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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW
The Evolving Payments System
The Federal Reserve's
Communications Center
and the Payments System
The Washington-Baltimore Regional
Check Clearing Center




N o t e :
This issue of the M o n t h l y R e v i e w is devoted to the nations
internal payments mechanism. The feature article examines some aspects
of the present system, noting recent improvements that have managed to keep
it from being engulfed by the rising flood of checks. It also
describes recent progress toward a more efficient payments system of the
future— one in which paper checks will likely give way to an
electronic transfer system possibly employing some variation of the giro principle.
Two major developments in the Fifth District this year could represent
important milestones on the road to a new payments system and are
discussed in separate articles. These are the completion of the
Federal Reserve’s new Communications and Records Center
at Culpeper, Virginia, and the establishment of a Regional Check Clearing
Center for the Washington-Baltimore area.

E d i t o r ’s

THE EVOLVING PAYMENTS SYSTEM
Businesses and banks in the United States are

of paper, and by the large investment in expensive

in danger of being drowned in a flood of paper

machinery and equipment that is needed to keep the

generated by the operation of the country’s payments

system operating.

system.

arising from inefficiencies and delays in processing

The accompanying chart, which shows the

Not so obvious are the costs

number and dollar amounts of checks handled in

the daily flood of checks.

recent years by the Federal Reserve Banks, gives

lays in collecting checks, by altering the reserve

some indication of the rate at which this flood has
grown. The number of checks handled in 1969, for

position of the banking system, may complicate the
monetary policymaking process.

example, was almost six times the number processed
in 1941, and almost twice the number handled only
ten years ago.

And these figures tell only part of

the story. A great many checks are collected through
clearing houses or correspondent banks without pass­
ing through a Federal Reserve Bank.

In addition,

checks passing through a Reserve Bank may be
handled, on the average, by five or six individuals,
businesses, or commercial banks before reaching a
Reserve Bank. Thus, the approximately seven billion
checks processed by Federal Reserve Banks in 1969
may have involved 40 to 50 billion processings before
finally returning to their drawers to be stored away
in their files.
The costs of operating this payments mechanism
are

enormous.

The

most obvious

real

cost

is

measured by the number of man-hours involved in
the sorting, proofing, and shipping of this huge flow
Digitized2 FRASER
for


Moreover, unforeseen de­

Criticisms of the Present System

A lth ou gh the

Federal Reserve System and the commercial banks
have made a number of changes to improve the check
payments system in recent years, the efficiencies
realized have hardly more than offset the increase in
volume.

(T h e number of checks handled by Federal

Reserve Banks increased 9.6 per cent last year, and
the average annual growth over the past five years
was in excess of 8 per cent.) Those who advocate a
fundamental change in our payments system claim
that we have gone about as far as we can go in im­
proving the present system.

They say that the real

need is for a new payments system, one that would
make full use of the fantastic technology of the
computer age.
What is under attack is the basic nature of the
check payments system itself. In this system, pay­
ment is made by transferring ownership of a deposit

claim against a commercial bank.

But the payment

A

Future Payments System?

The paym ents

is not made by means of an order presented directly

system of the future is usually seen as one that com ­

to the bank on which it is drawn. Instead, the order
(a check) is presented to the person to whom pay­

bines modern electronic technology with what is
known as the giro transfer system.1 The giro system

ment is being made. He examines and endorses it.
perhaps sorts it and puts it together with other

is one that has been widely used in continental
European countries for years but which has been

checks, and passes it along to another individual,

largely untried in the United States.

business, or bank.

istics make it especially suitable for the use of com ­

There the whole process is re­

Its character­

peated. And so it goes, until finally the check is
presented to the bank upon which it is drawn and

puters, although it does not require their use.

final payment is made by reducing the account of

involves deposit balances held by individuals and

the maker of the check and increasing the account

businesses at a financial or governmental institution,

of (or paying cash to) the party presenting the check.

and some systematic arrangement for the transfer of

Each transfer of the check in this chain represents

ownership of these balances from payer to payee.

a conditional payment.

The major difference between the giro and the check

That is, each holder in due

course has a claim against the party from whom he
received the check (or any previous endorser) in the
event that it is not honored by the bank upon which
it is drawn.
A typical check may pass through numerous hands,
and through two or more banks and/or a clearing
house, before being presented to the drawee bank.
Thus, payment by check is a round-about, time-con­
suming process that, by its very nature, generates a
great deal of costly paper handling. Critics of the
system compare its problems with those of the se­
curities business, where an excess of paper handling
has at times threatened to bring the m achinery
for transferring securities to a grin din g halt.

Like the check payments system, the giro system

system is in the method for effecting the transfer of
ownership.

Unlike the check system, in the typical

giro transaction the payer delivers to the drawee in­
stitution an order directing it to transfer a specified
sum from the payer’s account to that of the payee.
The institution is also required to advise the payee
and to supply the payer with a record of the trans­
action. Thus, giro transfers are more direct and in­
volve less time and less paper handling than ordinary
check transfers.
Giro transfers are extremely simple when both
the payer and the payee have accounts with the same
institution, but they can function with equal ef­
ficiency where the payer and the payee use different
institutions.

