PERSONNEL OF COMMITTEE HOLLISTER, GRANGER A., Chairman: Manufacturer and banker, of Rochester; vice president, Rochester Gas and Electric Corporation and Rochester Savings Bank; chairman, executive committee, Security Trust Company; trustee, New York Life Insurance Company; formerly president, Rochester Chamber of Commerce and formerly director, Chamber of Commerce of the United States. BARNETT, GEORGE E.: Economist, of Baltimore; professor in Johns Hopkins University and author of various studies in state banking. HEILMAN, RALPH E.: Economist, of Chicago; dean, School of Commerce, Northwestern University; formerly professor of economics at University of Illinois. MCCULLOCH, J. S.: Banker, of Philadelphia; president, Union National Bank of Philadelphia; formerly a manufacturer; member of board of directors, Philadelphia Chamber of Commerce, chairman of that organization's trade expansion committee, and member of its committee on banking and currency. MONTGOMERY, F. H.: Manufacturer, of Brooklyn; president, Knox Hat Company; member of National Association of Credit Men and member of New York Merchants' Association. PETERS, JAMES S.: Banker, of Manchester, Ga.; vice president, Bank of Manchester; member of committee on exchange, State Bank Division, American Bankers' Association; member, Georgia Committee, Federal International Banking Company. SCALES, J. H.: Wholesale merchant, of Louisville; treasurer, Belknap Hardware and Manufacturing Company; member of Louisville Board of Trade. SHEA, JOSEPH B.: Merchant, of Pittsburgh; president, Joseph Horne & Company; director, Pittsburgh Dry Goods Company and of Union National Bank; treasurer, Retail Research Association; during war, in charge of procurement of all non-metal materials, Aircraft Production Bureau; member of the Pittsburgh Chamber of Commerce. TEAL, CAPTAIN CHARLES H.: Merchant and planter, of Colfax, Louisiana. TREMAN, ROBERT H.: Banker and Manufacturer, of Ithaca, New York; recently deputy governor, Federal Reserve Bank of New York; president of Tompkins County National Bank and of Treman, King & Company; director, Ithaca Savings Bank and Cayuga Cement Company; formerly president, National Hardware Association. REPORT OF COMMITTEE Importance of Checks Clearing House Out-of-Town Checks Facilities under Reserve Non-Member Banks on PAR REMITTANCE FOR CHECKS To The Board of Directors of the Chamber of Commerce of the United States: By a great preponderance settlements are made in the United States by checks. Investigations which have extended over a period of years indicate that even in retail trade transfers of credit represent a large part of payments. Transfers of credit by means of checks are advantageous from the public point of view, because of the certainty and safety of such transfers as compared with transfers of currency. This has been recognized in the United States, through special development of payment by check. With the extension of this business practice other developments have come, such as the clearing house which now exists in every city of importance, to effect among the local banks settlements of the transfers of credit resulting from checks drawn upon the banks by their depositors. Checks deposited with a local bank but drawn upon banks in other cities have always presented problems, and except in a few instances, in certain localities like New England, these problems remained in good part unsolved when the Federal Reserve Act was enacted. One of the purposes of this law was to provide machinery through which credits might be more easily exchanged among different communities. Facilities of this sort were in fact offered by the twelve reserve banks, but under the original law they were at the disposal only of member banks in the reserve system. In 1916 and 1917 amendments were made to the law for the purpose of making these facilities available to non-member banks. In other words, any bank may now, if it wishes, arrange to clear through the federal reserve bank of its district the out-of-town checks it receives from its customers. Clearing of checks among the federal reserve districts is expedited through a settlement fund maintained at Washington by the reserve banks. Thus, economies of the principle of clearing checks, formerly available only locally, have been given general application. In this way one of the benefits expected from the federal reserve system has been made possible and in very large measure is being realized. The problem of the out-of-town check, however, persists to a certain degree because some of the non-member banks on which checks are drawn decline to make remittance to the reserve bank of their district for these checks at par. They wish to deduct Continued on page 6 ARGUMENTS IN THE NEGATIVE Neither the considerations which the Committee mentions nor provi- Depositors and Checks sions of the Federal Reserve Act alter the nature of checks or the obligation of a bank toward its depositors and other persons. These matters are governed by the law of the states, not by federal enactment, and are fundamental in any discussion of charges for remittance for checks. Whether a bank is organized under a state law or under the federal statute for national banks, the obligation which a bank undertakes when it receives a deposit is determined by state law. Under state law, a bank becomes a debtor when it receives an ordinary deposit and the terms of the debt are that the bank will on demand repay at its place of business to the depositor or to his order. In other words, the depositor receives a credit which, like any other debt, is payable at the place which the debtor and creditor designate, and in the case of the usual deposit in a bank the place is at the bank itself. The result of the ordinary deposit in a bank is, therefore, that a credit is created, and this credit can be used by its owner only at the place of its existence, the bank which has the credit on its books. The bank has promised to repay at its