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 UNn ERSITY OF PENNSYLVANIA 
 
 THE FEDERAL RESERVE CHECK 
 COLLECTION SYSTEM 
 
 GORDON B. ANDERSON 
 
 A THESIS 
 
 IN FINANCE 
 
 PRESENTEr TO THL FACULTY OF THE GRADUATE J,CnOOL IN 
 
 PARTIAl. FULl-TLLMENT v.F THE REQUIREMENTS /OR 
 
 THE DECREE OF DOCTOR OF PHILOSOPHY 
 
 OvJ 
 
 o 
 
 PHILADELPHIA 
 1917 
 
THE FEDERAL RESERVE GHEGK 
 COLLECTION SYSTEM 
 
 A THESIS 
 
 IN FINANCE 
 
 PRESENTED TO THE FACULTY OF THE GRADUATE SCHOOL OF THE 
 
 UNIVERSITY OF PENNSYLVANIA IN PARTIAL FULFILLMENT 
 
 OF THE REQUIREMENTS FOR THE DEGREE 
 
 OF DOCTOR OF PHILOSOPHY 
 
 GORDON B. ANDERSON 
 
 PHILADELPHIA 
 1917 
 

 
 EXCHANGE 
 
THE FEDERAL RESERVE CHECK COLLECTION 
 SYSTEM 
 
 In framing the Federal Reserve Act considerable attention 
 was directed to the subject of collecting out-of-town checks. 
 Sections 13 and 16 of the Federal Reserve Act referring to the 
 clearing and collection functions of the Federal Reserve Banks 
 provide as follows: 
 
 "Section 13. — . . . Any Federal Reserve Bank may receive from any of its 
 member banks, and from the United States, deposits of current funds in law- 
 ful money, national-bank notes, Federal Reserve notes, or checks, and drafts 
 payable upon presentation, and also, for collection, maturing bills; or solely 
 for the purposes of exchange or of collection, may receive from other Federal 
 Reserve Banks deposits of current funds in lawful money, national-bank notes, 
 or checks upon other Federal Reserve Banks, and checks and drafts, payable 
 upon presentation within its district, and maturing bills payable within its 
 district." 
 
 "Section 16. — . . . Every Federal Reserve Bank shall receive on deposit at 
 par from member banks or from Federal Reserve Banks checks and drafts 
 drawn upon any of its depositors, and when remitted by a Federal Reserve 
 Bank, checks and drafts drawn by any depositor in any other Federal Reserve 
 Bank or member bank upon funds to the credit of said depositor in said 
 reserve bank or member bank. Nothing herein contained shall be construed 
 as probibiting a member bank from charging its actual expense incurred in 
 collecting and remitting funds, or for exchange sold to its patrons. The 
 Federal Reserve Board shall, by rule, fix the charges to be collected by the 
 member banks from its patrons whose checks are cleared through the Federal 
 Reserve Bank, and the charge which may be imposed for the service of clear- 
 ing or collection rendered by the Federal Reserve Bank. 
 
 "The Federal Reserve Board shall make and promulgate from time to 
 time regulations governing the transfer of funds and charges therefor among 
 Federal Reserve Banks and their branches, and may at its discretion exercise 
 the functions of a clearing house for such Federal Reserve Banks, or may 
 designate a Federal Reserve Bank to exercise the functions of a clearing house 
 for its member Banks." 
 
 The Federal Reserve Act, as originally passed, did not provide 
 
 628945 
 
4^'\ \ :/' :^iHE: FED^EBAt RESERVE CHECK COLLECTION SYSTEM 
 
 a technically adequate system for the collection of checks, with 
 the result that the Federal Reserve Board recommended to 
 Congress an amendment recasting the phraseology of Section 
 13, which was adopted in August 1916. The wording above is 
 that of the law as then amended. The greatest change effected 
 by the amendment was the elimination of the requirement 
 that only checks and drafts upon "solvent member banks" 
 might be deposited with a Federal reserve bank. It was mani- 
 festly impossible at the time a check was received by a Federal 
 Reserve Bank to be certain that it was drawn upon a solvent 
 bank. The Federal Reserve Bank, moreover, was protected 
 against loss by the depositing member bank's endorsement on 
 each check. 
 
 In addition, the revision in phraseology made certain that the 
 Federal Reserve Banks could receive from member banks' de- 
 posits consisting in whole or in part of checks drawn upon non- 
 member state banks. This greatly increased the value of 
 the collection system to the member banks, particularly when 
 the majority in number of state banks remain outside of the 
 system. There were on March 5, 1917, 7581 national banks, 
 all of which are members of the Federal Reserve System, and 
 over 20,000 state banks, of which only 40 were members. Since 
 approximately one-half of the checks received by the member 
 banks are drawn upon non-member state banks, it became 
 necessary to make some provision for collection of such items. 
 
 Collections Under the National Bank Act. — Under the National 
 Bank Act national banks were divided into three groups, first, 
 the national banks in New York, Chicago and St. Louis, 
 designated as central reserve cities; second, national banks 
 in fifty -two cities, known as reserve cities; third, national banks 
 situated in other places, known as country banks. The purpose 
 of this classification was primarily to bring about a certain 
 degree of concentration of banking reserves. The central 
 reserve and reserve city banks as reserve agents, carried a 
 portion of the reserve, known as the "deposited reserve", 
 of other banks, commonly termed correspondents. The 
 deposited reserve is built up almost entirely through the 
 deposit of checks which are sent by the correspondents to 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 5 
 
 their reserve agents for collection and credit. It was the 
 common practice to credit these checks to the correspondent's 
 account immediately upon receipt whether or not the reserve 
 agent was able to collect them at once. Sometimes a week or 
 more was necessary for the actual collection of a check. The 
 aggregate of these uncollected checks was known as "the float." 
 
 Under the national banking system this "float" was of large 
 proportions, and was necessarily increased by the indirect 
 routing of checks and the delay in remittances. In a great many 
 cases the same checks served as a reserve, not only for the country 
 bank, but for the reserve city bank, inasmuch as the latter would 
 in turn, send them to central reserve city banks for deposit 
 and collection. The country bank upon mailing the checks 
 would immediately count them as part pf its deposited reserve. 
 The checks would not be received by the reserve city bank for a 
 day or more, and then the reserve city bank would forward the 
 checks to a central reserve city bank for collection, counting 
 this deposit as part of its own reserve. The reserve agents gave 
 the correspondent banks immediate credit for these items, 
 sometimes charging them exchange for the collection service 
 rendered, and on other occasions levying an indirect charge by 
 deferring interest until the funds were actually in hand. 
 
 Although correspondent banks received immediate credit for 
 checks, which they deposited with their reserve agents, on 
 the other hand, the reserve agent receiving checks drawn upon 
 its correspondents seldom charged these items immediately 
 against their accounts, but sent them home for collection and 
 allowed the correspondent bank sufficient time to remit. Fre- 
 quently the country bank would charge the reserve agent ex- 
 change for the checks presented on their accounts, this charge 
 presumably covering the cost of the service rendered in honoring 
 the checks and remitting by draft. Where the reserve agent 
 received checks drawn upon banks which were not included 
 among its list of correspondents, the common practice was to 
 collect these checks in one of two ways; first, to send such 
 checks to one of its correspondents situated in the same town 
 or in a nearby community ; second, to send the checks to a cor- 
 respondent situated at some point geographically near the bank 
 
6 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 on which the check was drawn, which correspondent had indi- 
 cated on its so-called "par list" that it would take checks drawn 
 on banks at their face value in that town. This roundabout 
 method of collection increased the delay incident to the collec- 
 tion of checks and consequently exaggerated the size of the 
 "float." It has been estimated that from one-third to one-half 
 of the deposited reserve with reserve agents, really consisted 
 of checks which were at the moment in the process of collection. 
 
 It is obvious that uncollected checks do not constitute a 
 legitimate bank reserve. One of the purposes of the Federal 
 Reserve Act is to eliminate fictitious reserves of this character, 
 and to substitute a tangible reserve that will be available when 
 necessary. The reduction in the reserve requirements of mem- 
 ber banks, therefore, has really been less than would appear 
 by a comparison of the percentages, for it will to a large degree, 
 be offset by the elimination of the "float", or the fictitious 
 portion of the deposited reserve under the old system. 
 
 Inauguration of the Federal Reserve Collection System. — ^The 
 keystone of the Federal reserve system is the twelve 
 Federal reserve banks, in whose hands will be centered the 
 greater part of the reserves of the banks joining the system, 
 known as member banks. The elimination of the old reserve 
 agents is to be brought about gradually over a period of three 
 years terminating in November 1917. Up to this time the mem- 
 ber banks — comprising all the national banks and about forty 
 out of the twenty thousand state banks — have been living under 
 an anomalous arrangement, by which most of them are carrying 
 their reserves in three places — in their own vaults, on deposit 
 with the old reserve agents and on deposit with the Federal 
 reserve banks. On and after November 16, 1917 (or earlier if an 
 amendment recommended by the Federal Reserve Board is 
 adopted) member banks can carry their reserves in only two 
 places — in their vaults or on deposit with the Federal reserve 
 banks. Thus the old reserve agents will be eliminated. It was 
 obvious to the framers of the Act that with the elimination of 
 the old reserve agents must come the creation of facilities which 
 would perform the service heretofore rendered by such agents 
 for the correspondent banks. The most important of these 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 7 
 
 services is the collection of out-of-town checks, frequently- 
 referred to as "foreign items." 
 
 The Voluntary Clearing System. — On May 15, 1915, the Federal 
 reserve banks instituted a voluntary intra-district clearing 
 system, which provided that the Federal reserve banks would 
 charge immediately on receipt against the assenting member 
 bank's account, subject to payment by such member bank, 
 checks and drafts, payable upon presentation, deposited by 
 other banks which had joined the system. Checks would be 
 charged only against the accounts of those member banks 
 which had assented to such action, from whence came the term 
 "voluntary clearing system." Under this system each member 
 bank had to provide sufficient funds to offset the items charged 
 against its account. The portion of the reserve of the member 
 bank, which the law required to be kept with the Federal reserve 
 bank, was not to be impaired and whatever additional amount 
 had to be kept on deposit to avoid such impairment, was to be 
 determined by experience. Checks and drafts payable on pres- 
 entation, drawn on any member bank in the district which had 
 joined the collection system, were, subject to final payment, 
 received for immediate credit to the depositing bank's account. 
 
 This plan is known as the reciprocal plan of immediate clear- 
 ance. Each Federal reserve bank worked out its own method, 
 based on the same general principle. At first it was purely 
 an intra-district clearing plan, based on the principle of imme- 
 diate debit and credit of items remitted to the bank for collec- 
 tion. Under this plan the member banks found it very difficult 
 to gauge the excess balance, which they had to keep on deposit 
 with the Federal reserve bank to cover items drawn on them. 
 The Federal reserve banks, especially in the early stages of the 
 system, had to be very lenient in the matter of deficiencies in 
 reserves. 
 
 Comparatively few member banks took advantage of clearing 
 their checks through the Federal reserve banks under the vol- 
 untary system. However, the large city banks cleared checks 
 drawn on assenting banks with which they did not correspond, 
 and in this way were able to dispose of some of their items more 
 cheaply than under the old system. Despite the fact that the 
 
8 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 Federal reserve banks absorbed all the costs involved, the vol- 
 untary plan of check collection was not a success. The member 
 banks were still operating under a dual system of reserves. The 
 reserve balances which the country banks carried with their old 
 reserve agents still compensated the latter for the collection 
 service rendered. Comparatively few banks agreed to the terms 
 of the voluntary system, and the provision of the law since 
 changed, which provided that only items on members of the 
 clearing system could be handled, limited its usefulness. The 
 need of including outside checks within the scope of operations, 
 was obvious. Again, the bankers felt that the Federal reserve 
 banks ought to assume the "float," but this, the Federal Reserve 
 Board refused to sanction; pointing out that this would per- 
 petuate the unsatisfactory procedure of making a large part of 
 the deposits of the Federal reserve banks, float. 
 
 The serious inroads that would be made upon the deposits of 
 the Federal reserve banks if they assumed the "float," can 
 readily be demonstrated by an example. In the month from 
 March 16, to April 15, 1917, the average daily collections 
 passing through the twelve Federal reserve banks, consisted of 
 231,800 items, aggregating $127,648,500. Of this $67,360,500, 
 or 52.7 per cent required from two to nine days for collection. 
 Presuming, for the sake of illustration, that the average time 
 of collection was three days, the "float" would, therefore, be in 
 excess of $200,000,000. The maximum deposits of the member 
 banks with the Federal reserve banks reported in this period 
 was $758,219,000. 
 
 Inauguration of the Compulsory Collection System. — ^After 
 the Federal reserve banks had operated the voluntary system 
 of clearing for a year the Federal Reserve Board inaugurated 
 the compulsory plan, which was put into operation July 15, 1916. 
 In a statement to the press the salient features of the plan were 
 stated as follows : 
 
 " (1) The Federal Reserve Banks will accept at par all checks from mem- 
 ber banks, whether drawn against other member banks, non-member banks, 
 or private banks. An exception is made at the outset in the case of checks 
 drawn against non-member banks which can not be collected at par. 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 9 
 
 "(2) All checks thus received from member banks will be given imme- 
 diate credit entry, although amounts thus credited will not be counted as 
 reserves nor become available until collected. 
 
 " (3) In order to enable member banks to know how soon checks sent in for 
 collection will be available either as reserves or for payment of checks drawn 
 against them, time schedules, giving the minimum time for collection, will 
 be furnished by each Federal Reserve Bank to its member banks. 
 
 " (4) The actual cost, without profit, of the clearing and collection of checks 
 will be paid by the Federal Reserve Banks and assessed against the member 
 banks in proprotion to their sendings. 
 
 " (5) The whole plan is based on generally accepted principles under which 
 clearing and collection plans have long been operated. A Federal Reserve 
 Bank will not debit a member bank's reserve account with items forwarded 
 to it for collection until the remittance of the member bank in payment of 
 such items, shall have had time to reach the Federal Reserve Bank." 
 
 Under this system member banks are free to continue accounts 
 with their city correspondents and in fact, none of the old col- 
 lection machinery need be disturbed. The collection plan is not 
 compulsory upon any bank so far as the use of facilities to be 
 provided is concerned. They are compelled, however, to remit 
 at par for all checks presented at their own counters. This 
 includes checks sent to them by the Federal reserve bank directly 
 through the mails. Member banks can remit by draft, either 
 on the reserve bank or on a bank acceptable to the reserve 
 bank, or in cash. In case cash is remitted, that is to say lawful 
 money of the United States or Federal reserve notes (anything 
 except national bank notes), the Federal reserve bank will pay 
 the transportation charges. 
 
 For member banks which send checks to the Federal reserve 
 bank for collection, a small service charge is made. This charge 
 is based on a flat rate per item and varies from two cents per 
 item, the charge of the San Francisco Reserve Bank and the 
 maximum charge allowed by the Federal Reserve Board, to 
 nine-tenths of one cent per item, the charge of the Boston 
 Reserve Bank. Most reserve banks have fixed the service 
 charge at 1}^ cents per item. Between all Federal reserve 
 banks a charge of IJ^ cents per item is made. The service 
 charges were determined after a canvass of the experience 
 
W THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 of the old reserve agents. If later experience of the Federal 
 reserve banks show that the charges are too high, reductions 
 will doubtless be made. Practically all of the reserve banks 
 are at present collecting checks at a cost considerably below 
 the service charge. 
 
 Collection Charges and Costs. — ^Some people have misinter- 
 preted this service charge as being in violation of the provision 
 of the Federal Reserve Act, requiring Federal reserve banks 
 to receive checks for deposit at par. As a matter of fact, checks 
 are immediately credited at par, the service charge being cal- 
 culated for each bank at the end of the month; a statement 
 being rendered to each depositing bank of the charges against 
 it, giving the number of checks received each day and the total 
 for the month. With but one exception the two-cent service 
 charge is ample — ^but in case of district twelve, the reserve bank 
 must absorb part of the cost of the collection business. The 
 service charge imposed per item and the cost of collection for 
 each of the twelve banks during the period from July 15, 1916, 
 to December 31, 1916, are shown on page 11. 
 
 The law did not contemplate that the collection service 
 should be done gratis, either on the part of the member bank 
 for its customers or by the Federal Reserve Bank. The law 
 specifically gives the Board power to regulate charges in both 
 instances, but on the other hand clearly indicates that the 
 charge shall represent the cost only — the item of profit being 
 eliminated. So far, the Board has not seen fit to regulate the 
 charges made by member banks to their depositors. 
 