Some European systems, for example,

provide for a central institution for making transfers
C H EC K S H A N D LED

BY FED ERA L R ESER VE

5 Bil.

BANKS
Bil. C h eck s

between member institutions as well as for transfers
between customers of those institutions. In fact, it
is possible for depositors in some European systems
to make payment to individuals or businesses in
other European countries.
Most descriptions of a future electronic payments
system incorporate some sort of giro arrangement
because the giro

system possesses characteristics

which make it particularly suitable for the use of
electronic data processing equipment.

Transactions

in the giro system take place entirely within the in­
dividual institution, or if more than one institution
is involved, entirely within the giro system.

Thus,

when a depositor instructs the institution holding his
account to make payment to another account holder.

Sou rce:

B oard of G o v e rn o rs, F ed era l Reserve System .




'F or a more detailed description of the giro system, see “ The Giro,
the Computer, and Checkless B anking,” in the April 1966 issue of
this M onthly R eview , reprinted in Lawrence F. Ritter (e d .), M oney
and Econom ic A c tivity, 3rd. ed.
(B oston:
Houghton M ifflin ),
pp. 34-38.

he provides the institution with all the information it
needs to complete the transaction— the identification
of both the payer and the payee, the amount to be
paid, and the time at which payment is to be made.
Computers could handle the entire transfer process
almost instantaneously.

Banks of the future undoubtedly will provide their
customers with some sort of automatic loan plan,
somewhat along the lines of the credit extended today
through the use of bank credit cards. If the house­
wife described above were shopping for new furniture

The payer’s instructions

or a television set and the amount of the purchase

could be fed into his bank’s computer, for example,

exceeded her current balance, the bank’s computer

and if both payer and payee are depositors of that

might make an instantaneous loan, up to some pre­

bank the computer could perform all of the operations

arranged amount.

necessary to make the transfer, including the printing

loan by authorizing her bank to have the computer

out of confirmation to the payer and advice of pay­

transfer money from her deposit account, either the

ment to the payee.

entire amount at the end of the month or in instal­

If the two have accounts at dif­

ferent banks, the computer at the payer’s bank could
perform the operations necessary for its records and
transmit the information to the second bank’s com ­
puter, perhaps through a central institution.

Settle­

ment between the two institutions could be made
through

entries

in

the

records

of

the

central

institution.
Numerous articles have been written in recent
years describing various features of an electronic
payments system, and it is not difficult to think of
many ways in which such a system could function.
The housewife of the future, for example, could pay
the family bills by simply inserting a card into a
special telephone device and giving the necessary in­
structions to her bank’s computer.

She could pay

all of her bills at one time by giving the computer
a list of her creditors, the amount to be transferred
to each, and the date at which transfer is to be made.
The housewife might pay for her groceries at the
supermarket by handing the cashier the same little
plastic card.

The cashier would insert the card into

a telephone-like terminal and instruct the bank’s com ­
puter to transfer the amount owed from the house­
wife’s account to that of the supermarket.
In addition to the use of the electronic payments
system for retailing purposes, business firms of the
future may also use it for processing payrolls. Rather
than issuing a check to each employee, for those de­
siring it the employer could have the employee’s pay
credited to his deposit account at regular intervals,
monthly, weekly, or even daily. The employer would
furnish the bank the necessary information in ma­
chine-usable form, or he might instruct his computer
to instruct the bank’s computer to reduce his account
and to credit his employees’ accounts in the proper
amounts. If his employees banked at several banks,
his computer might transmit the payroll data to a
central bank switching center, whence it would be
transmitted to the various banks concerned.

4


She might arrange to pay off the

ments over a period of time.
Making the Old System W ork Better

M ost o f

the changes in the payments mechanism in recent
years have served to improve the functioning of the
present system. The more important of these changes
have made it possible for people to write more and
more checks, year after year, without causing the
entire system to collapse.

Others have made modest

contributions toward reducing the need for checks.
Finally, there have been some tentative steps toward
the development of a new and different payments
mechanism.
The development of the Magnetic Ink Character
Recognition System (M IC R ) in the 1950’s was un­
doubtedly one of the most important improvements
in the present system. By putting certain essential
information on checks in a form that can be read
by electronic data processing equipment, the process
of reading, sorting, and tabulating checks is greatly
speeded up at certain points of congestion along the
circuitous route followed by the typical check.

A

large percentage of the checks that are written every
day are now being processed on electronic equipment.
One of the most spectacular changes in recent years
has been the growth in the use of credit cards. And,
although this was not the reason for their introduc­
tion, credit cards have served to reduce the number
of checks

used.

The

individual cardholder,

by

writing one check at the end of the month, may
settle for a number of transactions that occurred
over the course of the month.
Arrangements designed to reduce the handling
and use of checks include the use of a “ lock b o x ”
and the preauthorization of payments. The lock box
technique may be employed by a company whose
customers are distributed over a wide area. Rather
than have the customers pay their bills by sending a
check to the head office, the company may rent post

office boxes at strategic locations in the area and
customers mail their payments to this box. The
company maintains an account with a bank near each

Finally,

the

development

of

regional

clearing

centers has been encouraged as a means of reducing

of these locations, and authorizes the bank to collect

the length of the journey of the typical check and
cutting down on the number of times it is handled.

the checks from the box at frequent intervals. The
bank credits the company’s account in the amount of

The interest of the Federal Reserve System in this
type of arrangement is evidenced by the establish­

the checks received, advises the company of the pay­

ment at the Baltimore Branch of the Federal Reserve

ments, and sends the checks through regular chan­

Bank of Richmond of a Regional Clearing Center to

nels for collection.

