Full text of The Federal Reserve Leased Wire System : Its Origin Purposes and Functions

View original document

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

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

THE FEDERAL RESERVE
LEASED WIRE SYSTEM
ITS ORIGIN PURPOSES AND FUNCTIONS

GEORGE C. SMITH
FEDERAL RESERVE BANK OF NEW YORK
NEW YORK, NEW YORK

Submitted in partial fulfilment of the
requirements of The Graduate School of
Banking conducted by the American Bankers Association at Rutgers University.
New Brunswick, June 1956

PREFACE
A major portion of the reference material utilized in the
preparation of this thesis was obtained from correspondence, telegrams,
memoranda, reports of committees and individuals, operating procedures
and instructions, agreements and other unpublished documents contained
in the files of the Federal Reserve Bank of New York.

While these

sources are not specifically cited in the footnotes or under the bibliography, full acknowledgement is made of their importance and the liberal
extent of the references made thereto.
The writer assumes full responsibility for all statements,
interpretations and conclusions contained herein.

The opinions ex-

pressed are his own personal views, formulated as the result of research
and experience, and this thesis does not purport in any way to express
or reflect the opinions of the Federal Reserve Bank of New York, the
Board of Governors of the Federal Reserve System, or any other individual, group or organizationo

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CONTEN'IB

Page

Chapter
PREFACE
L

•

INTRODUCTION
Summary of Types and Significance of
o
•
o
Messages Handled
Ob j ective of Thesis • • •

1
e

ORGANIZATION AND FACILITIES •
Characteristics of Equipment o o • • •
Safeguards • • • • • • • • • • o • •
Contractual Relationship and Distribution
••
o
o
o
o
o
of Costs •
Standby and Emergency Equipment o o o • •
•
Importance of Equipment e
o

III.,

•

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

o
o

THE GOLD SE'ITLEMENT FUND

HISTORICAL DEVELOPMENT OF FACILITIES AND
POLICIES, EARLY PHASES~ 1914 TO 1939
Commercial Wires Initially Utilized
Use of Code and Test Words , , • , • ,, .. ,, • .. • ,, •
Need for Improved Wire Facilities ••
First Federal Reserve Private Wire System.
Description, Limitations and Costs • • • •
Growing Inadequacy of Leased Wire Facilities
Steps Taken to Alleviate Congestion •• o o
Change From Government to CoIImlercial Rates
Further Restrictions Placed on Leased
Wire Messages • • . • • • • • • • • • •
Conversion From Morse System to Teletype
Machines • • • • • • • • • • • • • • • •

iii

()

••••••

3
3
6

Purposes • • • • o • o • •
o
•
o
Or igin •• o o o • • • • •
Establishment and Manner of Operation~. o
Changes in Procedures and Structure of Fund
Growth of Fund i h Importance and Volume of
Transactions
IV ..

9
11
11
12

13
15

16
21
21
21

22
23
24

25
27

29
30
32

CONTENTS (cont'd)
Chapter

Page
HISTORICAL DEVELOPMENT OF FACILITIES AND
POLICIESj RECENT PHASES= 1940 TO PRESENT
Reperforator Tape Switching System
Question of Liberalizing and Making More
Efficient Leased Wire Services •• o o
Survey of Efficiency of Leased Wire System
Installation of New 8l=D l Leased Wire System.
0

THE BANK WIRE •

•

Extent and Nature of Network
•• o o • o •
Relationship Between The Bank Wire and
Federal Reserve Leased Wire System
Leased Wire Service of Bankers Trust Company
Announcement of Joint Private Wire Service
Inaugurat ion of The Bank Wire Service.
Contractual Arrangements
o
••••
o
Memorandum of Operation o
••
o
Types of Messages Handled.
• o • o ••• o
Transfer of Funds e • • •
•
....
o
..
Payments • ., • • .. ..
o
..
o
o
•
•
Security Transactions • • •
o
••
Collection Items •• o •
Reports of Balances or Deposits and Stop
Payment Orders
Cred i t Informat ion
Letters of Credit •• o
Foreign Exchange
Trust Transactions
•••
Purchases and Sales of Federal Funds
Evaluation of Services
o

VII.

VIII.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

••

•••

TEIEGRAPHIC TRANSFERS OF FUNDS
Scope and Significance
•••••••
Situation Prior to Federal Reserve System o
Improvements Resulting From Federal Reserve
Leased Wire System • .. • • • • • • • • • • •
Regulations Affecting Telegraphic Transfers ••
Federal Funds Transfers • o • • • • • • • • • •
Summary of Present Regulations and Scope of
Operations •• o • o
••••••••••
FACSIMILE TRANSMISSION AT THE FEDERAL RESERVE
BANK OF NEW YORK • • • o • • • • • • • • • • •
Purpose, Participants and Allocation of Costs •
Background and Installation of First
Intrafax Network
............ .
Limitations of Intrafax System and Conversion
to Letterfax o . . . . . . . . . . . . . . . .
Improvements Resulting from Letterfax • • •
Potentialities of Facsimile Transmission
iv

43
44

48
48
48
51
53
55
56
58

60
61
61
61
61
62
62
62
62
63
63
65
66

66
66
67
67

72
74
77

77
78

81
83
83

CONTENTS (cont'd)
Chapter
IXo

Page
WIRE TRANSFERS OF MARKETABLE SECURITIES OF THE
UNI TED STATES o o o
o
.,
.,
•
•
..
o
..
o
•
,.
•
Scope and Nature of Function •• o . . . o . . .
Authorization for Wire Transfers of Certificates
of Indebtedness and Treasury Notes • • • •
Extension of Wire Transfer Privilege to
Treasury Bills • • .. • • • • • • ., o • ., e .. o
Telegraphic Transfers of Treasury Bonds o •
Presently Effective Regulations
.. ., • ., o
Transfers Authorized • • • • • • ,.
Cities Between Which Transfers May be Made
Limitations .. • • ,, •
" ,, • o .. .. .. ,, "
Fees ., .. o o o • • •
"
Delivery ., •• o ., • o ., o ., ,, o ., o ,, ..
Economic Significance of Service ., o .,
e

•

....

......

OTHER FUNCTIONS OF THE LEASED WIRE SYSTEM
Government Financing and Fiscal Management
Federal Reserve Monetary Policies • ,, • ., •
Collection of Cash Items
., .... o
Collection of Noncash Items o
General .,
e

XI.

CONCLUSION

•

BIBLIOGRAPHY

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

•

•o

85
85

87
88

92
92
94

95
95

96
96
98
98

100
104
106
109
111
114

CHAPTER I
INTRODUCTION
The Federal Reserve Leased Wire System is a nationwide telegraphic
network which provides a teletypewriter service between, and for the
exclusive use of, the Board of Governors of the Federal Reserve System,
the twelve Federal Reserve Banks and their twenty four branches, the
Treasury Department (Washington, D. C. and Chicago Offices) and the
Commodity Credit Corporation (Washington, D. C.).
Summary of Types and Significance of
Messages Handled
Each day there flow

over the facilities of the Federal Reserve

Leased Wire System thousands of messages involving transactions of con•
siderable importance not only to the Federal Reserve Banks but also to
member banks of the Federal Reserve System, the Treasury Department and
to tpe public in general because of the significant role which the subject matter of the messages plays in our national economy.

Some of the

messages represent wire transfers of funds totaling billions of dolla~s
daily.

These reflect the flow of investment funds to and from the cen•

tral money markets, purchases and sales of federal funds for reserve
purposes and adjustments of available balances for accommodation of the
seasonal and otherwise varying needs of industry, commerce and agricul=
ture throughout the different sections of the country.

Others are for

the purpose of making transfers by wire of marketable bearer securities
of the United States Government in connection with sales of such securities to purchasers in other Federal Reserve cities.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Still others relate

to important matters of Federal Reserve policy including open market
operations, changes in discount rate and member bank reserve requirements, margin requirements in connection with loans secured by stock
exchange collateral and other matters pertaining to the monetary policies of the Federal Reserve System.

A great many of the messages are

concerned with Treasury financing or other aspects of fiscal management.
A number relate to the collection of cash items as well as the advice of
return of such items because of nonpaymento

Daily settlements of all

transactions between the several Federal Reserve Banks are effected over
the leased wire system through operation of the Interdistrict Settlement
Fund and numerous other messages conveyed via the leased wire system
pertain to the normal day to day communications among Federal Reserve
offices.

The leased wire network has quite appropriately been referred

to as the central nervous system of the Federal Reserve Bankse
pbjective of Thesis
It will be the purpose of this thesis to describe the present
facilities of the leased wire system and comment on pending improvements;
to trace the historical development of the leased wire system to its
present form; and a special effort will be made to indicate the scope
and nature of the various types of transactions functioned over the
leased wire system from the point of view of their importance not only
to the Federal Reserve Banks but also to their member banks and the
general public.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER II
ORGANIZATION AND FACILITIES
Characteristics of Equipment
The Federal Reserve Leased Wire System in its present form had its
inception in July 1953 when the American Telephone and Telegraph Company
adapted its so-called 81-D-l Automatic Teletypewriter System to meet the
particular requirements of the Board of Governors of the Federal Reserve
System, the Federal Reserve Banks and the Treasury Department.

The

installation consists of the most modern equipment available and is
designed for the rapid, fully automatic transmission of messages.
Private lines or circuits connect each station on the network.

The

lin~s and equipment are designed for handling transmissions at speeds up
to seventy five words per minute and all circuits are arranged for
duplex operation, that is, one channel for sending and one channel for
receiving.

This permits the simultaneous receipt and transmission of

messages over the same circuit by any station on the network and eliminates the delays and limitations imposed by the use of single or "onewayu circuits.
Each station on the network is equipped with at least one friction
feed sending teletypewriter and a corresponding receiving teletypewriter,
for the transmission and receipt of conventional messages, with the
exception of the Commodity Credit Corporation whose requirements are met
by a single receiving machine.

The occasional messages which are sent

by that corporation are transmitted over the facilities of the Board of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Governors.

In addition, under a new procedure originated by the Federal

Reserve Banks in cooperation with the American Telephone and Telegraph
Company, which is now in the process of installation, each Federal
Reserve Bank and branch will be equipped with special sprocket feed
sending and receiving teletypewriters for multiple form transmission of
messages pertaining to wire transfers of funds.

Provision is also being

ma.de for installing similar sprocket feed equipment for receiving wire
transfers of United States Government securities at all head offices and
branches, except Buffalo and Helena which do not process such transfers.
Installation also will be made of separate multiple form sending machines
for messages pertaining to Government security transfers at those Federal
Reserve Banks and branches where the volume of such transactions is sufficient to warrant the installation of this specialized type of equipment.
The advantages of the new form transmission procedure are that at
the sending bank the preparation of all advices and entry tickets on
multiple part forms and the transmission of the message will be accomplished in a single operation, and at the receiving bank all necessary
accounting forms, advices, and other required records will be prepared
automatically by the ma.chine receiving the message.

This will eliminate

a series of coding, decoding and typing operations which previously were
required and will result in considerably more expeditious service to
member banks of the Federal Reserve System, to dealers in United States
Government securities and to the general public in consUIDma.ting transfers
of funds and making deliveries of securities.

Although substantially

increased rental will result from the additional equipment and circuits
which will be required under the new form transmission procedures, it is
expected that the Federal Reserve Banks and branches will realize overall
operating economies because of reduced personnel requirements.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

This

5
innovation has attracted the attention of a considerable number of
bankers, but to my knowledge has not yet been utilized elsewhere.
The 81-D-l private wire system is completely integrated and auto=
matic.

All sending and receiving stations are connected by private

lines to the switching center of the leased w.ire system, which, for
security reasons, is located in the Federal Reserve Bank of Richmond,
Richmond, Virginia.

The only manual operations necessary under normal

conditions are the perforation of messages in tapes by the operators at
the originating stations by means of the sending teletypewriters; plac=
ing of the tapes in the transmitters for automatic transmission; and
removal of the received messages from the incoming teletypewriters at
destination.

The automatic directing and relaying of the messages are

effected by the use of "Station Directing Codes" which are punched into
the perforated tapes by the teletypewriter operators when originally
preparing the messages.

All messages flow from the station of origin to

a terminus unit at the switching center in Richmond.

Here they are

automatically retransmitted by means of the station directing codes to
similar units connected with outgoing lines and forwarded to their destination through selection and connection with the desired station's
receiving teletypewriter.

A message originating from any station on the

network is normally received at the stat:1,on to which addressed within a
relatively few seconds after the time of dispatch, despite the very long
distances which in some instances must be traversed.
Equipment has also been installed at the switching center so that
multiple address messages, that is, messages addressed to more than one
station on the network, can be routed at the switching center in a
manner so that they will be automatically retransmitted to all addressees
simultaneously.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Inasmuch as the Board of Governors, the Treasury
I

6
Department and other stations on the network quite frequently have
important policy or directional messages of some length addressed to all
or a number of the Federal Reserve Banks and branches (such messages are
commonly referred to as "book" messages) this has proved to be a very
practical and time saving arrangemento
Safeguards
Messages addressed to stations temporarily out of service and sin=
gle or multiple address messages with incorrect directing codes are
automatically i ntercepted at the switching centero

When service which

had been temporarily suspended is restored, the intercepted messages are
immediately and automatically released and forwarded to their points of
destinationo

Necessary steps are taken at the switching center for the

prompt re-coding and re-sending of messages containing improper directing codeso

Also at the switching center, traffic may be observed and

controlled to avoid "bottlenecking" and to insure a proper and continuous flow of work.

A system of alarms at both the switching center and

outlying stations has been installed to indicate trouble conditions and
direct the attention of personnel to the equipment involved so that
corrective action may be taken as promptly as possibleo

Every effort

has been made in designing the system to minimize any delays or errors
which might result from mechanical or human failureso
A point to point message numbering system whereby each station
maintains number controls of messages sent to and received from each
other station is also utilized for prompt detection and corrective
action in case of loss of a telegram in transmission or misplacement of
the message after receiptg
measure.

This is an extremely important protective

A message which is unaccounted for well might represent a

transfer of millions of dollars in cash or Government securities or

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

7
instructions to take immediate action in some other matter of importance
where failure to comply promptly could result in monetary loss or other
serious embarrassment and inconvenience.
Contractual Relationship and Distribution of Costs
Contractual relationships with the American Telephone and Telegraph
Company pertaining to the leased wire system are handled by the Board of
Governors of the Federal Reserve System.

Bills covering monthly circuit

and equipment rentals, installation and other charges and the costs of
operating the switching center are rendered to and paid or reimbursed by
the Board of Governors.

When presently pending improvements, which will

extend form transmission procedures throughout the entire System, have
been completed, total circuit and equipment rentals will aggregate in
excess of $400,000 annually.

The distribution of such expenses among

those participating in the network is made on a word count basis.
Each month the Treasury Department, the Commodity Credit Corporation
and the Federal Reserve Banks report to the Board of Governors the number of words sent during the previous month.

The Treasury report

includes the number of words originated at both its Washington and
Chicago Offices and the Reserve Banks submit consolidated reports showing the number of words sent by head office and branches.

The Board of

Governors combines the number of words transmitted by it during the
month with the number reported by the other participants to determine
the grand total of the number of words dispatched over the leased wire
system for the month.

The per word cost for leased wire messages is

then ascertained by dividing the total rental and other expenses for the
month by the total number of words sent.

Each participant is charged

with its proportionate share of the expenses on the basis of the number
of words sent by it.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

The word count at each station is accumulated

8
principally by means of mechanical counters attached to the transmitting
teletypewriters which count each six impulses (letters, digits, spaces,
etc.) as one wordo

The word count in connection with multiple address

messages is obtained by manual count of the number of words multiplied
by the number, less one, of the stations to which the message was directed.

The deduction of one in the multiplication of the number of

stations to which the message was sent is made because the word count
has been included once by the mechanical counter attached to the transmitting equipment.
Standby and Emergency Equipment
Normally all telegraphic communications between Federal Reserve
Banks and branches and other stations on the network are transmitted
over the leased wire system.

However, each leased wire station also is

provided with standby equipment to furnish telegraphic communications in
the event of leased wire failure or other emergency.

This equipment

permits participation in a national teletypewriter exchange service,
known as TWX, provided by the American Telephone and Telegraph Company
which has over thirty,,six thousand subscribers, including many banks and
other financial institutions as well as business, industrial and commercial enterprises of all sizes and categories.

This is much like a tele-

phone service except that instead of voice conversation, communication
is by teletypewriter and the messages are typed on one machine and reproduced instantly in printer form on any other teletypewriter to which
connection has been made by the TWX operator.

In the event both the

leased wire and TWX equipment should be inoperative at the same time for
any reason, commercial wires would be used.

11956 Bell System National TWX Teletypewriter Directory, American
Telephone and Telegraph Company, November 14, 1955, p. 4~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

9
Importance of Equ~pment
The maintenance of fast and uninterrupted communications over the
Federal Reserve Leased Wire System is basic to the efficient functioning
of our high speed, dynamic and expanding national economy.

This is a

factor the importance of which cannot be overemphasized, although it may
not always be thoroughly recognized nor fully understood.

Without a

high speed and efficient wire service, federal funds could not be made
immediately available nor could reserves be mobilized instantaneously at
any point in the country; nationwide accessibility to money markets
would not be feasible; a uniform countrywide market for United States
Government securities could not be sustained; the Treasury would be un=
able to promptly, efficiently and economically shift its balances among
the various Federal Reserve districts as circumstances required; and
settlement on the same day of the huge and growing volume of interdis=
trict transactions would not be possible.
In view of the vital nature of the transactions conveyed over the
leased wire system and the heavy responsibilities involved, it is essential to provide the most modern and best available communications facili~

ties and to utilize all available safeguards to protect against delays
and interruptions in services.

Continuous studies and reviews of the

facilities of the leased wire system are carried on by the Reserve Banks
under coordination of a special Federal Reserve System committee on
leased wire operations.

The primary objective of these studies is to

provide needed foresight in maintaining at all times adequate facilities
to accommodate the rapidly increasing volume of work and in meeting the
exigencies of peak periods and the pressures of closing hours with a
minimum of malfunctioning, breakdowns or delays in service.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Mr. Glenn Garrison in an article appearing in the April 15, 1925
issue of "Commerce and Finance" made the following rather colorful ref=
erence to the Federal Reserve Leased Wire System which is equally as
applicable today as at the time the article was written:
"Imagine a Gargantuan water tank filled with liquid gold instead
of water. Conceive this tank to be connected by mains to twelve
other huge tanks placed in strategic financial centers of the
United States. Realize that these twelve tanks are connected
with smaller ones advantageously located in their particular
districts. Then you have an idea of the reservoir of credit
stored up by the Federal Reserve Banks.
"The supply of water in a reservoir is really not useful unless
it can be quickly and easily distributed. The same statement
applies to a supply of credit no matter how large it may be.
The United States is so vast that business conditions in different parts of it fluctuate and vary materially. One section
is apt to have a surplus of credit, while another section is
badly in need of it. The leased wire system of the Federal
Reserve Banks furnishes the means of bringing these sections
quickly and easily together."2

2Glenn Garrison, "Electric Conduits for National Credit", Commerce
and Finance, April 15, 1925, No. 15, p. 705.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER III
THE GOLD SETrLEMENT FUND3
Purpose~
The Federal Reserve System's Gold Settlement Fund, as it was designated at the time of its original establishment in 1915, or the
Interdistrict Settlement Fund as it is known today, is basic to the
functioning of an effective and efficient nationwide mechanism for the
transfer of funds, for the clearing and collection of checks and for
the settlement of the balances arising from these and other interdistrict transactions.
Prior to the establishment of the Federal Reserve System and the
inauguration of the Gold Settlement Fund, there was no satisfactory
means for collecting checks and other cash and noncash items drawn on
or payable at out of town banks, particularly in cases where such
banks were located in areas remote from the collecting banks.

Neither

was there a system whereby counterbalancing claims between localities
could be offset or transfers of funds made to minimize the need for
physical movements of cash.

The absence of such facilities caused

considerable delays in the transfer of funds for the settlement of
adverse balances.