 The transit departments of all Federal reserve banks are 
 substantially similar, closely resembling the transit departments 
 of the larger city banks. In fact, the Federal reserve banks when 
 installing their transit departments had the advantage of the 
 co-operation of the city banks. In the case of Boston, the 
 Federal reserve bank took over in its entirety the staff and 
 quarters of the Boston Clearing House. In practically every 
 other case the Federal reserve transit departments number 
 among their clerical force experienced transit men, coming from 
 the banks in the city in which the reserve bank is located. The 
 plan of organization and the methods employed in the collection 
 
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12 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 departments of the several reserve banks do not vary sufficiently 
 to necessitate a detailed description of each. The collection 
 department of the Federal Reserve Bank of Philadelphia is used 
 as the basis of this study. Important variations in the methods 
 followed by the other reserve banks are noted wherever they 
 occur. 
 
 Regulations Governing Collection Service. — ^The collection activ- 
 ities of the Federal reserve banks are now being conducted under 
 Federal Reserve Board Regulation J, Series 1916, which reads 
 as follows: 
 
 "The Federal Reserve Board is empowered, under section 16, of the Fed- 
 eral Reserve Act, to require each Federal Reserve Bank to: 
 
 " ' Exercise the function of a clearing house for its member banks.' 
 
 "In pursuance of the authority vested in it under the provisions of this 
 section, the Federal Reserve Board, desiring to afford to both the public and 
 the various member banks a direct, expeditious, and economical system of 
 check collection and settlement of balances, hereby requires all Federal Reserve 
 Banks to exercise the functions of a clearing house for their respective mem- 
 ber banks under the following general terms and conditions: 
 
 "Each Federal Reserve Bank will receive at par from its member banks 
 checks* drawn on all member banks, whether in its own district or other 
 districts, and checks drawn upon non-member banks when such checks can be 
 collected by the Federal Reserve Banks at par. 
 
 "Each Federal Reserve Bank will receive at par from other Federal Re- 
 serve Banks checks drawn upon all member banks of its district and upon 
 all non-member banks whose checks can be collected at par by the Federal 
 Reserve Bank. The Federal Reserve Banks will prepare a par list of all non- 
 member banks, to be revised from time to time, which will be furnished to 
 member banks. 
 
 "Immediate credit entry upon receipt subject to final payment will be 
 made for all such items upon the books of the Federal Reserve Bank at full 
 face value, but the proceeds will not be counted as part of the minimum reserve 
 nor become available to meet checks drawn until actually collected in accord- 
 ance with the best practice now prevailing. 
 
 * A check is generally defined as a draft or order upon a bank or banking 
 house, purporting to be drawn upon a deposit of funds, for the payment at all 
 events of a certain sum of money to a certain person therein named, or to him 
 or his order, or to bearer, and payable instantly on demand. 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 13 
 
 "(2) Checks received by a Federal Reserve Bank on its member banks 
 will be forwarded direct to such member banks and will not be charged to their 
 accounts until advice of payment has been received or until sufficient time 
 has elapsed within which to receive advice of payment. 
 
 "(3) In the selection of collecting agents for handling checks on non- 
 member banks member banks will be given the preference. 
 
 "(4) Under this plan Federal Reserve Banks will receive at par from 
 their member banks checks on all member banks and on non-member banks 
 whose checks can be collected at par by any Federal Reserve Bank. Member 
 banks will be required by the Federal Reserve Board to provide funds to 
 cover at par all checks received from or for the account of their Federal Reserve 
 Banks: Provided, however, That a member bank may ship lawful money or 
 Federal Reserve notes from its own vaults at the expense of its Federal Reserve 
 Bank to cover any deficiency which may arise because of and only in the case 
 of inability to provide items to offset checks received from or for the account 
 of its Federal Reserve Bank. 
 
 " (5) Section 19 of the Federal Reserve Act provides that: 
 
 '"The reserve carried by a member bank with a Federal Reserve Bank 
 may, under the regulations, and subject to such penalties as may be pre- 
 scribed by the Federal Reserve Board, be checked against and withdrawn by 
 such member bank for the purpose of meeting existing liabilities: Provided, 
 however, That no bank shall at any time make new loans or shall pay any 
 dividends unless and until the total reserve required by law is fully restored.* 
 
 " It is manifest that items in process of collection can not lawfully be counted 
 as part of the minimum reserve to be carried by a member bank with its 
 Federal Reserve Bank. Therefore, should a member bank draw against such 
 items the draft would be charged against its reserve if such reserve were 
 sufficient in amount to pay it; but any resulting impairment of reserves 
 would be subject to all the penalties provided by the act. 
 
 " Inasmuch as it is essential that the law in respect to the maintenance by 
 member banks of the required minimum reserve shall be strictly complied 
 with, the Federal Reserve Board, under authority vested in it by section 19 
 of the act, hereby prescribes as the penalty for any deficiency in reserves a 
 sum equivalent to an interest charge on the amount of the deficiency of 2 
 per cent per annum above the ninety-day discount rate of the Federal Reserve 
 Bank of the district in which the member bank is located. The Board reserves 
 the right to increase this penalty whenever conditions require it. 
 
 "Member banks can at all times arrange to keep their reserves intact by 
 rediscounting with their Federal Reserve Bank. 
 
 *' (6) Each Federal Reserve Bank will determine by analysis the amounts 
 of uncollected funds appearing on its books to the credit of each member 
 
14 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 bank. Such analysis will show the true status of the reserve held by the 
 Federal Reserve Bank for each member bank and will enable it to apply the 
 penalty for impairment of reserve. 
 
 "A schedule of the time required within which to collect checks will be 
 furnished to each member bank to enable it to determine the time at which 
 any item sent to its Federal Reserve Bank will be counted as reserve and 
 become available to meet any checks drawn. 
 
 "(7) In handling items for member banks, a Federal Reserve Bank will 
 act as agent only. The Board will require that each member bank authorize 
 its Federal Reserve Bank to send checks for collection to banks on which 
 checks are drawn, and, except for negligence, such Federal Reserve Bank 
 will assume no liability. Any further requirements that the Board may deem 
 necessary will be set forth by the Federal Reserve Banks in their letters of 
 instruction to their member banks. 
 
 " (8) The cost of collecting and clearing checks must necessarily be borne 
 by thebanks receiving the benefit and in proportion to the service rendered. 
 An accurate account will be kept by each reserve bank of the cost of perform- 
 ing this service and the Federal Reserve Board will, by rule, fix the charge, 
 at so much per item, which may be imposed for the service of clearing or 
 collection rendered by the reserve banks, as provided in section 16 of the 
 Federal Reserve Act. 
 
 In addition to the Board's regulation, copies of which were 
 sent to the Federal reserve banks and member banks alike, each 
 of the twelve Federal reserve banks promulgated a series of rules 
 and regulations governing member banks, and state banks 
 having relations with its collection department. These relations 
 are generally identical. Those promulgated by the Federal 
 Reserve Bank of Philadelphia, issued under date of June 9, 1916, 
 are in part as follows : 
 
 "... Accordingly, under the authority of the Federal Reserve Act, and by 
 direction of the Federal Reserve Board, the Federal Reserve Bank of Phil- 
 adelphia will inaugurate on July 15, 1916, a system for collecting checks drawn 
 on banks located in all sections of the United States. On and after said date 
 this Bank will receive on deposit at par from its member banks, checks on all 
 member banks in the United States wherever situated and in addition checks 
 on all non-member banks in the United States which can be collected by 
 Federal reserve banks at par. A list of the latter banks will shortly be for- 
 warded to you and revisions thereof will be issued from time to time. Imme- 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM IS 
 
 diate credit entry will be made for all items received, subject to final payment. 
 The proceeds of such items will not, however, be available for withdrawal, 
 nor count as reserve until the lapse of time indicated in the attached schedule, 
 which for your convenience has been divided into four groups, with divisions 
 according to State lines, rather than Federal reserve districts. On the other 
 hand, items forwarded for payment to banks in this district will not be charged 
 to the account of paying banks until the second business day after they have 
 been forwarded by this Bank; thus enabling the member bank to calculate 
 accurately the amount necessary to be sent us to maintain its average reserve 
 unimpaired. A careful study of the following description of the plan of opera- 
 tion will enable you to avail yourselves of the collection service. 
 
 "Exchange Charges. — Since the Federal Reserve Act requires Federal 
 reserve banks to receive checks on their member banks on deposit at par, 
 the Federal Reserve Board will not permit Federal reserve banks to pay or 
 allow any exchange charges, and as the proposed plan is a reciprocal clearing 
 arrangement, member banks must therefore cover at par all checks drawn 
 upon themselves received from us or for our account, since such checks will 
 have been accepted by us on deposit at par. 
 
 " In case a member bank fails to receive from its customers in the regular 
 course of business checks on other communities sufficient in amount to offset 
 the checks on itself forwarded by us, and recognizing the principle that all 
 checks are payable only at the counter of the bank on which they are drawn 1 
 the privilege will be given to member banks to ship us lawful money or Federa, 
 reserve notes from their own vaults at our expense to cover checks received 
 from us or for our account. 
 
 "Items Forwarded. — Items on member banks in this district will be for- 
 warded direct to the paying banks and will be charged to their accounts on the 
 second business day after the date of sending, thus allowing us time to receive 
 advice of payment. 
 
 "Liability. — Every member bank forwarding to us items referred to herein 
 will be understood to have agreed to the terms and conditions set forth in this 
 circular. In receiving such items, the Federal Reserve Bank of Philadelphia 
 will act only as the collecting agent of the sending bank, assuming no responsi- 
 bility other than the exercise of due diligence until the funds are actually in its 
 hands. The Federal Reserve Bank of Philadelphia is authorized to send such 
 items for payment direct to the banks on which they are drawn. There shall 
 be no liability on the part of the Federal Reserve Bank of Philadelphia by 
 reason of its not having collected any such items in cash, or because of its 
 inability to return any such items to the member banks from which they were 
 received. In the event of the suspension or insolvency of the bank on which 
 any such items are drawn the Federal Reserve Bank of Philadelphia is author- 
 
16 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 ized to charge the proportionate amount of any and all items for which it has 
 not received payment to the account of the member banks from which such 
 items were received. 
 
 ** Restrictions as to Endorsements. — In the interest of good banking, the 
 indirect routing of items will be discouraged, and member banks will not be 
 allowed to deposit with us items payable in other districts which bear the 
 endorsement of member banks located outside of this district. 
 
 "District Routine. — Whenever time can be saved and the volume of busi- 
 ness between points located within or without the district warrants direct 
 interchange of items, such direct interchange will be encouraged. Balances 
 arising from such methods of collection may be settled by drafts on a Federal 
 reserve bank. 
 
 ** Non-member Bank Checks. — Letters will be sent to all non-member banks 
 in this district offering them the opportunity to remit at par on receipt for 
 checks on themselves either in satisfactory exchange, or by shipments of 
 currency at the expense of the Federal reserve bank. Since it is desirable to 
 give preference to member banks in the collection of non-member items, we 
 recommend that you make mutually satisfactory arrangements with the non- 
 member banks in your community for the collection of non-member items and 
 advise us of the conclusions reached. 
 
 "Service Charge. — The Federal Reserve Act provides that charges to be 
 fixed by the Federal Reserve Board may be imposed for the service of collec- 
 tion rendered by the Federal reserve banks. 
 
 " Under this authority the Federal Reserve Board has fixed a service charge 
 of IH cents per item, to be made for the depositing bank and to be debited to 
 the member bank's account monthly, such service charge to be based on the 
 estimated actual cost of handling the items. No service charge will be made 
 to member banks in this district on items payable in Philadelphia. 
 
 " It is hoped that as the system develops the cost of operation will tend to 
 decrease and that it will soon be possible to reduce the service charge. This 
 will largely depend on the cordial co-operation of the member banks. 
 
 "Sorting. — Careful sorting of items on the part of member banks will 
 materially reduce the handling by this Bank and the saving in expense will 
 therefore tend to reduce the service charge. 
 
 " Items sent for credit should be divided into the following five classes and 
 listed on separate sheets: 
 
 "1. Items immediately available as per accompanying schedule. 
 
 "2. Items drawn upon one-day points, as per accompanying schedule. 
 
 "3. Items drawn upon two-day points, as per accompanying schedule. 
 
 "4. Items drawn upon four-day points, as per accompanying schedule. 
 
 "5. Items drawn upon eight-day points, as per accompanying schedule. 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 17 
 
 "District Number. — Member banks and those non-members which have 
 agreed to remit at par, are urged to have imprinted on their checks the number 
 ' 3 ' in large skeleton figures in the center of the check. It is important that 
 this be done as quickly as possible, as the use of the district number will 
 facilitate the sorting of checks, thereby tending towards a reduction in the 
 service charge. It is also suggested that the words: 
 
 " 'COLLECTIBLE AT PAR THROUGH THE FEDERAL RESERVE 
 BANK OF PHILADELPHIA' 
 
 be stamped or printed on all checks drawn on member banks in this district 
 and on those non-member banks in this district, which have agreed to remit 
 at par. 
 
 " Penalty for Deficient Reserves. — In order that we may know that member 
 banks maintain adequate reserves with us, you are requested to report to us 
 at the end of each month, on forms to be furnished, the average reserves 
 required of your bank to be on deposit with us for the month. The Federal 
 Reserve Board circular provides for the assessment of penalties for impairment 
 of reserves and a penalty rate for such impairment has been fixed at 2 per cent 
 above the discount rate of this bank for 90-day paper, but in no case less than 
 6 per cent. 
 
 "Protest Instructions, — It is recommended that all cash letters bear sub- 
 stantially the following instructions governing the protest of items: 
 
 "Protest all items over $10.00 except those bearing the stamp N.P. 3-4 or 
 similar authority of a preceding bank endorser. 
 
 " 'Telegraph non-payment of items of $500.00 or over.' 
 
 " Items bearing other special instructions should be forwarded in a separate 
 letter. 
 
 " Time for Receiving Items. — Immediate credit entry subject to final pay- 
 ment will be given for all items received each day before 2.00 P. M. (except 
 Saturday when the hour will be 12 noon), items received after these hours will 
 be included in the following day's business. Unpaid items not subject to- 
 protest must be returned on the day after receipt. Unpaid items must not be 
 held for any purpose except for immediate protest. Returned items should be 
 sent direct to depositing bank with advice to us. Protested items should not 
 be forwarded a second time as cash items. 
 
 " Method of Endorsing Items. — All items forwarded to the Federal Reserve 
 Bank of Philadelphia, must be endorsed without restriction to the order of 
 the Federal Reserve Bank of Philadelphia, with all prior endorsements 
 guaranteed, and show on each side of the endorsement stamp the American 
 Bankers' Association transit number in prominent type. 
 
 "An endorsing stamp will be furnished to each member bank. 
 
18 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 "In due course, letters will be sent to member banks suggesting methods 
 of accounting, forms of remittance letters, etc. 
 
 "The Federal Reserve Bank of Philadelphia reserves the right to add, 
 alter, or amend the foregoing plan of operation." 
 
 The Time Schedules. — ^The term clearing cannot be correctly 
 applied to the present operations of the Federal reserve check 
 collection system. Checks are not exchanged nor are differences 
 between banks settled. The system differs from the operations 
 of the voluntary plan and the City Department of the ordinary 
 clearing house. The reserve banks maintain a collection depart- 
 ment or transit department, which collects checks deposited by 
 their members. Technically the bank acts as agent for its 
 member bank customer, receiving the items for collection; 
 credit being given immediately, but this credit is available only 
 after the remittances have been received for the items from the 
 banks on which they are drawn. It can be accurately determined 
 when remittances will be received, so for convenience, a time 
 schedule is arranged informing the depositing banks when the 
 proceeds of deposited items will be available. The time schedules 
 for all the Federal reserve banks diagramatically expressed, 
 appear on page 19. 
 