The use of lock boxes does not

serve banks in a 40-mile radius of Washington, D. C.

reduce the number of checks, but it does reduce the
round-about collection process and the number of

In its present stage of development the Baltimore
Clearing Center represents an attempt to improve

times each check is handled.

the functioning of the existing payments system, but

Preauthorized payments involve the periodic trans­

it should be remembered that the electronic payments

fer of money from one account to another with the

system of tomorrow will require the establishment of

expressed agreement of the parties concerned. Many

a number of highly automated regional clearing

preauthorized payments arrangements are internal to

centers.

the bank, involving such things as the transfer of

article elsewhere in this issue of the Monthly Review.

funds from a checking account to a savings account,
a Christmas or vacation club, or in payment for U. S.
Savings Bonds. Preauthorized payments external to

The Baltimore center is discussed in an

Steps Along the W a y

A press release b y the

Board of Governors of the Federal Reserve System,
dated September 20, 1968, began with these w o rd s:

the bank have included such things as payments of
insurance premiums, utility bills, taxes, and rental
or mortgage payments.

Both types of preauthorized

payments have reduced the number of checks in cir­
culation, but more important, perhaps, preauthorized

In a m a jor preparatory step tow a rd an electron ic
transfer system for bank deposits and financial data
in the 1970’s, the Federal R eserve System a nn oun ced
tod ay it has entered in to a con tra ct fo r a key segm en t
o f a com p u terized n etw ork to speed up the m ov em en t
o f m on ey, securities, and e co n o m ic statistics.

payments would be a significant element in any future
In these words the Federal Reserve System of­

electronic payments system.
Some form of payroll servicing is another way of

ficially called attention to a project which may rep­

reducing the number of checks used and one that

resent the beginning of a giant leap toward an en­

also would be an important element in an electronic

tirely new payments mechanism.

payments system.

be noted that the new Culpeper facility referred to

Corporations and governments

And yet, it should

issue a large number of checks for salaries and wages,

in the release is nothing more than a broadening and

and anything to short-circuit this process could re­
duce significantly the number of checks in circula­
Some companies and governmental agencies

an extension of a wire transfer facility the System
has operated since 1922. This facility, which is used
mainly for the transfer of funds and securities be­

have entered into agreements with banks to have em­

tween member banks, has many of the features of

ployees’ wages deposited automatically to each em­

the European giro systems.

p loyee’s ch ecking account.

In som e instances,

by one bank authorizing the Federal Reserve to

firms relate this kind of program to the automated

credit the account of another bank or some account

tion.

Transfers are effected

payroll service provided by their banks. The Federal

in that bank.

Reserve Bank of Richmond permits each employee

when and from whom payments have been received.

Payees are advised by their banks

to designate the bank in which his check will be

The scope and significance of the new facility, and

deposited. The Payroll Department then makes a list
for each bank designated, showing for each employee

of the specialized equipment employed in it, are dis­
cussed in an accompanying article in this Monthly

the amount to be deposited. A single check is issued

Review.

to each bank covering the total amount of deposits

the development and testing of a facility of this type

It is sufficient to our purposes to note that

for that bank. A t the head office of the Federal R e­

is an essential first step in the transformation of the

serve Bank of Richmond, all 35 officers and more

payments system.

than 200 other employees have salary checks de­

Mitchell, Member, Board of Governors of the Fed­

posited under this plan.

eral Reserve System, “ By its planning and action in




In the words of George W .

5

putting into place a sizable electronic transfer plant

noted earlier, the establishment of clearing centers to

and related staff the Federal Reserve System is
demonstrating its preparedness to accommodate an

permit electronic transfers of funds among member
institutions is an essential element in the creation of

automated payment system as rapidly as it earns

the payments system of the future.
Public acceptance is a major prerequisite to any

public acceptance.”
The establishment of the Culpeper switching center

far-reaching change in the payments mechanism, and

is the most important single step toward an electronic
payments system, but there have been many others.

way toward creating the proper climate for such

Some of these have been mentioned in the section

changes.

dealing with improvements in the old system.

One

major changes are inevitable is found in the example

interesting recent development was the action of the

cited above, and in the announcement by the Am eri­

Home Loan Bank Board in publishing a proposed

can Bankers Association that a top-level committee

developments over the last decade have gone a long
Evidence that bankers are convinced that

change in its regulations which would permit savings

of leading bank executives has been created to study

and loan associations to pay, at a shareholder’s re­

various aspects— economic, legal, technological, and

quest, amounts from the shareholder’s account to

marketing— of any modification of the payments

third parties.

W hile this action in itself is a far cry

mechanism.