place of business, and nowhere else. As the depositor wishes, it will repay in money or by transferring the credit on its books to another depositor. If there is such a transfer, the undertaking of the bank to the second depositor is exactly the same as to the first,-i. e., to repay at its place of business. A credit at a bank or elsewhere is consequently a very definite thing. Its owner, the depositor, can use it only as it stands. The bank has not undertaken to pay in another city nor in another country. It is true that, in addition to the function of creating credits through receiving deposits, banks have other functions, for each of which they are entitled to compensation. One of these other functions is to become the owner of credits in other cities, or even in other countries, and to sell these credits, for a consideration, to persons who desire to have credits available in these places. This function a bank performs by itself becoming a depositor in a bank situated in another city. In becoming a depositor, it uses its own money,-money which it may have received from its own depositors but for which it has paid value in the credits it has set up in favor of these depositors in accordance with its agreement with them. Transfers of these distant credits may be made by a bank through issue of a draft to a person to whom the credit is to be transferred. If a bank makes a charge for issuing such a draft, it is within its legal and business rights, and it will make such a charge unless it obtains its compensation in other ways. Checks are used by a depositor in a bank to indicate to whom the bank, in accordance with the agreement with the depositor, is to make payment at its place of business, or to enter a transfer from one account to another upon its books. Consequently, when a depositor sends his check to a person in another place, where the depositor has to make a payment, and the recipient of the check accepts it in payment, the recipient becomes only the transferee of the depositor's right,-i. e., his right to have the money paid on demand over the bank's counter or the credit transferred to him upon the bank's books. Such recipients of checks do not ordinarily wish to become depositors in the banks upon which checks are drawn, and ask for "remittance,"-i. e., for transfer of the credit from the place where it exists to the place where they desire it. This request is beyond the conditions of the credit as it was originally created by the bank. Granting the request is equivalent to the issue by the bank of a draft upon its own distant credit, created at its own expense and with its own money, and it entails expense to the bank in excess of the expense incident to fulfilling the agreement between the bank and the depositor who drew the check. For granting the request, and making Continued on page 7 State Law Governs Nature and Place of Bank Sales of Exchange Nature of Checks Check Sent Out of Town Out-of-Town Extra Service Recipient's Charge Asked Remittance to Reserve Expenses of Remitting Committee's View Expense Absorbed by Reserve Bank Other Situations a small charge, usually 1/8 or 1/10 of one per cent, when they remit by mail in payment of checks drawn upon them and received by them from the reserve bank of their district. On April 15, 1921, not only the 9,726 member banks in the reserve system were remitting at par but also 18,792 non-member banks, whereas the number of nonmember banks not remitting at par was 1,932. It is to be said, however, that the number of non-member banks not remitting at par does not represent the whole number of banks which wish to make deductions for remittance; some of the other banks likewise wish to make charges, although their total number is not at the moment ascertainable. The contention of the banks which desire to make a charge for remitting to their reserve bank in payment of checks drawn upon them by their depositors centers around an amendment to the Federal Reserve Act made at the time of the amendments which have been mentioned above. This amendment provides in effect that when a non-member bank receives from a federal reserve bank a check drawn upon it by a depositor it may not make a charge for remitting to the reserve bank in payment of the check. In other words, such a remittance must be made in the form of currency or of a draft for the entire amount for which the check is drawn. When exception is taken to the charge by correspondent banks or those whom they represent as collecting agents, the local bank takes the position that under the contract with its depositor who sent the check to the distant point it is obligated only to pay his checks at par when properly presented, and that when the presentation is by mail, and the bank must pay to a distant point by remitting currency or a draft by mail, it performs an additional service and is entitled to compensation for it. This, however, is not accepted as a proper defense because the charge is not made by the bank against its own depositor for whom the service is rendered, but invariably against a third party whose claim upon the bank is in the nature of a demand obligation and who therefore very properly takes exception to the bank's using this means of discharging that demand obligation at less than one hundred cents on the dollar. Furthermore, it should be explained that the federal reserve bank, in forwarding checks drawn on a non-member bank directly to that drawee bank for collection or payment, offers to pay all of the costs of transportation in the event the bank wishes to remit in currency, or the cost of postage in the event it wishes to remit by a bank draft. The actual expense to the drawee or paying bank is, therefore, almost entirely eliminated; certainly, it is no greater than, if as great as, the cost involved in paying a check in cash over the counter by responsible and higherpriced officers. The charge by a drawee bank for this service of remitting either Continued on page 8 |