The Gold Settlement Fund was designed to improve

this situation by providing the commercial banks and the United States
Treasury at minimum cost with a nationwide check clearance service and

3rn thi~ chapter the Annual Reports of the Federal Reserve Board
(1914-1920) have been drawn on heavily for the information contained
herein.
11

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

12
payment mechanism, including a method for the rapid transfer of funds
among the various Federal Reserve districts. 4

Today, all entries affec-

ting the books of the Interdistrict Settlement Fund are made from information contained in telegrams which are dispatched daily by the Federal
Reserve Banks to the Board of Governors over the circuits of the Federal
Reserve Leased Wire System.
Origin
The Federal Reserve Act in Section 16 authorizes the Board of
Governors of the Federal Reserve System at its discretion to exercise
the functions of a clearing house for the several Federal Reserve Banks
and to issue regulations governing the transfer of funds among the
Reserve Banks.5

Considering this a matter of primary importance for the

effective discharge of the functions of the Federal Reserve System, the
Federal Reserve Board in its early organizational plans took under advisement the ways and means of performing such a clearing house function.
Acting pursuant to the general authority of Section 16 of the Act, the
Board devised a plan for the establishment of a gold fund to be operated
under its custody and control for the weekly settlement of balances
arising out of transactions among the twelve Federal Reserve Banks. 6
The regulation governing the establishment and operation of this fund,
which was designated as the Gold Settlement Fund, was issued and became
effective on May 8, 1915.7
4Monthly Review of Credit and Business Conditions, Federal Reserve
Bank of New York, October 1954, p. 136.
5Federal Reserve Act as Amended to October 1, 1955, Section 16,
p. 92, par. 14 and p. 93, par. 15.
6circular No. 13, series of 1915, Federal Reserve Board, Federal
Reserve Board, Washington, D. C., May 8, 19150
7Regulation L, Series 1915, Federal Reserve Board, Federal Reserve
Board, Washington, Do C., May 8, 1915 ..

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

13
Establishment and Manner of Operation
The regulation provided for the appointment by the Board of
Governors of a settling agent to keep the necessary records and accounts
of the fund.

Each Federal Reserve Bank was required, not later than

May 24, 1915, to deposit with the Treasury for credit to the account of
the Gold Settlement Fund the sum of $1,000,000 in gold, plus an amount
at least equal to its net indebtedness then due to all other Federal
Reserve Banks.

The Treasurer of the United States agreed to advise the

Federal Reserve Board of the receipt of funds deposited. for the account
of the Gold Settlement Fund and to deliver to the Board gold order certificates made payable to the Board covering the sums deposited.

Each

Federal Reserve Bank was further required to maintain at all times a
balance in the Gold Settlement Fund of not less than $1,000,000.

The

amount standing to its credit on the books of the fund counted as a part
of the bank's legal reserves maintained against outstanding Federal
Reserve notes and deposit liabilities.9
In its relations with other Federal Reserve Banks, each Reserve
Bank was required by the regulation to keep on its books:
(a)

An account showing the balances "due to" other Federal
Reserve Banks, representing the proceeds of items
actually collected by it, and payments and transfers
made to it, for the account of such other Federal
Reserve Banks, and

(b)

An account showing balances "due from" other Federal

Reserve Banks representing the proceeds of items sent
8Federal Reserve Bulletin, Federal Reserve Board, Washington, D. C.,
June 1, 1915, p. 82.
9"Gold Clearance Fund at Washington", Federal Reserve Bulletin,
Federal Reserve Board, Washington, D. C., May 1, 1915, pp. 9, 10, 11.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

14
to, and payments and transfers made to, such other
Federal Reserve Banks for its account.
The regulations also required that at the close of business every
Wednesday night, each Federal Reserve Bank telegraph to the Federal
Reserve Board the amounts due on that date to each other Federal Reserve
Bank as indicated by its

due to" account.

On Thursday, the settling

agent was to make the proper debits and credits to the accounts of each
Federal Reserve Bank in the Gold Settlement Fund and telegraph to each
bank the amounts of the credits due it from each other Federal Reserve
Bank and its net debit or credit balance arising from the weekly settlement.

On receipt of the telegram from the settling agent, each Federal

Reserve Bank was required to .:
(a)

Charge on its books the "due to" accounts of the other
Federal Reserve Banks with the amounts it had reported
due to them and credit the Gold Settlement Fund in
like amount, and

(b)

Credit on its books the "due from" accounts of other
Federal Reserve Banks and debit the Gold Settlement
Fund with the amounts due to it as reported in the settling agent's telegram.

The difference between the total debits and credits would equal the
bank's net debit or credit in the Gold Settlement Fund as advised in
that day's telegram from the settling agent.
To ascertain the initial amount which each Federal Reserve Bank was
required to deposit in the fund, a preliminary settlement was made as of
the close of business May 19, 1915 and as a result deposits aggregating
$18,450,000 were made for the original establishment of the fund.lo
lOFederal Reserve Bulletin, Federal Reserve Board, Washington, D. C.,
June 1, 1915, p. 82.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

15
The first regular weekly settlement was effected on Thursday,
May 27, 1915. 11
Changes in Procedures and Structure of Fund
In general, the manner of operation, as well as the purpose and
utility of the fund, have remained quite stable from the date of incep=
tion to the present time.
The first important change in operating procedures was made on
July 1, 1918 when, because of the greatly increased volume of transactions handled through the fund, settlements were inaugurated on a daily
basis in place of the previous weekly settlements. 12

Under the daily

settlement plan, the Federal Reserve Banks telegraphed to the Board by
10~00 a.m. in the morning of each business day the respective amounts
credited to other Federal Reserve Banks on the previous dayo

Upon re-

ceipt of the telegrams by the Board, clearing was effected by book
entries in the fund and within one hour each Federal Reserve Bank was
advised of the amounts of credits to its account from the other Federal
Reserve Banks and of the net debit or credit to its balance in the Gold
Settlement Fund on the books of the Board.

The first Federal Reserve

private leased wire service, which was placed in operation during the
month of June 1918, contributed much toward the feasibility of making
daily gold fund settlements because of the more direct and quicker service which was afforded as compared with the commercial wires which previously had been utilized.
Daily settlements on the basis described above however, continued
to result in a delay of at least one day in consummating settlements

ilBoal"d Bulletin,t_ P• 82.

12"Plan for Daily Clearings through the Gold Settlement Fund~',
Federal Reserve Bulletip, Federal Reserve Board, Washington, DQ C.,
July 1, 1918, p. 610.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

16
between the Federal Reserve Banks.

As the balances involved continued

to become larger, these delays became of more significance.

As a result,

on March 1, 1920 each Federal Reserve Bank commenced dispatching its "due
to" wire to the Board as soon as possible after the close of business
each business day, and in any event prior to the final closing of its
books for the day.

Settlement was effected by the Board on the same day

and telegrams were dispatched to reach each bank in advance of the opening for business the following morning.

At that time necessary entries

were made and the books were finally closed for the preceding day.

This

eliminated the "float" formerly incurred and the effectiveness of the
method would seem to be indicated by the fact that settlements have continued to be made in essentially the same manner to the present time.
The last major ch&nge in the structure of the fund occurred when the
Gold Reserve Act of 1934 transferred to the United States the ownership
and possession of all Federal Reserve Bank gold. 13

At this time the

designation of the fund was changed to the Interdistrict Settlement Fund
and, in exchange for the gold previously held, there was substituted an
equivalent amount of gold certificates which remained on deposit with
the Treasury for the account of the fund. 14
Growth of Fund in Importance
and
Volume of Transactions
The advantages of the arrangement were apparent from its inception
and there was a rapid and steady growth in the volume of transactions
settled through the fund.

Considerable impetus was given to the increase

13Twenty-first Annual Report of the Federal Reserve Board Covering
Operations for the Year 1934, Federal Reserve Board, Washington, D. C.,
June 24, 1935, p. 3.
1 4Monthly Review of Credit and Business Conditions, Federal Reserve
Bank of New York, October 1954, p. 137.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

17
in the use of the fund when on July 15, 1916 the Federal Reserve Banks
began active check clearing and collection operations for their member
banks and a further stimulus resulted from the heavy demands in connec ...
tion with the financing of World War I. 1 5

It may be fairly stated that

the utility, and in fact the indispensibility of the fund, was proved
beyond a reasonable doubt when put to the test of meeting the vast financial requirements of World War I.

During that period heavy sales of

Government Bonds and Treasury Certificates, coupled with the need for
redistribution and disbursement of the sums realized, resulted in con=
tinuous transfers of very large a.mounts from districts where balances
had accumulated to other districts where funds were needed to meet disbursements for munitions, supplies, payrolls, and other requirements.
When it is realized that these enormous transfers were made almost instantaneously by means of the leased wire and that settlements of balances was made daily without the necessity for physical movements of
funds as otherwise would have been required, it will be recognized that
the arrangement resulted in savings of great magnitude in both time and
expense to the Government and to the public.

There is no doubt that the

previous more cumbersome methods of effecting interdistrict settlements
requiring physical transfers or shipments of money would have been a
serious deterrent to the war effort.
The Gold Settlement Fund, implemented by the Federal Reserve
System!s leased wire service, proved equally valuable in meeting the ex ...
panding operations and growing requirements of commercial banks by pro...
viding an expeditious means for the settlement of balances arising from

15"Clearing Circulars Issued by Banks", Federal Reserve Bulletin,
Federal Reserve Board, Washington, D. C., July 1, 1916, pp. 312, 313, 314.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

18
interdistrict check clearing and collection operations and making possi=
ble the transfers of bank balances by wire on an immediately available
basis to any point in the country.

This permitted the maximum utiliza=

tion of resources and the fullest accommodation of the varying sectional
requirements of industry, commerce and agriculture.

It is quite probable

that without the rapid and efficient Federal Reserve collection, transf.er
and settlement system, the tremendous growth in our national economy
which has been experienced over the years would have been seriously
impeded, if not impossible.
The fact that the Interdistrict Settlement Fund has served and is
continuing to serve a very useful purpose appears to be amply illustrated
by the growth in the volume of transactions settled through the fund.
For the seven months from its inception to December 31, 1915, the total
of clearings and transfers settled aggregated $L05 billion.

This in-

creased to $5.53 billion in 1916, the first full year of operations. 1 7
There were further substantial increases each year through 1920 when
settlements aggregated $92~63 billion. 18

The first decline to a total of

$68.22 billion was experienced in 1921 reflecting the post World War I
depression. 1 9

In 1922 the upward trend was resumed and continued without

16second Annual Report of the Federal Reserve Board for the Year
Ending December 31, 1915, Federal Reserve Board, Washington, D. C.,
February 1, 1916, p. 79.
17seventh .Annual Report of the Federal Reserve Board Coveriug
Operations for the Year 1920, Federal Reserve Board, Washington, D. C.,
February 16, 1921, p. 71.
l8seventh Annual Report of the Federal Reserve Board, p. 71.
19 11 Clearings and Transfers through the Gold Settlement Fund" ,
Twelfth Annual Report of the Federal Reserve Board Covering Operations
for the Year 1925, Federal Reserve Board, Washington, D. C., March 22,
1926, p. 108, Table No. 62.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

19
interruption through 1930 when a total of $153.66 billion was reached.20
Reflecting the overall status of our national economy, precipitous declines in volume were experienced over the depression years of the early
1930's.

The low point was reached in 1933 when settlements totaled

$78.91 billion, the lowest figure in any year since 1922. 21

With the in-

creases in economic activities commencing after the mid-thirties, the
total settlements again moved up reaching $110.66 billion in 1937. 22
1938, there was a drop to $95.08 billion. 2 3

However, in 1939 with the

increased activity occasioned by the onset of World War II the upward
movement again resumed and by 1942 a new high of $190.47 billion had been
reached, surpassing the previous high of $151.46 billion attained in
1930.

The increases during the war and post war periods were at an

extremely accelerated rate and for 1955 the all time record total of
$901.39 billion was reached, repres€nting an increase of 7% over the year

2 0"Gold Settlement Fund", Seventeenth Annual Report of the Federal
Reserve Board Covering Operations for the Year 1930, Federal Reserve
Board, Washington, D. C., February 25, 1931, p. 155.
21Twentieth Annual Report of the Federal Reserve Board Covering
Operations for the Year 1933, Federal Reserve Board, Washington, D. C.,
May 28, 1934, p. 121.
2211 summary of Transactions through the Gold Settlement Fund",
Twenty-fourth Annual Report of the Board of Governors of the Federal
Reserve System for the Year 1937, Board of Governors of the Federal
Reserve System, Washington, D. c., April 4, 1938, p. 68, Table No. 19.

2 3Boa.rd of Governors, Interdistrict Settlement Fund Weekly Summary
of Transactions, Board of Governors, Washington, D. C., 1938,
Forms B-812.
24 Federal Reserve Board, Gold Settlement Fund Weekly Summary of
Transactions, Federal Reserve Board, Washington, D. c., 1930,
(not numbered).

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1954. 25 This bears a close relationship to the 7 1/2% increase to the
record figure of $387 billion in the value of the gross national product
for the year 1955, as compared with 1954. 26

2 5Board of Governors, Interdistrict Settlement Fund Weekly and
Monthly Summary of Transactions, Board of Governors, Washington, D. C.,
1942-1955, Forms B-812, G 15 (a).

26 Tlle New York Times, Wednesday, February 15, 1956, p. 41,
Columns 2, 3.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER IV
HISTORICAL DEVELOPMENT OF FACILITIES AND POLICIES,
EARLY PHASES - 1914 TO 1939
Commercial Wires Initially Utilized
From the time the Federal Reserve Banks commenced operations in
November 1914 until June 1918, telegrams between the banks, the Federal
Reserve Board and the Treasury Department, including those pertaining to
the weekly gold fund settlements, were conveyed over the commercial
telegraph wires of the Western Union or Postal Telegraph Companies.
Use of Code and Test Words
Initially the messages were sent in the regular code of the American
Bankers Association (ABACO) but for security reasons there was soon added
to the messages a special test or key word which was used in connection
with telegrams involving the payment of money.

Messages requiring test-

ing included all interdistrict transfers of funds and other transactions
which were settled through the Gold Settlement Fund.

The testing proce-

dure required corresponding mathematical computations at both the sending
and receiving stations.

Among other factors., the computation involved

the dollar amount of the transaction and any error or discrepancy in the
message was immediately indicated by failure of both stations to arrive
at the same test word.

The testing procedure not only provided a means

for authentication of messages, in lieu of signatures, but also served
as a safeguard against possible errors in the amounts of money conveyed,
which frequently ran into millions of dollars.

In most of the important

~spects, the same procedure for testing messages relating to transfers

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

of monies or securities has been retained to the present day.
The use of codes in transmitting telegraphic messages has varied
over the years.

When the first leased wire system was installed in 1918,

the Federal Reserve Board directed that the use of the ABA code and test
words be discontinued in the transmission of all messages with the exception of those relating to transactions in the Gold Settlement Fund
and orders for shipments of gold notes.

In 1919 the Federal Reserve

System adopted a code of its own which was intended for comprehensive
use on all leased wire messages.

However, some of the code words con-

tained as many as eleven letters and it was found that comprehensive us~
of the code was cumbersome and caused delays and inaccuracies in transI

mitting messages.

Accordingly, use of the code was dropped for all

~essages conveyed over the leased wire except those relating to the
transfers of funds or United States Government securities.

In 1938 the

Federal Reserve leased wire code was completely revised and simplified
so that no word contained more than five letters.

However, it has not

been UBed on a comprehensive basis and to this day coded messages continue to be limited to those involving transfers of funds or United
States Government securities.

The use of the code for these purposes

also is being rapidly eliminated as progress continues in converting to
the new form transmission procedures.
Need for Improved Wire Facilities
When the Federal Reserve Banks commenced active check clearing and
collection operations in July 1916, the volume of transactions between
the banks increased substantially.

The increase in collection activi-

ties, accompanied by a steady growth in the volume of interdistrict
transfers of funds and other business between Federal Reserve offices
during World War I, made it desirable to establish daily, rather than
weekly, settlements through the Gold Settlement Fund to eliminate the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

23
large float which was being created.

Because of the further substantial

increase in wire communications which this would entail and in view of
the lengthening delays which were being experienced in transacting business over the commercial wires, the need for better telegraph facilities
became apparent.

As a result, the Conference of Governors of the Federal

Reserve Banks appointed a cozmnittee of three Governors to consider the
matter of a private wire connection between the Federal Reserve Board
and the Federal Reserve Banks.

This committee, in its report dated

April 1, 1918, recommended acceptance of a proposal submitted by the
American Telephone and Telegraph Company for establishment of a private
telegraph system to furnish a means of rapid communication between the
Federal Reserve Board, the Federal Reserve Banks and the Treasury
Department.

The committee concluded that "the urgent ne~d for this ser-

vice is so manifest that your committee unanimously recommends installment without delay, in order that the Treasury Department, the Federal
Reserve Boa.rd, and the Federal Reserve Banks may have the benefit thereof
during the Third Liberty Loano"
First Federal Reserve Private Wire Sys-tern
The committee's recommendations were approved and an order for installation of the necessary equipment was placed promptlyo

On June

1918 private wire facilities were available to all Federal Reserve Banks J
the Federal Reserve Board and the Treasury Department i n Washington, D. C.
and the first Federal Reserve private wire system had come into being.
The leased wire service which was originally installed was a manually
operated Morse system.

All transmissions and receptions were in dots

and dashes by operators using the Morse code.

As it was impossible to

include all Federal Reserve Banks on one circuit, the system was divided
into an Eastern ..Division and a Western Division.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Chicago, Cleveland,

24
Philadelphia, New York, Boston, Washington, Richmond and Atlanta constituted the Eastern Division and Chicago, St. Louis, Kansas City,
Minneapolis, Dallas and San Francisco, the Western Division.

Because of

its central locati?n, Chicago was placed in charge of leased wire operations and was connected on both circuits, serving as the central clearing
or relay office for all messages between the Eastern and Western Divisions.
Description, Limitations and Costs
The manner in which the circuits were arranged made it necessary
for all messages from points in the Eastern Division destined for the
Western Division,to be transmitted first to Washington, D. C. from where
they were retransmitted to Chicago.

Chicago, in turn, again retrans-

mitted the messages to the desired destination in the Western Division.
Similarly, traffic from the West to the East was transmitted to Chicago
from where it was retransmitted via Washington to the point of destination in the East.

Thus, all interdivisional main line traffic had to be

manually retransmitted at least once, and in most instances twice, before
arrival at the desired station on the leased wire network.

Because of

circuit arrangements, it was also necessary for a large percentage of
intradivisional communications to be retransmitted at the Washington or
Chicago relay points in order to reach the station of destination.
Communications between head offices and their respective branches
were the responsibility of the individual head office.

While several

branches were connected on the main line leased wire circuits, head
office to branch communications continued to be principally by commercial
wire.

Under the arrangement, a telegraphic message from a branch office

in one Division to a branch office in the other Division might require
as many as five separate transmissions before reaching its destination.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

25
The possibilities of delays as well as the opportunities for errors
under such an arrangement are manifesto
A further limitation of the system was that all circuits were single or "one way" and only one station on a circuit could transmit at a
time.

Under the operating procedures which were established, it was in-

tended that each point was to have proper use of the wire in its turn in
accordance with the importance of the message.

But in the face of a

rapidly increasing volume of transactions this arrangement quickly resulted in serious delays on the busier circuits.
Initial rental costs for the circuits were assessed at preferential
Government rates and totaled approximately $4,700 per month. 27

Rental

costs were billed by the American Telephone and Telegraph Company to the
Federal Reserve Bank of Chicago to whom telegraph operators' salaries
were also reported by the other Federal Reserve Banksa

The combined

rentals and operators' salary costs were prorated by the Chicago bank
among the Reserve Banks in proportion to their capital funds.

With the

permission of the Secretary of the Treasury, each Federal Reserve Bank
included in its monthly bill to the Treasury Department covering its
expenses of conducting Fiscal Agency operations, one&half of its prorated
share of the leased wire costsa
Growing Inadequacy of Leased Wire Facilities
Although the leased wire system represented a great improvement
over the use of regular commercial channels, it soon became evident that
the facilities provided were inadequate to accommodate the demands which
were placed upon them.

This was due in part to the rapidly expanding

volume of interdistrict transactions, particularly transfers of funds,

27Fromthe files of the Federal Reserve: Bank of New .York, Wir.e
Transfer Division, 1918.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

26
and the heavy war financing requirements of the Governmento

However, it

was also occasioned in part by the increased telegraph volume which the
installation of the leased wire system itself generatedo

Because of the

convenience and ready availability of the leased wire facilities, many
messages were transmitted by telegraph, in preference to mail or other
means of communication which previously had been utilizedo

For example,

in the absence of specific regulations as to the types of transactions
which would be handled over the leased wires, some of the Reserve Banks
immediately commenced making free transfers of funds for their member
banks payable not only to banks but to individuals or any other designeeso
This, of course, greatly increased the demand for such transfers and resulted in many long and complicated messages passing over the leased
wires directing the manner in which a Reserve Bank was to make payments
of funds, including the disbursement over its counters to individuals on
presentation of specified documents or other prescribed identification.
Some Reserve Banks even sent telegrams for their member banks directed
to such members correspondent banks in other cities ordering transfers
of funds between the accounts of individuals or corporations, in which
the Reserve Banks had no participation and in which they were in no way
concerned.