W hile the general public is probably

from the payments system of the future, it does

less aware than bankers are of the necessity for

constitute a limited recognition of the giro principle.

changing the present system, most people are prob­

The New Y ork Clearing House Association is en­

ably more receptive to change today than they would

gaged in setting up a network to transfer funds

have been ten years ago. The proliferation of credit
cards, among other things, has conditioned the public

electronically between major clearing house banks.
The first phase of the project, which will be used

to checkless and cashless purchases.

only for large-denomination international transac­

great deal remains to be done in the way of educating

N o doubt a

tions, is expected to become operational in the near

the public to the idea of a checkless society, but the

future. The system, which will make use of a central

task seems much less formidable than it did just

computer located at the Clearing House, is expected

a few years ago.

to eliminate as many as 40 thousand checks a week.

The technological know-how required for an elec­

The second phase will bring other New York in­

tronic payments system already exists.

stitutions into the system, and it is expected that

extensive use of electronic data-processing equipment

eventually it will be expanded to include banks in
other major U. S. cities.2
SC O P E (Special Committee on Paperless Entries)
is made up of representatives of banks in the Los
Angeles and San Francisco Clearing House Associa­
tions. Its purpose is to study and recommend ar­
rangements to enable California banks to transfer
debits and credits electronically between banks. A
recent news story indicates that commercial banks
in Seattle are considering a similar project3. A s was

in their operations, and a push-button type of tele­
phone has been developed which would permit a de­
positor to communicate directly with his bank’s com ­

-Am erican Banker, March 13, 1970, p. 1.
3A m erican Banker, A p ril 6, 1970, p. 1.

Digitized6for FRASER


puter.

Banks make

The Federal Reserve facility at Culpeper

represents the kind of switching center that would
be an integral part of any such system.

W hile there

would be problems, both legal and technological, in
the establishment of an electronic system, the limita­
tions of the check-payments system make it im­
perative that these problems be solved.
Aubrey N. Snellings

The Federal Reserve’s Communications Center
and the Payments System
Fortunately for the American payments system,
the growth of knowledge in the field of information
technology has kept pace with the growth of paper
generated by the ever expanding volume of economic
and financial transactions. W hile the paper jam has
on numerous occasions impaired the orderly flow of
economic activity, and probably will again, it is en­
couraging that steps are being taken which should
practically rid the payments system of the future of
this costly burden. One such step is that taken re­
cently by the Federal Reserve System in opening its
new Communications and Records Center at Cul­
peper, Virginia. The communications aspect of the
center is now in the testing stage and is expected to
be fully operational by July 1970. In view of the
Federal Reserve’s central role in the handling of
economic and financial data— particularly banking
statistics— the communications facility is expected to

have a significant bearing upon the speed and ac­
curacy with which the payments system operates as
well as upon the capacity of the system to handle the
increased volume of information.
Officially dedicated in December 1969, the Com­
munications and Records Center, built largely under­
ground, serves several roles. It provides vault space
for storage of money and duplicate records for use
in the event of a national emergency. Also, it will
house a computer to serve the data processing needs
of the Federal Reserve Board, and to supplement the
Board’s existing computer located in Washington.
O f most significance to the payments mechanism,
however, is the fact that the Culpeper facility con­
tains the Federal Reserve System’s new communica­
tions center, consisting of four large, high-speed,
special-purpose, com m unications sw itch in g co m ­
puters. The Culpeper facility, including the com ­

The Federal Reserve Bank of Richmond's C ulpeper facility. The facility houses the Federal Reserve System 's new com m unications center,
and provides vault space for the storage of m oney and duplicate records.




7

munications center, is operated by the staff of the
Federal Reserve Bank of Richmond for the entire
Federal Reserve System. When it goes into full
operation in about July of this year, the new com ­
munications system will replace the existing Tele­
graph and Switching Center, which has been in
operation at the Richmond Bank’s head office since
1953.

The Federal Reserve System has operated a

wire transfer system since 1922, but the Board of
Governors decided to move the center which handled
this operation from Washington to Richmond in
1953, to make it less vulnerable to nuclear attack.
The decision to move to Culpeper was predicated
partially on the same motive, but of equal importance
was the desire to establish a modern facility with a
capability for growth commensurate with that ex ­
pected in the Federal Reserve System’s communica­
tions needs.

office has the capability to send and receive messages,
although specialized equipment to receive or send
only is provided additionally at some locations. These
units handle the frequent and important low-content
messages involving transfers of funds and adminis­
trative transmissions, but usually not those messages
transmitting large quantities of data.
A t present, the system is equipped to handle mes­
sages to or from the Model 37 terminals at the speed
of 150 words per minute. The transmission speed
is constrained by the lines rather than by the mes­
sage exchange at Culpeper. The lines presently
available for use with the Model 37 terminals are
150 “ baud,” where “ baud” is defined as a unit of
signalling speed.

T he term is, for practical pur­

poses, almost synonymous with “ bits per second.”
W ith the A S C II code, there are eight bits per
character, and six characters per word. Allowing for
additional characters that are transmitted in order

Technical Features of the Com munications

to check the internal accuracy of the message, the

Center

term “ baud”

U nder a $2^4 m illion contract, Marshall

becomes approximately synonymous

Communications, Inc., now a division of Control

with words per minute.

Data Corporation, has installed a M-1000 Quad

potential speed in this respect, it should be noted that

Communications

Culpeper.

the message exchange computers at Culpeper are

M-1000 computers

capable of transmitting messages to distant points

which are designed to handle in very rapid fashion

at speeds of 9,600 bits per second. A t present, there­

the receiving and relaying of messages among the

fore, constraints are imposed by the lines as well as

12 Federal Reserve Banks, their 24 branches, the

by the types of terminals in use at the various end

Federal Reserve Board, and the U. S. Treasury.

locations.

