(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 proportion 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 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.

This "country-wide" clearing and collection plan was to go into operation on June 15, but on May 22, owing to protests by the banks, the Board voted to defer the opening date until July 15. The Board carefully pointed out that the use of the clearing system was not compulsory for any bank, but it was also careful to mention that every bank must maintain the statutory reserves and must pay without deduction checks drawn upon itself and presented at its own counters for payment. Moreover, remittance by the reserve bank through the mail is regarded as such presentation and the member bank must settle by acceptable checks on other banks or by remittance of lawful money or federal reserve notes at the expense of the federal reserve bank. Provision is also made for the acceptance for credit and collection by the reserve banks of checks on non-member institutions that pay their checks at par. This does not mean gratuitous collection. The plan provides for a small service charge against the banks that send in items for collection.

Countrywide clearing and collection plan

Modus operandi

The results of the working of this plan can be best set forth in the words of the Reserve Board itself:

It was estimated by the Board that as soon as the new clearing system could be put into operation checks upon about 15,000 national banks, state banks, and trust companies throughout the United States would be collected by the federal reserve banks at par, subject to the small service charge above referred to. As any bank will be likely to lose desirable business when checks drawn upon it are at a discount, while checks drawn upon a nearby competitor circulate at par, it is believed that in the near future checks upon all banks in the United States can be collected at par by federal reserve banks. Many banks have found it necessary hitherto to maintain balances with a number of correspondents for exchange purposes, thus compelling them to keep an undue proportion of their funds away from home. Under the new plan the number of banks upon which par collections are being made was, on December 15, over 15,000. In other respects also the plan is working as anticipated. The total daily clearance at all federal reserve banks now aggregate over $125,000,0001

Thus a country-wide clearing and collection system may be said to have been successfully begun. The Board laid down the general outline of the plan and left the reserve banks to fill in the details. Individual methods and practices are, of course, permitted, and hence there are variations in detail. Thus it may be mentioned that, anticipating dealings in exchange on federal reserve cities, the St. Louis bank offered to quote rates for buying and selling such exchange. The Dallas bank handles its clearing and collection system in clearing house form, each bank being charged or credited each day, not for the total amounts, but for net differences. A settlement slip is sent to each debtor bank which will authorize the reserve bank to charge its account for the amount due. Most interesting of all, however, was the taking over on July 15, 1916, by the Boston Reserve Bank of the management and operation of the Boston Clearing House. The reserve bank takes over all the country collections, but the clearing house association preserves its status as a voluntary organization, maintaining supervision over its own members, conducting its daily clearings, etc. The reserve bank furnishes the equipment, etc., while the officers and clerks of the clearing house are employees of the reserve bank. When, however, the clearing balances are once established, all settlements are effected through the reserve bank - as has been the practice in Boston since the reserve bank opened.

11916 Report, p. 10.

Practical results

Local differences in practice

The service charge is 1.5 cents per item at eight of the reserve banks. Those having a different charge and their respective charges are as follows: Boston, 0.9 cents; New York, 1.00 cent; Richmond, 1.25 cents; and San Francisco, 2.0 cents. The total number of items handled at the different banks and the amounts involved, during the period July 15-December 31, 1916, were as follows:1

Cost and volume of transactions

11916 Report of Federal Reserve Board, p. 11. 2 Does not include Government checks.