This practice was justified as a needed service to member

banks on the grounds that commercial telegraph facilities were so overloaded with important war messages that telegrams were being delayed in
transmission up to as long as four or more hourso
As a result of the overloaded condition of the wires, it frequently
was necessary at New York to wait as much as two hours before a single
message could be sent because the wire was in use by Washington.
Occasionally, the Treasury would find it necessary to utilize the wire
for the greater part of a dayo

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

This would hold up Reserve Bank telegrams

27
and delay until the following business day the completion of millions of
dollars of transfers of funds and also seriously retarded the transmission of other important messages of all types.
Steps Taken to Alleviate Congestion
Prompt action was taken toward alleviating congestion and bottlenecks by adding additional circuits and facilities as experience indicated that this was necessary.

What were among the more important of

the earlier changes occurred in September 1918 when the Chicago to
Washington circuit was converted to a duplex line permitting simultaneous
two way traffic between the Eastern and Western Divisions, and an additional circuit from New York to Chicago with a drop at Washington was
placed in operationo

The new circuit provided a direct contact between

the two largest Federal Reserve Banks and resulted in the elimination of
a tremendous amount of relay on the part of the operators in Washingtono
These changes helped materially in speeding up traffic but the volume of
transactions increased apace and it was necessary to continuously expand
circuit capacities.
In May 1919, the New York - Chicago wire was converted from a single
to a duplex circuit.

This, together with the New York - Washington and

Washington - Chicago duplex circuits, provided a triangle of two way
wires connecting the Eastern and the Western Divisions and furnished
alternate relay routes which added a highly desirable flexibility to the
system in the event of wire trouble and also greatly increased the
capacity of the networko
However, it appeared that the increase in facilities could not keep
up with the growing demands which were being placed on the leased wire
system.

Concern was felt with the lengthening delays being experienced

in consummating transfers and other business, despite the increased

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

28
expenses which were being incurred because of the additional circuits
provided.

As a result, in March 1919 the Governors of the Federal

Reserve Banks appointed a committee to consider ways and means of im~
proving the leased wire service and to provide a more equitable division
of the expenses.

The recommendations made by the committee were sub-

sequently approved by the Federal Reserve Board and became effective on
July 1, 1919.

The principal effect of this action was to materially

curtail the types of messages which would be accepted for conveyance
over the leased w:i.re s ys temo

The use of the wire was limited exclu-

sively to messages between Federal Reserve Banks, their branches and
departments of the Government.

This prohibited all commercial telegrams

as well as messages signed by member banks.

Wire transfers of funds

were limited to those ordering payments or credits to banks or bankers.
Orders directing payments by Reserve Banks to individuals, firms or
corporations other than banks were prohibited, although such transfers
could be effected through their banks.

Brevity was directed in the

wording of telegrams and in no case was the wire to be used when the
mails would serve the same purpose.

Each office was directed to arrange

for careful censorship of all messages sent, with the view toward eliminating unimportant telegrams and unnecessary wordage.
Also effective on July 1, 1919, pursuant to the committee's recommendations, expenses of the leased wire system were prorated among the
twelve Federal Reserve Banks according to the number of words sent by
each bank, rather than according to their capital stock as had been the
practice previously.

It was felt that this plan would not only provide

a fairer division of the expenses but that it also would tend to make
the banks exercise more care in eliminating unne_c essary messages and:
words in sending telegrams.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

At the same time, the portion of the expenses

29
of the leased wire service which the Reserve Banks charged to the
Treasury Department was reduced from fifty per cent to twenty-five per
cent which, at that time, represented a more equitable distribution of
the costs on the basis of the proportionate volume of Government business conveyed over the wires.
Change From Government to Commercial Rates
In 1920 representatives of the American Telephone and Telegraph
Company approached the Reserve Banks in regard to assessing leased wire
rental charges at the regular commercial rate, rather than the preferential Government rate which was only fifty per cent of the commercial
rateo

They regarded the Government rate as having been extended only as

a temporary war measure and since the company's counsel had advi.sed that
the Federal Reserve Banks were not Government institutions they saw no
reason why regular commercial charges should not be assessed.
It was pointed out that under an opinion of the Attorney General of
the United States, the Federal Reserve Board was an independent Federal
establishment or bureau and that monies expended by it were public
monies. 28

The question, therefore, rested principally on whether the

leased wire system was a Federal Reserve Board or a Federal Reserve Bank
system.
It was finally agreed that, effective May 1, 1920, existing contracts would be taken over by the Federal Reserve Board from the Federal
Reserve Bank of Chicago and tbat all main line services then in operation would be continued at Government rates.

However, head office to

branch lines, which it was agreed could not properly be classified as
"Board" services, as well as all main line and other installations subsequently made were to be paid for at the regular commercial rates.
2 830 Op. Atty. Geno 308, 311 (1914).

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

30
adjust to the new arrangement, the Reserve Banks commenced reporting
telegraph operators' salaries to the Federal Reserve Board which then
allocated leased wire rental and salary expenses to the respective
Federal Reserve Bankso

At the same time, the Treasury was placed on a

basis similar to the Reserve Banks whereby it paid for its share of the
leased wire costs according to the actual number of words sent on
Government business, instead of by payment of a specified percentage of
the total leased wire costs.
The arrangement with respect to the payment of Government rates for
"Boardvv services continued only until July 1, 1921 at which time
Government rates were discontinued entirely and all charges were made at
the regular commercial rate_.2 9

This increased leased wire costs by

about $115,000 per annum to a total of approximately $485,000, including
rental costs and operators' salaries.30
Further Restrictions Placed on Leased Wire Messages
In 1922 and 1924 it was again necessary to take System=wide action
to relieve wire congestion and regulations were issued by the Federal
Reserve Board further restricting the types of messages which could be
sent over the leased wires.

The regulations provided that telegraphic

transfers of funds for transmission over the leased wires would be
accepted from and paid to member banks only and that transfers would be
limited to bank balances for round amounts in multiples of $100.
transfers were made without cost to member banks.

Such

The term 11 bank balance"

was contrued to mean an accumulation of funds comprising a permanent

29Eighth Annual Report of the Federal Reserve Board Covering
Operations for the Year 1921, Federal Reserve Board, Washington, D. C.,
February 20, 1922, p. 59.
30Eighth Annual Report Board, p. 59.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

31
account carried by one member with another member bank.

Transfers bf the

proceeds of individual collection items werenot permitted.

Descriptive

data in transfer messages was limited to the name of the sending bank,
the name of its correspondent member bank requesting the transfer, the
name of the member bank recei.v-ing credit and the name of its correspondent bank.

Transfers for consummation on the date of receipt were not to

be accepted by Federal Reserve Banks later than thirty minutes prior to
the closing hour of the Federal Reserve Bank to which the transfer was
directed.

Any telegraphic transfers requested after that time would be

consummated only at the discretion of the Federal Reserve Bank receiving
the credito '> The restrictions as to the type of transfers which would be
accepted related only to transfers made over the leased wire system. The
Federal Reserve Banks continued to make transfers in any amounts and for
any purpose over commercial telegraph wires at the expense of the bank
requesting the transfer.

Such transfers were accepted from and paid to

member banks only, but could be for the use of any bank, individual,
firm or corporation.
The use of the leased wires was also prohibited for tracing or advising payment or nonpayment of noncash collection items or for tracing
t~e proceeds thereof and for reconciling exceptions in accounts between
Federal Reserve Banks, except where a loss might be involved.

Directions

were again issued to the effect that telegrams should not be sent when
communication by mail would suffice and that all telegrams should be
worded as concisely as possibleo
The above described restrictions in the types of business handled
over the leased wire, which became effective in July 1924, resulted in a
material curtailment of the volume of traffic to the extent the leased
wire system was able to render prompt and efficient service over the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

32
period of the next several years.

Due largely to the effects of the

restrictions which were imposed, although no doubt also influenced in
some measure by prevailing business conditions, the number of words conyeyed over the leased wires declined from 20.4 million in 1923 to
13.4 million in 1925. 31

The reduced volume permitted, at least tempora-

rily, some contraction in circuit capacities and costs of the services
were reduced correspondingly.

Among the changes which were made, the

New York-Chicago circuit was converted from a duplex to a single wire in
the latter part of 1924.

But as volume increased with the expanding

business activities of the late twenties it was again necessary in 1928
to duplex this circuit.
Conversion From Morse System to Teletype Machines
The next significant change in the leased wire system was conversion from the use of Morse code to a teletype machine system.

The origi-

nal impetus to this change occurred in the latter part of 1929 when the
Federal Reserve Bank of Chicago found it increasingly difficult to hire
competent Morse telegraph operators

and obtained permission of the

Leased Wire Committee to install the American Telephone and Telegraph
Company's Telegrapher Printer Service on some of the main line circuits.
The charge for the printer equipment was slightly higher than for the
regular Morse service, but this was more than offset by the dif:ference
in the salaries of typists, who could be utilized to operate the printer
equipment, as compared with the higher prevailing salaries for Morse
operators who were in extremely short supplyo

There was also considered

to be a substantial advantage to the printer equipment in that it provided a written record of the messages exactly as they were transmitted,

31 computed from material in the files of the Federal Reserve Bank
of New York.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

33
thereby reducing the number of errors made and the time spent in determining whether an error was attributable to the sending or the receiving
operator.
On March 30, 1930, the printer service was placed in operation on
the New York - Chicago duplex circuit.

It was also installed on several

other lines carrying a substantial volume of traffic, including the
St. Louis - Chicago and the San Francisco - Chicago circuits.

Experience

with the teleprinters was quite satisfactory in most respects and generally resulted in some overall savings in expenses.

However, messages

could be transmitted at a rate of only forty w9rds per minute, which was
but slightly more than half the rate of speed that could be attained by
an experienced Morse operator.

From the beginning, this reduced speed

tended to delay matertally New York - Chicago traffic and the New York
Reserve Bank was never fully satisfied with the new equipment.

However,

the lesser speed of transmission did not become a serious deterrent until
the period of the banking holiday.

At that time, the leased wires were

heavily burdened with long messages, including requests for rulings and
interpretations with respect to the numerous laws, proclamations and
executive orders which were issued, and on February 5, 1934 it was necessary to ree:o nvert the New York - Chicago wire to the Morse system on a
twelve hour a day operating schedule.

The added capacity gained by this

change permitted the relaying of some of the Washington - Chica.go traffic,
which was also subject to serious delays because of the heavy volume,
through New York thereby also relieving the congestion on that line.
The need for this increased capacity was of relatively short duration.

Because of the marked falling off in leased wire transmissions

resulting from the serious business depression of the nineteen thirties,
the contraction of facilities soon became feasible.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Since it was the

34
consensus that operating economies as well as increased accuracy in
transmissions could be realized from the use of printer rather than
Morse equipment, conversion on a gradual basis of the entire leased wire
system to teletypewriter service was recommended by the Leased Wire
Committeeo

This was approved by the Conference of Governors on

February 5, 19350

At that time, the Federal Reserve Board also con-

curred in a recommendation of the Leased Wire Committee that the Board
assume its proportionate share of the expenses of the leased wire system, which previously had been entirely allocated among the Federal
Reserve Banks.
By August 4, 1936, sixty speed teletype service bad been installed
and was placed in operation on the Chicago= New York and washington New York circuitso

The installation of the sixty speed machines offset

in some measure the reservations to the adoption of this type of equipment expressed by the Federal Reserve Bank of New York on the basis of
its earlier experience with the forty speed machines, which, as mentioned above, had been found too slow to carry peak loads in busy
periods without serious delays in service.
During the course of conversion to teletypewriter service, traffic
surveys indicated that on the basis of the prevailing volume of business,
numerous circuits no longer required private lines but could be advantageously converted to less expensive non~private facilities furnished
by either the American Telephone and Telegraph Company or the Western
Union Telegraph Company.

As a result, by mid-1938 all ma.in line facili-

ties had been converted to teletypewriter exchange service provided by
the American Telephone and Telegraph Company (TWX), with the exception
of the Washington - Chicago, Washington - New York and Chicago - New York

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

35
circuitso

These lines carried a sufficient volume to warrant their con-

tinuation on a private line basis.

Branch leased wire facilities were

also fully converted to either TWX or TWS, the latter being a service
provided by Western Union similar to the TWX service of the American
Telephone and Telegraph Companyo

The last regular use of the Morse

system was discontinued on June 16, 1938 when the New York - Boston circuit was converted from a full time leased wire with Morse equipment to
TWXo

The changes which were ma.de resulted in substantial savings in the

costs of operating the leased wire system.
As of August 15, 1938, the Chicago - San Francisco circuit was converted from TWX to a telemeter service provided by the 'Western Union
Telegraph Company when a change in the ta.riffs made it possible to utilize this service at a cost lower than TWXo

While telemeter service was

not a private wire system it was closely akin thereto.

Several customers

were included on a split type circuit under an arrangement· whereby mes=
sages transmitted by one customer could not inadvertently reach the
ceiving machine of another customer on the line.

re-

The principal

difference from a private line system was that there could be delays in
the p1ick up of messages for transmission caused by another customer
using the line.

A similar situation would, of course, exist in a pri-

vate wire system where several stations in the netv1ork were included on
one circuit, which was generally the caseo

Charges for telemeter serv-

ice were on a per word basis with the cost per word declining as the
number of words increased.

After traffic exceeded a specified volume

per month, there was no additional charge for the excess wordageo

This

·f eature, together with the fact that telemeter circuits were the equiva•
lent of a duplex wire permitting simultaneous two way transmission, made

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

it a very desirable type of service capable of accommodating expansion
in volume at a reasonable increase in cost, or at no extra cost after a
certain specified volume was surpassed.

The overall advantages of the

telemeter service were such that this system was promptly adopted on
many of the main line circuits, by all branch liries previously utilizing
TWS and by some branch lines using TWX, where there was sufficient volume to warrant the change.
At this time, the leased wire system was comfortably accommodating
the demands being made upon its capacitieso

In the circumstances, the

Board of Governors approved, effective July 1, 1939, a recommendation
that all telegrams between Federal Reserve Banks and branches which were
then being sent over commercial wires should be sent over the Federal
Reserve leased wires, except in cases where undesirable circuitous routing Would be 1·nvolvedo

Charges f or sueht e~egra.ms
l
were t o b e ma deon

the basis of regular commercial wire rates.

The effect of this action

was that the leased wi.res were opened to telegraphic transfers of funds
ordered by and payable to member banks for any purpose and in any a.mount,
without limitation as to descriptive data, subject in each case to a
charge not exceeding the commercial wire rate for the telegram or telegrams involved in the transfer.

While such transfers would be accepted

from and paid to member banks only, they could be for the use of any
bank, individual, firm or corporation.

Leased wire telegraphic trans-

fers of bank balances in multiples of $100 also were authorized, subject
to commercial wire charges, when ordered by a member bank for the credit

32circular No. 1958, Federal Reserve Bank of New York, June 30,
1939,

p. 2.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

37
of any nonmember clearing bank or by any nonmember clearing bank for the
credit of any member bank or any other nonmember clearing bank. 33
Free transfers of bank balances made for and paid to member banks
continued to be restricted to even amounts in multiples of $1,000.

This

limitation with respect to amount had been fixed in 1938, replacing the
previous restriction which had been in effect since 1924, authorizing
such transfers in round a.mounts of $100.

The change had been made be-

cause it was found that transfers in increments of $100 were being used
to circumvent the free transfer privileges and because it was considered
that inasmuch as

only bank balance transfers were involved the smaller

increments were unnecessary, as well as undesirable.

33circular No. 1958, p. 1.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPIBRV
HISTORICAL DEVELOPMENT OF FACILITIES AND POLICIES,
RECENT PHASES= 1940 TO PRESENT
Reperforator Tape Switching System
While the conversion to teletypewriter service was in process, the
Western Union Telegraph Company developed a . reperforator switching turret which permitted automatic relay of messages without the necessity of
manual retransmissions at relay points, as was required in other systems
for relaying telegrams which were in -existence at that time.

Under the

reperforator tape system, instead of manually retyping and retransmitting
telegrams at relay points, switchboards similar to telephone switchboards were employed for automatic relay of the messages.

The telegrams

were received at the switching center on perforated tape with the first
word on the tape indicating the destination of the message.

The opera-

tor at the switching turret, by means of inserting a jack in the switch=
board, made a direct connection between the sending and receiving stations, which permitted automatic through transmission of the messages.
This arrangement greatly reduced the time required for retransmitting
telegrams and also eliminated the possibility of errors in retrans=
mission, other than errors resulting from selection by the operator of
the improper station of destination.
Western Union recommended that the new switching system be adopted
for use in connection with the Federal Reserve Leased Wire System.
After careful consideration of that Company's proposals, as well as

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

39
counter proposals made by the American Telephone and Telegraph Company,
it was decided to install a reperforator switching turret in the telegraph room of the Board of Governors in Washington, D.

c.,

as this ap-

peared to be by far the most advanced development to that time for the
retransmission of telegraphic messages.

The installation was completed

and the new system was placed in operation on August 1, 1940.

In addi-

tion to the installation of the turret, this required conversion on all
main lines,from American Telephone and Telegraph Company equipment and
circuits to Western Union machines and lines.

High speed (sixty word

per minute) duplex private wire circuits and teleprinter machines were
installed for operation between Washington - New York and Washington Chicago and low speed (forty word per minute) single circuit private
lines and teleprinter machines were installed connecting on one circuit
Washington• Philadelphia - Baltimore and on a second circuit Washington Richmond.

All other main line leased wire circuits were operated on

Western Union telemeter service.

American Telephone and Telegraph

Company services were retained only in connection with several of the
branch lines.
When the reperforator switching turret was first installed, serious
operating difficulties and delays were encountered due to the many new
technical innovations which were included in the engineering of the
equipment.

However, these were ironed out within a short time and in

the spring of 1942, as the result of favorable experience, a similar
turret was installed at the Federal Reserve Bank of Chicago.

This ex-

tended the benefits of more rapid and more accurate retransmission of
telegraphic messages, previously enjoyed only by the Eastern •Division,
to the Western points of the leased wire system.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Sub-switching centers

40
were also installed at the Federal Reserve Bank of St. Louis a.nd the
Federal Reserve Bank of San Francisco so that messages could be relayed
to their branch offices without being manually retyped and retransmitted.
This service operated very satisfactorily and permitted telegraphic
communication over the leased wire system to be transmitted rapidly and
with a minimum of errors.

The elimination of errors in the retransmis=

sion of messages at relay points was of significance and resulted in a
sharp decrease in the number of ·s ervice messages sent daily inquiring
about and correcting such errorso

The system proved adequate to the

needs of the war and post war years and, in addition to affording substantial improvements in the speed and accuracy of transmission, savings
in operating costs of nearly $100,000 a year were realized as compared
with the costs of earlier and less efficient services.
Question of Liberalizing and Making More
Efficient Leased Wire Services
In 1948 the Bankers Trust Company, New York City, inaugurated at
its own expense a private leased wire service between itself and its
correspondent banks located in various of the larger cities throughout
the country.

Because of the competitive aspects involved, other large

New York City banks immediately began giving active consideration to
providing a similar service for their own correspondent banks, either
individually or on a joint basis, and representatives of several New
York City Banks discussed the subject with the Federal Reserve Bank of
New York.

