The subject of clearing among the reserve banks was first taken up by the Board in April, 1915. On May 8 of that year the Board1 issued a circular and regulation providing for the establishment of the gold settlement fund. By May 24 each reserve bank was required to forward to the United States Treasury or to a subtreasury, in gold or gold certificates, $1,000,000 plus its total net indebtedness to all the other federal reserve banks. The United States treasurer issued to the Reserve Board "gold order certificates" for the amounts so forwarded, and these certificates in the hands of the Board made up the "gold settlement fund." Each reserve bank was required to maintain in the gold settlement fund a balance of at least $1,000,000.

The process of clearing through this fund was provided for as follows: Each reserve bank keeps "accounts due to" and "accounts due from" other reserve banks growing out of items received or sent. On each Wednesday night the reserve banks telegraph to the Board (confirmation being sent by mail) the amounts in even thousands due to the several other reserve banks. On Thursday the proper entries are made by the Board's "settling agent," and the several credits, as well as the net debit or credit balances, are telegraphed to the banks. On receipt of the telegram each reserve bank makes the proper debit and credit entries and the difference between them equals the net debit or credit to the gold settlement fund as advised in the telegram. Deficits must be made good in gold, gold certificates, or gold order certificates, or by credit operations effected by the debtor bank with other reserve banks having a balance with the gold settlement fund. Any reduction in the required balance of $1,000,000 must be made good on or before Tuesday of the week following the clearings from which the deficit results. Excessive balances may be drawn down through the treasury or subtreasuries, although the balances in the gold settlement fund may be included in lawful reserves. The expense of handling the business through the fund is apportioned among the twelve reserve banks.

Gold settlement fund

Process of clearing

1 Regulation L, Series 1915. See 1915 Report of Reserve Board, p. 77.

The gold settlement fund was a success from the outset. To ascertain the amount which each bank should deposit a preliminary settlement was made May 20, 1915. The amount required was about $18,000,000. Thereafter the weekly clearings grew in volume and rose to a record of $412,103,000 May 17,1917. During 1915 the total clearings equaled $1,052,649,000 with a net change in the ownership of gold of 8.14%. During 1916 the total clearings equaled $5,533,966,000 with a net change in gold ownership of 4.0453%. The Reserve Board in its 1915 report (p. 79) says that "a noteworthy feature in the operation of the fund has been the avoidance of the necessity for shipment of funds between federal reserve banks." It also adds that "at only one subtreasury have the withdrawals exceeded the deposits, and as the fiscal operations of the Treasury Department had concentrated a surplus of cash at that point, no shipment was necessary to meet this excess of withdrawals."

In addition to the clearing operations carried on through it, the gold settlement fund has been employed for other purposes. Transfers are frequently made from one district to another through the gold settlement fund by simple bookkeeping entries. The June, 1917, Federal Reserve Bulletin states that the heavy gold imports ultimately destined for the industrial centers were transferred from New York through the gold settlement fund. The federal reserve bank of New York would deposit gold in the New York subtreasury. Credit would be given in the gold settlement fund and transfers to the other banks would then be made. Some of the southern banks also made transfers through the gold settlement fund to the treasury and had fractional currency shipped from the nearest subtreasuries.

Practical results

Transfers through fund

Similarly in September, 1915, through the adoption of a special resolution the Board directed that an account be opened by the settling agent of the gold settlement fund for each federal reserve agent. The settling agent receives from the reserve agents, or from the federal reserve banks on account of such agents, deposits of gold certificates to be held subject to the order of such agents. In this way a reserve bank can obtain funds from its reserve agent by making transfers from the gold settlement fund. During 1915 the reserve banks made transfers of gold to their reserve agents through the fund amounting to $52,460,000 net. During 1916 the amount so transferred was $73,040,000.1

Reserve agents account