 This chart shows when the proceeds of a check drawn on any 
 point in the United States are available, except checks 
 drawn on banks in District No. 11. With the exception 
 of Districts No. 1, Boston, No. 2, New York and No. 12, San 
 Francisco, only items drawn on member banks and banks as 
 listed in a printed schedule, which have agreed to remit at par, 
 can be deposited with the Federal Reserve Banks. These sched- 
 ules will be referred to later. The object of this chart is to show 
 when the funds created by the deposit of foreign items in a 
 Federal reserve bank are available for use by the member. 
 For example, a bank in Maine sends to the Federal Reserve 
 Bank of Boston items drawn on a bank in Alabama ; the chart 
 shows four days — that is four days after receipt by the Boston 
 Reserve Bank — ^the funds will be available for use by the deposit- 
 ing Maine bank. Items on California require eight days, includ- 
 ing items on San Francisco, the Federal reserve city for this 
 
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20 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 district. Items on Illinois require four days, but those on 
 Chicago — the seat of a Federal reserve bank — ^require two days. 
 The differences are due to the time required to forward the items 
 for collection and receive a remittance therefor by mail. 
 
 Organization of the Collection Department. — ^The collection or 
 transit department of the Federal Reserve Bank of Philadelphia 
 is under the supervision of the cashier and directly in charge of a 
 transit manager, who has under his jurisdiction thirty-five 
 clerks. The equipment consists of thirty-five duplex adding 
 and listing machines and six listing machines with a typewriter 
 attachment designed to describe the items, one electric letter 
 opener, one electric endorsing machine, and one electric letter 
 sealing machine. These are contained in a room 25' x 60', two 
 walls of which are a solid line of sorting racks. In the center of 
 the room are long tables with another row of tables at one 
 end making a T-shaped arrangement. 
 
 The plan contemplates two transit settlements each day, 
 namely, the morning or A. M. settlement and the afternoon or 
 P. M. settlement. The mail which arrives at the bank before 
 nine o'clock and also all deposits received from the Philadelphia 
 banks before this time are included in the morning work. The 
 mail which arrives at the bank after nine o'clock, as well as the 
 checks received from city bank messengers after that time, are 
 held over for the afternoon work. The reserve bank will accept 
 all deposits until 2.00 P. M., but after that time and until 3.30 
 P. M. will accept only items of $1,000 and over; all checks 
 arriving after 2.00 P. M., except those of $1,000 and over which 
 arrive at the reserve bank before 3.30 P. M., will be held over 
 until th^ next morning. 
 
 On Saturday the first settlement is conducted as usual; the 
 second differs, however. The incoming mail closes at 11.00 A. M. 
 and deposits from local banks at 12.00 M., instead of 2.00 P. M. 
 No provision is made for later receipt of items of $1,000 and 
 over. At present the need for a regulation covering the later 
 receipt of large checks on Saturday, has not arisen. 
 
 Receiving and Sorting the Mail. — ^The early mail is brought to 
 the bank from the Post Office by a messenger at 2.00 A. M. 
 The Philadelphia banks deliver their checks to the Federal 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 21 
 
 reserve bank at different times, credit being entered in a pass 
 book for the aggregate of each batch as deposited. Practically- 
 all of the morning city banks' deposits are received by the 
 transit department before 9.00 o'clock Some are delivered late 
 the preceding afternoon; others usually before 8.00 o'clock in 
 the morning. Four clerks report for duty in the transit depart- 
 ment at 6.00 A. M., so that the work on these early deposits 
 will be well under way and the bulk of the mail opened and 
 properly sorted for the remainder of the force to work upon when 
 they arrive two hours later. This sorting is done on ordinary 
 tables and consists of arranging the incoming mail into five 
 divisions conforming to the five general ledger divisions of the 
 bookkeeping department : 
 
 1. Those letters coming from banks located in towns of Pennsylvania whose 
 names begin with the letters A to D; banks in Delaware and that part 
 of New Jersey included in District No. 3. 
 
 2. "Pennsylvania E to O." 
 
 3. " Pennsylvania P to Z." 
 
 4. Other Federal reserve districts. 
 
 5. Non-member state bank remittances. 
 
 Then the envelopes are opened and the mail is checked as 
 hereafter described, and made up into batches. The envelopes 
 contain the checks sent for collection and credit by a particular 
 member bank. These checks are drawn on member banks 
 situated throughout the United States, and on such non-member 
 banks as have agreed to remit at par to the Federal reserve 
 bank of their district. Each member bank, as we have seen, 
 is supplied from time to time by the Federal Reserve Board 
 with printed schedules, in which are listed by Federal reserve 
 districts, sub-divided according to states, towns and cities, all 
 banks in the United States which remit at par to the Federal 
 reserve bank of their district. The lists contain the names of 
 all the members of the Federal reserve system, and in addition 
 they contain the names of all state institutions which have 
 made arrangements, through a member bank or directly with a 
 Federal reserve bank, to remit at par to the Federal reserve 
 bank of their district for all checks presented to them. On 
 
22 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 April 15, 1917, checks on 8,607 non-member state banks, in 
 addition to the 7,625 national and state member banks, were 
 collected at par by the Federal reserve banks — a total of 16,232 
 banks, or approximately 60 per cent of the total banks of all 
 classes in the United States. Three out of the twelve Federal 
 reserve banks — those situated in New York, Boston and San 
 Francisco — accept checks on every bank in their district. 
 
 The Cash Letter. — ^A cash letter, as it is called, accompanies 
 each bank's daily deposit of checks. 
 
 The depositing bank is requested, in making up its cash 
 letter, to describe the bank upon which each check is drawn, 
 either by inserting the name or the number of such bank, accord- 
 ing to the universal numerical system adopted by the American 
 Bankers' Association, and to insert opposite the name or number 
 the amount called for by the check. The regulations of the 
 Federal reserve bank further require that all items forwarded 
 for collection "must be endorsed without restriction" to the 
 order of the Federal reserve bank to which they are sent *'with 
 all prior endorsements guaranteed and show on each side of the 
 endorsement stamp, the American Bankers' Transit number in 
 prominent type." The Federal reserve bank will furnish to 
 each member bank a suitable endorsing stamp. The form of the 
 endorsement is substantially as follows: 
 
 Pay to the order of 
 FEDERAL RESERVE BANK OF PHILADELPHIA 
 
 Prior Endorsements Guaranteed, 
 
 3-20 May 5, 1917 3-20 
 
 FIRST NATIONAL BANK, PHILADELPHIA, PA. 
 
 3-4 Pay to the Order of 3-4 
 
 Any Bank, Banker or Trust Co., 
 
 Prior Endorsements Guaranteed. 
 FEDERAL RESERVE BANK OF PHILADELPHIA 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 23 
 
 It will be observed that the above endorsement is a double 
 endorsement, the upper half constituting the endorsement to the 
 Federal reserve bank by the member bank and the lower half 
 constituting the endorsement by the Federal reserve bank to 
 "any Federal reserve bank or member bank." By having one 
 stamp containing both endorsements the reserve banks are saved 
 the work of putting all checks sent to them for collection through 
 the endorsing machine. Checks collected through the local 
 clearing house must be put through the machine by the reserve 
 bank, as hereafter described. 
 
 The depositing bank in making up its cash letter is urged to 
 arrange its items in groups according to the date on which the 
 funds will be available, under the rules of its Federal reserve 
 bank. The time schedule of the several Federal reserve banks 
 has been heretofore given. In order to illustrate the working 
 of this schedule, which is in reality a composite of the schedules 
 of the several banks, the time schedule of the Federal Reserve 
 Bank of Philadelphia is here inserted. 
 
 FEDERAL RESERVE BANK OF PHILADELPHIA 
 
 On Receipt 
 
 Cities 
 
 Philadelphia New York 
 
 ONE BUSINESS DAY AFTER RECEIPT 
 
 Boston 
 Richmond 
 
 Cities 
 
 TWO BUSINESS DAYS AFTER RECEIPT 
 
 States 
 
 Atlanta 
 Chicago 
 Cleveland 
 Kansas City 
 Minneapolis 
 St. Louis 
 
 Connecticut 
 
 Delaware 
 
 District of Columbia 
 
 Maine 
 
 Maryland 
 
 Massachusetts* 
 
 New Hampshire 
 
 New Jersey 
 New York* 
 Pennsylvania* 
 Rhode Island 
 Vermont 
 Virginia* 
 
 
 FOUR BUSINESS DAYS AFTER RECEIPT 
 
 Dallas 
 New Orleans 
 
 Alabama 
 Arkansas 
 
 Minnesota* 
 Mississippi 
 
 Florida Missouri* 
 
 Georgia* North Carolina 
 
 Illinois* Ohio* 
 
 Indiana* South Carolina 
 
 Iowa Tennessee 
 
 Kansas West Virginia 
 
 Kentucky Wisconsin 
 Michigan 
 
24 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 EIGHT BUSINESS DAYS AFTER RECEIPT 
 
 San Francisco Arizona North Dakota 
 
 California Oklahoma 
 
 Colorado Oregon 
 
 Idaho South Dakota 
 
 Louisiana* Texas* 
 
 Montana Utah 
 
 Nebraska Washington 
 
 Nevada Wyoming 
 New Mexico 
 
 This schedule, as has previously been stated, is constructed 
 on the basis of the time required to forward checks by mail to 
 the banks upon which they are drawn and to receive a remittance 
 from them in the same fashion. 
 
 In brief, the time sheet provides that the deposit created by 
 checks sent to the Philadelphia Reserve Bank is available for 
 use by the member bank either immediately, or in part after 
 one, two, four or eight business days have elapsed. The deposit- 
 ing bank is required to arrange its items to conform with this 
 schedule. In listing the deposit a total for each class of credit 
 must be listed, and the checks contained in the deposit separated 
 into batches by the use of a rubber band to conform with the 
 time divisions on the latter. Sub-totals of each division and the 
 grand total of the contents of each package are given. 
 
 In ticking off or checking the incoming cash letter, each 
 check is not compared with the listing on the letter, the liability 
 of error being so small that it does not pay to check each item 
 on the latter, for if a mistake has been made by the depositing 
 bank it will be detected later when the checks are listed on the 
 batch sheets. Only the first and last items are scrutinized, to 
 be certain that the sending bank has made no mistake either 
 in enclosing the wrong cash letter, the wrong batch of checks, 
 or in misaddressing the envelope. If the sending bank has 
 not described the checks by inserting the names or universal 
 numerical system symbols of the drawee banks, the omission is 
 corrected at this time. The transit department does not check 
 the cash letter as to the arrangement of the items according to 
 the time schedule. Incorrect time listing can be detected by 
 the analysis department when checking up particular accounts. 
 
 * Except cities as listed. 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 25 
 
 Up to this point the contents of each cash letter still remain 
 intact, the sorting thus far being confined to a classification of 
 cash letters according to the points of origin of the letters. 
 For instance, the First National Bank of Scran ton's letter will 
 be received, placed on the space on the sorting table allotted to 
 "Pennsylvania P to Z," then opened by one of the clerks who 
 arrives at 6.00 o'clock in the morning and examined to see 
 whether the proper package of checks is enclosed. 
 
 Making Up and Sorting the Batches. — ^While checking the 
 incoming mail the clerk divides the mail in each division into 
 batches. One or more cash letters aggregating a pile of checks 
 about three inches in height, weighing approximately one pound 
 and containing in the neighborhood of four hundred items, 
 usually constitutes a batch. On the preceding afternoon the 
 necessary number of batch sheets are prepared. The batch 
 sheet is a piece of blank paper 12" x 19", which is stamped 
 on the lower right-hand corner as follows: 
 
 Sorted by 
 
 Listed by 
 
 Settled by 
 
 E— O No 
 
 These batch sheets are of five kinds; (1) Delaware and New 
 Jersey; Pennsylvania A — D; (2) Pennsylvania E — O; (3) 
 Pennsylvania P — Z; (4) Reserve, and (5) "Due Froms" that 
 is, remittances from state banks not members of the Federal 
 reserve system, which have agreed to remit at par, and are 
 making settlement for checks previously sent to them. Each 
 batch sheet is numbered so that a missing sheet may be detected 
 later in the make-up of the settlement sheet. 
 
 A batch of items is wrapped in a blank batch sheet, secured 
 with a rubber band, and passed to a sorting clerk. For the sake 
 of simplicity, assume for the present, that the batch contains 
 but one cash letter, meaning that a member bank has sent in a 
 letter accompanied by approximately four hundred items. This 
 is often the case. In some instances one cash letter, because of its 
 size, may be divided into two or more batches. On the other 
 hand as many as ten or more small cash letters are made up on 
 
26 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 one batch sheet. The make-up of the batch sheets, as has been 
 said, is primarily based on the quantity of checks, and not the 
 final disposition of the items. The sorting clerk now takes the 
 batch and proceeds to break up the portion of cash letter, or 
 the cash letters contained therein, sorting down the checks into 
 the following divisions : 
 
 1. Items payable through Philadelphia Clearing House. 
 
 2. Run (items drawn on banks and bankers in Philadelphia, 
 
 not members of the Clearing House). 
 
 3. Federal Reserve Bank of Philadelphia. 
 
 4. Return items. 
 
 5. Delaware and New Jersey. 
 
 6. Pennsylvania A — D. 
 
 7. Pennsylvania E — O. 
 
 8. Pennsylvania P — Z. 
 
 9. Other Philadelphia (outlying banks and trust companies). 
 
 10. Eastern (New York State and New England). 
 
 11. Other reserve districts. 
 
 A word of explanation concerning the above classification may 
 be helpful. "Items payable through the Philadelphia Clearing 
 House" include checks drawn upon banks situated in the City 
 of Philadelphia and members or associate members of the clearing 
 house. The division "Federal Reserve Bank of Philadelphia" 
 includes drafts drawn by member banks against their deposits 
 with the reserve bank. These drafts largely represent remit- 
 tances for checks previously sent out for collection, the draft 
 being included as a part of the cash letter of the member 
 bank. "Return Items" constitute checks previously sent 
 out for collection but which have been returned by the bank 
 on which they are drawn because of a variety of reasons, 
 as for example, because the person drawing the check has no 
 account with the bank on which he has drawn. Such "return 
 items" it will be observed, are included in the deposit of the 
 bank for the current day, and under the rules, constitute items 
 for which immediate credit will be given. The Federal reserve 
 bank will return them in the day's collection to the institution 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 27 
 
 which had originally sent them in for collection, immediately 
 charging them therefor. In making this immediate charge 
 the transit department fills out and sends a duplicate advice, 
 the original of which goes to the member bank together with the 
 checks sent out that day for collection. The duplicate goes to 
 the bookkeepers as the basis of the debit entry. 
 
 The "Eastern Division" includes the checks drawn on all 
 banks situated in New York State and in New England. This 
 division is made separately from that of "other reserve dis- 
 tricts", because of the large volume of checks to be collected on 
 New York and New England points. All checks drawn on 
 banks in reserve districts other than New England (District 
 No. 1) and New York (District No. 2) — ^whether drawn against 
 Federal reserve banks or any member bank or the state institu- 
 tions situated in such districts which have agreed to remit at 
 par, are included in the division "other reserve districts." All 
 such checks are sent for collection to the Federal reserve bank 
 for each particular district. It is altogether likely that, as 
 the volume of inter-district business continues to grow, this 
 latter group will be sub-divided in order to facilitate the work. 
 
 After a clerk has sorted the batch he hurriedly goes over the 
 sorting to correct any missorts which may have crept in. The 
 sorting clerk then initials the "sorted by" in the lower right- 
 hand corner of the batch sheet. 
 
 Listing the Batches. — ^The batch now goes to a listing clerk, who 
 inserts the blank batch sheet into a duplex adding machine and 
 lists all checks for the Clearing House in one column, printing 
 the total, the duplex machine transferring the total of these 
 checks to the lower counter of the machine. Likewise all the 
 checks for the "Run" are listed in another column. A total 
 is struck, this total being transferred and added to the clearing 
 house total and carried in the lower counter. The other divisions 
 are similarly run up in turn, the grand total being carried as 
 described above, and finally printed when the listing of the 
 batch is completed. The completed sheet shows the checks in 
 their proper columns with the total for each column and a grand 
 total for all the columns on the sheet. This grand total must 
 agree with the total of the cash letter, which in this illustration 
 
28 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 made up the batch. Each column is then properly marked by 
 the listing clerk, namely Clearing House as C. H. ,Run, R., 
 Pennsylvania A — D, A — D, etc. These captions are necessary, 
 because no particular order is followed in listing the divisions 
 nor does each batch necessarily contain checks for each transit 
 division. In case the grand total on the batch sheet agrees with 
 the total on the cash letter, the listing clerk then initials "listed 
 by" and turns the completed batch sheet and the checks over 
 to the settling clerk. In case the listing clerk finds, after he has 
 run up the batch sheet, that the total of the batch sheet and 
 the total of the cash letter does not agree, he immediately 
 checks back his work. If he does not locate the error he turns 
 it over to the settling clerk who must locate and reconcile the 
 difference before the particular batch is run through the depart- 
 ment. This may involve locating an error on the batch sheet 
 or the cash letter may be at fault. If the letter is incorrect, the 
 letter is changed and a memorandum is made of the essential 
 information so that the Federal reserve bank may write to the 
 member bank in question advising it of the mistake. 
 