The thought occurred that the Federal Reserve System might

render a worthwhile service to a considerable number of its member
banks, and at the same time assist in resolving the competitive aspects
without the necessity of expensive duplications of wire facilities by
individual banks or groups of banks, by expanding its own leased wire

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

system to include member banks in Reserve citieso

It was thought that

this might provide economically and t o a much larger group of banks,
substantially the same services which were then being enjoyed by the
participants in the wire service of the Bankers Trust Companyo

The

question was submitted to the Conference of Presidents of the Federal
Reserve Banks for consideration but in April 1949, before any specific
action had been taken, announcement was made of the establishment of a
private bank wire system sponsored by a group of large commercial banks
in New York City and Chicagoo

In the circumstances, it was decided that

the Federal Reserve Sys tem would give no further consideration at that
time to expanding its leased wire system t o include member bankso
While the subject of member bank participation in the Federal
Reserve Leased Wire System was under consideration, questions had arisen
as to the adequacy of the services which were being rendered and, in
November 1949, the Federal Reserve Banks were asked to submit any suge2
gestions they might have with respect to the question of liberalizing
and making more efficient the leased wire serviceso

This culminated in

the Board of Governors approving, effective January 12, 1951, the following changes in Federal Reserve Bank operating procedures~
(a)

Federal Reserve Banks and branches would absorb the
costs o:f telegrams transmitted over the Federal Reserve
leased wires in connection with telegraphic transfers
for member banks of bank balances in amounts of $1,000
or over, rather than only in even multiples of $1,000
as previously had been the case;

(b)

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Federal Reserve Banks and branches ~ould absorb the
costs of all telegrams transmitted over the Federal

42
Reserve leased wires which related in any way to cash
items deposited for collection through the Federal
Reserve check collection system by member or nonmember
clearing banks;
(c)

Messages relating to cash items di.spatched by a Reserve
Bank to a direct sending member or nonmember clearing
bank located i.n another Federal Reserve city previously
sent by commercial wire

collect", would be sent over

the leased wires to the Reserve Bank or branch in whose
territory the direct sending bank was located without
charge to the direct sending bank, and the message would
be relayed by the receiving Reserve Bank by commercial
wire "collect" o
The decision to absorb telegraphic costs relating to the collection
of cash items represented a broad change in Federal Reserve policy.
Previously all telegraphic charges pertaining to the payment or nonpayment of cash items, or in connection with receiving or transmitting any
other information or instructions with respect to such items, were
charged to the account of t he deposi.ting bank.

As late as November 1948

the policy of continuing to charge to depositing banks the costs of all
telegrams relating to t he collection of cash items had been conf'irmedo
This action was taken because it was felt that if the Federal Reserve
Banks were to absorb wi.re costs relating to the collection of cash i terns,
commercial banks, particularly those engaged in a correspondent banking
business, would raise serious objections on the grounds of competition
in the check collection field, since · they themselves were not permitted
to absorb such costs.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

However, it was believed that with the inception

43
of The Bank Wire the possibility of such criticism would be minimized,
as it was 1mderstood correspondent banks would absorb the costs of such
messages relating to the collection of cash items sent over their own
private wire systemo
Survei of Efficiency of Leased Wire System
In November 1950, the Leased Wire Committee was requested to ask
the Western Union Telegraph Company and the American Telephone and
Telegraph Company to make a survey of the operating efficiency of the
Federal Reserve Leased Wire System to determine whether it was abreast
of the most recent developments i.n the communications field and was
being operated efficiently and at a reasonable costo
This was motivated by the fact that since 1940, when the reperforator switching turrets were installed, the number of words transmitted
over the leased wire system had doubled from the rate of approximately
ten million to twenty million words per year and material delays in the
transmission of messages between some points on the network were again
being experienced.

Many of these messages were transfers of funds, some

of which resulted from sales or purchases of Federal funds, or transfers
of Government securities and, because of their importance, it was considered essential to provide the means for handling these types of messages with the greatest dispatch, especially during the peak period at
or around the closing houro

It had also come to the attention of the

Reserve Banks that the switching center equipment for relaying messages
which was being used in the operation of The Bank Wire was of a more
modern and efficient type than that used at the Federal Reserve switching centers.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

44
"While the overall surveys were in progress, it became necessary as
an interim measure to increase the capacity of the existing leased wire
system to improve the transmission of messageso

The Chicago= Washington

and Washington - New York circuits were particularly congested and to
alleviate this condition a leased wire duplex circuit was installed between the Chicago switching center and the Federal Reserve Bank of New
York.

A leased wire duplex circuit was also installed between the

Federal Reserve Bank of Boston and the Federal Reserve Bank of New York,
replacing a telemeter circuit which no longer was adequate.

The traffic

on the single or "one way" leased wire circuit connecting Washington=
Philadelphia - Baltimore had increased over

25oi

since 1940 and serious

delays were being experienced by all of these offices in transmitting
their outgoing messageso

Therefore, two separate single wire circuits

connecting Washington - Philadelphia and Washington= Baltimore were installed, doubling the former capacityo
Installation of New 81-D-l Leased Wire System
After thorough study of the adequacy of the existing facilities of
the leased wire system and of proposals submitted by the Western Union
Telegraph Company and t he American Telephone and Telegraph Company for
installation of a new communications system, the Leased Wire Committee
~

concluded that the present system was not adequate for the volume of'
traffic and was not modern compared with newer facilities which were
available for private wire systemso

The Leased Wire Committee, in its

report transmitted to t h e Conference of Presidents on December 31, 1951,
pointed out the following disadvantages of the then existing leased wire
system:

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

4:
1.

It was not a fully integrated system to the extent that
some of the branch lines were not connected with the
main line circuits.

The present system utilized the facilities of both
Western Union and American Telephone and Telegraph
Companies and was composed of single, duplex, telemeter
and TWX circuitso

3. There were delays in the transmission of messages, especially during the periods when it was most important that
wire transfers of funds and CPD transactions be completed
promptlyq
4.

The switching centers at Washington and Chicago were
manually operated.

It was necessary to manually retype messages at several
head offices for relay to their branches.

Expansion of switching system facilities was difficult
and time cons urning •.

The system was unnecessarily vulnerable because of the
location of the switching centers in critical target
areas.

The committee concluded that the proposal of the American Telephone
and Telegraph Company for installation of a completely automatic.and
integrated communications system with no manual handling of messages had
substantial advantages over both the present leased wire system and the
proposal submitted by Western Union, which provided for installation of
semi-automatic -push button equipment at switching centers in Washington,
Chicago and San Francisco.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It therefore recommended that the Telephone

46
Company's proposal be acceptedo

T.he following were considered to be

among the more important advantages of the system recommended for
adoption:
1.

It was a fully integrated automatic system connecting all
Federal Reserve Banks and brancheso

All circuits were duplex permitting simultaneous two way
transmissiono

It was much less vulnerable during a national emergency
because a single switching center would be located at
Richmond 7 which was considered to be a nontarget areao
If any office on a circui.t 7 except Richmond 7 were incapacitated, the service to all other offices on the circuit
would not necessarily be affectedo

One switching center (instead of two main switching cen=
ters and various relay points under the existing system
and three switching centers under the proposed Western
Union System) would speed up transmission time between
points of origin and destinationo

There would be no manual operation of any kind in re=
laying messageso

Less pers.onnel was required than under the existing system
or the system proposed by Western Uniono

7. It would increase speed of transmission from sixty five
or less wo:rds per minute to seventy five words per minute.
Bo

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It was capable of more rapid expansion and realignment of
circuits.

47
9.
10.

Less space in Reserve Bank buildings was required.
The American Telephone and Telegraph Company had more
lines available than Western Union.

The rental and installation costs of the system proposed by the
American Telephone and Telegraph Company compared favorably with those
quoted by Western Union and, although the rentals exceeded somewhat those
of the existing leased wire system, it was thought that the difference
would be largely compensated for by the lesser number of personnel which
would be required.
The committee's recommendations were approved and on March 19, 1952
the Board of Governors formally accepted the proposal of the American
Telephone and Telegraph Company and ordered the installation of that
Company's 81-D-l automatic teletypewriter system.

It was recognized that

because of a shortage of teleprinter machines and because all of the
equipment for the switching center would have to be manufactured and installed, completion of the new communications system would take more than
a year.

Installations progressed as anticipated and on July

6, 1953, the

new system was placed in operation, once again providing the Federal
Reserve System with the fastest and most advanced type of private communications system available for the prompt and efficient transmission of
telegraphic messages.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER VI
THE BANK WIRE

Extent and Nature of Network
The Bank Wire is a nationwide private telegraphic network engineered
by the Western Union Telegraph Company connecting approximately two=
hundred of the larger commercial banks located in fifty=nine major cities
throughout the country.

It was designed for the one prime purpose of

transmitting messages from one bank to another speedily, accurately and
in confidence and is the largest communications system of its kind in the
worl.d.34
Transmission of messages is by means of teleprinter machines, at
least one of which is installed in the office of each participating or
sponsoring bank.

All outgoing messages flow to one of five switching

centers, . located in San Francisco, Dallas, Chicago, Atlanta, and New York,
from where they are directed to the bank of destination by means of reperforator tape switching turrets.

Attendants at the switching centers for-

ward the messages by push button operation,;, but there is otherwise no

manual retyping or retransmission of any kind between the point of origin
and the station of destination, thereby insuring that the messages will be
received in exactly the form they were originally dispatched.
Relationship Between The Bank Wire and Federal
Reserve Leased Wire System
There is no d.irect connection of any kind between The Bank Wire and
the Federal Reserve Leased Wire System, but one may be said to complement
34'rhe American Banker, September 30, 1950, Vol. CXV, No. 177.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

49
the other in expediting the completion of nationwide banking and business
transactions of many kindso

For example,~ .Bank Wire participant in

Dallas may wish to replenish its reserve account by selling securities
held in custody by its New York City correspondent bank and having the
proceeds of sale transferred to its credit at the Federal Reserve Bank of
Dallaso

To accomplish this, it would order sale of the securities and

transfer of the proceeds by means of a telegraphic message conveyed over
The Bank Wire to its New York City correspondent bank.

The New York City

bank would effect the sale of the securities and direct the Federal
Reserve Bank of New York to charge its reserve account for the amount to
be .transferred and credit the Federal Reserve Bank of Dallas for the
account bf its correspondent bank in that city.

The desired transfer

would be effected over the Federal Reserve Leased Wire System and all
phases of the transaction would be accomplished with utmost dispatch~
When the question of establishing a private bank wire service was
originally being discussed, some bankers were of the opinion that the
need for an elaborate and expensive leased wire system among commercial
banks might be alleviated if the Federal Reserve _System would permit the
transfer of balances of individuals, firms, or corporations over the
Federal Reserve leased wires without cost, or would otherwise broaden
the use vhich commercial banks might make of its leased wire services.
The subject was informally discussed with Reserve Bank representatives
and the matter received .their careful consideration.

It was the pre=

vailing viewpoint that at peak periods the Federal Reserve leased wires
were loaded to capacity with Federal Reserve and Fiscal Agency messages
and that · substantial expansion in the scope and type of messages handled
might result in serious delayso

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It was also considered that Federal

50
Reserve facilities for transferring funds were primarily for the purpose
of transferring bank balances and that if the facilities were opened to
the free _transfer of corporate balances, including those Pertaining to
the business of insurance companies, firms and corporations having offi ...
ces, stores or factories located throughout the country, the volume
involved would be so great that the situation would arise where transfers
of bank balances would be of secondary importance and subject to delays
because of the extent of corporate transfers conveyed over the leased
wires.

There was a strong desire to avoid any possibility of delay in

transmitting important official Federal Reserve ,telegrams, Fiscal Agency
messages or bank balance

and security transfers totaling billiora of dol-

lars daily, by increasing the volume of member bank business transacted
over the leased wireso

At the same time, the Federal Reserve Banks gave

preliminary consideration to the desirability of one or more Reserve Banks
being .c onnected as participants in the commercial bank wire network and to
the action they should take if requested either to convey telegrams to a
Bank Wire participant for transmission over The Bank Wire, or to accept
from participants in The Bank Wire, telegrams which had been transmitted
over The Bank Wireo
However, the necessity or occasion to reach final decisions on the
above questions never materialized.

The majority of commercial bankers

apparently considered it more practical and desirable to establish their
own private wire

network, rather than to seek expansion of the services of

the Federal Reserve Leased Wire System to accomplish their objectives,
and the Reserve Banks were never formally requested to consider such an
expansion of their facilities.

Neither were the Reserve Banks invited to

participate in The Bank Wire network, nor did they request to be admitted

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

51
-t o participation.

Some .bankers were strongly opposed to the Federal

Reserve Banks having any connection whatsoever with the planning, organization or operation of The Bank Wire, and even objected to discuss =
ing it with them.
Inasmuch as the business of the Federal Reserve Banks, including
the business transacted over the leased wires, is in most respects fundamentally different from the business of commercial banks, it seems to
me quite appropriate that the Federal Reserve System and the commercial
banking system each should have i.ts own private wire systemo

This per-

mits them to serve in the manner they deem most efficient and effective
their own particular needs and requirements 7 without question as to the
relative importance of messages or conflict as to preference .and priority
in the transmission of messages during peak periods, particularly at or
near closing hours.
Leased Wire Service of Bankers Trust Company
Prior to April 1948, several New York City banks had leased wire
.connections with a few other banks in some of the larger cities of the
country, but the networks were not extensive and the costs of the services were _shared between the participantso

At that time, the Bankers

Trust Company, New York City, inaugurated a rather extensive private
wire system of its own for the purpose of improving its service .to cor=
respondent banks.

The wire facilities were ·leased from Western Union

and switching turrets were located at Bankers Trust Company's head office
in New York City and at its Chicago office.

Originally, it had connec-

tions with approximately twenty banks in fifteen cities but the services
proved very :attractive and the network grew quite rapidly, soon extending to ,include over forty ~anks in twenty six cities from coast to coast.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

52
The entire costs of the services were absorbed by the Bankers Trust
Company, with the exception of the salaries of teletype operators em=
ployed at the offices of outlying banks connected on the networko
Other New York City banks doing a substantial correspondent bank
business, as ~ould be expected, were much disturbed about this type of
competitiono

Within a short time several such banks began formulating

plans for the operation of a similar wire system and invited other banks
to join with themo

The way became cleared to operate a joint wire serv-

ice of this type when it was ascertained that it would not be in violation of the regulations of the Federal Communications Commission for a
group of banks to operate a single communications system and to share
the costs thereof, provided the ,arrangement was made in the name of one
bank rather than of an associationo

The regulations apparently were in

no way concerned with the manner in which the expenses were sharedo
Previously the Bankers Trust Company had given consideration to a cooperative system with other New York City banks but at that time were of
the understanding that the regulations of the Federal Communications
Commission would not perm.it the operation

of a system by an association

of banks for their mutual benefit, since this would be considered as
engaging in com.petition with regular communications companieso

While

the distinction appears quite technical, the new interpretation, nevertheless, cleared the way to go ahead with the group enterpriseo
At first, there was no great enthusiasm for the project on the part
of a few of the larger banks because of reservations that the benefits
to participants would be sufficiently great in terms of use, time savings
and other services to justify the very considerable expenses which would
be involvedo

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

However, the competitive aspects continued to be a matter

53
of major concern and the problem engaged the attention of large cor.,,
respondent banks not only in New York City but in Chicago as wello
One of the many problems which the private wire system of the
Bankers Trust Company posed for its competitors is illustrated by the
confusion caused in another New York City bank with respect to the
payment of telegraphic charges for transfers of fundso

Formerly, in

the ordinary course of business such charges were passed on to the
customers ordering the transfers.

However, with increasing frequency

customers complained about the imposition of the charges, stating that
Bankers Trust Company was offering a similar service free of costo

these cases, it was necessary to refer the complaints to an officer who
would determine on the basis of overall relationships with the partic ular customer whether or not to absorb the chargeso

If it were decided

that the charges should be absorbed J the name of the customer was placed
on a preferred list and the bank subsequently assumed all telegraphic
costs which ordinarily would have been passed on to the customero

addition to the confusion caused by the need to maintain and refer to
such a preferred list, the situation was quite undesirable from the point
of view of the bank's overall customer relationships.
Announcement of Joint Private Wire Service
By February 1949, arrangements among the banksto establish a joint
wire service -had progressed to the point an article appeared in the news-

papers stating that the National City Bank, the Guaranty Trust Company,
the Chemical Bank and Trust Company and the Central Hanover Bank and
Trust Company, all of New York City, were planning a new wire system to
link one hundred banks in thirty six cities and that the system, which

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

54
was "intended to compete with a similar but smaller network established
nearly a year ago by the Bankers Trust Company, would involve an annual
operating cost of about $500,ooo." 35

The response of out-of-town banks

to the service was reported as having been generally enthusiastic but
some .New York City bankers continued to hesitate joining in the plan
because of the high costs of' the services and the uneconomical aspects
involved in the duplication of facilities, which would result from the
operation of two competing leased wire networks among commercial banks
covering many of the same principal cities.
After a series of meetings over a period of several months, it was
agreed that the Bankers Trust Company's wire system would be discontinued
after the larger facilities became available and, on the basis of this
understanding, the Chase National Bank and the Bankers Trust Company
joined as sponsors of the new wire networko

Four Chicago banks, namely

the Continental Illinois National Bank and Trust Company, the First
National Bank of Chicago, the Harris Trust ~d Savings Bank _and the
Northern Trust Company, also joined with the New York City banks as

sponsoring institutions.

A press release issued in April 1949 stated

that the contemplated communications system, to be known as "The Bank
Wire", would link at least one hundred and twenty banks in thirty eight
cities from coast to coast and that the project was expected to involve
an annual operating cost approaching $750,000.

It was reported that

:1'while all banks participating in the (Bank Wire) system will contribute
to the cost of its operation . and maintenance, it is understood that the
sponsors will underwrite a larger portion of the expense." 36

3°5The
__________
New York .T_i_m_e_
·s.......
1 Thursday,

February

17, 1949,

p ..

35,

It will

Co 1 umn

36
The New Yor~ Times, Friday, April 8, ~949, p. 37, Columns 6, 7.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

5•

55
be recalled that the wire services of the Bankers Trust Company had
been operated without charge to the participating banks.

Because of

the magnitude of the network and the special nature of the required
equipment, operation of The Bank Wire was not scheduled to begin until
the early part of 1950.
Inauguration of The Bank Wire Service
Some delay was experienced in placing The Bank Wire in operation,
principally because of coal and steel. strikes which held up production
of the equipment needed.

Initial services to· one hundred forty two .

banks in thirty six cities were inaugurated on November 1, 1950 and
services to forty six additional banks in eighteen other cities were
commenced on December 4, 1950.

It will be noticed that from April 1949

when the system was first announced until operations commenced, the
number of banks accepted for participation increased from approximately
one-hundred and twenty to one hundred eighty eight and the number of
cities covered had grown from thirty eight to fifty four, indicating the
keen desire among banks to participate in the .service o

The number of

sponsoring banks had also increased from ten to sixteen including:

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

New York City Banks
Bank of the Manhattan Company
Bankers Trust Company
Central Hanover Bank and Trust Company
Chase National Bank
Chemical Bank .and Trust Company
First National Bank
Guaranty Trust Company
Irving Trust Company
Marine Midland Trust Company
Jo Po Morgan & Company,. Inc.
National City Bank
New York Trust Company

Chicago Banks
Continental Illinois National Bank and
Trust Company
First National Bank
Harris Trust and Savings Bank
Northern Trust Company
At present, there are seventeen New York City and Chicago sponsoring bankso

Among the original New York City sponsors, the Bank of the

Manhattan Company and the Chase National Bank have combined through
merger, as have the First National Bank and the National City Bank.

The

Bank of New York and the Manufacturers Trust Company have joined as additional sponsors.

The City National Bank and Trust Company of Chicago

has been added to the four original sponsoring banks in that city.
Contractual Arrangements
The agreement covering The Bank Wire installations and services was
executed on October 30, 1950, and is between the Bankers Trust Company
and The Western Union Telegraph Company.

Rentals for all circuits and

equipment are payable by Bankers Trust at rates fixed under the applicable tariff filed by Western Union with the Federal Communications
Commissiono

Charges for circuits are in accordance with the agreed

upon hours of operation, regardless of the number of words sent.
Western Union has provided space in its own buildings for installation
of necessary switching center equipment and the switching centers are
operated and maintained by Western Union personnelo

Western Union also

maintains for the convenience of the banks a record of the number of
messages relayed through the switching centers.

Installation costs of

switching center equipment, the monthly rental charges for such equipment and the salaries of switching center supervisory and operating
personnel are payable by Bankers Trust Company.

Bankers Trust Company

a.lso has contracted to pay the installation costs and rental charges

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

57
for equipment located at the offices of all sponsoring and participating
bankso

Western Union maintains the circuits and equipment, both at the

switching centers and the out stations.

The costs of such maintenance

are included in the established monthly rental rates and no additional
charges are made therefor.
The governing agreement specifies that the facilities of The .Bank
Wire are for the private use of ."banks connected with the private wire
system only in comm'Wlicating with any other bank connected to the systemn,
and _"that such facilities will not be used, either directly or indirectly,
for the handling of communications for the general public."
sion

This provi-

has been broadly construed to permit transmission over The Bank

Wire of messages addressed to or received from a nonparticipant, pro=
vided no charge is made against the nonparticipant, and further provided
that the receiving or sending participant bank has a direct interest in
the .t ext .of the message.