The system operates as a message exchange or

the maximum utilization of the capacity available at
the Culpeper message exchange.

Switching

System

This system is actually four

at

switch, and it communicates with the 38 locations,
each of which has one or more terminal units, by
means of telephone lines capable of high
data transmission.

speed

Any type of message, whether

T o compare present with

Present needs, however, do not require

The lines used with the Model 37 terminals are
“ full-duplex,” which means that messages can be
received and sent simultaneously between any given

quantitative or narrative, can be transmitted by the

points, each at the designated speed.

system.
A n important feature of the system is that the

a terminal is in the process of sending a message
does not preclude its receiving another message at

The fact that

kinds of terminal units located at each of the Federal

the same time.

Reserve offices can vary considerably.

by the message exchange computers at Culpeper.

Standardiza­

Whether this is done is determined

tion is achieved through the use of a universally

The Culpeper computers continuously poll all ter­

adopted code in which all messages are phrased and

minals to determine whether a message is waiting to

transmitted.

be transmitted.

This code, which can be handled by

The complete polling cycle takes

several types of terminal gear, is A S C II, American

about 45 seconds.

Standard Code for Information Interchange, known

by a waiting terminal, the Culpeper exchange receives

as “ asky.” The code is a communications language
which, in addition to actually transmitting informa­

the message and notifies the terminal of the mes­

tion, executes its own internal check on the accuracy

been received by the Culpeper exchange for delivery

of the information transmitted.

elsewhere, the Culpeper exchange notifies the ter­

Most Federal Reserve offices have been equipped

If a positive signal is indicated

sage’s arrival. In a similar fashion, if a message has

minal at the destination (or destinations) that a mes­

with Model 37 terminal units— slightly modernized

sage is to be delivered.

versions of conventional teletype equipment.

signal, the message is sent to its destination, and the


8


Each

Upon receipt of the proper

M-1000 com m unications switching computers and related equipm ent at the Federal Reserve's Com m unications and Records Center in C u l­
peper, V irg in ia . Equipm ent in this room links all offices of the Federal Reserve, and w ill play a central role in facilitating the nation's
paym ents system.

Culpeper computer awaits a signal from the terminal

terminals, is regarded as temporary at several of the

that the message was received.

Federal

All messages are

Reserve

offices.

A

number of

Reserve

then stored at the Culpeper center on disks or tapes

Banks and branches are in the process of upgrading

for a predetermined period of time.

their data processing and research computer equip­

In addition to the Model 37 terminals, the 12
Federal Reserve head offices and the Federal R e­

ment.

In doing this, they have taken into considera­

tion the coming potential of the Culpeper center.

serve Board are being equipped with I.B.M . Model

Thus, some of them intend to use large third-genera-

2968 tape units for transmitting and receiving large

tion computers as terminals to communicate with the

quantities of data through the Culpeper exchange.
These units utilize magnetic tape which is readable

Culpeper exchange in addition to performing other
data processing or research functions for the R e­

by the data processing computers at each of the lo­

serve Banks.

cations. Thus, tapes of economic information gen­
erated by the Banks’ computers can be immediately
transmitted to other Reserve Banks or to the Board

The Federal Reserve Bank of New

Y ork has planned from the outset to do this, and
will therefore begin its communication with the Cul­
peper exchange via a computer. The Federal R e­

through the Culpeper exchange, or conversely, can be

serve Banks of Chicago and San Francisco have

received by a given Reserve Bank for immediate

plans to follow a similar approach in the near future,

processing on its own computer.

and will probably replace or at least supplement

Lines available for

transmission by this method are 2400 “ baud,” i.e.,

their existing terminal gear with computer-to-com-

approximately 2400 words per minute.

puter communications.

are “ half-duplex,”

These lines

however, which means that a

Other Reserve Banks, in­

cluding the Federal Reserve Bank of Richmond, have

terminal can either receive or send at a given time,

similar plans under consideration.

but not both.
Since the Culpeper message exchange is capable of

of this approach are considerable in that all messages

The advantages

flowing to or from the Culpeper exchange at a given

communicating with a wide variety of terminal equip­

Reserve Bank can be examined by that Bank’s com ­

ment, the use of the Model 37 terminals, and to a

puter for informational content relevant to other com ­

lesser extent even the use of the Model 2968 tape

puter related functions— accounting, reserve account­




9

ing, research and statistics, fiscal agency operations,

Banks play an obviously critical role in the Am eri­

discount and credit, etc. The terminal computer can
thus automatically update files or perform necessary
processing of the data it receives from the message

can payments system as it presently exists. They
provide the mechanism through which the over­

flows.

Thus, the efficiency of communications among banks

Several Reserve Banks have further plans to
establish computer-to-computer communications with

largely determines the efficiency with which the pay­

member commercial banks in their districts.

Such

central bank, in turn plays a critical role in the set­

arrangements will make possible direct electronic
communication via the Culpeper exchange of com ­

tling of payments among banks, both member and

mercial banks throughout the nation.

