One of the most important functions of the new reserve system is that of clearing and collecting the checks and drafts which constitute so large a proportion of the credit instruments used in conducting the business of this country. In years past deposit currency has provided a very efficient and convenient method of payment, but it has imposed a heavy toll upon the business of the country through the high charges exacted for collecting checks. The new system is expected to reduce the waste and expense in collecting and transmitting funds.
As to collections, the Act authorizes any Federal reserve bank to receive on deposit from any of its member banks not only cash, but checks and drafts upon solvent banks payable on presentation; or, solely for exchange purposes, to receive from other Federal reserve banks cash and checks and drafts upon solvent member or other Federal reserve banks. Section 16 requires every Federal reserve bank to "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 . . . The Federal Reserve Board shall by rule fix the charge 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 clearing or collection rendered by the Federal reserve bank." Each reserve bank, therefore, must receive at par checks and drafts drawn on member banks in its own district if they are deposited with it by other reserve banks; but the reserve bank may make a charge, to be fixed by the Reserve Board, to a member bank for the collection through another Federal reserve bank, or otherwise, of checks drawn on member banks in another district.
An attempt was made to include in the Act a clause requiring the collection at par of the checks of all member banks all over the country, but this was not pressed owing to the tear that country banks, which would thereby lose a large source of revenue, would be antagonized and refuse to enter the system. The bill as finally passed contains a provision that "nothing herein contained shall be construed as prohibiting a member bank from charging its actual expense incurred in collecting and remitting funds, or for exchange sold to its patrons.' The reserve banks, therefore, are not compelled to accept all checks at par, but only those upon its own member banks and upon the members of other reserve banks if remitted by such reserve banks. The banks, however, will be restricted to moderate charges, and thereby a heavy burden will be lifted from the shoulders of the business man. Moreover, when the system gets into complete operation, the saving of time possible in the collection of foreign items by the reserve banks and their branches will greatly reduce the loss on the non-use of funds in transit.
The establishment of the new system is likely to effect a radical change in the methods of making payments between different parts of the country. Since checks and drafts drawn by member banks on their own reserve bank must be received at par by all other reserve banks, every Federal reserve city and, presumably, each city in which a reserve bank branch is located, will become a par point for the whole country. New York exchange, which heretofore has been the most acceptable form of remittance between different parts of the country, will have no advantage over exchange on any other Federal reserve city. Not only will the new system of exchange add greatly to the prestige and powed of the Federal reserve banks, but it will be the means of effecting an enormous saving in collection charges to the business community.
The Act also provides that the 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 such functions, and may also require each such bank to exercise the functions of a clearing house for its member banks." It is assumed that each reserve bank will become a clearing house for all member banks in its district. Though the work and expense involved in such an arrangement will be very considerable, the process of collection so far as the reserve bank is concerned will be simple, as each item will be charged against the account of the bank upon which it is drawn. Settlements between the banks will be made by transfers on the books of the reserve banks, thus greatly reducing the amount of cash needed.
It has been suggested that each reserve bank, and possibly each of its branches, may act as a clearing house for all member banks of the city in which it is located. Since the reserve bank is required to accept collection items of its members at par, the expense of maintaining the clearing house would then fall upon the reserve bank. The Act provides, however, that the Reserve Board may impose a charge "for the service of clearing or collection rendered by the Federal reserve bank." This opens the way for a shifting of the expense of conducting the clearing house from the reserve banks to member banks through an assessment or other charge upon member banks. If the reserve banks assume the expense of clearing house arrangements and succeed in performing the functions of existing clearing houses these are likely to disappear, though the problem of non-member banks would remain. The advantages of receiving immediate credit at par for all checks and drafts on other banks within the district and of having checks and drafts on themselves pass at par within the district may prove a strong incentive to state banks to enter the system. One of the first real tests of the new system will be in its exercise of this all-important clearing function.