Interpretation in this manner has permitted

participating banks to convey, by telephone or other means of communications, to

nonparticipating banks messages received over The Bank Wire,

and to accept from

nonparticipants, by telephone or otherwise, messages

for transmission over The Bank Wireo

In effect, this has extended the

benefits of the private wire system to correspondent banks of all participating banks, even though· such correspondents are not themselves
directly connected with The Bank Wire network.

The result has been to

greatly expand the scope of operations of The Bank Wire and to extend its
usefulness to numerous banks throughout the nation located in small communities, as well as to those situated in the larger .cities.
All other sponsoring banks have authorized the Bankers Trust Company
to -act as their .agent in executing the agreement with Western Union,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

58
.w ithout reference to their own interests in such agreement.

The spon-

wrs have also agreed tbat the rights, duties and obligations of Bankers
Trust Company are to be those of all sponsor banks, and that each sponsor
will assume and fulfill its proportionate sbare of the .duties and obligations assumed by Bankers under the terms of the agreemento
An Operating Committee, consisting of representatives of certain

sponsor banks, was initially appointed by the sponsors to supervise the
op-erations .o f The Bank Wire in accordance with duties and p.o wers as outlined in a ."Memorandum of Operation of The .B ank Wire", which is the basic
document governing the manner of operation of the serviceo
Me~orandum of Operation
The mem9randum of operation of The Bank Wire provides for the continuance of the Operating Committee on a rotating basis among the sponsoring banks.

It grants to the committee supervisory powers over all

operating matters affecting The Bank Wire, with the exception that it is
required to refer to the sponsor banks for approval such major questions
as the extension or termination of the contract with the communications
company, any change in the method of expense distribution or any other
matter which in the aggregate may increase to the extent ·of $50,000 or
· more per annum, the expenses of The Bank Wire.

The -Operating Committee

has broad p,owers to prescribe rules and regulations governing the use of
The Bank Wire• s facilities by sponsor banks and by participating banks .o
The memorandum of operation defines the terms and .conditions for
admission of add,itional sponsor banks from among other banks having their
principal office in New York City or Chicago and for the withdrawal from
the agreement of sponsor banks.

It also provides that banks, other than

those having a principal office in New York City or Chicago, may use the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

59
facilities of The Bank Wire as participating banks upon the consent of
two.,.thirds of the banks then represented on the Operating Committee.
To qualify as a participant, a bank must enter into an agreement, in a
form approved by the Operating Committee, with the leasee of the wire
facilities.
Operating costs allocated to participating banks are apportioned
on a basis recommended by the Operating Committee and approved by two=
thirds of the Chicago sponsor banks and two-thirds of the New York
sponsor banks.

At the present time, participating banks may send or

receive up to a total of one hundred messages per month without incur=
ring any costs for their use of Bank Wire facilities, over and above
their equipment rental costs.

Messages in excess of one hundred per

month are charged for at the rate of twenty seven cents per message.
Total operating costs, including any administrative expenses,
counsel fees and other non-recurring charges, less the payments re=
ceived from participating banks, are allocated among the sponsor banks.
Each sponsor is charged for the rental of equipment located at its
offices, as well as for the related equipment required at switching
centers.

The balance of the operating costs are apportioned among the

sponsors on the basis of their proportionate use of the facilities as
measured by the number of messages sent and received by them in relation to the total of all messages conveyed over the wireso

Provision

has been made for a minimum monthly assessment against sponsor bankso
The amount of such asse.ssment is presently set at $700 per month.

Any

surpluses which may be accumulated are distributed annually among the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

60
sponsor banks on the basis of their proportionate activity, in the same
ma.nr;ier as expenses are allocated.
The Operating Committee has appointed subcommittees on adminis=
tration, allocation of costs, circuits and publicity to assist it in
supervising the operations of The Bank Wire.

The subcommittees submit

to the Operating Committee their recommendations pertaining to matters
in the fields with which they are specifically concernedo

A full time,

technically trained communications consultant, whose salary is paid for
as an operating cost of The Bank Wire, has been employed and works in
close cooperation with the Subcommittee on Circuits.

He conducts con=

tinuous traffic studies to ascertain the adequacy of existing circuits
and makes recommendations for expansion of facilities as the need ap~
pears.

He is consulted on the feasibility, from a communications view-

point, of admitting new applicants for participation in The Bank Wire
network and furnishes advice on all technical questions with the view
to keeping Bank Wire facilities modern, adequate to the volume of business transacted and operating at a high level of efficiency in rendering
desired services to participantso

Surveys are being conducted at the

present time to determine the feasibility of substantially extending
Bank Wire facilities to banks located in the rapidly growing areas of
the State of Florida.
1'.n>es of Messages Handled
There is virtually no limit to the types of messages which may be
conveyed over The Bank Wire, nor to the services which it affords to
participating and sponsoring ban~s in transacting business either for

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

61
their own accounts or on behalf of their customers.

Some of the typical

ways in which the wire may be used to advantage are indicated below.
Transfer of Funds
In a matter of minutes, funds in any amount can be transferred from
one city to another for any desired purposeo

Without a doubt, one of

the principal attractions of The Bank Wire t9 country correspondent banks
is the facility it affords for the shifting of both bank and corporate
balances by telegraph at low cost and with immediate availability.
New York City banks have experimented in utilizing The Bank Wire
for transferring funds among themselves but this proved impractical because the volume involved interfered materially with traffic between
New York City banks and their out-of-town correspondents, which is the
type of communication The Bank Wire was primarily organized to handle.
Payments
Instructions may be issued for payments to firms, corporations,
banks or individuals, including payments of a specialized character.
For example, transactions requiring payments to Directors of Internal
Revenue for release of merchandise from bond in distant cities can be
handled promptly and efficiently.
Security Transactions
The system is ideally suited to handle orders for purchases or sales
of securities, including instructions for delivery and receipt.

It also

may be used for the transmission of quotations or special instructions of
all kinds a ffecting transactions in securities and commodities.
Collection Items
It is possible to obtain over The Bank Wire reports on the fate of
drafts, notes, coupons, bonds or other items entered for collection.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

62
Special or supplementary instructions may be given with respect to such
items or any docwnents related thereto.

Arrangements may also be made

for prompt remittance of the proceeds by wire.
/.

Reports · of B~lances or Deposits and Stop Payment Orders
Through use of the wire, reports of balances or deposits · can be
obtained promptly.

Stop payment orders may be received at the earliest

possible moment and prompt notification can be given in the event of
prior paymento

Quick notification of the removal of stop payment orders

also can be effected.
Credit Information
Business men and bankers often need credit reports on firm and individual names from distant cities on short notice.

The use of the wire

service for handling such credit inquiries can bring the desired information quickly and confidentially.
Letters of Credit
Shipment of goods may be expedited by wired notification of the
opening of a letter of credit and information concerning the necessary
documentsa

Irregularities in documents can be clarified and adjusted

over the wire in a matter of minutes.
Foreign Exchange
In the buying and selling of merchandise abroad and in the handling
of foreign transactions, many business firms and banks require prompt,
up to the minute quotations of foreign exchange rateso

The use of the

wire system makes possible the rapid receipt of such quotations and per-

mits the prompt execution of orders for foreign exchange purchases and
sales.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Trust Transactions
The wire service enables banks acting as trustee or in an agency
capacity to transfer funds for payments of securities, to expedite the
release of securities to underwriters following closings, to report
subscriptions to new issues, to complete exchanges, to file stop payment
and stop transfer orders, to report details of record date transfers and
to facilitate many other trust transactions.37
Purchases and Sales of Federal Funds
Requests for purchases or sales of Federal Funds may be made over
The Bank Wire to banks anywhere in the country. 38 The actual interdistrict transfer of Federal Funds balances, however, would be made over
the Federal Reserve Leased Wire System.
The following is an example of how The Bank Wire can render a valuable service in facilitating business transactionso

A mlller in

Minneapolis ships flour to a dealer in Los Angeles who has a limited line
of credit.

Shipments are made at frequent intervals and the cost of each

shipment usually exhausts the dealer's total line of credito

Because

remittances for these shipments are made tn Los Angeles funds, the miller
is often imposed upon to make a second shipment before payment of the
remittance for the previous shipment bas been finally collectedo

occasion, a third shipment may be in process of preparation prior to
final payment of the remittance for the first shipment.

This, of course,

results in a considerable over extension of credit by the miller to the
dealer.

The XYZ Trust Company (a New York City or Chicago "Bank Wire 0

bank) could readily solve this problem for the miller by requesting him

37Brochure, Private Wire System, Bankers Trust Company, New York
City, (not dated).
38Brochure, The Bank Wire, Manufacturers Trust Company, New York
City, July 1955.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

64
to ask his local bank to forward the bill of lading and draft for each
shipment direct to the Los Angeles corre·spondent bank of the XYZ Trust
Company for collection, with instructions to transfer the proceeds by
wire to the XYZ Trust Company for account of the Minneapolis bank for
use of the miller.

The telegrams from the Los Angeles bank to the XYZ

Trust Company and from the latter to the Minneapoli.s bank would be
dispatched over The Bank Wire and the miller would receive immediate
credit, making it unnecessary for him to overextend credit to the dealer.
Another typical way in which The Bank Wire permits a bank to render
a valuable service to its commercial customers is illustrated by the
following situation.

A large national corporation with numerous plants

and offices located throughout the country has standing instructions with
its principal bank of account in New York City to charge its account on
stated dates and in specified amounts for transfer to banks in locations
where disbursements must be made to meet payrolls or for other purposes.
By utilization of The Bank Wire, the transfers can be made immediately
available in the desired locations at the time the payments are due.
Therefore, unnecessary accumulations of balances at numerous points
may be avoided and funds are not tied up in transit, as would be the
case if the transfers were effected by the shipment of drafts or some
other meanso
The broadness of the services afforded by The Bank Wire appear to
be aptly summarized in a remark made by an officer of one of the New York
City sponsoring banks prior to the time the service was placed in operation.

This remark was to the effect that the potential uses of The Bank

Wire were limited only by the scope of the banking business and the
imagination of the banks in taking full advantage .o f the facilities

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

65
offereda

No doubt new uses for 'The Bank Wire will continuously be

discovered and its facilities will no doubt be of material assistance
in keeping the caliber of banking services abreast of t,he technical
changes and improvements in all fields which the nation is now experiencing.
Evaluation of Services
At the present time, about 200,000 messages of a wide variety are
being transmitted monthly over the facilities of The Bank Wire and there
would seem to be no question that this mechanism has contributed an
important forward step in the rendering of comprehensive and efficient
banking services throughout the nation.

Any earlier reservations there

may have been on the part of some bankers with respect to the value of
the services which could be provided in relation to the substantial
expenses involved, apparently have been dissipated by the enthusiasm
with which The Bank Wire has been received and the effectiveness with

which it bas operated.

It is now generally regarded as an integral and

essential element of our banking system which could be dispensed with
only at serious detriment to our banksi to .business and to our economic
system which requires the most rapid possible communications.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER VII
TELEGRAPHIC TRANSFERS OF FUNDS
Scope and Significance
One of the most important uses of the leased wire is for effecting
interdistrict transfers of funds between member banks of the Federal
Reserve System.

At the present time, such transfers constitute about

one-half of the entire traffic of the leased wire system and the significance of this function may be illustrated by the fact that for the year
1954 the aggregate amount of transfers of funds handled by the Reserve
Banks exceeded one trillion dollars. 39

This tremendous flow of funds,

which at the Federal Reserve Bank of New York alone averages well over
one billion dollars daily and frequently exceeds two billion dollars a
day, affords maximum elasticity to the functioning of the nation's banking system and the accommodation of business in general.

In order to

appreciate fully the val~e of this service to member banks and their
depositors, it may be helpful to review briefly the situation which
existed prior to the establishment of the Federal Reserve System.
Situation Prior to Federal Reserve System
Before the establishment of the Federal Reserve System there was no
centralized mechanism for transferring funds to and from distant cities.

39Forty-first Annual Report of the Board of Governors of the Federal
Reserve System Covering Operations for the Year 1954, Board of Governors
of the Federal Reserve System, Washington, D. C., March 15, 1955, p. 69.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It was customary for the larger commercial banks to maintain balances
with correspondent banks in the principal financial centers in order to
accommodate depositors' needs for funds in thos (cit ies.

Such balances

were known as "exchange" and "exchange" on 0th.e r cities was bought and
sold much in the same manner foreign exchange is traded today.

Rates of

exchange fluctuated with the 9upply of and demand for funds at various
points.
on rates.

Seasonal factors, such as crop movements, exerted an influence
When balances at distant points had to be replenished, or when

there was an occasion to reduce them, it was necessary for banks to ship
gold or currency.

Not only were the shipments expensive and subject to

hazards, but the funds were unavailable for investment or other use
during the period of transit.
Improvements Resulting From Federal Reserve
Leased Wire System
The Federal Reserve Act provided for a system of centralized reserves.
The creation of the Gold Settlement Fund and the development of the
Federal Reserve Leased Wire System made it possible to transfer funds
throughout the country quickly and inexpensively and the need to ship
currency for the purpose of settling balances was eliminated.

This pro-

vided the means of making funds available at any point throughout the
country within minutes after dispatch, and with no loss of interest
involved.
Regulations Affecting Telegraphic Transfers
Prior to the establishment of the leased wire system, telegraphic
transfer of funds were handled by the Reserve Banks through commercial
telegraph chalmels.

Errors were frequent, lost messages difficult to

trace, and long delays in transmission were commonly experienced.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

68
The tremendous rise in economic activity during World War I, the
inauguration of daily gold fund settlements and a sharp upward trend in
the number of telegraphic transfer of funds, which at the Federal Reserve
Bank of New York alone increased from 10,000 in 1917 to 39,000 in 1918,
were instrumental in the establishment of the leased wire system in
June 19180

When the leased wire was first inaugurated, free transfers of funds
were made by some Reserve Banks virtually without restrictions of any
kindo

The earliest regulation in this respect, issued in 1919 by the

Federal Reserve Board, prohibited direct payments by Federal Reserve
Banks to individuals, firms or corporations other than member banks, but
permitted such transfers (called third party transfers) to be effected
through the banks of such individuals, firms or corporations without cost.
This ruling applied uniformly to all Reserve ,Banks and was set forth in
the Federal Reserve Bank of New York's first circular issued to its member banks pertaining to procedures governing "Telegraphic Transfers" .. 41
This circular provided that:
"The funds of each member bank on deposit with us may be made
immediately available in any other Federal Reserve District
by telegraphic transfer at par, free of chargeo

"Wire transfers of funds through the Federal Reserve Banks
shall be strictly limited to those ordering payments or
credits to banks or bankers ..
"Direct payments by Federal Reserve Banks to individuals,
firms or corporations other than banks will not be permitted
but such transfers can be effected through their banks o"

40sixth Annual Report Federal Reserve Bank of New York for the
Year Ended December 31, 1920, Federal Reserve Bank of New York, March 1,
1921, p. 43.
41 circular No. 264, Federal Reserve Bank of New York, March 18, 1920.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

69
At that time, there were no restrictions with respect to the minimum amounts of transfers that could be made.

This privilege resulted in

requests for transfers by wire of sums as small at $10 in payment of per=
sonal transactions.

Because of the difficulties encountered by the in=

creasing volume of such transactions, the Reserve Banks in 1922 requested
member banks to refrain from making requests for telegraphic transfers
for small amounts or in instances where the transfers could be ma.de as
conveniently through the mails.

However, by 1924 the number of small

transfers increased to the extent that they were over-crowding the leased
wire system and seriously interfering with the processing of bank balance
transfers, a basic function of the Federal Reserve System.

In order to

alleviate this condition, the Reserve Banks, on July 1, 1924, discontinued sending third party transfers over the leased wires.

Requests for

such transfers were transmitted over the commercial wires and a service
charge was imposed amounting to the commercial telegraph rate for each
message.

At the same time transfers of funds over the leased wires free

of charge were restricted to bank balances in multiples of $100. 42
At the origin of the Federal Reserve System, only those banks which
became members of the System were entitled to the rights and privileges
pertaining thereto.

An amendment to Section 13, paragraph 1 of the

Federal Reserve Act, under date of September 7, 1916, authorized the
Federal Reserve Banks to grant to nonmember banks the privilege of participating in the System's check clearing and collection facilities, provided the nonmember bank maintained with the Reserve Bank of its district
a balance sufficient to offset items in transit for its account.

Many

42 circular No. 616, Federal Reserve Bank of New York, July 1, 1924.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

70
banks and trust companies availed themselves of this privilege as the
System expanded its activities.

In furthering the development of an ef-

ficient check collection system, the Reserve Banks cooperated in establishing special check collection arrangements and provided for the
settlement of resulting balances on their books for the accounts of nonmember as well as member banks.
To assist nonmember clearing banks in maintaining sufficient balances at the Reserve Banks or at their correspondent banks, the rules
governing transfers of funds were broadened in 1936 to permit telegraphic
transfers over commercial wires of round amounts in multiples of $100 at
the request of or for credit to nonmember clearing banks. 43

The revised

regulations authorized acceptance of such transfers from any member bank
for the credit of any nonmember clearing bank or f'rom any nonmember
clearing bank for the credit of any member bank or any other nonmember
clearing bank.

This was the first regulation extending to other than

member banks the privilege of making transfers of funds through the
Federal Reserve Banks.

Transfers over the leased wires continued to be

made only when ordered by and payable to member banks.
In 1937, the Board of Governors brought to ~he attention of all
Federal Reserve Banks, the experience of one Reserve Bank which had found
that unauthorized third party transfers were being made over the leased
wire system for the purpose of avoiding wire charges.
plished in the following manner.

This was accom-

The third party interests were not in-

dicated in the text of the messages but the transfers were for amounts
ending in even hu..~dreds of dollars; the hundred dollar digits serving as

43circular No. 1700, Federal Reserve Bank of New York, September 28,
1936.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

71
a code to direct the credit to a commercial account.

This matter was

considered in a report, dated June 1, 1937, of the Leased Wire Committee
which suggested that the responsibility for correcting abuses of this
nature rested with each Federal Reserve Bank.

A few such transfers were

noticed coming into the Federal Reserve Bank of New York but they were
brought to the attention of the member banks concerned and the practice
was soon discontinued.
In 1938, for the purpose of clarifying the provisions of the regulations with respect to transfers of funds eligible for transmission over
the leased wires, and to minimize the number of unauthorized "free"
transfers, the Board of Governors in a letter dated May 2, 1938 approved
the following recommendations of the Conference of Presidents of the
Federal Reserve Banks.
1.

Only transfers of member bank balances in round amounts in
multiples of $1,000 will be made over the leased wires.

Each Federal Reserve Bank reserves the right to decline to
effect over the leased wires any transfer which, in its
opinion, is an abuse of the wire transfer facilities.

In 1939, the Reserve Banks commenced utilizing the leased wires for
telegraphic transfers which were previously conveyed over commercial
wires.

Charges for such transfers continued to be made at commercial

wire rates and there were otherwise no basic changes in the regulations
relating to the transfer of funds. 44
The same general policies prevailed until 1951.
result of the development of

At that time, as a

The Bank Wire", the regulations governing

44 circular No. 1958, Federal Reserve Bank of New York,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

June

30, 1939.

72
transfers of funds over the leased wires were liberalized with respect to
member bank balance transfers.

Whereas formerly such transfers were

restricted to multiples of $1,000, the new regulations permitted free
telegraphic transfers of member bank balances of $1,000 and over, without
further limitation as to amount. 4 5

This afforded the banks a more flexi-

ble free service that better supplemented their own private wire system
and broadened accommodations in the transfer of funds and the purchase
and sale of Government securities and Federal Funds.
Federal Funds Transfers
Member banks endeavor to keep only the minimum required reserves
with the Federal Reserve Banks.

These balances earn nothing and the

banks continuously seek earnings for available funds and manage their
reserve positions with this consideration in mind.

Out-of-town banks

transfer excess reserves and other available balances to their city correspondents for investment in short - term Government securities or other
short-term liquid investments afforded by the large money markets of the
country.

The large city banks, or so-called money market banks, similarl~

seek to keep their available furtds invested in earning assets to the
maximum extent possible.