Messages in­

whelming preponderance of payments are

made.

ments system operates. The Federal Reserve, as the

nonmember. Therefore, the Federal Reserve’s com ­
munications center at Culpeper, the nerve center of

volving funds transfers, for example, will be com ­

the central

pleted almost instantaneously.

become a core element in the nation’s payments

Human intervention

in the transaction will be minimized thus reducing

banking

system,

will

unquestionably

mechanism.

the possibility of error, and automatic updating of

The significance of the Culpeper center is yet to

all relevant reserve accounts will be achieved as a
by-product of the communication.

be seen, since its contribution to the Federal R e­

The technical capability exists for still other com ­

serve and to the payments system does not begin
until mid-year.

Its potential impact, however, is

munications linkages, of a bank or non-bank nature,

more clearly revealed by its technical characteristics

either directly to the Culpeper exchange or to it via

than by the nature of the jobs that it will be required

a computer-type terminal at a Reserve Bank or

to perform in its initial stages.

branch. The existence of the Culpeper facility makes

that will be put through the Culpeper exchange at

feasible, for example, the sharing among Federal

the outset are conventional tasks that will be trans­

Reserve offices of a large centralized data bank of

ferred from the existing Telegraph and Switching

national economic information.
Implications for the Payments System T o obtain
maximum efficiency in the operation of any payments
system would require the instantaneous communica­
tion of transactions data.
Realistically, however,
constraints are imposed by the complexity of the
economy and its institutions, as well as by the
distances which separate individuals and organiza­
tions— not to mention many other natural barriers.
There is presumably some maximum speed at which
it is physically possible to sort checks, to move pieces
of paper from one location to another, or to ship
currency and coin.

W hile numerous advances have

been made in all these areas, progress to date is still
considered far short of adequate. Modern technology
does not seem to promise an ultimate solution where­
by maximum efficiency of the payments system can
be achieved.

Since all economic units are not elec­

tronically interfaced with one another, it is not
feasible to consider this kind of efficiency— nor would
such a system necessarily be desirable. Nevertheless,
the limits of feasibility have been greatly expanded.
The establishment of the Culpeper exchange is a re­
minder of the technological possibility of alternative
payments systems, which might feasibly include an
economy without checks.
Digitized 10 FRASER
for


Most of the work

Center— e.g., funds transfers among banks, adminis­
trative messages, transmissions of economic infor­
mation among Reserve Banks, etc. However, as the
Federal Reserve Banks and branches begin to install
more sophisticated terminal equipment, as communi­
cations via computers are established with com ­
mercial banks, and as rapid data transmission among
Reserve Banks gets underway, the impact of the
center upon the operations of these institutions should
be striking.
Significant departures from existing
customs of communication will be quick to follow.
Technological progress in the communications field
has exceeded present levels of ability and readiness
to take maximum advantage of its potential.

H ow ­

ever, there is little doubt that the Culpeper center
represents one of the early steps leading invariably
to an electronic payments system.
The Culpeper facility was a necessary develop­
ment because improvement in the timeliness of eco­
nomic information is necessary.
development is impressive.

But, even so, the

Its impressiveness lies

not in any immediate revamping of existing methods
of communication, but in the opportunity which it
offers for significant future accomplishments in the
communications field.
William H . Wallace

The Washington-Baltimore
Regional Check Clearing Center

Since its inception the Federal Reserve System
has worked with bankers to improve the check col­
lection process on which the nation’s payments system
is based. The opening of the Washington-Baltimore
Regional Clearing Center on January 2, 1970, repre­
sents a major step in that direction. Regional
clearing centers are perhaps the best immediate
answer to the check collection problem. Moreover,
a series of such centers, connected by wire with each
other and with their participating banks, could well
bridge the gap between the present payments system
and the “ checkless society” of the future.
Background In virtually all large cities, clearing
houses have existed for many years for the exchange
of checks among large city banks, but rarely have
these arrangements included smaller banks in the
surrounding areas. The Nassau County Clearing
Bureau, organized by about 80 banks on Long Island
in 1952, is a notable exception. Checks are picked
up each evening from the participating banks, sorted,
and delivered to the drawee banks early the next
morning. The Federal Reserve Bank of New York,
however, was not and still is not a direct par­
ticipant ; that is, it does not send checks to, nor
receive them from, the Clearing Bureau.
The success of this effort resulted in a similar
clearing system established later in Bergen County,
New Jersey. This Bureau began operations on O c­
tober 20, 1959, serving 31 banks with 70 offices. By
the end of 1969, the area served by the Bergen
County Clearing Bureau had been expanded to in­
clude nearby counties, with participation by 39 banks
with 185 offices.
As in the case of the Nassau
Bureau, the Federal Reserve Bank of New York
does not participate directly.
Meanwhile, the American Bankers Association,

