bank and to return such checks as it wished to return unpaid." This description of practice follows the method employed by the Federal Reserve Bank of Richmond and corresponds generally to the methods employed by all Federal reserve banks. The reserve banks do not give credit to their remitting member from the actual checks but the credit is given from the letters containing the checks, partly in order to facilitate the immediate transmission of the checks to the drawee banks and We enclose for collection and credit the items listed below. Protest dishonor of all items over $10.00 except those bearing this stamp [N] or a similar stamp of a preceding bank endorser. advice of NON-PAYMENT of items $500 and over, GIVING OUR ENDORSER. WIRE DRAWEE AMOUNT DRAWEE AMOUNT FIG. 32. CASH LETTER LISTING ITEMS FORWARDED BY ONE FEDERAL RESERVE BANK TO ANOTHER partly to lessen the number of debit and credit entries which have to be made in the books of the reserve bank. In this way the remitting member bank is enabled easily to verify the statement eventually transmitted to it by the Federal reserve bank while at the same time the localization of errors and the making of corrections or changes is somewhat simplified. Thus far nothing has been said of the collection items representing time obligations and in general "non-cash" claims. Federal reserve banks have generally assumed the collection of these classes of items, but the processes employed in connection with them do not differ from those adopted by the large member bank engaged in ordinary commercial business, and the detailed process of receiving, entering, and crediting them does not therefore need to be resurveyed. FIG. 33. DAILY ANALYSIS BY FEDERAL RESERVE BANK OF "DEFERRED DEBITS-TRANSIT' Nonmember Bank Collections ACCOUNT From the discussion thus far it will be plain that the member bank which is to be debited with a sum of checks drawn upon it and transmitted through the Federal reserve bank pays these checks in the form of a reduction of its balance with the Federal reserve bank. This is clear enough where a member bank sends to a reserve bank a letter containing a batch of checks which have been drawn upon other member banks exclusively. It does not meet the situation created by a member bank which sends in a batch of checks drawn on nonmember banks. The latter are obliged to transmit the payment for the collections in some form. Evidently this form must consist either (1) of a shipment of currency or money or (2) of a remittance consisting of a check or draft upon some other bank, in which case, under the theory upon which the reserve banks are working, final collection is effected only when such remittance check has actually been received and collected. In order to 4 = 7 Member. o use the cover this situation the Federal reserve bank usually asks a nonmember bank to enter into an agreement with it embodying the following points: 26 1. That the nonmember bank will remit at par upon the day of receipt for all items drawn upon it and forwarded to it by the Federal reserve bank. 2. That remittances will be made in funds acceptable to the Federal reserve bank or by the immediate shipment of currency at the expense of the Federal reserve bank. 3. That shipments of currency will be made in accordance with the regulations of the Federal reserve bank; regulations which are framed with a view to obtaining adequate insurance protection at a minimum cost of transportation and insurance on the currency. One matter is still left somewhat vague. This is the question as to what is meant by "funds acceptable to the Federal reserve banks." The issue is important in those cases where the remitting bank prefers to send exchange rather than currency and this is the case with the great majority of all banks. In such instances "acceptable funds" must take the place of currency and the question what is meant by that term becomes urgent. In those reserve districts which are organized around a financial center in which the banks of the community usually carry balances of other banks, acceptable funds mean an immediately collectible check or draft on a bank in that center. In those where there is no recognized center, acceptable funds are checks and drafts drawn upon banks located in places that have been designated by the reserve bank for that purpose. 27 Of course this implies that reserve banks are not in all cases located in financial centers, a financial center being a city in which balances are carried by the greater majority of the banks of the district. Obviously, this plan may result in a further delay in making actual collection, due to the fact that the funds on these financial centers must themselves be put through a collection process. Some of the reserve banks have therefore endeavored to work out more or less makeshift plans designed to render easier the process of debiting and crediting checks liquidated in this way and, at the same time, to shorten the amount of time involved in getting payment for them.28 In the eighth district "acceptable funds" means "funds available for reserve purposes the same as currency." It will be observed that no reference has been made to nonmember 20 Federal Reserve Bank of Richmond, "Letters to College Classes, No. 15,'' p. 9. The bank might then send checks as they come in with a correspondent, thus building up a balance which could be drawn upon; it might hold them for the purpose of remittance and send them to the reserve bank in liquidation of current claims as the latter were presented; or it might purchase exchange on the center from other banks which had balances there. 