 Should more than one cash letter be included in the batch, 
 the checks are sorted and listed in the same manner as described 
 above, and when the listing is completed the aggregate totals 
 of the cash letters must agree with the grand total of the batch 
 sheet. The totals of the cash letters are listed separately on 
 the batch sheet and each total is followed by the name of the bank 
 which sent the letter. If the aggregate totals do not agree the 
 work must be checked back and the error located and corrected. 
 In view of the fact that making up the batch sheets will dis- 
 close any errors which may have been made by the banks in 
 their cash letters, the mail is not carefully checked when opened. 
 
 When cash letters are very large, such as those coming from 
 the larger banks in Philadelphia, it is customary to split the 
 letter into two or more batches. As a matter of fact, a letter of 
 this size will consist of two or more pages and the Federal reserve 
 bank requires in such cases that there be inserted as well a 
 recapitulation sheet, appropriately designated as such, on which 
 is listed the totals of the checks listed on each sheet of the cash 
 letter. It is customary, in making up the batches, to separate 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 29 
 
 the checks in accordance with the pages of the cash letter, 
 that is to say, the checks called for by a particular page and that 
 page of the letter are made up as one batch. 
 
 Should a cash letter be large enough to necessitate splitting 
 it into two or more batches, the clerk who made up the batch 
 would indicate the fact on the cash letter by noting the number 
 of batches into which it has been divided. A figure enclosed 
 in a circle is the method followed by the Philadelphia Federal 
 Reserve Bank. When a split is made, a regular numbered batch 
 sheet is used, but in addition, lettered batch sheets are used for 
 the listing of items after they are sorted. For instance, if a 
 cash letter received from the Fourth Street National Bank of 
 Philadelphia, is divided into two batches, the checking clerk 
 will, when making up the batches, mark the recap sheet of the 
 original cash letter with a (2) and then will clip the recap sheet 
 to the numbered batch sheet; in this instance, Pa. P — Z No. 
 (whatever number happens to be next,) and hand it to the settle- 
 ment clerk. He will then take an unnumbered blank batch 
 sheet and mark it "A — Fourth Street National," enclose the 
 checks chosen for the batch and that part of the cash letter which 
 includes these checks, put a rubber band around the bundle 
 and hand it over to the sorting clerk. The second batch is 
 wrapped together with the other part of the letter and checks 
 in a batch sheet and marked "B — Fourth Street National." 
 These sheets are handled in the regular manner, but when they 
 are completed the work on the A and B sheets is recapitulated 
 by the settlement clerk on the numbered batch sheet. This 
 recap shows the totals of each transit division on the two batch 
 sheets, a grand total of the sheet, which must agree with the 
 total of the cash letter, as sent in by the Fourth Street National 
 Bank. Sheet A and B are then pinned to this recap sheet. 
 
 All completed batch sheets are turned over to the settlement 
 clerk who carefully looks over the work to see whether the 
 columns have been properly marked, and further to see whether 
 the proper checks have been included in the proper column. 
 The listing clerk may have run up checks belonging to two 
 different divisions under one division, in which case they must 
 be separated at this time. This checking is done by looking 
 
so THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 at the first and last check in each division, and comparing the 
 check with the Hsting on the batch sheet. After doing this 
 the settlement clerk initials "settled by," detaches the batch 
 sheets for use in making up the recapitulation and settlement 
 sheets, and puts the bundles of checks in a rack which contains 
 eleven compartments, one for each transit division, that is, 
 Clearing House, Run, Philadelphia Reserve Bank, Delaware and 
 New Jersey, etc. Thus all the incoming mail is listed on batch 
 sheets and the checks belonging to each division are concen- 
 trated in this rack. 
 
 The organization of the transit department is so divided 
 that certain men are confined to special divisions, namely, two 
 clerks have charge of the Delaware and New Jersey Division 
 (this division includes only that section of New Jersey which lies 
 in District No. 3) ; two other clerks have charge of Pennsylvania 
 A to D; three of Pennsylvania E to O; three of Pennsylvania 
 P to Z; one "Other Philadelphia" and six of the "Reserve," 
 which includes all checks drawn on cities outside of Federal 
 reserve district No. 3. These divisions work independently of 
 each other. All the clerks, however, before taking up the work 
 of their sections make up the batch sheets as described above. 
 
 The Recapitulation Sheet. — ^All the batch sheets are assembled 
 and a recapitulation made of the eleven divisions of these sheets. 
 The totals of each division on the batch sheets is listed on the 
 recap sheet. For example, the total of the Clearing House is 
 taken off of each batch sheet and listed on the recap sheet, the 
 total of this column is struck, the duplex machine transferring 
 and carrying this amount in the lower counter; likewise, all 
 batch sheet totals of the Run are listed on the recap sheet, a 
 total taken, and automatically transferred to the lower counter 
 of the machine and added to the Clearing House total. After all 
 the transit divisions are recapitulated in this way, the grand 
 total of all the divisions on the batch sheets, which has been 
 accumulated in the lower counter, is printed on the recap sheet. 
 The totals of all the cash letters are next recapitulated from the 
 batch sheets on the recap sheet, a grand total taken, which 
 total should agree with the grand divisional total. Thus, the 
 recap sheet shows in total all the checks as distributed from the 
 incoming mail to each division of the transit department. 
 
TEE FEDERAL RESERVE CHECK COLLECTION SYSTEM 31 
 
 However, there are certain items which do not come into the 
 transit department through the mail. Government deposits, 
 items from the receiving and paying tellers, interest checks 
 from the discount department, and exchanges, which include 
 checks lacking endorsements that have been returned by the 
 city banks which received them in the city clearing from the 
 reserve bank, all go through the transit department but are not 
 handled in the mail. These items go through the regular channels 
 to the transit department as previously described, that is, they 
 are checked, batched, listed and racked with the other items. 
 However, a separate batch sheet is made up for each, namely, 
 government, paying teller, receiving teller, exchanges, discounts. 
 These batch sheets are not merged into the recap sheet but the 
 totals are transferred directly to the settlement sheet as here- 
 after described. 
 
 The Settlement Sheet — ^The settlement sheet contains a division 
 for each of the eleven divisions of the transit department. The 
 totals of the divisions on the recap sheet are transferred to the 
 proper division on the settlement sheet. This represents the 
 amount with which the transit sections are charged. In addi- 
 tion, however, the totals of the government, paying, receiving, 
 discount, and exchange batch sheets are transferred to the proper 
 divisions on the settlement sheet. 
 
 Since the completed settlement sheet then shows the aggregate 
 amount of the checks which were given to each division in the 
 transit department, it follows that the total of the outgoing 
 letters of each division must agree with the amount charged 
 to them on the settlement sheet. The items for the 
 "Clearing House," "Run," and "Other Philadelphia" divisions 
 have been checked and verified with the debits against these 
 departments on the settlement sheet. The aggregate of the 
 outgoing letters comprised in each of the divisions — such as 
 Delaware and New Jersey, for example — must equal the aggre- 
 gate charged to that division. Thus there is a check on the 
 work of the entire transit department. 
 
 The Philadelphia Clearing House Items. — ^The checks for the 
 Philadelphia Clearing House must be taken care of first, as the city 
 clearing takes place at 10 A. M., and the rules of the association, 
 
32 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 penalize the tardy members. To facilitate the work of this 
 handle the clearing house items. Each morning the clearing 
 section several men are taken from their regular divisions to 
 house department has on hand checks received the preceding 
 day, which arrived after the city clearing for that day. These 
 checks are "racked down" or sorted into a rack contain- 
 ing a compartment for every member of the clearing house. 
 A rack consists of a series of pigeon holes, large enough to 
 accommodate the ordinary check, each clearing house member 
 having a pigeon hole. The front of the rack is open, the back 
 is covered with a wire net. The pigeon holes are approximately 
 three inches wide, eight or nine inches deep, and of varying 
 height. The racks are so constructed that the height of the 
 pigeon holes or compartments can be adjusted. The average 
 rack is about three feet high and is set on a table. The width is 
 determined by the number of compartments necessary, and the 
 ability of one or two men to work efficiently in sorting checks 
 into the same rack. 
 
 After the sorting is completed and the work verified, the 
 checks drawn on each member are listed separately in 
 adding machine on a duplicate slip, the total being printed 
 at the bottom, and the listing verified. A rubber band is 
 placed around the checks and the original of the slip 
 and the package is inserted in the clearing house envelope, 
 addressed to the clearing house member in question, and at the 
 same time, the total called for on the slip is written in ink on the 
 outside of the envelope. The envelopes containing such checks 
 are kept in a fireproof safe overnight. 
 
 The checks received in the morning mail are put through the 
 electric endorsing machine and are then racked down. After 
 the checks received in the morning's mail have been racked 
 down, the checks for each bank are listed on an adding 
 machine and the total thereof indicated. The adding machine 
 tape is affixed to the checks with a rubber band and inserted 
 in the envelope, referred to above, addressed to the member 
 of the clearing house. The envelope is then handed to another 
 clerk, who again lists and adds the morning checks on 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 33 
 
 an adding machine. This operation will prove whether the 
 morning checks have been correctly listed and that the total 
 is accurate. The second tape forms the transit department's 
 record of the morning checks included in each package. Their 
 record of the "hold-over" items herein included is the duplicate 
 of the list which has been made out the preceding afternoon. 
 
 The clerk in charge of the city clearing department then lists 
 the total of the morning work included in each envelope on the 
 outside of the envelope, and adds to that figure the amount of 
 the "hold-over" which already appears thereon. These figures 
 are totaled and to prove the work of the department, the total 
 of each envelope is listed. The grand total of all must agree 
 with the total checks charged to this department, as shown by 
 the clearing house division on the settlement sheet. After the 
 work has been proven the envelopes are sealed and secured by 
 sealing wax. 
 
 In the meantime the following lists are made up to be used 
 at the clearing house. The clearing house requires that items 
 on what are termed outside institutions be reported separately. 
 These institutions maintain a limited membership in the clearing 
 house, which entitles them to the clearing privilege only. These 
 sheets and the envelopes for the clearing house members are 
 now ready to be taken to the clearing house. The form of 
 the sheet is as follows: 
 
34 
 
 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 NO. 4 
 
 THE FEDERAL RESERVE BANK 
 
 ITEMS ON OUTSIDE INSTITUTIONS 
 RECEIPTS FOR PACKAGES. 
 
 1917 
 
 NO. 
 
 INSTITUTIONS 
 
 AMOUNT 
 SENT 
 
 RECEIVED 
 BY 
 
 101 
 
 ALDINE TRUST, 
 
 
 
 102 
 
 AMERICAN BANK & TRUST, 
 
 
 
 103 
 
 NATIONAL BANK OF COMMERCE, 
 
 
 
 104 
 
 CAMDEN NAT. BANK, 
 
 
 
 105 
 
 CAMDEN, FIRST NAT., STATE, 
 
 
 
 107 
 
 CENTRAL TRUST, 
 
 
 
 108 
 
 COLONIAL TRUST, 
 
 
 
 110 
 
 COMMONWEALTH TITLE, 
 
 
 
 111 
 
 CONTINENTAL-EQUITABLE T. & 1., 
 
 
 
 113 
 
 FIDELITY TRUST, 
 
 
 
 114 
 
 FRANKLIN TRUST, 
 
 
 
 115 
 
 LIBERTY TITLE & TRUST, 
 
 
 
 116 
 
 GUARANTEE TRUST, 
 
 
 
 117 
 
 HADDINGTON TITLE, 
 
 
 
 118 
 
 HAMILTON TRUST, 
 
 
 
 119 
 
 INTEGRITY TRUST, 
 
 
 
 121 
 
 MUTUAL TRUST, 
 
 
 
 122 
 
 NORTHERN TRUST, 
 
 
 
 123 
 
 NORTH PHILADELPHIA TRUST, 
 
 
 
 124 
 
 NORTHWESTERN TRUST, 
 
 
 
 125 
 
 PEOPLES BANK AND TRUST, 
 
 
 
 127 
 
 REAL ESTATE TRUST, 
 
 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 35 
 
 NO. 
 
 INSTITUTIONS 
 
 AMOUNT 
 SENT 
 
 RECEIVED 
 BY 
 
 128 
 
 REPUBLIC TRUST, 
 
 
 
 131 
 
 UNITED SECURITY L. INS. & T., 
 
 
 
 132 
 
 WEST END TRUST, 
 
 
 
 134 
 
 KENSINGTON TRUST, 
 
 
 
 135 
 
 
 
 
 136 
 
 
 
 
 137 
 
 
 
 
 138 
 
 
 
 
 139 
 
 
 
 
 140 
 
 
 
 
 141 
 
 
 
 
 142 
 
 
 
 
 143 
 
 
 
 
 144 
 
 
 
 
36 
 NO. 4 
 
 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 FROM FEDERAL RESERVE BANK 
 
 RECEIPTS FOR PACKAGES 
 CLERKS' PACKAGE STATEMENT, 
 
 1917 
 
 NO. 
 
 MEMBERS 
 
 AMOUNT 
 SENT 
 
 RECEIVED 
 BY 
 
 1 
 
 PHILADELPHIA, 
 
 
 
 2 
 
 BK. NORTH AMERICA & TRUST, 
 
 
 
 4 
 
 FEDERAL RESERVE, 
 
 
 
 7 
 
 SOUTHWARK, 
 
 
 
 8 
 
 KENSINGTON, 
 
 
 
 9 
 
 PENN, 
 
 
 
 13 
 
 GIRARD, 
 
 
 
 14 
 
 TRADESMENS, 
 
 
 
 18 
 
 CORN EXCHANGE, 
 
 
 
 19 
 
 UNION, 
 
 
 
 20 
 
 FIRST, 
 
 
 
 21 
 
 THIRD, 
 
 
 
 23 
 
 SIXTH, 
 
 
 
 25 
 
 EIGHTH, 
 
 
 
 26 
 
 CENTRAL, 
 
 
 
 28 
 
 SECURITY, 
 
 
 
 33 
 
 NINTH BANK & TRUST, 
 
 
 
 34 
 
 TENTH, 
 
 
 
 36 
 
 NORTHWESTERN, 
 
 
 
 37 
 
 SOUTHWESTERN, 
 
 
 
 39 
 
 FOURTH STREET, 
 
 
 
 40 
 
 MARKET STREET, 
 
 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 37 
 
 NO. 
 
 INSTITUTIONS 
 
 AMOUNT 
 SENT 
 
 RECEIVED 
 BY 
 
 42 
 
 QUAKER CITY, 
 
 
 
 43 
 
 NORTHERN. 
 
 
 
 44 
 
 FRANKLIN, 
 
 
 
 45 
 
 TEXTILE, 
 
 
 
 46 
 
 LAND TITLE & TRUST, 
 
 
 
 47 
 
 REAL ESTATE TITLE, 
 
 
 
 48 
 
 GIRARD TRUST, 
 
 
 
 49 
 
 WEST PHILA. TITLE, 
 
 
 
 50 
 
 PHILADELPHIA TRUST 
 
 
 
 51 
 
 PROVIDENT TRUST, 
 
 
 
 52 
 
 PENNSYLVANIA CO., 
 CLEARING HOUSE 
 
 
 
 
 TOTAL, 
 
 
 
 
 
 
 
 
 
 
 
 The clerks also take to the clearing house the following credit 
 tickets, which are given to the clearing house manager who 
 credits the bank on his clearing sheet with these amounts in the 
 day's clearing: 
 
 NO. 4 
 
 191 
 
 THE FEDERAL RESERVE BANK OF PHILADELPHIA 
 
 TOTAL CREDITS 
 
38 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 NO. 4 
 
 191 
 
 FEDERAL RESERVE BANK 
 
 TOTAL OF ITEMS ON 
 OUTSIDE INSTITUTIONS 
 
 $ 
 
 The Federal reserve bank not only presents items against 
 members of the clearing house, but also receives in the daily 
 clearing drafts drawn against the accounts of its depositors 
 presented by members of the clearing house. Members of the 
 Federal Reserve Bank of Philadelphia may have drawn drafts 
 against their balances in that bank and these drafts may ulti- 
 mately have been deposited with members of the Philadelphia 
 Clearing House, who present them through that organization 
 to the Federal Reserve Bank. However, the Federal reserve 
 bank usually deposits more items for credit in the clearing house 
 than are presented to it in the clearing. This makes the Federal 
 reserve bank a credit bank, and gives it the right to receive 
 the difference between the credits and debits in clearing house 
 gold certificates. Sometimes, however, the Federal reserve 
 bank is a debtor and then it must pay the difference to the 
 clearing house in gold certificates. It would seem that if the 
 Federal reserve bank were a creditor in the clearing house most 
 of the time, it would draw gold from the other city banks. 
 However, this is not the case, for the city banks build up their 
 deposits with the Federal reserve bank by means of out-of-town 
 checks, and thus they create balances in excess of the actual 
 reserve which the law requires them to keep. They draw drafts 
 against these balances and receive from the Federal reserve bank 
 eligible funds with which they pay their clearing house debit 
 balances. 
 
