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For release at 6:00 p.m. EST,
March 19, 1970


Remarks of Seorge W. Mitchell
Member, Board of Governors of the Federal Reserve System
at the
Senior Banking Forum
of the
Americtm Institute of Banking

Kansas City, Missouri
March 19, 1970

Progress toward an electronic payments system in the Sixties
was steady, if not spectacular.

Checks and drafts, ledgers and journals,

securities and passbooks are in the process of giving way to electronic
recording, transmission, manipulation, storage, and access.

But the

most important development may well have been the beginnings of the
psychological adjustment of bankers and their customers toward the
concept of handling money without moving paper.

Since much of the

historical business of banking has been built around the inefficiency
of its customers and the aged mechanics of traditional money transfer
and security, it is hardly surprising that resistance to a change in
transfer mechanics is inherent in the very structure and operations of
The role of banking and the adaptive capacity of bankers has,
of course, been subject to other fundamental changes in the 1960's.


now it is widely recognized that earlier fears of a reduction in the
industry's credit role due to lagging demand deposit growth underesti­
mated the resourcefulness of bankers.

As their customers became more

efficient in their use of money, bankers became more inventive in their
use of other intermediation devices and techniques.

They were so suc­

cessful in this that banking's share of credit markets actually rose
significantly in the decade of the 1960's.

This more innovative mood

of bankers has been demonstrated in the resourcefulness with which banks

managed by means of liability instruments and arrangements to disperse
some of the monetary restraint recently administered through Regula­
tion Q ceilings.

It has also been reflected in their use of affiliates,

subsidiaries, and one-bank holding companies to hold their existing
customers, to penetrate new markets, and to offer new services.


the record clearly shows that in these areas bankers dxd innovate
successfully in the Sixties, given a sufficient incentive.
In light of this track record, bankers might also have been
expected by now to have made much more progress in dealing with another
of their major challenges— the huge stacks of paper piling up as prod­
uct of their money transfer operations.

The reasons for laggard bank

progress in this area are not entirely obvious— they involve the subtle
interlacing relationship of currency, checks, securities, and ledgers
to banking's traditional services, structure, and rationale.
To be sure, there have been desirable improvements in check
processing effected in the Sixties, but these do not begin to solve the
basic problem.

It is not enough that virtually all of the 80 million

checks written daily should be processed (i.e., added and sorted) on
electronic equipment.

The savings from efficiency and speed of that

process are swamped by the burdensome practice of coincidental check
handling* the sorting, batching, proofing, shipping, resorting, rebatch­
ing, reproofing, reshipping, and so on that continues until the document
itself is repatriated for the drawer's final proofing and filing.

Electronic technology now available and of proven capability
can provide a vastly more efficient functional performance if permitted
to slough off paper tracers and by-products.

The needle in our paper

stack that we need to find is the requisite incentive to motivate banks
and others to install and accept the economies and conveniencesof an
electronic settlement system.

Basically, we know the nature of the

problem and we know how to solve it— what is lacking is enough motivation
to act.
Before pursuing further the incentives and altered attitudes
prerequisite to an all-electronic system, let me point to some recent
developments in money settlement techniques that underline our rapidly
improving capabilities in this field.
The most important of these, in my opinion, are those which
will help to eliminate, or eliminate after an initial input, all subse­
quent paper handling, sorting, storing, or referencing.

The term "paper­

less entries" has been used to describe electronic record-keeping systems.
Once initial inputs have been converted into electronic terms, all subse­
quent operations can be performed electronically, with, of course,
visual or print-out access.
There are elements of a "paperless entry" system m many
present practices.

The long-established Federal Reserve wire transfer

facility is one such example.

These interbank transfers of funds involve

no shipment of currency or checks and no further processing of the

original instruction or authorization.

While this facility is not now

a wholly "paperless" system, it is capable of becoming one since it has
recently been modernized and greatly expanded.

