As can readily be seen this collection service rendered to the depositor by the bank involves a great deal of labor and expense. Formerly the banks made collections for their customers without charge, and this is still the rule in some parts of the country. The tendency now, especially where there is a clearing house association, is to make a small charge, called "exchange," for collecting out-of-town checks, the exchange being charged up against the depositor for whom the collections are made. To many country banks this has been a large source of income. Under the rules of the New York Clearing House the country is divided into three zones, the collection charges upon all cities within each zone being uniform.
On cities near New York, known as discretionary points, each bank may use its own discretion as to charges, and in practice none are made The rest of the country is divided roughly by the Mississippi river, a uniform rate of 1-10 of 1 per cent being charged on all points east of that line and 1/4 of 1 per cent west of it.
Despite the economies and short-cuts devised by banks for collecting out-of-town checks, the system is wasteful in both time and money. From time to time proposals have been made to establish national or regional clearing houses to handle the collection and settlement of out-of-town checks in much the same way as city clearing houses now handle local checks. The Boston Clearing House has a branch known as the "foreign department" which makes collections for its members throughout New England. The clearing houses of Atlanta and Nashville have a somewhat similar arrangement for making collections for their member banks over a considerable area adjoining those cities. For several years the Kansas City clearing house association has had a country clearing house department embracing the states of Missouri, Kansas, Nebraska, Colorado, New Mexico, Oklahoma and Texas, and including over five thousand banks. This department has effected a saving of over fifty per cent in the expense of handling collection items in that territory and has reduced the time required to secure returns, by about twenty-five per cent. In addition to these benefits the country clearing house serves as a credit bureau.1
The Federal Reserve Act makes possible some far-reaching changes in clearing house and collection arrangements. It authorizes Federal reserve banks to receive cheeks and drafts on member banks and other Federal reserve banks, and requires every such bank to receive checks and drafts drawn upon any of its depositors at par. It follows, therefore, that a reserve bank cannot make any charge for collecting checks on any of its members. A charge may be made, however, to a member bank for the collection of checks drawn against member banks in another district, such charge to be fixed by the Federal Reserve Board. The Act also provides that the Federal Reserve Board may exercise the functions of a clearing house for the several reserve banks, or may designate one of them to act as a clearing house for the others; and may require each reserve bank to act as a clearing house for the others, and also for its members. If each reserve bank acts as a clearing house for all member banks of the city where it is located, the existing clearing houses in those cities may no longer be needed, though the problem of clearing checks presented by non-member banks would still remain. The reserve bank is required to receive checks and drafts on all member banks "on deposit at par" but the expense may be charged back on each member by a periodical assessment or in some other way. If these charges are made light, or if the earnings of the reserve banks make it possible for them to assume the entire cost of collections, member banks will probably find it profitable to clear through the reserve banks; if the charges are heavy it may be more economical for the banks to maintain their present clearing house organization. In years past business men have frequently complained of the high rates charged for collecting checks, and in the hearings which preceded the enactment of the new bank act, country bankers testified that in many instances fully one-half of their earnings came from such charges.
1 Chicaqo Banker, July 10, 1913.
It is believed that the system of clearings and collections provided for in the Act will effect a saving to business men of hundreds of thousand of dollars in collection charges every year. The assumption is that since reserve banks may keep accounts with each other for exchange purposes, they will take each others' drafts at par. So when payments are to be made in other Federal reserve districts a business man instead of sending his own personal check will buy from his local bank, perhaps at par, a draft on the reserve bank of his district. On his check there may be a collection charge in the other district, but the draft will be taken at par or will be subject to very moderate charges fixed by the Federal Reserve Board. Every city in which there is a reserve bank bill will, therefore, become a par point for the whole country. Heretofore, New York exchange has been superior to exchange on any other city for making remittances between different cities, but under the new system exchange on any of the twelve Federal reserve cities will be equally good, for each of them will become a par point for the entire country.
Barrett: Modern Banking Methods, Ch. VIII.
Bolles: Money, Banking, And Finance, Ch. XIX, XXVIII.
Cannon: Clearing Houses.
Fiske: The Modern Bank, Chs. X, XI, XIV, XXVIII.
Jefferson and Escher: Banking Practice and Foreign Exchange, Ch. X. Laughlin (Ed.): Banking Reform. Moxey: Practical Banking, Chs. XII, XVI. White: Money and Banking, Bk. III, Ch. III.