 The Run and Other Philadelphia Items. — ^The "Run" items are 
 next taken care of. These items are sorted in a rack which 
 contains a compartment for every bank and banker in Phila- 
 delphia, not a member of the clearing house. A number of 
 private bankers and a few commercial bankers comprise the 
 list. The process of handling these items is exactly like that of 
 handling the clearing house items, that is to say, the checks are 
 listed, a copy kept of the list and then the checks are put into 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 39 
 
 envelopes addressed to the banks from which they are to be 
 collected. The total of these envelopes must agree with the 
 "Run" division on the settlement sheet before the run is dis- 
 patched. The "Run" is disposed of by 10.30 A. M. 
 
 Each runner is charged with the total amount included in the 
 envelopes which constitute his route, and the total of the entire 
 run is charged to the paying teller, to whom the runners report 
 after they have finished their business. A run account in the 
 general ledger is charged by the bookkeeper for the total of the 
 run as shown by the transit department's record. This account 
 is credited when the runners return with the proceeds from the 
 items which they delivered to the several institutions, the 
 paying teller being charged with the same amount, which he 
 accounts for in his cash and cash items. The rules of the Federal 
 reserve bank allow run items to be settled either with a check 
 on a Philadelphia bank or in cash, so in case the paying teller 
 receives Philadelphia items he will turn these over to the transit 
 department, who will put them through the Philadelphia 
 clearing house on the following day. 
 
 By 11.00 A. M. every check received which is payable in 
 Philadelphia, has left the bank including items on outlying 
 national banks and trust companies, known as "Other Phila- 
 delphia," which are listed, proved and mailed immediately 
 so that they will be received by the drawee bank and remitted 
 for the same day. 
 
 Sorting Out-Of-Town Checks. — The Philadelphia items having 
 been settled, the clerks now proceed on the work of their assigned 
 divisions. Each division takes the checks from the distributing 
 rack, where they were placed after the batch sheets had been 
 settled, and sorts them into its own racks. The rack — sometimes 
 called a bin — contains a compartment for every bank in the 
 respective division to which checks are sent for collection. To 
 verify the sorting, the clerk takes the checks out of the first 
 compartment, examines them to see whether they all bear the 
 name of the bank designated on the compartment in the rack 
 from which he took them, then puts them back and repeats 
 the operation for every pigeon hole or compartment in the rack. 
 It is necessary to do this because an experienced transit clerk 
 
40 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 learns to know the position of each bank's compartment in the 
 rack and in sorting, which is done very rapidly, he may have 
 inadvertently put a check in the wrong compartment. This 
 verification will disclose the error which is, of course, imme- 
 diately corrected. 
 
 Preparing the Outgoing Letters, — ^The contents of each com- 
 partment or pigeon hole is now ready to be made up on an out- 
 going letter. These letters consist of a printed form made in 
 duplicate, the second sheet of which is blank, but being attached 
 to the first by a perforated edge. Previously, carbons have been 
 inserted and sheets run through an addressograph so that there 
 will appear under the printed head "Federal Reserve Bank of 
 Philadelphia", the name of a particular bank (which will also 
 appear on the carbon). These blank letters are arranged to 
 follow the order of the rack, so they will come to hand as the 
 process of listing progresses. The checks in the rack are now 
 taken out and listed on the letter. The listing consists of listing 
 the amount called for by each check contained in the compart- 
 ment, the total being pulled at the bottom of the letter. A 
 blank letter appears as follows : 
 
 FORM 28 
 
 FEDERAL RESERVE BANK 
 
 OF PHILADELPHIA 
 
 We enclose cash items as listed below 
 
 Wire Non-Payment of Items of $500. and over: DO NOT PROTEST 
 any Ittems of $10. or under, or those stamped N, P. 3-4 or those with a similar 
 stamp of a preceding endorser. 
 
 Frank M. Hardt, Cashier, 
 
 With the exception of letters sent to other Federal reserve 
 banks, checks are merely listed on the letters, no description 
 accompanying the items, as it is comparatively easy to trace an 
 item by the amount, and the extra labor in describing checks 
 can not be justified. It must be remembered that thirty-five 
 clerks handle 48,000 items in a day. The total of each cash 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 41 
 
 letter listed is transferred to and carried in the lower counter 
 of the duplex adding machine, so that after all the letters have 
 been made up, the aggregate totals of the lower counter of the 
 machines in a transit division must agree with the total checks 
 charged to the division by the settlement clerk on the settlement 
 sheet. If the totals do not agree each clerk checks back his 
 work immediately in order to locate the difference. A search 
 must be continued until the error is found, unless the error is less 
 than a dollar which can be carried in the "difference account". 
 In effecting the divisional settlement the following form is 
 used : 
 
 DETAILED SETTLEMENT OF THE SECTION 
 
 Struck Settlement at o'clock 
 
 over 
 Original difference short 
 
 over 
 
 Final Settlement short 
 
 Time 
 
 Upon the completion of this work the report is filed with the 
 manager of the transit department. 
 
 The foregoing description covers the work of six divisions or 
 sections, viz.: "Delaware and New Jersey"; "Pennsylvania 
 A to D"; "Pennsylvania E to O"; "Pennsylvania P to Z"; 
 "Eastern" (meaning New York and New England) and "other 
 reserve districts." By dividing the work into sections, two 
 positive advantages are secured, first, the well-known advantage, 
 utilized wherever possible in all accounting systems, of creating 
 groups of accounts, thereby localizing errors and simplifying and 
 expediting the work of locating such as occur. The second 
 advantage is that by limiting the number of institutions handled 
 by one clerk or group of clerks, greater familiaiity with the work 
 can be secured, expediting its performance and decreasing the 
 likelihood of error. 
 
 Presuming that a section has been able to settle, the outgoing 
 letters are laid aside to await the afternoon mail, which is handled 
 in exactly the same manner as the morning mail. Upon com- 
 pletion of the afternoon sorting the same outgoing cash letters 
 
42 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 are put in the adding machines. The total of the morning mail, 
 as called for on the letter, is inserted in the machine (but not 
 again printed on the letter) and the listing of the individual 
 checks follows. Upon completion of the listing a grand total of 
 the letter is struck and also transferred and carried in the lower 
 counter of the adding machine as in the morning. The aggregate 
 of the grand totals in the machines of the division must agree 
 with the amount charged to the division on the settlement sheet. 
 When the settlement has been effected the outgoing letters are 
 ready for mailing. The checks and the first page of the 
 letter are placed in an addressed envelope and sealed. The 
 duplicates are handed to the manager of the transit department, 
 who transmits them in due course to the bookkeepers in the bank 
 who use them as the basis for charges to the accounts of the 
 several banks to which the checks were sent for collection. 
 
 Collection of Checks on Non-Member State Banks. — Included 
 among the institutions comprised in each section, such as, for 
 example, "Delaware and New Jersey" or "Pennsylvania A to 
 D," are many state institutions which, while not members of the 
 Federal reserve system, have nevertheless agreed to remit at 
 par for checks drawn on themselves and sent to them for col- 
 lection by the Federal reserve bank. A pigeon hole is provided in 
 the rack for each non-member institution just as though it were 
 a member bank. 
 
 Checks on non-member state banks may be collected in 
 several ways. First an agreement is made between the Federal 
 reserve bank and the state institution that items drawn on the 
 state bank will be forwarded directly by the Federal reserve 
 bank and that the state bank will immediately remit by draft 
 on its Philadelphia or New York correspondent (preferably 
 Philadelphia) or ship currency at the expense of the Federal 
 reserve bank. A second method is for the Federal reserve bank 
 to forward items to one or more member banks in the same city, 
 which have previously agreed to put them through the local 
 clearing house or have them collected by runners. Where this 
 arrangement prevails the Federal reserve bank handles the items 
 as if drawn on the member bank to which they are forwarded. 
 The officials of the Federal reserve bank personally make these 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 43 
 
 arrangements and succeed in doing so by explaining the advant- 
 age of par collections. This puts the state bank checks on the 
 same basis as checks drawn on naHonal banks. Where the 
 state banks have agreed to the conditions no further trouble has 
 arisen. 
 
 In Federal reserve districts Nos. 1, 2 and 12, — in other words, 
 the territory allotted to the Federal reserve banks of Boston, 
 New York and San Francisco respectively, — the reserve banks 
 accept checks for credit and collection drawn on any bank in the 
 district, regardless of whether the bank has agreed or refused 
 to remit for such checks at par. Wherever the non-member 
 bank has agreed to remit at par, the checks are handled in the 
 ordinary manner heretofore described. Checks drawn on insti- 
 tutions in these districts, which have not agreed to remit at par 
 are collected through member banks located in the same town, 
 which have agreed to assume this work, or through the express 
 companies. 
 
 Criticism has arisen in some quarters concerning the practice 
 of the Federal reserve banks accepting checks for collection on 
 non-member banks which have agreed to remit at par. Objec- 
 tion is made on the ground that while member banks are required 
 to keep a deposit with the Federal reserve bank which, to a 
 degree, safeguards the payment of checks in the process of col- 
 lection, yet in the case of non -member institutions, there is no 
 such balance and consequently no safeguard of this character. 
 It is further contended that this opens up a valuable facility to 
 a non-member institution which it can enjoy without in any way 
 supporting the Federal reserve system. As opposed to the fore- 
 going contentions it is pointed out that the Federal reserve bank 
 merely acts as the agent for the remitting member bank and 
 that anything which increases the ease of collecting checks to a 
 member bank is of advantage to it and to all member banks in 
 the system. The further argument is advanced that many 
 state banks are so small that a radical reorganization will be 
 necessary to enable them to meet the minimum capital require- 
 ments of the Federal Reserve Act. 
 
 Among the amendments which were introduced in Congress 
 at the suggestion of the Federal Reserve Board in January, 1917, 
 
44 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 and which were reintroduced shortly after the opening of the 
 "war session" in April of the same year, was one proposing a 
 revision of that part of Section 13 dealing with the matter of 
 clearings and collections. The changes proposed were, first, 
 the addition of a phrase enabling a Federal reserve bank to 
 handle for collection maturing notes and bills, payable within 
 its district. In addition, the following clauses are added: "or 
 solely for the purposes of exchange or of collection, a Federal 
 reserve bank may receive from any non-member bank or trust 
 company deposits of current funds in lawful money, national- 
 bank notes. Federal reserve notes, checks and drafts payable 
 upon presentation, or maturing notes and bills: Provided, 
 Such non-member bank or trust company maintains with the 
 Federal reserve bank of its district a balance in an amount to be 
 determined by the Federal Reserve Board under such rules and 
 regulations as it may prescribe." 
 
 In explanation of the action of the Board in recommending 
 the foregoing above amendment, the following statement 
 appears in the Federal Reserve Bulletin for March 1917. 
 
 "it is contemplated that the compensating balances which non-member 
 banks participating in the clearing plan will be required to keep with Federal 
 Reserve Banks will be sufficiently large to protect member banks and justify 
 Federal Reserve Banks in undertaking the service. Any clearing and collec- 
 tion plan to be effective must be so comprehensive as to include all checks. 
 At present the par lists of the Federal Reserve Banks include the names of 
 banks checks on which can be collected in any circumstances at a minimum 
 of time and expense, but do not embrace a large number of towns in every 
 State where there are no member banks; and in order to make collections on 
 such points many banks are obliged to maintain accounts in addition to their 
 reserve accounts with the Federal Reserve Banks. A necessary factor in any 
 successful clearing plan is the offset whereby balances only require settlement 
 instead of the total volume of transactions. As long as the clearing system 
 does not embrace all of banks, this offset is lost in a corresponding degree and 
 the value of the system diminished in proportion." 
 
 It should be emphasized that if the foregoing amendment is 
 enacted into law, which seems likely in view of its endorsement 
 by the administration, it will be possible for non-member 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 45 
 
 banks to secure reciprocal advantages from the Federal reserve 
 collection system; that is to say, to have their checks pass at 
 par throughout the district and furthermore, to be able themselves 
 to use the Federal reserve banks for the collection of out-of- 
 town checks which they have received from their depositors. 
 It should be kept in mind that this arrangement does not 
 in itself confer membership upon state banks, and will not allow 
 them the privilege of rediscount or other protection afforded to 
 full members of the Federal reserve system. The arrangement 
 is made for the convenience of the public and incidentally for 
 the benefit of the member banks. 
 
 '* Eastern j" "Other Reserve Districts'' and "Divisions." — ^As 
 previously explained all checks sent to the Federal Reserve 
 Bank of Philadelphia for deposit and collection and drawn on 
 institutions situated outside of the Federal reserve district No. 3 
 are classified into two divisions — "Eastern" comprising Federal 
 Reserve Districts No. 1 and No. 2, consisting of New England, 
 the state of New York, and the northern portion of New Jersey — 
 and "Other Reserve Districts" which includes the entire country, 
 with the exception of Federal Reserve Districts, No. 1, 2 and 3. 
 
 Checks on banks included in the eastern division are resorted 
 according to whether the member bank is situated in the territory 
 of the Boston Federal Reserve Bank or the New York Federal 
 Reserve Bank, the pigeon holes being respectively denominated 
 "The Boston Federal Reserve Bank" and "The New York 
 Federal Reserve Bank." After this separation has been accom- 
 plished, the checks for each reserve bank are further sub-divided 
 according to the period of time which must elapse under the 
 time schedule, before the credit therefor will be available. For 
 example, checks of the New York Federal reserve bank are sub- 
 divided into two groups — first, those drawn on the Federal 
 Reserve Bank of New York, or upon other banks situated in 
 New York City; second, those drawn upon banks situated 
 outside of New York City. 
 
 The arrangement now prevailing in the Philadelphia District, 
 is, in substance, that checks remitted by banks situated outside 
 of Philadelphia to the Federal reserve bank for credit and col- 
 lection, drawn upon banks situated in New York City, will be 
 
A6 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 entitled to immediate credit. When such checks are remitted, 
 however, by banks situated in Philadelphia, credit will be given 
 one day after receipt. This practice follows in the main the 
 custom inaugurated by the country collection department of the 
 Boston Cleaiing House prior to the creation of the Federal 
 reserve system. It permits the country banks to remit for 
 checks sent to them for collection by their Federal reserve bank 
 either in New York or Philadelphia exchange. It is in reality a 
 concession designed to increase the attractiveness of the collec- 
 tion system to country banks. Checks drawn on banks situated 
 in New England are classified into two groups; those payable 
 in Boston, for which credit is given one business day after receipt; 
 and those drawn on banks in any other part of New England, 
 for which credit is available to the depositing member bank 
 two business days after receipt by the Philadelphia Federal 
 Reserve Bank. 
 
 All checks drawn on banks situated in the New York Federal 
 Reserve District are sent by the Federal Reserve Bank of Phila- 
 delphia to its sister institution in New York for credit and 
 collection. A similar course of action is followed with checks 
 drawn on banks situated in the Boston district, also with checks 
 district. This is the fundamental principle underlying inter- 
 drawn on banks situated in any other Federal reserve 
 district collections. Through the use of such a system the col- 
 lection machinery of any particular Federal reserve bank is 
 much simplified. Any Federal reserve bank is confined in its 
 activities to dealings with its member banks; with non-member 
 state banks situated within its district, which have agreed to 
 remit at par; with the clearing house of the city in which the 
 reserve bank is situated, and with each of the other eleven 
 Federal reserve banks. The eleven accounts with the other 
 Federal reserve banks may be likened to great trunk lines over 
 which collections can be made with thousands of other banks 
 situated throughout the United States, without any duplication 
 of machinery or confusion of work. 
 