With the expectation

that there will be a very rapid growth of money movements by wire during
the next several years, a new Federal Reserve communications system has
been designed that can take care of at least a twelve-fold increase in

It can be expanded to accommodate perhaps as much as 100

times present volumes.
The switching gear for this new system has been installed at
Culpeper, Virginia, and is now in the process of checkout.

It will

accommodate transfer rates varying from the relatively slow teletype
rates to the higher speeds of magnetic tape transceivers and of computers.
The transmission equipment used will depend on the type and volume of
traffic between the different points in the Federal Reserve System.


types of messages flowing between the Federal Reserve Banks and between
the Banks and the Board of Governors include not only transfers of funds,
but also a variety of textual, accounting, and statistical messages.
However, the predominant and most valuable use of the new communications
system will be the transfer of funds.
The communications switch, called the M1000, is a specially
designed computer system which works on the store-and-forward principle.
It presently will allow a transfer rate of up to 4,000 characters per
second, and this is expandable to 8,000 characters per second or possibly

more by providing additional memory and processing units.

All Federal

Reserve offices will be connected directly to the central switch.


volume expands, plans call for use of secondary collector facilities
to speed traffic along a smaller number of trunk lines.


there will be over 120 terminals including those located at the Treasury
Department and at the Commodity Credit Corporation.
Each of the twelve Federal Reserve Banks and the Board of
Governors will have magnetic tape equipment which will be used for
transferring accounting and statistical research data at medium trans­
mission speeds over 2400 baud lines.

Computer-to-computer communication

will allow data transfer at much higher rates of speed, and this capa­
bility is now ia the planning stage.
Switching of messages will be handled automatically for
messages between Federal Reserve Banks, and with this capability it is
envisioned that a wire transfer originating at a member bank or clear­
ing center may be routed through the Federal Reserve network and auto­
matically switched to the receiving bank.

The Chicago Federal Reserve

Bank will install a M1000 switch this summer which will enable it to
route messages among all of the midwestern banks linked to its facility
and also to any other Federal Reserve Bank or commercial bank similarly
linked to a Federal Reserve Bank.

Plans for similar installations at

New York and some of the other Federal Reserve Banks are under way.
Such services will provide a communications network that can support a
paperless payments system in the 1970's.

Another element of "paperless entry" coming into general use
substitutes some form of automated or electronic input for pay checks.
Since a large proportion of payments made by corporations and govern­
ments are for salaries and wages, a significant improvement in the pay­
ments mechanism would be achieved if electronic processing were adopted
in this one field alone.

The Federal government uses a procedure of

this kind for making payments to employees, retirees, and pensioners.
Additional applications are under study.

The response of payees has

hot been very enthusiastic: 10 percent of Government civilian personnel
elect to receive their pay in this manner, 28 percent of military per­

The Federal Reserve System offers a similar program for its

employees, and at the Board in Washington 35 percent of our employees
have opted for this arrangement.
Withholding sums from pay checks for tax and other payments
is another common payment practice which has important elements of a
paperless system.

One of these elements is the agreement by the employee

(enforced by law for taxes) to have payments made on his behalf by his

This agreement also fixes the time of payment and, where

practicable, a uniform amount for each pay period.

Given this authori­

zation, the employer can combine and accumulate payments to a common

Withheld taxes, union dues, group insurance premiums, charity

contributions, etc., are made as a single payment in lieu of scores,
hundreds, or thousands of monthly checks from individuals.

Many efforts have been made to extend the withholding principle
to utility payments, rents, insurance premiums, mortgage payments, and
the like.

Such plans work best if the payees are entities having a

large number of customers in a given area, if the payments are at regu­
lar intervals, and if the amounts are identical or can be made so by
averaging over some given period.

Khile pre-authorized payment plans

have yet to become popular, some have hopes they can be packaged to
gain broad acceptance.
The Home Loan Bank Board, for example, has recently published
a proposed change in its regulations which would give savings and loan
associations the authority to pay, at the shareholder's request, amounts
from savings accounts to third parties.

