e d was an e f f o r t on the p a rt of the management o f your R eserve Bank to p ro v id e f o r i t s members a s e r v ic e , the need o f which is not to be doubted.- I t was intended t o b r in g about a more s c i e n t i f i c system of ch eck cle a ra n ce s than at p resen t e x i s t s , f c r the econom ical b e n e fit o f th e trad e and commerce o f the U nited S ta k es, and tr encourage and in cre a s e the usage o f payment by ch eck s, w ith a corresp on d in g r e d u c tio n in the use o f cu rre n cy , but c e r t a in ly not f o r th e p r o f i t o f t h is bank, and member banks sh ou ld , in w eigh in g the advantages o f the c o l l e c t i o n system , co n s id e r the f a c i l i t i e s th ey are e n t it le d t o under the F ederal R eserve A ct in i t s e n t ir e t y , and that they on ly o b lig a t e them selves t o c le a r f o r th ose banks which w i l l c le a r in r e tu r n , and that they may withdraw from the system at w ill. Some bankers have t r i e d t o p o in t out that by attem pting t o a n t i c i p a te the sendings o f the F ederal R eserve Bank under th is system , the member banks would be r e q u ire d t o keep an account f a r in excess o f t h e i r reserv e requirem ents w ith th is bank* Even i f t h is were t r u e , which is d o u b t fu l, the re e d u c tio n in re s e r v e requirem ents under the F ederal R eserve Act as compared to th ose p r io r t o i t s a p p lic a t io n w i l l , under an a n a ly s is * in a l l c a s e s , o f f s e t the lo s s on a n o n -in te r e s t b ea rin g balance o f n ea rly tw ice the r e q u ir e d amount w ith the F ederal R eserve Bank. For example; a bank not in a r e s e r v e c i t y with t o t a l d e p o s its o f $ 5 0 0 ,COO was r e q u ir e d t o main t a in b e fo r e the o p e ra tio n o f the F ederal R eserve Act a t o t a l re se rv e o f $ 7 5 ,0 0 0 , on which th ere was an earning power o f $45,000 (th a t p a rt p er m itted t o be kept w ith r e s e r v e agen ts) which would have at the r a t e o f 2f0 amounted t o $900.00 per annum. Under the p resen t re s e r v e requirem ents the same bank is re q u ire d to keep a t o t a l re s e r v e o f $ 6 0 ,0 0 0 .0 0 , assuming that a l l o f i t s d e p o s its were payable on demand; that p art which may be kept w ith r e s e r v e a g e n ts, $ 2 5 ,0 0 0 , has an earning power o f $500.00 per annum, and the amount r e le a s e d f o r lo a n in g purposes by the reduced requ irem en ts, $ 1 5 ,0 0 0 , would i f put out at th e low r a t e of 6% earn $ 9 0 0 .0 0 , making t o t a l p r o f i t s under the p r o v is io n s o f th e F ederal R eserve Act $ 1 ,4 0 0 .0 0 as ag ain st $900.00 under the o ld system , showing an ex cess o f $500.00 under th e p resen t arrangement. In many banks th e ex cess earn in g power would be g re a te r by reason o f the low er re s e r v e requirem ents on time d e p o s it s , and o f a higher r a te o f in t e r e s t r e c e iv e d on lo a n s . From t h is i t w i l l be seen that the balan ce c a r r ie d w ith the F ederal R eserve Bank is not a l o s s . This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Page 2 , Number 15-A I t i s not p o s s i b l e , how ever, that th e member banks s h a ll have th e f u l l amount o f re s e r v e r e q u ir e d on the books o f the F ederal R eserve Bank at a l l tim e s . In th e event o f an u n u su ally la r g e volume o f checks b ein g r e c e iv e d in one day, i t would be th e p o l i c y o f t h is bank t o use i t s judgment in a llo w in g an o v e r d r a f t , th e same as would o b ta in in a com mercial ban k-to cov er on r e c e ip t o f the item sThe amount o f r e s e r v e s t o be c a r r ie d w ith the F ederal R eserve Bank i s determ ined by the member bank a cco rd in g t o i t s own books and. th e excess balance t o cover t r a n s it items would be based on th e w eekly average shown by e x p e r ie n c e . I t has been brought ou t that the checks drawn by a d e p o s ito r on a bank are payable over the bank*s cou n ter and not at the F ederal R eserve Bank, and t h is is t h e o r e t i c a l l y c o r r e c t , but t h is th eory borne out in p r a c t ic e would n e c e s s it a t e c o n tin u a l shipments o f cu rren cy and s i l v e r to p r o v id e f o r the payment o f checks s o p re se n te d and we are o f f e r i n g a f a c i l i t y that w i l l ob v ia te that n e c e s s it y . I t would a ls o seem t o be a bank duty t o i t s custom ers t o p ro v id e every con ven ien ce c o n s is t e n t w ith good banking f o r p u ttin g t h e ir checks on a p a r it y over the e n t ir e d i s t r i c t , and has lo n g been a ccep ted as a f a c t th a t the o ld method o f e s t a b lis h in g a r b it r a r y r a te s o f exchange, and the in d ir e c t r o u t in g o f item s has p la c e d th e burden o f ch eck e o l l e d t i o n where i t d id not r i g h t f u l l y b e lo n g , and i t i s the e f f o r t o f a l l u n s e lf is h in t e r e s t s t o s e e th a t in th e fu t u r e th e expense o f t r a n s fe r r in g funds s h a ll be p la c e d on th e d e p o si t o r , but that t h is expense s h a ll be more n ea rly the a ctu a l c o s t . Another o b je c t io n that has been v o ic e d i s th a t the banks which are d is t a n t ly s itu a t e d w i l l not have th e advantages in th e c le a r in g system such as w i l l accrue t o th e nearer o n e s , but t h is is a n atu ral disadvantage th a t i t i s im p o ssib le t o over-com e under any system , and by r e fe r r in g t o our c i r c u la r , you w i l l n ote that we make s p e c ia l m ention o f the f a c t that the system i s not in ten d ed at t h i s tim e to d is tu r b r a la t io n s h ip s between th ose banl's ahd t h e ir corresp on d en ts where i t i s more econom ical amd expedient on account o f th e d is ta n c e t o send t h e ir item s as h e r e t o fo r e . Having th e in t e r e s t s o f our e n t ir e membership in v iew , i t is not the p u rp oseof t h is bank to f o r c e upon i t s members an unwelcomed arrangement, and we s h a ll esteem i t a c o u r te s y i f th e o f f i c e r s of those member banks which have o b je c t io n s t o our p rop osa l w i l l communicate t h e ir views t o u s . We e a r n e s tly s o l i c i t your c a r e fu l c o n s id e r a t io n o f the p la n , a ls o your c o o p e r a tio n in i t s developm ent, b e lie v in g that i t w i l l r e s u lt ip s u b s ta n tia l b e n e fits . R e s p e c tfu lly , R . L. VAN Z-iHDT, Governor
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