more than 90 per cent of the dollar value of pay­
ments in the United States was being made by
check. A n efficient collection system is thus of key
importance in facilitating the flow of such payments.
The committee noted that check collection problems
arise primarily out of the volume of checks and esti­
mated that the average check passes through 2
banks in the process of collection. The volume prob­
lem, furthermore, could be alleviated by reducing
the number of check handlings.
The committee recommended that, where volume
warrants, checks drawn on nearby out-of-town
banks “ should be presented to drawees through a
central clearing arrangement serving all banks in the
area, with settlements being made on the books of a
correspondent bank or on the books of the Federal
Reserve Bank.” Some of the proposals made by the
committee, however, met with strong opposition, and
there was little support for establishing regional
clearing arrangements until the middle 1960’s.
The Washington-Baltimore Situation T he W a s h ­
ington-Baltimore area provided a striking example
of the inefficiencies possible under existing check
clearing arrangements. Delays resulted partly from
the fact that the Federal Reserve Bank of Richmond
served Washington and Northern Virginia while its
Baltimore Branch served Baltimore and surrounding
Maryland counties. A check drawn on a suburban
Maryland bank and deposited with a bank in
Northern Virginia might take as long as four days
to clear even though the banks were only a few miles
apart. If this check were deposited on Monday, and
sent to Richmond that night, the Richmond Fed
would send it on to Baltimore on Tuesday. The
Baltimore Branch, in turn, would forward the check
to the drawee bank on Wednesday and receive pay­

the Association of Reserve City Bankers, and the

ment on Thursday.

A return item would have to

Conference of Reserve Bank Presidents appointed a

follow this route back to the bank with which it was

joint committee to make a comprehensive study of

deposited. The entire process could take up to eight

the nation’s system of collecting checks.

or nine business days from the date of original de­

The com­

mittee in its report dated June 15, 1954, found that



posit.

A s a result, area banks were understandably
11

reluctant to collect checks through the Federal
Reserve.
Instead they resorted to one of several arrange­
ments for local clearing.
These included clearing
houses in Washington, Baltimore, and Frederick,
Maryland. There were also two informal exchanges,
one made up of two banks in the Maryland suburbs
of Washington and the other with limited participa­
tion of five Northern Virginia banks. No provisions
had been made, however, for exchanging checks
among these five groups.
Banking Characteristics of the Area T he ac­
companying table summarizes some of the banking
characteristics of the area that was under considera­
tion for a new regional collection system. It con­
firms that the area within a 40-mile radius of W ash­
ington had a very heavy concentration of the Fifth
District’s total banking activity. In 1967, there were
94 banks with 666 banking offices, representing 11.7
per cent and 22.2 per cent respectively of the totals
for the entire Fifth District. The deposits of these
banks totaled about $6 billion, or 32 per cent of the
District total. The population of the area represented
about a quarter of the total District population.
Development of the Plan Bankers in the area
have long been aware of the need for a better clearing
procedure. During the 1960’s many of these bankers
approached representatives of the Federal Reserve
Bank of Richmond about the possibility of establish­
ing some type of clearing center. They did suggest,
however, that the Federal Reserve should take the
initiative in setting up such a facility.
The Richmond Reserve Bank decided to initiate
efforts to establish a better collection system early in
1967. Accordingly, in March it invited the banks
belonging to the Washington and Baltimore clearing
houses, the Northern Virginia Bankers Association,
and the various banking associations in nearby M ary­

2. The formation of a six-man committee of
area bankers to advise the Reserve Bank on the
operation of the center.
3. The location of the center at a point con­
venient to participating banks, airports, and beltways.
4. The extension of participation privileges to
all banks within a 40-mile radius of Washington
and to any others near enough to make participa­
tion feasible. Federal Reserve offices wrould also
be allowed to send items directly to the center.
5. The settlement of clearing balances through
the reserve accounts of member banks.
6. The establishment of pickup and delivery
service so as to effect presentation of items to
drawee banks by 10 a.m.
Establishment of the Center A fter a lengthy dis­
cussion within the Federal R eserve System,
the Federal Reserve Bank of Richmond agreed to
establish a regional check collection center, the first
operation of its kind to be established by a Federal
Reserve Bank. The Washington-Baltimore Regional
Check Clearing Center officially began operations
on January 2, 1970.
The Clearing Center initially serves 90 banks
within a 40-mile radius of Washington (see m ap).
Included in the service area are the city of W ash­
ington ; the city of Baltimore and the counties of Anne
A rundel, Baltim ore, Calvert, Charles, H ow ard,
Montgomery, and Prince Georges in Maryland; and
the cities of Alexandria, Falls Church, and Fairfax
and the counties of Arlington, Fairfax, Loudoun, and
Prince William in Virginia.
For operational reasons the Center is located at
the Baltimore Branch of the Richmond Reserve
Bank, with a relay station in downtown Washington
for use by participating banks that may find it more
convenient.

Banks depositing their items at the

land counties to participate in a check clearing

relay station are subject to the same cut-off hours

survey of the Washington-Baltimore area.

This led

as those sending directly to the Center in Baltimore.

to the appointment of a team of area bankers and

The Federal Reserve Bank bears the expense of

representatives of the Richmond Reserve Bank to

transporting checks from the station to the Baltimore

conduct a survey and develop plans for a regional

Branch. Participating banks, both member and non­

check clearing center if one seemed desirable.

member, and

The survey team studied check movements in the

Federal

Reserve

Banks may send

checks, unsorted, drawn on other banks in the region

area during June 1967 and concluded that a clearing

to the Center by 1 a.m.

center definitely was needed. Its report to the Rich­

sires, it may fine sort its checks by drawee bank

mond Reserve Bank contained the following recom­

and deliver them to the Center by 5 a.m. for inclusion

mendations :
1.