The language of the proposal

conforms to the wording of Section 1716 of the Housing and Urban Devel­
opment Act of 1968; it specifies that the payment orders be nonnegotiable
and nontransferable.
The authorizations could either designate payment of a single
obligation or they could instruct the association to pay a member's
periodic obligations, such as utility bills, and could be honored even
if the amounts to be paid were not specified.

The payment orders could

effect a direct transfer to a savings account of the third party if the
third party agreed to the arrangement.
It would be possible, for example, for a shareholder to
authorize his association to pay each month the minimum balance due on

his revolving charge account at a department store.

A shareholder

could have his pay deposited directly with his association.
A successful implementation of this proposal would have a
significant impact on the payments system of this country.

Savings and

loan associations, by internal transfers of funds into the accounts of
utilities companies, insurance companies, and other large receivers of
payments, would displace a very large volume of individual checks.
The credit card is another accumulating and combining device
for payments.

The clientele of the card issuer, however, is not a cap­

tive group as are employees subject to withholding.

Card holders must

be won over by promotion, credit access, convenience, and some day, no
doubt, discounts for cash.

Credit cards make it possible for the

purchaser to write a single check to settle many obligations, and they,
therefore, take a considerable burden off of the currency circulating
and check-clearing systems.

Credit card systems still produce large

numbers of sales slips which must be cumulated in preparation of final

But in this case, the accumulator— the card issuer--has

enough economic incentive to install the kind of electronic systems to
handle large volumes of transactions economically and expeditiously.
Finally, mention should be made of the recent introduction
of book entry procedures as a substitute for the issuance and safe­
keeping of Government securities held by the Federal Reserve.
practice is extended— and it inevitably must be because of its

As this

overwhelming cost and convenience advantages— to securities of other
issuers, the service of safekeeping on the scale to which we have
become accustomed will give way to still another application of paper­
less accounting; it will be none too soon, either, considering the paper
blockades in the security business.
I could go on with further illustrations, but those advanced
should suffice to demonstrate our rapidly evolving potential to effectu­
ate a full-blown electronic-payment and record-keeping mechanism.
This brings me back to the need to find-or apply-the motiva­
tional needle.

No doubt an important factor inhibiting more rapid

progress is the disinclination to change on the part of many bankers.
This is more than a matter of inertia and the apparent security of the
status quo.

The innovative bankers of the 1960's who grappled with the

problems of that decade are not likely to dodge the implications of a
paperless technology.

No better example of this attitude can be found

than in the organization by the San Francisco and Los Angeles clearing
house associations of a committee called SCOPE (Special Committee on
Paperless Entries) to study, and recommend arrangements for exchanging
paperless credits and debits between banks.

The committee has included

among its objectives the development of uniform standards and procedures
for exchanging automatic credits and debits via magnetic tape, punch
cards or deposit tickets, and also functioning the accounting entries
for normal check clearings by means of magnetic tape.

The implications of such

lopthents lead to policy

alternatives that challenge the basic structure and operation of the
banking industry.

They extend well beyond the repercussions of the

inevitable reduction in float implicit in simultaneous charge and credit.
Float, after all, is a credit extension that has to be supplied by some­
one and, in an economic environment, paid for by the beneficiary in one
form or another.

All Float, that is, except the average of $2.5-3.0 billion

supplied by the Federal Reserve to promote a more economical and conveni­
ent settlement system.

This accommodation, obviously, should not become

an impediment to the evolution of an electronic settlement system.
principal problems for the industry are much more basic.


What happens,

for example, to the elaborate facilities and arrangements for security
when the paper they exist to protect no longer exists— having been
replaced by electronic storage?

What happens to banking office networks

which accommodate customers' deposit and withdrawal convenience when
money moves by wire?

What new services can be offered at these branch

offices as old services are phased out?
As we come closer to the "paperless" era, we become more
perceptive of the adaptations required in our institutions and in our
ways of doing business.

There can be no turning back.

But neither can

we move forward so precipitously as to commit ourselves to a blind alley
in development.
The banking industry and the Federal Reserve have the major
responsibility for achieving steady progress toward an electronic
payments mechanism.

I suspect an outsider would judge that neither of

us is working at full capacity to do so.