 Because of the differences in the time at which the proceeds of 
 checks drawn on banks situated in different parts of the Federal 
 reserve districts are available, two outgoing letters are used in 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 47 
 
 sending checks for collection to each reserve bank. The first 
 accompanies city items, that is checks drawn on banks situated in 
 the same city as the reserve bank; the second accompanying 
 country items or checks drawn on banks situated in any other 
 part of the reserve district. Each item is described as it is 
 listed by using the universal numerical system symbol or by 
 inserting the name of the bank. The form of these letters are 
 as follows: 
 
 FORM 55 25m 
 3-4 
 
 FEDERAL RESERVE BANK 
 OF PHILADELPHIA 
 
 City Items 
 3-4 
 
 TELEGRAPH NON-PAYMENTS OF ITEMS $500 OR OVER. 
 PROTEST ALL ITEMS OVER $10 EXCEPT THOSE BEARING 
 
 INSTRUCTIONS { on theur face this stamp (n. p. 3-4) or a similar 
 
 STAMP containing THE TRANSIT NUMBER OF A 
 preceding BANK ENDORSER. 
 
 FORM 56 75m 
 3-4 
 
 INSTRUCTIONS 
 
 FEDERAL RESERVE BANK 
 OF PHILADELPHIA 
 
 Country Items 
 3-4 
 
 TELEGRAPH NON-PAYMENTS OF ITEMS $500 OR OVER. 
 
 PROTEST ALL ITEMS OVER $10 EXCEPT THOSE BEARING 
 ON THEIR FACE THIS STAMP (n. P. 3-4) OR A SIMtLAR 
 STAMP CONTAINING THE TRANSIT NUMBER OF A 
 PRECEDING BANK ENDORSER. 
 
48 
 
 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 Report By the Transit Department to the Bookkeeping Depart 
 ment. — ^Viewed in its largest aspect, the primary function of the 
 transit department of a bank is to convert into cash checks and 
 other credit items passing through its hands. The results of the 
 work of the transit department are shown by the creation of 
 credits and debits to the accounts of the bank's depositors. It 
 is not the purpose of this study to follow in detail the bookkeeping 
 system of the Federal reserve bank, but it is necessary, how- 
 ever, to indicate the manner in which the transit department 
 reports to the bookkeeping department the results of its operation, 
 furnishing the basis for the entries to the several accounts of the 
 member banks and of the other institutions that are depositors 
 with the Federal reserve bank. After the batch sheets have been 
 settled, the incoming cash letters are sent by the transit depart- 
 ment to the bookkeeping department where the total of each 
 letter is credited to the account of the depositing bank. After 
 the total has been posted, the letters are acknowledged, use being 
 made of the following form: 
 
 FEDERAL RESERVE BANK OF PHILADELPHIA 
 
 Date 
 
 We credit your account 
 
 Your favor of the instant 
 
 has been received with enclosures as 
 stated. 
 
 F-29 
 
 F. M. Hardt, Cashier. 
 
 Charges against the accounts of member banks, as has been 
 said, are made from the duplicates of the outgoing cash letters, 
 which are sent by the manager of the transit department to the 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 49 
 
 bookkeeping department after the work of the former depart- 
 ment has been completed and proved. On the second day after 
 the checks have been forwarded or, in other words, two days after 
 the date of the outgoing cash letter, the bookkeepers will charge 
 the proper accounts with the amount of the outgoing letters. 
 In the interim, the duplicate letters are held separately. After 
 the proper entries have been made, the duplicate letters are 
 returned to the transit department for permanent file. 
 
 In case the remittance of the bank is in the form of cash, the 
 package does not go to the transit department but directly to 
 the receiving teller, who acknowledges its receipt by properly 
 filling out and mailing the following acknowledgement letter: 
 
 FORM 33 
 
 FEDERAL RESERVE BANK OF PHILADELPHIA 
 
 Date, 
 
 We beg to acknowledge receipt of your 
 (Shipment of Cash) and credit, subject to 
 
 count |. 
 
 Deposit through No $. 
 
 TeUer. 
 
 F. M. Hardt, Cashier, 
 
 General Summary. — ^The operations of the Federal reserve 
 transit department may be summarized as follows: 
 
 First : The incoming mail is sorted into five divisions depend- 
 ing upon point of origin, i. e. 
 
 (1) Delaware and New Jersey, Pennsylvania A-D. 
 
 (2) Pennsylvania E-0. 
 
 (3) Pennsylvania P-Z. 
 
 (4) Other reserve banks. 
 
 (5) Non-member state banks. 
 
 Second : The mail is opened and checked. 
 Third : The contents of a package or packages are batched 
 and then sorted into eleven transit divisions. 
 
so THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 (1) Clearing House Item. 
 
 (2) Run. 
 
 (3) Federal Reserve Bank of Philadelphia. 
 
 (4) Return items. 
 
 (5) Delaware and New Jersey. 
 
 (6) Pennsylvania A-D. 
 
 (7) Pennsylvania E-O. 
 
 (8) Pennsylvania P-Z. 
 
 (9) Other Philadelphia. 
 
 (10) Eastern (New York and New England). 
 
 (11) Other reserve districts. 
 
 Fourth: Items are listed under proper headings on a numbered 
 batch sheet. 
 
 Fifth: Make-up of each batch sheet is examined by the 
 settling clerk. 
 
 Sixth: The batch sheets are kept by the settlement clerk, 
 who after assembling all of them makes up a recap sheet. 
 
 Seventh: A settlement sheet is made up from the recap 
 sheet and additional data received from the tellers in the Federal 
 reserve bank is also included. 
 
 Eighth: The checks are assembled and then taken to the 
 proper divisions where they are racked. 
 
 Ninth: Outgoing letters addressed to the banks on which 
 checks are drawn, are made up. 
 
 Tenth: Each division settles by proving that outgoing letter 
 totals equal the incoming items as shown by the settlement sheet. 
 
 Eleventh: Checks with letters are put in envelopes, sealed, 
 stamped and mailed. 
 
 Twelfth : The incoming letters are acknowledged ; then posted 
 to the proper accounts by the bookkeepers, and returned to the 
 transit department for permanent records. 
 
 Variations in Transit Methods of the Federal Reserve Banks, — 
 Although the plan of the Philadelphia Reserve Bank is typical, 
 it varies in some details from the methods employed in other 
 districts. The Federal Reserve Bank of Boston requires that 
 the depositing bank arrange its cash letter not only to conform 
 ot the time schedule, as was explained in the description of the 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 51 
 
 Philadelphia Bank, but in addition that all checks drawn on 
 the same bank be grouped and handled as one amount. That 
 is, if several checks on the same institution are included in a 
 letter, a rubber band is put around them and a list of these 
 checks and the total thereof is included. This saves the transit 
 department a great deal of work, for it does not have to sort 
 each check in the deposit, but handles them in groups. This 
 facilitates the work in handling large deposits, particularly 
 those of the Boston banks, because in these deposits are included 
 many items which are drawn on the same bank in the district. 
 In levying the service charge against the depositing banks, 
 the Federal Reserve Bank of Boston assesses the depositing 
 bank nine-tenths of one cent for each individual check enclosed. 
 It does not base the charge upon the number of groups enclosed. 
 The old Boston clearing house plan differs from the Boston 
 reserve bank's plan in that the latter is reciprocal. Under the 
 old system New England country banks were largely compelled 
 to use the Boston banks in the collection of checks drawn on 
 other New England banks, because in no other way cou'd the 
 remarkably efficient and economical service of the country col- 
 lection department of the Boston Clearing House be enjoyed. 
 This tremendously emphasized the importance and value of the 
 Boston banks as reserve agents. Now the country banks can 
 secure the same service through the Federal reserve bank without 
 dealing with the Boston city banks. The latter are still used 
 because of inertia, or because the country bank can thereby 
 avoid paying the service charge itself — saddling this expense 
 upon the Boston city bank, which in turn is reimbursed out of the 
 profits which it makes on the country bank's balance. At 
 present the country bank is not allowed to carry more than one- 
 sixth of its required reserve of 12 per cent on deposit with the 
 Boston banks. This 2 per cent reserve, if carried in the Federal 
 reserve bank in addition to the 5 per cent which must at this 
 time be there carried on deposit would earn nothing for the 
 country bank. If carried with the old reserve agent it earns 
 2 per cent interest per annum for the country bank, and 
 in many cases enables the latter to avoid paying directly 
 the collection charges. Thus it follows that the country 
 
52 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 bank's deposit in the Boston bank serves a double purpose and 
 in Boston as elsewhere, the larger part of the collection items 
 continue to come to the Federal reserve bank through the city 
 banks. 
 
 After November 1917, at the latest, the country banks will be 
 faced with the alternative of continuing to carry a balance with 
 their former reserve agents for the sole purpose of avoiding the 
 direct payment of the service charge and in return for such 
 advice and other service as the old reserve agents have hereto- 
 fore performed for them. Such balances cannot thereafter be 
 counted as a part of the country bank's legal reserve. It seems 
 self-evident that the city bank will not assume service charges 
 and other expenses in a greater amount than it can earn from 
 the use of the country bank's balance. Many country bankers 
 may prefer to pay their service charges indirectly through the 
 maintenance of a compensating balance, but in spite of the 
 well known preference of all men for indirect taxation or charges 
 and of the equally well known conservatism and unwillingness 
 of the banker to make changes, it appears likely that with the 
 passage of the old system of reserve agents there will be a de- 
 crease in the volume of checks which will go through the Boston 
 banks. In consequence it will probably be necessary to a con- 
 stantly increasing degree, for the Federal Reserve Bank of 
 Boston to handle more individual items. 
 
 The plan followed by the Dallas bank differs from the others, 
 for while deposits of items are credited immediately, the 
 funds are not available until the remittances have actually been 
 received. No time schedule is followed, but when remittances 
 are received by the reserve bank, the credits established by the 
 corresponding deposit of the bank which sent in the items are 
 released for use. Under this arrangement the depositing bank 
 does not know definitely when its credits will be available. 
 
 The Gold Settlement Fund. — ^Section 16 of the Federal Reserve 
 Act directs the Federal Reserve Board to formulate regulations 
 governing the transfer of funds and charges therefor among the 
 Federal reserve banks and their branches. It further gives to 
 the Board the discretionary right to "exercise the functions of a 
 clearing house for such Federal reserve banks." Acting under 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 53 
 
 this authority, the Federal Reserve Bocird by Regulation I, 
 issued in June 1915, established the "Gold Settlement Fund." 
 Each Federal reserve bank was required to deposit for credit 
 to the account of the Gold Settlement Fund $1,000,000 in gold, 
 gold certificates or gold order certificates and in addition an 
 amount at least equal to its net indebtedness due to all the 
 Federal reserve banks at that time. The regulation further 
 provided that each Federal reserve bank should always maintain 
 a balance in the fund of not less than $1,000,000. However, 
 excess balances may, at the convenience of each Federal reserve 
 bank, remain on deposit in the fund, and as the balance on 
 deposit in the Gold Settlement Fund may be counted as part of 
 the Federal reserve bank's reserve there is no object in keeping 
 only the minimum on deposit. The Treasury Department 
 has provided the Reserve Board with a safe in one of the Treasury 
 vaults to accommodate these deposits of gold and certificates. 
 The combination of this safe is controlled by two persons repre- 
 senting the Board although two persons designated by the 
 Secretary of the Treasury must be present each time the safe 
 is opened. 
 
 Each Federal reserve bank maintains on its books an account 
 with every other Federal reserve bank. To these accounts items 
 sent to the other Federal reserve banks for collection are charged 
 or debited, as also are the payments and transfers of moneys 
 which have been made for the accounts of each of the other 
 Federal reserve banks. Each account is credited with the 
 proceeds of items that have been received from the other reserve 
 banks after they have been actually collected, and also for 
 payments and transfers of funds which have been made to it 
 for the account of each of the other Federal reserve banks. In 
 addition, the Federal reserve bank carries on its books an account 
 entitled "Gold Settlement Fund" to which is charged the 
 amounts placed to the credit of the bank upon the books of the 
 "Gold Settlement Fund" and maintained on the books of the 
 Federal Reserve Board in Washington, and to which is credited 
 all payments made through the Gold Settlement Fund, either 
 through the weekly settlement or by mail or telegraphic transfers. 
 
 At the close of business on Wednesday afternoon, the Federal 
 
54 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 reserve banks telegraph to the Federal Reserve Board the 
 amounts in even thousands of dollars "due to" or the total 
 credits in the account of each of the other Federal reserve banks 
 at that time. The total debits are not reported nor is the net 
 balance of the account reported. The "due to" items reported 
 by the other Federal reserve banks will act as the debits, when 
 reported to the Board after the settlement. Should Wednesday 
 be a holiday the telegram is dispatched on Tuesday. All tele- 
 grams are confirmed by a mailed report. 
 
 On Thursday morning the Federal Reserve Board assembles 
 the figures on a sheet known as "the checker board," which has 
 the names of the Federal reserve banks at the head of twelve 
 columns, and also at the left-hand margin. The form of "the 
 checker board" is shown on page 55. 
 
 The amounts reported "due to" other Federal reserve banks 
 are listed in the proper columns, under the names of the other 
 banks to which the amounts are due; the total "due to" is 
 entered at the right margin. Thus each horizontal column shows 
 the amounts which the Federal reserve bank named in the left 
 hand column owes to each other Federal reserve bank listed at 
 the head of the vertical columns, and also the aggregate due 
 to all other Federal reserve banks as entered on the right-hand 
 margin. When the contents of all the telegraims have been 
 entered and the columns of the "checker board" totaled both 
 horizontally and vertically, each vertical column shows the 
 amounts due to the bank listed at the head of the column from 
 each of the other eleven Federal reserve banks, and the aggre- 
 gate due to the bank is shown by the total of the vertical column. 
 In other words the vertical column shows the aggregate amount 
 "due from " the other banks to the bank listed at the head of the 
 column. The Reserve Board then charges each bank's account 
 with the total of the horizontal column opposite its name, and 
 credits each bank's account with the total due it from other 
 Federal reserve banks as shown by the total of the vertical column 
 bearing the name of that bank. 
 
 The Board telegraphs to each reserve bank, confirming the 
 telegram by mail, giving the "due to" amounts which other 
 Federal reserve banks reported, that is to say, the details of the 
 
7!^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 c 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 s 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 O 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 5 
 a 
 
 < 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 1 
 1 
 
 1 
 
 
 1 
 
 1 
 
 o 
 
 1^ 
 
 .2 
 
 00 
 
 .2 
 
 g 
 
 6 
 
 d 
 
 
 1 
 1 
 
 1 
 
56 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 vertical columns, and also the net amount which the pa-ticular 
 bank is debtor or creditor in the weekly settlement of clearings. 
 This is determined by ascertaining the difference between 
 totals "due to" and "due from" as shown by the checker- 
 board. The instructions of the Federal Reserve Board are that 
 "Each bank will then debit the 'Due to' Federal reserve bank's 
 accounts and credit the settlement fund, and will credit the 
 'due from' Federal reserve banks' accounts and charge the 
 Settlement Fund." 
 
 As previously stated figures are reported in even thousands so 
 inter-bank accounts are not entirely settled each week. Also 
 only the credits or amounts "due to" other Federal reserve 
 banks are reported by each bank to the Board, which renders a 
 weekly settlement of accounts impossible. The reserve banks 
 reconcile their accounts monthly. In these reconcilements items 
 in transit, and miscellaneous items can be readily checked up 
 and accounted for. 
 