Practically all transfers of funds in and out

of the money market are made through New York City banks by means of the
leased wire system, and the most important immediate determinant of day
to day money market conditions is the reserve position of the New York
City banks. 49

45First Supplement to Operating Circular No. 10, Federal Reserve
Bank of New York, January 8, 1951.

46 Harold V. Roelse, "The Money Market", Money Market Essays, Federal
Reserve Bank of New York, March 1952, p. 5, Column 2.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

73
Recently, the relatively restrictive Federal Reserve credit policy
and the resultant tightness in the reserve positions of member banks,
coupled with the requirements of dealers in United States Government securities and other short-term investors, who must make settlements in immediately available balances, has resulted in a strong demand for Federal
Funds and an attractive rate of return, running close to the Federal
Reserve discount rate of 2

3/4%.

This has developed a growing tendency

among banks to utilize the Federal Funds market to maintain a fully invested position and there has been an expanding countrywide activity in
this field, extending to the smaller out•of-town banks as well as the
larger city correspondent banks.
The increased interdistrict activity in Federal Funds transactions
is reflected in an acceleration of leased wire operations at the Reserve
Banks.

If the transaction is between two banks in New York City, or

between other b8.l'lks in the same Reserve District, the use of the leased
wire is not involved.

However, if the trade is between banks in differ-

ent Federal Reserve Districts, the lending bank authorizes its Federal
Reserve Bank to charge its account and credit the borrowing bank by means
of a transfer over the leased wires.

Because such trades are usually for

one business day, the funds are repaid by a return wire transfer on the
next business day.
The Federal Reserve Leased Wire System provides the sole facility
for charmeling Federal Funds to the points they are required on an immediately available basis.

It is, therefore, an essential element in in-

terdistrict dealings in Government securities and other transactions
which must be settled in Federal Funds.

It also makes possible the func-

tioning of a nationwide Federal Funds market which banks generally may

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

74
utilize to relieve temporary excesses or shortages in their reserve
balances at the Federal Reserve Banks.
Summary of Present Regulations
and Scope of Operations
The following summarizes the present regulations of the Federal
Reserve Banks pertaining to telegraphic transfers of funds.
All Federal Reserve Banks absorb the cost of telegrams transmitted
over the Federal Reserve leased wires in connection with telegraphic
transfers of member bank balances of $1,000 or over between Federal
Reserve Banks and branches.

Telegrams from member banks sent over the

commercial wires requesting Reserve Banks to make such transfers may be
sent to the Reserve Banks collect.

Such transfers will be made for and

paid to member banks only.
Telegraphic transfers of funds for any purpose and in any amount and
without limitation as to descriptive data also will be transmitted over
the leased wires, subject, however, to a charge not exceeding commercial
wire rates.

Such transfers will be made for and paid to member banks

only, but may be for the use of any bank, individual,firm or corporation.
In addition, the Reserve Banks will make telegraphic transfers of
bank balances,in multiples of $100,over the leased wires for nonmember
clearing banks, subject to commercial telegraph charges.

Requests for

such transfers will be accepted from any member bank for the credit of
any nonmember clearing bank, and from any nonmember clearing bank for the
credit of any member bank or any other nonmember clearing bank.
Member and nonmember clearing banks are required to prepay the cost
of commercial telegrams sent to the Reserve Banks requesting transfers
that are subject to a charge, and commercial telegrams sent by the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

75
Reserve Banks to member and nonmember clearing banks advising of credits
arising from telegraphic transfers are sent on a collect basiso 47
The privilege and facilities for transferring bank balances by wire
at par to all sections of the country are available without cost to the
more than sixty five hundred member banks of the Federal Reserve Systemo 48
Under the procedure of coding and decoding such messages, the transfers
are usually completed within one houro

The recently developed procedure

for transmitting wire transfers of funds on fanfold forms in clear
English, which will be extended to encompass the entire Federal Reserve
System within the next few months, will make possible the completion of
such transfers between any points in the country within a few minutes,
even at the heaviest volume periodso

Transfers of funds are handled with

the same speed and efficiency for nonmember clearing banks and, through
member bank, for the accounts of firms, individuals or corporations, subject to a small charge to the depositing banko
The facilities of the leased wire system have provided the means of
quickly mobilizing the reserves of the country in accordance with economic requirements and exercise a significant role in minimizing sudden
or disruptive tendencieso

The leased wires have also aided in broadening

the market for Federal Funds, much in the same manner as they have helped
to broaden the market for Treasury issues, as will be discussed in a subsequent chapter of this thesiso
The tremendous increase during recent years in the volume and dollar
amount of telegraphic transfers has presented few major operating problems

47operating Circular No. 10, Federal Reserve Bank of New York,
December 8, 1949, and First Supplement thereto, January 8, 19510
48Forty-first Annual Report of the Board of Governors of the Federal
Reserve System, Board of Governors of the Federal Reserve System,
Washington, D. Co, March 15, 1955, Po 81, Column 3o

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

76
because of the continued technical advances in communications.

In 1944,

the Federal Reserve Banks handled 906,000 telegraphic transfers of funds
aggregating two hundred and fifteen billi~n dollars. 49

In 1954 these fig=

ures rose to approximately 1,808,000 transfers totaling over one trillion
dollars. 50

During 1955, the upward trend in the volume of wire transfers

continued, as illustrated by an increase of 8% at the Federal Reserve
Bank of Nevt York over the comparable figure for 1954.5 1

49Thirty-third Annual Report of the Board of Governors of the Federal
Reserve System Covering Operations for the Year 1946, Board of Governors
of the Federal Reserve System, Washington, Do C., June 17, 1947, p. 77,
Table Noo 5, Colunm 3.
5°Forty-first Annual Report of the Board of Governors, p. 69. Table Nao 5,
Oolumn 1.

51 compil€d from the files of the Wire Transfer Division of the
Federal Reserve Bank of New York, 1954-19550

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER VIII
FACSIMILE TRANSMISSION AT
THE FEDERAL RESERVE BANK OF NEW YORK
Purpose, Participants and Allocation of Costs
At the present time, facsimile transmission equipment, leased from
the Western Union Telegraph Company, is utilized for the purpose of conveying officially signed instructions and advices of credits in connection with transfers of funds between the Federal Reserve Bank of New
York and twelve of the larger New York City Clearing House banks.

The

banks participating with the Federal Reserve Bank of New York in the
arrangement are The Bank of New York, Bankers Trust Company, The Chase
Manhattan Bank, Chemical Corn Exchange Bank, The First National City
Bank of New York, Guaranty Trust Company of New York, The Hanover Bank,
Irving Trust Company, Manufacturers Trust Company, The Marine Midland
Trust Company, Je P. Morgan & Company, Inc., and The New York Trust
Company.

The Federal Res erve Bank pays one-half of the rental costs for

the equipment and the balance is prorated among the other participants
based largely on their respective use of the equipment in terms of the
number of transactions processedo
While the facsimile transmission installation is not a part of the
Federal Reserve Leased Wire System, it closely supplements the leased
wires in accelerating the large volume of transfers of funds between the
participating New York City money market banks and other banks located
throughout the country.

When it is considered that in 1955 over 80% of

the total of $401 billion of wire transfers of funds handled by the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

78
Federal Reserve Bank of New York were dispatched by or destined for the
New York City banks which participate in the facsimile transmission procedure, the scope and importance of the transfers conveyed via the facsimile equipment are readily apparent.

For this reason, when the new

leased wire form transmission procedures were being developed, the advice
copy of the fanfold form for incoming transfers to the Federal Reserve
Bank of New York was designed in a manner so that the advice may be officially signed and retransmitted over the facsimile equipment in the form
received without retyping or other additional handling by the Reserve
Banko
Background and Installation of
First Intrafax Network
Shortly after World War II the Federal Reserve Bank of New York
commenced an investigation of the possibility of utilizing some sort of
mechanical or electrical equipment as a substitute for messenger service
in transmitting authorizations for wire transfers of funds and advices
of credits for such transfers between itself and the larger New York City
banks.

Consideration was given to various types of equipment which might

be employed for this purpose, including teletype machines and facsimile
transmitterso

However, it did not appear that teletype was particularly

well suited for the purpose and, at that time, facsimile transmission
had not been developed to the point where it was considered sufficiently
dependable or otherwise practicalo
In 1951, the Federal Reserve Bank of New York renewed its investigation of this matter.

It learned that the Western Union Telegraph Company

had made several improvements in facsimile transmission methods and a
survey was conducted to determine whether the new techniques might be
adaptable to the Reserve Bank's operations.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

After several months of

79
study, Western Union prepared a report stating that, on the basis of its
observations, it appeared that telefax (trade name for Western Union's
facsimile transmission process) could be used advantageously in conveying wire transfers of funds between the Federal Reserve Bank of New York
and the larger local banks.

Under the facsimile procedure recommended,

the recipients of, advices of credits or letters of instructions to
transfer money, instead of receiving delivery by messenger, would receive over the w,ires on specially prepared teledeltos recording paper
facsimile reproductions of the original messages bearing authorized
autograph signatures, which may be regarded for all purposes in the same
manner as though the originals had been delivered by messenger.
Western Union offered to make a trial installation between the
Reserve Bank's Wire Transfer Division and four or five of the larger New
York City banks with no expense to the Reserve Bank during the trial
period except for certain incidental out of pocket costs for line circuits and forms.

The proposal was accepted and arrangements were made

for a trial hookup with Bankers Trust Company, The Chase National Bank,
Chemical Bank and Trust Company and The First National Bank. Experimental
operations commenced in December 1951.
After a period of about two months, the Reserve Bank and the other
banks concluded that the use of facsimile equipment, in lieu of messengers, for conveying instructions and advices of credits in connection
with transfers of funds offered substantial advantages.

In the Reserve

Bank's operations, the principal advantage was a more even flow of work
than was possible when messengers delivered batches of messages at half~
hour or hourly intervals.

The commercial banks found that facsimile

transmission resulted in speedier completion of their outgoing transfers,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

80
a more even flow of work, and earlier notification of credit for incom~
ing transfers.
On the basis of the results of the experiment, facsimile equipment
was installed in eleven additional New York City banks, which agreed to
participate in the arrangement, and on October 14, 1952 the service,
designated as an "Intrafax" system, was formally inaugurated.

The fol-

lowing extracts from a press statement released on that date by the
Federal Reserve Bank of New York point up some of the interesting features of the arrangement~
iv Transfers of more than a billion dollars a day between the
Federal Reserve Bank of New York and 15 large New York City
banks today began flashing automatically in picture form
over a new intra-city facsimile telegraph system.
"The banks now equipped with facilities for direct, two way
facsimile communication with the Federal Reserve Bank are~
Bank of the Manhattan Company, Bank of New York, Bankers
Trust Company, The Chase National Bank, Chemical Bank &
Trust Company, Corn Exchange Bank Trust Company, The First
National Bank, The Hanover Bank, Irving Trust Company,
Manufacturers Trust Company, The Marine Midland Trust
Company, J.P. Morgan & Co., Inc., The National City Bank,
The New York Trust Company, and The Public National Bank
and Trust Company.
"To make a money transfer - often millions of dollars in a
single request - the necessary instructions are filled in
on a special form and signed by an authorized official.
The form is then placed on a metal drum, which is put in
a facsimile transmitter. Here the form is whirled before
a tiny electronic eye, which sends an exact picture of the
form.
"The receiving bank gets the picture on a miniature fac~
simile telegraph machine, called a Desk-Fax, simply by
pushing a button to open the receiving circuit in response
to a light signal. Each of the New York City banks has
one or more of the Western Union Desk-Fax machines.
"This marks the first time in banking history that signa•
tures transmitted by facsimile have been used to authorize
fund transfers on so large a scale."

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

81
Since all of the transfers, whether emanating from or destined for
the participating New York City banks, flow through the Federal Reserve
Bank of New York, the main operating center was set up in the Reserve
Bank's Wire Transfer Division.

This installation included eight recorder

units for receiving incoming messages, eight drum type facsimile transmitters and two switchboards through which operators made the appropriate
contacts with the participating banks for receiving or transmitting messages in response to signals conveyed by flashing lights.
Limitations of Intrafax System and
Conversion to Letterfax
This was a big step forward in expediting transfers of money to and
from the larger New York City banks and provided a service which these
banks considered to be highly advantageous.

However, with the steady

increase in the volume of traffic over the next several years, the
Intrafax equipment became progressively less able to handle the load,
especially during peak periods of the day.

From October 1952, the start

of facsimile transmission, through the first ten months of 1955, traffic
increased 25o/o.

The equipment at that time permitted only one-way trans-

mission and the machines were not built to stand the heavy use to which
they were subjected, requiring continuous servicing and resulting in
occasional breakdowns or delays.
The following statistics illustrate the steady upward trend of
Intrafax traffic~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Year

Daily Average
Transactions

(Last 2 1/2 months)

1952
1953

(First 10 months)

1954

921
959
1,095

1955

1,148

82
In order to provide improved services, the Western Union Telegraph
Company, on June 28, 1955, submitted to the Federal Reserve Bank of New
York a brochure proposing a more advanced and better facsimile transmission system called "Letterfax".

This proposal was accepted by the

Reserve Bank and the other participating banks and the new system was
installed and placed in operation on November 7, 1955.
Letterfax operates on the same general principles as the previous
system but offers a number of advantages over the older method.

Under

the new system, each participant is provided with at least one letterfax
transmitter and one recorder mounted on a console and connected by a
duplex circuit with the switchboard, or concentrator, located at the
Federal Reserve Bank of New York.

This permits simultaneous receipt and

transmission of messages by all participating banks, as compared with
the limitations of one-way operation imposed upon them by the equipment
formerly used.

The operating center at the Reserve Bank is equipped

with four recorder consoles, each of which contains two receiving units;
four transmitter consoles, each containing two transmitting units; and
switchboards for making the desired contacts with the outlying stations.
Each letterfax transmitter, at the participating banks as well as
the Reserve Bank, has the capacity for sending three advices at once, as
compared with single message transmission under the former method.
the reception of traffic is now automatic.

Also,

The advice is received on

the recorder, automatically cut off and deposited in the message accumulator, which will store in excess of fifty messages in the order received.

Formerly, at the out stations, each message had to be

individually removed at the time of receipt to permit further traffic.
At the Reserve Bank, receipt of messages previously was on continuous -

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

83
roll paper but no automatic cutting or storing devices were provided.
These improvements have greatly minimized the loading and unloading procedures of the operating personnel and facilitated the flow of work.

further advantage of the new equipment is that the scanning speed has
been increased with the result that the actual time required for transmitting a message has been reduced to about one-third of the time previously required.
Improvements Resulting from Letterfax
The letterfax equipment proved successful from the start.

After

three months of operation, a comparative analysis was made of the flow
of work at the Federal Reserve Bank of New York on February 1, 1956,
using letterfax equipment, as compared with May 6, 1955 using telefax
equipment.

The analysis indicated that, as a result of the increased

speed and capacity of the letterfax equipment, the peak volume was handled one hour earlier, providing a much improved service to the participating member banks in handling their wire transfers.

Letterfax has

greatly alleviated delays in transmitting advices during peak hour and
peak day operations and can readily absorb any large or sudden increases
in the flow of advices to or from the individual banks.

While the pre-

sent system has been engineered to handle anticipated loads for some
years to come, the facilities are readily susceptible of expansion with
maximum economy in the amount of space required for the additional
equipment.
Potentialities of Facsimile Transmission
The potentialities of facsimile transmission are fully recognized
by the large New York City commercial banks.

At a Planning Committee

meeting of the Bank Management Conference of New York, held on March 8,

1955, a proposed network of wire facilities was discussed with Western

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

84
Union representatives for making payments among New York City Clearing
House banks by facsimile reproduction of authorized payment forms, instead of by cashier or other official checks as at present.

A brochure

fully describing the equipment, cost and other details was sent to the
banks on April 8, 19550

The proposed system embraces the establishment

of a switching center at the New York Clearing House.

The clearing

house banks are actively considering the plan, the primary purpose of
which is to provide a fast, dependable and error free means of transferring advices among themselves, but a number of problems have not been
fully resolved and no decision has as yet been reached with respect to
the proposal.
Technical difficulties at the present time limit facsimile transmission at reasonable costs to relatively short distances.

However,

some communications people are of the opinion these difficulties may be
eliminated and it is quite possible that because of its authentic reproduction qualities and the other advantages which it affords,facsimile
transmission may become one of the foremost communication systems of the
future.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER IX
WIRE TRANSFERS OF MARKETABLE SECURITIES
OF THE UNITED STATEs52
Scope and Nature of Function
Another important use of the Federal Reserve Leased Wire System is
for making telegraphic transfers of long term and short term, outstanding,
unmatured marketable bearer securities of the United Stateso

This serv=

ice is performed by the Federal Reserve Banks as fiscal agents of the
United States.
In volume, the Government security transfer function is second only
to the transfer of funds and constitutes about twenty per cent of the
total traffic of the leased wire systemo

The Federal Reserve Bank of

New York is now dispatching about 5,500 wires per month requesting the
other Reserve Banks to deliver over $2 1/2 billion (par value) of securities and receives about 5,000 incoming wires per month requiring the
delivery of over $3 billion of securitieso

During the year 1955, the

Federal Reserve Bank of New York handled approximately 120,000 Government
security transfers aggregating

$62 billiono This represents

increase of 14% in the number of transfers handled as compared with 1954
and the trend has been steadily upwardo
The mechanics of a wire transfer of securities is relatively simple
and, perhaps, may be best described by a specific illustrationo

When,

52
Several confidential sources have been utilized extensively in
the preparation of this chapter.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

86
for example, a Government bond dealer in Chicago sells securities to a
purchaser in New York, the seller delivers the securities to the Federal
Reserve Bank of Chicago with instructions to deliver a like par amount
of the same issue to the purchaser against payment of a stipulated amount
of money.

The Chicago bank sends appropriate instructions over the

leased wire to the Federal Reserve Bank of New York, and retires thesecurities to be accounted for later to the Treasury Department.

Upon

receipt of the wire, the New York bank withdraws the appropriate securities from unissued stock held by it for account of the Treasury and
makes delivery at its window to the purchaser against payment of the
amount indicated.

When the securities have been delivered and payment

has been received, the Federal Reserve Bank of New York forwards a confirmation wire to the Federal Reserve Bank of Chicago and the necessary
transfer of funds in payment of the securities is then consummated.

The

increased accountability of the Chicago bank to the Treasury for the
securities retired offsets the decreased accountability of the New York
bank.

It is also possible for a seller to arrange for a wire transfer

of securities to be delivered against receipt, or against the deposit of
other securities; the mechanics, so far as the leased wire is concerned,
are much the same.
Authorization for Wire Transfers of Certificates
of Indebtedness and Treasury Notes
The procedure for transfer by wire of short term Government securities, including certificates of indebtedness and notes, was first established by the Treasury Department and the Federal Reserve Banks on
July 15, 1921.

When the service was inaugurated, no charges were made

in connection with the transfers.
not authorized at that time.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Wire transfers of Treasury bonds were

The principal reason for granting wire

87
transfer privileges with respect to short term obligations was to assist
in the development and maintenance of a uniform country-wide market for
Treasury certificates of indebtedness and Treasury notes.

This objective

was considered less compelling in the case of Treasury bonds.

Since

banks then, as now, relied on the short term Government securities market
for investment of their secondary reserves, the day to day fluctuations
in their reserve positions and in their requirements for cash frequently
resulted in transactions in the short term securities market in order to
make the necessary adjustments and to maintain a fully invested position.
To permit banks throughout the country to make these adjustments readily
and on the .same basis regardless of their location, wire transfers of
short term Government securities were authorized.

Treasury bonds, on

the other hand, were viewed as normally being held by banks for their
investment portfolios, which did not require the day to day adjustments
that characterized their holdings of short term securities.
Extension of Wire Transfer Privilege
to Treasury Bills
The Treasury bill, now an important type of Government financing,
was first introduced at the beginning of 1930~

Its purpose was to give

to the Treasury an additional flexible medium for short term financing
at minimum rates and to provide the money market with a highly liquid
security.

At the start of the program, bills sold only on a competitive

bid basis and maturities extended for three months.
later to

six and nine months. 53

This was extended

At the present time, they are sold on a

competitive· bid basis but bids for amounts up to $200,000 may be tendered

53w. Randolph Burgess, Notes on the Mechanism of the Market for
Treasury Bills, .F ederal Reserve Bank of New York, July 16, 1937.,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

88
on a noncompetitive basis with the rate fixed by the Treasury Department
at the time of issue; they mature in three months and carry no interest
coupons; the difference between the purchase price and the par value at
maturity providing the income or yield on the investment.
At the time of the inauguration of the Treasury bill program, it
was the view of the Undersecretary of the Treasury that the wire transfer
privilege should not be extended to the bills, in view of the possibilities of error, unless and until a real need for such transfers became
apparent.