The establishment of a regional check clear­

ing center to be owned and operated by the Rich­
mond Bank without cost to participating banks.

12


in the daily shipment.

If a participating bank de­

Nonparticipating member

banks from outside the area may also send to the
Center, but for them the cut-off hour is 4 p.m. of
the previous day.

Spotsylvania

A re a

served

by the W ashington-Baltim ore

C learin g

Center.

Regional Clearing Center personnel using high

The circle has a radius of 40 miles around W ashington.

Am ong other features of the Regional Clearing

speed computer equipment sort the checks by drawee

Center a re :

bank, make up the shipments and dispatch them by

1.

motor carrier in time to reach each bank by 10 a.m.
Member banks settle through their reserve ac­
counts and nonmembers through the reserve account
of member correspondents. Thus, participating banks

A requirement that participating banks that

are members of the Washington or Baltimore
Clearing House sort and package clearing house
items separately.
2.

A requirement that all items sent to the

each morning receive credit for all deposits made

Center must be amount encoded if a sending bank

prior to the cut-off hours and likewise are debited

averages more than 100 items per day in its de­

for all items presented to them.

posit.




13

3.
The establishment of an Advisory Group
made up of two commercial bankers from Northern
Virginia, twro from Washington, and two from
Maryland.
Advantages of the Center The R egional Clear­
ing Center has now been in operation more than
four months and has already produced a significant
improvement in the check collection system for
the Washington-Baltimore area. Am ong the ad­
vantages a re :
1. Earlier Collection of Items A regional
center of this type enables both participating banks
and banks outside the area to present and collect
many checks more promptly. Checks now clear in
one day, rather than up to four days as was pre­
viously the case.
2. Earlier Credit on Checks Because of the
faster process, participating banks collecting
through the Center receive earlier credit on their
checks in most instances.
3. Earlier Return of Unpaid Items
The
faster check collection process generally enables
participating banks to receive their return items
two or three business days sooner.
4. Reduction in Check Kiting The general
public had become increasingly aware of the length
of time required to collect checks in the W ashing­
ton-Baltimore area, and this had given rise to a
number of check kiting schemes. By reducing col­
lection time significantly, the Center greatly re­
duces the opportunities for such kiting operations.
5. Reduction in Commercial Bank Float By
reducing collection time on checks the Center

reduces commercial bank float on both intra-area
items and those presented from outside the area
by direct-sending banks and Federal Reserve
Banks.
6.
Fewer Check Handlings In terms of the
payments system, the most significant advantage is
the reduction in the number of times each check is
processed.
The Clearing Center is now functioning smoothly,
although some start-up problems were experienced
by the Federal Reserve Bank and participating banks.
Probably the most difficult situation resulted from
significantly higher volume than expected. Forecasts
of check volume, based on the 1968 survey, had in­
dicated that the Center would be processing about
600,000 items per day. Actual volume for the first
quarter of 1970. however, averaged 874,000 items per
day and necessitated diverting some of the checks
to Richmond for processing. W ith the installation of
additional computer equipment scheduled for this
month, the Center should be able to handle present
volume and its projected growth.
It is now evident that a regional clearing center
can provide a significant improvement in the check
collection process. If the idea spreads throughout
the country, both the banking system and the general
public should benefit.

The Federal Reserve’s new

communications network could conceivably provide
an electronic link between such centers.

In any

case, both these innovations represent considerable
progress toward an improved payments system of
the future.
H. L ee Boatwright, III
C. P. Kahler

BAN KIN G CHARACTERISTICS OF THE W ASH IN GTON -BALTIM ORE AREA
PO PU LATION
(July 1, 1967)

NUMBER OF
BAN KS
(July 1, 1967)

NUMBER O F
B A N K IN G O FFIC ES
(July 1, 1967)

BANK DEPOSITS
(June 30, 1966)

Northern V irg in ia 1

846,500

35

170

W ashington, D. C.

809,000

14

108

2,004,600

38

276

1,391,370,000

913,000

7

112

1,485,245,000

4,573,000

94

666

$6,030,004,000

Suburban M arylan d '
Baltim ore, M aryland
TOTAL SU RVEY AREA
Survey A rea as a Percentage
of Fifth District

24.8

11.7

22.2

$

842,429,000
2,310,960,000

31.7

1 Cities:
A le x a n d ria , Falls Church, and Fairfax.
Counties or parts thereof:
Arlington, Fa irfax , Loudoun, and Prince W illiam .
J Counties or parts thereof:
Source:

Anne Arundel, Baltim ore, C alvert, C h arles, H ow ard, Montgom ery, and Prince G eorg es.

Bureau of the Census, Current Population Reports, Series P. 25 No. 373, Septem ber 5,
Division of Statistics, Population Estim ates of M arylan d, August 30, 1967; University
Economic Research, Estim ates of the Population of Virgin ia Counties and Cities, July
surance Corporation, N ational Sum m ary of Accounts and Deposits in All Com m ercial

Digitized 14 FRASER
for


1967; M arylan d State Departm ent of Health,
of V irg in ia, The Bureau of Population and
1, 1967, O ctober 1967; Federal Deposit In­
Banks, June 30, 1966.

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