28 For example, the so-called "immediate credit plan," clearing banks. The amendment of June 21, 1917, provided for them, requiring that balances be maintained adequate to care for items in transit. Such a nonmember bank might advertise on its letterhead that it was a clearing member of the Federal Reserve System, 29 but since 1918 it may merely use the expression "nonmember depositor of the Federal reserve bank, through which checks on this bank are collectible." 30 In actual practice but few banks avail themselves of this privilege. On July 1, 1925, only 158 nonmember banks in seven districts maintained such clearing accounts, keeping $13,599,641.52 balances, and 127 of these were located in the St. Louis and San Francisco districts, although the 14 banks in the New York district kept almost $6,800,000 of the balances. Theory and Development of "Gold Settlement" It will be observed that what has been said thus far has apparently been based upon the idea of a collection system existing in each district and communicating or connecting with that in every other district merely through the informal method of transmission of items for collection by means of the intra-district plan. Of course this system would be inadequate and incomplete if adhered to absolutely. Indeed it may well be questioned whether it would have been practicable at all to establish twelve intra-district collection systems functioning side by side. The Technical Committee accordingly laid down as a fundamental basis for the whole undertaking the establishment of a gold settlement fund which was intended to act as a system of national clearance at Washington, between Federal reserve banks among themselves and between them and the Government. This was later supplemented by a reserve agents' fund which took over the funds of Federal reserve agents, just as the gold settlement fund took over moneys belonging to the several reserve banks. In order to understand the collection system fully, therefore, it is necessary to sketch the working of the gold settlement fund, although that working is a phase of the system with which the member bank has but little contact and the individual still less. The gold settlement fund is not mentioned by that name in the Federal Reserve Act but provision is there made (section 16) authorizing the Reserve Board itself to act as a clearing house for Federal reserve banks (or at its discretion to authorize one of the reserve banks to act in that capacity on its behalf). The Technical Organization Committee consisting of banking experts, which reviewed the entire situation relative to the organization of reserve banks during the months subsequent to the adoption of the Act and prior to the appointment of the Reserve 291917 Bulletin, p. 879; Digest, XIII-B, 100, p. 19. 1918 Bulletin, pp. 1119, 1216; Digest, XIII-B, 101, p. 19. Board, canvassed the subject carefully, and eventually advised the placing of a deposit of gold by each reserve bank with the Federal Reserve Board, such deposits to constitute the basis of clearance. It then proceeded to outline a system for transferring the funds on the books of the gold settlement system, by telegraph, each reserve bank informing the Board at stated intervals of the amounts which it desired so to have shifted. Such a plan was carried out within a few months after the organization of the Board. The conference of governors of reserve banks in January, 1915, submitted a corresponding plan to the Board, which, under date of May 8, 1915, issued Circular No. 13, Series of 1915, outlining a plan of clearing between reserve banks. The first settlement was made as of May 19. Each reserve bank placed with the fund (by shipment to the Treasury or the nearest subtreasury) $1,000,000 in gold or gold certificates, making a total of $12,000,000 in all, in addition to an amount at least equal to its net indebtedness to all other reserve banks. Each reserve bank was required to deposit to meet a deficiency and was permitted to withdraw all excess or make a special transfer thereof to another reserve bank. The grand total initial deposit was $18,450,000. For this the Treasury delivered to the Board gold certificates payable to the latter's order in denominations of $10,000. Then at the close of business each Wednesday each reserve bank telegraphed the Board (with mail confirmation) the amount in even thousands due by it to each other reserve bank. The Board harmonized these accounts the next day and debtor banks were charged with the net amounts owing by them to the others, while creditor banks were credited with the amounts due them from the others. The result was to change ownership in the gold on the books of the settlement fund. Each reserve bank was telegraphed the amount of credits in even thousands (the name of every other reserve bank and the amount being stated) as well as its net debit or credit balance as a result of the weekly settlement in question. The individual reserve bank then made appropriate entries in its own accounts with every other reserve bank showing amounts due to and due from them. The Board's counsel had ruled that the gold in the fund might be counted by the several banks as part of their reserve. Prior to this time, all the reserve banks had been maintaining accounts on one another's books, reliance being placed on shifting of debits and credits to equalize balances or keep them within reasonable limits. In this manner, shipment of gold, which the creditor bank had the right to require at any time, was largely avoided. The new plan made systematic application of the clearing principle. This plan worked well, but was eventually perfected in many details. The principal steps in this development may be outlined as follows: |