 Up to this point only that portion of the activities of the Gold 
 Settlement Fund which relate to the periodical settlement of 
 balances between the several Federal reserve banks arising out 
 of collection operations has been considered. The Fund serves 
 a second very important purpose. Through it, the Federal 
 reserve banks are enabled to effect the transfer by telegraph of 
 money from one to the other. The process, in brief, consists of 
 a telegraphic order, in code, directed by one Federal reserve 
 bank to the Federal Reserve Board authorizing the latter to 
 credit a specified amount to the account of a designated Federal 
 reserve bank. Upon the receipt of such a telegram, the Board 
 will wire to the Federal reserve bank to which the transfer is to 
 be made that it has placed the specified amount to the credit of 
 that institution. At the same time, the Board will, by appro- 
 priate entries, debit the account of the one bank and credit that 
 of the second To all practical intents and purposes, the money, 
 which in reality is gold, is just as useful to the second Federal 
 reserve bank in the Gold Settlement Fund as it would be in its 
 own vaults at its home office for the regulations allow the Federal 
 reserve bank to count balances in the Gold Settlement Fund 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 57 
 
 as a part of its reserve or to use such balances as the basis of 
 note issue.* 
 
 The tremendous value of the Gold Settlement Fund to the 
 reserve banks has been evident from the outset. It has operated 
 with remarkable economy and efficiency. The results of the 
 first year of operation were well described by the Board in the 
 Federal Reserve Bulletin for June, 1916: 
 
 "Since the gold-settlement fund has now been in operation for one year, 
 it may be interesting to review briefly the more important features of its 
 operations. The primary object for which the fund was established was the 
 settlement of obligations arising from the 12 Federal Reserve Banks, and the 
 extent of its operations of this kind may be measured by the total amount of 
 weekly clearings and transfers. These have amounted since May 20, 1915, 
 to $2,178,240,000, almost half of this amount having been handled since the 
 beginning of the present year. The weekly settlements and transfers which 
 at first averaged approximately $20,000,000, have steadily increased. For 
 each of the last four weeks they exceeded $60,000,000 and for the week ending 
 May 25 were close to $80,000,000. It is expected that with the more active 
 clearing operations by Federal Reserve Banks, which are to begin July 15, 
 the amounts settled each week will in all probability be considerably increased. 
 
 "The most important function of the fund has been to obviate unnecessary 
 shipments of gold currency between the various sections of the country. The 
 first step in such a process is, of course, to oflFset and cancel by clearing as 
 many obligations and of as large amount as possible, and this the Federal 
 Reserve Banks have accomplished and will to a still greater degree accomplish 
 through the gold settlement fund. The result of the clearing process thus 
 far has been that for $2,178,240,000 of obligations settled, there has remained 
 only a net balance of $144,288,000, or 6.62 per cent, to be paid by transfer of 
 ownership of the gold certificates held. Not only has the net amount necessary 
 to be covered by payment of gold or its equivalent been minimized by the 
 clearing operation of the fund, but the actual shipment of even the relatively 
 small balance has been entirely avoided. With the aid and co-operation of 
 the Treasury Department, it has been possible to have any Federal Reserve 
 Bank becoming debtor to another bank merely make deposit with the nearest 
 
 * Mention should be made in passing of the fact that in addition to the 
 Gold Settlement Fund operations above described, the Federal Reserve 
 Board has created a Gold Settlement Fund for Federal reserve agents, which 
 is used in connection with the operations of issuing, securing and retiring 
 Federal reserve notes. This latter fund has no direct connection with the 
 subject matter of this study. 
 
58 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 Sub-treasury (six Federal Reserve cities have sub-treasuries), and gold cer- 
 tificates have been issued at Washington payable to the order of the Federal 
 Reserve Board, to be held in the gold settlement fund. On the other hand, 
 whenever a Federal Bank has need of funds to its credit, the operation has 
 been reversed and payment made by the nearest sub-treasury. Such with- 
 drawals have been relatively small in volume and the major portion of the 
 gold paid into the fund has been permitted to remain. 
 
 Under the abnormal conditions prevalent during the past year, seasonal 
 movements of currency in the United States have been much deranged and 
 the usual ebb and flow has not taken place. Large imports of gold have 
 reached New York City, very substantial portions of which had as their 
 ultimate destination the various industrial and agricultural centers, from which 
 had gone the exports of commodities. Through this movement and through 
 the call on New York City banks for funds to make payments due from 
 member banks throughout the country on account of installments of reserve 
 deposits with the Federal Reserve Banks, a condition was created which, 
 without the gold settlement fund, would undoubtedly have occasioned large 
 and expensive domestic gold shipments from New York. Through the opera- 
 tion of the gold settlement fund the same end has been accomplished at almost 
 negligible expense by the Federal Reserve Bank of New York depositing gold 
 with the Sub-treasury for credit in the gold settlement fund and transferring 
 the credit thus acquired to other Federal Reserve Banks. During the year 
 almost $126,000,000 has in this way been transferred from New York to other 
 centers. 
 
 "An important service rendered to Federal Reserve Banks, and through 
 them to member banks, has been the making of deposits with the Treasurer 
 of the United States for various purposes, particularly for the release and 
 transfer to Federal Reserve Banks of United States bonds securing national 
 bank-note circulation." 
 
 In its annual report for the year 1916, the Federal Reserve 
 Board presents additional data concerning the operations of tne 
 Gold Settlement Fund. The total volume of business cleared 
 during the year 1916 was stated to have been about $5,533,966,- 
 000, handled at a cost of $1,343.37, "being a net cost of $.0002 J^ 
 per $1,000 . . . The net amount of change of ownership 
 among the Federal reserve banks of gold held in the Fund was 
 $223,870,000, and it may be estimated conservatively that the 
 shipment of coin and currency to at least this amount was thus 
 avoided. . . The resulting change in ownership of gold was 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 59 
 
 4.0453 per cent of the total obligations settled, as compared with 
 8.14 per cent in 1915. There has been a rapid and steady growth 
 in the volume of transactions handled through the Gold Settle- 
 ment Fund. Especially has this been true since July 15, 1916, 
 when the Federal reserve banks began active check clearing 
 and collecting operations." Commenting further upon the 
 results of operations of the Gold Settlement Fund from the date 
 of its establishment to the close of the year 1916, the Federal 
 Reserve Board stated: 
 
 The expectation that the operations of the fund would make unnecessary, 
 for the most part, actual shipments of gold between Federal Reserve Banks, 
 has been well justified by experience extending over 19 months. No expense 
 for shipment of gold in connection with the fund's operations has been incurred 
 other than the charges on a small number of shipments made by banks not 
 located in cities having sub-treasuries. The abnormal inflow of gold from 
 Europe entering the country at New York, though destined in large part for 
 interior points whose exports had induced the gold movement, has influenced 
 materially the trend of the settlements. The Federal Reserve Bank of New 
 York has usually been debtor at the clearings and has parted with gold during 
 the year to the amount of $222,147,000, and since May 20, 1915, to the amount 
 of $303,430,000. This movement has resulted in increased reserves held by 
 other Federal Reserve Banks and in increased holdings by Federal Reserve 
 Agents against Federal Reserve notes outstanding. 
 
 The aggregate deposits of the twelve Federal reserve banks 
 in the Gold Settlement Fund on May 4, 1917, were $218,910,000; 
 in addition to which $153,570,000 wais on deposit in the Federal 
 Reserve Agents' Fund, making an aggregate of $372,480,000 
 in the hands of the Federal Reserve Board. 
 
 Protest of State Banks Against Par Collections. — ^So long as the 
 collection activities of the Federal reserve banks were upon a 
 voluntary basis no considerable protest was voiced by the state 
 banks. There is no doubt that a large number of the state banks 
 were influenced against joining the reserve system by the profits 
 derived from charging exchange upon checks drawn on them- 
 selves. Profits from this source continued so long as the banks 
 remained non-members, and this was of great moment in a large 
 number of cases. 
 
«0 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 The state banks' case against compulsory par collections has 
 been vigorously and fully presented. Beginning with the resolu- 
 tion of protest by the Bankers' Association of Texas, determined 
 efforts have been made to secure official condemnation of par 
 collections by various bankers' associations. A meeting of some 
 150 accredited delegates, nominally representing twenty state 
 bankers' associations, was held in St. Louis in June 1916. It 
 was, as has been aptly phrased by a sympathetic state banker, 
 "a convention of protest and not of deliberation, for it refused to 
 listen to Festus J. Wade and others, who undertook to argue 
 that there were some merits in the plan." The convention 
 adopted resolutions declaring the plan to be "unwise, unneces- 
 sary, economically unsound and in the last analysis prejudicial 
 to the best interest of general business." Unsuccessful efforts 
 were made to secure the passage of a resolution by the Michigan 
 Bankers' Association condemning par collections. On the other 
 hand the Washington State Bankers' Association by resolution^ 
 adopted June 1916, declared that the plan for par check col- 
 lections "is an unnecessary interference with the usual methods 
 of banking" and "it is usurping one of the necessary functions 
 of the member banks." The Virginia Bankers' Association, 
 by resolution adopted June 24, 1916, declared that compulsory 
 par check collections were "unwise and unnecessary features of 
 the reserve act." 
 
 An effort was made without success to induce the American 
 Bankers' Association to undertake or co-operate in legal pro- 
 ceedings attacking the constitutionality of Sections 13 and 16 of 
 the Federal Reserve Act. The state bank members of the 
 American Bankers' Association, however, organized a state bank 
 section of that organization. Movements to organize state 
 bankers into separate groups were publicly deprecated by the 
 Federal Reserve Board. 
 
 The American Bankers' Association at its Convention, held 
 in October, 1916, adopted a resolution which set forth in the 
 preamble, among other things, that "the so-called par collection 
 of checks is not a feature necessary to the attainment of the 
 object sought by the Federal Reserve Act, and the system of 
 collecting checks now in operation under the law, as interpreted 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 61 
 
 and applied by the Federal Reserve Board, works serious hard- 
 ships upon and leavy losses to thousands of country banks, and 
 
 "Whereas, it is the belief of the majority of bankers that Congress did not 
 intend to deprive the banks of legitimate profit, therefore 
 
 "Be it Resolved, That the American Bankers' Association, while approv- 
 ing the fundamental principles of the Federal Reserve Act and expressing 
 loyalty to the Federal Reserve System, protest against the provisions of the 
 Act relating to the collection of checks, and instructs the Committee on 
 Federal Legislation of the American Bankers' Association to endeavor to 
 secure amendments to the Federal Reserve Act, providing for the establish- 
 hment of a collection system which is fair and equitable to all Banks and 
 to the general public. 
 
 "Be it Further Resolved, That the President of the American Bankers' 
 Association be authorized and directed to appoint a Committee of twenty- 
 five bankers, fifteen of whom shall be country bankers, and ten of whom 
 shall be reserve city bankers, and that this Committee co-operate with the 
 Committee on Federal Legislation of the American Bankers' Association in 
 bringing about the enactment of the desired amendment." 
 
 The majority of the Committee of Twenty-Five, as this 
 body has come to be known, is composed of country bankers, 
 who obviously have a special cause to plead. The framers of 
 the resolution were evidently taking no chances with the nature 
 of the Committee which the President of the Association, him- 
 self a banker, might appoint. The first meeting of the Committee 
 of Twenty-Five was held in December, 1916. According to the 
 report of the meeting, as prepared by Mr. Jerome Thralls, its 
 Secretary : 
 
 "the Committee, after mature deliberation unanimously concluded, that 
 its plain duty at this juncture is to seek an amendment to the law which 
 will accord to banks the rights that are guaranteed by the Constitution of the 
 United States to every citizen, (individual, firm and corporation) that is, 
 the right to demand and receive fair compensation for services rendered 
 entailing labor, risk and expense; and to undertake to bring about such 
 modifications and changes in the Federal reserve clearing and collection 
 system as are necessary to put it upon a basis where its development and 
 extension will depend entirely upon merit. It was the consensus of opinion 
 
62 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 that the Federal reserve clearing and collection system, like any private 
 business of similar character, will succeed and endure only because of its 
 ability to render the most efficient service upon the most economical lines, 
 and that so far as possible, all features of compulsion and coercion should 
 be removed. It was further expressed as the sense of the meeting that 
 the country clearinghouses being operated in eleven of the leading centers 
 of this country are most valuable and efficient collection agencies, and that 
 such organizations should be established and maintained in all of the 
 larger cities and that some plan should be evolved whereby they might be 
 united in a national association through which cash items could be collected 
 or cleared on every section of the United States. . . It is not only the 
 desire of every banker that the most modern, efficient, and economical 
 methods for handling cash items be evolved and developed, but it is the 
 duty of every banker to use his best efforts to that end, and to give the 
 business public the benefits of such savings as may be effected through 
 improved methods." 
 
 The prepared report of the deliberations further stated: 
 
 "The Committee has to deal with the problem of evolving the most efficient 
 and economic means of handling annually over 723,763,570 so-called country 
 checks, aggregating more than $30,000,000,000, and on which an exchange 
 charge of 66 2-3 cents per thousand dollars, or an annual amount of $20,000,000, 
 was assessed prior to July 15, 1916, and on which there was an expense in the 
 handling (generally known as administrative cost) of 33 1-3 cents per thousand 
 dollars, totalling annually $10,000,000. 
 
 "The handling of these items affects the relations of, and the business of, 
 7,618 member banks and 20,799 state banks, bankers and trust companies, 
 and the influence of changes in the vital principles relating to their issue, 
 payment or handling permeates every line of business. " 
 
 The amendment proposed by the "Committee of Twenty- 
 Five" is designed to strike out paragraph 13 of section 16 of 
 the Act and to reenact it with the addition of the following 
 clause: 
 
 "Nothing herein contained shall be construed as prohibiting a member 
 bank from making reasonable charges against the presenter, in no case to 
 exceed 10 cents per hundred dollars or fraction thereof, based on the total 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 63 
 
 of checks and drafts presented at any one time, for collections or payments of 
 checks and drafts drawn upon it and remission therefor by exchange or other- 
 wise, or for exchange sold to its patrons. The Federal Reserve Board shall, 
 by rule, fix the charge which may be imposed for the service of clearing or 
 collection rendered by the Federal Reserve bank." 
 
 It will be observed that the Committee's amendment 
 restricted the power of the Federal Reserve Board to fix 
 and determine exchange charges to the charges made by the 
 Federal reserve banks. It authorizes every bank to make a charge 
 of ten cents for every $100 or fraction thereof, irrespective of 
 whether this charge is a reasonable charge for the cost of the 
 service rendered by the institution. 
 
 The House of Representatives, before the close of the session 
 of Congress terminating March 4, 1917, voted down the so-called 
 Kitchen amendment, designed to accomplish the same effect as 
 that proposed by the Committee of Twenty-Five. Bills to 
 achieve the same end were introduced by Representatives Kitchen 
 and McFadden in the House of Representatives shortly after 
 the beginning of the "War Session" in April, 1917. Senator 
 Gronna introduced in the Senate the amendment, proposed by 
 the Committee of Twenty-Five, permitting an exchange 
 charge, not exceeding ten cents per $100 or fraction thereof. 
 The Chairman of the Senate Committee on Banking and Cur- 
 rency referred the Gronna amendment to the Federal Reserve 
 Board, with the request that the opinion of the Board con- 
 cerning the advisability of its enactment be communicated to 
 him. Governor Harding in his reply stated that 
 
 "After a full discussion of the matter the board directed me to say to you 
 that it would regard the adoption of the amendment as most unfortunate. 
 It believes firmly that it is the duty of every bank to pay without deduction 
 or discount, at its own counter, checks drawn by its depositors against their 
 balances. No bank questions this obligation on its part when cash payments 
 are demanded by the presenter of the check, and about one-half of all banking 
 institutions in the country are now remitting without deduction for checks 
 on themselves forwarded by the Federal Reserve banks. The board realizes 
 that the operation of the Federal Reserve check clearing system has in a number 
 of cases deprived banks of an income from exchange on checks which they 
 have hitherto enjoyed, but as they are enabled to offset checks drawn upon 
 
64 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 themselves sent them by the Federal Reserve banks with checks drawn upon 
 other banks and are permitted, furthermore, to cover by shipments of currency 
 at the expense of the Federal Reserve Bank, no actual hardship is imposed. 
 An amendment permitting a charge of not exceeding 10 cents per $100 or 
 fraction thereof, based on the total of checks and drafts presented at any 
 one time for collection and payment of checks and remissions therefor by 
 exchange or otherwise, would, in the opinion of the board, be construed by 
 the banks as a definite suggestion that they impose such a charge, with the 
 result that eventually these charges would be generally made, not only as 
 against checks coming in from a distance, but even against checks presented 
 by payees residing in the community where the bank is located. While 
 banks would no doubt pay checks for their own depositors without any charge, 
 it is entirely possible that many of them would avail themselves of the oppor- 
 tunity of enforcing this charge against checks presented by payees who are 
 not depositors. This would impose a hardship upon those of the poorer classes 
 who are not bank depositors. 
 
 "The board would call attention also to the fact that for some years past 
 actual payees of checks drawn upon country banks have been able in many 
 cases to collect them without exchange charges, which have been absorbed 
 by their depository banks, which have in turn been reimbursed by balances 
 kept with them by the country banks. Immediately upon the passage of 
 Senate Bill No. 8, or no later in any event than November 17 next, no bank 
 balances will count as reserve except those with Federal Reserve banks, so 
 that facilities for free collection will no longer be afforded by member banks, 
 and the result would be that many individuals, firms, and corporations would 
 be paying exchange charges of one-tenth of 1 per cent upon checks which they 
 have hitherto been able to collect at par. 
 