However, the demand for this service quickly developed and on

December 6, 1930 the Treasury extended the wire transfer privilege to
Treasury bills, subject to the same conditions and procedures as had
been established for wire transfers of Treasury certificates of indebtedness and Treasury notes.

Telegraphic Transfers of Treasury Bonds
The matter of extending wire transfer privileges to include Treasury
bonds was discussed intermittently as early as 1925.

In 1938, when the

short term debt was small in relation to the long term debt, this matter
was again considered by the Treasury Department and the Federal Reserve
Banks.

At that time, the question of whether a service charge should be

imposed to defray the expenses of transfers by wire of some or all securities was also considered.

It was finally decided that under the -cir-

cumstances then existing, there was no real need for wire transfers of
Treasury bonds and the whole matter was dropped.

The question arose

again early in 1942 after our entry into World War II when there ..was
some fear that coastal cities might be subjected to bombing attacks.

was felt that persons purchasing bonds in coastal cities might prefer to
have them delivered to custodians in inland cities in the interests of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

89
safety, and it was suggested that wire transfers might be made available
for this purpose.
Shortly after the Conference of Presidents of the Federal Reserve
Banks, held on June 23, 1942, the views of the Conference were conveyed
to the Secretary of the Treasury to the effect that if wire transfer
privileges were extended to Treasury bonds substantial advantages would
result both to the Treasury, by reason of the further improvements of
marketing facilities for Government securities, and to the Federal
Reserve Banks and the banking system in general, by reason of the diminished risks surrounding transfer and delivery of Government bonds.

was presumed, at that time, that a charge could be made for transfers of
long term and short term securities, which would substantially reimburse
the costs of the operation.

At a joint meeting of officials of the

Treasury Department and officials of the Federal Reserve Banks of New
York and Chicago, held in June 1942, it was decided; (1) that wire
transfers of bonds should be limited to cases involving sales, in accordance with the prevailing practice in respect to short term securities;
(2) that a charge sufficient to cover out•of-pocket expenses of the
Treasury and the Reserve Banks should be made in the case of transfers
of notes and bonds, and that the opinion of the Reserve Banks should be
sought as to whether a charge should also be made in the case of transfers of bills and certificates in view of the small investment return on
such securities; and (3) that the fairest way to make a charge would be
to have it on a gradually increasing basis, with a stated minimum charge,
the charge to be less in any case than the expense of making delivery by
registered mail insured.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

90
No further action was taken with respect to this discussion until

1943 when the Treasury Department stated that while it appeared desirable
to extend wire transfer facilities to bonds, inauguration of the service
would have to be deferred until additional manpower and mechanical equipment were available.
In November 1946, the Chairman of the Federal Reserve System
Committee on Fiscal Agency Operations and Reimbursable Expenses, in a
letter to the members of that Committee, suggested they again confer
with the Treasury regarding telegraphic transfers of Government securities, including bonds.

At that time, there was a price differential of

about 1/64 between New York and Chicago and 1/32 between New York and
San Francisco and it was felt that if wire transfer of Government bonds
were permitted, it would provide a comparatively uniform market for
Government securities throughout the country.

Some concern was expressed

regarding the physical capacity of the leased wire system to handle the
increased volume of transfers.

There was further concern that although

the Treasury had indicated in 1943 it would be prepared to extend wire
transfer facilities to bonds, except for shortages of mechanical equipment and manpower, its feeling in the matter might have changed since
the Treasury no longer was in the position of selling new issues for
cash to finance its expenditures and because of the continuation of the
debt retirement program which had been undertaken in March 1946.

In March 1947, a special Federal Reserve subcommittee, known as The
Subcommittee on Telegraphic Transfer of Government Securities, was appointed to review this entire subject.

After exhaustive studies covering

54 Thirty-second Annual Report Federal Reserve Bank of New York for
the Year Ended December 31, 1946, Federal Reserve Bank of New York,
March 27, 1947, p. 30.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

91
the potential volume of wire transfers of Treasury bonds, telegraphic
capacity to handle such volume, vault capacity at the Federal Reserve
Banks to accommodate the increased amounts of fiscal stock which would
be required, fiscal stock supplies, costs, fees and other considerations,
the subcommittee in a report dated September 29, 1947, recommended that
the wire transfer service be extended to include Treasury bonds.

On the

basis of these recommendations, which were concurred in by the Conference
of Presidents of the Federal Reserve Banks, the Treasury Department on
January 26, 1948 wired the Reserve Banks that effective March 1, 1948
the Treasury planned to extend telegraphic transfer facilities to include
"bearer" Treasury bonds, and that all transfers involving bonds or notes
which would not mature within one year from the date of transfer would be
handled on a fee basis.
On January 23, 1948 the Treasury Department issued a confidential
memorandum to the Federal Reserve Banks, containing instructions governing the proposed procedure.

This was followed by a press release on

February 4, 1948 by the Treasury Department~
"Secretary of the Treasury Snyder today announced that arrangements have been made with the Federal Reserve Banks, effective
March 1, 1948 for telegraphic transfer of Treasury bonds in
coupon· form, in addition to existing facilities for the telegraphic transfer of Treasury notes, certificates of indebtedness, and Treasury bills. These arrangements have been made
for the purpose of facilitating a broader market for
Government securities. Transfers will be made as at present
only against bona fide sales."
The desirability of broadening facilities for the transfer by wire
of Government securities to include bonds had become particularly cogent
by 1948 because of the increased proportion of the public debt which was
in the form of bonds as the result of war financing, and the expanded

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

92
service was well received and actively used.55
Presently Effective Regulations56
Transfers Authorized
The Federal Reserve Banks, as fiscal agents of the United States,
are authorized to make telegraphic transfers of outstanding, unmatured,
marketable bearer· securities of the United States, i.e. Treasury bonds,
Treasury notes, Treasury certificates of indebtedness and Treasury bills,
for account of the owners, but only in those instances;
(a)

Where an actual bona fide sale has been made at the time
the securities are presented for transfer and delivery
to the purchaser by another Federal Reserve Bank is
necessary to consummate the sale, or

(b)

Where the securities are pledged on original issue as
collateral for Treasury Tax and Loan Accounts and, at
the time of withdrawal from pledge, transfer by wire is
required in connection with the delivery of the securi•
ties to the owner or his agent.

Transfers for any other reason, such as transfers for the convenience of owners or transfers of securities as collateral, are not authorized.

The wire transfer service is provided as a privilege, rather than

a right of the owner, and all transfers are conditioned on the availability of facilities of Federal Reserve Banks, without responsibility on
their part for delays in effecting deliveries for any reason whatever.

55 T11irty-fourth Annual Report Federal Reserve Bank of New York for
the Year Ended December 31, 1948, Federal Reserve Bank of New York,
April 1, 1949, p. 50.
56

rnformation under this heading has been derived principally from
"Transactions in Marketable Securities of the United States," Operating
Circular No. 17, Federal Reserve Bank of New York, Fiscal Agent of the
United States, Revised January 9, 1951.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

93
Under procedures prescribed by the Treasury, the transactions are designated as CPD transfers and may be accomplished only through the exchange
of telegrams between Federal Reserve Banks over the leased wire system.
The procedure for consummating telegraphic transfers of securities
has been greatly simplified since the service was first inaugurated.
Originally, specific authorization by the Commissioner of Public Debt was
required in advance of each transfer.

This necessitated five telegrams,

as indicated below, to complete a single transactions, in each of which
it was necessary to describe the amount and the security issue involved.
(1)

From the Reserve Bank initiating the request to the
Commissioner of Public Debt (CPD) requesting authorization to make delivery.

(2)

From the initiating Reserve Bank to the delivering
Reserve Bank requesting that delivery be made on receipt of authority from CPD.

(3)

From CPD to delivering Reserve Bank authorizing delivery of the securities.

(4)

From CPD to initiating Reserve Bank advising that
delivery of the securities had been authorized.

(5)

From delivering Reserve Bank to initiating Reserve
Bank advising that delivery had been made.

This procedure was cumbersome, resulted in many delays and placed
additional burdens on the facilities of the leased wire system.

1941, the present procedure was adopted under which the number of telegrams required to complete a transaction has been reduced to two, one
authorizing and requesting delivery of the securities and one confirming
the transaction after delivery has been made.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

In connection with this

94
change in procedure, the Federal Reserve Banks commenced making a blanket
report monthly to the Commissioner of Public Debt of all transfers made
during the month, instead of obtaining his specific approval of each
transfer in advance.
In addition to the transfer of outstanding United States securities,
as described above, the transfer by wire of securities allotted on original issue is also authorized.

Where payment in full has been made for

securities allotted against subscription or tender, securities in bearer
form so allotted will be transferred free of charge upon request of the
subscriber.
AD transfers.

Such transfers are referred to as 'Allotment Deliveries1 or
Since deliveries of Government securities to subscribers

on original issue are made at the risk and expense of the Government, one
important effect of the transfer of allotments by wire is to minimize the
risks and cost to the Governmentp involved in sending the securities from
one Federal Reserve city to another.
Cities Between Which Transfers May be Made
Any of the securities specified above may be transferred against
payment or receipt between any of the following cities:

Boston, New

York, Philadelphia, Cleveland, Cincinnati, Pittsburgh, Richmond,
Baltimore, Charlotte, Atlanta, Birmingham, Jacksonville, Nashville, New
Orleans, Chicago, Detroit, St. Louis, Little Rock, Louisville, Memphis,
Minneapolis, Kansas City, Denver, Oklahoma City, Omaha, Dallas, El Paso,
Houston, San Antonio, San Francisco, Los Angeles, Portland, Salt Lake
City and Seattle.

Transfers of any such securities may also be made be-

tween any of the citfes mentioned and Washington, D. C., but such transfers may be made only against receipt.

Such securities also may be

transferred from the City of Buffalo, New York, to New York City or to
any of the other cities named above.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

95
Limitations
In order to avoid confusion, transfers are not authorized (a)

On the date of original issue of the securities;

(b)

On or after the date of maturity or call redemption
date of the particular issue;

(c)

On the last business day of a calendar month; or

(d)

On the last business day preceding an interest payment date for the securities involved.

On December 12, 1955, the Treasury announced that effective
January 1, 1956, only securities having a face value of $5,000 and more
would be accepted for transfer by wire.

Formerly, no minimum amount was

specified.
Fees
Because of the special circumstanceei involved, no fees are cn.arged
for transfers by wire of Treasury bills or certificates of indebtedness.
Neither is a charge imposed for the transfer of Treasury bonds or notes
within one year of the maturity or call redemption date of the particular
issue.
The amount of fee charged for each transfer of securities of any
one issue or series to a single recipient, is as follows:
(a)

Five dollars for each transfer in face amount not
exceeding $50,000.

(b)

Ten dollars for each transfer in face amount in excess
of $50,000.

Securities of two or more different ·issues may not be combined in a
single transfer, nor may securities for delivery to two or more recipients be combined in a single transfer.· Fees are paid to the Reserve Bank

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

where the transaction originates and are turned over to the Treasury
Bepartment monthly.

If sent by mail, in addition to regular postage and

registry fees, shipments would be subject to postal surcharges ranging
from tw_e lve to nineteen cents per $1,000.

When it is considered that

the wire transfer fee includes two wires, i.e. original instructions
and confirmation, the charge appears reasonable; the savings are substantial when amounts of $100,000 and over are involved.

Inasmuch as the

transfers handled by the Federal Reserve Bank of New York during the year
1955 averaged over $500,000 for each transaction, an appreciable advantage to the owners of United States Government securities and benefit to
the market is indicated.
Delivery
Securities transferred to a Reserve Bank by wire are delivered to
the transferee at the office of the receiving Federal Reserve Bank.
However, securities so transferred for the account of a member bank of
the Federal Reserve System, for which the Reserve Bank will hold securities in safekeeping, will be delivered to the safekeeping account of the
member bank with the Reserve Bank, when so requested.
Economic Significance of Service
Federal Reserve Bank facilities for transferring Government securities by wire are dependent on the leased wire system.

The economic sig-

nificance of the wire transfer service is that it has substantially
broadened the market for Government securities and makes possible a uniform market for such securities throughout the United States, which
otherwise would not exist.

If it were necessary to make deliveries of

securities to purchasers in distant cities by mail, prices would vary
according to the shipping and insurance costs involved in making the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

97
deliveries.

Because of the time required for shipment, interest charges

would also be involvedo

With the huge Government debt presently out-

standing and the frequent refunding operations, it appears unlikely that
without the telegraphic transfer device the market could function properly, except in the unlikely contingency that all Government securities
were lodged in New York Cityo

The problem of delivery and its effect on

restricting the market for Government securities was practically eliminated when the wire transfer service was extended to include Treasury
bondso

The transfer facilities enable banks to readily adjust their re-

serve positions regardless of their location, and reduce the Treasury's
risk and expense in connection with certain deliveries on original issue.
These advantages are but a small part of the contingent national benefits that accrue from efficient Treasury financing based on fast, unencumbered nationwide marketing facilities through the medium of the
leased wire systemo
The services provided by the leased wire in the above respects,
have been further enhanced by the recently developed automatic forms
transmission procedure which has eliminated the use of code, smoothed
out peak loads and speeded up telegraphic transfers of securities,
thereby better enabling the Reserve Banks to provide for delivery, and
payment on the same day in immediately available funds, of Government
securities between any Federal Reserve points in the nation.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER X
OTHER FUNCTIONS OF THE LEASED WIRE SYSTEM
Government -Financing and Fiscal Management
Among the many services provided by the leased wire system, its use
by the Treasury Department in Government financing ranks high in impor=
tance.

The significance of this role has increased with the growth in

the Federal debt and in the frequency and scope of Treasury financing
operations.
Large expansion of the Federal debt began in the middle 1930's and
reached previously unparalleled proportions during· .the second ~orld War.
The gross public debt outstanding at the end of the fiscal year 1930
amounted to slightly more than 16 billion dollars; in fiscal year 1936
it rose to almost 34 billion dollars and in 1946 was in excess of
269 billion dollars. 57

For the next several years it fell below the

1946 wa~ financing peak but in 1954 again rose to the previously un=
precedented high of 271.2 billion dollars. 58

March 31 this year, the

total gross public debt stood at almost 276 billion dollars, which
closely approaches the highest figure reached in the history of the

57Annual Report of the Secretary of the Treasury on the State of
the Finances for the Fiscal Year Ended June 30, 1954, Treasury Department
Document No. 3194, United States Government Printing Office, Washington,
D. C., 1955, p. 470, Column 4.
58Annual Report of the Secretary of the Treasury for the Fiscal
Year Ended June 30, 1954, p. 470, Column 4.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

99
countryo59

It is significant that of this amount more than 159 billion

dollars represents marketable obligations to which wire transfer privileges are extendedo 60
During 1955, there were fifty ,,three weekly offerings of Treasury
bills with accepted bids amounting to approximately $89,640 million and
fourteen offerings of interest bearing marketable securities totaling
approximately $49,052 million including offerings for cash, exchange or
cash and exchangeo

The leased wires were utilized extensively in con-

nection with all such financing operations and it is estimated that
about one million words were transmitted over the wires relating to basic
instructions, reports and announcements pertaining to the marketing of
these issueso 62

When a new Treasury issue is announced, the details are

communicated to the Head Offices of the Reserve Banks over the facilities of the leased wire system, usually in advance of public releaseo
Occasionally the text of the actual offering circulars are sent to the
banks by wire, as are all details regarding offerings and allotments of
the weekly issues of Treasury bills.

While subscription books are open,

the Reserve Banks telegraph daily reports to the Treasury with respect
to the amount of subscriptions received and also the final total of subscriptions when the books closeo

Press statements by the Treasury

59Daily Statement of the United States Treasury U. So Government
Printing Office, Washington 25, D. C., March 30, 1956, Po 5, Column 2.
60
Daily Statement March 30, 1956, Po 5, Colu.mn 2.
611,I reasury Bulletin, United States Treasury Department Office of
the Secretary, July 1955, pp. 19, 20, January 1956, pp. 22, 230
62

Compiled from information contained in files of Federal Reserve
Bank of New York, New York, N. Y.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

100

Department announcing the offerings, and subsequently the results of the
financing, are wired to the Reserve Banks for release by themo
The Treasury also utilizes the leased wires in connection with calls
for payments from Treasury Tax and Loan Accounts.

When such calls are

made, the Treasury uses the wires to instruct the Federal Reserve Banks
to notify the depositaries of the call.

The speed of the leased wire

service is particularly essential in connection with calls on Group C
depositaries where payments may be due on the same day the call is madeo
The leased wires also provide the Treasury with the same advantages
that member banks enjoy with respect to wire transfers of funds.

The

Treasury has an account with each Reserve Bank but its receipts in one
Federal Reserve District may not match its needs for funds to be disbursed in that District.

Therefore, to provide for its disbursements,

it transfers funds from one Reserve Bank to another.

As between the

Federal Reserve Banks involved, these transfers are settled through the
Interdistrict Settlement Fund.

Were it not for the availability of

Federal Reserve transfer facilities, the Treasury might be obliged to
ship money from one city to anothero
Federal Reserve Monetary Policies
It is generally recognized today that the primary purpose and objective of the Federal Reserve System is to help counteract inflationary and
deflationary movements, and to assist in creating conditions favorable
to sustaining a high level of employment, stability of the purchasing
power of the dollar, a rising level of production and consumption and
economic growth of the countryo 63

The means through which the Federal

63 Tb.e Federal Reserve System Purposes and Functions, Board of
Governors of the Federal Reserve System, Washington, D. C., 1954,
chapter 1, pp. 1, 2.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

101

Reserve System is able to accomplish this objective is its ability to
increase or decrease the availability, cost and volume of member bank
reserves.

This affects the general flow of credit and money by control-

ling the amount and cost of credit the banks may extent to the public
and influences the level of business.

By increasing the availability

and volume of bank reserves, the Federal Reserve is able to exercise the
means of lowering interest rates, easing monetary conditions and stimulating the level of business activity.

Conversely, by decreasing the

availability and volume of bank reserves, the Federal Reserve exerts its
influence in raising the cost of borrowing, tightening the supply of
credit and money and checking undesirable inflationary tendencies or
.
b ooms. 64
b us1ness

There are three principal Reserve banking methods of regulating the
availability, cost and volume of bank reserves.

These are (1) discount

operations, (2) the raising or lowering of member bank reserve require=
ments, and (3) purchases and sales of United States Government securities
in the open market. 65

In connection with each of these regulatory

methods, the Federal Reserve Leased Wire System performs a role of some
significanceo
When the directors of a Federal Reserve Bank decide that credit
conditions make it advisable to change the currently effective discount
rate, their decision and the change recommended is wired to the Board of
Governors.

When the Board approves the change, it forwards notice of

its concurrence over the leased wires and also uses the wires to notify

64 The Federal Reserve System Purposes and Functions, p. 14~

65 The Federal Reserve System Purposes and Functions, P~ 3lo

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

102
each of the other Federal Reserve Banks of the action taken and the effective date of the change in the rate.

Similarly, the Board of

Governors uses the leased wires to notify the Reserve Banks when changes
are made in member bank reserve requirements.

Press releases concerning

such changes are also transmitted to the Reserve Banks over the leased
wire system.
With respect to System credit policies as reflected in open market
operations, the importance of the speed and facilities of the leased
wire system in facilitating the existence of a uniform nationwide mar-

ket for Government securities has been discussed in previous chapters.
The availability of these facilities also materially assists in extend=
ing the scope and effectiveness of open market operations.

The trans-

fer facilities provided by the leased wire system, permitting mobility
of bank reserves and immediate availability of funds throughout the
country, are necessary adjuncts to sustaining a national money market
and constitute an important element in implementing Federal Reserve
monetary and credit policieso
The leased wire system is also utilized at the policy making level
in connection with Federal Reserve operations in the money market and
Government securities market.

The management of the Federal Open

Market Account, located at the Federal Reserve Bank of New York, discusses the market situation, the state of bank reserves, and other pertinent factors with representatives of the Federal Open Market Committee
and with its staff each morning, and it utilizes the leased wire system

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

103
actively in keeping the members of the Board of Governors and the
presidents of the Reserve Banks currently informed of all important
aspects of System Account operationso
The open market function at the Federal Reserve Bank of New York
also supplies to all other Federal Reserve Banks a daily current market information telegram describing conditions of the market shortly
after its opening at 11~00 aom.

