The second power conferred on the board by Section 16 of the Federal Reserve Act was to require each federal reserve bank to exercise the functions of a clearing house for its member banks. In a circular issued in April, 1915, the board outlined a voluntary reciprocal intradistrict par collection system which was to become effective June 1, 1915. The details were to be worked out by each federal reserve bank to conform to the conditions of the district. The plan met with varying degrees of success in the different districts and after a year of experimentation it was extended into a compulsory intra- and inter-district par collection system. The new system is in essence a country-wide extension of the plan of the Boston Country Clearing House, which had proved, by almost a generation of use, the best and most economical method of collecting checks in a given district.
The printed expression, " Collectible at par through the federal reserve bank," means literally what it says. Though credit may be given at once, the funds are not available as reserve, nor can they be drawn against, until the item has been collected or sufficient average time has elapsed for collecting it. No member bank is required to use the collection system; it has the choice of sending items for collection through the reserve bank regularly, occasionally, or not at all. The reserve bank will receive for collection items on all member banks throughout the United States, and items on all non-member banks in the United States which can be collected at par; and to this end par lists are published from time to time. The items are handled under uniform protest instructions and all are indorsed to the federal reserve bank. To insure direct routing, the reserve bank reserves the right to return any item drawn on a bank located outside of its district when such item bears the indorsement of a bank also located outside of its district. The items are given immediate credit at par, subject to final payment, but the proceeds are not available for withdrawal and do not count as reserve until the lapse of the average time necessary to send the item and get remittance in return. Schedules of deferment of credit are published, covering credits immediately available and those available after 2, 4, or 8 days.
Items drawn on a member bank are sent to it direct; items drawn on a non-member bank are sent to such members as desire to receive them, or by arrangement direct to the non-member. When time can be saved, arrangements may be made for direct routing between member banks of a certain district, or between members of this and of other districts, or between members of this district and other federal reserve banks.
Member banks may maintain their balances with their reserve bank in the following ways:
1. By Depositing Exchange On The Federal Reserve City.
2. By depositing out-of-town items, the proceeds of which will be available as reserve in accordance with the time schedules.
3. By shipment at the expense of the reserve bank of properly sorted lawful money or federal reserve notes.
4. By Rediscounting.
Member banks are required to provide funds to cover at par all checks received from or for account of their federal reserve bank, and if any member cannot provide funds otherwise, it is permitted to ship lawful money or federal reserve notes at the expense of the reserve bank. Penalties are fixed for impairment of reserves, at an interest charge on the deficiency of reserve, say, at 2 per cent above the maximum discount rate.
Until June 15, 1918, the cost of operating the system was borne by the banks using it, the actual cost being assessed monthly on a per item basis upon the banks depositing items. This was called a "service charge." Since that date the service charge has been absorbed by the federal reserve bank. This absorption operates to reduce the dividends of the reserve banks and to distribute the costs on the basis of capital and surplus rather than the actual use made of the system by the member banks.