 **The enactment of the proposed amendment, in the opinion of the board, 
 would, because of the injury it would work to holders of bank checks, create 
 a strong protest all over the country, which would be far stronger than the 
 pressure that is now being brought to bear for its enactment." 
 
 Governor Harding enclosed with his reply a resolution adopted 
 by the Governors of the Federal reserve banks at their Tenth 
 Conference, in which they "earnestly urged the Federal Reserve 
 Board to use every legitimate means possible to prevent the 
 enactment of the Kitchen Bill when introduced into Congress, 
 and to promptly develop and put in the fullest operation the 
 Federal reserve collection system." 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 65 
 
 Reserve Banks Plan to Have Par Collection Universal. — ^While 
 the state bankers have been exerting every influence at their 
 command to perpetuate exchange charges, the Federal Reserve 
 Board and the reserve banks have been working steadily toward 
 the extension of par check collections, looking forward to the 
 time when every check will pass at par throughout the country. 
 The first step toward a universal par list was taken by the Boston 
 Reserve Bank, which as has been said, took over the Boston 
 Clearing House. With 97 per cent of the aggregate amount of 
 checks already passing at par, it was not difficult to inaugurate a 
 system by which all checks would be received at par, the reserve 
 bank collecting the samll percentage drawn on non-assenting 
 banks through express companies or neighboring banks. The 
 Reserve Bank of San Francisco, with the inauguration of the 
 compulsory collection system, announced that it would accept 
 and collect checks at par on any bank in the district whether 
 it had assented to the plan or not. Perhaps the most significant 
 step, however, is that taken by the New York Reserve Bank, 
 which announced that on and after April 1, 1917, it would receive 
 for collection at par checks on all banks and trust companies 
 within its district. At that time some 935 banks, out of a total 
 of 1049 banks of all classes within the district, were remitting at 
 par. The reserve bank declared, that justice to the great majority 
 of banks demanded that the 114 recalcitrants should be forced 
 to honor their checks at par, and that the Federal Reserve Bank 
 would arrange to collect checks upon the non-assenting banks 
 by having them presented by an express company for payment 
 at the counters of these institutions. There could be no 
 objection, the Reserve Bank pointed out, to be required to 
 cash checks drawn by their depositors, regularly endorsed and 
 presented by responsible persons at the paying teller's window. 
 It was a legal and moral obligation which the bank must meet. 
 Although the plan would involve considerable expense, in 
 proportion to the items which had to be collected in this manner, 
 yet on the whole the advantage to the 16,000 banks which were 
 using the reserve collection system would far outweigh the 
 added cost. 
 
 The country bankers of New York State were not slow in 
 
66 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 accepting the challenge of the reserve bank. Some weeks after 
 the inauguration of the plan, the Federal Reserve Bank of New 
 York received for collection a few checks on non-assenting banks, 
 which checks had stamped thereon the words "not payable 
 through an express company." As the New York Federal 
 Reserve Bank declared 
 
 . . . this stamp is being used by some of them in the expectation that 
 they may be enabled thereby to pay checks drawn upon themselves at less 
 than their face value to the detriment of business men and others who 
 received such checks. ... Of the total banks in the New York Federal 
 reserve district 99.6 per cent, using figures on the basis of their resources, 
 are paying checks drawn on them at their face value. The collection system 
 of the bank is, therefore, so clearly complete that it will be carried to com- 
 pletion with the least possible delay. In order to accomplish this result, 
 and thereby give to the customers of all banks whether or not they are 
 members of the Federal reserve system, the benefits of a direct, economical 
 and scientific method of collecting checks, special agencies will be promptly 
 established wherever necessary to handle all checks carrying the restrictive 
 stamps." 
 
 Not to be outdone, the bankers induced the Legislature of 
 New York to pass a bill, intended to protect the right of state 
 banks to collect exchange charges on their checks when remitted 
 for collection. The bill, which is now in the hands of the Gov- 
 ernor, makes it a crime, punishable with a $1,000 fine, to compel 
 a banking institution of the state to surrender its right to make 
 a reasonable charge for domestic exchange, or to pay checks 
 drawn on it by any other means than cash in its own office. 
 The presenting of checks at the offices of the drawee bank 
 through express companies "or otherwise," would constitute a 
 crime. This grotesque bill will probably not receive the signa- 
 ture of the Governor, but if he should sign it, there is no doubt, 
 in the minds of Federal reserve officials, that it will be promptly 
 declared unconstitutional by the Federal Courts as an unlawful 
 restriction of interstate commerce. A test case will doubtless 
 be instituted concerning a check forwarded for collection to the 
 New York Federal Reserve Bank from some other Federal 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 67 
 
 reserve district, and drawn upon one of the objecting New York 
 State banks. In view of the very broad interpretation which 
 the Supreme Court consistently has given to the interstate 
 commerce clause, it is very unlikely that such a statute will 
 stand the test of the Supreme Court's scrutiny. The only doubt 
 concerns the power of the express companies under their char- 
 ters to engage in such an activity. Although the express com- 
 panies have engaged in the banking business to the extent of 
 selling money orders, it might be held that their corporate 
 powers did not extend to the collection of checks. The Federal 
 Reserve Bank of New York was evidently anticipating such a 
 condition when it announced that it would estabHsh "special 
 agencies " wherever necessary to make such collections. Whether 
 the Federal reserve bank intends to use other banking institu- 
 tions or entrust the work to responsible local citizens is not clear. 
 Either plan would defeat the objections of the state bankers. 
 
 From the standpoint of power there is no doubt that the 
 Federal Reserve Board has a tremendous advantage in forcing 
 the state banks to honor their own checks. The most efficient 
 collection medium is probably the post-office, which being a 
 Federal institution would lie beyond the power of a State Court's 
 injunction. As a matter of fact on July 20, 1916, the Secretary 
 of the Treasury announced, at the request of the Federal Reserve 
 Board and with his recommendation, that the Post Master 
 General had issued instructions to post masters in towns and 
 cities having no member bank, to accept from the Federal 
 reserve bank, and to present and collect checks drawn upon non- 
 member banks, which had refused to remit at par. The post 
 masters were authorized to receive checks from the Federal 
 reserve bank, present them at the counters of the state banks, 
 collect the currency, and remit the proceeds to the Federal 
 reserve bank of the district involved, at the expense of that 
 institution. However, the new plan was never put into opera- 
 tion for on July 28th the Post Master General suspended his 
 order until further notice. In announcing the suspension the 
 Post Master General stated that it was made at the instance of 
 the Federal Reserve Board, which desired further time in which 
 to perfect details of the check collection plan before enlisting 
 
68 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 the co-operation of the Post Office Department. No further 
 action has been taken concerning the use of the Post Office in 
 the collection of checks. 
 
 Analysis of State Bank Protests. — ^The protest of the state 
 banks is based upon two grounds: first, that the elimination of 
 exchange charges works a heavy decrease in their profits, render- 
 ing many state institutions unprofitable to their owners; and, 
 second, that it is unfair and unreasonable and cannot be defended 
 as a matter of principle. 
 
 No authoritative figures have been produced substantiating 
 the allegations that the elimination of exchange charges will 
 work ruin to the state banks. The results of an inquiry made by 
 the President of the Ohio Bankers' Association of the country 
 banks in that state are interesting, however, as throwing light 
 upon the extent of the effect of the new system upon the profits 
 of the country banks. President Sams in his annual address 
 before the Association, delivered in September 1916, stated the 
 results of his inquiry as follows: "We received prompt and very 
 full replies and in many instances comments upon the subject 
 of the inquiry all of which tended to show this to be one of the 
 minor items of profits of the Ohio banks. The average profit 
 of the banks reporting was a little over $15 for the month of 
 May 1916." 
 
 The argument that exchange charges are necessary to support 
 the small country bank is not borne out by the experience in 
 New England. Exchange charges on country checks have been 
 practically unknown in New England for years under the very 
 remarkable system developed by the country collection depart- 
 ment of the Boston Clearing House. Over 97 per cent of the 
 aggregate amount of all checks sent out for collection were 
 remitted for at par. If the absence of exchange charges was 
 destructive to the country bank, the results should be evident in 
 New England. An examination of the sworn statements of 
 earnings and expenses of the New England banks, as published 
 by the Comptroller of the Currency, shows these institutions to 
 be as profitable on the whole as those of any section of the 
 country. Certainly the data thus far presented does not estab- 
 lish the fact that the abolition of such charges will ruin the 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 69 
 
 country banks. Even though it be granted for the sake of 
 argument, that the revenue heretofore derived from exchange 
 charges is necessary for the support of many country banks, it 
 does not follow that the present system of charging exchange 
 should be perpetuated. 
 
 The second ground upon which the country banks attempt to 
 justify exchange charges has been well stated by Mr. W. J. 
 Gray, Vice-President of the First and Old National Bank of 
 Detroit: 
 
 "Those who favor the plan for eliminating this charge, the so-called 
 exchange, overlook, I think, the fact that the bank does something more than 
 merely paying a check over the counter. With the remittance, the bank is 
 obliged to write a letter (or make out a credit ticket of some kind), affix a 
 postage stamp, draw a draft on an acceptable point (or else place a credit on 
 its books), all of which things would be unnecessary if the check were simply 
 paid. It is quite evident then that the bank has done something beyond the 
 ordinary. For this, ought not the bank to be paid, and ought it not be paid 
 something by way of profit, beyond the mere cost of the service, that is the 
 outlay for stamps, stationery, and clerical hire? 
 
 "I think I understand the meaning of the term 'exchange.' I define it, 
 in homely phrase, as the price of money payable at a distant point. To buy 
 exchange on New York is to buy a draft payable in New York. Under its 
 machinery, a merchant in Portland who owes a debt payable in New York 
 can at his own bank buy a piece of paper which will be good in New York 
 for the amount of his debt. The primeval method of payment would be for 
 him to ship the currency to New York. In such event, he would have to pay 
 the shipping, insurance and other charges, but his expense will be much less 
 if he buys a banker's draft. Theoretically, of course, the banker would be 
 obliged to ship the currency to his New York correspondent to put him in 
 funds with which to meet the draft. But as there would probably be some 
 one in New York who wished to pay a debt in Portland, if the two debts were 
 in the same amount, it would be unnecessary to ship any currency either way. 
 At all events, it would only be necessary to ship the excess of the one debt over 
 the other. The same reasoning applies to a series of transactions, only the 
 net balance owing needs any remittance in currency. 
 
 "As the banker thus is not required to ship currency for each transaction, 
 his charge for the service, or 'exchange', need not be the same amount as if he 
 had actually to ship currency each time. Consequently the merchant in buying 
 exchange need not pay the cost of shipping the entire amount, usually a small 
 fraction, regulated in foreign exchange by demand and supply, and in domestic 
 exchange apparently regulated by nothing. *** 
 
70 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 "My personal view tends to the idea that the banks ought to get something 
 for service in remittance, but that the charges should be regulated by the 
 Federal Reserve Board. If the banks are doing something at an expense of 
 postage, stationery and clerk hire, they ought not to be expected to give this 
 to the public. Indeed, the Federal Reserve Board recognized this principle, 
 for the cost of the plan is assessed against the banks, and not against the 
 public who presumably are most benefited." 
 
 Mr. Caldwell Hardy, Chairman of the Board of Directors of 
 the Federal Reserve Bank of Richmond, in an address before the 
 Richmond Association of Credit Men, clearly stated the weak- 
 ness of this argument : 
 
 "There is a strong justification for the elimination of the country bank 
 charge. Many of them complain that it will be difficult for them to make 
 dividends if they lose their incomes from exchange charges, but if this is the 
 case, it demonstrates that there is little justification for their existence. If 
 they can live only by a charge made on their customers* checks, given to 
 city merchants and others, they are levying a tax indirectly on the business 
 of their communities for the benefit of the few in the community who are 
 stockholders in the bank. The income from collection charges has led these 
 banks to permit local merchants to run their bank accounts on a losing basis 
 to the bank, the loss being recouped through the collection charge made on the 
 checks referred to above. The elimination of collection charges will compel 
 the country banks to require their customers to keep their accounts on a 
 reasonably remunerative basis to the banks, the banks in turn giving the 
 customers a quid pro quo in the way of loans or otherwise." 
 
 He went on to point out that many large business concerns 
 carried balances in New York, Chicago or other large cities, 
 because drafts drawn on banks in such cities passed at par prac- 
 tically throughout the country. Under the Federal Reserve 
 System this practice will no longer be necessary in order to make 
 payment by a credit instrument that will pass at par. 
 
 "The ready availability, through this draft and collection system, of funds 
 deposited with any member bank will be a strong inducem,ent to large business 
 interests, corporations and transportation lines to keep their funds more on 
 deposit with the banks in their district, where they are located or operating. 
 This will bring about equalization of deposits throughout the country, and be 
 
THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 71 
 
 of great benefit to many districts which contribute largely to the support of 
 many large interests, but realize in many instances only limited advantages in 
 return." 
 
 Mr. Charles S. Hamlin, former Governor of the Federal 
 Reserve Board, in an address before the Virginia Bankers* 
 Association, strikingly phrased the basic argument for the new 
 collection plan when he said: "To oppose a national system of 
 check clearing at par, is no more justifiable than to oppose the 
 construction of a great free highway because a few owners of 
 toll roads benefit by their continuance." Akin to such opposi- 
 tion, he said, was the opposition of the city of Erie, Pa., many 
 years ago, to the transformation of the narrow-gauge Eastern 
 Railroad into a standard-gauge road, thus making possible 
 physical connection with the standard-gauge roads leading to 
 the West, whose terminals were located in another section of the 
 city. The joining of the two systems on a single standard-gauge 
 the City of Erie feared, would do untold damage by destroying 
 the town's flourishing transshipment industry. "The new 
 check-collecting system," he declared, "is merely an attempt to 
 fix a standard-gauge along which the country's vast volume of 
 checks may travel. The sooner banks adopt this system, the 
 sooner the whole banking world will benefit." 
 
 It must be clearly understood that the Federal Reserve Board 
 and the officials of the Federal Reserve Banks, in urging and 
 insisting upon par collections, do not advocate that a member 
 bank carry any account which is unprofitable after exchange 
 charges are eliminated. On the contrary they have consistently 
 taken the position that a depositor should be required to adjust 
 his account upon a basis which renders it moderately profitable 
 to his bank. If a country merchant carries an account which 
 would be unprofitable, except for the fact that the bank can 
 charge exchange for honoring the checks which this merchant 
 sends to his jobber or wholesaler in a distant city, the cost of 
 carrying the account is paid not by the depositor but by his 
 distant creditor. No wholesale establishment charges higher 
 prices to country merchants located in places where exchange 
 charges are heavy solely because of the exchange charges which 
 
72 THE FEDERAL RESERVE CHECK COLLECTION SYSTEM 
 
 must be paid in collecting the checks received from such cus- 
 tomer. Exchange chcirges are like postage; they constitute a 
 part of the general overhead expenses of a business, which are 
 uniformly levied against the entire enterprise. The mercant 
 doing business in a community where no exchange is charged 
 is contributing his share to pay a portion of the wholesaler's 
 expense for which he is in no way responsible. 
 
 In the last analysis, the customers of the retail merchant — 
 the people at large — are paying these charges, the progressive 
 community equally with the backward community; the thickly 
 populated districts alike with those which are sparsely settled. 
 Such a practice is no more defensible than one in which freight 
 charges were ignored and goods were billed for the same price 
 to the merchant doing business around the corner from the 
 wholesaler, as that charged to the storekeeper thousands of 
 miles away. 
 
 If any portion of the country banks find that certain of their 
 accounts are unprofitable when exchange charges are eliminated, 
 let them collect the deficiencies from such customers, either by 
 requiring larger balances or by making a charge to cover any 
 extraordinary expenses to which the bank is put. With a system 
 of competitive banking — ^with rival banks seeking the accounts 
 of local business men — competition between local banks, as a 
 rule, can be depended upon to protect the country merchant 
 against extortionate and unreasonable demands and charges 
 by his bank. 
 
 To pass a law giving permission to all banks to levy exchange 
 charges, without reference to whether they can be justified, 
 would put an end to the entire par collection system. It would 
 be a step backward made in the interests of a few banks at the 
 expense of the business interests of the entire country. 
 
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