A second such telegram is similarly

dispatched each day, following the close of the market, which summarizes the day's activityo

In these ways, the speed and confidential

nature of the communications service provided by the leased wire system
contribute toward the crystalizing of national situations and viewpoints and assist in reaching decisions with respect to policies to be
followed in current operationso
A related use of the leased wires in exercising credit controls is

made by the Board of Governors in announcing changes in margin requirements (1) on loans by banks for the purpose of purchasing or carrying
stocks registered on a national securities exchange (Regulation U),66
and (2) for the extension and maintenance of credit by brokers, dealers

66 "Loans

by Banks for the Purpose of Purchasing or Carrying Stocks
Registered on a National Securities Exchange," Board of Governors of
the Federal Reserve System Regulation U, Board of Governors of the
Federal Reserve System, Washington, Do Co, as amended to April 23, 1955.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

104
and members of national securities exchanges (Regulation T). 67

The value

of the capacity of the leased wire to rapidly and confidentially communicate information to all sections of the country is readily apparent in
connection with these matters.

It makes possible the withholding of

announcements of margin changes until after the closing of the principal
securities exchanges, with the new margins taking effect at the opening
of business the following morning.

This furnishes a protection against

disruptive influences on the markets and the unfair advantages which
might result from premature release or leakage of impending changes in
margin requirementso
Collection of Cash Items
With respect to telegrams relating to cash items deposited with a
Federal Reserve Bank for collection, Federal Reserve instructions
presently provide_:
"Telegrams pertaining to payment, nonpayment or tracing of
cash items, or in connection with receiving or transmitting
pertinent information or instructions, will be sent to the
extent practicable, over the Federal Reserve leased wires
without cost to member and nonmember clearing banks. The
cost of all such telegrams sent over commercial wires will
be charged to the banks from which the items were received,
and commercial wire telegrams to such banks will be sent
'collect'. 11 68
Currently effective Federal Reserve instructions further provide
that payee and intermediary collecting banks shall dispatch telegraphic
advices of nonpayment of cash items of $1,000 or over, except those not

67 "Extension

and Maintenance of Credit by Brokers, Dealers, and
Members of National Securities Exchanges," Board of Governors of the
Federal Reserve System Regulation T, Board of Governors of the Federal
Reserve System, Washington, D. C., as amended to April 23, 1955.

"Collection of Cash Items," Operating Circular No. 4, Federal
Reserve Bank of New York, Revised effective July 15, 1954, pp. 6, 7o

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

105
paid because of missing, irregular or unsatisfactory endorsement and
those bearing on their face "Do not wire nonpayment" with the A.B.A.
transit number of a Federal Reserve Bank or of a preceding bank endorser.
To facilitate tracing and identification of the items concerned, the
wires advising of nonpayment must include the A.B.A. transit numbers or
the names of the two endorsers immediately preceding the Federal Reserve
Bank .. 69

Such wire advices are for the purpose of providing the earliest

practicable notification of nonpayment as a protection to collecting
banks against possible malfeasance or losses resulting from payments
against "not good" items.
Pursuant to the above provisions, numerous messages are dispatched
daily over the leased wires between Federal Reserve Banks and branches
with respect to their check collection operations, including telegrams
involving notices of nonpayment of dishonored items of $1,000 or over
bearing the endorsement of another Federal Reserve Bank or branch.
Telegraphic notices of nonpayment of dishonored items bearing the endorsement of a direct sending bank located in a Federal Reserve Bank or
branch city, or located within telephone distance of such Federal Reserve
Bank or branch city, are also dispatched over the leased wires to the
Federal Reserve Bank or branch of the territory in which the direct
sending bank is located, for communication to such direct sending bank
by telephone or messengero

The use of the leased wires in dispatching

such messages expedites receipt of the notification of nonpayment by the
endorsing direct sending bank, as compared with the use of commercial
wires, without cost to it and has provided a service which has been well
received.

69 'collection
1

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

of Cash Items," Operating Circular No. 4, p. 6.

106
Information concerning debit entries in amounts of $10,000 or over
are dispatched over the leased wires to the interested Federal Reserve
Bank or branch, regardless of the reason for return, in order that re=
serve entries may be made on the proper date to offset the original
credits for the items.

The Federal Reserve Banks also use the leased

wires to notify other Reserve Banks and branches of consequential delays
in the presentation of items for any reason and to give prompt notification of receipt of cash letters or large items which were intended for
another Federal Reserve Bank or branch.

The leased wire service is

utilized daily when prompt information of any kind is required with re=
spect to cash items and is considered to be an essential element in today's check collection operations where the need for speed in presentation,
early availability, continuing growth in already large volumes and, in
many cases, lack of experienced help, tend to increase the number of
occasions on which advices of nonpayment or other wire communications
are required in connection with the vast volume and complexities of
countrywide check collection operations.
Collection of Noncash Items
The currently effective uniform instructions of the Federal Reserve
Banks with respect to telegraphic advices in connection with the collection of noncash items provide:
"When instructed to do so by sending banks, this bank will
request telegraphic advice of payment or nonpayment of non=
cash items and will transmit by telegraph any information
received. Charges for all telegrams pertaining to payment,
nonpayment or tracing of items, or in connection with receiving or transmitting any other information or instructions will be made at commercial rates against the banks
from which such items were received; telegrams to such
banks will be sent 'collect•. 11 70
7011 Collection of Noncash Items," Operating Circular No. 8, Federal
Reserve Bank of New York, Revised November 1, 1949, pp. 6, 7.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

107
In accordance with Federal Reserve policy in effect since 1939,
messages between Federal Reserve Banks and branches relating to noncash
collections are dispatched over the leased wires, but the sending banks
are charged for the cost of the telegrams at commercial wire rates without tax.

Although the costs of the telegrams are not absorbed by the

Reserve Banks, the leased wires are used quite extensively for communicating

information relating to noncash collections.

Member or nonmember clearing banks may deposit with the Federal
Reserve Bank or branch of the territory in which it is located noncash
collection items, including notes, drafts with or without securities or
other documents attached, maturing bonds and coupons or other eligible
noncash collection items, payable in another Federal Reserve Bank or
branch city.

The instructions contained in the collection letters with

respect to telegraphic advice may read "Wire Payment", "Wire Nonpayment",
"Wire Fate" or "Wire Credit".

The Reserve Bank's collection letters to

the Federal Reserve offices in whose territories the items are payable,
would relay the wire instructions as contained in the incoming collection letters.

Upon payment or nonpayment of the items, the latter

Reserve office would transmit over the leased wires the form of advice
requested.

The endorsing Reserve Bank, in turn, would convey such ad-

vice to the sending bank by telephone or commercial telegram.
With respect to the significance of telegraphic instructions, "Wire
Payment" is requested when telegraphic advice that payment has been made
by the drawee or payer to the collecting agent is desired, rather than
when the proceeds are credited to the bank's reserve or nonmember clear•
ing account.

Such advices do not necessarily imply that actually and

finally collected funds are in the possession of the Reserve Bank.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

"Wire

108
Nonpayment" is requested only when telegraphic advice of dishonor is
desired.

A request to "Wire Fate" indicates that a prompt advice of

payment or nonpayment by the drawee or payer is desired and a request to
"Wire Credit" is made when a telegraphic advice of final payment and of
credit to the reserve account or nonmember clearing account of the send-

71
.
b an k.is d esired.
.
1ng

By requesting "Wire Credit" the forwarding bank

receives advice of credit one or two days earlier than ordinarily would
be the case, depending on its distance from the territory where the item
is payableG

However, the bank's reserve position is not affected as all

credits for noncash collections are adjusted for reserve balance purposes
to the day the item was credited by the Federal Reserve office of the
territory in which the item was payable.
Member or nonmember clearing banks exercising the direct sending
privilege, may forward noncash collection items directly to the Federal
Reserve Bank or branch of the territory in which the items are payable,
for credit on the books of the Federal Reserve office of its own territory.

Direct sendings are encouraged wherever practicable and, in cases

where in their judgment the number or nature of the items warrant, the
Reserve Banks reserve the right to decline to accept noncash items for
collection unless routed direct to the Federal Reserve Bank or branch of
the territory in which payable.

Telegraphic advices with respect to

such direct sent items may be requested and will be furnished in exactly
the same manner as described above with respect to interdistrict items
forwarded through the Federal Reserve office of the territory in which
the sending bank is located.

71 "Collection of Noncash Items," Operating Circular No. 8, Federal
Reserve Bank of New York, Revised November 1, 1949, p. 7.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

109
The leased wires also would be used by the Reserve Banks in recalling noncash items payable in another Federal Reserve Bank or branch territory in cases where the item is due on the day the recall is received,
or in the event the recall notice would not reach the collecting Federal
Reserve Bank or branch before the due date if sent by mail.

Other spe-

cial circumstances in which the leased wires would be used in connection
with the collection of interdistrict noncash collection items include the
conveyance of instructions to release documents, to accept less than the
face amount of an item, to present a draft to someone other than the
drawee,to correct an advice of payment made in error, or other instances
where immediate instructions are necessary or desirable to avoid loss to
another Federal Reserve Bank or any of its member or nonmember clearing
banks.
General
In sunnnary, perhaps it may be said that the most important function
of the Federal Reserve Leased Wire System is to provide a dependable,
quick and confidential means of conveying official and other messages of

numerous types between the Board of Governors of the Federal Reserve
System, the Federal Reserve Banks and branches and the Treasury Department.
Some of the types of messages conveyed have been described or alluded to
in the previous pages of this thesis.

Other types of official communica""

tions handled would include interpretations, proclamations, instructions,
reports and approvals or disapprovals thereof, directions relating to
regulations, statutes or administrative acts and many others of similar
urgency and importance.

I believe it may be said safely that there are

few, if any, functions of the Federal Reserve Banks, including their

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

110
various fiscal agency and depositary operations for the United States,
that are not reflected at least occasionally in communications transmitted over the leased wire system.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHAPTER XI
CONCLUSION
Upon casual consideration it might seem that the area of communica=
tions is somewhat remote or far afield from the central banking function.
However, this actually is not the case and the foregoing account of the
principal uses and functions of the Federal Reserve Leased Wire System
illustrates its significance and the important role it plays in both
Federal Reserve and Treasury operations.
The leased wires constitute the principal channel through which in=
vestment funds flow to and from the central money markets in response to
factors creating supply and demand.

They provide the means of quickly

mobilizing the reserves of the country in accordance with economic re=
quirements, afford to member banks an outlet for their investment funds
regardless of location and have aided in creating a national market for
Federal Funds.

Together with the Interdistrict Settlement Fund, the

leased wires furnish the means for effecting prompt settlement of interdistrict transactions at par and constitute an essential element in our
national payment mechanism.

The wire transfer service provided by the

Federal Reserve Leased Wire System has substantially broadened the market
for long term and short term United States Government securities and
makes possible a uniform market for such securities throughout the nation,
which otherwise would not prevail.

The extent to which the leased wire

system ·contributes tbward efficient Treasury financing has been

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

111

112
commented upon, as has its role in other pha_s es· of fiscal management •.
Some of the ways the leased wires are utilized by the Federal Reserve
System in discharging its primary responsibilities with respect to regulating the availability, cost and volume of bank r e serves have been discussed and mention has been made of the significant uses of the leased
wires in connection with the collection of cash and noncash items and
in conveying important official messages of all types and descriptions
between the Federal Reserve Banks, the Board of Governors of the Federal
Reserve System and the Treasury Department.
Continuous efforts must be made to keep the leased wire system
modernized, up-to-date in all respects and operating at maximum efficiency, in the same manner as has been done since the inception of the
Federal Reserve Systemo

At the present time, the American Telephone and

Telegraph Company is installing for the United States Navy a private
leased wire system, designated as the 82•B =l Automatic Teletypewriter
Switching System, which is of more advanced design than the 8l=D=l
system utilized by the Federal Reserve Banks.

It is expected that the

new system will be in operation by September 1956 and the advantages
which it will afford, as compared with the 8l=D-l system, include ~
1.

Greater multiple message capacity,

Greater cross office speed in ~he receipt and
dispatch of messages at the switching center,

Greater capacity to handle more lines and
circuits,

Improved message priority features,

More flexibility in adding new circuits and

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

stations, and

113

6. Utilization of electronics in place of certain
mechanical features, which is expected . to
eliminate the principal source of delays
resulting from equipment difficulties or
failures.
The 82-A-l Automatic Teletypewriter Switching System, which is the
counterpart of the 82-B-l system adapted for commercial users, will"be
available to the public probably by 1958.

Some or .all of the improved

features of the new system may not be pertinent to the requirements of
the Federal Reserve Leased Wire System.

But, no doubt, the Reserve Banks

will keep abreast of the new developments an~ · continue to make necessary
changes and improvements as the needs appear and equipment of more ad=
vanced design becomes available, in order that the best possible services,
consistent with the costs and requirements of the operations, may be
provided.
The Federal Reserve Leased Wire System is indeed a dynamic, everchanging mechanism.

In view of the scope and significance of the

services which it provides, there can be little question as to the
importance of its role in our banking ·system, Treasury operations and
the functioning of our national economy.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

BIBLIOGRAPHY
Books
The Federal Reserve System Purposes and Functions, Board of Governors
of the Federal Reserve System, Washington, D. C., 1954.
W. Randolph Burgess, The Reserve Banks and the Money Market, Harper
Brothers Publishers, New York and London, 1927.
E. Sherman Adams, Monetary Management, The Ronald Pr~ss Company, New
York, 1950.
Reports and Pamphlets
Sixth Annual Report Federal Reserve Bank of New York for the Year
Ended December 31, 1920, Federal Reserve Bank of New York, March 1, 1921.
'l'hirt -second Annual Re ort Federal Reserve Bank of New York for the
Year Ended December 31, 194 , Federal Reserve Bank of New York,
March 27, 1947.
Thirty-fourth Annual Report Federal Reserve Bank of New York for the
Year Ended December 31, 1948, Federal Reserve Bank of New York,
April 1, 1949.
Harold V.. Roelse, "The Money Market," Money Market Essays, Federal
Reserve Bank of New York, March 1952.
W. Randolph Burgess, Notes on the Mechanism of the Market for
Treasury Bills, Federal Reserve Bank of New York, July 16, 1937.
Brochure, The Bank Wire, Manufacturers Trust Company, New York City,
July 1955.
Brochure, Private Wire System, Bankers Trust Company, New York City,
(Undated) ..
Periodicals
Glen Garrison, "Electric Conduits for National Credit," Commerce and
Finance, April 15, 1925, No .. 15.
The American Banker, September 30, 1950, Vol. CXV, No. 177.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

114

115
Periodicals (cont'd)
Monthly Review of Credit and Business Conditions, Federal Reserve
Bank of New York, October 1954.
Government Reports and Documents
Annual Reports of the Federal Reserve Board for the Years 1914
Federal Reserve Board, Washington, D. C.

1920,

Eighth Annual Report of the Federal Reserve Board Covering Operations
for the Year 1921, Federal Reserve Board, Washington, D. C., February 20,

1922.
"Clearings and Transfers through the Gold Settlement Fund," Twelfth
Annual Re ort of the Federal Reserve Board Coverin
erations for the
Year 1925, Federal Reserve Board, Washington, Do C., March 22, 192.
"Gold Settlement Fund," Seventeenth Annual Report of the Federal
Reserve Board Covering Operations for the Year 1930, Federal Reserve
Board, Washington, D. C., February 25, 1931.
Twentieth Annual Report of the Federal Reserve Board Covering
Operations for the Year 1933, Federal Reserve Board, Washington, Do C.,
May 28, 1934.
Twenty-first Annual Report of the Federal Reserve Board Covering
Operations for the Year 1934, Federal Reserve Board, Washington, D. Co,
June 24, 1935.
"Swmnary of Transactions through the Gold Settlement Fund," Twenty~
fourth Annual Report of the Board of Governors of the Federal Reserve
System for the year 1937, Board of Governors of the Federal Reserve
System, Washington, D. C., April 4, 1938.
Thirt -third Annual Re ort of the Board of Governors of the Federal
Reserve System Covering Operations for the Year 194, Board of Governors
of the Federal Reserve System, Washington, D. C., June 17, 1947.
Forty-first Annual Report of the Board of Governors of the Federal
Reserve System Covering Operations for the Year 1954, Board of Governors
of the Federal Reserve System, Washington, D. C., March 15, 19550
Federal Reserve Board Gold Settlement Fund Weekly Summary of
Transactions, Federal Reserve Board, Washington, Do C., 1930.
Board of Governors Interdistrict Settlement Fund Weekly Summary of
Transactions, Board of Governors, Washington, D. C., 1938.
Board of Governors Interdistrict Settlement Fund Weekly and Monthly _
Summary of Transactions, Board of Governors, Washington, D. Ce, 1942-1955.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

116
Government Reports · and Documents (cont'd)
Daily Statement of the United States Treasury, u. S. Government
Printing Office, Washington 25, D. c., March 30, 1956.
"Gold Clearance Fund at Washington," Federal Reserve Bulletin,
Federal Reserve Board, Washington, D. C., May 1, 1915.
Federal Reserve Bulletin, Federal Reserve Board, Washington, D. C.,
June 1, 1915.
"Clearing Circulars Issued by Banks," Federal Reserve Bulletin, _
Federal Reserve Board, Washington, D. C., July 1, 1916.
"Plan for Daily Clearings Through the Gold Settlement Fund," Federal
Reserve Bulletin, Federal Reserve Board, Washington, D. C., July 1, 1918.
Treasury Bulletin, United States Treasury Department, Office of the
Secretary, July 1955 and January 1956.
Annual Report of the Secretary of the Treasury on the State of the
Finances for the Fiscal Year Ended June 30, 1954, Treasury Department
Document No. 3194, United States Government Printing Office, Washington,
D. C., 1955.
Federal Reserve Act,as amended to October 1, 1955.
30 Op. Atty. Gen. 308, 311 (1914).
Circulars and Regulations
Circular No. 13, Series of 1915 Federal Reserve [Board, Federal
Reserve Board, Washington, D. C., May 8, 1915.
Circular No. 264, Federal Reserve Bank of New York, March 18, 1920.
Circular No. 616, Federal Reserve Bank of New York, July 1, 1924.
Circular No. 1700, Federal Reserve Bank of New York, September 28,
1936.
Circular No. 1958, Federal Reserve Bank of New York, June 30, 1939.
"Collection of Noncash Items," Operating Circular No. 8, Federal
Reserve Bank of New York, Revised November 1, 1949.
Operating Circular No. 10, Federal Reserve Bank of New York,
December 8, 1949.
First Supplement to Operating Circular No. 10,Federal Reserve Bank
Bank of New York, January 8, 1951.
Operating Circular No. 17, Federal Reserve Bank of New York, Fiscal
Agent of the United States, Revised January 9, 1951.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

117
Circulars and Regulations (cont'd)
"Collection of Cash Items," Operating Circular No.· 4, Federal
Reserve Bank of New York, Revised effective July 15, 1954.
Re ulation L Series 11

Federal Reserve Board, Federal Reserve

, 1915.
"Extension and Maintenance of Credit by Brokers, Dealers, and
Members of National Securities Exchanges," Board of Governors of the
Federal Reserve System Regulation T, Board of Governors of the Federal
Reserve System, Washington, D. C., as amended to April 23, 1955.
"Loans by Banks for the Purpose of Purchasing or Carrying Stocks
Registered on a National Securities Exchange," Board of Governors of the
Federal Reserve System Regulation U, Board of Governors of the Federal
Reserve System, Washington, D. C., as amended to April 23, 1955.,

1956 Bell System National TWX Teletypewriter Directory, American
Telephone and Telegraph Company, November 14, 19550
Newspapers
The New York Times, Thursday, February 17, 1949, Friday, April 8,

1949, Wednesday, February 15, 1956.
Interviews
John A. Baima, Long Lines Division, American Telephone and Telegraph
Company, New York, N. Y.
William C., Roe, Assistant Treasurer, Chase Manhattan Bank, New York,
Robert Vo Roosa, Assistant Vice President, Federal Reserve Bank of
New York, New York, N. Y.
Otto Susen, Chief, Wire Transfer Division, Federal Reserve Bank of
New York., New York, N. Y.
Noah T., 1u.bbs, Assistant Treasurer, Chase Manhattan Bank, New York,

N. Y.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Full text of The Federal Reserve Leased Wire System : Its Origin Purposes and Functions

FRASER